Private banks’ margins intact in Q3

Extending the trend from the previous quarter, private banks continued to report strong margins in Q3 FY23 even as corporate loans and deposit accretion started to show signs of a pick-up in growth.

Margins remained intact due to to the increasing share of higher-yielding unsecured loans and the repricing of floating-rate loans, which also partly offset the increase in cost of deposits for banks, said analysts.

Owing to their strong performance, Kotak Mahindra Bank and Federal Bank emerged the favourites post the quarterly earnings, with several brokerages revising upward their price target on the latter’s stock to ₹160-185.

“Pricing pressure has been significant which has compressed. Kotak Bank’s Strategy is to add more credit substitutes in well-rated spaces at rational pricing and fulfil PSL requirements. This segment has lower credit costs, SMA and slippages,” said Prabhudas Lilladher in a note.

While credit growth so far this year has been led by retail and unsecured loans, Q3 also saw banks reporting a pick-up in corporate loans, especially mid-corporate and business banking loans, supported by easing pricing pressures across some segments.

However, HDFC Bank was the outlier reporting a sequential de-growth in the wholesale book, as it deliberately gave up about ₹30,000-40,000 crore worth of wholesale loan business due to unattractive pricing.

“HDFC Bank management averred that there is no problem with wholesale loan demand, which is coming in from the NBFC, PSU, retail and infra segments and weakness in wholesale loan growth for the bank may be transient,” said YES Securities.

Deposit accretion also gained momentum, largely led by growth in bulk or term deposits whereas growth in low-cost CASA deposits remained muted. In their earnings call, multiple banks said that in order to support credit growth, they are growing term deposits to supplement the slowdown in CASA deposits--which will remain a key monitorable in the coming quarters.

“ICICI Bank’s deposit mobilisation was tepid. We believe the bank is on a sustainable growth path trajectory; however, growth may moderate if retail deposit accretion does not pick up pace with advances growth,” Sharekhan said.

Asset quality for banks was better across the board owing to lower fresh slippages and strong recoveries, allowing several banks to make additional contingency provisions.

Analysts warn that going forward there could be an increase in provisioning requirements as banks look to take advantage of the strong balance sheets right now and start making provisions as per the expected credit loss (ECL)-based framework to ensure a smooth transition when the regulator releases the final norms.

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