Gains in financials hinge on RBI policy but low base effect could boost growth: Report

In a recent report, market daily Business Standard noted that the banking sector and non-banking financials are both in an interesting space.

"On the one hand, the Reserve Bank of India (RBI) tightening the monetary policy and hiking interest rates are negative developments. But, if the economic recovery continues to have strong momentum, then credit expansion should take place anyway and non-performing assets (NPA) aggregation and credit slippages could be balanced by stronger corporate performance," it explained.

The report further pointed out that a low base effect could boost earnings and revenues in the first quarter of FY23 (Q1FY23) because Q1FY22 was affected by the second wave of Covid-19. The banking sector could continue to see the growth of over 15 percent year-on-year (YoY), said the BS report.

The sequential growth is around 2 -3 percent, which is mildly positive, BS said, adding that the net interest margin (NIM) will start being impacted by the rate hikes from Q2FY23 given the usual lags.

"Provisional numbers and channel checks suggest that retail, micro, small and medium enterprises (MSME) and agricultural loans continue to witness strong traction, and corporate loans have also started to show growth revival. Larger banks may be doing better. The inflationary impact has also led to higher working capital needs. Deposit-side growth is expected to remain healthy," it further highlighted.

Investors need to balance the positives and the negatives, advised analysts. Improving credit growth and strong NIMs and flat or improving credit costs are positives but the monetary policy trend and other macro factors are negatives, noted the market daily.

“Valuations are moderate across the sector historically, given strong profit growth in the last two quarters. Larger private banks should do better in Q1, but investors will be cautious, given the tightening monetary regime,” forecasts BS.

The next monetary policy in early August could move the sector down if there’s a further hike or liquid-tightening measures, but there could be a relief rally if the central bank maintains the status quo, it added.