Q2 result preview: Bank PAT growth may slow to 10% on margin pressure

Moderating credit growth, rising deposit cost likely to weigh on net interest income

Net profit growth of listed banks for the quarter ended September 30 (Q2FY25) is likely to moderate to 10 per cent year-on-year (Y-o-Y) due to pressure on margins, according to analysts’ estimates. They had posted over 33 per cent Y-o-Y growth in their net profit in Q2FY24 on the back of higher credit offtake and lower credit costs, according to Business Standard analysis.

Net profit, however, may shrink by 1 per cent sequentially, according to analysts’ estimates for 19 banks sourced from Bloomberg.

The estimates show that banks' net interest income (NII)— revenues from interest minus interest expenses — may grow by 8.8 per cent Y-o-Y. However, sequentially, NII may grow by just 1.7 per cent over the June 2024 quarter (Q1FY25) due to rising deposit costs.

Anil Gupta, co-group head (financial sector ratings) at ICRA, said NII would be under pressure and that net interest margins (NIMs) could decline due to moderating loan growth and rising deposit costs.

The cost of liabilities (deposits) has been rising, particularly in the 1-2 year buckets, while lending rates have stabilised. This has continued to put pressure on spreads and NIMs, senior bank executives said.

According to CareEdge Ratings data for Q1FY25, NIMs were down by 13 basis points (bps) Y-o-Y and dropped sequentially by 4 bps to 2.94 per cent. The spread between outstanding lending and deposit rates stood at 2.96 per cent as of August, decreasing marginally by 1 bps compared to July 2024.

Reserve Bank of India (RBI) data shows credit growth for banks moderated to 13 per cent Y-o-Y (as on September 20), which is lower than the 20 per cent growth a year ago and 17.4 per cent in June 2024. This figure includes the impact of the HDFC-HDFC Bank merger.

The moderation in loan growth is partly due to a slowdown in unsecured credit, a high-yielding product, Gupta of ICRA said.

The RBI has cautioned banks about the surge in unsecured credit, the high credit-deposit growth gap, and has asked bank boards to rework their business plans.

Domestic brokerage Motilal Oswal Securities said asset quality remained stable for public sector and large private banks. Credit quality in this cycle has been robust for most banks. However, some pockets, such as microcredit and small-ticket unsecured loans, are showing signs of stress.

While stress is rising incrementally, it may not be reflected in non-performing assets, as some lenders are resorting to higher write-offs after making accelerated provisions for slippages. Bankers said the effect would be seen in the form of higher credit costs.

After their recent channel checks and gathering feedback from branch visits, domestic brokerage Centrum Broking has increased loan loss provision estimates for banks for FY25, particularly for those with a higher proportion of unsecured lending.