Banks Expected to Report Weak Earnings Again—Top Stocks to Buy Before Results

Bank Earnings Outlook:

Banks are expected to report weak earnings for the September quarter, continuing a trend seen in previous quarters. However, this quarter may show some improvement compared to the June quarter, mainly due to private banks benefiting from higher fees and lower provisions.

The weak performance will largely stem from a slowdown in loan growth, leading to muted net interest income (NII). Still, asset quality should remain stable, except for banks involved in microfinance, according to analysts.

Kotak Equities noted that provisional data from various banks indicates a slowdown in loan growth, with a focus on reducing the credit-to-deposit ratio. Both public and private sector banks are expected to report lower earnings growth. Private banks are projected to see only 3% growth in profit after tax (PAT) year-on-year, with NII growth estimated at around 11%.

Key Performers:

Among private banks, Motilal Oswal predicts Bandhan Bank will lead with a 24% year-on-year growth, followed by IDFC Bank at 23% and Federal Bank at 16%. HDFC Bank, the leading private lender, is expected to show a loan growth of 7% year-on-year, with NII growth around 10% and a modest 2% increase in PAT. For public sector banks, NII growth is expected to be moderate at 6%, although State Bank of India (SBI) is likely to report a strong 17% PAT growth and a 6% rise in NII.

Stocks to Consider:

Despite the challenging outlook, analysts believe bank valuations are close to long-term averages, making them a potential value investment. JM Financial recommends focusing on larger banks, highlighting ICICI Bank, Axis Bank, and SBI as key picks.

Nomura is optimistic about banks with strong underwriting practices and lower credit exposure to risky segments, such as unsecured retail and microfinance. Their top choices include ICICI Bank, SBI, Kotak Mahindra Bank, and Federal Bank.