The cost of funds is up due to higher interest rate being offered on the retail deposits. The margins are under pressure while bank expect net interest margin (NIM) to be 2.85 per cent for FY09, its Chairman and Managing Director M V Nair told reporters today.
The bank will book mark-to-market (MTM) loss on part f its bond portfolio in the first quarter, Nair said. He, however, did not divulge the extent of provision bank will have to make. He was speaking on the sidelines of function to sign pact with KBC Bank of Belgium to form asset management company in India.
Banks have been hit hard due to sharp erosion in the prices of securities held in trading book and they have to make provision for MTM losses out of the profits. State Bank of India has already indicated that it will make provision of Rs 1,000 crore in Q1 for loss in value of investments.
"The target of 25 per cent growth in profit for 2008-09 looks difficult." But we have nine more months to make up", Nair said. The net profit for 2007-08 rose by 64.14 per cent to Rs 1,387 crore.
Elaborating of deposit growth bank chief said bank has seen 23 per cent year-on-year growth in deposits till end of June 2009. The state-owned has raised over Rs 6,000 crore from its 400 days deposit scheme, which was launched in April this year. It had planned to raised Rs 10,000 crore for this scheme which carried a interest rate of nine per cent.
After, recent rate revision, deposits in one-3 year maturity bracket get 9.5 per cent return and bank has withdrawn the scheme as rate no loner attractive, another Union Bank official said. The bank's retail deposit base has grown by a healthy 33 per cent during the first quarter.
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Its cost of funds at the end of March 2008 stood at 5.76 per cent. "Besides cost of funds, the effect of cut in Prime Lending rate, effected in Q4 of 2007-08, also has adverse effect on margins", official added.