Banks under brokerage firm Emkay's coverage during the third quarter of financial year 2024 (Q3FY24), an 8 per cent miss on pre-provision operating profit (PPoP) and profit after tax (PAT) has been attributed mainly to increased operational costs, reversible Asset Reconstruction Companies (ARC) impact, and elevated provisions, analysts said.

The earnings miss was particularly notable among a few mid-size Private Sector Banks (PVBs) and Non-Banking Financial Companies-Microfinance Institutions (NBFC-MFIs), which reported higher Non-Performing Assets (NPAs) leading to increased provisions. Despite some banks posting hits, the overall trend leaned towards misses for the quarter, the brokerage firm said in a note.

Among large banks, HDFC Bank reported a nearly in-line profit after tax (PAT), benefiting from lower taxes. However, concerns persist regarding slower deposit growth and margin sustenance.

ICICI Bank and Axis Bank missed on earnings due to ARC impact, while IndusInd Bank's miss was attributed to lower other income. Kotak Mahindra Bank also reported an earnings miss due to Mark-to-Market (MTM) hit on bonds and higher ARC provisions.

In the small/mid-size PVBs category, Karur Vysya Bank (KVB) stood out with a strong PAT beat and Return on Assets (RoA) of 1.6 per cent.

Federal Bank also exceeded expectations, driven mainly by lower provisions and higher other income.

However, IDFC Bank continued to disappoint on the operating expense front, and City Union Bank on the growth front. RBL Bank performed well operationally, but higher ARC impact caused a sharp earnings miss.

Within Scheduled Commercial Banks (SFBs), AU Small Finance Bank and Ujjivan Small Finance Bank (Ujjivan SFB) continued to witness higher NPA stress in the Vehicle Finance (VF) and Small and Medium Enterprise (SME) portfolio, while Ujjivan faced an earnings miss due to credit cost normalization, Emkay said.

Despite these challenges, most Public Sector Banks (PSBs) reported nearly in-line earnings or a beat, except for SBI Cards and Fusion, which missed on earnings due to rising asset-quality stress, analysts noted.

Rising Cost of Funds (CoF) weighed on margins for a few banks, with several PVBs running higher Loan-to-Deposit Ratios (LDR), raising regulatory concerns.

Banks expect a moderation in credit growth momentum due to regulatory actions on unsecured retail and NBFC loans. Despite potential challenges, PSBs are expected to report limited margin contraction in FY25, aided by lower CoF and healthy treasury gains.

While valuations have stretched for PSBs, caution is advised on retail-heavy PVBs amid rising asset-quality concerns, Emkay added.