The bottom line: Private lenders stumble sequentially in Q2, PSBs shine

Slippages in unsecured retail portfolios take a toll on private banks; elevated credit costs hurt, too

Higher provisions stemming from elevated slippages in unsecured retail portfolios weighed on the Q2FY25 showing of private sector lenders, with their earnings declining sequentially. By contrast, state-owned lenders have largely posted robust gains, with 10 of 12 public-sector banks reporting healthy quarter-on-quarter (Q-o-Q) rises in net profit, fuelled by reduced provisioning needs and marked improvements in asset quality.

 

The country’s largest lender, State Bank of India (SBI), along with Bank of India, is yet to announce Q2 earnings.

 

Data compiled by Business Standard reveals that private banks saw an 8.21 per cent year-on-year (Y-o-Y) rise in their net profit; however, sequentially, earnings declined around 4 per cent as provisioning costs rose significantly.

 

Net interest margins (NIMs), a key profitability indicator, had been under pressure for private lenders in Q2 amid elevated credit costs and intensifying deposit competition. Notably, HDFC Bank and Axis Bank managed to maintain stable NIMs, though ICICI Bank saw a decline. Despite these pressures, private sector lenders recorded a 16.43 per cent Y-o-Y growth in net interest income (NII) and a 2.82 per cent sequential increase, bolstered by loan growth of around 12 per cent Y-o-Y and 2.57 per cent sequentially.

 

“We remain cautious about Indian unsecured retail, given rising delinquencies and growing risks in that segment,” stated financial research firm CreditSights in a report. “The urban middle and lower-middle class consumer is stretched with high inflation and high interest costs, and economic activity in India has been slower than anticipated.”

 

Private sector banks, it further said, are now focusing on the business banking and SME segment (MSMEs) in loan growth for better yields. 

 

Among private lenders, ICICI Bank has stood out with solid loan and deposit growth and stable asset quality. HDFC Bank has kept its asset quality and NIMs steady, although its loan growth has lagged the industry average, as it aims to return its credit-deposit ratio to pre-merger levels. Axis Bank reported higher slippages and credit costs from its unsecured retail portfolio, while Kotak Mahindra Bank and IndusInd Bank faced rising slippages in their credit card and microfinance portfolios, respectively, impacting profitability.

 

Gross non-performing assets (NPAs) at private banks showed a 2.39 per cent Y-o-Y decrease but they climbed 72 basis points sequentially, reflecting stress in the unsecured retail space. Amitabh Chaudhry, MD&CEO of Axis Bank, remarked on the challenging conditions: “While we say we have excess liquidity, on the other side the deposit rates are not coming down… We are seeing some worsening of asset quality in some of the unsecured and other asset classes.”

 

Meanwhile, state-owned banks outperformed on profit growth, posting a 39 per cent Y-o-Y increase and a 17 per cent sequential rise in Q2. These gains were attributed to lower provisioning needs. However, their NII growth was more modest, inching up 7 per cent Y-o-Y and declining sequentially, with NIMs also strained by elevated deposit costs. Union Bank of India’s MD & CEO, A Manimekhalai, pointed to recent regulatory adjustments in penal charges as a factor in the decline.

 

Now the penalty on loans is not considered as interest income but treated as charge and part of non-interest income, she said.

 

Asset quality across public sector banks saw substantial improvement, with gross NPAs on an absolute basis down by over 20 per cent Y-o-Y and 5 per cent Q-o-Q.

 

On the deposits front, private sector banks led the way with a 15.33 per cent Y-o-Y and 3.85 per cent Q-o-Q growth, outpacing the 9.7 per cent Y-o-Y and 2.6 per cent sequential increase seen among state-owned peers. Bank of Baroda’s MD & CEO, Debadatta Chand, acknowledged the challenging deposit market, stating: “For most banks, (deposit) growth is a challenge because of savers’ money flowing to alternatives like capital markets.”