Serial interest rate hikes to fuel Q2 bank earnings

Banks are expected to post strong operational growth in the September quarter on the back of healthy margins and lower loan loss provisioning, analysts said. The sharp rise in policy rates, by 190 basis points, since May, and its transmission, will lead to an increase in net interest income and, consequently, a better net interest margin (NIM). Unlike the previous quarter, all banks are expected to see strong loan growth. It will be more diversified than the previous trend of favoring a few sectors such as retail. “Compared to the prior quarter, we should see NIMs starting to improve as MCLR/EBLR-linked loans have begun to reprice based on the new policy rates. Also, unlike the prior quarter, we are not concerned cash losses in this quarter as overall returns were slightly lower than in 1QFY23,” analysts at Kotak Institutional Equities said.

The brokerage firm expects banks covered by its hedge to post 56% year-on-year growth in second-quarter after-tax profit, led by 26% growth in operating profit from the previous year.

According to broker Prabhudas Lilladhar, private banks may see NII growth of 21% year-on-year as credit growth and NIM may see higher quarter-over-quarter. Public sector banks could also see loan growth in line with the system, but NII growth could be above 15%. In the second quarter, HDFC Bank recorded loan growth of 24% year-on-year, driven by retail at 22%, rural-trade at 32% and wholesale at 26%. Analysts also expect asset quality to continue to improve. Although there is no significant recovery in business loans, they expect better recovery trends for smaller loans that defaulted post covid. “Asset quality is expected to be stable as slippages may ease slightly quarter-on-quarter, although credit costs may see a slight increase. Retail and MSMEs may experience slippages due to one-time restructuring. Companies could remain resilient,” analysts Prabhudas Lilladhar said in a quarterly 50 basis points above June 2022 levels. As of September 9, system deposit growth was 9.5% year-on-year Banks have raised MCLR rates by 70 to 100 bps over the past 12 months With RBI raising the rate repo rate of 190 bps over the past few months, the repo-linked pound is gradually being revalued. probably increased for the banking system, especially for those who hold a large share of the floating rate portfolio on the asset side, this trend of spread expansion may subside once the deposit portfolio also revalues ​​to a high level. er rate, they added.

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