As 2023 draws to a close, India's banking landscape has seen significant transformations. Industry veterans Deepak Parekh and Keki Mistry bid farewell, while interest rates took the spotlight globally.
In a significant leadership shift, HDFC, a banking giant, changed hands from old leaders to Sashidhar Jagdishan's HDFC Bank. Similarly, Uday Kotak passed the baton at Kotak Bank to Ashok Vaswani. The merger of HDFC into HDFC Bank is expected to reshape the sector, narrowing the gap between private and public banks.
Despite HDFC Bank and Kotak Bank underperforming in the stock market, other banks like CSB, Jammu and Kashmir Bank, Karnataka Bank, and some PSU banks saw significant gains.
The NBFC space also saw mergers, with the Shriram Group consolidating Shriram City Union and Shriram Transport. Jio Financial emerged separately.
How banks performed this year
It was a solid year for banking in terms of profit and loss performance. The sector's profit grew by a solid 26% in FY23 to ₹2.28 lakh crore. While in the first half of FY24 it did even better growing its profit by 50%, over the previous first half.
Public sector banks did better, because of their weaker base. PSU bank profit rose by 62% in full year FY23 and by 66% in first half of FY24 over the previous first half.
Bad loans continued to decline rapidly in 2023 from 5.8% of total assets in FY22 to 3.96% as of March 2023 to 3.33% as of September 2023. Net non performing assets (NPAs) also fell from 1.7% of total assets in FY22 to 0.97% as of March 2023 and further to 0.78% as of September 2023.
Banks continued to improve their margins. Net interest margins (NIMs) rose from 2.92% in FY22 to 3.16% in FY23. But after rising further to 3.26% in the first quarter of the current year, NIMs fell to 3.21% in the second quarter.
Actions by the Reserve Bank of India
The story of falling NIMs was the consequence of the RBI’s interest rate and liquidity policy this year. The central bank, after raising rates in every policy from April 2022 to April 2023, unexpectedly stopped the hiking cycle, again proving to be ahead of the US Federal Reserve which stopped its hikes in July.
But an ugly 7.44% July inflation number in India, thanks to the spike in prices of tomatoes, and some disturbing monsoon trends, led the RBI to tighten liquidity in the banking system.
The RBI announced an out-of-the-box incremental cash reserve ration (ICRR) of 10% on all deposits collected by banks from May 29 to July 28. This squeezed out over ₹1.1 lakh crore from the interbank market pushing up the call rate from 6.5% to 6.75%. This, in turn, pushed up interest rates throughout the industry. The blow fell most cruelly on HDFC Bank which had raised almost half the deposits of the entire banking sector from May to July to back the loans of HDFC which was merged into it from July 1.
ICRR was withdrawn on September 8, but not the tight liquidity stance. Many suspected RBI was seeking to keep Indian short term rates higher than US yields where the 10-year treasury had shot up to 5% in October, triggering fears of a run on emerging market (EM) currencies.
RBI kept rupee stable with massive intervention but by mid-December, US yields waned as the Fed pivoted. But tight liquidity wasn’t the RBI’s only salvo. In November, sensing a sharp surge in unsecured loans like credit card and personal loans, the central bank raised the risk weight on such loans making them expensive. Loans from banks to NBFCs also became expensive but the biggest casualties were fintechs that specialise in unsecured loans.
Read Here | Retail lending in 2023: The year in review and what lies ahead
How banking stocks performed this year
Banking stocks were not the toast of 2023 like they were in 2022. Bank Nifty returned a handsome 21% in 2022 while Nifty rose only 4.3%. But in 2023, Nifty has returned a handsome 17%, but Bank Nifty underperformed with just 10% gains.
This despite PSU bank index gaining 28%. The culprits were HDFC Bank and Kotak Bank both almost flat as one struggled with merger while there was leadership transition in another.
But what will 2024 look like? Will these two banks show mean reversion and emerge from their uncertainties? Will credit growth and bank loan growth maintain the tempo of 2023? Will RBI follow the Fed with a dovish pivot at some point? These will be some of the questions investors will seek answers to.
Also Read | 2023 for Conglomerates: Next gen in decision making roles and thrust on new businesses, listings
In a significant leadership shift, HDFC, a banking giant, changed hands from old leaders to Sashidhar Jagdishan's HDFC Bank. Similarly, Uday Kotak passed the baton at Kotak Bank to Ashok Vaswani. The merger of HDFC into HDFC Bank is expected to reshape the sector, narrowing the gap between private and public banks.
Despite HDFC Bank and Kotak Bank underperforming in the stock market, other banks like CSB, Jammu and Kashmir Bank, Karnataka Bank, and some PSU banks saw significant gains.
The NBFC space also saw mergers, with the Shriram Group consolidating Shriram City Union and Shriram Transport. Jio Financial emerged separately.
How banks performed this year
It was a solid year for banking in terms of profit and loss performance. The sector's profit grew by a solid 26% in FY23 to ₹2.28 lakh crore. While in the first half of FY24 it did even better growing its profit by 50%, over the previous first half.
Public sector banks did better, because of their weaker base. PSU bank profit rose by 62% in full year FY23 and by 66% in first half of FY24 over the previous first half.
Bad loans continued to decline rapidly in 2023 from 5.8% of total assets in FY22 to 3.96% as of March 2023 to 3.33% as of September 2023. Net non performing assets (NPAs) also fell from 1.7% of total assets in FY22 to 0.97% as of March 2023 and further to 0.78% as of September 2023.
Banks continued to improve their margins. Net interest margins (NIMs) rose from 2.92% in FY22 to 3.16% in FY23. But after rising further to 3.26% in the first quarter of the current year, NIMs fell to 3.21% in the second quarter.
Actions by the Reserve Bank of India
The story of falling NIMs was the consequence of the RBI’s interest rate and liquidity policy this year. The central bank, after raising rates in every policy from April 2022 to April 2023, unexpectedly stopped the hiking cycle, again proving to be ahead of the US Federal Reserve which stopped its hikes in July.
But an ugly 7.44% July inflation number in India, thanks to the spike in prices of tomatoes, and some disturbing monsoon trends, led the RBI to tighten liquidity in the banking system.
The RBI announced an out-of-the-box incremental cash reserve ration (ICRR) of 10% on all deposits collected by banks from May 29 to July 28. This squeezed out over ₹1.1 lakh crore from the interbank market pushing up the call rate from 6.5% to 6.75%. This, in turn, pushed up interest rates throughout the industry. The blow fell most cruelly on HDFC Bank which had raised almost half the deposits of the entire banking sector from May to July to back the loans of HDFC which was merged into it from July 1.
ICRR was withdrawn on September 8, but not the tight liquidity stance. Many suspected RBI was seeking to keep Indian short term rates higher than US yields where the 10-year treasury had shot up to 5% in October, triggering fears of a run on emerging market (EM) currencies.
RBI kept rupee stable with massive intervention but by mid-December, US yields waned as the Fed pivoted. But tight liquidity wasn’t the RBI’s only salvo. In November, sensing a sharp surge in unsecured loans like credit card and personal loans, the central bank raised the risk weight on such loans making them expensive. Loans from banks to NBFCs also became expensive but the biggest casualties were fintechs that specialise in unsecured loans.
Read Here | Retail lending in 2023: The year in review and what lies ahead
How banking stocks performed this year
Banking stocks were not the toast of 2023 like they were in 2022. Bank Nifty returned a handsome 21% in 2022 while Nifty rose only 4.3%. But in 2023, Nifty has returned a handsome 17%, but Bank Nifty underperformed with just 10% gains.
This despite PSU bank index gaining 28%. The culprits were HDFC Bank and Kotak Bank both almost flat as one struggled with merger while there was leadership transition in another.
But what will 2024 look like? Will these two banks show mean reversion and emerge from their uncertainties? Will credit growth and bank loan growth maintain the tempo of 2023? Will RBI follow the Fed with a dovish pivot at some point? These will be some of the questions investors will seek answers to.
Also Read | 2023 for Conglomerates: Next gen in decision making roles and thrust on new businesses, listings
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