The Reserve Bank of India's Monetary Policy Committee is likely to vote in favour of a 25-basis-point repo rate hike, which would mark the first increase in the policy rate since February 2023. A rate hike could have varying implications across lenders and financial institutions, depending on their exposure to repo-linked loans and the speed at which lending rates reset. According to Morgan Stanley estimates, banks with a higher share of repo-linked loans are likely to benefit the most from a 25-basis-point increase.
Which Banks Stand To Gain?
All banks are expected to benefit from a repo rate hike, assuming the increase flows through only to their repo-linked loan books. Large private banks and public sector banks with greater exposure to such loans are likely to see a relatively stronger impact.
PNB could see the biggest improvement among banks tracked by Morgan Stanley, with an estimated 10-basis-point expansion in net interest margin and a 9% increase in profit before tax. Axis Bank and Kotak Mahindra Bank are expected to see the highest NIM benefit among private lenders at 11 basis points each. Morgan Stanley estimates a 5% increase in PBT for Axis Bank and 4% for Kotak Mahindra Bank.
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HDFC Bank and ICICI Bank could see NIM improvement of 9 basis points each, with estimated PBT gains of 4% and 3%, respectively. Federal Bank is expected to see a 9-basis-point NIM benefit and a 5% rise in PBT.
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Among PSU banks, Bank of India and Canara Bank could see NIM expansion of 7 basis points each, with PBT rising 8% and 6%, respectively. Bank of Baroda could see a 6-basis-point NIM benefit and a 5% increase in PBT, while SBI could see a 5-basis-point improvement and a 4% PBT increase.
Housing Finance Companies To Lead NBFC Gains
The impact is different for NBFCs, where housing finance companies are expected to benefit the most because loan rates can reset relatively faster.
LIC Housing Finance is estimated to see a 7.2% increase in PBT from a 25-basis-point rate hike, according to Morgan Stanley. REC and PFC could see PBT gains of 4.6% and 3.8%, respectively, while PNB Housing Finance could see a 3% increase. Can Fin Homes is estimated to see a 2.1% rise in PBT, followed by AB Capital at 1.5% and Home First Finance at 0.9%.
However, the impact is less favourable for several other NBFCs. Bajaj Finance is estimated to see no material PBT impact, while Aavas Financiers, Aptus Value Housing Finance and Shriram Finance could see PBT declines of 0.1%, 0.5% and 0.6%, respectively.
Muthoot Finance, Chola Finance, HDB Financial and L&T Finance could see PBT declines of 1.2%, 1.5%, 1.9% and 2.1%, respectively. Manappuram Finance, SBI Cards and M&M Finance could see PBT decline by 2.6%, 2.8% and 2.8%.
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The estimates assume immediate pass-through of the rate hike to both bank borrowings and floating-rate assets such as home loans.
What Happened In The Last Rate Hike Cycle?
The previous rate-hike cycle provides some clues about which banks could benefit from a rising-rate environment. Between fourth quarter of fiscal 2022 and first quarter of fiscal 2024, the repo rate was increased by a cumulative 250 basis points over six quarters.
RBL Bank recorded the largest NIM expansion during that period at 119 basis points, followed by Kotak Mahindra Bank at 95 basis points and ICICI Bank at 82 basis points. Bank of India saw its NIM expand by 76 basis points, while Axis Bank recorded a 57-basis-point improvement. IDFC First Bank saw a 43-basis-point increase, followed by Canara Bank at 22 basis points and IndusInd Bank at 19 basis points.
SBI's NIM increased by 18 basis points during the period, while PNB and Bank of Baroda saw improvements of 15 basis points and 14 basis points, respectively.
YES Bank's NIM rose by 10 basis points, while HDFC Bank saw no change. Federal Bank recorded a 7-basis-point decline and AU Small Finance Bank saw its NIM fall by 60 basis points.
The previous cycle highlights the importance of a bank's loan mix, funding costs and the speed at which lending rates adjust when assessing the impact of a change in the repo rate.
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