Oz Banks have been great, but.....

The banking sector serves as a fundamental pillar of any economy, and investors seeking market exposure can assess the conditions of financial stocks across different regions to gauge their economic health and future trajectory. Australian investors tend to favour domestic banks as a key part of their investment portfolio due to their perceived stability, as well as attractive dividends to create wealth. Although this is largely true, we view that investors seeking longer-term growth opportunities in the financial sector should look beyond the local markets as countries in the developing phase can present more attractive growth stories.

Scale and market saturation

When we compare the scale of India’s banks vs Australia’s banks, we see that Indian banks are comparable in size, whilst operating in a much less saturated market with a growing addressable market.

In 2023, the average savings account balance in India is just over AUD$550 as compared to the average savings account in Australia at around AUD$38,000. (Source: RBI, Finder Consumer Sentiment Tracker)

India’s GDP per capita is expected to rise to AUD$31,500 in 2047 as stated by PHD Chamber of Commerce and Industry, as compared to current levels of AUD$4,000. According to World Bank, Australia’s GDP per capita, on the other hand, has stagnated around AUD$95,000 for the last decade. The growth runway on India’s wealth and economy suggests that the Indian banking sector could be multiple times larger than what it currently is. 

Performance

The growth profile of Indian vs Australian banks in the last 10 years highlights the difference in investor experience, as well as the fundamental differences driving the trend in each financial sector. Despite reforms and stricter regulations in the past decade, Indian banks have charged ahead with their performance, driven by a growing market, rising wealth per capita, urbanisation, and expanding digital initiatives.

Growth Trajectory

Moving forward, India's banking sector is on a robust growth path, propelled by rapid economic expansion and increased adoption of digital banking services. The emphasis on technological innovation and expanding reach into rural areas positions Indian banks for sustained growth.

For example, India’s bank uses Unified Payments Interface (UPI), an instant real-time payment system developed by the National Payments Corporation of India (NPCI) that allows users to link multiple bank accounts in a single mobile application and conduct seamless transactions. It enables peer-to-peer (P2P) and business-to-customer (B2C) payments instantly, 24/7.

UPI has revolutionised digital payments in India due to its ease of use, zero or low transaction costs, and interoperability between banks. It is widely accepted by businesses, e-commerce platforms, and even for small peer-to-peer payments. A quick comparison with other existing payment systems globally highlights the technological advancements and innovation involved in India’s rapidly growing economy through financial digitisation.

Australian banks, on the other hand, are navigating a mature market with a focus on cost optimisation. Although they are in a more mature market, digital innovation has been lacking, and digital adoption has been slow. There has been a shift towards digital banking platforms in recent years, and core system modernisation aims to enhance customer experience and operational efficiency. However, the sector still faces challenges to growth, with market saturation and regulatory compliance costs being the major factors.

The Obvious Conclusion

In summary, while both Indian and Australian banks are central to their economies, they operate under different dynamics. Despite the big banks in each country having similar market cap sizes, Indian banks are likely to be substantially larger than they currently are as the country’s wealth, population, and digital adoption/innovation continue to expand at a rapid rate.

Investors seeking to capitalise on India’s growth opportunities should seek to gain exposure to this thematic through actively managed funds and Active ETFs focused specifically on the region.