Banks to report soft Q4 earnings due to weak credit growth, lower NIM

Fresh slippages in July-September 2024 quarter are expected to be stable sequentially.

In the fortnight ended September 20, banks loan growth moderated to 13 per cent from a 16 per cent as of end March 2024. (Representational)

Banks are likely to deliver a softer growth in the quarter ended September 2024, led by slower credit growth and moderation in net interest margins (NIM).

Net interest margin – the difference between the interest earned and the interest paid by a bank – are expected to decline by 2-10 basis points sequentially given pressure on cost of funds resulting from repricing of deposits, analysts said.

“Banks are expected to deliver yet another soft quarter with modest earnings growth in Q2 FY25. Pre-provision operating profit (PPoP) growth will remain muted, led by weak Net Interest Income (NII) growth (due to lower NIMs and slower loan growth),” according to a Sharekhan Research Report. It expects banks in its coverage universe to report a nearly 10 per cent year-on-year growth in earnings in the July-September 2024 quarter.

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In the fortnight ended September 20, banks loan growth moderated to 13 per cent from a 16 per cent as of end March 2024. A large part of the credit growth moderation has been due to the slowdown in the retail segment, including unsecured loans and mortgages, Emkay Global Financial Services said in a report. Large corporate credit growth has picked-up a bit, while SME loans continue to deliver strong growth. Deposit growth also continues to remain range-bound at 11-13 per cent.

Though the RBI is yet to finalize LCR (Liquidity Coverage Ratio) guidelines which are to be effective from April 1, 2025, a few banks have been asked to rework their LCR calculations, which has led to a contraction in LCR during Q1FY25 and the residual effect should be seen in Q2FY25E as well, the report by Emkay Global Financial Services said.

“This has prompted some banks to mobilize retail deposits and even raise long-term bonds (infrastructure/housing), which in a way could have some impact on margins amid the continued rise in deposit cost and possible interest reversal on retail/select corporate NPAs (non-performing assets),” it said.

On an overall basis, Emkay’s report expects margin contraction quarter-on-quarter (QoQ) to be range-bound at 2-10 bps with a relatively higher fall for a few banks as the one-off benefit wanes. “With US Fed cutting policy rates by 50 bps, the noise for rate cut has become louder in India as well, which we believe if done, could lead to one more round of margin softness across banks, and more so for private sector banks (PVBs) with their relatively higher share of floating rate loans,” it said.

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Fresh slippages in the July-September 2024 quarter are expected to be stable sequentially.

“Most banks will report steady asset quality metrics led by controlled slippages. However, banks (including Small Finance Bank (SFBs)) with a higher share of unsecured loans, particularly MFI (microfinance loans) could see asset quality deteriorate,” Axis Securities said in a report.

On the corporate side, the stress in MTNL and RINL (Rashtriya Ispat Nigam Ltd) was visible in Q2 for a few public sector banks. However, some of these banks have already made adhoc standard asset provisioning, hence incremental provisioning could be limited, Emkay said in the report. It expects the pace of gross non-performing assets (GNPA) ratio moderation to be slow at 8 bps quarter-on-quarter to 2.7 per cent for its coverage lenders.