Bank results Q1 preview: High profit growth likely but watch out for treasury hit

CASA deposits would keep banks’ cost of funds low in a rising interest-rate environment even as lenders pass on policy rate hikes to borrowers through lending-rate increases.

“CASA ratio has been improving in the last few quarters for most banks along with robust deposit growth overall. That trend is gradually changing as systemic excess liquidity gradually declines,” analysts at Kotak Institutional Equities wrote in a note.

Double-digit loan growth and steady margins would lift the net interest income of banks.

The first quarter of the current fiscal year will also be one of the best in terms of banks’ asset quality. Most lenders have trimmed their pile of corporate bad loans, and incremental stress is expected to remain low.

That said, small business loans may show some incipient signs of stress given the increase in input costs for some sectors.

Also read: NBFCs Results Preview: Q1 will sparkle but look out for trouble

Analysts expect overall bad-loan ratios to improve for banks. As such, gross non-performing assets are down to a six-year low of 5.9 percent of the loan book for the banking sector from 7.4 percent in FY21. Most banks have also reported an improvement in the performance of their restructured loan book.

Core interest income, bond portfolio 

Since loss of income through non-performing loans would reduce, the pressure on core interest income is gone. This would result in an additional boost to net interest income. The upshot is that banks’ bottomline would be largely driven by their core business.

Fee income is also expected to show robust growth and aid in non-interest income growth. A key headwind here is the Mark-to-Market (MTM) losses expected on the bond portfolio of banks. Given a sharp rise in bond yields, most banks are expected to report a sharp increase in treasury losses. For public sector banks, non-interest income may fall sharply sequentially due to such losses.

“MTM losses would be material for PSBs, given the sharp rise in yields—of both G-Secs and corporate,” analysts at Edelweiss Securities wrote in a preview note.

Also read: PSU banks duck market volatility, improving performance keeps analysts, investors bullish

Public, private-sector lenders 

Even big lenders may report a dent in their non-interest income. Kotak analysts expect treasury losses to hurt other income significantly. For instance, SBI’s treasury loss could be more than twice its profit before tax. To be sure, provisions made against mark-to-market losses could give some support.

Among banks, analysts expect outsized improvement from public sector lenders on asset quality. This explains the sharp rise in shares of PSU banks in the past few weeks despite the broad market being weak. State Bank of India, Bank of Baroda and Canara Bank are expected to report a sharp improvement in most metrics.

Among private sector banks, HDFC Bank, ICICI Bank and Axis Bank feature among analyst preferences. The three lenders have an advantage on cost of funds due to higher CASA deposit levels compared with peers. Loan growth has also been above industry levels for these lenders, which would aid core income. ​