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Takeaways from Banking conference-I
Apr 24, 2008

We recently attended the International Banking and Finance Conference organised by the Indian Merchants’ Chamber (IMC). This gave us a good perspective on the metamorphosis of the banking sector so far and offered interesting insights into where some industry stalwarts envision the sector going in the next two decades. The story so far…
The banking sector has witnessed a transformation of sorts in the last decade in terms of both operating metrics as well as business environment. Starting with overall NPA (non performing assets) levels of 8% to 10%, prime lending rates in the range of 13% to 15% and 25% of advances being in the ‘restructured category’ in 1996, the sector has come a long way and has evolved into a robust one, largely due to the turnaround of Indian corporates. This has also been possible through the RBI’s policy of merging the weak banks, particularly ones with CAR (capital adequacy ratio) of less than 9%, gross NPA in excess of 5% and return on assets lower than 0.25%. This involved a total of 77 amalgamations between the PSU and private sector and the private sector itself.

The largest banking entities in the public and private sector respectively, SBI and ICICI Bank enlisted some of the key tactics that helped them emerge as market leaders as well as transform the sector. These were sizing the scale of opportunity to drive capability, using scale as an advantage and being a relevant player. The banks themselves grew in size as well as scale, at the same time spotting and responding to opportunities. ICICI Bank, particularly, surpassed every other player in the financial domain across product categories in terms of market share.

SBI on the other hand managed to partially overcome its public sector work-culture through large scale training programmes. Both the banks also innovated and adopted the latest technology and re-engineered their businesses to suit domestic as well as global customers. An important ballpark figure that both the banks emphasised upon was the per capita income crossing the US$ 500 mark in early 2000, which is recognised by global banks as the early sign of rise in consumerism. Further, the current per capita income of US$ 1,000 is also seen as having the potential for change in aspiration levels and thereby sustain the momentum of demand for credit.

Then and now…
Indian banks 1998 2008
Players with Mcap > US$ 1 bn 1 13
Financial assets / GDP 96% 200%
Home loan market US$ 8 bn US$ 75 bn
PSU banks' share of PAT >85% <65%
     
ICICI Bank 1995 2008
Branches 6 1185
Customers < 1 m > 35 m
Usage of branches / ATMs 94% / 3% 10% / 41 %
Per capita income US$ 500 m US$ 1000 m

Accounting norms – Global convergence
With the aim of converging the accounting norms of the Indian banking entities with that of their global counterparts, the Institute of Chartered Accountants of India (ICAI) is working towards converging the Indian Accounting Standards (IAS) to the globally adapted IFRS. This conversion will take place by FY10 and will cover all financial entities, listed companies and other Indian entities with turnover in excess of Rs 1 bn, borrowings in excess of Rs 250 m.

The global stalwarts
Global consulting major, McKinsey enlisted some of the banks that have globally emerged as the top 20 due to their competence across parameters.

  1. Banco Santander – This Spanish banking entity was the 6th largest in Spain in the last decade. Its aggressive retail strategy has positioned it amongst the frontrunners globally.

  2. Kookmin Bank – From being Korea’s largest banking entity, this bank not just gained in market capitalisation but also has the distinction of having one of the highest return on equity amongst banking entities (22% in 2007).

  3. Uni Credit – This Italian bank has grown its market capitalisation 45 times in the last 15 years.

  4. Itau – This Brazilian bank has emerged superior to the best banks globally in terms of its technological innovations.

  5. Wells Fargo - In the midst of subprime turmoil amongst the US banks, this bank has emerged as one of the best hedged. Over the last ten years, Wells Fargo has averaged a 1.6% return on assets and an 18.2% return on equity. Neither mortgage nor commercial real estate lending in any geographical area accounts for more than 2% of Wells Fargo's total loans. Further, Wells Fargo's focus on cross selling is well known. The company has a stated goal of doubling the average number of products per consumer from four to eight.

In the second part of this article, we shall discuss the banking industry’s vision for 2020.

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