The financial sector braces for tightened belts as banks are set to face a pinch on their net interest margins (NIM) in the quarter ending March 2024. This expected contraction is largely attributed to the prevailing tight liquidity conditions and rising funding costs. Analysts, however, suggest that the quarter-on-quarter (QoQ) shrinkage in NIMs— a crucial measure of a bank’s profitability—would be relatively less severe compared to the dips seen in the preceding two quarters.
A gradient squeeze of about 5-15 basis points (bps) is on the horizon for most banks, according to predictions made by sector experts. “The tightened liquidity scenario, coupled with ongoing deposit pressures, signals an inevitable QoQ NIM contraction, particularly for private banks,” revealed a statement from a JM Financial report.
Additional insights from Axis Securities alluded to limited opportunities for loan repricing while highlighting the consistent rise in the cost of funds (CoF), factors that are poised to keep NIM growth in check. “Margin compression per se might ease somewhat sequentially for many banks. We’re jotting down an estimated net interest income (NII) growth of 6/3 percent year-on-year (YoY)/QoQ (excluding HDFC) for our coverage universe of banks, with NIM compressions anticipated to lie in the range of roughly 5-15 bps, primarily amongst private banks,” the report delineated.
In the granular breakdown provided by ICICI Securities, banks like RBL Bank could see NIMs constrict by nearly 20 bps, while other institutions such as IDFC First Bank and Federal Bank might witness relatively stable NIMs. City Union, however, stands as an outlier with an expected NIM rise of 15 bps QoQ, stemming from a lower base effect. Karur Vysya Bank (KVB) is projected to have a 30 bps dip QoQ on a reported basis, leading to an adjusted 10–15 bps fall, factoring in the one-offs of Q3. For the banking giant State Bank of India (SBI), a modest decline of about 5–6 bps QoQ in NIM is on the cards.
Shifting the lens to the lending landscape, the overarching systemic loan growth is poised to decelerate to 15–15.5 percent YoY, marking a decline from the previous 17-18 percent YoY as chronicled by the RBI trend and progress reports for FY23. ICICI Securities anticipates a softer loan growth in Q4FY24 at around 3.5 percent QoQ, down from the nearly 4.5 percent witnessed in Q2 and Q3 FY24. “Credit growth continues to be propelled by the retail and SME sectors, complemented by a slow yet steady resurgence in corporate borrowing. We’re also expecting some temperance in the unsecured lending sphere this quarter, in light of the tightened regulatory norms and cautious lending strategies triggered by emerging stress patches,” added the analysts from Axis Securities.
Noteworthy is the increase in risk weights by the Reserve Bank of India in the previous November by 25 percent up to 150 percent, specifically targeting exposure to consumer credit, credit card receivables, and non-banking financial companies (NBFCs).
Deposit growth—another crucial metric—is predicted to trail behind credit growth, hovering around 13 percent YoY. However, a notable uptick in deposits growth is projected, rising from the 2–3.5 percent QoQ range seen over the last quarters to 5.5 percent QoQ in Q4FY24, as estimated by ICICI Securities.
Banks are also expected to prolong their streak of robust asset quality this quarter. Industry experts anticipate that slippages will remain reigned in, bolstering asset quality through solid recoveries. “The state of asset quality is foreseen to stay robust, with muted gross slippages and hearty recoveries. Retail asset quality, in particular, exhibits positive behavior, as evidenced by the monthly bounce rate data. The agriculture sector, which faced a rise in slippages in the last quarter, should now return to a more favorable trajectory,” detailed the ICICI Securities report.
Amid the run-up to the general elections, certain banks may encounter a surge in slippages within the microfinance institution (MFI) portfolios. Across the board, however, slippages across nearly all banks are expected to witness a quarter-on-quarter decline. This collective anticipation of a tighter squeeze on profitability margins juxtaposed against a stable asset quality backdrop paints a mixed picture for banks as they navigate the concluding quarter of the fiscal year.
