Banking Sector & Capex Cycle

September 2018
Alpha Invesco Research – September 2018 2

Private Banks – Gaining Market Share

Alpha Invesco Research – September 2018 3

Indian Banking Credit – Industry Size

2,25,00,000

86,00,000
61,39,045
27,75,549
1,66,844 3,68,837 8,65,594

1994 1999 2004 2009 2014 2018 2025E

Banking Industry Credit (Cr)

• Incremental credit requirement of ~150 lac cr over next 7-8 years.

• Indian banks likely to lend in next 7-8 years almost twice of what they have lent in last 25 years combined!
Alpha Invesco Research – September 2018 4
2009 – 2014 was the only 5
Credit Breakup – Market Share year period when PSU
banks didn’t lose market
share. On the back of
above average lending.
Which led to
120% overcapacities across
heavy industries.
100% 1% 9% 18% 22% 22%
80% 33%

60%
99% 91%
40% 82% 78% 78%
67%
20%

0%
FY1994 FY1999 FY2004 FY2009 FY2014 FY2018
PSU Banks Private Banks

• Over last 25 years, private banks have increased their share from mere 1% to now being 1/3rd of total banking
credit.
Alpha Invesco Research – September 2018 5

Credit Growth – Private Banks

CAGR: 18% CAGR: 19%

40%

30% 25% 25% 24%

20% 19%
18% 18% 18% 17%
20%
14%
9%
10%

0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Private Banks Credit Growth

• Private banks have maintained their credit growth evenly throughout the decade.

• Whereas PSU Banks witnessed credit stagnation post FY2014, which lead to Private banks’ share increasing
their market share from ~22% to ~33% in just 4 years!
Alpha Invesco Research – September 2018 6

Branch Network

100%
11% 13% 14% 15% 16% 18% 18% 19% 22% 24% 23%
80%

60%

40% 89% 87% 86% 85% 84% 82% 82% 81% 78% 76% 77%

20%

0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
PSU Banks Private Banks

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total Bank Branches 54,168 58,329 63,004 68,754 75,105 81,604 91,147 98,143 106,457 110,595 118,572
PSU Bank Branches 47,959 50,896 54,400 58,191 62,750 67,257 74,448 79,612 82,580 84,473 90,827
Pvt. Bank Branches 6,209 7,433 8,604 10,563 12,355 14,347 16,699 18,531 23,877 26,122 27,745

• Over the past decade, private bank branches have increased their share from being 1 in every 10 bank
branches to around 1 in every 4 bank branches.

• However, due to digitization, the rate of adding branches has decreased for the banking industry as a whole.
 Alpha Invesco Research – September 2018 7

Employee Strength
(~2x Pvt. Bank Employees)
No. Of Employees
9,00,000 8,54,000
8,00,000 (~5x Pvt. Bank Employees) 7,38,000
7,00,000
6,00,000
6,00,000
5,00,000 4,11,000
4,00,000
3,00,000 2,46,000
2,00,000 1,20,000
1,00,000
-
FY08 FY13 FY18
PSU Banks Private Banks

Employees per Branch FY 2008 FY 2013 FY 2018

PSU Banks 12.57 10.98 9.40
Private Banks 19.26 17.15 14.81

• Banking is one of the rare industry where private sector has higher per unit employees than PSU companies.
Predominantly due to significant branch network in rural India where branches are small & need less
employees. Also business per employee is higher for private banks. They are far more productive compared to
PSU’s.
Alpha Invesco Research – September 2018 8

Deposit Growth – Outcome Of Branches And Employee Growth

Deposits (Cr)
1,20,00,000

1,00,00,000

80,00,000

60,00,000

40,00,000

20,00,000

Pvt Banks PSU Banks

• Owing to aggressively increasing branch network and employee strength / sales force, private banks have
improved their share in deposits in Indian banking sector.

• Better technology and convenience banking also plays a bigger role in attracting deposits.
Alpha Invesco Research – September 2018 9

CASA Trajectory

FY 1998 FY 2008 FY 2018

SBI 43.5% 41.9% 44.5%
Bank of Baroda 32.0% 31.6% 35.6%
PNB 43.6% 42.9% 41.0%
Canara Bank 37.8% 31.6% 31.8%
HDFC Bank 38.8% 54.5% 43.5%
ICICI Bank 17.8% 28.4% 49.9%
Axis Bank 10.9% 45.7% 53.5%
IndusInd Bank 9.0% 15.7% 44.0%
Federal Bank 15.4% 25.1% 33.6%

• Improving deposits helps in improving CASA and hence lowering the Cost of Funds.

• Legacy PSU banks have their CASA in the same ranges over last 2 decades, whereas private banks have seen
significant improvements.
Alpha Invesco Research – September 2018 10

NIM Trajectory

FY 2008 FY 2013 FY 2018

SBI 3.07% 3.34% 2.50%
Bank of Baroda 2.90% 2.66% 2.43%
PNB 3.58% 3.52% 2.16%
Canara Bank 2.42% 2.40% 2.42%
HDFC Bank 4.40% 4.50% 4.30%
ICICI Bank 2.22% 3.11% 3.23%
Axis Bank 3.47% 3.53% 3.44%
IndusInd Bank 1.53% 3.43% 3.99%
Federal Bank 3.49% 3.37% 3.21%

• Better Cost of Liabilities and improved Yield on Advances due to higher retail share of advances has helped
private banks to improve their NIMs and maintain them.
Alpha Invesco Research – September 2018 11

• The NPA Problem Is Peaking Out

• Credit Growth Coming Back
• Fresh Capex Cycle On Cards
Alpha Invesco Research – September 2018 12

Manufacturing Sector – Low Capacity Utilisation

• FY 2008 – 2014 was the period when excessive capacities were built by companies, loans were easily available,
crony capitalism / banker-politician-promoter nexus was thriving. Eventually we ended up in having very high
capacities that were far ahead of the local demand. On top of it, global export markets slowed down in the
after math of financial crisis.

• Post FY 2014, over capacities have lead to lower utilisation levels in the manufacturing sector. Most of this capex
was across heavy industries like power-steel-infra was funded via debt, leading to massive losses & NPA’s.
Alpha Invesco Research – September 2018 13

Provisioning Cycle Peaking Out

# Cumilative provisioning of listed private + PSU banks

10,00,000
~8,50,000
~8,00,000
8,00,000

6,00,000

4,00,000

2,00,000

0
Cumulative Provisioning 2014-2018 (Cr) Gross NPA Addition 2014-2018 (Cr)
Alpha Invesco Research – September 2018 14

Credit Growth – PSU Banks

CAGR: 19% CAGR: 3%

40%

30% 26% 26%

22% PSU banks’ credit de-
20%
20% 17% grew for 1st time in last
15% 14% 2 decades

10% 8%
2% 2%
-1%
0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
-10%
PSU Banks Credit Growth

• Till date, PSU banks had their ~37% credit exposure towards corporate sector v/s. ~23% exposure towards
retail, causing them to suffer during times of low manufacturing capex.

• Credit demand slowed down significantly as industry was already sitting on overcapacity. RBI’s asset quality
review in 2015 forced PSU banks to provide more. Their loan sanctions slowed down as a result.

• PSU Banks lending growth reduced drastically post 11 of 21 banks were added to PCA list ( Prompt corrective
action ). Another 6 banks are under watchlist which might be added to the PCA list.
Alpha Invesco Research – September 2018 15

NPA Trajectory – PSU Banks

20%
16%
16%

11%
12%
9%
8%
4% 5% 8%
3% 3%
4% 2% 2% 2% 2% 5% 6%

0% 2% 3%
1% 1% 1% 1% 1% 2%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Gross NPA as % of Advances Net NPA as % of Advances

• Gross NPA in PSU Bank shoot up dramatically in last 3-4 years. This is the outcome of unchecked lending to
weaker assets by PSU banks during 2008 - 2014 period.

• Over last 3 years, PSU banks have provisioned ~5.5 lac cr, which is 10% of their total advances!

• If we look at cumulative provisioning as a percentage of corporate book, one gets a sense that the NPA &
provisioning cycle is peaking out. Major stress sectors like road & steel are back on track. Power is being fixed.
Telecom & real estate especially developer loans could be next.
Alpha Invesco Research – September 2018 16

Provision Coverage Ratio – PSU Banks

75%

70%

65%

60%

55%

50%
FY14 FY15 FY16 FY17 FY18 Q1FY19
SBI Bank of Baroda IDBI Bank PNB

• The strict regulations by RBI and government led to sudden jump in the Gross NPAs for the banks, leading to a
dip in their PCR during FY 2016.

• However, over last 2 years, the provisions have increased proportionately and the banks have now provided
for 65 – 70 % of their Gross NPAs, signaling toping out of aggressive provisions in few quarters.
Alpha Invesco Research – September 2018 17

NPA Trajectory – Private Banks

8%

5%
4%
4% 3%
3% 3%
2% 2% 2% 2%
2% 2%

2% 2%
1% 1% 1% 1%
0% 1% 1% 1% 1%
0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Gross NPA as % of Advances Net NPA as % of Advances

• Aggressive provisioning norms of RBI had very minor effect on the NPA structure of most of the private banks,
apart from few banks. Barring ICICI & Axis bank, almost all large private banks have a book that is tilted
towards retail assets. Not lending to corporates during 2008-2014 has helped private banks to be in relatively
good shape.

• Currently, ICICI bank and Axis bank together account for ~65% of total gross NPA of the private banks. Out of
the additional ~1 lac cr Gross NPA since 2014, ~75,000 cr have come from these 2 banks.
Alpha Invesco Research – September 2018 18

Industry Wise Credit Funded By Banks/FIs

Rs Cr 2017 Max Max Capex Year

Infrastructure 1,13,200 2,01,500 2011 • We can see that the most of
i) Power 82,400 1,73,300 2011 the industries saw maximum
ii) Telecom - 67,200 2010
capex during the 2009 – 2014
iii) Ports & Airports 10,200 10,200 2017
iv) Storage & Water Management 6,600 6,600 2017 phase.
v) SEZ, Industrial, Biotech and IT Park 700 12,400 2008
vi) Roads & Bridges Construction 13,200 13,200 2017 • Also, 2017 capex by most of
Construction 21,600 47,100 2010 the industries was way smaller
Metal & Metal Products 8,800 79,200 2011
Transport Equipment & Parts 7,900 9,300 2009 in magnitude compared to
Textiles 7,300 13,400 2012 their historic high.
Cement 4,000 18,700 2009
Chemicals & Pesticides 3,800 6,700 2012 • Additionally, historic maximum
Hospitals & Health services 2,000 3,700 2010
Food Products 1,600 3,100 2009 capex was on a much smaller
Hotel & Restaurants 1,500 13,100 2011 economy size of ~$1.2-1.5
Glass & Pottery 1,100 2,500 2012 trillion.
Petroleum Products 900 17,200 2008
Transport Services 700 5,700 2010
Mining & Quarrying 700 10,200 2010
Sugar 200 3,700 2009
Electrical Equipment 400 7,500 2011
Others* 7,100 19,100 2008
Total Cost of Projects 1,82,800
 Alpha Invesco Research – September 2018 19

Investment – Driver Of Credit Growth

76.0 75.2
36.0 45 34.9 50 74.6
33.8 75.0 74.1
33.4 33.4 45
34.0
40 74.0
32.0 31.0 30.8
30.1 35 73.0
30.0 35 28.5 30 71.8
24 72.0
28.0 25
25.6 26 20 71.0
26.0 25.0
71.2
15 70.0
24.0 17 17 18
15 10
22.0 3 5 69.0
8
20.0 0 68.0
FY2000 FY2002 FY2004 FY2006 FY2008 FY2010 FY2012 FY2014 FY2016 FY2018 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18

Investment as a Percentage of GDP, LHS Credit Growth %, RHS Capacity Utilisation %

• For a growing economy like India, the investment as a % of GDP should be high. We saw investment drop to 28.5%
in 2016 which mirrored with the lowest credit growth of 3%.

• Now green shoots are appearing in the economy as in FY2018, Investments have risen to 31% in FY18 and
subsequently capacity utilization as a whole has bounced back to 75%. As utilizations move beyond 85-90%, a new
capex cycle in industrials-heavy industries is expected to pick up.
Alpha Invesco Research – September 2018 20

Insolvency & Bankruptcy Code Changes Everything For Bankers.

Promoters Can No More Behave In The Same Way.
Alpha Invesco Research – September 2018 21

Insolvency Ranking – Prior To The IBC

• As per the Doing Business index 2016 released by the World Bank, India fared the worst in insolvency ranking
among the BRICS nation and with 136th rank, India was far behind the developed economies such as the UK,
US, and others.
Alpha Invesco Research – September 2018 22

Recovery Rate & Time Taken For Recovery – Prior To IBC

• Among several requisites of a effective insolvency regime, recovery & time taken to recovery is one of the
most important parameters. At 25.7 cents per dollar and 4.3 years, India is ahead only of Brazil amongst BRICS.
Alpha Invesco Research – September 2018 23

Insolvency Resolution Gaining Momentum

600 525
500 437
400 361

300

200 156

100 36
-
Jan- Mar 2017 Apr- Jun 2017 July-Sept 2017 Oct-Dec 2017 Jan-Mar 2018
Corporates Undergoing Resolution

• At the end of March 2018, 525 corporates were undergoing insolvency resolution pro
Alpha Invesco Research – September 2018 24

Resolving Top 50 Cases Solves 40% of NPA Mess

Top 12 25 %

Next 38 15 %

Remaining 60 %

# of Cases Total NPA

• A huge part of the total 10 lac cr NPAs is concentrated amongst top 50 cases. Resolving these 50 cases would
solve ~40 % of the problem. Most of the NPA’s have been provisioned for. And there could be potential
writebacks in to the banking system once NCLT resolutions accelerate.
Alpha Invesco Research – September 2018 25
# FY18 recovery numbers do not
include Bhushan steel ( 35000 cr )
IBC Wave – Recoveries Touch 11% recovery since financial closure
happened in FY19. The recovery
numbers will jump substantially from
FY19 onwards.

90,000 81,683 84,272

80,000
70,000
57,585
60,000
49,018
50,000
40,000
30,000
20,000
10,000 5,461 8,096 8,680 7,106

-
FY15 FY16 FY17 FY18 (Upto Dec)

Loans Written Off Recoveries From Written off Loans

Cumulative Loans Written Off, cr Cumulative Recoveries, cr

2,72,558 29,343

• Banks have been able to recover merely 11% of the bad loans they had to write off their balance sheets over
the last 4 years. As the IBC/NCLT process matures, we can expect more recoveries & perhaps writebacks on
bank balance sheets.
Alpha Invesco Research – September 2018 26

Insolvency & Bankruptcy Code – The Most Impactful Reform

• A certain path was taken - Original idea was to create a bad bank, where all bad loans will be transferred.
However PSU banks would not have learnt any lesson & they would have continued with old practices. IBC
was important to force a cultural change in how PSU banks operate.

• Under IBC regime banks will be forced to write the assets down, industry wont get capital as PSU banks are
under pressure. Banks are quickly referring cases to NCLT & trying to recover the money.

• IBC enforces the principle of creative destruction. If companies fail, there will be no more ever greening of
loans. Companies will be auctioned / sold off & old entrepreneurs will lose control.

• This creates a rule based economy & which is a sign of a living and thriving business culture. The old context of
“nothing will happen even if we default” needed to be changed. And that’s what IBC has achieved.

• Promoters will now have the fear of losing their company if they do anything wrong or cheat banks.

• Banks are in a much better position to recover their money in case of default.
Alpha Invesco Research – September 2018 27

Thank You.
 Alpha Invesco Research – September 2018 28

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