Banks' net profit likely to grow by 16.7% in Q3 due to high credit offtake

High credit offtake, lower credit cost to support bottomline

Gaining from high credit off-take and lower credit costs, banks are likely to post 16.7 per cent year-on-year (Y-o-Y) growth in net profit during the third quarter of the financial year ended December 2023 (Q3 FY24).
 

However, sequentially, net profit may shrink by 2.4 per cent over the second quarter ended September 2023 (Q2), according to Bloomberg’s estimates.

Private sector lenders as well as public sector banks could witness sequential contraction in net profits. Sanjay Agarwal, director, CARE Ratings, said banks are benefiting from the high volume of loan off-take.

“Hence, the growth in the bottom line is steady (Y-o-Y basis) even while net interest margins (NIMs) are under pressure. The impact of margin pressure is visible on profits on a sequential basis,” he said.
 

 

Net interest income (NII), a key earning source for lenders, is expected to rise by 11.2 per cent Y-o-Y in Q3. However, sequentially, the growth could be subdued at 2.3 per cent, reflecting pressure from rising cost of deposits and NIMs.

The decline in share of low-cost funds — current account and savings account (CASA) — in total deposits continued in the third quarter as customers shifted funds from CASA to term deposits, bankers said.

“CASA ratios are likely to moderate further across banks as deposit churn towards higher rate-term deposits continue. We expect systemic NIMs to moderate further though the pace of moderation is likely to decline versus Q2 FY24,” brokerage Motilal Oswal said.

Credit in the banking system has expanded at a pace of 20.2 per cent Y-o-Y till the middle of December 2023, up from 17.4 per cent a year ago. Bank deposits raised also gathered pace with 14 per cent Y-o-Y growth by mid December 2023. It is up from 9.4 per cent a year ago, according to Reserve Bank of India (RBI) data.

Bankers said even with improved pace of deposits mobilisation, the gap between growth rate of deposits and advances remains significant. Banks have hiked term deposits to attract and retain deposits.

The weighted average rates on outstanding domestic term deposits rose to 6.79 per cent in November 2023 from 5.62 per cent a year ago.

The weighted average lending rates on outstanding loans rose to 9.78 per cent in November 2023 from 9.42 per cent a year ago, RBI data showed.

Domestic brokerage Centrum said banks are poised to achieve another quarter of robust advances growth.

However, intense competition on the deposits front persists, raising the cost of funds.

Bank gains from treasury income are likely to be modest as bond yields stayed elevated at the close of December 2023 over the previous quarter. On the expenses side, continued technology spends and investments in branch expansion/business growth would affect operating expenditure run-rate.

Shortfall on residual wage and pension provisioning would be important to assess earnings growth, according to Motilal Oswal’s note.

With a healthy asset quality and control on incremental slippages, the credit costs have remained low.

However, in this quarter, RBI flagged concerns over the sharp rise in unsecured credit and loans to non-banking financial companies (NBFCs) and hiked the risk weights for such exposure. This would make banks set aside more capital for lending and support to these segments.