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Indian Private Sector Banks
The all new tortoise and rabbit race
India’s smallest private sector banks- Indusind (IIB) and Yes Bank
(YES)- face the unenviable task of scaling up franchises in a far more
competitive lending and funding environment than faced by private
sector peer goliaths –ICICI, HDFC and Axis- in the 90s. While the
imminent entry of a new generation of private sector banks is likely
to increase competitive pressure, we turn Buyers of YES though still
prefer its slow grown peer Indusind due to a more scalable franchise
that derives its niche from the bank’s retail portfolio.
Funding, lending niche + branch network critical to success
In an increasingly competitive banking market, we think future success for YES
and Indusind will be driven by two sources:
• Ability to establish lending and funding niches: As the success of home
grown private sector giants- HDFC and Axis Bank and that of Greenfield
private sector banks’ across emerging markets prove (see pages 5-10),
new entrants with novel ideas (superior online platforms, product
segmentation and design, innovative customer service strategies) and
sizeable retail branch franchises are more likely to be successful in
competitive, fast growing markets such as India.
• Ability to ride the curve on regulatory changes: We think YES and
Indusind can benefit from two imminent regulatory events:
a) Deregulation of the savings deposits rate: In the event of a
deregulation of the savings deposits rate (fixed at 3.5% p.a. currently;
see our 6th Jan release for details), YES and Indusind can gain a head
start by targeting niche savings depositor bases through a mix of
higher interest rates and better service quality than incumbents
(preferably targeting the middling PSB’ customer bases).
b) Entry of new private sector banks: Ahead of the likely entry of
corporate giants in Indian private sector banking, YES and Indusind
need to target retail customer pockets across assets and deposits
ahead of these behemoths.
While both banks - YES (knowledge banking led mid corporate franchise) and
Indusind (niche retail loan portfolio + mature retail liabilities portfolio) - have
been successful in establishing niches we believe Indusind’s retail niche gives it
a significant head start over YES in its retail banking foray.
Valuations: Prefer Indusind to YES
At Rs 274, Indusind trades at 2.4x FY13E BV, in-line with the private sector
bank’s average (ex IIB). We think the bank’s superior retail franchise and
growing branch network is likely to sustain a faster growth momentum than its
mature private sector peers and hence a premium valuation is justified. We
upgrade our FY12, FY13 earnings by 10-14% to factor in superior NIMs amidst
stable credit costs. Revised valuation of Rs 330 indicates a 20% upside and an
implied FY13E P/BV of 2.8x.
At Rs 330, Yes Bank trades at 2.1x FY13E BV (15% discount to peers). With the
stock now trading at a sensible discount to its larger current and savings ‘CASA’
deposit peers and with the bank’s renewed commitment in recent quarters on
branch expansion we switch from a ‘Sell’ to a ‘Buy’. The revised valuation of Rs
386 indicates a 17% upside (implied FY13E P/BV of 2.4x).
Nearing an inflection point?
With a collective market share of <200bps, YES ($12bn FY11E asset base) and
Indusind Bank ($10bn) are India’s newest private sector upstarts. Both banks have
plans of a retail liability led scale up and their ambitious growth plans (ostensibly
called ‘YBL version 2.0’ incase of YES) will see their asset bases expand at a
CAGR of 35% between FY11-15. Each banks’ branch networks will multiply nearly
5x in this period (from the current 185 and 285 for YES and Indusind respectively).
The two banks have identified: (a) growth in low cost ‘CASA’ deposits, and (b) a
broader entry into retail banking as the key to this growth.
• In a glitzy May’10 launch of “YBL Version 2.0”, Yes Bank set aggressive
growth targets for itself (see table 1 on the right). In the period leading up to
2015, the bank’s branch network will expand to 750 (vs. 185 as on Dec’11)
while its deposit base will grow to Rs 1.2trn (35% CAGR between FY10-15).
Inspite of this rapid expansion, ROEs are targeted to remain in the 18-20%
range and RoAs at 1.6%.
• A month later, Romesh Sobti, MD and CEO of IndusInd Bank also outlined
similarly aggressive targets for Indusind bank. Indusind will add 400+
branches until FY15. The CEO expects the bank to have a branch network of
650-700 branches by FY14.
YES and Indusind have now gained critical mass
A look at the two most successful private sector franchises- HDFC and Axis
Bank- indicates that both banks reported a significant jump in their CASA ratios
when their branch network hit the now seemingly magic number of ~200
branches.
We believe both YES and Indusind Bank are nearing an inflection point in their
life cycles. Hence, we expect the next 2-3 years to be critical for both YES and
Indusind Bank.
Yet, both YES and Indusind’s business models are poles apart
However, given the differences in their business models for both banks
identifying the right strategy mix is key to success in the next few critical years.
The divergence in their business models originates on two fronts:
• Sizeable retail deposit base for Indusind Bank vs. negligible for YES
Bank: Retail deposits contribute currently to only 13.5% of Yes Bank’s
deposit base vs. ~ 50% for Indusind Bank.
• Nil retail loan exposure for YES vs. > 40% for Indusind Bank: Retail
loans are currently a mere 1% of YES’s loan book. In contrast retail
deposits and loans comprise 49% (of deposits) and 42% (of loans)
respectively for Indusind bank.
What makes for a successful private sector bank? - Branch
network and retail lending
As the success of HDFC and Axis Bank in the last two decades proves, there are
two key drivers of success in Indian private sector banking:
• Traditional branch and ATM network is still a must: As shown in table 2 in
the previous page, HDFC Bank and Axis reported significantly higher growth
momentum once they attained a critical mass of 180-200 branches. We
believe that investment into the traditional brick and mortar branch
network will continue to remain key to building a successful retail
franchise. Other key ingredients are:
o Building a concentrated branch network: During the inflection years
(i.e. between FY02-04) both Axis and HDFC Bank had high branch
concentration (two branches-per-city) reflecting their strategy of
building a recognisable brand name amongst retail customers. Indusind
and Yes bank compare poorly in this respect (1 branch per city) to both
Axis and HDFC Bank (see figure 2 below).
o Building a concentrated ATM network: Similarly both Axis and HDFC
heavily invested into their ATM networks with both banks having around
10 and 6 ATMs- per-city in FY04, an inflection year (figure 3).
With close to 3 ATMs per city, Indusind bank is better placed in this
metric relative to Yes bank (1.3 ATMs per city) but still below the ATM
concentration of larger private peers Axis and HDFC Bank.
• Retail assets and retail liabilities go hand-in-hand: Both Axis and HDFC
Bank significantly increased their retail lending in their initial years and were
able to build a retail liabilities franchise on its back. As the figure below
shows in the decisive years of FY02-04, Axis bank’s retail loans increased
from 5% (% of loans) in FY02 to 22% in FY04 (figure 3), growing at a CAGR
of 190% in this period. Similarly HDFC Bank increased its retail loan book
from 21% (of loans) in FY02 to 41% in FY04 (figure 4) at a CAGR of 121%.
o Indusind Bank: Retail loans currently comprise close to 42% of Indusind’s
loan book which should provide it with a ready retail client base from
which it can expand further. Close to 50% of the bank’s deposits also
came from retail clients.
o Yes Bank: With near nil retail loan exposure and only 14% retail deposits,
Yes bank faces a tougher task in expanding its CASA franchise.
Bringing it all together-Which business model works better?
Between the two banks, Indusind with a larger retail assets ($2.3bn; 42% of loans)
and retail deposits base (50% of total) has a considerable head start and a better
level of preparedness over YES vis-a-vis its abilities on a larger retail expansion. In
addition, Indusind’s retail liability franchise is likely to be a beneficiary of its
sizeable ($1.9bn; 90% of retail loans) and three decade old retail lending
portfolio. We expected improved synergies to continue to contribute to an
improvement in its low cost current and savings (CASA) deposits base
(collectively at 27% of deposits).
On the other hand, with little experience in retail branch banking YES is likely to
continue its focus on corporate banking and continue its attempts to grow its
CASA deposits base on the back of this corporate banking franchise.
However, while making the above conclusion we realize that there are few
success stories amongst Indian private sector and hence we remain cautious in
concluding that the only strategy in building a successful retail strategy is the
one adopted by Axis and HDFC Bank. To gauge the likely future success of YES
and Indusind Bank we sought banks and economies where niche private sector
banks (i.e. without sovereign backing) have been successful. In the next few
pages we present four of these success stories from across Poland, Brazil and
Spain.
Relative Valuation: Prefer Indusind to YES
Between the two banks, we think Indusind with its larger retail assets base (42%
of loans vs. nil for YES) and retail deposits base (50% of total vs. <10% for YES)
has a considerable head start on retail expansion and a better level of
preparedness for rising competitive pressure.
At Rs 274, Indusind trades at 2.4x FY13E BV, in-line with the private sector
bank’s average (ex IIB). We think the bank’s superior retail franchise and
growing branch network is likely to sustain a faster growth momentum than its
mature private sector peers and hence a premium valuation is justified. We
upgrade our FY12, FY13 earnings by 10-14% to factor in superior NIMs amidst
stable credit costs. Revised valuation of Rs 330 indicates a 20% upside and an
implied FY13E P/BV of 2.8x. More details on page 13.
At Rs 330, Yes Bank trades at 2.1x FY13E BV (15% discount to peers). With the
stock now trading at a sensible discount to its larger current and savings ‘CASA’
deposit peers and with the bank’s renewed commitment in recent quarters on
branch expansion we switch from a ‘Sell’ to a ‘Buy’. The revised valuation of Rs
386 indicates a 17% upside (implied FY13E P/BV of 2.4x).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Private Sector Banks
The all new tortoise and rabbit race
India’s smallest private sector banks- Indusind (IIB) and Yes Bank
(YES)- face the unenviable task of scaling up franchises in a far more
competitive lending and funding environment than faced by private
sector peer goliaths –ICICI, HDFC and Axis- in the 90s. While the
imminent entry of a new generation of private sector banks is likely
to increase competitive pressure, we turn Buyers of YES though still
prefer its slow grown peer Indusind due to a more scalable franchise
that derives its niche from the bank’s retail portfolio.
Funding, lending niche + branch network critical to success
In an increasingly competitive banking market, we think future success for YES
and Indusind will be driven by two sources:
• Ability to establish lending and funding niches: As the success of home
grown private sector giants- HDFC and Axis Bank and that of Greenfield
private sector banks’ across emerging markets prove (see pages 5-10),
new entrants with novel ideas (superior online platforms, product
segmentation and design, innovative customer service strategies) and
sizeable retail branch franchises are more likely to be successful in
competitive, fast growing markets such as India.
• Ability to ride the curve on regulatory changes: We think YES and
Indusind can benefit from two imminent regulatory events:
a) Deregulation of the savings deposits rate: In the event of a
deregulation of the savings deposits rate (fixed at 3.5% p.a. currently;
see our 6th Jan release for details), YES and Indusind can gain a head
start by targeting niche savings depositor bases through a mix of
higher interest rates and better service quality than incumbents
(preferably targeting the middling PSB’ customer bases).
b) Entry of new private sector banks: Ahead of the likely entry of
corporate giants in Indian private sector banking, YES and Indusind
need to target retail customer pockets across assets and deposits
ahead of these behemoths.
While both banks - YES (knowledge banking led mid corporate franchise) and
Indusind (niche retail loan portfolio + mature retail liabilities portfolio) - have
been successful in establishing niches we believe Indusind’s retail niche gives it
a significant head start over YES in its retail banking foray.
Valuations: Prefer Indusind to YES
At Rs 274, Indusind trades at 2.4x FY13E BV, in-line with the private sector
bank’s average (ex IIB). We think the bank’s superior retail franchise and
growing branch network is likely to sustain a faster growth momentum than its
mature private sector peers and hence a premium valuation is justified. We
upgrade our FY12, FY13 earnings by 10-14% to factor in superior NIMs amidst
stable credit costs. Revised valuation of Rs 330 indicates a 20% upside and an
implied FY13E P/BV of 2.8x.
At Rs 330, Yes Bank trades at 2.1x FY13E BV (15% discount to peers). With the
stock now trading at a sensible discount to its larger current and savings ‘CASA’
deposit peers and with the bank’s renewed commitment in recent quarters on
branch expansion we switch from a ‘Sell’ to a ‘Buy’. The revised valuation of Rs
386 indicates a 17% upside (implied FY13E P/BV of 2.4x).
Nearing an inflection point?
With a collective market share of <200bps, YES ($12bn FY11E asset base) and
Indusind Bank ($10bn) are India’s newest private sector upstarts. Both banks have
plans of a retail liability led scale up and their ambitious growth plans (ostensibly
called ‘YBL version 2.0’ incase of YES) will see their asset bases expand at a
CAGR of 35% between FY11-15. Each banks’ branch networks will multiply nearly
5x in this period (from the current 185 and 285 for YES and Indusind respectively).
The two banks have identified: (a) growth in low cost ‘CASA’ deposits, and (b) a
broader entry into retail banking as the key to this growth.
• In a glitzy May’10 launch of “YBL Version 2.0”, Yes Bank set aggressive
growth targets for itself (see table 1 on the right). In the period leading up to
2015, the bank’s branch network will expand to 750 (vs. 185 as on Dec’11)
while its deposit base will grow to Rs 1.2trn (35% CAGR between FY10-15).
Inspite of this rapid expansion, ROEs are targeted to remain in the 18-20%
range and RoAs at 1.6%.
• A month later, Romesh Sobti, MD and CEO of IndusInd Bank also outlined
similarly aggressive targets for Indusind bank. Indusind will add 400+
branches until FY15. The CEO expects the bank to have a branch network of
650-700 branches by FY14.
YES and Indusind have now gained critical mass
A look at the two most successful private sector franchises- HDFC and Axis
Bank- indicates that both banks reported a significant jump in their CASA ratios
when their branch network hit the now seemingly magic number of ~200
branches.
We believe both YES and Indusind Bank are nearing an inflection point in their
life cycles. Hence, we expect the next 2-3 years to be critical for both YES and
Indusind Bank.
Yet, both YES and Indusind’s business models are poles apart
However, given the differences in their business models for both banks
identifying the right strategy mix is key to success in the next few critical years.
The divergence in their business models originates on two fronts:
• Sizeable retail deposit base for Indusind Bank vs. negligible for YES
Bank: Retail deposits contribute currently to only 13.5% of Yes Bank’s
deposit base vs. ~ 50% for Indusind Bank.
• Nil retail loan exposure for YES vs. > 40% for Indusind Bank: Retail
loans are currently a mere 1% of YES’s loan book. In contrast retail
deposits and loans comprise 49% (of deposits) and 42% (of loans)
respectively for Indusind bank.
What makes for a successful private sector bank? - Branch
network and retail lending
As the success of HDFC and Axis Bank in the last two decades proves, there are
two key drivers of success in Indian private sector banking:
• Traditional branch and ATM network is still a must: As shown in table 2 in
the previous page, HDFC Bank and Axis reported significantly higher growth
momentum once they attained a critical mass of 180-200 branches. We
believe that investment into the traditional brick and mortar branch
network will continue to remain key to building a successful retail
franchise. Other key ingredients are:
o Building a concentrated branch network: During the inflection years
(i.e. between FY02-04) both Axis and HDFC Bank had high branch
concentration (two branches-per-city) reflecting their strategy of
building a recognisable brand name amongst retail customers. Indusind
and Yes bank compare poorly in this respect (1 branch per city) to both
Axis and HDFC Bank (see figure 2 below).
o Building a concentrated ATM network: Similarly both Axis and HDFC
heavily invested into their ATM networks with both banks having around
10 and 6 ATMs- per-city in FY04, an inflection year (figure 3).
With close to 3 ATMs per city, Indusind bank is better placed in this
metric relative to Yes bank (1.3 ATMs per city) but still below the ATM
concentration of larger private peers Axis and HDFC Bank.
• Retail assets and retail liabilities go hand-in-hand: Both Axis and HDFC
Bank significantly increased their retail lending in their initial years and were
able to build a retail liabilities franchise on its back. As the figure below
shows in the decisive years of FY02-04, Axis bank’s retail loans increased
from 5% (% of loans) in FY02 to 22% in FY04 (figure 3), growing at a CAGR
of 190% in this period. Similarly HDFC Bank increased its retail loan book
from 21% (of loans) in FY02 to 41% in FY04 (figure 4) at a CAGR of 121%.
o Indusind Bank: Retail loans currently comprise close to 42% of Indusind’s
loan book which should provide it with a ready retail client base from
which it can expand further. Close to 50% of the bank’s deposits also
came from retail clients.
o Yes Bank: With near nil retail loan exposure and only 14% retail deposits,
Yes bank faces a tougher task in expanding its CASA franchise.
Bringing it all together-Which business model works better?
Between the two banks, Indusind with a larger retail assets ($2.3bn; 42% of loans)
and retail deposits base (50% of total) has a considerable head start and a better
level of preparedness over YES vis-a-vis its abilities on a larger retail expansion. In
addition, Indusind’s retail liability franchise is likely to be a beneficiary of its
sizeable ($1.9bn; 90% of retail loans) and three decade old retail lending
portfolio. We expected improved synergies to continue to contribute to an
improvement in its low cost current and savings (CASA) deposits base
(collectively at 27% of deposits).
On the other hand, with little experience in retail branch banking YES is likely to
continue its focus on corporate banking and continue its attempts to grow its
CASA deposits base on the back of this corporate banking franchise.
However, while making the above conclusion we realize that there are few
success stories amongst Indian private sector and hence we remain cautious in
concluding that the only strategy in building a successful retail strategy is the
one adopted by Axis and HDFC Bank. To gauge the likely future success of YES
and Indusind Bank we sought banks and economies where niche private sector
banks (i.e. without sovereign backing) have been successful. In the next few
pages we present four of these success stories from across Poland, Brazil and
Spain.
Relative Valuation: Prefer Indusind to YES
Between the two banks, we think Indusind with its larger retail assets base (42%
of loans vs. nil for YES) and retail deposits base (50% of total vs. <10% for YES)
has a considerable head start on retail expansion and a better level of
preparedness for rising competitive pressure.
At Rs 274, Indusind trades at 2.4x FY13E BV, in-line with the private sector
bank’s average (ex IIB). We think the bank’s superior retail franchise and
growing branch network is likely to sustain a faster growth momentum than its
mature private sector peers and hence a premium valuation is justified. We
upgrade our FY12, FY13 earnings by 10-14% to factor in superior NIMs amidst
stable credit costs. Revised valuation of Rs 330 indicates a 20% upside and an
implied FY13E P/BV of 2.8x. More details on page 13.
At Rs 330, Yes Bank trades at 2.1x FY13E BV (15% discount to peers). With the
stock now trading at a sensible discount to its larger current and savings ‘CASA’
deposit peers and with the bank’s renewed commitment in recent quarters on
branch expansion we switch from a ‘Sell’ to a ‘Buy’. The revised valuation of Rs
386 indicates a 17% upside (implied FY13E P/BV of 2.4x).
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