Overview of Banking Industry Outlook   Preface | Foreword | Executive Summary | Methodolgy | Industry Report | Industry Insights | Award Winners | Company Listing | Launch Event | Editorial Team| Sponsors Alphabetical Listing Total Income Net Profit Total Assets Growth in Advances Growth in Deposit Total Employees Branches Listing ATM Wise Listing

Industry Insights

Dun & Bradstreet (India) attempts to highlight key trends of the 77 Scheduled Commercial Banks (SCBs) profiled in the publication. The SCBs comprises of 27 Public Sector Banks (PSBs), 22 Private Sector Banks and 28 Foreign Banks.

For the purpose of the study we considered all 77 SCBs profiled in the publication. The data for the study was collated through responses received directly from banks, from sources in public domain like RBI documents and annual reports of banks. We have examined various parameters such as income growth and composition, business growth, asset quality and market risk to gain insights on the profiled banks.

Total Assets

The total Assets of 77 SCBs rose by more than double to Rs 43,264.9 bn during FY08, as compared to the asset base of Rs 19740.2 bn in FY04. During FY08, the total asset base of the SCBs was equivalent to 91.8% of India’s GDP, as compared to 62.7% of GDP in FY04.

Public Sector Banks (PSBs) dominate the banking industry with a contribution of close to 69.9% to total assets, followed by private sector banks which account for around 21.7% of total assets.

Furthermore, based on the banks balance sheet size (total assets), Dun & Bradstreet has classified that banks as large sized banks, medium sized banks and small sized banks using the 80:15:5 principle.

The large sized banks are defined as banks with a balance sheet size of more than Rs 600 bn, medium sized from Rs 200 bn to Rs 600 bn and small sized banks are banks with a balance sheet of up to Rs 200 bn.

In line with this principle there are 22 large sized banks with a balance sheet size of more than Rs 600 bn together accounting for close to 80% of the total assets of SCBs. These comprise of 16 PSBs, 3 private sector banks and 3 foreign banks.

The 18 medium sized banks account for the next 15% of the total assets, and include 11 PSBs, 5 private sector banks and 2 foreign banks. The small size banks at the lower end of the spectrum account for 5% of the total assets and include 37 banks comprising of 23 foreign banks and 14 private sector banks.

Advances and Deposits

Over the last five years, the growth spurt and rapid expansion of the Indian economy coupled with rising income levels and ever increasing hunger for credit led to a record surge in the deposits and advances during the last five years. The Credit Deposit ratio, advances given to customers as a percentage of deposits, rose to 74.6% in FY08 as compared to 54.8% in FY04. Deposits for all SCBs in FY08 were higher by Rs 6,232 bn compared to FY07, at Rs 33,201 bn; whereas advances were higher by Rs 4958 bn compared to FY07, at Rs 24,770 bn. The booming economy led to a spurt in credit demand in industries, retail loan segment and other consumer finance segments.

The private sector banks have outperformed the PSBs as well as the foreign banks with deposits growing at a CAGR of 26% during FY04 – FY08, and the advances growing at a CAGR of 32% for the same period. The PSBs have outperformed their foreign peers in credit growth despite their high base.

Interest Rate Hike Slows Down Incremental Credit Growth

After years of continuous robust credit growth, FY08 witnessed a slight moderation in credit growth as compared to the previous years, as a result of the monetary policy tightening measures initiated by the RBI to contain inflation during the year. Prior to FY08, RBI raised CRR four times at regular intervals by 25 basis points each time between Dec 23, 2006 and Mar 3, 2007 (both days inclusive) in order to control excess liquidity and mounting inflation.

In addition, at the onset of FY08 the RBI further tightened its monetary stance by raising CRR twice in Q1 FY08 (Apr 14 and Apr 28) by a total of 50 basis points from 6% to 6.5%. This hike in CRR pushed interest rates upwards, and subsequently resulting in many banks raising their PLRs. The consequent hikes in interest rates resulted in a decline of 55 basis points in q-o-q incremental credit growth in Q1 FY08. However, credit growth picked up yet again in the forthcoming quarters and in fact remained robust during FY09 despite rising concerns of a slowdown. The robust credit growth during FY09 despite a slowing economy can be attributed to the drying up of alternative sources of funding like equity markets, ECBs, FCCBs, etc.

The downward spiral in prices of assets and the credit crunch in the west resulted in negative or lowered quantum of finance from overseas. Thus, despite concerns of a widespread slowdown, deceleration in industrial growth and ever increasing credit risk, credit growth has been robust - recording a year till date (till Feb 6, 2009) growth of over 20%.

Low Cost Deposits

The CASA (Current Account Saving Account) deposits are low cost deposits that are key to banks’ survival and profitability during a period of higher interest rates and interest rate volatility that is prevalent today. The low cost deposits help banks maintain the spread between the cost of funds and interest earned in a period of high interest rates, thus protecting their margin. For the purpose of analysing the market share of low cost deposits and its relation to net interest margin, we have compared the bank groups amongst themselves.

Amongst foreign banks, the share of demand deposits and savings bank deposits rose to 44.7% of the banks total deposits in FY08 as compared to a 33.8% share of low cost deposits in FY03; and amongst private banks the share of low cost deposits increased to 32.8% from a share of 23.8% of total deposits. The ratio of net interest income to total assets increased to 3.8% and 2.4% in 2008 for foreign banks and private banks respectively. However, for PSBs there is a slight decline in share of low cost deposits and a drop of 75 basis points in the ratio of net interest income to total assets.

Total Income

The total income of the SCBs doubled to Rs 3,688.9 bn in FY08 as compared to an income of Rs 1,838.7 bn in FY04. The PSBs continue to dominate the Indian banking industry, accounting for more than 66% share in total income; followed by 23.86% share of private sector banks.

The total income of these banks comprises of interest income and non interest income. The interest income is the interest earned on loans and advances besides income from investments; whereas the non interest income includes fee based income, income from treasury operations, gain/loss on sale or revaluation of investments, gain/loss on sale of banking and non-banking assets to name some.

Near-record loan growth lifts interest income

Accelerated economic growth in India over the last few years, coupled with heightened industrial activity and the subsequent robust credit growth lifted interest incomes, a major constituent of the banks’ total income, by a level of 21% CAGR during FY04 – FY08.

Although the PSBs have the lion’s share of the total interest income earned by banks, PSBs have been consistently losing out to private sector banks and foreign banks in the last three years. However, the pace of decline in the share of PSBs in the total interest income earned by the SCBs has decelerated in FY08. During FY08, the share of the PSBs in the total interest income earned by SCBs declined by just 173 basis points as compared to the 350 basis points decline in FY07.

Non Interest Income to Total Income

The share of non interest income per se in total income has declined since 2004. However, fee based income, a constituent of non interest income, has increased - sharply outperforming the growth from other segments of income including the interest income. Fee based income has created an additional revenue stream for banks and has thus become an increased focus area for most banks. The boom in the economy has led to richer opportunities in public markets, investment banking, M&A deals, etc; and more banks have ventured into these areas or have strengthened their presence in these activities to augment their revenue, and capitalise on the boom. The share of fee based income increased from just 29.9% of the non interest income in FY04 to over 52% during FY08.

In 2008, the non interest income as a per cent of total income was higher for foreign banks at over at 30%, followed by private sector banks at 19.1% and just 12.9% for PSBs.

In terms of the income share from fee based income, the PSBs have lost share to their private sector and foreign peers in all four years, and have a much lesser share of fee income, as compared to their dominance in interest income. The consolidated fee based income for SCBs outstripped growth in interest income by growing at a CAGR of 27% during FY04 – FY08. For private sector banks, fee based income grew at a CAGR of 45% for the same period, outperforming its foreign and public sector peers, whose fee based income grew at a CAGR of 35% and 18% respectively. In 2008, fee based income accounted for close to 12% of the total income of private sector bank; over 15% share in total income of foreign banks and just 6% of the total income of PSBs.

Segment Wise Revenue Distribution

In accordance to RBI guidelines for SCBs on AS – 17 (Segment Reporting) dated Apr 18, 2007; and effective Mar 31, 2008 the segment wise revenue of the banks are reported under retail banking, corporate/wholesale banking, treasury, and other banking operations. Other banking operations may include hire purchase and leasing operations, gain/loss on sale of banking and non-banking assets and other items not attributable to the other three segments.

Retail banking is a high volume business which constitutes a majority of the total revenue for both public and private sector banks. When compared to the private sector, PSBs which are perceived to be risk averse, have higher exposure to the retail banking segment, and lesser exposure to treasury operations.

Among the PSBs, SBI alone accounts for more than one fourth of the income pie from retail banking operations. In fact, out of SBIs total revenue close to half is contributed from its retail banking operations. The higher share of the PSBs in retail banking can be attributed to their unmatched rural reach which keeps them far ahead of their private sector and foreign peers in terms of their presence in rural areas. The PSBs account for 94.7% of the total branches in rural areas.

Treasury operations rule the business of foreign banks

Of the total 28 foreign banks, segment wise revenue was unavailable for six foreign banks due to non availability of their annual reports. On an aggregate level, for the 22 banks for which segment wise revenue was available, treasury operations ruled their top line with a contribution of 34% to the segment revenue, followed by a 31% contribution by retail banking operations and a 28% contribution by corporate banking operations.

Within 22 banks, only 12 banks had exposure to retail banking. These 12 banks shows that retail banking operations form a major chunk accounting for 36% of their revenue; followed by treasury operations and corporate banking. The 10 foreign banks that did not have any exposure to retail banking had a majority of their revenue from either corporate banking or treasury operations. Unlike their public sector and private sector peers, almost all the foreign banks are very active in treasury operations in India.

Asset Quality Could be a Cause for Concern Going Forward

Quality of bank asset has visibly improved for SCBs during the economic boom with standard assets consistently rising upwards, and moving from 97.3% in FY07 to 97.6% in FY08. Standard assets for all SCBs in FY08 stood at 22,758.4 bn and were higher by Rs 4,326.2 bn when compared to FY07. However, concerns on asset quality have emerged which reflects in movement of NPAs. Between FY07 and FY08, the ratio of addition to NPAs as a percentage of Gross NPAs has increased, while on the other hand recovery of NPAs as a per cent of Gross NPAs has declined. Further, the rise in total loan assets restructured reinforces the concern on asset quality.

The start of FY08 was marked with a period of high interest rate regime in order to control the excess liquidity and control inflation. Furthermore, to make matters worse, the down phase in the business cycle in recent months has raised the odds of credit default. The aggressive credit growth seen in recent years is now followed by a widespread slowdown in the economy. Concerns on the macro could mean that asset quality would be under scrutiny going forward.

Composition of Loan Assets

As depicted in the graph, asset quality of the PSBs has improved with a decline reported in sub standard, doubtful and loss assets as compared to their private sector and foreign peers. Private sector banks on the other hand have reported a sharp increase in sub-standard assets over the last couple of years. In FY08, the proportion of standard assets for private sector banks has declined by 34 basis points to 97.3% as compared to FY07.

Net NPA s to Net Advances

The ratio of net NPAs to net advances illustrate that despite the sharp credit growth witnessed over the past few years, non-performing assets as a percent of net advances declined consistently until between FY04 and FY07. The NPAs tend to be relatively lower for banks during expansionary phase and are expected to rise adversely during times of economic slowdown as prevalent today.

The speedy decline in NPAs can be attributed to the economic boom reported between FY04 – FY08, and the cautious and risk averse approach of banks who have increasingly used restructuring and securitisation of risky loans to minimise bad loans. The concentrated efforts of the banks, including loan restructuring, securitisation, one time settlements coupled with write offs of loss assets has helped them bring down the NPA levels over a period of time. The formation of DRTs, CDR mechanism and activation of SARFAESI act has also helped the cause of balance sheet cleaning.

In fact, the SARFAESI Act 2002 laid the foundation for establishment of ARCs to facilitate asset recovery and reconstruction. The primary purpose was to provide a structured platform for managing mounting NPA stocks of the banking system in India. With the enactment of SARFASEI Act 2002, the RBI issued guidelines and directions relating to registration and measures of ARCs, functions of the company, prudential norms, acquisition of financial assets and related matters under the powers conferred by the SARFAESI Act, 2002. This model of securitisation and reconstruction of financial assets was instrumental in controlling the NPAs of the banking system in India.

Movement of NPAs

The movement of NPAs prior to FY07 was favorable as the ratio of addition to NPAs was lower than the recovery of NPAs. Both these ratios were almost at the same level in FY07, however, in FY08, the ratio of addition to Gross NPAs surged higher, and the recovery of NPAs as a per cent of Gross NPAs declined. During FY08, the ratio of addition to Gross NPAs shot up sharply to 61%. This further reinforces the concerns on asset quality.

Total Loan Assets Restructured

The total loan assets restructured can be effective in avoiding delinquencies to a certain extent, but it also results in an understatement of asset quality. During FY08, there was an increase in structuring of loans, both corporate as well as non-corporate debt. In FY08, the total amount of loans restructured went up by 61% for the PSBs; and more than doubled for the private sector banks and foreign banks. The total amount of loans restructured by foreign banks was at Rs 1,623.2 mn in FY08, as compared to Rs 578.8 mn in FY07.

Off-Balance Sheet Exposure

Off-Balance Sheet Exposure also known as Contingent liabilities, include exposure to derivative contracts, letters of credit and guarantees, are not directly funded by banks and do not appear on their balance sheets.

In FY08, the off-balance sheet exposure of SCBs increased sharply by 88.4 per cent, the sharpest rise in recent years, while the exposure to forward exchange contracts, a constituent of offbalance sheet exposure rose by 94.6%. The exposure to forward exchange contracts contributes to more than half of the off-balance sheet exposure for the PSBs, private sector banks as well as foreign banks. In fact during FY08, the foreign exchange contracts for foreign banks were higher by Rs 43,608 bn as compared to FY07, at Rs 85,823 bn; contributing to around 84% of the off-balance sheet exposure of foreign banks displays the aggressiveness of foreign banks in the foreign exchange business.

Rising fluctuations in the currency market has led to many banks entering into simple as well as exotic forward contracts to hedge against any currency fluctuations. Unlike their lending business, banks are not required to bring in additional capital to scale up their derivative business. The business of lending of banks is curtailed by the amount of capital on the books of these banks.

PSBs which are perceived to have low risk appetite and conservative followers of banking norms, have the lowest ratio of off-balance sheet exposure to total assets at 61%, as compared their peers. However, their exposure to derivative contracts has increased over a period of time. This ratio compares the risk or the liability that may arise, to the balance sheet size of banks. As at the end of FY08, private sector banks had an off-balance sheet exposure to total assets ratio of 251%, and foreign banks have the highest off-balance sheet exposure to total assets ratio of 2803%. In FY08, the increase in absolute value of off-balance exposure was highest for foreign banks at 102% despite their higher base.