While the financial health of India's banks might be strong, there are challenges each one faces to build deposit growth and try and lend aggressively to improve net margins
Each bank has adopted different approaches to gain customer share and deposit share, in their ‘race for deposits’.
India’s largest private sector lender HDFC Bank’s stock lost 11.2 percent in the past two trading days at the stock markets, dragging with it the Nifty Bank index by five percent and the overall stock markets by 2.58 percent. A range of factors, including flat margins at 3.4 percent for the bank, a significant drawing down of the LCR [liquidity coverage ratio] and loans outpacing deposit growth, resulting in a high credit to deposit (CD) ratio, have hurt the near-term earnings outlook for HDFC Bank, pushing the stock down 13.2 percent in 2024.
The Bank’s CASA (Current and Savings Account) ratio has also come under pressure post the mega-merger with HDFC, down to 37.9 percent in the December-ended quarter from 44 percent for the corresponding quarter a year earlier. This was the impact of term deposits added to the base.
None of this data was unexpected or unknown. The pressure driving the stock down appears to be driven by the tone of the management. It reflects that these issues will take some time to correct.
With at least 12 banks, most commercial and some small finance banks, set to announce their quarterly earnings over the next week, are some of them likely to face similar concerns that HDFC Bank did? HDFC Bank is dealing with issues involving the merger, but some issues such as the difficulties surrounding building deposit growth are being faced by most of the banking ecosystem.
HDFC Bank’s loan book grew 3.8 percent quarter-on-quarter to around Rs 25,271 billion for Q3FY24, while deposits rose by 1.9 percent to Rs 22,140 billion, for the corresponding period. As a result, the CD (credit to deposit) ratio for the merged entity increased to 110 percent in 3QFY24. The RBI has not mandated a specific CD ratio level but would be happier with something around the 80 level.