Banks are likely to report a modest earnings growth in the second quarter, driven by a slower credit growth and a moderate decline in net interest margins (NIMs). Lenders are expected to witness 5-10-basis-point (bps) compression in NIMs due to rise in cost of funds, say experts.
“NIM are expected to decline by 5-10 bps sequentially, given the pressure on cost of funds resulting from repricing of deposits. Additionally, the CASA ratio for most banks has been on a declining trend,” brokerage firm Sharekhan said in a report. “NIM compression is expected for coverage universe given limited opportunity to increase the yield on the asset side,” it said.
Most large banks have indicated that the pass-through of fresh term deposit rates is largely complete and any further rise in overall cost of deposits should be very marginal, the report said.
HDFC Bank, Axis Bank, Bank of Maharashtra and Indian Overseas Bank will announce their quarterly results this week.
After a lacklustre performance in Q1, deposit growth has shown signs of improvement. Provisional numbers show improved trends in deposit mobilisation, particularly in current account savings account (CASA). However, the industry’s CASA ratio remains under pressure, reflecting higher reliance on term deposits. Analysts say this shift has increased the cost of funds for banks, further impacting their margins. Systemic deposit growth stood at around 11.5% as of September 20, 2024, compared to 11-13% in recent periods.
While larger banks may experience a more controlled decline in margins, small finance banks (SFBs) are expected to witness sharper NIM compression due to their greater dependence on high-cost deposits. “While managements have been optimistic about the demand-led growth continuing in FY25; we believe our under-coverage bank could see a downward revision in their credit growth estimates for FY25, driven by banks’ attempt to maintain a balanced LDR, moderating credit in the unsecured segment and slower corporate credit pick-up,” said Dnyanada Vaidya, research analyst, Axis Securities. “We expect earnings momentum to decelerate and banks (including SFBs) under our coverage to deliver a modest earnings growth of 7% YoY and a de-growth of 6% QoQ”.
Credit growth, a key driver for earnings, has decelerated in Q2FY25. Systemic loan growth is expected to be around 14% YoY, but just 4% QoQ, according to Axis Securities.
The slowdown is largely driven by private sector banks, which are adjusting their loan-to-deposit ratio (LDR) to maintain balanced liquidity, while public sector banks are likely to fare better, continuing their healthier growth trajectory.
On the asset quality front, most banks are expected to report steady metrics. Slippages are projected to remain broadly stable on a sequential basis, with corporate asset quality continuing to be pristine. However, higher slippages are anticipated in the unsecured loan and MFI segments.
“We see slippages for most banks to remain at similar levels sequentially in the second quarter as the residual restructured book will be reasonably well behaved,” said Yes Securities in a report. “Furthermore, the macro environment due to elevated interest rates has already caused some incipient build-up of stress, but slippages should broadly stabilise at these levels,” noted the report.