Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.
Banks (Sector Update) : NIM compression on the cards
Over FY20 so far, we've seen divergent NIM trends, but most of our coverage banks saw NIM improve. The drivers of movement on either sides, however, varied vastly.
Banks' core spreads and NIMs are likely to compress in the near term. Our stance is premised on the following, (1) faster growth in high yielding segments which supported WALR (o/s) is likely to slow, this may be inferred from by the sharp dip in WALR (fresh) which has dipped sharply in Mar-20, (2) the effects of lower MCLRs will become more pronounced, (3) external benchmark-linked loans will see a significant fall in yields and a gradual rise in share and (4) slower re-pricing of liabilities will limit benefits of lower TD rates although, SA rate cuts will provide some cushion here.
In the current environment, banks with a higher proportion of fixed rate loans and a stronger liability franchise are likely to be better off. Within our coverage, we believe RBK is set to see the highest NIM compression. KMB is best placed as it will benefit from a fund raise and sharp SA rate cut. We continue to prefer ICICIBC and AXSB amongst the larger banks and CUBK amongst the smaller banks within our coverage.
An analysis of weighted average lending and deposit rates along with MCLRs, yields the following trends:
WALR (o/s) have remained fairly steady, dipping just 27bps (11bps in case of private banks) from Jan-19. The difference between WALR (o/s) and the repo has increased sharply (to 560bps and to 660bps in case of private banks). While this does hint at weak policy transmission, we believe that it could also reflect faster growth in high yielding retail loans during this period.
WALR (fresh) have seen a sharper fall, down 114bps between Jan-19 and Mar-20. In case of private banks, the fall has been sharper and extremely recent (cummulative 140bps of which 98bps in Mar-20).
Banks' 1 yr MCLRs have trended downwards gradually over this period. However, the spread of WALR (fresh) over SCBs' median 1 year MCLR dipped sharply in Mar-20, esp. for private banks.
WATDR have trended downward gradually, falling 51bps (70bps in case of private banks) between Jan-19 and Mar-20. The spread between WATDR and the repo widened between Mar-19 and Oct-19, after which it contracted until Feb-20.
Banks have reduced their SA rates over the last few months. For e.g., most recently, SBIN has reduced its SA rate by 25bps to 2.75%, ICICIBC by 25bps to 3.25% and KMB by a whopping ~150bps to 3.5% (starting SA rates).