Banks Should Brace For Loan-Growth Slowdown, Margin Pressure: Macquarie

Loan growth will moderate across the systems in line with the regulator's intention as banks will continue to monitor the concentration of the NBFC exposure and remain choosy while lending, Macquarie Group has said.

Growth in the current account-savings account has been anaemic for banks. Technology, customer behaviour and even governments actively managing their float money have all resulted in CASA growth being weak, and CASA mobilisation continues to remain a big challenge, the research firm said in a note on Thursday.

The decline in growth will be larger for the non-banking financial companies as they have grown their unsecured book at a higher rate. "Reliance on partnerships and co-lending is higher for NBFCs where, as per our channel checks, delinquencies have increased," it said. "Commentary indicated system loan and deposit growth expectations of 12–14% and 10–12% for FY25 respectively."

The Reserve Bank of India tightened norms for unsecured retail loans in November. The central bank made consumer lending costlier for banks and non-bank lenders, and also asked them to limit exposure to such loans, amid growing risk concerns.

Capital levels are adequate for large private banks, well above their internal thresholds. The largest bank in India also indicated that capital levels are enough to fund growth, according to Macquarie. "Accordingly, we don't see any equity capital raise in the near term (6–12 months) by large banks."

Large private banks clearly indicated that retail and SME portfolios will continue to remain the key growth drivers. Demand for private-sector capex is still low.

Current liquidity levels are tight and most banks expect rate cuts to happen in the second half of the next fiscal. While the extent of margin decline will depend on the composition of the loan portfolio, deposit rates will remain elevated after the rate cut, given the current pressure on mobilisation. Margins could possibly come down by 10–15 basis points in case the RBI cuts the rate by 50 bps in the second half of the next fiscal.

Credit costs will increase as the recoveries decline. Retail delinquencies will normalise in line with expectations. Commentary indicates robust asset quality in the corporate and MSME segments for large banks, according to Macquarie.

Macquarie underscored that commentary from top banks clearly indicated that regulatory monitoring increased around growth and asset quality, which is visible during periodic inspections.

The RBI's key focus remains on aspects like underwriting, customer satisfaction, technology resilience and cybersecurity.

• The research firm reiterates 'outperform' and HDFC Bank Ltd. is its top sector pick. The target price is Rs 2,110, implying an upside return potential of 30.3%.

• Macquarie said the management of HDFC Bank clearly indicated that the RBI action of increase in risk weights for unsecured loans was necessary, given the high growth reported by the NBFCs and certain banks in the segment.

• On the pricing front, the management does not expect a significant increase in pricing, which would warrant a change in target customer segment. It expects to increase rates in the range of 25–50 basis points.

• Net interest margins to normalise to 3.7% levels in 18–24 months and targets 4% NIM levels in three–four years.

• This will be driven by normalisation of liquidity levels, improving product mix, retail mix to increase to 54% from 46% levels currently, improvement in CASA—which is currently 38% and the management targets this to improve to 40–41% (pre-merger 42%)—and decline in borrowing mix from current levels of 22% (pre-merger levels of 8-9%).

• The bank acquired Rs 5 trillion of eHDFC Ltd non-deposit liabilities and replacing every Rs 1 trillion of e-HDFC liabilities with the bank funding structure can add 12 bps to the NIMs of the bank.

• Macquarie maintains an 'outperform' rating on the bank, with a target price of Rs 1,190.

• On the growth front, the bank expects some slowdown at the system level, which is in line with the regulator's intention and consequently has some impact on the bank.

• ICICI Bank Ltd. has already increased rates on personal loans. It further indicated that it would look to trim its NBFC exposure, given capital consumption and the RBI's focus on concentration of banks' exposure on NBFCs.

• The bank also indicated that it has very small exposure to unsecured loans through partnerships and co-lending arrangements.

• CASA mobilisation remains a significant challenge as per the management. Its core philosophy on embracing open architecture remains unchanged and there will be no pressure to add any partner in third-party distribution of products just because fee income is under pressure.