capital markets: PSU banks brace for CASA recovery as fixed deposit rates decline: Santanu Chakrabarti

“So, one of the myths we have tried to kind of address in our current research report, which was published last week, is that look, allocation of moneys towards capital markets cannot fundamentally change the deposit flow of the ecosystem,” says Santanu Chakrabarti, BNP Paribas.

With this interest rate cut of 50 basis points, firstly, I mean, do you think India is likely to follow in the October meet?
Santanu Chakrabarti: Yes, I think India is going to follow at least a part of the rate cut and the reason we are expecting that in this quarter, if you look at even the RBI governor’s comments just a few days back, he made a point to emphasise that the regulator is looking for monetary policy decisions at the longer term inflation trends rather than a blip here or there. That in line with what has happened in the US, creates the environment where it is probably odds on to expect that the rate should be cut. We are building in already and we have been building in even before this development, a rate cut of 25 basis points in the last quarter of the calendar year.
What the outlook is from individual banks as well. For example, an AU Small Finance or an IndusInd Bank, they have a higher share of the fixed rate loans. Do you think that they are perhaps at an advantage compared to others?
Santanu Chakrabarti: For sure, at least in one dimension. See, there are two effects of a rate cut. One is on the asset side, the other is on the liability side. On the asset side, as you can understand, your mortgages, which are repo linked and overwhelming percentage of corporate exposure will get repriced almost immediately.

So, that is a clear vulnerability to that extent your argument of who has the highest amount of fixed rate book is completely valid in terms of insulation of said earnings to rate cuts. But there is a second aspect to this as well, which is the liability side of things. Now, of course, liability repricing or deposits repricing is a much more time consuming, slower process than assets.

But in terms of both mix, in terms of deposit pricing, how much of CASA can be mobilised, etc, that is another tailwind as well.

So, while one set of beneficiaries are names like IndusInd Bank, do not forget about other names like HDFC or Axis, where the liability side benefits, even though they may not be very dramatic right off the bat, essentially ensure that from coming off a bottom right post the rate cuts, margins can gradually start to inch back up a little bit or at least find stability. So, there are two aspects to this. Yes, there are these two aspects to watch out for. But what about the aspect of deposit growth because there has been that war of deposits, which was underway and if the rate cut cycle does begin, there might be a shift towards further into mutual funds or equity markets and the likes because deposit saving would not be as profitable. Do you see a further worsening of this deposit war then?
Santanu Chakrabarti: So, one of the myths we have tried to kind of address in our current research report, which was published last week, is that look, allocation of moneys towards capital markets cannot fundamentally change the deposit flow of the ecosystem. If I take Rs 100 out of my account and buy stocks with it, that Rs 100 goes into the seller’s account. The only way the total money supply and therefore deposits in the country can change is either through the external account, which is capital or current account, credit creation or destruction by the system, as well as what RBI does in terms of the open market operations, the extent to which RBI’s balance sheet expands or contracts and that is about it.

So, if you analyse why money supply or deposit growth in the last two years has not kept pace with the amount of credit that has got created, it becomes very clear that partly it is because of the external account where capital flows have not been that strong, but mostly is because RBI has gone from maintaining an excess liquidity situation into a liquidity shortfall.

So, on a net basis, RBI has extracted liquidity. And the moment in an easier monetary accommodation environment, the RBI reverses this policy, it is pure arithmetic that the mobilisation of deposits will be along the lines of credit creation.

You were just alluding to an AU Small Finance, IndusInd, etc. Tell me how the rate cuts you think are going to impact the deposit rates and deposit growth, according when it comes to, say, SBI in specific. We were talking to Mr Setty recently. He highlighted that the bank’s CASA ratio is going towards pre-COVID levels. For the last few quarters, the entire banking industry has faced pressure when it comes to CASA deposits. So, analyse some of these large PSU banks for us.
Santanu Chakrabarti: Picking up on the CASA argument, this is a very valid argument. So, the previous argument that I made related basically to the total amount of deposits, but what we have been seeing is that what has been mobilised within those deposits, it has been overwhelmingly fixed deposits.

As fixed deposit rates start to come back down, the gap between savings account rates and FD rates as they come down, you will see some migration back from fixed deposits into savings accounts.

Now, obviously, the harbinger of that migration will not be large banks, but some of the smaller banks where sometimes some of the larger ticket savings account rates look almost like FD rates, even higher than some of the larger banks. So, that is where the migration starts back.

But the entire trade that you have seen, where a lot of savings account money has moved into fixed deposits, for example, in the case of Kotak, in multiple other cases, that trade will start to reverse. And the current account part of the equation relates directly to the receivable cycle for the greater trade ecosystem of the country.

Now, if liquidity at the banking system level, it has been generally kept in a deficit to try and manage inflationary impulses, what that means is the velocity of money and the receivable cycle, the turn on the current accounts has also been limited.

So, as the environment eases, you will see current account money also start to move back up. So, while SA recovery is more a monetary phenomenon, as far as we are concerned, current account recovery, the recovery of the growth is going to be more a function of the liquidity in the overall system and the confidence that we should see in the money markets.

Net-net taking all of this into account, what is your pecking order within the sector?
Santanu Chakrabarti: So, HDFC Bank continues to remain our top pick. Our second pick is ICICI, followed by Axis, and then we get to SBI. But within this, what we have to keep in mind is HDFC and Axis are the most sensitive from the liability side, as far as the rate cuts are concerned, while IndusInd is perhaps most sensitive on the asset side.

ICICI although it is second in our pecking order, seems to be the all-weather pick where the earnings trajectory is not that dependent or sensitive to the way rates are flowing.