EIC Analysis – Banking Industry
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Transcript of EIC Analysis – Banking Industry
Economic-Industry-CompanyAnalysis of
Indian Banking Sector
Under the Guidance of: Under the Guidance of:
Mr. Prem Khatri Prof. Priti BakhshiFounder & CEO Associate Professor
Cafemutual ITM
Submitted By:
Shray TanejaPGDM 2009-11
KHR2009PGDMF089In Partial Fulfillment of 2 Years Full Time Post Graduate Diploma in Management
CAFEMUTUAL
• A new start-up
• It is a media company
• Focusing on distributors of financial services
• Providing information and education
• To launch a website focused on mutual funds
Economic Analysis
India’s GDP witnessed high growth and was the second fastest growing GDP after China
Indian Economy – Overview
• The Indian economy has witnessed an unprecedented growth….
2007-08 2008-09 2009-10 2010-11 2011-120
10
20
30
40
50
60
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
38.9 41.5 44.6
48.4 52.8
9.2%
6.7%
7.4%
8.5%9.0%
Gross Domestic Product at factor cost
Year
In R
s. Tr
illio
n
Source: Central Statistical Organization
The sound performance of each industry segment is leading to the overall robust performance of the Indian economy
Indian economy is the 4th largest in terms of PPP – USD 3.548 trillion in 2009
Current Indicators
• RBI estimates GDP growth in FY2010 between 7.2-7.5%
• Industrial production revives; average growth of 10.4% in FY2010 against 2.7% in FY2009
• Net FII inflow of USD 30 bn in FY2010 as against net outflow in FY2009
• Rupee appreciation of 11.4% vis-à-vis US dollar during FY2010
• Comfortable systemic liquidity and growing Exports• WPI inflation increased to 9.9% in Mar 2010• Policy rates normalizing in line with growth
Indian Economy – Banking (Positive)
• New players in the banking space expected• Infusion of Rs.16,500 Cr to public sector banks to
maintain tier-I capital• Increase emphasis on infrastructure: Financing to
rise to Rs. 20000 cr • Net market borrowing lower than expectation:
Reduce pressure on long term bond yields • Extension of 6-months for the repayment of loans
under agri-debt relief scheme• Housing loans – extended to 31st March 2011
Industry Analysis
Financial Year 2009 – 10
• New banking licenses, new players, more competition thus leading to better savings and lending rates
• Results for the Indian banking industry were in line with expectations
• Structural improvement in the CASA to 38% from 34% y-o-y basis
• Increasing CRR ratio and migration to base rate from the current PLR system were on the negative side
• Bond yield will have negative impact
Updates
• Expansion in Rural segments: Micro Finance • Payment of interest on daily balance: Higher
outflow to Banks• Biometric ATM’s will replace the conventional
ATM’s• Cheques will gradually be phased out and
replaced by RTGS (Real Time Gross Settlement) and NEFT (National Electronic Fund Transfer)
• At least 5 more International Banking giants will set up operations in India
Basel II Accord
Minimum Capital Requirements
Credit Risk
Operational Risk
Trading Market
Risk
Supervisory Review Process
Risk Management Policies and
Practices
Economic capital process
Additional Capital
Requirements
Market Discipline
Mandates increased minimum
public disclosure of
bank’s risk information
Pillar I Pillar IIIPillar II
Challenges
• International Financial Reporting Standards (IFRS) Convergence
• Deregulation: Banking market extremely competitive
• Diffused Customer loyalty• Competency Gap
Options to cope with the challenges• State of the art technology• Leveraging the branch network and sales
structure• Focusing on fee based income• Aggressive forays in the retail advances
segment of home and personal loans• Improving the asset quality as per Basel II
norms• Innovating Products: Credit Analytics Systems• Mobile banking: Access bank accounts through
Mobile phones
Company Analysis
IntroductionICICI Bank
• India’s 2nd Largest banks with total assets worth US $91.07 billion
• Ranked 219 as per Forbes Global 2000 list of companies
• 2000 branches and about 5219 ATMs in India
• Client Sales Simulator• Go Green – ‘Chlorophyll’• Caters more to the premium
segments
State Bank of India• India's largest banking group
with assets worth US $188.56 billion
• Ranked 219 as per Forbes Global 2000 list of companies
• 12496 branches and about 16294 ATMs in India
• Branches in 32 nations• SBI Smile• Kiosk Banking with bio-
metric validation
The Base Rate system
• Base Rate are: Cost of deposits Adjustment for the negative carry in respect of CRR and SLR Unallocatable overhead cost e.g. directors’ and auditors’
fees Profit margin
• Banks not permitted to resort to any lending below the Base Rate
• Actual lending rates= Base Rate + borrower-specific charges
• Both banks have set its base rate for loans at 7.5 percent
• SBI is having a rapid growth in its deposits• As SBI has larger network of branches and ATMs• People in India trust the public sector banks over the private sector ones• The average annual interest income was approx. Rs. 4972 crore• ICICI Bank’s income was well above the industry average at around Rs. 25700 crore• But still SBI had it at Rs. 70990 crore
• Bounce back of ICICI Bank has been phenomenal over the previous year• Primarily due to an increase in treasury income, a decrease in non-interest expenses, decrease in net interest income, and decrease in fee income• Profit of SBI has dipped significantly• Though Operating Profit, Net Interest Income, Other Income increased But Loan loss provision, Operating Expenses increased attributable to higher staff cost and other expenses
Mar '07 Mar '08 Mar '09 Mar '100.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
21.80%
26.10%28.70%
41.70%
44% 43%39%
47%
CASA
ICICI Bank SBI
• Increased CASA implies that the bank earn a higher interest than it has to pay• Stable low cost deposit base as it will get higher interest from its depositors and have excessive cash to give loans and advances• The banks are urged by the finance minister to increase their CASA deposits to 40% of the total deposits
• An indicator of how well earnings support the dividend payment• RBI has raised the cap on banks’ dividend payout ratio from 33.33% to 40%• ICICI Bank is large, stable and mature company as it offers a high D/P ratio.• D/P ratio of 23% for SBI is because of its growing trajectory• It is retaining some part of the cash for future expansionary purposes and has a conservative approach in wake of another financial crisis• RoE is a measure of the returns generated on shareholder funds• Also an indicator of financial strength• Companies with high RoE are more likely to generate incremental cash to fund capital expenses and are better placed to raise debt at fine rates
The CAMELS FRAMEWORK• RBI prescribes Banks to maintain a min (CRAR) of 9 % with regard to credit, market and operational risk • High ratio: Banks are in comfortable position to absorb losses, soundness and resilience• Capital adequacy ratio of the ICICI Bank was well above the industry average• It has ability to pursue accelerated growth
• Useful indicator of corporate efficiency• It shows the revenue a company generates from its assets• SBI is a better investment prospect as its return on asset is increasing over the years• The decline in ration for ICICI Bank could be because management is not adequately controlling the potential credit risks
• C - CAPITAL ADEQUACY• A - ASSET QUALITY • M - MANAGEMENT SOUNDNESS• E - EARNINGS & PROFITABILITY• L - LIQUIDITY• S - SENSITIVITY TO MARKET RISK
• An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment• It reduces profitability, and carrying cost is increased• Both banks have higher NPA than the industry average• Thus, they have to be much more efficient in giving out loan
• Measures a company’s profits compared to its entire investment• High ROA firms: more profitable, grow faster without borrowing or selling additional shares to raise capital• Indian banks operate at an average of around 1%• ROA of 1.13% ICICI Bank has performed much better than the entire industry
The CAMELS FRAMEWORK
• Is used to study liquidity position of the bank• High ratio: Large amounts of liquid cash to meet clients cash withdrawals• ICICI bank made a huge amount of business by granting loans & advances• SBI: playing safe in terms of its deposits & conserving cash for any unfavorable conditions as well as for expansionary purposes
The CAMELS FRAMEWORKSensitivity to Market Risk• Refers to the risk that changes in market conditions could
adversely impact earnings and/or capital. • The primary risk in most banks is interest rate risk (IRR)• IRR depends on many factors including:
Maturity Repricing characteristics The presence of embedded options, such as loan prepayments, interest rate
caps
• It is a director responsibility to ensure that the level of risk taken is appropriate for the institution and to ensure that the risk is well understood
• If the bank is taking on higher levels of IRR, it will need to maintain higher levels of capital and have higher levels of earnings
ICICI Bank SBI
Capital Market Performance
Bibliography
• Annual Report of ICICI bank• Annual Report of SBI • Reserve Bank of India• BSE Plus• Union Budget• Money Control• Mckinsey Report• Central Statistical Organization• www.icicibank.com• www.statebankofindia.com• www.google.com/finance • www.fdic.gov
Thank You