Crisil Ratings in its report stated that sectoral RoA will stay above the 20-year average of 0.8 per cent and 10-year average of 0.6 per cent.
The moderation in profitability will primarily stem from reduced treasury gains as bond yields normalise and higher provisions by banks ahead of the ECL framework implementation from April 1, 2027.
While the new norms allow for a transition glide path, some lenders have already begun setting aside provisions and this trend is likely to continue through the current fiscal, the report said.
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At the same time, net interest margins (NIMs) are expected to remain stable at around 2.9 per cent this fiscal, after declining 20 basis points last year, the agency said.
“Outstanding deposit rates fell around 50 basis points against a decrease of around 80 basis points in lending rates last fiscal, following a cumulative repo rate cut of 125 basis points. However, the cost of liabilities has likely bottomed out,” said Subha Sri Narayanan, director at Crisil Ratings.As credit growth continues to outpace deposit growth, competition for deposits remains intense, forcing banks to increasingly rely on costlier funding avenues such as bulk deposits, which may push deposit costs higher, Narayanan added.
Consequently, while NIMs may correct from the peak level of over 3 per cent seen in the fourth quarter of the previous fiscal, they are expected to remain broadly in line with the full-year average of last fiscal, the report said.
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The report also projected a moderation in total other income by 0.05-0.10 per cent from 1.2 per cent last fiscal, mainly due to lower treasury income after a sharp fall in bond yields in the first half of the previous year had boosted gains on investment portfolios.
According to the Vani Ojasvi, associate director at Crisil ratings, banking sector provisions could rise 0.05-0.10 per cent this fiscal due to proactive provisioning ahead of the new ECL framework.