Public and private sector banks experienced an average growth rate of 10 per cent in earnings in the second quarter this fiscal due to a slowdown in credit demand, according to analysts.

However, public sector lenders are likely to have experienced lower growth than their private sector counterparts due to the need for higher provisioning against loan defaults, the analysts from Kotak Institutional Equities and Sharekhan said.

As the public sector banks complete the transition to system-based non-performing assets recognition, the additional provisioning will hurt their profits, they said.

“State-owned banks will report higher delinquencies as they will likely complete their stringent NPL (non-performing loans) recognition platform in the reporting quarter (especially for small-ticket loans), whereas we find limited concern for private banks on this count,” Kotak Institutional Equities said in a report.

The report said it expects earnings to grow 10 per cent for the overall system, with PSU banks demonstrating 3 per cent growth and smaller private banks a higher growth rate of up to 27 per cent.

Analysts at brokerage Sharekhan peg the earnings growth of the overall banking system at 10.6 per cent, pulled down by rising interest rates, slowing credit expansion and growing concerns over asset quality.

“In Q2, the slower credit growth, increase in NPA provisions and the mark-to-market provisions on investment book are expected to adversely affect the growth in earnings,” it said.

In spite of repeated rate hikes by the Reserve Bank of India, the lenders - who will start reporting their results for the September quarter from this week - will not show any decline in their net interest margins, the analysts from Kotak Institutional Equities said.

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