HDFC Bank, ICICI, Axis, Kotak Bank shares volatile as Q3 results reflect margin pressures; here’s why banks are falling

HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank, the top four private sector lenders in India have announced their December quarter earnings which were marked by higher provisions and lower margins.

The Q3 results for most private banks were in-line with estimates, but showed challenges with respect to their profitability as they found difficulties in mobilizing low-cost deposits to meet the strong credit growth.

Declining margins were a key concern among these lenders during the October-December quarter and analysts believe the margins to continue to remain under pressure going ahead.

“The Q3 results of top private sector banks have been good overall and largely met expectations. There are concerns over rising cost of funds which have dragged the net interest margins (NIM) of banks in the December quarter. The NIMs are further likely to remain under pressure for 2-3 quarters going ahead which has led to moderation of future earnings expectations of banks,” said Vinod Nair, Head of Research, Geojit Financial Services.

Also Read: Pvt banks see muted Q3, challenges ahead

The deposit growth has been lagging behind the credit growth which has increased the cost of funds for banks. Thus, Nair believes the earnings growth of banks will come down due to rising costs.

A sharp sell-off was triggered in bank stocks with the Bank Nifty index falling more than 2% one week and over 5% in one month.

However, Nair believes the downside in the banking stocks is expected to be limited as valuations are not expensive, rather trading around long-term average.

Bank Nifty has support near the 200 EMA, with the 44,560 level acting as an immediate support level. On the flip side, 46,000, followed by 46,300, act as resistance for Bank Nifty, analyst said

Read here: HDFC Bank Q3 Results Highlights: Net profit rises 33% to ₹16,372 crore, NII up 24% YoY

HDFC Bank shares witnessed 15% slide in five sessions after it reported Q3 results. The bank posted net profit growth of 33% year-on-year (YoY) to ₹16,372 crore, while its net interest income (NII) rose 24% YoY to ₹28,470 crore.

The bank has grown its deposit base by 1.9% QoQ but retail deposits have grown by 2.9% QoQ. Management has cautiously reduced the wholesale deposit base from ~17% of total deposits in March 2023 to 16% in December 2023. This is because wholesale deposits have been volatile as well as expensively priced due to the negative systemic liquidity, analysts said.

“However, in case of a genuine credit growth momentum, raising wholesale deposits will not be a challenge for the bank. Thus, raising deposits is not a major challenge but rather we believe that with a rising geographic expansion, HDFC Bank is better placed to gain retail deposit market share from public sector or PSU banks,” said analysts at InCred Equities.

In case of a surge in wholesale deposits, HDFC Bank may witness initial pressure on its margins in the coming quarters but the same can be compensated by superior operating leverage (amid a rise in large-ticket mortgages) and managing range bound credit cost.

ICICI Bank delivered a good quarter with a rise of 23.5% in standalone net profit at ₹10, 272 crore and NII growth of 13.4% to ₹18,678 crore in the December quarter. NIM at 4.78% was in-line with street estimates due to better yields and interest on IT refund.

Also Read: ICICI Bank Q3 Results Highlights: Net profit rises 23.5% to ₹10,272 crore, NII up 13% YoY

Axis Bank posted a net profit of ₹6,071 crore in Q3FY24, reflecting a 4% YoY increase, while NII rose by 9% to ₹12,532 crore. NIM stood at 4.01%.

For Axis Bank, yield on advances improved 6 bps QoQ. The bank has increased pricing on personal loans and is in the process of doing so for NBFC loans. Cost of deposits increased 15 bps QoQ to 4.94% and this is expected to spill over into Q1FY25.

Given the focus on loan to deposit ratio, deposit growth would be a key constraint to growth in the near term, analysts said. Management does not see interest rates in the economy coming down anytime soon. Over the medium term, management reiterated guidance of growing 400-600 bps higher than banking system loan growth.

Also Read: Kotak Mahindra Bank Q3FY24 results: Net profit jumps 6.75%, total income rises 31% YoY

Kotak Mahindra Bank’s standalone net profit grew 7.6% YoY to ₹3,005. This was slightly lower than analyst expectations as Q3FY24 results for the Bank include ₹143 crore provision (post tax) on applicable Alternate Investment Fund (AIF) investments pursuant to RBI’s circular dated 19th Dec 2023. NII grew 16% YoY to ₹6,554 crore, while NIM stood stable at 5.22% sequentially.

NIM surprised positively due to utilization of excess liquidity post ICRR withdrawal along with better balance sheet management and credit flow led by higher yielding segments. In Q4FY24, low deposit growth and cost of deposits may normalize, thereby impacting NIM.

Going ahead, Nair expects the earnings growth of banks to come down, but he remains positive on private lenders. He has a ‘Buy’ rating on HDFC Bank.

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