The reasonably good Q2 results turned in by private sector banks where earnings for most lenders have grown by over 20% y-o-y, suggest that there are enough opportunities even in a slowing economy. Its true that most of these banks are still operating on a relatively small base and most of the crop has no legacy issues, but reporting good consistently good numbers, during a downturn, is creditable.
Loan growth at Axis Bank and HDFC Bank was a strong 23% y-o-y, driven by retail assets, while at ICICI Bank it was 18% y-o-y, driven by corporate loans. Profitability in terms of net interest margins (NIM) has remained more or less intact across banks, indicating their ability to compete in a difficult market; HDFCs NIM was a robust 4.2%, ICICI Banks 3% and Axis Bank reported 3.5%. More importantly, the news on the loan losses front has been reassuring. ICICI Bank may have classified the Deccan Chronicle account as an NPA, as has Kotak Mahindra Bank, and slippages at Axis Bank were higher during the quarter, with loan loss provisions at 1.3%, but the balance sheets of most banks are by and large clean. Indeed, the outstanding restructured loans at ICICI Bank were lower q-o-q at the end of the September quarter while the net NPAs stayed flat at 0.78%. And restructured loans for Axis Bank are at a comfortable 0.8% of loans, while HDFC Bank reported net NPAs of just 0.2%. Banks like Axis Bank that are a tad more leveraged to the macro situation need to watch out; ICICI Bank management has cautioned that all big projects need to be monitored, given the delays in fuel linkages and other constraints. However, given that private sector banks have virtually no exposure to SEBs, they are much better off than their public sector counterparts.
Nonetheless, even retail loans can be messy if they are not watched; so HDFC Bank needs to be careful that credit costs dont rise as it scales up in smaller towns. The banks well-thought out strategy by which it has preferred to lend in smaller ticket sizes and leverage its reach has worked well so farretail loans during the September 2012 quarter jumped 32% y-o-y. Again, ICICI Bank, which has built up a strong liability franchise in the last few years and is much less dependent on wholesale deposits than it was a few years back, may want to slow down a bit, in a difficult environment. In general, private sector banks have taken the precaution of making adequate provisions for loan losses and most of them are reasonably well capitalised; that will help them grow when the economy turns.