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The ROE trend for the Indian Financials sector over the last eight
years displays remarkable consistency with ROEs in the range of 14-
16% (barring FY04, when treasury gains had boosted reported
profits). However, this does not adequately reflect the number of
structural and cyclical changes the sector has undergone during the
period. Structurally, this has been a period of significant credit
expansion (24% CAGR in loans) resulting in credit penetration
increasing from 30% of GDP in FY04 to 50% in FY11. Loan growth
was driven by strong economic growth, higher savings rate and
improving consumption demand. The asset quality profile of the
banking system saw significant improvement, with NPLs declining
from 7.2% of loans in FY04 to 2.4% of loans in FY10, aided by a
strong economic cycle; meanwhile, RBI’s counter-cyclical measures
ensured that adequate provisioning cover was maintained. RBI’s
enhancement of capital adequacy requirements for NBFCs and a
spurt of capital-raising activities undertaken by the private sector
banks during FY08-10 have resulted in an improved leverage profile
for the sector, though public sector banks continue to run with at
relatively low levels of capital adequacy.
Cyclically, this period has also been witness to four distinct phases:
1) strong growth with comfortable inflation and loose monetary
policy (FY04-06); 2) moderation in growth with RBI in tightening
mode (FY06-08); 3) sharp slowdown in growth following the global
meltdown and concomitant policy loosening by the RBI (FY08-10);
and 4) a recovery after FY10, with lagged asset quality stress
witnessed by the system.
The core operating performance, particularly that of public-sector
banks, has improved, thanks mainly to productivity gains following
the introduction of core banking systems and a decline in loan loss
charges on asset quality improvement. NIMs witnessed a decline
during FY06-10 driven by policy tightening over FY06-08 and some
moderation in CASA, but saw a recovery in FY11 aided by sharp
downward re-pricing of deposits in 1H. Contribution of trading gains
has come down significantly, lending lower volatility to earnings.
Private sector banks’ ROAs improved on the back of NIM expansion
as a consequence of improvement in low-cost CASA deposit ratio.
This was partly offset by an increase in loan loss charges in line with
the seasoning of the loan book and also driven by the adverse retail
credit cycle during FY09-10. NBFCs’ profitability performance has
been similar, with ROA improvements driven by NIM expansion on
better ALM management partly offset by a decline in non-interest
income and increase in tax rate. ROEs of both private sector banks
and NBFCs moderated on account of reduction in balance-sheet
leverage.
The Financials sector’s asset turnover is likely to come under
pressure in the near term owing to a sharp increase in deposit rates
and incomplete pass-through in terms of lending rate increases and
some moderation in CASA ratio. However, slower growth in
operating expenses should result in ROAs being maintained at FY11
levels. Higher leverage should help ROEs sustain at the current
healthy levels of 15-16%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The ROE trend for the Indian Financials sector over the last eight
years displays remarkable consistency with ROEs in the range of 14-
16% (barring FY04, when treasury gains had boosted reported
profits). However, this does not adequately reflect the number of
structural and cyclical changes the sector has undergone during the
period. Structurally, this has been a period of significant credit
expansion (24% CAGR in loans) resulting in credit penetration
increasing from 30% of GDP in FY04 to 50% in FY11. Loan growth
was driven by strong economic growth, higher savings rate and
improving consumption demand. The asset quality profile of the
banking system saw significant improvement, with NPLs declining
from 7.2% of loans in FY04 to 2.4% of loans in FY10, aided by a
strong economic cycle; meanwhile, RBI’s counter-cyclical measures
ensured that adequate provisioning cover was maintained. RBI’s
enhancement of capital adequacy requirements for NBFCs and a
spurt of capital-raising activities undertaken by the private sector
banks during FY08-10 have resulted in an improved leverage profile
for the sector, though public sector banks continue to run with at
relatively low levels of capital adequacy.
Cyclically, this period has also been witness to four distinct phases:
1) strong growth with comfortable inflation and loose monetary
policy (FY04-06); 2) moderation in growth with RBI in tightening
mode (FY06-08); 3) sharp slowdown in growth following the global
meltdown and concomitant policy loosening by the RBI (FY08-10);
and 4) a recovery after FY10, with lagged asset quality stress
witnessed by the system.
The core operating performance, particularly that of public-sector
banks, has improved, thanks mainly to productivity gains following
the introduction of core banking systems and a decline in loan loss
charges on asset quality improvement. NIMs witnessed a decline
during FY06-10 driven by policy tightening over FY06-08 and some
moderation in CASA, but saw a recovery in FY11 aided by sharp
downward re-pricing of deposits in 1H. Contribution of trading gains
has come down significantly, lending lower volatility to earnings.
Private sector banks’ ROAs improved on the back of NIM expansion
as a consequence of improvement in low-cost CASA deposit ratio.
This was partly offset by an increase in loan loss charges in line with
the seasoning of the loan book and also driven by the adverse retail
credit cycle during FY09-10. NBFCs’ profitability performance has
been similar, with ROA improvements driven by NIM expansion on
better ALM management partly offset by a decline in non-interest
income and increase in tax rate. ROEs of both private sector banks
and NBFCs moderated on account of reduction in balance-sheet
leverage.
The Financials sector’s asset turnover is likely to come under
pressure in the near term owing to a sharp increase in deposit rates
and incomplete pass-through in terms of lending rate increases and
some moderation in CASA ratio. However, slower growth in
operating expenses should result in ROAs being maintained at FY11
levels. Higher leverage should help ROEs sustain at the current
healthy levels of 15-16%.
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