Private banks struggle with NIM contraction, falling CASA in Q2

Private banks recorded a healthy loan growth in the second quarter of current financial year but struggled to protect their Net Interest Margins (NIM) and CASA (Current Account-Savings Account) ratio. None of the major private banks was able to improve their NIM during the second quarter and reported a decline of 20 – 50 basis points (bps), sequentially.

HDFC Bank and Kotak Mahindra Bank saw significant NIM compression of nearly 50 bps. However, HDFC Bank’s numbers are not comparable as its merger with mortgage lender HDFC was completed on July1 this year.

“ICICI Bank’s NIMs witnessed contraction by 25bps quarter on quarter primarily on account of TD (term deposit) repricing. Management expects NIMs to contract further as some portion of deposits are yet to be repriced,” said Sameer Bhise, analyst, JM Financial.

Banks also struggled to protect their CASA ratio, which is a sticky and cheap source of funds for them. A higher CASA ratio indicates that the cost of funds of a bank is lower, which helps in boosting its earnings. HDFC Bank recorded highest decline of 490 bps in CASA ratio during the quarter while ICICI Bank’s 180 bps. In case of other private lenders, the decline was less than 100bps.

Banks are unlikely to see any significant improvement in CASA ratio in the next couple of quarters because banks are still keeping their term deposits rates at elevated level. Small and mid-size banks are giving stiff competition in raising term deposits rates.

Amid contracting NIM and falling CASA ratio, a healthy loan growth offered some respite to the banks. The gross advances of HDFC Bank, which includes various loans, rose by 58% to Rs 23.5 trillion during the quarter ended September 2023. ICICI Bank also witnessed strong loan growth as its total advances increased by 18.3% year-on-year to Rs11.1 trillion as of September 30, 2023. Kotak Mahindra Bank also posted 21 year on year increase in its advances which grew to Rs 3.57 trillion as on September 30, 2023. IndusInd Bank’s advances also grew by 21% during the quarter.