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A silent revival in business. With slow growth in the corporate-loan portfolio, banks
have shifted focus to retail, in which growth and risk-reward opportunities are more
favorable in the current leg of the cycle. Retail lending has gone through a change and
private banks and SBI are probably well placed to build a strong portfolio over the next
few years. Banks that have been focusing on housing are likely to shift to other lending
products, like credit cards, quite early in the cycle.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
The re-emergence of focus on lending to retail is a cyclical phenomenon
We expect retail loans to grow 20% CAGR over FY2015-19 and their contribution to overall
loans to increase to ~20% of loans from ~15% in FY2014. Retail has been staging a comeback
on the balance sheet in recent quarters because (1) opportunities in corporate banking have
dried up (loan growth is less than 10% yoy) as sanctions have fallen sharply and improvement
in the economy implies deleveraging ideas and lower working capital demand in the initial years
would be the main features of companies and (2) high impairment in the corporate-loan
portfolio and negligible risk in retail is forcing banks to re-look at this business. The move to the
retail business is cyclical at this stage, given these factors.
Private banks well placed given the nature of their lending; SBI best among public banks
We expect private banks to benefit most from the shift in loan growth towards retail as they
have a higher share of loans and greater focus to grow this portfolio. Besides HDFC Bank and
IndusInd Bank, we believe the re-entry of ICICI Bank and greater focus of Axis Bank will
enhance the share of private banks from 27% currently. Among public banks, we believe SBI
(32% share), which has the reach and focus in retail loans, is the biggest player. Most other
public banks will be competitive in select retail products.
Changes to business model expected to ease concerns; at least at this leg of the cycle
In this leg of the interest-rate cycle, we are less concerned about NPLs from the retail portfolio
as loans currently held appear to be reasonably strong. Besides, regulations on lending have
been tightened with measures such as caps on LTV in housing. However, we see private banks
as greater beneficiaries due to (1) a change in acquisition strategies due to solid expansion of
the customer base and branches, in recent years, which allow greater cross-sell, (2) credit
information bureaus, which have become stronger and (3) the ability to deploy analytics with a
larger data set, which probably differentiates this cycle from the previous one. On the other
hand, the biggest change for most leading private banks is the strength of the liability franchise
where CASA ratio is currently ~40%.
Profitability is a concern; we expect the mix to change and a higher share of unsecured loans
One of the key concerns about the shift to retail is the underlying profitability. The housing loan
segment is a low-margin business and vehicle loans offer slightly better yields, but after
adjusting the cost of acquisition and duration of loans, it is not as profitable. Hence, we expect
banks to look at new opportunities to improve profitability. A big area of change would be
unsecured, especially credit cards, as the contribution to profitability is far better than retail. We
expect the loan mix to change, especially with a greater share of used-vehicle financing and
loans against property. Also, we expect banks to balance the customer profile to include the
salaried and non-salaried segment.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily08012015ax.pdf
A silent revival in business. With slow growth in the corporate-loan portfolio, banks
have shifted focus to retail, in which growth and risk-reward opportunities are more
favorable in the current leg of the cycle. Retail lending has gone through a change and
private banks and SBI are probably well placed to build a strong portfolio over the next
few years. Banks that have been focusing on housing are likely to shift to other lending
products, like credit cards, quite early in the cycle.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
The re-emergence of focus on lending to retail is a cyclical phenomenon
We expect retail loans to grow 20% CAGR over FY2015-19 and their contribution to overall
loans to increase to ~20% of loans from ~15% in FY2014. Retail has been staging a comeback
on the balance sheet in recent quarters because (1) opportunities in corporate banking have
dried up (loan growth is less than 10% yoy) as sanctions have fallen sharply and improvement
in the economy implies deleveraging ideas and lower working capital demand in the initial years
would be the main features of companies and (2) high impairment in the corporate-loan
portfolio and negligible risk in retail is forcing banks to re-look at this business. The move to the
retail business is cyclical at this stage, given these factors.
Private banks well placed given the nature of their lending; SBI best among public banks
We expect private banks to benefit most from the shift in loan growth towards retail as they
have a higher share of loans and greater focus to grow this portfolio. Besides HDFC Bank and
IndusInd Bank, we believe the re-entry of ICICI Bank and greater focus of Axis Bank will
enhance the share of private banks from 27% currently. Among public banks, we believe SBI
(32% share), which has the reach and focus in retail loans, is the biggest player. Most other
public banks will be competitive in select retail products.
Changes to business model expected to ease concerns; at least at this leg of the cycle
In this leg of the interest-rate cycle, we are less concerned about NPLs from the retail portfolio
as loans currently held appear to be reasonably strong. Besides, regulations on lending have
been tightened with measures such as caps on LTV in housing. However, we see private banks
as greater beneficiaries due to (1) a change in acquisition strategies due to solid expansion of
the customer base and branches, in recent years, which allow greater cross-sell, (2) credit
information bureaus, which have become stronger and (3) the ability to deploy analytics with a
larger data set, which probably differentiates this cycle from the previous one. On the other
hand, the biggest change for most leading private banks is the strength of the liability franchise
where CASA ratio is currently ~40%.
Profitability is a concern; we expect the mix to change and a higher share of unsecured loans
One of the key concerns about the shift to retail is the underlying profitability. The housing loan
segment is a low-margin business and vehicle loans offer slightly better yields, but after
adjusting the cost of acquisition and duration of loans, it is not as profitable. Hence, we expect
banks to look at new opportunities to improve profitability. A big area of change would be
unsecured, especially credit cards, as the contribution to profitability is far better than retail. We
expect the loan mix to change, especially with a greater share of used-vehicle financing and
loans against property. Also, we expect banks to balance the customer profile to include the
salaried and non-salaried segment.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily08012015ax.pdf
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