Banking Sector Outlook: NIM Pressure Amid Rising Deposit Costs

The Indian banking sector faces pressure on net interest margins due to rising deposit costs, with stable asset quality. Loan growth remains healthy in 2QFY25, though operational costs rise modestly. Changes in the loan mix and bond yields impact performance for both private and public sector banks.

In a recent analysis by Yes Securities, the rising costs of deposits—attributed to increased term deposit rates and the repricing of legacy deposits—are predicted to put pressure on net interest margins (NIM) for Indian banks in the second quarter of the financial year 2024-25 (Q2FY25). While most banks anticipate steady NIM, some might experience slight declines.

The sector is expected to exhibit stable asset quality during this period, with fresh slippages holding steady due to a well-managed residual restructured book. Despite economic challenges, slippages could stabilize further, aided by seasonal factors, notably benefiting some banks.

Provisions will vary among banks; for instance, Bank of Baroda and RBL Bank may experience significant increases, whereas HDFC Bank and Indian Bank might see little change. Conversely, banks like State Bank of India (SBI), Axis Bank, and ICICI Bank are likely to record reduced provisions.

Furthermore, favorable adjustments in loan mixes could benefit certain banks. Private sector banks saw a small fall in the Weighted Average Domestic Term Deposit Rate (WADTDR) by 2 basis points, yet the Weighted Average Lending Rate (WALR) climbed 14 basis points. Public sector banks, however, noted a slight rise in WADTDR and a small drop in WALR, narrowing the loan spread and potentially lowering NIM by 2-10 basis points sequentially.

In terms of loan growth, projections indicate a robust outlook across the banking sector in 2QFY25. IDFC First Bank and CSB Bank are expected to surpass 4.5% growth, while moderate increases are foreseen for HDFC Bank, SBI, and others. Sequentially, operational expenses for both private and public banks are set to grow at a slightly slower rate compared to business growth. The quarter also saw a decrease in long-term bond yields, with the average 10-year yield dropping 20 basis points to 6.88% from the previous quarter.

Additionally, due to adjustments in accounting for the Available for Sale (AFS) investment book, there won't be any mark-to-market gains or losses, with realized profits still impacting profit and loss statements.

(With inputs from agencies.)