Private Banks Experience Margin Pressure as Deposit Costs Rise

The Net Interest Margin (NIM) of Private Banks (PVBs) declined by 34 basis points (bps) year-on-year (y-o-y), settling at 3.60%, primarily due to increased deposit costs impacting margins.

In the fourth quarter of FY24, Net interest Income (NII) for select Private Banks grew by 16.3% y-o-y to Rs. 0.75 lakh crore, driven by strong loan growth and higher yields on advances compared to the previous year. Adjusted for the HDFC merger impact, NII growth for PVBs stood at 7.4%.

According to a CareEdge report, PVBs witnessed robust loan growth of 30.8% y-o-y in Q4FY24, fueled by personal loans and increased activity in the corporate and MSME sectors. Deposits also grew by 27.0% y-o-y, with larger banks experiencing a higher growth rate compared to other PVBs.

However, sluggish growth in current account and savings account (CASA) deposits (7.7% y-o-y) was offset by significant growth in Time Deposits (30.7% y-o-y), resulting in a decline of 432 bps in CASA ratio over the last twelve months to 39.8%.

The Credit-to-Deposit (C/D) ratio expanded to 100.9% as of March 31, 2024, growing by approximately 787 bps y-o-y, driven by increased credit-deposit growth and the impact of the HDFC merger.

Sequentially, the CASA ratio decline contributed to a 4 bps decrease in the cost of funds, while NIM for PVBs declined by 7 bps quarter-on-quarter (q-o-q), attributed to robust growth in the liabilities franchise by 4.8%.

NII growth for Large PVBs and other PVBs was 16.1% and 16.9% y-o-y in Q4FY24, respectively. Sequentially, NII reported moderate growth, with Large PVBs and other PVBs showing increases of 3.6% and 2.6%, respectively.

Going forward, competition for deposits is expected to intensify further, leading to continued pressure on NIM trajectory for PVBs in upcoming quarters, especially due to the impact of the HDFC merger on margin performance.