Banks’ net interest margins (NIM) are expected to compress further in Q2 FY24 on the back of sustained pressure on cost of funds, owing to which the pace of deposit mobilisation will remain a key monitorable for every lender, according to analysts.

“Lending yields will continue to remain largely stagnant with only limited benefit flowing in from MCLR linked loan repricing, while CoF will continue its upward trajectory. Thus, margin compression for banks will continue even in Q2FY24,” Axis Securities said.

Macquarie Research pegged margin compression of 10-17 bps sequentially for the top private and PSU banks, also due to some negative impact of liquidity carry due to I-CRR.

However, the pace of margin compression could be lower for some banks led by a shift in the asset mix shift in favour of higher yield segments which offset the impact of deposit repricing to an extent, according to BNP Paribas.

Motilal Oswal Securities said that while deposit mobilisation will pick up significantly toward the quarter end, the overall accretion would be important to monitor as HDFC Bank alone will account for a significant deposit market share. The sector added over ₹2.28-lakh crore of deposits in Q2, of which ₹84,500 crore came from the merger of HDFC, it said.

Operating metrics

In addition to margin compression, elevated cost to income ratios and higher opex due to branch expansions, wage revisions, technology-related expenses and muted treasury gains are also expected to weigh on banks’ PPoP (pre-provisioning operating profit). PPoP is seen growing 12-20 per cent y-o-y in Q2 and remain largely flat sequentially. The PPoP for private banks is expected to be higher at 18 per cent compared with PSU banks 8 per cent.

As per estimates, private banks are seen posting yoy PAT growth of 25 per cent and PSU banks of 20 per cent. Increase in net interest income (NII) has been pegged at 16 per cent for the banking sector, wherein NII for private banks will grow 21 per cent and for PSU banks by 12 per cent.

HDFC Bank, ICICI Bank and Axis Bank remain brokerages’ favourites in terms of earnings growth, followed by Federal Bank and IndusInd Bank among mid-sized banks. Several analysts have also turned bullish on small finance banks from a medium to long-term perspective given their stronger fundamentals and loan growth trajectory.

BNP Paribas revised its price target multiple on IndusInd Bank to 1.8 times from 1.5 times, ciiting the strong momentum in NBFC-adjacent credit segments that increases confidence “in the bank’s continued loan growth acceleration”.

Loan, deposit growth

Axis Securities estimates loan growth for the sector to be around 15 per cent yoy and deposit growth to be 13.2 per cent, excluding erstwhile HDFC’s deposits.

“Systemic deposit growth has improved to 12.8 per cent y-o-y (adjusted for HDFC merger), aided by a benign base, the discontinuance of the ₹2,000 currency note and an improved real rate of return,” Motilal Oswal Securities said, adding that loan growth should also be robust sequentially led by improved corporate demand and ongoing traction in the retail and MSME segments.

Banks’ portfolio quality is seen improving further on the back of lower slippages, controlled credit costs and healthy pace of recoveries, including in restructured accounts.

However, the growth rate and the performance of unsecured loans, especially following RBI’s recent advisory on unprecedented growth in the segment, and the increase in share of term deposits amid falling CASA deposits, will be keenly watched, analysts said.

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