Profitability of most private sector banks improved significantly in the second quarter of the current financial year, as the lenders enjoyed higher yields on loans while deposit rates rose with a lag. Some banks have chosen excess liquidity to support credit growth, while others are treading gingerly on outlook for net interest margin (NIM) as they expect deposit rates to catch up and put pressure on margins.
Kotak Mahindra Bank topped the chart in terms of profitability in Q2FY23, with a massive 72 basis point (bps) y-o-y NIM expansion, followed by RBL Bank (49 bps), ICICI Bank (31 bps) and Axis Bank (30 bps). Even on a sequential basis, these banks saw an expansion in their NIMs.
A higher transmission of rising interest rates aided the better-than-average expansion in NIM for Kotak Mahindra Bank and RBL Bank, in addition to the use of excess liquidity to pump up loan growth. The transmission of lending rates happened faster as the banks focused more on floating rate loans. Kotak Mahindra Bank also has a higher capital at its disposal than currently needed, which the lender plans to utilise to fuel growth, keeping in in mind the focus areas of the bank, Jaimin Bhatt, CFO, said in a media interaction after the Q2FY23 earnings.
Despite an increase in the loan yields due to the hikes in policy rates, the impact of re-pricing of deposits on NIM in coming quarters is yet to be seen, Anindya Banerjee, CFO, ICICI Bank, said in an analyst call.
“The benefit of further upward revision in EBLR and MCLR is yet to fully reflect in NIMs (of Kotak Mahindra Bank). With modest growth in deposits, endeavour is to accelerate the liability engine, too, so it may exert some deposit cost pressure,” ICICI Securities said.
The sole outlier in the pack of private banks is HDFC Bank, which has not seen its margin fattening up to the same extent as its peers. The lender reported NIM of 4.10% as of September 30, which is on the lower side of its typical range of 3.95-4.25%. This is mainly because of shift in the wholesale-retail loan mix of the bank. Of the total portfolio, the wholesale loan book consists of 55% while the rest is retail, exerting downward pressure on NIM. However, with the retail segment now growing at a faster pace, providing the necessary impetus for NIM to expand going ahead, Surendran Vaidyanathan, CFO of HDFC Bank, said.
Similarly, IndusInd Bank saw a 17 bps increase in its margin, which according to HSBC Global Research is lower than expected, as the bank was unable to improve yields at the same rate as the increase in cost of funds.
With most private banks having a large portion of the book linked to floating interest rates and the reset in these buckets happening sooner rather than later, the banks’ ability to raise deposits are the most likely variable affecting their profitability. Although the banks were slow in raising deposit rates, they have quickened the pace, Anindya Banerjee said, with traction likely coming from savings accounts as some banks have increased rates on savings accounts.
In the private banks space, there is a notable gap in growth rate of loans and deposits. As per Q2FY23 numbers, deposit growth is almost half, compared to the credit growth rate. Banks are expected to aggressively raise deposits in the coming quarters, as according to Federal Bank MD & CEO Shyam Srinivasan, “there is a war for deposits going on”.
The gap between deposit and loan growth rate is lower for HDFC Bank and IndusInd Bank, while the trend is reversed in the case of Yes Bank and IDFC First Bank, which have higher deposit growth rates compared to credit growth. Most notable among private sector banks is IDFC First Bank, which has one of the highest current account, savings account (CASA) ratio and has seen a huge 36% y-o-y surge in deposit growth in Q2FY23. Similarly, Yes Bank also saw total deposits increase by 13%, higher than industry average, and advances growth of 11% in Q2FY23.
IndusInd Bank has ramped up deposit mobilisation as it acquired higher term deposit customers in Q2FY23. However, the savings deposits of the bank saw a reduction q-o-q primarily due to the implementation of centralised treasury settlements.
Similarly, HDFC Bank is also focusing on raising time deposits to support its credit growth.
Among other metrics, all private banks saw their bottomline improving significantly on account of lower provisioning, except Yes Bank, which saw its profits decline by 32% in Q2FY23. Rest of the banks in the group witnessed a jump in their profit in the range of 20-70%. Profits of RBL Bank and IDFC First Bank increased multi-fold on a lower base. Operating profits grew in the range of 10-69% y-o-y as fee income more than offset treasury losses leading to an improvement in non-interest income. At an operational level, RBL Bank saw its profits decline by 26% y-o-y. Net interest income (NII) also improved significantly aided by loan growth, which was in the range of 11-25% in Q2FY23. At banking industry level, non-food credit growth is closing in on 18% y-o-y, as of fortnight ended October 7, as per RBI data. Private banks also saw improvement in asset quality, with lower slippages.