RBI report on the banking sector 2007-08.
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Forum Name: Sector talk
Forum Discription: Discussion on sectors with regard to specific matters. We will be discussing the various sectors of the economy and how they would perform. Basically a top down approach.
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=1417
Printed Date: 04/Apr/2025 at 8:46am
Topic: RBI report on the banking sector 2007-08.
Posted By: BGKGURU
Subject: RBI report on the banking sector 2007-08.
Date Posted: 01/Dec/2007 at 9:13pm
http://feeds.feedburner.com/~r/dc/articles/~3/193068956/125100.php - New Private Sector Banks - Potential Trouble Ahead?
via http://desicritics.org/ - Desicritics by Ramki on 11/30/07
RBI recently published a report on trend and progress of banking in India (2006-07). This has information on the entire banking industry (scheduled commercial banks, co-operative banks, regional rural banks) as well as NBFCs.
There are a total of 82 scheduled commercial banks(SCBs) and the RBI categorises them into four broad categories - public sector banks(28), old private sector banks(17), new private sector banks(8) and foreign banks(29). Some of the salient features of the report are (data for scheduled commercial banks only):
- Aggregate advances grew 30.6% as compared to 31.8% in 2005-06 and 33.2% in 2004-05.
- Aggregate deposits grew by 24.6% as compared to 17.8% in 2005-06
- Lending to sensitive sectors (defined by RBI as capital market, real estate, commodity) : Exposure to sensitive sectors was
20.37% of advances as compared to 18.84% last year. 20.37% is broken down as 18.71% to real estate sector, 1.55% to capital market and 0.11% to commodities.
- Net NPAs as a % of net advances declined to 1.0% from 1.2% in 2006
- Net profits increased by 27% as compared with 17.3% in 2005-06
- CRAR of all SCBs remained at 12.3% as it was the previous year despite a significant increase in risk weighted assets, well above the minimum RBI
- requirement of 9%
- Tier I CRAR ratio declined to 8.3% from 9.3% of 2005-06 (due to slower growth in reserves and surplus) but Tier II CRAR increased to 4.0% from 3.1% of 2005-06. Still, Tier I CRAR is above the minimum of 6% prescribed by RBI
The report looks good in an overall sense but if we just focus on the section of new private sector banks (essentially comprising of Centurion Bank of Punjab, DCB, HDFC Bank, ICICI Bank, IndusInd, Kotak Mahindra Bank, Axis Bank and Yes Bank), there are some serious issues that crop up. Let me just point out a few
facts in this regard with respect to new private sector banks:
- CRAR of new private sector banks, which had improved in 2005-06 to 12.60%, declined to 12.00%, below the industry average of 12.30% in 2006-07
- Lending to real estate is highest among new private sector banks at 32.30% of their advances. This is quite a high figure - imagine that 1/3rd of the bank's lending is to real estate sector
- Net NPAs as a % of advances increased from 0.8% in 2006 to 1.0% in 2007
- Provisions made for NPAs increased by a whopping 39.43% in new private sector banks as compared to a 6.23% decrease for all SCBs
- Spread on assets for new private sector banks was 3.2% against 3.3% for all SCBs - lowest among all bank categories
- Operating profits of new private sector banks jumped by 46.7% as against 21.2% for all SCBs, the highest increase % among all bank categories
What does the above imply? How do we reconcile the fact that the net profits are growing, spreads are not really that great, NPAs have risen and lending to sensitive sector is very high for new private sector banks?
The answer is simple but not comforting - all deals done by private sector banks have a component of upfront fees in addition to the regular interest that is charged on the loan. These upfront fees are usually structured in such a way that they are a significant chunk so that this income can be booked for the quarter in which the deal is done. If the interest rate were higher, the money would come in over the life of the loan and structuring rates with a heavy upfront fee ensures higher incomes booked at the time of deal initiation. And this is a structure that is accepted by a lot of real estate developers and they are willing to pay the higher upfront. The core interest rate charged to real estate developers would also be higher due to the fact that there is a higher risk weight attached to the asset.
So what is the outlook? RBI is heavily coming down on lending to real estate and these banks would be forced to prune their real estate exposure and this would surely impact their bottomline. The real estate prices have marginally softened in the last six months due to lesser demand from individuals but has not seen a significant dip due to the fact that the developers are not willing to cut prices, even though the sales figures have gone down. And RBI is in no mood to cut interest rates and hence sooner than later, these developers would have to cut prices. And that would affect their repayment capability and this could create more NPAs for these new private sector banks in the coming months.
Stock prices of the new private sector banks are hitting all time highs - but it is time to be cautious on these names.
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Replies:
Posted By: Ajith
Date Posted: 01/Dec/2007 at 9:36pm
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Very valid view point.Risk of NPAs is very real.
Prices of flats in Bangalore are stable now.Lots of flats are available now unlike some months back.Is this a sign of worse to follow?What if buyers (speculators)vanish as in 1995/1996 when a bubble burst but at that time the market was not as funded by banks as now.How would this affect banks?
Appreciating rupee due to unacceptably high inflows is another worry for many industries.
The only consolation is that Yes Bank is starting with a clean slate.I will continue to hold Yes Bank.
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Ajith
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Posted By: omshivaya
Date Posted: 02/Dec/2007 at 2:49pm
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I removed this post, bcoz BGK jee has already posted it. I forgot about it. Sorry again. Thanks for posting BKG jee.
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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it
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Posted By: MPD05
Date Posted: 02/Dec/2007 at 8:06pm
As far as CRAR is concerned, a higher CRAR is not necessarily good by itself; it might indicate inefficient or non agressive deployment of capital. Deterioration in CRAR is a concern only if starts hovering around the minimum prescribed by Basle I/II or RBI, which is 8% and 9%.
In any event, lot of these new private sector banks have gone in for capital raising recently. If these figures were taken before that, it is natural to expect a slight deterioration in CRAR. Subsequent to the new capital raising, I expect the CRAR to look healthier.
Regards NPA, as the following indicates, it is interesting that the worst offenders seem to be Kotak and ICICI.
Source: RBI
| Appendix Table III.27: Non-Performing Assets as percentage of Total Assets – |
| Scheduled Commercial Banks (Continued) |
| (Per cent) |
| Sr. No. |
Name of the Bank |
Gross NPAs/Total Assets |
Net NPAs/Total Assets |
| |
|
2002-03 |
2003-04 |
2004-05 |
2005-06 |
2006-07 |
2002-03 |
2003-04 |
2004-05 |
2005-06 |
2006-07 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |
New Private Sector Banks |
3.76 |
2.42 |
1.56 |
0.96 |
1.07 |
2.16 |
1.1 |
0.8 |
0.43 |
0.54 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 21 |
Axis Bank |
1.17 |
1.14 |
0.82 |
0.76 |
0.57 |
0.83 |
0.46 |
0.57 |
0.44 |
0.36 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 22 |
Bank of Punjab Ltd. |
3.96 |
3.06 |
5 |
– |
– |
3.01 |
2.28 |
2.29 |
– |
– |
| |
|
|
|
|
|
|
|
|
|
|
|
| 23 |
Centurion Bank of Punjab Ltd. |
6.75 |
6.24 |
3.39 |
2.83 |
1.72 |
3.07 |
1.94 |
1.19 |
0.65 |
0.77 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 24 |
Development Credit Bank Ltd. |
5.89 |
3.92 |
6.67 |
8.42 |
2.78 |
4.37 |
2.2 |
3.09 |
2.24 |
0.83 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 25 |
HDFC Bank |
0.87 |
0.79 |
0.85 |
0.69 |
0.72 |
0.14 |
0.07 |
0.12 |
0.21 |
0.22 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 26 |
ICICI Bank |
4.71 |
2.43 |
1.65 |
0.88 |
1.2 |
2.6 |
1.1 |
0.9 |
0.42 |
0.58 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 27 |
IndusInd Bank Ltd. |
2.69 |
1.72 |
2.05 |
1.53 |
1.64 |
2.3 |
1.41 |
1.56 |
1.11 |
1.31 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 28 |
Kotak Mahindra Bank Ltd. |
0.7 |
0.31 |
0.43 |
0.37 |
1.39 |
0.06 |
0.06 |
0.23 |
0.15 |
1.09 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 29 |
Yes Bank |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
-------------
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Posted By: basant
Date Posted: 02/Dec/2007 at 8:46pm
| Regards NPA, as the following indicates, it is interesting that the worst offenders seem to be Kotak and ICICI |
This is all afucntion of where a bank wants to focus itself. If interest rates do not go down we could see some really ugly faces in the banks which have a relatively higher retail loan book.
Till date increases in interest rates have been adjusted with increasing the loan tenure and reducing the principal repayment and increasing the interest component in the intallments. But from what it stands now people are paying 90% of their installments toiwards interest costs and just 10% towards loan repayment.
So while the old mortgagees would continue to service deby the new ones would rather go slow on fresh commitements.
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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in
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Posted By: snehaldani
Date Posted: 03/Dec/2007 at 12:38pm
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Originally posted by MPD05 :
"it is interesting that the worst offenders seem to be Kotak and ICICI".
---------------------
Collatted statistics sometimes hide more than the realities on the ground.
Before evaluating the performance of Kotak in terms of deterioration of NPA (s) over a period of time as the reported chart indicates, a fact needs to be noted:
Kotak is in the business of purchase of stressed assets from other banking entities while ICICI and SBI, besides so many others sell them. By virtue of a change in RBI guidelines, Kotak is now required to include the NPA (s) of stressed assets also as a part of its gross and net NPA (s) and hence the significant spike in its numbers in 2006-07.
In fact, Uday Kotak now actually provides two set of numbers on NPA. Core NPA(s) of Kotak bank and Total NPA(s) including of the stressed assets. As investors, we are primarily concerned with the former as the latter number is the result of a strategy which is going to be a big booster to business profits in the days to come.
In fact, it is not for nothing that Kotak script continues to rock on a continuous basis. I would believe that Kotak is a multi bagger even from present rates.
-------------
Snehal P.Dani
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Posted By: johnnybravo
Date Posted: 03/Dec/2007 at 1:12pm
Originally posted by basant
Till date increases in interest rates have been adjusted with increasing the loan tenure and reducing the principal repayment and increasing the interest component in the intallments. But from what it stands now people are paying 90% of their installments toiwards interest costs and just 10% towards loan repayment.
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Well this is what ICICI has been doing since 2000. They had a PLR on which they offered loans. When rates increased by 300 bps, they increase their PLR by 500 bps. Then the stopped giving loans on the basis of PLR, the created a new jargon called as FRR which is now used as benchmark. The older PLR based customers are stuck becoz the PLR never came down when rates fell. I have a friend who is still paying his ICICI loan @ 14%. Seems like RBI has woken up to this gimmick - though too late.
Somewhere Mr. Ajith mentioned rates in B'lore stabilized or r falling down. This is bound to happen more in IT dominated pockets. Salaries increments this year seem to be miniscule - which will arrest rising property rates. The biggest IT products MNC in Pune has already reduced 3% of its work force!
Banks which have a significant exposure to retail (and mostly big ticket customers (or fools) are mostly in b'lore/hyd/pune/mumbai - might face some music.
The way these people offer credit cards, is just bewildering: no wonder they need stronger recovery agents.
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Posted By: MPD05
Date Posted: 03/Dec/2007 at 1:38pm
Originally posted by snehaldani
Originally posted by MPD05 :
"it is interesting that the worst offenders seem to be Kotak and ICICI".
---------------------
Collatted statistics sometimes hide more than the realities on the ground.
Before evaluating the performance of Kotak in terms of deterioration of NPA (s) over a period of time as the reported chart indicates, a fact needs to be noted:
Kotak is in the business of purchase of stressed assets from other banking entities while ICICI and SBI, besides so many others sell them. By virtue of a change in RBI guidelines, Kotak is now required to include the NPA (s) of stressed assets also as a part of its gross and net NPA (s) and hence the significant spike in its numbers in 2006-07.
In fact, Uday Kotak now actually provides two set of numbers on NPA. Core NPA(s) of Kotak bank and Total NPA(s) including of the stressed assets. As investors, we are primarily concerned with the former as the latter number is the result of a strategy which is going to be a big booster to business profits in the days to come.
In fact, it is not for nothing that Kotak script continues to rock on a continuous basis. I would believe that Kotak is a multi bagger even from present rates. |
Interesting observation regards Kotak's NPA. Thanks.
I agree with you, given its business portfolio, Kotak is a potential multi-bagger from here.
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Posted By: s_praharaj
Date Posted: 03/Dec/2007 at 9:41pm
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Thanx Snehaldani,
I was wondering since yesterday about the possible reason of Kotak's suuden spurt in NPA. Though I read earlier about Kotak's foray in purchasing the stressed assets of other Banks, I completely forgot that.
Thanx for putting it in the thread.
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Shashi Praharaj
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Posted By: kulman
Date Posted: 03/Dec/2007 at 9:54pm
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Thanks to all those experts on TED for making clear these nuances of Banking Sector. It is helping http://agencyfaqs.com/perl/advertising/storyboard/index.html?id=1697 - Kulwant Bhatias (like me) to gather some knowledge.
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Life can only be understood backwards—but it must be lived forwards
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Posted By: xbox
Date Posted: 03/Dec/2007 at 4:23am
Originally posted by kulman
Thanks to all those experts on TED for making clear these nuances of Banking Sector. It is helping http://agencyfaqs.com/perl/advertising/storyboard/index.html?id=1697 - Kulwant Bhatias (like me) to gather some knowledge.
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Sarkar, KB is genius despite being truck driver. His knowledge made company management speechless.
<<Lighter note => Every time I watch that ad, I imagine BM raising his hand and asking ROA/ROE query...sorry!! Basant jee>>
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Don't bet on pig after all bull & bear in circle.
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Posted By: smartcat
Date Posted: 03/Dec/2007 at 10:46am
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I think Basant sends his undercover agent "Vasanth" to ask such questions to Yes bank management.
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