India’s banking sector is expected to post a healthy growth in the quarter ended June 2023 on improvement in loan growth and continued on-year credit growth momentum. “Despite seasonal headwinds and hardened interest rates, systemic credit growth has remained firm and has picked up from 15.0 per cent YoY (Mar 24, 2023) to 15.4 per cent YoY as of June 16, 2023. As against the usual QoQ dip in Q1, calculated QoQ rise in systemic credit has been strong at ~2.5 per cent,” said Jai Prakash Mundhra from ICICI Securities. However, they may see pressure on margins from Q2FY24 onward because of the rise in the cost of deposits, according to Motilal Oswal Financial Services.
Jai Prakash Mundhra further added, “The unusual resilience in Q1FY24 credit growth could partly be attributed to strong estimated real GDP growth of 8 per cent YoY, which is expected to taper successively to 5.7 per cent by Q4FY24, as per the RBI.” According to analysts and brokerage firms, the sector will witness healthy loan growth in the first quarter of the financial year driven by continued traction in the retail and SME segments. “The Indian banking sector continued to see YoY credit growth momentum at mid-teens through 1QFY24, which should translate into high-teens credit growth for most large banks, especially in sticky loan segments like retail and SME,” said Santanu Chakrabarti, Head- BFSI Research, Director, BNP Paribas. According to the RBI data, as of June 2023, the industry has seen a credit growth of 15.4 per cent YoY despite seasonal weakness in Q1.
Deposit growth, said ICICI Securities, has increased from 9.6 per cent as of Mar 24, 2023 to 12.1 per cent YoY as of June 16, 2023, aided by earlier hikes in card rates as well as withdrawal of Rs 2,000 currency notes. “The repo rates have been unchanged since Feb 2023 which has restricted the rise in weighted average lending rate at ~6 bps in Mar 2023 to May 2023 period vs 20 bps rise in Q4FY23,” said Jai Prakash Mundhra.
Banks are expected to witness a deposit rate growth over the next two to three quarters which will help NIM to normalise. “Within deposits, low cost CASA growth has declined sharply, putting pressure on overall costs. We model ~10 bps QoQ decline in NIMs for most banks (barring IIB and Bandhan),” said Jai Prakash Mundhra from ICICI Securities. Further, analysts expect to witness NII growth in the range of 22-32 per cent for Q1FY24. “With margins that are in the vicinity of Q4FY23 levels and significantly higher than in Q1FY23, we expect Q1FY24 NII growth in the range of 22-32 per cent YoY for our covered banks. This translates into an even higher PPoP growth in most cases,” said Santanu Chakrabarti.
In terms of slippages, Motilal Oswal Financial Services stated that slippages are expected to remain under control, which, along with recoveries, should aid the ongoing improvement in asset quality.
Performance expectations for Q1FY24
The first quarter earnings hold significant importance for various sectors with banking and auto sectors expected to drive the growth during Q1FY24 quarter, said brokerage firms. According to Elara Capital, State Bank of India (SBI) and Bank of Baroda (BOB) might fare better than peers based on relative ranking amongst PSUs.
Per report by BNP Paribas, front-line Indian banks have the best asset quality and provisioning levels in decades, still robust credit growth including customer segments beyond prime and the potential for fixed deposit mobilisation to support credit growth. “Our top three sector picks remain HDFC Bank, ICICI Bank and Axis Bank, in that order. In mid-cap banks, we continue to prefer AU Small Finance Bank,” said Santanu Chakrabarti. Further, talking about the CASA growth, he said that the fact that HDFC Bank could deliver only 10.7 per cent CASA growth on-year suggests that system CASA growth still remains weak.
Meanwhile, according to a Morgan Stanley report, ICICI Bank and state-owned enterprises (SoE) banks like IndusInd Bank, Bank of Baroda, and SBI in particular are expected to record strong earnings in Q1FY24. It said that ICICI Bank will likely post significant volume growth for both loans and deposits and SoE banks are expected to record healthy profitability. “Considering the high loan growth and reduced credit costs, wholesale funded banks should post strong earnings,” it said.
“We expect strong results from IIB and Federal Bank, and soft results from Bandhan Bank, City Union Bank and RBL. For SBI, we estimate QoQ rise in gross slippages (led by agri) and decline in RoAs QoQ (from 1.23 per cent in Q4FY23) though still healthy at ~1.1 per cent (vs 48 bps YoY).,” said Jai Prakash Mundhra