Falling Core Income is Another Hurdle for PSB Profitability
Contraction in loan books increasingly getting reflected in deteriorating NII profile
‘other income’ such as treasury gains and fees may not be able to support operating profit given the sharp spike in the benchmark bond yields after the Reserve Bank of India announced a change in its monetary policy stance to “neutral” from “accommodative”. In the past two quarters when the benchmark yield declined by 63 basis points (bps) and then 30 bps, other income of PSBs grew by as much as 47% and 54%, respectively, excluding the sale of stake in life insurance business by SBI in the latest quarter. The slowdown in NII growth could also impact the net interest margin (NIM) especially if banks consider to further reduce their incremental lending rates or marginal cost of funds based lending rates (MCLR). In case of SBI, which has seen its NIM contract by 15 bps in the last one year, close to 40% of its loan book is currently MCLR-linked.