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RBI favours savings rate deregulation; negative near-term for banks
RBI discussion paper argues for deregulation
The RBI argues for interest rate deregulation on savings account deposits
which currently carries interest rates of 3.5% and has not been changed
since March 1, 2003. According to the discussion paper, it is necessary that
all rates move in tandem with the policy rates and the regulated savings
rate has adversely affected the transmission of monetary policy. The RBI
has not provided any time frame for the deregulation. Given the discussion
paper’s release a week before the monetary policy and the debate on this
in the past few months, we believe it might go in effect in the near future.
We believe the timing when the rates started to decline would have been
better for banks vs. now when rates are rising.
Savings rate likely to settle around the 15 to 90 day deposit
We believe that interest rates on savings accounts will likely be determined
by the interest rates cycle i.e below 3.5% in the low rate cycle and above
3.5% in high rate cycle. If it were deregulated now, the rate would likely
settle closer to term deposit rates of 15 to 90 day maturities or around
4.5%-5% vs. the current 3.5%. In the long term, banks with large networks
and strong franchises will likely attract more SA and pay lower rates on
savings account vs. their smaller counterparts.
Impact likely to be negative, unless banks pass on costs
The impact of the hike on banks’ margins could be negative unless: (1)
banks pass on the higher cost to borrowers, (2) they charge higher fees for
transactions, (3) require higher account balances, remove other free
services that come along with such deposits. We believe it will be a
combination of both, but banks may still see a net impact on margins and
profit in the short to medium-term until rates stabilize. Our sensitivity
analysis shows the impact on margins could range between -0.02bps to -
0.64bps and PBT by -0.4% to -36% for FY2012.
Only IndusInd and Yes have low savings
SBI, HDFC Bank, PNB and ICICI Bank SA ratio is at 28%-32%, Axis, BoB, BoI
and Union range between 20%-22%, IndusInd Bank is at 9%, while Yes has
the least at 2%. Clearly, those with a high SA could see relatively more
impact vs. Yes, IndusInd and Kotak Bank. We retain our Sell
recommendation on SBI and retain our Buy ratings on IndusInd Bank (on
CL), Yes Bank, and ICICI Bank.
Deregulation of savings rate to impact margin and banks’ profit
India has deregulated interest rates across both deposit and lending products with the
exception of the savings account rate (SA). We believe the rate deregulation seems likely
and given recent newsflow and this discussion paper, it appears that the RBI may move
ahead sooner then expected. If deregulated now, the rate could likely settle closer to term
deposit rates of 15 to 90 day maturities (as these are similar to short term rates, and
typically will settle closer to shorter term deposits) or around 4.5%-5.0% vs. the current
3.5%. In the long term, banks with large networks and strong franchises could likely attract
more SA and pay lower rates on savings account vs. their smaller counterparts.
Overall, the banking system savings deposits accounts for 22% of total deposits, which is
about 13% of financial savings of the household sector. SBI, HDFC Bank, PNB and ICICI
Bank have SA deposits of 28%-32%, Axis, BoB, BoI and Union range between 20%-22% and
IndusInd Bank 9%, while Yes has the least SA at 2%. Clearly, those with high SA could see
relatively more impact vs. Yes, IndusInd and Kotak Bank. We retain our Sell
recommendation on SBI and retain our Buy ratings on IndusInd Bank (on CL), Yes Bank,
and ICICI Bank. Our sensitivity analysis shows the impact on margin will range between -
0.02bps to -0.64bps and PBT by -0% to -36% for FY2012
Impact on margins could be significant if hike is not passed on
SBI, HDFC Bank, PNB and ICICI Bank have SA of 28%-32%, Axis, BoB, BoI and Union range
between 20%-22% and IndusInd Bank 9%, while Yes has the least SA. Our analysis shows
that the rate hikes can have significant impact on the net interest margin, NII growth and
PAT if not passed on (see Exhibits 5 and 6). Given the potential impact, banks may offset
this through either higher lending rates and or removal of free services to SA customers.
Banks will have to innovate, increase charges to protect margins
To protect margins banks will likely need to introduce new products, increase charges and
perhaps even increase lending rates.
Currently PSU banks charge Rs20 and Rs225 for urban areas and Rs20 and Rs100 for
rural areas per quarter on deposits below the minimum required. Private banks charge
higher rates of Rs750 for urban areas and Rs500 to Rs750 for rural areas per quarter.
Some banks charge Rs1 to Rs3 per leaf for additional cheques beyond the stipulated
number of cheques per quarter; some public sector banks have no limit on the number
of cheques that can be withdrawn per month.
Asian experience in Hong Kong, Taiwan and Singapore shows that banks: (1) introduced
new products such as combined savings and checking accounts, offered linked savings
products (something most private banks offer in India) (3) revised fees (including fees on
each transaction, monthly fees for operating accounts) and increased minimum balance
requirements, and (4) introduced a tiered structure of interest rates. Banks also generally
offer variable interest rates on savings deposits.
Will this impact financial inclusion, smaller deposits ?
RBI has rightly highlighted the possibility of banks not encouraging savings deposits with small
amounts impacting the financial inclusion initiative due to the associated high transaction costs.
Again this is the case more with PSU banks where deposit balances are lower than private
banks. An increase in the minimum balance or the reduction in the number of transactions
permitted free of charge, will likely impact small savers, in rural and semi- urban areas. It is not
clear whether RBI will restrict banks increasing charges to this segment
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI favours savings rate deregulation; negative near-term for banks
RBI discussion paper argues for deregulation
The RBI argues for interest rate deregulation on savings account deposits
which currently carries interest rates of 3.5% and has not been changed
since March 1, 2003. According to the discussion paper, it is necessary that
all rates move in tandem with the policy rates and the regulated savings
rate has adversely affected the transmission of monetary policy. The RBI
has not provided any time frame for the deregulation. Given the discussion
paper’s release a week before the monetary policy and the debate on this
in the past few months, we believe it might go in effect in the near future.
We believe the timing when the rates started to decline would have been
better for banks vs. now when rates are rising.
Savings rate likely to settle around the 15 to 90 day deposit
We believe that interest rates on savings accounts will likely be determined
by the interest rates cycle i.e below 3.5% in the low rate cycle and above
3.5% in high rate cycle. If it were deregulated now, the rate would likely
settle closer to term deposit rates of 15 to 90 day maturities or around
4.5%-5% vs. the current 3.5%. In the long term, banks with large networks
and strong franchises will likely attract more SA and pay lower rates on
savings account vs. their smaller counterparts.
Impact likely to be negative, unless banks pass on costs
The impact of the hike on banks’ margins could be negative unless: (1)
banks pass on the higher cost to borrowers, (2) they charge higher fees for
transactions, (3) require higher account balances, remove other free
services that come along with such deposits. We believe it will be a
combination of both, but banks may still see a net impact on margins and
profit in the short to medium-term until rates stabilize. Our sensitivity
analysis shows the impact on margins could range between -0.02bps to -
0.64bps and PBT by -0.4% to -36% for FY2012.
Only IndusInd and Yes have low savings
SBI, HDFC Bank, PNB and ICICI Bank SA ratio is at 28%-32%, Axis, BoB, BoI
and Union range between 20%-22%, IndusInd Bank is at 9%, while Yes has
the least at 2%. Clearly, those with a high SA could see relatively more
impact vs. Yes, IndusInd and Kotak Bank. We retain our Sell
recommendation on SBI and retain our Buy ratings on IndusInd Bank (on
CL), Yes Bank, and ICICI Bank.
Deregulation of savings rate to impact margin and banks’ profit
India has deregulated interest rates across both deposit and lending products with the
exception of the savings account rate (SA). We believe the rate deregulation seems likely
and given recent newsflow and this discussion paper, it appears that the RBI may move
ahead sooner then expected. If deregulated now, the rate could likely settle closer to term
deposit rates of 15 to 90 day maturities (as these are similar to short term rates, and
typically will settle closer to shorter term deposits) or around 4.5%-5.0% vs. the current
3.5%. In the long term, banks with large networks and strong franchises could likely attract
more SA and pay lower rates on savings account vs. their smaller counterparts.
Overall, the banking system savings deposits accounts for 22% of total deposits, which is
about 13% of financial savings of the household sector. SBI, HDFC Bank, PNB and ICICI
Bank have SA deposits of 28%-32%, Axis, BoB, BoI and Union range between 20%-22% and
IndusInd Bank 9%, while Yes has the least SA at 2%. Clearly, those with high SA could see
relatively more impact vs. Yes, IndusInd and Kotak Bank. We retain our Sell
recommendation on SBI and retain our Buy ratings on IndusInd Bank (on CL), Yes Bank,
and ICICI Bank. Our sensitivity analysis shows the impact on margin will range between -
0.02bps to -0.64bps and PBT by -0% to -36% for FY2012
Impact on margins could be significant if hike is not passed on
SBI, HDFC Bank, PNB and ICICI Bank have SA of 28%-32%, Axis, BoB, BoI and Union range
between 20%-22% and IndusInd Bank 9%, while Yes has the least SA. Our analysis shows
that the rate hikes can have significant impact on the net interest margin, NII growth and
PAT if not passed on (see Exhibits 5 and 6). Given the potential impact, banks may offset
this through either higher lending rates and or removal of free services to SA customers.
Banks will have to innovate, increase charges to protect margins
To protect margins banks will likely need to introduce new products, increase charges and
perhaps even increase lending rates.
Currently PSU banks charge Rs20 and Rs225 for urban areas and Rs20 and Rs100 for
rural areas per quarter on deposits below the minimum required. Private banks charge
higher rates of Rs750 for urban areas and Rs500 to Rs750 for rural areas per quarter.
Some banks charge Rs1 to Rs3 per leaf for additional cheques beyond the stipulated
number of cheques per quarter; some public sector banks have no limit on the number
of cheques that can be withdrawn per month.
Asian experience in Hong Kong, Taiwan and Singapore shows that banks: (1) introduced
new products such as combined savings and checking accounts, offered linked savings
products (something most private banks offer in India) (3) revised fees (including fees on
each transaction, monthly fees for operating accounts) and increased minimum balance
requirements, and (4) introduced a tiered structure of interest rates. Banks also generally
offer variable interest rates on savings deposits.
Will this impact financial inclusion, smaller deposits ?
RBI has rightly highlighted the possibility of banks not encouraging savings deposits with small
amounts impacting the financial inclusion initiative due to the associated high transaction costs.
Again this is the case more with PSU banks where deposit balances are lower than private
banks. An increase in the minimum balance or the reduction in the number of transactions
permitted free of charge, will likely impact small savers, in rural and semi- urban areas. It is not
clear whether RBI will restrict banks increasing charges to this segment
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