SSKI - Indian Banks - Margin Pressure: An exaggerated concern

Margin Pressure: An exaggerated concern


A concerned RBI has been on a tightening spree over the last one year. RBI has surprised the market on various occasions and its measures have impacted liquidity and have created a more tightly balanced, and some-what restrictive operating environment. This has raised the spectre of concern on bank margins through the year as their funding costs have risen disproportionately. An analysis of the results so far, makes us believe that the concerns are exaggerated.

However, despite all of this, margins for the banking system have remained stable qoq in Q4FY07 as banks have passed on the rate hikes to relatively underleveraged borrowers who are riding the wave of optimisim in the ongoing economic expansion. Both lending and deposit rates have risen by around 250-350bps on an average, with bulk deposits witnessing even larger rise. PSU banks following a calibrated loan growth strategy have seen rising margins (owing to their positively gapped ALMs). Private banks on the other hand have overcome the ALM disadvantage by raising their lending rates more aggressively than state-owned banks enabling them to maintain their margins.

We believe that margins for PSU banks will only slightly moderate (5-15bps) as deposits reprice over the next 12-18 months. However the margin outlook over the next few quarters is bright as the 100-125 bps PLR hikes over the past 3 months drive up yields. We maintain that significant margin pressures (if any) would be driven by structural issues ( like a very low CASA, or an ambitious loan growth strategy) rather than recent interest rate developments. Banks like HDFC bank and Union bank which have driven their CASA and followed a strategy of a calibrated loan expansion have actually witnessed increasing margins. We expect margins to remain insensitive to small hikes (around 25bps). However, the key risk to our assumptions is an outsized tightening / hike (50bps or more) by the RBI as banks may not be able to pass on hikes of such magnitude to their borrowers.

We prefer private sector banks and public sector banks with a calibrated loan growth strategy.

SSKI - Indian Banks - Margin Pressure: An exaggerated concern