Profit growth ranged from under 5% at HDFC Bank to 38% at Axis. Bad loans fell everywhere. But all three saw margins shrink
Saturday was the biggest day of India’s banking earnings season, and the results were a mixed bag.
ICICI Bank posted a 20% jump in standalone profit to ₹14,843 crore. Axis Bank’s profit rose 38% to ₹7,003 crore. HDFC Bank, the largest of the three, managed 4.7% growth to ₹19,510 crore.
On the surface, three very different quarters, but there is a common thread.
The winners and why
ICICI had the cleanest quarter. Net interest income rose 17.7% to ₹25,339 crore, fees rose 20%, and lending grew fast. Gross bad loans fell to 1.20%, among the lowest in Indian banking. It was the kind of steady, broad-based growth that has made ICICI the sector’s most consistent performer.
Axis Bank’s headline number was the biggest, but the reason matters. Most of the jump came from provisions. Axis set aside ₹1,694 crore for bad loans, half the ₹3,547 crore it needed a year ago. Core operating profit grew a more modest 11%, and profit came in slightly below analysts’ expectations. Loans grew 23%, and asset quality improved, with gross bad loans at 1.16%.
HDFC Bank had the weakest headline but a better story underneath. Its profit was dragged down by treasury income, which fell to ₹780 crore from ₹2,390 crore a year earlier as bond trading gains shrank. Excluding those gains, profit grew about 12.6%. Asset quality improved, and costs stayed in check. It was the last quarter under outgoing chief executive Sashidhar Jagdishan, before Anup Bagchi takes over on 27 October.
The thread: margins
Here’s what tied the three together. Every one of them saw margins shrink.
Net interest margin, the gap between what a bank earns on loans and pays for funds, fell to 3.16% at HDFC Bank from 3.26% in the June quarter. At ICICI it fell to 4.18% from 4.36%. At Axis it was 3.36%, or 3.47% excluding foreign-currency deposits.
The reason is the same everywhere. After two years of complaining that deposits couldn’t keep up with lending, banks went out and raised money aggressively. Much of it was expensive: fixed deposits, plus foreign-currency deposits raised under a special RBI window this summer that was designed to bring dollars into India and support the rupee. Axis alone raised about $10.6 billion through it.
Those deposits served a useful purpose. They also cost more, and that showed up in margins.
Two things could ease the squeeze. The RBI raised interest rates on 7 October, and loans linked to the repo rate reprice almost immediately, while deposit costs adjust more slowly. Banks have already started passing on the increase to borrowers. And as the foreign-currency deposits mature, or are replaced with cheaper money, their drag on margins should fade.
What it means
The bigger picture is reassuring. Bad loans are falling across the board. Deposit shortages are over. Smaller lenders are doing well too: Federal Bank, for instance, reported profit up about 45% with bad loans at decade lows.
The challenge now is profitability. Banks have the money and clean books. Turning that into faster profit growth will depend on how quickly margins recover. Bank shares react on Monday, and investors are likely to focus less on headline profits and more on what management said about margins.
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