The banking sector emerged as an outlier when the rest of India Inc witnessed a slowdown in earnings in FY23.
The combined net profit of listed public and private sector banks was up 39.4 per cent year-on-year (YoY) last financial year and their share in India’s gross value added (GVA) or gross domestic product (GDP) at factor cost rose to a record high of nearly 1 per cent up, from 0.8 per cent a year ago.
Listed banks’ combined net profit grew to Rs 2.36 trillion in FY23, from Rs 1.69 trillion a year ago. In comparison, India GVA at current prices was up 15.2 per cent YoY at Rs 247 trillion in FY23; it was around Rs 214 trillion a year ago.
GVA is the value of all goods & services produced in an economy, excluding subsidies and indirect taxes such as goods & services tax (GST) that distort market prices of goods & services.
Total indirect taxes net of subsidies was up 22.9 per cent YoY in FY23, resulting in much faster growth in GDP at market price than the production of goods & services in the economy.
The sharp rise in banks' earnings in 2022-23 was driven by an equally faster growth in banks interest income.
The combined gross interest income of banks in our sample was up 22.1 per cent YoY to Rs 14.1 trillion in FY23, up from Rs 11.55 trillion a year ago.
As a result, banks interest income was equivalent to 5.7 per cent of the country’s GVA in FY23 -- the highest in the past seven years with the exception of FY21, when GVA at current prices had declined by 1 per cent due to the Covid-19 pandemic and the nationwide lockdown enforced to stem its spread.
Banks gained from high double-digit growth in banks credit, especially personal loans, and the rise in lending rates last year. The latter allowed banks to charge more interest on loans, boosting their interest income and earnings.
Banks' bottom-line was also boosted by a double-digit decline in their provisions and contingencies for non-performing assets (NPA).
The banks combined provisions for NPA were down 18.2 per cent YoY to 1.37 trillion in FY23, the lowest since FY15.
Provisions and contingencies accounted for just 7.6 per cent of banks gross interest income in FY23, down from 11.1 per cent a year ago; it is the lowest since FY13.
In contrast, companies operating in the non-banking and financial space reported a sharp slowdown in their revenues and profit growth in FY23 from the highs of FY22.
The combined net profit of all 1,203 listed companies that have declared their results for Q4FY23 was up just 7.4 per cent in FY23, a sharp decline from 45.1 per cent YoY growth in FY22.
And the combined earnings of these listed companies (ex-banks) were down 0.9 per cent YoY in FY23, against 41.8 per cent YoY growth in their combined earnings in FY22.
The decline in earnings is even sharper when banks, non-banking financial companies, insurers, and stock broking firms are from the sample.
The combined net profit of listed companies ex-BFSI was down 4.6 per cent YoY in FY23, against 43.7 per cent YoY growth in FY22.
Most analysts expect banks’ earnings to continue to grow faster than the rest of India Inc in FY24, the growth may be slower than that in FY23.
“The operating environment of Indian Banks is likely to stay healthy for FY24E, which may translate into stable return on assets (RoA) despite moderation in credit growth and margin compression.
"The core earning of a bank is largely a function of advances, net interest margins (NIM), operating expenses, and credit cost,” wrote Ajit Kumar Kabi of LKP Securities in his recent report on banks' earnings.