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Indian banks are expected to report healthy operating performance in the March quarter, backed by strong credit growth and modest addition of bad loans, analysts said.

So far, HDFC Bank and ICICI Bank are among the large banks to report quarterly earnings, posting net profit growth of 23% and 59%, respectively. Others, including Axis Bank and Kotak Mahindra Bank, are slated to report their March quarter earnings in the coming weeks.

According to analysts at ICICI Securities, bank credit is expected to grow at more than 9% from a year earlier in the three months through March. The brokerage expects lenders it tracks to report 4-8% sequential loan growth. Encouragingly, corporate credit, too, is contributing to incremental growth, along with retail and commercial banking segments, the analysts said.

“Kotak Mahindra Bank, AU Small Finance Bank, Axis Bank, Bandhan Bank are estimated to outpace peers with over 16% y-o-y (year on year) credit growth. State Bank of India, Indusind Bank, Yes Bank, IDFC First Bank are likely to report 9-12% growth; while RBL Bank and City Union Bank will continue to lag average industry growth," it said in a report on 6 April.

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The brokerage said though there will be no direct impact on lenders from the current geopolitical situation, higher input prices and stretched working capital cycles will trigger short-term financing requirements.

That apart, impact on bilateral trades globally, disruption in payment mechanisms, and rate volatility will affect foreign exchange revenues.

Not just in the March quarter, analysts expect that over the long term, too, slippages into the non-performing category will moderate. However, the pool of restructured loans would need close attention. Estimates by credit rating agencies peg the total restructured book at 2.5% of loans, owing to higher recasts in retail and the small business segments.

“While we could see some slippages from the restructuring book, many banks pegged the overall impact to be 15-20%, which appears to be manageable in the context of provisions held on restructured loans, besides contingency buffers," Motilal Oswal said in a report on 25 April.

While asset quality within the small and medium enterprise (SME) sectors could remain under pressure, overall gross bad loans are likely to moderate, led by robust trends in the corporate and retail segments, according to the Motilal report cited above.

Others said hardening bond yields during the March quarter would hit banks’ treasury income. At India’s largest private sector lender HDFC Bank, other income growth rose 0.6% to 7,637.1 crore from a year earlier. It reported a loss on sale and revaluation of investments of 40.3 crore.

Analysts at Emkay Global Financial Services expect an overall net interest income growth of 18% on the back of healthy credit growth and stable margins.

“However, lower treasury gains and elevated operating expenses amid business normalization and higher tech spends should keep pre-provisioning operating profit growth in check at 4% y-o-y," the Emkay report said on 8 April.

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