Banks to boost earnings growth in Q4, while IT services report subdued numbers

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  • The earnings season for the banking sector is about to start HDFC Bank‘s results will be announced on April 15, followed by ICICI Bankis on April 22.
  • Motilal Oswal expects credit growth of 15.7% year-on-year for the banking sector in FY23 and 13.3% in FY24.
  • With deposit rates rising on interest rates, analysts are positive on deposits but are concerned about credit growth amid high lending rates.

Banks are expected to report healthy credit growth in the January through March quarter, driven by traction in retail, small and medium-sized enterprises (SMEs), and corporate customers, according to analysts at Motilal Oswal.

The banking sector earnings season kicks off with HDFC Bank’s results due on April 15, followed by those of ICICI Bank on April 22.

The brokerage firm expects 15.7% annual credit growth for the banking sector in FY23 and 13.3% in FY24.

While the corporate credit portfolio has shown a gradual recovery, a recovery in corporate capital expenditures would be critical to maintaining growth momentum going forward.

“The residential, vehicle, unsecured and small business segments continue to perform well, while demand for commercial vehicles is also improving. The credit card business is in healthy dynamics, with strong spending growth,” said the Motilal Oswal report.

Bank deposits rise with rate hikes, but credit growth is worth watching
With deposit rates rising on interest rates, analysts are positive on deposits but are concerned about credit growth amid high lending rates.

Since May 2022, RBI has raised the repo rate six times, making bank deposits attractive again. This is reflected in the healthy growth of bank deposits in the March quarter. HDFC Bank reported strong growth in deposits and advances on Tuesday with 21% growth in deposits and 16.9% in advances at ₹18.8 lakh crore and ₹16 lakh crore respectively on 31 March 2023.

At the same time, advances from private lender Bandhan Bank rose 9.8% and deposits rose 12.2% in the March quarter.

“Deposit rates have risen sharply in recent months, with the build-up of liability becoming increasingly important. However, the differential with credit growth remains high. While we expect a stable-positive margin in 4QFY23, rising cost of deposits and further rate hikes would impact the margin trajectory in FY24. In our view, margins are likely to come under pressure in FY24,” said the Motilal Oswal report.

This week will provide direction for the industry’s continued growth as the Reserve Bank of India is expected to announce a decision on a rate hike in its two-month monetary policy next Thursday. Economists expect the repo rate to rise by 25 basis points to 6.75%.

Furthermore, any change in the demand environment, given the challenging macroeconomic situation, high inflation and a high base effect are important points for the sector.

Expect moderate revenue growth for the IT sector in the fourth quarter amid a weak macro
The revenue season for the IT services sector kicks off with Tata Consultancy Services results due April 12, followed by Infosys on April 13 and HCL Technologies on April 20.

Motilal Oswal expects moderate revenue growth for the sector, as weak macroeconomic factors, such as the recent banking crisis in key US and European markets, could affect bank spending there.

“Our IT services coverage universe is expected to deliver median revenue growth of 0.8% quarter-on-quarter and 9.2% year-over-year in constant currency (CC) in 4QFY23,” said a report by Motilal Oswal. .

The report suggests that while Indian IT service providers have no significant exposure to the affected US regional banks, fears of a banking crisis could affect banks’ IT spending in the near term.

In addition, the impact of the crisis on companies’ quarterly results in March will be the main measurable factor during Q4 management commentary.

“Besides banking, financial services and insurance (BFSI), hi-tech, manufacturing and retail can also report moderate growth in 4Q. Customers have begun to reduce discretionary spending as they increasingly focus on cost efficiency. IT services companies are seeing a shift to cost optimization deals, along with more vendor consolidation deals in the pipeline,” the report said.

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Credit growth is showing signs of reversing from cyclical highs, but asset quality remains sound