Refined Bank: Earnings Preview: This sector will provide most of India Inc’s fourth quarter earnings

NEW DELHI – The final quarter of the previous fiscal year came at a time of unprecedented global volatility, as Russian tanks rolled into Ukraine and the Federal Reserve made a clear statement that it would hike interest rates in the world’s largest economy.

Indian companies are set to report earnings for this period over the next few weeks and this scorecard will play a large role in determining the direction of equity markets as the new fiscal year begins.

Amid multi-year surges in global commodity prices and the threat of funds returning to the US, analysts and money managers believe banks and financial sector companies will be the key drivers of January-March corporate earnings.

“Adjusted PAT (profit after tax) is expected to grow 32% year-on-year, driven primarily by the strong performance of banks,” said YES Securities.

“In financials, NII (net interest income) growth is likely to be the strongest over the last 8 quarters as borrowing picks up during the holiday season,” the broker said.

Elara Capital believes financials are likely to contribute a lion’s share of the incremental earnings over the past quarter, accounting for 58 percent year-on-year and 34 percent sequentially.

The financial services company estimates overall growth in after-tax earnings for Nifty50 companies at 15 percent year-over-year from January through March. Excluding financials, however, growth would fall to 8 percent year-on-year, it said.

For financials alone, YES Securities believes its after-tax earnings could grow a “staggering” 40 percent year-over-year.

The key factors that could drive financial stocks are a continued decline in the cost of borrowing and an improvement in credit growth.

The latest official data on sectoral bank lending is certainly encouraging, pointing to a sharp increase in loan disbursements in key areas, with total non-food loans registering 8 percent yoy growth in February 2022.

Year-to-date, non-food credit growth was 6.2 percent, suggesting that total credit growth for the previous fiscal year could top 9 percent, significantly higher than 5.5 percent in 2020-21 (Apr. March), ICICI Securities announced last week after the release of the data.

However, YES Securities warned that financials’ operating performance – measured by pre-provision operating profit – could be flat year-on-year, posting growth of just 4% despite a favorable base.

“We believe that the third wave was short-lived and its impact on asset quality should be minimal. Likewise, the impact of the Russia-Ukraine war should not be widespread and severe,” the brokerage firm wrote.

“The sequential development of provisions would not only be a function of deviations, but also of chargebacks in Q3 2022 and of already existing provision buffers.”

YES Securities expects provisions for HDFC Bank, ICICI Bank, Bank of Baroda and Federal Bank to decrease sequentially while there is an increase in provisions for Axis Bank, Kotak Mahindra Bank and a modest increase for the State Bank of India forecast.

EXCELLENT EFFECT

Financial services have a whopping 36 percent weight in the Nifty50 index, and the sector’s earnings should therefore play a key role in the index’s performance.

Given that the Nifty Bank has significantly underperformed the benchmark index over the past fiscal year – with returns of 9% versus the world’s best 19% of the Nifty50 – expectations are high for bank stocks, which fuel any rally.

Bank stocks reacted well to the Reserve Bank of India’s policy statement on Friday, with the Nifty Bank up 0.5 percent as analysts believe the central bank has set the stage for rate hikes in the coming months.

For adequately capitalized banks with healthy loan portfolios, raising interest rates works well when lending rates are rising and interest margins are widening.

“Bank Nifty releases US data and our RBI policy has found good support at 37k levels. Now it needs to be held above 38,300 levels to look for another target from 39,500 to 40,000 levels. Support for the week would be 36,600 and resistance 39,000-39,500,” said Vaishali Parekh, Technical Research Analyst at Prabhudas Lilladher.

The Nifty Bank was trading at 37,752.05 on Friday. With the Nifty50 ending last week near the 17,800 level, technical analysts are bullish on the index moving towards the 18,100-18,300 targets.

https://economictimes.indiatimes.com/markets/stocks/earnings/earnings-preview-this-sector-will-deliver-most-of-india-incs-profits-in-q4/articleshow/90742790.cms Refined Bank: Earnings Preview: This sector will provide most of India Inc’s fourth quarter earnings

Jaclyn Diaz

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