Tuesday, May 29, 2012

>INDIAN BANKING: Savings rate deregulation – Early trends

The current macro environment (high interest rate differential between SA and fixed-term deposits) and SB deregulation in Oct 11 have made SA deposit acquisition more challenging and competitive. Post deregulation, smaller new generation private banks that have raised rates have seen higher SA momentum, while large private sector banks are witnessing early weaknesses and PSU banks have seen a deterioration in SB deposits mobilisation. We expect smaller new generation private sector banks to gain market share at the cost of PSU banks in the initial phase. We expect the high SA interest rate environment to last only until small new generation banks reach the inflection point in terms of SA ratio, which also depends on how rate cuts pan out.

Macro environment not conducive for SA deposits growth
We expect the flight of deposits from savings accounts to fixed-term deposits to continue in FY13 as we expect liquidity conditions to remain tight for the rest of the year and interest rates to remain high in spite of an additional forecast 75bps cut for the rest of FY13. Further, we believe it would be reasonable t assume that the three new generation private sector banks that have increased their SA interest rates are likely to continue to offer higher SA interest rates than competitors to maintain their competitive advantage in terms of pricing differential.

SB Deregulation – divergent trends
Small new gen banks - Rate hikes helped initial gains: Since SA deregulation, Yes, Indusind and Kotak (not rated) have increased rates which has helped them to gain significant momentum on SA deposit mobilization (incremental SA deposit market share from 1% in Q1 FY12 to 4% as of Q4 FY12). Large Private banks – Holding the fort for now: Large private banks have managed to hold on to their CASA ratios and market shares over the last couple of quarters. ICICI, HDFC Bank & Axis Bank managed to maintain their SA ratio at 27.9% from Q1 to Q4 FY12.

PSU banks – Losing market share: The top 5 PSU banks have continuously lost market share (their combined SA market share decreased from 26.6% in Q1 FY11 to 25.2% in Q4 FY12 & SA ratio decreased from 26.4% in Q1 FY11 to 24.7% as of Q4 FY12).

How long will the high SA interest rate environment last?
Competitive positioning on key SA drivers...
Most banks have devised their current strategy based on their current positioning on four key SA drivers: (a) Interest rates; (b) rural branch network; (c) service quality; & (d) product portfolio. Three large private sector banks (ICICI, HDFC Bank and Axis) and SBI look better placed to handle higher competition while some of the larger PSU banks like, Union, PNB, BOB & BOI will likely continue to lose market share as the smaller private players gain market

... has determined banks’ current SA strategy
Large private banks (ICICI, HDFC Bank, Axis) are increasing their rural network, SBI is offering incentives (reducing minimum balance to zero) to increase incremental market share. PSU banks excluding SBI are offering Auto Sweep on SA accounts.

High SA rates will last for the next 12-18 months
Higher SA rates are highly dependent on how the rate cycle pans out and how quickly the new generation banks increase their SA Ratios. Based on our analysis, we calculate that a 25% SA ratio would be the tipping point for YES bank while the corresponding number is 35% for Indusind assuming a 75 -100 bps rate cut (see Table 15 &16), at which point the new generation banks may be forced to think long and hard about offering higher interest rates. We believe higher SA rates will last for the next 12-18 months, after which banks will likely be forced to revisit their high SA rate strategy.

To read report in detail: INDIAN BANKS