Financial services banking


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The analysis of the banking sector in India

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  • HHI (Herfindahl-Hirschman Index) = Sum of squares of Market shares of the companies. Market share is computed based on Sales as on Mar-2011 (year ended) or latest data available.
  • Threat of New entrants Rs300 cr. (going to be Rs 500cr) of capital to set up a bank As per Herfindahl–Hirschman Index method Top 10 banks hold 90% of the Business Stringent Regulations, Maintenance of various norms like Capital Adequacy Ratio Threat of Substitute: loans to corporates/wholesale loans (account to 75% of total loans), threat can be the capital markets (IPOs, Debentures) For others it’s low Bargaining power of suppliers Depositors are large in number & the money deposited is small; so no bargaining power in terms of returns Suppliers of funds have some option of parking their money like buying land, Mutual Funds, Government securities ( but they don’t provide services like instant liquidity) Bargaining Power of Customers 75% of the customers are big. They have options of going to Capital Markets which also very vast and competitive Even within the industry the bargaining power is high across banks Rivalry amongst existing banks: Top 10 banks holding 90% of the Business Tough regulations, regulators try to make markets more competitive Informed customers, the benefit and cost are “Direct MONEY”.. So it’s extremely price competitive
  • Financial services banking

    2. 2. Structure of the Banking Industry
    3. 3. Policy and Regulation Framework for Banking System
    4. 4. Evolution of Banking Reforms in India
    5. 5. Evolution of Banking Reforms in India … contd.
    6. 6. Market size <ul><li>India’s banking sector is dominated by public sector banks, i.e. 65% of the Gross credit suppliers. </li></ul><ul><li>The Bank credit market in India is lower than the global benchmark on account of lower penetration in the rural areas and tier-3 cities. Higher credit % reflects higher financial inclusion. This clearly reflects that lower PCI of rural areas has not attracted banks to service them. </li></ul>World average: 169.8%
    7. 7. Market size and Cost of Intermediation <ul><li>Cost of Intermediation still remains higher than other countries due to small ticket size, regulatory cost associated with SLR, CRR and PSA (Priority Sector Advances) on account of Hawkish monetary policy to contain recent inflationary pressure. </li></ul>
    8. 8. Population Group-wise distribution of Deposits and Credits of SCBs
    9. 9. Deposits Maturity Profile <ul><li>The recent decrease in the FD seen from 2009-10 was because of slashing of rates by the larger banks. </li></ul><ul><li>The short tern nature of deposit in New-Pvt Banks and Foreign Banks will make it difficult to finance the infrastructure loans under the BOT contract method. </li></ul>
    10. 10. Credit composition <ul><li>The Advances to Agri-sector decreased over the last year owing to the increase of NPA from the sector. </li></ul><ul><li>The Retail Advances is slowly picking up due to hint of consolidation and approval of FDI investments. </li></ul><ul><li>Textile investment has soared because of import of new technology and expertise, the industry is set to triple its size by 2020 . </li></ul>
    11. 11. Key Drivers for Growth <ul><li>Infrastructure investment in 11-th Five year plan was around 20 lakh crore. Private participation was 36.8%. </li></ul><ul><li>The investment in 12-th plan is set to be around 40 lakh crore. Private participation is expected to be > 45%. </li></ul><ul><li>The private bank lending to Infrastructure projects is set to increase due to less risky profile of BOT projects and higher yield compared to G-sec. </li></ul><ul><li>CAGR of credit to Power sector was 35% as compared to overall credit CAGR (over last 3 yrs) of 23%. </li></ul>
    12. 12. Key Drivers for Growth….. Contd. <ul><li>The SSI NPA increased due to working capital crunch. </li></ul><ul><li>The Agri-sector NPA decreased initially due to waiver of loans by the Govt. but rose as the impact receded. </li></ul><ul><li>The sharp increase in NPA of the retail was due to adverse credit selection during the expansionary phase. </li></ul><ul><li>The sharp increase in NPA of Foreign Banks during 2008-10 was on account of aggressive lending for purchase through credit cards and consumer durables. </li></ul>
    13. 13. Key Drivers for Growth….. Contd. <ul><li>The average CRAR is comfortably placed above 9% Basel-II norms. </li></ul><ul><li>The financing by the Govt. through the World bank to increase the CRAR of banks cloase to the base value. </li></ul><ul><li>Return on Advances adjusted to CoF is more than All SCBs average for Foreign and Pvt. Banks that reflects their higher capability/efficiency. </li></ul><ul><li>The increase in CASA ratio from 2008-09 to 2009-10 was because of shifting of funds from FD to CA and SA owing to the decrease in long-term interest rates. High CASA ratio leads to low cost of funds . </li></ul>
    14. 14. Profitability Pattern and Trends <ul><li>RONW in Public Banks is higher because of high leverage. </li></ul><ul><li>C-I ratio for Pvt. Banks are higher on account of high advertisement cost and rent charges. </li></ul><ul><li>Higher NIM for Pvt. Banks because of increase in growth of deposits and lower NPAs resulting in higher interest income. </li></ul><ul><li>The public bank on an average have a lower exposure to the fee-based sources of revenue. </li></ul>
    15. 15. Financial Inclusion <ul><li>The PSA is seen to be lower than the base value of 40% because of decrease in direct lending and buying loans from RRBs or MFIs to meet the shortfall. </li></ul><ul><li>More than 50% of the Public banks surveyed fell short of the min PSA requirement (40%). The ratio was higher for the Private sector in the weaker section advances. Very few of the FBs fell short of their 32% target in PSAs. </li></ul><ul><li>CBs lending are higher because they facilitate their lending to Agri-sector through KCCS. </li></ul>2007 2008 2009 2010 2011
    16. 16. Performance Index / Return to shareholders <ul><li>Post financial crisis monetary policy was eased. During recovery, banking sector outperformed other major industries (because of higher investment in Infrastructure sector; Government spent heavily in that sector) </li></ul>Since Apr-2008 SBI ICICI PNB SENSEX Avg Annual Return 5.64% 5.06% 22.44% 1.79%
    17. 17. Key Players – Performance Analysis Private Banks, though low in market share, have over-performed the Public banks in terms of EPS growth. PNB has emerged as one of the highly efficient among Public banks. Key Players in Indian Banking Sector Name of Bank Credit Portfolio as in March-11 (Rs. billion) Market Share (%) NIMs (2010-11) Tier I Capital % as in March-2011 Return on Net worth (2010-11) Gross NPA % as in March-2011 State Bank of India 7,567 16.44% 2.90% 7.80% 13% 3.30% ICICI Bank 2,164 5.51% 2.30% 13.20% 10% 4.50% Punjab National Bank 2,421 5.17% 3.50% 8.40% 24% 1.80% Canara Bank 2,125 4.36% 2.60% 10.90% 26% 1.50% Bank of Baroda 2,287 4.17% 2.80% 10.00% 24% 1.40% Bank of India 2,131 4.12% 2.50% 8.30% 17% 2.20% HDFC Bank 1,600 4.10% 4.20% 12.20% 17% 1.10% IDBI Bank 1,571 3.50% 1.80% 8.10% 16% 1.80% Axis Bank 1,424 3.35% 3.10% 9.40% 19% 1.10% Central Bank of India 1,297 2.79% 2.70% 6.40% 18% 2.20% Total Banking Sector 42,874 100% 2.90% 9.70% 17% 2.30% Source: Annual Reports Financial details of top 3 cos in terms of Mcap Name of Bank Profit / Emp (Cr.) EPS Growth YoY % EV/EBITDA P/BV P/E CD Ratio (%) Int Expended/ Int Earned % State Bank of India ( Pub) 0.04 -10.22% 17.07 2.70 21.92 79.90% 60.04% ICICI Bank (Private) 0.10 24.08% 17.68 2.33 25.90 92.97% 65.28% Punjab National Bank (Pub) 0.08 13.48% 16.07 1.93 8.95 76.25% 56.25%
    18. 18. Industry Concentration – Herfindahl-Hirschman Index Since the HHI of top 10 cos is 429 compared to overall industry value of 495, the Bank industry in India seems to be Oligopolistic market. Due to the unavoidable service requirement of financial intermediation and high regulations the industry is not attractive to Pvt. plalyers. The Fee based services of banks is still in nascent stage. Company Name NoC Full Year Data (Rs. Cr) Year ended - 2011-Mar Price Information as on 30-09 -2011     Equity Sales Sales MCAP NP LTP Eq MCAP Banks - Public Sector 28 14253.7 426935.4 72.18% 46774.6   3,22,178.15 Bank of Baroda   394.28 24,695.10 4.17% 4,241.80 764 30,122.99 Bank of India   546.48 24,393.50 4.12% 2,488.71 316 17,268.77 Canara Bank   443 25,767.04 4.36% 4,025.53 444 19,669.20 Central Bank   646.61 16,485.61 2.79% 1,252.48 102 6,595.42 IDBI Bank   984.61 20,684.47 3.50% 1,652.14 103 10,141.48 Punjab Natl.Bank   316.81 30,599.06 5.17% 4,431.46 952 30,160.31 St Bk of India   634.99 97,218.96 16.44% 8,274.75 1,911 1,21,346.59 Banks - Private Sector 116 37944.6 164578.7 27.82% 25857.9   3,34,906.27 Axis Bank   412.32 19,786.94 3.35% 3,392.82 1,021 42,097.87 HDFC Bank   467.41 24,263.36 4.10% 3,926.90 467 1,09,140.24 ICICI Bank   1,152.32 32,621.95 5.51% 5,120.00 875 10,08,280.00 Source:   All 144 Banks Top 10 in Sales HHI (Sales) 494.95 428.73 (87%) Concentration Ratio (Top 10 Cos.) 53.51% Rest 21 Public banks accounts for 31% of MCAP.
    19. 19. Recent significant and important changes in policy <ul><li>Implementation of BASEL I in 1992 </li></ul><ul><li>Movement to Market based Exchange Rate Regimen in 1993 </li></ul><ul><li>Legislative Amendment to allow Public Sector Banks to raise Capital Funds from Market </li></ul><ul><li>Abolition of Automatic monetization in 1997 by replacing “Ad-hoc treasury bills” with “Ways & Means Advances” </li></ul><ul><li>FERA replaced by FEMA for better management of Foreign Exchange </li></ul><ul><li>Introduction of “Liquidity Adjustment Facility” </li></ul><ul><li>Introduction of “Market Stabilization Scheme” to absorb access liquidity created by RBI’s foreign Exchange Operations </li></ul><ul><li>BASEL II implemented completely in 2007 </li></ul><ul><li>Shift from BPLR to Base Rate in 2010 </li></ul>
    20. 20. M. Porter’s Five Forces Analysis > Read Speaker’s Notes
    21. 21. Current Outlook: Inverted Yield Curve & Asset Liability Mismatch In developing countries, like India, the inverted yield curves are true reflection of Inflationary pressure and the effectiveness of the Hawkish monetary policies to contain the inflationary expectation in future. Because of the high interest rates, the short-term deposits seem to be high than in the long-term G-sec. Lower deposits in long-term bonds can also exacerbate ALM. Maturity (Yrs) Maturity (Days) Mar-11 Apr-11 May-11 06-Jun-11 07-Jun-11 Jul-11 Aug-11 0.997 363.998 7.846 7.852 8.512 8.196 8.608 8.592 8.555 9.992 3646.984 8.166 8.081 8.235 8.376 8.334 8.415 8.375 Spread (bps) 32 23 -28 18 -27 -18 -18
    22. 22. Challenges before Indian banking Sector <ul><li>Increased stress on Infrastructure Sector may bring down the actual investments because of the recent weakening signs of the economy which can stall the infrastructure projects. </li></ul><ul><li>The urge to Merge: The SBI is the only bank to feature in the list of Top 100 banks, the rest of them are too small compared to the global average. </li></ul><ul><li>Competition I Retail Baking: The new private banks have made this a lucrative sector and the PSBs are still playing catch-up </li></ul><ul><li>Risk Management: Higher revenues will be driven by higher advances so a sound risk management mechanism will be necessary </li></ul><ul><li>Stringent regulation and Micro-management by regulators </li></ul><ul><li>Redressal mechanism for customer grievances </li></ul><ul><li>Financial Inclusion: The need to tap the income savings of rural India and bring them into the financial market. </li></ul>
    23. 23. References <ul><li>Khan M Y , Indian Financial System , Tata Mcgraw Hill, 2010 </li></ul><ul><li>Jyoti, Ajay and Manoj, Banking outlook-CRISIL Research Report, CRISIL, 2011 </li></ul><ul><li> worldbank .org/ indicator (World bank database Indicator) </li></ul><ul><li>https://www. cia .gov/library/publications/the-world- factbook / (CIA Fact Book) </li></ul><ul><li> (Capital-line database) </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li>ISI Emerging Market </li></ul>