Jefferies says these 3 factors can give a boost to small private banks

“We believe that with moderation in credit growth towards 13-14 percent (it has already slowed from 17 percent to 15 percent), the gap over deposit growth (11 percent) will narrow and ease pressure on deposit rates,” it added.

Funding matrix

Easing interest rates can benefit banks with higher dependence on wholesale funding, higher share of fixed-rate loans and some ALM gaps, analysts at Jefferies said.

These banks saw a faster or a greater rise in their funding costs, which along with slower loan growth (in the back drop of higher non-performing loans) had dragged their topline growth compared to bigger banks or non-banking finance companies (NBFCs).

“Going forward, we expect these pressures to ease and this may appear to be in contrast with larger banks that may see a fall in NIMs as funding costs rise with a lag whereas their yields have already expanded sharply over past 2-3 qtrs. This may help them deliver better earnings momentum going forward,” it added.

Net interest margin (NIM) is the difference between the amount a bank spends and earns on its interest business through loans and deposits. For banks, NIM is an indicator of overall profitability and business growth

Among banks, Jefferies said IndusInd Bank, RBL Bank, Yes Bank, Bandhan Bank, AU Small Finance Bank, Ujjivan Small Finance Bank, IDFCFirst Bank and Indian Bank have a higher share of wholesale deposits and/or higher share of fixed rated loans as of FY23.

Despite recent outperformance, small private banks have traded at a discount to larger banks and NBFCs.

“The average valuation for small private banks is at 1.9x, whereas larger private banks trade at an average of 2.6x and large NBFCs trade at 5.2x,” it said.

As growth improves, valuations may have head for rerating, Jefferies added. Its preferred picks in the segment include IndusInd Bank and Bandhan Bank.

Cost pressures

While Jefferies has highlighted the sliding deposit costs for banks, investment group CLSA in a report said NBFCs’ FY24 fund costs will rise despite the rate pause.

“While there is investor excitement given a rate-pause/rate-cut narrative translating into lower cost of funds for NBFCs, we believe the reality is not so sweet. Firstly, less than 50 percent of borrowings for most large NBFCs are at floating rates, the transmission of which happens with a lag of 1-12 months.

Also read: NBFCs’ FY24 fund costs will rise despite rate pause; SBI Cards the preferred bet: CLSA

“Secondly, 20 percent of NBFCs’ non-convertible debentures (NCDs) are maturing in FY24/25 each — these NCDs bear coupon rates much below current levels, implying a refinancing hit. Thirdly, incremental cost of NCDs is unlikely to come off with repo rate cuts as bond yields are also factoring in repo rate cuts,” CLSA said.

The firm believes that the cost of NCDs is set to rise, not fall in FY24.

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