BT500: Amid banking sector turmoil, HDFC, ICICI, and SBI stand strong with impressive resilience

The smell test. For most bankers, this often remains a key yardstick—even though informal—to assess the credibility of a borrower and their ability and intent to pay off a loan.

The smell test seems to be working, at least for some of India’s largest banks, which have remained largely unscathed in terms of bad debt, amidst concerns over unsecured loans in recent months. This is reflected in their Q2FY25 results.

It is also evident in investor sentiment. India’s three largest banks—State Bank of India, HDFC Bank, and ICICI Bank—also remain amongst the Top 10 most valued companies by market capitalisation. According to this year’s BT500 study, the market capitalisation of these three lenders—HDFC Bank (No. 3 on the BT500 list), ICICI Bank (No. 4) and SBI (No. 7)—has grown by 20% or more between October 2023 and September 2024. The average annual market capitalisation of Kotak Mahindra Bank has, however, dropped by about 3% in this period; it is now at No. 16, falling from No. 12 in 2023.

Stellar Performance

These three banks have also posted steady growth in profit after tax (PAT) for FY24, as well as lower gross non-performing assets (GNPA) in FY24 compared to FY23. Their results in Q2FY25 also reflect this trend and have pleasantly surprised the markets and analysts amidst mixed results from several other lenders.

HDFC Bank reported a 5.3% year-on-year (YoY) rise in standalone PAT in Q2FY25, with GNPA at 1.36% of gross advances. Its PAT adjusted for higher treasury gains and tax credits in Q2FY24 had grown by 17% YoY. “The bank’s asset quality was stable due to the calibrated approach to its lending book, especially in unsecured lending over the past couple of years guided by its credit risk architecture, and this seems to have served us well again,” says a spokesperson, adding it will aim to grow in areas and products that meet its credit standards and help to optimise overall profitability.

HDFC Bank MD & CEO Sashidhar Jagdishan says the lender will bring down its credit-deposit (CD) ratio faster than it had anticipated. “Let me spell out some of the bright spots of our credit growth. [In] FY25, we would probably grow slower than the system; [in] FY26, we may be at or around the system growth rate; [and in] FY27, we should be faster than the system growth rate,” he said.

ICICI Bank also reported a 14.5% rise in profits YoY for Q2FY25 and its GNPA ratio fell to 1.97% on September 30, 2024. “The bank has proactively undertaken various measures, including in the unsecured loans segment, such as quality sourcing, tightening thresholds and increased pricing… These measures have resulted in maintaining a quality asset book,” says a spokesperson.

While the bank does not target any particular loan segment but has a focus on growing the business profitably within the guardrails of risk-return, the spokesperson says that in the unsecured loans segment, growth has moderated over the past couple of quarters due to tightening across various credit parameters and increased pricing. It sees an opportunity in business banking encompassing customers with turnover of up to Rs 750 crore.

Sandeep Bakhshi, MD & CEO of ICICI Bank, says the lender will continue to make investments in tech, people, distribution and building its brand. “We are laying strong emphasis on strengthening our operational resilience for seamless delivery of services to customers. We will remain focussed on maintaining a strong balance sheet with prudent provisioning and healthy levels of capital,” he said during an earnings call.

Analysts say the asset quality of these banks has held up well compared to peers. Asutosh Mishra, Head of Research and Lead BFSI Analyst-Institutional Equity at Ashika Stock Broking, says the asset quality of these banks remains robust compared to their smaller peers, primarily due to better underwriting standards and balanced portfolio composition. “Their market positioning, emphasis on high credit score customers, and stringent credit selection processes significantly mitigate risk. These larger banks have a relatively lower exposure to MFIs and unsecured retail credit, ensuring greater stability during times of economic stress,” he says.

Manish Chowdhury, Head of Research at online trading platform StoxBox, notes that both HDFC Bank and ICICI Bank are navigating challenges posed by a high-interest rate environment, but their strategic focus on asset quality and operational efficiency positions them well for future stability.

Meanwhile, SBI posted a 28% YoY jump in its net profit for Q2FY25 to Rs 18,331.4 crore and improvement in asset quality. “The results highlight continuity, consistency and SBI’s significant long-term strengths… Over the years, SBI has remained focussed on strengthening the key components that contribute to sustainable value not only for the bank but also the economy as a whole. We have prioritised our liability franchise, refined our processes, continued to improve our underwriting standards and aim to deliver value to all stakeholders while positioning ourselves as a reliable financial services brand,” said Chairman C.S. Setty in an analyst call.

“SBI reported a healthy quarter, driven by robust treasury income and steady net interest income... The bank has seen a reduction in its domestic CD ratio to approximately 67.9%. Fresh slippages and credit cost were contained, which underscores the improvement in underwriting standards and enabled further reduction in NPA ratios,” said Motilal Oswal on SBI’s Q2 results.

Choppy Waters

However, it’s not all smooth sailing. The banking industry faces a mismatch in deposit mobilisation and credit growth, which has been affecting the CD ratio. The CD ratio is an important indicator of a bank’s health, and a high rate indicates it has been aggressive in lending.

Sanjay Agarwal, Senior Director at CareEdge Ratings, says that the biggest issue in the banking sector is the CD ratio, which is more pronounced for private banks. “Deposit growth has been nominal and to balance that out, banks have had to cut down the credit growth. In recent months, banks have been curtailing credit to 50% of that of deposits,” he says.

However, credit and deposits are now generally moving in-line with each other, noted a recent report by CareEdge Ratings. The CD ratio witnessed a marginal sequential uptick of 33 bps reaching 79% for the fortnight ending November 15, 2024, it noted.

Agarwal highlights that the markets in general and regulators are not comfortable with rising growth in unsecured personal loans, consumer loans and lending by NBFCs. The Reserve Bank of India has also increased its vigilance over such loans by banks and introduced risk weights on unsecured credit to curtail such lending. This has had some impact. RBI data on sectoral deployment of credit says growth moderated to 13% YoY in September 2024 from 16% in March 2024. Analysts say this was driven primarily by a decline in unsecured credit growth from 20% in March to 13% in September.

“Bank credit to NBFCs declined from 15% YoY in March 2024 to 9% YoY in September 2024. This was in line with the regulator’s goal, in our view,” said a recent note by Macquarie, an investment banking and financial services group. As unsecured credit growth declines, the impact on net interest margins for banks remains a key monitorable. “Further, given the current stress in this segment, we expect credit costs to remain elevated in the near term,” says the report.

Bright Outlook

Despite the challenges, the future looks bright for banks. A revival in the private sector’s investment sentiment is expected to spur lending. And despite the curbs on retail loans, it is expected that consumer loan demand will remain strong and help improve lenders’ profitability because of higher yields.

Easier liquidity conditions could augur well for deposit mobilisation. “As credit growth stabilises and liquidity in the banking system improves, banks should face fewer challenges in attracting deposits,” says Mishra of Ashika.

While challenges remain and the waters may be choppy, calmer seas and a brighter outlook is expected in FY25 for large banks as well as the banking sector.

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