Indian banks‘ net interest margin, a key indicator of their profitability, peaked during the quarter ended March 2023 and will moderate by 10 to 20 basis points to 3%-3.1% in FY24, CRISIL Ratings said in a note Tuesday.
“We believe NIMs (net interest margin) for the banking sector have peaked. Competition for deposits has driven banks to hike rates since October 2022, and they could increase further given that deposit growth continues to lag credit growth,” said Krishnan Sitaraman, senior director and chief ratings officer at CRISIL.
Sitaraman said about 30%-35% of overall deposits are expected to come up for repricing this fiscal at higher rates and the continuing shift of customer parking their money from current and savings deposits to term deposits will also lead to higher deposit costs this fiscal.
Additionally, given that most of the repricing on the assets side has already been done, the NIM gains seen last fiscal will partly reverse, he added.
Large Indian banks including State Bank of India, Bank of Baroda, Punjab National Bank, HDFC Bank and ICICI Bank reported their Q4FY23 NIM in the range of 3.06%-4.9%. ICICI Bank, which posted the highest 90 basis points (bps) on-year rise in its NIM during Q4 at 4.90%, is expecting a moderation from hereon too, in-line with CRISIL’s comments.
Speaking at a post-earnings call, Anindya Banerjee, chief financial officer at ICICI Bank, had said, “Deposit costs have also started to reflect the higher rates at which deposits are being raised incrementally. So, I think we would believe that the NIMs are at kind of peak or near-peak levels. And from here, we should see a moderation.”
The expectation of NIM compression in FY24 is in contrast to FY23. During FY23, banks’ NIM are estimated to have grown 30 bps year-on-year to 3.2%. This was primarily due to the differential pace of rate changes between the assets side and the liabilities side for most of fiscal 2023. On the assets side, with 80% of advances being on floating interest rates, interest income rose sharply as repo rates started rising.
Asset quality relief
While NIMs are likely to moderate, lower credit cost due to benign asset quality environment will provide some comfort to lenders’ bottomline, CRISIL said.
Subha Sri Naraynan, director at CRISIL Ratings, said, “Gross non-performing assets (GNPAs) have already hit a decadal low of 3.9% as on March 2023 and leading indicators such as the quality of the corporate loan portfolio and the CRISIL Ratings credit ratio point to a further reduction in GNPAs this fiscal,” she said.
Lenders’ credit costs, meanwhile, which started to correct in fiscal 2021 from 1.8% on average between fiscals 2016 and 2020, are also estimated to have dropped to 0.7% in fiscal 2023, and are expected to fall further this fiscal, she added. “Hence, while NIMs will shrink this fiscal, overall banking sector profitability should remain at around 1.1% after having continuously improved for the past three fiscals,” CRISIL said.
