Indian banks better off than American, European peers
Summary
One crucial factor seen as a safeguard against a scenario of a liquidity crunch is the composition of deposits.
In a collateral damage of sorts, turbulence in the US and European banking sector has led to a negative rub-off effect on Indian banking stocks. In March so far, the Nifty Bank index has slid 3.3%. Even before the Silicon Valley Bank (SVB) crisis erupted, the index was trading on a weak note.
Concerns over the implications of the sector’s exposure to the Adani Group had also kept investors edgy. Developments related to SVB and its potential impact on tightening global liquidity, coupled with Credit Suisse’s woes, have only aggravated the pain for investors. There are worries of a potential contagion risk. But the sentimental impact aside, Indian banks are said to be on a relatively firmer ground.
“India has seen much lower increase in bond yields and interest rates; Indian banks are vastly different versus troubled US banks in several important aspects," said analysts from Kotak Institutional Equities in a report on Monday.
One crucial factor seen as a safeguard against a scenario of a liquidity crunch is the composition of deposits. Kotak’s analysts point out that Indian banks have a high proportion of retail deposits (savings account plus retail part of term deposits) in overall deposits compared with the high share of wholesale deposits for some of the US banks that are seeing large redemptions of deposits. This, in turn, is fuelled by concerns around large unrealized losses in their (US banks) bond portfolios. It is worth noting here that retail deposits are stickier in nature than wholesale and corporate deposits.
Secondly, Indian banks have a large portion of held-to-maturity securities in their overall bond books, added the Kotak report. Held-to-maturity securities are those where funds need to be parked in the products until the maturity date.
“Unlike in the US, for unrealized mark-to-market losses, other than those held-to-maturity portfolios, banks must make provisioning. And the provisions are done on a real-time basis almost by all banks which cushions the impact at the time of sale at loss," said Sujan Hajra, chief economist and executive director, Anand Rathi Shares and Stock Brokers.
Also, analysts note that overall, Indian banks have a decent capital position, which gives them a cushion at the time of crisis like this. In fact, according to global ratings agency Moody’s Investors Service, Indian banks have faced strenuous solvency challenges in the past decade, but their funding and liquidity have held up strongly and have been a key factor supporting their overall credit strength.
Furthermore, the Reserve Bank of India’s (RBI) relatively lower quantum of interest rate hikes than the US Federal Reserve may also avert a scenario of greater financial stress for banks due to tightening liquidity.
But that doesn’t mean Indian banks are immune to downside risks. With rising interest rates, the cost of funds are inching up as deposits get repriced. Consequently, the sector’s net interest margin, which has lately been a comfort point for investors, is poised to come under pressure. Along with that, the chase for mobilization of deposits could also get intense.
With the overall level of inflation hurting urban consumption and sluggish rural recovery, trends in credit growth are crucial. The latest data published by the RBI showed that credit growth for the fortnight ended 24 February was at 15.5% year-on-year. This was slower than the 16% increase seen in the previous fortnight ended 10 February. With rising rates, the drop was anticipated.
That said, banking stocks are unlikely to see an outperformance in the near term. “The overall market mood is sombre and positives such as stable asset quality and lower provisions have already been factored-in," an analyst said, seeking anonymity.
