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MOSL: FINANCIALS: WALR on o/s loans increases 14bp in Aug’22 (39bp in FY23 YTD)

.  FINANCIALS: WALR on o/s loans increases 14bp in Aug’22 (39bp in FY23 YTD)

 

 

• As per an RBI release, the Weighted Average Lending Rates (WALR) on fresh loans has increased by 15bp MoM, with private banks seeing a 16bp MoM increase v/s 27bp rise for PSU banks.
• As a result, the WALR on outstanding loans rose sharply by 14bp MoM to 9.13% for the banking universe. The increase is similar for private and PSU banks at 13bp MoM.
• Weighted Average Term Deposit Cost (WATDR) for the Banking system has risen marginally (up 7bp MoM) to 5.29%. This was led by 8bp MoM increase for private banks compared to 6bp MoM for PSU Banks.
• While the one-year MCLR rate has increased by 60-95bp for large banks over the past few months, the increase at 80-85bp is higher for mid-size banks. Smaller banks such as DCB and FB have had a smaller increase.
• While banks are gradually increasing their lending yields, we believe the widening gap between credit and deposit growth and faster deployment of surplus liquidity will drive sharp increase in deposit rates. It is interesting to note that WATDR of PSU and private banks are below repo rate, and thus, there exists significant scope for increase in TD rates. Banks with high LCR and CASA mix along with a higher mix of floating rate book will benefit in the current environment. Our top picks in the segment are ICICIBC, SBIN, IIB & FB.

 

WALR on fresh loans increases by 15bp MoM in Aug’22

WALR on fresh loans rose 15bp MoM in Aug’22, with PSU banks seeing a sharper rise (up 27bp) v/s 16bp increase for private banks. The MoM increase since April’22 is a reflection of the rising repo rate. As a result, WALR on outstanding loans for banks increased 14bp MoM to 9.13%, led by a similar expansion of 13bp MoM for private/PSU Banks. Yields stood at 10.08%/8.56% for private/PSU banks. The one-year MCLR rate for large banks rose 60-95bp since April’22. The increase is slightly more for mid-sized banks at 80-85bp over the same period. Smaller banks such as Federal and DCB, however, have seen a smaller increase.

 

WATDR rose 7bp MoM in Aug’22 – more controlled vs rise in loan yields

WATDR rose 7bp MoM to 5.29%. The increase (up 8bp MoM) is marginally higher for private banks than for PSU banks (an increase of 6bp MoM). With increasing competitive intensity, we expect sharper hikes in deposit rates in the coming quarters. This, in turn will put upward pressure on the cost of deposits. However, banks with a high LCR and a healthy CASA mix can calibrate the increase in deposit rates, given the ample liquidity on their balance sheets. Large banks, with a strong CASA ratio, are better placed to navigate the challenge of rising cost of funds.

 

Spread differential between private and PSU banks stable

Private banks have traditionally had a greater share of higher yielding assets than their PSU counterparts due to their dominance in unsecured loans. However, increasing focus of PSU banks on this segment has reduced the gap in lending yields on fresh loans between the two. However, the gap stays intact on outstanding loans due to its current loan mix. While the spread between the two sets has been stable at 147bp over the past few months, we expect it to widen, going forward.

 

Widening gap in credit and deposit growth to put pressure on deposit rates

The gap between credit growth and deposit growth at 6.7% is at a decadal high (11-year high) except for the distortion in deposit growth during demonetization in 2016. While the system can still fund the growth by using excess SLR, the focus on deposits will significantly increase going further, thus putting pressure on deposit rates. We thus remain watchful of margins over FY24 though we expect NIM improvements to continue over 2HFY23.