June 28, 2019 - ICICI Direct

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

Sector U

pdate

June 28, 2019

Banking

Rally in corporates banks to continue for a while…

In our last sector update “Opportune time to board the bus”, we

recommended buying the banking space at that time with our preferred pick

in banking sector being SBI, Axis & City Union Bank. Post that, the banking

space along with our picks continued to outperform. With a slowdown

witnessed by NBFCs on the back of liquidity crunch, banking continues to

be a prime beneficiary of it. Banks continue to grow at a higher pace

compared to NBFCs. Furthermore, an anticipated recovery in two large

NCLT account will benefit PSU banks more leading to improvement in asset

quality &, subsequently, reduce the capital pressure.

In our analysis of expected business growth in the banking sector, we

believe large corporate private banks will continue their outperformance. On

the back of expected NCLT resolution and lower incremental stress, going

ahead, PSU banks are poised to grow in line with system growth.

We expect the below factors to pan out over the next couple of quarters.

Subdued private capex & higher stress in the corporate sector led to

sluggish credit growth in the last few years. However, a revival in the

industry sector and consistent growth in retail & services led to a

gradual improvement in systemic credit growth to 12.3% in FY19.

Going ahead, MSME focus from the government is expected to push

up disbursements. However, the ongoing liquidity crisis in the NBFC

sector is expected to keep bank lending to NBFC growth lower &

shift of business from NBFCs/ HFCs to banks

Anticipated resolution in large accounts like Essar Steel, Alok

Industries and Bhushan Power & Steel along with resolution in the

power sector are expected to pare down industry GNPA by ~170

bps to 7.8%. NNPA ratio is seen falling ~50 bps to 3.2%.

Furthermore, relaxation in form of 60% consensus for approval of

resolution plan vs. 100% earlier will lead to faster resolution.

Amid a strong decline in G-sec yield of 40 bps, banks are poised to

report higher investment gains that will support overall earnings

trajectory. PSU banks being more sensitive to change in yield vs.

private banks, will remain major beneficiaries of the decline. A 50

bps cut in G-sec yield would benefit SBI most in PSU while PNB & ,

Canara Bank in non-coverage can add 12-15 bps to RoA

Focus on financial inclusion, improving granularity and digital reach by

promoting non-cash transactions, retail online payment methods have been

garnering strength; especially post demonetisation. Collaboration among

market participants is to lower costs of bringing underserved and unbanked

consumers in formal financial services. Increase in cash less payments

presents three primary advantage for banks and other financial

intermediaries: 1) Generating fee based income; 2) reduction in cost in lieu

of handling cash; 3) higher customer engagement and CASA accretion.

With ~97 crore cards and rising quantum of mobile payment, the move

towards digitisation has begun, though financial inclusion remains a distant

dream. Private banks and new generation –payment banks, has been playing

a dominant role in engaging substantial customers in digital payment arena.

We retain our confidence in banks rather than NBFCs at this current juncture

as balance sheet management and lower growth, apart from fresh asset

quality concerns will take two to three quarters to stabilise. Elevated capital

adequacy norms to 15% by NHB will entail capital requirements for future

growth of HFCs. We prefer SBI, Axis Bank within the banking sector

coverage and SBI Life Insurance within the insurance sector.

Sector View

Overweight

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

RATING RATIONALE

ICICI Securities | Retail Research 2

ICICI Direct Research

Sector Update | Banking

Revised framework for resolution of stressed assets

provides leeway in managing stress

Post the court ruling February 12 circular pertaining to early recognition of

stressed assets as virus, RBI has issued a revised framework for resolution

of stressed assets. The revised framework provides leeway to lenders

providing an extended timeline in stress recognition and flexibility in

choosing the best plan to implement a stressed loan. Given peaking of NPA

cycle and rising provision cover, these guidelines will not have any material

impact on the current stressed exposure. However, it is expected to set the

stage for speedy recognition and resolution of stress arising ahead.

Highlights of the revised framework are:

(1) Timeline for recognition of stress asset has been increased from single

day earlier to 30 days,

(2) Moving to IBC is no more a prerequisite if the resolution plan fails to be

implemented beyond 210 days (30 days + 180 days),

(3) Approval required has been lowered to 60% by number and 75% by

value,

(4) Additional provision of 20% to be made if resolution plan remains

unimplemented after 210 days and 35% after 365 days,

(5) Conditions for upgradation are relatively relaxed and

(6) Framework is applicable to exposures greater than | 2000 crore and |

1500-2000 crore from January 1, 2020

Exhibit 1: Revised resolution framework

Existing framework Revised framework

Applicability Applies to SCBs and all-India term financial

institutions

Applies to SCBs, all-India term financial institutions

(Nabard, NHB, etc), SFBs, deposit-taking NBFCs

and systemically important non-deposit-taking

NBFCs

Exposure for application of the framework Applicable to accounts with exposure above | 2000

crore

Applicable to accounts with exposure of | 2000

crore and on accounts at | 1500-2000 crore from

January 1, 2020 onwards

Timeline for implementation of Resolution

plan (RP)

Banks shall initiate resolution process within a day

of default and implement resolution plan within 180

days of default

Lenders are given 30 days to review account and

decide on resolution process. Resolution process is

to be implemeneted with 180 days from date of end

of review period i.e. 210 days from date of default

Approval of the resolution plan (RP) 100% of lenders will be in agreement for

implementation of resolution plan

Approval needed from 60% of lenders by number

and 75% of outstanding credit facilities

Delayed implementation of resolution plan

(RP)

Mandatorily refer account to IBC, post 180 days Additional provisions of 20% of outstanding amount

needs to be parked post 210 days of default and

15% post 365 days of default. If account is referred

to IBC, 50% of additional provisions can be reversed

on filing and remaining 50% on admission by NCLT

Upgradation If resolution involves restructuring/change in

ownership (including those undertaken under IBC),

accounts can be upgraded when all outstanding

exposures are performing from date of

implementation till at least 20% of outstanding

principal debt is repaid

If resolution involves restructuring/change in

ownership (including those undertaken under IBC),

accounts can be upgraded when all outstanding

exposure is performing from date of implementation

till at least 10% of outstanding principal debt is

repaid

In case of change in ownership Lenders shall establish that acquirer of asset is not

disqualified under section 29A of IBC

Along with earlier requirement, ‘new promoter’

should hold minimum 26% of paid up equity capital

and needs to be in control of entity. In addition,

acquirer should not be related to existing owner

Source: Company, ICICI Direct Research




Features of revised resolution framework

To recognise stress early, lenders need to classify stressed loans as special

mention accounts for SMA-0 for 1-30 days overdue, SMA-1 for 31-60 days

and SMA-2 for 61-90 days overdue. In case of revolving credit facilities, if

outstanding balance remains in excess of sanctioned limit, account is

classified as SMA-1 for 31-60 days and SMA-2 for 61-90 days overdue.

Lenders must formulate board approved policies for resolution of stressed

assets under this framework, including the timelines for resolution. On

default of a borrower, lenders to initiate review within 30 days of default and

decide on a resolution plan.

For large exposures above | 2000 crore, RP is to be implemented within 180

days from end of review period (30 days after date of default). For exposures

from | 1500 – 2000 crore, the framework is applicable from January 1, 2020.

All lenders need to enter into an inter-creditor agreement (ICA) to provide

ground rules for finalisation and implementation of RP. For implementation

of the plan, agreement of 75% by value and 60% by number of lenders will

be needed.

An independent credit evaluation by at least one credit rating agency is

needed for exposure below | 500 crore and by two agencies for exposure

above | 500 crore.

Lenders are required to make additional provision (higher of provision held

or required as per asset classification norms) of 20% of the outstanding in

cases where an RP is not implemented within 180 days from the end of

review period. Additional provision of 15% needs to be provided further on

completion of 365 days without implementation of resolution plan.

Additional provisioning could be reversed based on the following

implementation;

Payment of overdue by the borrower - the additional provisions may

be reversed only if the borrower is not in default for six months from

the date of clearing of the overdue with all the lenders;

Restructuring/change in ownership outside IBC - the additional

provisions may be reversed upon implementation of the RP;

Resolution pursued under IBC - half of the additional provisions

made may be reversed on filing of insolvency applications and the

remaining additional provisions may be reversed upon admission of

the borrower into the insolvency resolution process under IBC;

Initiation of assignment of debt/recovery proceedings - the

additional provisions may be reversed upon completion of the

assignment of debt/recovery.

Prudential norms for accounts restructured under the IBC framework or

outside IBC:

Restructured accounts classified as 'standard' shall be immediately

downgraded as non-performing assets (NPAs), i.e., 'sub-standard' to begin

with. The non-performing assets, upon restructuring, would continue to

have the same asset classification as prior to restructuring. In both cases,

the asset classification shall continue to be governed by the ageing criteria

as per extant asset classification norms.

Standard accounts classified as NPA and NPA accounts retained in the same

category on restructuring can be upgraded only when all outstanding loan

facilities demonstrate 'satisfactory performance' during the period from the

date of implementation of RP up to the date, by which time at least 10% of

the sum of outstanding principal debt and interest capitalisation sanctioned

as part of the restructuring is repaid.




For accounts with aggregate exposure above | 100 crore, any upgrade

would also require a minimum rating of BBB- (i.e. investment grade). For

exposures above | 500 crore, two rating agencies will need to certify the

account as investment grade.

Accounts restructured under the new framework will attract provisions as

per existing norms. Interest income for restructured accounts classified as

'standard assets' may be recognised on an accrual basis. With respect to the

restructured accounts classified as 'non-performing assets', they will be

recognised on a cash basis.

Softness in yields to play positive role in earnings…

The Indian debt market, after stable movement for the first half of the

quarter, saw a sharp decline in G-sec yield falling ~ 40 bps to 6.92% from

7.35%. The global environment, in terms of a sharp fall in crude oil prices to

~US$60 per barrel from more than US$70 per barrel and falling bond yields

(US 10 year yield down 90 bps from 3.0% to 2.1% in last six months), is

offering a conducive environment for lower interest rates domestically.

The change in liquidity stance from neutral to accommodative also boosted

investor sentiments. It indicates that system liquidity, which recently turned

positive after being in deficit mode since March 2019 is likely to remain in

surplus mode. The same augurs well for short-term rates. The lower

government spending in the last few months has already started to improve

post the formation of the new government. This will further help improve

the liquidity environment.

The cooling of yields will help banks report higher investment gains, seen

supporting the overall earnings trajectory. PSU banks are more sensitive to

any change in yield compared to private banks, led by higher proportion of

AFS book and longer duration. A 50 bps moderation in G-sec yield would

benefit SBI most among PSUs and PNB, Canara Bank in non-coverage can

add 12-15 bps to RoA. On the other hand, benefit to private banks is seen to

be limited in the range of 1-2 bps at RoA level.

Exhibit 2: PSU Banks as major beneficiary from decline in G-sec yields

Q4FY19

| crore

H

T

M

30 bps 50 bps 30 bps 50 bps 30 bps 50 bps 30 bps 50 bps

Public sector banks

Bank of India* 145,548 39,045 2.8 328 547 5.3 8.9 9.4% 15.7% 46000 0.7% 1.2%

Bank of Baroda 172,412 69,820 0.9 186 311 3 4 2.0% 3.4% 72634 0.3% 0.4%

PNB* 200,632 65,280 3.4 674 1,123 7 12 15.4% 25.7% 37390 1.8% 3.0%

Canara Bank* 150,460 61,611 3.0 556 927 8 13 15.7% 26.2% 29080 1.9% 3.2%

SBI 926,651 420,700 2.6 3,307 5,511 9 14 8.9% 14.8% 232800 1.4% 2.4%

Indian Bank 65,758 26,798 3.2 254 423 8 14 14.7% 24.5% 20216 1.3% 2.1%

Private sector banks

Axis Bank 174,969 54,240 NA NA NA NA NA NA NA 79168 NA NA

City Union Bank 7,863 1,540 1.0 5 8 1 2 0.4% 0.7% 5576 0.1% 0.1%

DCB 7,844 2,137 0.6 4 6 1 2 0.6% 1.1% 3531 0.1% 0.2%

J&K Bank 23,161 6,005 0.9 16 26 1 2 1.3% 2.2% 7249 0.2% 0.4%

Absolute

Impact due to

decline in Yield

Impact on PAT

due to decline

in yield

Impact on NW

due to decline

in yield

Networ

th

(FY20E)

Investment

book

AFS Duration

(yrs)

Impact on RoA

due to decline

in yield

Source: Company, ICICI Direct Research, *FY19E is from Bloomberg for non-coverage

Stable government and downward trend in global

interest rates leads to expectation of decline in G-

sec yields. Therefore, yields can play far positive role

in earnings, particularly of PSBs




Credit growth steady; revival in industry seen

Subdued private capex & higher stress in corporate sector led to sluggish

credit growth of ~8.6% CAGR in FY15-18. However, a revival in industry

sector & consistent growth in retail & services led to a gradual improvement

in systemic credit growth to 12.3% in FY19 vs. 8.4% in FY18. Industry credit

grew 6.9% in FY19 (vs. muted 0.7% in FY18), largely due to increased

working capital demand in the economy. Retail growth, which is a key driver

of credit growth, continued to grow at a consistent pace of 16.4% YoY in

FY19.

The industry sector growth 6.9%, largely driven by infrastructure & chemical

sector by 18.5% & 17.5%, respectively. Within infrastructure,

telecommunication grew 36.7%, roads grew 12.2% while power grew 9.5%.

Within chemical sector, due to a delay in subsidy by government, fertiliser

segment witnessed robust growth of ~31%. However, fertiliser growth is

poised to de-grow post availing subsidy.

Retail loan segment recorded growth at a steady pace of ~16% YoY as of

FY19 on the back of stable & consistent growth in housing, other personal &

credit card of 19%, 19% & ~29% YoY, respectively. However, a slowdown

in auto sales has impacted vehicle finance growth adversely at 6.5% in FY19.

The agricultural and allied activities segment growth seems to have

marginally improved in FY19 to ~8% YoY vs. ~4% in FY18.

The services segment growth continues to remain healthy at ~18% YoY in

FY19. Growth of non-banking financial companies (NBFCs) slowed down to

~29% YoY as of FY19 on the back of the NBFC crises while growth in

wholesale trade book continued to gain momentum with growth of 22% YoY

in FY19. Ex-NBFC, growth of the service segment was at ~14%.

Going ahead, the large industrial sector is poised to grow steadily compared

to small & medium industry in FY20E. MSME focus from the government is

expected to push up disbursements. However, the ongoing liquidity crisis in

the NBFC sector is expected to keep bank lending to NBFC lower impacting

service growth. With an improving credit scenario and shifting demand from

NBFCs to banks, we expect credit growth to stay stable at 14-15% in FY20E.

Exhibit 3: Retail growth remains steady; revival in industry witnessed


| crores FY15 FY16 FY17 FY18 Jan-19 Feb-19 FY19

Non-Food Credit 6,002,952 6,546,903 7,094,490 7,688,423 8,204,291 8,306,521 8,633,418

Agriculture & Allied Activities 765,880 882,942 992,386 1,030,215 1,083,159 1,092,771 1,111,300

Industry 2,657,629 2,730,679 2,679,831 2,699,268 2,750,000 2,774,256 2,885,800

Services 1,413,097 1,541,067 1,802,237 2,050,471 2,234,000 2,276,195 2,415,609

Personal Loans 1,166,348 1,392,216 1,620,034 1,908,469 2,137,063 2,163,298 2,220,732

YOY growth (%)

Non-Food Credit 8.1% 9.1% 8.4% 8.4% 13.1% 13.2% 12.3%

Agriculture & Allied Activities 9.2% 15.3% 12.4% 3.8% 7.6% 7.5% 7.9%

Industry 5.9% 2.7% -1.9% 0.7% 5.2% 5.6% 6.9%

Services 7.3% 9.1% 16.9% 13.8% 23.9% 23.7% 17.8%

Personal Loans 13.8% 19.4% 16.4% 17.8% 16.9% 16.7% 16.4%

Proportion (%)

Agriculture & Allied Activities 12.8% 13.5% 14.0% 13.4% 13.2% 13.2% 12.9%

Industry 44.3% 41.7% 37.8% 35.1% 33.5% 33.4% 33.4%

Services 23.5% 23.5% 25.4% 26.7% 27.2% 27.4% 28.0%

Personal Loans 19.4% 21.3% 22.8% 24.8% 26.0% 26.0% 25.7%




NPA concerns behind sector

Asset quality is now moving into the positive territory. Fresh slippages were

lower and led by write-offs. Absolute GNPA declined 3% sequentially and

was down 9.4% YoY to | 928470 crore. Write-off increased ~23% YoY to

~| 197705 crore in FY19 compared to | 161328 crore in FY18. Provisions

remained elevated at | 107584 crore, up 63% QoQ as higher provisions were

witnessed for NCLT & ILFS. Accordingly, GNPA& NNPA ratio improved to

9.5% & 3.7% in FY19 compared to 11.6% & 5.8% in FY18, respectively.

Going ahead, with resolution of highly anticipated NCLT cases (Essar Steel,

Bhushan Power & Alok Industries) and stressed power sector close to

completion is expected to reduce GNPA ratio to 7.8% in FY20E.

Exhibit 4: Asset quality continues to improve


Exhibit 5: Expected improvement in asset quality on back of NCLT/Power resolution


FY16 FY17 FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19

GNPA 575313 776835 1024586 1002682 997247 961129 928470

NNPA 331340 430173 517775 485181 463082 417837 359629

GNPA ratio 7.6 9.6 11.6 11.3 10.8 10.2 9.5

NNPA ratio 5.1 5.3 5.8 5.5 5.0 4.4 3.7

GNPA of PSU banks 523398 684733 896601 874071 868812 829745 797186

GNPA of Private banks 51915 92102 127985 128611 128435 131384 131284

w/off 57585 108374 161328 197705

(| crore)

Expected resolution (Essar Steel + Bhushan Power + Alok Industries) 131000

New GNPA 797470

New GNPA ratio 8.2

Resolution of power exposure to extent of ~| 35,000 crore 762470

New GNPA ratio 7.8

NNPA 312429

New NNPA ratio 3.2




Payment landscape offers huge opportunity ahead

India is an immense and extremely unique market with a nascent payments

industry that seems poised for dramatic growth. New dynamics on the

supply side including regulators and participants (universal and payment

banks, technology providers, aggregators, acquirers and fin-tech

companies) are bound to bring major change in the rules of the game.

Intense focus and strategic collaboration among market participants will

lower the costs of bringing underserved and unbanked consumers in formal

financial services. With collective and continuous emphasis by government,

central bank and other stake holders, non-traditional payment

methodologies are being redefined to pave way for higher digital modes of

payments. The new payments ecosystem will supplement as well as ride the

wave of smartphones, internet penetration and recent policy initiatives like

Jan Dhan, Aadhaar, Digital India and Digilocker to find creative ways to deal

with each other in the new marketplace to settle their positions on where

they will play and how they will win. Incentives and cash backs are being

offered to change the perception of digital payment; thereby encouraging

and engaging higher usage of non-cash medium of transactions. Increase in

cash less presents three primary advantage for banks and other financial

intermediaries: 1) provides opportunity to generate fee based income; 2)

reduction in cost in lieu of handling cash; 3) higher customer engagement.

Indian payment has been a cash economy for a long time but movement in

the direction of digital or cashless mode of transactions is rapid. Non cash

transactions have witnessed an increase at 14.1% CAGR to | 32.7 lakh crore.

Exhibit 6: Non cash payment on the rise

1,621,022 1,678,748 1,689,951

1,857,762

2,046,076

2,554,0862,855,818

3,269,487

0

5

10

15

20

25

30

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Payment in value (| billions) YoY growth (%)

Source: RBI, ICICI Direct Research

Drilling down further among constituents of non-cash payments, non-cash

broadly comprises six methodologies including RTGS, NEFT, paper clearing

and cards. With focus on improving granularity and reach of digital

payments and promoting non-cash transactions, retail payment methods

(IMPS and NEFT) have witnessed a faster increase in volumes as well as

value. Value of transactions undertaken through retail non-cash means

increased at ~40% CAGR in FY14-19. This has led to increase in the

proportion of retail non-cash in overall payment from ~1% in FY12 to ~8%

in FY19. In contrast, paper clearing has been trending downwards with

proportion in overall payment declining from 6.1% in FY12 to 2.5% in FY19.

Proportion of prepaid instruments (PPI), though very small in the overall pie,

has been growing at rapid pace of ~92% CAGR in FY12-19.




Exhibit 7: Retail non-cash proportion rises from 1% in FY12...

67%

25%

6%1%1%0% RTGS

CCIL Operated System

Paper Clearing

Retail Electronic

Clearing

Cards

Source: RBI, , ICICI Direct Research

Exhibit 8: …to ~8% in FY19

52%

36%

3%

8%1%0% RTGS

CCIL Operated System

Paper Clearing

Retail Electronic

Clearing

Cards

Source: RBI, , ICICI Direct Research

Exhibit 9: Rapid growth in non-cash retail payment

1.3% 1.9% 2.8% 3.5% 4.5% 5.2% 6.7% 7.9%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

RTGS CCIL Operated System Paper Clearing Retail Electronic Clearing Cards PPIs


SBI and HDFC Bank – leads the way among pack

With focus on improving digital banking, the India banking industry, as a

whole, is moving towards increasing the proportion of non-cash payments.

However, the proportion of digital means remain a bit concentrated among

top 10-15 intermediaries (predominantly banks). HDFC Bank and SBI are

leading the banking industry in the race towards non-cash banking, led by a

large customer base and continuous focus on digital banking.

In case of NEFT, SBI and HDFC Bank remain the major leaders with more

than 25% market share. Top 10 banks contribute a major proportion of

market share to the tune of ~70%. Similarly, in RTGS, top 10 banks

contribute ~70% market share. SBI and HDFC bank lead the pack with

~30% market share in the payment space.




Exhibit 10: Top 10 banks contribute ~70% of transactions

0.00

5.00

10.00

15.00

20.00

25.00

HD

FC

Bank

SB

I

AX

IS B

ank

CIT

I B

ank N

.A

.

DEU

TS

CH

E

Bank A

G

STA

ND

AR

D

CH

AR

TER

ED

…

NSD

L

Yes B

ank


Exhibit 11: HDFC Bank, SBI lead with ~25% market share

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

STA

TE B

AN

K O

F

IND

IA

HD

FC

BA

NK

RB

I,PA

D

AX

IS B

AN

K

CIT

I BA

NK

YES

BA

NK

KO

TA

K

MA

HIN

DR

A…

STA

ND

AR

D

CH

AR

TER

ED

BA

NK

HS

BC B

AN

K


Cards

In a bid to move towards a cashless society, Reserve Bank of India, in its

payments vision document (May 2019), has set an objective to achieve

~44% share in point of sale (PoS)-based debit card transaction by FY21.

Likewise, banks (both public, private sector banks) have been aggressively

deploying swipe machines across the country making inroads in Tier II and

III cities. Currently, there are ~37.5 lakh active PoS terminals deployed

across India by banks as of FY19. Though banks were adding to the reach of

PoS machines, demonetisation in November 2016 provided a fillip to the

momentum. Of the overall active PoS, first 14 lakh machines were installed

in 30 years while post demonetisation in the next three years, ~24 lakh

machines were added. This is expected to grow to ~50 lakh ahead.

Exhibit 12: PoS strength at ~37.5 lakh; target to reach ~50 lakh

11.3

13.9

25.3

30.8

37.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

March, 2015 March, 2016 March, 2017 March, 2018 March, 2019

No. of POS Terminals in India (in lakhs)


The Indian card industry is skewed towards debit cards with ~92.4 crore

cards comprising ~95% of total issued cards (~97.1 crore as of January

2019). Credit cards comprise the remaining 5% of issued cards at ~4.7 crore.

Increase in number of cards came after the Modi government came up with

Digital India as one of the main agenda. In 2016, there were ~68.6 crore

cards. In three years, this increased to ~97.1 crore i.e. CAGR of 12.28%. One

of the main reasons for such an increase in number of cards issued was

introduction of Jan Dhan scheme, which contributed to the issuance of

~35.39 crore cards.




Exhibit 13: Cards issued increases at 12% CAGR in last three years

553.45661.82

771.65861.08

924.63

21.11

24.51

29.84

37.48

47.09

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

January, 2015 January, 2016 January, 2017 January, 2018 January, 2019

Debit Cards (In Millions) Credit Cards (In Millions)


Private banks lead in credit cards; foreign banks ahead in utility

In terms of cards, India has seen healthy growth in cards in the last decade,

pushed mainly by private banks. Currently, ~4.7 crore credit card have been

issued by the banking sector, as a whole. In FY12-16, value of transaction

undertaken through credit card increased at 25.6% CAGR. However, this

pace increased further at 35.8% CAGR in FY16-19 to | 6 lakh crore. Value of

transaction undertaken through credit card is dependent on three factors –

1) number of cards issued, 2) number of transaction per card per annum and

3) amount of per transaction. In FY12-16, higher usage of credit card i.e.

transaction per card per annum increased from 18 to 36.9. This led to

increase in value of credit card transaction. However, post demonetisation,

there was an increase in number of credit cards issued. This is evident from

the rise in outstanding credit cards from 2.1 crore in FY16 to 3.78 crore in

FY19. During the last seven years, value per transaction broadly remained

stable at ~| 3200-3500.

Exhibit 14: Issuance of credit card rises post demonetisation

Volume

(Million)

Value

(Rupees

Billion)

Cards

(Million)

Transaction

per card

Value of per

transaction

Utility of

card

2011-2012 320 966 17.8 18.0 3020 54339

2012-2013 397 1230 17.8 22.3 3100 69209

2013-2014 509 1540 19.6 26.0 3025 78765

2014-2015 615 1899 19.2 32.0 3087 98761

2015-2016 786 2407 21.3 36.9 3063 113039

2016-2017 1087 3284 24.9 43.7 3021 132092

2017-2018 1405 4590 30.4 46.3 3266 151124

2018-2019 1763 6033 37.8 46.7 3423 159700

FY12-16 CAGR 25.2% 25.6% 4.6% 19.7% 0.4% 20.1%

FY16-19 CAGR 30.9% 35.8% 21.1% 8.1% 3.8% 12.2%

Credit cards


Of total credit card at ~4.7 crore, private banks have ~3.1 crore cards

contributing ~65% of total issued cards. In terms of value, per annum

transaction undertaken was at ~| 6 lakh crore in FY19. With average value

per transaction at | 3500 and ~37 transactions undertaken per annum, utility

per card was at | 128127 in FY19.

Private Banks contribute nearly two-third of total transactions at PoS

undertaken in terms of value at | 35377 crore (in April 2019) of total

transaction at | 57648 crore (in FY19). Among constituents, the value per

transaction is broadly similar across various issuing banks. However,




number of transactions per card per annum defines the difference in card

utility among the peers. For PSU banks, number of transactions per card per

annum ranges at ~35. Private Banks have higher number of transactions per

card per annum at ~39 per card. Foreign banks have substantially high

number of transaction per card per annum at ~66, led by an affluent

customer base.

Exhibit 15: Foreign banks have highest utilisation of credit card

Outstanding

cards (April

2019)

No. of

Transactions

Amount of

transactions

(| Millions)

Transacti

on per

card

Value of per

transaction (|)

Utility of

card (|)

PSB 10527121 30687137 103499 2.9 3373 9832

Private 31208547 101495121 353772 3.3 3486 11336

Foreign 6261123 34738328 119213 5.5 3432 19040

Total 47996791 166920586 576485 3.5 3454 12011


In terms of volume as well as value, HDFC Bank and SBI lead in terms of

credit cards market share, with ~43-45% market share. This is due to higher

number of card issued by financiers – HDFC Bank has 1.2 crore cards while

SBI has ~85 lakh cards. However, looking at card utilisation, volume of

transaction per card is the highest in cards issued by foreign banks - Citibank

(~7.8 in April 2019) followed by America Express (~4.6 in April 2019). Apart

from this, Union Bank of India is bank with number of transactions between

four and five per month.

Exhibit 16: Higher number of cards leads to substantial market share in volume

26.77

15.88

12.63

9.92

4.13 3.40 3.19 2.75 2.08

0

5

10

15

20

25

30

HD

FC

BA

NK LTD

STA

TE B

AN

K O

F

IND

IA

CIT

I B

AN

K

AX

IS B

AN

K L

TD

AM

ER

ICA

N

EX

PR

ESS

KO

TA

K M

AH

IND

RA

BA

NK LTD

RA

TN

AKA

R B

AN

K

LIM

ITED

STA

ND

AR

D

CH

AR

TER

ED

BA

NK

LTD

IND

US

IND

BA

NK

LTD


Exhibit 17: HDFC Bank, SBI have highest market share in value

27.93

16.33

10.539.06 8.38

4.593.18 2.74 1.95

0

5

10

15

20

25

30

HD

FC

BA

NK LTD

STA

TE B

AN

K O

F

IND

IA

AX

IS B

AN

K L

TD

AM

ER

ICA

N

EX

PR

ESS

CIT

I B

AN

K

IND

US

IND

BA

NK

LTD

RA

TN

AKA

R B

AN

K

LIM

ITED

KO

TA

K M

AH

IND

RA

BA

NK LTD

STA

ND

AR

D

CH

AR

TER

ED

BA

NK

LTD


Debit cards – next aim to usher in cashless economy

India has a large number of debit cards. However, primary usage was

restricted to cash withdrawal. Therefore, in spite of such a huge outstanding

card base, the goal of a cashless economy remains far distant. In addition, it

does not enable intermediaries to generate fee based income. However,




there has been a structural shift, though gradual, in the usage of debit card.

On the one hand, usage of debit card at ATMs has been on a continuous

decline from | 60791 per card per annum to | 36528 in FY19, primarily led

by a reduction in the number of transaction per card per annum. However,

usage of debit cards at PoS is on the rise; boosted by demonetisation.

Number of transaction per card per annum has risen from 1.4 in FY12 to 2.1

in FY16, which more than doubled to 4.9 in FY19. This increase is attributable

to demonetisation wherein scarcity of cash pushed usage of cards.

Exhibit 18: Transaction per debit card has been on a gradual decline

Volume

(Million)

Value

(Rupees

Billion)

Cards

(Million)

Transaction

per card

Value of per

transaction

(|)

Utility of

card (|)

2011-2012 5082 13998 230 22.1 2754 60791

2012-2013 5308 16683 282 18.8 3143 59182

2013-2014 6088 19648 337 18.1 3227 58326

2014-2015 6996 22279 400 17.5 3184 55747

2015-2016 8073 25371 565 14.3 3143 44934

2016-2017 8563 23603 671 12.8 2756 35166

2017-2018 8602 28988 781 11.0 3370 37126

2018-2019 9860 33108 906 10.9 3358 36528

FY12-16 CAGR 12.3% 16.0% 25.1% -10.3% 3.4% -7.3%

FY16-19 CAGR 6.9% 9.3% 17.1% -8.7% 2.2% -6.7%

Debit Cards - ATM


Exhibit 19: Higher usage of debit cards; especially post demonetisation

Volume

(Million)

Value (|

Billion)

Cards

(Million)

Transaction

per card

Value of per

transaction

(|)

Utility of

card (|)

2011-2012 328 534 230 1.4 1631 2321

2012-2013 467 743 282 1.7 1591 2636

2013-2014 619 955 337 1.8 1542 2834

2014-2015 808 1213 400 2.0 1502 3036

2015-2016 1174 1589 565 2.1 1354 2815

2016-2017 2399 3299 671 3.6 1375 4915

2017-2018 3343 4601 781 4.3 1376 5892

2018-2019 4414 5935 906 4.9 1344 6548

FY12-16 CAGR 37.6% 31.3% 25.1% 9.9% -4.5% 4.9%

FY16-19 CAGR 55.5% 55.1% 17.1% 32.8% -0.2% 32.5%

Debit Cards - POS


For the first time since demonetisation, payment through debit cards at

kirana & retail store has gained traction compared to ATM transactions. ATM

transaction, which usually forms more than two-third of total card volume,

saw a dip in market share led by higher PoS transaction. Accordingly, share

of PoS in total volume increased to 34% from 30% in January 2019. With

increasing penetration of e-commerce transaction & digitisation wave in in

Tier II & III cities, RBI is aiming at~44% share of PoS transaction by FY21.

Among constituents, foreign banks witness highest transaction value,

though it still remains lower than value of transaction through credit card.

Individually, HDFC Bank and SBI continue to command highest market share

led by high number of customers.




Exhibit 20: Foreign banks have highest utility in debit cards

Outstanding

cards (April

2019)

No. of

Transactions

Amount of

transactions

(| Millions)

Transacti

on per

card

Value of per

transaction (|)

Utility of

card (|)

PSB 674678034 238230866 309789 0.4 1300 459

Private 148590292 153307409 219632 1.0 1433 1478

Foreign 5815756 10849568 16231 1.9 1496 2791

Payment Bank 46753457 4188092 2510 0.1 599 54

SFB 8938200 996392 1422 0.1 1427 159

Total 884775739 407572327 549584 0.5 1348 621


Exhibit 21: HDFC Bank, SBI haver highest market in debit card volume at PoS

29.06

11.90

6.96

4.04 3.64 3.12 2.60 2.56 1.93

0

5

10

15

20

25

30

35

STA

TE B

AN

K O

F IN

DIA

HD

FC

BA

NK LTD

AX

IS B

AN

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TD

BA

NK O

F B

AR

OD

A

PU

NJA

B N

ATIO

NA

L B

AN

K

CA

NA

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BA

NK

BA

NK O

F IN

DIA

KO

TA

K M

AH

IND

RA

B

AN

K

LTD

IND

IAN

B

AN

K


Exhibit 22: Higher number of cards leads to substantial market share in volume

29.88

13.01

7.49

3.68 3.50 3.00 2.37 1.97 1.78

0

5

10

15

20

25

30

35

STA

TE B

AN

K O

F IN

DIA

HD

FC

BA

NK LTD

AX

IS B

AN

K L

TD

BA

NK O

F B

AR

OD

A

PU

NJA

B N

ATIO

NA

L B

AN

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CA

NA

RA

BA

NK

KO

TA

K M

AH

IND

RA

B

AN

K L

TD

BA

NK O

F IN

DIA

CIT

I B

AN

K


Mobile banking – penetrating to the last mile

Mobile usage has been on a continuous uptrend in daily life. The same is

observed in banking transactions. This is evident from the rapid growth in

the volume and value of transaction undertaken through mobile. In FY12-19,

mobile transaction has been growing at ~187% CAGR from a paltry | 18.2

billion in FY12 to | 29.5 trillion in FY19. One of the objectives of the digital




revolution was to make inroads in the arena for smaller transactions. With

the advent of Paytm and other payment banks, mobile transactions are on

the rise with substantial market share in terms of volume. However, scope

for increasing the quantum still remains huge.

Exhibit 23: Consistent rapid growth in mobile banking

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

2011-2012 2012-2013 2013-2014 2014-2015 2015-20162016-20172017-2018 2018-2019


In terms of volume of transactions through mobile, Paytm commands the

highest market share at ~20.4%, followed by SBI (contributing ~18%) and

Axis Bank (contributing ~12%). Therefore, top three companies cover more

than 50% market share while top 10 companies contribute ~80% of the

market share. In terms of value of transaction, SBI is leading with above 17%

market share followed by HDFC Bank with ~14%, respectively. Therefore,

top three banks contribute ~45% of market share while top 10 companies

contribute majority of market share at ~80%.

Exhibit 24: Paytm accounts for ~20% of market share

20.4318.16

11.79

6.484.97

3.762.10 1.96 1.94

0.00

5.00

10.00

15.00

20.00

25.00

Paytm

Paym

ents

Bank Lim

ited

STA

TE B

AN

K O

F

IND

IA

AX

IS B

AN

K L

TD

HD

FC

BA

NK LTD

.

Bank of In

dia

KO

TA

K

MA

HIN

DR

A…

Canara B

ank

Andhra B

ank

RB

L B

AN

K

LIM

ITED

Market Share (Volume Wise)


Exhibit 25: Top 10 companies contribute ~80% market share

17.39

14.2612.73

6.63

4.31

2.40 2.21 1.75 1.71

0.00

5.00

10.00

15.00

20.00

STA

TE B

AN

K O

F

IND

IA

HD

FC

BA

NK LTD

.

AX

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AN

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Paytm

Paym

ents

Bank Lim

ited

IND

US

IND

BA

NK

LTD

Bank of In

dia

RB

L B

AN

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LIM

ITED

BA

NK O

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BA

RO

DA

Market Share (Value)


Diving into the extent of payments in terms of sub category of financial

players, private banks (number of private banks – 19) lead in both market

share of volume as well as value. In terms of volume, payment banks (Paytm

contributes 20.4%) command substantial market share at ~22% of total

volumes in FY19, led by continuous effort by the government and RBI to

increase penetration of digital transaction. Followed by payment banks

(number of payment banks – 7), private and public sector contribute ~33%

and ~20% market share, respectively. However, in terms of value of

transactions, private banks have garnered a major chunk at ~54% market

share, led by improved technology and customer friendly applications. PSU

banks (number of PSU banks – 19) have ~32% market share followed by

payment banks at ~5% share. This shows that while payment banks have

better penetration, ticket size remains low. While average value per

transaction is ~| 7500-7800 for private and PSU banks, payment banks are

more entrusted in low value transactions at ~| 1024. Small finance banks

(number of banks – 10), with a small customer base, have been on the path

to begin garnering digital transactions.




Major players in the private banking space are HDFC Bank and Axis Bank,

while SBI, BoI and BoB hold substantial market share in PSU banks. Among

payment banks, Paytm Payment Bank is a major contributor with ~90%

share of payment banks.

Exhibit 26: Payment banks command volume; SCBs have value market share

Public Private SFB Payments Others

Number of Banks 19 19 10 7 225

Volume Market Share 19.83 32.77 0.08 22.10 25.22

Value Market Share 31.51 53.65 0.20 4.74 9.90

Ticket Size 7582 7810 12240 1024 1873

Name of Major Players SBI, BOI, Bank of Baroda HDFC, Axis Ujjivan SFBPaytm Payments

Banks


NBFC crisis in nutshell

NBFC’s share of credit grew from ~13% to ~19% in FY13-18, mainly fuelled

by a series of favourable factors: a) declining interest rate in the economy to

6% from 8% earlier, b) modest growth in PSU banks credit on the back of

asset quality issues leading to higher channelling of funds to thriving NBFCs,

c) sharp surge in lending by mutual fund aided by excess liquidity following

demonetisation (share of commercial papers increased from 5% in FY13 to

9% in FY18). However, the IL&FS debacle led to concerns over asset liability

mismatch of NBFCs having higher reliance on short-term funding (mainly

CPs) & higher bank borrowing, which triggered deep concerns on liquidity

problem at NBFCs.

Post ILFS crisis, while the NBFC sector was grappling with a liquidity crunch,

there was increasing demand for special liquidity window for NBFC. Since

then, RBI, in its endeavour to bring back normalcy, has taken a slew of

measures like liquidity through OMOs, easing securitisation norms, easing

of single borrower exposure & liquidity framework for NBFCs. However, it

has till now refrained from providing any special liquidity for the sector.

Post IL&FS episode, growth of NBFC sector has been heavily impacted as

lower availability of funds and rising lending cost in the system impacted

margins and profitability. While some companies could pass on rising cost

of funds to borrowers, this could get constrained by stronger competition

from private banks. Furthermore, riskier sectors like developer & MSME

could face issues in raising incremental funds from NBFCs & banks, which

could impact their repaying capacity leading to asset quality issues for

companies having exposure to such players.

Exhibit 27: Share of NBFC credit in total credit

14.9 15.115.6

16.717.3

18.7

0

2

4

6

8

10

12

14

16

18

20

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18





Exhibit 28: NBFC borrowing pattern

31

4959

7

2

8

28

29

17

1

78

33

7 6

0

20

40

60

80

100

120

FY10 FY13 FY18

Debentures CPs Banks Deposits Securitizations Others





Annexure

Exhibit 29: Asset quality trend

Asset quality trend Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY19 Q2FY19 Q3FY19 Q4FY19

PSU coverage

Bank of Baroda 55,875 55,121 53,184 48,233 22,384 21,059 19,131 15,610

Indian Bank 11,828 12,334 13,198 13,353 5,999 7,060 7,571 6,793

SBI 212,840 205,864 187,765 172,750 99,236 94,810 80,944 65,895

Private coverage

Axis Bank 32,662 30,938 30,855 29,789 14,902 12,716 12,233 11,276

Bandhan Bank 388 413 831 820 194 220 237 228

City Union Bank 851 848 892 977 473 498 528 591

Development Credit Bank 401 410 445 439 154 155 163 154

Federal Bank 2,869 3,185 3,361 3,261 1,620 1,796 1,817 1,626

HDFC Bank 9,539 10,098 10,903 11,224 2,907 3,028 3,302 3,215

IndusInd Bank 1,741 1,781 1,968 3,947 762 788 1,029 2,248

Jammu & Kashmir Bank 6,242 6,068 6,860 6,221 2,782 2,489 3,049 3,240

Kotak Mahindra Bank 3,899 4,033 4,129 4,468 1,527 1,501 1,397 1,544

Yes Bank 2,824 3,866 5,159 7,883 1,263 2,020 2,876 4,485

GNPA (| crore) NNPA (| crore)


Exhibit 30: Quarterly margin trend

NIM (%) Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19

PSU coverage

Bank of Baroda 2.3 2.7 2.5 2.7 2.6 2.7 2.9

Indian Bank 2.9 2.9 2.9 3.1 3.0 2.9 3.0

SBI 2.4 2.5 2.5 2.8 2.7 2.8 2.8

Private coverage

Axis Bank 3.5 3.4 3.3 3.3 3.4 3.5 3.4

Bandhan Bank 0.0 9.6 9.3 10.3 10.3 10.5 10.7

City Union Bank 4.5 4.4 4.4 4.2 4.3 4.4 4.4

Development Credit Bank 4.2 4.1 4.1 3.9 3.8 3.8 3.8

Federal Bank 3.3 3.3 3.1 3.1 3.2 3.2 3.2

HDFC Bank 4.3 4.3 4.3 4.2 4.3 4.3 4.4

IndusInd Bank 4.0 4.0 4.0 3.9 3.8 3.8 3.6

Jammu & Kashmir Bank 3.8 4.0 3.2 3.7 3.7 3.9 4.1

Kotak Mahindra Bank 4.3 4.2 4.4 4.3 4.2 4.3 4.5

Yes Bank 3.7 3.5 3.4 3.3 3.3 3.3 3.1


Exhibit 31: Key financial of industry as of Q4FY19

(| crore) Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19

NII 82808 85714 84835 94144 92132 99136 102887

Growth YoY 9.0 14.8 1.3 27.4 11.3 15.7 21.3

Other income 52189 38218 47391 37110 37019 41299 49070

Growth YoY 9.2 -16.7 0.7 -11.4 -29.1 8.1 3.5

Total operating exp. 59536 61162 69366 64525 64068 71463 76093

Staff cost 29088 30128 34342 32053 32749 35995 36478

Operating profit 75460 62771 62860 66730 65084 68973 75864

Growth YoY 12.2 1.6 -13.0 8.1 -13.8 9.9 20.7

Provision 65521 76618 148276 77236 70471 65837 107584

PBT 9899 -13888 -85460 -10552 -5437 3136 -31720

PAT 6221 -6943 -55648 -7130 -4404 -197 -21535

Growth YoY -42.4 NM NM NM NM NM NM

GNPA 840250 885788 1024586 1002682 997247 961129 928470

Growth YoY 19.2 20.9 31.9 20.9 18.7 8.5 -9.4

NNPA 452523 469278 517775 485181 463082 417837 359629

Growth YoY 11.2 12.4 20.4 3.9 2.3 -11.0 -30.5

Source: Capitaline, Company, ICICI Direct Research




ICICI Direct Research coverage universe (BFSI)

CMP M Cap

(|) TP(|) Rating (| Cr) FY18 FY19FY20E FY18 FY19FY20E FY18 FY19FY20E FY18 FY19FY20E FY18 FY19FY20E

Bank of Baroda (BANBAR) 124 170 Buy 47,738 -9.2 7.7 18.5 -13.5 16.1 6.7 1.0 1.5 1.2 -0.3 0.4 0.6 -5.8 9.7

State Bank of India (STABAN) 363 400 Buy 323,606 -7.3 1.0 27.2 -49.7 374 13.3 3.0 2.6 1.9 -0.2 0.0 0.7 -3.0 0.5 12.3

Indian Bank (INDIBA) 264 300 Buy 12,984 26.2 6.7 25.2 10.1 39.4 10.5 1.1 1.2 1.0 0.5 0.1 0.4 7.1 1.7 6.1

Axis Bank (AXIBAN) 805 880 Buy 210,886 -1.0 22.2 37.5 -786.5 36.3 21.5 4.4 3.7 3.1 0.0 0.8 1.1 0.0 0.8 1.1

City Union Bank (CITUNI) 217 240 Buy 15,939 8.9 9.3 10.3 24.3 23.3 21.0 3.9 3.7 3.2 1.6 1.6 1.6 15.5 15.3 14.7

DCB Bank (DCB) 238 250 Buy 7,371 7.8 10.5 13.5 30.3 22.6 17.6 3.0 2.7 2.4 0.9 1.0 1.1 10.9 12.1 13.8

Federal Bank (FEDBAN) 108 125 Buy 21,442 4.5 6.3 7.7 24.2 17.2 14.0 2.0 1.8 1.7 0.7 0.8 0.9 8.2 9.8 11.0

HDFC Bank (HDFBAN) 2,453 2,700 Buy 669,235 67.4 77.4 97.9 36.4 31.7 25.0 6.1 4.6 4.0 1.8 1.8 2.0 17.9 16.5 16.7

IndusInd Bank (INDBA) 1,416 1,860 Buy 85,393 60.1 55.0 92.3 23.6 25.7 15.3 3.7 3.5 2.9 1.8 1.3 1.8 16.2 13.1 19.0

Jammu & Kashmir Bk(JAMKAS) 41 53 Hold 2,286 3.6 8.3 14.7 11.3 4.9 2.8 0.7 0.7 0.6 0.2 0.5 0.7 3.4 7.3 11.8

Kotak Mahindra Bank (KOTMAH)1,478 1,500 Hold 282,113 21.4 25.5 30.4 69.0 58.0 48.6 7.9 6.9 6.1 1.7 1.7 1.7 12.5 12.1 12.7

Yes Bank (YESBAN) 108 180 Hold 25,069 18.3 8.4 13.3 5.9 12.9 8.2 1.0 1.1 0.9 1.6 0.6 0.9 17.6 7.3 10.9

Bandhan Bank (BANBAN) 535 725 Buy 63,807 11.3 16.4 22.0 9.6 6.6 4.9 1.4 1.2 1.0 3.6 3.9 4.0 19.5 19.0 21.1

Sector / Company

RoE (%)RoA (%)EPS (|) P/E (x) P/ABV (x)

Source: Bloomberg, ICICI Direct Research




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stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]




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June 28, 2019 - ICICI Direct

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