India’s private banks draw thinner margins on tepid credit growth

Mumbai: Net interest margins (NIMs), or core profitability from banking operations, have lately come under pressure at top Indian private sector lenders which, in the absence of robust growth in retail credit, leaned on low-yielding corporate loans to drive business in the June quarter.

HDFC Bank’s NIM, or the margin differential between earnings on loans and the cost of money for the bank, was 3.26% for April-June. This was among the lowest in recent quarters for India’s most-valued bank — down 9 basis points on-year and 12 basis points from the March quarter. One basis point is a hundredth of a percentage point.

Kotak Mahindra Bank posted a 19-quarter low NIM of 4.53%, down 12 bps YoY and 14 bps QoQ. Axis Bank, meanwhile, reported NIM at 3.46%.

Yields at a High

Axis Bank’s management indicated the metric has bottomed out.“Either you get growth or you get margins. This quarter across the board was marked by margin disappointments, which the market won’t like, in our view,” said Suresh Ganapathy, head of financial services research at Macquarie Capital.

Rising bond yields in the June quarter in the aftermath of the West Asia war and higher oil prices nudged corporates toward banks to help meet their working capital needs.

Yields on the 10-year government debt, which is used as a benchmark to price corporate bonds, rose to a high of 7.13%, and averaged 6.99% in the June quarter, increasing borrowing costs for corporates via the bond market.

Thinning Spreads

“What has happened is that retail loan growth is yet to pick up meaningfully, and corporate loan growth has been very strong, partly driven by higher working capital demand and a shift from bond markets to loan markets due to the West Asia war,” Ganapathy said. “All signs are that growth has been driven more by low-yielding corporate loans this quarter.”

HDFC Bank said margins aren’t going to snap back to pre-merger levels overnight.

The bank’s plan rests on two structural levers: Lowering funding costs over time by scaling up its customer base through branch expansion, rather than chasing deposit balances directly; and raising loan yields by shifting the loan mix back toward retail, to a targeted 60% from 52% now.

Both are multi-year structural levers, not quarterly fixes, the bank said.

For Axis Bank, NIM for Q1FY27 came in at 3.46%, down 34 bps YoY and 16 bps QoQ.