Research report :: New banking license in India

Transcription

1 Around three years ago, Pranab Mukherjee, the then finance minister, surprised everyone by announcing issue of new banking licences to the private sector, citing the need to improve access to banking services. Today, the decks have finally been cleared for the corporate giants to enter the sector. After a gap of over a decade, when no new licences were issued, Reserve Bank of India (RBI), on February 22, 2013, set out guidelines for the licensing and unlike the past, permitted corporate houses to apply for it. RBI had earlier expressed reluctance to allow real estate firms and brokers to apply for a licence, but then later its final guidelines didn t rule out a chance to such firms. The Reserve Bank of India (RBI) on 22 January 1993 issued the initial guidelines for licensing of new private sector banks in India. The central bank issued licenses to ten private sector banks in India following the 1993 guidelines. The RBI revised its banking license guidelines in January On the basis of the 2001 guidelines, the central bank issued licenses to two new private sector banks. Over the last two decades, the central bank has issued licenses to 12 new private sector banks on the basis of the guidelines of 1993 and List of the 12 private sector banks that were granted license Axis Bank 1994 (earlier UTI bank) Centurion Bank Ltd. 1994(Merged Bank of Punjab in late 2005 to become Centurion Bank of Punjab, acquired by HDFC Bank Ltd. in 2008) Development Credit Bank (Converted from Co-operative Bank, now DCB Bank Ltd) HDFC Bank (1994) ICICI Bank (1996) IndusInd Bank (1994) Kotak Mahindra Bank (2003) Yes Bank (2005) Times Bank (Merged with HDFC Bank Ltd) Global Trust Bank(Merged with Oriental Bank of Commerce) IDBI Bank (reverse merged with parent IDBI in 2004 to become IDBI Ltd., now IDBI Bank Ltd) Out of the following, Yes Bank and Kotak Mahindra Bank were granted banking licenses on the basis of the 2001 guidelines while ten were granted on basis of the 1993 guidelines. The guidelines specified by the RBI in 1993 prescribed that the private sector banks must be established as public limited companies under the Indian Companies Act, 1956, while the paid-up capital of such banks must be a minimum Rs 100 crore. In regard to branch opening, the banks were allowed to open branches at various centres including urban/metropolitan centres without the prior approval of the RBI if they meet the capital adequacy and prudential accounting norms. Considerations kept in view by the RBI while granting licenses to 10 private sector banks in 1993 They provide competitive, efficient and low cost financial intermediation services for the society at large. They are financially viable They should result in uprgradation of technology in the banking sector They avoid unfair preemption and concentration of credit, monopolization of economic power, cross holdings with industrial groups.

2 The RBI s banking license guidelines were subsequently revised in 2001 with the objective to bolster competition in the banking system to increase productivity and efficiency. The revised 2001 guidelines still signaled a cautious approach as large industrial houses were not allowed to promote banks. According to the 2001 guidelines, the minimum paid-up capital was raised to Rs 200 crore which had to be boosted to Rs 300 crore within three years of the bank s commencement of business. The guidelines prescribed that the promoters share would be a minimum 40 per cent and the voting right of a shareholder was not allowed to exceed 10 per cent, while the new private sector banks must also avoid unfair practices, concentration of credit, cross-holding of groups. The capital adequacy ratio was raised from 8 per cent to 10 per cent. The RBI would give preference to those banks that were eying establishing main headquarters in a center where no other banks had such an office. The banks were prescribed to observe priority sector lending target of 40 per cent of net bank credit as applicable to other domestic banks. The objective of the guidelines was to ensure that new private sector banks were financially viable and up-to-date with the latest technology from the very beginning. The RBI permitted new banks to rationalize their existing branch network, spinoff business, etc. Under the 1993 and 2001 banking guidelines, prominent private sector banks that were given licenses included ICICI Bank, GTB, HDFC Bank and IDBI Bank. Out of the 12 banks that were given to license, 7 survived, out of which 4 had been promoted by financial institutions, while some banks were merged. Takeaways from experience of issuing licenses on the basis of 1993/2001 guidelines

3 With the issuance of new bank license, competition in the banking system increased significantly. After first set of licenses offered to the private sector in 1993, there exists stiffed competition in the sector. In our view, given the overall increase in competitive intensity, the major implication of new bank licenses is that the sector s margins and ROEs are likely to come down in the coming few years, including those of existing private banks At present, some private banks are earning RoEs well in excess of 20% in spite of a GDP down-cycle, reflective of the high pricing power enjoyed by the sector inherently - a situation that is likely to change with the likely entry of significantly morethan-anticipated large corporates into the sector. Given the overall increase in competitive intensity, the major implication of new bank licenses is that the sector s margins and ROEs are likely to come down in the coming few years, including those of existing private banks. Productivity & efficiency enhanced in the banking arena after RBI adopted a liberalized policy and allowed Private players to enter into banking in the post reforms era. The entry of Private Sector Banks forced the public sectors banks (PSBs) to pay focused attention on customer service to sustain and grow further in the present competitive environment. However, PSBs are constrained to function in uneven level playing field since they continue to balance both commercial element and social cause. In such a scenario, opening of new banks may lead to further drift in clientele base (high-value) and market share of PSBs. New bank licensing norms are potentially a game-changing for the banking sector. Earlier banks that have been given licenses had a maximum impact in the banking sector. This space is a priority area for policy makers today, so new entrants eyeing this space are likely to find a supportive climate. If the new players can pull this off, it will change the banking landscape completely for the sub-middle class segment, similar to how ICICI changed the retail banking landscape for the middle class when it entered the sector. Expansion of the banking sector will likely be a mostly positive development. It is possible that some new entrants or incumbents may not be able to survive the competition such as the case of Times Bank, Bank of Punjab and Centurion Banks. New Entrants in the space may result in price based competition on deposits, loans and human resources and some merger & acquisition (M&A) among the small private banks without hurting the depositors. Thus, we remain optimistic that RBI will ensure that effect of new banking license will be mostly positive. The only conceivable downside can be a rush to the bottom for loan quality. But once again RBI's monitoring of NPAs [non-performing assets] is likely to prevent that. Thrust on financial inclusion will remain on new banks. The first set of licenses offered to the private sector in 1993 brought in fundamental changes state-of-the art technology, a better customer interface, professionalism and data-driven decision making. It had a positive effect on the banking sector and can be termed as game changing.

4 Post license performance of banks in terms of CASA and Deposits One of the key success factors to improve bank s margins has been the drastic improvement in liability profile. Deposits provides funding and liquidity to the banks. CASA ratio shows how much deposit a bank has in the form of current and saving account deposits in the total deposit. Higher CASA ratio means higher portion of the deposits of the bank has come from current and savings deposit, which is generally a cheaper source of fund. Many banks don't pay interest on the current account deposits and money lying in the savings accounts attracts a ~4% interest rate. Hence, higher the CASA ratios better the net interest margin, which means better operating efficiency of the bank. New private sector banks include those that were established in the past 20 years such as Yes bank, Axis bank and existing institutions that were converted in to commercial banks such as ICICI Bank and HDFC Bank. Old private sector banks are those banks, which were not nationalized at the time of bank nationalization that took place during 1969and Most of the old private sector banks are closely held by certain communities and their operation are mostly restricted to the areas in and around their place of origin. E.g. Federal Bank, Dhanalaxmi Bank, ING Vysya Bank. Under the Banking Law (Amendment) Bill 2011, the government is likely to issue new bank licenses. Share of CASA Deposits in total deposits PSB: Public Sector Banks OPRB: Old private sectors Bank NPRB: New private sectors Bank FB: Foreign Bank During FY12, CASA deposits formed almost one-third of total deposits of scheduled commercial banks. Bank group-wise analysis of composition of deposits revealed that foreign banks had the highest proportion of CASA deposits followed by new private sector banks. This could be partly explained by the fact that number of private sector banks revised their savings bank deposits rates revised upward after the deregulation of saving banks interest rate in October CASA ratio (%) Axis ICICI HDFC Yes Indusind Kotak FY FY NA NA NA FY NA NA NA Indian banks have mobilized ~80% of funding from deposits, thus their ability to win market share profitability is key to stocks return. In today scenario, current and saving account s (CASA) are the bank s lifeline for profitability growth, but during FY12, high interest rate choked them of such deposit, slowing expansion to five year low of 7%. In present competitive scenario, private banks are targeting the faster growing retail loan and also improving growth rate in fee income by increasing transaction fees.

5 ICICI Bank ICICI bank had a CASA of 40.9% at 9MFY 13 end and with a deposit base of `1,171 bn, despite a yearly fall in the demand deposit account due to weak business environment. On an absolute basis, the Bank s savings account deposits increased by 10.8% to `814.6 bn while the current account deposits fell by 10.9% to `356.7 bn in the first nine months of the fiscal. However, with higher incremental customer acquisitions and the daily average accretion to savings account deposits, the bank s management is confident of maintaining its CASA ratio in the range of 38-40% for FY13. In our view, the bank s substantial branch expansion from 955 branches at the end of Q3FY08 to 2,895 branches by Q3FY 13, and strong capital adequacy, at 19.5% (Tier-I at 13.3%) has positioned it to gain both CASA and credit market share, respectively. Under its aggressive CASA mobilisation strategy between FY08-FY12, ICICI Bank grew its CASA ratio at a CAGR of 15% from 26% in FY08 to 43.5% in FY12, which in turn has also helped the lender to improve its NIM. CASA deposit plays a key role in boosting margins as banks do not pay interest on current account and most of them pay 4% interest on savings accounts. But in a high rates environment, some cannibalisation of SA balance by term deposit have taken place as customers opted to cash in higher fix deposit rates. And considering the high interest rate scenario which may continue for a while, we believe any major improvement in CASA is unlikely in the near term. HDFC Bank HDFC Bank has consistently delivered one of the highest CASA mix in the industry. Although its CASA mix has come down to 45.4% in 9MFY13 in line with the industry trend, it still remains one of the best in the industry. During FY12, total deposits of HDFC Bank increased by 18.28% to 2,467 bn. In spite of price based competition, the bank witnessed a strong growth of 16.63% in its savings deposits while current account deposits contracted by 2.27% during FY12. The bank s CASA ratio stood at 48.40% during FY12. Continued traction in retail liabilities, superior CASA ratio and higher share of fixed rate retail loans would help HDFC Bank maintain superior margins, going forward. With increased emphasis of the lender in growing its low cost CASA base, we expect HDFC Bank s NIM to stay uptrend in FY13E. Axis Bank Axis Bank witnessed an increase of 16.3% in its total deposits to `2,201 bn, driven by growth of 26.0% in savings bank deposits and growth of 8.00% in current account deposits. In FY12, CASA deposits constituted 41.6% of total deposits as compared with 41.1% in FY11. With an objective to widen the retail deposit base, Axis Bank continued to focus on retail term deposits which grew by 43.0% as a result, the percentage share of retail term deposits to total term deposits has increased from 30.0% in FY 11 to 37.0% in FY 12. The share of aggregate retail deposits (comprising savings bank and retail term deposits) in total deposits has increased to 45.0% in FY 12 from 39.0% in FY 11.

6 Kotak Mahindra Bank (KMB) For KMB, CASA ratio improved from 30.0% in FY 11 to 32.0% in FY 12. CASA deposit in absolute number terms grew by 41.08% over the same period with 51.16% growth in savings deposits during this period. Overall deposits grew by 31.70% and term deposit grew by 26.44%. IndusInd Bank (IIB) The overall deposits of IIB grew by 23.27% and CASA deposits increased by 23.92%. The bank has seen a robust growth of 53.45% in saving bank deposits led by saving interest rate deregulation. While growth in saving deposits was robust, current account deposits growth moderated to 9.52% leading to CASA growth of 23.29%. Overall, the CASA ratio of IIB improved by 15 bps to 27.30% in FY 12. Yes Bank (YBL) YBL s deposit base grew 5.6x within a time span of 5 years, registering a CAGR of 53.75% over FY07-FY12 mainly due to base effect. However, the bank has historically relied more on wholesale deposits to ramp up loan growth. In addition, relatively lower branches (most of the branches being new) impacted the CASA mobilization of the bank. YBL's proportion of low cost deposits (CASA) is amongst the lowest in the Industry. However, in absolute numbers CASA has grown at 78% CAGR during FY During FY12, the CASA ratio of YBL improved substantially to 15% from 10.3% in the prior year. The robust traction in CASA deposits during the year, which came in at `73.9 bn, reflecting 55.6% growth on y-o-y basis, mainly driven by accelerated mobilization of savings deposits. Savings account (SA) deposits of the bank grew 206.4% (yoy) `25.0 bn on strategic initiative to offer higher savings rates of ~6% to customers maintaining balances below `100,000 and ~7% to those maintaining balances above `100,000, which was significantly higher than the 4% offered by public sector and larger private sector banks. Going further, YBL aims to achieve 30% CASA ratio in the coming 3 years. Term deposits and Certificates of deposit of the bank increased by 297% in financial year to Rs 6,539 mn while Savings deposits increased by 445% to Rs. 108 mn. Current deposits increased by 3208% as at March 31, 2006 over March 31, While Savings deposits and current deposits increased by 437% and by 38% as at March 2007 over March 2006, it increased by 153% and by 136% as at March 2008 over March We believe improvement in CASA ratio has been a key driver for margin improvement and has also negated the impact of falling proportion of high yielding unsecured retail loan. Thus with focus on strong branch expansion and technology up-gradation would help the new private sector banks to keep the CASA growth pace in line with overall balance sheet.

7 ATMs and Branch expansions Exhibit 8: Share of regions in new ATMs After a long lull spanning nearly a decade overall branch expansions have started rising steadily in the past five years. The number of branches has increased to over 82,000 in FY 12 after having stagnated at 67,000-69,000 till FY 05. PSU banks, which have enjoyed a strong franchise steadily built over decades, are now being threatened albeit slowly by large private sector banks. ICICI Bank and HDFC Bank, with a branch network of ~2,512 and 2,746 branches, have been aggressively expanding their presence outside urban areas, challenging some of the larger PSU banks by building a similar branch network in less than two decades. On the other hand, PSU banks had been slowly converting their existing extension counters into full-fledged branches, realigning their branches by closing a few non profitable branches and importantly investing in IT. To encourage the use of electronic mode of payments, RBI waived the processing charges for all electronic payment systems operated by the RBI. The spread of ATMs has increased from 34,789 in March 2008 to 98,074 in March 2012, of which 38% are owned by private sector banks, 33% by public sector banks, 27% by the SBI and Associates, and 2% by foreign banks. There has been a 30% year-on-year growth in the number of ATMs deployed in the country since 2008, but the penetration of ATMs in Tier III to Tier VI centres remains below the desired level. Banks have entered into bilateral or multilateral arrangements with other banks to have bilateral or inter-bank ATM networks to extend the use of ATMs of one bank to the customers of other banks. Reserve Bank of India issued directives making use of own bank s ATM or any other bank s ATM free of charge for cash withdrawal. The volume of ATM transactions has increased from 17,797 lakh aggregating to Rs4,381,510 mn during to 43,530 lakh aggregating to Rs26,164,560 mn during 2012.

8 Key takeaways from final guidelines for bank licenses issued on 22 Feb 13 With the object of enhancing access to banking services to a vast segment of population and expanding the geographic coverage of banks, it was announced that the RBI will be issuing additional licenses. The creation of new private sector banks will help in fostering competition, reducing costs, improving services, promoting financial inclusion and ensuring the availability of funding to industry players at affordable costs. Eligibility criteria- Entities/groups in the private sector owned and controlled by residents, public sector entities and promoter/promoter groups having an existing NBFC are eligible to set up a bank. Large industrial houses can set up a bank. Fit and proper criteria for promoter eligibility- Past record of sound credentials and integrity, financial soundness of running their business for atleast 10 years and business model shouldn t be misaligned with banking model. Licenses to be issued on a selective basis- guidelines state even if an applicant meets all the eligibility criteria, licenses may not be granted. Corporate structure-the new bank can only be set up through a wholly-owned Non-Operating Financial Holding Company (NOFHC) established by the promoter to hold its investments in the bank as well as all other financial service companies that are regulated by the RBI or other financial regulators. The NOFHC will be registered as an NBFC with the RBI. An individual belonging to the promoter group cannot hold more than 10% of the total voting equity shares of NOFHC.Non-financial service companies, other non-operative financial holding company in the group can hold shares in the NOFHC. Minimum capital requirements for banks and shareholding by NOFHC- initial minimum paid-up equity capital for a new bank shall be Rs 5 billion. The additional voting equity capital to be infused would depend on the business plan of promoters. The NOFHC shall hold a minimum 40% of the paid up voting equity capital of the bank with a lock-in period of 5 years from the date of commencement of the business of the bank. If NOFHC s shareholding exceeds 40%, it would be brought down to 40% within 3 years from the date of commencement of the business of the bank. Shareholding of the NOFHC to be brought down to 20% of the paid up capital voting equity capital of the bank within a period of 10 years and 15% within 12 years from the date of commencement of the business of the bank Capital adequacy and listing norms of the bank- the bank must maintain a minimum capital adequacy ratio of 13% of its RWA for a minimum period of 3 years after the commencement of operations. The NOFHC and entities held by it shall maintain a minimum capital adequacy ratio of 13% of its consolidated RWA for a minimum period of 3 years after the commencement of operations. Listing of shares on the stock exchanges must take place within 3 years of commencement of operations. Foreign shareholding in the bank-aggregate non-resident shareholding from FDI, NRI and FII in the new bank cannot exceed 49% for the first 5 years from the date of licensing. Non-resident shareholder can hold 5% or more in the paid-up voting equity capital of the bank for a period of 5 years from the date of commencement of business of the bank. Following the 5 year expiry clause, foreign shareholding would be as per the extant policy i.e. allowing foreign shareholding up to 74% of the paid-up voting equity capital. Corporate governance- no financial services entity under the NOFHC can be permitted to engage in any activity that the bank is allowed to undertake departmentally. No director of the NOFHC shall be a director in any other NOFHC or a bank except the banking company under it. The NOFHC shall not be managed by a person a) who is a director in any other company other than a subsidiary of the NOFHC or a company registered under section 25 of the Companies Act, 1956 b) who is engaged in any other business or vocation.

9 Key exposure norms for banks the bank cannot take any credit and investment exposure on promoters or individuals associated with the promoter group of the NOFHC nor will it be allowed to invest in the equity/debt capital instruments of any financial entities under the NOFHC or equity of other NOFHC. Equity investment by the bank in entities outside the promoter group cannot exceed 10% of the investee entity s paid-up share capital or 10% of aggregate of bank s paid-up share capital and reserves, whichever is less. However, aggregate of all such investments cannot exceed 20% of the aggregate of bank s paid-up share capital and reserves. Other conditions- no single entity or group of related entities, other than the NOFHC can have shareholding or control exceeding 10% of the paid-up voting equity capital of the bank. The bank must have an arm s length relationship with the promoter entities, their major supplier and major customers. The bank shall open at least 25% of its branches in unbanked rural centers. The major difference between RBI s past guidelines and the latest ones is allowing large industrial houses to promote new banks. The new guidelines signal that the RBI is very selective and cautious in granting new private sector licenses as those who have strong track record, credibility, integrity and financial soundness will be eligible for consideration. The RBI also wants to ensure that the banking operations of the promoter groups who are allowed to run such private sector banks must be managed professionally and independently of their other business activities so that the there is no possibility of any restrictive lending practices, etc. The latest guidelines also require the set-up of a non-operative financial holding company that will hold the bank as well as other financial companies within the same promoter group. The minimum capital requirements and capital adequacy ratio for such banks has been raised as the RBI has become tougher on capital adequacy norms following the global financial crises a few years ago. Consolidation of the promoter group s banking business and other financial business would also eradicate the risk of an arbitrage, if any, if the same activities would have been allowed to be carried out by the group s non-banking businesses.

10 Potential candidates for banking license We believe the new banking guidelines opens opportunities for many NBFC s who have been waiting to open up their own banks. As most of the private and public NBFCs would apply for banking license, very few of them would be allotted a banking license, given the stringent norms announced and multi layered decision making process. L&T Finance Ltd, Bajaj Finance Ltd., Mahindra & Mahindra Finance Ltd. and LIC Housing Finance Ltd to be probable candidates to get the banking license Key Ratios of potential candidates Company Year Operating Margin (%) NPM (%) ROA (%) ROE (%) EPS (`) BVPS (`) Enterprise Value (` bn) L&T Finance Holding FY FY M&M Financial FY FY Bajaj Finance Ltd FY FY LIC Housing Finance Ltd FY FY Reliance Capital Ltd FY FY India Infoline FY FY Aditya Birla Money FY (7.1) (2.3) (13.8) (1.5) FY12 (16.2) (18.6) (8.0) (41.3) (3.2) Religare Enterprises Ltd FY (10.8) (2.7) (10.3) (21.6) FY (6.6) (1.4) (5.8) (14.3)

11 L&T Finance Holding (LTFH) continued to report impressive performance over the past few years on back of strong growth in overall loan book driven by increase in disbursals in both financing subsidiaries. The company is all set for portfolio diversification by entering into housing finance segment and is expected to build a healthy book in the coming years considering the synergy benefits derived from the existing infrastructure of LTFH along with IPHF. The company also expects improvement in disbursements on back of several steps taken by government. Mahindra & Mahindra Financial Services Ltd (MMFIN) reiterated disbursement growth target at 25-30% despite weak macro environment. Continued diversification of products and vendors would help MMFIN to report better asset quality and robust earnings growth in the coming quarters. Partnership with multiple auto manufacturers will further boost profitability of the company. The company s intention of expanding branch network and product range will help it tap the growing business. Bajaj Finance will continue to show a strong growth trajectory on back of healthy loan book. The company has strengthened its position as a retail finance company and driven the growth across consumer and SME business. The ability of the company to keep a control on asset quality and maintain a prudent level of capitalization are the key positives. LICHF is the second biggest specialized mortgage lender in India, with a balance sheet size of over `740.0 bn. 95% of the credit portfolio of the company is derived from the retail segment. The company has a network of over 200 offices spread across the country. It is well poised to report strong loan book growth driven by a strong parent brand and success of its home loan products (60-70% of the incremental disbursements are in products having interest rate which is initially fixed, later converted to floating). Significant increase in share of developer loans to total loan book would be beneficial to improve margins going forward. Besides, many of corporate India s biggest names Tata, Birla and Reliance groups could also seek to take advantage of the RBI s decision to allow large industrial conglomerates to apply for the banking license.

12 Disclaimer: This document has been prepared by Action financial services India ltd.(afsil) This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. AFSIL will not treat recipients as customers by virtue of their receiving this report. The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavor to update the information herein on reasonable basis, AFSIL, its subsidiaries and associated companies, their directors and employees ( AFSIL and affiliates ) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent AFSIL and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of AFSIL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject AFSIL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. AFSIL & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities. AFSIL may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall AFSIL, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.