Banking sector earnings dragged by treasury hits, misses expectations; management retains positive outlook

April-June quarter earnings of the banking sector failed to meet expectations pinned by analysts at ICICI Securities owing to the MTM hit and elevated opex. “For April-June quarter, banks under our coverage reported ~16% YoY / 2% QoQ growth in NII. Core operating profit grew 17% YoY while treasury loss dragged operating profit lower by 13% YoY / 18% QoQ,” ICICI Securities said in a note. Seeing the quarterly results miss expectations pinned by analysts, the brokerage and research firm has now revised FY23E/24E earnings a tad downwards.

Treasury knock drags earnings

G-sec yields have surged 65 basis points since March of this year to 7.5% till June and corporate bond yields are up by ~70bps. “This created pressure on treasury profits for banks that dragged overall earnings growth. Having >25-60% of the investment portfolio in AFS/HTM with 1-2 years of modified duration led to a treasury knock,” analysts explained. Banks with relatively higher investment in corporate bonds witnessed an above-expected hit. Overall, ICICI Securities said that treasury loss had an impact of ~10-20% on core operating profit of banks.

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State Bank of India reported a treasury loss of Rs 65,490 million while HDFC Bank’s losses were at Rs 13,117 million — the two highest among lenders. Kotak Bank with more than 60% of its investment portfolio in AFS/HTM with a modified duration of 1.04 years had a treasury knock of Rs 8,570 million.

Management commentary strong

Banks, however, remain upbeat on growth and the same is reflected in advance growth of 2-4% QoQ in April-June quarter, otherwise a seasonally slow quarter. “Growth was primarily led by retail and proportion of unsecured retail advances inched up,” analysts said. For ICICI Securities coverage universe, loan growth was clocked at 18% on-year while deposits grew 12%. Net internet income soared 16% during the period.

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“Banks are getting more confident on credit risk having sailed through the covid second wave relatively well. Credit cost was managed better than expected due to reversal of standard asset provisioning or utilisation of contingency provisions or non-creation of incremental buffer,” ICICI Securities said. The brokerage firm believes growth to gather pace post Q1FY23 as further levers are available for SME, business banking and corporate lending. “Bank’s investment portfolio has repriced to current yield levels through MTM knock, but carries the risk of another hit in the event of further rise in interest rate expectations.”