Banks face margin squeeze amid deposit repricing
1 min read . Updated: 05 May 2023, 11:08 PM IST
PremiumIn FY23, the weighted average term deposit rate for the banking sector rose 245 bps to 6.48% in March, while the weighted average lending rate on fresh loans was up 181 bps to 9.32%.
Mumbai: Banks in India are unlikely to see strong margin expansion in the coming quarters, as deposit rate hikes made in the earlier months raise their cost of funds, industry experts said, signalling a potential impact on profitability.
This is because when banks make changes to deposit rates, only fresh deposits come under the new rates, unlike loans where new rates are applicable to all loans. Older deposits come under new rates with a lag.
Analysts said net interest margin or NIM, which is a key indicator of a bank’s profitability, may not sustain at the high levels seen recently.Typically, banks change their interest rates on deposits and loans in response to changes in the repo rate, which have happened six times since May 2022. To be sure, analysts also said that Indian banks are performing at a decadal best, with most lenders having reported healthy growth in net interest margins in Q4, backed by high lending rates, which is a key income for banks.
However, RBI data shows that the rise in deposit rates has been faster than lending rates which will negatively hit bank margins, going ahead. In FY23, the weighted average term deposit rate for the banking sector rose 245 bps to 6.48% in March, while the weighted average lending rate on fresh loans was up 181 bps to 9.32%. For instance, Federal Bank’s margin was at 3.31% in Q4, up from 3.16% in the year ago. The bank has guided for NIMs of around 3.35% in this financial year. “When we declared our Q3 results we said our NIMs will be around 3.35%, and in FY24 it will be in that range. Deposit repricing is visible in the numbers of Q4 and is evident in the NIM difference between Q3 and Q4. There may be some residual impact of repricing in Q2," said Shyam Srinivasan, chief executive, Federal Bank. The bank’s margins were down sequentially. Other banks also saw a similar Q4 uptick, compared to a year ago.
At Kotak Mahindra Bank, the net interest margin was at 5.75% in Q4, up 97 bps from Q4 of FY22. Jaimin Bhatt, president and group CFO, Kotak Mahindra Bank, said on 29 April that the sharp rise in margins will stop at some stage, given that the central bank has for the time being paused rate hikes and deposits will gradually get repriced. “You will see elevated NIMs, but they may not be at these levels. I don’t have a guidance for next year but, as we said, the full-year number is 5.33% and, next year, we should be somewhere around that."
Anindya Banerjee, group CFO, ICICI Bank said on 22 April that the kind of margin expansion it saw in FY23 will not be there in this fiscal, and there will be some pressure on margins. ICICI Bank’s NIM in Q4 was at 4.9%, against 4% in Q4 of last year “But it (margin pressure) will hopefully get addressed along with growth." he said.
Analysts said banks reporting margin improvement might not last very long. Motilal Oswal Financial Services said in a report: “While deployment of excess liquidity and repricing of loans aided margins, we believe further repricing of deposits will drive a sharper increase in the cost of deposit." Experts said deposit rates may not rise substantially now. While banks were initially reluctant to raise deposit rates after RBI started raising the repo rate—a benchmark for retail loans—they were forced to do so after deposit growth fell and customers opted for other investment avenues.
“While RBI’s stance on further rate hike or pause will be a key monitorable to assess the interest rate trajectory, we expect margins to moderate over FY24 and FY25," Motilal said on 3 May.
Fitch said in February that net interest margins of banks will face pressure in FY24 and banking sector’s average NIM will contract by about 10 bps to 3.45% in FY24, following the 15 bps increase in FY23 to 3.55%.