A slowdown in credit growth is expected to emerge as the common theme for banks in their quarterly earnings report for the October-December period, according to four brokerages.
This slowdown will be driven by slow unsecured lending growth, rising costs, and an elevated credit-to-deposit ratio amid persistent pressure on net interest margins, they said.
HDFC Bank Ltd. will kickstart the earnings season for the sector from Jan. 22.
"We continue to assume system loan growth of 12.5% y-o-y for FY25 in our base case. Multiple headwinds like tight liquidity conditions, muted growth in deposits, GDP slowdown and high loan-to-deposit ratio remain key risks to credit growth," HSBC Global Research said in its report.
Motilal Oswal Financial Services Ltd. also echoed a similar view and expects further signs of slowdown, particularly from unsecured loan stress.
"For 3QFY25, we estimate MOFSL Banking Universe earnings to grow 15.3% YoY, with sector earnings projected to post a 12.6% CAGR over FY25-27," the brokerage said.
ICRA Ltd. has slashed its credit growth estimate for fiscal 2025 to 10.5-11% from its previous expectation of 11.6-12.5%.
The net interest margins of banks are expected to continue to compress as lending rates have adjusted at a slower pace even as repo rates have remained unchanged since February 2023, and borrowing costs have risen due to the ongoing repricing of liabilities. Further, banks slowing down on credit growth in response to increasing stress in unsecured loans, could also hurt margins.
"...data indicates that while rates on fresh loans remain sticky, deposit rates have increased, suggesting that NIM contraction may persist, albeit at a more gradual pace," Motilal Oswal said.
Analysts will also watch out for robust deposit mobilisation as the elevated credit-deposit ratio and rising inflation pose challenges for banks in reducing deposit rates and costs.
The outstanding loan-to-deposit ratio has declined to 79.7%, although nearing the highs of 80.3% recorded in March. While most public sector banks have seen a rise in loan-to-deposit ratio recently, it remains lower as compared with their private counterparts, Motilal said. Private banks' liquidity coverage ratio remained at a comfortable level, falling within the range of 112-136%, it added.
Jefferies expect loan growth to slow to 11-13% on-year which will lead to potential cuts in earnings per share of some banks.
Citibank also expects the October-December to be a tough quarter for the banking sector with likely EPS cuts on change in asset quality expectation.
While net additions to non-performing advances remain low, but with the retail sector facing increasing stress, the overall fresh slippages are expected to rise, and recoveries and upgrades are likely to gradually taper, ICRA said.
Though fresh NPA generation rate is expected to see a relative increase in the current financial year and next, credit costs would see only a mild rise because of lower legacy net non-performing assets, ICRA said.
In the December quarter, credit costs for select banks is likely to go up, analysts said.
Big private sector lenders are likely to see cuts in growth and a seasonal impact on asset quality but public sector banks have lower downside risks to cut in EPS, Citibank said.
Motilal has preferred ICICI Bank Ltd., HDFC Bank, State Bank of India, Federal Bank Ltd., and AU Small Finance Bank Ltd. as its top picks.
"As earnings growth gap is also narrowing between banks and market, risk-reward is favourable with triggers from easing asset quality pressures and regulations," Jefferies said.
The brokerage backs public sector lenders over their private sector counterparts, and bets on large banks like ICICI Bank, Axis Bank Ltd. and HDFC Bank over the smaller lenders.
Jefferies has also upgraded Kotak Mahindra Bank Ltd. from 'hold' to 'buy' as valuations are more reasonable. Within PSBs, the brokerage likes SBI but has downgraded Bank of Baroda from 'buy' to 'hold' because of high LDR and slower deposit growth.
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