According to an Axis Securities report, the banking sector is expected to have a soft second quarter due to slow growth and margin pressures. However, this quarter is likely to mark the bottom.
As the earnings season for the second quarter of the current financial year is set to begin, banks are expected to report another soft performance, according to a report by Axis Securities. The brokerage firm highlighted that Q2 is likely to remain weak for the banking sector due to a combination of factors including tepid growth, net interest margin (NIM) pressures, weaker treasury performance on a sequential basis, and higher credit costs.
It stated “For banks, Q2 is expected to be another soft quarter, with tepid growth, NIM pressures”.
The report noted that banks are yet to see a meaningful recovery in credit growth, which is now expected to materialize in the second half (H2) of the financial year.
It stated that Q2 is likely to mark the bottoming out of NIMs, with margins expected to improve in H2.
This improvement is anticipated to be supported by deposit repricing and the recent Cash Reserve Ratio (CRR) cut announced by the Reserve Bank of India.
On the asset quality front, the report pointed out that banks are witnessing green shoots. The outlook suggests that better outcomes on asset quality metrics could be visible in the second half of the year.
This, combined with easing pressures on margins, is expected to provide some relief to the sector going forward.
It also commented on valuations, noting that for most banks, valuations remain comfortable at present levels. However, the brokerage emphasized that clarity on the pick-up in credit growth and consistent improvement in asset quality will be crucial factors that could trigger an upside in banking stocks.
In the present scenario the report continues to prefer banks with promising growth prospects, strong and healthy deposit franchises, stable asset quality metrics, and steady management teams.
Overall, while Q2 is expected to remain subdued for banks, the outlook for H2 appears more constructive, with margins, credit growth, and asset quality metrics expected to show meaningful improvement.
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