Bank Earnings: Easing Asset Stress to Boost Bank Earnings

Calcutta: Indian banks are expected to post strong profits in the second quarter of FY23, higher than the sector has experienced in the previous two periods, as tensions on asset quality are expected to ease, leading to a strong lower credit costs. In addition, net interest margins are expected to improve, supported by healthy credit growth and provision reversals to boost net income, banking industry analysts said.

Treasury losses could also remain limited, as overall bond yields were slightly lower than in the first quarter.

Earnings should also be healthy for all banks across the spectrum, unlike recent quarters where the recovery has been strongest for large private banks.

“We expect undercover banks to see earnings growth of approximately 56% year-over-year, driven by a 26% increase in operating profit. % loan growth,” Kotak Institutional Equities said. in a report.

Compared to the previous quarter, the banks’ net interest margin should improve, as all variable rate loans are revised to reflect the new key rates. “Furthermore, unlike the previous quarter, we have no cash loss concerns this quarter as overall returns were slightly lower than in 1QFY23,” the report said. The research predicted a roughly 53% year-on-year increase in net profit for private banks and 26% for public sector banks. “Earnings are expected to remain healthy, driven by higher business growth, NIM’s expansion and a sustained reduction in the cost of credit,” Motilal Oswal’s research report said.

It expects the quality of banks’ assets and the cost of credit to remain under control. “We believe that non-restructuring slippages will remain contained which, together with healthy turnarounds and upgrades, will result in continued improvement in asset quality. While the performance of the restructured portfolio and ECLGS emergency line of credit guarantee) will be closely watched, we expect the cost of credit to remain under control, while the balance sheet strengthens further,” he said.

Credit growth accelerated to 16.2% year-on-year (same as September 9), ignoring macro concerns.

Loan growth is now much more diversified and broad, with improving signs of business growth driven by demand for working capital, while retail growth continues to be robust, driven by strong demand for underlying consumption, said Emkay Global Financial Services. Within the personal segment, real estate credit remains the main driver of growth, while personal cards/loans, microfinance and even the car financing segment are experiencing a strong rebound.

“We expect the overall gross non-performing asset ratio to decline 29 basis points quarter-over-quarter to 4.8% in Q2FY23, driven by lower slippages, better retail recovery trends and an increase in write-offs as banks sit on excess provisions.That said, the SME sector remains vulnerable to macro risks, which could therefore lead to a greater flow of stress. high from the restructured pool,” Emkay said.

Within companies, lump-sum resolutions were limited in the second quarter, but there are visible signs of a resumption of resolutions through bankruptcy courts and elsewhere, primarily in the energy and infrastructure sector.

“There is no significant recovery in the corporate sector, but we are likely to see better recovery trends for smaller loans that defaulted after Covid,” the Kotak report said.