RBI hikes repo rate by 40 bps: Analysts see muted impact on banks' NIM, PAT

The move to hike repo rate and cash reserve ratio by the Reserve Bank of India (RBI), analysts said, may not have a significant negative impact on banks as they will benefit from higher yields on the lending portfolio that are linked to external benchmarks. Non-bank finance companies (NBFCs), however, may feel more heat, except those engaged in mortgage financing.
 

"A pick-up in advances growth, improving asset mix and continued hikes in policy rates will drive higher yields for banks over fiscal 2022-23 (FY23). However, a rise in deposit rates and any material change in demand environment have to be monitored even though we maintain a positive outlook on the banking system margins," said analysts at Motilal Oswal Financial Services.

On the bourses, the Nifty Bank and Financial Services indices ended flat after gaining nearly 2 per cent each in the intra-day trade. The former slipped 0.09 per cent while the latter added 0.15 per cent. In comparison, the benchmark Nifty50 index closed 0.03 per cent up.

According to analysts, the rise in repo rate will trigger broad-based increase in deposit and lending rates, which will be relatively more favourable for private banks vis-à-vis PSU banks. This is because the proportion of external benchmark rate (EBR)-linked loans for the former has risen to 57 per cent as of December, 2021, while that for PSU banks was at 28 per cent in December, 2021.

Over 60 per cent of PSU banks’ floating rate loans are still linked to Marginal Cost of Funds based Lending Rate (MCLR). Amongst product segments, 46 per cent/ 69 per cent/ 20.4 per cent of retail/ MSME / large industries credit, respectively, are linked to EBR and will reprice with repo rate being hiked, shows an analysis by ICICI Securities.

WATCH VIDEO: Impact of RBI's repo rate hike on borrowers, investors and the economy

For large industries, vehicles and personal/contingency/gold loans, 71 per cent/ 60 per cent/ 61 per cent are still linked to MCLR and these segments would see benefits with banks revising MCLR in due course, the brokerage said.

Impact on margins & yields
 

According to Jefferies, the increase in repo rate will also push banks to raise most retail and SME rates. The brokerage believes that a 5-bps change in NIMs in FY23 may impact profit before tax (PBT) estimates by 1-4 per cent.

"The effective rate hikes will be further adjusted by impact of CRR and also credit-pricing resets. While these could be tailwinds to margins, over the past few years, banks have largely maintained net interest margins (NIMs) in a relatively narrower band and we expect such trends to continue," it said.

Meanwhile, according to ICICI Securities, a 125-bps rise in wholesale deposits and 100-bps rise in retail term deposits would have an impact of 30-40 bps on cost of deposits.

Cumulatively, interest rate movement of 100 bps over 1-year horizon is likely to have a favourable impact of 2-5 per cent on net interest income (NII) and 5-15 bps on return on assets (RoA), it added.

The 10-year bond yield has moved up by 4 per cent in two days and touched 7.4-per cent level on Thursday. Moreover, 5-year/10-year G-sec yields have increased 81 bps/54 bps so far in Q1FY23, compared with 36 bps/67 bps rise, respectively, in FY22. This, Motilal Oswal Financial Services said, may result in mark-to-market (MTM) losses over Q1FY23.

"Earlier, a few PSU banks indicated that their treasury portfolio is protected up to a 10-year yield of 6.8-6.9 per cent, which is where the bonds traded at end of Q4FY22. We believe more rate hikes will have an adverse impact on PSU banks’ treasury performance during Q1FY23, though improvement in operating earnings would enable some absorption of these treasury losses," it said.