Bank NIMs Continue To Experience Sequential Strain

The CareEdge Ratings has said that bank net interest margins (NIMs) are experiencing continued pressure, with a sequential decline. This trend is expected to persist, posing a challenge to banks' profitability in the near term.

The NIM for scheduled commercial banks (SCBs) dropped on a year-on-year basis by 13 bps and stood at 2.94 per cent, as the rising cost of deposits along with slower growth in CASA impacted the NIM margin. 

Net Interest Income (NII) of select SCBs compared to the previous quarter, saw a relatively slower growth of 9.7 per cent year-on-year (YoY) to Rs 2.03 lakh crore in Q1FY25 driven by healthy credit growth, which was partially offset by a rise in deposits costs and a dip in yields on advances.

SCBs reported a robust rise in advances at 18.1 per cent YoY in Q1FY25 driven by the merger and personal loans. Meanwhile, SCBs witnessed a 13.7 per cent YoY deposit growth for the quarter. PVBs’ deposits rose by 23.2 per cent YoY while PSBs registered a slower pace of 9.0 per cent. 

Deposit growth lagged credit growth with sluggish current account and saving account (CASA) growth (3.3 per cent YoY), which was partially offset by the robust growth in time deposits (17.8 per cent YoY). CASA ratio continued to decline and reached 32.3 per cent.

The Credit and Deposit (C/D) ratio stood at 80.6 per cent as of 30 June 2024, expanding by 430 bps YoY over a year ago due to widening credit-deposit growth and HDFC merger impact.

In Q1FY25, credit offtake has witnessed a robust 18.1 per cent YoY surge driven by mergers, economic growth, capital expenditure, and retail credit promotion. Banks have thrived with strong credit demand, despite NIM pressure, increased funding costs, and high loan-to-deposit ratios amid intense deposit competition. Term deposit growth was healthy, but CASA's decline impacted the cost of funds. 

With high Credit to Deposit ratios, expanding the liability franchise is crucial for sustaining loan growth. “We expect that credit growth will trail deposit growth. Thus, intensified deposit competition will lead to further straining of NIM in upcoming quarters as interest rate competition persists,” according to the rating agency.