Banks are likely to report good growth in earnings in the fourth quarter ended March 2011, owing to higher credit growth and a rise in lending rates.
A senior State Bank of India (SBI) official said though the growth in loans at the end of the fourth quarter was less than the industry average, a series of hikes in the benchmark prime lending rate from the second quarter would help report better interest income. The cost of deposits rose by about 10 basis points and this would pressurise margins in the fourth quarter. The net interest margin (NIM) in the third quarter was 3.61 per cent.
Though the cost of funds rose in the fourth quarter, interest incomes would stave off pressure on margins for most banks. However, the margins could be somewhat lower than where they stood in the third quarter, according to bankers and sector analysts.
ICICI Securities said net interest margins would either be flat or marginally lower. Axis Bank and SBI may report a compression of 10-15 basis points in their NIMs. Overall, the growth in net interest income would be a healthy 28.4 per cent.
However, some public sector banks may report a rise in non-performing assets due to automation of reporting. This would entail higher provisioning. Higher pension and gratuity bills may also be downsides. “Provisions towards pension liability for retired staff and core banking solution-led recognition of non-performing assets could throw up a negative surprise for some PSU banks” said broking firm Motilal Oswal in a preview of the fourth quarter results.
On the effect of a hike in deposits rates on margins, a chief financial officer of a mid-sized private sector bank said this would not exert pressure on margins, since the rise in costs in incremental. However, the rise in interest incomes of elevated lending rates is immediate.