Synopsis: A recent report by BNP Paribas India highlights the gradual impact of potential delayed rate cuts on Indian bank margins. The report notes that while rate cuts will provide a gentle boost to banking margins, the benefits will materialize gradually. The report also emphasizes that any delay in rate cuts will postpone this recovery and potentially affect stock re-ratings.
A recent report by BNP Paribas India highlights the gradual impact of potential delayed rate cuts on Indian bank margins, emphasizing both the benefits and challenges that the banking sector including online-banking services may face in the coming years.
The anticipated rate cuts in October 2024 are expected to provide a gentle boost to banking margins, but not immediate relief.
Repo-linked mortgages and most prime corporate loans are likely to reprice quickly, setting the stage for a gradual margin expansion due to easing funding costs and an accelerated disbursement of high-yield fixed-rate loans.
According to the report, the benefits from reduced funding costs will materialize gradually, driven by the repricing of fixed deposits (FDs) and increased momentum in current account and savings account (CASA) deposits.
Immediate relief is expected only on short-term borrowing costs, with AXIS Bank (AXSB) standing out in this regard.
Despite strong earnings in FY24, the report notes that large-cap private bank stock prices have shown muted performance.
This is attributed to the FY25 earnings per share (EPS) growth projections appearing lackluster due to the anticipated late interest rate cycle margin moderation.
However, the firm forecasts a more optimistic outlook for FY26 earnings growth as the benefits of rate cuts gradually enhance margins.
Chakrabarti cautions that any delay in rate cuts will postpone this recovery and potentially affect stock re-ratings.
The marginal impact will depend on pricing choices made on loans and fixed deposits.
He also points out that geopolitical factors and US inflation targeting may lead to 'higher for longer' interest rates, presenting a significant risk.
The report explores the impact of delaying rate cuts by one or two quarters on FY26 earnings.
A one-quarter delay is projected to impact earnings by -0.3% to -2%, while a two-quarter delay could affect earnings by 0.3% to -5.7%.
Despite these variations, the impact is not significant enough to alter BNP Paribas's ranking of preferred banks.
The analysis highlights that a one or two-quarter delay would lower FY26 EPS growth by 18-210 basis points (bps) and 45-535 bps, respectively, from the current expectation of 11.1%-28.6%. AXSB and HDFC Bank (HDFCB) are projected to be the most affected, given their sensitivity to incremental funding costs.
Conversely, IndusInd Bank (IIB), with its high proportion of fixed-rate loans, could benefit from a delay in the short term, though its FY26 earnings growth may appear less appealing due to a higher base.
BNP Paribas reaffirms its top picks in the sector: HDFC Bank, ICICI Bank (ICICIBC), and AXIS Bank, in that order.
These banks are expected to navigate the potential delays in rate cuts with resilience, supported by their strategic financial positions and adaptive capabilities.
In conclusion, the report by BNP Paribas India highlights the gradual impact of potential delayed rate cuts on Indian bank margins.
While the anticipated rate cuts in October 2024 are expected to provide a gentle boost to banking margins, the benefits will materialize gradually.
The report emphasizes that any delay in rate cuts will postpone this recovery and potentially affect stock re-ratings.
The marginal impact will depend on pricing choices made on loans and fixed deposits.
The report also notes that geopolitical factors and US inflation targeting may lead to 'higher for longer' interest rates, presenting a significant risk.
BNP Paribas reaffirms its top picks in the sector: HDFC Bank, ICICI Bank, and AXIS Bank, in that order.
These banks are expected to navigate the potential delays in rate cuts with resilience, supported by their strategic financial positions and adaptive capabilities.
Related Questions
1. What is the expected impact of the anticipated rate cuts in October 2024 on Indian bank margins?
The anticipated rate cuts in October 2024 are expected to provide a gentle boost to banking margins, but not immediate relief.
2. What are some factors contributing to the gradual margin expansion in the banking sector?
Factors contributing to the gradual margin expansion include easing funding costs, repricing of fixed deposits (FDs), and increased momentum in current account and savings account (CASA) deposits.
3. What are the potential consequences of any delay in rate cuts?
Any delay in rate cuts may postpone the recovery of banking margins and potentially affect stock re-ratings.
4. How might geopolitical factors and US inflation targeting impact interest rates?
Geopolitical factors and US inflation targeting may lead to 'higher for longer' interest rates, presenting a significant risk.
5. Which banks are identified as top picks by BNP Paribas India despite potential delays in rate cuts?
BNP Paribas India reaffirms its top picks in the sector: HDFC Bank, ICICI Bank, and AXIS Bank, in that order.
