Banking Q2 results preview: Growth momentum likely to continue but margin pressure may persist

Dalal Street has entered a new corporate earnings season, and analysts and investors await the quarterly numbers from the country's crucial banking space, which began the financial year with a mixed bag of results for the April-June period. This time around, most analysts expect both private and public sector lenders to show resilience in the fiscal second quarter, driven by steady growth in loans and deposits and improving asset quality, but anticipate margin pressure to persist thanks to elevated costs of funds.

Here's what you can expect from the likes of State Bank of India (SBI), HDFC Bank, ICICI Bank, Bank of Baroda and Punjab National Bank (PNB) in the quarter ended September 30, 2023:

Net profit & net interest income

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SBI, Bank of Baroda, HDFC Bank, ICICI Bank and Axis Bank are estimated to register growth to the tune of 9.2-33.6 per cent in net interest income (NII)—or the difference between interest earned and interest paid—on a year-on-year basis in the September quarter, according to Motilal Oswal Financial Services.

While analysts at the brokerage estimate SBI to grow its net profit at a modest 0.6 per cent, they expect the other four lenders to clock expansion of 11.3-39.4 per cent in the period compared with the corresponding period a year ago.

The analysts peg earnings growth in the brokerage's banking coverage, which comprises six PSU and 12 private players, to average 22 per cent in the July-September period excluding HDFC Bank, with 25 per cent and 20 per cent in the private and public sectors, respectively. For the full year ending March 2024, MOFSL analysts estimate earnings growth for the 18 lenders to average 27 per cent.

The brokerage has coverage on the following lenders:

Motilal Oswal Financial Services has ICICI Bank, IndusInd Bank, Bank of Baroda and SBI Life as its top picks from the overall BFSI space. Here's how the brokerage has rated the Nifty Bank stocks:

Net interest margin

Analysts expect margin pressure to persist for commercial banks owing to rapid increases in benchmark interest rates.

"The cost of funds has gone up with strong credit growth and overall systemic liquidity being sucked out by the RBI in its efforts to bring down inflation," market expert Ajay Bagga told Zeebiz.com.

Bagga expects banks' net interest margins to decline sequentially in the September quarter.

The market veteran sees private banks faring better in maintaining their NIMs than their PSU counterparts.

Here's a summary of top banks' NIMs in the first quarter of the financial year 2023-24:

The RBI has held the repo rate—or the interest rate at which it lends money to commercial banks—at 6.5 per cent since February, after already increasing it by a total 250 basis points in six revisions since May 2022.

Meanwhile, most analysts expect banks to maintain robust growth in credit as well as deposits.

Analysts at IDBI Capital Markets have pegged credit growth for the banking system to stand at 14-15 per cent for the entire financial year. "During the quarter economic momentum continues, however higher interest rates due to inflationary impact could dampen the momentum. Credit growth expected to remain strong FY24 led by the retail and services sectors," they wrote in a research report.

IDBI Capital has HDFC Bank, ICICI Bank and City Union Bank among its top picks in the space. The brokerage also has Axis Bank, Federal Bank, IndusInd Bank, City Union Bank and DCB Bank in its coverage.

Asset quality

Analysts expect the asset quality—determined as a percentage of non-performing assets, or bad loans, in total loans—to improve for the sector driven by better collection efficiencies and a pickup in the economy.

Meanwhile, here's how the banking basket has fared on Dalal Street in the three-month period: