As banks lower lending rates to support economic growth, they will have a tough time managing capital mobilization costs to stabilize their net interest margins (NIMs). Financial statements for the fourth quarter of 2024 indicated a further narrowing of NIMs across the system, though the impact varies among banks. NIM is a key measure of bank profitability, reflecting the spread between lending rates and funding costs. It is influenced by loan interest rates, capital costs, and credit growth. In 2024, credit growth surged to 15.09%, the highest in seven years. While this rapid expansion boosted interest income, banks faced a dilemma: maintaining low lending rates to stimulate economic activity while managing capital costs effectively. Lower deposit rates helped reduce funding costs, but lower lending rates also squeezed profit margins. As both lending and deposit rates declined, banks’ ability to adjust these two variables became crucial in maintaining profitability. If funding costs were not reduced at the same pace as lending rates, NIMs suffered. This presented both risks and opportunities. Some banks saw further NIM contractions in Q4 2024, choosing to sacrifice short-term profitability for long-term growth. Others successfully optimized funding strategies, managing to maintain or even improve their NIMs despite […]