Banking Q3 Results Preview: Margin Pressure To Continue, Eyes On Deposit Mobilization; Top Stocks To Buy

For the Q3FY24 preview, the major focus will be on solid credit offtake led by favourable holiday sentiments, which may stimulate healthy credit growth across the banking sector. Asset quality is projected to remain good in Q3FY24E, and banks are expected to witness a purposeful reduction in the percentage of unsecured loans after the RBI's risk weight ruling according to KRChoksey.

Gradual pick up in deposits to continue

The banking industry credit offtake continued to grow by 20.1% YoY, reaching INR 158.1 Tn for the fortnight ending December 15, 2023. The impact of HDFC's merger with HDFC Bank, as well as the festival season and an upsurge in personal loans, triggered this increase. Excluding the impact of the merger, credit grew at a lower rate of 15.8% YoY in the same period compared to last year's growth of 17.4%.

The retail credit segment grew by 30.8% YoY (18.3% YoY excl. HDFC Ltd) as per the data released by RBI as of November'23. As per the sectoral deployment data released by RBI, within the retail segment, personal loans reported a growth of 30.1% YoY as of November 2023.

This growth includes the merger impact while excluding the merger, the personal loan growth decelerated to 18.6% YoY in November 2023 as against 19.9% a year ago, due to moderation in credit growth to housing. The credit to industry growth continued to report a growth of 6.1% YoY in November'23 as against 13.0% YoY in November'22, the report published by KR Choksey Research stated.

The corporate segment has been seeing a slower but gradual pick-up in their capex plans; thus, the corporate loan book pipelines for the banks remain positive, especially for SBIN. The credit-to-services sector grew by 21.9% YoY in November 2023.

Among major contributors, credit growth to NBFCs tapered down in November 2023. Unsecured personal loans and NBFC segments are expected to see a slowdown from their peak levels across all the banks, led by the recent RBI notification on risk weights. We expect the credit book to grow at an average of 25.0% YoY/5.0% QoQ as of December 31, 2023, for our coverage universe. Deposits grew by 14.1% YoY for the fortnight (including the merger impact), touching a 6-year high. Excluding merger impact, growth stood at 13.3%, the brokerage stated.

Thus, the credit-to-deposit ratio saw an uptick of 14 bps, compared to the previous fortnight, and stood at 79.9% in the fortnight (December 15, 2023), marking a three-year high, which was primarily driven by the HDFC merger. Excluding the merger impact ratio for the current fortnight, it stood at 77.4%, compared to 75.8% as of December 14, 2022. Attractive interest rates in term deposits compared to CASA deposits are expected to lead to a continued fall in CASA for all the major banks on a sequential basis. We expect an average deposit growth of 18.1% YoY and 3.3% QoQ for our coverage, said KR Choksey brokerage in a report.

Margins are expected to see compression

We expect Net Interest Income (NII) to grow at an average of 16.5% YoY and 4.0% QoQ for our coverage. NIMs are expected to report moderation QoQ in the range of 5-15 bps on account of a) a marginal increase in the yields on loans, b) a higher cost of funds, and c) excess liquidity in cases like HDFCB on account of the merger; however, we expect gradual deployment of this excess liquidity. Pre-Provisioning Operating Profits (PPOP) are expected to grow at an average of 5.5% YoY for Q3FY24E, with healthy business momentum resulting in decent operating income despite higher opex, according to KR Choksey.

Asset quality trends do not appear to be worrisome

Slippages should remain under control and asset quality improvement will continue, driven by healthy recoveries. Credit costs should remain stable, thereby lending some support to earnings. RoAs for banks are likely to have peaked and are expected to plateau hereon. The focus this quarter will continue to remain on management commentary on deposit mobilization and timelines for the NIMs bottoming out, Axis Securities said in a note.

Indian Banks: CY23 review and CY24 Outlook: 5 Things To Watch

Business Momentum: The credit-off take for SCBs remains strong in CY23. According to RBI announcement, in Oct-23 the gross bank credit grew by 19.7% YoY. Both public and private sector banks have performed well. Retail loan growth stood robust at 30.4% YoY, followed by service sector (23.6%) and agriculture credit (17.5%). Additionally, systemic deposit growth is in line. The PSBs have larger comfort for CD-R ratio. We expect the loan growth to remain robust for CY24 given election year, consumer demand and higher capital expenditure, said Ajit Kabi, Research Analyst at LKP Securities.

Margins: The policy rate remained unchanged since Feb-23. The liquidity measures like OMO and ICRR have impacted the margins of the banks. The cost of fund will be key monitorable for quarters to come. Moreover, the elevated operating expenses have dented the PPOP growth. Nevertheless, lower credit costs have led to stable profitability and return ratios remain intact. We may witness further margin compression in the next quarter and stability at the end of FY24, stated Ajit Kabi.

Asset Quality: The NPA ratio has improved significantly in CY23 driven by lower slippages and recoveries. We believe the NPA cycle at the bottom and the credit quality to remain intact in coming quarters. CY24 is unlikely to witness major NPA formation.

Capital Dilution: Higher risk weight to unsecured loan will dilute the capital adequacy. The private banks having a large proportion of personal loans and credit card outstanding will witness a major impact. Nonetheless, they have an adequate capital cushion to handle it.

Valuation comfort is the key: The private banks are trading at decade low valuations given robust return ratios reported in the previous three years. Hence, the low valuation may drive the stock price performance, added Ajit Kabi.

Top Stock Picks

Banks are expected to see a deliberate deviation in the share of unsecured loans after the RBI's risk weight announcement. We will remain watchful of the management commentaries in regard to this and its growth outlook going forward. We remain positive on the overall banking sector, especially HDFC Bank (2.5x FY25E P/ABV), ICICI Bank (2.4x FY25E P/ABV), and SBI (1.3x FY25E P/ABV), which remain our top picks for Q3FY24E, said KR Choksey.
From the banking sector, ICICI Bank, SBI, HDFC Bank are the top picks by Axis Securities and from the NBFC sector Manappuram Finance, Nippon AMC, Aptus are the top picks.

We are recommending IndusInd Bank, ICICI Bank, Bank of Baroda, and Canara Bank, said Ajit Kabi, Research Analyst at LKP Securities.

Disclaimer

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