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Motilal Oswal Report
The Weighted Average Lending Rate on fresh loans declined 16 basis points month-on-month in May’24, following a spike of 18 bp month-on-month in April 2024. The public sector undertaking banks reported a decline of 25 bp month-on-month (up 17 bp month-on-month in April-24), while private banks maintained a stable WALR on fresh loans on a month-on-month basis. The systemic WALR on outstanding loans, however, remained flat month-on-month.
The Weighted Average Term Deposit Rate for the system has increased 1bp month-on-month to 6.92% (a 2bp month-on-month rise for PSUs and private banks). More importantly, private banks witnessed an increase of 7 bp during April-May-24 versus PSB’s 3 bp increase. This rise can be attributed to the banks raising their rates in short-term maturities amid tight liquidity conditions.
Credit growth for the system remains robust at 15.6% YoY, and we estimate credit growth to sustain at a healthy 14% CAGR over FY25-26. However, liability mobilisation to sustain this growth remains critical, as systemic LDR remains elevated at 79.9%.
With repo rates remaining unchanged since Feb-23, lending rates have remained broadly stable; however, funding costs have been gradually rising due to ongoing liability re-pricing and the recent rise in deposit rates by select banks.
We thus expect the banking system’s margins to exhibit a slight downside bias in the near term, while the potential turn in the rate cycle during H2 FY25 will further compress lending yields. Our top picks are: ICICI Bank, HDFC Bank, SBI, and Federal Bank.
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