The banking industry is said to be the foundation of any country’s economy. As of September 7, 2021, India has around 12 public sector banks, 22 private sector banks, 45 foreign banks, 43 regional rural banks, 1,531 urban cooperative banks, and over ~97,000 rural cooperative banks are operating in the country to make sure that the monetary assets of the people are in good hands.
The Financial Stability Report by the RBI expects the gross NPA ratio of banks, which in March 2021 stood at 7.48%, to reach 9.8% by March 2022. To simplify this statement, for every Rs 10 advanced by banks, Re 1 would be irrecoverable. This estimate of 9.8% is under normal conditions, and if things turn ugly under severe stress scenarios, gross NPA may rise to 11.22%.
Analysis of the top 5 banks with the highest market capitalization
|Net interest income
|GNPA||Provisions and contingency reserves
|1||HDFC Bank||Rs 7,729.6||Rs 17,007 ( 8% y-o-y rise)||1.47%||Rs 4,830.8||Rs 8,72,362.42|
|2||ICICI Bank||Rs 4,616||Rs 3,706 ( 56% y-o-y rise)||5.15%||Rs 6,425||Rs 5,02,232.46|
|3||State Bank of India||Rs 6,504||Rs 2,6642 ( 3.7% y-o-y rise )||5.32%||Rs 10,051.96||Rs 3,85,007.74|
|4||Kotak Mahindra Bank||Rs 1,641.9||Rs 3,942 ( 6% y-o-y rise)||3.56%||Rs 935||Rs 3,55,358.72|
|5||Axis Bank||Rs 2,160||Rs 7,760( 11% y-o-y rise||3.85%||Rs 3,532||Rs 2,44,663.83|
Did you notice: SBI is the lone warrior from the public sector banks featured in this list. All the other four banks are from the private space. The closest public sector bank is Punjab National Bank with Rs 41,896.91 crores of market cap.
Evaluation of the quarterly results of the banking companies:
1. Net profit
Each of the top 5 companies reported an increasing trend in their profitability. The spread of the economic activities led by the ‘opening up’ theme and the fact that the country observed a strict lockdown during the same quarter previous year is seen as the reason for this massive rise in net profit.
Once again, SBI had the highest quarterly profits ever. The company informed that they made a net profit of Rs 6,504 crore, 55.3% higher on a y-o-y basis. However, the market was overwhelmed, with share price touching a high of Rs.456/- the day results were out.
The after-effects of the pandemic and the changing customer behavior were evident in the results of the leading private sector bank. HDFC Bank had a reasonably ordinary quarter, and its net profits were marginally up by 16.1% on a y-o-y basis. During the quarter, the company made a net profit of Rs 7,729.64 crores.
ICICI Bank had an exceptional quarter with a 78% y-o-y rise in net profit to Rs 4,616 crore led by robust net interest income and lower provisions. Kotak Mahindra Bank, meanwhile saw a 32% y-o-y rise in net profit, and together with SBI that saw a stellar 53.3% y-o-y rise, have set a high benchmark in the year.
2. Net Interest Income (NII)
Net interest income is the difference between the interest earned and the interest expended by the bank. Banks are yet to find a sweet spot in their net interest income. The pandemic has had a domino effect on the NII as well. Disrupted working cycles, fluctuations in the cash flow cycles, and borrower’s inability to pay their dues towards the banks are only adding to the woes.
Despite having a remarkable operating profit growth of 19%, Kotak Mahindra Bank managed to secure a net interest income growth of just 6% in the June quarter. However, this was way below the market expectations.
Meanwhile, ICICI Bank, the latest entrant to the 5 lakh crore market cap club, saw no worrying signs on the net interest income front as it posted a strong 18% y-o-y rise, taking its tally to Rs 10,936 crores.
3. Gross Non-Performing Assets:
The GNPA nightmare is real for the Indian banking sector. But thankfully, banks have shed off their rigidity and taken to more sensible planning on the NPA woes.
ICICI Bank earlier last financial year, informed about the change in their policy on NPA. They have shifted towards a more conservative approach, and rightly so. While the pandemic has massively struck the borrowers, the bank feels it does not make sense to make more provisions than usual to protect the business.
This updated policy helped the second-largest private sector bank claim a GNPA of 5.15% against 5.46% a year ago. However, when compared on a quarterly basis, the GNPA rose from the levels of 4.96% in the March quarter.
The private sector leader HDFC is having the lowest bad loans ratio among its peers. Still, it posted a marginal increase on a q-o-q basis. As a result, the GNPA ratio widened from 1.32% to 1.47% for the March to June quarter.
With RBI already expecting gross NPA levels of the banks to hit an all-time high by March 2022, it is important for the banks to provision accordingly.
4. Provisions and contingency reserves
Banks adopt a prudent approach to make appropriate provisions for their expected losses. So if a bank says its provisions for the year are Rs 500 crore, it is expecting to have a loss of Rs 500 crores in the year ahead, which it is acknowledging in its books.
In provisions, we saw a mixed bag of results. While HDFC Bank and ICICI Bank looked to foster their provisions, SBI and Kotak Mahindra bank posted a decline in their provisions.
HDFC Bank revealed their provisions rose to Rs 4,830.8 crore from Rs 3,891.5 crore a year ago. The company held COVID-19 responsible for their increased provisions.
SBI reported a significant decrease in its provision levels, declining to Rs 10,052 crores from Rs 12,501 crore a year ago. However, out of this Rs 10,052 crore provision, the COVID-19 uncertainty provision stands tall at Rs 9,065 crore.
The banking sector in India has held steady ground post the Global crisis of 2008-09. Stricter compliance along with robust technology with regulatory financial reforms promised a brighter future for this sector. NPAs have remained the number one issue of this sector even before the pandemic hit.
But now, with COVID-19 at the helm of all things, businesses and the economy shut and unemployment on a steep rise, NPAs/bad loans could potentially significantly impact this sector.
The RBI has been giving out more and more banking licenses suggesting its long-term viability for the banking space, but the banks will need to steer out the short-term slippages and redirect their bad loans.
With a third wave, an almost certainty, the asset quality of the major banks is decreasing, and with spillage being on the higher side, banks might see a tough year ahead.