Banks knee jerk reaction to SB rate deregulation

In a couple of days, analysts will come out with their detailed analysis of today's RBI announcement, and then, the reaction will be that SB rate deregulation is not as bad a factor as it is made out to be.

- Firstly, out of the CASA ratio, on average, Current Accounts account for over 40% of the CASA ratio. This means that only 60% of the CASA ratio is impacted by today's announcement.

- Secondly, even out of the SB accounts, this announcement impacts only SB accounts having over Rs 1 Lakh balance. This accounts for less than 1% of the SB balance.

- Especially as Interest rates have kept rising, and as FDs have become more and more attractive, banks have seen CASA ratios drop by about 1-2% - with pretty much most of the drop in the larger SB accounts. Because of this, they are at significantly lower risk from today's announcement than they were earlier - but even earlier, these large SB accounts accounted for relatively small portion of their overall CASA.

Because of this, today's announcement impacts less than 1% of CASA balances, and therefore less than 0.5% of their total balances.

Even a 1% increase in costs for SB accounts over Rs 1 Lakh will increase overall funding costs to banks by less than half of one basis point! So the impact will be so small, that NIM will drop from 3% to 2.995%!

Quite obviously, such a small drop in NIMs will not justify such a big fall in banking stocks.

So when this news is digested, people will realize that this is a major over-reaction from the market.

Needless to say, I think this is an excellent buying opportunity for all banks, but especially those that have fallen massively - like HDFC Bank and SBI.

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