Deposits outpace loans in relief for private banks

HDFC Bank, India’s largest private sector lender by value, reported a 7% on-year growth in advances in the three months ended September, according to its provisional business update for the second quarter. Deposits grew 15.1% during the period, outpacing the average industry growth of around 11.5%. Over the previous quarter, the bank’s loans were up 1.3%, while deposits rose 5.1%.

“Deposit growth is the metric that matters the most for HDFC Bank and it looks healthy," analysts at Sanford C. Bernstein (India) said in a note on 4 October. “Going by the other banks’ headline metrics that have come in, there is a clear improvement in the liquidity environment."

High credit growth in a resilient economy drove banks' loan-to-deposit ratio to a two-decade high of around 80% as of April 2024, prompting both the Reserve Bank governor and the finance minister to warn against increased reliance on high-cost and bulk deposits and potential liquidity risks.

While banks chased deposits, the banking regulator also clamped down on some categories of unsecured loans, the fastest growing segment of the credit market, to temper some of this loan growth.

Also read | Bears flock to HDFC Bank counter as loan, deposit growth slows

According to Sanford C. Bernstein analysts, while loan growth has been weaker in the second quarter, margin impact is expected to be minimal due to higher expected average loan growth for the whole of FY25, improving loan mix between corporate and retail credit, and increased securitization of loans. “Overall, we see this as a good set of numbers and if the margin is stable despite the slower loan growth, it would provide greater confidence on a quicker normalization story."

Other banks that have released updates for Q2 include Punjab National Bank, Bank of Baroda, YES Bank, Karur Vysya Bank, South Indian Bank and CSB Bank.

Loans for these banks grew 11-14% on year and 3-7% on quarter. CSB Bank was an outlier, with its loans rising 19.6% on year and 8.2% on quarter, owing to the much smaller base compared with peers. Deposits for these banks grew 8-18% on year and 2-5% on quarter. Here too, CSB Bank outperformed with a growth of 25% on year and 6% sequentially, respectively.

The faster pace of mopping up deposits was likely led by a slew of measures taken by banks over the past months. Even so, much of the growth seems to have stemmed from an increase in term deposits as the pace low-cost current account and saving account (CASA) deposits remained muted for most lenders, barring Yes Bank.

Also read | Private banks post strong credit, deposit growth in Q4

“HDFC Bank’s deposit growth was driven by strong growth in term deposits, up 6.7% over the previous quarter," Macquarie Research said in a 4 October note. “If one assumes a ₹1.2 trillion deposit accretion in Q3 followed by ₹1.6 trillion in Q4, the numbers imply a 17% YoY deposit growth, which would be a good outcome compared to our system deposit growth expectation of around 11%."

The research firm added that the moderation in the pace of advances was likely driven by a decline in corporate loans (down 3% over the prior quarter), in line with the bank’s guidance to sell down some corporate loans as part of the consolidation strategy.

Growth was driven by strong CRB (commercial and rural banking) book (up 5% QoQ), Macquarie said, while retail loan growth was relatively moderate at 3% QoQ. “Some retail loans also could have been sold down this quarter," he said, adding that margins are expected to improve in the coming quarters as incremental deposits replace the high-cost borrowings of erstwhile HDFC Ltd.

HDFC Bank completed merger with its parent Housing Development Finance Corporation Ltd. in July last year.

However, public-sector banks were more of a mixed bag, with both major lenders that have declared provisional figures so far--Punjab National Bank and Bank of Baroda--posting slightly higher loan growth. Sequentially, deposit growth for PNB was higher than loan growth.

Bajaj Finance, the country's largest retail-focussed NBFC, too, reported healthy deposit growth of 21% on year for Q2. However, like PSU banks, this was slower than 29% growth in the NBFC's AUM, despite the much smaller deposit base and higher deposit rates offered by NBFCs.

Earlier this week, Crisil Ratings said that credit growth for banks is expected to remain healthy at around 14% for FY25, albeit slower than 16% in FY24, owing to some moderation led by the revision in risk weights for some categories of unsecured loans--currently one of the highest growing segments for banks. Banks’ ability to mobilize cost-effective deposits continues to be a key factor in sustaining this growth, it had said.

After reporting robust growth in FY24, credit offtake is anticipated to moderate in FY25, led by temperance in unsecured retail and slower growth in advances to NBFCs, CareEdge Ratings said in a note on 4 October. "With enhanced focus on shoring up the deposit base and managing the credit-to-deposit ratio (which hovers around 80% currently) and the proposed LCR norms, bank credit offtake could face challenges and growth is likely to moderate from our earlier expectations."

As of 20 September, banks' loan growth was at 13.0% on year compared with 11.5% growth in deposits, according to the latest RBI data.

(With inputs from Shayan Ghosh)

And read | HDFC Bank’s CASA ratio falls; credit, deposit growth robust