Banks get margin boost in Q2 from cheaper deposits, lack of slippages

Large banks, many of these from the public-sector pack, saw an expansion in their net interest margins (NIMs) in the quarter ended September as falling interest rates helped cut their outgo on deposits. A judicial order barring the recognition of fresh slippages after August 31 also helped NIMs. In contrast, a few large lenders from the private sector reported shrinkage in margins as they were unable to profitably deploy the large amount of liquidity in their hands.

Given the excess liquidity and muted loan growth, large banks have slashed rates sharply over the past year, with one-year term deposit rates down 100-160 basis points (bps), according to a recent report by Credit Suisse. “With the sharp drop in funding costs over the past year, while lending rates have also come off, spreads have widened and have aided NIMs despite the excess liquidity on bank balance sheets,” the report said.

State Bank of India (SBI), Bank of Baroda (BoB) and Punjab National Bank (PNB) — the three largest state-owned lenders — saw their NIMs expand 12-71 bps sequentially in Q2FY21. Among private lenders, Axis Bank’s NIM rose 18 bps and Kotak Mahindra Bank’s NIM saw a 12-bps increase from Q1FY21.

PNB chief executive SS Mallikarjuna Rao admitted that the non-recognition of slippages had helped margins and that the 3.21% NIM should be considered an exception. “Second, we have also adopted a change in what you call income recognition in case of recoveries which are adjusted in NPA (non-performing asset) accounts,” Rao said, adding that PNB will be able to register a NIM of 2.75-2.8% for the full year.

Moreover, a scenario of limited credit demand is leading to greater competition among banks for good borrowers and that, in turn, could pressurise NIMs, bankers said. AK Das, MD and CEO, Bank of India (BoI), said last week that competition and rate-cut transmission to loans will both hit margins in the quarters ahead.

“There is a lot of competition in the market and demand is also not that great, especially from the manufacturing side. Margins will therefore continue to be under stress, but we will make attempts to cover it up through volume growth in advances,” he said. BoI’s NIM rose 18 bps sequentially to 2.66% in Q2.

Notable exceptions to the trend are private players HDFC Bank, ICICI Bank and IndusInd Bank. All three saw a sequential decline in NIMs despite lower deposit rates. The element of excess liquidity hit margins for all three. HDFC Bank told analysts that its average liquidity coverage ratio increased to 153% in Q2 from 140% in Q1, in line with its strategy to build on deposits. Srinivasan Vaidyanathan, chief financial officer, HDFC Bank, said that while the excess liquidity position in the bank positions it to cater to potential loan demand in the future, it impacted the current NIM by around 15 bps.

ICICI Bank also attributed the shrinkage in margin to surplus liquidity and said they would rather focus on getting good customers than specifically on margins. “It will be a function of how the credit growth pans out. We are really not targeting a credit growth (figure). If growth comes and it meets our expectations, automatically the carry that we have on excess liquidity will come down,” the management said in a post-results call.