Banks are likely to witness a 10-15-basis-point (bps) moderation in the net interest margin (NIM), a key indicator of profitability, and higher agriculture sector-related stress in the first quarter of the current fiscal, analysts say. HDFC Bank and YES Bank will kick-off the sector’s earnings season as they will announce Q1 results on July 20.
“We continue to believe that the growth-NIM conundrum may persist and the strain will sustain. Banks may continue to see a moderation in incremental spread,” said Elara Securities in a report. NIM will likely be impacted on three counts – A) continued repricing on deposits, B) sticky incremental deposit costs as a few banks raised rates in Q4FY24 and C) higher interest income reversal given higher agriculture-related slippages for some lenders.
A few lenders, however, will see stable NIM. These include HDFC Bank due to its lower base of 3.4%, IndusInd Bank owing to fixed-rate nature of its book and AU Small Finance Bank because of benefits related to its merger with erstwhile Fincare SFB. State Bank of India (SBI), too, has guided for stable margins while other public sector banks will see a decline in NIM due to higher cost of funds, Nuvama said.
Brokerage Kotak Institutional Equities believes that moderation in earnings growth will continue in the reporting quarter, as the best earnings growth drivers are well behind us. “Provisional business data released by a cross-section of banks suggest that loan growth has slowed further, but we don’t see a further reduction in the CD ratio. We expect banks to report a 10-15-bps decline in NIMs, led by repricing of deposits, or slippages that tend to be seasonal in nature (PSL loans)…” it said.
HDFC Bank’s gross advances increased to Rs 24.87 trillion for the quarter ended June 2024, up 53% compared with Rs 16.3 trillion in the year-ago period. Deposits stood at Rs 23.8 trillion, a growth of around 24% over Rs 19.13 trillion in the year-ago period, and at similar levels on a sequential basis.
Asset quality
The credit quality for most banks has been robust till now, Motilal Oswal said, leading to controlled provisioning expenses. However, the recent developments related to farm loan waivers could potentially upset the credit culture and would result in an uptick in credit costs, particularly in the agri and unsecured segments like microfinance.
The brokerage is factoring in a modest rise in provisioning expenses as the recovery from existing NPAs and technically written-off accounts pool moderates. The first quarter is a seasonally-weak one and is characterised by a rise in agriculture-related NPAs.
“We estimate NII (net interest income) for our banking coverage universe to grow 12.6% YoY in 1QFY25, while PPoP (pre-provisioning operating profit) is likely to increase at a modest rate of 9.2% YoY (-5.7% QoQ). For 1QFY25, we, thus, estimate private/PSU banks to report earnings growth of 15.6%/11.5% YoY,” Motilal Oswal said.
Nuvama said ICICI Bank and Federal Bank will likely report strong earnings while IndusInd Bank and other MFI-heavy lenders may witness soft earnings or higher slippages. For HDFC Bank, enhancing NIM will be the key, whereas mid-sized PSBs could see earnings benefitting from lower operating expenses and higher PSLC income, but NIM would decline.
For SBI, the sequential loan growth will be low at 1% with a stable NIM, but the lender will see seasonally-higher slippages.
