Financial Services Industry Analysis

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Must know facts:

As per AMFI – The asset management industry in India is among the fastest growing in the world.
At the end of April 2017, the assets under management of the mutual fund industry stood at US$ 299.04 billion.
Inflows in India’s mutual fund schemes via the systematic investment plan (SIP) route rose 44 per cent year-on-year to reach a record high of Rs 4,584 crore (US$ 711.17 million) in May 2017.
The mobile wallets business in the financial services sector, has the potential to be next phase of biggest digital boom after IT boom two decades back.

Influencing Factors for price change:

Movement of Financial services stock is best judged by analysing movement of NIFTY FIN SERVICE.
Bad – loans ratios / Non performing Assets – are certainly key ratios to do health check on financial services industry.
Digitisation initiatives rolled by the government are expected to benefit financial services industry in multi fold, due to quicker operational leverage they have in executing innovative policies.

Understanding the Industry:

The financial services industry manages money for individuals and corporations. It comprises such organisations as commercial and investment banks, insurance companies, hedge funds, credit-card companies, consumer finance firms, accounting agencies, and brokerage firms. The industry’s services are mainly related to banking and insurance services, asset management, investments, foreign exchange, and accounting.

Growth of the Capital Market in India with the introduction of infotech systems in the National Stock Exchange (NSE) in order to cater to the various investors in different locations has been one of the key growth drivers. The insurance market is filled up with new players which has led to the introduction of several innovative insurance based products, value add-ons, and services. Many foreign companies have also entered the arena such as Tokio Marine, Aviva, Allianz, Lombard General, AMP, New York Life, Standard Life, AIG, and Sun Life.

The Government of India has introduced several reforms to liberalise, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs).

The reforms pertaining to the monetary policies and the macro economic policies over the last few years has influenced the Indian economy to the core. The major step towards opening up of the financial market further was the nullification of the regulations restricting the growth of the financial sector in India. To maintain such a growth for a long term the inflation has to come down further.

India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities. The banking regulator has allowed new entities such as payments banks to be created recently thereby adding to the types of entities operating in the sector. However, the financial sector in India is predominantly a banking sector with commercial banks accounting for more than 64 per cent of the total assets held by the financial system.

Estimated Market Size:

The Mutual Fund (MF) industry in India has seen rapid growth in Assets Under Management (AUM). Total AUM of the industry increased 40 per cent year-on-year to hit a record Rs 23 lakh crore (US$ 358.78 billion) at the end of November 2017.At the same time the number of Mutual fund (MF) equity portfolios reached a record high of 46.63 million, of which 7.6 million portfolios were added in 2017 till November.

On account of rise in investments in the Mutual Funds and other financial instruments, the revenues of the brokerage industry in India are forecasted to grow by 15-20 per cent to reach Rs 18,000-19,000 crore (US$ 2.80-2.96 billion) in FY2017-18, backed by healthy volumes and a rise in the share of the cash segment.

Road Ahead:

The financial sector in India had an overall growth of 15%, which has exhibited stability over the last few years although several other markets across the Asian region were going through a turmoil. The development of the system pertaining to the financial sector was the key to the growth of the same. With the opening of the financial market variety of products and services were introduced to suit the need of the customer. The Reserve Bank of India (RBI) played a dynamic role in the growth of the financial sector of India.

The banking system in India is the most extensive. The total asset value of the entire banking sector in India is nearly US$ 270 billion. The total deposits is nearly US$ 220 billion. Banking sector in India has been transformed completely. Presently the latest inclusions such as Internet banking and Core banking have made banking operations more user friendly and easy.

– Article by Suman Adithya Rao (SEBI Certified Research Analyst, Management Graduate in Entrepreneurship & Small Business Management)
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Top Stocks in the industry:

Bajaj Finance, M&M Financial, Sundaram Fin, Manappuram Fin, Cholamandalam & many more.

(Please note above stocks are not recommendations, they are purely for information purpose only)

Information Source / References: IBEF, The Economic Survey 2016–17, Agricultural and Processed Food Products Export Development Authority (APEDA), Department of Commerce and Industry, Union Budget 2017–18, Press Information Bureau, Ministry of Statistics and Programme Implementation, Press Releases, Media Reports.

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