Indian banks are likely to attract increasing global investment from investors looking for better returns as higher credit growth, improved margins and stable asset quality boost lenders.
The total market value of foreign institutional investors' holdings in Indian banks has risen in recent years, climbing to 8.363 trillion rupees as of June 30 from 7.713 trillion rupees a year prior, according to data compiled by S&P Global Market Intelligence. This is a significant rise from the 6.734 trillion rupee figure in June 2020.
The country's economic growth prospects and lenders' solid performance, among other factors, are driving this investor interest, analysts said.
"There are some secular themes driving this trend," said Raghu Narain, Natixis' head of investment banking for Asia-Pacific. "As the economy grows and consumers need more credit, the banking and [nonbank financial company] sector are both growing bigger. Second, digitalization is further enabling the growth and profitability of the banking sector."
As a result, investors are investing with a greater zeal in India, Narain said, adding that the trend has proven successful and more global investors are likely to participate.
Indian banks have improved both profitability and asset quality in recent years, benefitting from higher credit growth and margins in a fast-growing economy. The economy is expected to expand 6% to 7% annually until 2026 at least, making it the fastest-growing major global economy, according to S&P Global Ratings.
India has become an attractive market for foreign investors due to its favorable demographics, strong economy and high investment ratios, UBS analysts said last month. Investors keen to invest in India's continued growth story could consider Indian banks, following their positive fiscal second-quarter results, the analysts said.
Private-sector banks
The majority of foreign institutional investors' holdings — 93.5% of the value as of June 30 — is concentrated in India's biggest private-sector banks, Market Intelligence data shows. Top investees for foreign institutional investors include ICICI Bank Ltd., HDFC Bank Ltd. and Kotak Mahindra Bank Ltd.
"Private sector banks in India have been growing loans at [more than] 15% since the last 10-15 years, and therefore the interest in banks has remained high over the years," Vishal Goyal, head of research at UBS Securities India, said via email. "Improvement seen in last few years could be probably due to bottoming of Corporate [nonperforming loan] cycle and a quick turnaround in growth post-COVID."
The market value of foreign institutional investors' holdings in Indian private-sector banks rose to 7.822 trillion rupees as of June from 7.291 trillion rupees a year ago. The value stood at 6.373 trillion as of June 2020, Market Intelligence data show. On the other hand, the market value of foreign institutional investors' holdings in Indian state-owned banks clocked in at 541 billion rupees as of June, versus 422 billion rupees a year ago.
Natixis' Narain expects more foreign investors to get attracted to Indian private-sector banks, which offer better growth prospects, higher quality of management, bigger market share and consistent profitability.
Top global investors
US-based Capital Research and Management Co. sat atop the list of foreign investors in Indian banks by market value, followed by BlackRock Inc. and Singapore's GIC Private Ltd. Thanks to its more than 6% stake in Kotak Mahindra Bank, Capital Research and Management's value of holdings in Indian banks stood at 542.90 billion rupees as of June, the data show.
More investments in Indian lenders may come from Australia, Europe, Japan, South Korea and the Middle East, given the dearth of investment opportunities in their home markets and a shift in investors' geopolitical focus.
GIC CEO Jeffrey Jaensubhakij told Nikkei Asia in July that the sovereign wealth fund was looking at investing more in emerging markets such as India, Indonesia and Vietnam as businesses rush to diversify outside of China.
"We have been witnessing this phenomenon of investors shifting their geographical focus due to change in the geo-political dynamics across sectors and I see the same impacting positively the Indian banking sector," said Sandeep Upadhyay, managing director of infrastructure practice at Centrum Capital Ltd. "India has emerged as a potent hub for robust growth in the financial ecosystem attracting high quality investors," Upadhyay said in comments emailed to Market Intelligence.
Upadhyay, however, warned that some risks still surround Indian banks in an otherwise favorable environment, including sustaining credit growth. High credit growth has helped banks improve their portfolio, but over-caution may erase gains for the lenders in the long term.
In addition, "the other area of concern could be capacity building towards improving appraisal skills sets and [the banks'] ability to raise cheaper capital in the long term," Upadhyay said.
