Indian Bank ROA to Fall to 1.15-1.2% in FY2025: Crisil

Banking Profitability Set to Decline This Fiscal

Indian banks are bracing for a profitability squeeze in the current fiscal year. Return on assets (RoA)—a key measure of how efficiently banks convert their asset base into profit—is expected to slip to 1.15–1.2%, according to Crisil, one of India's leading ratings agencies.

This marks a noticeable decline from the healthier RoA levels banks enjoyed in recent years. The culprits? Shrinking treasury gains and rising provisioning costs. Together, these factors will compress net margins across both public and private sector lenders.

The forecast highlights a turning point for the sector. After coasting on the tailwinds of favourable interest rate movements and forex volatility, banks must now return to the hard grind of earning profits through core lending and fee-based services.

Why Treasury Gains Are Disappearing

Over the past two years, banks reaped substantial gains from their investment portfolios. As interest rates fluctuated and bond yields moved, lenders booked profits on securities they held. Currency fluctuations also contributed to forex trading income, padding bottom lines even when lending margins were under pressure.

That era is ending. The rate environment has stabilised, reducing opportunities for one-time revaluation gains on held-to-maturity and available-for-sale securities. Forex volatility, which previously boosted some banks' non-core income, is also normalising.

Without these treasury tailwinds, banks must rely more heavily on their bread-and-butter business: making loans and earning interest. But with net interest margins (NIMs) already under pressure from competitive deposit pricing and cautious lending, this shift makes profitability harder to sustain.

Provisioning Costs Are Climbing

The second major drag comes from increased loan loss provisions. Banks are setting aside more capital to cover potential bad loans, driven by pockets of stress in certain sectors and a broader credit cycle that's shifting from growth to caution.

Provisioning directly eats into net profit. Even if a bank grows its loan book and maintains steady interest income, higher provisions reduce the final profit number—and therefore RoA. Regulators expect prudent provisioning to maintain financial stability, so banks have limited room to cut corners here.

Some stress points include retail unsecured loans, microfinance portfolios, and select corporate segments where repayment capacity has weakened. While overall asset quality remains manageable, banks are taking a conservative approach, building buffers now rather than scrambling later.

What This Means for Banks and Investors

A lower RoA signals tighter profitability across the sector. For bank managements, the focus will shift to cost control, operational efficiency, and diversifying revenue streams. Fee income from wealth management, investment advisory, insurance distribution, and transaction banking will become more critical to offset lending margin compression.

Larger banks with diversified income sources and economies of scale are better positioned to navigate this environment. Smaller and mid-sized lenders with limited non-core income and concentrated loan books may face sharper margin pressure.

For equity investors, lower RoA typically translates to more modest earnings growth and potentially lower valuations. Banking stocks may trade at compressed price-to-book multiples if the market views this profitability decline as structural rather than cyclical. Analysts will likely reassess earnings forecasts and price targets for the sector.

Risks to the Forecast

Crisil's projection assumes deposit growth remains steady and loan yields don't compress further. But these assumptions carry risks. If competition for deposits intensifies—especially as credit demand remains sluggish—banks may be forced to raise deposit rates, squeezing NIMs even more. That could push RoA below the 1.15% floor.

On the upside, if credit demand rebounds sharply or banks successfully reprice loans upward, the decline could be less severe. Much depends on the broader economic environment and the Reserve Bank of India's monetary policy stance in the coming quarters.

Broader Economic Context

The banking sector's profitability trajectory mirrors India's broader economic currents. GDP growth has moderated from pandemic-era highs. Consumer spending, while resilient, shows signs of caution as inflation bites into household budgets. Corporate credit demand remains uneven, with many businesses focused on balance-sheet repair rather than aggressive expansion.

In this environment, banks face a structural shift. The easy-money era that generated large treasury gains is over. The sector must now earn its returns through disciplined credit expansion, superior service quality, and tight cost management. The 1.15–1.2% RoA forecast reflects this new reality: profitability will be lower in the near term before the sector settles at a new equilibrium.

For depositors and borrowers, this outlook has mixed implications. Banks may tighten credit standards for marginal borrowers, making loans harder to access for some. But this conservatism should also underpin financial stability and protect the system from asset quality shocks.

Based on reports from Google News — Banking India.