This article from forbes could be good starting point if one wants to understand the role of Banks.
“A Licence to Print Money in Underbanked India”
Author Debasish Basu is one of my favorite and has used very simple language to explain why Banks rock !!
If you want to understand more on the Private Banking giant of India, HDFC Bank, “Bank for the Buck” a book by Tamal Bandhopadhya will be a great read…
Here is an interview with HDFC Banks EDParesh Sukhthankar, a good …
Traditionally, the banking system has grown at 2.5-3 times the real GDP growth. We have grown at some pace faster than that. When we were much smaller, we were growing at 7-10 percent faster than the system but in the last 5-10 years, weave been growing at somewhere between 4-5 or 3-6 percent faster than the banking system. Which means we are gaining market share. The important thing which weave done consistently is that the growth in market share or volumes has been achieved while maintaining a more balanced/stable net interest margin and within the bankas asset appetite in terms of asset quality (within the bankas risk appetite).
This link can helpyou want to understand more on the Nominal Vs Real GDP
While banking is a proxy for the economic growth, a lot of value in banking seems already captured.
There are two areas where banks have their major chunk of books, i.e., corporate and retail. While corporate book has to deal with elevated risk of NPAs where failure of one large account can skew the bank’s performance, the retail space is a gravy train which everyone wants to get a slice of, wants to ride out of their trouble, and looks to boost their growth; this is a growth area targeted by all the players and therefore subject to price wars and pyrrhic victories.
Many years ago, private sector banks came and disrupted the then existing banking space dominated by slumbering PSU banks and won business and market share. Today, while the PSU banks struggle under mountains of NPAs and poor credit disbursement/off-take, the private banks fight for the same pool of customers in a fragmented banking space with too many different types of players. It is difficult to pick the winners in this large vortex.
Now is the time for the disruptors to become disrupted. The next level of disruptors in banking space will be those that exploit the gap in the banking space, i.e., the rural/urban unbanked populace, which banks don’t want to or cannot serve as of now. These large chunk of market is ready and presents a clean runway for microfinance and small finance banks. On second level of thinking, we should search for the next set of winners here. Some private banks are looking to acquire these businesses in recognition of their potential, which vindicates this point of view.
Surely, these players have become expensive and one has to wait for the right price point for entry. Still on a long-term basis, some winners here will go the distance.
The above is only my opinion. All alternative views are welcome.
Disclaimer: The above is only for discussion purpose.
This is exactly my thought process for taking considerable positions in Ujjivan and Satin. We need to look beyond ROE, ROA, yield etc. India is truly under-penetrated and over banked at the same time. How much more you can load up salaried middle class, even if consumer banking is expected to rule?
Just go to any public place and take a look around, you will see that almost 60-70% are out of banking system. They won’t be served by HDFC, kotak, Yes or Indusind. This is the merit behind 10 SFB licenses by RBI. Besides, RBI gave license to 2 banks in 2015. Idfc is suffering from legecy issues whereas Bsndhan has grown by leaps and bounds, out of the gaze of stock markets. Bank’s deposits and advances stand at 22k crores. Casa ratio is 30-35%. Ujjivan is right now half of what Bandhan was in 2015. There is no reason why it can’t reach at the similar levels in next 5-6 years. In fact, I was comparing Yes bank of 2006 with ujjivan of 2017. With similar book value, yes bank was 10-12 times leveraged compared to 3-4x of Ujjivan. Imagine the scope of growth. yes bank had 40 branches then, compared to 470 for ujjivan. Even by conservative estimates of Ambit Capital, opportunity size for MFIs stand at 300,000 crores.