Q3 results review: Low core income, slippages hit banks' profitability

Lower core income, muted margins, and higher slippages weighed on the Indian banking sector’s (excluding small finance banks) profitability in the October–December quarter (Q3FY25). According to Capitalline data, the net profit of 32 scheduled commercial banks (SCBs) grew by 21.2 per cent year–on–year (Y-o-Y) but dipped 2.4 per cent sequentially.

 

Excluding State Bank of India (SBI), the banking sector’s net profit was up 12 per cent Y-o-Y. SBI, the country’s largest lender, on Thursday, reported a net profit of Rs 16,891 crore for Q3FY25, up 84.32 per cent Y-o-Y.

 

While private sector lenders' net profit grew by 3.8 per cent Y-o-Y, state-owned lenders reported a robust 47 per cent Y-o-Y growth in net profit, mostly supported by SBI’s handsome rise in profits.

 

Net interest income (NII) of the banking sector saw modest growth of 7.1 per cent Y-o-Y as interest expenses grew faster than the interest earned on account of banks shelling out more to acquire deposits. Sequentially, the NII of the lenders was up marginally by 1.3 per cent. While other income for the lenders was up 12 per cent Y-o-Y, it plunged by over 10 per cent sequentially.

 

Higher cost of funds and credit cost weighed on the banking sector’s net interest margin (NIM) – a measure of profitability of banks – in Q3. Experts said the pressure on NIMs will exacerbate in Q4 as the Reserve Bank of India (RBI) could cut policy rates to spur economic growth. A rate cut will mean banks have to immediately reprice their external benchmark-linked loans but the deposit rates would take time to adjust, thereby exerting pressure on the already battered margins.

 

CareEdge Ratings in an analysis of Q3FY25 of select listed banks said NIMs for banks reduced on a Y-o-Y basis by seven basis points to 3.36 per cent. “This slowdown can be attributed to sluggish credit growth amid stress in unsecured loan segments, increased risk weights and a reduction in the interest rate spread”, the rating agency said, adding that NIMs may continue to face downward pressure, potentially leading to a slight decline in NIMs for SCBs in the upcoming quarters.

 

A potential rate cut in FY26 could further strain NIMs, particularly impacting private sector banks, due to their higher share of loans linked to external benchmarks, it said.

 

According to Rajneesh Karnatak, MD&CEO Bank of India, external benchmark linked loans (EBLR) loans to retail and micro, small and medium enterprises (MSMEs) will be impacted and may also dent NIMs when the policy repo rate is cut.

 

K S Raju, MD&CEO, Canara Bank, said NIM was under stress due to challenges on the deposit mobilisation side.

 

Data showed that while for private sector banks, provisions and contingencies were up 29 per cent Y-o-Y due to higher slippages in the unsecured portfolio, the state-owned banks’ provisions were down 18.4 per cent during this period. For the sector, provisions and contingencies were up 3.6 per cent Y-o-Y but fell around 18 per cent sequentially.

 

Asset quality of the sector was largely stable, with both gross and net non-performing assets (NPAs), on an absolute basis, declining by 2.2 per cent and 0.6 per cent, respectively. In Q3, private banks saw higher slippages from the retail unsecured portfolios – personal loans, credit cards, and microfinance loans. State-owned banks, on the other hand, fared better than their peers on the asset quality front.

 

In Q3, advances grew by 11.2 per cent Y-o-Y, and 1.78 per cent sequentially, while deposits increased by 11.3 per cent Y-o-Y, and 2.97 per cent sequentially. Private sector banks saw a credit growth of 9.4 per cent Y-o-Y, and 2 per cent sequentially, while the state-owned banks reported a credit growth of 12.4 per cent Y-o-Y and 3.7 per cent sequentially. On the deposit front, private sector banks’ deposits grew by 14 per cent Y-o-Y and 1.6 per cent sequentially, while the state-owned banks saw deposit growth of 9.8 per cent Y-o-Y and 1.9 per cent sequentially, according to the data.

 

“Q3 was relatively subdued for Indian banks in terms of NIM, as the cost of funds increased. The pressure on NIMs is expected to intensify with a rate cut, as loans linked to external benchmarks will be repriced immediately, while deposit rates will take longer to adjust downwards”, said Sanjay Agarwal, Senior Director, CareEdge Ratings.

 

“On the asset quality front, there were no negative surprises. Weakening of asset quality of a PSU had a negative impact but unsecured retail loans will be a key area to monitor moving forward. Meanwhile, credit costs, which were at their lowest, are likely to rise. Credit growth was broadly in line with expectations, reflecting the slowdown observed in recent months. For the full year, credit growth is expected to be much slower compared to last year,” he said.  

PSBs capitalised, can meet credit demands: FinMin

 

Public sector banks (PSBs) are adequately capitalised and well poised to meet credit demandsof all sectors of the economy, with special thrust on agriculture, MSME and

infrastructure sector, the finance ministry said on Thursday.

 

According to the data, PSBs have shown record net profit growth of 31.3 per cent (Y-o-Y) to achieve highest ever aggregate net profit of Rs 1.29 trillion and aggregate operating profit of Rs 2.20 trillion in the first nine months of the financial year.

 

BS REPORTER