Q1 Earnings: The curious case of banking sector performance
The overall data from the Nifty 500 Index shows a year-over-year (YoY) revenue growth of 6.6%, an operating profit increase of 3.3% YoY, and a net profit growth of 2.6% YoY.
Source: Yes Securities, Bloomberg, Alchemy Capital
Data as on August 19, 2024
Interestingly, the financial sector has shown notable 14.5% YoY profit growth, significantly outpacing the 2.6% YoY growth of the entire universe. This trend is consistent across Nifty 50, smallcap, midcap, and largecap stocks.
Despite these positive numbers, the industry has not performed well in the stock market, sparking intense debate within the sector. The market's largest sector by weight is divided in opinion. Some see this as an asymmetric response, akin to irrational exuberance in other areas of market, while others are trying to identify new market leaders. The reality might lie somewhere in between.
Several potential incremental challenges for banks include:
1. Lower net interest margins (NIMs)
2. Higher credit costs
3. Deposit growth issues
While these negative factors could be real, consensus estimates seem to have accounted for lower NIMs from extremely high levels and higher credit costs from the low levels seen in the second half of FY23 and the first half of FY24. The main focus remains on gradual progressions. The issue of deposits is more complex, with low growth in CASA deposits potentially linked to overall deposit and credit growth.
Another reason for the sector's underperformance could be the convergence of multiples over the past
