Q1 results preview: Expect healthy loan growth with NIM pressure for banking sector; PSU Banks to outperform Pvt lenders

Indian banks have seen significant earnings growth in the last fiscal year led by healthy advances and improvement in profits. The total net profit of all listed banks, including the public sector and private sector lenders, increased 39% year-on-year (YoY) in FY24 to cross ₹3 lakh crore for the first time.

The banking sector is expected to commence FY25 on a soft note as the first quarter has been traditionally soft for the sector and analysts expect similar trends in Q1FY25.

Q1 results of Indian banks are likely to be characterized by net interest margin (NIM) strain with sustained funding cost pressures, better loan growth but softer deposit and CASA growth, steady slippages, and softer recovery trends.

While credit costs are likely to gradually move towards normalization, the change in investment norms and related impact are expected to dominate the managements’ discussions, especially for PSU banks.

Analysts at Elara Capital expect PSU banks to report better earnings than private players, led by lower credit cost, lower NIM impact and normalizing opex. They expect earnings discussions to be dominated by NIM and growth outcomes.

Credit Growth

While banks are benefitting from better-than-expected credit growth at more than 15% currently, the deposit growth is lagging credit and hence, the funding gap remains wide.

“While there is still some leeway in terms of liquidity and excess SLR for sustained growth without diluting the funding mix, any uptick in deposit growth is the key. Monitor CD ratios – private banks in 85-90% range and PSU banks in 70-75% – and LCR ratio, which will impact deposits. Expect lower CASA ratio for most banks, given higher accretion of term deposits,” Elara Capital said in a report.

NIM Pressure

Analysts continue to believe that the growth-NIM conundrum may persist and the strain will sustain. The banks may continue to see a moderation in incremental spread.

“We see NIM impact on three counts: a) continued repricing on back deposit book, b) sticky incremental deposit costs as a few banks raised (card) rates in Q4FY24 and c) higher interest income reversal given higher Agri slippages (for some). Expect NIM pressure to sustain, and, in this context, commentary on turning rate tables and consequent NIM impact to dominate the discussion,” the brokerage report added.

Asset Quality

Overall asset quality of the banks is expected to remain benign, but Q1 is traditionally soft, and trends may be similar this quarter. Although the overall trend is steady, there are a few pockets of vulnerability, namely personal loans and MFI. Management commentary will be keenly watched, especially in the wake of waivers announced.

Here is Q1 results preview of few top banks:

HDFC Bank: HDFC Bank’s net profit in Q1FY25 is expected to rise 34.5% YoY, while it is expected to fall 2.6% QoQ. Net interest income (NII) is expected to grow 26.7% YoY, while NIMs are likely to remain broadly steady. Asset quality may see another strong print, reflected in curtailed slippages, but there could be some variability on a QoQ basis, according to Elara Capital estimates.

ICICI Bank: The private sector lender’s net profit in the quarter ended June 2024 is expected to rise 8.1% YoY, with steady loan growth but softer deposit growth. Expect 4-5 bps NIM decline QoQ, which will feed into sub-10% YoY NII growth, said the brokerage firm. This with sticky opex in Q1 (bonus and hike effect) would feed into sub-10% PPoP growth. Slippages are likely to rise QoQ, largely on higher Agri slippages. This with softer recovery may slightly raise QoQ credit costs.

Axis Bank: The bank’s Q1 net profit is expected to rise 15% YoY, while NII growth is seen at 12.2%. Expect 2-3% QoQ growth in the loan book. NIM is estimated to drop 4-5 bps as funding cost rises. Asset quality is likely to see yet another steady performance, marked by curtailed slippages but will move towards normalising trends.

Kotak Mahindra Bank: The private lender is expected to see Q1FY25 net profit rising 3.4% YoY with NII improving by 10.3% YoY. Another strong quarter for NIMs holding on much better then peers as the loan mix tilts towards high yielding products and MFI merger (full quarter effect) may cushion NIM, Elara Capital said.

SBI: The public sector lender SBI is expected to report a marginal YoY rise in Q1FY25 net profit with 8.3% YoY growth in NII. Loan growth is estimated to remain strong at more than 16% YoY, largely supported by growth in Retail and SME segments. Expect NIIM to be steady, which will drive NII growth. Asset quality may sustain with curtailed slippages, while credit cost may be curtailed.

Banking Sector Outlook

Despite the recent outperformance by private banks, Elara Capital still prefers large private banks with strong earnings resilience harmonising with reasonable valuations.

“The valuations of mid-tier PSUs and mid-tier private banks do indicate that valuations are rather full and a re-rating hereon may rather be slow. We believe the risk-reward is sharply tilted towards frontline peers. No significant asset quality challenges and better growth may ensure a sustained rerating for PSU banks on earnings stability,” said the brokerage.

Its top pick within the PSU basket is State Bank of India (SBI).

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.