Bank earnings could rise further in third quarter, analysts say

• Indian banks are likely to see further gains in the December quarter due to upward revisions to loan prices.
• Loan growth is near a decade high at 17.4%, but brokers expect banks to grow further.
• Analysts say the rise in interest rates will also be reflected in net interest margins, which widen further in the third quarter, while asset quality is expected to decline further.

Analysts say Indian banks could see a further boost to earnings in the December quarter.

The RBI has hiked rates by 225 basis points so far following the US Federal Reserve’s (Fed) interest rate hikes. Banks continued to benefit from rate hikes in Q2, but analysts see room for rate hikes in Q3 as well.

“The earnings growth momentum in Q3 2023 could improve due to: an upward revision to the External Benchmark Linked Rate (EBLR) and the marginal cost of Fund-Based Lending Linked Rate (MCLR) loans; The ongoing benefits of ICICI Securities.

ICICI Securities expects to include banks in its scope including: SBIHDFC Bank, Axis Bank and Kotak Mahindra Bank, among others, reported a 40% year-on-year increase in net profit, slightly increasing from a cumulative total of Rs.37,037 in Q2 FY2023 to Rs.40,006 in Q3 FY2023. doing.

Meanwhile, net interest income is estimated to grow by more than 20% year-on-year, in line with Motilal Oswal analysts who estimate 24% growth. Motilal Oswal said in its earnings preview that “profit margins will show a positive bias, supported by rising interest rates and a healthy rebound in business growth.”

Loan growth continues, but asset quality moderates

Lending growth is another indicator that continues to show improvement, reaching a nearly 10-year high of 17.4% in December 2022, according to the Reserve Bank of India’s Financial Stability Report.

Brokers expect banks to report continued growth in lending growth, despite reaching the highest level in almost a decade.

Net non-performing assets (Net NPA), which is at its lowest level in a decade, is also expected to gradually improve, according to ICICI Securities. The brokerage firm estimates it will cover banks reporting net NPAs in the range of 0.3% to 4.5%, compared to the range of 0.3% to 4.8% in the previous quarter.

“We expect slippage to continue to ease, and along with a healthy recovery should further improve asset quality,” Motilal Oswal said.

Reasonable assessment, says Jeffries

In 2022, the Nifty Bank Index recorded growth of over 21.2%, while the benchmark Nifty50 Index gained 4.3%.Nevertheless, analysts Jeffries Bank valuations are reasonable, he said.

“Valuations are reasonable despite the revaluation and favorable earnings outlook for 2023. As the performance gap between commercial banks and PSU banks narrows, so will the valuation range,” Jeffries said. He added that healthy credit growth drives profitability.

The broker added: ICICI Bank and State Bank of India are still our top picks among the big banks. Indus India Bank A pick in the mid-cap segment.

“ICICI Bank remains our top pick as it offers the best risk-reward ratio among its peers due to its excellent growth, improved asset quality and improved return on equity,” said the brokerage firm. I’m here. Both SBI and IndusInd Bank are well positioned to achieve profit growth and lending expansion, he added.

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