Rising interest rates are unlikely to erode the net interest margin of banks this financial year, since lending rates are expected to rise further, even as deposit rates are seen steady, said senior officials of state-run and private sector banks.
Usually, the net interest margins of banks narrow amidst rising rates, as deposit costs rise and loan growth dwindles, with funds turning expensive. In the first three months of the current financial year, most banks' net interest margin declined, compared to the previous financial year.
However, the country’s top banks remain confident of being able to expand their loan books at rates higher than the industry average. They are also hopeful of protecting their margins despite the rising rates.
India's largest lender, State Bank of India (SBI), which announced its first quarter earnings on Saturday, improved its net interest margin by 44 basis points from a year earlier and 55 basis points sequentially to 3.62 per cent during the quarter. Net interest income, or the difference between interest income and interest expenditure, touched an all-time high, aiding a rise in the bank's margin.
“Now, I'm tempted to increase the guidance on our net interest margin to 3.6 per cent from 3.5 per cent (given earlier),” SBI Chairman Pratip Chaudhuri, said during the announcement. He, however, said the bank would wait till the end of this month before revising the margin guidance.
The country's largest private lender, ICICI Bank, also hopes to maintain its margin at the current 2.60 per cent for the rest of the current financial year. “While the industry as a whole is expected to face headwinds on margins, we expect to maintain our net interest margin at the current level this year,” said Managing Director and Chief Executive Officer, Chanda Kochhar.
HDFC Bank, known for its consistent earnings performance, expects its margin to stable in 2011-12. The lender ended the first three months of this financial year with a net interest margin of 4.2 per cent. “Our net interest margin has been in the range of 3.9 per cent and 4.3 per cent for the last few quarters. As of now, it appears fairly stable at the current level. We expect the interest margin to remain in this broad range for some more quarters,” said Executive Director Paresh Sukthankar.
Bankers said since the increase in deposit rates outpaced lending rate rises in the last financial year, the cost of deposits now appears to have peaked, though there is more room to raise loan rates. While banks have been revising lending rates across products for the past few months, deposit rate increases have been restricted to select maturities.
For instance, SBI increased its base rate thrice since May by 150 basis points, leading to higher borrowing costs for its loan products. The bank also raised deposit rates thrice during the period for select maturities, especially the short-tenure ones.
Bankers said the scope for a significant improvement in margins appears limited, since the demand for loans is expected to decline amidst rising rates. It also dismissed concerns over the dilution in net interest margins.
“The pressure on margins would remain in the second and third quarters this year. Any improvement would only be seen from the fourth quarter,” said B A Prabhakar, executive director, Bank of India. The state-run lender expects its margin for 2011-12 to improve by about five basis points, compared with the current level of 2.4 per cent.
