Q4 earnings watch: Banks’ income hits an 8-quarter high, but not because of loans

A Mint analysis of 97 listed banking, financial services and insurance (BFSI) companies, which have reported earnings so far, revealed that the aggregate total income and adjusted net profit of banks rose to an eight-quarter high in Q4, thanks to falling yields on their government bond holdings during that period.

Non-core income, which majorly includes gains from government securities, formed 16% of the banks’ total income in the March quarter, compared with 12.5% in the previous quarter, according to the analysis. While banks’ on-year core income growth marginally outpaced that of their non-core earnings, albeit on a lower base, sequentially, the contrast appears starker.

Their non-core income grew at a much faster pace of 35% over the previous quarter, while net interest income (core income) grew only 1.6%. Heavyweights like the State Bank of India (SBI) saw treasury gains rise sharply to ₹6,900 crore from ₹1,200 crore over the quarter, owing to lower G-sec yield and reversal of ₹3,900 crore on government-guaranteed securities, said Nuvama Institutional Equities.

Read more: Treasury gains save SBI’s day, but couldn’t avert earnings downgrades

As a result, even when domestic non-food credit growth remains sluggish, according to the latest Reserve Bank of India (RBI) figures for March, banks have managed to boost their top and bottom lines through substantial gains in their treasury income. This conceals a deeper trend where an ongoing slowdown in private capital expenditure has stalled meaningful growth in banks’ corporate loan books for several quarters now.

Capex revival still distant

A recent National Statistical Office survey indicates a further drop in private sector capex going ahead after a meagre uptick in FY25. This suggests that a meaningful revival in sectoral growth from large industries may still take time, according to a recent Elara Securities report. At a time when overall loan growth is witnessing a broad-based slowdown, undershooting expectations, the brokerage expects any recovery in banks’ core income to be “prolonged”.

Meanwhile, non-banking finance (NBFCs), asset management (AMCs) and insurance companies reported a slump in their non-core earnings in Q4, mainly due to their limited holdings of government securities. Banks hold a large chunk of government papers to maintain their liquidity requirements as mandated by RBI.

Ergo, even though just 29% of the sample consists of banks, they contributed to 94% of the BFSI sector’s non-core income in Q4. Insurance businesses, which are mostly invested in long-tenure bonds for their asset-liability management requirements, contributed 4% and NBFCs and others contributed the remaining 2% of the sector’s total non-core income.

Financial services like AMCs mainly rely on fee-based income as part of their non-core earnings, which hit the lowest in eight quarters this Q4, slumping almost 26% over a year earlier. However, their core earning and adjusted net profit posted a strong show, growing 17% and 8%, respectively, to an eight-quarter high during the same period.

Read more: Q4 shareholding moves: Institutional appetite for post-correction mid-caps grows

Insurance companies, however, are the biggest laggards. They tend to report high non-core treasury income every March quarter, the analysis showed. But it has been declining consecutively since the last two March quarters of FY24 and FY23, this time falling around 28.5% on-year. Their total income also fell 23%, while adjusted net profit rose 9% over Q4FY24.

This is the seventh part of a series of data stories about the ongoing Q4 earnings season.