Banks will continue to see a softening of net interest margins even in the fourth quarter, given the tight liquidity and the competition for deposits.
During the quarter of March, private banks are likely to outperform public sector lenders, as the latter were hit by wage increases in the said period.
JM Financial expects revenues for the banking universe to grow only about 5% annually for Q4. Private banks are seen leading the growth at 16.5%, while the same should be around 0.6% per annum for PSU banks.
“In a quarter affected by tight liquidity and continued pressure on deposits, a sequential decline in NIMs is a given – more so for private banks,” the brokerage said.
Growth of NII
Analysts see continued pressure on net interest income for banks during the fourth quarter on the back of moderating loan growth and NIM compression, although benign credit costs should dampen PAT growth somewhat.
ICICI Securities estimates that NII for the banks under its coverage will grow by a marginal 1%, with HDFC Bank likely to report a flat NII quarter-on-quarter.
Active quality
Banks are likely to witness yet another strong quarter in terms of asset quality. However, analysts said they remain wary of some pockets of stress in the unsecured portfolios.
“Slippages should remain under control and asset quality improvement will continue, driven by healthy recoveries. Credit costs are likely to remain at a normalized level and reversal of AIF provisions for certain banks could lend some support to earnings,” Axis Securities said.
Loan and deposit growth
Based on the interim updates released by banks so far, along with the systemic growth momentum and considering Q4 as a seasonally strong quarter, brokers expect the banks to reflect these trends and record 17-18% YoY credit growth (ex-HDFC).
Deposit growth, however, could lag credit growth despite banks fully accelerating to improve mobilization. “Most banks that have reported their interim business performance have seen a significant improvement in deposit growth with healthy performance in both CASA and TDs,” Axis Securities said.
Stock perspective
Analysts say sector valuations remain comfortable though near-term equity returns are likely to be driven by deposit and RBI’s liquidity stance. PSU Banks remain major beneficiaries of such a tight liquidity environment while for private banks, deposit growth will dictate overall growth returns and so on. valuations – HDFC Bank is the biggest beneficiary of easing liquidity.
“SBI, Axis Bank are our preferred plays. We like Bandhan bank because of cheap valuations and improving asset quality,” JM Financial said.
Meanwhile, Nomura is betting that ICICI Bank will enter fourth quarter results. “While Axis Bank is also one of our preferred options, we will be mindful of any pressures on its loan growth outlook led by deposit mobilization pressures,” it said.
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