Banks earnings to moderate in Q3 on weaker margins, rise in opex

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Earnings of banks are seen moderating to 15-18 per cent in Q3 of the current financial year on the back of weaker margins and lower pre-provisioning operating profits due to elevated operating expenditures, employee wage costs, and cost of funds.

“We expect banks to report muted operating profit growth in Q3FY24, on lower NII and higher opex, even as the sequential pace of NIM decline moderates. Repricing of term deposits will continue to drive funding costs higher. Credit costs should remain benign,” Axis Capital said in a note.

While loan growth for the sector is seen at around 16 per cent y-o-y, growth in net interest income (NII) is expected to be much lower at around 8-9 per cent, while the increase for private banks is seen higher at around 15 per cent compared with around 6 per cent for PSU banks.

The recent regulatory changes to increase the risk weights and signs on asset quality stress in pockets of consumer lending could lead to a slowdown in unsecured consumer credit, which could adversely impact smaller banks, Bernstein India said.

Declining NIM

Net interest margins (NIM) are seen declining by 8-15 bps sequentially due to continued re-pricing of deposits, albeit lower than 7-35 bps in the previous quarter, analysts said, highlighting Bank of Baroda and State Bank of India as the top PSU bank picks. Among private banks, HDFC, ICICI, CSB, Axis, Kotak, and IndusInd Bank were the top choices.

Deposit growth for the sector is seen at around 13 per cent, with Motilal Oswal Securities saying that the elevated CD ratios across most private banks, coupled with healthy credit volumes in the seasonally strong second half, will likely sustain high competitive pressure on liabilities.

Asset Quality

“Asset quality is expected to remain healthy, benefiting from low corporate slippages, limited residual outstanding restructured books, and steady recoveries (especially for PSu banks). With healthy PCR levels, many PSBs and mid-sized banks should continue to make contingent provisions in preparation for the eventual transition to the ECL framework,” Dolat Capital said.

Banks’ commentary on the impact of the higher risk weights on capital requirements, the pick-up in corporate credit, and falling CASA deposits will be watched, analysts said, adding that guidance on managing deposits, low-ticket delinquencies, and any unsecured loans-led growth slowdown will also be key.