FY23 was a solid year for banks amid robust loan demand, comfortable asset quality and improvement in return ratios. While the trend is expected to continue in Q1 FY24, analysts say banks may see a marginally weak quarter due to lower net interest margins and higher provisions as the June quarter usually sees agri delinquencies.
The Street expects the net interest margins (NIMs) – a key metric for lenders -- to be under pressure as repo rate hikes by the RBI have been paused but deposit cost increase is catching up.
NIM is a measure of the difference between the money that a bank earns from interest on loans and the amount it is paying in interest on deposits. That said, investors can take heart from recent RBI data which showed credit growth has been holding up well, while non-performing assets have slumped to a decadal low.
RBI Financial Stability Report: Banks see jump in credit, deposit in 2023
Credit growth, which has been rising since early 2022, led by both public sector banks (PSBs) and private banks, stood at 15.4 percent on June 2, 2023, as per RBI’s Financial Stability Report (FSR) released on June 28.
The deposits growth, which declined in 2021-22 and early 2022-23, stood at 11.8 percent as on June 2, 2023.
Credit growth was boosted by agriculture, services and personal loans, which grew faster than those for the industrial sector.
Personal loans recorded a growth of 22.2 percent, wherein all major segments such as housing, credit card receivables, vehicle/ auto loans and education loans registered robust expansion.
“Deposits are gathering momentum as deposit rates have been hiked. As at 23rd June’23, deposits grew by 12.1 percent YoY compared to 9.8 percent in March ’23,” analysts at Prabhudas Lilladher said.
Current accounts and saving accounts (CASA) – the cheapest source of funds for banks -- are expected to decline by 1.1 percent QoQ while CASA ratio could fall from 42.7 percent to 41.3 percent, they added.
“For our coverage banks, yield on assets is expected to improve by 23 bps QoQ while cost of funds could rise by 34 bps. Hence, NIM is expected to fall by 8 bps QoQ to 3.84 percent,” the domestic brokerage said.
Metrics Matrix
While the Indian banking sector has shown remarkable improvement in asset quality over the past few years, the first quarter of FY2024 can see a slight dip.
“Due to seasonal spike in agri slippages, we expect gross slippages to rise ~10% QoQ (off low base), but see ~12% decline YoY for our coverage private banks,” ICICI Securities said in a recent note, adding that it sees no material corporate slippages (including aviation sector).
For India's largest lender SBI, ICICI Securities is modelling in almost 2x gross slippages QoQ led by agri slippages.
Concerns on the agri front have been voiced by other experts as well.
“Asset quality is expected to see a slight blip and slippage ratio could rise from 1.26% to 1.46%, driven by agri slippages especially in case of SBI and HDFC Bank,” Prabhudas Lilladher said, adding Q1 usually sees agri delinquencies.
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However, beyond the agri space, analysts do not see much NPA stress for banks, though the trend remains to be seen amid elevated interest rates.
“We do not expect any adverse commentary on asset quality, apart from indications on the unsecured portfolio. Given high inflation and rate hikes, we await management commentary on business and lower income strata. Historically, there has been a low correlation on rates and asset quality, which took a hit from excesses created in the system, and there are no signs of that as on yet. We expect strong asset quality trends to sustain,” Elara Capital said.
As per RBI data, Indian banks’ gross NPA ratio declined to 3.9 percent in March 2023 – a 10-year low. The net NPA ratio of the scheduled commercial banks also improved to 1.0 percent, a level last observed in June 2011.
During 2022-23, NIMs improved by 30 bps as the transmission of monetary policy tightening to deposit rates lagged that of lending. The banks’ profit after tax (PAT) recorded a robust growth of 38.4 per cent (y-o-y) during last fiscal, driven by a strong increase in net interest income (NII) and lower provisions.
In terms of top picks, Elara Capital prefers ICICI Bank, Axis Bank, IndusInd Bank and SBI in the large-cap space as balance sheet heft and digital nimbleness give them an edge over mid-sized ones.
"Among midcap banks, we favour Federal Bank and Karur Vysya Bank and expect structural challenges in regional banks," it added.
In a note to clients, Emkay Global said ICICI Bank remains its top pick, though the stock momentum has been limited due to concerns around rising key management personnel (KMO) attrition/movement.
"Notwithstanding near-term business dislocation due to the merger, we believe HDFC Bank should be back in the game from H2, while Kotak’s nearing top management change should keep it under pressure," it added.
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