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Growth, NIM and opex likely to dominate discussions

Unlike the traditionally strong fourth quarter, we believe Q4FY24 will be relatively soft, characterized by: 1) NIM pressure, 2) steady loan growth but softer deposit growth, and 3) cost pressures with the impending impact of wage hikes & pension provision for a few. That said, lower credit cost and better recovery trends (recovery from writtenoff) should support earnings. Among our coverage universe, we expect PSU banks to report better earnings growth than private ones, led by lower credit cost. We expect earnings discussions to be dominated by NIM and growth outcomes.Steady credit growth; incremental funding gap monitorable

Banks are benefitting from better-than-expected credit growth at >16% currently, as per the latest RBI report, but the funding gap remains wide, with deposit growth lagging credit. While there is still some leeway in terms of liquidity and excess SLR for sustainable growth without diluting funding mix, deposit growth uptick is key. We are monitoring the CD ratios, with private banks in the range of 85-90% & PSU at 70-75% and LCR ratio, which will have a bearing on deposits. We expect lower CASA ratio for most banks, given higher accretion of term deposits

NIM pressure to continue

As we had highlighted on our note, Growth-NIM conundrum: Strain to sustain, released on 1 April 2024), banks continue to see moderation in incremental spread. While funding cost pressures are likely to persist (we have already seen retail TD rates raised by a few frontline banks during February-March 2024), the surprise is the pressure on lending rates as well, in our view. This also reflects increased competition, and, thus, the debate on growth vs NIM conundrum becomes more relevant. We expect NIM pressure to sustain, and, in this context, commentary on turning rate tables and the consequent NIM impact will dominate talks.

Likely benign outcome on asset quality

We expect overall asset quality outcome to remain benign, which is likely to result in below normalized credit cost. Traditionally, Q4 has been a strong recovery quarter, and we believe this quarter will be no different, even as it may lack lumpy accounts. Although the overall trend is strong, there are a few pockets of vulnerability, namely personal loans and MFI; management commentary will be keenly watched. Add to this, a few banks have provided for AIF exposure in Q3FY24 and post RBI relaxations we may see write-backs on this front.

Outlook: sector leaders restricting valuation

Banks are at an unusual junction wherein frontline names have underperformed. With outperformance by other private and mid-tier PSU banks, the valuation gap between mid-tier and frontline has narrowed. We retain our neutral stance on banks; hereafter, the riskreward may be tilted toward frontline peers. No significant asset quality challenges and better growth may ensure sustained rerating for PSU banks on earnings stability – with SBI being our top picks.

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