Mumbai: Third-quarter results for the 14 lenders that constitute the Bankex, the index for banking stocks, showed very little or no pressure at all on their margins. In fact, margins improved in most cases, surprising analysts.
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This was despite banks hiking deposit rates and the cost of funds going up consistently given the tight liquidity situation.
Now there is a sense that margins may have peaked already, or are close to peaking in the fourth quarter, and that the coming quarters in FY12 will see lower margins, impacting stocks.
Net interest margin (NIM), the difference between interest earned on advances and the cost of deposits, of the 14 lenders grew steadily. Private sector banks that have been enjoying a high NIM remained stable or saw a marginal fall.
State Bank of India (SBI), the country’s largest bank, improved its NIM to 3.61% in the December quarter from 2.82% a year ago. In the September quarter, the bank’s NIM was 3.43%.
The highest NIM among the public sector lenders was that of Punjab National Bank (PNB) at 4.13% against 3.64% in the year earlier and 4.06% in the preceding quarter. Overall, Kotak Mahindra Bank Ltd had the highest NIM, although it dropped to 5.3% from 6% a year ago. The largest private sector lender, ICICI Bank Ltd, managed to maintain NIM at 2.6%.
During this fiscal, banks have raised deposit rates by as much as 250 basis points (bps) and their lending rates by up to 100 bps since the introduction of the base rate system. One basis point is 0.01%. All fresh loans are disbursed at the base rate, which is the minimum lending rate for a bank.
Most of the rate movements happened after September and analysts had been expecting this to erode margins.
“The most positive surprise is improvement in margins in the third quarter. Most of us were expecting flat or falling NIMs, but that did not happen,” said Suresh Ganapathy, analyst at Macquarie Capital Securities (India) Pvt. Ltd. “Indeed, NIMs have peaked in this quarter and it won’t be surprising if NIMs fall by 20-25 bps in the next quarter.”
Bankers are cautious about giving guidance on NIMs, although almost none of them expects the measure to improve.
In fact, banks that have reported NIM of more than 3% will be content if it stays at around that level.
M.D. Mallya, chairman and managing director of Bank of Baroda, which reported 3.82% NIM in the third quarter, expects it to remain at a “healthy level” even after a minor correction in the present number.
PNB chairman and managing director K.R. Kamath declined to estimate NIM at the lender’s earnings press conference.
SBI chairman O.P. Bhatt has already said there will be pressure on margins going forward. The reason for this is that loan rate increases take effect immediately, boosting income, but higher deposit rates take time to have an impact.
Banks are expected to raise deposit rates further as RBI has, in its third-quarter policy review on 25 January, prodded them to focus more on increasing the deposit base instead of depending on short-term money or lending from RBI.
Another key factor is that banks have finalized their net liability towards a second pension option for employees and have started making adjustments in the profit and loss account. In the last four-five quarters, banks have been providing for this but largely based on estimates. They were able to crystalise their liabilities in the third quarter as 31 December was the last day for employees to opt for the pension in most cases.
The liability numbers, to be spread over five years, are larger than estimated for most of the lenders.
For example, PNB now estimates its liability towards the second pension option at Rs3,600 crore against Rs2,500 crore previously. Bank of Baroda estimates its second pension option cost at about Rs2,060 crore, Canara Bank at Rs2,200 crore and Union Bank at Rs1,600 crore.
“The amount of revision in pension liabilities has been much bigger than expected. This has come as a negative surprise. However, this won’t affect profit much as the liability will be spread over five years,” said Ganapathy of Macquarie.
SBI doesn’t have any second pension option because it offers employees other facilities.
Analysts were not unduly concerned about the asset quality of banks even as provisions increased, but one factor that could pose a challenge is deterioration in fee income, according to an analyst with a domestic brokerage.
Graphic by Paras Jain/Mint