In many ways, large private Indian banks seem to be having the time of their lives.
Credit growth has stayed strong over multiple quarter and asset quality is robust. Their cost of funds has inched up, but continues to remain low by historical standards.
Net interest margins — the money that a bank earns in interest on loans minus the amount it pays in interest on deposits, relative to its assets —have also been running close to all time highs.
But with the Reserve Bank of India putting the rate hike cycle on pause and the lag effect of rate hikes on deposits fading, thick margins that have cushioned bank profits are close to peaking, according to analysts BQ Prime spoke with.
HDFC Bank Ltd., India's largest private lender, reported a core net interest margin of 4.1% which was flat sequentially, but rose 10 basis points on a year-on-year basis.
The upward trend in margins is more sharply visible for the likes of ICICI Bank Ltd. and Axis Bank Ltd. ICICI Bank's NIM expanded by 90 basis points between March 2022 and March 2023 to 4.90% in Q4 FY23. Similarly, Axis Bank's overall NIM grew by 71 basis points in the same time period to 4.35% in the January-March quarter.
"...right now you're seeing some lead effect. The cost of funds will come. Already in this quarter, the cost of funds has moved up," Srinivasan Vaidyanathan, chief financial officer at HDFC Bank, told analysts during the bank's post-earnings conference call held on April 15.
"Interest margins are very close to their peak," Asutosh Mishra, leading banking and financial services analyst at Ashika Stock Broking Ltd., told BQ Prime. "In my experience, such margins are unsustainable," he said.
Even though banks reported strong results this quarter, their stock prices did not react in a meaningful way. This also indicates that there is an underlying realisation in the market, that this is the peak for margins, Amit Khurana, head of equities and research at Dolat Capital Market Pvt. told BQ Prime.
"Rising deposit costs and elevated (credit-deposit) ratios are likely to pressure NIMs going forward," analysts at JPMorgan wrote in an April 28 report on Axis Bank's Q4 FY23 results.
"The cost of deposits was 3.98% in this quarter, compared to 3.65% in the previous quarter. We expect to see the cost of deposits continuing to increase in future quarters," Anindya Banarjee, group chief financial officer at ICICI Bank, told analysts during a post-earnings conference call held on April 22.
Deposits For Growth
While credit growth has galloped at private banks, their deposits have grown at a relatively slower clip.
For instance, Axis Bank saw its deposit base swell by 15% year-on-year to Rs 9.46 lakh crore. The bank's advances, on the other hand, grew 19% year-on-year to Rs 8.45 lakh crore as of March 31, 2023.
A similar trend — growth in advances outpacing deposits — stands true for the likes of ICICI Bank, IndusInd Bank Ltd., Yes Bank Ltd. and Kotak Mahindra Bank Ltd. as well.
HDFC Bank is the one which bucks the trend with its advances growing by 16.9% year-on-year, as opposed to deposits which saw an uptick of 21% year-on-year.
With credit growth outpacing the rise in deposits, accruing additional deposits will be a key factor for banks over FY24. The clamour for deposits is also likely to keep operating expenses elevated, as private banks plan to expand their branch networks and spending on technology also ticks up.
Healthy Assets, Healthy Profits
Private banks also continued to improve their asset quality over the fourth quarter.
HDFC Bank's gross non-performing asset ratio stood at 1.12% in Q4 FY23, down 11 basis points sequentially. The net NPA ratio also improved six basis points sequentially to 0.27%.
Similarly, ICICI Bank's gross NPA ratio fell 26 basis points sequentially to 2.81%. The bank's net NPA ratio fell seven basis points quarter-on-quarter and stood at 0.48% as of March 31.
Axis Bank's gross NPA ratio stood at 2.02% in Q4 FY23, down 36 basis points quarter-on-quarter. The net NPA ratio also improved by eight basis points sequentially and stood at 0.39%.
IndusInd bank also saw an improvement in its asset quality, with the gross NPA and net NPA ratios down sequentially to 1.98% and 0.59%, respectively.
Asset quality has stayed robust at banks, even as their exposure to unsecured retail credit has galloped.
For instance, ICICI bank grew its unsecured retail loans — credit cards and personal loans — by 35% year-on-year to Rs 1.18 lakh crore, as of March 31, according to the bank's Q4 FY23 results. In the same time frame, the bank's total retail loans grew by 22.7% from Rs 4.5 lakh crore in March 2022 to Rs 5.5 lakh core in March 2023.
The trend stands true at a systemic level as well with banks — both public and private — registering a year-on-year growth of 24% in their unsecured loans, which stood at Rs 12.2 lakh crore, as of December 2022.
Overall retail credit, on the other hand, rose by 20.17% year-on-year to Rs 39.35 lakh crore as of December 2022.
"The unsecured retail credit segment is working well for the banks," Mishra said, referring to the healthy asset quality seen in such lending so far.
Overall, large private banks delivered a healthy quarterly performance to close out FY23. While optimism ringed true across the commentary from the management teams of these banks, FY24 will also see a shift in operating circumstances.
Competitive intensity for low cost CASA funds is rising, credit costs are bottoming out, and operating expenses are ticking up, Mishra said.
Just how well banks navigate these changes — alongside an ongoing pause and potential turn in domestic monetary policy — might very well determine the results FY24 delivers.
Maintaining credit growth at a faster clip than the system and ensuring that non-interest income supports profits will also be key monitorables for private banks going forward, Khurana said.
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