Banks Q4 earnings preview: In line with Q3, a moderate quarter likely. Top stocks to buy

JM Financial expects earnings for THE banking universe to grow just about 5% year-on-year for Q4. Private banks are seen leading the growth at 16.5%, while the same should be around 0.6% year-on-year for PSU banks.

"In a quarter impacted by tight liquidity and continued pressure on deposits, sequential decline in NIMs is a given – more so for private banks," the brokerage said.

NII growth

Analysts see continued pressure on net interest income for banks during the fourth quarter on the back of moderating loan growth and NIM compression, though benign credit costs should somewhat cushion PAT growth.

ICICI Securities estimates NII for the banks under its coverage to grow by a marginal 1%, with likely to report flattish NII quarter-on-quarter.

Asset quality

Banks are likely to witness yet another strong quarter in terms of asset quality. However, analysts said they remain vigilant of any pockets of stress in the unsecured portfolios.

"Slippages should remain under control and asset quality improvement will continue, driven by healthy recoveries. Credit costs are likely to remain at normalised level and reversal of AIF provisions for certain banks could lend some support to earnings," said Axis Securities.

Loan growth and deposits

Based on the provisional updates released by banks thus far, along with the systemic growth momentum and considering Q4 as a seasonally strong quarter, brokerages expect the banks to reflect these trends and register a 17-18% YoY credit growth (ex-HDFC).

The deposit growth, however, might lag credit growth despite banks going full throttle to improve mobilisation. "Most banks that have reported their provisional business performance have seen a significant improvement in deposit growth with healthy performance in both CASA and TDs," Axis Securities said.

Stock outlook

Analysts say sector valuations remain comfortable though near-term stock performance is likely to be driven by deposit performance and RBI’s liquidity stance.

PSU Banks remain key beneficiaries of such a tight liquidity environment while for private banks, deposit growth will dictate overall growth performance and thus valuations - HDFC Bank being the biggest beneficiary of easing in liquidity.

", are our preferred plays. We like Bandhan bank given inexpensive valuations and improvement in asset quality," said JM Financial.

Meanwhile, Nomura is betting on going into fourth quarter results. "While Axis Bank is also one of our preferred picks, we will watch out for any pressures on its loan growth outlook led by deposit mobilisation pressures," it said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)