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Informist, Thursday, Jan. 9, 2025

 

By Kshipra Petkar

 

MUMBAI – Softer credit growth and lower net interest margins are likely to weigh on the profitability of Indian banks in Oct-Dec, continuing the trend observed in the preceding quarter.

 

The cumulative net profit of 17 banks, out of 20 banks in the Nifty 200 index, is expected to rise 16% on year to INR 790.28 billion, according to an Informist poll of 12 brokerages. Sequentially, net profit is seen falling by 7%. The net interest income, as per the brokerage reports, is expected to rise by 8% on year, and merely 2% on a quarterly basis. Bank of Maharashtra, IDBI Bank and Indian Overseas Bank were excluded from the sample as enough estimates were not available.

 

"We estimate NII (net interest income) for our banking coverage universe to grow around 7.3% YoY in 3QFY25 (Oct-Dec), while PPoP (pre-provisioning operating profit) may grow 13.2% YoY and fall 3.8% QoQ," Motilal Oswal Financial Services said in its report.

 

Net interest margins of banks are expected to remain under pressure in Oct-Dec as their fixed-income assets earned only moderate interest returns due to the looming possibility of interest rate cuts in the coming months, analysts said.

 

"Persisting high interest rates and the slowdown in credit growth (especially towards high-yielding advances) would impact the margins of the banking sector. In addition, the rate transmission on yields is estimated to be faster as and when the rate cut cycle begins, which would further compress the margins," Sachin Sachdeva, vice-president and sector head-financial sector ratings at ICRA, said in a report.

 

Credit growth is expected to have slowed further as banks continue to reduce their exposure to unsecured retail and non-banking finance companies in response to the regulatory pressure from the Reserve Bank of India. Latest available data showed loans by scheduled commercial banks as on Dec. 13 were up 11.5% on year, as against a growth of 13.03% as of Sept. 20.

 

ICRA, in a recent report, revised its credit growth estimate downwards to 10.5-11% for 2024-25 (Apr-Mar) from the earlier estimate of 12.5% and estimated a further reduction to 9.7-10.3% in FY26. It cited persisting high credit-deposit ratios and the likely implementation of the proposed liquidity coverage ratio framework as reasons for the expected moderation in credit. 

 

On Jul. 25, the RBI issued draft guidelines that proposed that banks should assign an additional 5% run-off factor to internet and mobile banking-enabled retail deposits. Among other changes, it also proposed tighter norms to value high-quality liquid assets of banks. Comments on the draft norms were invited till Aug. 31. Currently, banks must maintain high-quality liquid assets worth 100% of their expected outflows for the next 30 days.

 

According to bankers and analysts, the changes proposed by the RBI are seen pushing up expected outflows, increasing the requirement for high-quality liquid assets--which primarily include government securities--and finally, lowering growth in bank loans.

 

On the deposit front, larger banks such as Axis Bank, IndusInd Bank and Canara Bank raised rates in the one- to three-year bucket in December, while some introduced new schemes offering higher interest rates. "The persistent rise in deposit rates indicates a strain on deposit mobilisation and funding cost challenges may persist in the near term," Elara Securities said in a report.

 

Stress in the microfinance segment and the unsecured lending book will also continue to affect the profitability of banks in the Oct-Dec quarter, analysts said in their pre-earnings reports. They also said that with the rise in stress in the retail loan segment, fresh slippages are expected to increase, while recoveries are expected to taper in the reporting quarter.

 

"Slippage and overdue loans are likely to rise sharply for MFI (microfinance) lenders. Unsecured loans, including credit cards, would also see higher slippage QoQ. But vehicle finance (VF), housing finance, mid and large corporates and secured retail appear safe," Nuvama said in its report.

 

ICRA expects gross fresh NPA for all banks to rise marginally to 1.6% in FY25 from 1.5% a year ago, though remaining lower than that observed in previous years. It also expects this trend to continue in the next financial year. It added that even though the gross NPA ratio is expected to remain range-bound by March, it is likely to inch up in FY26.

 

With the expectation of a rise in bad loans, analysts see provisioning expenses and credit costs also going up in the quarter ended December. "We factor in a rise in provisioning expenses for select players like IIB (IndusInd Bank), RBK (RBL Bank), Equitas, Bandhan and IDFCFB (IDFC FIRST Bank), while large private/PSU banks are relatively better positioned to navigate through the current cycle," Motilal Oswal said.

 

Analysts expect public sector banks to exhibit healthier asset quality and, consequently, greater profitability compared to their private sector peers due to relatively lower provisioning requirement. As per the estimates of three brokerage reports, the net profit of public sector banks is expected to grow 36-61% year-on-year, while private sector banks are expected to grow merely 2-4%.

 

In 2023-24 (Apr-Mar), public sector banks operated with a high-cost structure as they absorbed the impact of a hike in pension and wages. With the impact largely borne, 2024-25 will mark lower operating expenditure, which will cushion any impact on earnings, reports said. "We see the opex (operating expenditure) to be rather sticky for private banks as they continue to invest in franchise and digital resilience, with limited scope for improvement. For Q3 (Oct-Dec), we generally see higher business momentum for some retail product segments, which entails some rise in opex (on QoQ basis) and this trend will likely sustain," Elara Securities said in its report.

 

The capital ratios of several banks remain comfortable, and no major growth-related capital requirement is expected for FY26, ICRA's report said. Nevertheless, the implementation of the expected credit loss framework and increased provisioning for project finance in the medium term, as proposed by draft norms, are seen as key monitorable factors. 

 

On May 3, the central bank proposed tighter guidelines on project financing by banks and non-banking finance companies to avoid large defaults on infrastructure loans. As per the draft norms proposed by the central bank, lenders would have to make provisions of up to 5% of the outstanding exposures during construction, as against 0.4% currently, which would be reduced to 2.5% once the asset turns operational. Informist had exclusively reported, quoting a senior official, that the finance ministry had written to the RBI, suggesting a complete rethink on the draft norms, which threaten to tighten funding for infrastructure projects.

 

Due to the expectation of a slowdown in credit growth and the stress seen in the unsecured and the microfinance segment, the Nifty Bank index has fallen by over 7% in the last 30 days. At 0920 IST, the Nifty Bank index was at 49664.55 points, down 0.3%, on the National Stock Exchange.  End

 

Edited by Namrata Rao

 

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