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Banks/Financial Institutions
India
The circle gets completed. The much-awaited savings rate deregulation has saw the
light of the day, and with this interest rates on all liability products have been effectively
freed. We expect innovation from banks to attract and retain customers. Mid-tier
private banks will likely gain, large private banks are at risk from cost perspective while
large PSU banks like SBI are at limited risk. On a relative basis, this is positive for nonbanks
as well. We await market reactions from large players to understand earnings
impact (50 bps hike impact is about 4-7% on earnings).
Last leg of interest rate deregulation is complete though not the opportune time to deregulate
RBI allowed savings rate to be deregulated which nearly completes the interest rate deregulation
exercise. Savings account balances below `0.1 mn will have a uniform rate and balances above
can be freely charged but banks should not discriminate customers. Deregulation at an elevated
interest rate levels is a bit discomforting but the only positive from a timing perspective is that we
see a slowdown and banks are not in great demand for deposits.
Raises costs for the industry as product innovations aim to retain and acquire customers
In the medium term, a prolonged elevated interest rate cycle can result in banks protecting their
deposit franchise by raising interest rates. However, long-term implications on rates would depend
on the threat of the franchise for the larger players. We believe interest rates would be one of the
many tools to attract customers as the costs for a fully functional retail deposit franchise can be an
expensive proposition. A graded interest rate/charges product offering could emerge targeting
specific customers with different usage patterns and the banks’ ability to cross-sell other products.
We don’t expect interest rates to change frequently as the search costs for customers can result in
negative feedback. Our current analysis shows 4-7% EPS impact for 50 bps hike in deposits.
Mid-tier private banks to gain; relative benefit for non-banks; risks less for SBI but high for private banks
We see mid-tier private banks like Yes Bank, IndusInd, ING Vysya, DCB and Federal to gain as it
gives them an entry point (homogenous product) and could improve branch utilization resulting in
better cost-benefit analysis as compared to wholesale deposits. We see limited risks to SBI as they
have a fairly large diversified sourcing base.
In a rising interest rate scenario, non-banks are at disadvantage to banks that have high CASA
deposits. Thus, NBFCs will be relatively better-placed if the relative advantage of CASA declines
over time.
Large private banks like HDFC Bank, ICICI Bank and Axis Bank are at relatively higher risk - their
operational costs for managing retail savings product would make increasing interest rates an
expensive proposition as compared to under-utilized branches of other banks.
Serious risks emerging for PSU banks with large infrastructure portfolios
Our primary concern is the balance sheet risks that would evolve over a period of time for public
sector banks. They have increased their infrastructure exposure to about 15-25% of loans primarily
on the back of the stickiness of these core deposits which is currently under threat with the
current deregulation. Also, NIM can be a lot more volatile for these players going forward.
Other highlights from RBI policy
(1) Branch licensing for tier-2 cities has been freed from obtaining prior approval
but opening 25% of new branches in unbanked centers remain. (2) Restructured
loan classification can move to international standards. Implications not clear on
provisions by moving to such a classification - negative if the current provisioning
policy needs to be adopted. (3) Pricing of loan and advances to remove prevalent
distortions. (4) ‘Dynamic provisioning’ discussion paper to be introduced in March
2012. (5) Draft guidelines for Basel 3 implementation to be introduced by December
2011.
Differential pricing to result in innovation over time
Savings deregulation is likely to bring more innovations over a period of time. On an average,
we note that savings deposits are about 20-23% of the overall deposits. Nearly 60% of the
savings deposits are from urban/metro regions. PSU banks, especially mid-tier PSU banks
have a higher share of CASA deposits from savings balances. Customers are currently
offered a lower rate as they get a bundle of other services that are charged at substantially
lower rates - which could change under the current system as innovation improves. However,
select banks may attempt to de-bundle some of these services if they position savings rates
merely on interest rate perspective.
RBI currently has allowed the following for savings rates
Deposits up to `0.1 mn would be given uniform interest rates irrespective of the amount.
While we don’t have a bucket-wise analysis of average savings deposits, we note that the
average deposit in savings is about `1,000 in rural, `1,700 in semi-urban and `3,400 in
urban/metro regions. CASA proportion to overall deposits has been higher in rural/urban
areas but their share has been reducing as compared to overall CASA growth.
Deposits greater than `0.1 mn can have differential interest rates but with no
discrimination between customers.
RBI has clarified that innovation and definition of the above segments are completely left to
market participants. Only serious disruption could result in RBI intervention. Hence, interest
rates could be charges on monthly, weekly, least balance or by any other definition.
We note that Yes Bank has already started offering 6% interest on its savings deposit
balances (average daily balance credited quarterly).
Savings deposits from non-urban regions are less interest sensitive
We believe that banks with larger share of savings deposits from rural and semi-urban
regions will have lower impact (primarily SBI and PNB) from the recent move as compared to
banks which have a larger share from urban/metro areas. Private banks like HDFC Bank,
which could be having a larger share from urban/metro regions, could be relatively at a
disadvantage as compared to SBI, which could have a lot more geographically diversified
savings portfolio.
HDFC Bank has a higher share of retail deposits (65% levels) primarily on the strength of
salary accounts which contribute 52% of its total savings customers and about 30% of retail
deposits. However, concentration remains high (especially given the strong wealth
management practice) with nearly 13% of its customers contributing about 65% of retail
deposits – which could be at risk with the current move.
Where and when will rates settle? Business opportunity as against profitability
We expect interest rates to increase for the system as a whole, although gradually, but the
cost would not reflect equally for all banks. In the near term, banks which are operating
with healthy retail deposits may find the underlying interest rates fully factoring the cost of
servicing the client at closer to current levels. However, for banks which rely on wholesale
deposits (lower branch utilization) may find it optimal to raise savings deposits rates from an
opportunity perspective as it would still be effective from a cost-benefit analysis when
compared to wholesale rates
Rates would not be volatile but swings can be sharp in tight liquidity markets
We broadly expect savings interest rates to be less volatile as compared to term deposits as
search costs for customers should not result in negative feedback (customers who have
opened their accounts after thorough research but only to see the conditions changing post
opening the account). We do fear banks raising deposit rates when the underlying liquidity
is extremely tight but not sharply as it would signal that the bank could be facing funding
constraints.
SBI’s interest rates in the 30-45 days bucket have been at 4.5% levels since November 2004
(average rate). Marginal players are unlikely to create major impact to incumbents as the
product offering apart from interest rates would be critical to gain share.
Overall, we expect a 50 bps increase in savings deposits rates to have 8-10 bps impact on
NIMs and about 4-7% impact on earnings.
Fear of ALM mismatches remains a big risk, especially for public banks
Public sector banks have largely been funding infrastructure on the basis that these banks
have a strong core CASA deposit franchise. Ageing analysis of these deposits gives
reasonable confidence on the underlying deposits. However, the current development is
clearly a negative for most of these banks which have been aggressive in this vertical.
Other highlights of the regulation
Branch licensing for tier-2 cities freed from obtaining prior approval. We don’t
expect a major relief for banks due to the regulation which now allows them to open
branches in tier-2 cities (population between 50,000 and 100,000) without prior approval.
The existing guideline of opening 25% of branches in unbanked areas remains while
deposit mobilization continues to see increasing concentration of deposits in urban/metro
regions as indicated in our previous reports. RBI had recently allowed free branch opening
policy for tier-3 to tier-6 cities.
Restructured loan classification moving to international standards. RBI is looking at
moving to best practices for restructured loans but we are not clear of its implications.
International best practices recognize restructured loans similar to impaired while in India
loans can be classified as standard provided the restructuring exercise is completed within
a specified period. We are not sure if ‘impaired’ loans would attract higher provisions as
mandated by RBI as it would be similar to sub-standard loans.
‘Dynamic provisioning’ discussion paper to be introduced in March 2012. The
paper would provide guidelines to reduce the pro-cyclicality impact of provision
to economic conditions. We expect banks to make higher provisions in a strong
economic environment and utilize the excess during periods of distress.
Pricing of loan and advances to remove prevalent distortions. We believe that RBI
may introduce the last phase of removing distortions for loan pricing after the
introduction of base rate last year. The current guideline would attempt to
remove the frequent change in formula for loans pricing and managing risks -
especially on credit premiums for customers with similar credit profile.
Draft guidelines for Basel 3 guidelines by December 2011.
Priority sector definition would see a draft guideline in the next few months.
New bank licenses would be given only after the regulatory frameworks are in
place.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
The circle gets completed. The much-awaited savings rate deregulation has saw the
light of the day, and with this interest rates on all liability products have been effectively
freed. We expect innovation from banks to attract and retain customers. Mid-tier
private banks will likely gain, large private banks are at risk from cost perspective while
large PSU banks like SBI are at limited risk. On a relative basis, this is positive for nonbanks
as well. We await market reactions from large players to understand earnings
impact (50 bps hike impact is about 4-7% on earnings).
Last leg of interest rate deregulation is complete though not the opportune time to deregulate
RBI allowed savings rate to be deregulated which nearly completes the interest rate deregulation
exercise. Savings account balances below `0.1 mn will have a uniform rate and balances above
can be freely charged but banks should not discriminate customers. Deregulation at an elevated
interest rate levels is a bit discomforting but the only positive from a timing perspective is that we
see a slowdown and banks are not in great demand for deposits.
Raises costs for the industry as product innovations aim to retain and acquire customers
In the medium term, a prolonged elevated interest rate cycle can result in banks protecting their
deposit franchise by raising interest rates. However, long-term implications on rates would depend
on the threat of the franchise for the larger players. We believe interest rates would be one of the
many tools to attract customers as the costs for a fully functional retail deposit franchise can be an
expensive proposition. A graded interest rate/charges product offering could emerge targeting
specific customers with different usage patterns and the banks’ ability to cross-sell other products.
We don’t expect interest rates to change frequently as the search costs for customers can result in
negative feedback. Our current analysis shows 4-7% EPS impact for 50 bps hike in deposits.
Mid-tier private banks to gain; relative benefit for non-banks; risks less for SBI but high for private banks
We see mid-tier private banks like Yes Bank, IndusInd, ING Vysya, DCB and Federal to gain as it
gives them an entry point (homogenous product) and could improve branch utilization resulting in
better cost-benefit analysis as compared to wholesale deposits. We see limited risks to SBI as they
have a fairly large diversified sourcing base.
In a rising interest rate scenario, non-banks are at disadvantage to banks that have high CASA
deposits. Thus, NBFCs will be relatively better-placed if the relative advantage of CASA declines
over time.
Large private banks like HDFC Bank, ICICI Bank and Axis Bank are at relatively higher risk - their
operational costs for managing retail savings product would make increasing interest rates an
expensive proposition as compared to under-utilized branches of other banks.
Serious risks emerging for PSU banks with large infrastructure portfolios
Our primary concern is the balance sheet risks that would evolve over a period of time for public
sector banks. They have increased their infrastructure exposure to about 15-25% of loans primarily
on the back of the stickiness of these core deposits which is currently under threat with the
current deregulation. Also, NIM can be a lot more volatile for these players going forward.
Other highlights from RBI policy
(1) Branch licensing for tier-2 cities has been freed from obtaining prior approval
but opening 25% of new branches in unbanked centers remain. (2) Restructured
loan classification can move to international standards. Implications not clear on
provisions by moving to such a classification - negative if the current provisioning
policy needs to be adopted. (3) Pricing of loan and advances to remove prevalent
distortions. (4) ‘Dynamic provisioning’ discussion paper to be introduced in March
2012. (5) Draft guidelines for Basel 3 implementation to be introduced by December
2011.
Differential pricing to result in innovation over time
Savings deregulation is likely to bring more innovations over a period of time. On an average,
we note that savings deposits are about 20-23% of the overall deposits. Nearly 60% of the
savings deposits are from urban/metro regions. PSU banks, especially mid-tier PSU banks
have a higher share of CASA deposits from savings balances. Customers are currently
offered a lower rate as they get a bundle of other services that are charged at substantially
lower rates - which could change under the current system as innovation improves. However,
select banks may attempt to de-bundle some of these services if they position savings rates
merely on interest rate perspective.
RBI currently has allowed the following for savings rates
Deposits up to `0.1 mn would be given uniform interest rates irrespective of the amount.
While we don’t have a bucket-wise analysis of average savings deposits, we note that the
average deposit in savings is about `1,000 in rural, `1,700 in semi-urban and `3,400 in
urban/metro regions. CASA proportion to overall deposits has been higher in rural/urban
areas but their share has been reducing as compared to overall CASA growth.
Deposits greater than `0.1 mn can have differential interest rates but with no
discrimination between customers.
RBI has clarified that innovation and definition of the above segments are completely left to
market participants. Only serious disruption could result in RBI intervention. Hence, interest
rates could be charges on monthly, weekly, least balance or by any other definition.
We note that Yes Bank has already started offering 6% interest on its savings deposit
balances (average daily balance credited quarterly).
Savings deposits from non-urban regions are less interest sensitive
We believe that banks with larger share of savings deposits from rural and semi-urban
regions will have lower impact (primarily SBI and PNB) from the recent move as compared to
banks which have a larger share from urban/metro areas. Private banks like HDFC Bank,
which could be having a larger share from urban/metro regions, could be relatively at a
disadvantage as compared to SBI, which could have a lot more geographically diversified
savings portfolio.
HDFC Bank has a higher share of retail deposits (65% levels) primarily on the strength of
salary accounts which contribute 52% of its total savings customers and about 30% of retail
deposits. However, concentration remains high (especially given the strong wealth
management practice) with nearly 13% of its customers contributing about 65% of retail
deposits – which could be at risk with the current move.
Where and when will rates settle? Business opportunity as against profitability
We expect interest rates to increase for the system as a whole, although gradually, but the
cost would not reflect equally for all banks. In the near term, banks which are operating
with healthy retail deposits may find the underlying interest rates fully factoring the cost of
servicing the client at closer to current levels. However, for banks which rely on wholesale
deposits (lower branch utilization) may find it optimal to raise savings deposits rates from an
opportunity perspective as it would still be effective from a cost-benefit analysis when
compared to wholesale rates
Rates would not be volatile but swings can be sharp in tight liquidity markets
We broadly expect savings interest rates to be less volatile as compared to term deposits as
search costs for customers should not result in negative feedback (customers who have
opened their accounts after thorough research but only to see the conditions changing post
opening the account). We do fear banks raising deposit rates when the underlying liquidity
is extremely tight but not sharply as it would signal that the bank could be facing funding
constraints.
SBI’s interest rates in the 30-45 days bucket have been at 4.5% levels since November 2004
(average rate). Marginal players are unlikely to create major impact to incumbents as the
product offering apart from interest rates would be critical to gain share.
Overall, we expect a 50 bps increase in savings deposits rates to have 8-10 bps impact on
NIMs and about 4-7% impact on earnings.
Fear of ALM mismatches remains a big risk, especially for public banks
Public sector banks have largely been funding infrastructure on the basis that these banks
have a strong core CASA deposit franchise. Ageing analysis of these deposits gives
reasonable confidence on the underlying deposits. However, the current development is
clearly a negative for most of these banks which have been aggressive in this vertical.
Other highlights of the regulation
Branch licensing for tier-2 cities freed from obtaining prior approval. We don’t
expect a major relief for banks due to the regulation which now allows them to open
branches in tier-2 cities (population between 50,000 and 100,000) without prior approval.
The existing guideline of opening 25% of branches in unbanked areas remains while
deposit mobilization continues to see increasing concentration of deposits in urban/metro
regions as indicated in our previous reports. RBI had recently allowed free branch opening
policy for tier-3 to tier-6 cities.
Restructured loan classification moving to international standards. RBI is looking at
moving to best practices for restructured loans but we are not clear of its implications.
International best practices recognize restructured loans similar to impaired while in India
loans can be classified as standard provided the restructuring exercise is completed within
a specified period. We are not sure if ‘impaired’ loans would attract higher provisions as
mandated by RBI as it would be similar to sub-standard loans.
‘Dynamic provisioning’ discussion paper to be introduced in March 2012. The
paper would provide guidelines to reduce the pro-cyclicality impact of provision
to economic conditions. We expect banks to make higher provisions in a strong
economic environment and utilize the excess during periods of distress.
Pricing of loan and advances to remove prevalent distortions. We believe that RBI
may introduce the last phase of removing distortions for loan pricing after the
introduction of base rate last year. The current guideline would attempt to
remove the frequent change in formula for loans pricing and managing risks -
especially on credit premiums for customers with similar credit profile.
Draft guidelines for Basel 3 guidelines by December 2011.
Priority sector definition would see a draft guideline in the next few months.
New bank licenses would be given only after the regulatory frameworks are in
place.
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