Private lenders may have to cede profitability to strengthen deposit base

A recent note by JP Morgan stated that for banks, the system constraints shift from non-performing assets to deposits. “Deposit franchise will likely re-rate versus asset franchise,” the report adds.

In fact, December quarter (Q3) results of IndusInd Bank and HDFC Bank highlights the role of deposits in maintaining profitability and keeping cost of funds under check. The noticeable blip for both banks was the movement of the low-cost current account-savings account (CASA) deposits.

For IndusInd, while the CASA ratio was maintained at 43.6 per cent in Q3, deposit growth lagged loan growth, indicating the growth relevance of deposits in its liability franchise. As a result, profitability or net interest margin (NIM) came under pressure — down 20 basis points (bps) year-on-year (YoY) to 3.8 per cent in Q3.

For HDFC Bank, the CASA ratio declined to 40.7 per cent in Q3 (weakest in recent quarters) as against 44 per cent last year. According to the bank, there was movement of deposits from savings accounts to term deposits, though Suresh Ganapathy of Macquarie Capital notes that it led to a 25 bps sequential decline in NIM.

For investors, the key takeaway is that the days of brisk margin expansion for private banks may be well behind them as they once again chase retail customers to shore up deposits. 

Further, analysts at CLSA said the ability of banks to grow their loan assets from now on, will hinge on their ability to add to deposits. “The key risk to loan growth will originate from slower expansion in deposit base, which is seeing a 10 per cent rise YoY versus 15 per cent growth in domestic credit YoY. A structural pick-up in deposit growth will be needed through higher rates, reduction of currency in circulation and expansion of branch network to strengthen deposit base,” they added.

As state-owned banks are yet to register a sharp improvement in loan growth, experts say they may not get aggressive on deposits just yet. Private banks, though, may have to cede profitability to strengthen their deposit base.  

With CASA ratio upwards of 50 per cent, ICICI Bank and Axis Bank are better placed than peers.

However, IndusInd and HDFC Bank (with highest share of deposits in absolute terms) may see headwinds. Smaller private banks such as RBL Bank, Bandhan Bank, Federal Bank and City Union Bank with sub-45 per cent CASA ratio may see steeper NIM correction.