SBI hikes PLR & Base rate by 25bps each – Positive for the sector

SBI hikes PLR & Base rate by 25bps each – Positive for the sector

Hike in rates on expected lines – most banks likely to follow: The hike in lending rates is along expected lines as Base rate is reviewed at least once every quarter. Since funding costs have gone up we expect banks to revise their Base rates by 25bps. Most banks likely to follow as credit demand remains strong.

Move by SBI – positive for the sector: Move by the market leader SBI is very positive for the sector as the difference between SBI & nationalized banks PLR & Base Rate was at least 75bps & 125bps respectively (pre rate hike), which was a disadvantage for all other banks. Now SBI's PLR is at 13.25% while other PSU banks are at 13.75% (except for PNB, whose PLR is at 13.0%, while its base rate is in line with other PSU banks at 9.5%).

Deposit rates unlikely to move higher: Deposit rates seem to have peaked out, as some of the banks (BOI, CBOI) have already started cutting deposit rates from the peak rates offered by them. Meanwhile, some headroom in increasing lending rates remains, which will be in line with RBI's hawkish stance.

Outlook remains positive: Banks earnings outlook remain healthy, 50bps hike in lending rates could be absorbed without much strain on asset quality. Hence, we remain positive on the banking sector.

Our top picks are HDFC Bank, ICICI Bank and IndusInd Bank from the private space and Bank of Baroda and Union Bank from among PSU banks.