Corporate banking profitability at an all-time low

September 20, 2023

The heightened pricing war in the corporate or wholesale lending market is beginning to pinch banks more than what was anticipated. According to senior executives in the industry, NIM or net interest margin, which is the measure of profitability, is at a all-time low of 1.5-1.75 per cent for the wholesale banking business. This converts to a profitability erosion of over 100-120 basis points over the last five years.

To be sure, despite the 250 basis points increase in the repo rate since May 2022 (now at 6.5 per cent), well-rated corporates, those with credit rating of A and above, continue to access bank loans at the near about the benchmark rates. businessline had reported earlier that entities with AAA rating continue to access bank loans at 7.25 – 7.75 per cent, while those with A and above rating access debt at 7.5 – 8.75 per cent.

Prior to last year’s repo rate hikes, lending rates to top rated corporates dipped to as low as 4.75 – 5.25 per cent.

“Initially banks were able to handle such low rates without compromising much on profitability because the benign asset quality trends and the near tapering of ageing related provisioning supported pricing. However, since early 2023 it’s become a tricky situation and now it’s pinching banks hard on profitability,” said a senior banker who didn’t want to be named.

In fact as against the trend prior to 2018, when corporate loans were making up for retail business NIMs, now the tables have reversed. Bankers say that retail loans are literally feeding the overall profitability of banks, at times even that of corporate loans.