Margin squeeze to dent banks’ Q1 profits, loan growth may offer silver lining

While compressed NIM can hurt profitability, this will be partially offset by loan growth outpacing deposit growth, and robust treasury earnings helped by lower bond yields and a rallying equity market for most lenders, analysts said.

However, banks’ credit quality may take a marginal hit due to seasonal stress in farm loans, aggravated by election season lull in recovery and heatwaves in several parts of the country in the June quarter.

While sectoral margins have compressed over the past year, select banks have further raised rates, mainly for short-term deposits amid tight liquidity conditions, said Nitin Aggarwal, research analyst at Motilal Oswal. “This, coupled with a slight moderation in weighted average lending rate for the system, mainly public sector banks, points to the continued pressure on sector margins in the near term,” he said.

Emkay Global Financial Services expects banks’ pre-provisioning operating profit to record sluggish growth of 4% on-year in the June quarter, and 4% lower sequentially, mainly due to lower margins and higher operational costs, especially for private sector lenders. “Overall net profit growth is likely to be subpar at about 8% year-on year (and a 3% dip quarter-on-quarter), and we expect the first quarter to be a soft quarter,” said Anand Dama, an analyst at Emkay.He expects public sector banks to be relatively better off with net profit growth at 14% y-o-y vs 8% for private peers, backed by limited margin contraction, trading gains, lower staff cost and contained credit cost.

ET Bureau

Motilal Oswal differed on this count, expecting private banks to report earnings growth of 15.6%, ahead of public sector banks’ 11.5% increase.

The brokerage forecast State Bank of India to report net profit at Rs 16,860 crore in the fiscal first quarter, almost unchanged from Rs 16,884 crore a year earlier. Net profit at Punjab National Bank is predicted to surge nearly 140% to Rs 3,010 crore.

Among private lenders, HDFC Bank leads the pack with a projected 29% rise in net profit at Rs 15,460 crore. The bank’s margin is expected to remain under pressure in the near term, as deposit mobilisation may take some time before funding cost normalises and borrowings are replaced by lower cost deposits, Motilal Oswal said.

“Treasury performance is likely to remain healthy, underpinned by a decline in bond yields and buoyant capital markets. We also expect an improvement in common equity tier 1 (CET 1) for select PSBs, backed by the revised investment regulations,” it said.

The new investment classification norms, effective from April 1, require banks to recognise net notional gains or losses on available for sale (AFS) portfolio via AFS reserve. This move will reduce any volatility in profitability as notional losses need not be recognised via profits and losses, whereas notional gains parked in AFS reserve will be allowed to be included in CET 1 capital.