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Banks/Financial Institutions
India
ALM: Are we reading too much? We believe that ALM tables reported by banks
provide little information that is relevant from either a liquidity or interest rate sensitivity
perspective. The primary problem comes from the clubbing of CASA deposits in buckets
based on a static behavior analysis, which differs across banks. We believe residual term
deposits would be the best way to report the same. RBI reports on a consolidated basis
but with a significant lag.
Analyzing ALM trends is a futile exercise as reported data is clouded by long-term behavior
We believe the ALM data disclosed by banks provide very little information to make an informed
analysis on (1) liquidity position or (2) understanding the interest sensitivity of funds. The reported
deposits data include both CASA and term deposits. Banks use long-term behavior patterns when
reporting CASA deposits while use residual maturity for term deposits. Given the difference in
behavior pattern across banks, we believe a cross sectional or a time series analysis of this data
gives limited information.
SBI subsidiaries show wide variance despite banks using long-term historical observations
We have used the data of State Bank of Bikaner and Jaipur and State Bank of Mysore to highlight
the problem mentioned above. The former classifies CASA deposits primarily at the longer end
(less than 5% is in <14 days bucket) while State Bank of Mysore reports SA at the shorter end
(6 months) and CA is clubbed in the last bucket. While we do believe that banks use long-term
analysis to apportion these deposits, we note there is a cyclical element in savings deposits and
changes in behavior pattern of these deposits that rarely gets captured in these tables. The
consequent impact is that State Bank of Mysore looks to have a larger share of short-term deposits
which in reality may not be true.
Term deposits maturity can add value for analysis; RBI data for the sector is released with a lag
We believe banks would either need to report the buckets under which CASA are being
distributed or highlight only the term deposit portion for easier comparison with others or
historical analysis. Also, interest rates, the nature of customer and geographical distribution of
deposits play critical role in the duration of term deposits being mobilized. We note that RBI does
not provide this data but this is released for the entire sector with a lag of 4-6 quarters.
Is it wise to unshackle interest rates when it looks like CASA is the only long-term source of funds?
Given the shortening duration of term deposits over years and the possibility that CASA looks to
be one of the primary sources of long-term liabilities that banks are mobilizing today, one needs to
analyze if de-regulation of the savings interest rates does achieve its objective. Prima facie, the
assets sides of most public sector banks are continuously moving towards long duration assets like
infrastructure, and to some extent, housing loans and these banks would need long-term solutions
that enable these assets to be transferred and reduce the underlying mismatches of asset liability.
We see limited merit in looking at ALM reported by banks
If the primary objective of ALM aims to capture the inherent liquidity mismatches across
buckets, we don’t see how the current disclosures help in achieving the same for external
participants.
Classification of current account and savings deposits shows divergence across banks
The primary problem is in the reclassification of current account and savings deposits. RBI
allows banks to classify these in various buckets based on the bank’s internal behavioral
analysis. However, RBI advises banks to use long-term study for classification but we find
significant differences across a few banks that report this data. A few key implications on
analyzing this data with incomplete information:
Comparisons across banks will be incorrect as different banks may use their own arbitrary
forms of analysis. Time series analyses would be futile unless complete data for break-up
of deposits are given.
A consequence of this table is that we would never be able to analyze the interest rate
impact based on residual maturity as the near-term maturity has deposits contracted at
various intervals (for example 1 day maturity has deposits raised not only that day but also
all deposits raised a few quarters back at various time frames and different yields
maturing that day.
RBI study shows that savings accounts, especially in urban regions, exhibit a fair degree of
interest rate sensitivity which is not captured by banks in their respective models. Hence,
the inherent cyclical behavior of these deposits can marginally increase liquidity as well as
interest rate impact which the current table fails to show.
State Bank subsidiaries shows the divergence which should be visible in all banks
Two of State Bank of India’s subsidiaries, State Bank of Bikaner and Jaipur and State Bank of
Mysore, illustrate the problem that we mentioned previously on the classification of savings
and current accounts.
State Bank of Bikaner and Jaipur
State Bank of Bikaner and Jaipur reports CA and SA in four primary buckets with the bulk of
these deposits at the longer end. Both savings and current accounts have been split fairly
equally at 30% each in 1-3 year, 3-5 year and above 5-year bucket. The bank has seen a
change, albeit marginally, in the reporting format across years where it has increased the
proportion of CASA proportion from the lower end of the bucket to the higher end.
Initial analysis of the ALM shows a comfortable position for the bank with healthy deposits
at the longer end. However, 70-90% of these deposits are coming from these CASA
deposits as against term deposits.
State Bank of Mysore
State Bank of Mysore reports complete CA in the longest maturity (>5 years) while SA has
been classified at the shorted end in the six-month bucket. Based on this data, State Bank of
Mysore is probably suggesting that the average duration of savings deposits is about 6
months while CA is fairly long-term with limited risk. The bank, in fact, had negative growth
of 9% in FY2009 and just 6% growth in FY2011.
Also, the bank’s behavior of these two deposits contrasts quite sharply with State Bank of
Bikaner and Jaipur. It is also possible that one may come to an incorrect conclusion based on
the headline ALM that a larger portion of the bank’s deposits is coming up for maturity
every year as it has nearly 25% of overall deposits in savings deposits.
Term deposit maturity is rarely provided; RBI data comes with tremendous lag
We believe that the correct approach would be to either provide better disclosure (reports
the respective bucket under which they are classified) or exclude CASA deposits. We note
that RBI does not provide this data but they come with a tremendous lag. The latest data is
as of FY2010. Interest rates, nature of customer, geographical distribution of deposits play
critical role in the duration of term deposits being mobilized.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
ALM: Are we reading too much? We believe that ALM tables reported by banks
provide little information that is relevant from either a liquidity or interest rate sensitivity
perspective. The primary problem comes from the clubbing of CASA deposits in buckets
based on a static behavior analysis, which differs across banks. We believe residual term
deposits would be the best way to report the same. RBI reports on a consolidated basis
but with a significant lag.
Analyzing ALM trends is a futile exercise as reported data is clouded by long-term behavior
We believe the ALM data disclosed by banks provide very little information to make an informed
analysis on (1) liquidity position or (2) understanding the interest sensitivity of funds. The reported
deposits data include both CASA and term deposits. Banks use long-term behavior patterns when
reporting CASA deposits while use residual maturity for term deposits. Given the difference in
behavior pattern across banks, we believe a cross sectional or a time series analysis of this data
gives limited information.
SBI subsidiaries show wide variance despite banks using long-term historical observations
We have used the data of State Bank of Bikaner and Jaipur and State Bank of Mysore to highlight
the problem mentioned above. The former classifies CASA deposits primarily at the longer end
(less than 5% is in <14 days bucket) while State Bank of Mysore reports SA at the shorter end
(6 months) and CA is clubbed in the last bucket. While we do believe that banks use long-term
analysis to apportion these deposits, we note there is a cyclical element in savings deposits and
changes in behavior pattern of these deposits that rarely gets captured in these tables. The
consequent impact is that State Bank of Mysore looks to have a larger share of short-term deposits
which in reality may not be true.
Term deposits maturity can add value for analysis; RBI data for the sector is released with a lag
We believe banks would either need to report the buckets under which CASA are being
distributed or highlight only the term deposit portion for easier comparison with others or
historical analysis. Also, interest rates, the nature of customer and geographical distribution of
deposits play critical role in the duration of term deposits being mobilized. We note that RBI does
not provide this data but this is released for the entire sector with a lag of 4-6 quarters.
Is it wise to unshackle interest rates when it looks like CASA is the only long-term source of funds?
Given the shortening duration of term deposits over years and the possibility that CASA looks to
be one of the primary sources of long-term liabilities that banks are mobilizing today, one needs to
analyze if de-regulation of the savings interest rates does achieve its objective. Prima facie, the
assets sides of most public sector banks are continuously moving towards long duration assets like
infrastructure, and to some extent, housing loans and these banks would need long-term solutions
that enable these assets to be transferred and reduce the underlying mismatches of asset liability.
We see limited merit in looking at ALM reported by banks
If the primary objective of ALM aims to capture the inherent liquidity mismatches across
buckets, we don’t see how the current disclosures help in achieving the same for external
participants.
Classification of current account and savings deposits shows divergence across banks
The primary problem is in the reclassification of current account and savings deposits. RBI
allows banks to classify these in various buckets based on the bank’s internal behavioral
analysis. However, RBI advises banks to use long-term study for classification but we find
significant differences across a few banks that report this data. A few key implications on
analyzing this data with incomplete information:
Comparisons across banks will be incorrect as different banks may use their own arbitrary
forms of analysis. Time series analyses would be futile unless complete data for break-up
of deposits are given.
A consequence of this table is that we would never be able to analyze the interest rate
impact based on residual maturity as the near-term maturity has deposits contracted at
various intervals (for example 1 day maturity has deposits raised not only that day but also
all deposits raised a few quarters back at various time frames and different yields
maturing that day.
RBI study shows that savings accounts, especially in urban regions, exhibit a fair degree of
interest rate sensitivity which is not captured by banks in their respective models. Hence,
the inherent cyclical behavior of these deposits can marginally increase liquidity as well as
interest rate impact which the current table fails to show.
State Bank subsidiaries shows the divergence which should be visible in all banks
Two of State Bank of India’s subsidiaries, State Bank of Bikaner and Jaipur and State Bank of
Mysore, illustrate the problem that we mentioned previously on the classification of savings
and current accounts.
State Bank of Bikaner and Jaipur
State Bank of Bikaner and Jaipur reports CA and SA in four primary buckets with the bulk of
these deposits at the longer end. Both savings and current accounts have been split fairly
equally at 30% each in 1-3 year, 3-5 year and above 5-year bucket. The bank has seen a
change, albeit marginally, in the reporting format across years where it has increased the
proportion of CASA proportion from the lower end of the bucket to the higher end.
Initial analysis of the ALM shows a comfortable position for the bank with healthy deposits
at the longer end. However, 70-90% of these deposits are coming from these CASA
deposits as against term deposits.
State Bank of Mysore
State Bank of Mysore reports complete CA in the longest maturity (>5 years) while SA has
been classified at the shorted end in the six-month bucket. Based on this data, State Bank of
Mysore is probably suggesting that the average duration of savings deposits is about 6
months while CA is fairly long-term with limited risk. The bank, in fact, had negative growth
of 9% in FY2009 and just 6% growth in FY2011.
Also, the bank’s behavior of these two deposits contrasts quite sharply with State Bank of
Bikaner and Jaipur. It is also possible that one may come to an incorrect conclusion based on
the headline ALM that a larger portion of the bank’s deposits is coming up for maturity
every year as it has nearly 25% of overall deposits in savings deposits.
Term deposit maturity is rarely provided; RBI data comes with tremendous lag
We believe that the correct approach would be to either provide better disclosure (reports
the respective bucket under which they are classified) or exclude CASA deposits. We note
that RBI does not provide this data but they come with a tremendous lag. The latest data is
as of FY2010. Interest rates, nature of customer, geographical distribution of deposits play
critical role in the duration of term deposits being mobilized.
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