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Most lenders also saw an improvement in their net interest margins as lending rates have ticked up faster than deposit rates since the previous quarter. Even though the central bank has raised the benchmark lending rate by 190 basis points since May, banks are yet to hike deposit rates to fully reflect that.
“As rates go up there is this continuation of this lead and lag effect [between advances and deposits],” Srinivasan Vadiyanathan, chief financial officer at HDFC Bank, told analysts in conference call on October 15, following the bank’s earnings report.
Stong growth in the consumer, or retail, segment has also helped banks expand their NIMs. Axis Bank grew its retail loans by 25% year-on-year and Kotak Mahindra Bank saw a surge of 81% and 40% in credit cards and home loans & loans against property, respectively.
While analysts expressed overall bullishness about credit growth opportunites for banks, they also noted that growing deposits amid an interest rate upcycle would be a key monitoriable for the lenders.
“Credit growth will likely only accelerate from here,” Amit Khurana, head of equities and research at Dolat Capital, told BQ Prime. He added that if repo rate hikes continue beyond February, banks could find themselves in a much tighter situation when it comes to raising deposits.
“Overall interest rates may continue to rise … so there is potential in the future that our cost of deposits will rise faster than what we have seen till now,” Amitabh Chaudhry, chief executive officer of Axis Bank, told analysts in a conference call held on October 20.
Banks’ bottomline also benefitted from a sharp reduction in provisions over the second quarter. IndusInd Bank’s provisions for the quarter fell 33% from a year ago to Rs 1,141 crore and HDFC Bank’s provisions dropped by 17% in the same time period.
Yes Bank bucked the trend of falling provisions and instead reported a 54% year-on-year rise which also contributed to its profits falling by 32% as compared to last year.
Outstanding advances of banks also expanded over the second quarter of the year with ICICI Bank and HDFC Bank both growing their total advances by about 23% year-on-year.
“We are seeing advances book at the bank grow 25% year-on-year,” Jaimin Bhatt, chief financial officer at Kotak Mahindra Bank, said during an earnings conference call on October 22.
The ratio of non performing assets also declined at the banks over the second quarter. IDFC First Bank and Federal Bank both reported a dip of 21 basis points and 16 basis points respectively in their net NPA ratios. Federal Bank’s net NPA stood at 0.78% for the quarter, whereas IDFC reported the ratio at 1.26%.
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