Monday, May 9, 2011

Impact of RBI rate hikes>>>>>>>

The RBI raised the interest rate payable on savings account deposits from 3.5% (fixed) to 4% (fixed). In our view, this will have a negative impact on banks with higher proportion of savings account balances in their overall funding, i.e. SBI, PNB and HDFC Bank.

Assuming that banks don’t raise lending rates to offset this funding cost increase, this could have a 4-8% PBT impact for banks with a reliance on savings deposits.

What will the banks do? We believe that the flexibility available to pass this increased cost on to borrowers will be relatively low given that lending rates are already moving close to peak levels and growth outlook is uncertain. Furthermore, banks are also facing pressure from term deposit cost increases filtering through into portfolio cost of funds.

Provisioning calendar change: The Reserve Bank of India made a small increase in the provisioning calendar required for NPLs/restructured loans. Provisioning requirement on restructured loans was increased from 0.25%-1% to 2%. While this will increase credit costs estimates for the coming year, it is likely to be a relatively small impact.


Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.

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