SBI's Fixed Deposit Rate Hike Expected To Sustain Profitability Despite Credit Slowdown: Analysts

The State Bank of India (SBI) has recently announced an upward revision in its interest-rate buckets, signalling an increase of 25-75 basis points (bps) in select categories. The adjustment primarily targets deposits with a maturity of less than 12 months.

This strategic move comes amidst concerns around the sluggish growth of deposits compared to loans, prompting lenders to take proactive measures to manage their liabilities effectively, said analysts at Kotak Institutional Equities in a recent note.

This hike in interest rates on fixed deposits marks the first increase by the bank since December 2023.

According to the analysis of term deposit data, a significant portion of deposits falls within the 1-3-year maturity window, with less than 20 percent allocated to deposits of less than one year.

Notably, the majority of deposits impacted by rate adjustments are driven by non-individual accounts. Non-individual deposits comprise funds from corporate entities, partnerships, trusts, and other organisations.

Conversely, individual deposits refer to funds deposited by retail clients for personal use or savings.

"Gross advance growth of 5% qoq and 15% yoy was higher than guidance of 12-14% growth in FY24. Growth was led by strong growth of 11% qoq in corporate advances, while retail, agribusiness, and SME advances increased by 4-5% qoq. RAM mix declined to 55.5% (-50 bps qoq). Retail growth of 4% qoq and 15% yoy was mainly led by 5% qoq growth in home loans," according to Systematix Equities report.

Kotak analysts pointed out that various factors, including sensitivity to policy rates, competitive pressures, and ongoing market dynamics, influence the decision-making process behind these deposit rate changes.

"We conservatively estimate credit costs normalising to an average of 47bps over FY25/26E vs. 27bps in FY24, resulting in an earnings CAGR of 13%. As such, over FY25/26E, we estimate the bank to deliver an average RoA of 1.1% (up 10 basis points vs. the earlier estimate) and a RoE of 18%," Systematix added.

Public banks, in particular, are keen to safeguard their market share, leading to increased competition in deposit mobilization. "HDFC Bank is likely to remain a key player in the deposit market for the foreseeable future as the bank works through the replacement of borrowings into deposits," noted the analysts.

Despite these adjustments, the industry's outlook remains uncertain. While deposit mobilisation efforts continue, there is no consensus on the near-term outlook for net interest margins (NIMs).

Public and private banks are in line with the growth trends of the industry, indicating that the level of competition should stay reasonable for the foreseeable future.

Typically, when the repo rate goes up, the loan book gets re-priced immediately.

However, on the deposit side, they are at a fixed rate of interest, or whatever the contracted rate of interest is. There is always a lag in banks passing on the interest rate to depositors.

SBI's decision to adjust its deposit rates highlights the continued difficulties lenders encounter when attempting to make sense of the constantly changing interest-rate environment. According to Kotak analysts, long-term success will depend on maintaining a balanced approach to managing assets and liabilities.

Although SBI raised deposit rates to counter worries about slow deposit growth, Kotak analysts say the move will have little effect on profitability. As the banking sector navigates a number of obstacles, such as shifting market dynamics and competitive pressures, maintaining banks' long-term profitability will need a balanced approach to asset and liability management.

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