Banks/Financial Institutions: Expansion continues even while business concentration increases:Kotak Sec,

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Banks/Financial Institutions
India
Expansion continues even while business concentration increases. We see overall
branch expansion back at pre-crisis levels even as deposit mobilization and outstanding
loans increasingly get concentrated in urban/metro regions, especially in the top 50-200
centers. Private banks and select large PSU banks continue to gain share in CASA
deposits which are concentrated in urban/metro regions. Banks need to evolve new
strategies to target the top ‘N’ centers as regulations require new branch licenses for
these cities to be earned through rural expansion.


Branch expansion unlikely to benefit when business concentration is high in the top ‘N’ cities
We believe the current focus on branch expansion is unlikely to benefit banks as 50% of the
business is concentrated in the top 10 centers (12% of total branches) and 70% of the business is
in the top 50 centers (22% of total branches). Also, the trend in business has only improved in
recent years showing better underlying opportunity in these centers. Importantly, the top 10 or 20
centers have remained unchanged over the past few years. Branch expansion in these centers has
been higher than average with broad positive metrics (growth on deposits and loans per branch).
However, we should expect to see a slowdown if the current pace of expansion continues.
Better target segment and products results in further shift in CASA share to private banks
Nearly all private banks gained market share in CASA deposits over PSU banks. We attribute this to
their focus on (1) high growth segment of ’private companies‘ over ’businessmen/ traders‘ through
better products and execution and (2) higher growth of low cost deposits in urban centers. Large
PSU banks like SBI, Union and BoB have improved their market shares with their national presence
(SBI) and strong growth of CA deposits in western regions. However, the loss of market share is
visible in PNB (probably due to higher competition on branch expansion in north) and south-based
PSU banks despite healthy CASA deposit growth.
New licensing regime will need a revised look on branch opening strategies
We believe that banks, especially large private banks which have been growing at 20% CAGR over
the past few years, are likely to slow down their expansion plans on the back of (1) new guidelines
that require 25% of new branches to be opened in tier-5 and tier-6 centers (which are unbanked
areas), (2) these banks have a reasonably strong presence in the top 50-200 important centers,
and (3) potential to improve market share is higher in these regions compared to expansion. We
expect banks to open low-cost branches and expect a shift in focus to improve productivity levels
from existing ones and reach customers through alternate channels or through NBFCs/business
correspondents.
Branch focus on west and south to pay off on improving CASA deposit mobilization
Branch focus on the western and southern regions is likely to pay off on better CASA deposit
mobilization more than northern region, which has been fairly volatile in the past. The western
region has a market share of 38% in CA deposits and 36% in term deposits. Despite a fairly
penetrated market, the southern region has seen consistent growth across many years especially
with the development of multiple cities. Branch penetration has increased in the north in recent
years, which could partially explain the drop in CASA share for PNB. These three regions have a
market share of about 75% in overall business.