PSB Margins Under Pressure as Private Banks Narrow Loan Growth Gap

A Bernstein report warns Public Sector Banks could face margin pressure due to their reliance on borrowings for credit growth. Meanwhile, Private Sector Banks continue to narrow the loan growth gap and extend their lead in deposit growth.

Public Sector Banks (PSBs) could face pressure on their margins due to their greater reliance on borrowings to support credit growth, even as private sector banks (PVBs) are expected to continue narrowing the loan growth gap with their public sector counterparts, according to a report by Bernstein.

Overall Sector Outlook for FY27

The report expects the banking sector to maintain healthy growth in FY27, supported by strong liquidity conditions and a recovery in nominal credit growth. However, a possible tightening of policy later in the year could moderate the pace of growth. It stated, "Within the sector, PVBs are likely to continue narrowing the growth gap with PSBs, while the latter's greater reliance on borrowings could weigh on relative margin performance".

Private Banks Gain Ground as PSBs Face Headwinds

Within the sector, PVBs continued to gain momentum during the quarter and narrowed the loan growth gap with PSBs to around 1 percentage point. Private banks also extended their lead in deposit growth, resulting in continued gains in their market share. In contrast, PSBs remained more reliant on borrowings to support credit growth. The report said this greater reliance could weigh on their relative margin performance.

PSBs Show Strength in NII Growth

Despite this, PSBs continued to outperform PVBs on net interest income (NII) growth. The report attributed this to favourable shifts in the loan mix of public sector banks.

LCR Revisions Offer Limited Room for PSBs

The report also highlighted the impact of the revised Liquidity Coverage Ratio (LCR) framework. PSBs received greater benefits from the revised framework, but the gap between the LCRs of PSBs and PVBs remained relatively narrow. According to the report, this leaves limited room for PSBs to sustain their growth outperformance against private banks.

Diverging Profitability Between PSBs and PVBs

Profitability trends also differed between the two groups during the quarter. PSBs reported a sequential improvement in return on assets (RoA), while profitability trends among PVBs remained mixed.

Stable Margins and Asset Quality Expected

The report said the overall banking sector is expected to benefit from robust liquidity conditions and improving nominal credit growth in FY27. At the same time, developments in interest rates, borrowing requirements and deposit costs will remain important for the margin outlook. With deposit repricing largely completed, the report expects the margin outlook to remain stable. Any increase in policy rates could provide some additional support to NIMs. The report also expects asset quality to remain stable, helping banks maintain manageable credit costs and supporting earnings.

Overall, private banks are expected to continue closing the growth gap with public sector banks, while PSBs' greater dependence on borrowings could become a factor affecting their relative margin performance. (ANI)

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