Vault Matters: Dancing to the tune of NIMs 

One of the takeaways from the recently published Q3 results of most banks is that their profitability measured as net interest margin or NIM came under a bit of pressure during the quarter. Barring the exception of RBL Bank, this was a common feature for most private banks, and given the cost pressures and a surge in deposit rates across the board, the trend may not be any different for public sector banks.

It’s not that the compression in NIMs has come as a surprise or in the most unanticipated manner. Yet, it has been the central point of discussion in the analyst community and among the key guiding factors in analysing the potential of banking stocks. Is this approach justified?

NIM is an indicator of a bank’s profitability and can be a good benchmark to reflect the efficiency of a bank. It is a derivative or a byproduct of a bank’s business composition. But with most private banks easily surpassing the 4 per cent mark, especially post-pandemic, NIM is beginning to be seen as the fulcrum around which businesses are getting established and a critical yardstick that banks must preserve at any cost. In the process, adequate attention isn’t being given to how a bank is building its asset or loan book.

For instance, barring HDFC Bank, unsecured loans, especially personal loans, were the major growth drivers across most banks that published their results so far. While this has been the case for many successive quarters, it was anticipated that risk weights increasing for this category of loans could press the pedal. The chase for microfinance portfolios is another indicator of banks’ aggression to maintain high margins, especially among the private players.

On the other hand, banks are handing out short duration term deposits of 12–24 months to match the life of these loans. While from an asset liabilities mismatch management perspective, there could be little to complain; excessive reliance on shorter duration products may keep banks on their tenterhooks to make up for the run down in balance sheets and post healthy growth.

Take banks in US, Australia, Singapore and China. They work on average NIM of 1.5-3.2 per cent despite maintaining a capital buffer, which is at least 200 bps higher than what private banks in India hold.

Seen against the global context, banks in India are faring impressive on the profitability front. But back home, NIM is seen as a standalone factor and ends up getting importance without adequately factoring for some of the pricing and operational risk.

COMMENT NOW