Robust growth, loan repricing to support banks’ margins in Q3

Banks are expected to report another quarter of strong earnings as robust credit growth and repricing of loans are seen supporting their margins.

Profitability of banks is seen rising 34-40 per cent y-o-y in the third quarter of FY23 led by a 20-24 per cent rise in the net interest income (NII), on the back of 18-23 per cent credit growth, analysts said. The pre-provisioning operating profit (PPoP) is also seen higher by 20-25 per cent, analysts said.

“Repricing of the lending book, improved traction in better-yielding focused product segments and utilisation of liquidity and excess SLR for growth in advances are likely to offset deposit cost pressures and support gradual rise in net interest margins (NIM),” ICICI Securities said.

However, PSU banks could see some impact on margins as they make provisions for new wage settlement cycle that has come into effect from November 2022, analysts said.

Credit Vs deposit growth

“Systemic loans exhibit a consistent revival, with strong credit growth driven by continued traction in the retail and SME segment. The corporate segment is also seeing recovery. Home, vehicle, unsecured and small businesses continue to do well, while demand for commercial vehicles (CV) is also improving,” Motilal Oswal Securities said, adding that credit card spends are also growing at a robust pace.

On the other hand, deposit growth is expected to continue to lag credit growth leading to higher cash-deposit (C-D) ratios for most banks, analysts said.

The conversation is shifting away to sustainability of loan growth, challenges in raising term deposits given the existing wedge in deposit and loan growth and slower growth in low-cost CASA deposits versus term deposits and peaking of the NIM cycle, Kotak Institutional Equities said.

Lower provisions, credit cost

With asset quality for most banks seen stable, provisioning requirements are expected to continue to trend lower for most banks. As a result, moderate slippages, combined with healthy recoveries, should keep credit costs lower across the board, analysts said.

“We expect incremental slippages runrate to be contained in the range of 0.3-0.6 per cent on a non-annualised basis,” ICICI Securities said, adding that some seasonal agriculture loan-related stress, however, could be seen for certain banks.

Kotak Institutional Equities said it expects the recovery in return on equity (RoE) being the highest for mid- and small banks that were either affected by the corporate NPA cycle or the pandemic.


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