An Emkay Research report projects a 25.4% YoY rise in Indian banks’ net profit for Q2. This is attributed to strong credit growth and lower loan-loss provisions, despite near-term pressure on lending margins from higher FCNR-B deposits.
Indian banks could report a 25.4 per cent year-on-year rise in net profit in the July-September quarter, even as higher deposits raised through foreign currency accounts are expected to put pressure on lending margins, according to a report by Emkay Research.
Profitability Drivers and Margin Concerns
The brokerage expects profitability to improve as loan growth remains healthy, income from core banking operations increases and provisions for potential loan losses decline. “Profitability is expected to improve, led by better credit growth, flat/slight drop in margins, and lower credit costs, partly offset by lower treasury gains,” the report said.
However, it expects the impact of fresh foreign currency deposits on margins to ease gradually in the second half of the financial year as banks use the additional funds to repay expensive borrowings and expand lending.
Credit and Deposit Growth
Emkay described the September quarter as a “one-off quarter”, with significant mobilisation of Foreign Currency Non-Resident (FCNR-B) deposits contributing to faster credit and deposit growth.
System-wide credit growth stood at 18.1 per cent year-on-year as of September 15, while deposit growth accelerated to 17.3 per cent from 12 per cent in June.
The report said the additional funds would initially be used to retire high-cost liabilities, partly invested in other assets and gradually deployed as loans. Banks could take around two quarters to fully absorb the additional liquidity.
Financial Projections and Asset Quality
“NIMs may remain compressed in 2Q due to the FCNR(B)- led inflow but should gradually recover in 2H,” the report said, pointing to the expected repayment of expensive liabilities, deployment of excess funds into loans and benefits from the recent interest rate hike for banks with a larger share of floating-rate loans.
The brokerage expects net interest margins to decline by 1-32 basis points sequentially across its coverage universe in the September quarter. Large private banks could see a decline of 7-32 basis points, while public sector banks may see a smaller fall of 1-9 basis points.
Despite the near-term pressure, Emkay expects net interest income to grow 12.5 per cent year-on-year and pre-provision operating profit to rise 17.2 per cent. Provisions are projected to decline 8.7 per cent, supporting overall profitability.
Asset quality is expected to remain stable, with fresh stress easing in unsecured retail loans, including personal loans, credit cards and microfinance.
Outlook and External Risks
However, the brokerage said it remained watchful of external risks, including El Niño and drought conditions.
Emkay expects overall banking system growth to moderate to around 16 per cent in FY27 as the impact of FCNR-B-related funding normalises, while organic loan growth is expected to remain healthy. (ANI)
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