Banking Q2 results preview: Growth momentum likely to continue but margin pressure may persist

Here's what you can expect from the likes of State Bank of India (SBI), HDFC Bank, ICICI Bank, Bank of Baroda and Punjab National Bank (PNB) in the quarter ended September 30, 2023.

Dalal Street has entered a new corporate earnings season, and analysts and investors await the quarterly numbers from the country's crucial banking space, which began the financial year with a mixed bag of results for the April-June period. This time around, most analysts expect both private and public sector lenders to show resilience in the fiscal second quarter, driven by steady growth in loans and deposits and improving asset quality, but anticipate margin pressure to persist thanks to elevated costs of funds.

Here's what you can expect from the likes of State Bank of India (SBI), HDFC Bank, ICICI Bank, Bank of Baroda and Punjab National Bank (PNB) in the quarter ended September 30, 2023:

Net profit & net interest income

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SBI, Bank of Baroda, HDFC Bank, ICICI Bank and Axis Bank are estimated to register growth to the tune of 9.2-33.6 per cent in net interest income (NII)—or the difference between interest earned and interest paid—on a year-on-year basis in the September quarter, according to Motilal Oswal Financial Services.

Bank	NII		PAT
Bank	Q2 estimate	YoY change (%)	Q2 estimate	YoY change (%)
SBI	38,432.2	9.2	13,340	0.6
Bank of Baroda	11,118.3	9.3	4,000	20.9
HDFC Bank	28,089.4	33.6	14,780	39.4
ICICI Bank	18,331.8	24	9,660	27.8
Axis Bank	11,984.7	15.7	5,930	11.3
PNB	9,685.1	17.1	1,370	233.1
Canara Bank	8,803.9	18.4	3,520	39.5
Union Bank	8,921.6	7.4	2,950	59.9
NII and PAT figures in crore rupees \| Source: Motilal Oswal Financial Services

While analysts at the brokerage estimate SBI to grow its net profit at a modest 0.6 per cent, they expect the other four lenders to clock expansion of 11.3-39.4 per cent in the period compared with the corresponding period a year ago.

The analysts peg earnings growth in the brokerage's banking coverage, which comprises six PSU and 12 private players, to average 22 per cent in the July-September period excluding HDFC Bank, with 25 per cent and 20 per cent in the private and public sectors, respectively. For the full year ending March 2024, MOFSL analysts estimate earnings growth for the 18 lenders to average 27 per cent.

The brokerage has coverage on the following lenders:

Private		Public
AU Small Finance Bank	HDFC Bank	Bank of Baroda
Axis Bank	ICICI Bank	Canara Bank
Bandhan Bank	IDFC First Bank	Indian Bank
DCB Bank	IndusInd Bank	Punjab National Bank
Equitas Small Finance Bank	Kotak Mahindra Bank	State Bank of India
Federal Bank	RBL Bank	Union Bank of India

Motilal Oswal Financial Services has ICICI Bank, IndusInd Bank, Bank of Baroda and SBI Life as its top picks from the overall BFSI space. Here's how the brokerage has rated the Nifty Bank stocks:

Stock/index	Rating	Target
IndusInd bank	Buy	1,650
Federal Bank	Buy	165
AU Small Finance Bank	Buy	825
ICICI Bank	Buy	1150
PNB	Neutral	70
Kotak Mahindra Bank	Neutral	2,000
IDFC First Bank	Buy	100
HDFC Bank	Buy	1,950
SBIN	Buy	700
Bank of Baroda	Buy	240
Axis Bank	Buy	1,175
Bandhan Bank	Neutral	240

Net interest margin

Analysts expect margin pressure to persist for commercial banks owing to rapid increases in benchmark interest rates.

"The cost of funds has gone up with strong credit growth and overall systemic liquidity being sucked out by the RBI in its efforts to bring down inflation," market expert Ajay Bagga told Zeebiz.com.

Bagga expects banks' net interest margins to decline sequentially in the September quarter.

The market veteran sees private banks faring better in maintaining their NIMs than their PSU counterparts.

Here's a summary of top banks' NIMs in the first quarter of the financial year 2023-24:

Bank	Q1 NIM
State Bank of India	3.33
HDFC Bank	4.1
ICICI Bank	4.78
PNB	3.08
Bank of Baroda	3.27
Axis Bank	4.1
Bandhan Bank	7.3
Federal Bank	3.15

The RBI has held the repo rate—or the interest rate at which it lends money to commercial banks—at 6.5 per cent since February, after already increasing it by a total 250 basis points in six revisions since May 2022.

Meanwhile, most analysts expect banks to maintain robust growth in credit as well as deposits.

Analysts at IDBI Capital Markets have pegged credit growth for the banking system to stand at 14-15 per cent for the entire financial year. "During the quarter economic momentum continues, however higher interest rates due to inflationary impact could dampen the momentum. Credit growth expected to remain strong FY24 led by the retail and services sectors," they wrote in a research report.

IDBI Capital has HDFC Bank, ICICI Bank and City Union Bank among its top picks in the space. The brokerage also has Axis Bank, Federal Bank, IndusInd Bank, City Union Bank and DCB Bank in its coverage.

Asset quality

Analysts expect the asset quality—determined as a percentage of non-performing assets, or bad loans, in total loans—to improve for the sector driven by better collection efficiencies and a pickup in the economy.

Meanwhile, here's how the banking basket has fared on Dalal Street in the three-month period:

Stock/index	Change in Q2 (%)
Nifty50	2.3
Nifty Bank	-0.4
IndusInd Bank	3.9
Federal Bank	16.7
AU Small Finance Bank	-5.4
ICICI Bank	1.9
PNB	55.2
Kotak Mahindra Bank	-6
IDFC First Bank	20.3
HDFC Bank	-10.3
SBI	4.5
Bank of Baroda	12.3
Axis Bank	5
Bandhan Bank	3.9

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