Banks likely to remain on profitable path in New Year too with robust credit growth

According to Kotak Mahindra Bank Managing Director Uday Kotak, the Reserve Bank of India (RBI) may go for one more rate hike to 6.5% from existing 6.25%

Public sector banks appear to be out of the woods as they managed to reduce their bad loans and post record profits this fiscal, a trend which is likely to continue in 2023 also.

Robust credit demand and high interest rate regime due to tight monetary conditions globally are also expected to help the profitability of the banks.

In the private sector banking space, consolidation remained the flavour, with parent HDFC Ltd deciding to merge with HDFC Bank, and Axis Bank announcing the takeover of the retail portfolio of global giant Citibank. These two deals are expected to be completed in 2023.

According to Kotak Mahindra Bank Managing Director Uday Kotak, the Reserve Bank of India (RBI) may go for one more rate hike to 6.5 per cent from existing 6.25 per cent.

RBI's decision to hike the benchmark lending rate, repo rate, since May this year will have a bearing on the profitability of the banking sector as margins would get a leg up in the absence of commensurate increase in deposit rates.

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In the first half of current fiscal, 12 Public Sector Banks (PSBs), which account for around 60 per cent market share in terms of total business, posted a 32 per cent rise in cumulative net profit at Rs 40,991 crore.

In September quarter, PSBs reported 50 per cent jump in their combined net profit at Rs 25,685 crore while their total profit surged 76.8 per cent to more than Rs 15,307 crore in the June quarter.

Against the backdrop of the stellar performance of PSBs, Finance Minister Nirmala Sitharaman recently said the government's efforts to reduce bad loans and further strengthen the financial health of the banks by infusing capital of about Rs 3 lakh crore in the last 5 years are showing results.

The robust performance of the banks in the first half of current fiscal has been ably supported by a well-capitalised banking system that witnessed an upswing in credit disbursement to the retail, industry and services segments.

The growth in credit to industries has been driven by an increase in bank credit to MSME mainly due to the Emergency Credit Line Guarantee Scheme (ECLGS).

Out of the 12 PSBs, Punjab National Bank (PNB), and Bank of India reported a decline in profit ranging from 9-63 per cent over the second quarter of the previous fiscal.

Earlier this month, Sitharaman told Lok Sabha that Non-Performing Assets (NPAs) have come down drastically to 7.28 per cent at the end of March 2022 due to various measures taken by the government.

NPAs declined as a result of the government's 4Rs strategy of Recognition, Resolution, Recapitalisation and Reforms, she had said.

The Asset Quality Review (AQR) initiated in 2015 led to a surge in stressed accounts. It reached a peak of 14.58 per cent of total assets in 2018 and eased to 9.11 per cent in 2021.

Loan growth stood at 17 per cent while deposit growth was lower at 9.9 per cent. In absolute terms, loan growth of banks in the past year was at Rs 19 lakh crore, and deposit accretion was Rs 17.4 lakh crore as of December 2, 2022.

Going by the current trend, banks, including PSBs, are going to post better numbers than the last financial year. In 2021-22, the aggregate profit of the 12 PSBs was at Rs 66,539 crore, up 110 per cent from Rs 31,816 crore in the previous financial year.

As far as private sector banks are concerned, they earned a net profit of about Rs 91,000 crore, up 29 per cent over the previous year’s (2020-21) Rs 70,435 crore.

While State Bank of India and leading private sector banks have largely addressed their asset quality challenges, many other large PSBs are still saddled with weak assets, high credit costs, and poor earnings, Deepali Seth-Chhabria, Associate Director of Financial Institutions Ratings at S&P Global Ratings, said.

The credit momentum has picked pace driven by an increased momentum in corporate borrowing, she said, adding, "we expect loan growth to stay in line with the nominal GDP growth. Deposits growth will lag leading to increased competition for deposits".

On the private banks segment, HDFC has agreed to merge itself with its subsidiary HDFC Bank, which is touted as the biggest transaction in India's corporate history. The deal is valued at about $40 billion and would create a financial services titan. The proposed entity will have a combined asset base of around Rs 18 lakh crore. The merger is expected to be completed by the second quarter of FY24.

As part of its inorganic business growth plans, Axis Bank has announced the acquisition of retail business of Citibank India for Rs 12,325 crore. The retail business includes credit cards, retail banking, wealth management and consumer loans.

Axis Bank will have around 28.5 million savings accounts and 10.6 million active cards on completion of the merger.

The banking space also saw SBI-backed Yes Bank getting investments from two global private equity firms -- Carlyle Group and Advent. Each of them have acquired a 9.99 per cent stake in the bank.

The two private equity funds together pumped about Rs 8,896 crore in Yes Bank with full conversion of warrants into equity.

With the capital buffer in place, banks seem to be well prepared for challenges and headwinds, primarily caused by external factors.