The monetary policy announcement by India’s central bank today led to a sharp fall in bank stocks. The 14-share BSE banking index fell 1.2% as fears that deregulation of interest rates would crimp bank margins and a 25 basis point hike in policy rates would raise the proportion of bad loans.
India’s second largest private sector lender, HDFC Bank plunged 3% to Rs 468.75. Other banks that have seen significant losses in stock prices include Punjab National Bank, Axis Bank and State Bank of India. All of them were down by more than 3% each in intra-day deals.
While the large banks came under selling pressure, stocks of relatively smaller banks-Yes Bank, Kotak Mahindra Bank, Federal Bank and IDBI Bank clocked-in smart gains. The Yes Bank stock rose 8.8% to Rs 306.3. RBI’s decision to deregulate the savings bank deposit interest rates is likely to put smaller banks at an advantage vis-à-vis the larger ones.
Although these are early days yet, small banks with low portion of savings banks accounts are likely to attract customers by offering high interest rates. In an interview (dated 9 June) to Mint’s Tamal Bandyopadhyay, Rana Kapoor, CEO of Yes Bank, said that “It will be a colossal opportunity for a bank like ours,” if the RBI frees savings bank interest rates.
According to Vaibhav Agrawal, Vice President (Research) at Angel Broking:
Banks, whose CASA is in line with the industry average will have minimal impact. The ones with higher proportion of savings accounts will see a rise in cost of funds. Some of the hike (in cost of funds) could be passed on to the customers.
Agrawal adds further: But, it would be difficult to absorb the whole impact. Margins of large banks like State Bank of India, Punjab National Bank, State Bank of India and HDFC Bank could be impacted by 5-10 basis points if savings rates rise to 5%.
The ratio of deposits from current accounts savings account (CASA) is highest among large banks. Among private banks, HDFC Bank’s CASA ratio at 47.3% is the highest, followed by ICICI Bank (41.9%). State Bank of India (47.89) and Punjab National Bank (38.1%) tops the list amongst the prominent public sector banks.
Higher rates will raise cost of funds for banks with greater CASA ratio. According to Vaibhav Agrawal, banks with higher proportion of savings bank accounts could see their earnings impacted by 5-10% if savings rates have to go up to 5%.
While the small banks are definitely hungry for low cost deposits and are willing to pay more than 4%, it is still too early to say how much of market share they would gain.
The timing of the savings rate deregulation appears particularly inopportune at a time when banks are finding it difficult to raise margins and maintain asset quality. Although savings account customers will benefit, overall profit margins will get hit in case of a rate war among banks.
Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities said in a note: Currently, banks pay interest rate of 4% on the savings bank accounts. Post this deregulation, the interest rates on Savings bank accounts is bound to move up. This can have quite serious implications on the profitability of the banking system.
According to calculations by Agarwal of Angel Broking, a 1% rise in savings banks interest rates is estimated to increase the banking industry’s cost of funds by around 20 basis points. Banks with higher share of the savings bank accounts are expected to witness maximum impact.
SMC Global Securities has came out with a research note gauging the impact of the savings rate deregulation on the profitability of the banking companies. Based on the previous financial year data, higher savings bank rates are likely to impact public sector banks’ profitability more than the private banks.