Private banks continued to see healthy growth in Q1 FY24, posting another quarter of strong financial results led by steady increase in their net and non-interest incomes, low credit costs and stable asset quality.

Credit demand during the quarter was broad-based, being led by retail, rural, MSME and mid-corporate loans. However most banks, barring the likes of ICICI Bank and Axis Bank, saw a slowdown in lending to large corporates due to intensifying competition leading to pricing pressure in the segment.

Net interest income growth remained strong for the sector, led by 15-22 per cent loan growth, even as margins compressed slightly sequentially due to the ongoing repricing of the deposit base. Even as private lenders expect margin compression to continue for at least another quarter before stabilising, they remain optimistic given that the impact of the repricing continues to be lower than anticipated.

Growth in deposits, of around 13-20 per cent, was led by current account, term and bulk deposits, whereas savings account deposit balances declined sequentially for most lenders, given customers’ preference for higher yielding fixed deposits and other investment avenues. As a result, cost of deposits rose for most banks with expectations of an increase in overall cost of funds during the financial year.

Strong growth in other income led by treasury gains and fees and other income also aided profitability for most banks during the quarter, analysts said.

Stable asset quality

Asset quality remained stable for major private banks on the back of low provisioning requirements and credit cost. However, slippages were relatively elevated, largely led by delinquencies in the unsecured retail (including credit cards) and agriculture portfolios, and in certain cases some specific corporate accounts such as for YES Bank.

Large players such as ICICI Bank, HDFC Bank and Kotak Bank maintained that there is no asset quality stress in the unsecured book while saying they will continue to closely monitor the portfolios for any signs of stress.

ICICI Bank and Kotak Bank remain analysts’ top picks followings their Q1 results, and Federal Bank and IndusInd Bank the favourites among mid-sized lenders.

Going ahead, private banks’ lending to large corporate and unsecured segments will be eyed, even as they look to balance the impact of rising cost of funds on margins, and a potential increase in provisioning requirements as they prepare to meet the guidelines under the ECL (expected credit loss)-based framework.

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