With the rising interest rate environment, most Indian banks are likely to see some pressure on their net interest margins (NIM) over the next two to three quarters. However, analysts expect the trends to be divergent as banks with higher share of wholesale deposits and reasonable hike in MCLR over six months may be able to defend NIMs better than others.
Since December 2021, most Indian banks have taken a 170-210 basis points (bps) hike in their term deposit rates, with larger private banks and State Bank of India (SBI) taking hikes of around 170-210 bps, whereas smaller private banks have taken lower hikes of 150-170 bps.
The divergence between small private banks and large-private or PSU banks reflects higher level of rates for smaller banks, and improvement in their deposit franchise that is allowing them to narrow premium over the larger peers, Jefferies said in a report.
Banks with higher share of wholesale deposits would have seen higher inflation in deposit costs versus banks with higher share of retail deposits.
Also Read: Bank FD rates: Kotak, Axis, IDBI Bank revises fixed deposit rates. Details here
Meanwhile, hikes in MCLRs has been relatively divergent across banks. Over the past few months, the brokerage noted, larger PSU banks have taken lower hikes in MCLRs as compared to smaller PSUs and private banks, mostly targeted to gain market share in corporate loans.
Jefferies estimates that banks like IndusInd Bank and Axis Bank have seen the majority of the hikes in term deposit rate pass-through to P&L and hence should see lower cost pressures.
“On the other hand, larger banks like ICICI Bank and larger PSU banks could see higher cost pressures over the next two to three quarters. For HDFC Bank, merger with HDFC Limited and impact of incremental Cash Reserve Ratio (I-CRR) will have a higher impact than purely gaps in rate hikes,” Jefferies said.
Kotak Mahindra Bank is also benefiting from an increase in share of higher-yielding unsecured loans, it noted.
The brokerage expects banks like IndusInd Bank to be able to sustain margins near the current range, while Axis Bank may see 10-15 bps compression, whereas ICICI Bank and SBI may see about 30-40 bps compression over next two to three quarters.
Also Read: HDFC Bank share price extends decline; stock falls over 7% this week
Additionally, divergence in NIMs could lead to divergence in pre-provision operating profit (PPOP) growth over coming quarters, which may be reflected in near-term stock performances also.
Meanwhile, in the April-June quarter of FY24, Indian banks reported strong financial results led by healthy growth in net interest incomes, non-interest incomes, lower credit costs, robust loan growth and stable asset quality.
The public sector banks (PSBs) also delivered robust performance in Q1FY24, with many state-run lenders’ net profit growing more than double as compared to the same period last year.
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Updated: 21 Sep 2023, 12:13 PM IST