Indian banks have shown robust earnings growth in the fourth quarter of FY24, primarily driven by healthy loan expansion. Listed banks experienced a boost in net profits, attributed to increased other income and credit growth. However, net interest margins displayed mixed trends, largely influenced by the upward pressure on funding costs.
The combined net profit of both listed public and private sector banks surged by 39% year-on-year (YoY) in FY24, surpassing ₹3 lakh crore for the first time.
Private lenders, numbering 26, accumulated a net profit of ₹1.78 lakh crore, while the 12 PSU banks reported a combined net profit of ₹1.41 lakh crore during FY24.
This notable enhancement in the banking sector’s health has earned accolades from Prime Minister Narendra Modi. Describing it as a “remarkable turnaround,” PM Modi emphasized its potential to enhance credit accessibility for the underprivileged, farmers, and MSMEs.
“In a remarkable turnaround over the past decade, India’s banking sector has achieved a net profit exceeding ₹3 lakh crore for the first time ever. When we took office, our banks were grappling with losses and high NPAs due to the phone-banking policy of the previous administration. Access to banks was limited for the disadvantaged. This improvement will facilitate better credit availability to our underprivileged, farmers, and MSMEs,” PM Modi stated in a post on X on May 20.
In the meantime, market sentiment has revised upward the FY25 net profit projections for state-owned banks by mid-single digits, while projections for private banks remain largely stable.
In the fourth quarter of FY24, banks reported a 9% core Pre-Provisions Operating Profit (PPOP) increase and a 21% YoY growth in Profit After Tax (PAT). Banks with high loan-to-deposit ratios (LDR) experienced a decline in market share in FY24 and reduced corporate loans in Q4 due to weak pricing dynamics.
IIFL Securities anticipates a slowdown in system loan growth to 13% in FY25. Private banks expanding into Sub-Urban & Rural (SURU) areas and a weakening government agency business resulted in PSU banks losing 20-50 basis points of deposit market share in FY24.
“Deposit competition remains intense with a 10-50 basis points increase in Term Deposit rates year-to-date, banks raising funds through equity, Certificate of Deposit (CD), and bond issuances, and utilizing excess liquidity buffers. Despite the expansion in asset yields, Net Interest Margin (NIM) outcomes varied and are expected to continue doing so in FY25,” stated IIFL Securities.
Assuming no rate cuts in FY25, the brokerage firm’s residual re-pricing framework indicates a further decline in spreads by 5-17 basis points for select banks. ICICI Bank, Kotak Mahindra Bank, and State Bank of India (SBI) are likely to experience higher NIM compression, while Axis Bank, HDFC Bank, and Bank of Baroda may see lower compression. Conversely, RBL Bank, Federal Bank, and IndusInd Bank are expected to witness improvements.
Although there was a slight increase in Agri, MSME, and MFI slippages, overall credit costs remained low. PSU banks witnessed positive earnings revisions, but the cyclical tailwinds such as low LDRs, a favorable NIM trajectory, and low credit costs are expected to diminish in the coming quarters.
