Note on Marginal Cost of Funds based Lending Rate (MCLR)

Transcription

1 te on Marginal Cost of Funds based Lending Rate (MCLR) Tempered Approach December 2015

2 Marginal Cost of Fund based Lending Rate (MCLR) Tempered Approach The RBI s final guidelines on transitioning to a marginal cost of funds based computation of lending rates reflects a more accommodative stance, as anticipated, vis-à-vis the draft guidelines issued in September. While the RBI s primary objective of hastening monetary policy transmission stands intact, limiting the applicability of the MCLR formula to new loans issued beyond April 1, 2016, eradicates the fear of NIM erosion in the near term. However, post transition, the move to MCLR is likely to lead to a marked slowdown in transmission of deposit rates, usher in volatile card rates on deposits and create pro-cyclicality in earnings in an already stressed asset quality, low credit growth environment. netheless, we foresee limited impact on overall bank profitability as against the earlier draft guideline (refer our note on the draft guidelines dated Sep 7, 2015). While calculating negative carry on CRR is likely to result in an addition of ~25bps to the MCLR against no negative carry on CRR+SLR in the prior formula, banks now do not have subjectivity in calculating hurdle rates on RoE; the new formula prefers an objective cost of equity approach carrying a low 8% weight. Also, by including the tenor premium in the MCLR instead of in the spread charged to the borrower, the RBI has largely negated spread subjectivity. Our sensitivity analysis suggests that banks with a significant borrowing profile are better positioned as the borrowing cost is computed on an average basis. To illustrate, a bank with a 20% borrowing profile is likely to see ~40% pass through of falling deposit rates into MCLR while a largely deposit funded franchise is likely to witness ~70% pass through. Given that most banks operate on a fairly stable operating cost structure and stable tenor premiums, eventually, the MCLR computation will morph into a direct one on one correlation with the marginal cost of funds, impeding deposit rate transmission. We compute a 29bps delta between existing base rates and MCLR computed according to the new guidelines for our coverage universe. The delta post transition is likely to be limited for KMB, HDFCB, SBIN and ICICIBC while SIB, DCBB, PNB and JKBK could witness the largest differentials. netheless, we see limited NIM impact for our coverage universe led by a) the existing loan book seeing no impact b) the ability to mark a higher risk premium in the spread component under MCLR vis-a-vis the current base rate methodology. We make no changes to our stock calls and model portfolio post our analysis. Bank Existing Base Rate % MCLR (1Yr) % Delta (bps) SIB 10.00% 9.24% 76bps DCBB 10.70% 10.07% 63bps PNB 9.60% 9.01% 59bps JKBK 9.50% 8.95% 55bps YES 10.50% 9.96% 54bps CUBK 10.50% 10.00% 50bps IIB 10.60% 10.12% 48bps CBK 9.65% 9.20% 45bps KVB 10.40% 9.99% 41bps AXSB 9.50% 9.12% 38bps BOI 9.70% 9.33% 37bps FB 9.63% 9.38% 25bps BOB 9.65% 9.42% 23bps ICICIBC 9.35% 9.14% 21bps SBIN 9.30% 9.12% 18bps HDFCB 9.35% 9.17% 18bps KMB 9.75% 9.78% -3bps Coverage Universe 9.53% 9.23% 29bps Date 21 Dec, 2015 Market Data SENSEX BANKEX NIFTY % 10% 0% -10% -20% Dec-14 Mar-15 Jun-15 Sep-15 Dec-1 Bankex Sensex Stock Performance (%) 1m 3m 12m Bankex -1% -5% -10% Sensex 0% -3% -6% ABHINESH VIJAYRAJ abhinesh@sparkcapital.in NAVIN BABU E S navin@sparkcapital.in NISHANT RUNGTA nishant@sparkcapital.in Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 2

3 Key differences Key Differences Component Draft Guidelines Final Guidelines Marginal Cost of Funds Simple weighted average of cost of liabilities (card rates) and proportion of liabilities. More detailed, with cost of long term borrowings being computed on an average basis; core portion of the CA & SA deposits to be used for CASA; swap cost and hedge cost included in foreign currency borrowings. Cost of Equity calculated using CAPM to be included. Negative Carry Computed on both CRR and SLR. Computed only on CRR. Operating / Overhead costs Should comprise solely of costs incurred for the bank as a whole, not allocable to any particular business activity or unit. Fixed for 3 years. All operating costs associated with providing the loan product including cost of raising funds will be included under this head. Service charges to be netted off. Return on Equity Separate component; hurdle rate of return on equity to be board / management determined. CoE computed using CAPM, included in Marginal Cost of Funds with weights limited to 8%. Tenor Premium Included in the spread component. Included as a separate component in the MCLR, limiting subjectivity in spreads. Date of implementation April 1, April 1, Exemptions exemptions specified. Exemptions on loans such as FITL, WCTL under restructuring, GOI linked refinance schemes. Existing Loans transition specified. To continue on current terms until repayment or renewal. Review periodicity Quarterly. Monthly (to be reviewed & published on a pre-announced date). Different rates for different maturities Spreads Reset Source: Spark Capital Research. To be uniform for a certain risk level. t specified. Yes. To be based on a board approved policy and the broad components being business strategy & credit risk premium (based on appropriate risk rating model). Spread for a borrower cannot be changed without a full risk profile review. Reset dates linked either to date of sanction or to the date of review of MCLR. Rate on date of sanction to be applicable until reset. Page 3

4 Impact of MCLR not as pronounced under Final guidelines SBI s Marginal Cost of Fund based Lending Rate (MCLR) under the new methodology works out to 9.12%, which is 18bps lower than the current base rate. Source of funds (excluding equity) Deposit Rates on the date of review (%) Balance O/s as % of total funds Marginal Cost CA % 0.00 SA % 1.16 TD - Upto 1 month % to 6 months % months to 1 year % More than 1 year % 1.85 Borrowings RBI % 0.00 Other banks % 0.15 Bonds and debentures % 1.01 Marginal Cost of Borrowings 5.78 Rs.Bn SBIN Current Base Rate 9.30% Marginal Cost of Borrowing [A] 5.78% Cost of Equity (CAPM) [B] 14.25% Marginal CoF [C] = 92% * [A] + 8% * [B] 6.46% Negative carry on CRR [D] = 4% * [C] / (1-4%) 0.27% Operating costs [E] 1.89% Tenor Premium (1Yr) [F] 0.50% Marginal Cost of Funds based Lending Rate [G] = [C] + [D] + [E] + [F] 9.12% Delta (bps) -18 Computation of existing base rate = Bench mark Cost (usually linked to the 6 month deposit rate, ranges between 6% to 8.25%) + Negative Carry on CRR and SLR (linked to the 365 day treasury bill currently at 7.46%) + Unallocable costs (usually varies between 0-1%) + Average RoE (last financial year). For SBI => 7.25% + 0.3% + 1% % = 9.7%. Computation of base rate (according to draft guidelines) = Marginal cost of funds (applicable card rates on the date of review, ranges between 5.8% to 7.1% ) + Negative Carry on CRR and SLR (linked to the 365 day treasury bill currently at 7.46%) + Unallocable costs (usually varies between 0-1%) + Hurdle RoE (to be decided by the Board/management of the bank). For SBI=> 5.92%+ 0% +1% % = 8.65%. Computation of Marginal Cost of Fund based Lending Rate (MCLR) = Marginal cost of funds (calculated as weighted average of marginal cost of borrowings and cost of equity) + Negative carry on CRR (linked to marginal CoF) + Operating costs (cost of providing loans including cost of raising funds) + Tenor Premium (asset class agnostic and linked to bank s ALM). For SBI => 6.46% % % % = 9.12%. Source: Spark Capital Research, * Tenor premium assumed at 50bps for 1-year residual tenor Page 4

5 Components of MCLR - Sensitivity Analysis Sensitivity Analysis Impact on base rates for SBI MCLR (bps) Borrowings (as % of liabilities) Cost of Deposits (%) % 8.53% 8.63% 8.72% 8.82% 8.92% 9.02% 9.11% 9.21% 9.31% 9.40% 9.50% 8% 8.55% 8.65% 8.75% 8.84% 8.94% 9.04% 9.14% 9.23% 9.33% 9.43% 9.53% 9% 8.58% 8.67% 8.77% 8.87% 8.97% 9.06% 9.16% 9.26% 9.35% 9.45% 9.55% 10% 8.60% 8.70% 8.80% 8.89% 8.99% 9.09% 9.18% 9.28% 9.38% 9.48% 9.57% 11% 8.63% 8.73% 8.83% 8.92% 9.02% 9.12% 9.21% 9.31% 9.41% 9.51% 9.60% 12% 8.65% 8.75% 8.84% 8.94% 9.04% 9.14% 9.23% 9.33% 9.43% 9.52% 9.62% 13% 8.67% 8.77% 8.87% 8.96% 9.06% 9.16% 9.26% 9.35% 9.45% 9.55% 9.64% 14% 8.70% 8.79% 8.89% 8.99% 9.09% 9.18% 9.28% 9.38% 9.47% 9.57% 9.67% 15% 8.72% 8.82% 8.92% 9.01% 9.11% 9.21% 9.30% 9.40% 9.50% 9.60% 9.69% 16% 8.75% 8.84% 8.94% 9.04% 9.13% 9.23% 9.33% 9.43% 9.52% 9.62% 9.72% Marginal CoF Negative carry on CRR Operating costs Tenor Premium Marginal CoF based Lending Rate (MCLR) Changes in deposit rates result in immediate impact on marginal of borrowings, which has a 92% in calculation of Marginal cost of funds. The other 8% weightage is towards the cost of equity, which was computed as the hurdle rate under the earlier base rate guidelines. Indian banks currently run a negative carry on CRR/SLR of ~20-60bps, adding to the overall base rate. Under the new methodology there is no negative carry on SLR since the marginal cost of funds ranges between 5.6% to 7.0%. The marginal CoF results in ~25bps of negative carry for most banks. Operating costs are costs associated with providing the loans and includes the cost of raising the funds, effectively meaning entire operating expenses of the bank, and could range between 1.1% to 2.9%. Any service charges recovered would not be part of this component. RBI has introduced a tenor premium to the mix, to adjust for the costs arising out of asset liability mismatches, and this would not be specific to borrower or asset class. Tenor premium could be ~0.5% for 1-year tenor, and much higher for longer residual tenors. Page 5

6 MCLR Computation ICICIBC, HDFCB, SBIN relatively insulated Marginal Cost of Borrowings [A] Cost of Equity (CAPM) [B] Marginal CoF [C] = 92% * [A] + 8% * [B] Negative Carry on CRR [D] = 4% * [C] / (1-4%) Operating Costs Tenor Premium MCLR (as per Final Guidelines) 1D 1M 3M 6M 1YR 1D 1M 3M 6M 1YR [E] [F] [G] = [C] + [D] + [E] + [F] [H] Difference Existing in Base rate Rates( ) [I] = [H] - [G] Impact on current base rates AXSB 5.7% 13.9% 6.4% 0.27% 2.0% 0.3% 0.4% 0.4% 0.5% 0.5% 8.9% 9.0% 9.1% 9.1% 9.1% 9.50% 0.38% BOB 7.0% 13.7% 7.5% 0.31% 1.1% 0.3% 0.4% 0.4% 0.5% 0.5% 9.2% 9.3% 9.4% 9.4% 9.4% 9.65% 0.23% BOI 6.5% 15.5% 7.2% 0.30% 1.3% 0.3% 0.4% 0.4% 0.5% 0.5% 9.1% 9.2% 9.3% 9.3% 9.3% 9.70% 0.37% CBK 6.4% 15.1% 7.1% 0.30% 1.3% 0.3% 0.4% 0.4% 0.5% 0.5% 9.0% 9.1% 9.1% 9.2% 9.2% 9.65% 0.45% CUBK 6.7% 13.5% 7.3% 0.30% 1.9% 0.3% 0.4% 0.4% 0.5% 0.5% 9.8% 9.9% 9.9% 10.0% 10.0% 10.50% 0.50% DCBB 6.4% 11.9% 6.8% 0.28% 2.5% 0.3% 0.4% 0.4% 0.5% 0.5% 9.9% 9.9% 10.0% 10.0% 10.1% 10.70% 0.63% AXSB BOB BOI CBK CUBK DCBB 0.38% 0.23% 0.37% 0.45% 0.50% 0.63% FB 6.0% 13.3% 6.6% 0.28% 2.0% 0.3% 0.4% 0.4% 0.5% 0.5% 9.2% 9.2% 9.3% 9.3% 9.4% 9.63% 0.25% FB 0.25% HDFCB 5.5% 11.9% 6.0% 0.25% 2.4% 0.3% 0.4% 0.4% 0.5% 0.5% 8.9% 9.0% 9.1% 9.1% 9.2% 9.35% 0.18% HDFCB 0.18% ICICIBC 6.0% 13.8% 6.6% 0.27% 1.8% 0.3% 0.4% 0.4% 0.5% 0.5% 8.9% 9.0% 9.1% 9.1% 9.1% 9.35% 0.21% IIB 6.3% 12.8% 6.8% 0.28% 2.5% 0.3% 0.4% 0.4% 0.5% 0.5% 9.9% 10.0% 10.1% 10.1% 10.1% 10.60% 0.48% JKBK 5.9% 11.5% 6.3% 0.26% 1.9% 0.3% 0.4% 0.4% 0.5% 0.5% 8.7% 8.8% 8.9% 8.9% 9.0% 9.50% 0.55% KMB 5.6% 12.5% 6.2% 0.26% 2.8% 0.3% 0.4% 0.4% 0.5% 0.5% 9.6% 9.6% 9.7% 9.7% 9.8% 9.75% -0.03% KVB 6.7% 12.1% 7.1% 0.30% 2.1% 0.3% 0.4% 0.4% 0.5% 0.5% 9.8% 9.9% 9.9% 10.0% 10.0% 10.40% 0.41% PNB 5.8% 14.2% 6.5% 0.27% 1.7% 0.3% 0.4% 0.4% 0.5% 0.5% 8.8% 8.9% 9.0% 9.0% 9.0% 9.60% 0.59% SBIN 5.8% 14.2% 6.5% 0.27% 1.9% 0.3% 0.4% 0.4% 0.5% 0.5% 8.9% 9.0% 9.1% 9.1% 9.1% 9.30% 0.18% SIB 6.3% 12.1% 6.8% 0.28% 1.7% 0.3% 0.4% 0.4% 0.5% 0.5% 9.0% 9.1% 9.2% 9.2% 9.2% 10.00% 0.76% YES 6.8% 14.8% 7.5% 0.31% 1.7% 0.3% 0.4% 0.4% 0.5% 0.5% 9.7% 9.8% 9.9% 9.9% 10.0% 10.50% 0.54% ICICIBC IIB JKBK KMB KVB PNB SBIN SIB YES -0.03% 0.21% 0.48% 0.55% 0.41% 0.59% 0.18% 0.76% 0.54% Source: Spark Capital Research, Banks deposit card rates, Bloomberg Delta in MCLR need not translate the actual lending rate post loan renewal Eg: Current borrower of say IIB: Base rate + tenor premium + risk premium (10.6% + 0.3% + 1.5%= 12.4%). Borrower under MCLR: MCLR + risk premium = 10.1% + 2.3% = 12.4% Page 6

7 Valuation Matrix Banks Bank Net Interest Income, Rs. bn Operating Profits, Rs. bn PAT, Rs. bn Gross NPA FY15-17E CAGR NIM FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E NII PAT ABV FY15 FY16E FY17E AXSB % 1.5% 1.5% 16% 14% 16% 3.6% 3.7% 3.7% BOB % 5.6% 5.3% 10% 24% 1% 2.0% 2.0% 2.1% BOI % 7.8% 8.2% 11% -20% -21% 2.1% 2.1% 2.2% CBK % 4.2% 4.3% 12% 20% 5% 2.0% 2.0% 2.0% CUBK % 2.1% 2.1% 16% 21% 15% 3.3% 3.5% 3.4% DCBB % 1.9% 1.8% 18% -5% 9% 3.8% 3.6% 3.5% FB % 2.8% 2.7% 10% 5% 5% 3.3% 3.1% 3.2% HDFCB % 0.9% 0.9% 23% 25% 17% 4.6% 4.6% 4.6% ICICIBC % 3.8% 3.7% 11% 11% 15% 3.4% 3.5% 3.5% IIB % 0.8% 0.8% 31% 33% 33% 3.8% 4.0% 4.1% JKBK % 6.7% 6.5% 7% 38% 13% 3.7% 3.9% 4.0% KMB % 2.7% 2.4% 38% 31% -11% 4.7% 4.1% 4.2% KVB % 2.0% 1.9% 16% 25% 10% 3.0% 3.4% 3.3% PNB % 6.6% 6.4% 6% 18% 10% 3.1% 2.9% 2.9% SBIN % 4.2% 4.1% 9% 28% 12% 3.1% 3.0% 3.0% SIB % 2.3% 2.2% 12% 27% 8% 2.6% 2.7% 2.8% YES % 0.6% 0.6% 30% 28% 19% 3.1% 3.4% 3.4% 7

8 Valuation Matrix Banks (Cont d) Bank RoE RoA ABV/share Rs. P/ABV (x) CMP Shares M.Cap Target FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY16E FY17E (Rs.) (mn) Rs. bn P/ABV(x) Price (Rs.) Rating AXSB 17.8% 17.5% 17.1% 1.7% 1.7% 1.6% SELL BOB 9.2% 8.5% 11.4% 0.5% 0.5% 0.6% SELL BOI 6.3% -3.8% 3.8% 0.3% -0.2% 0.2% SELL CBK 10.7% 10.1% 12.0% 0.5% 0.5% 0.6% SELL CUBK 16.7% 15.8% 17.5% 1.5% 1.5% 1.7% BUY DCBB 14.5% 10.2% 9.7% 1.3% 0.9% 0.8% SELL FB 13.7% 9.4% 13.2% 1.3% 0.8% 1.1% BUY HDFCB 19.4% 18.1% 20.1% 1.9% 1.8% 2.0% BUY ICICIBC 14.5% 14.5% 14.0% 1.8% 1.8% 1.8% BUY IIB 19.0% 17.3% 16.7% 1.8% 1.9% 2.0% BUY JKBK 8.6% 12.2% 13.4% 0.7% 1.0% 1.1% BUY KMB 14.0% 9.4% 12.7% 1.9% 1.2% 1.5% SELL KVB 12.1% 13.3% 14.5% 0.9% 1.0% 1.1% BUY PNB 8.5% 8.5% 9.8% 0.5% 0.5% 0.6% SELL SBIN 10.6% 11.9% 13.4% 0.7% 0.8% 0.9% BUY SIB 9.2% 10.8% 12.6% 0.5% 0.6% 0.7% BUY YES 21.3% 20.0% 21.8% 1.6% 1.7% 1.7% BUY * ICICIBC, KMB & SBIN - P/ABV adjusted for subsidiaries 8

9 Valuation Matrix NBFCs NBFC Net Interest Income, Rs. bn Operating Profits, Rs. bn PAT, Rs. bn Gross NPA FY15-17E CAGR NIM FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E NII PAT ABV FY15 FY16E FY17E CIFC % 4.6% 5.8% 15% 15% 10% 7.1% 7.4% 7.4% HDFC % 0.7% 0.7% 9% 8% 11% 3.3% 3.1% 3.1% LICHF % 0.6% 0.9% 20% 13% 14% 2.2% 2.4% 2.4% MMFS % 8.9% 10.0% 8% 2% -2% 8.6% 8.0% 8.1% POWF % 1.4% 1.7% 14% 12% 14% 4.8% 5.0% 4.8% RECL % 1.2% 1.6% 14% 17% 17% 5.2% 4.9% 4.8% REPCO % 1.7% 1.6% 26% 24% 18% 4.4% 4.4% 4.3% SCUF % 6.0% 7.3% 14% 6% 6% 13.6% 13.4% 13.0% SHTF % 5.5% 6.6% 12% 6% 7% 7.6% 7.5% 7.4% SUF % 1.6% 2.5% 10% 7% 11% 6.8% 6.6% 6.6% NBFC RoE RoA ABV/share Rs. P/ABV (x) CMP Shares M.Cap Target FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY16E FY17E (Rs.) (mn) Rs. bn P/ABV(x) CIFC 17.5% 16.3% 14.9% 1.9% 2.0% 2.0% BUY HDFC 20.3% 19.6% 19.2% 2.3% 2.2% 2.1% SELL LICHF 18.1% 19.1% 17.9% 1.3% 1.3% 1.3% SELL MMFS 15.5% 12.0% 13.6% 2.1% 1.7% 1.9% SELL POWF 20.0% 19.7% 18.5% 2.8% 2.8% 2.7% BUY RECL 23.1% 23.3% 22.1% 3.1% 3.1% 2.9% BUY REPCO 15.8% 16.8% 18.0% 2.3% 2.1% 2.1% BUY SCUF 15.9% 13.5% 13.1% 3.2% 2.9% 2.7% BUY SHTF 14.1% 13.2% 12.9% 1.8% 1.7% 1.6% SELL SUF 16.9% 15.6% 14.6% 2.4% 2.5% 2.3% BUY Source: Spark Capital Research Prices as of Dec 18, 2015 Price (Rs.) Rating 9

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