Savings rate deregulation: Near-term pain for banks

The freeing up of savings account rate is likely to impact the margins of high-CASA banks in the near term, but longer-term implications may not be significant.

The Reserve Bank of India’s (RBI) move on Tuesday deregulating the interest rate that banks pay on savings account deposits is likely to impact margins and profits of banks in the near term, especially those with high current and savings (CASA) deposits. Analysts' estimates suggest the move will intensify competition for deposits. They say the impact will be higher for public sector banks, especially State Bank of India (SBI). Though private banks like HDFC Bank, ICICI Bank and Axis Bank will also feel the heat (see table), the impact is likely to be relatively less. A report by Deutsche Bank analysts (dated April 26) estimates the impact on net interest margin (NIM) to range from 2-45 basis points, depending on the increase in savings account rate that banks undertake. NIM is the difference between a bank's income on loans and cost of deposits.

Not surprisingly, stocks of most of these large banks fell by up to 4.5 per cent on Tuesday, against 0.2-9 per cent rise recorded by stocks of smaller banks, pulling down the BSE Bankex by 1.2 per cent on a day when broader markets were up about two per cent.

SHORT-TERM PAINS
After asking banks to calculate interest on savings account on a daily basis in April 2010, the RBI raised the interest rate that banks pay on savings bank deposits by 50 basis points to four per cent in May. On Tuesday, it deregulated the rate, wherein banks will have to keep a uniform rate of interest for savings accounts with deposits up to Rs 1 lakh, while allowing them to set rates for other customers.

This move will intensify competition within banks in their bid to garner low-cost CASA deposits, which analysts believe will impact banks which currently have high CASA deposits.

"Crisil expects the average interest rate on savings accounts in the banking system to increase by 50 to 100 basis points over the medium term. However, this means increased pressure on banks' cost of deposits and profitability," says a Crisil report.

Currently, savings accounts forms around 23-25 per cent of overall deposits in the banking system. Analysts believe every 50 basis points increase in savings rate will push up the cost of deposit by 11-12 basis points for banks. Public sector banks will be hit more as compared to their private peers, due to strong savings deposits. Also, higher contribution of fee income in the private banks' total income provides a cushion in a rising interest rate scenario. Banks such as SBI, ICICI Bank, HDFC Bank and Axis will be hit the most while Yes Bank and IndusInd Bank will be least impacted, say analysts.
 

IMPACT ANALYSIS
	Base case FY12		Impact of SB rate at 4.5%		Impact of SB rate at 5.0%		CASA Ratio (in %)
	NIM (%)	Profits * (Rs cr)	NIM (in bps)	Profits (in %)	NIM (in bps)	Profits (in %)
Axis Bank	3.60	4,062	-20	-7.30	-30	-11.0	40.5
HDFC Bank	4.11	5,199	-22	-9.10	-22	-13.7	49.1
ICICI Bank	2.55	6,535	-20	-9.70	-29	-14.6	41.9
Kotak Bank	5.36	961	-7	-2.50	-11	-3.7	27.0
Yes Bank	2.90	961	-2	-0.70	-3	-1.1	10.9
Bank of Baroda	3.03	4,752	-23	-11.30	-34	-16.9	33.9
Bank of India	2.89	3,380	-19	-13.10	-29	-19.7	30.2
Canara Bank	2.99	4,881	-21	-10.90	-31	-16.3	25.4
PNB	3.81	5,363	-28	-13.00	-42	-19.5	37.0
SBI	3.26	18,426	-30	-12.70	-45	-19.0	48.0
Union Bank	3.15	2,778	-23	-13.00	-34	-19.5	31.5
CASA ratio figures are as on end of the June quarter                                                     Source: Deutsche Bank, Other banks

Says Vaibhav Agarwal of Angel Broking, "We believe SBI, PNB, Central Bank and HDFC Bank will be hit more, given their high CASA ratios. A 100 basis points increase in savings rate will reduce the FY13 estimated pre-provisional profits between five-eight per cent for banks with high savings accounts."

Meanwhile, larger players such as SBI and ICICI Bank are adopting a wait-and-watch approach towards raising their savings rate, given the moderating loan growth. Pratip Chaudhuri, chairman, SBI, believes the savings rates may not go up immediately due to comfortable liquidity. "We are not in a hurry to raise rates," he said in a conference after RBI's credit policy announcement.

However, banks having low CASA base like Yes Bank is looking to raise the rates by up to 50 basis points immediately with an aim to capture higher number of customers. Thus, initially, competitive pressures are likely to determine the extent of increases in the savings rate.

LITTLE LONGER-TERM IMPLICATIONS
In the longer term, though, this rate will be a function of the prevailing liquidity situation among other factors. Though higher interest rates may induce some churn in customers, ultimately, banks providing better service quality and accessibility will be able to retain their customers. In the conference, Aditya Puri, managing director, HDFC Bank stated that in the worst case, margins could be hit by 25 basis points assuming a 100 basis points hike in savings rate.

Says Apurwa Shiva of Nirmal Bang, "We expect banks that have a large component of saving deposits like SBI, PNB and HDFC Bank to maintain their interest rates on saving deposits. We believe that until the large banks go for similar rate increases, only then the cost of savings deposits would increase for the banking sector. If this happens, we expect banks to either increase their lending rates or their charges to compensate for the increase in costs of savings deposits and we therefore believe it would be neutral on the banks' profitability, as banks are only intermediaries."

The larger banks are also likely to come up with innovative offerings to retain their customers. Most analysts are of the view that banks may look at raising service charges or improve profitability of their branches or a combination of these in order to maintain profitability.

The Crisil report adds, "Banks are likely to partially offset the impact of the increase in interest cost by levying transaction and servicing charges.

Clearly, while there are near-term implications, the actual impact will depend on how a bank uses various levers at its disposal to maintain its profitability.