Banks gear up for another strong quarter

Thus, sustained credit demand and lower credit costs seen in the last quarter will be key drivers of growth for banks. The latest fortnightly data by the Reserve Bank of India (RBI) showed that systemic credit growth stood at 15% year-on-year till March 24. Systemic credit growth has moderated from levels seen in the recent past. Nevertheless, banks are expected to do well in the March quarter as far as credit growth is concerned. Kotak Institutional Equities expects the bank to report solid net interest income growth of around 25% YoY on the back of around 16% YoY loan growth under its coverage.

Another positive in Q4 is likely to be in the form of stable net interest margin (NIM), aided by faster revaluation of loans. Motilal Oswal Financial Services expects NIMs of private sector banks to remain stable sequentially and for public sector banks to improve marginally.

so far so good. But, in FY24, NIM is set to shrink. Banks are said to be using the excess liquidity in the system to meet credit demand. However, with internal liquidity almost exhausted, competition for deposits becomes intense. Banks will have to increase deposit rates to raise more deposits. In fact, NIM will buckle under pressure. Against this backdrop, analysts believe that NIM has peaked in the fourth quarter. “Margins for most banks are expected to be largely flat on a sequential basis. However, margin contraction will be visible after FY24,” said Gnanda Vaidya, research analyst at Axis Securities.

Besides, concerns may also emerge over the funding gap of the sector. “Banks are benefiting from better credit growth, but the funding gap is widening as deposit growth at sub-10% lags credit. A report by Elara Securities (India) said while banks have some leeway in terms of higher liquidity and additional SLR – for sustainable growth without diluting the funding mix – deposit growth uptick is critical. The mix shifting from retail deposits to wholesale deposits has to be monitored here, as the latter are sticky in nature.

True, the RBI’s latest decision to keep the repo rate unchanged surprised the market. While the status quo is a relief, the cumulative 250 basis points hike from May on the cost of borrowing for banks will have an impact eventually. The transmission of interest rate movements in economic activity occurs with a lag. Kaitav Shah, BFSI Research Analyst, Anand Rathi Institutional Equities, said, “Since assets revalue faster than liabilities, even with a pause in rate hikes, liabilities will continue to revalue.”

Furthermore, as rate hikes begin, systemic credit growth may slow. “We will watch for any change in the demand environment given the challenging macro environment, high inflation and high base effect,” said analysts at Motilal Oswal. The broking firm expects systemic loan growth of 13.3% in FY24.

Meanwhile, the silver lining is that asset quality is in better shape, owing to less slippage, and is expected to remain healthy in Q4. But in the current scenario, this alone will not be enough to rekindle investor confidence or get a significant re-rating. So far in 2023, the Nifty Bank index has declined 5%. A similar decline has been seen in the Nifty Private Bank index, but a bigger decline of 13% in the Nifty PSU Bank index.