RBI steps to impact banks Q2; Yes Bank to be hard hit: IIFL

The recent steps taken by the Reserve Bank of India (RBI) to curb rupee's fall may hit banks' margins in the long-term, Sampath Kumar, Banking Analyst, Institutional Equities, IIFL told CNBC-TV18 in an interview.

"What the government said looks more like a transient. If that is transient, then certainly there will be some impact in the shorter-term, but it may not translate into long-term impact. However, if it translates into a longer term impact then it would mean that margins of banks will take a hit and it will vary depending upon how they are positioned Asset Liability Management (ALM) wise," he elaborated. He expects some impact of these steps on earnings of banks in the second quarter of FY14. According to him, it will be difficult for banks to pass on higher costs to borrowers. Private sector lender Yes Bank has higher dependence on bulk deposits, which is a very price sensitive segment, so it will be at the higher end of the impact, he added. Below is the verbatim transcript of his interview on CNBC-TV18 Q: Yes Bank stock is down 10-11 percent in two days but Yes Bank believes that they will not be affected at all and this is an overreaction while most brokers have lowered their estimates on Yes Bank and become more cautious since yesterday. Would you buy the management’s contention? A: The key issue is whether the measure by Reserve Bank of India (RBI) has a permanent impact or not. It is slightly becoming difficult to take the view now unless we have more guidance from the RBI and hopefully we will get that guidance when RBI announces its monetary policy end of this month. Going by what the government said yesterday, it looks more like a transient. If that is transient, then certainly there will be some impact in the shorter-term but it may not translate into long-term impact. However, if it translates into a longer term impact then it would mean that margins of banks will take a hit and it will vary depending upon how they are positioned Asset Liability Management (ALM) wise. If you look at banks like Yes Bank and the other smaller banks like IndusInd Bank or other private sector banks, you would find that their reliance on bulk deposits or wholesale deposits are higher and that is a very price sensitive segment. That cost will move up. We would think that banks will find it difficult to pass on higher costs to the borrowers. So, without a pricing power on their lending side, we will have to assume that this will translate into margin impact. If we assume 50 bps increase on the bulk deposit component alone, then that would mean an impact on earnings anywhere between 1-5 percent and certainly Yes Bank will be at the higher end of the impact. We have not done any changes as of now in terms of estimates for any of the banks but we are trying to see whether this is going to be a transient or whether it is going to be a longer term impact. Q: Even for the next couple of quarters assuming this is a temporary measure you are not changing your outlook or expectations from some of these so-called vulnerable banks like Yes Bank, IndusInd Bank - you do not think there will be any impact visible in the next couple of quarters? A: In the coming quarter that is September ending quarter, we should see some impact. I do not think we can wish away that. But that impact is something which the bank should be able to absorb. A 50 bps impact for the rest of the year translates to about 5 percent for Yes Bank for instance. That would mean that if you are assuming just one-two quarters, we will have to knockoff anywhere between 2-3 percent of earnings.  However, it doesn’t look like a very large number for us to worry about. We will have to do that adjustment though. Q: While there is clear relation in terms of the impact on margins because of wholesale funding issue. What about the slightly more circuitous issue of what happens to asset quality because the fear is that because of these changes many banks could be staring at higher non-performing loans (NPLs) in a situation where they thought the worst of the NPL cycle was behind them? A: As far as NPL situation is concerned, it continues to remain worse. We know that there is a lag between improvements in NPL situation versus growth. If, in a base case, we are assuming an improvement growth outlook in the latter half of this year; we can only expect an improvement in the NPL situation perhaps towards the end of FY15, or the year after. So, anyways we are going to have large influx of NPL or restructured loans this year. That in our view is baked into our estimates and we are not expecting any improvement. But on where it can take a hit - growth can take a hit, because at the end of the day we were assuming that growth will recover in the second half of this year. Gradually, going into FY15, we were assuming higher loan growth assumption - we were going from 13-14 percent loan growth this year to about 15-16 percent next year, actually might end up with lower loan growth this year and a consequently lower loan growth next year as well. That would mean a bit of a double whammy between margin and growth and that can exacerbate problems for banks.