Banks

India OutlookReport

2011 Outlook: Indian Banks

RidingtheIndiaGrowthStory
RatingOutlook
Strong Growth Outlook for the Economy: Indian banks will continue to benefit from investment growth trends in the domestic economy. Real GDP growth is expected at 8.5% in 2011, driving strong credit demand. Commercial banks remain the dominant intermediary (estimated 60% share of Indian financial system assets) and are best placed to cater to this demand. Loan growth is estimated between 20% and 22%, slightly lower than in 2010, led by the infrastructure sector. Improved Outlook on Asset Quality: The credit outlook on most industrial sectors has improved, reducing asset quality concerns. The lagged effect of restructured loans turning into nonperforming loans (NPLs) is also likely to start getting muted, with companies benefiting from healthy domestic revenue growth. The systemic gross NPL ratio is expected to start reducing after peaking at 3% in March 2011. Concerns on Bubbles in Commercial Real Estate and Equity Expected to be Manageable: Challenges could revive for players in the commercial real estate sector; however, the banking sectors direct exposure is only 3% of total loans. A correction in property prices would affect NPL recoveries from chronic cases; historical evidence suggests that the residential mortgage portfolio should not suffer much as loans are mostly to borrowers who live in the purchased property. Neutral to Negative on Profitability: The impact of lower net interest margins (NIMs) in a rising interest rate scenario will be partly balanced by subdued credit costs as NPL accretion from restructured loans subsides. Additional provisions for the new pension schemes in government banks may be routed directly through equity or amortised; early estimates suggest that the impact on the Tier 1 ratio could be up to 50bp. Capital Planning Foremost for Banks: With the benefits of the standardised credit approach wearing off, loan growth will more directly affect capital ratios. This, together with the impact of pension provisions and the still relatively low NPL reserves, means that government banks would need to plan equity infusions. Banks will rely on the governments plans to maintain Tier 1 ratios of government banks at over 8% and owning a minimum 58% of the banks share capital by infusing equity. NonRetail Funding to Increase: While the focus on accruing lowcost customer deposits will remain, strong loan growth may result in a rising proportion of wholesale funding, partly from refinancing institutions. While some of these are longterm in nature, the overall funding profile could deteriorate if shortterm non repo borrowings are used to boost balance sheet size.

Analysts
Ananda Bhoumik +91 22 4000 1720 ananda.bhoumik@fitchratings.com Prakash Agarwal +91 22 4000 1700 prakash.agarwal@fitchratings.com Saswata Guha +91 22 4000 1701 saswata.guha@fitchratings.com Tarun Kumar +91 22 4000 1713 tarun.kumar@fitchratings.com Ambreesh Srivastava +65 6796 7218 ambreesh.srivastava@fitchratings.com

RelatedResearch
Applicable Criteria Global Financial Institutions Rating Criteria (August 2010)

ShortTerm Ratings Criteria for Corporate

Finance (November 2010) Other Outlooks www.fitchratings.com/outlooks

Indian Banks Rating Outlook

(%) 100 75 50 25 0 Positive Source: Fitch Stable 11 89

Ratings Outlook Stable: With performance remaining stable, rating considerations will be driven by structural changes, including improved quality of capital balanced by any shift in banks loan portfolios towards lowerrated corporate in search of yields. Banks with improved competitiveness and tested risk management systems may see upgrades in Individual Ratings and, in some cases, in National LongTerm Ratings. The foreigncurrency ratings of the major banks are mostly in line with the sovereign rating.

WhatCouldChangetheOutlook
Though unlikely, reckless loan growth and sharp rises in system interest rates together with any macroeconomic shock could result in the outlook turning negative.

www.fitchratings.com

31 January 2011

Banks
KeyIssues
Loan Growth to Remain Strong: Concerns have been expressed at the slowing trend in industrial growth since August 2010, which could be compounded by rising interest rates. However, the easy liquidity in developed markets could help maintain foreign equity inflows to keep the investment cycle going, thereby creating a good appetite for domestic credit from banks.
Monthly Index for Industrial Production (I.I.P) in India, Bank Loan Growth
(yoy %) 20 15 10 5 0 5 Jun 06 Source: RBI Dec 06 Jul 07 Feb 08 Sep 08 Mar 09 Oct 09 May 10 IIP change (LHS) Loan growth (RHS) (% change yoy) 35 28 21 14 7 0 Dec 10

Strong Economic and Loan Growth Eases Cost Pressures, Asset Quality Concerns: The growth in net interest income is expected to ease the pressure on cost/income ratios from rising employee and operating costs. The improved outlook on most manufacturing sectors should keep NPL ratios under control, which may start easing off from mid2011 by when most of the restructured loans some of which could turn into NPLs are due for redemption (please see special report Improved Outlook for Restructured Loans of Indian Banks in 2010 dated 19 January 2010). Loans to the infrastructure sector have grown rapidly, and there are concerns stemming from rising construction and interest costs due to project delays, or any inability of promoters to meet funding gaps if the equity markets were to crash. It is therefore not unreasonable to expect occasional restructuring of infrastructure loans in 2011 for some of these reasons. The fundamental premise, however, is that credit losses on viable projects are expected to be manageable given the acute demand for infrastructure in India. Diversified Loan Portfolio Provides Resilience: The loan portfolio remains well diversified amongst sectors, and barring a concerted shock that could destabilise domestic economic growth, NPLs are not expected to affect the stable rating outlook on the system. However, some of the small regional banks plan to diversify into new markets within the country with aboveaverage loan growth targets, which could challenge their risk management systems.
Sectoral Distribution
Industry ex infra (%) 100 75 50 25 0 Jun 2006 Source: RBI Aug 2008 Sep 2010 Infrastructure Consumer ex hsg Housing Agri. Trade, services, others

2011 Outlook: Indian Banks January 2011

Banks
NIMs Likely to Contract, Pressures Likely on Funding Profile: NIMs are expected to narrow in 2011 as interest rates rise and banks are forced to raise deposit rates to manage liquidity. While banks have the contractual ability to pass such hikes on to borrowers, they may prefer to absorb some of this increase at the cost of NIMs in the face of competition. Furthermore, strong loan growth, together with tight INR liquidity, is likely to increase the proportion of highercost wholesale funding, putting further pressure on margins. Retail deposits and customer current accounts will, however, remain the dominant funding sources, together accounting for about 65% of total deposits. Some comfort on shortterm liquidity stems from banks holdings in government securities (about 24% of assets) and cash (6% of assets) that Indian banks are statutorily required to maintain.
Movement of CASA and NIMs (System)
(%) 3.50 3.25 3.00 2.75 2.50 FY06 Source: RBI FY07 FY08 FY09 FY10 NIMs (LHS) CASA (RHS) (%) 40 38 36 34 32 Sep 10

Credit Costs to Ease: ROA is, however, expected to benefit from a reduction in credit costs to 0.85% of loans from 0.95% in 2010, as asset quality concerns ease and incremental NPLs reduce. The reduction is unlikely to take credit costs back to the FY09 (financial year ended March 2009) level of 0.76% of loans, as loan loss reserves now need to be maintained at a minimum of 70%, higher than the levels maintained in 2009.
Loan Loss Provision/Avg. Loans

( %) 1.0 0.8 0.6 0.4 0.2 0.0 FY06 Source: Fitch FY07

Indian system

SBI ('C')

BoB ('C/D')

FY08

FY09

FY10

FY11E

FY12F

Capital Issuances to Continue: Issuances are likely to be led by State Bank of India (Individual Rating: C), followed by the large and midsized government banks. Some of the lowerrated regional private banks have announced plans for aboveaverage loan growth in relatively new markets, which may need capital support, particularly in light of their relatively high unreserved NPL/equity ratios (for example, the D/E average in the chart below). The likely infusion of common equity would further improve the quality of capital for government banks. At 9%, the core Tier 1 capital ratio currently comprises 90% of the Tier 1 capital of Indian banks.

2011 Outlook: Indian Banks January 2011

Banks
Tier 1 Capital & Net NPLs to Equity
(%) 16 12 8 4 0 [C] Indian Banks Source: Fitch [C/D] Indian Banks [D] Indian Banks [D/E] Indian Banks Tier 1 (FY10) (LHS) Tier 1 (FY09) (LHS) Net NPLs to equity (FY10) (RHS) (%) 24 18 12 6 0

2010Review
The rating outlook for Indian banks turned stable from negative in 2010 as banks credit profile emerged unscathed from the 2009 credit crisis. The commitment by the government to help stateowned banks maintain a minimum Tier 1 level of 8% reinforced expectations of timely support, which, together with relatively improved finances of the government, resulted in Fitch upgrading the Support Rating Floors of many government banks from the B category on the international scale to the BB category in a band closer to that of the sovereigns own Foreign Currency rating of BBB. As a result, some of the supportdriven LongTerm Ratings of government banks were upgraded (Uco Bank, Dena Bank). The rating Outlooks of banks whose risk management systems and overall competitiveness had improved compared with peers changed to Positive or remained Positive in 2010 (Allahabad Bank, City Union Bank, Dhanlaxmi Bank). Also, the rating Outlook for Development Credit Bank changed to Stable from Negative after the banks performance stabilised. The Negative Outlook on the earlier supportdriven National LongTerm Rating of ING Vysya Bank changed to Stable after the rating was downgraded to the banks unsupported rating level.

2011 Outlook: Indian Banks January 2011

1,000 0

3,000 2,000

5,000 4,000

1,000

1,500

2,000

(INRbn)

(INRbn)

500

SBI
SBI PNB ICICI BoB Canara BoI IDBI

(INRbn) 91.66 50 40 30 20 10 0 10 20
SBI PNB ICICI BoB Canara BoI IDBI HDFC Union CBI Axis Syndicate OBC UCO IOB Allahabad Corporation Indian Andhra SBHyderabad SBPatiala United Vijaya Maharashtra SBTravancore Dena SBBikaner&Jaipur Punjab & Sind SBMysore Federal SBIndore J&K Yes Kotak IndusInd ING Vysya South Indian
Karnataka Karur Vysya City Union Lakshmi Vilas Dhanalakshmi Catholic Syrian DCB

Source: Fitch

Source: Fitch
10,534.14
6,319.14

Source: Fitch

ICICI

PNB

BoB

Canara

2011 Outlook: Indian Banks January 2011

HDFC

Exhibit 3: Net Income

Exhibit 2: Total Loans

Exhibit 1: Total Assets

Axis
HDFC Union CBI Axis Syndicate OBC UCO IOB Allahabad Corporation Indian Andhra SBHyderabad SBPatiala United Vijaya Maharashtra SBTravancore Dena SBBikaner&Jaipur Punjab & Sind SBMysore Federal SBIndore J&K Yes Kotak IndusInd ING Vysya South Indian

Union
Government

BoI

Government

Indian

Government

Allahabad

Corporation

OBC

CBI New private

Andhra

IDBI

New private

New private

UCO

SBHyderabad

Syndicate

IOB Old private

SBTravancore

Kotak

Old private

Old private

SBPatiala

J&K

Dena

Punjab & Sind

Vijaya

Yes

FY10 median

FY10 median

FY10 median

Federal

SBBikaner&Jaipur

SBMysore

Maharashtra

IndusInd

Karur Vysya

FY09 median

FY09 median

United

FY09 median

SBIndore

ING Vysya

South Indian

Karnataka

Karnataka Karur Vysya City Union Lakshmi Vilas Dhanalakshmi Catholic Syrian DCB

Annex:Financials/ratiosofselectIndianbanksfor the financialyearended March 2010

City Union

Lakshmi Vilas

FY08 median

FY08 median

FY08 median

Dhanalakshmi

Catholic Syrian

Banks

DCB

100

(%) 120

(%) 30 25 20 15 10 5 0 5 10 15

2.0 1.5 1.0 0.5 0.0 0.5 1.0 1.5

20 (%) SBTravancore Karur Vysya Kotak Indian Yes Axis City Union HDFC PNB Andhra J&K SBTravancore Canara BoB Corporation Union Federal IndusInd Allahabad ICICI Punjab & Sind SBMysore South Indian SBHyderabad Dena SBIndore SBI OBC SBBikaner&Jaipur UCO Vijaya SBPatiala ING Vysya BoI Maharashtra IDBI Federal Karnataka IOB United ICICI Dhanalakshmi Lakshmi Vilas Catholic Syrian DCB Karnataka CBI Syndicate IOB IDBI United Dhanalakshmi Lakshmi Vilas Catholic Syrian DCB Andhra SBIndore PNB Karur Vysya Canara UCO SBHyderabad Corporation BoB Union Dena Punjab&Sind City Union SBBikaner&Jaipur Yes Indian Axis Allahabad J&K SBMysore IndusInd South Indian Maharashtra HDFC SBPatiala Vijaya Syndicate CBI SBI OBC Kotak BoI ING Vysya Old private Government

40

60

80

CatholicSyrian

Source: Fitch Source: Fitch Source: Fitch

Dhanalakshmi

DCB

Karnataka

IOB

2011 Outlook: Indian Banks January 2011

Government

Maharashtra

ING Vysya

United

Lakshmi Vilas

SBI

Exhibit 6: Cost to Income Ratio

Government

Syndicate

CBI

Exhibit 4: Return on Average Assets

Exhibit 5: Return on Average Equity

IndusInd

Vijaya

Dena

New private

SBBikaner&Jaipur

New private

New private

UCO

Kotak

HDFC

South Indian

SBTravancore

Old private

Punjab & Sind

Old private

BoI

SBMysore

BoB

SBIndore

Karur Vysya

Andhra

FY10 median

FY10 median

FY10 median

Axis

OBC

SBPatiala

Canara

Union

IDBI

FY09 median

FY09 median

FY09 median

PNB

City Union

Allahabad

Indian

J&K

ICICI

FY08 median

Corporation

FY08 median

FY08 median

Yes

SBHyderabad

Banks

Federal

(%)

(%) 10 20 30 40 50 60 (%) HDFC SBI Axis ICICI PNB J&K SBBikaner&Jaipur United Maharashtra Dena DCB Allahabad CBI SBIndore ING Vysya IOB Indian Union SBMysore Syndicate Kotak SBTravancore BoB Andhra Canara Corporation SBHyderabad BoI Federal SBPatiala Catholic Syrian Punjab & Sind OBC UCO Vijaya IndusInd Karur Vysya Karnataka South Indian City Union Dhanalakshmi Lakshmi Vilas IDBI Yes SBTravancore South Indian BoB DCB SBI SBBikaner&Jaipur Punjab & Sind OBC Allahabad BoI Union SBHyderabad Canara SBIndore ICICI Corporation Vijaya SBPatiala Dhanalakshmi Dena Syndicate United Maharashtra UCO Catholic Syrian CBI Karnataka IDBI FY08 median IOB ING Vysya Yes Lakshmi Vilas City Union SBMysore Andhra Karur Vysya IndusInd J&K Axis PNB Federal Indian HDFC Kotak

10 9 8 7 6 5 4 3 2 1 0

DCB

Source: Fitch Source: Fitch

Source: Fitch

Lakshmi Vilas

ICICI

IOB

Karnataka

2011 Outlook: Indian Banks January 2011

Catholic Syrian

United

SBI

Maharashtra

Exhibit 7: Net Interest Margin

Government

Government

Government

Federal

BoI

CBI

Vijaya

Exhibit 9: Gross NPLs to Gross Advances

Union

Syndicate

New private

New private

New private

SBPatiala

SBIndore

UCO

SBMysore

J&K

Dena

Old private

Old private

Old private

OBC

SBBikaner&Jaipur

Karur Vysya

PNB

Exhibit 8: LowCost Deposits (Demand + Savings)/Total Deposits (CASA)

Allahabad

SBTravancore

FY10 median

FY10 median

FY10 median

Dhanalakshmi

IDBI

Canara

HDFC

City Union

BoB

FY09 median

FY09 median

FY09 median

South Indian

ING Vysya

Axis

IndusInd

SBHyderabad

Corporation

FY08 median

FY08 median

Andhra

Indian

Punjab & Sind

Banks

Yes

90 80 70 60 50 40 30 20 10 0

(%)

10
J&K Federal Andhra Yes HDFC Karur Vysya BoB Axis PNB DCB Corporation South Indian Union Allahabad ING Vysya IndusInd ICICI Karnataka SBBikaner&Jaipur SBPatiala City Union Catholic Syrian Syndicate SBMysore OBC CBI SBIndore SBTravancore BoI Dhanalakshmi SBI United Maharashtra Axis South Indian Punjab & Sind BoB HDFC Corporation J&K Karur Vysya Indian Andhra Yes Punjab & Sind UCO Vijaya SBHyderabad IOB IDBI Dena Canara Indian Lakshmi Vilas

15

20

25

30

35

(%)

(%)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

0
Lakshmi Vilas DCB IOB ICICI United Kotak SBI Maharashtra Catholic Syrian Vijaya Karnataka BoI Dena ING Vysya UCO SBIndore Syndicate Canara SBPatiala IDBI SBMysore SBTravancore OBC Dhanalakshmi Union SBBikaner&Jaipur CBI Allahabad City Union SBHyderabad PNB IndusInd Federal Old private New private

LakshmiVilasBankLimited

Source: Fitch

Source: Fitch

Source: Fitch

IOB

Maharashtra

United

UCO

2011 Outlook: Indian Banks January 2011

Government

Catholic Syrian

DCB

Syndicate Government

Vijaya

Government

SBI

Exhibit 12: Net NPLs to Equity

Dena

Exhibit 11: Net NPLs to Advances

BOI

SBIndore

IDBI New private

SBPatiala

SBTravancore

New private

Canara

Exhibit 10: Specific Loan Loss Reserve Coverage

SBMysore

SBBikaner&Jaipur

Karnataka Old private

Dhanalakshmi

Old private

ING Vysya

CBI

Union

OBC

Kotak

ICICI

Allahabad

FY10 median

FY10 median

FY10 median

SBHyderabad

PNB

City Union

Punjab & Sind

IndusInd

South Indian

FY09 median

FY09 median

FY09 median

Baroda

Corporation

Federal

AXIS

Andhra FY08 median

J&K

FY08 median

FY08 median

Karur Vysya

HDFC

Indian

Banks

Yes

(%) 16 14 12 10 8 6 4 2 0 Federal Kotak ICICI HDFC Yes Karur Vysya J&K South Indian City Union Lakshmi Vilas DCB Axis Indian ING Vysya Karnataka IndusInd SBI OBC Corporation SBTravancore BoB PNB Dhanalakshmi IOB SBHyderabad SBIndore Canara BoI SBBikaner&Jaipur Syndicate Andhra United SBPatiala Dena Allahabad Catholic Syrian Union Vijaya Punjab & Sind SBMysore UCO CBI Maharashtra IDBI BoB PNB Andhra SBTravancore Allahabad SBIndore City Union Canara SBI SBBikaner&Jaipur SBPatiala UCO Punjab & Sind Dhanalakshmi BoI United Maharashtra Dena Indian Syndicate OBC UBI Vijaya SBMysore Karnataka CBI IDBI Catholic Syrian Karur Vysya IOB Lakshmi Vilas DCB SBHyderabad ING Vysya IndusInd Corporation South Indian Axis J&K HDFC Kotak Federal ICICI Yes

(%) 19 17 15 13 11 9 7 5 3

(%) 23 21 19 17 15 13 11 9 7

ICICI

Source: Fitch

Source: Fitch

Source: Fitch

Kotak

Federal

DCB

HDFC

2011 Outlook: Indian Banks January 2011

Government Government Government

Axis

Yes

Indian

Karur Vysya

City Union

Exhibit 13: Total Capital Ratio

Exhibit 14: Tier 1 Capital Ratio

J&K

Exhibit 15: Equity to Assets Ratio

Lakshmi Vilas

ING Vysya

Karnataka

IndusInd

New private

New private

New private

SBI

OBC

PNB

SBMysore

South Indian

IOB

Old private

Old private

Old private

Allahabad

Canara

Dhanalakshmi

BoB

Union

SBIndore

BoI

FY10 median

FY10 median

FY10 median

Corporation

Catholic Syrian

United

Vijaya

SBPatiala

Andhra

FY09 median

FY09 median

FY09 median

SBHyderabad

SBTravancore

Punjab & Sind

Dena

SBBikaner&Jaipur

IDBI

FY08 median

FY08 median

FY08 median

CBI

Syndicate

Maharashtra

Banks

UCO

(%) 80 70 60 50 40 30 20 10 0 10 20 Yes Dhanalakshmi IDBI South Indian Punjab & Sind IndusInd Corporation Karur Vysya Axis HDFC Andhra Kotak Union CBI Dena Canara Karnataka OBC Allahabad BoB SBHyderabad Catholic Syrian City Union Indian PNB Federal UCO Lakshmi Vilas United SBBikaner&Jaipur BoI SBTravancore Maharashtra Vijaya SBI SBMysore Syndicate ING Vysya J&K SBIndore SBPatiala DCB IOB ICICI Lakshmi Vilas Union OBC UCO Indian Maharashtra BoI SBTravancore IndusInd Axis Dena PNB SBMysore SBBikaner&Jaipur HDFC SBHyderabad Karnataka Vijaya J&K Federal IOB Catholic Syrian SBI SBIndore SBPatiala ING Vysya DCB Syndicate ICICI FY08 median FY08 median FY09 median FY09 median FY10 median FY10 median Old private Old private New private CBI Allahabad United New private BoB City Union Corporation Canara Government Government South Indian Karur Vysya Andhra Punjab & Sind Dhanalakshmi IDBI Kotak Yes

(%) 70 60 50 40 30 20 10 0 10

Source: Fitch

Source: Fitch

2011 Outlook: Indian Banks January 2011

Exhibit 17: Loan Growth

Exhibit 16: Deposits Growth

Banks

10

Banks

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2011 Outlook: Indian Banks January 2011

11