India’s banks have successfully anchored their performance to one of the world’s most vibrant economies. First-quarter bank earnings show dramatic growth as the country’s businesses and retail consumers have left the pandemic behind, powered by a compelling domestic story resilient to global shocks.
On Saturday, ICICI reported a 39.7% year-on-year increase in profit after tax, to $1.2 billion equivalent for the first quarter. The same day, Kotak Mahindra Bank trumped it with a 50.6% rise in consolidated profit to $506 million, or 66.7% on a standalone basis for the bank. On July 17, HDFC Bank, in its first earnings after its merger with its parent Housing Development Finance Corporation, had reported a 30% increase in standalone net profit for the quarter to $1.45 billion.
All are reporting steady or improving asset quality – net non-performing asset (NPA) ratios of 0.48%, 0.43% and 0.3%, respectively – and provision coverage. They reflect an industry-wide picture. In June, the Reserve Bank of India (RBI) put out a report on the stability and resilience of the Indian financial sector, noting: “Even as the [net and gross non-performing loans (NPLs)] of scheduled commercial banks declined to a decadal low, the system-level capital to risk-weighted assets ratio reached a new high. The net interest margin increased further and post-tax profits recorded growth as credit expanded alongside adequate provisioning and strengthening of capital buffers.”
The RBI, it should be said, is not slow at pointing out when its banking system is not doing what it is supposed to. So, relatively speaking, this is high praise from the central bank.
Technology backbones
Reporting its results, ICICI pointed to two areas of progress. One, naturally, was credit growth: its net domestic advances grew 20.6% year-on-year in the first quarter, with retail loans up 21.9%, business banking 30.4% and small and medium-sized enterprises (SME) up 28.5%.
The rural portfolio, which Euromoney has previously identified as a new long-term driver of Indian banking, grew 17.6% year-on-year. These numbers are mirrored across the banking sector.
The other is growth in digital and payments platforms. ICICI’s iMobile Pay has so far logged more than 10 million activations by non-ICICI Bank account holders, a crucial metric to see how its digital ideas are taking it beyond its core customer base, and 230,000 on its InstaBIZ platform. The value of the bank’s merchant-acquiring transactions through India’s state-led Unified Payments Interface (UPI) – upon which all digital platforms are permitted to operate – grew 88% year-on-year.
ICICI says about 70% of its trade transactions were done digitally through the first quarter, and that volumes are growing fast: the value of transactions done through its Trade Online and Trade Emerge platforms in the first quarter were up 40% year-on-year.
There is no crystal ball when the credit reverts to mean, but there will be reversion to mean,” said
Srinivasan Vaidyanathan, HDFC Bank
Similarly, Kotak Mahindra devoted much of its investor presentation to the investments it is making in its technology backbone. The bank hired 179 engineers between January and July, it says, and aims to bring on another 171 by March. It has poured money into tech architecture, infrastructure, talent, cyber security and automation.
During the quarter, it launched Myntra Kotak, a co-branded credit card with integrated digital onboarding, it says. Its fyn (for your needs) mobile app onboarded 5.8 times as many clients as a year ago, it says. And 95% of new personal loans by volume, 96% of new credit cards sold, and 77% of new business loans by volume were disbursed digitally. Also, 37 new partners were made live through application programming interfaces (APIs) in the first quarter.
At HDFC Bank, more than 12.5 million unique customers have now conducted over 22 million interactions on the HDFC Bank One customer hub, while the PayZapp app handled more than 13 million transactions during the quarter, from customers spending 1.5 times as much as they did a year ago.
All these efforts are starting to show up in customer acquisition, cost-to-income ratios and, ultimately, the bottom lines of India’s better lenders.
Longer term
How long can this bonhomie last? Nomura analyst Param Subramanian had billed this earnings season as a “test of margin defence”. The banks appear to have passed that test for the moment, but analysts are watching closely for any sign of moderation in net interest margins. Nomura has a buy on Axis, ICICI and HDFC Bank, and is neutral on Kotak.
In that respect, it has been interesting to watch stock-market reaction to these stellar results. On the first trading day after their results, Kotak shares promptly fell 3%, while ICICI sharply dropped at first before recovering modestly. HDFC’s share price also fell on the day of its results.
Does this suggest investor expectations have got ahead of what is reasonable? Or is it profit-taking? A sense that this is as good as it will get?
Probably all three. Long-term investors are still sold on India’s story: Temasek, the Singapore sovereign wealth vehicle, is planning to commit as much as $10 billion to India during the next three year and is increasing its India team to more than 20 people, Temasek India head Ravi Lambah told Bloomberg in July. But retail is notoriously skittish in India.
Executives were asked by analysts about whether banks’ current strategy – taking the benefits of eased credit conditions, and spending it through bigger loan books and customer acquisition – was sustainable.
“There is no crystal ball when the credit reverts to mean, but there will be reversion to mean,” says Srinivasan Vaidyanathan, chief financial officer of HDFC Bank, on an earnings call for analysts. “When that reverts to mean, that is part of the risk-management art. Our credit will tell us a few quarters ahead of time.
“Our risk management will evolve and tell us in terms of how the cycle is going to turn out when. And it is nothing but a function of maturity. It’s not about the quality of the book.”
The next indicator will be Axis Bank, which reports on Wednesday – in its first results since the formal completion of its acquisition of Citi’s consumer banking operation in India. Watch this space.
