Nomura India in its fresh report on banks said any rate cut in India going ahead would be a sector return on asset (RoA) dampener, adding that a potential 50 basis points repo rate cut may negatively hurt net interest margins (NIMs) of most large private banks by 15-20 basis points.
The impact would be lower for State Bank of India (SBI), IndusInd Bank Ltd, AU Small Finance Bank Ltd and Bandhan Bank Ltd, the foreign brokerage said. Nomura India though clarified it prefers not to switch its stock bets based on NIM implications alone. It revised lower its price targets on SBI, Bank of Baroda (BoB) and Axis Bank.
Nomura India said HDFC Bank, Kotak Mahindra Bank, Axis Bank, ICICI Bank, Federal Bank, BOB, SBI, AU SFB, IndusInd Bank and Bandhan Bank have 30-60 per cent of their loan books directly linked to the repo rate or external benchmarks.
Banks’ liabilities, on the other hand, are entirely on fixed rates, which only reprice lower on maturity and leaves them negatively exposed to potential rate cuts.
“From a maturity perspective, only 14-22 per cent of banks’ term deposits mature in less than 1 year, with 65-70 per cent of these maturing in 1-3 years. Smaller private banks (e.g., IIB, AUBANK and Bandhan) have higher share of fixed-rate loans and hence would see lower impact on NIMs. SBI, too, with a higher share of MCLR-linked loans would see a lower impact of 12bp vs 15-20bp for large private banks,” it said.
That said, smaller banks are also more exposed to any pick-up in credit costs in their customer cohorts. Hence, Nomura India prefers not to base its sector thesis on potential NIM sensitivities alone and said larger banks offer significant valuation comfort and, hence, it do not see the need to move down the risk curve.
The brokerage noted that although Kotak Mahindra Bank has a higher NIM impact, it also gains from having 80 per cent if its investments in marked-to-market buckets, and so the ultimate impact on profitability is lower.
Large private banks such as ICICI Bank, Axis Bank and HDFC Bank could see FY26 EPS cuts of 3-6 per cent, it said.
Among PSU banks, SBI with a high share of MCLR-linked loans is relatively better off. However, it should also see 6 per cent EPS cuts on the back of a lower RoA profile relative to private banks.
“We prefer stronger deposit franchises (with no LDR constraints), with stronger asset quality outlooks, higher RoAs to cushion EPS from rate cuts and offering valuation comfort. Our top picks, hence, stay Kotak Bank, ICICI Bank, SBI and Federal Bank. At a sector level, we struggle to see meaningful triggers for near-term outperformance,” it said.
The longer-term thesis for the sector remains intact amid a broad return on equity (RoE) delivery cycle and attractive valuations, it said.
During FY18-20, repo rate witnessed a cut of 200 basis points. But the impact on bank margins varied from minus 15 to 45 bps (barring AU Bank and Bandhan) . This is because prior to FY20, there was no concept of repo-rate-linked or external benchmark-linked loans, and banks’ floating rate lending rates were primarily linked to their own internal benchmarks, predominantly MCLR).
It was only in October 2019 that the RBI introduced a norm stipulating that all incremental floating rate loans in retail and MSME segments have to be linked to the repo rate or other appropriate external benchmark interest rate (EBLR).
“We reduce our target prices for Axis Bank, SBI and Bank of Baroda (while reiterating our Buy ratings) as we lower our target multiple led by lower sustainable RoEs. Our revised target prices for Axis/SBI/BOB are Rs 1,370/Rs 980/Rs 280 (vs Rs 1,435/Rs 1,030/Rs 310 previously).