India’s banking sector may witness a modest decline in profitability during the current financial year, according to a report by Crisil Ratings.
The agency expects the industry's return on assets (RoA) to decline by 10-15 basis points to 1.1-1.2 percent this fiscal from around 1.3 percent in the previous year.
The fall is mainly expected because of lower treasury income and higher provisioning by banks ahead of the implementation of the Expected Credit Loss (ECL) framework.
Despite the moderation, Crisil noted that profitability will remain significantly higher than the banking sector’s 20-year average RoA of 0.8 percent and 10-year average of 0.6 percent.
Net Interest Margins Likely To Remain Stable
According to Crisil, banks' net interest margins (NIMs) are expected to remain stable at around 2.9 percent this fiscal.
Last year, NIMs declined by 20 basis points as lending rates fell faster than deposit rates following cumulative repo rate cuts of 125 basis points.
Subha Sri Narayanan said deposit rates declined by around 50 basis points, while lending rates fell nearly 80 basis points during the previous fiscal year.
However, she noted that the cost of liabilities has likely reached its lowest level.
With credit growth continuing to outpace deposit growth, banks are facing intense competition for deposits.
This is increasing dependence on costlier funding sources such as bulk deposits, which could push deposit costs higher.
Treasury Income May Decline
Apart from interest margins, banks are also expected to face pressure from lower treasury income.
Crisil estimates that total other income could soften by 5-10 basis points this year.
The decline is expected because treasury gains are normalising after strong bond market performance during the first half of last fiscal.
However, fee and commission income is likely to remain healthy.
The ratings agency expects bank credit growth of around 13 percent this fiscal, which should support fee-based earnings.
