: The Indian banking industry has developed the capacity to absorb turmoils, says Sitanshu Swain
Despite suffering the heaviest correction in the fourth quarter, Indian banking has topped the charts in value creation in FY 2007-08 among all major economies, says the latest report of Boston Consulting Group titled "Managing Shareholder Value in Turbulent Times".
Reeling out vital statistics, the report says overall, the global banking sector's average total shareholder return (TSR) plummeted by 93% in 2007, to 1.7%, and was well below the 15.2% average TSR of all industries.
Globally, the sector's market capitalisation increased by a mere 2.4 % to $8.3 trillion-a stark change from 2006, when market cap grew by 31%. Since the end of 2007, shareholder returns in the banking industry, in general, have deteriorated rapidly: in less than three months, the sector's market cap has dropped by more than 15%, to $7 trillion from $8.3 trillion.
The report, which has claimed to analyse a sample of banks representing more than 75% of total banking market capitalisation, shows that 2007 was a year with two halves.
In the first half of 2007, the sector's market capitalisation grew by 5.7 %.
In the second half, as the crisis became more widespread, banks lost $269 billion in market value.
A gaping performance divide separated ten major developed markets from the rest of the banking world. Banking total shareholder returns (TSRs) in these developed markets fell to an average of about -13%, while the average TSR outside these markets was about 27%. Emerging markets, in particular, avoided much of the turmoil and provided a counterweight to the weak performance of western and Japanese banks.
"Even among the BRIC countries, the Indian banking sector outshone everyone else in 2007 in value creation," said Saurabh Tripathi, partner and director at the Boston Consulting Group. "This is despite the heaviest correction in Q1 of 2008."
Also the banking and non-banking financial services (NBFS) gave consistent returns, beating the market across all-time horizons over the last 5 years. Axis Bank and BoI were the toppers among banks in consistent value creation over all 3 horizons (1, 3, and 5 years), says the report.
The large equity issuances by several banks have improved their loss absorption capabilities and hence their resilience to negotiate downside risks, says Fitch.
The non-performing assets ratios will mostly rise from their historic lows but not to alarming levels.
Individual ratings of most banks are still relatively low so downside risk is limited and outlook is mostly stable, explains the rating agency.
Improving credit culture and risk management systems, improving creditors' rights has also improved prudential regulations and more proactive supervision, says Fitch.
The earnings of Indian banks remain largely net interest income (NII) driven although fee income is rising.
Though net interest margin (NIM) has been under pressure; banks with a larger proportion of low-cost deposits have been less affected
A severe fall in property prices - although unlikely - could affect the banks' residential (13% of loans) and commercial property lending (4% of loans) portfolio. Also, the larger private banks may increase market share at the expense of government banks and consolidation in the longer term may enhance Indian banks' performance and operational efficiencies, says Fitch.
Despite volatility in rates and uncertain atmosphere, the credit offtake in the first two months of this fiscal has been better, OP Bhatt, chairman, State Bank of India (SBI) points out. "Credit offtake will not go down very much. We expect a 20% credit growth this fiscal. Even then, the growth rate would be far lower as compared to the nearly 30% credit growth clocked in the previous year," he says.
KV Kamath, managing director and CEO, ICICI Bank said he too does not expect a further slowdown in the growth of his bank's retail portfolio. "Retail growth has already slowed down and I don't see it slowing down further, he said."
However, strong corporate profitability and comfortable liquidity conditions have lessened the pressure on the banking industry, which was witnessing a sluggish growth in the past few months, Kamath observes. "Liquidity is comfortable, credit offtake has moderated. The good news is that corporate profitability is strong and liquidity is comfortable."
However, another international rating agency Moody's says although evidence over recent years had shown that the robust growth in retail loans had been sustained, these credits experienced a significant slowdown in growth to 29.9% in FY 2007 from 40.9% in FY 2006.
These retail loans have yet to be fully tested in a negative credit cycle. The high growth rates in recent years, pointing to a credit boom environment, may give rise to some concerns with regard to the quality of retail loans amid unfavourable economic conditions.
Moody's believes that certain banks may not have the comprehensive credit scoring and monitoring systems and tools in place for closely screening retail loans despite the unprecedented growth they experienced. This could leave them in a difficult position if delinquency rates were to rise substantially, a scenario we have observed in other retail booming emerging markets in Asia in the past.
"We hold a positive view on the increasing role that banks other than PSBs will be playing in the Indian market in the years to come. Increased competition will eventually translate into a more efficient and transparent banking system. All banks will ultimately be forced to adopt the new products, rigorous credit culture, and sophisticated management information systems (MIS) that foreign and private sector banks are fostering," says Moody's.
Looking ahead over the medium to longer term, the larger PSBs will eventually be in a position to offer better quality of service and a wider product range to their customers, putting them on a more equal footing with their private sector and foreign counterparts. In addition, PSBs will also improve their revenue-earning capacity through increased non-interest income from services such as cash management, which are increasingly being required by large corporates, observed Moody's.
"While, PSU banks cannot have same multiples as private banks, appropriate changes in the business model, HR practices, technology usage, and a few other initiatives can increase the multiple to industry average levels," says BCG's
Tripathy.
Talking about the employee status, BCG pointed out that the compounded annual growth rate of employees in state-run banks between 2004 and 2007 stood negative at 1% while assets growth was 17%.
"These banks have done well in terms of their assets, branch presence, and have also ventured into newer businesses, however, the employee growth was negative. HR practices need to change. From 2009 onwards, state-run banks need to add 60,000-70,000 employees every year or else they will lose market share," Tripathi added. Meanwhile, the growth of employees in new generation private sector banks has been 80%, on a much smaller base, during 2004-07, the report said.
BCG advocated for a drastic improvement in the number of bank branches as the growth of bank branches has been at a very low rate of 2%, between 2001-07. Currently, the country has 57,829 branches as of end of 2007.
Clearly, with or without all the current turbulence, a much larger growth opportunity is awaiting the Indian banking industry.
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