Banks' Profit To Grow In Q3, NBFCs Face Margin Pressure: Jefferies

Cost growth should be higher as banks reinvest stronger core profits into expansion and tech, Jefferies said.

<div class="paragraphs"><p>(Source:&nbsp;<a href=";utm_medium=referral&amp;utm_content=creditCopyText">Andre Taissin</a> on <a href=";utm_medium=referral&amp;utm_content=creditCopyText">Unsplash</a>)</p></div>
(Source: Andre Taissin on Unsplash)

Banks will lead the financial pack as lending activity is robust though NBFCs will witness a divergence in profit growth reflecting margin pressure and select insurers will report stronger growth, according to Jefferies.

During the third quarter of fiscal 2023, banks will lead with a 33% year-on-year growth in profits, a 20% rise in net interest income and a 24% fall in credit costs, the research house said in a financials preview note issued on Tuesday.

The increase in topline will be aided by buoyant loan growth and quarter-on-quarter/year-on-year expansion in net interest margins, according to the note.

"We expect most banks to see NIMs expansion into 4Q as well before they start to normalise."

Slippages will continue to be at cyclical lows and so will credit costs as most banks had enough coverage, it said.

The key concern in the pre-quarter release for banks has been the weakening of growth in the current account savings account or CASA, reflecting a switch into term deposits where rates have been hiked, Jefferies said.

Cost growth should also be higher as banks are reinvesting stronger core profits into expansion and digital investments, and the treasury income should be less volatile as yields have been stable, it said.

It highlighted that among banks, SBI may see stronger growth while Bandhan Bank's profit may decline sharply due to rise in credit costs.

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Jefferies pointed out that non-banking financial companies had seen healthy disbursement activity, but growth in operating profits and net profits would be divergent, reflecting some pressure on margins and credit costs.

"We expect most NBFCs to see margin pressure for 3Q and a few more quarters with rise in their funding costs," the note said.

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Among non-lending financial institutions, the research house is betting on HDFC Life Insurance Co. and SBI Life Insurance Co. as they have reported stronger premium growth, which should drive better value of new business growth at 25% and 24%, respectively.

"ICICI Prudential Life Insurance growth would be slower than the pack. ICICI Lombard GIC has seen healthy premium growth and profit should rise by 29%, sensitivity to investment gains is higher. Nippon AMC should report 2% rise in profit led by 2% rise in revenues."

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