Analysis of Banking Industry PDF

Analysis of Banking Industry
Industry Structure Bank Group-wise performance Advances Deposits Investments NPAs Operating Expenditure Profitability Spreads Sectoral Deployment of Credit Review and Future Growth Projections Asset Quality Yield Analysis Player Profiles
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Industry structure
Overview of financial system in India
Structure of scheduled commercial banks in India
Structure of cooperative credit institutions
Banks and DFIs - Important activities
Bank group-wise performance
Business

The business of all scheduled commercial banks (SCBs) grew at a CAGR of 22.5 per cent, from Rs 29,853 billion in 2004-05 to Rs 82,495 billion in 2009-10. Public sector banks, which includes State Bank of India (SBI) and associates and Nationalised banks, have been the major driver behind the overall growth of SCBs business for the past 5 years.
Public sector banks

The business of public sector banks grew at a CAGR of 22.8 per cent, the highest amongst all bank groups, from Rs 22,905 billion in 2004-05 to Rs 63,931 billion in 200910, driven by a CAGR of 25.9 per cent in advances, between 200405 and 2009-10. During the same period, deposits grew at a CAGR of 20.8 per cent. The share of advances in funds deployed increased to 62.8 per cent in 2009-10 from 61.8 per cent in 2008-09, while the proportion of investments in funds deployed almost remained stable at 28 per cent in 2009-10 (28.2 per cent in 2008-09). Like in the previous years, public sector banks continued to dominate amongst SCBs in terms share of business, where it stood at 77.5 per cent in 2009-10.
Private sector banks

The business of private sector banks grew at a CAGR of 22.2 per cent, from Rs 5,330 billion in 2004-05 to Rs 14,553 billion in 2009-10, driven by a CAGR of 23.4 per cent in advances and 21.2 per cent in deposits for the same period. The share of advances in funds deployed declined to 57.4 per cent in 2009-10 from 59.1 per cent in 2008-09, while the share of investments in funds deployed increased to 32.2 per cent in 2009-10 from 31.5 per cent in 2008-09. The segment stood second in terms of the share in total business at 17.6 per cent in 2009-10.
Foreign banks
The business of foreign banks grew at a CAGR of 19.9 per cent, the lowestamongst all bank groups, from Rs 1,618 billion in 2004-05 to Rs 4,011 billion in 2009-10, driven by a CAGR growth of 16.7 per cent in advances between 2004-05 and 2009-10 - lowest amongst all bank groups. Deposits grew at a CAGR of 22.5 per cent during the same period. The group had the lowest share of 4.86 per cent in the total business of SCBs in 200910.
Share of bank groups in SCBs - Total business
Share of bank groups in SCBs - Total business
Advances
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Sectoral Deployment of Credit Agriculture and allied activities Industry Personal Loans
2005-06 12% 32% 26%
2009-10 16% 47% 14%
Other services Total Credit
30% 100%
23% 100%
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Public sector banks have grown at a faster pace over last 5 years All SCBs
Total advances of SCBs grew at a CAGR of 24.9 per cent, from Rs 11,508 billion in 2004-05 to Rs 34,971 billion in 2009-10. However, growth in advances for SCBs declined, similar to last year, when the yearon-year (y-o-y) growth in advances dropped from 21.1 per cent in 2008-09 to 16.5 per cent in 2009-10. Credit growth in 2009-10 was low due to improved access of corporates to non-bank domestic sources of funds and tightening of credit by banks to retail sector due to asset quality related concerns. Working capital loans grew at a CAGR of 23 per cent to Rs 14,887 billion in 2009-10 from Rs 5,289 billion in 2004-05. On a y-o-y basis, working capital loan growth declined to 15.6 per cent in 2009-10 from 23.7 per cent in 2008-09.
Public sector banks have grown at a faster pace over last 5 years All SCBs
On the other hand, term loans witnessed a higher CAGR growth of 26.4 per cent to reach Rs 20,083 billion in 2009-10 from Rs 6,219 billion in 2008-09. Like working capital loans, term loans also witnessed a decline in y-o-y growth, from 19.3 per cent in 2008-09 to 17.2 per cent in 2009-10. The share of working capital loans to total advances stood at 42.6 per cent in 2009-10, a marginal decline of 30 basis points (bps) from the previous year, while term loans to advances increased by 30 bps in 2009-10 to reach 57.4 per cent.
SCBs - Breakup of advances
Public sector banks

Advances of public sector banks increased at a CAGR of 25.9 per cent between 200405 and 2009-10 to reach Rs 27,013 billion. The term loans segment registered a CAGR of 27.6 per cent between 2004-05 and 2009-10, while the working capital loans segment grew at a CAGR of 24 per cent for the same period. In terms of y-o-y growth, total public sector banks advances growth declined to 19.5 per cent in 2009-10 (25.7 per cent in the previous year), while growth in working capital loans and term loans declined to 18.7 per cent and 20.2 per cent, respectively (27.9 per cent and 24 per cent, respectively last year). The shares of working capital and term loans to total advances were stable (at around 45 per cent and 55 per cent respectively) for the public sector banks in 2009-10 as compared to the previous year.
Public sector banks - Breakup of advances

Private sector banks registered a CAGR of 23.4 per cent in advances, where it increased from Rs 2,213 billion in 2004-05 to Rs 6,325 billion in 2009-10. Working capital loans registered a CAGR of 19.5 per cent between 2004-05 and 200910, while term loans registered a CAGR of 25.2 per cent for the same period. Overall growth in advances for private sector banks declined marginally to 9.9 per cent in 2009-10 from 11 per cent in 2008-09. While the growth in working capital loans dropped sharply to 5.8 per cent in 2009-10 (from 11.4 per cent in 2008-09), term loans registered a y-o-y growth of 11.8 per cent in 2009-10 (up by 100 bps from the previous year). The share of working capital loans to total advances declined to 29.4 per cent in 200910 from 30.6 per cent in the previous year. On the other hand, the share of term loans to advances went up from 69.4 per cent in 2008-09 to 70.6 percent in 2009-10.
Private sector banks - Breakup of advances
Foreign banks
The total advances of foreign banks grew at a CAGR of 16.7 per cent, from Rs 753 billion in 2004-05 to Rs 1,633 billion in 2009-10. However, compared to other bank groups, it was the only one to register a negative y-o-y growth in advances- a decline of 1.3 per cent in 2009-10. The group witnessed a CAGR of 17.9 per cent in working capital and 15.5 per cent in term loans in 2009-10, but saw a yo-y decline of 0.8 per cent and 1.9 per cent respectively for the same period. The share of working capital loans to total advances of the group witnessed a marginal increase from 53.1 per cent in 2008-09 to 53.4 per cent in 2009-10 to reach Rs 872 billion, while the term loans share declined marginally from 46.9 per cent in 200809 to 46.6 per cent in 2009-10 to reach Rs 760 billion.
Foreign banks - Breakup of advances
Priority sector advances

Priority sectors have been an integral part of bank credit delivery in India. The sector received a boost from RBI's initiative in recent years, which has increased the credit flow into the sector. As per the revised guidelines, the priority sectors now comprise agriculture, SSI, education and housing. Targets and sub-targets are now linked to the adjusted net bank credit (ANBC) or credit equivalent amount of off balance sheet exposure (CEOBSE). Also, the sector received fresh impetus in the union budget 2011-12, where the government has proposed to enhance the housing loan limit under the priority sector from Rs 2 million to Rs 2.5 million. Loans up to Rs 1.5 million availed for financing homes up to 2.5 million will now recieve an interest subvention of 1 per cent. This will attract higher credit flow to the sector with lower interest rates for the borrowers, and will help banks to meet its lending targets.
Priority sector lending targets

Over the last one year (i.e. between 2008-09 and 2009-10), there has been growth in priority sector credit from domestic commercial banks (public and private) and foreign banks. However, as compared to domestic banks, foreign banks growth in priority sector lending declined for the second consecutive year (2009-10) leading to increasing share of domestic banks in total priority sector advances (from 94 per cent in 2008-09 to 95 per cent in 2009-10).

Over the last one year (i.e. between 2008-09 and 2009-10), there has been growth in priority sector credit from domestic commercial banks (public and private) and foreign banks. However, as compared to domestic banks, foreign banks growth in priority sector lending declined for the second consecutive year (2009-10) leading to increasing share of domestic banks in total priority sector advances (from 94 per cent in 2008-09 to 95 per cent in 2009-10).
Public sector banks

The outstanding priority sector advances of public sector banks increased by 19.4 per cent during 2009-10 as compared to 18.6 per cent during 2008-09. The total priority sector advances of public sector banks constituted 41.6 per cent of their ANBC in 2009-10, as compared to 42.7 per cent in the previous year.
Advances to priority sector by public sector banks

Priority sector advances by private sector banks increased by 14.7 per cent during 2009-10 as compared to 14.5 per cent last year, and accounted for 45.9 per cent of ANBC, which is well over the prescribed target of 40 per cent set by the RBI.
Advances to priority sector by private sector banks
Foreign banks
The growth rate of priority sector lending by foreign banks followed in last year's footsteps, declining to 8.8 per cent in 2009-10 (as compared to 10.2 per cent last year). Total priority sector advances by foreign banks constituted 35 per cent of their ANBC (as compared with 39.5 per cent last year), which was above the prescribed target of 32 per cent set by the RBI.
Advances to the priority sector by foreign banks
Foreign banks
Note:
With effect from April 30, 2007, the targets and sub-targets under priority sector lending have been linked to ANBC [Net bank credit (NBC) plus investments made by banks in non-SLR bonds held in HTM category] or credit equivalent amount of offbalance sheet exposures (OBE), whichever is higher, as on March 31 of the previous year. The outstanding FCNR (B) and NRNR deposits balances will no longer be deducted for computation of ANBC for priority sector lending purposes. Investments made by banks in the recapitalisation bonds floated by the Government of India will not be taken into account for the purpose.
Foreign banks Note:

Existing investments (as on April 30, 2007) made by banks in non-SLR bonds held in the HTM category will not be taken into account for calculation of ANBC, up to March 31, 2010. However, fresh investments by banks in non-SLR bonds held in the HTM category will be taken into account for the purpose. Deposits placed by banks with NABARD/SIDBI, as the case may be, in lieu of nonachievement of priority sector lending targets/sub-targets, though shown under Schedule 8 'Investments' in the balance sheet, will not be treated as investment in nonSLR bonds held under HTM category. For the purpose of calculation of credit equivalent of off-balance sheet exposures, banks can use the current exposure method. Inter-bank exposures will not be taken into account for priority sector lending targets/sub-targets.
Deposits
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Type of Deposits current Savings Term Total
Overall 12% 22% 67% 100%
SBI and Associates 13% 25% 61% 100%
Private Banks 14% 19% 67% 100%
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OSCBs register lowest growth in deposits in 2008-09 All SCBs

The total deposits of all SCBs grew at a 5-year CAGR of 20.9 per cent to reach Rs 40,632 billion at the end of March 2009. On a y-o-y basis, deposits of SCBs increased by 22.4 per cent in 2008-09.
Breakup of deposits - All SCBs
Total deposits - All SCBs
Term deposits, which account for a major portion of the total deposits, grew by 27.3 per cent in 2008-09 to reach Rs 27,161 billion. Low-cost deposits, which form 33.2 per cent of the total deposits, rose by 13.6 per cent to reach Rs 13,471 billion at the end of March 2009.
SBI and associates Breakup of deposits - SBI and associates
Total deposits - SBI and associates
Total deposits - SBI and associates

SBI and associate banks' total deposits grew from Rs 7,739 billion in 2007-08 to Rs 10,071 billion in 2008-09. Term deposits grew at a robust 37.8 per cent in 2008-09, whereas low-cost deposits increased at a steady 19.5 per cent during the same period. The group's low-cost deposits constituted 38.6 per cent of the total deposits as of March 2009 as against 42.0 per cent as of March 2008.
Nationalised banks
The total deposits of nationalised banks grew at a 5-year CAGR of 21.5 per cent to reach Rs 21,057 billion at the end of March 2009. In terms of year-on-year growth, the group saw an increase of 25.3 per cent in 200809.
Breakup of deposits - Nationalised banks
Total deposits - Nationalised banks
Term deposits, which comprise a major portion of total deposits, grew by 31.2 per cent Rs 14,772 billion in 2008-09. The group's low-cost deposits, which form 29.8 per cent of the total deposits, increased by 13.4 per cent to reach Rs 6,285 billion at the end of March 2009.
Other scheduled commercial banks Breakup of deposits - OSCBs
Total deposits - OSCBs
Total deposits - OSCBs

OSCBs recorded the highest CAGR of 22.4 per cent in total deposits between 2003-04 and 2008-09, mainly due to the new private sector banks, which are expanding their operations aggressively. The total deposits grew from Rs 2,686 billion in 2003-04 to reach Rs 4,285 billion in 2005-06 and Rs 7,364 billion in 2008-09. Low-cost deposits constituted 32.7 per cent of total deposits of OSCBs. OSCBs do not have a wide network of branches, which is essential for garnering low-cost deposit volumes. Moreover, the technology-driven customised products introduced by the new private sector banks allow customers to switch between savings and term deposits. The group's term deposits grew at a drastically lower rate of 9.2 per cent as against 17.1 per cent in 2007-08, to reach Rs 4,953 billion in 2008-09.
Foreign banks
Foreign banks registered significantly lower year-on-year growth rate of 12.0 per cent in total deposits, as against 26.8 per cent in 2007-08. The group recorded a 21.7 per cent CAGR between 2003-04 and 2008-09.
Breakup of deposits - Foreign banks
Total deposits - Foreign banks

The share of low-cost deposits in total deposits decreased slightly from 42.9 per cent in 2003-04 to 41.8 per cent in 2008-09. Within low-cost deposits, demand deposits have a higher share of 67.8 per cent, as foreign banks generally prefer to cater to corporate clients who maintain current account deposits, and also because they have sound cash management systems (CMS). This explains the significant rise in current account deposits since 2006-07. The savings deposits of foreign banks grew at a CAGR of 18.0 per cent from a lower deposit base of Rs 126 billion in 2003-04 to Rs 288 billion in 2008-09. Term deposits increased at a CAGR of 22.2 per cent from Rs 458 billion in 2003-04 to Rs 1,247 in 2008-09.

Foreign banks generally cater to high net worth individuals (HNIs) and NRI deposits. Besides, only very few banks, such as HSBC Bank, Standard Chartered Bank, Citibank and ABN AMRO Bank, are involved in retail banking. Many banks had hived off their retail business division and begun concentrating on institutional business. But, of late, foreign banks (those active in the retail business space) are also, with the aid of technology, prompting customers to maintain low-costdeposits with them. Moreover, a few foreign banks have started expanding their branch network to increase the number of savings deposits.
Investments
Investments
Lower credit demand led to higher investments in 2009
Investments by banks fall into two broad categories: Statutory liquidity ratio (SLR) investments (comprising government and other approved securities eligible for being reckoned for maintaining the SLR) Almost fourfifths of banks' investments fall under the SLR category. Non-SLR investments (comprising commercial paper, shares, bonds and debentures issued by the corporate sector). Growth in investments by banks had decelerated marginally to 23.1 per cent in 200809 from 23.7 per cent in 2007-08. However, the share of SLR securities in net demand and time liabilities (NDTL) increased to 28.1at the end of March2009, as prevailing uncertainties encouraged banks to park their funds in low-risk and low-return instruments.
Investments in government and other approved securities

All SCBs
As per the Banking Regulation (BR) Act, 1949, banks have to invest a prescribed minimum of their NDTL as liquid assets in government and other approved securities. The ratio of liquid assets to NDTL is known as SLR. As part of the financial sector reforms undertaken in the nineties, the SLR requirement for banks had been gradually reduced to 25 per cent by October 1997 from the peak of 38.5 per cent in February 1992. However, despite this reduction, banks maintained average SLR investments of 37.3 per cent of NDTL from 1998-99 to 2002-03. Such investments reached an all-time high of 42.7 per cent of NDTL in April 2004.
Investments in government and other approved securities

All SCBs
Lower demand for credit owing to the slowdown in the industrial sector, which was undergoing restructuring, forced banks to park their funds in government securities. In the declining interest rate scenario, such investments became particularly attractive for banks due to their high yields. Incidentally, the period of low demand for credit corresponded with the period when banks were making efforts to raise capital levels and reduce NPA levels. Banks became slightly risk averse due to the application of capital adequacy norms, which required them to maintain 8 per cent of their riskweighted assets as capital from March 31, 1996, and the pressure to bring down their NPA levels. Consequently, investments in government and other approved securities, which attracted zero-risk weights, became the preferred mode of investments for banks.
Statutory liquidity ratio - Excluding gold
Statutory liquidity ratio - Excluding gold

Although the banking sector held excess SLR investments at Rs 1,698.46 billion (above the prescribed minimum requirement of 24.0 per cent) at end-March 2009, several banks were operating their SLR portfolio very close to the prescribed minimum level. Excess SLR investments of SCBs increased to Rs 2,887.54 billion as on September 25, 2009. As a result, the share of SLR investments in NDTL increased to 30.4 per cent as of September 2009 from 28 per cent as of March 2009.
SBI and associates

In 2008-09, SBI and associates' investments in SLR securities increased to 28.29 per cent. This signalled a reversal in the group's downward trend (its SLR investments had decreased to 25.2 per cent in 2007-08 from 26.5 per cent in 2006-07). Thus, the growth clearly indicates a significant increase in the group's investments in government securities in 2008-09.
Nationalised banks
Continuing the downward trend, SLR investments by nationalised banks declined from 25.0 per cent in 2007-08 to 24.84 per cent in 2008-09. This group had the least exposure to SLR investments amongst all bank groups.
Bank group-wise statutory liquidity ratio
Other scheduled commercial banks

The proportion of government securities in total NDTL of OSCBs increased marginally from 25.5 per cent in 2007-08 to 26.15 per cent in 2008-09.
Foreign banks
Foreign banks have been constantly increasing their exposure to SLR securities, and in 2008-09, their exposure was the highest amongst all bank groups. The SLR ratio for foreign banks stood at 35.19 per cent in 2008-09 as against 33.3 per cent in 2007-08.
Non-SLR investments
Non-SLR investments of SCBs comprise commercial paper, investments in shares, bonds/debentures issued by public as well as private sector companies, units of UTI and other mutual funds. Growth of banks' investments in non-SLR securities stood at 10.5 per cent in 2008-09 as compared with the increase of 14.3 per cent during the previous year. The total flow of funds from SCBs to the commercial sector comprising credit and non-SLR investments, increased by 17.5 per cent (Rs 4,210.9 billion) in 2008-09 as compared with the rise of 22.6 per cent (Rs 4,448.1 billion) in the previous year. The composition of non-SLR investments of banks has changed in recent years, notably since 2004-05.
Non-SLR investments
The share of banks' investment in shares, commercial papers and units of mutual funds has been growing, while the share of investment in bonds/ debentures has been declining, partly reflecting the changing risk appetite of commercial banks in India. This trend also continued in 2008-09; the only exception was investment in shares, which dipped due to the subdued conditions in the Indian stock markets.
NPAs
Nonperforming assets Gross NPA for all SCBs flat at 2.3 per cent in 2008-09
As per the asset classification norms prescribed by the RBI, loan assets can be classified into four categories standard assets, sub-standard assets, doubtful assets and loss assets. The central bank has prescribed appropriate provisioning requirements for each of these asset categories. Of the aforementioned categories, sub-standard assets, doubtful assets and loss assets together make up nonperforming assets (NPAs). NPA is a loan or an advance where interest and/or instalment of principal remain overdue for a period of more than 90 days.
Nonperforming assets Gross NPA for all SCBs flat at 2.3 per cent in 2008-09
Historically, the Indian banking industry has been plagued with high levels of NPAs, which can be attributed to factors such as archaic policies, industrial inefficiency, lack of adequate legal recourse to lenders and wilful defaulters. However, from 2004-05 to 2007-08, the cyclical uptrend in the economy along with the concomitant recovery in the business climate improved the abilities of the debtors to service loans, thereby improving banks' asset quality. Therefore, despite the sharp rise in credit growth in recent years, the proportional levels of gross NPAs (to gross advances) as well as the absolute levels of gross NPAs have declined significantly.
The following factors have contributed to the striking improvement in the asset quality of Indian banks: 1. Banks have gradually improved their risk management practices and introduced more rigorous systems and scoring models for identifying credit risks. 2. A favourable macroeconomic environment in recent years has also meant that many entities and units of traditionally risky industries are now performing better. 3. Diversification of credit base with increased focus on retail loans, which generally have low delinquency rates, has also contributed to the more favourable credit risk profile.
The following factors have contributed to the striking improvement in the asset quality of Indian banks: 4. The RBI and the Central government have initiated several institutional measures to contain the level of NPAs. These include debt recovery tribunals (DRTs), Lok Adalats (people's courts), asset reconstruction companies (ARCs) and corporate debt restructuring (CDR) mechanism. Settlement advisory committees have also been formed at the regional and head office levels of commercial banks. In particular, banks can also issue notices under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 for enforcement of security interest without the intervention of courts, which has provided more negotiating power to the banks for resolving bad debts. Thus, banks have several options to contain their NPAs. These factors have helped banks to recover a large amount of NPAs during the year. Banks were specifically advised to ensure that recoveries of NPAs exceed write-offs while bringing down bad debts.
ALL SCBs
Improvement in the asset quality of banks continued during 2008-09. Indian banks recovered a higher amount of NPAs in 2008-09 as compared to the previous year. Though the total amount recovered and written-off in 2008-09 (Rs 388.28 billion) was higher as compared to that in 2007-08 (Rs 282.83 billion), it was lower than the fresh addition of NPAs (Rs 523.82 billion) during the year. As a result, the gross NPAs of SCBs increased across bank groups.
ALL SCBs
ALL SCBs
Banks have recourse to various channels for dealing with bad loans; of these, the SARFAESI Act and the Debt Recovery Tribunals (DRTs) have been the most effective in terms of amount recovered. The amount recovered as percentage of amount involved was the highest under the DRTs, followed by SARFAESI Act. The recovery rate (percentage of recovery to demand) of direct agricultural advances of public sector banks declined to 75.4 per cent for the year ended June 2008 from 79.7 per cent a year ago.
NPAs recovered by scheduled commercial banks through various channels
NPAs recovered by scheduled commercial banks through various channels

The Reserve Bank has so far issued Certificate of Registration (CoR) to 12 Securitisation Companies/Reconstruction Companies (SCs/RCs), of which 11 have commenced their operations. As at end-June 2009, the book value of total amount of assets acquired by SCs/RCs registered with the Reserve Bank was Rs 515.42 billion, clocking an increase of 24.5 per cent during the year (July 2008 to June 2009). While security receipts subscribed to by banks/FIs amounted to Rs 95.70 billion, security receipts redeemed amounted to Rs 27.92 billion.
Details of Financial Assets Securitized by SCs/ RCs
Movements in provisions for NPAs

Provisioning made during 2008-09 was higher than the write-back of excess provisioning during the year for all bank groups. Despite this, net NPAs increased due to the rise in gross NPAs. The outstanding provisions to gross NPA ratio declined in case of all bank groups, except new private sector banks and foreign banks. The gross NPAs to gross advances ratio for SCBs remained constant at 2.3 per cent. The gross NPA to gross advances ratio of public sector banks declined, but that of private and foreign banks increased. The net NPA ratio (net NPAs as percentage of net advances) increased marginally in case of SCBs. As of end-March 2009, the net NPAs to net advances ratio of all public sector banks was less than 2 per cent.
Movements in provisions for NPAs

The distribution of this ratio in case of other bank groups was also skewed, with only 10 banks in the 'above 2 per cent and below 5 per cent' category, and only one bank in the 'above 5 per cent and below 10 per cent category'. In sharp contrast to the distribution of the ratio as at end-March 2005, no bank had a net NPA to net advances ratio of more than 10 per cent. This suggests overall improvement in the financial health of Indian banks in recent years. The share of NPAs in the 'doubtful' and 'loss' categories remained more or less static, while the share of 'sub-standard category witnessed some variations. As per the asset classification norms, a sub-standard asset is one that has been an NPA for up to 12 months. Thus, the above-mentioned increase in the share of sub-standard category is indicative of the deterioration of the assets in the last one-year.
SBI and associates
SBI and associates

Gross NPAs as a percentage of gross advances of the SBI group declined from 6.98 per cent in 2003-04 to 2.50 per cent in 2008-09 because the write-offs/recoveries in the last few years were higher than the additions to gross NPAs, indicating an improvement in the NPA management system. Between 2003-04 and 2008-09, the ratio of net NPAs to net advances declined from 2.70 per cent to 1.50 per cent. During the same period, the NPA provision cover for the group as a whole dropped from 56.48 per cent to 40.76 per cent. The share of SBI Group in gross advances of all SCBs declined from 29.97 per cent in 2003-04 to 24.60 per cent in 2008-09, and the share in gross NPAs increased from 25.34 per cent in 2003-04 to about 26.67 per cent in 2008-09.
SBI and associates

Thus, the ratio of share of gross NPAs to gross advances of the SBI Group to that of all SCBs increased from 0.85 per cent in 2003-04 to 1.08 per cent in 2008-09. The share of SBI Group in net advances of all SCBs declined from 28.93 per cent in 2003-04 to 24.60 per cent in 2008-09, and the share in net NPAs increased from 24.24 per cent in 2003-04 to about 34.39 per cent in 2008-09. Thus, the ratio of share of net NPAs to net advances of the SBI Group to that of all SCBs increased from 0.84 per cent in 2003-04 to 1.40 per cent in 2008-09.
Nationalised banks
Nationalised banks
The proportion of gross NPAs to gross advances declined from 8.21 per cent in 200304 to 1.80 per cent in 2008-09, on account of recovery and write-offs of sticky assets. Between 2003-04 and 2008-09, the gross NPAs decreased from Rs 355 billion to Rs 254 billion. The provisioning cover fell slightly from 58.00 per cent in 2003-04 to 57.09 per cent in 2008-09, which caused the net NPA ratio to drop from 3.14 per cent in 2003-04 to 0.70 per cent in 2008-09. The share of nationalised banks in total gross advances of all scheduled commercial banks came down from 53.75 per cent in 2003-04 to 47.2 per cent in 2008-09.
Nationalised banks
The proportion of gross NPAs of nationalised banks to gross NPAs of all SCBs also declined from 56.34 per cent in 2003-04 to 36.81 per cent in 2008-09. The proportion of net NPAs of nationalised banks to net NPAs of all SCBs decreased drastically from 52.38 per cent in 2003-04 to 29.62 per cent in 2008-09 due to higher provisioning/ write-offs of sticky assets. The group had been making higher provisions towards NPAs to improve asset quality.

The proportion of gross NPAs to gross advances declined from 5.85 per cent in 200304 to 2.91 per cent in 2008-09, showcasing tremendous improvement. From 2003-04 to 2008-09, net NPAs as a proportion of net advances declined from 2.42 per cent to 1.30 per cent, as banks increased their provisioning cover from 50.51 per cent to 55.29 per cent during this period. Increased treasury profits helped banks in making a higher provision. The proportion of gross advances of private banks in total gross advances of all SCBs declined from 22.39 per cent in 2003-04 to 19.26 per cent in 2008-09, while the proportion of gross NPAs of the private banks in the total gross NPAs increased from 14.12 per cent to 24.64 per cent. Despite the decrease in the share of gross advances of private banks in total gross advances of all SCBs, the share of gross NPAs of OSCBs in total gross NPAs of all SCBs has increased.

This signals deterioration in their asset quality. The ratio of gross NPAs to gross advances increased from 0.63 per cent in 2003-04 to 1.28 per cent in 2008-09. New private sector banks have been aggressive in their lending, and hence, have seen an increase in gross NPAs. The group's share in the advances has also been hovering at around 20 per cent in recent years. The proportion of net advances of OSCBs in the total net advances of all SCBs decreased marginally from 19.96 per cent in 2003-04 to 19.17 per cent in 2008-09, while the proportion of net NPAs of the private banks in the total net NPAs increased from 19.73 per cent to 23.89 per cent. The ratio of net NPAs to the share of net advances has gone up from 0.99 per cent in 2003-04 to 1.25 per cent in 2008-09. In spite of the significant increase in the proportion of gross NPAs.
Foreign banks
Foreign banks
In the past, stringent risk management practices have helped foreign banks maintain the lowest NPA levels amongst all SCBs. However, the global financial downturn brought forth a new scenario, wherein foreign banks registered the steepest increase in NPAs as compared to last year. The proportion of gross NPAs to gross advances increased from 1.80 per cent in 200708 to 4.00 per cent in 2008-09, while the proportion of net NPAs to net advances rose from 0.90 per cent to 1.70 per cent. The share of foreign banks in gross advances of all SCBs declined from 7.94 per cent in 2003-04 to 5.59 per cent in 2008-09. Over the same period, the share of gross NPAs in all SCBs increased from 4.20 per cent to 9.86 per cent, while the share of net NPAs increased from 3.65 per cent to 9.55 per cent.
Foreign banks
The share of foreign banks in net advances of all SCBs came down from 7.50 per cent to 5.51 per cent. The performance of the group in comparison with that of the industry indicates that the quality of assets has declined. The ratio of gross NPAs to gross advances increased from 0.53 per cent in 2003-04 to 1.76 per cent in 2008-09, while the ratio of net NPAs to net advances increased from 0.49 per cent in 2003-04 to 1.73 per cent in 2008-09.
Sector-wise NPAs
NPAs of the priority sector registered a decline on year-on-year basis, while that of the non-priority sector rose by 36.7 per cent. The decline in priority sector NPAs was primarily driven by the reduction in NPAs in the agricultural sector, partly reflecting the effect of the debt waiver scheme for farmers announced by the Central government in 2007. The sharp rise in NPAs of the non-priority sector was reflective of the slowdown in the economy and stressed financial conditions of corporates. The Reserve Bank has issued guidelines regarding restructuring of loans, as a onetime measure and for a limited period of time in view of the extraordinary external factors, for preserving the economic and productive value of assets which were otherwise viable.
Sector-wise NPAs - Bank group-wise as at end March
Restructuring of assets Loans subjected to restructuring & corporate debt restructured - 2008-09
Restructuring of assets Loans subjected to restructuring & corporate debt restructured - 2008-09
Out of the total loans subject to restructuring and corporate debt restructured of Rs 764.97 billion in 2008-09, 64 per cent loans were of nationalised banks. SBI and associates accounted for a quarter of the restructured loans, other scheduled commercial banks constitued 8 per cent; the share of foreign banks was the lowest at 3 per cent.
Operaing expenditure
OSCBs prove most productive amongst all bank groups in 2008-09
CRISIL Research has attempted to analyse the performance of various bank groups in two areas: staff cost and other operating expenses.
Operating Expenditure
Operating expenditure
Staff cost
Traditionally, staff cost as a percentage of total operating expenditure has been significantly higher for public sector banks, and hence, they initiated the voluntary retirement scheme (VRS) in the late 1990s to reduce this cost. However, in the post-VRS period, public sector banks rationalised staff cost to contain non-interest expenses. In recent years, per employee cost of PSBs has risen due to the changing composition of the staff and increased provisioning towards superannuation liabilities. Wages by SCBs increased at 19.25 per cent in 2008-09 as compared with 10.8 per cent in the previous year. In terms of percentage to total assets, however, the wage bill of SCBs has remained constant at 0.9 per cent.
Staff cost
The ratio of wage bill to operating expenses increased from 51.7 per cent in 2007-08 to 53.4 per cent in 2008-09. Continuing the trend, the wage bill to operating expenses ratio was the lowest in respect of OSCBs (39.0 per cent) in 2008-09, followed closely by foreign banks (39.8 per cent). The wage bill to operating ratio of all bank groups, except foreign banks, showed a marginal rise during 2008-09. We believe that staff costs should be viewed in conjunction with the quantum of funds managed by the staff. Hence, to analyse staff cost, we have compared the following ratios across bank groups: Average advances/staff costs Average funds deployed (AFD)/staff cost
Average advances/staff cost
Average funds deployed/staff cost
Average funds deployed/staff cost

In 2008-09, OSCBs were the most productive amongst all bank groups. The average advance to the total staff cost ratio for OSCBs was the highest at 64 times, closely followed by nationalised banks at 62 times and SBI and associates at 54 times. Continuing their past year's trend, the ratio for foreign banks declined to 33 times in 2008-09. The average advances to total cost ratio of SBI and associates and nationalised banks has been increasing since 2006-07, while that of OSCBs and foreign banks has been declining during the same period. The average funds deployed to the staff cost ratio was also the highest for OSCBs at 110 times, followed by nationalised banks at 99 times, SBI and associates at 86 times and foreign banks at 66 times. The ratio for OSCBs declined, while all the bank groups witnessed a rise in the same.
SBI and associates
Nationalised banks
Nationalised banks' productivity was the second highest amongst all SCBs, with average advances to total staff cost standing at 62 times, and AFD to total staff cost at 99 times in 2008-09. In 2008-09, nationalised banks' core-fee based income as a percentage of staff cost stood at 68.0 per cent, which was the lowest amongst all bank groups.
Nationalised banks

The average advances to total staff cost ratio of OSCBs declined to 64 times in 2008-09 from 66 times in 2007-08, while AFD to total staff cost also decreased to 110 times in 2008-09 from 113 times in 2007-08. Despite this, OSCBs continued to be the frontrunners in terms of productivity. The branch network of OSCBs is not as large as that of public sector banks. In addition, they have invested heavily in technology, thereby bringing down their staff requirements. For example, an ATM is manned by just one person and performs numerous basic banking operations. Also, OSCBs make use of direct selling agents (DSAs) to source prospective clients, which helps restrict need for staff.
OSCBs
Foreign banks
The productivity of foreign banks is the lowest among all bank groups. The group's ratio of average advances to total staff cost declined from 34 times in 2007-08 to 33 times in 2008-09. The ratio of AFD to total staff cost increased marginally from 64 times to 66 times in the same period.
Foreign banks
Other operating expenses (excluding staff cost) Other operating expenses (Total operating expenses less employee cost)
SBI and associates

The SBI and associates' other operating expenses recorded the lowest CAGR (15.7 per cent) amongst all bank groups, from Rs 38 billion in 2003-04 to Rs 78 billion in 2008-09.
Nationalised banks
The other operating expenses of nationalised banks increased at a CAGR of 16.5 per cent to Rs 132 billion in 2008-09 from Rs 62 billion in 2003-04. With the largest network of 40,766 offices, nationalised banks have the highest operating expenses amongst all bank groups. The proportion of other operating expenses of nationalised banks to that of all scheduled commercial banks was 31.7 per cent in 2008-09, slightly above 30.2 per cent in 2007-08.
Nationalised banks
With nationalised banks now focusing on advertising their products through various media, their advertisement expenses have increased substantially. A similar trend is also seen in the case of postage and telephone expenses. With banks in this group increasing their focus on retail finance and also venturing into other areas for diversifying their income, their other operating expenses are expected to rise.

Between 2003-04 and 2008-09, the operating expenditure of OSCBs grew by 22.4 per cent, which is the second highest among all bank groups.
Foreign banks
Foreign banks witnessed the highest CAGR of 23.7 per cent between 2003-04 and 2008-09. In absolute terms, the other operating expenses grew from Rs 26 billion in 2003-04 to Rs 74 billion in 2008-09. As compared with other bank groups, foreign banks invest heavily in advertising to reach customers, which is evident from their high advertisement expenses of Rs 7 billion in 2008-09, which was also the highest amongst all bank groups.
Profitability
Net profitability margin NPM of SCBs increased marginally to 1.66 per cent in 2008-09
Net profitability margin NPM of SCBs increased marginally to 1.66 per cent in 2008-09
Research uses the net profitability margin (NPM) to measure profitability for a lending business. NPM is equivalent to the yield on carry business less cost of borrowings plus nonfund (fee) income less operating expenses. The net profitability margin for SCBs increased marginally to 1.66 per cent in 2008-09 from 1.52 per cent in 2007-08. While spreads rose slightly by 3 bps, operating expenses to average funds deployed (AFD) declined by 11 bps. Core-fee income as a percentage of AFD remained almost constant at 1.24 per cent.
Bank-group wise performance SBI and associates
The NPM of SBI and associates decreased by 8 bps from 1.47 per cent in 2007-08 to 1.39 per cent in 2008-09. The spreads dropped by 21 bps y-o-y to 2.15 per cent in 2008-09. While the operating expense as a percentage of AFD declined by 13 bps, core fee income as a percentage of AFD went down by 1 bp.
Nationalised banks NPM - Nationalised banks
Nationalised banks NPM - Nationalised banks

After having dropped by 41 bps in 2007-08, the NPM of nationalised banks increased by 11 bps from 1.07 per cent in 2007-08 to 1.18 per cent in 2008-09. NPM rose mainly because spreads increased by 4 bps, while the operating expense to average funds deployed (AFD) declined by 7 bps. Core fee income as percentage of AFD went down by 1 bps to 0.70 per cent.

NPM - OSCBs

NPM - OSCBs
The NPM of OSCBs increased by 30 bps from 1.54 per cent in 2007-08 to 1.84 per cent in 2008-09. Their spreads rose by 19 bps, while operating expenses to AFD and core fee income to AFD decreased by 19 bps and 7 bps, respectively, in 2008-09.
Foreign banks NPM - Foreign banks
Foreign banks NPM - Foreign banks

The NPM of foreign banks increased by 85 bps to 5.49 per cent in 2008-09 from 4.63 per cent in 2007-08. Their spreads rose by 42 bps to 5.27 per cent in 2008-09 from 4.85 per cent in 2007-08. The operating expense ratio for the group went up by a marginal 4 bps to reach 4.06 per cent in 2008-09, while the core-fee income ratio increased by 48 bps to reach 4.28 per cent during the same period.
Interest earned and expended Total interest income All SCBs
Interest earned and expended Total interest income All SCBs

The total interest income for SCBs grew at a CAGR of 22.0 per cent from 2003-04 to 2008-09 on the back of a 32.6 per cent increase in interest on advances during the same period. Income on investments grew at a lower CAGR of 7.0 per cent during the period.
SBI and associates Total interest income - SBI and associates
SBI and associates Total interest income - SBI and associates

Between 2003-04 and 2008-09, the total interest income of SBI and associates grew at a CAGR of 16.8 per cent, with interest on advances rising at a CAGR of 32.3 per cent. Income on investments increased marginally at a CAGR of 0.1 per cent. During the same period, interest on balances with the RBI and other inter-bank funds declined by 7.9 per cent.
Nationalised banks Total interest income - Nationalised banks
The total interest income for nationalised banks recorded a CAGR of 21.9 per cent between 2003-04 and 2008-09, driven by a 32.7 per cent growth in interest on advances and a moderate 5.5 per cent growth in income on investments
Other scheduled commercial banks Total interest income - OSCBs
Other scheduled commercial banks Total interest income - OSCBs

OSCBs recorded the second-highest growth in total interest income amongst all bank groups, registering a CAGR of 27.2 per cent from 2003-04 to 2008-09. This increase was driven by a 32.9 per cent growth in interest on advances and 17.1 per cent growth in income on investments.
Foreign banks Total interest income - Foreign banks
Foreign banks Total interest income - Foreign banks

The total interest income of foreign banks increased at a CAGR of 27.6 per cent between 2003-04 and 2008-09. The income on advances grew at a CAGR of 32.5 per cent, whereas income on investments grew at a CAGR of 20.9 per cent. During the same period, interest on balances with the RBI and other inter-bank funds increased by 16.2 per cent.
Total interest expended Total interest expended - SCBs
The total interest expended by SCBs increased at a CAGR of 24.6 per cent between 2003-04 and 2008-09. For the same period, interest on deposits and interest on RBI and inter-bank borrowings went up by a CAGR of 24.3 per cent and 38.3 per cent, respectively.
Bank group-wise performance SBI and associates Total interest expended - SBI and associates
Between 2003-04 and 2008-09, the total interest expended rose at a CAGR of 19.5 per cent. During the same period, the interest on RBI and inter-bank borrowings saw a marked rise of 70.2 per cent.
Nationalised banks Total interest expended - Nationalised banks
Nationalised banks Total interest expended - Nationalised banks

From 2003-04 to 2008-09, the total interest expended by nationalised banks grew at a CAGR of 26.7 per cent, while interest on deposits (the main component of total interest expended) grew at a slightly lower CAGR of 25.6 per cent. Interest on RBI and inter-bank borrowings and other interest went up significantly by 44.2 per cent and 40.3 per cent, respectively, during this period; however, their proportion is too small to have substantial impact on the total interest expended.
Other scheduled commercial banks Total interest expended ?? OSCBs
Other scheduled commercial banks Total interest expended ?? OSCBs

The total interest expended by OSCBs increased at a CAGR of 26.6 per cent between 2003-04 and 2008-09, posting the second-highest growth amongst all bank groups. Interest on deposits grew at a healthy CAGR of 30.1 per cent. The interest on RBI and inter bank borrowings also increased at a CAGR of 41.0 per cent.
Foreign banks Total interest expended - Foreign banks
Foreign banks Total interest expended - Foreign banks

From 2003-04 to 2008-09, foreign banks witnessed a CAGR of 24.5 per cent in total interest expended. Over the same period, interest on deposits and borrowings rose by 26.3 per cent and 19.8 per cent, respectively. In general, domestic banks focus on mobilising deposits to meet their funding requirements, while foreign banks (on account of their restricted branch network) have a higher proportion of borrowings in their total borrowed funds vis-a-vis their domestic peers.
Other income Core fee income essential to enhance profitability

Besides interest income, banks also earn fees from services such as issuing letters of credit, providing guarantees, bills collection and cash management services, for which they charge commission or brokerage income in the form of draft charges and bank charges. These sources of income together constitute the 'other income' of a bank. Income earned by way of profits on the sale of investments also falls under this category.
Other income (excluding profit on sale of investments) Other income (ex-profit on sale of investments) as percentage of total income
Other income (excluding profit on sale of investments) as a percentage of the total income for all SCBs increased from 11.1 per cent in 2003-04 to 12.8 per cent in 2008-09.
Core fee income as percentage of other income
Over the same period, the core-fee income which forms part of the total other income increased from 45.3 per cent to 72.1 per cent across SCBs.
Core fee income
SBI and associates

For SBI and associates, the share of other income (excluding profit on sale of investments) in total income decreased marginally from 12.5 per cent in 2007-08 to 12.2 per cent in 2008-09. The growth in other income was mainly driven by core-fee based income, which stood at Rs 120 billion as of March 2009.
Nationalised banks
Nationalised banks have traditionally had the lowest proportion of other income in total income amongst all bank groups, as their foray into peripheral segments has been comparatively slow. The share of other income in the total income of nationalised banks fell from 9.4 per cent in 2007-08 to 8.7 per cent in 2008-09. The core fee income as a percentage of other income decreased slightly from 58.0 per cent in 2007-08 to 57.0 per cent in 2008-09.

The proportion of other income to total income of OSCBs declined from 16.2 per cent in 2007-08 to 14.6 per cent in 2008-09 due to the base effect. Their core fee income as a percentage of other income increased from 75.5 per cent in 2007-08 to 79.0 per cent in 2008-09.
Foreign banks
In continuation of past trends, foreign banks had the highest proportion of other income to total income, which stood at 29.7 per cent in 2008-09. Their global presence has enabled foreign banks to be strong players in foreign exchange and trade finance transactions. Moreover, the syndication fee/ processing fee on foreign currency lending, in which they are strong players, helps foreign banks in increasing their fee-based income. However, government regulations that restrict the number of branches that foreign banks can operate have been hampering growth in their fee income in the form of commission and exchange income.
Profit on sale of investments Share of profit on sale of investments in total income

In 2008-09, the share of profit on sale of investments in the total income increased for all bank groups, except in the case of OSCBs, which witnessed a decline in the same. The rising interest rates in 2007-08 and low bond prices pulled down trading profits for most bank groups. The profit on sale of investments for all SCBs declined from Rs 193 billion in 200304 to Rs 154 billion in 2008-09.
SBI and associates

Over the years, SBI and associates have exhibited low reliance on other income, including profits on sale of investments, on account of their strong core business. The share of profit on sale of investments in total income for SBI and associates increased from 1.85 per cent in 2007-08 to 3.10 per cent in 2008-09 due to the soft interest rate scenario and greater exposure to high coupon SLR securities.
Nationalised banks
In 2007-08, the share of profit on sale of investments in total income was the highest in case of nationalised banks at 3.39 per cent. The group maintained its leading position in 2008-09, with this share increasing to 3.71 per cent. Asnationalised banks have fairly high exposure to high coupon securities, they were able to book healthy profits during the soft interest rate regime.

OSCBs were the only group to witness a decrease in the share of profit on sale of investments in total income; the share dipped from 3.15 per cent in 2007-08 to 2.81 per cent in 2008-09. The profit on sale of investments for OSCBs declined at a CAGR of 3.7 per cent from 2003-04 to 2008-09.
Foreign banks
Foreign banks registered a substantial increase in the share of gain on sale of investments in total income. The share increased to 3.24 per cent in 2008-09 from 0.60 per cent in 2007-08.
Spreads
Spreads Spreads of SCBs up 3 bps y-o-y in 2008-09

Spreads are defined as the difference between the yield on carry business and the interest cost of banks. The spreads of SCBs increased marginally to 2.47 per cent in 2008-09 from 2.44 per cent in the previous year.
Spreads Spreads of SCBs up 3 bps y-o-y in 2008-09

Deposit and lending rates of SCBs across bank groups were on the rise during the first half of 2008-09. Taking a cue from the Reserve Bank's monetary policy announcements, the SCBs reduced their deposit and lending rates in the second half of the year. Rates declined further in the first half of 2009-10 (up to September 11, 2009).

A study of group-wise spreads indicates that foreign banks enjoy the highest spreads at 5.27 per cent. OSCBs had a spread of 2.72 per cent in 2008-09, followed by SBI and associates at 2.15 per cent; nationalised banks had the lowest spread of 2.14 per cent.
SBI and associates Spreads - SBI and associates
Spreads
The spreads of SBI and associates declined by 21 bps from 2.36 per cent in 2007-08 to 2.15 per cent in 2008-09. Although yield on advances increased by 34 bps, the spreads dipped due to a 34 bps fall in yield on investments and a rise of 22 bps in interest cost in 2008-09.
Yield on carry business

The yield on carry business went up by 2 bps in 2008-09, driven by yield on advances. However, the rise was marginal due to the combined influence of the fall in yield on investments and the increase in interest costs.
Nationalised banks Spreads - Nationalised banks
Spreads
The spreads of nationalised banks increased marginally by 5 bps to 2.14 per cent in 2008-09 from 2.09 per cent in 2007-08. The increase was the result of a more-than-proportionate rise in the yield on carry business over interest cost in 2008-09.

The yield on carry business went up by 37 bps to 8.71 per cent in 2008-09 from 8.34 per cent in 2007-08. The yield on advances also moved up by 69 bps from 9.50 per cent in 2007-08 to 10.19 per cent in 2008-09, while the yield on investments decreased by 28 bps from 7.32 per cent in 2007-08 to 7.06 per cent in 2008-09.
Interest cost
The interest cost for nationalised banks went up by 33 bps from 6.24 per cent in 200708 to 6.57 per cent in 2008-09. This was driven by an increase of 31 bps and 106 bps in cost of deposits and cost of borrowings, respectively.
Other scheduled commercial banks Spreads - Other scheduled commercial banks
Spreads
Spreads for OSCBs increased by 19 bps from 2.53 per cent in 2007-08 to 2.72 per cent in 2008-09 on the back of the 35 bps increase in the yield on carry business.

The yield on carry business for OSCBs increased by 35 bps to reach 9.77 per cent in 2008-09. The yield on advances went up by 40 bps to 11.41 per cent, while the yield on investments fell by 30 bps to 6.93 per cent in 2008-09.
Interest cost
The group's interest cost increased from 6.88 per cent in 2007-08 to 7.05 per cent in 2008-09, which was the highest amongst all bank groups. The cost of borrowings scaled up by 18 bps to 11.35 per cent in 2008-09, while the cost of deposits went up by 14 bps to 6.60 per cent. Many OSCBs, especially the old private sector banks, offer higher interest on term deposits as compared to public sector banks (nationalised banks and SBI and associates). Moreover, the technology-driven products introduced by many private sector banks (OSCBs) allow customers to switch between term and savings deposits; this increases their liability on term deposits. These factors contributed to higher cost of deposits for OSCBs. OSCBs do not have a wide network of branches, which is essential for garnering low-cost deposit volumes. The group's low-cost deposits constituted only 32.7 per cent of the total deposits in 2008-09.
Foreign banks Spreads - Foreign banks
Spreads
Foreign banks registered the highest growth in spreads amongst all bank groups, increasing by 42 bps to reach 5.27 per cent in 2008-09, largely driven by the improvement in yield on carry business.

Despite the decline in yield on investments, the yield on carry business of foreign banks went up by 54 bps to 10.01 per cent in 2008-09, led by the substantial improvement of 167 bps in yield on advances. The yield on investments decreased by 61 bps to 7.63 per cent in 2008-09. Foreign banks have very little exposure to long-tenure securities and the re-pricing of securities they hold occurs at a faster pace, which has resulted in higher yield on investments. Generally, foreign banks lend foreign currency loans and external commercial borrowings (ECBs), which carry floating rates of interest.
Interest cost The interest cost for foreign banks went up by 12 bps to reach 4.74 per cent. Cost of deposits went up by 39 bps to 4.58 per cent, while the cost of borrowings decreased by 77 bps to 5.50 per cent in 2008-09. Historically, foreign banks' reliance on deposits has been low as compared with other bank groups. Also, they offer lower interest rates on deposits as compared with public sector banks. This, coupled with the increased share of low-cos deposits, has helped them achieve the biggest drop in the cost of deposits between 2001-02 and 2004-05. Although the share of low-cost deposits in total deposits of foreign banks has declined from 42.9 per cent in 2003-04 to 41.8 per cent in 2008-09, it remains the highest amongst all bank groups.
Interest cost Within low-cost deposits, demand deposits have a higher share of 67.8 per cent, as foreign banks generally prefer to cater to corporate clients who maintain current account deposits, and also because they are strong in cash management systems (CMS).
Sectoral deployment of credit
168
Sectoral deployment of gross bank credit

The deceleration in bank credit growth observed during 2007-08 continued in 2008-09 as well. The slowdown was mainly indicative of the downturn in the real economy as the banks adopted a guarded approach in the wake of increasing uncertainties. Growth in credit to the industry (small, medium and large) decelerated for the second consecutive year to 21.6 per cent as at end-March 2009 from 24.3 per cent as at end- March 2008. Continuing last year's trend, industrial credit posted higher growth as compared to overall credit. So the share of outstanding credit to industry in non-food gross bank credit increased to 40.5 per cent at end-March 2009 from 39.4 per cent at end-March 2008.

Infrastructure (which has the biggest share in credit outstanding) had the largest share of incremental bank credit to industry in absolute terms, followed by basic metals and metal products, and textiles. Credit to petroleum, coal products and nuclear fuels registered the sharpest rise in growth rate (63.8 per cent), followed by construction (37.8 per cent) and infrastructure (31.6 per cent). Despite the slowdown, credit to select sectors, especially petroleum and coal products, rose sharply.

The growth rate in retail credit by banks, which has been declining since 2005-06, fell drastically to 4.0 per cent as at end-March 2009 from 17.1 per cent at end-March 2008. It also remained lower than the growth in loans and advances of SCBs (21.2 per cent). As a result, the share of retail credit in total loans and advances declined to 21.3 per cent at end- March 2009 from 24.5 per cent at end-March 2008. Though loans to consumer durables increased, growth of banks retail portfolio decelerated on account of the slowdown in credit for housing loans, auto loans, credit card receivables and other personal loans.
Sectoral deployment of non-food credit - Flows

As of March 2009, the total credit provided by public sector banks to the micro and small enterprises (MSE) sector stood at Rs 1,913.1 billion, which formed 11.3 per cent of adjusted net banking credit (ANBC) and 26.5 per cent of the total priority sector advances of these banks. Advances to manufacturing enterprises and service enterprises by public sector banks amounted to Rs 1,311.8 billion and Rs 544.5 billion, respectively, constituting 68.6 per cent and 28.5 per cent, respectively, of the total advances to MSE sector. The total credit provided by private sector banks to the MSE sector was Rs 479.2 billion as of March 2009, which formed 11.8 per cent of ANBC and 25.2 per cent of their total priority sector advances.

Advances to manufacturing enterprises and service enterprises by private sector banks amounted to Rs 176.3 billion and Rs 263.6 billion, respectively, constituting 36.8 per cent and 55.0 per cent, respectively, of the total advances to the MSE sector. The total credit provided by foreign banks to the MSE sector as of March 2009 was Rs 181.4 billion, which formed 11.2 per cent of ANBC, and 32.7 per cent of their total priority sector advances.
Review and Future Growth Projections
176
Advances
177
Introduction
With the economic growth consolidating around the pre-crisis trend and growing confidence in the Indian economy, companies have reinstated their investment plans in 2010-11. However, due to increase in commodity prices and rising interest rates, CRISIL Research expects capital investments to slightly moderate over the next 2 years. Owing to the buoyant credit flow from the banking system, banks accounted for nearly 60 per cent of total incremental financing to the commercial sector during April-December 2010. The funding from non-bank sources, particularly foreign sources, decreased on account of lower FDI inflow and lower subscription to American Depositary Receipts/Global Depositary Receipts.
Fast-paced credit growth in 2010-11

During the first half of 2010-11, bank credit grew at 19.1 per cent (September 2010) vis-a-vis 13.0 per cent (September 2009), on account of large borrowings by telecom companies for 3G spectrum and broadband wireless access auctions. In the second half, growth in retail credit along with capital investments by corporates supported the growth momentum. The aggregate bank credit growth is expected to be around 22 per cent for 2010-11, lead by industry and services sector. Within industry, credit flow to segments like infrastructure, cement, petrochemicals and metals has grown at 36 per cent y-o-y on the back of reviving economy and growth in capital expenditure.
Fast-paced credit growth in 2010-11

The services sector, which posted a growth of 12 per cent in 2009-10, is expected to grow by 21 per cent in 2010-11. The growth was mainly supported by NBFC, tourism, hotels and restaurants segments. Given business growth and expansion, NBFCs have increased their share significantly in overall services credit.
Credit growth to moderate over the next 2 years

Aggregate bank credit growth is expected to be in the range of 18-20 per cent over the next 2 years on account of drop in capital investments across industrial sectors such as refinery, cement, automobiles and auto ancillaries. Although growth in industrial capital expenditure is likely to moderate, substantial investments are expected in the infrastructure segment. Investment activity in segments like power, roads and ports is expected to remain buoyant over the next 2 years. With inflation expected to remain higher than long term average, CRISIL Research anticipates interest rates to rise over the medium term. Thus, due to increasing interest rates and expected moderation in sales of underlying assets like housing, consumer durable, cars and commercial vehicles, growth in retail credit is expected to remain stable.
Credit growth
Incremental credit-deposit ratio to reach 70-72 per cent in 2011-12

Strong credit off take and relatively slower growth in deposits had led to the incremental credit-deposit ratio to increase to 100.1 per cent on February 25, 2011 from 93.5 per cent on September 24, 2010. Research expects the incremental credit-deposit ratio to reach 70-72 per cent by the end of 2011-12 primarily due to an expected moderation in credit growth and a high deposit growth rate.
CD Ratio and Incremental CD ratio
Occupation-wise credit Industry credit growth to moderate in 2011-12

Advances can be classified as food and non-food credit. Non-food credit is further divided into agricultural, industry, retail and services. The industry and retail segment is expected to grow at a faster pace in 2010-11 as compared to 2009-10. Large capital expenditure plans by the industry translated into immense demand from corporates for term loan funding.
Occupation-wise deployment of credit
Growth rate of credit by occupation
Growth rate of credit by occupation

Given sharp increase in credit off take by industries like petrochemicals, cement and basic metals in 2010-11, the annual growth rate of industry credit is expected to be significantly higher at around 27 per cent vis-a-vis 24 per cent of 2009-10. This high growth rate can be attributed to two factors - firstly, increase in additional demand for domestic credit in the first half of 2010-11 owing to telecom players investing for 3G and BWA spectrum licences; in the second half of 2010-11, credit growth became more broad based across sectors thus raising demand for additional funds despite the continued tightening of monetary policy by the central bank. Research expects commercial credit to grow at 18 per cent in 2011-12 and 19 per cent in 2012-13 due to drop in capital investments across industrial sectors, notably, telecommunications, refinery, cement and automobiles and prevalence of high interest rates.
Infrastructure share in bank credit increasing at phenomenal pace

Bank lending to infrastructure projects has been increasing rapidly over the last few years; the share of infrastructure credit in total bank credit has increased from 9.2 per cent in March 2008 to 13.8 per cent in March 2011. This trend is also expected to continue in 2011-12, with infrastructure credit growing at 21.7 per cent y-o-y as against a 18.6 per cent growth in total bank credit. Within the infrastructure space, the power sector would attract the largest chunk of investments, notwithstanding issues related to availability of coal. Main drivers of investment would be continuing deficit in power supply, government's increased thrust on augmenting power generation capacity and increasing private sector participation.
Infrastructure share in bank credit increasing at phenomenal pace

In the telecom sector, while overall investments would be lower than in 2009-10 and 2010-11, players would continue to invest in 3G rollouts and augmentation of network capacity. The government is expected to increase thrust on investments in transport and trade infrastructure (roads, railways, ports, and airports) to support high economic growth. Investments in build-operate-transfer (BOT) road projects are also expected to be higher due to resolution of policy issues.
Proportion of infrastructure credit to total bank credit
Proportion of infrastructure credit to total bank credit

However, any increase in exposure beyond comfort levels of banks could constrain their ability to lend to infrastructure. Most of the banks are exhausting their prudential limits in terms of sector and borrower exposure. Banks, therefore, need to explore other measures of infrastructure financing such as take-out financing and secondary market for infrastructure bonds.
Industry credit across sectors as of January 2011
NBFC to lead services credit growth

Credit to the services sector is expected to grow by 21 per cent in 2010-11 as compared to 12 per cent in 2009-10 due to significant increase in advances towards segments namely, transport operators, tourism, hotel and restaurant and commercial real estate. Over the next 2 years, services sector is projected to grow by 23-24 per cent, driven by non banking finance companies (NBFCs) and wholesale trade. NBFCs, on account of business growth and expansion in their reach, are expected to increase their share significantly in overall services credit.
Retail credit growth projected at 13-14 per cent over next 2 years
Demand for retail credit picked up In 2010-11 due to rising prices of underlying assets. Reflecting a rise in retail consumption and expenditure, the growth in personal loans is expected to accelerate to 14 per cent as against 4 per cent in 2009-10. Credit of categories like housing, advances against fixed deposits, vehicle loans and education also increased. Housing retail credit is expected to post a sharp increase in growth of outstanding to 14 per cent in 2010-11 from 8 per cent in 2009-10. Over the next 2 years, credit growth to this segment is likely to remain stable, as affordability increases. CRISIL Research expects growth in the retail portfolio of banks to be slower than that in industry credit.
Retail credit growth projected at 13-14 per cent over next 2 years
While segments such as housing loan and auto loan are likely to register a doubledigit growth in their outstanding portfolio. We forecast personal loans and consumer durable loans growth to moderate. Consequently, we expect retail credit to grow by 13-14 per cent over the next 2 years.
Components of credit Prominence of term loans to grow

Long-term credit in the form of term loans, constituting around 62 per cent of overall bank credit, is estimated to register growth of 25 per cent in 2010-11 as against 16 per cent in 2009-10. On the demand side, the increase in growth can be attributed to corporates implementing their expansion plans in the light of economic recovery. We expect the share of term loans to increase marginally to 63 per cent in 2011-12 with growth rate of 21 per cent.
Com p on en t -wise share of credit
Working capital credit to grow at lower rate than term loans

Working capital credit includes bills purchased and discounted, cash credits, overdrafts and loans repayable. Revenue growth forecasts, working capital cycle and the willingness of banks to fund corporate requirement are some of the major factors influencing growth in this segment. In 2010-11, working capital credit is expected to have grown by 6-8 per cent given the shift of banks to base rate regime, resulting in higher cost of borrowing for corporates. Thus, corporates raised short-term money from alternate funding sources primarily commercial papers. The short-term credit growth was also subdued due to improved profitability resulting in servicing of working capital requirements through internal accruals. The proportion of working capital credit is expected to decline marginally over the next 2 years on account of moderation in top line growth and efficient working capital management.
Growth rate of various components of credit
Deposits
201
Deposits to grow at 17-18 per cent over the next 2 years

Reining inflation coupled with negative real interest rates in the first half of 2010-11, lead to high currency holdings and lower deposit growth. During most part of the period, deposit growth ranged between 14-15 per cent. Given the tightening liquidity scenario (on account of sudden withdrawal of liquidity from the system in June 2010 due to 3G and BWA spectrum auction) and rising demand for credit, several banks hiked deposit rates by 100-200 bps across maturities during second half of 2010-11. As a result, the deposit growth rate picked up from 14.3 per cent as on September 24, 2010 to 16.5 per cent as on February 25, 2011.
Deposits to grow at 17-18 per cent over the next 2 years

In 2011-12, CRISIL Research expects a further 50-75 bps hike in deposit rates across maturities, as deposit growth continues to lag credit growth. Further, with the increase in deposit rates, and real interest rates turning positive, the deposit growth rate is expected to be in the range of 17-18 per cent by 2011-12.
Deposits growth
Growth of term deposits
Methodology to project deposit growth

CRISIL Research has forecast the growth of retail deposits based on a set of identified parameters, which impact growth of such deposits. Following factors influence retail deposits: GDP growth Employment Per capital income Growth in disposable income Rate of inflation Interest rates Taxation Opportunity cost of investments in other avenues

The methodology for making forecasts for retail deposits has been presented below: Start with gross domestic personal disposable income Estimate the household savings as a percentage total disposable income Estimate the proportion of physical and financial savings in the total household savings Estimate the movement in proportions of deployment of financial savings across various financial assets (deposits, currency, government schemes, investment in market, contractual savings) This gives us incremental retail deposits. Apply the proportion of incremental retail deposits in total incremental deposits to arrive at total incremental deposits
Asset quality
209
GNPA
NPA levels in the banking system to increase moderately over the medium term
CRISIL Research expects NPA levels in the banking system to increase moderately over the medium term. The gross NPA ratio is estimated to move up to 2.8 per cent by the end of 2011-12 from 2.4 per cent in 2009-10. NPAs for agriculture and small-scale industries (SSIs) segments are likely to increase while corporate and retail NPAs are projected to decline marginally over the next 2 years.
Scheduled Commercial Banks (SCBs): Movement in gross NPA ratio (per cent)
Corporate loans: Increasing exposure and NPAs in infrastructure and other sectors
On the back of the economic downturn of 2008-09, the RBI had allowed onetime restructuring for banks across industry segments. As of March 2010, restructured assets contribute to 3.3 per cent of gross advances. Due to improving economic scenario there have been slippages of only 5-10 per cent of the restructured assets. While the recovery in demand and improved credit risk profile of borrowers had offset a part of the risks, some specific sectors like airlines, microfinance, textiles (processing), real estate are still under pressure. In infrastruture sector even though the overall NPAs are still below 1 per cent, the absolute amount of NPAs have increased by almost 100 per cent from Rs 14.4 billion as Sept 2009 to Rs 27.3 billion as of Sept 2010. Thus, NPAs in the above sectors need to be closely monitored.
Corporate loans: Increasing exposure and NPAs in infrastructure and other sectors
Research expects the overall NPA ratio in the corporate segment to increase to 2.1 per cent in 2010-11 and remain stable in 2011-12 on the back of strong economic growth. However, in 2012-13, the ratio is expected to decline to 1.9 per cent given improving demand and better liquidity situation.
SCBs: Movement in corporate gross NPA ratio (per cent)
Retail loans: Stringent lending norms to keep check on NPA levels

Delinquencies in the retail sector, which had increased sharply given the economic slowdown and aggressive lending, improved during 2009-10 and in the subsequent quarters of 2010-11. The sharp increase in retail NPAs in 2008-09 was primarily due to adverse credit selection during the economy's expansionary phase. Consequently, SCBs increased their focus on secured loans, share of which increased by 500 bps between March 2009 to September 2010 to reach 65 per cent (of the total retail advances). This share is expected to go up further over the medium term.
SCBs: Retail advances and share of unsecured loans
SCBs: Retail advances and share of unsecured loans

Further, CRISIL Research believes that the stringent lending norms adopted by banks over the past few years and improved availability of credit information through Credit Information Bureau (India) Ltd (CIBIL), will help banks monitor NPA levels, especially unsecured NPAs. Thus, we estimate retail NPA ratio to decline to 3.6 per cent in 2010-11, and continue to decline further in 2011-12 and 2012-13. However, housing loan NPAs which increased sharply by around 27 per cent in 200910 and further by around 26 per cent till September 2010 need to be closely monitored.
SCBs: Movement in retail gross NPA ratio (per cent)
Growth in SSI NPAs to be highest amongst all segments over the medium term
Delinquency levels in small-scale industries (SSIs) portfolios have traditionally been higher than those of other asset classes. The SSI sector is the first to be impacted in case of any economic slowdown. Constraints in working capital payments have impacted the SSI sector's business and earnings profile in 2009-10. We estimate the NPA ratio in the SSI loan portfolio to increase to 3.9 per cent in 201011, and further to 4.4 per cent by 2011-12 given the impact of tight liquidity on the payment capability of SSIs.
SCBs: Movement in SSI gross NPA ratio (per cent)
Agriculture NPAs to increase over the medium term

Higher delinquency levels have been present in agriculture segment over the last few years. However, the absolute NPA in the agriculture segment declined to 71.5 billion in 2008-09 from Rs 97.3 billion in 2007-08, mainly due to the Central Government's agricultural debt waiver scheme in 2007. As the immediate impact of these policy measures started to recede, NPA levels in the segment also started to move up, where absolute gross NPA stood at Rs 103.5 billion in 2009-10. Therefore, CRISIL Research expects the NPA ratio in the agricultural loans portfolio to rise to 3 per cent in 2010-11. With the receding effect of debt waiver scheme and increasing exposure to agriculture sector (as banks look to meet their priority sector lending targets), we expect the ratio to retrograde to 2007-08 levels in 2011-12 and rise further to 3.8 per cent in 2012-13
SCBs: Movement in agriculture gross NPA ratio (per cent)
Methodology Methodology for calculating Gross NPA
Methodology Methodology for calculating Gross NPA

Research has estimated the increase in gross and net NPAs by taking into account the following: Restructured assets (RAs) have been forecast based on expected additions to restructured assets, assets restructured in the past turning into GNPAs, and repayments on RAs. Estimates have been made on the amount of RAs that would turn into NPAs. Gross NPAs have been forecast taking into account the slippages from standard assets and restructured assets. A provision coverage of 70 per cent has been applied on gross NPAs to arrive at net NPAs
Yield analysis
225
Spreads to decline by 21 bps in 2011-12 and 10 bps in 2012-13

Credit growth is estimated to have exceeded deposit growth by 400 basis points by March 2011. Further, the credit deposit (CD) ratio has reached a high level of around 76 per cent. These factors have caused a liquidity crunch in the system. Tight liquidity is also reflected in low SLR investments of 26 per cent in 2010-11 as a proportion of Net Demand and Time Liability (NDTL). Given the tight liquidity scenario, bargaining power of banks has increased, enabling them to pass on the increase in costs by increasing lending rates by 50-100 basis points in the third and fourth quarter of 2010-11. In addition, to meet the increasing demand for funds, banks raised deposit rates by around 100-200 bps across maturities in second half of 2010-11.

Deposits raised in the last 3 years constitute around 80 per cent of term deposits for banking system. Thus, the impact of increase in deposit costs will be visible in 2011-12 and 2012-13, as low cost deposits raised in 2009-10 get repriced upwards.Furthermore, the move by RBI, in April 2011, to hike savings account interest rates would increase the cost of funds for banks, on this account only, by around 10 bps. CRISIL Research expects the spreads to decline by 21 bps in 2011-12 and 10 bps in 2012-13. Net interest margins would decline by around 20 bps and 8 bps respectively during this period from 2.65 per cent in 2010-11, To compensate for the rise in cost of deposits, banks may impose additional charges for providing various facilities on the savings account.

Consequently, the impact on net profit will be partly offset by the increase in fee income. We expect the CD ratio to decline in the near term. As the 200 bps concession on Statutory Liquidity Ratio (SLR) is withdrawn, deposit growth will have to be higher than credit growth to bring down the CD ratio. The current high deposit rates will aid higher growth in deposits.
SLR investment as a percentage of NDTL
NPM for banking system
Yield on investments
The yield on the investment portfolio of banks hinges upon the mix of trade and nontrade strategic investments, the maturity profile of investments and the interest rates at the time of issuance of securities and at their maturity. With interest rates likely to rise over the next 6-12 months, banks are expected to invest in securities of shorter tenure to take advantage of the same.
Maturity profile of investments of SCBs
Maturity profile of investments of SCBs

The investment profiles of SCBs reveal that almost 45.8 per cent of the portfolio belongs to the over-5-years maturity bucket. A large proportion of these investments are likely to be strategic in nature such as investments in subsidiaries. As of March 2010, around 27 per cent of these investments were held in trading securities with remaining maturity of less than 1 year, 14.5 per cent were in the 1-3 years bucket, and 12 per cent were in the 3-5 years maturity bucket. The yield on investments is expected to fall post 2009-10 due to upward movement of interest rates, as upward movement in yields exerts pressure on bond prices. We expect yield on investment to fall by 10-20 bps over the next 2 years.
Cost of deposits
Bank deposits comprise current deposits, savings deposits, and term deposits. Current and savings deposits (CASA) constitute low-cost deposits for banks. While banks do not offer interest on current deposits, interest on savings deposits are regulated by the RBI; it currently stands at 4.0 per cent. Interest rates on term deposits are determined by individual banks based on the tenure. When credit offtake is high, and competing investments such as mutual funds, stock markets and post office savings offer attractive returns, banks tend to increase rates on term deposits to attract customers.
Maturity profile of term deposits of SCBs
Maturity profile of term deposits of SCBs

As on March 2011, the credit off take is estimated to be higher by 400 basis points than the deposits off take. Further, the CD ratio has also reached peak levels leading to severe crunch in liquidity. Thus, banks have increased deposit rates by around 100-200 bps across maturities over the last 6 months. The full effect of this would be felt over the next 2 years. Also, the cost of deposits is likely to increase further if the RBI deregulates the savings account deposit rates. Consequently, cost of deposits is expected to increase by 40 bps and 30 bps in 2011-12 and 2012-13, respectively.
Cost of deposits for SCBs
Cost of borrowings
As in the case of advances, most bank borrowings are raised on floating rate basis. Borrowings are raised primarily to fix liquidity mismatches, and hence, are generally short term in nature. According to CRISIL Research, analysis of the maturity profile indicates that 55-60 per cent of SCB borrowings belong to the less than 1-year maturity bucket. The sources of funds for banks and the share of each source in total borrowings have been enumerated in the following table:
Sources of borrowing
Sources of borrowing
As the table indicates, borrowings from other banks have declined, while that from outside India have increased significantly to 60 per cent in 2009-10 from 44 per cent of total borrowings in 2005-06. Borrowings from outside India are generally linked to the London Interbank Offered Rate (LIBOR), which is relatively low. Therefore, we expect this trend of increased borrowings outside India to continue over the medium term. Based on the proportion of borrowings from various sources, and the movement in rates for each source, the cost of borrowing is estimated to increase in 2011-12 and 2012-13 in view of the expected upward movement in interest rates.
Player Profiles
ICICI Bank
KEY FINANCIALS
KEY BUSINESS INFORMATION Asset Quality maintained Gross NPA decreases on an absolute basis by 2% sequentially to Rs94.7bn, however due to de-growth in balance sheet, as a proportion to advances, it increases by 6bps to 4.69%. Retail NPA amounts to 2/3rd of Gross NPA. Slippage continued to remain high at Rs11bn; write-off amounts to Rs6bn. Management indicates NPA has peaked and it will go down with decrease in un-collateralized retail business & decrease in loan growth. Net NPA has decreased 2% sequentially to Rs 45.6bn and as a % to advances it stable at 2.3%.
KEY BUSINESS INFORMATION REALIGNMENT WITHIN LOAN BOOK With overall slowdown in the economy and increasing risk-profile among borrowers, ICICI Bank seems to realigning its portfolio. Retail Advances as a % to total advances has been consistently brought down from 55% last year to 45%, which we project to decrease further. Within retail portfolio focus has been shifted from personal loans to mortgages. Corporate and SME composition have increased by 500 bps sequentially to 22%. Corporate segment has grown by 34% sequentially. This is a conscious decision to slow on business and increase the margins by attracting higher low cost deposits and also diversifying away from retail to Corporate and SME segment including project finance and corporate finance thereby decreasing fresh slippage.
KEY BUSINESS INFORMATION LOAN PORTFOLIO
KEY BUSINESS INFORMATION CASA (CURRENT AND SAVINGS ACCOUNT) CASA has improved phenomenally over last quarter, it increased by 650 bps to 36.9%. On an absolute basis, CASA has grown by 9%, with a modest growth in overall CASA; the CASA proportion has increased dramatically because overall deposit has de-grown by 11%. It would be interesting to watch whether it would be able to maintain CASA, once the balance sheet growth resumes. We have factored in modest growth in CASA ratio from last year, as the CASA proportion anyways improves in a lower interest rate regime on account of decreasing differential between interest on term and saving deposits.
KEY BUSINESS INFORMATION CASA (CURRENT AND SAVINGS ACCOUNT) AS PROPORTION OF TOTAL DEPOSITS
KEY BUSINESS INFORMATION COST RATIONALIZATION PROVIDE SOME RELIEF Despite healthy expansion in branches in 2009-10, operating expenses decreased by 18% to Rs14.2bn. Major cost containment came from direct marketing expenses. Cost to income has been brought down to 36.9% as against 43.2% in corresponding quarter last year. It has approval to open 580 additional branches, which should limit further cost rationalization.
HDFC BANK
FINANCIALS
Source: Edelweiss Research
KEY BUSINESS INFORMATION BUSINESS GROWTH TO REMAIN AHEAD OF INDUSTRY; MARGINS AT ~4% Credit growth for HDFC Bank was at 15% YTD (11% Y-o-Y), well above the industry growth of ~5% (~13% Y-o-Y). The bank maintained that it remains well positioned to grow above industry average growth for FY10 and maintain margins at ~4%. Both retail and corporate segments are growing, driven by improvement in business environment. Management has indicated that it is looking to build selectively longer duration portfolio in its book. The bank reaffirmed that factors such as - 1) surplus liquidity, giving borrowers an arbitrage to borrow cheaply through non-banking channels; 2) repayment by specific industries; 3) low inflation/low inventory environment; and 4) fill-up of capital by equity markets have resulted in subdued credit growth for the industry.
KEY BUSINESS INFORMATION Marginal shift in asset book In the corporate segment, the bank, which is mainly into working capital lending, is witnessing an increase in long-term proposals. For HDFC Bank, participation in the infrastructure segment, which has been the biggest consumer of credit for the banking sector, has been mainly through working capital loans to suppliers of the vertical. Given the current liability structure, the bank believes that it would be able to take a slightly higher duration corporate assets in its portfolio from current levels. It has indicated that going forward, it is willing to participate in a few of the long-term projects (infrastructure mainly in telecom, power and other CAPEX related investments), provided pricing of credit risk and duration is appropriate.
KEY BUSINESS INFORMATION CLASSIFICATION OF LOANS ACCORDING TO NATURE OF LENDING
KEY BUSINESS INFORMATION COST IMPROVEMENT Cost-income ratio, which had increased to ~56% during the time of merger, has declined significantly in the past few quarters. Productivity improvement expectation, a key rationale for the merger is coming well, and ahead of the banks estimates, leading to lower cost-income ratio. Experience from the CBoP acquisition has been positive, given the productivity improvement achieved in a relatively short period. Going forward, the bank believes that there is further scope to improve its productivity, mainly from CBoPs branches through a two-fold mechanism: new origination of assets/liabilities and crosssell of the suite of HDFC Banks products. On new branch expansion, the bank is looking to add ~200 branches yearly (FY10 target at ~1,650 branches). For FY10/11, we are keeping cost-income ratio at ~47% levels.
KEY BUSINESS INFORMATION COST TO INCOME RATIO HAS FALLEN BELOW 50%
KEY BUSINESS INFORMATION Asset quality risks have peaked; loan loss provisions likely to decline. The bank believes that concerns of asset quality have significantly abated. It is witnessing lower NPA formations against FY09. Further, in the past one year, it has aggressively worked on the portfolio of CBoP to bring the overall portfolio coverage to ~70%, as mandated by RBI. CBoP portfolio will see a complete run-off by FY11 as some of the longer duration loans like personal loans still exist in the book. Overall, the bank believes that its loan loss provisions will gradually decline over the next few quarters.
KEY BUSINESS INFORMATION
State Bank of India
COMPANY BACKGROUND The State Bank of India is the largest commercial bank in India in terms of profits, assets, deposits, branches and employees. State Bank of India and Macquarie Group launched the Macquarie-SBI Infrastructure Fund (MSIF), which will invest in infrastructure projects in India. State Bank of India has raised USD 100 million via senior debt fixed rate bonds. SBI, IAG insurance JV is expected to commence commercial operations in the first half of the calendar year 2011 subject to final approvals from IRDA. State Bank of India, which enjoys the largest overseas presence among local lenders, will be opening 23 more branches abroad by March 2010. Net Income and PAT of the bank are expected to grow at a CAGR of 17% & 15% over FY08 to FY11E.
COMPANY FINANCIALS
KEY BUSINESS INFORMATION Plans to hire 27,000 staff, open 1,000 more branches India's largest lender State Bank of India is planning to hire more than 27,000 people across its various divisions this year. It is planning to recruit 20,000-22,000 people in the clerical segment and 5,500 people at the probationary officer level . As part of its strategy of enhancing focus on rural operations, it will be deploying 2,000 probationary officers in rural areas. The banking major may also go for lateral recruitments in the middle-management level this year.
KEY BUSINESS INFORMATION Introduces 'SBI Gift Card' in Hyderabad The country's largest lender, State Bank of India (SBI) has launched its new product 'SBI GiftCard', a prepaid card accepted in all Visa outlet shops across the country. With the launch of this product, the scheme which was earlier introduced in a few branches on a pilot basis would now be available in all SBI branches in Hyderabad for customers convenience. The SBI card is a perfect substitute to gift in the form of gift articles, gift vouchers and cash.
SBI to install 7,000 talking ATMs for visually challenged India`s largest lender, State Bank of India plans to introduce 7,000 voice enabled ATMs across the country for visually challenged customers. Out of its 18,500 ATMs, 7,000 will be made voice enabled for visually challenged people. These voice enabled ATMs, customised with headphones and braille key pads, will offer services like funds transfer and downloading of account statements.
Aditya Birla Group, SBI Card partner to offer co-branded credit cards Aditya Birla Group and SBI Card enter into a partnership to offer co-branded credit cards to all customers of the Aditya Birla Group companies. The Aditya Birla Group - SBI co-branded credit cards will be available to over 28 million customers of Aditya Birla Group companies, namely Aditya Birla Retail, Aditya Birla Financial Services Group (which includes Birla Sun Life Insurance and Birla Sun Life Mutual Funds), IDEA and Madura Garments. The initiative will be led by the financial services arm of the Aditya Birla Group Aditya Birla Financial Services.
KEY BUSINESS INFORMATION Signs MoU with Honda Siel for auto financing State Bank of India has signed a memorandum of understanding with auto maker Honda Siel Cars India for providing retail financing to customers. Under the agreement, the state-run lender will be the preferred financier for the entire range of vehicles marketed by Honda Siel Cars India (HSCI). The MoU aims at targeting high-end customers who will be availing car loan from SBI above Rs 0.50 million. SBI has come out with a special scheme called SBI Advantage Car Loan Scheme for this niche segment.

SBI, IAG insurance JV to begin operations State-run State Bank of India announced that its joint venture (JV) Co in association with Insurance Australia Group (IAG) is expected to commence commercial operations in the first half of the calendar year 2011 subject to final approvals from Insurance Regulatory and Development Authority (IRDA). The bank, for its general insurance subsidiary has made an investment of Rs 1.11 billion towards the 74% share of the equity capital of SBI General Insurance Company. Also, IAG International, a subsidiary of Insurance Australia Group (IAG) has made an investment Rs. 5.42 billion (including share premium) towards 26% share of the equity capital of SBI General Insurance Company.

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Analysis of Banking Industry

:3 :8 : 16 : 38 : 56 : 67 : 96 : 113 : 152 : 168 : 176 : 209 : 225 : 239

Overview of financial system in India

Structure of scheduled commercial banks in India

Structure of cooperative credit institutions

Banks and DFIs - Important activities

Bank group-wise performance

Bank group-wise performance

Public sector banks

Private sector banks

Share of bank groups in SCBs - Total business

Share of bank groups in SCBs - Total business

2005-06 12% 32% 26%

2009-10 16% 47% 14%

Other services Total Credit

SCBs - Breakup of advances

Public sector banks

Public sector banks - Breakup of advances

Private sector banks

Private sector banks - Breakup of advances

Foreign banks - Breakup of advances

Priority sector advances

Priority sector lending targets

Priority sector lending targets

Priority sector lending targets

Priority sector lending targets

Priority sector lending targets

Public sector banks

Advances to priority sector by public sector banks

Private sector banks

Advances to priority sector by private sector banks

Advances to the priority sector by foreign banks

Foreign banks Note:

Type of Deposits current Savings Term Total

Overall 12% 22% 67% 100%

SBI and Associates 13% 25% 61% 100%

Private Banks 14% 19% 67% 100%

OSCBs register lowest growth in deposits in 2008-09 All SCBs

Breakup of deposits - All SCBs

Total deposits - All SCBs

SBI and associates Breakup of deposits - SBI and associates

Total deposits - SBI and associates

Total deposits - SBI and associates

Breakup of deposits - Nationalised banks

Total deposits - Nationalised banks

Other scheduled commercial banks Breakup of deposits - OSCBs

Total deposits - OSCBs

Total deposits - OSCBs

Breakup of deposits - Foreign banks

Total deposits - Foreign banks

Total deposits - Foreign banks

Total deposits - Foreign banks

Investments in government and other approved securities

Investments in government and other approved securities

Statutory liquidity ratio - Excluding gold

Statutory liquidity ratio - Excluding gold

SBI and associates

Bank group-wise statutory liquidity ratio

Other scheduled commercial banks

NPAs recovered by scheduled commercial banks through various channels

NPAs recovered by scheduled commercial banks through various channels

Details of Financial Assets Securitized by SCs/ RCs

Movements in provisions for NPAs