State-run banks may see an improvement in earnings in the third and fourth quarters, as their biggest pain point—falling net interest margins (NIMs)—stabilised sequentially in the September quarter after three straight quarters of decline, even though margins remain lower year-on-year. The outlook, however, hinges on the Reserve Bank refraining from springing a downside surprise with another repo rate cut next month.
The improvement in net interest margin, which is the difference between what a lender earns from borrowers and manages to keep with them after paying depositors and other funds, has been achieved by slashing deposit rates both for term and fixed, as well as savings deposits (to a record low of 2.5%), after RBI delivered 100 bps cut in the repo rate in three successive reductions between February and June this year. Better credit offtake also helped contain the fall.
An analysis of top six PSBs, only two (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 YoY and quarter-on-quarter. That means the system-wide improvement is led by PSBs, which had faced the brunt of deposit flight and resultant effort to get them back since the pandemic as all four largest private sector banks saw margins falling sequentially and annually. However, they too could narrow fall in terms of proactive re-pricing 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 YoY and up by 7 bps from the first quarter. SBI chairman CS Setty had attributed this improvement to better liability management, with focus moving to growing retail deposits, and re-pricing new term deposits at lower rates.