fitch+outlook ndian_ banking

8/2/2019 Fitch+Outlook Ndian_ Banking

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Banks

www.fitchratings.com

India

Outlook Report

2011 Outlook: Indian Banks Riding the India Growth Story

Rating Outlook Strong Growth Outlook for the Economy: Indian banks will continue to benefitfrom investment growth trends in the domestic economy. Real GDP growth isexpected at 8.5% in 2011, driving strong credit demand. Commercial banks remainthe dominant intermediary (estimated 60% share of Indian financial system assets)and are best placed to cater to this demand. Loan growth is estimated between 20%and 22%, slightly lower than in 2010, led by the infrastructure sector.

Improved Outlook on Asset Quality: The credit outlook on most industrial sectors

has improved, reducing asset quality concerns. The lagged effect of restructuredloans turning into non‐performing loans (NPLs) is also likely to start getting muted,with companies benefiting from healthy domestic revenue growth. The systemicgross NPL ratio is expected to start reducing after peaking at 3% in March 2011.

Concerns on Bubbles in Commercial Real Estate and Equity Expected to beManageable: Challenges could revive for players in the commercial real estatesector; however, the banking sector’s direct exposure is only 3% of total loans. Acorrection in property prices would affect NPL recoveries from chronic cases;historical evidence suggests that the residential mortgage portfolio should notsuffer much as loans are mostly to borrowers who live in the purchased property.

Neutral to Negative on Profitability: The impact of lower net interest margins

(NIMs) in a rising interest rate scenario will be partly balanced by subdued creditcosts as NPL accretion from restructured loans subsides. Additional provisions forthe new pension schemes in government banks may be routed directly throughequity or amortised; early estimates suggest that the impact on the Tier 1 ratiocould be up to 50bp.

Capital Planning Foremost for Banks: With the benefits of the standardised creditapproach wearing off, loan growth will more directly affect capital ratios. This,together with the impact of pension provisions and the still relatively low NPLreserves, means that government banks would need to plan equity infusions. Bankswill rely on the government’s plans to maintain Tier 1 ratios of government banksat over 8% and owning a minimum 58% of the banks’ share capital by infusing equity.

Non‐Retail Funding to Increase: While the focus on accruing low‐cost customerdeposits will remain, strong loan growth may result in a rising proportion ofwholesale funding, partly from refinancing institutions. While some of these arelong‐term in nature, the overall funding profile could deteriorate if short‐term non‐repo borrowings are used to boost balance sheet size.

Ratings Outlook Stable: With performance remaining stable, rating considerationswill be driven by structural changes, including improved quality of capital balancedby any shift in banks’ loan portfolios towards lower‐rated corporate in search ofyields. Banks with improved competitiveness and tested risk management systemsmay see upgrades in Individual Ratings and, in some cases, in National Long‐TermRatings. The foreign‐currency ratings of the major banks are mostly in line with thesovereign rating.

What Could Change the Outlook Though unlikely, reckless loan growth and sharp rises in system interest ratestogether with any macroeconomic shock could result in the outlook turning negative.

Analysts

Ananda Bhoumik+91 22 4000 [email protected]

Prakash Agarwal+91 22 4000 [email protected]

Saswata Guha+91 22 4000 1701

[email protected]

Tarun Kumar+91 22 4000 [email protected]

Ambreesh Srivastava+65 6796 [email protected]

Related Research

Applicable Criteria

· Global Financial Institutions Rating Criteria

(August 2010)

· Short‐Term Ratings Criteria for CorporateFinance (November 2010)

Other Outlooks

· www.fitchratings.com/outlooks

11

89

0

25

50

75

100

Positive Stable

Indian Banks Rating Outlook

(%)

Source: Fitch

http://www.fitchratings.com/outlooks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685



Banks

2011 Outlook: Indian BanksJanuary 2011 2

Key IssuesLoan Growth to Remain Strong: Concerns have been expressed at the slowingtrend in industrial growth since August 2010, which could be compounded by rising

interest rates. However, the easy liquidity in developed markets could helpmaintain foreign equity inflows to keep the investment cycle going, therebycreating a good appetite for domestic credit from banks.

‐5

0

5

10

15

20

Jun 06 Dec 06 Jul 07 Feb 08 Sep 08 Mar 09 Oct 09 May 10 Dec 10

0

7

14

21

28

35

IIP change (LHS) Loan growth (RHS)(yoy %)

Monthly Index for Industrial Production (I.I.P) in India, Bank Loan Growth

Source: RBI

(% change yoy)

Strong Economic and Loan Growth Eases Cost Pressures, Asset Quality Concerns: The growth in net interest income is expected to ease the pressure on cost/incomeratios from rising employee and operating costs. The improved outlook on mostmanufacturing sectors should keep NPL ratios under control, which may start easingoff from mid‐2011 by when most of the restructured loans — some of which couldturn into NPLs — are due for redemption (please see special report “ImprovedOutlook for Restructured Loans of Indian Banks in 2010” dated 19 January 2010).

Loans to the infrastructure sector have grown rapidly, and there are concernsstemming from rising construction and interest costs due to project delays, or anyinability of promoters to meet funding gaps if the equity markets were to crash. Itis therefore not unreasonable to expect occasional restructuring of infrastructureloans in 2011 for some of these reasons. The fundamental premise, however, is thatcredit losses on viable projects are expected to be manageable given the acutedemand for infrastructure in India.

Diversified Loan Portfolio Provides Resilience: The loan portfolio remains welldiversified amongst sectors, and barring a concerted shock that could destabilisedomestic economic growth, NPLs are not expected to affect the stable ratingoutlook on the system. However, some of the small regional banks plan to diversifyinto new markets within the country with above‐average loan growth targets, which

could challenge their risk management systems.

0

25

50

75

100

Jun 2006 Aug 2008 Sep 2010

Industry ex infra Infrastructure Consumer ex hsg Housing Agri. Trade, services, others

Sectoral Distribution

(%)

Source: RBI



Banks


NIMs Likely to Contract, Pressures Likely on Funding Profile: NIMs are expectedto narrow in 2011 as interest rates rise and banks are forced to raise deposit ratesto manage liquidity. While banks have the contractual ability to pass such hikes on

to borrowers, they may prefer to absorb some of this increase at the cost of NIMs inthe face of competition. Furthermore, strong loan growth, together with tight INRliquidity, is likely to increase the proportion of higher‐cost wholesale funding,putting further pressure on margins.

Retail deposits and customer current accounts will, however, remain the dominantfunding sources, together accounting for about 65% of total deposits. Some comfort onshort‐term liquidity stems from banks’ holdings in government securities (about 24% ofassets) and cash (6% of assets) that Indian banks are statutorily required to maintain.

2.50

2.75

3.00

3.25

3.50

FY06 FY07 FY08 FY09 FY10 Sep 10

32

34

36

38

40

NIMs (LHS) CASA (RHS)(%)

Movement of CASA and NIMs (System)

Source: RBI

(%)

Credit Costs to Ease: ROA is, however, expected to benefit from a reduction incredit costs to 0.85% of loans from 0.95% in 2010, as asset quality concerns ease

and incremental NPLs reduce. The reduction is unlikely to take credit costs back tothe FY09 (financial year ended March 2009) level of 0.76% of loans, as loan lossreserves now need to be maintained at a minimum of 70%, higher than the levelsmaintained in 2009.

0.0

0.2

0.4

0.6

0.8

1.0

FY06 FY07 FY08 FY09 FY10 FY11E FY12F

Indian system SBI ('C') BoB ('C/D')( %)

Loan Loss Provision/Avg. Loans

Source: Fitch

Capital Issuances to Continue: Issuances are likely to be led by State Bank of India(Individual Rating: C), followed by the large and mid‐sized government banks. Someof the lower‐rated regional private banks have announced plans for above‐averageloan growth in relatively new markets, which may need capital support, particularlyin light of their relatively high unreserved NPL/equity ratios (for example, the D/Eaverage in the chart below).

The likely infusion of common equity would further improve the quality of capitalfor government banks. At 9%, the core Tier 1 capital ratio currently comprises 90%of the Tier 1 capital of Indian banks.



Banks


0

4

8

12

16

[C] Indian Banks [C/D] Indian Banks [D] Indian Banks [D/E] Indian Banks

0

6

12

18

24

Tier 1 (FY10) (LHS) Tier 1 (FY09) (LHS) Net NPLs to equity (FY10) (RHS)

Tier 1 Capital & Net NPLs to Equity

(%)

Source: Fitch

(%)

2010 Review

The rating outlook for Indian banks turned stable from negative in 2010 as banks’credit profile emerged unscathed from the 2009 credit crisis. The commitment bythe government to help state‐owned banks maintain a minimum Tier 1 level of 8%reinforced expectations of timely support, which, together with relatively improvedfinances of the government, resulted in Fitch upgrading the Support Rating Floors ofmany government banks from the ‘B’ category on the international scale to the ‘BB’category in a band closer to that of the sovereign’s own Foreign Currency rating of‘BBB−’. As a result, some of the support‐driven Long‐Term Ratings of governmentbanks were upgraded (Uco Bank, Dena Bank).

The rating Outlooks of banks whose risk management systems and overallcompetitiveness had improved compared with peers changed to Positive orremained Positive in 2010 (Allahabad Bank, City Union Bank, Dhanlaxmi Bank). Also,

the rating Outlook for Development Credit Bank changed to Stable from Negativeafter the bank’s performance stabilised. The Negative Outlook on the earliersupport‐driven National Long‐Term Rating of ING Vysya Bank changed to Stableafter the rating was downgraded to the bank’s unsupported rating level.



Banks


Annex: Financials/ratios of select Indian banks for the financial year endedMarch 2010

0

1,000

2,000

3,000

4,000

5,000

S B I

P N B

I C I C I

B o B

C a n a r a

B o I

I D B I

H D F C

U n i o n

C B I

A x i s

S y n d i c a t e

O B C

U C O

I O B

A l l a h a b a d

C o r p o r a t i o n

I n d i a n

A n d h r a

S B H y d e r a b a d

S B P a t i a l a

U n i t e d

V i j a y a

M a h a r a s h t r a

S B T r a v a n c o r e

D e n a

S B B i k a n e r &

J a i p u r

P u n j a b &

S i n d

S B M y s o r e

F e d e r a l

S B I n d o r e

J & K

Y e s

K o t a k

I n d u s I n d

I N G

V y s y a

S o u t h I n d i a n

K a r n a t a k a

K a r u r V y s y a

C i t y U n i o n

L a k s h m i V i l a s

D h a n a l a k s h m i

C a t h o l i c S y r i a n

D C B

Government New private Old private FY10 median FY09 median FY08 median

Exhibit 1: Total Assets

(INRbn)

Source: Fitch

10,534.14

0

500

1,000

1,500

2,000

S B I

P N B

I C I C I

B o B

C a n a r a

B o I

I D B I

H D F C

U n i o n

C B I

A x i s

S y n d i c a t e

O B C

U C O

I O B

A l l a h a b a d


I n d i a n

A n d h r a


S B P a t i a l a

U n i t e d

V i j a y a



D e n a

S B B i k a n e r &

J a i p u r

P u n j a b &

S i n d

S B M y s o r e

F e d e r a l

S B I n d o r e

J & K

Y e s

K o t a k

I n d u s I n d

I N G

V y s y a


K a r n a t a k a

K a r u r V y s y a

C i t y U n i o n




D C B


Exhibit 2: Total Loans

(INRbn)

Source: Fitch

6,319.14

‐20‐10

01020304050

S B I

I C I C I

P N B

B o B

C a n a r a

H D F C

A x i s

U n i o n

B o I

I n d i a n

A l l a h a b a d


O B C

C B I

A n d h r a

I D B I

U C O


S y n d i c a t e

I O B


K o t a k

S B P a t i a l a

J & K

D e n a

P u n j a b &

S i n d

V i j a y a

Y e s

F e d e r a l

S B B i k a n e r &

J a i p u r

S B M y s o r e


I n d u s I n d

K a r u r V y s y a

U n i t e d

S B I n d o r e

I N G

V y s y a


K a r n a t a k a

C i t y U n i o n




D C B


Exhibit 3: Net Income

(INRbn)

Source: Fitch

91.66



Banks


‐1.5

‐1.0

‐0.5

0.0

0.5

1.0

1.52.0

K a r u r V y s y a

K o t a k

I n d i a n

Y e s

A x i s

C i t y U n i o n

H D F C

P N B

A n d h r a

J & K


C a n a r a

B o B


U n i o n

F e d e r a l

I n d u s I n d

A l l a h a b a d

I C I C I

P u n j a b &

S i n d

S B M y s o r e



D e n a

S B I n d o r e

S B I

O B C

S B B i k a n e r &

J a i p u r

U C O

V i j a y a

S B P a t i a l a

I N G

V y s y a

B o I


K a r n a t a k a

C B I

S y n d i c a t e

I O B

I D B I

U n i t e d




D C B


Exhibit 4: Return on Average Assets

(%)

Source: Fitch

‐15‐10‐505

1015202530


A n d h r a

S B I n d o r e

P N B

K a r u

r V y s y a

C a n a r a

U C O

S B H y d

e r a b a d

C o r p

o r a t i o n

B o B

U n i o n

D e n a

P u n j a b

&

S i n d

C i t

y U n i o n

S B B i k a n e r &

J a i p u r

Y e s

I n d i a n

A x i s

A l l a h a b a d

J & K

S B

M y s o r e

I n d u s I n d


M a h a

r a s h t r a

H D F C

S B

P a t i a l a

V i j a y a

S y

n d i c a t e

C B I

S B I

O B C

K o t a k

B o I

I N G

V y s y a

I D B I

F e d e r a l

K a

r n a t a k a

I O B

U n i t e d

I C I C I

D h a n a

l a k s h m i



D C B


Exhibit 5: Return on Average Equity

(%)

Source: Fitch

0

20

40

60

80

100

120



D C B

K a r n a t a k a

I O B


I N G

V y s y a

U n i t e d


S B I

S y n d i c a t e

C B I

I n d u s I n d

V i j a y a

D e n a

S B B i k a n e r &

J a i p u r

U C O

K o t a k

H D F C



P u n j a b &

S i n d

B o I

S B M y s o r e

B o B

S B I n d o r e

K a r u r V y s y a

A n d h r a

A x i s

O B C

S B P a t i a l a

C a n a r a

U n i o n

I D B I

P N B

C i t y U n i o n

A l l a h a b a d

I n d i a n

J & K

I C I C I


Y e s


F e d e r a l


Exhibit 6: Cost to Income Ratio

(%)

Source: Fitch



Banks


0

1

2

3

4

5

6

7

K o t a k

H D F C

I n d i a n

F e d e r a l

P N B

A x i s

J & K

I n d u s I n d

K a r u r V y s y a

A n d h r a

S B M y s o r e

C i t y U n i o n


Y e s

I N G

V y s y a

I O B



B o B

D C B

S B I

S B B i k a n e r &

J a i p u r

P u n j a b &

S i n d

O B C

A l l a h a b a d

B o I

U n i o n


C a n a r a

S B I n d o r e

I C I C I


V i j a y a

S B P a t i a l a


D e n a

S y n d i c a t e

U n i t e d


U C O


C B I

K a r n a t a k a

I D B I


Exhibit 7: Net Interest Margin

(%)

Source: Fitch

0

10

20

30

40

50

60

H D F C

S B I

A x i s

I C I C I

P N B

J & K

S B B i k a n e r &

J a i p u r

U n i t e d

M a h a r

a s h t r a

D e n a

D C B

A l l a

h a b a d

C B I

S B I n d o r e

I N G

V y s y a

I O B

I n d i a n

U n i o n

S B M

y s o r e

S y n

d i c a t e

K o t a k

S B T r a v a

n c o r e

B o B

A

n d h r a

C

a n a r a

C o r p o

r a t i o n

S B H y d e

r a b a d

B o I

F e d e r a l

S B P

a t i a l a

C a t h o l i c

S y r i a n

P u n j a b &

S i n d

O B C

U C O

V i j a y a

I n d u s I n d

K a r u r

V y s y a

K a r n a t a k a

S o u t h

I n d i a n

C i t y

U n i o n

D h a n a l a

k s h m i

L a k s h m

i V i l a s

I D B I

Y e s


Exhibit 8: Low‐Cost Deposits (Demand + Savings)/Total Deposits (CASA)

(%)

Source: Fitch

0123456789

10

D C B


I C I C I

I O B

K a r n a t a k a


U n i t e d

S B I


F e d e r a l

B o I

C B I

V i j a y a

U n i o n

S y n d i c a t e

S B P a t i a l a

S B I n d o r e

U C O

S B M y s o r e

J & K

D e n a

O B C

S B B i k a n e r &

J a i p u r

K a r u r V y s y a

P N B

A l l a h a b a d



I D B I

C a n a r a

H D F C

C i t y U n i o n

B o B


I N G

V y s y a

A x i s

I n d u s I n d



A n d h r a

I n d i a n

P u n j a b &

S i n d

Y e s


Exhibit 9: Gross NPLs to Gross Advances

(%)

Source: Fitch



Banks


0

10

20

30

40

50

60

70

8090

J & K

F e d e r a l

A n d h r a

Y e s

H D F C

K a r u r V y s y a

B o B

A x i s

P N B

D C B



U n i o n

A l l a h a b a d

I N G

V y s y a

I n d u s I n d

I C I C I

K a r n a t a k a

S B B i k a n e r &

J a i p u r

S B P a t i a l a

C i t y U n i o n


S y n d i c a t e

S B M y s o r e

O B C

C B I

S B I n d o r e


B o I


S B I

U n i t e d


P u n j a b &

S i n d

U C O

V i j a y a


I O B

I D B I

D e n a

C a n a r a

I n d i a n



Exhibit 10: Specific Loan Loss Reserve Coverage

(%)

Source: Fitch

0.0

0.5

1.0

1.5

2.0

2.5

3.03.5

4.0

4.5

L a k s h m

i V i l a s

D C B

I O B

I C I C I

U n i t e d

K o t a k

S B I

M a h a r

a s h t r a

C a t h o l i c

S y r i a n

V i j a y a

K a r n a t a k a

B o I

D e n a

I N G

V y s y a

U C O

S B

I n d o r e

S y n

d i c a t e

C a n a r a

S B P a t i a l a

I D B I

S B M

y s o r e


O B C


U n i o n

S B B i k a n e r &

J a i p u r

C B I

A l l a

h a b a d

C i t y

U n i o n


P N B

I n

d u s I n d

F

e d e r a l

A x i s

S o u t h

I n d i a n

P u n j a b

&

S i n d

B o B

H D F C

C o r p o

r a t i o n

J & K

K a r u r

V y s y a

I n d i a n

A

n d h r a

Y e s


Exhibit 11: Net NPLs to Advances

(%)

Source: Fitch

0

5

1015

20

25

30

35

L a k s h m i V i l a s B a n k L i m i t e d

I O B


U n i t e d

U C O


D C B

S y n d i c a t e

V i j a y a

S B I

D e n a

B O I

S B I n d o r e

I D B I

S B P a t i a l a


C a n a r a

S B M y s o r e

S B B i k a n e r &

J a i p u r

K a r n a t a k a


I N G

V y s y a

C B I

U n i o n

O B C

K o t a k

I C I C I

A l l a h a b a d


P N B

C i t y U n i o n

P u n j a b &

S i n d

I n d u s I n d


B a r o d a


F e d e r a l

A X I S

A n d h r a

J & K

K a r u r V y s y a

H D F C

I n d i a n

Y e s


Exhibit 12: Net NPLs to Equity

(%)

Source: Fitch



Banks


7

9

11

13

15

17

19

21

23

Y e s

I C I C I

F e d e r a l

K o t a k

H D F C

J & K

A x i s



I n d u s I n d

I N G

V y s y a


D C B


I O B

K a r u r V y s y a

B o B

P N B

A n d h r a


A l l a h a b a d

S B I n d o r e

C i t y U n i o n

C a n a r a

S B I

S B B i k a n e r &

J a i p u r

S B P a t i a l a

U C O

P u n j a b &

S i n d


B o I

U n i t e d


D e n a

I n d i a n

S y n d i c a t e

O B C

U B I

V i j a y a

S B M y s o r e

K a r n a t a k a

C B I

I D B I



Exhibit 13: Total Capital Ratio

(%)

Source: Fitch

3

5

7

9

11

13

15

17

19

F

e d e r a l

K o t a k

I C I C I

H D F C

Y e s

K a r u r V y s y a

J & K

S o u t h

I n d i a n

C i t y

U n i o n

L a k s h m

i V i l a s

D C B

A x i s

I n d i a n

I N G

V y s y a

K a r

n a t a k a

I n

d u s I n d

S B I

O B C


S B T r a v

a n c o r e

B o B

P N B


I O B


S B

I n d o r e

C a n a r a

B o I

S B B i k a n e r &

J a i p u r

S y n

d i c a t e

A n d h r a

U n i t e d

S B P a t i a l a

D e n a

A l l a h a b a d

C a t h o l i c

S y r i a n

U n i o n

V i j a y a

P u n j a b

&

S i n d

S B M

y s o r e

U C O

C B I


I D B I


Exhibit 14: Tier 1 Capital Ratio

(%)

Source: Fitch

0

2

46

8

10

12

14

16

I C I C I

K o t a k

F e d e r a l

D C B

H D F C

A x i s

Y e s

I n d i a n

K a r u r V y s y a

C i t y U n i o n

J & K


I N G

V y s y a

K a r n a t a k a

I n d u s I n d

S B I

O B C

P N B

S B M y s o r e


I O B

A l l a h a b a d

C a n a r a


B o B

U n i o n

S B I n d o r e

B o I



U n i t e d

V i j a y a

S B P a t i a l a

A n d h r a



P u n j a b &

S i n d

D e n a

S B B i k a n e r &

J a i p u r

I D B I

C B I

S y n d i c a t e


U C O


Exhibit 15: Equity to Assets Ratio

(%)

Source: Fitch



Banks


‐10

0

10

20

30

40

50

60

70

Y e s

K o t a k

I D B I


P u n j a b &

S i n d

A n d h r a

K a r u r V y s y a


C a n a r a


C i t y U n i o n

B o B

U n i t e d

A l l a h a b a d

C B I


U n i o n

O B C

U C O

I n d i a n


B o I


I n d u s I n d

A x i s

D e n a

P N B

S B M y s o r e

S B B i k a n e r &

J a i p u r

H D F C


K a r n a t a k a

V i j a y a

J & K

F e d e r a l

I O B


S B I

S B I n d o r e

S B P a t i a l a

I N G

V y s y a

D C B

S y n d i c a t e

I C I C I


Exhibit 16: Deposits Growth

(%)

Source: Fitch

‐20‐10

01020304050607080

Y e s

D h a n a l

a k s h m i

I D B I

S o u t h

I n d i a n

P u n j a b

&

S i n d

I n

d u s I n d


K a r u r V y s y a

A x i s

H D F C

A n d h r a

K o t a k

U n i o n

C B I

D e n a

C a n a r a

K a r

n a t a k a

O B C

A l l a h a b a d

B o B

S B H y d

e r a b a d

C a t h o l i c

S y r i a n

C i t y

U n i o n

I n d i a n

P N B

F

e d e r a l

U C O

L a k s h m

i V i l a s

U n i t e d

S B B i k a n e r &

J a i p u r

B o I

S B T r a v

a n c o r e


V i j a y a

S B I

S B

M y s o r e

S y n

d i c a t e

I N G

V y s y a

J & K

S B

I n d o r e

S B

P a t i a l a

D C B

I O B

I C I C I


Exhibit 17: Loan Growth

(%)

Source: Fitch



Banks


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