Easing asset stress to boost bank profits

Kolkata: Indian banks are expected to report robust earnings in the second quarter of FY23, better than what the sector witnessed in the previous two periods, as asset quality stress is likely to ease, leading to a sharp fall in credit costs. Besides, net interest margins are expected to improve backed by healthy credit growth and provision write-backs to boost net profit numbers, banking sector analysts said.

Treasury losses may also remain restricted as overall bonds yields were marginally lower than in the first quarter.

The earnings are also expected to be healthy for all banks across the spectrum, unlike the past few quarters where the recovery was strongest for the large private banks.


"We expect banks under coverage to report about 56% year-on-year earnings growth, led by a 26% rise in operating profit. We expect net interest income growth to bounce back at 17% on-year on the back of nearly 15% loan growth," Kotak Institutional Equities said in a report.

As compared to the previous quarter, banks' net interest margin is expected to improve as all floating rate loans get repriced to reflect the new policy rates. "In addition, unlike the previous quarter, we don't have any concerns about treasury losses as well this quarter as overall yields have been marginally lower than in 1QFY23," the report said.

Motilal Oswal Research has projected about a 53% year-on-year rise in net profit for private banks and a 26% rise for public sector banks.

"Earnings are likely to remain healthy, led by higher business growth, NIM expansion and a sustained reduction in credit cost," Motilal Oswal's research report said.

It expects banks' asset quality and credit cost to remain controlled. "We estimate slippages excluding of restructuring to remain controlled, which along with healthy recoveries and upgrades will result in a continuous improvement in asset quality. While the performance of restructured and ECLGS (emergency credit line guarantee scheme) book will be closely monitored, we expect credit cost to remain under control, while the balance sheet strengthens further," it said.

Credit growth accelerated to 16.2% year on year (as on September 9), shrugging off macro concerns.

Loan growth is now much more diversified and broad-based, with improving signs of corporate growth led by working capital demand, while retail growth continues to be robust led by the strong underlying consumption demand, Emkay Global Financial Services said. Within the retail segment, mortgages remain the key growth driver, while cards/personal loans, microfinance and even the vehicle financing segment have seen a strong rebound.

"We expect the overall gross non-performing assets ratio to decline by 29 basis points quarter on quarter to 4.8% in Q2FY23, led by lower slippages, better recovery trends in retail and higher write-offs with banks sitting on excess provisions. That said, the SME sector remains vulnerable to macro-risks, which could thus lead to higher stress flow from the restructured pool," Emkay said.

Within corporate, lumpy resolutions have been limited in Q2 but there are visible signs of a pick-up in resolution via bankruptcy courts and otherwise, mainly in the power and infra sector.

"There is no large recovery in the corporate sector, but we are likely to see better recovery trends in small-ticket loans that defaulted post-Covid," the Kotak report said.