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Savings Bank Interest finally deregulated

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Savings Bank Interest finally deregulated

Saving bank account interest rate deregulation has finally arrived. The first banks to lead the way with higher rates were the ones with nothing much to lose namely Yes Bank, IndusInd Bank and Kotak Bank. Low saving deposit balance meant that these banks have a greater scope as the gap between SA and term deposits remains a 400-450 bps gap.  The mammoths of the banking system have yet to budge. I understand the insistence that saving accounts are transaction related products. However, with standardization across transaction banking services and the small banks named above no less technologically savvy my guess is the argument won’t last too long.  So should we expect a rush at branches for account opening applications? Unfortunately the answer is NO. The reason being, large banks continue to enjoy huge network, yes it does matter even in the days of internet banking and cross linkages of ATMs, and not to mention transaction related tie ups and linkages. Savings account products are convenience related and with real interest rates negative on most retail deposits, it is hard to imagine savings accounts as the next investment vehicle. So will the large banks increase saving account rates? I believe that eventually they will, things have a way of balancing out, it’s just my hunch but they are holding off as long as they can.

There also seems a split in the nature of customers and between banks. One is the urban and rural divide. Rural customers sub Rs1 lakh deposits are a lot more loyal to banks. Can’t blame them really, a trip outside of the metros and Tier I cities will explain the presence PSU banks have built. PSU banks have thrived on this fact and dominate this category of rural and semi urban customers. The issue now comes to urban centers and metros. Here there is a mix of the sub Rs1 lac and higher depositor and PSU and Private Banks. This is where large banks cannot write off the rate increase by smaller technologically advanced new generation banks.  

A lot has been said on the subject over the past 2 weeks and a number of citations have been made of developed countries offering deregulated rates. However, there aren’t any free lunches. Deregulation has been introduced at a time when money supply is under pressure and banks may be pulling all strings to maintain a low cost deposit base. Hence we are experiencing a rising saving rate cycle. However, just like the pattern in developed countries this could reverse itself when money supply is easy. Also, banks could impose a levy on transaction services offered to saving account holders or pass higher cost of funds through higher base rate. From what we have seen over the past 2-3 quarters bankers are in no mood to absorb higher rates and if their second quarter margins are intact it only means that they have passed on the increase in cost of funds.




Written by Fundamental Side

November 9, 2011 at 11:29 am

Yes bank – achieving growth as planned

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Yes bank – achieving growth as planned

Our team recently met the management of Yes Bank. The purpose was to review the business prospects and the version 2 plan in context of the current macro environment and tight monetary policy.
The management of the bank is confident in achieving its goals of version 2 unlike a situation in 2008-09 where plans of expansion where shelved due to the macroeconomic environment. The bank has gained size from Rs229 bn in FY09 to Rs590 bn in FY11 and the ability to successfully emerge from the previous adverse interest rate cycle has enabled it to tide over the current high interest rate environment.
We also wanted to review our concern on scale and granularity of the bank. In that context, top 20 depositors make up 18.3% of deposits and top 20 borrowers make up 14% of the loan book ( top 5 borrowers would make up 7-8% of loan book). While many of the large banks slowed down activity post crisis, Yes Bank used this as an opportunity to build relationships with large and medium corporates. The bank has 500-600 existing relationships with large corporates and a CRM of 2,000 corporates in the pipeline. This has enabled the bank to move from the last leg in the consortium to becoming a consortium player.
Balance sheet and loan book growth continues to be on track and the management has indicated a growth ~2x of the industry (35-40% for FY12E). Specific sectors of growth over the next 2-3 quarters are life sciences, pharma and segments of engineering, while food and agri will be driven by seasonal and cyclical trends of monsoons, cropping patterns and commodity prices. We expect the loan book to grow at a CAGR of 36% over FY11-13E with increasing focus on commercial (mid corporates) and branch banking.
The bank is on track with its version 2 target of 250 branches in June 2011. New branches will increasingly focus on commercial and branch banking activities and the focus is towards building a liability franchise. Moving towards a hub and spoke model, Yes Bank has the hub in place with the first 50 -75 branches and is expanding to incorporate the spokes.
We believe that the gestation period of new branches for Yes Bank might be higher as compared to 12-15 months for the industry owing to the fact that the bank is in a build up phase for SME and branch banking activities. Thus despite a slower growth in term deposits at a 34% CAGR over FY11-13E and a stronger CAGR in CASA of 51% CAGR over FY11-13E we expect CASA share of ~13% in FY13E.
The bank’s ALM is structured such that 78% of liabilities are <1 year and 49% of assets are less than 1 year (based on the FY11). Thus the rising interest rate environment during Q1FY12 would exert pressure on NIMs. We expect NIMs for FY12 to remain below 3%. However, beyond the inflexion point of interest rates moving upwards we expect the 55% floating loan book to even out rates at ~2.8-2.9%. Thus NIMs are likely to remain flat to marginally negative.

The bank had a CAR of 16.5% (March 2011) with a tier I capital of 9.7%. With a balance sheet growth of 33% over FY11-13E, Tier I is likely to slip below 9% in FY12E. We believe that the bank will have to raise capital towards the end of FY12 or Q1FY12. We have
factored in capital raising of `13.2 bn in Q1FY12 which will give a tier I headroom of 175- 200 bps. We also acknowledge that capital raising in the current environment might be a challenge for the bank and a delay will influence the pace of growth at which the bank is expected to grow over the next 2 years.

Written by Fundamental Side

July 14, 2011 at 2:50 pm

Posted in Fundamental Side

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Rising rates, Banks are in a position to pass on costs

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Loan growth for banks grew by 20% at the end of January 2011. Credit growth was broad based as growth from rural regions remained healthy while urban offtake too was robust.

The move towards the base rate regime saw a lot of reluctance from corporate clients who moved away from banking sources (for short term loans). However this was the case during H1FY11 when liquidity was abundant. Banks even gave in by subscribing to corporate debt which pushed up the size of their investment books. Now with liquidity remaining a continuing concern banks have begun passing on costs to corporate clients and are even reluctant to allow corporates the benefits of arbitrage between banking and market rates.

One look at the incremental CD ratio which has inched up from 0.82x in Sep 2010 to 0.99x in Jan 2011 and the situation in the industry is apparent. Since October 2010 bankers have shown serious intent on garnering deposits. With half of Q4FY11 already behind us banks at best are likely to end FY11 with a 14-15% deposit growth. Although deposit rates have moved up by 150-200 bps banks have also begun hiking loan rates by 100-150 bps.

So with this equation how were the NIMs maintained? Apart from the growth in low cost deposits, banks have also been operating at higher CD ratios. Thus contrary to the dip expected in H2FY11, banks are most likely to sustain NIMs during FY11.

However, the story for FY12 could be different as interest rates continue to rise. The focus would then move from sustaining NIMs towards having a broad based growth across sectors.

From the desk of Chaitra Bhat


Written by Fundamental Side

February 18, 2011 at 10:09 am