Banks’ margins to shrink but lower credit cost to aid PAT in Q4
Banks profitability is seen moderating in Q4 FY24 to around 10 per cent yearonyear (yoy) on the back of muted net interest income (NII) growth and further shrinking of margins. Margins are expected to shrink 312 bps quarteronquarter due to increase in banks’ cost of funds, decline in credittodeposit ratio and backbook deposit repricing, according to analysts.
“Deposit growth has pickedup to 13.5 per cent yoy due to RBI’s nudge on higher systemic loantodeposit ratio (LDR). However, such growth has come on the back of highcost retail and bulk deposits, which coupled with some moderation in LDR and unsecured loan growth, could put pressure on margins in Q4,” Emkay Global Financial said in a note. Sequentially, the profitability is seen improving to about 17 per cent due to lower opex for stateowned banks, AIF relief for private sector lenders and treasury gains owing to softening gilt yields. HDFC Bank will kickstart the Q4 earnings season for banks on April 20. ICICI Bank, Axis Bank, IndusInd Bank and RBL Bank are the favourite among private banks.
Kotak Mahindra Bank is seen weighed down by management transition in the neartomedium term. For HDFC Bank, a sharp reduction in LRD is seen weighing on margins, which coupled with higher opex could offset the positive impact from the sale of HDFC Credila stake. Indian Bank,
Punjab National Bank and State Bank of India are the top picks among PSU banks.
CREDIT, NII GROWTH
“Preresult updates suggest broadbased sequential traction in credit, which has so far been strong, driven by services and retail segment. Outlook on credit growth will be important as liquidity gets tighter and on RBI’s action on unsecured retail loan and loan to NBFCs,” Phillip Capital said. Provisional Q4 numbers reflect strong business momentum for private banks with sequential loan growth of 35 per cent and deposit growth of 5.76.7 per cent. Public banks’ sequential loan growth was 34 per cent whereas deposits grew 45 per cent.
Overall, system loan growth is seen at over 1516 per cent yoy and 4 per cent qoq, and deposit growth at 5.3 per cent. There has been some moderation in retail credit, especially credit cards and personal loans, partly due to seasonal factors and the regulatory increase in risk weights, Emkay Global said, adding that some temperance is also seen in vehicle finance and gold loans.
NII is seen growing 4.4 per cent yoy and 1.82.8 per cent qoq. Within this, private banks’ NII is seen up 7.2 per cent yoy and 3.2 per cent qoq whereas for PSU banks is seen 0.9 per cent higher yoy and 2.1 per cent qoq.
DECLINE IN BAD LOANS
Led by contained slippages, accelerated writeoffs and strong provisioning buffers, gross NPA ratios of banks are seen moderating to around 2.02.7 per cent from 2.9 per cent in the previous quarter. The net NPA ratio is seen declining to around 0.5 per cent, analysts said.
“Banks are likely to witness yet another strong quarter in terms of asset quality; however, we remain vigilant of any pockets of stress in the unsecured portfolios. Slippages should remain under control and asset quality improvement will continue, driven by healthy recoveries. Credit costs are likely to remain at normalised level,” Axis Securities said in a preearnings note.