Mutual Funds Commodities Research Tax Planning IPO Our Team Contact Us  

| More

Banks & NBFC's Sector Update Report - Yet another watershed moment? - HDFC Securities

Posted On: 2020-11-23 05:26:17 (Time Zone: Arizona, USA)

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

In its recently released report, the RBIʹs Internal Working Group (IWG) has proposed several recommendations to harmonise the ownership guidelines, regulatory landscape, and corporate microstructure of Indian private banks. We explore the key implications of the findings and recommendations and the likely winners.

Perhaps the most significant set of recommendations, in line with the intent to increase the number and diversity of private banks, is the RBI laying out two potential routes for the entry of new private banks by allowing large corporate houses to set up banks and large NBFCs to become banks. We believe that potential new banks are more likely to choose the 'NBFC-Bank route' as the entry of industrial houses will require a slew of changes to the extant legislative, regulatory and supervisory frameworks. The recommendations proposed by the IWG are especially significant given that no non-financial institution was able to float a bank under the 2013 licensing guidelines and no NBFC has successfully converted into a bank under the extant 2016 'On-tap' licensing guidelines. While large NBFCs aspiring for banking licenses will face near-term challenges, conversion into a bank should be viewed as a desirable long-term strategy, in our opinion. Amongst banks within our coverage, DCBB and IIB stand to benefit from the recommended increase in the limit on promoter shareholding.

A medium-term rise in competitive intensity notwithstanding, our long-term thesis continues to favour large private banks on the back of their stronger balance sheets and stable liability franchises.

Relaxation of promoter holding norms recommended: Under the extant licensing guidelines for private banks and SFBs, promoters are required to bring down their holding to at least 15% within 15 years. The IWG recommends that this cap be raised to 26% as this would balance the need of diversified ownership with more skin in the game for the promoter. This is consistent with the outcome in the KMB promoter shareholding matter, it would not be entirely unreasonable to expect this recommendation to translate into actual policy. Within our coverage, we believe that DCBB and IIB, whose promoters have already expressed interest in increasing their stake, will stand to benefit from such a policy change.

Will the RBI finally permit ownership of banks by large corporate houses? Historically, the RBI has maintained a cautious stance on this matter, in view of the 'serious risks, governance concerns, and conflict of interest that could arise'. We resonate with the regulator's outlook and believe that such caution is well-founded. Despite briefly allowing industrial and business houses to apply for a banking license under the 2013 edition of its licensing guidelines, the RBI granted a banking license only to two entities - IDFCBK and BANDHAN, both erstwhile financial institutions. At the time, several other corporates either unsuccessfully applied or withdrew their applications, in some cases citing excessive regulatory requirements.

Set against this background, the IWG's report builds a strong case for increasing the role and number of private banks to further economic development- this is not surprising. Acknowledging the capital, managerial expertise and strategic thinking that large industrial houses could bring to the table, the IWG recommends that large corporate/ industrial houses be permitted to promote banks only after necessary amendments to the Banking Regulation Act (the act) are made.

Is this a watershed moment for the banking industry? Contrary to the opinion of experts, the IWG has recommended allowing large corporate houses to set up banks. Despite the RBIʹs fresh attempt at welcoming industrial houses to apply for a banking license, we remain relatively sceptical of this route playing out meaningfully in the near-term. While several large domestic conglomerates stand to gain from having a banking license, we believe that the RBI will continue to remain selective and cautious in its approach to allowing industrial houses. Taking a cue from unsuccessful / withdrawn applications under the 2013 edition, we believe that the likely amendments to the legislative, regulatory and supervisory framework for large corporate houses will be significantly demanding from a compliance perspective. For large corporate houses looking to enter the space, acquisition may be a more attractive route and a few mid-tier banks serve as interesting potential targets.

Conversion of NBFCs to banks - a more likely route: The IWG recommends allowing ʹwell-run large NBFCsʹ (asset size more than Rs 500bn), including those owned by large corporate houses to convert into banks. This recommendation is not surprising, especially in light of recent remarks by one of the RBI Deputy Governors. Given that NBFCs were already permitted to convert under extant licensing guidelines, it remains to be seen how the new guidelines differ in terms of compliance requirements or in terms of incentivising NBFCs to convert. The IWG also recommends 'scale-based' regulation of NBFCs with a tighter 'banklike' regulatory framework for larger NBFCs, eliminating any regulatory arbitrage.

We opine that an NBFC's decision to convert into a bank hinges on the trade-off between sustainability (lower mortality risk) and higher regulatory (CRR/SLR) and compliance (tighter supervision) and operating costs (arguably transient). Although large well-run NBFCs are, by definition well-funded, we believe such conversion represents a desirable long-term outcome for such entities to ensure sustainable growth. Exhibit 1 carries our indicative framework that helps assess the likelihood of large NBFCs converting into banks.

IWG recommends NOFHC structure: The IWG recommends that NOFHCs should continue to be the preferred structure for all new 'Universal Banks'. Further, banks currently under the NOFHC structure, which do not have other group entities within their fold could be permitted to exit said structure. We believe that the IWG recommendations, in their current shape, are vague on whether the NOFHC structure applies to SFBs - in case this eventually applies to SFBs, UJJIVAN and EQUITAS will be positively impacted.

Source: Equity Bulls

Click here to send ur comments or to

Disclaimer:The article above is a gist / extract of the original report prepared by the research firm / brokerage firm. This article is not to be considered as an offer to sell or a solicitation to buy any securities. This article is meant for general information only., its employees or owners or the research firms, its employees or owners won't be responsible for any liability that may arise from information, errors or omissions in these articles. or its employees or owners / the research firms or its employees or clients or owners may from time to time hold positions in securities referred in this article. For detailed research reports, please contact the concerned research firm directly.

Other Headlines:

Maintain ADD on Mindtree - Into another operating orbit - HDFC Securities

NBFCs Q3FY21 Results Preview - Micro headwinds > Macro tailwinds - HDFC Securities

Mindtree - Margin beat and raise cycle seems to be over! - ICICI Securities

Shoppers Stop - Focusing on omni-channel growth - ICICI Securities

Piramal Enterprises - Strategic synergies, optional value to follow DHFL's buyout - ICICI Securities

Motherson Sumi Systems - Focus remains on growth and cost efficiency - ICICI Securities

Metropolis Healthcare - Acquires Hitech Diagnostics in South India - ICICI Securities

Nifty PE shifting orbits - ICICI Direct

Rallis India Ltd - Q3FY21 First Cut - ICICI Direct

Q3FY21 Company update - GTPL Hathway - ICICI Direct

Q3FY21 Result update - HDFC Bank - ICICI Direct

Q3FY21 Result Update - PVR Ltd - ICICI Direct

Q3FY21 Result update - HCL Technologies - ICICI Direct

Maintain BUY on HCL Technologies - Mode-2, 3 driven momentum - HDFC Securities

HDFC Bank Q3FY21 Results - Concall Highlights and Views of YES SECURITIES

HDFC Bank Q3 FY21 - 'Stellar Show' - Retain BUY and raise 12m PT to Rs1870 - YES Securities

IPO Review - Indian Railway Finance Corporation (IRFC) - ICICI Direct

HCL Technologies - Q3FY21 First Cut - ICICI Direct

Logistics Sector Update - Indian Railways - getting aggressive - HDFC Securities

Indigo Paints - IPO view - YES SECURITIES

Infosys - Near-term margins will likely come under pressure - ICICI Securities

CESC - 7% dividend yield + higher ESG rating - ICICI Securities

South Indian Bank - Unveils vision 2024; targets RoA / RoE of 1% / 13% by 2024 - ICICI Securities

Maintain BUY on Infosys - Growth certainty on explosive deal wins - HDFC Securities

Maintain ADD on Wipro - Growth acceleration - HDFC Securities

Consumer Durables - Q3FY21 Results Preview - HDFC Securities

Q3FY21 Company Update - Filatex India - ICICI Direct

Q3FY21 Result Update - Wipro Ltd - ICICI Direct

Q3FY21 Result Update - CESC - ICICI Direct

Monthly Inflation - December 2020 - ICICI Direct

Q3FY21 Result Update - Infosys - ICICI Direct

Banks Q3FY21 Results Preview - Scope for optimism beyond a tepid 3Q - HDFC Securities

Consumer Discretionary Companies - Q3FY21 Results Preview Report - HDFC Securities

Pharma Sector Update - Ample catalysts to sustain luster - HDFC Securities

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research on IIP data

Infosys - Q3FY21 First Cut - ICICI Direct

Wipro - Q3FY21 First Cut - ICICI Direct

HDFC Securities - Real Estate Q3FY21 Results Preview - Has COVID triggered a new cycle?

Industrials Q3FY21 Results Preview - Normalisation done, growth awaited - HDFC Securities

FMCG & Alco Bev - Q3FY21 Results Preview - HDFC Securities

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research on December 2020 CPI Data

Cement & Building Materials (Tiles) - Results Preview - Robust Performance on Improved Volume - Reliance Securities

Automobile & Auto Ancillary - Results Preview - Strong Results on Healthy Volume Performance in 3QFY21 - Reliance Securities

Q3FY21 Result Update - Tata Consultancy Services - ICICI Direct

Q3FY21 Result Preview - Real Estate & Infrastructure - ICICI Direct

Q3FY21 Result Update - Avenue Supermarts - ICICI Direct

Q3FY21 Result Preview - Metals & Mining - ICICI Direct

Insurance and Capital Markets Companies Q3FY21 Results Preview - Stronger earnings expected across sectors - HDFC Securities

Capri Global Capital - Getting back to normalcy - ICICI Securities

Avenue Supermarts - Fast recovery; there are speed breakers though - ICICI Securities

Website Created & Maintained by : Chennai Scripts
West Mambalam, Chennai - 600 033,
Tamil Nadu, India

disclaimer copyright © 2005 - 2020