Private banks perform better in southern and western parts of India compared to others.
Private banks maintained a strong momentum on gains in deposit share largely at the expense of public sector undertaking (PSU) banks, a trend that we see in all deposit products and across geographies. The focus of banks has tilted from rapid expansion to productivity improvement—overall gains in productivity were balanced across geographies. Overall growth in deposits moderated after strong growth in FY2017 as the impact of demonetisation faded off.
Branch expansion moderate
After witnessing rapid expansion in branches over the past five years (7% CAGR), the pace of branch expansion has moderated with overall branches increasing by 1% year-on-year (y-o-y) in FY18. Growth in branches was flat in urban areas after witnessing 10% y-o-y growth in FY17 while rural areas saw a slight pickup in branch expansion (up 2% y-o-y) after decline of 3.5% in FY17.
PSU banks continue to lose share
PSU banks have lost 770 basis points (bps) market share in deposits since FY11, with the loss gradually picking pace in the past few years. PSU banks lost 250 bps market share in FY18 alone. However, the loss in branch share is far less at 450 bps since FY11 and 200 bps in FY18. This demonstrates superior performance by private banks and partly reflects strong growth in loans for private banks, which requires them to focus more on deposits.
This can be compared to most public banks, which were under the PCA framework that also restricted them to lend, leading to lower focus on deposit mobilisation. Driven by rising NPLs that have put pressure on profitability, these banks are reducing branch expansions.
Focus on financial inclusion
Massive improvement in SA penetration was witnessed across all regions. The progress was superior in less-penetrated areas such as East, North-East and Central India where banks continue to follow rapid expansion. Focus on financial inclusion had led to rapid surge in savings accounts.
Central India impressive
North India continues to see improvement in deposit share after years of sluggish growth in performance until FY15 even as branch share continued to rise. Central, East and North-East India showcased smooth growth in deposit share with broadly stable share of branches. Concerns continue to persist in western India as it witnessed the fourth consecutive year of drop in deposit market share. South India has been a standout performer over the past decade and it holds the highest share in deposits, improving each year. We expect it to stabilise as the other less-penetrated regions pick pace. It is interesting to note that the performance of private banks has been better in southern and western parts of India compared to others.
(Edited extracts from Kotak Institutional Equities Research report)