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The April-June quarter (Q1) of the current financial year (FY25) may be soft for banks with loan growth moderation, net interest margin (NIM) pressures, and higher staff and credit costs inching up, according to analysts.
Credit growth could ease due to the lagged impact of the Reserve Bank of India (RBI) tightening and deposit growth has weakened, and the current account and savings account (CASA) ratio has declined 10-370 basis points (bps) quarter-on-quarter (Q-o-Q) for many banks.
As banks have raised deposit rates in the face of tight credit-deposit ratios, there is likely to be net interest margin (NIM) contraction also.
The RBI crackdown on cards may also hurt fee incomes.
While asset quality remains stable, there is a seasonal impact in terms of higher activity in MFI (microfinance) and Agri segments where higher slippages have been seen historically.
As of June 14th, system loan growth has softened to 15.6 per cent year-on-year (Y-o-Y) (excluding the HDFC-HDFC Bank merger), and one reason is moderation in unsecured loans and credit to NBFCs (non-banking finance companies) following hike in risk weights by the RBI.
Among banks that have reported business updates for Q1FY25, loans have shown growth in the band of -2 per cent to +5 per cent Q-o-Q. System deposits were reduced by Rs 80,000 crore in FY25 year-to-date, while loans grew by Rs 2.7 trillion, pushing credit-deposit ratios higher by 90 bps to 78 per cent.
CASA ratios have declined due to the seasonality.
Spreads have therefore declined for both private and public sector banks and NIMs may contract Q-o-Q due to hikes in time deposit rates, and interest reversals from seasonally high Agri slippages.
New investment norms from April 1 will put a ceiling on treasury gains.
Card-related fee income growth will slow with the RBI embargo on new card issuances for a couple of banks.
Axis Bank could be among the few outperformers.
The FY24 had the full impact of Citi s acquisition, and high NIM and low credit costs drove return on equity (RoE) to a decade high at 18 per cent.
NIM expanded by 15 bps Y-o-Y to 3.6 per cent and net interest income (NII) growth of 16 per cent Y-o-Y was led by 14 per cent Y-o-Y loan growth.
The provisions grew 22 per cent Y-o-Y, largely led by the retail segment.
PBT (profit before tax) hit highs, as all business units have fully recovered from the corporate non-performing loans (NPLs) and Covid-related cycles.
The net NPL to net worth (2 per cent) and net NPL to operating profit (less than 10 per cent) ratios are close to best in history and subsidiaries had a strong year.
Axis Bank may be capable of growing faster than peers and it may see a decline in operating expenses ratio from current levels as the full impact of Citi's integration costs could be completed by H1FY25.
The credit growth is estimated to be around 13-14 per cent in FY25, normalising from high levels given constraints in deposit growth as well as slowing of credit to retail and NBFCs.
However, the bank is confident of growing at 300-400 bps higher than the industry over the medium term.
The management also indicated that NIMs, at 4.1 per cent, are likely to sustain above structural guidance of 3.8 per cent.
The incremental cost of funds has stabilised, but the overall cost of funds will inch up due to re-pricing with peak in Q2FY25 assuming no further policy rate changes.
Credit costs are lower currently, but may increase over time as and when net slippages increase.
The bank will hold excess provisions with a conservative approach.
Axis Bank trades at around 2.1x its expected FY25 Book Value.
The valuation multiple could re-rate positively.
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