Dull loan growth, margin pressure, credit cost to weigh on bank earnings

The country's largest lender State Bank of India (SBI) is expected to report lacklustre results for the first quarter ended June, weighed down by a dip in margins and sluggish loan growth and fee income, with analyst estimates ranging from a 3% decline in profits to a 4.8% growth.

Leading private lender HDFC Bank is seen posting a 4% to 6.3% rise in net profit, driven by a strong rise in core operating income, even as muted loan growth, margin compression, seasonally weak fee income, and elevated credit costs are expected to impact most banks, according to estimates from five brokerage houses.

"We expect SBI to post muted loan and deposit growth with net interest margins (NIMs) declining by 13 basis points sequentially," Ankit Bhilani, analyst at Nomura, said in a note. "Credit cost is expected to remain contained at 0.5%." SBI's domestic NIM was at 3.35% in the first quarter of FY25.


HDFC Bank's loan book rose 6.7% year-on-year in the June quarter to ₹26.53 lakh crore while deposits grew 16% to 27.64 lakh crore, it informed exchanges last week.

"If the gap in loan and deposit growth has been offset by a rundown in borrowings, the margin trajectory (of HDFC Bank) could turn out to be healthier relative to peers-especially if the bank has continued to run down low-yielding corporate credit," said Pranav Gundlapalle, head of India financials at Bernstein.

While across the sector, banks are expected to report weak earnings for the June quarter, strong treasury gains, aided by a 25-basis point decline in 10-year G-sec yields, are expected to offer some cushion, according to Nomura.

In the PSU banking space, Motilal Oswal projects modest profit after tax growth of 4.8% year-on-year, reflecting a decline in NIMs, normalised operating expenses, and higher provisions following the one-time reversal of provisioning on security receipts in Q4. Net interest income (NII) is also expected to remain flat year-on-year.

Private sector banks may see a 2.5% decline in profit after tax, with pre-provision operating profit (PPOP) expected to grow only 4.2% year-on-year, according to the brokerage. NII for the sector is likely to grow just 3.1%, amid rising pressure on margins following the 100 basis points cut in the repo rate this year. Analysts expect NIMs across the sector to decline by 12 to 25 basis points.

System-wide loan growth moderated to 10.6% year-on-year in the June quarter, with the MSME segment being the only outlier. Deposit growth is expected to remain subdued, ranging between 0% and 16% year-on-year.

On the asset quality front, fresh slippages in the first quarter are likely to remain elevated for banks with significant exposure to unsecured retail and microfinance segments.

"NPA formation should inch up due to seasonality from the agri sector," said Bunty Chawla, analyst at IDBI Capital.