Time ripe for banks to raise bond reserves

Banks' acute need to boost their bond reserves might not have come at a better time than now as government bond yields seemed to be near their peaks, said MBN Rao, Chairman and Managing Director of Canara Bank .

"There is a perception that yields are at a fairly comfortable level and may not go up further," Rao said. "These are the right levels to enter the market," he avered.

Currently, the 10-year gilt yield is 7.65 per cent and it is expected to soften reflecting the view that interest rates in the US, world's largest economy, are set to slide.

Rao said that gilt investments by several banks would rise as the mandated holdings to meet the statutory liquidity ratio (SLR) drifted down towards the minimum 25 per cent of deposits.

"In percentage terms, SLR investments used to be over 34 per cent (a year back) and now it is 29.8 per cent," he noted.

Banks', which renewed efforts to boost deposits to keep pace with rising credit demand, are expected to increase their SLR needs. By October 13, bank deposits grew by 20 per cent while credit was up per cent.

Raising deposit and lending rates because the RBI hiked the repo tender rate for overnight loans to banks last week wasn't on Canara Bank's agenda.

"Liquidity is comfortable and our loan portfolio is well balanced," Rao said.

So far in 2006-07, the Canara Bank hiked its loan rate to 75 basis points to 11.5 per cent. The rate on deposits of two years to below three years is 7 per cent.

The repo rate hike is not expected to impact the bank's loan portfolio."Our bank is not much into real estate or housing loans. Our entire retail loan portfolio size is 20 per cent of the balancesheet, " said the bank CMD

RBI hiked the repo rate to 7.25 per cent from 7 per cent to urge banks to rebalance their credit portfolios and push up deposit mobilisation.

Canara Bank had estimated a credit growth of 20 per cent in the financial year when RBI spelt out its credit policy in April, Rao said. The bank projected a deposit growth of 18 per cent for the current financial year, he added.

"It is not that the latest policy move has made us reduce our credit projections. When we finalised our business plan in April, we anticipated that this year's loan growth will not be as much as in the past," Rao said.

The bank's credit portfolio grew 25-30 per cent yearly in last couple of years. Rao expects the bank to end 2006-07 with a net interest margin of above 3 per cent.

"As of September-end, we were able to project the net interest margin. It is in the range of 3.15 per cent," he said. In March, the bank's net interest margin was at 3.36 per cent.

The hike in the prime lending rate and re-pricing in terms of the sub-PLR lending helped the bank contain its net interest margin, Rao said. "This time we have reduced our investment duration and have adjusted our portfolio," he added.

The bank will raise capital via upper Tier-II issue in October-December, Rao said. So far it has raised Rs 1,075 crore by way of Tier-II and upper Tier-II issues. "We will be raising some more amount through upper Tier-II in the current quarter," Rao said.

The bank will make an announcement on the issue size this week. Rao said that the bank didn't plan a follow-on public equity issue.

"Almost 8 per cent of our 12.2 per cent capital adequacy is in Tier-I and only 4 per cent is Tier-II. So, there is enough headroom for the upper Tier-II issue," he said.