Potential rate cuts to deepen net interest margin woes as private banks report mixed results

In the third quarter of FY25, private banks experienced mixed earnings, with ICICI Bank and Kotak Mahindra Bank standing out due to their double-digit profit growth.

With net interest margins (NIMs) dipping across the banking sector, a potential rate cut in the Reserve Bank of India’s (RBI) February policy is likely to exert further pressure on NIMs, according to Bunty Chawla, AVP (BFSI) at IDBI Capital.

He further noted that banks will not be able to absorb the rate cut immediately. Chawla explained that banks would take one or two quarters to adjust their deposit rates downward, eventually allowing them to maintain their profit margins. "While the asset side of their balance sheets will feel the impact right away, there will be a delay in adjusting deposit rates."

He however remains optimistic about deposit costs and stated, "The cost of deposits has already peaked. With the possibility of rate cuts, we only expect these costs to decrease and stabilise."

He also mentioned that with the recent liquidity adjustments by the RBI - such as Open Market Operations (OMOs), Variable Rate Repo (VRR), and the USD/INR Buy/Sell Swap auction - deposit rates are unlikely to climb further.

In the third quarter of FY25, private banks experienced mixed earnings, with ICICI Bank and Kotak Mahindra Bank standing out due to their double-digit profit growth. However, the broader banking sector faced challenges, including a noticeable dip in NIMs.

ICICI Bank managed to outperform the sector by maintaining a lower cost-to-income ratio and reduced credit costs. The bank’s NIM declined slightly by 2 basis points (bps) from Q2 to Q3 FY25, and by 18 bps year-over-year.

Kotak Mahindra Bank maintained a stable NIM of 5.22 percent over the last two quarters, though this was marginally down from 5.45 percent in Q3 FY24.

HDFC Bank’s NIM, on the other hand, declined from 3.6 percent in Q2 FY25 to 3.5 percent in Q3 FY25, a significant drop from 4 percent in FY24. The bank’s cost of funds rose from 4 percent in Q2 to 4.1 percent in Q3.

Federal Bank reported a minor decrease in NIM, which stood at 3.11 percent in Q3 FY25 compared to 3.12 percent in the previous quarter. Its cost of funds increased from 5.93 percent in Q2 to 6.01 percent in Q3 FY25.

Other banks, including Canara Bank and IDFC First Bank, also reported slight declines in NIMs alongside marginal increases in their cost of funds.

Yes Bank maintained a consistent NIM at 2.4 percent across three quarters, with a minor rise in the cost of funds from 6.4 percent in Q2 FY25 to 6.5 percent in Q3, in line with the rate in Q3 FY24.