Overall earnings for private banks remained robust in Q3 FY24, but profitability for most players was lower than estimated, in a quarter marked by higher provisions and pressure on margins.

Loan growth remained strong led by retail, MSME and mid corporates, whereas large corporate demand continued to lag amid muted private capex. Even so, banks expect overall loan growth to be healthy at 18-20 per cent for FY24 and FY25, led by faster growth in higher yielding retail loans, which continue to see the highest demand.

On the other hand, deposit mobilisation continued to be an area of pain for the sector, with deposit growth lagging credit growth for most large and mid-sized players. Low-cost CASA (current and savings account deposits) shrunk for most banks leading to higher reliance on bulk and term deposits. Most banks said they continue to focus on granular deposits and will remain competitive on interest rates, hinting at further scope of deposit rate hikes.

Private banks expect the crunch of deposits to continue for a few quarters given the tight system liquidity. This will continue to push up cost of funds and assert pressure on margins, and could possibly impede loan growth going into FY25.

HDFC Bank, which has a low share of retail loans, said there is a need to improve the retail mix to support margins. Despite RBI’s caution on unsecured loans, other banks too maintained that the outstanding unsecured portfolio remains a small portion of overall loans and they expect to continue to see 28-32 per cent growth in this segment.

Provisions for most banks surged during the quarter as they made one-time provisions against their AIF investments. Higher operating expenses led by staff costs and investments in technology, liability franchise and branch expansion also weighed on banks’ bottomline.

Asset quality improved for most players on the back of a steady corporate loan book. Slippages during the quarter were largely from the retail portfolio, but banks said they don’t see any stress in the portfolio as the pace of slippages remains “manageable” and controlled. Further, most banks expect slippages to reduce and recoveries to pick-up in the coming quarters.

Analysts said that the room for further increase in lending rates and yields remains limited due to credit competitiveness. However, despite a moderation in NIMs and deposit-related challenges, healthy loan growth and benign asset quality should continue to drive healthy earnings for private banks.