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Rising rates to hurt private lenders more than state-run banks

Rising rates to hurt private lenders more than state-run banks

Mumbai: Indian banks’ net interest income, or interest earned minus interest expended, may shrink by 9% if the interest rate goes up by one percentage point from the current level, says a recent HSBC report.

The country’s central bank has raised the interest rate by 125 basis points to 9% so far this year.

One basis point is a 100th of a percentage point.

In an analysis of 10 public and private sector banks, the HSBC report—Indian Banks: Assessing the asset-liability mismatch—authored by Todd Dunivant and Saumya Agarwal, said most banks have a larger proportion of deposits that mature in one year vis-à-vis loans and advances, and therefore have a negative asset-liability gap.

“If interest rates rise, this funding gap will need to be re-financed at a higher rate of interest, which will cause near-term margin pressures," it said.

The analysis indicates that private sector banks are mostly at risk, while public sector banks are better off when it comes to asset-liability mismatch over a one-year period.

It identified private sector Yes Bank Ltd, ING Vysa Ltd and ICICI Bank Ltd to be at risk, while state-run Punjab National Bank (PNB), State Bank of India (SBI) and Corporation Bank were the least risky.

The deposits maturing within one year for these three private sector banks were 86%, 70% and 65%, respectively. In contrast, SBI, Corporation Bank and PNB had 29%, 32% and 48% of their deposits, respectively, maturing within one year.

The credit portfolio maturing within a year were 56%, 57% and 31%, respectively, for Yes Bank, ING Vysa and ICICI, whereas that of SBI, Corporation Bank and PNB were 31%, 30% and 53%, respectively.

Among public sector banks, Bank of Baroda (BoB) and Canara Bank were labelled riskier. BOB’s deposits maturing within a year was 60% against 51% of its advances maturing within the year. In case of Canara Bank, the ratio was 57% and 43%. The report estimated a one percentage point rise in interest rate would shave off 9% of Yes Bank’s and ING Vysa’s net interest income (NII) and 6% of ICICI Bank’s.

While BoB risked losing 4% of its NII, Canara Bank could see its NII fall 2%. SBI will be least affected, sacrificing 0.3% of its NII. However, “if interest rates fall, a negative gap would lead to margin expansion as liabilities get repriced to lower rates", the report said.

According to BoB chairman M.D. Mallya, this mismatch is not a major concern as deposits and loans are in continuous flow in the bank. “Given the size of our balance sheet, this is (asset-liability gap) not a concern. This can always be handled through effective balance sheet management," he said.

Yes Bank Ltd president (financial markets, institutions and investment management), Rajat Monga, said banks’ net interest margins (NIMs) can be increased by increasing the low-cost current and savings account ratio. Banks don’t pay any interest on current accounts, 3.5% interest on savings accounts and between 8% and 10% on term deposits.

“Yes Bank has a dominantly floating rate loan book, with little exposure to consumer loans. With sufficient pricing power in its hands, Yes Bank effectively has a ‘positive’ asset-liability gap," said Monga.

The HSBC report does not take into account the impact of the repricing of loans and deposits in the absence of information on the repricing profile of banks. “Therefore, the impact on NII could be higher, or lower than our estimates...depending on the proportion of loans getting repriced vis-à-vis deposits in a one-year time frame."

An executive with a private bank said the report has not taken into account the floating rate portfolio and does not consider banks’ ability to raise rates and reprice assets. “It is an oversimplified analysis," the executive said, but did not want to be named.

He said this analysis has taken into account only deposits, whereas a bank’s liabilities also include tier II bonds and hybrid debt.

According to a general manager with a large public sector bank, unless mandated by the government, Indian banks are quick in following RBI cues and thus, the issue of a fall in NIM may not be that acute as portrayed by the report.

In fact, rates in the banking industry have gone up by almost 5% in the last three years, but banks in India have so far grown their NII.

According to the private sector banker, banks were raising one-year deposits at 6-7% about three years ago. But now they are raising one-year deposits at 10% and still they are able to maintain the margin.

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