Deposit-heavy banks will gain most from SBI’s savings rate cut

Just when the Street was underestimating the power of deposits, especially savings deposits, the move by State Bank of India (SBI) to cut rates on Monday could reiterate its relevance. Seen as the cheapest source of funds for a bank, SBI introduced dual interest rates on saving account deposits. Savings deposits of less than Rs 1 crore will earn only 3.5 per cent interest while keeping the rate unchanged at four per cent for deposits of more than Rs 1 crore.

Analysts expect banks with a strong deposit franchise to benefit from SBI’s rate cut as they too are likely to follow the leader. Apart from SBI, banks with high deposits include Punjab National Bank, Bank of Baroda, Canara Bank, HDFC Bank, ICICI Bank and Axis Bank.

SBI’s rate cut is significant as it is the first savings rate cut implemented since 2011. As it just precedes the Reserve Bank of India’s (RBI)’s monetary policy announcement on Wednesday, analysts say the move could signal a reduction in lending rates too.

Over 80 per cent of savings accounts are estimated to have deposits of less than Rs 1 crore. Therefore, SBI is clearly headed for an improvement in financials from the September quarter onwards as Monday’s announcement takes effect from July 31.

“SBI can save Rs 4,026 crore of interest outgo (of Rs 2,818 crore on a post-tax basis). It forms five per cent of net interest income (NII) and 3.4 per cent of pre-provisioning operating profit (PPOP),” analysts at ICICI Securities spell out. “On standalone FY17, the impact would have seen a surge of about 20 per cent in net profit,” they add.

With the largest bank making a bold move, analysts say peers, especially the public sector banks (PSBs), would quickly follow suit, based on past experience. “PSBs including Bank of Baroda with 25 per cent of savings deposits and Punjab National Bank (34.4 per cent of savings deposits) are seen to witness five-six per cent benefit on NII and PPOP. Large private banks — HDFC Bank and Axis Bank — are expected to gain two-three per cent on both parameters. The overall benefit for banking peers is expected to range between three and six per cent on NII and PPOP,” analysts at ICICI Securities quantify.

Suresh Ganapathy of Macquarie Capital estimates private banks could see 0.09- 0.11 per cent reduction in overall cost of funds, whereas PSBs could benefit more by 0.11–0.15 per cent.

Clearly, better days await banks who had invested in mobilising deposits, whether savings, current or term, especially when most of them are still battling asset quality woes.

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