McKinsey expects return on assets of banks to fall in 24-30 months
Mumbai: Indian banks are likely to post a lower return on assets, between 0.85 and 1%, in the next 24-30 months as net interest margins (NIMs) contract due to repricing of deposits, showed an analysis by McKinsey & Co. Return on assets (RoA) of the banking system, a measure of profitability in relation to assets, stood at 1.1% in FY23, up from -0.2% in FY18 and 0.9% in FY22. “If we take a 12-18 month view, we expect RoAs to fall.
If you look at all banks’ quarterly results and their forward looking projections as well, everyone has made the same commentary that we will see pressure on net interest margins (NIMs) going forward," Peeyush Dalmia, senior partner, McKinsey & Co. This, Dalmia said, automatically translates into RoA and it will be very difficult for other factors to compensate for the drop in NIMs. Dalmia said that RoAs, at an average, was about 1% in FY13, then came down to -0.2% and has again gone up to 1.1%.
“We are at a 10-year high from a profitability perspective as far as the banking industry is concerned," he said. This is predominantly driven by two factors. The NIMs have come back to its historical highs because retail loans have grown faster.
Dalmia said that the share of retail loans in total banking advances has gone up quite significantly and corporate loans have grown the slowest. “Retail does give you the maximum amount of NIM," he said. That apart, even as rates moved up, cost of deposits did not go up at the same rate but lenders were able to pass the new rate to the borrowers.
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