Private banks trump state-owned peers on return on assets despite weak show in Q1FY25

ROA, ROE

Return on assets (RoAs) of private sector banks surpassed that of state-owned banks in the first quarter of the current financial year, while the latter outperformed on the return on equity (RoE) metric.

According to the Moneycontrol’s analysis of banks’ investor presentation, the RoAs of private banks were in the range of 1.70-2.40 percent as compared to 0.70-1.13 percent for state-owned banks.

RoA is a key financial indicator of how much profit a firm makes by utilising its assets, which in the case of banks is largely measured as investments and advances. It is used to gauge how effectively a bank is using its resources to make a profit.

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Private banks shine

In the April-June quarter, ICICI Bank reported an RoA of 2.36 percent as compared to 2.39 percent in the year-ago period.

HDFC Bank and Axis Bank delivered RoAs of 1.90 percent and 1.70 percent, respectively.

“The RoAs have been in the region of 1.9 percent to 2.1 percent. And as you know, it may be – this is not a new number or new metric that we have encountered. We have seen, for a long period of time, this number of 1.9 percent in the pre-merger levels as well,” said Sashidhar Jagdishan, managing director and chief executive officer of HDFC Bank.

Further, Arjun Chowdhry, group executive, affluent banking, NRI, cards & payments at Axis Bank, said, “The bank keeps calibrating its growth in terms of where they see the best returns, and returns are measured by RAROC (Risk-Adjusted Return on Capital), as we talked about. So there will be a constant calibration in the composition of the balance sheet.”

Among state-owned banks, Indian Bank posted the highest RoA of 1.20 percent during the first quarter, followed by State Bank of India at 1.10 percent.

Bank of Baroda, Union Bank of India and Canara Bank reported RoAs of over 1 percent in the April-June quarter.

An analysis of 10 state-owned banks by Moneycontrol showed that Bank of India, UCO Bank, and Indian Bank reported low RoAs of 0.70 percent each in Q1FY24.

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PSBs post better RoEs

On the other hand, when rated on return on equity (RoE), state-owned banks posted numbers better than private banks.

RoE of state-owned banks was in the range of 13.50-21 percent in Q1FY25, as compared to 13.50-17.70 percent range for private banks.

Like RoA, RoE is also a measure of a bank’s ability to churn profits. While RoA weighs profits against the assets of a bank, RoE indicates how a bank or company has utilised shareholders' funds to generate profits.

State Bank of India reported the highest RoE of 20.98 percent in Q1FY25, followed by 20.88 percent by Canara Bank, 19.76 percent by Indian Bank, and 17.45 percent by Bank of Baroda. In the private bank space, ICICI Bank reported an RoE of 17.70 percent in the April-June quarter, and Axis Bank, 16.68 percent.

Explaining why PSU banks posted better RoE in Q1, A Manimekhalai, managing director and chief executive officer of Union Bank of India, attributed it to an improvement in asset quality position. “The credit cost improved to 0.73 percent, grew by 24 bps YoY. The RoA has improved to 1.06 percent and RoE to 15.7 percent as of June 2024. The implementation of the new investment norms has positively impacted our portfolio,” she said.