Stress In Unsecured Loans Weigh On Most Private Banks' Q3 Performance

The December quarter was a tepid one for most private sector banks owing to deterioration in asset quality, rise in provisions and persistent pressure on margins, according to analysts.

This has come as stress in unsecured loans prompted most banks to recalibrate their loan-book mix, shifting to more secured assets, which weighed on their net interest margins. Having to provide more provisions for stress in unsecured and microfinance institutions loans also hurt their profits.

While banks with high exposure to microfinance institutions suffered the most, such as RBL Bank and IDFC First Bank, those with limited exposure — Kotak Mahindra Bank and ICICI Bank — buck the trend.

"FY25 is a walkout year, we may not see any positive surprises from banks in Q4 as well," Ashutosh Mishra, head of research-institutional equity at Ashika Stock Broking Ltd., said.

"Commentary was also not that great and results were largely tepid. But banks with concentrated MFI portfolios have shown negative performance," Mishra said.

These two pain points come at a time when the economy is witnessing a slowdown, which has further led banks to curtail their credit-growth guidance for the current financial year and, in some cases, for 2025–26 as well.

But with deposit growth anticipated to pick up, large players like HDFC Bank aim to grow deposit growth faster than credit growth next year.

Fall in provisions helped HDFC Bank Ltd. report a 2.2% year-on-year rise in profit for the December quarter to Rs 16,736 crore, but asset quality of the bank deteriorated. Gross non-performing assets ratio rose to 1.42% as of December, compared to 1.36% a quarter ago.

The bank's aim has been to increase loan growth below industry levels in the current fiscal, at par with industry in the next fiscal and higher than industry levels in 2026–27, Chief Financial Officer Srinivasan Vaidyanathan had said in the post-earnings call.

For Axis Bank, a sharp rise in provisions and slightly higher bad loans weighed on its net profit to Rs 6,304 crore, just up 4% on year. The bank witnessed increased risks from overleveraging in certain retail segments in the October–December period and has taken corrective action.

Stress caused by overleveraging of borrowers in the MFI space hit RBL Bank and IDFC First Bank the most, with the latter reporting a 53% fall in profit to Rs 716 crore. RBL Bank's profit was a mere Rs 33 crore, down 86%.

However, management commentaries of banks suggest that the MFI segment will start normalising from July–September or October–December of next year as collection efficiency has been seeing an improvement.

Interest-rate reversal and higher slippages also affected net interest margins of private banks this quarter. Most of them have also cut their margin guidance on the back of the current macroeconomic environment and tight liquidity conditions.

Axis Bank's NIMs contracted to 3.93% from 3.99% a quarter ago. The bank said that its guidance on the NIMs through the current cycle will remain at 3.8%.

Kotak Mahindra Bank was a clear outlier on the margin front at 4.93% as of December-end, higher than 4.91% a quarter ago.

ICICI Bank saw largely stable NIMs at 4.25% in the December quarter as against 4.27% a quarter ago. The bank did provide margin guidance, but it expects it to remain broadly stable till the rate-cut cycle starts.

Banks do expect the pressure on margins to continue once the rate-cut cycle starts as loans will get repriced faster than deposits.