The net interest income of banks is likely to remain under pressure in the January-March period due to delayed impact of deposit repricing and a fall in the proportion of low-cost current account savings account deposits, CareEdge said on Friday.
The growth in net interest income slowed year-on-year in July-September as the cost of funds continued to inch up.
The net interest margins of banks declined by 16 basis points (bps) YoY to 3.14% in the December quarter. Within this, the net interest margin of public sector banks declined 12 bps to 2.77% while that of private banks fell 32 bps to 3.75%.
“Margins were also under pressure as total assets saw a strong double-digit growth, driven by the merger impact. The trajectory of margins has shifted and is expected to continue in this direction, leading to a sequential reduction in PPOP margin,” the rating agency said in a release.
The gross non-performing asset ratio of banks is expected to fall to 2.80-2.90% by March 31, from nearly 3% as on December 31. The agency expects the NPA ratio to decline below the record low of 0.7% as on December 31.
The credit offtake rose 20.3% YoY as on December 31, driven by the demand for personal loans and the impact of the merger between Housing Development Finance Corporation and HDFC Bank. Deposit growth was also healthy primarily because of the growth in term deposits.
However, the growth in current account savings account (CASA) remained tepid across the industry owing to a sequential rise in funding costs. “As the credit-to-deposit ratio remains elevated, growth in the liability franchise would play a significant role in sustaining the loan growth,” the rating agency said.
Overall, CareEdge notes that banks are in a good position as they have been witnessing a robust credit growth, continuous improvement in the asset quality, lower requirement of provisions due to buffer available for provisioning, lower incremental slippages and reduction in restructured assets.