Banking Sector Faces Mixed Earnings Amid Margin Pressures

Public sector banks are projected to experience a 0.6% profit dip QoQ but maintain a 17.2% YoY growth in Q2 FY25. Private banks foresee mixed results with a modest 5% YoY PAT growth. Despite short-term struggles, both sectors show strong long-term growth prospects, according to Motilal Oswal.

As the earnings season for Q2 FY25 progresses, public sector banks (PSBs) are forecasted to encounter a slight decline in profits compared to the previous quarter, according to a Motilal Oswal report. The report anticipates PSBs' Profit After Tax (PAT) will decrease by 0.6% quarter-on-quarter (QoQ) but exhibit a more robust year-on-year (YoY) growth of 17.2%.

The slower growth trajectory is attributed to stagnant net interest margins (NIMs) and an uptick in loan loss provisions (LLP). Public banks' Net Interest Income (NII) is projected to rise by approximately 6% YoY, though interest margins may remain under strain.

Despite these immediate hurdles, the report suggests that PSBs are poised to achieve a compound annual growth rate (CAGR) of 15% between FY24 and FY26, highlighting sustained long-term growth. In contrast, private sector banks are predicted to experience mixed outcomes. Their Pre-Provision Operating Profit (PPoP) is expected to climb by 12% YoY and 1% QoQ, while PAT growth could be a modest 5% YoY and 0.6% QoQ.

Looking forward, private sector banks are anticipated to witness steady profitability increases, with earnings growing at a CAGR of 12.4% over FY24-FY26. Overall, both public and private banks may encounter tempered growth in the second quarter due to margin pressure and elevated provisions, but their long-term earnings outlook remains optimistic.

(With inputs from agencies.)