Pvt bank profits rise thanks to higher NII, low provisions
Witness robust loan growth and higher operating expenses in March quarter
Most private banks that declared their Januarymarch quarter (fourth quarter, or Q4) earnings reported robust growth in net profit, aided by healthy uptick in net interest income (NII) and lower provisions for bad loans as asset quality improved and slippages moderated. Banks also saw higher loan growth, which essentially drove their higher NII growth in the quarter.
But margin performance was mixed.
Operating expenses also saw an increase, exerting pressure on pre-provisioning operating profit (PPOP).
Many major private-sector banks, including HDFC Bank, ICICI Bank, Axis Bank, Indusind Bank, YES Bank, IDFC First Bank, and IDBI Bank, have announced their Q4 earnings.
Net profit of these lenders increased in the range of 23–59 per cent in Q4 of 2021-22, or FY22 (IDFC First Bank’s net profit increased 168 per cent), and increase in NII was in the range of 10–84 per cent, with loan growth ranging between 11 per cent and 21 per cent.
While the country’s largest private-sector lender, HDFC Bank, saw 21 per cent growth in advances, driven mainly by the wholesale book, ICICI Bank’s advances grew 17 per cent, mainly on the back of robust growth in the retail book.
Axis, on the other hand, saw 15 per cent growth in the loan book, on the back of 21 per cent growth in the retail book.
Indusind’s loan growth was fuelled by growth in the consumer and corporate segments.
In FY22, bank credit in the economy expanded 9.6 per cent, with incremental credit growth at ~10.5 trillion - 1.8x higher than growth of ~5.8 trillion in 2020-21 (FY21). In FY21, bank credit had expanded 5.6 per cent.
“Earnings of major private-sector banks that declared their results are on track, ably supported by declining credit cost. Credit cost for the entire banking system appears to be undershooting. Loan growth reported by banks has been quite healthy, especially for HDFC Bank and ICICI Bank,” said Nitin Aggarwal, head–bfsi research, institutional equities, Motilal Oswal Financial Services.
As far as asset quality is concerned, all banks saw their gross non-performing assets fall and slippages moderate. ICICI Bank saw marginal rise in slippages in Q4 over the preceding quarter.
“We have seen good NII growth, aided by loan growth, thereby driving up operating profit. For the top banks, asset quality is looking good because the restructured book is not very high. The problem is with mid-sized banks, where the restructuring book is high, as the selfemployed segment is relatively higher in their loan book. The guidance from banks that have declared their earnings on loan growth, margin expansion, and asset quality is good,” said Anil Gupta, vice-president, financial sector ratings, ICRA.
Interestingly, the operating expenses of all banks in the sample increased in the range of 11-24 per cent in Q4, with IDFC First Bank seeing the highest increase, followed by Axis and YES Bank.
“The higher operating expenses in some cases have affected PPOP growth. While ICICI Bank and Indusind have reported positive bias on margins, HDFC Bank and Axis have not. Thus, margin performance has been mixed, while treasury gains have more or less been subdued across banks. Operational expense has also increased, putting pressure on PPOP,” said Aggarwal.
“Banks are spending more on technology (tech), collection efforts, expansion of branches, resulting in an increase in operational expenses. For the next two quarters, we are looking at undershooting of credit costs, and overall credit cost for 2022-23 will accordingly decline. If the trend continues further, the Street may look at bringing down its provisioning estimates for the financial year,” he added.
“With credit cost going down and credit cost visibility likely to remain low, banks are stepping on the pedal on investments in the tech and distribution network,” said Gupta.
“Accordingly, many banks have guided for an elevated operating cost, driven by investments in scaling up their businesses. Since there was uncertainty related to asset quality and credit costs, it is possible they were holding back certain discretionary expenses in these areas. However, with better visibility on income growth, asset quality, and profitability, they are more confident of making these discretionary expenditures,” he added.
In FY22, bank credit in the economy expanded 9.6 per cent, with incremental credit growth at ~10.5 trillion - 1.8x higher than growth of ~5.8 trillion in FY21. In FY21, bank credit had expanded 5.6 per cent