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Indian banks can report stronger financial results in Q3 FY23; Here's why

Indian banks can report stronger financial results in Q3 FY23; Here's why

Riding on the strong growth in credit offtake, banks are expected to report better results in Q3FY23

Riding on the strong growth in credit offtake, banks are expected to report better results in Q3FY23 Riding on the strong growth in credit offtake, banks are expected to report better results in Q3FY23

While the broader Nifty 50 Index gave a return of just 2.5 per cent in April-December, 2022, the Nifty Bank Index gave a return of 16 per cent during the same period. If you think this is a lot, then you need to consider the return of 52 per cent given by the Nifty PSU Bank Index.

The banking sector has outshone the broader market as well as other industry sectors, led by impressive growth in credit, rising interest rates, and improving asset quality. Riding on these, banks alone have given a total profit of nearly Rs 59,000 crore in Q2FY23; a jump of 59 per cent. So, will these factors continue to drive the banking industry’s growth in Q3FY23?

A report from brokerage firm Sharekhan by BNP Paribas states that banks are likely to report a 35 per cent year-on-year (YoY) growth in earnings in Q3FY23. The earnings growth will be led by healthy growth in loans and lower credit costs. Net interest income (NII) growth is also expected to be higher at 23 per cent YoY. The quantum of margin expansion is expected to be lower compared to the previous quarter due to the increased cost of deposits to garner a higher share of retail liabilities, the report states.

The Reserve Bank of India has increased the repo rate five times since May, 2022, resulting in a total jump of 225 basis points. Despite that, there are three overarching trends that will drive the sector’s performance. These are:

Strong Credit Growth: The third quarter of FY23 is expected to be positive for banks as credit growth continues to remain strong. Retail portfolios are also likely to register growth in the quarter led by demand for home and vehicle loans, among others.

Consider this: HDFC Bank’s advances grew 19.5 per cent to Rs 15.07 lakh crore in Q3FY23 compared to Rs 12.61 lakh crore in Q3FY22. Sequential growth, however, was around 1.8 per cent at over Rs 14.80 lakh crore in Q2FY23.

A recent report by Emkay Global Financial Services states that banks like RBL Bank, Equitas Small Finance Bank, AU Small Finance Bank, and Federal Bank have reported better-than-expected growth, while ICICI Bank, SBI and Bank of Baroda are also expected to report healthy growth in the quarter.

As per a report by Motilal Oswal Investment Services (MOIS) released in December 2022, credit growth is expected to remain buoyant and grow at a CAGR of 15 per cent between FY23 and FY24. The report states: “Systemic loans exhibit a consistent revival with strong credit growth at 17.4 per cent YoY in December 2022 (nine-year high), driven by continued traction in the retail and SME segments. The corporate segment is also seeing a recovery.”

Credit-Deposit Gap: While credit demand has picked up, the growth in deposits was slower in Q2FY23 due to a delay in passing on the benefit of interest rate increases to depositors. However, now the deposit rates have started moving up sharply, aiding in liability accretion, though the gap versus credit growth still remains large, the report by MOIS states.

“While we expect a positive bias in margins in Q3FY23, 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,” it states.

Improving Asset Quality: The RBI in its financial stability report released in December 2022, stated that the gross non-performing assets (NPA) ratio of banks has declined to a seven-year low of 5 per cent and the banking system remains well-capitalised. A report by IDBI Capital states that the asset quality of banks is expected to improve in the quarter as the formation of NPAs could decline along with better recovery led by improvement in collection efficiency.

However, slippages from restructured assets could be seen as most of the NPAs have moved out of the moratorium period, the report adds. The report further notes that the focus will be on management commentary on the impact of restructured assets in the quarters going ahead, and the provision requirements.

@teena_kaushal

Published on: Jan 20, 2023, 1:52 PM IST
Posted by: Arnav Das Sharma, Jan 20, 2023, 1:42 PM IST