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11

Banking

For updated information, please visit www.ibef.org

NOVEMBER

2011

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22

Contents

Advantage India

Market overview and trends

Growth drivers

Success stories: HDFC, Axis Bank

Opportunities

Useful information


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2011

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33

Banking

For updated information, please visit www.ibef.org ADVANTAGE INDIA

Advantage India

NOVEMBER

2011

Advantage

India

Increase in working population anddisposable incomes are likely topropel demand for banking services

Rural banking is expected to witnessstrong growth in the future

Mobile and internet banking toimprove operational efficiency

Vast un-banked populationhighlights scope for innovationin delivery

Rising fee incomes improving therevenue mix of banks

High net interest margins, alongwith low NPA levels, ensure healthybusiness fundamentals

Wide policy support in the form ofprivate sector participation andliquidity infusion

Budget FY11 to infuse INR60 billion oftier I equity capital in public sectorbanks

Total asset

size:

USD28.5

trillion

FY25F

Total asset

size:

USD1.5

trillion

FY11

Source:IBA report titled Being five-star in productivity--

Roadmap for excellence in Indian banking.

Growing demand Innovation in services

Business fundamentals Policy support

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44

Contents

Advantage India


Growth drivers


Opportunities

Useful information


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2011

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55For updated information, please visit www.ibef.org MARKET OVERVIEW AND TRENDS

Evolution of the Indian banking sector

Source: IBA, Aranca Research, BMI

Notes: RBI- Reserve Bank of India, FDI is foreign direct investment

BankingNOVEMBER

2011

Closed market

State-owned Imperial

Bank of India was the

only bank existing

RBI was established as

the central bank ofcountry

Quasi central banking

role of Imperial Bank

came to an end

Imperial Bank

expanded its network

to 480 branches

In order to increase

penetration in rural

areas, Imperial Bank

was converted intoState Bank of India

Nationalisation of 14large commercial

banks in 1969 and 6

more banks in 1980

Entry of private

players such as ICICIintensifying the

competition

Gradual technology

upgradation in PSUbanks

1921

1935

1936 -1955

1956-2000 Number of banks

increased to-27

public sector banks,

22 private sectorbanks and 36

foreign banks

Advent of mobile

and internet

banking

Growing FDI in theIndian banking

sector

Post 2000

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66For updated information, please visit www.ibef.org

The structure of Indian banking sector

Source:RBI, Aranca Research

MARKET OVERVIEW AND TRENDS

BankingNOVEMBER

2011

Reserve Bank of India

Banks

Scheduled CommercialBanks (SCBs)

Public sector banks (27)

Private sector banks (27)

Foreign banks (32)

Regional rural banks (RRB) (84)

Urban cooperative banks (1,674)

Rural cooperative creditinstitutions (96,751)

Cooperative creditinstitutions

Financial institutions

All-India financial institutions

State-level institutions

Other institutions

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Indian banking sector has grown at ahealthy and steadypace (1/2)


Credit off-take has surged at a CAGR of 19.9 per cent

over FY06-11

Loan growth has been driven by strong economic

growth, rising consumerism and income levels

Demand has grown for both corporate and retail

loans

Growth in credit off-take over past few years

Source: Reserve Bank of India (RBI), Aranca Research

CAGR: Compounded annual growth rate

BankingNOVEMBER

2011

0

100

200

300

400

500

600

700

800

900

FY06 FY07 FY08 FY09 FY10 FY11

CAGR

19.9 %

USD billion

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Income from interest, as well as fees,has seen robust growth (1/2)


Public sector banks account for over 70 per cent of

the interest income in the sector

Public sector banks lead the pack in interest income

growth w ith a CAGR of 16 per cent since FY08

Overall, the interest income for the sector has grown

at over 13 per cent CAGR dur ing the period

Interest income growth in Indian banking sector

Source: IBA, Aranca Research

BankingNOVEMBER

2011

0

20

40

60

80

100

FY09 FY10 FY11

Public banks Private banks Foreign banks

USD billion

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Public sector banks account for over 60 per cent of

the other income in the sector

Other income for public sector banks has risen at a

CAGR of 6 per cent since FY09

Overall, the other income for the sector has risen at 3

per cent CAGR over the per iod

Other income growth in Indian banking sector

Source: IBA, Aranca Research

BankingNOVEMBER

2011

Income from interest, as well as fees,has seen robust growth (2/2)

0

3

6

9

12

FY09 FY10 FY11

Public banks Private banks Foreign banks

USD billion

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High NIM, Low NPA place Indianbanking among worlds best (1/2)


Indian banking sector enjoys healthy net interest

margins (NIM) compared with global peers

HDFC leads the large banks with a NIM of over 4 per

cent

Prominent Chinese banks have NIMs between 2-3 per

cent, significantly lower than Indian peers

Despite virtually zero cost funds, the banks in the US

have NIMs comparable to Indian peers

Healthy net interest margins

Source: Company reports, Aranca Research

BankingNOVEMBER

2011

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

HDFC ICICI SBI Axis

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Despite the global financial crisis the net non-

performing assets (NPA) of Indian banking sector have

declined over past few years.

Net NPA levels declined from 1.02 per cent in FY07 to

0.97 per cent in FY11, indicating significantimprovement in asset quality.

Declining net NPA levels


BankingNOVEMBER

2011

High NIM, Low NPA place Indianbanking among worlds best (2/2)

1.02%

1.00%

1.05%

1.12%

0.97%

0.9%

0.9%

1.0%

1.0%

1.1%

1.1%

1.2%

FY07 FY08 FY09 FY10 FY11

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Although public sector banks continue to control

majority of the banking assets, their share is

gradually declining

Share of public sector banks in total assets have

declined from 76 per cent in FY05 to 73.7 per cent inFY11

Market share of bank groups by assets

Source: IBA statistics, Aranca Research

BankingNOVEMBER

2011

Private/foreign banks are aggressivelyincreasing asset size (1/2)

76% 73.7%

17% 19.5%

7% 6.9%

0%

10%

20%

30%

40%

50%60%

70%

80%

90%

100%

FY05 FY11

Public sector banks Private sector banks Foreign banks

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Share of public sector banks in total deposits have

also declined from 78.2 per cent in FY05 to 77.9 per

cent in FY11

This is largely due to the fact that foreign and private

sector banks are rapidly capturing share in savingsdeposit

Market share of bank groups by deposits

Source: IBA statistics, Aranca Research

BankingNOVEMBER

2011

Private/foreign banks are aggressivelyincreasing asset size (2/2)

78.2% 77.9%

17.1% 17.9%

4.7% 4.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY05 FY11

Public sector banks Private sector banks Foreign banks

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Notable trends in the Indian bankingsector (1/2)

Improved risk

management practices

Indian banks are increasingly focusing on adopting integrated approach to risk

management

Banks have already embraced the international banking supervision accord of

Basel II

Most of the banks have put in place the framework for asset-liability match,

credit and derivatives risk management.

Diversification of

revenue stream

Banks are laying emphasis on diversifying the source of revenue stream to

protect themselves from interest rate cycle and its impact on interest income

Focusing on increasing fee and fund based income by launching plethora of

new asset management, wealth management and treasury products

Technological

innovations

Indian banks, including public sector banks are aggressively improving their

technology infrastructure to enhance customer experience and gain competitive

advantage

Internet and mobile banking is gaining rapid foothold

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2011

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Notable trends in the Indian bankingsector (2/2)

Focus on financial

inclusion

RBI has emphasised the need to focus on spreading the reach of banking

services to the un-banked population of India

Indian banks are expanding their branch network in the rural areas to capture

the new business opportunity

Derivatives and risk

management products

The increasingly dynamic business scenario and financial sophistication has

increased the need for customised exotic financial products

Banks are developing Innovative financial products and advanced risk

management methods to capture the market share

Consolidation

With entry of foreign banks competition in the Indian banking sector hasintensified.

Banks are increasingly looking at consolidation to derive greater benefits such

as enhanced synergy; cost take-outs from economies of scale; organisational

efficiency; diversification of risks

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2011

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1717

Contents

Advantage India


Growth drivers


Opportunities

Useful information


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2011

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1818For updated information, please visit www.ibef.org GROWTH DRIVERS

Growth drivers of Indian banking sector

BankingNOVEMBER

2011

Notes: GDP- Gross Domestic Product, KYC- Know Your Customer,

RBI- Reserve Bank of India, ATM- Automated Teller Machine

Favourable demographics

and rising income levels

Strong GDP growth

(CAGR of 8.1 per cent

expected from 2011-16)

to facilitate banking

sector expansion

The sector will benefit

from structural economicstability and continued

credibility of monetary

policy

Extension of interest

subsidy to low cost

home buyers

Simplification of KYC

norms, introduction of

no-frills accounts and

Kisan Credit Cards to

increase ru ral banking

penetration

RBI is considering giving

more licenses to private

sector players to

increase banking

penetration

India currently spends 6

per cent of GDP on

infrastructure; Planning

Commission expects this

fraction to grow going

ahead

Banking sector is

expected to finance part

of the USD1 trillion

infrastructure investments

in the 12th Five Year Plan,

opening a huge

opportunity for the sector

Economic and

demographic driversPolicy support Infrastruc ture financing

Technological innovation

will not only help to

improve products and

serv ices but also to reach

out to the masses in cost

effective way

Use of alternate channels

like ATM, internet and

mobile hold significant

potential in India

Technological innovation

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Rapid urbanisation, decreasing household size and

easier availability of home loans has been driving

demand for housing

Demand in the low- and mid-income segments

exceeds supply three- to four-fold

This has propelled demand for housing loan in the last

few years

Growth in credit to housing sector


BankingNOVEMBER

2011

Housing and personal finance have beenkeydrivers (1/2)

0

10

20

30

40

50


CAGR

8.5 %

GROWTH DRIVERS

USD billion

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Growth in disposable income has been encouraging

households to raise their standard of living and boost

demand for personal credit

Unlike other emerging markets such as China credit-

induced consumption is still less in India

Growth in personal finance


BankingNOVEMBER

2011

Housing and personal finance have beenkeydrivers (2/2)

0

25

50

75

100

125

150


CAGR

10.0 %

USD billion

GROWTH DRIVERS

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Rising per capita income will lead to increase in the

fraction of the Indian population that uses banking

services

Population in 25-60 age group is expected to grow

strongly going ahead, giving further push to thenumber of customers in banking sector

Indias working age population and GDP per capita

Source: World Bank, IMF, Aranca Research

BankingNOVEMBER

2011

Strong economic growth to propelbanking sector expansion (1/2)

Note: E-Expected, F-Forecasted, GDP- Gross Domestic

Product

0

500

1,000

1,500

2,000

2,500

3,000

0

100

200

300

400

500

600

700

2001 2006 2011E 2016F

GDPpercapita

USD

25-60 age group GDP per capita (RHS)

GROWTH DRIVERS

Population million

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Indias GDP is forecasted to grow at a healthy CAGR of

8.1 per cent during 2011-2016

Strong GDP growth will facilitate banking sector

expansion

The sector will also benefit from economic stability

and credibility of monetary policy

Total loans: growth forecast over 2011-16

Source: Business Monitor International Ltd (BMI),

Aranca Research

BankingNOVEMBER

2011

Strong economic growth to propelbanking sector expansion (2/2)

GROWTH DRIVERS

34,746

6,254

7,380

9,676

11,611

83,602

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2010E 2011F 2012F 2013F 2014F 2015F

INR billion

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Despite healthy growth over the past few years, the

Indian banking sector is relatively underpenetrated

Loans-to-GDP ratio is low (62 per cent) relative to

many of its emerging markets peers as well as

developed economies such as the US and UK

Loan/GDP vs. GDP per-capita in select countries

Source: World Bank Financial Access report 2010, IMF,

Aranca Research

BankingNOVEMBER

2011

Low banking penetration indicates hugelatent demand (1/2)

Estonia

Bulgaria Hungary

Czech

Republic

PolandTurkey

Vietnam

India

China

Germany

UK

US

0%

50%

100%

150%

200%

250%

300%

350%

0 10,000 20,000 30,000 40,000 50,000 60,000

Total loans / GDP

Per-capita

GDP (USD)

GROWTH DRIVERS

Size of the bubble represents GDP per capita

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Limited banking penetration in India is also ev ident from low branch per 100,000 adults ratio

Branch per 100,000 adults ratio in India stands at 747 compared to 1,065 for Brazil and 2,063 for Malaysia

Deposit accounts per 1,00,000 adults

Source: World Bank Financial Access report 2010, IMF, Aranca Research

BankingNOVEMBER

2011

Low banking penetration indicates hugelatent demand (2/2)

GROWTH DRIVERS

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

India

SouthAfrica

Brazil

Poland

Turkey

Malaysia

US

Ireland

Austria

UK

Belgium

Banking penetration

(deposits/ '000 adults) in

India is lower than a numberof peers in Emerging

countries

Advanced economies

Emerging economies

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2525

Contents

Advantage India


Growth drivers


Opportunities

Useful information


BankingNOVEMBER

2011

B kiNOVEMBER

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2626For updated information, please visit www.ibef.org SUCCESS STORIES: HDFC, AXIS BANK

Success stories in the Indian bankingsector (1/4)

BankingNOVEMBER

2011

HDFC Bank

Established in 1994, HDFC Bank is the second largest private sectorbank in India. HDFC was amongst the first to receive an 'in

principle' approval from the RBI to set up a bank in the private

sector

Divisions Retail banking, Wholesale banking and Treasuryoperations

Size Number of branches and extensions : 1,986

Number of ATMs : 5,471

Number of employees: 55,752

Recognition

Strongest Bank in Asia Pacific (Asian Banker:2011)

Best Bank (Bloomberg UTV:2011)

Net profit

238

331

468

614

818

0

100

200

300

400

500

600

700

800

900


USD million

Source:Company annual reports, Aranca Research

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BankingNOVEMBER

2011

71%

24%

5%

Fund income

Fee income

Other income

Advances and deposits

1013

2126

33

14

21

3035

43

0

10

20

30

40

50


Advances Deposits

USD billion

Income break-up

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BankingNOVEMBER

2011

Axis Bank

Established in 1994, Axis Bank is the third largest private sector bank

in India. The bank is capitalised to the extent of USD85.4 million withthe public holding at 53.6 per cent as on 31st March, 2011

Divisions Treasury, retail banking, corporate/wholesale banking and

other banking business Size Number of branches and extensions : 1,390

Number of ATMs : 6,270

Number of employees : 23,600

Recognition

Best Domestic Debt House in India (Asia money :2010)

Best Bond House in India (Finance Asia :2010)

Net profit

137

223

378

524

706

0

100

200

300

400

500

600

700

800


USD million


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BankingNOVEMBER

2011

Advances and deposits

59%

37%

4%

Fund income

Fee income

Other income

Income break-up

8

12

17

22

30

12

18

24

29

39

0

10

20

30

40

50


Advances Deposits

USD billion

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3030

Contents

Advantage India


Growth drivers


Opportunities

Useful information


BankingNOVEMBER

2011

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3131For updated information, please visit www.ibef.org OPPORTUNITIES

Rising rural income pushing up demandfor banking

Notes: CAGR Compounded Annual Growth Rate QE Quick Estimate , RE Revised Estimate

Banking 2011

The real annual disposable household income in rural India is forecasted to grow at CAGR of 3.6 per cent over next

15 years

The Indian agriculture, forestr y & fishing sector has grown at fast pace, clocking a CAGR of 16.1 per cent over past 6

years

Rising incomes are expected to enhance the need for banking services in rural areas and therefore drive the

growth of the sector

GDP of agriculture, forestry & fishing sector, at current prices

Source:MOSPI, Aranca Research

Real disposable household income in rural India

Source:McKinsey estimates, Aranca Research

1,875 2,167

2,667

3,229

0

700

1,400

2,100

2,800

3,500

2010 2015 2020 2025

CAGR

3.6 %

0

60

120

180

240

300

FY05 FY06 FY07 FY08 FY09 FY10

QE

FY11

RE

CAGR

16.1 %

USD billionUSD

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Mobile banking to provide a costeffective solution

Source:TRAI, Aranca Research

Banking 2011

Banking penetration is low in rural India

Of the 600,000 village habitations in India only 5 per cent have a

commercial bank branch

Only 40 per cent of the adult population has bank accounts

Debit card holders constitute only 13 per cent of the population and

only 2 per cent have a credit card

51.4 per cent of nearly 89.3 million farm households do not have

access to any credit either from institutional or non-institutional

sources

Only 13 per cent of farm households are availing loans from the

banks in the income bracket of < USD1000

Soaring rural teledensity opens avenue of mobile banking

Agriculture requires timely credit to enable smooth

functioning. However, only one-eighth of farm

households avail bank credit

Local money-lending practices involve interest rates

well above 30 per cent, therefore making bank credit

a compelling alternative

0

5

10

15

20

25

30

2007 2008 2009 2010

Rural teledensity

Tele-density in rural India soared to nearly 25 per

cent in 2010 from less than 1 per cent in 2007

Banks, telecom providers and RBI are making

efforts to make inroads into the un-banked rural

India through mobile banking solutions

OPPORTUNITIES

%

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3333

Contents

Advantage India


Growth drivers


Opportunities

Useful information


BankingNOVEMBER

2011

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3434For updated information, please visit www.ibef.org USEFUL INFORMATION

Industry Associations

Indian Banks' AssociationWorld Trade Centre, 6th Floor

Centre 1 Building,

World Trade Centre Complex,

Cuff Parade, Mumbai - 400 005

India

E-mail: [email protected]

Banking 2011

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Glossary

ATM: Automated Teller Machines CAGR: Compound Annual Growth Rate FY: Indian financial year (April to March) GDP: Gross Domestic Product INR: Indian Rupee KYC: Know Your Customer NIM: Net interest margin NPA: Non-performing assets RBI: Reserve Bank of India USD : US Dollar

Conversion rate used: USD1=INR 48

Wherever applicable, numbers have been rounded off to the nearest whole number

USEFUL INFORMATION

Banking 2011

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36

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prepare this presentation and the same has been

prepared by Aranca in consultation with IBEF.

All rights reserved. Al l copyright in this presentation and

related works is solely and exclusively owned by IBEF.

The same may not be reproduced, wholly or in part inany material form (including photocopying or storing it in

any medium by electronic means and whether or not

transiently or incidentally to some other use of this

presentation), modified or in any manner communicated

to any third party except with the written approval of

IBEF.

This presentation is for information purposes only. While

due care has been taken during the compilation of this

presentation to ensure that the information is accurate to

the best of Aranca and IBEFs knowledge and belief, the

content is not to be construed in any manner whatsoever

as a substitute for professional advice.

Aranca and IBEF neither recommend nor endorse any

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taken as a result of any reliance placed on this

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Neither Aranca nor IBEF shall be liable for any direct or

indirect damages that may arise due to any act or

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Disclaimer

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Banking 50112