PSBs' Q2 net profits zoom 50% YoY on steady rise in interest income

Strong loan growth, rising lending rates give the boost

Twelve public sector banks (PSBs) reported an average of 50 per cent year-on-year growth in net profit at Rs 25,685 crore in the July-September quarter (Q2FY23), primarily on the back of a steady rise in net interest income (NII). Sequentially, they posted a 76.8 per cent rise in net profit over Rs 15,307 crore in Q1FY23.

Supported by strong credit growth and expansion of interest margins, the financial results of PSBs were robust in the second quarter, said Anil Gupta, senior vice-president, co-group head-financial sector ratings, ICRA. Going forward, there can be moderation in interest margins, but healthy profitability is likely to sustain.

NII (interest earnings minus interest expenses) grew 20.3 per cent YoY in the reporting quarter to Rs 88,268 crore. Sequentially, growth was slightly slower at 12.5 per cent over Rs 78,491 crore in Q1FY23, data compiled by BS Research Bureau showed.

Strong growth in loans ahead of the festival season, besides hardening of lending rates, helped banks report a substantial rise in NII, bankers said.

The Reserve Bank of India’s (RBI’s) state of the economy report said banks have been quicker in adjusting (hiking) their lending rates vis-à-vis retail deposit rates. During May- September 2022, banks increased their external benchmark-based lending rates (EBLRs) by 140 basis points in response to the increase in repo rate.

Scheduled commercial banks (SCBs) have also increased the one-year median marginal cost of funds-based lending rate (MCLR) by 70 basis points. Also, weighted average lending rates (WALRs) on fresh rupee loans increased by 82 basis points. The median term deposit rate was up 26 basis points during May-September 2022.

The median term deposit rate of SCBs, which reflects the prevailing card rates on fresh deposits, increased by 26 basis points during May-September 2022.

Hardening yields impact treasury income on YoY basis

Showing the adverse impact of hardening yields on investment books, this revenue stream, comprising sources like treasury income and fees, saw a 9.4 per cent drop YoY to Rs 28,362 crore. Sequentially, the situation was quite the opposite over Q1FY23. Other income rose 52.6 per cent over Rs 18,582 crore in the April-June 2022 quarter.

In Q1FY23, many banks took a knock on treasury income because of mark-to-market loss on bond portfolios against the backdrop of hardening of yields due to a hike in policy repo rates. 

Though yields have moderated over Q2FY23, they have increased over the shorter tenure, which may keep the treasury performance muted, said domestic brokerage Motilal Oswal Financial Services in a research note.

Asset quality profile gains strength

Provisions and contingencies rose 18.2 per cent YoY to Rs 24,480 crore. Sequentially, they grew by just 3.3 per cent over Rs 23,688 crore in the previous quarter.

According to PSB executives, while asset quality pressure is not intense, banks continue to provide higher provisions for bad loans and restructured books.

Credit provisions remain benign given high provisions on legacy stressed loans, Gupta of ICRA said.

Gross non-performing assets of state-owned lenders declined 15.8 per cent YoY and 8.3 per cent QoQ to Rs 4.98 trillion. Net NPA were also down 13.1 per cent YoY and 29.4 per cent QoQ to Rs 1.28 trillion at end of September 2022.