Lenders witnessed contraction in net interest margins (NIM) in the June quarter of FY18 owing to factors including the shift to the marginal cost of funds-based lending rate (MCLR) and lower net interest income (NII), data compiled by FE showed. According to the data, Kolkata-based United Bank of India saw one of the highest contractions in Q1 margins. Its NIM reduced 101 basis points (bps) on a year-on-year (y-o-y) basis to 0.85%. Margins of larger banks such as Punjab National Bank (PNB) and State Bank of India (SBI) also shrank in the quarter. While, PNB’s margin (domestic) fell 24 bps y-o-y to 2.56%, SBI’s margin dropped 48 bps to 2.36%.
Arundhati Bhattacharya, chairman of SBI, told reporters at its Q1 results conference that the bank’s NIM fell mainly on account of the reduction in its base rate and the MCLR. “Moreover, since we have factored in the entire slippages, we believe that going forward the NIM will definitely show some kind of an improvement,” she said. SBI has guided for a 10-15-bps pick-up in NIM owing to an expected increase in the loan growth coupled with a decline in cost of deposits.
Analysts pointed out that NIM compression, which was expected to be gradual, slipped sharply in the June quarter. Kotak Institutional Equities said in a recent report that shift to the MCLR from the high-spread base rate regime, high impairments leading to lower NII recognition and high levels of liquidity were hurting public and private banks. “The recent compression appears to be driven by shift from high spread base rate to MCLR as well as slippages. Improving pricing is a bit of a challenge as liquidity is high and with availability to raise funds from alternate channels and shift in loan mix towards retail,” the report said.
Union Bank of India’s margins dipped 22 bps y-o-y to 2.06% in Q1FY18. Rajkiran Rai G, MD & CEO, said its cost of deposits was not decreasing as sharply as its yields on advances owing to the quicker transmission through the marginal cost of funds-based lending rate.
However, Canara Bank stood out among its peers and reported an improvement in margins. Rakesh Sharma, MD &CEO, told analysts after its June quarter results that the improvement mainly came from a 62 bps reduction in cost of deposits from 6.45% last year to 5.83%. “So, as a result, net interest margin is also showing good growth from – in fact the domestic net interest margin is 2.56% and the global is 2.34%.”
Among private banks, while ICICI Bank reported a 17 bps increase in its margins (domestic) to 3.62%, Axis Bank’s margins fell 16 bps to 3.63%. Rakesh Jha, chief financial officer, ICICI Bank, told analysts after its first quarter results that there would be some reduction in the margin in the current fiscal, mainly driven by a fair bit of repricing of loans. “Plus, of course, if you look at the year as a whole FY 2017 and compare that with Q1, the margins are kind of at a similar level,” he said.