Q1 Results Preview—Public Sector Banks to Outperform Private Lenders

Mumbai: Amid tight liquidity, several lenders have hiked deposit rates and have been aggressively pushing franchisee network to mobilize deposits resulting in higher operating expenditure and funding cost. To limit impact on margins, banks have also hiked lending rate. However, analysts still expect Net Interest margins, a key profitability metric to soften by 5-10 basis points quarter on quarter and 5-50 basis points year on year for most banks during Q1FY25 due to lead-lag effect.

The average Weighted Average Domestic Term Deposit Rate (WADTDR) for private sector banks for April and May of FY 25 rose 8 basis points to 6.90 per cent, compared with the average for 4QFY24. The corresponding Weighted Average Lending Rate (WALR) was flat at 10.75 per cent, implying that Loan Spread declined by 8 basis points. For the public sector banks, the WADTDR rose 4 bps to 6.98 per cent and their average lending rate declined by 3 basis points QoQ at 9.22 per cent, which implies that Spread declined by 7 basis points. It may be noted that the WADTDR and WALR for 2M1QFY25 excludes June month. “We see NIM marginally lower (2-10 bps) sequentially for most banks in coverage universe,” said Yes Securities in its Q1FY25 earnings preview report.

According to Emkay Global, fresh slippages for some banks could be elevated due to seasonal impact, elections, heat wave-related impact in agri/Kisan credit card portfolio (mainly for public sector banks like SBI and large private banks like HDFC Bank), whereas lower corporate recovery could pace off bad loan moderation trajectory in Q1FY25 (down by just 10 basis points QoQ).

Public sector banks are expected to be relatively better off with net profit growth at 14 per cent YoY versus 8 per cent for private banks aided by limited margin contraction, better priority sector lending certificate fees for select banks (Indian, Canara), trading gains, lower staff cost QoQ, and contained credit cost. Within large private banks, we expect ICICI Bank to remain an outlier on relative basis due to better growth/contained credit cost, whereas we expect Axis, Kotak to report a relatively-soft quarter. For HDFCB, deposit growth QoQ and margin sustenance remain key monitorables added Emkay report.

Banks/NBFCs with higher micro finance portfolio may witness slightly higher slippages in Q1FY25 due to election-related collection disruption in May-24, despite being partly recovered in June-24 said analysts.