Industry Outlook
The Indian Banking industry has got into rapid transformation post liberalization, resulting in higher inflow of funds from Foreign Institutional Investors (FII's) into the capital market. Despite the incursion of foreign banks in the country, Indian Banks continue to be the biggest lenders in the country, primarily due to their size and penetration of branches. The Reserve Bank of India is the Indian equivalent of the Fed. The opportunities in this industry remain extremely promising due to its relatively low penetration of both basic as well as advanced financial products.
Though the Indian finance and banking industry did suffer significantly during the past 2 years, it was relatively sheltered from the triggers of the global melt-down, suffering instead due to monies from FII’s drying up, falling interest rates, rapidly rising inflation and poor investor confidence. Annual reports suggest that most of the larger Banks have begun to pick up from where they left off, albeit with more caution, and most industry pundits are optimistic about the current fiscal year.
Industry Structure
Among PSU Banks State Bank of India holds the majority market share and among the private banks ICICI is at the top.
Let’s look at the Banking value chain which is more or less common across all the banks in India.
| External Factors | Marketing Sales | Operations | Delivery Channels | Revenue Channels |
| Regulatory Agency | Branding | Deposit | Branch N/w | Banking Products |
| Alliance Partner | Account Acquisition | Loan | ATM’s | Insurance Products |
| Deposit gathering | Treasury | Internet | Wealth Mgmt Services | |
| Payment | Mobile/Telephone | Investment Products | ||
| Regulator reporting | Call Centre |
Industry Attractiveness
The Banking system in India is different from that of the other Asian nations because of the country’s diverse social and economic demography. Though the sector opened up quite late compared to US and EU. The profitability of Indian banking sector is at par with that of developed nations, though the scale of operations may not be comparable.
Let’s look at the forces acting over the Indian banking sector to see for a player to be here is attractive or not.
Implications of Porter’s 5 forces Model
Now looking at the forces for a new entrant to enter this industry it’s very tough because of the regulatory policies and the capital intensive. And there is considerable bargaining power from the suppliers and threat from substitutes which makes it industry to be for competent players.
For the existing players the industry is attractive enough to persist with the business that’s majorly due to large untapped market, lesser bargaining power of customers rising income levels, growing employment, emerging economy and FII’s pumping money for returns. Above all the existing players have the trust, brand image and the competency to run the business, which shows in their growth year on year.
Factors driving Industry change
The forces are making demand for banking services to people increase and it is increasing the competition between the players in the sector increase and those who are able to differentiate themselves from other are reaping reward in terms of profitability as such industry itself is growing positively at a healthy rate.
Industry growth in deposits is around 21% and 30% for advances. And it is this attractiveness which makes even new players to have a say in the industry that why companies like L&T, Sundaram finance, Bajaj Capital are excited to enter the sector.
Macro Environment Factors on the Banking Industry
A look at the Macro Environment factors on banking industry will help us analyzing the opportunities and threats an organization faces in this sector and what it could do it build on its strength to mitigates its weak and move from where it is now, to where it wants to go.
Looking at the macro environment factors the opportunities outweighs the threats hence there is lot of scope for growth in this industry than threats which are evident for all the players in common and the success of the organization in this sector depends on how well they make use of the opportunities presented to them, from others and differentiates themselves from others.
Strategic Group Mapping
ICICI Bank is grouped with among the private banks and it is the top bank in this league. Though it might not be in direct competition from the PSB’s with the increasing and improving services from the nationalized banks which is feeling the heat to scale up their customer services will pose serious competition in future.
Industry Life Cycle Positioning
- Attractiveness High
- Scope for increase in banking networks Very high only 40% population having basic banking services
- Avg. growth of Banks High
- Competition (Fragmented) High
- Demand for banking services High
- Maturity during economic crisis High
- Regulation Good
The above factors make it evident that the industry is in growth stage
ICICI Bank Vs Industry Benchmark (SBI, HDFC Bank, PNB)
(Assumption: return rate is 12% and financing cost is 12% for a period of 10 years)
EVA: - Economic Value Add is a powerful indicator to show whether the company
is able to sustain its profitability.
ROCE : Return on Capital Employed
WACOC: Weighted Average Cost of Capital
ICICI Bank has got one the best ROCE and surpasses the benchmark. Showing its ability to make profit even with lesser number of branches. Most of its account holders are under salaried account and high networth individuals and charge premium for the services they offer.
Key Success Factors
To be successful in such a high competitive industry requires a bank focus on Key Success Factors (KSF) which will help it to survive the competition.
To List a few Key Success Factors for the banking industry are:
- Strong Financial resources/Lower NPA
- Customer service capabilities
- Image/Trust
- Scalability of branches (in rural, tier-II & tier-IIIcities)
- Financial product/service innovation
- Strong Lobbying with RBI/Ministry of Finance
- Focus on skilled manpower.
- Strong management
Competitive Strength Assessment
(All figures in Rs. Million lacs)ParameterICICI BankSBIHDFC BankPunjab National BankCanara BankTotal Assets37.996.418.324.621.9Customer service Capabilities/ATM’s61028548329521502006Service innovation Ranking12354
S.NoKSF/Strength MeasureImportance Wt.ICICI Bank rating/scoreSBI rating/scoreHDFC Bank rating/scorePNB rating/score1.Strong financial resources0.307/2.19/2.75/1.55/1.52.Customer service capabilities0.2510/2.57/1.758/26/1.53.Innovation in service0.2010/28/1.67/1.45/14.Branding0.159/1.89/1.87/1.45/15.Scalability of branches0.206/1.210/25/18/1.6
Sum of Imp Wt’s1.0
Wt. overall strength rating
9.89.857.36.6SWOT of ICICI Bank
ICICI Bank joined the band wagon of retail banking in 1994. Before that it was dealing with services for corporate. And within 10 years it had became the largest private bank in India and still continuing it.ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year ended March 31, 2010. The Bank has a network of 2,529 branches and about 6,102 ATMs in India, and has a presence in 19 countries, including India.ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).Let us do a SWOT Analysis of ICICI Bank to see how to see where it stands and how it maps to fulfill the KSF.Strength:Strong domestic market presence and largest private bank in the countryKSF 1
International presence of commercial banking increases profitability of ICICI
Relatively higher operational efficiency reason for its better marginsKSF2, 7
Use of technology and innovation at service makes it a favorable bank among depositorsKSF 5Excellent management with likes of K.V Kamath & Chanda Kochar at the top
KSF 8Weakness:Increasing non-performing assets (NPA) reduces profitability.No major promoters, shareholding pattern quite scattered.Frequent capital dilution.Less no. of retail deposits. Liability mix mismatchOpportunities:Rural banking still it its nascent stage large opportunity exists thereGrowth in insurance sectorOnly 40% of population has accounts with banks.Many people will be added in payroll under NREGA scheme.Industry Growth of around 25 % y-o-yThreats:Opening of banking licenses to NBFC’s will increase competitionDomestic and Global economic slowdownPSB aggressive and improving their services to match up with private banksStrategy for ICICI Bank going forward
- ICICI Bank has been able to maintain its foothold as largest private bank in India. But competition is increasing more than ever and to maintain its momentum. ICICI bank needs to build on its strength continue to do what it has been doing. Strategically it needs to take certain steps to become the largest bank in India.
- Next growth of India is coming from smaller cities and rural markets. hence increase branches in rural India to increase deposits
- Economies of scale do apply in banking sector too. Hence ICICI think of consolidating smaller private banks to improve their operational efficiency further.
- Bank should lend its money in a growth oriented sector and do a risk management and expand fund generation profile and revenue streams to capitalize on the forthcoming opportunities.
References
http://www.icicibank.com/aboutus/corp-profile.html
Disclaimer:
The author by no means is promoting any bank here with his research.
The study is purely research oriented.
