NIMs fall despite higher credit spreads: Enam

ANALYST'S VIEW

Banks such as SBI, ICICI Bank, Axis Bank and PNB are fundamentally better positioned with higher visibility on earnings growth.

The net interest margins (NIMs) of many banks were under pressure while credit spreads improved in the first quarter-ended August 2008. It suggests that thinner bond spreads were partly responsible for compression in NIMs.

Lower yields in the money market in Q1 also contributed to the pressure on NIMs. Growth in the net profit of many banks remained robust due to lower provisioning and higher treasury gains.

Despite the hike in term deposit rates in the last quarter of FY07, credit spreads improved for banks. This is largely on account of the hike in prime lending rates (PLR) three times in the last financial year. The improvement in spreads was evident both on year-on-year (YoY) and quarter-over-quarter basis.

Banks are also slowly moving away from housing loans to industrial loans, where discount to PLR reduced to some extent. Also, pressure on credit spreads expected to be lower with banks cutting down on deposit rate.

The moderation in credit is helping banks to reduce cost of deposits. Therefore, incremental cost of deposits will be lower. However, pressure on NIM may still sustain as deposits come up for re-pricing in the next few quarters.

The deposit growth of some banks was higher than the credit growth, reflecting the impact of high rates that many banks offered on their term deposits.

Some banks like HDFC Bank, Bank of India (BOI) and Corporation Bank saw higher deposit growth compared to credit growth. The low cost deposit base "" Current and Savings accounts (CASA) "" of most banks also fell on y-o-y basis on account of higher focus on term deposits.

The credit quality saw some deterioration sequentially, though intact on a y-o-y basis. ICICI Bank, State Bank of India and Punjab National bank saw some deterioration in asset quality on a sequential basis. The net non-performing assets (NPAs) of most banks remained under control.

The operating costs of most public sector banks saw only marginal growth. PNB and Bank of Baroda were two exceptions. For PNB, higher provisions for AS-15 led to higher staff cost. The private banks' operating costs have risen largely in-line with their balance sheet growth.

The increase in staff costs for PSBs has been lower as net attrition continues for most banks.

The new generation private sector banks continue to recruit aggressively, keeping with higher business growth. This has also raised staff costs for them. Some Public Sector Banks have not provided anything for AS-15 and are awaiting final clarification from the RBI. Some banks have started providing on an ad-hoc basis.

On the capital adequacy front, Enam said most private banks' Tier-I capital is at a comfortable position after the recent fund raising.

Though the Tier-I capital in some banks does not still reflect the additional capital raised in July 2007. ICICI Bank, HDFC Bank and Axis Bank are among the prominent ones to raise capital in July 2007.

Some of the public sector banks may be required to raise capital in this fiscal. SBI, PNB, BOB are at comfortable levels, though SBI is planning an equity issue soon.

BOI and Bank of Maharashtra may plan an equity dilution by the end of this fiscal. The Syndicate Bank has already announced equity dilution.