SBI's deposit rate hikes amid lagging credit growth not likely to impact profitability: Kotak analysts

SBI's interest rate hike on fixed deposits marks the first increase in the rates by the bank since December 2023

State Bank of India (SBI) recently announced an upward revision in its interest-rate buckets, signaling an increase of 25-75 basis points (bps) in select categories. The adjustment primarily targets deposits with a maturity of less than 12 months. This move comes amidst concerns around sluggish growth of deposits compared to loans, prompting lenders to take proactive measures to manage their liabilities effectively, said analysts at Kotak Institutional Equities in a recent note.

SBI's interest rate hike on fixed deposits marks the first increase in the rates by the bank since December 2023.

As per the analysis of term deposit data, analysts said that a significant portion of deposits falls within the 1–3-year maturity window, with less than 20 percent allocated to deposits of less than one year.

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Notably, majority of deposits impacted by rate adjustments are driven by non-individual accounts. Non-individual deposits are basically deposits from corporate entities, partnerships, trusts, and other organisations.

On the other hand, individual deposits refer to funds deposited by individual customers, typically retail clients, into their bank accounts for personal use or savings.

Kotak analysts said that various factors, including sensitivity to policy rates, competitive pressures, and ongoing market dynamics influence the decision-making process behind these deposit rate changes.

Public banks, in particular, are keen to safeguard their market share, leading to increased competition in deposit mobilisation. "HDFC Bank is likely to remain a key player in the deposit market for the foreseeable future as the bank works through the replacement of borrowings into deposits," they noted.

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Despite these adjustments, the industry's outlook remains uncertain, they said. While deposit mobilisation efforts continue, there is no consensus on the near-term outlook for net interest margins (NIMs). Banks, both public and private, are aligned with industry growth trends, suggesting that the intensity of competition should remain manageable in the foreseeable future.

Typically, when the repo rate goes up, the loan book gets re-priced immediately. But on the deposit side, they are at a fixed rate of interest or whatever the contracted rate of interest. There is always a lag in passing on the interest rate to the depositors by banks.

As the SBI decided to revise its deposit rates, it underscores the ongoing challenges faced by lenders in navigating the evolving interest-rate landscape. Kotak analysts believe that maintaining a balanced approach to managing assets and liabilities will be crucial for sustaining profitability in the long run.

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