Pressure on net interest margins due to the high cost of deposits may continue in the sector quarter as well.
Banks’ yield on advances rose by 23 bps to 9.07% q-o-q while the cost of funds increased by 30 bps to 4.79% in Q1FY24, according to a CareEdge report. The increase in the cost of funds can also be attributed to muted CASA ratio which contributed to the rising cost of funds, it said.
Net Interest Income (NII) of Scheduled Commercial Banks (SCBs) grew by 26.5% year-on-year (y-o-y) to Rs 1.84 lakh crore in Q1FY24 due to healthy loan growth and a higher yield on advances over the year-ago period.
The Net Interest Margin (NIM) of SCBs witnessed a year-on-year improvement of 36 basis points (bps), reaching 3.27% in Q1FY24. This enhancement can be attributed to the faster repricing of loans, whereas deposit rates have not yet reflected the increased interest rates. Besides, SCBs witnessed higher-than-expected deposit growth in the quarter. The anticipated rise in deposit costs, which is expected to be a lag effect, is likely to put continued pressure on NIM in Q2FY24, it said.
Advances rise
SCBs reported a robust rise in advances at 16.7% y-o-y in Q1FY24 mainly driven by personal loans, NBFCs and MSMEs, with similar growth for private sector banks (PVBs) and public sector banks (PSBs). SCBs witnessed a 13.5% y-o-y deposit growth in the quarter, within this private banks’ deposits rose by 17.4% y-o-y in Q1FY24 while
PSBs registered at a slower pace of 10.9% in the same period. Meanwhile, deposit growth lagged in credit growth with sluggish current account and saving account (CASA) growth. Other PSBs’ NIM expanded by 41 bps y-o-y at 2.85% in Q1FY24, outperforming large PSBs and private banks, it said.
In terms of sequential performance, SCBs’ NIM contracted by 2 bps to 3.27% due to a drop in the NIM of large PSBs, it said, adding “Though, the NIM of Other PSBs and other PVBs expanded by 8 bps and 6 bps in the quarter.”
The Credit and Deposit (C/D) ratio stood at 75.1% as of July 01, 2023, expanding by ~210 bps y-o-y over a year ago due to faster y-oy growth in credit compared to deposits.
Within PSBs, NIM of smaller/other PSBs outperformed in terms of year-on and sequential performance. With improving asset quality and renewed business growth, NIM of other PSBs expanded by 41 bps y-o-y and 8 bps q-o-q to 2.85% in Q1FY24 whereas large PSBs rose by 32 bps y-o-y, while dropping by 10 bps q-o-q, it said.
“NIM of PVBs expanded by 35 bps y-o-y and 3 bps q-o-q at 4.08% in Q1FY24 driven by strong NII growth, also aided by slower asset growth as compared to NII. Other PVBs NIM expanded by 6 bps at 4.13% in the quarter, expanding higher than PVBs,” the report said.
