As 2022 draws to a close, the BFSI (Banking, Financial Services and Insurance) sector has thrown quite a few surprises – outperformance from unexpected  players, and underperformance by a few sector leaders. The sector comprises a wide range of government-owned banks, private banks, NBFCs as well as life and general insurance companies.

The surprise of the year was the clear outperformance by PSU (Public Sector Undertaking) banks. From the beginning of the year, this was one of the best-performing sectors with the Nifty PSU Bank index generating 70% returns.

PSU banks have historically been known for their indiscriminate lending patterns, taking the hit for welfare schemes by central and state governments, which led to significant non-performance and losses for several years. All this changed when the central government took the decision to launch Asset Quality Review (AQR) in April 2015 to unearth hidden non-performing assets (NPAs).

While the NPAs of PSBs were Rs 2.17 lakh crore on March 31, 2014, it surged to Rs 8.96 lakh crore on March 31, 2018, mainly due to indiscriminate lending. This was the first major step to clean up and strengthen the PSB segment of the Indian banking sector. The result of this cleansing exercise has been visible for the past few quarters. 

Even during the pandemic (FY21 and FY22), these banks took measures to ensure that their NPAs were under control. As normalcy returned in Q1FY23, the lending of these banks also saw a jump. The combined effect of lower NPAs and growth in credit affected the bottom lines of these banks, with many of them posting their highest-ever profits in Q2FY23. As a result, the stock prices of seven PSU banks soared more than 50% since January this year.

Following the Q2FY23 results, Union Finance Minister Nirmala Sitharaman tweeted, “The continuous efforts of our govt for reducing the NPAs & further strengthening the health of PSBs are now showing tangible results. All 12 PSBs declared a net profit of Rs 25,685 crore in Q2FY23 and Rs 40,991 cr in H1FY23, up by 50% and  31.6% respectively (YoY).”

In Q2FY23, the largest PSU bank, SBI, saw a 74% jump in its net profit, while it was 89% for Canara Bank at Rs 2,525 crore, 145% for UCO Bank at Rs 504 crore, 58.7% for Bank of Baroda at Rs 3,312.42 crore and 12% for Indian Bank at Rs 1,225 crore. 

The graph above shows that the net NPAs of PSU banks have fallen sharply in Q2FY23 from their respective levels in Q2FY22. In fact the NPA ratios for most of these banks are at their lowest ever. Whether they continue to maintain these levels has to be seen in the future. 

SBI’s net NPA fell below 1% at 0.80% in Q2FY23, which was 5.73% in FY19. In Q2FY23, the net NPA of Canara Bank was down to 2.19%, as compared to 7.48% in FY19. Other banks also saw a sharp decline in NPAs. Net NPA of Indian Bank reduced by 176 bps to 1.50% in Q2FY23 from 3.26% in the same period previous year.

While PSU banks have been around for a few decades now, Indian banking has seen remarkable changes with rising competition from private sector banks. During the past two decades, private banks led the banking sector in technology adoption, introduction of customer-oriented products and digital initiatives. Most  PSU banks have now caught up on tech – another reason why they have given returns much ahead of the private banks this year.

The Banknifty, an index comprising PSU as well as private banks, delivered returns of 22% this year, as compared to 70% by the PSU bank index. The outperformance of PSU banks helped the Banknifty index reach its all-time high, where it is currently trading in December 2022.

Considering the top five private banks by market capitalization, ICICI Bank, IndusInd Bank and Axis Bank have delivered returns above 25% since the beginning of the year. The returns for HDFC Bank and Kotak Mahindra Bank in the same time frame are way below the average performance of the entire banking sector.

 

Apart from private banks, another key component in the BFSI space, the life insurance industry, also disappointed investors this year. This year was particularly memorable for the life insurance industry as the government launched India’s biggest IPO for LIC of India in May 2022. While this drove lots of investors into the life insurance sector via the LIC IPO, the returns since the listing have only disappointed investors. It is down around 30% from its listing price in December 2022. Except for SBI Life, no other life insurer delivered positive returns this year.

Post-listing, LIC has been aggressively making up for lost market share to private insurers. LIC gained almost 4.5% market share in H1FY23 in new business premium (NBP) from private players, mainly on account of robust growth in its group business segment. NBP is the premium acquired from new policies for a particular year. It is the sum of the first-year’s premium and a single premium, reflecting total premiums received from the new business written.

According to data released by the insurance regulator, IRDAI (Insurance Regulatory and Development Authority of India), LIC improved its market share to 67.72% as of October 2022, a gain of 447 basis points (bps), while private sector insurance companies’ market share dropped to 32.28%. Among top private players, SBI Life shed 82 bps in market share in H1FY23, HDFC Life’s market share dropped 157 bps, and ICICI Prudential Life’s market share dropped 64 bps during this period.

At the end of FY22, private players had 36.75% share of the life insurance market, while LIC had 63.25%. By the end of FY21, LIC’s market share was 66.18%, and private players took up 33.82%.

This year PSU banks made a comeback, with private banks clearly losing out their investment potential and the life insurance industry disappointing investors. As we head into a new year, the BFSI sector shows potential and may hold more surprises next year.