In the April-June 2024 quarter, analysts predict a moderate decline of 10-15 basis points (bps) in net interest margins (NIM), a crucial profitability metric. HDFC Bank and YES Bank are set to kick off the reporting period on July 20 with their Q1 results. Concerns over the growth-NIM balance persist, with ongoing pressures expected due to several factors.
“With continued deposit re-pricing weighing on CoF coupled with limited loan re-pricing opportunities, we expect banks to continue reporting margin compression in Q1FY25. However, we expect the pace of compression is likely to come off. We expect NIM contraction to the tune of 5-10bps for our coverage universe bank, with SFBs (ex-AUSFB) witnessing sharper NIM compression while the larger banks could report a more calibrated decline in margins,” Axis Securities said in a report.
The potential decline in NIMs is attributed to continued deposit repricing, persistent high incremental deposit costs following rate hikes in Q4FY24, and increased interest income reversals due to higher agricultural sector-related loan defaults. Amidst these challenges, certain banks such as HDFC Bank and IndusInd Bank are anticipated to maintain stable NIMs due to specific strategic advantages.
HDFC Bank reported a notable increase in gross advances to Rs 24.87 trillion for the quarter ending June 2024, marking a substantial rise from Rs 16.3 trillion a year earlier. Deposits also showed robust growth, reaching Rs 23.8 trillion compared to Rs 19.13 trillion in the previous year.
Asset quality
In terms of asset quality, most banks have maintained strong credit metrics so far, keeping provisioning expenses under control. However, there are concerns that recent developments, including potential farm loan waivers, could lead to increased credit costs, particularly affecting agriculture and unsecured lending segments like microfinance.
Looking ahead, analysts foresee a modest increase in provisioning expenses as banks navigate seasonal challenges, such as higher non-performing assets (NPAs) related to agriculture loans during the first quarter. Despite these headwinds, private and public sector banks are expected to report varied earnings growth rates for Q1FY25.
ICICI Bank and Federal Bank are anticipated to post strong earnings results, while IndusInd Bank and other lenders with significant exposure to microfinance could experience softer earnings or higher slippages. For State Bank of India (SBI), loan growth is expected to be sluggish at 1% sequentially, with a stable NIM but potentially higher seasonal slippages.
Overall, the banking sector faces margin pressures and varying asset quality dynamics across different banks.
