Private banks' net profit soars on healthy loan growth, higher margins

NIMs expanded as banks hiked rates on lending faster than those on deposits

The net profit figures of private sector banks soared in the July-September (Q2FY23) quarter, on the back of higher net interest income (NII) and robust loan growth.

Moreover, the lag in passing off increased rates of interest to depositors while pushing the lending rates higher, following the raising of the repo rate by the Reserve Bank of India (RBI) by 190 basis points, translated into an impressive growth in the margins of these lenders.

Except for Yes Bank, all major private sector lenders that reported their July-September earnings, saw their provisions drop. Asset quality also improved significantly as both gross non-performing assets (NPAs) and net NPAs declined year on year during the period under review.

Most banks reported double-digit growth in their portfolios, broadly in line with the credit growth seen in the banking system. But deposit growth was seen trailing credit growth by a large margin. Experts believe banks will get aggressive in the days ahead to raise their deposits and garner durable liquidity to fund the rising credit demand in the economy.

Also, unlike Q1, the banks did not suffer huge mark-to-market losses in their treasury portfolios as yields were on the rise.

“In our annual outlook at the beginning of the year as well our recent mid-year outlook, we have stated that FY23 is going to be a good year for the banking sector in general. Credit costs were expected to be low, as corporate asset quality had largely played out and challenges on MSME and Retail were manageable. The challenges from the Covid pandemic also didn't cause as much damage as feared,” said Prakash Agarwal, director and head, financial institutions, India Ratings and Research.

“Further interest rates have moved up sharply and transmission on the asset side is faster, as a significant portion of the private banks’ portfolio is linked with external benchmarks. The banks have enjoyed good margins in Q2. However, going forward the deposit rates are going to move up but we estimate the impact of this on the margins will have a larger impact on next year's performance. Additionally, this quarter banks treasury losses are expected to be modest then what they had suffered in Q1 and that has also contributed to a good performance in this quarter,” Agarwal said.

Net profit of ten major private sector banks that Business Standard analysed were up 20-70 year on year (YoY) in Q2FY23, as the NII of these banks grew in the 19-48 per cent range during the same period. Net interest margin, a measure of profitability, ranged from 2.60-5.98 per cent. IDFC First Bank had the highest NIM in the sample, at 5.98 per cent, followed by Kotak Mahindra Bank (5.17 per cent).

However, most of the major banks saw margin expansion because transmission of the rate hike was quicker on the asset side than the liabilities side. Experts said these high margins may not be sustainable as deposit rates catch up with lending rates, resulting in some moderation.

“Credit costs for some banks in India are in low double-digits and banks are making contingent provisions in order to avoid showing abnormal growth in profits, and to top it all, there is sharp margin expansion, strong loan growth and all-time high ROAs. As [Uday] Kotak himself nicely put it, 'This is a Cinderella moment for the banking sector in India',” said Suresh Ganapathy, Head of Financials Research, Equity Research, Macquarie Capital in a note.

“All the clean-up in the corporate sector has happened and banks now hold a very pristine corporate portfolio. So, as such incremental legacy provisions as well as provisions for corporate sector are not happening. In the retail sector, the liquidity and balance sheet of retail is still very strong. The average quarterly balances, anecdotally, have gone up quite sharply over the past several years…so hardly even defaults are happening in the retail sector. Unlike many other markets, Indian banks largely lend on the ability of the borrower to repay and not solely based on collateral values). So even if rates are moving up, things are fine…”, Ganapathy added.

The concerning factor for the industry is now the lagging deposit growth. According to Reserve Bank of India (RBI) data, credit growth touched a decadal high of 18 per cent in the fortnight ended October 7 but deposits grew at a much slower pace of 9.6 per cent. A majority of the banks, which announced their quarterly earnings this month, have reported high loan growth but their deposit growth was seen trailing the loan growth by a large margin, except for HDFC Bank and IDFC First Bank.