Stable asset quality, stronger lending growth to boost earnings at Indian banks

India's biggest banks will benefit from stable asset quality and stronger lending growth as the nation's economy recovers from the COVID-19 pandemic.

Most private and public sector banks in India reported higher net income for the fiscal third quarter ended Dec. 31, 2021, driven by credit growth, better margins and lower loan loss provisions. Analysts expect that performance to continue.

"Our base case assumption is that net income for banks should improve hereon as credit growth picks up in the fourth quarter," said Krishnan Sitaraman, senior director at CRISIL Ratings. India's banking system will likely record credit growth of 9% to 10% in the fiscal year that ends on March 31. Overall bank credit growth accelerated to 9.2% year over year in December 2021, from 5.2% in March.

State Bank of India, the biggest lender by assets, reported 95.55 billion rupees in net income for the fiscal third quarter, up from 62.58 billion rupees in the prior-year period. HDFC Bank Ltd., the country's largest private sector lender, said its net income for the period grew 21% year over year to 105.91 billion rupees.

Capital strength

Indian banks, especially state-owned lenders, bolstered their capital and tried to reduce their bad loans in recent years. State-owned banks returned gross profit, on aggregate, for the first time in five years in the fiscal year that ended March 31, 2021, Sitaraman noted. The drag from the omicron variant of COVID-19 was less severe than previous waves of the pandemic, giving confidence to the central bank that the nation's GDP would grow 9.2% in the current fiscal year to March 31.

"With the banking sector best capitalized in the past 20 years, improving aggregate demand conditions will drive loan growth and operating profit," Nomura said in a Feb. 22 research note. Bad loans for the retail and small industries sector declined, while slippage in the asset quality of large corporates has been "negligible," Nomura said, adding, credit costs for banks are likely to continue to decline.

State Bank of India, Bank of Baroda, Punjab National Bank all reported quarter-over-quarter declines in nonperforming loans in the three months that ended Dec. 31.

While stress "still remains elevated" in some retail segments, overall NPLs will moderate due to lower slippages and higher recovery or write-offs as most banks have "comfortable" provision coverage, Anand Dama, senior research analyst at Emkay Global Financial Services, said in a Feb. 17 note.

As of Feb. 23, US$1 was equivalent to 74.62 Indian rupees.