Report predicts modest PAT growth for banking sector in FY25 and FY26
The banking sector is expected to see a subdued profit after tax (PAT) growth of 6 percent in FY25 and 4 percent in FY26, according to a report by IIFL capital. However, given the inexpensive valuations, much of this outlook is already factored into stock prices. The sector's performance will largely depend on whether earnings downgrades stabilize. India's banking sector saw a mixed performance in the third quarter, with net interest income (NII) growing 6 percent year-on-year (YoY), core pre-provision operating profit (PPOP) rising 13 percent, and adjusted profit after tax (PAT) increasing by 7 percent. While earnings expectations for FY25 have been slightly upgraded by 1 percent, a 3 per cent downgrade has been made for FY26.
Banks' loan growth has slowed due to elevated loan-to-deposit ratios (LDR), although overall system credit growth remains healthy at 14 percent YoY, supported by non-banking financial companies (NBFCs), external commercial borrowings (ECB), and bonds. IIFL-covered banks reported loan growth ranging between 3-16 percent YoY in Q3, compared to the system-wide growth of 11.2 percent. Unsecured loan growth has started moderating, declining by 1-5 percent quarter-on-quarter (QoQ) due to increased stress and regulatory interventions.
Public sector banks (PSBs) are facing a decline in deposit market share as liquidity deficits and competition for deposits remain high. Despite recent measures by the Reserve Bank of India (RBI), system-wide liquidity is still tight, leading to a rising liquidity leakage of 5.5 per cent of net demand and time liabilities (NDTL). Net interest margins (NIMs) have returned to pre-rate hike levels, and further contraction is expected as RBI moves towards a rate-cut cycle. Reported NIMs remained flat or declined by up to 15 bps QoQ, with sharper drops for banks like Bank of Baroda and SBI due to overseas exposures.
With banks slowing down on large-scale hiring and PSU banks already factoring in wage provisions, operating expense (opex) growth has moderated. While NII growth remained subdued, core PPOP increased by 13 per cent YoY due to only a 2 per cent YoY rise in opex. Private banks saw a slightly higher opex increase of 6 per cent YoY. This moderation is now a key lever in managing profitability.
The microfinance (MFI) sector remains under pressure due to emerging state-specific issues, increased stress among borrowers with multiple loans, and the upcoming implementation of a three-lender cap from April 2025. With rising delinquencies in credit cards personal loan (PL) stress is expected to take a few more quarters to peak.
Unsecured business loans, which have grown rapidly, are also being monitored for potential risks. However, asset quality in the MSME and corporate sectors remains stable. (ANI)