“Although the financial services sector has experienced several interest rate cycles in the past, we argue that this rate hike cycle is different due to a) the accelerated nature of policy rate hikes (90 basis points over a 30-day period); and b) loan pricing regime (mixture of loan portfolio linked to external benchmark with shorter resets),” HDFC Securities said in a note.
On Wednesday, the RBI announced a 50 basis point hike in the repo rate to 4.90%. The discount rate and the marginal standing facility rate now stand at 5.15% each.
The central bank has prepared the ground for further rate hikes by sharply raising its inflation projections for the current year. India faces significant upside inflation risks from the surge in global commodity prices following Russia’s invasion of Ukraine.
Unlike past cases, banks are witnessing an increase in margin during the current phase of rising interest rates, bearing in mind an almost complete pass-through to the asset side of balance sheets, especially taking into account monetary transmission at an early stage,
The titles said.
More and more banks have gradually shifted their loan portfolios to externally benchmarked lending rates, with around 40% of loans across all retail categories anchored at the repo rate.
In recent years, the RBI has pushed banks to adopt new benchmarks for lending rates to ensure faster monetary transmission.
Major private banks currently have 35-50% of their loan portfolios tied to EBLR with a 3-month reset clause, the brokerage said.
The two banks best positioned to take advantage of the current cycle are the country’s largest lender,
() and ICICI Bank, HDFC Securities said.
“We identify ICICI Bank (48% EBLR; 22% MCLR (Marginal Funds Lending Rate) for the domestic loan portfolio) and SBI (34% EBLR; 41% MCLR) as best positioned to capitalize on this milestone. of the rate cycle.
The brokerage, however, said the rise in margins is not expected to last more than two quarters as the pace of asset-side transmission gradually decreases and lags the revaluation of deposits.
Passing on higher interest rates for MCLR-linked loans would lag significantly behind externally benchmarked ones, the brokerage said, adding that system-wide, about 20 to 30% of total loans are currently linked to MCLR.
“Given the frenetic pace of rate normalization, we expect the transmission on the MCLR wallet to lag significantly behind the transmission on the EBLR wallet; both in terms of quantum (extent of transmission) and timing (EBLR will be more immediate),” HDFC Securities said.
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