Thursday, August 20, 2009

Export Import Bank (Exim Bank) at Crossroads?

What do Ex-Im Bank of USA, China Exim Bank, Korea EximBank, Exim Bank Malaysia, and Exim Bank of India have in common? With its homegrown Chairman & Managing Director TC Venkat Subramanian facing retirement after a long stint, and its chief promoter, Government of India (GoI), looking at somebody from outside to replace him, Export-Import Bank of India appears to be truly at crossroads.

The Export Import Bank of India was created for two core objectives – one, to finance the country’s exporters and importers; and two, to finance those financial institutions aspiring to finance exporters and importers.

But somewhere down the line, Exim Bank got into unconnected businesses like film, SME, and agricultural financing.

Exim Bank of India got into film financing through the related domain of cash-flow financing for film distribution in overseas markets, but it soon led Exim Bank to produce films too. The bank has financed successes like Kabul Express, Dhoom, Dhoom-2, Fanaa, Veer Zaara, The Rising etc, but with the stakes getting higher and higher with each production, risk might be just round the corner.

For example, Exim Bank is financing the Rs. 70 crore Priyadarshan movie ‘De Dhana Dhan’ starring Akshay Kumar, Katrina Kaif, Suniel Shetty, and Paresh Rawal.

Exim Bank of India’s diversifications into small and medium enterprises (SME) and agricultural finance, however, don’t carry even the synergies found in film financing, that is, except when it is for export assistance to these sectors.

Exim Bank is facing difficult prospects in its core business as overseas investments by Indian companies have witnessed a decline of nearly 15% during 2008-09. If this trend continues, Exim Bank of India stands to face a tough 2009-10 in its core areas like export credits, EOU finance, overseas investment finance, lines of credit, & export services.

Exim Bank of India’s Chairman & Managing Director TC Venkat Subramanian had recently cited the gloomy economic situation making the availability of export trade finance a major problem. It is not known how the bank plans to address this.

Exim Bank was recently pulled up by Reserve Bank of India (RBI) for lacking better compliance to its guidelines regarding loan syndication in multiple banking arrangements, as it had the potential for allowing major fraud.

Exim Bank of India was originally hived off from RBI in 1982 as a separate bank for Export-Import, under the Export-Import Bank of India Act 1981. It was modeled around the Ex-Im Bank of USA, China Exim Bank, Afrexim Bank, Korea EximBank, Exim Bank Malaysia, Exim Thailand, EximBank Vietnam, and several others, with similar objective - expanding nation's overseas trade.

Exim Bank is now considering the funding of a major Jatropha plantation project in Ethiopia by Emami Group of India. Queries by Seasonal Magazine regarding the risks of this move, considering the risk-profile of this African country as well as the plant, remain unanswered from Exim Bank of India at the time of publication.

It is possible that with the current Chairman’s exit – who was native to Exim Bank - the Government is planning a return to the original objectives at Exim Bank of India, with an outsider at the helm. TC Venkat Subramanian was with Export-Import Bank of India ever since its inception and was heading the bank since 2001.


Friday, August 14, 2009

Has Union Bank’s ICICI-Like Strategies Worked?

Union Bank of India’s campaign ‘Your Dreams Are Not Your Alone’ was perhaps the most catchy bank promotion in recent times. However, it was not the only strategy Union Bank – led by veteran banker MV Nair - copied from India’s private sector banks like ICICI Bank, HDFC Bank, & Axis Bank. But has it really worked for this Mumbai headquartered public sector bank (PSB)?

ICICI Bank, Indian banking's leader in promotional campaigns, has cut their advertisement expenditure by one-third ever since the downturn began. But it was also a time when a few public sector banks, notably State Bank of India (SBI) and Union Bank of India (UBI) hiked their advertisement spending. Union Bank’s was the sharpest increase in ad spend, going up by almost thrice over the previous year.

Union Bank of India also seems to be following some of the strategies that ICICI Bank pursued during the last boom and later discarded – like growing their Point of Sale (POS) business astronomically and providing retail / vehicle loans to non-customers.

On the recruitment front, Union Bank recruited 2200 employees during last year, and this year plans to take in around 2000 – much like how private banks like ICICI Bank, HDFC Bank, and Axis Bank were doing. But with no performance-linked pay structure in place like these private banks, and the retirement-to-recruitment ratio being 3:1, the need for such a move is difficult to rationalize.

The complex effects of Union Bank of India’s promotional campaign – that amounted to Rs. 142 crore in 2008-09 - are now unraveling with the latest quarterly results. On first look, the headline profit growth of 94% shows that the campaign has clicked. Even some constituent figures like the substantial growth in fixed deposits may be an outcome of this aggressive campaign.

However, on a closer look, many other constituent figures are troubling. The fact that Union Bank could post only a 1.52% growth in net interest income shows that something went wrong in their core business of deposits and advances. On the other hand, the most promising component in the results – doubling of non-interest income including treasury – had nothing to gain from the promotional campaigns.

Even the rise in fixed deposits might have complex aftereffects. Union Bank of India’s cost of deposits has increased to 6.47% due to this major focus on fixed deposits. At the same time, the bank’s Net Interest Margin (NIM) is down to 2.29% from 2.92% last year, with pressure coming from these high-cost fixed deposits that will take time to mature. Now, the bank faces an uphill task in raising NIM to a healthy 3%.

At the same time, despite this heavy promotional campaign, the bank could not perform well on the low-cost current account / savings account (CASA) deposits, and now Union Bank has to struggle to bring CASA to 35%, something which might take until 2012.

The bank which has always performed well on the NPA front, however, saw net non performing assets (NPA) going up by 0.57% during last quarter. But this might have to do with Reserve Bank of India (RBI) rejecting a proposal from Union Bank of India to deduct floating provisions from gross NPA. The reason for the RBI rejection is not clear, as similar proposals from peers like Punjab National Bank (PNB), Bank of Baroda (BoB), and Central Bank of India were allowed.

Post-budget, the outlook for treasury gains is bleak for all banks. This is said to be especially so in the case of Union Bank where loan growth is relatively low and treasury portfolio is high. With treasury income being their mainstay during the last quarter, the bank needs to think of other sources for showing profit.

With parking surplus funds in liquid and liquid-plus mutual funds (MF) not going to be viable after around August 2009, Union Bank will be forced to increase lending, but in the face of lackluster demand. MFs was one area where Union Bank of India could register good profits.

Even while bigger players like SBI decided to keep off, Union Bank participated in the consortium funding Air India / NACIL. Now with Air India in deep trouble, the decision seems badly made.

After a good performance in the bourses for some time, Union Bank of India has now started appearing with ‘SELL’ recommendations due to poor short-term prospects.

Like many other public sector banks (PSBs), Union Bank too might have surprises from their restructured loan book in the coming quarters.

Maybe Union Bank of India needs to learn more lessons from ICICI Bank which has discarded brand promotions and is now resorting to Customer Education type of promotions. Also, there seems to be no point in Union Bank adopting aggressive business policies discarded by private sector banks.


Thursday, August 13, 2009

Can Vijaya Bank Build Upon the Turnaround?

Vijaya Bank has recently proven that it could sustain the turnaround that started in 2008-09. Further success down the year, however, will depend upon how Vijaya Bank addresses major challenges like managing non performing assets (NPA), bettering NRI remittances, coping with lower treasury gains, and rapid expansion of alternate delivery channels (ADC). Seasonal Magazine finds out Vijaya Bank’s strategies from interactions with Chairman & Managing Director Albert Tauro and Executive Director SC Kalia.

The turnaround that started from the second quarter of last fiscal now seems complete at Bangalore headquartered Vijaya Bank.

Waging formidable battles on both the yield-on-advances front and the cost-of-deposits front – that too in difficult years like FY’09 and FY’10 – Vijaya Bank has come up trumps on the crucial figure of Net Interest Income (NII) in Q1.

Though Vijaya Bank’s performance on the non performing assets (NPA) front leaves room for improvement, the bank finds solace in the fact that it is not a mass issue but an issue with a few large accounts like the sick public sector unit (PSU) Spices Trading Corporation Ltd (STCL).

For managing NPAs, both recovery efforts and monitoring of restructured accounts to prevent fresh slippages have been undertaken.

The bank is betting big on their substantial presence in NRI hotspots like Mangalore, Hyderabad, Kochi, & Chandigarh to achieve a four-fold rise in NRI deposits to Rs. 5000 crore.

Vijaya Bank’s Chairman Albert Tauro and Executive Director SC Kalia realizes that treasury gains won’t be good next time, but believes that their better credit deposit ratio would help reduce the impact.

The bank is also pinning much hope on expanding their alternative delivery channels (ADCs) to achieve this fiscal’s growth target of Rs. 1.1 lakh crore. Vijaya Bank has already implemented 100% Core Banking Solution (CBS).

To manage their network expansion of around 100 new branches, and scheduled retirements, Vijaya Bank is recruiting 1000 new staff this year. This year’s branch expansion will focus on North, West, & Central India, as against its conventional footprint of South India.

Seasonal Magazine interviews Chairman Albert Tauro and Executive Director SC Kalia:

With the June 30 results out, Vijaya Bank has made a dramatic turnaround to profitability on a year on year basis – from a 76.64 crore loss to a 143.38 crore profit. Are the quarter-on-quarter results equally promising?

The results are certainly promising and make us feel upbeat about the coming quarters. Let me also make it clear that the turnaround started from the second quarter of last fiscal and we moved consistently and progressively thereafter till the last quarter. On stand alone basis, growth in Vijaya Bank’s core earnings every quarter has been one of the highest among public sector banks (PSBs). Our Net Interest Income (NII) for Q4 of last fiscal clocked a 62% growth, followed by a 54% growth in the June quarter this year. Concomitantly, our earning efficiency also improved progressively from 2.07% in the second quarter of last year to 2.38% for the June quarter. I am sure, with likely pick up in quality and stable business, the current and subsequent quarters show a lot of promise.

Unlike many bigger PSBs, Vijaya Bank has managed a 53.75% growth in Net Interest Income (NII). What were its key drivers? Is it sustainable in the coming quarters?

The key drivers of our NII growth is better yield from our advances portfolio and to some extent, interest cost containment. Vijaya Bank’s yield on advances, at 10.72%, is quite comparable to the best in business while on the cost front, we have managed to bring down cost of deposits to 6.82%. Managing cost of deposit was quite a challenge, I must say, especially in view of the volumes contracted during the second half of 2007-08, a common feature of the banking industry then. For us, it is possible to sustain the NII growth in the coming quarters. Our focus on current account / savings account (CASA) deposits, broad based advances, and quality loan assets is likely see us maintain the growth in core earnings.

You have embarked Vijaya Bank upon a campaign to increase your NRI deposits four-fold within the next couple of years. Apart from starting overseas branches, how do you plan to achieve the target of Rs.5000 Crore?

Campaign "Mission NRI – 5000" aims to increase our non-resident deposit base to Rs.5000 Crore by the end of this fiscal. Vijaya Bank has got good presence in high potential centres like Kochi, Mangalore, Chandigarh and Hyderabad and we are confident of realizing this goal. As brought out by a recent report, India receives the highest inward remittance in the world and with the global market sentiments slated for improvement from the second half of the current financial, we should further this goal with even greater vigour. We don’t have any overseas branch as yet, which we make good with the aid of tie-ups with our correspondent banks. We are also in the process of tying up with leading Exchange Houses in the Middle East to step up our non-resident deposit growth.

Vijaya Bank continues to suffer on the non performing assets (NPA) front, with a increase from 1.71% to 2.94%. With NPAs coming in all the crore lending sectors like commercial real estate, personal loans etc, how do you plan to combat it in the coming quarters?

NPAs are not an exception to Vijaya Bank alone, more particularly if you consider the last few quarters marked by recessionary pressures. About the June quarter as well, almost all the banks have seen rise in the NPA level that was on expected lines. Let me also add that in our case, the addition has been on account of very few large accounts and we are making all efforts to turn those around. Otherwise, our NPA level in sectors like agriculture, education loans etc are quite reasonable and manageable. We have an action plan in place to improve our asset quality. In the first place, we are targeting our restructured loan books and keeping a close vigil so as to prevent fresh slippages. Our loan appraisal and monitoring systems have also been strengthened further to contain the accretion to the bare minimum. Finally, our recovery efforts are being reinvigorated in the form of more V-Adalats, Baaki Vasuli Camps and recourse to various legal provisions.

Vijaya Bank’s STCL account is particularly troubling. How do you plan to solve the issue?

I would not like to comment on any individual account for obvious reasons.

Do you foresee treasury gains slowing for Vijaya Bank in the coming quarters, due to India's mounting fiscal deficit and your low credit deposit ratio?

First of all credit deposit ratio exceeding 67% probably does not merit to be termed as low as against the industry average of about 70%. What is more heartening is the fact that despite relatively low growth in advances, Vijaya Bank could notch up 54% growth in Net Interest Income and 69 bps rise in our Net Interest Margin (NIM) quarter on quarter. That way, our core earnings significantly augmented our treasury income and as such, we are confident of sustaining our overall earnings. Treasury gains in the coming quarters may not be as buoyant as they were in the last quarter. This is applicable to the entire banking industry, given the current trend, likely inflationary pressures and recovery in credit demand and the Government's borrowing plan. Benchmark yields are likely to undergo some hardening, especially from the latter part of the second half. We must also appreciate that the Reserve Bank of India (RBI) may withdraw its accommodative stance once the revival takes effect. In such a scenario, treasury gains may feature slackness in the coming quarters.

From the current business levels of Rs.92000 Crore you plan to move Vijaya Bank up to Rs.1,10,000 Crore by fiscal end. What role will alternate delivery channels like IT play in this growth?

IT Enabled Alternative Delivery Channels (ADCs) will be one of the key drivers in our business growth. Vijaya Bank is already 100% CBS and we have the wherewithal to draw new tech savvy clientele and augment our top line. We offer today any-branch banking as well as remote banking options which are good value propositions for customers who prefer to conserve time and energy by not going for physical branch banking. We have internet banking modules for both corporate and retail segments, offering SMS enabled facilities, bill payment, tax remittance and so on. We are very soon launching Mobile Banking and Phone Banking as also an e-enabled Trading Portal aimed at our niche segments. We have plans to increase our ATM network to 500 by this fiscal and at the moment, our ATM hits are quite encouraging though there is still a lot of upside to it. Besides, ADCs are going to be our competitive advantage as far as our NRI customers and High Net-worth Individuals (HNI) are concerned. Lastly, Vijaya Bank is all set to launch an Online Loan Processing System that will help us improve our advances volume further.


Wednesday, August 12, 2009

Can PNB Take on ICICI Bank, SBI?

Punjab National Bank, India’s second-largest public sector lender, is trying to overcome remaining challenges like a significant restructured loan book and still-to-be-perfected operational efficiencies, to take State Bank of India (SBI) and ICICI Bank head on. PNB already has the largest ATM network and the second-largest branch network among all public sector banks (PSBs).

India’s ongoing tussle in the banking sector – the fatherly advice of RBI to lower rates, and the free-thinking defiance of public sector banks – doesn’t affect one player much, because, at 11%, Punjab National Bank (PNB) already has the lowest prime lending rate (PLR) among all banks in the country.

It goes without saying that it is a feature that makes PNB a favoured bank among India’s businesses, farmers, and consumers.

Punjab National Bank also excels on Capital Adequacy Ratio (CAR) – perhaps the only parameter where many Indian banks fall short, much like their global counterparts. While many Indian Banks are struggling to keep their heads above the floor-levels of 9-12%, PNB’s CAR is at a very comfortable 14%, a distinction that it shares with only one other PSB. This also makes PNB in no need for recapitalization by the government, something that is plaguing many other peers.

New Delhi headquartered PNB, India’s second-largest public sector lender, has over the years acquired some unique strengths vis-à-vis its peers, which can make this public sector bank take on bigger players from both the public and private sector, provided it can manage some key challenges.

The bank produced a Dalal Street beating Q1 financial performance which was noted not only for its headline profit growth of 62% aided by a sharp rise in treasury income, but for its several constituent and other key figures. Loans were up by 38%, total income was up by 34%, operating profit was up by 59.7%, but the biggest surprise came by way of interest income which was up by 26%.

The performance on the net interest income (NII) front is especially good, taking into account their low PLR and how other comparable banks have performed. It also enabled PNB to manage margin pressures better.

The bank has a good source of low-cost funds in its CASA deposits that amount to nearly 40% of its total portfolio.

Punjab National Bank which lost its last Chairman KC Chakraborty recently to Reserve Bank of India (RBI), since he was the senior-most banker in India, is now led by its Executive Directors MV Tanksale and Nagesh Pydah, both veteran bankers from India’s public sector banking.

According to Tanksale, the bank is eyeing a profit of Rs. 3700 crore for the current fiscal, based on an anticipated loan growth of 22% and maintenance of Net Interest Margin (NIM) at 3.5%.

PNB is a good performer on the bourses, with most analysts assigning ‘BUY’ or ‘KEEP’ recommendations, and the scrip commanding a significant premium over spot-price in Foreign Institutional Investor (FII) transfers.

Punjab National Bank had also put in a good performance during 2008-09, which saw net profit going up by nearly 69% over the previous year. And it was a sustained, all-quarter performance, with even the choppy Q4 producing a 59% jump in net profit. Buoyed by the development, PNB was also quick to declare a generous 200% dividend.

2009-10 will be a momentous one for PNB, as it battles some of its core challenges and handles some divestments.

PNB has a huge portfolio of restructured loans, which is the second-largest (as a percentage of its loan-book) in the public sector category. The bank needs to keep a close watch on these accounts lest they fall into the non-performing category next year.

Punjab National Bank also need to improve in its overall business efficiency, as, despite having India’s second largest branch network, it is only third-largest in total business - behind State Bank of India (SBI) and ICICI Bank - when considering both public and private sector banks. A part of this seeming inefficiency is directly due to meeting their social commitments as a public sector bank, something private sector players are not burdened with.

For example PNB’s ratio of priority sector credit to net bank credit is 41.53% as against the national goal of 40%, and its ratio of agricultural credit is 19.72% as against the goal of 18%.

Punjab National Bank is divesting a 26% stake in its wholly owned subsidiary PNB Housing Finance to international major Dawnay Day for an amount estimated to be between Rs. 70 – 80 crore. The sale’s due diligence is going on and PNB expects to wind up the process within two months.

The bank continues to garner international recognition and partnerships, with the latest being Ex-Im Bank of USA recognizing Punjab National Bank for partnership in its $2.45 billion India Infrastructure Facility, a mega loan facility for India’s infrastructure projects.

On the technology front, PNB has not only completed implementation of Core Banking Solutions (CBS) throughout its vast network, but has also completed CBS in all its affiliated Regional Rural Banks (RRBs) – a sector that is normally shy of technology.

With 100% CBS, the largest ATM network among all PSBs, and Internet Banking, Punjab National Bank has implemented truly ‘Anytime Anywhere’ banking. In fact, it goes even beyond to facets of e-commerce like booking of tickets, payment of bills etc.

PNB is an outperformer in socially inclusive banking, and has kick-started several initiatives in sectors like microfinance, self-employment loans, kisan credit cards, rural smart cards, enabling technologies for the handicapped, support for the economically challenged etc.

Punjab National Bank has operations in UK, Norway, Dubai, Singapore, Hong Kong, Shanghai, Afghanistan, Kazakhstan, & Nepal, and is now planning to enter markets like Canada, Australia, Indonesia, Bhutan, & Fiji, as well as strengthen its presence in UK, China, Dubai, & Singapore. In UK alone, PNB plans to pump in $50 million more to multiply its thriving business there.