RBI hikes policy rates; pause on the horizon: HSBC

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India Financials
RBI hikes policy rates; pause on the horizon
 RBI hikes policy rates 25bps, surprising street as well as
banks
 Home loan lending norms tightened, banks may go slow
 Preferred plays continue to be smaller private banks – YES
and IIB




RBI’s policy was interest rate positive as it implied pausing the monetary policy
tightening post today’s hike in the near future. Measures announced to curtail aggressive
lending to the home loan segment would be growth negative, but positive from a portfolio
health perspective.

Impact on bank stocks: We expect the upward bias to lending and deposit rates to
continue, given today’s rate hike as well as the persistent tight liquidity, which can affect
bank margins in 2H. Also, incrementally, there is a likelihood of banks slowing down
their teaser rate home loans due to additional provision impact as well as rising deposit
costs. We continue to prefer smaller banks – YES and IIB – which are less exposed to the
home loan segment and are in a much better position to deliver on loan growth given their
small size and ongoing structural shift.

LAF hiked by 25 bps: RBI today raised the LAF rates in view of the stubborn domestic
inflationary pressures. However, given the persisting tight liquidity in the system along
with the risks to growth, RBI has said that it may pause in the near future.

Home loan measures: RBI also tightened screws on the home loan segment, clearly
viewed as prone to higher asset valuation risks by RBI. Of the three changes announced –
LTV capped at 80%, higher risk weights (125%) for high-value loans and higher standard
provisioning (from 0.4% to 2%) for teaser loans – the last one can create a bigger negative
impact on banks’ profits. While banks are still awaiting clarity on the retrospective or
prospective nature of the provisioning, they have talked about adjusting incremental
provisions against their excess provisions in which case, there would be no impact on
profits from their existing book. Incrementally, the higher provision requirement is likely
to discourage players from continuing their teaser rate home loans unless competitive
pressures continue. The other two are likely to have only a marginal impact with average
LTVs at ~65-70% and high-value loans forming a smaller portion of banks’ books.

Investment in subsidiaries: Investments in subsidiaries exceeding 20% (previously 30%)
will now be deducted at 50% from Tier-I capital. This however, is a minor negative as
most players have more than a 30% stake in most of their subsidiaries.