Banks are set to report a strong recovery from the pandemic’s impact in the financial year 2022 with an improvement in key metrics in the fourth quarter. Analysts expect the lenders to report double-digit net profit growth in the three months ended March, marked by a sequential recovery in business.
That said, the profitability improvement would be driven more by lower provisions and less by credit growth as the pile of stressed loans steadily comes down with the receding pandemic.
“We expect a strong quarter-on-quarter earnings growth for banks in 4QFY22, but driven solely by lower provisions,” analysts at Kotak Institutional Equities wrote in a note.
Bank earnings are expected to grow 90 percent year-on-year in the period, according to Kotak. In the first three quarters of the financial year, banks reported an improvement in bad-loan ratios and lowered provisions although the second and the third wave of COVID-19 caused some volatility in the trend.
As a result, credit costs (loan-loss provisioning as a percentage of advances) may come down. “We expect credit cost to be stable, if not descend, in Q4FY22E and likely normalise further in FY23E,” wrote analysts at ICICI Securities Ltd in a note.
For instance, analysts expect credit costs at State Bank of India (SBI) to slip to 1.3 percent from 1.8 percent a year ago. Those for private-sector lenders could fall in the range of 0.20-0.50 percentage points.
Most of the stress has come under control with collection efficiencies improving. Restructured loans that consisted of retail and small business loans too may decline.
Revenue trajectory modest
Banks are expected to report modest growth in both their core interest income and other income. Net interest income (NII) is expected to remain subdued owing to weak credit growth.
To be sure, loan growth improved to over 8 percent in the fourth quarter, data from the Reserve Bank of India shows. Even so, core income growth would be visibly strong only for select lenders, analysts said. Non-interest income growth may moderate because rising bond yields would hit treasury gains.
Growth in loans to small and medium enterprises is likely to have outpaced corporate credit, which is expected to have stabilised during the quarter. Retail loans would continue to drive overall credit growth, analysts at Motilal Oswal Financial Services Ltd wrote in a note.
“Disbursement growth across several retail products has surpassed the pre-COVID levels, while the Corporate segment too witnessed a revival with a focus on high-rated corporates primarily for working capital needs,” the Motilal Oswal note said.
Future imperfect
More than the earnings for FY22, investors must look for the outlook that banks’ management teams project for the next year. The negative impact of global geopolitical tensions on corporate borrowers needs to be watched.
As such, the turn in the interest rate cycle augurs well for the net interest margins of banks. For the fourth quarter, too, banks may report stable margins, or a slight improvement, on the back of a pick-up in corporate loan growth.
Kotak analysts said prospects of credit growth are still unclear. Most securities firms are betting on large banks such as State Bank of India, ICICI Bank, HDFC Bank and Axis Bank given the expected expansion in their returns on equity.
Shares of State Bank of India have outperformed the broad market so far this year by a huge margin, while those of large private sector lenders have lagged behind.
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