Interest rates may rise more: UBS

The boards of three PSU banks -- Bank of Baroda, Oriental Bank of Commerce and Andhra Bank -- met in deference to the finance ministry's insistence, but quite unexpectedly they did not roll back the rate hikes announced last week.

Mahrukh Adajania of UBS securities says that banks will raise rates further with rising borrowing costs. She adds that the interest rates are likely to go up further.

She further adds that banks that have postponed rate hikes will be impacted.

Excerpts from CNBC-TV18's exclusive interview with Mahrukh Adajania:

What did you read into what came through at the bank board meetings yesterday and are your fears on government interference allied with what came through?

I think that investors have been worried that the banks may have to roll back their PLR hikes as it was announced last week, but with the boards of two banks ratifying the hikes, this concern has been addressed. Bank of Baroda is a large state bank and Bank of Baroda's board approval for the rate hike is a good benchmark for all the other large state banks that are likely to see board approvals over the next few weeks, namely SBI and PNB.

PNB's board meeting is on August 12 and SBI's is on August 24. Oriental Bank of Commerce did rollback the hike in rates on home loans below Rs 20 lakh (Rs 2 million) and they also postponed the decision to hike PLR by a month.

Given that investors have been concerned about the lack of earnings clarity in state banks over the last one year, we believe that only banks that have been hiking the lending rates to protect margins and earnings would be rewarded.

As such, we believe that the stocks of Bank of Baroda, SBI, PNB and even Bank on India would outperform, whereas banks that have postponed rate hikes such as OBC would underperform. But with the large banks such as Bank of Baroda, increasing rates, government

interference concerns have been put to rest.

The question that arises is that yes a lot of banks have announced their increase in PLR so the government possibly gave them the green signal. But going ahead, given the interest scenario, would there be this kind of a consent granted to them, how would banks perform in the medium-term?

Everyone expects rates to continue to rise at least in the short-term and therefore, this would not be the last hike by banks and banks would require to hike rates even in future if the borrowing cost continues to rise. When we speak to management of banks, especially those that have ratified their hikes yesterday, we get a sense that they are not concerned about the future consents.

They are quite confident that even in future, if borrowing costs rise and they need to raise their lending rates, they would be able to do so, going by what happened in the board meetings yesterday. So the management seems pretty confident, which is a good signal.

So you have no reason to believe that the net interest margins could be under threat, going forward?

I guess that the banks would have the flexibility of hiking rates, of course they will have to go through their boards, they will have to get a backing from everyone on the board, including the government nominees. But I guess the big concern, that the pricing power has completely gone away from the state banking sector has been put to rest.

UBS disclaimer:

"Neither I, nor my dependent family members, nor my employers -- UBS Securities India Private Limited -- have any interest or position in the securities just commented upon. Due to strict Chinese Wall procedures within the group, I am not aware of positions, if any, held by other UBS group concerns."

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