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Indian Banking Sector


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Its a very raw presentation on the Indian Banking sector. Just an outlook from my side

Indian Banking Sector

  1. 1. Indian Banking Sector September 2009
  2. 2. Table of Contents: <ul><li>Macro Outlook </li></ul><ul><li>Developed vs. Emerging Economics </li></ul><ul><li>Sector Outlook </li></ul><ul><li>Public Vs Private Sector Banks </li></ul><ul><li>Q1 Result Update </li></ul><ul><li>Future Outlook </li></ul>
  3. 3. Macro Outlook <ul><li>Excess Liquidity: </li></ul><ul><ul><li>Global Liquidity is flooding Emerging Markets </li></ul></ul><ul><ul><li>Excess Liquidity in the system due to monetary and fiscal measures undertaken </li></ul></ul><ul><ul><li>RBI added liquidity through OMO and unwinding MSS </li></ul></ul><ul><li>Inflation </li></ul><ul><ul><li>Inflation is likely to move in a positive territory and end with approximately 6% by the end of the current fiscal </li></ul></ul><ul><ul><li>Inflation is likely to more supply driven due to increase in the commodity prices </li></ul></ul><ul><ul><li>Base effect will decline in the second half of the fiscal </li></ul></ul><ul><li>GDP </li></ul><ul><ul><li>As predicted by the Government and Economists, GDP is expected to be anywhere in the range of 5-6% </li></ul></ul><ul><ul><li>Strong Domestic demand, Investment consumption & IIP recovery leading to a high GDP growth </li></ul></ul><ul><li>Interest Rates </li></ul><ul><ul><li>Expected to harden due to high fiscal deficit </li></ul></ul><ul><ul><li>Monsoon Failure will add further pressure on government debt which will have an impact on the interest rate </li></ul></ul><ul><ul><li>Higher interest rates are likely to moderate growth upsides. It can has a negative influence on the loan growth </li></ul></ul>
  4. 4. Macro Outlook…Cond <ul><li>Fiscal Deficit </li></ul><ul><ul><li>Fiscal deficit at 6.8% is at a 16 year high </li></ul></ul><ul><ul><li>Rising government debt due to various monetary and fiscal measures undertaken have added to the huge fiscal deficit. </li></ul></ul><ul><ul><li>Monsoon failure will further add to the fiscal deficit </li></ul></ul><ul><li>IIP: </li></ul><ul><ul><li>A Sharp rebound in the IIP numbers over the last 3 months signals a positive development for the economy </li></ul></ul><ul><ul><li>Expected to report good numbers due to low base effect </li></ul></ul><ul><ul><li>Strong domestic demand and increase in the investment thrust have helped the economy to grow </li></ul></ul><ul><li>Currency: </li></ul><ul><ul><li>I expect INR to strengthen against all the major currency due to a strong revival in the domestic economy </li></ul></ul><ul><ul><li>Emerging markets are getting flooded with money (especially India) as there seems to be a lot of opportunities in the emerging economies </li></ul></ul><ul><ul><li>Expected growth in the second half of the fiscal is likely to drive the export which is going to be favorable for INR </li></ul></ul><ul><li>Government: </li></ul><ul><ul><li>Strongest government in the last 20 years </li></ul></ul><ul><ul><li>Expectation on reforms building up with the strong government </li></ul></ul>
  5. 5. Developed V/s Emerging Economies <ul><li>Developed Market </li></ul><ul><ul><li>2009 Nominal GDP is expected to be negative </li></ul></ul><ul><ul><li>Fiscal deficit as a % of GDP is expected to be over 8% </li></ul></ul><ul><ul><li>Net debt/EBITDA for developed markets is 1.4x </li></ul></ul><ul><li>Emerging Market </li></ul><ul><ul><li>2009 nominal GDP is expected to be positive (expected to grow by 5-6%) </li></ul></ul><ul><ul><li>IMF forecasts emerging economy fiscal deficit as a % of GDP of less then 3% </li></ul></ul><ul><ul><li>Net debt/EBITDA for listed EM companies is 0.7x </li></ul></ul>Emerging markets corporate earning remains strong due to stronger growth potential and adequate liquidity Emerging markets are currently trading at 1.8x P/BV, in line with the long term average, which is not comparable with the bubble like valuation seen in India, China and Japan where P/BV peaked at 6.4x, 5.3x and 5.2x resp. India is the most expensive among the emerging markets, trading above 2x P/BV. But good positive macro environment and stable government are doing good for India
  6. 6. Banking Sector Outlook <ul><li>Under banked: </li></ul><ul><ul><li>Even after the fastest growth in the last one decade, majority of people in India are under banked, less then 25% of the people have a bank accounts. Credit penetration is India is only at 52% of GDP and deposit is 69% of the GDP which is the lowest amongst all the emerging economies </li></ul></ul><ul><ul><li>Similarly, decade after liberalization of insurance sector, penetrations levels are only 4% of GDP </li></ul></ul><ul><li>Drivers to accelerate credit and deposit growth: </li></ul><ul><ul><li>Favorable demographics, large young population and rising proportion of middle class </li></ul></ul><ul><ul><li>Strong Economic Growth </li></ul></ul><ul><ul><li>High Savings Rate </li></ul></ul><ul><ul><li>Huge upside potential as it is under banked and need to do the catching up </li></ul></ul><ul><li>Market Triggers: </li></ul><ul><ul><li>Strong recovery in the domestic and the global economy has had a positive impact on the banking sector </li></ul></ul><ul><ul><li>Strong domestic demand </li></ul></ul><ul><ul><li>Prospects of higher capital inflows due to stable government and expected strong reforms </li></ul></ul>
  7. 7. Banking Sector Outlook <ul><li>Market Triggers: </li></ul><ul><ul><li>Improved capital positions </li></ul></ul><ul><ul><li>Improvement in the investment climate both globally and in domestic market bodes well for investments </li></ul></ul><ul><ul><li>Loan growth is accepted to accelerate in the second half of the fiscal due to expected strong industrial growth </li></ul></ul><ul><ul><li>Cost of funding is likely to come down as the high cost deposits are expected to re-priced from the 3 rd and 4 th quarter of the current fiscal which will help margins to re-bound </li></ul></ul><ul><ul><li>Provisioning expenses are likely to come down as Gross NPLs and restructed assets are most likely peaked in 1Q2010 </li></ul></ul><ul><ul><li>Increase thrust by the banks to focus on low cost deposits i.e. CASA </li></ul></ul><ul><ul><li>Fee income to be driven by strong capital markets leading to a pick up in third party distribution fee and improved credit off take, is likely to go up </li></ul></ul><ul><ul><li>Asset quality is likely to go up in the coming quarters </li></ul></ul><ul><ul><li>Margins to revive as credit growth picks up, CD ratio improves </li></ul></ul>
  8. 8. Banking Sector Outlook <ul><li>Key Risks: </li></ul><ul><ul><li>NIM to remain under pressure due to slowdown in loan growth, risk averse strategy adopted by majority of banks due to weak corporate health </li></ul></ul><ul><ul><li>High investment in government securities to yield lower rates </li></ul></ul><ul><ul><li>Cost of Funding will fall but with a lag as deposits get re-priced slower then loans </li></ul></ul><ul><ul><li>Need to finance the high fiscal deficit could act as a burden on the banks </li></ul></ul><ul><ul><li>Steep decline in the lending rates partly due to government action and the due to excess liquidity prevailing in the system </li></ul></ul><ul><ul><li>Investor sentiment may remain subdued due to high fiscal deficit and rising risk of inflation exerting pressure on interest rates </li></ul></ul><ul><ul><li>Lower recovery of NPA in a challenging macro environment </li></ul></ul>
  9. 9. Banking Sector Outlook <ul><li>Key Risks: </li></ul><ul><ul><li>Higher NPA provision required in a deteriorating asset quality scenario </li></ul></ul><ul><ul><li>Substantial dependence on global liquidity </li></ul></ul><ul><ul><li>Increase in the interest rates </li></ul></ul><ul><ul><li>Deterioration in the credit quality environment </li></ul></ul><ul><ul><li>Fee Income to remain sluggish due to weak capital market </li></ul></ul><ul><ul><li>Hardening of bond yields is likely to rise in MTM provisions on investments </li></ul></ul><ul><ul><li>Slower pace of global recovery </li></ul></ul><ul><ul><li>Governemnt inability to meet expectations </li></ul></ul>
  10. 10. Private Sector Banks <ul><li>Investment rationale </li></ul><ul><li>Private sector banks are better capitalized compared to PSU Banks in case of rising NPLs </li></ul><ul><li>More seasoned loan book resulting in less incremental NPLs </li></ul><ul><li>NIM are stable as the PLR cut is not much compared to PSU banks </li></ul><ul><li>Pvt Sector banks to improve margins due to steep decline in deposit cost (decline in wholesale deposit cost by 400-500 bps point) </li></ul><ul><li>Top 3 pvt banks has a significant portion of their revenue coming from capital market linked business. While the capital markets are expected do well in the near future it bodes well for the private sector banks </li></ul><ul><li>Majority of the top private banks (except AXIS bank) are in a process to consolidate their balance sheet, to restructure their balance sheet, reduced NPLs, restructured loans and slippages which is good in the long term </li></ul><ul><li>Increased thrust on the CASA deposit i.e., primarily focusing on the low cost deposit </li></ul><ul><li>Private banks have been historically innovative and technologically superior </li></ul><ul><li>Best Picks: Axis Bank, HDFC Bank, Yes Bank, Jammu and Kashmir Bank </li></ul>
  11. 11. Private Sector Banks <ul><li>Things to watch for: </li></ul><ul><li>Private sector banks have been conservative in last few quarters, restructuring there balance sheet which will have a negative impact on the NIMs, profitability, RoE in the coming quarters </li></ul><ul><li>Private sector banks have relied heavily on capital market linked activity, approximately 30-40% of their revenue and net worth is relied on third party distribution products. Any downfall in the capital market will have a significant impact on the bottom line of the company </li></ul><ul><li>Private sector banks trades at a lower RoE (13-14%) compared to public sector banks (17-18%) </li></ul><ul><li>Cost of funding at 6.5% is higher in comparison to Public sector banks (6%) </li></ul><ul><li>Private sector banks might need to account for MTM losses, provisions etc due to its presence in uncertain international markets </li></ul>
  12. 12. Public Sector Banks <ul><li>Investment Rationale </li></ul><ul><li>Despite higher RoE, PSU banks are trading at a lower P/BV </li></ul><ul><li>Strong operating performance and profitability </li></ul><ul><li>Strong Earnings growth </li></ul><ul><li>Improving Quality of earnings </li></ul><ul><li>No MTM losses </li></ul><ul><li>Banks have significant franchise value </li></ul><ul><li>Improving quality of earnings </li></ul><ul><li>PSU banks have been more aggressive in lending which will help it to increase its profitability, NIMs, RoE </li></ul><ul><li>Increased focus on low cost deposit by rapidly increasing the branches leading to a decline in the funding cost </li></ul><ul><li>Improved focus on non-banking revenues (Asset Management, Private Equity, IB etc), leveraging on its existing branch network </li></ul><ul><li>Best Picks: BoB, Corporation Bank </li></ul>
  13. 13. Public Sector Banks <ul><li>Things to watch for: </li></ul><ul><li>PSU Banks are likely to face more margin pressure compared to private sector banks: </li></ul><ul><ul><li>Lending rates have been cut much more then private sector banks </li></ul></ul><ul><ul><li>Lending in a weak corporate environment </li></ul></ul><ul><ul><li>High cost deposit mobilized during the second half of 2009 </li></ul></ul><ul><ul><li>Excess investment in government securities and parking of excess funds with RBI carry's a negative yield on investment portfolio </li></ul></ul><ul><li>PSU banks are more likely to be persuaded by Government to reduce the lending rates </li></ul><ul><li>Operating expenses for the PSU banks are likely to go up due to higher wage increase and transfer from PF to pensions </li></ul><ul><li>Restructuring has been high in PSU banks resulting in a increase in NPLs </li></ul><ul><li>Cautious on fundamentals due to slowing loan growth, declining margins (NIMs) and rising credit costs </li></ul><ul><li>Employee productivity and profit per branch have always been a concern in compare to private sector banks </li></ul><ul><li>Traditionally, PSU banks have been laggard in technology </li></ul><ul><li>Asset quality will be a concern in a long run due to aggressive lending in a weak corporate environment </li></ul><ul><li>Yield on advances at 9.5% is lower compared to private banks (11%) </li></ul>
  14. 14. Public Sector v/s Private sector Banks <ul><ul><li>C/D </li></ul></ul><ul><ul><li>Inv/Dep </li></ul></ul><ul><ul><li>Asset/Equity </li></ul></ul><ul><ul><li>Cost of Dep </li></ul></ul><ul><ul><li>Yield on Dep </li></ul></ul><ul><ul><li>Yield on Inv </li></ul></ul><ul><ul><li>NIM </li></ul></ul><ul><ul><li>NII/Total Inc </li></ul></ul><ul><ul><li>RoE </li></ul></ul><ul><ul><li>RoA </li></ul></ul><ul><li>73% </li></ul><ul><li>33% </li></ul><ul><li>17.3 </li></ul><ul><li>6.0 </li></ul><ul><li>7.4 </li></ul><ul><li>9.5 </li></ul><ul><li>2.4 </li></ul><ul><li>67.1 </li></ul><ul><li>17.2 </li></ul><ul><li>1.0 </li></ul>77% 41% 10.3 6.5 7.3 11 2.7 57.3 13.4 1.0 Pvt Banks Public Banks
  15. 15. Q1FY10 Result Update <ul><li>Systematic loan growth at 15.3% yoy and deposit growth at 21% yoy </li></ul><ul><li>As per RBI, State owned banks loan grew by 22% yoy and private sector banks loan grew by 4% yoy </li></ul><ul><li>NII growth of 13% yoy for the coverage universe remain muted. NII for the private banks grew at 6.7% yoy and PSU banks grew at 15.7% yoy </li></ul><ul><li>Earnings driven by higher trading gains. All the banks benefited from treasury gains booked in Q1FY10 (16-45% of the operating profits) </li></ul><ul><li>Higher treasury gains and higher fee income likely compensated for weak NIM and loan growth in Q1FY10 </li></ul><ul><li>NIM was largely under pressure due to slowdown in credit off take, reduction in the lending rates, excess liquidity, high cost of deposit </li></ul><ul><li>CASA ratio remain under pressure reflecting a slowdown in economic activity, excess investment in term deposit due to high differences between term and savings deposit </li></ul><ul><li>Credit Linked fees up by 19% yoy despite slower credit off take </li></ul><ul><li>Capital market related fee income from third party distribution products like Asset management, Insurance business continues to remain sluggish </li></ul><ul><li>Asset quality remain a concern as the Gross NPLs and restructured loans have gone up </li></ul>
  16. 16. Future Outlook <ul><li>Strong re-bound in the economic activity should drive a significant loan growth in the second half of the fiscal </li></ul><ul><li>Historically, loan growth to real GDP multiplier has been 3.3x in the past 25 years. Based on the GDP projection of 6%+, I except loan growth at 20%+ for the entire fiscal </li></ul><ul><li>Decline in the cost of funding as the high cost term deposit mobilized in Q3 and Q4 of FY09 is likely to mature in the coming quarters </li></ul><ul><li>The deposit rate is unlikely to fall below 7.5% in the recent time as the small saving scheme offers 8% interest rate. A fall below 7.5% interest rates is unlikely as it will disturb banking system </li></ul><ul><li>Interest rates are likely to go up in Q4FY10 due to high fiscal deficit and monsoon failure </li></ul><ul><li>Increase in the interest rates has a inverse relationship with the banking stock </li></ul><ul><li>Bond yields are expected to harden up in the coming quarters due to high government borrowings which will lead to a increase in MTM provisions in the bank portfolio, having an negative impact on the bottom line </li></ul>
  17. 17. Future Outlook…Cont <ul><li>PSU banks to remain under pressure as they can be pressurized by the government to lower their lending rates </li></ul><ul><li>Gross NPLs and restructured loans are likely to stable or go down as they are most likely to get peaked in 2Q2010 and due to lower provisions on account of improving loan growth and economic activity </li></ul><ul><li>Non Interest revenue is likely to be the flavor of the time in the near future. Improved economic and capital market activity should drive a rebound in non-interest revenue </li></ul><ul><li>CASA ratio is likely to improve due to narrowing of the differences between term deposits and saving deposits. Also, managements across the board have placed more emphasis on low cost deposit </li></ul><ul><li>PSU banks are expected to get more aggressive in loan growth to spurt growth in the economy and private banks are more likely to consolidate their balance sheet in the near term </li></ul><ul><li>Trading income is likely to come down due to hardening of bold yields </li></ul><ul><li>NIM is likely to go up in the second half of the fiscal due to decline in the funding cost, increase in credit off take, strong domestic demand </li></ul>
  18. 18. Important numbers <ul><li>Highest credit Growth </li></ul><ul><ul><li>PSU Banks: PNB(38%) </li></ul></ul><ul><ul><li>Pvt Banks: Axis(28%) </li></ul></ul><ul><li>Highest Deposit Growth </li></ul><ul><ul><li>PSU Banks: SBI(36%) </li></ul></ul><ul><ul><li>Pvt Banks: Axis(24%) </li></ul></ul><ul><li>NIM </li></ul><ul><ul><li>PSU Banks: PNB(3.4%) </li></ul></ul><ul><ul><li>Kotak Mahindra Bank(6%), HDFC BK(4.1%) </li></ul></ul><ul><li>CASA </li></ul><ul><ul><li>PSU Banks: PNB(38%), SBI(38%) </li></ul></ul><ul><ul><li>Pvt Banks: HDFC BK(45%), Axis Bank (40%) </li></ul></ul><ul><li>Provision </li></ul><ul><ul><li>PSU Banks: PNB(89%), BoB(81%) </li></ul></ul><ul><ul><li>Pvt Banks: HDFC Bk(71%), Axis Bank(59%) </li></ul></ul><ul><li>Credit Spread </li></ul><ul><ul><li>PSU Banks: PNB(4.9) </li></ul></ul><ul><ul><li>Pvt Banks: Yes Bank(4.4) </li></ul></ul>