Analysts see Q2 net profit growth of banks at 23% YoY, NII at 10%

Banks are expected to report a healthy rise in profit and net interest income in the second quarter of the current financial year as successive rate hikes by the Reserve Bank of India (RBI) have translated into higher lending rates, even as additions to bad loans appear to be contained.

Though aggressive loan demand amid tighter liquidity has resulted in a rise in funding costs, higher lending rates are seen as providing a cushion for bank margins, especially after the shift to the external benchmark lending rate regime, which results in policy rate changes being passed on almost immediately, analysts said.

Bank earnings may also see an improvement in July-September due to easing government bond yields as against a sell-off in the bond market in the first quarter which had resulted in marked-to-market losses and hence eaten into profitability.

According to a Bloomberg compilation of analysts’ estimates for 16 listed banks, profit after tax of banks in Q2 is seen to have risen 23.4 per cent YoY and 19.9 per cent sequentially. Net interest income, or the difference between interest earned and interest expended, is expected to have risen 10.1 per cent YoY and 10.8 per cent sequentially.

With economic activity having progressively increased following the disruptions caused by the Covid crises, analysts predict a broad-based improvement in bank earnings in July-September. The resumption in economic activity has also led to an improvement in asset quality. In June, the RBI said that the gross NPA ratio of banks fell to a five-year low of 5.9 per cent in March 2022.

“We are likely to see healthy performance from all banks, unlike the past few quarters when recovery was the strongest for large private banks; we are likely to see solid loan growth for all banks and this growth is now much more diversified, compared to it being skewed to a few sectors, such as retail earlier,” analysts at Kotak Institutional Equities wrote.

“The NIM (net interest margin) outlook would be positive in the short term (a few quarters), given the structure of the loan book; asset quality should see further improvement with strong near-term commentary on the direction of NPL ratios for FY23,” the brokerage wrote.

According to economists from Bank of Baroda, the transmission of rate hikes carried out by the RBI since May has been much quicker when it comes to bank lending rates versus deposit rates. The bank’s analysis does not take into account the latest 50-basis point repo rate hike announced by the RBI on September 30. Since May 4, 2022, the RBI has hiked the repo rate by a total of 190 bps.
 

“The NIM expansion for private banks may be higher by 11 bps compared to 5 bps for PSU banks as the proportion of repo-linked loans is higher for private banks,” analysts at Prabhudas Lilladher wrote.

From April to September, banks’ marginal cost of funds-based lending rates (MCLRs) for tenures ranging from overnight to one-year increased by 55-105 bps, while weighted average lending rates rose 41-68 bps, Bank of Baroda wrote.

For the same period, however, the weighted average domestic term deposit rates climbed 40-87 basis points for term deposits of more than a year on average, the state-owned bank said. Foreign banks have taken the lead in transmitting rate hikes to both deposit rates and lending rates.

While the quicker pass-through of rate hikes to lending rates is seen to have boosted bank margins in July-September, analysts flagged the pressure to mobilise deposits amid shrinking liquidity as a key determinant of profitability going ahead. Banks have already started to offer higher rates on deposits, including certificates of deposits, to fund strong loan growth.

“Due to tight liquidity, deposit growth would be a key. We expect coverage banks to report 4 per cent QoQ loan growth, while deposit growth can be 2.9 per cent,” Prabhudas Lilladher’s analysts wrote.

The latest RBI data showed that as on September 23, bank credit grew at a nine-year high of 16.4 per cent on-year. Deposit growth lagged at 9.2 per cent.

The major driver of loan demand is the retail segment, while momentum in the agriculture and industrial segments persists, analysts said.

Analysts at ICICI Securities pointed to favourable conditions in the bond market as a factor that may benefit the top line for banks. The yield on the 10-year benchmark government bond eased 5 basis points to 7.40 per cent in the quarter gone by. Given that bond prices rise when yields fall, this translates into better treasury performance by banks.

“G-sec yields have fallen 5 bps since June 22 to 7.45 per cent from 7.40 per cent, and corporate bond yields have fallen in the range of 10-15 bps. To that extent, the hit on the treasury portfolio won’t be significant while there is a possibility of some write-back. Given insignificant treasury knock in Q2, it should support operating profit growth across banks,” ICICI Securities wrote.