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The quarterly earnings season is upon us and there is enough noise to suggest that listed firms will report another stellar bunch of numbers. Of course, the speed will vary within sectors. Among the cacophony (that has engulfed even mid-cap and small-cap), there are some data points that can give investors the right focus. We will look at two with respect to the banking sector.
First: The share of loans bearing interest rate 9 percent and above rose to 56.1 percent by January-March of FY23.
Second: Nearly two-thirds of the bank deposits carry an interest rate below 7 percent as of FY23 end.
These two data points give us the scope of bank earnings this season. Banks charge interest on loans they give out and pay interest on deposits they get. The difference between the two is their earnings. The scope of lending rate increases is low now since much of the transmission of policy rate hikes seems to have happened. Indeed, the share of loans with interest rates of 9 percent and above was 39 percent in the fourth quarter of FY22—it's now 56.1 percent. Any increase of lending rates further would endanger the robust credit growth in play right now. Banks would not want that.
On deposits, there is scope for repricing since two-thirds pay less than 7 percent interest. That means another round of deposit rate hikes are round the corner. As such, the wedge between deposit and loan growth is still wide, and growth in low-cost current and savings account deposits has decelerated. The early updates on business performance for the April-June quarter by select banks show this trend.
The upshot is that there would be pressure on bank earnings and analysts are already flagging a compression in net interest margin. But where incremental earnings look less appealing, the sheer growth of the balance sheet of banks would give them enough mojo to show sustained profits, in some cases even better profits than before. Analysts at Kotak Institutional Equities are pencilling in a 58 percent year-on-year jump in the aggregate net profit of the banks they cover. This is mainly on the back of reduced incremental provisions because the proportion of loans that have stopped paying back, or non-performing assets, is coming down steadily. That means earnings forgone due to bad loans are reducing. Also, strong loan growth would mean a robust net interest income.
Banks have learnt their lessons from the previous bad loan cycle and are exercising caution while underwriting new risk. Therefore, as our Chart of the Day shows, in FY23 banks turned away from risky microfinance loans, but are now coming back. The comeback though is slow and not a headlong chase for returns. This is reflected in other sectors as well, including infrastructure.
For banks, earnings are in the fast lane, but lenders are putting their seatbelts in place this time. They are also looking out for unsuspecting turns lest they are caught in the wrong lane. The most interesting part in the first quarter’s earnings would be whether bank chiefs will shift gears towards more momentum or will they continue to stick to a measured speed. A lot depends on how much of a smooth road they see on deposit growth and how may speed breakers may come their way from external factors.
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