Private banks have another quarter of expanding NIMs

Since the December 2022 quarter an interesting trend has been visible. Private banks have done extremely well in this period and most of the large private banks saw a consistent growth in the net interest income and expansion of the net interest margins (NIMs). This has been driven by a very interesting trend seen in the banks. Most of the private banks have chunk of their loans on the MCLR rates tend to move in tandem with the repo rates. When the repo rates were raised by the RBI by a full 250 basis points, the impact on the lending rates was almost immediate.

However, the impact on the deposit rates was much slower and also much smaller. As a result, the lag effect created positive interest spreads for the banks with cost of funds going up much slower than the yield on loans. This resulted in a sharp improvement in the bank margins. Let us look at the performance of 4 leading private banks that have announced results till now and how this factor has impacted their net spreads and their overall growth in revenues and profits.

HDFC Bank net profits grew by 20.6% in the March 2023 quarter

HDFC Bank reported 30% growth in total revenues for the March 2023 quarter (Q4FY23) and on a consolidated basis the revenues were Rs57,159 crore. Even on sequential basis, revenues were higher by 5.61%. While operating profits were higher on a yoy basis by 12.65%, the net profits were higher by 20.6%. Here is a gist of the financials of HDFC Bank.

Net interest income (NII) for Q4FY23 was up 23.7% at Rs23,352 crore while core net interest margin (NIM) expanded by 20 bps to 4.3%. Despite higher operating costs, this was possible only because the total credit cost in Q4FY23 fell sharply to 0.67% from 0.96% yoy. While the loan growth was faster than the deposit growth, there was also the advantage of improved asset quality. For instance, gross NPA ratio remained subdued at 1.12%, lower than the year ago quarter and the sequential quarter. Similarly, the Net NPAs at 0.27% were also lower than comparable quarters. Return on assets stayed robust at 0.53%, which was the net outcome of the entire improvement in spread story.

ICICI Bank net profit up 27.6% for March 2023 quarter

ICICI Bank saw good traction on the top line and the bottom line. Total revenues were up 25.9% yoy on consolidated basis at Rs53,923cr, while the sequential growth in revenues was at 12.67% for Q4FY23. But the big story was, as we stated earlier, in the Net interest income (NII). In fact, for Q4Fy23, the NII increased by 40.2% yoy to Rs17,667 crore. During the same period, the net interest margins (NIM) expanded by a record 90 bps from 4.00% to 4.90% yoy. Even on a sequential basis compared to Dec-22 quarter, NIMs were up 35 bps.

For the quarter, ICICI Bank saw operating profit growth of 31.9% yoy and net profit growth of 27.64% yoy. That was led by the core operating profits adjusted for provisions growing by a full 34.7% yoy to Rs12,247 crore in Q4FY23. Even non-interest income grew 11.3% while the fee income for the quarter was up 10.6% yoy at Rs4,830 crore. Once again the loan growth was quicker than the deposit growth rate and most of the deposit growth is also from CASA. In terms of asset quality, provision coverage ratio or PCR stood at 82.8% even as gross NPAs fell to 2.81% and net NPAs were also sharply lower at 0.48%. The net outcome of all this was that the ROA stood healthy at 0.50%.

Axis Bank Q4FY23 NII grows despite write-off losses in Q4FY23

Axis Bank reported 31% growth in total revenues for the March 2023 quarter on consolidated basis at Rs30,126cr and 7.27% growth in revenues in sequential terms for Q4FY23. However, the bottom line saw a big hit from the Citi consumer banking acquisition which resulted in an overall net loss of Rs-5,362 crore in the fourth quarter. The total hit on account of the Citi buy was to the tune of Rs12,489 crore; so barring that the bank still made a healthy profit. In fact, had it not been the provision for the Citi acquisition, Axis Bank would have actually reported a net profit of Rs7,127 crore. Here are the bank key numbers.

Operating numbers were still good for Axis Bank. The growth in NII has also been steady while Axis Bank has maintained net interest margins or NIMs of close to 4.3%. Operating margins at 32% are robust and at par with other major banks and the losses are purely out of the Citi deal.

Kotak Bank PAT up 17.3% as Q4FY23 NIM touches 5.75%

Finally, we look at Kotak Bank where revenues were up 24.3% yoy at Rs20,731 crore and 13.1% in sequential terms for Q4FY23. Here again the outperformance was visible in the spread numbers. For Q4FY23, net interest income (NII) was up 35% at Rs6,103 crore while the net interest margins (NIM) expanded to 5.75%; one of the highest in the industry. The ROA at 0.74% for the fourth quarter is among the best in the banking industry in India.

The moral of the story across banks in Q4FY23 has been that private banks are gaining big time from the lag spread. Analysts are cautioning it may not sustain, but for now the honeymoon is on.