The rising interest rates will enable Indian banks to continue posting good profits during the remaining part of FY23, according to S&P Global Market Intelligence.

In a report on the Indian banking sector, S&P Global Market Intelligence said five of the six biggest banks by assets in India reported an increase in net income for the fiscal second quarter ended September 30, 2022.

“Banks took advantage of the higher interest rate environment to bolster their net interest margins, while previous efforts to reduce their non-performing assets resulted in lesser loan loss provisions, their recently released earnings reports showed,” the report notes.

The fiscal second-quarter results of the private sector, as well as public sector banks, were “picture perfect,” said Tusharika Aggarwal, research analyst, Asia-Pacific dividend forecasting at S&P Global Market Intelligence.

“I remain fairly confident in the banks’ earnings for the rest of the year. The interest rate hikes, although the quantum will decline, would still benefit Indian banks. And because credit growth is increasing, so despite high-interest rates, net interest income will grow,” Aggarwal added.

While lending rates have increased on aggregate with growing demand, interest rates offered to depositors have risen more slowly. In addition, the gap, along with lower credit loss provisions, has resulted in better returns on assets for banks, Aggarwal said.

Citing the Reserve Bank of India’s (RBI) data, the S&P Global Market Intelligence report said the bank credit growth has picked up for both public and private sector banks in the first half of fiscal 2022-2023.

Private sector banks’ credit growth for the fiscal first half came to 20.4 per cent, compared to 13.9 per cent for public sector banks.

The central bank expects gross domestic product growth at 7 per cent in the current fiscal year ending March 31, 2023, and to ease to 6.5 per cent in the next fiscal year, dampened by further monetary tightening in the central bank’s fight to control inflation.

According to the report, though the RBI had hiked its benchmark lending rate by 190 basis points to 5.90 per cent since May, a further hike in the interest rate may not be steep since inflation may have peaked.

The key surprise in banks’ fiscal second-quarter results was a 25 basis points quarter-over-quarter expansion in net interest margin (NIM), S&P Global Market Intelligence said, citing a report by Jefferies.

Most banks reported faster credit growth as they rode on rising demand for loans.

With deposit growth lagging in credit growth, the interest rates on term deposits will go up which may result in the movement of funds from savings accounts to fixed deposits, the report said.

Some bank chiefs have said they would try to keep the NIMs intact by opening more savings accounts where the interest cost is low.

The S&P Market Intelligence said State Bank of India (SBI) reported a rise in fiscal second-quarter net profit to Rs 147.52 billion from Rs 88.89 billion, while Bank of Baroda’s net profit for the period rose 56.8 per cent year over year to Rs 34 billion from Rs 21.68 billion.

Punjab National Bank, however, reported that its net profit for the quarter fell 55.3 per cent to Rs 4.94 billion as the state-run lender increased provisions for non-performing assets by 30.9 per cent year over year to Rs 35.33 billion.

The private sector banks also reported higher incomes, with HDFC Bank Ltd posting a 22.3 per cent year-over-year increase in consolidated net profit for the September quarter to Rs 111.25 billion, while ICICI Bank Ltd reported a 31.4 per cent rise in net profit to Rs 80.07 billion. Axis Bank Ltd’s profit rose 65.7 per cent to Rs 56.12 billion, S&P Market Intelligence said.