Emkay Global Financial Services Ltd (EGFSL) expects the overall gross non-performing assets (GNPA) ratio of banks under its coverage universe to moderate by 20 basis points (bps) sequentially to a decadal low of 2.7 per cent in Q4 FY24 (vs 2.9 per cent in Q3 FY24) owing to contained slippages and accelerated write-offs, with banks sitting on higher provisions.

“We do not expect any lumpy corporate NPA formation in Q4 (January-March), but recoveries would be reasonably healthy (including KSK Mahanadi and some infra/road/toll projects), leading to a reduction in corporate NPAs mainly benefiting public sector banks/PSBs (including SBI),” said EGFSL analysts Anand Dama, Kunaal N and Marazbaan Dastur.

However, a few banks may report slightly higher agri NPAs due to seasonal factors and, thus, higher NPAs quarter-on-quarter (q-o-q).

EGFSL’s coverage universe includes six public sector banks (PSBs), 12 private sector banks (PVBs), a card company and two NBFC-MFIs.

“Stress built up in the low ticket unsecured personal loans, business loans/small business loans, and card segment continues to inch up which should manifest via higher NPAs for select mid-size PVBs. MFI stress in North India (Punjab, Haryana) continues to hurt select MFI-heavy NBFCs/banks,” the analysts said.

EGFSL expect pre-provisioning operating profit (PPOP) to grow 8 per cent y-o-y mainly due to continued moderation in net interest income (NII) growth as margins continue to decline but grow 19 per cent q-o-q due to lower staff cost (mainly for PSBs), treasury gains on softening G-Sec yields, one-off gains for select banks (mainly HDFC Bank) and absence of AIF (alternative investment fund) provisions for PVBs (ICICI Bank, HDFC Bank, RBL Bank, Axis Bank, Kotak Mahindra Bank).

“Overall profitability too is likely to be sub-par at 10 per cent y-o-y, but logs 17 per cent q-o-q. However, net profit growth for PSBs is likely to be better at 15 per cent y-o-y vs 6 per cent for PVBs (adjusted for the Citi goodwill write-off impact for Axis Bank). Reversal of AIF provisions may potentially lead to better profitability for PVBs vs our expectation,” per the analysts’ assessment.

Overall credit growth continues to surprise positively, while deposit growth too has picked up pace, albeit at a higher cost and could hence weigh on margins, per the report.

“However, broader asset quality remains healthy, barring some noise in the unsecured space which we believe is unlikely to blow up. That said, we remain slightly cautious on the sector and thus prefer banks with relatively healthy capital/provision buffers, management stability and reasonable valuations,” the analysts said.