Will Dream Run For Banks Continue?

It won't be easy for the banking sector to better its performance every quarter, predicts Tamal Bandyopadhyay.

Earlier this month, a Business Standard report mentioned a sharp slowdown in India Inc's earnings in FY23.

The combined net profits of 823 non-BFSI (banking, financial services and insurance) companies -- part of BSE 500, BSE Mid-cap and BSE Small Cap indices -- dropped 8.9 per cent in the year.

The report cited the normalisation of corporation margins from their abnormally high level of FY22 and FY21 as the main reason for this.

The banking sector, in contrast, has never had it this good.

The combined net profits of 32 listed private and public-sector banks (PSBs) were up 40.56 per cent in FY23 to close to Rs 2.29 trillion.

Both sets of banks crossed the Rs 1 trillion mark in recording net profits -- Rs 1.24 trillion for private banks and Rs 1.05 trillion for PSBs.

Quite a few banks have recorded their highest ever net profits. The nation's largest lender, State Bank of India, is one of them.

It has posted a net profit of Rs 50,232 crore (Rs 502.32 billion), the highest among all listed banks.

HDFC Bank Ltd comes second with Rs 44,109 crore (Rs 441.09 billion) and ICICI Bank Ltd third with Rs 31,896 crore (Rs 318.96 billion).

Three other banks have posted a net profit of at least Rs 10,000 crore (Rs 100 billion).

They are Bank of Baroda (Rs 14,110 crore/Rs 141.10 billion), Kotak Mahindra Bank Ltd (Rs 10,939 crore/Rs 109.39 billion) and Canara Bank (Rs 10,604 crore/Rs 106.04 billion).

Barring Axis Bank Ltd, Yes Bank Ltd and Punjab National Bank, all others have recorded a rise in net profit.

Axis Bank's loss is due to Rs 12,490 crore(Rs 124.90 billion) nspent on acquiring Citibank NA's consumer business in India.

RBL Bank Ltd, which had posted a net loss of Rs 74.74 crore (Rs 747.4 million) last year, has bounced back to the black with Rs 882.73 crore (Rs 8.82 billion) profit.

Bandhan Bank Ltd's net profit has zoomed from Rs 125.79 crore (Rs 1.25 billion) to Rs 2,195 crore (Rs 21.95 billion).

However, the rise in the operating profit of the banking industry is much lower -- 16.04 per cent, to Rs 4.64 trillion. In fact, RBL Bank, Bandhan Bank, UCO Bank, Dhanlaxmi Bank Ltd and DCB Bank Ltd have shown a drop in operating profits.

Of course, there are others that have shown handsome growth.

The list includes IDFC First Bank Ltd and Karur Vysya Bank Ltd (both have recorded over 50 per cent rise), Jammu & Kashmir Bank Ltd (39.48 per cent), Karnataka Bank Ltd (35.14 per cent) and Bank of India or BoI (34.08 per cent).

At least four others -- Axis Bank, Federal Bank Ltd, Bank of Maharashtra and ICICI Bank -- have recorded 25 per cent growth in operating profits.

How could the industry post record net profit while the operating profit has not grown in tandem?

And, despite a drop in operating profits, how could the net profits of a few banks zoom?

It's elementary, my dear reader: A sharp drop in provision for bad assets.

The private banks have recorded a 32.61 per cent drop in provision and the PSBs 9.7 per cent.

Among private banks, only Citi Union Bank Ltd has shown a marginal rise in provision, while BoI, among PSBs, has raised its provision kitty by a hefty 62 per cent.

Four other PSBs, led by the Central Bank of India (21.79 per cent), have recorded higher provisions.

This means 26 of the 32 listed banks have provided much less in FY23 as bad assets have been tamed.

A drop in provision apart, hefty recovery of bad loans has contributed to the bottom line of certain banks.

To be sure, the net interest income of the industry, the bedrock of a bank's income, has risen handsomely.

Barring Bandhan Bank, every listed bank's net interest income has risen during the year in double digits.

The highest net interest income is recorded by BoI (44.18 per cent) and five banks have recorded at least 30 per cent rise in net interest income.

They are South Indian Bank (34.48 per cent), Dhanlaxmi Bank (31.31 per cent), ICICI Bank (30.89 per cent), Indian Overseas Bank or IOB (30.8 per cent) and IDFC First Bank (30.18 per cent).

Overall, the listed banks' net interest income has risen close to 23 per cent in FY23, year-on-year.

But the other income, which includes income from fees and treasury, has not risen for many.

Six private banks and eight of the 12 PSBs have recorded a drop in the other income.

The fall is the sharpest for Dhanlaxmi Bank (55.94 per cent).

Meanwhile, Karur Vysya Bank (50.7 per cent), IDFC First Bank (38.64 per cent) and Central Bank of India (37.57 per cent) have seen a hefty rise.

Overall, PSBs have recorded a 1.97 per cent drop in the other income, while private banks have seen it rising by 7.8 per cent. For all listed banks, the rise is 2.44 per cent.

The icing on the cake is that all PSBs have shown a drop in their gross and net NPAs -- both as a percentage of loans as well as in absolute terms.

However, among private banks, a few, including HDFC Bank and IndusInd Bank Ltd, have shown a rise in absolute terms.

Of course, as a percentage of their overall loan portfolio, like the PSBs, all private banks have shown a drop -- both in gross and net bad loans.

In a few cases, the decline is very sharp.

For instance, IDBI Bank's gross bad loans have dropped from 20.16 per cent to 6.38 per cent and those of Yes Bank Ltd from 13.93 per cent to 2.17 per cent.

The sale of such loans to asset reconstruction companies have led to the sharp drop.

The lone private bank to have more than 2 per cent net NPAs is City Union Bank Ltd (2.36 per cent), while 12 of the 20 such listed banks have less than 1 per cent of it.

The comparable figure for PSBs is four. In this pack, PNB is the only bank to have more than 2 per cent net NPAs (2.72 per cent).

When it comes to gross NPAs, IDBI Bank has the highest net NPAs among private banks (6.38 per cent), followed by J&K Bank (6.04 per cent) and Dhanlaxmi Bank (5.19 per cent).

PNB's gross NPAs, at 8.74 per cent, are the highest among PSBs, while BoM has the lowest (2.47 per cent), followed by SBI (2.78 per cent).

Eight of 12 PSBs have at least 5 per cent gross NPAs.

Now, let's come to the not-so-happy part of the picture. The average growth of deposits for all listed banks has been 11.3 per cent against 17.7 per cent credit growth in FY23.

While the growth in advances is comparable between PSBs and private banks, when it comes to deposits, private banks have fared better.

Their deposits have grown 15.3 per cent versus PSBs' 9.26 per cent.

At least one PSB -- IOB -- has recorded a drop in its deposit portfolio (-0.49 per cent), while its advance book has grown 23.44 per cent.

Quite a few banks have seen their advance portfolio growing many times more than their deposit portfolio.

The list of such banks includes South Indian Bank (2.82 per cent vs 16.35 per cent), Central Bank of India (4.85 per cent vs 20.7 per cent), Indian Bank (4.64 per cent vs 15.45 per cent), Punjab & Sind Bank (7.73 per cent vs 20.73 per cent), and BoI (6.64 per cent vs 15.46 per cent).

Will the dream run for banks continue? S&P Global Ratings thinks so.

In a recent report, the rater said the sector's profitability will stabilise at a healthy level, benefitting from higher net interest margins and lower credit costs, and the banks' asset quality will continue to improve.

It also says recovery in written-off accounts is boosting the profitability of banks.

At the risk of sounding like Cassandra, let me say there are challenges ahead.

It won't be easy for the banking sector to put up a better performance every quarter.

With a bulk of the deposits being repriced, the net interest margin, or the difference between what they pay to the depositors and earn on advances, will shrink.

A rise in loan rate will lead to some cracks in the quality of retail assets.

And, the pace of recovery will taper off. Not every bank will be able to continue with the stellar show.

Tamal Bandyopadhyay is a consulting editor at Business Standard. You can read his earlier columns here.