Margin, deposit pressure likely to spoil banks’ June quarter show

Indian banks are expected to report lackluster earnings growth for the June quarter (Q1FY25), hurt mainly by margin pressures with lenders unable to raise deposits at a pace matching credit expansion. Some early signs of stress were already visible in the Q1 updates of various banks.

For instance, state-owned Punjab National Bank reported quarter-on-quarter deposits growth of 2.8%, while advances grew 5%. Private lender Yes Bank clocked a 0.9% sequential rise in loans and advances, even as deposits shrank 0.5%. The biggest disappointment was HDFC Bank. The country’s largest private sector lender saw a 0.8% sequential drop in gross advances at ₹24.87 trillion, weighed by a fall in corporate and wholesale loans. Total deposits were flat quarter-on-quarter at ₹23.79 trillion.

The mismatch in credit and deposit growth has been plaguing the sector for a while now. Overall credit growth has been sustaining at around 16% year-on-year, aided by robust demand from the retail segment for housing, personal and consumption loans. At the same time, systemic deposits have expanded at about 13% year-on-year, with a bulk of retail flows going towards equity markets in the form of SIPs.

This has led to the credit-to-deposit (CD) ratio for banks remaining uncomfortably high (75% and above). As a result, lenders find themselves caught between a rock and a hard place—either sacrifice growth by going slow on advances or raise the deposit rates to mobilize funds, which, in turn, will dent their net interest margins (NIMs).

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Analysts expect the trend to be discernable in banks’ upcoming Q1 results. “We continue to believe that the growth-NIM conundrum may persist and the strain will sustain... We see NIM impact on three counts: a) continued repricing on back deposit book, b) sticky incremental deposit costs as a few banks raised (card) rates in Q4FY24 and c) higher interest income reversal given higher agri slippages (for some),” Elara Securities said in a note.

The country’s largest lender State Bank of India hiked its term deposit rates twice last quarter, while HDFC too increased rates for select tenures.

Compounding the trouble for banks is the declining share of the CASA (current account savings account) deposits, which is the cheapest source of funds for banks. In their Q1 updates, several banks reported a sequential fall in their CASA ratios.

HDFC Bank’s CASA ratio tumbled to 36.3% from 38.2% in the preceding quarter, while that of RBL Bank fell to 32.6% as against 37.3%. Rising term deposit rates and declining CASA ratios will have the cumulative effect of jacking up banks’ cost of funds in Q1FY25.

“We expect CoD (cost of deposits) to inch up QoQ for most of the banks – also impacted by unfavourable mix (pressure on CASA),” ICICI Securities pointed out. It added that systemic weighted term deposits rates have been inching up, though the pace has become much calibrated. “While a large part of the deposits re-pricing is over, there is a substantial gap (>150bps) in the term deposits rates vs. Jun’22, suggesting upward pressure upon renewal of longer tenure deposits,” it said.

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While credit quality for most banks has been robust, leading to lower provisioning costs, the recent developments related to farm loan waivers could potentially upset the credit culture and lead to an uptick in credit costs, especially in agri and microfinance segments.

Also, Q1 saw disruptions related to the general elections and a severe heatwave affecting large parts of the country. As it is, Q1 is a seasonally weak quarter and is characterized by an uptick in agri NPAs.

“The overarching theme about asset quality, barring seasonal variations, continues to remain less worrisome. However, banks have been consistently cautioning that the current levels of slippages and credit costs are not sustainable,” Kotak Institutional Equities said. Recovery from bad loans (a key earnings driver for public banks) is likely to be muted in Q1FY25, it added. Overall, it expects Q1 earnings growth to be weak for PSU banks (2% year-on-year) compared to private banks (17% year-on-year).

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