Banks to see moderation in NIM in Q4 on tight liquidity condition

BANKS ARE likely to see pressure on their net interest margins (NIM) in the quarter ended March 2024 on account of tight liquidity conditions and higher funding cost.

However, the quarter-onquarter (QOQ) decline in the NIM - the difference between the interest earned and the interest paid by a bank — will be lesser when compared to the previous two quarters, analysts said.

Most of the lenders are likely to see around 5-15 basis points (bps) compression in NIM, which an indicator of banks profitability and growth, on a sequential basis, experts said.

“In a quarter impacted by tight liquidity and continued pressure on deposits, sequential decline in NIMS is a given – more so for private banks,” JM Financial said in a report.

Limited scope for loan repricing along with pressure owing to an increase in cost of fund (COF) will continue to pose headwinds for NIMS, Axis Securities said in a research report.

“We believe that the quantum of margin compression could be marginally lower sequentially for many banks. We pen down NII (net interest income) growth of 6/3 per cent year-on-year (YOY)/QOQ (EXHDFC) for our coverage universe banks, with NIMS compression ranging between around 5-15 bps across banks (mainly private banks),” it said.

ICICI Securities sees NIM compression of nearly 20 bps for RBL Bank, but to remain flattish for IDFC First Bank and Federal Bank. It estimates a 15 bps rise in NIM QOQ for City Union, off low base.

For Karur Vysya Bank (KVB), it expects 30 bps dip QOQ on reported-basis, but close to 10–15 bps on adjusted for one-off in Q3. For State Bank of India (SBI), the QOQ NIM is expected to dip approximately by 5–6 bps.

On the credit front, adjusted systemic loan growth will likely decelerate to 15–15.5 per cent YOY compared to 17-18 per cent YOY (as per RBI trend and progress), as of FY23.

As against close to 4.5 per cent QOQ loan growth for both Q2 and Q3 FY24, ICICI Securities estimates around 3.5 per cent QOQ loan growth for Q4FY24, ICICI Securities said in the report.

“Credit growth continues to be led by the retail and SME segments, with a gradual pickup in corporate lending. We expect some moderation in the unsecured lending segment during the quarter on account of tightened norms by the regulator along with caution on part of lenders, considering the emergence of stress in certain pockets as seen in the previous quarter,” Axis Securities said.

In November last year, the Reserve Bank of India had raised risk weights — the capital banks keep aside as provisioning to cover any loan defaults — on the exposure of banks towards consumer credit, credit card receivables and non-banking finance companies (NBFCS) by 25 per cent up to 150 per cent.

Banking sector analysts said that the deposit growth will continue to lag credit growth. Deposit growth is expected to be at 13 per cent YOY. On the other hand, deposits growth shall likely see a significant rise, from 2–3.5 per cent QOQ range for the last three quarters, to 5.5 per cent QOQ in Q4FY24, ICICI Securities said.

In terms of asset quality, banks are likely to witness yet another strong quarter. Slippages will remain under control and asset quality improvement will continue, driven by healthy recoveries.

“Asset quality is likely to remain comfortable with contained gross slippages and healthy recoveries. The monthly data on bounce rate suggest healthy retail asset quality behaviour. Agriculture slippages, which saw an uptick last quarter, should also see a benign trend,” ICICI Securities said in the report.

Due to the approaching general elections, select banks may see elevated slippages in MFI (micro finance institution) portfolio, but overall slippages are likely to see a decline QOQ across almost all banks, it said.