Banking & Finance: Conference KTAs - Earnings growth to slow down

21 Mar 2024 , 05:48 PM

Analysts of IIFL Securities hosted the management of 11 banks at IIFL’s Investor Conference. Key takeaways are: (1) Deposit competition has intensified and is likely to persist for the next couple of qtrs. (2) Pvt banks’ loan growth should slow down due to high CD ratio. (3) NIM outcomes should remain divergent. (4) Select banks have opex levers to manage the profitability. (5) Asset quality remains benign, barring the uptick in slippages in the unsecured loans. Analysts of IIFL Securities prefer Private over PSU banks, as the latter’s earnings momentum is slowing and valuations are no longer cheap. Analysts of IIFL Securities cut their estimates and TP for HDFC recently. They expect only Axis, IIB and SBI to deliver mid-to-high teen earnings growth in FY25E. 

Private banks’ loan growth to slow down: 

Loans for IIFL covered banks grew 3-5% QoQ and 15-22% YoY in Q3 vs. 5% QoQ and 16% YoY for the system. With the increase in the risk-weights, sluggish deposit growth and the RBI’s nudge to lower credit-deposit ratio, most of the Private banks indicated loan growth to slow down. However, with relatively lower CD ratio, loan growth is likely to remain stronger for PSU banks. Corporate loan growth has picked up from the tepid levels, but given the low pricing power, is unlikely to accelerate sharply. Banks remain cautious in lending to the power sector, and instead prefer to lend to PFC/REC. HDFC, Kotak IIB, and Federal have scope to further increase the share of unsecured loans. Analysts of IIFL Securities expect system loan growth run-rate to slow down to 13-14% in FY25E. 

No signs of deposit competition ebbing: 

Deposit growth of 2-3% QoQ continues to lag loan growth. In 9MFY24, deposit mobilisation was better for Private vs. PSU banks. Deficit system liquidity and sluggish interbank market have kept the overnight call rates above the policy rate, but should improve post the elections. With the system CD ratio at an all-time high, the deposit competition has aggravated and is reflected in: (1) TD interest rate hike of 10-100 bps in last nine months (mainly in short-tenure and bulk deposits). (2) Select midsized Private banks’ peak savings ROI now higher than larger banks’ peak TD rates. (3) 18% YoY increase in the banks’ certificate of deposit issuances as the banks tap short-duration funds. (4) Increase in the bond issuances. (5) Drawdown of excess liquidity (LCR down 2-14 pp QoQ). Banks expect CASA ratio to remain under pressure. 

Divergent NIM outcomes to continue: 

Asset yield expansion in Q3 was on the back of drawdown in excess liquidity and faster growth in unsecured loans. Banks took rate hikes on personal loan and NBFC exposure following the increase in risk-weights, but the ability to passthrough higher rates in other products is difficult. COF is rising as deposits continue to reprice with a lag, and bulk TD rates are now 50- 100 bps higher than retail TD rates (vs. 50 bps cheaper in the past). While NIMs are declining since last few quarters, they are still 10-50 bps ahead of Q4FY22 level. The managements’ near-term NIM outlook corroborates analysts of IIFL Securities residual re-pricing analysis based conclusion of higher compression for ICICI/Kotak; lower for Axis/Federal; stable for SBI and HDFC; and improvement for RBL, BOB and IIB. Most banks expect first rate-cut around Aug, which should drive NIM expansion for the fixed rate lenders (IIB, Equitas), and result in relatively better H2FY25E NIMs for HDFC (benefit from swaps) and PSU banks (higher share of MCLR linked loans) vs. other private banks. 

Opex levers available to partly offset NIM pressure: 

Axis’s cost ratio should improve as Citi India integration expenses end from Aug24. ICICI and HDFC Bank can potentially slow down on the employee hiring (headcount up 40-75% since FY22). Wage revision provisions for PSU banks and Federal Bank will be over in Q4FY25. 

Unsecured loan slippages inch-up, credit costs remain low: 

Led by loan waiver in northern India and floods in TN, MFI slippages have inched up 10-300 bps. Delinquencies also rose for credit card and KCC (seasonal) loans. With increase in gross slippage and moderation in recoveries, net slippage ratio inched up QoQ (save for HDFC, Axis and BOB). However, overall AQ still remains benign with stressed loan ratio improving 20 bps QoQ. Credit costs remain low at 40 bps (flat QoQ and 83 bps in Q3FY23), mainly due to reversal in standard provisions for the PSU banks. Analysts of IIFL Securities forecast credit costs to increase 20- 40 bps over FY25-26E as the asset quality environment normalises.