INDUSTRY ANALYSIS AND VALUATION - Banking - INDIA - 2009
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Learning Assignment
Information on the industry is to be posted by Vidushi Aggarwal
AIMR FORMAT
Assocation of Investment Management and Research (now CFA institute) gave the following format some time back for providing industry analysis.
Industry Classification (HDFC Bank): Banking Industry
–Life cycle position:
The Indian banking sector is currently in a transition phase. While public sector banks are in the process of restructuring, private sector banks are busy consolidating through mergers and acquisitions (the sector has been recently opened up for foreign investments). With the Finance Minster’s announcement of introducing a Bill on Banking Reforms, law on foreclosure and plans to set up an asset reconstruction company (ARC), the sector is likely to witness a significant structural change the coming years.
–Business cycle:
Influenced by the global financial turmoil and repercussion of the subprime crisis, the global banking sector has been witness to some of the largest and best known names succumb to multi-billion dollar write-offs and face near bankruptcy. However, the Indian banking sector has been well shielded by the central bank and has managed to sail through most of the crisis with relative ease. Further with the economic buoyancy the world over showing signs of cooling off, the investment cycle has also been wavering. Besides gearing up for the compliance with Basel II accord, the sector is also looking forward to consolidation and investments on the FDI front.
•External Factors
–Technology: Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income.
–Government: Foreign banks have confined their operations to mostly metropolitan cities, as the RBI restricted their operations. However, off late, the RBI has granted approvals for expansions as well as entry of new foreign banks in order to liberalize the system.
–Social: Similarly, growth drivers for the retail segment are more or less similar to the corporate borrowers. However, the elasticity to a fall in interest rate is higher in the retail market as compared to corporates. Income levels and cost of financing also play a vital role. Availability of credit and increased awareness are other key growth stimulants, as demand will not be met if the distribution channel is inadequate.
–Foreign: Accounting for a part of banking capital, non-resident Indian (NRI) deposits showed a net inflow of US $ 1.1 billion in April-September 2008, increasing from net outflow of US$ 78 million in April-September 2007.
–Demographic
•Demand Analysis
India is a growing economy and demand for credit is high though it could be cyclical.
–Real and Nominal Growth
Advances Growth: The advances of all scheduled commercial banks grew at a healthy 24 per cent till end of December 2008 compared to the year-ago numbers. In the same period, deposits grew by 21 per cent. The major contributor to the credit growth was corporate credit just as term deposits aided deposit growth.
Profit Growth: Consider the nine months of FY09 – net profit of 37 listed banks grew at 24 per cent. The robust net profit growth can be attributed to a 30 per cent growth in net interest income and a 17 per cent growth in other income. Profit of the banks would have been higher but for higher provisions and contingencies mainly on account of mark-to-market and asset quality provisions.
-Bargaining Power of Customers:
For good creditworthy borrowers bargaining power is high due to the availability of large number of banks.
–Trends and Cyclical variation around trends
–End users:
•Supply Analysis:
Despite the severe liquidity pressure post the repo and CRR (cash reserve ratio) hikes, the money supply remained buoyant during FY08, expanding by 20% YoY, thus outpacing RBI's projections of 17% YoY growth. Liquidity is controlled by Reserve Bank of India(RBI).
–Degree of Concentration & Competition:
Concentration: Banks, especially the private sector ones, are likely to face penetration concerns. The lack of credit penetration and the geographic concentration of bank credit is evident from the fact that 5 states having the highest proportion of per capita credit enjoy 55% of the total credit disbursals in the country.
Competition: High- There are public sector banks, private sector and foreign banks along with non banking finance companies competing in similar business segments.
–Ease of entry: Licensing requirement, investment in technology and branch network.
-Bargaininging Power of Suppliers: High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms. Depositors may invest elsewhere if interest rates fall.
–Industry capacity: Banking capital (net) amounted to US$ 4.8 billion in April-September 2008 as compared with US$ 5.7 billion in April-September 2007.
•Profitability
–Supply/Demand Analysis: The reserve money lying with the RBI as on November 21, 2008 as per the January 2009 bulletin, is a total amount of US$ 179.28 billion and RBI’s credit to the commercial sector stood at US$ 3.65 billion.
–Cost Factors: Short-term liquidity crunch led to banks scurrying for high cost bulk and term deposits in FY08, even at the cost of narrow margins (NIMs). Thus, while the savings bank interest remained unchanged, the interest rate on deposits of up to one year soared to as high as 9.0% and those for one to two years are fetched upto 10.5% per annum. However, on the liabilities side, with better penetration in the semi urban and rural areas the banks garnered a higher proportion of low cost deposits thereby economising on the cost of funds.
–Pricing: A bank derives revenues in the form of fees that it charges for the various services it provides (like processing fees for loans and forex transations). In developed economies, banks derive nearly 50% of revenues from this stream. This stream of revenues contributes a relatively lower 15% in the Indian context.
•International competition and markets
Economic Times Sectoral (Industry) Indices - December 2008
| Index | Days Close | Days Close | Days Close | |
| 5th Dec 08 | 12th Dec 08 | 19th Dec 08 | P/E ratio | |
| ET 100 | 3204.09 | 12.13 | ||
| Sectoral Indices | ||||
| Auto-Ancillaries | 4483.36 | 8.59 | ||
| Automobiles | 2424.13 | 8.51 | ||
| Banks | 5633.29 | 9.53 | ||
| Capital goods | 8653.69 | 17.44 | ||
| Cement | 4699.77 | 5.31 | ||
| Chemicals | 3968.69 | 5.32 | ||
| Construction | 9378.76 | 17.15 | ||
| Consumer durables | 3568.39 | 6.36 | ||
| FMCG | 3311.64 | 19.01 | ||
| Fertiliser | 3311.18 | 5.5 | ||
| Hospitality | 4267.23 | 10.3 | ||
| Infotech | 1948.15 | 9.36 | ||
| Logistics | 10875.04 | 10.8 | ||
| Media | 2412.8 | 19.71 | ||
| Metals | 6096.29 | 3.58 | ||
| NBFC | 10675.91 | 12.01 | ||
| Oil & Gas | 3186.18 | 15.86 | ||
| Pharma | 3119.78 | 13.34 | ||
| Power | 3612.03 | 19.36 | ||
| Realty | 3952.32 | 5.77 | ||
| Retail | 671.22 | 55.38 | ||
| Shipping | 5871.53 | 3.39 | ||
| Sugar | 8070.69 | 4.51 | ||
| Teleservices | 1655.4 | 15.11 | ||
| Textiles | 2922.81 | 17.97 | ||
| Conglomerates | 6600.24 | 8.25 | ||
| Bollywood | 784.71 | 9.76 |
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