Banks likely to face earnings pressure in Q3 on muted loan growth, higher credit costs

“Q3FY25 has been a tough quarter with higher credit cost, decelerating loan growth, shortage of deposits even amidst slowing loan growth, moderate pressure on NIM and lower trading gains. Asset quality is the overwhelming theme,” Nuvama Institutional Equities said in a note.
Microfinance loans (MFI) and unsecured loans will continue to see elevated stress. Lenders such as ICICI Bank, Federal Bank and state banks are likely to face less stress while MFI lenders would see a sharp deterioration, it said.

“Apart from banks with a higher exposure to unsecured segments, particularly MFI and credit cards, we expect most banks to report under-control slippages and steady to improving asset quality trends,” Axis Securities said. Lenders’ commentary around stress in the microfinance segment peaking-out would be keenly eyed, especially for small finance banks (SFBs) and banks with a prominent presence in the segment.

Axis Securities expects credit costs during the quarter to jump up significantly around 10 per cent quarter-on-quarter (QoQ) for its coverage banks, thereby weighing on earnings. “We do not see any respite on earnings for banks, which is likely to de-grow by nearly 6 per cent QoQ in Q3FY25 estimate,” Axis Securities said.

The credit growth of banks tapered to around 11.12 per cent (as of December 27) as against 15-16 per cent in the recent past. This is primarily driven by a significant slowdown in the unsecured loans alongside banks, mainly private banks intending to bring down their loan-to-deposits ratio (LDRs) to a balanced level, Axis Securities said. LDR is used to calculate the percentage of loans issued by a bank in comparison to its deposits. A higher LDR means that a bank is taking more risk by offering loans more than its deposits and low percentage means a bank is not using its deposits effectively.

Amidst concerns around asset quality in certain segments (majorly unsecured lending), weaker-than-expected macro data and constraints around LDR (for certain banks), banks have been cautious towards chasing aggressive growth, Axis Securities said. The brokerage expects banks under its coverage to deliver around 12 per cent year-on-year (YoY) credit growth in Q3FY25, in-line with industry growth.

The systemic growth rate for FY25 is expected to hover around 11-12 per cent, it said. According to Geojit Financial Services’ fund manager Pawan Parakh, stock prices of banks are close to the bottom. “Going ahead, as interest rates reduce, the fight for deposits should ease. Low interest rate environment augurs well for asset quality as well,” he said.

Over the next one to two quarters, investors should gradually build up exposure in this segment, he said.