Smart Money | Banks' margin to decline from fourth quarter, says expert
It seems that the Indian banking sector is set to face some significant challenges in the coming years. Banks with high LDR and low CASA ratios may be particularly vulnerable to margin pressures, while all banks are likely to see some decline in their margins due to spread compression.
The Indian banking sector has been facing significant challenges in recent years due to a range of factors, including the impact of the pandemic and increased competition. The Nifty Bank is down almost 7 percent this year and the PSU bank index is down almost 15 percent. In a CNBC-TV18 special. Smart Money, experts closely monitoring the industry's performance predict potential outcomes for the coming years and discuss what is ailing the banking stocks.
Vishal Goyal, Head of India Research and Banks Analyst at UBS Securities predicted that margins are likely to decline from quarter four due to sharp spread compression.
“Incremental spread compression would be the key reason for margins to start declining,” he said.
This refers to the difference between a bank's cost of funds and the interest rate it charges borrowers. As this spread compresses, banks may find it more challenging to maintain their margins.
According to, banks with a relatively high loan-to-deposit ratio (LDR) are likely to see a sharper margin decline in FY24.
This is because such banks typically have a higher cost of funds, which could impact their margins more significantly.
Additionally, Goyal noted that banks with lower Current Account Savings Account (CASA) ratios and high External Benchmark Lending Rates (EBLR) could also see a sharper margin decline in FY24. This is due to the fact that such banks have a higher cost of deposits, which could affect their margins more significantly.
Despite these challenges, Goyal also pointed out that margins are likely to peak post quarter three of FY23. This means that banks may see some relief in the short term before facing further margin pressures in the long term.
Krishnan ASV, Lead Analyst - BFSI, HDFC Securities, also spoke about his predictions for the banking sector in the near future.
For more details, watch the accompanying video
First Published: Feb 24, 2023 5:52 PM IST
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