A clutch of private sector banks expects net interest margins (NIM) to flatten in the coming financial year, as the cost of deposits are likely to go up and the impact of repo rate transmission on loan rates slows down. However, these lenders are confident of holding their margins within the range given in the guidance.
The top private sector lender, HDFC Bank, reported the NIM at 4.3% in Q3FY23, flat on both y-o-y and sequential basis. The bank is sticking to its margin guidance of 4-4.5%. However, it is walking a tightrope, with the bank improving its liabilities side, aided by hike in retail deposit rates, while a high fixed-rate loan book impacting its margin, according to analysts at HSBC Global Research.
The bank’s confidence to maintain its margin comes from marginal cost of funds-based lending rates (MCLR). A large portion of its retail book and SME portfolio is linked to the MCLR and the bank has increased its MCLR above deposit rates. “So, that means we are catching up on the asset yield also,” Srinivasan Vaidyanathan, CFO, HDFC Bank, said in an analyst call.
For the bank to move towards the higher end of the NIM guidance, the share of retail loans needs an increase, Vaidyanathan said. Currently, the retail segment consists of 45% while wholesale is 55% of the total book.
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ICICI Bank remains cognizant of the fact that the increase in NIMs came from quicker transmission of repo rates into lending rates, aided by external benchmark lending rates (EBLR), typically repo rate. The bank saw a 35-bps jump in its NIM to 4.7% as of December 31.
The bank will remain watchful of the incremental lending and funding to optimise the balance sheet. It has around 45% book linked to the repo rate and 21% to MCLR or other benchmarks.
“Any intensification of competition in the market is likely to adversely impact the margin trajectory going forward,” Kotak Institutional Equities said in a report.
Axis Bank‘s NIM was at 4.26% as of December 31, which was higher compared to its historical levels. The margin jumped 73 bps YoY and 30 bps QoQ on account of higher spread in yields and one-time interest reversal.
Despite the jump, the bank expects the NIM to moderate Q4FY23 onwards as deposit costs will increase over the next few quarters and there will be a limited room to expand on loan rates. To limit the impact, the bank has built some cushion for maintaining its margin, CFO Punit Sharma said. ICICI Securities is estimating the bank’s NIM at around 3.9% for FY24.
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Kotak Mahindra Bank saw a 30-bps expansion in NIM to 5.47% due to strong rate transmission and increase in the share of high-yielding loans. The bank has 55% of its book linked to the repo rate. The rise in policy rate starting from May was quickly passed on to borrowers and that is still continuing, CFO Jaimin Bhatt said in an analyst call.
“Despite a healthy loan growth (20% CAGR), the compression in NIM will now become sharper going forward,” HSBC Global Research said.
The bank has a CASA ratio well over 50% which has come down in the short run, managing director Dipak Gupta said, adding that once the CASA ratio recovers, it will give the lender a cost-of-fund advantage.
Banks saw a sharp improvement in their NIMs in the first two quarters of FY23, which spilled over in Q3FY23. With a major chunk of loans being tied up with EBLR, banks were able to enjoy higher yield on assets on account of faster transmission. As of March 2022, 44% of all banks’ outstanding floating rate rupee loans were linked to EBLR, according to Reserve Bank of India (RBI) data. As deposit rates are revised with a lag, banks could enjoy higher margins.