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Indian banks' foreign operations
Indian banks have 8% of loans in overseas market of which 90-95% is to
Indian/India-linked clients. About half of forex loans are for trade finance
and balance is mostly to fund capex and M&A. These loans make lower
spreads (100-150bps), but higher fees– overall profitability is similar to
domestic business. BOB, ICICI, BOI, SBI and Axis have larger overseas
presence (+15% of loans). Demand for forex loans is healthy, but sharp
rise in borrowing costs may force banks to go slow on lending, which will
impact fee growth. Rise in cost may impact NIMs, especially for banks
with ALM mismatch, but banks indicate that liquidity is manageable.
Indian banks’ overseas presence is India-linked
q Indian banking sector has 8% of loans (7% of total assets) in overseas market
of which 90-95% would be to Indian / India-linked clients (figure 1).
q Nearly half of these loans are for trade finance and rest for capex and M&A.
q Most of the overseas assets are in form of loans; investments are very low and
are mostly in form of sovereign bonds (SLR) and other liquid assets.
q Deposits and bonds contribute equally to liabilities (figure 3)- share of deposits
is higher for banks with larger branch network (mostly PSU banks).
q Overseas spreads are lower (100-150bps), but fees are higher and it helps
banks to build relationships with domestic clients. Overall profitability is similar
to domestic business due to higher fees, lower costs and better asset quality.
Concentrated market: Five banks control +80% of the market
q India’s overseas lending market is highly concentrated with five banks
commanding 84% market share - SBI is the largest player (figure 4).
q In case of BOB, ICICI and BOI loans outside India form ~25% of loans
whereas in case of Axis and SBI they constitute ~15% of loans.
q BOB has the highest proportion of total assets in foreign currencies (30%);
besides loans, it also has sizable assets in the money market (figure 7).
q HDFC Bank, Yes Bank and other PSU banks have a smaller overseas portfolio.
q In recent years, ICICI has consolidated overseas exposures- slower growth in
standalone loans and 20-30% fall in assets of UK and Canadian subsidiaries.
Growth may be volatile, asset quality stable
q We understand that demand for forex loans is healthy and fall in hedging costs
from 4-6ppt to 2-3ppt has been positive for demand for such loans.
q However, the sharp rise in borrowing costs for Indian banks is impacting their
ability to raise funds and is likely to lead to slower growth in forex loans.
q Fees will be impacted more as forex capex loans generate high fees.
q Meanwhile in 2Q, banks will report +10% QoQ growth in overseas loans due to
the sharp depreciation of rupee; though it will not impact profits.
q Risk aversion among foreign banks towards Indian corporate may lead to
surge in credit demand from Indian banks; part of it may also get converted
into rupee credit and hence boost domestic loan growth.
q Overseas loans have lower NPLs and our interaction with banks indicates
limited stress currently, especially as it is mostly to larger Indian groups.
Maturity gaps may put pressure on spreads
q Analysis of maturity profile of assets and liabilities (ALM) as on March 2011
indicates that banks have some maturity mismatches i.e., short term forex
liabilities are higher than short-term forex assets (see figure 19).
q Rise in funding costs and ALM gaps can put pressure on spreads; credit rating
downgrade for SBI can exacerbate the impact.
q Our interactions with banks indicate that though spreads may see pressure,
liquidity is comfortable (Indian banks could raise funds even in 2008-09). Also
as spreads in the inter-bank market haven’t expanded as much as in the open
market, it would mitigate the upward pressure on cost of funds.
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Indian banks' foreign operations
Indian banks have 8% of loans in overseas market of which 90-95% is to
Indian/India-linked clients. About half of forex loans are for trade finance
and balance is mostly to fund capex and M&A. These loans make lower
spreads (100-150bps), but higher fees– overall profitability is similar to
domestic business. BOB, ICICI, BOI, SBI and Axis have larger overseas
presence (+15% of loans). Demand for forex loans is healthy, but sharp
rise in borrowing costs may force banks to go slow on lending, which will
impact fee growth. Rise in cost may impact NIMs, especially for banks
with ALM mismatch, but banks indicate that liquidity is manageable.
Indian banks’ overseas presence is India-linked
q Indian banking sector has 8% of loans (7% of total assets) in overseas market
of which 90-95% would be to Indian / India-linked clients (figure 1).
q Nearly half of these loans are for trade finance and rest for capex and M&A.
q Most of the overseas assets are in form of loans; investments are very low and
are mostly in form of sovereign bonds (SLR) and other liquid assets.
q Deposits and bonds contribute equally to liabilities (figure 3)- share of deposits
is higher for banks with larger branch network (mostly PSU banks).
q Overseas spreads are lower (100-150bps), but fees are higher and it helps
banks to build relationships with domestic clients. Overall profitability is similar
to domestic business due to higher fees, lower costs and better asset quality.
Concentrated market: Five banks control +80% of the market
q India’s overseas lending market is highly concentrated with five banks
commanding 84% market share - SBI is the largest player (figure 4).
q In case of BOB, ICICI and BOI loans outside India form ~25% of loans
whereas in case of Axis and SBI they constitute ~15% of loans.
q BOB has the highest proportion of total assets in foreign currencies (30%);
besides loans, it also has sizable assets in the money market (figure 7).
q HDFC Bank, Yes Bank and other PSU banks have a smaller overseas portfolio.
q In recent years, ICICI has consolidated overseas exposures- slower growth in
standalone loans and 20-30% fall in assets of UK and Canadian subsidiaries.
Growth may be volatile, asset quality stable
q We understand that demand for forex loans is healthy and fall in hedging costs
from 4-6ppt to 2-3ppt has been positive for demand for such loans.
q However, the sharp rise in borrowing costs for Indian banks is impacting their
ability to raise funds and is likely to lead to slower growth in forex loans.
q Fees will be impacted more as forex capex loans generate high fees.
q Meanwhile in 2Q, banks will report +10% QoQ growth in overseas loans due to
the sharp depreciation of rupee; though it will not impact profits.
q Risk aversion among foreign banks towards Indian corporate may lead to
surge in credit demand from Indian banks; part of it may also get converted
into rupee credit and hence boost domestic loan growth.
q Overseas loans have lower NPLs and our interaction with banks indicates
limited stress currently, especially as it is mostly to larger Indian groups.
Maturity gaps may put pressure on spreads
q Analysis of maturity profile of assets and liabilities (ALM) as on March 2011
indicates that banks have some maturity mismatches i.e., short term forex
liabilities are higher than short-term forex assets (see figure 19).
q Rise in funding costs and ALM gaps can put pressure on spreads; credit rating
downgrade for SBI can exacerbate the impact.
q Our interactions with banks indicate that though spreads may see pressure,
liquidity is comfortable (Indian banks could raise funds even in 2008-09). Also
as spreads in the inter-bank market haven’t expanded as much as in the open
market, it would mitigate the upward pressure on cost of funds.
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