This is why there is still potential for a surge in banking stocks

In the fiscal year 2023, the banking sector experienced strong credit growth, with a YoY increase of approximately 17%. However, the growth rate of deposits was slower, at around 11% YoY. In order to maintain an adequate Credit Deposit Ratio (CDR) and a regulatory Liquidity Coverage Ratio (LCR) of 100% of High-Quality Liquid Assets (HQLA), banks need to focus on increasing deposit mobilization. Currently, there is intense competition among banks to expand their deposit base.

Some banks are offering higher deposit rates, particularly Small Finance Banks (SFBs), while larger banks tend to offer lower rates. As a result, the gap in Weighted Average Term Deposit Rates (WATDR) between different banks has widened. However, it is expected that the gap in deposit rates between SFBs and other banks will narrow down over time. SFBs are currently operating at the peak of their Cost of Deposits (COD), while larger banks may experience a further increase in their COD.

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In the case of HDFC Bank, it offers the lowest interest rates on deposits among all private banks. However, the deposit rates of HDFC Ltd, the parent company, are slightly higher. Following the merger, it is expected that the gap between the deposit rates for new customers will decrease, and there may be some adjustments in deposit rates for the merged entity.

With the stabilization of deposit rates, it is anticipated that Net Interest Margins (NIMs) for the banking system will become more sustainable. Stable NIMs, coupled with lower credit costs, are likely to help maintain healthy return ratios for banks. Considering that valuations are currently below their peak levels, there is still potential for a surge in the stock prices of banks. Therefore, there is a bullish view on banks in the market.

The author, Ajit Kabi is Banking analyst at LKP Securities

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