Private banks face toughest June quarter in years with shrinking margins, poor asset quality, high slippages

Interestingly, most banks attributed increasing stress in agri-portfolio, kisan credit cards, unsecured loans including credit cards and micro finance loans as causes of stress in Q1.

The first quarter of the fiscal year 2025 saw private sector banks struggle with shrinking margins, worsening asset quality and widening slippages. The quarter came with seasonal challenges which was acknowledged by the lenders in their post-results interaction with the Press.

In addition, banks also saw rising provisions due to decline in asset quality majorly on their credit cards, personal loans and agri-portfolio.

NIM misses expectations

With deposit repricing becoming extremely visible in Q1, a surge in the cost of funds weighed on the net interest income (NII). Many banks reported a year-on-year growth in NII but missed market expectations. An analysis of nine private sector banks showed a 15.5 percent on-year growth in NII. While HDFC Bank led the pack with 26 percent NII growth in Q1, ICICI Bank and Axis Bank were laggards posting 12 percent and 7 percent growth in Q1.

Kotak Mahindra Bank, India's fourth largest private lender, reported an NII of Rs 6,842 crore, up only 10 percent year-on-year, missing the market expectations of Rs 7,067 crore. RBL Bank reported a slim 2 percent NII growth, much lower than market expectations.

Pressure on NIMs continues

In an environment with rising cost of funds largely on the deposit front to mobilise more deposits, banks are seeing a continuous pressure on their net interest margins (NIM).

Yes Bank, for instance, in the quarter, reported an NIM of 2.4 percent, flat on a sequential basis. In the corresponding quarter last year, the lender’s NIM was at 2.5 percent.

Among other private lenders, HDFC Bank reported an NIM erosion of 60 bps to 3.5 percent. ICICI Bank’s NIM for the quarter fell 42 bps to 4.36 percent from 4.78 percent last year. Axis Bank’s NIM stood at 4.05 percent, down by 5 bps from 4.10 percent, while IndusInd Bank’s NIM dropped by 4 bps to 4.25 percent from 4.29 percent.

Kotak Mahindra Bank’s NIM posted the sharpest NIM contraction of 55 bps at 5.02 percent from 5.57 percent in Q1FY24.

The pressure on NIMs may be linked to spending more on deposit rates and a corresponding increase in yield on advances. less on the credit side. Deposit accretion for banks has been a prolonged tough fight in the last few quarters which is making them hand out higher rates of interest in order to ensure a good flow of deposits. Seasonally, in Q1, most banks saw an erosion in their deposit base on a sequential basis, making the fight for liquidity tighter than the previous quarters.

Asset quality woes

The sequential pressure was seen on the asset quality front too largely due to pressure on the collection and recovery front.

Among these banks, HDFC Bank saw the highest gross non-performing asset ratio (GNPA) jump of 16 bps on a YoY basis from 1.17 percent to 1.33 percent.

Axis Bank’ also posted a reasonable spike in gross non-performing asset ratio (GNPA) in Q1FY25 stood at 1.54 percent, a rise of 11 basis points (bps) from 1.43 percent in Q4FY24. The net NPA (NNPA) of the lender spiked by 3 bps to 0.34 percent. IndusInd Bank too saw pressure on its GNPA, up 20 bps at 2.02 percent. NNPA of the lender too spiked a little to 0.60 percent versus 0.57 percent last quarter

Sanjay Agarwal of CareEdge said that gross NPAs for private banks increased by 18.9 percent which can be attributed to HDFC Bank’s merger.

Most private lenders attributed the increase in non-performing assets to the elections which gripped the country for most part of Q1.

Jump in provisioning costs

A noticeable trend was seen among the private banks which saw a jump of 32 percent year on year in their provisions for the quarter. Worsening asset quality for some lenders led to more funds kept aside in Q1.

The country’s second largest private sector bank, ICICI Bank, saw its provisions jump by 85.4 percent sequentially and 3.1 percent YoY to Rs 1,332 crore, while for Axis Bank and IDFC First Bank provisioning costs increased by 97 percent and 118 percent respectively year on year in Q1.

Kotak Mahindra Bank’s provisioning jumped by 58 percent YoY to Rs 578 crore. RBL Bank’s provisioning stood at Rs 366, making a jump of 38 percent. HDFC Bank’s provisioning improved in the quarter by 9 percent and total provisions stood at Rs 366 crore.

Rising slippages

On the slippages side, that is, the accretion of fresh bad loans in the banks, private banks saw a sequential surge. For instance, in Q1, ICICI Bank said slippages were high owing to the agri-portfolio and kisan credit cards (KCC). For HDFC Bank, stress emanated due to agricultural seasonality.

Cumulatively, the banks’ slippages jumped by 12 percent and Axis Bank saw the highest jump in slippages at 38 percent. The bank’s total slippages stood at Rs 4,793 crore.

Interestingly, most banks attributed increasing stress in the agri-portfolio, kisan credit cards, and unsecured loans, including credit cards and micro finance loans, as causes of stress in Q1.

Muted bottomline

On a cumulative basis, data from private banks showed a 31 percent YoY jump in net profit. But the net profit growth in Q1 was among the weakest seen in many years, though names such as IndusInd Bank and Axis Bank underperformed this range, posting PAT growth of meager numbers.

Axis Bank’s profit for the quarter was at Rs 6,035 crore as against Rs 5,797 crore last year, making a 4.1 percent on-year growth. IndusInd Bank’s net profit grew marginally from Rs 2,124 crore to Rs 2,171 crore, posting a 2.2 percent growth. Kotak Bank, excluding its insurance subsidiary sale, reported a net profit of 2 percent. Yes Bank and Bandhan Bank reported net profits of 47 percent each.