Coverage: weekly note · Information to 1 July 2024
TGB Premium Intelligence — Open Access
This report was originally available exclusively to TGB Premium subscribers. It is now part of our open research archive.
TGB Weekly Research Note · 1 July 2024
Scheduled commercial banks ended FY2024 with a return on equity of 13.8%, close to decadal highs, while large listed lenders reported returns well above that level, although one-off items, a merger and base effects distort several fourth-quarter comparisons.
The desk view
The Reserve Bank of India's (RBI) June 2024 Financial Stability Report puts the return on assets (RoA) and return on equity (RoE) of scheduled commercial banks at 1.3% and 13.8%, close to decadal highs. Profit after tax rose 32.5% year on year in March 2024 as provisioning needs fell with a shrinking stock of bad loans. The large listed lenders ran well above the system: annualised RoE in the quarter to March 2024 was 20.35% at Axis Bank, 18.5% at ICICI Bank and 17.54% at Kotak Mahindra Bank, while State Bank of India (SBI) reported 20.32% for FY2024. Our reading is that the profitability cycle is real but that fourth-quarter headline comparisons need care: one-off gains, provisions, a merger and base effects move several of them, while funding costs rose faster than asset yields over the year.
System profitability is close to decadal highs
The RBI released the 29th issue of its Financial Stability Report on 27 June 2024. Its overview describes RoA of 1.3% and RoE of 13.8% as close to decadal highs, with the gross non-performing assets (GNPA) ratio at 2.8% and the net NPA ratio at 0.6%, both multi-year lows. The report links part of the improvement to the lending environment: amid a lengthy tightening cycle, profitability was bolstered by high net interest margins (NIMs) and strong credit demand. The GNPA ratio was at a 12-year low in March 2024, and public sector banks cut their GNPA ratio by 76bp in the six months to March 2024.
The earnings mix explains much of the jump. Net interest income rose during 2023-24 and a surge in trading income lifted other operating income. As the need for additional provisions fell with a depleting stock of NPAs, profit after tax rose 32.5% year on year in March 2024, despite a large increase in operating expenses. Private sector banks posted higher profit growth than public sector banks, on the back of significant increases in net interest and other operating income.
The same report shows the margin tailwind fading. Lagged transmission of earlier policy rate increases and shifts in liquidity raised the cost of funds by nearly 100bp during 2023-24, against a 75bp rise in the yield on assets, and the NIM of scheduled commercial banks shrank marginally. The banking stability indicator shows RoA, RoE and NIM still strong in March 2024 but marginally lower than in September 2023. On capital, the capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) ratio stood at 16.8% and 13.9% at end-March 2024. System CRAR nonetheless fell 37bp over 2023-24, as risk-weighted assets at private and foreign banks grew faster than their capital.
Large lenders run well above the system average
Results for the quarter ended 31 March 2024 put the large listed lenders comfortably above the system RoE. Axis Bank reported annualised RoE of 20.35% and RoA of 2.00% for the quarter, and RoE of 18.86% for FY2024. ICICI Bank's standalone RoE was 18.5% annualised in the quarter and 18.7% for FY2024, with RoA of 2.36% in the quarter. Kotak Mahindra Bank reported RoE of 17.54% for the quarter and 15.34% for FY2024, with quarterly RoA of 2.97%. SBI reported RoE of 20.32% and RoA of 1.04% for FY2024, and RoA of 1.36% for the quarter. For HDFC Bank, the standalone results filing shows average RoA of 1.98% for FY2024, against 2.07% for FY2023.
SBI's own series shows how far the cycle has come. Its RoE moved from -3.78% in FY18 to 0.48% in FY19 and rose each year to 20.32% in FY24, a path the bank describes as continuous improvement from FY19 onwards. At this level, SBI's full-year RoE marks a sharp break from the negative return of FY18.
Large lenders' profitability, margins and asset quality, Q4 FY2024
| Bank | Q4 profit growth, y/y | RoE | RoA | NIM | GNPA ratio | CET1 ratio |
|---|---|---|---|---|---|---|
| SBI | 23.98% | 20.32% (FY2024) | 1.36% | 3.47% (domestic) | 2.24% | 10.36% |
| HDFC Bank | 37.1% (includes HDFC Ltd from 1 July 2023) | Not disclosed in release | 1.98% (FY2024) | 3.44% (core, on total assets) | 1.24% | 16.3% |
| ICICI Bank | 17.4% | 18.5% | 2.36% | 4.40% | 2.16% | 15.60% |
| Axis Bank | 8% (against Q4 FY2023 before exceptional items) | 20.35% | 2.00% | 4.06% | 1.43% | 13.74% |
| Kotak Mahindra Bank | 18% | 17.54% | 2.97% | 5.28% | 1.39% | 19.2% |
Source: State Bank of India, Press release: Q4FY24 results (NSE filing), 9 May 2024; HDFC Bank Limited, News release: Financial results (Indian GAAP) for the quarter and year ended March 31, 2024 (NSE filing), 20 April 2024; HDFC Bank Limited, Audited standalone and consolidated financial results for the quarter and year ended March 31, 2024 (NSE filing), 20 April 2024; ICICI Bank Limited, Q4-2024: Performance review (investor presentation, filed with BSE and NSE), 27 April 2024; Axis Bank Limited, Press release: Axis Bank announces financial results for the quarter and year ended 31st March 2024 (NSE filing), 24 April 2024; Kotak Mahindra Bank Limited, Media release: Kotak Mahindra Bank announces results (NSE filing), 4 May 2024.
SBI return on equity, FY18 to FY24, %
Source: State Bank of India, FY24 Analyst Presentation (NSE filing), 9 May 2024.
One-offs and base effects distort fourth-quarter comparisons
HDFC Bank's quarterly profit after tax rose 37.1% to ₹165.1bn after certain tax credits, with profit before tax at ₹157.6bn. Net revenue included transaction gains of ₹73.4bn from the stake sale in its subsidiary HDFC Credila Financial Services. Against that, the bank made floating provisions of ₹109.0bn, which it described as a countercyclical buffer that also qualifies as Tier 2 capital within regulatory limits. Operating expenses included a staff ex-gratia provision of ₹15bn. Excluding the floating provisions, provisions and contingencies were ₹26.1bn, against ₹26.9bn a year earlier. The year-on-year comparison is also affected by the merger: the bank's figures include the operations of the erstwhile HDFC Ltd, which amalgamated with and into HDFC Bank on 1 July 2023, and the bank says comparisons with previous periods have to be read in that light. The quarter therefore contains large items in both directions, which limits what its headline profit says about underlying earnings.
SBI's quarterly profit of ₹20,698 crore was 23.98% higher year on year but 125.87% above the ₹9,164 crore of the previous quarter. That previous quarter had absorbed exceptional items of ₹7,100 crore, provisions for a one-time increase in pension liabilities. FY2024 also carried a one-time wage revision expense of ₹13,387 crore. The bank's full-year profit of ₹61,077 crore was reported after both the wage settlement and the exceptional item.
Axis Bank's comparison is distorted in the other direction. Its profit of ₹7,130 crore for the quarter compares with a net loss of ₹5,728 crore a year earlier. The earlier figures include exceptional items relating to the Citibank business acquisition. Before those items, the bank puts Q4 FY2023 net profit at ₹6,625 crore and annualised RoE at 21.12%, so on that basis profit rose 8% and RoE was lower in Q4 FY2024. Treasury income also helped: Axis Bank's trading income was ₹1,021 crore in the quarter, against ₹83 crore a year earlier. This is consistent with the system-wide surge in trading income that the RBI identified for 2023-24.
ICICI Bank and Kotak Mahindra Bank show steadier year-on-year growth, with quarterly profit after tax up 17.4% and 18% respectively. Taken together, the system data support profitability close to decadal highs, while year-on-year and quarter-on-quarter comparisons at individual banks need adjusting for these items.
Margins, funding and supervision set the limits
Margin pressure is visible at bank level. ICICI Bank's NIM was 4.40% in the quarter against 4.90% a year earlier, while its cost of deposits rose from 3.98% to 4.82%. SBI's domestic NIM fell from 3.84% to 3.47% over the same period. Funding has shifted towards term deposits: HDFC Bank's time deposits grew 40.4% on its merged basis, leaving current and savings accounts at 38.2% of total deposits. Kotak Mahindra Bank's average term deposits grew 35% year on year in the quarter.
Credit has also run ahead of deposits. The system credit-deposit ratio peaked at 78.8% in December 2023 before easing to 76.8% at end-March 2024. Between April 2022 and March 2024, retail lending grew at a compound annual rate of 25.2% and lending to services at 22.4%, against overall credit growth of 16.4%. At private sector banks, personal loans accounted for over half of credit growth, according to the RBI. Risk weights on certain consumer credit and on bank credit to non-bank financial companies (NBFCs) were raised in November 2023. The RBI judges credit growth of 16.1% as on 31 May 2024, net of the merger of a housing finance company with a bank, to be sustainable and within a 16-18% range beyond which it may lead to higher impairments.
Supervisory risk is bank-specific as well. On 24 April 2024 the RBI directed Kotak Mahindra Bank to stop onboarding new customers through its online and mobile banking channels and to stop issuing fresh credit cards, citing concerns from its IT examinations for 2022 and 2023.
The RBI's stress tests suggest buffers are ample. System CRAR is projected at 16.1%, 14.4% and 13.0% in March 2025 under baseline, medium and severe scenarios, results the RBI says should not be read as forecasts. Under the baseline, the GNPA ratio may improve to 2.5% by March 2025, while severe stress would take it to 3.4%. The Monetary Policy Committee (MPC) held the repo rate at 6.50% on 7 June 2024 and remained focused on withdrawal of accommodation.
For bank executives and investors, the implication is that current profitability rests partly on lower credit costs and trading income, not only on core margins. Sustaining returns at current levels will depend on deposit costs, the pace of consumer lending and supervisory standards on technology.
What to watch
- 6-8 August 2024: next meeting of the Monetary Policy Committee
Primary sources: Reserve Bank of India, Financial Stability Report, June 2024: Overview, 27 June 2024; State Bank of India, Press release: Q4FY24 results (NSE filing), 9 May 2024; ICICI Bank Limited, Q4-2024: Performance review (investor presentation, filed with BSE and NSE), 27 April 2024; Axis Bank Limited, Press release: Axis Bank announces financial results for the quarter and year ended 31st March 2024 (NSE filing), 24 April 2024; Kotak Mahindra Bank Limited, Media release: Kotak Mahindra Bank announces results (NSE filing), 4 May 2024; HDFC Bank Limited, News release: Financial results (Indian GAAP) for the quarter and year ended March 31, 2024 (NSE filing), 20 April 2024; Reserve Bank of India, Financial Stability Report, June 2024: Chapter I, Macrofinancial Risks, 27 June 2024; Reserve Bank of India, Financial Stability Report, June 2024: Chapter II, Financial Institutions: Soundness and Resilience, 27 June 2024; Reserve Bank of India, RBI releases the Financial Stability Report, June 2024 (press release 2024-2025/572), 27 June 2024; HDFC Bank Limited, Audited standalone and consolidated financial results for the quarter and year ended March 31, 2024 (NSE filing), 20 April 2024; State Bank of India, FY24 Analyst Presentation (NSE filing), 9 May 2024; Reserve Bank of India, Supervisory Action against Kotak Mahindra Bank Limited under Section 35A of the Banking Regulation Act, 1949 (press release), 24 April 2024; Reserve Bank of India, Monetary Policy Statement, 2024-25: Resolution of the Monetary Policy Committee (MPC) June 5 to 7, 2024 (press release 2024-2025/453), 7 June 2024.