Bank earnings could see a further ramp up in Q3, say analysts

• Indian banks could see a further boost in their earnings in the December quarter thanks to loans being repriced upwards.
• Despite loan growth being at a near-decade high of 17.4%, brokerages expect banks to witness more growth.
• Rising interest rates will also reflect in the net interest margins expanding further in Q3, while asset quality is expected to moderate further, analysts say.

Indian banks could see a further boost in their earnings in the December quarter as the benefits of loans being repriced upwards are expected to continue flowing in, say analysts.

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“Q3 FY23 earnings growth momentum on a sequential basis is likely to be better on the following grounds: continuing benefit of upward repricing in external benchmark-linked rate (EBLR) and marginal cost of funds-based lending rate-linked (MCLR) loans is likely to outweigh pressures on funding costs,” said a report by ICICI Securities.

ICICI Securities expects the banks in its coverage, including SBI, HDFC Bank, Axis Bank, Kotak Mahindra Bank, among others, to report a 40% year-on-year increase in net profit, edging up from a cumulative ₹37,037 crore in Q2 FY23 to ₹40,006 crore in Q3 FY23.

On the other hand, it estimates the net interest income to grow over 20% year-on-year, in line with analysts at Motilal Oswal, who estimate a growth of 24%. “Margins to exhibit a positive bias, supported by rising interest rates and healthy pick up in business growth,” said Motilal Oswal in its earnings preview.

Loan growth to continue while asset quality to moderate

Loan growth is another metric that has continued to show improvement, rising to a near-decade high of 17.4% in December 2022, according to the Reserve Bank of India’s Financial Stability Report.

Despite touching a near-decade high, brokerages expect banks to report a continued increase in loan growth.

Net non-performing assets (Net NPAs) – which are at their lowest in the last 10 years – are also expected to improve further sequentially, according to ICICI Securities. The brokerage estimates the banks in its coverage to report net NPAs in the range of 0.3-4.5%, when compared to a range of 0.3-4.8% in the previous quarter.

“We estimate slippages to continue to moderate, which, along with healthy recoveries, should result in a further improvement in asset quality,” said Motilal Oswal.

Valuations reasonable, says Jefferies

In 2022, the Nifty Bank index registered a growth of over 21.2%, while the benchmark Nifty50 index gained 4.3%. Despite this, analysts at Jefferies say that bank valuations are reasonable.

“Despite re-rating and good earnings visibility for 2023, valuations are reasonable. With the performance gap between private and PSU banks narrowing, the range of valuations will also narrow,” said Jefferies, adding that the healthy credit growth will aid profitability.

The brokerage added that ICICI Bank and State Bank of India remain its top picks amongst large banks, while IndusInd Bank is its pick in the midcap segment.

“ICICI Bank stays top-pick as it offers the best risk reward ratio across peers with superior growth, improved asset quality and higher return on equity,” the brokerage said. It added that SBI and IndusInd Bank are both well-positioned to deliver earnings growth and ramp up lending.

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