Q1 Results Preview: Public Sector Banks to Outperform Private Lenders

Bombay: Amid tight liquidity, several lenders raised deposit rates and aggressively pushed their franchise networks to mobilise deposits, resulting in higher operating expenses and funding costs. To limit the impact on margins, banks also raised lending rates. However, analysts still expect net interest margins, a key measure of profitability, to contract by 5-10 basis points quarter-on-quarter and by 5-50 basis points year-on-year for most banks in Q1FY25 due to lag effects.

The weighted average domestic deposit rate (WADTDR) for private sector banks for April-May FY25 rose by 8 basis points to 6.90 per cent, compared to the average for 4QFY24. The corresponding weighted average lending rate (WALR) remained at 10.75 per cent, implying a credit spread that fell by 8 basis points. For public sector banks, the WADTDR rose by 4 basis points to 6.98 per cent and their average lending rate fell by 3 basis points quarter-on-quarter to 9.22 per cent, implying a spread that fell by 7 basis points. It is to be noted that the WADTDR and WALR for 2M1QFY25 exclude the month of June. “We see NIM to be marginally lower (2-10 bps) sequentially for most banks in the insurance universe,” Yes Securities said in its Q1 FY25 earnings preview report.

According to Emkay Global, fresh slippages for some banks may be higher due to seasonal impact, elections, impact of heatwave on agri/kisan credit card portfolio (primarily for public sector banks like SBI and large private banks like HDFC Bank), while weaker corporate recovery may delay the trajectory of moderate bad loan repayments in Q1 FY25 (down just 10 basis points on quarterly basis).

Public sector banks are expected to be in a relatively better position with net profit growth at 14 per cent YoY as against 8 per cent for private banks, aided by limited margin reduction, better priority sector credit certificate fees for select banks (Indian, Canara), trading gains, lower staff costs QoQ and contained credit costs. In the case of large private banks, we expect ICICI Bank to remain an outlier on a relative basis due to better growth/contained credit costs, while we expect Axis, Kotak to report a relatively weak quarter. In the case of HDFCB, QoQ deposit growth and margin retention remain key monitorable factors, the Emkay report added.

Analysts said banks and financial firms with larger microfinance portfolios could see marginally higher deviations in the first quarter of fiscal year 2025 due to election-related disruptions in dues collections in May 2024, despite partial recovery in June 2024.