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This is a presentation describes Competitiveness of the Indian Banking Sector - public sector banks.
Competitiveness of the Indian Banking Sector- Public Sector Banks
OVERALL BANKING SECTOR ROADMAP AND SOLUTION FOR PUBLIC SECTOR BANKS HAS TO KEEP IN MIND TWIN OBJECTIVES
Supporting GDP growth
Social/ macro-economic objectives
• GDP projected to grow at 8-9% going
forward
• Financial inclusion
• Infrastructure spending to be more than
USD 600 bn in the next 5 years
• Agri- lending
• Government sponsored schemes • Currency market support • Stock market support • Government debt
• 500 mn new people added to middle class
households
• Rural and semiurban per capital
consumption to reach current urban levels by 2017
1
CONTENTS
• Public sector banks today • Indian economy and imperatives for banking • Reforms needed
2
CREATION OF NATIONAL BANKING INSTITUTIONS HAS SERVED THE ECONOMY WELL BETWEEN 1980 AND 2000
Objective of Nationalization Inspired by a larger social purpose and to subserve national priorities and objectives such as • Rapid growth in agriculture, small industries and exports • Raising employment levels • Encouragement of new entrepreneurs, and • Development of backward areas
Sectoral deployment of non food bank credit (Rs. billions) CAGR 3,751
792
Number of branches
16.0% Others Wholesale trade Industry 19.6% 11.5% 3.6% 65,412 59,752 5,595 8,042 Metro 32,419 4,014 5,178 8,122
15,105 11,324 8,219 10,052 14,407
168
1,473
15.5% 17.7% 16.2% 14.9% Urban Semi-Urban Rural
1,007 22 165 55 19 13 383 191 83 155 26 165 28 83 1980 16 1990 82
346 528 444
Other priority SSI Agriculture
34,791
32,734
2000 391
1980 Export Credit
1990
2000
17.2
"Average GDP growth at 5.6% in the same period" Source: RBI, IBA
“Nationalized banks have played a key role in helping the UPA government achieve nine per cent growth in the last fiscal" – Finance Minister P Chidambaram, Oct 9, 2007 3
VALUATIONS OF PSU BANKS ARE LOW DESPITE HIGHER PROFITABILITY
Bank profitability in India
FY 2008 ROE
16.8 PSU banks 19.1 19.6 16.0 PSU banks
Bank valuation in India Mar 31 2008 P/E
11.0 5.9 7.8 7.2
P/B
1.6 1.1 1.5 1.1
11.7 Private banks 17.7 17.4 21.8 Private banks
20.6 29.4 26.4 21.9
1.8 4.1 3.2 3.7
Source: Annual reports, Prowess
4
SEVERAL FACTORS ARE RESPONSIBLE FOR LOWER VALUATIONS OF PUBLIC SECTOR BANKS
1. Lower asset quality – Gross NPA levels of PSU banks at 2.7%, compared to 1.9%
for new private banks and 1.8% for foreign banks
2. Slower growth – CAGR in balance sheet for private banks over 2003-07 is 35%,
more than double that of PSU banks at 16%
3. Lower productivity – Profit per branch for PSUs is only Rs 0.5 crores compared to
Rs 2.5 crores for private banks. Profit per employee is also much lower at Rs 2.6 lakhs vs Rs 7.6 lakhs for the private sector
4. Different customer profile – Foreign and private banks share of younger customers
is over 60% PSU banks have only 32% customers under the age of 40. Private sector banks also have a much higher share of the more profitable mass affluent segment
5. Losing share in fee based wholesale and retail banking products – ECM, M&A,
Institutional equities, transaction banking and cross- sell of investment products, and insurance
5
PUBLIC SECTOR BANKS HAVE NOT EVOLVED ON SEVERAL DIMENSIONS OF THE BUSINESS MODEL IN RETAIL
Key dimensions of business model Superior customer service Proactive sales
ILLUSTRATIVE
Public sector banks
• Customer service levels and TATs below market practices
• Focused on catching customers as they walk into the branch • A few public sector banks (e.g., Bank of Baroda, SBI) have
recently started proactive sales, but their numbers are lower than competition
• In-branch sales engine is not effective
World class operations
• Distributed/decentralised configuration resulting in a varied
performance – branches doing most of the operations
New access options
• Limited/low level usage of entire range of channel options • While ATM usage has increased in the recent past, penetration
of phone banking and internet banking is lower than competition
6
TALENT, OPERATIONAL CONTROL, OWNERSHIP ARE BIGGEST ISSUES FOR PSU BANKS
Talent Operational
• Unable to attract entry level talent
– Rigid recruitment policies – Slower growth to middle and senior management path – Lower compensation/no ESOPs – Poor performance culture – Perceived lack of operating freedom
• Fear of accountability
– Accountability to government restricts decision making • CVC guidelines adherence issues • CAG Audit • Procurement process L1/L2
• Union issues
– Transfers/Reassignments – Disciplining – Inability to mete out significant consequence management systems Ownership
• Government ownership floor at 51% restricts ability to raise capital • More than fair share in
– Priority sector – Minority lending – Bankers to government – Financial inclusion/rural
7
WHILE ON AN AGGREGATE, PERFORMANCE DIFFERENCE BETWEEN PSUs AND PRIVATE SECTOR IS SIGNIFICANT…
FY 2002 Profit per branch (Rs crore)
PSU Bank average*
FY 2008
0.24
1.28
Private Bank average**
0.84
2.49
2002
Profit per employee (Rs lakh)
PSU Bank average*
2007
1.20
4.10
Private Bank average**
5.20
6.34
* Average of SBI, PNB, Canara Source: Annual reports
** ICICI, HDFC, Axis 8
…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOT THAT STARK IN METRO AND URBAN (1/4)
Operating profit per branch, 2008, Rs. crore
Private sector SBI overall SBI- metro and urban SBI-rural 0,2 1,3 3,7
5,1
* ICICI, HDFC, Axis Source: Annual reports
9
…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOT THAT STARK IN METRO AND URBAN (2/4)
Operating profit per employee, 2008, Rs. lakh
Private sector SBI overall 9,0
13,0
SBI- metro and urban
SBI-rural 1,9
15,9
* ICICI, HDFC, Axis Source: Annual reports
10
…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOT THAT STARK IN METRO AND URBAN (3/4)
FY 2008 Deposits per branch (Rs crore)
SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average*
99.69 22.44 157.97
Deposits per employee (Rs lakh)
SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average*
FY 2008
435.89 217.94 402.63
* ICICI, HDFC, Axis Source: Annual reports
11
…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOT THAT STARK IN METRO AND URBAN (4/4)
FY 2008 Advances per branch (Rs crore)
SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average*
85.44 13.14 136.92
Advances per employee (Rs lakh)
SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average*
FY 2008
373.56 127.67 348.99
* ICICI, HDFC, Axis Source: Annual reports
12
CONTENTS
• Public sector banks today • Indian economy and imperatives for banking • Reforms needed
13
INDIA’S GDP HAS RISEN STEADILY SINCE THE 1950’S. . .
Real GDP growth* US$ billion 7.3%
9.0%
Average growth rate of 8.9% over 2003 - 2007
773 709
5.2%
464
4.4% 3.4%
60 118 279
1950
1970 548
1990 850
2000 1,016
2006 1,112
2007** 1,169
Population (Million)**
365
* Base year = 2002 ** 2007 figures are forecasts sourced from WMM Source: Global Insight; Economic Survey of India; Team Analysis
14
A GROWING WORKING AGE POPULATION WILL PROPEL GROWTH TILL 2035 LATER THAN CHINA
Working age population (age 15-60) Per cent of total population
72% 70% 68% 66%
India
Brazil
64% 62% 60% 58% 2000
China Russia G6
2005 2010 2015 2020 2025 2030 2035 2040
15
Source: Global Insight; Team Analysis
HOUSEHOLD INCOMES WILL ACCELERATE ACROSS INDIA
Average household disposable income Thousand; Indian rupees; 2000
Compound annual growth rates 1985-2005 2005-2025
500
Actual
Forecast
Urban
400
5.8% All India
300
200
4.6% 3.6%
5.3% 3.6%
Rural
100
2.8%
0 1985
1990
1995
2000
2005
2010
2015
2020
2025
Source: McKinsey Global Institute
16
THE SHAPE OF INDIA'S INCOME PYRAMID WILL CHANGE DRAMATICALLY AS INCOMES GROW
Household income brackets Thousand, Indian rupees, 2000 Globals (>1,000) Strivers (500–1,000) 2005 Seekers (200–500) Aspirers (90–200) Deprived (1,000)
Strivers (500–1,000) 2015 Seekers (200–500) Aspirers (90–200) Deprived (1,000) 2025 Strivers (500–1,000) Seekers (200–500) Aspirers (90–200) Deprived (
This is a presentation describes Competitiveness of the Indian Banking Sector - public sector banks.
Competitiveness of the Indian Banking Sector- Public Sector Banks
OVERALL BANKING SECTOR ROADMAP AND SOLUTION FOR PUBLIC SECTOR BANKS HAS TO KEEP IN MIND TWIN OBJECTIVES
Supporting GDP growth
Social/ macro-economic objectives
• GDP projected to grow at 8-9% going
forward
• Financial inclusion
• Infrastructure spending to be more than
USD 600 bn in the next 5 years
• Agri- lending
• Government sponsored schemes • Currency market support • Stock market support • Government debt
• 500 mn new people added to middle class
households
• Rural and semiurban per capital
consumption to reach current urban levels by 2017
1
CONTENTS
• Public sector banks today • Indian economy and imperatives for banking • Reforms needed
2
CREATION OF NATIONAL BANKING INSTITUTIONS HAS SERVED THE ECONOMY WELL BETWEEN 1980 AND 2000
Objective of Nationalization Inspired by a larger social purpose and to subserve national priorities and objectives such as • Rapid growth in agriculture, small industries and exports • Raising employment levels • Encouragement of new entrepreneurs, and • Development of backward areas
Sectoral deployment of non food bank credit (Rs. billions) CAGR 3,751
792
Number of branches
16.0% Others Wholesale trade Industry 19.6% 11.5% 3.6% 65,412 59,752 5,595 8,042 Metro 32,419 4,014 5,178 8,122
15,105 11,324 8,219 10,052 14,407
168
1,473
15.5% 17.7% 16.2% 14.9% Urban Semi-Urban Rural
1,007 22 165 55 19 13 383 191 83 155 26 165 28 83 1980 16 1990 82
346 528 444
Other priority SSI Agriculture
34,791
32,734
2000 391
1980 Export Credit
1990
2000
17.2
"Average GDP growth at 5.6% in the same period" Source: RBI, IBA
“Nationalized banks have played a key role in helping the UPA government achieve nine per cent growth in the last fiscal" – Finance Minister P Chidambaram, Oct 9, 2007 3
VALUATIONS OF PSU BANKS ARE LOW DESPITE HIGHER PROFITABILITY
Bank profitability in India
FY 2008 ROE
16.8 PSU banks 19.1 19.6 16.0 PSU banks
Bank valuation in India Mar 31 2008 P/E
11.0 5.9 7.8 7.2
P/B
1.6 1.1 1.5 1.1
11.7 Private banks 17.7 17.4 21.8 Private banks
20.6 29.4 26.4 21.9
1.8 4.1 3.2 3.7
Source: Annual reports, Prowess
4
SEVERAL FACTORS ARE RESPONSIBLE FOR LOWER VALUATIONS OF PUBLIC SECTOR BANKS
1. Lower asset quality – Gross NPA levels of PSU banks at 2.7%, compared to 1.9%
for new private banks and 1.8% for foreign banks
2. Slower growth – CAGR in balance sheet for private banks over 2003-07 is 35%,
more than double that of PSU banks at 16%
3. Lower productivity – Profit per branch for PSUs is only Rs 0.5 crores compared to
Rs 2.5 crores for private banks. Profit per employee is also much lower at Rs 2.6 lakhs vs Rs 7.6 lakhs for the private sector
4. Different customer profile – Foreign and private banks share of younger customers
is over 60% PSU banks have only 32% customers under the age of 40. Private sector banks also have a much higher share of the more profitable mass affluent segment
5. Losing share in fee based wholesale and retail banking products – ECM, M&A,
Institutional equities, transaction banking and cross- sell of investment products, and insurance
5
PUBLIC SECTOR BANKS HAVE NOT EVOLVED ON SEVERAL DIMENSIONS OF THE BUSINESS MODEL IN RETAIL
Key dimensions of business model Superior customer service Proactive sales
ILLUSTRATIVE
Public sector banks
• Customer service levels and TATs below market practices
• Focused on catching customers as they walk into the branch • A few public sector banks (e.g., Bank of Baroda, SBI) have
recently started proactive sales, but their numbers are lower than competition
• In-branch sales engine is not effective
World class operations
• Distributed/decentralised configuration resulting in a varied
performance – branches doing most of the operations
New access options
• Limited/low level usage of entire range of channel options • While ATM usage has increased in the recent past, penetration
of phone banking and internet banking is lower than competition
6
TALENT, OPERATIONAL CONTROL, OWNERSHIP ARE BIGGEST ISSUES FOR PSU BANKS
Talent Operational
• Unable to attract entry level talent
– Rigid recruitment policies – Slower growth to middle and senior management path – Lower compensation/no ESOPs – Poor performance culture – Perceived lack of operating freedom
• Fear of accountability
– Accountability to government restricts decision making • CVC guidelines adherence issues • CAG Audit • Procurement process L1/L2
• Union issues
– Transfers/Reassignments – Disciplining – Inability to mete out significant consequence management systems Ownership
• Government ownership floor at 51% restricts ability to raise capital • More than fair share in
– Priority sector – Minority lending – Bankers to government – Financial inclusion/rural
7
WHILE ON AN AGGREGATE, PERFORMANCE DIFFERENCE BETWEEN PSUs AND PRIVATE SECTOR IS SIGNIFICANT…
FY 2002 Profit per branch (Rs crore)
PSU Bank average*
FY 2008
0.24
1.28
Private Bank average**
0.84
2.49
2002
Profit per employee (Rs lakh)
PSU Bank average*
2007
1.20
4.10
Private Bank average**
5.20
6.34
* Average of SBI, PNB, Canara Source: Annual reports
** ICICI, HDFC, Axis 8
…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOT THAT STARK IN METRO AND URBAN (1/4)
Operating profit per branch, 2008, Rs. crore
Private sector SBI overall SBI- metro and urban SBI-rural 0,2 1,3 3,7
5,1
* ICICI, HDFC, Axis Source: Annual reports
9
…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOT THAT STARK IN METRO AND URBAN (2/4)
Operating profit per employee, 2008, Rs. lakh
Private sector SBI overall 9,0
13,0
SBI- metro and urban
SBI-rural 1,9
15,9
* ICICI, HDFC, Axis Source: Annual reports
10
…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOT THAT STARK IN METRO AND URBAN (3/4)
FY 2008 Deposits per branch (Rs crore)
SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average*
99.69 22.44 157.97
Deposits per employee (Rs lakh)
SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average*
FY 2008
435.89 217.94 402.63
* ICICI, HDFC, Axis Source: Annual reports
11
…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOT THAT STARK IN METRO AND URBAN (4/4)
FY 2008 Advances per branch (Rs crore)
SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average*
85.44 13.14 136.92
Advances per employee (Rs lakh)
SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average*
FY 2008
373.56 127.67 348.99
* ICICI, HDFC, Axis Source: Annual reports
12
CONTENTS
• Public sector banks today • Indian economy and imperatives for banking • Reforms needed
13
INDIA’S GDP HAS RISEN STEADILY SINCE THE 1950’S. . .
Real GDP growth* US$ billion 7.3%
9.0%
Average growth rate of 8.9% over 2003 - 2007
773 709
5.2%
464
4.4% 3.4%
60 118 279
1950
1970 548
1990 850
2000 1,016
2006 1,112
2007** 1,169
Population (Million)**
365
* Base year = 2002 ** 2007 figures are forecasts sourced from WMM Source: Global Insight; Economic Survey of India; Team Analysis
14
A GROWING WORKING AGE POPULATION WILL PROPEL GROWTH TILL 2035 LATER THAN CHINA
Working age population (age 15-60) Per cent of total population
72% 70% 68% 66%
India
Brazil
64% 62% 60% 58% 2000
China Russia G6
2005 2010 2015 2020 2025 2030 2035 2040
15
Source: Global Insight; Team Analysis
HOUSEHOLD INCOMES WILL ACCELERATE ACROSS INDIA
Average household disposable income Thousand; Indian rupees; 2000
Compound annual growth rates 1985-2005 2005-2025
500
Actual
Forecast
Urban
400
5.8% All India
300
200
4.6% 3.6%
5.3% 3.6%
Rural
100
2.8%
0 1985
1990
1995
2000
2005
2010
2015
2020
2025
Source: McKinsey Global Institute
16
THE SHAPE OF INDIA'S INCOME PYRAMID WILL CHANGE DRAMATICALLY AS INCOMES GROW
Household income brackets Thousand, Indian rupees, 2000 Globals (>1,000) Strivers (500–1,000) 2005 Seekers (200–500) Aspirers (90–200) Deprived (1,000)
Strivers (500–1,000) 2015 Seekers (200–500) Aspirers (90–200) Deprived (1,000) 2025 Strivers (500–1,000) Seekers (200–500) Aspirers (90–200) Deprived (