Goldman Sachs: India banks: Second round of deposit rate hikes

Second round of deposit rate hikes
Key banks like SBI and PNB hiked their deposit rates on Sep 30 by 25-
75 bp. In aggregate, deposit rates have been increased by 50-125 bp by
these banks since the rate hike cycle kicked off in Jan 2010. However, SBI
has not changed its base rate nor prime lending rate (PLR), which remain at
7.5% and 12.25% since August, respectively. PNB has, however, raised its
base rate by 50 bp to 8.5% while retaining PLR at 11.75%. The PLR has
moved up by 50 bp in aggregate ytd for SBI and 75bp for PNB. The shorter
end of the market has, however, seen a sharper increase in rates, with the
CP and CD rates for 3Ms moving up a hefty c. 330 bp since December.
Higher credit growth yoy and increase in PLR positive for margins
so far, but…
We believe the higher credit growth yoy at 21.1% (including CPs) vs. 17.2%
in Aug 2009, along with the increase in PLR should lead to stable qoq and
higher yoy margins for the banks. However, on an incremental basis,
banks should hike PLR simultaneously with their deposit rates to protect
margins. We believe the current disparity between deposit rate and PLR
hikes is therefore a bit concerning. Banks have seen strong growth in NII
over the last few quarter due to strong yoy margin expansion. We believe
this phase will peak in 2QFY11, and NII growth will taper thereafter as the
full benefit of margin expansion from lower cost of deposits will have been
reflected. As such, incremental margin expansion would need to be driven
by PLR/base rate hikes.
We retain our preference for retail vs. wholesale borrowers
Given significant valuation expansion and rising rate environment, we
continue to prefer retail borrowers that have the ability to protect margins.
We believe wholesale borrowers focused on retail lending business like
mortgages may see margin challenges ahead, given that large players like
SBI plan to retain a teaser rate scheme. We retain our Buy ratings on PNB,
BoB, and ICICI Bank and IndusInd Bank (on Conv list). We retain Sell
ratings on SBI, LIC HF (on Conv list), HDFC, and IDFC.