Banks : Rates gradually reversing - MCLR data based on sanctions, portfolio yield and cost of deposit movement - Kotak

Rates gradually reversing. RBI's data on system-wide average lending and deposit rates for January appear to broadly point towards an interest rate hardening cycle. This confirms recent trends of increase in CP/CD rates by 90/30 bps over last three months, hike in retail term deposit rates (up to 50 bps) and MCLR (up to 20 bps) by SBI effective March. While improving loan growth and increase in lending rates provides an ideal mix for positive NIM trajectory, near-term outlook on slippages, gap between fresh lending and weighted average yield of loans, base rate to MCLR and medium-term impact of RBI's policy recommendations are key imponderables.

Signs of reversal in lending yields and deposit costs

Latest data by RBI (as of January 2018) on system-wide lending yields and borrowing costs suggests signs on reversal in lending yields which hitherto have been declining and vice versa in case of deposit costs. Having peaked in September 2013, the weighted average deposit rates for PSU and private banks have declined by ~240 bps through November 2017, before inching up in December 2017 and January 2018. On the lending rates front, the trends are relatively not as firm. However, the pace of decline has slowed down and recent trends in MCLR rates and CP/CD rates suggest possible reversion in lending rate cycle.

RBI data confirms high frequency data points

A quick look at some of the high frequency datapoints suggests reversal in rate cycle. CP and CD rates have moved up by 90 bps and 30 bps respectively so far in CYTD. Also, the system-level liquidity has shrunk drastically since September 2017. While there is typical seasonality at play during March, we have seen banks increasing their MCLR and term deposit rates in recent months. SBI increased retail term deposit rates by up to 50 bps and MCLR rates by up to 20 bps effective March 2018. Starting January 2018, banks also need to maintain higher liquidity buffers to comply with increased LCR requirements.

Lot of transient factors at play to impact NIM for banks

Rising interest rates coupled with improving loan growth is an ideal scenario for banks from a NIM point of view. We appear to be heading in this direction as rates have started to firm, along with improving growth trends. While we have seen fresh lending rate move up marginally, average lending rates are still ~80 bps above the fresh lending rates. This gap needs to narrow down as the portfolio is still witnessing pressure on the downside while the cost of funds has already started to increase. In this context higher borrowing costs for NBFCs can provide competitive relief to some extent. Slippages, the other variable in the NIM math, are a key unknown in the short-term in the wake of recent guidelines by RBI on stress resolution.

Differences persist between RBI and banks on how to price loans

Over the medium to long-term, we see continued change on pricing of loans as we are yet to settle with a broad framework on pricing of loans. We are currently at MCLR (started in FY2016) having started with PLR (Prime Lending Rate) and then moved to base rate in July 2010. We are now looking to shift the balance of base rate loans to MCLR while parallel discussion on market pricing of loans has started. However, it does appear that the move to external benchmarks from April 2018 is unlikely to be implemented and RBI has not come with the final guideline on transition of base rate loans to MCLR.

Source : Equity Bulls

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