Banks are poised to post strong earnings in Q1FY23 as recovery in economic activities has led to strong growth in advances and lower stress on their books.

“Post the repo rate hike by the Reserve Bank of India, most banks have been quick to pass on the interest rate hikes on both sides of the balance sheet. Thus, easing excess liquidity, improving growth, and a 90 basis points increase in repo-linked loans is likely to help banks maintain or marginally improve their net interest margins sequentially,” said Axis Securities.

With business activities of borrowers getting back on track with consequent cash flow improvements, we expect moderation in slippages for all banks, the agency said. “This, coupled with a strong recovery pipeline, is likely to result in an improvement in GNPAs during the quarter,” it further said.

Asset quality on the mend

Emkay Global Financial Services believes better credit growth, along with rising interest rates, should be margin positive for banks having a higher share of floating rate books, including mortgages. “Moreover, asset quality is on the mend, with the risk of a fresh NPA cycle remaining low, which should lead to healthy profitability or return ratios for banks,” it said.

For its coverage universe, it expects the overall gross non-performing assets ratio to decline by 20 basis points quarter-on-quarter to 5.2 per cent in Q1FY23, led by lower slippages (reflecting in low EMI bounce rate at 22 per cent), better recovery trends in retail, and higher write-offs with banks sitting on excess provisions.

“...stress in agri loans, including KCC, and slightly higher relapse in SME could pose some risk in the first quarter for public sector banks and select private banks,” it further said.

As of June 30, 2022, a number of banks have disclosed double digit growth in advances and loans, and RBI data indicate that bank credit grew at a three year high of 13. 1 per cent year-on-year. Most banks are well-provided for and bankers have said they do not currently foresee asset-related trouble.

Q1 results from next week

Federal Bank and HDFC Bank are scheduled to announce their Q1 results on July 15 and 16, respectively while Axis Bank will meet to finalise and approve its results on July 25.

JM Financial expects the earnings of its banking coverage universe to grow by 17.3 per cent YoY. It said, this would be on a low base of Q1FY22, which was impacted due to the second wave of Covid-19.

“We expect net slippages for the sector to turn positive after two strong quarters of recoveries – though credit costs are likely to normalise upwards only gradually,” it further said.

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