An increase in lending rates helped banks get higher yields on loans, even as the cost of funds remained relatively low as they have managed with smaller increases in deposit rates.
Fiscal second-quarter results show private sector banks have all reported a strong increase in net interest margins (NIM) along with robust loan growth, especially from retail loans.
reported a 31-basis-point increase in NIM to 4.31% in the September quarter from a year earlier. NIM is the difference between the yield a bank earns on loans and the interest it pays on deposits, and is considered a key matrix to judge bank profitability. One basis point is 0.01 percentage point.
The improvement in NIM was across the board, with (57 basis points), (72) and (135) also reporting strong expansion in profitability. For , the NIM remained unchanged at 4.1%.
Analysts say private sector banks have made the most of rising interest rates, passing on rate hikes almost instantly resulting in a strong increase in margins across the board even as the cost of funds has stayed low as deposit rate hikes have lagged.
“The impact on margins and hence, profitability is at its peak, especially in an extremely benign credit cycle. Going forward, with the instant transmission of RBI hikes on asset yields, margins will reflate further before deposit pricing catches up. These are clearly the best times for banks (on the asset side), and lenders with no asset quality distractions or operational issues are seeing record profits,” said ASV Krishnan, institutional analyst, BFSI at Securities.
Analysts say though deposit rates will go up from hereon, the quicker transmission of rates has ensured profitability will be unhindered as banks still have enough leeway to avoid large-scale increases in deposits.
“Banks are likely to continue benefitting from the faster transmission of rate hikes. Deposit hikes have now started but will only eat into margins with a lag, which may be from Q4. As a result, profitability especially for private sector banks is likely to remain robust,” said Alpesh Mehta, BFSI analyst at
.
Deposit growth for all banks, like the broader banking system, has trailed the pace of credit expansion. For example, ICICI’s deposit growth at 12% was almost half the 23% increase in loan growth it reported.
But executive director Sandeep Batra brushed aside concerns of a future asset-liability mismatch by pointing out that the bank has a liquidity coverage ratio of 127% – higher than what is required to make up for the slower pace of growth.
