Margins under pressure: Union Bank

The cost of funds has risen due to the higher interest rates being offered on retail deposits. The margins are under pressure, as the bank is expecting the net interest margin (NIM) to be 2.85 per cent in FY09, according to the chairman and managing director M V Nair.

The bank will book mark-to-market (MTM) losses on a part of its bond portfolio in the first quarter, Nair said, without divulging the extent of provisioning. He was speaking after signing a pact with KBC Bank of Belgium to form an aset management company in India.

 

Banks have been compelled to make provisioning for MTM losses out of their profits, thanks to the sharp erosion in the prices of securities held in their trading books. State Bank of India has already indicated that it will make a provision of Rs 1,000 crore in the first quarter for loss in the value of investments.

"The target of 25 per cent profit growth for 2008-09 looks difficult. But we have nine more months to make up", Nair said. The net profit for 2007-08 rose by 64.14 per cent to Rs 1,387 crore.

Elaborating on the deposit growth, Nair said the bank has seen a 23 per cent year-on-year growth in deposits till the end of June 2009. The state-owned bank has raised over Rs 6,000 crore from its 400-day deposit scheme launched in April this year. It had planned to raise Rs 10,000 crore for this scheme, which carried an interest rate of nine per cent.

Deposits in the 1-3 year maturity bracket give 9.5 per cent returns, thanks to the recent rate revision. The bank has withdrawn the 400-day deposit scheme as the interest rate is no longer attractive, another Union Bank official said. The bank's retail deposit base has grown by a healthy 33 per cent during the first quarter.

The bank's cost of funds stood at 5.76 per cent at the end of March 2008. "Besides the cost of funds, the cut in the prime lending rate, effected in the fourth quarter of 2007-08, has an adverse effect on the margins", the official added.