Banks could see profits growing further in Q3

Mumbai: Indian banks are on course to make even more profits through this quarter and the next, courtesy repricing of loans in the March quarter and the increasing trend of shifting a greater proportion of advances to external benchmark rates.

What's the likely bottom-line impact? Well, leading high-street banks could see their net interest margins (NIM), or core profitability, climb nearly a sixth of a percentage point.

"Repricing of the lending book, improved traction in better-yielding focused product segments and utilisation of liquidity and excess SLR for growth in advances are likely to offset deposit cost pressures and support gradual rise in NIMs," said Kunal Shah, analyst, ICICI Securities. "Continuing benefit of upward repricing in external benchmark linked rates and marginal cost of lending rate (MCLR) linked loans is likely to outweigh pressures on funding cost."

About 53% of advances at Kotak Mahindra Bank are linked to the external benchmark lending rate, followed by HDFC Bank and Axis Bank at 41% each, and SBI at 34%. SBI has a relatively higher proportion of loans linked to MCLR at 41%.

"Margins are expected to witness a positive bias, supported by a pick-up in growth and further repricing of the floating rate book," said Nitin Aggarwal, head-BFSI research, Motilal Oswal Financial Services. "However, we remain watchful of a rise in the deposit costs, which may keep the margins under pressure over the medium term."

Experts say banks with higher share of floating rate loans, rising mix of high-yielding assets such as retail and business loans, reduction in low-yielding RIDF bonds, and a low cost liability franchise will see sharper growth in margins.

"Lending rates on fresh loans are on a clear upward trajectory, while the lending rates on outstanding loan books have followed a similar trend, indicating disciplined lender behaviour," said MB Mahesh, at Kotak Institutional Equities.

"The spread between outstanding loan yield and average term deposit rate has sustained at a healthy level, especially for private banks. Another rate hike in December 2022 has ensured that we will continue to see margin expansion in the near term, but the market for deposit rates is also getting aggressive by the day."