The early results of the banking sector for the third quarter show signs of weariness, yet the prospects are far from glum. Though large public sector banks are yet to announce their Q3 results, three major private sector players —HDFC Bank, ICICI Bank, and Kotak Bank—have, giving a taste of what to expect. HDFC Bank’s Q3 numbers cracked the stock market last week, with the shares falling by 8.5% on January 17 after it announced its results. But the market seems to have overreacted to the bank’s slower deposit growth and margin contraction. The results of other banks, particularly those of ICICI Bank and IDFC Bank, show robust numbers.
The story so far has been that of net interest margin contraction—a trend that was expected because of higher deposit costs—slower deposit growth, continued pick-up in retail loan growth, and overall improvement in asset quality. The recent regulatory changes with regard to exposure in alternate investment funds (AIFs) and unsecured retail lending, though, have started showing their impact on the banks’ books. Kotak Mahindra Bank had to make additional provision of Rs 143 crore (post tax) on applicable AIF investments. The bank, which has so far declared the most underwhelming Q3 numbers, also had a higher year-on-year unsecured loan at 11.3% (vis-a-vis 9.3% a year ago). The RBI has increased the risk weightage on unsecured loans, while it has asked banks to increase provision on AIF investments that have exposure to the banks’ borrowers.
Higher deposit cost and slow deposit growth are becoming a bit of a drag for the banks. Yet, healthy credit growth and improved asset quality continue to boost the prospect of banks. ICICI Bank’s net NPA fell to 0.44% in the third quarter from 0.55% in the corresponding period of the previous year. Kotak Bank’s net NPA fell from 0.43% last year to 0.34% in the third quarter of this year. IndusInd maintained its gross and net NPA levels.
Though HDFC Bank saw its NPA levels going up year-on-year, it is largely due to its merger with its mortgage arm HDFC. Some of the regulatory tightening may have curbed unnecessary ‘exuberance’ in credit offtake but in the long run, they create a shield against asset quality deterioration. While large PSU bank results would give a clearer picture of the banking sector in the coming days, the early signs are encouraging.