Assessing margin trajectory amid rapidly easing environment
* Sharp cut in deposit rates to offset NIM pressures; Private banks better placed
* The interest rate environment has eased rapidly in recent months as the government and RBI announced steps to handhold the system amid the COVID-19 shock. Most large private and PSU banks have announced a series of sharp cuts in Term/Savings rates to offset NIM pressures. In a recent move, AXSB and ICICIBC reduced their SA rate by 25bp to 3.0%, and SBIN lowered its SA rate by 5bp to 2.7%. While a sharp reduction in the repo rate has resulted in moderation in yield under the externally benchmark-based price regime loans, a reduction in deposit rates would offset margin pressure to some extent. Amid this backdrop, we assessed the margin trajectory for the major banks; we believe private banks are relatively well-positioned to preserve their margins even as we expect slight compression in NIMs at the sector level. We maintain our preference for ICICIBC, HDFCB, and SBIN.
* The RBI has been lowering the repo rate since Feb’19 and has to date effected a 250bp reduction in the repo rate (115bp alone in Mar’20 and Apr’20) v/s 80– 130bp decline in MCLR for most banks during this period. The maximum reduction in one-year MCLR has been by SBI at 130bp, followed by KMB at 115bp.
* Most banks have followed this up with reducing interest rates on SA/TDs. SBI has reduced its peak term deposit rate by 150bp to 5.3%, and large private banks have reduced their TD rates between 165–205bp. Over the past six months, TD rates have declined in the range of 65–95bp for PSU banks and in the range of 105–125bp for private banks.
* While SBIN has reduced its SA rate further by 5bp to 2.7%, large private banks have announced a further reduction in the SA rate by 25bp to 3.0%. KMB has effected a massive 150bp/200bp SA rate cut to 3.5%/4% and is thus likely to maintain resilient margins as SA deposits re-price immediately. TD rates have also been revised down across banks, with short-tenure rates in the range of 2.9–3.5%, well below the repo rate. KMB witnessed a sharp uptick in its CASA deposits, with SA deposits forming ~40% of the total deposits.
* We believe this would help lenders tackle margin pressures as continued monetary easing would result in lower yield under the external benchmarkbased pricing regime. With the proportion of SA deposits rising, we believe a reduction in SA rates could support margins as TD reduction takes time to reprice, while SA rate re-pricing happens instantly.
* Thus, banks with a strong/granular liability franchise and a rising proportion of loan mix toward high-yielding products would be able to tackle margin pressures in a better way. Nevertheless, we expect margins to decline in the range of 5–20bp over FY21. Maintain preference for ICICIBC, HDFCBC, and SBIN.
Weighted Average Lending Rate (WALR) on fresh loans moderated by 43bp MoM
* WALR on fresh loans declined ~100bps to 9.20% for private banks in Feb’20 and 35bps to 8.65% for PSU banks over the past six months.
* WALR on O/S loans stood at 10.95% for private banks in Mar’20 (decline of 11bp in Feb’20). For PSU banks, WALR has been on the decline and stood at 9.45% in Mar’20, implying a drop of 55bps over the past six to nine months.
* WATDR has been declining over the past one year; it fell by ~70bps to 6.54% for private banks and by 40bps to 6.38% for PSU banks.
Spread differential between private banks and PSBs doubles to ~134bp
* Private banks have been focusing on high-yielding assets, while PSBs (barring SBIN) have not been very aggressive; thus, the lending yield differential between the two remains high. However, continued monetary easing has resulted in lower yield under the external benchmark-based pricing regime, and the lending yield differential between private banks and PSBs has therefore narrowed to ~60bp (v/s 150bp in Mar’19). On the other hand, the deposit rate differential is at ~15bp. This has caused the spread difference between private and PSU banks to widen—the gap has more than doubled to ~134bp v/s ~62bp over the past one year.
* Valuation and view
* We believe this reduction in deposit rates would help lenders tackle margin pressures as continued monetary easing would result in lower yield under the external benchmark-based pricing regime. With the proportion of SA deposits rising, we believe a reduction in SA rates could support margins as TD reduction takes time to re-price, while SA rate re-pricing happens instantly. Thus, banks with a strong/granular liability franchise and rising proportion of loan mix toward high-yielding products would be able to better tackle margin pressures. Nevertheless, we expect margins to decline in the range of 5–20bp over FY21. Maintain preference for ICICIBC, HDFCB, and SBIN.
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