IndusInd Bank's net interest margin is likely to expand in coming quarters as the private lender is expected to protect its yield on advances even as cost of funds is set to decline in a declining interest rate regime.
Improving liability mix and infusion of fresh equity are also likely to benefit the bank's margin, which has remained under pressure since the third quarter of financial year 2010-11 (April-March). The net interest margin has declined over 35 basis points since then to 3.25% at the end of September, 2012.
"IndusInd Bank's margin decline was led by increase in cost of funds (by 200 basis points). While yields on corporate loan portfolio increased by 235 basis points, higher share of fixed rate loans restricted overall yield improvement to just 160 basis points and thus impacted margins negatively," Alpesh Mehta and Sohail Halai, analysts with brokerage Motilal Oswal Securities, wrote in their note to clients on Friday.
"The above scenario is likely to reverse in the expected falling interest rate regime, wherein wholesale deposit rates cool off, and we expect IndusInd Bank to be a key beneficiary. Margin is expected to improve as almost 50% of the loan book is fixed in nature with duration of more than one year. Even though on the corporate side, loans yields are expected to decline, overall loan yields will likely fall to a lesser extent," the analysts noted.
Also, improving share of low-cost current account savings account (CASA) deposits is likely to aid the bank's margin. The private lender's CASA ratio was close to 28% at the end of September, 2012 compared to 26.8% during the third quarter of 2010-11. The bank is one of the few private lenders that offer higher interest rate on its savings deposits.
Earlier this month the bank raised Rs 2,000 crore via qualified institutional placement (QIP). The equity infusion is likely to benefit the bank's margin by around 40 basis points.
"We factor in margin improvement of 40 basis points in the second half of 2012-13 over the first half and further 20 basis points year-on-year for 2013-14 financial year," the analysts said.
Motilal Oswal has a "buy" rating on IndusInd Bank stock with a target price of Rs 500 per share.
At 11:52 AM, the bank's shares were traded at Rs 418.25 on the National Stock Exchange (NSE), up 0.8% from previous close.