Falling growth in loans is making banks to look at the possibility of lowering the interest rates on savings bank…
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Falling growth in loans is making banks to look at the possibility of lowering the interest rates on savings bank accounts so as to improve their pre-provision operating profits, investment banking firm Jefferies said.
In an industry note on Indian banking sector about the concerns of investors after the US roadshows, Jefferies said: "Falling loan growth doesn't augur well with NIMs (net interest margin)."
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According to the report, with falling loan:deposit ratios, weak loan growth and compressing spreads, banks are looking at the possibility of lowering the savings interest rates.
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"Most banks currently offer four per cent, while some of the private sector banks offer a much higher rate," Jefferies said.
According to the report, a 50 basis point cut in savings rate would result in around 8 per cent improvement in the sector's core pre-provision operating profits.
Most investors saw valuations and weak earnings growth for the sector as an immediate headwind. But there was comfort with the longer-term investment thesis driven by government initiatives, the report said.
"Power sector overhang needs a faster asset quality resolution. Investors were concerned about the lack of asset quality resolution which could stall the medium term loan growth for the banks," it added.
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