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Home Market Research Business

Earnings: Lenders likely to report muted Q4 earnings growth, margin pressure

by TheAdviserMagazine
7 months ago
in Business
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Earnings: Lenders likely to report muted Q4 earnings growth, margin pressure
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Mumbai: Indian banks, which together account for more than a third of the Nifty by weighting, are expected to log muted earnings growth in the March quarter, although investor focus will likely be on future margin protection as an ‘accommodative’ central bank embarks on an expectedly deep rate-easing cycle.

Motilal Oswal Financial Services projects just 0.5% year-on-year earnings growth for the March quarter across its coverage universe of 18 banks, including five large lenders.

Others such as Kotak Institutional Equities and IIFL Capital also expect the March quarter to be weak. IIFL expects profit for nine banks under its coverage to shrink 7% YoY.

However, management commentary is likely to focus on net interest margin (NIM) compression, as policy rate cuts begin to reflect immediately on a sizable chunk of advances.

“We are shifting focus to NIM pressure due to the recent cut in policy rates and moving away from the challenges created on deposit growth and asset quality,” Kotak Institutional Equities.

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It expects bank NIMs – the metric for a lender’s core profitability – to decline 10-15 basis points in the March quarter, compared with the three months to December.Rates are likely to ease further in India, with Mint Road assessing disproportionate trade-turbulence impact on growth than on prices. Loans linked to policy rates are re-priced immediately, while the cost of deposits or short-duration borrowings often take time to reduce proportionately.At an aggregate level, slowing credit growth, challenges in deposit mobilisation and rising loan loss provisions in, particularly, microfinance exposure are expected to weigh on the March quarter bottom-line performance.

As the banking system wrapped up the final quarter of FY2025, credit growth stood at 11%, a sharp decline from 16.4% a year earlier. Provisional data from several banks indicates that deposit growth continued to lag credit expansion during the quarter.

State-run lenders are forecast to post stronger results, with profit after tax (PAT) likely to climb 4.5% YoY, while private banks are expected to see a 3% decline in PAT, according to Motilal Oswal.

State Bank of India (SBI), the country’s largest lender, could report a 10-20% YoY drop in profits as provisioning normalises. Margins may compress further, accompanied by a rise in operating expenses, according to estimates by brokerages.

HDFC Bank, ICICI BankMeanwhile, HDFC Bank is projected to report modest PAT growth of about 5%, with loan growth trailing broader credit expansion due to its focus on maintaining healthy loan-to-deposit ratios. ICICI Bank is expected to deliver the strongest performance among its peers, with PAT likely to increase in excess of 12%, though margin pressure remains, said analysts.

According to analysts and fund managers, despite expectations of stronger absolute earnings from leading private sector banks, several structural factors favor public sector lenders in the current environment.

For instance, only around 45% of PSB loans are linked to external benchmarks such as the repo rate compared to 86% for private banks, resulting in relatively lower NIM pressure for publc sector lenders.

Public sector banks are also poised to benefit more from noninterest income, particularly from treasury gains, as government bond yields have declined, multiple analysts said.

In addition to profit booked on sale of government securities, open market operation (OMO) purchases by the central bank are expected to boost treasury income, particularly of PSU banks, because they were the majority sellers in such liquidity-inducing operations.

Gains on this account are expected to be in the range of `4,000 crore, according to bond dealers. On the asset quality front, PSBs are comparatively better positioned. Investor attention is increasingly focused on the rising stress in unsecured lending, particularly in microfinance, a segment where midsized private banks are more exposed than PSBs.

Additionally, revised norms for the sale of government-guaranteed security receipts, issued in exchange for distressed asset sales to the National Asset Reconstruction Company (NARCL), could enable PSBs to reverse excess provisions.



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