Higher treasury income, supported by a fall in bond yields during the January-March period, is likely to boost earnings of banks in the fourth quarter of the previous fiscal. However, net interest margins (NIMs) are expected to shrink as the cost of funds remains elevated, with banks continuing to hike rates on deposits to mobilise funds to meet high credit growth.
“The decline in bond yields is expected to contribute to increase in banks’ treasury income for the fourth quarter as they hold significant volume of government securities,” head of treasury of a private sector bank told FE.
The yield on 10-year benchmark government security eased 26 bps year-on-year and 12 bps quarter-on-quarter in Q4 to settle at 7.06% on March 28, the last trading day of FY24. The price of the 10-year paper closed at Rs 100.83, about 80 paise higher compared to the Q3 and about Rs 1.20 paise higher over the year-ago period.
“Banks will see modest treasury gains in Q4 due to moderation in bond yields which will boost other incomes. NIMs of banks are expected to remain under pressure as lenders continue to raise rates on deposits,” Ajit Kabi, banking analyst, LKP Securities, told FE. “The market will keenly watch banks’ management commentary on the credit and deposit growth outlook and NIMs for the current financial year.”
Impacted by the hike in term deposits and tight liquidity in the banking system, cost of funds for banks has gone up, putting pressure on NIMs. Credit growth remained robust at 16.5% for the fortnight ended March 8 while deposit growth was lagging at 13.1%, according to RBI data.
Several large banks, including HDFC Bank, ICICI Bank and Axis Bank, raised rates on fixed deposits during the fourth quarter, showing that lenders are still aggressive in attracting deposits to meet their credit demand. Provisional figures show that some banks have grown their deposits faster than advances. According to provisional data released by top private sector banks, the deposit growth for five of the seven lenders has outpaced the credit growth sequentially in Q4FY24.
HDFC Bank grew its deposits 7.5% QoQ to Rs 23.80 trillion as on March 31, 2024, while its gross advance rose 2% to Rs 25.08 trillion. Yes Bank, Federal Bank, RBL Bank and Bandhan Bank also showed a similar trend of growing deposits faster than advances in Q4 on a sequential basis.
“Unlike the traditionally strong fourth quarter, we believe Q4FY24 will be relatively soft, characterised by NIM pressure, steady loan growth but softer deposit growth and cost pressures with the impending impact of wage hikes and pension provision for a few,” noted a report by Elara Capital. “That said, lower credit cost and better recovery trends (recovery from written-off) should support earnings,” it added.
Motilal Oswal Financial Services expects ICICI Bank, Axis Bank and Kotak Mahindra Bank to see a 7-11 bps moderation in NIMs while HDFC Bank, SBI and Union Bank may see flat NIMs during the quarter.
Experts expect the asset quality to remain healthy with recoveries from stressed assets to rise. “We anticipate slippages to remain manageable, with upgrades, recoveries and resolutions in certain corporate and SME segments enabling a continued decline in the GNPA (gross non-performing assets) ratio,” noted a Motilal Oswal report. “We estimate that credit costs will stay below their normalised run rate, with the release of certain AIF provisions further supporting this lower rate,” it added.
