Gaining strength

Improving bank balance sheet will support growth

The last financial year, 2023-24 (FY24), was good for private banks and excellent for public-sector banks (PSBs). Net interest income in aggregate expanded for all banks and net interest margins have been sustained for the most part. Non-interest income too has increased as banks have developed better cross-selling mechanisms and generated more fee income. Across the board, gross non-performing assets (GNPA) have reduced sharply. Net NPAs have also declined. Provisions have been reduced or reversed in many cases, as sticky loans have been recovered, resulting in higher profits and lower credit costs. Interest income has grown 38 per cent year-on-year (Y-o-Y) for private banks and 26 per cent Y-o-Y for PSBs in FY24 compared to FY23.

NPAs have reduced both nominally and as a percentage of advances. Aggregate GNPAs for PSBs stood at Rs 3.4 trillion in March 2024, versus Rs 5.4 trillion in March 2022. Net NPAs stood at Rs 72,544 crore in March 2024, versus Rs 1.54 trillion in March 2022. GNPAs stood at Rs 1.24 trillion in March 2024 for private banks, versus Rs 1.74 trillion two years ago. Net NPAs for private banks were around Rs 29,000 crore in March 2024, versus Rs 40,500 crore two years ago. Most banks have managed to keep net NPAs below 1 per cent while reducing provisions. As a result, most banks now boast stronger balance sheets. The stock market response in this context is worth analysing. The National Stock Exchange’s private bank index has returned 6 per cent in the last year, underperforming the benchmark Nifty 50 (up 20 per cent). The Bank Nifty, which includes both private banks and PSBs, while being overweight in private banks, returned 8.3 per cent. The PSB index returned 78 per cent.

PSBs had much lower valuations and much more in the way of bad loans. Although private banks still receive higher valuation discounts and have better balance sheets, the dramatic improvement in PSB balance sheets has meant a positive re-rating for many of these. Outperformers with triple-digit returns include Bank of Maharashtra, Punjab National Bank, Indian Overseas Bank, Union Bank, and Central Bank. These were among the institutions with the largest GNPA and net NPA overhang. In contrast, State Bank of India, and Bank of Baroda, which are the two strongest and best-capitalised PSBs, have received less recognition from the stock market, though they have returned 40 per cent plus, which is objectively good.

Among the private majors, HDFC Bank, for instance, has seen negative returns in the past year, with the market still uncertain about the impact of its amalgamation with HDFC. In many ways, banks seem to be looking at a positive future. They are anticipating strong demand for corporate credit as growth accelerates and also hoping for easing of monetary policy and rate cuts as and when the inflation rate declines to the legally mandated target. However, the central bank has raised risk weighting for several categories of unsecured loans and proposed increasing provisioning for infrastructure-related loans in an apparent attempt to prevent overheating. Also, as credit-deposit ratios are tightening, banks are being forced to raise interest rates on deposits and this will impact interest margins. While tighter control by the Reserve Bank of India will affect profits in the near term, the sector is in good health. From the macroeconomic standpoint, the banking sector is now well placed to support the revival in private-sector capital expenditure.