Banking Sector Outlook for Q1FY25: Challenges and Opportunities Ahead

The banking sector has had a strong finish to FY24, but the outlook for Q1FY25 is expected to be relatively muted. While most banks are projected to see single-digit growth, there are some positive trends on the horizon.

According to projections by JM Financial, the banking sector is expected to grow 6.9% year-on-year in Q1 FY25, excluding HDFC Bank. Private banks are expected to see a growth of 7.8% YoY, while PSU banks may see a growth of 5.9% YoY. Loans are expected to grow by 14.9% YoY, and deposits may see a 12.7% YoY uptick.

Steady systematic credit growth is seen as a positive, with NII expected to grow at 9.5% YoY. However, analysts at Elara Capital caution that NIM strain may persist, with ongoing challenges in balancing growth and NIM. The ratio of operating expenses to revenue coverage is expected to decrease slightly, as banks adjust their operational costs to offset NIM pressures.

Asset quality is expected to show a generally favourable outcome, but the first quarter may exhibit seasonal softness. Specific areas of concern include personal loans and MFIs, with potential disruptions linked to election phases affecting collection efficiencies.

Looking at the Q1 results for a few top banks, HDFC Bank anticipates a strong year-on-year increase in net profit, while ICICI Bank and SBI are also expected to see positive growth in net profit and NII. Despite challenges in NIM and asset quality, the banking sector is poised to navigate through these hurdles and continue on a path of growth and stability.

Overall, while the banking sector may face some challenges in the near term, there are positive indicators that suggest a resilient and adaptive industry that is well-positioned to weather the storm and emerge stronger in the long run. Investors will be closely watching the Q1 results and management commentary for insights into the sector’s performance and outlook for the rest of FY25.