Q3FY25 results preview: Moderate credit growth, margin pressures to weigh on banking sector

Moderate credit growth expected

The post-COVID era saw one of the highest credit growth rates in the economy, at 16% YoY, which has now moderated to 11%, according to the latest available data from the RBI. The lower interest rate policy led to a substantial rise in unsecured and retail borrowers, who now look stressed as interest rates have been held higher for longer. In addition, poor GDP growth has also impacted slower credit offtake by corporates/MSMEs, adding stress to the banks’ balance sheets.

Margins to remain muted

Banks are expected to witness margin pressure in Q3FY25 as they struggle to mop up cheaper sources of funds through CASA (current account and savings account) deposits in a high-interest-rate scenario. Net interest margins are expected to be under pressure as deposit mobilisation remains challenging across all banks. HDFC Bank and IndusInd witnessed sequential degrowth in CASA deposits, indicating elevated credit costs. Public-sector banks may see better net interest margin expansion than private-sector banks, largely due to better deposit mobilisation and strong collection efficiency at the branch level. Lastly, small-to-mid-sized private banks like Federal Bank garnered more deposits than the industry average through their fintech tie-ups and partnership ventures.

Asset-quality concerns rise

The overall asset quality of the Indian banking sector is expected to remain mixed, with retail unsecured portfolios witnessing higher stress. In addition, the microfinance segment is also likely to see more significant pain than other segments as delinquencies rise in this high-risk asset category. Banks have been cautious in expanding their unsecured portfolio and have shown restraint in growing the base, which could see desired results in coming quarters. Contrarily, the corporate and secured retail category is expected to remain broadly stable.

Micro and small finance banks are expected to witness some deterioration in asset quality, which will consequently impact their profitability. In Q2FY25, large and mid-sized microfinance institutions have seen a sharp decline in profitability, primarily driven by high stress on asset quality.

Profitability metrics to remain mixed

The bottom line for the banking sector is expected to show mixed performances in Q3 as large private banks are expected to be burdened by higher credit costs and slower credit growth. On the other hand, some public sector banks like Bank of Baroda and Punjab National Bank and other private lenders like Federal Bank are expected to put up a good show on the bottom-line front, mainly due to manageable credit costs and relatively higher credit growth rate. At the same time, microfinance lenders like Credit Access Grameen and AU Small Finance Bank, which have high exposure to unsecured retail loans, credit cards, and microfinance, are expected to feel more pain than others.

Subdued index performance in Q3FY25

The NIFTY Bank index performed poorly in the October-to-December quarter, with -3.6 % returns, slightly better than the benchmark NIFTY50, which fell nearly 7% in the same period. Shares of HDFC Bank, ICICI Bank and Federal Bank were the top three gainers for Q3FY25, with gains in the range of 1% to 3.5%. On the other hand, IndusInd Bank and AU Small Finance Bank fell the most, with 33% and 23% losses during the similar period.

Outlook

The overall outlook for banks remains stable as the focus has shifted to better deposit mobilisation and improving asset quality. In addition, the much-anticipated rate cut will boost the animal spirits in the corporate lending space, which looks dry at present. The new set of credit offtakes is expected to come from large corporations sitting light on the balance sheet. The government’s boost in the upcoming budget and a potential RBI rate cut could accelerate the credit growth cycle for banks, which is currently in the slow lane.