Banks to report healthy bottom line on high credit growth, low credit costs

Benefitting from a rise in lending rates, high credit offtake, and lower credit costs, banks are likely to report about an 18 per cent rise in net interest income (NII) and 23 per cent in profit year-on-year (Y-o-Y) in the first quarter ended September 2023 (Q1FY24).

NII, a key earning source for lenders, may show higher growth in private banks (24.4 per cent Y-o-Y) compared to public sector banks (12.1 per cent Y-o-Y) in Q2FY24.

Nitin Aggarwal, Research Analyst, Motilal Oswal said while the focus is on NII, there will be pressure on interest margins due to aspects like repricing of deposits.

In the current interest rate cycle, banks benefited from an immediate increase in lending rates. Later, a rise in deposit rates came with a lag, creating pressure on margins.

The Net Interest Margin (NIM) of banks had witnessed an improvement of 36 basis points (bps) Y-o-Y, reaching 3.27 per cent in Q1FY24 due to faster repricing of loans, whereas deposit rates have not yet fully reflected the increased interest rates, according to CARE Ratings.

Higher growth in bank credit has pushed up interest income. Reserve Bank of India data showed bank loans grew by 15.27 per cent Y-o-Y growth in advances to Rs 145.58 trillion till September 22, 2023, and deposits expanded by 12.34 per cent growth on Y-o-Y basis to Rs 191.33 trillion till September 22, 2023.

As for other income, it is not likely to be a driver of revenues for the quarter under review (Q2FY24). At the sectoral level, there may not be treasury gains due to the hardening of yield on bonds.

“Banks were prepared for it, limiting the dent in treasury profits,” said a senior bank executive.

Turning to the asset quality profile, it remains robust with fewer slippages on enhanced monitoring and timely steps to address any stress. The credit costs, amount set aside for non-performing assets remain under control, bankers said.

Motilal Oswal in a preview note said slippages are likely to remain under control, which, along with higher recoveries, should further aid the continuous improvement in asset quality. Restructured books are likely to moderate further, while a low Special account book will keep credit costs in check.

Bankers pointed out the payout from the resolution of SREI twin finance companies and IL&FS Tamil Nadu Power projects of over Rs 5,000 crore would provide a marginal benefit, especially to public sector banks as they would prioritise building provision to reduce Net NPAs over profits.