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Indian banks to gain from tailwind of rising rates as credit growth stays steady

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According to Market Intelligence, December 2022


Indian banks to gain from tailwind of rising rates as credit growth stays steady

Rising interest rates will continue to help Indian banks in the rest of the fiscal year ending March 31, 2023, after high credit growth and stronger margins helped propel earnings.

Five of the six biggest banks by assets in India reported an increase in net income for the fiscal second quarter ended Sept. 30. Banks took advantage of the higher interest rate environment to bolster their net interest margins, while previous efforts to reduce their nonperforming assets resulted in lesser loan loss provisions, their recently released earnings reports showed.

The fiscal second quarter results of private sector, as well as public sector banks, were "picture perfect," said Tusharika Aggarwal, research analyst, Asia-Pacific dividend forecasting at S&P Global Market Intelligence. "I remain fairly confident in the banks' earnings for rest of the year. The interest rate hikes, although the quantum will decline, would still benefit Indian banks. And because credit growth is increasing, so despite high-interest rates, net interest income will grow," Aggarwal added.

Rising rates

While lending rates have increased on aggregate with growing demand, interest rates offered to depositors have risen more slowly, Aggarwal said, adding that the gap, along with lower credit loss provisions, has resulted in better return on assets for banks.

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Bank credit growth picked up for both public and private sector banks in the first half of fiscal 2022-2023, according to Reserve Bank of India data released in September. Private sector banks' credit growth for the fiscal first half came to 20.4%, compared to 13.9% for public sector banks. The central bank expects gross domestic product growth at 7% in the current fiscal year ending March 31, 2023, and to ease to 6.5% in the next fiscal year, dampened by further monetary tightening in the central bank's fight to control inflation.

The Reserve Bank of India has raised its benchmark overnight lending rate by 190 basis points to 5.90% since it began its rate hike cycle in May. Further hikes in the key interest rate are expected to be less steep as analysts believe that inflation may have peaked when the annual retail inflation rose to a five-month high in September to 7.41%, Reuters reported Oct. 13. The rate eased to 6.77% in October, according to data released by the National Statistical Office on Nov. 14.

Credit outpacing deposits

The key surprise in banks' fiscal second quarter results was a 25-basis-point quarter-over-quarter expansion in NIM, Jefferies said in a Nov. 11 note. It added, however, that even as this trend is working favorably now, it will increase the procyclical nature of earnings and will be a concern later when rates begin declining.

Most banks reported faster credit growth as they ride on rising demand for loans. However, deposit growth is lagging and may push up funding costs later, Nikita Anand, associate director at S&P Global Ratings said. "We note that deposit growth is lagging credit growth, leading to higher loans-to-deposit ratios, which is positive for margins. However, with higher term deposit rates, there is likely to be some movement of funds from savings deposits to terms deposits. This could lead to some rise in cost of funds," Anand said.

Some bank chiefs said they have started looking at ways to keep NIMs intact.

Dinesh Khara, chairman of State Bank of India, said the bank will continue to open more savings bank accounts to attract low-cost funds and offer remunerative rates on term deposits to customers. "We are very mindful in terms of increasing our interest rates on the term deposits. So, I think, hopefully our effort will be to sustain the NIM," Khara said during the bank's Nov. 5 earnings call.

Bank profits rise

State Bank of India reported a rise in fiscal second-quarter net profit to 147.52 billion rupees from 88.89 billion rupees, while Bank of Baroda's net profit for the period rose 56.8% year over year to 34.00 billion rupees from 21.68 billion rupees.

Private sector banks also reported higher incomes, with HDFC Bank Ltd. posting a 22.3% year-over-year increase in consolidated net profit for the September quarter to 111.25 billion rupees, while ICICI Bank Ltd reported a 31.4% rise in net profit to 80.07 billion rupees. Axis Bank Ltd.'s profit rose 65.7% to 56.12 billion rupees.

Punjab National Bank, however, reported that its net profit for the quarter fell 55.3% to 4.94 billion rupees as the state-run lender increased provisions for nonperforming assets by 30.9% year over year to 35.33 billion rupees.

As of Nov, 16, US$1 was equivalent to 81.45 Indian rupees