Thursday, January 22, 2009

Indian banking looks sound

Three private banks- Axis Bank, HDFC Bank and IndusInd Bank- have reported earnings growth of over 40% in Q3. This, at a time when banks worldwide have collapsed and there is an earnings debacle forecast for non-financial firms in India. How come? Is this sustainable?

Well, the Indian banking situation is very different from that in Europe and the US. There, banks' distress is the cause of the economic crisis. Here, it is a consequence. The Indian economy is hit on two counts- exports have slowed down and so have capital inflows because of international conditions. Indian banks are not directly impacted by the financal crisis because of their low exposure to the sub-prime market.

The slowing down of the economy impacts on banks. But, you have to remember that economic growth of 6% is still pretty good for any banking system. Through the nineties and until 2003, that sort of growth brought about the turnaround in the Indian banking system.

We don't know what nasty surprises the financial crisis will throw up next. But, Indian banking looks pretty sound- and we can expect it to be an outperformer in the Indian economy in FY 2009-10. More on this in my ET column, Banking remains a bright spot.

5 comments:

Pranam said...

I am a great fan of your blogs. Simple and to the point. Keep blogging :-)

ekadasia said...

The basic fundamentals are same and I disagree with you.The reason of bank failure is not sub prime every where,in EU,and in other countries.Sub Prime is a matter of past and now it is the heat taken by two large Banks of USA.Start with UK.It is basically peoples faith in market declining so the value of Bank share fell sharply.The reason for down ward trend can be anything right from performance from its constituents,growing losses,not properly identifying toxic assets when it was needed and so on.
Coming back to India,the post says on good Q3 profit which I do not deny.Even public sector Bank like UCo Bank states 107% net profit growth.But the figures are in comparison to corresponding last year performance.Equally watch the growth in advances including non fund please, and its percentage growth.You may find that if the growth in advances is 100% then how much profit should have come.
Next is the quality of advances.Please take into account the unsecured loan,off balance sheet items.The simple logic derived from Banks profit growth is that all industries (the constituents of that particular Bank)are also doing well.Because unless they do well,how Bank can book a good profit?
Do you think that all industries in India are performing well and their sale not affected and they are unaffected by so called recession.We are so immune.
Similarly take the credit offtake.Even after government injection of substantial fund into public sector banks,did the credit offtake go on with the expectation level.
RBI is also releasing The Macroeconomic and Monetary Developments - Third Quarter Review 2008-09 will be available on the RBI website at 5.00 p.m. on January 26, 2009 and the Third Quarter Review of the Monetary Policy for 2008-2009 at 11:15 a.m. on January 27, 2009.
Please watch that.
1st problem with Indian banking System is the thin operating level.
2nd problem is the hidden Non Performing Assets

There they have identified and trying to make toxic assets separate.We do have system.But like Bank of America,Citi,we too do not strictly listen to the Regulators.
3rd problem is too much interference in performance
4th problem is still there is requirement for more transparency.
I have never come across a Balance sheet (in most of the cases)where the auditor has given foot note on off balance sheet liabilities of a company on the basis of which a Bank finances non fund facilities.

There is no shame on admitting the fact that we appear sound now but things can change for better or worse depending on situation.
Let us come back to compilation of a credit report of a Director of a company to whom any bank thinks of financing.You will always see TNW showing a good figure since the proposal has to be through.
We only react only when some big mishap takes place.Coming back to policy on Indian Banking,let us go back to debt relief and its resultant effect.Who got the benefit,you know that the defaulters got it and the genuine ones did not get any incentive.Through that what message we passed on.
Forget sub prime.Let us discuss about sub prime lending rate to big companies who are in problem now.How far below sub prime lending rate you will go to nurse them?Ultimately it will affect the capital,liquidity or the stake holders.
I am also optimistic.But my view is that Indian Banking has its own weakness and it is not immune to the international scenario since we all do business and at least Bank's constituents do business outside as well.
Watch the scenario after FY 2008-2009 and impact of Basel II provisioning,then, only option for merger will be there because it will be survival of the fittest.
Same thing is happening outside.

gopi kumar v said...

Sir,
Your argument that the basic fundamentals remain the same is questionable. Also, the recent results of banks look attractive because the real problems in India has started only in the last 3-4 months. The good results till date are a reflection of the performance during the first half of the year. The results shown by banks like Indus Ind bank look very ordinary. The profit has been primarily driven by bad loan recoveries. The other income of Indusind bank is higher than the NII which I feel is not sustainable. The operating environment for banks is going to be extremely difficult in the days to come. The direct and indirect exposures to real estate have started pinching the banks. Also the exposures of banks to SMEs will also affect banks like Axis very badly in the coming days as they face payment delays and defaults from their customers in various trouble hit segments like auto, textile, real estate etc ( from all the 230 odd sectors and sub sectors linked to housing). The other income component which has boosted the revenues of the banks will also come down drastically as the fee income from selling MF, Insurance etc will drop. The rise in risk premiums will bring down the valuations of banks and their market caps. This will result in more consolidations in the Indian banking industry and also the entry of more financially strong business houses like ADAG which has already positioned its troops in small regional banks in the south.

Anonymous said...

My take on this is that, private banks in india will take a hit shortly..The cultural factor in india is playing a bit, but never the less, once job losses mount and defaults rise, we will see banks booking huge losses. We are sitll in the early stages of this downturn.

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