Strong Q4 on the cards, but concerns emerge on fall in CASA deposits and credit offtake slowdown

• Indian banks are on course to repeat their stellar Q3 performance again in Q4, driven by a strong momentum in credit growth as well as a decline in provisions.
  
• While strong performance is all but given, eyes are now on what lies ahead for Indian banks.
  
• From CASA deposits falling to a 7-year low in FY23, to economic slowdown forcing the brakes on credit offtake, here are the key things to watch out for as Indian banks head into the Q4 earnings season.

Indian banks are on course to repeat their stellar Q3 performance again in Q4, driven by a strong momentum in credit growth as well as a decline in provisions. While strong performance is all but given, eyes are now on what lies ahead for Indian banks. Analysts caution that there could be a few uncertainties on the horizon.

One of those concerns is already reflected in the share of CASA (current account and savings account) deposits of banks, which have hit a 7-year low of 11.7% as part of the overall deposits.

According to data from the Reserve Bank of India, since FY14, the share of CASA in overall deposits was the highest in FY22 at 12.7%. It has seen a sharp decline of 106 basis points since then.



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CASA deposits are one of the cheapest sources of funds for banks, and a decline in these deposits means banks have to go for relatively more expensive alternatives.

While interest rate on savings account deposits has remained in the range of 3%, a hike in interest rates by the RBI’s Monetary Policy Committee (MPC) has made fixed deposits a better option – interest rate on fixed deposits has increased by an average of 100 basis points, with State Bank of India offering as much as 7% interest on FDs.

Looking beyond the CASA fall: Margin pressures, risk of slowdown in loan growth

Apart from the slowdown in CASA deposits, a likely increase in margin pressures and risks of a sharp slowdown in loan growth are some of the key factors to watch out for going forward, according to analysts.

“We are probably closer to the peak on net interest margin for banks as the cost of funds is likely to move faster than lending yields,” said a report by Kotak Institutional Equities.

Concerns of a looming economic slowdown could also lead to a slowdown in loan growth, and there are minor signs pointing at a moderation already. According to the latest data from the Reserve Bank of India, credit growth stood at 15.7% year-on-year in March 2023, down from the highs of 18% seen in October last year.

This was primarily led by a slowdown in corporate loans, and “signs of some sluggishness in retail are also on the horizon due to rising interest rates”, said a report by Emkay Global.

Expect healthy performance in a seasonally strong quarter

The March quarter is considered a seasonally strong one for banks, and there is a broad analyst consensus that banks will post strong growth across key metrics like net interest income, net interest margins, credit growth and asset quality improvements.

Analysts expect robust credit offtake, pegging the growth in loan book to be around 17%. Net interest margins are expected to remain steady as lenders continue to transmit repo rate hikes, offsetting the increase in deposit costs.

“Healthy growth, steady margins and normalised credit cost is expected to keep earnings momentum unabated at 33.7% year-on-year ₹42,975 crore,” said a report by ICICI Direct.

Analysts at Emkay Global have pencilled in a minor slow down on a sequential basis, but maintained that by and large, earnings growth is expected to remain healthy.

While the overall scenario for Indian banks in Q4 looks optimistic and a repeat of Q3 is likely on the cards, especially post the business updates given by HDFC Bank and IndusInd Bank, the focus is now on the future outlook and it will be one of the key things to watch out for heading into the Q4 earnings season.

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