Public Sector Lenders' Profitability to Moderate Due to Decreasing Net Interest Margins

Strategic Insights -

Large public sector lenders have seen a 26% cumulative increase in net profit for FY25, but their net interest margins (NIMs) are expected to come under pressure, leading to a moderate return on assets (RoA) in the current fiscal year. Banks such as State Bank of India, Canara Bank, and Punjab National Bank have lowered their NIM expectations, attributing this to a faster downward repricing of loan assets than of deposit liabilities in a falling interest rate environment.

Key Takeaways:

  • The public sector lenders' return on assets (RoA) is expected to moderate by 10-20 basis points (bps) to 1.1-1.2% this fiscal year from a peak of 1.3% in FY24 and FY25.
  • The expected contraction in NIMs is due to a faster downward repricing of loan assets than of deposit liabilities in a falling interest rate environment.
  • Large banks such as State Bank of India, Canara Bank, and Punjab National Bank have lowered their NIM expectations.
  • Canara and PNB have also given guidance of lower credit growth amid geopolitical uncertainty triggered by US tariffs.
  • Excluding gold loans, the entire banking sector's total loans linked to an external benchmark are around 45%, primarily repo-linked loans, which are typically repriced rapidly after rate cuts.
  • For public sector lenders, the EBLR-linked loans are around 35% of the total portfolio.
  • SBI chairman CS Shetty expects another 50 basis points policy rate cut starting with 25 bps in the next monetary policy committee meeting scheduled on June 6.
  • SBI expects gross credit to grow by 12-13% in FY26, against 12% expansion in FY25.
  • Canara Bank gave a guidance of 10-11% credit growth against 11.74% in FY25, while PNB pegged it at 11-12% as compared with the FY25 growth of 13.6%.
  • Crisil's Subhasri Narayanan expects overall bank credit to grow 100-200 basis points (bps) faster on-year to 12-13% in fiscal 2026.
  • Santanu Chakrabarti, an analyst with BNP Paribas Securities India, expects reasonable credit growth to translate into concurrent earnings growth momentum for banks in FY26.

Statistics:

  • 26% cumulative increase in net profit for FY25 for public sector lenders.
  • 10-20 basis points (bps) moderate decline in return on assets (RoA) to 1.1-1.2% this fiscal year.
  • 45% of total loans linked to an external benchmark for the entire banking sector.
  • 35% of the total portfolio for public sector lenders linked to EBLR (External Benchmark-Linked Rate).
  • 12-13% gross credit growth expected by SBI in FY26.
  • 10-11% credit growth guidance by Canara Bank for FY26.
  • 11-12% credit growth guidance by Punjab National Bank for FY26.
  • 50 basis points policy rate cut expected by SBI chairman CS Shetty.

Sources:

  • Subhasri Narayanan, director, Crisil Ratings
  • SBI chairman CS Shetty
  • Santanu Chakrabarti, an analyst with BNP Paribas Securities India
  • Economic Times (ET)
  • Times Content