The Hindu Business Line : Bank earnings set to rise in Q2

Bank earnings in the second quarter of this financial year are expected to be robust on the back of improved interest income and lower depreciation on investments.

Bankers said that the net interest margins of almost all the banks have improved during the second quarter. Net interest margin (NIM) is the difference between interest income and interest expenditure. NIMs for most of the top banks are expected to be upward of 3 per cent for this quarter, they added. For the stronger banks, both in the public and private sectors, NIMs were expected to be about 3.5 per cent, the bankers said.

The improvement in the NIMs was largely triggered by the robust credit offtake in Q2. During the quarter, credit offtake has remained at over 30 per cent. Direct farm credit is currently priced at 7 per cent, but there is an additional subsidy from the Government of another 2 per cent. This effectively made the interest spread for banks of close to 4 per cent over their weighted average cost of working funds.

Revision in pricing

During the last quarter, some revisions in the pricing of corporate and retail advances were also made, which contributed to beefing up the earnings. For corporate loans, after the re-pricing, the effective interest was in the vicinity of about 8.5 to 9 per cent. Bankers said these revisions were done in line with the loan covenants bankers had entered into with the borrowers. Bulk of the loans was advanced at discounts to the benchmark prime lending rate (BPLR). With the revision in the BPLR over the last few weeks lending rates were also automatically revised, bankers said. The BPLR, at the beginning of the second quarter this year, ranged between 10.75 and 11.25 per cent. Currently, the BPLR is between 11 and 11.50 per cent for public sector banks. For some foreign banks the rates are about one per cent above these rates.

Bankers said that the realignment of lending rates was also effected for the housing loan segment. The housing sector comprised a substantial component of bank lending, with over 70 per cent of it in the form of floating rates. The revision in BPLR had triggered a series of revisions in the home loans rates. Home loan rates are now close to 10 per cent.

What has also helped bankers keep the NIMs upwards of 3 per cent was the fact that most of them had managed to contain the cost of liabilities. The average cost of deposits was still about 5 per cent despite the fact that some of them had bid for bulk deposit from corporates and floated certificates of deposits at rates of above 8 per cent.

Further, in this quarter, the drop in yields had also helped avert large provisions for depreciation on investments. Ten-year yields since the beginning of the quarter had softened by 50 basis points from 8.2 to 8.7 per cent.

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