Mumbai: Two of India’s largest banks—HDFC Bank and Bank of Baroda—reported sequential decline in loans and deposits in the June quarter of FY25, in what could be the beginning of a potential slowing down of the remarkable pace of business growth seen last fiscal. Banks define business as the aggregate of loans and deposits.

The quarter-on-quarter (q-o-q) decline at these two banks occurred even as their smaller peers like Federal Bank and IndusInd Bank posted q-o-q growth in both loans and deposits, albeit lower than their year-on-year (y-o-y) growth numbers. These were part of provisional numbers released on the stock exchanges.

Down q-o-q, but up y-o-y

HDFC Bank’s total deposits was practically stagnant at 23.8 trillion in April-June on a q-o-q basis. This was led by a 5% sequential decline in current and savings account (Casa) deposits to 8.6 trillion. On the other hand, gross loans and advances at the end of the quarter shrunk 0.8% to 24.9 trillion as on 30 June. 

However, on a y-o-y basis, both loans and deposits of HDFC Bank were higher compared to last year by 52.6% and 24.4%, respectively. Erstwhile mortgage lender HDFC Ltd had merged with its subsidiary, HDFC Bank, on 1 July and so the June quarter of FY24 did not have the merged entity’s business numbers.

Seemingly disappointed with the provisional numbers, investors dumped HDFC Bank shares last Friday, which closed 4.55% down from its previous close. What probably added to the rout was a Bloomberg report on Friday that said the bank was planning to sell some loans amid heightened regulatory scrutiny on the nation’s lenders as their credit growth surges, citing people familiar with the matter.

Meanwhile, at Bank of Baroda (BoB), domestic deposits were down 2% q-o-q to 11 trillion as on 30 June, and domestic loans were down 1.8% to 8.8 trillion. However, just like HDFC Bank, y-o-y growth was up for BoB—deposits and loans were up 5.3% and 8.5%, respectively, in the June quarter. 

Debadatta Chand, BoB’s chief executive, had earlier given a 2024-25 guidance of 10-12% growth in deposits with a focus on Casa and retail term deposits. On loans, the state-owned bank has set a target of 12-14% growth, Chand had told analysts on 10 May. 

Analysts at Sanford C. Bernstein (India) said that although deposit growth at HDFC Bank was higher than the system deposit growth rate, it was lower than the growth rate required  of around 18-20% y-o-y for an “accelerated normalization of the bank’s liability profile”. 

Following the merger with HDFC, the bank was saddled with high-cost debt, which it planned to replace by aggressively adding deposits. A tempering of deposit growth would impede that plan. 

“A slower loan growth was in line with expectations and would have helped the margins, if only the deposit growth was higher,” they said in a note to clients on 4 July. 

The Casa Decline

According to Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital, HDFC Bank’s Casa decline was on account of seasonality and higher short-term flows coming towards the end of Q4 FY24. 

“The bank reported 4.6% q-o-q average deposit growth (average over the three months), which although appears decent, the average number is not available for all peers and thus not comparable. Further, historical average deposit balances for HDFC Bank are not available, making it difficult to compare average deposit growth,” said Ganapathy in a note on 4 July. 

Other experts point to changes in how people save as a reason why banks are finding it hard to woo depositors. 

SBI Capital Markets (SBI Caps) wrote in a report last week that structural changes in savings patterns are impacting the quality and quantity of deposits available to sustain credit growth. The report said that not only the quantity, but also the quality of deposits is declining. 

“Over 70% of incremental deposits (Mar 2024 vs Mar 2023) were term deposits, leading to a steady decline in Casa. The share of fickle bulk deposits—59% of deposits—is surging,” it said, adding that it expects deposits to grow 10-12% y-o-y in FY25, lagging credit growth, owing to structural trends coupled with a big base of FY24, which was helped by return of 2,000 denomination notes. 

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