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Elina Mohanty

Net interest margins under pressure in Q4

Mumbai March 23 The recent increase in interest rates may marginally reduce the net interest margin of some banks in the fourth quarter this fiscal, but is unlikely to have a major impact on their profitability, say bankers and analysts.

Net interest margin is the difference between what the bank pays for deposits and borrowings and what they earn on loans and investments. It is also referred to as "profit margin on money" and higher the margin the better for banks' profit.

A few PSU banks with low current and savings accounts base but experiencing a high credit growth may report contraction in NIMs, said Mr Vishal Goyal, Banking Analyst, Edelweiss Research.

However, most banks are expected to report stable NIMs and a few of them with high current accounts and saving accounts deposit base such as Punjab National Bank, Housing Development and Finance Corporation and State Bank of India shall report improvement in margins, he said.

According to some analysts, private sector banks may see a lower contraction in net interest margins compared with the public sector banks, which may record a larger drop in margins.

Private sector banks have been able to pass on their cost of borrowing to the customers by steeply increasing the lending rates unlike their counterparts in the public sector.

ICICI Bank's benchmark advance rate (I-BAR) is now at 14.75 per cent, HDFC Bank's and UTI Bank's prime lending rate (PLR) is at 14 per cent. On the other hand, public sector banks such as SBI has its PLR at 12.25 per cent, while Bank of India and Bank of Baroda have their PLR at 12.5 per cent each. Most banks' peak deposit rate is in the range of 9-9.5 per cent.

Most banks increased their lending and deposit rates after the RBI hiked CRR to 6 per cent in two phases in February.

According to Ms Sarika P. Lohra, Banking Analyst, Angel Broking, "In the fourth quarter, most banks will experience a pressure on their margins by almost 10-12 basis points following the effect of CRR hikes in the quarter. Profitability of banks will be affected by around 4-7 per cent."

"A bank with a higher amount of deposits maturing this quarter as compared to advances maturing this quarter, will experience a higher pressure on margins," said Mr J. Moses Harding, Head-Wholesale Banking, IndusInd Bank.

"For instance, a bank may have Rs 1,000 crore deposits with an average rate of 8 per cent and also advances of Rs 2,000 crore with an average rate of 10 per cent maturing this quarter. The deposits may be re-priced at 9.5 per cent and loans at 12.5 per cent. A bank will then stand to gain by 2.5 per cent through advances, but it will cost a bank 1.5 per cent through deposits," he said.

But how will the interest margins be affected in the long-run? Mr Krishnan Sitaraman, Head-Financial Sector Ratings, Crisil, said, "In the long-run, interest spreads are not expected to materially come down. Interest spread is the difference between the yield on advances and yield on investments, and cost of deposits. Banks tend to price their advances in line with the change in cost of deposits. This trend is also indicated by Crisil analysis over the past 12 years, which reveals that the interest spread for the banking system has moved in a narrow range of 2.6 per cent-3.2 per cent, regardless of systemic interest rate movements."

"When the interest rates in the past moved up, the banks had been able to match their assets and liabilities, so I don't see a significant change in core profit due to a slight reduction in net interest margin," he added.

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