Earnings of private banks to increase in the third quarter of FY2023

- Private banks can report up to 25 percent increase in their net profit on an annual basis

Private sector banks are likely to report strong earnings growth during the October-December quarter of FY2023. Their earnings will be supported by strong loan growth, margin expansion, lower credit costs and lower provisioning costs. However, operating costs can remain high due to investments in businesses.

Banks' other earnings will not be affected much in the third quarter, as financial performance is likely to remain strong.

According to analysts' estimates, private banks can register up to 25 percent annual growth in their net profit.

On a quarterly basis, the net profit of these banks may increase by around 9 percent in the October-December quarter. Additionally, estimates suggest that the net interest income of these lenders could grow by around 18 percent annually and 5 percent quarterly.

Analysts expect net interest income to grow 24 percent year-on-year in the third quarter. Credit growth in the banking system is at a decade high, but deposit growth has remained modest.

According to Reserve Bank of India data, bank credit has increased by 17.4 percent in the fortnight ended December 16. Deposits increased by 9.4 percent during the same period.

Going forward, demand for credit is likely to remain strong as private sector capital spending has picked up on government spending, following a recovery in consumer demand.

Analysts have estimated that the credit growth of Indian banks could be up to 4 percent on a quarterly basis. They project an annual growth of 15 percent in systematic loans during FY 2023-24.

An interesting fact is that deposit growth has remained in the high range since September even as banks have hiked interest rates. The impact of the increase in deposit rates may be limited on bank margins, as they have benefited from a change in the environment of rising interest rates.

Many large banks' loan portfolios are linked to external benchmarks.

"There has been a sharp rise in deposit rates over the past few months, which has led to an increase in liabilities. So with a positive turnaround expected in Q3, rising cost of deposits will be a key factor in assessing the margin trajectory in FY24. However, there may be some pressure on margins in FY2024.

Banks are in good shape as far as asset quality is concerned. Non-Performing Assets (NPAs) are lowest in last 10 years. Going forward, it is expected that banks' bad loans will remain across the segment, which will also reduce the provisioning burden.