Indian Banks Face NIM Pressure Amid Rising Interest Rates; Divergence Expected.

Indian Banks Face NIM Pressure Amid Rising Interest Rates; Divergence Expected.
Indian Banks Face NIM Pressure Amid Rising Interest Rates; Divergence Expected.
Indian Banks Face NIM Pressure Amid Rising Interest Rates; Divergence Expected.
Indian Banks Face NIM Pressure Amid Rising Interest Rates; Divergence Expected.

Indian Banks Face NIM Pressure Amid Rising Interest Rates; Divergence Expected.

Indian Banks Face NIM Pressure Amid Rising Interest Rates; Divergence Expected

Bank Margins Under Pressure

With the prevailing rise in interest rates, most Indian banks are anticipated to experience pressure on their Net Interest Margins (NIM) in the coming two to three quarters. Analysts, however, expect that trends will vary, with banks holding a higher proportion of wholesale deposits and a reasonable increase in Marginal Cost of Funds-Based Lending Rate (MCLR) over the past six months likely to defend their NIMs better than others.

Rate Hikes and Deposit Costs

Since December 2021, Indian banks have implemented rate hikes ranging from 170 to 210 basis points (bps) in their term deposit rates. Larger private banks and the State Bank of India (SBI) have raised rates by approximately 170 to 210 bps, while smaller private banks have undertaken relatively lower hikes of 150 to 170 bps. This divergence reflects higher rates for smaller banks and improvements in their deposit franchise, enabling them to narrow the premium over their larger counterparts.

Banks with a higher proportion of wholesale deposits have experienced greater inflation in deposit costs compared to those with a larger share of retail deposits.

MCLR Hikes.

The hikes in MCLR rates have also been relatively diverse across banks. Larger public sector banks (PSUs) have imposed smaller MCLR hikes compared to smaller PSUs and private banks, mainly to gain market share in corporate loans.

Jefferies estimates that banks like IndusInd Bank and Axis Bank have seen most of the term deposit rate hikes passed through to their Profit & Loss (P&L), resulting in lower cost pressures. On the other hand, larger banks like ICICI Bank and major PSUs may face higher cost pressures in the next two to three quarters.

The merger of HDFC Bank with HDFC Limited and the impact of incremental Cash Reserve Ratio (I-CRR) will have a more significant effect on HDFC Bank than merely rate hike gaps.Kotak Mahindra Bank is benefiting from an increased share of higher-yielding unsecured loans.

NIM Impact on Banks

Jefferies anticipates that banks like IndusInd Bank will likely maintain margins near their current range, while Axis Bank may witness a 10-15 bps compression. In contrast, ICICI Bank and SBI may face approximately 30-40 bps compression over the next two to three quarters.

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Divergence in NIMs and PPOP Growth

The divergence in NIMs could lead to variations in pre-provision operating profit (PPOP) growth over the coming quarters, potentially influencing short-term stock performances as well.

Q1FY24 Results and PSBs

During the April-June quarter of FY24, Indian banks reported robust financial results, driven by healthy growth in net interest income, non-interest income, lower credit costs, robust loan growth, and stable asset quality. Public sector banks (PSBs) also delivered strong performance in Q1FY24, with many state-run lenders reporting net profit growth more than double that of the same period the previous year.These developments reflect the challenges and opportunities facing Indian banks as they navigate the evolving interest rate landscape.

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