Indian banking: a challenge-ready industry

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: The Indian banking industry has developed the capacity to absorb turmoils, says Sitanshu Swain

Despite suffering the heaviest correction in the fourth quarter, Indian banking has topped the charts in value creation in FY 2007-08 among all major economies, says the latest report of Boston Consulting Group titled "Managing Shareholder Value in Turbulent Times".

Reeling out vital statistics, the report says overall, the global banking sector's average total shareholder return (TSR) plummeted by 93% in 2007, to 1.7%, and was well below the 15.2% average TSR of all industries.

Globally, the sector's market capitalisation increased by a mere 2.4 % to $8.3 trillion-a stark change from 2006, when market cap grew by 31%. Since the end of 2007, shareholder returns in the banking industry, in general, have deteriorated rapidly: in less than three months, the sector's market cap has dropped by more than 15%, to $7 trillion from $8.3 trillion.

The report, which has claimed to analyse a sample of banks representing more than 75% of total banking market capitalisation, shows that 2007 was a year with two halves.

In the first half of 2007, the sector's market capitalisation grew by 5.7 %.

In the second half, as the crisis became more widespread, banks lost $269 billion in market value.

A gaping performance divide separated ten major developed markets from the rest of the banking world. Banking total shareholder returns (TSRs) in these developed markets fell to an average of about -13%, while the average TSR outside these markets was about 27%. Emerging markets, in particular, avoided much of the turmoil and provided a counterweight to the weak performance of western and Japanese banks.

"Even among the BRIC countries, the Indian banking sector outshone everyone else in 2007 in value creation," said Saurabh Tripathi, partner and director at the Boston Consulting Group. "This is despite the heaviest correction in Q1 of 2008."

Also the banking and non-banking financial services (NBFS) gave consistent returns, beating the market across all-time horizons over the last 5 years. Axis Bank and BoI were the toppers among banks in consistent value creation over all 3 horizons (1, 3, and 5 years), says the report.

The large equity issuances by several banks have improved their loss absorption capabilities and hence their resilience to negotiate downside risks, says Fitch.

The non-performing assets ratios will mostly rise from their historic lows but not to alarming levels.