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The Reserve Bank of India (RBI) has finally decided to deregulate the savings bank (SB) deposit rates
currently regulated at 4%. Banks are now free to decide the SB rate but will have to provide a uniform rate
on SB balances up to INR0.1m irrespective of the amount in the account. Banks may provide differential
rates over INR0.1m if they so choose. We think the impact will be negative for most PSU banks and Private
Banks like HDFC, ICICI and Axis Bank. We await detailed operational guidelines, but in this report we have
tried to analyse the impact on the Indian banking sector and how SB deregulation can evolve and what
challenges the sector may witness in the future.
Quantifying the impact: Every 50bp SB rate hike (all else remaining constant), on average negatively
impacts banks’ margins by 8-9bp, ROA by 5-6bp and ROE by 90-100bp. PSU banks generally get more
impact due to their higher exposure to SB accounts compared to larger private bank peers. Additionally,
lower share of non-interest income for PSU banks in net total income (31% vs 40% for private banks and
44% for foreign banks) would result in a higher earnings impact than its private peers in the initial phase
once the SB rates are deregulated.
SB rates and funding costs for the sector to have an upward bias: As banks with low SB ratios tend to offer
higher rates it will put upward pressure on the SB rates that larger PSU and Private banks will need to offer
to retain their customers.
ALM impact may be crucial in medium to long term: Banks can levy fees, increase lending rates and
cushion their earnings impact or P&L impact. However, we are more concerned from an asset-liability
mismatch (ALM) or balance sheet (BS) point of view. Although RBI had very aptly analysed, in its draft
report, that the fear of ALM is misplaced and may not be significant in the overall context of the system, for
certain banks it may expose the vulnerability in their BS as the volatility in SB balances is likely to increase
initially due to unhealthy competitive play.
Margins to remain under pressure if banks are to correct their ALM in the long term: We believe if the
banks try to correct their asset liability profile in the long term, it could result in margin erosion for banks
as the long-term average spreads offered on the medium- to long-term maturities (three years and above)
are substantially higher (by 300-350bp) and how much of it could be passed on or recouped through
noninterest income will remain a key factor to watch for.
Economics of SB and TD relations are different; hence initial risk of unhealthy competition remains high
The intensity, or desperation, to acquire and retain a SB deposit relation is much higher than trying to
garner a TD relation. The TD relation in the bulk or wholesale market is a pure function of interest rates,
while for retail depositors it is less interest-rate sensitive. Hence, in a deregulated scenario, we observe
that there would be an initial phase where banks with low SB share would try to attract SB customers from
other banks by offering higher rates. For example Yes Bank has already announced a 200bp increase in SB
rates to 6%
The bank targeting SB customers of other banks will likely offer higher rates and would be factoring in
higher balances, fees and cross-selling opportunities to make up for the higher cost. This would lead to
pricing competition among banks and the initial bank would most likely match the terms of the aggressive
new bank to retain its customer, provided the customer is profitable for the bank.
Quantifying the impact
Every 50bp SB rate hike (all else remaining constant), on average negatively impacts banks’ margins by 8-
9bp, ROA by 5-6bp and ROE by 90-100bp. PSU banks generally get more impacted due to their higher
exposure to SB accounts compared to larger private bank peers. Additionally, lower share of non-interest
income for PSU banks in net total income (31% vs 40% for private banks and 44% for foreign banks) would
result in a higher earnings impact than its private peers in the initial phase once the SB rates are
deregulated.
Impact analysis on margins:
Assuming a 50bp rise in SB rates, SBI is likely to be the most impacted, with IDBI to be the least impacted
from the PSU space. Meanwhile among private banks, Jammu & Kashmir Bank is likely to be the most
impacted, while Yes Bank would be the least impacted.
ALM impact may be crucial in medium to long term
We believe that one of the other major areas of concern for banks would be asset liability management in a
SB deregulated environment. While most banks utilise their savings bank balances as part of their core
deposits to fund their longer tenor loans (mainly infrastructure sector), we believe savings banks rate
deregulation could create asset liability mismatches for most banks, leaving them in a spot where they
could find it difficult to maintain a balance between asset-liability matching and the maintenance of
spreads. We observe from the exhibit below that funding short- to medium-term advances for banks (up to
three years maturity) does not seem to be a bigger issue as nearly 70-80% of the deposits mobilised by
banks currently fall in the 1-3-year maturity bucket. Moreover, the availability of deposits in this category
is not a constraint for banks and, thereby, does not pose a threat for asset liability mismatch in this
maturity bucket. However, as is evident in the exhibit below, the asset liability mismatch for banks could
occur in the over 3-year maturity bucket. In terms of the gap between long-term deposits and advances,
the gap for PSU Banks is narrower compared with that of the private as well as of foreign banks.
Margins to remain under pressure if banks are to correct their ALM in the long term
We believe if the banks try to correct their asset liability profile in the medium to long term, it could result
in margin erosion for banks as the long-term average spreads offered on the medium to long term
maturities (three years and above) are substantially higher (by 300-350bp) and how much of it could be
passed on or recouped through noninterest income will remain a key factor to watch for.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Reserve Bank of India (RBI) has finally decided to deregulate the savings bank (SB) deposit rates
currently regulated at 4%. Banks are now free to decide the SB rate but will have to provide a uniform rate
on SB balances up to INR0.1m irrespective of the amount in the account. Banks may provide differential
rates over INR0.1m if they so choose. We think the impact will be negative for most PSU banks and Private
Banks like HDFC, ICICI and Axis Bank. We await detailed operational guidelines, but in this report we have
tried to analyse the impact on the Indian banking sector and how SB deregulation can evolve and what
challenges the sector may witness in the future.
Quantifying the impact: Every 50bp SB rate hike (all else remaining constant), on average negatively
impacts banks’ margins by 8-9bp, ROA by 5-6bp and ROE by 90-100bp. PSU banks generally get more
impact due to their higher exposure to SB accounts compared to larger private bank peers. Additionally,
lower share of non-interest income for PSU banks in net total income (31% vs 40% for private banks and
44% for foreign banks) would result in a higher earnings impact than its private peers in the initial phase
once the SB rates are deregulated.
SB rates and funding costs for the sector to have an upward bias: As banks with low SB ratios tend to offer
higher rates it will put upward pressure on the SB rates that larger PSU and Private banks will need to offer
to retain their customers.
ALM impact may be crucial in medium to long term: Banks can levy fees, increase lending rates and
cushion their earnings impact or P&L impact. However, we are more concerned from an asset-liability
mismatch (ALM) or balance sheet (BS) point of view. Although RBI had very aptly analysed, in its draft
report, that the fear of ALM is misplaced and may not be significant in the overall context of the system, for
certain banks it may expose the vulnerability in their BS as the volatility in SB balances is likely to increase
initially due to unhealthy competitive play.
Margins to remain under pressure if banks are to correct their ALM in the long term: We believe if the
banks try to correct their asset liability profile in the long term, it could result in margin erosion for banks
as the long-term average spreads offered on the medium- to long-term maturities (three years and above)
are substantially higher (by 300-350bp) and how much of it could be passed on or recouped through
noninterest income will remain a key factor to watch for.
Economics of SB and TD relations are different; hence initial risk of unhealthy competition remains high
The intensity, or desperation, to acquire and retain a SB deposit relation is much higher than trying to
garner a TD relation. The TD relation in the bulk or wholesale market is a pure function of interest rates,
while for retail depositors it is less interest-rate sensitive. Hence, in a deregulated scenario, we observe
that there would be an initial phase where banks with low SB share would try to attract SB customers from
other banks by offering higher rates. For example Yes Bank has already announced a 200bp increase in SB
rates to 6%
The bank targeting SB customers of other banks will likely offer higher rates and would be factoring in
higher balances, fees and cross-selling opportunities to make up for the higher cost. This would lead to
pricing competition among banks and the initial bank would most likely match the terms of the aggressive
new bank to retain its customer, provided the customer is profitable for the bank.
Quantifying the impact
Every 50bp SB rate hike (all else remaining constant), on average negatively impacts banks’ margins by 8-
9bp, ROA by 5-6bp and ROE by 90-100bp. PSU banks generally get more impacted due to their higher
exposure to SB accounts compared to larger private bank peers. Additionally, lower share of non-interest
income for PSU banks in net total income (31% vs 40% for private banks and 44% for foreign banks) would
result in a higher earnings impact than its private peers in the initial phase once the SB rates are
deregulated.
Impact analysis on margins:
Assuming a 50bp rise in SB rates, SBI is likely to be the most impacted, with IDBI to be the least impacted
from the PSU space. Meanwhile among private banks, Jammu & Kashmir Bank is likely to be the most
impacted, while Yes Bank would be the least impacted.
ALM impact may be crucial in medium to long term
We believe that one of the other major areas of concern for banks would be asset liability management in a
SB deregulated environment. While most banks utilise their savings bank balances as part of their core
deposits to fund their longer tenor loans (mainly infrastructure sector), we believe savings banks rate
deregulation could create asset liability mismatches for most banks, leaving them in a spot where they
could find it difficult to maintain a balance between asset-liability matching and the maintenance of
spreads. We observe from the exhibit below that funding short- to medium-term advances for banks (up to
three years maturity) does not seem to be a bigger issue as nearly 70-80% of the deposits mobilised by
banks currently fall in the 1-3-year maturity bucket. Moreover, the availability of deposits in this category
is not a constraint for banks and, thereby, does not pose a threat for asset liability mismatch in this
maturity bucket. However, as is evident in the exhibit below, the asset liability mismatch for banks could
occur in the over 3-year maturity bucket. In terms of the gap between long-term deposits and advances,
the gap for PSU Banks is narrower compared with that of the private as well as of foreign banks.
Margins to remain under pressure if banks are to correct their ALM in the long term
We believe if the banks try to correct their asset liability profile in the medium to long term, it could result
in margin erosion for banks as the long-term average spreads offered on the medium to long term
maturities (three years and above) are substantially higher (by 300-350bp) and how much of it could be
passed on or recouped through noninterest income will remain a key factor to watch for.
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