Banks to see pressure on Q2 margins as cost of deposits surge even as lending rates stay flat

Axis Securities, in a report, said lending yields will continue to remain largely stagnant with only limited benefit flowing in from MCLR (marginal cost of funds-based lending rates) linked loan repricing, while cost of funds will continue its upward trajectory.

“Thus, margin compression for banks will continue even in Q2FY24. However, for a few banks, the quantum of compression could be marginally lower sequentially,” Axis securities said in its earning preview report.

With a calibrated rise in yields and rising cost of deposits, systemic NIM had peaked in the second half of FY2023 and saw some decline on a QoQ basis in the first quarter of the current fiscal.

“While card (deposit) rates have been relatively stable, we still see upward pressure on outstanding cost of deposits due to deposits re-pricing and thus expect QoQ decline in NIM for Q2FY24,” ICICI Securities said in a report.

On a QoQ basis, ICICI Securities see upto 10 basis points (bps) decline in NIM for Axis Bank, Bandhan Bank, Yes Bank and State Bank of India and 15–20 bps dip for Kotak Mahindra Bank, Karur Vysya Bank and South Indian Bank. It expects a flattish to positive QoQ NIM for RBL Bank, City Union Bank and Federal Bank in the July-September quarter.

Prabhudas Lilladher its report said that banks, which are under its coverage, are expected to witness a weak quarter as core earnings could fall by 9.3 per cent QoQ to Rs 45,400 crore (vs -2.7 per cent QoQ in Q1 FY2024), mainly driven by lower NIM.

For FY2024, NIMs are likely to be flattish or incur a marginal decline on y-o-y basis due to a rise in deposits cost along with a reduction in the share of low-cost CASA, according to a Care Ratings’ report.

Analysts expect net interest margins (NII) of the banking sector to see a 15-16 per cent growth in the second quarter.

Axis Securities expect a NII growth of 16 per cent year-on-year and one percent QoQ (ex-HDFC) for its coverage universe banks.

ICICI Securities has estimated a 15 per cent YoY rise in NII for private banks (ex-HDFCB), which are under its coverage universe. However, it sees a flattish NII QoQ due to pressure on NIM. For SBI, it sees a 10 per cent YoY rise in NII, but flattish growth QoQ.

In line with NII and PPOP (pre provision operating profit) growth coupled with benign credit costs, ICICI securities expects around 17 per cent YoY growth and near 4 per cent dip QoQ in PAT (profit after tax) for private banks (ex-HDFC Bank) under coverage.

For Q2 FY2024, banks credit growth is expected to be at around 15 per cent on YoY basis.

ICICI Securities estimates private banks under its coverage (ex HDFC Bank) to report a credit growth of around 3.6 QoQ and 17.5 per cent YoY basis.

Deposit growth of close to 13.2 per cent YoY (12.3 per cent ex-HDFC) continues to gather pace but lags

behind credit growth. It continues to be led by robust growth in term deposits (TDs), with most banks witnessing CASA (current account savings account) ratio contraction, Axis Securities report said.

“We do not expect any adverse asset quality trends during the quarter. Slippages are expected to remain under control and asset quality improvement should continue, driven by healthy recoveries,” it said.

Credit costs should remain stable, thereby lending some support to earnings for banks. Earnings growth is seen at 26 per cent YoY and flat QoQ, the Axis Securities report said.