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Interest Rate Cut, Deposit Growth to Hurt Lenders’ Profitability in Q1

July 13, 2020 08:16 AM


Interest Rate Cut, Deposit Growth to Hurt Lenders’ Profitability in Q1
LOAN GROWTH has moderated due to lockdown, but deposits rose faster, which could compress margins by 10-15 bps; NPAs may not rise due to moratorium, say analysts


A sharp fall in lending rates due to aggressive benchmark rate cuts by the Reserve Bank of India (RBI) and faster deposit growth during the lockdown could lead to a 10-15 basis point contraction in bank margins, impacting profitability in the first quarter ended June 2020. One basis point is 0.01percentage point.

Loan growth is likely to be slower as the quarter was entirely washed out due to the nationwide lockdown. RBI data show credit growth moderated to 6.2% in the fortnight ended June 5, but deposit growth was faster at 11.3%, which means banks could not match the pace of new loans with deposits. More importantly, credit growth moderated from over 11% a year earlier.

“We expect net interest margins to contract by 10-15 basis points in Q1 as banks have not been able to build assets during this period even as interest rates have fallen. Fee income will also be muted but that could be covered by higher treasury gains, which is likely for banks in the quarter,” said Rohan Mandora, an analyst at Equirus Securities.

Though credit growth is slower, banks have had to reduce lending rates following the RBI’s rate cuts. Data from the RBI show that the monthly weighted average lending rates on fresh loans slipped 28 basis points for commercial banks between March and May, though lower than the 115-bps cut by the RBI during that period.

“Given transmission of rate cuts announced earlier with aggressive cuts in MCLR/base rate and deposit rates, margins are seen witnessing a marginal pressure (5-10 bps) in the quarter. While delinquencies are expected to remain benign amid the moratorium, continued build-up of contingent provisioning is expected to keep credit costs elevated,” said ICICI Direct.

Analysts do not expect a rise in nonperforming assets (NPA) due to the RBI-directed moratorium, but some banks may choose to make extra provisions to buffer against any spike in bad loans later in the year. As a result, there is likely to be a divergent provision trend among lenders. Motilal Oswal expects banks to further strengthen their balance sheets by making healthy provisions. It is watching collection efficiency trends as an important near-term metric.

Early result indicators show that some like Bandhan and HDFC Bank have managed to end the quarter with a healthy loan and deposit growth. Bandhan registered an 18% growth in loans and 35% growth in deposits while HDFC Bank reported a 21% loan growth and 25% deposit growth. However, not all banks have done that well. IndusInd Bank said its credit grew nearly 4% with a sequential contraction, while deposits grew 6% year on year.

The challenges will be more for PSU and mid-size private sector banks, said Motilal Oswal. “Besides the dreadful impact of Covid-19, sluggish loan growth due to merger integration, a higher proportion of moratorium and delay in the resolution of NCLT accounts are additional earning dampeners for PSU banks

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