Indian banks' margins are likely to be squeezed by slowing credit growth, liquidity pressures and potential rate cuts.
The six biggest Indian banks posted year-over-year growth in net income for the quarter ended June 30, though the pace of growth was slower compared to the previous fiscal year when they reported record profits.
State Bank of India, India's largest bank by assets, said its net income for the quarter rose 4.3% to 193.25 billion rupees from 185.37 billion rupees year over year. HDFC Bank Ltd., the largest private bank in the country, reported net income of 164.75 billion rupees for the fiscal first quarter, compared with 123.7 billion rupees in the prior-year period.
"We expect credit growth to moderate in fiscal 2025 due to expected slowdown in unsecured retail loans following [the Reserve Bank of India] action and continued liquidity pressure," Anand Dama, senior research analyst at Emkay Global Financial Services Ltd., wrote in an Aug. 22 note. Dama expects loan growth to moderate to between 12% and 13% in the current fiscal year that will end March 31, 2025.
"This, coupled with new LCR norms and potential lending rate cut by the far-end of the year, should add to the pressure on margins, more so for private sector banks," Dama said, noting that the sector had a "soft quarter" with after-tax profit only up 7% year over year due to factors such as moderating credit growth, dwindling margins and higher loan loss provisions for some lenders with higher shares of unsecured loans.
Dama expects public sector banks to report better earnings growth than their private-sector peers, as they will benefit from lower wage costs, treasures gains and contained provisions.
Bank credit growth in India appears to be moderating after staying strong in recent years, thanks to the country's strong economic growth.
Data from the Reserve Bank of India (RBI) show bank credit grew 13.9% in June, compared to 16.3% a year ago. Personal loan growth fell to 16.6% from 21.3% a year ago, largely due to a moderation in growth in "other personal loans" and "advances against fixed deposits," the RBI said in a July 31 release.
While the central bank moved to curb the growth of unsecured lending, overall credit growth has remained higher than deposit growth, raising concerns.
Banks are "facing challenges on the funding front with bank deposits trailing loan growth," RBI Governor Shaktikanta Das said in an Aug. 8 statement. Banks are depending more on short-term nonretail deposits and other liability instruments to meet the incremental credit demand, which may potentially expose the banking system to structural liquidity issues, Das said.
In July, the central bank issued draft guidelines on liquidity coverage ratio and asked banks to set aside a higher stock of liquid securities as a buffer on deposits.
India's banking sector could face significant liquidity risks due to the widening credit-deposit gap, said Tusharika Aggarwal, an analyst with S&P Global Market Intelligence's Dividend Forecasting team.
Banks, including State Bank of India, are responding with higher-rate deposit schemes and other strategies. While the schemes help banks improve liquidity and attract deposits, increased interest expenses associated with higher deposit rates could lead to compressed margins.
HDFC Bank, meanwhile, plans to grow its loans slower than its deposits to bring down its loan-to-deposit ratio, said CEO Sashidhar Jagdishan on a July 20 earnings call. The bank's loan-to-deposit ratio clocked in at 107.26% in the 12 months ended June 30, compared with 108.94% in the fiscal year ended March 31, according to Market Intelligence data.