<ul><li><keyword id="19895995" type="General" weightage="20" keywordseo="hdfc-bank" source="keywords">HDFC Bank</keyword>’s loan to deposit ratio (<keyword id="20235896" type="General" weightage="20" keywordseo="ldr" source="keywords">LDR</keyword>) went up to a tight 110% versus its pre-merger LDR of around 85%.</li><li>There is chatter that the RBI intends to bring LDR to around 75%, which may stress other banks as well.</li><li>If it happens, margins will be stressed, and cause aggressive deposit mobilization that will cause de-rating of the sector, say analysts. </li></ul><keyword id="19896378" type="General" weightage="20" keywordseo="hdfc" source="keywords">HDFC</keyword> Bank opened 2.5% lower on Thursday, after a sharp 9% plunge on Wednesday as its third quarter earnings report shocked the street. The bank, which reported its second earnings report after merger with parent HDFC, saw its loan to deposit ratio (LDR) go up to a tight 110%. Its pre-merger LDR was anywhere between 85-89%. The Reserve Bank of India is generally comfortable if banks maintain their LDRs between 70-75%. By this, India’s largest private bank will have the highest LDR. The market fears that it might not be the only one. “HDFC Bank results showed heightened levels of credit/deposit (CD) ratio beyond RBI’s comfort levels. This is the case with most other banks as well. Thus, the markets expect either margin pressure, in case banks go in for aggressive deposit mobilization, a slowdown in lending growth, or both. This development can lead to some de-rating of the sector,” said <keyword id="19958485" type="General" weightage="20" keywordseo="naveen-kulkarni" source="keywords">Naveen Kulkarni</keyword>, chief investment officer at Axis Securities. As of Thursday morning, Bank Nifty slipped by 0.8% or 384 points. Eight out of 12 of the banking index’s constituents opened in the red with Federal Bank, PNB and IndusInd Bank falling over 1%. The stress of deposit growth HDFC Bank, analysts say, will have to grow its deposit growth rate at 3-4% higher than credit growth to help improve its LDR to pre-merger levels. In the third quarter, its gross loan growth came in at 4.9% sequentially, while deposits grew at 1.9%. The management said that it plans to bring it back, but it will happen over 3-4 years. “Management has been replacing non-retail deposits with retail to granularize the deposit base and avoid the fiercer price competition in the non-retail space. System liquidity also declined in Q3 which led to more intense market deposit competition that the bank had chosen not to participate in,” said a report by CreditSights. In the meanwhile it has plans to grow its unsecured loans in the range of high-teens in spite of RBI’s recent crackdown as they now make up for 22% of its loan book, after the merger. To be able to chase this growth without a fast ramp up in deposit growth, might stress net interest margins (NIMs). They came in flat for the quarter. “The lower liquidity coverage ratio (LCR) and slower deposit growth may limit net interest margin NIM expansion going forward. The reported NIMs of 3.6% (for interest earning assets) came below expectations. The lower LCR, CDR bottleneck and slower deposit growth may squeeze NIMs going forward,” said <keyword id="20080833" type="General" weightage="20" keywordseo="ajit-kabi" source="keywords">Ajit Kabi</keyword>, research analyst at LKP Securities.

Banks continue to spook markets after HDFC Bank’s LDR shock in Q3

<ul><li>The Monetary Policy Committee (<keyword id="19918491" type="General" weightage="20" keywordseo="mpc" source="keywords">MPC</keyword>) has decided to keep the repo rate unchanged at 6.5%. </li><li>Economists had expected the MPC to keep key rates unchanged due elevated inflation in December 2023.</li><li>A few experts hoped that it would change its stance to ‘neutral’ given the tight liquidity situation. </li></ul> The <keyword id="19899810" type="General" weightage="20" keywordseo="reserve-bank-of-india" source="keywords">Reserve Bank of India</keyword> (<keyword id="19899808" type="General" weightage="20" keywordseo="rbi" source="keywords">RBI</keyword>)’s rate setting panel – the Monetary Policy Committee – decided to keep its key lending rate (repo rate) unchanged at 6.5% on Thursday. It also decided to remain focussed on the ‘withdrawal of accommodation’ stance. RBI Governor <keyword id="19913110" type="General" weightage="20" keywordseo="shaktikanta-das" source="keywords">Shaktikanta Das</keyword> said that both the decisions have been taken with five out of six members voting in favour. Governor Das said there was further room for transmission. “Taking into account this growth-inflation dynamics and the fact that transmission of the cumulative 250 bps policy rate hike is still underway, the MPC decided to keep the policy repo rate unchanged at 6.50%. The MPC will carefully monitor any signs of generalisation of food price pressures which can fritter away the gains in easing of core inflation,” he said. The MPC also raised the FY24 real GDP growth projection to 7.3% from 7%. It also set FY25’s real GDP growth projections at 7%. “The momentum in economic activity seen in FY24 is expected to continue in FY25 as well,” Das said. It also projected FY25’s Q1 GDP growth at 7.2%, Q2 to see 6.8% growth, Q3 at 7% and Q4 at 6.9%. The MPC also retained FY24’s retail inflation projections at 5.4%, but set FY25’s inflation projections at 4.5%. It sees inflation for Q1 of FY25 at 5%, Q2 at 4%, Q3 at 4.6% and Q4 at 4.7%. “Monetary policy was supported by pro-active supply-side measures by the government. That said, the job is not yet finished, and we need to be vigilant about new supply shocks that may undo the progress made so far,” Das said. Das said that elevated levels of public debt was raising serious concerns in many economies including advanced economies. “On one hand, the odds of soft landing in the global economy increased. But the other hand, wars and conflicts add uncertainties to the outlook,” the governor said. Experts have been expecting the monetary policy committee (MPC) to keep its key rates unchanged. India’s retail inflation for December 2023 came in at 5.7%, which is much higher than RBI’s comfort level of 4%. “We expect the RBI to continue the pause stance in the upcoming policy. Strong US non-farm payroll data and wages seem to have pushed back on market expectations for a quick pivot to rate cuts. First rate cut on table from June or August 2024 looks the best bet now,” said a report by SBI Ecowrap. Ajit Kabi, research analyst at LKP Securities said that the RBI is likely to support economic growth with a cautious stance on inflation. “Consequently, we expect the unchanged policy rate and possibility of a shift in stance to NEUTRAL. Additionally, RBI may take steps to improve liquidity conditions. We expect a policy rate cut by June 24,” he added. There has been a pressure of liquidity which made a few experts hope that it could change its stance from ‘withdrawal of accommodation’. “There is a strong case for the RBI to change its stance from ‘withdrawal of accommodation’ to ‘neutral’. Financial conditions have tightened a lot in the last few quarters. Real rates are reasonably high and likely to increase further as inflation is trending down,” said Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC. While growth in deposits is much higher than last year on YTD basis as of January 12, the increase in credit and investments at ₹22.25 lakh crore is higher than that of deposits at ₹18.2 lakh crore. In terms of growth rates on a year-to-date basis, says Bank of Baroda data. Liquidity condition has also tightened with banking system liquidity running in deficit of over ₹2 lakh crore on daily basis. “Under these conditions there is some part of the market segment that believes that a change in stance is possible, though we believe that this will not be the case. The fact that the corridor of call rates is being maintained at between repo and Marginal Standing Facility (MSF0 rate, is indicative of the fact that the withdrawal of liquidity position would continue,” said <keyword id="20102121" type="General" weightage="20" keywordseo="madan-sabnavis" source="keywords">Madan Sabnavis</keyword>, chief economist at Bank of Baroda.

RBI hikes GDP growth projection for FY24 to 7.3%, keeps rates, stance unchanged

<keyword id="1397102" type="General" weightage="20" keywordseo="Public-sector-bank-stocks" source="Orion">Public sector bank stocks</keyword> have rallied more than 25 per cent post their stellar Q2 financial results with net profit jumping by 50 per cent. Union Bank of India stock price is up by 60.8 per cent over the last month among the PSU bank stocks. Bank of India is up by 56.1 per cent during the month while UCO Bank is up by 32.4 per cent. The Nifty PSU Bank index made a new 52-week high on Friday. The index was up by 21.35 per cent last month. Amber Pabreja, Founder and CEO of Trendlyne, said the Nifty PSU Bank index has rallied more than 25 per cent after public sector banks delivered strong Q2 results - a sign of investor confidence. Loan growth has jumped by double digits. "We should keep in mind, however, that interest rates are on the rise, and deposits are growing relatively slowly. This means more expensive loans and lower net interest margin growth in the coming quarters. It will be a riskier environment for the banks," he said. "Overall, PSU banks will need to keep a close eye on their asset quality, especially as we head into FY24. And investors will have to become more selective with their picks. I expect major banks to stay resilient. State Bank of India (SBI), for example, reported a net NPA ratio of less than 1 per cent (.8 per cent for September 2022 quarter), and its earnings are expected to grow by 33 per cent in FY23 as per Trendlyne's consensus estimates," Pabreja said. S&amp;P Global Market Intelligence said in a report that Indian banks will gain from tailwind of rising rates as credit growth stays steady. Rising interest rates will continue to help Indian banks in the rest of the fiscal year ending March 31, 2023, after high credit growth and stronger margins helped propel earnings. Five of the six biggest banks by assets in India reported an increase in net income for the fiscal second quarter ended September 30, the report said. Vinod Nair, Head of Research at Geojit Financial Services, said, "The rally of PSBs was triggered by the strong earnings growth announced in Q2 results. It provided a good set of number with high provision coverage and improvements in asset quality. Combined net profit of 12 PSBs is up by 50 per cent on a Y-o-Y basis to Rs 25,685 crore. " Nair said the upgrade in outlook demanded improvement in valuation. There was a strong arbitrage opportunity due to heavy disparity between the valuation of private and public sector banks. However, due to sharp rally, P/B ratio has increased to 0.9x from 0.5x, narrowing the valuation gaps and limiting the performance on a short to medium-term. Banks took advantage of the higher interest rate environment to bolster their net interest margins, while previous efforts to reduce their nonperforming assets resulted in lesser loan loss provisions, their recently released earnings reports showed, S&amp;P Global Market Intelligence said. The second quarter results of private sector, as well as public sector banks, were "picture perfect", said Tusharika Aggarwal, research analyst, Asia-Pacific dividend forecasting at S&amp;P Global Market Intelligence. "I remain fairly confident in the banks' earnings for rest of the year. The interest rate hikes, although the quantum will decline, would still benefit Indian banks. And because credit growth is increasing, so despite high-interest rates, net interest income will grow," Aggarwal said. While lending rates have increased on aggregate with growing demand, interest rates offered to depositors have risen more slowly, Aggarwal said, adding that the gap, along with lower credit loss provisions, has resulted in better return on assets for banks. Ajit Kabi, Banking Analyst at LKP Securities, said, "The outperformance of public banks was evident as the fundamentals are getting stronger. The recapitalisation had improved the capital requirement which led the banks to grow the balance sheet. The credit growth reported was the highest in the decade. The deposit growth was also above the market growth rate. The large public banks (SBI, BoB, Canara Bank) have gained market share." On the asset quality front, the GNPA/NNPA level reduced significantly with ample provision buffers. The contingent provision for the bank seems adequate and above regulatory requirements against the restructured pool. The outperformance across yardsticks and inexpensive valuation has driven the rally in recent times. The rally is likely to continue for public banks as their balance sheet is at a sweet spot to grow with minimum asset quality hiccups, Kabi said. S&amp;P Global Market Intelligence said bank credit growth picked up for both public and private sector banks in the first half of fiscal 2022-2023, according to Reserve Bank of India data released in September. Private sector banks' credit growth for the fiscal first half came to 20.4 per cent, compared to 13.9 per cent for public sector banks. The central bank expects gross domestic product growth at 7 per cent in the current fiscal year ending March 31, 2023, and to ease to 6.5 per cent in the next fiscal year, dampened by further monetary tightening in the central bank's fight to control inflation. Manoj Kumar Dalmia, Founder and Director, Proficient Equities, said PSU bank stocks have been in a rally recently pertaining to good quarters and increased credit uptakes due to festive demand. The banks are also poised well, having improved asset quality. Despite the rally, many PSU banks are available at a reasonable valuation ranging from 0.5-1.0 Price/BV and investors can accumulate them with a long-term perspective. Some PSU banks to look for could be Canara Bank and Union Bank of India. Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers, said, "With robust credit growth, improving net interest margin (typical during the early phase of a rate hiking cycle), adequate coverage ratios, and no major signs of asset quality deterioration, we are fundamentally positive on the banking sector. "However, with the overstretched credit-to-deposit ratio, either the credit growth rate or the net interest margin of the private sector banks are likely to deteriorate. With very significant excess investment in government securities over statutory requirements, public sector banks are better off which explains the recent strong rally." After a sharp fall in deposit and credit shares to private banks, there are signs that PSUs may get back a part of it. There has been relative improvements in the return ratios as well. Meanwhile, large valuation differences continue. These factors also seem to be driving the rally, he added. S&amp;P Global Market Intelligence said the key surprise in banks' fiscal second quarter results was a 25-basis-point quarter-over-quarter expansion in NIM. It added, however, that even as this trend is working favourably now, it will increase the procyclical nature of earnings and will be a concern later when rates begin declining. Most banks reported faster credit growth as they ride on rising demand for loans. However, deposit growth is lagging and may push up funding costs later, Nikita Anand, associate director at S&amp;P Global Ratings, said. "We note that deposit growth is lagging credit growth, leading to higher loans-to-deposit ratios, which is positive for margins. However, with higher term deposit rates, there is likely to be some movement of funds from savings deposits to terms deposits. This could lead to some rise in cost of funds," Anand said. Some bank chiefs said they have started looking at ways to keep NIMs intact. Dinesh Khara, chairman of State Bank of India, said the bank will continue to open more savings bank accounts to attract low-cost funds and offer remunerative rates on term deposits to customers. "We are very mindful in terms of increasing our interest rates on the term deposits. So, I think, hopefully our effort will be to sustain the NIM," Khara said during the bank's November 5 earnings call. State Bank of India reported a rise in fiscal second-quarter net profit to Rs 147.52 billion from Rs 88.89 billion, while Bank of Baroda's net profit for the period rose 56.8 per cent year-over-year to Rs 34 billion from Rs 21.68 billion. Punjab National Bank, however, reported that its net profit for the quarter fell 55.3 per cent to Rs 4.94 billion as the state-run lender increased provisions for nonperforming assets by 30.9 per cent year-over-year to Rs 35.33 billion. SEE ALSO: <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/stock-market/news/sensex-nifty50-post-negative-returns-this-week-as-autos-drag-psu-banks-surge/articleshow/95607400.cms" style="">Sensex, Nifty50 post negative returns this week as autos drag – PSU banks surge</a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/stock-market/news/three-out-of-seven-companies-out-from-trillion-dollar-club/slidelist/95607217.cms">Three out of seven companies out from trillion dollar club</a>

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Banks continue to spook markets after HDFC Bank’s LDR shock in Q3

Katya Naidu

RBI hikes GDP growth projection for FY24 to 7.3%, keeps rates, stance unchanged

Katya Naidu

PSB stocks on 52-week high riding on record profits, double-digit loan growth

IANS