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Banks/Financial Institutions
BFSI CONCLAVE 2011
Key takeaways from KIE’s 3rd BFSI Conclave. We hosted 32 companies over two days
of intense interactions with institutional investors. Companies in the financial space
appear to be watching with caution macro indicators of high inflation and rising rates,
even as they are optimistic of sustaining ~20% loan growth with somewhat moderate
margins. Managements remain positive on asset quality despite headwinds and expect
FY2012E to be a good year on this front. Managements do not expect defaults, not
even in the infrastructure sector that is rife with challenges (especially Power).
Corporate strategists would like to see greater government will and execution of
strategies that will address India’s current challenges.
BAJAJ FINANCE
Key takeaways
A diversified business model. Bajaj Finance focuses on multiple loans—auto, consumer,
infrastructure, 3W, small business and loans against property and loans against shares.
The company has reported 45% loan growth book CAGR between FY2008 and FY2011.
The diversified business model implies lower dependence on single asset class though
caps its RoE in the range of 18-21%.
No niche focus. Unlike other NBFCs, the company does not focus on niche segments.
Better quality of service delivery and more efficient use of technology in the higher-end of
the market (affluent) segment is the USP of the company—typical products in these
segments are small business loans, loans against property. Unlike other banks and NBFCs,
the company follows a ‘mid-market model’—the sales manager is the collection agent as
well.
Limited impact of change in PSL guidelines. Bajaj Finance has negligible dependence
on loan sell-down to banks under the PSL category. As such, the company finds limited
impact of change in regulations for PSL status on loan sell-down or refinance.
BANK OF INDIA
Key takeaways
High slippages likely to be behind. In FY2011, slippages remained high as it accounted
for NPLs from agriculture and moved aggressively towards recognizing NPLs without
manual intervention for all accounts over Rs5 mn. The management expects much lower
slippages in FY2012E, even as recoveries/upgradations will remain strong for the bank.
Overall, it expects both gross NPLs and net NPLs to be lower in absolute numbers in
FY2012E.
NIMs may compress by 10-15 bps. Currently the margins are at 2.9%. The
management expects some pressure in 1Q, but through the year expects it to be at 2.8-
2.9%. Rates will come down only if inflation eases. Deposit mobilization may pose as a
problem otherwise. Good monsoon is critical for performance.
Credit growth to moderate. At current high interest rates, there is clearly some
moderation which the bank is witnessing. Demands for ECB loans have increased, as it is
becoming cheaper to borrow from the overseas market as compared to the domestic
one. While the bank is still targeting a growth of 20%+ in credit, risks to that expectation
are rising.
Savings rate deregulation: Neutral in the long run. The management highlighted
that deregulation usually sees some spike in deposit rates, but this will settle down when
competitors realize the substantial transaction cost to savings accounts. For example, cost
per ATM transaction is Rs18. Impact of 50 bps increase in savings rate was 10 bpd on
funding for overall book (13 bps for domestic).
CARE RATINGS
Key takeaways
Business growth robust. CARE’s growth and profitability is high in the backdrop of high
growth in the ratings business due to bank loan ratings. Unlike CRISIL and ICRA, CARE
has a single line of business, i.e. credit ratings. Management believes that 20% growth is
reasonable to expect over the longer term. Increase in capital market volumes as
companies look increasingly at alternates like NCDs for fund raising is a positive.
MFI industry is here to stay. Andhra Government killed the MFI business. Now, the
government is planning micro-lending on its part, but recovery will be a big issue. Very
few companies have the ability to recover funds. Banks are incapable of giving and
recovering money from the poor. PSU banks are, therefore, unwilling and incapable of
venturing into micro-lending. Thus, it expects the microfinance industry to survive in some
form or the other.
Improvement in downgrades. CARE witnessed downgrades in early FY2011, but the
situation is ‘stable to improving’ now. Management believes that even if interest rates go
up by another 50-75 bps hereon, corporate profitability in general is sufficient to cover
higher interest rates.
SEBs unlikely to default. In general, government utilities get the rating of the state
government. Rated bonds never see a default, as the state government guarantee is valid.
Defaults happen owing to lethargy of the bureaucracy (in getting funding approved from
the state government), but willful default is unlikely. SEBs are going concerns and unlike
companies which can be referred to the BIFR, leading to credit loss for lenders.
CORPORATION BANK
Key takeaways
Confident on growth above industry average. Management intends to grow loans
and deposits by at least 20-25%, ahead of the industry average, in FY2012E. Retail and
SME segments would witness more focus compared to infrastructure and large corporate
segments witnessed in FY2011. Sanctions are slowing down in infrastructure as exposures
have increased sharply over the past 24 months and the bank is closer to reaching
internal limits.
Maintaining margins at current levels. The bank is looking to maintain NIMs at 2.6%
levels (2.5% in FY2011). Deposit rates are increasing but re-pricing of loans is yet to be
fully completed.
Focusing on expanding branch presence. Corporation Bank has been consistently
growing its branch network by 10-11% CAGR over the past four years and would look to
add another 650 branches (10% CAGR for FY2011-15E) by FY2015E, taking the total
branch network to 2,000.
Targeting gross NPLs at 1% and net NPLs between 0.3% and 0.4%. The bank
internal monitoring on asset quality shows comfortable trends barring any unforeseen
chunky NPLs. NPL recognition has no manual intervention resulting in lower slippages in
FY2012E. Recent initiatives (public display of NPL accounts) taken to address sticky NPLs
have brought better-than-desired results
DENA BANK
Key takeaways
Looking to diversify growth from infrastructure. The bank is targeting a loan growth
of 20% in FY2012E but would aim to reduce dependence on the infrastructure sector
(currently 23% of overall loans). No fresh sanctions are being made to this sector. The
bank has increased the number of SME hubs to 91 (from 68 earlier) to increase focus on
lending to SMEs. Extensive training and hiring specialists are being used for credit
appraisals.
Aiming to maintain NIMs at above 3%. FY2011 saw NIMs of 3.2% and the bank
would focus on maintaining NIMs at above 3% (a compression of 20 bps from current
levels). Re-pricing of loans is yet to be fully completed. Having a CASA ratio at 35% has
helped to contain the sharp rise in cost of deposits. The bank is looking to open another
100 branches in FY2012E compared to 68 branches in FY2011 (total branches of 1,291).
Full transition of NPL recognition yet to be completed. Reporting of NPLs without
manual intervention has been completed for loans above Rs10 mn and the bank expects
this exercise to be completed for the balance (about 20% of loans) as prescribed by the
government of India.
Well capitalized post capital infusion. Tier-1 ratio currently stands at 9.8% post the
recent capital infusion by the government of India. Management expects capital will not
be a constraint to loan growth as the government has been forthcoming in
understanding their capital requirements.
DEWAN HOUSING FINANCE
Key takeaways
Third largest HFC. Dewan Housing Finance (DHFL) is the third largest housing finance
company with total consolidated assets of Rs200 bn. The company has grown its loan
book at 50% CAGR between FY2008 and FY2011. The company has recently acquired
the business of Deustche Postbank Housing Finance (DPHF)—the same will be merged
with DHFL over the next one year.
Focus on the lower end of the market. DHFL has focused on the lower end of the
market with average ticket size of about Rs1 mn. DPHF, on the other hand, focuses on
the premium markets with ticket size of about Rs5 mn. Post merger, DPHL will remain as
an independent SBU in DHFL.
Limited impact of slowdown. The real estate markets have been somewhat sluggish in
select segments—Mumbai and Pune. The demand in smaller towns, however, remains
robust. The company has reported about 70% disbursements and approvals growth in
FY2011; management expects the growth traction to remain strong in FY2012E as well.
Higher inflation will, however, put some pressure on the disposable earnings of DHFL
customers. Management has highlighted that pre-payment typically reduces in such
circumstances.
Different from HDFC and LICHF. DHFL’s borrowings cost typically tends to be
somewhat higher than larger NBFCs due to higher size and parentage of the latter. DHFL
makes up its NIMs by charging somewhat higher lending rates to their customers.
Operating expenses ratio also tend to be somewhat higher as the company operates in
the lower end of the market.
Excellent track record of collections. The company has maintained low NPL (gross NPLs
of 1.5-1%). Currently, the installment to income ratio is low at about 39%. Provisioning
coverage is high at 85%.
Capital issuance on the cards. The company will likely need to raise capital over the
next few quarters as the CAR ratio will decline post merger.
DEVELOPMENT CREDIT BANK
Key takeaways
Margins will decline on back of higher deposit costs. Margins would come off by
about 20-30 bps on the back of revised savings deposit rates and higher cost of deposits.
Overall growth depends on liability growth. Balance sheet growth would be driven
by liability performance. Expects CASA at 30% levels and higher contribution from retail
deposits at all times. All branch managers are monitored through scorecards. Assets
would be driven primarily in SME (40% of overall loans) and retail (25% of loans, mainly
housing loans and loans against property).
No large concerns on asset quality. Limited concern on asset quality and loan loss
provisions. Early warning signals are in place. Better overall performance could result in
fresh branch licenses from the RBI. Loans disbursed in the past 6-8 quarters are
witnessing very low levels of delinquency. SME loans are for customers with a prior credit
history of about two years and strong collaterals.
Fee income business has scope to show higher contribution. Management looks to
build a fee income business around trade (forex-related income) and third party wealth
management products. The bank has more than 100 IRDA certified employees.
No immediate requirement for capital. Tier-1 ratio is comfortable at 11% (also
internal profits have started to accrue with the bank becoming profitable) and would look
to raise further capital at an appropriate time.
EQUIFAX
Key takeaways
Establishing a strong foundation. Equifax is among the top two credit bureaus in US
and Europe. In India, it owns 49% (maximum as per FDI regulation) with the balance
owned by few banks (BoB, BoI, Union Bank and Kotak Mahindra) and NBFCs (Religare
and Sundaram) in India. Credit history available for more than two years for over 650 mn
accounts.
Need more acceptances from public banks. Credit information bureaus are witnessing
a gradual acceptance given the wealth of information they carry on retail clients. However,
it is still skewed with a few public sector banks and most new generation banks actively
seeking information. New information bureaus lack history but ideally a three-year
window is a reasonable indicator given changes in customer behavior.
New products differentiating information bureaus. Competition within the sector
has improved the quality of information being supplied, including qualitative data. New
products are being introduced by various bureaus to differentiate their services. Over the
long term, expect banks to take information from more than one bureau as they are
inexpensive. Ability to expand in new verticals is high, especially in SME/agriculture
borrower but loan details captured in many PSU banks are weak. Improved reporting
format from clients would accelerate analysis of client behavior.
Small market size as retail assets penetration is low. Overall revenues for credit
information bureaus are unlikely to grow rapidly in the near term, though the long-term
potential remains very strong as new products and asset classes are covered. Retail assets
are still slow to pick up. Unsecured loans are still declining for most banks. Volumes likely
to grow at over 20% levels but pricing have dropped with higher competition. Aiming for
banks to continuously monitor delinquent client profile through innovative products.
FEDERAL BANK
Key takeaways
Loan growth target at above-industry average. The bank is targeting loan growth of
over 20% in FY2012E. Performance is likely to be balanced across business segments
compared to the skew witnessed in 2HFY11. Within retail, the gold loan business has
been reactivated; the bank would use its subsidiary outside Kerala for better focus.
Margins to come off 40 bps qoq. Margins would come down in FY2012E by about 40
bps from current levels of 4.2% as focus has shifted to risk-adjusted margins. The bank is
passing on rate hikes as much as possible though borrower resistance is steadily rising.
Reasonably comfortable with the progress on slippages. SME and retail loans are
witnessing lower delinquencies as the bank is benefitting from some of the recent
initiatives like early warning signals and follow up through externally appointed call
centers. Near-term focus is to reduce net NPLs below 0.5% levels (currently at 0.6%).
Focus on strengthening fee income streams. Would look to actively improve income
from other items like fee income by introducing new products, better share of fee income
from existing clients, and training on retail wealth management products.
FUTURE CAPITAL HOLDINGS
Key takeaways
FCH—niche focus. FCH, in its new avatar, is focusing on distinct businesses in the
consumer and corporate lending segments—secured loans (loans against property, gold
loans) and promoter funding/loans against shares. The company is also engaged in
consumer durables financing though management does not find significant scale in this
business over the longer term.
High growth on low base. As of March 2011E, loan book was Rs28 bn (up from Rs15
bn in March 2010). The company has a loan book target of Rs70-80 bn by March 2013E.
The share of retail will likely increase sharply—from 20% in 2010 to 28% in 2011 and
65-70% in 2013E.
Several operational changes. The company has about 200 touch-points, including 80
store-in-stores. Over the past few months, the new management has focused on
reducing its borrowings costs, closing the deal with Centrum and reverse merger of its
group company. FCH’s marginal borrowing rate is currently close to 10.8% as compared
to 13% earlier. FCH has swapped its minority shareholding in Centrum Forex with
balance shareholding in Centrum Wealth Managers—FCH now owns full stake in the
wealth management company which currently has a loss of Rs25 mn.
Pressure on NIM, leverage to boost RoE. While rising rates will put pressure on NIM,
improvement in operating leverage will support RoA—management has guided for RoA
of 4.5%. Higher financial leverage will improve RoE to about 10-12% from 6% in
FY2011.
New management. Operations of FCH are managed by V Vaidyanathan, VC and MD.
Prior to joining FCH, Mr. Vaidyanathan worked with ICICI Bank, where he had set up the
retail business in 1999.
HDFC BANK
Key takeaways
Growth should remain strong. Expects industry to grow at near 20% on the back of a
7.5% GDP growth. Growth has continued for HDFC Bank in the last couple of months on
the back of an all-round performance in retail and corporate.
Margins likely to sustain despite headwinds. The management was very confident of
sustaining margins in the range of 4-4.2%. The loan pricing environment is much better
than the previous cycle and maintaining margins is not at all a challenge. On savings rate
deregulation also, it does not foresee any impact to margins, as it expects savings rates to
settle lower from the current 4%.
Good time for asset quality. Asset quality-wise, it’s a very good time period for HDFC
Bank. As trends have remained better, the bank has made counter cyclical provisions and
most likely will continue with the policy of making counter cyclical provisions. There are
yet no signs of NPL trends becoming worse, despite higher interest rates.
HDFC LTD
Key takeaways
Long-term growth drivers remain intact. The demographics support housing
growth—60% of the population is under the age of 30. The typical buyer is about 34
year old. So, large numbers coming into the home buying phase.
Interest rates headed north. HDFC expects 25 bps rate rise from here if monsoons are
reasonable and global commodities controlled. Even if rate increases are higher, HDFC is
armed with the experience of working with higher rates for the past 15 yrs. If rates go up,
HDFC can adjust by increasing tenure to enable buyers to still purchase the property they
desire.
Loan sell-down to HDFC Bank is profitable. Loan sell-down to HDFC Bank earns
1.56% spread without any capital allocation. HDFC Bank can buy to meet its priority
sector lending. Loan sell-down is the best way to reduce ALM risk.
Non-retail loan book is low risk and profitable. About 10-14% of HDFC’s book are
developer loans; overall non-retail loan book is close to 40%. HDFC does not provide
loans for working capital \ land; provides only project-based finance with the entire
project mortgaged to them. In even depressed times, security cover is over 1.6X. Till date,
HDFC has never written off any developer loan. About 10% of the book is rental
discounting, which is heavily collateralized as well and therefore, low risk.
There is little supply in Mumbai. Mumbai’s biggest problem is lack of supply. Vacancy
is very low, and therefore prices will not come down. Mumbai market accounts for about
6-7% of the business and is now ranked #3 from #1 about 2-3 years back.
Capital infusion not required. HDFC has never raised capital for the core mortgage
business. HDFC will need capital unless there is a dramatic change in regulation.
IDBI
Key takeaways
Improving liability profile is the main agenda. Focus in the current year would remain
on improving the liability profile of the bank more than loan growth. New schemes
introduced are showing improved performance. CASA ratio is currently at 21% compared
to 14-15% in the past few years led by healthy growth in savings and current deposit
growth.
Looking to maintain NIM at closer to current levels. Aiming at net interest margins of
2.2-2.3% in FY2012E (versus 2.1% in FY2011) through a mix of improving liability profile
and better yield on advances.
Asset quality trends are encouraging. Limited impact on NPL when the bank moved to
reporting NPL without any manual intervention. Excluding any untoward events, aiming
gross slippages of 1% in FY2012E. Expect delay in a select infrastructure projects but
don’t expect any serious setbacks in this portfolio.
Well-capitalized for near-term growth. Tier-1 ratio for the bank stands at over 8.5%
levels and it would look to unlock value in select unlisted subsidiaries at an appropriate
time.
IDFC
Key takeaways
Loan growth of 25%—back-ended in 2012E. IDFC expects loan growth to moderate
to 25% from 50% in FY2011E. Roads and power will remain key contributors. The
growth will likely be back-ended in FY2012E unlike higher disbursements in 1HFY2011E.
Thus, loan growth will likely be subdued in the next 1-2 quarters.
Confidence on NIM. The company is very comfortable on its NIM unlike a guidance of
NIM decline earlier. In the past, SBI and other PSU banks provided strong competition.
Now, these banks have raised their PLR/ base rates and currently the marginal rate of
lending for IDFC is lower than SBI. We believe that IDFC’s lending rates will go up, but
clearly there is lesser pressure on NIM. The company will prefer maintaining margins and
asset quality to growth. The company remains selective—about 70% of incremental
business will be contributed by the top-20 clients.
Most other businesses subdued. Business from investment banking and broking will
remain subdued and linked to the equity markets. IDFC PE expects brisk deal flow in the
current environment. IDFC PE III is invested to the extent of 40%. IDFC AMC will likely see
some pressure on AUMs due to recent RBI cap for bank investments in MFs.
INDIAN OVERSEAS BANK
Key takeaways
Focus on growth. The bank is targeting a loan growth of 20-25% for FY2012. Growth
focus would remain on retail (especially in mortgage/gold loans) and mid corporate
segment. Infrastructure has grown very fast over the past couple of years and growth is
expected to moderate in FY2012E.
NIMs to sustain above 3%. Net interest margins would see maximum compression of
15-20 bps in FY2012E from current levels of 3.2%. Re-pricing of loans is yet to be fully
completed.
Asset quality to remain under control. Management expects to maintain gross NPLs at
closer to current levels or improve it. Focus will remain on recoveries as the underlying
collateral in these loans is strong. Slippages are likely to remain at 1.5% levels in FY2012.
Provisioning will still remain high. Provisioning will remain high on account of revised
guidelines for (1) restructured loans, (2) standard and doubtful assets and (3) countercyclical
buffer. However, this would be offset by lower provisions on account of lower
provisions for retirement benefits and lower slippages.
INDIAN BANK
Key takeaways
Cautious on aggressive loan growth. Would be comfortable in maintaining current
growth trends in deposits and loans at 20% levels or at about industry average. Wary of
growing beyond these levels as it would hurt asset quality. Looking to shift focus from
wholesale segment to retail and SME segments in the current year for loans and deposit
growth (about 25% loan growth from these two segments).
Margins to taper down as cost of funds rises. Expect margins to come off from
current levels of 3.9% levels as there is resistance in passing higher cost of funds.
However, management believes that re-pricing of loans is yet to be fully completed which
should cushion the impact of deposit re-pricing.
Revised provisions on restructured loans to have impact on near-term earnings.
Bank would need to make provisions on restructured loans (7% of loans) but revised
provisions on sub-standard and doubtful loans would have limited impact as the current
provisioning policy is very conservative. Not too much concerned on the infrastructure
portfolio currently.
Capital raising would be done at an appropriate time. Tier-1 ratio is currently at
11%, well above the comfort levels of 8% for PSU banks. However, the management
would look to raise capital at an appropriate time to fund the balance sheet growth
requirements.
LIC HOUSING FINANCE
Key takeaways
Interest rates largely passed on. LICHF is able to pass through cost increase to the
variable rate portfolio. They have increased rates by 150 bps to offset cost increase.
Despite passing increase in cost through, they are still competitive because HDFC
increased rates by higher amount. Rate hike by SBI has clearly eased the competitive
pressure in the industry. However, SBI will likely remain retail focused and could come
back as growth pressure compels them. Does not think SBI has changed forever.
NIM & loan growth. Target of 2.5-2.7% for FY12E, compression of 10-30 bps from
FY11 NIM, and compares to our assumption of 2.5%. Expects loan growth of 25%. Pan-
India demand remains good (Mumbai is not representative).
Developer loans. These are 8.5% of book and NPAs are Rs40 mn, and are fully
recoverable. LICHF looks at salability of the developer, gives only construction financing.
Escrow mechanism ensures there are no diversion of funds, and also take personal
guarantees of developer. Developer lending rate is running at 15%. Disbursement to
developers picked up again in March.
Macro environment not very adverse. Management believes that they are not even
close to stress today, as they have seen a much worse environment (2008 and 2009). If
there is a substantial degradation in employment, only then do they see a concern on
NPAs. LTV remains lower than 60%, and recovery is still good.
MAGMA FINCORP
Key takeaways
Multiple business lines. Magma has focus on multiple assets—cars, construction
equipment (CE) finance, used CE, small business loans and tractors. The company has
about Rs109 bn of assets under management.
Niche focus. The company focuses on first time users/ small customer primarily from
smaller towns and cities—the focus segment has lesser competition and hence can earn
higher yields-loan yield close to 15-16%.
Business in sweet spot. The company expects about 50% loan book growth in FY2012E.
The share of high yield loans in overall lending will increase, thus management finds
limited impact of rising rates on its NIM; it does acknowledge that it is not possible to
pass-on rate hike to its customers. Last week, KKR and IFC infused Rs4.4 bn (27% of
post-money equity base) at Rs88/ share. This will support medium-term growth.
Share of loans outside balance sheet is declining. The share of loans sold (outside
balance sheet) is currently close to 50%, down from 80% in the past. Management
targets a ratio of 25% over the longer term. RBI proposes to review PSL status on loans
sold down. In case, the regulator disallows PSL status on loans sold to banks to disallow
banks to buy loans from NBFCs, Magma’s near-term NIMs will likely remain under
pressure. The recent capital infusion is a very positive development in this backdrop
MAHINDRA FINANCE
Key takeaways
Focus on rural economy which is in a sweet spot. Mahindra Finance (MMFSL) has
focused on lending in semi-urban and rural India. The rural economy continues to do well
and hence there is higher visibility on growth for MMFSL. The company expects about
25% loan growth in FY2012E on the back of 50% growth in FY2011E. Rural economy
continues to have strong linkages with monsoon and business momentum for MMFSL
typically picks up in 2H, i.e. post monsoon. While there is no clarity on the monsoon
trends for FY2012E, the strong earnings momentum of FY2011 provides comfort. Cars,
CVs and used vehicles will likely grow at a faster pace.
Risk of rising rates inevitable. MMFSL faces limited competition from banks and other
NBFCs. Hence, it’s relatively better-placed to pass on rise in lending rates to its customers.
Nevertheless, rate hike provides risk of tempering demand due to pressure on customer
cash flows. Management expects auto manufacturers to step in at the initial phase and
provide subvention in order to hold up demand.
Removal of priority sector benefit on loans to NBFCs will have negligible impact.
About 15% of its borrowings were refinance on PSL loans, these borrowings have
enjoyed 75 lower interest rates. As of March 2011, only about 15% of its loans were sold
down. However, the company follows a policy of upfront recognition of entire income of
loans sold down. In case of removal of PSL status on loans sold down, the overall NIM of
the company will be impacted.
MANAPPURAM GENERAL FINANCE (MGFL)
Key takeaways
About the gold lending business. In 2005, banks started lending to NBFCs which was
the turning point for growth in the business. The business is now moving to north India
from the south. Average tenure of a loan is 110 days, but loan period is one year.
Appraisal in the branch is done by 4-5 people, with loans approved in 5 minutes. For
calculating LTV, they use average of gold price of the past three months. At 85% LTV,
interest rate is 24% versus 12% for 60% LTV. 30% of business in Kerala, and 70%
outside.
Competition is not a concern. Management is not worried over the next five years on
this. People are comfortable going to NBFCs versus banks (which have lower rates)
because their processing time is 5 minutes, versus days for PSU banks. Even HDFC Bank
takes half a day to approve a gold loan.
NIM under pressure. NIM will likely compress 200 bps; in case of any more pressure
than that, they will pass on to the consumer.
Regulation is biggest worry. Management believes that the RBI wants to achieve lower
rates for consumers. Mannapuram makes the argument that they are steadily doing that
as rates have come down over years. It will be able to replace priority sector loans with
other sources at reasonable cost. Asset quality will not be a concern (unlike MFIs due to
the secured nature of the business).
Comments on gold loan business by other parties
Mahindra Finance. They have decided to come out of the gold loan business after trying
their hand at it because it is too specialized and not worth the time and management
attention.
Federal Bank. The bank is trying to grow its gold lending business as they set up
exclusive centers outside Kerala. This is an initiative of the new management team. Note
that Federal Bank is a Kerala-based bank, which is the home of the gold lending business
and that is why they may have gathered the experience to be able to launch this new
venture.
South Indian Bank. Will continue gold lending the traditional way, but is incapable of
competing with NBFCs. Federal Bank is using an old NBFC license to open small gold
lending branches. Other banks will not be able to follow as the RBI will not grant fresh
licenses.
RURAL ELECTRIFICATION CORPORATION
Key takeaways
SEB losses. Improvement in several states. Losses have been there since REC was started.
However, management feels that things are improving in a lot of states. Earlier, they
never used to get audited accounts of Discoms, which they have now started getting.
28% of assets have state guarantees; balance of the asset base is covered with escrow \
collateral.
Visibility on 20%+ growth in FY2012E is very high. REC has approved loan book of
over Rs1 tn. Substantial growth will come from transmission, which is not hampered by
coal availability. The coal availability issues will also get resolved in the medium term. REC
believes that the situation is power sector in India changes quickly. In the long term, is not
concerned about growth, but interest rates can be a cause of concern in the medium
term.
Dishonor of PPAs is a cause of concern. The problem is very case specific. In some
cases, the state had excess hydro power, so they are not lifting thermal power but still
paying fixed cost to the operator.
No official guideline for provisions. RBI has not given any direction to PFC and REC to
making any standard asset provisions; the recent news article (which states that REC and
PFC will need to make standard asset provision) is thus inaccurate. Government-owned
NBFCs remain exempt from most guidelines applicable to other NBFCs.
SHRIRAM TRANSPORT FINANCE
Key takeaways
Some impact on NIM due to regulatory changes. The company enjoyed benefit of
150 bps due to securitization. This will likely decline as the RBI will likely tamper the
economics of the transactions. The RBI is unlikely to ignore that fact that NBFCs play an
important role in the system. Complying with the RBI’s KYC norms is not a concern for
the company. In the past, banks have done due diligence for each and every account.
ICICI Bank has done due diligence for 0.16 mn accounts
Management expects 10-12% growth in industry with a risk of downside. Internally,
STFC has not changed any growth prospects though the scenario has changed
considerably. The management believes that they can achieve their growth targets by
taking a hit on NIM. Rising cost of diesel and economic slowdown may not impact
volumes. They now model lower NIM. In 2009, STFC reported NIM of 7%; in 2011, NIMs
were 8.3%. The improvement is due to decline in cost of funding. Current NIM guidance
is minimum of 7%.
The construction equipment finance business grows rapidly. STFC’s construction
equipment finance subsidiary reported a nominal PAT in FY2011. The company has a loan
book of about Rs6.5 bn (Rs2bn disbursements in March 2011) and proposes to have a
loan book of Rs24 bn and Rs50 bn by March 2012E and March 2013E. The business will
likely require capital infusion of Rs10 bn in the next two years.
Automalls being set up. Shriram Transport Finance (STFC) launched its first ‘automall’ in
Chennai. This follows the launch of ‘Shriram New look’, its auto refurbishment business
and construction equipment finance business launched earlier this year. The company
launched its second ‘automall’ in Vadodara recently and proposes to roll out about 50
‘automalls’ in one year.
SOUTH INDIAN BANK
Key takeaways
Aiming for consistent earnings delivery. The management intends to deliver
consistent earnings in business growth, RoEs and RoAs. The bank is targeting NIMs at 3%
levels, RoAs at 1% and RoEs at 18% levels.
Expanding delivery channels to meet growth targets. South Indian Bank is targeting
to open 750 branches from current levels of 640. The bank will look to grow its loans by
25-30% CAGR over the next five years.
Gold loan continues to remain an attractive opportunity. Growth has remained
strong, especially coming from gold loans over the last couple of years. The bank has the
highest proportion of gold loans at over 20% of overall loans compared to peers. It is
setting up a subsidiary for doing gold loan business which will serve well than the branch
banking model.
Looking to improve contribution from fee income business. Fee income growth is a
challenge (fee income contribution to overall loans is about 70 bps) but is being
addressed by a combination of better products and more income through third party
distribution.
Higher cost-income structure on the back of higher investments. Targeting costincome
ratio at 45% from current levels of 47% as the bank is currently investing in
branch expansion/hiring. Incentive plans is driving operating performance, improving
service delivery standards and is facing limited resistance by employees.
STATE BANK OF INDIA
Key takeaways
Shifting focus. Internal focus of the bank has been steadily shifting to increase efficiency,
profitability and improve asset quality. Business growth is one of the many key
parameters for the bank. Expects deposit growth of 20%, credit growth to be somewhat
slower than historic trends. Loan growth to largely track deposit growth.
Targeting margins of 3.5%. The recent rate hikes will allow the bank to increase its
yields and margins—targeting margins of 3.5% in FY2012E versus 3.3% in FY2011.
While focus on market share remains, it will not fight on pricing to increase market share.
It has already withdrawn all teaser loan products from the market.
Slippages to improve from current high levels. The management expects slippages
trend to improve from 1Q onwards on the back of very high slippages in FY2011. Most
slippages have come from the mid-market segment—which still remains a stressful sector.
Most other sectors have seen an improving trend over the last few quarters. Provisions,
however, will remain high in 1QFY12E, largely on account of higher provisions on
restructured assets, substandard loans and to meet regulatory coverage ratios.
Rights issue needs government approval. It will raise about Rs200 bn from the market
in FY2012E. Currently it is in dialogue with the government on the same.
Have completely accounted for pension shortfall. The bank has completely
accounted for the shortfall moving to 9th bipartite settlement and there is unlikely to be
any requirement for any further provision. The bank will start making provisions (ad hoc
in nature) moving towards the next settlement due in 2012 to prevent a recurrence of
such event.
UNION BANK OF INDIA
Key takeaways
Margins to moderate. Margins are likely to come off by 25 bps from 4Q levels with
target NIM of 3.2% in FY2012E, as against a NIM of 3.3% in FY2011. Lending yield repricing
has not been fully completed.
Loan growth to remain strong at about 20%+ levels. Growth likely to be driven by
retail and SMEs. The bank expects CD ratio to sustain at current levels of 76%. Looking to
open another 400 branches in FY2012E but has revised CASA ratio targets by about 200
bps to 33%, from its earlier targets of 35%, in light of the higher interest rates.
Comfortable on asset quality. Slippages would be kept at 1.25% levels with gross NPLs
declining to 1.9% from 2.4% currently in FY2012E. Loans above Rs0.5 mn is reported
without any manual intervention. Limited concern in the infrastructure loan portfolio
though delays in execution are being witnessed.
Likely capital infusion. Expect capital infusion of about Rs5 bn in FY2012E as the bank
received lesser-than-required capital in the previous round of infusion from the
government of India.
YES BANK
Key takeaways
Satisfactory first year performance on Version 2.0. Loan growth has been a bit frontended
and such a performance is unlikely to be repeated in FY2012E. Meeting PSL targets
in agriculture but loan targets in weaker sections is challenging.
Margins are likely to remain at current levels. The bank is able to pass on higher
deposit costs. Also, given the shorter duration of liabilities—bulk of the re-pricing for the
bank looks closer to completion. Shorter asset and liability profile, a conscious decision, is
keeping the volatility of margins low.
Looking to open 125 branches in FY2012E. There would be an impact on the revised
branch licensing policy which increases the thrust in opening in rural areas. Expect
gradual improvement in CASA ratio but proportion of CA (about 60-65% of total CASA
compared to about 85% currently) would still remain high.
Core banking fees showing higher growth to overall fee income growth. Fee
income trends would see higher contribution from transaction banking and retail fees.
Investments made in new client acquisitions over the past two years are resulting in this
performance.
Well-capitalized in the near term. Tier-1 ratio comfortable at 9.7% but the bank has
taken an enabling resolution to raise US$500 mn—no immediate timeframe on capital
raising plans.
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Banks/Financial Institutions
BFSI CONCLAVE 2011
Key takeaways from KIE’s 3rd BFSI Conclave. We hosted 32 companies over two days
of intense interactions with institutional investors. Companies in the financial space
appear to be watching with caution macro indicators of high inflation and rising rates,
even as they are optimistic of sustaining ~20% loan growth with somewhat moderate
margins. Managements remain positive on asset quality despite headwinds and expect
FY2012E to be a good year on this front. Managements do not expect defaults, not
even in the infrastructure sector that is rife with challenges (especially Power).
Corporate strategists would like to see greater government will and execution of
strategies that will address India’s current challenges.
BAJAJ FINANCE
Key takeaways
A diversified business model. Bajaj Finance focuses on multiple loans—auto, consumer,
infrastructure, 3W, small business and loans against property and loans against shares.
The company has reported 45% loan growth book CAGR between FY2008 and FY2011.
The diversified business model implies lower dependence on single asset class though
caps its RoE in the range of 18-21%.
No niche focus. Unlike other NBFCs, the company does not focus on niche segments.
Better quality of service delivery and more efficient use of technology in the higher-end of
the market (affluent) segment is the USP of the company—typical products in these
segments are small business loans, loans against property. Unlike other banks and NBFCs,
the company follows a ‘mid-market model’—the sales manager is the collection agent as
well.
Limited impact of change in PSL guidelines. Bajaj Finance has negligible dependence
on loan sell-down to banks under the PSL category. As such, the company finds limited
impact of change in regulations for PSL status on loan sell-down or refinance.
BANK OF INDIA
Key takeaways
High slippages likely to be behind. In FY2011, slippages remained high as it accounted
for NPLs from agriculture and moved aggressively towards recognizing NPLs without
manual intervention for all accounts over Rs5 mn. The management expects much lower
slippages in FY2012E, even as recoveries/upgradations will remain strong for the bank.
Overall, it expects both gross NPLs and net NPLs to be lower in absolute numbers in
FY2012E.
NIMs may compress by 10-15 bps. Currently the margins are at 2.9%. The
management expects some pressure in 1Q, but through the year expects it to be at 2.8-
2.9%. Rates will come down only if inflation eases. Deposit mobilization may pose as a
problem otherwise. Good monsoon is critical for performance.
Credit growth to moderate. At current high interest rates, there is clearly some
moderation which the bank is witnessing. Demands for ECB loans have increased, as it is
becoming cheaper to borrow from the overseas market as compared to the domestic
one. While the bank is still targeting a growth of 20%+ in credit, risks to that expectation
are rising.
Savings rate deregulation: Neutral in the long run. The management highlighted
that deregulation usually sees some spike in deposit rates, but this will settle down when
competitors realize the substantial transaction cost to savings accounts. For example, cost
per ATM transaction is Rs18. Impact of 50 bps increase in savings rate was 10 bpd on
funding for overall book (13 bps for domestic).
CARE RATINGS
Key takeaways
Business growth robust. CARE’s growth and profitability is high in the backdrop of high
growth in the ratings business due to bank loan ratings. Unlike CRISIL and ICRA, CARE
has a single line of business, i.e. credit ratings. Management believes that 20% growth is
reasonable to expect over the longer term. Increase in capital market volumes as
companies look increasingly at alternates like NCDs for fund raising is a positive.
MFI industry is here to stay. Andhra Government killed the MFI business. Now, the
government is planning micro-lending on its part, but recovery will be a big issue. Very
few companies have the ability to recover funds. Banks are incapable of giving and
recovering money from the poor. PSU banks are, therefore, unwilling and incapable of
venturing into micro-lending. Thus, it expects the microfinance industry to survive in some
form or the other.
Improvement in downgrades. CARE witnessed downgrades in early FY2011, but the
situation is ‘stable to improving’ now. Management believes that even if interest rates go
up by another 50-75 bps hereon, corporate profitability in general is sufficient to cover
higher interest rates.
SEBs unlikely to default. In general, government utilities get the rating of the state
government. Rated bonds never see a default, as the state government guarantee is valid.
Defaults happen owing to lethargy of the bureaucracy (in getting funding approved from
the state government), but willful default is unlikely. SEBs are going concerns and unlike
companies which can be referred to the BIFR, leading to credit loss for lenders.
CORPORATION BANK
Key takeaways
Confident on growth above industry average. Management intends to grow loans
and deposits by at least 20-25%, ahead of the industry average, in FY2012E. Retail and
SME segments would witness more focus compared to infrastructure and large corporate
segments witnessed in FY2011. Sanctions are slowing down in infrastructure as exposures
have increased sharply over the past 24 months and the bank is closer to reaching
internal limits.
Maintaining margins at current levels. The bank is looking to maintain NIMs at 2.6%
levels (2.5% in FY2011). Deposit rates are increasing but re-pricing of loans is yet to be
fully completed.
Focusing on expanding branch presence. Corporation Bank has been consistently
growing its branch network by 10-11% CAGR over the past four years and would look to
add another 650 branches (10% CAGR for FY2011-15E) by FY2015E, taking the total
branch network to 2,000.
Targeting gross NPLs at 1% and net NPLs between 0.3% and 0.4%. The bank
internal monitoring on asset quality shows comfortable trends barring any unforeseen
chunky NPLs. NPL recognition has no manual intervention resulting in lower slippages in
FY2012E. Recent initiatives (public display of NPL accounts) taken to address sticky NPLs
have brought better-than-desired results
DENA BANK
Key takeaways
Looking to diversify growth from infrastructure. The bank is targeting a loan growth
of 20% in FY2012E but would aim to reduce dependence on the infrastructure sector
(currently 23% of overall loans). No fresh sanctions are being made to this sector. The
bank has increased the number of SME hubs to 91 (from 68 earlier) to increase focus on
lending to SMEs. Extensive training and hiring specialists are being used for credit
appraisals.
Aiming to maintain NIMs at above 3%. FY2011 saw NIMs of 3.2% and the bank
would focus on maintaining NIMs at above 3% (a compression of 20 bps from current
levels). Re-pricing of loans is yet to be fully completed. Having a CASA ratio at 35% has
helped to contain the sharp rise in cost of deposits. The bank is looking to open another
100 branches in FY2012E compared to 68 branches in FY2011 (total branches of 1,291).
Full transition of NPL recognition yet to be completed. Reporting of NPLs without
manual intervention has been completed for loans above Rs10 mn and the bank expects
this exercise to be completed for the balance (about 20% of loans) as prescribed by the
government of India.
Well capitalized post capital infusion. Tier-1 ratio currently stands at 9.8% post the
recent capital infusion by the government of India. Management expects capital will not
be a constraint to loan growth as the government has been forthcoming in
understanding their capital requirements.
DEWAN HOUSING FINANCE
Key takeaways
Third largest HFC. Dewan Housing Finance (DHFL) is the third largest housing finance
company with total consolidated assets of Rs200 bn. The company has grown its loan
book at 50% CAGR between FY2008 and FY2011. The company has recently acquired
the business of Deustche Postbank Housing Finance (DPHF)—the same will be merged
with DHFL over the next one year.
Focus on the lower end of the market. DHFL has focused on the lower end of the
market with average ticket size of about Rs1 mn. DPHF, on the other hand, focuses on
the premium markets with ticket size of about Rs5 mn. Post merger, DPHL will remain as
an independent SBU in DHFL.
Limited impact of slowdown. The real estate markets have been somewhat sluggish in
select segments—Mumbai and Pune. The demand in smaller towns, however, remains
robust. The company has reported about 70% disbursements and approvals growth in
FY2011; management expects the growth traction to remain strong in FY2012E as well.
Higher inflation will, however, put some pressure on the disposable earnings of DHFL
customers. Management has highlighted that pre-payment typically reduces in such
circumstances.
Different from HDFC and LICHF. DHFL’s borrowings cost typically tends to be
somewhat higher than larger NBFCs due to higher size and parentage of the latter. DHFL
makes up its NIMs by charging somewhat higher lending rates to their customers.
Operating expenses ratio also tend to be somewhat higher as the company operates in
the lower end of the market.
Excellent track record of collections. The company has maintained low NPL (gross NPLs
of 1.5-1%). Currently, the installment to income ratio is low at about 39%. Provisioning
coverage is high at 85%.
Capital issuance on the cards. The company will likely need to raise capital over the
next few quarters as the CAR ratio will decline post merger.
DEVELOPMENT CREDIT BANK
Key takeaways
Margins will decline on back of higher deposit costs. Margins would come off by
about 20-30 bps on the back of revised savings deposit rates and higher cost of deposits.
Overall growth depends on liability growth. Balance sheet growth would be driven
by liability performance. Expects CASA at 30% levels and higher contribution from retail
deposits at all times. All branch managers are monitored through scorecards. Assets
would be driven primarily in SME (40% of overall loans) and retail (25% of loans, mainly
housing loans and loans against property).
No large concerns on asset quality. Limited concern on asset quality and loan loss
provisions. Early warning signals are in place. Better overall performance could result in
fresh branch licenses from the RBI. Loans disbursed in the past 6-8 quarters are
witnessing very low levels of delinquency. SME loans are for customers with a prior credit
history of about two years and strong collaterals.
Fee income business has scope to show higher contribution. Management looks to
build a fee income business around trade (forex-related income) and third party wealth
management products. The bank has more than 100 IRDA certified employees.
No immediate requirement for capital. Tier-1 ratio is comfortable at 11% (also
internal profits have started to accrue with the bank becoming profitable) and would look
to raise further capital at an appropriate time.
EQUIFAX
Key takeaways
Establishing a strong foundation. Equifax is among the top two credit bureaus in US
and Europe. In India, it owns 49% (maximum as per FDI regulation) with the balance
owned by few banks (BoB, BoI, Union Bank and Kotak Mahindra) and NBFCs (Religare
and Sundaram) in India. Credit history available for more than two years for over 650 mn
accounts.
Need more acceptances from public banks. Credit information bureaus are witnessing
a gradual acceptance given the wealth of information they carry on retail clients. However,
it is still skewed with a few public sector banks and most new generation banks actively
seeking information. New information bureaus lack history but ideally a three-year
window is a reasonable indicator given changes in customer behavior.
New products differentiating information bureaus. Competition within the sector
has improved the quality of information being supplied, including qualitative data. New
products are being introduced by various bureaus to differentiate their services. Over the
long term, expect banks to take information from more than one bureau as they are
inexpensive. Ability to expand in new verticals is high, especially in SME/agriculture
borrower but loan details captured in many PSU banks are weak. Improved reporting
format from clients would accelerate analysis of client behavior.
Small market size as retail assets penetration is low. Overall revenues for credit
information bureaus are unlikely to grow rapidly in the near term, though the long-term
potential remains very strong as new products and asset classes are covered. Retail assets
are still slow to pick up. Unsecured loans are still declining for most banks. Volumes likely
to grow at over 20% levels but pricing have dropped with higher competition. Aiming for
banks to continuously monitor delinquent client profile through innovative products.
FEDERAL BANK
Key takeaways
Loan growth target at above-industry average. The bank is targeting loan growth of
over 20% in FY2012E. Performance is likely to be balanced across business segments
compared to the skew witnessed in 2HFY11. Within retail, the gold loan business has
been reactivated; the bank would use its subsidiary outside Kerala for better focus.
Margins to come off 40 bps qoq. Margins would come down in FY2012E by about 40
bps from current levels of 4.2% as focus has shifted to risk-adjusted margins. The bank is
passing on rate hikes as much as possible though borrower resistance is steadily rising.
Reasonably comfortable with the progress on slippages. SME and retail loans are
witnessing lower delinquencies as the bank is benefitting from some of the recent
initiatives like early warning signals and follow up through externally appointed call
centers. Near-term focus is to reduce net NPLs below 0.5% levels (currently at 0.6%).
Focus on strengthening fee income streams. Would look to actively improve income
from other items like fee income by introducing new products, better share of fee income
from existing clients, and training on retail wealth management products.
FUTURE CAPITAL HOLDINGS
Key takeaways
FCH—niche focus. FCH, in its new avatar, is focusing on distinct businesses in the
consumer and corporate lending segments—secured loans (loans against property, gold
loans) and promoter funding/loans against shares. The company is also engaged in
consumer durables financing though management does not find significant scale in this
business over the longer term.
High growth on low base. As of March 2011E, loan book was Rs28 bn (up from Rs15
bn in March 2010). The company has a loan book target of Rs70-80 bn by March 2013E.
The share of retail will likely increase sharply—from 20% in 2010 to 28% in 2011 and
65-70% in 2013E.
Several operational changes. The company has about 200 touch-points, including 80
store-in-stores. Over the past few months, the new management has focused on
reducing its borrowings costs, closing the deal with Centrum and reverse merger of its
group company. FCH’s marginal borrowing rate is currently close to 10.8% as compared
to 13% earlier. FCH has swapped its minority shareholding in Centrum Forex with
balance shareholding in Centrum Wealth Managers—FCH now owns full stake in the
wealth management company which currently has a loss of Rs25 mn.
Pressure on NIM, leverage to boost RoE. While rising rates will put pressure on NIM,
improvement in operating leverage will support RoA—management has guided for RoA
of 4.5%. Higher financial leverage will improve RoE to about 10-12% from 6% in
FY2011.
New management. Operations of FCH are managed by V Vaidyanathan, VC and MD.
Prior to joining FCH, Mr. Vaidyanathan worked with ICICI Bank, where he had set up the
retail business in 1999.
HDFC BANK
Key takeaways
Growth should remain strong. Expects industry to grow at near 20% on the back of a
7.5% GDP growth. Growth has continued for HDFC Bank in the last couple of months on
the back of an all-round performance in retail and corporate.
Margins likely to sustain despite headwinds. The management was very confident of
sustaining margins in the range of 4-4.2%. The loan pricing environment is much better
than the previous cycle and maintaining margins is not at all a challenge. On savings rate
deregulation also, it does not foresee any impact to margins, as it expects savings rates to
settle lower from the current 4%.
Good time for asset quality. Asset quality-wise, it’s a very good time period for HDFC
Bank. As trends have remained better, the bank has made counter cyclical provisions and
most likely will continue with the policy of making counter cyclical provisions. There are
yet no signs of NPL trends becoming worse, despite higher interest rates.
HDFC LTD
Key takeaways
Long-term growth drivers remain intact. The demographics support housing
growth—60% of the population is under the age of 30. The typical buyer is about 34
year old. So, large numbers coming into the home buying phase.
Interest rates headed north. HDFC expects 25 bps rate rise from here if monsoons are
reasonable and global commodities controlled. Even if rate increases are higher, HDFC is
armed with the experience of working with higher rates for the past 15 yrs. If rates go up,
HDFC can adjust by increasing tenure to enable buyers to still purchase the property they
desire.
Loan sell-down to HDFC Bank is profitable. Loan sell-down to HDFC Bank earns
1.56% spread without any capital allocation. HDFC Bank can buy to meet its priority
sector lending. Loan sell-down is the best way to reduce ALM risk.
Non-retail loan book is low risk and profitable. About 10-14% of HDFC’s book are
developer loans; overall non-retail loan book is close to 40%. HDFC does not provide
loans for working capital \ land; provides only project-based finance with the entire
project mortgaged to them. In even depressed times, security cover is over 1.6X. Till date,
HDFC has never written off any developer loan. About 10% of the book is rental
discounting, which is heavily collateralized as well and therefore, low risk.
There is little supply in Mumbai. Mumbai’s biggest problem is lack of supply. Vacancy
is very low, and therefore prices will not come down. Mumbai market accounts for about
6-7% of the business and is now ranked #3 from #1 about 2-3 years back.
Capital infusion not required. HDFC has never raised capital for the core mortgage
business. HDFC will need capital unless there is a dramatic change in regulation.
IDBI
Key takeaways
Improving liability profile is the main agenda. Focus in the current year would remain
on improving the liability profile of the bank more than loan growth. New schemes
introduced are showing improved performance. CASA ratio is currently at 21% compared
to 14-15% in the past few years led by healthy growth in savings and current deposit
growth.
Looking to maintain NIM at closer to current levels. Aiming at net interest margins of
2.2-2.3% in FY2012E (versus 2.1% in FY2011) through a mix of improving liability profile
and better yield on advances.
Asset quality trends are encouraging. Limited impact on NPL when the bank moved to
reporting NPL without any manual intervention. Excluding any untoward events, aiming
gross slippages of 1% in FY2012E. Expect delay in a select infrastructure projects but
don’t expect any serious setbacks in this portfolio.
Well-capitalized for near-term growth. Tier-1 ratio for the bank stands at over 8.5%
levels and it would look to unlock value in select unlisted subsidiaries at an appropriate
time.
IDFC
Key takeaways
Loan growth of 25%—back-ended in 2012E. IDFC expects loan growth to moderate
to 25% from 50% in FY2011E. Roads and power will remain key contributors. The
growth will likely be back-ended in FY2012E unlike higher disbursements in 1HFY2011E.
Thus, loan growth will likely be subdued in the next 1-2 quarters.
Confidence on NIM. The company is very comfortable on its NIM unlike a guidance of
NIM decline earlier. In the past, SBI and other PSU banks provided strong competition.
Now, these banks have raised their PLR/ base rates and currently the marginal rate of
lending for IDFC is lower than SBI. We believe that IDFC’s lending rates will go up, but
clearly there is lesser pressure on NIM. The company will prefer maintaining margins and
asset quality to growth. The company remains selective—about 70% of incremental
business will be contributed by the top-20 clients.
Most other businesses subdued. Business from investment banking and broking will
remain subdued and linked to the equity markets. IDFC PE expects brisk deal flow in the
current environment. IDFC PE III is invested to the extent of 40%. IDFC AMC will likely see
some pressure on AUMs due to recent RBI cap for bank investments in MFs.
INDIAN OVERSEAS BANK
Key takeaways
Focus on growth. The bank is targeting a loan growth of 20-25% for FY2012. Growth
focus would remain on retail (especially in mortgage/gold loans) and mid corporate
segment. Infrastructure has grown very fast over the past couple of years and growth is
expected to moderate in FY2012E.
NIMs to sustain above 3%. Net interest margins would see maximum compression of
15-20 bps in FY2012E from current levels of 3.2%. Re-pricing of loans is yet to be fully
completed.
Asset quality to remain under control. Management expects to maintain gross NPLs at
closer to current levels or improve it. Focus will remain on recoveries as the underlying
collateral in these loans is strong. Slippages are likely to remain at 1.5% levels in FY2012.
Provisioning will still remain high. Provisioning will remain high on account of revised
guidelines for (1) restructured loans, (2) standard and doubtful assets and (3) countercyclical
buffer. However, this would be offset by lower provisions on account of lower
provisions for retirement benefits and lower slippages.
INDIAN BANK
Key takeaways
Cautious on aggressive loan growth. Would be comfortable in maintaining current
growth trends in deposits and loans at 20% levels or at about industry average. Wary of
growing beyond these levels as it would hurt asset quality. Looking to shift focus from
wholesale segment to retail and SME segments in the current year for loans and deposit
growth (about 25% loan growth from these two segments).
Margins to taper down as cost of funds rises. Expect margins to come off from
current levels of 3.9% levels as there is resistance in passing higher cost of funds.
However, management believes that re-pricing of loans is yet to be fully completed which
should cushion the impact of deposit re-pricing.
Revised provisions on restructured loans to have impact on near-term earnings.
Bank would need to make provisions on restructured loans (7% of loans) but revised
provisions on sub-standard and doubtful loans would have limited impact as the current
provisioning policy is very conservative. Not too much concerned on the infrastructure
portfolio currently.
Capital raising would be done at an appropriate time. Tier-1 ratio is currently at
11%, well above the comfort levels of 8% for PSU banks. However, the management
would look to raise capital at an appropriate time to fund the balance sheet growth
requirements.
LIC HOUSING FINANCE
Key takeaways
Interest rates largely passed on. LICHF is able to pass through cost increase to the
variable rate portfolio. They have increased rates by 150 bps to offset cost increase.
Despite passing increase in cost through, they are still competitive because HDFC
increased rates by higher amount. Rate hike by SBI has clearly eased the competitive
pressure in the industry. However, SBI will likely remain retail focused and could come
back as growth pressure compels them. Does not think SBI has changed forever.
NIM & loan growth. Target of 2.5-2.7% for FY12E, compression of 10-30 bps from
FY11 NIM, and compares to our assumption of 2.5%. Expects loan growth of 25%. Pan-
India demand remains good (Mumbai is not representative).
Developer loans. These are 8.5% of book and NPAs are Rs40 mn, and are fully
recoverable. LICHF looks at salability of the developer, gives only construction financing.
Escrow mechanism ensures there are no diversion of funds, and also take personal
guarantees of developer. Developer lending rate is running at 15%. Disbursement to
developers picked up again in March.
Macro environment not very adverse. Management believes that they are not even
close to stress today, as they have seen a much worse environment (2008 and 2009). If
there is a substantial degradation in employment, only then do they see a concern on
NPAs. LTV remains lower than 60%, and recovery is still good.
MAGMA FINCORP
Key takeaways
Multiple business lines. Magma has focus on multiple assets—cars, construction
equipment (CE) finance, used CE, small business loans and tractors. The company has
about Rs109 bn of assets under management.
Niche focus. The company focuses on first time users/ small customer primarily from
smaller towns and cities—the focus segment has lesser competition and hence can earn
higher yields-loan yield close to 15-16%.
Business in sweet spot. The company expects about 50% loan book growth in FY2012E.
The share of high yield loans in overall lending will increase, thus management finds
limited impact of rising rates on its NIM; it does acknowledge that it is not possible to
pass-on rate hike to its customers. Last week, KKR and IFC infused Rs4.4 bn (27% of
post-money equity base) at Rs88/ share. This will support medium-term growth.
Share of loans outside balance sheet is declining. The share of loans sold (outside
balance sheet) is currently close to 50%, down from 80% in the past. Management
targets a ratio of 25% over the longer term. RBI proposes to review PSL status on loans
sold down. In case, the regulator disallows PSL status on loans sold to banks to disallow
banks to buy loans from NBFCs, Magma’s near-term NIMs will likely remain under
pressure. The recent capital infusion is a very positive development in this backdrop
MAHINDRA FINANCE
Key takeaways
Focus on rural economy which is in a sweet spot. Mahindra Finance (MMFSL) has
focused on lending in semi-urban and rural India. The rural economy continues to do well
and hence there is higher visibility on growth for MMFSL. The company expects about
25% loan growth in FY2012E on the back of 50% growth in FY2011E. Rural economy
continues to have strong linkages with monsoon and business momentum for MMFSL
typically picks up in 2H, i.e. post monsoon. While there is no clarity on the monsoon
trends for FY2012E, the strong earnings momentum of FY2011 provides comfort. Cars,
CVs and used vehicles will likely grow at a faster pace.
Risk of rising rates inevitable. MMFSL faces limited competition from banks and other
NBFCs. Hence, it’s relatively better-placed to pass on rise in lending rates to its customers.
Nevertheless, rate hike provides risk of tempering demand due to pressure on customer
cash flows. Management expects auto manufacturers to step in at the initial phase and
provide subvention in order to hold up demand.
Removal of priority sector benefit on loans to NBFCs will have negligible impact.
About 15% of its borrowings were refinance on PSL loans, these borrowings have
enjoyed 75 lower interest rates. As of March 2011, only about 15% of its loans were sold
down. However, the company follows a policy of upfront recognition of entire income of
loans sold down. In case of removal of PSL status on loans sold down, the overall NIM of
the company will be impacted.
MANAPPURAM GENERAL FINANCE (MGFL)
Key takeaways
About the gold lending business. In 2005, banks started lending to NBFCs which was
the turning point for growth in the business. The business is now moving to north India
from the south. Average tenure of a loan is 110 days, but loan period is one year.
Appraisal in the branch is done by 4-5 people, with loans approved in 5 minutes. For
calculating LTV, they use average of gold price of the past three months. At 85% LTV,
interest rate is 24% versus 12% for 60% LTV. 30% of business in Kerala, and 70%
outside.
Competition is not a concern. Management is not worried over the next five years on
this. People are comfortable going to NBFCs versus banks (which have lower rates)
because their processing time is 5 minutes, versus days for PSU banks. Even HDFC Bank
takes half a day to approve a gold loan.
NIM under pressure. NIM will likely compress 200 bps; in case of any more pressure
than that, they will pass on to the consumer.
Regulation is biggest worry. Management believes that the RBI wants to achieve lower
rates for consumers. Mannapuram makes the argument that they are steadily doing that
as rates have come down over years. It will be able to replace priority sector loans with
other sources at reasonable cost. Asset quality will not be a concern (unlike MFIs due to
the secured nature of the business).
Comments on gold loan business by other parties
Mahindra Finance. They have decided to come out of the gold loan business after trying
their hand at it because it is too specialized and not worth the time and management
attention.
Federal Bank. The bank is trying to grow its gold lending business as they set up
exclusive centers outside Kerala. This is an initiative of the new management team. Note
that Federal Bank is a Kerala-based bank, which is the home of the gold lending business
and that is why they may have gathered the experience to be able to launch this new
venture.
South Indian Bank. Will continue gold lending the traditional way, but is incapable of
competing with NBFCs. Federal Bank is using an old NBFC license to open small gold
lending branches. Other banks will not be able to follow as the RBI will not grant fresh
licenses.
RURAL ELECTRIFICATION CORPORATION
Key takeaways
SEB losses. Improvement in several states. Losses have been there since REC was started.
However, management feels that things are improving in a lot of states. Earlier, they
never used to get audited accounts of Discoms, which they have now started getting.
28% of assets have state guarantees; balance of the asset base is covered with escrow \
collateral.
Visibility on 20%+ growth in FY2012E is very high. REC has approved loan book of
over Rs1 tn. Substantial growth will come from transmission, which is not hampered by
coal availability. The coal availability issues will also get resolved in the medium term. REC
believes that the situation is power sector in India changes quickly. In the long term, is not
concerned about growth, but interest rates can be a cause of concern in the medium
term.
Dishonor of PPAs is a cause of concern. The problem is very case specific. In some
cases, the state had excess hydro power, so they are not lifting thermal power but still
paying fixed cost to the operator.
No official guideline for provisions. RBI has not given any direction to PFC and REC to
making any standard asset provisions; the recent news article (which states that REC and
PFC will need to make standard asset provision) is thus inaccurate. Government-owned
NBFCs remain exempt from most guidelines applicable to other NBFCs.
SHRIRAM TRANSPORT FINANCE
Key takeaways
Some impact on NIM due to regulatory changes. The company enjoyed benefit of
150 bps due to securitization. This will likely decline as the RBI will likely tamper the
economics of the transactions. The RBI is unlikely to ignore that fact that NBFCs play an
important role in the system. Complying with the RBI’s KYC norms is not a concern for
the company. In the past, banks have done due diligence for each and every account.
ICICI Bank has done due diligence for 0.16 mn accounts
Management expects 10-12% growth in industry with a risk of downside. Internally,
STFC has not changed any growth prospects though the scenario has changed
considerably. The management believes that they can achieve their growth targets by
taking a hit on NIM. Rising cost of diesel and economic slowdown may not impact
volumes. They now model lower NIM. In 2009, STFC reported NIM of 7%; in 2011, NIMs
were 8.3%. The improvement is due to decline in cost of funding. Current NIM guidance
is minimum of 7%.
The construction equipment finance business grows rapidly. STFC’s construction
equipment finance subsidiary reported a nominal PAT in FY2011. The company has a loan
book of about Rs6.5 bn (Rs2bn disbursements in March 2011) and proposes to have a
loan book of Rs24 bn and Rs50 bn by March 2012E and March 2013E. The business will
likely require capital infusion of Rs10 bn in the next two years.
Automalls being set up. Shriram Transport Finance (STFC) launched its first ‘automall’ in
Chennai. This follows the launch of ‘Shriram New look’, its auto refurbishment business
and construction equipment finance business launched earlier this year. The company
launched its second ‘automall’ in Vadodara recently and proposes to roll out about 50
‘automalls’ in one year.
SOUTH INDIAN BANK
Key takeaways
Aiming for consistent earnings delivery. The management intends to deliver
consistent earnings in business growth, RoEs and RoAs. The bank is targeting NIMs at 3%
levels, RoAs at 1% and RoEs at 18% levels.
Expanding delivery channels to meet growth targets. South Indian Bank is targeting
to open 750 branches from current levels of 640. The bank will look to grow its loans by
25-30% CAGR over the next five years.
Gold loan continues to remain an attractive opportunity. Growth has remained
strong, especially coming from gold loans over the last couple of years. The bank has the
highest proportion of gold loans at over 20% of overall loans compared to peers. It is
setting up a subsidiary for doing gold loan business which will serve well than the branch
banking model.
Looking to improve contribution from fee income business. Fee income growth is a
challenge (fee income contribution to overall loans is about 70 bps) but is being
addressed by a combination of better products and more income through third party
distribution.
Higher cost-income structure on the back of higher investments. Targeting costincome
ratio at 45% from current levels of 47% as the bank is currently investing in
branch expansion/hiring. Incentive plans is driving operating performance, improving
service delivery standards and is facing limited resistance by employees.
STATE BANK OF INDIA
Key takeaways
Shifting focus. Internal focus of the bank has been steadily shifting to increase efficiency,
profitability and improve asset quality. Business growth is one of the many key
parameters for the bank. Expects deposit growth of 20%, credit growth to be somewhat
slower than historic trends. Loan growth to largely track deposit growth.
Targeting margins of 3.5%. The recent rate hikes will allow the bank to increase its
yields and margins—targeting margins of 3.5% in FY2012E versus 3.3% in FY2011.
While focus on market share remains, it will not fight on pricing to increase market share.
It has already withdrawn all teaser loan products from the market.
Slippages to improve from current high levels. The management expects slippages
trend to improve from 1Q onwards on the back of very high slippages in FY2011. Most
slippages have come from the mid-market segment—which still remains a stressful sector.
Most other sectors have seen an improving trend over the last few quarters. Provisions,
however, will remain high in 1QFY12E, largely on account of higher provisions on
restructured assets, substandard loans and to meet regulatory coverage ratios.
Rights issue needs government approval. It will raise about Rs200 bn from the market
in FY2012E. Currently it is in dialogue with the government on the same.
Have completely accounted for pension shortfall. The bank has completely
accounted for the shortfall moving to 9th bipartite settlement and there is unlikely to be
any requirement for any further provision. The bank will start making provisions (ad hoc
in nature) moving towards the next settlement due in 2012 to prevent a recurrence of
such event.
UNION BANK OF INDIA
Key takeaways
Margins to moderate. Margins are likely to come off by 25 bps from 4Q levels with
target NIM of 3.2% in FY2012E, as against a NIM of 3.3% in FY2011. Lending yield repricing
has not been fully completed.
Loan growth to remain strong at about 20%+ levels. Growth likely to be driven by
retail and SMEs. The bank expects CD ratio to sustain at current levels of 76%. Looking to
open another 400 branches in FY2012E but has revised CASA ratio targets by about 200
bps to 33%, from its earlier targets of 35%, in light of the higher interest rates.
Comfortable on asset quality. Slippages would be kept at 1.25% levels with gross NPLs
declining to 1.9% from 2.4% currently in FY2012E. Loans above Rs0.5 mn is reported
without any manual intervention. Limited concern in the infrastructure loan portfolio
though delays in execution are being witnessed.
Likely capital infusion. Expect capital infusion of about Rs5 bn in FY2012E as the bank
received lesser-than-required capital in the previous round of infusion from the
government of India.
YES BANK
Key takeaways
Satisfactory first year performance on Version 2.0. Loan growth has been a bit frontended
and such a performance is unlikely to be repeated in FY2012E. Meeting PSL targets
in agriculture but loan targets in weaker sections is challenging.
Margins are likely to remain at current levels. The bank is able to pass on higher
deposit costs. Also, given the shorter duration of liabilities—bulk of the re-pricing for the
bank looks closer to completion. Shorter asset and liability profile, a conscious decision, is
keeping the volatility of margins low.
Looking to open 125 branches in FY2012E. There would be an impact on the revised
branch licensing policy which increases the thrust in opening in rural areas. Expect
gradual improvement in CASA ratio but proportion of CA (about 60-65% of total CASA
compared to about 85% currently) would still remain high.
Core banking fees showing higher growth to overall fee income growth. Fee
income trends would see higher contribution from transaction banking and retail fees.
Investments made in new client acquisitions over the past two years are resulting in this
performance.
Well-capitalized in the near term. Tier-1 ratio comfortable at 9.7% but the bank has
taken an enabling resolution to raise US$500 mn—no immediate timeframe on capital
raising plans.
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