Banks’ earnings to be under pressure in Q3 on asset quality, growth concerns

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Indian banks’ Q3FY25 earnings are likely to remain muted, primarily on account of slower business growth, static margins and asset quality stress, analysts say.

“Q3FY25 has been a tough quarter with higher credit cost, decelerating loan growth, shortage of deposits even amidst slowing loan growth, moderate pressure on net interest margin (NIM) and lower trading gains,” said Nuvama Research in a report.

Asset quality stress

“Asset quality is the overwhelming theme. MFI (microfinance loans) and unsecured loans continue to see elevated stress. HDFC, ICICI, Federal and state banks are likely to face less stress while MFI lenders would see a sharp deterioration,” it said.

According to Devarsh Vakil, deputy head of retail research at HDFC Securities, lenders with exposure to the unsecured retail and MFI segments will likely see asset quality stress. Bandhan Bank, IndusInd Bank and RBL Bank have a higher share of unsecured credit cards, personal loans and microfinance loans in their overall advances.

“Tighter regulation in MFI lending could curtail asset growth for some of the smaller banks. We believe large banks are poised to navigate this cycle effectively and are currently available at very attractive valuations. Recoveries from stressed assets are likely to aid PAT growth for some PSU banks,” he said.

Business growth

According to brokerage Motilal Oswal, the systemic credit growth has declined to 11.5 per cent from the recent high of 16 per cent amid a slowdown in unsecured retail and demand moderation in certain other secured segments.While a few banks like IndusInd Bank and RBL Bank have already lowered their growth guidance, select large banks are also likely to report tepid full-year growth guidance owing to a high credit-deposit (CD) ratio and rising asset quality concerns.

As per provisional figures, HDFC Bank’s overall advances grew 3 per cent on year to ₹25.42 lakh crore in Q3, while deposits rose 16 per cent to ₹25.63 lakh crore.

“Slower economic activity as reflected in a slower GDP growth print is closely watched and may drive growth moderation in Corporate/SME segments,” Motilal Oswal said, adding that it estimates credit growth to be at 11 per cent for FY25 and FY26 growth to be broadly maintained at 12.5 per cent.

Deposit growth, too, remains a daunting task as competition remains aggressive as many banks are focusing on improving their CD ratios, while competition from public sector banks (PSBs) is also picking up. Low-cost current account and savings account (CASA) accretion continues to remain a challenge as depositors are locking in money at higher term deposit rates ahead of a potential reversal in the rate cycle. Further, banks’ funding will also likely stay elevated, maintaining pressure on margins.

Overall, private banks are likely to deliver 2.3 per cent year-on-year (YoY) growth in Q3FY25 net profit, while PSBs’ profit will likely grow 36 per cent YoY, Motilal Oswal said.