Banks' Q3FY25 Outlook: Brokerages see weak earnings amidst slow loan growth, pressure on NIMs

Banks

Indian banks are expected to report weaker earnings in the third quarter of FY25 due to weaker loan growth, possible higher slippages in unsecured loans, and pressure on net interest margins (NIMs), according to brokerage firms.

Subdued recovery trends and softer deposit growth will also contribute to weak earnings, brokerage reports added.

“Overall profitability for PVBs (private banks) will remain subdued in Q3, dragged down by slower credit growth, contracting margins, elevated opex, and loan loss provisions,” Emkay Global said.

“PSBs (public sector banks) too will report some earnings moderation, sequentially, due to lower treasury gains, hurt by the recent resurgence in G-Sec yields, slower NPA (non-performing assets) recovery, and margin softness, partly offset by lower opex and contained credit costs, as corporate asset quality remains well under control,” Emkay Global report added.

Profit after tax of state-owned and private banks are expected to grow in the range of 10-70 percent in Q3FY25. Some banks are expected to report a fall.

According to Motilal Oswal, Equitas Small Finance Bank, IDFC First Bank, IndusInd Bank, and RBL Bank are expected to report a fall in net profit on a yearly basis.

NII and NIMs

Elara Capital said in its report that the impact on NIMs will be due to three factors: continued repricing on the back of deposit book (albeit not incrementally material) and sticky incremental deposit cost, higher interest income reversal (higher slippages) and the impact of penal interest (for a few).

In terms of the recent rate changes, large banks like Axis Bank, IndusInd Bank and Canara Bank have raised rates in the 1-3- year bucket in December also, the impact of which may be visible in the ensuing months. The persistent rise in deposit rates indicates a strain on deposit mobilisation and funding cost challenges may persist in the near term, Elara Capital added.

On the net interest income (NII) front, the brokerage firm believes that banks may report a 1-5 percent growth in Q3FY25.

“NII will moderate due to slower advances growth, absence of treasury gains (in case of PSBs), and continued cost pressure,” Emkay Global said.

Analysts further said that the overall funding cost is expected to remain higher and this can put pressure on NIMs despite the Reserve Bank of India (RBI) cutting the CRR (cash reserve ratio) by 50 bps due to systemic liquidity, but banks did not cut deposit rates in order to keep the deposit momentum intact.

On an overall basis, we expect a 5-25 bps margin contraction in 3Q, Emkay Global said.

Asset quality

Banks are expected to face pressure on the asset quality in the third quarter of the current financial year due to higher slippages in MFI, unsecured, and KCC segments.

Axis Securities report said that banks with a higher share of unsecured loans would continue to see an uptick in slippages and deterioration in asset quality .

MFI stress is on the rise in Q3, post the implementation of the MFIN guardrails since August 2024, which should manifest in the higher NPAs/PAR portfolio.

The postponement of MFIN guardrails 2.0 from Jan 1 to April 1, 2025, may give some breathing space to MFI lenders/borrowers, albeit a prolonged asset quality cycle. However, we believe that lenders, mainly banks/SFBs, are likely to accelerate provisions in H2FY25 and hope to move on to a relatively lower stress/cleaner slate in H2FY26, Emaky Global said.

Deposit and credit growth
The systemic credit growth (as of December 13, 2024) has tapered to ~11.5 percent vs 15-16 percent in the recent past. This is driven primarily by a significant slowdown in the unsecured loans, alongside banks, mainly private banks, intending to bring down their LDRs to a balanced level, Axis Securities said in a report.

Amidst concerns around asset quality in certain segments (majorly unsecured lending), weaker-than-expected macro data and constraints around LDR (for certain banks), banks have been cautious in chasing aggressive growth. We expect banks under our coverage to deliver ~12 percent YoY credit growth in Q3FY25, in line with the industry growth, the report added.

Among banks which have provided business updates for Q3, most have reported suboptimal credit growth, except IDFC First Bank, Karur Vysya Bank, Punjab National Bank, Equitas Small Finance Bank, and AU Small Finance Bank.

“With a new RBI governor in office, we expect some easing of credit/liquidity squeeze during CY25 and this would thus ease pressure on banks,” Emkay Global said.