Banks may see compressed margins this year

Rating agencies including Icra and Crisil are seeing a compression in the profitability margins this fiscal as deposit costs rise.

The banking sector is expected to see a compression of 10-20 basis points (one bps is 0.01 percent) in net interest margins (NIMs) to 3.0-3.1% this fiscal as deposit rate hikes play out according to ratings firm Crisil.

But lowering of credit costs as deposit rates may not rise and lower growth in non performing loans could help improve profitability next fiscal say the rating agencies. NIMs were higher in FY'23 due to the differential pace of rate changes between the assets side and the liabilities side for most of the fiscal, Crisil said.

“We believe NIMs for the banking sector have peaked. Competition for deposits has driven banks to hike rates since October 2022, and they could increase further given that deposit growth continues to lag credit growth" said Krishnan Sitaraman, senior director and chief ratings officer, Crisil Ratings." With an estimated 30- 35% of deposits expected to come up for re-pricing this fiscal, at higher rates, and the shift from current and savings deposits to term deposits continuing, overall deposit costs will rise this fiscal. And given that most of the re-pricing on the assets side has already been done, the NIM gains seen last fiscal will partly reverse.”

" While there will be upward pressure on deposit costs as the deposit base reprices significantly in fiscal 2024, putting pressure on net interest margins (NIMs), banks’ robust loan growth would help keep core operating profits at a steady level" said Karthik Srinivasan, senior vice president and Group Head, Icra.

“With deleveraged balance sheets, corporate asset quality remains strong, which, coupled with the stable performance of the retail asset quality, will help to reduce fresh slippages inasset quality at Indian banks,” he added.

Icra siad that while the year-on-year loan growth is likely to moderate to 11.0%-11.7% in the fiscal year ending 31 March 2024 (fiscal 2024) from 15.5% in fiscal 2023 with higher interest rates, the incremental credit growth is expected to be Rs 15-16 lakh crore which is poised to become the banking sector's second-highest increase on record.