Lower Deposit Rates and Liquidity to Boost Bank Profits in Q3
Banking Profitability Remains Resilient
– Loan-to-deposit ratios (LDRs) in the banking sector soared to an unprecedented 81% in the December quarter, highlighting a significant gap between credit growth and deposit mobilization.
– Analysts predict that banking profitability will stay strong in the third quarter. The decline in deposit rates may counterbalance the recent quarter-percentage-point cut in policy rates, thereby supporting net interest margins (NIMs).
– The Reserve Bank of India’s (RBI) infusion of liquidity through a 100 basis point cut in the cash reserve ratio (CRR) during the quarter will enhance liquidity and further bolster bank margins.
Credit Growth Trends
– Early reports indicate that credit growth among large banks has outpaced the overall banking system’s growth, which stands at 10% to 12% for the quarter. This suggests a strong demand for loans.
– Analysts also emphasize that stable asset quality and increasing fee income will contribute positively to the banking sector’s results in Q3.
Key Insights from Analysts
– “While the yield on advances (YOA) continues to decrease, the positive effects from prior reductions in term deposit rates are anticipated to be noticeable starting this quarter. These factors, combined with benefits from CRR cuts, should help sustain margins,” noted Siddharth Rajpurohit and Rishit Savla from Systematix Shares & Stocks.
– Increased fee income and reduced credit costs are expected to further benefit the banks amid robust credit demand.
Impact of CRR Cuts on Liquidity
– The 100 basis point CRR reduction was largely implemented in Q3, with three out of four tranche cuts coming into effect during October and November, potentially releasing ₹1.87 lakh crore of interest-free funds into the banking sector.
– Nitin Aggarwal, an analyst at Motilal Oswal, foresees banking system credit growth remaining above 12% year-on-year this fiscal year, driven particularly by mid-sized banks.
Risks and Challenges Ahead
– All banks are encountering challenges in securing low-cost deposits. The high LDR poses systemic risks, forcing banks to either slow down loan growth or increase deposit rates, both of which could negatively affect profitability.
– Anand Dama, head of BSFI research at Emkay Global Financial Services, highlights that banking loan growth is likely to be supported by demand from fast-growing sectors such as MSMEs and mid-tier corporates, along with retail finance avenues like gold loans and vehicle financing.
Future Outlook
– The outcome for NIMs in Q3 is expected to vary, as some banks—such as Axis Bank, IndusInd Bank, Federal Bank, Indian Bank, and Bank of Baroda—are projected to report declines, whereas others like HDFC, IDFC First, Kotak Mahindra, State Bank of India, AU Bank, RBL, Bandhan, and Equitas may show growth. ICICI, Punjab National Bank, Central Bank, Union Bank, and DCB are expected to report mostly stable NIMs.
Conclusion
The outlook for the banking sector in Q3 remains optimistic despite the challenges posed by high loan-to-deposit ratios and difficulties in mobilizing low-cost deposits. With lower deposit rates and increased liquidity from RBI, banks are poised to maintain profitability, leveraging strong credit demand and enhanced fee income as crucial factors for growth.