Muted Q3FY25 Earnings Expected for Banks Amid Slower Credit Growth

Mumbai: Banks are expected to report tepid Q3FY25 earnings sequentially on account of muted credit growth translating to slower Net Interest Income growth as well as profitability.

Some banks have increased their card rates on shorter tenor deposits and would also see some residual repricing of legacy low-cost deposits resulting in overall cost of deposits to rise but the quantum would be lesser than preceding quarters. Several banks have also raised the Marginal Cost of Funds based Lending Rate (MCLR). The average Weighted Average Domestic Term Deposit Rate (WADTDR) for private sector banks for October and November 2024 rose 4 bps, to 6.9 per cent compared with the average for 2QFY25. The corresponding Weighted Average Lending Rate (WALR) was down by one basis points to 10.83 per cent, implying that Loan Spread declined 5 basis points.

Anil Gupta, senior vice-president & co-group head of financial sector ratings, ICRA said, "The credit growth for banks for Q3FY25 is likely to be muted sequentially and this is expected to translate into slower growth in net interest income as well as net profits."

"The credit to deposit ratio at a system level is expected to decline marginally with deposit growth slightly outpacing the credit growth. Asset quality is expected to remain steady. Some banks with higher exposure to microfinance loans and unsecured loans may report a sequential increase in non-performing assets (NPA) as well as credit loss provisions," added Gupta.

"Sequential loan growth will be healthy over 4.5 per cent for IDFC Bank, reasonable (3.5-4.5 per cent for ICICI Bank, Kotak Bank, Axis, IndusInd Bank, Federal Bank, City Union, Catholic Syrian Bank, and DCB and moderate (2.5-3.5 per cent) for HDFC Bank, SBI, BOB, Indian Bank, Karur Vyasya Bank and RBL," said Yes Securities.

Fresh slippages in 3QFY25 would remain elevated for banks with high exposure to unsecured retail and microfinance but may not rise materially on sequential basis from already elevated levels seen in 2QFY25. In general, slippages have been moderately on the rise sequentially for the system and a similar moderate rise may continue said analysts.

HSBC expects return ratios of private banks to remain under pressure due to slower loan growth, NIM compression and credit cost normalisation. Weak deposit growth for the system, high loan-to-deposit ratio and tight banking system liquidity should keep loan growth muted, it said.

"Change in loan mix towards lower yielding loans, capped loan deposit ratios (LDRs) and declining CASA ratios should affect private banks’ NIM. Banks with high exposure to microfinance (MFI) loans should see elevated credit costs. Overall, we estimate net profit for our covered banks to decline by 4 per cent QoQ in 3QFY25. Relatively, in 3QFY25, earnings performance of PSU banks might be stronger than private peers," HSBC said.

On Monday the stock market fell as banks and consumer firms posted lacklustre quarterly updates. HDFC Bank, the heaviest stock on the Nifty 50, fell 2.2 per cent after it posted a sequential dip in its current and savings account deposits for the three months ended December. HDFC Bank's average CASA deposits were at Rs 8.17 lakh crore for the December 2024 quarter, a growth of around 6 per cent over Rs 7.71 lakh crore for the December 2023 quarter, and around 1.1 per cent compared to Rs 8.08 lakh crore for the September 2024 quarter. Shares of state-run banks also dropped 4 per cent led by a 7.5 per cent slide in Union Bank of India after the lender's total business and deposits dropped sequentially.