Banking example Q2: Banks are expected to show healthy profitability for the July-September quarter as core income growth is driven by a jump in loan disbursements and the initial benefits of a rising interest rate cycle drive margins. The sharp 190 basis point increase in the key rate since May and its transmission will result in higher net interest income (NII), and thus a better net interest margin (NIM).
Analysts expect listed banks to report total net profit growth of more than 40 percent for the second quarter, led by healthy 18-20 percent growth in net interest income.
Gaurav Jani – Research Analyst, Prabhudas Lilladher Pvt Ltd, said: “We expect private banks to report NII growth of 21 percent year-on-year as both NIM and credit growth show a quarter-on-quarter increase. could report. The credit growth in line with the system is also seen in public sector banks, while the NII rise may exceed 15 percent. In the second quarter, HDFC Bank saw 24 percent year-over-year credit growth, with retail growing 22 percent, rural commercial 32 percent and wholesale 26 percent.”
According to analysts at Kotak Institutional Equities, NIMs are likely to improve as MCLR/EBLR-linked loans begin to reprice due to the new policy rates. Also, there are no worries about Treasury losses in this quarter, unlike the previous one. Unlike the previous quarter, all banks are likely to see strong credit growth.
The transmission of repo rate increases has to be done for both loans and deposits. So far, lending rates have risen faster than deposit rates, giving banks a wider spread. It will help banks’ NIMs in the second quarter. However, with declining systemic liquidity and robust credit growth, attracting deposits will be important to fund credit growth. So in order to attract customers, the deposit rate must be increased.
The credit mix will be critical to the magnitude of the benefits the banks will receive. Heavy balance sheets with a high retail loan would yield more benefits, as corporate loans are often aggressively priced. Furthermore, the loan portfolios linked to the external benchmark-linked interest rate (EBLR) have gone through the full pass-through of policy rate hikes compared to loans linked to the older marginal cost-based lending rate (MCLR) scheme.
Banks that have a higher share of EBLR loans may see margin expansion, analysts at ICICI Securities point out. HDFC Bank, IDFC First Bank and ICICI Bank have clear advantages here. State Bank of India (SBI) and IndusInd Bank have a larger share of MCLR loans. Spreads for retail banks, which were already high, are likely to widen further in the near term, according to Kotak analysts. That said, their deposit growth and revaluation would be essential to differentiate between banks.
Asset quality, another critical metric for the banking sector, is improving. According to Kotak Institutional Equities, asset quality should continue to improve with strong short-term commentary on the direction of non-performing loan ratios for FY23. For banks under its coverage, the brokerage expects net interest income (NII) growth to bounce back to 17 percent yoy, following 15 percent yoy growth on loans.
That said, slippages of the Restructured and Emergency Credit Line Guarantee Scheme book will be one of the key monitorables in Q2FY23. Given the recent movements in bond yields, the impact on banks’ treasury revenues should also be monitored. Overall, bank stock investors are bracing for strong Q2 gains. This optimism is well reflected in the Bank Nifty, which has gained 7.5 percent so far in FY23, while the Nifty 50 index fell 1 percent.
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