Banking & Finance: Who shall win the ‘Race for Deposits’?

8 Jan 2024 , 11:20 AM

This is Part 2 (focused on deposits) of a 4 part-series (Part 1), where analysts of IIFL Capital Services discuss the outlook for banks’ key earning drivers. They expect HDFC Bank to ace the ‘Race for Deposits’, followed by ICICI, SBI and Axis. HDFC has gained 15 pp incremental deposit market share (MS) in the last five years. Analysts of IIFL Capital Services build 20% deposit Cagr driven by: (1) 2-5x branch addition vs peers in districts witnessing strong deposit growth. (2) 3-10x branch addition vs peers in ‘high potential districts’. (3) Limited competition in SURU, as 45-50% of the pin codes where HDFC has opened branches, have no presence of ICICI/Axis. (4) Faster deposit compounding, as 60% of the existing branches (one of the highest) are < 10 years old. Among the larger peers, Kotak is a laggard with a very concentrated branch strategy (no branches in 88% of pin codes where SBI has a presence) and high share of matured branches. Further, HDFC ranks #1 on analysts of IIFL Capital Services liability franchise scorecard, led by deposit/ branch MS gains, leadership in capturing customers’ transaction flows, government’s Agency business, and the best productivity despite high branch expansion. Axis and IIB should be able to progress well on their liability turnaround and execution. HDFC, Axis and IIB are analysts of IIFL Capital Services top picks in the sector.

Identifying winners in the ‘Race for Deposits’: 

With system liquidity tightening and HDFC Bank’s deposit aggression being led by distribution expansion, other Private banks have also embarked on branch expansion. Historically, there is a high correlation between deposit MS gains and branches. Analysts’ of IIFL Capital Services analysis is based on Pin code (19k+) and district-level insights, rather than stopping at the state level, as banks’ own strategies are now micro-market focused.

(1) Presence in districts witnessing stronger deposit growth: 

Analysts of IIFL Capital Services analyse the data of banks’ branches and deposits in 550+ districts in India (out of total 766 districts). Fast-growing districts (FGD) have seen average deposit growth of 13% Cagr in the last five years — almost double the growth-rate of ‘medium growth districts’ and significantly higher than 2% Cagr for ‘slow growth districts’. HDFC has opened 1,100+ new branches in fast growing districts in the last four years — 2-5x of the branches opened by larger peers. In terms of total branches, SBI, BOB and HDFC have a dominant MS of 3-10% in these districts; but Kotak and IIB have <1% branch MS. 

(2) Presence in districts with high deposit-accretion potential: 

While having a higher branch presence in the ‘fast growing districts’ aid banks’ deposit growth today, it is also necessary to build presence in the ‘districts having high deposit-accretion potential, so as to sustain deposit growth momentum in future. HDFC’s branch opening strategy is more geared towards the ‘potential’ districts i.e. with high nominal GDP, but low deposit penetration. Overall, SBI, BOB, HDFC, ICICI and Axis have higher share of their branches in these districts, with high deposit accretion potential.

(3) Pin code level branch strategy: 

HDFC should benefit from early mover advantage, as 45-50% of the new branches are in the pin codes where ICICI/Axis are not present. The competition in these areas is mainly from PSU banks, where making in-roads into loan and deposit products should be relatively easier due to HDFC’s wider product suite and a strong brand name. 

(4) Branch vintage and productivity analysis:

As the vintage of ‘developing branches’ (analysts of IIFL Capital Services define as 10 years old), the deposit/branch should increase faster. While the matured branches can deliver deposit growth in line with nominal GDP growth, developing branches should deliver higher deposit growth. RBL, IIB, Axis and HDFC have higher share of ‘developing’ branches at 60-80%. And, with 45-80% of these developing branches in the metro/urban areas, deposit compounding should be relatively higher vis-a-vis the peers as they mature. On the other hand, 50-80% of Kotak, BOB, SBI and Federal’s branches are ‘matured’.