Margins may stay under pressure in FY27 as banks brace for West Asia risks, ECL transition: Report
New Delhi, May 17
During the March quarter, Indian banks managed to keep asset quality largely stable, shrugging off worries faced due to the ongoing Gulf war.
Brokerage firm Systematix warned that the true impact of the West Asia conflict was likely to surface only in the second half of the financial year 2026-27. Despite this, the brokerage maintained a constructive outlook on the sector, citing buffers from government schemes like CGSMFI 2.0 and ECLGS 5.0.
"The repo rate cut of 25 basis points in December weighed on yields in the March quarter, with the full impact flowing through to the Yield on Advances (YoA)," Systematix noted.
For SBIN, AXIS Bank and Indian Bank, the sequential decline in Yield on Advances was steeper than peers. Although some benefit came from the downward repricing of deposits, it was limited for a few banks, resulting in a sequential contraction in Net Interest Margins (NIMs) for SBIN, Union Bank, Indian Bank and AXIS Bank.
Large private banks fared better. ICICIBank and HDFC Bank managed to keep NIMs largely stable with a slight upward bias, improving by 2 bps and 3 bps QoQ, respectively. In contrast, PSBs faced sharper compression, with SBIN's NIM falling 17 bps QoQ to 2.81 per cent and Union Bank's down 12 bps to 2.64 per cent, as their higher share of EBLR and T-bill-linked loans bore the brunt of the rate cut.
Federal Bank and Bank of Baroda reported improved NIMs, but Systematix noted these were largely driven by one-offs such as interest on income tax refunds and higher recoveries from written-off accounts. Kotak Mahindra Bank's 13 bps expansion to 4.67 per cent was aided by day-count benefits, though normalised NIM was flat at 4.54 per cent.
Asset quality remained broadly in check. Most coverage banks reported a net slippage ratio below 80 bps, with the exception of IndusInd Bank. Slippages increased marginally for seven of the 12 banks, while five saw a decline.
IndusInd led the improvement with an 85 bps QoQ drop to 2.2 per cent as stress in the microfinance segment eased, followed by Kotak Mahindra and AXIS Bank. Among PSBs, SBIN continued to report a low 0.5 per cent slippage ratio, while Bank of India and Bank of Maharashtra saw modest upticks.
Credit costs were mixed as banks created buffer provisions amid geopolitical uncertainty. ICICIBank posted the lowest credit cost at 0.03 per cent, supported by strong corporate recoveries, while AXIS Bank and Federal Bank raised one-time prudent provisions of ₹20.01bn and ₹4.56bn, respectively. Bank of Baroda and Union Bank also made additional provisions for floating and standard assets.
Advances growth held up, with the coverage universe expanding 5.2 per cent QoQ and 14.9 per cent YoY. Bank of Maharashtra led with 6.9 per cent QoQ growth, while AXIS Bank was the fastest among large private banks at 6.4 per cent QoQ. Deposit growth outpaced advances at 6.1 per cent QoQ, helped by 4Q seasonality. HDFC Bank recorded the strongest sequential deposit growth at 8.6 per cent QoQ.
On capital, banks guided that they were confident of managing the transition to the new Expected Credit Loss (ECL) framework notified on 27 April, estimating a 0.7 per cent to 2.5 per cent impact on capital adequacy. Systematix concluded that while upside risks to asset quality persisted, the overall sector outlook remained positive.
— ANI
Reader Comments
Good to see IndusInd Bank's microfinance stress easing - that sector was a big worry for retail investors last year. But the West Asia risk in H2 FY27 is alarming since Gulf remittances and oil prices directly impact our economy. Banks should definitely build more buffer provisions now rather than later. Hope RBI is monitoring this closely.
Honestly, I'm tired of these reports always being optimistic about the sector outlook. Last year they said the same thing and NIMs still contracted sharply for PSBs. SBIN dropping 17 bps while HDFC improves 3 bps shows the gap between public and private is widening. Taxpayers fund PSBs but they underperform - something needs to change in their management. Not all rosy.
Interesting data on deposit growth outpacing advances at 6.1% QoQ - that's a positive sign for liquidity in the banking system. HDFC's 8.6% sequential deposit growth is impressive. However, the Gulf war impact is a real cloud over FY27. Indian banks have historically handled geopolitical shocks well, but this time with ECL transition, it's a double challenge.
One-offs driving NIM improvement for Federal Bank and BoB is a red flag. Interest on income tax refunds won't happen every quarter! Kotak's flat normalized NIM at 4.54% is more realistic. For retail investors like me, I'd stick with HDFC and ICICI for stability - their corporate recovery strength is unmatched. PSB recovery is too slow.
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