Capital Investments to drive credit growth

16th June, 2010

Nagarajan NarasimhanDirector – ResearchCRISIL Limited

2.

Outline

• CRISIL’s Macroeconomic outlook

• Banking credit growth to revive

• Banks need to monitor asset quality

• Banks well capitalised to support growth

3.

CRISIL’s Macroeconomic outlook

4.

CRISIL’s Macroeconomic outlook

2009-10 2010-11 P Rationale

GDP*(y-o-y%)

* Agri growth at 5.5%, Industry at 8.6% & Services at 8.4%

Private Consumption (y-o-y %)

WPI inflation(average)

10-year G-sec(March-end 2011)

Rs per US$(March-end 2011)

Legend - Risk level

Low

Neutral

High

7.2%

4.1%

3.8%

6.5%

6.5 - 7.0%

Private demand, both on consumption and investment side, areexpected to drive GDP growth close to its trend level in FY11. Normalmonsoon is assumed.

With improvement in the economy and recovery in employmentscenario, consumer confidence should begin to pick-up, resulting inrelatively high growth in private consumption.

Rising commodity & agricultural prices and a rollback of excise dutycuts would keep inflation high in H1FY11. Inflation is expected to bearound 6.5% at March-end 2011.

8.0%

Larger net borrowing programme by the governmentas compared tolast year along with monetary tightening (to fight inflation) wouldpressurize 10 year G-sec yield.

43.5 - 44.0

8.3 - 8.5%

Note: P: Projected

7.8%

45.1 Currency appreciation to continue as foreign investment inflowsgather pace, although growing current accountdeficit should reducethe pace of appreciation.

5.

Industry leads recovery in 2009-10

• 15 out of 17 industries in IIP recorded positive growth during Apr-09 to Feb-10

• Revival in economy has resulted in higher capacity utilisation, growth in revenues

and improved profitability for Indian corporates

• GFCF growth, after being subdued over last 2 years, is expected to grow by 12.5% in

2010-11

Demand Drivers Growth (y-o-y%)

1.6

4.7

-0.2

9.5

3.9

8.2

10.59.8

8.7

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY08 FY09QE

FY10AE

FY08 FY09QE

FY10AE

FY08 FY09QE

FY10AE

Agriculture Growth (y-o-y%) Industry Growth (y-o-y%) Services Growth (y-o-y%)

6.

Banking credit growth to revive

7.

Low

Alternate Energy, Fertilisers,Hospitals,Tea, Sugar

Crude Oil, Natural Gas,Pharmaceuticals,Power,Telecom Services

Medium

Aluminium, Auto Components,Construction (non-housing), Household Appliances, Organised Retail, Paper, Petrochemicals, Ports, Road

Banking, Cars & Two-wheelers,IT, ITeS, Media (electronic & print) Cement

High Airline Services,Cotton Yarn, Pig Iron,Man-made Fibres, Real Estate,Readymade Garments,Sponge Iron

Airports, Auto Finance, Commercial Vehicles,Hotels,Shipping,Steel Products

High Medium Low

Financial Stress

Vu

lne

rab

ilit

y t

o d

em

an

d s

low

do

wn

Global economic meltdown impacted industry in early 2009…

Due to their leveraged capital structure, these sectors were particularly hard hit by the decline in demand following the global economic meltdown.

8.

… but situation has improved in last 3 quarters for Corporate India

Based on sample of 200 leading companies across 22 different sectors

Source: CRISIL Research

Aggregate Sales and Operating margins

1,250

1,500

1,750

2,000

2,250

2,500

J un-07 Sep-07 Dec-07 Mar-08 J un-08 Sep-08 Dec-08 Mar-09 J un-09 Sep-09 Dec-09

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Sales (Rs bln) Operating margin (per cent)

• Upward trend in revenues along with positive economic indicators points to better days

ahead

9.

Commercial sector’s high dependence on banking credit

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007-08 2008-09 2009-10

Bank credit ADR/GDR and short term credit Public issues/ Pvt placement and CPs FIs ECB / FCCB FDI

Rs 7805 billion Rs 8340 billion Rs 9708 billion

10.

Backdrop for credit growth

11.

Advances to grow over 20% annually over next 2 years

P: Projected

• Acceleration in economic growth, sustained thrust on infrastructure and recovery in

exports to support growth in banking credit

• Term loans to corporates for financing capital expenditure projects would be the

largest contributor to growth in banking credit

• Retail credit to revive due to growth in housing and auto loans

-

10,000

20,000

30,000

40,000

50,000

60,000

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11P

2011-12P

(Rs billion)

0%

5%

10%

15%

20%

25%

30%

35%

Advances Growth (RHS)

31

21

36

29 27

1413

36

28

69

16

912

17

38

21 22 2520

26

0

10

20

30

40

50

60

70

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

E

20

10

-11

P

20

11

-12

P

Retail credit Industry & other commercial credit

(per cent)

12.

Infrastructure to drive investment growth

Oil and Gas13%

Telecom Services

8%

Metals7%

Power 16%

Other Infrastructure

sectors 28%

Other Manufacturing

14%

Roads & ports14%

(per cent) (2009-10 to 2011-12)

E: Estimated; P: Projected ; Other manufacturing includes Cement, Automobiles, Textiles, and FertilisersOther infrastructure includes Irrigation, Urban infrastructure, and Airport Infrastructure

• Infrastructure investments to grow at a CAGR of 17% over next 2 years

• Latent demand to drive investments in power, telecom and gas distribution

• A need for quick and efficient transportation of passengers and goods to drive investments in sectors like roads, railways, ports and airports

• India’s competitiveness as a manufacturing destination would drive investments in steel, aluminium and automobiles

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2009-10 E 2010-11 P 2011-12 P

(Rs

bill

ion)

Power Oil and Gas Telecom Services

Metals Other Manufacturing Roads & ports

Other Infrastructure sectors

Rs 6709 billion Rs 7272 billion Rs 8453 billion

14.

Proportion of bank lending to infrastructure to increase further

• Banks will continue to play a crucial role in financing infrastructure projects

– Share of infrastructure lending in industry credit has increased from 16% in March 2004 to 29%

as of March 2010

– Expected to reach low-to-mid 30s over next 2 years

• However, development of secondary market for infrastructure bonds and success of

take-out financing is critical to support investment in infrastructure

0%

5%

10%

15%

20%

25%

30%

35%

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

20%

25%

30%

35%

40%

45%

50%

55%

60%

Infrastructure proportion Infrastructure credit growth (RHS)

Infr

astr

uct

ure

as a

pro

po

rtio

n o

f in

du

str

y c

red

it

Other industries43

Textiles9

Infrastructure29

Metals13

Engineering6

(per cent) (2009-10)

15.

Banks need to monitor asset quality

16.

GNPAs expected to increase to 3.6 per cent by 2010-11

• Some of the restructured assets likely to turn into NPAs

– Industries like Iron & Steel, Textiles, Commercial real estate, Infrastructure and chemical & pharmaceuticals

contributed to 50%- 55% of the restructured assets

• Banks require Rs 620 billion to meet new provisioning norms by March 2011

• Close watch on asset quality and risk-based credit pricing are the need of the hour

P: Projected

3.3%

2.3%2.8%

2.5%

2.3%

3.6%

1.0%

2.0%

3.0%

4.0%

Mar-06 Mar-07 Mar-08 Mar-09 Dec-09 Mar-11 P

0

200

400

600

800

1,000

1,200

1,400

1,600(Rs billion)

Absolute GNPA Gross NPAs (LHS)

17.

Banks well capitalised to support growth

18.

Government’s thrust on capitalisation bodes well for industry

• As of 2008-09, every Indian bank had a CAR of over 10 per cent

• Only 20% of the banks, mainly PSBs, had a Tier-I CAR of less than 8%

• Hence, government’s thrust on capitalisation by budgeting Rs 165 billion augurs well for PSBs

• High net worth to net NPA ratio also provides adequate comfort

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

(Times)

0%

2%

4%

6%

8%

10%

12%

14%

16%

Networth to NNPA CAR (RHS)

19.

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