By Shashank Didmishe
Rising bond yields caused by monetary tightening have impacted pre-provisioning operating profits (PPOP) of private banks in the first quarter of the current fiscal. Most of the private lenders posting treasury losses have resulted in significant moderation of non-interest income, thereby impacting profits at an operational level despite a robust loan growth and improving asset quality.
The decline in operating profit occurred depending on trading strategies and exposure to the G-Sec market. The fall in operating profit was more pronounced for Yes Bank, which saw a 20% y-o-y fall in its PPOP. Axis Bank and Kotak Mahindra Bank saw operating profits decline by 5% and and 4%, respectively. ICICI Bank and IndusInd Bank managed to grow their PPOP in double digits.
Treasury losses were on the higher side for HDFC Bank in absolute numbers. HDFC Bank posted heavy treasury losses in Q1FY23, which led to a muted operating profit growth. Kotak Institutional Equities found its trading losses at Rs 1,312 crore lower than expected as it had estimated the figure at Rs 3,000 crore. “We do not read too much into it considering that these are cyclical events and don’t have a credit costs impact that is worrisome,” analysts at the brokerage firm said.
Kotak Mahindra Bank took a hit of Rs 857 crore on its treasury operations due to higher proportion of securities held for trading, whose modified duration is 1.04 years. As one-year treasury spiked, the bank had to take this kind of mark-to-market knock, ICICI Securities said in a note. This unique trading strategy led to high trading losses, according to HSBC Global Research.
ICICI Bank and IndusInd Bank did not post trading losses, but saw significant reduction in treasury income.
RBL Bank saw a 31% y-o-y decline in PPOP as its loan growth was marred by subdued microfinance loans. The management expects the operating profit to remain steady at these levels, and it will take another three-four quarters to reach Rs 700-750-crore operating profit. The lender plans to upfront the cost for future growth in the credit card business and technology spends.
Although several public sector banks are yet to announce Q1 results, ratings agency ICRA estimates heavier MTM losses for PSBs given their higher participation in the bond market.
Despite a decline in operating profits, net profits of private banks have jumped, with some lenders reporting astronomical improvement in their bottom line compared to the previous year, mainly because of a fall in provisions.
Smaller banks such as RBL Bank have turned profitable against a loss in the previous quarter while Bandhan Bank’s bottom line soared by a massive 138% YoY on a lower base. Net profits of ICICI Bank, HDFC Bank, Kotak Mahindra Bank, IndusInd Bank and Yes Bank rose risen between 19% and 56% YoY.
ICICI Bank topped the chart in net interest income (NII) by registering a 21% y-o-y growth to Rs 13,210 crore, followed by Kotak Mahindra Bank and IndusInd Bank at 19% and 16%, respectively. All private banks registered over 10% growth in NII.
Despite a healthy loan growth and improving asset quality, the profitability at ICICI Bank may get impacted due to a shift towards higher proportion of corporate loans, while the lower deposit growth may impact the NIM, HSBC Global Research said.
HDFC Bank’s NIM was flat sequentially at 4% while the margin contracted by 10 bps on a y-o-y basis. The management took the decision to shift the asset mix towards higher-rated loans during the pandemic, which adversely impacted the NIMs as such assets give lower yield.
However, with HDFC Bank’s credit growth being largely led by retail and MSME, margin should improve as repricing of such loans takes place at a faster rate being linked to the repo rate, analysts at ICICI Securities said.
Kotak Mahindra Bank’s 30-bps NIM expansion to 4.92% surprised analysts, which was brought about by a change in the asset mix. The bank continues to stretch its balance sheet to eke out NIMs, analysts at HSBC Global Research said.
“We have seen repo rates hiked twice in this quarter, which enabled us to pass that on to our borrowers almost immediately,” Jainmin Bhatt, chief financial officer at the bank, said. As higher share of floating-rate loans are linked to repo rate, transmission will be better on the lending side, which will be a positive for margins, ICRA had said earlier.
According to analysts, the bank is likely to see an expansion in margin as the benefit of upward revision in EBLR and MCLR is yet to fully reflect in NIM.
Bandhan Bank’s NIM contracted 50 bps YoY in Q1FY23 to 8% as costs of funds substantially increased. While NII at 6% was ahead of estimates, NIMs contracted lower than expected to 8%, foreign brokerage Nomura said in a report.
Axis Bank has managed to bring operational efficiency while maintaining its asset quality, KIE said in a report. “Axis Bank has converged on various operating metrics with its frontline peers. We expect return ratios to operate in a very tight band and the asset quality to be quite similar,” the brokerage said.
Headline asset quality numbers have declined for the banks. Bandhan Bank’s NPAs, which were on the higher side, moderated in Q1. Gross NPA stood at 7.25% as on June 30, 2022, compared with 8.18% in the previous year. Net NPAs were at 1.92% compared to 3.29% a year ago.
Yes Bank’s asset quality improved as its GNPA declined to 13.4%, compared with 15.6% a year ago, while net NPA ratio stood at 4.2% against 5.8%. The bank has made progress in formation of an asset reconstruction company to clean most of the bad loans from its balance sheet.
“The credit profile of some banks with a high level of restructured loans will be a monitorable, especially those with weak operating profitability and weak capital cushions,” ICRA had said.
Rise in recoveries and upgrades by Yes Bank, coupled with lower slippages resulting in lower GNPA and transfer of bad loans to the ARC, will likely lead to GNPA levels of 11.8% in FY23, ICICI Securities said. Yes Bank’s provisions declined 62% in Q1FY23. The brokerage expects that income from recovery resolution would be higher than credit costs expected from new slippages and ageing provisions in FY23.