1. COMPANY P/E (x) EPS (Rs)* MKT CAP (Rs m) 52-WEEK GET
HIGH / LOW (Rs) MORE
INFO
AXIS 11.89 87.42 426,561 1,600 / 1,063
BANK
Banking
[Key
Points |
Financial
15Share Year '10 |
Prospects
| Sector
Do's and
Dont's]
Influenced by the global financial turmoil and repercussion of the subprime
crisis, the global banking sector has been witness to some of the largest and
best known names succumb to multi-billion dollar write-offs and face near
bankruptcy. However, the Indian banking sector has been well shielded by the
central bank and has managed to sail through most of the crisis with relative
ease. Further with the economic buoyancy the world over showing signs of
cooling off, the investment cycle has also been wavering. Having said that, the
latent demand for credit (both from the food and non food segments) and
structural reforms have paved the way for a change in the dynamics of the
sector itself. Besides gearing up for the compliance with Basel II accord, the
sector is also looking forward to consolidation and investments on the FDI
front.
Public sector banks have been very proactive in their restructuring initiatives
be it in technology implementation or pruning their loss assets. While the likes
of SBI have made already attempts towards consolidation, others are keen to
take off in that direction. Incremental provisioning made for asset slippages
have safeguarded the banks from witnessing a sudden impact on their
bottomlines.
Retail lending (especially mortgage financing) that formed a significant portion
of the portfolio for most banks in the last two years lost some weightage on the
banks' portfolios due to their risk weightage. However, on the liabilities side,
with better penetration in the semi urban and rural areas the banks garnered a
higher proportion of low cost deposits thereby economising on the cost of
funds.
Apart from streamlining their processes through technology initiatives such as
ATMs, telephone banking, online banking and web based products, banks also
resorted to cross selling of financial products such as credit cards, mutual
funds and insurance policies to augment their fee based income.
Key Points
Supply Liquidity is controlled by the Reserve Bank of India (RBI).
Demand India is a growing economy and demand for credit is high
though it could be cyclical.
Barriers to entry Licensing requirement, investment in technology and
branch network.
Bargaining power High during periods of tight liquidity. Trade unions in public
of suppliers sector banks can be anti reforms. Depositors may invest
elsewhere if interest rates fall.

2. Bargaining power For good creditworthy borrowers bargaining power is high
of customers due to the availability of large number of banks
Competition High- There are public sector banks, private sector and
foreign banks along with non banking finance companies
competing in similar business segments.
TOP
Financial Year '10
After a difficult FY09 Indian banks managed to grow their balance sheets in
FY10 albeit at a lower average rate than that projected by the RBI. The
monetary stimuli (reduction in repo rate, cash reserve ratio (CRR) and
statutory liquidity ratio (SLR) offered to the banks by the RBI early in the fiscal
made it easier to sustain margins But what really helped was the accretion of
low cost deposits (CASA). Indian banks grew their advances and deposits by
16.9% YoY and 17.2% YoY respectively in FY10. The growth was mainly
driven by a expansion in low cost deposits and growth in agricultural and large
corporate credit. Having said that, higher delinquency levels in retail credit and
debt restructuring took its toll on the sector.
Data source: RBI
With lesser avenues of credit disbursal, banks had to park most of the liquidity
available with them with the RBI. In the retail portfolio, while home loans grew
by 11% YoY, personal loans enjoyed a much smaller growth of 6% YoY due
to bank's reluctance towards uncollateralized credit. Credit card outstanding in
fact dropped by 27% YoY.
Indian banks, however, enjoyed higher levels of money supply, credit and
deposits as a percentage of GDP in FY10 as compared to that in FY09
showing improved maturity in the financial sector.

3. Data source: RBI
Despite poor pricing power lower cost of funds helped Indian banks grow their
net interest margins in FY10. While few like ICICI Bank chose to reduce their
balance sheet size, most entities chose to reasonably grow their franchise as
well as assets. Public sector banks outdid their private sector counterparts in
terms of growth and franchise expansion in the last fiscal. Improved capital
adequacy also helped banks to comfortably comply with Basel II. The higher
efficiency levels were the hallmarks of better performance of Indian banks last
year.
Most banks had to restructure some loans in their portfolio during FY10 which
deferred their interest income. Further the PSU banks had also to provide for
the loss of interest on the agri-loans waived by the government.
In FY10, as per the RBI mandate, all commercial banks in India as well as
foreign banks operating in India migrated to the Basel II norms for capital
adequacy. While some PSU banks are falling short of capital due to the same,
they may witness some capital infusion from the government in FY11.
TOP
Prospects
With banks having complied with Basel II and having sufficient capital in their
books; it will be a challenge to deploy the same safely and profitably in the
event of persistence of economic slowdown. Banks are likely to concentrate
more on non funded income in this scenario.
Banks, especially the private sector ones, are likely to face penetration
concerns. The lack of credit penetration and the geographic concentration of
bank credit is evident from the fact that 5 states having the highest proportion
of per capita credit enjoy 55% of the total credit disbursals in the country.
RBI's roadmap for the entry of foreign banks and the acquisition of stake by
the foreign entities in Indian private banks has been deferred for the time
being. However, the tussle for higher market share in the already fragmented
sector is only set to aggravate.
The proposal for Cabinet's approval to allow PSU banks to bring down the
government's stake in them below the stipulated 51%, which is yet to be
tabled, can help the bank raise substantial capital without borrowing at high
rates and give the entities an opportunity to enhance their capital adequacy

4. ratios besides competing with their private sector peers