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Beating expectations of a dip in Net Interest Margins (NIMs), HDFC Bank has managed to hold NIMs at 4.2 per cent in the quarter ended June. This makes it the third straight quarter in which the NIMs have stood steady at 4.2 per cent.
What makes it interesting is that, the bank has maintained its NIMs despite the rise in savings bank interest rates from 3.5 to 4 per cent, a sequential fall in the proportion of low cost deposits (CASA ratio ) from 51 per cent to 49.1 per cent, a 30- 40 basis points sequential rise in the overall cost of funds and only a marginal increase of about 0.3 per cent in the Net Interest Income (NII) on a quarter on quarter basis ( Rs 2,848 crore vs Rs 2,839 crore ).
Reason
So, what has helped HDFC bank stick to its NIMs? First, it has been able to limit its exposure to high cost wholesale deposits during this period as it has raised Rs 3,650 crore of Tier-II capital in May 2011. In fact, deposits grew by only 1.2 per cent over the March quarter, whereas, advances grew by 9.7 per cent.
Two, with a good portion of corporate lending being working capital borrowings (which typically are short-term loans), the bank has been able to re-price its corporate loan book periodically. Hence, although the cost of funds has gone up, the yield on advances too have moved up by a similar 30-40 basis points sequentially, thus keeping the margins stable. Despite the fall in the current quarter, a healthy CASA ratio at around 50 per cent has done its bit in capping the rise in cost of funds too.
Outlook
That said, the bank does not promise maintaining the margin at the same 4.2 per cent in the forthcoming quarters. Instead, the management expects it to be in the 3.9-4.3 per cent range. Besides, the bank does anticipate some more shaving off of CASA deposits, given the high fixed deposit rates prevailing currently. Going forward, the CASA ratio is expected to be between 46–50 per cent, akin to what was seen during 2008, when fixed deposit rates were at similar levels.
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