Bank loan growth set to take a hit

Banks may report negligible loan book growth and decline in margins in the October-December quarter as companies and retail borrowers have stayed away from taking fresh debt due to demonetization.

However, treasury gains are expected to boost the non-interest income of banks.

Religare Securities said in a report, “The loan growth is slowing and large banks will bear the brunt. In the aftermath of demonetization, we expect a significant decline in loan growth across banks. In our view, larger banks will be the hardest hit. In contrast, we expect small/mid-sized private banks like YES and IndusInd to grow faster than the system as well as their larger peers at 25% over the previous year, given that their loan books are fairly diversified with a low base and working capital funding dominates their corporate books.”

Loan growth fell to 5% during the period ended December 23 last year.

Demonetization saw an influx of deposits in line with banks’ market share, largely in the form of deposits into current accounts and savings accounts (CASA). The biggest gainers would be the smaller banks which were reliant on high-cost bulk deposits.

RBI’s cash reserve ratio (CRR) hike and tepid loan growth in high-yielding segments such as retail and SME will more than offset this benefit and compress margins.

Kotak Institutional Equities said in a report, “Impact on asset quality remains uncertain due to 90-day dispensation on non-performing asset recognition, with actual impact only visible in FY18, benefit on the liability side (deposit side is a definite positive, but irrational competitive behaviour on pricing will not only offset the positive impact but will lead to margin pressures eventually.”

Flushed with liquidity and facing a dearth of investment opportunities, banks have been compelled to park their incremental deposits with the RBI under low yielding repo, which will put further pressure on margins.

The fall in the yields on government bonds will ensure treasury gains for the banks. This will then help drive the growth in non-interest income. With the pace of growth of personal loans like housing, education loans dipping, the fee income is expected to be dim from these segments. But the treasury gains will more than make up for the loss in non-interest income segment. The government had also ordered the waiver of the merchant discount rates (MDR) on debit card transactions during Q3.

This will have some impact on fee income, albeit not overly so because credit cards are bigger revenue drivers. However, even the credit card spends are falling, according to RBI data.

The Kotak report said they expect banks to report a 95% year on year (YoY) growth in the earnings with 1% decline over the preceding quarter. In the same quarter last year, banks had reported massive losses as provisions leapfrogged after RBI conducted an asset quality review (AQR). Excess liquidity following demonetization and income de-recognition in the third quarter due to AQR will support 9% YoY net interest income growth, even as loan growth is expected to be muted at 3% over the previous year.

Surplus liquidity has prompted a 0.30% to 0.40% decline in government bond yields in the third quarter. This directly benefits most banks (especially PSBs) in terms of higher treasury gains, thus aiding profitability.

The NPAs in retail and agriculture segments may remain stable in Q3 due to the RBI’s 90-day grace period for NPA recognition on outstanding accounts less than slippages is likely to be lower, especially for public sector banks.


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