Financial sector Q1FY24 preview: Expect healthy earnings growth, but margins to moderate going ahead, says Motilal Oswal

The brokerage firm expects financial firms’ systemic loan growth to remain healthy in Q1FY24, with healthy credit growth of 15.4 per cent year-on-year (YoY) in June 2023, driven by continued traction in the retail and SME (small and medium-sized enterprises) segments.

“The corporate segment has remained sluggish, dragging down overall loan growth. Home, vehicle, unsecured, and small business segments continue to do well. The credit card business is seeing strong momentum, with robust growth in both spending and the number of cards. We estimate systemic loan growth of 13 per cent in FY24,” Motilal Oswal said.

“The rise in the cost of deposits will lead to margin moderation for several banks, though some banks may report stable margins in Q1FY24. Margins are likely to see pressure mainly from Q2FY24 onward, in our view,” the brokerage firm said.

The brokerage firm estimates slippages to remain under control, which, along with recoveries, should aid the ongoing improvement in asset quality.

“Restructured and ECLGS (emergency credit line guarantee scheme) books are likely to moderate gradually, while low SMA (special mention accounts) books will keep credit costs in check. We estimate banking sector earnings to grow nearly 54 per cent and 23 per cent YoY in Q1FY24 and FY24 respectively,” said the brokerage firm.

“We estimate our banking coverage universe to deliver about 54 per cent YoY growth in PAT (profit after tax) in Q1FY24 and sustain PPoP (pre-provision operating profit) growth at nearly 35 per cent YoY. In Q1FY24, we expect private and PSU banks to report earnings growth of nearly 32 per cent and 96 per cent YoY, respectively,” Motilal Oswal said.

As per the brokerage firm, commentaries on slippages (especially for MSME), the performance of the restructured book and provisioning guidance will be in focus. Commentaries on the growth outlook for unsecured loans and margins amid rising deposit costs will also be a key area of focus.

Deposit traction is another key monitorable amid liquidity tightening and the rise in funding costs/bulk deposits mix to meet demand, Motilal Oswal said. The brokerage firm added that the traction in fee income and treasury performance due to the moderation in bond yields are key focus areas.

Here’s what the brokerage firm estimates about the different segments in the financial sector for Q1FY24:

Q1FY24 estimates for private banks

Motilal Oswal expects private banks to report PPoP growth of about 31 per cent year-on-year (YoY) but flat quarter-on-quarter (QoQ) and PAT growth of nearly 32 per cent YoY (-4.8 per cent QoQ) in Q1FY24.

“Earnings should remain steady, aided by healthy business growth and benign credit costs, but margin pressure and elevated opex may affect the overall growth trajectory,” said Motilal Oswal.

The brokerage firm believes margins may moderate for select private banks due to the rising cost of deposits and stagnating yields. However, healthy loan growth will continue to aid NII (net interest income).

“We estimate NII growth of about 28 per cent YoY (3.7 per cent QoQ) in Q1FY24, with ICICI Bank at nearly 36 per cent, Kotak Mahindra Bank at nearly 32 per cent, Axis Bank at nearly 31 per cent, HDFC Bank at about 26 per cent, and IndusInd Bank at 18 per cent YoY,” said the brokerage firm.

Slippages may remain under control across segments, said the brokerage firm but Bandhan Bank may be an exception on this front due to residual recognition from the SMA pool.

Motilal Oswal believes asset quality should continue to improve in Q1FY24, while the growth rate and performance of unsecured loans will be key factors to watch out for.

Q1FY24 estimates for public sector banks

Earnings growth of public sector banks (PSBs) may remain robust, aided by controlled credit costs, though margins can show a downside bias on rising funding costs.

“PSBs are likely to deliver NII and PPoP growth of 27 per cent and 40 per cent YoY respectively and PAT growth of about 96 per cent YoY (-12.8 per cent QoQ) in Q1FY24E. Opex is likely to remain elevated as banks provide for wage revisions. Treasury performance should remain healthy due to a moderation in bond yields and a recovery in capital markets,” said Motilal Oswal.

“Loan growth may remain modest after strong growth in FY23. Most PSBs are already guiding for moderation in loan growth in FY24. Asset quality improvement is likely to continue, while healthy PCR (provisioning coverage ratio) and a sharp decline in SMA/stressed asset pool will keep credit costs in check,” said the brokerage firm.

Motilal Oswal expects AU Small Finance Bank to report a stable performance, as benign provisions should offset a slight margin decline. Advances may grow by a healthy 5.1 per cent QoQ. The brokerage firm estimates Q1FY24 PAT to grow nearly 44 per cent YoY to ₹390 crore (29 per cent CAGR in FY23-25E).

Equitas Small Finance Bank is likely to report another robust quarter, with PPoP and PAT growth of 21 per cent and 81 per cent, respectively, YoY and nearly 33 per cent YoY growth in advances (5.4 per cent QoQ), Motilal Oswal said.

Q1FY24 estimates for life insurers

Motilal Oswal expects premium growth for the segment to remain muted after a robust Q4FY23.

“Demand for the annuity, non-PAR and credit life segments are likely to fare relatively better, while Protection is witnessing a gradual recovery. The growth outlook, after the implementation of budgetary changes especially in the non-ULIP segment, would be a key monitorable,” said the brokerage firm.

“We expect HDFC Life Insurance Company, SBI Life Insurance Company and Max Financial Services to post APE (annual premium equivalent) growth of 15 per cent, 8 per cent and 8 per cent YoY, respectively, in Q1FY24, while ICICI Prudential Life Insurance Company is likely to post a 9 per cent YoY decline in APE,” Motilal said.

“We estimate VNB (value of new business) growth of about 8 per cent YoY for SBI Life Insurance Company, 28 per cent for HDFC Life Insurance Company and 17 per cent for Max Financial Services. We estimate ICICI Prudential Life Insurance Company’s VNB to decline by 5 per cent YoY in Q1FY24,” said Motilal Oswal.

Q1FY24 estimates for payments and fintech

Motilal Oswal highlighted that the momentum in credit card spending and new account sourcing is likely to remain healthy for SBI Cards and Payment Services. Margins may remain broadly stable after a sharp fall, aided by a rising mix of EMI loans even as funding costs may continue to inch up. The credit cost may stay elevated, keeping earnings flat on a sequential basis, said Motilal Oswal.

For Paytm, Motilal estimates Q1FY24 gross merchandise value (GMV) to grow 35 per cent YoY to ₹4 lakh crore, while the value of loans disbursed is likely to grow 170 per cent YoY and 19 per cent QoQ to ₹15,000 crore.

The brokerage firm expects Paytm’s revenue from operations to grow 43 per cent YoY to ₹2,400 crore, while contribution profit may grow 82 per cent YoY to ₹1,320 crore (contribution margin of nearly 55 per cent). “We estimate EBITDA before ESOP cost to come in at ₹115 crore,” said Motilal Oswal.

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Disclaimer: The views and recommendations given in this article are those of the brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

Updated: 05 Jul 2023, 02:06 PM IST