Banking & Finance: Pull and push of structural vs. cyclical drivers of deposits

18 Apr 2024 , 10:32 AM

India’s deposit growth is not only improving, but is also higher than other countries. However, rising LDR (8ppt increase in last 3yrs) vs. stable levels for other countries is a concern. Increase in the government balance with the RBI and a surge in outward remittances has increased the banking system leakage to 6.5% of NDTL. Structural factors such as dwindling household savings and a shift in allocations to other instruments (creates friction and returns as bulk deposits) should cap the deposit growth. However, certain cyclical factors are turning in favour of deposits ala improving system liquidity, reducing spread between the banks’ TD rates vs. other savings scheme and a normalisation in physical savings. Analysts of IIFL Securities expect 13-14% system deposit growth in FY25E. HDFC, SBI and ICICI rank high on their ‘liability franchise scorecard’, Axis is improving and Kotak is deteriorating.

Deposit growth decelerating across the countries (save for India), but rising loan-to-deposit ratio mainly a concern for India:

Money supply growth is decelerating across the countries save for India, Brazil and Mexico. While there is razor sharp focus on deposit growth in India, analysts of IIFL Securities highlight that India’s deposit growth of 13% YoY is not only higher vs. its own historical run-rate (10 year Cagr of 10%), but is also improving and higher than other countries. However, India’s banking system loan growth has accelerated to ~17% YoY in the last couple of years (vs. 10 year Cagr of 10%); whereas, it is decelerating for other countries. Please note that while banks’ loan growth has accelerated, total system credit is growing at low-teens in-line with the historical run-rate. Consequently, loan-to-deposit ratio for Indian banks has increased 8ppt in the last three years to an all-time high of 80% (93% for Private banks) vs. stable for other countries.

Rising leakage from the banking system and dwindling household savings weighing on deposits:

Increase in the government balance with the RBI and a surge in the outward remittances under the Liberalised Remittance Scheme (40% ten-year Cagr) has increased the leakage in banking system deposits to ~6.5% of NDTL. In addition to these, there are two structural trends that shall likely continue to cap the deposit growth: (1) Dwindling household savings - households own ~60 of total deposits, and it’s growth deceleration (9% in FY23 vs 23% 10yr Cagr) has been a key drag on overall deposit growth. This slowdown is due to incremental HH financial savings declining to a fivedecade low of 5% of GDP in FY23. (2) Savings allocation moving to other instruments – HH savings allocation to deposits is growing the slowest vis-à-vis other financial instruments. With deposits constituting 45% of Indian HH’s financial assets vs. 15% for the USA, this trend is likely to persist as the financialisation of savings continues. While this isn’t a leakage from the system, it creates friction and more importantly returns to the banks as bulk deposits, which is not a preferred choice for the banks (higher cost and not sticky).

Cyclical factors turning in the favour of deposits:

(1) System liquidity has improved from a deficit to a modest surplus, and may remain benign as government spending resumes post the elections. (2) Post office schemes are mobilising more savings vs. bank deposits. However, this drag should normalise with the spread of banks’ TD rates vs. other savings schemes improving in last one year. (3) The share of physical savings in the overall household savings is back to its previous FY12 peak, and higher rates should make owning financial assets more attractive to the physical assets (negative 80% correlation between physical savings and bank TD rates).

Deposit growth improving:

System deposit growth has picked up to 3.5% QoQ/13.5% YoY (12.9% ex. HDFC merger), thereby narrowing the gap vs loan growth to 340bps from 540bps YoY. Based on prequarterly updates, deposit growth is strong at 3-16% QoQ and 7-42% YoY, driving LDR improvement of 25-600 bps across banks. CASA ratio also improved 40-255bps QoQ on seasonality, but is still down 1-10ppt YoY. While some of the seasonal gains will reverse in Q1, with improving cyclical factors analysts of IIFL Securities expect 13-14% system deposit growth in FY25. HDFC, SBI and ICICI rank high on our ‘liability franchise scorecard’, Axis is improving and Kotak is deteriorating