Strong Q3 Indicated By Business Updates From Banks
Banks are poised to reveal robust credit growth in the third quarter of FY24, as indicated by their recent business updates. The surge in deposits is notable, but it is primarily driven by timely deposits rather than low-cost current account-savings account (CASA) deposits, potentially impacting net interest margins (NIMs).
Analyst Ajit Kabi from LKP Securities stated that large private banks are anticipated to report credit growth of approximately 20 per cent, public sector banks around 12 per cent and small finance banks may report over 25 per cent growth in Q3FY24.
The third quarter typically sees better retail credit growth due to increased demand for retail loans during festivals. Wholesale credit growth is fueled by heightened capital expenditure by companies and government infrastructure spending. Earnings announcements by banks, starting with HDFC Bank on January 16, will provide further insights.
According to brokerage firm Sharekhan, banks are experiencing healthy loan growth, especially in retail and micro small and medium enterprises (MSME) credit. The retail segment remains robust, with clear demand in vehicle loans, microfinance, mortgages, and unsecured segments. The SME sector is also witnessing healthy traction.
While corporate loan growth has been slow in the current financial year, it is expected to pick up as capital expenditure increases gradually. Many companies are planning capacity expansions funded by bank loans.
Provisional numbers from banks indicate deposit growth, but this could impact profit margins. Intense competition among banks to raise deposit rates has increased the cost of funds. Analysts anticipate pressure on NIMs in the third quarter due to higher funding costs.
A headwind for banks is the re-pricing of deposit rates upward, affecting NIMs as most repricing on the asset side has already occurred. Analyst Ajit Kabi noted that banks are likely to report a higher cost of funds in Q3, with NIM compression of 10-15 basis points expected across banks.
Despite the RBI increasing risk weights on unsecured loans, banks are expected to continue unsecured lending as these loans yield higher returns. The impact of increased risk weights on the capital adequacy ratio of banks is predicted to be around 80-100 basis points.
While asset quality is anticipated to remain stable with modest slippages and increased recoveries and upgrades, analysts expect banks to report healthy asset quality numbers for the third quarter.
