Banking Central| What do the latest bank results tell us about industry trends

Bank earnings reveal underlying trends in the economy

The earnings season is on in earnest and, as always, the banking sector’s performance offers a peek into the state of the economy and underlying trends in the repayment cycle. So far, the December numbers are pointing to underlying pressures in the industry.

The quarter, for instance, has been a mixed bag for IDFC First Bank, with a significant 52.6 percent year-on-year decline in net profit at Rs 339.4 crore. The fall has largely been attributed to a slowdown in the microfinance business and a rise in the share of wholesale banking, which has affected the lender’s net interest margin (NIM).

While the bank's net interest income (NII) grew 14.4 percent to Rs 4,902 crore, it is clear that the bank is facing operational and business model challenges in some segments. Despite the challenges, the growth in operating income (up 15 percent) and core operating profit (up 15 percent) points to a solid foundational performance.

For IDFC, the underlying issue seems to be the transition in its microfinance business. As the bank pivots to universal banking, including expanding into segments such as wealth management, corporate banking and credit cards, it could eventually leverage operational efficiencies as its scale increases. The microfinance transition, though problematic in the short term, highlights the challenges of maintaining profitability while balancing compliance with regulatory norms such as Priority Sector Lending (PSL) for underserved sectors.

ICICI Bank reported a 15 percent year-on-year increase in net profit at Rs 11,792 crore. While its net interest income grew by 9.1 percent to Rs 20,370 crore, the slight decline in NIM — from 4.43 percent to 4.25 percent — suggests that India’s second-largest private bank by assets, too, is experiencing margin compression, a trend that is becoming increasingly evident across the sector. This is particularly notable as the Indian banking industry faces the twin pressures of inflationary cost increases and heightened competition for retail deposits.

ICICI Bank's stable asset quality with a marginal dip in its gross non-performing assets (NPA) ratio, however, reflects a resilient business model. The 17 percent increase in provisions suggests a prudent approach in the light of bad loan risks, especially considering the seasonal stress in the Kisan Credit Card portfolio, a crucial element of rural credit.

A few days ago, HDFC Bank earnings, too, signalled pressure on asset quality. Gross non-performing assets (GNPA) increased to Rs 36,019 crore in the third quarter, up 16 percent from Rs 31,012 crore a year ago. The GNPA ratio expanded 18 basis points (bps) to 1.42 percent from 1.26 percent in the previous year.

One basis point is one-hundredth of a percentage point.

Similarly, net non-performing assets (NNPA) jumped 51 percent to Rs 11,588 crore, with the NNPA ratio increasing 15 bps to 0.46 percent from 0.31 percent YoY. Provisions for the quarter declined to Rs 3,154 crore from Rs 4,217 crore, a 25 percent reduction from the year-ago period.

What lies beneath?

For the banking industry at large, these numbers underline challenges as well as opportunities. The focus on high-margin assets continues to grow, while niche segments such as microfinance face hurdles as the regulatory and economic landscape evolves.

Pressure on margins, from rising interest rates as well as increased competition for retail deposits, is a theme that is expected to continue to play.

Banks have a twin challenge of managing the slowdown in credit growth, as demand remains muted, as well as keeping deposits healthy.

The slowdown in credit growth raises questions about its causes.

One possibility is that banks are deliberately tempering credit expansion to lower their credit-deposit (CD) ratios, which the Reserve Bank of India has advised against due to associated risks.

A high CD ratio can indicate over-leveraging and potential difficulties in meeting obligations.

Alternatively, the slowdown may reflect reduced credit demand in specific segments. Data from the previous year reveals significant declines in credit growth in personal and service loans, suggesting that economic activity in these areas may be slowing. As far as deposit growth goes, banks have stepped up efforts to draw investors by hiking interest rates on deposits.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)