Q2 result augurs well for banks

The provisional figures for the quarter published by other banks broadly indicate that the second quarter has been good. The revival in credit growth of the industry and rising interest rates will boost the Net Interest Margin (NIM). The continued momentum in retail loans and high demand for corporate loans are seen as drivers of the sector’s credit growth trajectory. Data from the Reserve Bank of India (RBI) shows that as on September 23, overall bank credit growth stood at 16.4 per cent year-on-year.

Analysts at Nirmal Bang Institutional Equities said that in Q2, large private banks are expected to grow at a higher rate than mid-cap and small-cap peers and public sector banks (PSBs). “Large private banks are expected to report faster growth (21.4% year-on-year credit growth), while mid-cap and small-cap private banks are also expected to maintain growth momentum at 15-16% year-on-year. There is a possibility,” it said in a report dated October 9. Considering a favorable base, PSBs are expected to report 20% growth in credit, it said.

Since May, the RBI has increased the cumulative repo rate by 190 basis points (bps). One basis point is 0.01%. As loan growth accelerates, margins will expand because as interest rates rise, floating loans are re-priced. Therefore, banks with a higher mix of floating-rate loan books stand to benefit.

Analysts at Prabhudas Lilladher expect the NIMs of banks under his coverage to rise 9bps sequentially to 3.74%. The brokerage said the expansion of NIMs for private banks could be 11 bps higher as compared to 5 bps for PSU banks as the proportion of repo-linked loans is higher for private lenders.

The repo rate hike is to be broadcast for both loans and deposits. So far, lending rates have increased at a faster rate than deposit rates, giving banks more exposure. This will help the NIMs of the banks in Q2. However, with dwindling systemic liquidity and strong credit growth, accumulating deposits will be critical to fund credit growth. Hence deposit rates have to be increased to attract customers. Analysts at JM Financial Institutional Securities said, “As we enter a seasonally strong 2H coupled with a stable demand environment, we may see the deposit race heating up, resulting in an upward trend in deposit rates.” There should be further amendment.” This means an increase in the cost of deposits could put some pressure on the medium-term NIMs. Hence, management’s comments on the same will be taken into account when Q2 results come out.

Another important metric for the banking industry is improving asset quality. According to Kotak Institutional Equities, asset quality should see further improvement with strong near-term comments on the direction of non-performing debt ratio for FY23. For banks under its coverage, the brokerage expects net interest income (NII) growth to return to 17% yoy on the back of 15% year-on-year loan growth.

That said, slippage from the book by the restructured and emergency credit line guarantee scheme will be under major watch in Q2FY23. Also, given the recent volatility in bond yields, the impact on banks’ Treasury earnings also needs to be tracked. All told, investors in banking stocks are poised for strong Q2 earnings. This optimism is well captured in the Bank Nifty, which is up 7.5% so far in FY23, while the Nifty 50 index is down 1%.