Banking Sector & Capex Cycle · 2018-10-30 · Alpha Invesco Research – September 2018 6 • Over the past decade, private bank branches have increased their share from being 1

Banking Sector & Capex Cycle

September 2018

Alpha Invesco Research – September 2018 2

Private Banks – Gaining Market Share

• Incremental credit requirement of ~150 lac cr over next 7-8 years.

• Indian banks likely to lend in next 7-8 years almost twice of what they have lent in last 25 years combined!


Indian Banking Credit – Industry Size

1,66,844 3,68,837 8,65,594 27,75,549

61,39,045

86,00,000

2,25,00,000

1994 1999 2004 2009 2014 2018 2025E

Banking Industry Credit (Cr)


• Over last 25 years, private banks have increased their share from mere 1% to now being 1/3rd of total banking

credit.

Credit Breakup – Market Share

99% 91% 82% 78% 78%

67%

1% 9% 18% 22% 22%

33%

0%

20%

40%

60%

80%

100%

120%

FY1994 FY1999 FY2004 FY2009 FY2014 FY2018

PSU Banks Private Banks

2009 – 2014 was the only 5

year period when PSU

banks didn’t lose market

share. On the back of

above average lending.

Which led to

overcapacities across

heavy industries.


• Private banks have maintained their credit growth evenly throughout the decade.

• Whereas PSU Banks witnessed credit stagnation post FY2014, which lead to Private banks’ share increasing

their market share from ~22% to ~33% in just 4 years!

Credit Growth – Private Banks

25%

18%

9%

25%

20% 18% 18% 17%

24%

14%

19%

0%

10%

20%

30%

40%

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Private Banks Credit Growth

CAGR: 18% CAGR: 19%


• Over the past decade, private bank branches have increased their share from being 1 in every 10 bank

branches to around 1 in every 4 bank branches.

• However, due to digitization, the rate of adding branches has decreased for the banking industry as a whole.

Branch Network

89% 87% 86% 85% 84% 82% 82% 81% 78% 76% 77%

11% 13% 14% 15% 16% 18% 18% 19% 22% 24% 23%

0%

20%

40%

60%

80%

100%



2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Total Bank Branches 54,168 58,329 63,004 68,754 75,105 81,604 91,147 98,143 106,457 110,595 118,572

PSU Bank Branches 47,959 50,896 54,400 58,191 62,750 67,257 74,448 79,612 82,580 84,473 90,827

Pvt. Bank Branches 6,209 7,433 8,604 10,563 12,355 14,347 16,699 18,531 23,877 26,122 27,745


• Banking is one of the rare industry where private sector has higher per unit employees than PSU companies.

Predominantly due to significant branch network in rural India where branches are small & need less

employees. Also business per employee is higher for private banks. They are far more productive compared to

PSU’s.

Employee Strength

6,00,000

7,38,000

8,54,000

1,20,000

2,46,000

4,11,000

-

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

6,00,000

7,00,000

8,00,000

9,00,000

FY08 FY13 FY18

No. Of Employees


(~5x Pvt. Bank Employees)

(~2x Pvt. Bank Employees)

Employees per Branch FY 2008 FY 2013 FY 2018

PSU Banks 12.57 10.98 9.40

Private Banks 19.26 17.15 14.81


• Owing to aggressively increasing branch network and employee strength / sales force, private banks have

improved their share in deposits in Indian banking sector.

• Better technology and convenience banking also plays a bigger role in attracting deposits.

Deposit Growth – Outcome Of Branches And Employee Growth

0

20,00,000

40,00,000

60,00,000

80,00,000

1,00,00,000

1,20,00,000

Deposits (Cr)

Pvt Banks PSU Banks


• Improving deposits helps in improving CASA and hence lowering the Cost of Funds.

• Legacy PSU banks have their CASA in the same ranges over last 2 decades, whereas private banks have seen

significant improvements.

CASA Trajectory

FY 1998 FY 2008 FY 2018

SBI 43.5% 41.9% 44.5%

Bank of Baroda 32.0% 31.6% 35.6%

PNB 43.6% 42.9% 41.0%

Canara Bank 37.8% 31.6% 31.8%

HDFC Bank 38.8% 54.5% 43.5%

ICICI Bank 17.8% 28.4% 49.9%

Axis Bank 10.9% 45.7% 53.5%

IndusInd Bank 9.0% 15.7% 44.0%

Federal Bank 15.4% 25.1% 33.6%


• Better Cost of Liabilities and improved Yield on Advances due to higher retail share of advances has helped

private banks to improve their NIMs and maintain them.

NIM Trajectory

FY 2008 FY 2013 FY 2018

SBI 3.07% 3.34% 2.50%

Bank of Baroda 2.90% 2.66% 2.43%

PNB 3.58% 3.52% 2.16%

Canara Bank 2.42% 2.40% 2.42%

HDFC Bank 4.40% 4.50% 4.30%

ICICI Bank 2.22% 3.11% 3.23%

Axis Bank 3.47% 3.53% 3.44%

IndusInd Bank 1.53% 3.43% 3.99%

Federal Bank 3.49% 3.37% 3.21%


• The NPA Problem Is Peaking Out

• Credit Growth Coming Back

• Fresh Capex Cycle On Cards


• FY 2008 – 2014 was the period when excessive capacities were built by companies, loans were easily available,

crony capitalism / banker-politician-promoter nexus was thriving. Eventually we ended up in having very high

capacities that were far ahead of the local demand. On top of it, global export markets slowed down in the

after math of financial crisis.

• Post FY 2014, over capacities have lead to lower utilisation levels in the manufacturing sector. Most of this capex

was across heavy industries like power-steel-infra was funded via debt, leading to massive losses & NPA’s.

Manufacturing Sector – Low Capacity Utilisation


Provisioning Cycle Peaking Out

~8,00,000 ~8,50,000

0

2,00,000

4,00,000

6,00,000

8,00,000

10,00,000

Cumulative Provisioning 2014-2018 (Cr) Gross NPA Addition 2014-2018 (Cr)

# Cumilative provisioning of listed private + PSU banks


• Till date, PSU banks had their ~37% credit exposure towards corporate sector v/s. ~23% exposure towards

retail, causing them to suffer during times of low manufacturing capex.

• Credit demand slowed down significantly as industry was already sitting on overcapacity. RBI’s asset quality

review in 2015 forced PSU banks to provide more. Their loan sanctions slowed down as a result.

• PSU Banks lending growth reduced drastically post 11 of 21 banks were added to PCA list ( Prompt corrective

action ). Another 6 banks are under watchlist which might be added to the PCA list.

Credit Growth – PSU Banks

26% 26%

20% 22%

17% 15% 14%

8%

2% -1%

2%

-10%

0%

10%

20%

30%

40%


PSU Banks Credit Growth

PSU banks’ credit de-

grew for 1st time in last

2 decades

CAGR: 19% CAGR: 3%


• Gross NPA in PSU Bank shoot up dramatically in last 3-4 years. This is the outcome of unchecked lending to

weaker assets by PSU banks during 2008 - 2014 period.

• Over last 3 years, PSU banks have provisioned ~5.5 lac cr, which is 10% of their total advances!

• If we look at cumulative provisioning as a percentage of corporate book, one gets a sense that the NPA &

provisioning cycle is peaking out. Major stress sectors like road & steel are back on track. Power is being fixed.

Telecom & real estate especially developer loans could be next.

NPA Trajectory – PSU Banks

2% 2% 2% 2% 3% 3% 4% 5%

9%

11%

16%

1% 1% 1% 1% 1% 2% 2% 3%

5% 6% 8%

0%

4%

8%

12%

16%

20%


Gross NPA as % of Advances Net NPA as % of Advances


• The strict regulations by RBI and government led to sudden jump in the Gross NPAs for the banks, leading to a

dip in their PCR during FY 2016.

• However, over last 2 years, the provisions have increased proportionately and the banks have now provided

for 65 – 70 % of their Gross NPAs, signaling toping out of aggressive provisions in few quarters.

Provision Coverage Ratio – PSU Banks

50%

55%

60%

65%

70%

75%

FY14 FY15 FY16 FY17 FY18 Q1FY19

SBI Bank of Baroda IDBI Bank PNB


• Aggressive provisioning norms of RBI had very minor effect on the NPA structure of most of the private banks,

apart from few banks. Barring ICICI & Axis bank, almost all large private banks have a book that is tilted

towards retail assets. Not lending to corporates during 2008-2014 has helped private banks to be in relatively

good shape.

• Currently, ICICI bank and Axis bank together account for ~65% of total gross NPA of the private banks. Out of

the additional ~1 lac cr Gross NPA since 2014, ~75,000 cr have come from these 2 banks.

NPA Trajectory – Private Banks

2% 3% 3%

2% 2% 2% 2% 2%

3%

4% 5%

1% 1% 1% 1%

0% 1% 1% 1% 1%

2% 2%

0%

4%

8%


Gross NPA as % of Advances Net NPA as % of Advances


Industry Wise Credit Funded By Banks/FIs

Rs Cr 2017 Max Max Capex Year

Infrastructure 1,13,200 2,01,500 2011 i) Power 82,400 1,73,300 2011

ii) Telecom - 67,200 2010

iii) Ports & Airports 10,200 10,200 2017 iv) Storage & Water Management 6,600 6,600 2017 v) SEZ, Industrial, Biotech and IT Park 700 12,400 2008

vi) Roads & Bridges Construction 13,200 13,200 2017 Construction 21,600 47,100 2010

Metal & Metal Products 8,800 79,200 2011 Transport Equipment & Parts 7,900 9,300 2009

Textiles 7,300 13,400 2012 Cement 4,000 18,700 2009

Chemicals & Pesticides 3,800 6,700 2012

Hospitals & Health services 2,000 3,700 2010

Food Products 1,600 3,100 2009

Hotel & Restaurants 1,500 13,100 2011

Glass & Pottery 1,100 2,500 2012

Petroleum Products 900 17,200 2008 Transport Services 700 5,700 2010

Mining & Quarrying 700 10,200 2010

Sugar 200 3,700 2009

Electrical Equipment 400 7,500 2011

Others* 7,100 19,100 2008

Total Cost of Projects 1,82,800

• We can see that the most of

the industries saw maximum

capex during the 2009 – 2014

phase.

• Also, 2017 capex by most of

the industries was way smaller

in magnitude compared to

their historic high.

• Additionally, historic maximum

capex was on a much smaller

economy size of ~$1.2-1.5

trillion.

25.0 25.6

31.0

33.8 34.9

33.4 33.4

30.1

28.5

30.8

24

45

17

35

26

17 18 15

3 8

0

5

10

15

20

25

30

35

40

45

50

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

36.0

FY2000 FY2002 FY2004 FY2006 FY2008 FY2010 FY2012 FY2014 FY2016 FY2018

Investment as a Percentage of GDP, LHS Credit Growth %, RHS


Investment – Driver Of Credit Growth

• For a growing economy like India, the investment as a % of GDP should be high. We saw investment drop to 28.5%

in 2016 which mirrored with the lowest credit growth of 3%.

• Now green shoots are appearing in the economy as in FY2018, Investments have risen to 31% in FY18 and

subsequently capacity utilization as a whole has bounced back to 75%. As utilizations move beyond 85-90%, a new

capex cycle in industrials-heavy industries is expected to pick up.

74.6

71.2

71.8

74.1

75.2

68.0

69.0

70.0

71.0

72.0

73.0

74.0

75.0

76.0

Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18

Capacity Utilisation %


Insolvency & Bankruptcy Code Changes Everything For Bankers.

Promoters Can No More Behave In The Same Way.


Insolvency Ranking – Prior To The IBC

• As per the Doing Business index 2016 released by the World Bank, India fared the worst in insolvency ranking

among the BRICS nation and with 136th rank, India was far behind the developed economies such as the UK,

US, and others.


Recovery Rate & Time Taken For Recovery – Prior To IBC

• Among several requisites of a effective insolvency regime, recovery & time taken to recovery is one of the

most important parameters. At 25.7 cents per dollar and 4.3 years, India is ahead only of Brazil amongst BRICS.


Insolvency Resolution Gaining Momentum

36

156

361

437

525

-

100

200

300

400

500

600

Jan- Mar 2017 Apr- Jun 2017 July-Sept 2017 Oct-Dec 2017 Jan-Mar 2018

Corporates Undergoing Resolution

• At the end of March 2018, 525 corporates were undergoing insolvency resolution pro


Resolving Top 50 Cases Solves 40% of NPA Mess

• A huge part of the total 10 lac cr NPAs is concentrated amongst top 50 cases. Resolving these 50 cases would

solve ~40 % of the problem. Most of the NPA’s have been provisioned for. And there could be potential

writebacks in to the banking system once NCLT resolutions accelerate.

Top 12

Next 38

Remaining

25 %

15 %

60 %

# of Cases Total NPA

49,018

57,585

81,683 84,272

5,461 8,096 8,680 7,106

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

FY15 FY16 FY17 FY18 (Upto Dec)

Loans Written Off Recoveries From Written off Loans


IBC Wave – Recoveries Touch 11%

• Banks have been able to recover merely 11% of the bad loans they had to write off their balance sheets over

the last 4 years. As the IBC/NCLT process matures, we can expect more recoveries & perhaps writebacks on

bank balance sheets.

Cumulative Loans Written Off, cr Cumulative Recoveries, cr

2,72,558 29,343

# FY18 recovery numbers do not

include Bhushan steel ( 35000 cr )

recovery since financial closure

happened in FY19. The recovery

numbers will jump substantially from

FY19 onwards.


Insolvency & Bankruptcy Code – The Most Impactful Reform

• A certain path was taken - Original idea was to create a bad bank, where all bad loans will be transferred.

However PSU banks would not have learnt any lesson & they would have continued with old practices. IBC

was important to force a cultural change in how PSU banks operate.

• Under IBC regime banks will be forced to write the assets down, industry wont get capital as PSU banks are

under pressure. Banks are quickly referring cases to NCLT & trying to recover the money.

• IBC enforces the principle of creative destruction. If companies fail, there will be no more ever greening of

loans. Companies will be auctioned / sold off & old entrepreneurs will lose control.

• This creates a rule based economy & which is a sign of a living and thriving business culture. The old context of

“nothing will happen even if we default” needed to be changed. And that’s what IBC has achieved.

• Promoters will now have the fear of losing their company if they do anything wrong or cheat banks.

• Banks are in a much better position to recover their money in case of default.

Thank You.

27 Alpha Invesco Research – September 2018

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28 Alpha Invesco Research – September 2018

Documents

Banking Sector & Capex Cycle · 2018-10-30 · Alpha Invesco Research – September 2018 6 • Over the past decade, private bank branches have increased their share from being 1