The loan growth of banks is expected to remain bullish in the June quarter, but net interest margins will likely see compression as deposits get re-priced at a faster pace than loans, say analysts.
“We expect systemic loan growth to remain healthy in April-June, driven by a continued traction for retail, small and medium-sized enterprises segment,” brokerage firm Motilal Oswal Financial Services said in a pre-earnings report.
The brokerage said while the loan growth in the corporate segment remains sluggish, demand for home, vehicle, unsecured, small business loans, and credit cards remain strong.
Analysts have noted that the loan growth in the first quarter has been aided by the expansion in the GDP. Bank loans grew 15.4% year-on-year in May 2023, higher than 12.2% Y-o-Y rise in the same month last year, the latest data from the Reserve Bank of India (RBI) showed.
In the quarter under review, the RBI announced withdrawal of Rs 2,000 notes from circulation, and this has aided the growth in deposits. While withdrawal of these notes have taken some pressure off the cost of deposits of banks, the outstanding cost of deposits is still expected to rise at a faster pace than loan yields, say analysts.
“While there has been a decline in fresh term deposits rates on a month-on-month basis for the last two months till May’23, o/s cost of term deposits has been on a rising trajectory (up 21 bps since Mar’23),” ICICI Securities said in a pre-earnings report. “Additionally, within deposits, low-cost CASA growth has sharply declined , putting pressure on overall costs.”
Barring IndusInd Bank and Bandhan Bank, ICICI Securities said, it expects the net interest margin of most lenders to fall by 10 bps on a sequential basis.
While net interest income of private banks is expected to rise 25% YoY, the quarter-on-quarter growth will likely be muted.
“We expect NIMs to compress marginally as deposit repricing will be faster than new loans yields. Term deposit rates have also increased for several banks. Hence, we are likely to witness marginally lower NIMs sequentially,” Ajit Kabi, banking analyst at LKP Securities, said.
Analysts expect slippages of banks to remain under check, which, along with recoveries, will help improve the asset quality. This will ensure that the profitability remains intact.
“We estimate broadly stable provision coverage ratio QoQ for banks (barring City Union Bank) and benign credit costs for most banks,” ICICI Securities said. While SBI and large private banks have healthy o/s contingent buffer, commentary around Ind-AS implementation (and the need for creating prudential buffer) would be the key monitorable for small-mid private and other PSU banks,” the brokerage said.
The growth rate and the performance of the unsecured loan portfolio will also be keenly watched.