H1FY22 report: Poor corporate loan growth, thin margins hit big banks’ NIIs

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November 05, 2021 5:00 AM

Deposit rate cuts have been less frequent so far this year and with lending rates continuing to trend down, NIIs have come under pressure, bankers said.

The PNB management attributed the drop in NII to the one-off impact of a judicial embargo on bad-loan recognition during the September quarter of FY21.The PNB management attributed the drop in NII to the one-off impact of a judicial embargo on bad-loan recognition during the September quarter of FY21.

As loan growth in the corporate segment slowed and low interest rates put a lid on margins, most large banks saw their net interest incomes (NII) growing slower during the first half of FY22. Some public sector banks (PSBs) even saw their NIIs fall on a year-on-year (y-o-y) basis during Q2FY22.

Deposit rate cuts have been less frequent so far this year and with lending rates continuing to trend down, NIIs have come under pressure, bankers said.

Punjab National Bank (PNB), Yes Bank, Indian Bank and Canara Bank were among the lenders who saw their NIIs fall during the September quarter. PNB’s NII was down 25% y-o-y, with the net interest margin (NIM) falling 30 basis points (bps) sequentially and 80 bps y-o-y.

The PNB management attributed the drop in NII to the one-off impact of a judicial embargo on bad-loan recognition during the September quarter of FY21.
Also, the Delhi-based bank said it had to price loans in the corporate and micro, small and medium enterprises (MSME) segments downwards.

SS Mallikarjuna Rao, MD & CEO, PNB, told investors that the lender has reduced the pricing in the MSME segment aggressively from August onwards. “So two months of an impact was roughly around Rs 150 crore in action. Then there was an aggressive repricing in the short-term corporate book where people take WCDL (working capital demand loans). So that book is more than `50,000 crore, where repricing aggressively has taken place,” Rao said.

Private banks put up a relatively better show on the core income front without bucking the overall downward trend. Axis Bank’s NII grew 7.8% y-o-y in Q2FY22, as against 20% in Q2FY21 and 11% in Q1FY22.

HDFC Bank, which saw its NII growth improve to 12% y-o-y in Q2FY22 from 9% in the previous quarter, still undershot its year-ago growth rate of nearly 17%. The largest private lender’s management said the change in its loan mix in favour of a larger wholesale book was responsible for the muted NII growth.

Srinivasan Vaidyanathan, chief financial officer and group head – finance, HDFC Bank, said that certain segments where the bank grew over the last 18 months were low-risk segments. “That means with a lower price that comes with it,” he said, adding that the contribution of retail loans is now on the rise. “…even in this quarter while we have had the retail growth coming up, …[it] will take a couple of quarters for the average to catch up with the overall base,” he said.

Kotak Mahindra Bank registered an NII growth of 3.2%, slower than 5.8% a quarter ago and 16.8% a year ago, as the lender saw loan growth picking up only around the end of the July-September quarter. “While at the period-end, you see the loan growth happening, a large part of it is seen around the end of the quarter. So it doesn’t really bring me NIIs for this period,” said Jaimin Bhatt, president & group CFO, Kotak Mahindra Bank.

Moreover, a lot of the incremental credit growth during the last year has happened in home loans and other secured loan segments, where yields are lower. “If you look at the higher-yielding loans, like unsecured personal loans or credit cards or some of the agri loans, they’ve actually de-grown. So some of the mix change has also impacted the NII,” Bhatt said.

As the busy season progresses in the second half of FY22, banks expect their core earnings to improve. Both PNB and Kotak Mahindra Bank said that their NII performance will be better in the next quarter as earnings from festive-season business start to flow in. The central bank’s liquidity withdrawal exercise could also help banks price credit better.

“I’m expecting improvement in the next quarter because … as the liquidity is slowly being removed by the RBI and I’m expecting them to bring it down from Rs nine lakh crore to Rs 2.5 lakh crore by December second week,” PNB’s Rao said. “So our pricing will be moving in a better manner in Q3 and Q4,” he added.

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