While FY23 was riddled with headwinds including high inflation, rising interest rates, foreign investor selling, a slowdown in consumption, weak global macros, concerns regarding the recession, and the latest banking crisis in US and Europe, resilient corporate earnings was the only silver lining.
Q4 earnings preview: Another strong quarter for banks? Axis, ICICI, SBI and Federal Bank top MOSL picks
In the March quarter of FY23 (Q4FY23) as well, the earnings growth is expected to be healthy driven by BFSI and auto space.
In an earnings preview note, domestic brokerage house Motilal Oswal said that the corporate earnings growth in Q4FY23E is expected to be healthy and would be mainly led by financials.
"BFSI will drive 70 percent of the incremental YoY earnings growth for MOFSL Universe in Q4FY23E aided by healthy business growth, net interest margin (NIM) expansion, and benign credit costs, even as opex could remain high due to continuous investments in businesses," it predicted.
The brokerage estimates banks in its coverage universe to deliver 44 percent YoY growth in profit after tax (PAT) in Q4FY23 and sustain pre-provision operating profit (PPOP) growth at 30 percent YoY. Overall in FY23, it expects private and PSU banks to report earnings growth of 39 percent and 56 percent YoY, respectively. It estimates earnings growth of 46 percent, 24 percent, and 19 percent YoY over FY23, FY24, and FY25, respectively.
Credit Growth: As per the brokerage, the systemic loan growth is likely to remain robust in Q4FY23, with a healthy credit growth of 15.7 percent YoY in the March 2023 quarter, driven by continued traction in the retail and SME segments. The corporate segment has also witnessed a gradual recovery, though a pick-up in capex would be key to sustaining the growth momentum, it said. Home, vehicle, unsecured, and small business segments will also continue to do well, while demand for CV is also improving, it added.
Key monitorables remain any change in the demand environment, given 1) the challenging macro situation, 2) elevated inflation, and 3) a high base effect. It forecasts systemic loan growth of 15.7 percent and 13.3 percent in FY23 and FY24, respectively.
Deposit rates: Deposit rates have increased sharply over the past few months, with liability accretion gaining importance, said the brokerage. While it expects a stable-positive bias in margins in Q4FY23, the rise in the cost of deposits and further rate hikes would influence the margin trajectory in FY24, it pointed out. Margins are likely to see some pressure in FY24, added MOSL.
Asset quality: The brokerage estimates slippages to remain under control, which, along with recoveries, should improve asset quality.
As per the brokerage, private banks are expected to report a PPoP growth of 26 percent YoY (4.5 percent QoQ) and a PAT growth of 23 percent YoY (5.6 percent QoQ) in Q4FY23. Earnings should remain healthy, aided by healthy business growth, healthy margins, and benign credit costs, however, opex could remain high due to continuous investments in business, it predicted. It estimates an 18 percent loan growth for private banks in FY23/FY24 each.
The brokerage further stated that margins should witness a stable-positive bias, supported by healthy loan growth and continuous re-pricing of the floating rate book. However, it remains watchful of a rise in the deposit cost, which would keep margins under pressure over FY24. MOSL estimates NII growth of 30 percent YoY in Q4FY23, with Axis Bank at 41 percent, ICICI Bank at 39 percent, Kotak Mahindra Bank at 33 percent, HDFC Bank at 27 percent, and IndusInd Bank at 19 percent.
Slippages are likely to remain under control across segments, barring Bandhan Bank. Overall, it believes asset quality should continue to improve in Q4FY23.
Public Sector Banks
As per the brokerage, earnings growth is likely to remain healthy for PSBs, aided by healthy margins and a constant reduction in the credit cost, however, opex is likely to remain elevated as banks provide for wage revisions, which could slightly impact the operating profitability. It also sees loan growth remaining healthy but traction in deposits and a rise in the cost of funds would influence the margin trajectory in the medium term. The credit cost is likely to remain stable as asset quality improves further, it added.
It expects PSBs to deliver net interest income (NII) and PPoP growth of 31 percent and 33 percent YoY, respectively, (5.7 percent QoQ each) and PAT growth of 84 percent YoY (10.9 percent QoQ) in Q4FY23E.
In the banking space, Axis Bank, ICICI Bank, SBI, and Federal Bank are MOSL's top picks.
Axis Bank: Axis Bank has progressed well over the past few years and has strengthened its balance sheet by making it granular, increasing the mix of retail loans and improving its PCR. As a result, its key metrics such as loan growth, margins and profitability have improved. MOSL, thus, expects a 16 percent CAGR in loans over FY23-25.
"Axis Bank remains focused on building a stronger, consistent, and sustainable franchise. Since asset quality issues are behind, slippages and credit costs will be under control. While the bank will continue to make investments, it expects to bring down the cost-to-assets ratio to 2 percent by FY25-end," said MOSL. It estimates Axis Bank to deliver FY25 RoA/RoE of 1.9 percent/17.9 percent.
ICICI Bank: The brokerage noted that ICICI Bank has substantially increased its PCR to 83 percent as of Q3FY23 – the highest in the industry – and carries Covid-related provisions of ₹11,500 crore (1.2 percent of loans).
Slippages have moderated over the past few quarters and are likely to subside further. The lender is well-cushioned with higher provisions on its balance sheet and expects normalization in credit costs from FY23, said MOSL. ICICI has room for re-rating as it continues to deliver solid return ratios and sustainable growth, led by its focus on core operating performance. MOSL estimates RoA/RoE of 2.2 percent/17.3 percent for FY25.
SBI: "SBIN has reported a strong improvement in asset quality, which has been resilient over the past few quarters, aided by improved underwriting and significant mobilization in customer engagement by the recovery team. Fresh slippages moderated, beating private peers, while PCR improved to 76 percent," explained MOSL. SBIN, inarguably, has the best liability franchises, which puts it in a better position to manage the funding cost in a rising rate regime, said the brokerage. While the cost of deposits may inch up, NIM is likely to remain stable, it added. It further highlighted that SBI appears well-positioned to report a strong uptick in earnings and estimates FY25 RoA/RoE of 1.1 percent/17.8 percent.
Federal Bank: The brokerage pointed out that the bank's asset quality ratios have improved, aided by healthy recoveries/upgrades and moderation in slippages. Further, it has a lower cost of funds advantage v/s other mid-sized banks and this, along with a focus on cross-selling liability products to corporate clients to garner salary accounts and a pick-up in loan growth is likely to support margin, said MOSL.
"FB has been taking a cautious approach in building its loan mix to high-rated Corporates and secured Retail loans. The mix of Retail loans improved to 32 percent as of 3QFY23 from 28.4 percent in FY19. We expect loan growth to remain healthy, resulting in a further improvement in its overall operating performance. We expect RoA/RoE of 1.3 percent/15.8 percent by FY25," predicted MOSL.
Explain Like I am 5
Booked profits in FY23? Here’s how to reduce income tax by loss harvestingAprajita Sharma
DIY Investors: How to evaluate your risk profile with these 5 questionsAnushka Trivedi
What is asset allocation and how to choose for your portfolio?Nishant Batra