During the March quarter, the banking sector showcased remarkable strength and resilience, demonstrating robust financial performance across key metrics, with major banks achieving their best-ever quarterly show. The net profit of public sector banks in particular rose by a massive 95% YoY to ₹34,483 crore in Q4FY23.
The PSBs also witnessed a substantial 57% surge in their cumulative profit to ₹1,04,649 crore in FY23. This achievement stands in stark contrast to the collective net loss of ₹85,390 crore recorded by these banks in the fiscal year 2017-18.
SBI's exceptional performance contributed nearly 50% to the collective profit generated by PSBs in FY23. The country's largest bank achieved a remarkable milestone by surpassing the ₹50,000-crore mark in net profit, recording a growth of 58.58% to reach ₹50,232 crore.
Private-sector banks, on the other hand, including majors like HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and IndusInd Bank, also displayed solid performance during the March quarter.
Among small- and mid-size private sector banks (PVBs), Karur Vysya Bank performed well, surpassing its peers. The bank reported a robust year-on-year (YoY) growth in profit after tax (PAT) of 58.68% and a quarter-on-quarter (QoQ) growth of 17%, reaching ₹338 crore.
Margin softness expected in FY24
Domestic brokerage firm Emkay Global said the banks saw strong margin delivery in FY23, benefiting from the lead and lag of asset-liability re-pricing, consumption of internal liquidity, and lower NPA formation.
However, the brokerage believes the on-balance-sheet liquidity has been largely consumed, while higher deposit growth coupled with the lagging repricing should catch up, leading to margin softness in FY24 for most banks, it added.
“We believe the rate hike cycle is largely behind; thus, managing the liability cost becomes vital for protecting margins. That said, a few banks with lower LDR (e.g., SBI) or a higher share of MCLR (Indian Bank) to be repriced should be able to protect their margins or witness a relatively lesser correction,” said the brokerage firm.
Also, banks with a higher fixed-rate asset book, coupled with a reasonable CASA base, should see margin expansion once the rate cycle reverses, it added.
Growing risk of macro-disruptions
Despite the stress flow from the restructured pool and some flare-ups in agri slippages for select banks, they continue to report net negative slippages. This, together with accelerated write-offs and healthy credit growth, led to a sharp decline in the GNPA ratio by 44 basis points QoQ to 3.6% for PVBs and by 55 basis points to 4.7% for PSBs, the brokerage noted.
The latest bounce-rate trend does not show any visible build-up of stress, though banks need to be vigilant in the unsecured and BB/SBL segments amid the increasing macro dislocation and higher interest-rate regime. On the corporate front, two players from the airline industry – Go Air and SpiceJet – have shown signs of stress, it stated.
However, a few large groups are up for resolution, including the ADAG group, ILFS, and Srei. Separately, a few banks disclosed their net ECL requirement during 4Q.
Canara Bank created quite a furore as it disclosed the net ECL requirement to be significantly high at 5.5% of loans, which it has now indicated to be lower than disclosed. However, peer banks like SBI and BOB have revealed an ECL requirement of 1–1.5%, according to the brokerage.
Brokerage's selective approach
The brokerage maintains a cautious approach towards banks considering the growing risk of macro-disruptions. It specifically looks for banks with robust capital and provision buffers, as well as strong return ratios.
Among large private banks, ICICI Bank stands out as the brokerage's top choice due to its solid capital and provision buffers, along with a favorable return profile.
Furthermore, the brokerage shows preference for IndusInd Bank, expecting it to demonstrate a promising growth and margin trajectory, while still being reasonably valued.
When it comes to mid-/small-cap private sector banks, Federal Bank and KVB are highlighted as its top picks, while RBL is recommended as a tactical Buy for investors seeking alpha.
Among public sector banks (PSBs), the brokerage favors BOB, SBI, and Indian Bank.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.