The re-pricing of external benchmark-linked loans and marginal cost of funds-based lending rate (MCLR)-linked loans is likely to cushion net interest margins (NIMs) of banks from the impact of deposit rate hikes in October-December, analysts said.
“Re-pricing of the lending book, improved traction in better-yielding-focused product segments and utilisation of liquidity and excess SLR for growth in advances are likely to offset deposit cost pressures and support the gradual rise in NIMs,” ICICI Securities said in a pre-earnings report.
To put things in perspective, around 53% of Kotak Mahindra Bank’s advances are linked to external benchmark-linked lending rate. This is at 41% each for HDFC Bank and Axis Bank, and 34% for State Bank of India (SBI). Similarly, 45% of IndusInd Bank‘s loans and 41% of SBI’s loans are linked to MCLR.
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Private sector banking behemoth HDFC Bank will kick-off the results season on January 14.
The wide gap between loan growth and deposit growth will remain the big talking point in Q3 as well, say analysts. Bank’s non-food credit rose nearly 18% YoY in December while deposits grew a mere 9.4%.
At a time when there is a liquidity crunch in the financial system, several banks have been hiking term deposit rate in a bid to attract customers. The impact of these hikes on banks’ margins is being monitored by analysts.
“Margins to witness a positive bias, supported by a pick-up in growth and further re-pricing of the floating rate book. However, we remain watchful of a rise in the deposit cost, which would keep the margins under pressure in the medium term,” brokerage firm Motilal Oswal Financial Services said in a pre-earnings report.
ICICI Securities expects banks’ net interest income to rise 23% YoY while Motilal Oswal Financial Services sees it going up 24% in the December quarter.
Broadly, banks’ earnings are expected to remain healthy in the December quarter due to a good growth in business, expansion in margins and benign credit costs, say analysts. But, operating expenditure could remain high because of continuous investment in business.
“We believe slippages (ex-restructured pool) could be stable QoQ in Q3FY23 given improvement in bounce rates and better collection efficiencies. No chunky corporate slippages are expected. Nonetheless, credit cost is likely to trend towards normalisation from a very low base of Q2FY23,” ICICI Securities said.
“10-year India G-Sec yields fell 7 bps to 7.33% in Q3FY23 from 7.40% in Q2, and 1-3-year G-Sec yields fell 5-10 bps. To that extent, the hit on treasury portfolio would not be significant while there is a possibility of some write-back,” the brokerage said.
HDFC Bank, SBI, Axis Bank, ICICI Bank, Federal Bank, AU Small Finance Bank and Equitas Small Finance Bank are preferred picks of analysts.