Analysts expect banks to report 6-7% operating profit growth in Q4FY22

The banking system enjoyed a steady phase of activity in the March quarter of FY22, but high operating costs could dampen operating profit growth, according to analysts who follow the sector. They see pre-provisioning operating profits for banks growing in the range of 6% to 7% in Q4FY22, even though net profit growth may reach 75% on an annual basis (year-on-year).

Slippages should remain modest, and an improvement in the trend of recoveries and upgrades would result in an overall improvement in asset quality. Although the performance of the restructured portfolio is a concern, analysts expect credit costs to remain low at all banks.

“Q4FY22 will likely be characterized by stability and normalization after several quarters of volatility. NIMs (net interest margins), slippages and the cost of credit should remain at least stable, possibly improving. We expect that recoveries and upgrades outpace new slippages and GNPA (non-performing gross assets)/stage 3 pool decline,” ICICI Securities said in a note on Wednesday.

Private banks could see some stress emerging in their microfinance portfolios, according to analysts at Motilal Oswal Financial Services (MOFSL). “Slippages are expected to remain modest in the fourth quarter of FY22 across all segments except for MFI business, which may experience some extreme stress,” the brokerage said.

As yields rise in money markets, banks, especially those in the public sector, could see their cash income hit further.

In Q3FY22, five of the 12 PSOs saw their operating profits decline. Most attributed the bearish trend to poor Treasury performance, as soaring yields on all debt instruments led banks to post mark-to-market (MTM) losses on their investment portfolios. Meanwhile, the hit to cash income in the fourth quarter will be partially offset by lower pension benefit provisioning, analysts at ICICI Securities said.

The recent pick-up in credit growth will provide a boost to bank earnings. Non-food credit growth reached more than 8% in March 2022 thanks to strong disbursements in all segments. “Growth in disbursements across several retail products exceeded pre-Covid levels, while the corporate segment also saw a revival with a focus on high-rated companies, primarily for working capital needs” , said MOFSL.

Some experts are of the opinion that the general trend of bank income growth could remain subdued for a few quarters. Morgan Stanley said in a note dated March 28 that if little change is expected in banks’ risk appetite, there will be demand moderation in some segments of retail and small business lending.

“Most importantly, the delayed rate hike by RBI coupled with intense price competition will keep improving margins in check. A combination of the above factors will weigh on revenue growth in the near term, ahead of the acceleration as of H2FY23,” Morgan Stanley analysts said.