Bank of Baroda tops the BT-KPMG Best Banks Survey of 2011

IN NUMBERS List of Best Banks in India

Downgrade! Downgrade! Like a flu spreading like wildfire from the US to Europe to Asia, the 'D' word is sending shivers down the spines of pinstriped bankers around the world. In just over a month, the big three global ratings agencies have set the alarm bells ringing. Standard & Poor's, or S&P, lowered the ratings of close to a dozen Spanish financial institutions, including the country's two biggest banks - Banco Santander and Banco Bilbao Vizcaya Argentaria. Moody's painted Russia's banking system with a negative bias from stable, and also downgraded Bank of America's long-term rating by two notches. And Fitch Ratings declared a negative outlook on Italy's five largest banks.

In fact, even France-based BNP Paribas, the world's largest bank in term of assets at $2.72 trillion, joined the downgrade bash this October when S&P cut its rating by a notch. The threat of downgrade is also looming large over marquee names such as Morgan Stanley, Goldman Sachs and JPMorgan.

The Winners BEST LARGE BANK Bank of Baroda BEST MID-SIZED BANK IndusInd Bank BEST SMALL BANK JPMorgan Chase MOST CONSISTENT LARGE BANK Axis Bank GROWTH, QUALITY OF ASSETS (LARGE BANKS) YES Bank PRODUCTIVITY & EFFICIENCY (LARGE BANKS) IDBI Bank GROWTH (MID-SIZED BANKS) Dhanlaxmi Bank QUALITY OF ASSETS (MID-SIZED BANKS) Karur Vysya Bank PRODUCTIVITY & EFFICIENCY (MID-SIZED BANKS) City Union Bank PRODUCTIVITY & EFFICIENCY (SMALL BANKS) JPMorgan Chase GROWTH, QUALITY OF ASSETS (SMALL BANKS) Mizuho Corporate Bank QUALITY OF ASSETS (SMALL BANKS) Bank of America

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After the subprime lending fiasco, banks find themselves in another quagmire - the euro debt crisis and slowdown in credit demand. Only Chinese banks are sitting pretty - ICBC and China Construction Bank are today the world's largest in terms of market cap - though Hong Kong banks with high exposure to the mainland are looking more vulnerable.

In India, the country's largest bank, State Bank of India, or SBI, came under Moody's scanner, which downgraded its perpetual bond ratings by a notch. The downgrade indicates that India's banking sector is not in the best of health. There are growing concerns on deteriorating asset quality, capital challenges and issues such as financial inclusion as 50 per cent of the Indian population has no banking access.

Let's take the capital challenges first. There is an estimate that Indian banks will require more than Rs 10 trillion (one trillion equals 100,000 crore) over the next 10 years to fund growth requirements. That's a tall order, especially for public sector banks - which control 75 per cent of the Indian banking system - where the government is a reluctant partner when it comes to pumping in capital. In an interview with BT a few hours after announcing the 13th interest rate hike in the past one and a half years, Reserve Bank of India, or RBI, Governor D. Subbarao said that India, being a rapidly transforming economy, will require more credit than it did in the past. "The capital requirements of banks are going to be more than we would project from previous history," he said.

The government is also mulling a holding structure for PSU banks - that saves them from diluting its stake - for allowing them to raise capital. On the asset quality front, nonperforming assets, or NPAs, are creating a headache with gross NPA figures closing in on Rs 1 trillion (see In Default Mode, page 84). In this challenging environment, banks have to make efficient use of capital, write good quality assets, reward shareholders, and play an integral role in India's economic development.

It is in this context that the 2011 edition of the Business Today-KPMG Best Banks study was conducted. And not surprisingly, the study has thrown up some, um, surprises. Private sector major HDFC Bank was the undisputed leader in the BT-KPMG study from 2003 to 2008, but when it pounced on Centurion Bank to acquire size, it lost out on many performance parameters and the top slot. A public sector bank - Bank of India - rose to the top in 2009 when the global financial meltdown affected many a bank in the country. A year later, Axis Bank came out tops.

MUST SEE: Winners in pictures

This year, the country's fifth largest bank, Bank of Baroda, has galloped like a dark horse to the peak. The bank's rise is made unique by the fact that it did not top in any of the 27 parameters in its group, yet emerged overall winner. Another surprise winner is the Hindujas owned IndusInd Bank in the mid-sized category .

IndusInd's rise to the top is a shot in the arm for corporate houses eyeing the fast-growing banking sector, including the Tatas, Reliance, Birla and Mahindra. Romesh Sobti, Managing Director and CEO of IndusInd Bank, says: "A country's GDP funnels through the banking system. India's growth story will require many more banks to meet its credit needs." Chanda Kochhar, Managing Director & CEO of ICICI Bank, says India's economic fundamentals should enable it to average eight per cent real GDP growth over the next several years. To support this, bank credit would need to grow by about 2.5 times, or 20 per cent, annually. This means the current non-food credit of about Rs 40 trillion will grow to about Rs 200 trillion by 2020. "This is the kind of scale we have to be ready for if banks are to play the role they need to play in this growing economy," she says. "I believe these are conservative estimates; we are basing this projection on India's growth in absolute terms as well as relative to other markets."

It is no secret that there is ample growth potential. Even as many argue that metros and urban centres are saturated, there is a strong view that both will remain twin tracks of future growth. Today, more and more customers in urban and metro markets are moving toward Internet banking, ATMs and mobile banking. "This self-directed population is growing faster than the normal channel," says Rajiv Sabharwal, Executive Director at ICICI Bank. But the bigger market would undoubtedly be the hinterland or the unbanked areas, where the competition is already building up.

Does that mean India's banks will also have to bulk up? "Size and scale are important, but we should not forget that Indian banking has done remarkably well despite difficult global conditions," says M.D. Mallya, Chairman of Bank of Baroda. In fact, when it comes to transactions, SBI claims to be the biggest bank in the world. "We have 250 million accounts and about 170 million customers," says SBI's Managing Director A. Krishna Kumar. "We have about 40-45 million transactions daily. The peak was 52 million in March this year." But these transaction values, when converted into dollars, remain insignificant.

But at a time when central bankers and governments around the world are striving to ensure that banks don't become too big to fail, size is certainly going to take a back seat. "The aspiration is not just size," says ICICI Bank's Kochhar. "It is a robust, innovative banking system that effectively meets the growth needs of all segments of the Indian economy."

Ergo, size should be seen together with growth, productivity, efficiency, quality of earnings and capital adequacy. How well Indian banks are doing on this front is what the BT-KPMG study captures every year.