Private banks post solid earnings in Q2 driven by margin expansion and a fall in bad loans

Private sector banks delivered a strong performance in the September quarter as credit growth in the system remained strong. This was despite continuous rate hikes from the Reserve Bank of India (RBI).

The central bank has lifted interest rates by 190 basis points (bps), pushing the repo rate to 5.9% this year.

Following RBI's rapid rate hikes, banks raised lending rates quickly but went slow on deposit rates, resulting in higher net interest margins in the second quarter. In addition, lower provisions have also contributed to the bank's profitability.

With the Indian economy emerging from the COVID-19 slump, credit demand has significantly increased. Loans for personal use, business purposes, the service sector, and loans for agriculture and related activities have all seen high demand.

Bond yields have risen sharply in response to the ongoing rate hikes from RBI, causing the corporate sector to shift to banks for their incremental funding needs, contributing to credit growth's continued high level.

According to the most recent RBI data, bank credit increased 17.94% YoY as of October 21, 2022. Deposit growth was 9.5% during the same period.

Going forward, credit rating agency firm, Crisil sees bank credit to grow at 15% this fiscal and the next, citing broad-based economic recovery and stronger, cleaner balance sheets.

The agency noted that large lenders have seen corporates flocking to banks for funds for capital expenditures and also for working capital as the demand side of the economy is faring better.

It expects credit growth this year to be driven more by retail and MSME segments, while corporate credit could be the larger contributor next fiscal year.

Meanwhile, in their results preview reports, brokerages expected private sector banks to report solid numbers for the September quarter, and most private sector banks exceeded analysts' expectations. Following the second quarter's performance, domestic brokerages raised their earnings estimates and target prices for the sector.

Robust Performance

India's largest private sector lender, HDFC Bank, reported a 20.01% jump in its standalone net profit at ₹10,605.78 crore for the September ending quarter compared to ₹8,834.31 crore in the year-ago period on the back of low provisions. The bank posted a net profit of ₹9,196 crore in the preceding quarter.

The bank's net interest income surged to 18.9% to ₹21,021 crore in Q2, and the net interest margin came in at 4.1%.

The gross NPA ratio of the bank fell to 1.23% in Q2 FY23 as against 1.35% in Q2 FY22. while the net NPA stands at 0.33% in Q2 vs. 0.40% in the same quarter last year.

The bank's provisions came down to ₹3,240 crore in the September-ending quarter from ₹3,925 crore in the similar quarter of last fiscal.

In a similar fashion, the country's second-largest private-sector lender, ICICI Bank, reported a 37.12% YoY increase in standalone net profit in Q2 at ₹7,557 crore, up from ₹5,511 crore in the same quarter last year.

The bank's core net interest income grew by 26% to ₹14,707 crore in the September-ending quarter, helped by a 23% loan growth and a 0.30% expansion in the net interest margin to 4.31%.

The bank's asset quality improved as its net non-performing assets declined to 0.61% in the September quarter from 0.70% in Q1 FY23 and 0.99% in Q2 FY22. In the September quarter, the gross NPA ratio declined to 3.19% from 4.82% in Q2 FY22 and 3.41% in Q1FY23.

Likewise, Axis Bank posted a 70% jump in its standalone net profit for the September quarter to ₹5,329.77 crore. The country's third-largest private lender had posted a net profit of ₹3,133.32 crore in the year-ago quarter.

The bank's provisioning for bad loans and contingencies fell to ₹549.78 crore for the July-September quarter of FY23 from ₹1,735 crore in the same period of the previous fiscal.

The gross non-performing assets of the bank dropped to 2.50% of the gross advances as of September 30, 2022, from 3.53% in the year-ago same period.

On similar lines, mid-sized banks also posted record profits during Q2. Karnataka Bank reported its highest-ever net profit of Rs. 411.63 crore in Q2FY23, up by 228% from Rs. 125.45 crore in the September 2021 quarter.

The bank's net interest income grew by 26% to ₹802.73 crore during the quarter, from ₹637.10 crore in the year-ago period. The bank's GNPAs fell to 3.36% from 4.52% in Q2 FY22, while NNPAs decreased to 1.72% from 2.85% in the year ago period.

Stocks are at record highs

Since the Q2 announcement on November 02, shares of Karnataka Bank have zoomed 44%, jumping from ₹93.90 to the current level of ₹136.60. The stock started its upward journey after hitting a 52-week low of Rs. 55.45 in March. Since then, it has doubled investors' wealth by rising 146.34%, and at the present trading price, the stock is trading at a five-year high.

Meanwhile, the stock took nearly three years and four months to trade above ₹100 mark.

On the other hand, Karur Vysya Bank shares have risen 124.24% in the last four months, with the majority of the gains coming in July after the bank posted a 110% YoY rise in net profit in Q1. Mirroring the same trend, the stock surged nearly 28% in the previous month after it reported a 52% YoY jump in its net profit in Q2FY23.

So far in 2022, the stock has risen 130 per cent as against a 19.88 per cent rise in Nifty Bank and a 6.07 per cent rise in the benchmark Nifty.

Other banking stocks, including South Indian Bank, IDFC First Bank, Federal Bank, and City Union Bank, also rally between 50-80% over the last six months.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.