Professional Documents
Culture Documents
Banking MOSL
Banking MOSL
Financials
Pool of Wealth
Page No.
Summary ........................................................................................................................ 3-5
Can landscape for existing private sector banks alter? ........................................... 47-48
Prices as on 28 February 2014; Investors are advised to refer through disclosures made at the end of the Research
Report.
3 March 2014 2
Financials | Thematic
Private Financials
Pool of Wealth
Post 1990’s liberalization, Indian Financial Services have seen massive overhaul, led by the significant role played
by the private sector. New Private Banks (NPBs) took advantage of the predicament of state-owned banks
(lethargic and technologically backward) and foreign banks (restriction on branch spread) by rapid expansion,
innovation and introduction of new products. In less than two decades, while NPBs have managed to grab 15%
market share in total business, their share in overall profitability has increased to 27%. Superior performance of
the NPBs has led to massive wealth creation for investors as well. As the industry is gearing up for the next set of
new banking licenses, in this note, we trace the journey of private banks, try to identify likely winners in the
current round of licensing and gauge the probable impact of the entry of new players on the incumbents.
3 March 2014 3
Financials | Thematic
3 March 2014 4
Financials | Thematic
Near-term profitability of The hurdle bar for NBFCs has been raised by overhaul of the regulations and
NBFCs to halve with a expected increase in competitive intensity. This will bring down the business
banking license growth rate and also impact return ratios in the long term.
Conversion to a bank would also bring several challenges in the near term.
There would be regulatory costs: (a) maintenance of CRR/SLR from the day of
commencement, (b) locating 25% of branches in unbanked areas, (c) priority
sector lending, (d) aggressive NPA recognition norms, etc.
Back-of-the-envelope estimates suggest 50%+ drop in near-term profitability.
3 March 2014 5
Financials | Thematic
Over the last two decades, the RBI has issued 12 new bank licenses (10 in 1993 and
two in 2003-04). Of these, the seven surviving banks have demonstrated strong
market share gain (15%), improvement in service quality, and have created value (RoA
of 1.7%) and wealth for investors (market cap of INR4.2t v/s invested capital of
INR765b till date).
In the initial years, the licensees of 1993 gained share due to inefficiency of state-
owned banks (backward technology, lower productivity) and marginalization of
foreign banks (as branch network was restricted).
FY09-13, was one of the most stressed periods for the economy, wherein NPBs posted
decadal high RoAs while maintaining strong asset quality performance, demonstrating
the strength of their business model. Superior technology, introduction of new
products and branch expansion-backed growth were the common themes across
banks.
The number of mergers/failures is sometimes overshadowed by the strong
performance of existing companies. Against a peak of 35 private banks, only 22 exist.
Early 90’s: State-owned banks lost loan market share to …despite the foreign banks’ branch network remaining
foreign banks (%)… virtually flat over FY90-96 (nos)
92 246
89
92
90 85 184 194 184 186 194
87 161 167
80 148 150 150 151 154
80 79
82
80 79
74
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
110+ applications and only The RBI announced new banking licenses in 1993, to which the response was
10 licenses issued, though overwhelming and it received 113 applications. It issued 10 licenses, bringing about
not all at one go a structural shift in Indian Banking – the journey of value and wealth creation began.
3 March 2014 6
Financials | Thematic
Focused expansion strategy NPBs’ market share in both loans (11.5% in FY02) and low cost deposits (5% in FY02)
to leverage on coming increased at the cost of the incumbents. Further, scaling of branch network laid the
economic boom and foundation to leverage on the coming economic boom and consumerism
consumerism (unchartered area in Indian Banking).
NPBs halted the surge of foreign banks (loan market share; %) NPBs made rapid market share gains in CASA deposits (%)
New Private Old Private Foreign New Private Old Private Foreign
12.0 6.0
4.5
8.0
3.0
4.0
1.5
0.0 0.0
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
Source: RBI, MOSL Source: RBI, MOSL
Year 2003-04 – two new licenses issued: While there were ten licenses issued in the
first round, in the second round, only two licenses were allotted - Kotak Mahindra
(2003, legacy in the NBFC space) and YES Bank (2004, expertise in agriculture
lending coupled with its promoter, Rabo Bank). Both entities started banking
operations in year 2004-05.
Complacent state-owned State-owned banks were able to mobilize assets with focus on large ticket corporate
banks gave easy way for loans, especially infrastructure loans. However, a relatively inefficient technological
market share gains to NPBs platform resulted in a weakening of their liability franchise (core of the banking
business) and loss of CASA market share. As per RBI data, 95% of state-owned banks
Technological
backwardness and labor
became fully computerized only in FY08 and transition to core banking solution
issues impacted state- (CBS) happened as recently as FY10. Further, a unionized labor force and slow
owned banks adaptability of the workforce held the state-owned banks back. NPBs, on the other
3 March 2014 7
Financials | Thematic
hand, invested more on advertising and publicity, which created greater visibility
and awareness, and attracted customers.
State-owned banks were fully computerized and on CBS Aggressive marketing strategy adopted by private banks
platform only in FY10 (%) (share in advertising and publicity spend, %)
5 4 2
14 8
46.6
48.4
23 14
56.5
58.4
59.2
29
61.9
62.4
63.2
63.7
66.7
27
70.0
70.9
71.6
78.6
84.6
41
49
60 81 90
53.4
51.6
43.5
68
41.6
40.8
38.1
37.6
36.8
36.3
33.3
30.0
29.1
28.4
44
FY00 21.4
FY99 15.4
29
11
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY05 FY06 FY07 FY08 FY09 FY10
Private banks get an early mover advantage; state-owned banks have been doing catch up
NPBs initial focus on metros For the industry, the metros and urban areas accounted for 67% of bank deposits
and urban regions, building and 78% of loans in FY02, though in terms of number of accounts and offices, their
scale along the years share was lower at 44% and 28%, respectively. With technological advancement and
a bouquet of products to offer, NPBs targeted middle and upper-class customers in
the metros and urban regions, as (1) these regions offered immense growth
potential, and (2) grabbing market share from state-owned banks was relatively
easier.
3 March 2014 8
Financials | Thematic
Metro and urban deposit CAGR of 30%... …. and loan CAGR of ~34% over FY02-09
Rural Semi-urban Urban Metro Rural Semi-urban Urban Metro
31.7
32.6 34.1
25.8 28.2 29.9
21.5 25.2
20.1
NPBs’ branch market share increased by 3x+ over FY05-13 (%) NPBs: Strong market share gain in branches (%)
SBI Other PSBs Old Private New Private Rural Semi-urban Urban Metro
95 93
86 84 82
FY00 FY05 FY10 FY12 FY13
23 59 7 11 79 80 77
23 60 7 10
25 60 7 7
7 12 12 15
1 3 5 3
25 63 8 3
2005: Private banks leveraging on alternate delivery channels 2013: State-owned banks remain laggards
Total ATMs ATM/ Branch Total ATMs ATM/ Branch
4.7 27,175
5,271 5.8
4.1
3.4 3.5
2.0
11,245
1,910 6,364 10,481
1,599 1.8 10,743
0.6 550 263 1,147 2,133
1.1
0.1 0.1 0.5
SBIN PNB BOI AXSB ICICIBC HDFCB SBIN PNB BOI AXSB ICICIBC HDFCB
3 March 2014 9
Financials | Thematic
NPBs: State-of-the-art infrastructure and technologically efficient services led to the shift
Innovative Launches: In
2008, ICICI Bank and Dish
TV launched banking
interactive service,
“ICICIACTIVE” on Dish TV
platform
3 March 2014 10
Financials | Thematic
Though NPBs’ business market share declined from 16.4% in FY09 to 14.9% in FY13,
CASA market share
their CASA market share increased from 14% to 17% and CASA ratio improved from
improved 300bp to 17%;
35% to 40%+. A large part of the shift could be attributed to ICICIBC (largest market
consolidated CASA ratio
improved to 40% from 35% share among private banks), which underwent aggressive balance sheet
restructuring to emerge stronger.
While other banks reeled under pressure, the NPBs focused attention on credit risk
Significant improvement in
return ratios and wealth management (including early exit strategies) and strong core operations, leading to
creation over the years historically high RoA of 1.7%. State-owned banks’ focus on corporate loans led to
higher asset quality issues in the downturn. NPBs’ profitability market share
increased to 27% v/s asset market share of 15%.
Balance sheet consolidation, liability profile improvement… …resulting in higher CASA ratio and NIM improvement (%)
Loan Market Share CASA Market Share NIM CASA ratio
43.1 42.5 3.6
17.0 41.4
16.5 35.2
15.8 41.2
14.9 15.2
3.5
3.5
14.9
14.0 14.3 14.5
3.4 3.4
13.7
FY09 FY10 FY11 FY12 FY13 FY09 FY10 FY11 FY12 FY13
3 March 2014 11
Financials | Thematic
Institution backed entity emerged stronger; Five out of twelve NPB either merged or acquired
Market Share Profitability over FY04-13 Market Capitalization
Licenses
Name Promoted Loan Deposit CASA EPS CAGR RoA RoE USD B Rank in Mcap
awarded in
ICICIBC 1993 FI 4.9 3.9 5.0 11.7 1.3 13.1 19.0 2
HDFCB 1993 FI 4.1 4.0 5.7 25.8 1.5 18.3 25.4 1
AXSB 1993 FI 3.3 3.4 4.5 28.0 1.4 19.9 9.0 4
IIB 1993 Corporate 0.8 0.7 0.6 9.4 1.1 16.9 3.3 7
DCB 1993 Individual Group 0.1 0.1 0.1 N.A. -0.5 0.2 39
IDBI Bank 1993 FI Merged with Public Financial Institution
Times Bank 1993 Corporate Merged with HDFC Bank
GTB 1993 Individual Group Merged with OBC
Centurion Bank 1993 Corporate Merged with HDFC Bank
Bank of Punjab 1993 Individual Group Merged with CBoP
THE LATTER TWO ENTRANTS
YES 2003 Individual Group 0.9 0.9 0.6 51.8 1.5 19.5 1.8 9
KMB 2004 Individual Group 0.9 0.7 0.7 8.2 1.5 16 8.7 5
Source: Company, MOSL
3 March 2014 12
Financials | Thematic
Of the NPBs born out of the first set of new banking licenses, the three financial
institution-backed ones emerged as the strongest players. HDFCB and ICICIBC have
market share of ~5% each in the overall banking space.
Case study #1: HDFCB – A hallmark of consistency: Strong retail franchise and earnings
CAGR of 27%+; best in class return ratios
Case study #2: ICICIBC – Pioneer in retail banking space: Journey not very smooth, but
has emerged stronger every time
… and now one of the From being retail focused for deposit mobilization, HDFCB’s attention shifted to the
largest/the largest retail asset side and the acquisition of Times Bank provided the impetus. In early 2000’s,
bank across products retail banking in India was at a nascent stage and state-owned banks’ offerings left a
gap, which was explored by HDFCB. The exit of a number of NBFCs and overall low
penetration further fostered growth in this stream.
Retail loan traction playing well (%)… …also supported by growth in SA deposits (%)
Retail Loan as a % of loan portfolio SA Deposits (%) of deposits Market Share
Market Share in retail loans
4.8 5.0
15.2 4.5 4.7
13.7 4.0
3.5
10.9 10.8 11.7 3.0 3.1
2.6
7.7 2.1
5.9 6.2
4.1 4.6
41.3 45.7 60.6 60.3 61.9 61.8 50.2 50.1 54.8 56.9 25.7 31.4 29.0 28.7 26.0 24.4 29.8 30.4 30.0 29.8
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
The strategy: (a) Focus on growing middle class population, (b) Superior liability mix
Unmatched execution,
consistent strategies to gain advantage in cost of funds, (c) New product introduction and increasing
penetration in retail business, (d) Staying away from the crowded project loan
market and focus on working capital financing, and (e) Maintaining an opportunistic
approach – not following the crowd; Focused on gaining advantage by choosing the
right customer when the competition/market is going through challenges.
Seventh largest in terms of HDFCB has been able to effectively capitalize on the growing consumerism in the
branch network; strongest Indian economy. It rapidly expanded reach through organic/inorganic routes and
branch expansion in last increased its presence from 131 branches in FY01 to 3,062 in FY13, spanning 1,845
decade ex-SBIN
cities (122 in FY03). Its customer base increased from less than 7m in FY05 to 28.7m
in FY13.
3 March 2014 13
Financials | Thematic
FY09-13: 1,650 branches of which 1,317 in new cities Number of debit cards and customer base
Branches Cities Covered 1,845 No. of debit cards (m) Customer (m)
28.7
26.0
1,399
21.1
996 18.0 19.0
779
528 3,062 11.6
9.6 10.0 15.8
228 316 327 2,544 14.1
122 163 211 1,725 1,986
6.8 11.6
1,412 9.1 9.8
231 312 339 535 684 761 3.9 4.1 5.4
1.4 2.1 3.0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Source: Company, MOSL Source: Company, MOSL
Acquired four banks, HDFCB acquired four banks directly/indirectly: (1) Times Bank, (2) Centurion Bank,
directly/indirectly gaining (3) Bank of Punjab and (4) Lord Krishna Bank. While a large number of bank mergers
strength in distribution
have been bailouts, with weaker banks being merged with strong banks (for
network
example, OBC and GTB), HDFCB's mergers have been rational and not thrust upon.
Acquisition of Times Bank In FY00, HDFCB acquired Times Bank, an NPB promoted by Bennett, Coleman &
helped become largest NPB; Company (the Times Group). This increased its customer base by 0.2m and branch
first M&A between two network by 39 to 107, making HDFCB the largest NPB. Times Bank was also well
NPBs
renowned for its technology, which threw open a large scale opportunity for growth
and cross-selling. Integration of employees was not a big hurdle, as the work culture
in both banks was similar.
CBoP acquisition, three The strategic rationale behind the acquisition of Centurion Bank of Punjab (394) was
banks’ acquisition in one to expand geographic reach (at that time there was a ban on branch expansion),
transaction advanced gain economies of scale, and improve combined profitability of the merged entity.
growth by at least two While the CBoP merger added 20% to HDFCB’s balance sheet, it added 55% of the
years
branch network. It is the ‘distribution strength’ that made the big difference.
CBoP acquisition helped to CBoP acquisition helped HDFCB to gain a strong foothold in the southern (Lord
gain presence in South and Krishna Bank) and northern (Bank of Punjab) markets. Further, Centurion Bank also
North; integration had strong retail presence. Post acquisition, while some of the core parameters
smoother and faster than (CASA, C/I ratio, NPAs, etc) deteriorated, speedy integration process, strong HR
expected
engagement and improving productivity from CBoP’s strong branch network helped
HDFCB to return to near its original trajectory.
3 March 2014 14
Financials | Thematic
While operating cost has been higher due to high retail business, rapid branch
expansion in the hinterlands (where it takes longer to break even) and acquisitions,
strong asset quality performance has helped keep credit cost restrained. HDFCB
now enjoys highest ever RoA in the Indian Financials space.
Highest comfort on Earnings growth to moderate but remain superior: HDFCB’s earnings growth is
earnings growth of 25%+ likely to moderate (25% v/s 30% reported so far) on lower loan growth at the system
over FY14/16 level. NIMs are unlikely to surprise positively whereas fee income growth is
expected to remain under pressure due to overall lower growth and regulatory
pressure on retail fees. Asset quality is at its best and credit cost is expected to
increase going forward, which will take away the benefit of operating leverage and
trading profits, if any. Strong FCNR B flow of USD3.4b under RBI forex swap window
will provide cushion to earnings. Our calculation suggests benefit can be ~4% of PBT.
Attractive valuations for strong liability franchise: Over the last 12 years, HDFCB’s
market share in loans increased from 1.1% to ~5% and profitability market share
increased to 7.4%, indicating the strength of its franchisee. Strong fundamentals and
near nil stress loans would enable the bank to gain further market share. Valuations
have come down to attractive levels, with one-year forward P/E of 15x (10-year low;
25% discount to its LPA) and P/BV of 3.1x (~5% discount to its LPA), with the highest
comfort of 25%+ earnings CAGR. RoE at ~22% is at a 10-year high. Maintain Buy
with a target price of INR820 (3.2x FY16BV).
Consistent gain in Market Share (%) Consistently increasing RoE and RoA
6 1.7
1.6
4 1.4 1.4 1.4 1.5
1.4 1.4
2
16.7
18.7
20.3
21.6
22.8
18.5
16.9
16.1
FY07 19.5
FY06 17.7
FY08 17.7
0
FY05
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
3 March 2014 15
Financials | Thematic
Q. Your mantra has been that banking sector growth rate reflects the economic
growth rate. And you have this 30% net profit growth expectation. What is the
scene now that growth rate has halved?
A. We give no guidance. Normally the construct for our growth is GDP. Statistically,
and traditionally, credit has grown by 3-3.2 times GDP and we have been growing
faster than market at 4-6% every year. So, you take that and you can project into
infinity. Top-line and bottom-line growth may not be the same as we have invested
heavily in 1,200 to 1,400 branches in the last two-and-a-half to three years. These
branches are like factories. As we put products, our cost to revenue will go down by
Mr Aditya Puri approximately by 0.4% to 0.5%. So the bottom-line will grow faster than the top-
(MD, HDFC Bank) line.
Credit has grown by 3-3.2 Q. Most people are impressed with HDFC Bank's ability to keep its non-performing
times GDP and we have assets low and growth high. What is your formula?
been growing faster than A. The formula is quite simple. We defined our target market and since demand
market at 4-6% every year. exceeds supply in this country we have not felt the need to either go down the risk
So, you take that and you ladder or reduce our pricing and our margin to take care of defaults. So as long as
can project into infinity. you have a clear target market, as long as you test that target market you establish
the probability of default and you carry on monitoring it. There is no reason why our
default rate should go much higher than what is predicted.
We defined our target
market and since demand
Q. How is HDFC Bank building capabilities to service the rural consumer?
exceeds supply in this
A. We have been building this for the last four years. If you see the McKinsey report,
country we have not felt
it says only 15% of the semi-urban and rural people have access to organized finance
the need to either go down
on the asset side (loans) and only about 40% have access to organized finance in
the risk ladder or reduce
terms of liabilities. Obviously, the opportunity is immense. First we decide on
our pricing and our margin
to take care of defaults
products, delivery models and collection methods. Then we look at whether these
customers can be served through the centralized backend or you need credit hubs,
which require decentralization. You need common collection systems for different
products. You learn from small pilot projects. We run projects for a year and then
scale it up.
Rural population does not Q. Many bankers say they do not want to go to rural India because of poor credit
have a higher proportion of culture.
delinquencies. You cannot A. We have not faced a problem. Rural population does not have a higher
write off 65% of the proportion of delinquencies. We started two-wheeler finance eight years ago. When
population. we do pilots, we understand customer behavior and then we arrive at rates or ask
for higher security. But you cannot write off 65% of the population.
Our presence overseas will Q. Why is HDFC Bank’s presence in overseas markets minimal?
remain minimal and there A. Our presence overseas will remain minimal and there are enough reasons for it.
are enough reasons for it. Have Indian corporate gone overseas? Yes, but is it a stampede or a few swallows
that have come announcing summer? Just as some of my peers have decided not to
go to rural India, we have decided not to go overseas.
Q. What’s your take on the reluctance of Mahindra’s and the Tata’s to enter
There is a very large
pre-emption of deposits
banking?
by the government,
A. There is a very large pre-emption of deposits by the government, which is a drag.
which is a drag. If you do not give forbearance to large corporate that has finance companies to
convert into banks, and they have to maintain SLR, CRR and priority sector lending,
3 March 2014 16
Financials | Thematic
3 March 2014 17
Financials | Thematic
Consistently gained market share; two mergers added to balance sheet and branch strength (%)
Deposit Growth Loan Growth Deposit Market Share Loan Market Share
FY98
FY99
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY10
FY11
FY12
FY13
FY00*
FY09*
*Acquisitions/merger
Strong corporate relationships led to high CA float in initial phase; with scale, strong growth in SA drove market share (%)
CASA Ratio CASA Market Share
5.5 5.5 5.7
5.2
60.6 57.7 4.7
54.7 55.4
45.6 46.3 43.0 4.6
37.3 38.8 40.8 40.7 52.7
35.6 52.0 48.4 47.4
3.7 4.0 44.4
54.5
3.2
2.9
5.6 0.4 0.5 2.1
0.1 0.2 1.8
0.0 1.2 1.3
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Strong asset quality performance demonstrated across all cycles (%)
NNPA GNPA
3.6
3.1 3.2
2.2
1.9 2.0
1.7
1.4 1.4 1.4 1.4
1.1 1.0 1.0 1.0
0.4 0.5 0.4 0.4 0.5 0.6
0.4 0.2 0.3 0.2 0.2 0.2
0.2
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
RoA has structurally moved up; strong NIM and lower credit cost driving RoA (best in industry) to decadal high (%)
ROE ROA
26.4 25.3
23.9
2.9 22.0 20.7 20.6 20.3
18.4 18.5 19.5 18.7
17.7 17.7 16.9 16.1 16.7
17.4
12.2 2.7
2.3
1.7 1.8
1.5 1.5 1.5 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.5 1.6
0.9
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
3 March 2014 18
Financials | Thematic
Differentiated strategy of ICICIBC’s strong growth has been supported by technological advancement and ATM
utilizing alternate delivery expansion. In FY01, it had 540 ATMs as against HDFCB’s 207 and AXSB’s (then UTI
channels to attract Bank) 303. The management’s strategy was to use ATMs to penetrate the retail
customers
market. ICICIBC also tapped corporate salary accounts by putting up ATMs to
support specific large corporate salary customers. On the other hand, some
competitors had underinvested in their ATM network, which led to customer
dissatisfaction. This helped ICICIBC to gain customers from its competitors.
Rapid scale-up of branch network Leveraging alternate delivery channels (ATM network)
3,100 10,481
2,752 9,006
2,529
1,707 6,104
1,262
1,419 4,713 5,219
3,881
3,271
755
413 503 614 1,790 1,910 2,100
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Consistent market share ICICIBC’s retail-focused strategy translated into strong customer additions – the
gain backed by strong retail number of savings accounts and customers increased rapidly. Its loan portfolio
loan growth over FY02-08 expanded at a CAGR of 33% over FY02-07, while the system average loan CAGR was
25%. Consequently, its market share increased from 7.3% in FY02 to 9.9% in FY07,
even though its distribution network was smaller than several competitors.
Strong market share gain over FY03-09 (%) …led by retail loans (%)
Loan Growth Loan Market Share Retail Loan as a % of loan portfolio
Market Share in retail loans
9.6 9.9
9.1 28.0
25.6 25.8
7.9 21.9
7.3 18.7 19.0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
3 March 2014 19
Financials | Thematic
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
3 March 2014 20
Financials | Thematic
Aggressive growth In its quest for growth and market share gains, ICICIBC increasingly became
strategies back fired; dependent on (1) direct selling agents (DSAs) for sourcing business (that too
liquidity squeeze in FY08 unsecured), and (2) and bulk deposits (ALM profile weakened; low CASA ratio),
added fuel to fire though its SA deposit CAGR over FY02-08 was strong at 58% v/s 20% for the system.
Increasing competition from MNCs and state-owned banks, asset quality issues and
liquidity issues led to margin squeeze (NIM of 2.2% for FY08) and sharp fall in return
ratios.
Painful process of To improve core operating profitability, the management shifted its focus from
restructuring over; now on aggressive growth (at times sacrificing profitability) and market share acquisition to
a profitable growth track improving profitability even at the cost of growth (two years of consolidation). It
reduced unsecured retail loans, improved CASA ratio and reduced ALM mismatches
considerably. The branch banking model was adopted to reduce risk, translating into
improvement in core operating parameters and structurally higher RoA of 1.6-1.7%.
NIM has improved considerably (%)… …aided by better ALM and improvement in liability mix (%)
3.11 45.1 43.5
CASA Ratio 41.7 41.9
2.70 2.60 2.73
2.43 2.50
2.19 2.22
28.7
26.1
23.0 24.3 22.7 21.8
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
ICICIBC has emerged as one of the most successful financial conglomerates and has
Well placed to leverage
leadership across financial services businesses. Balance sheet restructuring during
strong capital base and
branch network FY08-10 has given it a strong platform to deliver sustainable growth, with RoA now
at 1.6%+. Increasing leverage should boost RoE higher to 15%+.
3 March 2014 21
Financials | Thematic
ICICIBC's risk adjusted margins have expanded from a low of 1% in FY10 to 2.4% in
FY13, led by a ~90bp fall in credit cost and 50bp NIM improvement. Despite lower
growth in fees and higher credit cost assumption, continuous NIM improvement
(~25bp over FY14/15) will help the bank to maintain RoA of ~1.7%.
Given a market share of ~5%+ in domestic loans and the largest branch network
among private financials, above industry growth and favorable margins will drive
earnings. Despite the challenging macro environment, ICICIBC has managed its asset
quality fairly well and within the guidance. Stress loans (NNPAs + restructured loans)
are contained at 3% (1.7% in FY11). While FY15/16 will be critical to see the fate of
few large exposures, ICICIBC is confident of tiding over this without any dent on its
profitability. We model credit cost of 80-85bp (in line with guidance) for FY14/16
against 60bp in FY13.
Improved core operation to Return ratios are on an upward trajectory, and structurally, ICICIBC’s core
help sustain RoA’s of 1.6%+; operations have improved significantly. This should enable it to sustain higher RoA.
Capitalization remain strong Importantly, tier-1 would remain strong at 10%+ as at end-FY15, and repatriation of
and increasing leverage
capital from overseas subsidiary and unlocking of value from insurance business
would lead to higher RoEs
could provide capital support and also lead to re-rating. Increasing leverage will
boost RoE as well. Maintain Buy.
Strong capitalization, with improving operating parameters; RoE to rise as well (%)
ROA Tier 1
14.4
13.2 12.7 12.8
11.8 11.8
9.2
One of the best Tier 1 7.6 7.4
ratios in the industry 6.1
1.4 1.4 1.2 1.0 1.1 1.0 1.1 1.3 1.4 1.6
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
3 March 2014 22
Financials | Thematic
Q. Talking about growth, when you took over as CEO in May 2009, your return on
equity (RoE) was less than 8%; you have almost doubled it to 15%. You have said
that you want to raise it to 18%.
We will follow the growth
path that the environment A. Our journey on RoE had two phases and the first phase was to double it. Having
allows us to do and with successfully reached there, I have set the next aspiration of taking the 15% to 18%.
that we will reach 18%. Our It would probably take two-and-a-half to three years but, again, in the current
return on assets (RoA) at situation, I would not like to put a specific time frame because if our GDP (gross
1.75% is among the best in domestic product) grows at 8%, banking industry can grow at 22% and we can grow
the industry.
at 25% and our journey to 18% RoE can be much faster. But if GDP grows at 5%, the
industry grows at 12-13% and it will be foolish for us to say that we will grow at 22%
and achieve that 18% RoE. We will follow the growth path that the environment
allows us to do and with that we will reach 18%. Our return on assets (RoA) at 1.75%
is among the best in the industry.
3 March 2014 23
Financials | Thematic
Q. About 75% of your new branches are in rural India. At one point in time you
burnt your fingers in rural lending. Do you see it as a compulsion for financial
inclusion or a business opportunity?
A. We believe there is business opportunity there because growth is actually
trickling down. Even to do financial inclusion and to do priority sector advances, we
are better off doing it directly through the bank rather than through intermediaries.
That’s why the focus is to set up branches, have products that are required for these
people, and create different channels through which you can serve them.
Your first five-year term as CEO comes to an end in April. What’s the new thing
you want to do in the next five years?
We have to aspire for the A. As I look at the next five years, the most important thing would be not to lose any
next step of 18% RoE; it of the strength we have created because the environment is such that there will be
should not take five years pressures on NIM, cost ratios and fee income. The first thing is to not sleep on our
though.
laurels but to make sure we sustain them. We have to aspire for the next step of
18% RoE; it should not take five years though.
Q. ICICI Bank always looked for M&A opportunities in banking. With new banks
being set up, do you see a change in landscape?
New banking licenses: A. I will still look for opportunities. Talking about new banking licenses, for the
There is enough business medium-to-long term, there is enough business for everyone to grow but, at the
for everyone to grow but, same time, to be able to grow profitably in banking is not easy because you need
to be able to grow
the brand, competitiveness, network, products, and people. Everybody who can get
profitably in banking is not
easy because you need the them right will find enough opportunities to grow. We will have to focus on
brand, competitiveness, strengthening our fundamental strengths so that we find our ways to grow. As new
network, products, and players come in, you will see war on talent and extremely competitive pricing; but
people. these are short-term phases that any industry goes through.
Source: Mint, January 6, 2014
3 March 2014 24
Financials | Thematic
Rapid expansion phase over FY02-08 stalled as asset quality and ALM issues led to balance sheet consolidation (%)
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Liability mix strengthened as bank focused on consolidation even as CASA market share was stable (%)
CASA Ratio CASA Market Share
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Tackled asset quality issue over last three years with focus on quality growth rather than chasing market share (%)
NNPA GNPA
10.5
9.4
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Structurally, RoA on rising trajectory, as bank’s focus on profitability is yielding results (%)
ROE ROA
2.7
2.0 2.0
1.4 1.6
1.2 1.4 1.4 1.2 1.3
1.1 1.0 1.1 1.0 1.1 1.0 1.1
0.4
6.5 23.7 22.4 22.0 14.5 13.2 6.5 18.3 21.9 19.5 14.6 13.4 11.7 7.9 8.0 9.7 11.3 13.3
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
3 March 2014 25
Financials | Thematic
Indian Banking has been riding a strong growth curve, with business CAGR of 18%+
over the last two decades. However, in our view, there is a lot of impetus left, as an
underpenetrated Indian economy and increase in savings will drive the next leg of
growth.
Over the last two decades, Indian Banks have witnessed loan CAGR of 19% and loan-
to-GDP has improved to 51%. Based on nominal GDP growth assumption of 12% and
multiplier of 1.4x, Indian Banks are poised to deliver a loan CAGR of 17% over the next
10 years and loan-to-GDP should increase to 87% by 2025.
India’s financial landscape presents a huge opportunity for innovators and nimble-
footed players, as demonstrated in the last two decades. We believe NPBs (including
new licensees) will be well poised to further marginalize state-owned banks and
achieve loan CAGR of 20% over the next decade.
3 March 2014 26
Financials | Thematic
With long-term nominal GDP growth of 12% (real GDP growth of 7% and inflation of
5%) and average multiplier of 1.4x, the bank loan portfolio is likely to expand to
INR339t by 2025, 6x FY13 loans and CAGR of 17% over FY13-25. Loan-to-GDP of 87%
will, however, remain lower than in some peer nations currently, indicating the
tremendous opportunity that India provides. This further reinforces our view that
strong asset creation would continue and India is nowhere near saturation point.
100
112
126
141
158
177
198
222
248
278
311
349
390
10
12
14
16
18
20
22
23
25
28
32
37
43
50
56
65
78
90
6
7
8
9
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15E
FY17E
FY19E
FY21E
FY23E
FY25E
Source: MOSL, RBI
Factored average multiplier of 1.4x (in line with long period Even in 2025, loan-to-GDP ratio in India would be lower than
average) – loan-to-GDP to rise gradually to 87% in some peer nations currently (%)
Loan to GDP Loan to GDP multiplier
3.0
2.7
2.2
2.2
1.8
1.7
1.7
1.6
1.5
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.3
1.2
1.2
1.1
1.1
1.1
20.5 0.9
19.8 0.9
19.6 0.6
18.4 0.5
18.6 0.5
19.6
20.2
20.7
20.6
21.7
23.6
25.1
28.8
29.6
33.9
40.8
45.0
47.4
49.3
50.1
50.6
51.4
52.5
54.7
57.1
59.5
62.1
64.8
67.5
70.4
73.4
76.6
79.9
83.3
86.9
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15E
FY17E
FY19E
FY21E
FY23E
FY25E
3 March 2014 27
Financials | Thematic
Loan (INR t)
CAGR 16.8%
Loan portfolio could expand
to INR339t from INR52t in
CAGR
FY13, more than 6x rise in CAGR CAGR
CAGR CAGR 17.4%
next 12 years 20.3% 24.1%
15.8% 15.6%
114.4
133.6
156.0
182.2
212.8
248.6
290.3
339.1
11.0
15.1
19.3
23.6
27.8
32.4
39.4
46.1
52.6
61.4
71.8
83.8
97.9
1.2
1.3
1.5
1.6
2.1
2.5
2.8
3.2
3.7
4.4
5.1
5.9
7.3
8.4
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15E
FY17E
FY19E
FY21E
FY23E
FY25E
Source: MOSL, RBI
Indian Banking will be world’s third largest by 2025 (total banking assets in USD b)
120 35
80 30
40 25 3.2
0.6
0 20
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16
FY18
FY20
FY22
FY24
3 March 2014 28
Financials | Thematic
Retail Banking in India has had a strong run over the last decade, with 14% loan CAGR
and 7%+ CAGR in number of accounts. The driving force has been private sector banks,
which have witnessed a CAGR of 23%+ in loans as well as number of accounts.
We believe Retail Banking in India is still at the cusp of a new era. Consumer loan to
GDP is still very low (in comparison with peer nations) at near 15%.
Enabling factors: (a) change in demographics, (b) access to credit, (c) rising income
levels, (d) nuclear family concept gaining prominence, (e) dual income etc.
Housing finance will be the key contributor to the growth in consumer loans. Other
contributors will be auto loans, shift from cash transactions to cashless transactions,
and increasing credit card penetration.
Demographics to drive In contrast with some of the developed economies, India has a unique demographic
consumption demand advantage, where a large part of its population is young and would fall into the
category of working population. The non-working age population would be lower
than the working age population by 2030. This would result in an increase in the
demand for discretionary spending, and in turn, consumer loans (including
mortgages).
Higher proportion of population to come into working age group – a push for consumer loans
Population Pyramid: 1990 Population Pyramid: 2010 Population Pyramid: 2030
3 March 2014 29
Financials | Thematic
Share of discretionary The consumption pattern has changed over the years, with the proportion of
spending has gone up by discretionary spending in rural and urban expenditure increasing to 50% and 60%,
10% both in rural and urban respectively in FY12 as compared to 40% and 50%, respectively in FY00. This is likely
areas from FY00-12 to drive further shift towards discretionary spending, in turn driving consumer loans
– largely mortgages, auto loans and credit cards.
Indian middle class households to increase 3x+ over FY11-25 Mortgage to GDP lower compared to peers (%)
Indian middle class household (m) 101
Mortgage to GDP
Individual (m) 84
76
Percentage of total population
547 54
40 44 45
32 36
15 20
8
267
160
Taiwan
Thailand
UK
114
Malaysia
Denmark
Germany
USA
India
Singapore
China
South Korea
Hongkong
31 53 37
13 20
3 March 2014 30
Financials | Thematic
India’s SME segment, which comprises 29.8m enterprises, employs 69m people and
generates 45% of its industrial output, faces acute shortage of funding.
An IFC study reveals immediate addressable need of INR9.9t even if unviable projects,
sick units and companies without track record are excluded. This implies 19% of the
existing bank loan portfolio.
Incremental share of MSME loans on a rise (%)… …yet, informal sources are a major funding source (INR t)
Share in overall Loans MSME Loan Growth
67.7 7
1.1
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Supply Formal Sources Self-Equity Informal Sources
3 March 2014 31
Financials | Thematic
We believe that the opportunity in this segment would be lower than envisaged
Structural opportunity
under the plan, as current headwinds are a deterrent for fresh investments, and
remains high; however,
strong policy measures banks would be more cautious and reluctant to lend. Nevertheless, a sizeable
required to boost opportunity exits and strong policy measures (some of which have been initiated –
investments and funding tariff hike, coal pooling and cabinet committee clearance for projects worth INR1.4t)
could help bring back investment and growth in this segment.
10.4
9.2
7.1 8.1
5.3 6.2
3.6 4.0 4.6
3.0
FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E FY17E
3 March 2014 32
Financials | Thematic
Formal savings in India lower than rest of developing world and other BRIC economies
Source: Asli Demirguc - Kunt and Klapper, L (2012): Measuring financial inclusion', Policy Research Working Paper, 6025, World Bank
3 March 2014 33
Financials | Thematic
Strong branch expansion has started yielding results. This is reflected in the number
of savings accounts added in rural areas in last three years – up from 60.2m to
100.8m. India’s best run bank, HDFCB’s strategy of entering semi-urban areas in the
hinterland to tap the increasing potential has played well. There remains huge scope
for financials to penetrate into the hinterland and bring about a shift from informal
sources to the formal segment.
Spreading into the hinterlands to grab a vast space of opportunity Business correspondent model
3 March 2014 34
Financials | Thematic
High borrowing costs, interest rate volatility to act as constraints for NBFCs (COF %)
SHFT MMFS HDFCB SBIN YES
Banking license to provide The biggest incentive for an NBFC to opt for a banking license is to bring stability to
access to granular retail the liability profile. However, building a liability franchise is not an easy task. For SA
deposits – a big positive;
deposits to cross the 20% threshold, it took nine years for HDFCB, sixteen years for
however, competition is
ICICIBC and thirteen years for AXSB.
immense
The two banks that started operations in 2003-04 (YES and KMB) have found it
difficult to build a low cost deposit franchise, despite being in business for over
3 March 2014 35
Financials | Thematic
eight years. Only post savings rate deregulation, when these banks raised their
interest rates on SA deposits to 5-7% (v/s 4% for over 98% of the banking system),
some traction was witnessed. The gap between the top-3 and smaller banks is
yawning, as overall CASA ratio of the latter is equal to or lower than the SA
proportion of the former.
SA ratio moving up post deregulation of savings rates (%) CA build-up has been relatively easy (%)
HDFCB ICICIBC AXSB HDFCB ICICIBC AXSB
IIB Kotak YES IIB Kotak YES
40.0 30.0
30.0
20.0
20.0
10.0
10.0
0.0 0.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Source: Company, MOSL Source: Company, MOSL
Market share of smaller private banks started inching up (%) Share in CA deposits relatively steady (%)
ICICIBC HDFCB AXSB ICICIBC HDFCB AXSB
YES IIB KMB YES IIB KMB
6.0 8.0
6.0
4.0
4.0
2.0
2.0
0.0 0.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
For new players, offering New players would find intense competition for SA deposits. The critical success
higher interest rates on factors for SA deposit mobilization are: (a) branch network, (b) retail asset base, (c)
savings accounts would be service, (d) innovative products, and (e) technology. While the new players are
the most important tool to likely to have service and technology in place, attaining critical mass will take time.
garner deposits In our view, the new entrants would take advantage of deregulated SA deposit
rates and offer interest rates at par with or higher than the smaller incumbent
banks.
3 March 2014 36
Financials | Thematic
0.5
0.3
0.2
Leveraging capability higher for banks than for NBFCs (average assets/average equity (x))
Some entities are running at Average FY09/13
14.4 14.9
less than half of the private
sector banks’ leverage 12.4
11.2 11.6
7.8 8.0
6.5
4.8 5.4
ICICIBC KMB HDFCB AXSB YES IIB IDFC MMFS SHFT LIC
3 March 2014 37
Financials | Thematic
Kotak: A legacy NBFCs is among the most successful bank in Indian Financials
Achieving PSL targets will be a daunting task for some entities on a higher loan base
Target % of Adjusted Net Bank
Priority Sector Activities Credit
Direct and indirect agriculture agri allied
Agriculture activities 18%
Micro enterprises, small enterprises,
MSME education, housing No specific target
Export credit MSE engaged in export activities No specific target
Advances to weaker
section Small farmers, SHG 10%
Source: RBI, MOSL
3 March 2014 38
Financials | Thematic
Rural and semi-urban market share: Deposits – 23% Rural and semi-urban market share: Credit – 20%
Rural Rural
9% 9%
Semi-urban
Semi-urban
11%
14%
Metro
urban
56% Metro 18%
urban 62%
21%
Proportion of banking system deposits and credit from top-200 centers (%)
Banking is highly Deposits Loans
concentrated in top 200
FY10 FY11 FY12 FY13 1HFY14 FY10 FY11 FY12 FY13 1HFY14
centers, which account for
Top 8 48.8 48.9 47.6 46.4 45.3 58.9 58.9 58 57.4 57.3
73% of deposit base and
Top 20 55.8 56.3 55.2 54.2 53.4 67.2 67.6 66.8 66.0 65.9
80% of loans
Top 100 69.4 69.7 69.1 68.6 67.9 78.0 78.6 78.3 77.2 76.7
Top 200 74.4 74.6 74.1 73.6 73.0 81.5 82 81.7 80.8 80.3
Source: RBI, MOSL
3 March 2014 39
Financials | Thematic
FY12: 67% of Incremental branches in semi-urban/ rural areas FY13: 72% (competition is increasing)
Metro Metro
20% 12%
Rural
29% Rural
Urban 37%
16%
Urban
13%
Semi-urban Semi-urban
38% 35%
HDFC and HDFCB: HDFC and HDFCB are running as independent entities. HDFC has
refrained from merging itself with HDFCB, as the impact of regulatory compliance
could significantly alter the return ratios of the combined entity.
KMB and Kotak Prime: KMB is still running its car financing business as an NBFC
subsidiary, which still accounts for 20% of the consolidated profitability and has
delivered better profitability than the consolidated entity.
Shriram Group keen to run CV financing business separately: The Shriram group is
not very keen on converting Shriram Transport Finance (SHTF) into a bank. The
group has also made a request to run this business separately. However, it seems
unlikely that the RBI would allow this, at least in this round.
3 March 2014 40
Financials | Thematic
In the initial round, NBFCs with strong track record and good corporate governance
are likely to get banking licenses. Corporate houses may be awarded in the second
round. Our key bets are IDFC, LICHFL, LTFH and Janalakshmi Finance (JFS).
NBFCs with large asset base/weak profitability are likely to suffer most. A large part
of the dent in earnings would be on account of regulatory reserves and priority sector
requirement. Return ratios of existing players could fall by over 50%.
Placing our bets in round one: While credentials of most of the applicants are excellent, we believe IDFC
IDFC, LICHF, LTFH and JFS; (established track record; expertise in Infrastructure sector), LTFH (professionally
ABNL and BJFIN may get managed; strong parentage; diversified loan book), LICHF (strong parentage; large
license in round two. customer base), and Janalakshmi Financial (experienced management and expertise
Department of Post could be a
in financial inclusion via MFI model) are the strong contenders in round one. While
dark horse.
ABNL (strong brand; established financial services business) and BJFIN (strong
brand; diversified lending business) also have strong chances, in our view, business
houses may not be considered in the first round of licensing.
3 March 2014 41
Financials | Thematic
We have analyzed the impact on the financials of our-coverage NBFCs like SHTF,
LTFH will see maximum BJFIN, LTFH, IDFC and LICHF. Our analysis suggests (based on FY13 balance sheet)
impact due to lower return that in the first year of conversion of an NBFC into a bank, profitability will be
ratios and large asset base significantly hit and RoE will at least halve (from the existing 18-20%) due to
regulatory costs (CRR, SLR, PSL), coupled with increased operational and
provisioning costs.
PAT impact will be high for Companies having lower RoA will see higher impact on PAT. Our back-of-the-
companies with low RoAs envelope calculations suggest that the impact on account of CRR and SLR will be 10-
and larger asset base 40% of PAT for the first year, keeping other things constant. The impact will be
much for companies like LTFH that have lower RoA coupled with relatively larger
asset base.
PSL another drag on NBFCs do not have any mandatory requirement of fulfilling priority sector lending
profitability; however, targets. As banking entities, they will have to keep 40% of the outstanding previous
transition period of 30-37 year loan book as priority sector loans. Priority sector lending (PSL) is an extremely
months given
difficult business as it has lower yields and has the highest NPAs in the system.
3 March 2014 42
Financials | Thematic
Some NBFCs like IDFC do not have any priority sector loans in their balance sheet,
which will make extremely difficult for them to bring in the priority sector loans.
Some of the NBFCs like SHTF, BAF and LICHF have loans that qualify under PSL.
NPA norms to tighten; Post the conversion of an NBFC into a bank, credit cost would increase significantly.
credit cost to go up Currently, NBFCs (excluding HFCs) recognize NPLs on 180-day past due as against
90-day past due for banks. Though we have not factored this impact in our analysis,
credit cost is likely to go up significantly in the initial years. Impact will be lower on
companies like IDFC, BAF (already following stringent policy) and LICHF (already on
90dpd norm).
Some NBFCs are operating at a cost to income ratio of <20% due to corporate
Opex to go up; most NBFCs
business proportion being higher, limited branch and greater reliance on generating
running at C/I ratio of <20%;
branch banking and retail business through agents or tie ups, and branches at low cost locations (2nd/3rd
focus to increase C/I ratio floors of building; not main street locations). NBFCs getting converted into banks
considerably will have to put in place new systems and processes, recruit trained manpower to
handle the banking business, open new branches, etc, which will lead to higher
opex in the initial years and will impact profits, though difficult to quantify
currently.
Strategies that NBFCs can adopt to lower the regulatory cost impact
Focus on reducing the balance sheet size by actively engaging into securitization/assignment transaction. Benefit
of this arrangement will be a) retention of existing customer base b) lower reported loan book leading to lower
PSL requirement c) Less strain of CRR/SLR in the initial years.
On receipt of banking license large share of disbursement in building PSL book and non renewal of working
capital loan. Retail/project financiers are unlikely to get significant benefit from the same.
Acquisition of strong regional private bank/small private banks, helping to expedite the branch rollout and PSL
fulfillment. NBFCs focused on PSL like MFI can also be good acquisition candidate.
Significant focus on technology and outsourcing, new low cost business models like Business correspondents,
ultra small/mini branches etc to reduce burden on P&L.
Attracting talent via heavy ESoPs rather than upfront high salaries.
3 March 2014 43
Financials | Thematic
3 March 2014 44
Financials | Thematic
NPB: Emerging winners NPBs marginalized other peers with rapid market share gains in assets as well as low
cost deposits (core of the banking business).
We expect this trend to continue; despite technological improvement, state-owned
banks are likely to continue losing market share, as:
(1) Competitive landscape intensifies – new players come with less baggage
(2) Existing NPBs strengthen their foothold in semi-urban and rural areas; state-
owned banks’ dominance in these regions could be passé
(3) Realignment of business model is a must for state-owned banks, as continuous
weakening of liability profile, lower return ratios and tier-I capital would
constrain growth especially in an environment where capital rules are becoming
more stringent.
While we expect industry loan growth to be ~17%, market share gains should drive
20%+ growth for NPBs.
Two decades of Over the last two decades, NPBs have been continuously gaining market share from
marginalization of the state-owned banks. We expect this to continue for years to come. The
state-owned banks; underlying reason for our view is three-fold: (1) competitive intensity would
market share loss to
increase, as new banks come into play, (2) existing private banks are strengthening
hasten, as new private
banks come in the play their foothold in semi-urban and urban areas, where state-owned banks’
dominance would be challenged, and (3) state owned banks are struggling with the
capital and employee related issues.
Structural issues of state- State-owned banks are facing structural issues in terms of weakening of liability
owned banks: weakening franchise (aggregate CASA ratio ex-SBIN has dropped to 29% from 37% in FY05).
liability profile, The situation is more exasperate in case of mid-sized state-owned banks, where the
low capitalization and
liability profile has become even more feeble (CASA ratio of 24-26%), making them
fixed cost structure
susceptible to systemic interest rate volatility. Tier-I capital of the state-owned
banks is significantly lower than private peers, and with the Indian Banking system
moving towards more stringent capital rules, the dependence of state-owned banks
on government (for capital) would increase further.
Expect state-owned banks We expect industry loan CAGR to be ~17% over the next decade. Assuming that
to lose 10% market share in loan CAGR of state-owned banks is a tad lower at 15%, they would lose ~12%
the next decade
market share. We expect the loan market share of state-owned banks to drop to
64% by the end of FY23. This would translate into a large pie of INR33.8t (55+% of
the FY13 loan book), direct beneficiary of which would be the NPBs.
3 March 2014 45
Financials | Thematic
Potentially, loan book can expand 10x for NPBs in next 12 years (INR t)
Private financials (Matrix): Strong return ratios and trading at an attractive valuations
Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%)
(INR) (USD b) FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16
ICICIBC* Buy 1,044 19.4 96 110 8.5 7.2 574 651 1.4 1.3 1.7 1.7 15.7 15.7
HDFCB Buy 668 25.5 45 56 14.9 11.9 214 257 3.1 2.6 2.0 2.1 22.8 23.8
AXSB Buy 1,266 9.5 148 171 8.6 7.4 935 1,077 1.4 1.2 1.7 1.7 16.9 16.9
KMB* Neutral 683 8.4 37 42 18.4 16.2 272 313 2.5 2.2 1.7 1.7 13.3 13.3
YES Buy 305 1.8 51 58 6.0 5.2 239 287 1.3 1.1 1.5 1.5 23.3 22.2
IIB Buy 397 3.4 31 38 12.6 10.6 189 220 2.1 1.8 1.7 1.7 17.9 18.3
VYSB Buy 545 1.6 41 46 13.4 11.8 409 447 1.3 1.2 1.1 1.1 10.4 10.8
FB Buy 77 0.2 11 13 7.2 6.0 90 100 0.9 0.8 1.1 1.1 12.4 13.4
J&KBK Buy 1,335 1.0 257 278 5.2 4.8 1,375 1,577 1.0 0.8 1.5 1.4 20.1 18.9
SIB Neutral 21 0.5 4.1 4.5 5.2 4.7 27 31 0.8 0.7 0.9 0.9 15.7 15.3
Source: Company, MOSL
3 March 2014 46
Financials | Thematic
At the core of banking is liability franchise and building low cost franchise is a
herculean task. Smaller NPBs were able to mobilize SAs (except YES) but the pace of
growth was slow and raising rates was the preferred option.
New players could join in raising SA deposit rates, as strong competition would
otherwise act as a deterrent in improving liability profile.
Poaching of employees and shift of large corporate ecosystem business are the other
risks that could impact the performance of existing private banks.
On the assets side, with competition already very strong and cost of funds expected
to be higher for new banks, we do not expect significant pressure on lending yields.
Small private banks ride on Deregulation of SA deposit rates has taken competitive intensity to the next level,
high SA deposit rates with few of the small private banks offering SA deposit rates of 5-7%. Their
aggressive pricing strategy has led to a shift in the share of SA deposits in favor of
small private banks – increase of 3x+ (43bp) to 1.2%. To attract low cost funds, new
banks could also adopt an aggressive pricing strategy. Given that they do not carry
any past baggage, this would put further pressure on incumbents.
Private banks offering differentiated rates have witnessed strong growth (%)
FY05/11 FY11/13 173
ICICIBC and VYSB report 68
FY05/11 CAGR 22%
moderate SA deposit FY11/13 CAGR 15%
172
growth; state-owned banks 42
continue to grow below 34 33 35
industry average 18 19 17 21 21 20 21
13 13 4 13 18 25 52 48 7 18 22 13
VYSB
ICICIBC
SIB
Other
Group
AXSB
YES
HDFCB
Private
JKBK
FB
IIB
KMB
SBI &
PBS
SA rate deregulation, game changer: Aggressive ad campaigns by Kotak, IIB and Yes Bank offering higher SA rates
State-owned banks and Small private sector banks offering higher rates on SA deposits have gained market
foreign banks are getting share. FY13 data reflects that foreign banks (lost 90bp to 2.4% over FY11-13 as
marginalized in SA market against steady-state of 3.3-3.5%) and state-owned banks (drop of 1%) have lost
significant ground.
3 March 2014 47
Financials | Thematic
Pace of market share gains While the large private sector banks gained market share, the pace of market share
for the large three private gains slowed down. ICICIBC gained just 10bp in the last three years. AXSB and
sector banks slows HDFCB have gained 50bp each, implying a gain of 15-20bp per year as compared to
an average of 40bp+ over FY04-10.
Pace of market share gain has slowed down for large NPB (%) NPBs gained on cost of incumbents; SBIN market share stable
FY04 FY10 FY13 FY04 FY10 FY13
5.0 57
4.8 4.9 50 49
4.5
3.6
3.1 29 30 30
2.2 17 19
2.1 11
3 3 2
0.7 0.170.40
0.220.41 0.34
Associates
Foreign
owned
Private
Banks
State-
Banks
Other
0.04
Banks
0.11 0.01
SBI &
ICICIBC HDFCB AXSB IIB KMB YES
Impact of 18bp and 5bp on NIMs for every percentage change in SA deposit rate and proportion respectively
3 March 2014 48
Financials | Thematic
If select NBFCs convert into banks, the initial phase would require realignment of
their business model. This would leave a gap and competition would ease in the
intermediate phase, thus providing opportunity for NBFCs like MMFS, SUF, CIFC etc.
Successful applicants will explore to reduce the balance sheet size to minimize
regulatory cost, while existing players will scout for buying portfolios and fill the gap
left by them.
Achieving priority sector targets, along with building liability franchise will be crucial
for new applicants. This could spur M&A activity and small private banks would be
targets. VYSB, FB and DCB Bank seems good bets.
Regional private sector Intense competition in metros and urban areas and RBI’s thrust on financial
banks like FB, VYSB, DCB etc inclusion (pushing banks to expand into unbanked areas) would shift the focus on
are good contenders for banks having niche presence and expertise in rural lending. Achieving priority
acquisition. sector targets will be a crucial parameter (existing banks are finding it difficult). This
along with the desire to strengthen liability franchise (achieve higher CASA ratio)
with the strong presence in key markets will be the crucial determinant.
Regional banks: Unionized New banks may focus on targeting the existing bank. However, the unionized work
labor and strong force and high community presence in regional banks may be a deterrent. In the
community presence - an past, several deals did not go through due to these issues. Most of the old private
aspect to be content with sector banks still have unionized labor, though the strength/bargaining power has
started diluting in recent years. Freeing of branch licensing, valuations will be one
of the key considerations for acquisition now .
VYSB, FB and DCB Bank Amongst the existing banks VYSB, FB and DCB Bank could be attractive
most attractive bets propositions. Others like Dhanalaxmi Bank, Lakshami Vilas Bank, Catholic Syrian
Bank etc with weak financials but strong presence in key markets (TN, Kerala etc)
may also be considered. Certain regional banks with healthy financials like CUB,
KVB etc can also be takeover targets. However, any potential M&A will bring with
itself own set of challenges considering long operating history of small private
banks.
3 March 2014 49
Financials | Thematic
65% of the branches in Strong foothold in southern, urban and metro regions: VYSB’s branch network
southern region spans ~550 branches, with more than 65% of the branches located in southern
region. Further, of the overall network, 65% of branches are located in metro and
urban areas (proportion of metro and urban area to overall Indian banking business
is ~80%). CASA ratio is ~32%, with higher proportion of CA deposits (~19%;
leveraging strong corporate relationship).
Reduced unionized labor force: Addition of new employees (not a part of IBA) and
induction of employees directly to its payroll has led to a sharp reduction in the
proportion of unionized employees to nearly 33%, compared to 50%+ in FY11.
Sep-09
Feb-14
Feb-04
Sep-09
Feb-14
Jun-07
Dec-12
Jun-07
Dec-12
Jul-08
Jul-08
Oct-10
Oct-10
Apr-05
May-06
Apr-05
May-06
Nov-11
Nov-11
3 March 2014 50
Financials | Thematic
Retail and SME stress reduces, high coverage ratio: Net stress loans of 5.4% are
comparatively higher than some of its peers. However, improved backend
Significant improvement in processes and risk management systems are yielding results, with slippages in SME
risk management and back and retail segment continuously trending down. While corporate segment remains
end processes vulnerable, consolidation of the corporate book (lower by 26% YTD) over the last
three quarters and management’s guidance of most stress already been recognized
provide some confidence. PCR (including technical write-off) is strong at 83% and a
large recovery expected from a government account (exposure of INR2b) provides
cushion to earnings.
Structural improvement in liability profile and granularity on asset side: Bank has
utilized the consolidation phase to de-bulk its balance sheet. Retail deposits stand
at 93% and CASA ratio at 30%+ (highest since FY99) and on the asset side, SME
(niche expertise) has increased to 25% v/s 16% in 1QFY12 and retail loans are at
32%+, indicating a strong granular business.
Sep-09
Feb-14
Feb-04
Sep-09
Feb-14
Jun-07
Dec-12
Jun-07
Dec-12
Jul-08
Jul-08
Oct-10
Oct-10
Apr-05
May-06
Apr-05
May-06
Nov-11
Nov-11
Promoter holding at 18.5%: Its promoter and promoter group, the Aga Khan Fund
for Economic Development (AKFED) and Platinum Jubilee Investments Ltd, hold
3 March 2014 51
Financials | Thematic
Calibrated growth strategy: DCB consolidated its business in FY09-10 after it was
impacted by high NPLs due to exposure to unsecured retail loans. Since then the
Share of bulk deposits portfolio mix of retail loans (45% of loans) has shifted from unsecured PL and CV
business declined loans (32% in FY09) to more secured mortgages (39% of portfolio). Further, bulk
considerably business (corporate loan) proportion declined to 24%, compared to the peak of
34% in 2QFY11, which in the current environment is more risky, particularly for
DCB, due to lower balance sheet size. SME loans in 3QFY14 stood at 19%. Bank is
well poised to grow above the industry growth rates, which is demonstrated by
balance sheet expansion of ~23% CAGR (post consolidation phase).
Retail deposits proportion - among the best: One of the bank’s key strength is the
high proportion of retail deposits (77% at end-3QFY14). Strong expansion in
balance sheet without commensurate growth in retail and CASA deposits led to a
decline in CASA ratio (27% against the peak of 35% at end-FY11). However, this
remains the best among peers and gives a scalable platform to the new player.
Well capitalized: The bank is well capitalized with tier 1 capital of ~12%. With
sufficient capital and strong management in place, it is geared to tread the growth
path and is well poised to deliver medium term goals.
3 30 Negative
Negative Earnings
2 Earnings 1.6 20 18.5
Cycle
Cycle 1.0 16.0
1 1.3 10 7.7
0 0
Sep-09
Feb-14
Sep-09
Feb-14
Jan-09
Jan-09
Mar-11
Mar-11
Jun-10
Jun-10
Jul-07
Aug-12
Jul-07
Aug-12
Oct-06
Oct-06
Apr-08
May-13
Apr-08
May-13
Nov-11
Nov-11
3 March 2014 52
Financials | Thematic
Companies
BSE Sensex: 21,120 S&P CNX: 6,277 March 2014
Bajaj Finserv 56
IDFC 59
Janalakshmi Financial
Services 62
Shriram Capital 68
3 March 2014 53
Thematic | Sector: Financial
3 March 2014 54
Aditya Birla Nuvo
3 March 2014 55
Thematic | Sector: Financial
Bajaj Finserv
BSE Sensex S&P CNX
21,120 6,277 CMP: INR720 Not Rated
3 March 2014 56
Bajaj Finserv
3 March 2014 57
Bajaj Finserv
3 March 2014 58
Thematic | Sector: Financial
IDFC
BSE Sensex S&P CNX
21,120 6,277 CMP: INR94 Buy
3 March 2014 59
IDFC
IDFC: Leading IFC with a loan book of INR560b IDFC: Shareholding well diversified
Others
15%
Energy
34%
Telecom
26%
Transportat
ion
25%
3 March 2014 60
IDFC
3 March 2014 61
Thematic | Sector: Financial
3 March 2014 62
Thematic | Sector: Financial
3 March 2014 63
LIC Housing Finance
LICHF: Second largest HFC with loan book of INR865b LICHF: Strong promoter backing
Developer
Loan
3%
Individual
Home Loan
97%
LICHF: If parent (LIC) comes under NOFHC, structure may turn complex
3 March 2014 64
LIC Housing Finance
3 March 2014 65
Thematic | Sector: Financial
View: Low ROA of ~1% - constrain for near term profitability if converted into a bank
LTFH trades at 1.8x FY15E BV, and has a RoA of 1% and RoE of ~11%. We do not have a formal coverage on
the stock.
3 March 2014 66
L&T Finance Holdings
3 March 2014 67
Thematic | Sector: Financial
Shriram Capital
BSE Sensex S&P CNX
21,120 6,277 Not Listed
3 March 2014 68
Shriram Capital
SHTF AUM mix: CVs account for 70% of AUM SCUF loan mix: diversified retail lender
DII
3%
FII FII
50% 26%
3 March 2014 69
Financials | Thematic
Click here for further details Annexure: New banking license guidelines
Key takeaways from RBI final guidelines on banking license
3 March 2014 70
Financials | Thematic
Exposure norms for the financial entities (ex-bank) held by the NOFHC
The financial entities held by NOFHC shall not have: A) Any credit and
investments exposure to the Promoter Group entities or individuals associated
with the Promoter Group or the NOFHC. B) Shall not make investment in the
equity / debt capital instruments amongst themselves. C) Cannot invest in
equity instruments of other NOFHCs
3 March 2014 71
Financials | Thematic
Bank shall maintain arm’s length relationship with Promoter / Promoter Group
entities, and the major suppliers and major customers of these entities.
3 March 2014 72
Financials | Thematic
3 March 2014 73
Financials | Thematic
Notes
3 March 2014 74
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