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• SBI's 150bp deposit rate hike raises potential concerns on NIMs – our
(then) pessimistic view on flat NIMs now looks optimistic. We are
worried about the secondary impact of such a sharp rate move on CASA
migration and wholesale deposits. We now have a clear preference for
private banks over PSUs and NBFCs. Top picks - ICICI/Kotak (positive)
and SBI/IDFC (negative).
• Sharp hikes - collateral damage likely: SBI has reacted to a prolonged
spell of tight liquidity with dramatic rate hikes of 50-150bp. Apart from
putting pressure on term deposit costs, this raises the possibility of
CASA migration and pre-maturity repricing of wholesale deposits. Loan
repricing may not fully cushion this and we see NIM pressure in 4Q.
• Regulatory noises adverse: The RBI governor’s indictation to banks to
cut NIMs, as well as the public discussions on deregulating savings
rates, are also negative indicators for NIMs, at least in the near term.
• Bond yields rising, limited impact: The 10-year gilt is now at 8.2%,
and we see M2M losses (mainly for PSU banks) in 3Q11 – our
assessment of yield cut-offs is 7.8-8% for most of the PSU banks. We
think SBI is the most affected (see table inside) - bad news, given the
asset quality issues already in play.
• Preference for private banks: We were expecting the liquidity situation
to be short term, but SBI’s capitulation dents those hopes. Our preference
for non-NIM drivers stands out, and ICICI and Kotak are thus favoured
plays. We also think that HDFC and HDFC Bank will add portfolio
resilience. We would avoid PSU banks for the short term, as a consensus
downgrade cycle is likely. Our key "avoids" would be IDFC and SBI.
Sharp hikes - collateral damage likely
SBI has reacted to a prolonged spell of tight liquidity with a dramatic rate hike of 50-
150bp. Apart from putting pressure on term deposit costs, this raises the possibility
of CASA migration and pre-maturity repricing of wholesale deposits. Loan repricing
may not fully cushion this and we see NIM pressures in 4Q.
Yield curve has flattened
The yield curve has flattened significantly, with the corporate yield curve inverted
for some time now. The tightness in short-term liquidity has persisted since early
October, and caused a sharp rise in short-term rates over this period. RBI’s active
management, however, kept overnight interest rates within the LAF corridor, driving
the expectation that short-term rates would ease soon.
SBI’s capitulation, however, adds a permanency to the rate move. Even if it does
trigger increased liquidity flows into the system, we do not see rates coming off in
the near future, as banks will be reluctant to cut rates any time soon. To some extent,
we therefore see this as an inflexion point on rates.
NIM sustainability difficult
The SBI move is a negative surprise to us and puts our thesis of flat margins at risk.
The key risks are:
• The deposit repricing cycle is now clearly negative (see chart below) and this will
put significant pressure on overall cost of deposits. The book usually reprices
within 9-12 months - if 20-25% of the book reprices at 300-400bp higher rates,
the impact on overall cost of funds will be negative
• The banks have been enjoying improved CASA ratios across the board. The
sudden spike in term deposit rates could put pressure on CASA ratios, as
coustomers migrate to term deposits. This would be a one-time adjustment which
would drive down NIMs, unless compensated by rising loan yields.
• A big risk is that wholesale deposits reprice upwards in a block – as the yoy
change in term deposits rise, the cost of premature renewals outweigh the
advantage. We do not think the differential is high enough to worry now but that
could potentially be another risk to NIMs.
If interest rates stabilize from here on, there is a chance that this NIM compression
will be temporary and loan repricing will restore balance by 1Q12. We believe,
however, that the RBI's tightening pause in December is merely temporary, and are
expecting a further 100bp tightening in 2011 – we then see NIMs remaining under
pressure for longer.
Savings bank dereg – risk in the near term
There has been increasing discussion in the media (ET, 5/6 Dec, eg) that the RBI is
seriously considering savings bank deregulation. While regulatory action is difficult
to predict, the RBI governor’s indication to banks that they should compress lending
spreads is an indication that there could be some regulatory impact.
The immediate impact of this would be negative. Smaller banks would most certainly
raise savings bank rates in an effort to get market share, and we think the larger
banks would be forced to follow. This, obviously, is negative for NIMs in the short
term. Over the longer term, this would adjust into higher CASA ratios and loan
pricing, but it would be negative for margins in the short term.
The high CASA banks would be the most impacted by this. Of these, the PSU banks
would be more impacted as their additions to SA accounts tends to be much slower
than the private sector players.
The 10-year gilt is now at 8.2%, and we see M2M losses (mainly for PSU banks) in
3Q11 – our assessment of yield cut-offs is 7.8-8% for most of the PSU banks. SBI is
the most affected (see table inside) - bad news, given the asset quality issues already
in play.
Among the larger PSU banks, SBI is the most impacted, given higher duration for its
AFS book. PSU banks have relatively higher maturities for their investment book at
2.5-3.5 yrs v/s 1.0-1.5 yrs for the private banks and in a rising-rate environment that
would add on to the pressure on margins.
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