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We expect our banking coverage universe to report profit growth of +47%% YoY/+12% QoQ in 4QFY23E led by continued strength in NIMs and low credit costs. Sector credit has grown at 15.7% YoY as of 10Mar’23 led by continued momentum in retail (esp. auto and unsecured products) and MSME credit. Deposit growth has picked up in 4QFY23 given rising rates on TDs (weighted average domestic term deposit rate - WADTDR increased by 63bps between Sep-22 and Feb-22) though it remains well below the fresh weighted average lending rate - WALR uptick (173bps uptick in fresh WALR since Apr22 vs 99bs for WADTDR). We expect deposit rates to remain elevated in near-to-medium term given banks will seek to rebalance LDRs to more normalized levels in the coming quarters. CASA ratios, expectedly, are likely to trend lower given shift of monies towards TDs. As highlighted earlier, we expect margins to remain healthy given continued repricing of MCLR-linked loans and benefit of recent RBI rate hikes. Opex growth is likely to moderate from the heady levels witnessed in 1HFY23 though still remain elevated given the uptick in retail loans. Asset quality will remain in fine fettle and provision costs will stay moderate (100bps for our coverage vs 110bps QoQ). We expect moderation in credit growth from current levels in FY24E as lagged effects of rate hikes play through. We build relatively healthy NIMs for our coverage universe in FY24E and thus expect healthy PPOP growth for FY24. In our view, larger banks offer attractive risk reward at current valuations given their ability to navigate the clouded macro environment. Our preferred plays are ICICIBC, AXSB. We believe IIB and Bandhan offer attract

* Grmowth momentum sustains; argins to remain healthy: Sector credit has grown at 15.7% YoY (and 3.0% QoQ) for 4QFY23 (as of 10Mar’23) led by continued momentum in retail (esp. auto and unsecured products) and MSME credit. Provisional loan growth numbers reported by few large banks have been strong and we expect the growth trend to hold up for other larger players too. We expect our banking coverage universe to report a loan growth of +17% YoY/+5% QoQ for 4QFY23E. We expect moderation in credit growth from current levels in FY24E as lagged effects of rate hikes play through. Deposit growth has picked up pace in 4QFY23 given rising rates on TDs (+10.3% YoY as of 10Mar’23) and we expect deposit growth rate to gradually improve in medium term given banks will seek to rebalance LDRs (incremental 12M rolling LDR at 109% as of 10Mar’23) to more normalized levels in the coming quarters. CASA ratios, expectedly, are likely to trend lower given shift of monies towards TDs. As highlighted earlier, we expect margins to remain healthy given continued repricing of MCLR-linked loans and benefit of recent RBI rate hikes.

* Opex growth to see moderation; healthy asset quality to keep provisions low: Opex growth is likely to moderate from the heady levels witnessed in 1HFY23 though still remain elevated given the uptick in retail loans. We expect opex for our coverage banks to grow at +18.5% YoY/+4% QoQ. However, strong NII growth (driven by healthy NIMs and strong loan growth) (+30% YoY, +6% QoQ) should result into robust PPOP growth of +28% YoY, +4% QoQ. Asset quality will remain in fine fettle and provision costs will stay moderate (100bps for our coverage vs 110bps QoQ) thus resulting in profit growth of +47% YoY/+12% QoQ in 4QFY23E.

* Valuations and view: Overall, we expect the quarter to be healthy for the banks under our coverage. We expect the return metrics to remain robust driven by a) continued strength in NIMs and b) healthy asset quality resulting in lower credit costs. In our view, larger banks offer attractive risk reward at current valuations given their ability to navigate the clouded macro environment. Our preferred plays are ICICIBC, AXSB. We believe IIB and Bandhan offer attractive risk reward at current valuations. Within smaller banks, Equitas SFB is our preferred pick.

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