scorecardresearchBanking sector earnings preview: Q3 to be another strong quarter, says Sharekhan; here are its top picks

Banking sector earnings preview: Q3 to be another strong quarter, says Sharekhan; here are its top picks

Updated: 09 Jan 2023, 03:10 PM IST
TL;DR.
Sharekhan said the banks in its coverage universe are expected to report 35 percent YoY earnings growth in Q3 FY2023E, driven by healthy loan growth and lower credit costs. Among private banks, Sharekhan expects ICICI Bank, Axis Bank, and Kotak Mahindra Bank to report strong advances growth.
Overall, deposit growth is expected to gain traction as deposit rates have risen sharply across banks over the past few months. However, the gap between credit and deposit growth still remains large.

Overall, deposit growth is expected to gain traction as deposit rates have risen sharply across banks over the past few months. However, the gap between credit and deposit growth still remains large.

The Indian banks delivered a stellar performance in H1FY23 on the back of a strong acceleration in credit growth. In addition, the fall in bad loans also boosted the profits for the majority of banks. This trend is expected to continue in Q3FY23 as the credit demand in the system remains strong.

The system-level credit off-take grew by 17.4 percent y-o-y in the fortnight ending December 16, 2022, indicating loan growth has been sustained, given distinct signs of an improving economy and a revival of investments and loan demand.

As per recent media reports, the net profit of public sector banks is estimated to reach a milestone of 1 lakh crore by the end of the current fiscal year.

In addition, on January 06, the RBI in its Financial Stability Report said that the gross NPA ratio of banks has fallen to a 7-year low of 5 prcent and the banking system remains sound and well capitalised.

Going forward, brokerage firm Sharekhan expects the banking sector to report a healthy performance in third quarter. The brokerage said the banks in its coverage universe are expected to report 35 percent year-on-year earnings growth in Q3 FY2023E, driven by healthy loan growth and lower credit costs. Net interest income (NII) growth is expected to be higher at 23 percent YoY on account of solid loan growth, it said.

However, due to the increased cost of deposits to garner a higher share of retail liabilities, the brokerage expects the magnitude of margin expansion to be lower than in the previous quarter.

While the non-interest income performance for banks would continue to remain weak, led by lower Treasury income, asset quality may improve further or remain stable with modest slippages, according to the brokerage.

Among private banks, Sharekhan expects ICICI Bank, Axis Bank, and Kotak Mahindra Bank to report strong advances growth of 20 percent YoY, 16 percent YoY, and 23 percent YoY, respectively. 

HDFC Bank delivered healthy advances growth of 19 percent YoY in Q3, however, loan growth moderated sequentially to 1.8 percent QoQ vs. 6.1 percent in the previous quarter.

In mid-tier private banks, IndusInd Bank and Federal Bank both reported solid loan growth at 19 percent YoY, respectively, for the December ending quarter.

Among small private banks, Au Small Finance Bank delivered a healthy AUM growth of 39.4 percent YoY. Loan growth across the retail and SME segments continues to be strong, while the corporate loan segment is seeing a pick-up, led by some capex demand, the brokerage added.

Among public sector banks, the top PSU banks are expected to report 16–18 percent YoY growth in advances, while other PSBs are likely to report growth equivalent to the system’s growth.

Overall, deposit growth is expected to gain traction as deposit rates have risen sharply across banks over the past few months. However, the gap between credit and deposit growth still remains large, the brokerage pointed out. 

HDFC Bank and Federal Bank saw deposit growth outpacing credit growth sequentially, mainly due to higher term deposit growth.

Having said that, the brokerage stated the near-term risk for the sector will be present on the back of interest rate tightening being witnessed across the globe, and its impact could be in the form of exchange rate volatility and excessive tightening in the local market.

Secondly, consensus estimates for GDP have been lowered for CY2023. However, “we believe there could be some slowdown in loan growth in FY2024E, which may be partial (due to a higher base effect and an increased CD ratio), rather than on asset quality at this stage of the cycle,” it said. 

Key discussion points would be around strengthening deposits, mobilisation growth, and the peaking of NIMs for the banks, it added. 

Axis Bank, ICICI Bank, and HDFC Bank are Sharekhan's preferred picks among private banks. SBI and PNB continue to be the brokerages' top choices in the PSBs space. AUSFB was its preferred pick in the small private banks, and Federal Bank was its top choice in the mid-tier private banks.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 09 Jan 2023, 03:10 PM IST