Financials -
November 2024
Sector Update | 19
Banks | Financials
Financials - Banks
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Assessing impact of draft LCR guidelines: RoA to dip by up to 8bp
Sector earnings to be impacted by ~1%; incremental deposits required at INR2.7t
AUBANK
IDFCB
FB
AXSB
IIB
ICICIBC
BOB
HDFCB
SBIN
CBK
KMB
Potential impact
on NIMs (bp)
-25.6
-21.9
-17.1
-16.0
-12.7
-12.1
-4.9
-5.3
-3.0
NA
NA
Potential impact
on RoA (bp)
-8
-7
-7
-6
-5
-5
-3
-2
-1
NA
NA
Old
New Drop in
LCR (%) LCR (%) LCR (%)
115.2
97.7
17.4
137.4 123.4
14.0
127.3 113.4
13.9
135.9 122.3
13.6
127.7 114.1
13.5
130.0 116.7
13.3
111.9 100.2
11.7
115.8 104.1
11.7
120.7 109.4
11.2
114.9 104.2
10.7
118.1 109.3
8.8
*data as of 1QFY25
Source: Company, MOFSL
In July’24, RBI issued draft guidelines to enhance the liquidity resilience of banks
under the Basel III Framework on Liquidity Standards. These guidelines focus on
reviewing haircuts on HQLA and run-off rates on certain categories of deposits.
In our previous note, we highlighted a potential 7 to 13% hit on the overall LCR if the
draft guidelines were implemented; in this note, we are further assessing the NIMs,
profitability, and growth implication from the same. We estimate that if the guidelines
were to be implemented, our key coverage banks would require an additional deposit
of INR2.7t. Alternatively, the absence of these guidelines could lead to a moderation
in their growth trajectory. We have recently published a note on systemic business
growth trends pegging FY25 credit growth at 11%.
We estimate that while our coverage banks’ LCRs will be impacted by 8.8% to 17.4%
(as we keep a threshold LCR level of 120%) the impact on NIMs from the same will
vary between 3 to 26bp. This will translate into a RoA impact of 1 to 8bp for our
coverage banks, with PSBs being more resilient due to higher LCRs. Top ideas: ICICIBC,
HDFCB, SBIN, FB, and AUBANK.
Draft guidelines to have an impact of 8.8% to 17.4% on banks’ LCR
AUBANK
FB
AXSB
ICICIBC
IIB
IDFCB
HDFCB
BOB
SBIN
CBK
KMB
The draft guidelines from RBI represent proactive steps to strengthen the
liquidity framework of banks. By increasing run-off factors for digital banking
deposits and ensuring accurate valuation of HQLA, these measures aim to
enhance the overall liquidity resilience of banks, ensuring they are better
prepared to manage risks in the evolving financial landscape.
Within our coverage universe, AUBANK, AXSB, and FB are among the PVBs with
lower LCRs, while most PSBs are better positioned with LCRs of >120%.
However, PSBs hold a larger share of retail deposits, which may offset this
advantage to some extent.
According to our calculations, we observe that the impact on banks’ LCR is
broadly in the range of 8.8% to 17.4%, based on the assumptions that large PVBs
have IMB deposits of 85% and PSBs have close to 70% while we keep a
threshold LCR of 120%.
FB
CBK
BOB*
KMB
HDFCB
SBIN
AUBANK
IDFCB
ICICIBC
AXSB
IIB
NIMs for our coverage banks to witness a limited impact of 3 to 26 bp
We estimate that banks will need to raise 1% to 5.7% of their existing deposit pool
to meet the LCR requirements. Given the current tight liquidity, we expect banks to
raise retail deposits at a rate of 7.25% while earning only 6.7% on the G-Sec/SLR
after accounting for the CRR impact. Considering this, we reckon that banks will
witness an overall impact of 3 to 26 bp on NIMs, with PSBs being in more
comfortable positions aided by their higher LCR ratio. Meanwhile, amongst PVBs,
AUBANK and IDFCB are expected to have the highest impact at 26bp and 22bp,
respectively, and HDFCB the lowest at 5bp. Select banks such as KMB and CBK
within our coverage will not have any impact on NIMs as they have been already
maintaining a healthy LCR ratio.
Nitin Aggarwal - Research Analyst
(Nitin.Aggarwal@MotilalOswal.com)
Research Analyst: Dixit Sankharva
(Dixit.sankharva@MotilalOswal.com) |
Disha Singhal
(Disha Singhal@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Financials - Banks | Financials
Elevated CD ratio does not necessarily indicate a lower LCR
With robust credit growth over the recent years, many banks have been operating
with a higher CD ratio. Recent regulatory measures, such as encouraging banks to
lower their CD ratio, increasing risk weights for the rapidly growing loan segments,
and proposing a review of the LCR framework, highlight the need to balance credit
growth with deposit growth while prioritizing retail deposit expansion. Exhibits 4
and 5 show that certain banks have a higher CD ratio but alongside also maintain a
higher LCR. Bandhan Bank serves as a notable example, possessing a high CD ratio as
well as a high LCR — a pattern also seen in banks such as KMB and RBL. This implies
that banks with higher CD ratio doesn’t necessarily need to have higher LCR ratio.
Inability to raise deposits can further suppress credit growth
Banks ability to attract deposits remains crucial for sustaining future credit growth.
We had previously argued for an upcoming deceleration in the system credit growth
which subsequently manifested in growth moderating sharply to 11.9% as of 1
st
Nov’24, while deposit growth followed a steadier path at 11.8%. In recent months,
banks have intensified their efforts to mobilize deposits, increasing the short-term
TD rates to meet ALM needs. We believe that insufficient deposit growth could
continue to constrain credit growth, further compounded by a high CD ratio. We
have thus revised our FY25 credit growth forecast to 11% YoY from the previous
estimate of 12.5% YoY.
RoA for key coverage banks to moderate by up to 8bp
While the final LCR guidelines are still awaited and implementation may happen
from Apr’25, PSBs are better positioned to absorb any potential impact as most
PSBs maintain a significantly higher LCR.
In some cases, we believe that PSBs may not even consider raising their retail
deposits as they have been maintaining a higher share of HQLA, enough to
absorb any new additional requirements of retail deposits. For PSBs, we believe
the RoA impact to be minimal at 1-2 bp with CBK not having any impact as the
bank is already maintaining a high LCR ratio.
Among PVBs, we believe the RoA impact to be higher for AUBANK at 8bp as
bank’s LCR has already moderated to 112%. This will be followed by FB and
AXSB at a 7bp impact. For ICICIBC, IIB, IDFCB, HDFCB we estimate RoA impact of
3 to 6bp. KMB stands out due to its higher LCR ratio and, therefore, is unlikely to
experience any impact.
Valuation and view
The banking sector has delivered range-bound returns over the past year,
underperforming the Nifty due to concerns on margins, asset quality deterioration,
and moderation in loan growth. The impending guidelines on LCR and ECL migration
will further tighten the regulatory framework and impact the operating performance
of underlying banks. While we are still awaiting the final guidelines, according to our
initial assessment, they will impact banks’ margins by 3 to 26bp, while RoA will
contract by 1 to 8bp (refer to Exhibit 13 for details).
Our preferred picks are ICICIBC,
HDFCB, SBIN, FB, and AUBANK.
19 November 2024
2
 Motilal Oswal Financial Services
Financials - Banks | Financials
Story in Charts
Exhibit 1:
Loan growth stood at 11.9%
Loans (INR t)
Chg YoY (%)
Exhibit 2:
Deposit growth stood at 11.8%
Deposits (INR t)
Chg YoY (%)
Source: MOFSL, RBI
Source: MOFSL, RBI
Exhibit 3:
LCR stood healthy for most PSBs; while PVBs’ LCR ratio stood in the range of 112-151%
LCR Ratio (%)
Source: MOFSL, Company
Exhibit 4: CD ratio remained high for PVBs; PSBs had a lower
CD ratio (as of 2QFY25) …
CD Ratio (%)
HDFCB
IDFCFB
AXSB
BANDHAN
99.8
96.2
92.0
88.5
86.6
86.6
86.5
85.6
85.3
82.2
81.5
81.4
76.9
75.4
73.0
72.2
69.9
Source: MOFSL, Company
Exhibit 5: …though a higher CD ratio does not necessarily
translate into lower LCR
LCR Ratio (%)
HDFCB
IDFCFB
AXSB
BANDHAN
127.7
115.8
114.9
151.0
118.0
135.9
112.0
115.2
120.7
123.7
119.7
129.0
120.5
130.0
130.6
144.1
129.0
Source: MOFSL, Company
IIB
KMB
AUBANK
FB
ICICIBC
BoB
DCBB
RBK
INBK
SBIN
CBK
UNBK
PNB
IIB
KMB
AUBANK
FB
ICICIBC
BoB
DCBB
RBK
INBK
SBIN
CBK
UNBK
PNB
19 November 2024
3
 Motilal Oswal Financial Services
Financials - Banks | Financials
Exhibit 6:
Retail deposits across banks as per LCR
Retail Deposits Mix as per LCR (%)
67.4
66.0
61.1
60.2
60.0
58.6
57.5
57.1
57.1
56.6
54.9
53.7
52.6
52.4
44.1
39.5
*data as of 1QFY25, Source: MOFSL, Company
Exhibit 7: CASA ratio continues to moderate for most banks
CASA Ratio (%)
DCBB
FB
CBK
AUBANK
UNBK
BANDHAN
RBK
HDFCB
IIB
INBK
PNB
BoB
ICICIBC
SBIN
AXSB
KMB
IDFCFB
25.6
30.1
31.3
32.0
32.7
33.2
33.6
35.3
35.9
38.9
39.3
39.8
40.6
40.0
41.0
43.6
48.9
Source: MOFSL, Company
Exhibit 8: Decline in CASA ratio for banks since FY22
% change in CASA ratio since FY22
KMB
HDFCB
BANDHAN
PNB
ICICIBC
FB
IIB
SBIN
AUBANK
CBK
BoB
AXSB
UNBK
INBK
RBK
DCBB
IDFCFB
-17.1
-12.9
-8.4
-8.1
-8.1
-6.9
-6.8
-5.3
-5.0
-4.6
-4.4
-4.0
-3.8
-2.9
-1.7
-1.1
0.5
Note: Decline in HDFCB is attributed partly to the merger;
Source: MOFSL, Company
Exhibit 9:
Proposed changes should drive down LCR; sensitivity of LCR to IMB-linked deposits
Source: MOFSL, ICRA
19 November 2024
4
 Motilal Oswal Financial Services
Financials - Banks | Financials
Exhibit 10:
Draft LCR guidelines to lead 9-17% decline in LCR
FB
CBK
BOB*
KMB
HDFCB
SBIN
AUBANK
IDFCB
ICICIBC
AXSB
IIB
Old LCR (%)
115.2
137.4
127.3
135.9
127.7
130.0
111.9
115.8
120.7
114.9
118.1
New LCR (%)
Drop in LCR (%)
97.7
17.4
123.4
14.0
113.4
13.9
122.3
13.6
114.1
13.5
116.7
13.3
100.2
11.7
104.1
11.7
109.4
11.2
104.2
10.7
109.3
8.8
*data as of 1QFY25, Source: MOFSL, Company
Exhibit 11:
NIMs to face an impact of 3 to 26 bp
Potential impact on NIMs (bp)
-
-4.9
-12.7
-17.1
-21.9
-25.6
-16.0
-12.1
-5.3
-3.0
-
Source: MOFSL, Company
Exhibit 12:
RoA impact limited at 1 to 8bp for banks
Potential impact on RoA (bp)
-
-2
-1
-
-3
-5
-5
-6
-8
-7
-7
Source: MOFSL, Company
19 November 2024
5
 Motilal Oswal Financial Services
Financials - Banks | Financials
Exhibit 13:
Impact of LCR guidelines on banks’ RoA and NIMs
Particulars (INR b)
LCR post the outflow impact (%)
Assuming min LCR compliance of 120%
HQLA for LCR under new methodology
- Required increase in retail deposits
-Deposits required adjusted for SLR requirement @18% & CRR@4.5%
- As % of total retail deposits as per LCR (2QFY25)
- As % of total deposits as per BS (2QFY25)
Assuming banks raise required retail deposits at 7.3%
- Cost of incremental deposits @7.25%
- Parking them in G-Sec @6.7% to raise HQLA levels
- Negative carry from CRR
Net impact
NII (FY26)
Avg Int earning assets (FY25-26)
NIM on the basis of Int earning assets (%) - calc
- Potential impact on margins (bp)
Average Assets (FY25-26)
FY26 PAT
Earnings impact (%)
RoA (FY26, %)
% change in RoA, bp
-32.2
29.7
-1.3
-3.78
1,362.7
37,668
3.6
-5.3
41,846
757.69
-0.4
1.8
-2.6
-38.6
35.6
-1.6
-4.53
913.2
22,235
4.1
-12.1
24,024
511.09
-0.7
2.1
-6.3
-40.3
37.2
-1.7
-4.73
620.5
16,512
3.8
-16.0
18,091
299.62
-1.2
1.7
-7.3
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
-9.9
9.2
-0.4
-1.16
259.0
5,836
4.4
-12.7
6,365
98.90
-0.9
1.6
-4.8
-11.1
10.3
-0.5
-1.30
114.9
3,700
3.1
-17.1
4,011
48.43
-2.0
1.2
-7.3
-8.2
7.6
-0.3
-0.97
235.0
3,778
6.2
-21.9
4,066
39.43
-1.8
1.0
-4.6
-4.3
4.0
-0.2
-0.51
100.5
1,666
6.0
-25.6
1,754
28.86
-1.3
1.6
-8.0
-36.7
33.9
-1.5
-4.31
1,864.1
63,474
2.9
-3.0
71,633
760.77
-0.4
1.1
-1.2
-15.8
14.6
-0.7
-1.86
524.6
17,465
3.0
-4.9
18,671
202.23
-0.7
1.1
-2.0
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
HDFCB
114.1
120
7,056
344
444
3.0
1.8
ICICI
109.4
120
4,686
412
532
6.2
3.6
AXSB
104.2
120
3,267
431
556
9.3
5.1
KMB
122.3
120
1,331
NA
NA
NA
NA
IIB
109.3
120
1,189
106
137
7.9
3.3
FB
97.7
120
640
119
153
8.1
5.7
IDFCB
104.1
120
677
88
113
8.4
5.1
AU SFB
100.2
120
280
46
60
5.2
5.4
SBIN
116.7
120
14,133
392
506
1.5
1.0
BoB
113.4
120
3,070
169
218
2.7
1.6
CBK
123.4
120
2,982
NA
NA
NA
NA
Source: MOFSL, Company
19 November 2024
6
 Motilal Oswal Financial Services
Financials - Banks | Financials
Exhibit 14:
Valuation summary for Banks
Company
Financials
Banks-Private
ICICIBC
1,254
HDFCB
1,705
AXSB
1,126
BANDHAN
166
KMB
1,723
IIB
1,005
FB
200
DCBB
113
IDFCFB
66
EQUITASB
66
AUBANK
579
RBK
158
Banks - PSU
SBIN
814
PNB
101
BOB
241
CBK
98
UNBK
115
INBK
528
Fintech and payments
Paytm
784
SBICARD
677
Prices as on 18 November 2024
CMP
(INR)
Rating
EPS (INR)
P/E (x)
P/B (x)
RoE (%)
FY24 FY25E FY26E FY24 FY25E FY26E FY24 FY25E FY26E FY24 FY25E FY26E
Buy
58.4
Buy
80.0
Neutral 80.7
Neutral 13.8
Neutral 69.4
Buy
115.5
Buy
16.3
Buy
17.1
Neutral 4.3
Buy
7.1
Buy
23.0
Neutral 19.3
Buy
Neutral
Buy
Buy
Buy
Buy
Neutral
Neutral
68.4
7.5
34.4
16.0
18.9
62.2
-22.4
25.4
65.4
88.2
85.1
24.3
72.6
94.9
17.1
18.8
3.5
3.1
31.8
16.9
79.8
13.9
35.8
17.9
20.4
77.3
-26.2
21.5
73.3
100.1
98.2
26.5
81.0
128.2
20.3
24.7
5.7
7.3
39.3
28.4
85.6
15.4
39.3
20.2
22.4
83.7
-10.5
30.1
17.0
17.6
12.6
12.0
7.2
8.7
12.2
6.6
15.2
9.2
25.2
8.2
8.2
13.4
7.0
6.1
6.1
8.5
NA
26.7
15.2
16.0
12.0
6.8
6.9
10.6
11.7
6.0
19.0
20.9
18.2
9.4
7.0
7.2
6.7
5.5
5.6
6.8
NA
31.6
13.6
14.1
10.4
6.3
6.2
7.8
9.9
4.6
11.5
8.9
14.7
5.6
6.5
6.5
6.1
4.8
5.1
6.3
NA
22.5
2.9
2.4
2.1
1.2
1.0
1.2
1.7
0.7
1.4
1.2
3.1
0.6
1.4
1.1
1.1
1.1
0.9
1.3
3.7
5.3
2.5
2.2
1.8
1.1
0.9
1.1
1.5
0.7
1.3
1.2
2.6
0.6
1.2
0.9
1.0
0.9
0.8
1.1
4.1
4.6
2.2
1.9
1.5
1.0
0.8
1.0
1.3
0.6
1.2
1.1
2.2
0.6
1.0
0.8
0.9
0.8
0.7
1.0
4.3
3.9
18.9
14.6
18.0
10.8
15.3
15.3
14.7
11.8
10.2
14.4
13.1
8.2
18.8
8.7
17.8
20.2
16.7
17.1
-10.8
22.0
18.0
14.4
16.1
17.0
13.9
11.2
13.4
11.7
7.3
5.9
15.4
6.7
18.8
14.4
16.2
19.3
15.9
18.4
-13.2
15.7
17.4
14.6
15.9
16.3
13.6
13.6
14.1
13.7
11.0
12.8
16.2
10.7
17.4
14.1
15.7
18.9
15.4
17.3
-5.7
18.8
Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
19 November 2024
7
 Motilal Oswal Financial Services
Financials - Banks | Financials
NOTES
19 November 2024
8
 Motilal Oswal Financial Services
Financials - Banks | Financials
Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
< - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be within following 30 days take
appropriate measures to make the recommendation consistent with the investment rating legend.
Disclosures
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the business of providing Stock broking services, Depository participant services & distribution of various financial products. MOFSL is a listed public company, the details in respect of which are available on
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1 MOFSL, Research Analyst and/or his relatives does not have financial interest in the subject company, as they do not have equity holdings in the subject company.
2 MOFSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company
3 MOFSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months
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5 Research Analyst has not served as director/officer/employee in the subject company
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9 MOFSL has not received any compensation or other benefits from third party in connection with the research report
10 MOFSL has not engaged in market making activity for the subject company
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financial interest in the subject company
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 Motilal Oswal Financial Services
Financials - Banks | Financials
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Registration details of group entities.: Motilal Oswal Financial Services Ltd. (MOFSL): INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst: INH000000412 . AMFI:
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