RBI's rate cuts to impact margins of top banks in FY16

The Reserve Bank of India has cut benchmark rates by 50 basis points this year, which will have a direct bearing on the profitability of banks in FY16. Typically, net interest margins of banks tend to float downwards during the rate cut cycle. 

Analysts say that in the previous rate cut cycle, NIMs fell by 50 basis points for public sector banks. Given that the liabilities (deposits) come with a fixed tenure, the transmission of lower rates tend to impact the asset (loans) side faster.

Private banks are better at asset-liability management than the public sector banks. Suresh Ganapathy of Macquarie Capital does not expect significant benefits from treasury profits. RBI's Basel-III LCR rules will also keep a check on margins and ability to monetize SLR investments. Given the challenges facing public sector banks, analysts remain positively inclined on top private banks. Macquarie has an "under perform" rating on all public sector banks.

Public sector banks are expected to clock lower loan growth in FY16, which has been talked about ad nauseam, thanks to their capital constrains. As a result, PSU banks may not be best placed to capitalize on any pick-up in loan growth. Other than asset quality and capital constraints, now public sector banks will also see erosion of profitability through lower net interest margins.

According to Spark Capital, PSU banks are likely to see the twin pangs of lower growth, delayed NIM expansion besides continued asset quality pains. In FY16, analysts see PSU banks clocking sub-10% credit growth, which would further cap earnings.

Till last year, there were three trades in banking. The first one was that of improving macro-economic fundamentals and reforms by the new government. This trade has already played out, believe analysts, as bank stocks are up 80% in the last 12 months. 

Improving asset quality and loan growth were the other two plays that analysts were betting on. Loan growth is expected to remain at 10% levels, much of which would be driven by retail and some bit of foreign disinter mediation.

According to Citi, an uptick in loan growth could precede the asset quality improvement, but the stock impact of such an event is less than top-down or asset-quality trades. The next round of stock price movement would largely be linked to balance sheet improvement, which is expected to take longer.