Banks bounce back from pandemic woes
Indian banks are set to reward their shareholders with the highest dividend payouts in at least seven years, thanks to their strong performance in the fiscal year 2023. The country’s banks are forecast to take their share in aggregate payout across all sectors to 13% for the year ending March 31, 2024, according to S&P Global Market Intelligence. This is up from 12% for the fiscal year ended March 31, 2023, and 9% in the year ended March 31, 2022.
This is a sharp rebound from just 1% in 2020, when the Reserve Bank of India (RBI) asked lenders to conserve cash and suspend dividend payments due to COVID-19. HDFC Bank, which declared a special dividend to commemorate 25 years of its operation, was the only major lender to make a payout for 2020.
Indian banks’ share in aggregate dividends stood at 7.6% in the fiscal year ended March 2017 and 5% each in the following two pre-pandemic years, according to Market Intelligence data.
Rising interest rates and credit growth boost earnings
The main drivers of the banks’ profitability were the rising interest rates and the strong credit growth as the country’s economy recovered from the pandemic. Several Indian banks recently reported record net profits for the fiscal year 2023, surpassing analysts’ expectations.
For instance, HDFC Bank reported a net profit of Rs. 35,443 crore, up by 18.5% from the previous year. ICICI Bank posted a net profit of Rs. 26,257 crore, up by 104.2%. State Bank of India (SBI) recorded a net profit of Rs. 41,961 crore, up by 40.9%. Axis Bank registered a net profit of Rs. 8,186 crore, up by 300.6%.
The banks also benefited from the improvement in their asset quality and financial metrics. Banks, especially state-owned ones, have reduced their bad debts and increased their provisions for loan losses. The system-wide gross nonperforming asset (NPA) ratio fell to 3.9% in March, the lowest in 10 years, according to the RBI.
Shareholders rejoice as dividends soar
The impressive results have prompted the banks to announce generous dividends for their shareholders. HDFC Bank declared a dividend of Rs. 23 per share, which translates to a payout ratio of 32%. ICICI Bank announced a dividend of Rs. 2 per share, which implies a payout ratio of 3%. SBI declared a dividend of Rs. 4 per share, which means a payout ratio of 4%. Axis Bank announced a dividend of Rs. 3 per share, which indicates a payout ratio of 16%.
The dividends are expected to increase further in the next fiscal year, as the RBI has relaxed its dividend policy for banks. In April, the RBI said that banks can pay dividends for the fiscal year 2023 subject to certain conditions, such as maintaining a minimum capital adequacy ratio of 11% and a common equity Tier 1 ratio of at least 6.5%.
“Banks remain well-positioned to capitalize on opportunities in the Indian economy and banking industry,” said Tusharika Aggarwal, a dividend forecasting research analyst at S&P Global Market Intelligence. “India’s brisk economic activity will likely sustain high credit growth, resulting in excellent earnings forecasts for Indian banks,” Aggarwal said.
