India’s banking sector is heading into the first-quarter earnings season. The sector is moving with expectations of another healthy performance, even as lenders continue to deal with pressure on margins.
In the latest brokerage report by JM Financial, strong loan growth, stable asset quality and improving treasury income are expected to support profitability during the quarter. However, higher funding costs and pressure on net interest margins could remain key challenges.
The brokerage house report noted that most banks have maintained healthy business momentum, although deposit growth has not kept pace with credit growth. This has increased the credit-to-deposit ratio for many lenders, making deposit mobilisation an important factor to watch in the coming quarters.
JM Financial’s preferred banking picks
As per the brokerage report, these banks stand out because of their business growth, stable asset quality, diversified lending portfolios and improving operating performance. JM financial believes that these banks are well placed to navigate near-term challenges while maintaining earnings growth.
Loan growth remains the biggest support
JM Financial report added that banking activity remained healthy during the April-June quarter. Provisional business updates from 28 banks indicate that overall loan growth remained strong.
“Strong loan growth of ~16.4% YoY,” the report noted, while deposit growth stood at around “12.3% YoY.”
Among private sector lenders, Axis Bank reported one of the strongest loan growth numbers, followed by HDFC Bank and Kotak Mahindra Bank. Among small finance banks, Ujjivan Small Finance Bank and Equitas Small Finance Bank continued to report loan growth of more than 25% year-on-year.
Furthermore, the report also noted that the recent data from the Reserve Bank of India (RBI) also suggests that incremental lending has been driven mainly by large corporate borrowers and non-banking financial companies (NBFCs), while retail lending has remained largely stable.
Bank sector: Margins may remain under pressure
JM Financial expects bank sector stocks to face pressure on Net Interest Margin (NIM).
“We expect NIM to remain under pressure,” the brokerage said.
According to the JM Financial report, one reason is the faster growth in lower-yield loan segments such as corporate lending and home loans. At the same time, banks have raised more funds through high-cost Certificates of Deposit (CDs), increasing funding costs.
The brokerage also pointed out that the first quarter is usually affected by seasonal agricultural loan slippages, which can also impact margins.
However, it expects Net Interest Income (NII) growth across its coverage universe to improve to around 11% year-on-year during the quarter.
Asset quality continues to stay stable
According to the brokerage report, “Asset quality trends remain favourable,.” for most of the top picks among JM Financial’s top banking bets.
Stress in unsecured retail loans and microfinance portfolios has continued to moderate, while collection efficiencies have remained healthy.
The brokerage highlighted that Ujjivan Small Finance Bank reported another quarter of improving Gross Non-Performing Assets (GNPA), while Bandhan Bank maintained healthy collection efficiency.
Stable credit costs should continue to support profitability even if margins remain under pressure, added the brokerage report.
What should investors watch out for?
Earnings growth in the banking sector is expected to remain healthy despite near-term pressure on margins. “Healthy quarter despite NIM pressure,” the report said.
The brokerage believes falling bond yields could improve treasury income, while operating expenses are expected to grow at a slower pace than balance sheet expansion.
JM Financial believes investors should closely monitor deposit costs, Liquidity Coverage Ratio (LCR) trends after new regulations, mobilisation of Foreign Currency Non-Resident Bank [FCNR(B)] deposits, implementation of the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, and any signs of stress in small and medium enterprises or unsecured retail lending.
Disclaimer: This article discusses sectoral trends and earnings expectations for the Indian banking sector based on analysis by JM Financial. The information provided is for educational and informational purposes only and does not constitute a specific investment recommendation, buy/sell/hold signal, or financial advice. Banking stock valuations and performance are subject to market volatility, regulatory policy shifts by the Reserve Bank of India (RBI), and macroeconomic factors. Readers are advised to consult a SEBI-registered financial advisor before making any investment decisions. This disclaimer has been generated using AI to support user well-being and responsible content consumption.
