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India Banks

Slowing but not Stumbling


The Bankex has corrected by 13% since Sep10 due to concerns over profitability, slowing growth momentum and possible spurt in asset quality issues. Most banking stocks are trading near/below their 5-yr P/Adj. book value and we believe the correction is now overdone. In our estimates, the banking system will still generate a healthy earnings growth of 22% CAGR over FY11-13E driven by lower opex, moderating credit costs and healthy topline growth of 16-20% CAGR. However, given the current environment of macro headwinds, we remain selective and prefer banks with a) robust deposit franchise, b) diversified loan book & growth visibility, c) healthy capital adequacy and d) comfortable valuations. Our top picks include a) ICICI Bank, b) Axis Bank, c) Yes Bank, d) United Bank of India and e) Bank of Baroda. We also initiate coverage on ING Vysya (HOLD), Allahabad Bank

Institutional Research

(BUY) and IndusInd Bank (HOLD). Inflation v/s growth

Inflation precedes over growth in the RBIs agenda. In order to tame inflation, the RBI, in its 4QFY11 credit policy, raised repo rate by 50bps to 7.25% while it has set the credit growth target at 19%. With more rate hikes on the card to (mainly to tame inflation), the growth momentum in the economy (GDP and industrial production) will moderate. The systemic credit growth will slow down to 19-20% in FY12E-FY13E due to a) rising interest rates (est. another 25-50bps hikes in lending rates), b) moderation in high growth sectors such as infra., construction and real estate and c) fragile business confidence.

We estimate the growth to be largely driven by a) working capital, b) regular capex related credit demand, c) agriculture (esp. for PSU banks) and d) retail loans (expect modest demand).

Liquidity situation to remain mixed; Interest rates to remain tight

The liquidity situation in the system will remain mixed for a large part of the year as it has become more of a structural issue than a seasonal one. During fiscal 2011, the liquidity overhang in the system was mainly due to a) higher currency with public (at Rs9.2tn higher than 3yrs average by Rs500bn), b) higher govt. balances, c) negative real return and d) rise of other asset classes such as gold/silver.

We believe there are factors which will be critical for liquidity position such as a) higher inflation, b) sluggish foreign flows, c) higher current account deficit (est. at 3%) and d) higher cash balances with public. We expect deposit rates to remain at elevated levels however we do not expect deposit rates to go up sharply (not more than 25-50bps), as the system braces lower growth regime. Our estimate for deposit growth in FY12-13E is at 17-18%.

Earnings growth to remain healthy; Cherry pick the stocks

We estimate that the earnings for our coverage universe will grow at 22% CAGR over FY11-13E. While PSU banks will register earnings CAGR of 21%, private banks to realize 25% growth in earnings. We expect margins (NIMs) to shrink by 15-20bps over FY11-13E, cost/income ratio to moderate ~200bps and credit cost to come-in lower as asset quality is likely to improve YoY. Bankex corrected ~13% (since Sep10), and most of the stocks are trading at below 5yr average. While macro headwinds to keep re-rating under check in the near to mid term, we prefer stocks with a) robust deposit franchise, b) healthy capital adequacy, c) diversified loan mix & growth visibility and d) comfortable valuations.

We like ICICI, Axis, Yes (new initiation), BoB and United Bank of India (new initiation) with an average upside of 25-30%. Also initiate coverage on other banks Allahabad Bank (BUY, Rs232/share), IndusInd (HOLD, Rs223/share), ING Vysya (HOLD, Rs358/share).

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

HDFC Securities Limited, Trade World, C. Wing, 8th Floor, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai 400 013 Phone: (022) 6171 7330 Fax: (022) 6615 2374

India Banks - Slowing but not Stumbling

Table of Contents

Section 1: Inflation v/s growth ..................................................................................................................... 3 Section 2: Liquidity situation to remain mixed; Interest rates near peak levels .......................................... 15 Section 3: Earnings growth to remain healthy; Cherry pick the stocks ........................................................ 25 Appendix ..................................................................................................................................................... 45

Banks New Initiations


Allahabad Bank ........................................................................................................................................... 53 ING Vysya Bank .......................................................................................................................................... 61 IndusInd Bank ............................................................................................................................................ 72 United Bank of India ................................................................................................................................... 80 Yes Bank ..................................................................................................................................................... 88

Banks Updates

Axis Bank .................................................................................................................................................... 98 Bank of Baroda.......................................................................................................................................... 104 Bank of India ............................................................................................................................................ 105 Canara Bank .............................................................................................................................................. 114 ICICI Bank ................................................................................................................................................ 119 Oriental Bank of Commerce ....................................................................................................................... 125 Punjab National Bank ................................................................................................................................ 130 State Bank of India ................................................................................................................................... 135 Union Bank of India .................................................................................................................................. 139


May 18, 2011 Page 2

Section 1: Inflation v/s growth

Section 1: Inflation v/s growth


The Reserve Bank of India intensified its war on inflation in its 4QFY11 monetary Intensifying war on inflation policy. In a ninth consecutive policy rate hike, RBI increased the repo rate by 50bps to 7.25%. According to the RBI, a 50bps increase in repo rate was necessitated because of change in drivers of inflation. Between November 2010 and March 2011, the major driver of inflation was manufacturing non-food inflation. Prior to this, inflation was driven by food, fuel and power and primary non-food articles. In fact, in March 2011, core inflation had increased to 7.1% from a low of 3.2% in March 2010. Chart 1: Trend showing the movement of policy rates Ninth consecutive rate hike by the RBI to 7.25%
10.0% 9.0% 8.0%

New corridor (MSF) introduced and pegged at 100bps above repo rate; making liquidity available but at a higher price (8.25%)

7.0% 6.0% 5.0% 4.0% 3.0%


Dec-09 Dec-10 Oct-09 Jun-09 Apr-09 Apr-10 Jun-10 Oct-10 Aug-09 Aug-10 Feb-09 Feb-10 Feb-11 Oct-10 Apr-11 Mar-11

Call money
Source: RBI , Bloomberg

Repo

Reverse repo

MSF (notional)

Chart 2: WPI and core inflation Focus shifts from food inflation to core inflation
12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0%
Nov-07 May-05 Feb-09 Jul-09 May-10 Mar-06 Jan-07 Aug-06 Sep-08 Dec-09 Oct-05 Jun-07 Apr-08

WPI
Source: Office of Economic Advisor

Core

Inflation to average 9% in 1HFY12 and 8.4% in FY12

With steady pass through of high commodity prices to finished goods, RBI saw this as a necessary measure to anchor inflationary expectations. RBI expects inflation to average at 9.0% in 1HFY12. With partial pass through of high crude oil prices to retail prices of diesel and petrol, we expect inflation to average 8.4% during FY12.

May 18, 2011

Page 3

Growth momentum to moderate

Section 1: Inflation v/s growth

With the central government turning more hawkish in recent times and with the Higher rates to moderate growth momentum control of inflation being a clear agenda, the growth momentum of the economy will certainly slow down, hurting the investment climate and in-turn hurting the demand for bank credit. RBI expects FY12 GDP growth at 8.0%, lower than the government projection of RBI pegs GDP growth target at 8% for FY12 9% GDP growth in FY12. Investment demand will slowdown owing to rising interest rates. Government consumption is also expected to remain muted with fiscal deficit projected at 4.6% of GDP.

Chart 3: Nominal GDP growth


18%

Chart 4: Fiscal deficit estimated at 4.6% in FY12


-8.0% -7.0%

14%

-6.0% -5.0% -4.0%

10%

-3.0% -2.0%

6%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11BE FY12E

-1.0% 0.0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E

Source: CSO, HDFC Securities Institutional Research

Source: CSO, HDFC Securities Institutional Research

Credit growth to subside


FY11 witnessed record The credit growth in FY11 came in marginally higher than expectations at 21.5% 1.5% higher than the RBI target levels. The growth during the last year picked up to a high of 24.6% - highest since Jan09, even as net disbursements (during FY1011) were at Rs6.9tn which was the highest so far. Growth, in our view, was largely led by working capital related demand We believe the demand at the later half (of fiscal) was largely driven by working capital related funding and the regular capex exercise of the corporate whereas the large ticket capex activity slowed down due to multiple bureaucratic and political issues concerning esp. land acquisitions and environmental clearances. Credit in the system to grow ~1920% YoY in FY12-FY13E The systemic credit growth will slow down to ~19-20% in FY12E-FY13E due to a) rising interest rates (another 25-50bps hikes in lending rates), b) moderation in high growth sectors such as infra, construction and real estate and c) fragile business confidence. We expect the growth drivers to shift away from infrastructure to other sectors Growth drivers to shift away from infrastructure such as manufacturing, retail, agriculture and other industries. The industries directly related to infrastructure will also see some moderation. Over FY12-FY13E, we expect the credit growth to be driven by working capital related demand and other regular industrial capex related credit demand; retail to grow 15-16% CAGR over FY11-13E. disbursements of Rs6.9tn

May 18, 2011

Page 4

Limiting growth

Section 1: Inflation v/s growth

The Indian banking system realized a loan growth of 21% CAGR over a period of 18% of incremental credit growth during came from infrastructure during FY06-11 FY06-11. The key drivers of the growth have so far been infrastructure (36% CAGR), construction (30% CAGR) and commercial real estate (24% CAGR). During FY06-11, the above mentioned industries contributed 24% of incremental growth during FY06-11 while during FY11; they contributed 27% to incremental book. Given that the outstanding proportion of infrastructure in the systems loan book has reached ~14%, nearing most of the banks sectoral limit, the incremental Limit to infrastructure nearing its peak disbursements to the sector would slow down. In which case, the incremental growth from the infrastructure sector would moderate and hence will affect the headline credit growth as well. Furthermore, the other faster growing sectors such commercial real estate, construction also likely to slowdown due to underlying weaknesses in the respective sectors.

Estimate infra sector to grow at ~25% CAGR over FY11-13E to a proportion of ~16%

We estimate the infrastructure sector to grow at a slower pace of ~25% in FY12-13E not only as banks (select large ones) have reached their limits but also due to higher interest rate environment and fragile business confidence. We estimate that the proportion of infrastructure on a systemic level would remain in the range of current 14-15%.
Chart 6: Industry segment wise growth over FY06-11 (5yr CAGR)
Gems & Jewellery Chemicals Petroleum & Coal Vehicles Textiles Engineering Food Processing Basic Metal Cement Construction Infrastructure

Chart 5: Loan growth over FY06-11 (5yr CAGR)

Personal loans Non-food credit Agri Total services Industries 5% 10% 15% 20% 25%

0%

10%

20%

30%

40%

Source: RBI, HDFC Securities Institutional Research

Source: RBI, HDFC Securities Institutional Research

Chart 7: Incremental loan book mix (FY06-11)


Comm. Real Estate, 4% Other Industries, 23%

Chart 8: Incremental loan book mix (FY10-11)


Agri, 7% Housing, 7% Basic Metals, 7% Other pers. loans, 9% NBFCs, 10% Other Industries, 18% Other services, 15% Comm. Real Estate, 3% Infra, 23%

NBFCs, 6% Basic Metals, 6% Housing, 7% Other pers. loans, 7%

Infra, 18%

Agri, 13%

Other services, 16%

Source: RBI, HDFC Securities Institutional Research

Source: RBI, HDFC Securities Institutional Research

May 18, 2011

Page 5

Section 1: Inflation v/s growth

Chart 9: Proportion of Infra in banking systems credit has increased from 4% in FY02 to ~14% in FY11
18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Chart 10: Trend showing infrastructure credit (YoY growth)


120% 100% 80% 60% 40% 20% 0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY10 FY10 FY13E FY11 FY11

Source: RBI, HDFC Securities Institutional Research

Source: RBI, HDFC Securities Institutional Research

Chart 11: Commercial real estate loans grew higher than the credit growth of banking system
35% 30% 25% 20% 15% 10% 5% 0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Chart 12: Commercial real estate loans as % of bank credit increased from 0.4% in FY02 to 2.8% in FY11
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY08 FY09 FY09

140% 120% 100% 80% 60% 40% 20% 0% -20%

Non-food credit growth YoY (LHS) Comm. Real Estate growth YoY (RHS)
Source: RBI, HDFC Securities Institutional Research

Source: RBI, HDFC Securities Institutional Research

Chart 13: Proportion of construction as % of bank credit increased to 1.3% in FY11 from 0.7% in FY02
1.6% 1.4%

Chart 14: NBFCs loans as % of bank credit rose to 4.5% in FY11 from 1.6% in FY02
5%

4%
1.2% 1.0% 0.8% 0.6% 0.4%

3%

2%

1%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

FY02

FY03

FY04

FY05

FY06

Source: RBI, HDFC Securities Institutional Research

Source: RBI, HDFC Securities Institutional Research

May 18, 2011

FY07

Page 6

Credit growth drivers in FY11

Section 1: Inflation v/s growth

During FY11, the credit growth drivers became broad based. While the growth in infrastructure sector slowed down, that for services and retail picked up. As we highlighted above that banks are nearing the limit to infrastructure sector and therefore the growth momentum from this sector will slow down. Key growth drivers during the year were services (24% YoY) led by NBFCs mainly, infrastructure (39%), metals (~30% YoY), textiles etc. The sector that witnessed increase in proportion were industries, services while retail and agri declined. Table 1: Key components of bank credit
Rsbn Agriculture & Allied Activities Industry Food Processing Mar-09 3,387 10,544 538 1,027 756 1,288 658 385 2,700 3,193 6,463 393 454 1,444 924 989 2,260 5,625 2,794 487 280 286 621 1,158 26,018 Mar-10 4,161 13,115 657 1,214 857 1,629 738 442 3,799 3,778 7,268 525 434 1,645 921 1,134 2,608 5,856 3,009 487 201 369 638 1,153 30,400 Mar-11 YoY growth 4,603 16,208 849 1,447 945 2,099 932 501 5,267 4,167 9,008 655 603 1,863 1,118 1,756 3,014 6,854 3,461 605 181 437 793 1,376 36,674 11% 24% 29% 19% 10% 29% 26% 13% 39% 10% 24% 25% 39% 13% 21% 55% 16% 17% 15% 24% -10% 19% 24% 19% 21%

Industry segment growth was driven by infra (39% YoY) , metals (29% YoY) and textiles (19% YoY)

Textiles Chemicals Basic Metal Engineering Construction Infrastructure Other Industries Services Transport Operators Professional Services

NBFCs led the services segment growth (55% YoY)

Trade Commercial Real Estate NBFCs Other Services Personal Loans Housing Advances against FD Credit Cards Education Vehicle Loans Other Personal Loans Total

Retail

loans

grew

slower

than

systems growth

Source : RBI , HDFC Securities Institutional Research

Chart 15: YoY credit growth (Mar11)


25% 20% 15% 10% 5% 0% Services Industry Personal Loans Agri

Source : RBI, HDFC Securities Institutional Research

May 18, 2011

Page 7

Section 1: Inflation v/s growth

Chart 16: Outstanding credit break up (FY11)


Agri, 13% Personal Loans, 19%

Chart 17: Incremental credit break up (FY10-11)


Agri, 7%

Industry, 44%

Personal Loans, 16% Industry, 49%

Services, 28%
Services, 25%

Source : RBI, HDFC Securities Institutional Research

Source : RBI, HDFC Securities Institutional Research

Chart 18: Infrastructures contribution to incr. credit dropped last year


30% 25% 20% 15% 10% 5%

Chart 19: Trend showing housing loans growth (YoY)


30% 25% 20% 15% 10%

FY07

FY08

FY09

FY10

FY11

5% 0% FY07 FY08 FY09 FY10 FY11

Infra's contribution to incr. credit (YoY) Infra's (ex-telecom) contribution to incr. credit (YoY)

Source : RBI, HDFC Securities Institutional Research

Source : RBI, HDFC Securities Institutional Research

Chart 20: Trend showing real estate loans growth (YoY)


25% 20% 15% 10% 5% 0%
Nov-10 Dec-10 Sep-10 Jan-11 May-10 Mar-10 Feb-11

Chart 21: Trend showing NBFCs loans growth (YoY)


60% 50% 40% 30% 20% 10% 0%
Sep-10 Nov-10 Dec-10 Jan-11 May-10 Mar-10 Feb-11

-5%

Source : RBI, HDFC Securities Institutional Research

Mar-11

Source : RBI, HDFC Securities Institutional Research

May 18, 2011

Page 8

Mar-11

Section 1: Inflation v/s growth

Chart 22: Incremental retail loan mix (FY10-11)


Credit Cards, -2%

Chart 23: Housing contributed outstanding retail credit (FY11)


Education, 6% Advances against FD, 9% Vehicle Loans, 12%

50%

of

the

Education, 7% Advances against FD, 12% Vehicle Loans, 16%

Credit Cards, 3%

Housing, 45%

Housing, 50%

Other Personal Loans, 22%


Source : RBI, HDFC Securities Institutional Research

Other Personal Loans, 20%


Source : RBI, HDFC Securities Institutional Research

Higher interest rates to moderate growth momentum


Given our view that the interest rates will remain high, we believe growth Higher interest rates & uncertain economic environment to weaken growth momentum momentum of the economy will slow down for a large part of the year. Definitely, higher interest rates are not conducive to the capex environment and therefore we believe due to this, the big ticket capex activities will slow down in FY12. Historically, it has been seen that in higher interest rate environment, the credit growth moderates and so does the credit multiplier. We expect the credit growth to Industry slowdown interaction confirms be affected too this time around. Based on our interaction with industry sources, we realize that due to higher interest rates and fragile business conditions, corporate are going slower on embarking on any big ticket capex activity. Therefore, on the back of this, the credit growth would also be under pressure.

Chart 24: Higher interest rates may impact GDP growth adversely
20% 18% 16% 14% 12% 10% 8%
FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E

Chart 25: High interest rates to hurt industrial production


35% 25% 15% 5% -5% -15%
Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

15% 14% 13% 12% 11% 10%

14% 14% 13% 13% 12% 12% 11% 11% 10%

GDP Nominal (LHS)


Source : RBI , Bloomberg

SBI PLR (RHS)

IIP growth (LHS)


Source : Bloomberg

SBI PLR (RHS)

May 18, 2011

Page 9

Section 1: Inflation v/s growth


Chart 26: Higher interest rate environment to moderate credit growth
15% 35% 30% 25% 20% 12% 11% 10%
FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Inverse correlation between credit growth and interest rates

14% 13%

15% 10% 5%

SBI PLR (LHS)


Source : RBI , HDFC Securities Institutional Research

Credit growth YoY (RHS)

Chart 27: Capital formation has a ve correlation with high interest rates
40% 16% 15% 14% 13% 12% 11% 10%
FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY07 FY08 FY09 FY06 FY10

Interest rate plays an important role for capital formation in the system
35% 30% 25% 20%

Gross capital formation (LHS)


Source :HDFC Securities Institutional Research

SBI PLR (RHS)

Chart 28: Credit growth multiplier might moderate further Credit growth multiple might come off further
3.5 3.0 2.5 2.0 1.5 1.0 0.5 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

15% 14% 13% 12% 11% 10%

Credit Multiplier (LHS)


Source :RBI ,HDFC Securities Institutional Research

SBI PLR (RHS)

Note: 1) Credit multiplier = Credit growth YoY / Nominal GDP growth YoY 2) FY11 GDP growth numbers based on budgeted estimates

May 18, 2011

Page 10

Structural liquidity issues

Section 1: Inflation v/s growth

Structural liquidity issues to have its overhang on credit growth

Based on our assumption of 17% YoY growth in deposits in FY12, the availability of loanable funds to the banking system would be Rs7.3bn just enough to achieve the credit growth of 18%. Furthermore, with investment to deposit ratio coming down to a low of ~29%, the excess cushion in the form of investments would also not be available for banks to fuel credit growth by selling investments. Table 2: Loanable fund available with the banking system
Particulars Deposits (Rsbn) Deposit Growth (% YoY) FY11 52,047 16% 7,181 FY12E 60,895 17% 8,848 3,430 50% 1,715 19% 14,955 29% 16,670 27% 531 7,265 82% 39,387 22% 46,652 18%

Loanable funds would be just enough for 18% credit growth

Incr. Deposits (Rsbn) Govt. net borrowings (Rsbn) Banks' subscription to G-secs Banks' subscription to G-secs (Rsbn) - as % of incr. deposits O/S G-secs G-Secs as % of deposits Incr. CRR requirement (@6%) Incr. funds available to lend Incr. LDR O/S Loans YoY growth Source : HDFC Securities Institutional Research

Note: Incr. funds available to lend includes estimated profits of the banking system for FY12

Loan book to grow 19-20% CAGR over FY11-13E


We estimate that the loan book will grow at a CAGR of 19-20% over the next two Loan growth to be driven by working capital, regular capex, retail and agri related demand years. The growth in credit will be largely driven by demand for working capital loans and regular capex activity (especially brownfield expansion projects). The project/infrastructure loans which were sanctioned or where the disbursals have begun should continue though with some moderation. However, we expect the big ticket and greenfield projects to halt/slow down given the uncertain global and domestic business environment and further expectations of higher interest rates. Chart 29: Loan book to grow at 19-20% CAGR over FY11-13E Loan growth to be driven by working capital related credit demand, regular capex and agriculture
60,000 50,000 40,000 30,000 20,000 10,000 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY05

Rsbn

35% 30% 25% 20% 15%

Bank credit (LHS)


Source :RBI ,HDFC Securities Institutional Research

YoY growth (RHS)

May 18, 2011

Page 11

Section 1: Inflation v/s growth


Chart 30: Trend showing loan book composition

Retail proportion to remain in the range of 17-18% v/s ~19% over the last three years (average)

100% 80% 60% 40% 20% 0% FY09 Agri FY10 Industries FY11 Retail FY12E FY13E Services

Source :RBI ,HDFC Securities Institutional Research

Chart 31: Working capital loans contributed 48% of incremental loan (FY06-10)
Capex , -1%

Chart 32: Working capital loans to contribute 54% of incremental loan book over FY11-13E
Capex , -2% Agriculture , 13%

Agriculture , 15% Infra , 19% Working Capital , 48% Retail Loans, 13%
z`

Infra , 16%

Retail Loans, 15%


Source :RBI ,HDFC Securities Institutional Research

Working Capital , 54%

Source :RBI ,HDFC Securities Institutional Research

Table 3: Key loan book components


Particulars (Rsbn) Food Credit Agri Corporate Loans - Infra Retail - Housing Total Credit FY09 462 3,545 18,069 2,835 5,625 2,770 27,700 FY10 485 4,364 21,695 3,989 5,860 3,010 32,404 FY11 643 4,863 26,640 5,530 7,241 3,461 39,387 FY12E 675 5,836 31,812 6,931 8,374 3,980 46,697 FY13E 709 7,003 38,306 8,687 9,732 4,597 55,750 CAGR (FY11-13E) 5% 20% 20% 25% 16% 15% 19%

Source: HDFC Securities Institutional Research

Working capital demand to continue to lead


With commodity prices expected to remain firmer, we expect the demand for High commodity prices to push demand for working capital related loans working capital related credit to remain high during the course of the year mainly due to the higher raw material prices. Historically, it has been seen that the working capital loan growth picked up in the years when commodity prices were higher. (See chart 33). During the period of buoyant global economic growth, the demand for working capital related loans grew 24% CAGR during FY04-08.

May 18, 2011

Page 12

Section 1: Inflation v/s growth


In the current year, the demand for working capital will be largely led by industries such as oil marketing companies (which are currently heard to be borrowing in foreign currency), metals, chemicals and other capital intensive companies.

Working capital related loans to grow 22% CAGR over FY11-13E

We estimate that demand for working capital related credit demand to sustain and grow at 21-22% CAGR over FY11-13E. The proportion in systemic loan book to expand by 200-220bps over FY11-13E to ~49%. Chart 33: Trend showing working capital loans growth and commodity index

High correlation between commodity index and banks working capital loan growth
200 250

30% 25% 20% 15% 10%

150

100
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY09

5%

CRY index

Working capital loan growth YoY

Source: Bloomberg ,HDFC Securities Institutional Research

Chart 34: Proportion of working capital related loan to total loan book Proportion of working capital loan to expand
70% 65% 60% 55% 50% 45% 40%
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY10

Source: RBI ,HDFC Securities Institutional Research

Retail credit demand to remain under pressure


The growth in retail loan portfolio picked up over the last six-eight months mainly driven by housing (growth picked up from 10% in Sep10 to 15% in Mar11), vehicle loans and other personal loans (~18% of portfolio). In higher interest rate environment we expect the growth in retail to moderate from ~17% in FY11. We expect retail sector to register a growth of ~15-16% over FY1213E CAGR. We estimate retail to grow 15-16% in FY12-13 While we reckon that the higher property prices and interest rates will have a drag on the housing segment (which contributes ~50% to the total retail segment), higher wages would keep the demand from genuine buyers intact though with some moderation especially in metros. However the demand for vehicle loans (~12% of loan book) might moderate due to a) lower volumes growth indicated by auto players due to base effect and increase in prices of vehicles, and b) higher interest rates.

Retail growth to moderate

May 18, 2011

Page 13

Section 1: Inflation v/s growth


Chart 36: Retail loan growth YoY (FY11)
Housing Total retail loans

Chart 35: Retail loan growth (FY06-11 CAGR)

Advances against FD

Housing

Education
Total retail loans

Vehicle
Education

Advances against FD
0% 20% 40%

0%

5%

10%

15%

20%

25%

Source :RBI ,HDFC Securities Institutional Research

Source :RBI ,HDFC Securities Institutional Research

Chart 37: Trend showing HDFCs loan disbursal and retail lending rates
35% 30% 25% 20% 15%
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Chart 38: Trend showing vehicle loan growth


30% 25% 20% 15% 10% 5% 0% -5% -10% -15%
Nov-08 Nov-09 Jul-08 Jul-09 May-08 May-09 Mar-09 Mar-10 Sep-08 Sep-09 Dec-10 Feb-11 Jan-09 Jan-10

YoY growth

16% 15% 14% 13% 12% 11% 10% 9% 8%

14% 14% 13% 13% 12% 12% 11% 11% 10%

HDFC's loan disbursal (LHS)

HDFC's PLR (RHS)

Vehicle loans YoY (LHS)

SBI PLR (RHS)

Source : HDFC Securities Institutional Research

Source :RBI ,HDFC Securities Institutional Research

Chart 39: Property prices movement in major towns High property prices made up for lower volumes prices growth could but going forward high interest rates and high property moderate housing loans growth
180 160 140 120 100 80
4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11

Index

Mumbai

Delhi

Bengaluru

Kolkata

Source :RBI ,HDFC Securities Institutional Research

May 18, 2011

Page 14

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels

Section 2: Liquidity situation Interest rates near peak levels

to

remain

mixed;

The liquidity issues in the system are unlikely to settle down anytime in the near future. Issues pertaining to liquidity are more structural than seasonal. With money with public being at its peak at Rs9.4tn (22nd Apr11), negative real return and rise of other asset classes such as gold/silver, the expansion in deposits remained Deposit rates to remain higher in the system muted during FY11. In order to attract deposits back in the system, we believe, the deposit rates in the system to remain firmer. We estimate the banking system to realize a deposit growth of 17-18% over FY11-13E, mainly led by higher growth in term deposits. We estimate deposits to grow 1718% CAGR over FY11-13E However, we do not think the deposit rates will further go up especially after the Q4 monetary policy in which the RBI pegged the credit growth lower at 19% for FY12E and with the current deposit rates being where they are, we believe banks should be comfortable with 17%YoY growth in deposits to meet 19% credit growth.

Unprecedented liquidity squeeze


Banks ~2.5% remained of NDTL borrower for the upto longest During the fiscal 2011, the liquidity situation in the banking system remained precarious. The banking system were the net borrower at the RBIs LAF window at an average of ~Rs850bn for over 6mths (2-3% of NDTL much above the comfort level of +/- 1% as specified by the RBI). This was the longest over the last 10yrs. a drag on money As per our understanding we believe, the liquidity was tight due to a) higher currency with the public (partly due to higher inflation) b) negative real rate of return, c) higher government balances and d) emergence of other asset classes such as gold/silver. Further, the gulf between the credit growth (YoY) and deposit growth (YoY) No further space was available for the banks in the form of investments remained higher in FY11 at ~5.5% (full year avg.). The higher gap between the credit and deposit growth was not for the first time in the history (fiscal year 07 witnessed credit-deposit growth gap of ~9%). However, during FY05-06 despite of a higher incremental credit-deposit ratio, the banking system was marginally in deficit as it was just marginally investing/winding down investments. What is different this time is that the system doesnt even have the cushion in the form of higher investments. The investment to deposit ratio has moderated to 20% (avg. for FY11) from ~40% (avg. for FY10). Chart 40: Net reverse repo as % of NDTL
6% 5% 4%

period in FY11

Inflation multiplier

is

Tightness to continue even during FY12, but not to the extent witnessed in FY11

3% 2% 1% 0% -1% -2% -3%


Jan-08 Sep-04 Sep-10 Oct-05 Jun-07 Apr-05 Nov-06 May-06 Aug-09 Feb-09 Mar-04 Mar-10 Apr-11 Jul-08

Source : RBI , HDFC Securities Institutional Research

May 18, 2011

Page 15

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels
Chart 42: SLR has been falling and have come closer to the statutory requirement (a gap of ~500bps)
45% 40% 35% 30% 25% 20%
Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Oct-10

Chart 41: Wedge between credit and deposit growth (YoY) remained higher at 5.5% (avg.) in FY11
20% 15% 10% 5% 0% -5% -10%

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Oct-10

Apr-11

SLR Investments

SLR requirement

Source : RBI , HDFC Securities Institutional Research

Source : RBI , HDFC Securities Institutional Research Note: RBI further opened another window (MSF) which allows banks to borrow upto 1% of SLR

Chart 43: Banking system remained in deficit mode in the later part of FY11
4,000 3,400 2,800 2,200 1,600 1,000 400 (200) (800) (1,400) (2,000) (2,600) (3,200)
Apr-04

Rsbn

160% 140% 120% 100% 80% 60% 40% 20% 0%

The Incremental credit-deposit ratio was not high for the first time

Last cycle, system was on excess investments which it utilized to fund credit growth

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Oct-10

Deficit (LHS)
Source : RBI , HDFC Securities Institutional Research

Incr. LDR (RHS)

Note: Deficit = Incr. Deposits (YoY) Incr. Credit Incr. Investments + Incr. borrowings and other DTL

Chart 44: Gold imports in India


1000 800 mt 60% 50% 40% 30% 20% 10% 0% -10% -20% 0
CY92 CY93 CY94 CY95 CY96 CY97 CY98 CY99 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10

Rise of other asset classes

600 400 200

Imports of gold was highest ever (since CY92) in the country at ~960mt. We attribute this also as one of the reason for a slower deposit accretion in the system

Apr-11

-30%

Gold Imports (LHS)


Source : WGC, HDFC Securities Institutional Research

YoY growth (RHS)

May 18, 2011

Page 16

Apr-11

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels
Liquidity, a structural issue
The liquidity problem in India appears to be more of a structural issue than a seasonal one which has caused unprecedented liquidity tightness in the system. We believe there are multiple issues which have caused such a situation. Below are some of the key ones:

Higher

inflation

leads

to

higher

leakage of money in the system

Higher inflation: As per NCAER, an average Indian spends 51% of its income on food. Further, it has been observed that in higher inflationary environment, the currency with the public tends to go up. Similarly, even in fiscal 2011, higher food inflation caused higher growth in currency with public. Higher cash balances with public at Rs9.2tn up by Rs1.5tn YoY as compared to an average increase of Rs1tn (YoY) over the last couple of years, owing to 1) negative real interest rates in the system for a larger part of the year, 2) higher food inflation and 3) rise of other investment avenues such as gold/silver India imported gold to the tune of 963mt. Slower accretion to forex reserves at US$13bn. historically, the forex reserves accretion in the country has played an important role. Since 2002, the incremental forex reserves have contributed on an average of 33% of incremental deposits in the system. Higher government balances with RBI at ~Rs770bn (avg. between Jun10Mar11) largely due to 3G & BWA auctions. However, the government spending continued to remain healthy and grew 28% YoY as on Feb11.

as a result, FY11 witnessed sharper increase in currency with public at Rs1.5tn, higher by Rs1tn on an average

Forex reserves are important tool for liquidity. In FY11, the net addition to forex were only US$13bn

Chart 45: Trend showing currency with public


10,000 8,000 Rsbn 20% 18% 16% 14% 12% 10%
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

Higher

inflation

pushes

up

the

currency with public

6,000 4,000 2,000 -

Currency with the public (LHS)


Source : RBI, HDFC Securities Institutional Research

YoY growth (RHS)

Chart 46: Trend showing negative real interest rate


10% 8% 6% 4% 2% 0% -2% -4%
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

Chart 47: Trend showing correlation between currency with public and food inflation
24% 22% 20% 18% 16% 14% 12% 10% 25% 20% 15% 10% 5% 0%

Mar-07

Mar-08

Mar-09

Mar-10

Sep-06

Sep-07

Sep-08

Sep-09

Currency with the public YoY growth (LHS) Food Inflation (RHS)

Source : RBI, Bloomberg , HDFC Securities Institutional Research Note: Real interest rate: inflation (WPI)long bond yields

Source : RBI, Bloomberg , HDFC Securities Institutional Research

May 18, 2011

Sep-10

Mar-11

Page 17

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels
Chart 48: Wallet share of an individual

~50% of money is spent on food by a typical Indian

100 80 60 40 20 0

8 5 7 6 10 5 4

13 5 7 9 11 5 6

10 5 7 7 11 5 5

55

45

51

Rural Food
Source : RBI

Urban Transport Education Clothing

All India Durables Others

Housing

Health

Chart 49: Net forex reserves (accretion) averaged 33% of incremental deposits Incremental foreign reserves contributed an average of 33% to incremental deposits of the system
100 80 60 40 20 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

US$bn

70% 60% 50%

Average of 33% of Incr. deposits

40% 30% 20% 10%


FY10

0% -10% -20%

(20) (40)

BOP (LHS)
Source :RBI

BOP as % of Incr. deposits (RHS)

Note: BOP = (Total current account deficit + Capital Account) or (forex reserve accretion)

Chart 50: Growth (YoY) in Govt spending


400%

Chart 51: Govt balances with RBI


1,500 1,200 900 Rsbn

300%

200%
600

100%

300 0
Jan-08 Sep-07 Dec-09 Oct-10
Jan-10

0%
Jun-08 Apr-07 Aug-09 Nov-08 Feb-11 May-10 Mar-09

Sep-10

Aug-10

Nov-10

Dec-10

Apr-10

Jun-10

Feb-10

Oct-10

Jan-11

Jul-10

May-10

Mar-10

Feb-11

-100%

-300

Source : CGA

Source :RBI

May 18, 2011

Page 18

Mar-11

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels
Liquidity position to remain mixed
The liquidity position in the system will remain mixed over FY12-13E. There are various factors which will play an important role for liquidity position in the system. We lay down our view on each of the important factors as below.
a)

Crude oil prices and current account deficit: Crude oil contributes 30% to the total import bill of the country. Higher crude oil prices will put pressure on the current account deficit which is currently estimated at ~3% for FY12. Further, higher crude prices potentially shave off the GDP growth as well.

Chart 52: Trend showing import bill mix


100% 80% 60% 40% 20% 0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10
31% 32% 74% 73% 71% 69% 68% 69% 70%

Chart 53: Current account deficit as % of GDP


3% 2% 1% 0% -1% -2%

26%

27%

29%

31%

30%

-3% -4% -5%


FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Oil

Non-oil

Source : RBI

Source : RBI , HDFC Securities Institutional Research

b) Foreign flows: We understand that foreign flows are dynamic and difficult to India received robust foreign flows but driven by volatile foreign flows precisely estimate. During FY10-11(Apr-Dec10), India remained an attractive destination for foreign investors and saw inflows of US$53bn (FII + FDI) against US$38bn in year ago. The composition shifted towards volatile flows such as FII investments and trade credits. The RBI mentioned that since net inflows under FDI were lower and as the CAD is expected to be at US$58bn in 2011-12, the sustainability of Any slowdown in forex accretion will have an impact on deposit growth unless RBI intervenes by way of printing more money financing the CAD becomes important. With developed markets (DMs) showing signs of stability, there could be a possibility of reversal of flows to DMs or may be slower inflows in the country. In any case, it will have an impact on the liquidity position in the country. While forex played an important role in easy liquidity conditions during FY0408, however, during FY09-10, in the event of net forex outflow from the Cut in reserve requirement, fresh money printing pushed the deposit growth in FY09, year of forex outflows

country, the deposits growth was still healthy with higher OMO buybacks and MSS de-sequestering (Rs700bn in 1HFY10) by the RBI offsetting the drag created by thinner foreign inflows. While this supported new money creation or base money growth substantial cuts in the CRR and a pick up in government spending also eased system liquidity by boosting the money multiplier.

May 18, 2011

Page 19

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels

Chart 54: Trend showing balance of payment as % of incr. deposits


120% 100% 80% 60% 40% 20% 0%
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Chart 55: Trend showing BOP growth (YoY) and deposits growth (YoY)
150% 100% 25% 20% 15% 10% 5% 0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Mar-08

25% 20% 15% 10% 5% 0%

50% 0% -50% -100% -150% -200%


FY10
Mar-09 Mar-10

-20% -40%

Overall BOP as % of Incr. Deposits (LHS) Deposits YoY growth (RHS)


Source : RBI, HDFC Securities Institutional Research

FY10

BOP growth YoY (LHS)

Deposits YoY growth (RHS)

Source : RBI, HDFC Securities Institutional Research

Chart 56: Trend showing forex reserves as % of reserve money


200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0%
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

Chart 57: Trend showing currency in circulation as % of forex reserves


140% 120% 100% 80% 60% 40% 20% 0%
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-11

Source : RBI, HDFC Securities Institutional Research

Source : RBI, HDFC Securities Institutional Research

Chart 58: RBI maintained a ratio of fresh printing of money in-line with forex accretion except in Jun10
1,600 1,400 1,200 1,000 800 600 400 200 Mar'11 Jun'05 Jun'06 Jun'07 Jun'08 Jun'09 Jun'10

Rsbn

1600% 1400% 1200% 1000% 800% 600% 400% 200% 0% -200%

Notes printed by RBI (LHS)

Notes printed as % of incr. forex (RHS)

Source : RBI, HDFC Securities Institutional Research

May 18, 2011

Page 20

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels
c) Inflation: Inflation continues to remain on the higher side and came in at ~9% in Mar11 1% higher than the RBI target. The RBI took a hard stance and raised the benchmark policy rates by aggressive 50bps (v/s expectations of 25bps). The RBI has clearly mentioned that its priority is to control inflation, and therefore we expect it to maintain its hawkish stance. Economist at HDFC Bank expects rates to harden by 50-75bps in FY12. Based on NCAER survey, food accounts for 51% of an individuals wallet and therefore higher food prices would cause the money to move out of the system. As seen historically, higher inflation has resulted in higher growth in currency with public. Therefore, we believe higher inflation will be a drag for deposit growth in the banking system.
d)

Inflation remains a critical issue

RBI to continue with its hawkish stance

Deposit growth will be at risk if inflation remains high

Currency with public: Currency with public increased by a whopping Rs1.5tn, almost Rs500bn higher than an average increase of Rs1tn over the last two years. We believe, with higher interest rates on deposits (at 7.5-9%), some part of excess cash will return to banking system, even from other asset class such as gold. As observed historically, in higher interest rate environment the currency with public growth slows down. Chart 60: Higher inflation increase the currency with public
10% 9% 8% 7% 6% 5% 4% 24% 22% 20% 18% 16% 14% 12% 10%
Mar-07 Mar-08 Mar-09 Mar-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11

Chart 59: Higher interest rates pulls money into banking system
22% 21% 20% 19% 18% 17% 16% 15%
Sep-06 Dec-08 Oct-05 Aug-07 May-09 May-05 Nov-09 Mar-99 Mar-07 Feb-08 Apr-10 Apr-06 Oct-10 Jul-08 Mar-11

25% 20% 15% 10% 5% 0%

Currency with public as % of deposits (LHS) SBI 1yr TD rates (RHS)


Source : RBI, Bloomberg, HDFC Securities Institutional Research

Currency with the public YoY growth (LHS) Food Inflation (RHS)
Source : RBI, Bloomberg, HDFC Securities Institutional Research

RBI well equipped to manage liquidity


RBI will ensure just enough liquidity in the system While we expect the liquidity position to remain tight in FY12-13E due to the factors discussed above, the RBI has got sufficient tools with it to manage liquidity in the system. The selection of the tools would be dependent on the inflationary position in the system. In its 4Q credit policy, the RBI introduced another facility called Marginal Standing Facility (MSF) which will provide liquidity upto 1% of SLR but at a higher rate of 8.25% (pegged at 100bps above Repo rate). The tools that the RBI can potentially use are: a) Open market operations: The most direct and effective tool available with the RBI is to control the liquidity flow by conducting open market operations (OMOs) which effectively buys back the government securities from the banks hence infusing cash in the system. Historically, RBI had been quite active in controlling liquidity in the system through OMOs. During FY10 and 10MFY11, RBI bought back the bonds worth ~Rs1.4tn while during FY06-07 it sold bonds worth Rs90bn to sterilize excess flow in the system.
b)

New liquidity window introduced as a option of last resort

RBI frequently used OMOs manage liquidity situation

to

Reduction in reserve ratios: Given RBIs stance against inflation, reduction in reserves looks difficult, but temporary relaxation in meeting SLR requirement (upto a limit) might be possible. A cut in CRR can only happen if the inflation

May 18, 2011

Page 21

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels
comes within RBIs comfort zone. We believe that either of these things can happen only in 2HFY12 given that government needs to finish 60% of its borrowing program in the 1H only. And any reduction in SLR would reduce the demand for G-Secs from the banking system which will push the yields up, making the borrowing expensive for the government.

Chart 61: Trend showing the movement of reserve ratios 25bps of reduction in CRR can free upto Rs145bn. A multiplier of 4x will create deposits of Rs580bn, 1% of outstanding deposits as on Apr11
26% 26% 25% 25% 24% 24% 23%
Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-00 Sep-01 Sep-02 Sep-05 Sep-06 Sep-00 Sep-10 Sep-03 Sep-04 Sep-07 Sep-08 Sep-09 Mar-11
70% 65% 60% 55% 50% 45% 40%
Jun'05 Jun'06 Jun'07 Jun'08 Jun'09 Jun'10 Mar'11

10% 9% 8% 7% 6% 5% 4%

SLR (LHS)
Source : RBI, HDFC Securities Institutional Research

CRR (RHS)

c) Fresh money printing: The RBI undertakes the exercise of printing fresh money depending upon the situation. During the year ending Jun09 and Jun 10, RBI printed a cumulative of Rs2.3tn in order to ensure sufficient liquidity in the system, partly due to outflow/slower accretion to forex reserves. We compare this metrics with the forex reserves and realize that the RBI has maintained a ratio of notes in circulation to forex reserves at 58% (avg.) over the last 6yrs. During year ending Jun10, the ratio picked up to 66%, much higher than the last six year average of 58%.

Chart 62: RBI printed sufficient money in 2010 when forex reserves declined
1,600 1,400 1,200 1,000 800 600 400 200 Mar'11 Jun'05 Jun'06 Jun'07 Jun'08 Jun'09 Jun'10

Chart 63: Notes in circulation as % of forex reserves increased consecutively to 66% (v/s 5yr avg. of 56%)

Rsbn

1600% 1400% 1200% 1000% 800% 600% 400% 200% 0% -200%

10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000

Rsbn

Notes printed by RBI (LHS) Notes printed as % of incr. forex (RHS)


Source : RBI, HDFC Securities Institutional Research

Notes in Circulation (LHS) Notes in Circulation as % of forex res. (RHS)


Source : RBI, HDFC Securities Institutional Research

May 18, 2011

Page 22

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels
Chart 64: Money supply (M3)/Reserve Money (M1)

Multiplier expanded from 2.8x to 4.0x by Mar11

4.3 4.1 3.9 3.7

During

FY09-11,

M3

grew

by

3.5 3.3 3.1 2.9

~16.6% while in FY11 by 15.9%

RBI pegs growth of M3 in FY12 at 16%

2.7 2.5
Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
125 75 200 200 200 100 190 150 100

Source : RBI, HDFC Securities Institutional Research

Therefore, we believe that the RBI would try and maintain enough liquidity in the system so that it can ensure smooth transition of its monetary policy to counter inflationary pressures while not choking the liquidity taps in the system.

Deposits rates are near peak levels


Interest rate on deposits unlikely to come off While higher inflation (core) prompted the RBI to continue to take policy action by raising policy rates ninth increase since Mar10, cumulatively at 225bps, the interest rates are unlikely to come-off in a jiffy. But neither are they expected to go up further (not more than 50bps) Per our HDFC Banks economics team, the inflation is likely to remain in double during 1HFY12 and 6-7% by FY12, which makes us believe that the RBI will maintain its hawkish stance and therefore the rates will remain higher in the system. In its 4Q monetary policy, the RBI has pegged the credit growth at 19% YoY Inflation to remain in the range of 910% during 1HFY12 (against 21.5% YoY in FY11), deposit growth at 17% YoY (v/s 16% YoY in FY11) in FY12E. With growth outlook moderating, we do not expect banks to rush to tie-up liabilities before spotting asset growth opportunities. Hence, we do not expect the deposit rates (retail) to go up sharply (not more than 25-50bps).

Deposits to grow 17-18% CAGR over FY11-13


The banks in order to attract deposit flow, raised deposit rates by 200-300bps since Sep10. Despite that the growth remained subdued at 16% as on 25th Mar11. Therefore, we expect deposit growth to gather momentum as the real rate of return improves due to a) moderation in inflation (from 9.4% in Jan11 to 8.66% in Apr11), b) higher deposit rates in the system and c) peak prices of other asset classes such as silver/gold/property etc. Table 4: Deposit rate hikes by banks since Sep'10 Deposit rates went up by 200Bank BOB BOI Canara Bank Corp. Bank PNB SBI Union Bank Axis Bank ICICI Bank Note: Highest rates taken in respective maturity buckets <1 Yr (Bps) 150 225 175 290 300 175 200 175 100 1-3 Yr (Bps) 175 250 210 200 215 200 175 190 175 3-5 Yr (Bps)

300bps since Sep10

May 18, 2011

Page 23

Section 2: Liquidity situation to remain mixed; Interest rates near peak levels
Chart 65: Trend showing deposit rate movement and deposit growth (YoY)
30% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0%
Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Apr-04 Oct-04 Mar-08 Mar-09 Mar-10 Mar-05 Mar-06 Mar-07 Mar-11

Higher deposits

interest

rates

to

attract

25% 20%

1yr term deposits rates are higher at 7.75% as compared to 5-yr average of 6.5%

15% 10%

Deposits growth YoY (LHS)

SBI 1 Yr TD rate (RHS)

Source : RBI, Bloomberg ,HDFC Securities Institutional Research

Further, with other asset classes such as gold & silver being on their life time highs, the probability of generation of absolute returns looks difficult hence making deposits an attractive investment avenue.

Chart 66: Gold historic price


1,550 1,350 1,150 950 750 550 350
Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Oct-10 Apr-11

Chart 67: Silver historic price


50 40 30 20 10 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Oct-10 Apr-11

US$/OZ

US$/OZ

Source : Bloomberg

Source : Bloomberg

May 18, 2011

Page 24

Section 3: Earnings growth to remain healthy; Cherry pick the stocks

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


The earnings for the banking system is likely to grow at 22% CAGR over FY11-13E Earnings to grow 22% CAGR over FY11-13E (v/s 24% CAGR over FY06-10) with lower operating costs and lower credit costs to offset some pressure on earnings growth from margin compression. We believe banks with higher proportion of low cost deposits will continue to score above banks with lower proportion even though the interest rate on savings product Lower opex and lower credit cost to drive earnings growth while NII growth to moderate has gone up by 50bps , hurting NIMs by 10-15bps (without considering any change in yields). Asset quality concerns though largely abated, but higher interest rates will certainly put the financial health of small and medium enterprises (SMEs) under-check and banks with higher exposure to SMEs/mid-corporate might face some pressure if interest rates go up by another 50bps or so.

Earnings growth to remain healthy


The banking system closed FY11 with an earnings growth of 15% YoY. The growth was driven by improved margins (expanded 40bps YoY), lower credit costs and uptick in loan growth. However, going into FY12, we see the profit growth remaining healthy but the drivers would change. While volumes are estimated grow at 18-20% YoY, core spreads in FY12 will remain under pressure (YoY) due to higher cost of deposits. However, lower operating costs (due to lower pension cost) and lower credit cost will enable a healthy earnings growth. Table 5: Consolidated Income Statement (Our coverage)
Rsm Interest income Interest on Advances Income on Investments Interest on bank balances Other Interest Received Interest expense Net interest income Other income - Fee income - Treasury Gains - Other Gains Total income Operating expenses -Employee Expenses -Others Pre-provision Profit Total Provision -Provision for NPL - Provision for Investments - Provision on Std Assets - Others PBT Provision for Tax PAT Source: HDFC Securities Institutional Research FY11 2,936,694 2,137,374 721,877 74,349 13,548 1,819,566 1,117,128 491,157 305,940 49,263 136,930 1,601,316 713,024 427,260 291,462 888,292 274,514 226,131 15,899 23,781 11,693 613,779 195,257 418,522 YoY growth 20% 20% 19% 33% 11% 11% 36% 2% 12% -48% 21% 23% 22% 29% 16% 23% 33% 13% -199% 324% -30% 19% 27% 15% FY12E 3,791,673 2,818,747 872,582 85,442 14,902 2,505,789 1,285,885 575,162 369,530 44,209 161,423 1,869,579 811,942 465,908 346,032 1,057,637 306,031 241,090 30,725 19,789 14,427 751,606 239,549 512,057 YoY growth 29% 32% 21% 15% 10% 38% 15% 17% 21% -10% 18% 17% 14% 9% 19% 19% 11% 7% 93% -17% 23% 22% 23% 22% FY13E 4,608,056 3,447,217 1,053,098 91,348 16,393 3,076,703 1,531,352 690,284 446,087 54,249 189,948 2,233,156 970,847 557,620 413,226 1,262,308 350,077 283,170 26,344 26,135 14,429 912,231 290,349 621,882 YoY growth 22% 22% 21% 7% 10% 23% 19% 20% 21% 23% 18% 19% 20% 20% 19% 19% 14% 17% -14% 32% 0% 21% 21% 21%

May 18, 2011

Page 25

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Table 6: Consolidated sector Du Pont Analysis (Our coverage)
FY11 Interest income Interest on Advances Income on Investments Interest on bank balances Interest expense Net interest income Other income - Fee income - Treasury Gains - Other Gains Total income Operating expenses -Employee Expenses -Others Pre-provision Profit Total Provision -Provision for NPL - Provision for Investments - Provision on Std Assets PBT Provision for Tax PAT Equity / Assets ROAE Source: HDFC Securities Institutional Research Note: Banks under coverage universe 7.3% 5.3% 1.8% 0.2% 4.6% 2.8% 1.2% 0.8% 0.1% 0.3% 4.0% 1.8% 1.1% 0.7% 2.2% 0.7% 0.6% 0.0% 0.1% 1.5% 0.5% 1.0% 6.6% 15.9% FY12E 7.9% 5.9% 1.8% 0.2% 5.2% 2.7% 1.2% 0.8% 0.1% 0.3% 3.9% 1.7% 1.0% 0.7% 2.2% 0.6% 0.5% 0.1% 0.0% 1.6% 0.5% 1.1% 6.3% 17.0% FY13E 8.0% 6.0% 1.8% 0.2% 5.4% 2.7% 1.2% 0.8% 0.1% 0.3% 3.9% 1.7% 1.0% 0.7% 2.2% 0.6% 0.5% 0.0% 0.0% 1.6% 0.5% 1.1% 6.0% 18.0%

Margins to contract 17bps YoY in FY12

Treasury gains could be a wild card

C/I ratio to moderate ~200bps

ROEs to be healthy at 18-19%

Margins to remain under pressure


The net interest margins of the banking system peaked out in 3QFY11. Due to higher inflationary environment the Reserve Bank of India (RBI) raised rates nine times in a row by 225bps to 7.25% (repo). That coupled with tighter liquidity Easing liquidity conditions have environment saw the deposit rates moving up faster. Banks raised deposit rates by 75-225bps in 1-3yrs maturity bucket while on the shorter end the rates went up by almost 200-250bps during the last six months. However, rates at the shorter end have cooled off with 3m CP and CD rates coming off by ~70bps, mainly due to seasonal phenomenon and reduced government balances with the RBI. Lag effect of higher deposit cost to impact the margins While banks raised the lending rates by ~150bps over 6-7mths. Large part of higher lending rates got factored in NIMs as the average floating rate loan book is 70% but the lag effect of higher deposit costs will flow in FY12, will keep the margins under pressure.

cooled off the rates of late

May 18, 2011

Page 26

Section 3: Earnings growth to remain healthy; Cherry pick the stocks

Chart 68: RBI aggressively raised rates inflation


8.0% 7.0% 6.0% 5.0% 4.0% 3.0%

to counter
12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Chart 69: Rates at shorter end have cooled off


12.0% 10.0% 8.0% 6.0% 4.0%

Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

Sep-10

Dec-10

Jun-10

Oct-10

Jan-11

Apr-10

Aug-10

Nov-10

May-10

Feb-11

Repo rate (LHS)

Reverse repo (LHS)

WPI (RHS)

3mth CP

3mth CD

Source :RBI , Bloomberg, HDFC Securities Institutional Research

Source : Bloomberg ,HDFC Securities Institutional Research

Chart 70: Cost of deposits quarterly trend


6.5% 6.0% 5.5% 5.0% 4.5% 4.0% Q4FY10 PNB 1QFY11 BOB 2QFY11 Canara Bk 3QFY11 BOI 4QFY11 SBI

Chart 71: Yields on advances quarterly trend


12% 11% 10% 9% 8% 7% Q4FY10 1QFY11 2QFY11 3QFY11 4QFY11

PNB

BOB

Canara Bk

BOI

Mar-11
SBI

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 72: NIMs quarterly trend NIMs peaked in 3Q


4.5% 4.0% 3.5% 3.0% 2.5% 2.0% Q4FY10 Axis Bk 1QFY11 ICICI Bk 2QFY11 PNB 3QFY11 BOB 4QFY11

Source : HDFC Securities Institutional Research

May 18, 2011

Page 27

Apr-11

Jul-10

SBI

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Moderating CASA ratio and slowing credit growth to hurt margins
On the back of higher interest rate, the low cost deposits (CASA) growth of the

Growth in term deposits picked up

banks to falter while that of term deposits to pick up. Since Sep10, the growth in term deposits stood strong at 17% (YoY) while that in low cost deposits moderated from 27% to 25%. Even the proportion of CASA deposits declined in total deposits by ~50bps to 35%.

Proportion of CASA to ~200bps over FY11-13

moderate

As we expect the rates on deposit to remain higher for a large part of the year, we expect CASA ratio to moderate by 150-200bps over FY12-13. Moderating CASA, higher cost on savings product at 4% and moderation in credit growth to impact the margins adversely. We expect the margins to contract by 1030bps over FY11-13E, depending on banks growth in CASA deposits. The most impact banks would be banks with lower CASA ratio such as BOI, Corp Bk, OBC and Union Bank.

Chart 73: Trend showing growth (YoY) in term deposits


22% 20% 18% 16% 14% 12% 10%
Nov-10 Jul-10 Jul-10 Feb-11 Feb-11 Dec-10 Sep-10 Aug-10 Dec-10 Mar-11 Oct-10 Jun-10 Oct-10 Jan-11 Apr-11

Chart 74: Trend showing growth in term deposits (YoY growth) for sector
18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 3QFY11

Source : HDFC Securities Institutional Research Note: Data as per RBI. This also includes certain proportion of savings and current deposits

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Chart 75: Trend showing growth in CASA deposits YoY


30%

Chart 76: Trend showing proportion of CASA deposits


38% 36% 34%

25%

20% 32% 15%


3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11

30%
4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 4QFY11

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

May 18, 2011

Page 28

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Chart 78: Core spreads to moderate
4.0% 3.8% 3.6% 3.4% 3.2% 3.0%

Chart 77: Margins to contract in FY12 to flatten out in FY13


3.0% 2.9% 2.8% 2.7% 2.6% 2.5% FY08 FY09 FY10 FY11 FY12E FY13E

FY08

FY09

FY10

FY11

FY12E

FY13E

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Source : HDFC Securities Institutional Research Note: 1)For banks under coverage universe 2) Core spreads: Diff. of yield on advances and cost of deposits

Table 7: Changes in cost/yields assumptions in FY12E


Particulars (bps) Allahabad Bk Axis Bk BOB BOI Canara Bk Corp Bk ICICI Bk IndusInd Bk ING Vysya Bk IOB OBC PNB SBI Union Bk United Bk Yes Bk Source: HDFC Securities Institutional Research Yield on advances 68 72 57 52 67 67 64 76 70 88 72 75 66 70 68 68 Cost of deposits 89 79 81 74 76 74 60 62 82 85 86 78 69 66 68 81 NIMs -14 -27 -16 -18 -19 -26 -3 -9 -10 -28 -21 -18 -6 -16 4 -19 CASA ratio -105 -155 -100 -63 -87 -64 -136 87 -90 -91 -100 -111 -182 -36 -113 178

Net interest income growth to moderate


Having witnessed a disappointing FY10 (16% growth), the profitability of the system improved in FY11 with the system logging 36% growth in net interest income (our coverage universe), driven by higher net interest income growth, expansion in margins and stable credit cost. However, going forward, we expect the growth to moderate due to under pressure core spreads and moderating volumes growth. We expect the net interest income growth in the system to come at 15% mainly driven by private sector banks which will grow at 17% while PSU banks will grow at ~15%. Banks that are likely to log higher growth in NII over FY11-13E are Axis, Yes, IndusInd, Allahabad Bank and United Bank.

May 18, 2011

Page 29

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Chart 79: Trend showing NII growth
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% FY06 FY07 Sector FY08 FY09 FY10 FY11 FY12E Pvt. Bank FY13E

PSU Banks

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Fee income growth


Fee income growth of the banking system is largely linked with the growth in loan Fee income to grow in tandem with balance sheet growth book. With an expected moderation in loan growth, we expect the fee income growth to also moderate. Moreover, banks with higher proportion of fee income from third party distribution would further witness pressure due to regulatory changes on commission charged. We expect fee income for the sector to grow at ~21% CAGR over FY11-13E, in-line with loan growth of 21%. In our view, banks with all round presence such as a) international presence, b) syndication capabilities, c) investment banking etc. would have an edge over other banks.

Chart 80: advances


1.6%

Trend

showing

fee

income

as

of

Chart 81: Trend showing fee income growth (YoY)


35% 30%

1.4%

25% 20%

1.2%

15% 10%

1.0%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

5%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

May 18, 2011

Page 30

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Chart 83: Fee income from TPD as % of total fee income (FY10)
60% 50% 40% 30% 20% 10% 0%
ING Vysya IndusInd Bk Axis Bk OBC Canara Bk Yes Bank ICICI Bk Corp Bk PNB SBI

Chart 82: Trend showing fee income growth and advances growth (YoY)
40% 30% 20% 10% 0%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

40% 35% 30% 25% 20% 15% 10%

Fee income growth YoY (LHS) Advances growth YoY (RHS)


Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Source : HDFC Securities Institutional Research

Trading income potential wild card


In a higher interest rate environment, the long-bond yields will move up, impacting the earnings of the banks that have higher AFS portfolio. With the government pegging its net borrowing lower at Rs3.5tn, higher crude oil can disturb the equation. This along with the RBIs hawkish monetary policy stance might not augur well for the yields. Our HDFC Bank economics team expects the RBI to further hike rates by 50-75bps over the full year in order to rein in inflation. The state owned banks are more vulnerable to higher yields due to higher classification of investments in available for sale (AFS) category. Banks that have higher proportion of AFS in investment book are BOI, AllBank and Corp Bank. We estimate that 50bps increase in yields would impact the FY12E pre-provisioning profit for banks by 1.7-6.4%.

Chart 84: Proportion of AFS portfolio in investment book (FY11)


40%

BOI, AllBank and Corp Bank have higher proportion of AFS in investment book

35% 30% 25% 20% 15% 10% 5% 0%


BOI Allahabad Bk OBC PNB SBI Canara Bk Corp Bk United Bk Union Bk BOB

Source : HDFC Securities Institutional Research

May 18, 2011

Page 31

SBI 76% 24% 3.8 BOB 84% 16% 2.8

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Union Bank 75% 24% 1.8 Allahabad Bk 71% 65% OBC 28% 4.4 35% 2.5

Table 8: AFS portfolio of banks with duration


(FY11) HTM book (%) AFS book (%) Duration (Yrs) BOI Canara Bk 65% 35% 0.8 73% 26% 2.2 Corp Bk 67% 32% 1.5 PNB 75% 22% 2.7 United Bk 72% 28% Na

Source: HDFC Securities Institutional Research

Table 9: Impact of 50bps increase in yields


(FY11) OBC SBI Allahabad Bk Corp Bk Canara Bk PNB Union Bk BOB BOI AFS Investments 116,420 718,000 151,510 140,570 218,300 210,670 141,100 112,663 290,834 Proportion of AFS 28% 24% 35% 32% 26% 22% 24% 16% 35% Duration (Yrs) 4.4 3.8 2.5 1.5 2.2 2.7 1.8 2.8 0.8 Change in Yields by 50bps 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Impact (Rsm) 2,532 13,534 1,917 1,075 2,434 2,855 1,249 1,583 1,192 Impact on FY12E operating profit 6.4% 4.9% 4.9% 3.5% 3.2% 2.6% 2.4% 1.8% 1.7%

Source: HDFC Securities Institutional Research

Chart 85: Rising bond yields to result in MTM losses on banks' MTM portfolio
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0%

Trading income as % of G-Sec

Bond yields

Source : Bloomberg , HDFC Securities Institutional Research

Operating efficiency to improve


During FY11, banks provided ~Rs174bn towards pension liability for both existing and retired employees (for our coverage universe). While the RBI permitted banks to amortize the liability over the term of five years (FY11 being the first year) for existing employees, it mandated banks to provide against retired employees in FY11 itself. As a result, the growth in operating expenses was whopping 22% YoY to Rs713bn (our coverage). The liability for retired employees formed 20% of total liability. With this one-off component not there in FY12, the operating expenses will grow by just 14%. Hence, cost/income ratio will improve from ~46% in FY11 to 44% by FY12.

May 18, 2011

Page 32

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Table 10: Second pension option liability for existing and retired employees
Particulars (Rsm) PNB BOI BOB IOB Union Bk Canara Bk OBC Corp Bk Allahabad Bk United Bk Total Source : HDFC Securities Institutional Research Second pension liability 27,577 22,122 18,299 7,587 16,902 23,731 8,545 5,525 7,081 2,682 140,051 Provision for retired employees 5,570 7,078 5,541 1,883 3,757 5,200 1,509 Na 2,500 1,000 34,038

Chart 86: Tend showing operating expenses growth (YoY)


24% 22% 20% 18% 16% 14% 12%
FY08 FY09 FY10 FY11 FY12E FY13E FY13E

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Chart 87: Trend showing cost/income (ex-treasury) ratio


55%

C/I to improve by 200bps as one-off related to second pension liability towards retired employees wont be there in FY12

50%

45%

40%
FY08 FY09 FY10 FY11 FY12E

Source : HDFC Securities Institutional Research Note: Banks under coverage universe


May 18, 2011 Page 33

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Chart 89: Change in Cost/Income ratio over FY11FY3E
BOI Allahabad Bk Union Bk Canara Bk BOB ING Vysya Bk OBC United Bk PNB Corp Bk Axis Bk ICICI Bk IndusInd Bk Yes Bank SBI

Chart 88: Cost/income (ex-treasury) ratio FY12E

OBC BOB Canara Bk Corp Bk Yes Bank Allahabad Bk PNB BOI Axis Bk Union Bk ICICI Bk United Bk IndusInd Bk SBI ING Vysya Bk 25% 35% 45% 55% 65%

-10%

-5%

0%

5%

10%

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Asset quality issues to subside, but risk remains


Maintain cautious stance on asset quality Having seen the worst year during FY10, the asset quality has improved since then and as a result the gross NPAs for the system has declined from 2.7% to 2.6% of advances. However, the fresh delinquencies were marginally lower during FY11 at 1.90% v/s 1.92% in FY10 (of average advances) for the system; state owned banks an average slippages ratio at 1.90% with select PSU banks having delinquencies as high as ~2.7%. The restructuring of advances slowed down post the special dispensation scheme which ended in Jun10.

Chart 90: Gross NPA YoY growth - FY11


40%

Gross NPA increased 21% YoY in FY11 v/s 25% in FY10

30% 20% 10% 0% -10% -20%

OBC

BOB

SBI

PNB

United Bk

Union Bk

ICICI Bk

Axis Bk

BOI

Source : HDFC Securities Institutional Research

May 18, 2011

ING Vysya Bk

Allahabad Bk

IndusInd Bk

Yes Bk

Canara Bk

Corp Bk

IOB

Page 34

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Chart 92: Restructured assets as % of total advances FY11
7% 6% 5% 4% 3% 2% 1%

Chart 91: Restructured assets YoY growth - FY11


40% 20% 0% -20% -40% -60% -80%

PNB

BOI

IndusInd Bk

Corp Bk

Canara Bk

Axis Bk

SBI

Yes Bk

BOB

OBC

ICICI Bk

0%
PNB BOI Axis Bk Allahabad Bk IndusInd Bk OBC SBI Canara Bk United Bk Corp Bk Union Bk ICICI Bk Yes Bk BOB

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 93: Delinquency ratio


3% 2% 1% 0%
PNB BOI Axis Bk ING Vysya Bk SBI Allahabad Bk IndusInd Bk OBC Canara Bk United Bk Union Bk ICICI Bk Corp Bk Yes Bk BOB

FY10
Source : HDFC Securities Institutional Research

FY11

CRISIL

noted

that

asset

quality

We expect that higher commodity prices and higher interest rates will keep the profitability of manufacturing companies under pressure. CRISIL, credit rating agency, in its latest review has noted that the credit quality might peak out. It upgraded 605 ratings and downgraded 269 ratings in FY11, on a base of around 6200 ratings as on March 31, 2011.

might peak out

May 18, 2011

Page 35

Section 3: Earnings growth to remain healthy; Cherry pick the stocks

Chart 94: Trend showing interest rate movement and systems NPA movement
18% 16% 14% 0% 12% 10%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

30% 20% 10%

-10% -20%

SBI PLR (LHS)


Source : HDFC Securities Institutional Research

Gross NPAs growth YoY (RHS)

While we expect the asset quality of the system to improve as compared to that in Asset quality to improve.. FY10 and FY11, but significant improvement is not expected if a) interest rates further goes up by more than 50bps, b) debt-related crisis in some of the European nations and c) higher commodity prices. ..on the back of lower slippages and higher recoveries and up gradations During FY10-11, the delinquency ratio for the system peaked at 1.9-2.1% - highest since FY05. However, we do not expect the slippages to be so high in FY12-13 and building in a lower delinquency ratio at ~1.7-1.8%, 20bps lower than previous 2yrs average. On the other hand, while recoveries and upgradations could be healthy in FY12, but will slowdown in FY13 owing to slowdown in economic growth, which will headline gross NPAs higher at elevated levels. We estimate the gross NPAs to be in the range of 2.6-2.7% over FY12-13E.

Chart 95: Trend showing Gross NPA YoY growth


30% 25% 20% 15% 10% 5% 0%
FY08 FY09 FY10 FY11 FY12E FY13E

Chart 96: Trend showing Gross NPA ratio


3.0%

2.5%

2.0%
FY08 FY09 FY10 FY11 FY12E FY13E

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

May 18, 2011

Page 36

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Chart 98: Trend showing coverage ratio
70% 65%

Chart 97: Trend showing delinquency ratio


4%

3%

60% 55% 50%

2%

1%

45% 40%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY12E FY13E FY13E FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

0%

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Source : HDFC Securities Institutional Research Note: For banks under coverage universe

Select sectors still under stress, shows latest CDR report


The latest corporate debt restructuring tally shows that during the quarter that the accounts restructured increased by Rs35bn during 4QFY11 even as number of proposals increased by 5% to 242, mainly led by sectors such textiles (11%), sugar (11%) and cement (27%).

Chart 99: Sectors that reported an increase in CDR (QoQ 4QFY11)


30% 25% 20% 15% 10% 5% 0%
Cements Paper/ Packaging Textiles Chemicals Sugar

Chart 100: Large contributors to outstanding balance of cases referred under CDR
400 350 300 250 200 150 100 50 Rsbn

Textiles

Fertilizers

Petrochemicals

Sugar

Iron & Steel

Source : CDR India

Source : CDR India

May 18, 2011

Infrastructure

Page 37

Refineries

Cements

Telecom

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Table 11: CDR Performance - Mar'11
Industry (Rsbn) No. of case

Iron & Steel Textiles Fertilizers Sugar Cements Petrochemicals Telecom Infrastructure Refineries Power Chemicals Metals (Non-ferrous Metals) Electronics Pharmaceuticals Paper/Packaging Other
Total

Aggregate debt outstanding 25 367

% share

33% 9% 8% 6% 5% 5% 5% 5% 4% 3% 3% 2% 2% 2% 2% 6%
100%

Avg. size/case 15

54 8 23 8 3 8 9 1 7 14 5 2 6 13 56
242

102 85 61 59 55 54 52 49 38 28 22 21 21 19 76
1,109

2 11 3 7 18 7 6 49 5 2 4 11 4 1 2

Source : CDR India

Credit cost to decline 15-20bps As we expect the delinquencies to be lower in fiscal FY12, we moderate our credit
On the back of lower delinquencies we expect credit cost to moderate

cost assumptions also. We estimate that the credit costs will be lower in FY12 by 1520bps, but will stable with an upward bias depending upon economic conditions in FY13E. In its 4Q monetary policy, the RBI increased the provisioning requirement for various categories of NPAs (see below the table). This would imply higher provisioning requirements which will push up the loan loss provisions. At the same time, banks will need to set aside more for borderline cases which slips into NPAs sometimes under a prudent measure adopted by managements.

Table 12: Changes in loan loss provisions as % of avg. advances


Particulars FY11 YoY change (bps) -30 FY12E YoY change (bps) -12 FY13E YoY change (bps) 0

Allahabad Bk Axis Bk BOB BOI Canara Bk Corp Bk ICICI Bk IndusInd Bk ING Vysya Bk OBC PNB SBI Union Bk United Bk

1.0% 1.1% 0.5% 0.6% 0.5% 0.7% 1.2% 0.7% 0.7% 0.7% 0.9% 1.3% 0.9% 0.9%

0.9% 0.7% 0.5% 0.6% 0.6% 0.6% 0.7% 0.6% 0.5% 0.7% 1.0% 1.2% 0.8% 0.7% 0.3%

0.9% 0.7% 0.6% 0.6% 0.6% 0.6% 0.7% 0.7% 0.5% 0.7% 1.2% 1.1% 0.8% 0.7% 0.4%

-40 -8 -57 -40 11 -103 -4 -58 -5 35 39 23 21 -33

-36 -2 0 3 -13 -50 -13 -27 0 2 -7 -8 -21 12

0 5 0 0 -5 0 13 5 0 25 -15 0 0 5

Yes Bk 0.2% Source : HDFC Securities Institutional Research

May 18, 2011

Page 38


Allahabad Bk Axis Bk BOB BOI Canara Bk Corp Bk ICICI Bk IndusInd Bk OBC PNB SBI Union Bk United Bk Yes Bk
Reported coverage ratio(FY11) 76%

Section 3: Earnings growth to remain healthy; Cherry pick the stocks

Table 13: Coverage ratio (calculated) movement


CalculatedFY11 YoY change (bps) FY12E YoY change (bps) FY13E YoY change (bps)

55% 74% 75% 60% 24% 50% 76% 73% 51% 53% 53% 50% 45% 89%

-620 613 0 479 -653 -2,003 1,658 1,242 43 -1,605 875 -1,364 212 1,021

66% 77% 78% 71% 41% 76% 82% 74% 73% 61% 68% 67% 59% 84%

1060 285 280 1,097 1,714 2,626 628 116 2,217 710 1,503 1,719 1,347 -417

70% 76% 78% 73% 51% 79% 84% 73% 83% 65% 74% 72% 65% 94%

410 -105 74 219 1,026 293 202 -112 920 413 581 474 652 938

81% 85% 72% 73% 75% 76% 73% 77% 73% 65% 68% 72% 89%

Source : HDFC Securities Institutional Research

Table 14: New provisioning requirements on non-performing advances


% Sub-std. assets - Secured Sub-std. assets - Unsecured Current provisioning norms 10 20 Revised 15 25

RBI

increased

the

provisioning

requirements on certain categories on non-performing assets

Doubtful advances (Secured) - Upto 1yr


- Upto 1-3yr

20
30

20
40

New banks

norms

to

push

up of

the the

- >3yr Doubtful advances (Un-Secured) Source : RBI

100 100

100 100

provisioning

requirements

Table 15: Proportion of substandard and doubtful assets as % of gross NPAs (FY10)
Particulars Substandard assets Doubtful assets (1-3yr)

SBI ICICI Bk BOI Canara Bk PNB Union Bk BOB OBC Axis Bk Corp Bk Allahabad Bk ING Vysya Bk IndusInd BK United Bk Yes Bk Source : HDFC Securities Institutional Research

45% 56% 58% 75% 60% 54% 37% 46% 49% 41% 54% 40% 50% 44% 98%

5% 19% 11% Na 23% 25% Na 30% 3% 14% 29% 13% 25% 53% -

As on FY10 , Canara Bk , PNB and BOI had higher proportion of substandard assets

The RBI also mandated the banks to set aside higher provisioning on restructured loans at 2% as compared to 0.25-1%, making the restructuring expensive. Banks that have higher proportion of restructuring are IOB, PNB, BOI, OBC and SBI. A higher provisioning (assuming incremental provisioning at 1.5%) will impact the profit by 0.3-3.4%.

May 18, 2011

Page 39

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Cherry pick the stocks While the earnings growth for the banks in FY12-13 likely to be fairly healthy due to the factors discussed above, we would prefer banks that have robust deposit franchise, sufficient capital adequacy to fund the growth, diversified loan book, growth visibility and comfortable valuations. Bankex corrected ~13% (since Sep10), and most of the stocks are trading at below 5yr average. While the macro headwinds to keep valuation re-rating under check in the near to mid term, but stocks which can sustain growth momentum while maintaining profitability will be preferred. We like ICICI, Axis, Yes, BoB and United Bank of India (new initiation) with an average upside of 25-30%. Also initiate coverage on other banks Allahabad Bk (BUY, TP: Rs232/share), IndusInd (HOLD, TP: Rs223/share), ING Vysya (HOLD, TP: Rs358/share). Below are our some of the key investment argument: ICICI Bank: Well positioned to grow acquire assets at favorable yields. Strong CAR (tier I of 13.2%), robust CASA ratio of ~45%, no major asset quality issues as book is largely seasoned and incremental growth coming from corporate. Key concerns include pressure on NIMs and improvement in international book. ICICI Bank trades at 2.0x FY12 adjusted core book. Maintain BUY with a target price of Rs1,320/share. Axis Bank: Healthy deposit franchise as CASA ratio forms 41%, diversified loan mix and growth visibility, tier I ratio of 9.4%. Key concerns include pressure on NIMs, asset quality issues in higher interest rate environment amongst others. Stock is trading at 2.2x FY12 adjusted book, below its 5yr average historical P/ABV. Maintain BUY with a target price of Rs1,545/share. Yes Bank (new initiation): While CASA ratio is amongst the lowest, but is improving as it expanded from 9% in FY09 to 10% in FY11; will be around ~14% by FY13E. Entering into the next stage of growth, Yes will be able to realize a loan growth of ~40% CAGR driven by SME/mid-corporate accounts while NIMs to remain largely stable over FY11-13 at 2.7-2.8% (calculated). Key concerns include asset quality issues as the bank targets to grow book in SME/mid-corporate space. Stock currently trades at 2.2x FY12 adjusted book, slightly below its 5yr average P/ABV multiple and we believe it can trade at 2.9x FY12 adjusted book (~2x FY13 adj. book). Bank of Baroda: BOB, given its lower proportion stressed assets, higher coverage ratio and robust capital adequacy, is well poised to grow its loan book at a slightly higher than industry, partly also driven by international book. We expect the bank to realize an earnings growth of 20% CAGR over FY11-13E. Key concerns include any sharp rise in slippages and higher than anticipated contraction in NIMs. The stock currently trades at higher than its 5yr average multiple. United Bank of India (new initiation): With a CASA ratio of ~41% (~38% - 3yr average), improving credit-deposit mix, will enable the bank to grow its earnings at 28% CAGR over FY11-13E. We believe the stock can trade at 1.1x FY12E (1x FY13E), implying a target price of Rs135/share. Initiate with BUY rating. Allahabad Bank (new initiation): The bank is likely to grow its earnings at the fastest pace at 29% CAGR over FY11-13E driven by higher loan growth, expansion in credit-deposit ratio and lower operating expenses. Key concerns include higher slippages tough we built in delinquencies at 1.7% (in line with 5yr average). Stock is attractively valued at 1.1x FY12E adj. book value.

May 18, 2011

Page 40

P/Ex FY12E

Section 3: Earnings growth to remain healthy; Cherry pick the stocks

Table 17: Valuation Matrix


P/ABVx FY13E FY12E FY13E ROAE (%) FY12E FY13E ROAA (%) FY12E FY13E

PSU Banks

Allahabad Bk BOB BOI Canara Bk Corp Bk IOB OBC PNB SBI (consol.) Union Bk United Bk
Pvt. Banks

5.0 6.9 6.8 5.5 5.3 5.9 4.7 6.8 10.8 8.1 5.5 11.1 18.9 15.3 9.4

3.8 5.6 6.0 4.4 4.1 4.9 3.7 6.0 9.0 6.3 4.0 9.2 15.7 12.8 7.7

1.1 1.5 1.3 1.2 1.0 1.1 0.8 1.6 1.9 1.8 0.8 2.2 2.0 2.6 1.4 2.2

0.9 1.2 1.1 1.0 0.9 0.9 0.7 1.4 1.6 1.5 0.7 1.9 1.7 2.3 1.3 1.5

21.8% 22.7% 18.9% 22.3% 19.8% 17.9% 18.4% 22.5% 16.7% 20.7% 14.0% 21.5% 14.3% 17.8% 15.3% 22.9%

24.1% 23.2% 18.5% 23.1% 21.9% 18.9% 20.3% 21.4% 17.4% 22.7% 17.1% 21.9% 15.7% 18.4% 16.3% 23.8%

1.1% 1.2% 0.9% 1.2% 1.0% 0.8% 1.1% 1.2% 0.8% 1.0% 0.6% 1.7% 1.5% 1.4% 1.0% 1.4%

1.2% 1.3% 0.8% 1.2% 1.0% 0.8% 1.2% 1.1% 0.8% 1.0% 0.8% 1.6% 1.5% 1.4% 0.9% 1.5%

Axis Bk ICICI Bk IndusInd BK ING Vysya Bk

Yes Bk 10.5 8.0 Source: HDFC Securities Institutional Research

Table 18: Recommendations and target price


Particulars PSU Banks Rec. CMP TP % upside

Allahabad Bk BOB BOI Canara Bk OBC PNB SBI (consol.) Union Bk United Bk
Pvt. Banks

BUY BUY HOLD BUY BUY HOLD HOLD HOLD BUY

192 861 402 542 324 1,058 2,414 318 100

232 1,046 427 635 421 1,176 2,560 313 135

21% 21% 6% 17% 30% 11% 6% -2% 35%

Axis Bk ICICI Bk IndusInd BK ING Vysya Bk Yes Bk Source: HDFC Securities Institutional Research

BUY BUY HOLD HOLD BUY

1219 1040 241 321 288

1545 1,320 223 358 370

27% 27% -7% 12% 28%

May 18, 2011

Page 41

Section 3: Earnings growth to remain healthy; Cherry pick the stocks


Table 19: Premium/Discount to 5yrs average multiple
P/ABVx - 5 yr avg. multiple PSU Banks P/ABVx - FY12E Prem. / (Disc.)

Allahabad Bk BOB BOI Canara Bk Corp Bk IOB OBC PNB SBI (consol.) Union Bk United Bk
Pvt. Banks

0.9 1.2 1.4 1.2 1.0 1.2 0.9 1.5 1.7 1.4 Na 2.4 2.1 2.0 1.5 2.6

1.1 1.5 1.3 1.2 1.0 1.1 0.8 1.6 1.9 1.8 0.8 2.2 2.0 2.6 1.4 2.2

21% 28% -8% 3% 0% -10% -6% 8% 11% 26% Na -6% -4% 31% -7% -12%

Axis Bk ICICI Bk IndusInd BK ING Vysya Bk Yes Bk

Source: HDFC Securities Institutional Research

Chart 101: Risk return trade off


P/Adj.BV (FY12E) 3.3 2.8 2.3 1.8 1.3 0.8 0.3 12% 14% 16% United Bk ICICI Bk IndusInd Bk SBI Axis Bk Yes Bk Union Bk BOB PNB BOI Canara Bk IOB Corp Bk Allahabad Bk OBC ROAE (FY12E) 20% 22% 24%

ING Vysya Bk

18%

Source: HDFC Securities Institutional Research

May 18, 2011

Page 42

Section 3: Earnings growth to remain healthy; Cherry pick the stocks

Trend showing range of P/ABV between +/- 1 Stdev.


Chart 102: Allahabad Bank
2.0 1.5
+1SD

Chart 103: Axis Bank


4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
+1SD 5yr Avg. -1SD

1.0 0.5 0.0


Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11

5yr Avg. -1SD

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 104: Bank of Baroda


2.0 1.5 1.0 0.5 0.0
Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11

Chart 105: Bank of India


2.0
+1SD

+1SD 5yr Avg. -1SD

1.5

May-11
5yr Avg. -1SD

1.0

0.5

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 106: Canara Bank


2.0 1.5 1.0 0.5 0.0
+1SD 5yr Avg. -1SD

Chart 107: Corporation Bank


2.0

1.5
+1SD 5yr Avg. -1SD

1.0

0.5

0.0

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

May-11

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

May-11

May-11

Page 43

Section 3: Earnings growth to remain healthy; Cherry pick the stocks

Chart 108: ICICI Bank


4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
+1SD 5yr Avg. -1SD

Chart 109: IndusInd Bank


4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
+1SD 5yr Avg. -1SD

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

May-11

Source : HDFC Securities Institutional Research

Chart 110: ING Vysya Bank


3.0 2.5

Chart 111: Oriental Bank of Commerce


1.5
+1SD

2.0 1.5 1.0 0.5 0.0

+1SD 5yr Avg. -1SD

1.0

May-11
5yr Avg. -1SD

0.5

0.0

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

May-11

Source : HDFC Securities Institutional Research

Chart 112: Punjab National bank


2.5 2.0 1.5 1.0 0.5 0.0

Chart 113: State Bank of India


3.0 2.5
+1SD 5yr Avg. -1SD

May-11
+1SD 5yr Avg. -1SD

2.0 1.5 1.0 0.5 0.0

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

May-11

Source : HDFC Securities Institutional Research

May 18, 2011

May-11

Page 44

Section 3: Earnings growth to remain healthy; Cherry pick the stocks

Chart 114: Union Bank of India


2.5 2.0
+1SD

Chart 115: Yes Bank


5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

1.5 1.0 0.5 0.0

5yr Avg. -1SD

+1SD 5yr Avg. -1SD

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

May-11

Jan-07

Dec-07

Jun-08

Nov-08

May-09

Nov-09

Apr-10

Oct-10

Jul-06

Jul-07

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

Mar-11

Page 45

Appendix

Appendix
Table 20: 4QFY11 Earnings summary - Sector (Our coverage)
Particulars (Rsm) 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 YoY growth QoQ growth

Interest income Interest expenses


Net Interest Income

623,408 389,577
233,830

654,421 405,245
249,176

705,802 431,749
274,053

761,303 462,731
298,572

816,131 519,838
296,293

31% 33%
27%

7% 12%
-1%

Non-interest income Total income Operating expenses


Pre-Provision Profits

128,636 362,467 160,949


201,518

111,589 360,766 151,600


209,166

113,202 387,255 171,290


215,965

111,973 410,545 176,735


233,810

146,452 442,745 212,849


229,896

14% 22% 32%


14%

31% 8% 20%
-2%

Provisions
Pre-tax Profits

82,399
119,426

51,283
157,061

68,893
147,073

62,200
171,609

94,032
135,864

14% 14% 36%


5%

51% -21% -16%


-23%

Tax
Net Income

34,061
85,365

50,597
106,464

43,603
103,469

54,787
116,822

46,277
89,586

Other details

Advances Deposits CASA deposits (Abs.) CASA Ratio Gross NPLs (Rsbn)

21,456,080 28,496,552 10,214,419 36% 544

21,749,392 28,313,986 9,689,135 34% 568

22,759,174 29,982,724 10,401,857 35% 607

24,797,228 31,695,288 10,983,444 35% 619

26,951,316 34,836,926 12,320,518 35% 658

26% 22% 21% 0% 21%

9% 10% 12% 1% 6%

Source : HDFC Securities Institutional Research

Table 21: 4QFY11 Earnings summary - PSU Banks (Our coverage)


Particulars (Rsm) 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 YoY growth QoQ growth

Interest income Interest expenses


Net Interest Income

515,726 324,487
191,239

542,056 335,890
206,166

582,002 355,115
226,887

628,643 379,840
248,803

670,416 426,279
244,136

30% 31%
28%

7% 12%
-2%

Non-interest income Total income Operating expenses


Pre-Provision Profits

95,989 287,228 129,915


157,313

80,484 286,650 120,152


166,499

82,096 308,984 137,276


171,708

77,764 326,566 140,386


186,180

110,152 354,288 173,551


180,738

15% 23% 34%


15%

42% 8% 24%
-3%

Provisions
Pre-tax Profits

68,463
88,850

38,923
126,754

57,255
114,453

53,271
132,909

86,774
93,964

27% 6% 39%
-7%

63% -29% -23%


-33%

Tax
Net Income

24,249
64,601

41,413
85,341

34,545
79,908

43,651
89,258

33,764
60,199

Other details

Advances Deposits CASA deposits (Abs.) CASA Ratio Gross NPLs (Rsbn)

17,988,085 24,269,652 8,536,296 35% 402

18,151,106 24,011,798 8,069,745 34% 421

18,970,813 25,209,183 8,555,299 34% 457

20,719,126 26,985,876 9,148,339 34% 468

22,522,264 29,583,541 10,280,814 35% 524

25% 22% 20% 0% 30%

9% 10% 12% 1% 12%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 46

4QFY10 1QFY11 2QFY11 3QFY11

Appendix

Table 22: 4QFY11 Earnings summary - Pvt. Banks (Our coverage)


Particulars (Rsm) 4QFY11 YoY growth QoQ growth

Interest income Interest expenses


Net Interest Income

107,682 65,091
42,591

112,365 69,355
43,010

123,800 76,634
47,166

132,661 82,891
49,769

145,715 93,558
52,157

35% 44%
22%

10% 13%
5%

Non-interest income Total income Operating expenses


Pre-Provision Profits

32,648 75,239 31,034


44,205

31,105 74,115 31,448


42,667

31,106 78,272 34,014


44,258

34,209 83,979 36,349


47,630

36,300 88,457 39,299


49,158

11% 18% 27%


11%

6% 5% 8%
3%

Provisions
Pre-tax Profits

13,936
30,575

12,361
30,307

11,638
32,620

8,929
38,700

7,258
41,900

-48% 37% 28%


42%

-19% 8% 12%
7%

Tax
Net Income Other details

9,812
20,763

9,184
21,123

9,059
23,561

11,137
27,564

12,513
29,387

Advances Deposits CASA deposits (Abs.) CASA Ratio Gross NPLs (Rsbn)

3,467,995 4,226,900 1,678,123 40% 142

3,598,286 4,302,189 1,619,390 38% 146

3,788,361 4,773,541 1,846,558 39% 150

4,078,103 4,709,412 1,835,105 39% 151

4,429,052 5,253,385 2,039,704 39% 133

28% 24% 22% -1% -6%

9% 12% 11% 0% -12%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 47

Appendix

Key trend charts


Chart 116: Advances YoY growth FY11
70% 60% 50% 40% 30% 20% 10%
ING Vysya

Chart 117: Advances QoQ growth 4QFY11


25% 20% 15% 10% 5% 0%
ING Vysya Bk Allahabad Bk

Allahabad Bk

IndusInd Bk

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 118: Deposits YoY growth FY11


80% 70% 60% 50% 40% 30% 20% 10% 0%

Chart 119: Deposits QoQ growth 4QFY11


25% 20% 15% 10% 5% 0%

HDFC Bk

PNB

Axis Bk

ING Vysya Bk

IndusInd Bk

Allahabad Bk

HDFC Bk

Yes Bk

Canara Bk

Corp Bk

OBC

BOB

OBC

BOB

IOB

PNB

ING Vysya Bk

Allahabad Bk

IndusInd Bk

United Bk

Canara Bk

United Bk

Axis Bk

Union Bk

Union Bk

Corp Bk

Yes Bk

BOI

BOI

IOB

ICICI Bk

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 120: CASA ratio- 4QFY11

Yes Bk OBC Corp Bk IndusInd Bk Canara Bk BOI IOB Union Bk Allahabad Bk BOB ING Vysya Bk PNB United Bk Axis Bk ICICI Bk HDFC Bk 0%

11%

22%

33%

44%

55%

Source : HDFC Securities Institutional Research

May 18, 2011 Page 48

ICICI Bk

IndusInd Bk

Canara Bk

United Bk

Union Bk

HDFC Bk

Canara Bk

United Bk

Union Bk

ICICI Bk

ICICI Bk

Corp Bk

HDFC Bk

Axis Bk

PNB

IOB

Yes Bk

Corp Bk

Axis Bk

PNB

IOB

Yes Bk

BOI

OBC

BOB

BOI

OBC

BOB

0%

Appendix
Chart 122: NII growth QoQ growth 4QFY11
20% 15% 10% 5% 0% -5%
HDFC Bk PNB Axis Bk

Chart 121: NII growth YoY growth 4QFY11


60% 50% 40% 30% 20% 10% 0%
IOB ING Vysya Bk Allahabad Bk IndusInd Bk Yes Bk Canara Bk United Bk Union Bk Corp Bk OBC BOB BOI ICICI Bk

HDFC Bk

ING Vysya Bk

Allahabad Bk

IndusInd Bk

Axis Bk

Yes Bk

OBC

BOB

PNB ING Vysya Bk

IOB

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 123: Operating profit YoY growth 4QFY11


130% 115% 100% 85% 70% 55% 40% 25% 10% -5%
HDFC Bk OBC BOB United Bk PNB ING Vysya Bk Allahabad Bk IndusInd Bk Canara Bk Union Bk Corp Bk Axis Bk IOB Yes Bk ICICI Bk BOI

Chart 124: Operating profit QoQ growth 4QFY11


30% 20% 10% 0% -10% -20% -30% -40%
HDFC Bk Axis Bk PNB IOB Allahabad Bk IndusInd Bk Yes Bk OBC Canara Bk BOB United Bk Corp Bk ICICI Bk Union Bk BOI SBI

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 125: 4QFY11


200 180 160 140 120 100 80 60 40 20 0 bps

Yield

on

advances

-calculated

(YoY)

Chart 126: 4QFY11


120 100 80 60 40 20 0 -20

Yield

on

advances

(QoQ)-calculated

bps

ING Vysya

Allahabad

OBC

HDFC Bk

BOB

Axis Bk

ING Vysya Bk

IndusInd Bk

Allahabad Bk

Union Bk

Yes Bk

Canara Bk

HDFC Bk

PNB

Axis Bk

IOB

PNB

IOB

Canara Bk

United Bk

ICICI Bk

Union Bk

IndusInd Bk

Canara Bk

Union Bk

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

ICICI Bk

Yes Bk

OBC

Corp Bk

BOB

BOI

Page 49

BOI

Corp Bk

BOI

Appendix
Chart 128: Cost of deposits calculated (QoQ change) 4QFY11
120 100 80 60 40 20 0
OBC ING Vysya Bk

Chart 127: Cost of deposits calculated (YoY change) 4QFY11


200 180 160 140 120 100 80 60 40 20 0 bps

bps

HDFC Bk

IndusInd Bk

HDFC Bk

Axis Bk

Union Bk

BOB

PNB

PNB

IOB

ING Vysya Bk

Allahabad Bk

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 129: NIMs YoY change - 4QFY11


80 60 40 20 0 -20 -40
HDFC Bk PNB IOB ING Vysya Bk Allahabad Bk IndusInd Bk OBC BOB Canara Bk Corp Bk United Bk Union Bk BOI ICICI Bk

Chart 130: NIMs QoQ change - 4QFY11


30 20 10 0 -10 -20 -30
HDFC Bk ING Vysya Bk Allahabad Bk IOB IndusInd Bk Yes Bk Canara Bk OBC BOB United Bk Union Bk ICICI Bk Corp Bk BOI ICICI Bk

bps

bps

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 131: Treasury income as % of operating income 4QFY11

5% 3% 1% -1% -3% -5% -7%


Axis Bk PNB ING Vysya Bk Allahabad Bk OBC BOB Canara Bk Union Bk BOI

Source : HDFC Securities Institutional Research

May 18, 2011

Page 50

Allahabad Bk

Axis Bk

IndusInd Bk

Canara Bk

Canara Bk

Yes Bk

Corp Bk

Union Bk

ICICI Bk

ICICI Bk

Yes Bk

OBC

BOB

IOB

BOI

Appendix
Chart 133: Gross NPAs QoQ growth 4QFY11
20% 15% 10% 5% 0% -5% -10% -15%
HDFC Bk Axis Bk OBC BOB

Chart 132: Gross NPAs YoY growth 4QFY11


40% 30% 20% 10% 0% -10% -20%
PNB ING Vysya Bk IndusInd Bk IOB Allahabad Bk Yes Bk OBC BOB Corp Bk Canara Bk United Bk Union Bk BOI ICICI Bk

HDFC Bk

PNB

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 134: Gross NPA ratio FY11

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
OBC BOB United Bk HDFC Bk PNB ING Vysya Bk Union Bk Allahabad Bk IndusInd Bk Axis Bk IOB Canara Bk ICICI Bk Corp Bk HDFC Bk Yes Bk BOI

Source : HDFC Securities Institutional Research

Chart 135: Net NPA ratio FY11

1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%


OBC United Bk BOB PNB ING Vysya Bk Union Bk Allahabad Bk IndusInd Bk Axis Bk IOB Canara Bk ICICI Bk Corp Bk Yes Bk BOI

Source : HDFC Securities Institutional Research

May 18, 2011

ING Vysya Bk

Allahabad Bk

Canara Bk

Page 51

United Bk

Axis Bk

Union Bk

Yes Bk

BOI

ICICI Bk

IOB

Chart 137: Delinquency ratio 4QFY11


4% 3% 2% 1% 0%
OBC United Bk BOB PNB Union Bk Allahabad Bk Axis Bk IndusInd Bk Canara Bk Corp Bk Yes Bk BOI OBC ICICI Bk BOB PNB Union Bk Allahabad Bk IndusInd Bk Canara Bk

Appendix

Chart 136: Restructured assets ratio 4QFY11


7% 6% 5% 4% 3% 2% 1% 0%

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 138: Recoveries & upgradations as % of opening gross NPAs 4QFY11

70% 60% 50% 40% 30% 20% 10% 0%


OBC United Bk BOB PNB Allahabad Bk IndusInd Bk Canara Bk Union Bk Corp Bk Axis Bk BOI

Source : HDFC Securities Institutional Research

Chart 139: Coverage ratio FY11


Union Bk IOB BOI United Bk IndusInd BK Canara Bk PNB Corp Bk Allahabad Bk ICICI Bk OBC Axis Bk ING Vysya Bk BOB Yes Bk 60%

65%

70%

75%

80%

85%

90%

Corp Bk

95%


May 18, 2011

Source : HDFC Securities Institutional Research

Page 52

Axis Bk

BOI

Allahabad Bank - Initiating Coverage

BUY
CMP Target Stock Return (%) Rs192 Rs232 21%

Allahabad Bank
Allahabad Bank (AllBank), a mid-sized bank with a balance sheet size of Rs1.5tn (US$33bn), is based out of North-Eastern part of India. During FY02-11, AllBank significantly improved its operating parameters during which it realized an operating profit growth of 25% CAGR even as asset quality improved sharply with ROAs being one of the highest amongst peer banks at 1.1% (average). We believe, with a healthy CASA mix of 31% in FY13E, diversified loan book and declining cost/income ratio, Allahabad Bank will realize an earnings growth of 29% CAGR over FY1113E one of the highest in our coverage universe. We estimate the ROAs to be at 1.2% and ROEs (ex reval) at ~24% in FY13E. We believe the stock is attractively priced at 1.1x FY12E adjusted book. Initiate coverage with a BUY and a target price of Rs232/share, implying an upside of 21%. All set Allahabad Bank had a transformational period during FY02-07, during which the bank significantly improved its operating parameters. The quality of earnings improved as proportion of net interest income and fee income increased from 78% in FY02 to 98% in FY07. Bank realized a net profit growth of 38% CAGR over FY0211 led by a) improved asset quality (gross NPAs declined from 15.4% in FY02 to (1.7% in FY11), b) declining cost/income ratio which came off from 84% in FY03 to 45% in FY11 and lower loan loss provisioning at 1%. We believe AllBank is well positioned to maintain the growth momentum due to a) healthy liability mix with retail term deposits forming 53% - one of the highest, b) diversified loan book, c) declining cost/income ratio (ex treasury), d) improving asset quality and e) healthy tier I ratio. Earnings to grow at 29% CAGR over FY11-13E During Q4FY11, the bank reported a flat (YoY) net profit but higher core operating profit growth at ~34% YoY and 92% QoQ. Bank arrived at a second pension liability of Rs9.6bn (including Rs2.5bn towards retired employee). We estimate the bank to realize a net profit growth of 29% CAGR over FY11-13E (fastest amongst peer banks) led by a volumes growth of ~23-24% (v/s target of 25% by the management in FY12E as we expect demand to be lower due to higher interest rates), healthy fee income growth, declining cost/income ratio to ~37% in FY13E and lower credit costs (at 0.85% v/s an average of 1%). We expect margins to contract 10-15bps over FY11-13E due to higher cost of deposits as CASA deposits expected to moderate by 200bps to 31%. In FY11, the slippages were higher at Rs17.5bn (~50% of that came in Q4) as bank moved to CBS based NPL recognition, however, we expect delinquency ratio to be at 1.7%-1.8% in FY1213E (in-line with a 5-yr average of 1.7%). Initiate coverage with BUY On the back of earnings growth of 29% CAGR over FY11-13E, bank is estimated to register ROAs of 1.2% - amongst the highest. With an estimated ROEs of ~24% by FY13E, we believe the stock can trade at 1.3x FY12E adjusted book, implying a price target of Rs232/share. Initiate with BUY rating. Key risks include a) economic slowdown, b) sharper volatility in interest rates and c) higher than estimated slippages. Table 1: Summary financials
(Rsm) Total net income PPP PAT FY09 33,006 19,012 7,686 17.2 (21.1) 16.4 0.85 102 11.1 1.9 FY10 41,664 25,485 12,063 27.0 57.0 22.2 1.10 121 7.1 1.6 FY11 53,929 30,546 14,231 29.9 10.7 21.0 1.04 145 6.4 1.3 FY12E 62,197 39,026 18,139 38.1 27.5 21.8 1.09 173 5.0 1.1 FY13E 76,048 48,719 23,859 50.1 31.5 24.1 1.21 205 3.8 0.9

Nifty Sensex

5,439 18,137

Key Stock Data


Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6 mth avg traded val. (Rs. mn) Banking ALBK.BO ALBK IN 476 91 2,025 217

Stock Performance (%)


52 - Week high / low Absolute (%) Relative (%) Rs272/150 3M (8.9) (6.9) 6M (25.7) (17.0) 12M 20.4 12.7 (%) 58.00 15.53 15.06 11.41

Shareholding Pattern
Promoters FIs & Local MFs FIIs Public & Others Source: Company

Sensex and Stock Movement


Sensex 160 140 120 100 80
Sep-10 May-10 Nov-10 Jan-11 Jul-10 May-11 Mar-11

Allahabad Bank

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

EPS EPS growth (%) RoAE (%) - ex revaluations RoAA Adj BV (ex reval. & 100% cover)

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324 May 18, 2011

PEx P / Adj BV - ex revaluations

Source : HDFC Securities Institutional Research

Page 53


Table 2: 4QFY11 results summary
Particulars (Rsm) Interest earned - on Advances / Bills - Income on investments Interest Expended Net Interest Income Other income Operating income Total Operating Expenses -Employee expenses -Other Operating expenses Operating profit Provisions and contingencies PBT Provision for Tax PAT Other details Balance Sheet items & ratios Advances Deposits CASA ratio CD ratio CAR (%) NIMs Asset Quality Gross non-performing assets Net non-performing assets % of gross NPAs % of net NPAs Coverage ratio (calcualted) Operating efficiency Cost-Income ratio (ex-treasury) 44.9% 42.0% 41.7% 12,218 4,702 1.7% 0.7% 62% 11,393 3,084 1.5% 0.4% 73% 14,703 4,565 1.8% 0.6% 69% 724,370 1,060,560 34.8% 68.3% 13.6% 3.0% 757,180 1,083,200 Na 69.9% 13.6% 3.1% 831,830 1,136,330 Na 73.2% 13.5% 3.3% 4QFY10 22,066 16,637 5,387 14,640 7,426 4,020 11,446 4,867 3,057 1,810 6,579 2,972 3,608 1,363 2,245 1QFY11 24,031 18,107 5,816 15,528 8,503 2,986 11,489 4,443 2,853 1,590 7,046 1,511 5,535 2,064 3,471 2QFY11 26,369 19,840 6,308 16,677 9,692 3,447 13,139 5,324 3,503 1,821 7,815 2,714 5,101 1,075 4,026

Allahabad Bank - Initiating Coverage

3QFY11 28,555 21,309 7,117 18,038 10,516 2,576 13,093 5,209 3,196 2,013 7,884 2,359 5,526 1,368 4,158

4QFY11 31,192 23,485 7,461 19,679 11,513 4,695 16,208 8,407 6,024 2,383 7,801 4,655 3,145 569 2,576

YoY growth QoQ growth 41.4% 41.2% 38.5% 34.4% 55.0% 16.8% 41.6% 72.7% 97.0% 31.7% 18.6% 56.7% -12.8% -58.2% 14.7% 9.2% 10.2% 4.8% 9.1% 9.5% 82.2% 23.8% 61.4% 88.5% 18.4% -1.1% 97.4% -43.1% -58.4% -38.0%

868,370 1,209,480 Na 71.8% 12.8% 3.4%

936,249 1,318,872 33.7% 71.0% 13.0% 3.5%

29.3% 24.4% -110bps 270bps -66bps 50bps

7.8% 9.0% Na -80bps 18bps 5bps

15,405 5,067 1.8% 0.6% 67%

16,479 7,364 1.7% 0.8% 55%

34.9% 56.6% 5bps 13bps -620bps

7.0% 45.3% -3bps 20bps -1180bps

40.4%

52.3%

740bps

1190bps

Source: HDFC Securities Institutional Research

May 18, 2011

Page 54

Allahabad Bank - Initiating Coverage

Chart 1: NIMs to contract by 10-15bps over FY11-13E


4.00% 3.50% 3.00% 2.50% 2.00%

Chart 2: Increase in cost of deposits to put pressure on NIMs in FY12-13E


4.0% 3.5% 3.0% 2.5% 2.0% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E FY11E

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

NIMs (LHS)

Cost of deposits (RHS)

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 3: CASA ratio to moderate by 200bps to ~31% in FY13E


50% 45% 40% 35% 30% 25%

Chart 4: Cost/Income (ex-treasury) to drop by 780by to 37% in FY13E


90% 80% 70% 60% 50% 40% 30%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY12E

FY13E
FY13E

FY11E

FY12E

FY13E

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 5: Delinquency ratio to be at 1.7-1.8% in FY12-13E


6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E


May 18, 2011

Source : HDFC Securities Institutional Research

Page 55

FY12E

FY13E

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Allahabad Bank - Initiating Coverage

Chart 6: Gross NPAs declined from 15.4% in FY02 to 1.7% in FY11

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

Rsm

18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

Gross NPA

Net NPA

Gross NPA % (RHS)

Net NPA % (RHS)

Source : HDFC Securities Institutional Research

Chart 7: ROAs (FY11) one of the best among peer banks

Chart 8: Slippages on account of moving to CBS based NPL recognition resulted in high delinquency ratio in FY11

IOB

Corp Bank

OBC

OBC
Allahabad Bank

Corp Bank

Allahabad Bank

0.5%

0.7%

0.9%

1.1%

1.3%

0.0%

0.5%

1.0%

1.5%

2.0%

FY13E
2.5%

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 9: Comparative cost/income ratio (FY11)

OBC

Corp Bank

Allahabad Bank

IOB

30%

35%

40%

45%

50%


May 18, 2011

Source : HDFC Securities Institutional Research

Page 56


Chart 10: NII to grow at 20% CAGR over FY11-13E
70,000 60,000 50,000 40,000 30,000 20,000 10,000 Rsm 60% 50% 40% 30% 20% 10% 0%

Allahabad Bank - Initiating Coverage


Chart 11: Earnings to grow at 29% CAGR over FY1113E
30,000 25,000 20,000 15,000 10,000 5,000 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Rsm 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30%

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

NII (LHS)

YoY growth (RHS)

Net profit (LHS)

YoY growth (RHS)

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 12: Trend showing range of P/ABV between +/- 1Stdev.

2.0 1.5
+1SD

1.0 0.5 0.0

5yr Avg. -1SD

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

350 300 250 200 150 100 50 -

Source : HDFC Securities Institutional Research

Chart 13: 12mth forward P/ABV multiple


1.6x 1.2x 1.0x 0.8x

Chart 14: 12mth forward P/E multiple


400 350 300 250 200 150 100 50 0
6x 4x 2x 8x

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

May-11

Nov-06

Nov-07

Nov-08

Nov-09

May-11 May-10 Nov-10

May-06

May-07

May-08

May-09

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research


May 18, 2011

Page 57

May-11

Allahabad Bank - Initiating Coverage


Chart 15: Risk return trade off

3.3 2.8 2.3 1.8 1.3 0.8 0.3 12%

P/Adj.BV (FY12E)

IndusInd Bk ICICI Bk SBI BOI

Axis Bk Yes Bk Union Bk BOB PNB

ING Vysya Bk United Bk

IOB OBC

Canara Bk Corp Bk Allahabad Bk ROAE (FY12E)

14%

16%

18%

20%

22%

24%

Source : HDFC Securities Institutional Research

Table 3: Du Pont Analysis


FY09 Interest Income - Interest on Advances - Income on Investments - Interest on bank balances Interest Expense Net Interest Income Non-Int Income - of which fees - of which Treasury Net Total Income Operating Expenses - Employee expenses - Other Expenses Pre-provision profits Provisions - NPL provisions - Investment provisions - Other provisions PBT Tax PAT (RoA) Equity / Assets ROAE 8.16% 6.09% 2.05% 0.02% 5.77% 2.39% 1.26% 0.53% 0.76% 3.66% 1.55% 0.97% 0.58% 2.11% 0.91% 0.37% 0.40% 0.15% 1.19% 0.34% 0.85% 6.15% 13.85% FY10 7.63% 5.83% 1.77% 0.02% 5.21% 2.42% 1.38% 0.59% 0.70% 3.80% 1.48% 0.92% 0.55% 2.32% 0.71% 0.76% -0.09% 0.04% 1.62% 0.52% 1.10% 5.75% 19.14% FY11 8.07% 6.06% 1.96% 0.05% 5.12% 2.95% 1.00% 0.63% 0.12% 3.95% 1.71% 1.14% 0.57% 2.24% 0.78% 0.65% 0.10% 0.03% 1.46% 0.37% 1.09% 5.59% 19.50% FY12E 8.66% 6.73% 1.88% 0.05% 5.85% 2.81% 0.94% 0.63% 0.10% 3.75% 1.40% 0.89% 0.50% 2.35% 0.69% 0.64% 0.12% 0.03% 1.67% 0.50% 1.09% 5.54% 19.74% FY13E 8.88% 7.01% 1.83% 0.04% 5.98% 2.90% 0.94% 0.65% 0.10% 3.84% 1.38% 0.88% 0.50% 2.46% 0.52% 0.67% 0.05% 0.02% 1.93% 0.58% 1.21% 5.43% 22.20%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 58

Allahabad Bank - Initiating Coverage


Table 4: Balance sheet
(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets 66,368 296,510 213,833 588,018 11,098 14,487 976,480 91,682 384,286 309,829 716,049 11,183 13,792 1,216,992 110,274 432,471 371,795 936,249 11,482 22,388 1,512,864 117,021 499,068 408,975 1,151,586 12,056 24,179 1,803,910 112,610 581,692 482,590 1,422,209 12,659 26,113 2,155,284 4,467 54,052 58,519 227,744 66,232 555,742 849,718 38,489 29,753 976,480 4,467 63,063 67,530 282,712 83,155 694,690 1,060,558 54,355 34,550 1,216,992 4,762 80,312 85,074 350,000 91,560 877,312 1,318,872 69,182 39,736 1,512,864 4,762 93,908 98,670 413,000 100,716 1,070,320 1,584,036 77,494 43,710 1,803,910 4,762 111,554 116,316 487,340 110,788 1,305,791 1,903,918 86,969 48,081 2,155,284 FY09 FY10 FY11E FY12E FY13E

Source : HDFC Securities Institutional Research

Table 5: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 73,647 52,061 21,587 11,419 4,794 6,863 33,006 13,994 8,739 19,012 8,254 3,332 10,758 3,072 7,686 FY10 83,692 57,187 26,505 15,159 6,489 7,633 41,664 16,178 10,114 25,485 7,769 8,331 17,716 5,653 12,063 FY11E 110,147 69,922 40,225 13,704 8,570 1,600 53,929 23,383 15,576 30,546 11,239 8,820 19,307 5,076 14,231 FY12E 143,701 97,081 46,620 15,577 10,439 1,630 62,197 23,171 14,797 39,026 13,113 10,650 25,913 7,774 18,139 FY13E 176,074 118,630 57,444 18,603 12,869 1,891 76,048 27,328 17,461 48,719 14,634 13,171 34,085 10,225 23,859

Source : HDFC Securities Institutional Research

May 18, 2011

Page 59

Allahabad Bank - Initiating Coverage

Table 6: Ratios
FY09 EPS Earnings growth (%) BVPS (ex revaluations) Adj. BVPS Adj. BVPS (ex revaluations) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Investments (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 10,783 4,221 1.8% 0.7% 61% 0.58% 12,218 4,702 1.7% 0.7% 62% 1.27% 16,479 7,364 1.7% 0.8% 55% 0.97% 22,611 7,707 1.9% 0.7% 66% 0.85% 34,286 10,293 2.4% 0.7% 70% 0.85% 18.3% 69.2% 6.0% 10.0% 34.6% 13.1% 8.0% 21.8% 67.5% 5.5% 9.4% 34.5% 13.6% 8.1% 30.8% 71.0% 5.6% 9.1% 33.5% 13.0% 8.6% 23.0% 72.7% 5.5% 8.6% 32.4% 12.5% 8.4% 23.5% 74.7% 5.4% 8.2% 31.4% 11.4% 8.0% 1.5% 53.5% 1.5% 47.5% 1.7% 44.7% 1.4% 38.3% 1.4% 36.9% 10.1% 7.1% 6.4% 3.7% 2.46% 9.8% 5.8% 5.7% 4.1% 2.47% 10.0% 6.5% 5.6% 4.4% 3.01% 10.7% 6.7% 6.4% 4.3% 2.87% 10.8% 6.8% 6.5% 4.3% 2.96% 17.2 (21.1) 111.5 121.6 102.0 0.85% 13.85% 16.45% 11.1 1.9 FY10 27.0 57.0 131.7 140.6 121.2 1.10% 19.14% 22.21% 7.1 1.6 FY11E 29.9 10.7 160.6 163.2 145.1 1.04% 18.65% 21.03% 6.4 1.3 FY12E 38.1 27.5 189.3 191.0 173.1 1.09% 19.74% 21.77% 5.0 1.1 FY13E 50.1 31.5 226.6 222.6 204.9 1.21% 22.20% 24.10% 3.8 0.9

Source : HDFC Securities Institutional Research

May 18, 2011

Page 60

ING Vysya Bank - Initiating Coverage

HOLD
CMP Target Stock Return (%) Rs324 Rs358 11%

ING Vysya Bank


ING Vysya Bank (ING) is a small boutique bank with a focus on wholesale and secured retail banking, largely in South India which accounts for its ~70% of branch network. Post the change in management, the bank realigned its business strategy and showed remarkable improvement in operating parameters. In its second stage of growth, the bank focuses on steady and sustainable growth as it leverage on parentage, improves productivity and expands footprint to capture growth from newer geographies. We estimate the bank to realize a net profit growth of 26% driven by healthy volumes growth, improving operating efficiency and better asset quality. ROAs will improve from ~90bps in FY11 to ~100bps by FY13E with ROEs touching ~16% by FY13. We believe the stock can trade at 1.6x. Initiate with HOLD and a target price of Rs358/share. Shifting gears After inducting the new management in FY10, ING showed remarkable improvement in its operating parameters with loan book growing at 28% YoY (in FY11) while ROAs expanded from 75bps to ~90bps. In its next growth stage, management targets to achieve steady and sustainable growth as it leverages on parentage (to benefit growth in wholesale book and improve fee income), improves productivity (cost/income ratio estimated to come down from 65% in FY11 to ~60% in FY13E due to one off item for pension related costs) and expands footprint to capture growth from newer geographies. While management targets to improve the proportion of low cost deposits, we expect the CASA ratio to remain under pressure due to higher interest rate environment. Earnings to grow 26% CAGR We expect the bank to realize a loan growth of 25% CAGR driven by demand for working capital related credit, regular capex related spend by corporate and secured retail products (especially mortgages which account for 18%). We estimate the earnings to grow 25% CAGR over FY11-13E aided by moderating cost/income ratio (ex treasury), healthy fee income growth (27% CAGR) led by both fund based and non-fund based activities and lower credit costs and healthy topline growth. The margins are likely to be under pressure and we expect it to contract ~10bps over FY11-13E. Initiate with HOLD target price of Rs358/share We initiate coverage on ING Vysya Bank with a HOLD rating and a target price of 358/share. With an estimated ROAs of ~1% and ROE of +16% over FY12-13E, we believe the stock can trade at 1.6x FY12E adjusted book, based on three stage dividend discount model. ING is well capitalized to sustain the growth momentum with tier I ratio at 9.4%. The key risks in our view is a) sharp volatility in interest rates and b) asset quality issues should the economy experience higher inflation for a long period and hence slowdown in economic growth.
May-11

Nifty Sensex

5,439 18,137

Key Stock Data


Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6 mth avg traded val. (Rs. mn) Banking VYSA.BO VYSB IN 121 39 868 42

Stock Performance (%)


52 - Week high / low Absolute (%) Relative (%) Rs444/283 3M (1.3) 0.7 6M (22.8) (14.1) 12M 2.6 (5.1) (%) 43.35 12.83 23.81 20.01

Shareholding Pattern
Promoters FIs & Local MFs FIIs Public & Others Source: Company

Sensex and Stock Movement


160 140 120 100 80
May-10 Nov-10 Jul-10 Sep-10 Mar-11 Jan-11

Sensex

ING Vysya

Table 1: Summary financials


Rsm Total net income PPP PAT EPS FY09 11,973 4,248 1,888 18.4 20.2 12.5 0.7 133.3 17.4 2.4 FY10 FY11A/E 14,501 6,420 2,422 20.2 9.7 12.7 0.7 166.6 15.9 1.9 16,615 6,355 3,187 26.3 30.4 13.5 0.9 200.3 12.2 1.6 FY12E 19,313 7,920 4,127 34.1 29.5 15.3 1.0 226.9 9.4 1.4 FY13E 23,778 9,866 5,027 41.6 21.8 16.3 0.9 255.8 7.7 1.3

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

EPS growth (%) RoAE (%) (ex revaluations) RoAA Adj BV (100% cover) PEx

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

P / Adj BV

Source : HDFC Securities Institutional Research

May 18, 2011

Page 61


Table 2: 4QFY11 results summary
Particulars (Rsm) Interest earned - on Advances / Bills - Income on investments Interest Expended Net Interest Income Other income Operating income Total Operating Expenses -Employee expenses -Other Operating expenses Operating profit Provisions and contingencies PBT Provision for Tax PAT Other details Balance Sheet items & ratios Advances Deposits CA SA CASA ratio CD ratio CAR (%) Cost and profitability ratio Cost of Deposit (%) Yield On Advances (%) Yield on Investments (%) NIM Asset Quality Gross non-performing assets Net non-performing assets % of gross NPAs % of net NPAs Coverage (calculated) Operating efficiency Cost-Income ratio 54.5% 59.0% 5,572 2,218 3.0% 1.2% 60% 6,279 2,574 3.3% 1.4% 59% 4.6% 10.5% 5.7% 3.58% 4.7% 9.6% 5.9% 3.28% 185,072 258,653 40,921 43,350 32.6% 71.6% 14.9% 189,765 242,053 37,615 44,676 34.0% 78.4% 14.5% 4QFY10 5,679 4,267 1,405 3,208 2,471 1,479 3,950 2,153 1,140 1,014 1,797 1,063 1,041 362 679 1QFY11 5,876 4,360 1,506 3,496 2,380 1,244 3,624 2,138 1,244 894 1,486 439 1,047 356 691

ING Vysya Bank - Initiating Coverage

2QFY11 6,388 4,819 1,543 3,846 2,542 1,933 4,475 2,633 1,601 1,032 1,842 698 1,145 392 753

3QFY11 6,907 5,233 1,614 4,448 2,459 1,668 4,127 2,533 1,454 1,079 1,594 336 1,258 428 830

4QFY11 YoY growth QoQ growth 7,769 5,914 1,801 5,086 2,683 1,705 4,389 2,957 1,758 1,199 1,432 43 1,389 476 913 36.8% 38.6% 28.2% 58.5% 8.6% 15.3% 11.1% 37.3% 54.3% 18.2% -20.3% -96.0% 33.4% 31.6% 34.4% 12.5% 13.0% 11.6% 14.3% 9.1% 2.2% 6.3% 16.7% 20.9% 11.1% -10.2% -87.3% 10.4% 11.3% 10.0%

202,420 260,690 44,030 49,500 35.9% 77.6% 13.5%

214,580 272,680 42,070 49,210 33.5% 78.7% 12.7%

236,021 301,943 51,070 53,520 34.6% 78.2% 12.9%

27.5% 16.7% 24.8% 23.5% 204bps 660bps -200bps

10.0% 10.7% 21.4% 8.8% 116bps -50bps 25bps

4.9% 9.8% 6.1% 3.34%

5.4% 10.1% 6.2% 3.10%

6.0% 10.7% 6.6% 3.30%

140bps 20bps 90bps -28bps

60bps 60bps 50bps 20bps

6,015 1,639 2.9% 0.8% 73%

5,819 1,373 2.7% 0.6% 76%

5,532 918 2.7% 0.4% 83%

-0.7% -58.6% -26bps -80bps 2320bps

-4.9% -33.1% 4bps -25bps 700bps

58.8%

61.4%

67.4%

1290bps

600bps

May 18, 2011

Page 62


Chart 1: Post management change in FY10 loan book grew 28% YoY in FY11
35% 30% 25% 20% 15% 10% Growth picked up post mgt change

ING Vysya Bank - Initiating Coverage


Chart 2: Consumer and business banking driving growth (YoY FY11)
50% 40% 30% 20% 10% 0% -10% -20% -30% -40%

Comm. & Auto Loan

Wholesale banking

Business banking

Mortgages

Personal loans
FY13E

ING Vysya loan growth YoY System's loan growth YoY


Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 3: Advances to grow at 25% CAGR over FY11-13E

400 350 300 250 200 150 100 50 -

Rsbn

FY08

FY09 Advances

FY10

FY11

FY12E

YoY growth (RHS)

Source : HDFC Securities Institutional Research

Chart 4: Deposit growth of 17% YoY in FY11


35% 30% 25% 20% 15% 10% 5% 0%

Chart 5: was driven by CASA deposits which grew 24% YoY in FY11
25% 20% 15% 10% 5%

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

0% -5% CA

ING Vysya' deposits growth System's deposits growth YoY

SA

TD

CD

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research


May 18, 2011

Loan against securities


30% 25% 20% 15% 10% 5% 0%

Agri & Rural banking

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Page 63

ING Vysya Bank - Initiating Coverage


Chart 6: Product momentum across business segment

450 400 350 300 250 200 150 100 50 0 Lending


Mar'07

4.0x 2.7x 2.4x

1.8x

FM

Transaction Banking
Mar'11

Advisory

Source : Bank , HDFC Securities Institutional Research

Chart 7: Fee income as % of gross wholesale revenue at 50% as of Mar11

70% 65% 60% 55% 50% 45% 40% Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Source : Bank , HDFC Securities Institutional Research

Chart 8: Branch expansion in geographies beyond South India

100% 80% 60% 40% 20% 0%

7% 10%

8% 10%

9% 16%

10% 16%

12% 17%

14% 19%

42%

41%

38%

37%

35%

34%

42%

42%

38%

37%

35%

34%

Mar-07 AP

Mar-08

Mar-09

Mar-10 North & East

Mar-11

Projected West

Rest of South

Source : Bank , HDFC Securities Institutional Research

May 18, 2011

Page 64

ING Vysya Bank - Initiating Coverage


Chart 9: Average retail CASA balance improves from Rs52bn in 1QFY10 to Rs78bn in 4QFY11

80 75 70 65 60 55 50

Rsbn

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

Source : Bank , HDFC Securities Institutional Research

Chart 10: Twelve Month Retail CASA acquisition per FOS improves 1.14x
4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 YTD Mar'10 YTD Mar'11

Chart 11: Twelve Month Retail CASA branch improves 1.09x


19.0 Rsm

acquisition per

Rsm

18.0

17.0

16.0

15.0 YTD Mar'10

YTD Mar'11

Source : Bank , HDFC Securities Institutional Research

Source : Bank , HDFC Securities Institutional Research

Chart 12: Advances growth picking up

80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% ING Vysya Bk

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

IndusInd Bk

Axis Bk

ICICI Bk

Source : HDFC Securities Institutional Research

May 18, 2011

Page 65

ING Vysya Bank - Initiating Coverage


Chart 13: Tier I ratio at 9.4% as on Mar11 adequately capitalized

BOI PNB Corp Bk Union Bk ING Vysya Bk Axis Bk Yes Bk BOB Canara Bk OBC HDFC Bk IndusInd Bk ICICI Bk 2%

4%

6%

8%

10%

12%

14%

Source : HDFC Securities Institutional Research

Chart 14: Cost/Income (ex-treasury) to improve from 65% in FY11 to 60% n FY13E

68% 66% 64% 62% 60% 58% 56% 54%

FY08

FY09

FY10

FY11

FY12E

Source :HDFC Securities Institutional Research

Chart 15: Net interest income to grow at 20% CAGR over FY11-13E

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 -

Rsm

FY13E
35% 30% 25% 20% 15% 10% 5% 0% FY13E

FY08

FY09 NII (LHS)

FY10

FY11

FY12E

YoY growth (RHS)

Source : HDFC Securities Institutional Research

May 18, 2011

Page 66

ING Vysya Bank - Initiating Coverage


Chart 16: Net profit to grow at 26% CAGR over FY11-13E

6,000 5,000 4,000 3,000 2,000 1,000 -

Rsm

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

FY08

FY09 Net profit (LHS)

FY10

FY11E

FY12E

FY13E

YoY growth (RHS)

Source : HDFC Securities Institutional Research

Chart 17: NIMs to contract by 10bps over FY11-13E

3.0% 2.9% 2.8% 2.7% 2.6% 2.5% 2.4% 2.3% 2.2% 2.1% 2.0%

FY08

FY09

FY10

FY11

FY12E

Source : HDFC Securities Institutional Research

Chart 18: Remain watch full on asset quality



9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Rsm 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

FY08

FY09

FY10

FY11

FY12E

Gross NPA

Net NPA

Gross NPA % (RHS)

Net NPA % (RHS)

Source : HDFC Securities Institutional Research

May 18, 2011

FY13E

FY13E

Page 67

ING Vysya Bank - Initiating Coverage


Chart 19: Trend showing range of P/ABV between +/-1 Stdev.

3.0 2.5 2.0 1.5 1.0 0.5 0.0


+1SD 5yr Avg. -1SD

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Chart 20: 12mth forward P/ABV multiple


700 600 500 400 300 200 100 Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11
0.8x 2.5x 2.0 1.5x

Chart 21: 12mth forward P/E multiple


600
14x

500 400 300 200 100 0

May-11

12x 10x 8x

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

Page 68

May-11


Table 3: Du Pont Analysis - Comparative
ING Vysya Bk FY12E Interest Income Interest Expense Net Interest Income Non-Int Inc - Of which fees - Of which treasury gains Operating revenue Opr. Costs Pre-provision profits Provisions - NPL provisions - Investment provisions - Other provisions PBT Tax PAT (RoA) Equity / Assets ROAE Source : HDFC Securities Institutional Research 8.0% 5.3% 2.7% 1.8% 1.5% 0.1% 4.5% 2.6% 1.8% 0.3% 0.3% 0.0% 0.0% 1.5% 0.5% 1.0% 6.5% 15.6% FY13E 8.2% 5.5% 2.7% 1.8% 1.5% 0.1% 4.5% 2.6% 1.9% 0.4% 0.3% 0.0% 0.0% 1.5% 0.5% 1.0% 6.0% 16.7%

ING Vysya Bank - Initiating Coverage

IndusInd Bk FY12E 9.2% 5.9% 3.4% 1.7% 1.0% 0.1% 5.1% 2.5% 2.6% 0.4% 0.3% 0.0% 0.1% 2.2% 0.7% 1.5% 8.5% 17.5% FY13E 9.5% 5.9% 3.5% 1.7% 1.0% 0.1% 5.3% 2.6% 2.6% 0.5% 0.4% 0.0% 0.1% 2.2% 0.7% 1.4% 7.8% 18.4%

Yes Bk FY12E 8.9% 6.4% 2.4% 1.4% 1.3% 0.0% 3.8% 1.4% 2.4% 0.2% 0.2% 0.0% 0.0% 2.2% 0.7% 1.5% 6.0% 24.6% FY13E 9.0% 6.3% 2.7% 1.5% 1.3% 0.0% 4.1% 1.5% 2.6% 0.3% 0.2% 0.0% 0.0% 2.4% 0.8% 1.6% 6.3% 25.3%

Table 4: Du Pont Analysis


FY09 Interest Income Interest Expense Net Interest Income Non-Int Inc - Of which fees - Of which treasury gains Operating revenue Opr. Costs Pre-provision profits Provisions - NPL provisions - Investment provisions - Other provisions PBT Tax PAT (RoA) Equity / Assets ROAE 7.8% 5.5% 2.3% 1.9% 1.5% 0.1% 4.2% 2.7% 1.48% 0.4% 0.4% 0.0% 0.0% 1.1% 0.4% 0.7% 5.6% 13.0% FY10 6.8% 4.3% 2.5% 1.9% 1.4% 0.2% 4.4% 2.5% 1.95% 0.7% 0.7% 0.0% 0.1% 1.2% 0.4% 0.8% 6.1% 13.3% FY11E 7.4% 4.6% 2.8% 1.8% 1.4% 0.2% 4.6% 2.8% 1.74% 0.4% 0.4% 0.0% 0.0% 1.3% 0.5% 0.88% 6.8% 13.0% FY12E 8.0% 5.3% 2.7% 1.8% 1.5% 0.1% 4.5% 2.6% 1.83% 0.3% 0.3% 0.0% 0.0% 1.5% 0.5% 1.01% 6.5% 15.6% FY13E 8.2% 5.5% 2.7% 1.8% 1.5% 0.1% 4.5% 2.6% 1.86% 0.4% 0.3% 0.0% 0.0% 1.5% 0.5% 1.00% 6.0% 16.7%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 69


Table 5: Balance sheet
(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets

ING Vysya Bank - Initiating Coverage

FY09 1,026 16,003 17,029 33,984 33,145 181,770 248,899 31,853 20,789 318,570

FY10 1,200 22,109 23,309 43,350 40,921 174,383 258,653 36,714 20,126 338,802

FY11A/E 1,210 25,033 26,243 53,520 51,070 197,353 301,943 41,469 20,485 390,140

FY12E 1,210 28,593 29,803 65,294 62,305 250,638 378,237 46,445 22,944 477,430

FY13E 1,210 32,913 34,123 79,659 76,013 318,310 473,982 52,019 25,697 585,820

22,823 104,955 92,585 167,509 4,372 18,911 318,570

30,270 104,729 81,938 185,072 4,959 13,772 338,802

25,214 110,207 86,224 236,021 5,028 13,669 390,140

35,687 126,400 100,019 295,027 5,280 15,036 477,430

43,911 151,042 122,024 368,783 5,544 16,540 585,820

Source : HDFC Securities Institutional Research

Table 6: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 22,399 15,903 6,496 5,477 3,293 390 11,973 7,725 3,922 4,248 1,302 1,063 2,947 1,059 1,888 FY10 22,329 14,031 8,298 6,202 3,490 797 14,501 8,081 4,289 6,420 2,704 2,296 3,715 1,293 2,422 FY11A/E 26,941 16,875 10,065 6,550 4,140 820 16,615 10,260 6,057 6,355 1,516 1,520 4,839 1,652 3,187 FY12E 34,745 23,096 11,648 7,664 5,310 355 19,313 11,393 6,359 7,920 1,639 1,328 6,281 2,154 4,127 FY13E 43,546 29,240 14,306 9,472 6,638 416 23,778 13,913 7,949 9,866 2,214 1,844 7,652 2,625 5,027

Source : HDFC Securities Institutional Research

May 18, 2011

Page 70


Table 7: Valuation ratios

ING Vysya Bank - Initiating Coverage

FY09 EPS Earnings growth (%) BVPS (ex revaluations) Adj. BVPS (ex revaluations) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Int. earning Inv. (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) Note:*gross of technical write off 2,094 2,220 1.3 1.3 (6.0) 0.7 2.7 66.7 11.1 5.6 6.3 5.0 2.4 18 20.2 155 133 0.7 11.7 12.5 17.4 2.4

FY10 20 9.7 185 167 0.7 12.0 12.7 15.9 1.9

FY11A/E 26 30.4 208 200 0.9 12.9 13.5 12.2 1.6

FY12E 34 29.5 237 227 1.0 14.7 15.3 9.4 1.4

FY13E 42 21.8 273 256 0.9 15.7 16.3 7.7 1.3

9.7 4.9 4.9 5.1 2.7

9.7 6.0 5.3 4.6 2.9

10.4 6.0 6.0 4.5 2.8

10.5 6.2 6.2 4.5 2.8

2.5 59.0

2.8 65.0

2.6 60.1

2.6 59.6

14.3 67.3 5.3 10.2 27.0 11.7 6.9

10.5 71.6 6.9 12.6 32.6 14.9 10.1

27.5 78.2 6.7 11.1 34.6 12.9 9.4

25.0 78.0 6.2 10.1 33.7 12.9 9.1

25.0 77.8 5.8 9.3 32.8 11.9 8.4

2,345 2,218 1.3 1.2 5.4 1.3

5,532* 918 2.3 0.4 83.4 0.7

6,206* 1,264 2.1 0.4 79.6 0.5

7,876 * 2,090 2.1 0.6 73.5 0.5

Source : HDFC Securities Institutional Research


May 18, 2011

Page 71

IndusInd Bank - Initiating Coverage

HOLD
CMP Target Stock Return (%) Rs241 Rs223 -7%

IndusInd Bank
IndusInd Bank has shown consistent and remarkable improvement in operating parameters post the induction of new management. While maintaining a rapid growth in loan book, IndusInd improved upon profitability (NIMs up 200bps between FY08-FY11) and contained slippages to 1.2%. We estimate that the bank will deliver an earnings growth of 28% over FY11-13E driven by healthy volumes, stable margins over FY12-13, higher fee income and lower credit costs. We expect ROAs to remain one of the best in the industry at 1.5%. Initiate coverage with
Banking INBK.BO IIB IN 466 112 2,483 423

Nifty Sensex

5,439 18,137

Key Stock Data


Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6 mth avg traded val. (Rs. mn)

HOLD rating and a target price of Rs223/share. Changing gears Post the induction of new management, IndusInd Bank showed remarkable improvement on all the operating parameters. The ROAs of the bank improved from 0.3% in FY08 to 1.4% in FY11; driven by improvement in lending profitability (NIMs improved from 1.7% to 3.6%), growth in loan book, diversified fee income mix and moderation in fresh slippages. In its next phase of growth, the bank has identified new goals in the form of improving CASA mix, boosting branch productivity, further improving profitability in lending business and laying further emphasis on investment banking fee income.

Stock Performance (%)


52 - Week high / low Absolute (%) Relative (%) Rs309/174 3M 4.7 6.7 6M (14.9) (6.2) 12M 33.7 26.0 (%) 19.54 8.27 34.78 37.41

Well poised to sustain growth momentum albeit at modest pace IndusInd Bank, having raised capital is well positioned to maintain its growth momentum. The bank has been growing its loan book at ~30% (yoy) over the last few quarters, mainly driven by vehicle loans and loans to small business. However, we expect the growth momentum to moderate over FY12 and FY13 due to a) slowdown in economy, b) higher interest rates and c) higher commodity prices which could potentially impact CV sales. We expect the bank to realize a loan growth of 27% CAGR over FY11-13E. Rich valuations; Initiate with HOLD and a target price of Rs223/share On the back of robust volumes growth, stable margins and improving fee income drivers, we expect the bank to realize a net profit growth of 28% CAGR. IndusInd bank currently trades at 2.6x 12m fwd. multiple with an estimated ROE of ~18% in FY12. However, as the growth momentum is expected to slowdown, we believe, the stock can potentially trade lower at 2.4x. We initiate with a HOLD rating with a target price of Rs223/share.

Shareholding Pattern
Promoters FIs & Local MFs FIIs Public & Others Source: Company

Sensex and Stock Movement


Sensex 160 140 120 100 80
Sep-10 May-10 Nov-10 Jan-11 Jul-10 May-11 Mar-11

Indusind Bank

Table 1: Summary financials


Rsm Total net income PPP PAT FY09 9,153 3,682 1,483 4.2 78.1 11.7 0.6 35.1 57.7 6.9 FY10 FY11A/E 14,399 7,038 3,503 8.5 104.3 19.5 1.1 50.2 28.2 4.8 20,902 10,817 5,773 12.4 45.3 19.3 1.4 80.4 19.4 3.0 FY12e 26,059 13,393 7,316 15.7 26.7 17.8 1.4 92.5 15.3 2.6 FY13e 33,207 16,595 8,755 18.8 19.7 18.4 1.4 106.0 12.8 2.3

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

EPS EPS growth (%) RoAE (%) (ex revaluations) RoAA Adj BV (100% cover) PEx P / Adj BV

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

Source : HDFC Securities Institutional Research

May 18, 2011

Page 72


Table 2: 4QFY11 Results summary
Particulars (Rsm) Interest earned - on Advances / Bills - Income on investments Interest Expended Net Interest Income Other income Operating income Total Operating Expenses -Employee expenses -Other Operating expenses Operating profit Provisions and contingencies PBT Provision for Tax PAT Other details Balance Sheet items & ratios Advances Deposits CA SA CASA ratio CD ratio CAR (%) Cost and profitability ratio Cost of Deposit (%) Yield On Advances (calculated) (%) Yield on Investments (calculated) (%) NIM Asset Quality Gross non-performing assets Net non-performing assets % of gross NPAs % of net NPAs Coverage (calculated) Operating efficiency Cost-Income ratio Source: HDFC Securities Institutional Research 50.5% 49.5% 48.1% 2,555 1,018 1.2% 0.5% 60% 2,752 825 1.3% 0.4% 70% 2,864 837 1.2% 0.4% 71% 6.0% 11.3% 6.0% 3.19% 6.0% 11.5% 6.6% 3.32% 6.0% 12.0% 6.5% 3.41% 205,506 267,102 44,068 19,150 23.7% 76.9% 15.3% 216,081 273,824 46,230 20,400 24.3% 78.9% 13.7% 234,525 312,903 55,980 23,610 25.4% 75.0% 16.2% 4QFY10 7,202 5,578 1,572 4,474 2,728 1,324 4,052 2,047 779 1,267 2,005 531 1,473 494 980 1QFY11 7,715 6,048 1,645 4,759 2,957 1,610 4,566 2,260 890 1,370 2,306 487 1,819 633 1,186 2QFY11 8,541 6,771 1,752 5,244 3,297 1,751 5,049 2,430 954 1,476 2,619 567 2,051 720 1,332

IndusInd Bank - Initiating Coverage

3QFY11 9,149 7,231 1,874 5,519 3,630 1,960 5,590 2,678 980 1,698 2,912 562 2,350 811 1,539

4QFY11 YoY growth QoQ growth 10,489 8,297 2,063 6,608 3,881 1,816 5,698 2,717 1,002 1,715 2,981 403 2,578 860 1,718 45.6% 48.8% 31.3% 47.7% 42.3% 37.2% 40.6% 32.7% 28.6% 35.3% 48.7% -24.3% 75.0% 74.2% 75.4% 14.6% 14.7% 10.1% 19.7% 6.9% -7.3% 1.9% 1.5% 2.3% 1.0% 2.4% -28.4% 9.7% 6.0% 11.7%

250,010 306,630 56,280 25,860 26.8% 81.5% 15.6%

261,657 343,654 62,720 30,590 27.2% 76.1% 15.9%

27.3% 28.7% 42.3% 59.7% 350bps -80bps 60bps

4.7% 12.1% 11.4% 18.3% 400bps -540bps 30bps

6.2% 11.9% 6.3% 3.61%

7.0% 13.0% 6.5% 3.50%

100bps 172bps 45bps 30bps

900bps 100bps 20bps -10bps

3,060 910 1.2% 0.4% 70%

2,659 728 1.0% 0.3% 73%

4.1% -28.5% -22bps -22bps 1250bps

-13.1% -20.0% -20bps -8bps 230bps

47.9%

47.7%

-280bps

-22bps

May 18, 2011

Page 73


Chart 1: Loan book to grow at 27% CAGR over FY1113E
450 400 350 300 250 200 150 100 50 FY08 FY09 FY10 FY11 FY12E FY13E 35% 30% 25% 20% 15% 10% 5% 0%
64% 60% 72% 68%

IndusInd Bank - Initiating Coverage

Chart 2: CD ratio to remain stable at 75-76%


80% 76%

FY08

FY09

FY10

FY11

FY12E

Advances (Rsbn)

YoY growth (RHS)

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 3: Outstanding loan book (FY11)

Two wheeler loans 4% Three wheeler loans 6% Equipment Finance 6% Loan to small business 10%

Car loans 3%

UV loans 3%

Others 1%

Corp & Inv banking 26%

Comm banking 19%

Comm vehicle loans 22%

Source : HDFC Securities Institutional Research

Chart 4: NIMs improved from 1.7% in 4QFY08 to 3.5% in 4QFY11


4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%

Chart 5: C/I ratio (ex treasury) to moderated by 100bps to ~51% in FY13E


70% 65% 60% 55% 50% 45%

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

40% FY08

FY09

FY10

FY11

FY12E

FY13E

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research


May 18, 2011

Page 74

FY13E


Chart 6: Credit costs to will remain stable over FY1213E
100 80 60 40 20 -

IndusInd Bank - Initiating Coverage


Chart 7: Asset quality could witness some pressure
6,000 5,000 4,000 3,000 2,000 1,000 Rsm 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

FY08

FY09

FY10

FY11

FY12E

FY08

FY09

FY10

FY11

FY12E

FY13E

Gross NPA Gross NPA % (RHS)

Net NPA Net NPA % (RHS)

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 8: Business per branch (FY11)


4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Rsm

Chart 9: Savings account per branch (FY11)


Yes Bank ING Vysya Bk IndusInd Bk PNB ICICI Bk

PNB

ING Vysya Bk

Yes Bank

IndusInd Bk

ICICI Bk

FY13E

Axis Bk

Axis Bk 0

Rsm

100

200

300

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 10: CASA per branch (FY11)


ING Vysya Bk PNB Yes Bank ICICI Bk IndusInd Bk Axis Bk 100 200 300 400 500 Rsm 600

Chart 11: Healthy RoA at 1.4% (FY11)


ING Vysya Bk PNB ICICI Bk IndusInd Bk Yes Bk Axis Bk 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.7%

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

Page 75

IndusInd Bank - Initiating Coverage


Chart 12: Adequately capitalized with tier I capital at 12.3%

PNB ING Vysya Bk Axis Bk Yes Bank IndusInd Bk ICICI Bk 2%

4%

6%

8%

10%

12%

14%

Source : HDFC Securities Institutional Research

Chart 13: Trend showing range of P/ABV between +/- 1Stdev.

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
+1SD 5yr Avg. -1SD

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Chart 14: 12mth forward P/ABV multiple


400 350 300 250 200 150 100 50 1.0x 2.0x 3.0x 4.0x

Chart 15: 12mth forward P/E multiple


400 350 300 250 200 150 100 50 0
Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11
10x 18x 14x 22x

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

May-11

Source : HDFC Securities Institutional Research

May 18, 2011

May-11

Page 76


Table 3: Du Pont Analysis - Comparative
ING Vysya Bk FY12E Interest Income Interest Expense Net Interest Income Non-Int Inc - Of which fees - Of which treasury gains Operating revenue Opr. Costs Pre-provision profits Provisions - NPL provisions - Investment provisions - Other provisions PBT Tax PAT (RoA) Equity / Assets ROAE Source : HDFC Securities Institutional Research 8.0% 5.3% 2.7% 1.8% 1.5% 0.1% 4.5% 2.6% 1.8% 0.3% 0.3% 0.0% 0.0% 1.5% 0.5% 1.0% 6.5% 15.6% FY13E 8.2% 5.5% 2.7% 1.8% 1.5% 0.1% 4.5% 2.6% 1.9% 0.4% 0.3% 0.0% 0.0% 1.5% 0.5% 1.0% 6.0% 16.7%

IndusInd Bank - Initiating Coverage

IndusInd Bk FY12E 9.2% 5.9% 3.4% 1.7% 1.0% 0.1% 5.1% 2.5% 2.6% 0.4% 0.3% 0.0% 0.1% 2.2% 0.7% 1.5% 8.5% 17.5% FY13E 9.5% 5.9% 3.5% 1.7% 1.0% 0.1% 5.3% 2.6% 2.6% 0.5% 0.4% 0.0% 0.1% 2.2% 0.7% 1.4% 7.8% 18.4%

Yes Bk FY12E 8.9% 6.4% 2.4% 1.4% 1.3% 0.0% 3.8% 1.4% 2.4% 0.2% 0.2% 0.0% 0.0% 2.2% 0.7% 1.5% 6.0% 24.6% FY13E 9.0% 6.3% 2.7% 1.5% 1.3% 0.0% 4.1% 1.5% 2.6% 0.3% 0.2% 0.0% 0.0% 2.4% 0.8% 1.6% 6.3% 25.3%

Table 4: Du Pont Analysis


FY09 Interest Income Interest Expense Net Interest Income Non-Int Inc - Of which fees - Of which treasury gains Operating revenue Opr. Costs Pre-provision profits Provisions - NPL provisions - Investment provisions - Other provisions PBT Tax PAT (RoA) Equity / Assets ROAE 9.1% 7.3% 1.8% 1.8% 0.8% 0.5% 3.6% 2.2% 1.45% 0.5% 0.5% 0.0% 0.0% 0.9% 0.3% 0.6% 5.9% 10.3% FY10 8.6% 5.8% 2.8% 1.8% 0.9% 0.4% 4.6% 2.3% 2.23% 0.5% 0.4% 0.0% 0.1% 1.8% 0.6% 1.2% 6.4% 18.3% FY11 8.9% 5.5% 3.4% 1.8% 0.9% 0.2% 5.2% 2.5% 2.67% 0.5% 0.4% 0.0% 0.1% 2.2% 0.7% 1.43% 7.9% 17.9% FY12E 9.2% 5.9% 3.4% 1.7% 1.0% 0.1% 5.1% 2.5% 2.62% 0.4% 0.3% 0.0% 0.1% 2.2% 0.7% 1.49% 8.5% 17.5% FY13E 9.5% 5.9% 3.5% 1.7% 1.0% 0.1% 5.3% 2.6% 2.62% 0.5% 0.4% 0.0% 0.1% 2.2% 0.7% 1.44% 7.8% 18.4%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 77

IndusInd Bank - Initiating Coverage


Table 5: Balance sheet
(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets 19,237 80,834 62,944 157,706 6,232 12,138 276,147 26,032 104,018 85,215 205,506 6,448 11,691 353,695 40,246 135,508 100,554 261,657 5,965 12,983 456,358 73,260 138,389 115,637 332,199 6,263 14,282 564,393 84,627 169,573 144,546 424,084 6,576 15,710 700,570 3,552 13,081 16,632 12,999 29,550 178,554 221,103 28,170 10,242 276,147 4,106 19,844 23,950 19,150 44,068 203,884 267,102 49,343 13,300 353,695 4,660 35,763 40,422 30,590 62,720 250,344 343,654 55,254 17,028 456,358 4,660 41,556 46,215 41,297 81,536 315,433 438,266 61,189 18,723 564,393 4,660 48,352 53,012 55,750 105,997 397,446 559,193 67,778 20,587 700,570 FY09 FY10 FY11A/E FY12E FY13E

Source : HDFC Securities Institutional Research

Table 6: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 23,095 18,504 4,590 4,563 1,391 1,216 9,153 5,471 1,871 3,682 1,408 1,328 2,274 792 1,483 FY10 27,070 18,206 8,864 5,535 1,936 1,110 14,399 7,361 2,906 7,038 1,708 1,313 5,330 1,827 3,503 FY11A/E 35,894 22,129 13,765 7,137 2,569 872 20,902 10,085 3,827 10,817 2,019 1,587 8,798 3,025 5,773 FY12E 47,142 30,012 17,129 8,930 3,563 692 26,059 12,666 5,548 13,393 2,257 1,633 11,136 3,820 7,316 FY13E 59,794 37,622 22,171 11,035 4,538 848 33,207 16,612 7,768 16,595 3,270 2,571 13,325 4,570 8,755

Source : HDFC Securities Institutional Research

May 18, 2011

Page 78


Table 5: Ratios

IndusInd Bank - Initiating Coverage

FY09 EPS Earnings growth (%) BVPS (ex revaluations) Adj. BVPS ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Int. earning Inv. (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 2,550 1,791 1.6 1.1 29.8 0.9 2.2 68.9 12.6 6.6 8.1 4.9 1.9 4 78.1 47 35 0.6 9.8 11.7 57.7 6.9

FY10 9 104.3 53 50 1.1 17.3 19.5 28.2 4.8

FY11A/E 12 45.3 87 80 1.4 17.9 19.3 19.4 3.0

FY12E 16 26.7 99 92 1.4 16.9 17.8 15.3 2.6

FY13E 19 19.7 114 106 1.4 17.6 18.4 12.8 2.3

11.6 6.1 6.4 5.2 3.0

12.1 6.6 6.2 5.9 3.6

12.9 6.7 6.7 6.1 3.5

13.0 6.8 6.7 6.2 3.6

2.3 55.4

2.5 50.3

2.5 49.9

2.6 51.3

23.3 71.3 6.0 10.5 19.2 12.6 7.6

30.3 76.9 6.8 11.7 23.7 15.3 9.6

27.3 76.1 8.9 15.4 27.2 15.9 12.3

27.0 75.8 8.2 13.9 28.0 14.9 11.4

27.7 75.8 7.6 12.5 28.9 13.7 10.5

2,555 1,018 1.2 0.5 60.1 0.7

2,660 730 1.0 0.3 72.6 0.7

3,570 938 1.1 0.3 73.7 0.6

5,446 1,492 1.3 0.4 72.6 0.7

Source : HDFC Securities Institutional Research


May 18, 2011

Page 79

United Bank of India - Initiating Coverage

BUY
CMP Target Stock Return (%) Rs100 Rs135 35%

United Bank of India


United Bank of India (UBI) is a small-sized bank with a balance sheet size of Rs900bn (US$19.8bn) with a large presence in Eastern and NorthEastern part of the country. UBI improved its business performance considerably during FY11 with net profit growing faster at 63% driven largely by improving deposit mix, better lending profitability and lower delinquencies. We expect the bank to continue to report stronger earnings growth in FY12E and FY13E as it improves upon its a) credit-deposit ratio (currently at ~69%), b) better liability mix (CASA at 41% - higher than the peer banks), c) broadening loan mix, and d) lower slippages (at 2% v/s 2.5% in FY10). UBI is trading at attractive valuations of 0.8x FY12 adj. book with an estimated ROE of ~17%. We initiate coverage on the stock with a BUY rating and a target price or Rs135/share, based on 1.1x FY12 adjusted book (1x FY13E adj. book). Turnaround story UBI is a small sized bank with a balance sheet size of Rs900bn, having 80% of branches located in Eastern and North Eastern part of the country. Until 2010, the bank operated on a relatively lower credit-deposit which along with moderating CASA ratio and higher non-performing loans resulted in earnings de-growth at 11% during FY05-09. However, during the course of FY10, the bank significantly improved its performance which sustained even in FY11 with net profit growing at 69% CAGR during FY09-11. With structural changes taking place in the bank with respect to improving business mix, bigger thrust on diversifying loan growth, improvement in deposit mix with reliance on bulk deposits coming down, we believe UBI is well heeled to gain market share while maintaining profitability. Bank has re-aligned its treasury portfolio by lowering the proportion of AFS (mark to market portfolio) from 41% in FY10 to 28% in FY11, thereby insulating earnings from mark-to-market hit in such high volatile interest rate environment. Earnings to grow 28% CAGR over FY11-13E We estimate that UBI will realize an earnings growth of 28% CAGR over FY11FY13E on the back of healthy volumes growth of ~20%, expanding margins and stable asset quality. The cost/income ratio will improve by 380bps over FY11-13E as one off expense relating to retired employee will not be present in FY12. During FY11, bank arrived at a pension liability of ~Rs3.7bn (including Rs1bn towards retired employees). We estimate UBI to report expansion in net interest margins by 4-5bps in FY12 and 11bps in FY13 due to expanding credit-deposit ratio from 69% in FY11 to ~73% in FY13E. We estimate delinquency ratio at 2% (lower than FY11 but higher than 5-yr average) as we remain cautious on banks higher growth in retail loans (autos and other personal loans), where the risk management of PSU banks have traditionally remained weaker, relatively speaking. Initiate coverage with BUY rating and a target price of Rs135/share With an earnings growth of 28% CAGR over FY11-13E, estimated ROEs of ~17% by FY13E we believe the stock can trade at 1.1x FY12E (1x FY13E), implying a target price of Rs135/share. Initiate with BUY rating.
Sep-10 Nov-10 Jan-11 Jul-10

Nifty Sensex

5,439 18,137

Key Stock Data


Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6 mth avg traded val. (Rs. mn) Banking UBOI.BO UNTDB IN 344 34 45 45

Stock Performance (%)


52 - Week high / low Absolute (%) Relative (%) Rs152/72 3M 2.6 4.6 6M (21.2) (12.5) 12M 27.0 19.2 (%) 85.48 2.01 3.06 9.45

Shareholding Pattern
Promoters FIs & Local MFs FIIs Public & Others Source: Company

Sensex and Stock Movement


180 160 140 120 100 80
May-10 May-11 Mar-11

Sensex

United Bank

Table 1: Summary financials


(Rsm) Total net income PPP PAT EPS EPS growth (%) RoAE (%) (ex revaluations) RoAA Adj BV (100% cover) PEx P / Adj BV FY09 16,524 6,772 1,844 1.2 27.1 6.9 0.3 15.0 83.0 6.6 FY10 19,500 8,758 3,224 10.2 746.4 10.4 0.5 81.3 9.8 1.2 FY11e 28,064 15,070 5,240 15.2 49.3 13.8 0.6 100.6 6.6 1.0 FY12e 32,010 17,465 6,244 18.1 19.2 14.0 0.6 118.5 5.5 0.8 FY13e 38,514 21,303 8,607 25.0 37.9 17.1 0.8 136.8 4.0 0.7

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324 May 18, 2011

Source : HDFC Securities Institutional Research

Page 80


Table 2: 4QFY11 Results summary
Particulars (Rsm) Interest earned - on Advances / Bills - Income on investments Interest Expended Net Interest Income Other income Operating income Total Operating Expenses -Employee expenses -Other Operating expenses Operating profit Provisions and contingencies PBT Provision for Tax PAT Other details Balance Sheet items & ratios Advances Deposits CA SA Retail TD Bulk TD CASA ratio CD ratio CAR (%) Cost and profitability ratio Cost of deposits (%) Yield On Advances (%) Yield On Investments (%) NIMs Asset Quality Gross non-performing assets Net non-performing assets % of gross NPAs % of net NPAs Coverage ratio calculated) Operating efficiency Cost-Income ratio Source: HDFC Securities Institutional Research 50.6% 13,723 7,786 3.2% 1.8% 43.3% 5.6% 9.2% 7.7% 2.5% 427,560 681,800 66,470 193,360 225,676 196,358 38.1% 62.7% 12.8% 4QFY10 13,999 9,656 4,348 9,780 4,219 1,595 5,814 2,942 1,823 1,119 2,872 2,818 54 (408) 462

United Bank of India - Initiating Coverage

3QFY11 16,310 12,058 4,209 10,712 5,597 1,457 7,054 3,187 2,067 1,120 3,867 1,666 2,201 570 1,631

4QFY11 17,674 13,200 4,261 11,926 5,748 2,192 7,940 3,689 2,177 1,513 4,250 2,838 1,412 (20) 1,432

YoY growth 26.2% 36.7% -2.0% 21.9% 36.2% 37.4% 36.6% 25.4% 19.4% 35.2% 48.0% 0.7% 2523.4% -95.1% 209.9%

QoQ growth 8.4% 9.5% 1.2% 11.3% 2.7% 50.4% 12.6% 15.8% 5.3% 35.1% 9.9% 70.4% -35.8% -103.5% -12.2%

506,790 731,060 62,290 231,940 255,140 182,034 40% 69.3% 12.5%

539,340 778,450 85,290 232,170 275,571 182,936 40.8% 69.3% 13.1%

26.1% 14.2% 28.3% 20.1% 22.1% -6.8% 270bps 660bps 25bps

6.4% 6.5% 36.9% 0.1% 8.0% 0.5% 50bps -4bps 50bps

6% 10.4% 7.8% 3.2%

6.0% 10.7% 7.7% 3.1%

40bps 150bps 5bps 65bps

40bps 32bps -3bps -7bps

14,853 7,630 2.9% 1.5% 48.6%

13,558 7,574 2.5% 1.4% 44.1%

-1.2% -2.7% -70bps -40bps 90bps

-8.7% -0.7% -40bps -10bps -450bps

45.2%

46.5%

-410bps

130bps

May 18, 2011

Page 81


Rsbn

United Bank of India - Initiating Coverage


Chart 1: Loan book to grow 21% CAGR over FY11-13E
800 600 400 20% 200 10% 0% 50% 40% 30%

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

Advances

YoY growth

Source : HDFC Securities Institutional Research

Chart 2: Loan book mix ( FY11)


Food Credit 2% Agri. 11% Retail 14%

Chart 3: Retail loans mix (FY11)


Auto 5% Education 6%

Mortgage 14% Personal 44%

MSME 15%

Large & Mid-Corp 58%

Housing 31%

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 4: Credit-deposit ratio lower than system, likely to improve going forward

80% 75% 70% 65% 60% 55% 50% FY06 FY07 UBI's CD ratio

FY08

FY09

FY10

FY13E
FY11

System's CD ratio

Source : RBI , HDFC Securities Institutional Research


May 18, 2011

Page 82

United Bank of India - Initiating Coverage


Chart 5: Margins to expand by 15bps over FY11-13E

3.6% 3.3% 3.0% 2.7% 2.4% 2.1% 1.8% 1.5%

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

Source : HDFC Securities Institutional Research

Chart 6: CASA ratio (FY11) one of the highest amongst peer banks
OBC Corp Bk IOB Allahabad Bk UBI 20%

Chart 7: Comparative proportion of bulk deposits to total deposits

Allahabad Bk

UBI

OBC

30%

40%

50%

10%

15%

20%

25%

30%

FY13E
35%

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 8: Delinquency ratio trend

3.0%

2.5%

2.0%

1.5%

1.0%

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

Source : HDFC Securities Institutional Research


May 18, 2011

FY13E

Page 83

United Bank of India - Initiating Coverage


Chart 9: Asset quality to improve on account of lower slippages

25,000 20,000 15,000 10,000 5,000 -

Rsm

6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

Gross NPA

Net NPA

Gross NPA % (RHS)

Net NPA % (RHS)

Source : HDFC Securities Institutional Research

Chart 10: NII to grow at 20% CAGR over FY11-13E


35,000 30,000 25,000 20,000 15,000 10,000 5,000 Rsm 60% 50% 40% 30% 20% 10% 0% -10% -20% -30%

Chart 11: Earnings to grow at 28% CAGR over FY1113E


10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Rsm 100% 80% 60% 40% 20% 0% -20% -40% -60%

FY07

FY08

FY09

FY10

FY11

FY12E

FY12E

NII (LHS)

YoY growth (RHS)

FY13E

Net profit (LHS)

YoY growth (RHS)

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 12: Risk return trade off United bank is attractively valued

3.3 2.8 2.3 1.8 1.3 0.8 0.3 12%

P/Adj.BV (FY12E)

IndusInd Bk ICICI Bk SBI

Axis Bk Yes Bk Union Bk

ING Vysya Bk United Bk

BOB PNB BOI Canara Bk IOB Corp Bk Allahabad Bk OBC ROAE (FY12E)

14%

16%

18%

20%

22%

FY13E

FY07

FY08

FY09

FY10

FY11

FY13E

24%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 84


Table 3: Comparative Du Pont Analysis
UBI FY12E Interest Income Interest Expense Net Interest Income Non-Int Inc - Of which fees - Of which treasury gains Operating revenue Opr. Costs Pre-provision profits Provisions - NPL provisions - Investment provisions - Other provisions PBT Tax PAT (RoA) Equity / Assets 8.0% 5.1% 2.94% 0.7% 0.3% 0.1% 3.6% 1.5% 2.11% 0.9% 0.5% 0.2% 0.2% 1.3% 0.4% 0.86% 4.6% FY13E 8.2% 5.2% 3.02% 0.6% 0.3% 0.1% 3.7% 1.5% 2.18% 0.8% 0.5% 0.1% 0.2% 1.4% 0.5% 0.97% 4.6% 21.18%

United Bank of India - Initiating Coverage

Allahabad Bk FY12E 8.48% 5.73% 2.74% 0.93% 0.62% 0.10% 3.68% 1.40% 2.28% 0.64% 0.49% 0.12% 0.03% 1.64% 0.49% 1.15% 5.57% 20.62% FY13E 8.57% 5.87% 2.70% 0.92% 0.63% 0.10% 3.63% 1.38% 2.25% 0.47% 0.40% 0.05% 0.02% 1.77% 0.53% 1.24% 5.49% 22.60%

Corp Bk FY12E 7.47% 5.44% 2.03% 1.00% 0.41% 0.08% 3.03% 1.13% 1.91% 0.41% 0.34% 0.05% 0.02% 1.50% 0.48% 1.03% 4.89% 21.00% FY13E 7.64% 5.55% 2.09% 1.03% 0.42% 0.11% 3.12% 1.12% 2.00% 0.38% 0.31% 0.05% 0.01% 1.62% 0.51% 1.11% 4.77% 23.24%

ROAE 18.50% Source: HDFC Securities Institutional Research

Table 4: Du Pont Analysis


FY09 Interest Income Interest Expense Net Interest Income Non-Int Inc - Of which fees - Of which treasury gains Operating revenue Opr. Costs Pre-provision profits Provisions - NPL provisions - Investment provisions - Other provisions PBT Tax PAT (RoA) Equity / Assets ROAE 7.4% 5.4% 2.0% 0.8% 0.3% 0.4% 2.8% 1.7% 1.16% 0.7% 0.3% 0.2% 0.1% 0.5% 0.1% 0.4% 4.6% 8.6% FY10 7.5% 5.5% 2.0% 0.8% 0.3% 0.3% 2.8% 1.5% 1.26% 0.6% 0.4% -0.1% 0.3% 0.6% 0.1% 0.5% 4.4% 11.4% FY11 7.6% 5.0% 2.6% 0.8% 0.2% 0.2% 3.4% 1.6% 1.80% 0.9% 0.5% 0.1% 0.3% 0.9% 0.2% 0.7% 4.5% 15.5% FY12E 8.2% 5.6% 2.6% 0.7% 0.3% 0.1% 3.3% 1.5% 1.79% 0.8% 0.4% 0.2% 0.2% 1.0% 0.3% 0.7% 4.6% 15.9% FY13E 8.4% 5.7% 2.7% 0.7% 0.3% 0.1% 3.4% 1.5% 1.88% 0.8% 0.5% 0.1% 0.2% 1.1% 0.3% 0.8% 4.5% 18.0%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 85


(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds

United Bank of India - Initiating Coverage


Table 5: Balance sheet
FY09 15,324 12,953 28,278 2,500 152,124 53,953 339,281 545,359 19,818 24,453 620,407 FY10 3,164 30,365 33,529 5,500 193,355 66,477 421,970 681,803 24,403 24,876 770,112 FY11e 3,444 38,773 42,217 8,000 232,170 85,290 460,988 778,448 44,115 27,625 900,405 FY12e 3,444 43,557 47,001 8,000 262,352 98,084 548,576 909,011 51,718 30,940 1,046,671 FY13e 3,444 50,289 53,733 8,000 296,458 115,739 652,805 1,065,002 61,042 34,653 1,222,430

Preference Capital (PNCPS) Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets

64,102 179,242 140,633 353,935 6,242 16,885 620,407

63,778 260,677 195,672 423,300 6,510 15,846 770,112

73,277 262,590 197,107 535,024 8,189 21,325 900,405

67,256 305,330 226,673 642,029 8,598 23,458 1,046,671

56,746 353,997 267,474 776,855 9,028 25,804 1,222,430

Source : HDFC Securities Institutional Research


Table 6: Income statement
(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 43,119 31,504 11,615 4,909 1,363 2,160 16,524 9,751 6,576 6,772 4,337 1,988 2,435 591 1,844 FY10 52,489 38,577 13,912 5,587 1,588 1,805 19,500 10,741 6,625 8,758 4,653 2,727 4,105 882 3,224 FY11e 63,415 41,721 21,694 6,371 1,741 1,985 28,064 12,994 8,144 15,070 8,380 4,362 6,690 1,450 5,240 FY12e 79,760 54,141 25,620 6,390 2,354 994 32,010 14,544 8,306 17,465 8,794 4,494 8,672 2,428 6,244 FY13e 95,798 64,774 31,025 7,489 2,838 1,154 38,514 17,211 9,552 21,303 9,349 5,438 11,954 3,347 8,607

Source : HDFC Securities Institutional Research

May 18, 2011

Page 86


Table 7: Ratios

United Bank of India - Initiating Coverage

FY09 EPS Earnings growth (%) BVPS (ex revaluations) Adj. BVPS (ex revaluations) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Int. earning Inv. (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 10,200 5,250 2.8 1.5 48.5 0.6 27.0 64.9 4.6 8.0 37.8 13.3 7.6 1.7 67.9 9.5 7.1 5.9 3.6 2.1 1 27.1 18 15 0.3 6.9 6.9 83.0 6.6

FY10 10 746.4 106 81 0.5 10.4 10.4 9.8 1.2

FY11e 15 49.3 123 101 0.6 13.8 13.8 6.6 1.0

FY12e 18 19.2 136 118 0.6 14.0 14.0 5.5 0.8

FY13e 25 37.9 156 137 0.8 17.1 17.1 4.0 0.7

9.5 7.1 6.1 3.5 2.1

9.7 6.4 5.5 4.2 2.67

10.4 6.5 6.1 4.2 2.71

10.5 6.5 6.2 4.2 2.82

1.5 60.7

1.6 49.8

1.5 46.9

1.5 46.1

19.6 62.1 4.4 7.9 38.1 12.8 8.2

26.4 68.7 4.7 7.9 40.8 13.1 8.9

20.0 70.6 4.5 7.3 39.7 12.0 8.2

21.0 72.9 4.4 6.9 38.7 11.1 7.7

13,720 7,790 3.2 1.8 43.2 0.7

13,555 7,574 2.5 1.4 45.3 0.9

15,031 6,190 2.3 1.0 58.8 0.7

19,098 6,619 2.4 0.9 65.3 0.7

Source : HDFC Securities Institutional Research


May 18, 2011

Page 87

Yes Bank - Initiating Coverage

BUY
CMP Target Stock Return (%) Rs288 Rs370 28%

Yes Bank
We initiate coverage on Yes Bank (Yes) with a BUY rating and a target price of Rs370/share based on 2.9x 12m fwd. adjusted book. Yes, having grown its loan book at 54% CAGR over FY08-11, now focuses on building the liability franchise by focusing on improving branch mix and higher growth in SME-mid corporate loan book. We estimate that the bank will realize an earnings growth of 40% CAGR over the next two years driven by a) volumes growth of 39% CAGR, b) stable margins on the back of improving deposit mix, c) healthy operating efficiency as cost/income ratio to still remain one of the lowest in the system at ~37%. Key risks include sharper volatility in interest rates. Yes 2.0 Yes Bank successfully managed the rapid growth in business while improving profitability and managing asset quality during its first phase of growth period between FY05-11. In its second stage of growth, the bank will grow its balance sheet to Rs1.5tn. It targets more broad based growth and focus on improving the liability mix by having higher proportion of CASA deposits. In its loan book, the proportion of Mid-SME banking (branch & commercial) will expand from the current 35% to 43%, in our estimate, while the deposit mix will improve with CASA proportion expanding from 10% to 14% by FY13E. While asset quality outlook remains healthy, we believe, in higher interest rate environment there could be higher slippages as bank plans to increase its exposure to SMEs etc. Earnings to grow 40% CAGR We estimate Yes to realize a net profit growth of 40% CAGR over FY11-13E. The key drivers to the earnings growth will be a robust loan book growth of 39%, stable NIMs (over FY11-13E), fee income growth of 44% CAGR and healthy asset quality. Given that bank focuses on SME-mid corporate segment which are vulnerable in higher interest rate environment, we build higher delinquency ratio at 0.6% on average over FY11-13E (v/s 0.2% in FY11). The net interest margins could see improvement in the near term due to repricing of high cost bulk deposits, but expected to contract in FY12E by ~20bps; increasing proportion of CASA deposits will lead to expansion of margins in FY13E. Notwithstanding expansion plans and higher opex estimates (CAGR 45% over FY11-13E), we see operating efficiency to improve as cost/income ratio (ex treasury) will increase 120-150 bps driven mainly due to expansion in its distribution network. BUY with a target price of Rs370/share We initiate coverage on Yes Bank with a BUY rating and a target price of 370/share. With estimated ROAs of 1.5% and ROE of 23-24% over FY12-13E, we believe the stock can trade at 2.9x 12m fwd. book, based on three stage dividend discount model. The key risks in our view is a) sharp volatility in interest rates to impact bank adversely due to its higher reliance on bulk deposits and b) asset quality issues should the economy experience higher inflation for a long period and hence slowdown in economic growths. Table 1: Summary financials
May-11 Mar-11 Jan-11

Nifty Sensex

5,439 18,137

Key Stock Data


Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6 mth avg traded val. (Rs. mn) Banking YESB.BO YES IN 348 100 2,222 964

Stock Performance (%)


52 - Week high / low Absolute (%) Relative (%) Rs388/234 3M 2.2 4.2 6M (13.2) (4.5) 12M 5.7 (2.0) (%) 26.57 14.69 45.54 13.20

Shareholding Pattern
Promoters FIs & Local MFs FIIs Public & Others Source: Company

Sensex and Stock Movement


Sensex 140 120 100 80
May-10 Nov-10 Jul-10 Sep-10

Yes Bank

Rsm Total net income PPP PAT EPS EPS growth (%) RoAE (%) (ex revaluations) RoAA Adj BV (100% cover)

FY09 9,462 5,277 3,038 10.2 51.3 20.6 1.5 53.3 28.2 5.4

FY10 13,635 8,633 4,777 14.1 37.5 20.3 1.6 90.6 20.5 3.2

FY11A/E 18,702 11,904 7,271 20.9 48.9 21.1 1.5 109.0 13.8 2.6

FY12E 26,642 16,608 9,525 27.4 31.0 22.9 1.4 128.9 10.5 2.2

FY13E 38,915 24,687 14,173 36.1 31.7 23.8 1.5 188.2 8.0 1.5

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324 May 18, 2011

PEx P / Adj BV

Source : HDFC Securities Institutional Research

Page 88


Table 2: 4QFY11 Results summary
Particulars (Rsm) Interest earned - on Advances / Bills - Income on investments Interest Expended Net Interest Income Other income Operating income Total Operating Expenses -Employee expenses -Other Operating expenses Operating profit Provisions and contingencies PBT Provision for Tax PAT Other details Balance Sheet items & ratios Advances Deposits CASA deposits Term deposits CASA ratio CD ratio CAR (%) Tier I (%) Cost and profitability ratio Cost of Funds (%) Yield On Advances (%) NIM Asset Quality Gross non-performing assets Net non-performing assets % of gross NPAs % of net NPAs Coverage (calculated) Operating efficiency Cost-Income ratio Source: HDFC Securities Institutional Research 36.3% 38.7% 36.6% 602 130 0.3% 0.1% 78% 597 111 0.2% 0.0% 81% 677 172 0.2% 0.1% 75% 6.3% 9.7% 3.20% 6.3% 9.6% 3.10% 6.7% 9.5% 3.00% 221,931 267,986 28,182 239,804 10.5% 82.8% 20.6% 12.9% 262,568 302,387 31,799 270,588 10.5% 86.8% 16.6% 10.3% 303,481 400,137 40,528 359,609 10.1% 75.8% 19.4% 11.0% 4QFY10 6,646 4,900 1,718 4,204 2,442 1,601 4,043 1,467 708 759 2,576 426 2,150 750 1,400 1QFY11 7,392 5,579 1,766 4,771 2,621 1,438 4,059 1,570 812 758 2,490 126 2,364 800 1,564 2QFY11 9,538 7,252 2,245 6,406 3,132 1,310 4,442 1,628 878 750 2,814 174 2,640 877 1,763

Yes Bank - Initiating Coverage

3QFY11 11,262 8,178 2,993 8,030 3,232 1,617 4,848 1,736 903 833 3,113 250 2,863 952 1,911

4QFY11 YoY growth QoQ growth 12,226 8,883 3,269 8,741 3,485 1,868 5,353 1,865 1,030 835 3,488 433 3,055 1,021 2,034 84.0% 81.3% 90.3% 107.9% 42.7% 16.6% 32.4% 27.1% 45.4% 10.0% 35.4% 1.6% 42.1% 36.2% 45.2% 8.6% 8.6% 9.2% 8.9% 7.8% 15.5% 10.4% 7.4% 14.0% 0.3% 12.1% 73.4% 6.7% 7.3% 6.4%

311,122 394,528 40,369 354,159 10.2% 78.9% 18.2% 10.4%

343,636 459,389 47,500 411,889 10.3% 74.8% 16.5% 9.7%

54.8% 71.4% 68.5% 71.8% -22bps -800bps -410bps -320bps

10.5% 16.4% 17.7% 16.3% 10bps -400bps -170bps -70bps

7.1% 10.0% 2.81%

7.8% 10.7% 2.80%

150bps 100bps -40bps

70bps 70bps -1bps

724 174 0.2% 0.1% 76%

805 92 0.2% 0.0% 89%

33.8% -29.6% -4bps -3bps 1020bps

11.2% -47.4% Flat -3bps 1265bps

35.8%

34.8%

-145bps

-96bps

May 18, 2011

Page 89


Chart 1: Yes achieved one of the highest loan book growth in the initial five years of operations
70% 60% 50% 40% 30% 20% Yes Bk HDFC Bk Axis Bk ICICI Bk
55% 65%

Yes Bank - Initiating Coverage


Chart 2: Net profit grew at 67% CAGR in the first 5yrs of operations
70%

60%

Yes Bk

ICICI Bk

Axis Bk

HDFC Bk

Source : HDFC Securities Institutional Research Note: First 5yrs of operation considered as under Yes: FY06-11, HDFC Bk: FY96-01, Axis Bk: FY98-03 and ICICI Bk: FY02-07

Source : HDFC Securities Institutional Research Note: First 5yrs of operation considered as under Yes: FY06-11, HDFC Bk: FY96-01, Axis Bk: FY98-03 and ICICI Bk: FY02-07

Chart 3: Yes maintained healthy ROEs at 18% (avg.) in first 5yrs of operations

Chart 4: First 5yrs avg. C/I ratio at 49%

ICICI Bk

HDFC Bk

Yes Bk

Yes Bk

HDFC Bk

Axis Bk

Axis Bk

ICICI Bk

10%

15%

20%

25%

30%

40%

50%

60%

70%

Source : HDFC Securities Institutional Research Note: First 5yrs of operation considered as under Yes: FY06-11, HDFC Bk: FY97-00, Axis Bk: FY99-03 and ICICI Bk: FY03-07

Source : HDFC Securities Institutional Research Note: First 5yrs of operation considered as under Yes: FY06-10, HDFC Bk: FY96-00, Axis Bk: FY98-02 and ICICI Bk: FY03-07

May 18, 2011

Page 90

Yes Bank - Initiating Coverage


Chart 5: Loan book to grow at 39% CAGR over FY11-13E
800 700 600 500 400 300 200 100 Rsbn 80% 70% 60% 50% 40% 30% 20% 10% 0%

FY08

FY09

FY10

FY11

FY12E

Advances (Rsbn)

YoY growth (RHS)

Source : HDFC Securities Institutional Research

Chart 6: Branch & Commercial banking contributes 35% to the outstanding loan book
100% 80% 60% 40% 20%

Chart 7: ...proportion to increase to 43% by FY13E


100% 80% 60% 40% 20%

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

FY08

FY09

FY10

FY11

FY12E

FY13E

Corp & Institutional Banking Branch Banking

Commercial Banking

Corp & Institutional Banking Branch Banking

Commercial Banking

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 8: CASA deposits grew at 70% YoY (4QFY11)


500 450 400 350 300 250 200 150 100 50 0 Rsbn 120% 100% 80% 60% 40% 20% 0%

Chart 9: Proportion of CASA deposits to increase to 14% by FY13


100%

80%

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

60%

FY08

FY09

FY10

FY11

FY12E

FY13E

CASA deposits

YoY growth (RHS)

Term

Demand

Saving

Source : HDFC Securities Institutional Research


Source : HDFC Securities Institutional Research

May 18, 2011

Page 91

FY13E

Yes Bank - Initiating Coverage

Chart 11: Fee income as % of RWA


2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0%

Chart 12: Fee income composition


100% 80% 60% 40% 20% 0%

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

FY08

FY09

FY10

FY11E

FY12E

FY13E

Financial Advisory Financial Markets

Transaction Banking Retail fees & Others

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 13: Cost/income ratio (ex treasury) will go up to 37% in FY13E


60% 55% 50% 45% 40% 35% 30%

Chart 14: Stressed assets (gross NPLs + restructured assets) as % of advances at 0.5% as on 4QFY11
1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

FY11E

FY12E

Source : HDFC Securities Institutional Research

FY13E

Source : HDFC Securities Institutional Research

May 18, 2011

Page 92

4QFY11

FY08

FY09

FY10

4QFY11


Chart 15: NII to grow at 42% CAGR over FY11-13E
30,000 25,000 20,000 15,000 10,000 5,000 40% 20% 0% Rsm 100% 80% 60%

Yes Bank - Initiating Coverage


Chart 16: Net profit to grow at 40% CAGR over FY1113E
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 FY08 FY09 FY10 FY11E FY12E FY13E

Rsm

120% 100% 80% 60% 40% 20% 0%

FY08

FY09

FY10

FY11

FY12E

NII (LHS)

YoY growth (RHS)

FY13E

Net profit (LHS)

YoY growth (RHS)

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 17: Fee income to grow at 44% over FY11-13E


80% 70% 60% 50% 40% 30% 20% 10% 0%

Chart 18: Fee income as % of advances at 1.7% as on FY11


2.4% 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0%

FY09

FY10

FY11

FY12E

FY13E

FY08

FY09

FY10

FY11

FY12E

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 19: We estimate higher delinquency ratio at 0.6% over FY11-13E


0.9%

Chart 20: Gross NPAs to move up


6,000 5,000 4,000 Rsm 0.8% 0.6% 0.4% 0.2% 0.0%

0.6%

3,000 2,000

0.3%

1,000 -

FY09

FY10

FY11

FY12E

0.0%

FY08

FY09

FY10

FY11E

FY12E

FY13E

Gross NPA (Rsm) Gross NPA % (RHS)

Net NPA (RSm) Net NPA % (RHS)

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

FY13E

Page 93

FY13E

Yes Bank - Initiating Coverage


Chart 21: Trend showing range of P/ABV between +/- 1Stdev.
5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

+1SD 5yr Avg. -1SD

Jan-07

Dec-07

Jun-08

Nov-08

May-09

Nov-09

Apr-10

Oct-10

Jul-06

Jul-07

Source : HDFC Securities Institutional Research

Chart 22: 12mth forward P/ABV multiple


600 500 400 300 200 100 1.5x 4.0x 3.5x 2.5x

Chart 23: 12mth forward P/E multiple


500 450 400 350 300 250 200 150 100 50 0
15x 12x 9x

Mar-11

6x

Nov-06

Nov-07

Nov-08

Nov-09

Nov-10

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

May-11

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Table 3: Du Pont Analysis - Comparative


ING Vysya Bk FY12E Interest Income Interest Expense Net Interest Income Non-Int Inc - Of which fees - Of which treasury gains Operating revenue Opr. Costs Pre-provision profits Provisions - NPL provisions - Investment provisions - Other provisions PBT Tax PAT (RoA) Equity / Assets ROAE Source : HDFC Securities Institutional Research 8.0% 5.3% 2.7% 1.8% 1.5% 0.1% 4.5% 2.6% 1.8% 0.3% 0.3% 0.0% 0.0% 1.5% 0.5% 1.0% 6.5% 15.6% FY13E 8.2% 5.5% 2.7% 1.8% 1.5% 0.1% 4.5% 2.6% 1.9% 0.4% 0.3% 0.0% 0.0% 1.5% 0.5% 1.0% 6.0% 16.7% IndusInd Bk FY12E 9.2% 5.9% 3.4% 1.7% 1.0% 0.1% 5.1% 2.5% 2.6% 0.4% 0.3% 0.0% 0.1% 2.2% 0.7% 1.5% 8.5% 17.5% FY13E 9.5% 5.9% 3.5% 1.7% 1.0% 0.1% 5.3% 2.6% 2.6% 0.5% 0.4% 0.0% 0.1% 2.2% 0.7% 1.4% 7.8% 18.4% Yes Bk FY12E 8.9% 6.4% 2.4% 1.4% 1.3% 0.0% 3.8% 1.4% 2.4% 0.2% 0.2% 0.0% 0.0% 2.2% 0.7% 1.5% 6.0% 24.6% FY13E 9.0% 6.3% 2.7% 1.5% 1.3% 0.0% 4.1% 1.5% 2.6% 0.3% 0.2% 0.0% 0.0% 2.4% 0.8% 1.6% 6.3% 25.3%

May 18, 2011

Page 94

May-11


Table 4: Du Pont Analysis

Yes Bank - Initiating Coverage

FY10 Interest Income Interest Expense Net Interest Income Non-Int Inc - Of which fees - Of which treasury gains Operating revenue Opr. Costs Pre-provision profits Provisions - NPL provisions - Investment provisions - Other provisions PBT Tax PAT (RoA) Equity / Assets ROAE Source : HDFC Securities Institutional Research 8.0% 5.3% 2.7% 1.9% 1.4% 0.3% 4.6% 1.7% 2.91% 0.3% 0.3% 0.1% 0.0% 2.6% 0.8% 1.7% 8.0% 21.9%

FY11 8.5% 5.9% 2.6% 1.3% 1.3% -0.1% 3.9% 1.4% 2.50% 0.1% 0.1% 0.0% 0.0% 2.4% 0.8% 1.6% 7.2% 22.5%

FY12E 8.9% 6.4% 2.4% 1.4% 1.3% 0.0% 3.8% 1.4% 2.38% 0.2% 0.2% 0.0% 0.0% 2.2% 0.7% 1.5% 6.0% 24.6%

FY13E 9.0% 6.3% 2.7% 1.5% 1.3% 0.0% 4.1% 1.5% 2.62% 0.3% 0.2% 0.0% 0.0% 2.4% 0.8% 1.6% 6.3% 25.3%

May 18, 2011

Page 95


Table 3: Balance sheet
(Rsm) Sources of funds: Share Capital* Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity 2,970 13,272 16,242 1,921 12,197 147,576 161,694 37,017 14,055 229,008 FY09

Yes Bank - Initiating Coverage

FY10 3,397 27,499 30,896 3,910 24,272 239,804 267,986 47,491 17,453 363,825

FY11A/E 3,472 34,469 37,941 6,591 40,918 411,880 459,389 66,909 25,831 590,070

FY12E 3,472 41,659 45,130 10,876 67,514 568,395 646,785 81,830 28,930 802,676

FY13E 3,922 70,162 74,084 16,857 108,022 750,281 875,161 100,121 32,402 1,081,767

Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets 19,227 71,170 46,801 124,031 1,311 13,269 229,008 26,732 102,099 67,865 221,931 1,155 11,907 363,825 34,960 188,288 125,154 343,636 1,324 21,861 590,070 57,271 238,406 168,958 481,562 1,391 24,047 802,676 80,966 304,486 228,093 668,403 1,460 26,452 1,081,767

Source : HDFC Securities Institutional Research Note:*We have assumed a 11.5% dilution at the price of Rs400/share in FY13E

Table 4: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 20,014 14,921 5,093 4,369 2,258 1,486 9,462 4,185 2,180 5,277 617 571 4,659 1,621 3,038 FY10 23,697 15,818 7,880 5,755 3,791 986 13,635 5,002 2,569 8,633 1,368 876 7,265 2,487 4,777 FY11A/E 40,417 27,948 12,469 6,233 5,860 (460) 18,702 6,798 3,623 11,904 982 495 10,922 3,650 7,271 FY12E 61,836 44,847 16,989 9,653 8,252 107 26,642 10,034 5,508 16,608 2,284 1,445 14,323 4,798 9,525 FY13E 84,998 59,775 25,223 13,692 12,075 136 38,915 14,228 7,986 24,687 3,374 2,339 21,313 7,140 14,173

Source : HDFC Securities Institutional Research

May 18, 2011

Page 96


Table 5: Ratios

Yes Bank - Initiating Coverage

FY09 EPS Earnings growth (%) BVPS (ex revaluations) Adj. BVPS (ex revaluations) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Int. earning Inv. (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 849 412 0.7 0.3 51.5 0.5 31.5 76.7 7.1 13.1 8.7 16.6 9.5 2.1 52.5 13.6 8.2 8.7 5.3 2.7 10 51.3 55 53 1.5 20.6 20.6 28.2 5.4

FY10 14 37.5 91 91 1.6 20.3 20.3 20.5 3.2

FY11A/E 21 48.9 109 109 1.5 21.1 21.1 13.8 2.6

FY12E 27 31.0 130 129 1.4 22.9 22.9 10.5 2.2

FY13E 36 31.7 189 188 1.5 23.8 23.8 8.0 1.5

10.2 6.8 6.2 4.4 2.8

10.6 7.1 6.6 4.5 2.72

11.3 7.2 7.1 4.3 2.53

11.4 7.2 7.0 4.5 2.76

1.7 39.5

1.4 35.5

1.4 37.8

1.5 36.7

78.9 82.8 8.5 13.9 10.5 20.6 12.9

54.8 74.8 6.4 11.0 10.3 16.5 9.7

40.1 74.5 5.6 9.4 12.1 15.2 8.5

38.8 76.4 6.8 11.1 14.3 16.2 10.0

602 130 0.3 0.1 78.4 0.5

805 92 0.2 0.0 88.6 0.2

2,555 397 0.5 0.1 84.5 0.3

4,793 295 0.7 0.0 93.8 0.4

Source : HDFC Securities Institutional Research


May 18, 2011

Page 97

Axis Bank - Update

BUY
CMP Target Stock Return Rs1,219 Rs1,545 27%

Axis Bank
While Axis Bank reported a mixed set of 4Q numbers, the earnings growth outlook remains healthy. Though the systemic credit growth likely to slow down, Axis to realize a volumes growth of 25% CAGR over FY11-13E. The pressure on margins to sustain due to tight liquidity environment. With asset quality outlook largely remaining healthy, we expect delinquency ratio to moderate marginally from 1.2% in FY11 to 1.1% in FY12-13E. On the back of healthy liability franchise, diversified loan book, multiple fee income levers and better asset quality, we estimate Axis to realize an earnings growth of 27% CAGR over FY11-13E. We maintain our BUY rating but lower our target price to Rs1,545/share. 4QFY11 results summary While Axis struggled to maintain its topline growth momentum, it logged a healthy growth in its bottomline at 33% YoY and 14% QoQ as bank reported strong noninterest income (55% YoY, 26% QoQ) - 46% of operating income and lower loan loss provisioning (77bps v/s 107bps in 3Q annualized) as asset quality improved (delinquency ratio at 0.7% during the quarter). The topline came under pressure (down 2% QoQ) as lending profitability was lower due to sharper rise in cost of funds (80bps QoQ) due to tight liquidity conditions, higher growth in deposits (21% QoQ), lower CASA ratio at 41% (down 120bps) and disbursements to lower yielding segments such as agriculture (35% contribution to loan growth). As a result of robust growth in non-interest income, the cost/income ratio declined by 150bps QoQ to 43%. The strong growth in fee income at 58% YoY and 27% QoQ was a positive surprise and was driven by corporate segment (24%QoQ) and agri and SME banking (72% QoQ); fee from insurance distribution also picked up which was a bit of the drag as the business restructuring was underway. Growth outlook remains healthy; NIMs to remain under pressure During the year (2011), Axis logged a strong credit growth at 36% YoY and 15% QoQ with Agri contributing the highest, followed by corporate and SME segment. We expect the growth to moderate ahead in FY12 and FY13 to 24-25%; growth to be driven by retail, agri while the share of corporate loan book to moderate marginally from 53% in FY11 to 52% in FY12E.We expect the margins to contract 25-30bps YoY due to a) tighter liquidity environment and Axis higher reliance on wholesale segment for deposits mobilization (41% of total deposits and 70% of total term deposits), b) slow down of growth in corporate segment as focus on other segments such as secured retail loans (on which the yields are relatively lower) and agriculture steps up. Reducing reliance on RIDF/NABARD bonds to meet agri priority norms, should marginally benefit the margins. Earnings to grow 27% CAGR over FY11-13E; Maintain BUY While NIMs to remain under pressure over the next two years even as growth moderates due to higher interest rates, the earnings, in our view, will grow healthy at 27% CAGR over FY11-13E driven by a) robust non-interest income growth, and b) lower credit costs at 70bps (v/s 150bps in FY10 and ~70-80bps in FY11). We maintain BUY rating on the stock but lower our price target to Rs1,545/share, valuing at 2.9x FY12E adjusted book (2.4x FY13E adj. book).
Table 1:Summary financials
Particulars (Rsm) FY09 65,831 37,248 18,153 50.6 68.9 19.1 1.4 275.4 24.1 4.4 FY10 101,751 64,653 37,393 92.3 82.5 28.5 2.3 385.7 13.2 3.2 FY11 111,951 64,157 33,885 82.5 (10.6) 19.3 1.6 452.8 14.8 2.7 FY12e 142,661 81,893 44,905 109.4 32.5 21.5 1.7 542.1 11.1 2.2 FY13e 177,635 100,148 54,564 132.9 21.5 21.9 1.6 647.4 9.2 1.9

Nifty Sensex

5,439 18,137

Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6m Avg. traded val. (Rs mn) Banking AXBK.BO AXSB IN 411 501 11,092 2,527

Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Shareholding Pattern Promoters FIs & Local MFs FIIs Public & Others Source: Company Sensex and Stock Movement
Sensex 120 100 80
May-10 Nov-10 Jul-10 May-11 Sep-10 Mar-11 Jan-11

Rs1609/1147 3M (7.5) (5.5) 6M (17.0) (8.3) 12M (3.4) (11.2) (%) 37.21 5.13 37.68 19.98

Axis Bank

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Total net income PPP PAT EPS EPS growth (%) RoAE (%) RoAA

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

Adj BV (100% cover) PEx P / Adj BV

Source : HDFC Securities Institutional Research

May 18, 2011

Page 98

Axis Bank - Update

Table 2: 4QFY11 results summary


Particulars Interest earned - on Advances / Bills - Income on investments Interest Expended Net Interest Income Other income - Fee income - Treasury income - Other income Operating income Total Operating expenses Employee expenses Operating profit Provisions and contingencies PBT Provision for Tax PAT Other Details Advances Deposits CASA NIM Tier I Gross NPA Net NPA Gross NPA ratio Net NPA ratio Coverage 1,043,430 1,413,000 660,300 4.09% 11.18% 13,180 4,190 1.13% 0.36% 68.20% 1,086,091 1,474,794 592,490 3.71% 10.32% 13,410 4,130 1.13% 0.35% 69.20% 1,105,928 1,568,871 651,860 3.68% 9.77% 13,624 4,094 1.12% 0.34% 69.95% 1,235,470 1,558,106 659,310 3.81% 8.86% 14,829 3,855 1.09% 0.29% 74.00% 1,424,078 1,892,378 777,670 3.44% 9.41% 15,994 4,104 1.01% 0.26% 74.30% 36% 34% 18% -65bps -177bps 21% -2% -12bps -10bps 610bps 15% 21% 18% -37bps 55bps 8% 6% -8bps -3bps 30bps Q4FY10 29,885 20,750 8,560 15,284 14,601 9,335 7,796 1,027 512 23,936 10,098 3,338 13,838 2,019 11,819 4,171 7,649 1QFY11 33,256 23,109 9,353 18,118 15,138 10,008 7,431 1,957 619.7 25,146 10,645 4,164 14,501 3,330 11,171 3,752 7,419 2QFY11 36,243 24,290 11,235 20,092 16,151 10,332 8,490 1,080 762.4 26,483 11,620 4,053 14,864 3,788 11,076 3,725 7,351 3QFY11 38,383 26,006 11,668 21,052 17,331 11,477 9,680 1,350 447 28,808 12,224 3,962 16,585 3,139 13,446 4,532 8,914 4QFY11 43,667 30,626 12,131 26,657 17,010 14,504 12,310 580 1,614 31,514 13,306 3,960 18,208 2,544 15,664 5,463 10,201 YoY growth 46% 48% 42% 74% 17% 55% 58% -44% 215% 32% 32% 19% 32% 26% 33% 31% 33% QoQ growth 14% 18% 4% 27% -2% 26% 27% -57% 261% 9% 9% 0% 10% -19% 16% 21% 14%

Source: HDFC Securities Institutional Research

Chart 1: Advances growth - YoY


50% 40% 30% 20%

Chart 2: Incremental growth in advances was led by agri segment


Retail loans , 14% Agri , 35%

SME, 23%
10% 0% Large & Mid corp Agri Retail loans SME

Large & Mid corp, 29%

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

Page 99

Axis Bank - Update


Chart 4: CASA ratio moderated by 100bps QoQ
48% 46% 44% 42% 40% 38% 36%

Chart 3: Agri as % loan book increased to 12% in 4QFY11 from ~10% in 4QFY09
13% 12% 11% 10% 9% 8% 7% 6% 5%

Q2FY07 Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 1QFY11 2QFY11 3QFY11 4QFY11

1QFY11

2QFY11

3QFY11

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 5: NIMs contracted by 40bps QoQ due to sharp rise in cost of funds (80bps QoQ)
4.40% 4.20% 4.00% 3.80% 3.60% 3.40% 3.20% 3.00% 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00%

Chart 6: Fee Income growth was driven by Agri & SME (72% QoQ) and corporate banking (24% QoQ)
Retail banking Business banking Corporate banking Capital Markets Others Agri & SME banking 0% 20% 40% 60% 80%

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

1QFY11

2QFY11

3QFY11

NIMs (LHS)

Cost of Funds (RHS)

Source : HDFC Securities Institutional Research

4QFY11

Source : HDFC Securities Institutional Research

Chart 7: Cost/Income ratio moderated by 150bps QoQ


47% 46% 45% 44% 43% 42% 41%

Chart 8: Asset quality improves on moderation of slippages


16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Rsm 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00%

Q4FY10

1QFY11

2QFY11

3QFY11

Q2FY10

Q3FY10

Q4FY10

1QFY11

2QFY11

3QFY11

4QFY11

Gross NPA Gross NPA % (RHS)

Net NPA Net NPA % (RHS)

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

4QFY11

Page 100

4QFY11

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Axis Bank - Update


Chart 9: Loan growth to be driven by retail and agri in FY12-13E
60% 50% 40% 30% 20% 10% 0% FY10 - Advance - Retail FY11E - Large & Mid corp FY12E - SME FY13E - Agriculture

Source : HDFC Securities Institutional Research

Chart 10: Trend showing range of P/ABV between +/- 1 Stdev.


4.5 4.0 3.5

Axis Bank currently trades below its 5yr average P/ABV multiple

3.0 2.5 2.0 1.5 1.0 0.5 0.0

+1SD 5yr Avg. -1SD

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Chart 11: 12mth forward P/ABV multiple


2,425 2,225 2,025 1,825 1,625 1,425 1,225 1,025 825 625 425 225 25
4.0x

Chart 12: 12mth forward P/E multiple


3,525 3,025 2,525 2,025
2.0x 1.0x

May-11

30x

3.0x

20x 15x 10x

1,525 1,025 525 25

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

May-11

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

Page 101

May-11

Axis Bank - Update


Table 3: Balance sheet
(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets 150,169 463,304 284,182 815,568 10,729 37,451 1,477,220 152,064 559,748 341,959 1,043,431 12,224 39,011 1,806,478 214,087 719,916 439,808 1,424,078 22,732 46,321 2,427,134 270,931 874,035 593,741 1,772,735 27,278 55,585 341,394 1,075,358 742,176 2,222,222 32,733 66,703 3,590 98,557 102,147 258,221 248,216 667,304 1,173,741 155,199 46,133 1,477,220 4,052 156,395 160,446 338,618 321,677 752,707 1,413,002 171,696 61,335 1,806,478 4,106 185,883 189,988 408,500 369,170 1,114,700 1,892,370 262,679 82,089 2,427,134 4,106 222,718 226,824 490,200 443,004 1,426,816 2,360,020 315,215 98,506 4,106 267,598 271,704 598,044 531,605 1,840,593 2,970,241 378,257 118,208 FY09 FY10 FY11 FY12e FY13e

3,000,564 3,738,410

3,000,564 3,738,410

Source : HDFC Securities Institutional Research

Table 4: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 108,355 71,493 36,862 28,969 21,733 2,884 65,831 28,583 9,977 37,248 9,394 8,377 27,854 9,701 18,153 FY10 116,380 66,335 50,045 51,706 37,900 7,140 101,751 37,098 12,558 64,653 13,891 13,564 50,762 13,368 37,393 FY11 151,548 85,918 65,630 46,321 37,911 4,967 111,951 47,794 16,139 64,157 12,800 14,029 51,357 17,472 33,885 FY12e 209,161 130,792 78,369 64,292 47,952 3,687 142,661 60,768 20,174 81,893 14,871 12,409 67,022 22,117 44,905 FY13e 266,156 168,564 97,592 80,043 58,926 4,655 177,635 77,487 25,217 100,148 18,710 15,556 81,438 26,875 54,564

Source : HDFC Securities Institutional Research

May 18, 2011

Page 102

Axis Bank - Update


Table 5: Valuation ratios
FY09 EPS Earnings growth (%) BVPS Adj. BVPS ROAA (%) ROAE (%) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Int. earning Inv. (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR 2.2 45.4 2.3 39.2 2.3 44.7 2.2 43.7 2.3 44.8 10.6 8.4 6.2 4.5 3.1 8.6 7.6 4.6 4.2 3.3 8.4 8.2 4.6 4.0 3.3 9.2 8.4 5.4 3.9 3.1 9.3 8.4 5.6 3.8 3.0 50.6 68.9 284.5 275.4 1.4 19.1 24.1 4.4 FY10 92.3 82.5 396.0 385.7 2.3 28.5 13.2 3.2 FY11 82.5 (10.6) 462.8 452.8 1.6 19.3 14.8 2.7 FY12e 109.4 32.5 552.5 542.1 1.7 21.5 11.1 2.2 FY13e 132.9 21.5 661.8 647.4 1.6 21.9 9.2 1.9

36.7 69.5 6.9 12.5 43.1 13.7 9.3 FY09

27.9 73.8 8.9 15.4 46.7 15.8 11.2 FY10 13,179.6 4,190.0 1.3 0.4 68.2 1.5

36.5 75.3 7.8 13.3 41.1 12.7 9.4 FY11 15,994.0 4,104.0 1.1 0.3 74.3 1.1

24.5 75.1 7.6 12.8 39.5 12.2 9.0 FY12e 18,681.4 4,260.9 1.1 0.2 77.2 0.7

25.4 74.8 7.3 12.2 38.0 11.8 8.7 FY13e 24,793.3 5,914.5 1.1 0.3 76.1 0.7

Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 8,977.3 3,271.3 1.1 0.4 63.6 1.0

Source : HDFC Securities Institutional Research

May 18, 2011

Page 103

Bank of Baroda - Update

BUY
CMP Target Stock Return Nifty Sensex Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6m Avg. traded Val. (Rs mn) Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Shareholding Pattern Promoters FIs & Local MFs FIIs Public & Others Source : Company Sensex and Stock Movement
160 140 120 100 80 Sensex BOB

Bank of Baroda
Rs861 Rs1,046 21% 5,439 18,137

In its 4Q results, BOB reported higher net profit growth at 43% YoY to Rs12.9bn, with deterioration in asset quality as 4QFY11 delinquency ratio was at 1.2%. We believe, BOB is well positioned as it has a) among the lowest stressed assets, b) strong coverage ratio, c) healthy tier I ratio and d) diversified loan book. We estimate the loan book to grow 22% CAGR over FY11-13E. Bank to realize an earnings growth of 20% CAGR over FY11-13E led by healthy topline growth and lower opex. Maintain BUY rating but lowering target price to Rs1,046/share. 4QFY11 results summary BOB, in its 4Q results, reported a strong net profit growth of 43% YoY and 21% QoQ to Rs12.9bn mainly driven by lower tax provisions and interest on income tax refund amounting ~Rs2.5bn, adjusting for which the results were in-line with our estimates. BOB arrived at pension liability on account of retired employees at Rs5.5bn and Rs18.3bn on account of existing employees which is to be amortized over five years (Rs14.6bn over four remaining years). The core fee income growth was healthy at 21% YoY and 35% QoQ but a tad lower as compared to volumes growth. BOB reported a strong growth in total business at 28% YoY and 9% QoQ driven by both advances (31% YoY and 10%QoQ growth) and deposits growth (27% YoY and 8%QoQ growth); business mix also improved with credit-deposit ratio expanding by 130bps QoQ. Asset quality deteriorated during the quarter with delinquency ratio coming at 1.2% - highest in the year. Well positioned, but slowdown ahead BOB, given its lower proportion stressed assets, higher coverage ratio and robust capital adequacy, is well poised to grow its loan book at a slightly higher than industry, partly also driven by international book. We expect the bank to realize an earnings growth of 20% CAGR over FY11-13E, lower than the growth in FY11 of 39%. Bank has been diversifying its loan book. In 4Q, advances growth was quite broad based; sector which logged faster growth were retail (34%YoY), corporate advances (34% YoY), and SME (30% YoY); within retail segment while housing grew healthy at 22% YoY; non-housing loans registered a 43% YoY growth. Earnings to grow 20% CAGR; Maintain BUY We estimate the bank to realize a net profit growth of 20% CAGR driven by healthy topline growth of 20%, lower operating costs as we expect the cost/income ratio to improve over FY11-13E by 600bps as one-time effect of pension liability for retired employees wanes down. Over the coming quarters, margins are likely to contract as the lag effect of higher deposit cost comes in. We expect margins to contract by 1520bps over FY11-13E. Asset quality, while remained healthy during FY11 with average delinquency ratio stood commendable at 0.9% - lowest within the PSU banks, we expect it to remain at these levels and factor in a credit cost of 0.5% over FY11-13E. Maintain BUY rating but lowering our target price to Rs1,046/share (based on 1.8x FY12 adj. book), as we do not see significant re-rating of multiple given the current headwinds that the banking system is facing. Table 1: Summary financials
(Rsm) Total net income PAT EPS EPS growth (%) RoAE (%) - ex revaluations RoAA Adj BV (ex reval. & 100% cover) PEx FY09 78,811 22,272 61.1 66.8 21.3 1.10 301 14.1 FY10 87,458 30,583 84.0 37.3 24.3 1.21 362 10.3 2.4 FY11 116,114 42,417 108.0 28.6 25.3 1.33 481 8.0 1.8 FY12E 139,339 49,143 125.1 15.9 22.7 1.24 580 6.9 1.5 FY13E 168,760 60,774 154.7 23.7 23.2 1.26 700 5.6 1.2

Banking BOB.BO BOB IN 392 338 7,491 421

Rs 1,052/654 3M (6.1) (4.1) 6M (11.1) (2.4) 12M 27.8 20.1 (%) 57.03 15.99 16.56 10.42

May-10

Nov-10

Jul-10

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

May-11

Sep-10

Mar-11

Jan-11

P / Adj BV - ex revaluations 2.9 Source : HDFC Securities Institutional Research

May 18, 2011

Page 104

Bank of Baroda - Update

Table 2: 4QFY11 results summary


Particulars (Rsm) Interest income - Interest on advances - Interest on investments - Interest on bal with RBI Interest expenses Net Interest Income Non-interest Income - CEB - Forex - Recovery in bad debts - Treasury Total income Operating expenses - Employee Exp Pre-provision profits Provisions - NPL Provisions - Provisions for std. assets Pre-tax Profits Tax Net Income Other details Gross NPAs (Rsm) Net NPAs (Rsm) Gross NPAs ratio Net NPAs ratio Coverage Advances Deposits Global CASA deposits 24,007 6,023 1.36% 0.34% 75% 1,750,350 2,410,440 714,680 26,574 7,173 1.41% 0.39% 73% 1,855,946 2,546,678 747,840 27,199 7,313 1.39% 0.38% 73% 1,929,590 2,696,600 798,150 27,703 7,442 1.32% 0.36% 73% 2,072,088 2,815,119 819,960 31,525 7,909 1.36% 0.35% 75% 2,286,764 3,054,395 875,890 31% 31% Flat 1bps Flat 31% 27% 23% 14% 6% 4bps -1bps 180bps 10% 8% 7% 4QFY10 43,536 32,461 9,250 1,233 26,089 17,448 8,483 3,575 1,067 1,181 2,068 25,931 9,645 5,318 16,286 3,773 2,318 792 12,513 3,452 9,061 1QFY11 47,270 35,658 10,224 1,273 28,690 18,580 6,172 2,787 1,216 561 1,279 24,752 9,474 5,767 15,279 2,513 2,775 288 12,765 4,174 8,592 2QFY11 51,587 38,383 11,565 1,469 31,205 20,381 6,813 3,388 1,000 692 1,101 27,194 10,627 6,562 16,567 1,855 1,423 520 14,713 4,520 10,193 3QFY11 56,662 42,122 12,774 1,146 33,739 22,923 6,762 3,187 1,471 615 848 29,684 11,172 6,942 18,512 3,041 2,064 369 15,471 4,783 10,689 4QFY11 63,342 45,872 13,184 1,336 37,203 26,139 8,345 4,310 1,461 859 1,209 34,484 15,026 9,897 19,458 5,904 4,244 1,061 13,554 611 12,944 YoY growth 45% 41% 43% 8% 43% 50% -2% 21% 37% -27% -42% 33% 56% 86% 19% 56% 83% 34% 8% -82% 43% QoQ growth 12% 9% 3% 17% 10% 14% 23% 35% -1% 40% 43% 16% 34% 43% 5% 94% 106% 187% -12% -87% 21%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 105

Bank of Baroda - Update


Chart 1: Trend showing range of P/ABV between +/-1 Stdev
2.5 2.0 1.5 1.0 0.5 0.0

+1SD 5yr Avg. -1SD

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Chart 2: 12mth forward P/ABV multiple


1,160 1,060 960 860 760 660 560 460 360 260 160 60
1.8x 1.5x 1.2x 0.8x

Chart 3: 12mth forward P/E multiple


1,660 1,460 1,260 1,060 860 660 460 260 60
7x 5x 12x

May-11

9x

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

May-11

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

Page 106

May-11

Bank of Baroda - Update


Table 3: Balance sheet
(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments Advances Fixed Assets Other Assets Total Assets 240,871 524,459 1,432,514 23,097 45,781 354,671 611,824 1,750,353 22,848 43,472 499,341 712,606 2,286,764 22,997 62,264 438,881 1,052,445 2,782,991 23,457 65,377 516,863 1,288,207 3,395,249 23,926 68,646 3,643 125,155 128,797 424,873 144,512 1,354,584 1,923,970 127,679 86,277 3,643 147,421 151,064 525,439 189,236 1,695,768 2,410,443 133,501 88,160 3,928 206,003 209,931 644,540 231,350 2,178,505 3,054,395 223,079 96,567 3,928 245,916 249,844 760,557 272,993 2,701,346 3,734,896 272,188 106,224 3,928 295,641 299,569 905,063 322,132 3,322,656 4,549,850 326,626 116,846 FY09 FY10 FY11 FY12E FY13E

2,266,722 2,783,167 3,583,972 4,363,152 5,292,892

2,266,722 2,783,167 3,583,972 4,363,152 5,292,892

Source : HDFC Securities Institutional Research

Table 4: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 150,916 99,682 51,234 27,577 7,455 9,001 78,811 35,761 23,481 43,050 9,621 3,376 33,429 11,157 22,272 FY10 166,983 107,589 59,395 28,064 8,973 7,232 87,458 38,106 23,509 49,353 6,972 9,555 42,381 11,797 30,583 FY11 218,859 130,837 88,023 28,092 10,206 4,437 116,114 46,298 29,168 69,816 13,313 10,506 56,503 14,086 42,417 FY12E 298,208 194,272 103,937 35,402 13,942 5,840 139,339 49,931 30,626 89,408 16,061 12,674 73,347 24,205 49,143 FY13E 367,339 241,015 126,324 42,436 16,990 7,300 168,760 57,420 35,220 111,340 20,632 16,990 90,708 29,934 60,774

Source : HDFC Securities Institutional Research

May 18, 2011

Page 107

Bank of Baroda - Update


Table 5: Valuation ratios
FY09 EPS Earnings growth (%) BVPS Adj. BVPS Adj. BVPS (ex revaluations) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 18,429 4,512 1.3% 0.3% 75.5% 0.3% 24,007 6,023 1.4% 0.3% 74.9% 0.6% 31,525 7,909 1.4% 0.3% 74.9% 0.6% 40,263 8,973 1.4% 0.3% 77.7% 0.5% 55,164 11,883 1.6% 0.3% 78.5% 0.6% 34.3% 74.5% 5.7% 9.0% 29.6% 14.1% 8.5% 22.2% 72.6% 5.4% 8.6% 29.6% 14.4% 9.2% 30.6% 74.9% 5.9% 9.2% 28.7% 14.5% 10.0% 21.7% 74.5% 5.7% 9.0% 27.7% 13.5% 9.4% 22.0% 74.6% 5.7% 8.8% 27.0% 13.4% 9.4% 1.8% 51.2% 1.5% 47.5% 1.5% 41.5% 1.3% 37.4% 1.2% 35.6% 9.0% 5.4% 3.5% 2.6% 7.9% 4.7% 3.2% 2.42% 8.0% 4.5% 3.5% 2.83% 8.6% 5.3% 3.3% 2.67% 8.7% 5.4% 3.3% 2.67% 61.1 66.8 313.8 341.2 301.4 1.1% 18.6% 21.3% 14.1 2.9 FY10 84.0 37.3 378.4 398.2 361.9 1.2% 21.9% 24.3% 10.3 2.4 FY11 108.0 28.6 501.1 514.3 481.0 1.3% 23.5% 25.3% 8.0 1.79 FY12E 125.1 15.9 603.1 613.2 580.2 1.2% 21.4% 22.7% 6.9 1.48 FY13E 154.7 23.7 730.0 732.4 699.7 1.3% 22.1% 23.2% 5.6 1.23

Source : HDFC Securities Institutional Research

May 18, 2011

Page 108

Bank of India - Update

HOLD
CMP Target Stock Return Nifty Sensex Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6m Avg. traded Val. (Rs mn) Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Rs 589/310 3M (10.1) (8.1) 6M (15.1) (6.4) 12M 22.4 14.6 (%) 65.86 12.50 14.28 7.36 Banking BOI.BO BOI IN 546 220 4,877 578 Rs402 Rs427 6% 5,439 18,137

Bank of India
Bank of India, after witnessing a strain on asset quality in FY10, reported a lower delinquency in FY11 at 1.5%. While advances growth picked up during Q4FY11, the earnings growth came in lower than our estimates at 15% YoY mainly due to higher pension cost at Rs9.8bn during the quarter; total pension liability arrived at ~Rs29bn. We expect the bank to realize a volumes growth of 22% CAGR over FY11-13E, even as margins will contract by 20-30bps over FY11-13E. Earnings will grow 22% CAGR over FY11-13E boosted by lower operating expenses and lower credit cost. Maintain HOLD rating on the stock with a target price of Rs427/share. 4QFY11 results summary Bank of India (BOI) reported a lower than estimated earnings growth at 15% YoY mainly due to provisions related to second pension option; bank provided Rs9.8bn during 4Q towards the same. Total pension liability for the bank is around Rs29bn, which includes Rs7bn towards retired employees. The topline growth was higher than our estimates at Rs23bn. The core operating growth declined by 11% YoY, but adjusting for pension related one-offs, the growth was higher at 48% YoY. Bank registered a robust advances growth of 26% YoY and ~12% QoQ driven by agri, SME and retail. Within the deposit mix, the proportion of CASA deposits moderated sharply. The improving asset quality trend halted during the quarter as slippages on a sequential basis came in higher at Rs9bn (annualized delinquency ratio of 1.85% much higher than 9m delinquency ratio of 1.32%). Trend remains mixed BOI, after witnessing a strain on asset quality in FY10, reported an improvement in asset quality over subsequent quarters. However, the trend of improving asset quality was halted as the bank reported higher slippages at 1.8% in 4QFY11 partly due to seasonal phenomenon. Business growth momentum also likely to slow down to 22% CAGR due to macro headwinds. Margins will remain under pressure as it is expected to decline by 20-30bps. BOI has lower capital adequacy also as compared to some of the peer banks such as BOB, Canara Bank, which will naturally impact
BOI

Shareholding Pattern Govt. of India FIs & Local MFs FIIs Public & Others Source : Company Sensex and Stock Movement
Sensex 160 140 120 100 80

the growth momentum. Maintain HOLD with a target price of Rs427/share We estimate that bank will register an earnings growth of 22% CAGR over FY1113E, with an estimated ROE of 19% (ex reval.). We maintain HOLD rating on the stock but lower the target price to Rs427/share. Key risks include a) disappointment on asset quality, b) margin compression and c) lower than estimated loan growth.

Nov-10

Jul-10

May-10

May-11

Sep-10

Mar-11

Jan-11

Table 1: Summary financials


(Rsm) Total net income PPP PAT EPS EPS growth (%) RoAE (%) - ex revaluations RoAA Adj BV (ex reval. & 100% cover) PEx P / Adj BV - ex revaluations FY09 85,508 54,568 30,073 57.2 49.7 29.2 1.49 212 7.0 1.9 FY10 83,726 47,048 17,411 33.1 (42.1) 14.2 0.70 201 12.1 2.0 FY11 104,524 53,842 24,887 45.5 37.4 17.3 0.79 256 8.8 1.6 FY12E 119,129 70,298 32,414 59.2 30.2 18.9 0.85 308 6.8 1.3 FY13E 136,580 80,501 36,820 67.3 13.6 18.5 0.82 355 6.0 1.1

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi Vishal.modi@hdfcsec.com 91-22-6171 7324

Source : HDFC Securities Institutional Research

May 18, 2011

Page 109

Bank of India - Update

Table 2: 4QFY11 results summary


Particulars - (Rsm) Interest earned - on Advances / Bills - Income on investments - on bal with RBI and other banks Interest Expended Net Interest Income Other income - CEB - Profit on Sale of Investments - Recovery in w/o a/cs - Other income Operating income Operating expenses -Employee expenses -Other Operating expenses Operating profit Provisions and contingencies - NPL provisions PBT Provision for Tax PAT Other details Advances Deposits CASA (%) Gross NPL Net NPL Gross NPL ratio (%) Net NPL ratio (%) Coverage (%) NIMs (%) Cost of Deposits (%) Yield On Advances (%) Yield on investments (%) CAR (%) Source : HDFC Securities Institutional Research 1,713,130 2,297,619 31.50% 48,827 22,075 2.85% 1.31% 55% 2.57% 4.79% 8.12% 6.98% 12.94% 1,713,170 2,336,680 32.34% 47,945 20,612 2.71% 1.05% 57% 2.89% 4.79% 8.38% 6.90% 13.29% 1,843,768 2,410,711 33.23% 48,696 20,704 2.64% 1.14% 57% 2.81% 4.99% 8.47% 7.26% 13.04% 1,927,538 2,525,257 32.30% 45,421 16,603 2.36% 0.88% 63% 3.09% 4.97% 8.78% 7.71% 12.41% 2,161,540 2,988,858 29.20% 48,116 19,450 2.23% 0.91% 60% 2.94% 5.32% 8.81% 8.04% 12.17% 26% 30% -228bps -1% -12% -62bps -40bps 479bps 37bps 53bps 69bps 106bps -77bps 12% 18% -309bps 6% 17% -13bps 3bps -387bps -15bps 35bps 3bps 33bps -24bps 4QFY10 45,251 32,752 11,932 567 29,734 15,518 7,232 3,338 661 935 2,298 22,749 9,995 5,987 4,008 12,754 8,090 6,600 4,665 385 4,280 1QFY11 48,217 34,919 11,776 1478 30,813 17,405 5,859 2,500 1000 369 1,990 23,264 9,158 5,738 3,420 14,106 3,859 3,078 10,247 2995.3 7,251 2QFY11 51,556 36,598 13,072 1884 33,795 17,761 5,845 3,007 360 301 2,177 23,606 9,810 6,031 3,779 13,796 5,274 2,863 8,522 2354.6 6,168 3QFY11 54,675 40,234 12,750 1,514 34,806 19,869 6,482 2,838 592 658 2,394 26,351 12,464 8,369 4,094 13,888 4979.4 1,236 8,908 2,377 6,532 4QFY11 63,069 43,252 14,120 2,952 39,996 23,073 8,231 3,468 1,266 919 2,578 31,304 19,251 14,617 4,635 12,053 4776.4 3,367 7,277 2,340 4,936 YoY growth 39% 32% 18% 421% 35% 49% 14% 4% 92% -2% 12% 38% 93% 144% 16% -6% -41% -49% 56% 508% 15% QoQ growth 15% 8% 11% 95% 15% 16% 27% 22% 114% 40% 8% 19% 54% 75% 13% -13% -4% 172% -18% -2% -24%

May 18, 2011

Page 110

Bank of India - Update


Chart 2: Tier I ratio FY11
BOI PNB Corp Bk Union Bk ING Vysya Bk Axis Bk Yes Bk BOB Canara Bk OBC HDFC Bk IndusInd Bk ICICI Bk 2%

Char 1: Delinquency ratio for 4QFY11 at 1.8%


4% 4% 3% 3% 2% 2% 1% 1% 0%
OBC BOB PNB Allahabad Bk Union Bk IndusInd Bk Canara Bk Corp Bk Axis Bk BOI

4%

6%

8%

10%

12%

14%

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 3 Trend showing range of P/ABV between +/- 1Stdev. BOI currently trading below its 5yr average multiple
1.5

2.0
+1SD 5yr Avg. -1SD

1.0

0.5
Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11

Source : HDFC Securities Institutional Research

Char 4: 12mth forward P/ABV multiple


575 505 435 365 295 225 155 85 15
1.8x 1.5x 1.2x 0.8x

Chart 5: 12mth forward P/E multiple


815 715 615 515 415 315 215 115 15
9x 7x 5x 12x

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

May-11

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research


May 18, 2011 Page 111

May-11

Bank of India - Update


Table 3: Balance sheet
(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments Advances Fixed Assets Other Assets Total Assets 217,613 526,072 1,429,094 25,319 56,920 312,301 670,802 1,684,907 23,518 58,136 373,100 858,724 2,130,962 24,807 124,132 316,916 1,018,482 2,589,119 26,792 134,063 391,968 1,207,007 3,158,725 28,935 144,788 5,259 129,690 134,949 381,937 125,815 1,389,332 1,897,085 156,732 66,252 5,259 137,041 142,300 480,758 158,872 1,657,989 2,297,619 223,999 85,746 5,472 167,435 172,907 587,218 144,167 2,257,473 2,988,858 220,214 129,747 5,472 191,743 197,215 675,301 158,584 2,663,818 3,497,703 247,732 142,722 5,472 219,748 225,221 783,349 182,371 3,303,135 4,268,855 280,354 156,994 FY09 FY10 FY11 FY12E FY13E

2,255,018 2,749,665 3,511,726 4,085,371 4,931,423

2,255,018 2,749,665 3,511,726 4,085,371 4,931,423

Source : HDFC Securities Institutional Research

Table 4: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 163,474 108,485 54,989 30,519 10,916 7,461 85,508 30,940 19,374 54,568 12,924 7,103 41,644 11,571 30,073 FY10 178,780 121,220 57,560 26,166 10,965 5,936 83,726 36,678 22,961 47,048 22,109 17,855 24,939 7,528 17,411 FY11 217,517 139,411 78,106 26,418 11,810 3,219 104,524 50,682 34,754 53,842 18,888 12,043 34,953 10,067 24,887 FY12E 277,596 189,802 87,794 31,335 14,632 2,853 119,129 48,831 30,584 70,298 21,920 14,813 48,378 15,965 32,414 FY13E 329,208 230,477 98,732 37,848 17,818 3,475 136,580 56,078 35,171 80,501 25,547 18,085 54,954 18,135 36,820

Source : HDFC Securities Institutional Research

May 18, 2011

Page 112

Bank of India - Update


Table 5: Ratios
FY09 EPS Earnings growth (%) BVPS (ex reval.) Adj. BVPS Adj. BVPS (ex reval.) ROAA (%) ROAE (%) ROAE (%) (ex reval.) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Investments (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 24,710 6,280 1.7% 0.4% 74.6% 0.50% 48,829 22,075 2.9% 1.3% 54.8% 1.06% 48,119 19,450 2.2% 0.9% 59.6% 0.57% 53,368 15,719 2.0% 0.6% 70.5% 0.57% 67,990 18,534 2.1% 0.6% 72.7% 0.57% 26% 75% 6% 9% 27% 13.0% 8.9% 18% 73% 5% 8% 28% 12.9% 8.5% 26% 71% 5% 8% 24% 12.2% 8.3% 22% 74% 5% 8% 24% 11.2% 7.7% 22% 74% 5% 7% 23% 10.5% 7.5% 1.37% 40% 1.33% 47% 1.44% 50% 1.20% 42% 1.14% 42% 9.78% 7.14% 5.90% 3.88% 2.82% 8.42% 7.46% 5.30% 3.12% 2.38% 8.12% 6.76% 4.87% 3.26% 2.59% 8.64% 6.85% 5.46% 3.18% 2.41% 8.57% 6.95% 5.56% 3.01% 2.27% 57.2 50% 224.1 244.7 212.1 1.49% 25.0% 29.2% 7.0 1.9 FY10 33.1 -42% 243.4 228.6 201.4 0.70% 12.6% 14.2% 12.1 2.0 FY11 45.5 37% 291.2 280.4 255.6 0.79% 15.8% 17.3% 8.8 1.6 FY12E 59.2 30% 336.8 331.7 308.1 0.85% 17.5% 18.9% 6.8 1.3 FY13E 67.3 14% 389.2 377.7 355.3 0.82% 17.4% 18.5% 6.0 1.1

Source : HDFC Securities Institutional Research

May 18, 2011

Page 113

Canara Bank - Update

BUY
CMP Target Stock Return Rs542 Rs.635 17%

Canara Bank
In its 4Q results, Canara Bank reported lower than estimated earnings growth at 79% YoY, mainly due to lower topline growth, higher loan loss provisioning and pension expenses for retired employees. On profitability, the bank reported contraction in margins by 33bps QoQ due to sharper rise in cost of deposits and lower income from investments. While bank grew its volumes strong at 25% YoY, the growth momentum is likely to slow down due to macro headwinds. Higher tier I ratio at 10.9% and lower stressed assets at 5.3%, we believe Canara Bank can sustain the growth momentum. But higher exposure to infrastructure sector could be a drag. We estimate the bank to realize an earnings growth of 17% CAGR over FY11-13E. Maintain BUY but lower price target of Rs635/share. 4QFY11 results summary Canara Bank reported a net profit growth of 79% YoY but declined 19% QoQ lower than estimates, mainly due to lower than estimated topline growth at ~24% YoY (NIMs compressed 33bps due to higher cost of deposits), higher loan loss provisions and second pension related cost. The positive surprise was improving operating efficiency as cost/income ratio (ex treasury) declined ~210bps QoQ to 41%, due to robust fee income and strong cash recoveries from w/o accounts at ~Rs3.3bn (11% of operating income). Employee expenses remained largely stable QoQ even though bank provided Rs3.3bn towards pensions. The total pension liability arrived at by the bank is Rs23.7bn (in addition Rs5.2bn for retired employees). The asset quality deteriorated during the quarter with delinquencies at Rs18.4bn partly due to movement to CBS based NPL recognition (large account contributed ~Rs3.5bn to slippages). Recoveries were quite strong at Rs17bn; coverage ratio (reported) declined 290bps QoQ. Well capitalized to grow but higher exposure to infra could prove a drag With a tier I ratio of 10.9%, Canara Bank is well capitalized to sustain the growth momentum for over the next two years. The exposure to infrastructure sector is one of the highest in the system at ~23% of the advances. As we expect the momentum in infrastructure to slow down due to macro conditions, we believe, even Canara Bank could witness some pressure on its loan growth. Hence, we estimate the bank to realize a loan growth of 17% CAGR over FY11-13E, lower than a growth of 5yr CAGR of 25%. Earnings to grow 17% CAGR; Maintain BUY We expect the bank to report an earnings growth of 17% CAGR due to lower operating expenses and stable credit cost at 0.6%. We expect margins to contract by 15-20bps over FY11-13E. Maintain BUY but lower price target to Rs635/share.
Sep-10 Nov-10 Jan-11 Jul-10

Nifty Sensex

5,439 18,137

Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6m Avg. traded Val. (Rs mn) Banking CNBK.BO CBK IN 443 240 5,317 783

Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Rs 844/345 6M (30.1) (21.4) 12M 27.4 19.6 3M (9.3) (7.3)

Shareholding Pattern Promoter FIs & Local MFs FIIs Public & Others Source : Company Sensex and Stock Movement
200 180 160 140 120 100 80 Sensex Canara Bank

(%) 67.72 11.47 14.93 5.88

May-10

May-11

Mar-11

Table 1: Summary financials


(Rsm) Total net income PPP PAT EPS EPS growth (%) RoAE (%) - ex revaluations RoAA Adj BV (ex reval. & 100% cover) PEx FY09 71,449 40,797 20,724 50.5 32.4 22.7 1.04 207 10.7 FY10 86,814 52,037 30,214 73.7 45.8 26.8 1.25 262 7.4 FY11 105,263 61,070 40,259 90.9 23.3 26.5 1.34 351 6.0 1.5 FY12E 121,255 77,265 43,938 99.2 9.1 22.3 1.19 437 5.5 1.2 FY13E 146,178 96,063 55,192 124.6 25.6 23.1 1.25 537 4.4 1.0

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

P / Adj BV - ex revaluations 2.6 2.1 Source : Bank, HDFC Securities Institutional Research

May 18, 2011

Page 114

Canara Bank - Update

Table 2: 4QFY11 results summary


Particulars (Rsm) Interest earned - on Advances / Bills - Income on investments - on bal with RBI and other banks Interest Expended Net Interest Income Other income -CEB -Treasury Income Operating income Total Operating Expenses -Employee expenses -Other Operating expenses Operating profit Provisions and contingencies - NPL Provisions PBT Provision for Tax PAT Other details Balance Sheet Advances Deposits CA SA CASA ratio CD ratio CAR (%) Cost and profitability ratio Cost of Deposits (%) Yield On Advances (%) Yield on investments (%) NIM Asset Quality Gross non-performing assets Net non-performing assets % of gross NPAs % of net NPAs Coverage (ex tech. w/o) Coverage (incl. tech. w/o) Operating efficiency Cost-Income ratio (Excl Treasury) 40.0% Source: Bank, HDFC Securities Institutional Research 43.7% 43.5% 43.5% 41.4% 140bps -210bps 25,903 17,997 1.5% 1.1% 31% 77.8% 25,491 17,294 1.5% 1.0% 32% 78.0% 26,361 18,597 1.5% 1.1% 29% 77.1% 27,533 19,910 1.4% 1.1% 28% 75.9% 30,892 23,473 1.5% 1.1% 24% 73.0% 19.3% 30.4% -7bps 5bps -650bps -480bps 12.2% 17.9% 1bps 6bps -370bps -290bps 6.1% 9.8% 7.5% 2.80% 5.7% 9.4% 7.5% 3.01% 5.7% 9.6% 7.6% 3.16% 5.7% 9.7% 7.7% 3.21% 5.8% 9.7% 7.7% 3.12% -32bps -8bps 20bps 32bps 14bps 6bps 4bps -9bps 1,693,350 2,346,510 185,500 500,000 29.1% 72.2% 13.4% 1,737,940 2,388,550 157,850 535,650 29.0% 72.8% 12.4% 1,760,710 2,491,870 176,620 543,390 28.9% 70.7% 13.9% 1,898,820 2,634,970 179,380 585,580 29.0% 72.1% 13.0% 2,124,672 2,939,727 245,000 586,170 28.3% 72.3% 15.4% 25.5% 25.3% 32.1% 17.2% -82bps 10bps 195bps 11.9% 11.6% 36.6% 0.1% -76bps 20bps 240bps 4QFY10 47,966 35,454 11,801 543 31,990 15,976 7,101 2,130 1,140 23,077 8,772 4,981 3,792 14,305 7,274 5,780 7,031 2,000 5,031 1QFY11 51,609 37,936 13,194 478 34,331 17,278 7,340 1,638 2,240 24,618 9,785 6,611 3,173 14,833 2,200 1,388 12,634 2,500 10,134 2QFY11 55,774 41,096 14,165 513 35,741 20,033 4,996 1,740 16 25,029 10,872 7,274 3,597 14,158 1,579 1,990 12,579 2,500 10,079 3QFY11 59,079 43,259 15,308 512 37,887 21,192 5,366 1,690 290 26,558 11,428 7,838 3,591 15,130 1,573 1,300 13,557 2,500 11,057 4QFY11 64,172 48,228 15,214 730 44,449 19,723 9,328 2,490 (180) 29,052 12,109 7,825 4,284 16,943 5,460 5,410 11,483 2,500 8,983 YoY growth 33.8% 36.0% 28.9% 34.4% 38.9% 23.5% 31.4% 16.9% Na 25.9% 38.0% 57.1% 13.0% 18.4% -24.9% -6.4% 63.3% 25.0% 78.6% QoQ growth 8.6% 11.5% -0.6% 42.5% 17.3% -6.9% 73.8% 47.3% Na 9.4% 6.0% -0.2% 19.3% 12.0% 247.1% 316.2% -15.3% 0.0% -18.8%

May 18, 2011

Page 115

Canara Bank - Update


Chart 2: Stressed assets (restructured assets and gross NPLs) ratio FY11
10% 8% 6% 4% 2% 0% PNB Axis Bk May-11 Allahabad Bk IndusInd Bk OBC Canara Bk United Bk Union Bk ICICI Bk Corp Bk Yes Bk BOI BOB

Char 1: Comparative tier I ratio FY11

BOI PNB Corp Bk Union Bk ING Vysya Bk Axis Bk Yes Bk BOB Canara Bk OBC HDFC Bk IndusInd Bk ICICI Bk 2%

4%

6%

8%

10%

12%

14%

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

Chart 3: Trend showing range of P/ABV between +/- Stdev.


2.0
+1SD 5yr Avg.

1.5

Canara Bank has been trading above its 5yr average multiple for the past 1yr

1.0

-1SD

0.5

0.0

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Char 4: 12mth forward P/ABV multiple


900 805 710 615 520 425 330 235 140 45
0.8x 1.8x 1.5x 1.2x

Chart 5: 12mth forward P/E multiple


950 850 750 650 550 450 350 250 150 50

May-11

8x 6x 5x 3x

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

May-11

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

May-10

Nov-10

Page 116

Canara Bank - Update


Table 3: Balance sheet
(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments Advances Fixed Assets Other Assets Total Assets 166,598 577,769 1,382,194 29,295 40,603 196,532 696,770 1,693,346 28,594 32,169 307,081 836,999 2,124,672 28,444 63,592 352,128 987,659 2,570,853 30,720 69,951 405,962 1,185,191 3,123,586 33,177 76,946 4,100 117,978 122,078 418,109 143,568 1,307,248 1,868,925 140,009 65,446 4,100 142,618 146,718 498,754 183,859 1,663,901 2,346,514 84,406 69,773 4,430 195,968 200,398 586,170 245,000 2,108,557 2,939,727 142,617 78,046 4,430 232,282 236,712 674,096 289,100 2,551,353 3,514,549 172,637 87,412 4,430 278,000 282,430 775,210 346,920 3,112,651 4,234,781 209,750 97,901 FY09 FY10 FY11 FY12E FY13E

2,196,458 2,647,411 3,360,788 4,011,310 4,824,862

2,196,458 2,647,411 3,360,788 4,011,310 4,824,862

Source : Bank, HDFC Securities Institutional Research

Table 4: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies PBT Provision for Tax PAT FY09 171,191 124,012 47,178 24,271 6,388 6,746 71,449 30,652 18,772 40,797 15,072 25,724 5,000 20,724 FY10 187,520 130,714 56,805 30,008 7,239 8,724 86,814 34,776 21,937 52,037 13,823 38,214 8,000 30,214 FY11 230,640 152,407 78,233 27,030 7,560 2,360 105,263 44,193 29,548 61,070 10,811 50,259 10,000 40,259 FY12E 299,824 210,695 89,129 32,126 9,391 4,287 121,255 43,990 28,071 77,265 18,681 58,584 14,646 43,938 FY13E 365,589 257,165 108,424 37,754 11,389 5,194 146,178 50,115 32,282 96,063 22,473 73,590 18,397 55,192

Source : Bank, HDFC Securities Institutional Research

May 18, 2011

Page 117

Canara Bank - Update


Table 5: Valuation ratios
FY09 EPS Earnings growth (%) PPP / Share BVPS (ex revaluations) Adj. BVPS Adj. BVPS (ex revaluations) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/PPP (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Investments (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Fees income/ Op. rev. (%) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Investment / Deposit ratio -G-sec/Deposit ratio Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 21,680 15,073 1.6 1.1 30.5 0.73 25,913 17,997 1.5 1.1 30.5 0.99 30,892 23,473 1.4 1.1 24.0 0.58 37,255 21,924 1.4 0.9 41.2 0.61 48,607 23,616 1.5 0.8 51.4 0.61 28.9 74.0 30.9 27.2 5.6 8.8 30.1 14.1 8.0 22.5 72.2 29.7 26.8 5.5 8.7 29.1 13.4 8.5 25.5 72.3 28.5 26.5 6.0 9.4 28.3 15.4 10.9 21.0 73.1 28.1 26.7 5.9 9.2 27.4 14.8 10.1 21.5 73.8 28.0 26.9 5.9 9.0 26.5 14.3 9.8 1.5 47.4 9.9 1.4 44.5 9.3 1.5 42.9 7.3 1.2 37.6 8.0 1.1 35.5 8.1 10.4 8.2 6.8 3.7 2.4 9.1 7.7 5.9 3.2 2.4 8.9 7.8 5.5 3.5 2.7 9.6 7.9 6.2 3.4 2.5 9.7 8.0 6.3 3.4 2.5 51 32 100 244 261 207 1.04 18.3 22.7 10.7 5.4 2.62 FY10 74 46 127 306 314 262 1.25 22.5 26.8 7.4 4.3 2.07 FY11 91 23 138 404 399 351 1.34 23.2 26.5 6.0 3.9 1.54 FY12E 99 9 174 487 485 437 1.19 20.1 22.3 5.5 3.1 1.24 FY13E 125 26 217 591 584 537 1.25 21.3 23.1 4.4 2.5 1.01

Source : Bank, HDFC Securities Institutional Research

May 18, 2011

Page 118

ICICI Bank - Update

BUY
CMP Target Stock Return Rs1,040 Rs1,320 27%

ICICI Bank
ICICI Bank, having consolidated its business is now well oiled to get back the growth momentum, albeit higher than systemic growth as it focuses on corporate and secured retail segments. While margins will remain under pressure due to higher cost of deposits (esp. in domestic business), improvement in international business will partly offset the drag. With a tier I ratio of 13.2%, healthy CASA ratio of 45%, lower delinquencies, we believe ICICI Bank can realize an earnings growth of 22% CAGR over FY11-13E. Re-iterate BUY with a price target of Rs1,320/share. 4QFY11 results summary During 4Q, the reported net profit grew 44% YoY and 1% QoQ in line with our estimates. The quality of earnings improved as topline growth came in higher than our estimates (due to expansion in margins as the bank benefited from early breakages of FDs), fee income growth was healthy and bank prudently utilized higher income to make higher provisions for loan losses. The cost/income ratio remained stable at 42% (ex treasury) due to healthy operating income growth at 8% QoQ (ex treasury). Volumes growth was healthy at 5% QoQ and 19% YoY. The growth was largely driven by rural (37% QoQ) - seasonal phenomenon, international (9% QoQ) and retail (7% QoQ). Deposits grew 4% QoQ, largely driven by growth in CASA deposits which grew 6% QoQ (savings a/c 4% and current a/c 10%); 65% of total deposits are retail in nature. Well lubricated ICICI Bank, having consolidated its business positioning is well positioned to grow its balance sheet while improving its profitability and containing asset quality slippages. With a tier I ratio of 13.2% - highest in the system, and improving deposit profile, the bank would be able to grow the book profitably. While the headwinds on margins continue, we expect them to remain stable over FY11-13E, partly due to improvement in international business. The asset quality concerns have also largely abated, but we are building in delinquency ratio at around 1% for FY11-13E, which will lower the credit costs from an average of +1% to 60-70bps. Earnings to grow 22% CAGR over FY11-13E We estimate the bank to realize an earnings growth of 22% CAGR over FY11-13E, with ROAs estimated to improve by 20-30bps over FY11-13E and ROEs touching ~16% (core). Over FY11-13E, we expect margins to remain stable with an upward bias subject to improvement in international margins (currently at 85bps). The cost/income ratio will marginally increase by ~60bps over FY11-13E due to higher operating expenses which will grow as the balance sheet growth picks up. We estimate the target price for the stock at Rs1,320/share, with core banking book valued at 2.7x FY12E adj. book. Key trigger for multiple re-rating would be improvement in NIMs along with healthy growth in loan book. Table 1: Summary financials
(Rsm) Total net income PAT EPS EPS growth (%) RoAE (%) RoAA Adj BV (100% cover) PEx FY09 159,703 37,581 33.8 (9.7) 10.1 1.0 289.8 30.8 FY10 155,920 40,249 36.1 6.9 10.6 1.1 313.5 28.8 2.8 FY11 156,648 51,514 44.7 23.9 12.7 1.3 345.2 23.2 2.4 FY12e 189,569 63,255 54.9 22.8 14.3 1.5 385.5 18.9 2.0 FY13e 226,276 76,213 66.2 20.5 15.7 1.5 426.6 15.7 1.7

Nifty Sensex

5,439 18,137

Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6m Avg. traded Val. (Rs mn) Banking ICBK.BO ICICIBC IN 1,152 1,198 26,538 5,013

Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Rs 1,279/712 3M (1.6) 0.4 6M (13.5) (4.8) 12M 15.5 7.7

Shareholding Pattern Promoters FIs & Local MFs FIIs Public & Others Source : Company Sensex and Stock Movement
160 140 120 100 80 Sensex ICICI Bank

(%) 24.19 38.62 37.19

May-10

Nov-10

Jul-10

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

May-11

Sep-10

Mar-11

Jan-11

P / Adj BV 3.1 Source : HDFC Securities Institutional Research

May 18, 2011

Page 119

ICICI Bank - Update

Table 2: 4QFY11 results summary


Particulars (Rsm) Income statement Interest earned - on Advances / Bills - Income on investments - on bal with RBI and other banks Interest Expended Net Interest Income Other income - Treasury Income - Fee income Operating income Total Operating expenses - Employee expenses - DMA - Others Operating profit Provisions and contingencies PBT Provision for Tax PAT Other details Gross NPAs (Rs bn) Net NPAs (Rs bn) Gross NPAs (%) Net NPAs (%) Coverage Advances (Rsbn) Deposits (Rsbn) - CASA Source : HDFC Securities Institutional Research 96 39 5.1% 2.1% 58% 1,812 2,020 842 100 35 5.1% 1.9% 64% 1,844 2,009 846 102 32 5.0% 1.6% 69% 1,942 2,231 981 102 29 4.8% 1.4% 72% 2,067 2,177 962 101 25 4.5% 1.1% 76% 2,164 2,256 1016 5% -37% -59bps -100bps 1760bps 19% 12% 21% -1% -14% -28bps -30bps 380bps 5% 4% 6% 58,270 38,168 15,709 1,305 37,920 20,349 18,908 1,960 15,210 39,258 15,269 5,827 458 8,984 23,989 9,898 14,091 4,036 10,056 58,125 37,785 16,586 981 38,211 19,915 16,805 1,040 14,130 36,720 14,835 5,756 358 8,721 21,885 7,978 13,907 3,643 10,264 63,091 39,492 19,161 823 41,047 22,044 15,779 (1,440) 15,900 37,823 15,704 6,243 355 9,106 22,119 6,411 15,708 3,345 12,363 66,960 41,620 21,212 954 43,842 23,117 17,488 210 16,250 40,605 17,179 7,605 405 9,170 23,426 4,643 18,783 4,413 14,370 71,565 45,351 22,093 911 46,467 25,097 16,407 (1,960) 17,910 41,504 18,455 8,566 453 9,436 23,049 3,836 19,213 4,692 14,521 23% 19% 41% -30% 23% 23% -13% 18% 6% 21% 47% -1% 5% -4% -61% 36% 16% 44% 7% 9% 4% -4% 6% 9% -6% 10% 2% 7% 13% 12% 3% -2% -17% 2% 6% 1% 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 YoY growth QoQ growth

Chart 1: Advances growth momentum picked up


2,200 2,100 2,000 1,900 1,800 1,700 1,600 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11
Loans (Rsbn) YoY growth (RHS)

Chart 2: led by rural and International segments (QoQ)


40% 30% 20% 10% 0% -10% -20% Rural International Retail Corporate

Rsbn

20% 15% 10% 5% 0% -5% -10% -15% -20%

Source : Bank, HDFC Securities Institutional Research

Source : Bank, HDFC Securities Institutional Research

May 18, 2011

Page 120

ICICI Bank - Update


Chart 3: Loan book outstanding (4QFY11)
Others, 10% Corporate , 26%

Rural , 10%

Auto Loans, 4%

Home loan , 25% International , 26%

Source : Bank, HDFC Securities Institutional Research

Chart 4: CASA ratio improved by 90bps QoQ to 45.1%


50%

Chart 5: CASA deposits grew at 21% YoY


40% 35%

45%

30% 25%

40%

20% 15%

35%

10% 5%

30% 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11

0% 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11

Source : Bank, HDFC Securities Institutional Research

Source : Bank, HDFC Securities Institutional Research

Chart 6: SLR as % of deposits and domestic borrowings continued to decline


30% 28% 26% 24% 22% 20% 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11

Source : Bank, HDFC Securities Institutional Research

May 18, 2011 Page 121

ICICI Bank - Update


Chart 7: Asset quality improved as gross NPA declined QoQ
Rsbn 100 80 60 40 20 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Gross NPL (Rsbn) % of Gross NPL (RHS)

Net NPL (Rsbn) % of Net NPL (RHS)

Source : Bank, HDFC Securities Institutional Research

Chart 8: Trend showing range of P/ABV between +/- 1Stdev.


4.0 3.5 3.0 2.5
+1SD 5yr Avg. -1SD

ICICI Bank currently trades at its 5yr avg. multiple

2.0 1.5 1.0 0.5 0.0

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Chart 9: 12mth forward P/ABV multiple


1,800 1,600 1,400 1,200 1,000 800 600 400 200 Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11
1x 2x 3x 4x

Chart 10: 12mth forward P/E multiple


1,850 1,650 1,450 1,250 1,050 850 650 450 250 50
10x 25x 20x 30x

Nov-06

Nov-07

Nov-08

Nov-09

May-11

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

Page 122

May-11

ICICI Bank - Update


Table 3: Balance sheet
(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds Preference Capital Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets 299,666 1,030,583 633,775 2,183,108 38,016 241,636 3,793,010 388,737 1,208,928 683,991 1,812,056 32,127 192,149 3,633,997 340,901 1,346,860 764,432 2,163,659 47,443 163,475 4,062,337 333,265 1,419,729 840,875 2,587,693 51,551 196,170 4,588,408 318,031 1,617,657 1,009,050 3,169,951 56,133 235,404 5,397,175 11,133 484,197 495,330 3,500 410,361 216,317 1,556,800 2,183,478 928,055 182,647 3,793,010 11,149 505,035 516,184 3,500 532,184 309,975 1,178,008 2,020,166 939,136 155,012 3,633,997 11,518 539,388 550,907 3,500 668,690 347,780 1,239,551 2,256,021 1,092,043 159,863 4,062,334 11,518 580,003 591,521 3,500 802,428 399,947 1,549,439 2,751,814 1,049,736 191,836 4,588,408 11,518 627,237 638,755 3,500 962,914 459,939 1,952,293 3,375,146 1,149,571 230,203 5,397,175 FY09 FY10 FY11 FY12E FY13E

Source: HDFC Securities Institutional Research

Table 4: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies PBT Provision for Tax PAT FY09 310,925 227,259 83,666 76,037 56,343 12,864 159,703 70,452 19,717 89,252 38,083 51,169 13,588 37,581 FY10 257,069 175,926 81,144 74,777 59,369 7,316 155,920 58,599 19,258 97,321 43,869 53,453 13,203 40,249 FY11 259,741 169,572 90,169 66,479 59,148 6,389 156,648 66,173 28,169 90,476 22,868 67,607 16,093 51,514 FY12E 314,722 213,721 101,001 88,568 72,395 6,916 189,569 83,763 33,803 105,806 15,442 90,364 27,109 63,255 FY13E 379,514 259,651 119,864 106,412 87,986 7,593 226,276 97,523 40,563 128,753 19,877 108,876 32,663 76,213

Source : HDFC Securities Institutional Research

May 18, 2011

Page 123

ICICI Bank - Update


Table 5: Valuation ratios
FY09 EPS Earnings growth (%) BVPS Adj. BVPS ROAA (%) ROAE (%) P/E (x) P/ABV (x) (adj for Inv in Subs) Value of subs Profitability Yield on Advances (%) Yield on Int. earning Inv. (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 96,414 45,539 4.2 2.1 52.8 1.7 94,688 38,411 5.0 2.1 59.4 2.2 100,343 24,070 4.4 1.1 76.0 1.2 97,731 17,302 3.6 0.7 82.3 0.7 102,863 16,136 3.1 0.5 84.3 0.7 (3.2) 100.0 13.1 22.7 28.7 15.5 11.8 (17.0) 89.7 14.2 28.5 41.7 19.4 14.0 19.4 95.9 13.6 25.5 45.1 19.5 13.2 19.6 94.0 12.9 22.9 43.7 18.1 13.6 22.5 93.9 11.8 20.2 42.2 17.2 12.8 1.8 48.0 1.6 39.4 1.7 44.0 1.9 45.9 2.0 44.6 10.1 8.1 7.1 3.2 2.4 8.7 6.9 5.8 3.2 2.5 8.3 7.3 5.4 3.1 2.6 8.9 7.3 6.0 3.0 2.6 9.2 7.4 6.2 3.1 2.6 33.8 (9.7) 445 290 1.0 10.1 30.8 3.1 140 FY10 36.1 6.9 463 314 1.1 10.6 28.8 2.8 175 FY11 44.7 23.9 478 345 1.3 12.7 23.2 2.4 211 FY12E 54.9 22.8 514 385 1.5 14.3 18.9 2.0 253 FY13E 66.2 20.5 555 427 1.5 15.7 15.7 1.7 303

Source : HDFC Securities Institutional Research

Table 6: Sum of parts valuations


Rsbn ICICI Prudential Life insurance Company (74% stake) ICICI Lombard General Insurance (74% stake) ICICI Asset management (50% stake) ICICI Securities ICICI Ventures (100% owned) ICICI Home Finance ICICI PD Business ICICI Bank UK ICICI Bank Canada Other Subsidiaries Total Value of Subsdiaries Value of the bank Target value for ICICI Bank Source : HDFC Securities Institutional Research 121 11 14 12 11 19 8 28 42 14 267 1,187 1,454 Rs / share 109 10 13 11 10 17 7 25 38 12 253 1,068 1,320

May 18, 2011 Page 124

Oriental Bank of Commerce - Update

BUY
CMP Target Stock Return Rs324 Rs421 30%

Oriental Bank of Commerce


Oriental Bank of Commerce is well capitalized to sustain the growth momentum. However, banks higher delinquencies, lower CASA ratio and concentration in select sectors such as real estate, infrastructure etc. could be a drag. In its 4QFY11 results, OBC reported lower than estimated earnings growth at ~5% YoY to Rs3.3bn mainly on account of contraction in NIMs and higher loan loss provisioning. Earnings of the bank is likely to grow at 31% CAGR over FY11-13E, mainly driven by lower employee expenses and lower credit costs even as margins are estimated to contract 10bps over FY11-13E. Maintain BUY with a target price of Rs421/share. 4QFY11 results summary OBC posted lower than estimated earnings growth at 5% YoY (down 18% QoQ) to Rs3.3bn. The performance on most operating parameters disappointed; NII growth was lower at 2% YoY (but declined QoQ), fee income was down ~24% YoY (up ~21% QoQ seasonal phenomenon) and higher slippages during the quarter. Cost to income ratio declined by 310bps QoQ on account of lower employee expenses (down 13% QoQ) mainly due to lower provisioning related to second pension liability as the bank was carrying excess provisions; total pension liability for the bank came out at ~Rs10bn (Rs1.5bn for retired employees). The business growth was muted at 15% YoY and 7% QoQ due to subdued growth in advances. The margins during the quarter declined by 10bps to 3% as the cost rose sharper than yields. Slippages were higher during the quarter as the bank moved to system based NPL recognition. Concentration risk OBC is well capitalized with a tier I ratio of 11.2% - highest within PSU banks to sustain the loan growth momentum. However, given banks higher proportion of stressed assets, low CASA ratio and higher concentration in select sectors such as, infrastructure (~19%), Iron & Steel (6%) and real estate (~3%) would be a drag. We estimate the bank to realize a loan book growth of 22% CAGR over FY11-13E, higher than the systems due to base effect. However, given the current environment of higher interest rate and fragile business confidence, the growth could further slowdown even as asset quality might come under pressure. Earnings to grow at strong at 31% CAGR We estimate the bank to realize an earnings growth of 31% CAGR over FY11-13E driven by lower employee cost and lower credit costs. The margins are estimated to contract 10bps over FY11-13E; net interest income to grow at 16% CAGR. The slippages ratio were higher during FY11 as bank moved almost 80% of its business on system based NPL recognition, but we expect the slippages ratio to be lower in FY11-13E by 20bps. As a result the credit cost likely to be lower in FY12 & FY13 by 5-10bps. OBC currently trades at 0.8x FY12E adjusted book 15-20% discount to peer banks. With an estimated ROE of ~19%, we believe the stock can easily trade at 1x-1.1x compared to its 5yr average (0.9x). Maintain BUY with a target price to Rs421/share.
Table 1: Summary financials
(Rsm) Total net income PAT EPS EPS growth (%) RoAE (%) - ex revaluations RoAA Adj BV (ex reval. & 100% cover) FY09 30,678 8,904 35.5 152.1 14.6 0.88 240 9.2 FY10 41,075 11,347 45.3 27.4 16.5 0.91 263 7.2 1.2 FY11 51,376 15,029 51.5 13.7 17.2 1.01 317 6.4 1.0 FY12E 59,433 20,172 69.1 34.2 18.4 1.15 383 4.7 0.8 FY13E 73,389 25,791 88.4 27.9 20.3 1.24 456 3.7 0.7

Nifty Sensex

5,439 18,137

Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6m Avg. traded Val. (Rs mn) Banking ORBC.BO OBC IN 292 95 2,100 332

Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Rs 546/302 3M (4.2) (2.2) 6M (32.2) (23.5) 12M (3.7) (11.4)

Shareholding Pattern Promoters FIs & Local MFs FIIs Public & Others Source : Company Sensex and Stock Movement
160 140 120 100 80 Sensex OBC

(%) 58.00 22.17 13.74 6.09

May-10

Nov-10

Jul-10

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

May-11

Sep-10

Mar-11

Jan-11

PEx

P / Adj BV - ex revaluations 1.4 Source : HDFC Securities Institutional Research

May 18, 2011

Page 125

Oriental Bank of Commerce - Update


4QFY10 26,855 16,961 9,894 2,654 275 2,360 12,548 4,779 2,859 1,919 7,769 4,174 3,480 3,595 425 3,170 1QFY11 28,308 17,736 10,572 2,147 170 1,406 12,720 4,497 2,531 1,966 8,223 2,280 1,436 5,943 2310.2 3,633 2QFY11 29,919 19,148 10,771 2,141 8 1,650 12,912 4,853 2,764 2,089 8,059 2,263 2,196 5,796 1819.9 3,976 3QFY11 30,328 20,029 10,299 2,314 314 1,494 12,613 4,873 2,771 2,103 7,739 1,918 1,781 5,822 1,739 4,083 4QFY11 32,324 22,190 10,134 2,998 262 1,800 13,132 4,702 2,418 507 8,430 5,604 3,931 2,826 -512 3,338 YoY growth 20% 31% 2% 13% -5% -24% 5% -2% -15% -74% 9% 34% 13% -21% -221% 5% QoQ growth 7% 11% -2% 30% -17% 20% 4% -4% -13% -76% 9% 192% 121% -51% -129% -18%

Table 2: 4QFY11 results summary


Income statement (Rsm) Interest earned Interest Expended Net Interest Income Other income - Treasury income - CEB Operating income Operating expenses -Payment/Provisions for Employees -Other Operating Expenses Operating profit Provisions and contingencies - NPL Provisions PBT Provision for Tax PAT Other Details NIM Gross NPA (Rsm) Net NPA (Rsm) % of gross NPAs % of net NPAs Coverage ratio Advances Deposits 3.27% 14,688 7,238 1.74% 0.87% 50.7% 841,839 1,202,576 4.42% 14,951 6,159 1.74% 0.75% 58.8% 860,980 1,230,570 4.42% 14,569 6,066 1.67% 0.70% 58.4% 867,032 1,257,862 3.10% 17,641 8,161 1.94% 0.91% 53.7% 908,010 1,293,350 2.98% 19,205 9,382 1.98% 0.98% 51.2% 968,389 1,390,543 -29bps 31% 30% 24bps 11bps 43bps 15% 16% -12bps 9% 15% 4bps 7bps -259bps 7% 8%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 126

Oriental Bank of Commerce - Update


Chart 1: Trend showing range of P/ABV between +/- 1 Stdev.
1.5
+1SD

OBC currently trade at its 5yr avg. multiple of 0.9x

1.0

5yr Avg. -1SD

0.5

0.0

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Chart 2: 12mth forward P/ABV multiple


805 735 665 595 525 455 385 315 245 175 105 35
Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11
1.8x 1.5x 1.2x 0.8x

Chart 3: 12mth forward P/E multiple


1,235 1,035 835 635 435 235 35
Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11
10x 8x 5x 15x

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

May-11

Page 127

Oriental Bank of Commerce - Update


Table 3: Balance sheet
(Rsm) Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets 122,251 284,890 249,245 685,004 13,839 19,843 1,125,826 145,999 357,853 327,530 834,893 13,940 21,624 1,374,310 190,887 420,748 393,036 959,082 13,978 28,739 1,613,434 213,265 472,934 432,339 1,170,080 14,128 27,302 1,897,709 233,859 544,576 497,190 1,439,199 14,278 25,937 2,257,849 FY09 2,505 71,529 74,034 156,456 77,106 750,127 983,688 27,220 40,883 1,125,826 FY10 2,505 79,874 82,379 198,056 102,173 902,347 1,202,576 48,870 40,484 1,374,310 FY11 2,918 108,054 110,971 247,504 93,976 1,049,063 1,390,543 56,392 55,528 1,613,434 FY12E 2,918 123,153 126,070 284,630 103,373 1,258,875 1,646,878 60,903 63,857 1,897,709 FY13E 2,918 143,176 146,094 327,325 121,980 1,523,239 1,972,544 65,776 73,435 2,257,849

Source : HDFC Securities Institutional Research

Table 4: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 88,565 68,600 19,965 10,713 4,015 4,814 30,678 13,978 7,562 16,700 5,255 2,168 11,445 2,540 8,904 FY10 102,571 73,497 29,074 12,000 5,721 4,236 41,075 16,860 9,713 24,215 8,176 5,636 16,039 4,692 11,347 FY11 120,878 79,103 41,776 9,601 6,349 754 51,376 18,925 10,485 32,451 12,065 9,694 20,386 5,357 15,029 FY12E 150,576 104,904 45,672 13,762 7,984 1,651 59,433 19,929 10,275 39,504 9,396 7,658 30,108 9,936 20,172 FY13E 184,961 128,274 56,687 16,701 9,785 1,859 73,389 23,578 12,124 49,810 11,316 9,422 38,494 12,703 25,791

Source : HDFC Securities Institutional Research

May 18, 2011

Page 128

Oriental Bank of Commerce - Update

Table 5: Ratios
FY09 EPS Earnings growth (%) BVPS (ex revaluations) Adj. BVPS Adj. BVPS (ex revaluations) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Investments (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 10,581 4,424 1.5% 0.6% 58.2% 0.3% 14,688 7,238 1.7% 0.9% 50.7% 0.7% 19,205 9,382 2.0% 1.0% 51.1% 1.0% 20,789 5,546 1.8% 0.5% 73.3% 0.7% 25,719 4,496 1.8% 0.3% 82.5% 0.7% 1.2% 54.0% 1.2% 45.8% 1.2% 37.4% 1.1% 34.5% 1.0% 33.0% 10.6% 8.2% 7.5% 3.1% 2.02% 10.0% 7.7% 6.5% 3.5% 2.39% 10.0% 7.1% 5.9% 4.1% 2.87% 10.7% 7.2% 6.7% 4.0% 2.67% -0.21% 10.9% 7.3% 6.8% 4.1% 2.78% 0.12% 35.5 152.1% 258 278 240 0.9% 13.5% 14.6% 9.2 1.4 FY10 45.3 27.4% 292 300 263 0.9% 14.5% 16.5% 7.2 1.2 FY11 51.5 13.7% 350 348 317 1.0% 15.5% 17.2% 6.4 1.0 FY12E 69.1 34.2% 402 413 383 1.1% 17.0% 18.4% 4.7 0.8 FY13E 88.4 27.9% 471 485 456 1.2% 19.0% 20.3% 3.7 0.7

25.5% 69.6% 6.6% 10.8% 23.7% 13.0% 9.1%

21.9% 69.4% 6.0% 9.9% 25.0% 12.5% 9.3%

14.9% 69.0% 6.9% 11.6% 24.6% 14.2% 11.2%

22.0% 71.0% 6.6% 10.8% 23.6% 13.5% 10.7%

23.0% 73.0% 6.5% 10.2% 22.8% 12.6% 10.1%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 129

Punjab National Bank - Update

HOLD
CMP Target Stock Return Rs1,058 Rs1,176 11%

Punjab National Bank


PNB, in its 4QFY11 results, while reported higher than estimated growth, disappointed on asset quality. PNB continued to chase the growth even at the cost of profitability. While PNB, given its higher CASA ratio (amongst PSU banks) (at 39%), better capital adequacy (tier I ratio at 8.4%) and higher coverage ratio (73% as on Mar11) is relatively better positioned to garner growth, but its asset quality remains a concern. We estimate the bank to realize a loan growth of 21% CAGR, margins to contract 15-20bps and asset quality though improve compared to FY11, but delinquency ratio to remain higher at 2.4%. Earnings are estimated to grow 12% CAGR over FY11-13E.Downgrade to HOLD with a target price of Rs1,176/share. 4QFY11 results summary PNB reported a higher than estimated net profit growth at 6% YoY and 10% QoQ to Rs12bn mainly on account of higher non-interest income, lower loan loss provisioning and marginally lower operating expenses (QoQ). The cost/income (ex treasury) ratio declined by ~300bps QoQ to ~40%. Bank arrived at the second pension liability to the tune of Rs33bn (lower than previous estimates of Rs36bn), including Rs5.5bn on account of retired employees. Business growth was quite strong at 27% YoY driven by ~30% YoY growth in advances and deposit growth of ~25% YoY. During the quarter margins contracted 22bps QoQ to 3.9%. The core spreads declined during to quarter by 20bps QoQ to 5.2% mainly due to sharp rise in cost of deposits which expanded 44bps QoQ as bank reported strong growth in term bulk deposits. Asset quality during the quarter was disappointing as fresh slippages were Rs12.5bn, implying a delinquency ratio of 2.1% (v/s1.8% in Q3). The reported coverage ratio (incl. technical write offs) declined ~400bps QoQ. Well positioned but asset quality concern remains PNBs grew its loan book quite rapidly in 4Q, much higher than the industry growth of ~ 5% as on Mar11. It appears that the bank wants to gain market share at the cost of profitability as NIMs declined and even the delinquency ratio was higher. PNB is well positioned amongst the PSU banks to sustain the growth momentum profitably as its CASA ratio is higher at 39%, tier I capital comfortable at 8.4% (bank recd just Rs1.8bn from GOI) and higher coverage ratio. We remain concerned on the asset quality and build in higher delinquency ratio of 2.0% (lower than FY11 but higher than the 5yr avg.), due to banks aggressive growth strategy. Earnings to grow 12% CAGR We estimate the earnings to grow at 12% CAGR over FY11-13E mainly driven by lower operating expenses (mainly due to lower impact and lower credit cost (even though it is estimated at 95bps). We expect margins to remain under pressure and contract by 15-20bps over FY11-13E. Downgrade to HOLD with a target price to Rs1,176/share With an estimated ROE of ~23% in FY12E, we believe, PNB can trade at 1.7x FY12E adjusted book (1.5x FY13E adj. book). Downgrade to HOLD with a target price to Rs1,176/share.

Nifty Sensex

5,439 18,137

Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6m Avg. traded Val. (Rs mn) Banking PNBK.BO PNB IN 315 334 7,393 391

Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Rs 1,399/900 3M (4.4) (2.4) 6M (19.8) (11.1) 12M 5.8 (2.0) (%) 58.00 17.48 19.33 5.19

Shareholding Pattern Govt. of India FIs & Local MFs FIIs Public & Others Source : Company Sensex and Stock Movement
Sensex 140 120 100 80
May-10 Nov-10 Jul-10

PNB

May-11

Sep-10

Mar-11

Jan-11

Table 1: Summary financials


(Rsm) Total net income PPP PAT EPS EPS growth (%) RoAE (%) - ex revaluations RoAA Adj BV (ex reval. & 100% cover) PEx FY09 99,505 57,443 30,909 98.0 50.9 25.8 1.39 408 10.8 FY10 120,882 73,263 39,054 123.9 26.4 26.6 1.44 484 8.5 2.2 FY11 154,201 90,558 44,336 139.9 13.0 24.4 1.31 569 7.6 1.9 FY12E 178,054 108,922 49,524 156.3 11.7 22.5 1.19 672 6.8 1.6 FY13E 215,065 132,085 55,514 175.2 12.1 21.4 1.12 762 6.0 1.4

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

P / Adj BV - ex revaluations 2.6 Source : HDFC Securities Institutional Research

May 18, 2011

Page 130

Punjab National Bank - Update


4QFY10 56,080 43,300 12,280 308 31,097 24,983 9,346 34,329 6,532 4,469 11,001 23,328 6,219 4,620 17,109 5,756 11,354 1QFY11 59,919 46,947 12,768 160 33,733 26,186 8,715 34,901 9,952 3,967 13,919 20,982 5,341 5,500 15,640 4,958 10,683 2QFY11 64,554 50,352 13,972 205 34,787 29,767 7,183 36,950 11,131 4,818 15,949 21,001 5,160 3,590 15,841 5,095 10,746 3QFY11 71,191 54,894 14,926 255 39,158 32,033 8,572 40,605 12,235 4,871 17,106 23,499 7,139 5,550 16,360 5,463 10,898 4QFY11 74,403 59,041 14,725 222 44,113 30,290 11,454 41,744 11,293 5,376 16,668 25,075 7,279 5,440 17,796 5,787 12,009 YoY growth 32.7% 36.4% 19.9% -27.7% 41.9% 21.2% 22.6% 21.6% 72.9% 20.3% 51.5% 7.5% 17.1% 17.7% 4.0% 0.5% 5.8% QoQ growth 4.5% 7.6% -1.3% -12.9% 12.7% -5.4% 33.6% 2.8% -7.7% 10.4% -2.6% 6.7% 2.0% -2.0% 8.8% 5.9% 10.2%

Table 2 : 4QFY11 results summary


Particulars (Rsm) Interest earned - on Advances / Bills - Income on investments - on bal with RBI and other banks Interest Expended Net Interest Income Other income Operating income Employee expenses Other Operating expenses Total Operatig expenses Operating profit Provisions and contingencies - NPL Provisions PBT Provision for Tax PAT Other details Advances Deposits CA SA CASA ratio Cost of Deposits (%) Cost of funds (%) Yield On Advances (%) Yield on investments (%) NIM Gross non-performing assets Net non-performing assets % of gross NPAs % of net NPAs Coverage ratio Cost-Income ratio (Excl Treasury) CAR (%) 1,866,010 2,493,300 237,170 781,330 41% 4.9% 4.4% 10.2% 6.6% 3.99% 32,144 9,817 1.7% 0.5% 69% 34% 14.2% 1,968,700 2,553,350 255,380 818,470 41% 5.0% 4.5% 10.2% 6.8% 3.94% 36,138 12,833 1.8% 0.7% 64% 41% 13.8% 2,087,644 2,733,945 236,870 872,960 41% 5.0% 4.4% 10.6% 6.7% 4.06% 40,248 14,255 1.9% 0.7% 65% 44% 12.6% 2,212,520 2,888,730 229,450 898,600 39% 5.2% 4.5% 10.6% 6.8% 4.13% 45,411 15,751 2.0% 0.7% 65% 43% 11.9% 2,421,067 3,128,987 268,380 934,870 39% 5.6% 4.9% 10.8% 6.4% 3.91% 43,794 20,386 1.8% 0.9% 53% 40% 12.4% 29.7% 25.5% 13.2% 19.7% -165bps 76bps 47bps 61bps -21bps -8bps 36.2% 107.7% 8bps 32bps -1600bps 620bps -174bps 9.4% 8.3% 17.0% 4.0% 15bps 44bps 37bps 24bps -35bps -22bps -3.6% 29.4% -24bps 13bps -1190bps -260bps 52bps

Source : HDFC Securities Institutional Research

May 18, 2011

Page 131

Punjab National Bank - Update

Chart 1: Trend showing range of P/ABV between +/- 1 Stdev.


2.5 2.0 1.5 1.0 0.5 0.0
Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11

+1SD 5yr Avg. -1SD

Source : HDFC Securities Institutional Research

Chart 2: 12mth forward P/ABV multiple


1,450 1,250 1,050 850 650 450 250 50
0.8x 1.5x 1.2x 1.8x

Chart 3: 12mth forward P/E multiple


1,850 1,650 1,450 1,250 1,050 850 650 450 250 50
2.5x 7x 5x 10x

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

May-11

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

May-11

Page 132

Punjab National Bank - Update

Table 3: Balance sheet


(Rsm) Sources of funds: Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments Advances Fixed Assets Other Assets Total Assets 214,131 633,852 1,547,030 23,971 50,202 2,469,186 234,736 777,245 1,866,012 25,135 63,201 2,966,328 296,912 951,624 2,421,067 31,056 82,594 3,783,253 386,525 1,082,820 2,929,491 34,161 86,724 4,519,721 456,026 1,304,834 3,544,684 37,578 91,060 5,434,182 3,153 143,383 146,536 626,460 188,139 1,283,006 2,097,605 124,597 100,448 2,469,186 3,153 174,076 177,229 781,328 237,172 1,474,798 2,493,298 192,624 103,177 2,966,328 3,168 211,917 215,085 934,870 268,380 1,925,737 3,128,987 315,898 123,283 3,783,253 3,168 250,548 253,716 1,103,147 308,637 2,368,657 3,780,440 347,488 138,077 4,519,721 3,168 291,092 294,260 1,301,713 364,192 2,937,135 4,603,039 382,236 154,646 5,434,182 FY09 FY10 FY11 FY12E FY13E

Source : HDFC Securities Institutional Research

Table 4: Income statement


(Rsm) Interest Earned Interest expended NII Other Income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 193,262 122,953 70,309 29,197 99,505 42,062 29,244 57,443 9,769 8,853 47,674 16,765 30,909 FY10 217,695 129,440 88,255 32,627 120,882 47,619 31,211 73,263 14,215 10,587 59,048 19,994 39,054 FY11 269,865 151,790 118,075 36,126 154,201 63,642 44,611 90,558 24,920 22,630 65,638 21,302 44,336 FY12E 355,312 217,163 138,149 39,905 178,054 69,132 44,165 108,922 34,449 27,449 74,473 24,948 49,524 FY13E 435,144 266,801 168,343 46,722 215,065 82,979 52,115 132,085 48,606 41,306 83,479 27,966 55,514

Source : HDFC Securities Institutional Research

May 18, 2011

Page 133

Punjab National Bank - Update


Table 5: Valuation ratios
FY09 EPS Earnings growth (%) BVPS (ex revaluations) Adj. BVPS Adj. BVPS (ex revaluations) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Investments (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 25,070 2,639 1.6% 0.2% 89% 0.57% 32,145 9,817 1.7% 0.5% 69% 0.57% 43,785 20,400 1.8% 0.8% 53% 0.93% 67,431 26,631 2.3% 0.9% 61% 0.94% 109,292 38,647 3.0% 1.1% 65% 1.17% 29.5% 73.8% 5.9% 9.5% 38.8% 14.0% 9.0% 20.6% 74.8% 6.0% 9.5% 40.8% 14.2% 9.1% 29.7% 77.4% 5.7% 8.9% 38.5% 12.4% 8.4% 21.0% 77.5% 5.6% 8.7% 37.3% 11.4% 7.9% 21.0% 77.0% 5.4% 8.3% 36.2% 13.6% 8.6% 1.9% 45.3% 1.8% 42.2% 1.9% 42.1% 1.7% 39.0% 1.7% 39.0% 10.7% 7.5% 6.1% 4.5% 3.26% 9.8% 6.9% 5.3% 4.5% 3.35% 9.8% 6.5% 5.1% 4.7% 3.60% 10.6% 6.7% 5.9% 4.7% 3.42% 10.7% 6.8% 6.0% 4.7% 3.47% 98.0 50.9 416.7 456.4 408.4 1.39% 22.92% 25.84% 10.8 2.6 FY10 123.9 26.4 514.8 531.0 483.6 1.44% 24.12% 26.59% 8.5 2.2 FY11 139.9 13.0 633.2 614.5 568.8 1.31% 22.60% 24.43% 7.6 1.9 FY12E 156.3 11.7 755.6 716.8 671.6 1.19% 21.13% 22.51% 6.8 1.6 FY13E 175.2 12.1 884.1 806.8 762.1 1.12% 20.26% 21.37% 6.0 1.4

Source : HDFC Securities Institutional Research

May 18, 2011

Page 134

State Bank of India - Update

BUY
CMP Target Stock Return Nifty Sensex Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6m Avg. traded Val. (mn) Banking SBI.BO SBIN IN 635 1,533 33,954 7,938 Rs2,415 Rs2,560 6% 5,439 18,137

State Bank of India


SBIs 4QFY11 results were marred by several one-offs such as pension related costs (Rs8.8bn during 4Q higher by ~Rs3bn QoQ), provisioning of Rs5bn for dual rate home loan product, higher tax provisions (as bank didnt get any relief for pension related provisions of Rs24bn during FY11). The performance on operating parameters also disappointed as NIMs contracted sharply by 54bps QoQ despite higher CASA ratio of ~49%. Asset quality slipped as fresh slippages were higher at Rs56.5bn (~3% of ann. Delinquency ratio), largely contributed by corporate (~33%), followed by SMEs & agri as bank moved on system based NPLs recognition. On account of pension liability, the bank routed liability of upto Mar10 through capital account amounting to Rs79.3bn, lowering the tier I ratio. We believe, with lower tier I ratio of 7.8%, the growth momentum will slow down. Estimate earnings to grow 23% CAGR over FY1113E. We downgrade the stock to HOLD with a target price of Rs2,560/share. Clean up, disappointing Q4 SBI, in its 4QFY11 decided to clean up the pending liability pertaining to a) pension amounting to Rs104bn (Rs79.3bn for upto Mar10 and remaining for Mar11), b) gratuity of Rs15.7bn, c) provisioning for dual rate product (Rs5bn) and d) significantly higher tax rate at ~100% in 4Q and ~45% in FY11 as bank didnt create any DTA (~Rs9bn). Even the operating performance was not quite encouraging as NIMs contracted 54bps QoQ to 3.07% in Q4, partly due to a) interest on IT refund in 3Q, b) regulatory provisions related to provident fund etc and c) higher cost of deposits (30bps QoQ -calculated). Growth momentum to moderate SBI recorded a loan growth of ~20% YoY and ~4% QoQ mainly driven by retail and large & mid-corporate. The growth in deposits was lower than the industry mainly due to lower growth in term deposits at 5% QoQ and 12%YoY; CASA ratio continued to remain strong at 48.7%, up ~50bps QoQ. As SBI routed pension related cost upto Mar10 amounting Rs79.3bn from capital account, the tier I ratio got impacted to 7.8% and has now casted shadow over the growth momentum of the bank. We expect the growth momentum to slow down and bank to realize loan growth of ~17% CAGR over FY11-13E. Asset quality deteriorated; Provisioning to remain higher The asset quality deteriorated as the delinquency ratio came in quite high at 2.98% (fresh slippages of Rs56.5bn). The main contributors of the slippages were corporate (33% of slippages in Q4), followed by SME (~26%) and agri (22%) as the bank moved to system based NPLs recognition. For the full year FY11, the delinquency ratio was higher at 2.6%, highest since FY04. While we estimate the slippage ratio to moderate in FY12, it will still be higher than the 5yr average of 2.14%. During 4Q, bank provided loan loss provision of Rs32bn (including Rs5bn towards dual rate home loan product). As a result, the coverage ratio moved up marginally from 64% to 65%. We expect the credit costs to remain higher at 1.2% in FY12 as bank needs to provide Rs25bn towards a) higher provisions on various categories of NPAs, b) restructured loans (Rs5bn), and c) counter cyclical buffer of Rs10bn. Earnings to grow 23% CAGR; Downgrade to HOLD While we cut our earnings estimate by 16-17% on the back of lower NII, higher credit costs and higher MTM provisions (AFS duration is at 3.7yrs one of the highest). We estimate SBI to realize an earnings growth of 23% CAGR over FY11-13E. We expect margins to contract 14bps over FY11-13E even though bank corrected its lending rate by increasing it from 100bps. Given the multiple issues and macro headwinds, we do not see any immediate scope of re-rating and hence downgrade the stock to HOLD from BUY and lower target price to Rs2560/share. Table 1: Summary financials
Rsm FY09 336 93 145.9 36.9 18.6 1.10 16.5 FY10 386 92 144.4 (1.0) 15.8 0.91 16.7 2.8 FY11E 484 83 130.2 (9.9) 13.6 0.73 18.5 2.9 FY12E 552 106 167.7 28.8 16.7 0.80 14.4 2.4 FY13E 635 125 196.2 17.0 17.3 0.80 12.3 2.1

Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Rs 3,515/2138 3M (13.2) (11.2) 6M (21.6) (12.9) 12M 7.3 (0.4)

Shareholding Pattern Govt. of India FIs & Local MFs FIIs Public & Others Source : Company Sensex and Stock Movement
160 140 120 100 80
May-10 Nov-10 Jul-10

(%) 59.40 16.57 12.80 11.23

Sensex

SBI

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

May-11

Sep-10

Mar-11

Jan-11

Total net income PAT EPS EPS growth (%) RoAE (%) RoAA PEx

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

P / Adj BV - ex revaluations 3.2 Source : HDFC Securities Institutional Research

May 18, 2011

Page 135

State Bank of India - Update


Table 1: 4QFY11 results summary
Particulars (Rsm) Interest earned - on Advances / Bills - Income on investments - on bal with RBI and other banks Interest Expended Net Interest Income Other income -CEB -Treasury Income Total income Total Operating Expenses -Employee expenses -Other Operating expenses Operating profit Provisions and contingencies - NPL Provisions PBT Provision for Tax PAT Other details Balance Sheet items & ratios Advances Deposits CA SA CASA ratio CD ratio CAR (%) Cost and profitability ratio Cost of Deposits (%) Yield On Advances (%) 5.8% 9.7% 2.96% 5.2% 9.6% 3.61% 5.3% 9.6% 3.07% -50bps -10bps 10bps 10bps flat -50bps 4QFY10 179,656 129,673 44,523 2,177 112,442 67,214 45,085 34,858 4,256 112,300 60,361 35,918 24,440 51,939 23,494 22,592 28,445 9,779 18,666 3QFY11 214,120 157,166 51,561 1,040 123,630 90,490 33,139 24,770 2,170 123,629 55,992 35,117 20,876 67,637 20,515 16,323 47,122 18,849 28,273 4QFY11 217,214 162,566 52,179 870 136,633 80,581 48,155 37,310 6,123 128,735 67,938 42,188 25,750 60,797 41,570 32,639 19,227 19,019 209 YoY growth 21% 25% 17% -60% 22% 20% 7% 7% 44% 15% 13% 17% 5% 17% 77% 44% -32% 94% -99% QoQ growth 1% 3% 1% -16% 11% -11% 45% 51% 182% 4% 21% 20% 23% -10% 103% 100% -59% 1% -99%

Employee expenses were higher on account of one-off relating to pension (Rs8.8bn higher by ~3.5bn QoQ) and gratuity Rs5bn provision made for dual rate home loan product Higher tax rate as the bank didnt create DTA (~Rs9bn)

6,319,140 8,041,160 903,010 2,562,620 47% 79% 13.4%

7,266,490 8,789,790 747,448 3,190,462 48% 83% 13.2%

7,567,195 9,339,330 999,140 3,233,940 49% 81% 12.0%

19.8% 16.1% 10.6% 26.2% 200bps 240bps -140bps

4.1% 6.3% 33.7% 1.4% 50bps -160bps -120bps

NIMs contracted by 54bps QoQ

NIM Asset Quality Gross non-performing assets Net non-performing assets % of gross NPAs % of net NPAs Coverage (ex tech. w/o) Coverage (incl. tech. w/o)

195,349 108,702 3.1% 1.7% 44% 59%

234,378 116,951 3.2% 1.6% 50% 64%

253,263 123,469 3.3% 1.6% 51% 65%

29.6% 13.6% 20bps -10bps 690bps 570bps

8.1% 5.6% 10bps flat 110bps 90bps

Operating efficiency Cost-Income ratio (Excl 55.9% Treasury) Source : HDFC Securities Institutional Research

46.1%

55.4%

-50bps

930bps

May 18, 2011

Page 136

State Bank of India - Update


Table 2: Balance sheet (SBI Standalone)
(Rsbn) Sources of funds: Share Capital Reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets 1,044.0 2,759.5 2,262.2 5,425.0 38.4 377.3 9,644 961.8 2,857.9 2,267.1 6,319.1 44.1 351.1 10,534 1,228.7 2,956.0 2,493.8 7,567.2 47.6 437.8 12,237 1,528.6 3,553.5 2,942.6 8,815.8 49.4 459.7 14,407 1,833.2 4,124.8 3,501.7 10,314.5 54.3 482.7 16,809 6.3 573.1 579.5 1,982.2 1,107.5 4,331.0 7,420.7 841 804 9,644 6.3 653.1 659.5 2,574.6 1,225.8 4,240.8 8,041.2 1,030 803 10,534 6.4 643.5 649.9 3,233.9 999.1 5,106.2 9,339.3 1,196 1,052 12,237 6.4 723.2 729.6 3,880.7 1,099.1 6,433.9 11,413.7 1,159 1,105 14,407 6.4 815.7 822.0 4,579.3 1,263.9 7,849.3 13,692.5 1,135 1,160 16,809 FY09 FY10 FY11 FY12E FY13E

Source : HDFC Securities Institutional Research

Table 3: Income statement (SBI Standalone)


(Rsbn) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies -Prov. for NPAs (incl. std prov.) PBT Provision for Tax PAT FY09 637.9 429.2 208.73 126.9 76.2 25.7 335.64 156.5 97.5 179.2 35.9 27.1 143.2 50.6 92.6 FY10 709.9 473.2 236.71 149.7 96.4 21.2 386.40 203.2 127.5 183.2 43.9 52.3 139.3 47.6 91.7 FY11 813.9 488.7 325.26 158.2 115.6 9.2 483.51 230.2 144.8 253.4 103.8 97.7 149.5 66.9 82.6 FY12E 1,029.5 657.0 372.52 179.3 131.1 8.2 551.77 278.1 176.7 273.7 113.6 102.0 160.1 53.6 106.5 FY13E 1,221.9 797.9 424.03 210.7 153.0 9.7 634.78 336.2 215.5 298.6 111.3 104.9 187.3 62.7 124.6

Source : HDFC Securities Institutional Research

May 18, 2011

Page 137

State Bank of India - Update


Table 4: Valuation ratios (SBI Standalone)
FY09 EPS Earnings growth (%) BVPS Adj. BVPS Adj. BVPS (ex revaluations) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Sum of parts Profitability Yield on Advances (%) Yield on Investments (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 157.1 92.5 2.9% 1.7% 41.1% 0.5% 195.4 108.7 3.0% 1.7% 44.4% 0.8% 253.3 118.8 3.3% 1.6% 53.1% 1.3% 319.6 101.8 3.5% 1.2% 68.1% 1.2% 410.1 106.8 3.9% 1.0% 73.9% 1.0% 1.86% 50.48% 2.01% 55.63% 2.02% 48.53% 2.09% 51.16% 2.15% 53.78% 9.67% 6.84% 5.97% 3.70% 2.61% 8.62% 6.71% 5.46% 3.16% 2.44% 8.64% 7.18% 5.16% 3.48% 2.97% 9.30% 7.25% 5.89% 3.41% 2.90% 9.45% 7.35% 6.02% 3.43% 2.81% 145.9 37% 912.7 710.0 710.0 1.10% 18.60% 18.60% 16.5 3.2 148.5 FY10 144.4 -1% 1,038.8 800.0 800.0 0.91% 15.80% 15.80% 16.7 2.8 159.1 FY11 130.2 -10% 1,023.4 761.0 761.0 0.73% 13.56% 13.56% 18.5 2.9 216.4 FY12E 167.7 29% 1,148.9 905.3 905.3 0.80% 16.65% 16.65% 14.4 2.4 238.0 FY13E 196.2 17% 1,294.6 1,035.2 1,035.2 0.80% 17.29% 17.29% 12.3 2.1 261.8

30.2% 73.11% 6.01% 10.40% 42% 14.3% 9.4%

16.5% 78.58% 6.26% 10.18% 47% 13.4% 9.5%

19.8% 81.03% 5.31% 8.40% 45% 12.0% 7.8%

16.5% 77.24% 5.06% 8.11% 44% 11.4% 7.5%

17.0% 75.33% 4.89% 7.83% 43% 11.0% 7.2%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 138

Union Bank of India - Update

HOLD
CMP Target Stock Return Rs318 Rs313 -2%

Union Bank of India


Union Bank of India consolidated and improved its performance in asset quality as delinquency ratio declined consecutively to 1.1 % in 4QFY11 as compared to 2.3% in 3QFY11. In its 4QFY11 results, the bank reported anline net profit growth at ~1% YoY, mainly driven by better topline growth (NIMs remained stable QoQ at 3.4%) and lower loan-loss provisions. We expect the bank to realize an earnings growth of 24% CAGR driven by lower employee-benefit related costs and lower credit costs; margins expected to compress 10-15bps over FY12-13E. Maintain HOLD with a price target of Rs313/share.
Banking UNBK.BO UNBK IN 524 167 3,697 241

Nifty Sensex

5,439 18,137

Key Stock Data Sector Reuters Code BLOOMBERG Code No. of Shares (mn) Market Cap (Rs bn) Market Cap ($ mn) 6m Avg. traded Val. (Rs mn)

4QFY11 summary Union Bank surprised positively on asset quality by reporting lower delinquency ratio sequentially to 1.1% from 2.3% in 3QFY11. The net profit growth though came in line, we were positively surprised by the quality of earnings as the net interest income growth was healthy at ~6% QoQ as NIMs were flat QoQ at 3.4% against the trend, mainly due to improvement in business mix (CD ratio expanded by 375bps) and effective cost management as costs of deposits went up marginally by 4bps QoQ. The cost/income ratio was higher during the quarter at ~66% as bank provided towards second pension. Bank arrived at the second pension liability at Rs20.6bn (including Rs3.7bn on account of retired employees). While asset quality improved, due to lower loan loss provision, the coverage ratio declined by 260bps to 67.6% (including technical write offs). Earnings to grow 24%CAGR Union Bank, after the capital infusion amounting Rs6.8bn by the GOI, is well positioned to sustain the growth momentum but due to macro headwinds, we expect the bank to grow its loan book by 20-21% over FY11-13E. We expect margins to contract 10-15bps over FY11-13E, as core spreads will contract by an estimated 4-6bps over FY11-13E, partly also due to contraction in CASA ratio (40100bps). We estimate the earnings to grow 24% CAGR over FY11-13E, mainly driven by lower employee related costs and lower loan-loss provisioning as we expect credit costs to decline from 90bps to 80bps. We remain cautious on asset quality and build in higher slippages ratio at 2.4%. Due to lower employee expenses, the cost/income ratio will decline from ~51% in FY11 to 43% by FY13E. Maintain HOLD due to rich valuations Driven by an estimated earnings growth of 24% CAGR over FY11-13E, we estimate Union to make ROAs of ~1.0%, while ROEs will be around 21-22%. The stock currently trades at 1.8x FY12 adjusted book, as compared to its 5-yr average

Stock Performance (%) 52 - Week high / low Absolute (%) Relative (%) Rs 427/275 3M (8.8) (6.8) 6M (15.5) (6.8) 12M 8.4 0.7 (%) 57.07 12.30 15.05 15.58

Shareholding Pattern Promoters FIs & Local MFs FIIs Public & Others Source : Company Sensex and Stock Movement
Sensex 140 120 100 80
May-10 Nov-10 Jul-10

Union Bank

May-11

Sep-10

Mar-11

Jan-11

multiple of 1.4x. We do not expect any significant re-rating to happen in the stock and maintain our HOLD rating but lower our target price to Rs313/share. Table 1 : Summary financials
(Rsm) FY09 52,961 17,266 34.2 24.5 27.2 1.21 133 9.3 2.4 FY10 61,674 20,749 41.1 20.2 26.2 1.17 155 7.8 2.1 FY11 82,550 20,820 32.8 (20.2) 20.8 0.97 147 9.7 2.2 FY12E 91,754 25,007 39.4 20.1 20.7 0.97 180 8.1 1.8 FY13E 111,452 32,097 50.5 28.4 22.7 1.04 212 6.3 1.5 Total net income PAT EPS EPS growth (%) RoAE (%) - ex revaluations RoAA Adj BV (ex reval. & 100% cover) PEx P / Adj BV - ex revaluations

Rahul Jain rahul.jain@hdfcsec.com 91-22-6171 7344

Vishal Modi vishal.modi@hdfcsec.com 91-22-6171 7324

Source : HDFC Securities Institutional Research

May 18, 2011

Page 139

Union Bank of India - Update


4QFY10 35,617 25,501 9,659 21,656 13,961 4,925 820 3,525 580 18,887 7,411 4,236 3,175 11,475 3,400 2,830 8,075 2,140 5,935 1QFY11 36,857 27,335 9,102 23,376 13,480 4,350 1,130 2,840 380 17,830 7,393 4,350 3,044 10,437 1,973 810 8,464 2,450 6,014 2QFY11 39,522 27,758 9,851 24,164 15,358 5,096 1,130 3,526 440 20,455 9,149 5,919 3,229 11,306 5,989 6,290 5,317 2,284 3,034 3QFY11 41,995 30,644 10,738 25,836 16,158 4,938 1,080 3,548 310 21,096 8,483 5,202 3,281 12,613 4,000 3,610 8,614 2,816 5,798 4QFY11 46,153 34,576 10,335 28,987 17,165 6,006 1,120 3,906 980 23,171 14,475 10,526 3,949 8,695 1,533 1,170 7,163 1,187 5,976 YoY growth 30% 36% 7% 34% 23% 22% 37% 11% 69% 23% 95% 148% 24% -24% -55% -59% -11% -45% 1% QoQ growth 10% 13% -4% 12% 6% 22% 4% 10% 216% 10% 71% 102% 20% -31% -62% -68% -17% -58% 3%

Table 2: 4QFY11 results summary


Particulars (Rsm) Income statement Interest earned - on Advances / Bills - Income on investments Interest Expended Net Interest Income Other income - Profit on Sale of Investments - Other income - Recovery in w/o accounts Operating income Operating expenses -Employee expenses -Other Operating expenses Operating profit Provisions and contingencies - NPL provisions PBT Provision for Tax PAT Other details Balance Sheet Advances Deposits CA SA CASA ratio CD ratio CAR (%) Cost and profitability ratio Cost of Deposits (%) Yield On Advances (%) NIM Asset Quality Gross non-performing assets Net non-performing assets % of gross NPAs % of net NPAs Coverage (ex tech. w/o) Operating efficiency Cost-Income ratio (Excl Treasury) 41.02% 44.27% 47.34% 42.38% 65.65% 2460bps 2330bps Source : HDFC Securities Institutional Research 26,709 9,653 2.20% 0.81% 64% 27,356 11,496 2.19% 0.94% 58% 35,243 14,620 2.79% 1.18% 59% 35,809 15,974 2.68% 1.16% 55% 36,228 18,034 2.37% 1.19% 50% 36% 87% 20bps 40bps -1360bps 1% 13% -30bps flat -520bps 5.9% 9.9% 3.4% 5.3% 9.4% 3.0% 5.4% 9.6% 3.4% 5.5% 10.0% 3.4% 5.5% 9.9% 3.4% -40bps -10bps 10bps flat -20bps flat 1,212,490 1,700,400 162,290 377,280 31.7% 71% 12.51% 1,247,430 1,714,840 161,160 397,290 32.6% 73% 12.59% 1,264,230 1,777,796 160,730 420,380 32.7% 71% 12.53% 1,337,870 1,862,240 156,900 464,160 33.3% 72% 11.88% 1,530,220 2,024,613 196,180 446,890 31.8% 76% 12.95% 26% 19% 21% 18% flat 430bps 40bps 14% 9% 25% -4% -150bps 370bps 110bps

May 18, 2011

Page 140

Union Bank of India - Update


Chart 1: Trend showing range of P/ABV between +/- Standard Deviation (SD)
2.5 2.0
+1SD

Union Bank currently trades at 1.8x its 1yr fwd BV , we do not expect significant re-rating to happen in the stock

1.5 1.0 0.5 0.0


Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11

5yr Avg. -1SD

Source : HDFC Securities Institutional Research

Chart 2: 12mth forward P/ABV multiple


370 320 270 220 170 120 70 20
Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11
1.8x 1.5x 1.2x

Chart 3: 12mth forward P/E multiple


465 415 365 315 265 215 165 115 65 15
2.5x 5x 7x 10x

0.8x

Nov-06

Nov-07

Nov-08

Nov-09

May-06

May-07

May-08

May-09

May-10

Nov-10

Source : HDFC Securities Institutional Research

Source : HDFC Securities Institutional Research

May 18, 2011

Page 141

May-11

Union Bank of India - Update


Table 2: Balance sheet
(Rsm) Sources of funds: Share Capital Reserves -Revaluation reserves Shareholder's funds Savings Current Term Deposit Total Deposits Borrowings Other Liabilities & Provisions Total Liabilities & Equity 5,051 82,352 16,860 87,404 285,448 131,664 969,917 1,387,028 79,349 55,974 5,051 99,187 16,160 104,238 377,278 162,292 1,160,828 1,700,397 92,153 54,830 6,353 121,292 15,998 127,645 446,890 196,180 1,381,543 2,024,613 133,160 74,427 6,353 139,003 15,838 145,356 527,330 231,492 1,657,851 2,416,674 153,134 87,824 6,353 162,379 15,680 168,732 616,976 273,161 2,006,000 2,896,138 176,104 103,632 FY09 FY10 FY11 FY12E FY13E

1,609,755 1,951,618 2,359,845 2,802,987 3,344,605

Application of funds: Cash & Bank balance Investments -G-Secs Advances Fixed Assets Other Assets Total Assets 159,849 429,970 348,574 965,342 23,352 31,242 157,767 544,035 426,529 1,193,153 23,054 33,609 200,984 583,991 480,000 1,509,861 22,928 42,080 211,950 709,031 600,000 1,811,833 21,782 48,392 220,677 864,326 750,000 2,183,259 20,692 55,651

1,609,755 1,951,618 2,359,845 2,802,987 3,344,605 Source : HDFC Securities Institutional Research

Table 3: Income statement


(Rsm) Interest Earned Interest expended NII Other Income - Fee income (CEB) -Treasury income Total Income Earned Total op exp - Employee expense Pre Provisioning Profit Provisions & Contingencies PBT Provision for Tax PAT FY09 118,894 80,758 38,136 14,826 3,133 3,215 52,961 22,141 11,519 30,820 7,255 23,566 6,300 17,266 FY10 133,029 91,103 41,926 19,747 3,518 5,728 61,674 25,078 13,545 36,595 8,266 28,329 7,580 20,749 FY11 164,526 102,364 62,162 20,388 4,055 4,640 82,550 39,500 25,997 43,050 13,496 29,554 8,734 20,820 FY12E 210,596 139,996 70,599 21,154 4,983 2,160 91,754 40,443 24,697 51,310 15,587 35,724 10,717 25,007 FY13E 256,256 170,291 85,965 25,487 5,993 2,700 111,452 46,837 28,402 64,615 18,762 45,853 13,756 32,097

Source : HDFC Securities Institutional Research

May 18, 2011

Page 142

Union Bank of India - Update


Table 4: Valuation ratios
FY09 EPS Earnings growth (%) BVPS (ex reval) Adj. BVPS Adj. BVPS (ex reval. & 100% cover) ROAA (%) ROAE (%) ROAE (%) (ex revaluations) P/E (x) P/ABV (x) Profitability Yield on Advances (%) Yield on Investments (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (CAR) - Tier I CAR Asset quality Gross NPLs (Rsm) Net NPLs (Rsm) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) 19,233 3,259 2.0% 0.3% 83.1% 0.65% 26,713 9,650 2.2% 0.8% 63.9% 0.60% 36,228 18,030 2.4% 1.2% 50.2% 0.88% 46,700 15,215 2.5% 0.8% 67.4% 0.82% 65,774 18,309 2.9% 0.8% 72.2% 0.82% 1.38% 44.5% 1.29% 44.8% 1.67% 50.7% 1.44% 45.1% 1.40% 43.1% 10.4% 7.4% 6.2% 4.2% 2.79% 9.0% 7.2% 5.6% 3.4% 2.43% 8.9% 7.1% 5.2% 3.7% 2.97% 9.6% 7.2% 5.9% 3.7% 2.81% 9.7% 7.3% 6.0% 3.7% 2.86% 34.2 24.5 139.7 166.6 133.2 1.2% 21.5% 27.2% 9.3 2.4 FY10 41.1 20.2 174.4 187.3 155.3 1.2% 21.7% 26.2% 7.8 2.1 FY11 32.8 (20.2) 175.7 172.5 147.4 1.0% 18.0% 20.8% 9.7 2.2 FY12E 39.4 20.1 203.9 204.8 179.9 1.0% 18.3% 20.7% 8.1 1.8 FY13E 50.5 28.4 240.9 236.8 212.1 1.0% 20.4% 22.7% 6.3 1.5

30% 70% 5% 9% 30% 13.3% 8.2%

24% 70% 5% 9% 32% 12.5% 7.9%

27% 75% 5% 8% 32% 13.0% 8.7%

20% 75% 5% 8% 31% 12.3% 8.4%

21% 75% 5% 8% 31% 11.8% 8.0%

Source : HDFC Securities Institutional Research

May 18, 2011

Page 143

India Banks - Slowing but not Stumbling

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May 18, 2011