Q1 results: Private banks' net profit rises 47% on fall in provisions

Loan repricing, high loan growth buttress NII

Private sector banks posted 47.2 per cent year-on-year (YoY) growth in net profit in the April-June quarter (first quarter, or Q1) of 2022-23 (FY23) on sharp fall in provisions and contingencies.

Propped up by repricing of loans and robust credit growth, net interest income (NII) expanded 16.9 per cent YoY and 3.7 per cent quarter-on-quarter, reveals a BS Research analysis of 14 listed Indian private banks.

The Reserve Bank of India (RBI) in its July bulletin said banks increased their external benchmark lending rate by 50 basis points (bps) in June. Twenty-eight domestic banks have also increased their one-year marginal cost of funds-based lending rate in the range of 5-50 bps during June.

The reporting quarter was marked by volatility in bond markets as response to central banks’ action to rein in runaway inflation. The contribution from the treasury was negligible or absent, given the hardening of yields as the RBI hiked the policy repo rate by 90 bps in the quarter. As a consequence, other income, where treasury revenues have a significant contribution, fell 4 per cent YoY in Q1FY23 and 14.3 per cent sequentially.

The provisions and contingencies declined 56 per cent YoY, helping bolster the bottom line. Improved asset quality profile supported the decline in provisions. Gross non-performing assets declined 11 per cent to Rs 1.65 trillion at the end of June, from Rs 1.9 trillion a year ago.  

Nitin Aggarwal, senior group vice-president (banking research) Motilal Oswal Securities, said the trend of bank performance in Q1FY23 was on expected lines. The quarter was marked by volatility on the treasury side. Profiting from repricing, NII and margins are expected to improve.  Also, volatility in treasury income is also expected to subside on stabilisation in market yields.

While banks have been quick to increase lending rates, the transmission to deposit rates has been relatively sluggish. Deposit rates are reliant on on demand for credit, as well as liquidity conditions in the banking system.

In the case of term deposits, 25 of 33 domestic banks increased their term deposit rates in the range of 3-38 bps.

Private banks under review posted 18.2 per cent growth in advances — higher than the rate at which the banking system’s loan book expanded (14.4 per cent YoY) in June. The pace of credit offtake was lethargic last year (Q1 of 2021-22) as demand got hit by the second wave of Covid-19.

Private sector bank deposits grew 14 per cent YoY — higher than the banking system’s 9.8 per cent until the end of June — according to the RBI data.