Wary of deposit rate repricing; profits may be hit: OBC

The RBI-triggered liquidity crunch will reduce profitability, says SL Bansal, chairman and managing director, Oriental Bank of Commerce. However, Bansal asserted the bank will maintain its net interest margins (NIMs) between 2.8 and 2.85 percent.

"I can say that we will be remaining insulated but the point is that the benefit which we were expecting will not be there. In fact that is a loss in the sense that was always in our mind when we are doing some calculation. So, Rs 300-400 crore profit will not be available to us," adds Bansal in an interview to CNBC-TV18.
Bansal also says that the repricing of deposits near maturity will now be a serious concern as deposits rates have been increased by 200 basis points. He also adds that the loan rates will increase now considering the short-term deposit rates have gone up. He adds that the bank will take a call on the rates in the next 2-3 days. Below is the edited transcript of Bansal's interview to CNBC-TV18 Q: You have announced an intent of base rate cut. Now with certificate of deposit (CD) rates going up by 200 basis points (bps), will you have to do a rethink?
A: Naturally, it will appreciate because the short-term deposit rates have gone up, so the market is going to tighten up, there will be not much liquidity. So, we will have a rethink. Let’s see how the market reacts in the next three-four days. We will take a call at the appropriate time. Q: Do you think that in the follow through of these steps, you could even see deposit rates rising. Your CD has been raised 200 bps, it would be tempting for banks to raise deposit rates?
A: It is a function of liquidity. At present, there is not much credit offtake but still the repricing of the deposit which is maturing is a serious concern. Last year at the same time we raised deposits at somewhere around 9.30-9.40 percent. We were thinking that we will be benefited by 100 bps on all these deposit rates, whether it is CD rates or deposit rates which will then translate into a benefit of 8-10 bps cost and that is why we took a decision of cutting our base rate by 25 bps so that we can take some hit on our margin and then some reduction in cost and by improving the efficiency at the year-end we can maintain the margin. But now all these things have gone for a toss. We will sit again decide either on Thursday evening or Friday morning. Q: What is your early assessment, how cost of borrowing will go up and secondly if yields stay at this 8 percent, what will be the impact on your bond portfolio?
A: The point is earlier we were thinking that CD rate will be closer to 7.35 or 7.40 percent, so there will be substantial gain to the bank on treasury front, which will offset this increased provisioning requirement on various fronts. This benefit is also not available now. So, there will be huge pressure on the profitability, one will have to provide more on the restructured assets, now the growth of forecast is not very encouraging. So all these things naturally will affect the profitability. Somewhere, somehow you have to maintain yourself healthy, this will be a serious concern. Q: If you can give a ballpark number if the yields stay at 8 percent, what might be the loss on the bond portfolio?
A: As on date, it remains at 8 percent. For OBC, I can say that we will be remaining insulated but the point is that the benefit which we were expecting will not be there. In fact that is a loss in the sense that was always in our mind when we are doing some calculation. So, Rs 300-400 crore profit will not be available to us. Q: How much of your borrowing comes from the wholesale market and will this increase your cost of borrowing with call rates at this 9.5-10 percent mark?
A: We have got about Rs 35,000 crore worth of multi-deposits. From last Monday, we have reduced our deposit rate for more than 5 crore to 8.50. So, a combination of all these factor is bearing on the cost. When we will sit together, we will have all numbers in our hands and then we will take a call. Q: Assuming these steps continue for a quarter or two, on an average for the banking system, how might the NIMs take a hit or for that matter for your bank would the NIMs for the year be 20 bps lower than last year 30 bps?
A: It is a dynamic situation. I cannot tell you anything about the banking industry because every bank cost structure is different. For OBC, last year our total NIM for the whole year was 2.80 percent, Q1 it will be something maybe closer to 2.85-2.86 percent, but still audit is going on. The exact figure I cannot share with you.
We were thinking that going forward our cost would come down by 8-10 bps. Our NIMs have gone up by 5bps in the Q1, so by slight improvement in efficiency, we have been expecting that our NIM will remain at same level 2.80 to 2.85 percent. That is how we have taken this decision of cutting our base rates. We are in a dynamic situation, everyday new things are coming, restructuring is going on whether it has gone up at the increased scale, so we are confident that we will be able to hold on to our margins despite of all the pressure.