Chindia banking - Sector outlook:: On their way up - CLSA

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On their way up
While banks in both China and India are well poised to leverage the
opportunities their burgeoning economies offer, India could see faster
growth in credit over the next five years as penetration is lower and its
capex cycle is yet to play out. Regulators will have a key role in shaping
the future. Chindian institutions will need US$120bn of capital in the next
three years, which is manageable given their high-quality profit growth.
We like those with high ROAs: ICICI Bank, HDFC Bank, Axis Bank, ABC,
Bank of China and CCB.
Leveraged on economic growth
q Indian and Chinese banks are set to leverage on the countries’ 15-20% growth in
nominal GDP over the next five years.
q China may see speedier economic growth, but India will continue to expand credit
at a faster pace given low penetration and as it is still in the midst of a capex cycle.
q Greater credit intensity will mean China’s penetration will remain higher than India’s.
q In the long run, retail borrowings will drive loan adoption in both countries.
India led on reform, China on regulations
q India is ahead of China in terms of sector reforms, such as interest-rate
deregulation, which remains a wild card for Chinese banks’ profitability.
q China has been more proactive in monitoring and regulating banks in the current
cycle, with splitting the monetary and regulatory authorities a key initiative.
US$120bn of capital needs in three years
q Over the next three years, Indian and Chinese banks will collectively need
US$120bn to fund growth and meet higher capitalisation requirements.
q Institutions in India may have to raise US$34bn, which is nearly 20% of their
market cap; those in China are likely to require US$85bn (c.10% of market cap).
q Capital-raising will be more dilutive for Indian banks and those with higher leverage
may see as much as a 500bp compression in ROE.
q Asset quality has improved over past decade, but pockets of risk have emerged.
Like private banks in India, SOEs in China
q Banks’ ability to leverage will fall and hence high-ROA banks will come out stronger.
q In India, private banks generate higher ROAs and in China, state-owned enterprises
(SOEs) are more profitable.
q A strong deposit franchise, high fees and asset quality are key to profitable growth.
q China and India’s bank valuations are comparable, but dispersion is higher in India.
q Among Indian institutions, ICICI Bank, HDFC Bank and Axis Bank are our top picks
and in China, we like Agricultural Bank, Bank of China and China Construction Bank