Big or small, CASA eludes all banks in Q3 but deposits hold up

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Ten banks have released early business updates for the October-December quarter, showing a decline in low-cost current and savings account deposits. Despite this, lenders have managed to shore up overall deposit growth as the sharp hikes in deposit rates seem to have paid off.

India’s most valuable private sector bank HDFC Bank reported a stellar 20 percent deposit growth, which was faster than its loan book expansion. A strong retail franchise along with hikes in deposit rates helped it bring in funds. But the bank disappointed with the share of its CASA in overall deposits. The lender’s CASA ratio has consistently declined for four quarters to 44 percent as of December.

“The trend in Retail/Term deposits remains strong, even as the bank witnessed a sequential decline in its CASA ratio to 44 percent,” pointed out analysts at Motilal Oswal Financial Services.

A part of this decline could be a shift from CASA deposits to term deposits after the bank began hiking interest rates on them. The bank has hiked its deposit rates thrice during the last quarter. Most lenders have followed through with deposit rate hikes of varying degrees during the period.

Deposits hold up

In fact, this shift could be one key reason why the share of CASA has fallen for almost all banks for the December quarter, but overall deposits have held up.

Mid-sized lenders such as IndusInd Bank, Federal Bank and even Yes Bank posted double-digit deposit growth, exceeding the industry’s sub-10 percent expansion. But the trend in smaller banks has been divergent, perhaps signifying the efforts each one took to garner deposits. Sequentially too, deposit growth has surprised on the upside for many lenders.

Microlender AU Small Finance Bank, gold loan-focused CSB Bank and Karnataka Bank all reported a deposit growth of 10 percent and above. South Indian Bank floundered, reporting a mere 3 percent deposit growth for the quarter.

But a weak trend on CASA has big implications on margins for banks as it leads to an increase in the cost of funds.

Margins in focus

So far, banks have reaped the benefits of low deposit rates and surplus liquidity and have earned fat net interest margins. The leads and lags of transmission on policy rates onto lending and deposit rates would ensure that margins remain steady for at least one more quarter, according to analysts.

“Deposit rates get revised the last during a rising interest rate cycle, but the revision once done is sweeping on the entire stock. So the margin compression will be sharp but it won’t be soon,” said a banking analyst.

Most lenders have hiked their deposit rates to attract funds in the past three months but loan rates have risen far earlier in response to the policy rate hikes by the Reserve Bank of India.

Data from the central bank shows that the pass-through of the 225 basis points worth of policy rate hikes since May 2022 has been far more in lending rates than deposit rates.

One basis point is one-hundredth of a percentage point.

In the past year, the weighted average lending rate on new loans has gone up by 100 bps, while the weighted average term deposit rate increased by only 55 bps.

Q3 performance

This could change in the coming quarters now. For October-December though, banks are expected to report steady margins and some lenders may report expansion.

“Given the current policy rate hike forecast, we think the positive thrust of the repo rate hikes on bank NIM could start to witness headwinds in the start of FY24,” analysts at Nomura wrote in a note.

The clear upside for investors of banks is the advances book. The 14 percent rise of the Nifty Bank index in the past year that far outstrips the 1.7 percent gain in the broader Nifty is essentially based on the surge in credit.

Barring HDFC Bank’s modest 19.5 percent loan growth, most lenders have reported an increase in credit growth for the third quarter.

Nomura analysts expect loan growth to sustain with instances of borrowers shifting from market borrowings to bank borrowings. That said, the loan growth hinges on how fast private capex bounces back, bringing with it opportunities to lend for banks.