Indian banks will likely maintain their strong earnings momentum in the final quarter of the fiscal year to March 31 before rising interest rates start to drag on credit growth.
"For most of the key credit measures we look at for banks, things are on the up: credit losses have declined sharply; nonperforming assets are on the decline; higher interest rates are boosting net interest margins; and returns on average assets are recovering toward decade high numbers," Geeta Chugh, an analyst at S&P Global Ratings, said in an email.
State Bank of India, the country's largest bank by assets, reported 154.77 billion rupees in net income for the quarter, up from 95.55 billion rupees in the prior-year period. HDFC Bank Ltd., the country's largest private sector bank by assets, also reported an increase in net income for the quarter to 126.98 billion rupees from 105.91 billion rupees. ICICI Bank Ltd.'s net income grew to 87.92 billion rupees from 65.37 billion rupees.
Fastest-growing economy
India is one of the fastest-growing major economies in the world with the International Monetary Fund projecting that the country's gross domestic product will expand to 6.1% in 2023, compared with the projected 2.9% expansion in the world economy. Still, inflation has remained a worry. The Reserve Bank of India raised its benchmark lending rate to 6.5% on Feb. 8, the sixth tightening move since May 2022.
"The country's ongoing economic recovery and improvement in corporate credit quality is driving credit costs to cyclical low levels and pushing asset quality higher, while stronger balance sheets, higher demand for working capital loans and the shift from capital markets to the banking sector is boosting bank loan growth," Chugh said. "The unwinding of stresses in India's banking system is continuing apace," Chugh added.
Indian banks' credit growth picked up in recent quarters to reach a 10-year high of 17.4% in December 2022, according to RBI data.
"System credit growth remains strong at 16% year over year, led by healthy traction in both retail as well as the corporate book," Anand Dama, senior research analyst at Emkay Global Financial Services, said in a Feb. 16 note.
Brakes on credit growth
However, rising interest rates "will have some tempering effect on credit growth, particularly in the retail segment, including mortgages and vehicles," Dama said.
For the rest of the fiscal year that ends on March 31, Emkay Global expects overall credit growth to remain at 16%, before slowing 100 basis points to 200 bps in the next fiscal year as higher rates filter through the economy.
State Bank of India Chairman Dinesh Khara said during the lender's Feb. 3 earnings call that he expects the pace of credit growth "to continue in the next financial year also, but some moderation can happen."
SBI's nonperforming loans fell to 992.99 billion rupees in the quarter from 1.209 trillion rupees in the prior year. The bank's net interest margin increased to 3.39% from 3.04%. HDFC Bank also reported a decrease in nonperforming assets to 187.64 billion rupees from 192.77 billion rupees as Indian lenders focus on asset quality.
As of Feb. 17, US$1 was equivalent to 82.77 Indian rupees.