Thursday, June 28, 2012

Indian Banks - Will Their Battle Plans be Enough?

Seasonal Magazine recently queried Chairmen / top-management of several public sector and private sector Indian banks to assess their battle plans for FY’13.

FY’12 numbers have poured in completely. Beneath the good or bad headline numbers lie the hidden prospects for fiscal 2013.

One thing is sure. The battle is likely to be a long drawn out one. It is not won or lost on a quarter’s arithmetic.

Beyond the optimism due to the 50 bps cut, has come in the reality of continuing challenges like inflation and sluggish credit growth, and the resultant no-more-cuts-now stance from RBI.

Which would be the banks that are poised to satisfy all stakeholders? Beyond just gratifying promoters and employees, to satisfying retail customers, industries, and shareholders too?

Surely, they are the ones with the best battle plans for the year. War plans for defending strongholds like asset quality or margins. Plans for opening new war fronts on CASA and retail. Schemes for delighting customers with over-delivery, from automated bills payment to mobile banking.

And in the process, satisfying all those who own a piece of the bank, from government to institutional investors, to innocent individual investors who are the only ones supporting banking stocks during deep falls.

Indian banking is fortunate enough to have as its patron the Indian democracy, a democracy and its regulators like RBI that have been vigilant enough to never let a major bank fail in recent years.

As the special sector that takes in nervous and short-term money from retail depositors and lends it to bold and long-term business projects, it is a no-brainer that any nation’s banks can fail if confidence in the banking system falters, and every depositor demands their money back.

With such risks pre-empted by our strong democracy, unlike even in the US which allowed Lehman to happen - the task before our banks is simply to satisfy the nation overwhelmingly.

Seasonal Magazine queried public and private Indian banks to assess their battle readiness for FY‘13. Here are the first-round of assessments:


Beyond the reasonable set of headline numbers, PNB’s performance in the quarter is not very inspiring and calls for a tough battle-plan if the performance is to continue in the upcoming quarters and this fiscal. Though net profit grew at a reasonable 18.6% year-on-year, the various constituents that went into it show a different picture. For example, non-interest income was up by 11.4% on high trading profit, there was a writeback  of Rs. 202 crore, and the tax outgo was lower. However, the greater concern with the second-largest PSU bank by revenue, continues to be of asset quality. Provisioning has doubled over the year-ago period, and it is striking that these reserves against bad loans are up in almost all categories of credit. Both restructuring and slippages shot up in the fourth quarter. The Delhi headquartered PSU banking major’s problems seem to stem from its high exposure to infrastructure and aviation sectors. For example, this quarter’s restructured accounts included three SEBs, two airlines, and a telecom tower company. PNB which recently lost its status as the second-most profitable stock to BoB, has also been on a steady downfall, and recently touched a new 52-Week Low. The bank urgently needs to formulate a battle-plan that will reverse the fundamental slide in performance by embracing higher-yield sectors like retail and MSME, even while patiently waiting for its core and troubled sectors like infra, aviation, textiles, and metals turn around.


Bank of Baroda’s newfound status as the second-most profitable PSU bank has happened this quarter, and it is not only because PNB, hitherto the position-holder, underperformed. Net profit is up by 17%, while Interest Income (NII) rose 28.2%, and NII rose 7%. The world too took instant notice of the development, with BoB being added to the prestigious and widely followed Morgan Stanley Capital International (MSCI) Global Standard Indices. Chairman MD Mallya is confident that the high restructuring the bank witnessed in recent quarters, won’t be there in FY’13, signalling that asset quality improvements would be sustained. Though the NIM has corrected somewhat in Q4, BoB still enjoys one of the best margins in the sector, and Chairman Mallya doesn’t see it falling below 3% in any case. And revealing the stature of BoB further is the fact that the Mumbai based lender is one among the select five public and private banks that has been directed by RBI for early adoption to Basel III. Other banks are considered not ready to go in for this major overhaul.


The last fiscal or even the current one haven’t been too kind to PSU banks. Under Chairman & Managing Director, Alok Kumar Mishra, the Bank of India has been re-strategizing on most fronts.  Bank of India had recently stunned market watchers with a robust set of Q4 numbers with operating profit climbing by 67% and net profit jumping by 93%, on a year-on-year basis. But beneath such headline stunners are to be found the real turnaround signals that reveal a battle-plan in the making. The crucial CASA deposits has gone up, on a quarter-on-quarter basis, by 1.84% to reach a healthy 34.25% now. Powered by this higher CASA, BoI could achieve a higher Net Interest Margin of 2.86%, which is up by 0.31% sequentially. On the asset quality front, which is one of Bank of India’s weaker links, the bank is steadily gaining ground with Gross NPAs reduced by 0.40% on a QoQ basis to reach 2.34%, which is a good achievement in a quarter when many banks reported asset quality weakening further. For BoI, it is especially good as when it switched to system generated NPAs in September, the Gross NPAs were at 3.02%. The sequential fall in Net NPAs was even more impressive, from 1.78% to 1.47%. Provisioning for bad loans was flat on a sequential basis. This PSU bank has also cut its slippages to a great extent. Slippages refer to restructured loans becoming NPAs later on. While in the previous sequential quarter saw Rs. 587 crore worth of slippages, this time around it was contained to just Rs. 75.8 crore. This development is especially comforting to investors and analysts as the bank has added Rs. 3900 crore more in this quarter into restructured assets, and this has been the only area of asset quality concern in Q4. Though sequentially it is a rise from Rs. 3010 crore, the bank now has a significantly improved and demonstrated capability in avoiding slippages. Two more developments also point that asset quality can only improve from here on. Firstly, the bank has almost completed its bulk restructuring exercises like in the case of State Electricity Boards. Secondly, a major portion of BoI’s restructured accounts are of Government companies like Air India and SEBs, which are highly unlikely to slip into NPAs. In fact, analysts have pointed out that in many countries, government bank lending to government companies are not considered NPAs at all. While some of the spike in net profit this time is due to high provisioning for pension in the year-ago period as well as income-tax refunds, it needs to be highlighted that both interest income and non-interest income did have up-ticks, of 8.4% and 17.5% respectively, on a year-on-year basis. The higher rise in non-interest income shows that the bank has been successful in cash recoveries. The bank has maintained a 70% dividend payout to investors this year too, which comes to Rs. 7 for each share of face value Rs. 10. The bank’s new battle plan that has so far delivered, and on which CMD AK Mishra is betting on is a newfound focus on retail and SME loans that are of higher yield than corporate advances. The achievements on CASA front is set to better as Bank of India rolls out more branches in a strategic manner. The bank is also aggressive in its internal targets for asset quality improvement in the coming quarters and fiscals. The GNPA target has been set at 1.6% and NNPA at 1.1%, which when achieved will ensure BoI’s position among the bluest of blue-chip banks.


The large-sized public sector bank has not only turned around significantly in Q4, but has prepared a firm battle plan for FY’13 under Chairman D Sarkar, which hinges on a newfound focus on retail, SME, and agriculture sectors, as well as on a rapid branch roll-out that will see 300 to 400 new branches and induction of 6000 new probationary officers in this new fiscal. Union Bank of India has performed well on most parameters in Q4 to mark a strong end to FY’12. While the initial euphoria of Union Bank watchers were based on the strong headline performance of net profit growing by 29.4% and total income growing by 24.6%, a deeper look too is satisfying on most counts. Two fronts were Union has performed well this time is good growth in fee income, and a significant capping of expenses, especially on account of employee expenses. At the same time, the large-sized public sector bank has performed well on core business fronts, with advances growing by 17.8% on a year-on-year basis. The Net Interest Margin has remained stable at 3.3% even in this difficult period for maintaining margins, and it is to be noted that Union enjoys one of the highest margins among its peers. There has been marked improvement also on the asset quality front with both Gross NPAs and Net NPAs getting cut. While the slippages moderated from an average quarterly pace of Rs. 890 crore to Rs. 607 crore, the PSU bank could also cut its provision coverage ratio this quarter. Union Bank’s restructured loan portfolio is noted for the absence of any exposure to the troubled airlines industry. The only concern on the asset quality front is that the bank added Rs. 3236 crore more to its restructured book, and that it needs to restructure an account worth Rs. 1100 crore in the upcoming quarter. But such developments have been happening at most PSU banks, due to their exposure to Government companies as well as the prevailing high interest regime. And in case, Union Bank numbers show that the pace as well as need for restructuring is coming down significantly. Union Bank is also expected to fare much better in the coming quarters as it has a large portfolio of technical slippages, from which recoveries have much higher visibility. Due to the recent mark correction, Union Bank of India stock has become attractive again, as it is trading at just 0.83 times its TTM book value. The dividend offered by the bank for FY’12 is Rs. 8 per share of face value Rs. 10, and at the current market price, delivers a yield of 4.12%. The bank doesn’t need any capital requirement for the next two years, and devoid of such headaches, Chairman and Managing Director, D Sarkar has crystallized a firm battle plan to improve Union Bank’s performance in the coming quarters of the new fiscal. This strategy revolves around growing some key segments where the yield is much better. On Union’s radar are segments like retail, SME, and agriculture. CMD Sarkar is convinced that this battle plan can see UBI growing its credit at 19% and deposits at 17%. The strategy seems just right, as there is significant room for growth in Union’s retail loan portfolio which is just 9% now. Though the crucial low-cost CASA deposits are comfortable at 31.28%, the bank would be looking forward to shore it up further, as this has become a major competitive arena, the performance in which can give any bank that crucial edge in performance. To attract CASA as well as give an jumpstart to the overall business, Union Bank is going in for a massive new branch roll-out that will see 300-to-400 new branches by this fiscal end. In Q4, the bank has been aggressive in recruitments to deploy at these new branches with nearly 2500 probationary officers being newly inducted. But the full branch roll-out will create 6000 vacancies and the bank is all set to recruit 3500 officers more. Also being added are 1000 new clerical vacancies. The PSB is also proactive on advancing tech-led banking initiatives which can save costs drastically, even while delivering superior customer service. As part of this plan, 1100 new ATMs are being planned for the year which will take Union’s ATM network tally to over 5000 across the country. The bank is also focusing on quality issues, and the latest initiative on this front has been the special ‘Union Experience’ branches which will showcase the very best the bank has to provide in terms of world-class customer services as well as enabling technologies. Everything is set to roll out six Union Experience branches by this June.


The South based PSU lender is re-strategizing. From a focus on wholesale segments like infrastructure and short-term corporate loans, it is taking a momentous shift to higher-yield sectors like retail, agriculture, MSME etc. In fact, much of its sluggish performance in Q4 was due to this plan already finding traction. After disturbed by accounts like Air India and SEBs, the top management under Chairman S Raman has consciously decided to chase quality rather than quantity. CanBank has also corrected weaknesses in its CASA strategy to better its NIMs going forward. The mid-sized public sector lender’s Q4 bottomline is 7.77% lower on a year-on-year basis, and 5.31% on a quarter-on-quarter basis. Not a very adverse development, compared to a couple of peers whose bottomline slipped into red in this quarter. But the core question is, is it only a case of net profit dipping? Well, on most other metrics, Canara has shown stable growth. Core income is up by nearly 29% YoY, and nearly 6% sequentially, which shows that the bank’s core topline hasn’t slowed down at all even in this difficult period for credit growth. Other Income has remained stable on a quarter-on-quarter basis. The bank could also well contain expansion in non-interest expenses, with it remaining almost flat at 1.34%. Despite interest expenses swelling, CanBank could also post a 3.4% increase in Net Interest Income on a YoY basis. On the asset quality front too, there were improvements, with Gross NPAs moderating from 1.81% to 1.73% sequentially, while Net NPAs bettered slightly by falling from 1.49% to 1.46% on a YoY basis. On a sequential basis, there was a small up-tick in NNPAs. S Raman, Chairman & Managing Director of Canara Bank has made it clear that the bank could have had better performance in the quarter, if not for some conscious decisions it took in formulating a new battle-plan for FY’13. The first decision was to go slow on wholesale or large-ticket loans. Canara Bank especially had high exposures to two kinds of such loans - infrastructure loans and short-term corporate loans. The figures for the whole year, made available with Q4 numbers, show that the bank could reduce short-term corporate loans by over Rs. 10,000 crore. The strategy seems very sound as in lieu of large volume of business, these loans are not only of lower yield, but also of relatively higher risk. Under CMD Raman, Canara has also completed the detailed process of acquiring a handle or consolidating its position on all its assets, and this has enabled him to confidently state that, going forward, only some restructuring would be the only major task before the bank as far as asset quality is concerned. But a closer look at this restructuring requirements, reveals that much of it has to do with its exposure to State Electricity Boards (SEBs). But then, apart from the temporary pressure it exerts on the finances, such government company loan assets held by a government bank is not really thought of as serious NPAs in most countries due to the very low chance of default. Even in this quarter, nearly a third of its restructuring in this quarter of around Rs. 4500 crore was towards its Air India account, which has received much attention and support from government ensuring that slippages are a remote possibility. Apart from a Rs. 5000 crore restructuring for SEBs, what will remain is less than Rs. 1000 crore of such requirement in a few assorted accounts, which shows that Canara Bank is indeed in a better shape than many comparable PSU banks on the asset quality front. Provisions were already lower in the quarter by 16.8%, falling to Rs. 662 crore from Rs. 796 crore in the corresponding year-ago period. The battle plan that Chairman Raman has crafted together with his top management starts with an aggressive campaign for bettering their CASA profile. In fact, it has already started yielding results, with Savings Bank accounts showing a growth of nearly 11%.  Now the bank is focusing more on bettering its Current Accounts where there is significant room for improvement, as due to some technological challenges in their IT infrastructure, the bank was forced to go slow on this front. But that has been fixed now, and Current Accounts will receive high focus from now on. Bettering CASA profile will benefit Canara much, as during Q4, what hurt it most was a YoY hit on Net Interest Margin (NIM) due to rise in deposit costs outpacing rise in yield on advances.


Chennai based PSU lender, Indian Bank’s Q4 and annual results were a mixed bag, with annual results holding ground even while Q4 numbers was uninspiring. Core income and net profit have improved in FY’12, and could have been better if not for the downfall due to higher provisioning and higher restructured loans in Q4. However, core interest income showed a strong up-tick year-on-year in Q4. Operating Profit too has shown a modest up-tick year-on-year. Chairman TM Bhasin is confident that the bank can outperform this year’s business growth with a renewed focus on MSMEs, agriculture, and retail sectors. The bank is targeting a 20% growth that will see it cruising to a total business of Rs. 2.60 lakh crore in FY’13. The bank doesn’t have the headache of further capital raises in FY’13 as its Capital Adequacy Ratio stands comfortable at 13.5% now. The bank which has had an impressive branch expansion in recent years would continue the trend. Indian Bank now has 1955 branches and three overseas branches in Singapore and Sri Lanka. Chairman Bhasin is confident that NIM would be at 3.2% for the whole of FY’13. Due to market correction, the stock is trading quite cheap at 0.81 times its book. The bank has announced a handsome dividend of Rs. 7.50 for the Rs. 10 FV shares.


Beyond a shocking loss in Q4, which was largely due to migration to system-generated NPAs, Central Bank of India has a definitive battle-plan made ready to make a strong turnaround in FY’13. The idea is to grow its retail and MSME segments, by an unbelievable 45% in this fiscal. The plan looks workable when one looks into the deeper numbers, and finds out that the Mumbai headquartered PSU banking major has already started sprinting in key areas like property-backed mortgages, home loans, MSME, gold loans etc. Under Chairman MV Tanksale, the bank is planning these initiatives to new heights with tailor-made products for these high-yielding segments. One of the most dismal results, as far as headline numbers are concerned, was of Central Bank of India. From a net profit position of Rs. 132.70 in Q4 of last fiscal, and from a in-green bottomline of Rs. 113.24 in Q3, CBI has this time posted a net loss of Rs. 105.23. But a closer look reveals that what the top management has done is perhaps the most prudent step that could be taken by the large-sized PSU bank under the given circumstances. Essentially, this has been a cleanup act, once and for all. What Chairman & Managing Director, MV Tanksale, has boldly done is complete the migration to the system generated NPA model in Q4, and the apparent hit on bottomline is largely due to that. The Mumbai based public sector lender’s topline growth continued to be healthy, growing by 17% year-on-year, and over 4% quarter-on-quarter, even in this difficult credit climate. Other Income has shown a sequential up-tick of nearly 21%. But even without its help, Operating Profit has shown a strong year-on-year growth of 30%, revealing that the bank has been able to contain its non-interest expenses, that has remained flat on a year-on-year basis, expanding by only less than 1%. The Operating Profit for the whole of FY’12 has also stayed in the green, growing by nearly 29%. The hit to the bottomline in Q4 was in the interest expenses, which expanded by over 31% year-on-year.  CMD Tanksale has clarified that the turn to net loss has been due to the spike in NPAs, which in turn was due to the migration to the system-generated structure. The slippages in the quarter which rose to Rs. 3300 crore was mainly due to a few large corporate accounts, which the bank is not overly worried about due to the technical nature of some of these slippages. Apart from that, three major accounts of the bank in sectors like steel and agriculture underperformed. Central Bank is taking these specific accounts quite seriously, as their outlook remains hazy. The bank which saw total provisions against bad loans in the quarter at Rs. 870 crore, is prepared to add more provisions, taking into account the possibility of their restructured book expanding due to the continuing challenges in the country‘s economic climate. But the bigger story for investors, employees, and all stakeholders of the bank is that apart from these environmental challenges, CBI has a clean slate to begin a new pace of reforms in this centennial year. Chairman Tanksale’s core strategy for the bank in the new fiscal is to grow its retail business aggressively. He is confident that a 45% growth is possible in retail in FY’13. While this looks a tough target on first looks, their focus retail segments when enumerated tells a convincing story. In retail, the bank will be focusing on Micro, Small, & Medium Enterprises (MSME), home loans, other mortgages, and gold loans - all high growth segments even in this difficult period. The retail business of Central is already showing an up-tick from 10% last year to 12% now. The bank has also been successful in creating tailor-made programs in different segments. Cent Sahayog, their flagship MSME scheme now offers loans without security and with added insurance cover, in association with SIDBI. Similarly in the home loan segment, the bank has created a special program that is designed to speed up the construction and thus aid the developer as well as the customer. Under this scheme, Central will offer disbursement in one-go to carefully screened developers and projects. The bank’s home loan and gold loan businesses are growing satisfactorily while its mortgage against property has grown three times in this fiscal, thereby proving that their battle-plan for FY’13 is very workable.


Oriental Bank’s Q4 was not encouraging with a 21% decline in net profit, capping a rather sluggish year that saw income improving, but bottomline dipping due to the difficult economic climate and the Bank’s struggle with asset quality issues. However, Chairman & Managing Director, SL Bansal has prepared a meticulous battle plan for a turnaround in FY’13 that will see a focus on growing its retail business. In fact, Oriental Bank has already started moving full stream ahead to garner a better chunk of the retail business from the market. It has been most aggressive in loan interest rates cuts, with both OBC Home Loans and Car Loans getting cheaper up to 0.75% & 1.25% respectively. Valuing long-term retail customers relations highly, OBC is also extending a 0.25% cut to existing loyal customers with good track-record which is a step that most Indian Banks hitherto shied away from. Encouraging customers who are of more benefit to the Bank, it is also extending rate cuts to all those with an annual average balance of Rs.1.00 Lac in Savings Bank and Rs.5.00 Lac and above in Current Account. Improving SB Accounts has become crucial for all banks as it contributes more to a stable CASA rather than the highly volatile Current Accounts. The mid-sized PSU Bank is also going aggressive on the education loan front with up to a 100 bps cut, as it anticipates this sector to be a high-growth one. The tenure for car loans has been extended to 7 years, while the period from home loans has been increased to 25 years, thereby making a OBC car loan at 11.50% and a OBC home loan at 10.75% highly attractive options for customers. The Bank has taken the lead to promote payments through the electronic mode by making all NEFT transactions upto Rs.1 lac free and reducing the charges for transactions between Rs.1 lac to Rs.2 lac from Rs.15/- to Rs.10/-. This move will not only motivate the customers to undertake more and more e-transactions but also result in increasing the customer base.


HS Upendra Kamath is a realistic banker who sees the ongoing pressure on the system, as such. He is candid enough to admit that cases of Corporate Debt Restructuring (CDR) would rise across the system in FY’13, as due to the lag effect with which such issues arise. Ironically, such a candid leadership model is what enabled him and the top management of Vijaya Bank to come up with a splendid turnaround in Q4 which also shored up the bank’s fiscal 2012. Q4 net profit is up by 234% while interest income is up by almost 34%, both on year-on-year basis. Net Interest Income is up by 3% in Q4, while interest income is up by 37% for the whole year. Advances outpaced deposits at a growth rate of 19% against 13%. Saving Bank accounts has shown an up-tick of 2.06% year-on-year, while total CASA stands at 25.25% now. The small-sized PSU bank is reducing its exposure to troubled sectors like Infrastructure, while it doesn’t have significant exposure to the troubled airlines industry. Vijaya Bank has achieved an impressive 24% reduction in non-interest expenditure in Q4 on a YoY basis. On the asset quality front, provisioning has sharply reduced YoY by around 82%, while NPAs came down to 1.72% from 1.81%. Both cash-recoveries and upgrades were on the higher side, thereby indicating that asset quality concerns are easing. Among its restructured accounts, majority are discoms and infra companies, which most analysts expect to come out of their troubles soon. While discoms are expected to benefit from government support, the upcoming lower interest regime would definitely help the infra players. Chairman Kamath doesn’t see much slippages in the current quarter, Q1 of FY’13. However, the realistic banker that he is, CMD Kamath feels that CDR requirements will be high and that will put pressure on margins. His battle plan for Vijaya Bank is to carefully monitor asset quality, ensuring recoveries or up gradations, and at the same time go in for higher-yield sectors like retail and MSME. The Chairman of Vijaya is also supporting the four-fold approach proposed by the banking leaders for ensuring effective CDR, which include, conversion of debt into cumulative convertible preference shares or equity, obtaining personal guarantee of promoters, contribution to be brought in by promoters, and the change in management.


Karnataka Bank’s interest income as well as operating profit have grown healthily in Q4, both on a year-on-year and quarter-on-quarter basis. Net profit too grew sequentially, but fell by 8.43% on year-on-year basis. The fall which is largely due to higher provisioning and higher taxes don’t appear serious, especially as bank’s operating profit recorded a 100% rise. Also, for the whole year, bank has achieved a net profit growth of 20.26%. MD & CEO P Jayarama Bhat is confident of achieving a 25% business growth in FY’13. Asset quality has improved with both Gross NPAs and Net NPAs moderating in the quarter. The bank’s battle-plan for FY’13 is being readied with the assistance of global consultancy major, KPMG. The plan revolves around adding 1 million new clients in this fiscal, to target higher CASA deposits as well as lend more to MSMEs and agriculture sectors. The targeted 25% growth will see the Karnataka based private sector lender reaching a business of Rs. 65,000 crore, and the plan will be assisted by 50 new branches and over 100 new ATMs in this fiscal.


South Indian Bank has delivered one of the best results among similar-sized private sector banks. The Thrissur headquartered small-sized bank posted a high profit in Q4 of nearly Rs. 122 crore, which enabled it to finish FY’12 with record profit of Rs. 402 crore. On the total income side too, SIB came on top of the list of banks growing their topline the highest. Confident with the kind of results his team could deliver MD & CEO VA Joseph has set a target of Rs. 78,000 crore business in FY’13 and Rs. 1,00,000 crore by FY’14. SIB stockholders also had reason to cheer as the bank has cut its capital raising requirement to Rs. 400 crore from the earlier announced Rs. 1000 crore, thereby allaying fears of high dilution. To assist in its growth targets, the bank is on a recruitment spree which will see 1000 new recruits, belonging both to the officer and clerical grades. Credit growth at 33% outpaced deposit growth at 23%. The good numbers in Q4 has arrested the fall of the stock due to market downfall, and the South Indian Bank’s stock is available at an attractive P/BV of 1.20% now compared with its higher valued private sector banking peers.

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