banking sector and opportunities in india march 2004
TRANSCRIPT
Banking Sector and Opportunities in India
March 2004
2
Agenda
Economic backdrop
Banking sector - overview & opportunities
In summary
3
Indian economy - Strong fundamentals
GDP growth
Forex reserves
Exports
Ten year average of 6.0%
US$ 90 billion
US$ 50 billion in FY2003
4
Indian economy - Strong fundamentals
Interest rates
Short term debt
External debt
6.5% decline in last five years
0.8% of GDP
20% of GDP
5
Diversified composition, robust growth
Sectoral share of GDPSector
22.1Agriculture
21.8Industry
56.1Services
Projected growth FY2004
(%)
10.7
5.0
7.3
GDP 7.4
6
Strong growth drivers…
Services Information technology Business process outsourcing Financial services Entertainment, media, travel & tourism
Information technology Business process outsourcing Financial services Entertainment, media, travel & tourism
Industry
Strong domestic demand Improving competitiveness – lower
interest rates, increased productivity, better working capital management, deleveraging
Export thrust
Strong domestic demand Improving competitiveness – lower
interest rates, increased productivity, better working capital management, deleveraging
Export thrust
Agriculture Favourable climatic conditions with
good monsoon Modernisation of agriculture – scale
and farming methods
Favourable climatic conditions with good monsoon
Modernisation of agriculture – scale and farming methods
7
…underpinned by strong infrastructure growth…
Roads
Construction of Golden Quadrilateral and North-South, East-West corridors
13,000 km long - world’s largest single highway project
Boosting demand for steel, cement, commercial vehicles
Construction of Golden Quadrilateral and North-South, East-West corridors
13,000 km long - world’s largest single highway project
Boosting demand for steel, cement, commercial vehicles
Industry
Basic telephone subscriber base of 39.9 million, growing at an average rate of 23% over last 7 years
Cellular subscriber base of 11.7 million, growing at an average rate of 88% over last 6 years
Positive impact on efficiency of firms and services exports
Basic telephone subscriber base of 39.9 million, growing at an average rate of 23% over last 7 years
Cellular subscriber base of 11.7 million, growing at an average rate of 88% over last 6 years
Positive impact on efficiency of firms and services exports
8
…though certain areas require close attention
Certain mis-steps have constrained development in this sector
Now being corrected through policy initiatives
Electricity Act passed by Parliament New focus on creating capacities as
well as enhancing transmission and distribution efficiency
Certain mis-steps have constrained development in this sector
Now being corrected through policy initiatives
Electricity Act passed by Parliament New focus on creating capacities as
well as enhancing transmission and distribution efficiency
Need for urban rejuvenation – housing, roads, utilities
Local bodies in several cities taking initiatives in this area
Need for urban rejuvenation – housing, roads, utilities
Local bodies in several cities taking initiatives in this area
Power
Urban infrastructure
9
Changing demographic profile
…high proportion of younger, working population driving growth
15 - 35 years35%
< 14 years34%
> 50 years14%
35 - 49 years17%
Source: Ministry of Home Affairs, Government of India
10
Robust household savings pattern
Source: Economic Survey 2002-2003, Ministry of Finance
5%
11%
17%
23%
1970-71 1985-86 2000-01
10.1%
22.5%Household savings as a % of GDP
2001-02
11
-
25
50
75
100
1990-91 1997-98 1999-00 2001-02 2002-03
Merchandize exports Services exports NRI remittances etc
Large inflows of foreign currency
Gross forex inflows (US$ billion)
58.25
67.13
79.44
25.60
~~
Source: Economic Survey 2002-2003, Ministry of Finance; RBI
95.23
12
83.80104.23
5.80
74.81
29.42
78.00
0
25
50
75
100
1990-91 1999-00 2002-03
External debt
Forex reserves
Gap
Strong external position
Forex reserves & external debt (US$ billion)
~~
Source: RBI
13
0.2
0.6
0.9
1.3
1.6
1997-98 1998-99 1999-00 2000-01
Enhanced corporate competitiveness
Return on Equity (PAT / Equity)
Asset turnover (Revenue / Assets)
Source: Deutsche Bank
India
0%
7%
14%
21%
1997-98 1998-99 1999-00 2000-01
Shanghai A (Chinese cos. listed in Shanghai SE)H-shares (Chinese cos. listed in HK SE)Red chips (Chinese Govt. controlled cos. listed in HK SE)
14
The above developments are the result of a decade of reform… Focus on globalisation
Opening up of the economy Thrust on export led growth Deregulation to encourage technology & capital
flows Integration with international financial markets
Key reform measures Lowering of tariff barriers and liberalised imports
Average tariff reduced from 53% to 18% in last 5 years Full convertibility of the rupee on current account Permitting domestic companies to access foreign
capital markets Substantial liberalisation of restrictions on foreign
investment
15
..driving transformational change Dramatic growth of services sector
Over 50% of GDP Significant contributor to exports
Restructuring of manufacturing sector over the past decade Early 1990s: capitalising on domestic demand Mid- to late 1990s: restructuring to achieve
world-class efficiency 2000: Articulation of international
competitiveness
16
The underlying fundamentals are based on a deep structural change in the economy and provide a sustainable platform for continued growth. The opportunities in the banking sector have to be viewed in this context.
17
Agenda
Economic backdrop
Banking sector - overview & opportunities
In summary
18
A decade of change and evolution…
Pre-reform
Extensive regulation
Focus on industrial sector
The 1990s Today
Indian economy
Financial sector
..financial sector mirroring macro-economic change
Liberalisation
Globalisation
Structural change – services
Resilient industry
Buoyant services sector
Highly segmented
Public sector dominance
Opening up of various sub-sectors
Private sector participation
Diversified financial groups
Globally benchmarked
19
The banking sector today
Depth Countrywide coverage
Large number of players
Increasingly sophisticated financial markets
Technology Increasing use of
technology in operations
Poised to expand and deepen technology usage
Diversification
Emergence of integrated players
Diversifying capital deployment
Leveraging synergies
Regulation Robust regulatory
system aligned to international standards
Efficient monetary management
20
Sector snapshot
Size Total assets of US$ 335 billion Total deposits of US$ 279 billion
Total assets of US$ 335 billion Total deposits of US$ 279 billion
Number of banks
Over 290 scheduled banks Public sector: 27 Private sector: new – 9; old – 24 Foreign: 37 Over 190 regional rural banks
Over 290 scheduled banks Public sector: 27 Private sector: new – 9; old – 24 Foreign: 37 Over 190 regional rural banks
Branch network
Over 66,000 branches Public sector: 46,000 Private sector: 5,500 Foreign: 190 Regional rural: 14,400
Over 66,000 branches Public sector: 46,000 Private sector: 5,500 Foreign: 190 Regional rural: 14,400
21
Structural issues Non-performing assets
Legacy systems Low levels of technology
Seller’s market mindset Low level of innovation in products and
services Limited responsiveness to customers’ needs
The Indian banking sector has responded to these structural issues by adopting certain strategic imperatives
22
Legacy issues addressed… Challenges of a changing competitive
environment Small and unviable pre-liberalisation units Large investments post-liberalisation impacted by
global commodity cycles and high interest rates Supportive legal and regulatory changes
Setting up of Debt Recovery Tribunals and enactment of SARFAESI Act, reducing delays in enforcement of security and creating effective legal deterrent
Corporate Debt Restructuring Forum for restructuring viable companies
Enabling framework for asset reconstruction companies
Proactive approach to resolution and increase in provisioning levels in the system
23
…with significant success in resolution
0.02.04.06.08.0
10.012.0
1997 1998 1999 2000 2001 2002
4%
15%
43% 43%40%
30%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Chin
a
Thai
land
Mal
aysi
a
Japa
n
S. K
orea
Indi
a
(%)
Position much stronger than other Asian economies
Net NPL accretion tapering off with progress in asset resolution and increase in provisioning levels Source: E&Y, RBI
US$ bn Net NPAs of banks & FIs
Gross NPAs as % of GDP
24
A new orientation among banks…
Sell products Product research:
what will sell? Product sales and
profitability targets Product specialist
groups Introduce new
offerings every few years/months
“Branch banking” Focus - customer
acquisition
Meet customers’ needs
Customer research: what does the customer want?
Customer segment sales and profitability targets
Customer owners Customer specific
new offerings every week/day
Customer convenience
Deepen relationships
Traditional/ public sector New/ private sector
25
Technology- the ICICI Bank experience
Share of transactions
in March 2000
Channel
2%Internet
3%ATMs
94%Branches
Share of transactions in July 2003
10%
51%
28%
Call centre 11%1%
26
Retail credit opportunity…
18
33
52
4
55
0
10
20
30
40
50
60
70
Korea Taiwan Malaysia Thailand India
Consumer loans / GDP (%) Consumer loans / Total loans (%)
%
Source: SSKI, CLSA
..penetration currently low, with growth driven by strong fundamentals…
60
36
27
14
27
Retail credit drivers
Declining retail loan
interest rates
Interest rates on residential mortgages have reduced by 7% over last 4 years
Interest rates on residential mortgages have reduced by 7% over last 4 years
Increasing
availability
Entry of banks has led to increased competition and coverage
Increasing use of technology further enhancing reach and accessibility
Entry of banks has led to increased competition and coverage
Increasing use of technology further enhancing reach and accessibility
Changing demographic
profile
Middle & high income households increased from 11.6 million in fiscal 1995 to 25.7 million in fiscal 2002
Middle & high income households increased from 11.6 million in fiscal 1995 to 25.7 million in fiscal 2002
28
Retail market size
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
1999-00 2000-01 2001-02 2002-03
Housing finance Car finance Credit card spendCommercial vehicle finance 2-wheeler finance Personal loansConsumer durable finance
7.3
9.4
12.9
16.5CAGR of
31%
Annual disbursement (US$ billion)
29
Changing profile of corporate banking… Change in corporate focus - improving
efficiency Better asset utilisation and financial
management Limited new capacity creation
Increasing disintermediation in top tier segment
However, several opportunities for banks Technology-driven fee-based services Treasury and risk management products Facilitating resource raising by corporates
through syndication, securitisation and market-making
New approach to SME lendingSophisticated banking servicesScientific portfolio construction and management
30
Financial services potential: insurance
Source: Swiss Re, Economic Research & Consulting (June 2002)
14.2%
12.1%
9.0%
5.2%
2.9% 2.7% 2.2%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
UnitedKingdom
SouthKorea
UnitedStates
Malaysia Thailand India China
Life insurance General insurance
Premium as a % of GDP
…the opening up of the sector provides a major opportunity for financial services players
31
The “international Indian” opportunity
Canada(0.42 mn)
US(1.2 mn)
West Indies
UK(0.72 mn)
GCC
(4.1 mn)
Nepal
Singapore/ Malaysia(0.14 mn NRIs)
Fiji Zimbabwe/ Uganda
South Africa
Area of large NRI population
Areas of large PIO population
Number of NRIs
()
Australia and New Zealand
(< 0.1 mn)
…the Indian diaspora, the emergence of Indian multinationals and resultant economic flows have created a new opportunity
32
Agenda
Economic backdrop
Banking sector - overview & opportunities
In summary
33
In summary The reform and liberalisation process has
transformed the Indian economy Structural shift with service sector growth
Immense potential to leverage technology and knowledge capital
Improved competitiveness in manufacturing after intermediate period of restructuring & rationalisation
Growing international linkagesExports, manufacturing and distribution overseasIndia as a manufacturing base
Globally benchmarked businesses, capable of competing internationally
34
In summary (contd). The banking sector has achieved significant
success in addressing legacy concerns Resolution of asset quality concerns through
recovery, restructuring and provisioning Focus on technology and customer orientation
The economic transformation provides major opportunities for the banking sector Retail finance – credit and banking services Corporate finance - banking services and
structured finance The sector is poised to capitalise on these
opportunities
35
Thank you