Banks to drive earnings growth in Q4 while IT services to report muted numbers

• The earnings season for the banking sector will start with HDFC Bank’s results scheduled to be announced on April 15 followed by ICICI Bank’s on April 22.
• Motilal Oswal expects credit growth of 15.7% on year for the banking sector in FY23 and 13.3% in FY24.
• As deposit rates have been rising with hike in interest rates, analysts are positive on deposits but worry about credit growth amid high borrowing rates.

Banks are expected to report a healthy credit growth in the January to March quarter driven by traction in retail, small and medium enterprise (SME) and corporate customers, as per analysts at Motilal Oswal.

The earnings season for the banking sector will start with HDFC Bank’s results, scheduled to be announced on April 15, followed by ICICI Bank’s on April 22.

The brokerage house expects credit growth of 15.7% on year for the banking sector in FY23 and 13.3% in FY24.

While the credit book of the corporate segment witnessed a gradual recovery, a pick-up in capex among corporates would be key to sustain growth momentum ahead.

“Home, vehicle, unsecured, and small business segments continue to do well, while demand for commercial vehicles is also improving. The credit card business is seeing healthy momentum, with robust growth in spends,” said the report by Motilal Oswal.

Bank deposits up with rate hikes but credit growth worth watching
As deposit rates have been rising with hike in interest rates, analysts are positive on deposits, but worry about credit growth amid high borrowing rates.

Since May 2022, RBI has hiked the repo rate six times, making bank deposits attractive again. This is reflected in the healthy growth in bank deposits in the March quarter. HDFC Bank on Tuesday reported strong growth in deposits and advances with 21% growth in deposits and 16.9% in advances at ₹18.8 lakh crore and ₹16 lakh crore respectively as on March 31, 2023.

At the same time, private sector lender Bandhan Bank's advances grew 9.8% and deposits jumped 12.2% in the March quarter.

“Deposit rates have increased sharply over the past few months, with liability accretion gaining importance. However, the gap v/s credit growth still remains high. While we expect a stable-positive bias in margins in 4QFY23, the rise in the cost of deposits and further rate hikes would influence the margin trajectory in FY24. Margins are likely to see some pressure in FY24, in our view,” said the report by Motilal Oswal.

This week will provide direction to the sector growth going ahead as the Reserve Bank of India is expected to announce a decision on interest rate hike in its bi-monthly monetary policy this Thursday. Economists are expecting an increment of 25 basis points in the repo rate to 6.75%.

Further, any change in the demand environment, considering the challenging macro situation, elevated inflation and a high base effect are key monitoring points for the sector.

Expect muted revenue growth for IT sector in Q4 amid weak macro
Earnings season for the information technology services sector will begin with the results of Tata Consultancy Services that will be out on April 12 followed by Infosys on April 13 and HCL Technologies on April 20.

Motilal Oswal expects muted revenue growth for the sector as weak macroeconomic factors like the recent banking crisis in the key markets of the US and Europe may impact spending by banks there.

“Our IT Services coverage universe is expected to deliver a median revenue growth of 0.8% quarter-on-quarter and 9.2% year-on-year in constant currency (CC) terms in 4QFY23,” said a report by Motilal Oswal.

The report suggests that although Indian IT services firms do not have meaningful exposure to the affected US regional banks, fears of a banking crisis could impact near-term IT spending by banks.

Moreover, the impact of the crisis in the companies’ March quarter earnings will be the key monitorable during the 4Q management commentaries.

“Apart from banking, financial services and insurance (BFSI), hi-tech, manufacturing and retail may also report muted growth in 4Q. Clients have started to cut discretionary spends while increasing focus on cost efficiency. IT services companies are seeing a shift to cost optimisation deals, along with increased vendor consolidation deals in the pipeline,” said the report.


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