Core Income, Provisions Help Private Banks Beat Estimates In Q2

Seven out of the nine largest private lenders in India beat profit estimates in July-September as higher interest income and lower provisions delivered a strong quarter for banks.

HDFC Bank Ltd., India's leading private lender, reported a net profit of Rs 10,606 crore in the second quarter against an expected profit of Rs 4,749 crore, according to analysts polled by Bloomberg.

ICICI Bank Ltd. and Axis Bank Ltd. also beat profit estimates with a healthy margin, and the trend stood true for all major lenders, except Yes Bank Ltd. and RBL Bank Ltd.

Most banks also saw an improvement in their net interest margins as lending rates have ticked up faster than deposit rates since the previous quarter. Even though the central bank has raised the benchmark rate by 190 basis points since May, banks are yet to hike deposit rates to fully reflect that. 

"As rates go up there is this continuation of this lead and lag effect [between advances and deposits]," Srinivasan Vadiyanathan, chief financial officer at HDFC Bank, told analysts in conference call on Oct. 15, following the bank's earnings report. 

Strong growth in the consumer, or retail, segment also helped banks expand their NIMs. Axis Bank's retail loans grew 25% year-on-year and Kotak Mahindra Bank saw a surge of 81% and 40% in credit cards and home loans & loans against property, respectively. 

While analysts expressed overall bullishness about credit growth opportunities for banks, they also noted that growing deposits amid an interest rate upcycle would be a key monitorable for the lenders.

"Credit growth will likely only accelerate from here," Amit Khurana, head of equities and research at Dolat Capital, told BQ Prime. If repo rate hikes continue beyond February, he said, banks could find themselves in a much tighter situation when it comes to raising deposits.

"Overall interest rates may continue to rise ... so there is potential in the future that our cost of deposits will rise faster than what we have seen till now," Amitabh Chaudhry, chief executive officer at Axis Bank, told analysts in an Oct. 20 conference call.

Banks' bottom line also benefitted from a sharp reduction in provisions over the second quarter. IndusInd Bank's provisions for the quarter fell 33% from a year ago to Rs 1,141 crore and HDFC Bank's provisions dropped 17% during the period. 

Yes Bank bucked the trend, reporting a 54% year-on-year rise, which also contributed to its profit falling 32%.

Outstanding advances of banks also expanded over the second quarter of the year with ICICI Bank and HDFC Bank seeing a growth of about 23% year-on-year.

"We are seeing the advances book at the bank grow 25% year-on-year," Jaimin Bhatt, chief financial officer at Kotak Mahindra Bank, said during an earnings conference call on Oct. 22. 

The ratio of non performing assets also declined over the second quarter. IDFC First Bank and Federal Bank both reported a dip of 21 basis points and 16 basis points, respectively, in their net NPA ratios. Federal Bank's net NPA stood at 0.78% for the quarter, whereas IDFC reported 1.26%.  

"Repo rate increases have so far have been quite well absorbed by the borrowers and clearly don't seem to be leading to signs of any higher delinquencies," Anindya Banerjee, chief financial officer at ICICI Bank, told analysts on Oct. 22.

If credit growth demand continues to outpace growth in deposits, the banks could encounter pressure on their interest margins as the competition for deposits intensifies on the pricing front. 

"Profitability will be under slight pressure [going forward]," Asutosh Mishra, lead banking analyst at Ashika Stock Broking, told BQ Prime. While margin pressures may emerge, it's unlikely that banks will face major delinquency issues over the next two to three years, Mishra said.