PSBs outperform private peers again, but sector challenges remain

The banking sector's good run continues, but there are challenges, both on asset and liabilities turf

Public sector banks (PSBs) seem to have made it a habit of putting up a better show than their private peers. After a good performance in the March quarter, they have outshone again in the first quarter of the current financial year (April-June).

 

Barring Punjab National Bank, year-on-year, every PSB has recorded an increase in net profit in the June quarter. The rise varies between 75.57 per cent (Indian Overseas Bank) and 1.87 per cent (Bank of Baroda).

 

In contrast, net profit has dipped for at least eight private banks. Among large private banks, Axis Bank Ltd’s net profit dropped 3.79 per cent, while IndusInd Bank Ltd posted a 68.21 per cent fall.

 

Private banks’ collective net profit dropped close to 3 per cent, while PSBs’ rose 10.62 per cent.

 

In absolute terms, State Bank of India (SBI) led the charge, with a Rs 19,160 crore net profit, followed by HDFC Bank Ltd (Rs 18,155 crore) and ICICI Bank Ltd (Rs 12,768 crore). The only other bank that recorded a net profit of at least Rs 5,000 crore is Axis Bank (Rs 6,035 crore). All figures are rounded off.

 

Only one PSB (Union Bank of India) posted a drop in operating profit. Among private banks, six – led by IndusInd Bank – did so.

 

While the net profit of private banks as a group shrank in the June quarter, their operating profit rose handsomely, by a wider margin than PSBs’.

 

HDFC Bank led the show with a Rs 35,734 crore operating profit, followed by SBI (Rs 30,544 crore). Two other banks posted an operating profit of over Rs 10,000 crore: ICICI Bank (Rs 18,746 crore) and Axis Bank (Rs 11,515 crore).

 

Despite recording higher operating profit than PSBs, private banks lag behind when it comes to net profit because they have made far higher provisions than PSBs. Their collective provision in the June quarter zoomed to Rs 27,661 crore from Rs 9,844 crore. In contrast, PSBs’ provision dropped to Rs 15,918 crore from Rs 17,004 crore.

 

Barring IDBI Bank Ltd, Jammu & Kashmir Bank Ltd, Karur Vysya Bank Ltd and Tamilnad Mercantile Bank Ltd, all private banks jacked up their provisions in the June quarter to maintain the quality of loan assets. In contrast, seven PSBs pared their provision.

 

The highest provision was by HDFC Bank (Rs 14,442 crore) – almost half of what all private banks’ and about one-third of the industry’s. This is against the provision of Rs 2.602 crore in the year-ago quarter and Rs 3,193 crore in the preceding quarter. It includes Rs 9,000 crore of floating provisions and Rs 1,700 crore of special contingency provisions. These are not based on any regulatory requirement, but are a buffer against future stress in assets.

 

Even though its net non-performing assets (NPAs) as a percentage of total loans remained less than 1 per cent, they rose from 0.43 per cent in June 2024 to 0.47 per cent in June 2025. In the March quarter, HDFC Bank’s net NPAs were 0.39 per cent. Its gross NPAs have also risen marginally, to 1.4 per cent, from 1.33 per cent (both in the June 2024 and March 2025 quarters).

 

Barring six, the net NPAs of all listed banks, including all PSBs, have been less than 1 per cent in the June quarter, and most banks have shown a declining trend.

 

HDFC Bank apart, the list includes ICICI Bank, Axis Bank, Kotak Mahindra Bank Ltd, Yes Bank Ltd, IDBI Bank Ltd, and IDFC First Bank Ltd, besides others. Among private banks with more than 1 per cent net NPAs are IndusInd Bank and Bandhan Bank Ltd.

 

IDBI Bank has the lowest net NPAs (0.21 per cent). Among PSBs, Bank of Maharashtra and Indian Bank have the lowest (0.18 per cent).

 

Bandhan Bank has the highest gross NPAs (4.96 per cent), followed by IndusInd Bank (3.64 per cent). Eight other banks – five PSBs and three private – have at least 3 per cent gross NPAs. Karur Vysya Bank Ltd is the only one to have less than 1 per cent gross NPAs (0.66 per cent).

 

Let’s look at some of the other parameters to assess how healthy the banking industry is. The average deposit growth of listed universal banks is close to 11 per cent and credit growth a shade over 10 per cent.

 

IDFC First Bank leads, with 26.4 per cent growth in deposits and 21 per cent growth in advances. CSB Bank Ltd has grown its deposits by a little over 20 per cent and advances by 31.3 per cent, but on a very low base. IndusInd Bank is the only entity to have posted a decline in both deposits and advances (3.3 per cent each). Among large banks, SBI’s deposits have grown 11.7 per cent year-on-year, but the quarter-on-quarter growth is just 1.7 per cent.

 

HDFC Bank has shown 6.7 per cent growth in advances year-on-year. Quarter-on-quarter, its advances have grown 0.4 per cent.

 

While many banks have posted double-digit growth in advances in the June 2025 quarter over June 2024, just one bank, a relatively small one (Karur Vysya Bank), has been able to cross 5 per cent growth in advances quarter-on quarter. And, at least nine banks have seen their loan book shrink – between 5 per cent and less than 1 per cent – quarter-on-quarter.

 

Finally, let’s assess how the banks have performed on the two most critical metrics: net interest margin (NIM), and current and savings accounts (Casa). NIM is loosely the margin between a bank’s cost of funds and earnings on funds, and Casa is low-cost deposits that bring down a bank’s cost of funds. Higher Casa and NIM make a bank profitable, provided the quality of its loan assets is good.

 

Barring a few exceptions, both NIM and Casa shrank for most banks in the June quarter, year-on-year and quarter-on-quarter. This has been the case for a few quarters now.

 

SBI’s Casa declined from 40.7 per cent to 39.36 per cent year-on-year. During this period, its NIM shrank from 3.22 per cent to 2.9 per cent. HDFC Bank’s Casa dropped from 36 per cent to 34 per cent, and NIM from 3.47 per cent to 3.35 per cent.

 

Among large banks, ICICI Bank’s Casa shrank from 39.6 per cent to 38.7 per cent, and Axis Bank’s from 42 per cent to 40 per cent. While ICICI Bank recorded a marginal drop in NIM (4.36 per cent to 4.34 per cent), Axis Bank’s NIM declined from 4.05 per cent to 3.8 per cent.

 

Bank of Maharashtra has the highest Casa (50.07 per cent), followed by IDFC First Bank (48 per cent), Central Bank of India (46.88 per cent) and J&K Bank (45.71 per cent). Only three other banks have more than 40 per cent Casa. 

 

Bandhan Bank enjoys the highest NIM (6.4 per cent), followed by IDFC First Bank (5.71 per cent). Three other banks continue to have more than 4 per cent NIM: Kotak Mahindra Bank (4.65 per cent), RBL Bank (4.4 per cent) and ICICI Bank (4.34 per cent).

 

Of course, NIM by itself does not tell the full story. Typically, interest rates for unsecured loans are higher, and that leads to a higher NIM. But if such loans turn bad, a lender has no recourse to recovery since they are not backed by collaterals.

 

In sum, the banking sector’s good run continues, but there are challenges, both on the asset and liabilities turf. The competition for deposits is getting fierce even as the demand for loans remains tepid. Meanwhile, there are signs of stress in a few segments of loans. The good news is that banks are not in denial mode. They are charting out their course accordingly.    

The writer is an author and senior advisor to Jana Small Finance Bank Ltd.

His latest book: Roller Coaster: An Affair with Banking.

To read his previous columns, log on to www.bankerstrust.in.

X: @TamalBandyo