PSU banks outshine private banks in Q2FY25 as profitability, asset quality improve

Bank earnings

The performance of the state-owned banks in the second quarter (Q2) of financial year (FY) 2025 was better than the private banks as far as a few key metrics such as profitability and asset quality are concerned, according to Moneycontrol’s analysis of 35 banks.

The growth in the net profit of the state-owned banks remained in the range of 23-51 per cent in the July-September quarter, while private banks were in the range of 4-40 per cent.

Similarly, state-owned banks reported better net non-performing numbers, as compared to their peers in the private space.

“The profitability of public sector banks has improved due to improvement in the net interest margins (NIMs) amid an increase in the interest income coupled with a rise in lending rates in the past. Besides, the cost of deposits was kept under check as the rates were not significantly increased by the state-owned banks,” said Jyoti Prakash Gadia, Managing Director (MD), Resurgent India, a SEBI (Securities and Exchange Board of India registered) Category 1 merchant bank.

Among the state-owned banks, Punjab National Bank (PNB) reported a sharp rise in its net profit by 145 per cent; UCO Bank and Central Bank of India by over 50 per cent, and Indian Bank, Bank of Maharashtra and Union Bank of India (UBI) registered more than 30 per cent growth in Q2.

YES Bank delivered a net profit of over 140 per cent during the same period, followed by IDBI Bank and Jammu and Kashmir Bank, which posted profits of over 38 per cent, as compared to FY24.

However, few others banks in the private space such as IndusInd Bank, RBL Bank, and IDFC First Bank reported a fall in their net profits, the data compiled by Moneycontrol showed.

Gadia, however, said that quarterly figures are also, at times, impacted by base effect and  improved profitability. Asset quality in a particular quarter does not signify the overall performance because the results are dependent on the long-term strategy and effectiveness in implementation through functional efficiency by each bank, he added.

NII and NIM

In the July-September quarter, private banks reported better net interest income (NII) and margins compared to their peers in the PSU (public sector units) space because of higher impact felt by the latter due to penal charges norms, which were implemented by the Reserve Bank of India (RBI) earlier this year.

The growth in NII of private banks remained in the range of 5-25 per cent, which was higher than the range of 5-20 per cent for their state-owned counterparts.

The RBI’s penal charges norms bar banks and finance companies from charging borrowers additional sum for missing loan repayments or breaking other loan rules.

Banks must treat penalties for non-compliance as “penal charges” and not levy them in the form of “penal interest” that is added to the rate of interest charged on the loans. Banks cannot treat such penalties as revenues, stated the RBI guidelines.

These norms have affected many banks' net interest income and margins.

UBI’s net interest margin (NIM) declined 11 basis points (bps) in Q2 after the implementation of the central bank's new guidelines on the penal interest.

“As per RBI guidelines, ‘penal interest’ is to be treated as ‘penal charges’. This will now form part of non-interest income, instead of interest income. Impact of the same is reduction of 11 bps (Q2FY25) and 6 bps (H1FY25), respectively, on NIMs,” the RBI said in a release.

Asset quality

The asset quality of the bank, which illustrates how much stressed the bank is on their recovery front, has shown an improvement in Q2 for both private or state-owned banks.

As per Moneycoltrol’s analysis, net NPA (non-performing asset) ratio of the state-owned bank remained in the range of 0.20-0.98 per cent. While for the private banks it stayed in the range of 0.2-1.50 per cent in Q2, ending September 30.

On August 19, Finance Minister Nirmala Sitharaman acknowledged the efforts made by the banks to improve the asset quality and advised them to optimise the scope of resolution and recovery offered by NCLT (National Company Law Tribunal) and NARCL (National Asset Reconstruction Company Ltd).

Few banks, such as Bank of Baroda (BoB) and PNB, have seen a recovery from some accounts, which was pending in NCLT for resolution.

BoB’s MD and Chief Executive Officer (CEO), Debadatta Chand, told Moneycontrol, that resolution of a number of large accounts by NCLT has translated into higher recoveries for bank in Q2FY25.

In the July-September quarter, the BoB recovered Rs 2,525 crore from accounts, which had technical write-offs. The amount was significantly higher, as compared to Rs 554 crore and Rs 1,231 collected in the first quarter (Q1) and FY24, respectively.

Similarly, PNB’s MD and CEO, Atul Kumar Goel, told Moneycontrol that the bank recovered Rs 1,976 crore in Q2FY25, of which Rs 1,000 crore were recovered from the NCLT accounts.