Published on 23/11/2018 11:06:57 AM | Source: ICICI Securities Ltd

Banking & Financial Conference 2018 - ICICI Securities Ltd

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Conference : Key takeaways

We hosted our biggest event ever for the financial sector with senior representations from 28 banks, NBFCs, MFIs, SFB, exchanges, depositories, rating agencies, insurance companies and AMCs over two days from November 13-14 at Mumbai. Based on our discussions with the senior management of the corporates, we reiterate our high-conviction BUY rating on the following names in our coverage universe – RBL Bank, Karur Vysya Bank, Federal Bank, AU Small Finance Bank, ICICI Lombard and CDSL.

Key discussion among large banks revolved around the liquidity crisis situation, which appears to be alleviating. Banks are benefiting by gaining share in the current environment. However, deposit costs are likely to increase for banks even as their loan books continue to reprice upward. Some banks perceive potential issues in the SME segment related to demonetisation and GST implementation. Other specific discussions predominantly revolved around regulations, the bankruptcy law and vehicle finance.


Worst seems to be over for NBFCs:

The month of October saw very low disbursements from NBFCs and more particularly the HFCs. Everyone was looking to conserve cash to pay up their liabilities when they come due. All the CPs that came up for renewal in October and early-November have either been repaid or have been rolled over. Things have definitely started to ease up in the short-term debt markets and money is available, albeit at a 100-200bps higher cost. Nevertheless, for most, the longterm market borrowings or term loans from banks are still not as easy to come by. While the strong NBFCs might still be able to raise money at a higher cost and meet their growth targets, the weaker ones at the tail-end might not grow or de-grow this year.


Pressure on spreads to remain; developer finance asset quality to be closely monitored:

Evidently, the incremental cost of borrowings for the NBFCs and the HFCs will go up by as much as 50-150bps. Companies that have a big fixed interest asset book or don’t have the pricing power would find it difficult to pass on the incremental cost of funds to customers. Particularly among the HFCs, the spreads in individual asset books will come down while the spreads in the non-individual asset books will increase given that virtually everyone is shying away from incremental lending to developers. Some of the smaller developers will find incremental funding difficult to come by and might face liquidity issues. This could potentially lead to a domino effect of developers not being able to complete projects and sitting on large unsold inventories. As such, it becomes important to closely monitor the asset quality in the developer finance book of the HFCs.


Niche SME financiers likely to gain market share:

Banks like DCB, CUBK and KVB broadly maintained their growth guidance for FY19E and sounded confident about sustaining asset quality. They also highlighted that the recent liquidation challenge has eased competitive intensity in NBFC-served segments like LAP and SME. Thus, it provides good opportunity to banks like DCB and CUBK to gain market share. Further, most banks expect margins to moderate going forward given the likely increase in borrowing cost.


BSE bets on new initiatives; market share movement key to watch in commodity derivatives segment:

The regulatory environment in commodity derivatives segment remains positive and MCX is on track to on-board four top bank broking arms by FY19-end. However, market share movement remains key to watch as both BSE and NSE entered the segment in Oct’18 with universal exchange license. BSE remains positive on its new growth initiatives such as the mutual fund platform, commodity derivatives, power exchange and insurance distribution business over the long term. In the depository business, CDSL continues to gain the larger share of incremental demat accounts, with 66% of new accounts opened in FY19-TD. CDSL’s overall share was 48% as at Oct’18-end from 46% at Mar’18-end. In this report, we present detailed feedback from the various managements / experts who attended our event.


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