56 - Banking - Sector Thematic 24mar14

Sector Thematic
INDIA
FINANCIALS
24 March 2014

REPORT AUTHORS
Siddharth Teli
(91-22) 6766 3463
siddharth.teli@religare.com
Vikash Mundhra
(91-22) 6766 3474
vikash.mundhra@religare.com
J aynee Shah
(91-22) 6766 3467
jaynee.shah@religare.com

RCML Universe: Recommendation summary

CMP
(Rs)
Target
Price
Reco
PSU banks

SBIN 1,702 2,200 BUY
PNB 642 700 HOLD
BOB 656 825 BUY
BOI 202 205 HOLD
CBK 240 250 HOLD
UNBK 116 135 HOLD
OBC 192 240 BUY
Private Banks
ICICIBC 1200 1,450 HOLD
HDFCB 987 1,187 BUY
AXSB 1,394 1,470 HOLD
YES 360 475 BUY
IIB 472 535 BUY
NBFCs
HDFC 843 1,000 BUY
LICHF 224 270 BUY
SHTF 667 800 BUY
POWF 171 225 BUY
REC 207 270 BUY
MGFL 21 28 BUY
MMFS 254 290 BUY
SCUF 1,015 1,200 BUY
BAF 1,673 1,850 BUY
Source: RCML Research #Prices as on Mar 21, 2014

India Financials
Play the recovery cycle
Banks, especially PSUs, face large capital requirements upon
transition to Basel III. As the macro improves and the NPL cycle
likely moderates, core operating parameters such as a strong
CASA franchise will return to the fore. Private banks and large
PSUs (SBIN, BOB) are better placed due to higher capital efficiency
and a superior liability franchise valuations too are attractive with
multiples still below the 7-yr mean. Top picks: Banks HDFCB,
SBIN & ICICIBC (upgrade to BUY); NBFCs SHTF, POWF & RECL.

Credit growth may dip before recovering: Relatively lower LDRs and
real positive deposit rates (as inflationary pressures ease off) should
boost deposit growth and hence, credit growth in FY16. On a lower
base of FY15, our bottom-up analysis suggests credit growth may pick
up in the range of 14-18% in FY16.
Importance of core liability franchise could return to the fore: While
asset quality trends affect banks price performance in a down cycle,
core operational metrics such as liability franchise may gain greater
significance as the cycle turns. Private banks and larger PSUs like SBIN
and BOB have maintained/improved their CASA base over the past
decade, which would help them once the credit cycle picks up.
Capitalisation levels a key differentiator among banks: Transition to
Basel III is likely to entail an external capital requirement of Rs 2trn for
our coverage stocks (7 PSUs and 5 private banks) through FY19, a bulk of
which is likely to be driven by PSU banks due to their lower profitability.
Private banks along with their larger PSU counterparts such as SBIN and
BOB are better cushioned owing to higher capital efficiency.
Asset quality pressures could abate in FY16: Elevated interest rates
may continue to impact asset quality in the near term. However, the
stress is likely to abate in FY16, driven by a pickup in GDP, lower
inflationary pressures, softening interest rates and improving
corporate profitability.
Retail and power NBFCs may fare better upon a macro recovery:
Lower competitive intensity along with a likely macro recovery should
drive a pick-up in vehicle sales benefitting retail NBFCs. Despite the
recent run-up, gradual improvement in asset quality is likely to further
boost sentiment for power NBFCs.
Valuations still below long-term mean: Current P/E valuations for
private banks are nearly 1SD lower than their 7-year mean. Valuations
could trend towards their long-term averages as economic concerns
abate. For PSU banks, this argument is relevant where capitalisation
levels are strong, viz. for SBIN and BOB. We upgrade ICICIBC to BUY
and maintain HDFCB, SBIN and ICICIBC as top picks. SHTF, POWF and
RECL are our preferred picks among NBFCs.

This report has been prepared by Religare Capital Markets Limited or one of its affiliates. Where the report is distributed by Religare Capital Markets
(UK) Limited (RCMUK), the firmis an Appointed Representative of Elevation Trading Limited, which is authorised and regulated by the Financial
Conduct Authority in the United Kingdom. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section
at the end of this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE
restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
India Financials

Sector Thematic
INDIA
FINANCIALS

24 March 2014 Page 2 of 37

Contents
Macro: Play the recovery cycl e ........................................................................ 3
Growth near-bottom; a gradual recovery ahead ............................................................ 3
CAD no longer bad INR positive at the margin ........................................................... 4
Fisc remains under control ............................................................................................ 5
Inflationary pressures to keep rates stronger-for-longer ................................................ 6
Credit growth could fall to 12-14% in FY15 before picking up in FY16 ........ 7
Growth recovery could be stretched .............................................................................. 7
Bottom-up analysis supports our view of stretched recovery; credit cycle could turn in
FY16 .............................................................................................................................. 8
Improving LD ratio and positive real deposit rates may aid recovery .......................... 10
High CASA banks better positioned to capture growth .............................. 11
Liability franchise gains significance as the cycle turns ............................................... 11
Private banks and SBIN have scored well on the CASA front over the last decade ... 12
Capitalisation levels to decide who is best pl aced in the cycle.................. 13
Private banks best placed on capital PSU market share losses to get exaggerated in
this cycle ..................................................................................................................... 13
Impact on valuations of private banks due to additional capital raising ....................... 16
Dilution levels to be much higher in PSU banks could hurt their growth in the next
credit cycle .................................................................................................................. 17
Some PSU banks are optically cheap severe impact due to additional capital raising
.................................................................................................................................... 20
Asset qual ity Are there any signs of reversal? ......................................... 21
Retail credit quality has stayed strong, corporate stress the worry so far.................... 21
Incremental stressed loan formation has moderated................................................... 21
Asset quality stress may abate in FY16 ...................................................................... 22
Valuations reasonabl e despite recent run-up ............................................... 23
What is the upside post the recent run-up? ................................................................. 23
Banking stock recommendations ................................................................................ 27
Softening wholesale rates may drive outperformance for NBFCs ............. 29
Price performance correlated to liquidity and wholesale rates .................................... 29
Retail NBFCs may benefit with a likely upturn in the CV cycle, as the macro picks up 29
Power NBFCs: Balanced risk-reward .......................................................................... 30
Housing Finance: Stable growth story ......................................................................... 30
NBFC stock recommendations .................................................................................... 31
Key risks ........................................................................................................... 32
Company
ICICI Bank ....................................................................................................... 33
India Financials

Sector Thematic
INDIA
FINANCIALS


Macro: Play the recovery cycle
Indias macro environment remains entrenched in a cyclical downturn; growth is still
weak with FY15 GDP likely to grow ~5.3%, over FY14s 4.7-4.9%. As the economy enters
into its fourth year of weak growth, a few key indicators have started to turn around,
painting macro vulnerabilities in a new light. Indias twin-deficit problem has dissipated
for now, with the current account deficit (CAD) for FY14 at a comfortable ~2% of GDP,
and likely to remain so in FY15 as anaemic growth keeps imports in check. Fiscal deficit
has remained in line with budgeted estimates for two consecutive years, backed by a
sharp cut in plan expenditure, steady price increases in diesel, and some clever
accounting. FY15 could well see India continue on the fiscal prudence path set by the
Govt. in 2012, with our fiscal deficit estimate at 4.1%. The INR could benefit from
improved fundamentals, with an extended period of stable behaviour.
On the flip side, growth is likely to remain weak in FY15 and even as headline inflation
has started to come off its peaks, core inflation remains sticky and divergent. The RBI is
therefore likely to hold rates high for now, keeping any recovery in check.
Growth near-bottom; a gradual recovery ahead
Even as the Govt.s advance FY14 GDP growth estimate of 4.9% faces downside risks, we
believe growth has largely bottomed out and we should see a recovery from hereon,
albeit at a moderate and gradual pace, with GDP growth expected to rise to 5.3% in FY15.
While things dont look as rosy for the Agriculture sector, after a bumper FY14, amidst
expectations of El Nino (FY15 growth expected at 5.3%), Industrial growth would likely
pick up to 3.1% in FY15 as the new Govt. gears up to address the sharp industrial
slowdown witnessed over the last few years; a low base would also provide some
support. Services growth is expected to recover gradually to 6.9%, more so towards to
second half of FY15. However, inflationary concerns would keep growth expectations
muted in the near-to-medium term.
Fig 1 - GDP growth likel y to have bottomed out Fig 2 - but bumper monsoons are the saviour for Agri.

Source: MOSPI, RCML Research


3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
FY11 FY12 FY13 FY14
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
FY11 FY12 FY13 FY14
Growth has largely bottomed out;
recovery hereon to be moderate and
gradual, with GDP growth expected to
rise to 5.3% in FY15
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 3 - Industrial growth remains subdued Fig 4 - but Services expected to graduall y pick up


CAD no longer bad INR positive at the margin
Indias ballooning CAD in FY13 and early-FY14 along with the US Federal Reserves
announcement of tapering of its asset purchase programme in May13 resulted in the
INR depreciating to record lows of 68.6 to the USD. The sharp respite on the INR since
Aug13 (up ~11.4%) is largely due to measures taken by the new RBI Governor
Dr. Raghuram Rajan, which resulted in huge inflows via FCNR (B) deposits (US$ 34bn).
However, it has been the sharp decline in trade deficit figures that helped the rupee
sustain at appreciated levels, even post the shutdown of the FCNR (B) swap window.
Thanks to several restrictions on gold imports announced in May13 (imports on
consignment basis only, import duty hikes) and the 80:20 rule announced in Jul13 (20%
of gold imports to be kept aside for exports), gold imports declined from US$ 7.7bn in
May13 to US$ 1bn-2bn levels per month. This led to trade deficit dropping from a
record-high of US$ 20.7bn in May13 to US$ 6.7bn in Sep13, consistently beating our
estimates, notwithstanding some support provided by weak domestic demand. Going
forward, we expect some downside risks to our FY14 CAD estimate of US$ 44bn, a sharp
relief from the record-high print of US$ 88bn seen in FY13.
Things, therefore, are definitely turning around on the external front. While import
growth may revive marginally in FY15 from an 8% decline in FY14TD (third decline in 21
years), the trade deficit is expected to remain largely range-bound. Thus, we expect CAD
to only marginally rise in FY15 (sub-2% of GDP), providing much-needed support to the
overall balance of payments.
Fig 5 - Huge inflows via FCNR (B) deposits save the INR Fig 6 - with falling trade deficit extending further support

Source: RCML Research

Source: RCML Research
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
FY11 FY12 FY13 FY14
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
FY11 FY12 FY13 FY14
50
54
58
62
66
70
Apr-13 J un-13 Aug-13 Oct-13 Dec-13 Feb-14
(25)
(20)
(15)
(10)
(5)
-
-40
-20
0
20
40
60
80
100
Feb-11 Nov-11 Aug-12 May-13 Feb-14
($bn) (%)
Trade deficit (R) Export (%YoY)
Import (%YoY)
Sharp INR appreciation since Sep13
(11.4%) was led by huge FCNR (B)
deposits (US$ 34bn over Sep-Nov13),
and a sharp decline in trade deficit
CAD likely to remain under control in
FY15 as well, at sub-2% of GDP
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 7 - Concerns about CAD have eased for now

Source: RBI, RCML Research
The INR, therefore, is likely to see upside support at 62-levels in the near term. Downside
risks remain higher-than-expected import growth, a further weakening of the dollar,
sharp unwinding of the RBIs short forward position (~US$ 32bn as of Jan14) and an
unfavourable election outcome.
Fisc remains under control
The Govt. has remained committed to fiscal consolidation, delivering a 4.6% fisc print in
FY14, better than its budgeted target of 4.8%, even if this was led by further pruning of
plan expenditure and big dividend payouts by PSUs/RBI. Growth, however, clearly
remains the casualty. Sustained diesel price hikes (a total of ~Rs 7 in FY14) have helped
reduce Indias total oil under-recoveries from Rs 1.6trn in FY13 to ~Rs 1.4trn in FY14,
partly negated by the rise in crude prices. We expect diesel price hikes to continue in
FY15, providing further relief to the Govt. as far as oil subsidies are concerned. This, along
with slightly better tax collections as a growth recovery unfolds, should help the Govt.
achieve its FY15 budgeted fisc estimate of 4.1% of GDP.
Fig 8 - Fisc to remain under control

Source: Finmin, RCML Research

6
14
(2)
(7)
(10)
(16)
(28)
(38)
(46)
(78)
(88)
(44)
-7%
-5%
-3%
-1%
1%
3%
(100)
(80)
(60)
(40)
(20)
0
20
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E
(US$bn)
Current Account Balance % of GDP (R)
3.9
3.3
2.6
6.0
6.4
4.6
5.7
4.9
4.6
4.1
2
3
4
5
6
7
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14RE FY15BE
(%) (Rs trn)
Fiscal Deficit Fisc. deficit/GDP (R)
INR to see upside support at 62 in the
near term
India Financials

Sector Thematic
INDIA
FINANCIALS


Inflationary pressures to keep rates stronger-for-longer
The sharp dip in food prices has enabled headline WPI/CPI inflation to decline sharply
over the last few months to 8.1%/4.7% in Feb14, even as core inflation has remained
sticky. In fact, while WPI and CPI inflation have declined 280bps and 310bps since Nov13
respectively, the core component in both baskets has remained firm at 3%/8%. While we
expect inflation to continue downward, we would want it to be a broad-based decline.
Despite inflation coming off, we dont expect the RBI to change its stance in a hurry, with
rates likely to remain high at least over the next six months.
Fig 9 - Inflation continues the downward trajectory Fig 10 - but core remains sticky


Fig 11 - Rates to remain stronger-for-longer


8.1%
4.7%
3%
5%
7%
9%
11%
13%
May-12 Dec-12 J ul-13 Feb-14
(%)
CPI WPI
3.1%
7.9%
0%
2%
4%
6%
8%
10%
12%
Feb-12 J un-12 Oct-12 Feb-13 J un-13 Oct-13 Feb-14
(%)
WPI-core CPI-core
7
8
4.0
2
3
4
5
6
7
8
9
10
Apr-10 J an-11 Oct-11 J ul-12 Apr-13 J an-14
(%)
Reverse Repo Repo CRR
India Financials

Sector Thematic
INDIA
FINANCIALS


Credit growth could fall to 12-14% in FY15 before picking up in FY16
A stretched growth recovery and elevated interest rates along with inflationary pressures
may lead to a dip in credit growth to 12-14% in FY15, before a likely pick-up in FY16. Our
bottom-up analysis suggests credit growth may pick up in the range of 14-18% during
FY16 (after dipping to 12-14% in FY15) this will be driven by relatively lower LDRs and
positive real deposit rates (as inflationary pressures ease), which are likely to aid stronger
deposit and, hence, credit growth during FY16.
Growth recovery could be stretched
We remain cautious on Indias prospects over the medium term while growth seems to
have bottomed out, recovery could stretch well into FY15 and hence growth is likely to
remain below-potential over FY14-FY15. With little scope for significant upside from the
Agriculture sector due to higher chances of below-normal rainfall in FY15 (El Nino),
weak Manufacturing and an unlikely turnaround in the Services sector due to elevated
interest rates, we believe credit growth could fall to low levels of 12-14% in FY15, before
bouncing back in FY16.
Fig 12 - Credit growth trending below deposit growth

Source: Company, RCML Research
Fig 13 - Sanctions and Capex paint a poignant story
Year of
Sanction
Project Cost
Sanctioned (Rs bn)
Envisaged capital expenditure in the year (Rs bn)
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Beyond
FY14
Upto FY05 405 154 54 12 1
FY06 1,342 413 439 237 85 23 18

FY07 2,834 149 946 942 496 148 31 20

FY08 2,844 5 113 593 723 411 326 78 47

FY09 4,228 1 263 1,013 829 529 346 84 46

FY10 5,560

2 436 1,324 1,161 747 314 77 34
FY11 4,603

3 286 1,071 1,046 788 464 94
FY12 2,120

57 230 669 554 282 124
FY13 1,963 1 384 587 519 472
Total 972 1,653 2,091 2,768 3,079 3,367 3,290 2,374 1,388 724
% Change 70.10% 26.50% 32.40% 11.20% 9.40% -2.30% -27.80%

8.0%
12.0%
16.0%
20.0%
24.0%
28.0%
Apr-01 Sep-02 Feb-04 J ul-05 J an-07 J un-08 Nov-09 Apr-11 Sep-12 Mar-14
(%)
Deposits growth Credit growth
Credit growth likely to remain below-
potential over FY14-15, before
bouncing back in FY16
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 14 - Consumption growth slowing down Fig 15 - and so is investment


Bottom-up analysis supports our view of stretched recovery; credit cycle
could turn in FY16
Our bottom-up analysis paints a similar picture of growth slowing down in FY15 before
recovering meaningfully (on a lower base too) in FY16. We note that 34-39% of
incremental credit in the past three years came from five segments, i.e. Infrastructure
(largely Power), Metals, Chemicals, Food Processing and Textiles, and the extension of
the current slowdown in any of these segments would have a significant impact on credit
growth next year.
Our scenario analysis projects FY15 credit growth in a relatively narrow modal range of
12-14% depending on economic and socio-political conditions, not least of which is a
favourable (market-friendly) outcome in the ensuing general elections. Our base case
assumes macro growth at 5.3% on a base of 4.7-4.9% this year, and a gradual downward
trajectory in inflation to ~7% in FY15. From a top-down perspective, our economist does
not assume any change in income elasticity.
Delving into specific details in some sectors, we see a meaningful drop in project
sanctions in the Infrastructure sector over the last three years, resulting in
commensurately lower, albeit gradually slowing disbursals. Depleting consumption
growth due to inherent weak demand on account of prolonged elevated interest rates
would act as a roadblock for new projects. From FY12 onwards, capital expenditure has
been much higher than fresh project sanctions, thinning out the disbursement pipeline.
Fig 16 - Fresh project sanctions are slowing down

2.5%
4.3%
0%
2%
4%
6%
8%
10%
FY03 FY05 FY07 FY09 FY11 FY13 FY15E
3.8%
4.8%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
FY03 FY05 FY07 FY09 FY11 FY13 FY15E
0.0
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
(Rs bn)
Project cost sanctiones Capital Expenditure
We expect credit growth of 12-14% in
FY15 depending on economic and
socio-political conditions, including a
market-friendly election outcome
India Financials

Sector Thematic
INDIA
FINANCIALS


In our view, the credit growth cycle would start picking up from the first or second
quarter of FY16 driven by gradually moderating interest rates. Our scenario analysis
projects FY16 credit growth to be in a broad range of 14-18%, likely driven by a low base
of FY15, relatively lower LDRs and positive real deposit rates this will aid lower deposit
rates and trigger a credit cycle. A strong political outcome will aid gradual recovery in the
investment cycle, which should further bolster credit growth in FY16.
Fig 17 - Bear, Base and Bull cases of credit growth
(%) FY15E FY16E
Bear Case 12.0 14.0
Base Case 14.0 16.0
Bull Case 16.0 18.0
Fig 18 - Breakup of credit growth from FY11 onwards
Sr No. Sector (%) FY11 FY12 FY13 10MFY14
Non-food Credit (1 to 4) 21 17 14 15
1 Agriculture & Allied Activities 11 19 8 13
2 Industry 24 20 15 14
2.1 Textile 19 10 15 13
2.2 Basic metals and metal product 29 25 20 15
2.3 Infrastructure 39 20 16 13
2.3.1 Power 43 23 26 17
2.3.2 Roads 26 20 18 18
3 Services 24 14 13 17
3.1 Trade 13 21 23 19
3.2 Commercial Real Estate 21 1 12 17
3.3 NBFCs 55 33 12 13
4 Personal Loans 17 14 15 17
4.1 Housing 15 15 15 18
4.2 Vehicle Loans 24 12 25 20
Fig 19 - Bottom-up anal ysis of credit growth
Sr. No. Sector (%)
Bear Case Base Case Bull Case
FY15E FY16E FY15E FY16E FY15E FY16E
Non-food Credit (1 to 4) 12 14 14 16 16 18
1 Agriculture & Allied Activities 13 15 14 16 15 16
2 Industry 9 12 11 13 13 15
2.1 Textile 8 11 10 11 13 16
2.2 Basic metals and metal product 11 14 13 18 15 19
2.3 Infrastructure 9 11 11 12 12 14
2.3.1 Power 10 12 12 14 14 16
2.3.2 Roads 12 14 13 15 16 18
3 Services 16 18 17 19 17 21
3.1 Trade 19 21 20 22 21 24
3.2 Commercial Real Estate 16 18 17 20 19 22
3.3 NBFCs 14 16 15 18 17 21
4 Personal Loans 16 17 17 22 20 24
4.1 Housing 19 20 19 24 24 26
4.2 Vehicle Loans 15 18 18 22 22 28
FY16 credit growth to be in a broad
range of 14-18% on a low base, lower
LDRs and positive real deposit rates
India Financials

Sector Thematic
INDIA
FINANCIALS


Improving LD ratio and positive real deposit rates may aid recovery
While the RBI cut rates in FY12, the elevated LDR in the system did not leave room for a
cut in lending rates (as base rate is linked with cost of deposits), thus leading to a drop in
credit growth in the system. However, incremental LDR for the system has been trending
down (69% during Mar14), driven by improvement in deposit growth (led by FCNR
deposits) and a moderation in credit growth. The scope for improvement in deposit
growth has widened as the moderating inflation turns real deposit rates positive,
implying greater room for banks to cut deposit rates, thereby improving deposit and
credit growth.
Fig 20 - LDR trend over the years currentl y LDR is at 77%

Fig 21 - Incremental loan-deposit ratio


40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
J
a
n
-
9
1
N
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v
-
9
1
S
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-
9
2
A
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9
3
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4
A
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5
M
a
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-
9
6
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-
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7
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9
9
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1
J
u
n
-
1
2
A
p
r
-
1
3
M
a
r
-
1
4
(%)
Credit-Deposit ratio
22.1
67.2
(150.0)
(100.0)
(50.0)
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
S
e
p
-
0
1
M
a
y
-
0
2
J
a
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b
-
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t
-
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-
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M
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-
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A
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1
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-
1
2
A
p
r
-
1
3
J
a
n
-
1
4
(%)
Incremental CD Ratio
Scope for improvement in deposit
growth has widened with the rate of
inflation moderating
High incremental LDR of >100% over
FY04-FY07 was largely on account of
lower o/s LDR and significant bond
gains, which wont be the case in the
current stressed environment
India Financials

Sector Thematic
INDIA
FINANCIALS


High CASA banks better positioned to capture growth
While asset quality trends typically determine the price performance of banks in a down
cycle, core operating metrics such as quality of liability franchise are likely to gain
significance as the cycle gradually turns. Typically a pickup in credit growth benefits banks
with a larger market share at the beginning of the cycle. While the first leg of reduction in
costs of funds could be seen in wholesale funded/low CASA names, we expect banks with
a stronger liability franchise (CASA) to capture a higher proportion of growth in the
longer term. Larger banks like SBIN, BOB, HDFCB, ICICIBC and AXSB have largely posted
higher growth in credit offtake than the sector and are better placed as the cycle turns.
Liability franchise gains significance as the cycle turns
Savings deposits are the lowest cost source of funds for banks, after current account
deposits. With the pressure of higher provisions towards increased NPLs, a banks savings
and current account portfolio plays a key role in boosting core operating performance. A
potential increase in low-cost deposits is likely to offset the impact of rising provisions,
thereby improving core performance. A 5% increase in the proportion of saving deposits
is likely to offset the impact of higher provisions arising out of a 0.5% rise in GNPLs. Thus,
while trends in asset quality are likely to determine the price performance of banks in a
downcycle, the key drivers of core operating parameters may start gaining significance as
the cycle gradually turns.
Fig 22 - Breakup of Global CASA deposits

Fig 23 - Movement of CASA ratio in PSU banks Fig 24 - Movement of CASA ratio in Pvt banks



0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
YES IIB AXSB ICICIBC HDFCB BOI CBK OBC BOB UNBK PNB SBIN
(%)
Current Deposits Savings Deposits
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
FY08 FY09 FY10 FY11 FY12 FY13 Q3FY14
(%) BOI CBK OBC BOB
UNBK PNB SBIN
0.0
10.0
20.0
30.0
40.0
50.0
60.0
FY08 FY09 FY10 FY11 FY12 FY13 Q3FY14
(%)
YES IIB HDFCB AXSB ICICIBC
Banks with stronger liability franchise
(CASA) will capture higher proportion
of growth in the longer term
Key drivers of core operating metrics
may start gaining significance as the
cycle gradually turns
India Financials

Sector Thematic
INDIA
FINANCIALS


Private banks and SBIN have scored well on the CASA front over the
last decade
Market share trends in savings deposits indicate PSU banks lost market share over the
past decade. However, SBIN largely maintained market share during this period despite
the apparent swing towards private banks, especially post the savings bank rate
deregulation. If we dissect this data further, within other PSU banks, top players like BOB
and BOI have maintained their market share while PNB among the larger ones and
smaller PSU banks like CBK have been the worst hit. On the other hand, apart from SBIN,
PSU banks as a group have maintained their market share in current deposits over the
past decade, only to see a marginal dip in FY13.
Private banks have increased their market share in both savings and current account
deposits over the past decade. The apparent winners among the new private banks are
HDFCB and AXSB which have seen a consistent rise in market share for saving deposits.
ICICIBC (the market leader among private banks) saw a decline in market share post
FY08, while HDFCB has seen a gradual rise over the past decade to overtake ICICIBC
in FY13.
During the past decade, market share trends in CASA and savings deposits indicate a
positive bias towards private banks and large PSU banks like SBIN, BOB and BOI which
have been able to maintain/increase market share amid strong competition.
Fig 25 - Market share trend in savings deposits (SD) Fig 26 - Market share trend in SD for top PSU banks



Fig 27 - Market share trend in SD for top pvt banks Fig 28 - Market share trend in Current deposits



27.2
28.2
56.1
45.8
7.4
17.7
0.0
10.0
20.0
30.0
40.0
50.0
60.0
FY02 FY04 FY06 FY08 FY10 FY12
(%) SBIN Nationalised banks Private banks
5.2
4.6
4.7
4.2
7.9
6.7
5.3
3.9
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
(%)
BOB BOI PNB CBK
0.0
1.0
2.0
3.0
4.0
5.0
6.0
FY04 FY06 FY08 FY10 FY12
(%)
HDFCB ICICIBC AXSB YES+IIB+KMB
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
(%) SBIN Nationalised banks Private banks
India Financials

Sector Thematic
INDIA
FINANCIALS


Capitalisation levels to decide who is best placed in the cycle
With the ongoing transition to BASEL III, higher provision requirements for stressed
assets and the need for internal loan growth, Indian banks, particularly PSUs, will be
saddled with heavy capital requirements over FY15-FY19. As per our analysis, the total
external capital requirement for our coverage banks (7 PSUs and 5 private banks) is
Rs 2.0trn (Rs 5.7trn incl. internal accruals).
In our analysis, we assume a 200bps increase in tier I requirement (incl. capital
conservation buffer) for private sector banks and a top-up of 75bps for PSU peers over
and above the regulated tier I (we build this cushion for PSUs given erratic dividend
payouts). We give some leeway to PSUs on the top-up due to their critical capital
condition and past history of maintaining capital close to regulated levels.
Private banks would also require external equity capital, but much lower than that of PSU
peers. Our calculation, at current market price, suggests potential dilution of 1-22% for
private banks (highest at YES) and a much higher range of 39-278% for PSUs (highest
at UNBK).
Fig 29 - Transitional arrangement of BASEL III Plan by RBI
(%) FY14 FY15 FY16 FY17 FY18 FY19
Minimum CET 1 5.0 5.5 5.5 5.5 5.5 5.5
Capital Conservation buffer (CCB) 0.6 1.3 1.9 2.5 2.5
Minimum CET1 +CCB 5.0 6.1 6.8 7.4 8.0 8.0
Minimum Tier I Capital (excl. CCB) 6.5 7.0 7.0 7.0 7.0 7.0
Minimum Tier I (incl. CCB) 6.5 7.0 7.0 7.4 8.0 8.0
Minimum CAR 9.0 9.0 9.0 9.0 9.0 9.0
Minimum CAR + CCB 9.0 9.6 10.3 10.9 11.5 11.5
Fig 30 - Capital requirement and sources of capital till FY19
for our coverage banks
Fig 31 - Private banks are fairl y comfortable on capital vis-
-vis PSU peers


Private banks best placed on capital PSU market share losses to get
exaggerated in thi s cycle
Our analysis suggests that private banks are much better placed on the capitalisation
front compared to PSU peers. This is largely on account of improved and sustainable
ROAs (leading to higher internal accruals), well managed credit cost in the current
stressed environment and the recent raising of capital by a few players like AXSB and IIB,
keeping CETI and Tier I ratios much above the regulated level. With our expectations of
the economy picking up meaningfully from FY16, we believe private banks are well
5.7
3.7 3.7
2.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Total Internal accruals Equity capital
(Rs trn)
3.7
2.0 2.0
2.0
1.8 1.8
1.7
0.2
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Total PSU PVT
(Rs trn)
Internal accruals
Equity capital
Total external capital required for our
coverage is Rs 2.0trn till FY19
(Rs 5.7trn incl. internal accruals)
We estimate dilution in the range of 1-
22% for private banks and 39-278% for
PSUs
India Financials

Sector Thematic
INDIA
FINANCIALS


positioned to further improve market share as PSU banks will go slow on growth to
conserve capital.
While SBIN, BOB and PNB are relatively better off among PSUs, within private banks, we
find HDFCB, IIB and AXSB comfortably placed on capitalisation; these three banks will
need to raise capital only in FY18 with much lower potential dilution (at current market
price) of 1-5%. AXSB and IIB raised capital in FY13-FY14, while HDFCBs strong internal
accruals would help meet most of the capital required till FY18. ICICIBC will also need to
raise capital in FY18; however, the extent of dilution is slightly higher at 12%. In BASEL III,
investment in subsidiaries/associates would be fully deducted from common equity (in
BASEL II, 50% deducted from tier I, 50% from tier II). This would result in lower tier I
capital for ICICIBC and hence the bank has to raise slightly higher capital vs. peers.
YES appears to be under-capitalised and will require to bring in capital, though very
minimal, from FY17 onwards with higher dilution at 22%. That said, core tier I ratio
for YES at 9.3% should help the bank tide through a difficult cycle as growth rates
remain calibrated.
Fig 32 - Total capital requirement over FY15-FY19 of private
peers and dilution
Fig 33 - Internal accruals to fund major part of capital
requirements for private banks



Fig 34 - Recent capital infusion will help AXSB to delay raising capital till FY18 with minimal dilution of 2%
AXSB FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 10.9 9.2 9.3 12.1 12.0 11.4 10.8 10.4 10.3 9.9
Tier I Capital (%) 11.2 9.4 9.4 12.2 12.1 11.5 10.9 10.5 10.3 10.0
CAR (%) 15.8 12.7 13.7 17.0 17.1 16.3 15.2 14.5 14.0 13.3

Internal accruals (Rs bn) 19 27 35 42 47 53 65 73 86 101
Capital Required (Rs bn) 0 0 0 0 0 0 0 0 15 0
Equity dilution (%) At CMP 0 0 0 0 0 0 0 0 2 0

RoE (%) 19.2 19.3 20.3 18.5 16.4 16.5 17.4 17.1 17.3 17.6
Payout (%) 23 20 18 19 20 20 20 20 20 20
Growth in Assets (%) 22 34 18 19 10 17 19 18 18 18
Source: Company, RCML Research Note: Impact of any capital i nfusion before FY15 has been taken i nto calcul ati on and hence not showed separatel y
15.0
12.9
162.6
13.6
28.0
2.3
0.7
11.7
5.5
21.5
0.0
5.0
10.0
15.0
20.0
25.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
AXSB HDFCB ICICIBC IIB YES
(%) (Rs bn)
Total Equity Capital Dilution at CMP (RHS)
1,742
232
378
15
615
13
538
163
105
14 106
28
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
Total AXSB HDFCB ICICIBC IIB YES
(Rs bn)
Internal Accruals
Equity Capital
HDFCB, IIB and AXSB will have to raise
capital only in FY18 with much lower
potential dilution of 1-5%
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 35 - Strong internal accruals to help HDFCB meet large part of capital requirement
HDFCB FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 13.2 12.1 11.5 11.0 10.5 10.4 10.3 10.1 10.1 9.9
Tier I Capital (%) 13.3 12.2 11.6 11.1 10.6 10.5 10.4 10.2 10.2 10.0
CAR (%) 17.5 16.2 16.5 16.8 16.8 16.8 16.5 16.0 15.5 14.8

Equity dilution (%) 0 0 0 0 0 0 0 0 1 0

RoE (%) 16.3 16.7 18.7 20.3 21.5 22.5 23.8 23.1 22.7 22.4
Payout (%) 22 23 23 23 22 22 23 23 23 24
Growth in Assets (%) 21 25 22 18 18 19 21 18 18 18
Fig 36 - ICICIBC requires the maximum capital amongst private peers with dilution of 12%
ICICIBC FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 13.1 12.3 11.9 12.1 11.1 10.2 9.3 8.7 9.8 9.2
Tier I Capital (%) 14.0 13.2 12.7 12.8 12.0 11.1 10.2 9.6 10.7 10.0
CAR (%) 19.4 19.5 18.5 18.7 17.8 16.6 15.2 14.3 15.1 14.1

Equity dilution (%) 0 0 0 0 0 0 0 0 12 0

RoE (%) 8.0 9.7 11.2 13.1 13.8 14.0 15.1 16.8 16.2 15.9
Payout (%) 37 35 33 31 33 33 33 33 33 33
Growth in Assets (%) -4 12 20 10 12 14 17 17 17 17
Source: Company, RCML Research Note: Impact of any capi tal infusion before FY15 has been taken i nto calcul ati on and hence not showed separatel y
Fig 37 - Recent capital infusion means IIB will need to raise capital onl y in FY18 with minimal dilution of 5%
IIB FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 9.7 12.3 11.4 13.8 13.2 12.3 11.2 10.6 10.8 10.0
Tier I Capital (%) 9.7 12.3 11.4 13.8 13.2 12.3 11.2 10.6 10.8 10.0
CAR (%) 15.3 15.9 13.8 15.4 14.4 13.4 12.3 11.7 12.2 11.7

Equity dilution (%) 0 0 0 0 0 0 0 0 5 0

RoE (%) 19.5 19.3 19.3 17.8 17.6 18.6 19.1 19.4 19.1 18.9
Payout (%) 25 19 15 18 16 16 18 18 20 20
Growth in Assets (%) 28 29 26 27 23 21 24 22 20 20
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 38 - Amongst private peers, YES dilution is the highest at 22% with capital requirement starting from FY17
YES FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 11.8 8.5 8.7 8.3 9.0 8.8 8.9 8.9 10.1 9.6
Tier I Capital (%) 12.9 9.7 9.9 9.5 10.0 9.6 9.6 9.4 10.6 10.0
CAR (%) 20.6 16.5 17.9 18.3 19.2 18.5 18.1 17.2 17.9 17.2

Equity dilution (%) 0 0 0 0 0 0 0 1 20 0

RoE (%) 20.3 21.1 23.1 24.8 24.0 22.9 22.5 20.9 18.9 17.8
Payout (%) 13 14 17 19 13 13 15 18 18 18
Growth in Assets (%) 59 62 25 35 21 19 16 18 18 18
Impact on valuations of private banks due to additi onal capital raising
To analyse the impact of capital requirements on stock valuations, we considered three
cases, assuming all capital will be raised at (a) current market price, (b) 10% above CMP,
and (c) 20% higher than CMP. Our working indicates a significantly wide range of equity
dilution across the three cases from 1-2% for HDFCB and AXSB at CMP to 22% for YES
(18% dilution if capital raised at 20% higher than CMP). The impact on IIB and ICICIBC is
not significant but slightly higher at 6% and 12% respectively at CMP (5% and 10%
respectively at 20% higher than CMP). We also calculate the impact on P/BV multiples for
these banks, as outlined in the tables below.
Fig 39 - Impact on valuation due to capital requirement (At CMP)
AXSB HDFCB ICICIBC IIB YES
O/S shares (mn) 468 2379 1154 523 359
Capital Required (Rs bn) 15 13 163 14 28
Fresh shares issues (mn) 11 18 136 29 78
Dilution (%) 2 1 12 6 22
FY14E BVPS (Rs) 807 180 635 164 200
BVPS post dilution (Rs) 820 184 694 180 229
P/BV (x) 1.7 4.1 1.9 2.9 1.8
P/BV post dilution (x) 1.7 4.0 1.7 2.6 1.6
Fig 40 - Impact on valuation due to capital requirement (At 10% and 20% above CMP)

At 10% premium to CMP At 20% premium to CMP

AXSB HDFCB ICICIBC IIB YES AXSB HDFCB ICICIBC IIB YES
O/S shares (mn) 468 2379 1154 523 359 468 2379 1154 523 359
Fresh shares issues (mn) 10 16 123 26 71 9 15 113 24 65
Dilution (%) 2 1 11 5 20 2 1 10 5 18
FY14E BVPS (Rs) 807 180 635 164 200 807 180 635 164 200
BVPS post dilution (Rs) 822 184 701 181 232 823 184 707 182 236
P/BV (x) 1.7 4.1 1.9 2.9 1.8 1.7 4.1 1.9 2.9 1.8
P/BV post dilution (x) 1.9 4.4 1.9 2.9 1.7 2.0 4.8 2.0 3.1 1.8

India Financials

Sector Thematic
INDIA
FINANCIALS


Dilution levels to be much higher in PSU banks could hurt their growth in
the next credit cycle
At the end of FY14, most PSU banks would be either short or low on core equity capital.
This is primarily on account of sharply depleting ROAs due to pressure on NIMs and a
worsening operating performance (resulting in lower internal accruals), lower bond
gains/treasury losses due to the sharp uptick in interest rates and higher provisioning
requirement on account of steady deterioration in asset quality.
The Govt. infused Rs 140bn of equity capital into PSU banks in FY14, but it failed to shore
up the CET meaningfully as infusion to individual banks fell short of their requirements.
Further, a significant portion of the capital infused was offset by high interim dividends
paid out by PSU banks. The Govt. has budgeted ~Rs 110bn for FY15; however,
considering constraints to the Govt.s financial position, we believe PSU banks, unlike
private peers, would require frequent external equity infusions over FY15-FY19.
Our analysis shows that among our PSU coverage, BOB, PNB and SBIN are relatively
comfortable on capitalisation and will need to raise capital only in FY17 with relatively
lower potential dilution (at CMP) of 39%, 60% and 51% respectively. Amongst the worst
hit are BOI, CBK and UNBK, as all three would have to bring in capital more frequently
starting from FY15 onwards with much higher dilution (219-278%).

Fig 41 - Total external capital requirement of public sector
banks and dilution over FY15-FY19
Fig 42 - Sources of capital for individual PSU banks



Fig 43 - BOB is the best capitalised bank amongst PSU peers, requires to raise capital from FY17 with lower dilution of 39%
BOB FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 8.4 9.1 10.1 9.5 9.2 8.7 8.3 8.2 9.1 8.5
Tier I Capital (%) 9.2 10.0 10.8 10.1 9.8 9.1 8.7 8.5 9.4 8.8
CAR (%) 14.4 14.5 14.7 13.3 13.5 12.8 12.2 11.9 12.8 12.2

Equity dilution (%) 0 0 0 0 0 0 0 6 33 0

RoE (%) 24.3 25.3 21.8 15.9 13.8 14.0 15.1 14.4 13.4 12.9
Payout (%) 21 18 16 24 20 20 20 20 20 20
Growth in Assets (%) 22 29 25 22 13 13 15 15 15 15
110 348 242 94 140 644 204
39
269
219
163
60
51
278
0.0
50.0
100.0
150.0
200.0
250.0
300.0
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
BOB BOI CBK OBC PNB SBIN UNBK
(%) (Rs bn)
Total Equity Capital Dilution at CMP (RHS)
1
9
7
7
1
7
8
2
284
110
177
348
152
242
82
94
273
140
876
644
134
204
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
Total BOB BOI CBK OBC PNB SBIN UNBK
(Rs bn)
Internal Accruals
Equity Capital
PSU banks, unlike private peers, would
require frequent external equity
infusions over FY15-FY19
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 44 - BOI requires to raise capital frequentl y from FY15 onwards with a high dilution level of 269%
BOI FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 7.4 7.3 7.7 7.5 7.2 7.2 7.5 7.9 9.9 8.7
Tier I Capital (%) 8.5 8.3 8.6 8.2 7.8 7.8 7.9 8.3 10.2 8.9
CAR (%) 12.9 12.2 12.0 11.0 10.2 9.9 10.3 10.9 12.7 11.6

Equity dilution (%) 0 0 0 0 0 18 32 58 161 0

RoE (%) 14.6 17.7 15.6 13.6 12.3 11.6 10.7 9.6 8.0 7.6
Payout (%) 36 18 17 25 18 18 19 20 20 20
Growth in Assets (%) 22 28 10 18 21 13 14 17 17 17
Source: Company, RCML Research Note: Impact of any capi tal infusion before FY15 has been taken i nto calcul ati on and hence not showed separatel y
Fig 45 - CBK too requires to raise capital frequentl y from FY15 onwards with a high dilution level of 219%
CBK FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 8.0 10.0 9.6 9.1 7.5 7.5 7.7 8.1 9.6 8.6
Tier I Capital (%) 8.5 10.9 10.4 9.8 8.0 8.0 8.0 8.4 9.8 8.8
CAR (%) 13.4 15.4 13.8 12.4 10.1 10.0 10.5 11.3 12.7 11.7

Equity dilution (%) 0 0 0 0 0 16 25 51 127 0

RoE (%) 27.0 26.7 17.1 13.3 10.1 10.8 11.2 9.4 8.1 7.8
Payout (%) 16 14 17 23 20 20 22 22 22 22
Growth in Assets (%) 21 27 11 10 21 12 13 15 15 15
Fig 46 - OBC is comfortabl y placed till FY15, but would later on require to raise capital each year till FY18
OBC FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 8.6 10.3 9.4 8.6 8.3 8.0 7.7 9.6 9.5 8.6
Tier I Capital (%) 9.3 11.2 10.1 9.2 8.9 8.4 8.1 9.9 9.8 8.8
CAR (%) 12.5 14.2 12.7 12.0 11.7 11.2 10.8 12.6 12.5 11.8

Equity dilution (%) 0 0 0 0 0 0 9 108 45 0

RoE (%) 16.6 17.1 10.7 11.5 8.7 10.6 11.4 10.1 9.0 9.3
Payout (%) 24 24 24 24 15 15 22 22 22 22
Growth in Assets (%) 22 17 10 13 12 14 15 16 16 16
Source: Company, RCML Research Note: Impact of any capi tal infusi on before FY15 has been taken into cal cul ati on and hence not showed separately
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 47 - PNB is one of the few well capitalised banks which would require to raise capital only in FY17
PNB FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 8.0 7.6 8.6 9.1 8.5 7.9 7.5 7.9 9.0 8.6
Tier I Capital (%) 9.1 8.4 9.3 9.8 9.0 8.4 7.9 8.2 9.3 8.8
CAR (%) 14.2 12.4 12.6 12.7 11.6 10.7 10.3 10.9 12.0 11.6

Equity dilution (%) 0 0 0 0 0 0 0 18 43 0

RoE (%) 26.8 24.7 21.3 16.7 10.7 12.1 12.9 14.4 14.8 14.2
Payout (%) 21 18 18 24 20 20 23 23 23 23
Growth in Assets (%) 20 28 21 5 13 14 15 16 16 16
Source: Company, RCML Research Note: Impact of any capital i nfusion before FY15 has been taken into cal cul ati on and hence not showed separately
Fig 48 - Recent capital issuance by QIP will keep SBIN well capitalised till FY16
SBIN FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 8.8 7.2 9.2 9.0 8.9 8.2 7.6 7.8 9.0 8.5
Tier I Capital (%) 9.5 7.8 9.8 9.5 9.4 8.6 8.0 8.1 9.3 8.8
CAR (%) 13.4 12.0 13.9 12.9 12.4 11.3 10.5 10.9 12.0 11.5

Equity dilution (%) 0 0 0 0 0 0 0 13 38 0

RoE (%) 12.1 10.1 12.7 12.6 8.1 9.6 10.8 12.1 12.2 11.7
Payout (%) 23 26 23 23 23 23 23 23 23 23
Growth in Assets (%) 9 16 9 17 14 15 16 16 16 16
Fig 49 - UNBK is the worst capitalised bank in our coverage and has huge capital requirements from FY15 onwards
UNBK FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E
CET I (%) 7.1 7.9 7.7 7.7 6.3 7.3 7.3 7.7 9.1 8.4
Tier I Capital (%) 7.9 8.7 8.4 8.2 6.7 7.7 7.7 8.1 9.4 8.6
CAR (%) 12.5 13.0 11.8 11.4 9.3 10.1 10.2 10.8 11.9 11.3

Equity dilution (%) 0 0 0 0 0 59 30 56 134 0

RoE (%) 26.2 20.9 14.9 15.0 9.8 9.8 9.4 10.4 9.8 9.9
Payout (%) 16 23 29 26 16 16 18 18 18 18
Growth in Assets (%) 21 21 11 19 13 14 14 15 15 15

India Financials

Sector Thematic
INDIA
FINANCIALS


Some PSU banks are opti cally cheap severe impact due to additional
capital raising
As with private sector banks, we analysed the impact of capital requirements on PSU
valuations if capital were to be raised at (a) current market price, (b) 10% higher than
CMP, and (c) 20% higher than current market price. Our analysis indicates a significantly
wide range of equity dilution across the three cases at 39-278%, the lowest being for
BOB and SBIN and the highest for BOI, CBK and UNBK.
We also calculate the impact on P/BV multiples for these banks for all the three cases.
Though BOI, at 0.4x FY14E BV, is currently trading at a significant discount to BOB (0.8x
FY14E BV), current valuations are misleading as upon factoring in the entire capital
requirement impact, it trades virtually on par with BOB. We believe BOB, PNB and SBIN
are relatively well placed on the capital front and could garner market share as growth
picks up. The exhibit below gives valuation details for PSU banks under coverage.
Fig 50 - Impact on valuation due to capital requirement (At CMP)

BOB BOI CBK OBC PNB SBIN UNBK
O/S shares (mn) 431 601 461 300 362 747 597
Capital Required (Rs bn) 110 348 242 94 140 644 204
Fresh shares issues (mn) 168 1725 1008 488 218 378 1753
Dilution (%) 39 269 219 163 60 51 278
FY14E BVPS (Rs) 813 434 548 440 955 1568 286
BVPS post dilution (Rs) 769 262 337 286 837 1613 159
Current P/BV (x) 0.8 0.5 0.4 0.4 0.7 1.1 0.4
P/BV post dilution (x) 0.9 0.8 0.7 0.7 0.8 1.1 0.7
Fig 51 - Impact on valuation due to capital requirement (At 10% and 20% above CMP)

At 10% premium to CMP At 20% premium to CMP
BOB BOI CBK OBC PNB SBIN UNBK BOB BOI CBK OBC PNB SBIN UNBK
O/S shares (mn) 431 601 461 300 362 747 597 431 601 461 300 362 747 597
Capital Required (Rs bn) 110 348 242 94 140 644 204 110 348 242 94 140 644 204
Fresh shares issues (mn) 153 1568 916 443 198 344 1594 140 1438 840 406 182 315 1461
Dilution (%) 35 243 199 148 55 46 251 32 221 182 136 50 42 229
FY14E BVPS (Rs) 813 434 548 440 955 1568 286 813 434 548 440 955 1568 286
BVPS post dilution (Rs) 789 281 359 303 867 1664 171 806 299 380 319 893 1709 182
Current P/BV (x) 0.8 0.5 0.4 0.4 0.7 1.1 0.4 0.8 0.5 0.4 0.4 0.7 1.1 0.4
P/BV post dilution (x) 0.9 0.8 0.7 0.7 0.8 1.1 0.7 1.0 0.8 0.8 0.7 0.9 1.2 0.8

Our working indicates a significantly
wide range of equity dilution from
39-278%, lowest being for BOB & SBIN
and highest for BOI, CBK & UNBK
India Financials

Sector Thematic
INDIA
FINANCIALS


Asset quality Are there any signs of reversal?
Indian banks have been going through an elongated NPL cycle largely driven by stress in
the corporate sector even as retail credit quality remains impeccable. In the last three
years, scheduled commercial banks, particularly PSUs, have seen higher gross impaired
loan formation, which increased from 2.5% in FY11 to 3.6% in FY13 and further to 3.8% in
H1FY14. Asset quality pressure leading to higher credit cost has caused stocks to remain
very weak and thus to underperform the broader markets. The prolonged period of
elevated interest rates is likely to have an impact on asset quality for another 2-3
quarters. We believe asset quality pressure is likely to ease from FY16 led by a pickup in
GDP growth, lower inflationary pressures and softening of interest rates.
Retail credit quality has stayed strong, corporate stress the worry so far
Though the agriculture segment recorded the highest GNPL ratio at 5.5% as at end
Sep13 followed by industries at 4.9%, industries recorded the highest share in
restructured standard advances at 10.9% of total advances as at end Sep13. Industries
thus contributed the highest share of stressed advances in their loans portfolio at 15.9%
as at end Sep13, followed by services at 7.6%. Loans under the retail segment fared
much better with GNPA and restructured standard advances to total advances at 2.2%
and 0.3% as at end Sep13 respectively. Thus, while retail asset quality has stayed strong,
stress in the corporate/industrial segment continued to drive slippages over the past
few quarters.
Fig 52 - Sector-wise break up of GNPA and restructured loans as at end Sep13

Incremental stressed loan formation has moderated
While outstanding impaired assets remain high, the pace of formation has moderated
over the past two quarters, driven by an improving economic environment along with
receding stress in sectors like power which drove a bulk of the restructuring in the recent
past. Additionally, EBITDA of Sensex companies ex-oil has seen an improving trend over
the past two quarters, signifying improving corporate profitability. Also, the Govt.s effort
to revive the economy with ongoing reforms across sectors and RBIs measures to
recognise NPAs early have helped control the pace of formation of fresh impaired loans
in the last two quarters.
5.5
4.9
4.2
2.2
1.5
10.9
3.4
0.3
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Agriculture Industries Services Retail
GNPA to total loans (%) Restructured advances to total loans (%)
Asset quality pressure likely to ease
from FY16 on pickup in credit growth
and improvement in NPL recovery
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 53 - Corporate profitability (ex-oil and gas) seems to have bottomed out

Fig 54 - Trend of systemic impaired assets Fig 55 - Bank-wise o/s impaired assets as on Q3FY14


Asset qual ity stress may abate in FY16
Prolong period of elevated interest rate may continue to weigh on asset quality for
another 2-3 quarters. While incremental bad loan formation has moderated, provisions
may continue to remain high as credit costs lag bad loan formation. However, asset
quality may improve during FY16, on a higher base of FY15, driven by improvement in
GDP, lower inflationary pressures and hence softening of interest rates.
Fig 56 - Real GDP growth vs Systemic GNPA (lag of 12m)

0.0
5.0
10.0
15.0
20.0
25.0
30.0
Q
3
F
Y
1
2
Q
4
F
Y
1
2
Q
1
F
Y
1
3
Q
2
F
Y
1
3
Q
3
F
Y
1
3
Q
4
F
Y
1
3
Q
1
F
Y
1
4
Q
2
F
Y
1
4
Q
3
F
Y
1
4
(%)
Sensex ex-oil EBITDA (%YoY)
1
9
.
5
1
8
1
7
.
8
1
6
1
5
.
9
1
4
1
1
.
4
1
0
.
4
8
.
8
7
.
2
5
.
2
3
.
3
2
.
5
2
.
2
2
.
3
2
.
4
2
.
5
3
.
1
3
.
6
3
.
8
2
.
9
0
.
7
0
.
5
1
.
2
2
.
84
.
6
3
.
8
5
.
3
5
.
8
6
.
4
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
Q
2
F
Y
1
4
(%)
GNPA (%) Restructuring (%)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Y
E
S
H
D
F
C
B
I
I
B
A
X
S
B
I
C
I
C
I
B
C
B
O
I
B
O
B
U
N
B
K
S
B
I
N
C
B
K
O
B
C
P
N
B
(%)
GNPA (%) Restructuring (%)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
Q
1
F
Y
1
4
Q
2
F
Y
1
4
Q
3
F
Y
1
4
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(%) (%)
GDP Growth Systemic stressed loans (lag of 12M) - RHS
India Financials

Sector Thematic
INDIA
FINANCIALS


Valuations reasonable despite recent run-up
Banking and Financial stocks have rallied 20-25% over the last two weeks, sentimentally
driven by a favourable/pro-growth government outlook. While we believe the NPL cycle
is peaking (albeit at elevated levels), improvement in the same would be stretched and
likely only in FY16. We continue to maintain our preference for well capitalised banks as
they are better placed to milk the impending credit cycle. We upgrade ICICIBC from HOLD
to BUY and maintain HDFCB, SBIN and ICICIBC as top picks among banks. We prefer SHTF,
POWF and RECL among NBFCs.
What is the upside post the recent run-up?
While PSU banks with low capitalisation levels will continue to struggle, we see value in
privates and well capitalised PSUs as these still trade at 1 SD lower than their 7-year
mean P/E multiples (we believe P/E valuation is apt given their low capital requirements).
Though we dont see an immediate uptick in earnings growth, we do believe that
valuations will start reverting towards the mean against the backdrop of a gradual
recovery. Private banks profitability remains resilient and an uptick in the economy could
lead to higher multiples given the three top privates ICICIB, HDFCB and AXSB trade at just
1.7x, 3.4x and 1.5x FY15E earnings respectively. We foresee meaningful upsides in names
like ICICIBC and HDFCB despite the recent-run up as valuations trend towards long-term
averages.
As far as PSUs are concerned, we would extrapolate this argument only for those names
where capitalisations levels are strong and will aid growth in the next cycle, viz. SBIN and
BOB. As a result, despite the significant discount to long-term averages, we believe that
PSU banks with low capitalisation could find it tough going in the long run. That said, we
do not rule out a near-term bounce in these names given optically cheap valuations but
would recommend avoiding these stocks.
Fig 57 - Comparison of one-year forward P/ABV of top 3 private banks

0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Apr-12 May-12 J ul-12 Sep-12 Nov-12 J an-13 Mar-13 May-13 J ul-13 Sep-13 Nov-13 J an-14 Mar-14
(x) AXSB 1yr fwd P/ABV HDFCB 1yr fwd P/ABV ICICIBC 1yr fwd P/ABV
We maintain our preference for well
capitalised banks as they are better
placed to milk the impending credit
cycle
We believe valuations will start
reverting towards the mean in the
backdrop of a gradual recovery
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 58 - Comparison of one-year forward P/ABV of IIB and YES


Fig 59 - One-year forward P/ABV of AXSB Fig 60 - One-year forward P/E of AXSB



Fig 61 - One-year forward P/ABV of HDFCB Fig 62 - One-year forward P/E of HDFCB



0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Apr-12 May-12 J ul-12 Sep-12 Nov-12 J an-13 Mar-13 May-13 J ul-13 Sep-13 Nov-13 J an-14 Mar-14
(x)
IIB 1yr fwd P/ABV YES 1yr fwd P/ABV
0.0
1.0
2.0
3.0
4.0
5.0
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
-
0
8
D
e
c
-
0
8
M
a
y
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
-
1
1
J
a
n
-
1
2
J
u
n
-
1
2
N
o
v
-
1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x)
AXSB 1yr fwd P/ABV Average
+1 SD -1 SD
0.0
5.0
10.0
15.0
20.0
25.0
30.0
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
-
0
8
D
e
c
-
0
8
M
a
y
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
-
1
1
J
a
n
-
1
2
J
u
n
-
1
2
N
o
v
-
1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x)
AXSB P/E (x) Average P/E +1 SD -1 SD
1.0
2.0
3.0
4.0
5.0
6.0
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
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0
8
D
e
c
-
0
8
M
a
y
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0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
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l
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1
1
J
a
n
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1
2
J
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n
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1
2
N
o
v
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1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x)
HDFCB 1yr fwd P/ABV Average
+1 SD -1 SD
10.0
15.0
20.0
25.0
30.0
35.0
40.0
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
-
0
8
D
e
c
-
0
8
M
a
y
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
-
1
1
J
a
n
-
1
2
J
u
n
-
1
2
N
o
v
-
1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x)
HDFCB P/E (x) Average P/E +1 SD -1 SD
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 63 - One-year forward P/ABV of ICICIBC Fig 64 - One-year forward P/E of ICICIBC



Fig 65 - One-year forward P/ABV of IIB Fig 66 - One-year forward P/E of IIB



Fig 67 - One-year forward P/ABV of YES Fig 68 - One-year forward P/E of YES



0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
A
p
r
-
0
7
S
e
p
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0
7
F
e
b
-
0
8
J
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l
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0
8
D
e
c
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0
8
M
a
y
-
0
9
N
o
v
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0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
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J
a
n
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1
2
J
u
n
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1
2
N
o
v
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1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x)
ICICIBC 1yr fwd P/ABV Average
+1 SD -1 SD
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
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0
8
D
e
c
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0
8
M
a
y
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0
9
N
o
v
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0
9
A
p
r
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1
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S
e
p
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1
0
F
e
b
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1
1
J
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l
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J
a
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J
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N
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A
p
r
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1
3
S
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p
-
1
3
M
a
r
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1
4
(x)
ICICIBC P/E (x) Average P/E +1 SD -1 SD
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
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0
8
D
e
c
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0
8
M
a
y
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0
9
N
o
v
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0
9
A
p
r
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1
0
S
e
p
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1
0
F
e
b
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1
1
J
u
l
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1
1
J
a
n
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1
2
J
u
n
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1
2
N
o
v
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1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x)
IIB 1yr fwd P/ABV Average
+1 SD -1 SD
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
-
0
8
D
e
c
-
0
8
M
a
y
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
-
1
1
J
a
n
-
1
2
J
u
n
-
1
2
N
o
v
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1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x)
IIB P/E (x) Average P/E +1 SD -1 SD
0.0
1.0
2.0
3.0
4.0
5.0
6.0
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
-
0
8
D
e
c
-
0
8
M
a
y
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
-
1
1
J
a
n
-
1
2
J
u
n
-
1
2
N
o
v
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1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x)
YES 1yr fwd P/ABV Average
+1 SD -1 SD
0.0
5.0
10.0
15.0
20.0
25.0
30.0
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
-
0
8
D
e
c
-
0
8
M
a
y
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
-
1
1
J
a
n
-
1
2
J
u
n
-
1
2
N
o
v
-
1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x)
YES P/E (x) Average P/E +1 SD -1 SD
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 69 - Comparison of one-year forward P/ABV of top 6 PSU banks

Fig 70 - One-year forward P/ABV of BOB Fig 71 - One-year forward P/ABV of BOI



Fig 72 - One-year forward P/ABV of CBK Fig 73 - One-year forward P/ABV of PNB


0.0
0.5
1.0
1.5
2.0
2.5
A
p
r
-
1
2
M
a
y
-
1
2
J
u
l
-
1
2
A
u
g
-
1
2
O
c
t
-
1
2
D
e
c
-
1
2
J
a
n
-
1
3
M
a
r
-
1
3
M
a
y
-
1
3
J
u
n
-
1
3
A
u
g
-
1
3
O
c
t
-
1
3
N
o
v
-
1
3
J
a
n
-
1
4
M
a
r
-
1
4
(x)
BOB 1yr fwd P/ABV BOI 1yr fwd P/ABV CBK 1yr fwd P/ABV
PNB 1yr fwd P/ABV SBIN 1yr fwd P/ABV UNBK 1yr fwd P/ABV
0.0
0.5
1.0
1.5
2.0
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
0
8
J
u
l
-
0
8
D
e
c
-
0
8
M
a
y
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
-
1
1
J
a
n
-
1
2
J
u
n
-
1
2
N
o
v
-
1
2
A
p
r
-
1
3
S
e
p
-
1
3
M
a
r
-
1
4
(x) BOB 1yr fwd P/ABV Average
+1 SD -1 SD
0.0
0.5
1.0
1.5
2.0
2.5
A
p
r
-
0
7
S
e
p
-
0
7
F
e
b
-
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India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 74 - One-year forward P/ABV of SBIN Fig 75 - One-year forward P/ABV of UNBK


Banking stock recommendations
Upgrade ICICIBC to BUY from HOLD
ICICIBC: We upgrade ICICIBC from HOLD to BUY and raise our TP from Rs 1,115 to Rs
1,450. ICICIBC is among the better placed banks with a meaningful expansion in
footprint over the last 5-6 years coupled with high tier-I capital. We expect retail
loans to grow faster than corporate loans driven by higher branch productivity and a
pick-up in GDP growth, supporting 16% earnings CAGR through FY16. Though
corporate asset quality remains under pressure, comfortable capitalisation with tier I
at 12.7% (Basel III including plough back of profit of last nine months) and a
meaningful pickup in ROE to 15%+ by FY16E the highest since FY05 would drive a
re-rating. Valuations at 1.7x FY15E BV are not demanding if ROE improves to 15%+.
Maintain BUY on HDFCB
HDFCB: We believe HDFCB remains best placed in the current macro environment
due to its strong liability franchise, pristine asset quality and leadership position in
the retail banking space (where we believe the impact of a slowdown is much lower
due to the under-leveraged nature of Indian households). We also like HDFCB for its
increasing semi-urban and rural build-up (59% of the total branches). Cost ratios
should improve as revenues start building in these branches, albeit a long drawn
process. Valuations are at a premium, but are justified due to the banks strong
earnings growth, above-average ROE of 20%+ and low risks on the balance sheet.
Prefer YES over IIB
YES: YES is a play on falling rates (largely wholesale funded), continued traction in
savings bank balances (CASA now at 22%) and increase in retail book on the assets
side of the business. YES has maintained robust asset quality with GNPL/NNPL of
0.4%/0.08% and restructured assets of 0.29% as on Q3FY14. Asset quality should
hold up well as the loan book has a relatively short tenor. Long-term triggers will be
retail asset growth which will impart stability to the liabilities side as well (current
traction in retail liabilities is aided by predatory pricing). An increasing proportion of
retail assets (driven by higher cross-selling, more specifically to liabilities customers)
will lead to higher valuations the stock is currently trading at 1.5x FY15E BV, lower
than some NBFCs despite sustainable ROE of 19-20%.

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+1 SD -1 SD
ICICIBC best placed to scale up retail
portfolio as GDP growth picks up;
upgrade to BUY
HDFCB best placed in the current
macro climate; maintain BUY
Prefer YES over IIB
India Financials

Sector Thematic
INDIA
FINANCIALS


IIB: IIBs profit growth so far was partly driven by strong fee income growth and
robust growth in its auto loan portfolio. A higher base of fee income and sharp
slowdown in auto loans can put significant pressure on IIBs profit growth. Also, YES
is trading at a steep discount to IIB (at 1.5x FY15E vs. 2.5x for IIB) despite better
average ROEs (25% for YES vs. 18% for IIB).
Maintain HOLD on AXSB
AXSB: While AXSB is now trading at inexpensive valuations of 1.5x FY15E BV and the
overhang on account of the stake sale by SUUTI is largely behind us, we remain
cautious on the stock given its large corporate exposure.
Maintain BUY on SBIN and BOB
SBIN: Our bullishness stems from SBINs CASA which remains in the vicinity of ~45%
even as PSU banks lost considerably on this front over the last 6-7 years. While asset
quality has been an area of concern, we believe SBIN is a play on recovery in the
asset quality cycle (recoveries, upgrades and lower slippages could aid earnings apart
from stable NIMs). Moreover, SBIN is already providing for retirement benefits based
on LICs new mortality tables that prescribe a average life expectancy of 81 years
most other banks seem to be factoring in a lower age here. Currently trading at 1x
FY15E P/BV.
BOB: BOBs asset quality has been largely in line with management guidance even
after its previous CMDs retirement, with overall stressed loans (GNPA + Rest)
relatively lower than most peers. BOB has high international exposure (~33% of
advances) which we believe will aid superior asset quality relative to peers.
Moreover, the bank has been able to protect margins in 9MFY14 and we believe it
would continue to do so, due to an increase in LDR (70% vs. 73-74% for peers). We
prefer BOB given its relatively better liability profile, asset quality, return ratios,
higher tier I and sound management. While valuations at 0.7x FY15E BV are at a
meaningful premium to peers, adjusting for the capital requirement of peer banks,
valuations are at par (see fig 50 on Page 20). BOB remains one of our top PSU picks.
Maintain HOLD on BOI, CBK, PNB and UNBK
BOI and UNBK: While valuations are at multi-year lows, we remain concerned over
the low capital position of these banks which, in the worst case scenario, would lead
to significant capital dilution at depressed valuations.
PNB: PNB has the largest proportion of impaired assets among all PSU banks. While
ROEs are still healthy, we are cautious due to its high impaired assets and large
exposure to sensitive sectors.
CBK: We remain chary of CBKs recent aggressive growth coupled with large
exposure to infrastructure projects and corporate lenders. ROEs to a large extent are
boosted by a low tax rate and core profitability remains low due to subdued NIMs
(despite a lower proportion of international advances). We also remain concerned
over the banks low capital position.

We remain cautious on AXSB given its
large corporate exposure
BOB and SBIN remain our top PSU
picks
Maintain HOLD on BOI and UNBK due
to the low capital base of these banks
India Financials

Sector Thematic
INDIA
FINANCIALS


Softening wholesale rates may drive outperformance for NBFCs
A likely softening of wholesale rates in the near term may drive near-term
outperformance of NBFCs. Within NBFCs, a gradual pick-up in CV volumes along with
stable growth in the used CV financing market would benefit SHTF. Despite the recent
run-up in power NBFCs, improvement in the macro climate along with a gradual turn in
asset quality cycle should boost sentiment, even as valuations at 0.8x/0.9x FY15E BV
continue to look attractive. We prefer SHTF, POWF and RECL among NBFCs.
Pri ce performance correl ated to liquidity and wholesal e rates
NBFCs typically tend to underperform during periods of tight liquidity and higher
wholesale rates, largely due to the wholesale tilt in their liability mix and vice versa. Thus,
as seen below, NBFCs underperformed during the period of May13-Aug13 which
coincided with a rise in wholesale rates, driven by a tightening policy adopted by the RBI.
With an improvement in the macro, stable currency and ease in liquidity, wholesale rates
in the system may trend downwards.
Fig 76 - NBFC Index (ex HDFC) vis--vis 3-year AAA yi elds (%)

Retail NBFCs may benefit with a likel y upturn in the CV cycl e, as the macro
picks up
Competition with banks and a decline in CV sales drove a moderation in loan growth for
retail NBFCs over the past two years. M&HCV sales declined 23% during FY13 and 27% in
9MFY14, though LCV sales continue to fare better. However, a pick-up in GDP growth,
lifting of the mining ban and a better rabi harvest are likely to drive a revival in volumes.
Additionally, the used CV market is likely to benefit from the high growth seen in new CV
volumes during FY10/11, as these vehicles enter the re-sale market (3-5 years).
With the larger banks/newer entrants going slow on disbursements towards CVs,
competitive intensity is likely to decline, benefitting existing players like SHTF. Despite
higher slippages for SHTF and MMFS, managements maintain stress is unlikely to rise
from current levels. Additionally, a decline in LTV over the past 1-2 years should support
asset quality. As rural cash flows remain buoyant, NBFCs like MMFS may see a
moderation in slippages. We continue to prefer SHTF and MMFS among retail NBFCs.
5
6
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8
9
10
11
12
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Apr-10 Oct-10 May-11 Dec-11 J ul-12 J an-13 Aug-13 Mar-14
NBFC Index (ex HDFC) AAA rates- 3 years (%, RHS)
Wholesale rates in the system likely to
trend down, benefitting NBFCs
We continue to prefer SHTF and MMFS
among retail NBFCs
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 77 - IIP growth vs CV cycle

Power NBFCs: Balanced risk-reward
Power NBFCs have outperformed the NBFC Index (ex-HDFC) by 16-25% over the past
three months, driven by easing concerns on their exposure towards loss-making SEBs and
the riskier private sector power projects. With a majority of the loss-making SEBs having
already applied for financial restructuring, the ensuing power tariff hike is likely to aid
their financial position. Additionally, the governments thrust on ensuring fuel supply
through a coal pooling mechanism would largely mitigate concerns towards private
sector projects. With a likely macro recovery ahead, we expect a gradual revival in the
power sector, thus largely mitigating asset quality concerns for POWF and RECL.
Valuations at 0.8x/0.9x FY15E BV continue to look attractive. We maintain our BUY
ratings on POWF and RECL.
Fig 78 - Comparison of P/BV for POWF and RECL

Housing Finance: Stable growth story
Business momentum for HFCs is likely to remain strong, aided by stable competition.
Contrary to perception, competition in the Indian mortgage industry is unlikely to
increase due to the absence of any large new companies entering the market and re-
alignment of rates across borrowers. The rise in NPLs in Dec13 is likely seasonal in nature
and unlikely to sustain.
-50%
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Apr-06 J un-07 J ul-08 Aug-09 Oct-10 Nov-11 Dec-12 Feb-14
IIP growth (YoY, RHS) CV sales growth (YoY)
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Feb-10 Sep-10 Apr-11 Nov-11 J un-12 J an-13 Aug-13 Mar-14
POWF P/B RECL P/B
Easing concerns on their exposure
towards loss-making SEBs is fuelling a
re-rating in power NBFCs
Business momentum for HFCs is likely
to remain strong
India Financials

Sector Thematic
INDIA
FINANCIALS


Fig 79 - GNPL trend for LICHF and HDFC

NBFC stock recommendations
Prefer SHTF over MMFS
SHTF: A pick-up in the GDP growth, lifting of the mining ban and a better rabi harvest
is likely to drive a pick-up in CV volumes. With the larger banks/ newer entrants
going slow on disbursements towards CVs, competitive intensity is likely to decline,
benefitting the existing players like SHTF.
MMFS: Asset quality stress may continue for a few more quarters; however stringent
focus on recoveries may offset the potential impact. Loan growth should remain
stable, even as disbursements slow down.
BAF: While business growth has moderated amid tight liquidity, asset quality and
credit costs continue to remain low. Strong earnings CAGR and reasonable valuations
merit a positive view, though banking license, if granted will be a key catalyst for the
stock.
SCUF: Growth in outstanding loans excluding gold is strong and is likely to remain so
given the focus on expansion in the northern and western regions. Valuations at 1.8x
FY15 BV appear reasonable.
Maintain BUY on power financials
POWF & RECL: Despite higher exposure to SEBs, both POWF and RECL have not seen
any slippages in this segment. Assuming a stress case scenario of slippages in the SEB
exposure, the downside to the book value is restricted. NIMs, even on a higher base,
are likely to remain stable given their pricing power. Despite the recent run-up,
valuations look attractive.
Regulatory environment improves for gold financials
MGFL: With regulatory risks gradually receding, growth in AUMs is likely to pick-up.
Asset quality is likely to stabilize given lower LTVs and increased efforts to make
recoveries at regular intervals. Maintain BUY. The diversification into housing finance
is unlikely to impact earnings estimate till FY16. Maintain BUY.

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150%
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Apr-06 J un-07 J ul-08 Aug-09 Oct-10 Nov-11 Dec-12 Feb-14
IIP growth (YoY, RHS) CV sales growth (YoY)
Prefer SHTF over MMFS
Despite the recent run-up valuations
continue to look attractive for power
financials
India Financials

Sector Thematic
INDIA
FINANCIALS


Business momentum may remain strong for housing financials
HDFC & LICHF: The rise in NPLs during Dec13 is likely seasonal in nature. Business
momentum continues to remain strong. Banking license may remain a key catalyst
for LICHF. Maintain BUY on HDFC and LICHF.

Fig 80 - RCML Financials Coverage Universe: Valuation snapshot

CMP
(Rs)
Target
(Rs)
Reco
MCAP
(Rs bn)
P/BV (x) P/E (x)
EPS growth
(%)
Average RoE
(%)
Average RoA
(%)
CASA
(%)
FY14E FY15E FY14E FY15E FY13-15E FY13-15E FY13-15E FY13
PSU Banks

SBIN 1,702 2,200 BUY 1,271 1.00 0.90 9.2 7.6 3.0 12.3 0.8 44.8
SBIN # 1,166 1,664

871 0.73 0.66 6.5 5.3 3.2 12.7 0.7 44.8
PNB 642 700 HOLD 232 0.61 0.56 5.3 4.5 2.0 13.1 0.8 39.2
BOB 656 825 BUY 282 0.72 0.64 5.4 4.5 11.2 14.6 0.8 25.3
BOI 202 205 HOLD 130 0.42 0.38 3.6 3.3 10.2 12.3 0.6 25.6
CBK 240 250 HOLD 111 0.40 0.36 3.7 3.1 6.0 11.7 0.6 24.2
UNBK 116 135 HOLD 73 0.37 0.34 3.5 3.0 2.8 11.9 0.6 31.0
OBC 192 240 BUY 58 0.40 0.36 3.9 3.3 8.4 10.6 0.6 24.6
Private Banks

ICICIBC 1,200 1,450 BUY 1,385 1.7 1.5 12.6 10.1 17.9 14.3 1.7 41.9
ICICIBC # 987 1,237

1,139 1.7 1.5 11.2 8.9 18.6 16.1 1.6 41.9
HDFCB 734 860 BUY 1,759 3.4 2.8 16.5 13.0 25.8 22.1 2.0 47.4
AXSB 1,394 1,470 HOLD 655 1.5 1.3 9.8 8.1 15.8 17.2 1.7 44.4
YES 360 475 BUY 130 1.4 1.2 7.5 6.3 16.3 21.8 1.4 18.9
IIB 472 535 BUY 248 2.5 2.1 14.3 11.9 25.1 18.3 1.7 29.3
NBFCs

HDFC 843 1,000 BUY 1,316 4.1 3.6 19.8 17.5 15.5 21.6 2.8

HDFC # 611 768

954 3.9 3.3 15.6 13.8 15.0 28.6 2.7

LICHF 224 270 BUY 113 1.3 1.1 7.4 6.6 19.4 18.3 1.6

SHTF 667 800 BUY 151 1.6 1.4 9.9 8.4 9.8 18.0 3.0

PFC 171 225 BUY 225 0.7 0.6 3.8 3.4 14.4 19.8 2.9

REC 207 270 BUY 205 0.8 0.7 3.9 3.4 16.3 23.2 3.4

MGFL 21 28 BUY 18 0.6 0.6 5.6 4.7 21.8 11.1 2.5

MMFS 254 290 BUY 145 2.6 2.1 13.4 10.9 16.8 21.1 3.5

SCUF 1,015 1200 BUY 60 1.8 1.5 9.8 7.9 16.3 20.5 4.1

BAF 1,673 1850 BUY 84 1.8 1.5 9.5 8.3 19.2 20.2 3.6

Source: Company, RCML Research #Adj. for subsidiaries * Prices as on Mar 21, 2014
Key risks
Prolong slowdown in the economy: As per our economist, GDP growth has largely
bottomed out and things are expected to recover from hereon, albeit at a moderate
and gradual rate, with GDP growth expected to rise to 5.3% in FY15. A sharp
downward reversal or prolong slowdown in growth rates is a key risk.
Slower-than-anticipated de-leveraging: The high leverage of large corporates is one
of the key reasons for stress on the asset quality of Indian banks. A prolong
slowdown in the markets could lead to slower-than-anticipated de-leveraging,
providing more stress to the sector and serving as an downside risk to estimate.

Stable growth story and impeccable
asset quality keeps the outlook for
housing financials positive

Financial Highlights
Company Update
INDIA
FINANCIALS
24 March 2014

REPORT AUTHORS
Siddharth Teli
+91 22 6766 3463
siddharth.teli@religare.com
Vikash Mundhra
+91 22 6766 3474
vikash.mundhra@religare.com
J aynee Shah
+91 22 6766 3467
jaynee.shah@religare.com

PRICE CLOSE (21 Mar 14)
INR 1,200.00
MARKET CAP
INR 1,384,382 mln
USD 22,680 mln
SHARES O/S
1,152.8 mln
FREE FLOAT
100.0%
3M AVG DAILY VOLUME./VALUE
3.4 mln/ USD 59.1 mln
52 WK HIGH
INR 1,241.25
52 WK LOW
INR 758.80

BUY
TP: INR 1,450.00
20.9%
ICICI Bank
ICICIBC IN

Retail uptick to drive re-rating upgrade to BUY

We upgrade ICICIBC from HOLD to BUY and raise our TP from Rs 1,115 to Rs
1,450. ICICIBC is among the better placed banks with a meaningful expansion
in footprint over the last 5-6 years coupled with high tier-I capital. We expect
retail loans to grow faster than corporate loans driven by higher branch
productivity and a pick-up in GDP growth, supporting 16% earnings CAGR
through FY16. Corporate asset quality pressures will continue but we still expect
ROE to expand to 15%+ by FY16, the highest since FY05, driving a re-rating.

Expect sharp uptick in retail credit to drive loan growth: ICICIBCs retail loans have
grown at a slower pace at ~3% CAGR in the last five years; we expect strong growth
in this segment driven by an uptick in GDP growth coupled with productivity gains.
This should aid NIMs and asset quality apart from providing a fillip to fee income.
Historically, ICICIBC has reported higher ROE when retail loans have grown at a
faster clip.
Strong NIM expansion in FY14 sustainable in our view: ICICIBCs reported NIM has
increased 20bps in FY14E to 3.3%, which is sustainable on the back of a strong
liabilities franchise. Higher growth in domestic loans (as opposed to international
loans) will lend further support to margins. We factor in a 15bps uptick in NIMs
through FY16.
Tight leash on operating costs allows for higher credit costs: A tight leash on
operating costs has helped bring cost/assets down to 1.7%, from a peak of 2.4%. We
expect cost ratios to remain at current levels which will allow for higher provisioning
costs in a tough corporate asset quality environment. Restructuring is likely to remain
high and we incorporate higher credit costs at 80bps through FY16.
Robust capitalisation levels a positive; upgrade to BUY: High capitalisation (CET at
11.5%) will aid growth without the need for capital raising till FY17-FY18. With ROE
likely to rise 140bps to 15.2% though FY16 (the highest since FY05), we expect a
re-rating and upgrade the stock to BUY with a new SOTP-based TP of Rs 1,450/sh.

Y/E 31 Mar FY12A FY13A FY14E FY15E FY16E
Net interest income (INR mln) 107,342 138,664 166,144 197,091 232,885
Net revenues (INR mln) 182,369 222,121 263,471 303,519 355,735
Pre-provision profits (INR mln) 103,865 131,992 160,797 185,149 218,425
Adj. PAT (INR mln) 64,653 83,255 96,838 110,055 129,398
Adj. EPS (INR) 56.1 72.2 83.9 95.4 112.2
ROE (%) 11.2 13.1 13.8 14.3 15.2
ROA (%) 1.5 1.6 1.7 1.7 1.7
Gross NPA (%) 3.6 3.2 3.2 3.6 3.1
Tier I ratio (%) 12.7 12.8 12.1 12.4 12.6
P/BV (x) 2.3 2.1 1.9 1.7 1.5
P/E (x) 21.4 16.6 14.3 12.6 10.7
Source: Company, Factset, RCML Research

0
100
200
300
(%) Stock Price Index Price
BUY
TP: INR 1,450.00
20.9%
ICICI Bank
ICICIBC IN

Company Update
INDIA
FINANCIALS


Fig 1 - SOTP valuations FY15E
Businesses
Valuation
method
AUM/PAT/BV
(Rs mn)
Multiple (x)
Valuation of
business (Rs mn)
% stake of
ICICI Bank
Per share
Value (Rs)
Banking Standalone P/BV 675,754 2.1 1,436,272 100 1,244
Other businesses
ICICI Prudential Life 177,801 74 90
ICICI Home Finance P/BV 24,073 1.3 31,295 100 27
ICICI Bank UK P/BV 40,054 0.9 36,049 100 31
ICICI Bank Canada P/BV 57,686 0.9 57,686 100 50
ICICI Lombard P/BV 27,067 1.4 37,894 74 24
ICICI Securities P/E 1,000 10.0 10,000 100 9
Mutual Fund % of AUM 841,252 4.0 42,063 51 19
Venture capital % of AUM 103,500 12.0 12,420 100 11
Value of other businesses (with 18% discount) 206
Total 1,450
Source: RCML Research, Company

BUY
TP: INR 1,450.00
20.9%
ICICI Bank
ICICIBC IN

Company Update
INDIA
FINANCIALS


Per Share Data
Y/E 31 Mar (INR) FY12A FY13A FY14E FY15E FY16E
Reported EPS 56.1 72.2 83.9 95.4 112.2
Adjusted EPS 56.1 72.2 83.9 95.4 112.2
DPS 18.4 22.5 27.3 31.0 36.5
Book value 524.0 578.2 634.9 699.3 775.0
Adjusted book value 512.1 564.1 616.1 677.2 748.4

Valuation Ratios
Y/E 31 Mar (x) FY12A FY13A FY14E FY15E FY16E
P/E 21.4 16.6 14.3 12.6 10.7
P/BV 2.3 2.1 1.9 1.7 1.5
P/ABV 2.3 2.1 1.9 1.8 1.6

Financial Ratios
Y/E 31 Mar (%) FY12A FY13A FY14E FY15E FY16E
Spread Anal ysi s
Yield on advances 9.4 10.1 10.3 10.4 10.3
Yield on investments 6.6 6.7 6.7 6.8 6.7
Cost of funds 6.2 6.3 6.4 6.4 6.3
NIMs 2.6 2.9 3.1 3.2 3.3
Operati ng Rati os
Operating cost to income 43.0 40.6 39.0 39.0 38.6
Operating expenses / Avg assets 1.8 1.8 1.8 1.8 1.8
Proportion of CASA deposits 43.5 41.9 39.5 39.5 40.2
Non-int inc / Total income 41.1 37.6 36.9 35.1 34.5
Credit / Deposit ratio 99.3 99.2 100.5 100.5 101.2
Investment / Deposit 62.5 58.6 52.0 51.0 49.8
Asset Qualit y and Capi tal
Gross NPA 3.6 3.2 3.2 3.6 3.1
Net NPA 0.7 0.8 0.9 0.9 0.9
Coverage ratio 80.4 76.8 73.5 76.6 72.9
CAR 18.5 18.7 17.9 17.9 17.7
Tier I ratio 12.7 12.8 12.1 12.4 12.6
Growth Ratios
Net interest income 19.0 29.2 19.8 18.6 18.2
Non-interest income (1.4) 0.5 14.5 14.0 18.0
Non-interest income (ex-treasury) 109.9 102.7 114.9 113.4 116.0
Pre-provisioning profit 14.8 27.1 21.8 15.1 18.0
Net profit 25.5 28.8 16.3 13.6 17.6
Assets 16.6 13.3 11.7 15.4 17.7
Advances 16.7 13.9 17.5 17.9 19.7
Deposits 13.3 14.5 16.2 17.4 19.5
Book value per share 9.6 10.3 9.8 10.1 10.8
EPS 25.4 28.7 16.3 13.6 17.6

DuPont Anal ysis
Y/E 31 Mar (%) FY12A FY13A FY14E FY15E FY16E
Net interest income / Assets 2.4 2.7 2.9 3.1 3.1
Non-interest income / Assets 1.7 1.7 1.7 1.6 1.6
Operating expenses / Assets 1.8 1.8 1.8 1.8 1.8
Provisions / Assets 0.4 0.4 0.5 0.5 0.5
Taxes / Assets 0.5 0.6 0.6 0.6 0.6
ROA 1.5 1.6 1.7 1.7 1.7
Equity / Assets 13.1 12.6 12.3 11.9 11.3
ROAE 11.2 13.1 13.8 14.3 15.2

BUY
TP: INR 1,450.00
20.9%
ICICI Bank
ICICIBC IN

Company Update
INDIA
FINANCIALS


Profit and Loss Statement
Y/E 31 Mar (INR ml n) FY12A FY13A FY14E FY15E FY16E
Interest i ncome 335,427 400,756 463,279 536,417 627,990
Interest expense (228,085) (262,092) (297,136) (339,326) (395,104)
Net interest income 107,342 138,664 166,144 197,091 232,885
Non-interest income 75,028 83,457 97,328 106,428 122,850
Non-interest income (ex-treasury) 75,767 77,806 89,428 101,428 117,650
Net revenue 182,369 222,121 263,471 303,519 355,735
Operating expenses (78,504) (90,129) (102,675) (118,370) (137,310)
Pre-provision profits 103,865 131,992 160,797 185,149 218,425
Provisions & contingencies (15,830) (18,025) (27,777) (34,389) (41,168)
PBT 88,034 113,967 133,019 150,760 177,258
Extraordinaries 0 0 0 0 0
Income tax (23,382) (30,712) (36,181) (40,705) (47,860)
Reported PAT 64,653 83,255 96,838 110,055 129,398
Adj. net profit 64,653 83,255 96,838 110,055 129,398

Balance Sheet
Y/E 31 Mar (INR ml n) FY12A FY13A FY14E FY15E FY16E
Cash i n hand & bal with RBI 204,613 190,527 209,580 230,538 253,592
Bal with banks, money at call 157,680 223,648 246,013 270,614 297,675
Investments 1,595,600 1,713,936 1,769,619 2,034,305 2,372,854
Advances 2,537,277 2,902,494 3,415,873 4,011,553 4,826,967
Fixed assets (net) 46,147 46,471 51,118 56,218 65,907
Other assets 195,154 290,871 305,414 320,685 331,879
Total Assets 4,736,471 5,367,947 5,997,617 6,923,913 8,148,875
Equity capital 11,528 11,536 11,536 11,536 11,536
Reserves & surplus 313,591 314,030 314,030 314,030 314,030
Net worth (ex-pref capital) 604,052 667,060 732,425 806,712 894,056
Preference capital 0 0 0 0 0
Deposits 2,555,000 2,926,136 3,400,170 3,990,100 4,768,169
- CASA deposits 1,110,194 1,225,763 1,343,067 1,576,089 1,916,804
- Term deposits 1,444,806 1,700,374 2,057,103 2,414,010 2,851,365
Borrowings (+sub-ord bonds) 1,401,649 1,453,415 1,511,552 1,738,284 2,051,175
Other liabilities & provisions 175,770 321,336 353,470 388,817 435,475
Total Equit y & Li abi lities 4,736,471 5,367,947 5,997,617 6,923,913 8,148,875


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