Bank Loans to Surge 19% While Profits Stagnate at 6%: Jefferies
Jefferies predicts a surge in bank loan growth to 19% this quarter, but warns that profits may only grow by 6% due to margin pressures.
The Indian banking sector is facing a curious paradox this September quarter. While credit demand is firing on all cylinders, the actual bottom line for major lenders may not reflect this massive surge in activity. According to a recent equity research report by Jefferies, bank loan growth is projected to accelerate to 19 per cent year-on-year, yet aggregate profit after tax is expected to grow by a much more modest 6 per cent.
The Great Divergence: Credit Boom vs. Profit Squeeze
The disconnect between high-octane lending and sluggish profit growth is driven by several underlying economic pressures. Although large banks are seeing aggregate loans rise significantly, their ability to convert this volume into profit is being hampered by shrinking margins and a significant hit to non-core income.
Jefferies highlights that while the demand for credit remains robust, banks are grappling with:
- Pressure on Net Interest Margins (NIMs): Despite strong credit demand, the margins banks earn on their lending activities are under strain.
- Deposit Deployment Lag: While deposit growth is being managed—aided by FCNR-B inflows—there is a temporary drag on margins because it takes time to deploy these new funds into productive loans.
- Treasury Income Crash: A massive decline in earnings from treasury operations is expected to act as a heavy anchor on reported profits.
Treasury Income Set to Plummet
One of the most striking findings in the Jefferies report is the projected collapse in treasury profits. The firm estimates that aggregate treasury profit for large banks will stand at approximately Rs 55 billion for the September quarter. This represents a staggering 58 per cent drop from the Rs 131 billion recorded during the same period last year.
“Treasury income will fall sharply,” the report noted, explaining that elevated bond yields during the quarter have severely limited the gains banks can typically make from their investment portfolios.
The Silver Lining: Asset Quality and Core Profits
Despite the gloomy outlook for headline profits, the report suggests that the "engine" of the banking sector remains healthy. When looking past the volatile treasury numbers, the underlying fundamentals show signs of strength.
Jefferies expects core profit (defined as Profit Before Tax minus treasury income) for large banks to grow by a much healthier 15 per cent year-on-year. This indicates that the primary lending businesses are still performing well.
Furthermore, the outlook for asset quality appears positive:
- Declining Slippages: Aggregate slippages are estimated to decline sequentially to Rs 310 billion, down from Rs 333 billion in the June quarter.
- Improved Asset Quality: Lower credit costs and better asset quality are expected to provide a cushion against the impact of weaker margins.
In summary, while the headline profit figures for the September quarter may look underwhelming due to treasury fluctuations, the core banking business continues to show resilience through strong credit growth and improving asset health.