NICE Investors Service has identified six savings banks, including SBI Savings Bank, as lenders whose interest income would shrink most if the base rate rises. Savings banks with heavy exposure to high-rate products such as unsecured personal loans have little room to pass higher funding costs on to borrowers, leaving their profitability more exposed, the credit rating agency said.
A 1 percentage point increase in the base rate would cut savings banks' interest income as a share of total assets by an average of 0.48 percentage points, according to a recent NICE report cited by financial industry sources on the 29th. The agency reviewed 26 savings banks with active credit ratings, examining the most recent rate-hike cycle, and found declines ranging from 0.01 to 1.11 percentage points by company.
SBI, OK, Welcome, Daol, Yegaram and JT Chinae savings banks were classified as highly sensitive on interest income, meaning their earnings would fall more sharply as rates climb.
Savings banks see funding costs rise quickly when rates go up because they must raise deposit rates, yet they cannot fully reflect those costs in lending rates. The squeeze is tightest on products that already carry high rates, such as unsecured personal loans, where the legal interest rate ceiling and the rate criteria for government-backed medium-interest-rate consumer loans leave little room for further increases. Unsecured personal loans accounted for an average 43.4% of the six banks' lending at the end of March, far above the 23.6% average for the 26 banks reviewed.
SBI's unsecured credit lending stood at 6.87 trillion won ($4.9 billion) at the end of June, or 63.24% of its total loan book, little changed from 63.16% a year earlier. Household loans also edged up to 60.23% from 59.71% over the same period.
Some asset quality and profitability measures deteriorated from a year earlier. SBI's delinquency rate rose 0.46 percentage points to 4.52% at the end of June from 4.06% a year earlier. Its ratio of substandard-or-below loans climbed to 6.36% from 5.90%, while return on assets fell to 0.70% from 0.86%.
NICE said rising rates could hurt earnings not only through weaker interest income but also through higher credit costs as borrowers face heavier interest burdens. Because profitability and asset quality were key drivers of rating changes this year, the agency said it plans to monitor credit quality at savings banks with large holdings of high-rate products.
"In a rising rate environment, the sector as a whole inevitably contracts," an official in the financial industry said. "With savings banks also finding it hard to expand aggressively, there are concerns about weaker profitability."
