Banking sector Q3 results preview: NIM likely to remain weak for top lenders with minor improvement in asset quality

According to IDBI Capital Markets, although economic momentum likely continued in the October-December period, the RBI’s regulatory action on unsecured portfolios could play spoilsport for the BFSI sector as a whole.

HDFC Bank, ICICI Bank and Axis Bank are scheduled to report their Q3 results between January 16 and January 23. SBI and Bank of Baroda are yet to announce the dates on which their boards will consider their quarterly numbers. | Image: Reuters

With India Inc all set to enter a new earnings season, all eyes will be on the crucial banking space, which carries a weight of about 30 per cent in the headline Nifty50 index. Analysts expect margins in the sector to remain under pressure with low, double-digit credit growth, and steady improvement in asset quality.

Brokerage Prabhudas Lilladher expects the three largest private lenders in the country, HDFC Bank, ICICI Bank and Axis Bank, to register growth of 3-11.5 per cent in net interest income (NII) on a year-on-year basis for the December quarter. While it expects State Bank of India (SBI), the country’s largest PSU lender, to clock growth of 3.7 per cent, it estimates Bank of Baroda’s NII to remain unchanged.

Out of the five lenders, the brokerage expects HDFC Bank and ICICI Bank to register year-on-year profit growth of 0.2 per cent and 17.3 per cent respectively. It expects the remaining three, SBI, Bank of Baroda and Axis Bank, to face contraction of 15.8 per cent, 8.2 per cent and 4.1 per cent respectively.

TRENDING NOW

Bank	Prabhudas Lilladher Q3 FY24 estimate vs Q3 FY23 (%)
Bank	PAT	NII	NIM
SBI	-15.8	-0.1	-0.21
Bank of Baroda	-8.2	-0.1	-0.42
HDFC Bank	0.2	3	-0.5
ICICI Bank	17.3	11.5	-0.17
Axis Bank	-4.1	0	-0.17
Source: Prabhudas Lilladher

Brokerage IDBI Capital Markets is of the view that although economic momentum likely continued in the October-December period, the RBI’s regulatory action on unsecured portfolios could play spoilsport for the banking, financial services and insurance sector (BFSI) sector.

ALSO READ: After RBI tightens norms, SBI may see moderation in unsecured lending portfolio

“Credit growth expected to remain strong FY24 led by retail and services sector,” wrote analysts at IDBI Capital in a report dated January 5.

“Net interest margins (NIMs) continue to remain under pressure albeit at slower pace during Q3FY24 led by repricing of liabilities for banks. System credit growth remains healthy at 16 per cent YoY (15th Dec’23) led by retail and services. The retail portfolio led by demand for home loans and vehicle loans while credit guarantee scheme, working capital loans for better rated corporates as well as gold loans continue to support. We expect banking system credit to grow in the range of 14-15 per cent for FY24. However, we need to watch for impact of increased risk weight changes in personal loans, credit cards and NBFC on credit growth,” according to IDBI Capital, which has HDFC Bank, ICICI Bank and City Union Bank as its top picks in the banking space.

“Asset quality should continue to improve as slippages (are) expected to remain under control. Further, we expect credit cost to normalise going forward,” it added.

While Prabhudas Lilladher analysts expect State Bank of India's net interest margin (NIM) to contract by a year-on-year 21 basis points to 3.04 per cent, they peg Bank of Baroda's to contract by 42 basis points to 3.08 per cent.

Among the private sector lenders, the brokerage’s analysts estimate HDFC Bank and ICICI Bank NIMs to shrink by 50 basis points to 3.74 per cent and by 17 basis points to 4.69 per cent respectively.

Prabhudas Lilladher has 10 banks in its coverage universe, whereas IDBI Capital Markets has seven:

Stock	Rating	Target (in rupees per share)
Axis Bank	Buy	1,250
HDFC Bank	Buy	2,025
ICICI Bank	Buy	1,280
IndusInd Bank	Buy	1,620
Kotak Mahindra Bank	Buy	2,250
Federal Bank	Buy	180
DCB Bank	Buy	160
City Union Bank	Accumulate	160
Bank of Baroda	Buy	240
State Bank of India	Buy	770
Source: Prabhudas Lilladher

Stock	Rating	Target (in rupees per share)
Axis Bank	BUY	1,280
DCB Bank	BUY	150
Federal Bank	BUY	195
HDFC Bank	BUY	1,970
IndusInd Bank	BUY	1,675
City Union Bank	BUY	170
ICICI Bank	BUY	1,240
Repco Home Fin.	BUY	515
Manappuram Fin.	BUY	205
Muthoot Fin.	HOLD	1,300
Cholamandalam Inv.	HOLD	1,150
Mahindra Finance	BUY	330
Sundaram Finance	BUY	3,870
Shriram Finance	BUY	2,230
Source: IDBI Capital Markets

Banks under Prabhudas Lilladher’s coverage are expected to witness a weak quarter, with a sequential decline in core profitability, mainly caused by a reduction in net interest margins (NIMs), wrote analysts at the brokerage in a report dated January 8. It expects core earnings of the banks to fall by 7.3 per cent in comparison to the September quarter.

The brokerage expects the net profit of the 10 banks under its coverage to decline 2.4 per cent and 8.7 per cent on year-on-year and quarter-on-quarter bases, respectively. It has ICICI Bank and HDFC Bank as its top picks, citing earnings quality and an expected bounce-back in margin in the fiscal second half, respectively.

According to Axis Securities, which has identified ICICI Bank, SBI and HDFC Bank as "positive result plays", deposit growth continues to lag credit growth in the banking space, given the systemic increase of around 14 per cent in deposits (13 per cent barring HDFC Bank) largely driven by term deposits.

The CASA ratio continues to take a beating with term deposits registering faster growth, analysts at the brokerage pointed out in a report dated January 9.

Asset quality

The brokerage expects the five lenders’ net non-performing assets (NNPAs) to decrease by up to five basis points sequentially.

Bank	Q3 FY24 NNPA estimate	Q2 FY24 NNPA
SBI	0.62%	0.64%
Bank of Baroda	0.71%	0.76%
HDFC Bank	0.34%	0.35%
ICICI Bank	0.43%	0.46%
Axis Bank	0.36%	0.38%
Source: Prabhudas Lilladher

How the banking space has performed on Dalal Street

Headline index Nifty50 grew 10.7 per cent in the December quarter, outperforming banking gauge Nifty Bank’s 8.3 per cent rise. Here’s how SBI, Bank of Baroda, HDFC Bank, ICICI Bank and Axis Bank shares fared:

Stock	Q3 return
PNB	19.4
HDFCBANK	12
INDUSINDBK	11.9
AUBANK	10.3
BANKBARODA	8.1
SBIN	7.2
AXISBANK	6.4
ICICIBANK	4.7
BANDHANBNK	-4
IDFCFIRSTB	-7

The Nifty rallied 20 per cent in 2023—its best yearly performance since 2021 and second-best since 2017—while the banking index rose 12.3 per cent.
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