SBI may surprise with surge in Q3 profit, dull show likely at HDFC

Mumbai: India's largest bank State Bank of India (SBI) and its closest private sector rival HDFC Bank are set to report divergent profit growth for the quarter ending December 2024, estimates by analysts show.

State-run SBI could report profit after tax (PAT) growth upwards of 80% on the back of comparatively better deposit growth and lower wage costs, while HDFC Bank may report less than 7% rise in PAT amid muted loan and deposit growth across the banking sector.

Most banks are set to report lacklustre earnings growth for the December quarter due to slowing business as well as higher credit costs amid increasing stress in unsecured retail segments, analysts said. This would increase downward pressure on banks' net interest margins (NIM) and may bring down their net interest income (NII), they added.

"A few banks have already lowered their growth guidance while select large banks are also likely to report tepid full-year growth guidance owing to a high CD (credit-deposit) ratio and rising asset quality concerns," said Nitin Aggarwal, head-BFSI at Motilal Oswal Securities.

"Slower economic activity may drive growth moderation in corporate and SME segments. CASA (current and saving accounts) accretion remains a challenge as depositors are locking in money at higher term deposit rates ahead of a potential reversal in the rate cycle," he added.

Agencies

NIM PRESSURES
Margins are expected to see gradual compression, with Nomura estimating a 4-6 basis points sequential drop for HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank, primarily led by moderation in CASA ratios. As per the brokerage house, NIM compression for PSU banks should be lower, supported by late-cycle re-pricing of MCLR-linked loans and stable loan-to-deposit ratios.

Funding costs for banks are likely to stay elevated, which will keep pressure on margins. With rate cuts projected in early 2025, the banking system's yield is expected to witness further pressure over the coming quarters. "Deposits should continue to be a constraint on loan growth outlooks across banks," said Param Subramanian, analyst at Nomura. "We prefer banks with strong deposit franchises, strong retail underwriting and lower exposure to unsecured retail."

ASSET QUALITY STRESS
Overall slippages in the banking industry are expected to remain under control, but the unsecured retail segment, especially microfinance, is likely to witness high delinquencies, brokerages said.

As per Nomura, credit costs will increase by 5-10 basis points sequentially for large private banks, while smaller banks with higher exposure to unsecured retail and microfinance should see a 15-40 basis points rise in credit costs. PSU banks like SBI and Bank of Baroda should see lower sequential credit costs on account of higher non-NPL provisions in the September quarter, it said. One basis point is 0.01 percentage point.

IDBI Capital analyst Bunty Chawla said increased NPA formation from unsecured loan portfolio during the quarter, along with lower recoveries led by lower collection efficiency, is expected to increase asset quality stress in the banking sector. Banks need to monitor the impact of new guardrails on MFI portfolio along with tightened risk management on other unsecured loans such as personal loan and credit card portfolio, he added.

OPEX UNDER CONTROL
Operating expenses are likely to follow a normalised trend, as banks continue to invest in branches and digital capabilities. Other income is anticipated to be modest because treasury performance is likely to remain muted as bond yields have seen an uptick during the quarter, while equity markets have been volatile.

Despite the overall stress on the industry, SBI is likely to report strong profit growth on the back of better-than-peers CASA deposit growth and lower wage bills after reducing its headcount by about 10% since 2019.