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UBS Investment Research
India Banking & Finance Sector
Rising deposit rates is not a big concern
„ SBI, BOI raise deposit rates across maturities
SBI hiked deposit rates by 50-150 bps across maturities while BOI raised by 25-
100 bps yesterday. This was preceded by ICICI bank hiking rates last week. This is
largely in response to 3 things in our view 1) Sluggish deposit growth 2) Tight
liquidity conditions 3) Seasonally strong credit (JFM) quarter. Liquidity has been
tight since October with banks borrowing an average of Rs 825 bn from the LAF
window; while short term wholesale rates have moved up by 100 bps.
„ Lending rate hikes to offset the pressure on NIMs
Private banks (HDFC Ltd, ICICI Bank, IIB) have raised PLR/base rates by 25-75
bps over last week and with the spate of deposit rate hikes we expect PSU banks to
follow suit. With lending rate hikes (either PLR/base rate), pressure on NIMs could
be offset to a large extent, though we do expect NIMs to normalize from Q2 levels
as deposit growth catches up (and therefore lower incremental CD ratio)
„ Investment portfolio will come back in focus
With 10 year bench mark rates going up by nearly 40 bps to 8.2% currently since
Sep 30th, MTM provisions will likely be required in Q3.
We believe quarterly volatility in NIMs is inherent with lag in deposit and lending
rate hike but on a rolling basis we would see NIM stable in a rising rate
environment. SBI is one of the best placed banks and trading at attractive
valuations. While we like ICICI for expected turnaround in its business. SHTF
(Key call) is our preferred pick in the NBFC space given its high pricing power.
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