In January 2017, Morgan Stanley had warned that the days of fat net interest margins (NIMs) are over for private sector banks.
NIM is what banks earn from their assets, minus what they pay on deposits, divided by interest-earning assets. Indeed, margins of top private sector banks had slimmed down since then, but now the tide is turning back in favour of lenders.
Analysts believe that NIMs of large corporate lenders, such as ICICI Bank Ltd, Axis Bank Ltd and State Bank of India (SBI) may improve in the medium term. Kotak Securities Ltd noted that margins are a combination of factors from loan growth to recoveries. “As such, we expect NIM expansion for select corporate banks like ICICI, Axis and SBI over medium term," analysts at the firm wrote in a note.
“For SBI, while it remains aggressive in loan pricing, we still expect its NIMs to improve and PPOP (pre-provision operating profit) growth to remain robust as well," analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd wrote in a note.
What investors and bankers are betting on is the rise in recoveries of bad loans to help beef up their margins. But large cases are still doing the rounds of insolvency courts, and recovery levels are still unpredictable.
Surely, the improvement in margins is not going to be that easy to predict, or even achieve for lenders. Perhaps the biggest impediment to margin improvement is the sharp slowdown in loan growth.
Non-food credit net of repayments shrank. What this means is repayments exceeded fresh lending during the first six months of FY20. This is unlikely to change significantly in the coming quarters, as forecasts for credit growth is at 10-12%. When banks haven’t lent, they haven’t made fresh money.
Therefore, what they have to rely for margins is earnings from past loans. The signs are not encouraging there. Loan recoveries have been modest at best and credit costs have stayed elevated.
Ergo, for the second quarter, banks are likely to report stable or even lower margins.
Even so, with the major clean-up of books in place for most banks, investors can hope that the focus will be on recoveries from here on.
As for margins, with the fall in bad loans on which banks earn no income, an improvement should be in the offing.