Clean books, thin margins: The new reality of Indian banking

Bond prices and yields move in opposite directions: When yields rise, bond values fall, triggering a mark-to-market (MTM) hit on banks' treasury income. The country's largest lender, State Bank of India (SBI), saw its treasury income drop about 20 per cent year-on-year (y-o-y) in the September quarter, weighed down by both the earlier uptick in bond yields and a depreciating rupee.

A recent report by CareEdge Ratings pegs the fall in treasury income across select scheduled commercial banks in the September quarter at 61.6 per cent y-o-y. Private sector banks saw a 65.7 per cent drop, sharper than their public sector peers at 59.4 per cent. As bond yields hardened towards the end of the quarter, banks were forced to book MTM losses—the notional loss recognised when the market value of securities falls below their book value, even if they are not sold—and had fewer opportunities to book trading profits.

Another pain point is the persistent squeeze in low-cost current account and savings account (Casa) deposits. All listed universal banks reported a y-o-y drop in their Casa ratio, barring five. Three of them are in the public sector (Indian Overseas Bank or IOB, Union Bank of India and Indian Bank) and two in the private sector (Federal Bank Ltd and Karnataka Bank Ltd). For a few, the contraction was 4 percentage points or more. Among the five exceptions, only IOB recorded a rise—albeit marginal—on both a y-o-y and quarter-on-quarter (q-o-q) basis.

IDFC FIRST Bank Ltd leads the industry with a Casa ratio of 48.4 per cent, followed by Bank of Maharashtra (46.47 per cent), Central Bank of India (44.65 per cent), IDBI Bank Ltd (43.82 per cent), Jammu & Kashmir Bank Ltd (41.97 per cent) and IOB (40.71 per cent). No other bank has crossed the 40 per cent mark. Among large lenders, SBI, ICICI Bank Ltd and Kotak Mahindra Bank Ltd maintained a Casa ratio of at least 38 per cent each, while Axis Bank Ltd had 36 per cent and HDFC Bank Ltd 31.6 per cent. For some lenders, large inflows of foreign currency non-resident (FCNR-B) deposits swelled the term deposit base and pulled the ratio down.

Another headache for bankers is the continued compression in net interest margin (NIM)—broadly, the spread between a bank's yield on advances and its cost of funds. Large private sector lenders bore the brunt of this squeeze due to elevated deposit costs, intense competition for retail funds, and the thin margins earned on the FCNR-B deposits mobilised in large volumes during the quarter.

HDFC Bank's NIM fell 11 basis points (bps) y-o-y and 10 bps q-o-q to 3.16 per cent in the September quarter, its lowest on record. ICICI Bank's margin dropped 12 bps y-o-y and 18 bps sequentially to 4.18 per cent. Axis Bank saw a sharper contraction—down 37 bps y-o-y and 10 bps q-o-q to 3.36 per cent. SBI bucked the trend: Its domestic NIM rose 11 bps sequentially to 3.11 per cent. At 2.94 per cent, its whole-bank NIM was down 3 bps y-o-y but up 8 bps q-o-q. One bps is a hundredth of a percentage point.

Subdued treasury income is a cyclical phenomenon—it routinely occurs when yields harden. The persistent erosion in Casa and NIM, however, points to deeper structural shifts. A steady slide in Casa reflects a fundamental change in how Indian savers deploy their money, forcing banks to adapt to higher funding costs as competition intensifies.

Yet one metric on bank balance sheets signals a far more profound structural transformation and underscores how the business of banking is evolving. No prizes for guessing: It is the steady, continuous decline in bad assets.

Just one public sector bank (PSB) currently has a net non-performing asset (NPA) ratio above 0.5 per cent, alongside five private sector lenders. These six banks are Bandhan Bank Ltd (92 bps), IndusInd Bank Ltd (83 bps), Karnataka Bank Ltd (74 bps), DCB Bank Ltd (73 bps), Punjab & Sind Bank (61 bps) and Jammu & Kashmir Bank (51 bps).

What’s more, every listed bank reported a y-o-y drop in net NPAs in the September quarter. All but one—IDBI Bank—recorded a reduction both y-o-y and q-o-q. IDBI Bank reported a net NPA ratio of 17 bps, down from 21 bps a year ago, though marginally higher than 16 bps in the June quarter.

Among the mega-lenders, SBI reported a net NPA ratio of 36 bps, HDFC Bank 37 bps, ICICI Bank 30 bps and Axis Bank 35 bps. South Indian Bank Ltd boasted the lowest net NPA ratio in the industry at 9 bps, followed by Bank of Maharashtra (12 bps), Tamilnad Mercantile Bank Ltd and Indian Bank (14 bps each), and IOB (16 bps).

On gross NPAs, only two lenders kept their ratio below 1 per cent—Tamilnad Mercantile Bank (61 bps) and Karur Vysya Bank Ltd (69 bps). Next came RBL Bank Ltd (102 bps), Kotak Mahindra Bank (104 bps), HDFC Bank (111 bps), Axis Bank (116 bps), IOB (119 bps), and ICICI Bank and Yes Bank Ltd (120 bps each). SBI's gross NPA ratio stood at 139 bps, its lowest in more than two decades.

In absolute terms, PSBs' gross NPAs fell 12.9 per cent y-o-y to Rs 2.31 trillion at the end of September, while private banks saw a 6.7 per cent drop to Rs 1.28 trillion. Across all listed banks, gross NPAs contracted by 10.8 per cent.

On the net NPA front, PSBs recorded a 13.3 per cent drop to Rs 44,092 crore, while private banks logged a 7.7 per cent decline to Rs 34,606 crore. Aggregate net NPAs across all listed banks fell 10.9 per cent.

To put this turnaround in perspective, gross NPAs of all scheduled commercial banks in India (including foreign banks and small finance banks) had peaked at Rs 10.36 trillion in the fourth quarter of FY18, with net NPAs at Rs 5.21 trillion. At that peak, PSBs accounted for Rs 8.96 trillion of gross NPAs—a staggering 14.6 per cent ratio—and Rs 4.54 trillion of net NPAs (8 per cent). Private banks' gross NPAs then stood at Rs 1.29 trillion (4.7 per cent) and net NPAs at Rs 64,380 crore (2.4 per cent).

On most operational metrics today, PSBs are outperforming their private sector peers. Their operating profits grew 17.2 per cent y-o-y in the September quarter, compared with 13.5 per cent for private banks. Total operating profit for all listed banks rose 15.4 per cent to Rs 1.81 trillion. SBI led with Rs 34,226 crore in operating profit, followed by HDFC Bank (Rs 29,483 crore), ICICI Bank (Rs 20,576 crore), Bank of Baroda (Rs 11,430 crore) and Axis Bank (Rs 11,083 crore). No other lender crossed the Rs 10,000 crore mark.

After setting aside Rs 27,271 crore in provisions for bad loans (down 9.1 per cent y-o-y, though up 7.2 per cent sequentially), aggregate net profit for all listed banks rose 20.1 per cent y-o-y to Rs 1.16 trillion. PSBs and private banks ran neck-and-neck in profit growth. Three lenders crossed the Rs 10,000 crore net profit mark: SBI (Rs 23,038 crore), HDFC Bank (Rs 19,510 crore) and ICICI Bank (Rs 14,843 crore).