All about Indian Financial sector

Banking Sector

The Indian Banking sector is the backbone of Indian economy. The banking industry has been undergoing major changes. Advancement in communication and information technology has facilitated growth in Internet banking, ATM Network, Electronic transfer of funds and quick dissemination of information. Structural reforms in the banking sector have improved the health of the banking sector. The reforms recently introduced include the enactment of the Securitization Act to step up loan recoveries, establishment of asset reconstruction companies, initiatives on improving recoveries from non-performing Assets (NPAs) and change in the basis of income recognition has raised transparency and efficiency in the banking system. Spurt in treasury income and improvement in loan recoveries has helped Indian Banks to
record better profitability. The following factors are likely to drive banking sector performance from here on:

1. Credit growth likely to remain healthy at around 20-23% and deposit growth at 18%

2. Margin pressures could reduce from hereon. As seen recently banks could continue to cut
deposit rates, which is likely to translate into better margins.

3. CASA ratios could stabilize and even improve hereon as banks cut rates.

4. Non- interest income is likely to remain strong on the back of a buoyant economy and third party product distribution.

5. Slowdown in retail credit, buoyant economy, rising wages and increased employment
opportunities provide for a quality asset portfolio of banks.

The net non-performing loans to GDP ratio for the Indian banking sector has declined sharply to 1% Y2007 as compared to 10.4% in 2002 (Source: Kotak Institutional Equity estimates). A buoyant economy, higher profitability, and asset inflation is reflected in the strengthening balance sheet in the corporate sector and improving asset quality of the financial sector.

Brokerages:
Market-wide trading volumes have gone up sharply; in Q3FY08, average daily trading volume rose by 55% Q-o-Q and 172% Y-o-Y. Over and above, the sequential growth in cash segment was higher than derivatives segment in Q3FY08 (unlike in the past quarters where F&O segment primarily drove volume growth). This reversal of trend will further boost broking revenues, as commission rates in cash segment are higher than derivatives (Source: Edelweiss Capital, Banking and Financial services, Dec 07). Given that the Indian economy is likely to remain robust, the level of activity in equity market can be expected to be high leading to increased volumes. Obvious beneficiaries of this significant rise in trading volumes will be
brokerage houses. Consequently, the revenues of these broking firms are expected to be buoyant.


Insurance & Mutual Funds:
Going forward, listing of Insurance and Mutual funds businesses would provide a big opportunity in the financial sector. Mutual fund houses and Insurance companies act as intermediaries and provide a platform for investors to invest their funds in capital markets. Both these sectors have demonstrated good growth over the past few years. The mutual fund industry has grown at a compounded annualized rate (CAGR) of approximately 50% over the past 5 years with the total industry assets under management being Rs 5,50,000 crore (as on Dec 31, 2007). The insurance sector has grown at a CAGR of around 22% over the same period as indicated by the increase in premiums. Given this rate of growth there is still a huge potential for further growth in these sectors. For instance, in India currently only 3% of household financial savings are invested through MFs. This is a small number when compared to the US where more than 26% of the household financial savings are routed through mutual funds. Markets have started to
value the Mutual Fund and Insurance businesses, which is being reflected through the realization of embedded value of the companies holding these businesses. Listing of these businesses would bring up a number of investment opportunities both during the IPO and on an ongoing basis. Globally banking and financial services are the main drivers for demand more so in the developed economies. This can be seen from the fact that banking and finance companies have more than 15% weight in the Dow Jones Industrial Average index in the US and there are 92 banking and financial companies out of the 500 companies that comprise the S&P 500 index again in the US. Further as indicated by the Dow Jones World Financials Index, currently there are 1302 companies, which form the investible universe for banking and financial companies listed globally.}

The global scenario:
Globally, financial and banking stocks slid, pressured by liquidity and credit concerns related to the sub prime mortgage debacle. Uncertainty about the Federal Reserve’s next move, as well as concerns over inflation, the housing market and unemployment further triggered the downfall. However post the correction, many of these banks and financial companies are looking attractive from a value perspective. In addition, several compelling long-term trends should lead to steady earnings growth. These include the growth of global capitalism, bank consolidation, the increasingly cashless society, and the need for savings and retirement products.