The net interest margins of banks are expected to come under pressure in the second quarter of the current financial year, impacted by higher cost of funds, say analysts. The gap between bank loans and deposits is expected to narrow in July-September due to a benign base, withdrawal of the Rs 2,000 currency note and an improved real rate of return.
The difference between credit and deposit growth has moderated further to 2.3% in September, excluding the impact of the HDFC Bank merger, and the banking system has added around Rs 2.8 trillion deposits, Motilal Oswal Financial Services said in a pre-earnings report.
“While we expect deposit mobilisation to pick up significantly toward the end of the quarter, the overall accretion would still be important to monitor as HDFC Bank alone is going to account for a significant deposit market share,” the brokerage firm said.
On the other hand, loans are expected to remain steady in the quarter under review driven by continued traction in the retail, small and medium-sized enterprise segments. While the corporate segment has also seen some recovery, growth in personal loans and real estate has been robust.
Home loans, vehicle loans, gold loans, unsecured loans, and small business loans continue to perform well, while demand for commercial vehicles remains healthy. The credit card business is also seeing strong momentum due to a growth in spending and new card issuance.
“We expect loan growth across scheduled commercial banks to stay strong at 14.5% year-on-year (y-o-y) for 2QFY24, driven by continued traction in the retail and SME segments. The corporate segment has also witnessed some recovery,” Ajit Kabi, banking analyst, LKP Securities said.
HDFC Bank will kick-start results for the banking sector on October 16.
According to the provisional data, loans of HDFC Bank, IndusInd Bank, and Federal Bank rose around 5% quarter-on-quarter (q-o-q) each. Various other banks have also reported a strong credit growth.
“Change in deposit rates will have full impact in FY24 while repo rate has been stable for last quarter, thus impact on the margins is to be seen,” IDBI Capital said in a report. “Further, strong deposit growth led to slight decline in CD (Credit -Deposit) ratio q-o-q, which should have impact on margins,” the report added.
Prabhudas Lilladher expects the net interest margin of banks to fall 22 basis points on a sequential basis to 3.61% in the September quarter. As a result, net interest income is expected to decline by 1.8% on a sequential basis.
“Fee income is broadly expected to follow loan accretion; we see a 3.3% q-o-q increase, which would be offset by a 6.6% spike in operating expense (opex) to `793 billion as Q2 sees a higher opex rise for public sector banks,” the brokerage said.
Broadly, Prabhudas Lilladher expects the earnings of banks to fall 9.3% q-o-q mainly driven by a lower net interest margin. But, IndusInd Bank, Axis Bank, Federal Bank, and City Union Bank could be outliers on bottom-line due to better margin trajectory than peers.
The asset quality of banks is expected to improve in the quarter under review due to a jump in loan recoveries and upgrades. An improvement in collection efficiency is also expected to aid the asset quality of banks.
