We met the management teams of over a dozen Indian banks, insurers and asset managers in the financial capital of Mumbai, India in December. With real GDP growth of over 7% over the past decade, India is one of the largest emerging markets and forecast to be the fastest growing major economy in 2019. Not surprisingly, the management teams we met were very upbeat. Exposure to Indian banks for the Hamilton Capital Global Banks ETF (HBG) and Hamilton Capital Global Financials Yield ETF (HFY) is ~7% and 5% of holdings, respectively. Below are the key takeaways from our meetings in Mumbai.
- Favorable macroeconomic backdrop for financials: Indian financials and banks have benefited from strong GDP growth, fiscal consolidation, easing inflation trends and bankruptcy reforms. Economic growth remains strong and in fact, GDP growth has averaged 7%+ for over five consecutive years. Overall, Indian financials, particularly those geared to consumption growth and demand, see a strong, secular multi-year growth period ahead of them.
- Inflation within target, monetary policy remains supportive: With CPI inflation1 well within the RBI’s medium-term target of 4% (tolerance band of +/-2%), monetary policy is expected to remain supportive of economic growth. Expectations of a dovish turn of the monetary policy have risen more recently with the appointment of a new Indian central bank chief (a former bureaucrat) and the steep fall in crude energy prices (~30% decline since October 2018).
- 2016 demonetization initiative was net positive: Banks have been net beneficiaries of the 2016 currency exchange initiative2 even though this change proved somewhat disruptive to the broader Indian economy. Banks – particularly those with large retail banking, asset management and insurance arms – saw large asset inflows from a structural shift away from cash to bank deposits and other financial assets in key urban markets.
- Market share gains expected to continue for India’s private sector banks (& losses for its state-owned banks): One of the most important trends in Indian banking is the growth in market share of the private banks over their less well run state-owned competitors. In fact, in the last decade, private banks have benefited from a substantial 10% increase in market share (~30% share in loans), particularly in the fast growing, underpenetrated, higher ROE retail banking sector. Private sector bank management teams we met were optimistic on retail credit demand and expected retail credit growth (~45-55% of loans for the large private banks)3 to continue to outpace corporate credit (~40% of loans) in FY194 and beyond. Generally, bankers told us that credit risk remains benign in retail banking.
- For Banks, asset quality expected to improve: Two years since the introduction of bankruptcy reforms5, non-performing loans (NPLs – or “bad loans”), across the Indian banking sector remain elevated, particularly at the state-owned banks6. Of note, there are several large Indian corporations in high profile bankruptcy proceedings including those in the infrastructure, steel and power sectors. With many of these court cases approaching resolution, a strong economy and labour market, improved data analytics and risk management, it was the view of many executives that asset quality should improve in 2019 (supporting earnings growth).
- Asset managers have benefitted from cyclical and structural tailwinds: With strong equity market performance over the past decade, the asset management industry has seen record inflows (AUM at ~US$329bn7). Large bank-owned asset managers have benefitted from the 2016 currency exchange initiative in particular. While the sector has seen a flurry of regulatory tightening in recent months (including a cap on expenses ratios)8, underlying ROE remains attractive.
- Strong demand spurs insurance market growth: Life insurers we met expected healthy premium growth in unit-linked and protection insurance segments driven by favorable demographics9, rising affluence and a growing savings pool. Distribution is primarily bancassurance driven (53% for private insurers10), which favors the incumbent private banks.
Biggest risk for 2019? National elections: Bankers we met were generally supportive of the incumbent party’s pro-business and pro-growth economic policies of the past five years. With less than three months before a national election, policy uncertainty has risen for the sector. For example, the pending elections have raised expectations of a loan waiver and/or cash sop to India’s large and politically influential agricultural sector (~13% of loans11), especially with weak agricultural produce prices and difficult monsoon weather over the past two years. Some firms we met with expressed concern that corporate credit demand may decline ahead of the election as companies await policy clarity before making long-term capex commitments. That said, bank management teams expect a split/dilutive political mandate to delay but not derail the pace of long-term economic reforms.
Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.