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

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The banking system has seen a stable phase of business in the March quarter of FY22, but elevated operating costs may put a lid on operating profit growth, according to analysts tracking the sector. They see pre-provisioning operating profits for banks growing in the range of 6% to 7% during Q4FY22, even as net profit growth may be as high as 75% on a year-on-year (y-o-y) basis.

Slippages are likely to remain modest, and an improved trend in recoveries and upgrades would result in an overall improvement in asset quality. Although the performance of the restructured book is an area of concern, analysts expect credit costs to remain low across banks.

“Q4FY22 will likely be characterised by stability and normalisation after several quarters of volatility. NIMs (net interest margins), slippages and credit cost are likely to remain at least stable, if not improve. We expect recoveries and upgrades to outpace fresh slippages and GNPAs (gross non-performing assets)/stage-3 pool to descend,” ICICI Securities said in a note on Wednesday.

Private banks could see some stress emerging in their microfinance books, according to analysts at Motilal Oswal Financial Services (MOFSL). “Slippages are likely to remain modest over Q4FY22 across segments, barring the MFI business, which could see some tail stress,” the brokerage said.

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

In Q3FY22 five of the 12 PSBs saw their operating profits decline. Most of them attributed the downtrend to poor performance on the treasury front as yields shooting up across debt instruments resulted in banks booking mark-to-market (MTM) losses on their investment portfolios. At the same time, the hit to treasury income in Q4 will be partially offset by lower retirement benefit provisioning, analysts at ICICI Securities said.

The recent pick-up in credit growth will lend a hand to banks’ earnings. Non-food credit growth rose to over 8% in March 2022 on the back of strong disbursements across segments. “Disbursement growth across several retail products has surpassed the pre-Covid levels, while the corporate segment too witnessed a revival with a focus on high-rated corporates primarily for working capital needs,” MOFSL said.

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

“More importantly, the delayed rate hike by RBI coupled with intense price competition will keep margin improvement under check. A combination of the above factors will weigh on revenue growth near term, before the acceleration in H2FY23,” analysts at Morgan Stanley said.

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