Update | Financials
| 13 March 2019
Market Cap to CASA (%)
Current 10yr/15yr Avg.
Assessing the trends; looking at liability based valuation multiples
Systemic credit growth has recovered to a five-year-high of ~14%, while deposit
growth remains modest at 10%. We expect credit growth to remain strong, given the
improving economic parameters and rising share of banks in the total credit needs of
the economy. Key beneficiaries of this trend will be lenders with strong liability
franchisee, as it will allow smooth flow of funds at reasonable costs.
On analyzing the key trends, we note that: (a) Private banks' share in total deposits
has increased to 27% from 18.6% in FY14. (b) CASA market share of private banks has
increased from 21.7% in FY14 to 28.8%, while the share of banks offering differential
SA rates has increased to 5% from 1.4% in FY14. (c) Jan Dhan deposits formed 9% of
incremental SA deposits for PSU banks.
Reserve Bank of India (RBI) has issued 12 banking licenses (including SFBs) over the
The rising significance of liability franchise
*Represents 7yr-10yrs avg.
# Adjusted for subs
Market Cap to Deposit (%)
Current 10yr/15yr Avg.
*Represents 7yr-10yrs avg
#Adjusted for subs
past five years, as against 12 licenses in the preceding 20 years. This has allowed
conversion of many non-bank lenders into banks and enabled them access to stable
and low cost liabilities. Recent funding issues in the financial sector have again
stressed the need of the liability franchisee. This consideration will drive M&As, going
forward. The RBI, too, will step in support of such moves, in our view.
Building a strong liability franchise is imperative:
The recent liquidity crisis has
again highlighted the importance of a strong liability franchise, as liquidity and
interest rate movements make it challenging for the NBFCs to manage their funding
cost due to the higher dependence on wholesale borrowings. The share of bank
borrowings for major NBFCs has increased sharply (range of 400bp-959bp) over
9MFY19 as usual funding channels were affected. Besides this, the cost of funds has
also risen for non-bank lenders. As the regulator and rating agencies tighten the
norms further, the cost of funding will remain elevated for them versus the banks.
Chase for deposits via M&As, focus to be on strengthening liability franchise:
importance of a liability franchise is only likely to increase as new universal banks
and SFBs aggressively chase deposits to drive business growth. M&A activities in the
banking sector have been mainly driven by either the government (SBIN’s merger
with associates; BOB/Vijaya/Dena merger) or the synergy benefits arising from the
asset-liability mix (HDFCB/CBoP, KMB/ING Vysya, IDFCB/CAFL). A liability franchise
will assume an increasingly important role behind potential M&As in the BFSI space,
more so as there remains a wide discount to the liability based valuation multiples.
Valuing the liability franchise:
Our long-term analysis of valuing the liability franchise
suggests that (a) retail private banks have traded at a higher market cap to CASA
multiple and (b) private corporate banks have seen de-rating of multiples, with asset
quality pressures leading to slowdown in business growth. On the basis of 10-15-year
average, HDFCB has traded at market cap/CASA of 115%-102%, KMB at 193%-236%,
IIB at 147%-120%, while the average for AXSB and ICICBC has been lower at 60%-80%.
With earnings momentum now back on track and the NPL cycle largely behind, we
expect multiples to improve and reflect the strength of the liability franchise.
Private Banks Ratio (%)
Source: MOFSL, Company
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542
(Parth.Gutka@motilaloswal.com); +91 22 6129 1567
13 March 2019
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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