Bank margins set for near-term boost as EBLR loans reprice after MPC rise | Banking

The 25-basis-point rate increase by the Reserve Bank of India’s (RBI’s) six-member Monetary Policy Committee (MPC) on Wednesday could provide a near-term boost to banks’ margins, particularly for lenders with a higher share of external benchmark-linked loans, as lending rates are expected to reprice faster than deposits. While the increase will be transmitted almost immediately to loans linked to external benchmarks, banks may take longer to reprice their existing deposit base, giving lenders some room to benefit from a wider spread. However, fresh deposit rates could see some hardening as short-term money market rates have risen in the past couple of weeks.

  

According to Jefferies, Indian banks, especially large private banks, have a higher share of policy rate-linked loans that reprice over one to three months. Banks with a higher share of external benchmark lending rate (EBLR)-linked loans and a reasonable domestic loan-to-deposit ratio (LDR) could see some positive earnings over the next three to six months.

 

The biggest beneficiaries could be ICICI Bank and Kotak Mahindra Bank, which have a higher share of EBLR-linked loans and manageable LDRs. While public sector banks have a lower share of EBLR-linked loans, they could still benefit from the rate increase given their lower LDRs and lower baseline return on assets (ROA), particularly amid headwinds from higher expected credit loss (ECL) provisioning and ongoing wage negotiations, the brokerage said. Banks such as HDFC Bank and Axis Bank, which also have a higher share of EBLR-linked loans but have higher LDRs or a greater proportion of wholesale deposits, are likely to benefit, though to a lesser extent than ICICI Bank and Kotak Mahindra Bank.

 

“For banks margins goes up. Private sector banks have much large repo rate linked book. NBFCs margins will go down and for insurers there is eventual competition from banks in terms of higher deposit rates competing against their products and embedded value (EV) goes down because of rise in discount rates,” said Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital.

 

Kotak Mahindra Bank was the top gainer among private sector banks on Wednesday, with its shares closing 1.88 per cent higher on the NSE. It was followed by ICICI Bank, which gained 1.09 per cent, and Federal Bank, which rose by a similar margin. Among state-owned banks, Union Bank of India was the top gainer, with its shares rising 2.8 per cent, followed by Punjab National Bank, which gained 2.39 per cent, and Canara Bank, which rose 1.13 per cent. Bank of Baroda also gained, while State Bank of India (SBI) declined 0.5 per cent.

 

Meanwhile, the money markets, in anticipation of a widely expected repo rate increase, had started pricing this in, with 90-day and one-year certificate of deposit (CD) rates inching up in the last three weeks. While 90-day CD rates have risen to around 6.75 per cent, one-year CD rates have moved up to 7.5 per cent. Deposit rates will also inch up gradually for fresh deposits as more rate increases are expected and as excess liquidity gets absorbed by the system, a banker said.

 

Bankers expect deposit rates on new deposits to rise by 15–20 basis points in the near term, with the pace of repricing depending on the RBI’s subsequent policy moves, credit growth and liquidity conditions. If the FCNR(B) inflows had not taken place, the increase in deposit rates could have been slightly sharper. However, banks are currently sitting on a reasonable degree of liquidity and are managing their funding requirements accordingly, bankers said.

 

According to a senior banker at a private sector bank, banks had started offering slightly higher rates for high-value deposits even earlier, in anticipation of a rate increase. If the FCNR(B) inflows had not happened, the increase in deposit rates would have been sharper. However, repricing of the existing deposit base will generally take around 18 months for banks. “Repo linked loans, which account for 40-50% of banks’ advances, will be repriced almost immediately in Q3 (with the full impact felt in Q4) but MCLR linked loans will be priced gradually when they come up for reset and as the MCLR increases which will happen with a lag,” the banker said.

 

Despite the rate increase, RBI Governor Sanjay Malhotra said that credit growth in the system is unlikely to soften a great deal and would continue to be strong going ahead. Latest data suggest credit is growing at 18.1 per cent year-on-year while deposits are growing at 17.3 per cent year-on-year. Separately, Malhotra cautioned banks to exercise due diligence while deploying the funds mobilised through FCNR(B) deposits and advised them to take a measured approach rather than deploying the funds overnight.

 

“Credit growth has already been as high as about 18-19 per cent. But if you take a long term average of say 10 years, generally it is in the range of 12-14 per cent which is very sustainable and very supportive of growth. So some moderation in any case will occur. We have seen that it takes about a couple of quarters for transmissions to materialise. As these rates transmit, some moderation will occur relating to demand as well as rate together. But moderation from 18-20 per cent is not bad and will be adequate enough to support growth,” RBI Deputy Governor Swaminathan J highlighted.

 

Another senior banker said credit growth is unlikely to see any substantial moderation, citing three key factors: the festive season, resilient corporate demand and the potential shift of foreign currency borrowings, external commercial borrowings (ECBs) and debt market financing towards the banking system.