Banks back with a bang; profit is 2.4x of FY20, but how...

The Indian banking sector has been delivering robust growth for the past few quarters and Q1 FY24 is among the highest of the growth spurt. For the record, the banking sector posted a net profit of ₹1.02 lakh crore in FY20 but in the next three years, banking companies' profit increased 135% to ₹2.4 lakh crore.

Banks' profits are aided by factors like powerful credit growth over the past few quarters, continuous improvement in the asset quality indicated by the net non-performing assets (NNPA) ratio at all-time low levels, lower incremental slippages, lower provisions, and reduction in restructured assets.

A report on the banking, financial services, and insurance (BFSI) by CareEdge ratings points out that scheduled commercial banks’ (SCBs) net profit grew by a record 68.9% y-o-y to ₹0.73 lakh crore for Q1 FY24. Public sector banks (PSBs) reported strong net profit growth of 124.8% y-o-y to ₹0.34 lakh crore in Q1FY24, while private sector banks also posted a growth of 38.4% y-o-y to ₹0.39 lakh crore in Q1FY24.

Banks’ return on assets (RoA, annualised) also improved by 44 bps y-o-y to 1.31% in Q1FY24. Amongst the factors that put minor breaks to their growth story were marginal pressure on a sequential basis due to the rising cost of deposits, reduction in low-cost CASA deposits, and seasonality impact. However, scheduled commercial banks (SCBs) were adequately capitalised in Q1FY24.

Reasons for Increase in Banks’ Profits:

The growth of pre-provisioning operating profit (PPOP) and lower credit costs were responsible for the profit growth of PSBs, as per the report. Their PPOP grew by 53.1% y-o-y to ₹0.68 lakh crore in the quarter, which was in turn driven by the growth in net interest income (NII) and treasury income, while provisions dropped by 19.8% y-o-y in the same period. The increased profits of PSBs led to the expansion of the median common equity tier- 1 (CET-1) ratio by 90 bps y-o-y to 12.3% in Q1FY24, and the median capital adequacy ratio (CAR) expanded by 100 bps y-o-y to 15.9% in the quarter.

On the other hand, private sector banks’ net profit rose by 38.4% to ₹0.39 lakh crore in Q1FY24 on account of robust growth in PPOP. In terms of sequential growth, the net profit of private banks marginally declined. There was a decline of 1.4% in sequential growth due to seasonality. Credit costs of private sector banks also increased during the same period.

Banks performed well on all parameters:

On the matrix of return on asset (RoA), the scheduled commercial banks not only improved by 44 bps y-o-y to 1.31% in Q1FY24 but also surged from 0.48% in Q1FY22. Their headline RoA continues to be strong, and much higher, than the average of 26 quarters. The RoA of PSBs improved by 50 bps y-o-y to 0.98% in Q1FY24. This was mainly due to large PSBs, which expanded by 55 bps y-o-y. However, the other PSBs underperformed their larger counterparts in the quarter and their RoA expanded by 35 bps y-o-y. The RoA of private sector banks expanded by 31 bps y-o-y to 1.87% in the quarter. However, on a quarter-on-quarter basis, the return on assets (RoA) of PSBs declined by 10 bps q-o-q because of higher credit costs and seasonal factors, the report states.

On the parameter of capital adequacy ratio (CAR), the highest growth was registered by PSBs, whose median CAR expanded by 100 bps y-o-y to 15.9% for Q1FY24 on account of robust profitability and bond issuance. The median CAR of scheduled commercial banks rose by 60 bps y-o-y to 16.7% in Q1FY24. The SCBs also issued bonds between Q2FY23 and Q1FY24 periods to improve their capital base for managing healthy credit growth. Although the median CAR of private banks dropped by 40 bps to 17.1% in the quarter, the median CAR of all kinds of banks remains much above the regulatory requirement of 11.5%, indicating a stable position, as per the report.

The common equity tier 1 (CET-1) ratio of PSBs improved by 90 bps y-o-y to 12.3% in Q1FY24 due to improved net profits, while private sector banks’ CET-1 ratio declined by 66 bps y-o-y due to robust growth in advances. The median CET-1 of SCBs witnessed a healthy y-o-y expansion of 113 bps to 13.7% in Q1FY24 aided by strong growth in profitability which was mainly driven by the PSBs. The current CEI-1 levels are comfortably higher than the regulatory requirements of 8.0%, which also includes a capital conservation buffer (CCB) of 2.5%.