Margins drive private banks' profitability

ICICI Bank, HDFC Bank and Axis Bank reported better-than-expected margin growth during the quarter ended March 2013, even as analysts expect net interest margin of public sector banks to stay flat or moderate a little. On a sequential basis, the top three private lenders expanded their margins by 13-23 basis points (bps).

"Private sector banks have performed well on the margin front. Higher yield on advances and lower cost of funds on the back of growth in low-cost deposits allowed these banks to improve their margins," said an analyst with a local brokerage.

While the industry credit growth during the last financial year was estimated at 14.1 per cent, HDFC Bank's net advances increased by 22.7 per cent. Axis Bank reported 16 per cent growth while ICICI Bank's advances increased by 14 per cent, year-on-year.

According to bankers and industry analysts, the growth in private banks' credit portfolio was driven by higher demand for retail loans. Axis Bank, for instance, improved the share of retail loans in total advances to 27 per cent at the end of March 2013 from 22 per cent a year ago. The bank reported 44 per cent rise in retail loans in 2012-13. The asset quality of top private banks has remained stable despite the uncertain economic environment.

"On the asset quality front, HDFC Bank reported healthy performance, as its gross and net non-performing asset levels, on an absolute basis, came down sequentially by four per cent each," said Vaibhav Agrawal, vice-president of research (banking) at Angel Broking. Better asset quality allowed both HDFC Bank and ICICI Bank to cut provisions during the quarter. "ICICI Bank's asset quality has been holding fairly well over the past few quarters and we expect it to continue," said Gautam Sinha Roy, vice-president of equities at Motilal Oswal Securities.

According to market participants, private sector banks are likely to outperform their state-run rivals with better earnings growth in the fourth quarter as improved margin, stable asset quality and rise in interest income led to strong growth in private lenders' profit after tax.

Analysts also noted change in actuarial assumption may lead to higher employee expenses for state-run banks, restricting the growth in the profit.

While fee income growth of most private lenders was muted during the quarter, public sector banks are not expected to perform any better due to slowdown in corporate banking fees.

However, most analysts fee that the recent rise in private banks' shares are likely to cap further gains in these stocks. "Some of the positives were already factored in the stock prices. We do not expect significant re-rating to happen as valuations have become a bit expensive. We will wait for public sector banks' earnings performance before re-rating private banks' shares," said Hatim Broachwala, analyst with Karvy Stock Broking.