Lower savings rate to boost SBI's margins, whet investor interest
Reduced rates would apply to about 90% of its savings account deposits.
The SBI stock trades at price to forward book value multiple of 1.20 times even after a 36% rally in the last one year: Hence, investor interest may remain high due to benefits this rate cut brings to SBI's profitability and net interest margin (NIM).
In what may set a trend for industry-wide deposit rates, India's largest state-run lender on Monday reduced savings account deposit rates by 50 basis points to 3.5 per cent for accounts with balance of less than Rs 1 crore.
According to SBI, the reduced rates would apply to about 90 per cent of its Rs 9.4 lakh crore of savings account deposits. This means that the bank is looking at pre-tax profitability savings of close to Rs 4,000 crore from the move in FY18 and this could give a fillip to its earnings per share (EPS) of up to 27 per cent, contingent upon outgoing tax.
Although the SBI management had been hinting at a likely move on deposit rates for six months now because of the swelling base in the af termath of the demonetisation, the move is a boon for the bank's NIM when the transition of its loan book toward MCLR (marginal cost of funds based lending rate) impacts the incremental interest income.
According to estimates, as of March, about 40 per cent of the lender's loan book was linked to MCLR. SBI reduced its MCLR by 90 bps in January this year. Its NIM has trended down for the last one year and is moving in a range of 2.78 per cent-2.84 per cent.
SBI says the deposit-rate cut would help maintain the MCLR at the current level and does not expect an outflow of savings bank deposits.The decision may support the downward move in the overall cost of funds that has reduced to 5.88 per cent in March 2017 from 6.31 per cent in March 2016. As per CLSA calculations, SBI could see a 16 bps decline in its FY19 cost of funds from a 50 bps cut in its savings deposit rates.