SECTOR UPDATE BANKING CIBIL perceives firm retail quality, but some stress in SME India Equity Research Banking and Financial Services We had recently organised a conference call with Mr. Satish Pillai, Chief Operating Officer, CIBIL, to gain insights into emerging trends on asset quality, to understand the scope of credit data available, the process of collecting & recording the same, and finally the impact of the bureau s credit monitoring on the structural behaviour of asset quality. We understand that retail asset quality continues to clock historical low delinquency levels, barring a slight uptick in the auto segment. Stress in auto segment (along with commercial vehicles) is however restricted to some products for a certain set of banks only and is not a widespread phenomenon. Moderation in trends is however visible on SME portfolios given the tough environment. Along with CIBIL data sounding caution on commercial vehicles asset quality, we believe: (i) pressure on freight rates on key routes; (ii) excess capacity creation with falling cargo availability; and (iii) operators cash flows taking a hit as operating costs continue to mount, make this segment vulnerable. We remain watchful of banks and NBFCs with sizeable exposure to commercial vehicles. Asset quality: Barring auto, retail quality intact; stress in SME The asset quality trend has been healthy over the past 18-24 months in vintage portfolios across all retail products, other than auto loans (both 30dpd and 90dpd) and delinquencies are at historical lows. Within auto loans, some segments for a few banks are seeing higher than normal delinquencies (15-20% higher than last year), but acrossthe-board decline is not the trend. Further, various banks are performing differently in terms of recovery as well as some are able to recover pre write off. Commercial vehicles, however, are clearly witnessing stress. The other segment of advances viz., SME and private proprietorships have higher NPA rates for few banks. On large corporates while data is available, the focus is on SMEs. As per CIBIL, banks growth over the next 18 months will also have a bearing on asset quality. Retail asset quality drawing strength from improved processes Various factors are at play underscoring the superior performance of retail assets. Prominent amongst them are: (1) sourcing strategy shifting from self employed to salaried customers; (2) unsecured loans being stopped by many banks post the previous downturn; (3) mix of credit off take has also changed and now just 30-3 enquiries are for unsecured credit; (4) credit processes have improved over the years where subjective underwriting is being replaced with information-based underwriting; (5) banks along with their internal analysis (large banks have 3-4mn accounts data) are using the bureau score for decision making; and (6) portfolio management is gaining importance at banks, more so in private and multinational banks to track if their customers have increased their leverage with the other banks. Nilesh Parikh +91 22 4063 5470 nilesh.parikh@edelcap.com Kunal Shah +91 22 4040 7579 kunal.shah@edelcap.com Suruchi Chaudhary +91 22 6623 3316 suruchi.chaudhary@edelcap.com September 17, 2012 Edelweiss Research is also available on www.edelresearch.com, 1 Edelweiss Securities Limited Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Banking and Financial Services CIBIL: Regulations make it mandatory for financiers to report data CIBIL was set up by SBI (40%), HDFC (40%), TransUnion (10%), and Dun & Bradstreet (10%) in 2001. Overtime, as per RBI (sole regulator for CIBIL), the holdings of banks have reduced and now there are 15 shareholders with TransUnion being the largest shareholder at 27%. Currently, over 820 members provide data on monthly basis. As per the Credit Information Companies (Regulation) Act every financial institution is required to be a member of of atleast one credit information company by law and to give data on monthly basis. Hence, the entire credit history of an individual is available in most of the cases; enabling credit scoring by the bureau. Specified users can access the data outside of banks to enquire about individuals (insurance, telecom companies etc.). Credit data can be used only for existing customers or once the application comes; it cannot be used for marketing and selecting customer segments. Types of data repositories: Ranging from individual to frauds Individual client database: Information of 135mn individuals and 230mn accounts. Data available since 1995 and month-by-month updates. Commercial entities database: 2mn entities or 10mn accounts. Mortgage database (CIBIL Mortgage Check): Where deeds are checked for double financing against the same property. It is different from the one being formed by the government as it is not open to end customers. Currently, data on 8mn properties is available. Fraud database (CIBIL Detect): Repository of frauds committed as reported by banks. It is set up in collaboration with IBA. Purely to be used by banks to identify names that have been involved in frauds. Source is banks only while talks with SEBI are on to source information from it as well. Within the other offerings of the bureau are decisions making solutions to help financiers consume data better and integration of systems to help data usage faster. Along with credit quality monitoring quality of acquisition is also seen and that too does not show any deterioration on part of banks as yet. Data management and challenges: Continuous improvement Monthly data collection happens generally by the 15th of every month whereby information pertaining to the repayment behavior of a borrower is collected, fields like Rate of Interest and Tenure are not mandatory. To check evergreening by a particular bank benchmarking between banks is done to check for dramatic shifts between NPAs across vintage. Hit ratios are robust with the overall number at 70%, though it differs across products with credit cards being highest at 80%, auto (50-60%), two wheelers 40% hit rates and personal & home loans in the 60-80% range. ~30% of people coming to banks are new customers. Balance 70% already have a record with the bureau. Biggest challenge is data management, collection and dissemination. CIBIL is working to speed up the process. Private banks usage runs deep Private banks have a deeper usage of data than PSU banks. Some PSUs are big users of the credit bureau and there are others which are still learning to integrate the systems. 2 Edelweiss Securities Limited
Sector Update Chart 1: Shareholding pattern: Large participation by banks Fig. 1: History of CIBIL April 2011 TransUnion International 28% ICICI 10% HDFC BOB BOI SBI 10% Sundaram Finance 2% Central bank of India CIBIL TransUnion Score made available to individuals IOB Standard Chartered HSBC Citicorp Finance (India) Union bank of india PNB Source: Company Sept 2010 July 2010 Nov 2007 May 2006 April 2004 Aug 2000 Nov 1999 Launched the first centralized database on Mortgages in India-CIBIL Mortgage Check Launched CIBIL Detect- India's first repository for information on highrisk activity CIBIL TransUnion Score introduced to Banks Commenced Commercial Bureau operations Launch of Credit Bureau services in India (Consumer Bureau) CIBIL was Incorporated basis the recommendations made by the Siddiqui Committee Report submitted by SiddiquiCommittee for setting up India's first Credit Information Bureau Source: Company 3 Edelweiss Securities Limited
Banking and Financial Services Edelweiss Securities Limited, Edelweiss house, off C.S.T. Road, Kalina, Mumbai 400 098. Board: (91-22) 4009 4400, Email: research@edelcap.com Vikas Khemani Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206 Nischal Maheshwari Co-Head Institutional Equities & Head Research nischal.maheshwari@edelcap.com +91 22 4063 5476 Nirav Sheth Head Sales nirav.sheth@edelcap.com +91 22 4040 7499 Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services Allahabad Bank, Axis Bank, Bank of Baroda, Federal Bank, HDFC, HDFC Bank, ICICI Bank, Infrastructure Development Finance Co Ltd, IndusInd Bank, Indian Overseas Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, Multi Commodity Exchange of India, Manappuram General Finance, Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital, Rural Electrification Corporation, State Bank of India, Shriram City Union Finance, South Indian Bank, Union Bank Of India, ING Vysya, Yes Bank Recent Research Date Company Title Price (INR) Recos 08-Sep-12 NBFC RBI s voice: Eye on gold loan NBFCs processes; Visit Note 16-Aug-12 IDFC Beat on operating performance; Result Update 136 Buy 13-Aug-12 Reliance Capital A steady quarter; Q2FY13 to see stake sale proceeds; Result Update 354 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* 113 53 19 186 * 1 stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) 114 58 14 Buy Hold Reduce appreciate more than 1 over a 12-month period appreciate up to 1 over a 12-month period depreciate more than over a 12-month period 4 Edelweiss Securities Limited
Sector Update General Disclaimer: DISCLAIMER This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. 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. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided 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 investigation 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 his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. 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 Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their dependents from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information provided in these documents remains, unless otherwise stated, the copyright of Edelweiss. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright Edelweiss and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders. Edelweiss might be engaged or may seek to do business with companies covered in its research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should take informed decision and use this document for assistance only and must not alone be taken as the basis for their investment decision. Analyst Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Analyst holding in the stock: No. Additional Disclaimer for U.S. Persons This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved Access the entire repository of Edelweiss Research on www.edelresearch.com 5 Edelweiss Securities Limited