Specialist in Indian Banking and Economic Research

Hemindra Hazari

Is a Securities & Exchange Board of India (SEBI) registered research analyst with over 25 years experience in the Indian capital markets with a specialization in banking and economy research and has managerial experience of establishing profitable equities business, leading and mentoring analysts.  He has worked with prominent foreign and domestic capital market firms such as UBS, Societe Generale, HSBC, ASK Raymond James  and Karvy Stock  Broking and is a regular guest on business media channels and is respected for his non-consensus view on stocks and the market.

Private Sector Banks Increase Lending Rates: Securing Themselves Against the Coming NPA Wave?

It Will Be Tougher for HDFC Bank to Maintain Its Remarkable Profitability in the Future

HDFC Bank: The Puzzle of Stand-Alone Operating Expenses Being Higher than Consolidated

Thematic (Sector/Industry)

The near-absence of a government stimulus to revive the Indian economy from the Covid-19 meltdown portends a severe and prolonged economic slowdown. This will squarely hit the banking industry with huge credit costs and low growth. In such a dismal scenario, the only lever available to the banks is cost management: to reduce costs and to leverage the existing cost structure to generate more business. In both respects, banks would have to adopt a revised business model: successfully implementing digitisation, which would entail re-engineering processes, developing new businesses and  taking market share from other banks must take precedence to reduction in headcount; salary cuts (starting from the bloated remuneration given to senior management); and a re-examination of overheads. As compared with government banks, private sector banks have a higher component of non-staff costs to staff costs, on account of the incentives they pay to direct sales agents (DSAs) and for business processing outsourcing (BPO); for government banks such work is done by their own staff. In the 1QFY2021 it would appear that banks have commenced cost cutting measures, as they reported a decline in non-staff operating expenses. However, management commentary claimed that this was on account of the loss in business, which resulted in lower expenses related to the business, such as sourcing fees and commissions to direct sales agents (DSA). But nevertheless the banks in our sample, with the exception of <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a>, reported improvements in the cost-to-income (excluding domestic treasury profits) ratio.While the 1QFY2021 results reveal that the banks are aware of the importance of cost management, a lot more has to be done as credit costs in the coming days rise sharply. The only lever available to management to prop up profits in the face of the inevitable economic slowdown is to hasten the process of digitisation, thereby reducing headcount, develop new business verticals and slash salaries. Shareholders therefore need to closely monitor cost-to-income ratios stripped of treasury profits to determine which banks are successfully implementing cost management and digitalisation.

The near-absence of a government stimulus to revive the Indian economy from the Covid-19 meltdown portends a severe and prolonged economic slowdown. This will squarely hit the banking industry with huge credit costs and low growth. In such a dismal scenario, the only lever available to the banks is cost management: to reduce costs and to leverage the existing cost structure to generate more business. In both respects, banks would have to adopt a revised business model: successfully implementing digitisation, which would entail re-engineering processes, developing new businesses and  taking market share from other banks must take precedence to reduction in headcount; salary cuts (starting from the bloated remuneration given to senior management); and a re-examination of overheads. As compared with government banks, private sector banks have a higher component of non-staff costs to staff costs, on account of the incentives they pay to direct sales agents (DSAs) and for business processing outsourcing (BPO); for government banks such work is done by their own staff. In the 1QFY2021 it would appear that banks have commenced cost cutting measures, as they reported a decline in non-staff operating expenses. However, management commentary claimed that this was on account of the loss in business, which resulted in lower expenses related to the business, such as sourcing fees and commissions to direct sales agents (DSA). But nevertheless the banks in our sample, with the exception of Indusind Bank (IIB IN), reported improvements in the cost-to-income (excluding domestic treasury profits) ratio.While the 1QFY2021 results reveal that the banks are aware of the importance of cost management, a lot more has to be done as credit costs in the coming days rise sharply. The only lever available to management to prop up profits in the face of the inevitable economic slowdown is to hasten the process of digitisation, thereby reducing headcount, develop new business verticals and slash salaries. Shareholders therefore need to closely monitor cost-to-income ratios stripped of treasury profits to determine which banks are successfully implementing cost management and digitalisation.

For Banks, Cost Management Is the Only Way of Surviving the Long Slump