Edelweiss Banking Report

8/3/2019 Edelweiss Banking Report

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Strictly Private and Confidential

Nilesh Parikh +91-22-4063 5470 [email protected]

Kunal Shah +91-22-4040 7579 [email protected]

Vivek Verma +91-22-4040 7576 [email protected]

December, 2010



Summary

Operational highlights of Scheduled Commercial Banks (SCBs) Key attributes of balance sheet:

– Contribution of CASA in incremental deposits touched 48.4% in FY10 (21.7% in FY09)

– PSBs ained market share in FY10 forei n banks saw contraction

Asset-liability management:

– ALM mismatch was noticeable for PSBs with a shift in liabilities towards short end and assets towards the

longer end

– ,shorter end

Attributes of P&L account:

– Modest growth in earnings due to slow NII and other income growth

– ROAs and ROEs (sector) contracted; however new pvt. banks showed improvement

Asset quality deteriorated:

– Gross NPL ratio increased; however, private banks showed improvement

– Sli a es increased to INR 657 bn in FY10 recoveries remained weak at INR 390 bn

– Weaker sections have shown steady decline in NPA ratio in recent years, corroborating the point that weakersections are in fact not less creditworthy than other sections

Other highlights: – ,

Global banks are faced w ith three major challenges:

– Refinancing a large portion of their liabilities

– Ending their dependence on emergency support measures by the public sector

2

– Redressing balance sheet weaknesses and reducing operating costs



Operation and performance of SCBs



Balance sheet composition

Liability composition Liability composition

As a funding option (system level), contributionof CASA increased by 2.2% pts while that of 80.0

100.0

orrow ngs ec ne . p s

PSB had higher dependence on term deposits

compared with other groups20.0

40.0

60.0

( % )

or pr va e an ore gn an s, orrow ngs wasan important source of funding

In Indian operations, foreign banks have lowerleverage

0.0

PSB Private Old pvt New pvt Foreign SCBs

Other liab. Borrowings TD SA CA Res. & and surp. Capital

Asset composition Asset composition

Y-o-Y, contribution of investments (up 87bps),workin ca ital loans u 39b s and term loans

80.0

100.0

(up 40bps) increased

New private sector banks had higher proportion

of term loans in their assets20.0

40.0

60.0

( % )

New private banks and foreign banks havehigher exposure to non-approved securities

Foreign banks were heavily invested in GSECs

.

PSB Private Old pvt New pvt Foreign SCBs

Fixed & other assets Term loans Cash credits

Bills pur./disc. Non approved sec. Other approved sec.

Govt. sec. Cash & call money

4Source: RBI



Asset growth: PSBs witness strong asset growth

Asset growth: PSBs w itness strong growth Y-o-Y, asset growth moderated for PSBs, butremained ahead of other banking groups

Foreign banks witnessed contraction in assets, aForeign

Sector

rea n e ren o serve n e recen pas

Private

Old private

New private

(5.0) 0.0 5.0 10.0 15.0 20.0 25.0 30.0

PSB

(%)

FY10 FY09

PSBs gained market share in assets of banking sector Despite the moderation in growth of assets of PSBs,their relative share in the total assets of the bankingsector rose in FY1016.9 17.2 15.2 14.6

7.9 8.4 8.5 7.2

80

100

The share of old private sector banks stood almostunchanged Y-o-Y, while foreign and private bankssaw a decline

70.5 69.9 71.9 73.7

4.6 4.5 . .

40

60

( % )

0

2007 2008 2009 2010

Public sector banks Old private sector banks

5



CASA contribution to incremental deposits on the rise

Increasing contribution of CASA deposits in overall depositbase

Strong CASA grow th (~18%) registered in FY10

100.0 30.0

71.7 6878.3

51.6

40.0

60.0

.

( % )

12.0

18.0

.

( % )

28.3 3221.7

.

0.0

20.0

FY07 FY08 FY09 FY10

Term deposits CASA

0.0

6.0

FY07 FY08 FY09 FY10

CASA TD Total Deposits

While overall borrowings slowed dow n, foreign banks saw acontraction in borrow ings

Sector

Old private

New private

Foreign

(40.0) (20.0) 0.0 20.0 40.0 60.0 80.0 100.0

PSB

Pr vate

FY10 FY09

6

Source: RBI

(%)



Advances growth moderated over FY09-10

Advances grow th dropped in FY10 Industry CD ratio remained stable - Foreign/ new private banksaw decline, while it increased for P SBs/old private banks

35.035SCBs

14.0

21.0

.

14

21

( % )

( I N R t n )

Old pvt

New pvt

Foreign

0.0

7.0

0

7

FY05 FY06 FY07 FY08 FY09 FY10

Advances Growth (%)

- 20.0 40.0 60.0 80.0 100.0

PSB

(%)

FY10 FY09 FY08

Percentage contribution of industry in incremental bank

credit continued to increase

Sectoral credit/ sectoral GDP continued to increase for

industrial sector

60.0

80.0

.

% )

75.0

100.0

.

% )

0.0

20.0

40.0 (

0.0

25.0

50.0

7

Source: RBI

FY07 FY08 FY09 FY10

Personal Services Industy Agri

gr n us ry erv ces

FY08 FY09 FY10



Relationship between industrial credit and industrial production

Empirical study: Industrial credit and industrial production

The regression used:

Ln(industrial credit) = 2.01 + 2.08 Ln(industrial production)(1.40) (8.17)*

* Significant at 1 per cent probability.R2 = 0.650.

ConclusionTaking monthly data on industrial credit and production April 2006 onwards, the elasticity of industrial credit withrespect to industrial production worked out to 2.08

8

Source: RBI



Business contribution: Regional performance

Share of top 100 centers in total amount of deposits and bankcredit remained stable

Regional loan-deposit ratios - High in South; low in North-Eastand central regions

80.5North-east

70.0

73.5

.

( % )

West

North

East

63.0

66.5

FY09 FY10

% deposits % advances

0 20 40 60 80 100

All India

(%)FY10 FY09

Banking penetration on a rise- atleast at slow pace

17.817 16.6 16.116

20

0 0 )

12.711.7 11 10.4

15.1 14.5 14

8

12

16

. o f

p e r s o n s i n ' 0

0

4

2007 2008 2009 2010

( N o

Population per branch in rural areas Population per branch in urban areas

9

Source: RBI

o a popu a on per an ranc



ALM profile

Maturity profile - Deposits Maturity profile - Advances

60.0

75.0

52.0

65.0

15.0

30.0

45.0

( % )

13.0

26.0

39.0

( % )

0.0

Public Private Old private New private Foreign SCBs

Up to 1 year 1 year to 3 year Over 3 years

0.0

Public Private Old private New private Foreign SCBs

Up to 1 year 1 year to 3 year Over 3 years

Key takeaways

In FY10, there was a shift towards short and medium-term deposits mobilised by banks; there was a decline inthe share of deposits with long-term maturity of over three years

While the maturity distribution of loans and advances remained largely unchanged in FY10, there was a shift infavour of long-term investments by banks

Asset liability mismatch was noticeable for public sector banks with a shift in their deposit liabilities during FY10towards the short-term end of the maturity spectrum, alongside a shift in their loans and investments towardsthe long-term end

New rivate sector banks, which normall relied heavil on short-term de osits, exhibited a shift in favour of

10

medium- and long term deposits in FY10, while their loans moved closer to the short end of the spectrum



Non-SLR investment: Growing contribution of MF

Absolute exposure to CPs declined while that to MFs increased

Break-up of non-SLR investments

(INR bn) ( % ) (INR bn) ( % )

H1FY10 FY10

. .

Shares 377 15.2 302 12.9

PSB 71 2.9 46 2.0

Private 270 10.9 255 10.9

Bonds/debentures 1,057 42.7 937 39.9

PSB 202 8.1 227 9.7

Private 503 20.3 401 17.1

Units of MFs 335 13 . 6 529 22 . 5

Source: RBI

Instruments issued by Fis 267 10.8 326 13.9

Total 2,474 100.0 2,345 100.0

11



RBI study: Inter-linkage between SCBs and MFs

(INR bn)

Dec 08 Mar 09 Jun 09 Sep 09 Nov 09

Banks' investments in debt oriented MFs 177 513 917 1,124 1,259

r o w . . . .

MFs investments in CDs 1,093 1,376 1,873 1,781 2,183

Mfs' funds placements in repo/CBLO held by banks 260 483 637 787 639

MFs funds with SCBs 1,352 1,859 2,509 2,567 2,822

Source: RBI

Gr o w t h ( % ) 3 7 .5 35 .0 2 .3 9 .9

Net borrowing by banks from MFs 1,176 1,346 1,592 1,444 1,563

Gr o w t h ( % ) 1 4 .5 18 .3 ( 9 . 3 ) 8 .3

Key takeaways

During the period, strong growth was observed in bank's investments in Debt Oriented Mutual Funds (DOMFs)

However, growth in investments of DOMFs outpaced the bank's investments in DOMFs

Banks were net borrowers since December 2008 and not net lenders to MFs

When banks were arran ed in descendin order b the amount of their net borrowin s from MFs PSB fi uredprominently

90% of investments in DOMFS by SCBs was held by 14 banks in November 2008; it increased to 24 banks inNovember 2009

12



International business profile

International liability profile International asset profile

900

1,200

1,500

R b n )

900

1,200

1,500

R b n )

0

300

600

N R E

F C N R

F C B

s o f l d b y

t h e r s

N R O

G D R s

i t t a b o

f s o f o n d s

( I

0

300

s t o N

R

u r r e n

c y

t o n t s

p . b i

l l s

o n N R s

i d e n t s

a l a n c

e s

a s s e

t s

o f d e

b t

i t i e s

( I

E q u i t i e

b a n k s h N R I O

A D R s /

C a p i t a l / r e

l e p r o f i t s

f o r e i g

O w n i s s u

s e c u r i t i e s /

FY09 FY10

L o a n

F o r e i g n c

l o a n s

r e s i d

O / S e

d r a w n

b y r e

N o s t r o b

O t h e r

H o l d i n g s

s e c u r i

FY09 FY10

Key takeaways

Inflows from FCNR (B)/NRE deposits remained weak

Maturity of international claims remained stable

56.0

70.0

.

• A steady fall in the benchmark LIBOR duringFY10, resulting in a fall in the effective rate of

interest payable

28.0

42.0

( % )

• Appreciation in the exchange rate of INR withrespect to major international currencies duringthis period

0.0

.

Short term maturity Long-term maturity Unallocated

FY09 FY10

13

Source: RBI



Off balance sheet exposure

Significant contraction in forex contracts in FY10

% of total liab. of concerned banking group

PSB New private Fore ign SCBs% of total liab. of conce rned

Forward exchange contract 41.6 36.7 115.7 98.8 1,414.1 1,206.5 159.3 118.8

Guarantees given 4.4 4.6 11.7 13.7 12.9 13.8 8.0 8.7

Acceptances, endorsements 4.2 4.9 76.7 82.4 259.8 378.2 45.6 47.3

Off balance sheet exposure: New private and foreign banks have significant off

balance sheet exposure

80.0

100.0

40.0

60.0

( % )

0.0

20.0

PSB Old private banks New private banks Foreign banks

- -

14

Source: RBI



P&L: Banking sector

P& L

INR bn Growth (% ) INR bn Growth (% )

Interest income 3,885 25.9 4,158 7.0

FY09 FY10

, . , .

Net Interest Income 1,253 24.7 1,437 14.7

Other income 752 24.6 785 4.4

Operating expenses 896 15.9 998 11.4 . .

Provision and contingencies 581 42.3 653 12.3

Operating Profit 1,109 32.7 1,224 10.4

Net Profit for the year 528 23.5 571 8.3

Key takeaways

Moderate NII/PAT growth in FY10 over FY09

Source: RBI

Other income growth moderated (due to decline in treasury profits)

Wage bill up 15% Y-o-Y

15



Yield/profitability analysis

- - - -

private banks (>150bps)

,

new private banks showed improvement of 118bps

4.5

6.0

7.5

) 12.0

16.0

20.0

)

0.0

1.5

3.0

b l i c

s e d

S B I

a t e

a t e

a t e

i g n

B s

( %

0.0

4.0

8.0

S B e

d u p

a t e

a t e

a t e

i g n

B s

( %

P u

N a t i o n a l i

P r i v

O l d p r i v

N e w p r i v

F o r S

FY09 FY10

P

N a t i o n a l i

S B I g r

P r i v

O l d p r i v

N e w p r i v

F o r e S

FY09 FY10

ROAs declined 8bps Y-o-Y; against the industry trend, newprivate banks show ed improvement of 26bps

Return on funds fell 95bps Y -o-Y; decline high at 225bps forforeign banks and 140bps for new private

12.5 2.5

2.5

5.0

7.5

10.0

( % )

0.5

1.0

1.5

2.0

( % )

0.0

P u b l i c

N a t i o n a l i s e d

S B I

P r i v a t e

O l d p r i v a t e

N e w p r i v a t e

F o r e i g n

S C B s

0.0

P S B


S B I g r o u p

P r i v a t e

O l d p r i v a t e

N e w p r i v a t e

F o r e i g n

S C B s

16

Source: RBI

FY09 FY10 FY09 FY10



Asset quality deteriorated during FY10

Gross NPL ratio increased 14bps Y -o-Y to 2.39% ; privatebanks showed improvement, while foreign banks showed

above average deterioration

Net NPL ratio increased 7bps to 1.12% ; nationalised banksshowed above average deterioration

5.0 2.0

1.0

2.0

3.0

4.0

( % )

0.4

0.8

1.2

1.6

( % )

0.0

P S B

a t i o n a l i s e d

S B I G r o u p

P r i v a t e

O l d p r i v a t e

N e w p r i v a t e

F o r e i g n

S C B

0.0

P S B

a t i o n a l i s e d

S B I G r o u p

P r i v a t e

O l d p r i v a t e

N e w p r i v a t e

F o r e i g n

S C B

Movement of NPLs (FY10) Movement of NPLs (FY09)

FY09 FY10 FY09 FY10

1,500 1,500

657

390

103900

1,200

I N R

b n )

524373900

1,200

N R

b n )

683847

0

300

O enin GNPLs Sli a es Recover Write offs Closin

(

554690

0

300

( I

17

Source: RBI



Empirical study: Asset quality compromised during high growth

Empirical analysis indicated that NPA growth follows credit growth with a lag of two years Growth in NPAs of Indian banks has largely followed a lagged cyclical pattern with regard to credit growth

The empirical analysis, taking growth rates of gross advances and gross NPAs since June 2000, indicated thatgrow o ows cre grow w a ag o wo years

The coefficients of credit growth were positive and statistically significant from the second lag, reflecting thatcredit growth fed into growth in NPAs in a lagged manner

This underlined the pro-cyclical behaviour of the banking system, wherein asset quality can get compromiseduring perio s o ig cre it growt an t is can resu t in t e creation o nonper orming assets or an s in t e

later years

EstimateThe estimation was carried out for contemporaneous credit growth and credit growth with lags up to three years. The

NPA growth = á + 0.62*Credit growth (t-2) + 1.41*Credit growth (t-3)(1.9)* (5.8)**

* Significant at 5% probability** Significant at 1% probability

18

Source: RBI



PSBs’ non-std assets increased marginally; down for private banks

Public sector banks: sub-standard assets increased by 3% pts w hile loss assets increased by 1% pt

Loss9%

FY09- non std. assets at 2% of total assets FY10- non std. assets at 2.2% of total assets

Loss10%

Sub standard45%

Doubtful46%

Sub standard48%

Doubtful42%

Loss7%

Loss12%

New private banks: doubtful assets increase by 8% pts, while loss assets increased by 5% pts

FY09- non std. assets at 3.1% of total assets FY10- non std. assets 2.9% of total assets

Doubtful27%

Sub standard53%

Doubtful35%

Loss

66%

Loss

Scheduled Commercial Banks: doubtful assets increased by 2% pts wh ile loss assets increased by 1% pt

FY09- non std. assets at 2.3% of total assets FY10- non std. assets 2.4% of total assets

Sub standard50%Doubtful

10%

Sub standardDoubtful

9%

40%

19Source: RBI



NPLs for PSL higher than those for Non-PSL

Non- performing loans (FY10) Increase in NPLs for priority sector higher than that for non-priority sector

520

650

3.183.37

4.0

130

260

390

( I N R b n )

2.07 2.1

1.6

2.4

.

( % )

0

N o n -

p r i o r i t y

s e c t o r

P r i o r i t y -

S S I

P r i o r i t y -

O t h e r s

P r i o r i t y -

A g r i

P u b l i c

s e c t o r

SCBs New private Old private SBI group

0.0

0.8

2009 2010

Priority sector Non-priority sector

Source: RBI

Note: PSL stands for priority sector lending; NPSL stands for non-priority sector lending

Key takeaways

Sectoral distribution of NPAs showed a growing proportion of priority sector NPAs between FY09 and FY10

Priority sector NPAs, which constituted little over half of the total NPAs of domestic banks up to FY08, had shown a

steep decline in FY09, attributable primarily to the Agricultural Debt Waiver and Debt Relief Scheme of 2008Between FY09 and FY10, however, the share of priority sector NPAs, in general, and SSIs, in particular, went up,partly a reflection of the impact of the financial crisis and economic slowdown

At end of FY10, the percentage of priority sector NPAs in total NPAs was 53.8% for PSBs against 27.6% for private

20



Weaker sections not less creditworthy than others

Weaker section NPLs on the decline Weaker section (group w ise) - PSBs have higher NPLs inthe segment

6.0

3.2

4.0

2.4

3.6

4.8

(

% )

0.0

0.8

1.6

2.4

( % )

0.0

1.2

FY07 FY08 FY09 FY10

P S B s


S B I g r o u p

P r i v a t e b a n k s

O l d p r i v a t e

b a n k s

N e w p r i v a t e

b a n k s

Key takeaways

Source: RBI

…

ea er sec ons ave s own a s ea y ec ne n e ra o n recen years, corro ora ng e po n aweaker sections are, in fact, not less creditworthy than other sections and strengthens the argument forfurthering the process of financial inclusion

At end of FY10, the NPA ratio for weaker sections stood at 2.73% for domestic banks, a little higher than the NPAratio for non-priority sectors

NPA ratio for weaker sections for public sector banks was higher at 3.0% than 0.5% for private sector banks atend of FY10

21



Bank lending to sensitive sector marginally down

Exposure to sensitive sector (% of loans)-FY10 Exposure to sensitive sector (% of loans)-FY09

28.0

35.0

28.0

35.0

7.0

14.0

21.0

( % )

7.0

14.0

21.0

( % )

0.0

PSB SBI group Old private New private Foreign banks

Commodities Real Estate Capital market

0.0


Commodities Real Estate Capital market

Marginal reduction in exposure (expressed as % of

loans) to sensitive sectors in FY10 over FY09Decline sharper in real estate vis-à-vis capital markets

PSBs reduced exposure to both capital markets and

Change in exposure (% of loans) in FY10 over FY09

200

real estate; however, SBI, contrary to the group trend,increased its exposure to real estate, whilemaintaining exposure to capital markets

Old private banks decreased exposure to all three(100)

0

( b p s )

,markets)

New private banks decreased exposure to real estate,but increased their exposure to capital markets

Forei n banks increased their ex osure to both ca ital

(300)

(200)


Capital market Real Estate Commodities

markets and real estate (but overall, foreign banks

saw overall 3% contraction in assets)22

Source: RBI



Global comparison



Global scenario

In the w ake of crises: Bank credit to private sector decelerated in the mature markets

Securitisation markets outside those supported by public sector remained weak

Low quality borrowers lacked access to capital funding

What has changed?

Despite credit and quantitative easing policies, global real private borrowing rates remained stable since April2009

Public sector interventions increased public sector indebtedness

,funding markets reopened

Stronger banks faced no difficulty obtaining funding; some weaker banks were less able to access interbank andcapital markets or only at penal rates

24



Credit to pvt. sector up; refinancing needs to create pressure

Private lending - BRICs/ MexicoKey takeawaysLoan book contraction reversed

Contraction of BIS reporting banks’ internationalbalance sheets which had be un in the 4CY08

33.0

42.0

came to an end during 9mCY10

Turnaround was led by sizeable increases ininternational claims on residents of the UK/US. Claims

on Asia-Pacific, Latin America and Caribbean 6.0

15.0

24.0

( % )

,emerging Europe declined

Nevertheless, internationally active banks increasedtheir exposure to Greece, Ireland, Portugal andSpain, mainly as a result of rising off-balance sheet

(3.0)

Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10

China Russia Brazil Mexico India

Private lending - Developed countries

items

Progress towards global financial stability experiencedsetback in April and May 2010 with the emergence of Euro zone sovereign debt stress

10.0

15.0

Refinancing needs to create pressure in bond markets

According to the IMF, the huge refinancing need of

~EUR 300 bn for maturing bonds in the PIIGS has the

0.0

5.0

( % )

po en a o sp over o o er reg ons

Going forward, the large and significant rolloverneeds in the PIIGS would create insurmountablepressure on bond markets as simultaneous fundingneeds of US, UK, Japan, and Euro zone of the order

(10.0)

.

Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10

US UK France Germany Japan

25

Source: RBI

of ~USD 4 tn for bonds due for redemption in the 3rdand 4th quarters come to fore



IMF revised down LLP estimates for global banks

NPL levels increased across countries

12.0

15.0

3.0

6.0

9.0

( % )

0.0

P a k i s t a n

R u s s i a

I r e l a n d

G r e e c e

I t a l y

U S

T h a i l a n d

S p a i n

B r a z i l

P h i l i p p i n e s

M a l a y s i a

F r a n c e

U K

G e r m a n y

I n d o n e s i a

P o r t u g a l

M e x i c o

I n d i a

C h i n a

Key takeaways

For 2007-10 IMF’s GSFR of October 2009 estimated the total write downs and loan rovisions of the lobal bankin

Source: RBI

2008 2009

system would amount to ~USD 2.8 tn on account of loan losses (US:USD 1.025 tn, UK: USD 604 bn)

GSFR for April 2010 reduced the size of estimated global write downs and LLP to USD 2.3 tn, taking account of theestimated decline in the implied cumulative loss rate from 5.0% to 4.1%

esp e s mo era on, ere s e ev ence o sugges a osses ave na y a a e ue o e uncer a n ysurrounding the estimates of delinquencies as a result of differences in accounting procedures, reporting lags acrossregions, uncertain path of future delinquencies and covert concealment of losses through extension of maturities of loanssold by banks

26



A glance at large banking systems

Banking ROEs - Returning to profitability Capital adequacy ratio

0.0

14.0

28.0

) 15.0

20.0

25.0

)

(42.0)

(28.0)

(14.0)

z i l s i a

s i a

i n a

i c o

d i a e s n

d a i n n d

c e

g a l

s i a a

n a l y

U K a

* U S c e m n y

(

0.0

5.0

10.0

i a z i l

i a o n s d i a K y S i a e i n l y c e a a

l

( %

B r

I n d o n e

M a l a y

C h i

M e x

I n

P h i l i p p i

T h a i l

S p

S w i t z e r l

F r a

P o r t u

R u s

J aI t

E u r o a r

G r e

B e l g i

G e r m

2008 2009

R u s s

B r a

I n d o n e s

M e x i

J a p

P h i l i p p i n

T h a i l a

M a l a y s

G e r m a

I n d

F r a n

S p a

I t a

G r e e

C h i

P o r t u g

2008 2009

Key takeaways: According to BIS Annual Report 2010

Banks returned to profitability and strengthened their capital ratios in 2009

Source: RBI

,

Going forward, banks would have to address three major challenges:

Refinancing a large portion of their liabilities

Redressing balance sheet weaknesses and reducing operating costs

27



A glance at large banking systems (contd…)

US banking system Key takeaways

– Four largest bank holding companies recorded profits in Q1CY10 as trading revenues and lower loss

– Regional and smaller banks continued to struggle with profitability as credit losses on core operationsremained high

– Pace of failures of small banks continued in 2010 at the same pace as 2009, driven largely be credit losses in

The Euro zone banking system

Key takeaways

– in accounting standards; (b) lags across regions; © uncertain path of future delinquencies; and (d) covertconcealment of losses through extension of maturities of loans sold by banks

– Tier I capital rose to the highest level in 15 years due to slower growth in private credit and shift to govt.. .

earnings and efforts made to raise capital from public and private sources

– ECB FSR estimates for cumulative write downs for 2007-10 revised down from 515 bn in June 2010 from 553bn estimated in December 2009

– ,

– According to the BIS Annual Report 2010, the European banking system needs more capital even if therewere no increase in the regulatory capital requirements under enhanced Basel II regime

28




UK banking system Key takeaways

– The implied mark-to-market losses of the UK banks in their banking books declined by ~50% from the.

USD 398 bn by April 2010, reflecting improvement in expected losses on residential mortgages. Accordingly,the projected loss provision rate for the first half of 2009 was revised downwards by IMF in April 2010

–

Core Tier 1 capital ratios at 9.6% as at end 2009 exceeded the pre-crisis levels, but remained low whencom ared historicall

Emerging markets banking system

Key takeaways

– Emer in markets banks are re-eminent atherers of savin s unlike western banks that borrowed heavilto finance business and suffered significantly from the financial crisis

– Banks in emerging Asia gained significantly from a favourable combination of macroeconomic circumstancessuch as a sharp rise in domestic savings and easy monetary policies that led to low cost financing

– , ,exposure to government bonds

29




Chinese banking system Key takeaways

– Chinese banks lent a record USD 1.4 tn in 2009, more than double the new loans issued in 2009, despite the

bad

– According to the rating agency, S&P, if 30% of the loans to local government vehicles become bad, it would

add 4-6 percentage points to overall non-performing loan ratio of banks that is presently at a respectablelevel. Losses could be ma nified if the real estate ex osures are also affected b delin uencies

– Banks have also been asked to put all loans sold or transferred to lightly regulated trusts back on their booksand refrain from ‘informal securitisation’

30



NBFCs

NBFC O ti l hi hli ht f NBCF



NBFC: Operational highlights of NBCFs

Key attributes of balance sheet: Assets have grown by 12% to INR 1.1 tn

– Balance sheet of NBFCs-D expanded by 22%

Networth increased by 19% to INR 162 bn.

Assets, deposits and networth of NBFCs Number of NBFCs registered in RBI

1,250

750

1,000

b n )

9,000

12,000

15,000

n )

250

500 ( I N

3,000

6,000 ( I N R

Source: RBI

0

Assets Deposits Net Owned funds

FY09 FY10

0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

NBFCs-D Regd NBFCs

32

NBFC D A t 22% b t ti fit d li d 19%



NBFCs-D: Assets grew 22% but operating profits declined 19%

Assets registered significant growth of 22% to INR 937 bn 3/4th of the assets were held by asset finance companies

Only 7% of NBFCs-D has an asset size of >INR 5 bn, which had 97% share in total assets.

NBFCs-D source 45% of borrowings via term loans and 21% through debentures

Operating profits declined 19% to INR 24.9 bn and PAT came off 32% to INR 14.1 bn.

Borrow ing profile of NBFCs-DLiability profile of NBFCs-D

FY103.5

Government7%

Externalsources

1%

Others26%

2.1

2.8

( % )

Banks/FIs

45%

0.7

1.4

Source: RBI

Debentures21%

0.0

March 2009 March 2010 June 2010

Gross NPA to gross advances Net NPA to net advances

33

NBFCs D: NPLs decline; adequately capitalised



NBFCs-D: NPLs decline; adequately capitalised

Gross NPLs declining trend continued; net NPLs remained negative due to excess provisioning212 out of 216 NBFCs-D had CAR of >12%.

Gross NPLs declining continuously; still carries excessprovisioning

NBFCs-D in India are primar ily adequately capitalised

10

13

)

3.0 1 1 7

27

NBFCs-D break-up b ased on capital adequacy

3

5

( %

0

2002 2003 2004 2005 2006 2007 2008 2009 2010

Gross NPA to credit exposure177

< 9% 9-12% 12-15% 15-20% 20-30% > 50%

34

NBFCs ND SI: Earnings flat despite 17% asset growth



NBFCs-ND-SI: Earnings flat despite 17% asset growth

Assets registered a growth of 16.7% to INR 5.63 tnPAT was almost flat Y-o-Y at INR 109 bn; RoAs came off from 2.2% in FY09 to 1.9% in FY10

NBFCs-ND-SI: NPLs deteriorate marginally in FY10;however subsequent quarter showed some improvement

Earnings flat despite asset growth of 17%

2.8

3.5

)

6,000

7,500

)

0.7

1.4

.

( %

1,500

3,000

,

( I N R b

Source: RBI

0.0

March 2009 March 2010 June 2010

Gross NPA to gross advances

0

Net Profit Assets

FY09 FY10 Q1FY11

35



Documents

Edelweiss Banking Report