IndusInd Bank Ltd's net interest margin is likely to expand in the coming quarters, as the private lender is expected to protect its yield on advances, even as the cost of funds is set to decline.

An improving liability mix and infusion of equity are also likely to benefit the margin, under pressure since the third quarter of financial year 2010-11 (April-March). The net interest margin has declined 35 basis points since then to 3.25 per cent at the end of September 2012.

"IndusInd Bank's margin decline was led by increase in cost of funds (by 200 basis points). While yields on corporate loan portfolio increased by 235 basis points, higher share of fixed rate loans restricted overall yield improvement to just 160 basis points and thus impacted margins negatively," Alpesh Mehta and Sohail Halai, analysts with brokerage Motilal Oswal Securities, wrote in their note to clients.

"The above scenario is likely to reverse in the expected falling interest rate regime, wherein wholesale deposit rates cool off, and we expect IndusInd Bank to be a key beneficiary. Margin is expected to improve as almost 50 per cent of the loan book is fixed in nature with duration of more than one year. Though on the corporate side, loans yields are expected to decline, overall loan yields will likely fall to a lesser extent," the analysts noted.

Also, improving the share of low-cost current account savings account (Casa) deposits is likely to aid the Bank's margin. The private lender's Casa ratio was close to 28 per cent at the end of September 2012, compared to 26.8 per cent during the third quarter of 2010-11. The Bank is one of the few private lenders that offer higher interest rate on its savings deposits.

Earlier, the Bank raised 2,000 crore via qualified institutional placement. The equity infusion is likely to benefit the Bank's margin by around 40 basis points.

"We factor in margin improvement of 40 basis points in the second half of 2012-13 over the first half and further 20 basis points year-on-year for 2013-14 financial year," the analysts said.

Courtesy: Business Standard, January 2013