Net profit of 19 listed banks is likely to decline by 4 per cent year-on-year (Y-o-Y) for the quarter ended March (Q4FY25) mainly due to pressure on net interest margins (NIM) as a result of rate cut by the Reserve Bank of India (RBI), according to analysts’ estimates.
Additionally, loan growth is expected to further slowdown amid low demand in certain secured products, stress in the unsecured segment, and a high cost to deposit (CD) ratio across the system.
However, banks are set to gain from softening of bond yields, boosting treasury income for Q4FY25.
According to Bloomberg estimates, private banks’ net profit may decline by 5.3 per cent while that of state-owned banks by 2.5 per cent Y-o-Y.
According to analysts, banks’ NIM may contract by 5-8 basis points (bps) Y-o-Y for Q4FY25.
Elara Securities, in its quarterly preview, said NIM will be impacted due to continued repricing of the deposit book and sticky incremental deposit cost, impact of the RBI rate cut.
At the same time, it could benefit from cut in the cash reserve ratio (CRR).
“The net interest income (NII) has been impacted due to moderation in credit disbursements and some transmission of reduction in policy repo rate cut to externally benchmarked loans (February 2025 rate cut).
"The treasury gains from softening of yields may partly compensate for subdued NII in Q4FY25,” said Karan Gupta, director and head, financial institutions, India Ratings and Research.
The spread between the outstanding weighted average lending rate and outstanding weighted average deposit rate stood at 3.62 per cent as of February 2025 and decreased by 11 bps from the level seen in November 2024, said Yes Securities.
On a yearly basis, both loan and deposit growth may see some moderation.
However, on a sequential basis, both the segments are expected to pick up, analysts said.
Broking firm Motilal Oswal said that banking system credit growth slowed down to 11 per cent from 16.5 per cent a year ago due to contraction in demand in some secured products, stress in the unsecured segment, and a high CD ratio across the system.
On the deposit front, growth in the Current Account and Savings Account (CASA) continues to be a challenge for banks.
“Deposit growth for the system has been at 10.2 per cent Y-o-Y while FY25 year-to-date (YTD) growth stands closer at 9.9% against credit growth of 10.3%.
"With CASA accretion being a challenge and depositors preferring term deposits (TDs) with higher rates, these factors could push cost of funds to the higher side and thus hurt NIM,” Motilal Oswal said in its report.
The moderation in loan growth was due to factors like banks going slow on unsecured credit — a high-yielding product — as well as lending to non-banking financial companies (NBFCs) after the RBI hiked risk-weights on such exposure in November 2023, said a senior public sector bank (PSB) executive.
The RBI has rolled back the risk weight from April 1.
While overall asset quality of the banking sector may remain healthy, there are some pockets of stress like unsecured credit – personal loan and microfinance.
As for private sector lenders, overall slippages are expected to remain under control, though unsecured retail (especially MFI segment) is likely to witness higher delinquencies.
On the other hand, state-owned banks’ asset quality stays healthy for all segments, with recoveries exceeding slippages.
Moreover, state-owned banks are to materially gain from the new norm of reversing excess provisions on government guaranteed security receipts (SR).
The silver lining for the quarter under review is banks’ treasury gains as long-term bond yields have declined on a sequential basis.
However, there will be no MTM (mark-to-market) gain/loss on the investment book but any profit actually booked will have a positive impact on the profit and loss account.
Going forward, the NIM will remain under pressure in Q1FY26.
Elara Capital said in a report that the drop in NIM will be more visible in FY26.
The first six months of FY26 may be characterised by strained liquidity, softer loan growth, pressure on NIM, and sustained vulnerability in MFI and unsecured segments.
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