'Rising deposit costs will exert pressure on NIM of banks in Q2 FY25'

New Delhi, Oct 13: The rising cost of deposits, driven by increased rates on term deposits and the repricing of legacy low-cost deposits, will exert pressure on net interest margin (NIM) in Q2FY25 on banks, according to the Yes securities report.

Most banks are set to hold steady on a sequential basis in terms of net interest margin (NIM), although a few may witness a slight decline.

The Indian banking sector is expected to show stable asset quality in the second quarter of the financial year 2024-25 (2QFY25).

Most banks are anticipated to maintain similar levels of fresh slippages compared to the previous quarter, thanks to a well-behaved residual restructured book.

Despite some macroeconomic stress due to high interest rates, slippages are likely to stabilize, with a few banks potentially experiencing lower slippages due to seasonal factors.

Provisions will vary across banks, with Bank of Baroda (BOB) and RBL Bank expected to see significant rises sequentially, while HDFC Bank, Indian Bank, and others may exhibit a flat trend. Conversely, banks such as State Bank of India (SBI), Axis Bank, and ICICI Bank are likely to record a decline in provisions.

However, some banks may benefit from favorable changes in their loan mix.

For private sector banks, the average Weighted Average Domestic Term Deposit Rate (WADTDR) fell slightly by 2 basis points, while the Weighted Average Lending Rate (WALR) increased by 14 basis points.

On the other hand, public sector banks experienced a slight increase in WADTDR and a minor decline in WALR, leading to a narrowing loan spread. Overall, NIM is expected to be marginally lower for some banks by 2-10 basis points sequentially.

Loan growth during 2QFY25 is projected to be healthy across the banking sector. IDFC First Bank and CSB Bank are likely to see loan growth exceeding 4.5 per cent, while moderate growth is expected for banks like HDFC Bank, BOB, SBI, and others.

Sequentially, operational expenses for both private and public sector banks are anticipated to grow at a slightly slower pace than business growth. Meanwhile, long-term bond yields have decreased, with the average 10-year yield standing at 6.88 per cent during the quarter, down by 20 basis points from the previous quarter.

Due to changes in accounting for the Available for Sale (AFS) investment book, there will be no mark-to-market gains or losses, although any actual profits will reflect in the profit and loss statements.