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Business News/ Industry / Banking/  Banking sector earnings preview: Expect a decent YoY earning growth in Q2 despite NIM compression, says Motilal Oswal

Banking sector earnings preview: Expect a decent YoY earning growth in Q2 despite NIM compression, says Motilal Oswal

Management commentaries on unsecured loan growth and margins, traction in deposits and opex trends, the traction in fee income and treasury outlook are expected to be in focus in the banking sector's Q2 scorecard.

The July-September quarter (Q2) earnings of the Indian banking sector may show decent growth on a year-on-year (YoY) basis.

The July-September quarter (Q2) earnings of the Indian banking sector may show decent growth on a year-on-year (YoY) basis with private and PSU banks likely to post earnings growth of about 25 per cent and 20 per cent YoY, respectively, even though there could be some compression in net interest margin (NIM), said a report from Motilal Oswal Financial Services.

Apart from the numbers, management commentaries on unsecured loan growth and margins, traction in deposits and opex trends, the traction in fee income and treasury outlook are expected to be in focus in the banking sector's Q2 scorecard.

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Motilal Oswal Financial Services expects systemic loan growth to remain healthy at 14 per cent (YoY) in FY24, largely driven by continued traction in the retail and SME segments. The brokerage firm highlighted that the corporate segment has also seen some recovery, while growth in personal loans and real estate has been robust at 31 per cent and 39 per cent YoY, respectively.

"The home, vehicle, unsecured, and small business segments continue to do well. The credit card business is seeing strong momentum with robust growth in spending and new card issuance," Motilal Oswal said.

Also Read: Earnings preview: Experts expect more misses than hits in Q2; how can it impact market sentiment?

Moreover, the brokerage firm believes the systemic deposit growth of the banking sector has improved to 12.8 per cent YoY (adjusted for merger), aided by a benign base, the discontinuance of the 2,000 currency note and an improved real rate of return. Hence, the brokerage firm underscored, that the gap versus credit growth has moderated further to 2.3 per cent in Sep’23 (excluding HDFC, HDFC Bank merger).

"In Q2FY24 so far, the banking system has added 2.28 lakh crore of deposits ( 84,500 crore adjusted for the HDFC merger) and while we expect deposit mobilisation to pick up significantly toward the quarter end, the overall accretion would still be important to monitor as HDFC Bank alone is going to account for a significant deposit market share. We estimate sectoral margins to remain under pressure due to rising funding costs," Motilal Oswal said.

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Motilal Oswal expects slippages to remain under control, which, along with higher recoveries, should further aid the continuous improvement in asset quality. "Restructured book is likely to moderate further, while low SMA (special mention account) book will keep credit costs in check," said Motilal Oswal.

The brokerage firm estimates its banking coverage universe (excluding HDFC Bank) to report earnings growth of about 22 per cent YoY in Q2FY24. It expects its coverage banks to sustain PPoP (pre-provision operating profit) growth at about 12 per cent YoY in Q2.

"Private and PSU banks are expected to post earnings growth of about 25 per cent and 20 per cent YoY, respectively, in Q2," said the brokerage firm.

Also Read: Earnings preview: Indian IT firms to report soft numbers in Q2FY24; revenue, profit likely to be muted

Q2 earnings expectations for private banks (excluding HDFC Bank)

Private banks, excluding HDFC Bank, may see healthy earnings, supported by healthy business growth and benign credit costs, but margin compression and elevated opex may pose challenges to the overall growth trajectory, Motilal Oswal said.

Excluding HDFC Bank, Motilal Oswal expects private banks to report PPoP growth of nearly 18 per cent YoY and PAT growth of about 25 per cent YoY in Q2FY24. However, on a quarter-on-quarter (QoQ) basis, excluding HDFC Bank, both the PPoP and PAT could be flat.

"Margins are expected to moderate further due to the rising cost of deposits and stagnating loan yields. However, healthy loan growth will continue to aid NII (net interest income). We estimate NII growth of nearly 21 per cent YoY (flat QoQ) in Q2FY24, with IDFC First Bank at nearly 31 per cent, ICICI Bank at about 24 per cent, Kotak Mahindra Bank at about 24 per cent, IndusInd Bank at about 18 per cent, and Axis Bank at 16 per cent YoY," said Motilal Oswal.

Slippages are likely to remain under control, which should drive continued improvement in asset quality ratios. The growth rate and the performance of unsecured loans will be key to watch out for in the medium term, the brokerage firm said.

Q2 earnings expectations for public sector banks (PSBs)

Motilal Oswal expects earnings growth to remain robust for PSBs in Q2FY24, aided by controlled credit costs, though margins may moderate due to rising funding costs.

"PSBs are likely to deliver NII and PPoP growth of 12 per cent and 8 per cent YoY, respectively, and PAT growth of nearly 20 per cent YoY," said the brokerage firm.

"Loan growth should recover on a sequential basis, led by improved corporate demand and ongoing traction in the retail and MSME segments. Asset quality improvement is likely to continue, while healthy PCR and a sharp decline in the SMA asset pool will lead to further moderation in credit costs," the brokerage firm added.

Q2 earnings expectations for small finance banks

Motilal Oswal expects AU Small Finance Bank to report 25 per cent YoY growth in the loan book, which, as per the brokerage firm, is lower than the average run rate as the bank continues with its sell-down approach.

Motilal estimates opex ratios to remain elevated (cost-to-income ratio at nearly 63 per cent for FY24), while margins may fall another 12 bps QoQ to 5.6 per cent after a 38bp decline in Q1FY24.

"We estimate Q2FY24 PAT to grow about 20 per cent YoY to 410 crore (29 per cent CAGR in FY23-25E)," Motilal Oswal said.

"Equitas Small Finance Bank is likely to report a healthy quarter with 32 per cent and 65 per cent YoY growth in the PPoP and PAT, respectively, and about 33 per cent YoY growth in advances (5.5 per cent QoQ). However, margins are likely to moderate by another 32bp QoQ to 8.4 per cent," said the brokerage firm.

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Disclaimer: The article is based on a report by brokerage firm Motilal Oswal Financial Services. The views and recommendations above are those of the broking company, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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