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Easing of risk weights on loans given to MFIs and NBFCs
Equities, Markets - January 27, 2025

Bank Results highlight issues in the banking segment

Bank Results highlight issues in the banking segment

Overview
Earnings season has begun, and as usual, the performance of the banking industry provides insight into the overall health of the economy and underlying patterns in the payback cycle. The December figures thus far suggest that the industry is under underlying pressure.

IDFC First Bank’s profit slides
For example, IDFC First Bank’s quarter has been uneventful, with a notable 52.6 percent year-over-year drop in net profit at Rs 339.4 crore. The decline has mostly been ascribed to a downturn in the microfinance industry and an increase in wholesale banking’s market share, both of which have had an impact on the lender’s net interest margin (NIM).

Even though the bank’s net interest income (NII) increased 14.4% to Rs 4,902 crore, it is evident that certain business model and operational issues are plaguing the bank. Notwithstanding the difficulties, the rise in core operating profit (up 15 percent) and operational income (up 15 percent) suggests a strong base performance.

The shift in IDFC’s microfinance business appears to be the fundamental problem. The bank may eventually take advantage of operational efficiencies as its scale grows as it shifts to universal banking, which includes branching out into areas like wealth management, corporate banking, and credit cards. Despite its short-term difficulties, the microfinance shift brings to light the difficulties in sustaining profitability while striking a balance with adherence to regulatory standards such Priority Sector Lending (PSL) for underprivileged sectors.

ICICI Bank’s margin suffers
At Rs 11,792 crore, ICICI Bank’s net profit increased by 15% year over year. The second-largest private bank by assets in India may also be suffering margin compression, as evidenced by the minor drop in NIM from 4.43 percent to 4.25 percent, despite a 9.1 percent increase in net interest revenue to Rs 20,370 crore. This is especially noteworthy because the Indian banking sector is under pressure from both increased competition for customer deposits and inflationary cost rises.

Despite a slight decline in its gross non-performing assets (NPA) percentage, ICICI Bank’s steady asset quality indicates a robust business strategy. Given the seasonal stress in the Kisan Credit Card portfolio, a vital component of rural credit, the 17% increase in provisions indicates a responsible strategy in light of bad loan risks.

HDFC Bank’s asset quality drops
The earnings of HDFC Bank also indicated deterioration on asset quality a few days ago. The third quarter’s gross non-performing assets (GNPA) climbed 16 percent to Rs 36,019 crore from Rs 31,012 crore in the same period last year. From 1.26 percent the year before to 1.42 percent, the GNPA ratio increased by 18 basis points (bps). The net non-performing assets (NNPA) ratio increased 15 basis points to 0.46 percent from 0.31 percent YoY, while NNPA itself surged 51 percent to Rs 11,588 crore. The quarter’s provisions decreased by 25% from the same period last year, from Rs 4,217 crore to Rs 3,154 crore.

Faults in the Banking Sector
These figures highlight both potential and problems for the banking sector as a whole. The emphasis on high-margin assets is increasing, but as the economic and legal environment changes, niche markets like microfinance encounter difficulties. It is anticipated that the theme of pressure on margins from growing interest rates and heightened competition for retail deposits would persist.

Banks face two challenges: maintaining strong deposits and managing the slowdown in lending growth due to dampened demand. There are concerns regarding the reasons behind the decline in credit growth. In order to reduce their credit-deposit (CD) ratios, banks may be purposefully limiting loan expansion. The Reserve Bank of India has cautioned against this practice because of the hazards involved. Over-leveraging and possible trouble fulfilling commitments may be indicated by a high CD ratio.

On the other hand, the slowdown can be the result of lower credit demand in particular markets. Significant drops in personal and service loan credit growth are shown in data from the prior year, which may indicate a slowdown in economic activity in these sectors. In terms of deposit growth, banks have increased their attempts to attract investors by raising deposit interest rates.

Budget to reduce NPAs to strengthen the banking sector
Without addressing the problem of non-performing assets (NPAs), which has afflicted the Indian banking industry for many years, Finance Minister Nirmala Sitharaman cannot implement any reforms. A favorable trend is seen in recent statistics from the Reserve Bank of India’s (RBI) Financial Stability Report (December 2024), which shows that gross non-performing assets (NPAs) for scheduled commercial banks decreased from 3.9% in March 2023 to a 12-year low of 2.6% in September 2024.

Achieving significant reforms will depend on taking lessons from the past and avoiding repeated inefficiencies. The budget’s suggested actions can lower non-performing assets (NPAs) and pave the way for long-term financial stability and economic growth if they are implemented with a comprehensive strategy. Since the Indian economy shows promise for the future, this budget would be crucial because, in addition to financial institutions like banks, NBFCs, ARCs, and AIFs, private credit players and international distressed funds are also closely monitoring this area in the hopes that the sector’s full potential will be realized.

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India Inc: Navigating a Challenging Q2 with Resilience in ROCE
Business, Equities, Market News, Markets - November 29, 2024

India Inc: Navigating a Challenging Q2 with Resilience in ROCE

India Inc: Navigating a Challenging Q2 with Resilience in ROCE

The Indian economy is currently grappling with discussions of a slowdown, with many attributing the lackluster performance in corporate profits to untimely and severe rains as well as the impact of an astrologically inauspicious period during Q2 FY24. These factors have reportedly led to deferred large purchases and a general postponement of new ventures. While some consider this slowdown temporary, the data reveals that Q2 was indeed challenging for corporate India.

The Centre for Monitoring Indian Economy (CMIE) data, encompassing 3,291 listed non-financial companies, reveals a 9% year-on-year (YoY) decline in net profits after adjusting for exceptional items. This sharp drop highlights the hurdles faced by corporate India in maintaining profitability during this quarter.

Manufacturing: A Sector Under Pressure
Manufacturing companies, which form the backbone of the economy, witnessed significant stress. Their net profits plunged by approximately 20% YoY in aggregate terms, indicating the challenges brought about by higher costs and demand constraints. Even when excluding petroleum products, the sector’s net profits grew by a modest 5.3% YoY, which is a stark contrast to the robust 20.8% growth witnessed in Q1 FY24.

The subdued performance can largely be attributed to elevated input costs, erratic rainfall disrupting operations, and weaker-than-expected consumer demand during the festive season. These factors combined to weigh heavily on the manufacturing sector’s profitability.

Non-Financial Services: A Silver Lining
In contrast, the non-financial services sector emerged as a relative outperformer. The sector’s net profits after exceptional items grew by an impressive 22.55% YoY. While this growth represents a deceleration from the 28.2% YoY growth recorded in Q1, it still indicates the sector’s resilience in navigating economic headwinds. Sectors such as IT services, hospitality, and transportation appear to have contributed significantly to this growth, buoyed by sustained demand and improving business conditions.

The Bigger Picture: ROCE Shows Resilience
Despite these challenges, a broader view of India Inc’s financial health reveals a noteworthy silver lining. Data from 3,094 listed non-financial firms shows that the aggregate Return on Capital Employed (ROCE)—a key measure of profitability and efficiency—improved from 8.04% in March 2024 to 8.38% in September 2024.

Interestingly, this improvement in ROCE is primarily driven by the non-financial services sector, which continued to leverage its growth momentum. Manufacturing firms, however, saw a decline in ROCE, reflecting the profit pressures mentioned earlier.

What’s remarkable is that the ROCE of 8.38% is significantly higher than the levels recorded in the pre-COVID era, suggesting that Indian firms have made strides in optimizing capital efficiency in recent years. The financial services sector also showed progress, with its ROCE at 4.74%, a marked improvement from the challenges of the pre-COVID years when bad loans were a major concern for banks and non-banking financial companies (NBFCs).

Earnings Estimates Revised Down
The subdued Q2 performance has prompted analysts to revise down earnings estimates for several companies. Weak consumer sentiment, unpredictable weather patterns, and global uncertainties continue to pose risks to profitability in the near term. However, the resilience shown in ROCE indicates that many firms have been able to adapt to these challenges, leveraging cost efficiencies and maintaining a healthy balance sheet position.

Lessons from the Data
The data paints a mixed picture. On the one hand, the fall in manufacturing profits underscores the challenges of rising costs and fluctuating demand. On the other hand, the strength of non-financial services and the improvement in ROCE reflect the adaptability of Indian companies.

For investors, this dichotomy offers valuable insights. While sectors such as manufacturing might face near-term headwinds, areas like IT, hospitality, and financial services could present growth opportunities. The ROCE metric serves as a reminder that capital efficiency remains a critical factor for evaluating corporate performance, especially in times of economic uncertainty.

Outlook for Corporate India
Looking ahead, the trajectory of the Indian economy and corporate earnings will largely depend on a few key factors:

Macroeconomic Stability: Inflationary pressures and global interest rate movements will play a crucial role in shaping corporate margins.

Policy Support: Government measures to boost infrastructure spending and manufacturing, coupled with sector-specific incentives, could help revitalize growth.

Consumer Demand Recovery: A rebound in consumer sentiment, driven by stable incomes and lower inflation, will be essential for driving volume growth across sectors.

Global Trade Dynamics: Export-oriented sectors will need to navigate the complexities of slowing global demand and supply chain disruptions effectively.

Conclusion
Q2 FY24 may have been challenging for India Inc, but the resilience in ROCE indicates that Indian companies are better equipped to handle economic headwinds than they were in the pre-COVID era. While challenges persist, particularly in the manufacturing sector, the strong performance of non-financial services and the improving efficiency in capital utilization provide hope for a better second half of the financial year.

For investors, the focus should remain on sectors and companies demonstrating robust ROCE and the ability to adapt to evolving economic conditions. With policy support and a potential recovery in demand, corporate India could be poised for a stronger performance in the quarters to come.

As the economy navigates this slowdown, it’s clear that the foundations for sustainable growth remain intact, offering a promising outlook for long-term stakeholders in India’s growth story.

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Business, Equities, Market News, Markets - September 17, 2024

India's Q1 Growth Slows to 6.7% Amid Soft Consumer Spending

India’s Q1 Growth Slows to 6.7% Amid Soft Consumer Spending

India’s economic landscape has shown a mix of resilience and moderation in the first quarter of the fiscal year 2024-25. The latest GDP data, released by the National Statistical Office, paints a picture of an economy that’s still growing, albeit at a slower pace than previous quarters.

The headline number that’s grabbed attention is the 6.7% GDP growth rate for Q1 FY25. The economy’s pace has eased compared to the previous year’s same period, when it expanded at a more robust 8.2% rate.  It’s worth noting that this is the slowest growth rate India has seen in 15 months, which naturally raises some eyebrows.

What’s behind this slowdown?  Household expenditure, typically a crucial driver of economic growth, has underperformed expectations, dampening overall economic momentum. This softness in household expenditure has contributed to the overall slowdown in growth, as consumers appear to be more cautious with their wallets. The reasons behind this restraint in spending could be varied, ranging from economic uncertainties to shifts in consumer priorities. This trend warrants attention, as robust consumer activity is typically crucial for sustaining economic momentum and fostering broader economic health. Additionally, government spending hasn’t been as robust as in previous quarters. These elements combined have contributed to the more modest growth figure.

For comparison, China, often seen as India’s economic rival, posted a growth rate of 4.7% in the same period. This underscores India’s continued economic dynamism, even in the face of global challenges.

A closer look at different sectors reveals varied performance. Agriculture, a key pillar of the economy and major employer, showed modest growth at 2%. This represents a slowdown from last year’s 3.7% expansion in the same period. Given agriculture’s crucial role in rural livelihoods and national food supply, this deceleration raises some concerns about its broader economic impact.

On a more positive note, the manufacturing sector showed signs of revival. It registered a 7% growth, up from 5% a year ago. This uptick in manufacturing is encouraging, as it often translates to job creation and increased economic activity across various supply chains.

The services sector, particularly financial, real estate, and professional services, saw a moderation in growth. It expanded by 7.1%, which is still robust but marks a significant slowdown from the 12.6% growth seen in the previous year. This sector has been a strong performer for India in recent years, so this deceleration will be closely watched in coming quarters.

Looking ahead, there’s cautious optimism among economists and policymakers. The Reserve Bank of India (RBI), while acknowledging the slowdown, has maintained its full-year growth forecast at 7.2% for FY25. This suggests confidence in the economy’s ability to regain momentum in the coming quarters.

RBI Governor Shaktikanta Das has highlighted several positive factors that could support growth going forward. He pointed to the pickup in agricultural activity, which could boost rural consumption. There’s also evidence of increasing private corporate investment, with capacity utilization reaching an 11-year high. These are important indicators of business confidence and potential future growth.

The central bank’s focus remains firmly on managing inflation while supporting growth. The RBI seems optimistic about food inflation potentially softening, thanks to favorable monsoons and improving agricultural output.

It’s interesting to note the RBI’s stance on monetary policy at this juncture. They view the current steady growth as an opportunity to focus unambiguously on bringing inflation down to target levels. This suggests that we might not see significant changes in interest rates in the near term, as the RBI prioritizes price stability.

As we look at these numbers and projections, it’s important to remember the broader context. India, like many economies, is navigating a complex global environment. Factors such as geopolitical tensions, fluctuating commodity prices, and the lingering effects of the pandemic continue to influence economic performance.

Moreover, India’s economic story is not just about numbers. It’s about the millions of people whose lives are impacted by these economic trends. The slowdown in agricultural growth, for instance, could affect rural incomes and consumption patterns. On the flip side, the uptick in manufacturing could create new job opportunities in urban and semi-urban areas.

The coming quarters will be crucial in determining whether this slowdown is a temporary blip or a sign of more persistent challenges. Policymakers, businesses, and citizens alike will be keenly watching how various sectors perform, how global economic conditions evolve, and how government policies adapt to these changing circumstances.

In conclusion, while the 6.7% growth rate for Q1 FY25 represents a moderation from previous quarters, it still positions India as a growth leader among major economies. The mixed performance across sectors suggests both challenges and opportunities ahead. As the year progresses, it will be fascinating to see how India balances its growth aspirations with the need for economic stability and inclusive development. The resilience and adaptability of India’s economy will undoubtedly be put to the test, but if history is any indication, there’s reason for cautious optimism about the country’s economic trajectory.

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Business, Equities, Market News, Markets - August 30, 2024

India's Q1 FY2025 GDP Slows, Potential MPC Rate Cut Expected

India’s Q1 FY2025 GDP Slows, Potential MPC Rate Cut Expected

India’s economic landscape is facing a period of moderation as Q1 FY2025 GDP data is set to reveal a significant slowdown. The latest projections indicate that GDP growth will ease to 6 percent in Q1 FY2025, marking a six-quarter low and a substantial drop from the 7.8 percent growth recorded in Q4 FY2024. This anticipated deceleration is notably below the Monetary Policy Committee’s (MPC) forecast of 7.1 percent for the quarter. However, this slowdown is largely attributed to temporary and technical factors, with expectations for a rebound in growth to above 7 percent in the latter half of FY2025.

A key factor driving this slowdown is a technical aspect involving the narrowing gap between GDP and Gross Value Added (GVA) growth. This gap, which reflects net indirect taxes (the difference between indirect taxes and subsidies), is projected to contract sharply. In H2 FY2024, a steep decline in the subsidy bill led to a widening of the GDP-GVA growth gap, reaching 178 basis points (bps) in Q3 and 148 bps in Q4. For Q1 FY2025, this gap is expected to narrow to around 30 bps due to single-digit growth in both government subsidy expenditure and indirect taxes. This compression is anticipated to affect GDP growth more significantly than GVA growth, with GVA growth projected to ease by a relatively smaller 60 bps to 5.7 percent from 6.3 percent in Q4 FY2024.

In addition to this technical factor, there are clear signs of a temporary slowdown in investment activity. This is evident from multi-year lows in new project announcements and completions, along with a year-on-year deterioration in most investment-related indicators compared to the previous quarter. The parliamentary elections created uncertainty and delays in project commissioning, contributing to the slowdown. Moreover, capital expenditure by both central and state governments saw sharp contractions of 35 percent and 23 percent, respectively, during this period. These factors have further dampened gross fixed capital formation (GFCF) growth in Q1 FY2025, exacerbated by an unfavorable base effect.

Consumer sentiment, particularly in urban areas, has also shown signs of weakening. According to the RBI’s Consumer Confidence Survey rounds from May and July 2024, urban consumer confidence has declined. This deterioration is attributed to several transient factors, including heatwaves affecting retail footfall, excess rainfall in early July, and elevated food prices. Additionally, reduced government capital spending’s impact on employment in certain sectors may have contributed to this decline. Rural consumer sentiment has been constrained by the lingering effects of last year’s unfavorable monsoon and an uneven start to the 2024 monsoon season. Consequently, growth in consumption demand is expected to have remained sluggish in Q1 FY2025.

On the production side, the deceleration in GVA growth is anticipated to be primarily driven by the manufacturing and construction sectors. Manufacturing companies have experienced a slight easing in profit margins amid rising global commodity prices, and growth in manufacturing Index of Industrial Production (IIP) volumes has slowed. The construction sector has likely faced a temporary lull in momentum, as indicated by weakening performance across most infrastructure and construction-related indicators compared to Q4 FY2024.

Looking ahead, there are positive signs on the horizon. Government capital expenditure is expected to pick up significantly in H2 FY2025, and a healthy kharif harvest is anticipated to boost rural demand. While there is cautious optimism about potential improvements in urban consumer confidence in the next survey round, a lack of improvement would be a cause for concern.

If Q1 FY2025 GDP growth aligns with ICRA’s expectations, it may lead to a downward revision of the MPC’s 7.2 percent GDP growth estimate for FY2025. This could prompt the Committee to place greater emphasis on the growth outlook in its October 2024 meeting. Additionally, the recent Consumer Price Index (CPI) inflation numbers, which fell to a 59-month low of 3.5 percent in July 2024 from 5.1 percent in June, and expectations of similarly benign figures for August, may also influence the MPC’s decisions. These factors are likely to lead to a downward revision of the MPC’s Q2 FY2025 CPI inflation estimate of 4.4 percent.

Given these developments, a shift in the MPC’s tone towards monetary easing is anticipated in the October 2024 meeting. However, the views of new external MPC members will be crucial in determining the direction of monetary policy. Overall, while short-term economic indicators present some challenges, the longer-term outlook remains positive, with expectations for a rebound in growth in the latter half of the fiscal year.

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