Indian Banks outperform global peers on key financial parameters

August 03, 2023

Indian banks outperformed global peers on financial parametersIndian banks have outperformed global peers on financial parameters, driven by strong profitability, higher growth expectations and prudent risk management, according to McKinsey & Company.

However, expansion in yield may be limited due to slow deposit growth and an increasing proportion of credit-tested customers, per the report ‘Indian Banks: Building Resilient Leadership’.

The report is based on the performance of 80 banks over the last five years.

The banks led with healthy credit growth of 10-11 per cent over the last decade, with higher ROA (return on assets) than global peers, resulting in a valuation premium with higher Price-to-Book (P/B) multiples, McKinsey said.

The top three banks in India enjoyed P/B multiples of 2.5, compared to P/B multiple of 0.5-1.5 for banks in other major geographies as of Q1 FY2023.

McKinsey assessed that Indian banks’ profitability is higher than pre-pandemic levels, with resilient NIMs (net interest margins) and declining credit costs contributing to healthy margins.

Over the last decade, NIMs have remained high (around 2.9 per cent in March 2022, rising from around 2.5 per cent in FY18) due to increased penetration of retail lending and a significant proportion of floating rate loans driving faster transmission of rate changes, which has led ROA (return on assets) to touch around 1.1 per cent in March 2023.