COMMENT. HDFC Bank rate cut: why PSBs will find it tough to follow suit

It was not concerns on lower GDP growth that unnerved banking stocks on Tuesday. Rather, it was the steep 35-basis point cut in HDFC Bank’s base rate — to which all lending rates are pegged — that spooked banking stocks. The CNX PSU Bank index took a sharper knock and fell 4.4 per cent.

With this rate cut, HDFC Bank has the lowest base rate in the industry at 9.35 per cent, far below the 9.7 per cent that leading lenders, such as SBI and ICICI Bank offer.

This means that the loans offered by HDFC Bank will become a lot cheaper than those of other banks.

But this obvious outcome is not what flustered the market. The fact that other banks, particularly PSBs, don’t have enough elbow room to engage in a price war has been a bigger factor contributing to Tuesday’s fall.

Many banks, like HDFC Bank, have also lowered their deposit rates by similar or higher quantum across tenures, which has reduced their cost of funds.

In the one- to three-year bucket for instance, while HDFC Bank has lowered its deposit rates by 50-75 basis points since January, SBI and PNB have slashed theirs by as much as 1-1.25 percentage points.

Given that each of these banks’ cost of funds has come down substantially from the beginning of this year, passing on RBI’s 75-basis point cut in policy rate should not be an issue. But despite cost savings, many PSBs are unlikely to cut their lending rates as aggressively as HDFC Bank.

The main reason for this stems from the poor performance of most public sector banks. Even in the latest June quarter, earnings of PSBs shrunk by over 30 per cent.

Performance of leading players, such as PNB, BOB and SBI, that are better placed to challenge private banks, has faltered too.

PNB, for instance, saw its core net interest income fall 6 per cent during the June quarter, due to muted loan growth and fall in net interest margin (NIM). The bank’s domestic loan book grew about 6 per cent over last year while NIM fell by 50 basis points. BOB, too, saw its net interest income grow by a modest 3.9 per cent during the June quarter. SBI’s core performance has been no different from its peers. The bank’s net interest income grew a meagre 3.6 per cent in the quarter, owing to a sharp slowdown in its loan growth to 6 per cent.

Contrast this with the performance of leading private banks. Both Axis Bank and HDFC Bank were able to grow their loan books by 22-23 per cent in the latest June quarter. ICICI Bank too, delivered a healthy 17 per cent loan growth. These banks have also been able to maintain steady margins.

HDFC Bank’s strong performance has helped it lower its lending rates substantially without fearing loss of margins. While ICICI Bank and Axis Bank are better placed to cut their base rates further and compete with HDFC Bank, other PSBs are likely to wait it out.

Until such time, the yawning gap in lending rates is worrisome. Currently, the difference in HDFC Bank’s base rate and the next lowest rate is 35 basis points. But for some PSBs and smaller private banks that have their base rate pegged at 10 per cent, the gap is too wide to bridge. This could eat into their market share and impact earnings further.

The difference in lending rates of HDFC Bank, SBI and ICICI Bank is also unusually high with the latest cut. But a similar trend was seen in 2012, when ICICI Bank and HDFC Bank were the first to lower their base rates as the rate-hike cycle came to an end. SBI followed with a three to four months lag.

But till such time, its base rate was 20-25 basis points higher than its private sector peers. Given its weak operational performance, how long it will be before SBI lowers its base rate this time needs to be seen.