Q3 result preview: Banking sector’s earnings could moderate; NIM compression to ease from Q2 levels, says Motilal Oswal

After a healthy show in the current financial year's September quarter (Q2), the December quarter (Q3) earnings of Indian banking players may see some moderation but NIM (net interest margin) compression may ease from Q2 levels, according to brokerage firm Motilal Oswal Financial Services.

However, the brokerage firm believes sustained momentum in retail, business banking, and recovery in the corporate segment may keep the sector's growth steady.

The Indian banks delivered healthy earnings during the second quarter of FY24, but the performance was marked by slowing momentum. The lenders reported net profit growth of 33 per cent year-on-year (YoY) led by a reduction in credit costs.

Also Read: Banking sector Q2 results: Healthy earnings print with slowing momentum; asset quality continues to improve

Motilal Oswal estimates net interest income (NII) for its banking coverage universe to grow at nearly 9 per cent YoY (excluding HDFC Bank) during Q3FY24, while elevated opex may drag pre-provision operating profit (PPoP) to a 4 per cent YoY decline (excluding HDFC Bank).

"For Q3FY24, we estimate private and PSU banks to report earnings growth of 23 per cent (18 per cent excluding HDFC Bank) and 4 per cent YoY respectively," said Motilal Oswal.

Also Read: Q3 result preview: NBFCs likely to see healthy profit growth of 27% YoY amid moderating margins

Motilal expects CASA (current account and savings account) ratios to moderate further across banks as deposit churn toward higher rate term deposits continues. The brokerage firm expects systemic NIMs to moderate further though the pace of moderation is likely to decline versus that in Q2FY24.

Q3 expectations for private banks

Motilal Oswal estimates PPoP growth of 8 per cent YoY and 3 per cent QoQ (excluding HDFC Bank) for its private bank coverage universe during Q3FY24, while PAT growth is estimated to sustain at 18 per cent YoY and 1.5 per cent QoQ (excluding HDFC Bank).

"Earnings growth is supported by robust business growth and controlled credit costs compensating for continued NIM compression and slightly higher opex. However, we expect the pace of NIM compression to moderate over Q2 levels," Motilal Oswal said.

Motilal expects Q3FY24 NII growth of 18.5 per cent YoY (15 per cent YoY excluding HDFC Bank) with IDFC First Bank at nearly 27 per cent, HDFC Bank at nearly 27 per cent, Kotak Mahindra Bank at nearly 15 per cent, ICICI Bank at nearly 12 per cent, IndusInd Bank at nearly 18 per cent and Axis Bank at 11 per cent YoY.

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Q3 expectations for public sector banks (PSBs)

Motilal Oswal expects PSBs' earnings growth to moderate, led by elevated opex and slight compression in margins.

"We estimate PSBs to report NII growth of 6 per cent YoY while PPoP is expected to decline 12 per cent YoY and PAT is expected to grow at 3.6 per cent YoY," said Motilal Oswal.

The brokerage firm believes PSBs' asset quality improvement may continue, with controlled slippages, while healthy recoveries, upgrades and sales to NARCL will aid asset quality ratios. Healthy PCR (provisioning coverage ratio) and a sharp decline in the SMA (special mention accounts) pool augur well for credit costs, Motilal said.

Q3 expectations for small finance banks

Motilal Oswal estimates AU Small Finance Bank to report 7 per cent YoY growth in Q3FY24 PAT to ₹418 crore (up 4.2 per cent QoQ) as opex ratios remain elevated (cost-to-income (C/I) ratio at nearly 62 per cent for FY24), while NIMs fall further by 10bp QoQ to 5.4 per cent, after a 22bp decline in Q2FY24.

"We remain watchful on asset quality as the bank reported an uptick in credit cost during Q2FY24, citing normalisation in underlying business metrics," Motilal Oswal said.

Equitas Small Finance Bank may report a healthy quarter with PPoP and PAT growth of 27 per cent and 24 per cent YoY respectively and nearly 31 per cent YoY growth in advances (nearly 6 per cent QoQ), Motilal Oswal said. However, the brokerage firm estimates margins to further moderate by another 25bp QoQ to 8.2 per cent.

Q3 expectations for payments and Fintech

For SBI Cards and Payment Services, Motilal expects the momentum in credit card spending and new account sourcing may remain healthy amid festive demand in Q3. However, NIM may see slight moderation as the revolver mix remains sticky at 24 per cent. Asset quality pressures are likely to continue, keeping credit costs elevated.

Motilal estimates earnings of SBI Cards and Payment Services to grow 18 per cent YoY but it could remain flat QoQ.

For Paytm, Motilal Oswal estimates Q3FY24 GMV (gross merchandise value) to grow 37 per cent YoY to ₹4.8 lakh crore, while the value of loans disbursed is likely to moderate, given the cautionary stance on personal loans and postpaid loans.

"We expect revenue from operations to grow 32 per cent YoY to ₹2,730 crore, while contribution profit is estimated to grow 42 per cent YoY to ₹1,490 crore (contribution margin of nearly 55 per cent). We estimate adjusted EBITDA to come in at ₹204 crore," Motilal Oswal said.

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