Synopsis: India's banking sector experienced a varied performance in the third quarter of fiscal year 2024-25, with net interest income (NII) increasing by 6% year-on-year (YoY), core pre-provision operating profit (PPOP) rising by 13%, and adjusted profit after tax (PAT) growing by 7%.
In Q3 FY25, the Indian banking sector showcased a mixed financial performance:
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Net Interest Income (NII): Increased by 6% YoY, reflecting moderate growth in interest earnings.
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Core Pre-Provision Operating Profit (PPOP): Rose by 13% YoY, indicating improved operational efficiency.
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Adjusted Profit After Tax (PAT): Grew by 7% YoY, suggesting steady profitability.
Despite these positive indicators, the sector faces challenges that may impact future growth.
Projected Growth and Earnings Outlook:
According to a report by IIFL Capital, the banking sector is anticipated to witness subdued PAT growth:
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FY25: Projected growth of 6%.
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FY26: Projected growth of 4%.
While earnings expectations for FY25 have been slightly upgraded by 1%, a 3% downgrade has been applied for FY26. These projections suggest cautious optimism, tempered by underlying economic factors.
Factors Influencing the Sector:
Several elements contribute to the current and projected performance of India's banking industry:
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Loan Growth: Banks' loan growth has decelerated due to elevated loan-to-deposit ratios (LDRs). However, overall system credit growth remains healthy at 14% YoY, supported by non-banking financial companies (NBFCs), external commercial borrowings (ECBs), and bonds. IIFL-covered banks reported loan growth ranging between 3-16% YoY in Q3, compared to the system-wide growth of 11.2%.
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Unsecured Loans: Growth in unsecured loans has begun to moderate, declining by 1-5% quarter-on-quarter (QoQ) due to increased stress and regulatory interventions. The microfinance (MFI) sector remains under pressure from emerging state-specific issues and increased stress among borrowers with multiple loans. The upcoming implementation of a three-lender cap from April 2025 may further impact this segment.
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Liquidity Conditions: Public sector banks (PSBs) are experiencing a decline in deposit market share amid liquidity deficits and heightened competition for deposits. Despite recent measures by the Reserve Bank of India (RBI), system-wide liquidity remains tight, leading to a rising liquidity leakage of 5.5% of net demand and time liabilities (NDTL).
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Net Interest Margins (NIMs): NIMs have reverted to pre-rate hike levels, with further contraction expected as the RBI moves towards a rate-cut cycle. Reported NIMs remained flat or declined by up to 15 basis points QoQ, with sharper drops for banks like Bank of Baroda and State Bank of India (SBI) due to overseas exposures. Fitch Ratings estimates that Indian banks' NIMs could decline by an average of 10 basis points in FY26 due to anticipated rate cuts.
Operational Efficiency and Cost Management:
Banks are adopting measures to enhance profitability through cost management:
- Operating Expenses (Opex): Growth in opex has moderated as banks slow down large-scale hiring and PSBs account for wage provisions. While NII growth remained subdued, core PPOP increased by 13% YoY due to only a 2% YoY rise in opex. Private banks experienced a slightly higher opex increase of 6% YoY. This moderation is now a key lever in managing profitability.
Disclaimer: This article is based on information available up to February 21, 2025. The banking sector's performance is subject to change due to evolving economic conditions and regulatory policies.
