Star Metro - FCNR(B) deposit drive puts sharper margin pressure on private banks

The aggressive mobilisation of Foreign Currency Non-Resident Bank [FCNR(B)] deposits increasingly weighed on bank margins during the September quarter, with private lenders bearing a disproportionate impact owing to their larger participation in the RBI’s FCNR(B) drive.

A comparison of the September quarter earnings shows that private banks, despite reporting stronger loan and deposit growth, witnessed sharper compression in net interest margins (NIMs) than most public sector peers.

Among private banks, Kotak Mahindra Bank reported the steepest decline, with NIM falling 44 basis points year-on-year to 4.1%. Axis Bank’s NIM declined 37 basis points to 3.36%, while ICICI Bank’s margin slipped 12 basis points to 4.18%. HDFC Bank, the largest private lender, recorded a 14 basis point decline in NIM to 3.16%.

PSU resilience

In contrast, PSU banks displayed greater resilience. Union Bank of India reported NIM expansion of 19 basis points to 2.86%, while Central Bank of India’s margin improved 12 basis points to 3.01%. Bank of India’s NIM declined by a modest six basis points to 2.41%.

“The impact has been far more pronounced for private banks because their FCNR(B) mobilisation was significantly higher relative to their existing deposit base. While PSU banks mobilised FCNR(B) deposits equivalent to roughly 2-2.5% of deposits, private lenders such as ICICI Bank, Kotak Mahindra Bank and Axis Bank raised FCNR(B) deposits amounting to about 7.5-10% of their deposit base. As a result, a larger pool of funds remained parked in lower-yielding assets pending deployment, leading to greater pressure on margins.” said Siddharth Rajpurohit, Lead Analyst - Banking and non-lending financials, Systematix Group.

“FCNR(B) inflows created a near-term pressure on margins as we carried excess liquidity during the quarter, said Ashok Vaswani, MD & CEO, Kotak Mahindra Bank during the media call. “The funds have been used to replace costlier borrowings and support growth opportunities. As the remaining liquidity is deployed into higher-yielding assets and repo-linked loans are repriced, we expect the margin impact to gradually moderate while NIMs remain broadly stable through the second half of the year,” he said.

Anshul Chandak, Head Treasury, RBL Bank, said the margin impact is temporary and reflects the cost of raising and hedging these deposits before they are fully deployed.

“From next quarter, you will start seeing improvement in NIMs,” Chandak said. He noted while FCNR(B) deposits initially weigh on margins because of their cost structure, the drag should ease as banks deploy the funds and balance sheets adjust.

Narrowing gap

For most banks, the impact is projected to normalise by the December quarter. However, lenders that raised FCNR(B) deposits disproportionately relative to their balance-sheet size could take longer to absorb the costs. Analysts expect the gap to narrow over the next two quarters as FCNR(B) funds are deployed and hedging costs stabilise. Until then, the banks that led the FCNR(B) mobilisation drive are likely to continue reporting a greater impact on margins than their state-owned peers.

“The FCNR(B)-related drag on margins is temporary,” said Rajpurohit. “Some impact could still persist in the December quarter as banks continue deploying these funds, but the pressure should start easing as the excess liquidity is put to work and repo-rate transmission normalises. By the fourth quarter, margins should largely stabilise, with the benefits of asset repricing and improved deployment of FCNR(B) funds helping offset the earlier drag,” he said.

S.Lapointe--SMC