Banks are likely to report a modest growth in earnings with improved loan growth in the third quarter of the fiscal and asset quality could improve.

Kotak Institutional Equities said it expects an improvement in asset quality outlook for most lenders in the third quarter led by lower slippages and better recovery trends.

“There are no large corporate slippages while retail and SME should show improvement on a net basis,” it said in a research note.

Loan growth

While the early releases on the quarterly performance show accelerating trends in loan growth, which is positive, it is still below pre-Covid levels, it further said.

“Net interest margin outlook unlikely to be positive for most lenders. Lenders have shifted focus to growth and we should expect spreads to come under pressure for an unchanged loan mix,” it further said.

Private sector lenders, starting with HDFC Bank, are set to report their results for the quarter ended December 31, 2021 in the coming weeks. HDFC Bank will announce its results on January 15 while ICICI Bank will report its financial performance on January 22 and Axis Bank on January 24. ICICI Securities said the third quarter of 2021-22 will be characterised by growth gathering pace and uptick in collections with recovery in business activities.

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“With lower slippages and improving collections and recoveries, we expect improvement in the overall stress pool and credit cost for banks,” it said, adding that it expects a nine per cent year-on-year (y-o-y) growth in net interest income for banks and a two per cent to four per cent operating profit growth.

Robust growth in disbursements

Most private sector lenders have reported robust growth in disbursements by end of December with an estimated 4 per cent loan growth on a sequential basis.

JM Financial Institutional Securities said it expects its banking coverage universe to report earnings growth of 49 per cent y-o-y and 26 per cent quarter-on-quarter (q-o-q) in the third quarter of the fiscal.

“Loan growth is likely to be nine per cent (y-o-y) and four per cent q-o-q for the third quarter led by sequential pickup in retail and SME segments while corporate credit growth continues to be sluggish,” it said in a research note.

According to Centrum Broking, asset quality may further improve for banks with lower slippages (which could emanate from ECLGS) although restructured pool could rise by 10-20 per cent, it further said.