Brokerage firms and analysts remain positive about the banking sector despite the rising rate regime as they point out lenders have been increasing lending rates in the past few months, in sync with the rise in repo rates.
The growth prospects of the banking sector are bright as the demand for loans is strong despite the rising interest rate scenario, thanks to the revival in the economy. Analysts point out that the banking sector is likely to benefit from expanding margins as it passes on rate hikes through the floating rate loans while simultaneously delaying the rate hikes for deposits.
The ongoing monetary tightening is expected to benefit banks that have a higher mix of floating-rate books.
"The lending rates for banks have been constantly increasing over the past few months, in tandem with the rise in the repo rate. Banks, with a higher mix of floating-rate book, stand to benefit from the continued monetary tightening," said brokerage firm Motilal Oswal Financial Services.
RBI further increased the repo rate by 35 bps in the last policy meet on December 7, 2022, and maintained the withdrawal of its ‘accommodative’ stance to keep inflation under check.
Motilal Oswal expects a further 25 bps hike in February 2023 and the terminal policy repo rate to be nearly 6.5 percent.
While interest rates are rising, there has been a slower increase in deposit rates.
As the brokerage firm highlighted, the weighted average term deposit rates (WATDR) rose 13 bps month-on-month (MoM) and 59 bps since April 2022 to 5.62 percent in November 2022.
Motilal Oswal believes as the competitive intensity to garner deposits has intensified, deposit rates will increase further, driving an increase in funding costs. However, banks with a higher LCR and a healthy CASA mix can calibrate the increase in deposit rates and are thus better placed to navigate the challenges posed by the rising cost of funds, said Motilal Oswal.
"We expect net interest margin (NIM) to improve in the near term while remaining watchful of margins over FY24. Our top picks are Axis Bank, ICICI Bank, SBI, and Federal Bank," said Motilal Oswal.
Ajit Banerjee, Chief Investment Officer at Shriram Life Insurance, pointed out that the banking sector’s balance sheet is amongst the strongest in the last 10 years, especially in terms of credit cost potential.
He said that the risk-reward looks attractive, with the potential for upgrades and rerating.
"Banks with strong liability franchises and large branch networks would benefit more from maintaining deposits growth in a rising rate environment," he said.
Apurva Sheth, Head of Market Perspectives & Research, Samco Securities, is of the view that the banking stocks will continue to remain favourites in the calendar year 2023.
"The best asset quality in a decade, significant improvement in capital ratios, robust credit demand, and improving quality of customers have aided the first leg of re-rating. The next leg of re-rating will be driven by the continued improvement in its quarterly performance and enhancing profitability," said Sheth.
In RBI’s half-yearly Financial Stability Report (FSR) published on December 29, governor Shaktikanta Das said the domestic banking system was sound and well-capitalised. According to him, banks are able enough to withstand even severe stress conditions, should they materialise.
RBI said banks' gross NPA ratio has fallen to a 7-year low of 5 percent. Going forward, the RBI believes the gross non-performing assets (GNPA) ratio may fall further to 4.9 percent in September 2023.
On the other hand, the provisioning coverage ratio (PCR) has been increasing steadily since March 2021, reaching 71.5 percent.
Meanwhile, thanks to the increase in interest rates in the last three months, deposits in banks grew strong in the December quarter of the current financial year, said a Mint report.
HDFC Bank reported a 20 percent deposit growth from a year ago. YES Bank posted 15.9 percent deposit growth compared to advances growth of 11.7 percent from the year earlier. IndusInd Bank, CSB Bank, Federal Bank, RBL Bank, and AU Small Finance Bank posted double-digit deposit growth, higher than the sector’s deposit growth of 10 percent, the report said.
Brokerage firms expect the banking sector to report a healthy performance in the third quarter. Trends in deposits, NIMs and NPA will be the focus of investors.
As per recent media reports, the net profit of public sector banks is estimated to reach a milestone of ₹1 lakh crore by the end of the current fiscal year.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.