Home / Industry / Banking /  Serial interest rate hikes to power bank earnings in Q2

Banks are expected to report strong operating growth in the September quarter on the back of healthy margins and a drop in loan loss provisioning, analysts said. The sharp rise in policy rates, by 190 basis points, since May, and its transmission, will lead to higher net interest income, and consequently, better net interest margin (NIM). Unlike the previous quarter, all banks are likely to report strong loan growth. It will be more diversified than the earlier trend of being skewed to a few sectors such as retail. “As compared to the previous quarter, we should see NIMs start improving as the loans linked to MCLR/EBLR have started to reprice reflecting the new policy rates. In addition, unlike the previous quarter, we don’t have concerns about treasury losses in this quarter as overall yields have been marginally lower than in 1QFY23," said analysts at Kotak Institutional Equities.

The brokerage expects banks under its coverage to report 56% year-on- year growth in profit after tax during the second quarter led by 26% operating profit growth from the year ago.

According to brokerage Prabhudas Lilladhar, private banks could see NII growth of 21% from the year earlier, as both credit growth and NIM could see an uptick quarter-on-quarter. Public sector banks may also see loan growth in line with the system, but NII growth may be higher at 15%. In the second quarter, HDFC Bank posted 24% year-on-year loan growth led by retail at 22%, commercial-rural 32% and wholesale by 26%. Analysts also expect asset quality to improve further. While there will be no large recovery in corporate loans, they expect better recovery trends in small ticket loans that defaulted post-covid. “Asset quality is expected to be steady as slippages could slightly soften quarter-on-quarter, though credit costs may see a minor increase. Retail and MSME could see slippages due to one-time restructuring. Corporate may remain resilient," Prabhudas Lilladhar analysts said. Treasury gains are likely to be muted after banks took a sharp hit due to mark to market losses on investments in government securities in the June quarter. Bond yields declined initially before eventually rising to end the quarter 50 bps above the June 2022 levels. That said, all analysts will be watching for managements’ commentary on deposit accretion. As of 9 September, system deposit growth was 9.5% from the year ago. Banks have raised MCLR rates by 70-100 bps in the past 12 months. With RBI hiking repo rate by 190 bps in the past few months, the repo-linked book is getting re-priced gradually. Till August, the lending rate on outstanding book for banks went up by 40 bps. While margins are likely to have expanded for the banking system, especially for those having a large share of the floating rate book on asset side, this margin expansion trend may get tempered once the deposit book also gets repriced to the higher rates, they added.


Gopika Gopakumar

Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
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