Indian banking sector dividends expected to reach a seven-year high

Driven by strong credit growth among other factors, the Indian banking sector is poised to deliver the highest dividend payout to shareholders in seven years.

S&P Global Market Intelligence forecasts that by March 31, 2024, the Indian banking sector's share of the total industry dividend payout will reach 13%. This ratio not only exceeds the 12% recorded in the fiscal year ending March 31, 2023, but also surpasses the 9% in the fiscal year of 2022.

Market data shows that for the fiscal year ending March 2017, Indian banks accounted for 7.6% of the total dividend payout, with shares at 5% for both the 2018 and 2019 fiscal years.

In the fiscal year 2020, impacted by the COVID-19 pandemic, the Reserve Bank of India (RBI) required banks to retain cash and pause dividend payments. HDFC Bank Ltd was the only bank to distribute dividends that fiscal year.

Tusharika Aggarwal, a dividend research analyst at Standard & Poor's, says that active economic activities in India may sustain high credit growth in the banking sector and bring optimistic profit forecasts for major banks, thus supporting a higher dividend payout in the banking sector.

Benefiting from rising interest rates and robust credit growth, several major Indian banks recently reported record net profits. At the same time, Indian banks, particularly state-owned ones, have reduced their bad loans and improved financial metrics such as the capital to risk-weighted assets ratio and the Tier 1 common equity ratio. According to data from the Reserve Bank of India, the overall non-performing assets ratio of the Indian banking sector dropped to 3.9% in March, reaching a ten-year low.

Despite increased macroeconomic uncertainty leading to some bank failures, global banking profits have remained resilient in a high-interest-rate environment. A report released at the beginning of the month by Market Intelligence expects an 8.5% increase in global bank dividend payouts in 2023 and a 6% increase in 2024, supported by high interest rates and strong credit growth.

Although the Reserve Bank of India expects India's economic growth to reach 6.5% this year, lower than the previous fiscal year's 7.0%, major Indian banks are predicted to exceed the average dividend payout level projected by Market Intelligence, thanks to significant public infrastructure spending and economic growth momentum.

Aggarwal suggests that in the coming years, the share of total dividends paid out by the Indian banking sector is likely to remain stable, supported by strong economic activities, high credit growth, and infrastructure investment. Furthermore, robust economic activities and infrastructure investments help the Indian banking sector reduce provisions for bad loans, enabling banks to have more funds for loan disbursement and expand net interest income.

According to Aggarwal's prediction, in the coming years, major banks such as Axis Bank Ltd., Bandhan Bank Ltd., and AU Small Finance Bank Ltd. will lead in dividend increases. Specifically, by the fiscal year 2024, Axis Bank's dividend is expected to grow by 49%, ICICI Bank's by 19%, HDFC Bank's by 12%, and State Bank of India's by 10%.