Banking News

finance: Banks’ margins dip as deposit costs rise


Bank margins are dipping after four straight quarters of rise last fiscal as higher deposit costs finally bite lenders. Most banks saw their margins fall in the first quarter this fiscal year compared to March 2023 and expect it to drop further this fiscal year.

But analysts do not expect a sharp impact on banks’ profitability because it will be cushioned by strong loan growth and low provisions this fiscal, analysts said.

Data collated by ET showed net interest margins (NIM) for banks have fallen between 10-30 basis points on an average between the quarter ended March and June 2023. Only seven out of the 21 banks that have released results so far have managed to hold on to or improve margins compared to March. One basis point is 0.01 percentage point.

Bankers and analysts expect further softening in margins this fiscal as the full force of banks’ deposit rate hikes last year is blended into cost of funds.

“We should expect bank margins to come off quarter over quarter this fiscal, mainly as cost of funds will trend higher. Also, the scope for further increase in yields is limited, which will also impact margins,” said Ajit Kabi, analyst at LKP Securities.

A sharp fall from the current levels is however unlikely because many banks, especially the larger ones, have enough surplus investments they can liquidate to fund lending growth without increasing deposit rates.Bankers said they were prepared to work on a lower NIM this fiscal. For example, ICICI executive director Sandeep Batra expects the repricing of deposits to continue for another couple of quarters moderating NIM. Batra expects his bank’s margins to end the current fiscal year at around 4.50%, which is the average margin reported by the bank in fiscal 2023. ICICI’s margins have narrowed to 4.78% from a peak of 4.90% in March 2023.But lower margins do not necessarily mean lower profitability. Siddhartha Khemka, head of research (retail) at Motilal Oswal, said strong loan growth and benign credit costs will make up for lower margins.

“Loan growth is projected to be at 14% to 15%, which, though lower than the 16% recorded last fiscal, is still strong. For larger banks that dominate the market, it will be faster than the system. Bank asset quality is also at its best level in more than a decade, which will keep credit costs low. Both these factors will support bank profitability even if margins come down,” Khemka said.

However, though banks will continue to make profits, the pace of profit growth will slow down considering the impact of lower loan growth and margins.

“There could be about a 5% to 10% impact on bank profits during the current fiscal year. With credit costs in their favour, banks will now have to keep operating expenses in check to maintain profitability,” said Gaurav Jani, banking analyst at Prabhudas Lilladher.
Broadly, analysts expect large private and public sector banks, like ICICI, HDFC, Axis and State Bank of India and Bank of Baroda, to have better control over margins this fiscal.


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