One, lower interest rates will benefit banks with relatively lower of current and savings accounts (Casa) and higher dependence on wholesale funds. Examples are Canara Bank, Allahabad Bank and YES Bank (see table), among others. Their funding costs will go down and enable them to reduce rates on fixed deposits, too.
Second, the asset quality of most banks will improve, as the financial health and debt repayment ability of India Inc will be better than earlier, aided by pick-up in economic growth in 2015-16. Third, treasury income for most banks, particularly those with higher exposure to longer duration bonds (Axis, public sector banks) will increase, aiding their bottom line.
Non-banking housing finance companies such as Housing Development Finance Corporation, LIC Housing Finance and Shriram Transport Finance are among those standing to gain significantly. Their overall borrowing costs will come down and allow them to lower their lending rates, making loans more affordable.
Notably, though the rally in banking stocks fizzled out on Wednesday, analysts believe the medium-term trend remains positive. And, unlike in the past, public sector banks (PSBs) will lead the rally in the Bank Nifty.
Vaibhav Agrawal, vice-president at Angel Broking, says: ”The sector has been under pressure due to higher non-performing assets (NPAs). We believe the banking index will do well. PSBs will fuel the rally, given that their valuations were compressed due to higher asset quality worries.”
Most analysts believe some PSBs will trim their base rates by 25 basis points (bps) immediately. They expect meaningful base rate cuts to come through from the first quarter of 2015-16 (April-June).
While companies' debt servicing ability is likely to improve, the asset quality for most banks is expected to do so only after the second quarter (Q2) of FY16. This is partly due to high restructuring in the current quarter, as the window for softer treatment on the balance sheet closes on March 31. Timely onset of the monsoon will be another key factor impacting asset quality in rural segments, beside having an indirect impact (through food inflation).
Agrawal adds, “We believe NPAs will start coming down only from Q2. In the March 2015 quarter, treasury gains could be similar to Q3 or even 20-25 per cent higher than Q3 for some banks. Banks can also choose to book unrealised (treasury) gains in Q4.”
A cut in rates translates into higher bond prices and vice versa. A rally in bond prices should translate into higher treasury gains for banks.
Hatim Broachwala, financials analyst at Nirmal Bang Securities, believes PSBs will post strong treasury income in the March quarter, as they have a high proportion in long-duration bonds.
Analysts are factoring in a further 50-75 bps cut in the repo rate till December, given the sharp fall in inflation and improving current account and fiscal account deficits. While rate cuts would not be the sole factor to push credit demand, these will surely rub off favourably on the financials of banks, especially PSBs.