Banks Q4 Preview- Continued Pressure On NII, PAT, But Deposits Growth To Outpace Loan Growth: ICICI Securities

Title: Banks' Q4 Performance: Pressure on Net Interest Income and Profit After Tax Amidst Deposit Growth Outpacing Loan Growth

The Indian banking sector is gearing up for the announcement of their fourth quarter (Q4) financial results for the fiscal year 2022-23. The sector has been undergoing significant changes in the past few quarters, with various challenges impacting their Net Interest Income (NII) and Profit After Tax (PAT). In this preview, we will discuss the factors contributing to the continued pressure on these key financial metrics and the anticipated trend of deposits growth outpacing loan growth in the upcoming quarterly reports.

Firstly, let's delve into the challenges faced by banks in terms of Net Interest Income (NII). NII is the difference between the interest earned on loans and advances and the interest paid on deposits. The primary factors affecting NII include the Reserve Bank of India's (RBI) repo rate hikes and the sticky deposit rates. The RBI has raised the repo rate by 190 basis points (bps) since May 2020 to curb inflation. However, banks have been slow to pass on the full benefit of these rate hikes to their customers in the form of higher interest rates on deposits. As a result, banks have been experiencing a narrowing of their net interest margins (NIM), which puts pressure on their NII.

Another challenge for banks in the upcoming quarter is the pressure on their Profit After Tax (PAT). The increase in provisioning for non-performing assets (NPAs) and higher operating expenses are the primary contributors to this pressure. The RBI's recent circular on the reclassification of restructured loans as standard assets from March 31, 2023, has added to the uncertainty surrounding the provisioning requirements for banks. This reclassification could lead to a significant reduction in the provisioning requirements for some banks, but it may also result in a one-time hit to their profits in the current quarter as they make the necessary adjustments to their balance sheets.

Despite these challenges, there is a silver lining for the banking sector in the form of deposits growth outpacing loan growth. The RBI's recent monetary policy statement indicated that retail inflation is expected to remain above the target of 4% in the coming quarters. This has led to an increase in deposit rates across the board, with banks offering attractive rates to attract customers. The RBI's data shows that deposits grew by 11.3% year-on-year (YoY) as of February 2023, while loans grew by 10.3% YoY during the same period. This trend is expected to continue in the upcoming quarter as banks focus on growing their deposit base to maintain their liquidity position and meet regulatory requirements.

In conclusion, the Indian banking sector is bracing for a challenging quarter in terms of NII and PAT due to the ongoing pressure from the RBI's repo rate hikes, sticky deposit rates, and provisioning requirements. However, the trend of deposits growth outpacing loan growth offers some relief as banks focus on growing their deposit base to maintain their liquidity position and meet regulatory requirements. The upcoming quarterly reports will provide insights into how individual banks have navigated these challenges and their strategies for the coming quarters.

Disclaimer: This preview is for informational purposes only and should not be considered as investment advice or a recommendation to buy or sell any security. Please consult with a financial advisor or financial professional before making any investment decisions.