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Asia-PacificJuly 1 2015

The state of play: India’s banks in 2015

The Indian government may be keen for consolidation in the banking sector – driven by a desire to see the country's lenders figure among the world's largest banks – but internal resistance to such changes, from bank employees and their unions in particular, continue to thwart such activity. On top of this, India's lenders are struggling with non-performing assets, which has proved a blight on their profits over the past 12 months.  
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The state of play: India’s banks in 2015

At a banking retreat early this year, the Indian prime minister Narendra Modi challenged the country's financial institutions to break into the ranks of the world’s top banks. While India has the third largest number of billionaires in the world, after the US and China, its banks do not share this impressive global standing. 

Of the 45 or so domestic commercial lenders in the country, only the State Bank of India (SBI) features in the top 100 of The Banker's Top 1000 World Banks ranking by assets, in 55th place. At $449.3bn, SBI’s assets account for only about 13% of the $3370bn held by Industrial and Commercial Bank of China, the world's largest lender. And with $137.5bn in assets, ICICI Bank, India’s second largest lender, which is ranked 129th globally by this measure, is only one-third the size of SBI.

Growth plan

The only way that India's banks can scale up rapidly, in order to compete on the global stage, is through mergers and acquisitions. The country’s regulators, as well as banking experts, have long advocated the need to merge the weaker banks with stronger ones. A 2013 discussion paper by the Reserve Bank of India (RBI) entitled ‘Banking structure in India – the way forward’ stated: “The issue of consolidation in the banking sector has assumed significance, considering the need for a few Indian banks to cater to the global needs of the economy by becoming global players. Consolidation in the banking sector may pave the way for stronger financial institutions with the capacity to meet corporate and infrastructure funding needs.”

Among the state-backed banks, discussions have centred on first merging SBI with its associate banks and then extending the process to other public sector banks. SBI started the consolidation process nearly seven years ago, when it merged with two of its associate banks – State Bank of Saurashtra and State Bank of Indore – in 2008 and 2010, respectively. Since then, there has not been any further developments, with opposition to such activity coming from bank employees and unions, who fear layoffs. In June this year, SBI’s remaining five associate banks planned strikes on two days in protest of possible mergers.

Arundhati Bhattacharya, the chairperson of SBI, believes that  consolidation is required but cannot be forced. “Consolidation is on everyone’s mind. It is a given but shotgun marriages do not work,” she says. SBI and its associate banks, she says, are already considered as a group and rather than consolidation, would benefit from focusing on further developing the niche strengths of each entity. “I would expect consolidation to happen in two to three years' time,” she adds.

Although private sector banks have witnessed mergers and acquisitions in the past, of late they too have not been very prolific. Kotak Mahindra Bank's acquisition of ING Vysya Bank, which received regulatory approval in April this year, was the first major bank takeover in India since ICICI Bank bought Bank of Rajasthan about five years previous. 

C Jayaram, joint managing director at Kotak Mahindra Bank, explains that the main driver of ING Vysya’s acquisition was to become a much larger player in the Indian banking sector. “We could have grown organically. But it would have taken longer, especially in the context of new banks coming in. Now, we are a much larger bank," he says. With this $2.4bn all-share deal, Kotak Mahindra Bank has become the fourth largest private sector bank in the country after ICICI, HDFC and Axis Bank.

So, with mass consolidation looking unlikely in the short term, how are Indian banks planning to grow?

State Bank of India (SBI)

India’s oldest and largest commercial bank, SBI, had Tier 1 capital of more than $25bn as of the end of March 2015, about 300 million customers and staff of more than 200,000 across its 16,333 branches. Between March 2012 and March 2015, bank branch numbers increased with a 5% compound average growth rate (CAGR), while its number of ATMs grew at a 26% CAGR to reach 56,560. In the same period, internet banking users increased by 35% to 220,000 and mobile banking users grew by 54% to 135,000. 

The bank is in the process of radically transforming its image, from a traditional bank to a digital bank. Encouraged by the positive reception to its digital branches – equipped with multi-functional kiosks providing services such as instant account opening and personalised debit cards – that were set up last year in several major cities, SBI plans to extend its digital footprint further.

However, the bank continues to struggle with non-performing assets (NPA). Although it showed 20.3% year-on-year profitability growth for the financial year 2015, to Rs131bn ($2bn on a standalone basis), loan growth has been muted at 7.25%. Additionally, total stressed assets (gross NPA plus restructured assets) at the bank touched Rs1125.7bn in March 2015. This is 8.43% of total advances, compared with 8.41% in March 2014.

Bank of Baroda

Setting it apart from most of India's banks, Bank of Baroda, the second largest public sector bank in India with $122.1bn of assets, has a significant overseas presence, providing it with risk diversification benefits. In the past financial year, the bank opened two new branches in Kenya and Tanzania, bringing its total number of overseas offices to 104, which includes 60 branches in 24 countries.

In the 2015 fiscal year, Bank of Baroda’s global business expanded by 8.25% year on year to Rs10,450bn. In this period, the overseas business, which contributes 32.4% to the overall business, grew by 7.88%, while the domestic business expanded by 8.43%. However, the bank’s net profit showed a sharp drop of 20%, due to higher tax and non-tax provisions.

Bank of Baroda has one of the lowest gross NPA ratios among public sector banks in the country, but it continues to face asset quality challenges. Between fiscal year 2014 and fiscal year 2015, the bank’s gross NPA ratio increased from 2.94% of gross advances to 3.72%, to touch Rs162.6bn. Restructured advances also increased in this period, from Rs265.4bn to Rs315.7bn.

Bank of India

The third largest state-backed lender in the country, Bank of India has $104bn in assets, 4892 branches and 6771 ATMs. The bank saw a jump of nearly 25% in retail internet banking customers in the past year. It currently has nearly 3 million retail internet banking customers, 60,000 corporate internet banking customers and 165,000 mobile banking customers.

Bank of India recently reported its first quarterly loss in nearly two decades. Its net loss for the quarter ending March 2015 came to Rs561m, compared with a profit of Rs557.5bn recorded in the same quarter in 2014. Its net profit declined 37% to Rs17.1bn from Rs27.3bn in financial year 2014.

This performance is largely due to the bank's high levels of provisioning for NPAs. The banks gross NPA ratio jumped to 5.39% of the total loan book in the fourth quarter of financial year 2015, from 4.07% in the previous quarter and 3.15% in March 2014. The bank estimates that nearly half of the additions to bad loans in the fourth quarter of financial year 2015 were from the infrastructure sector.

Punjab National Bank

With $100.4bn of assets, New Delhi-headquartered Punjab National Bank (PNB) has a customer base of 92.4 million, 8200 ATMs and a debit card base of 33 million.

Similar to many of the country's public sector banks, PNB has been struggling with NPAs and has one of the highest gross NPA ratios among Indian banks. In the first quarter of 2015, gross NPAs as a percentage of total loans increased to 6.55% from 5.97% in the previous quarter and 5.25% a year earlier. The bank’s high provisioning for bad loans in the quarter negatively impacted its net profit, which dropped sharply by 62% to Rs3.07bn in March, compared with Rs8.06bn a year earlier.

PNB has indicated that some of its key activities for the new fiscal year will be to contain NPAs, expedite the loan recovery process and focus on digital banking services targeting new-age customers. The bank, which currently has about 2.7 million internet banking customers, has recently embarked on a successful mobile banking campaign, which saw more than 600,000 new customers enrol for its mobile banking service. As of the end March this year, PNB had more than 850,000 mobile banking users and experienced an average of 9.6 million mobile banking transactions per month, worth an aggregate Rs11.3bn.

Union Bank of India

Union Bank of India is among the few state-backed public sector banks in India that experienced a slight reprieve in its bad loans situation in the past fiscal year. Although the bank’s gross NPA ratio increased from 4.08% to 4.96% between fiscal year 2014 and 2015, the bank experienced an improvement in asset quality in the latter half of the year, with a decline in gross NPA ratio to 4.96% in the fourth quarter, compared with 5.08% in the third quarter. The bank said that this was because of a steady reduction in the pace of slippages and a significant jump in cash recovery.

The bank’s net profits increased from Rs16.9bn in financial year 2014 to Rs17.8bn in 2015. However, its fourth quarter profits declined 23.3% year on year, a drop that was largely attributed to higher provisions.

In the new fiscal year, Union Bank of India is focusing on digital banking, as well as on improving customer experience through process improvements and digitisation, leveraging customer data through analytics to improve cross-selling propositions, and providing training to improve performance management and leadership development.

Arun Tiwari, chairman and managing director at the bank, says: “The bank aims to build an ecosystem where people are hungry for knowledge and are empowered to do more at individual level, harnessing the power of IT for quick, convenient and quality service to customers on one side; and on the other side to transform big data into information and knowledge, so as to better serve the customers while meeting their varied banking needs. At the heart of our proposition is the customer.”

ICICI Bank

ICICI Bank is India’s second largest bank, and the largest private sector lender with assets worth $137bn. It has 52 million customers, 4050 branches and 12,451 ATMs. The bank has a presence in 17 countries including India.

ICICI has the highest gross NPA ratio among private sector banks. In the fourth quarter of financial year 2015, the bank registered a low 10.2% rise in net profit to Rs29.22bn, and also reported a worsening of asset quality. The gross NPA ratio for the bank increased to 3.78% in the first quarter of 2015, compared with 3.4% in the final quarter of 2014 and 3.03% in the first quarter of 2014. The bank’s provision for non-performing and other assets increased from Rs22.52bn in financial year 2014 to Rs31.41bn in 2015, primarily due to an increase in NPAs and restructured loans. The bank, however, maintained strong momentum in retail lending, which accounts for 43.5% of total lending, with its retail advances portfolio growing by 25% year on year.

According to ICICI, about 50% of all of its banking transactions are carried out on the internet or on mobile. In its continuing efforts to leverage digitisation and mobile trends, ICICI launched a digital wallet service early this year that enables users to make payments on any website or mobile app in the country. In financial year 2015, it also launched video banking services for non-resident Indian customers, offered contactless debit and credit cards based on near-field communication technology, and launched a variety of mobile banking apps.

HDFC Bank

With assets worth $101bn, HDFC Bank is the second largest private sector bank in the country. It has more than 11,750 ATMs, over 4000 branches and 32 million customers. HDFC Bank has taken a comprehensive approach towards digital banking, that encompasses front-end channels as well as utilising its back-end operations to enable straight-through processing, faster turnaround times and lower costs. Late last year, the bank launched a mobile banking service that enables customers to check their account balance, transfer funds and pay bills on their mobile phones. According to the bank, 63% of its banking transactions take place over the internet and mobile. The branch accounts for only 12% of banking transactions in India today, compared with 27% in 2005.

HDFC continues to enjoy good asset quality, with its gross NPA standing at less than 1% of total advances over the past three years. As of the end of March 2015, its gross NPA ratio was 0.93%, compared with 0.98% at the same time in 2014. In financial year 2015, the bank’s restructured loans were also at a low 0.1% of gross advances. The bank showed a net profit of Rs102.1bn for financial year 2015, a robust 20.5% growth over the previous year. The bank also showed a healthy 20.6% loan growth for financial year 2015, which was attributable to both the retail and wholesale segments growing at 21.8% and 17.6%, respectively. Retail loans account for 51% of HDFC’s loan portfolio.

Axis Bank

The third largest private sector bank in the country, Axis Bank has assets of $76.9bn and a network of 2589 domestic branches as well as 12,355 ATMs servicing more than 14 million customers. As is the case at many of the country's banks, Axis Bank is making a concerted push towards digital channels. According to Axis, its mobile banking app already has 1.7 million customers with about 80,000 new customers added on a monthly basis.

Its volume of digital transactions is increasing and, in March this year, the bank's customers conducted about Rs100bn-worth of transactions via the internet and mobile. Recently, the bank launched a ‘multi-social’ payment app that enables smartphone users to transfer funds seamlessly to anyone using social media apps, such as WhatsApp, Facebook and Twitter, as well as over email.

Axis Bank maintained a steady growth during fiscal year 2015, with its net profit growing 18% year on year to Rs73bn. The bank also maintained its asset quality. Its gross NPA ratio for the 2015 financial year stood at 1.34%. Axis Bank’s total advances grew 22% year on year, while retail loans, which account for 40% of net advances, showed a strong 27% year-on-year growth.

Kotak Mahindra Bank

Following its acquisition of ING Vysya Bank, Kotak Mahindra Bank has become the fourth largest private sector bank in India, broadening its geographical reach and business focus. Both the merging entities have complementary strengths. While Kotak is strong in north and west India, and has a retail focus, ING Vysya is primarily present in the south and focuses on the small and medium-sized enterprise (SME) segment. The merger has helped Kotak Mahindra Bank nearly double its footprint. Its branch network has increased from 641 to 1214, ATMs from 1159 to 1794 and employees from 29,220 to 39,811.

ING Vysya Bank’s employee union originally opposed the merger, insisting on demands such as job security. However, over the past few months, these issues appear to have been largely been resolved. Other aspects, such as the integration of technology, cultural integration, branch rationalisaton and achieving uniform productivity across both entities, are expected to take six to 12 months to be fully realised.

Prior to the merger, Kotak Mahindra Bank delivered a solid performance for financial year 2015. The bank showed a year-on-year 24% growth in net profit to Rs18.65bn and a 25% growth in advances, driven primarily by the corporate banking segment. Notably, the gross NPA ratio for the bank dropped from 1.98% to 1.85% between financial year 2014 and financial year 2015.

Yes Bank

Yes Bank has assets worth $22.65bn, 630 branches and 1190 ATMs. For financial year 2015, the bank’s net profit increased by 24% to Rs20.0bn and total advances grew by 35.8%. Yes has the lowest gross NPA ratio in the industry, although between financial year 2014 and financial year 2015 its gross NPA ratio increased from 0.31% to 0.41%. 

While corporate banking currently accounts for about 65% of the bank’s loans portfolio, Yes is focusing on offering new products to grow the lending book for the retail and SME sector. Yes Bank's CEO, Rana Kapoor, says: “In the near term, we will launch credit cards, thus completing the suite of our retail asset product offering. The retail and business banking proportion of the book has already started to show traction, and after a gestation period, they are expected to grow exponentially, thus becoming significant growth drivers for us over the next three years.”

Please note that several profit figures in this article are on a standalone basis and may differ from consolidated figures in the Top 1000 World Banks ranking.

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