As the second quarter of FY25 earnings season begins, public sector banks (PSBs) are anticipated to report a slight decline in profits compared to the previous quarter, according to a report by Motilal Oswal. The report estimates that PSBs’ Profit After Tax (PAT) will drop by 0.6% quarter-on-quarter (QoQ) while showing a strong year-on-year (YoY) growth of 17.2%.
Factors Behind Profit Decline
The expected slowdown in profit growth for PSBs is attributed to flat net interest margins (NIMs) and a slight rise in loan loss provisions (LLP). Although Net Interest Income (NII) is projected to grow by 6% YoY, interest margins are likely to remain under pressure, contributing to the modest decline in profits every quarter.
“We estimate PSBs to report moderate earnings growth of 17.2% YoY and a decline of 0.6% QoQ in 2QFY25,” the report stated.
Despite these near-term challenges, the report is optimistic about the long-term outlook for public sector banks, forecasting a compound annual growth rate (CAGR) of 15% between FY24 and FY26, signaling sustained growth ahead.
Mixed Results Expected for Private Banks
The report also provides insights into the private sector banking space, where mixed results are expected for the second quarter. For private banks, Pre-Provision Operating Profit (PPoP) is forecasted to grow by 12% YoY and 1% QoQ. However, PAT growth for private banks is projected to be more modest, increasing by 5% YoY and 0.6% QoQ.
“For our private bank coverage universe, we estimate a PPoP growth of 12% YoY and 1% QoQ, with PAT growth of 5% YoY and 0.6% QoQ in 2QFY25,” the report added.
Looking forward, private sector banks are expected to maintain steady profitability growth, with earnings projected to grow at a CAGR of 12.4% over FY24 to FY26.
While both public and private sector banks may face moderate profit growth in the second quarter due to margin pressures and higher provisions, their long-term earnings prospects remain positive.