Higher deposit rates and rising treasury yields are likely to impact banking profits in the second quarter even though the sector still remains profitable. The impact of higher cost of funds on banks’ net interest margins (NIMs) will slow profit growth, with this quarter likely marking the start of normalisation in bank interest incomes.
Banks have so far benefited from rising interest rates as deposit rate hikes have lagged lending rates in the last year. But as deposit rates reprice higher starting the second quarter, banks will start shedding the advantage they so far had on net interest margins (NIM). It is the difference between the yield earned on loans and that paid on deposits.
US-based brokerage Jefferies expects banks’ profit growth should slow to 12%, as NIMs are moderating, and treasury gains are lower even as credit cost remains stable. Jefferies expects bank margins to contract between 10 to 30 basis points year on year, mostly led by private sector banks. One basis point is 0.01 percentage point.
“Large PSU banks may see softer trends than most private sector banks. We expect banks like IndusInd & Axis to see lower pressure than SBI & ICICI Bank. Our coverage of banks to report 15% growth in loans & 12% in net interest income,” Jefferies said.
Analysts say the sharp rise banks saw in the NIM over the course of last fiscal year will now moderate. ICICI and Kotak for example saw their NIM increase by 90 and 100 basis points respectively between March 2022 and March 2023.
Mona Khetan, vice president-institutional research at Dolat Capital said bank operating profits will be under pressure as treasury profits will also be hit due to a rise in bond yields during the quarter. The yield on the 10-year bond has increased to 7.22% at the end of September from 7.12% at the end of June.
“Pre-provisioning operating profits of banks will be under pressure this quarter though lower credit costs will help. Net interest income will also be impacted due to the higher cost of funds. But though the pace of profit growth will reduce, banks still remain profitable and continue to have a healthy return on assets,” Khetan said.
Prabhudas Lilladher analysts Gaurav Jani and Anant Dumbhare expect net profits for banks under their coverage to fall by 9.3% quarter-on-quarter.
“Large private banks could see a NII fall of 3.3% quarter-on-quarter and NIM might decline by 34 basis points to 4.1% due to lag effect of deposit cost given deposit rate hikes across banks were much steeper in the second half of the last fiscal,” they said.
Jani and Dumbhare expect NIMs to decline by 12 basis points for public sector banks to 3.11%. Profit before provisions will also fall for these lenders due to lower NII growth and seasonal spikes in operating expenses. However, slippages are expected to improve which will keep a lid on provisions.
