Bank Margins Likely To Remain Under Pressure In Q2; ICICI May Remain Outlier, Soft Quarter Expected For Axis

Indian banks are expected to report softer performance in the second quarter ended September 2024, as pressure on margins is likely to continue, led by a rise in deposit costs amid an overall moderation in credit growth.

Bank of Maharashtra is set to report its July-September earnings results on Tuesday, followed by Axis Bank on Thursday.

While analysts will watch out for the impact of increased risk weight changes on unsecured retail credit, lenders whose loan portfolios are exposed to microfinance institutions are not in a comfortable position and are likely to see elevated credit costs and weak commentary on near-term business performance.

Sharekhan stated in an earnings preview that banks in the unsecured and MFI loan segment should expect slightly higher slippages along with lower recoveries and upgrades.

"We expect muted PAT (profit after tax) growth, led by slower business growth... We expect banks to report a 10-basis-point sequential decline in NIMs (net interest margins), led by the re-pricing," Kotak Institutional Equities said in an earnings preview.

While Axis Securities expects costs of funds to remain elevated, margins are likely to fall slightly for most banks to the tune of 5-10 basis points.

While large-sized private sector banks and public sector banks could report a more calibrated decline in margins, small finance banks may see sharper compression, it said.

Additionally, a reversal in the interest rate cycle could further lead to yield pressure and may impact private sector banks more because they have a relatively higher share of floating rate loans, Emkay Global Financial Services said.

Motilal Oswal Securities believes that state-owned banks will be better capable of maintaining their margins, led by a higher mix of marginal cost of lending rate books.

Apart from pressure on NIMs and high credit costs, the credit-deposit ratio of banks and commentary around it will be closely monitored due to regulatory concerns growing because of its elevated levels, which are at 79.6% as of September.

While the gap between deposit and credit growth has narrowed from the peak of 8.8% in November 2022 to 2.3% as of last month, a high incremental loan-to-deposit ratio will further bring down loan growth, Motilal Oswal said.

"We thus estimate the CD growth gap to reduce to <100bp over FY25 while estimating credit growth to slow down to 12.5% over FY25," it said.

High CD ratios of HDFC Bank and Axis Bank at 103.5% and 92.2%, respectively, as of April-June will be keenly watched out for.

Overall, credit growth has declined to 14.2% from 16.4% in 2023-24 (April-March), and deposit growth has remained in the range of 11–13% over the past 14 months.

Barring expectations of higher slippages from unsecured and MFI segments, the asset quality of banks is largely expected to be stable in July-September, and analysts are not expecting any meaningful weakness.

The corporate asset quality continues to be pristine, and bad loan coverage remains healthy for most banks, Sharekhan said.

High slippages in the agriculture segment witnessed in April-June are expected to partially ease in July-September, primarily benefiting public sector banks and private players.

However, stress in the MFI space could lead to higher non-performing assets for MFI-heavy banks such as IndusInd Bank, Ujjivan Small Finance Bank, RBL Bank, AU Small Finance Bank, and Bandhan Bank, Emkay Global said.

Stress in the credit card segment is also refusing to subside for a few players due to overleveraging and could impact NPAs of IDFC Bank, AU Small Finance Bank, and RBL Bank.

"We expect a varied performance across banks and better performance from ICICI Bank and Axis Bank among large private banks and Bank of Baroda among PSU banks," according to Elara Securities.

Emkay Global expects public sector banks to report a better performance in Jul-Sep, with PAT growth better off at 18% on year as compared to 8% on year growth for private sector banks due to lower staff costs and better treasury gains.

State Bank of India, Bank of Baroda, Bank of India, and Punjab National Bank are the most preferred picks.

Within large private players, ICICI Bank is likely to remain an outlier due to better growth and contained credit costs, while Axis Bank and Kotak Mahindra Bank should report a relatively soft quarter, Motilal Oswal said.

HDFC Bank has bounced back on the deposit front in July-September, but slower loan growth and higher costs could limit earnings growth, the brokerage said .