Morgan Stanley sees margin hit for public sector banks

The banking industry, particularly state-owned banks, will see compression in their net interest margins (NIMs, or the interest earned minus expended, as a percentage of earning assets) in the current fiscal.

“We now expect NIMs to narrow by 40-70 basis points over the next 12 months across state-owned banks,” Anil Agarwal, Mihir Sheth, Subramanian Iyer and Sumeet Kariwala, analysts with Morgan Stanley, said in a note to clients on Monday.

“Private banks are likely to enjoy a more controlled NIM environment, as they are not affected by bond book repricing to the same extent,” the report said.

According to the quartet, the cause of NIM compression will be a spike in funding costs. “Banks raised deposit rates fairly aggressively in December 2010. Given that term deposits in India are fixed in nature, with an average duration of about one year, we have not yet seen pressure on NIMs from higher deposit costs. That is likely to start in first quarter of the current fiscal, as new deposits will be up to 300 basis points more expensive than those being replaced,” said Agarwal, Sheth, Iyer and Kariwala.
Other analysts said the increasing cost of funds can be passed on only partially to the customers.

“Due to the increasing cost of funds NIMs will go down. Banks will not be able to pass on the impact of increasing cost of funds entirely. Banks will be able to pass on the increased cost of funds only partially,” said Vaibhav Agrawal, vice-president (research), Angel Broking.