SBI, PNB fall but analysts
Say base lending rate to boost growth impact on non-banks financiers is likely to be negative as financiers that were dependent on wholesale/bond market financing, could likely face a squeeze in spreads on incremental volume. Jefferies believes banks are likely to outperform non-banks. Shares of state-owned banks reacted negatively to the surprise benchmark lending rate cut on Sunday. PSU banks including State Bank of India , PNB , Union Bank and IDBI reduced marginal cost of funds based lending rate (MCLR) by up to 90 basis points. Shares of SBI and PNB fell 1-2 percent intraday on Monday.
SBI has reduced MCLR by 0.9 percent from 8.90 percent to 8 percent for one-year tenure. This is said to be in one of the steepest cuts since the 2008 global economic crisis. Market analysts are cautious but feel the move may boost growth at lower margins. They feel non-banking financial companies (NBFCs) especially those in housing loans may have to cut rates to stay competitive but may benefit from a sharp fall in fund costs. CLSA thinks rate cut may compel other banks to follow suit which could help to lift growth. The cut in lending rates may help to stimulate credit demand at the margin, especially in retail segments such as housing loans, and also help to regain some share from bond markets, it adds. "With another 80-90bps cut in the banking sector’s MCLR, the premium of bank loan rates over bond markets (AAA corporate bonds) could halve to 70-80bps – the lowest since 2014 – and this may help to regain some share," CLSA says in a note. According to CLSA, banks may also lower their term deposit rates if a large portion of new money received during demonetisation is sought to be converted to term deposits. However, this may also bring in a bit of bad news as well. CLSA is worried that sharp rate cuts may be a drag on net interest margins (NIMs) - a 5bps lower NIM in FY18 could impact earnings by 4 percent, with a higher impact on PSU banks. It feels impact will be mitigated as the MCLRs will apply only to incremental loans.
Jefferies does not think MCLR cut will be margin dilutive for banks for 1-2 quarters. It says implication on corporate profitability and improvement in Interest Coverage Ratio (ICR) could be material for certain corporates given the extent of MCLR cut and hence non-performing loans (NPL) outlook could turn slightly better for the banks. It agrees that impact on non-banks financiers is likely to be negative as financiers that were dependent on wholesale/bond market financing, could likely face a squeeze in spreads on incremental volume. It believes banks are likely to outperform non-banks. Jefferies retains cautious stance on the sector and remain broadly positive on corporate banks over a medium term perspective given their cross-cycle valuation and outlook. Its top preferences are ICICI Bank, Axis Bank, HDFC Bank within private banks and State Bank of India among PSU banks. At 10:21 hrs State Bank of India was quoting at Rs 245.90, down Rs 3.85, or 1.54 percent, Punjab National Bank was quoting at Rs 114.50, down Rs 1.10, or 0.95 percent on the BSE.
Say base lending rate to boost growth impact on non-banks financiers is likely to be negative as financiers that were dependent on wholesale/bond market financing, could likely face a squeeze in spreads on incremental volume. Jefferies believes banks are likely to outperform non-banks. Shares of state-owned banks reacted negatively to the surprise benchmark lending rate cut on Sunday. PSU banks including State Bank of India , PNB , Union Bank and IDBI reduced marginal cost of funds based lending rate (MCLR) by up to 90 basis points. Shares of SBI and PNB fell 1-2 percent intraday on Monday.
SBI has reduced MCLR by 0.9 percent from 8.90 percent to 8 percent for one-year tenure. This is said to be in one of the steepest cuts since the 2008 global economic crisis. Market analysts are cautious but feel the move may boost growth at lower margins. They feel non-banking financial companies (NBFCs) especially those in housing loans may have to cut rates to stay competitive but may benefit from a sharp fall in fund costs. CLSA thinks rate cut may compel other banks to follow suit which could help to lift growth. The cut in lending rates may help to stimulate credit demand at the margin, especially in retail segments such as housing loans, and also help to regain some share from bond markets, it adds. "With another 80-90bps cut in the banking sector’s MCLR, the premium of bank loan rates over bond markets (AAA corporate bonds) could halve to 70-80bps – the lowest since 2014 – and this may help to regain some share," CLSA says in a note. According to CLSA, banks may also lower their term deposit rates if a large portion of new money received during demonetisation is sought to be converted to term deposits. However, this may also bring in a bit of bad news as well. CLSA is worried that sharp rate cuts may be a drag on net interest margins (NIMs) - a 5bps lower NIM in FY18 could impact earnings by 4 percent, with a higher impact on PSU banks. It feels impact will be mitigated as the MCLRs will apply only to incremental loans.
Jefferies does not think MCLR cut will be margin dilutive for banks for 1-2 quarters. It says implication on corporate profitability and improvement in Interest Coverage Ratio (ICR) could be material for certain corporates given the extent of MCLR cut and hence non-performing loans (NPL) outlook could turn slightly better for the banks. It agrees that impact on non-banks financiers is likely to be negative as financiers that were dependent on wholesale/bond market financing, could likely face a squeeze in spreads on incremental volume. It believes banks are likely to outperform non-banks. Jefferies retains cautious stance on the sector and remain broadly positive on corporate banks over a medium term perspective given their cross-cycle valuation and outlook. Its top preferences are ICICI Bank, Axis Bank, HDFC Bank within private banks and State Bank of India among PSU banks. At 10:21 hrs State Bank of India was quoting at Rs 245.90, down Rs 3.85, or 1.54 percent, Punjab National Bank was quoting at Rs 114.50, down Rs 1.10, or 0.95 percent on the BSE.
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