India’s top three private banks report strong growth after subdued quarters.
The country’s top three private sector banks – ICICI Bank, HDFC Bank and Axis Bank —haven’t disappointed shareholders since January. Despite policy rate hikes by the Reserve Bank of India (RBI) to control inflation, stocks of private banks were major outperformers in this period.
Expectations of good numbers in the March quarter and improving business outlook were the major reasons.The results did not disappoint. Improvement in asset quality and increase in business volumes ensured that earnings grew more than 30 per cent for each of these banks in the recently-concluded quarter. With economic conditions improving, things should only get better from here.
Lending increases
From the trough of 10 per cent seen in the third quarter, credit volumes picked up in the fourth quarter and averaged around 16 per cent for the full year. Private banks, that were in a conservative mode to protect asset quality last year, have started to lend more. In the past few quarters, private lenders were disbursing loans primarily to the corporate segment. The trend changed in the recent quarter, albeit at a slower pace, with disbursals to the retail segment seeing a rise.
On a year-on-year basis, HDFC Bank’s retail loan book grew a healthy 22 per cent, while the corporate portion grew 40 per cent in the March quarter. Overall, HDFC Bank’s advances grew 27 per cent (at much the same pace of Axis Bank). While ICICI Bank’s advances continued to show a declining trend on a year-on-year basis, they grew (by 1.1 per cent) sequentially for the first time in the past four quarters.
Chanda Kochhar, managing director and CEO, ICICI Bank, says, “For the current fiscal (2010-11), we intend to expand our loan book by 15-20 per cent and deposits by 20 per cent. We see demand coming from segments like home loans, car loans, CV (commercial vehicle) loans, project finance and trade finance.”
Paresh Sukthankar, executive director, HDFC Bank, said the bank (HDFC Bank) would grow faster than RBI’s credit target of 20 per cent for the year. Axis Bank expects to grow marginally more than the overall system growth of about 25 per cent, or slightly higher.
Hikes in policy rates are precursors of a hardening interest rate cycle. In the interim, bankers are not in a hurry to increase interest rates dramatically. Sukthankar said an increase in interest rates by 50-100 basis points was unlikely to affect credit growth. However, if rates rise more than that, it could have an impact on retail loans, he said,
Margins hold up
Re-pricing of high-cost deposits helped banking companies maintain higher margins in the past few quarters. Besides, addition of new branches and conversion of existing branches to target retail deposits pushed up the share of low-cost current and savings account (or CASA) as a percentage of total deposits, aiding margin expansion.
HDFC Bank’s share of CASA deposits surged to 50 per cent in the March 2010 quarter, currently the highest in the industry. Axis Bank came second, with its CASA at 47 per cent of total deposits. Even ICICI Bank, which has lagged both its private sector peers in terms of CASA deposits in the past, saw CASA share rise to 42 per cent in the March quarter.
On the back of a higher proportion of low-cost deposits and retirement of high cost deposits, Axis Bank saw net interest margins (NIMs) improve by 70 basis points year-on-year to 4.1 per cent. HDFC Bank’s margins were up by 20 basis points to 4.4 per cent, again the highest in the industry. ICICI Bank’s NIMs stood flat at 2.6 per cent.
Going ahead, the impact of hike in the cash reserve ratio and higher effective cost on savings account will put pressure on cost of funds. While HDFC Bank expects to maintain margins at 4-4.2 per cent, Axis Bank perceives that margins could taper to 3.5-3.75 per cent in the coming quarters.
Asset quality improving
With the economic environment improving, the three private banks saw provisions decline in the quarter, which aided faster growth in net profits. HDFC Bank, which historically has sustained high asset quality, reported net non-performing assets (NPAs) of just 0.3 per cent. However, for ICICI Bank, this was 2.1 per cent. Axis Bank’s net NPAs for the March quarter stood at 0.4 per cent.
In terms of the provisioning coverage target of 70 per cent by March 2011, mandated by RBI, while Axis Bank (69 per cent) and HDFC Bank (78 per cent) are relatively better placed, ICICI Bank may see its absolute provisions remain relatively higher, given that its coverage ratio is 60 per cent.
Overall, on account of lower provisioning and improvement in the business environment, Axis Bank and HDFC Bank are expected to deliver net profit growth of about 30 per cent for 2010-11.
Given the current valuations, the three stocks can be considered on dips.
