Banking Sector Fourth Quarter Earnings Should Shine

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Manufacturing companies across all sectors are grappling with input cost pressures, increasing the risks of a downward earnings revision. In this context, the performance of the banking sector could reassure investors. After all, financial services companies have a large weighting in the key benchmark Nifty50.

Banks are expected to post strong earnings in the fiscal fourth quarter (Q4FY22), driven by improving credit growth in the retail and corporate segments. In addition, lower provisions are likely to increase bank profits. Private sector lender HDFC Bank Ltd will release March quarter banking sector results on Saturday.

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In recovery mode

In the retail lending vertical, housing loan disbursement traction continued and there was sequential improvement for the unsecured lending segment in the March quarter, analysts noted.

However, the recovery of the microcredit segment has lagged. Nonetheless, the sector is well on its way to recovery and should see less slippage and better asset quality in March quarter results.

Analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd expect major banks such as HDFC Bank Ltd, ICICI Bank Ltd, Axis Bank Ltd and State Bank of India (SBI) to report improving underlying business conditions. “Their low cost of funds will continue to be an important factor in continued growth and market share gains,” they said in an April 11 note. In the case of Axis Bank, ICICI Bank and SBI, loan growth is expected to be driven by all segments, the overseas brokerage said.

For Bank of Baroda, while loan growth is likely to accelerate in Q4FY22 compared to the prior quarter, it could still be below industry average.

Nirmal Bang Institutional Equities estimates large-cap banks would continue to post higher credit growth of 18.5% in the three months to March 31 compared to a year earlier, beating rivals at Mid/Small Cap and Public Sector, which are expected to grow by 10.1% and 8.6%, respectively.

“Interim figures show that HDFC Bank outperformed its mid/small cap peers,” the brokerage pointed out in its earnings overview report. Additionally, as large-cap banks have built up sufficient provisioning buffers, they are likely to report the lowest borrowing costs. .

Clearly, this bodes well for Nifty50’s earnings-per-share growth prospects, given that financials have a 35.17% weighting in the index. As of March 31, HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank are among the top 10 constituents of this index and together represent a weighting of 21.07%.

“Strong performance in Financials will help our coverage earnings growth stay above the 20% year-on-year growth mark for the second consecutive quarter,” Jefferies India analysts said in a 11 note. april.

Over the past year, the Nifty Bank Index has risen around 18%, slightly underperforming Nifty50’s 20% returns. Bank stocks have been among the main victims of sell-offs by foreign institutional investors in recent months.

Meanwhile, with the Reserve Bank of India poised to raise key interest rates sooner rather than later, comments on net interest margins (NIMs) would be important.

“For banks, NIMs generally remain nearly neutral from one rate cycle to the next, but given the delay in repo rate hikes, having an outlook on NIMs will be critical,” analysts said. of Jefferies in another report. Continued loan growth momentum, with high inflation weighing on disposable income, would also be crucial. Investors should closely monitor management comments and the outlook for FY23.

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