The good and not so good of Indian banking story

The drop in provisions is a healthy sign - 21 of 32 listed banks have less than 1% net NPAs. But their CASA and NIM are under pressure

In the last financial year, the combined net profits of 32 listed private and public sector banks (PSBs) had risen 40.56 per cent to close to Rs 2.29 trillion, with both sets of banks crossing the Rs 1-trillion mark in net profits and a few recording their highest-ever net profits.

The good run continued in the June quarter of the current financial year with the listed banks’ quarterly year-on-year (Y-o-Y) net profit rising 68.5 per cent to Rs 73,620 crore (figures are rounded off).

There’s no looking back. In the September quarter of FY24, their collective net profit was Rs 77,587 crore — up 33.51 per cent Y-o-Y — taking the first half of the current year’s net profit to over Rs 1.51 trillion.

Except for an old private bank (The Karnataka Bank Ltd) and two public sector banks (Punjab & Sind Bank and Uco Bank), all banks have shown a rise in profits in the June quarter Y-o-Y. Punjab National Bank (PNB) has shown 327 per cent growth and Bandhan Bank Ltd 244 per cent — both on a low base. In the quarter, 20 listed private banks’ net profit has risen by 35.51 per cent and that of 12 PSBs by 31 per cent.

In absolute terms, HDFC Bank Ltd’s net profit has been the highest — Rs 15,976 crore. It is followed by the nation’s largest lender, State Bank of India (Rs 14,330 crore), and ICICI Bank Ltd (Rs 10,261 crore). These heavyweights apart, others who have shown big, fat net profits are Axis Bank Ltd (Rs 5,864 crore), Canara Bank (Rs 3,606 crore), Union Bank of India (Rs 3,511 crore) and Kotak Mahindra Bank Ltd (Rs 3,191 crore).

However, the growth in operating profits is not in sync with the growth in net profits. For instance, PNB’s operating profit is up 11.66 per cent and that of Bandhan Bank just 1.96 per cent. In fact, five private banks and four PSBs have reported a drop in operating profits. Overall, the operating profits of all listed banks have risen 12.53 per cent, not even one-third of the growth in net profits.

What’s the catch? Indeed, both net interest income or NII (roughly, the difference between what a bank pays to the depositors and what it earns from its borrowers) as well as the fee income of banks have risen, but the key contributor to the rise in net profits continues to be a sharp drop in provisions and contingencies. Overall, there is a 32.42 per cent slide in provisions and contingencies for the industry — Rs 23,932 crore versus Rs 35,414 crore. Only seven of 32 listed banks — four private and three PSBs — have shown a rise in provision and contingencies.

Barring three (Punjab & Sind Bank, City Union Bank Ltd and YES Bank Ltd), all others have recorded a rise in their NII, led by IDFC First Bank Ltd (31.58 per cent) and HDFC Bank (30.27 per cent). Other listed banks that have shown at least 20 per cent or more rise in NII are Bank of Maharashtra, RBL Bank Ltd, ICICI Bank, Kotak Mahindra Bank, Indian Bank and Indian Overseas Bank. As a group, private banks’ NII is up 22.05 per cent in contrast to PSBs’ 13.47 per cent.

When it comes to other income, which includes fee income, only two private banks and three PSBs have shown a drop. Private banks’ other income is up 26.27 per cent and PSBs’ 19.03 per cent, bringing down the average growth for all banks to 11.52 per cent.

The drop in provisions is a sign of a healthy banking system. Almost every bank has brought down its net non-performing assets (NPAs) — the bad loans that have been provided for — as a percentage of their total assets. Bandhan Bank is an exception. Its net NPAs have risen from 1.86 per cent in September 2022 to 2.32 per cent in September 2023. The only other private bank, which has more than 2 per cent net NPAs, is City Union Bank.

Believe it or not, 21 of 32 listed banks have less than 1 per cent net NPAs — nine have more than 1 per cent and two more than 2 per cent.

HDFC Bank, Kotak Mahindra Bank, IDBI Bank, ICICI Bank, Catholic Syrian Bank, Axis Bank and Karur Vysya Bank, among private banks, have less than half a per cent of net NPAs, while Bank of Maharashtra, among PSBs, has less than a quarter per cent. For most banks, the net NPAs have been the lowest in a decade or more.

When it comes to gross NPAs, Bandhan Bank tops the list (7.32 per cent), followed by Dhanlaxmi Bank Ltd (5.36 per cent), The South Indian Bank Ltd (4.96 per cent) and IDBI Bank Ltd (4.9 per cent).

At least four PSBs have more than 5 per cent but less than 7 per cent gross NPAs, and five have more than 4 per cent gross NPAs. PNB (6.96 per cent), Union Bank of India (6.38 per cent), Punjab & Sind Bank (6.23 per cent) and Bank of India (5.84 per cent) belong to the first group.

The PSBs, by and large, have higher gross NPAs than large private banks, but for all of them bad loans are going down in contrast to a few private banks that have recorded a rise.

Till now, it’s a great story. The not-so-good part of the story is a decline in the heap of low-cost money in the form of current and savings account (CASA) for most banks, leading to a drop in some banks’ net interest margin (NIM). Among all listed banks, Jammu & Kashmir Bank has the lowest net interest margin (1.02 per cent) despite having 50.61 per cent CASA (while CASA has come down from 54.69 per cent Y-o-Y, its NIM has been steady). It is followed by YES Bank (2.3 per cent NIM), which has 29.4 per cent CASA. Bandhan Bank has the highest NIM — 7.2 per cent.

Barring Bank of Baroda, every listed bank has shown a drop in CASA. For many of them, it has been a sharp drop. For HDFC Bank, the drop is 7.4 percentage points, following the merger of HDFC Ltd with the bank. Bank of Baroda has 39.88 per cent CASA in the September quarter, marginally higher than the year-ago quarter but lower than the June quarter. Jammu & Kashmir Bank apart, IDBI Bank and Bank of Maharashtra have at least 50 per cent CASA even though both have shown a drop in the September quarter.

Finally, 26 of the 32 listed banks have shown double-digit growth in advances, but only half of them have recorded growth in deposits. IDFC First Bank leads the brigade with 41.45 per cent growth in advances. Five other private banks (Axis Bank, IndusInd Bank Ltd, RBL Bank Ltd, CSB Bank Ltd and Federal Bank) have posted at least 20 per cent advance growth, while Uco Bank’s advance growth has been 25.07 per cent and that of Bank of Maharashtra 24.98 per cent.

IDFC First Bank’s deposit portfolio is up 38.73 per cent, the highest in the industry. At least 16 banks have shown single-digit deposit growth. Among them, IndusInd Bank Ltd’s advance growth in the quarter is six times its deposit growth; for Uco Bank and Indian Overseas Bank, it has been four times.

The plain fact is the savers are shifting to fixed deposits and other instruments such as equity and mutual funds, leading to a drop in CASA. As most banks are paying higher interest rates to attract deposits (to keep pace with the growth in credit), their interest income is compressing. The trend is likely to continue, putting pressure on the margin.

The quality of unsecured loans for some banks is not exactly immaculate. For now, there is no worry, but the scene can change. Meanwhile, investors are going gaga over most bank stocks — both private and PSBs. That’s a different story.

The writer is an author and senior advisor to Jana Small Finance Bank Ltd
His latest book is Roller Coaster: An Affair with Banking

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