Margin squeeze to dent banks' Q1 profits, loan growth may offer silver lining
banks may face modest earnings growth in the fiscal first quarter squeezed by pressures on net interest margin (NIM) mainly due to higher deposit costs.
While compressed NIM can hurt profitability, this will be partially offset by loan growth outpacing deposit growth, and robust treasury earnings helped by lower bond yields and a rallying equity market for most lenders, analysts said.
However, banks' credit quality may take a marginal hit due to seasonal stress in farm loans, aggravated by election season lull in recovery and heatwaves in several parts of the country in the June quarter.
While sectoral margins have compressed over the past year, select banks have further raised rates, mainly for short-term deposits amid tight liquidity conditions, said Nitin Aggarwal, research analyst at Motilal Oswal. «This, coupled with a slight moderation in weighted average lending rate for the system, mainly public sector banks, points to the continued pressure on sector margins in the near term,» he said.
Emkay Global Financial Services expects banks' pre-provisioning operating profit to record sluggish growth of 4% on-year in the June quarter, and 4% lower sequentially, mainly due to lower margins and higher operational costs, especially for private sector lenders.
«Overall net profit growth is likely to be subpar at about 8% year-on year (and a 3% dip quarter-on-quarter), and we expect the first quarter to be a soft quarter,» said Anand Dama, an analyst at Emkay.
He expects public sector banks to be relatively better
