Context:
The Indian banking sector, apart from small finance banks, remained muted in terms of profitability in Q3FY25 due to lower core income, declining margins, and increasing slippages.
What Are Core Earnings?
Core earnings are the profits derived from a company’s main or principal business, which does not take into consideration some of the expenses related to the main activities, as well as nonrecurring income or expense items that lie outside of the normal business.
Key Highlights:
- Growth in Net Profit
- YoY: 21.2% year over year.
- Growth for 32 scheduled commercial banks (SCBs).
- QoQ: A 2.4% quarterly decline sequentially.
- Without SBI: 12% YoY growth.
- SBI’s Impact
- SBI reported a whopping 84.3% YoY increase in net profit to ₹16,891 crore.
- Without SBI, state owned banks reported 47% YoY net profit growth.
- Private banks grew by 3.8% YoY.
Revenue & Profitability Trends
- Net Interest Income (NII) Growth
- Net Interest Income (NII) is the difference between the revenue generated from a bank’s interest-bearing assets and expenses incurred while paying its interest-bearing liabilities
- YoY: Up 7.1% as banks paid more to acquire deposits.
- Other income: Increased 12% YoY but decreased by more than 10% quarter on quarter.
- Net Interest Margins Under Pressure
- Net Interest Margins Under Pressure” means that banks are experiencing a decline in their profitability from lending activities, as the difference between the interest they earn on loans and the interest they pay on deposits is shrinking.
- NIMs for Q3: Declined by 7 basis points YoY to 3.36%.
- Factors influencing margins
- Higher cost of funds (increased deposit rates).
- High credit costs (higher risk weight on unsecured loans).
- Slow credit growth.
- Interest rate spread compression.
Effects of Suggested RBI Cut
It is expected that NIM will compress even in Q4 and beyond, in case RBI lowers the repo rates to enhance economic growth.
- Reason
- Banks will have to reprice their external benchmark linked loans instantly.
- Deposit rates response is slower, and hence short term squeeze is bound to happen.
- Most vulnerable
- Private banks, since they have a larger share of EBLR linked loans.
- Affected sectors
- Retail and MSME loans margin could get eroded.
Outlook & Challenges
- NIMs Likely to Decline Further
- Pressure will persist into FY26 if RBI implements rate cuts.
- Growth Dependent on Rate Movements
- Banks will struggle to maintain profitability unless credit growth picks up.
- SBI’s Strong Performance May Not Reflect Broader Trends
- Other banks face tougher challenges due to lower NII and higher credit costs.
