Results preview: Banks' net profit growth likely moderated in Q3FY25

Margin pressures, sluggish loan offtake may weigh on performance

Net profit of 19 listed banks for the quarter ended December 2024 (Q3FY25) is likely to grow at a modest pace of 9.7 per cent year-on-year (Y-o-Y). This is owing to pressure on margins, moderation in credit off-take, along with some increase in credit costs, according to analysts’ estimates.

 

Net profit may shrink sequentially by 5.2 per cent over the quarter ended September 2024 (Q2FY25), the estimates by analysts for 19 banks, sourced from Bloomberg, showed.

 

The estimates show that banks’ net interest income (NII), interest earned minus interest expended, may grow 9.1 per cent Y-o-Y. Sequentially, NII may decline by 0.9 per cent over September 2024.

 

Karan Gupta, head and director financial institutions, India Ratings said NII and margins will remain under pressure due to rising cost of funds and slippages. The NPAs would lead to reversal of income, eroding into interest income, he said.

 

Bankers said the pressure on net interest margins (NIMs) persisted in the third quarter. While the lending rates have remained broadly stable, funding costs have been trending upwards due to re-pricing in select tenures by some banks to garner deposits.

 

Elara Securities, in its quarterly preview, said NIM will be impacted from three counts. First, continued re-pricing of the deposit book and sticky incremental deposit cost, the interest income reversal (higher slippages) and the impact of penal interest for a few banks. 

 

NIMs were down by 14 basis points (bps) Y-o-Y to 2.9 per cent in Q2FY25, from 2.94 per cent in Q1FY25, according to CareEdge data.

 

The spread between the outstanding weighted average lending rate and outstanding weighted average deposit rate stood at 2.89 per cent as of November 2024 and decreased by 3 bps over the level seen in October 2024, the CareEdge added.

 

Reserve Bank of India (RBI) data showed the credit growth of banks moderated to 11.5 per cent Y-o-Y (as of December 20, 2024) and is much lower than 20 per cent growth a year ago and 13 per cent in September 2024. The figure includes the impact of the HDFC-HDFC Bank merger.

 

The moderation in loan growth was due to factors like banks going slow on unsecured credit — a high yielding product — as well as lending to non-banking finance companies (NBFCs) after the RBI hiked risk-weights on such exposure in November 2023, said senior public sector bank executive.

 

Besides hiking risk weights, the banking regulator has cautioned banks on the high credit-deposit ratio and asked boards to re-work business plans. 

 

Banks' treasury income is expected to remain subdued in the October–December quarter (Q3FY25) of the current financial year (FY2). This comes as benchmark yields remained largely unchanged at the end of the quarter.

 

Yield on the benchmark 10-year government bond moved up by 1 bps to settle at 6.76 per cent at the end of Q3FY25. In Q2FY25, the benchmark yield had softened by 25 bps.

 

“The rates trading desk may not see significant income, as there was only a small movement that people might have captured. It also depends on timing — yields have fallen substantially. So, those who exited positions early could have booked some profits, but yields later retraced,” said the treasury head at a private bank.

 

Despite subdued activity in the rates segment, the foreign exchange (FX) side showed potential for generating trading income.

 

Currency markets witnessed noticeable fluctuations, offering opportunities for banks that made accurate trading calls. While this could partially offset the muted treasury gains, FX trading alone is unlikely to match the profit and loss contributions observed in the previous quarter.

 

While overall asset quality of the banking sector remains robust and may remain healthy, there are some pockets of stress like unsecured credit – personal loan and microfinance.

 

According to domestic brokerage Motilal Oswal Securities asset quality is likely to remain robust for public sector banks.

 

As for private sector lenders, overall slippages are expected to remain under control, though unsecured retail (especially MFI segment) is likely to witness high delinquencies.