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Asia-PacificJuly 2 2018

The state of play: India’s banks in 2018

State Bank of India is the country's leading state bank, while HDFC Bank is the leading private sector lender. Rekha Menon profiles the top five banks in each field to assess how they are operating within this notoriously difficult but potentially lucrative market.
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Canara

TOP FIVE INDIAN PUBLIC SECTOR BANKS

1. State Bank of India

State Bank of India (SBI), the country’s largest bank both in terms of Tier 1 capital and assets, reported consecutive losses in the last two quarters of financial year 2018. However, SBI is among the stronger public sector banks in the country. It successfully completed the merger of its five associate banks and now has a vast network of 22,414 branches spread across the country, a staff of 264,041 and a highly diversified portfolio, with the retail segment driving growth. 

Personal retail advances at SBI grew by 13.55% year on year, from Rs4800bn ($70.5bn) as of March 2017 to Rs5500bn as of March 2018, with home loans growing by 13.26%.

SBI has built a strong digital banking focus over the past few years. According to the bank, nearly 80% of transactions take place through alternative channels. Now the bank is implementing a comprehensive risk management and governance process and structure, which should be completed by mid-2018. 

New SBI chairman Rajnish Kumar says: “SBI has adopted a multi-pronged approach. We have revamped our corporate credit department and changed our risk committees. We have implemented early-warning systems and also a new tool to recast cash flows in the corporate segment.”

2. Bank of Baroda

The second largest public sector bank in India in terms of Tier 1 capital, Bank of Baroda, has about 78 million customers across India and the international market. The 109-year-old bank has a global presence, with 105 overseas offices spanning 23 countries. Its total business as of the end of March, 2018 stood at Rs10,500bn, up by 4.15% from the previous financial year. International business contributed to 22.33% to the bank’s total business in this period. 

Similar to other public sector banks, Bank of Baroda had a tough fourth quarter of financial year 2018. Gross non-performing assets (NPAs) stood at Rs564.8bn as of March 31, 2018, compared to Rs484.8bn as of December 31, 2017. Gross NPA ratios for the bank stood at 12.26% in March 2018 compared with 11.31% in December 2017. Due to higher provisions for stressed assets, the bank posted a net loss of Rs31.02bn for the fourth quarter of financial year 2018. The bank’s full-year losses were Rs24.32bn, compared with profits of Rs13.83bn in financial year 2017.

According to the bank, its transformation exercise – which began in 2016 – is continuing apace. It has centralised several processes, such as deposit account opening, trade finance and retail loans, and also launched centres of excellence in IT and analytics.

3. Canara Bank

As Punjab National Bank drops down the rankings, Canara Bank has moved up to become the third largest public sector bank by Tier 1 capital in India. It has 6204 branches and 9395 ATMs catering to 82.7 million customers.

The bank’s bad loans increased by 38% over the past year and its NPA ratio increased from 9.6% at the end of financial year 2017 to 11.8% at the end of financial year 2018. With provisions for NPAs nearly doubling, Canara Bank reported a net loss of Rs40.9bn in financial year 2018 against a profit of Rs12.3bn the previous year.

Recently, UK regulator the Financial Conduct Authority fined the UK operation of Canara Bank £896,100 ($1.18m) and blocked it from accepting new deposits for about five months for anti-money laundering issues. According to the bank, these deficiencies have since been rectified.

4. Punjab National Bank

Punjab National Bank (PNB) is struggling from the dual impact of high NPAs and a nearly $2bn fraud discovered early in 2018 where two jewellery groups colluded with bank employees to get credit from overseas banks using fake guarantees. The bank witnessed a sharp deterioration in its asset quality as its NPA ratio increased to 18.38% at the end of March 2018, against 12.53% a year ago.

PNB’s gross NPAs swelled from Rs553.7bn in financial year 2017 to Rs866.2bn in financial year 2018. The bank reported the highest net loss in the banking sector of Rs134.2bn in the fourth quarter. For the financial year, PNB made a net loss of Rs121.3bn in financial year 2018 as against a profit of Rs11.9bn in financial year 2017.

PNB witnessed an 18.01% decrease in its Tier 1 capital over the past financial year, dropping two places to eighth position among all Indian banks. Moody’s expects PNB to receive capital support from the Indian government due to the fact that as the second largest public sector bank in India by total deposits, the systemic importance of PNB is very high. The rating agency adds that it expects the government to provide extraordinary support to the bank’s creditors and depositors when required.

5. Bank of India

Bank of India (BoI) is the fifth largest public sector bank in terms of Tier 1 capital in India, but as a result of its weak balance sheet and capital position, the banking regulator placed BoI under prompt corrective action in December 2017.

In line with other public sector banks, BoI saw an increase in losses as it set aside more funds for bad loans. The bank reported a net loss of Rs39.7bn for the March quarter of financial year 2018 and Rs60.7bn for the financial year. BoI had made losses in the previous two financial years as well and its bad loan ratio has increased from 13.09% at the end of financial year 2016 to 16.51% at the end of financial year 2018.

In contrast, in March 2015, before the Reserve Bank of India-led asset quality review was initiated, BoI’s gross NPA ratio was at a much lower 5.36%. A key aspect of the bank’s strategy going forward is rebalancing its portfolio in favour of retail, agriculture and micro, small and medium-sized enterprise advances, and reducing exposure to the corporate sector. Retail advances for the bank grew by 19.25% in financial year 2018.

TOP FIVE INDIAN PRIVATE SECTOR BANKS

1. HDFC Bank

HDFC Bank has moved up one place to become the second largest Indian bank in terms of Tier 1 capital according to The Banker's 2018 ranking. In an industry grappling with bad loan problems, HDFC Bank’s balance sheet has remained relatively clean, as a result of limited exposure to troubled corporate sectors. HDFC Bank’s total advances on a standalone basis as of the end of March 2018 were Rs6600bn, an increase of 18.7% on the previous financial year. The bank’s loan portfolio comprises 57% retail loans and 43% wholesale loans. In financial year 2018, retail loans grew by 27.4% and wholesale loans grew by 9.4%.

HDFC Bank’s gross NPAs nearly doubled in the year leading to March 2018 to Rs86.07bn. The gross NPA ratio slightly deteriorated from 1.05% as of the end of March 2017, but remained at a respectable 1.3% by the end of March 2018. The bank’s net profit for the year grew by 21.4% to Rs185.1bn.

HDFC Bank’s strong digital banking focus continues. Nearly 85% of all banking transactions take place via mobile and the internet, against 17% in 2008. The bank branch accounts for only 8% of all banking transactions today, against 43% a decade ago.

2. ICICI Bank

ICICI Bank has dropped down The Banker’s league table of India banks. While it still remains the second largest bank in India in terms of assets, it is now the third largest in terms of Tier 1 capital. The bank experienced a 25% drop in net profits for financial year 2018, while net profits on a standalone basis for the fourth quarter dropped by about 50% compared to the fourth quarter of financial year 2017.

As with other banks, ICICI Bank is also focusing on the retail segment. Loan growth in financial year 2018 was driven by ICICI Bank’s retail franchise, which currently accounts for 57% of the loans portfolio. Retail loans grew by 21% year on year, while overall advances grew by 10% year on year to Rs5120bn as of March 31, 2018. On the other hand, bad loans grew by about 27% over the financial year 2018 to Rs540.6bn, out of which Rs157.4bn was added in the fourth quarter. Bad loans formed 8.84% of the loan book as of the end of March 2018, against 7.89% at the end of the previous financial year.

ICICI Bank has been hitting the headlines in recent months, not for its performance, but for concerns over corporate governance. CEO Chanda Kochhar is in the eye of a storm regarding allegations of conflicts of interest regarding loans granted to a corporate group. The bank’s board indicated its confidence in Ms Kochhar, but has set up a panel to investigate the allegations. Ms Kochhar has gone on leave and a new chief operating officer has been appointed for a period of five years.

3. Axis Bank

Axis Bank, the third largest private sector bank by Tier 1 capital in India, saw a steep 93% contraction in its net profit in financial year 2018. It reported its first ever quarterly loss in the fourth quarter of financial year 2018 of Rs21.9bn after the Reserve Bank of India revised NPA rules in February 2018. It had made a profit of Rs12.25bn in the fourth quarter of the previous financial year.

The bank has claimed the losses were because of higher provisions for accelerated NPA recognition in the fourth quarter. Slippages for the fourth quarter of financial year 2018 stood at Rs165.4bn, 84% of which came from corporate lending. The bank, however, said the NPA recognition cycle is nearly over and financial year 2019 will be a year for growth for the bank.

Bad loan issues have dogged Axis Bank for the past few years and it was also pulled up by the banking regulator a couple of times for under-reporting bad loans. Notably, the regulator recently asked the bank board to reconsider the decision to extend the tenure of the CEO, following which the CEO requested the board to accept an early termination of her tenure. The bank is currently in the process of searching for a replacement.

4. Kotak Mahindra Bank

India’s fourth largest private sector bank by Tier 1 capital, Kotak Mahindra Bank reported a 24.52% growth in pre-tax profits in financial year 2018, the highest among the country’s top 10 banks in a year when the industry has been shaken by rising bad loans and losses. Kotak’s retail and small and medium-sized enterprise focus has meant that it is not significantly impacted by NPAs. In financial year 2018, gross NPAs for the bank grew by only 7% to Rs40.7bn. Its ratio of NPAs dropped from 2.25% in financial year2017 to 1.95% in financial year 2018.

Digital banking remains a core focus at Kotak, with nearly two-thirds of its retail transactions taking place through digital channels. In financial year 2018, mobile banking at the bank grew by 76% in value and 114% in volume, while personal loans acquired through digital channels grew by 168%.

There is a lot of market speculation and we do not comment on rumours and speculation

Dipak Gupta

There is much conjecture in the market about Kotak acquiring Axis Bank, however. Dipak Gupta, joint managing director at Kotak, remains non-committal, saying: “There is a lot of market speculation and we do not comment on rumours and speculation.” In 2017, Kotak completed the integration of ING Vysya's bank operations, which it acquired in 2015. 

5. Yes Bank

Yes Bank’s Tier 1 capital grew by 34.94% in the 2018 financial year, placing it in ninth position, ahead of Bank of India, in The Banker’s ranking of the top 10 Indian banks by Tier 1 capital. The private lender reported a 22.63% growth in pre-tax profits and a 26% growth in net profits. As a percentage of total loans, gross NPAs stood at 1.28% in the final quarter of financial year 2018 compared with 1.72% in the previous quarter, and 1.52% in the final quarter of financial year 2017. 

Yes Bank has a network of 1100 branches and 1724 ATMs. In financial year 2018, the bank experienced a growth in advances of 53.9% year on year, with advances to the retail segment nearly doubling. Retail currently accounts for 12.2% of the bank’s loan portfolio. Rana Kapoor, CEO at Yes Bank, says: “As the bank continues its robust growth in the next phase, our focus will be on growing Yes Bank’s retail banking division along with a strong growth in the corporate segment. We aim to achieve a healthy retail loan book, up to 40% of our overall lending portfolio, by 2020.”

Top 10 Indian Banks Tier 1 Capital 0618

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