The return on assets of banks is expected to fall 10-20 basis points (bps) to 1.1-1.2% in 2024-25 (April-March), from a 20-year high of 1.3% in 2023-24, owing to a higher cost of deposits, Crisil Ratings said in a report on Thursday.
However, the return on assets will remain higher than the 20-year sectoral average of 0.75% and the 10-year sectoral average of 0.5%.
“The expected moderation in profitability is on account of higher cost of deposits given continued re-pricing at elevated rates,” the rating agency said, adding that the deposit costs of banks are expected to rise 25-30 bps this financial year.
Also, the report said that an improvement in credit costs, which has supported the rising profitability of the banking sector in recent years, is likely to bottom out this financial year. Therefore, it will only partially offset the higher deposit costs.
The net interest margin of banks is expected to fall 10-20 bps this financial year to 3-3.1%
“The interest rate on fresh term deposits has largely plateaued. But the impact is still flowing through to the outstanding deposits as they come up for renewal, resulting in re-pricing of existing deposits at higher rates,” said Ajit Velonie, senior director, Crisil Ratings.
“While interest rates may come down in the second half of this financial year, the transmission of any rate cut on the deposit side would be slower given the competitive environment and the tight systemic liquidity,” he added.
Separately, India Inc’s credit quality outlook remains positive on the back of stronger, deleveraged balance sheets, the rating agency said.
The gross non-performing assets ratio of banks is expected to decline further in FY25. The gross NPA ratio stood at 2.7% as on March 31.