The financial performance of banks is expected to remain steady in Q1 FY24 led by strong loan growth trends, stable credit costs and asset quality, which are seen supporting profitability.

However, concerns regarding banks’ ballooning unsecured retail loans portfolio remain, with the market looking towards management guidance on future NIM (net interest margin) trajectory and low-cost deposit growth.

“Apart from the frontline banks, even the mid-tier and smaller banks continue to show healthy credit growth numbers. Underwriting appetite has significantly improved in the microfinance segment as borrower incomes have recovered to a large extent,” Kotak Institutional Equities said in a note.

NIMs decline

Analysts peg credit growth for banks at 15-16.5 per cent y-o-y for the first quarter and NII (net interest income) growth at 20-28 per cent. NIMs are 10-20 bps lower sequentially, but higher by 20-60 bps on year.

Net profit for banks is seen rising 54-60 per cent y-o-y led by around 35 per cent increase in operating profit. PSU banks are seen leading with 96-116 per cent PAT growth and private banks at 32-45 per cent.

While NIMs are expected to decline marginally for most banks due to the rise in cost of funds, some large private banks are likely to report stable NIMs given that the deposit repricing has been lower than anticipated.

Customer’s choices

ICICI Bank, Kotak Mahindra Bank and IndusInd Bank are the preferred banks, with Axis Bank expected to return to profitability following last quarter’s loss due to the Citi acquisition. HDFC Bank is seen slowing down on growth due to elevated opex ahead of the merger with parent HDFC. Federal Bank, RBL Bank and Karur Vysya Bank are the top picks among mid-sized banks.

Asset quality is seen sanguine even as discussions around the rising share of banks’ lending to the high yielding but riskier unsecured retail segment gain pace.

In addition, recoveries and upgradations are expected to continue surpassing slippages whereas some PSU banks may report higher provisions to boost their coverage ratios, analysts said, pegging gross NPA ratios at 21 bps lower on quarter. They added that banks’ commentary on the impact of the recent unseasonal rains on the quality of agri loans/KCC will be also eyed.

On the other hand, deposit growth continues to lag credit growth for most banks across the board, leading to lenders using their balance sheet liquidity, corporate deposits, or short-term market borrowings to fund lending.

“Deposit growth has improved to 12 per cent YoY and 3.4 per cent QoQ, partly aided by RBI’s mini DeMon of ₹2,000 notes. However, CASA ratio should trend down due to cannibalisation towards high-rate term deposits,” Emkay Global Financial said.

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