Banks/Financial Institutions
Aligning deposit rates to market rates. We see SBI’s recent move to increase rates as
a measure to counter the rising cost of tight liquidity and normalize its interest rates in
line with market rates. We expect a marginal decline in NIMs in 2HFY11E from the
elevated levels of 2QFY11 and our earnings estimates capture that. We believe high
CASA banks will have a lower impact of rising funding costs compared to peers. We
maintain our estimates and believe the bank would benefit from better operating
leverage and lower provisions in FY2012. Maintain BUY.
Deposit rates across buckets increased by 50-150 bps; move aimed at normalization
SBI today announced a hike in its deposit rates by 50-150 bps across various buckets as the
liquidity environment continues to remain tight (advance tax outflows in December). Lending rates
remain unchanged. The overall increase looks sharper, regardless, we believe this rate hike is
aimed at aligning SBI’s interest rates towards market rates and the tight liquidity environment
experienced by the industry. The sharpest rise has been in the 46-90 day bucket at 150 bps (5.5%
and one of the highest in the industry), indicating that SBI is probably looking at the current
liquidity deficit to be temporary in nature, a situation likely to reverse in 4QFY11 as government
spending improves. This rate however, continues to be lower than prevailing call money rates.
However, the rates have been increased by 100 bps in the 1-3 year categories (7.75-8.5%)
Strong CASA ratio of 48% to cushion rising costs; building NIM decline in estimates
In light of tight liquidity environment, we favor high CASA banks like SBI to cushion the impact of
steep rise in deposit costs. As of 2QFY11, SBI had a CASA ratio of 48% (domestic deposits),
second highest in the industry following HDFC Bank.
We anyways build reasonable cushions in our 2HFY11 estimates as we expect FY2011
improvement in NIM (calc) of about 45 bps while the bank has been running at about 60 bps
higher NIMs during 1HFY11, as compared to FY2010 NIMs. Also, our earnings already factor NIMs
to decline in FY2012 by about 10 bps to 2.8% (calc).
Logical to expect lending rate hike as well; credit growth is also picking up
We believe SBI will also raise lending rates in due course. Even in the past, lending rate hikes have
followed deposit rate hikes. Further credit growth has just started to pick up – bankers have been
highlighting that credit growth has been firm during recent times and is getting more diversified.
We believe pricing power remains with bankers on the back of steady loan demand coupled with
tighter liquidity in the system
Earnings impact limited as strong levers available
We believe SBI has multiple levers to deliver over 20% earnings growth and RoAs of 1%
despite NIM pressure in FY2010-12E, mainly from better operating leverage and lower loan
loss provisions. A cost-income ratio of 47% and opex/assets at 2% has scope for further
improvement as the bank has completed near-term investments in branches, technology and
employees. 2HFY12 would see loan loss provisions to ease as the bank reaches 70%
provision coverage ratios as mandated by RBI. Also, strong improvement in the underlying
economy would also see lower slippages and higher recovery cycle resulting in lower loan
loss provisions (we are building FY2012 loan loss provisions to remain at FY2011 levels).
