Private Sector Banks: Q3-25 Performance & Outlook
Banking undergoing a recalibration as it grapples with profitability pressures & concerns around asset quality. Banks adopting strategies focused on sustainable growth & customer-centric approaches
Table of Contents
Overall Performance in Q3 FY25: Macroeconomic Uncertainty
Analysis of Q3 FY25 Earnings
Loan Growth: Overall Cautious Growth
Deposit Growth Strategies: Balancing growth & quality
Asset Quality: Overall Stability with Emerging Concerns
Credit Quality: Rising stress
Credit Costs Rising and Normalisation of Credit Cycle
Sources
1. Overall Performance in Q3 FY25: Macroeconomic Uncertainty
Insights from Q3-25 performance of top 5 private sector banks by market cap i.e. HDFC, ICICI, Axis, Kotak Mahindra & IndusInd Bank
Macroeconomic Uncertainty: All banks acknowledge a challenging and volatile macroeconomic environment including tight liquidity, geopolitical uncertainty and inflationary pressures. This leads to a cautious approach to growth and increased focus on asset quality and risk management.
Deposit Growth and CASA Ratio: Deposit growth and maintaining a healthy CASA (Current Account Savings Account) ratio are major concerns. Banks are focused on granularising their deposit base and improving the quality of their LCR (Liquidity Coverage Ratio) deposits, although some are struggling with deposit growth in the current environment.
Asset Quality Monitoring: Banks are closely monitoring asset quality, particularly in unsecured lending (personal loans, credit cards), microfinance, and the agricultural sector. They are employing tighter underwriting standards and strengthened collection efforts.
Strategic Focus: Banks are emphasising customer centricity, digital transformation, and building a resilient, "all-weather" franchise. They are also focused on optimising cost structures and improving efficiency.
Profitability: While most banks demonstrated healthy profit growth, some faced NIM pressures due to rising costs and portfolio mix.
Future Outlook: The outlook is cautiously optimistic, with banks focusing on sustainable growth, balance sheet strength, and customer-centric approaches to navigate the evolving economic landscape.
2. Analysis of Q3 FY25 Earnings
Profitability Trends
ICICI Bank's Q3 FY2025 earnings call highlights a strong financial performance with profit after tax growing by 14.8% year-on-year to 117.92 billion Rupees. The profit before tax excluding treasury grew by 12.8% year-on-year to 152.89 billion Rupees. Core operating profit also saw an increase, growing 13.1% year-on-year.
Kotak Mahindra Bank's consolidated profit reached Rs 4,700 crore, a 10% year-on-year increase. The bank's customer assets grew by 15% year-on-year, and deposits increased by 16%. Net Interest Margin (NIM) remained stable at 4.93%.
Axis Bank reported a 14% year-on-year increase in core operating profit, driven by income growth and moderated expense growth. Consolidated Return on Assets (ROA) was 1.71% and Return on Equity (ROE) was 15.8%.
HDFC Bank reported that Net Interest Margins (NIMs) have remained reasonably range-bound and stable despite the headwinds from tight liquidity, leading to a tight pricing environment.
IndusInd Bank, however, saw Net Interest Margin (NIM) impacted, registering 3.93% versus 4.08% QoQ. This was attributed to lower QoQ average balances for microfinance and EBLR repricing, while the cost of funds was sequentially higher due to increased deposit costs and higher borrowings QoQ. The operating profit for the quarter was stable QoQ at Rs 3,601 crores.
Asset Quality and Credit Costs
Asset quality is a focal point across the earnings calls, particularly concerning non-performing assets (NPAs) and provisioning.
ICICI Bank reported gross NPA additions of 60.85 billion Rupees in the current quarter, compared to 50.73 billion Rupees in the previous quarter. Recoveries and upgrades from gross NPAs were 33.92 billion Rupees. The provisioning coverage ratio on non-performing loans was 78.2% at December 31, 2024.
Axis Bank's gross NPA (GNPA) stood at 1.46%, declining 12 bps year-on-year. Net NPA (NNPA) was 0.35%, largely flat year-on-year and QOQ, with a Provision Coverage Ratio (PCR) of 76%. Net slippages in the quarter were Rs. 3,517 crores, increasing 48% QOQ.
HDFC Bank's earnings call highlighted that, excluding seasonal agri loans, slippages were flat period-to-period. The overall PCR was about 68%, but excluding seasonal agri loans, PCR was 71%, consistent with the prior quarter.
IndusInd Bank saw gross slippage ratio at 0.62% versus 0.56% YoY. The earnings call transcript noted that while slippages may get elevated for another quarter, their customer base is showing early signs of stability which should start reflecting from Q1 onwards.
Kotak Mahindra Bank's gross NPA was at 1.5%, with net NPA at 0.41%, and the provision coverage ratio improved to 73%. Slippages during Q3 were lower compared to Q2.
Strategic Outlook and Future Initiatives
ICICI Bank aims to drive risk-calibrated profitable growth by focusing on customer relationships, an extensive franchise, and collaboration within the organization, supported by investments in technology and distribution.
Kotak Mahindra Bank is focused on customer centricity and transforming for scale, expecting these efforts to reflect in future results. The bank is also working through a strategy accepted by RBI, and is operating within a LDR range that has been consistent for five quarters.
Axis Bank is focused on becoming a resilient, all-weather franchise by improving deposit quality and retail asset quality, and managing costs. The bank emphasized a focus on building a granular deposit book and is not necessarily running after lumpy deposits.
HDFC Bank aims to grow and bring down the credit deposit ratio as quickly as possible over a 2- to 3-year timeframe.
IndusInd Bank is cautious on the microfinance segment and expects retail loan share to start inching up again. The bank aims to granularize its liability by reducing bulk deposits and expects to have 48% to 50% share of retail LCR deposits with a Loan Deposit Ratio of around 88% to 90%.
3. Loan Growth: Overall Cautious Growth
Overall Cautious Growth: Banks appear to be prioritizing prudent and sustainable growth over aggressive expansion. This suggests a broader industry trend towards measured lending strategies, taking into account asset quality, economic conditions and regulatory guidance.
Deposit Growth as a Constraint: Deposit growth is seen as a key constraint for the growth in advances. Banks recognize that the ability to expand their loan portfolios is directly linked to their capacity to gather deposits. Banks are implementing strategies to enhance deposit quality and granularization, which will be key for sustainable growth.
Focus on Asset Quality: Asset quality is a significant concern, particularly in unsecured loan segments. Banks are closely monitoring delinquencies and implementing stricter underwriting standards. This suggests that banks will likely remain cautious about unsecured lending and focus on secured assets to maintain a healthy portfolio.
Strategic Calibration: Banks are actively calibrating their loan growth through credit and pricing models. This involves adjusting lending rates and tightening credit standards based on risk assessments and market conditions. Such calibration is a way to manage risk while optimizing profitability.
Cyclical and External Factors: Banks acknowledge that their performance is subject to cyclical economic factors and external events. This includes being prepared for potential economic slowdowns, changes in interest rates, and the impacts of geopolitical events.
Nuances in Retail Lending: The trends in retail lending demonstrate a nuanced approach, with variations across different product types. For example, while some segments like mortgages and auto loans are growing steadily, others like personal loans may experience deceleration. Banks are adapting to these variations by focusing on specific customer segments and tailoring their offerings accordingly.
Corporate Sector Engagement: In the corporate sector, banks are moving away from simply chasing loan growth and are instead focusing on building long-term relationships with corporate clients. This involves understanding their clients' needs and providing tailored financial solutions that align with their strategic goals.
Technology and Collection: Banks are leveraging technology to improve their collection capabilities and monitor their portfolios effectively. Investment in technology and analytics allows banks to identify early warning signs and take proactive measures to mitigate risks.
Regional Factors: Banks need to be aware of regional factors that may affect loan growth. For example, one bank noted that it is closely watching how new microfinance regulations in Karnataka develop and whether they spread to other states.
4. Deposit Growth Strategies: Balancing growth & quality
Deposit growth strategies strategies emphasize balancing growth with quality, managing costs, and leveraging technology to enhance customer engagement and expand market reach.
Balancing Deposit Growth with Quality:
Focus on Granular Deposits: A key strategy is to prioritize the acquisition of granular deposits over lumpy, high-value deposits that may be sensitive to pricing. Granular deposits, which consist of a large number of smaller accounts, provide a more stable funding base and reduce the risk of sudden outflows. One bank is focused on building a granular deposit book, and is not running after lumpy deposits, which are one on the back of pricing, which can lead to volatility in books.
Improve Deposit Quality: Banks aim to improve the quality of their LCR (Liquidity Coverage Ratio) deposits to improve outflow ratios. Project Triumph, a bank-wide deposit transformation program, aims to improve the granularization of deposits and improve the operating rhythm of the franchise. Another bank improved the granularization in their deposit book, which positively impacts the quality of LCR deposits, improving the outflow ratio by 320 bps over the last 2 to 3 years.
Managing the Cost of Deposits:
Control cost of funds: Banks aim to demonstrate a controlled increase in the cost of funds. The increase in cost of deposit remains contained at 3bps increase QoQ, mainly driven by change in mix.
Offer competitive rates: Banks intend to reduce the differential between their rates and those of their competitors. Banks also intend to ensure that they generate deposits of the right kind at the right price, and all these factors are feeding into each other.
Balance CASA, ActivMoney and TD: Banks seek to strike a balance between savings, ActivMoney and term deposits in a granular manner to achieve growth targets.
Leveraging Digital Channels and Technology:
Enhance digital capabilities: Banks are improving digital capabilities to mobilise deposits and to encourage customers to use digital platforms. A direct digital model is scaling.
Expand digital offerings: Banks are launching new products including a personal finance management tool and making enhancements to their products including redesign of several journeys. A bank has also launched INDIE for Business – a one of its kind industry first solution to bring “better business banking” to all MSME clients in the country.
Focus on Transacting Platforms: Banks believe that their transacting platforms are pretty strong and their whole objective is to get more and more adoption of those by their existing customers and acquire more and more new customers on the strength of those platforms across the entire spectrum from large corporates to small businesses.
Expanding Market Reach and Customer Engagement:
Branch Expansion: Despite the growing emphasis on digital channels, some banks continue to expand their branch networks, particularly in rural areas. A bank opened 130 new branches in the last three months, and 330 in the first nine months of this fiscal.
Targeted Customer Segments: Banks are focusing on specific customer segments with tailored products and services. A bank launched special women’s account “Arise”.
Premiumization of Services: Banks are focusing on premium customer segments. A bank has seen 42% YOY growth in Premium acquisitions in NTB Salary book by December 2024 and 26% YOY growth in Burgundy assets under management.
Leverage opportunities through the value chain: Banks are also using opportunities through the value chain such as salary credits. A bank has seen 24% YOY growth in Salary Uploads in the NTB Salary book by Dec 24.
Increase share of business with existing customers: Banks approach this by wanting customers to do as much of their banking as possible through them. Banks want a bigger portion of that share whether it is CA or SA or a fixed deposit.
Other observed strategies:
Affluent and NRI Banking: Banks are showing robust traction amidst the challenging deposit environment through affluent and NRI banking.
Customized solutions: Banks offer industry leading customized solutions across liquidity management, payments and collections continue to drive higher transaction banking flows leading to better current account balances.
These strategies indicate that banks are adapting to a changing economic landscape by prioritizing sustainable deposit growth, managing costs, and leveraging technology to enhance customer engagement and expand market reach.
5. Asset Quality: Overall Stability with Emerging Concerns
Overall Stability with Emerging Concerns:
While some banks maintain stable asset quality overall, there are emerging concerns, particularly in specific sectors like unsecured lending and microfinance. This suggests a bifurcated trend where the strength of secured portfolios is contrasted by increasing risks in certain unsecured segments.
Unsecured Lending:
Rising Delinquencies: The transcripts indicate a general rise in delinquencies in unsecured products, including personal loans, credit cards and microfinance, across the industry. This is attributed to factors such as credit hungriness and over-leverage. One of the banks observed a rise in delinquencies in some pockets, specifically in unsecured products, including MFI, across the industry. The primary reasons are credit hungriness and over-leverage.
Cautious Outlook: Given the heightened delinquency levels in the industry, banks are adopting a cautious stance toward unsecured lending.
Proactive Interventions: Banks are implementing proactive measures, including regular portfolio monitoring and early warning triggers, to recalibrate policies and manage delinquencies within acceptable thresholds.
Early signs of stabilisation: Stress in the credit card portfolio is now plateauing and therefore hopefully in the next couple of quarters it will actually see a decline.
Microfinance:
Increased Slippages: Some banks have seen increased slippages in their microfinance portfolios. .
Cautious Stance: Recent regulatory actions have led banks to adopt a cautious stance on the microfinance sector, both through direct and indirect sourcing.
Not a Significant Portion: While there are concerns, microfinance does not constitute a significant portion of some banks' portfolios.
Corporate and Business Banking:
Strong Performance: The corporate and business banking loan books continue to perform well for some banks.
Low Slippages: Annualized slippages in the corporate book remain low and stable.
Provisioning and Recognition:
Conservative Policies: Some banks claim to have conservative recognition and provisioning policies compared to their peers.
100% Provisioning: A key policy is to maintain 100% provisioning on unsecured retail loans once the loan turns NPA. One bank details unsecured gets written off at 150, which means if an account is not recoverable at 90, there is a very quick P&L take on that.
Improved Recoveries: Recoveries from written-off accounts have improved, contributing to the provision line.
External Factors:
Macroeconomic Conditions: Banks acknowledge that the macroeconomic environment impacts asset health, with slower growth potentially affecting customers' ability to repay loans.
Geopolitical Environment: Banks continue to closely monitor the geopolitical environment, inflation, and liquidity.
Seasonality: Seasonality impacts certain sectors, such as agriculture, leading to fluctuations in slippages.
Forward-Looking Strategies:
Strengthening Collection Infrastructure: Banks are focused on strengthening their collection infrastructure, including using technology to improve collection capabilities.
Prudent Underwriting: Banks are tightening underwriting norms and recalibrating policies to ensure delinquencies remain within acceptable thresholds.
Focus on Secured Assets: Banks are focusing on secured assets and de-emphasizing unsecured lending to maintain a healthy portfolio.
Banks are generally maintaining stable asset quality, they are closely monitoring emerging risks, particularly in the unsecured lending space. Banks are implementing proactive measures to manage these risks and are preparing for potential challenges in the macroeconomic environment. The focus on secured lending, prudent underwriting, and strengthened collection efforts indicates a conservative approach aimed at ensuring long-term financial stability.
6. Credit Quality: Rising stress
Stable Performance in Specific Sectors Some banks report that their corporate and business banking loan books are performing well. For instance, one bank notes that its domestic corporate portfolio grew year-on-year. Additionally, annualised slippages in the corporate book remain low and stable. Another bank also shares that the secured book continues to have negligible delinquencies. This suggests that these banks have strong underwriting standards and effective monitoring mechanisms in place for their corporate clients.
Emerging Challenges in Unsecured Lending: Rising delinquencies in unsecured products, such as personal loans, credit cards and microfinance, across the industry. One of the banks observed a rise in delinquencies in some pockets, specifically in unsecured products, including MFI. This increase in delinquencies is attributed to factors such as credit hungriness and over-leverage.
Cautious Outlook on Microfinance The microfinance sector is also facing challenges, with some banks experiencing increased slippages in their microfinance portfolios. Recent regulatory actions have led banks to adopt a cautious stance on the microfinance sector, both through direct and indirect sourcing. However, it's important to note that microfinance may not constitute a significant portion of some banks' portfolios.
Proactive Risk Management In response to these challenges, banks are implementing proactive measures to manage risks. These measures include:
Regular portfolio monitoring
Early warning triggers
Tightening of underwriting norms
Recalibrating policies to ensure delinquencies remain within acceptable thresholds
Conservative Provisioning Policies Several banks emphasise their commitment to maintaining conservative provisioning policies to mitigate potential losses. These policies include:
Maintaining 100% provisioning on unsecured retail loans once the loan turns NPA
Writing off unsecured loans at 150 days past due
Accelerated provisioning for accounts not recoverable within 90 days
Leading Indicators of Asset Quality Banks are closely monitoring various leading indicators to assess and manage asset quality. These include:
SMA (Special Mention Accounts) 1 & 2
Early bucket movements in both secured and unsecured portfolios
Borrower behaviour
External Factors Influencing Asset Quality Several external factors are influencing the credit quality trends observed in the banking sector:
Macroeconomic conditions: Banks acknowledge that the macroeconomic environment impacts asset health, with slower growth potentially affecting customers' ability to repay loans.
Geopolitical environment: Banks continue to closely monitor the geopolitical environment, inflation and liquidity.
Seasonality: Seasonality impacts certain sectors, such as agriculture, leading to fluctuations in slippages.
Specific Bank Strategies Different banks are adopting specific strategies to address the credit quality trends in their portfolios. For example, IndusInd Bank is reducing bulk deposits and focusing on retail LCR deposits to granularise their liabilities. Some banks are focused on secured assets and de-emphasising unsecured lending to maintain a healthy portfolio.
In summary, the credit quality trends in the banking sector reveal a mix of stability and emerging challenges. While corporate and business banking portfolios are generally performing well, unsecured lending and microfinance sectors are experiencing rising delinquencies. Banks are proactively managing these risks through prudent underwriting, strengthened collection efforts and conservative provisioning policies. They are also closely monitoring external factors, such as macroeconomic conditions and seasonality, to anticipate and mitigate potential challenges.
7. Credit Costs Rising and Normalisation of Credit Cycle
Rising Credit Costs and Normalisation of Credit Cycle Across the board, many banks are seeing a general increase in credit costs, signalling a shift from previous periods of low expenses. Multiple transcripts refer to the "normalisation" of the credit cycle, suggesting a move towards more typical, and possibly higher, credit costs compared to the unusually low levels seen recently. This indicates that banks are preparing for increased expenses related to loan losses as the economic environment evolves.
Factors Contributing to Credit Cost Pressures
Unsecured Retail Lending: A significant factor driving up credit costs is the increasing stress in unsecured retail lending, particularly in segments like credit cards and personal loans. For example, one bank noted that slippages are mainly in their retail unsecured book.
Microfinance Challenges: The microfinance sector is contributing to rising credit costs for some banks, with increasing slippages noted in their microfinance portfolios. One bank is being cautious about the disbursements in microfinance and remains watchful of trends.
Seasonality: Seasonality plays a role, especially in the agricultural sector, leading to fluctuations in slippages and consequently affecting credit costs. For example, one of the banks typically see higher NPA additions from the kisan credit card portfolio in the first and third quarter of a fiscal year.
Macroeconomic Environment: The broader macroeconomic conditions are also exerting pressure, with a tough environment impacting customers' ability to repay loans.
Strategies to Manage Credit Costs In light of these trends, banks are actively implementing strategies to manage and mitigate rising credit costs.
Strengthening Collection Efforts: A key focus is on enhancing collection infrastructure, including deploying technology to improve collection capabilities.
Tightening Underwriting Standards: Banks are tightening underwriting norms and recalibrating policies to ensure delinquencies remain within acceptable thresholds. One bank tightened the underwriting norms more than a year ago.
Prudent Provisioning Policies: Banks are emphasising their commitment to maintaining prudent provisioning policies to absorb potential losses. As an example, one of the banks has structured rule based write offs, that in the short term impact reported numbers like credit costs and net slippages.
Focusing on Secured Lending: A common strategy involves focusing on secured assets while de-emphasising unsecured lending to maintain a healthier portfolio.
Specific Insights from Banks
Axis Bank: In Q3FY25, Axis Bank reported that annualized net credit cost increased 26 bps QOQ to 80 bps, which was partly attributed to seasonality. Slippages were mainly observed in the retail unsecured book, particularly in cards and personal loans. The bank is taking portfolio action and seeing early signs of positive delinquency trends.
HDFC Bank: HDFC Bank has a strict policy of writing off unsecured loans at 150 days past due.
IndusInd Bank: IndusInd Bank is closely monitoring the microfinance segment and is watchful of the trends. The bank is reducing bulk deposits and focusing on retail LCR deposits to granularise liabilities.
Key Considerations and Cautions
Impact of Policy Changes: Banks are proactively adjusting their strategies in response to emerging challenges, and early results are measured. For example, Axis Bank is measuring lead indicators and early indicators across product sets are showing a positive sign.
Macroeconomic Uncertainty: Banks are closely monitoring the macroeconomic environment and the potential for further disruptions. As one bank stated, the macro environment does require a lot of caution in this current environment.
Variations in Reporting and Provisioning: It is important to recognise that different banks have different policies for provisioning and write-offs, making direct comparisons challenging.
Consistent trend of increasing credit costs, driven largely by challenges in unsecured retail lending and the microfinance sector, as well as the normalisation of the credit cycle. Banks are actively responding by strengthening collection efforts, tightening underwriting standards, and maintaining prudent provisioning policies, all while closely monitoring the macroeconomic environment.
8. Sources
Disclaimer
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