According to a Jefferies report, major Indian banks used different strategies to deploy FCNR-B funds, causing varied impacts on lending margins. Private banks saw margin compression, while PNB's margins expanded, with a gradual recovery expected.
Major Indian banks have adopted different strategies to deploy funds raised through Foreign Currency Non-Resident Bank (FCNR-B) deposits, resulting in varying impacts on lending margins, according to a Jefferies research report released following the September-quarter earnings announcements.
The brokerage said that deploying these funds in relatively lower-yielding assets has weighed on private banks' margins, but expects a gradual reallocation over the next two quarters to support profitability. In its equity research report, Jefferies said, "FCNR-B raising were in lower-yielding assets (liquid deposits/ corporate loans) & expect reallocation over 2qtrs to aid margins."
Divergent Deployment Strategies
Analysing HDFC Bank, ICICI Bank, Axis Bank and Punjab National Bank (PNB), the brokerage said banks had adopted different approaches to deploying the funds. "All banks raised large pool of funds through FCNR-B deposits & have applied divergent ways to find immediate deployment of funds," Jefferies stated.
According to the report, ICICI Bank retained part of its funds in bank balances while expanding international lending. Axis Bank increased corporate lending, while HDFC Bank spread its deployment across different assets. PNB, meanwhile, repaid high-cost liabilities and continued reducing its exposure to lower-yielding purchased retail loans.
Jefferies estimated that gross FCNR-B mobilisation was equivalent to around 9 per cent of ICICI Bank's June-quarter deposits, followed by 7 per cent for Axis Bank, 3 per cent for HDFC Bank and 2 per cent for PNB.
Impact on Net Interest Margins
The differing strategies were reflected in the banks' September-quarter margins. "Private banks have seen a compression in NIMs due to drag from FCNR-B deposits, whereas PNB's margins expanded by 8bps QoQ," Jefferies noted.
Net interest margin (NIM) measures the difference between interest earned on a bank's assets and its funding costs, relative to interest-earning assets. HDFC Bank's margins declined by 8 basis points sequentially, Axis Bank's by 10 basis points and ICICI Bank's reported margins by 18 basis points.
Future Outlook and Margin Recovery
Looking ahead, Jefferies expects private-bank margins to remain under pressure in the December quarter, as seasonal stress in agricultural loans could offset benefits from better fund deployment.
The brokerage said banks will benefit from the RBI’s repo rate hike at different times, depending on how quickly they revise loan interest rates. PNB will benefit first, followed by HDFC Bank, ICICI Bank and Axis Bank. Public sector banks may see improved margins from the December quarter, while private banks are likely to benefit from the March quarter. (ANI)
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