Banks see pressure on NIMs but asset quality improves

some major banks reported a contraction in their net interest margins (NIM), an analysis of the banks’ earnings report showed.

India's banking sector, in the July-September FY24 quarter saw double-digit profits and improvement in the asset quality, according to a Moneycontrol analysis.

Additionally, some major banks reported a contraction in their net interest margins (NIM), an analysis of the banks’ earnings report showed.

Among major banks, the country’s largest private sector bank, HDFC Bank, reported a net profit of Rs 15,976 crore, a 51 percent YoY jump. At the same time, the country’s largest bank, the State Bank of India (SBI) reported a net profit of Rs 14,330 crore in the July-September FY24 quarter. Whereas, ICICI Bank’s net profit for the quarter stood at Rs 10,261 crore and that of public sector lender, Bank of Baroda (BoB), stood at Rs 4,253 crore.

Axis Bank’s net profit jumped by 10 percent to Rs 5,864 crore. Canara Bank’s net profit for the quarter was at Rs 3,606 crore compared to Rs 2,525 crore last year.

Also read: Top banks increase loan write-offs in September quarter

Pressure on NIMs

Several major banks reported a contraction in their NIMs for the July-September FY24 quarter. NIM is the difference between the amount a bank spends and earns from its interest business through loans and deposits. In other words, it is the amount of money that a bank earns in interest on loans and deposits. For banks, NIM is an indicator of overall profitability and business growth.

For example, SBI’s NIM contracted to 3.43 percent from 3.55 percent. The NIM of HDFC Bank stood at 3.6 percent, falling from 4.3 percent last year.

BoB reported an NIM of 3.07 percent compared to 3.33 percent in the year-ago period. Central Bank of India reports a marginal drop in NIMs, to 3.43 percent, from 3.44 percent last year.

Healthy asset quality

SBI’s gross non-performing asset (GNPA) improved to 2.76 percent from 3.52 percent on a YoY basis. The net NPA (NNPA) of the lender for the July-September FY24 quarter decreased to 0.64 percent from 0.8 percent.

BoB’s GNPA for the quarter stood at 3.32 percent improving from 5.31 percent and the NNPA stood at 1.16 percent from 0.76 percent.

Also read: Banks see sharp growth in unsecured loans even after RBI caution

Union Bank reported an improvement in asset quality with the lender’s GNPA fell to 6.38 percent from 8.45 percent on a YoY basis. The NNPA of the bank decreased to 1.3 percent from 2.64 percent in the year ago period.

The Bengaluru-headquartered Canara Bank’s asset quality improved in Q2FY24, with the GNPA ratio at 4.76 percent against 6.37 percent in the year-ago period. The NNPA ratio stood at 1.4 percent, better than 2.19 percent in the year-ago period.

Central Bank of India's GNPA improved to 4.62 percent from 9.67 percent last year. The lender's NNPA stood at 1.64 percent, improving from 2.95 percent in the corresponding quarter last year.

Among private sector lenders, HDFC Bank’s GNPA ratio stood at 1.34 percent, rising from 1.23 percent in the corresponding period a year ago. Similarly, its NNPA stood at 0.35 percent from 0.33 percent last year.

ICICI Bank’s GNPA stood at 2.48 percent from 2.76 percent and NNPA stood at 0.43 percent from 0.61 percent.

Whereas Axis Bank’s GNPA for Q2FY24 stood at 1.73 percent, falling from 2.5 percent. NNPA of the lender improved to 0.36 percent from 0.51 percent on a YoY basis.

Kotak Mahindra Bank’ asset quality showed healthy growth, with the GNPA falling to 1.72 percent from 2.08 percent. The NNPA of the bank stood at 0.37 percent compared to 0.55 percent.

IndusInd Bank's GNPA stood 1.93 percent, down from 2.11percent recorded in the same quarter last year. On the other hand, net NPA of the bank for the quarter stood at 0.57 percent, from 0.61 percent on a YoY basis.

What do experts say?

Industry experts said that the banking sector is in a strong overall growth cycle with record NPA numbers and profits.

Saurabh Bhalerao, Associate Director, BFSI, CareEdge, said that after the asset quality review in 2015, banks have been showing improvement in their overall NPAs.

"Overall NPAs have been good. But the focus from now would be on the retail and corporate bad loans of the banks as the RBI has been cautioning banks on their retail growth," Bhalerao said.

Aditya Shah, Founder and Chief Investment Officer, JST Investments said: "The credit growth of the banks is strong. Alongside, the balance sheets are clean with low NPA and slippages.

Also read: Unsecured loans not a worry for SBI, says Chairman Dinesh Khara

Bhalerao further said that the pressure on NIMs is expected to stay for a few quarters.

Going forward, Shah highlighted that the strong credit cycle will play out with banks reporting strong results and after this there is a risk of decline in valuation of banks.

"Banks, and most PSBs will enjoy good results and strong RoA. But we will soon reach the peak valuation and later the NPAs will start to come out and the valuation could decline," said Shah.