Indian banks' margins set to fall, credit growth to moderate in FY25 - S&P

Indian Bank

15/02/2024 07:58

MUMBAI, Feb 15 (Reuters) - Funding conditions in India
are likely to play a crucial role in constraining loan growth
for many banks in the country, and credit expansion could
moderate by 200 basis points in the next fiscal year, S&P Global
Ratings said in note on Thursday.
    The rating agency expects system-level credit growth to
moderate to 14% in FY25, starting April 1, from about 16% annual
growth in the first three quarters of FY24, with margins also
set to fall.
    "Credit demand is strong. The economic backdrop is highly
conducive to growth. Asset quality is improving, buoyed by a
confluence of supportive structural and cyclical factors," the
rating agency said.
    "All that India's banks are missing is a boom in deposits."
    If credit and deposit growth rates remain steady, a period
of deposit competition would loom and further squeeze bank
margins, it said.
    "Private-sector banks (PVBs) are likely to bear the brunt of
the situation, as they are operating at much higher LDRs
(loan-to-deposit ratio) as compared with the public-sector banks
(PSBs) and many PSBs have better deposit franchise," S&P said.
    "Adding to the stresses on PVBs, the lenders are growing at
a much faster pace than the PSBs."
    HDFC Bank  HDBK.NS  is under extra pressure due to its
merger with Housing Development Finance Corp Ltd in 2023,
resulting in a weakened funding profile. The entity, India's
largest private lender by market capitalisation, may need
several years to revert to its pre-merger levels, said S&P.
    S&P expects system-wide net interest margin to slip to 2.9%
in FY25 from 3% in the current fiscal year. However, S&P said
rated private banks should be able to withstand the
deterioration in their LDRs and pressure on margins without any
major decline in their credit profile.
    "Indian banks will have to strike a fine balance between
maintaining strong loan growth and paying more for deposits to
fund that growth. If the clash for deposits gets fiercer, Indian
banks will take a hit, either with slimmer margins or slower
growth."

 (Reporting by Swati Bhat; Editing by Sonia Cheema)
 ((swati.bhat@thomsonreuters.com; twitter.com/swatibhat22;
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