Mounting pressure on banks’ top line

We enter a period of NIM contraction. Large private banks (ICICI Bank and Axis Bank) will not be well-placed in this leg of the cycle but we should expect public banks and HDFC Bank (given the construct of liabilities) to be relatively well-positioned, the report said

Negative Outlook on NIM

• Asset quality under watch
• Credit costs below long-term averages
• Valuation premiums shrinking between large and mid-pvt/PSBs

New Delhi: Banks are entering a period of low revenue growth for second half of the current fiscal as the cost of funds is yet to peak for all players, Kotak Institutional Equities said in a report. Diversifying books may sustain high loan growth for non-banks, even as asset quality in select pockets may be under watch. Broadly, keep a negative outlook on NIM, but a positive outlook on credit costs as it is likely to be below long-term averages, the report said.

Healthy earnings print, but slowing momentum marked the performance of the quarter as NIM declined for most led by re-pricing of cost of deposits/bank loans; loan growth was comfortable at 15 per cent YoY for banks/20 per cent for private non-banks, and (2) earnings growth of 33 per cent YoY for banks was led by reduction in credit costs.

A key challenge has been weak price performance by large banks, ignoring strong earnings trends. On the other hand, valuation premiums are shrinking between large and mid-private/public banks led by better asset quality and SFBs (AU SFB with Equitas, Ujjivan SFB). “We enter a period of NIM contraction. Large private banks (ICICI Bank and Axis Bank) will not be well-placed in this leg of the cycle but we should expect public banks and HDFC Bank (given the construct of liabilities) to be relatively well-positioned,” the report said. “We believe that despite the above concern on NIM trajectory, investors are probably better-off with large private banks over mid and small banks as the valuation premiums are far lower than what is comfortable,” it said.