Indian Banks Face Pressure from Tight Deposits and Rising Credit Costs as Rate Cuts Remain Unlikely

Indian Banks Face Pressure from Tight Deposits and Rising Credit Costs as Rate Cuts Remain Unlikely

Indian banks are grappling with shrinking customer deposits and rising credit costs, a challenge expected to take center stage when HDFC Bank Ltd. and Kotak Mahindra Bank Ltd. release their quarterly earnings this Saturday. These banks, like others in the sector, have struggled to attract sufficient deposits to support their lending operations. With an increasing number of Indian consumers opting to invest their funds in equity markets rather than savings accounts or fixed deposits, the situation has worsened in recent quarters.

Several banks have reduced loan growth, particularly in retail segments, as they aim to meet the Reserve Bank of India's (RBI) guidelines on lowering loan-to-deposit ratios. Jefferies analysts highlighted that HDFC Bank, which faces a high loan-to-deposit ratio, managed a modest 5.1% increase in deposits from the previous quarter, according to the bank’s pre-earnings update. Despite this, net income for HDFC Bank is projected to grow just 1.9%, reflecting the impact of its efforts to align with RBI standards.

The prospect of a rate cut in December remains uncertain, especially after inflation surged unexpectedly last month. Should rate cuts be implemented, banks could see increased credit costs due to the lag in repricing deposits, potentially worsening their financial strain. On Saturday, analysts expect HDFC Bank and Kotak Mahindra Bank to report second-quarter profit growth of 1.9% and 7.3%, respectively. However, HDFC Bank’s earnings growth is expected to trail behind its peers as it works to bolster its deposit base, which has led to a lower valuation compared to rivals like ICICI Bank and Kotak Mahindra.

Kotak Mahindra Bank has faced additional hurdles as it remains under a digital banking ban, preventing it from onboarding new customers or issuing credit cards. Bloomberg Intelligence analysts noted that this likely increased the bank's compliance and technology expenses, negatively impacting profits.

Looking ahead, Bajaj Finance is set to release its second-quarter earnings on Tuesday, with analysts predicting a 16% rise in net income, driven by higher net interest income. However, concerns have emerged over a potential 14 basis point decline in net interest margin due to increased funding costs. On Wednesday, Hindustan Unilever’s earnings will follow, with analysts anticipating faster volume growth in the second quarter, driven by a recovery in rural demand. Nonetheless, rising costs of palm oil, cocoa, and coffee are expected to weigh on the company's margins, contributing to a predicted 1.3% decline in profit.