CASA is king - CLSA

With average expected call rates for next twelve months trading at 9.7%,
market seems to be factoring in a repo-rate increase of ~75bps; even if
the hike is not to that extent, a higher interest rate regime is here to stay.
Liquidity will remain tight, rates may harden +50bps. Difference between
wholesale and retail deposits has widened to +150bps. With pressure on
spreads, CASA will be king; banks with high CASA likely to outperform.
Call money market reflecting expectation of ~75bps hike in repo
􀂉 The average expected call money rate for next twelve months (IRSWO1 Curncy) is
trading at 9.7%; this effectively means market participants are willing to pay 9.7%
fixed against receiving call money rate over the next 12 months
􀂉 Call money rates tend to reflect repo rates (if call rates are higher than repo rates,
banks would borrow from RBI under repo window); hence such a differential in the
forward market suggests that market is expecting repo rates to go up by ~75bps
􀂉 While the rates may not go up to that extent, we believe a high interest rate regime
is here to stay in the near future; RBI is likely to keep liquidity tight and rates may
further harden by 25-50bps
􀂉 The differential between wholesale and retail fixed deposit rates expands in tight
liquidity conditions; in the last couple of months this differential has expanded to
+150bps with wholesale rates running at +11% for one year plus deposits
100bps improvement in CASA expands margin by up to 10bps
􀂉 Banks don’t pay any interest on Current account balances while interest on Savings
accounts are capped at 3.5%; the differential between the fixed deposit rates and
savings account rates has expanded from a low of ~200bps in 2004 to 600bps now
􀂉 Accordingly any bank with a high CASA enjoys better spreads which further
expands in a rising interest rate scenario (lending rates move up while cost of CASA
is stable); in the current environment a 100bps expansion in CASA will lead to a
margin expansion of up to 10bps (see figure 16)
􀂉 We believe banks with high CASA, like HDFC bank, Axis, PNB, SBI are likely to
outperform banks which rely on wholesale deposits;
􀂉 While ICICI bank has a deposit franchise similar to its peers (CASA / branch), the
bank has been a big borrower in the wholesale market, due to its aggressive
growth trajectory, as a result of which it has a lower proportion of CASA deposits;
􀂉 A slow down in credit growth will reduce its demand for wholesale funds and this
coupled with an aggressive expansion in distribution network is likely to expand
ICICI bank’s CASA ratio, driving a margin expansion of 40bps over FY08-10
􀂉 State-owned banks, on the other hand, would keep losing CASA deposits to private
banks, as the latter expand their distribution network in tier II and tier III cities
􀂉 Banks like HDFC Bank , Axis Bank and ICICI Bank which are likely to fund a higher
% of incremental growth through CASA would see margin expansion, whereas
banks like BOI, BOB and Canara Bank where a higher % of incremental growth is
coming from non CASA deposits will report higher margin pressures