Expansion in net interest margins of banks


In the September quarter, some large banks, mostly public sector ones, saw an expansion in net interest margins (NIM). The reason for this expansion could be attributed to falling interest rates and the judicial order that barred fresh slippages after August 31.

State bank of India (SBI), Bank of Baroda (BoB), and Punjab National Bank (PNB) saw an expansion of 12-71 bps sequentially. NIM is a profitability indicator for financial institutions. Axis Bank and Kotak Mahindra Bank are the private sector banks that saw an increase in NIM. Axis Bank’s NIM rose 18 bps, and Kotak Mahindra Bank’s NIM rose 12 bps. A few large private sector banks reported shrinkage in margin due to excess liquidity. Credit Suisse, in its report, said that despite excess liquidity, the banks were able to widen the spreads due to a sharp drop in funding cost and reduced lending rates.

S S Mallikarjuna Rao, PNB chief executive, said that non-recognition of slippages had helped in expanding the margins. Also, PNB has adopted a change in income recognition in case of recoveries that are adjusted in NPAs. He added that the bank would be able to register a NIM of 2.75%-2.8% for the year.

The excess liquidity hit margins of large private sector players like HDFC Bank, ICICI Bank, and IndusInd Bank; they saw a decline in their NIMs. HDFC Bank reported an increase in its average liquidity coverage ratio to 153% in the second quarter from 140% in the first quarter. Srinivasan Vaidyanathan, CFO of HDFC Bank, said that excess liquidity would help the bank to provide to potential loan demand. Excess liquidity affected the bank’s NIM by 15 bps. ICICI Bank responded that their emphasis is on getting reliable customers rather than focusing specifically on margin. ICICI management, after the Q2 results, said that the bank is not targeting credit growth (figure). If there is growth and when that meets the bank’s expectations then the excess liquidity will automatically fall.

Limited credit demand in the market is leading to tight competition for good borrowers. A K Das, MD, and CEO of Bank of India (BoI) said that competition and rate-cuts would pressurize NIMS in the quarters ahead. The company would try to overcome this through volume growth in advances. BoI reported a rise in Nim by 18 bps to 2.66% in Q2.


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