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Event update: State Bank of India (Outperformer) - Floating savings deposits could increase volatiality in NIMs

SBI has linked the rate on deposits above Rs100,000 and the rate on cash credit/ short term loans to an external benchmark - the RBI repo rate. Given the amount of cash credit that would reprice lower on the asset side is less than the amount of deposits that will reprice lower, the impact of this change will be positive on the day it becomes effective which is May 1, 2019. However, deposit mobilization is a bit of an issue in the sector right now with deposit growth lagging loan growth. If other banks do not follow suit, SBI could lose some share as rates offered by other banks will be higher than SBI's. We believe the financial impact of this change can be assessed once we know how other banks are likely to respond. We do believe that while it is NIM positive, it is also not the best time to lower deposit rates when deposit growth is slowing. Also, the impact on NIMs would be negative when rates start rising.

SBI's rate action:

In order to address the concern of rigidities in the Balance Sheet structure and address the issue of quick transmission of changes in RBI’s policy rates; effective from 1st May 2019, SBI has taken the lead in linking its key pricing decision for Savings Bank Deposits and Short Term Loans to the Repo Rate of RBI. The major steps are as under:

• Linking of Savings Bank Deposits, with balances above Rs. 100,000 to Repo rate. The spread has been fixed at 2.75% below the repo rate. This leads to the current effective rate of 3.5% for all deposits above Rs100,000.
• All Cash Credit accounts and Overdrafts with limits above Rs100,000 also to be linked to the Repo Rate (Current Repo Rate 6.25% plus a spread of 2.25%). The Risk premiums over and above this floor rate of 8.50 % would be based on the risk profile of the borrower, as is the current practice.
• The spread over the external benchmark for both CC and deposits is unlikely to change in future.

Impact and management feedback

• SBI says that while the number of accounts for deposits under Rs100,000 is large, the value of deposits above Rs100,000 is much higher than the value below Rs100,000. According to management as much as 80% of total deposits by value are above Rs100,000 which is contrary to what we thought given that SBI is the largest bank with the widest reach.
• Further in the above Rs100,000 category the deposits with balance of Rs10M or above is a high proportion. These deposits will immediately get repriced from the current rate of 4% to the external benchmark linked rate of 3.5%. For all other deposits between Rs100,000 and Rs10M, the old and the new rate will remain the same at 3.5%.
• The repricing of deposits above Rs10M from 4% to 3.5% which is a substantial portion according to management will result in better NIMs.
• The repricing of cash credit would have a negative impact on NIMs but the absolute value of cash credit is lower than the value of deposits above Rs100,000. As such the move will be a net positive at current rates. The total value of domestic savings deposits for SBI was Rs9,994bn in FY18, 80% of which or Rs7,995bn will now be floating. Against this the value of cash credit in FY18 was Rs7,463bn.
• While the external linking is positive for NIMs in the current environment, it could become a challenge when rates move up. More importantly even in the current environment while it will be margin positive, if other banks do not follow SBI and keep deposit rates high, SBI could lose some share.  SBI believes that they may not lose share because 1)  they get deposits for their reach not for their rates 2) savings accounts are transactional. For playing rates, savers use fixed deposits. As such savings deposits are not sensitive to rates according to SBI. But we still believe we will have to wait and watch for action from other players.

·       We maintain OP on SBI.​