Steep hike in fixed deposit rates by BoB and CB

 Hike in deposit rates: 

BOB and CB set the trend

Brief: Bank of Baroda (BoB) and Canara Bank (CB) hiked their fixed deposit rate to 7% for normal category and 7.5% for senior citizens. While BoB offer this rate for 399 days for non callable deposits , CB extend the benefit for 666 days deposits without any withdrawal restrictions. The rates offered by the two banks is higher by 75 bps at least, as compared to the maximum deposit rates on offer from the other major public sector/ private banks. The move surprised many as BoB and CB are the third and fourth largest, respectively, among PSBs, in terms of total assets. They  also posted impressive finacial results in the first two quarters of the current financial year 2022-23.

Trend setter or trigger forced rates? Are they setting a trend for the other banks to follow? Or is it that there are trigger points in the business portfolio that forced both to offer interest rate that beat the market, by a huge margin. I perused their presentation to analysts for the quarter ended Sep’ 2022 and observed the following:

1. Trigger 1: Growthth in advances: BoB and CB have grown their advances substantially, morethan 15% YoY) Both posted impressive growth under gold loans (helped them in CAR, profit margin and also in achieving priority and agriculture targets as 90% of the growth under gold loan is in agri segment), retail loans (margin is high as the loans are linked to repo rate and get repriced automatically with every revision in policy rate) and in corporate advances , with main focus ofcorporates on NBFCs and Infra segments. The said segments retail, gold and corporate, continue to show more appetite for bank credit.

2. Trigger 2 Mismatch in growth between deposit and advances: The difference between advances and deposit growth is 5% for BoB (dep growth 10% and advances growth 15%) and 10% for CB (dep growth 8% and advances growth 18%). In both the banks the CASA share has come down YoY, bulk deposits accounted for more than 50% of the total growth in deposits with sluggish growth reported under retail term deposits.

3. Trigger 3 SLR is liquid but carry MTM loss: Though the share of SLR to NDTL has gone up YoY and are much higher than regulatory prescription of 18% (BoB is holding app 30% and CB is holding more than 25% SLR as compared to NDTL), they are unable to sell the excess holdings and book fresh loans, since the yields have hardened resulting in depreciation in the value of investments. The results under treasury also indicate that the MTM valuations in the present scenario prevent the banks to divest their excess holdings in SLR towards fresh loans:                                 

(Rs.in Cr.)

Title

BoB

CB

Profit on sale of investments

174

(1221)

467

(1133)

Depreciation

413

(54)

-

Provision on Non performing investment

-

526

(220)

 (Figures in brackets refer to corresponding previous year results)

Conclusion:

A.   While improving market share in total/retail term deposits might be the pre-dominant factor, (i) sluggish growth in retail deposits, (ii) fall in CASA share and (iii) the not so conducive environment to shed excess SLR investments so as to book fresh advances also had their impact behind the decision of steep hike in interest rate on fixed deposits of BoB and CB.

B. Kotak Mahindra Bank, IndusInd Bank and Yes Bank set the trend of higher interest rates (6-7%) for savings deposits a few years back. Kotak Mahindra certainly benefitted from the experiment as the share of savings to total deposits witnessed a significant improvement. Now two of the large PSBs set in motion higher interest rate on fixed deposits (more than even the post office fixed deposits). The questions are (a) whether this move will enable them to post growth in deposits equivalent to growth in advances? and (b) are we likely to see a similar hike in deposits from other PSBs/private banks in the immediate future or after MPC meet in December?   Let us wait and see.

Regards

V. Viswanathan

10th November 2022.

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