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1QFY25 Preview: Slow at the ‘core’, soft at the ‘margin’

We estimate the profits for our banking coverage universe to grow +6.9%YoY (ex-HDFCB) in 1QFY25 (+7.8% YoY for private banks, +5.9% YoY for PSU banks). Growth is expected to remain slighlty soft given the effect of seasonality coupled with impact of elections. We expect 14.9%YoY (ex-HDFCB) growth in loans and 12.7% YoY growth in deposits (exHDFCB). PPOP growth for our coverage stands at 6.7% YoY (ex-HDFCB) (7.5% for Pvt banks and 5.3% for PSU banks) for 1QFY25 with NII estimated to grow at 9.5% YoY (ex-HDFCB) (9.7% for private banks and 9.3% YoY for PSU banks) . While RBI continues to hold its purse strings tight, systemic credit growth (at 16.1% YoY adj. for HDFCB merger) has remained steady. We anticipate further moderation in unsecured loans as banks continue to react to regulatory caution on these products. Deposit growth continues to lag credit growth, especially for private banks, hence, LDRs will remain the focal point of discussion, given the regulator’s discomfort at current levels. Cost of deposits continue to inch up albeit at a more gradual pace than seen previously and we also believe that system is possibly reaching a peak (or should we say plateau?) in deposit rates. This is likely to weigh on NIMs in 1HFY25 and thus keep NII momentum in check for the sector as a whole. Meanwhile, margins for PSU banks in our coverage is expected to remain largely stable given their lower LDRs and will likely see a peak as and when rates come off. We forecast a slight moderation in opex intensity of our coverage as private banks manoeuvre operating costs to alleviate NIM pressures. For PSU banks, respite from wage hike related provisions should aid PPOP trajectory. While credit quality for banks have remained largely benign until now, we expect it to normalise going forward and thereby build in a uptick in credit costs emanating primarily from retail segments. However, returns trajectory is likely to remain stable for our coverage. Valuations remain close to long-term averages and banks remain one of the few pockets of value. Notwithstanding the valuation argument, we see growth (NII, PPOP) and asset quality to be more critical factors for sector re-rating and thus maintain our circumspect stance (Jan24 report) . We continue to prefer larger banks and our key picks are ICICIB, AXSB.

* Margins expected to come off; LDR remains a key monitorable: We expect NII momentum to remain in check for the sector as a whole, as clamour for deposit continues given the tight liquidity conditions. In our view, cost of deposits will continue to have a bearing on NIMs in 1HFY25. Meanwhile, margins for PSU banks in our coverage is expected to remain largely stable given their lower LDRs and will likely see a peak as and when rates come off. As deposit growth is still expected to trail credit growth, LDR (Exhibit 4) continues to be a key monitorable given the regulatory diktat. With the seasonality in the quarter coupled with elections, we don’t expect a meaningful change in LDR for private banks. Meanwhile, PSU banks continue to fare well on this front.

* Personal loan growth moderates; Industry credit picks up: Despite continuing tight liquidity conditions and the impact of elections, banking credit growth has remained steady at 19.8% YoY (16.1% adj. for HDFC merger) as of May 31st, 2024. While credit to services sector continues to remain buoyant (+20.7% YoY), credit to industry accelerated to 8.9% YoY (vs 6% in May ’23) with further uptick expected going forward, as capex picks up. Growth in retail loans reduced to 17.8% YoY (vs 19.1% a year ago). Within retail, while growth in unsecured segments has come off from Oct'23 levels, there remains scope for further moderation. We expect loan growth for our coverage at 21.1% YoY (+14.9% YoY ex-HDFCB) and 2% QoQ (+2.1% QoQ ex-HDFCB).

* Opex to moderate; Credit costs to see an uptick: We forecast a slight moderation in opex intensity of our coverage (-3.8% QoQ) as private banks manoeuvre operating costs to mitigate NIM pressures. For PSU banks, respite from wage hike related provisions should aid PPOP trajectory. While credit quality for banks have remained largely benign until now, we expect it to normalise going forward and thereby build in a uptick in credit costs emanating primarily from retail segments. However, returns trajectory is likely to remain stable for our coverage.

* Valuations and view: Valuations remain close to long-term averages and banks remain one of the few pockets of value. Notwithstanding the valuation argument, we see growth (NII, PPOP) and asset quality to be more critical factors for sector re-rating and thus maintain our circumspect stance (Jan-24 report). We continue to prefer larger banks and our key picks are ICICIB, AXSB.

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