Banks likely to report healthy profits in Q2 on high credit growth

Sequentially rising fund cost put pressure on margins

Benefiting from rise in lending rates, high credit off-take, and lower credit costs, banks are likely to report about 18 per cent rise in net interest income (NII) and 25.3 per cent in profit year-on-year (Y-o-Y) during the second quarter ended September 2023 (Q2FY24).

NII, a key earning source for lenders, may show higher growth for private banks (24.4 per cent Y-o-Y) compared to public sector banks (PSBs) (12.2 per cent) in Q2FY24, according to a Bloomberg analyst’s estimates.

Nitin Aggarwal, research analyst, Motilal Oswal, said while the focus is on NII, there will be pressure on interest margins due to factors like repricing of deposits.

In the current interest-rate cycle, banks benefited from immediate increase in lending rates in Q2. Later, a rise in deposit rates came with a lag, creating pressure on margins.

According to CARE Ratings, the net interest margin (NIM) of banks had witnessed an improvement of 36 basis points (bps) Y-o-Y.

It reached 3.27 per cent in Q1FY24 due to faster repricing of loans, whereas deposit rates have not yet fully reflected the higher interest rates.

Domestic brokerage JM Financial said it expected compression in NIMs of 10-15 bps for banks under its coverage in Q2FY24 as the impact of deposit rate hikes start to reflect in the top line for the banks.

Reserve Bank of India (RBI) data bank loans grew by 15.27 per cent Y-o-Y. Growth in advances was Rs 145.58 trillion till September 22, and deposits expanded by 12.34 per cent to Rs 191.33 trillion. Other income is not likely to be a driver of revenues for the quarter under review (Q2FY24).

At the sectoral level, there may not be treasury gains due to hardening of yield on bonds. “Banks were prepared for it, limiting the dent in treasury profits,” said a senior bank executive.

Asset-quality profile remains robust with fewer slippages on enhanced monitoring and timely steps to address any stress. The credit costs and the amount set aside for non-performing assets (NPAs) remain under control, bankers said.

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

The payout from the resolution of Srei twin finance companies and lL&FS Tamil Nadu Power Projects of over Rs 5,000 crore would provide marginal benefit, especially to PSBs as they would prioritise on building provisions to reduce net NPAs over profits, bankers added.