The falling interest rate regime has given banks a double-whammy in terms of net interest margin and return on assets, both of which are set to take a hit of 10-20 bps each this fiscal.
The interest rates on loans are likely to come down faster than those on deposits. Return on assets (RoA) of banks is set to fall 10-20 bps to 1.1-1.2% this fiscal from an over-two-decade peak of 1.3% in fiscals 2024 and 2025. Not just that, this will be driven by a similar contraction in their net interest margins (NIMs) to 2.8-2.9% this fiscal, Crisil Ratings said in a note.
The agency also expects another 50 bps cut in the repo rate this fiscal, taking the total rate cuts to 100 bps — from 6.5% to 5.5%. Apart from NIMs, credit costs also have a bearing on banks’ earnings. The agency said while a secular decline in credit costs has supported profitability in the past a few years, they have bottomed out now. With other income and operating expenses, which are the other major components of earnings, are seen heading to flat growth, NIM compression will translate to a moderation in RoA after accounting for taxes
