Fifteen years after India began unshackling private enterprise as part of economic liberalisation, the remarkable resurgence in the country’s private banks is visible on city streets. In most large cities, crowds throng at cash machines in railway stations, airports and shopping centres; banks routinely offer internet banking services and the telemarketing of credit cards and loans is threatening to become a public nuisance.
Behind the marketing blitz are savvy private Indian banks that have excelled in using the latest technology in providing customers with modern products at competitive prices. They have around a tenth of the 69,000 bank branches in the country, but a market share of 20% of total bank assets. They manage more than 7659 cash machines, more than nine times the number foreign banks run. Unsurprisingly, while the private banks have surged ahead, the market share of the giant public sector banks in total bank assets is falling – at 72% now – while that of foreign banks hovers around 7%.
ICICI Bank, the largest private bank and the second largest commercial bank in the country, HDFC Bank and UTI Bank are the clear leaders of the pack of 28 private Indian banks. Not far behind is a group of smaller, fast-growing banks, many of which are rejuvenated old private banks, which are eager to join the big league. The Banker picked five banks that are growing annually at about 30%, and have individual market shares of between 2% and 5%.
Retail banking and serving small and medium-sized businesses have emerged as the growth drivers for these banks now that the easy days of earning fat treasury profits are gone. They are well-capitalised listed banks with top international investors on board – two are listed abroad and two may raise capital overseas soon. With healthy loan books and dynamic managers, they are the banks to watch.
Jammu and Kashmir Bank
One of the oldest banks from a war-torn state, Jammu and Kashmir Bank has turned adversity into opportunity. Not strictly speaking a private bank – it is owned by the state government – J&K Bank enjoys a near monopoly in the state. All state government accounts are kept with the bank, budgetary allocations are routed through it and the bank collects income tax on behalf of the federal government. The Rs500bn (€9bn) government programme for economic reconstruction of the state will boost the bank’s loan book over the next three years.
The state’s loan-deposit ratio is one-third that of the national average and there is enormous scope to grow. Chairman Haseeb Drabu expects the bank’s loan book to grow by 35% this year, most of which is expected to come from the bank’s home turf. “Given its physical and market dominance, credit growth is not a problem; managing growth is the real issue for the bank,” says Saday Sinha, an analyst at Kotak Securities.
Profits after tax rose 55% in the year ending March and despite the rise in interest rates on term deposits, the bank’s ratio of low-cost deposits is high at 37%, a level that would be the envy of any bank. The civil war conditions in the state do not appear to have tarnished the quality of its assets: net non-performing assets (NPAs) are 1.13% of net advances with a coverage ratio (ratio of provisions to gross NPAs) of 61%.
After a two-year period of consolidation, the bank is set to better leverage its balance sheet. The bank has lined up a global depository offering later this year to raise capital to step up investment in several subsidiaries. These include doubling a 25% stake in Metlife India, an insurance venture with US insurer MetLife, setting up an asset reconstruction company in partnership with Standard Chartered Bank as well as a stock broking firm. Unsurprisingly, the bank has attracted investment from foreign institutional investors, more than 60 of them together have invested $300m (€220m) in the bank’s shares.
Federal Bank
One of the oldest private banks in Kerala, Federal Bank is trying to shed its image as a regional bank. About four-fifths of the bank’s 536 branches are in the state, and the bank is focusing on expanding outside the state. “About 55% of our business is done outside Kerala,” says chief financial officer George John in an interview from Aluva, where the bank is headquartered. Twenty of the 30 branches the bank opened last year were outside Kerala, and a merger last year with Ganesh Bank of Kurundwad, a small private bank in the western state of Maharashtra, added a sizable presence there.
Profits grew by 30% last year, with non-interest income jumping 32%, on an asset book of more than Rs200bn. Recoveries made on past bad loans added about a quarter of non-interest income earned by the bank last year. Gross non-performing advances dropped 2.9% from 4.6% in the previous year as the bank actively manages NPAs, writing off loans that cannot be recovered. The coverage ratio is high at 82% with net NPAs at only 0.44%.
Federal Bank is the second largest in the remittance market, mostly from Keralites working in west Asian countries. The bank collects a sizable chunk of its deposits, about 30%, from such expatriate Indians but these deposits are not cheap because they tend to move out quickly from the bank into investments in equity or real estate.
As a result, the bank’s ratio of low-cost deposits has fallen to 25% from 27% and the bank’s cost of deposits is slightly higher than peers at about 5.5% last year. “Rising pressure on net interest margins is evident as term deposits fund credit growth,” writes Vishal Shah, an analyst at ILFS Investmart.
With the recent rise in the rupee the and central bank mandated cut in expatriate deposit rates, Mr John expects a slowdown of such deposits this year. Nonetheless, the bank has tried to protect its net interest margins (which fell slightly to 3% in the year to March) by lending largely to the middle market – the small and medium-sized enterprise sector in particular – rather than top-rated companies.
Last month the bank got approval to set up a representative office in Abu Dhabi and it plans to set up a subsidiary in the Dubai International Finance Centre to service clients who do business there.
The ratio of capital to risk weighted assets of the bank is at 13.6% after an offering of global depository receipts last year brought in Rs3.5bn. The London Stock Exchange-listed bank has also announced a 1:1 rights issue this year.
Centurion Bank of Punjab
Centurion is one of India’s nine new-age banks licensed in the mid-1990s to showcase the country’s economic reforms. The bank ran into early trouble, piling up bad loans under poor management when, in 2004, a foreign private equity group led by former Standard Chartered CEO Rana Talwar rescued the bank with a shot of fresh equity and a fresh team of professional managers. Shailendra Bhandari, a former Citibanker who had also worked at HDFC Bank, took charge at the bank.
Since then, the bank has growing inorganically through several mergers. First, Bank Muscat, which surrendered its branch licence, merged itself into the bank in 2004 and now owns 22%. Then in 2005, Bank of Punjab (BoP) was merged into it and the bank is currently in the process of completing a merger with Lord Krishna Bank, a private bank which has more than 112 branches in the south.
The merger with BoP was transformational, according to CEO Shailendra Bhandari; both banks were of equal size and brought together their complementary strengths in retail and SME segments. The next ‘big change’ merger could be as soon as next year. To manage the challenges of integration, Mr Bhandari has a team of merger specialists who weigh up each one carefully and chart a plan for integration. The mergers were paid for in stock swaps rather than cash, according to Mr Bhandari.
The bank grew by a phenomenal 63% last year, with SME business growing at 90%, although on an admittedly small base. Mr Bhandari is keen to increase the bank’s SME business to balance what used to be a retail-obsessed bank. Retail assets have already dropped to 68% from more than 82%.
Commenting on the vulnerability of the bank’s retail portfolio to the impact of the rise in interest rates, Vishal Goyal, an analyst at Edelweiss, writes in a report that “deterioration in the quality of (retail) assets can impact the bank’s profitability”.
Mr Bhandari believes that size and scale are important. The bank has among the largest networks among private banks in the northern states of Punjab, Haryana, Chandigarh and Delhi, and he is keen to establish dominance in particular segments – Centurion figures among the top three banks for motorcycle and scooter loans and is one of the biggest retail foreign exchange agents.
Perhaps the strongest advantage the bank has is pedigree, with more than 70% of its equity owned by foreign investors. Apart from Bank Muscat, Singapore’s Keppel Bank owns slightly less than 10%, and foreign private equity investors Citigroup and Chrysalis own between 4% and 5% each. Sabre Capital owns about 2% but effectively controls 10% to 12% with warrants and options thrown in.
Kotak Mahindra Bank
The youngest in the group of fast-growing small banks, Kotak Mahindra Bank is just four years old. As a finance company, before it became a bank, Kotak had a strong presence in brokerage, investment banking and car loans. “Our products were already strong in the market when the bank was a kid. It’s what sets us apart from the others,” says managing director Dipak Gupta. That legacy is visible in the bank’s logo: ‘Think Investments, Think Kotak’.
This gave the bank an advantage in harnessing two streams of income: brokerage fees and access to cheap funds. About 30% of the consolidated bank revenues are earned from fees from broking, distribution of insurance and asset management and as a book-running lead manager to large equity offerings, most recently the $2.4bn initial public offering (IPO) by Indian property company DLF. This gives the bank access to ‘free float’ or subscription money that is collected from millions of investors until their shares are allocated.
Becoming a bank meant having a neighbourhood presence; so the first task Mr Gupta took up was to open bank branches. Some 110 have been set up in the past four years and Mr Gupta aims to reach 200 in the next year or two. A third of the branches are in cities, and the bank has close to one million customers today. This will give Kotak what every new bank yearns for, but takes years to build: access to low-cost deposits.
In retail loans, Kotak is positioned as a shop-keepers’ bank. While most banks are wary of lending to self-employed professionals such as small traders or restaurant-owners because they do not fit into the parameterised credit-scoring models the bigger banks use, and would rather opt for the safe, salaried borrower, Kotak chooses to focus on this segment of borrowers that finds it hard to get a loan. “We understand their needs; they are profitable customers because they are willing to pay an extra 100 to 200 basis points on their loans,” says Mr Gupta.
In fact, unlike most other banks, mortgages comprise just 15% of Kotak’s retail assets, because, Mr Gupta thinks, contrary to most bankers, that a rise in interest rates has an immediate adverse impact on mortgages. “The impact [of a rise in interest rates] on a blue-collar residential mortgage borrower is immediate because his loan repayment can be as high as 40% of his income. An investor may also find it hard to keep up payments on a house he does not need, but he may still pay his car loan because it is a luxury product and is usually a smaller sum,” he points out.
The bank is building an SME business by leveraging its investment banking relationships and the network of suppliers and dealers that sell car and vehicle loans. “We understand their business and know how to tie in the cash flow,” says Mr Gupta. Having grown at 25% to 30% over the past three years, Mr Gupta sees a slight slowdown over the next six months as the rise in interest rates curtails expansion. Meanwhile, the bank is getting ready for the next burst in growth, which will include launching a credit card. The bank’s subsidiaries are throwing up enough cash to keep the consolidated capital to risk-weighted assets ratio at more than 15%; and next year the bank plans to list in Luxembourg.
ING Vysya
This bank is unusual because it is the only Indian bank owned by a foreign one. Dutch bank ING picked up a small stake in Vysya, a Bangalore-based private bank, several years ago and gradually bought up 44% in a market that is closed to purchases of local banks by foreign banks. ING slipped under the line before the rules were announced, and is in the envious position of not having to submit to restrictions imposed on other foreign banks on the number of branches it can open. Bart Hellemens, a former managing director and the first banker from ING to take charge, insists that it is an Indian bank. The 75-year-old bank has about 400 branches, while all foreign banks in India together have about 260 branches.
A third of the bank’s branches are spread across the prosperous southern states. The new CEO and managing director Vaughn Richtor, who moved to Bangalore from ING Direct in Australia, is focused on increasing the “productivity of existing branches” rather than expanding in new ones. Intense competition has kept interest rates on loan products in a tight range, and the only way to improve margins is to access low-cost deposits, he points out. “I would like to double our retail liabilities in the next three years,” he says. In June, the bank introduced a no-frills, zero-balance Freedom account aimed at the mass retail savings market.
Private banking, to which the Dutch bank brings its specialised global skills and products, is a special focus area and a few select branches offer wealth management products and services to the rich. As for retail assets, the bank is keen on selling mortgage and personal loans. “The key is using technology effectively to improving distribution,” says Mr Richtor. The bank has long been serving clients in the SME sector, and offers them a full range of services from cash management to trade finance.
Profits in the year ended March rose sharply to Rs889m after the bank aggressively recovered previously written off bad loans. Gross non-performing advances fell by 150 basis points to 2.5% and net NPA also fell to 0.94% as result of higher provisions made (coverage ratio is now 63%) by the bank on bad loans.
