MUMBAI: State-run banks are set to see better earnings in the third and fourth quarters and going ahead as the biggest pain point -- falling net interest margins (NIMs), the key profitability gauge, -- has stabilised sequentially in the September quarter for most of them (though on-year most of them saw declines) after falling for three quarters. But better days are ahead only if the Reserve Bank doesn’t surprise them on the downside with another repo cut next month.
The improvement in the net interest margin, which is the difference between what a lender earns from borrowers and manages to keep with him after paying to depositors and other funds, has been achieved by slashing deposit rates both for term/fixed as well as savings deposits (to a record low of 2.5%) after the RBI delivered a 100 bps reduction in the repo rate in three successive cuts between February and June this year. Better credit offtake also helped contain the fall.
Only two of the top six public sector banks (PNB and Central Bank of India) saw NIM compressions continuing while all others saw improvement sequentially. But all the top four private banks saw their margins still falling both on-year and on-quarter. That means the systemwide improvement is led by public sector banks, which had faced the brunt of deposit flight. All the four largest private sector banks saw their margins falling both sequentially and annualised. However, they too could narrow the fall in both terms with proactive repricing of deposits.
The industry leader SBI, which handles a fifth of all system-wide credit, saw its NIM printing in at 3.09% for domestic operations and at 2.97% for the whole bank in Q2, which is lower by 18 bps on-year and up by 7 bps from the first quarter.
Bank chairman CS Setty had attributed this improvement to better liability management, with the focus moving to growing retail deposits, and re-pricing new term deposits at lower rates, which both contributed to lower cost of funds, despite an overall decline in yield on advances as over 65% of its loans are linked to repo rates. The cost of deposits fell by 8 bps sequentially to 5.1% while yield on advances sequentially declined 10 bps to 8.7%.
As against this, SBI's NIM in Q1FY26 was 2.90%, down from 3.10% in Q1 FY25 and from 3.15% in Q4FY25, due to a higher cost of deposits and a shift towards term deposits with domestic NIM falling to 3.02% from 3.35% on-year and 3.15% on-quarter.
Setty maintained NIM guidance of over 3% for March 2026, even if there is a rate cut next month.
Bank of Baroda, the second largest public sector lender, also saw its NIM improving by 5 bps to 2.96% in Q2 sequentially but down from 3.11% a year ago. The bank expects NIM to remain range-bound in Q3 and expects a more significant expansion from Q4 FY26 onwards.
The third largest state-run bank PNB however could not contain the margin compression, with Q2 printing in at 2.72%, down from 3.06% a year ago and from 2.81% in Q1. The bank attributed the contraction to factors like deposit repricing and a drop in the yield on advances. However, it anticipates NIM to improve in Q3FY26 and beyond due to expected deposit repricing and CRR adjustments.
The fifth largest state-run lender Canara Bank a saw a steeper 34 bps decline in Q2 at 2.52% on-year but only 3 bps lower than on-quarter. This decline was primarily driven by higher funding costs due to competitive deposit mobilization, despite strong growth in advances and retail loans. The bank also saw strong growth in its overall loan book, driven by the retail, agriculture, and MSME segments.
Central Bank of India saw a steeper 52 bps fall on-year to 2.89% in Q2 from 3.41% a year ago and from 3.61% in Q1. It attributed the margin pressure to a lag in repricing deposits compared to lending rates.
Bank of India saw its NIM printing in at 2.66% in Q2, down from 2.82% in Q2 FY25 but better than Q1 when it was 2.55%. This was attributed to factors such as corporate loan repayments in July, but the bank anticipates NIM to improve to around 2.90%.
On the other hand, the largest private bank HDFC Bank, which is also the second largest systemwide, fared better, despite falling on-year and on-quarter. But the bank, which has been struggling since July 2023 when the reverse merger with its parents got completed which also saw a lot high-cost term deposits coming to its books, has been able to contain the fall this time, with NIM printing in at 3.27%, down from 3.46% in Q2 last fiscal and from 3.35% in Q1 as the bank repriced deposits faster than assets.
ICICI Bank also saw its NIM falling to 4.30% in Q2 from 4.36% in Q1 and from 4.34% a year ago. The management expects the NIM to remain stable in the near term, with further pressure being limited as deposit rate hikes have stabilized. The optimism is based on the view that deposit rate hikes have already occurred and significant increases are not expected.
Axis Bank wasn’t better either with Q2 NIM printing in at 3.73%, down 25 bps on year and 7 bps sequentially. But this was better than analysts' expectations as the bank proactively repriced its term deposits.
So did Kotak Mahindra Bank which also saw its margin pressure continuing in Q2 at 4.54%, a sequential decline from 4.65% but remained flat on yearly terms at 4.54%. The bank attributed this to factors like the full repo-rate transmission and a lower mix of high-yield assets. It expects this to stabilize and improve in the coming quarters as it has already fully passed on the repo-rate transmission.