Jan 27, 2023

Nine leading private banks grew their net profit at an average year-on-year growth rate of 37% in the third quarter. 7:46 AM IST, 27 Jan 2023 7:46 AM IST, 27 Jan 2023 7:46 AM IST, 27 Jan 2023 Save ADVERTISEMENT Driven by credit growth, buoyant interest income, and notably healthy margins, Indian private banks delivered a strong quarterly performance in the third quarter of FY23. But the performance also comes at a time when banks have seen a dip in the share of low cost deposits to their overall deposit base. Low cost current accounts and saving accounts are the cheapest source of capital for banks and if their share dips, it can get more e... Driven by credit growth, buoyant interest income, and notably healthy margins, Indian private banks delivered a strong quarterly performance in the third quarter of FY23. But the performance also comes at a time when banks have seen a dip in the share of low cost deposits to their overall deposit base. Low cost current accounts and saving accounts are the cheapest source of capital for banks and if their share dips, it can get more expensive to fund incremental credit growth. The ratio of such deposits to a bank's overall deposit base is called the CASA ratio. India's largest private sector lender, HDFC Bank Ltd., saw its CASA ratio decline 140 basis points sequentially in Q3 FY23 to 44%. "Retail [deposits] came in quite well but did not come in as much as we thought," Srinivasan Vaidyanathan, chief financial officer at HDFC Bank, said during the Q3 earnings conference call on Jan. 14. Similarly, ICICI Bank Ltd. and Kotak Mahindra Bank Ltd. also reported a decline of 30 basis points and 660 basis points in their respective CASA ratios in the third quarter. "CASA deposits tend to suffer during a rising interest rate cycle," Asutosh Mishra, lead banking analyst at Ashika Stock Broking, told BQ Prime. When interest rates rise, people move their money to better return yielding time deposits or other instruments such as liquid mutual funds. Private banks reported notably healthier net interest margins over the third-quarter with Kotak Mahindra Bank and Axis Bank both posting lifetime highs on their NIMs. "There is some room to even go up further before it starts moderating," Jaimin Bhatt, chief financial officer at Kotak Mahindra Bank, told analysts in a Jan. 21 conference call. Growth in net interest margins for banks has stayed strong and is largely due to the lagged effect of interest rate hikes on liabilities as opposed to assets, Mishra of Ashika Broking said. Banks that are more heavily engaged in mortgage lending have especially benefited from the lag, he said. Healthy margins—aided by buoyant interest incomes—also aided profitability for private banks this quarter. Financial results of nine leading private banks showed an average year-on-year growth rate of 37% for their net profits in the October-December quarter. India's largest private lender, HDFC Bank, grew its net profit by 19% year-on-year in the third quarter. ICICI Bank and Axis Bank grew their net profit by 34% and 62% year-on-year, respectively. Private banks also improved their asset quality over the quarter with Yes Bank Ltd. reporting the most marked change due to a one-time sale of over Rs 43,000 crore worth of assets to JC Flowers Asset Reconstruction Co. Yes Bank's gross non-performing asset ratio fell from 12.9% in Q2 FY23 to 2.02% in the third quarter. HDFC Bank and ICICI Bank reported net NPA ratios of 0.33% and 0.55%, respectively, in the third quarter. "These are the best numbers we've seen from banks at large in almost 10-12 years," Amit Khurana, head of equities and research at Dolat Capital, told BQ Prime. Asset quality is also likely to remain benign for a while, since it's still early days of the credit cycle and a fuller picture only emerges after five or six quarters of the money being lent, Khurana said. According to Mishra, whether banks are able to further strengthen their margins will depend on the direction that monetary policy takes in February. If rates move up further, margins could get more headroom even as the price of deposits catches up. Although the overall profitability of banks was aided by a reduction in provisions over earlier quarters, financial results of four out of nine private banks indicate they increased their provisions over the third quarter. The fours banks are: ICICI Bank, Kotak Mahindra Bank, Yes Bank, and IDFC First Bank Ltd. "We have changed our provisioning norms on non-performing assets to make them more conservative for corporate, SME and business banking. This change resulted in higher provisions," Sandeep Bakshi, managing director and chief executive officer at ICICI Bank, said during an earnings conference call on Jan. 21. ICICI Bank increased its provisions by 12.4% year-on-year to Rs 2,257 crore in the third quarter. The one-time provisioning that some banks have done is driven by either changes related to bad asset recognition policies or because banks detected heating in certain segments, Mishra said. ADVERTISEMENT