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SBI can make more money on existing loans despite hike in CRR, say experts

SBI can make more money on existing loans despite hike in CRR, say experts

SBI can make more money on existing loans despite hike in CRR, say experts
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By Dipti Sharma  May 5, 2022 2:14:52 PM IST (Published)

This is a bad time for banks as the sudden hike in repo rate---rate at which Reserve Bank of India (RBI) lends money to commercial banks--could hurt credit growth. But what it could mean for State Bank of India (SBI) is that the lender could now make more money on existing loans. Reacting to the hike in repo rate and Cash Reserve Ratio, Dinesh Kumar Khara, Chairman, State Bank of India told CNBC-TV18 in an interaction today that the removal of excess liquidity from the system will improve the pricing of loans.

The Reserve Bank of India hiked the repo rate – the rate at which the RBI lends money to commercial banks – by 40 basis points to 4.40 percent in a sudden move on Wednesday. It also increased the Cash Reserve Ratio (CRR) – the share of total deposits lenders need to keep with the RBI – by 50 basis points to 4.5 percent. CRR is raised to control the excess flow of money in the economy as the amount available with lenders to sanction loans comes down.

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But despite a CRR hike, the State Bank of India (SBI) could make more money on existing loans. “The surplus liquidity already there in the system is almost Rs 5.7 lakh crore as far as my last recollection goes," Dinesh Kumar Khara, chairman of SBI, told CNBC-TV18.
"So, I think out of that, if Rs 85,000-87,000 crore goes, that will not have a significant impact on us or any of the banks. If you ask me, the part of the liquidity getting sucked like this perhaps leads to a situation where the risk will be rightly priced because the pricing was not rightly done because of the excess liquidity," Khara said, adding the removal of excess liquidity from the system will improve the pricing of loans.
At 13:24 IST, SBI shares were trading 1.7 percent higher at Rs 487.9 on BSE. The stock has gained after three days of consecutive losses and touched an intraday high of Rs 494.1, up 3 percent.
sbi, stock price, share price, stock market india SBI stock price chart (Source: BSE)
On the repo rate hike, Gaurav Jani, research analyst at Prabhudas Lilladher, said, “A back of the envelope calculation suggests that this would be more beneficial for Kotak Mahindra Bank than ICICI Bank followed by HDFC Bank, Axis Bank, and State Bank of India."
Purvesh Shelatkar, head of Institutional Broking, Monarch Networth Capital, said that the number of loans sanctioned is unlikely to be impacted because demand is picking up, and the hike in repo rate will help the lender mint more money.
“The interest rate hike will give firepower to the lender, which will increase its income on existing loans,” said Shelatkar. He said the hike in CRR, although meant to control liquidity, will hardly impact SBI or any other large banks as the liquidity is already superfluous.
SBI's Khara also confirmed that the bank does not expect RBI's move to have an impact on home loan demand. “The kind of behaviour we are observing in the system is that the loans are growing faster than deposits,” Khara said.
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Meanwhile, Axis Securities has named SBI as one of its top stock picks for May 2022. The brokerage firm believes that this is a good time to increase allocation towards top-tier private banks with a perspective of the next two to three years.
“We have two high conviction buys in ICICI Bank and SBI delivering superior growth and better risk-reward in the current environment. They also have good asset quality, and the operational matrix for both the banks is also improving. SBI is a good ROE up-gradation story from FY21-24 and a good PSU play at the current juncture,” said Neeraj Chadawar, head of Quantitative Equity Research, Axis Securities.
Chadawar believes that in the rising interest rate scenario, banking stocks tend to do well. "The RBI has committed to calibrated tightening by balancing the growth and inflation dynamics, which means that at this juncture, the impact of yesterday’s rate hike on credit growth is limited as the underline growth drivers are intact," he added.
He is of the opinion that the banking space could deliver decent returns in the current calendar year as the outlook for the sector has significantly improved in the last few quarters. Further, he said, an increase in capital expenditure spending will enable banks to improve credit growth, and the overall increase in the budget expenditure in FY23 will help deliver broad-based growth.
“In overall space, the top-tier banks are well placed in terms of overall asset quality and visibility of the improvement in the operational matrix. We could see an improvement in ROE for top-tier banks in upcoming years,” Chadawar highlighted.
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