Analysis of Banking Industry.pdf

7/29/2019 Analysis of Banking Industry.pdf

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1

Analysis of Banking Industry


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2

Industry Structure : 3Bank Group-wise performance : 8

Advances : 16

Deposits : 38

Investments : 56

NPAs : 67

Operating Expenditure : 96

Profitability : 113

Spreads : 152

Sectoral Deployment of Credit : 168

Review and Future Growth Projections : 176

Asset Quality : 209

Yield Analysis : 225

Player Profiles : 239


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3

Industry structure


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Overview of financial system in India


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Structure of scheduled commercial banks in India


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Structure of cooperative credit institutions


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Banks and DFIs - Important activities


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8

Bank group-wise performance


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9

Business


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Bank group-wise performanceThe business of all scheduled commercial banks (SCBs) grew at a CAGR of 22.5 per

cent, from Rs 29,853 billion in 2004-05 to Rs 82,495 billion in 2009-10.

Public sector banks, which includes State Bank of India (SBI) and associates and

Nationalised banks, have been the major driver behind the overall growth of SCBsbusiness for the past 5 years.


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Public sector banks

The business of public sector banks grew at a CAGR of 22.8 per cent, the highest

amongst all bank groups, from Rs 22,905 billion in 2004-05 to Rs 63,931 billion in 2009-

10, driven by a CAGR of 25.9 per cent in advances, between 2004-

05 and 2009-10. During the same period, deposits grew at a CAGR of 20.8 per cent.

The share of advances in funds deployed increased to 62.8 per cent in 2009-10 from

61.8 per cent in 2008-09, while the proportion of investments in funds deployed almost

remained stable at 28 per cent in 2009-10 (28.2 per cent in 2008-09).

Like in the previous years, public sector banks continued to dominate amongst SCBs

in terms share of business, where it stood at 77.5 per cent in 2009-10.


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Private sector banks

The business of private sector banks grew at a CAGR of 22.2 per cent, from Rs 5,330

billion in 2004-05 to Rs 14,553 billion in 2009-10, driven by a CAGR of 23.4 per cent in

advances and 21.2 per cent in deposits for the same period.

The share of advances in funds deployed declined to 57.4 per cent in 2009-10 from

59.1 per cent in 2008-09, while the share of investments in funds deployed increased to

32.2 per cent in 2009-10 from 31.5 per cent in 2008-09.

The segment stood second in terms of the share in total business at 17.6 per cent in

2009-10.


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Foreign banks

The business of foreign banks grew at a CAGR of 19.9 per cent, the lowestamongst all

bank groups, from Rs 1,618 billion in 2004-05 to Rs 4,011 billion in 2009-10, driven by a

CAGR growth of 16.7 per cent in advances between 2004-05 and 2009-10 - lowest

amongst all bank groups. Deposits grew at a CAGR of 22.5 per cent during the same

period.

The group had the lowest share of 4.86 per cent in the total business of SCBs in 2009-

10.


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Share of bank groups in SCBs - Total business


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16

Advances


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17

100%100%Total Credit

23%30%Other services

14%26%Personal Loans

47%32%Industry

16%12%Agriculture and allied activities

2009-102005-06Sectoral Deployment of Credit


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Public sector banks have grown at a faster pace over last 5 years All SCBs

Total advances of SCBs grew at a CAGR of 24.9 per cent, from Rs 11,508 billion in

2004-05 to Rs 34,971 billion in 2009-10.

However, growth in advances for SCBs declined, similar to last year, when the year-

on-year (y-o-y) growth in advances dropped from 21.1 per cent in 2008-09 to 16.5 per

cent in 2009-10.

Credit growth in 2009-10 was low due to improved access of corporates to non-bank

domestic sources of funds and tightening of credit by banks to retail sector due to

asset quality related concerns.

Working capital loans grew at a CAGR of 23 per cent to Rs 14,887 billion in 2009-10

from Rs 5,289 billion in 2004-05.

On a y-o-y basis, working capital loan growth declined to 15.6 per cent in 2009-10

from 23.7 per cent in 2008-09.


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Public sector banks have grown at a faster pace over last 5 years All SCBs

On the other hand, term loans witnessed a higher CAGR growth of 26.4 per cent to

reach Rs 20,083 billion in 2009-10 from Rs 6,219 billion in 2008-09.

Like working capital loans, term loans also witnessed a decline in y-o-y growth, from

19.3 per cent in 2008-09 to 17.2 per cent in 2009-10.

The share of working capital loans to total advances stood at 42.6 per cent in 2009-10,

a marginal decline of 30 basis points (bps) from the previous year, while term loans to

advances increased by 30 bps in 2009-10 to reach 57.4 per cent.


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SCBs - Breakup of advances


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Public sector banks

Advances of public sector banks increased at a CAGR of 25.9 per cent between 2004-

05 and 2009-10 to reach Rs 27,013 billion.

The term loans segment registered a CAGR of 27.6 per cent between 2004-05 and

2009-10, while the working capital loans segment grew at a CAGR of 24 per cent for

the same period.

In terms of y-o-y growth, total public sector banks advances growth declined to 19.5

per cent in 2009-10 (25.7 per cent in the previous year), while growth in working

capital loans and term loans declined to 18.7 per cent and 20.2 per cent, respectively

(27.9 per cent and 24 per cent, respectively last year).

The shares of working capital and term loans to total advances were stable (at around

45 per cent and 55 per cent respectively) for the public sector banks in 2009-10 as

compared to the previous year.


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Public sector banks - Breakup of advances


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Private sector banks registered a CAGR of 23.4 per cent in advances, where it

increased from Rs 2,213 billion in 2004-05 to Rs 6,325 billion in 2009-10.

Working capital loans registered a CAGR of 19.5 per cent between 2004-05 and 2009-

10, while term loans registered a CAGR of 25.2 per cent for the same period.

Overall growth in advances for private sector banks declined marginally to 9.9 per

cent in 2009-10 from 11 per cent in 2008-09. While the growth in working capital loans

dropped sharply to 5.8 per cent in 2009-10 (from 11.4 per cent in 2008-09), term loans

registered a y-o-y growth of 11.8 per cent in 2009-10 (up by 100 bps from the previous

year).

The share of working capital loans to total advances declined to 29.4 per cent in 2009-

10 from 30.6 per cent in the previous year. On the other hand, the share of term loans

to advances went up from 69.4 per cent in 2008-09 to 70.6 percent in 2009-10.


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Private sector banks - Breakup of advances


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Foreign banks

The total advances of foreign banks grew at a CAGR of 16.7 per cent, from Rs 753

billion in 2004-05 to Rs 1,633 billion in 2009-10. However, compared to other bank

groups, it was the only one to register a negative y-o-y growth in advances- a decline

of 1.3 per cent in 2009-10.

The group witnessed a CAGR of 17.9 per cent in working capital and 15.5 per cent in

term loans in 2009-10, but saw a yo-y decline of 0.8 per cent and 1.9 per cent

respectively for the same period.

The share of working capital loans to total advances of the group witnessed a

marginal increase from 53.1 per cent in 2008-09 to 53.4 per cent in 2009-10 to reach Rs

872 billion, while the term loans share declined marginally from 46.9 per cent in 2008-

09 to 46.6 per cent in 2009-10 to reach Rs 760 billion.


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Foreign banks - Breakup of advances


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Priority sector advances

Priority sectors have been an integral part of bank credit delivery in India.

The sector received a boost from RBI's initiative in recent years, which has increased

the credit flow into the sector. As per the revised guidelines, the priority sectors now

comprise agriculture, SSI, education and housing. Targets and sub-targets are now

linked to the adjusted net bank credit (ANBC) or credit equivalent amount of offbalance sheet exposure (CEOBSE).

Also, the sector received fresh impetus in the union budget 2011-12, where the

government has proposed to enhance the housing loan limit under the priority sector

from Rs 2 million to Rs 2.5 million.

Loans up to Rs 1.5 million availed for financing homes up to 2.5 million will now

recieve an interest subvention of 1 per cent.

This will attract higher credit flow to the sector with lower interest rates for the

borrowers, and will help banks to meet its lending targets.


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Priority sector lending targets


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Over the last one year (i.e. between 2008-09 and 2009-10), there has been growth in

priority sector credit from domestic commercial banks (public and private) and

foreign banks.

However, as compared to domestic banks, foreign banks growth in priority sector

lending declined for the second consecutive year (2009-10) leading to increasing share

of domestic banks in total priority sector advances (from 94 per cent in 2008-09 to 95

per cent in 2009-10).


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Over the last one year (i.e. between 2008-09 and 2009-10), there has been growth in

priority sector credit from domestic commercial banks (public and private) and

foreign banks.

However, as compared to domestic banks, foreign banks growth in priority sector

lending declined for the second consecutive year (2009-10) leading to increasing share

of domestic banks in total priority sector advances (from 94 per cent in 2008-09 to 95

per cent in 2009-10).

Public sector banks

The outstanding priority sector advances of public sector banks increased by 19.4 per

cent during 2009-10 as compared to 18.6 per cent during 2008-09.

The total priority sector advances of public sector banks constituted 41.6 per cent of

their ANBC in 2009-10, as compared to 42.7 per cent in the previous year.


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Advances to priority sector by public sector banks


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Priority sector advances by private sector banks increased by 14.7 per cent during

2009-10 as compared to 14.5 per cent last year, and accounted for 45.9 per cent of

ANBC, which is well over the prescribed target of 40 per cent set by the RBI.

Advances to priority sector by private sector banks


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Foreign banks

The growth rate of priority sector lending by foreign banks followed in last year's

footsteps, declining to 8.8 per cent in 2009-10 (as compared to 10.2 per cent last year).

Total priority sector advances by foreign banks constituted 35 per cent of their ANBC

(as compared with 39.5 per cent last year), which was above the prescribed target of 32

per cent set by the RBI.

Advances to the priority sector by foreign banks


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Foreign banks

Note:

With effect from April 30, 2007, the targets and sub-targets under priority sector

lending have been linked to ANBC [Net bank credit (NBC) plus investments made by

banks in non-SLR bonds held in HTM category] or credit equivalent amount of off-

balance sheet exposures (OBE), whichever is higher, as on March 31 of the previous

year.

The outstanding FCNR (B) and NRNR deposits balances will no longer be deducted

for computation of ANBC for priority sector lending purposes. Investments made by

banks in the recapitalisation bonds floated by the Government of India will not be

taken into account for the purpose.


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Foreign banks

Note:Existing investments (as on April 30, 2007) made by banks in non-SLR bonds held in

the HTM category will not be taken into account for calculation of ANBC, up to March

31, 2010.

However, fresh investments by banks in non-SLR bonds held in the HTM category

will be taken into account for the purpose.

Deposits placed by banks with NABARD/SIDBI, as the case may be, in lieu of non-

achievement of priority sector lending targets/sub-targets, though shown under

Schedule 8 'Investments' in the balance sheet, will not be treated as investment in non-

SLR bonds held under HTM category.For the purpose of calculation of credit equivalent of off-balance sheet exposures,

banks can use the current exposure method. Inter-bank exposures will not be taken

into account for priority sector lending targets/sub-targets.


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38

Deposits


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39

100%100%100%Total

67%61%67%Term

19%25%22%Savings

14%13%12%current

Private BanksSBI and AssociatesOverallType of Deposits


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OSCBs register lowest growth in deposits in 2008-09

All SCBs

The total deposits of all SCBs grew at a 5-year CAGR of 20.9 per cent to reach Rs

40,632 billion at the end of March 2009.

On a y-o-y basis, deposits of SCBs increased by 22.4 per cent in 2008-09.


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Breakup of deposits - All SCBs


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Total deposits - All SCBs

Term deposits, which account for a major portion of the total deposits, grew by 27.3

per cent in 2008-09 to reach Rs 27,161 billion. Low-cost deposits, which form 33.2 per

cent of the total deposits, rose by 13.6 per cent to reach Rs 13,471 billion at the end of

March 2009.


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SBI and associates

Breakup of deposits - SBI and associates


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Total deposits - SBI and associates


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Total deposits - SBI and associates

SBI and associate banks' total deposits grew from Rs 7,739 billion in 2007-08 to Rs

10,071 billion in 2008-09.

Term deposits grew at a robust 37.8 per cent in 2008-09, whereas low-cost deposits

increased at a steady 19.5 per cent during the same period.

The group's low-cost deposits constituted 38.6 per cent of the total deposits as of

March 2009 as against 42.0 per cent as of March 2008.

Nationalised banks

The total deposits of nationalised banks grew at a 5-year CAGR of 21.5 per cent to

reach Rs 21,057 billion at the end of March 2009.

In terms of year-on-year growth, the group saw an increase of 25.3 per cent in 2008-

09.


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Breakup of deposits - Nationalised banks


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Total deposits - Nationalised banks

Term deposits, which comprise a major portion of total deposits, grew by 31.2 per

cent Rs 14,772 billion in 2008-09.

The group's low-cost deposits, which form 29.8 per cent of the total deposits,

increased by 13.4 per cent to reach Rs 6,285 billion at the end of March 2009.


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Other scheduled commercial banks

Breakup of deposits - OSCBs


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Total deposits - OSCBs


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Total deposits - OSCBs

OSCBs recorded the highest CAGR of 22.4 per cent in total deposits between 2003-04

and 2008-09, mainly due to the new private sector banks, which are expanding their

operations aggressively.

The total deposits grew from Rs 2,686 billion in 2003-04 to reach Rs 4,285 billion in

2005-06 and Rs 7,364 billion in 2008-09.

Low-cost deposits constituted 32.7 per cent of total deposits of OSCBs. OSCBs do not

have a wide network of branches, which is essential for garnering low-cost deposit

volumes.

Moreover, the technology-driven customised products introduced by the new privatesector banks allow customers to switch between savings and term deposits.

The group's term deposits grew at a drastically lower rate of 9.2 per cent as against

17.1 per cent in 2007-08, to reach Rs 4,953 billion in 2008-09.


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Foreign banks

Foreign banks registered significantly lower year-on-year growth rate of 12.0 per cent

in total deposits, as against 26.8 per cent in 2007-08.

The group recorded a 21.7 per cent CAGR between 2003-04 and 2008-09.


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Breakup of deposits - Foreign banks


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Total deposits - Foreign banks


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The share of low-cost deposits in total deposits decreased slightly from 42.9 per cent

in 2003-04 to 41.8 per cent in 2008-09.

Within low-cost deposits, demand deposits have a higher share of 67.8 per cent, as

foreign banks generally prefer to cater to corporate clients who maintain current

account deposits, and also because they have sound cash management systems (CMS).

This explains the significant rise in current account deposits since 2006-07.

The savings deposits of foreign banks grew at a CAGR of 18.0 per cent from a lower

deposit base of Rs 126 billion in 2003-04 to Rs 288 billion in 2008-09.

Term deposits increased at a CAGR of 22.2 per cent from Rs 458 billion in 2003-04

to Rs 1,247 in 2008-09.


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Foreign banks generally cater to high net worth individuals (HNIs) and NRI deposits.

Besides, only very few banks, such as HSBC Bank, Standard Chartered Bank, Citibank

and ABN AMRO Bank, are involved in retail banking.

Many banks had hived off their retail business division and begun concentrating on

institutional business.

But, of late, foreign banks (those active in the retail business space) are also, with the

aid of technology, prompting customers to maintain low-costdeposits with them.

Moreover, a few foreign banks have started expanding their branch network to

increase the number of savings deposits.


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Investments


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Investments

Lower credit demand led to higher investments in 2009

Investments by banks fall into two broad categories:

Statutory liquidity ratio (SLR) investments (comprising government and other

approved securities eligible for being reckoned for maintaining the SLR) Almost four-

fifths of banks' investments fall under the SLR category.

Non-SLR investments (comprising commercial paper, shares, bonds and debentures

issued by the corporate sector).

Growth in investments by banks had decelerated marginally to 23.1 per cent in 2008-

09 from 23.7 per cent in 2007-08.However, the share of SLR securities in net demand and time liabilities (NDTL)

increased to 28.1at the end of March2009, as prevailing uncertainties encouraged

banks to park their funds in low-risk and low-return instruments.


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Investments in government and other approved securities

All SCBs

As per the Banking Regulation (BR) Act, 1949, banks have to invest a prescribed

minimum of their NDTL as liquid assets in government and other approved

securities.

The ratio of liquid assets to NDTL is known as SLR. As part of the financial sector

reforms undertaken in the nineties, the SLR requirement for banks had been gradually

reduced to 25 per cent by October 1997 from the peak of 38.5 per cent in February

1992.

However, despite this reduction, banks maintained average SLR investments of 37.3

per cent of NDTL from 1998-99 to 2002-03.

Such investments reached an all-time high of 42.7 per cent of NDTL in April 2004.


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Investments in government and other approved securities

All SCBs

Lower demand for credit owing to the slowdown in the industrial sector, which was

undergoing restructuring, forced banks to park their funds in government securities.

In the declining interest rate scenario, such investments became particularly attractive

for banks due to their high yields.

Incidentally, the period of low demand for credit corresponded with the period when

banks were making efforts to raise capital levels and reduce NPA levels.

Banks became slightly risk averse due to the application of capital adequacy norms,

which required them to maintain 8 per cent of their riskweighted assets as capitalfrom March 31, 1996, and the pressure to bring down their NPA levels.

Consequently, investments in government and other approved securities, which

attracted zero-risk weights, became the preferred mode of investments for banks.


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Statutory liquidity ratio - Excluding gold


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Statutory liquidity ratio - Excluding gold

Although the banking sector held excess SLR investments at Rs 1,698.46 billion

(above the prescribed minimum requirement of 24.0 per cent) at end-March 2009,

several banks were operating their SLR portfolio very close to the prescribed

minimum level. Excess SLR investments of SCBs increased to Rs 2,887.54 billion as on

September 25, 2009.

As a result, the share of SLR investments in NDTL increased to 30.4 per cent as of

September 2009 from 28 per cent as of March 2009.


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SBI and associates

In 2008-09, SBI and associates' investments in SLR securities increased to 28.29 per

cent.

This signalled a reversal in the group's downward trend (its SLR investments had

decreased to 25.2 per cent in 2007-08 from 26.5 per cent in 2006-07).

Thus, the growth clearly indicates a significant increase in the group's investments in

government securities in 2008-09.

Nationalised banks

Continuing the downward trend, SLR investments by nationalised banks declined

from 25.0 per cent in 2007-08 to 24.84 per cent in 2008-09.

This group had the least exposure to SLR investments amongst all bank groups.


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Bank group-wise statutory liquidity ratio


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The proportion of government securities in total NDTL of OSCBs increased

marginally from 25.5 per cent in 2007-08 to 26.15 per cent in 2008-09.

Foreign banks

Foreign banks have been constantly increasing their exposure to SLR securities, and

in 2008-09, their exposure was the highest amongst all bank groups.

The SLR ratio for foreign banks stood at 35.19 per cent in 2008-09 as against 33.3 per

cent in 2007-08.


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Non-SLR investments

Non-SLR investments of SCBs comprise commercial paper, investments in shares,

bonds/debentures issued by public as well as private sector companies, units of UTI

and other mutual funds.

Growth of banks' investments in non-SLR securities stood at 10.5 per cent in 2008-09

as compared with the increase of 14.3 per cent during the previous year.

The total flow of funds from SCBs to the commercial sector comprising credit and

non-SLR investments, increased by 17.5 per cent (Rs 4,210.9 billion) in 2008-09 as

compared with the rise of 22.6 per cent (Rs 4,448.1 billion) in the previous year.

The composition of non-SLR investments of banks has changed in recent years,

notably since 2004-05.


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Non-SLR investments

The share of banks' investment in shares, commercial papers and units of mutual

funds has been growing, while the share of investment in bonds/ debentures has been

declining, partly reflecting the changing risk appetite of commercial banks in India.

This trend also continued in 2008-09; the only exception was investment in shares,

which dipped due to the subdued conditions in the Indian stock markets.


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NPAs


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Nonperforming assets

Gross NPA for all SCBs flat at 2.3 per cent in 2008-09

As per the asset classification norms prescribed by the RBI, loan assets can be

classified into four categories standard assets, sub-standard assets, doubtful assets

and loss assets.

The central bank has prescribed appropriate provisioning requirements for each of

these asset categories.

Of the aforementioned categories, sub-standard assets, doubtful assets and loss assets

together make up nonperforming assets (NPAs). NPA is a loan or an advance where

interest and/or instalment of principal remain overdue for a period of more than 90

days.


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Nonperforming assets

Gross NPA for all SCBs flat at 2.3 per cent in 2008-09

Historically, the Indian banking industry has been plagued with high levels of NPAs,

which can be attributed to factors such as archaic policies, industrial inefficiency, lack

of adequate legal recourse to lenders and wilful defaulters.

However, from 2004-05 to 2007-08, the cyclical uptrend in the economy along with

the concomitant recovery in the business climate improved the abilities of the debtors

to service loans, thereby improving banks' asset quality.

Therefore, despite the sharp rise in credit growth in recent years, the proportional

levels of gross NPAs (to gross advances) as well as the absolute levels of gross NPAs

have declined significantly.


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The following factors have contributed to the striking improvement in the asset

quality of Indian banks:

1. Banks have gradually improved their risk management practices and introduced

more rigorous systems and scoring models for identifying credit risks.

2. A favourable macroeconomic environment in recent years has also meant that many

entities and units of traditionally risky industries are now performing better.

3. Diversification of credit base with increased focus on retail loans, which generally

have low delinquency rates, has also contributed to the more favourable credit risk

profile.


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The following factors have contributed to the striking improvement in the asset

quality of Indian banks:4. The RBI and the Central government have initiated several institutional measures to

contain the level of NPAs. These include debt recovery tribunals (DRTs), Lok Adalats

(people's courts), asset reconstruction companies (ARCs) and corporate debt

restructuring (CDR) mechanism. Settlement advisory committees have also been

formed at the regional and head office levels of commercial banks.In particular, banks can also issue notices under the Securitisation and Reconstruction

of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 for

enforcement of security interest without the intervention of courts, which has

provided more negotiating power to the banks for resolving bad debts.

Thus, banks have several options to contain their NPAs.These factors have helped banks to recover a large amount of NPAs during the year.

Banks were specifically advised to ensure that recoveries of NPAs exceed write-offs

while bringing down bad debts.


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ALL SCBs

Improvement in the asset quality of banks continued during 2008-09.

Indian banks recovered a higher amount of NPAs in 2008-09 as compared to the

previous year.

Though the total amount recovered and written-off in 2008-09 (Rs 388.28 billion) was

higher as compared to that in 2007-08 (Rs 282.83 billion), it was lower than the fresh

addition of NPAs (Rs 523.82 billion) during the year.

As a result, the gross NPAs of SCBs increased across bank groups.


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ALL SCBs


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ALL SCBs

Banks have recourse to various channels for dealing with bad loans; of these, the

SARFAESI Act and the Debt Recovery Tribunals (DRTs) have been the most effective

in terms of amount recovered.

The amount recovered as percentage of amount involved was the highest under the

DRTs, followed by SARFAESI Act.

The recovery rate (percentage of recovery to demand) of direct agricultural advances

of public sector banks declined to 75.4 per cent for the year ended June 2008 from 79.7

per cent a year ago.


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NPAs recovered by scheduled commercial banks through various channels


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NPAs recovered by scheduled commercial banks through various channels

The Reserve Bank has so far issued Certificate of Registration (CoR) to 12

Securitisation Companies/Reconstruction Companies (SCs/RCs), of which 11 have

commenced their operations.

As at end-June 2009, the book value of total amount of assets acquired by SCs/RCs

registered with the Reserve Bank was Rs 515.42 billion, clocking an increase of 24.5

per cent during the year (July 2008 to June 2009).

While security receipts subscribed to by banks/FIs amounted to Rs 95.70 billion,

security receipts redeemed amounted to Rs 27.92 billion.


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Details of Financial Assets Securitized by SCs/ RCs


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Movements in provisions for NPAs

Provisioning made during 2008-09 was higher than the write-back of excess

provisioning during the year for all bank groups.

Despite this, net NPAs increased due to the rise in gross NPAs. The outstanding

provisions to gross NPA ratio declined in case of all bank groups, except new private

sector banks and foreign banks.

The gross NPAs to gross advances ratio for SCBs remained constant at 2.3 per cent.

The gross NPA to gross advances ratio of public sector banks declined, but that of

private and foreign banks increased.

The net NPA ratio (net NPAs as percentage of net advances) increased marginally incase of SCBs.

As of end-March 2009, the net NPAs to net advances ratio of all public sector banks

was less than 2 er cent.


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Movements in provisions for NPAs

The distribution of this ratio in case of other bank groups was also skewed, with only

10 banks in the 'above 2 per cent and below 5 per cent' category, and only one bank in

the 'above 5 per cent and below 10 per cent category'.

In sharp contrast to the distribution of the ratio as at end-March 2005, no bank had a

net NPA to net advances ratio of more than 10 per cent.

This suggests overall improvement in the financial health of Indian banks in recent

years.

The share of NPAs in the 'doubtful' and 'loss' categories remained more or less static,

while the share of 'sub-standard category witnessed some variations.

As per the asset classification norms, a sub-standard asset is one that has been anNPA for up to 12 months.

Thus, the above-mentioned increase in the share of sub-standard category is

indicative of the deterioration of the assets in the last one-year.


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SBI and associates


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SBI and associates

Gross NPAs as a percentage of gross advances of the SBI group declined from 6.98

per cent in 2003-04 to 2.50 per cent in 2008-09 because the write-offs/recoveries in

the last few years were higher than the additions to gross NPAs, indicating an

improvement in the NPA management system.

Between 2003-04 and 2008-09, the ratio of net NPAs to net advances declined from

2.70 per cent to 1.50 per cent.

During the same period, the NPA provision cover for the group as a whole dropped

from 56.48 per cent to 40.76 per cent.

The share of SBI Group in gross advances of all SCBs declined from 29.97 per cent

in 2003-04 to 24.60 per cent in 2008-09, and the share in gross NPAs increased from

25.34 per cent in 2003-04 to about 26.67 per cent in 2008-09.


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SBI and associates

Thus, the ratio of share of gross NPAs to gross advances of the SBI Group to that of

all SCBs increased from 0.85 per cent in 2003-04 to 1.08 per cent in 2008-09.

The share of SBI Group in net advances of all SCBs declined from 28.93 per cent in

2003-04 to 24.60 per cent in 2008-09, and the share in net NPAs increased from

24.24 per cent in 2003-04 to about 34.39 per cent in 2008-09.

Thus, the ratio of share of net NPAs to net advances of the SBI Group to that of all

SCBs increased from 0.84 per cent in 2003-04 to 1.40 per cent in 2008-09.


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Nationalised banks


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Nationalised banks

The proportion of gross NPAs to gross advances declined from 8.21 per cent in 2003-

04 to 1.80 per cent in 2008-09, on account of recovery and write-offs of sticky assets.

Between 2003-04 and 2008-09, the gross NPAs decreased from Rs 355 billion to Rs 254

billion.

The provisioning cover fell slightly from 58.00 per cent in 2003-04 to 57.09 per cent in

2008-09, which caused the net NPA ratio to drop from 3.14 per cent in 2003-04 to 0.70

per cent in 2008-09.

The share of nationalised banks in total gross advances of all scheduled commercial

banks came down from 53.75 per cent in 2003-04 to 47.2 per cent in 2008-09.


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Nationalised banks

The proportion of gross NPAs of nationalised banks to gross NPAs of all SCBs also

declined from 56.34 per cent in 2003-04 to 36.81 per cent in 2008-09.

The proportion of net NPAs of nationalised banks to net NPAs of all SCBs

decreased drastically from 52.38 per cent in 2003-04 to 29.62 per cent in 2008-09 due to

higher provisioning/ write-offs of sticky assets.

The group had been making higher provisions towards NPAs to improve asset

quality.


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This signals deterioration in their asset quality. The ratio of gross NPAs to grossadvances increased from 0.63 per cent in 2003-04 to 1.28 per cent in 2008-09.

New private sector banks have been aggressive in their lending, and hence, have

seen an increase in gross NPAs.

The group's share in the advances has also been hovering at around 20 per cent in

recent years.

The proportion of net advances of OSCBs in the total net advances of all SCBs

decreased marginally from 19.96 per cent in 2003-04 to 19.17 per cent in 2008-09, while

the proportion of net NPAs of the private banks in the total net NPAs increased from

19.73 per cent to 23.89 per cent.The ratio of net NPAs to the share of net advances has gone up from 0.99 per cent in

2003-04 to 1.25 per cent in 2008-09. In spite of the significant increase in the proportion

of gross NPAs.


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Foreign banks

In the past, stringent risk management practices have helped foreign banks maintainthe lowest NPA levels amongst all SCBs.

However, the global financial downturn brought forth a new scenario, wherein

foreign banks registered the steepest increase in NPAs as compared to last year.

The proportion of gross NPAs to gross advances increased from 1.80 per cent in 2007-08 to 4.00 per cent in 2008-09, while the proportion of net NPAs to net advances rose

from 0.90 per cent to 1.70 per cent.

The share of foreign banks in gross advances of all SCBs declined from 7.94 per cent

in 2003-04 to 5.59 per cent in 2008-09.

Over the same period, the share of gross NPAs in all SCBs increased from 4.20 per

cent to 9.86 per cent, while the share of net NPAs increased from 3.65 per cent to 9.55

per cent.


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Restructuring of assetsLoans subjected to restructuring & corporate debt restructured - 2008-09


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Operating expenditure

Staff costTraditionally, staff cost as a percentage of total operating expenditure has been

significantly higher for public sector banks, and hence, they initiated the voluntary

retirement scheme (VRS) in the late 1990s to reduce this cost.

However, in the post-VRS period, public sector banks rationalised staff cost tocontain non-interest expenses.

In recent years, per employee cost of PSBs has risen due to the changing composition

of the staff and increased provisioning towards superannuation liabilities.

Wages by SCBs increased at 19.25 per cent in 2008-09 as compared with 10.8 per cent

in the previous year.

In terms of percentage to total assets, however, the wage bill of SCBs has remained

constant at 0.9 per cent.


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Staff cost

The ratio of wage bill to operating expenses increased from 51.7 per cent in 2007-08 to53.4 per cent in 2008-09.

Continuing the trend, the wage bill to operating expenses ratio was the lowest in

respect of OSCBs (39.0 per cent) in 2008-09, followed closely by foreign banks (39.8 per

cent).

The wage bill to operating ratio of all bank groups, except foreign banks, showed a

marginal rise during 2008-09.

We believe that staff costs should be viewed in conjunction with the quantum of

funds managed by the staff.

Hence, to analyse staff cost, we have compared the following ratios across bank

groups:

Average advances/staff costs

Average funds deployed (AFD)/staff cost


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Average funds deployed/staff cost


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SBI and associates


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The average advances to total staff cost ratio of OSCBs declined to 64 times in 2008-09

from 66 times in 2007-08, while AFD to total staff cost also decreased to 110 times in

2008-09 from 113 times in 2007-08.

Despite this, OSCBs continued to be the frontrunners in terms of productivity.

The branch network of OSCBs is not as large as that of public sector banks. In

addition, they have invested heavily in technology, thereby bringing down their staff

requirements.

For example, an ATM is manned by just one person and performs numerous basic

banking operations.Also, OSCBs make use of direct selling agents (DSAs) to source prospective clients,

which helps restrict need for staff.


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Foreign banks

The productivity of foreign banks is the lowest among all bank groups.

The group's ratio of average advances to total staff cost declined from 34 times in

2007-08 to 33 times in 2008-09.

The ratio of AFD to total staff cost increased marginally from 64 times to 66 times in

the same period.


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Foreign banks

Foreign banks witnessed the highest CAGR of 23.7 per cent between 2003-04 and

2008-09.

In absolute terms, the other operating expenses grew from Rs 26 billion in 2003-04 to

Rs 74 billion in 2008-09.

As compared with other bank groups, foreign banks invest heavily in advertising toreach customers, which is evident from their high advertisement expenses of Rs 7

billion in 2008-09, which was also the highest amongst all bank groups.


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Profitability


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Net profitability marginNPM of SCBs increased marginally to 1.66 per cent in 2008-09


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Net profitability marginNPM of SCBs increased marginally to 1.66 per cent in 2008-09

Research uses the net profitability margin (NPM) to measure profitability for a

lending business.

NPM is equivalent to the yield on carry business less cost of borrowings plus non-

fund (fee) income less operating expenses.

The net profitability margin for SCBs increased marginally to 1.66 per cent in 2008-09

from 1.52 per cent in 2007-08.

While spreads rose slightly by 3 bps, operating expenses to average funds deployed

(AFD) declined by 11 bps.

Core-fee income as a percentage of AFD remained almost constant at 1.24 per cent.


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Nationalised banks

NPM - Nationalised banks


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Nationalised banks

NPM - Nationalised banks

After having dropped by 41 bps in 2007-08, the NPM of nationalised banks increased

by 11 bps from 1.07 per cent in 2007-08 to 1.18 per cent in 2008-09.

NPM rose mainly because spreads increased by 4 bps, while the operating expense to

average funds deployed (AFD) declined by 7 bps.

Core fee income as percentage of AFD went down by 1 bps to 0.70 per cent.


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NPM - OSCBs


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NPM - OSCBs

The NPM of OSCBs increased by 30 bps from 1.54 per cent in 2007-08 to 1.84 per cent

in 2008-09.

Their spreads rose by 19 bps, while operating expenses to AFD and core fee income

to AFD decreased by 19 bps and 7 bps, respectively, in 2008-09.


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Foreign banks

NPM - Foreign banks


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Interest earned and expendedTotal interest income

All SCBs


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Interest earned and expendedTotal interest income

All SCBs

The total interest income for SCBs grew at a CAGR of 22.0 per cent from 2003-04 to

2008-09 on the back of a 32.6 per cent increase in interest on advances during the same

period.

Income on investments grew at a lower CAGR of 7.0 per cent during the period.


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SBI and associates

Total interest income - SBI and associates


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SBI and associates

Total interest income - SBI and associates

Between 2003-04 and 2008-09, the total interest income of SBI and associates grew at a

CAGR of 16.8 per cent, with interest on advances rising at a CAGR of 32.3 per cent.

Income on investments increased marginally at a CAGR of 0.1 per cent. During the

same period, interest on balances with the RBI and other inter-bank funds declined by

7.9 per cent.


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Nationalised banks

Total interest income - Nationalised banks

The total interest income for nationalised banks recorded a CAGR of 21.9 per cent

between 2003-04 and 2008-09, driven by a 32.7 per cent growth in interest on advances

and a moderate 5.5 per cent growth in income on investments


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Foreign banks

Total interest income - Foreign banks

The total interest income of foreign banks increased at a CAGR of 27.6 per cent

between 2003-04 and 2008-09.

The income on advances grew at a CAGR of 32.5 per cent, whereas income on

investments grew at a CAGR of 20.9 per cent.

During the same period, interest on balances with the RBI and other inter-bank funds

increased by 16.2 per cent.


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Nationalised banks

Total interest expended - Nationalised banks

From 2003-04 to 2008-09, the total interest expended by nationalised banks grew at a

CAGR of 26.7 per cent, while interest on deposits (the main component of total

interest expended) grew at a slightly lower CAGR of 25.6 per cent.

Interest on RBI and inter-bank borrowings and other interest went up significantly by

44.2 per cent and 40.3 per cent, respectively, during this period; however, their

proportion is too small to have substantial impact on the total interest expended.


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Total interest expended ?? OSCBs

The total interest expended by OSCBs increased at a CAGR of 26.6 per cent between

2003-04 and 2008-09, posting the second-highest growth amongst all bank groups.

Interest on deposits grew at a healthy CAGR of 30.1 per cent.

The interest on RBI and inter bank borrowings also increased at a CAGR of 41.0 per

cent.


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Foreign banks

Total interest expended - Foreign banks

From 2003-04 to 2008-09, foreign banks witnessed a CAGR of 24.5 per cent in total

interest expended.

Over the same period, interest on deposits and borrowings rose by 26.3 per cent and

19.8 per cent, respectively.

In general, domestic banks focus on mobilising deposits to meet their funding

requirements, while foreign banks (on account of their restricted branch network)

have a higher proportion of borrowings in their total borrowed funds vis-a-vis

their domestic peers.


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Other income

Core fee income essential to enhance profitability

Besides interest income, banks also earn fees from services such as issuing letters of

credit, providing guarantees, bills collection and cash management services, for which

they charge commission or brokerage income in the form of draft charges and bank

charges.

These sources of income together constitute the 'other income' of a bank. Income

earned by way of profits on the sale of investments also falls under this category.


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Other income (excluding profit on sale of investments)

Other income (ex-profit on sale of investments) as percentage of totalincome

Other income (excluding profit on sale of investments) as a percentage of the total

income for all SCBs increased from 11.1 per cent in 2003-04 to 12.8 per cent in 2008-09.


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Core fee income as percentage of other income

Over the same period, the core-fee income which forms part of the total other income

increased from 45.3 per cent to 72.1 per cent across SCBs.


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Core fee income


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SBI and associates

For SBI and associates, the share of other income (excluding profit on sale ofinvestments) in total income decreased marginally from 12.5 per cent in 2007-08 to

12.2 per cent in 2008-09.

The growth in other income was mainly driven by core-fee based income, which

stood at Rs 120 billion as of March 2009.


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Nationalised banks

Nationalised banks have traditionally had the lowest proportion of other income intotal income amongst all bank groups, as their foray into peripheral segments has

been comparatively slow.

The share of other income in the total income of nationalised banks fell from 9.4 per

cent in 2007-08 to 8.7 per cent in 2008-09. The core fee income as a percentage of otherincome decreased slightly from 58.0 per cent in 2007-08 to 57.0 per cent in 2008-09.


The proportion of other income to total income of OSCBs declined from 16.2 per cent

in 2007-08 to 14.6 per cent in 2008-09 due to the base effect.Their core fee income as a percentage of other income increased from 75.5 per cent in

2007-08 to 79.0 per cent in 2008-09.


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Foreign banks

In continuation of past trends, foreign banks had the highest proportion of otherincome to total income, which stood at 29.7 per cent in 2008-09.

Their global presence has enabled foreign banks to be strong players in foreign

exchange and trade finance transactions. Moreover, the syndication fee/ processing

fee on foreign currency lending, in which they are strong players, helps foreign banksin increasing their fee-based income.

However, government regulations that restrict the number of branches that foreign

banks can operate have been hampering growth in their fee income in the form of

commission and exchange income.


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Profit on sale of investments

Share of profit on sale of investments in total income


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In 2008-09, the share of profit on sale of investments in the total income increased for

all bank groups, except in the case of OSCBs, which witnessed a decline in the same.

The rising interest rates in 2007-08 and low bond prices pulled down trading profits

for most bank groups.

The profit on sale of investments for all SCBs declined from Rs 193 billion in 2003-

04 to Rs 154 billion in 2008-09.


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Spreads


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Spreads

Spreads of SCBs up 3 bps y-o-y in 2008-09Spreads are defined as the difference between the yield on carry business and the

interest cost of banks.

The spreads of SCBs increased marginally to 2.47 per cent in 2008-09 from 2.44 per

cent in the previous year.


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Spreads

Spreads of SCBs up 3 bps y-o-y in 2008-09Deposit and lending rates of SCBs across bank groups were on the rise during the

first half of 2008-09.

Taking a cue from the Reserve Bank's monetary policy announcements, the SCBs

reduced their deposit and lending rates in the second half of the year.Rates declined further in the first half of 2009-10 (up to September 11, 2009).


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Bank group-wise performance

A study of group-wise spreads indicates that foreign banks enjoy the highest spreadsat 5.27 per cent.

OSCBs had a spread of 2.72 per cent in 2008-09, followed by SBI and associates at 2.15

per cent; nationalised banks had the lowest spread of 2.14 per cent.


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Spreads

The spreads of SBI and associates declined by 21 bps from 2.36 per cent in 2007-08 to2.15 per cent in 2008-09.

Although yield on advances increased by 34 bps, the spreads dipped due to a 34 bps

fall in yield on investments and a rise of 22 bps in interest cost in 2008-09.

Yield on carry business

The yield on carry business went up by 2 bps in 2008-09, driven by yield on

advances. However, the rise was marginal due to the combined influence of the fall in

yield on investments and the increase in interest costs.


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Foreign banks

Spreads - Foreign banks


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Sectoral deployment of gross bank credit

Infrastructure (which has the biggest share in credit outstanding) had the largestshare of incremental bank credit to industry in absolute terms, followed by basic

metals and metal products, and textiles.

Credit to petroleum, coal products and nuclear fuels registered the sharpest rise in

growth rate (63.8 per cent), followed by construction (37.8 per cent) and infrastructure(31.6 per cent).

Despite the slowdown, credit to select sectors, especially petroleum and coal

products, rose sharply.

l d l f b k d


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Sectoral deployment of gross bank credit

The growth rate in retail credit by banks, which has been declining since 2005-06, felldrastically to 4.0 per cent as at end-March 2009 from 17.1 per cent at end-March 2008.

It also remained lower than the growth in loans and advances of SCBs (21.2 per cent).

As a result, the share of retail credit in total loans and advances declined to 21.3 per

cent at end- March 2009 from 24.5 per cent at end-March 2008.Though loans to consumer durables increased, growth of banks retail portfolio

decelerated on account of the slowdown in credit for housing loans, auto loans, credit

card receivables and other personal loans.

S l d l f f d di Fl


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Sectoral deployment of non-food credit - Flows


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176

Review and Future Growth Projections


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I t du ti


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Introduction

With the economic growth consolidating around the pre-crisis trend and growingconfidence in the Indian economy, companies have reinstated their investment plans

in 2010-11.

However, due to increase in commodity prices and rising interest rates, CRISIL

Research expects capital investments to slightly moderate over the next 2 years.Owing to the buoyant credit flow from the banking system, banks accounted for

nearly 60 per cent of total incremental financing to the commercial sector during

April-December 2010.

The funding from non-bank sources, particularly foreign sources, decreased on

account of lower FDI inflow and lower subscription to American Depositary

Receipts/Global Depositary Receipts.


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Incremental credit-deposit ratio to reach 70-72 per cent in 2011-12


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Incremental credit deposit ratio to reach 70 72 per cent in 2011 12

Strong credit off take and relatively slower growth in deposits had led to the

incremental credit-deposit ratio to increase to 100.1 per cent on February 25, 2011 from

93.5 per cent on September 24, 2010.

Research expects the incremental credit-deposit ratio to reach 70-72 per cent by the

end of 2011-12 primarily due to an expected moderation in credit growth and a high

deposit growth rate.

CD Ratio and Incremental CD ratio


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CD Ratio and Incremental CD ratio

Occupation-wise credit


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Occupation wise credit

Industry credit growth to moderate in 2011-12Advances can be classified as food and non-food credit. Non-food credit is further

divided into agricultural, industry, retail and services.

The industry and retail segment is expected to grow at a faster pace in 2010-11 as

compared to 2009-10.

Large capital expenditure plans by the industry translated into immense demand

from corporates for term loan funding.


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Growth rate of credit by occupation


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G o t ate o c ed t by occupat o

Given sharp increase in credit off take by industries like petrochemicals, cement and

basic metals in 2010-11, the annual growth rate of industry credit is expected to be

significantly higher at around 27 per cent vis-a-vis 24 per cent of 2009-10.

This high growth rate can be attributed to two factors - firstly, increase in additional

demand for domestic credit in the first half of 2010-11 owing to telecom players

investing for 3G and BWA spectrum licences; in the second half of 2010-11,credit growth became more broad based across sectors thus raising demand for

additional funds despite the continued tightening of monetary policy by the central

bank.

Research expects commercial credit to grow at 18 per cent in 2011-12 and 19 per cent

in 2012-13 due to drop in capital investments across industrial sectors, notably,

telecommunications, refinery, cement and automobiles and prevalence of high interest

rates.

Infrastructure share in bank credit increasing at phenomenal pace


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g p p

Bank lending to infrastructure projects has been increasing rapidly over the last few

years; the share of infrastructure credit in total bank credit has increased from 9.2 per

cent in March 2008 to 13.8 per cent in March 2011.

This trend is also expected to continue in 2011-12, with infrastructure credit growing

at 21.7 per cent y-o-y as against a 18.6 per cent growth in total bank credit.

Within the infrastructure space, the power sector would attract the largest chunk of

investments, notwithstanding issues related to availability of coal.

Main drivers of investment would be continuing deficit in power supply,

government's increased thrust on augmenting power generation capacity and

increasing private sector participation.


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Proportion of infrastructure credit to total bank credit


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Industry credit across sectors as of January 2011


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Retail credit growth projected at 13-14 per cent over next 2 years


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While segments such as housing loan and auto loan are likely to register a double-

digit growth in their outstanding portfolio.

We forecast personal loans and consumer durable loans growth to moderate.

Consequently, we expect retail credit to grow by 13-14 per cent over the next 2 years.


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Working capital credit to grow at lower rate than term loans


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Working capital credit includes bills purchased and discounted, cash credits,

overdrafts and loans repayable.

Revenue growth forecasts, working capital cycle and the willingness of banks to fund

corporate requirement are some of the major factors influencing growth in this

segment.

In 2010-11, working capital credit is expected to have grown by 6-8 per cent given the

shift of banks to base rate regime, resulting in higher cost of borrowing for corporates.

Thus, corporates raised short-term money from alternate funding sources primarily

commercial papers.

The short-term credit growth was also subdued due to improved profitability

resulting in servicing of working capital requirements through internal accruals.

The proportion of working capital credit is expected to decline marginally over the

next 2 years on account of moderation in top line growth and efficient working capital

management.

Growth rate of various components of credit


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Deposits to grow at 17-18 per cent over the next 2 years


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Reining inflation coupled with negative real interest rates in the first half of 2010-11,

lead to high currency holdings and lower deposit growth. During most part of the

period, deposit growth ranged between 14-15 per cent.

Given the tightening liquidity scenario (on account of sudden withdrawal of liquidity

from the system in June 2010 due to 3G and BWA spectrum auction) and rising

demand for credit, several banks hiked deposit rates by 100-200 bps across maturities

during second half of 2010-11.

As a result, the deposit growth rate picked up from 14.3 per cent as on September 24,

2010 to 16.5 per cent as on February 25, 2011.

Deposits to grow at 17-18 per cent over the next 2 years


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In 2011-12, CRISIL Research expects a further 50-75 bps hike in deposit rates across

maturities, as deposit growth continues to lag credit growth. Further, with the

increase in deposit rates, and real interest rates turning positive, the deposit growth

rate is expected to be in the range of 17-18 per cent by 2011-12.

Deposits growth


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Methodology to project deposit growth


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CRISIL Research has forecast the growth of retail deposits based on a set of identified

parameters, which impact growth of such deposits. Following factors influence retail

deposits:

GDP growth

Employment

Per capital income

Growth in disposable income

Rate of inflation

Interest rates

Taxation

Opportunity cost of investments in other avenues


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Methodology to project deposit growth


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209

Asset quality


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Scheduled Commercial Banks (SCBs): Movement in gross NPA ratio (per


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cent)

Corporate loans: Increasing exposure and NPAs in infrastructure and other


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sectors

On the back of the economic downturn of 2008-09, the RBI had allowed onetime

restructuring for banks across industry segments.

As of March 2010, restructured assets contribute to 3.3 per cent of gross advances.

Due to improving economic scenario there have been slippages of only 5-10 per cent

of the restructured assets.While the recovery in demand and improved credit risk profile of borrowers had

offset a part of the risks, some specific sectors like airlines, microfinance, textiles

(processing), real estate are still under pressure.

In infrastruture sector even though the overall NPAs are still below 1 per cent, the

absolute amount of NPAs have increased by almost 100 per cent from Rs 14.4 billion

as Sept 2009 to Rs 27.3 billion as of Sept 2010. Thus, NPAs in the above sectors need to

be closel monitored.

Corporate loans: Increasing exposure and NPAs in infrastructure and other


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sectors

Research expects the overall NPA ratio in the corporate segment to increase to 2.1 per

cent in 2010-11 and remain stable in 2011-12 on the back of strong economic growth.

However, in 2012-13, the ratio is expected to decline to 1.9 per cent given improving

demand and better liquidity situation.


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SCBs: Retail advances and share of unsecured loans


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SCBs: Movement in retail gross NPA ratio (per cent)


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Growth in SSI NPAs to be highest amongst all segments over the medium


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term

Delinquency levels in small-scale industries (SSIs) portfolios have traditionally been

higher than those of other asset classes.

The SSI sector is the first to be impacted in case of any economic slowdown.

Constraints in working capital payments have impacted the SSI sector's business and

earnings profile in 2009-10.

We estimate the NPA ratio in the SSI loan portfolio to increase to 3.9 per cent in 2010-

11, and further to 4.4 per cent by 2011-12 given the impact of tight liquidity on the

payment capability of SSIs.

SCBs: Movement in SSI gross NPA ratio (per cent)


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SCBs: Movement in agriculture gross NPA ratio (per cent)


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MethodologyMethodology for calculating Gross NPA


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225

Yield analysis

Spreads to decline by 21 bps in 2011-12 and 10 bps in 2012-13

Credit growth is estimated to have exceeded deposit growth by 400 basis points by


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Credit growth is estimated to have exceeded deposit growth by 400 basis points by

March 2011. Further, the credit deposit (CD) ratio has reached a high level of around

76 per cent.

These factors have caused a liquidity crunch in the system.

Tight liquidity is also reflected in low SLR investments of 26 per cent in 2010-11 as a

proportion of Net Demand and Time Liability (NDTL).

Given the tight liquidity scenario, bargaining power of banks has increased, enabling

them to pass on the increase in costs by increasing lending rates by 50-100 basis points

in the third and fourth quarter of 2010-11.

In addition, to meet the increasing demand for funds, banks raised deposit rates by

around 100-200 bps across maturities in second half of 2010-11.


Deposits raised in the last 3 years constitute around 80 per cent of term deposits for


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p y p p

banking system.

Thus, the impact of increase in deposit costs will be visible in 2011-12 and 2012-13, as

low cost deposits raised in 2009-10 get repriced upwards.Furthermore, the move by

RBI, in April 2011, to hike savings account interest rates would increase the cost of

funds for banks, on this account only, by around 10 bps.

CRISIL Research expects the spreads to decline by 21 bps in 2011-12 and 10 bps in

2012-13.

Net interest margins would decline by around 20 bps and 8 bps respectively during

this period from 2.65 per cent in 2010-11, To compensate for the rise in cost of

deposits, banks may impose additional charges for providing various facilities on the

savings account.


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NPM for banking system


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Yield on investments

The yield on the investment portfolio of banks hinges upon the mix of trade and non-


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The yield on the investment portfolio of banks hinges upon the mix of trade and non

trade strategic investments, the maturity profile of investments and the interest rates

at the time of issuance of securities and at their maturity.

With interest rates likely to rise over the next 6-12 months, banks are expected to

invest in securities of shorter tenure to take advantage of the same.


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Maturity profile of investments of SCBs

The investment profiles of SCBs reveal that almost 45 8 per cent of the portfolio


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The investment profiles of SCBs reveal that almost 45.8 per cent of the portfolio

belongs to the over-5-years maturity bucket.

A large proportion of these investments are likely to be strategic in nature such as

investments in subsidiaries.

As of March 2010, around 27 per cent of these investments were held in trading

securities with remaining maturity of less than 1 year, 14.5 per cent were in the 1-3

years bucket, and 12 per cent were in the 3-5 years maturity bucket.

The yield on investments is expected to fall post 2009-10 due to upward movement of

interest rates, as upward movement in yields exerts pressure on bond prices. We

expect yield on investment to fall by 10-20 bps over the next 2 years.

Cost of deposits

Bank deposits comprise current deposits, savings deposits, and term deposits.


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Bank deposits comprise current deposits, savings deposits, and term deposits.

Current and savings deposits (CASA) constitute low-cost deposits for banks.

While banks do not offer interest on current deposits, interest on savings deposits

are regulated by the RBI; it currently stands at 4.0 per cent. Interest rates on term

deposits are determined by individual banks based on the tenure.

When credit offtake is high, and competing investments such as mutual funds, stock

markets and post office savings offer attractive returns, banks tend to increase rates on

term deposits to attract customers.

Maturity profile of term deposits of SCBs


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Maturity profile of term deposits of SCBs

As on March 2011 the credit off take is estimated to be higher by 400 basis points


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As on March 2011, the credit off take is estimated to be higher by 400 basis points

than the deposits off take.

Further, the CD ratio has also reached peak levels leading to severe crunch in

liquidity.

Thus, banks have increased deposit rates by around 100-200 bps across maturities

over the last 6 months.

The full effect of this would be felt over the next 2 years.

Also, the cost of deposits is likely to increase further if the RBI deregulates the

savings account deposit rates.

Consequently, cost of deposits is expected to increase by 40 bps and 30 bps in 2011-12

and 2012-13, respectively.

Cost of deposits for SCBs


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Cost of borrowings

As in the case of advances, most bank borrowings are raised on floating rate basis.


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, g g

Borrowings are raised primarily to fix liquidity mismatches, and hence, are generally

short term in nature.

According to CRISIL Research, analysis of the maturity profile indicates that 55-60

per cent of SCB borrowings belong to the less than 1-year maturity bucket.

The sources of funds for banks and the share of each source in total borrowings have

been enumerated in the following table:

Sources of borrowing


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Sources of borrowing

As the table indicates, borrowings from other banks have declined, while that from


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As the table indicates, borrowings from other banks have declined, while that from

outside India have increased significantly to 60 per cent in 2009-10 from 44 per cent of

total borrowings in 2005-06.

Borrowings from outside India are generally linked to the London Interbank Offered

Rate (LIBOR), which is relatively low.

Therefore, we expect this trend of increased borrowings outside India to continue

over the medium term.

Based on the proportion of borrowings from various sources, and the movement in

rates for each source, the cost of borrowing is estimated to increase in 2011-12 and

2012-13 in view of the expected upward movement in interest rates.


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Player Profiles


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ICICI Bank

KEY FINANCIALS


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KEY BUSINESS INFORMATION

REALIGNMENT WITHIN LOAN BOOK

With overall slowdown in the economy and increasing risk-profile


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among borrowers, ICICI Bank seems to realigning its portfolio.Retail Advances as a % to total advances has been consistentlybrought down from 55% last year to 45%, which we project to decreasefurther.Within retail portfolio focus has been shifted from personal loans to

mortgages.Corporate and SME composition have increased by 500 bpssequentially to 22%.Corporate segment has grown by 34% sequentially.This is a conscious decision to slow on business and increase the

margins by attracting higher low cost deposits and also diversifyingaway from retail to Corporate and SME segment including projectfinance and corporate finance thereby decreasing fresh slippage.


LOAN PORTFOLIO


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CASA (CURRENT AND SAVINGS ACCOUNT)

CASA has improved phenomenally over last quarter, it increased by


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650 bps to 36.9%.

On an absolute basis, CASA has grown by 9%, with a modest

growth in overall CASA; the CASA proportion has increased

dramatically because overall deposit has de-grown by 11%.

It would be interesting to watch whether it would be able to

maintain CASA, once the balance sheet growth resumes.

We have factored in modest growth in CASA ratio from last year, as

the CASA proportion anyways improves in a lower interest rate

regime on account of decreasing differential between interest on term

and saving deposits.


CASA (CURRENT AND SAVINGS ACCOUNT) ASPROPORTION OF TOTAL DEPOSITS


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COST RATIONALIZATION PROVIDE SOME RELIEF


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Despite healthy expansion in branches in 2009-10, operatingexpenses decreased by 18% to Rs14.2bn.

Major cost containment came from direct marketing expenses.

Cost to income has been brought down to 36.9% as against

43.2% in corresponding quarter last year.

It has approval to open 580 additional branches, which should

limit further cost rationalization.


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HDFC BANK

FINANCIALS


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BUSINESS GROWTH TO REMAIN AHEAD OF INDUSTRY;MARGINS AT ~4%


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Credit growth for HDFC Bank was at 15% YTD (11% Y-o-Y), wellabove the industry growth of ~5% (~13% Y-o-Y).The bank maintained that it remains well positioned to grow aboveindustry average growth for FY10 and maintain margins at ~4%.Both retail and corporate segments are growing, driven by

improvement in business environment.Management has indicated that it is looking to build selectivelylonger duration portfolio in its book.The bank reaffirmed that factors such as - 1) surplus liquidity, givingborrowers an arbitrage to borrow cheaply through non-banking

channels; 2) repayment by specific industries; 3) low inflation/lowinventory environment; and 4) fill-up of capital by equity markets have resulted in subdued credit growth for the industry.


Marginal shift in asset book

In the corporate segment, the bank, which is mainly into working


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capital lending, is witnessing an increase in long-term proposals. For HDFC Bank, participation in the infrastructure segment, which

has been the biggest consumer of credit for the banking sector, has

been mainly through working capital loans to suppliers of the

vertical.

Given the current liability structure, the bank believes that it wouldbe able to take a slightly higher duration corporate assets in its

portfolio from current levels.

It has indicated that going forward, it is willing to participate in a

few of the long-term projects (infrastructure mainly in telecom,

power and other CAPEX related investments), provided pricing of

credit risk and duration is appropriate.


CLASSIFICATION OF LOANS ACCORDING TO NATURE OFLENDING


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COST IMPROVEMENTCost-income ratio, which had increased to ~56% during the time ofmerger, has declined significantly in the past few quarters.


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g , g y p qProductivity improvement expectation, a key rationale for themerger is coming well, and ahead of the banks estimates, leading tolower cost-income ratio.Experience from the CBoP acquisition has been positive, given theproductivity improvement achieved in a relatively short period. Going forward, the bank believes that there is further scope toimprove its productivity, mainly from CBoPs branches through atwo-fold mechanism: new origination of assets/liabilities and crosssellof the suite of HDFC Banks products.On new branch expansion, the bank is looking to add ~200

Documents

Analysis of Banking Industry.pdf