Banking sector Q2 results: Healthy earnings print with slowing momentum; asset quality continues to improve

While loan growth during Q2FY24 was comfortable at around 15% YoY for banks, net interest margin (NIM) declined largely due to repricing of bank deposits and lending costs. Asset quality improved sequentially for public and private banks.

According to Kotak Institutional Equities, the healthy earnings growth of the banks under their coverage was led by 17% YoY net interest income (NII) growth and 13% YoY operating profit growth.

Analysts believe we are entering a period of low revenue growth for H2FY24 for banks as the cost of funds is yet to peak for all players.

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“Earnings growth is starting to slow as we are seeing reversals in NIM trends across most of the banks we cover. Loan growth (adjusted for HDFC Bank merger) continues to show stable trends at ~15% YoY. The cost of credit is still running well below the long-term average led by lower slippages. RoE is closer to long-term averages for all banks,” said Kotak Institutional Equities.

Total provisions of all covered banks declined by 19% sequentially during the quarter ending September 2023 and 36% YoY. Your bank’s asset quality continued to improve. The percentage of delinquent loans on the balance sheet continued to decrease. The stock of NPLs is decreasing sequentially for PSU banks. Gross slippage for the sector remained under control and QoQ has declined.

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“Asset quality is unlikely to be a concern for most banks in the medium term, unless there is a macroeconomic downturn—a relatively low occurrence in our view,” the brokerage said.

Meanwhile, a key challenge is weak price performance at large banks, despite strong earnings trends. On the other hand, valuation premiums are shrinking between large and mid-sized private or public banks driven by better asset quality and Small Finance Banks.

The brokerage believes that we are entering a period of NIM contraction where large private banks like ICICI Bank and Axis Bank will not be well positioned in this part of the cycle but we expect public banks and HDFC Bank to be relatively well positioned .

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“We believe that despite the above concerns about the trajectory of NIM, investors are likely to be better off with large private banks over medium and small banks as the valuation premiums are much lower than is comfortable. While we do not see a risk of higher credit costs, we are likely to see similar results on growth, yield ratios, credit costs or asset quality metrics,” the brokerage firm said.

With merger speeds completed for HDFC Bank, it is expected that the big banks will be able to rerate.

Among its top picks, Kotak Institutional Equities has ‘Buy’ ratings on State Bank of India (SBI) with a target price of ₹725 per share; Axis Bank with a target price of ₹1,100 per share; HDFC Bank with TP of ₹1,800 per share and ICICI Bank with a target of ₹1,150 per share.

Disclaimer: The opinions and recommendations made above are the opinions of individual analysts or brokerage firms, and are not the opinions of Mint. We encourage investors to check with certified experts before making any investment decision.

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Updated: 15 November 2023, 04:03 PM IST