So far, 13 banks— six private sector and seven public sector lenders—have reported their third quarter business updates. These reports highlight a divergence in growth strategies, with private lenders prioritizing deposit mobilization while public banks focus on loan expansion.
State-owned banks showcased relative stability in their credit-deposit (CD) ratios, reflecting their emphasis on loan expansion. While the entire banking system has struggled with a deposit crunch for much of the last two years, deposit growth is typically easier for state-owned banks given their larger presence across the country, comfort of government backing and customer loyalty, allowing them to be better placed compared to their private peers in terms of the deposit base.
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In contrast, private sector banks, which have been aggressively chasing deposits for several quarters, reported an uptick in deposit growth, a development crucial for addressing their elevated CD ratios.
Diverging loan and deposit trends
Despite Q3 traditionally being a period of high loan growth due to accelerated festival spending, the quarter saw some moderation in loan growth. System-wide credit growth slowed to an estimated 11% in Q3, compared with 13% in the previous quarter.
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India’s largest private lender, HDFC Bank, reported its slowest loan growth in recent years, with advances rising just 3% year-over-year and 0.9% sequentially. This was attributed to the bank’s aggressive portfolio sales aimed at improving its loan-deposit ratio (LDR).
Deposits at HDFC Bank rose by 15.8% on-year and 2.5% sequentially, driven primarily by term deposits, which grew 23% on-year. However, the bank’s CASA (current account savings account) ratio declined by 130 basis points to 34%.
“Deposit growth (for HDFC Bank) was led by a sharp growth in term deposits (+23% YoY), as the CASA ratio declined to 34% (-130 bps QoQ). Loan growth declined further to 3% YoY (vs 7% YoY in Q2 FY25), a combination of a system wide slowdown in loan growth and the bank’s continued securitization of its loan portfolio,” Bernstein Research said in a note.
During the quarter, HDFC Bank securitized loans worth ₹21,600 crore. While retail loans grew 10% year-over-year and commercial and rural banking loans rose 12%, corporate loans declined 10%.
The moderation in HDFC Bank’s loan growth, coupled with healthy deposit growth, contributed to a 150-basis point sequential decline in its LDR, Bernstein added. It emphasized that while these trends appear positive for balance sheet health, slower loan growth necessitates higher returns on assets (RoA) to sustain earnings per share (EPS) growth.
Among banks that reported Q3 updates, loan growth ranged between 12% and 19% year-on-year, excluding HDFC Bank’s subdued 3% growth. Union Bank of India was an outlier among public sector lenders, posting just 5.3% loan growth. Sequentially, most banks reported loan growth of 2-5%, except for HDFC Bank, which managed only 0.9%.
On the deposit front, growth ranged from 6% to 16% year-over-year across most lenders. However, Bandhan Bank and IDFC First Bank emerged as notable outliers, posting 20% and 29% deposit growth, respectively. Sequential deposit growth was muted at 0-4%, with some banks—Union Bank, IndusInd Bank, and Bandhan Bank—reporting declines of 1-2% from the previous quarter.
“We expect return ratios of private banks to remain under pressure due to slower loan growth, NIM (net interest margin) compression, and credit cost normalisation. Weak deposit growth for the system, high loan-to-deposit ratio and tight banking system liquidity should keep loan growth muted,” HSBC Research said in a note.
The research firm added that a shift toward lower-yielding loans, capped LDRs, and declining CASA ratios would further erode private banks’ margins. Banks with significant exposure to microfinance (MFI) loans are expected to experience elevated credit costs, adding another layer of pressure.
Banks such as RBL Bank, Bandhan Bank and IndusInd saw asset quality and consequently earnings being hit in Q1 and Q2 due to higher delinquencies in the microfinance portfolio. Most of these banks had then built additional provisions to battle this stress and said that they are strengthening underwriting for these loans leading to higher credit costs for these loan segments.
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HSBC Research estimates a 4% sequential decline in net profit for private banks in Q3. In contrast, public sector banks are likely to deliver stronger earnings, buoyed by steady loan growth and less pronounced margin pressures.
System credit growth, adjusted for the HDFC merger, moderated to 11.8% year-over-year in November, down from 12.8% in the previous month. By mid-December, credit growth improved marginally to 12.4% year-over-year but remained aligned with deposit growth, which stood at 11.9%.
The system-level LDR ratio continued to hover at an elevated 78%, reflecting the broader liquidity challenges within the banking sector. Loan to deposit ratio for banks is calculated basis total amount of loans given divided by the total amount of deposits for the same period.
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Typically, an ideal loan-to-deposit ratio is considered to be 75-80% whereas a ratio above 100% indicates that the bank has loaned every rupee received as deposits, reflecting the possibility of higher capital requirements.
