Indian banks pass Jefferies’ Silicon Valley Bank test, brokerage finds them ‘well placed’

Indian banks pass Jefferies’ Silicon Valley Bank test, brokerage finds them ‘well placed’
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  • Thanks to high quality, sticky deposits and lesser reliance on bonds, Indian banks have passed global brokerage JefferiesSilicon Valley Bank (SVB) test.
  • Overall, the brokerage says the impact of a fall in bond prices will impact only 6% of the capital of private banks, and 15% for public sector banks.
  • Government bonds account for 80% of the total investments in securities, and most banks hold 72% to 78% of these till maturity, meaning a fall in prices won’t impact these investments.
Indian banks in both the public and private sectors have passed global brokerage Jefferies’ SVB test – an assessment of the quality of deposits as well as the impact of mark-to-market losses on the bonds held by banks till maturity. The brokerage says Indian banks are well placed due to high quality deposits and lesser reliance on investment in securities.

The US-based Silicon Valley Bank’s (SVB) collapse last week has brought the strength of banks’ balance sheets into sharp focus. SVB’s downfall was triggered by the lender’s heavy reliance on 10-year mortgage-backed securities that dropped in value due to a rapid rise in interest rates in the US.

Jefferies’ evaluation of the Indian banks has found that, on the whole, a fall in bond prices would have little impact on the banks’ capital. “On a four-to-five-year duration, impact will be just 6% of the capital for private banks and 15% for public sector banks,” the brokerage said in its report.

Central banks around the world have been raising interest rates to tame inflation over the past year. In India, the Reserve Bank of India has increased repo rates by 250 basis points since May 2022.

The value of bonds and interest rates have an inverse relationship – this means that if interest rates rise, bond prices fall and vice versa.


‘Indian banks well placed’

According to Jefferies, the eight large Indian banks under its coverage have strong asset-liability management (ALM) positions. The brokerage notes that most banks under its coverage have investments in securities in the range of 22% to 28% of their total assets.

Moreover, government securities (G-Secs) account for 80% of the total investments in securities. Banks are allowed to account these government bonds at cost if they fall under the held-to-maturity (HTM) category. This means that fluctuations in bond prices will not affect banks’ investments.

According to Jefferies’ calculations, these HTM investments of banks under its coverage stood at ₹20.11 lakh crore at the end of December 2022. Of this, the three largest banks – namely State Bank of India, HDFC Bank and ICICI Bank – account for ₹14.4 lakh crore or nearly 72% of the total.

In terms of investments in government bonds under the HTM category, Punjab National Bank emerged on top with 91% of its G-Sec investments marked under HTM and Kotak Mahindra Bank was last at just 45%. The remaining banks held between 72-78% of their government bond investments under HTM.

“Indian banks are well placed,” the Jefferies report concluded.

Most deposits from household savings

A bulk of the banks’ deposits also come from household savings which tend to be stickier, Jefferies said. Corporate deposits accounted for only 22% of the banks’ total deposits, while household deposits’ share stood at 63%. Corporate deposits tend to be less sticky and more risk-sensitive when compared to household deposits.

This is unlike the case with SVB, which catered primarily to startups – nearly half of the startups in the US backed by venture capitalists banked with SVB.

Ahead of the SVB collapse, analysts were largely optimistic about the Indian banking sector. Earlier this month, a Bernstein report underlined that despite reporting decade-best metrics, the valuations of Indian banks were subdued.


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