Banks may witness operational stability, macro uncertainty in Q4

Mumbai: The fourth quarter of the past year is likely to be steady for banks, with modest growth in earnings and revenue, stable to slightly weaker NIM, lower treasury gains, and benign asset quality. Credit costs are expected to ease due to lower slippages.

Post-results commentary may remain cautious amid geopolitical uncertainty, deposit constraints and mid-corporate risks. Risk-reward appears favorable in large banks, supported mainly by inexpensive valuations currently, feel experts.

While they see earnings growth of 2 per cent, led by 1 revenue growth, they also expect NII to grow 6and non-interest income to decline 10 per cent.

Analysts also expect private banks to report 14 per cent earnings growth and PSU banks to report 11 per cent earnings decline and see NIM to be stable or marginally lower Quarter on Quarter (QoQ). It will be factoring in the re-pricing of retail deposits, but partly offset by a rise in wholesale deposits.

Lower treasury gains are expected. We are building in lower credit costs, factoring in lower slippages for the sector, while we expect recoveries from bad loans to keep credit costs lower for PSU banks. We expect banks that were impacted by microfinance and lower-ticket unsecured loans to report a healthy reduction in credit costs, says a report by Kotak Institutional Research.

Areas dominating investor discussions post-February, amid rising global geopolitical tensions include potential supply-chain disruptions and second-order asset quality implications,sustainability of credit demand as lenders turn cautious after a period of optimism and emphasis on deposit and its quality.

While valid, these concerns are likely to elicit inconclusive commentary. Analysts see lenders operating with a dual-track strategy. Another month of tensions could see banks prioritize balance-sheet protection. Conversely, if conditions stabilize, growth could remain intact but anchored by deposit accretion. NIM sensitivities will vary as lenders look at loan growth and NIM. Near-term asset quality commentary could remain benign, with system risk materially lower than FY24 and FY20.They find the risk-reward ratio favorable in large banks at this stage, but they do acknowledge that the investment thesis is still inconclusive as of now. Valuations are inexpensive and remain the primary argument at this stage. PSU banks still have the headroom to compete with similar asset-quality outcomes.

Talking to Bizz Buzz, MV Hariharan, former treasury head, State Bank of India says, “The most likely scenarios are the evolving turbulence and consequent shifts in alliances reflecting self-interests, every country's economy will be dictated by its domestic agenda focused on maintaining the fragile supply chains, fossil fuels availability in the ‘medium term’ to grab all the attention and direction of policy making..for the foreseeable future and in view of the forgoing developments, money and its deployment and returns thereon will be impacted by very short time lines.”