Bank of India aims to boost its net interest margin to 2.55% in the second half of fiscal year 2027, driven by higher interest rates. While lending yields are rising, the lender faces the challenge of managing deposit costs as they reprice over time. Investors are also tracking the bank's Rs 65,000 crore loan pipeline in sectors like infrastructure and power.
Bank of India has projected an improvement in its net interest margin, a key measure of profitability representing the difference between interest earned on loans and interest paid on deposits, to 2.55% for the second half of the 2027 financial year. This target is an increase from the 2.47% margin reported in the September quarter. The positive outlook is primarily driven by the recent repo rate increase by the Reserve Bank of India, which allows the bank to earn higher interest income on its advances.
A significant factor helping the bank is that approximately 66% of its loans are linked to external benchmark rates. This means that when the central bank hikes interest rates, the bank can pass on these increases to borrowers almost immediately. Because the interest it earns rises faster than the interest it pays to depositors, the bank expects a temporary expansion in its profit margins.
However, investors are watching the deposit side of the business closely. While the bank is earning more on its loans, the cost of funds may increase as current term deposits mature and are renewed at higher interest rates. Management noted that about 60% of the bank's current term deposits are in the 12- to 18-month maturity bucket. This suggests that the impact of higher interest rates on the bank's costs will be gradual rather than immediate. The ability of the bank to maintain these margins will depend on how effectively it manages this rising cost of deposits in the coming quarters.
The bank also highlighted the role of its international operations, which account for about 15% of its total loan book. Interestingly, there is a clear difference in profitability between the two segments; the bank’s domestic operations enjoy margins exceeding 2.70%, while international margins are thinner, at roughly 1.14%. The bank retains flexibility to move funds across its 15-country network to balance these returns.
On the growth front, the bank has a healthy pipeline of future lending opportunities, totaling Rs 65,000 crore as of September 30. Infrastructure remains the primary driver of this demand, with power projects making up Rs 10,000 crore, road projects Rs 5,600 crore, and the oil and gas sector contributing over Rs 4,000 crore. Other sectors like manufacturing, cement, and shipbuilding also feature in the pipeline. Asset quality remains a focus for investors, and the bank reported lower slippages in the recent quarter, suggesting that current lending practices are helping to contain bad loans. Going forward, the primary monitorables for shareholders will be the actual trend in deposit costs, the speed at which the bank converts its loan pipeline into actual disbursements, and the stability of asset quality as interest rates remain elevated.