New Delhi, April 9: Banks are likely to report lower profits in 2007-08 as they grapple with a dip in retail loans and higher cost of funds, analysts said.

“Most public and private sector banks’ profitability will get reduced by 0.8 percentage points to 1.5 percentage points for fiscal 2007-08,” Kajal Jain, banking analyst, ICICIdirect.com, said.

Prakash P. Mallya, chairman and managing director of Vijaya Bank, said the hike in the repo and cash reserve ratio (CRR) by the RBI “will have an impact on loan growth, especially in housing mortgages.”

He said banks with large mortgage loans may be hit by the “weaker interest income” and a likely increase in costs.

Jain said the CRR hike has reduced funds available to banks for lending, forcing them to borrow from the RBI at higher repo rates, which affects net income.

A. Prasanna, equity analyst, ICICI Securities, said the rate hikes by the RBI will impact the demand for retail loans, which is expected to grow moderately at 20-25 per cent compared with 30 per cent in the previous years.

Analysts also feared losses in bond holdings of banks. The yields on the benchmark 10-year government bonds, which move opposite to prices, was at its highest in eight months on April 3 following the rate hikes by the RBI.

“As interest rates rise, banks’ bond portfolios will take greater losses,” a Morgan Stanley analyst said. The analyst said the yields have risen not only in government bonds but also in corporate bonds, causing significant losses to UTI Bank and HDFC Bank.

Morgan Stanley has forecast a lower profit growth of 15.9 per cent at ICICI Bank, the country’s leading mortgage lender. The higher loans rates of the bank, to maintain its margins, is expected to deter borrowers, Morgan Stanley said.

Among public sector banks, analysts expect the largest lender, the State Bank of India, to post net sales of just 2.8 per cent, though credit growth is forecast at 25 per cent and net profit growth at 80.6 per cent.

Vishal Goyal, banking analyst of Edelweiss Capital, has forecast a 32 per cent profit growth by Punjab National Bank (PNB) and a lower profit of 22 per cent by Oriental Bank of Commerce whose net sales is estimated at 4.8 per cent.