BANKING UPDATE

Q3FY11 Result Review -NOT RATED 09th February 2011

Analyst: Krinal Shah Amid the uncertainties of elevated price levels, liquidity crunch,
krinal.shah@anagram.co.in delayed deposit growth and pressure of sustaining of margins, the
banking sector once again enabled to record robust earnings growth
KEY DATA
in the third quarter of the current financial year, on account of the
SENSEX 17776
reasonable rise in core income. However subdued amount of trading
BANKEX 11530
52 Week High 15108 profit along with substantial sum provided for non tax provisions
52 Week Low 9236 suppressed the bottom line growth in case of PSU banks. Net
Market Cap (Rs Cr) 379511
Interest Margins inched up following the performance of NII. In
P/E 14.4
terms of core activities, the sector had witnessed accelerated
P/BV 2.5
growth in loan book as compared to deposit base. Despite several
rounds of rate hike both from lending as well as saving rates, the
banks still have not succeeded to incrementally add up to the

CURRENT RATES deposit base so as to meet the RBI's target.

Indicators %
CRR 6.00 According to the latest data released by the Reserve Bank of India,
SLR 24.00 during the 12 months ended Jan 14, 2011, bank credit expanded
Repo Rate 6.50 by 23.6%, at Rs 37198 billion, partly due to low base effect. While
Rev. Repo Rate 5.50 on liability front, deposits growth on yearly basis lagged at 16.4%
Bank Rate 6.00 at Rs 49456 billion.

Credit Growth (%)

ECONOMIC INDICATORS
Indicators %
7.80 GS 2020 Yield 8.2
Export Growth YoY (Dec 10) 36.4
Import Growth YoY (Dec 10) -11.1
WPI Inflation (Dec 10) 8.4
GDP Growth (Q2 FY11) 8.9
Infrastructure Growth (Dec 10) 6.6
IIP (Nov 10) 2.7

Source: RBI, Anagram Research

As expected and even evidencing from growth momentum, the demand

BUSINESS GROWTH OF SCBs
Indicators
Aggregate Deposit (YoY)
Aggregate Advance (YoY)
C/D Ratio
Incremental C/D Ratio
for credit that was earlier driven by infrastructure sector, is now shifting
broad based across sectors and industries such as metals, engineering,
% textiles, food processing and chemical and chemical products. On flip side,
16.4
despite several rounds of rate hikes, resource mobilization activities
23.6
remained lackluster on account of negative interest rates. However, the
75.2
banks have adopted dynamic approach to tackle with this situation with
101.7
the introduction of special schemes so as to lure the investors.

Contd...

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Banking : Q3FY11 Result Review
After a respite from Dec 10 policy,
RBI again hiked repo and reverse
repo rates by 25 bps each in the
policy review of Jan 11.
As high food inflation persists, the
prospect of it spilling over to the
general inflation process is rapidly
becoming a reality.
2 09th February 2011
Another Round of Rate Hike, Pressure from Sustained High Inflation
As a part of the calibrated exit from the crisis driven expansionary monetary
stance, the Reserve Bank increased the repo rate by 150 bps and the reverse
repo rate by 200 bps during March–November 2010. In addition, the cash
reserve ratio was raised by 100 bps. After a respite from Dec 10 policy, RBI
again hiked repo and reverse repo rates by 25 bps each in the policy review
of Jan 11. In response to these monetary policy measures, scheduled
commercial banks raised their deposit rates in the range of 25-250 bps
during March 2010 - January 2011 across various maturities, indicating
strong monetary policy transmission.
Source: RBI, Anagram Research
Even as a large slack persists, inflation has edged up in major advanced
economies owing mainly to increase in food and energy prices. In India
Food inflation has remained at an elevated level for more than two years
now. It is not only that the moderation in food price inflation as expected
during a normal monsoon year has not occurred to the extent expected,
but also that there has been sharp unusual increase in prices. It is also
significant that food inflation is not confined to a few items which were
affected by unseasonal rains in some parts of the country but is fairly
widespread across several food items. As high food inflation persists, the
prospect of it spilling over to the general inflation process is rapidly becoming
a reality.
Source: Bloomberg, Anagram Research
Banking : Q3FY11 Result Review
The overall liquidity condition has
remained in deficit mode from the
third quarter of current financial
year, partly on account of above-
normal government cash
balances.
3 3
Liquidity under Pressure
The overall liquidity condition has remained in deficit mode from the third
quarter of current financial year, partly on account of above-normal
government cash balances. However, the widening difference between credit
and deposit growth rates coupled with high currency growth accentuated
the structural liquidity deficit. The tightness had been reflected in hardening
of overnight rates and huge borrowings by banks from the RBI’s repo tender.
To avoid the adverse impact of liquidity strain on credit growth, RBI has
allowed banks to dip into their Statutory Liquidity Ratio holdings up to 1%
of their net demand and time liabilities, conducted OMOs and introduced
second LAF window on daily basis.
Source: RBI, Anagram Research
09th February 2011
Banking : Q3FY11 Result Review

Q3FY11 RESULT HIGHLIGHTS

Private players outperformed PSU ones

Yet again private banks performed

far ahead from PSU banks in terms
of bottom line growth

Despite uncertainties prevailed in

the sector such as interest rate
pressures, liquidity crunch and
passive growth of deposits, the
bank enabled to show significant
improvement in their earnings on
sequential basis

NP Growth of PSU banks lagged,

albeit buoyant income from core
activities, on account of subdued
non-interest income and high
provision cost

Source: Company, Anagram Research

NII expanded by an average of 43% YoY

Boosted by core business activities

where in credit growth accelerated
than deposit base, coupled with
decreased level of cost of deposits
enabled banks to post reasonable
expansion in NII

NII of PSU banks on average basis

grew by 48% while in case of
private banks it went up by 36%
YoY

Source: Company, Anagram Research

4 09th February 2011

Banking : Q3FY11 Result Review

NIM inched up following NII growth

Net interest Margin showed an

upward trend during the quarter,
primarily driven by improved level
of demand deposits as well as C/D
ratio.

Source: Company, Anagram Research

Credit demand revived

Following the demand from infra

and retail side, the banks
succeeded to cross the RBI’s credit
target of 20%

Private Banks were seen more

aggressive with an average growth
of 35%, while PSU banks registered
an average rise of 25%.

Source: Company, Anagram Research

Delayed Deposits Growth

The banking sector also passed
from the several round of rate
hikes, following RBI’s cues but
failed to narrow down credit
deposit gap.

PSU banks on an average basis

reported deposit growth of 19%
YoY where as private banks
accumulated deposits at a pace of
an average of 31% YoY

Source: Company, Anagram Research

5 5 09th February 2011

Banking : Q3FY11 Result Review

Improvement in CASA level

Banks across the sector witnessed
improvement of more than 70 bps
YoY in CASA level on average basis,
supporting the margins, but fell
down on sequential basis.

From PSU fronts SBI, Syndicate

bank and Bank of Maharashtra
reported significant improvement
while from private side ICICI bank,
Federal bank, J & K bank, IndusInd
bank and Karnataka bank were the
top performers.
Source: Company, Anagram Research

Credit quality deteriorated in case PSU banks

Asset quality management
continued to be under scrutiny for
PSUs as the sector had witnessed
on average 70% deterioration in
NNPA in absolute terms in Q3FY11.

Net NPA of Allahabad bank, Andhra

Bank, Indian Bank and Union bank
in absolute terms registered a jump
of more than one fold.

Source: Company, Anagram Research

Along with spike in non-performing

assets, provisions for the same had Non Tax Provisions surged
also been increased, putting
pressure on the bottom line.

Almost all banks achieved 70%

provision coverage ratio that is
stipulated by RBI before Sep 10,
however SBI, IOB, UCO, Vijaya,
bank of Maharashtra and ICICI
Bank are still below the limit as
they have got the extension period
from RBI.

Source: Company, Anagram Research

Contd...

6 09th February 2011

Banking : Q3FY11 Result Review

Trading profit remained subdued

PSU banks, being the major

participants in the bond market
witnessed trading loss on
investment book due to hardening
of the bond yield, putting pressure
on other income despite
reasonable growth from fee income
side.

Source: Company, Anagram Research

Capital base of the banks remained Capital Base declined following RBI’s Norms
at comfortable level though lower
than previous year as banks have
not included 9 months profit in
calculating Tier I capital, following
RBI’s guidelines.

However IDBI, Bank of

Maharashtra, UCO bank widened
their capital base with the help of
recent capital infusion of Rs 6211
Cr by the Government.

Source: Company, Anagram Research

7 7 09th February 2011

Banking : Q3FY11 Result Review

NII Dec 10 NII Dec 09 YOY NP Dec10 NP Dec 09 YOY CMP BV P/BV
Rs Cr Rs Cr Growth % Rs Cr Rs Cr Growth % Rs Rs
PSU Banks

Allahabad Bank 1052 676 55.7 416 345 20.4 194 158 1.2
Andhra Bank 840 582 44.2 331 275 20.2 139 111 1.3
Bank of Maharathra 522 362 44.3 90 112 -19.4 56 62 0.9
Bank of India 1987 1495 32.9 653 406 61.1 414 282 1.5
BOB 2292 1601 43.2 1069 832 28.4 820 492 1.7
Canara Bank 2119 1478 43.4 1106 1053 5.0 550 382 1.4
Central Bank 1432 731 96.0 404 306 31.7 151 136 1.1
Corporation Bank 842 599 40.5 382 305 25.3 554 477 1.2
Dena Bank 466 283 64.8 155 135 15.4 96 99 1.0
IDBI 1204 717 67.9 454 287 58.1 129 127 1.0
Indian Bank 1038 827 25.5 491 441 11.2 203 184 1.1
IOB 1130 794 42.3 232 102 127.8 122 128 1.0
OBC 1030 876 17.6 408 289 41.3 308 339 0.9
PNB 3203 2212 44.8 1090 1011 7.8 1006 617 1.6
SBI 9050 6316 43.3 2828 2479 14.1 2639 1114 2.4
Syndicate Bank 1150 718 60.2 256 206 24.5 104 115 0.9
UBI 1616 1089 48.3 580 534 8.5 321 204 1.6
UCO Bank 1062 628 69.2 301 246 22.5 100 78 1.3
Vijaya Bank 539 396 36.2 152 125 21.9 81 72 1.1
NII Dec 10 NII Dec 09 YOY NP Dec10 NP Dec 09 YOY CMP BV P/BV
Rs Cr Rs Cr Growth % Rs Cr Rs Cr Growth % Rs Rs
Private Banks

Axis Bank 1733 1349 28.5 891 656 35.9 1192 449 2.7
DCB 49 33 51.3 8 -18 -145.2 45 28 1.6
Dhanalakshmi Bank 74 39 87.8 7 1 450.0 103 98 1.0
Federal Bank 447 381 17.4 143 110 29.8 344 298 1.2
HDFC Bank 2777 2224 24.9 1088 818 33.0 2004 524 3.8
ICICI Bank 2312 2058 12.4 1437 1101 30.5 951 482 2.0
IndusInd Bank 363 238 52.7 154 88 74.8 219 81 2.7
ING Vysya Bank 246 219 12.1 83 61 37.0 288 202 1.4
J & K Bank 390 290 34.3 168 140 19.9 726 719 1.0
Karnataka Bank 161 103 56.5 39 37 5.4 119 145 0.8
Karur Vysya Bank 211 151 39.4 113 76 49.2 521 252 2.1
Kotak Mah Bank 571 487 17.4 188 142 31.9 339 87 3.9
South Indian Bank 205 172 19.2 75 62 20.7 19 15 1.3
Yes Bank 323 211 53.2 191 126 51.8 248 104 2.4

Source : Company / Anagram Research

8 09th February 2011

Banking : Q3FY11 Result Review

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Tel.: -91-22-42198100
Email: avinash.gorakshakar@anagram.co.in

RATING INTERPRETATION :

BUY Expected to appreciate more than 20% over a 12-month period

Accumulate Expected to appreciate up to 20% over a 12-month period
Neutral Expected to remain in a narrow range
SELL Expected to depreciate more than 10% over a 12-month period

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9 9 09th February 2011