Deposits make banks sweat as loans come easy in Q1

Small and mid-sized banks are finding themselves on shaky ground while garnering low-cost retail deposits. Early updates on the business metrics of the first quarter of FY23 by select banks indicate that deposit growth could be a challenge going forward.

Three of nine banks that filed their balance sheet growth numbers for the June quarter over the past week reported a sequential reduction in deposits, which weighed on year-on-year deposit growth as well.

Bank of Maharashtra, Yes Bank and South Indian Bank reported a sequential contraction of 1-3 percent in their deposits. RBL Bank and CSB Bank reported negligible deposit growth for the first quarter. Among mid-sized lenders, Federal Bank reported a mere 1 percent sequential growth in deposits and an 8 percent year-on-year expansion.

In the past two months, most banks have increased their deposit rates in response to the Reserve Bank of India’s policy rate hikes. The deposit rate hikes by small banks have been of a bigger margin than those of big lenders. Small banks also aggressively increased deposit rates to attract more customers.

CASA anxiety

The strong point of a bank is access to low-cost current and savings account (CASA) deposits. This is where banks have an edge over non-bank lenders, and big banks over small banks. The latter was visible in the quarterly business numbers.

Small lenders were unable to scale up their CASA deposits during the first quarter and for some, such deposits declined. Bank of Maharashtra and Yes Bank reported a sequential decline in their CASA deposits.

HDFC Bank, the most valuable lender, reported a sequential decline of 2.2 percent in its CASA deposits. RBL Bank, South Indian Bank and Federal Bank reported a 1-2 percent increase in such deposits.

The pressure on CASA deposits could be a sign of Indians drawing down on their savings to spend. Note that in the fourth quarter of FY22, the Omicron variant of Covid-19 had crimped consumption somewhat. Further, growth in CASA deposits plateaued after surging during the pandemic due to forced savings.

Analysts said deposit growth may lag loan growth this year. Year-on-year growth in CASA deposits had been encouraging for most banks, in double digits. Big lenders such as HDFC Bank had an advantage here owing to a strong credibility and a vast network.

That said, banks will need to sweat it out on deposits this year through faster interest rate hikes. The pressure on net interest margins through the rise in cost of funds is expected to show up for most banks.

Loan bonanza

Credit growth showed marked improvement across banks for the first quarter of FY23. The sector-wide loan growth recovered to about 11 percent from single digits last year.

HDFC Bank continued to report faster-than-industry loan growth while mid-sized Federal Bank too showed a neat 16 percent growth for Q1 of FY23. IDFC First Bank, Yes Bank, IndusInd Bank and South Indian Bank all reported 14-21 percent loan growth.

Much of this is expected to have been driven by retail lending, but corporate loan growth also picked up. For HDFC Bank, retail loans continued to outpace corporate lending growth.

To be sure, the impressive loan offtake is partly due to a low base last year as the second wave of the pandemic was a drag on credit disbursals in Q1 of FY22.

“The current uptick in credit growth has been led by higher utilisation of working capital limits (partly inflation-led). As impact of repo rate hikes and potentially lower commodity prices percolates through the economy, we expect some sequential moderation unless corporate credit demand improves in a meaningful manner,” analysts at JM Financial wrote in a note.

Loan growth and lower delinquencies are expected to buttress banks’ earnings for the first quarter of the current year as well as for FY23. All banks need to ensure now is that their liabilities hold up well.

For large lenders, this is relatively easy, but for small banks it may come down to choosing between margin compression and business growth.