A rise in cost of deposits has resulted in a significant drop in net interest margin (NIMs) of banks in consecutive quarters. They expect NIMs to fall in the current financial year, too.
NIMs of 32 public and private banks have declined by 13 basis points (bps) over year-before levels and 26 bps over the highest average margins of 3.42 per cent recorded in December 2010. In the fourth quarter, the 32 banks’ interest income rose 30.2 per cent while interest cost rose 36.9 per cent.
IDBI Bank Chief Financial Officer P Sitaram said, “Difficult times will continue, due to tepid offtake in credit.”
| THE BIG PICTURE Year-on-year basis point change in net interest margin for quarter ended | ||||
| Jun,’11 | Sep,’11 | Dec,’11 | Mar,’12 | |
| Gainers | ||||
| State Bank | 44 | 36 | 44 | 82 |
| Central Bank | 13 | -14 | -92 | 78 |
| ICICI Bank | 10 | 1 | 6 | 27 |
| Syndicate Bank | 7 | -11 | -13 | 17 |
| J & K Bank | 12 | 3 | -6 | 14 |
| Dena Bank | 8 | -30 | 6 | 12 |
| Axis Bank | -43 | 10 | -6 | 11 |
| HDFC Bank | -10 | -10 | -10 | 0 |
| Losers | ||||
| Canara Bank | -59 | -64 | -69 | -62 |
| Kotak Mah. Bank | -40 | -40 | -30 | -40 |
| Bank of Baroda | -3 | 5 | -21 | -49 |
| Punjab Natl.Bank | -7 | -11 | -25 | -41 |
| Corporation Bank | 210 | -45 | -30 | -36 |
| Andhra Bank | 5 | -9 | -10 | -35 |
| Oriental Bank | -40 | -66 | -20 | -30 |
| Allahabad Bank | 30 | 34 | 29 | -26 |
| IndusInd Bank | 9 | -6 | -36 | -21 |
| Union Bank (I) | 7 | -14 | -13 | -18 |
| United Bank (I) | 4 | 11 | 17 | -13 |
| Bank of India | -70 | -37 | -54 | -8 |
| For 32 banks | -5 | -10 | -16 | -14 |
| Source: Banks | ||||
With a falling currency, inflation will be a bigger concern than growth for Reserve Bank of India (RBI). This could further limit growth in lending.
Banks have already started cutting lending rates without altering deposit rates. Tight liquidity is keeping interest rates for liabilities high. Plus, business volumes are low, which would impact interest income in the first quarter of this financial year.
Ananda Bhoumik, senior director in Fitch Ratings’ financial institutions group, said, “As lending rates have started coming down, with banks holding on to high deposit rates, net interest margins will continue to remain under pressure.”
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Freeing of interest rates for deposits by non-resident Indians will further drive up deposit costs, while possible RBI intervention in the currency market will keep rupee liquidity tight.
Bhoumik said this would keep interest rates for deposits on the higher side, by putting pressure on banks’ margins.
The fall in NIM has been significantly high for public sector banks. Private banks have managed to maintain it through a thoughtful business mix. Of the 32 banks studied , only 10 have recorded improvement; 19 reported a decline.
Three banks — HDFC, IDBI and YES Bank — have maintained their NIMs. State Bank of India showed a big jump in NIM, up 82 bps, while private sector leader ICICI Bank improved NIM by 27 bps, after maintaining it for three quarters.
Saday Sinha, banking analyst at Kotak Securities, said, “NIM in the banking sector, on an average, is estimated to fall further by 15-20 basis points.”
He said banks were planning to improve their Casa (current account-savings account), allowing them access to higher deposits at lower cost. But this would not be easy.
Inflationary pressure and competition from tax-free bonds, among others, will not let banks reduce interest rates of deposits, while lending rates will come under pressure due to lower demand for credit in case overall growth does not happen. According to Sinha, this will result in lower NIM for the sector.
For State Bank, a cut in the cash reserve ratio by 125 bps in the fourth quarter improved liquidity, helping the bank improve domestic NIM by 95 bps to 4.28 per cent.
However, with the lowest base rate at 10 per cent and expectations of further rate cuts in the current financial year, the management expects NIM to be under some pressure but says it expects to maintain it above 3.5 per cent for 2012-13.
ICICI Bank benefited by repricing loans on the new base rate, increase in yield on investments and nearly zero loss on securitisation against a huge loss in the corresponding previous quarter.
The management expects NIM to be higher by 10-15 bps for FY13. HDFC Bank maintained the NIM through increasing the share of retail loans, runoff of old wholesale loans and also certificates of deposit. The management says it will maintain NIM in the range of 3.9-4.2 per cent for FY13.