Big Indian bank profits to level off as net interest margins plateau

Indian banks' profits are leveling off as credit growth eases and margins plateau amid rising deposit costs.

The biggest lenders in the South Asian nation reported year-over-year gains in their net incomes in the July-to-September quarter. Sequentially, however, earnings were flat. Net interest margins (NIMs), a key growth driver for earnings in recent quarters, have plateaued.

Indian banks were initially able to quickly pass higher interest rates to their customers. Now, the central bank has hit pause and deposit rates have had time to catch up with lending rates.

Overall, the banking sector "is expected to see a compression of 10-20 basis points in net interest margins" in the financial year ending March 31, 2024, Ajit Velonie, senior director at CRISIL Ratings, told S&P Global Market Intelligence in an email. Absolute profits increased for most banks in the fiscal second quarter, driven by continued growth.

India remains the world's fastest-growing major economy. GDP grew 7.8% in the April-to-June quarter, and the Reserve Bank of India expects the economy to expand 6.5% in the current fiscal year to March 31, 2024, as "available high frequency indicators suggest continuation of this momentum," RBI Governor Shaktikanta Das said Nov. 9.

"Driven by its inherent dynamism and supported by a prudent policy mix, growth is getting [a] stronger foothold while inflation is also coming under control," Das said.

Flat margins

NIMs at the large banks moved differently quarter over quarter, CRISIL's Velonie noted. While some large Indian banks reported a compression in NIMs, others saw sequentially flat margins.

The "differential impact" on NIMs comes because, while deposit rates have been rising since the fiscal third quarter of the previous financial year, some lenders increased yields on their assets due to changes in their product mix, Velonie said. "This increase in yield has helped some banks offset the impact of higher deposit costs," said Velonie.

Lenders expect NIMs to stay flat.

"My expectation is that our margin should be around this level, or maybe it might see compression for another 3 to 5 basis points," State Bank of India (SBI) Chairman Dinesh Kumar Khara said during the bank's Nov. 4 earnings call. SBI is India's biggest lender by assets.

ICICI Bank Ltd., which also saw a quarter-over-quarter decline in NIM, attributed the change to "the lagged impact of the increase in term deposit rates over the last year, on the cost of deposits," according to CFO Anindya Banerjee.

"We would continue to expect to see some increase in the cost of deposits on the book, and therefore some moderation in margins over the next quarter or so as well … On a full-year basis, we continue to expect that the margins would be at a similar level as they were in FY'23," Banerjee said during an Oct. 21 post-earnings call with analysts.

At the same time, bank credit growth has moderated. RBI data showed that bank credit registered a growth of 15.3% in September, compared with 16.9% in September 2022. CRISIL expects credit growth to dip to 13%-13.5% in the fiscal ending March 31, 2024, from 15.9% in fiscal 2023.

Unsecured loans

The central bank also flagged concerns about the "very high growth" in unsecured personal loans. Banks and nonbanking financial companies "would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest," said RBI's Das during a monetary policy speech Oct. 6.

ICICI Bank said personal loans grew 40.4% year over year. Banerjee said the bank is tracking its unsecured loan portfolio quite closely.

"We feel that the risks should not be something which would cause too much concern, but we will continue to monitor this as we go along," Banerjee said.

HDFC Bank Ltd. CFO Srinivasan Vaidyanathan said the bank sees personal loans as a "strategic growth area" for the bank. "The more customers we bring in and more they go through the seasoning process and monitoring process, we get the canvas even more opened up for an opportunity on personal loan," Vaidyanathan said during an Oct. 16 earnings call.

SBI's Khara said the bank's delinquencies on its personal loan book are "well within control" and that the bank is giving unsecured loans to those with salary accounts with the bank. "I wish to state that excess credit has been one of the safest product lines of the bank as it is given to corporate salary account customers, whose salaries are visible to us," Khara said.