Banking Sector reports decent Q1FY23 performance


“The Q1FY23 operating performance of banks under our coverage demonstrated an upbeat stance on advance growth and credit cost outlook. Nonetheless, reported earnings missed our expectations due to MTM hit and elevated Opex. NIMs just stayed put (as against expectations of improvement) as upward repricing of EBLR/MCLR loans will likely take 3-6 months reset period to fully reflect in yields” said ICICI Securities.

Following the same, it can be said that several significant banks in the sector have seen around 16% YoY & 2% QoQ growth in NII. Their core operating profit grew 17% YoY, while treasury loss dragged operating profit lower by 13% YoY and 18% QoQ. Whereas subsiding credit cost and lower base supported 35% YoY earnings growth. Yet, earnings of SBI, HDFC Bank and Kotak lagged investors expectations, they still came out to be robust, keeping in the mind global recessionary fears & falling of rupee value. As the situation still seems to be improving, Bank Nifty has also broken one of their past resistances and made a robust up move post Q1FY23. It is also noteworthy that the otherwise underperforming PSU banks fared better their private sector counterparts in the past few months which have helped the Banknifty scale towards new highs.

IndusInd Bank & ICICI Bank are the leaders in YTD returns among the private banks. IndusInd Bank and ICICI Bank, both gave robust above 20% return YTD. While SBI also gave almost 20% returns, Kotak Mahindra and HDFC Bank seems to be losing their steam.

Now, as NIFTY50 is trading near 18,000 levels and analysts are expecting it to make a new high, by crossing the resistance with high volumes, let’s check how the sentiment plays for the banking sector. We will now analyse quarterly performance of these five banks mentioned in the graph above, to understand the performance of the Banking sector in Q1FY23 and prospects going forward.

Banking Sector results Q1FY23: Everyone saw NII going up YoY basis

Performance of IndusInd Bank in Q1FY23 reaffirmed broker’s confidence of it being able to deliver >5% PPoP/loans (Pre provision operating profits), 1.7%/1.9% RoAs and 15%/16% RoEs by FY23E/FY24E, respectively. Their NII was up 15.8% YoY, 3.5% QoQ to Rs 4,125 crore on the back driven by robust growth in business. Sequentially margins remained flat at 4.21% (up 15 bps YoY). Other income was up 8.3% YoY to Rs 1929 crore, driven by healthy growth of 47% and 9% YoY & QoQ respectively, in core fee income at Rs 1932 crore.

HDFC’s NII was up 14.5% YoY and 3.2% QoQ to Rs 19,481 crore aided by healthy loan growth of 21.6% YoY and stable NIMs at 4.0% on a sequential basis. Other income declined 16.4% QoQ and showed modest 1.6% growth on yearly basis mainly on account of treasury loss of Rs 1,312 crore vs. a gain of Rs 601 YoY. Fee income reported strong growth of 38% YoY.

ICICI Bank as it is well-placed to optimally invest in building new growth runways, however, incrementally enhancing medium term return ratios appears a steep ask. ICICI’s NII growth (+21% YoY), led by stable NIMs (4%). Loan growth was balanced across portfolios as the quarter witnessed improved utilisations and Capex activity in underlying wholesale lending (+17% YoY), while retail was led by mortgage (+22%), business banking (+45%) and credit cards (+63%).

SBI’s operational performance was below estimates with NII growth at 12.9% YoY and flat QoQ to Rs 31,196 crores, due to lower NIMs (13 bps decline QoQ). Other income was impacted significantly due to MTM loss and came in at Rs 2312 crore, 5x lower compared with Q1FY22 and Q4FY22. `

Kotak Mahindra’s posted a healthy growth in NII at 19.2% YoY and 3.9% QoQ to Rs 4697 crore. Healthy NII growth was aided by 14 bps sequential expansion in NIMs to 4.92% and robust growth in advances. Other income was down 8% YoY and 31.9% QoQ to Rs 1243 crore, mainly due to lower trading income. Fee income grew 41.7% YoY but declined 2.4% on QoQ basis.

Key banking ratios: GNPAs & NNPAs have improved, supported by robust CASA growth

IndusInd Bank’s GNPA and NNPA inched up slightly by 8 bps and 3 bps QoQ to 2.35% and 0.67%, respectively. Restructured book declined 50 bps QoQ to 2.1%. Their loans increased by 17.7% YoY and 3.7% QoQ to Rs 2.47 lakh crore. Deposit growth was healthy at 13.1% YoY and 3.1% QoQ to Rs 3.02 lakh crore, driven by 16% YoY uptick in CASA.

HDFC Bank posted a mixed set of numbers as business growth continued its healthy traction, but asset quality performance was modest. GNPA and NNPA ratio increased from 1.17% and 0.32% to 1.28% and 0.35%, respectively, on a sequential basis. Retail book saw stable asset quality, but CRB and corporate loans witnessed 20 bps and 11 bps QoQ rise in GNPA levels, respectively.

ICICI’s GNPA/NNPA ratio contracted by 19bp/6bp QoQ to 3.41%/0.7%. PCR ratio was broadly stable 80%. On the liability front, deposits grew 13% YoY, but fell 2% QoQ. CASA deposits grew 16% YoY but fell 5% QoQ. Average CASA mix improved by 60bp QoQ to 45.8%. Fresh slippages rose to Rs 5880 crores (2.7% annualized). However, higher recoveries restricted the increase in net slippages to Rs 3,800 crores.

SBI’s Asset quality was largely steady as GNPA ratio fell 6 bps QoQ to 3.9% while net NPA was down 2 bps QoQ to 1%. Fresh slippages increased to Rs 9,740 crore from Rs 2,845 crore in Q4FY22. Thus, slippage ratio was at 1.38%. Watch-list (SMA1 and SMA2) is now at Rs 6,983 crore vs. Rs 3,544 crore QoQ, respectively. The bank reported overall gross credit growth at 14.9% YoY to Rs 29 lakh crore, led by 18.6% YoY growth in retail segment. Deposit growth came in at 8.73% YoY to Rs 40.5 lakh crore where CASA deposits grew 6.5% YoY. Thus, CASA ratio declined slightly from 45.9% to 45.3% QoQ.

Kotak Mahindra Bank’s asset quality performance improved as GNPA and NNPA declined 10 bps and 2 bps sequentially to 2.24% and 0.62%, respectively. Net slippage for the quarter was at Rs 654 crore vs. Rs 736 crore QoQ. The bank had total provisions of Rs 6,532 crore at the end of Q1FY23 vs 6,710 crores in Q4FY22. Overall loan growth for the quarter was healthy at 28.8% YoY and 3.3% QoQ to Rs 2.8 lakh crore. Deposits were up 10.4% YoY to Rs 3.16 lakh crore, where in CASA deposits grew 7% YoY. CASA ratio declined from 60.7% in Q4FY22 to 58.1% in Q1FY23 (60.2% in Q1FY22).

Other key Updates:

HDFC bank and HDFC ltd has already announced a mega merger, which is expected to be completed in the next 14-16 months.

Another news in the similar lines is the merger talks about Kotak Mahindra bank and Federal Bank looming in the market. While the Federal Bank MD & CEO denied the claim in an interview with media and said that they may probably acquire some other entity. Few investors are considering this as a speculative move and betting on the same. So, it would be interesting to see what happens in the ever-growing future.

Our View:

Banks have already seen several ups and downs from the beginning of 2022 with RBI hiking benchmark rates repeatedly in 2022 with a move to control the inflation. Several banks have also seen improvement in margins in Q1FY23, while others are still struggling. As the future prospects appear to be in favour of banks with growing CASA and other indicators, recessionary fears are still a hurdle.

Therefore, long term investors can consider investing in banks having robust fundamentals including the private banks as well as the PSU banks going forward. A long-term investing bet appears to be reasonable as NIFTY is already testing its resistance to make a new high and economy recovering from covid havoc appears to be few factors favouring their growth.

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

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