Shares of major private lenders fell after reporting lower net interest margins for the June quarter. While HDFC Bank and Axis Bank struggled with rising borrowing costs, ICICI Bank and Punjab National Bank shares rose after posting resilient margins and stable profitability. Investors are now focusing on how banks manage funding costs to protect their bottom lines.
The Indian banking sector witnessed a split performance on Monday as investors reacted to divergent results for the June quarter. While large private lenders faced selling pressure due to shrinking net interest margins, or NIMs, some public and private sector banks managed to buck the trend by demonstrating stable profitability.
Net interest margin is a key measure for banks, representing the difference between the interest they earn from loans and the interest they pay out to depositors. When this margin tightens, it often suggests that a bank is struggling to keep its funding costs low while maintaining profit levels.
Pressure on Large Private Lenders
Leading private lenders including Axis Bank, HDFC Bank, and Kotak Mahindra Bank saw their shares drop as the market assessed their latest quarterly performance. Axis Bank shares declined by 5.5%, while HDFC Bank shares fell by 5.1%.
For HDFC Bank, the NIM was reported at 3.2%. The management highlighted that a significant portion of its borrowings, estimated between ₹40,000 crore and ₹50,000 crore, is due to mature over the next two years. This maturity profile provides the bank with an opportunity to replace high-cost debt with cheaper alternatives, which could eventually help stabilize or improve margins. However, brokerage reports, including those from Macquarie Research, suggest that margin pressure may continue in the near term due to sticky borrowing costs.
Axis Bank also faced a margin contraction, with its NIM falling by 16 basis points to 3.46%. The bank cited interest income reversals and changes in its balance sheet mix as primary contributors to this decline. Analysts have noted that the bank’s goal of reaching a 3.8% margin may be challenging given the current competitive environment and the composition of its corporate loan book. Similarly, Kotak Mahindra Bank reported its NIM at 4.53%, a low point not seen in the last 19 quarters.
Resilience in ICICI Bank and PNB
In contrast, ICICI Bank and Punjab National Bank saw their share prices advance following their earnings reports. ICICI Bank reported a 16% year-on-year profit increase, with its NIM staying stable at 4.28%. Market analysts pointed to the bank's disciplined approach to pricing its assets and effectively managing funding costs as a key reason for this performance.
Punjab National Bank also reported a modest expansion in its NIM, which rose by 3 basis points sequentially. The bank’s management attributed this gain to a successful reduction in the cost of funds and an improved yield on its advances. The focus for these banks remains on expanding their low-cost deposits, known as CASA, to offset broader industry-wide margin pressures.
For investors, the primary monitorable in the coming quarters will be how effectively each bank can reprice its loans and optimize its deposit mix to counter the ongoing pressure on interest margins.