India Banks – The Deposit Decathlon: Taking the fight to PSU banks’ home turf

30 Oct 2023 , 10:45 AM

With credit-deposit ratio at an all-time high, the long-term growth and profitability trajectory for the Indian banks will be underpinned by their success in deposit mobilisation. In this report, analysts of IIFL Capital Services deep-dive into banks’ pin code level, district-level strategy and vintage analysis of branches. HDFC ranks #1 on their liability franchise scorecard, followed by SBI and ICICI. Analysts of IIFL Capital Services also have a contrarian view on the credit growth exuberance and stress in MSME loans. Their re-pricing analysis shows NIM divergence ahead. They expect only marginal decline in cyclical high ROAs (expansion for Axis, IIB and RBL), with Private banks having cost levers to sustain it. Initiate with BUY on Axis, HDFC, IIB and Federal; ADD on ICICI, RBL and SBI; REDUCE on Kotak and BOB. 

HDFC Bank to ace the ‘Race for Deposits’ 

With credit-deposit ratio at an all-time high, the long-term growth and profitability trajectory for banks will be underpinned by their success in deposit mobilisation. Analysts of IIFL Capital Services have done a deposit deep-dive to analyse factors weighing on deposit growth, and identify potential winners based on the individual banks’ pin code level, district-level strategy and vintage analysis of branches. Analysts of IIFL Capital Services liability franchise scorecard ranks covered banks on 15 comprehensive metrics. They believe the weakness in the household deposits (60% share), and the rural-semi-urban slowdown has weighed on deposit growth. Incremental HH financial savings (5% of GDP) has fallen to 50 years low, but it is mainly the shift in HH asset allocation from bank deposits to physical assets (homes, vehicles) that has dragged system deposit growth. With the share of physical savings in the overall household savings back to its previous FY12 peak, and the rise in interest rates making financial asset ownership more attractive vs. physical assets, analysts of IIFL Capital Services expect household deposit growth to improve going forward. 

Analysts of IIFL Capital Services expect HDFC Bank to ace the ‘Race for Deposits’, followed by SBI, ICICI and Axis. HDFC has gained 15 pp incremental deposit market share in the last five years, and analysts of IIFL Capital Services build 21% 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 its existing branches (one of the highest) are <10 years old. Kotak is a laggard among the larger peers 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 their 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.