Deposit dynamics - banks' dependence on bulk deposits on the rise
Augmenting deposits was a key challenge for Indian banks whereby Indian retail customers have systematically been exposed to capital market investments (including mutual funds) which led to a decline in householders' deposit share to ~60% of total deposits in FY24 from ~64% in FY21. This resulted in the rising dependence of banks on wholesale deposits. Bulk deposits of most large banks grew by ~2-13% qoq while retail deposits grew by ~2-5% qoq in 4QFY24. The recent increase in limits for bulk deposits by the Reserve Bank of India (RBI) will provide further comfort to banks while negotiating rates.
Deposit growth to accelerate credit growth in coming quarters
Though deposit augmentation has been a challenging affair, we expect the momentum to improve in the coming quarters. Considering the spread between repo rate and the one-year term deposit rate, we feel the deposit rate cycle has not yet peaked and there is room for a rate hike of ~30-50bp incrementally. Bank managements are already adopting various means including driving staff KRAs and incentivizing employees towards higher deposit augmentation. Also, the recent branch expansion of most banks in semi-urban/rural areas will drive the CASA deposits momentum. Thus, we expect the deposit growth to beat credit growth in FY25F.
Credit growth slows but retail will outpace corporate loan growth
We expect credit growth to witness a slowdown in FY25F, with the credit growth remaining in the range of 12-14% led by retail/SME/rural loan growth, which will continue to outpace wholesale loan growth. We expect the banks to selectively participate in corporate lending, given the high competition and lower margins. We believe the sporadic trend in retail asset growth may continue, with specific segments including affordable housing, gold loans, personal unsecured loans, and SME/MSME lending to do well compared to premium mortgages, automobile loans, etc. With retail loan growth accelerating, we also expect the share of retail loans to total credit to improve to ~34% by FY25F against ~32% currently.
Margin pressure for banks is inevitable
With the rise in repo rate, bank lending rates have started moving up, leading to a surge in margins. However, with benchmark lending rates (repo) saturating, a further rise in lending rates also gets capped. On the contrary, the cost of funds will continue to move up due to the repricing of deposits, which happens with a lag effect and so the surge in cost of funds for banks may continue for at least a couple of quarters. Going ahead, we expect the banks to see a surge in deposit costs by ~30-50bp with stagnant yields (being benchmarked to external rates). This will lead to banks' NIM compressing by ~25-50bp in FY25F.
Consolidation to continue; HDFC Bank & SBI are our preferred picks
We have been highlighting the risk of a decline in bank margins amid repricing of deposits at higher rates as well as limited scope for a further rise in yields. We also expect a limited improvement in credit costs from here on, as the best of the asset quality cycle is already behind. This will ensure a gradual decline in RoA of banks and would be weighing over valuations. We should see a consolidation phase for stock prices in the banking sector till the margins improve. HDFC Bank (ADD, TP Rs2,000) trades at an attractive risk-reward ratio amid the growth granularity & pricing power. We also like SBI (ADD, TP Rs1,000) because the diversity in its growth and improving retail franchise will command a valuation premium. |
