Savings Rate Cut To Lift SBI’s Earnings. Will Other Banks Follow Suit?

State Bank of India's decision to slash the saving account rate for most customers may lead to an increase of nearly 20 percent in its profit before tax, according to brokerage estimates.

India's largest lender will introduce a two-tier savings bank rate from July 31, 2017 in which accounts with less than Rs 1 crore will earn an interest rate of 3.5 percent compared to 4 percent earlier. Interest rate on savings bank accounts with more than Rs 1 crore will remain unchanged at 4 percent.

The savings rate reduction will lead to profit before tax savings of Rs 4,500 crore for SBI at the consolidated level, according to a report by Motilal Oswal Securities analyst Alpesh Mehta. The brokerage has thus revised its estimated profit before tax for the financial year 2017-18 higher by 20 percent. The upward revision is based on the assumption that 95 percent of the savings accounts will have a balance of less than Rs 1 crore.

A 50-basis-point savings on savings bank deposits could have a 10-basis-point increase on return on assets (RoA) of the bank, analyst Pankaj Agarwal of Ambit Capital estimates. However, if the MCLR framework is to be followed, the bank will have to pass on the benefit immediately, he adds. The two-tier savings rate cut will then allow allow for more competitive loan pricing and help India's largest bank increase its market share.

About 36 percent of SBI's deposits are savings bank deposits, according to a CLSA report. It is followed by ICICI Bank Ltd., Punjab National Bank and HDFC Bank Ltd. at 35 percent, 34 percent and 30 percent, respectively, CLSA says.

Aashish Agarwal of CLSA estimates that a 50-basis-point decline in cost of savings deposits will reduce funding costs by 10-15 basis points and will give the lender scope to reduce aggression in unsecured retail lending and improve competitiveness in corporate lending.

The brokerage estimates a 20 percent rise in SBI's profit before tax for the financial year 2018-19.

Also Read: SBI Slashes Savings Bank Interest Rate For Most Customers

Will Other Lenders Follow?

Will SBI's decision prompt other banks, especially the likes of Yes Bank and Kotak Mahindra Bank which currently offer savings account deposits rates of as much as 6 percent, to undertake a similar cut?

Motilal Oswal Securities' Alpesh Mehta estimates a profit before tax increase for HDFC Bank for FY18, if the private lender were to follow SBI's lead. The impact on ICICI Bank is seen at Rs 1,000 crore which is equivalent to 8.2 percent of the profit before tax.

According to CLSA, a cut in the savings deposit rate could lift earnings by 11 percent on an average for the banking industry. The benefit would be higher for government-owned banks at 24 percent.

SBI shares jumped as much as 3.78 percent after the announcement, taking the Bank Nifty to record highs.