Credit Growth to Boost Indian Bank Profitability Amid Potential Foreign Exchange Headwinds

Indian Banks See Healthy Q4 Numbers Despite Treasury Losses

Indian banks, including HDFC Bank Ltd. and ICICI Bank Ltd., reported healthy fourth-quarter numbers on Saturday, thanks in part to strong credit growth. Credit growth during the January-March quarter saw a significant pickup, according to data from the Reserve Bank of India, which attributed the increase to cuts in the key lending rate and cash reserve ratio, as well as a consumption recovery driven by cuts to the goods and services tax.

While this uptick in credit growth is a positive sign, it also increases banks' credit-deposit ratios. However, recent messaging from the central bank indicates that banks have room to further expand their ratios and fund lending growth, according to Motilal Oswal.

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However, escalations in the Middle East conflict may dampen this momentum, particularly for small business loans, which could come under stress. Corporate capital expenditure plans, especially in oil-sensitive sectors, may be deferred amid rising uncertainty, Axis Securities warned.

IndusInd Bank Ltd., which is set to report its numbers on Friday, is grappling with a reduction in its loan book as it focuses on improving asset quality and strengthening its balance sheet. The RBI's recent decision to limit the net open positions that banks can hold in the onshore foreign exchange market likely led to mark-to-market losses for ICICI Bank, resulting in a significant treasury loss of 1.06 billion rupees ($11.4 million) for the quarter.

Separately, the surge in yields may also limit treasury income, further impacting bank profits. Japan's biggest brokerage, Nomura Holdings Inc., is set to kick off the local earnings season, reporting a record full-year profit after signaling wholesale revenues were tracking more than 20% higher in the fourth quarter, driven by equity products in trading and investment banking operations.