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Analysts Predict Moderate Decline in Net Interest Margins for April-June 2024 Quarter
July 09, 2024
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In the April-June 2024 quarter, analysts expect a moderate decline of 10-15 basis points (bps) in net interest margins (NIM), a key measure of bank profitability. HDFC Bank and YES Bank will kick off the reporting period on July 20 with their Q1 results. Concerns over balancing growth and NIM persist due to ongoing pressures.
Axis Securities reported, “With continued deposit re-pricing affecting the cost of funds and limited opportunities for loan re-pricing, we expect banks to report margin compression in Q1FY25. However, the pace of compression is likely to slow. We anticipate a NIM contraction of 5-10bps for banks in our coverage, with smaller finance banks (excluding AUSFB) facing sharper NIM declines, while larger banks may see a more controlled margin decline.”
The potential decline in NIMs is due to continued deposit repricing, high incremental deposit costs following rate hikes in Q4FY24, and increased interest income reversals from higher agricultural loan defaults. Amidst these challenges, banks like HDFC Bank and IndusInd Bank are expected to maintain stable NIMs due to strategic advantages.
HDFC Bank reported a significant increase in gross advances to Rs 24.87 trillion for the quarter ending June 2024, up from Rs 16.3 trillion a year earlier. Deposits also grew strongly, reaching Rs 23.8 trillion compared to Rs 19.13 trillion last year.
Most banks have maintained strong asset quality so far, keeping provisioning expenses low. However, concerns remain that recent developments, like potential farm loan waivers, could increase credit costs, particularly in agriculture and microfinance.
Looking ahead, analysts foresee a modest increase in provisioning expenses as banks face seasonal challenges, such as higher non-performing assets (NPAs) related to agriculture loans in the first quarter. Despite these issues, 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 microfinance exposure may experience softer earnings or higher slippages. State Bank of India (SBI) is expected to see sluggish loan growth 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.
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