Sliding interest rates: Falling CASA ratios may hit private banks’ profitability

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November 22, 2019 1:22 AM

The fall in current account (CA) balances in particular may be the fallout of the increasing spread of digital payments acceptance infrastructure and the trend is only likely to pick up pace.

The fall was more remarkable for the private banks, with Axis Bank’s CASA ratio falling 700 basis points (bps) y-o-y to 41% at the end of September. The fall was more remarkable for the private banks, with Axis Bank’s CASA ratio falling 700 basis points (bps) y-o-y to 41% at the end of September.

At the end of the September quarter, most large banks saw their CASA (current account savings account) ratios sliding on a year-on-year (y-o-y) basis. As interest rates fall and the larger banks enable the auto-sweep feature for their savings accounts (SA) customers, balances have been moving from CASA deposits to term deposits, bankers say.

The fall was more remarkable for the private banks, with Axis Bank’s CASA ratio falling 700 basis points (bps) y-o-y to 41% at the end of September. At ICICI Bank, the CASA ratio declined 410 bps to 46.7%, while that at HDFC Bank slipped 300 bps to 39% at the end of Q2FY20.

In an analyst call, ICICI Bank’s management told analysts that it has been maintaining a deliberate focus on raising term deposits. Rakesh Jha, chief financial officer, ICICI Bank, said: “Over the last five to six quarters, we’ve been focused a lot on growing the retail term deposits and it is not that we are pricing our retail deposits at anything higher than what the peers are. In fact, here we are kind of leading also in reducing the term deposit rates.”

An equity strategist with a foreign investment bank explained that over a period of time, falling CASA ratios would impact profitability of banks. “The four pillars of a bank’s profitability are credit growth, fee income, CASA ratios and distribution reach. If CASA ratios fall, banks’ cost of funds will rise and that will invariably hit profitability,” he said.

Bankers admit that the rate-easing cycle has done its bit to eat into their CASA balances. “Now that rates are falling, people are moving as much money as they can into FDs (fixed deposits) to lock into rates available now. They expect deposit rates to fall further,” said a senior executive with a large public-sector bank (PSB).

Some experts say falling rates may actually be pushing savers to the equity markets. In a recent report, economists with State Bank of India (SBI) wrote, “We are now in a regime of lower interest rates with RBI cutting the rates steadily from February 2019 till October 2019. When we look at the change in the NSE retail + HNI investor turnover and time deposits between April-September 2019, we find that the turnover indexed to April has moved up at a faster place in case of retail investor turnover while that of time deposits has gone up at a slower pace.”

An analyst tracking the banking sector said, “Private banks like HDFC Bank, ICICI and Kotak have for long been cannibalising their own CASA balances through the automatic sweep feature.” Such a feature allows a depositor to link their FDs to CASA accounts and set a limit on the CASA balance, beyond which any additional funds get automatically transferred to the FD.

The fall in current account (CA) balances in particular may be the fallout of the increasing spread of digital payments acceptance infrastructure and the trend is only likely to pick up pace. Pallav Mohapatra, managing director and chief executive officer, Central Bank of India, said, “CA growth will not pick up by much because now that all banks are moving towards digitisation, people don’t need to keep money in current accounts. They can do transactions online or through the digital mode. Even for the merchant, the turnaround time is T+1 (one day after the date of transaction); so not much will remain in the current account.”

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