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Earnings growth to moderate; remain watchful on NIMs

Controlled slippages to aid further AQ improvement

* Credit growth steady; unsecured loan growth to moderate across banks:

Systemic credit growth remains healthy at 16% for the fortnight ended 15- Dec’23 and we expect growth trends for our coverage universe to remain steady, led by continued momentum in Retail, Business Banking, and recovery in the corporate segment. The SME segment has shown robust performance, while the real estate sector has been witnessing strong activity, with a segmental loan growth of 41% YoY. Among the retail segment, Home loans, Vehicle and Small business segments continue to do well, while unsecured loans are expected to witness some moderation in growth amidst RBI’s RWA regulation.

* Deposit growth gains pace, buoyed by elevated rates; NIMs to compress further

Systemic deposit growth has improved to 13.3% YoY (fortnight ended 15 Dec’23), driven by higher push for deposit mobilization and aggressive TD rates being offered by banks. This has helped further narrow the gap between credit and deposit growth to ~2.4% in Dec’23. The elevated CD ratios across most private banks, coupled with healthy credit volumes in the seasonally strong second half, will likely sustain high competitive pressure on liabilities. Deposit accretion among top lenders such as HDFCB, AXSB, BOB, and IDFCFB will thus be a key monitorable and an important factor to determine the loan growth. CASA ratios are likely to moderate further across banks as deposit churn toward higher rate TDs continue. We thus expect systemic NIMs to moderate further though the pace of moderation is likely to decline vs that in 2QFY24.

* Slippages and credit cost to remain under control: We estimate slippages to remain under control, while the recovery momentum remains healthy, thus driving continued improvement in asset quality ratios. Further, restructured book is likely to moderate, which along with low SMA book will help keep credit costs in check.

* Estimate banking coverage universe earnings to grow ~15%/28% (10%/24% YoY Ex of HDFCB) in 3QFY24/FY24: We estimate NII for our banking coverage universe to grow at ~9% YoY (Ex of HDFCB) during 3QFY24, while elevated opex drags PPoP to a 4% YoY decline (Ex of HDFCB). For 3QFY24, we thus estimate private/PSU banks to report earnings growth of 23% (18% ex of HDFCB)/4% YoY.

We estimate MOSL Banking Universe earnings to grow 28% (~24% ex of HDFCB)/22%/20% YoY over FY24/FY25/26E.

Private Banks – 3QFY24 PAT to grow ~18% YoY (Ex of HDFCB)

* We estimate PPoP growth of 8% YoY (+3% QoQ) (Ex of HDFCB) for our Private bank coverage universe during 3QFY24, while PAT growth is estimated to sustain at 18% YoY/1.5% QoQ (Ex of HDFCB). Earnings growth is supported by robust business growth and controlled credit cost compensating for continued NIM compression and slightly higher opex. However, we expect the pace of NIM compression to moderate over 2Q levels.

* We thus estimate 3QFY24 NII growth of 18.5% YoY (15% YoY ex of HDFCB) with IDFCFB at ~27%, HDFCB at ~27%, KMB at ~15%, ICICIBC at ~12%, IIB at ~18%, and AXSB at 11% YoY.

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