Mumbai: Treasury gains for Indian lenders are likely to moderate in the coming quarters as bond yields remain in a narrow range, with the Reserve Bank of India (RBI) possibly sticking to a long pause. Banks will also see pressure on earnings growth with a likely increase in provisions for expected credit loss, a new accounting norm that is kicking in.
For the first quarter, the State Bank of India reported a treasury income of ₹3,850 crore, the highest in the past 12 quarters. Likewise for Axis Bank, the whole business income was soft, but a treasury gain of ₹519 crore aided the return on assets (ROA) ratio.
Analysts believe such gains will be hard to come by in the future.
“ROAs have clearly peaked and we should see a steady decline over the next few quarters from current levels. This quarter also has the support of treasury gains which won’t recur,” said Suresh Ganapathy, associate director at Macquarie Capital. “Issue is bulk of deposit rate hikes happened post September last year and assuming 12 to 18 months repricing period, full repricing is yet to happen and I am not convinced that MCLRs can further go up and offset deposit cost increase. So we are in for some negative surprises on margins.”
Analysts are also saying that banks could see pressures on provisioning as well as most state-run lenders don’t hold any excess provisions. According to Ganapathy, the expected credit loss accounting norms could add a cost of 100 to 200 basis points to bank balance sheets.
Another issue is the limited room banks will have to raise rates as RBI is expected to go for a loan pause to rein in inflation. Experts say that while inflation was lower than 5% in June, it’s expected to come closer to 6% in July.
“The RBI has no compelling reason to spur growth presently and hence repo rate will remain unchanged till the end of the calendar year,” said Madan Sabnavis, chief economist at the Bank of Baroda.
“Fed has indicated possible hikes in future, and treasury yields have moved up. With comfortable liquidity, the stance of withdrawal of accommodation will remain.”
In June 2023, fresh lending rates dropped while fresh deposit rates increased. The weighted average lending rate on fresh rupee loans of scheduled commercial banks declined sequentially by 7.5 basis points to 9.19% in June from 9.27% in May.
“The withdrawal of ₹2,000 banknotes have boosted short-term liquidity in the banking sector thereby reducing the pressure on deposit rates and in the later part of FY24, banks are likely to face pressure on NIMs,” CARE Ratings said in a report.
