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WALR on O/S loans declines, while WATDR continues to inch up

* The Weighted Average Lending Rate (WALR) on fresh loans declined 14bp MoM in Nov’24, after a jump of 17bp in Oct’24. PSBs reported a 12bp decline MoM (up 14bp MoM in Oct’24), while PVBs declined just 4bp MoM (up 2bp MoM in Oct’24).

* The Weighted Average Term Deposit Rate (WATDR) for the system increased 2bp MoM to 6.98% (up 2bp MoM for PSBs and 1bp for PVBs). During Aug-Nov’24, WADTDR rose 5bp (5bp for PSBs as well as PVBs); this ongoing rise indicates that competition for deposits remains intense, while demand for credit moderates.

* Systemic credit growth declined sharply to 11.5% as of 13th Dec’24, driven by the rising stress in unsecured loans and elevated LDR levels. We project credit growth to be ~11% for FY25, with FY26 growth stabilizing at 12.5%.

* Repo rates remain unchanged since Feb’23, while lending rates have increased and stabilized recently. However, funding costs continue to rise due to ongoing liability repricing and higher deposit rates set by banks.

* We anticipate a continued negative bias in margins for the banking industry, with the expected reversal of the interest rate cycle in early CY25 likely to further compress lending yields. Consequently, we project NIMs to remain under pressure through FY26.

* Our top picks are ICICI, HDFCB, SBIN, FB, and AUBANK.

WALR on fresh loan declines in Nov’24; flattish for the past three months

* WALR on fresh loans declined 14bp MoM (up 17bp in Oct’24), with a 12bp decline for PSBs and 4bp for PVBs. During Aug-Nov’24, WALR on fresh loans declined 1bp, with PSBs declining 1bp and PVB increasing 12bp.

* As of Nov’24, fresh rupee loans over repo premium stood at 3.81% for PVBs (3.85% in Oct and 3.84% in Sep) and 2.09% for PSBs (2.21% in Oct and 2.07% in Sep). Banks have largely kept lending rates steady, emphasizing balanced growth while safeguarding margins.

* WALR on outstanding loans remained flat MoM at 9.87%. It has stayed flattish over the past six months, fluctuating within the range of 9.8-9.9%.

* One-year MCLR for most PVBs increased 10-75bp YoY, with City Union recording the maximum increase of 75bp. For large PVBs, the MCLR expansion stood in the range of 10-25bp.

WATDR rises 2bp/1bp MoM for both PSBs and PVBs

* WATDR rose 2bp MoM in Nov’24, led by a 2bp gain for PSBs and 1bp for PVBs. During Aug-Nov’24, WATDR rose 5bp, with PSBs and PVBs both gaining 5bp each. The upward trend reflects growing competitiveness within the industry and is likely to keep the CoF elevated.

* With recent data indicating a system liquidity deficit and regulators injecting liquidity, deposit challenges are expected to persist for the foreseeable future. We anticipate higher TD rates, even with the expected rate cuts. Banks will continue to prioritize a well-balanced mix of LCR, CASA, and retail deposits.

Credit growth decelerates; deposit growth crucial for supporting credit expansion

* Systemic credit growth has slowed to ~11.5%, down from a peak of ~16%, driven by a deceleration in unsecured retail lending and moderated demand in select secured segments.

* Deposit growth has remained within a narrow range of 10-13% over the past 18 months, with a YTD increase of 7.8%, slightly outpacing the YTD credit growth of 7%. Moreover, deposit competition remains intense as banks focus on enhancing their CD ratios, with PSU banks also ramping up their efforts.

* The deceleration in credit growth has been sharper than anticipated. However, the system’s CD ratio remains elevated, making robust deposit growth essential to sustain credit growth. Consequently, we estimate credit growth to reach ~11% in FY25 and stabilize at 12.5% in FY26.

CD ratio remains elevated; incremental CD ratio at 79.4% (decelerated from the highs of 102.4%)

* The outstanding LDR has declined to 79.7%, although nearing the highs of 80.3% recorded in Mar’24. While most PSBs have seen a rise in LDR recently, it remains lower vs their private counterparts.

* The incremental LDR for banks under our coverage stood at 50-120%, with HDFCB recording the lowest at 50% and SBI recording the highest at 120%. INBK’s incremental LDR was 119%. The LCR ratio, however, remained at a comfortable level, with most large PVBs falling within the range of 112-136%.

NIMs to be at a negative bias; costs to stay elevated

* Although repo rates have remained unchanged since Feb’23, lending rates have adjusted at a slower pace, while borrowing costs have risen due to the ongoing repricing of liabilities. Additionally, many banks have slowed credit growth in response to increasing stress in unsecured loans, which could result in NIM contraction.

* Furthermore, data indicates that while rates on fresh loans remain sticky, deposit rates have increased, suggesting that NIM contraction may persist, albeit at a more gradual pace.

Our view: Maintain preference for ICICIBC, HDFCB, SBI, FB, and AUBANK

* We maintain our view that NIMs will remain under pressure due to slow growth in unsecured lending, rising costs, and an elevated CD ratio, which are likely to constrain credit growth.

* We are closely monitoring the potential shift in the interest rate cycle and the pace of monetary easing, as these factors will significantly influence margin trends. Additionally, robust deposit mobilization will be crucial, as the elevated CD ratio and rising inflation pose challenges for banks in reducing deposit rates and costs.

* Margins and the delinquency cycle in unsecured loans remain key focus areas. We anticipate an uptick in credit costs for select banks.

* As banks approach 3Q earnings, we expect further signs of a slowdown, particularly from unsecured loan stress. For 3QFY25, we estimate MOFSL Banking Universe earnings to grow 15.3% YoY, with sector earnings projected to post a 12.6% CAGR over FY25-27.

* Our top picks are: ICICI, HDFCB, SBI, FB, and AUBANK.

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