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India Banks
CV Financing: Bottom-Up View Healthier than Top-Down
CV financing, a good indicator of macro pressures — CV financing is strongly
linked to the overall macro and is a good indicator of any budding asset-quality
pressures despite its relatively small size (2-4% of total loans). We carried out
extensive channel checks to gauge the impact of the current macro headwinds.
Key takeaways: a) Demand is still strong (macro overriding higher rates); b) Scope
for passing more rate hikes (up to 50bps); c) Growth rates are currently high (25-
30%), but should moderate to 10-15% for the industry; d) NIMs under some
pressure (can decline 20-30bps); and e) Asset quality is the best-ever currently. In
sum, the business seems better bottom-up than the macro suggests.
Competitive intensity, penetration levels remain high — CV financing is the
oldest retail financing segment in India and is reflected in a high finance
penetration (over 90%) and LTVs (75-80%). Competitive intensity has typically
been high, with both NBFCs and Banks having a largely equal share of
disbursements. So far, competition seems to be fairly rational, though some
relatively newer NBFCs appear to be getting more aggressive on pricing. Key
players – HDFC Bank, Kotak, ICICI Bank and Shriram.
Expect lending rates to rise further, NIMs under some pressure — Lending
rates have increased by 100-150bps in the CV segment, but higher funding costs
are exerting pressure on NIMs. We expect part of this to be passed on to
borrowers (25-50bps more) and cushion the NIM impact (we expect 20-30bps
reduction). We believe gradual rate hikes can in turn be passed on by the
borrowers through higher freight rates, but sharper hikes will dampen loan growth.
Asset quality - best ever, but for how long? — Asset quality has turned around
sharply from mid-2009 troughs, currently – a) NPLs, incremental delinquencies,
and credit costs are all better than ever before; and b) Advance warning signals
(sales mix, early defaults, repossession losses, etc.) are also very strong. We
expect asset quality to remain healthy, but with some moderation medium term –
as current performance suggests it cannot get any better than this.
CV Financing in India
Commercial Vehicle (CV) financing may be a small portion of the banking system’s loan
books (2-4%) but its importance lies in its sensitivity to the overall macro environment
(growth, inflation, interest rates) – both in terms of its growth outlook and, more
importantly, for the asset-quality performance. CVs are typically among the first segments
to feel the asset-quality pressure and are also relatively easier to track – as there are
separately listed companies in this segment. We recently did extensive channel checks
with dealers as well as banks to ascertain the impact of the current macro headwinds on
the business (if any).
Competitive intensity has been historically high
The commercial-vehicle financing segment is the oldest retail financing
segment in India has historically been amongst the most competitive and
fragmented (within the financial services space). Initially, it started with a large
number of non-banking finance companies vying for market share in this
segment. The number of companies was reduced significantly post a period of
liquidity / asset quality crisis (in early 1990s). However, there are still a few
large, well established, non-banking financials operating in this segment along
with the banking industry. In recent years, however, banks have been gaining
market share from the non-banking finance companies, with governmentowned
banks also becoming increasingly active in this segment.
In recent years we have seen some vacillation in the competitive intensity in the
sector – a few established players have eased their presence (over the last 18-
24 months) due to a variety of factors: a) slowdown in vehicle sales in FY08
and FY09, b) asset-quality concerns due to global/domestic issues, and c) lack
of risk appetite/capital (especially for foreign banks). This led to a meaningful
easing in competitive intensity in this segment during FY08-09.
Some of these players can return swiftly (as they already have established
distribution channels) and some of them have already started to increase
activity levels. Competition however, has remained largely rational so far – with
very few instances of aggressive price competition – barring a few newer
NBFCs which appear to have become more aggressive in recent months.
Overall, the sector appears in a much better shape bottom-up than is
suggested by the top-down macro headwinds.
Financing penetration is high
Penetration rates in the commercial-vehicle financing segment in India have
remained quite high and the segment is well penetrated (between 90-95%
penetration rates). However, there is still a significant difference in the
penetration rates in urban versus rural areas in the country, with rural areas
having meaningfully lower penetration rates than urban areas. We expect
penetration rates to gradually increase further, driven by higher penetration
rates in rural areas as lenders and auto manufacturers increasingly expand
their distribution networks deeper into the country.
Cyclical industry – growth prospects appear healthy
The broader vehicle-financing industry in India has grown at a healthy pace
over the last few years, with the industry size growing 60% over FY04-10, and
commercial vehicles have outgrown the broader segment during this period.
The key factors influencing this strong growth have included a) strong overall
economic growth in the country (especially expenditure on infrastructure
creation), b) increasing household income levels, and c) increasing finance
penetration levels.
Growth in new vehicle sales is cyclical, with periods of strong growth followed
by relatively weaker growth. This can be seen over the last few years in which
sales volumes were low in FY08 and FY09 (-4.6% and 0.8% growth
respectively) and rebounded strongly in FY10 (+26.4% yoy) and remains strong
YTD FY11 (+27.6% yoy) as well.
We believe India is currently in the middle of a strong growth environment and,
even though the current high growth rates should moderate, overall growth
should still remain healthy over the medium term. Key enablers for continuing
growth of commercial vehicle sales would likely be: a) Continued healthy GDP
growth; b) Increasing expenditure on infrastructure projects and c) Increases in
industrial capacity over the next few years.
Commercial vehicle sales are quite sensitive to the overall macro and are
impacted by overall GDP growth, industrial production, as well as interest rates.
Historical data suggests: a) Demand is correlated more to economic activity
levels (IIP/GDP) than interest rates, b) Higher interest rates are a dampener on
growth – though gradual rate hikes have significantly lesser impact than sharp
hikes in rates; c) Higher inflation is generally good for sales – but very high
inflation tends to reduce growth levels; and d) Freight rates typically lag sales
growth and are usually a lagging indicator of demand. Overall, we expect
current high growth rates (25-30% growth in CV sales) to moderate to more
normalized levels (between 10-15% for FY12).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Banks
CV Financing: Bottom-Up View Healthier than Top-Down
CV financing, a good indicator of macro pressures — CV financing is strongly
linked to the overall macro and is a good indicator of any budding asset-quality
pressures despite its relatively small size (2-4% of total loans). We carried out
extensive channel checks to gauge the impact of the current macro headwinds.
Key takeaways: a) Demand is still strong (macro overriding higher rates); b) Scope
for passing more rate hikes (up to 50bps); c) Growth rates are currently high (25-
30%), but should moderate to 10-15% for the industry; d) NIMs under some
pressure (can decline 20-30bps); and e) Asset quality is the best-ever currently. In
sum, the business seems better bottom-up than the macro suggests.
Competitive intensity, penetration levels remain high — CV financing is the
oldest retail financing segment in India and is reflected in a high finance
penetration (over 90%) and LTVs (75-80%). Competitive intensity has typically
been high, with both NBFCs and Banks having a largely equal share of
disbursements. So far, competition seems to be fairly rational, though some
relatively newer NBFCs appear to be getting more aggressive on pricing. Key
players – HDFC Bank, Kotak, ICICI Bank and Shriram.
Expect lending rates to rise further, NIMs under some pressure — Lending
rates have increased by 100-150bps in the CV segment, but higher funding costs
are exerting pressure on NIMs. We expect part of this to be passed on to
borrowers (25-50bps more) and cushion the NIM impact (we expect 20-30bps
reduction). We believe gradual rate hikes can in turn be passed on by the
borrowers through higher freight rates, but sharper hikes will dampen loan growth.
Asset quality - best ever, but for how long? — Asset quality has turned around
sharply from mid-2009 troughs, currently – a) NPLs, incremental delinquencies,
and credit costs are all better than ever before; and b) Advance warning signals
(sales mix, early defaults, repossession losses, etc.) are also very strong. We
expect asset quality to remain healthy, but with some moderation medium term –
as current performance suggests it cannot get any better than this.
CV Financing in India
Commercial Vehicle (CV) financing may be a small portion of the banking system’s loan
books (2-4%) but its importance lies in its sensitivity to the overall macro environment
(growth, inflation, interest rates) – both in terms of its growth outlook and, more
importantly, for the asset-quality performance. CVs are typically among the first segments
to feel the asset-quality pressure and are also relatively easier to track – as there are
separately listed companies in this segment. We recently did extensive channel checks
with dealers as well as banks to ascertain the impact of the current macro headwinds on
the business (if any).
Competitive intensity has been historically high
The commercial-vehicle financing segment is the oldest retail financing
segment in India has historically been amongst the most competitive and
fragmented (within the financial services space). Initially, it started with a large
number of non-banking finance companies vying for market share in this
segment. The number of companies was reduced significantly post a period of
liquidity / asset quality crisis (in early 1990s). However, there are still a few
large, well established, non-banking financials operating in this segment along
with the banking industry. In recent years, however, banks have been gaining
market share from the non-banking finance companies, with governmentowned
banks also becoming increasingly active in this segment.
In recent years we have seen some vacillation in the competitive intensity in the
sector – a few established players have eased their presence (over the last 18-
24 months) due to a variety of factors: a) slowdown in vehicle sales in FY08
and FY09, b) asset-quality concerns due to global/domestic issues, and c) lack
of risk appetite/capital (especially for foreign banks). This led to a meaningful
easing in competitive intensity in this segment during FY08-09.
Some of these players can return swiftly (as they already have established
distribution channels) and some of them have already started to increase
activity levels. Competition however, has remained largely rational so far – with
very few instances of aggressive price competition – barring a few newer
NBFCs which appear to have become more aggressive in recent months.
Overall, the sector appears in a much better shape bottom-up than is
suggested by the top-down macro headwinds.
Financing penetration is high
Penetration rates in the commercial-vehicle financing segment in India have
remained quite high and the segment is well penetrated (between 90-95%
penetration rates). However, there is still a significant difference in the
penetration rates in urban versus rural areas in the country, with rural areas
having meaningfully lower penetration rates than urban areas. We expect
penetration rates to gradually increase further, driven by higher penetration
rates in rural areas as lenders and auto manufacturers increasingly expand
their distribution networks deeper into the country.
Cyclical industry – growth prospects appear healthy
The broader vehicle-financing industry in India has grown at a healthy pace
over the last few years, with the industry size growing 60% over FY04-10, and
commercial vehicles have outgrown the broader segment during this period.
The key factors influencing this strong growth have included a) strong overall
economic growth in the country (especially expenditure on infrastructure
creation), b) increasing household income levels, and c) increasing finance
penetration levels.
Growth in new vehicle sales is cyclical, with periods of strong growth followed
by relatively weaker growth. This can be seen over the last few years in which
sales volumes were low in FY08 and FY09 (-4.6% and 0.8% growth
respectively) and rebounded strongly in FY10 (+26.4% yoy) and remains strong
YTD FY11 (+27.6% yoy) as well.
We believe India is currently in the middle of a strong growth environment and,
even though the current high growth rates should moderate, overall growth
should still remain healthy over the medium term. Key enablers for continuing
growth of commercial vehicle sales would likely be: a) Continued healthy GDP
growth; b) Increasing expenditure on infrastructure projects and c) Increases in
industrial capacity over the next few years.
Commercial vehicle sales are quite sensitive to the overall macro and are
impacted by overall GDP growth, industrial production, as well as interest rates.
Historical data suggests: a) Demand is correlated more to economic activity
levels (IIP/GDP) than interest rates, b) Higher interest rates are a dampener on
growth – though gradual rate hikes have significantly lesser impact than sharp
hikes in rates; c) Higher inflation is generally good for sales – but very high
inflation tends to reduce growth levels; and d) Freight rates typically lag sales
growth and are usually a lagging indicator of demand. Overall, we expect
current high growth rates (25-30% growth in CV sales) to moderate to more
normalized levels (between 10-15% for FY12).
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