>INDIA: Financial Services

Banking Sector – In good shape
We recently hosted an Indian Financials road trip, where investors hadextensive interaction with 25 corporates. Our key takeaways:

(1) Credit growth will likely accelerate and will be more broad based in 2H as corporates start drawing down on approvals,

(2) Deposit growth which has been sluggish so far (not indicted to be a concern) will improve as banks have raised deposit rates,

(3) Banks remain optimistic on CASA targets despite a rising rate environment,

(4) Not all banks were confident of margin improvement given less pricing power, which they expect to return with credit growth,

(5) Banks expect NPLs to rise in FY2011 on account of agri debt, and end of moratorium period for restructured assets, both of which could lead to some more slippage, though remain manageable and improve in FY2012,

(6) HR issues seem to be the major concern for PSU banks as they see a large number of senior staff retiring as well as debate about compensation packages to retain and attract talent. Branch expansion and shorter branch breakeven seem to be key drivers of growth for private banks to increase profitability.

Insurance Sector – Jury will be out for some time
Insurance industry interactions were more tepid in tone with the jury still likely to be out for some time on how recent regulations would impact growth and margins. Companies are currently in the process of calibrating strategies – product mix, and focus on cost, productivity and persistency to minimize impact.

From our interactions it emerged that insurance companies expect volume growth to be lower in 2H given a higher base, lower commissions and retraining of agency force to sell new products. Most companies we interacted with indicated a potential shift in product focus to traditional
products from ULIP, though these traditional products along with distributors may potentially be the next target area for the regulator.

We expect margins to fall to 12-15% from 19-20% pre-regulatory changes even despite the potential significant cost cuts planned by companies.

Most companies seem comfortable on capital at least for FY2011. Potential equity issuances are now not on the horizon.

To read the full report: FINANCIAL SERVICES