Some of the top lenders in India have already started to see a decline in margins in the September-ended quarter, but they are hopeful that this trend will reverse soon, hopefully starting in the next quarter itself.
The fear of weaker quarterly margins and poor earnings growth spooked investors, causing shares of Axis Bank, ICICI Bank and HDFC bank to fall on Monday. Axis Bank fell 4.19% to ₹1,236 at the BSE, while ICICI Bank fell 1.15% to ₹1,381 while HDFC Bank slid 2.31% to ₹712.
HDFC Bank, the largest private sector bank by asset size, reported its lowest-ever net interest margin in the September-ended quarter, at 3.16%. a 10-basis point fall from 3.26% per cent in the preceding quarter.
Its rival ICICI Bank’s net interest margin (NIM) moderated to 4.18% in Q2FY27, compared with 4.30% in the year-ago quarter and 4.36% in the April-June quarter.
Axis Bank’s NIM came in at 3.36%; and the bank said that excluding FCNR(B) impact, the NIM would have been at 3.47%. “Last quarter we utilised some portion of these funds to retire the more expensive NRTDs (Non-retail term deposit), which was done towards the end of the quarter. We should be able to see some benefit of that come through in the next quarter in terms of NIM uplift,” the Axis Bank management said.
HDFC Bank and ICICI Bank
Sashidhar Jagdishan, HDFC Bank’s outgoing managing director & CEO during the bank’s media earnings call said that the trend is likely to change as the interest rate trajectory turned upwards. “The impact may be slightly higher this quarter. That’s because of the full impact of the previous quarters’ asset push in terms of the non-retail composition being high both on the liability side, on the asset side. I think that sort of has gone through in this quarter, in addition to the impact on account of the FCNR(B) mobilisation as well,” he said.
“But as we move to toward from here, I think with the upward rate trajectory, there should be a change because a large part of our balance sheet is linked to variable benchmarks, and therefore you will see a much faster transmission on the asset side,” Jagdishan said.
Banks in India had raised $127.8 billion through Foreign Currency Non-Resident [FCNR(B)] deposits under the Reserve Bank of India’s (RBI) special currency swap window, which closed on August 31.
ICICI Bank is believed to have raised near $17.9 billion through this route, Axis Bank raised about $12 billion while HDFC Bank raised about $9 billion in the form of these deposits.
But profitability of banks does get squeezed in the near term, which hurts margins. Also banks are cannot immediately lend out to high-yielding assets.
The ICICI Bank management, post their analysts call, said “The decline in margins for 1-2 quarters, on an optical basis, does not worry us. The bank has raised large quantum of fixed rate funding, which support growth. Interest rates are likely to go down rather than go up from here.”
“The increase in proportion of the assets of overseas branches in the total assets and large sequential increase in the retail term deposit base have led to a moderation in margins, and the full impact would reflect in the third quarter. After this we expect the margins to start moving back up, even based on the current level of policy rates.”
ICICI Bank’s management said that FCNR(B) deposits were raised during Q2FY27, the full impact on the balance sheet would be seen in Q3 and there could be a further moderation in margins in Q3. From Q4 onwards, margins will come back in a healthy way as these factors are to reverse out, the bank said.