CUSTOMER Takes Centre Stage In This Round Of The Battle

As the July-September quarter of 2024-2025 (FY25) comes to an end amid intense debate over whether the best is behind India’s banking industry, let’s look closely at some critical data.

The industry’s year-on-year (y-o-y) operating profit – or the operating profit of the September quarter of the?current financial year (FY2025) over the September quarter of the previous finance year (FY2024)?– is up by a handsome 20.27 per cent, from Rs 1.27 trillion to Rs 1.52 trillion (figures are rounded off). Beside all universal banks, this includes the earnings of nine small finance banks (SFBs).?

The State Bank of India (SBI) leads the brigade with a 51 per cent increase in its operating profit, from Rs 19,417 crore to Rs 29,294 crore. Among others, IDBI Bank Ltd has posted 45.12 per cent growth in operating profit and Central Bank of India, 41.46 per cent.

Only two universal banks have shown a drop in y-o-y operating profit – IndusInd Bank Ltd and Karnataka Bank Ltd. On quarter-on-quarter (q-o-q), or the September quarter over the June quarter?of FY25, besides these two, at least five other banks have recorded a decline.

After making provisions, the industry’s net profit is up 18.61 per cent (Rs 91,792 crore). In absolute terms, SBI tops the list with a Rs 18,331 crore net profit, followed by HDFC Bank Ltd (Rs 16,821 crore). SBI's net profit is up 27.92 per cent and that of HDFC Bank, 5.29 per cent. Three private banks – IndusInd Bank, IDFC First Bank Ltd and RBL Bank Ltd – have recorded a dip in their net profits. Overall, the provisions made by them are up 26.68 per cent, but eight private banks and seven public sector banks have cut down on their provisions.

Net interest income (NII) is the main driver of the banks’ profit. This is up 8.99 per cent y-o-y, though only 1.05 per cent q-o-q. Two banks have posted a drop in their NII y-o-y, and?seven q-o-q.? Of the 31 universal banks listed, only two have reported a y-o-y drop in NII. However, q-o-q, seven have recorded a drop. Another interesting fact is that 13 banks have reported double-digit growth in NII y-o-y, but on q-o-q, this number shrinks to two.

Credit cost, which was eating into banks’ profits till recently, has been falling. In absolute terms, the industry’s gross non-performing assets (NPAs) are down to nearly 12 per cent (to Rs 4.30 trillion), and the net NPAs are down 14.86 per cent (to Rs 94,187) y-o-y. More banks have recorded a drop in gross and net NPAs than those that have witnessed a rise, both y-o-y and q-o-q.

In percentage terms as well, most banks’ gross and net NPAs have fallen in the September quarter. Bandhan Bank Ltd has the highest gross NPAs (4.68 per cent), followed by Central Bank of India (4.59 per cent), Punjab National Bank (4.48 per cent) and Union Bank of India (4.36 per cent). Among public sector banks, SBI has the lowest gross NPAs (2.13 per cent). Only two other PSU banks have less than 3 per cent gross NPAs. They are Bank of Baroda and Indian Overseas Bank.

The good story is that just 24 of the 31 listed universal banks now have less than 1 per cent net NPAs.?Among PSU banks, Punjab & Sind Bank is the only entity which has more than 1 per cent net NPA, the rest six are private banks. Both Bank of Maharashtra and IDBI Bank Ltd have just 0.2 per cent net NPAs, the lowest. Among the relatively large banks, HDFC Bank Ltd, ICICI Bank Ltd, Axis Bank Ltd, Kotak Mahindra Bank Ltd, IDFC First Bank Ltd, Punjab National Bank, Indian Bank and Indian Overseas Bank have less than 0.5 per cent of net NPAs. SBI’s net NPAs are 0.53 per cent.

Since there is no visible dent in the quality of assets, let’s shift our focus to the cost of deposits and the net interest margin (NIM),?loosely the difference between the interest a bank earns from loans and the interest it pays on deposits.?When credit cost is low, the key to a bank’s performance is the cost of money and how much it earns in the form of interest.

Except for a few, most banks' NIM in the September quarter is down, both q-o-q and y-o-y. Only a handful of banks have improved their NIM over this period. IDBI Bank is one of them. Its NIM has risen from 4.18 per cent in the June quarter to 4.87 per cent in the September quarter. In the June quarter of FY24, its NIM was 4.33 per cent.??

Most large banks have been showing a progressive decline in NIM over the past one year. For instance, SBI’s NIM was 3.29 per cent in September 2023; it dropped to 3.22 per cent in the June quarter; and has fallen further to 3.14 per cent in September 2024. The comparable figures for Punjab National Bank are 3.11 per cent, 3.07 per cent and 2.92 per cent; for Canara Bank, 3 per cent, 2.9 per cent and 2.86 per cent; and for Union Bank of India, 3.18 per cent, 3.05 per cent and 2.9 per cent.

The same trend is seen among large private banks. Here’s the trajectory of ICICI Bank Ltd’s NIM during this period: 4.53 per cent, 4.36 per cent and 4.27 per cent. Similarly, Axis Bank’s NIM has slipped from 4.11 per cent in September 2023 to 4.05 per cent in June and 3.99 per cent in September 2024. The comparable figures for Kotak Mahindra Bank are 5.22 per cent, 5.02 per cent and 4.91 per cent. HDFC Bank has been able to hold on to its NIM. It was 3.4 per cent in September 2023. From there, it rose to 3.47 per cent in June 2024, before marginally slipping to 3.46 per cent in September 2024.

Despite recording a drop, Bandhan Bank enjoys the highest NIM among universal banks (7.4 per cent), followed by IDFC First Bank (6.2 per cent) and RBL (5.4 per cent). Of course, NIM in isolation doesn’t mean much; it is related to the profile?of a bank's?credit portfolio. Typically, loans not backed by collateral or unsecured loans always fetch higher interest rates and lead to higher NIM.

Now, the last part of this story – the cost of funds of banks. The higher the percentage of current and savings bank accounts, or Casa, the lower a bank’s overall cost of funds since savings accounts offer relatively low interest rates compared to fixed deposits, and current accounts don’t earn any interest.

For most banks, the Casa ratio has been going down. For some, it’s stable. It’s up for only a few, and that too marginally. Only nine banks have recorded over 40 per cent Casa in the September quarter – four from the private and five from the public sector. They are Bank of Maharashtra (49.29 per cent), Central Bank of India (48.93 per cent), IDFC First Bank (48.9 per cent), Jammu & Kashmir Bank Ltd (48.6 per cent), IDBI Bank (48.14 per cent), Kotak Mahindra Bank (43.6 per cent), Bank of India (42.68 per cent), Indian Overseas Bank (42.44 per cent) and State Bank of India (40.03 per cent).

Of course, Casa on its own doesn't have the last word on the cost of a banks’ fund since one bank can pay a higher interest rate on its savings accounts than what another bank pays for fixed deposits. For instance, SBI pays just 2.7 per cent on savings accounts, while some private banks pay 6 per cent, or even more, on higher amounts kept in such accounts.

While the banking sector has substantially improved its risk-management and underwriting skills to keep bad loans at bay, it needs to be innovative to mobilise deposits and keep the cost of money low. In this round of the battle, the customer takes centre stage.

The writer is a Consulting Editor with Business Standard.

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