Deposit Rates – 100 bps Hike
Quick Comment – What’s new: State Bank of India
has raised deposit rates by 50-150 bps across maturities.
In the 1-2 year bucket (using 555-day deposit as
benchmark) SBI has increased rates by 100 bps. No
changes in prime lending rates / base rate have been
announced as yet. SBI’s rate increase follows increases
by other entities during the past week
Pace of increase was a surprise: While we were
building in deposit rates to increase at about 50 bps per
quarter – the pace of the increase (+100 bps) was
sharper than expectations. Historically, we have not
seen such a sharp in increase at one go by SBI.
Margins to normalize going forward: Over the last
few months Indian banks were benefitting from higher
lending rates, lag in feeling the impact of higher deposit
rate and higher LD ratio. However, now NIM’s are close
to peak levels and ready to normalize. We expect NIM’s
to come down (though likely to stay higher than historical
average) – today’s rate hikes don’t have a material
impact on our numbers. These rates will flow through
earnings over next 12 months and we will not be
surprised if the bank increases lending rates by then.
Our numbers will be affected if banks raise deposit rates
further without touching lending rates.
Why didn’t the bank raise lending rates – As we have
mentioned in our previous notes, historically banks used
to raise deposit rates and touch lending rates with a lag
of 3-6 months (loans are floating rate while deposits are
fixed rate). In this cycle, SBI raised lending rates along
with deposit rate, till now – probably to ensure adequate
revenue momentum to meet higher credit costs. Now
with NIM’s at 3.4% and rising, it can afford to revert to
old style rate hikes. Exhibit 10 shows how banks with
strong funding had seen lending spreads expand during
last rate hike cycle.
Why a sharp increase in deposit rates? Deposit growth in
India continues to lag credit growth owing to low real deposit
rates – hence incremental credit-deposit ratio both on trailing
3M and 1 yr basis have been elevated. This is also reflected in
the tight-interbank liquidity conditions. The sharp increase
announced today would have likely been driven by the fact that
we are entering the “busy” season in terms of credit growth and
banks may be looking to raise deposits ahead of the same.
How many more deposit rate hikes? We expect another 50
bps deposit rate hike (over 3-6 months) and about 75 bps PLR
hike (over next 6-9 months). While the first reaction on seeing
the 100 bps rate hike is to think that rates are going to rise
sharply, history provides some perspective. The last time SBI
was offering around 8.5% on 1 year deposits (April 2008), repo
was at 7.75% (6.25% right now), CRR was 7.75% (6% now),
crude was US$ 115/barrel, WPI inflation was at 8% and rising
to 11.2% by July. Unless inflation goes awry, we are likely
coming close to the end of higher deposit rates.
Near term pressure likely, buy liability franchises – We
continue to prefer strong liability franchises. Stocks could be
under pressure in the near term especially until liquidity
conditions improve. In this environment, we continue to prefer
HDFC Bank and State Bank of India wherein the strong liability
franchises will provide an offset and revenue growth will
continue to be robust.
We have also liked asset aggregators but given the pressure
on liquidity stock performance is likely to be weak in the near
term. However, we would look at buying on weakness as we
expect these stocks to do well in 2011.
