Mumbai: State-run Corporation Bank expects squeeze on its margins in the first half of FY12 due to higher cost of funds and advances to grow by a quarter in the year, a top official told Reuters on Wednesday.

“Next fiscal, up to six months, is going to be tight. The reason is that whatever (banks) have taken the money now is on high cost. That will reflect in the next two quarters. That will hit the margins," chairman and manging director Ramnath Pradeep said.

After the Oct-Dec. earnings announcement in January, the bank had said its margins could be under pressure in Jan-March due to bad asset quality and higher cost of deposits.

The Reserve Bank of India has raised key lending rates seven times since March last year and more rate hikes are in the offing to curb stubbornly high inflation.

The lender expects net interest margins (NIM) at 2.5-3% in the year-ending March 2012, Pradeep said over the telephone. In the quarter-ended December, its NIM was 2.7%.

Macquarie Research, in a note in February, had factored in a 20-basis point NIM compression for FY12 estimates for Indian banks, 40 basis points lower than December quarter NIM levels.

The lender, which expects to get about 300 crore from the government in March, does not have immediate plans to raise more funds.

However, he said the bank will not raise funds in the first quarter next financial year, but may require later.

“By April-May, the picture will be clearer on how much money we want to raise. We will see depending upon the credit growth," he said.

The bank has a headroom to raise up to 1800 crore through Tier-II capital.

Robust credit

Credit growth in FY12 will be led by demand from infrastructure and agriculture, Pradeep said, adding deposits could grow by a fifth.

The Mangalore-based bank expects FY11 advances to grow at 25% and deposits at 22%.

It had witnessed a sequential slowdown in advances, especially to the corporate sector, and deposits in the December quarter.

Of the 19 analysts who cover Corporation Bank, 14 have a ‘buy’ rating on it while only two have an ‘underperform´ rating, according to Thomson Reuters I/B/E/S estimates. Three analysts have a ‘hold’ rating.

At 1 p.m., shares of Corporation Bank, valued at $1.8 billion, were trading at 0.89 percent at 562.6 in a weak Mumbai market.