Pvt banks to report healthy earnings in Q3, aided by robust credit growth

Private sector banks are expected to report healthy growth in earnings during the October–December quarter of FY23.

This would be aided by robust credit growth, margin expansion, benign credit costs, and lower provisioning burden. However, operational costs may remain high due to investment in businesses. Also, other income of banks in Q3 of FY23 would not see a significant hit as treasury performance is likely to remain stable.

There is also a possibility of a write-back as yields on government securities and corporate spreads have moderated on a sequential basis.

According to Bloomberg estimates, private banks may see their net profit increase by over 25 per cent year-on-year (YoY). Sequentially, net profit of these banks could move up by around 9 per cent in the October–December quarter.

Further, estimates suggest that the net interest income (NII) of these lenders could see an uptick of about 18 per cent YoY and 5 per cent sequentially.

Analysts at Motilal Oswal have estimated a 24 per cent YoY growth in Q3 NII.

Credit growth in the banking system is touching decadal highs but deposit growth has lagged.

According to Reserve Bank of India (RBI) data, bank credit has grown by 17.4 per cent for the fortnight ended December 16. Deposits have grown by 9.4 per cent during the same period.

Going ahead, revival in consumer demand, rise in private capex followed by a rise in government spending could keep the demand for credit buoyant.

Analysts at ICICI Securities have estimated that credit growth of Indian banks could be around 4 per cent on a sequential basis. Motilal Oswal estimated a 15 per cent compound annual growth rate (CAGR) in systemic loans over FY23–24.

Private sector banks, including HDFC Bank, who came out with their Q3 business update, have shown healthy advances growth.

Interestingly, deposit growth has also been on the higher side because banks have been raising rates since September.

The impact of hike in deposit rates could have limited impact on bank margins because they have the advantage of repricing their lending book in a rising interest rate scenario.

Most large banks have a significant portion of their loan portfolio linked to the external benchmarks.

Among banks, 53 per cent of advances of Kotak Mahindra are linked to external benchmarks, followed by HDFC Bank and Axis Bank at 41 per cent each, and State Bank of India (SBI) at 34 per cent.

IndusInd and SBI have relatively higher proportion of loans linked to marginal cost of funds based lending rate (MCLR) at 45 per cent and 41 per cent, respectively.

“Deposit rates have increased sharply over the past few months, aiding liability accretion, though the gap versus credit growth still remains large. While we expect a positive bias in margins in Q3, the rise in the cost of deposits would be a key factor to assess the margin trajectory in FY24. Margins may see some pressure in FY24, in our view”, analysts at Motilal Oswal said in their report.

Banks are in a sweet spot as far as their asset quality is concerned. Net non-performing assets (net NPAs) are at the lowest in the last 10 years. And, going ahead, analysts expect slippages of banks to remain under control across segments, resulting in provisioning burden to be lower.

“We estimate slippages to moderate, which along with healthy recoveries, should result in a further improvement in asset quality,” said analysts at Motilal Oswal.

“On the asset quality front, we expect incremental non-annualised slippages run-rate to be contained in the range of 0.3-0.6 per cent and credit cost to normalise,” ICICI Securities said in a note.

Analysts expect operational costs of banks to be on the higher side as they look to invest more in their businesses.

According to ICICI Securities, cost structure is expected to remain elevated, though growth rates would be relatively lower.