BackBanks Q4 result review: Strong earnings beat led by healthy loan growth, robust margins
The Indian banks reported a strong performance in the quarter, boosted by strong credit growth, healthy margins, and sustained improvement in asset quality.
PremiumIndia Inc’s financial performance for the January-March 2023 quarter was so far in line with the street estimates amid challenging global macroeconomic backdrop. The corporate profits in Q4FY23 remained healthy led by financials and auto.
The Banking, Financial Services and Insurance (BFSI) sector drove almost the entire incremental earnings in FY23 and the Nifty ended FY23 with an EPS growth of 11%.
The Indian banks reported a strong performance in the quarter, boosted by strong credit growth, healthy margins, and sustained improvement in asset quality. Credit expansion was driven by multiple factors, with the Retail and MSME sectors demonstrating strong growth, while the corporate book witnessed a healthy recovery.
Private Banks witnessed healthy net interest income (NII) growth, while Public Sector Banks saw modest growth. Overall net profit growth for the banking sector was around 51% YoY and 14% QoQ with PSBs logging their historically-best quarter. The pre-provision operating profit (PPOP) was supported by strong fee income and controlled treasury gains. Slippages remained in control, driving further improvement in asset quality across banks.
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“The banking sector reported strong financial performance during FY23, with a few banks clocking their decadal-best RoA, mainly aided by robust growth, margin delivery in a rising rate cycle, and improving asset quality in a post-Covid era. This is reflected in the strong sector performance in markets, including PSBs," said Emkay Global Financial Services.
Among top banks, HDFC Bank posted 19.8% YoY growth in Q4FY23 net profit to ₹12,047.5 crore, while its NII rose 23.7% to ₹23,351.8 crore. Asset quality improved sequentially as gross NPA declined to 1.12% of gross advances as against 1.23% in Q3FY23.
ICICI Bank’s net profit rose 30% to ₹9,122 crore during Q4FY23 from ₹7,018.71 crore in Q4FY22. NII grew by 40.2% YoY to ₹17,667 crore and the net interest margin (NIM) improved to 4.90% as compared to 4.00%, YoY.
State Bank of India (SBI), the country’s largest bank, reported a net profit of ₹16,694.5 crore, a rise of 83% from ₹9,113.5 crore in the corresponding quarter last year. SBI’s NII increased 29.5% to ₹40,392 crore, while domestic NIMs increased by 44 bps YoY to 3.84%.
Private lender Axis Bank reported a net loss of ₹5,728. 42 crore in Q4 owing to purchasing cost of Citi Bank's India consumer division during the quarter. Its NII increased 33% YoY to ₹11,742 crore and NIM was at 4.22%, up 73 basis points YoY.
IndusInd Bank exceeded the Street's expectations with a standalone net profit of ₹2,040.51 crore in Q4FY23, an increase of nearly 50% over ₹1,361.37 crore, YoY. The lender's NII totaled ₹4,669.46 crore, up 17%, YoY.
Overall, among private banks, business growth remained intact, while NII and core PPoP growth remained buoyant. Public sector banks’ loan growth remained healthy and asset quality continued to improve.
The Road Ahead
Going ahead, analysts expect loan growth to moderate amid muted credit growth in corporate, while NIMs to decline in FY24 as cost of funds gets repriced. Asset quality of banks may remain solid with low net slippage.
“We expect loan growth to moderate to 12-14% in FY24 from 15-16% in FY23 as credit growth in corporate stays muted and deposit growth stays anchored at 10%. We also expect NIMs to compress in FY24 as cost of funds gets repriced while levers for asset repricing are limited. Asset quality stays solid with low net slippage. Banks have high coverage on NPLs/stress loans and thus credit costs will undershoot long-term average in FY24. This will partially compensate for loan growth/margin pressures, leading to banks delivering earnings growth of 13% in FY24 vs 48% in FY23," said Ambit Capital.
It recommends banks which have structurally improved their core PPP trajectory and are trading at reasonable valuations. The brokerage house prefers Axis Bank, SBI Bank, ICICI Bank, HDFC Bank and Kotak Mahindra Bank in large-caps and Federal Bank in mid-caps.
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Brokerage firm Motilal Oswal Financial Services expects earnings to remain resilient, guided by robust traction in loan growth and a benign credit cost. However, a challenging macro environment could slow the demand recovery, it said.
It expects competition for deposits to intensify further, thus driving a sharper rise in funding costs in the coming quarters and believes the margin trajectory could witness pressure over FY24.
“Banks with a higher CASA mix are well positioned to navigate the rising rate environment, even as the funding cost is likely to increase. The asset quality outlook remained encouraging, with a moderation in slippages, healthy PCR, and contingent buffers driving benign trends in core credit costs," Motilal Oswal said.
It marginally raised its FY23-25 earnings estimates for the sector by around 2%.
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