Banking Q2 Earnings Preview: Expect Healthy Profit Growth, Margin Compression To Continue

Indian banks are expected to show decent growth in the July-September quarter, driven by core income growth boosted by an increase in loan disbursals, and the initial benefits of a rising interest rate cycle increased margins.

According to analysts, listed banks are likely to report aggregate net profit growth of over 40 per cent for the September quarter on account of 18-20 per cent growth in net interest income. Motilal Oswal expects the private and PSU banks to post earnings growth of 30 per cent and 20 per cent, respectively, however, there could be some decline in net interest margin.

Market participants will also focus on the management commentaries on unsecured loan growth and margins, traction in deposits and opex trends, traction in fee income, the further margin compression, and treasury outlook.

Axis Securities expects systemic loan growth to remain healthy at 20 per cent YoY factoring in the HDFC-HDFC Bank merger, largely driven by traction in Retail and SME space.

Banks are likely to maintain their credit growth momentum in the second quarter and post healthy growth of 15 per cent YoY,” according to the brokerage firm.

It also highlighted that the lending yields will continue to remain stagnant with only limited benefit flowing in from MCLR-linked loan re-pricing, whole CoF will continue its upward trajectory. “Thus, margin compression for banks will continue even in Q2FY24. However, for a few banks, the quantum of compression could be marginally lower sequentially. We pen down NII growth to 16/1% YoY/QoQ (ex-HDFC) for our coverage universe banks,” according to Axis.

Kotak Institutional Equities expects the net interest margins (NIMs) to decline from the previous quarter.

“Asset quality remains in a sweet spot, leading to lower slippages, whereas recovery and upgrades are likely to slow down, as the number of cases in the pipeline available for resolution has declined. The coverage ratio is at an all-time high and net NPLs are closer to all-time lows, resulting in lower credit costs,” according to Kotak.

Q2 Earnings Preview For Private Banks

According to Motilal Oswal, private banks (excluding HDFC Bank) are expected to post strong earnings on the back of healthy business growth and benign credit costs but margin compression and elevated opex may pose challenges to the overall growth trajectory.

It expects private banks to report PPoP (pre-provision operating profit) growth of 18 per cent YoY and PAT (profit after tax) growth of 25 per cent in the July-September quarter.

“Margins are expected to moderate further due to the rising cost of deposits and stagnating loan yields. However, healthy loan growth will continue to aid NII. We estimate NII growth of 21 percent YoY (flat QoQ) in 2QFY24, with IDFC First Bank at 31 per cent, ICICI Bank at 24 per cent, Kotak Mahindra Bank at 24 per cent, IndusInd Bank at 18 per cent, Axis Bank at 16 per cent YoY,” the brokerage said.

“Slippages are likely to remain under control, which should drive continued improvement in asset quality ratios. The growth rate and the performance of unsecured loans will be key to watch out for in the medium term,” it added.

Q2 Earnings Preview For Public Sector Banks (PSBs)

Motilal Oswal in its report said that earnings growth for PSBs is likely to remain strong in Q2, supported by controlled credit costs, however, margins may moderate due to high funding costs.

PSBs are expected to witness NII growth of 12 per cent, PPoP growth of 8 per cent, and PAT growth of 20 per cent YoY.

“Opex is likely to remain elevated as banks provide for wage revisions. Treasury performance should be sluggish during the quarter due to an increase in bond yields after a robust 1QFY24,” the brokerage reported.

In addition, loan growth is expected to recover quarterly due to improvement in corporate demand and traction in the retail and MSME segments.

Q2 Earnings Preview For Small Finance Banks

“Credit growth has continued to remain healthy for Ujjivan Small Finance Bank and Equitas Small Finance Bank, while AU Small Finance Bank reported a marginally lower credit growth QoQ,” according to Axis Securities.

The traction on liability franchises continued to remain strong, driven by term deposits, while CASA ratios declined, the brokerage said.

Small Finance Banks are likely to witness margin contraction between 10-30 basis points (bps) in the September quarter.

“Slippages during the quarter are expected to remain in check and asset quality will continue its improving trend. Credit costs are expected to remain benign supporting earnings,” it added.