avendus report on financial institutions

8/7/2019 avendus report on Financial Institutions

1/13

Private & Confidential

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Avendus Banking & Financial Services Conclave

January 14, 2011


2/13


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Key takeaways from the conference

TheAvendusBankingandFinancialconference washeldonJanuary14,2011.Fivecompaniesfrom the listedspaceand fourfastgrowingcompanies from the

unlistedspaceparticipatedintheconference.

Thekeytakeawaysfromtheconferenceare:

Mostbanksandnonbankingfinancialshaveseenstronggrowthintheirloanbookon thebackofincreasedconsumerdemand.Theyexpectthisgrowthtosustain,

supportedbyastrongmacroenvironment.

Spreadsarelikelytobeunderpressureaswholesaleborrowingcostshaveincreasedsignificantly.

NonbankingfinancialssuchasManappuramGeneralFinanceandShriramCityUnionFinanceare likely toseestronggrowth in AUMs, led bya shift from the

unorganizedgoldlendingmarkettotheorganizedspace.

Assetqualityhasimprovedformostnonbankingfinancials,ledbyrisingruralincome.

StockSummary(asonJanuary19,2011)

12.011.41.410.212.8NANA11,782.9101.5SREIInfrastructureFinance

45.11.22.211.113.92.83.5169,168.2748.0ShriramTransportFinance

20.520.815.58.910.91.82.226,188.9530.0ShriramCityUnionFinance

112.84.86.311.720.62.93.959,593.2143.1ManappuramGeneralFinance

27.745.320.99.021.61.01.18,798.7103.4DhanlaxmiBank

1 year3 month1 monthFY12fFY11fFY12fFY11f(INRmn)(INR)

Stockperformance P/EP/EP/BP/BMCAPCMP

Source: Bloomberg


3/13


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Dhanlaxmi Bank (DHLBK IN, NR)

DHLBK

Businessupdate

Currentnetworkof275branches,covering14states.

PresenceacrossIndiahasimprovedwith124nonKeralabranches.

Totalassetbaseof INR114bnason30Sep10, indicating73%growthyoy.

Thebankexpectsloangrowthof80%90%inFY12and45%50%inFY13.

Capitaladequacyratioat14.6%withTierIratioof11.7%ason30Sep10.

Employeestrengthason30Sep10was4,508.

Currently,corporatesdominate,butthebankplanstoincreaseSMElending.

AimstohaveequitabledistributioninSMEs,corporatesandretailbanking.

Has high operating costs, with cost/income ratio currently at c84%;

cost/incomeratiolikelytoremainatc75%tillFY12.

HasmaintainedCASAat20%22%forthepastsixquarters;likelytomaintain

CASAatc22%forthenextfourquarters.

NetNPAratioason30Sep10was0.71%.

About39%of incremental liabilitiesarefromnewbranches.DHLBKexpects

newbranchestobreakevenbyend2QFY12.

LookingtoraiseINR8bnINR11bnin4QFY11.

DoortodoorservicesunderNRI/NREaccountcategoryisthenewoffering.

Planstoaddlessthan50,000cards/yeartothecreditcardsegment.

Inflectionpoints

Marketupdate

Givenitssmallsizeandregionalprofile,DHLBKis likelytofacecompetition

fromlargerbanksoutsidesouthIndia.

MaintainingNIMswouldbeachallenge,givenahigherinterestratescenario

andlowerCASA.

OnebranchhasbeenaddedinJan11,takingthetallyto275.

Likelytoapplyforlicensesfornewbranchesin2QFY12;mostnewbranches

arelikelytobeoutsidesouthIndia.

HasstartedadoortodoorinitiativeforNRI/NREaccounts.


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Financial Inclusion Network and Operations

FINO

Businessupdate

WasconceptualizedduetotheRBIsinitiativeofprovidingfinancialinclusion

totheloweststrataofsociety.

WassetupinJul06,withICICIBank(ICICIBCIN,Add)asprincipalsponsor.

With 70%80% market share, it is a market leader with c1,500 employees

and12,000BusinessCorrespondents(BCs).

The BCs are responsible for collecting deposits, managing withdrawals and

remittancesadforinsurancepolicies.

Asmartcard(swipecard)actsasavirtualbankaccount forcustomers.

Currently associated with most banks operating in the country (public and

private);alsoundertakesgovernmentdisbursementprojects.

Depositsaretransferredtotherespectivebanks;doesnotcarryliabilitieson

itsbooks.

Receivesaonetimepaymentfrombanksonacquiringnewcustomers,along

withafeeoneverytransaction.

Onaverage,INR30bnishandledpermonth,ledby3mn4mntransactions.

About 65% of FINOs income is earned from signing new customers, while

thebalanceisrecurringincomefromexistingcustomers.

About80%ofnewcustomersarefirsttimeusersofbankaccounts amplyputtingintofocusFINOsaimofexpandingfinancialinclusion.

Currently services c25mn customers across the country; is adding c2mn

customerspermonth.

Hassmallexposuretodirectlending(lessthan1%ofitsincome).

Alsocarriesoutlendingactivityonbehalfofbanks,allowingittoearnagency

commission.

Inflectionpoints

Marketupdate

Thefinancialinclusionmarketisgrowingat200%300%perannum.

Thegovernment islikelytoplayavitalrole ingrowingthemarketasmore

andmoregovernmentrelatedtransactionsmovetotheelectronicspace.

These include the Rashtriya Swasthya Bima Yojana (a cashless health

insurancescheme)andtheNationalRuralEmploymentGuaranteeScheme.

Competitioncouldarisefromtechgiantsvyingtoenterthespace.

However,giventherapidgrowthinthemarket,FINOappearswellplacedto

playouttheopportunity.

Atthecurrentrunrateofclientaddition,FINOexpectstoaddanother25mn

customersoverthenext1820months.

ByMar11,thecompanyexpectstoexpanditsBCnetworkto18,000.

ExpectstoclosethecurrentfinancialyearwithtoplineofINR1.5bn.

TurnedEBITDApositiveinFY10;isaprofitmakingcompanyinFY11.

Plans to raise funds over the medium term. Would require INR2.25bn, of

whichINR1.25bnINR1.35bnwouldbefromfreshequity.


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6/13


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Ratnakar Bank

RATNA

Businessupdate

After induction of the new management team, the focus has been on

upgradingoperationsandtechnology,revampingcreditprocessesandcreating

separatebusinessverticalssuchasSMEandConsumer.

Core business areas are SME, Midmarket, Consumer/Retail and Financial

Inclusion.

HadadepositsandadvancesbaseofINR15.8bnandINR11.8bn,respectively,

atendMar10.InvestmentswereINR5.1bn.

Has 88 branchesspread across Maharashtra, Karnataka and Goa, with a

smallpresenceinGujaratandNCR;15branchesareintheMumbai region.

HasinstalledCBSinmostofitsbranches.

Hasover400,000clients.

Totalnumberofemployeesis750.

AtendMar10,theCASAratioofthebankwas35%,grossNPLratiowasc2%

andCARwasc35%.

Inflectionpoints

Marketupdate

While it has had considerable success in hiring at the senior and middle

managementlevels,employeerecruitmentandretentionwillcontinuetobea

focusareaandachallenge,giventhebanksambitiousgrowthplansandthe

highlycompetitivelabourmarketinthesector.

Givenitslargesemiurbanandruralfootprint(50%ofthebranchnetwork),

there existsasignificant opportunity to leverage this presence, especially as

theseregionsarehighergrowthmarketsintermsofconsumptionandwealth

generation.

Inductionofnewmanagementteamsixmonthsago.

Thenewmanagementisfocusedonthetransformationofthebank through

the introduction of new technology and processes, creation of separate

business verticals, addition of new branches and eventually expanding the

footprinttomorestatesinIndia.

Retention

of

existing

clients

and

attracting

newer

clients,

which

will

allow

thebank toachievethedesiredscale,would need significant investments in

branding,distribution,marketingandtechnology.


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Shriram City Union Finance (SCUF IN, NR)

SCUF

Businessupdate

LoanbookforecasttogrowfromINR63bnatendSep10toINR100bnbyend

Mar12.

Operates 650 branches with over 400 branches operational in south India,

includingMaharashtra.

Loandurationdoesnotexceed40months.

Averagecostofborrowingisc10%.

Procures63%ofitsborrowingsfrombanksintermsofcashcredit,termloans

whilethebalanceisfromInstitutionalNCDsandcommercialpapers.

Borrowingsthroughcommercialpapers likelytoincreasewith improvement

inthecreditratingduring3QFY11.

Planstoforayintohousingloansthrougha100%subsidiaryoverthenext18

months.

5%IRRpaidasoperatingcoststoShriramChitsfortheportfoliosoriginating

fromthem expensedupfrontfromtheP&L.

Averagerateofinterestonloansisc20%perannum.

MonthlycollectionsnowstandatINR3,500mn.

MaintainsCARat23%,asagainstminimumrequirementof15%.

LikelytomaintaingrossNPAsatcurrentlevelofc2%andnetNPAsat0.6%.

Inflectionpoints

Marketupdate

Thereislikelytobea50bphikeinthecostofborrowingoverthenextyear

asnewloansareraisedathigherinterestrates.

Smallbusinessloansandgoldloansarelikelytobethedriversforexpansion

oftheloanbook.

Leveraging the 0.1mnstrong customer network associated with the Chit

Fundbusiness.

Improvement in credit rating likely to help reduce the average cost of

borrowinginthenearfuture.

Focusonproductexpansionacrossbranches.

Capitalizingthereachofgroupcompanies,especiallyforgoldloans.


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Shriram Transport Finance (SHTF IN, NR)

SHTF

Businessupdate

ExpectstogrowtheloanbookataCAGRof20%toINR500bnbyFY13.

In the preowned market, SHTF has a share of 20%25% and in new truck

financing,ithasashareofc7%.

Passengercommercialvehiclefinancingandequipmentfinancingarelikelyto

bethenewgrowthareas.

Equipment financing would be undertaken by the whollyowned subsidiary,

ShriramEquipmentFinance,whichstartedoperationson13Oct10.

Current loan book of INR 315bn; expects to increase the loan book to

INR500bnbyFY13.

Generates45%ofitsbusinessfromtheSouth,30%fromtheWest,18%from

theNorthandthebalancefromtheEast.

Netinterestmarginslikelytoremainstableas30%ofassetsandliabilitiesareatafloatingrate.

Assetsandliabilitieshavematurityof39monthsand42months,respectively.

Thus, with a change in interest rates, the rates on incremental assets and

liabilitiesarerepricedtothenewinterestrates,keepingNIMsstable.

Competitionincreasesduringgoodeconomicconditions;however, thereisno

riskofsustainedcompetition.

WithsomeforeignplayersexitingthemarketandsomelargedomesticNBFCs

reducingtheirexposure,theprobabilityofincreasingmarketshareishigher.

Inflectionpoints

Marketupdate

Estimated market size of freight bill discounting is INR60bnINR70bn, for

passengercommercialvehiclefinancingitisINR100bn,fortractorfinancingit

isINR192bnandforconstructionequipmentfinancingitisINR300bn.

Industrygrowth likelytobedrivenbyused commercialvehicles and used

equipmentfinancing.

SHTFplanstoincreasethenumberofbranches.

Eachbranchhandlesc2,500customers. Ifthenumberofcustomerscrosses

2,500atanybranch,anewbranchwouldbeopenedatthesamelocation.

Likelytoaddthreeautomallsandover150kiosksinFY11.

Auto malls are likely to help build a strong entry barrier and enhance the

relationshipswithsellersandbuyersacrossvehicles.

Auto malls are likely to help generate brokerage fees for transactions and

alsofinancethebuyingofusedvehicles.


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SREI Infrastructure Finance (SREI IN, NR)

SREI

Businessupdate

Enjoys 33% market share in the equipment finance business; looking to

maintainmarketshareatcurrentlevels.

Theequipmentfinancebusinessisexpectedtogrowatasteadypace,while

theprojectfinancebusinessisexpectedtogrowfaster,givenitslowbaseand

smallermarketshare.

Projectfinanceloanbookhasthepotentialtogrowfrom INR50bncurrently

toINR200bnINR220bnin23years.

Investment portfolio of INR6.6bn; has pending equity commitment of

INR1.5bnINR2bnoverthenexttwoyears.

Managementnot lookingtoextend its investmentportfoliobeyond INR8bn

tillendMar12 incremental commitment may be met out of rechurning of

portfolio.

NIMintheprojectfinancebusinesslikelytodeclinefrom7.93% in2QFY11to

4.25%,understeadystate,onrepaymentofonetimeloanstoQuippo.

Management expects larger feebased revenue; is targetingcontribution of

20%25%tothebottomline.

Management has guided to standalone PAT of INR2.0bnINR2.1bn and

25%30%growthinFY12.

Inflectionpoints

Marketupdate

SizeoftheequipmentfinanceindustryestimatedatcINR300bn.

Equipmentsaleshavegrownat20% inthepastsixmonths;theequipment

financeindustryisgrowingat20%25%perannum.

In equipment financing,SREIhasextended its portfolio to IT infrastructure

andmedicalequipment,whicharelikelytodrivegrowth.

Likely toget the statusofan Infrastructure NBFC from the RBI in the next

fewmonths.

TargetinganequipmentfinancingportfolioofINR150bnbyMar12,forwhich

it

may

look

at

further

equity

infusion

into

its

JV

with

BNP

Paribas.


10/13


- 10 -

Tata Capital

TATACAP

Businessupdate

Product offerings include commercial finance, investment banking, private

equity,infrastructurefinance,wealthmanagement,consumerloans,securities,

andtravelrelatedservices.

Vehicle financingdoes not include financingof Tata Motors (TTMT IN, NR)

vehiclesasitisundertakenbyTataMotorFinance.

About18%oftheretailfinancingbookisforchannelfinancing towardsTatadealers.

Has106branches,spreadover40cities.

Total AUMs amount to INR140bn, with a target to scale up to INR400bn

INR500bnoverthenext23years.

Liability mix equally spread among bank funding, commercial papers and

Nonconvertibledebentures.

Netinterestmarginsareabove3%.

CARcurrentlyat18%.

Owns4%oftheequitycapitalofDevelopmentCreditBank(DCBIN,NR).

AlsosettingfootinoverseasmarketswithregisteredofficesinSingaporeand

London.

Inflectionpoints

Marketupdate

Homeloanslikelytooccupyalargerportionofthebookwithin retailloans.

StrongcompetitionfromIDFC(IDFCIN,NR)andbanks intheinfrastructure

financingspace.

Tofocusonhomeloans,infrastructurelendingandcorporatelending.

Intendstoconverttoabank,iftheregulationspermit.


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Disclaimer and Disclosure

Disclosureofintereststatement(asofJanuary20,2011)

NoNoNoDevelopmentCreditBank

NoNoNoTataMotors

NoNoNoICICIBank

NoNoNoStateBankofIndia

NoNoNoIDFC

NoNoNoSREIInfrastructureFinance

NoNoNoSundaramFinance

NoNoNoMahindra&MahindraFinance

NoNoNoShriramTransportFinance

NoNoNoKarnatakaBank

NoNoNoKarurVysyaBank

NoNoNoManappuramGeneralFinance

NoNoNoShriramCityUnionFinance

No

No

No

No

Avendusoritsassociatecompanys

ownershipofthestock

NoNoLakshmiVilasBank

NoNoDhanlaxmiBank

NoNoCityUnionBank

NoNoFederalBank

Analystownership

ofthestock

InvestmentBankingmandatewith

associatecompaniesofAvendus


13/13


- 13 -

BSECM INB011292639|NSECM INB231294639|NSEF&O INF231294639SEBIRegistrationNo:AvendusSecuritiesPrivateLimited

F:+912266480040

F:+14842312343F:+918066483636T:+912266480950T:+912266480050

T:+12123515066T:+918066483600Bandra(E),Mumbai400051Bandra(E),Mumbai400051

NewYork,NY10017Ulsoor,Bangalore8.India.BandraKurlaComplexBandraKurlaComplex

16thFloor,#1&2,10thFloor,MurphyRoad,BQuadrant,6thFloor,BQuadrant,5thFloor,

100ParkAvenueTheMillenia,TowerA,IL&FSFinancialCentre,IL&FSFinancialCentre,

NorthAmericaBangaloreInstitutionalBrokingCorporateoffice

OUROFFICES

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