Banks to walk the margin tightrope in Q1 as outlook remains uncertain

HDFC Bank, ICICI Bank and Yes Bank, which released their Q4 earnings on Saturday, said in their post-earnings calls that the reduction on fixed deposit interest rates—the fastest growing segment for deposit accretion—is expected to play out over the next few quarters, thus keeping margins—primarily NIM or net interest margin—under pressure.

Sandeep Batra, executive director of ICICI Bank, said at the post-earnings call on Saturday that margins will get impacted by repo rate cuts “because a fair bit of loans are linked to the external benchmark, which reprice pretty fast within three months, whereas deposits reprice with a lag". He added, however, that the bank is focused on overall profitability of which NIM is only one component.

ICICI Bank said 31% of its loan portfolio is fixed rate, 53% is linked to the repo rate or external benchmarks, and 15% of loans are linked to the marginal cost of funds-based lending rate (MCLR) as of March 2025.

HDFC Bank, which has been strategically growing its deposit book faster than loan growth to normalise its credit-deposit ratio, said that while there will be stability in margins from a longer-term perspective, there could be some volatility in margins in the short-term.

Also read | Banks Q4 preview: Earnings to soften as loan growth slows, margin pressure rise

To be sure, following the second policy rate cut of 25 bps on 9 April, several large lenders such as HDFC Bank, ICICI Bank, Axis Bank and Federal Bank cut rates on their savings account deposits by up to 25 bps to offset the impact of the parallel reduction in external benchmark-linked loans. The Reserve Bank of India (RBI) cut the policy repo rate by 25 basis points twice in the space of three months.

NIM stable in Q4

While the quantum of rate cuts expected has increased, banks also saw some amount of moderation in rates on retail and wholesale deposits and market borrowings, which combined with stable to higher yield on advances, supported overall cost of deposits and margins for the quarter. As a result, all three banks posted stable to better NIM (net interest margin) for Q4, but the trajectory hereon is not as clear, the banks said.

“There are many moving parts such as extended timing of the repo cuts, quantum and timing of decline of both retail and wholesale deposits, competition intensity, global uncertainty and liquidity," said Batra.

Yield on advances for ICICI Bank jumped to 9.9% from 9.7% in the fourth quarter; for HDFC Bank to 8.4% from 8.3%; and for Yes Bank was unchanged at 10.1%. These are seen correcting in the current quarter owing to transmission of the recent rate cuts.

Also read | Banks slash deposit rates taking cue from RBI’s repo cut

ICICI Bank’s NIM for Q4 FY25 was 4.4%, flat from a year ago and marginally higher than 4.3% in the previous quarter. However, Batra attributed the stability in NIM, despite the repo rate cuts, primarily to the impact of day count, the 50 bps cut in the cash reserve ratio (CRR) in December 2024 and interest income from tax refunds.

‘Day count’ determines the number of days between two coupon or interest payments. In October 2024, group CFO Anindya Banerjee had also said that the dip in NIM in Q3 was due to calendar effects and would reverse in the fourth quarter.

HDFC Bank’s NIM for the quarter was 3.5%, slightly higher than 3.4% a quarter ago and year ago, whereas that for YES Bank was 2.5% compared with 2.4% in the previous quarter and year ago period.

For perspective, NIM is a key financial metric that reflects the profitability of a bank or financial institution. It is calculated by subtracting the interest paid on deposits and other borrowings from the interest earned, or net interest income (NII) from loans and other interest-bearing assets.

Also read | Mint Explainer: How RBI's latest rate cut impacts borrowers, depositors

Recalibrating loan strategy

Banks are now looking to focus on higher yielding loan segments such as retail and MSME and staying away from large corporate or wholesale sale loans. ICICI Bank’s corporate loans de-grew 0.4% in Q4 whereas for Yes Bank the portfolio fell 6.9%. HDFC Bank’s corporate and wholesale book was 2.5% higher on quarter but 3.6% lower on year.

ICICI Bank’s Batra said that amid de-growth on the corporate side, the bigger opportunity for lending continues to be in retail loans. However, there, too, pricing and competition has been intense especially in the case of mortgage loans and so the bank remains focused on “appropriate loan spreads".

“There was enormous competition (in wholesale loans) from banks undercutting and having loan pricing, particularly larger ticket loan pricing and even the marginal cost of deposits," said HDFC Bank’s chief financial officer Srinivasan Vaidyanathan. "Mortgage rates are getting priced anywhere between 8% and 8.2%, which in our view is very low. Thereby, our disbursals are down 19-20% because we are very circumspect on how we are approaching the right kind of pricing."

Also read | State-owned banks outpace private peers in loans, claw back market share

Prashant Kumar, managing director and chief executive officer of Yes Bank, said the bank has been taking a calibrated call on the lending side to focus on profitability.

“The products which don't contribute to the margins, we are not disbursing. We have been very, very selective in case of retail. Even on the corporate side, we are not going ahead with those kinds of exposures where the margins are very thin, where the pricing is very competitive," Kumar said in the earnings call.