November post-Diwali was sluggish for banks, says Kotak Institutional Equities

The share price of lenders (banks) saw a decline in November, while non-lenders (insurance and capital markets) saw only a minor decline, Kotak Institutional Equities said in its report. Kotak further said that payment activity saw marginal month-on-month (m-o-m) decline after the festive (Diwali) season and the loan growth too continued to be sluggish with no sharp recovery in any specific segment barring SME despite a low interest rate environment.

Kotak believes that with the asset quality issues gradually receding, they see spreads decline but loan demand issues remain.

“November was a sluggish month for the BFSI sector as the Bank Nifty registered a decline of 9 per cent. Non-frontline private banks saw the sharpest decline of 14 per cent, while non-lenders (capital market players and insurance companies) resisted the downward momentum. Frontline private banks also saw a drawdown, with HDFC Bank performing relatively better. NBFCs outperformed the bank index. On a 12-month horizon, PSU banks have outperformed the Bank Nifty quite meaningfully. The emergence of a new Covid strain has put pressure on the market, but we wait to see if the spread could result in another set of mobility restrictions in India,” Kotak Institutional Equities said in its report.

Highlights from the report

Payments data continues to be strong, albeit with marginal m-o-m decline

Daily payments data for November from RBI indicates that strong trends in payments continued across payment systems, with marginal mom decline on the back of the festive season in October. In particular, a representative subset of card spends data indicates that spends in November were robust, although marginally lower mom. UPI transactions also saw a similar trend. Bank credit growth stood at ~7% levels with negligible growth from the corporate segment and a marginally better performance on the retail side. Loan growth has been sluggish, but seems to have bottomed out and we expect to see some strengthening in the trend.

NIM expansion unlikely

As per the latest data from RBI, deposit rates were flat m-o-m at around 5.1%. Both private and PSU banks have reduced their TD rates by around50 bps over the past 12 months. Wholesale deposit cost (as measured by CD rates) has seen a much sharper decline. It has been broadly stable in FY2022. The gap between repo and 1-year TD rate for SBI stands at 100 bps after declining from peak levels of around 130 bps. The premium of SBI TD rates over G-Sec yields has narrowed from its peak level.

Lending rates on fresh loans were flat m-o-m for banks overall, but declined nearly 30 bps m-o-m for private banks and increased 30 bps m-o-m for PSU banks. These rates have been volatile in recent months. The gap between fresh lending rates of private and PSU banks has declined to around 120 bps, which is in line with the average over the past 12 months. The gap between outstanding and fresh lending rates has been in the range of 110-140 bps since the onset of Covid. Steep decline in bond market rates till July 2020 had led to a narrowing of the spread between bank funding and bond rates, but bond yields seem to be trending upwards now. The lenders have been slow in passing the lower cost of funds. In recent months, the spreads are beginning to peak out and decline marginally suggesting that expansion of NIM on corporate books is a low probability event.

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