Banking: Spike in short term rates to weigh on margins

Emkay Global Financial Services has come out with its report on banking space.

• CD rates higher by ~50bps (12-mth) to 100bps (3-mth) on average vs Q3FY12. We expect impact of 5-27bps on the cost of deposits for banks under our coverage
• The impact on NIMs to be partially mitigated by higher LDRs# and reduction in CRR## that happened w.e.f. Jan, 28. We expect the NIMs to take hit of +2 to -30bps
• Growth in NII to moderate to 0.8% qoq for Q4FY12 vs 6-7% qoq in previous two quarters. However, due to favorable base effect NII to grow 18.5% yoy vs 16.6%yoy in the Q3FY12
• The impact to be more prominent in case of BOB, ICICIB, CBK and UNBK. Low LDRs and lower wholesale deposits to help ALBK and BOI to do a better 3% qoq growth in NII

Sharp spike in short term rates in Q4FY12: The short term interest rates (3-m to 12-m Certificate of Deposits (CD)) have seen a sharp spike since mid Feb-12. The 3-m CD rates have inched up by almost 120bps and 12-m CD rates have inched up by about 60bps since then.

Market participants expect the same to be a short term phenomenon: Couple of bank managements have highlighted to us that this could be a short term phenomena as seasonally the short term rates spike up during Q4FY12 for three reasons (1) higher demand for credit (net deployments up 33% yoy) (2) higher G-Sec borrowings (53% yoy) and (3) Mar 15 advance tax payments. Most of them highlighted that they are borrowing in 3-m CD market and intend to do so for two reasons (1) repay the CDs in Q1FY13 which will be lean season for deployment and (2) most of them expect the RBI to cut rates in Q1FY13. Hence, they are not looking at revising the long term deposits rates (more than 180 days) in retail category as of now. Few banks have tweaked their short term deposit rates like BOB and BOI, to more align them with the peers

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