How Long Will The Good Run Of Banking Industry Last?

Hold your breath.

In the financial year 2024, which ended in March, 26 listed banks – 14 private banks, seven public sector banks (PSBs) and five small finance banks – had less than 1 per cent net non-performing assets (NPAs).?When did we last see such robustness in the Indian banking industry?

The list of sub-1 per cent NPA banks includes the top three by assets – the State Bank of India (0.57 per cent), HDFC Bank Ltd (0.33 per cent) and ICICI Bank Ltd (0.45 per cent).?

Among others, Axis Bank Ltd (0.31 per cent), IndusInd Bank Ltd (0.57 per cent), Kotak Mahindra Bank Ltd (0.34 per cent), IDFC First Bank Ltd (0.6 per cent), IDBI Bank Ltd (0.34 per cent), Yes Bank Ltd (0.6 per cent), Bank of Baroda (0.68 per cent), and Punjab National Bank (0.73 per cent) are members of this club.

They have achieved this through the recovery of bad loans, providing or setting aside money for them and?even?writing them off. The industry will need to do more. Why? Only six banks across three categories have less than 2 per cent gross NPAs. As the advance portfolio grows, NPAs in percentage terms go down. That’s simple arithmetic.

In percentage terms, Punjab National Bank has the maximum gross NPAs (5.73 per cent), followed by Punjab & Sind Bank (5.43 per cent). Four others have more than 4 per cent, but less than 5 per cent gross NPAs. These are Bank of India (4.98 per cent), Union Bank of India, ESAF Small Finance Bank Ltd (4.76 per cent each) and the Jammu & Kashmir Bank (4.08 per cent).

Indeed, as the quality of loan assets improves, the requirement for provision goes down for banks.?But the private banks have not shied away from making far more provision that the PSBs.?At Rs 49,116 crore, the provision made by private banks in FY24 is around 19 per cent higher than the previous year; in contrast, the public sector banks’ provision has depressed 37 per cent year-on-year – from Rs 97,029 crore in FY23 to Rs 61,580 crore in FY24.?All figures are rounded off.

Overall, provision made by all listed banks has come down by close to 19.5 per cent – from Rs 1.41 trillion to Rs 1.13 trillion.?The reason for the drop in provision is indeed a drop in bad loans but had all the PSBs been more liberal, they would have presented even a better picture in terms of NPAs.

The growth in net interest income (NII), or roughly the difference?in what a bank earns from?its lending activities and the interest it pays for liabilities, including deposits,?has been driven by growth in advances. It’s widely known that the banking sector’s advance growth has been far higher than the deposit growth. In FY24, the deposit growth of all scheduled commercial banks was 13.8 per cent (versus 10.2 per cent in FY23), while the advances grew 19.9 per cent (versus 15.8 per cent). However, this pattern does not reflect in the balance sheets of all banks.

For instance, HDFC Bank’s deposit growth for the year was 26.36 per cent against a 56.68 per cent advance growth. This was on account of the merger of Housing Development Finance Corporation Ltd with the bank.

IDBI Bank’s deposit growth was 8.67 per cent versus 16.03 per cent growth in advances. Yes Bank reversed the scene with 22.47 per cent deposit growth versus 12.07 per cent advance growth.

If we don’t include small finance banks,?IDFC First Bank?has recorded the highest growth in deposits (38.68 per cent) as well as advances (25.13 per cent) in FY24. Of the 12 government-owned banks, six have shown a single-digit growth in deposits. Punjab & Sind Bank in this group is the lone entity that has grown both advances and deposits in single digit. In the private sector, IndusInd Bank and Tamilnad Mercantile Bank give them company.

As banks fight it out to collect deposits, barring one –Uco Bank – no other entity was able to show better growth in the low-cost current and savings account (CASA) in FY24. Uco Bank’s CASA in FY24 grew 39.25 per cent against 37.82 per cent in FY23. Yes Bank was able to maintain the growth year-on-year – 30.9 per cent versus 30.8 per cent. All other banks showed a drop in growth in CASA. For some of them, the dip was quite sharp.

For instance, HDFC Bank?(which had coined the term CASA)?saw its low-cost deposit portfolio?growth?slipping from 44.4 per cent?in FY23 to 38.2 per cent in FY24. Again, that’s because of the merger. Among others, Axis Bank has seen its CASA growth down from 47 per cent to 43 per cent over the year and ICICI Bank, 44.4 per cent to 38.2 per cent.

In the universe of listed banks, four – two each from private and public sectors – have shown over 50 per cent CASA in FY24. But all four of them have shown a drop in the growth rate. They are Bank of Maharashtra (52.73 per cent in FY24, down from 53.38 per cent in FY23), the Jammu & Kashmir Bank Ltd (50.51 per cent versus 54.1 per cent), IDBI Bank (50.43 per cent versus 53.02 per cent) and the Central Bank of India (50.02 per cent versus 50.39 per cent).

As a result, the net interest margin (NIM),?calculated by dividing NII by the average earning assets,?for most banks have shrunk. For HDFC Bank, the shrinkage has been sharp – from 4.1 per cent in FY23 to 3.44 per cent in FY24. During this period, SBI’s net interest margin dipped from 3.58 per cent to 3.3 per cent, and that of ICICI Bank, from 4.9 per cent to 4.4 per cent.

Bandhan Bank Ltd seems to be the only one to buck the trend. Its NIM in FY24 was up 7.6 per cent from 7.3 per cent a year ago. The only other bank (excluding small finance banks), which earns more than 6 per cent NIM, is IDFC First Bank (even though it is down from 6.41 per cent to 6.35 per cent).

Finally, collectively all listed Indian banks?(including small finance banks)?posted close to Rs3.20 trillion net profit in FY24, around 38.5 per cent higher than the previous year – the highest ever.

SBI led the brigade with Rs 61,077 crore net profit. HDFC Bank followed close behind, posting a net profit of Rs 60.812 crore. Other banks that posted net profit of at least Rs 10,000 in FY24 include ICICI Bank (Rs 40,888 crore), Axis Bank (Rs 24,862 crore), Bank of Baroda (Rs 17,789 crore), Canara Bank (Rs 14,554 crore), Kotak Mahindra Bank Ltd (Rs 13,782 crore) and Union Bank of India (Rs 13,648 crore).

Incidentally, SBI’s March quarter earnings of Rs 20,698 crore is the highest among all listed Indian companies, including Reliance Industries Ltd, traditionally the most profitable firm. Of course, in terms of annual earnings, Reliance is ahead of SBI.

As a group, private banks have logged in Rs1.73 trillion net profits, higher than public sector banks, which clocked Rs 1.41 trillion.

When it comes to operating profit, the difference is slender. Collectively, private banks posted Rs 2.69 trillion operating profits, 22 per cent higher than the previous year, versus public sector banks (Rs 2.66 trillion – 11 per cent higher than FY23). Tax and provision for bad loans eat into banks’ net profit.

How long will the good run last? As long as banks are exercising caution on retail loans, particularly personal loans. The banking regulator is keeping a close tab on what’s happening there.?In public, bankers are pretty confident and say that everything is hunky-dory, but the rising defaults in a few pockets don’t exactly suggest that. Let’s keep a close eye on credit growth.

This column first appeared in the Business Standard

The author? writes? Banker's Trust every Monday in Business Standard.

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