With volatility history, banks to see stability

Mumbai: After a long period of volatility, Indian banks are expected to see momentum in business with earnings growth expected to gain traction in the March quarter.

The impact of the third Covid wave is now negligible, boosting the asset quality outlook for lenders, although the performance of the restructured book remains a key monitorable.

"The March quarter will likely be characterised by stability and normalisation after several quarters of volatility," said Kunal Shah, analyst, ICICI securities. "Net interest margins, slippages and credit cost are likely to remain stable and recoveries and upgrades will outpace fresh slippages."

ICICI Securities estimates a nearly 20% year-on-year growth in net interest income and 6% operating profit growth during the fourth quarter, while bank credit is likely to grow 9% annually. According to Motilal Oswal, banks will deliver pre-provision operating profit growth of 7% while profits could rise by 52%. "Our estimates indicate continued traction in earnings over FY22-FY23 even as we expect treasury income to remain modest," said Nitin Aggarwal, analyst, Motilal Oswal.

"We project private and PSU banks to report earnings growth of 30% and 36% in FY23, respectively. Overall, our banking coverage universe is anticipated to report earnings growth of 33% in FY23, after posting strong growth of 46% over FY22."

Banks are expected to report moderation in slippages, which along with healthy recoveries and upgrades would result in an overall improvement in asset quality, but the retail and MSME segments could experience some asset quality deterioration. The performance of the restructured book would be important to assess the credit cost trajectory.

Lenders are also periodically assessing the geopolitical situation, but there seems to be no direct impact for now. The rise in bond yield is likely to weigh on treasury gains but will be partially offset by lower retirement benefit provisioning. According to ICRA, the gross non-performing advances are expected to decline to 5.6-5.7% by March 2023 as against an estimate of 6.2-6.3% by March 2022 while the net non-performing advances will decline to 1.7-1.8% as against an estimate of 2.0% by March 2022.

Credit and other provisions are estimated to decline to 1.3-1.4% of advances in FY2023 as against an estimated 1.7-1.8% in FY2022. While there are positives, the deposit growth is expected to slow down to 7.3-7.9% in FY2023.

"For the sector, challenges emanate from the performance of restructured loan book which poses uncertainty to asset quality as these loans exit moratorium," said Anil Gupta, vice-president, ICRA. "Also, the Russia-Ukraine conflict poses macro-economic challenges related to cost inflation, higher interest rates and exchange rate volatility, this could pressurise asset quality. Elevated levels of overdue loans in retail and MSME segments post-Covid also remain a concern."