Financial Institutions

Banks

FY17 Outlook: Banks

Credit Costs to Erode Profits despite Growth Pickup; Capital Support Critical
Outlook Report
Rating Outlook

Stable Outlook: India Ratings and Research (Ind-Ra) has maintained a stable rating and

S T A B LE
( F Y 1 6 : S T ABL E )
Rating Outlooks
Positive

Stable

Negative

100%

sector outlook on private sector banks for FY17 and a stable-to-negative sector outlook for
public sector banks (PSBs). While capital requirements tow ards the Basel III transition w ill
continue to increase in FY17, Ind-Ra expects large private banks and few large PSBs to be
better placed w ith healthy internal accruals, robust capitalisation and w ith better access to
capital.
Most PSBs w ill Face Pressure: Mid-sized public sector banks w ill continue to experience

80%

pressure on profitability as increasing asset quality charges are likely to offset any gains from
the uptick in credit. This, along w ith w eak capitalisation and high funding gaps are likely to
constrain the outlook of PSBs.

60%
40%
20%
0%
End-2014
Source: Ind-Ra

Current

Private Sector Banks, SFBs

S T A B LE
Public Sector Banks

S T A B LE T O
N E G A T IV E
( F Y 1 6 : S T ABL E )

Capital raising critical for growth and

cushion against concentration risk.

Capital Situation Getting Exacerbated Despite Governm ent Support: Ind-Ra expects
incremental Tier 1 capital requirement of INR2.9trn till FY19 tow ards the Basel III transition
(including INR1.5trn in common equity Tier I: CET1). Of this INR630bn w ould be needed by
FY17 (excluding INR250bn from the second tranche under the governments equity infusion
plans) mostly in Additional Tier-1 (AT1) bonds. Support from the government remains critical
for PSBs, given their low internal accruals, eroded equity valuations and the risk of fur ther
slippages due to their exposure to highly levered corporates. Ind-Ra w ill w atch out for the union
budget commentary on the potential ramp up of the states equity infusion plan.
Developm ent of AT1 Market Crucial: The development of the AT1 market w ill be critical in
FY17, given the significant requirement and the burden of sluggish industrial activity in FY16. A
mere INR130bn of AT1 issuances have taken place so far, w ith insurance and pension funds
(w hich have long-term liability and risk appetite to invest in these instruments) keeping aw ay on
account of regulatory hurdles and inadequate price discovery.

Related Research
Other Outlooks
www.indiaratings.co.in/outlooks

Other Research
Ind-Ra: Economy to Expand, But Fiscal
Slippage Likely in FY17
LCR Transition to Impact Banks Profitability
and Credit Growth
The INR1trn Shortfall from Distressed
Corporates
Go to appendix f or list of rated entities

Analysts
Abhishek Bhattacharya
+91 22 4000 1786
abhishek.bhattacharya@indiaratings.co.in
Jindal Haria
+91 22 4000 1750
jindal.haria@indiaratings.co.in
Udit Kariwala
+91 22 4000 1749
udit.kariwala@indiaratings.co.in

Stress from levered corporates to persists despite plateauing of Im paired Asset Ratio:
Ind-Ra estimates around one third of the corporate sector borrow ing from banks to be deeply
stressed currently (totalling to 21% of bank credit) of w hich about half has been recognized
currently as impaired in the books (Non-performing loans: NPLs and restructured). Schemes
like 5/25, strategic debt restructuring and the recent discom (state electricity distribution
companies) restructuring package are all likely to help contain headline impaired asset ratios.
How ever, Ind-Ra expects the stress from PSBs exposure to highly levered corporates to persist
over the next few years. Ind-Ra expects the impaired asset ratio to inch up to 12.5% (including
ARC receipts but excluding Discom bonds) by (FY15:10.8; FY16E 12). Ind-Ras assessment of
the potential haircut that banks may face to revive the financial viability of distressed accounts
w hich is still unrecognised is around INR1trn or about 1.7% of risk w eighted assets (RWA)
for PSBs.
Credit Cost to Rem ain High and erode bank profits in FY16E and FY17: While retail asset
quality remains robust, Ind-Ra expects agri NPLs to inch up in FY17. Overall credit costs (P&L
NPL provisions) are likely to remain high (120bp for FY17), given the low provision coverage as
w ell as recent push by RBI to recognize the stress from levered corporates. Ind-Ra expects the
banking system RoAs to dip to 66bp in FY16E and 69bp in FY17F (FY15:77bp, FY14:79bp)

Harshal Patkar
+91 22 4000 1722
harshal.patkar@indiaratings.co.in

www.indiaratings.co.in

1 February 2016

Financial Institutions
Macro Tailw inds Point to Likely Pickup in Deposit and Credit: Ind-Ra expects credit grow th
to pick up in FY17 to 13.5% (FY16E:10.7%; FY15: 9.7%). While this is based on a nominal
GDP uptick in FY17, the deposit multiplier has started expanding backed by monetary easing.
On the demand front, w hile greenfield capex still remains sometime aw ay, an increase in
investment announcements after six years in FY15 may start reflecting in the corporate credit
pickup for FY17. Ind-Ra expects retail credit grow th to remain strong driven by mortgage and
unsecured loans.
High Funding Gaps to Hurt More Under LCR and MCLR Guidelines: Large asset liability
management (ALM) gaps run by most mid sized PSBs w ill continue to impact their margins
under the new liquidity coverage ratio (LCR) and marginal cost based pricing of loans rates
(MCLR) regime. Ind-Ra expects activity in infrastructure bonds to pick up again in FY17 after a
sluggish FY16, given the rate cycle and potential to low er the volatility in MCLR.
Stable outlook on Sm all Finance Banks Most of the recently announced small finance banks
(SFBs) and payments banks (PBs) w ill commence banking operations meaningfully only by
FY18, Ind-Ra believes the landscape particularly on the liability side has started to shift w ith
rapid expansion in digital platforms and banking correspondent (BC) channels. Ind-Ra has also
started coverage of the SFB segment w ith a stable outlook.

Outlook Sensitivities
Long-Term issuer ratings for PSBs are largely support driven and w ill change only if there is
any change in the governments support stance or a relative shift in their systemic importance.
Ratings for private sector banks and ratings on tier-1 bonds (like AT1) for all banks are linked to
the respective banks standalone profile. Positive triggers such as improvements in funding
gaps and single-name concentrations together w ith increased capitalisation levels and low er
loan loss provisions may result in a positive outlook for banks w hose ratings are driven
by performance.
Negative triggers w ill be pressure on capital ratios due to w eak profitability, a spike in credit
costs and delays in equity injections may lead to a negative sector outlook. Issuer ratings
of government banks w ill mostly remain resilient on the expectations of continued
government support.

FY 17 Outlook: Banks
February 2016

Financial Institutions
Capital Requirement Situation Worsening; Pickup in Appetite for
AT1 Crucial in FY17
Figure 1

Indian Banks: Capital

Projections for Basel III
Transition

(INRbn)

B3 Tier 2 issuance
B3 AT1 issuance
CET1 injection - capital markets
CET1 injection - govt. contribution

Ind-Ra estimates a capital requirement of INR3.7trn from FY17 to FY19 for banks including
INR1.5trn in CET1 and INR1.4trn in AT1 bonds. Of this CET1 requirement, INR1trn w ould be
the likely share of the government, assuming no change in their current shareholding of PSBs.
Of this INR1trn about INR450bn is expected to come as part of the remaining tranches under
mission Indradhanush, a plan to revamp PSBs. The government has already recapitalised
banks by INR250bn this year as part of this programme.

2,000

Government support remains critical for PSBs, given their low internal accruals, eroded equity
valuations and risk of further slippage from levered corporates. Ind-Ra w ill w atch out for union
budget commentary on the potential ramp up of the states equity infusion plan.

1,500
1,000
500
0
FY16E FY17F FY18F FY19F
Source: Ind-Ra's estimates. Study includes all
government and elevel private banks

Assumptions:
CCB and D-SIB buffer included in
calculations. Additional buffer of
50bp considered for banks
FY16-19 blended RWA CAGR of
13.5% for all banks
Assuming normalized RoAs from
FY17 onwards moving in tandem
with asset growth
Government ownership
unchanged from FY16 to FY19

Figure 2

PSU Banks (SBI

Consolidated, PNB, BOB,
Canara, BOI)
Capital projections for basel III
transition

(INRbn)
800
600
400
200
0

B3 Tier 2 issuance
B3 AT1 issuance
CET1 injection - capital markets
CET1 injection - govt. contribution

to invest in these instruments) keeping aw ay on account of regulatory hurdles and inadequate

price discovery. RBIs amended guidelines in September 2014 to bring in temporary w ritedow ns and a 5-year call option has helped improve investor interest to some extent, but active
participation by insurance firms and provident funds are still to be seen. Both regulators, the
Insurance Regulatory and Development Authority and Pension Fund Regulatory and
Development Authority have advised their regulated entities to keep the rating floor at AA,
w hich in Ind-Ras opinion shuts the market on 50%-60% of the required amount. PSBs have
also been reluctant to benchmark the coupons of these instruments against their respective
cost of equity, leading to offers w hich have not been perceived as commensurate w ith the risk
involved. The continued deterioration in the standalone credit profiles of most of these PSBs
has kept marquee investors aw ay. If domestic institutions continue to shy aw ay from this
market, Indian banks may have little choice but to tap the overseas markets.

PSBs Need Growth Capital

Assuming 14% CAGR in RWA for large PSBs, the total incremental tier-1 capital requirement is
INR1.4trn (50% CET1, 50% AT1) w ith a strong frontloaded requirement for AT1 bonds. While
most of these large five PSBs have been proactive in testing the AT1 market w ith a combined
issuance of INR65bn so far, the requirement by FY17e w ill be another INR250bn.
Ind-Ra estimates that mid-sized PSBs w ill require INR1.2trn in total capital by March 2019
(60% CET1 and 40% AT1), despite budgeting for a 12.5% RWA CAGR over FY16-FY19. Most
of these PSBs have w eak capitalisation, low internal accruals and low valuations, w hich is

FY16E FY17E FY18E

Source: Ind-Ra's estimates

FY19E

Figure 3

Other PSU Banks

B3 Tier 2 issuance
B3 AT1 issuance
CET1 injection - capital markets
CET1 injection - govt. contribution

600
500
400
300
200
100
0

FY16E FY17E FY18E

Source: Ind-Ra's estimates

FY 17 Outlook: Banks
February 2016

hampering their capital market support. The CET1 requirement by March 2019, w ithout
including the likely infusion under Indradhanush w ould be about 55% of their combined current
market capitalization. Unless their market valuations improve over the next tw o years they w ill
need to hugely depend on the government and quasi-government institutions for their capital
requirement over the transition period. These banks have raised just INR75bn in AT1 capital so
far, w hile the requirement by FY17E is an additional INR225bn.

Capital projections for basel III

transition

(INRbn)

Development of AT1 market w ould be critical in FY17, given the significant requirement and the
burden of very w eak market appetite in FY16. A mere INR130bn of AT1 issuances have taken
place so far w ith insurance and pension funds (w hich have long-term liability and risk appetite

Impact of Large Concentration to Further Weigh on Capital Requirement

While Ind-Ra believes the quantum of capital may be manageable through government
finances, if effectively spread out through the transition period, the risk from large levered
corporates could be an additional burden. If w e include Ind-Ras estimate of INR1trn as a
potential haircut for large stressed corporates, the additional fiscal burden of taking on the
entire equity requirement for PSBs w ould amount to about 35-40bp of nominal GDP annually
from FY16 to FY19.

FY19E

Financial Institutions
Headline Impaired Asset Ratio Plateauing But Stress from Levered
Corporates Persists:
Figure 4

Ind-Ra expects the impaired asset ratio of the banking system to inch up to 12.5% (including
ARC receipts but excluding Discom bonds) by FY17 (FY16E: 12%, FY15 :10.8%). Overall
credit costs (P&L NPL provisions) are likely to remain high (120bp for FY17), given the
low provision coverage as w ell as the recent push by RBI to recognize the stress from
levered corporates.

Impaired Asset Ratio

(%)

GNPL ratio
Non CDR

FY17F
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05

5.6
5.1
4.3
3.9
3.2
2.8
2.3
2.4
2.3
2.2
2.5
3.3
5.0

CDR
ARC receipt

Ind-Ra estimates about one third of the corporate sector borrow ing from banks to be stressed

0
5
10
Source: Ind-Ra's estimate; RBI

15

(totalling to 21% of bank credit) of w hich about half has been recognized currently as impaired
in the books (NPLs and restructured). While schemes like 5:25, strategic debt restructuring and
the recent Discom restructuring package are likely to help contain headline impaired asset
ratios, Ind-Ra expects the stress from highly levered corporates to persist over the next
few years.
Figure 5

Estimated Stressed corporates

(ICR < 1x)

21%
of total bank credit (as of FY15E)

9%

2.5%

Recognised as
either NPA or
restructured as
of FY15

Identified in
process/pipeline for
5:25 or Strategic
Debt Restructuring

Of this 9% (of bank

credit) covered as
part of Ind-Ra's
1 trillion report

1%

8.5%

Sold to ARCS or in
talks for sale

Stress yet to be
recognised

3%

Could potentially be
eligible for future
5:25, SDR or JLF
proposals

Figure 6

Impaired Asset Formation

Ratio

1.5%

Impaired asset formation (LHS)

Real GDP (FY12 prices)
(RHS - reverse scale)

(%)

(%)

6
5
4
3
2
1
0

5
6

Likely further
addition to
restructured book
mostly from
infrastructure

4%
Potential Slippages
by FY17E

7
8
9

FY17F

FY16E

FY15

FY14

FY13

FY12

FY11

FY10

10

Source: RBI; CSO; Ind-Ra's estimate

(PSBs) w ill need INR930bn, w hich is equivalent to an equity w rite-dow n of about 1.7% of the
banks RWA, and represents the loan haircut that banks may face to revive the financial
viability of distressed accounts. All these exposures are currently treated as performing and
carry a minimal loan loss provision of 5% or less. RBI has already asked banks to recognise

Figure 7

Impaired Asset Ratio

Remains Elevated
(%)

While the impaired asset formation ratio is likely to moderate, and schemes like 5:25 w ill
provide liquidity in the near term, Ind-Ra believes Indian banks may need up to INR1trn over
and above their Basel-III capital requirements to manage the concentration risks arising out of
their exposure to highly levered and large stressed corporates. Of this, public sector banks

Median AAA

Median AA+

Median AA

Median AA-

20
15
10

some of these deeply stressed assets as non-performing and to make prudent provisions
for them.
The shortfall may significantly increase the governments equity injection requirement
compared to the INR700bn announced on 31 July 2015. The access to equity w ill be a critical
input to Ind-Ras rating of AT1 bonds, as these instruments carry loss triggers linked to the
banks CET 1 ratio.

0
FY12
FY13
FY14
FY15 1HFY16
Source: Bank annual reports and investor
presentations

FY 17 Outlook: Banks
February 2016

Ind-Ra analysed 30 large, stressed corporates, each w ith aggregate bank debt of over
INR50bn, totalling to about 8%-9% of the overall bank credit. Bank loans to all these corporates
are accounted as performing (most of them figure as SMA1: principal or interest payment
overdue betw een 31-60 days/SMA2: 61-90 days accounts). The pow er and other infrastructure

Financial Institutions
sectors account for 50% of this exposure w hile the iron & steel sector accounts for another
32%. Aviation, ship-building, sugar and textile form the balance. These sectors have seen a
significant increase in their leverage over the last few years during a period of w eak operating
environment. The median debt-to-equity ratio for this set increased to 4x-6x in FY15 from under
2x in FY10 w hile the median market-cap-to-debt ratio contracted to 5%-7% from 35%-50%.
Figure 8
Figure 9

Debt to Equity and ICR Across Stressed Corporates by Sector

Median D/E Ratio for

Stressed Corporates
(x)

FY15
FY12

ICR (median)
2.0

FY14
FY11

FY13
FY10

Textile

1.5

Iron & steel

1.0
Textile

Infra & constr

Power

0.5

Sugar

0.0

Power

Ship building

-0.5
Iron & steel

-1.0
0

4
5
6
D/E ratio (median)
Source: Ind-Ra's estimates, Ace Equity. Size of bubble represents bank debt amount

Infra & constr

0
2
4
Source: Ace Equity; Ind-Ra

Figure 10

Market Cap to Debt and ICR Across Stressed Corporates by Sector

ICR (median)
2.0

Figure 11

1.5

Top 20 Exposure to Equity

1.0

Textile

Iron & steel

0.5
FY15

Power

Infra & constr

Sugar

0.0

Ship building

-0.5

FY14

-1.0

FY13

10
MCap to debt (median)
Source: Ind-Ra's estimates, Ace Equity. Size of bubble represents bank debt amount

FY12

15

20

FY11

Ind-Ras analysis attempts at estimating a viable leverage level for these exposures. The

FY10
0
Source: Ind-Ra

100

200

300

analysis takes the current enterprise value for these corporates as a starting point and
assumes a pick-up in the operating performance close to their respective peak capacity
utilisation. This is to estimate the level of debt these corporates w ill be able to service even
w hen the macro environment picks up. The study reveals that banks w ould need an average
24% reduction in their current exposure to ensure reasonable debt servicing (1.5x interest
coverage: ICR) by these corporates on a sustained basis.
Figure 12

Figure 13

Movement of Sector-wise
GNPA % (Top 5 Banks)
Agri & Aliied
Industry (MSME & large)
Services (including CRE)
Personal loans
8
6

Amount and Ratio of Potential Haircut Needed in Each Sector

(INRbn)

Haircut (LHS)

Balance debt (LHS)

Haircut ratio (RHS)

1,500

35
30

1,200

25
900

20

600

15
10

300

0
0
FY10 FY11 FY12 FY13 FY14 FY15
Source: Annual reports, Ace Equity

FY 17 Outlook: Banks
February 2016

(%)

Iron &
Infra &
steel
constr
Source: Ind-Ra's estimates

0
Power

Textile

Aviation

Capital
goods

Sugar

Ship
building

Financial Institutions
As the trends above suggest, any sharp pullback in delinquencies is unlikely in the near term.
This is because corporate leverage today is significantly higher than in 2008. Also, unlike the
cyclical recovery seen from FY02-FY07, it may take a few years of elevated grow th before
leverage turns comfortable. Even in a highly optimistic scenario, it w ill take about three years
for the leverage levels to reduce to the FY10-FY11 levels. Delinquency levels, therefore, are
likely to recover only over the medium-term. Additionally, w hile retail asset quality remains
robust, agri NPLs are likely to trend up further, reflecting the impact of successive crop cycle
failures across most geographies.

Banking Stress Test Reveals Potential Impact from Concentration Risk

Banks stress tolerance capability has come under pressure over the last few years. At a
system level, Ind-Ras stress test output expects some erosion in CET-I. The credit profiles of
most government banks remain vulnerable to elevated single-name and sector concentrations.
Most private banks have created stronger buffers on improved funding from w ider branch
expansion.
Figure 14

Stress Test Result of Banks Point to Stress from Single Name Concentration
As % of average loans

Historical credit cost

Addl. estimated cost if all restructured were treated as NPLs
Single name stress
Infrastructure stress
Cyclical stress
Historical PPOP
Stressed PPOP

(%)
6
4
2
0
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Stress
case
(2015)

Source: Ind-Ra. System test result obtained as weighted average of individual bank stress test results

Figure 15

Ind-Ra Stress Test: Stressed Credit Costs and PPOP

Credit cost from concentration
Credit cost from infra
Credit cost from cyclicals (inlc. Agri, Retail, CRE & NBFC)
Stress tolerance buffer (stressed PPOP)

(%)
6
4
2

BOM

Dhanlaxmi

Corp Bank

LVB

City Union

South Indian

J&K

Federal

IOB

United

OBC

Dena

Central

Vijaya

Andhra

Allahabad

BOI

UCO

Indian

IDBI

Union

Canara

PNB

BOB

Indusind

SBI Cons

Axis

Kotak Cons

HDFCB

ICICI Cons

Source: Annual reports, Ind-Ra's estimates

Figure 16

Deposit Multiplier vs
Real Deposit Rate

Macro Tailwinds Point to Credit Pickup:

1-yr TD rate adjusted for CPI (LHS)

(%)
4.0

Ind-Ra forecasts GDP grow th in FY17 to improve to 7.9% from 7.4% in FY16E. All major
sectors namely agriculture, industry and services are expected to contribute to the GVA grow th.

Deposit growth/NGDP Growth

(multiplier) (RHS)
1.5

2.0

1.4

0.0

1.3

-2.0

1.2

-4.0

1.1

-6.0

1.0

Industrial GVA is likely to grow at 7.6% in FY17 as against 7.3% in FY16E. A number of factors
are driving the incipient industrial recovery. Various announcements made in the FY15 and
FY16 budgets to address the structural issues plaguing the industrial and infrastructure sectors
are gradually gaining traction on the ground.

-8.0
0.9
FY07 FY09 FY11 FY13 FY15 FY17F
Source: CSO; RBI; Ind-Ra's estimate

FY 17 Outlook: Banks
February 2016

Financial Institutions
Figure 17

Bank Credit Growth by Sectors

(%)

Capex

Working Capital

Mortgage, CV and secured retail

Unsecured retail

Agri

NBFI/MFI

25
20
15
10

Figure 18

Capex Contribution to Bank

Credit vs Investment
Announcement

(%)

Capex contribution to bank credit

growth (LHS)
Investment announcements (RHS)
(INRbn)

15
25,000
12
20,000
9
15,000
6
10,000
3
5,000
0
0
FY07 FY09 FY11 FY13 FY15 FY17F
Source: CMIE; RBI; Ind-Ra's estimate

FY11

FY12

FY13

FY14

FY15

FY16E

F17F

Source: RBI; Ind-Ra's estimate

Ind-Ra expects credit grow th to pick up to 13.5% in FY17 (FY16E:10.7). While this is premised
on a nominal GDP uptick in FY17, the deposit multiplier has also started expanding backed by
continuous monetary easing. On the demand front, w hile greenfield capex still remains
sometime aw ay, an increase in investment announcements after six years in FY15 could
potentially start show ing in corporate credit pickup for FY17. Ind-Ra expects retail credit grow th
to remain strong driven by mortgage and unsecured loans.

Funding Challenges Remain; LCR and MCLR to Increase Pressure

on Banks with High ALM Gaps
Most private sector banks continued to improve their funding profile w hile PSBs reported high
ALM gaps in FY15 and continue to show similar trends as per latest data into FY16.
Figure 19

Ratio of Short-Term Funding Gap to Total Assets

(Deposits & borrowings maturing in 1 year - Loans and investments maturing in 1 year)/total assets
(%)

Government banks

New private sector banks

Old private sector banks

25
20

(G-Secs + CRR)/Assets

15
10

5
0
-5
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Ind-Ra, RBI. CRR: Cash Reserve Ratio. Data for end-March

Ind-Ra believes that the refinancing capability of government banks remains strong, based on
the strengths of their granular deposit bases and funding franchises.
Banks w ith large ALM gaps may how ever w itness higher funding costs due to elevated
refinancing pressure, compromising their capability to effectively transmit monetary easing.

FY 17 Outlook: Banks
February 2016

Financial Institutions
Figure 20

Funding Gaps Indian Banks in 2015

1 year cumulative funding gap/assets (%) as on end-March 2015
(%)

1 year cumulative funding gap/assets

(G-Secs + CRR)/assets

VIJAYA

ANDHRA

OBC

DENA

ALLB

SYND

SIB

IDBI

UCO

BOM

CENTRAL

CANARA

INDUSIND

SBI

IOB

KOTAK

BOI

CORP

FED

UNION

PNB

UNITED

BOB

AXIS

INDIAN

J&K

ICICI

CUB

HDFCB

60
40
20
0
-20
-40

Funding gap = (Deposits and borrowings maturing in 1 year - Loans and investments maturing in 1 year Unencumbered cash and Interbank assets)/total assets. Source: Annual reports, Ind-Ra

The focus on compliance tow ards LCR w ould further start impacting margins for banks w ith
high ALM gaps. Banks w ill need to bring their LCR ratios above 100% by March 2019. This
could be achieved by either reducing outflow s from the liability side by garnering more stable
deposits (such as those from retail and SME clients and any non-callable deposits, w hich have
low er runoff rates) or increasing the asset side high quality liquid assets (HQLA) component
(cash in hand, excess cash reserve ratio: CRR and excess statutory liquidity ratio: SLR
securities) w hich comes w ith its ow n drag on margins. How ever, improvements on the liability
side may take time to materialise depending upon the pace of retail deposit accretion. Banks
that have been losing retail deposit market share over the last few years or the ones running
high ALM mismatches in the short-term buckets w ould be compelled to keep a high proportion
of HQLA to manage their LCRs. This w ill be a drag on their profitability.
Figure 21

LCR Ratios for Indian Banks (Mar 15)

(%)

LCR ratio

Regulatory minimum (60%)

305

350

206
205
197
165
144
139
130
127
119
113
112
111
109
108
107
102
101
101
97
88
81
80
80
77
74
72
70
69
65
65
64
63
62
54

300
250
200

150
100
50

JKBK
KVB
IOB
UNTD
SBI
SYND
CBOI
BOI
ALBK
UCO
FED
UNBK
DCB
KTKA
BOB
SIB
OBC
ICICI
HDFC
PNB
AXIS
BOM
YES
INDB
IDBI
ANDB
RBL
PSB
KTM
VIJ
CAN
DEN
CUB
IIB
CORP

Source: Annual reports. Lighter shade represents private sector

Figure 22

LCR Breakup Indian Banks FY15

(%)

HQLA/TA

NCOF/TA

Median

20
16

Increasing liquidity coverage ratio

12
8
4

JKBK
KVB
IOB
UNTD
SBI
SYND
CBOI
BOI
ALBK
UCO
FED
UNBK
DCB
KTKA
BOB
SIB
OBC
ICICI
HDFC
PNB
AXIS
BOM
YES
INDB
IDBI
ANDB
RBL
PSB
KTM
VIJ
CAN
DEN
CUB
IIB
CORP

Source: Annual reports

FY 17 Outlook: Banks
February 2016

Financial Institutions
Figure 23

Classification of stable and less

stable deposits (within retail and
SME deposits) indicates why a
high CASA ratio does not directly
imply more stable deposits

Stable and Less Stable Classification of Outflows LCR FY15

% stable

% less stable

CASA %

100%
80%
60%
40%
20%

BOI
PSB
ALBK
IDBI
SIB
ANDB
YES
KVB
INDB
SBI
DCB
KTM
CUB
HDFC
DEN
ICICI
UNBK
KTKA
AXIS
BOM
CBOI
CAN
BOB
LVB
IIB
SYND
IOB
FED
JKBK
UCO
PNB
CORP
VIJ
OBC
UBI

0%

Source: Annual reports

Banks w ith LCR below 100% w ill need, on average, to increase HQLA by 4% of the total FY15
assets or 4.5% of NDTL. This ranges as high as 8% for some banks and w ould imply that some
banks w ould need to raise SLR levels to above 30%. This w ould imply a return on assets
impact of 6-8bp up-till FY19.
The MCLR ratio w ill also increase the focus on ALM management by banks and could
potentially incentivise shoring up of long tenor bonds like infrastructure bonds as a tool to
reduce volatility. Banks w ith higher mix of senior bonds could see low er volatility on MCLR both
on account of better matched tenors and average cost of borrow ing calculated on the entire
borrow ing profile.

FY 17 Outlook: Banks
February 2016

Financial Institutions
Small Finance Banks and Payments Banks to Start Changing
the Landscape:
Figure 24

BC Channel Size and

Throughput
BC points (LHS)
Amt transacted/BC p.a (RHS; INR 000)
Tx. per BC point/year (RHS)
Amt/tx (RHS; INR)
(000)
600

2,000
1,500

400

1,000
200

500

In FY16 RBI has, attempted to introduce differentiated banks to serve the financially
underserved micro, small and medium enterprises and individuals. Ind-Ra had pointed out in
the report Microfinance: Strong Comeback that large diversified micro finance institutions
(MFIs) or smaller but geographically concentrated entities w ill be the best suited to operate as
an SFB and the 10 entities referred above broadly fulfil the criteria. The payment bank licenses
also aim at transforming the payment landscape by bringing cash lying outside the banking
channels into the system through convenient and safer digital platforms. In the agencys
opinion, most of these entities w ill collaborate in the near term w ith other PBs, SFBs,
Scheduled commercial banks, BCs, Telecom companies and w hite label ATM providers to
evolve the eco-system.

FY11 FY12 FY13 FY14 FY15

Source: RBI

In addition, both the SFBs and PBs w ill require feet-on-the ground and hence partner w ith BCs.
Although their efficiency and role has been limited till date, (some studies have show n that only

Figure 25

Mobile and Internet

Subscribers

50% of the BC points are operational), w e believe that the entry of these 21 private entities w ill
increase the throughput of the BC channel significantly and increase the sustainability of the
client service points of the BCs.

Internet (subscribers)
Mobile
Mobile internet

(Population
in m)
1,200

Most of the recently announced SFBs and PBs w ill meaningfully commence banking operations
only from FY18. Ind-Ra believes the landscape particularly on the liability side has started to
shift, w ith rapid expansion in digital platforms and BC channels. Ind-Ra has also initiated
coverage of the SFB segment w ith a stable outlook.

Although India has the second highest number of internet users in the w orld in FY16, the
internet penetration is still low er than many developing countries. How ever the pace of increase
in internet penetration, data usage and smart phone penetration indicates that digital literacy is

1,000
800

600
400
200
0
Dec 13 Jun 14 Dec 14 Jun 15 Dec 15

Source: TRAI, Ind-Ra estimates

a possibility in 5-10 years. Internet and mobile association of India expects the smart phone
penetration to increase from 30% in FY16 to 70% by FY19-FY20 and this could play a larger
role in familiarising PB and SFB customers w ith app based systems. In addition, e-Know your
customer and Adhaar adoption and verification, digitisation and digital payment systems
(Aadhar enabled payment systems, IMPS, NEFT, SMS Banking) and extensive use of credit
bureaus (now mandatory even for bank self-help group programs) indicate that the regulatory
bodies and other intermediaries are preparing for the digital transition.

Payment Banks
The payment system in India is undergoing a change tow ards electronic and digital
transactions. Paper based clearing systems have seen a drop of 10% in transactional volume

Figure 26

Internet and Smartphone

Penetration
Internet (LHS)
Smart phone (LHS)
Mobile internet/mobiles (LHS)
Data/month/mobile subscriber (RHS)

FY16 and w e expect the trends to continue given the systemic push by all participants in the
financial market and mobile and internet penetration.

Dec 15

Jun 15

Dec 14

Jun 14

(MB)
150
100
50
0

Dec 13

(%)
40
30
20
10

share betw een FY12-FY16 (till date) w hile w allets and mobile banking have gained 4.5% in the
same period. In terms of value, the larger ticket size transactions still follow NEFT route w hile
relatively smaller transactions have moved to w allets, credit cards and mobile banking
channels. The pace of change in preference of mode of transaction has increased especially in

Source:Track.in, TRAI, IAMAI (Mobile

internet in India 2014), Gartner,
Ind-Ra's estimates

FY 17 Outlook: Banks
February 2016

10

Financial Institutions
Figure 27

Market Share Changes Payment Systems FY12-FY16

Value market share change (%)
4
EFT/NEFT

2
Debit Cards

Mobile Banking

Cards

ECS

-2

IMPS

Retail Electronic

PPI

Credit Cards Wallets

Paper Clearing

-4

RTGS

-6
-8

-15

-10

-5

0
5
Volume market share change (%)

10

15

Source: RBI payment system statistics. data for FY16 till Nov 15

Although the payment banks may not be able to provide a compelling value proposition at
present to customers w ho are w ell acquainted w ith digital channels (adequately served by
independent w allets and banks), they could drive up volumes of transaction from those
unfamiliar w ith digital banking. Most banks have also developed their ow n w allet products, but if
the user base does not expand, the smaller payments could move to independent w allets or
innovative payment banks.

Small Finance Banks

The combined loan assets of the SFBs (including their key operating subsidiaries) stood at
INR134bn in FY14 and INR215bn in FY15 (60% yoy grow th). Equitas Holdings, AU Financiers
and Capital Local Area Bank are diversified financiers w hile others are primarily NBFC-MFIs.
Figure 28

SFB Loan Assets and Growth

AUM (1HFY16, INRm)
80,000

Au Consol

Janalakshmi

60,000
Ujjivan

40,000

20,000

Disha-FFSL
RGVN

0
30

50

Equitas

ESAF

Suryoday

70
90
110
Growth CAGR (FY14-H1FY16; %)

Utkarsh
130

150

Source: Company data, MFIN

In addition to deposit services, the SFBs w ould look to provide diverse credit products to their
customer like loans for affordable housing, small business loans, gold loans, vehicles and loan
against property. How ever SFBs w ill need to upgrade their technological platforms and
collaborate w ith credit bureaus, regulatory bodies and other financial institutions to prevent
overleveraging and frauds.
The SFBs need to deploy resources to garner deposits from individuals and corporate entities.
For retail liabilities, they w ill compete w ith the payment banks, scheduled commercial banks,
regional rural banks, LABs and co-operative banks. Our analysis of a set of efficient cooperative banks revealed median current account savings account (CASA) ratio at 15-20% of
deposits w here the deposit base has already grow n to 85-90% of total liabilities. Ind-Ra
expects that the steady level of CASA ratio for SFBs could be 10-15% of total liabilities (bank
self-help group program has maintained savings to credit ratio of about 20%). The SFBs w ould
need to depend on BCs and other platforms to mobilise deposits (since the combined branch
netw ork of the SFBs is approximately equivalent to Allahabad Banks (IND AA/Stable) in
FY 17 Outlook: Banks
February 2016

11

Financial Institutions
H1FY16).
We expect that the systemic risk and geo-political risks faced by MFIs w ould reduce w ith their
transformation into SFBs. How ever, on the flip side SFB-MFIs could see erosion in RoAs
(currently ranging at 3%-5%) as they w ill incur costs tow ards developing banking infrastructure,
creating liability franchise, maintaining CRR and SLR deposits. As the share of non-group
loans increase, their bad loans and as a result credit cost may reach similar levels as
diversified NBFCs.

Profitability to be under severe pressure particularly for PSBs

Figure 29

PPOP Credit Cost as % of

Average Assets

The profitability (ROA) of government banks w ill continue to see the impact of high credit costs
w hile large ALM gaps run by most mid-sized PSBs w ill continue to impact their margins under
the new LCR and MCLR regime.
Figure 30

Figure 31

Key Performance Trends

Key Performance Trends

Return on assets & return on equity

Net interest margin and credit costs

ROA (LHS)

Figure 33

Key Performance Trends

Key Performance Trends

Asset quality Gross NPL ratio and LLR

Tier 1 ratios
(%)

Ratios under Basel II

Source: Ind-Ra, RBI

Figure 34

Figure 35

Key Performance Trends

Key Performance Trends

15

40

10

20

0
FY17F

FY16E

FY14

Nominal GDP growth

FY13

FY12

FY11

FY10

Loan growth

FY09

FY17F

60

FY16E

20

FY15

80

FY14

25

FY13

100

FY12

(%)

FY11

Loan growth and nominal GDP growth

(%)

FY10

Loan-to-deposit ratio

FY09

FY17F

Source: Ind-Ra, RBI

Source: Ind-Ra, RBI

FY16E

FY15

FY14

FY13

FY12

FY11

FY10

12
10
8
6
4
2
0

FY09

FY17F

FY16E

FY09

FY15

FY14

FY13

FY12

FY11

FY10

Gross NPL ratio (LHS)

(%)
Specific loan loss res. cov. ratio (RHS)
70
60
50
40
30
20
10
0

FY17F

Source: Ind-Ra, RBI

Figure 32

(%)

FY16E

FY15

FY14

FY13

FY12

FY17F

Source: Ind-Ra, RBI

FY 17 Outlook: Banks
February 2016

3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

FY11

Net interest margins (LHS)

(%)
Credit costs as % of avg. loans (RHS)
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0

(%)

FY09

0.0

FY16E

0.2

FY15

0.4

FY14

12

0.6

FY13

0.8

FY12

15

FY11

18

1.0

FY10

1.2

FY09

FY15

FY14

FY13

1HFY16

Source: Annual reports

FY12

FY11

FY10

FY09

FY08

(%)

FY10

(%)

ROE (RHS)

FY15

Median of AAA rated PSUs

Median of AA+ rated PSUs
Median of AA rated PSUs
Median of AA- rated PSUs
Median other PVT
Median AAA PVT sec banks

Source: Ind-Ra, RBI

12

Financial Institutions
The profitability of banks is likely to w itness another year of pressure as credit costs remain
elevated, w ith higher w rite-offs accompanying high delinquency. For FY17, net interest margins
w ould be flat despite the steep fall in cost of funds on account of higher impairment and low er
loan to deposit ratio. Capital levels of banks may remain stable in FY17, despite the prospect of
higher capital injection by the government due to their low er internal accruals.

FY 17 Outlook: Banks
February 2016

13

Financial Institutions
Appendix 1
Figure 36

Bank Ratings
Bank
Allahabad Bank
Andhra Bank
Axis Bank
Bank of Baroda
Canara Bank
Catholic Syrian Bank
Central Bank of India
City Union Bank
Corporation Bank
Dena Bank
Federal Bank
HDFC Bank
IDBI Bank
Indian Bank
IndusInd Bank
ING Vysya Bank
Jammu and Kashmir Bank
Kotak Mahindra Bank
Lakshmi Vilas Bank
Punjab National Bank
South Indian Bank
State Bank of India
UCO Bank
Union Bank of India
United Bank of India
Vijaya Bank

Long-Term Issuer
Rating/Outlook
IND AA/Stable
IND AA/Stable
IND AAA/Stable
IND AAA/Stable
IND AAA/Stable
IND BBB(Withdrawn)
IND AA/ Stable
IND A+/Stable
IND AA+/Stable
IND AA-/Stable
IND AA-/Stable
IND AAA/Stable
IND AA+/Stable
IND AA+/Stable
IND AA+/Stable
IND AAA(Withdrawn)
IND AA/Stable
IND AAA/Stable
IND BBB+/Stable
IND AAA/Stable
IND A+/Stable
IND AAA/Stable
IND AA/Stable
IND AA+/Stable
IND AA-/Stable
IND AA-/Stable

Perpetual Tier I/Upper

AT1 Issuance Rating Tier II Rating (Basel 2)

IND AA+
IND AA+
IND AA

IND AA-

IND AA-

IND AAIND AA
IND AA+

IND AA+

IND A+
IND AA
IND A-/Negative
IND A-

Source: Ind-Ra

FY 17 Outlook: Banks
February 2016

14

Financial Institutions

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FY 17 Outlook: Banks
February 2016

15