Higher cost of funds keeps pvt banks? NIMs under pressure

The Net Interest Margins (NIM) of private banks remained under pressure during the fourth quarter, impacted by rising cost of funds amid tight liquidity.

Lenders, including HDFC Bank, ICICI Bank, Yes Bank, IDFC Bank and RBL Bank have reported 5 to 50 basis points year-on-year decline in NIM in the fourth quarter.

With demand of loans staying strong, HDFC Bank, ICICI Bank and several other lenders raised interest on fixed deposits by up to 10 bps in February to mobilise deposits amid tight liquidity.

“NIM compression in private sector banks is primarily driven by two key factors.

“Firstly, deposit rates on a weighted average basis have increased more than lending rates in recent months, which has narrowed the interest spread,” Sujan Hajra, chief economist & executive director, Anand Rathi Shares and Stock Brokers told FE.

“Secondly, a slight decline in asset quality has been observed, necessitating increased provisioning by the banks,” he added.
Helped by strong demand for loans, credit growth has significantly outpaced deposit growth.

Helped by strong demand for loans, credit growth has significantly outpaced deposit growth.

Credit offtake increased by 20.2% year-on-year to Rs 164.3 trillion (including the merger of HDFC twins) and 0.7% sequentially for the fortnight ended March 22, according to Care Ratings.

Excluding the impact of the merger, the growth stood at 16.3% year-on-year for the fortnight. Deposits rose at 13.5% year-on-year to `204.8 trillion for the fortnight ended March 22, and sequentially increased by 0.3%. Without considering the merger, deposit growth was 12.9%.

“Over the past six months, the sudden rise in the cost of funds, largely driven by a significant uptick in term deposits compared to CASA, resulted in a contraction of NIMs,” Anwin Aby George, research analyst, Geojit Financial Services, told FE.

“Banks responded by recalibrating their asset portfolios by adding more high yield assets, with a particular focus on the retail segment. This move allowed them to pass on the heightened cost of funds, thereby stabilising NIMs at their current levels,” he added.

The numbers of HDFC Bank are not strictly comparable on a year-on-year basis as a result of its merger with mortgage lender HDFC that came into effect from July 2023.

“We have started to see repricing on the asset side, so while pressure on NIMs will continue at least for another two quarters which will keep net interest income growth in check for all private banks, however in the second half we should see some relief on NIMs compression,” said Kunal Shah, senior research analyst, Carnelian Asset Management & Advisors.