Financials Deep
2014
25 September
Dive
Sector Update
Financials
Taking a deep dive into financial services
15 experts share business insights
We hosted eminent speakers from various financial institutions to share views on their
businesses and industry trends. We had around 15 business heads from banks, NBFCs, an
insurance company, and an asset restructuring company (ARC). We present our key
takeaways.
Retail business to remain key growth engine; auto financing to revive
Over the last decade, the scope of retail banking has widened. The retail
segment has secured a prominent portion of the loan portfolio of banks. Poor
credit demand and adverse asset quality experience in the corporate segment
has also led to higher focus on the retail segment.
Growth in mortgages remains strong. The auto financing market should pick up
towards the end of the fiscal. The CV segment has been beset with lack of
replacement demand for the past one and half years; a recovery is likely in
1HCY15.
Asset quality of the retail portfolio (excluding CV loans) remains impeccable.
Participated companies
HDFC Bank
ICICI Prudential Life
Insurance
IDFC
IndusInd Bank
Mahindra Finance
Pheonix ARC
Shriram Housing
Yes Bank
Digitization a key focus area; thrust on cross-selling and customer mining
Technological platform is key for the next leg of growth. Sourcing through online
platforms constitutes 10-15% of incremental customer additions. Focused
business model, strong liability franchise, and customer-friendly service are the
key determinants of success in retail banking.
Most banks are focusing on acquiring the ‘right’ retail clients, especially
professionals starting their career lifecycle and wealthy customers. Increasing
savings account float, cross-selling (3-4 products per customer), and other fee-
based businesses would be the key focus areas over the next five years.
Green shoots visible in economy; corporate book to pick up by end of FY15
The economy is showing signs of picking up. Sentiments have improved post-
elections; all departments within the government are working together to revive
demand.
However, corporate banking is still under pressure, with low credit growth. The
next couple of quarters would be challenging, post which loan growth should
pick up.
With reduced competition and opportunities provided by the RBI (infrastructure
bonds), the focus of mid-size private banks on project/infrastructure financing
should increase. Banks are looking at generating higher fees from this segment.
Corporate banking has become a commoditized product; focus is on providing
innovative service and solutions in addition to usual product offerings.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Sunesh Khanna
(Sunesh.Khanna@MotilalOswal.com)/
Vallabh Kulkarni
(Vallabh.Kulkarni@MotilalOswal.com)
25 September 2014
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Financials Deep Dive
HDFC Bank: Retail Financing
Participants
Mr Ashok Khanna
Senior Executive Vice President
& Business Head - Auto
Financing
Mr Biju Pillai
Senior Executive Vice President
& Business Head – LAS,
Personal loan and Home loan
What makes HDFCB a market leader in auto financing?
HDFCB entered the vehicle financing market aggressively when large MNC banks
exited in 2003. It introduced its last product – tractor financing – in 2006. Since
then, HDFCB has stayed in the market across cycles. This helped gain dealer and
customer loyalty.
Currently, HDFCB has ~3.2m vehicle loan customers, and has a market share of
~25% in cars, ~18% in CVs, ~20% in 2Ws, and ~12% in tractors.
What is driving vehicle financing growth for HDFCB?
Growing aspiration levels
New OEMs entering and their products getting acceptance,
Strong relationships with dealers, and
Higher penetration in the hinterlands.
What was your strategy in the CV financing segment during the recent downturn?
HDFCB increased focus on LCVs and ultra LCVs, and became cautious on the
MHCV segment, as competition was aggressive and OEMs were offering
aggressive discounts.
What challenges do you face in rural financing?
Most rural borrowers do not have credit scores. Further, it is challenging to
figure out a potential borrower’s income and repayment capacity. Financing is
therefore, based on more localized knowledge.
Can you share some details on your loans against property business?
Valuations have not been a criterion ever; focus on cash flow-based lending
Average ticket size has largely remained stable at INR0.4m-0.45m over the last
3-4 years
60-65% of loans against property are to own customers
Customers are largely from the retail or MSME segments,
Higher growth in working capital financing in the small space of enterprises with
a turnover of less than INR50m.
What is HDFCB’s cross-selling ratio for various products?
Focus on cross-selling began 2 ½ years ago. The
intent
is to become the primary
banker for the customer.
HDFCB’s cross-sell ratio in retail lending – overall: 50%+, vehicle financing: 24%,
loans against property and Gold loans: 60-70%, unsecured loans: 50%.
25 September 2014
2

Financials Deep Dive
YES Bank: Retail Banking
Participants
Mr Pralay Mondal
Senior Group President -
Branch, Retail and Business
Banking
Ms Chitra Pandeya
Senior President and Country
Head – Savings Account liability
management, Cards, and Direct
Banking
Mr Sanjay Agarwal
Senior President - Business
Banking
Mr Nipun Jain
President - Consumer Banking
Assets
What are you doing to create capacities for the retail business?
YES is following a hub and spoke model. Most of the hubs are already in place
and YES has a focused approach for spoke branch expansion.
Size of the distribution channel has doubled over FY11-14. YES has recruited
people on the bank’s payroll, not on contract.
It is enhancing focus on digitization and the direct banking channel.
What is your strategy for acquiring liability customers?
One of the focus segments is young customers starting first banking
relationship, as such customers often keep their association for life; ~50% of
new customer acquisitions are from this segment.
For corporate salary accounts, YES is not focusing on sole mandate but on being
empanelled as additional bank.
Significant emphasis is on value from customers and not on number of accounts.
What is your experience with cross-selling and savings balance?
Liability average balance increases 30-40% with cross-selling. YES has no targets
for bancassurance; it is focusing on quality.
So far, YES sourced home loans for Dewan Housing Finance; however, with infra
bond guidelines, it will start home loans on its own balance sheet.
YES’ median savings balance is significantly higher than other banks. Share of
retail liabilities is 43% v/s 21% in FY11 and CASA at 23% v/s 10%.
What is your strategy related to building a retail assets portfolio?
YES has forayed into all products except credit cards (likely launch within a
year). Focus is on internal customers.
Retail assets will be 2 ½ times in the next four years and portfolio size will be
INR150b-200b. Once critical size is achieved, YES may also look for external
customers.
What is your experience with SME business?
The SME business offers significant scope to gain market share and will be a big
growth driver.
To increase focus, YES has bifurcated this segment into three – CBB (turnover
INR0.2b-1b), EBB (turnover up to INR0.2b), and ABB (deeper geography). The
EBB portfolio (INR20b) is largely eligible for PSL.
Asset quality is healthy, with very low NPLs.
Other takeaways
Profitability of non-metro branches higher than metro branches in the short
term; however, metro branches will remain highly profitable in the long run.
Cost of acquisition per rupee is declining for YES, but increasing for industry.
25 September 2014
3

Financials Deep Dive
M & M Financial Services: Rural Financing
Participants
Mr Rajnish Agarwal
Vice President – Operations
Mr Bhaskar Karkera
General Manager – CV & CE
Mr Sandeep Mandrekar
General Manager – LMV
Finance
What is your target segment and customer profile?
Most vehicle finance customers are first-time buyers and largely self-employed;
they are a little above BPL level and are second income generators.
Customers run their vehicles commercially for load or passengers. MMFS has
~3m customers in 180k villages. It has built strong relationships with customers;
existing customers account for 20-25% of its business.
Despite the rural economy doing well, why has your growth moderated?
There are multiple reasons: (a) OEMs are offering large discounts, (b) Unlike
competition, MMFS has been focusing on maintaining LTV at 70-75%, with
duration of 30-36 months, (c) Consumer sentiment is subdued in rural areas.
While pent-up demand is high, MMFS does not foresee much growth in the next
6-9 months.
How do you plan to capitalize the long-term opportunity?
To make the most of the long-term opportunity, MMFS is penetrating further
into the hinterlands.
It has added 300+ branches and expects to add a further 300 branches by March
2015.
How are you dealing with asset quality issues?
MMFS recognizes that these are tough times for its customers. While
repossessions are a continuous process, MMFS is consciously avoiding
aggressive re-possession (a) to remain in the market, and (b) large repossessions
might bring down resale prices of vehicles.
Of its 75,000 NPA clients, ~60% have slipped post regular payments for 18-24
months. For most of its NPAs, MMFS is adequately covered on the principal side.
It expects NPAs to be around 5% by March 2015.
What are the key challenges the company is facing?
Demand is weak. The rural market is sentiment-driven. The number of visits for
collections has increased due to strained customer cash flows.
The industry is still awaiting anticipated policy announcements.
25 September 2014
4

Financials Deep Dive
Shriram Housing Finance: Afforadable Housing
What are your views on the Government of India’s target of housing for all by
2022?
The Government of India’s target of “Housing for all by 2022” should drive
strong growth in the affordable housing space.
Housing has both forward and backward linkages. Because of this, even a small
initiative in housing can propel a multiplier effect in the economy through the
generation of employment and demand.
What is the quantum of financing required just to finance the housing shortfall?
There is an acute shortage of 90m housing units (37m units in urban areas and
53m units in rural areas) in India.
Assuming average cost of INR1.2m for an urban housing unit, the size of India’s
urban housing market could be ~INR4t.
What is your target customer segment? Is it under-banked or unbanked
customers?
Shriram Housing has ~5,000 clients. Of these, ~70% are self-employed. Its
customers include those who do not meet the requirements of banks. It
considers informal income and suppressed cash flows while determining loan
eligibility.
Most of the loans Shriram Housing has disbursed are for self-construction. Such
loans account for 65-70% of its portfolio.
What initiatives are required from the government and regulator to propel
growth?
The government needs to facilitate long-term sources of funds for the
development of real estate and housing finance.
In India, most developers face problems in acquisition of land, high cost of
capital for construction, and delays in project clearances. Moreover, inadequate
liquidity in the system for financing housing projects is a big hurdle.
A lot needs to be done in terms of relevant regulations and adequate liquidity to
strengthen the housing industry, which in turn will boost the economy.
The emergence of organized builders in tier-II and tier-III towns would lower
operating costs for housing finance companies.
Participant
Mr Sujan Sinha
Managing Director & Chief
Executive Officer
25 September 2014
5

Financials Deep Dive
IndusInd Bank: CV Financing
Participant
Mr S V Parthasarthy
Executive Vice President - Head
of Consumer Finance
What are your views on the current CV cycle?
The CV industry goes through a cycle every 4-5 years. The current cycle is the
longest (about 18 months). In 2011-12, volumes were 320k, from where they
have declined to 200k. In 2008, the decline was very sharp; this time it is
gradual.
While volumes in the MHCV segment are more to do with the economy, LCV
volumes are linked to last mile connectivity, which is fairly good.
In a normal cycle, MHCV volumes in the different categories are: (a) goods
segment 200k (100k now), (b) passenger segment 40k-50k (almost unchanged
now), (c) tripper+mining+road applications (low of 20k and peak of 100k;
currently at 10k).
In the goods segment, typically 25% of vehicles come up for replacement every
year. However, over the last 1 ½ years, replacement is not happening due to
uncertainty. The tripper segment, which is used for core sectors, is going
through tough times due to environment-related issues, government inaction,
and judicial action.
By when do you see recovery happening in the current CV cycle?
People have started realizing that vehicles have to be replaced. There is
reasonable indication of possible demand (new and used CV discount
converging, stable freight rates, etc), especially in the South, and not much of it
has converted into business.
The CV segment is likely to grow 60-100% in 2HFY15. The top-7 players hold
~70% market share in MHCVs and are better placed during a turnaround.
Can you throw some light on IIB’s CV financing portfolio?
Though the CV financing market has declined 20% in the last two years, IIB’s CV
portfolio has been flat. As a result, it has gained market share.
In the last 4-5 years, IIB’s market share has been similar to HDFCB.
Peak NPA/credit cost was 2%/0.7% and the lowest was less than 1%/0.5%.
Factors driving strong asset quality are longevity of the business and 70% of
business from repeat customers.
What is your strategy for used CV financing?
Used CV loans constitute ~15% of IIB’s overall portfolio and ~20% of its
disbursements. Disbursements are largely to own customers, and this helps to
maintain asset quality.
IIB does volumes of ~2k, SHTF does 35k-40k, and the total industry volumes are
70k-80k.
Asset quality in old CV financing is marginally inferior to the asset quality in new
CV financing; however, higher yields compensate for the same.
25 September 2014
6

Financials Deep Dive
IndusInd Bank: Corporate Financing
Participant
Mr Suhail Chander
Executive Vice President - Head
of Corporate and Commercial
Banking Group
What is the structure of corporate banking at IIB?
IIB has three important lines in corporate banking
a. Small business unit (branch based – small businessmen, traders, importers
and exporters, with a turnover of INR500m-750m, and facility size of
INR20m-30m),
b. Wholesale (large corporate, financial institutions, PSUs, and investment
banking), and
c. Distribution (mid-sized corporate, agri finance, commodity finance, MFI,
supply chain financing, etc).
Can you throw some light on the investment banking business?
This business focuses only on the debt capital market and does not have any
presence in the equity business. Three key activities that IIB is engaged in are (1)
structured debt (largest), (b) syndication – origination and distribution, and (c)
advisory solutions (smallest).
In both structured solutions and syndication, IIB keeps part of the debt on its
balance sheet to provide confidence to other lenders.
IIB started this business primarily for mid-sized businesses and bulk of the
transactions are from this segment.
Typically, it takes 3-4 months to close a transaction and IIB closes 8-10
transactions per month. Incrementally, IIB is moving up the value chain in terms
of customers.
What are the success mantras in the highly commoditized corporate business?
A competent team (coverage bankers) that can identify entry and exit
opportunities is important. If a bank has a good team, just benchmark products
are good enough to succeed (no need for much differentiation).
IIB’s mantra for this business is to never compete on price but on expertise. IIB
is largely a working capital banker for corporates, which has helped to keep
asset quality fairly resilient even in tough times.
Do you plan to tap any specific sector or product for growth?
IIB is excited about the infra/project finance opportunity. IIB is in the process of
setting up a project financing unit and focusing on taking advantage of infra
bonds.
According to the management, infra financing guidelines largely address the
bank’s key concern related to ALM.
Within infra financing, it is open to all segments and its focus will largely be on
ports, power, and roads. The project finance strategy is to take a small part of
the loans and a large part of the ancillary business. IIB will continue to focus on
working capital loans.
IIB is developing capabilities to take advantage of distress business. This
business will add volumes immediately, but value will come in 18-20 months.
25 September 2014
7

Financials Deep Dive
Is the growth sustainable for forex fees?
The retail and wholesale segments contribute evenly to forex fees. The retail
forex business is about pure distribution fees (inward/outward remittances,
buying books/magazines, etc), while the corporate forex business is both vanilla
forex business and structured forex income.
IIB believes private banks are grossly under-penetrated in the corporate forex
business, and a large part of the share is with MNC banks. Growth in the forex
business will be sustained in the near term.
ICICI Prudential Life Insurance
Participants
Mr Sandeep Batra
Executive Director
Mr. Binay Agarwala
Executive Vice President, Chief
Financial Officer and Chief Risk
Officer – Enterprise Risk
What will be the capital requirements for ICICI Pru life over the next 5 years?
There is no near-term capital requirement and RoE on invested capital can
remain ~30%.
Considering the growth expectations and solvency ratio of ~375%, dividend
payout is likely to remain high in the near term.
Can you throw some light on the business sourcing via channels
60% of the business comes from the banking channel, 20% from the agency
channel, and the rest from corporate agents and own sales force.
Recently has tied up with Standard Chartered in July 2014, which will help it to
increase business via the banking channel.
How has been your experience with the digital channel?
Focus has increased on the digital channel. Though contribution to the overall
business from this channel is very low, it is used as a facilitator for distribution,
as cost is significantly lower.
The management expects the contribution of this channel to rise meaningfully,
especially in traditional products.
What is your outlook on profitability of the life insurance business?
Opex ratios will improve, led by higher topline growth. In the medium term, as
the market is likely to revive, productivity of the agency channel should increase
manifold. While there is no room for cutting costs further, excess capacity is
available to handle 2-3x the current business.
Products in terms of higher profitability a) Protection b) Traditional participating
and c) ULIP. NBAP margins have declined sharply to low single digits and expect
to settle at the same level. The company works with absolute level of
profitability in mind.
What is your outlook on ULIPs considering revival in the markets?
ULIPs contributed ~80% of its WNRP in 1Q and this trend should sustain, given
that (a) risk appetite is improving, and (b) products have become more
customer-friendly now.
25 September 2014
8

Financials Deep Dive
IDFC: Infrastructure Financing
Participant
Mr Vinayak Mavinkurve
Group Head - Project Finance
What are your views on the new government’s approach to the infrastructure
sector?
There has been significant improvement in the way of functioning after the new
government coming in. All departments are working together.
Suggestions are invited for all issues related to infrastructure, and the pros and
cons are studied in detail.
What are the most important issues in the power sector that need to be
addressed?
Three major issues to be addressed for the power sector are (a) Fuel availability,
(b) PPA, and (c) Judiciary related.
If the fuel passthrough, and differences due to change in taxes, duties and law
are allowed as passthrough, 60-70% of the issues related to tariffs would be
resolved.
Adani and Tata case verdicts would give direction relating to various PPA
projects.
Which segment in the infra space is likely to witness maximum growth?
In the near term, while the power sector will see consolidation, roads will see
growth. IDFC is not seeing much stress on the BOT portfolio.
There is more stress at the promoter level (construction category). As per the
management this is a great space for private equity investors and those looking
to take over portfolios.
What could be the next area of growth for IDFC?
Education is a massive growth opportunity.
Other comments
Discussions relating to gas pooling are at an advanced stage and some action is
likely to be taken in the next six months.
A lot is yet to be done on the DISCOM side. The government is seriously thinking
of some reforms where it has majority at the state level. (Rajasthan might be
one of the first).
Our interactions with various players in the industry suggest that people are
worried more about PPA than the Supreme Court order, as a number of
complexities are involved.
25 September 2014
9

Financials Deep Dive
Phoenix ARC: Stress assets acquistion
Participant
Mr Kiran Shingwekar
Chief Operating Officer
What is the quantum of assets sold to ARCs during the past 2-3 years? In your
opinion, how much would be recovered?
In the current cycle, closures so far are INR400b-450b. However, recoverability
is likely to be INR200b-250b.
Most cases have high complexities (monies being transferred from corporate
level to subsidiary level to project level to equipment purchase, etc).
Due to restructuring and higher moratorium period, economic value of the
assets has declined in some cases.
What would be the impact of the recent RBI guidelines on ARCs?
Post the new ARC guidelines, transaction value is likely to decline drastically.
The RBI is more concerned about economic value to assets.
While the loss on the sale is allowed to be written down over two years, only
one large transaction has happened so far. More transactions are expected in
the SMA2 or restructured loans category.
Now, outcome of the resolution would be most important for an ARC to buy any
distress assets. Earlier, ARCs were banking on fees to recover their share.
Can you please give some flavor on the current transactions pipeline?
As at the end of August 2014, 8-10 auctions, with transaction value of INR100b-
120b were going on. However, due to aggressive pricing, not much is likely to go
through.
Transactions are likely to dry up over the next 2-3 quarters until banks lower
reserve price.
What is the view of private banks on selling assets to ARCs?
There have not been too many transactions on SR basis from private banks.
Private banks are more concerned about the impact of the transaction over the
life cycle.
What is your view on the existing reported stress loans and recoverability of the
same?
Reported number of GNPA+RL at the system level is an understatement
according to the management. LGD is likely to be 30-40%; the balance would be
recoverable in the next five years.
Recovery rates in various asset classes over 3-4 years:
Unsecured retail loans
20-25%, MSME 50-60%, larger cases 30-35% (depends upon collaterized or not).
What are the issues currently faced by the ARCs industry?
Most ARCs are over-levered (3 to 3 ½ times) and they have limited avenues to
raise capital; Single shareholder cannot hold more than 49% and average ROE in
this business is 12-15%
Too many players (14 players; only 4-5 to survive in the long term) leading to
aggressive pricing; Recovery rates are likely to be lower
Extremely regulated
25 September 2014
10

Financials Deep Dive
NOTES
25 September 2014
11

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