Banks post strong earnings, expect loan growth to improve

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Bombay : Banks reported strong fourth-quarter earnings, helped by a pickup in loan and provisioning growth. However, pre-provisioning operating profit was subdued due to higher operating expenses and subdued cash gains at banks and, although asset quality was controlled, some state-owned banks experienced higher slippages. elevated due to their exposure to the Future group and increased slippage in the micro, small and medium-sized enterprise (MSME) segment.

Ten state-owned banks, which have so far released their March quarter results, reported a 75% jump in net profit, while 18 private sector banks reported 91% growth of their net profit. Growth in net interest income or basic income was mixed across the sector, with the exception of Bandhan Bank, Ujjivan Small Finance Bank, AU Small Finance Bank, IDFC First Bank and Fino Payments Bank which recorded growth much higher. Margins improved for ICICI Bank, Kotak Mahindra Bank and mid-sized banks, while they declined for HDFC Bank, Axis Bank, Federal Bank and public banks. Other income was subdued for most banks due to the impact of reduced cash gains due to tighter bond yields. In the case of private lenders, higher operating expenses due to increased investment in technology helped to dampen pre-operating earnings growth.

“We expect earnings to remain resilient; however, a high inflationary environment and aggressive rate hikes can affect the pace of demand recovery. While comments on cash performance are surprisingly benign, we remain alert to potential MTM (mark-to-market) losses which, coupled with high operating expenses for some banks, may affect PPoP (profit before provisioning),” said Nitin Aggarwal, Bank Analyst, Motilal Oswal.

During the quarter, asset quality was in check for private banks, with most seeing a sequential decline in gross NPLs. However, state-run lenders except SBI recorded an increase mainly due to higher MSME slippages. The provision coverage ratio (PCR), or the percentage of bad assets a bank must cover from its own funds for the system, is also at the highest level in two decades. ICICI Bank had the highest PCR at 80% with other major banks in the range of 72-75%. This results in a sharp drop in the cost of credit for the banking system.

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