Large private banks have reported a year-on-year rise of between 20% and 46% in their net profits for the quarter ended March. This was led by continued expansion in net interest income (NII), a stable asset quality and expanding margins, analysts said.
Axis Bank was the only lender among top five private banks to have reported a net loss of Rs 5,728 crore due to an exceptional one-time cost of completing the deal to buy Citibank India’s consumer business. Excluding the exceptional expense, Axis Bank said its net profit would have been at Rs 6,625 crore in Q4FY23, up 61% on a Y-o-Y basis.
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Though all the lenders have reported widening of the net interest margin, experts have said that NIMs will moderate going forward. All major private banks are operating at a higher credit-to-deposit ratio, which is unsustainable. Besides, banks’ yields on advances will now be limited, but deposits will come up for re-pricing very soon.
“This quarter was no different from the past two-three quarters. Banks are operating at record margins because one side of the balance sheet is re-pricing itself much faster than the other side. Loans are getting re-priced much faster than deposits, so while loan yields have moved up by, say 50 basis points (bps), cost of deposits has moved only 10-15 bps. So, automatically, the NIMs (net interest margin) have widened,” said Krishnan ASV, lead BFSI institutional analyst at HDFC Securities. He added that in little over two quarters, ICICI Bank and Kotak Mahindra Bank have witnessed their loan yield expanding by nearly 60 bps.
Robust loans, NII growth
All five top private lenders continued to post higher double-digit loan growth figures during Q4FY23 as the credit demand, especially in the retail loan and unsecured loan segments, soared. The largest private sector lender, HDFC Bank, for instance, grew its advances by 17% YoY to Rs 16 trillion as on March 31. Retail loans accounted for 47% of the lender’s total advances and wholesale loans formed the rest. ICICI Bank reported its total advances at Rs 10.19 trillion as on March 31, up 19% YoY. The retail loan portfolio of ICICI Bank grew by 23% YoY and comprised 55% of the total loan portfolio.
Axis Bank, Kotak Mahindra Bank and IndusInd Bank too saw between 18% and 21% YoY loan growth in Q4FY23, according to Motilal Oswal reports. But while advances grew in double-digits, the deposit growth continued to lag the credit growth, with HDFC Bank being an exception as it continued its efforts to mobilise higher deposits to execute merger of Housing Development Finance Corp (HDFC) with the bank. HDFC Bank’s total deposits grew 21% YoY to Rs 18.8 trillion as on March end, while low-cost current account and savings account (CASA) ratio was down to 44.4% during Q4FY23, against 48% in Q4FY22.
“…deposit growth is cranking up (for HDFC Bank) after a miss in Q3FY23 – now up 21% YoY and 9% QoQ in the run up to the merger – while recent branch additions – 1,479 branches in FY23 + 734 branches in FY22 – are yet to contribute meaningfully. The bank would continue to ramp up its branch network, customer addition to stock-up deposits which may keep funding and sourcing costs elevated and the NIMs/core-PPoP (operating profit) growth in check,” said brokerage Emkay Global Financial Services.
A robust rise in advances also led to a higher NII, the difference between interest earned and interest expanded, for all large private banks. HDFC Bank’s NII grew 24% YoY to Rs 23,351.8 crore, ICICI Bank’s NII rose a massive 40% YoY to Rs 17,667 crore, while Axis Bank’s NII grew 33% YoY to Rs 11,742 crore.
Consequently, NIMs also improved during Q4. Going ahead, however, NIMs are likely to moderate, analysts say.
According to Krishnan, almost all top private banks are operating at a higher credit-to-deposit ratio, but this cannot be sustained for a longer time. “We believe that NIM reflation cannot be sustained as almost all top private banks are operating at an unsustainably high loan-to-deposit ratio (CD ratio). In addition, the RBI has already taken a pause, which means in Q1FY24, we are unlikely to see any movement in asset yields, but deposit prices will catch up with a lag. Bulk of the top banks’ deposits are in the one-year to three-year bucket and these will come up for re-pricing very soon,” Krishnan said, adding the brokerage is expecting roughly a 30-bps decrease in banks’ NIM in FY24.