Net Interest Margins fell 14bps sequentially but rose 7bps over the year (to 4.07%). Cost of deposits rose 13bps sequentially and 21bps on a yearly basis (to 4.53%) vs a rise in yield on advances by 6bps sequentially and 86bps on a yearly basis (to 9.17%).
A 75% growth in operating expenses was largely on account of the base effect caused by the banks decision to re-classify provisions for pension liabilities in the fourth quater FY06. The re-classification had led to a 43% fall in staff costs in fourth quater FY06. Provisions for the quarter were high at Rs 6.1bn, of which Rs 330 crore was on account of the MTM losses on the bond portfolio.
The portfolio continues to look a bit exposed with 62.3% in the HTM category and AFS duration at 3.5 years. Net NPAs have risen from 0.42% in Q3 to 0.76% in the fourth quater.While there has been a slight pressure on incremental NIMs on a sequential basis, the banks ability to keep NIMs above 4% is still commendable. However, we are reducing our price target by 6% to account for the lower than expected earnings in FY07. The stock quotes at 1.5x FY08E BV and 9.2x FY08E earnings.