Banks Q2 earnings: Top five things to watch out for

As the July-September 2023 quarter earnings for the banking sector kick off in the mid of October, industry experts highlighted there are some elements which need a watchful eye.

Indian banks have shown strong growth in the last few quarters aided mainly by record profit and healthy asset quality. Be it public or private sector banks, they have recorded overall growth in all segments.

As the July-September 2023 quarter earnings for the banking sector kick off in the middle of October, industry experts highlighted there are some elements which need a watchful eye.

Asset quality

Most analysts and banking experts Moneycontrol spoke to said the asset quality of banks is likely to remain stable in the July-September 2023 quarter due to less stress on the assets of banks.

However, experts pointed out some stress areas which need to be watched such as the agricultural loan segment due to weak monsoon during Q2.

Also read: Banks’ asset quality to improve in FY24 on low net slippages and write-offs, says ICRA

“The headline asset-quality metrics for the sector and most banks at large continue to remain comfortable, however, we will be watchful of any stress in the agricultural loan segment because of weak monsoon and expectations of farm loan waivers in the run-up to elections,” said Aashay Choksey, Vice President & Sector Head- Financial Sector Ratings, ICRA Ltd.

Further, he added that banks are likely to continue to report largely satisfactory asset quality numbers in the second quarter of the current financial year.

Treasury income

Banks are likely to report moderation in the treasury income in the July-September quarter due to rising yield on the government bonds, analysts said.

“At a sector level, there will be a moderation in treasury income both on sequential as well as year-on-year basis as the yields moved higher in Q2FY2024 compared to a declining trend in Q2FY2023 as well as Q1FY2024,” Choksey from ICRA said.

In July-September 2023, yield on the government securities moved up 9-10 basis points due to uncertainty related to higher inflation and other international as well as domestic factors.

However, the upward movement was capped after the announcement of Indian government bonds inclusion in JP Morgan Chase & Co’s key emerging-market index.

In the last week of September, JPMorgan Chase & Co said it will add Indian government bonds to its benchmark emerging-market index (GBI-EM) starting June 28, 2024.

The decision has significant implications for India's debt market and global investors, with India's weight in the index limited to a maximum of 10 percent and eligible government bonds valued at $330 billion, analysts said.

Soon after the inclusion was announced, the yield on the 10-year benchmark bond eased to 7.0930 percent at the open as against a 7.1443 percent close in the previous trading session.

Currently, the yield on the 10-year benchmark Indian government bond is 7.3696 percent, which is sharply higher compared to the announcement of inclusion day.

Retail and personal loan growth

In the last few quarters, banks have been aggressively growing their retail and personal loan portfolios. This can be seen in the August 2023 sectoral credit data released by the central bank.

Credit to the personal loan portfolio grew by 30.8 percent, compared to 19.4 percent growth on a year-on-year basis, the data showed. The total credit to the segment was Rs 47.70 lakh crore in August 2023, compared to Rs 36.47 lakh crore in August 2022.

Also read: Bank credit to personal loan jumps 30.8% in August 2023, shows RBI data

Additionally, the regulator has been cautioning banks on the risks associated with the aggressive retail and personal loan growth. In the latest of the warnings, RBI Governor Shaktikanta Das while announcing the Monetary Policy Committee’s (MPC) decisions on October 6 said that RBI is closely monitoring certain components of personal loans which are recording very high growth.

“Certain components of personal loans which are recording very high growth are being closely monitored by RBI for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest,” said Das.

But banks are taking cautious moves and further plan to go aggressive in the segment. Shanti Ekambaram, Wholetime Director, Kotak Mahindra Bank, in an interview with Moneycontrol, had said that the bank plans to grow its unsecured business in the mid-teens. Similarly, Shyam Srinivasan, MD and CEO, Federal Bank, is also looking at growing the bank’s unsecured portfolio.

Net interest margins

Rating agency CRISIL said on June 13 said the banking sector is expected to see a compression of 10-20 basis points (bps) in net interest margins (NIMs), to 3-3.1 percent in the current fiscal as the deposit rate hikes play out.

Krishnan Sitaraman, Senior Director and Chief Ratings Officer, CRISIL Ratings, said that NIMs for banks have peaked.

“NIMs for the banking sector have peaked. Competition for deposits has driven banks to hike rates since October 2022, and they could increase further,” Sitaraman said.

For example, in the April-June FY24 quarter, private sector lender Bandhan Bank recorded flat NIM at 7.3 percent. Other than Bandhan Bank, many public sector banks saw a sequential drop in their NIMs for Q1FY24. For instance, Bank of Baroda saw a drop of 26 basis points (bps) in its NIM to 3.27 percent.

One basis point is one-hundredth of a percentage point.

Also read: Debt recovery remains a challenge in India, says Deepak Parekh

Here, analysts said that going ahead, how banks work on their deposit rates will show NIM movement in the sector.

“We can see NIM compression for banks in Q3 of FY24. We may have to see how the picture plays out in the next quarters,” said Saurabh Bhalerao, Associate Director, BFSI, CareEdge.

Recoveries on write-offs

The latest data available with the RBI showed that scheduled commercial banks have done an aggregate recovery of Rs 10.16 lakh crore during the last nine financial years.

Alongside this, banks have, in the past quarter, written off significant bad loans. For example, public sector lender Central Bank of India wrote off Rs 7,856 crore of loans in April-June 2023. Another example includes the private sector lender ICICI Bank, which wrote off loans worth Rs 1,169 crore in the same period.

Also read: Recovery continues to be less in IBC cases, data from banks, CareEdge show

Here, experts said that recoveries have been slow for banks as the debt recovery process is delayed at various stages of the process.

“The efficiency of the process is often caught between the demands for a quick resolution, stakeholders’ choice, and the preservation of asset value," said Sonam Chandwani, Managing Partner, KS Legal and Associates.