Banks To Be Re-Rated Lower (MarketDhara.Com)

We believe the savings rate deregulation, if it happens, could result in bank

s’ margins coming under severe pressure in the near term as some irrational competition could occur in the market and we could see banks, especially those with poor deposit franchises, trying to woo customers by offering attractive rates. 

The liquidity situation may not be the key factor determining savings rates in the near term in our view. There could also be some ALM mismatches in the near term due to savings deposits being switched from one bank to other as the banks start competing. Assuming all else remains constant, margins could come down on average by 25-30bps for every 100bps increase in savings rate, by our assumptions. 

High fragmentation, renewed focus of PSU banks on CASA the key culprits 

The Indian banking industry is highly fragmented, and with new banking licenses also likely to be offered, we believe there could be increased competition. New entrants and those banks with weak funding franchises, in particular, could resort to desperate measures to attract savings deposits. PSU banks have also been given well-defined CASA targets by the government, which was not the case in the past, and having a high CASA ratio is an important performance metric for the PSU banks’ top management. This is evident in the renewed focus of all the PSU banks on CASA over the past two years.  

Regional experience reveals that savings rate deregulation impacted bank market values negatively 

A study on deregulation of the savings rate in Hong Kong reveals that deregulation wasn’t taken well by the markets, and bank market values declined post announcement of the regulation. Larger banks were impacted more than smaller ones. The conclusion was that the regulated savings rate subsidised bank earnings at the expense of depositors. However interactions with our regional analysts suggest that over the longer term, offering higher interest rates acted as a poor hook to capture customers, and service levels and accessibility were more key in determining the ability to garner savings deposits. 

Large PSU banks impacted the most 

Contrary to the popular perception that private banks, especially HDFC Bank, will be impacted the most by savings rate deregulation, it’s likely to be the large PSU banks that are impacted the most. Firstly the savings deposit proportion across all banks is not materially different. HDFC Bank’s exceptionally high CASA is mainly due to its higher current account balance. Secondly the contribution of NII (Net Interest Income) to overall income and profits for PSU  banks is higher than for private banks. Private Banks have a large dependence on non-interest income. Hence the earnings impact on average for the large PSU banks is around 13% for every 100bps increase in savings rate compared to 8% for private banks. Amongst PSU banks, SBI is impacted the most due to its very high savings deposit proportion of 38%, followed by PNB at 31%. Among private banks, the earnings impact for the top 3 – HDFC Bank, ICICI Bank and Axis Bank – is more or less similar.

 

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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.