RBI’s CRR Shock Sinks Banking Stocks, Halts Bond Market Rally 

Brokerages expect banks to take a hit as the Reserve Bank of India moved to suck out excess liquidity triggered by the flood of deposits post the demonetisation of Rs 500 and Rs 1,000 notes.

RBI has asked banks to set aside 100 percent of the deposits (NDTL) accrued between September 16, 2016 and November 11, 2016, as incremental cash reserve ratio (CRR). This requirement will be reviewed on or before December 09, 2016.

Demonetisation deposits will now be a drag on the net interest margins and profitability, according to leading brokerages. Banks are paying about 4 percent on deposits (mostly savings account deposits), but will not earn anything on CRR.

The Nifty Bank Index opened 1.5 percent lower at 18,237, while the Nifty PSU Bank Index saw a sharper fall of 4.4 percent. The Nifty PSU Bank Index had rallied 4.4 percent since the government’s demonetisation announcement on November 8, 2016.

The yield on the ten-year government bond rose 6 basis points from Friday to 6.294 percent.

Deutsche Bank says the move is a “clear negative for banks’’, while Jefferies says larger banks would be net beneficiaries over medium to longer term. Here’s more from what leading brokerages had to say on the RBI’s latest move.

Deutsche Bank

• Likely expected gains will now be a net loss.
• Bond yields are likely to move up somewhat.
• Near term NIM could decline 12-15 basis points for larger banks in second half of the financial year.
• Banks will cut deposit rates sharply, but not lending rates.
• Banks with large distribution franchise including State Bank of India, Bank of Baroda, Punjab National Bank, ICICI Bank Ltd. and HDFC Bank Ltd., were expected to be the gainers from the deposit inflows. Now they will be hurt the most.
• Banks will ask for compensation, but RBI is unlikely to be comfortable with that.

Jefferies

• Govt/RBI’s new rules driven by second-order impacts make it difficult to cogently argue reasonable investment conclusion in the short term.
• Stay cautious on the banking sector.
• NIM improvement expectation for the quarter for state owned banks is now at risk.
• Larger banks (ICICI Bank, SBI and HDFC Bank) would be net beneficiaries of the sticky deposit inflows over the medium to longer term.

Motilal Oswal

• Margins to get impacted in the short term.
• Loss to banking system (assuming limit is not lifted by December 9) is likely to be around Rs 2,000 crore on net interest income versus expectation of Rs 2,000-3,000 crore gain earlier.
• Upward correction in yields in the short run means lower than estimated trading income for banks than previously estimated.
• Near term reactions from government and RBI will weigh on stock performance.
• CRR action by RBI is immediate negative for bulk financiers like mid-sized private banks and non-banking finance companies.
• Continue to prefer HDFC Bank, ICICI Bank, SBI, PNB, BoB, RBL Bank Ltd. within banking space.
• LIC Housing Finance Ltd. remains the top NBFC pick.

Religare Capital Markets

• Impact on NIM will be limited as loss of interest will be only on around 3 percent of their NDTL, which is not very high.
• Directionally, the move is negative for banks especially for PSU banks.
• Don’t rule out any further measures from the RBI.

Bond Markets & Implications Of Repo Cut

For the bond markets, brokerages expect bond yields to see a knee-jerk reaction today, ending their downward trajectory to 7.5 year lows.

Citi

• Bond yields could spike around 15 basis points.
• The risks of a sharp near-term growth decline may warrant a 25 bps rate cut to arrest any spillover effects.
• Some possibility that RBI may stay pat in December to better assess the impact on economic activity/liquidity.
• RBI may keep options open for even an inter-meeting rate cut.

Nomura

• The initial market reaction should be negative and we expect the yield curve to flatten.
• Do not rule out an initial 10-15 basis point sell-off in bonds.
• Despite operational nature of the CRR maintenance requirement, expect market to temper its expectation of rate cuts initially.

HSBC

• Market participants had assumed that higher banking sector liquidity would mean faster transmission to lower bank lending rates.
• Expect a repo rate cut in the December 7 policy meeting.

Bank of America Merrill Lynch

• The case for RBI rate cuts is growing more compelling. Expect the central bank to cut rates by 25 basis points on December 7, and 50 basis points by April.
• But as CRR does not pay interest, banks would find it difficult to cut lending rates even if RBI moves in December.
• Retain expectation that banks will cut lending rates by 75 basis points till September 2017.
• See 30 basis point risk each to financial year 2016-17 growth forecast of 7.4 percent, and FY18 forecast of 7.6 percent.