Positive surprises in banks’ earnings are unlikely as there is no scope for NIM (net interest margin) expansion, while the outlook on loan growth appears to be showing signs of moderation from current levels, Kotak Securities Ltd (KSL) said in a report.

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“Deposit growth and NIM continue to dominate discussions (at a recent investors conference), but there are no visible signs of accelerating trends on deposits, while NIM is likely to be under pressure in FY2025,” said KSL analysts’ M B Mahesh, Nischint Chawathe, Ashlesh Sonje, Abhijeet Sakhare and Varun Palacharla.

Asset quality trends across banks (public, private, regional and small finance banks) remain comfortable, suggesting credit costs are likely to see a reversal to normalcy at a much slower pace.

Valuation appears to be comfortable, but lacking triggers for a re-rating, opined the analysts.

Increasing interest rates

The analysts said there is a common view among lenders that increasing interest rates (term or savings) would see immediate responses from all players and with no pass through possible, this would be NIM dilutive for all. Hence, lenders prefer to build infrastructure to mobilise deposits rather than increase interest rates.

“More headwinds on NIM progression, as the rate cycle is closer to reversing, while cost of funds may be lot more stickier during this period until the funding environment eases. Most banks have chosen to prioritise NIM over loan growth. Even public banks with healthy balance sheets (deposits, CET-1 and asset quality) were a lot more sanguine on growth expectations,” per the KSL report.

The analysts noted that asset quality and credit costs would eventually reverse to the worst.

“The past two years had seen significant improvement in slippages and strong recovery trends, especially for public banks. However, extrapolation of these trends, especially credit costs, which are closer to historic lows, is not realistic. Frontline banks have built buffers, but there is no time frame to reverse these provisions at this stage,” they said.