Days of high margins may soon end for banks chasing deposits

Mumbai: Even as banks report multi-quarter high margins, analysts say this is not sustainable going forward.

Banks have benefited largely due to a quick rate transmission under the external benchmark regime and will lose out on net interest margin (NIM) growth in the coming quarters as they are forced to increase deposit rates to fund credit growth here on.

"While overall numbers have been very good this quarter, we need to keenly watch out for deposit growth," said Suresh Ganapathy, associate director, Macquarie Capital. "A 20-30 basis point compression in margins for all banks (barring HDFC Bank) next year is inevitable."

Analysts say that the faster transmission of repo rate hikes into loans as compared to deposit repricing has helped banks report strong margins. ICICI Bank's net interest margin improved to 4.65%, the highest ever for the bank, in the quarter ended December 31, 2022.

"In a rising interest rate environment, many banks see loans linked to the external benchmark getting repriced faster, but as deposit rates are also getting repriced, we do expect NIMs to peak in a quarter or so," ICICI Bank executive director Sandeep Batra told ET during a post-earnings media call. Private lender Axis Bank saw its net interest margin at 4.34%, a two-year high, at the end of the December quarter. Its deposit growth was 10%, the weakest among the peers. Also, its retail-term deposits growth has remained flat over the last five quarters, indicating that the bank would have to aggressively reprice its deposit rates to beat industry peers.

Kotak Mahindra Bank posted its net interest margin at a multi-quarter high of 5.47%.

"Some of the NIM increase is due to the ability to pass on the rate hike, some of those we have seen in this quarter and some you will see in the March quarter," said Dipak Gupta, Kotak Mahindra Bank's joint managing director. "Though, over a period of time the cost of funds will go up and you will also see that impact (on NIMs)."