50 bps rate cut won't impact economy in big way: Macquarie

A 50 basis points repo rate cut does not change the economics of the game in a very big way, says Suresh Ganapathy of Macquarie. As far as the banking sector is concerned, a rate is positive from a long-term perspective, but in the near-term there will be margin pressure across the board. "Problem here is everybody has the issue of cost of funds which does not come down as fast because everything is based on weighted average cost of funds and the deposit base is fixed. As a result, once lending rate is cut, immediately there is a margin pressure," he told CNBC-TV18. He expects margin pressure to be higher for public sector banks (PSBs) as about 70-80 percent of their portfolio is in floating rate.The Reserve Bank of Tuesday lowered the benchmark repo rate by 50 basis points (bps) to 6.75 percent, while keeping the CRR and SLR unchanged.

He says a 30-40 basis points lending rate cut will result in 15-20 bps compression in NIMs for PSU banks and maybe just a 10 bps hit for private sector banks.

He also gave his views on housing finance companies.Below is the verbatim transcript of Suresh Ganapathy’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: A rate cut of that magnitude and the aggression with which the Reserve Bank of India (RBI) is saying it should be transmitted is normally not very positive for banks. How have you read the policy and its impact on banks? A: To begin with, I have a reservation with the media because they tend to make a mountain out of a molehill at times. An additional 25 basis points is what Rajan has done compared to the expectation. The expectations were 25 basis points, he has gone ahead and done an additional 25 basis points, that doesn’t change the economics of the game in a very big way. To begin with, from a banking sector, a rate is positive over the longer term because that helps in kick-starting the economy. In the near-term there are going to be margin pressures across the board. The problem here is that everybody has one issue of cost of funds which doesn’t come down as fast as because everything is based on weighted average cost of funds and the deposit base is actually fixed. So, what happens is that once you cut your lending rates, immediately you will have margin pressure. So, that is going to be a margin pressure across the board for all the banks, more so for public sector banks because they have closer to about 70-80 percent of their portfolio being floating rate. So, you will see earnings pressure for banks in the coming quarters. Sonia: Can you quantify that for us because yesterday when we spoke to State Bank of India (SBI) post the base rate cut, Arundhati Bhattacharya did mention that there will be at worst an 11 basis points cut in their margins or decrease in their margins. What are you factoring in, in terms of margin pressure for some of these PSU banks?A: Suppose if you land up cutting your rates by about 30-40 basis points and you have roughly 70-80 percent of the portfolio being floating rate linked, you can have closer to about 15-20 basis points compression in margins and that is what has happened with SBI. When SBI cut its base rate by about 30 basis points odd over the course of last three or four months, the margins if you look at on a quarter-on-quarter (Q-o-Q) basis went down  roughly about 15-20 basis points. So, something similar like that can happen across the public sector banks. Private sector banks obviously are in a better position to manage so maybe their margins don’t take a hit of more than 10 basis points. Latha: Are all private sector banks equally kind of insulated from base rate cuts. HDFC Bank clearly is but would that be true even of ICICI Bank, Axis Bank and Yes Bank?A: No, not at all. If you look at it, HDFC Bank is the best placed. They only have about 25-30 percent of their portfolio being floating rate. The corresponding number for most of the private sector banks is going to be in the range of 50 percent plus. So, clearly base rate cut of that magnitude which HDFC Bank has done, it is very difficult for others to replicate. If they also land up cutting rates by more than 30-40 basis points, they will have a greater amount of margin pressure compared to HDFC Bank. So, in my opinion HDFC Bank will continue to have the lowest base rate in the system.Sonia: What about the housing finance companies because they have seen the biggest gains in terms of stock prices, the reduction of this risk weight for housing loans, how will it impact them?A: The rules are not very clear exactly as to what is the threshold criteria which RBI is defining for affordable housing. Now, affordable housing as terminology is super confusing. Even going by the RBI definition, it keeps changing the affordable housing for different segments. For priority sector it is Rs 30 lakh, for infrastructure bonds it is Rs 40-50 lakh, for low cost affordable housing it less than Rs 10 lakh, so, really we don’t have any clue as to what exactly RBI means by affordable housing and what would the corresponding reduction in risk weights.So, unless and until we know the threshold, ticket sizes based on that we will be ascertain the possible impact. Now, that most housing finance companies like HDFC, LIC Housing Finance and for that matter Indiabulls Housing Finance, all of them have their ticket sizes in the range of between Rs 20-25 lakh and even the public sector banks. So, if that is the segment that they are targeting where they want to give risk weight benefits then it will benefit a whole lot of players in the system. Sonia: What are your top picks in this space?A: We would in this environment when rates are heading downwards; HDFC Bank stands out because their ability to withstand margin pressures is far higher compared to any of other banks in the system. So, HDFC Bank will be my top pick, followed by Axis Bank and Yes Bank considering where the valuations are we do see compelling reasons to buy these two names also.Latha: In the NBFC space, what would you like at all, after all their sources of funds definitely get cheaper?A: Yes that is true, but, then at this point in time, every NBFC is facing some issue or the other. So, we cannot look only in isolation and say that what would happen if interest rates were to come down and therefore whether I would like to pick an NBFC to play the theme.Shriram Transport has its asset quality issues, M&M Financial has been having asset quality issues for quite some time. So, those issues are not going to disappear anytime soon. Monsoon has not been that great this year so the best one plays in my opinion in this environment would be the housing finance companies because they are much safer bets when it comes to asset quality and more leveraged to the interest rate cycle. So, my preferred picks in the housing finance segment considering where the valuation is, is going to be LIC Housing Finance. Sonia: Because the sentiment has improved with this 50 basis points rate cut, the expectation is that credit growth will pick up as well. What are you factoring in, in terms of credit growth for many of these banks? A: It is going to be tough. To be honest another 25-50 basis points is going to kick-start credit growth; we know that the key drivers behind credit growth is completely different. It is about pick up in the capex cycle, investment cycle and that all takes time. It is not going to happen overnight and it is not going to happen over the course of next 12 months. It will take 24-36 months for the capex cycle to pickup. So, that related recovery is not going to be seen in the credit growth. As the SBI Chairperson has been telling for quite some time, this is what we have also observed while speaking to various bank managements is that, the low commodity prices is really creating a lot of impact on the working capital demand. So, working capital loan growth is actually very weak at this point in time. It is not about one month or one week or one quarter where we are seeing 9.5 percent kind of credit growth. 9.5 percent credit growth has been there now for the past six to seven months and I just don’t understand the logic behind base which people argue. The point here is that we are looking at year-on-year (Y-o-Y) numbers. The base was weak even last year so you are looking at a Y-o-Y number, so, 9.5 percent is a genuine number. The seasonal aspect is something which I don’t understand. So, even as you head into the March quarter, last year’s March quarter was also going to be pretty heavy in terms of credit disbursement. I think we are not likely to see a significant credit recovery this year. This year has gone; we are now looking at FY17 and beyond.Latha: What is the sense you are getting about the quantum of stressed loans in the system itself? Has most of the poison come out, are the new weapons that the RBI has given in the form of strategic debt restructuring (SDR) or taking over of companies by conversion of loan into equity and a whole host of things working, will work at all, is the worst of the stress known to us? A: There is still a lot more to go. We don’t know what is going to be the bottom for the steel sector. Our commodity team keeps cutting the steel forecast every month by 10-15 percent. So, clearly most of these large steel players have not even been restructured, forget about being shown as NPLs, they have not even been restructured which means that there is going to be a lot of stress coming from the steel sector at this point in time. Plus we have been hearing quite a lot about talks about state electricity board (SEB) reform and stuff but they are yet to gain momentum. So, the power sector still continues to be in quite a lot of mess. As latest as the quarter ago, IDFC took massive write-down on their power sector exposures. So, the private sector banks have already started taking some write-down on the exposures which the public sector banks and many of other large private sector banks are yet to take down. So, I don’t think we have seen the worst in terms of asset quality cycle. It will definitely take time. RBI themselves are lowering growth assumptions. Very clearly in a declining growth environment how can one get comfort over asset quality? That beats me, even if rates are coming down. Growth is the biggest panacea. If one were to ask me what is going to solve the problem, it is not rates, obviously growth is contingent on rates but growth needs to start showing up and that is yet to be seen across the numbers for various banks or for that matter the economy.