Economic-Industry-CompanyAnalysis of

Indian Banking Sector

Under the Guidance of: Under the Guidance of:

Mr. Prem Khatri Prof. Priti BakhshiFounder & CEO Associate Professor

Cafemutual ITM

Submitted By:

Shray TanejaPGDM 2009-11

KHR2009PGDMF089In Partial Fulfillment of 2 Years Full Time Post Graduate Diploma in Management

CAFEMUTUAL

• A new start-up

• It is a media company

• Focusing on distributors of financial services

• Providing information and education

• To launch a website focused on mutual funds

Economic Analysis

India’s GDP witnessed high growth and was the second fastest growing GDP after China

Indian Economy – Overview

• The Indian economy has witnessed an unprecedented growth….

2007-08 2008-09 2009-10 2010-11 2011-120

10

20

30

40

50

60

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

38.9 41.5 44.6

48.4 52.8

9.2%

6.7%

7.4%

8.5%9.0%

Gross Domestic Product at factor cost

Year

In R

s. Tr

illio

n

Source: Central Statistical Organization

The sound performance of each industry segment is leading to the overall robust performance of the Indian economy

Indian economy is the 4th largest in terms of PPP – USD 3.548 trillion in 2009

Current Indicators

• RBI estimates GDP growth in FY2010 between 7.2-7.5%

• Industrial production revives; average growth of 10.4% in FY2010 against 2.7% in FY2009

• Net FII inflow of USD 30 bn in FY2010 as against net outflow in FY2009

• Rupee appreciation of 11.4% vis-à-vis US dollar during FY2010

• Comfortable systemic liquidity and growing Exports• WPI inflation increased to 9.9% in Mar 2010• Policy rates normalizing in line with growth

Indian Economy – Banking (Positive)

• New players in the banking space expected• Infusion of Rs.16,500 Cr to public sector banks to

maintain tier-I capital• Increase emphasis on infrastructure: Financing to

rise to Rs. 20000 cr • Net market borrowing lower than expectation:

Reduce pressure on long term bond yields • Extension of 6-months for the repayment of loans

under agri-debt relief scheme• Housing loans – extended to 31st March 2011

Industry Analysis

Financial Year 2009 – 10

• New banking licenses, new players, more competition thus leading to better savings and lending rates

• Results for the Indian banking industry were in line with expectations

• Structural improvement in the CASA to 38% from 34% y-o-y basis

• Increasing CRR ratio and migration to base rate from the current PLR system were on the negative side

• Bond yield will have negative impact

Updates

• Expansion in Rural segments: Micro Finance • Payment of interest on daily balance: Higher

outflow to Banks• Biometric ATM’s will replace the conventional

ATM’s• Cheques will gradually be phased out and

replaced by RTGS (Real Time Gross Settlement) and NEFT (National Electronic Fund Transfer)

• At least 5 more International Banking giants will set up operations in India

Basel II Accord

Minimum Capital Requirements

Credit Risk

Operational Risk

Trading Market

Risk

Supervisory Review Process

Risk Management Policies and

Practices

Economic capital process

Additional Capital

Requirements

Market Discipline

Mandates increased minimum

public disclosure of

bank’s risk information

Pillar I Pillar IIIPillar II

Challenges

• International Financial Reporting Standards (IFRS) Convergence

• Deregulation: Banking market extremely competitive

• Diffused Customer loyalty• Competency Gap

Options to cope with the challenges• State of the art technology• Leveraging the branch network and sales

structure• Focusing on fee based income• Aggressive forays in the retail advances

segment of home and personal loans• Improving the asset quality as per Basel II

norms• Innovating Products: Credit Analytics Systems• Mobile banking: Access bank accounts through

Mobile phones

Company Analysis

IntroductionICICI Bank

• India’s 2nd Largest banks with total assets worth US $91.07 billion

• Ranked 219 as per Forbes Global 2000 list of companies

• 2000 branches and about 5219 ATMs in India

• Client Sales Simulator• Go Green – ‘Chlorophyll’• Caters more to the premium

segments

State Bank of India• India's largest banking group

with assets worth US $188.56 billion

• Ranked 219 as per Forbes Global 2000 list of companies

• 12496 branches and about 16294 ATMs in India

• Branches in 32 nations• SBI Smile• Kiosk Banking with bio-

metric validation

The Base Rate system

• Base Rate are: Cost of deposits Adjustment for the negative carry in respect of CRR and SLR Unallocatable overhead cost e.g. directors’ and auditors’

fees Profit margin

• Banks not permitted to resort to any lending below the Base Rate

• Actual lending rates= Base Rate + borrower-specific charges

• Both banks have set its base rate for loans at 7.5 percent

• SBI is having a rapid growth in its deposits• As SBI has larger network of branches and ATMs• People in India trust the public sector banks over the private sector ones• The average annual interest income was approx. Rs. 4972 crore• ICICI Bank’s income was well above the industry average at around Rs. 25700 crore• But still SBI had it at Rs. 70990 crore

• Bounce back of ICICI Bank has been phenomenal over the previous year• Primarily due to an increase in treasury income, a decrease in non-interest expenses, decrease in net interest income, and decrease in fee income• Profit of SBI has dipped significantly• Though Operating Profit, Net Interest Income, Other Income increased But Loan loss provision, Operating Expenses increased attributable to higher staff cost and other expenses

Mar '07 Mar '08 Mar '09 Mar '100.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

21.80%

26.10%28.70%

41.70%

44% 43%39%

47%

CASA

ICICI Bank SBI

• Increased CASA implies that the bank earn a higher interest than it has to pay• Stable low cost deposit base as it will get higher interest from its depositors and have excessive cash to give loans and advances• The banks are urged by the finance minister to increase their CASA deposits to 40% of the total deposits

• An indicator of how well earnings support the dividend payment• RBI has raised the cap on banks’ dividend payout ratio from 33.33% to 40%• ICICI Bank is large, stable and mature company as it offers a high D/P ratio.• D/P ratio of 23% for SBI is because of its growing trajectory• It is retaining some part of the cash for future expansionary purposes and has a conservative approach in wake of another financial crisis• RoE is a measure of the returns generated on shareholder funds• Also an indicator of financial strength• Companies with high RoE are more likely to generate incremental cash to fund capital expenses and are better placed to raise debt at fine rates

The CAMELS FRAMEWORK• RBI prescribes Banks to maintain a min (CRAR) of 9 % with regard to credit, market and operational risk • High ratio: Banks are in comfortable position to absorb losses, soundness and resilience• Capital adequacy ratio of the ICICI Bank was well above the industry average• It has ability to pursue accelerated growth

• Useful indicator of corporate efficiency• It shows the revenue a company generates from its assets• SBI is a better investment prospect as its return on asset is increasing over the years• The decline in ration for ICICI Bank could be because management is not adequately controlling the potential credit risks

• C - CAPITAL ADEQUACY• A - ASSET QUALITY • M - MANAGEMENT SOUNDNESS• E - EARNINGS & PROFITABILITY• L - LIQUIDITY• S - SENSITIVITY TO MARKET RISK

• An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment• It reduces profitability, and carrying cost is increased• Both banks have higher NPA than the industry average• Thus, they have to be much more efficient in giving out loan

• Measures a company’s profits compared to its entire investment• High ROA firms: more profitable, grow faster without borrowing or selling additional shares to raise capital• Indian banks operate at an average of around 1%• ROA of 1.13% ICICI Bank has performed much better than the entire industry

The CAMELS FRAMEWORK

• Is used to study liquidity position of the bank• High ratio: Large amounts of liquid cash to meet clients cash withdrawals• ICICI bank made a huge amount of business by granting loans & advances• SBI: playing safe in terms of its deposits & conserving cash for any unfavorable conditions as well as for expansionary purposes

The CAMELS FRAMEWORKSensitivity to Market Risk• Refers to the risk that changes in market conditions could

adversely impact earnings and/or capital. • The primary risk in most banks is interest rate risk (IRR)• IRR depends on many factors including:

Maturity Repricing characteristics The presence of embedded options, such as loan prepayments, interest rate

caps

• It is a director responsibility to ensure that the level of risk taken is appropriate for the institution and to ensure that the risk is well understood

• If the bank is taking on higher levels of IRR, it will need to maintain higher levels of capital and have higher levels of earnings

ICICI Bank SBI

Capital Market Performance

Bibliography

• Annual Report of ICICI bank• Annual Report of SBI • Reserve Bank of India• BSE Plus• Union Budget• Money Control• Mckinsey Report• Central Statistical Organization• www.icicibank.com• www.statebankofindia.com• www.google.com/finance • www.fdic.gov

Thank You