Q1 marks growth phase for India’s banks but warts are visible too

What investors need to pay attention to is that the top five banks by asset size accounted for half of the reduction in provisions and 53 percent of the drop in bad loans. This means the asset quality improvement is not broad-based and small lenders are yet to recover completely.

Also read: Banks have much cleaner books now; where did all NPAs go?

Loan growth recovery

A fall in non-performing assets frees up capital, enabling banks to lend more freely in addition to removing the drag on quarterly profits. The bad loan pile of listed banks on a gross basis dropped 11 percent from a year ago, data showed. On a net basis, the fall was 22 percent.

As loans that do not earn anything for banks have begun to reduce, they are no longer hamstrung in seeking out loans that generate income. Ergo, loan growth for most banks has recovered to double digits. For listed commercial banks that have detailed their June quarter results, loan growth was in excess of 16 percent from a year ago.

Private lenders reported faster loan growth than their public sector peers. Large lenders such as ICICI Bank, HDFC Bank and State Bank of India (SBI) grabbed market share by growing faster than the overall sector. Analysts noted that mid-sized and small lenders reported more modest loan growth in the quarter.

Strong loan growth aided the 12 percent increase in core interest income for banks. Here too, private lenders reported a faster 18 percent growth in net interest income, while public sector banks reported a 12 percent growth. Most lenders also reported stable net interest margins, which augurs well for core income growth.

One of the weak links in the June quarter performance of banks was non-interest income. Treasury losses dragged other income for some lenders while some banks managed to limit the hit on their investments.

Bond yields

Treasury losses decimated SBI’s non-interest income to just a third of what it was a year ago. Public sector banks saw the steepest drop in other income while private banks reported a modest 4 percent fall. But the outlook on treasury income has improved as bond yields are unlikely to rise from here on.

Also read: Bond yields weigh on Q1 profits for banks, but road ahead looks smoother

Further, bankers have said the hit from bond yields would be minimised in the coming quarters. For that, they will need to deftly manage their treasury investments as policy rate hikes are expected to continue.

Yet another spot of bother for investors should be a sequential increase in fresh slippages, which indicates that stress has increased in the near term. Banks would need to be cautious while giving out riskier small business loans and unsecured retail loans.

This year, the crutch of forbearance by way of relaxation to recast loan covenants is no longer available. For now, investors are focusing on the balance sheet growth of banks, which comes after a gap of almost five years. That seemed to have been enough to send banking stocks surging over 10 percent in the past three months, outperforming the broad market by a mile.