Margin pressure to influence banks' earnings in Q4: IIFL Securities

Continued margin pressure and elevated operational expenses are expected to be the primary drivers behind a flattish growth in Pre-Provision Operating Profit (PPOP) for the banks in upcoming quarterly earnings, analysts at IIFL Securities said. However, the subdued outlook is expected to be mitigated to some extent by low credit costs, which should contribute to a 4 per cent quarter-on-quarter (QoQ) growth in Profit After Tax (PAT).

Loan growth, a key metric for the banking sector, has remained healthy, but experts foresee a moderation in FY25 due to regulatory tightening. The moderation is expected to stem from regulatory measures aimed at lowering the loan-deposit ratio and adjusting risk weights, indicating a shift in the lending landscape, IIFL Securities noted.

On the deposit front, there has been a notable uptick in growth during the seasonally strong fourth quarter. The surge in deposit growth has led to improvements in Loan-to-Deposit Ratio (LDR) and Current Account Savings Account (CASA) ratio, signalling positive momentum within the banking sector.

However, amid these developments, Net Interest Margins (NIMs) are expected to contract by 5-10 basis points Quarter-on-Quarter (QoQ) on the back of various factors including recent increases in Time Deposit (TD) rates, lower LDR, and deposit re-pricing.

Operational expenses are set to remain elevated, driven by residual wage bipartite provisions and ongoing franchise investments. These factors are likely to exert pressure on the overall profitability of banks, leading to subdued PPOP growth, analysts noted.

Despite these challenges, asset quality is expected to remain benign, with stable trends expected in terms of gross slippages and recoveries. The expected part reversal of Additional Tier 1 (AT1) provisions, facilitated by RBI relaxations, should further contribute to low credit costs and support PAT growth, analysts at IIFL said.

Among the individual banking shares, IIFL Securities has downgraded Federal Bank to a ‘Reduce’ rating, citing various factors including potential fourth-quarter results, NIM pressures, and uncertainties around succession planning. On the flipside, there is optimism surrounding ICICI Bank, with expectations of positive earnings revisions driven by robust loan growth and moderated operational expenses.