From the debris of the Indian banking industry, a small segment of lenders – the old private sector banks – is rising like phoenix with a promise of being profitable, but on a scale that they could afford.
Correction of past mistakes, availability of technology off the shelf, entry of professional managers from large banks, and availability of capital for those with a promise are all helping many laggards of the past turn around.
The transformation in some of these banks is not going unnoticed at the market place with investors cherry picking those banks which are making a difference to the community they serve, and at the same time keep an eye on the financial metrics.
In the growth versus profitability debate too, they appear to be better placed as the state-run banks are likely to be hobbled by lack of capital as they clear the bad loan mess, while large private sector ones would be handicapped by their sheer size tempering their growth.
A look at how laggards like Lakshmi Vilas Bank, Federal Bank and DCB Bank are scripting a turnaround
"There is a bet on select old-generation private sector banks," said A Balasubramanian, chief executive officer at Birla Sun Life Asset Management Company. "Those banks have a balanced mix of retail and corporate loans, which mitigates risks. In the next few years, they should be elevated to mid-sized banks’ league. Their growth will outpace the industry average."
Lakshmi Vilas Bank, Federal Bank, South Indian Bank, DCB Bank, Karur Vysya Bank, Karnataka Bank are on a roll when the banking industry dominated by state-run banks is on the mat. Shares of these banks have outperformed the broader market with them soaring 30-90% in the past year, beating the BSE Bankex's 25% gain.
CHANGING MINDSET
A lot of these banks are changing with times. Many like Lakshmi Vilas, Federal and Karnataka Bank have professionalised their board of directors and taken their management away from the community that was instrumental in laying the foundation for them.
The Chennai-based Lakshmi Vilas has Parthasarathi Mukherjee as chief executive, a banker who had spent over 20 years in Axis Bank as the head of its corporate relationships. Prior to that, he was with State Bank of India. The lender had in the past appointed PR Somasundaram, formerly with Standard Chartered Bank, as chief executive.
Federal Bank, the Kerala-based lender hired Shyam Srinivasan, who managed consumer banking business at Standard Chartered, as chief executive in 2010. Since then, its loans have surged 132% to Rs 74,091 crore (between FY11 and FY17) and its profits have risen nearly 50% to Rs 257 crore from Rs 172 crore.
"We have broken out the traditional model to scale up," said Srinivasan of Federal Bank. "We have gained acceptance from the markets, customers."
Many of the banks with their new managers from outside the community or the region are beginning to look at the market afresh. They are breaking the barriers of the old by embracing change.
"With a new management at the helm of affairs, our bank is shedding its old image to bring out a new look," said Parthasarathi Mukherjee. "All these are triggering a professional work culture."
BANKING FOUR
The industry comprises four broad segments—state-run banks with about 71% market share, followed by new-age private sector lenders that hold about one-fourth of the market share. The marginal players are the old private sector lenders, which escaped bank nationalisation, and foreign banks together holding less than 5% of the pie.
A look at how laggards like Lakshmi Vilas Bank, Federal Bank and DCB Bank are scripting a turnaround
The old private lenders were a neglected lot with many of them serving a community or, at best, being a regional player, say in a particular state. A Lakshmi Vilas or a Karur Vysya will get dominant business from Tamil Nadu, or Karnataka Bank from the eponymous state. Federal Bank has dominant business from Kerala's diaspora, or DCB Bank from the western region.
Since many had their origins as a community bank, a few controlling dominant groups stifled their growth in some cases. Their financial ratios were the envy of even the dominant ones. Tamilnad Mercantile Bank—which declared a dividend of 1,000% for 2005-06 and 2006-07, and 5,000% in 2007-08— was plagued by fight within the Nadar community. Bank of Rajasthan was under regulatory lens but was forced into a merger with ICICI Bank.
DIFFERENT STROKES
Indian banks in the decade between 2002 and 2012 were binging on the growth in infrastructure and corporate lending. Many of them cut cheques for thousands of crores of rupees for infrastructure projects. The strategy helped them rake in huge profits.
But when the tide turned in 2012 due to a fragile macro-economic condition with high fiscal and current account deficit, excess of imports over exports, banks were left with defaulters. Bad loans have since surged to almost 10% of total loans.
"These banks are now seeing themselves in a better position to grow as larger peers are saddled with high NPAs and hesitant to further lending," says Kuntal Sur, partner-financial services, PwC, a consultant. "They have capacity to expand, as they have lower non-performing assets compared to larger peers, in particular PSU banks."
Many like the Mumbai-based DCB Bank are seeing opportunities to grow. "Our idea is to double the loan book in three to four years to reach Rs 30,000 crore," says Murali Natarajan, CEO, DCB Bank. "We will be small but we have got to be meaningful in terms of our technology, business and service to customers.
TECHNOLOGY & CULTURE
Although many of these banks could not match the size and scale of state-run banks, or the service efficiencies of the new-age private sector lenders such as HDFC Bank and ICICI Bank, the staff of old private sector banks are close to their customers and know their needs. They also bring that personal touch to the table which is usually missing at the banking behemoths.
"Our board wants to see the organisation being handled more professionally. Having said that, what is also important is that we have always treated our customers, staff members and stakeholders as a family and that culture has always been there," said K Venkatraman, chief executive, Karur Vysya Bank.
THE TECH EDGE
LVB, DCB and Federal Bank have adopted technology to offer services almost at par with the big four in Indian banking.
The proliferation of technology is making a difference. About two decades ago, when banks wanted to improve the processes, the choice was top guns like an Infosys Technologies or a Tata Consultancy Services.
But in the past few years, many innovations introduced by fintech startups have made life easier. Some technologies like Unified Payments Interface (UPI), Immediate Payment Service (IMPS) or data analytics are available off the shelf that narrowed the gap between a State Bank of India and a Karur Vysya Bank.
"We are spending considerably on technology and that will clearly give us an edge in day-to-day business. Eventually it will lead to substantial savings in operational costs," said Mukherjee of LVB.
Technology is enabling them to acquire customers. Lack of past growth is a blessing in disguise. Billionaire Prem Watsa’s plan to buy a controlling stake in Catholic Syrian Bank may have come a cropper, but is a sign of things to come.
"If they continue to surpass the average banking industry growth in terms of assets and liabilities, these shares will yield above average return to shareholders in coming years," says R Sreesankar, head -institutional equities, Prabhudas Lilladher.
Source : Economic Times
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