Banking Sector Q4 Preview: Lenders Brace For Muted Quarter On Soft Loan Growth, Margin Squeeze

The March quarter, which has traditionally been a strong one for the banking sector, is likely to witness muted earnings on the back of soft credit growth, continued pressure on margins and the impact of an interest rate cut, six brokerages said in their preview reports.

"In Q4FY25, banks are expected to experience a modest earnings growth of 1% quarter-on-quarter (QoQ) and a dip of 5% year-on-year (YoY), impacted by moderation in growth and NIM, and gradual normalisation of credit cost," according to Dolat Capital Market Pvt.

HDFC Bank Ltd. will kickstart the earnings season for the banking sector on April 19.

So far, 21 public and private sector banks have reported provisional numbers, which show that loan growth was lower on a year-on-year basis.

As of March 31, the loan growth of public sector banks was 9-18% on year and that of private sector banks was 1.4-20.3%.

Meanwhile, the deposit growth of private sector banks was higher at 7-27% on year, as compared to public sector banks which reported 5-13% growth on year.

Banking sector credit growth was 11% as of March 21, higher than deposit growth of 10.3%, according to the Reserve Bank of India data.

While frontline private lenders like ICICI Bank and Kotak Mahindra Bank are expected to show resilience, mid-sized banks may struggle. Public sector banks are set to report subdued earnings growth, largely in line with expectations.

Despite the 25-basis-point repo rate cut in February and a pressure on net interest margins, many private banks, especially ICICI Bank Ltd. and Kotak Mahindra Bank Ltd., are seen benefitting from seasonal factors such as stronger fee income and treasury gains.

However, the outlook for some mid-sized private banks is less promising, with IndusInd Bank and AU Small Finance Bank likely to report a weak set of numbers with their unsecured and microfinance portfolios under scrutiny.

IndusInd Bank will be on the radar as its business momentum is likely to be impacted, given the recent episode around derivative accounting and management transition.

The broader banking system faces persistent liquidity challenges and slow loan growth, with overall system loan growth under 12%. Despite a seasonal uptick in January-March, sluggish credit demand, tighter deposit growth, and delayed private capex is holding back growth across the board.

This has come at a time when higher funding costs and deposit rates are failing to materialise at the required pace.

For public sector banks, NIMs are expected to remain stable led by re-pricing on marginal cost of lending rate. Private players will face slight drop in margins due to the recent rate cuts.

Among state-owned lenders, State Bank of India and Bank of Baroda are likely to post steady earnings on the back of strong asset quality and higher-than-expected treasury gains.

In terms of asset quality, the quarter could see some relief with recovery trends gaining momentum, particularly in corporate debt. However, concerns linger over unsecured loans, especially microfinance, where delinquencies remain elevated.

While most banks are expected to see lower credit costs from a change in regulations, the vulnerability of unsecured segments could result in higher slippages for certain players, analysts said.

The revised norms for the sale of government-guaranteed security receipts should release the excess provisions for PSU banks, which they can use for potential requirements, Motilal Oswal Financial Services said.

Going forward, the new financial year is poised to unfold in two distinct halves. The first half could witness strained liquidity and continued NIM pressure, while the second half promises more favourable conditions, particularly for state-owned banks and larger private lenders.

For investors, risk-reward dynamics seem skewed towards private sector banks, with solid earnings resilience and reasonable valuations offering an attractive proposition in the medium term.

Overall, the quarter offers mixed prospects and banks are navigating through softer growth, evolving liquidity conditions, and asset quality concerns, with PSU banks better positioned in the near term.