Description
This is a presentation provides the overview of banking sector in India.
OVERVIEW OF BANKING SECTOR IN INDIA
Achal Mittal -Komal Poddar
-
Deregulation of savings bank deposit interest rate
Guidelines: A uniform interest rate on savings bank deposits up to Rs.1 lakh For savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest, subject to the condition that banks will not discriminate interest between two deposits on same date and of same amount.
Applicable to savings bank deposits of resident Indians only.
Only Interest rate on Non-Resident (External) Accounts Scheme and Ordinary NonResident Deposit under savings account, will continue to be regulated (@ 4 % p.a.)
Why deregulation?
• Interest rates, whether on deposits or on credit, were deregulated long before. • Provided strong incentive for consumption, investment and growth. • The only rate that was still governed by the RBI was the rate on savings deposits, apart from the policy rates like the repo rate or the bank rate. • Savings deposits are over 23 % of the total bank deposits. • A 0.5 percent increase in interest rate would raise the interest cost for banks by Rs 6,000 crore • That is, in fact, the loss that the depositors in savings accounts suffer. What is relevant, is that the savings depositors are individuals • In spite of the steep increase in other rates like the treasury bills jumped 300 bps and repo market rate 200 bps and the sharp rise in inflation (at over 9%), interest on savings account had remained static. The depositor in savings account was losing the real value of his money @4%.
no change in the savings deposits rate
cheapest source of funds with max. spread depositor in savings account is losing the real value of his money
Implications
Not as attractive as it seems(another savings a/c that offers a few hundred bps more)why? Depositor does not view savings bank accounts as investment vehicles Only that amount which is required for meeting contingencies and regular expenses is parked in the savings account. This amount usually does not go beyond 20% of the initial credit Even this amount is partly channelised into „SweepIn? accounts offered by most banks and amounts residing in savings bank accounts are earning interest on a daily basis for the past few months.
Banks may counterbalance outsized interest rates by beginning to charge for those services which are currently free, increase the fees for cheque books/debit cards, raise the minimum balance reqd. etc.
Power sector lending
Power sector is making losses. Why? Power companies are barely able to recover even their VCs , an example of JSW Power
Huge Capital locked+ gestation pd. is long
Due to political considerations (bijli, roti, kapda , makaan) the cost of purchasing electricity has risen, while consumer tariffs have not been at par Subsidies to agricultural (more than 50%) and domestic consumers at the cost of industrial consumers is another problem Transmission and distribution losses ,a perfect recipe for disaster
JSW POWE R
Coal @$7580/ton
Cost of coal Rs.2.7/unit
S.P. Rs. 2.852.90/unit
Government is resorting to temporary short-fixes , it wrote off Rs 41,400 crore worth of losses to “rescue” the power sector. Now, planning to do something similar again.
Response
7.3 % 3040%
Rs 56000 Cr.
Power sector loans that could be at risk (SnP?s estimate)
Total outstanding Accounted credit for banks in for by SEBs the sector
Banks have decided to halt lending to power companies • PNB announced it has restructured Rs 2,500 cr of loans in the past quarter, of which Rs 1,800 cr was lent to Tamil Nadu SEB • Indian Overseas Bank has revealed SEBs have asked for a restructuring of their loans. The bank, which has lent about Rs 9,000 cr to the sector • SBI and ICICI Bank have the highest exposure to the power sector; both of them have lent almost Rs 30,000 cr. • With RBI asking banks to reduce lending to power companies, they will now have to depend on Power Finance Corp.(PFC) and Rural Electrification Corp.(REC) In most cases PFC does not release the next instalment unless the project
Moody?s downgrading
Global ratings firm Moody's on Oct 4, 2011 downgraded its rating of SBI's financial strength by one notch to „Baa3'
What does rating „Baa3? mean?
• modest intrinsic financial strength, potentially requiring some outside support at times
WHY?
low Tier-I capital ratio • 7.60% on June 30, 2011, as against the suggested level of 8% termed as desirable by the govt. for public sector banks It would require $8 bln to replenish its Tier-I capital ratio to 8%
What does rating „Baa2? mean?
• adequate intrinsic financial strength
The Rs 23,000-crore rights issue that SBI is currently seeking would raise its Tier-I ratio to approx. 9.3% However, it is estimated that capital deployed for loan growth, assuming 15% p.a. for the next 3 fiscal years, will cause the Tier-I ratio to fall below 8%, thereby necessitating
deteriorat ing asset quality
•
•
•
due to higher interest rates & slower economy NPAs reached a 3 yr. high of 3.52% of loans for the qtr ended June 30 & 43% of bank?s tier-1 capital
Moody?s Outlook for Indian Banks
From “stable” to “negative”. A "negative" outlook is one that is characterized by volatility and uncertain conditions
Reasons: Monetary tightening and a slowdown in the economy would cut bank loan growth Recent liberalization of savings deposit rates by the central bank would pressurize lenders' profitability India's slowing economic momentum because of high inflation, monetary tightening and rapidly rising interest rates A bigger reason for the future expected rate tightening is the increase in the govt. borrowing. That increase is going to impact the borrowing rates of the corporates. Indian federal government would be borrowing Rs.528 billion ($10.79 billion) extra in October-March acc. to it.
Consequence s
Adversely hit asset quality, capitalization, and profitability
Will make overseas borrowings for Indian banks costlier It triggered intense selling in stock markets
Identifying a Banking Stock
? ? ? ? ? ?
Capital Adequacy & the role of capital Asset and Liability Management Interest Rate Risk Liquidity Asset Quality Profitability
Indian Banking Stocks
Capital Requirements ----- Liquid Assets
Private Sector Banks Public Sector Banks
ICICI Bank
Vs.
State Bank
NIM – The most important tool
Interest Generated
Interest Paid
Valuation of a Banking Stock
Year 0
Book Value $1,000
Year 1
$1,000 + $75 = $1,075
Year 2
$1,075 + $80.6 = $1,155.60
Retained Earnings*
$1,000 x 15% x (1-50%) = $75
$1,075 x 15% x (1-50%) = $80.60
*(1 - payout ratio) = the percentage of earnings retained.
Year 0 Excess Return Present Value (15%-11%) x $1,000 = $40 $40 / (1 + 11%)0 = $40
Year 1 (15%-11%) x $1,075 = $43 $43 / (1 + 11%)1 = $38.74
Year 2 Terminal Value Present Value ((15% - 11%) x $1,155.60) / (11% - 3%) = $577.80 $577.80 / (1 + 11%)2 = $468.96
The Excess Return Model
Current Book Value $1,000.00
Excess Return (Year 0) Excess Return (Year 1) Terminal Value (Year 2) Total Per-Share Value
$40.00 $38.74 $468.96 $1,547.70 $1,547.70/100 = $15.48
Decision Time
BASEL 3
BASEL 2 ? BASEL 3
•
• • •
Impact on Indian Banks
Regulatory Capital Adequacy Levels Proposed Basel III Norm
4.5% 2.5% 0-2.5% 8.5-11% 10.5-13%
No change in overall capital requirement
TIER 1 Capital – 4 % to 6 % Common Equity - 2 % to 4.5% Capital conservation buffer – 2.5 %
Total capital (including the buffers) Common equity (after deductions) Conservation Buffer Countercyclical Buffer Tier I(including the buffer)
Existing RBI Norm
3.6% (9.2%) Nil Nil 6% (10%) 9% (14.5%)
Areas
Main Basel III components
Capital definition
Countercyclical buffers Leverage ratio Minimum capital standards Systemic risk
Capital ratios and targets
RWA requirements
Liquidity standards
Counterparty risk Trading book and securitisation (also known as Basel II.5) Liquidity coverage ratio Net stable funding ratio
Basel III impact on Public Sector Banks
14
Provisions & Impacts
Enhances banks ability to conserve core capital in the event of stress through a capital buffer
Purpose
• To ensure that banks maintain a buffer to absorb losses
The prescribed liquidity requirements are aimed at bringing uniformity in liquidity standards followed by banks, globally
Raises the min. core capital stipulation, introduces counter cyclical measures & enhances banks? ability to conserve core capital
Mechanism
• Buffer of 2.5 percent, on top of Tier 1 capital, will be met with common equity
Indian banks are already following stringent guidelines and hence are in a better position vis-a-vis foreign banks
Most of the Indian banks already maintain core and O/A capital in excess of the regulatory minimum
NBFC Analysis
Recent Regulations
RBI?s approval of bank lending to NBFCs from „Priority Sector? Status
Impact
Increased Cost of funds – Since NBFCs are no longer included in priority sector, the cost of funds can increase by 15-70 BPS
The Proposed changes in NPA recognition from 180 days to 90 days is likely to inc. the provisioning requirements
Tougher Provisioning & Lower Profitability. Lower profitability
Leverage to come down
Increased Capital Adequacy requirement of 15%
NPA?s will increase due to the 90 day criteria for recognizing bad debts
Why NBFCs should convert into a bank ???
This is the first time in many years that RBI has opened a window for new banking licenses NBFCS have been subject to adverse regulatory changes in recent past. This will definitely impact the profitability of the NBFCs
Without priority sector status, it would be difficult for MMFS to generate liabilities at a higher rate than banking system deposit growth unless debt market develops in India
Given the recent regulatory changes, it will be difficult for NBFCs to generate ROE higher than banks Higher competition from banks with aggressive rural expansion drive due to financial inclusion guidelines.
doc_165037752.ppt
This is a presentation provides the overview of banking sector in India.
OVERVIEW OF BANKING SECTOR IN INDIA
Achal Mittal -Komal Poddar
-
Deregulation of savings bank deposit interest rate
Guidelines: A uniform interest rate on savings bank deposits up to Rs.1 lakh For savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest, subject to the condition that banks will not discriminate interest between two deposits on same date and of same amount.
Applicable to savings bank deposits of resident Indians only.
Only Interest rate on Non-Resident (External) Accounts Scheme and Ordinary NonResident Deposit under savings account, will continue to be regulated (@ 4 % p.a.)
Why deregulation?
• Interest rates, whether on deposits or on credit, were deregulated long before. • Provided strong incentive for consumption, investment and growth. • The only rate that was still governed by the RBI was the rate on savings deposits, apart from the policy rates like the repo rate or the bank rate. • Savings deposits are over 23 % of the total bank deposits. • A 0.5 percent increase in interest rate would raise the interest cost for banks by Rs 6,000 crore • That is, in fact, the loss that the depositors in savings accounts suffer. What is relevant, is that the savings depositors are individuals • In spite of the steep increase in other rates like the treasury bills jumped 300 bps and repo market rate 200 bps and the sharp rise in inflation (at over 9%), interest on savings account had remained static. The depositor in savings account was losing the real value of his money @4%.
no change in the savings deposits rate
cheapest source of funds with max. spread depositor in savings account is losing the real value of his money
Implications
Not as attractive as it seems(another savings a/c that offers a few hundred bps more)why? Depositor does not view savings bank accounts as investment vehicles Only that amount which is required for meeting contingencies and regular expenses is parked in the savings account. This amount usually does not go beyond 20% of the initial credit Even this amount is partly channelised into „SweepIn? accounts offered by most banks and amounts residing in savings bank accounts are earning interest on a daily basis for the past few months.
Banks may counterbalance outsized interest rates by beginning to charge for those services which are currently free, increase the fees for cheque books/debit cards, raise the minimum balance reqd. etc.
Power sector lending
Power sector is making losses. Why? Power companies are barely able to recover even their VCs , an example of JSW Power
Huge Capital locked+ gestation pd. is long
Due to political considerations (bijli, roti, kapda , makaan) the cost of purchasing electricity has risen, while consumer tariffs have not been at par Subsidies to agricultural (more than 50%) and domestic consumers at the cost of industrial consumers is another problem Transmission and distribution losses ,a perfect recipe for disaster
JSW POWE R
Coal @$7580/ton
Cost of coal Rs.2.7/unit
S.P. Rs. 2.852.90/unit
Government is resorting to temporary short-fixes , it wrote off Rs 41,400 crore worth of losses to “rescue” the power sector. Now, planning to do something similar again.
Response
7.3 % 3040%
Rs 56000 Cr.
Power sector loans that could be at risk (SnP?s estimate)
Total outstanding Accounted credit for banks in for by SEBs the sector
Banks have decided to halt lending to power companies • PNB announced it has restructured Rs 2,500 cr of loans in the past quarter, of which Rs 1,800 cr was lent to Tamil Nadu SEB • Indian Overseas Bank has revealed SEBs have asked for a restructuring of their loans. The bank, which has lent about Rs 9,000 cr to the sector • SBI and ICICI Bank have the highest exposure to the power sector; both of them have lent almost Rs 30,000 cr. • With RBI asking banks to reduce lending to power companies, they will now have to depend on Power Finance Corp.(PFC) and Rural Electrification Corp.(REC) In most cases PFC does not release the next instalment unless the project
Moody?s downgrading
Global ratings firm Moody's on Oct 4, 2011 downgraded its rating of SBI's financial strength by one notch to „Baa3'
What does rating „Baa3? mean?
• modest intrinsic financial strength, potentially requiring some outside support at times
WHY?
low Tier-I capital ratio • 7.60% on June 30, 2011, as against the suggested level of 8% termed as desirable by the govt. for public sector banks It would require $8 bln to replenish its Tier-I capital ratio to 8%
What does rating „Baa2? mean?
• adequate intrinsic financial strength
The Rs 23,000-crore rights issue that SBI is currently seeking would raise its Tier-I ratio to approx. 9.3% However, it is estimated that capital deployed for loan growth, assuming 15% p.a. for the next 3 fiscal years, will cause the Tier-I ratio to fall below 8%, thereby necessitating
deteriorat ing asset quality
•
•
•
due to higher interest rates & slower economy NPAs reached a 3 yr. high of 3.52% of loans for the qtr ended June 30 & 43% of bank?s tier-1 capital
Moody?s Outlook for Indian Banks
From “stable” to “negative”. A "negative" outlook is one that is characterized by volatility and uncertain conditions
Reasons: Monetary tightening and a slowdown in the economy would cut bank loan growth Recent liberalization of savings deposit rates by the central bank would pressurize lenders' profitability India's slowing economic momentum because of high inflation, monetary tightening and rapidly rising interest rates A bigger reason for the future expected rate tightening is the increase in the govt. borrowing. That increase is going to impact the borrowing rates of the corporates. Indian federal government would be borrowing Rs.528 billion ($10.79 billion) extra in October-March acc. to it.
Consequence s
Adversely hit asset quality, capitalization, and profitability
Will make overseas borrowings for Indian banks costlier It triggered intense selling in stock markets
Identifying a Banking Stock
? ? ? ? ? ?
Capital Adequacy & the role of capital Asset and Liability Management Interest Rate Risk Liquidity Asset Quality Profitability
Indian Banking Stocks
Capital Requirements ----- Liquid Assets
Private Sector Banks Public Sector Banks
ICICI Bank
Vs.
State Bank
NIM – The most important tool
Interest Generated
Interest Paid
Valuation of a Banking Stock
Year 0
Book Value $1,000
Year 1
$1,000 + $75 = $1,075
Year 2
$1,075 + $80.6 = $1,155.60
Retained Earnings*
$1,000 x 15% x (1-50%) = $75
$1,075 x 15% x (1-50%) = $80.60
*(1 - payout ratio) = the percentage of earnings retained.
Year 0 Excess Return Present Value (15%-11%) x $1,000 = $40 $40 / (1 + 11%)0 = $40
Year 1 (15%-11%) x $1,075 = $43 $43 / (1 + 11%)1 = $38.74
Year 2 Terminal Value Present Value ((15% - 11%) x $1,155.60) / (11% - 3%) = $577.80 $577.80 / (1 + 11%)2 = $468.96
The Excess Return Model
Current Book Value $1,000.00
Excess Return (Year 0) Excess Return (Year 1) Terminal Value (Year 2) Total Per-Share Value
$40.00 $38.74 $468.96 $1,547.70 $1,547.70/100 = $15.48
Decision Time
BASEL 3
BASEL 2 ? BASEL 3
•
• • •
Impact on Indian Banks
Regulatory Capital Adequacy Levels Proposed Basel III Norm
4.5% 2.5% 0-2.5% 8.5-11% 10.5-13%
No change in overall capital requirement
TIER 1 Capital – 4 % to 6 % Common Equity - 2 % to 4.5% Capital conservation buffer – 2.5 %
Total capital (including the buffers) Common equity (after deductions) Conservation Buffer Countercyclical Buffer Tier I(including the buffer)
Existing RBI Norm
3.6% (9.2%) Nil Nil 6% (10%) 9% (14.5%)
Areas
Main Basel III components
Capital definition
Countercyclical buffers Leverage ratio Minimum capital standards Systemic risk
Capital ratios and targets
RWA requirements
Liquidity standards
Counterparty risk Trading book and securitisation (also known as Basel II.5) Liquidity coverage ratio Net stable funding ratio
Basel III impact on Public Sector Banks
14
Provisions & Impacts
Enhances banks ability to conserve core capital in the event of stress through a capital buffer
Purpose
• To ensure that banks maintain a buffer to absorb losses
The prescribed liquidity requirements are aimed at bringing uniformity in liquidity standards followed by banks, globally
Raises the min. core capital stipulation, introduces counter cyclical measures & enhances banks? ability to conserve core capital
Mechanism
• Buffer of 2.5 percent, on top of Tier 1 capital, will be met with common equity
Indian banks are already following stringent guidelines and hence are in a better position vis-a-vis foreign banks
Most of the Indian banks already maintain core and O/A capital in excess of the regulatory minimum
NBFC Analysis
Recent Regulations
RBI?s approval of bank lending to NBFCs from „Priority Sector? Status
Impact
Increased Cost of funds – Since NBFCs are no longer included in priority sector, the cost of funds can increase by 15-70 BPS
The Proposed changes in NPA recognition from 180 days to 90 days is likely to inc. the provisioning requirements
Tougher Provisioning & Lower Profitability. Lower profitability
Leverage to come down
Increased Capital Adequacy requirement of 15%
NPA?s will increase due to the 90 day criteria for recognizing bad debts
Why NBFCs should convert into a bank ???
This is the first time in many years that RBI has opened a window for new banking licenses NBFCS have been subject to adverse regulatory changes in recent past. This will definitely impact the profitability of the NBFCs
Without priority sector status, it would be difficult for MMFS to generate liabilities at a higher rate than banking system deposit growth unless debt market develops in India
Given the recent regulatory changes, it will be difficult for NBFCs to generate ROE higher than banks Higher competition from banks with aggressive rural expansion drive due to financial inclusion guidelines.
doc_165037752.ppt