What does private banks Q3 FY24 results signify?

After the third quarter results of FY24, the financial position of large private banks may seem good but most bank results are either below estimates on some scale or face some other significant challenges.

Whether it’s the declining ratio of Current Account Savings Account (CASA) in total deposits, decreasing Net Interest Margins (NIMs), or slow deposit growth compared to loans, the question arises: why is there a slowdown? In such a scenario, after quarterly results, how should private banks formulate their strategies? Let’s understand.

Following the results of the country’s largest private bank, HDFC Bank, private banks find themselves in a rather concerning situation. Profit growth in private banks is happening, but the growth of Net Interest Income (NII), is slowing down.

NII is the difference between the interest received on loans given and the payments made on deposits, i.e. the growth in Net Interest Income is lower than analysts’ estimates, affecting profit growth as well. The answer to this could be found in the falling CASA ratio of banks. CASA refers to the portion of total deposits that comes from Current and Savings Accounts. For banks, deposits through CASA are cheaper compared to Fixed Deposits (FDs) or other forms  <GFX 2 Out>

This is because banks do not have to pay interest on the amount kept in current accounts, and they offer relatively low interest on the amounts held in savings accounts. Therefore, financial advisors recommend investing money in Fixed Deposits (FDs) or other investment avenues to achieve better returns. Due to rising expenses and higher interest on loans due to inflation,

There is a fall in the amount kept in savings accounts due to the increasing inclination towards investing in the stock market and the burden of EMI. However, despite high interest rates, banks are witnessing good growth in loan portfolios.

To match the rate of loan growth or to easily provide loans, banks need at least 3-4% higher deposit growth. However, currently, deposit growth is lagging behind loan growth.

Hence, despite the RBI maintaining the repo rate stable five times, banks are increasing their deposit rates. There is also intense competition from other banks. As they are acquiring deposits at higher rates, banks are facing pressure on their Net Interest Margins (NIMs).

In the third quarter, there was a reduction of approximately 0.10% in ICICI Bank’s Net Interest Margin (NIM). And this trend has been ongoing for the past two quarters.

Now, let’s understand why profit growth is slowing down. There might be new Non-Performing Assets (NPAs) due to higher interest rates. In technical terms, these are known as “slippages.”

For the stressed loans, banking regulator RBI has mandated that, banks are required to make higher provisions, as reflected in the results of this quarter.

Rajesh Agrawal, HoR at AUM Capital, believes that private banks have shown resilience in the third quarter results, but this is limited to only one or two quarters. Especially after HDFC Bank’s results, the market is getting worried as if the bank is about to close. Investors should have a long-term perspective on banks. HDFC Bank is offering a good investment opportunity from a perspective of 1.5 to 2 years.

Therefore, investors should start buying shares gradually.

Now, the big question is how long the trend of increasing provisions and decreasing Net Interest Margins (NIMs) in banks will continue. And now, how should the strategy be prepared for private banks? So, according to Rajesh Agrawal, there will be a halt in the falling NIMs in the next 1-2 quarters. It is expected that there will be a reduction in the repo rate by RBI in the next 4 months. From a perspective of the next 1.5-2 years, investments can be made in HDFC Bank and Kotak Bank.

In these two banks, there is an expectation of at least a 15% Compound Annual Growth Rate (CAGR).

Overall, gathering deposits and maintaining NIMs for the past 1-2 quarters has been quite challenging for banks.

But the good news is that this trend might not last long. Therefore, after the results, considering the fall in share prices, a gradual buying approach with a long-term perspective can be initiated in selected private banks.