Home / Politics / Policy /  Worthless cash turning into gold for state-run banks

Mumbai: Shares of India’s biggest state-run lenders are on a roll, thanks to a government ban on high-value notes that took almost four-fifths of the nation’s currency out of circulation.

Since the so-called demonetisation policy was introduced on 8 November, State Bank of India (SBI) and Bank of Baroda (BoB) have surged at least 4% amid speculation they will benefit more than private-sector peers from the influx of deposits that followed the cash ban, according to IDBI Capital Market Services Ltd. Private-sector rivals HDFC Bank Ltd and ICICI Bank Ltd dropped 6% and 8%, respectively.

The government’s surprise move last month to invalidate Rs500 and Rs1,000 notes has driven millions of Indians to banks to deposit the currency or exchange them for new denominations. Lenders had taken in Rs12.4 trillion ($183.6 billion) of deposits as of 10 December, out of the Rs15.6 trillion notes cancelled, central bank figures show.

“State-run banks are getting to generate a large float of low-cost current and saving account deposits after demonetisation," A.K. Prabhakar, head of research at IDBI Capital in Mumbai, said by phone.

More news on demonetisation

Having a large base of so-called CASA deposits, which typically carry lower interest rates, gives banks a cheaper pool of funds from which to lend, bolstering their interest margins. About 43% of SBI’s deposits were in CASA accounts as of 30 September, more than HDFC Bank’s 40% and ICICI Bank’s average of 41.5% for the September quarter, filings show.

While stock traders are betting on the benefits state banks will derive from the cash ban, the same can’t be said of the analysts who follow the lenders. Consensus earnings-per-share estimates for this year and next for the members of the Nifty PSU Bank Index—which tracks government lenders—have barely moved since the cash ban was enacted.One positive sign for earnings: Lenders like SBI and BoB are purchasing more bonds as deposits increase and may end up booking profits from a rally in Indian bond prices, said Sanjiv Bhasin, an executive vice president at brokerage India Infoline Ltd.

Also read: Demonetisation updates: Here is what PM Narendra Modi has said so far

Benchmark 10-year sovereign bonds last month capped their best performance since April 2009, though the rally has lost some steam after the central bank unexpectedly held the key policy rate at a six-year low of 6.25% last week. The yield on the 10-year benchmark note was at 6.42% on Wednesday, still 38 basis points down from 8 November levels.

“The cash demonetization will provide the state-run banks a large base of low-cost deposits and huge treasury gains," Bhasin said. “That will remove all negativity in the short term." Bloomberg

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