Banks: once bitten, twice shy

Strong traction in retail and corporate loans kept the credit growth in good stead. On an aggregate basis, the credit growth rose around 18% year-on-year (y-o-y), with broad participation from private and public lenders, said Kotak Institutional Equities’ report.

With rising interest rates, a faster repricing of loans buoyed NIM. Increase in fee income and treasury gains aided the key metric of net interest income. Lower slippages, higher recoveries, and contained write-offs aided asset quality. The gross non-performing loans slid to a seven-year low in Q3 as per the Kotak report.

However, deposit growth has lagged credit growth. This was because many banks preferred using their existing liquidity to meet credit demand instead of hiking deposit rates. But this approach would now change, as internal liquidity is said to have mostly exhausted. Now, with rising loan rates, the demand for home and vehicle loans could see some moderation. Even so, a widely held expectation is that overall systemic credit growth would remain robust. So, to meet higher credit demand, it is crucial for banks to catch up on deposit mobilization. And banks are acting on that by raising deposit rates to entice potential depositors.

“We believe that even if liquidity and monetary conditions do not ease, large banks are in a position to mobilize significantly more fixed deposits, with appropriate rate increases, a journey that we think has started only recently,” said Santanu Chakrabarti, India analyst, BFSI, BNP Paribas.

A fallout of the rise in cost of deposits, and cost of funds for banks, would mean pressure on NIMs going into FY24. Analysts caution of NIM compression pressures emerging in the second half of FY24. But the Street was already aware of this factor playing out eventually, given the Reserve Bank of India’s interest rate hiking spree. A potential spanner in the works has suddenly emerged from the sector’s exposure to the Adani group, shifting attention back to asset quality. “Despite a strong earnings print, conversation with investors has primarily focused on a large Indian conglomerate,” said the Kotak report.

Going by the disclosures made by banks, the exposure is minimal and pertains to operational assets. So, analysts do not see any immediate default risk. That said, it is a wait-and-watch on how the situation at the Adani group further unfolds. But as they say, once bitten, twice shy. “However, the narrative is quite strong, hard to overlook, and importantly, it refreshes the painful corporate non-performing loans cycle that we have just completed,” said the Kotak report.So far in CY23, the Nifty Bank index is down 4.3%, with the Nifty PSU Bank index taking a deeper knock of nearly 12%. A sharp near-term re-rating for the sector looks unlikely. “For tier-1 private banks, we don’t see a meaningful scope for a further re-rating because return on equity and return on assets are likely to remain stable at current levels,” said Dnyanada Vaidya, research analyst at Axis Securities Ltd.

All said, banks have sailed through Q3FY23 with flying colours, but developments relating to the Adani group have overshadowed the positives and remain a crucial trigger for banking stocks, for now. But going ahead, if deposits fail to adequately pick up, banks will be faced with a trade-off between achieving credit growth and protecting margins, Vaidya cautioned.