The banking sector is expected to report 35 per cent year-on-year growth in earnings in December quarter, on the back of healthy loan growth and lower credit cost, says brokerage Sharekhan. The brokerage expects Net interest income (NII) growth to be higher at 23 per cent year-on-year on account of solid loan growth.
"The quantum of margin expansion is expected to be lower compared to the previous quarter due to increased cost of deposits to garner a higher share of retail liabilities. Non-interest income performance for banks would continue to remain weak, led by lower treasury income. Asset quality may improve further or is expected to remain stable with modest slippages (ex. Restructured) along with improvement in recoveries and upgrades," Sharekhan said in its report.
Among the brokerage top preferred picks, it has Axis Bank, ICICI Bank, and HDFC Bank in large private banks, Federal Bank in midtier private banks and in small private banks it picked AUSFB. In PSBs, it picked SBI and PNB.
The brokerage expects ICICI Bank, Axis Bank, and Kotak Mahindra Bank to report strong advances growth of 20% y-o-y, 16% y-o-y, and 23% y-o-y, respectively.
HDFC Bank delivered healthy advances growth of 19% y-o-y; however, loan growth moderated sequentially to 1.8% q-o-q as compared to 6.1% in the previous quarter.
Among PSBs, top PSU banks are expected to report 16-18% y-o-y growth in advances and other PSBs are likely to report growth equivalent to the system’s growth.
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In mid-tier private banks, IndusInd Bank and Federal Bank both reported solid loan growth at 19% y-o-y, respectively.
Among small private banks, AUSFB delivered healthy AUM growth of 39.4% y-o-y.
It noted that deposits 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 deposits growth still remains large. Within deposits, growth is slower in low-cost CASA deposits and higher in term deposits," the report added.
Whereas, NII growth is likely to be strong on account of solid loan growth.
"Benign core credit cost would further support earnings and asset quality may improve further for banks under our coverage due to moderation in slippages (ex. restructured book), healthy recoveries, and better collection efficiencies. However, slippages from the restructured book would be key monitorables," it added.
However, the brokerage said that the 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 higher base effect and increased CD ratio), rather than on asset quality at this stage of the cycle. Key discussion would be around strengthening deposits mobilisation growth and peaking of NIMs for the banks," Sharekhan said.
The brokerage has given 'buy' rating to HDFC Bank, ICICI Bank, Axis Bank at a target price of ₹1,800, ₹1040 and ₹1,140 respectively in the large private bank.
Kotak Mahindra Bank, IndusInd Bank, Federal Bank also have 'buy'rating at a target price of ₹2,250, ₹1,400 and ₹165 respectively in the mid-tier private bank. In PSBs, 'buy' rating is for SBI, PNB and Bank of India for target price of ₹710, ₹64 and ₹77 respectively.
