Pvt banks see muted Q3, challenges ahead

Mumbai: Higher provisions and lower margins marked the October-December quarter earnings of most private sector banks, as they reported muted numbers. Most banks continue to grapple with challenges to their profitability, stemming from difficulties in mobilizing low-cost deposits to meet the robust demand for credit. Large state-owned banks are yet to declare their Q3 results.

India’s largest private sector lender, HDFC Bank, saw its worst day in the market in over three years as it posted weaker than expected earnings. Net profit rose 2.5% year-on-year (y-o-y) in line with estimates, and gross non-performing assets improved to 1.26% from 1.34% quarter-on-quarter (q-o-q). Net interest income, though, grew 4% on a q-o-q basis, against the expected 8%, and 23.9% y-o-y.

Net interest margin, or NIM, a key indicator of the earnings on each loan sold, stood flat at 3.4%, as deposit growth continued to lag behind credit growth. In an analysts’ call held last week, Srinivasan Vaidyanathan, chief financial officer of HDFC Bank, said there is a need to increase the retail mix, especially in the unsecured loans, to improve margins.

Comparatively, ICICI bank’s NIM stood at 4.43% at the end of December quarter, although that was a contraction from 4.53% in the previous quarter. NIM was 4.65% in the year-ago quarter.

Despite the margin contraction, ICICI Bank reported a 24% rise in net income to ₹10,270 crore at the end of December quarter, higher than market estimates.

Vaidyanathan also expressed confidence of seeing an improvement in the share of current and savings accounts or Casa in its overall deposits. The Casa deposit share fell to 38% in Q3 compared with 42% in the June quarter, and 44% in the December 2022 quarter.

Mobilising low-cost Casa accounts has turned out to be a challenge for most banks in the third quarter. Kotak Mahindra Bank’s Casa ratio dipped to 47.7% at the end of the December quarter, from 48.3% in the previous quarter and 53.3% a year earlier. The bank’s new CEO Ashok Vaswani emphasized that private sector lender’s primary challenge will be business expansion.

ICICI Bank’s Casa stood at 39.6% at the end of December compared with 40.8% in the previous quarter and 45.3% a year ago.

“Despite a moderation in interest margin, the growth in loan book coupled with benign credit costs continue to drive healthy earning for the banks,” said Anil Gupta, senior VP, Icra rating agency. “While earnings growth may moderate in coming quarters driven by slowing credit growth amid challenges in deposit mobilization, the earnings outlook for the banks is still expected to remain healthy.”

Provisions for most banks jumped in the third quarter as most private sector banks, barring IndusInd Bank, made one-off provisions on their investments in alternative investment funds (AIFs).

This, after the Reserve Bank of India (RBI) said that banks and non-bank lenders should either liquidate their investments in or make provisions against their investments in AIFs with holdings in the banks’ current or recent borrowers, to avoid cases of “evergreening” bad loans.

HDFC Bank’s provisions rose 50% as the bank made provisions worth ₹1,200 crore for investments in AIFs. ICICI Bank made provisions worth ₹627 crore during the quarter, RBL ₹115 crore and Kotak Mahindra Bank, ₹190 crore.

Operating expenses for most banks increased in this quarter on account of higher employee expenses and investment in liability franchise. HDFC Bank’s operating expense rose 28% y-o-y while ICICI Bank saw a 22% jump and IndusInd Bank, 25%.

Asset quality improved for most banks. IndusInd Bank saw a jump in fresh slippages sequentially on both corporate and retail loans. The bank added fresh slippages worth ₹1,453 crore in this quarter as against the management guidance of ₹1,200 crore– ₹1,300 crore.

In its analysts’ call, the management of IndusInd Bank acknowledged that it has missed the guidance on slippages. However, it remains confident that slippages run-rate should improve over the next couple of quarters.