Bank margins likely to remain stable in coming quarters too

Base rate, hike in PLR to come to the rescue.

Benefiting from a sharp fall in cost of deposits in 2009-10, banks reported a significant improvement in net interest margins (NIMs) in the first quarter ended July 2010.

Despite the recent turn in the interest rate cycle (rising rates), most bankers and analysts see banks reporting better margins for a few more quarters. The recent hike in prime lending rates by most banks and the shift to the base rate will bring more interest income, they say.

Though they will spend more on interest payments as they raise deposits rates to get funds, the balance will still be in favour of better margins, say bankers.

The cost of deposits dipped substantially for all banks. For State Bank of India, the bellwether of the banking system, it declined 89 basis points to 5.27 per cent in 12 months to June 2010.
 

PERFORMANCE MATRIX GOOD SHOW; RISING NIM AND FALLING COST OF DEPOSITS
Bank	Net interest margins		Cost of Deposits (%)
	Jun ’09	Jun ’10	Jun ’09	Jun ’10
Allahabad Bank	2.70	3.10	6.08	5.60
Andhra Bank	2.85	3.72	6.77	5.49
Bank of Baroda	2.57	3.43	6.16	5.09
Bank of India	2.83	3.29	6.48	5.37
Canara Bank	2.70	3.01	6.48	5.69
City Union Bank	2.79	3.56	8.36	6.97
Corporation Bank	2.26	2.62	6.67	5.19
Dena Bank	2.42	2.82	6.44	5.67
Federal Bank	3.31	4.17	7.06	5.82
Indian Bank	3.56	3.71	6.13	5.29
ING Vysya Bank	2.70	3.30	6.35	4.69
Karur Vysya Bank	2.78	3.37	7.89	6.51
Oriental Bank	1.83	3.34	7.41	5.61
Punjab Natl.Bank	3.24	3.94	5.94	5.02
State Bank of India	2.30	3.18	6.16	5.27
Syndicate Bank	2.70	2.83	6.62	5.27
Union Bank	2.32	3.03	6.47	5.31
United Bank	1.90	2.98	6.47	5.40
Vijaya Bank	2.33	2.90	6.08	5.54
For the quarter ended

The yield on advances did not drop in the same proportion. In case of SBI, it was just 70 basis points in the 12-month period. The combined effect was a sharp rise in NIM to 3.18 per cent from 2.30 per cent a year ago.

A senior official of a public sector bank said, “Lending rates tend to be sticky on the downward journey. Banks do not cut lending rates with the same intensity as they cut deposit rates”.

The interest rate cycle turned at the close of the first quarter (June 2010) due to RBI’s rate hikes and hardening liquidity. Bulk deposits rates moved by over 100 basis points in a month. This raised a question mark over banks’ ability to maintain healthy margins in the future.

IDBI Bank Chief Financial Officer P Sitaram said the increase in deposit rates would push up costs. But banks have started raising lending rates and still have the flexibility to charge clients more. There will not be pressure on margins but they may not improve further as costs go up, say experts.

The credit growth is racing ahead of deposit growth. And, as companies and household draws credit, the need to garner deposits will drive banks to further hike deposit rates. Many banks have jacked up rates across maturities by 25-150 basis points.

The daily calculation of interest on savings accounts would also add to the cost of funds.

Bipin Kabra, chief financial officer of Dhanlaxmi Bank, a mid-size private bank, said in this round, lending rates started moving up before banks raised deposit rates. The rates for bill discounting and short-term lending were already up before July 2010. So, margins should not suffer much.

Banks may also benefit from the recent hike in prime lending rates as most of their customers are yet to move to the base rate.

P Jayarama Bhat, chief executive and managing director of Karnataka Bank, said margins had not peaked. They could improve further, as banks could increase lending rates in an environment where the credit market was tight, he said.