S1FY22 Report: Slow Growth in Business Lending, Low Margins Affect Big Banks’ NIIs

As loan growth in the corporate segment slowed and low interest rates limited margins, most major banks saw their net interest income (NII) grow more slowly in the first half of the year. the FY22. Some public sector banks (PSBs) even saw their NIIs drop year-on-year (year-on-year) during Q2FY22.

Deposit rate cuts have been less frequent so far this year and with lending rates continuing to fall, NIIs are under pressure, bankers said.

Punjab National Bank (PNB), Yes Bank, Indian Bank and Canara Bank are among the lenders that saw their NII plummet during the September quarter. GNP NII declined 25% year-on-year, with net interest margin (NIM) declining 30 basis points (bps) sequentially and 80 bps year-on-year.

PNB management attributed the decrease in the NII to the one-time impact of a legal embargo on the recognition of bad debts during the September quarter of fiscal year 21.
In addition, the Delhi-based bank said it needs to downgrade loans in the enterprise and micro, small and medium enterprise (MSME) segments.

SS Mallikarjuna Rao, managing director and CEO of PNB, told investors that the lender has significantly reduced prices in the MSME segment from August. “So two months of impact has been roughly Rs 150 crore in action. Then there was an aggressive revaluation of the short-term corporate portfolio where people take WCDLs (loans on demand for working capital). So this pound is over 50,000 crore, where an aggressive revaluation has taken place, ”Rao said.

Private banks have done relatively better on the basic income front without reversing the overall downward trend. Axis Bank‘s NII grew 7.8% year-on-year in T2FY22, compared to 20% in T2FY21 and 11% in T1FY22.

HDFC Bank, which saw its NII growth improve to 12% year-on-year in T2FY22 from 9% in the previous quarter, again exceeded its growth rate by nearly 17% a year ago. Management of the largest private lender said the shift in its loan mix in favor of a larger wholesale portfolio was responsible for the NII’s moderate growth.

Srinivasan Vaidyanathan, CFO and Group Head – Finance, HDFC Bank, said some segments where the bank has grown in the past 18 months are low risk segments. “This means with a lower price to go with it,” he said, adding that the contribution from personal loans is now on the rise. “… Even during this quarter when we had retail growth to come,…[it] It will take a few quarters for the average to catch up with the overall base, ”he said.

Kotak Mahindra Bank saw NII growth of 3.2%, below 5.8% a quarter and 16.8% a year ago, as the lender only saw loan growth pick up again. towards the end of the July-September quarter. “While at the end of the period you see loan growth happening, a lot of it is seen towards the end of the quarter. So it doesn’t really give me an NII for this period, ”said Jaimin Bhatt, group chairman and chief financial officer, Kotak Mahindra Bank.

Additionally, much of the incremental credit growth over the past year has occurred in home loans and other secured loan segments, where yields are lower. “If you look at higher yielding loans, like personal loans or unsecured credit cards or some of the farm loans, they’ve actually gone down. So part of the mix change also impacted the NII, ”Bhatt said.

As the busy season progresses into the second half of FY22, banks expect their core earnings to improve. PNB and Kotak Mahindra Bank have said their NII performance will be better in the next quarter as profits from the holiday season activities start to flow. The central bank liquidity withdrawal exercise could also help banks assess credit better.

“I expect improvement over the next quarter because … as the liquidity is slowly being removed by the RBI and I expect it to increase from Rs nine lakh crore to Rs 2.5 lakh crore by the second week of December, “PNB’s Rao mentioned. “Our pricing will therefore evolve better in the third and fourth quarters,” he added.