Bank Margins Expected to Face Pressure in Q2 Due to Rising Deposit Costs, Analysts Say

Bank Margins Expected to Face Pressure in Q2 Due to Rising Deposit Costs, Analysts Say

Banking sector margins are likely to remain under pressure in the second quarter of FY25, as increasing deposit costs continue to impact profitability, according to market analysts. The rise in deposit rates, driven by tight liquidity conditions and heightened competition for funds, has squeezed net interest margins (NIMs) for many banks, limiting their ability to expand profits.

Analysts point out that while the lending environment remains stable, the cost of raising funds has increased significantly, eroding the profitability of loans. "Deposit rates have been rising steadily in response to strong credit demand and liquidity constraints, and banks are struggling to pass these costs onto borrowers at the same rate," said an analyst from a leading brokerage firm.

The impact of this trend is expected to be more pronounced for smaller and mid-sized banks, which are more reliant on deposits to fund their loan portfolios. Larger banks, with a more diversified funding base and stronger capital reserves, may fare better but will still face margin compression.

Some experts predict that banks will be forced to raise lending rates further to protect their margins, though this could dampen credit growth. Others believe that banks may turn to alternative sources of income, such as fee-based services, to offset the impact of higher deposit costs.

Despite the pressure on margins, analysts note that overall asset quality in the banking sector remains stable, with non-performing assets (NPAs) under control. However, the rising cost of funds is expected to be a key concern for banks in the coming quarters as they navigate a challenging financial environment.