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Macroeconomic headwinds await as markets enter a new year, but stable margins could aid banks with earnings upgrades, according to Spark Capital Advisors’ Ganeshram Jayaraman.
Banks are witnessing a “very unique margin environment” as compared to previous interest rate cycles, and can see some earnings upgrades, Jayaraman, the managing director and head of institutional equities at the investment firm, told BQ Prime.
Earlier, a rise in interest rates used to impact the margins immediately. But currently, Jayaraman is seeing a different asset liability structure for banks this cycle because 40% of the banking sector’s loans are linked to external benchmarks. So, the repricing is almost immediate as the repo rate goes up, which was not the case earlier, he said.
Another 40% of the loans are marginal cost of funds-based landing rate or MCLR loans, which will rise as deposit rates rise, he said.
According to him, between the September, December and March quarters, the entire repo rate-linked loans will reprice a little ahead of liabilities.
Over the next six quarters, 80% of banking sector loans may get repriced, Jayaraman said. Only about 20-25% of the liabilities will get repriced during this period as CASA does not get repriced. Current Account Savings Accounts are a type of non-term deposit account.
Incremental deposits will reprice. Hence, the margins will not be at risk and should be quite stable, he said.
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