Private banks end FY24 on a strong note; focus remains on margins, profitability in FY25
Private banks closed FY24 on a strong note with healthy Q4 earnings across the board led by strong loan growth and a pick in deposit growth in the last quarter of the financial year.
Loan growth continued to be led largely by retail, unsecured and small and mid-corporate segments. While capex growth continues to be led by PSUs and government spending, some mid and large banks were optimistic about some signs of a pick in private capex going into FY25.
While deposit growth momentum is expected to sustain to an extent, some large banks such as Axis Bank and HDFC Bank also cautioned that combined with higher risk weights, the pressure on deposit accretion could lead to some amount of moderation in loan growth in the coming quarters. Further, given elevated lending rates, more corporates are choosing to raise funds from the market as against taking bank loans which could lead to higher opportunities for banks in the capital market segments instead of pure corporate term loans, they added.
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Margins were flat to lower for most banks on the back of the elevated cost of funds due to the push for deposit mobilisation. In the earnings call, the management of banks guided that margins are likely to remain weighed down for at least 1-2 quarters before normalising, supported by an expectation of easing in lending rates in the second half of the financial year. YES Bank was the outlier seeing an improvement in margins both on year and sequentially, with the bank saying that it expects margins to improve further.
Key focus area
What weighed on the bottom line for most banks during the quarter and FY24 was higher operating costs due to investments in technology and digital upgradation and wages or employee incentives given the high attrition rate across the sector. As a result, in addition to strengthening the deposit base and holding onto margins, maintaining and improving profitability ratios is a key focus area for banks going into the new fiscal year.
Slippages during Q4 were largely from the retail portfolio, in line with the loan growth in the segment, whereas corporate slippages improved for most lenders, especially in unsecured personal loans and credit cards. Due to the higher risk weights imposed by the regulator and elevated slippages, banks such as ICICI Bank said that are continuously monitoring and recalibrating the retail portfolio based on risk parameters such as ticket size, credit scores and lines of credit, among others. Most other banks also highlighted that a majority of their unsecured book is to existing customers and remains a small portion of total loans.
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Smaller private banks such as RBL Bank and DCB Bank said that while they were slower to emerge from the covid pandemic impact due to the high exposure to rural, semi-urban and self-employed borrowers, the trend has started reversing and recoveries and collections from these segments have improved significantly, leading to an improvement in asset quality ratios for most lenders.