The Q4 results of banks are set to bring cheer to the sector
Premium- In Q4FY22, traction in disbursement of housing and unsecured loans may have improved
- For Axis Bank, ICICI Bank and SBI, loan growth is likely to be driven by all segments
Manufacturing companies across sectors are struggling with input cost pressures, raising risks of an earnings downgrade. Against this backdrop, the performance of the banking sector could provide some comfort to investors. After all, financial services companies have a significant weightage in the key benchmark Nifty50 index.
Banks are expected to post robust fiscal fourth-quarter earnings (Q4FY22), driven by improving credit growth across retail and corporate segments. Plus, lower provisions are likely to boost profits for banks. Private sector lender HDFC Bank Ltd will on Saturday kick off March quarter banking sector earnings.
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Within the retail lending vertical, traction in loan disbursements in housing has sustained and there has been a sequential improvement for the unsecured loans segment in the March quarter, analysts noted.
However, recovery in the micro-lending segment has lagged. Nonetheless, the sector is well on its way to recovery and is likely to see lower slippages and improved asset quality in the March quarter earnings.
Analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd expect large banks such as HDFC Bank Ltd, ICICI Bank Ltd, Axis Bank Ltd, and State Bank of India (SBI) to report improvement in underlying business conditions. “Their lower cost of funds will continue to be an important factor in chasing growth and market share gains," they said in a 11 April note. In the case of Axis Bank, ICICI Bank, and SBI, loan growth is likely to be driven by all segments, said the foreign brokerage.
For Bank of Baroda, while the loan growth will likely pick up in Q4FY22 compared with the prior quarter, it could still be lower than the sector average.
Going by the estimates of Nirmal Bang Institutional Equities, large-cap banks would continue to report higher credit growth of 18.5% in the three months ended 31 March from a year earlier, beating their mid/small-cap and public sector rivals, which are expected to see 10.1% and 8.6% growth, respectively.
“Provisional numbers show that HDFC Bank has outpaced mid-/small-cap peers," pointed out the brokerage in its earnings preview report. Also, since large-cap banks have built sufficient provisioning cushions, they are likely to report the lowest credit costs.
Clearly, this bodes well for Nifty50 earnings per share growth outlook, considering that financial services have a weightage of 35.17% on the index. As of 31 March, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank are among the top 10 constituents of this index and together account for 21.07% weightage.
“Strong performance in financials will help earnings growth for our coverage stay above the 20% y-o-y growth mark for the second consecutive quarter," said analysts at Jefferies India in a 11 April note.
In the past year, the Nifty Bank index has risen by around 18%, marginally underperforming Nifty50’s 20% returns. Banking stocks have been among key casualties of the selling by foreign institutional investors in recent months.
Meanwhile, with the Reserve Bank of India poised to raise key interest rates sooner than later, commentary on net interest margins (NIMs) would be important.
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“For banks, NIMs generally stay near neutral across rate cycles, but given the delay in repo rate hikes, it will be key to gain perspectives on NIMs," said Jefferies’ analysts in another report. Sustenance of loan growth momentum, with elevated inflation weighing on disposable income, would also be crucial. Investors should keenly follow management commentary and outlook for FY23.