Bank  shares  social gathering  nonetheless  has  extra  legs

Banks had been the cynosure of all eyes on the newest earnings ball. If it wasn’t for the stellar present put up by the sector, India Inc’s total company earnings within the September quarter (Q2FY23) would have been muted, leading to a bleak outlook for FY23 earnings estimates.

Robust systemic credit score progress, improved traction in retail loans, and a pick-up in company loans boosted the Q2 earnings of banks. In a rising rate of interest state of affairs, the sector’s internet curiosity margin (NIM) growth was hanging, with loans getting repriced quicker than deposits. As a acutely aware technique, banks are first absorbing inner liquidity. This is resulting in a slowdown in elevating deposit charges, stated Emkay Global Financial Services Ltd.

Kotak Mahindra Bank’s managing director and chief government officer Uday Kotak summed this up aptly, “We (banking trade) are most likely in one of the crucial essential Cinderella instances of the credit score cycle.”

The clock for this Cinderella moment has started ticking, with systemic liquidity in tightening mode. However, there is some time before the party ends, as a full pass-through of rate hikes on the deposit front is yet to happen.


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Since May, the Reserve Bank of India has increased the repo rate by a cumulative 190 basis points (bps). Banks are upbeat on sustaining their loan growth trajectory, mainly on the back of expected traction in corporate loans. Most banks have raised their credit growth estimate for FY23 by 200-300bps, said the Emkay report dated 18 November.

The challenging part now is that deposits growth is muted and lags credit growth. However, banks are likely to raise deposit rates aggressively to fund credit demand. This means the fight for deposits would become intense.

“Within deposits, low-cost and current and savings account (CASA) deposits are showing weaker growth. In Q2FY23, many prominent large banks saw a drop in the CASA mix because of tighter monetary policy, which is now reflecting on the liquidity within the system,” stated Santanu Chakrabarti, India analyst, banking, monetary companies, and insurance coverage, at BNP Paribas. Thus, if deposit progress disappoints, the combat for CASA and marginal spends round it could escalate, impacting the sector’s NIM. As such, deposit mobilization and the tempo at which banks enhance deposit charges are essential parameters to be careful for, aside from tendencies in price of funds.

The aforementioned state of affairs would unfold finally; till then the consolation on NIM stays. “We anticipate NIMs to stay in good stead in H2FY23. Credit progress is predicted to stay sturdy in H2FY23, provided that This autumn is a seasonally robust quarter for the sector and a few a part of festival-led mortgage demand would have additionally flown into the December quarter,” said Dnyananda Vaidya, research analyst at Axis Securities Ltd.

Further, as things stand, analysts are not too worried about the sector’s asset quality as incremental stress build-up is expected to be low. Meanwhile, mid-tier banks still have some scope for a valuation re-rating, said Vaidya. “Among large banks, ICICI Bank and State Bank of India are better placed on the valuation front than HDFC Bank, since the overhang of the merger would restrict a re-rating,” she stated.

Overall, buyers in banking shares are in a merry temper taking the sector index Nifty Bank to a brand new 52-week excessive on Thursday. So far in CY22, Nifty Bank has risen 21%, comfortably beating the Nifty 50’s 7% returns. But maintain your breath. Note that banks will not be proof against progress slowdown dangers arising from additional potential deterioration in macro-economic setting. Therefore, the social gathering might proceed, however might not final lengthy.

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