Banks to reap rewards of interest rate hikes in Q2 earnings

• The Indian banking sector is expected to report strong growth in net interest income, margins and loans in Q2 FY23.
  
• Brokerages suggest that multiple rate hikes, which were quickly passed on to customers, will be a key growth driver.
  
• Deposits remain an area of concern, as weaker household savings and banks being slower in passing on rate hikes have resulted in a slowdown.
  

Banks are expected to post strong growth in net interest income thanks to multiple interest rate hikes and loans growing stronger than management expectations, analysts say ahead of Q2 results.

RBI has hiked repo rates by 190 basis points so far, following the lead of the US Fed. Analysts say these hikes, which have quickly been passed on to customers, will result in higher net interest income and thereby improved net interest margins.

“As compared to the previous quarter, we should see net interest margins start improving as the loans linked to MCLR/EBLR have started to reprice reflecting the new policy rates,” said a Kotak Institutional Equities report.

The brokerage expects banks under its coverage – including SBI, ICICI Bank, HDFC Bank, and Axis Bank, among others – to report an overall growth of 56% in net profit on a year-on-year basis, while the net interest income (NII) growth is pegged at 17% in the same period.

On the other hand, analysts at Prabhudas Lilladher expect private banks to report higher growth in NII at 21%.

Loan growth to be stronger than management expectations

Despite a rise in interest rates, banks have witnessed a healthy growth in loans.

HDFC Bank, the largest private sector lender, reported a 24% year-on-year growth in loans in its Q2 update, driven by corporate-rural, retail and wholesale segments.

Explaining the reasons behind the growth in loans in the banking sector, Edelweiss said, “Festival demand, return of travel related and foreign education spends, rise in salaries in IT and BFSI over the last two years, the urge to own larger houses, increasing consumerism, banks relaxing Covid related controls on credit cards, opening up of businesses post Covid are the factors driving strong growth despite a sharp rise in lending rates.”

Despite healthy loan growth, brokerages expect the overall asset quality to improve, with the corporate segment loans expected to remain resilient.

“Retail and MSME could see slippages due to one-time restructuring. Corporate may remain resilient,” said a report by Prabhudas Lilladher.

Analysts say the overall surge in margins could temper once their deposit rates catch up with the rate hikes.

Deposits slowing across markets

Weaker household savings and banks being slower in hiking retail deposit rates have resulted in a slowdown in deposits. According to data from RBI, deposit growth has slowed to 10% year-on-year across markets, both urban and rural.

“While loan growth is strong, deposit growth continues to lag with loan to deposit ratios crossing 85% for private banks. One of the key reasons for the slow growth in deposits is that banks have been slow in hiking retail deposit rates,” stated a report by Edelweiss Research.

According to the Kotak report, the term deposit durations have also continued to fall, with the share of non-individual depositors remaining high at 45%. This could be a reason for worry since these deposits are sensitive to interest rate changes.

Given that more rate hikes are expected in the future, the focus could be on increasing deposit growth rate, but that could result in a rise in costs for banks.

“Deposits rates are likely to increase to aid liability accretion and fund credit growth. The rise in cost of deposits would be key to assessing the margin trajectory over FY24,” said a report by Motilal Oswal.

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