Banks to see 10-20 bps compression in NIMs in FY24, says CRISIL

Net interest margins (NIMs) of banks to remain in 3 perent to 3.1 percent in the fiscal year (FY) 2023-24 as the deposit rate hikes scenario plays out, CRISIL said.

The banking sector is expected to see a compression of 10-20 basis points (bps) in net interest margins (NIMs), a profitability metric, to 3-3.1 percent in the current fiscal as the deposit rate hikes play out, ratings agency CRISIL Ratings said on June 13.

The overall banking sector profitability should remain steady after touching a decadal high of around 1.1 percent in FY23, the agency said.

“Return on assets to be steady at 1.1 percent as lower credit costs provide an offset. However, with lower credit costs providing an offsetting tailwind on account of continued benign asset quality, banking sector profitability should remain steady,” the agency said.

NIM is the difference between the amount a bank spends and earns from its interest business through loans and deposits. In other words, it is the amount of money that a bank earns in interest on loans and deposits. For banks, NIM is an indicator of overall profitability and business growth.

Banks NIMs

The country’s biggest lender State Bank of India (SBI) recorded a 22 bps year-on-year (YoY) growth in NIM. For FY 23, the bank’s NIM stood at 3.58 percent, growing from 3.36 percent in the previous year.

One basis point is one-hundredth of a percentage point.

Among private sector banks, HDFC Bank recorded a 20 bps growth in NIM for the quarter ended March 31, 2023 .at 4.3 percent from 4.1 percent in the year-ago period.

During the same period, ICICI Bank’s NIM expanded by a record 90 bps from 4 percent to 4.90 percent.

Despite major banks recording growth, industry experts have said NIMs peaked for banks and with the possibility of an increase in deposit rates, they could fall.

“NIMs for the banking sector have peaked. Competition for deposits has driven banks to hike rates since October 2022, and they could increase further,” said Krishnan Sitaraman, Senior Director and Chief Ratings Officer, CRISIL Ratings.

Sitaraman also said an estimated 30-35 percent of deposits were expected to come up for re-pricing in the current fiscal. "And given that most of the re-pricing on the assets side has already been done, the NIM gains seen last fiscal will partly reverse,” he said.

CRISIL Ratings director Subha Sri Narayanan said NIMs were expected to compress, which would provide an offset and overall bank profitability may see a reduction in credit costs.

“Gross non-performing assets (GNPAs) have already hit a decadal low of around 3.9 percent, and there is a chance of further reduction in GNPAs this fiscal. Therefore, credit costs are estimated to have dropped to 0.7 percent in fiscal 2023, and are expected to fall further this fiscal,” Narayanan said.