The Reserve Bank of India (RBI) has reduced the repo rates by 140 bps over the last 12 months with the majority of the repo rate cut of 115 bps between February and May 2020. The pace of interest rate transmission has also picked up over the past 3-6 months.
The commercial banks have decreased MCLR significantly by around 80-90 bps over the last six months. While banks only cut the MCLR by 30-40 bps from February to May 2020, the MCLR rate has further come off by 30-40 bps over the past three months.
“The RBI’s stance of maintaining surplus system liquidity has led to AAA NBFC yields coming off +100bps in last 3mnts leading enabling 70 bps cut in system mortgage rates,” brokerage CLSA said.
Meanwhile, funding costs are coming off as well and loan spreads becoming comfortable.
Given ample liquidity and low credit offtake, banks have been able to cut term-deposit rates by more than 150 bps the past 12 months and over 100 bps the past six months.
“Hence loan spreads for banks and HFCs are holding up. There could be some near-term Net Interest Margin (NIM) pressure for banks primarily due to negative or no carry on excess SLR liquidity,” CLSA said.
According to RBI lending rate data, interest rates for new loans have fallen by more than 100 bps over the past months.
The brokerage also noted that the mortgage spreads for AAA HFCs have improved in spite of the +100 bps drop in mortgage rates as AAA funding rates have come off by 150 bps in last six months. The majority of the 150 bps fall in funding costs for AAA HFCs has happened in the past three months.
Among banks, 1-year term deposit rates for SBI and the top four private banks is currently at 5.1%-5.5% and the MCLR is at 7%-7.65% with Axis Bank at 20-30 bps higher than SBI, HDFC Bank and ICICI Bank. Kotak Mahindra Bank’s deposit and MCLR rates are now in-line with HDFC Bank and ICICI Bank.
IndusInd Bank’s deposit rates and MCLR rates have remained sticky with just a 50 bps change versus a 150 bps drop in rates by larger private peers. Post, Yes Bank, IndusInd Bank did face liability side challenges and the bank is offering higher rates to get back granular retail deposits, CLSA added.
Housing Finance Companies (HFC) and NBFCs like HDFC, LIC Housing Finance and Bajaj Finance are now borrowing at 200 bps below the pre-IL&FS level. Players like M&M Financial Services, Cholamandalam Financial and Piramal Finance have seen drops in wholesale borrowing costs the past 3-6 months. Among the larger NBFCs, Shriram Finance’s cost of funding remains sticky, according to the brokerage report.
Further, mortgage rates for SBI and HDFC have come down to 6.9-7.0 percent, down 80-100 bps from 8 percent six months ago.
Wholesale funding rates for AAA HFCs have dropped to 5.5 percent with a +150 bp drop the past six months leading to incremental mortgage spreads increasing from 90 bps to 160 bps. Mortgage spreads are at their highest since the IL&FS crisis (August 2018).
CLSA believes that HFCs like HDFC and LIC Housing Finance are better-placed to gain from better mortgage spreads.
The brokerage remains most positive on large private banks such as ICICI Bank, Axis Bank and HDFC Bank and SBI. Among mid-caps, it is positive on CreditAccess Gramin.