Private banks' Q2 profit soars 26% as economy shows signs of recovery

Helped by lower provisions and contingencies, which fell 26%; asset quality was broadly stable with 1% rise in GNPAs

The net profit of private banks rose 26 per cent (year-on-year) in the July-September 2021 quarter (Q2) and 21.9 per cent sequentially over March-June 2021 (Q1), marking a phase of recovery in the economy and credit demand.

According to an analysis of the performance of 12 banks, their net interest income (NII) — interest income minus expenses — was up 10.8 per cent (y-o-y) and 2.5 per cent (q-o-q). The yield on advances, especially wholesale loans, was under pressure amid a system flush with liquidity and low demand for credit, bankers said.

Weighted average lending rates on rupee loans were 9.09 per cent in September 2021, down from 9.59 per cent in September 2020 and 9.1 per cent in June 2021, according to Reserve Bank of India (RBI) data. Other income comprising fees, commissions and recoveries rose 15.7 per cent y-o-y and 7.9 per cent q-o-q.

Provisions and contingencies by private lenders fell both y-o-y — 22 per cent — and sequentially — 30.2 per cent. The portion of provisions are for one-time restructuring under regulatory package 2.0 to address stress that borrowers, especially individuals, households and small businesses faced during the second wave of the pandemic.

Besides regulatory requirements, many banks keep aside additional amounts, which some term management overlay to absorb potential risks.

Axis Bank said there was limited restructuring and asset quality was improving while the balance sheet was resilient. On an aggregate, the coverage ratio for Axis Bank was 124 per cent, including specific, standard and Covid provisions.

Asset quality was broadly stable with a small rise — 1.1 per cent — in gross non-performing assets (NPAs) at Rs 1.73 trillion on a y-o-y basis. However, sequentially they fell 3.5 per cent from about Rs 1.8 trillion in June 2021.  

Net NPAs rose by 27.5 per cent (y-o-y) to Rs 42,895 crore, but fell sequentially by 7.3 per cent from Rs 46,280 crore in June 2021.

While the asset quality is stable, there are risks from borrowers who suffered severe economic disruptions during the pandemic. Anil Gupta, head, financial sector ratings, Icra, said private banks have shown a steady performance, ticking all boxes — profitability, asset quality, etc. “Yet, they need to be conscious of risks of slippage from restructured books as accounts exit from moratorium,” he said.

As for the growing loan book, combined advances of banks rose 11.8 per cent (y-o-y) and 3.9 per cent (q-o-q).

RBI data showed banking systems credit rose 6.5 per cent (y-o-y) till early October 2021, up from 5.7 per cent a year ago, reflecting a gradual uptick in loans. The pace, however, remains below 8.9 per cent in FY20, which was before the pandemic.

Sandeep Bakhshi, managing director and chief executive, ICICI Bank, in an analyst call said overall the industrial activity is above pre-Covid levels. "The progress in the vaccination programme is supporting an improvement in mobility indicators. We expect the festive season to give further impetus to economic activity," he said.

HDFC Bank — the largest private lender in the country — echoed a similar assessment about growth momentum. It expects growth in absolute numbers (for credit) to reach pre-pandemic levels by the third quarter.