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Revenues slowing sharply; asset quality stable

We expect earnings growth for banks to remain healthy at ~17% yoy, but operating profit growth is weak as the NIM contraction cycle is underway. Non-banks under coverage will continue to deliver strong qoq loan growth. Earnings growth has support from lower provisions as asset quality remains in a healthy spot for all types of lenders. Key conversation would be on NIM progression and deposit mobilization trends.

Banks: Operating profit growth witnessing a sharp slowdown

3QFY24 is likely to be an extension of the theme that played in 1HFY24. Trends in operating profit growth are likely to be weak, though we expect earnings growth to have support from lower provisions. The provisional business data releases by a cross-section of banks suggests that loan growth has been ahead of deposit growth. Treasury gains is likely to be negligible. Asset quality is likely to remain in a sweet spot, leading to lower slippages, but recovery and upgrades are likely to lower as well. We expect banks to report a 15-20 bps decline in NIMs. While loan yields have limited room for expansion, we see deposit costs likely to re-price higher. A key discussion would be trends in deposit mobilization, as it has lagged loan growth. This would have a bearing on our NIM forecasts, given the sensitivity of the policy rates on NIM.

We prefer to own large banks after the rally in mid-tier banks. The improvement in asset-quality ratios leading to lower credit costs and normalization of growth has played out when we look at the valuation.

NBFCs: Strong headline performance, asset quality monitorable in pockets.

We expect most non-banks under coverage to deliver 6-39% growth in earnings, driven by healthy 19-43% loan growth (excluding 6% for LICHF, decline for LTFH). This is partially offset by 40-160 bps yoy (13-35 bps qoq) compression in NIM for most reflecting higher cost of refinance and rate transmission by banks. While we do not find red flags in most asset classes, likely stress in unsecured loans, tractors and a rise in early delinquencies down South will dominate discussion with investors. Retain positive stance; Shriram, LICHF and Aavas/Home First in affordable HFCs remain our top picks.

A strong quarter for the non-lenders

3QFY24 has been a strong quarter generally for capital market players, as reflected in market returns (Nifty-100 up ~12% in 3Q), strong retail flows and bond issuances (up 30% qoq). Among AMCs, equity AAUM growth has been much stronger for HDFC/Nippon (11-12% qoq), whereas it was much weaker for ABSL/UTI (4-5% qoq), reflecting the underlying fund performance. CAMS and Kfin are likely to benefit from operating leverage in the core MF RTA business, with a growing contribution from the non-MF businesses. Rating agencies should gain from sequentially stronger bond-raising activity, but nonrating revenues are harder to predict given the linkages with global markets.