Manufacturing companies across sectors are facing cost pressures, increasing the risk of declining earnings. Against this backdrop, the performance of the banking sector may provide some comfort to investors. After all, financial services companies have significant weighting in the major benchmark Nifty 50 index.
Banks are expected to post strong fiscal fourth quarter earnings (Q4FY22), driven by improving credit growth in the retail and corporate sectors. Also, lower provisions are likely to boost profits of banks. Private sector lender HDFC Bank Ltd will close its March quarter banking sector earnings on Saturday.
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Analysts said that within the retail lending sector, the traction in loan disbursements to housing has continued and there has been a gradual recovery for the unsecured loan segment in the March quarter.
However, the recovery has lagged in the micro-lending segment. However, the sector is on a recovery track and is likely to see less slippage and better asset quality in March quarter earnings.
Analyst at Nomura Financial Advisory & Securities (India) Pvt Ltd. Ltd. expects large banks such as HDFC Bank Ltd., ICICI Bank Ltd., Axis Bank Ltd. and State Bank of India (SBI) to report an improvement in underlying business conditions. “Their low cost of funds will continue to be a key factor in their pursuit of growth and market share gains,” he said in an April 11 note. In case of Axis Bank, ICICI Bank and SBI, credit growth is likely to be driven by all segments, the foreign brokerage said.
For Bank of Baroda, while credit growth will likely be expected in Q4FY22 as compared to the previous quarter, it may still be lower than the sector average.
As per estimates by Nirmal Bang Institutional Equities, large-cap banks continue to report higher credit growth of 18.5 per cent in the three months ended March 31 compared to a year ago, outperforming their mid/small-cap and public sector rivals. Will keep Expected to see growth of 10.1% and 8.6% respectively.
In its earnings preview report, the brokerage said, “Provisional numbers show that HDFC Bank has outperformed its mid-/small-cap counterparts. Further, since large-cap banks have created substantial provisioning cushion, they are the lowest. Are likely to report the credit cost.
Clearly, this bodes well for the Nifty 50 earnings per share growth outlook, given that the financial services index has a weightage of 35.17%. As on March 31, HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank are among the top 10 constituents of this index and together account for 21.07% weightage.
“Strong performance in the financial sector will help earnings growth for our coverage stay above the 20% growth mark for the second consecutive quarter,” analysts at Jefferies India said in an April 11 note.
The Nifty Bank index has gained almost 18% in the past one year, which is slightly less than the 20% return of Nifty 50. Banking stocks have been the main loser of sell-offs by foreign institutional investors in recent months.
Meanwhile, with the Reserve Bank of India set to hike key interest rates at the earliest, the comment on net interest margin (NIM) will be crucial.
“For banks, NIMs generally remain neutral across rate cycles, but given the delay in repo rate hikes, it will be important to gain perspective on NIMs,” Jefferies analysts said in another report. Sustaining the pace of credit growth with high inflation weighing on disposable income will also be important. Investors should follow management’s comments and outlook for FY13 carefully.