Lower deposit rates, liquidity to shore up bank profits in Q3

Mumbai: Banking profitability is expected to remain unhurt in the third quarter as falling deposit rates may offset the latest quarter-percentage-point cut in policy rates and support net interest margins (NIMs). Liquidity infusion by the Reserve Bank of India (RBI) through the 100 basis points cash reserve ratio cut implemented during the quarter would also ease liquidity and support bank margins, analysts said. One basis point is a hundredth of a percentage point.

Early numbers released by banks show that credit growth especially for large lenders has been above banking system growth of 10% to 12% during the quarter indicating demand for loans. Stable assets quality and fee income will also support banking results during the third quarter, analysts said.

“Although the yield on advances (YOA) continues to decline, the positive impact from prior term deposits’ (TD) rate reductions is expected to become evident this quarter onwards. This, along with advantages from CRR reductions, should help maintain steady margins. Profitability is expected to improve led by sustained sequential advances growth, higher fee income, lower credit costs,” said Siddharth Rajpurohit and Rishit Savla, analysts at Systematix Shares & Stocks.

RBI’s 100 basis point CRR cut was largely implemented in the third quarter with three of the four tranche cuts coming into effect the fortnight beginning October 4, November 1, and November 29 likely releasing ₹1.87 lakh crore of interest free funds for the banking sector.

Nitin Aggarwal, analyst, Motilal Oswal, expects banking system credit growth to remain above 12% year-on- year this fiscal, driven by a brisk pace of growth by mid-sized banks. However, all banks are facing pressures in mobilising low cost deposits.

“NIM outcome in the third quarter is expected to be divergent, as Axis Bank, IndusInd Bank, Federal Bank, Indian Bank and Bank of Baroda are likely to report a decline, whereas HDFC, IDFC First, Kotak Mahindra, State Bank of India, AU Bank, RBL, Bandhan and Equitas may report expansion and ICICI, Punjab National Bank, Central Bank, Union Bank and DCB would report largely flat NIMs,” Aggarwal said in his report.

Loan-to-deposit ratios (LDRs) across the banking system reached an all-time high of 81% in the December quarter, underscoring a persistent divergence between credit growth and deposit mobilisation. High LDR presents a systemic risk because banks may either have to slow down their loan growth or increase deposit rates to improve deposit growth. Both these situations will have a detrimental impact on banking profits. Anand Dama, head, BSFI research, Emkay Global Financial Services, said banking loan growth during the quarter would be helped by demand from fast growing sectors like MSMEs and mid corporate with support from retail sectors like gold loans and vehicle finance.