Sector Watch: Banks

OVERVIEW: The net interest margin of the banking sector rose 15.64 per cent in the nine months of 2006-07 owing to costly borrowings.

The interest income of listed banks rose 24.54 per cent compared with 30.72 per cent increase in interest cost during the period. Other income too moved up at a slower pace of 15.71 per cent. Higher cost of funds coupled with provisioning for bad loans tempered the aggregate profit growth of banks to 18.69 per cent at Rs 17,633 crore.

TRIGGER: The margin improvement was led by rising yield on advances and investments and an marginal increase in cost of liabilities.

OUTLOOK: Analysts expect net interest margins to witness a stable-to-declining trend in the fourth quarter. This is because banks have scrambled for high-cost deposits to keep up credit growth and, hence, the cost of funds would go up.

The cash reserve ratio hike is expected to suck out about Rs 14,000 from the system and this will add to banks' liquidity woes. The situation may worsen in March, being a month burdened with heavy tax outflows, unless RBI pumps $4-5 billion into the system.