All banks except one in MOSL's coverage see sharp jump in Q2 profit; here are its top picks

The banking sector reported strong September quarter (Q2FY23) earnings, led by healthy loan growth, margin expansion, and continued moderation in provisions. Loan growth was led by sustained traction in Retail and SME (small and medium enterprises) segments, along with a sharp revival in corporate loans, a report by domestic brokerage house Motilal Oswal (MOSL) stated.

Deposit growth, however, was tepid, with CASA (current account savings account) deposits under pressure. Large banks saw a moderation in the CASA mix, while small and mid-size banks reported an increase.

Of all the lenders under MOSL's coverage, only Punjab National Bank (PNB) reported a year-on-year (YoY) decline in its profit after tax (PAT) in the September quarter as provisions for non-performing assets rose. All other banks posted robust profit growth for the quarter under review. In fact, eight of them posted over 50 percent jump in their Q2 profit.

The highest jump in profit in Q2FY23 was seen by RBL Bank. It reported a near seven-fold rise in net profit for the September quarter at ₹202 crore against ₹31 crore in the year-ago period, largely owing to a 63 percent fall in provisions at ₹241 crore. The bank's net interest income rose 16 percent at ₹1,064 crore while the net interest margin was at 4.55 percent.

Canara Bank reported an 89 percent rise in its net profit to ₹2,525 crore for the quarter under review versus a net profit of ₹1,333 crore in the same period of the previous fiscal. The bank posted net-interest income of ₹20,482.35 crore, an 18.51 percent YoY increase against ₹17,336.33 crore in Q2FY22. Its asset quality also improved. During this quarter, the value of net non-performing assets (NNPA) was ₹17,296.89 crore, as against ₹20,884.40 crore in the same quarter last year.

SBI, India's largest lender, was third on the list. It reported its highest-ever quarterly PAT of ₹13,264.62 crore, up 74 percent YoY in Q2FY23 versus ₹7,626.57 in the year-ago period. SBI reported a 13 percent increase in its NIIs to ₹35,183 crore for the quarter under review from ₹31,184 crore in the year-ago quarter. Gross NPAs eased to 3.52 percent in Q2FY23 from 3.91 percent in Q1FY23 and 4.9 percent in Q2FY22.

"We expect the strong traction in credit growth to continue after the festive season. It has been growing at 16-17 percent. It aims to keep the margin at current levels for the next two quarters, with a slight upside risk. The restructured book has been performing as per our expectation, and the SMA 1 and 2 in this book stood at 9 percent," said the brokerage.

Private sector lender DCB Bank also posted a 73 percent jump in net profit at ₹112 crore for the quarter ended September 2022 on the back of a reduction in bad loans. The bank had reported a profit of ₹63 crore in the year-ago period. NII for the lender also increased to ₹411 crore as against ₹323 crore in the same period of the previous fiscal while its gross NPAs declined to 3.89 percent of the gross advances at the end of September 2022, from 4.73 percent at September-end 2021.

Axis Bank posted a 70 percent YoY growth in net profit to ₹5,330 crore for the quarter under review. Its NII grew by 31 percent on year to ₹10,360 crore. Provisions in the quarter dropped to ₹550 crore from ₹1,735 crore a year ago. The asset quality improved further during the quarter. The gross non-performing asset ratio fell to 2.5 percent as on September 30, from 2.76 percent a quarter ago and 3.53 percent a year ago.

“Axis Bank's focus remains on the three core areas of instilling a performance culture, strengthening its core, and building for the future. It will continue to improve profitability, with strong return ratios. It is committed to attain a cost-to-assets ratio of 2 percent in the medium term. With respect to the Citi transaction, CCI approval is in place. It expects to complete the deal by Q4FY23. As of now, the management has no intention to raise capital. However, it will continue to evaluate the same till the acquisition is completed,” predicted MOSL.

IndusInd Bank, Bank of Baroda and Federal Bank also reported over 50 percent YoY jump in their Q2 net profit. Other banks like HDFC Bank, ICICI Bank, Kotak Bank, AU Small Finance Bank, Indian Bank, and Union Bank posted double-digit jump in their net profits for the quarter under review while Bandhan Bank turned profitable for the quarter after posting a loss in the year-ago period.

Going ahead, the brokerage expects the earnings of the lenders to remain resilient, guided by robust traction in loan growth and an improving margin trajectory (aided by rate hikes) and asset quality. However, high inflation and aggressive rate hikes can adversely impact the pace of demand recovery, it added.

"Banks, with a higher CASA mix and floating loans, are well-positioned to navigate the rising rate environment, even as funding cost is likely to increase. Large Banks, with a strong liability franchise, are well placed to gain incremental market share. Banks reported a healthy trend in fee income. However, a muted treasury performance and higher OPEX kept PPOP growth under pressure. The asset quality outlook remained encouraging, with moderation in slippages, healthy PCR, and contingent buffers driving benign trends in core credit cost," it said.

Post the earnings, MOSL raised its FY23/FY24 earnings estimates for the sector by 6 percent/3 percent and retains its preference for ICICI Bank, SBI, IndusInd Bank, and Federal Bank.