2014 09 04 - 1409808826

IndiaEquityResearch
Financials
September04,2014
Banks
Returningintothe'normal'zone
SectorReport
Potential uptrend in GDP and cut in rates may be a pleasantmix for

banksinFY16.RecedingpressureonNPLsfromFY16fonwards,revival
in core revenues led by NIM, is likely to drive RoA expansion of PSU
banksbyupto25bpoverFY15fFY17f.Despitethesharprally,P/Bof
PSUbanksis15%belowthe5yearmean.Thetrendincontractionof
discount to new banks, which besgan about an year ago, is likely to
sustain.WereinitiatecoverageonBOB,BOI,PNB,SBIN,AXSB,HDFCB,
ICICIBCandIIB.Thepotentialupsideofupto21%inPSUbanksexceeds
thereturninnewprivatebanksover12months.Wepreferbankswith
superior capitalization and asset quality among the PSU banks. BOB,
ICICIBCandHDFCBareourpreferredpicks.
BankofBaroda(BOBIN)
Rating
CMP(INR)
BUY
886.0
TargetPrice(INR)
52wkH/L(INR)
1,076
1,010/450
BankofIndia(BOIIN)
Rating
ADD
292.0
312
357/132
CMP(INR)
TargetPrice(INR)
52wkH/L(INR)
PunjabNationalBank(PNBIN)
Rating
CMP(INR)
TargetPrice(INR)
BUY
961.1
1,182
52wkH/L(INR)
StateBankofInida(SBININ)
1,068/400
Rating
CMP(INR)
BUY
2,505
TargetPrice(INR)
52wkH/L(INR)
2925
2,835/1,455
AxisBank(AXSBIN)
Rating
ADD
CMP(INR)
TargetPrice(INR)
52wkH/L(INR)
HDFCBank(HDFCBIN)
Rating
413.7
455
415/153
CMP(INR)
TargetPrice(INR)
52wkH/L(INR)
ICICIBank(ICICIBCIN)
856.7
1,004
865/557
BUY
LargeupgradetoGDP,byupto3%duringFY09FY10wasaccompaniedbyc2.4x
expansionintheP/BofPSUbanks.Currentconsensusforecastfactorsrevivalin
GDP by 1.6% to 6.3% in FY16; there was 20bp upgrade to the FY16 GDP
forecastinthelast3months.PSUbankscouldbealargerbeneficiaryofGDP
revival due to larger exposure to the corporate sector compared to the new
private banks. While high food inflation is likely to keep the interest rates
elevated in CY14, potential cut in FY16 coupled with the uptrend in GDP is
expectedtobeapleasantmixforbanks.
StressonassetqualityintensebutincrementalNPLmoderating
The 4quarter moving average for incremental NPL ratio declined during the
last four quarters by 0.56bp. This is in sharp contrast to those in the new
private banks, which had an increase of 10bp during Jun13Jun14. While the
NPLstressislikelytostayinFY15f,weassumeanimprovementinincremental
NPL during FY15fFY17f, by upto 0.72%. However, recovery in NPL ratios and
NPLprovisionsmaybedelayedduetosubduedloangrowthandfallinthePCR.
RiseinNIMmayrevivecorerevenuesofPSUbanksoverFY15fFY17f
Rating
CMP(INR)
ADD
1,581
TargetPrice(INR)
52wkH/L(INR)
1,780
1,619/777
IndusIndBank(IIBIN)
Rating
CMP(INR)
ADD
616.3
TargetPrice(INR)
52wkH/L(INR)
665
623/342
Valuations
PotentialriseinGDPandcutinratesapleasantmixforbanksinFY16
P/E
FY15f
FY16f
P/B(Adj.)
FY15f
FY16f
BOB
BOI
7.45
6.69
6.31
5.17
1.09
0.84
0.96
0.78
PNB
SBIN
8.69
13.31
6.55
10.99
1.10
1.45
1.00
1.30
AXSB
HDFCB
ICICIBC
IIB
13.72
19.11
15.90
18.61
11.49
15.38
13.71
14.99
2.24
3.34
2.33
3.12
1.95
2.85
2.13
2.68
Pleaserefertothedisclaimertowardstheendofthedocument.
CurrentearningsexpectationforPSUbanksforFY15FY16isabovethatforthe
newbankswithFY16fPATgrowthforecastbeingupgradedbyc6%inthelast
12 months. With the gradual moderation in the addition to NPLs, the sharp
dropinyieldonloansislikelytogetarrested,benefittingthemargins.Reducing
bulkdepositsinthelasttwoyearsislikelytomoderatetheircostoffunds.We
forecastanexpansionintheRoAofupto25bpoverFY15fFY17fforthePSU
banksunderourcoverage,aheadofthepotentialrisefornewbanks.
LargerpotentialupsideinPSUbanksoverthe12monthsperiod
The rally in CY14 follows the highest annual underperformance in a decade.
Discount of PSU banks to new banks contracted by 8% during Oct13Sep14,
afterpeakingoutat78%inOct13.Despitethefall,thediscountstaysbelowthe
5year mean. Improving fundamentals is likely to sustain the outperformance
of PSU banks. The potential supside of upto 21% in PSU banks exceeds the
upside in private banks over 12months. BOB, ICICIBC and HDFCB are our
preferred picks. Lack of roadmap on capitalization of PSU banks, delayed
recoveryinassetqualityarekeyriskfactors.
ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com
Banks
TableofContents
PotentialriseinGDPandcutinratesapleasantmixforbanks ........................................................ 3
UpgradestotheFY09,FY10GDPforecastbyuptoc3% ....................................................................3
wascoupledwiththec2.4xexpansionintheP/BofCNXPSBK .........................................................3
Currentforecastbuilds1.6%riseinGDPoverFY15FY16 .....................................................................4
Lessscopeforriseinthereporateasgapwith1yrGsecyieldfalls ...................................................4
WhileCPItargetforJan15issettobeachieved................................................................................5
foodinflationmaykeeptheinterestrateshighinCY14 ...................................................................5
RatescutmaybebackendedinFY15...................................................................................................6
StressonassetqualityintensebutincrementalNPLtrendingdown................................................ 7
IncrementalNPLofPSUbanksareondownwardtrajectory.............................................................7
andstressedassetsvirtuallystableforthelastsevenquarters ........................................................7
WeassumemoderationintheincrementalNPLinFY16fFY17f .......................................................8
butsubduedloangrowthlikelytodelaytherecoveryinNPLratios .................................................8
NIMexpansionmayrevivecorerevenuesoverFY15fFY17f .......................................................... 10
OurFY15fPATforecastforPSUbanksismarginallybelowconsensus ...............................................10
PSUbanksPATgrowthforecasttoexceednewbanksforFY15FY16 ...............................................10
Fallinrates,moderationinslippagetosupportNIMexpansion ........................................................11
EdgeinSBdepositshasslippedfornewprivatebanks.......................................................................12
Retailpartlyoffsetthelargeslowdowninthecorporateloans ..........................................................13
PSUbanksseerevivalinretailloangrowthaheadoffewnewbanks.................................................14
NII/assets,fallinprovisionstodriveRoAexpansionofPSUbanks .....................................................14
FallinthevaluationgapbetweenPSBsandnewbankscouldsustain............................................ 16
RallyinCY14ontheheelsoflargestunderperformancein10years..................................................16
Evenaftertherally,P/BofCNXPSBKc15%belowthe5yearmean ...................................................17
Reforms,reboundinassetqualitycouldfurthershrinkvaluationgap ...............................................17
LargerpotentialupsideinPSUbanksoverthe12months ............................................................. 19
DCFassumereturntonormalRoAoversemiexplicitperiodforPSBs ...............................................19
Potentialupsideofupto21%forPSUbanksover12months ............................................................19
Riskfactors ..........................................................................................................................................20
Annexure:StockselectionwithinPSUbanksbasedonthefilters ......................................................21
Companies
BankofBaroda.24
HDFCBank31
ICICIBank39
PunjabNationalBank47
StateBankofIndia..53
AxisBank......60
IndusIndBank.67
BankofIndia75
Financials
Banks
PotentialriseinGDPandcutinratesapleasantmixforbanks
Large upgrade to GDP, by upto 3% during FY09FY10 was accompanied by c2.4x expansion in the P/B of PSU banks.
CurrentconsensusforecastfactorsrevivalinGDPby1.6%to6.3%inFY16,with20bpupgradetotheFY16GDPforecast
inthelast3months.PSUbankscouldbealargerbeneficiaryofGDPrevivalduetolargerexposuretothecorporate
sectorcomparedtothenewprivatebanks.Thereislessscopeforfurtherriseinthereporateasgapwith1yrGsec
yield has contracted. In recent monetary policy, RBI indicated the peaking of interest rates. CPI and WPI have
moderated and stay close to the comfort zone of RBI. While high food inflation is likely to keep the interest rates
elevatedinCY14,potentialcutinFY16coupledwiththeuptrendinGDPislikelytosustaintherecentexpansioninP/B.
UpgradestotheFY09,FY10GDPforecastbyuptoc3%
The reported GDP (revised estimate) for FY09FY10 was significantly higher than the consensus
forecast.WeassumealagofthirteenmonthsfortheGDPtobereportedasfinalrevisedestimatefrom
thefiscalend.ThemonthlytimeseriesforecastfortherealGDPgrowthforFY09wasupgradedfrom
4% in Mar09 to 7% in Jul09. The reported revised GDP was closer, at 6.7%. Similarly, FY10 GDP was
upgradedfrom6.3%inOct09to8.2%inMar10.
wascoupledwiththec2.4xexpansionintheP/BofCNXPSBK
ThedurationoflargeGDPupgradeswascoupledwithlargeexpansionintheP/BofPSUbanks.TheP/B
ofCNXPSBKincreasedfrom0.69xattheendofMar09andpeakedat1.65xinOct10.
Uptoc3.5%fallintheFY11FY13GDPforecastcoupledwiththefallinP/B
ForFY11,fromthepeakof9.0%inJan11,GDPforecastdeclinedto7.75%inMar11.ThereportedGDP
was1.4%higherat8.91%.TherewaslargedowngradetotheGDPforecastforFY12from8.7%inJun11
to5.2%inMar13.However,thereportedGDPwashigherat6.69%.FY13GDPat4.7%wasabout2.2%
lower than the forecast in Jul12. The P/B of CNXPSBK declined from 1.33x in Jan11 to 0.56x at end
Feb14.
Exhibit1: GDPgrowthforecastand1yearforwardP/BofCNXPSBK
10
2.0
1.5
1.0
0.5
P/B(CNXPSBK,RHS)
FY10
FY13
2
Oct07
Oct08
FY08
FY11
Oct09
Sep10
FY09
FY12
Sep11
Sep12
Aug13
0.0
Aug14
Source:Bloomberg,IL&FSInstitutionalEquities
RBIindicatespositivebiastowardsFY15centralestimateof5.5%
ThecurrentforecastforrealGDPgrowthforFY14,FY15andFY16isbetween4.7%and6.3%,withina
narrowrangeof1.6%.FY16GDPhasbeenupgradedby20bpsinceMay14.RBI,initsAnnualMonetary
policyApril2014hadstatedthatcontingentuponthedesiredinflationoutcome,realGDPgrowthis
projected to pick up from a little below 5% in 201314 to a range of 5 to 6% in 201415 albeit with
downside risks to the central estimate of 5.5% However, in its latest Bimonthly monetary policy
there was a positive bias towards the GDP guidance prospects for reinvigoration of growth have
Financials
Banks
improvedmodestly.Thefirmingupofexportgrowthshouldsupportmanufacturingandservicesector
activity.Iftherecentpickupinindustrialactivityissustainedinanenvironmentconducivetotherevival
ofinvestmentandunlockingofstalledprojects,withongoingfiscalconsolidationreleasingresourcesfor
private enterprise, external demand picking up and international crude prices stabilising, the central
estimate of real GDP growth of 5.5% within a likely range of 5 to 6% that was set out in the April
projectionfor201415canbesustained.
Currentforecastbuilds1.6%riseinGDPoverFY15FY16
FY16GDPhasbeenupgradedby20bpsinceMay14
Exhibit2: GDPgrowthforecastand1yearforwardP/BofCNXPSBK
10
2.0
P/B(CNXPSBK,RHS)
FY14
FY15
FY16
1.5
1.0
0.5
2
Jul12
Nov12
Feb13
May13
Aug13
Nov13
Feb14
May14
0.0
Aug14
PSUbankscouldbelargerbeneficiaryoftherevivalinGDP
We believe the impending uptrend in GDP is likely to sustain the gradual expansion in valuation of
banks. PSU banks could be a larger beneficiary of GDP revival due to their larger exposure to the
corporatesectorcomparedtothenewprivatebanks.TheP/BofCNXPSBK,despitesharpriseinCY14,
at0.85xon02Sep14staysbelowthe5yearmean.
Lessscopeforriseinthereporateasgapwith1yrGsecyieldfalls
OneyearGsecyieldcloselytrackstherepoinnormaltimeswithformerbeingtheleadindicatorfor
thereporate.ThedeclineinthegapbetweenoneyearGsecyieldandreporatewithfallinthespread
closeto5yearmeanof39bpleaveslessscopeforanysignificantriseinthereporate.
Exhibit3: 1yrGsecandReporate
Exhibit4: Spreadbetween1yrGsecandRepo
4.2
11.0
1yrGsec(%)
Reporate(%)
9.5
2.8
8.0
1.4
6.5
0.0
5.0
1.4
3.5
Mar06 Dec07
2.8
Mar06 Dec07
Aug09 Apr11 Dec12
Source:IIL&FSInstitutionalEquities
Aug14
Spread(1yrGsecandRepo)
5yrsmean
Aug09
Apr11
Dec12
Aug14
Source:IL&FSInstitutionalEquities
Financials
Banks
Exhibit5: CPI(%)
Exhibit6: FoodsegmentinCPI(%)
25%
CPI(yoy,RHS)
CPI(mom,annualised)
13%
34%
Food(mom,annualised)
17%
15%
11%
18%
14%
5%
9%
2%
11%
5%
7%
14%
15%
Jan12
Jun12
Nov12
Apr13
Sep13
Feb14
5%
Jul14
Food(33.8,yoy,RHS)
8%
30%
Jan12
Jun12
Nov12
Apr13
Sep13
Feb14
5%
Jul14
WhileCPItargetforJan15issettobeachieved
AccordingtotheUrijitPatelCommitteetoreviseandstrengthenthemonetarypolicyframework in
view of the elevated level of current CPI inflation and hardened inflation expectations, supply
constraintsandweakoutputperformance,thetransitionpathtothetargetzoneshouldbegraduated
tobringingdowninflationfromthecurrentlevelof10%to8%overaperiodnotexceedingthenext12
months and 6% over a period not exceeding the next 24 month period before formally adopting the
recommendedtargetof4percentinflationwithabandof+/2%..CPI(combined)hasdeclinedfrom
9.87%inDec13to7.42%inJul14.
foodinflationmaykeeptheinterestrateshighinCY14
While we may see rise in retail inflation driven largely by food, in the nearterm due to inadequate
rainfall, CPI may moderate towards the end of FY15. In the latest Annual Monetary Policy, RBI has
stated the risks to achieving the inflation of 8% by Jan15 such as lessthannormal monsoon due to
possibleelninoeffects,uncertaintyonthesettingofMSPforagricommoditiesandthesettingofother
administered prices, especially of fuel, fertilizer and electricity; the outlook for fiscal policy; geo
politicaldevelopmentsandtheirimpactoninternationalcommodityprices.However,therewillalso
beadownwardpullonCPIinflationexertedbybaseeffectsofhighinflationduringJunNov13.
Exhibit7: YoychangeinWPIanditssegments
WPI
Fuel(inc.crude,15.8)
15.5%
Exhibit8: Mom(annualized)changeinWPIsegments
Food(24.3)
Manufactured(exc.food,55)
Food(24.3)
Manufactured(exc.food,55)
Fuel(inc.crude,15.8)
60%
11.5%
30%
7.5%
0%
3.5%
30%
0.5%
Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 Apr14 Jul14
60%
Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 Apr14 Jul14
Financials
Banks
RatescutmaybebackendedinFY15
Nearterm rise in food Inflation may lead to the upward pressure on inflation. Hence, despite the
moderation in WPI and CPI, the interest rate cut may be backended in FY15 after the impact from
factorssuchasmonsoonsandbaseeffectplaysout.
FallinWPIfortwoconsecutivemonthsinJun14Jul14
WPI surged to 6.01% in May14 after the decline in Apr14 to 5.2% and staying below 5.7% in the
precedingfourconsecutivemonths.However,therehasbeenadeclineinthetwoconsecutivemonths
of Jun14Jul14. The Food segment24.3% weight in the Wholesale Price Index (WPI) has remained
closerto7%forfivemonths.Themomchange(annualised),revealsthesteepriseinfoodpricesin
May14andJul14andmaykeeptheWPIhighinthenearterm.
Exhibit9: Reporate,1yearGsecyield,CPI(%)andWPIinflation(%)
12
12
10
10
6
Reporate
1yrGsecyield
CPI(yoy,RHS)
WPI(yoy,RHS)
4
4
Jan12 Mar12May12 Jul12 Sep12 Nov12 Jan13 Mar13May13 Jul13 Sep13 Nov13 Jan14 Mar14May14 Jul14
Source:Company,AvendusResearch
Financials
Banks
StressonassetqualityintensebutincrementalNPLtrendingdown
The intense stress on the asset quality of PSU banks is visible in nearly the decade high stressed assets and low
provisioncoverage.However,thepaceofnetadditiontostressedassetismoderating.Thefourquartermovingaverage
forincrementalNPLratiodeclinedduringthelastfourquartersby0.56bp.Thisisinsharpcontrasttothoseinthenew
privatebanks,whichhadanincreaseof10bpduringJun13Jun14.WhilethestressislikelytostayinFY15f,weassume
animprovementinincrementalNPLduringFY15fFY17f,byupto0.72%.However,therecoveryinNPLratiosandNPL
provisionsmaybedelayedduetosubduedloangrowthandburdenduetosharpfallinthePCR;thePCRofthefifteen
largestPSUbanksdeclinedfrom61.7%attheendofSep08to42.4%attheendofJun14.
IncrementalNPLofPSUbanksareondownwardtrajectory
The incremental NPL (change in outstanding gross NPL over four quarters as percentage of starting
loans)of15PSUbanksdeclinedforthethirdconsecutivequarterinMar14,thisbeingthefirstdecline
forthreeconsecutivequartersinnineteenquarters.Mar14beingcyclicallybetterquarter,therewas
riseinJun14quarterbutstayedwellbelowthepeak.TheincrementalNPLmayhavepeakedat0.72%
inJun13quarterbeforedecliningthereafter.ThedeclinewaslargelydrivenbySBI,BOB,CanaraBank,
AndhraBank,CentralBankandIDBIBank.Largewriteoffandsaleto ARCspartlycontributedto the
declineinnetadditionsinthelastfewquarters.
Newprivatebankshadthereverse,risingtrendfor5consecutivequarters
ThetrendinincrementalNPLfornewprivatebankshasbeenmovinginthedirectionoppositetothat
ofthePSUbanks.Therehasbeenaconsistentriseintheratiointhelastfivequartersfrom0.12%in
theDec12quarterto0.34%intheMar14quarterbeforemoderatingintheJun14quarter.Theincrease
hasbeendrivenbyICICIBank,KotakMahindraBankandYesBank.HDFCBankandIndusIndBankhad
thereversetrendwithinnewbankswithdeclineintheirincrementalNPLratiooverpastfivequarters.
Exhibit10: IncrementalNPL(4qtrsmovingaverage)
0.8%
Newprivatebanks
PSUbanks
0.6%
0.4%
0.2%
0.0%
Dec09
Jun10
Dec10
Jun11
Dec11
Jun12
Dec12
Jun13
Dec13
Jun14
Source:Company,IL&FSInstitutionalEquities
andstressedassetsvirtuallystableforthelastsevenquarters
The stressed asset (Gross NPL and restructured loans) of the group of fifteen largest PSU Banks has
remainedclosetoc11%inthelasteightquarters.Restructuredloanofagroupofthefifteenlargest
PSUbankshasremainedwithinarangeof6.5%to7.5%inthelasttenquarters.Afterneardoublingin
FY13to6.5%ofloans,therestructuredloansaspercentageofloanshaslargelystabilized.Thegross
NPLratiohasalsoremainedwithinaverynarrowrangeof4.3%4.5%inthelastfourquarters.After
sharpriseby80bpand67bpinFY12andFY13,respectively,thepaceofrisehassloweddowninFY14.
Thetotalstressedassetshavedeclinedinthepastthreequartersfrom11.7%attheendofJun13to
Financials
Banks
Exhibit11: Stressedassets(%)
Exhibit12: PCR(%,excludingwriteoff)
12.0
450%
90
8.0
300%
70
4.0
150%
50
RatioofPSU/New(RHS)
PSU
New
Newprivatebanks
0.0
0%
Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec13 Jun14
PSUBanks
30
Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec13 Jun14
11.2% at the end of Jun14. While the has been partly driven by sale of asset by banks to ARCs, the
stressedasstsasremainedvirtuallystableandwithinaverynarrowrangeof10.6%11.5%inthelast
eightquarters.
WeassumemoderationintheincrementalNPLinFY16fFY17f
We assume the incremental NPL in FY15f to stay close to the average during FY13FY14 for the PSU
banksunderourcoverage.ThesignificantimprovementintheassetqualityislikelyinFY16fFY17f.For
thePSUbanksunderourcoverage(SBIN,BOB,BOI,PNB),weassumedeclineinincrementalNPLover
FY15fFY16fbyupto0.72bp.However,despitetheimprovementinassetquality,wedonotexpect
theincrementalNPLratiotofalltothepreFY12level.Forthenewbanks,weassumetheincremental
NPLtoremainlargelystablewithupto5bpriseassumedforICICIBCandIIBduetolargeincremental
restructuringintherecentquartersanddelayedrecoveryintheCVcycle.
Exhibit14: IncrementalNPL(%)
Exhibit13: IncrementalNPL(%)
FY10FY12
2.0%
FY13FY14
FY15f
FY16FFY17f
FY10FY12
1.8%
FY13FY14
FY15f
FY16FFY17f
1.5%
1.6%
1.2%
1.2%
0.9%
0.8%
0.6%
0.4%
0.3%
0.0%
0.0%
SBI(s)
PNB
BOB
BOI
ICICIBC
AXSB
HDFCB
IIB
butsubduedloangrowthlikelytodelaytherecoveryinNPLratios
WhiletheremaybefallinthepaceofnetadditiontogrossNPLs,thereboundintheNPLratiosand
NPL provisions may be delayed. Moderation in loan growth may partly keep the gross NPL ratio at
higher level. For the PSU banks under our coverage, we estimate the rise in gross NPL ratios. Loan
growthoverFY15FY17isassumedtogrowthintherangeof15%18%,constrainedduetolargecapital
requirementsevenifthereisarecoveryintheinvestmentcycle.
Financials
Banks
Exhibit15: GrossNPLratio
FY10FY12
7.5%
FY13FY14
Exhibit16: GrossNPLratio
FY15f
FY16FFY17f
FY10FY12
7.5%
6.0%
6.0%
4.5%
4.5%
3.0%
3.0%
1.5%
1.5%
0.0%
FY13FY14
FY15f
FY16FFY17f
0.0%
SBI(s)
PNB
BOB
BOI
ICICIBC
AXSB
HDFCB
IIB
LowPCRiskeeptheprovisioningburdenhigh
ThePCR(excludingwriteoff)ofthefifteenlargestPSUbanks(referexhibit19)declinedfrom61.7%at
theendofSep08to42.4attheendofJun14.SBI,BOBandIDBIbankarebestplacedamongPSUbanks
withtheirPCRbeingcloseto50%.
Exhibit18: PCR(%)
Exhibit17: PCR(%)
FY10FY12
FY13FY14
FY15f
FY16FFY17f
FY10FY12
80
80
60
60
40
40
20
20
FY13FY14
FY15f
FY16FFY17f
AXSB
HDFCB
IIB
0
SBI(s)
PNB
BOB
BOI
ICICIBC
Except SBI, we do not forecast the NPL provisions/ loans to decline to preFY13 level. Even with an
improvementtheprovisioningburdenislikelytostayhighduetopossibleincreaseintheprovisionson
restructuredloansandverylowcoverageratio.
Exhibit20: NPLprovisions/loans(%)
Exhibit19: NPLprovisions/loans(%)
FY10FY12
1.5
FY13FY14
FY15f
FY16FFY17f
FY10FY12
1.5
1.2
1.2
0.9
0.9
0.6
0.6
0.3
0.3
0.0
SBI(s)
PNB
BOB
BOI
FY13FY14
FY15f
FY16FFY17f
0.0
ICICIBC
AXSB
HDFCB
IIB
Financials
Banks
NIMexpansionmayrevivecorerevenuesoverFY15fFY17f
Current earnings expectation for PSU banks for FY15FY16 is above that for the new banks with FY16f PAT growth
forecastbeingupgradedbyc6%inthelast12months.WiththegradualmoderationintheadditiontoNPLs,thesharp
dropinyieldonloansislikelytogetarrested,benefittingthemargins.ThesignificantleadinSBdepositsproportionof
thenewprivatebanksoverPSUbankshasdeclinedoverthelasttwoyears.TheyoySBdepositsgrowthofPSUbanks
declinedfrom20%28%inFY11to13%18%inFY14PSUbanksundercoverage.Theslowdownhasbeenlargerforthe
newprivatebanksfrom21%60%to17%41.WeforecastanexpansionintheRoAofupto25bpoverFY15fFY17ffor
thefourlargePSUbanksunderourcoverage.EasingofpressureoncorerevenuesanddeclineinNPLprovisionsasnet
additiontogrossNPLrecedes,islikelytodrivetheRoAexpansion.
OurFY15fPATforecastforPSUbanksismarginallybelowconsensus
Exhibit21: ConsensusandourforecastforthePSUbanksinourcoverage
(INRmn)
Ourforecast
Consensus
Variationwithconsensus
FY15f
FY16f
FY17f
FY15f
FY16f
FY17f
FY15f
FY16f
FY17f
184,586
239,780
306,884
179,017
220,181
267,885
3%
9%
15%
PNB
41,708
55,299
70,475
48,187
59,623
74,838
13%
7%
6%
BOB
52,863
62,397
75,354
53,799
64,907
76,731
2%
4%
2%
SBI
BOI
Total
32,439
41,996
48,804
32,870
41,335
53,601
1%
2%
9%
311,596
399,471
501,517
313,872
386,045
473,055
1%
3%
6%
Exhibit22: Consensusandourforecastforthenewbanksinourcoverage
(INRmn)
Ourforecast
Consensus
Variationwithconsensus
FY15f
FY16f
FY17f
FY15f
FY16f
FY17f
FY15f
FY16f
FY17f
70,821
84,574
100,323
71,874
85,548
103,537
1%
1%
3%
HDFCB
108,103
134,265
162,107
104,166
128,848
160,184
4%
4%
1%
ICICIBC
114,874
133,235
153,153
112,047
132,073
157,042
3%
1%
2%
AXSB
IIB
Total
17,409
21,611
26,880
17,692
22,196
27,901
2%
3%
4%
311,207
373,685
442,463
305,779
368,666
448,665
2%
1%
1%
PSUbanksPATgrowthforecasttoexceednewbanksforFY15FY16
Exhibit23: YoyPATgrowth(CNXPSBK)
FY14
Exhibit24: YoyPATgrowth(Newprivatebanks)
FY15f
FY16f
FY14
30
30
20
20
10
10
10
10
20
May13 Aug13 Oct13 Dec13 Feb14
Apr14
Jun14
Aug14
FY15f
20
May13 Aug13 Oct13 Dec13 Feb14
FY16f
Apr14
Jun14
Aug14
Financials
10
Banks
PATgrowthforecastbytheconsensusforFY15FY16forPSUbanksisabovethatforthenewprivate
banks.FY15fPATgrowthforecasthasbeenupgradedfortheCNXPSBK,withanincreasefrom19.4%in
Sep13 to 25.1% in Sep14. The consistent upgrade has been on the low base and downgrade in FY14
PATgrowth.FY16fPATgrowthforecasthasalsoseenanupwardtrajectory.Newbankshaveastable
PATgrowthforecastforFY15FFY16f,inthenarrowrangeof18%20%.Whilethereexistarisktothe
earningsofPSUbanksposedbyhigherNPLprovisions,itisforecasttostaywellabovethatinFY14.
Fallinrates,moderationinslippagetosupportNIMexpansion
WiththegradualpickupinloansandmoderationintheadditiontoNPLs,thesharpdropinyieldon
loansforthePSUbanksislikelytogetarrested.WeforecastgradualrecoveryinNIMofthePSUbanks.
SBINislikelytoseelargestexpansioninNIMduetotheirstrongliabilityfranchise.
New banks had large NIM expansion over the last two years and we estimate it to have peaked for
mostofthem.HighCASA,strongtilttowardshighyieldingretailloanspartlycontributedtotherising
NIMofthenewbanks.
Exhibit26: NIM(calculatedfortheyear,%)
Exhibit25: NIM(calculatedfortheyear,%)
SBI(s)
PNB
BOB
BOI
3.8
ICICIBC
AXSB
HDFCB
IIB
4.8
4.3
3.3
3.8
2.8
3.3
2.8
2.3
2.3
1.8
Mar10
Mar12
Mar14
1.8
Mar10
Mar16f
Mar12
Mar14
Exhibit27: Yieldonloans(%)
Exhibit28: Costofdeposits
SBI(S)
PNB
BOB
BOI
SBI(S)
11
10
7
Mar10
Mar12
Mar14
Mar16f
4
Mar10
PNB
Mar12
Mar16f
BOB
Mar14
BOI
Mar16f
NIMdeclineofPSUbanksinlasteightquartersweredrivenbyhostoffactors
TherewaslargedeclineinNIMofthePSUbanksduringFY13FY14withthecontractioninfourlargest
PSU banks byupto 60bp over last two years, largest being for SBI and BOB. High cost of funds, low
yieldsduetotheinabilitytopassonratehikefollowinglackofloandemandandinterestreversalon
accountofhighslippageledtothesharpcontractionintheNIMofPSUbanks.
Financials
11
Banks
Exhibit29: Loan/depositsratioofallbanks
Incr.loans/deposits
Exhibit30: Loangrpwthanddepositsgrowth
Loangrowth
Loans/deposits(RHS)
1080%
79.0%
860%
77.5%
31%
640%
76.0%
26%
420%
74.5%
21%
200%
73.0%
16%
20%
71.5%
11%
240%
Jun08
Jul09
Jul10
Jul11
Aug12
Aug13
70.0%
Aug14
Depositgrowth
36%
6%
Jun08
Jul09
Jul10
Jul11
Aug12
Aug13
Aug14
Normalizationofloan/depositratiomayhavelimitedimpactonPSUbanks
Theloan/depositratioofbankssawsignificantrisefrom70%attheendofCY09toc78%attheendof
Mar14.However,ithasdeclinedsinceMar14to76.1%.TheimpactonNIMduetofallinloandeposit
ratio may be limited for PSU banks. However, several new private banks replaced deposit with
borrowingsinFY14tomanagetheircostoffunds.Thetrendmayreverseandputneartermpressure
ontheirNIM.
EdgeinSBdepositsgrowthhasslippedfornewprivatebanks
The significant lead in SB deposits proportion of the new private banks over PSU banks has declined
over the last two years. Also, there has been rise in the SB deposits proportion of PSU banks in the
recent years, partly driven by low accretion of term deposits following sharp slowdown in corporate
loans.
Exhibit31: SBdepositsproportionattheendofMar14
40%
32%
24%
16%
8%
0%
SBI(s)
PNB
BOB
BOI
ICICIBC
AXSB
HDFCB
IIB
Declineininflation,interestratesmayarrestthedeclineinSBdepositsgrowth
TheyoySBdepositsgrowthdeclinedfrom15%30%inFY10toc15%inFY14formostPSUbanks.The
slowdownhasbeenlargerforthenewprivatebankswiththeirSBdepositsgrowthalignedtothatof
thePSUbanksfrom30%45%inFY10toc15%,exceptforIIB.Wedonotexpectsignificantrevivalin
Financials
12
Banks
growthandproportioninFY15f.Fallininflation,declineininterestratesmaybebackendedinFY15
andthisislikelytoleadtothereboundinSBdepositsinFY16.
Exhibit33: SBdepositsgrowth
Exhibit32: SBdepositsgrowth
SBI(s)
PNB
BOB
BOI
ICICIBC
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
Mar10
Mar12
Mar14
Mar16f
0%
Mar10
AXSB
Mar12
HDFCB
Mar14
IIB
Mar16f
Retailpartlyoffsetthelargeslowdowninthecorporateloans
Largecorporateloanshadsteadydeclineintheircontributiontoloangrowth
Exhibit34: Contributiontononfoodcreditgrowth Exhibit35: Contributiontononfoodcreditgrowth
FY12
FY13
FY12
FY14
FY13
FY14
20%
60%
15%
45%
10%
30%
5%
15%
0%
5%
0%
Micro&small
Medium
Power
Large
Telecom
Roads
OtherInfra
CREandhousingloanscontributiontoloangrowthroseoverFY12FY14
Exhibit36: Contributiontononfoodcredit
FY12
FY13
FY14
Exhibit37: Contributiontononfoodcredit
10.0%
15%
7.5%
11%
5.0%
7%
2.5%
3%
0.0%
FY12
FY13
Consumer
Housing
FY14
1%
CRE
Trade
Vehicle
Financials
13
Banks
Thesharpslowdown inthecorporatesegmentledtothefallinthecontributionoflargeindustryto
incremental nonfood loan growth, from 50.8% in FY12 to 42.1% in FY14. The small and midsize
industryresumedtheirgrowthaftertheperiodofconsolidationduringFY12FY13.Industrywas45.3%
of nonfood loans at the end of Mar14, large industry being 36.7% of total nonfood loans. The
decelerationincorporatesegmentwaspartlyoffsetbyfewsegmentswithinretail.Housingloanshada
steady rise in their contribution to nonfood loan growth from 8.2% in FY12 to 12.1% in FY14.
Commercialrealestate(CRE)hashadincreaseintheirmomentuminthelastthreeyears.
PSUbanksseerevivalinretailloangrowthaheadoffewnewbanks
TheretailloangrowthofPSUbankshadareboundinFY14,largelydrivenbyhousingloans.PNB,BOB
andBOIreportedretailloangrowthinFY14higherthanthatforHDFCBank,IndusIndBankandsimilar
to ICICI Bank. The sharp slowdown in retail loans of new private banks was largely driven by the
slowdowninthevehicleloansegmentandislikelytoreviveforward.However,PSUbankshavebeen
morecompetitiveintheretailsegmentandcouldsustaintheuptrend.
Exhibit39: Retailloangrowth
Exhibit38: Retailloangrowth
SBI(s)
PNB
BOB
ICICIBC
BOI
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
Mar11
Mar12
Mar13
0%
Mar11
Mar14
AXSB
Mar12
HDFCB
Mar13
IIB
Mar14
NII/assets,fallinprovisionstodriveRoAexpansionofPSUbanks
We forecast an expansion in the RoA of up to 24bp over FY15fFY17f for the four large PSU banks
under our coverage universe. While the pressure on core revenues may ease for most PSU banks,
declineinNPLprovisionsasthenetadditiontogrossNPLrecedes,islikelytodrivetheRoAexpansion.
WhileourforecastassumesafallinincrementalNPLsandNPLprovisionsafterFY14,theprovisionsare
estimatedhigherthanthepreFY13leveltorecoverthePCRratio.
Exhibit40: DupontofPSUbanksundercoverage
SBIN
PNB
Change
FY14 FY12FY14
BOB
Change
FY15fFY17f FY14 FY12FY14
BOI
Change
Change
FY15fFY17f FY14 FY12FY14 FY15fFY17f
Netinterestincome 2.93
0.08
0.24
3.14
0.36
0.14
1.98
0.78
0.13
2.11
0.44
0.19
Feebasedincome
0.28
0.01
0.61
0.11
0.05
0.41
0.07
0.00
0.42
0.13
0.01
0.10
0.86
Otherincome
0.24
0.00
0.02
0.28
0.07
0.07
0.33
0.07
0.00
0.42
0.11
Operatingrevenue
4.04
0.21
0.22
4.03
0.54
0.12
2.72
0.92
0.14
2.95
0.46
0.10
Operatingexpenses
2.13
0.11
0.04
1.81
0.07
0.12
1.18
0.27
0.06
1.31
0.35
0.06
Operatingprofit
1.91
0.31
0.18
2.21
0.47
0.00
1.54
0.65
0.08
1.64
0.11
0.05
Loanlossprovisions 0.85
0.11
0.13
0.88
0.28
0.13
0.49
0.15
0.03
0.77
0.43
0.03
Provisionforinvest.
0.02
0.00
0.15
0.11
0.12
0.03
0.03
0.01
0.01
0.03
0.00
0.07
0.03
Otherprovisions
0.07
0.05
0.01
0.27
0.17
0.11
0.11
0.03
0.02
0.16
0.06
Tax
0.31
0.27
0.10
0.26
0.37
0.11
0.16
0.28
0.09
0.16
0.17
0.08
Netprofit
0.65
0.08
0.20
0.65
0.66
0.25
0.75
0.58
0.04
0.53
0.28
0.07
Financials
14
Banks
WeforecastpeakingoftheRoAformostnewprivatebanks
Contrary to the trend in PSU banks, we believe the RoA of new private banks could have peaked in
FY14 and is likely to see marginal moderation. The peaking of NII/assets, largely stable NPL
provision/assetsislikelytoresultinthemarginalcontractionintheirRoA.Declineinthehighyielding
retailloanproportion,fallintheyieldonloansintheneartermwithfallininterestratesislikelytoput
pressureontheyields.NPLprovisionhasalowbaseandevenwiththedeclineinincrementalNPL,we
donotseesignificantdeclineinNPLprovisions/assetsoverFY15fFY17f.
Exhibit41: DuPontofnewprivatebanks
AXSB
ICICIBC
Change
FY14 FY12FY14
Netinterestincome 3.30
0.20
Feebasedincome
1.65
0.20
Otherincome
0.39
0.06

0.02
HDFCB
Change
2.91
0.58
0.07
1.44
0.23
0.05
0.41
0.35

0.01
IIB
Change
Change
FY15fFY17f FY14 FY12FY14 FY15fFY17f
4.14
0.07
0.14
3.61
0.21
0.08
0.14
1.60
0.21
0.08
2.23
1.21
0.15
0.07
0.18
0.25
0.05
0.13
0.62
0.01
Operatingrevenue
5.35
0.06
0.04
4.75
0.70
0.08
5.92
0.03
0.16
5.96
0.80
0.24
Operatingexpenses
2.18
0.07
0.01
1.82
0.12
0.04
2.70
0.16
0.03
2.73
0.24
0.20
Operatingprofit
3.17
0.14
0.05
2.93
0.58
0.04
3.22
0.13
0.19
3.24
0.57
0.05
Loanlossprovisions 0.36
0.09
0.01
0.35
0.17
0.00
0.37
0.06
0.07
0.39
0.01
0.01
Provisionforinvest. 0.03
0.07
0.04
0.01
0.04
0.01
0.07
0.07
0.07
0.11
0.09
0.11
0.01
Otherprovisions
0.25
0.15
0.00
0.10
0.08
0.02
0.06
0.40
0.01
0.08
0.00
Tax
0.87
0.04
0.01
0.73
0.32
0.02
0.96
0.21
0.02
0.90
0.15
0.00
Netprofit
1.72
0.12
0.01
1.73
0.40
0.05
1.90
0.33
0.19
1.76
0.33
0.06
Financials
15
Banks
FallinthevaluationgapbetweenPSBsandnewbanksmaysustain
Despite the large outperformance, valuations of banks stay well below the 5year high. Strong outperformance in
CY2014 has lifted the depressed valuation of banks close to their 5year mean. The rally in CY14 follows the
underperformance of 37% and 18% of CNXPSBK and Bankex, respectively, during 2013, highest during the year in a
decade.Also,thedurationofunderperformancewaslongestin2013,ateightmonths.DiscountofPSUbankstonew
banks contracted by 8% during Oct13Sep14, after peaking out at 78% in Oct13. Despite the fall, the discount stays
below the 5year mean and well below the 5year peak of 46%. We believe there could be a gradual and extended
outperformanceofPSUbanksoverthenext12monthsleadingtofurthercontractioninthediscount.
Exhibit42: RelativeperformanceofBankIndicesandkeyfundamentalindicators
NoofMonths
NoofMonths
Increase/
duringwhich
duringwhich
Underperformance/
Underperformance/ (decrease)inthe
BANKEX
CNXPSBK
underperformed outperformance underperformed outperformance
RepoRate
RealGDP
(Avg.for4qtrs)
GrossNPLratio
(AllBanks)
2004
16%
17%
1.00
7.34
7.19
2005
6%
17%
0.25
9.22
4.91
2006
7%
24%
1.00
9.60
3.47
2007
14%
15%
0.50
9.66
2.65
2008
0%
11%
1.25
8.17
2.39
2009
3%
2%
1.75
6.42
2.45
2010
16%
16%
1.50
9.78
2.51
2011
7%
17%
2.25
7.27
2.36
2012
31%
13%
0.50
4.94
2.94
2013
18%
37%
0.25
2014(ytd)
14%
12%
0.25
4.70
5.16
3.42
4.32
Source:Bloomberg,RBI,IL&FSInstitutionalEquitiesNote:GrossNPLratioisattheendoffiscalyear
RallyinCY14ontheheelsoflargestunderperformancein10years
Thedepressedvaluationandthefavorableelectionoutcomeresultedinthelargeoutperformanceof
banksinCY14.TherecentrunupinbankstocksduringCY14followedthestrongestunderperformance
of banks in a calendar year in the last ten years. Also, the duration of the underperformance was
longestin2013,withtheBankexandCNXPSBKunderperformingbenchmarkIndicesfor8monthsby
18%and37%,respectivelyfollowingsmallcutininterestratebutlargefallintheGDPgrowth.
Exhibit43: WeeklyrelativeperformanceofCNXPSBK
WeeklychangeofCNXPSBKrelativetoCNXNifty(RHS)
CNXPSBK
4,710
7.8%
4,230
5.0%
3,750
2.2%
3,270
0.6%
2,790
3.4%
2,310
6.2%
1,830
9.0%
Apr11 Jul11 Oct11 Jan12 Apr12 Jul12 Oct12 Jan13 Apr13 Aug13 Nov13 Feb14 May14 Aug14
Financials
16
Banks
Evenaftertherally,P/BofCNXPSBKc15%belowthe5yearmean
TherallyinPSUbankshasliftedtheP/BofCNXPSBKto0.85xon02Sep14,closetotheirfiveyearmean
of1.0x.TheP/BofPSUbanksmayhavebottomedoutatthedecadelowvaluationof0.49xon3Sep13
andhasbeenseeinggradualrecoverythereafter.TherapidbouncesinceFeb14haslifteditsP/Bclose
to15%belowthefiveyearmean.DespitelargeoutperformancetoNiftyof12%inCY14(ytd),theP/B
isstillbelowthe5yearmeanandwellbelowthepeakinFeb08andNov10.
Newprivatebanksc11%abovetheir5yearmeanof2.28x
However,newprivatebankssawtheirvaluationrise11%abovetheir5yearmean(2.28x)to2.54xon
02Sep14butbelowthepeakof2.99xinNov10.
Exhibit44: OneyearforwardP/BofCNXPSBKandnewprivatebanks
4
CNXPSBK
3
NPVT
Avg(Sep09Sep14)
2
Avg(Sep09Sep14)
1
0
Apr04
May05
Jul06
Sep07
Nov08
Jan10
Mar11
May12
Jun13
Aug14
Reforms,reboundinassetqualitymayfurthershrinkvaluationgap
ThereportbyDrP.J.NayaktoreviewthegovernanceofboardsofbanksinIndiaentailsmeasuresto
improve the structural framework of the PSU banks. The committee has recommended the new
governance structure including reduction of the government shareholding in banks to avoid capital
support from government. Other key recommendations include: elimination of constrains which are
applicableonlytothePSUbankssuchasdualregulation,shorttenorsofCMDsandEDs,compensation
constrains,externalvigilanceenforcementandapplicabilitytoRTIAct.Whilereformscouldbealong
drawnprocess,theintroductionofsomeoftheseproposalsandgradualturnaroundintheNPLcycle
maysustainthecontractioninthevaluationgapwithnewbanksclosertothelongtermmeanoverthe
next12years.
DiscountofPSUtonewbanksbottomedmuchearlierthantherallyin2014
Theimprovedoutlookfortheeconomyfollowingthestableelectionoutcomeanddepressedvaluation
ledtothelargeoutperformanceofPSUbankstothenewprivatebanksinMay14Jun14.Drivenbythe
sharp rise in NPLs and concern over the capital constrain, the discount of PSU to new banks had
increasedtoadecadehighof78%.Ithascontractedthereafterto71%on02Sep14butstayshigher
thanthe5yearaverageof63%.TheoutperformanceofthePSUbanksmayextendfurtherovernext
12months.
Financials
17
Banks
Exhibit45: DiscountofCNXPSBKtonewprivatebanksinP/B
20%
DiscountofPSUbanksoverNPVT
30%
40%
50%
Avg(Apr04Aug14)
Avg(Aug09Aug14)
60%
70%
28Oct13,78%
80%
Apr04
May05
Jul06
Sep07
Nov08
Dec09
Feb11
Apr12
Jun13
Aug14
Financials
18
Banks
LargerpotentialupsideinPSUbanksoverthe12months
WehavevaluedbanksusingacombinationofDCF,P/EandP/B.OurthreestageDCFusesexplicitforecastsuntilFY17,
followedby10yearsofsemiexplicitforecasts.Wehavecappedleverageratioforthesemiexplicitperiodat18xforthe
PSUbanksandlinkedtheloangrowthtothetargetasset/equity.Hence,thesemiexplicitgrowthforthePSUbanksis
assumedtobeintherangeof6%14%.WereinitiatecoverageonBankofIndia,BankofBaroda,PunjabNationalBank
StateBankofIndia,AxisBank,HDFCBank,ICICIBankandIndusIndBank.TheestimatedpotentialupsideinPSUbanks
exceedsthereturninnewbanksoverthe12monthsperiod.ThepotentialupsideinPSUbanksisupto21%.Weprefer
banksthatarebettercapitalizedandaresuperiorinassetquality.OurmostpreferredpickamongPSUbanksisBankof
BarodaandICICIBankamongnewprivatebanks.
DCFassumereturntonormalRoAoversemiexplicitperiodforPSBs
We have valued banks using a combination of DCF, P/E and P/B. Our threestage DCF uses explicit
forecastsuntilFY17,followedby10yearsofsemiexplicitforecasts,wherewelinkloangrowthtothe
leverageratioandassumedividendpayoutof20%.Thefinalstageof12yearsassumesconvergenceof
RoEandCoE(assumedtobe14%).TheRoAisassumedtoconvergetothe10yearaverageforthePSU
banksand1.2%forthenewprivatebanksattheendofthesemiexplicitperiod.
WehaveestimatedthemeanP/EandP/Bforthefiveyearperiodended02Sep14.Weapplytheseto
our oneyear forward EPS and adjusted book value forecast to arrive at our P/E and P/Bbased fair
value.Ourtargetpriceisaweightedaverage,whereweassignaweightof30%toourDCFvalueand
35%eachtoourP/EandP/Bvalues.
Caponleverageratioduringsemiexplicitperiodimplieslowergrowth
Wehavecappedleverageratioforthesemiexplicitperiodat18xforthePSUbanksandlinkedtheloan
growthtothetargetasset/equity.Hence,thesemiexplicitgrowthforthePSUbanksisassumedtobe
in the range of 6%14%. New private banks, being well capitalized are assumed to keep growing at
fasterpacethantheirPSUcounterparts.
Potentialupsideofupto21%forPSUbanksover12months
We reinitiate coverage on Bank of India, Bank of Baroda, Punjab National Bank State Bank of India,
AxisBank,HDFCBank,ICICIBankandIndusIndBank.OurmostpreferredpickamongPSUbanksisBank
ofBarodaandamongprivatebanksisHDFCBankandICICIBCwithlargestpotentialupside.Weapply
25% discount to the 5year mean P/E and P/B for BOI given large volatility in its NPLs and low
capitalizationratios.Also,weapply25%premiumtothe5yearmeanP/EandP/BforICICIBCgivenits
significantlreboundinRoEoverlast3years.
Exhibit46: AssumptionsfortheDCFbasedfairvalues
RoA(%)
Growth(%,CAGR)
Actual Explicitperiod Semiexplicit Semiexplicit
(FY13FY14)
(FY15fFY17f (FY18fFY27f)
Asset/Equity(Mean)
Actual Explicitperiod Semiexplicit
(FY27f) (FY13FY14)
Actual
Explicit
period Semiexplicit
(FY13fFY15f (FY16fFY25f) (FY13FY14) (FY15fFY17f (FY18fFY27f)
BOI
0.59
0.580.71
0.80
22.1%
15.9%
5.9%
20.3
21.5
18.0
BOB
0.83
0.770.90
0.98
17.5%
17.0%
11.3%
17.9
19.3
18.0
PNB
0.83
0.810.96
1.00
9.0%
16.3%
16.2%
16.0
16.3
18.4
SBIN
0.76
0.760.92
0.95
16.5%
18.5%
13.5%
16.9
17.2
17.9
AXSB
1.69
1.721.44
1.21
16.4%
18.6%
22.7%
10.7
10.4
14.3
HDFCB
1.86
2.051.71
1.21
25.1%
20.2%
20.9%
11.2
9.7
11.8
ICICIBC
1.69
1.801.47
1.21
15.1%
17.6%
22.8%
8.0
8.8
14.1
IIB
1.69
1.821.22
1.21
26.5%
25.2%
22.9%
10.5
10.9
14.6
Financials
19
Banks
Exhibit47: AverageP/EandadjustedP/B(02Sep14)
P/E
P/B
3M
6M
1year
2years
3years
5years
3M
6M
1year
2years
3years
5years
BOI
4.94
5.23
4.84
4.26
4.62
4.99
0.75
0.81
0.80
0.72
0.84
0.94
BOB
6.58
6.58
6.48
5.75
5.48
5.44
1.03
1.02
0.99
0.86
0.89
0.97
PNB
6.50
6.83
6.33
5.12
4.90
4.94
0.85
0.87
0.80
0.66
0.71
0.82
SBI
9.33
9.86
9.22
8.07
7.52
7.44
1.25
1.33
1.25
1.08
1.14
1.19
AXSB
11.94
12.07
11.14
9.68
9.73
9.52
1.98
1.99
1.82
1.56
1.68
1.68
HDFCB
17.51
17.76
17.28
16.66
17.68
18.03
3.03
3.16
3.30
3.27
3.49
3.48
ICICIBC
14.54
14.37
13.84
12.60
12.90
13.05
2.05
2.02
1.91
1.70
1.69
1.63
IIB
15.25
15.52
15.28
14.55
15.26
14.92
2.72
2.75
2.69
2.50
2.84
2.78
Exhibit48: PE,P/BandDCFbasedfairvaluesandthetargetprice
PE
PB
DCF/SOP
Weights
35%
35%
30%
PE
P/B
PE
P/B
BOI
269
355
314
312
292
7%
Add
5.11
0.79
5.83
0.81
BOB
953
1,179
1,101
1,076
886
21%
Buy
6.95
1.10
6.84
1.02
PNBK
964
1,217
1,396
1,182
961
23%
Buy
7.09
1.15
7.47
1.05
2,970
3,119
2,644
2,925
2,501
17%
Buy
8.62
1.34
9.31
1.29
SBI
TP
CMP(03Sep14)
Upside
Rating
Targetvaluation
Currentvaluation
453
484
423
455
414
10%
Add
11.56
1.98
12.51
2.08
HDFCB
1,198
1,179
575
1,004
860
17%
Buy
16.34
3.07
17.11
3.09
ICICIBC
2,124
1,550
1,647
1,780
1,579
13%
Add
14.36
2.28
14.70
2.22
705
753
514
665
616
8%
Add
14.41
2.65
16.59
2.88
AXSB
IndusInd
Riskfactors
f Delay in the roadmap for the capitalization of PSU banks may stay an overhang. Basel III
requirementswouldpressureontheloangrowtheveniftheinvestmentcyclepicksup.
f Delay in the recovery in NPL cycle and elevated slippage extending into FY16 may pull down the
profitability.
f RegulatorychangessuchasmandatinghigherPCRrequirementsmayimpacttheprofitability.
f Elevatedinterestratesin2016mayextendtheNPLcycle,mainlyintheSMEsegmentanddelaythe
revivalintreasuryincome.
Financials
20
Banks
Annexure:StockselectionwithinPSUbanksbasedonthefilters
ChangeinNetNPL/Networth(Mar12Mar14)
Exhibit49: NetNPL/NetworthVschangeinnetNPL/NetworthbetweenMar12Mar14
40
ALBK
30
ANDB
CRPBK
20
BOMH
IOB
DBK
PNB
INBK SNDB
10
BOB
OBC
IDBI
BOI SBI
CBK
UNBK
VJYK
CBOI
UCO
0
15
20
25
30
35
NetNPL/Networth(%,Mar14)
40
45
50
RiseinGrossNPLratiobasedon2yearagoloans
Exhibit50: GrossNPLratio(Mar14)VschangeingrossNPLratiobasedon2yearagoloans(Mar12)
2.5
2.0
SBI
BOMH
ANDB
BOI
1.5
INBK
SNDB
BOB
DBK
IOB
ALBK
CBOI
PNB
CRPBK
OBC
VJYK
1.0
UNBK
UCO
CBK
IDBI
0.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
GrossNPLratio(Mar14)
Exhibit51: RoE(FY15f)VsP/B(FY15f)basedonconsensus(02Sep14)
1.7
SBIN
1.5
P/B(FY15)
1.3
1.1
CBK
0.7
IOB
0.5
3
BOB
PNB
CBOI
0.9
ANDB DBNK OBC

IDBI
CRPBK
7
UNBK
UCO
BOI
SNDB
INBK ALBK
9
11
RoEbasedonconsensus(FY15f)
13
15
17
Financials
21
Banks
ChangeinPricebetween14Feb142Sep14
Exhibit52: P/B(FY15f)Vschangeinpricebetween14Feb14and02Sep14
121
UNBK
108
95
CBK
82
PNB
OBC
69
ALBK
56
BOB
BOI
INBK
SNDB
SBIN
CBOI
43ANDB
IDBI
DBNK CRPBK
30
0.5
VJYK
0.7
UCO
0.9
1.1
1.3
1.5
P/B(FY15)
Financials
22
Banks
Thispagehasbeenintentionallyleftblank
Financials
23
IndiaEquityResearch
Financials
September04,2014
BankofBaroda
BUY
TargetPrice(INR)1076 Superiorassetquality,RoEtodriveoutperformance
CompanyReport
LastPrice(INR)
886.0
BOBIN
Bloombergcode
BOB.BO
Reuters code
Avg.Vol.(3m)(mn)
1.57
Avg.Va l.(3m)(INRbn)
1.37
1,010/450
52wkH/L(INR)
27,140
Se ns ex
MCAP(INRbn/USDbn)
380.46/6.29
Shareholding(%)
03/14
06/14
Promote rs
56.3
56.3
MFs ,FIs ,Ba nks
18.6
17.7
FIIs
15.6
17.0
4.7
4.9
4.7
4.4
Public
Others
StockChart(RelativetoSensex)
920
850
780
7 10
Moderationintheaccretionofstressedassetsinthelastfewquarters
is likely to sustain. We assume a 37bp reduction in the incremental
NPL,translatinginto8bpfallinNPLprovision/loansoverFY15fFY17f.
RiseinPCRduringthelastfewquartershaslifteditabovepeersandis
likelytoreducetheincrementalprovisioningburden.Acontractionin
the NIM over the past two years is likely to get arrested, as interest
rates and slippage moderate. Large cut in bulk deposits is likely to
sustain the cost at lower level, supporting NIM. Despite buildingin
elevatedprovisions,weforecasta206bpRoEexpansionoverFY15f
FY17f. BOB is our most preferred stock among PSBs due to superior
asset quality, Tier I ratio and RoE. Reinitiate coverage with a TP of
1,076andaBuyrating.TheTPimplies1yrfwdadjustedP/Bof1.1x.
RecentriseinthePCRandmoderatingNPLstoeaseprovisionburden
RiseinthePCRcoupledwithmoderatingadditiontostressedassetsislikelyto
lowertheprovisioningburdenoverFY15fFY17f.Overthelast3quarters,PCR
has increased by 8.2% to 50.2% at endJun14, highest among the PSBs.
IncrementalgrossNPLdeclined4bpyoyto1.17%inFY14afterrisingsharply
by79bpintheprecedingtwoyears.Wefactora37bpfallintheincremental
NPL over FY15fFY17f to 0.80% in FY17 translating into a 8bp fall in the NPL
provisions/loans. However, improvement in asset quality is builtin during
FY16fFY17fasweassumethestresstocontinueinthecurrentfiscal.
CoreprofitabilitytorevivewithgradualNIMexpansion
640
StockPerfm.(%)
1m
3m
1yr
Abs olute
0.9
1.9
92.1
NIMexpansionandlikelypickupincorefeesisestimatedtoexpandRoAand
RoE to c0.80% and c16%, respectively in FY17f. With softening interest rates
andslippage,thelargeNIMcontractionoverthelasttwoyearsislikelytoget
arrested,ascostofdepositsmoderatesandyieldimproves.Weforecast13bp
NIM expansion over the next three years. The share of CDs to term deposits
declined3.5%qoqto4.0%atendJune14,partlycontributingto10bpqoq
expansioninNIM.WeforecastthePATtoriseata3yearCAGRof18.4%.
Rel.toSe ns ex
7.4
7.3
43.2
DilutionrequiredlikelytostaylowerthanthepeersoverFY15fFY17f
Financials(INRbn)
03/14
03/15f
03/16f
NII
119.7
143.6
167.7
5.7
20.0
16.8
92.9
111.7
129.1
570
500
S e p 13
J a n 14
M a y14
Bank of Baroda
S e p 14
Sensex Rebased
45.4
52.9
62.4
Sho/s (dilute d)
430.7
444.7
444.7
BOBiscapitalisedbetterthanpeersandisunlikelytorequirelowerdilutionin
thenearterm.Weassume3%dilutioninFY15f,likelytobethroughbudgetary
allocation. CET 1 was 8.95% and CAR was 12.28% at the end of Mar14. The
pickup in retained earnings growth is likely to sustain CET 1 above 8.4% over
the next 3 years. Also, moderation in RWA growth is assumed tosustain at a
lowerlevel3yearCAGRof16%preservingthecorecapital.
A.EPS(INR)
106.4
120.8
140.3
MostpreferredamongPSBs;TPvaluesBOBatAdj.P/Bof1.1x
0.6
12.7
18.0
Equity/As s ets (%)
5.5
5.5
5.3
P/E(x)
8.4
7.5
6.3
P/B(Adj)(x)
1.2
1.1
1.0
0.8
13.8
0.7
14.1
0.8
14.7
YoY(%)
Ope ra tingprofit
A.PAT
YoY(%)
RoA(%)
RoE(%)
Q uarterlyTrends
09/13
12/13
03/14
06/14
Op. inco me (INRbn)
38.7
39.9
44.5
43.5
11.7
10.5
11.6
13.6
PAT (INRbn)
BOBisourmostpreferredstockamongPSBsduetosuperiorassetquality,Tier
I ratio and RoE. We value P/E, P/B and DCF to arrive at the blended TP of
INR1,075. Our DCF assumes a cost of equity of 14% and semiexplicit, fade
periodgrowthof11.4%and3%,respectively.Thesemiexplicitperiodcapsthe
asset/equityat18x.OurSep15TPofINR1,076valuesBOBat1yrfwdadjusted
P/B of 1.1x. Reinitiate coverage with a Buy. Lowerthanestimated NIM and
slowrecoveryinNPLsare keyrisk factors.
BankofBaroda
SustainedriseinthePCRlikelytoeasetheincrementalprovisions
Afterasharpcontractionof23%inthePCRbetweenMar12Sep13,PCRhasrecoveredinthelastthree
quartersby8.2%to50.2%attheendofJun14,partlybenefitingfromthemoderationinslippageand
marginalrecoveryinthecorerevenues.BOBsPCRstayswellabovemostpeerssuchasBOI(37.5%),
PNB(47%),CBK(21.2%)andUNBK(44.2%),andisinlinewithSBIN.
Exhibit2: Provisioncoverageratio
Exhibit1: SlippageandNPLratios
GrossNPLratio
Slippageratio
NetNPLratio
Provisioncoverageratio(exc.writeoff)
3.5%
70%
2.8%
60%
2.1%
50%
1.4%
40%
0.7%
30%
0.0%
20%
Jun12
Dec12
Jun13
Dec13
Jun14
Jun12
Dec12
Jun13
Dec13
Jun14
Slippageratio,despitesomevolatility,stayswellbelowthepeak
AdditionstothegrossNPLdecreasedinthethreeconsecutivequartersto1.23%intheMar14quarter
(annualised)beforerisingto2.3%intheJun14quarter,drivenbyslippageintheSMEandagri.While
slippage is likely to stay elevated in FY15f as most restructured loans are nearing their moratorium
period,weassumeittostaybelowthepeak.However,NPLratiosarelikelytostayhighduetoslow
pickpickintheloangrowth.
Paceofrestructuringhasbeenmoderatinginthepastfourquarters
The addition to the stock of restructured loans has been trending down in the last few quarters.
However,thepercentageofrestructuredloansaspercentageofloansincreasedintheJun14quarter
largelydueto4%sequentialcontractionintheoutstandingloans.
Exhibit3: Restructuredloans
Loansrestructured(INRbn)
Domestic
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
7.71
9.33
15.87
35.25
19.97
14.84
12.13
17.03
Jun14
9.86
8.03%
8.40%
9.08%
8.31%
9.72%
9.60%
9.39%
8.29%
8.81%
Overseas
4.17%
4.70%
4.82%
3.83%
3.98%
4.08%
3.57%
3.19%
3.20%
Totalrestructuredloans
6.82%
7.21%
7.68%
6.89%
7.83%
7.83%
7.49%
6.68%
7.01%
Exposuretotheriskysectorslowerthantheindustryaverage
Exhibit4: ExposureofBOBandIndustrytotheriskysectors(Mar14)
(INRmn)
BankofBaroda
Allbanks
Fundbased
%ofdomesticloans
Outstanding
%oftotalloans
25,580
0.92%
353,260
0.59%
BasicMetalandmetalproducts
161,811
5.82%
3,619,690
6.02%
Energy
187,543
6.75%
4,883,460
8.12%
Total
374,933
13.49%
8,856,410
14.73%
Miningandquarrying
Financials
25
BankofBaroda
Weestimate20bpfallinprovisionsfollowingslowingNPLaddition
IncrementalgrossNPL(riseino/sgrossNPLasapercentageofstartingloans)declined4bpyoyin
FY14 to 1.17%. It increased 79bp in the preceding two years. We assume stable incremental NPL in
FY15f as the stress may sustain due to large restructured loans nearing their moratorium period.
However,wefactora37bpfallintheincrementalNPLoverFY16fFY17fto0.80%inFY17f.However,
moderationintheloangrowthmayleadtothe86bpriseinthegrossNPLratioto3.80%.
However,fallinNPLprovision/loansisestimatedtobelower,at8bp
We build in higher NPL provisions in our estimate to bring the PCR ratio closer to its historical level.
Historically,BOBsPCRhasremainedabovepeers.NPLprovisions/loansdeclined19bpyoyto0.80%
in FY14. We estimate a decline of 8bp to 0.72% FY15fFY17f and estimate 7.5% rise in the PCR to
56.7%. The threeyear average NPL provisions/loan is estimated at 0.76%, just 4bp lower than the
precedingthreeyearsaverage.
Exhibit6: NPLprovision/loan,PCR
Exhibit5: NPLratioandincrementalNPL
IncrementalNPL
NNPLratio
GNPLratio
NPLprovision/loans
PCR(RHS)
4.0%
1.0%
80%
3.2%
0.8%
70%
2.4%
0.6%
60%
1.6%
0.4%
50%
0.8%
0.2%
40%
0.0%
30%
0.0%
Mar11
Mar13
Mar15f
Mar17f
Mar11
Mar13
Mar15f
Mar17f
FallinNIMlikelytobearrestedasfundingcost,slippagesmoderate
Withthesharpreductioninthehighcostbulkdeposits(CDs/termdepositsat4%attheendofJun14)
andstableCASA,weestimate11bpfallinthecostofdeposits.Also,yieldsarelikelytobenefit,asthe
slippagetrendsdownward.ThelargeNIMcontraction,by60bp,seenoverthepasttwoyearsreversed
intheJun14quarterandislikelytosustain.Weestimate5bpexpansioninFY15f.
Exhibit8: CalculatedNIMfortheyear(%)
Exhibit7: NIM,depositcost,yield(quarterly)
Costofdeposits
NIM(RHS)
Yieldonloans
NIM
10
3.0
3.0
2.8
2.5
2.6
2.0
2.4
1.5
2.2
1.0
2.0
Jun14
0.5
5
Jun12
Dec12
Jun13
Dec13
Mar11
Mar13
Mar15f
Mar17f
Financials
26
BankofBaroda
EstimatedretainedearningscouldsustainCET1above8%tillFY17f
BOB is capitalised better than peers and is unlikely to require dilution in the near term. CET 1 was
8.95%andCARat12.28%attheendofMar14.TierIwas9.06%andCARat11.91%attheendofJun14
(withoutaddingbackquarterlynetprofit).3%dilutioninFY15fandpickupinretainedearninggrowth
islikelytosustainCET1above8.4%overthenextthreeyears.Also,amoderationintheRWAgrowthis
assumedtosustain,preservingthecorecapital.WeassumeRWAtoriseatathreeyearCAGRof16%.
Exhibit9: CapitalratiosattheendofJun14
Exhibit10: GrowthinRWA,retainedearnings,TierI
TierI(RHS)
Retainedearnings(yoy)
RWA(yoy)
15
12
10%
9%
20%
15%
8%
10%
7%
5%
6%
0%
5%
CAR
TierI
CET1
TierII
Mar14
Mar15f
Mar16f
Mar17f
Despiteelevatedprovisions,scopeforRoEandRoAexpansion
Exhibit11: RoA,RoE
RoA
RoE(RHS)
1.4
30
1.2
24
1.0
18
0.8
12
0.6
0.4
Mar11
Mar12
Mar13
Mar14
Mar15f
Mar16f
0
Mar17f
We forecast an expansion in the return ratios over FY15fFY17f, driven by the peaking of NPLs and
gradual NIM expansion. RoA and RoE is estimated to expand 4bp and 206bp, to 0.8% and 15.9%,
respectively.TheimprovementinprofitabilityisestimateddespitefactoringelevatedNPLprovisions.
Financials
27
BankofBaroda
MostpreferredamongPSBsonundemandingcurrentvaluation...
Exhibit12: Discount/premiumofBOBtoPNBandSBIN,adjustedP/BofBOB
AdjustedP/B(RHS)
PremiumtoPNB
DiscounttoSBI
60%
2.5
40%
2.0
20%
1.5
0%
1.0
20%
0.5
40%
Jun09
Dec09
Aug10
Mar11
Oct11
May12
Nov12
Jul13
Jan14
0.0
Aug14
andhigherprofitability
Higher RoE could drive the relative outperformance of BOB. With superior asset quality and
profitability compared to peers, a sharp recent fall in its premium to PNB and rise in its discount to
SBINcouldreverse.BOBisourmostpreferredstockamongPSBs.
Exhibit13: RoEofBOBandpeers
BOB
BOI
PNB
SBIN
FY13
FY14
FY15f
FY16f
FY17f
15.68
12.95
16.48
15.43
13.80
11.16
10.17
10.03
14.09
11.22
11.30
11.37
14.70
12.65
13.31
12.74
15.87
13.33
15.12
14.03
OurTPvaluesBOBat1yearforwardadjustedP/Bof1.1x
Our target price is based on the DCF, P/E and P/B methods. Our DCFbased fair value stands at
INR1,076,whereinweassumeacostofequityof14%aswellassemiexplicitandfadeperiodgrowth
of11%and3%,respectively.Thesemiexplicitperiodcapstheasset/equityat18xandlinksittothe
growth. Our Sep15 target price of INR1,076 values BOB at 1.1x the oneyear forward adjusted book
value.WereinitiatecoveragewithaBuyrating.
Exhibit14: AverageP/EandP/B(till2Sep13)
1month
3month
6month
12month
2year
3year
5year
6.58
1.03
6.58
1.02
6.48
0.99
5.75
0.86
5.48
0.89
5.44
0.97
6.15
1.20
P/E
P/B
Exhibit15: P/E,P/BandDCFbasedTP,andweightedaverageTP
Weights
P/E
P/B
DCF/SOP
TP
35%
952
35%
1,179
30%
1,101
1,076
Financials
28
BankofBaroda
Exhibit16: OneyearforwardP/BandtargetP/B
1yearforwardP/ABV(X)
12monthsmovingaverage
Exhibit17: OneyearforwardP/EandtargetP/E
5yearaverage
1yearforwardP/E(X)
5yearaverage
10
2.4
2.0
1.6
6
1.2
4
0.8
0.4
Jan10
Dec10
Nov11
Nov12
Oct13
Sep14
Sep15
2
Jan10
Dec10
Nov11
Nov12
Oct13
Sep14
Sep15
Riskfactors:
f Some of the large exposures become delinquent, leading to higherthanestimated slippage and
NPLprovisions.
f SustainedmonetarytightnessoverFY15FY16islikelytohurtmarginsduetohighercostoffunds,
giventhelowCASAofthebank.
f Growthpicksupsignificantlyanddilutionbecomesimminentintheneartermleadingtoalower
thanestimatedRoE.
Financials
29
BankofBaroda
Financialsandvaluations
Incomestatement(INRbn)
Fiscalyearending
Netinterestincom e
Feei ncome
Tradi ngprofi t
Otheri ncome
Totaloperatingincom e
Tota l opera ti ngexpens e
Operatingprofit
Provi s i onforba ddebt
Otherprovi s i on
PBT(reported)
Tota l taxes
PAT(reported)
(+)Sha rei na s s oc.ea rni ngs
Les s :Mi nori tyi nteres t
Pri orperi odi tems
Neti ncome(reported)
Adjustednetincom e
Sha res outs ta ndi ng(mn)
Di l .s hares (mn)
DilEPS(INR)
DecompositionofRoA(%)
03/14
119.7
24.8
7.4
12.4
164.3
71.4
92.9
29.4
8.6
55.0
9.6
45.4
0.0
0.0
0.0
45.4
45.4
430.7
430.7
105.4
03/15f
143.6
27.7
8.1
14.8
194.1
82.4
111.7
35.7
6.5
69.6
16.7
52.9
0.0
0.0
0.0
52.9
52.9
430.7
444.7
118.9
03/16f
167.7
32.8
9.9
17.2
227.6
98.4
129.1
38.2
8.8
82.1
19.7
62.4
0.0
0.0
0.0
62.4
62.4
430.7
444.7
140.3
03/17f
200.0
39.2
11.1
20.0
270.4
117.6
152.8
43.3
10.4
99.2
23.8
75.4
0.0
0.0
0.0
75.4
75.4
430.7
444.7
169.5
21.0
5.7
20.2
4.3
1.3
0.6
15.6
20.0
11.7
21.5
16.4
12.7
17.7
16.8
18.6
7.1
18.0
18.0
17.8
19.3
19.6
13.3
20.8
20.8
72.8
15.1
56.6
27.6
17.4
74.0
14.3
57.5
27.2
24.0
73.7
14.4
56.7
27.4
24.0
74.0
14.5
56.5
27.9
24.0
03/14
4.3
0.0
355.5
359.9
5,688.9
191.2
355.0
6,595.0
1,308.8
1,161.1
3,970.1
27.3
127.7
6,595.0
03/15f
4.4
0.0
407.4
411.8
6,599.2
168.2
340.0
7,519.2
1,427.7
1,326.1
4,589.7
29.9
145.8
7,519.2
03/16f
4.4
0.0
453.8
458.2
7,712.2
178.2
371.3
8,719.9
1,632.3
1,489.5
5,404.1
31.7
162.2
8,719.9
03/17f
4.4
0.0
508.2
512.7
9,069.9
187.5
408.4
10,178.5
1,904.0
1,692.6
6,366.5
33.0
182.4
10,178.5
69.8
20.4
17.0
16.5
3.4
69.5
20.1
17.0
16.6
2.9
70.1
19.3
16.6
16.2
2.6
70.2
18.7
16.2
15.9
2.3
Growthratios(%)
Fiscalyearending
Neti nteres ti ncome
Feei ncome
Otheri ncome
Opera ti ngi ncome
Opera ti ngexpens es
Operatingprofit
Loanl os s provi s i ons
Provi s i onfori nves tments
Otherprovi s i ons
Ta x
Netprofi t
03/14
1.98
0.41
0.33
2.72
1.18
1.54
0.49
0.03
0.11
0.16
0.75
03/15f
2.03
0.39
0.32
2.75
1.17
1.58
0.51
0.01
0.08
0.24
0.75
03/16f
2.07
0.40
0.33
2.80
1.21
1.59
0.47
0.02
0.09
0.24
0.77
03/17f
2.12
0.42
0.33
2.86
1.24
1.62
0.46
0.02
0.09
0.25
0.80
RoA
As s ets /Equi ty
RoE
0.75
18.34
13.80
0.75
18.80
14.09
0.77
19.13
14.70
0.80
19.90
15.87
03/14
03/15f
03/16f
03/17f
8.40
1.06
1.21
2.84
7.45
0.96
1.09
3.39
6.31
0.86
0.96
4.06
5.23
0.77
0.85
5.30
106.4
106.4
835.6
731.4
25.2
122.7
120.8
926.1
810.0
30.0
144.9
140.3
1,030.4
919.6
36.0
175.0
169.5
1,152.9
1,043.8
47.0
KeyRatios
Loa ns
Feei ncome
Adjus tedneti ncome
Di l .EPS
Operatingratios(%)
NII/opera ti ngi ncome
Feei ncome/operati ngi ncome
Operati ngprofi tma rgi n
Netprofi tma rgi n
Effecti veTaxra te
Balancesheet(INRbn)
Fiscalyearending
Equi tycapi ta l
Preferencecapi ta l
Res erves ands urpl us
Networth
Depos i ts
Tota l borrowi ngs
Otherl i a bi l i ti es andprovi s i ons
Totalliabilities
Cas ha ndba nkbal a nces
Inves tments
Loa ns
Fi xeda s s ets
Othera s s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
Inves tment/Depos i t
SLRInves tment/Depos i t
SLRInves tment/NDTL
Debenture/Inves tment
Fiscalyearending
Valuationratios(x)
P/E(ondi l .EPS)
P/BV
P/Adjus tedBV
Di vi dendyi el d(%)
Pershareratios(INR)
Ba s i cReportedEPS(INR)
Di l utedReportedEPS(INR)
ReportedBookVa l ue(BV)
Adjus tedBookVal ue(ABV)
Di vi dendpers ha re(INR)
Return/ProfitabilityRatios(%)
Yi el dona dva nces
Yi el doni nves tments
Cos tofdepos i ts
Neti nteres tmargi n
Feei ncome/Oprevenue
Tra di ngprofi t/Oprevenue
Opexpens e/Oprevenue
CapitalizationRatios(%)
Equi ty/As s ets
Loans /As s ets
Inves tments /As s ets
Di vi dendpa yout
Interna l ca pi ta l growth
Ca pi ta l a dequa cy
AssetQuality
Gros s NPLra ti o
NetNPLra ti o
NetNPL/networth
Loanl os s res erve/Gros s NPL
Loanprovi s i ons /NII
Loanprovi s i ons /Tota l l oa ns
Productivity/Efficiencyratios
Bus i nes s perbra nch(INRmn)
Netprofi tperempl oyee(INRmn
7.69
7.32
4.84
2.03
15.07
4.53
43.44
7.81
7.39
4.73
2.08
14.25
4.16
42.47
7.86
7.40
4.74
2.11
14.41
4.33
43.26
7.97
7.41
4.76
2.16
14.50
4.12
43.50
5.46
60.20
17.61
23.86
10.81
12.28
5.48
61.04
17.64
25.24
10.98
10.67
5.25
61.97
17.08
25.66
11.26
10.26
5.04
62.55
16.63
27.74
11.88
9.74
2.94
1.52
17.5
49.2
24.5
0.74
3.55
1.80
20.6
50.2
24.9
0.78
3.69
1.73
20.7
54.1
22.8
0.71
3.80
1.68
21.0
56.7
21.6
0.68
1,981.7
0.99
2,121.5
1.11
2,353.1
1.28
2,627.9
1.51
Financials
30
IndiaEquityResearch
Financials
September04,2014
HDFCBank
BUY
TargetPrice(INR)1004 Sharpfallinvaluationpremiumunlikelytosustain
CompanyReport
LastPrice(INR)
856.7
Bloombergcode
HDFCBIN
Reuters code
HDBK.BO
Avg.Vol.(3m)(mn)
1.99
1.64
865/557
52wkH/L(INR)
27,140
Se ns ex
MCAP(INRbn/USDbn)
2,067/34.18
Shareholding(%)
03/14
06/14
22.6
22.6
9.9
10.1
FIIs
34.1
33.9
Public
Others
8.0
25.4
8.1
25.4
Promote rs
MFs ,FIs ,Ba nks
920
840
760
A sustained cost advantage and fall in provisions is likely to support

RoAexpansionoverFY15fFY17f.DuringFY14,alargedeclineof32bp
inthecost/assetratiooverFY13FY14offsettheweaknessinfeesand
NIM.Retailloangrowthislikelytoreboundwiththebottomingofthe
vehicle loans in the 2HFY15. The retail loan proportion is likely to
stabilise near 49%. The asset quality cycle is poised to stabilise; we
forecast a 0.15% incremental NPL by Mar16f, 12bp fall over FY14. A
sharpdropinthevaluationpremiumoverpeersisinconflictwithits
superiorreturnratios.OurSep15TPofINR1,004valuesthestockata
P/Eof16.3xandP/Bof3.07x,15%discounttoits5yearmean.Were
initiatecoveragewithaBuyrating.
Sharpfallinvaluationpremiumtopeersunlikelytosustain
The valuation premium of HDFCB to AXSB and ICICIBC in P/B (adjusted) has
fallen by c60% in the past six months, well below the fiveyear mean. Higher
NIM and low credit cost has sustained superior RoA and RoE of HDFCB
compared to peers. The average (FY13FY14) RoA and RoE of HDFCB were
higherthanpeersbyupto0.17%and7.25%,respectively.Thesuperiorasset
quality and NIM is unlikely to fade away. Hence, a sharp fall in the valuation
premium of HDFCB to peers is unlikely to sustain and the current valuation
couldprovidereasonablereturnwithrelativeoutperformanceover12months.
Assetqualitypoisedtostabilisewithgradualreboundinretailsegment
680
600
520
S e p 13
J a n 14
M a y14
HD FC Bank
S e p 14
Sensex Rebased
StockPerfm.(%)
1m
3m
1yr
Abs olute
5.1
3.9
52.3
1.5
5.3
3.4
Financials(INRbn)
03/14
03/15f
03/16f
NII
184.8
227.9
276.0
16.9
23.3
21.1
143.6
179.9
219.4
Rel.toSe ns ex
YoY(%)
Ope ra tingprofit
A.PAT
Sho/s (dilute d)
84.8
108.1
134.3
2,399.1
2,411.1
2,411.1
The asset quality in the CV/CE portfolio has likely peaked, but should stay
stable rather than improve until there is a material change in the underlying
industryconditions.WeforecastanincrementalNPLof0.15%adeclineof12
bpoverFY14byFY16f.WithlowNPLsandastrongcapitalposition,HDFCBis
wellplacedtoreboundingrowth,asdemandpicksup.Weexpecttotalloans
andretailloanstoincreaseata3yearCAGRof21%and20%,respectively.
Significantleverspresenttosustaincostratioimprovement
Despite assuming normalised employee addition and a rise in the average
pay/employee, a 32bp fall in the costasset ratio in the past two years may
sustainduringFY15fFY17f.Thereisscopeforcost/incomeratioimprovement,
ledbytheoperatingleverage,derivingbenefitsfromsignificantinvestmentsin
distribution (including branches) that is yet to reach full productivity. Some
structural techbased improvements in process, led by digitisation, could
translateintostructuralcostbenefits.Weforecastthecostincomeratiotostay
closeto44%,lowerthanthelastthreeyearaverageof48%.
A.EPS(INR)
35.5
44.9
55.7
CAGRof24%inPATlikelytodrive19bpRoAexpansion
YoY(%)
25.0
26.9
24.2
8.8
10.5
10.3
24.2
19.1
15.4
4.7
3.3
2.8
1.9
21.3
2.0
20.5
2.1
19.9
We forecast a CAGR of 24% in PAT over FY15fFY17f, driven by a 14bp NIM

expansion, sustainable cost advantage and declining provisioning burden. A
decrease in provisions is likely to support RoA expansion. An uptrend in the
RoAisbelievedtosustain;weforecasta19bpexpansionto2.09%.OurSep15
TPofINR1,004valuesthestockat16.45xand3.07xtheoneyearforwardP/E
andP/B,respectively.WereinitiatecoverageonthestockwithaBuyrating.
Equity/As s ets (%)

P/E(x)
P/B(Adj)(x)
RoA(%)
RoE(%)
Q uarterlyTrends
09/13
12/13
03/14
06/14
Op. inco me (INRbn)
63.4
63.2
67.8
69.5
PAT (INRbn)
18.4
19.8
23.3
23.2
HDFCBank
Pickupinretailloanslikelyasvehicleloansbottomout
Retail loans reported a sharp slowdown in FY14 due to the slump in the vehicle loan segment. As a
percentageofnetloans,retailloanswere49%attheendofMar14,decliningfromapeakof57%at
the end of Mar12. Retail loans increased at a CAGR of 18% over FY13FY14, largely driven by
unsecuredloanspersonalloansandcreditcards;theytogethercomprise22%ofretailloans.While
creditcardsroseataCAGRof33%,personalloansandbusinessbankingwentupatCAGRsof21%and
16%,respectively.HDFCBhastheoptionofretainingc70%ofmortgagesthatthebankoriginatesfor
theparentHDFC(HDFCIN,NR).ThemortgagebooksizewasINR193bnattheendofMar14;HDFCB
originatescINR5bnmortgagespermonthandwebelieve,itislikelytoaidloangrowth.
Exhibit1: Breakupofretailloans
Auto
CV
PL
BB
Home
Creditcard
Others
100%
13.0%
16.8%
6.5%
75%
8.2%
13.3%
12.9%
17.4%
16.7%
50%
13.0%
13.6%
12.2%
9.6%
25%
24.6%
22.1%
Mar12
Mar14
0%
VehicleloanhasseenasignificantslowdowninthepasttwoyearswiththeCAGRinCV/CEandauto
loansat5%and12%,respectively.Commercialvehicleloans,asapercentageofretailandtotalloans,
havebeendecliningconsistentlyoverthepasttwoyears.Theshareinretailloansdeclinedfrom12.2%
attheendofMar12to8.9%attheendofJun14.
Exhibit2: Growthinretailloansandretailasapercentageofnetloans
Retail/netloans(RHS)
Totalloangrowth
Retailloangrowth
40%
57%
32%
54%
24%
51%
16%
48%
8%
0%
45%
Mar12
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
CAGRof20%assumedinretailloansduringFY15fFY17f
WithlowNPLsandstrongcapitalposition,HDFCBiswellplacedtoreboundingrowth,asdemandpicks
up; the competitions ability to absorb elevated demand may be limited. During FY15fFY17f, we
expecttotalloanstoriseataCAGRof21%andretailloansat20%.
Financials
32
HDFCBank
Exhibit3: CAGRinloans
Mar11Mar12
Mar13Mar14
Mar15Mar17f
Totalloans
23.7%
23.9%
20.7%
Retailloans
39.8%
18.2%
19.8%
SBdepositstogaintractionasnewlyopenedbranchesyieldbenefits
The pace of branch additions has increased in the past three years ended Mar14 with 1,417 branch
additions, much higher than the 574 branches added in the preceding two years (Mar09Mar11).
During FY14, 74% of the banks branches opened in the semiurban and rural regions; this lifted the
shareofsemiurbanandruralbranchesfrom53%attheendofMar13to55%attheendofMar14.The
SB deposits grew at a CAGR of 18% during FY12FY14, moderating from 35% in the preceding two
years, partly due to high inflation. The CAGR in SB deposits may begin to pick up, as inflation
moderates and large branch expansion undertaken in the last three years yield benefits. While we
assume branch addition to moderate in the forthcoming years, we forecast a CAGR of 20% in SB
depositsduringFY15fFY17f.WeexpecttheCASAratiotoremainwithin45%47%overFY15fFY17f.
Exhibit5: CAGRinsavingsdeposits
Exhibit4: Savingsdeposits
SBdepositsgrowth
SBdepositsproportion(RHS)
CAGRinSBdeposits
Branchesadded
25%
30%
35%
1500
20%
29%
28%
1300
15%
28%
21%
1100
10%
27%
14%
900
5%
26%
7%
700
25%
0%
0%
Jun12
Dec12
Jun13
Dec13
500
Mar09Mar11Mar11Mar14Mar14Mar17f
Jun14
Significantleverspresenttosustainimprovementincostratios
DeclineincostratioexceededfallinfeeintensityoverFY12FY14
Exhibit6: Cost/asset,fee/assetandNII/assetratios(%)
4.6
3.8
Fee/assets
Cost/assets
NII/asset(RHS)
3.1
4.3
2.4
4.0
1.7
3.7
1.0
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15f
Mar16f
3.4
Mar17f
Financials
33
HDFCBank
During the two years ended Mar14, HDFCBs cost/asset ratio decreased 32bp, while the fee/asset
ratiofell21bpandtheNII/assetratiodeclinedmarginallyby6bp.Thus,therelativeadvantageoffees
andNIIovercosthasincreasedby5bp.
Exhibit7: Costratios(%)
Mar10
Mar11
Mar12
Mar13
Employeecost/asset
Mar14 Mar15f
Mar16f
Mar17f
1.13
1.13
1.11
1.07
0.94
Nonemployeecost/asset
1.80
1.73
1.91
1.97
1.76
0.94
0.96
0.98
1.68
1.71
Totalcost/asset
2.93
2.86
3.02
3.04
1.70
2.70
2.62
2.66
2.68
Costincome
48.0
48.1
49.7
49.6
45.6
44.5
44.1
43.8
Despitenormalisedemployeeaddition,riseinaveragepay/employee
DuringFY14,HDFCBsoperatingexpenseincreasedjust7%;employeecostwentupevenlower,justby
5%yoy,partlydrivenbythedeclineinnumberofemployeesby900to68,165attheendofMar14.
This follows a large net addition of 13,200 employees in the past two years. We assume addition of
employeestobenormalisedwith11,338netadditionsduringFY15fFY17f.Ourforecastassumesthe
average pay per employee to grow at an accelerated pace of 17% (compared to just 5% in the
precedingthreeyearsoverthenextthreeyears,astheeconomyrebounds).
improvementincostratiosforecasttosustainduringFY15fFY17f
Withanincreaseinthepaceofrevenueandassetgrowth,theimprovementincostratiosisforecastto
sustain. The biggest driver in sustaining cost ratios would be the operating leverage. The bank has
madesignificantinvestmentsoverthelastfewyearsindistribution(includingbranches)andthatisyet
to reach full productivity. This operating leverage impact should last another 12 years at least. The
strongcostcuttingexerciseoverthepastyearorsohasalsoyieldedresults.Someofthisisvulnerable
tobeingunwoundwhengrowthreturns,butthemanagementbelievesthatsomeofthiscostcontrol
willremain.Therearesomestructuraltechbasedimprovementsinprocess,largelyledbydigitisation.
Theprimarybenefithasbeen inbettercustomerserviceandfasterturnaroundtimes,butthiscould
translateintosignificantstructuralcostbenefitsoverthelongterm.
DecliningprovisionstosupportRoAexpansionoverFY15fFY17f
IncrementalNPLforecastat0.17%,4bplowerthanpast3yearaverage
TheassetqualityintheCV/CEportfoliohaslikelypeaked,butshouldstaystableratherthanimprove
untilthereisamaterialchangeinunderlyingindustryconditions.
Exhibit8: NPLratiosandincrementalNPL(%)
GNPLratio
NNPLratio
IncrementalNPL(RHS)
Exhibit9: Provisions/assetsandPCR
1.2%
0.27%
NPLprovisions/assets
Otherprovisions(exc.taxandinvest.)/assets
NPLprovisions/grossNPL
0.48%
85%
0.9%
0.17%
0.36%
80%
0.6%
0.07%
0.24%
75%
0.3%
0.03%
0.12%
70%
0.13%
0.00%
0.0%
Mar11
Mar13
Mar15f
Mar17f
65%
Mar11
Mar13
Mar15f
Mar17f
Theassetqualityinotherretailloansisstillstrong,creditcostsanddelinquencieshavebeenrisingover
thepastyearorso,butthemanagementseesthataspartofthenormalisationprocess.Therecouldbe
somemoreuptickiftheeconomystaysweak,butthemanagementdoesnotexpectanalarmingspike,
Financials
34
HDFCBank
given the overall standards of credit control. The overall corporate loan portfolio is likely to remain
stable;apartfromsomeaccountspecificrisks,theoverallportfolioisstable.Weassumeincremental
NPL to decline 12bp to 0.15% over FY15fFY16f. The average incremental NPL for FY15fFY17f is
assumed at 0.17%, 4bp lower than the preceding three years. The gross NPL ratio is estimated to
decline7bpto0.98%bytheendofFY17f.Theprovisioncoverageratioisforecasttoremainatc70%
duringFY15fFY17f.TheNPLprovision/assetsincreased6bpto0.37%;weforecasta7bpdeclineover
the next three years, following the softening in the incremental NPL. A large rise in other provisions
during FY11FY12 was driven by a floating provision of INR13.7bn. We assume the decline in other
provisionswiththenormalisationofNPLsinthepasttwoyearstosustainandremaincloseto5bp.
CAGRof24%inPATlikelytodrive19bpRoAexpansion
We forecast a CAGR of 24% in PAT over FY15fFY17f, driven by a 14bp NIM expansion, sustainable
costadvantageandthedecliningburdenofprovisions.Adecreaseinprovisionsisbelievedtosupport
earningsgrowthandRoAexpansion.AriseinRoAinthepastfouryearsisbelievedtosustainduring
thefollowingthreeyearswithaforecastedexpansionof19bpto2.09%.TheRoEislikelytostayclose
tothe21%level.
Exhibit10: TrendinRoEandRoA
Asset/Equity
RoE
RoA
25
2.20
20
2.00
15
1.80
10
1.60
1.40
1.20
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15f
Mar16f
Mar17f
ValuationpremiumofHDFCBtopeerswellbelow3yearmean
Exhibit11: ValuationpremiumofHDFCBoverAXSBandICICIBCinadjustedP/B
280%
AXSB
ICICIBC
210%
140%
70%
0%
Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14 Sep14
Financials
35
HDFCBank
ThevaluationpremiumofHDFCBtopeers,intheadjustedP/Bhascontractedsignificantlyinthelast
sixmonths.ThepremiumofHDFCBtoICICIBCcontractedbyc74%andtoAXSBbyc79%toc42%and
c50%,respectively,inthepastsixmonths;thiswaswellbelowthethreeyearmean.
SustainedhigherRoA,RoEtoreversethefallinvaluationpremium
HighermarginsandlowcreditcosthaveledtoasustainedsuperiorRoAforHDFCBcomparedtopeers.
Thecompetitiveedgeinassetqualityandlowcostfundsisunlikelytofadeawayoverthenextthree
years.Hence,asharpfallinthevaluationpremiumofHDFCBtopeersisunlikelytosustain.
Exhibit13: AverageRoA(%)
Exhibit12: AverageRoE(%)
AXSB
HDFCB
AXSB
ICICIBC
21
2.1
14
1.4
0.7
HDFCB
ICICIBC
0.0
FY13FY14
FY15fFY17f
FY13FY14
FY15fFY17f
Targetpricevaluesstockat3.07x,1yearforwardadj.P/B
WevalueHDFCBcombiningtheDCF,P/EandP/Bmethods.OurthreestageDCFusesexplicitforecasts
untilFY17,followedby10yearsofsemiexplicitforecasts,whereweassumeaCAGRof21%inloans
and a dividend payout of 20%. We also assume the RoA at the end of the semiexplicit period to
converge to 1.2% (fiveyear average for new private banks). The final stage of 12 years assumes the
convergenceofRoEandCoE(expectedtobe14%).ThismethodresultsinafairvalueofINR575.
WeestimatethemeanoneyearforwardP/EandP/Bforthefiveyearperiodended02Sep14at19.5x
and3.6x,respectively.WeapplythesetoourforecastedEPSandP/BforSep15toarriveatfairvalues
of INR1,198 and INR1,179, respectively. Our Sep15 TP of INR1,004 is a weighted average, where we
assignaweightof30%toourDCFvalueand35%eachtoourP/EandP/Bvalues.
Exhibit14: OneyearforwardP/E(x)andtargetP/E
1yearforwardP/E(X)
5yearaverage
30
5.0
25
4.3
20
3.6
15
2.9
10
Jan10
Dec10
Nov11
Nov12
Oct13
Sep14
Sep15
2.2
Jan10
Dec10
Nov11
Nov12
5yearaverage
Oct13
Sep14
Sep15
Financials
36
HDFCBank
1month
3month
6month
12month
2year
3year
5year
17.51
3.03
17.76
3.16
17.28
3.30
16.66
3.27
17.68
3.49
18.03
3.48
19.49
3.60
P/E
P/B
Weights
P/E
P/B
DCF/SOP
TP
35%
1,198
35%
1,179
30%
575
1,004
Keyriskstoourestimates
f LowerthanestimatedsavingsdepositsgrowthinFY15fandFY16fmaydecreasetheproportionof
savingsdeposits,leadingtolowerNIMexpansion.
f NPLratiosmayriseinlinewithhigherthanestimatedincrementalNPLs.Loanlossprovisionsmay
behigherunderthisscenario,resultinginadownwardrisktoearnings.
f A rebound in fee intensity may be higher than our estimates, resulting in an upward risk to
earnings.
Financials
37
HDFCBank
Fiscalyearending
Netinterestincom e
Feei ncome
Tradi ngprofi t
Otheri ncome
Operatingprofit
Provi s i onforbaddebt
Otherprovi s i on
PBT(reported)
Tota l taxes
PAT(reported)
Pri orperi odi tems
Adjustednetincom e
Di l .s hares (mn)
DilEPS(INR)
03/14
184.8
71.4
4.6
3.3
264.0
120.4
143.6
16.3
0.5
127.7
42.9
84.8
0.0
0.0
0.0
84.8
84.8
2,399
2,399
35.3
03/15f
227.9
87.7
3.3
3.1
322.1
142.2
179.9
18.4
2.5
159.0
50.9
108.1
0.0
0.0
0.0
108.1
108.1
2,411
2,411
44.8
03/16f
276.0
108.2
3.9
3.9
392.0
172.6
219.4
18.9
3.0
197.4
63.2
134.3
0.0
0.0
0.0
134.3
134.3
2,411
2,411
55.7
03/17f
332.1
130.5
4.6
4.8
472.0
207.1
264.8
22.8
3.6
238.4
76.3
162.1
0.0
0.0
0.0
162.1
162.1
2,411
2,411
67.2
26.4
16.9
11.5
32.3
26.0
25.0
20.2
23.3
23.0
12.9
27.5
26.9
20.3
21.1
23.3
2.7
24.2
24.2
20.8
20.3
20.6
20.5
20.7
20.7
70.0
27.0
54.4
32.1
33.6
70.8
27.2
55.9
33.6
32.0
70.4
27.6
56.0
34.3
32.0
70.4
27.7
56.1
34.3
32.0
03/14
4.8
0.0
430.0
434.8
3,673.4
233.8
574.0
4,916.0
395.8
1,209.5
3,030.0
29.4
251.2
4,916.0
03/15f
4.8
0.0
615.5
620.4
4,415.4
232.0
662.9
5,930.7
532.2
1,425.6
3,642.2
31.2
299.6
5,930.7
03/16f
4.8
0.0
722.2
727.0
5,320.6
253.2
764.7
7,065.4
615.8
1,676.6
4,380.3
33.8
358.9
7,065.4
03/17f
4.8
0.0
852.1
856.9
6,437.9
282.5
876.4
8,453.7
696.1
1,998.4
5,291.0
38.1
430.1
8,453.7
82.5
32.9
25.3
23.8
1.0
82.5
32.3
24.8
23.6
1.1
82.3
31.5
24.1
23.0
1.1
82.2
31.0
23.7
22.7
1.0
Growthratios(%)
03/14
4.14
1.60
0.18
5.92
2.70
3.22
0.37
(0.07)
0.06
0.96
1.90
03/15f
4.20
1.62
0.12
5.94
2.62
3.32
0.34
0.05
0.94
1.99
03/16f
4.25
1.67
0.12
6.03
2.66
3.38
0.29
0.05
0.97
2.07
03/17f
4.28
1.68
0.12
6.08
2.67
3.41
0.29
0.05
0.98
2.09
RoA
As s ets /Equi ty
RoE
1.90
11.19
21.28
1.99
10.28
20.49
2.07
9.65
19.93
2.09
9.80
20.47
03/14
03/15f
03/16f
03/17f
24.2
4.7
4.7
0.8
19.1
3.3
3.3
0.9
15.4
2.8
2.8
1.1
12.7
2.4
2.4
1.3
35.5
35.5
181.2
180.9
7.2
44.9
44.9
257.3
256.6
8.0
55.7
55.7
301.5
300.7
9.8
67.2
67.2
355.4
354.4
11.4
KeyRatios
Loa ns
Feei ncome
Adjus tedneti ncome
Di l .EPS
Operatingratios(%)
Feei ncome/opera ti ngi ncome
Operati ngprofi tmargi n
Netprofi tma rgi n
Effecti veTaxra te
Balancesheet(INRbn)
Fiscalyearending
Equi tycapi ta l
Preferenceca pi ta l
Networth
Depos i ts
Tota l borrowi ngs
Otherl i a bi l i ti es a ndprovi s i ons
Totalliabilities
Cas ha ndba nkba l ances
Inves tments
Loa ns
Fi xeda s s ets
Othera s s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
SLRInves tment/NDTL
Fiscalyearending
Feei ncome
Otheri ncome
Opera ti ngi ncome
Operatingprofit
Loa nl os s provi s i ons
Otherprovi s i ons
Tax
Netprofi t
Fiscalyearending
Valuationratios(x)
P/E(onAvendus EPS)
P/BV
P/Adjus tedBV
Pershareratios(INR)
ReportedBookVal ue(BV)
Adjus tedBookVa l ue(ABV)
Yi el dona dva nces
Cos tofdepos i ts
Neti nteres tma rgi n
Equi ty/As s ets
Loa ns /As s ets
Di vi dendpa yout
Interna l capi ta l growth
Ca pi ta l a dequacy
AssetQuality
Gros s NPLra ti o
NetNPLra ti o
NetNPL/networth
Loa nl os s res erve/Gros s NPL
Loa nprovi s i ons /NII
Loa nprovi s i ons /Tota l l oa ns
Bus i nes s perbranch(INRmn)
11.7
7.8
5.9
4.4
21.7
1.7
45.6
11.8
7.5
5.9
4.5
21.9
1.0
44.1
11.7
7.5
5.9
4.5
21.7
1.0
44.0
11.6
7.4
5.8
4.5
21.7
1.0
43.9
8.8
61.9
24.6
23.7
17.9
16.1
10.5
61.7
24.0
20.9
19.7
17.9
10.3
62.2
23.7
20.6
17.2
17.4
10.1
62.8
23.6
19.8
17.9
16.9
1.0
0.3
1.9
72.4
8.8
0.7
1.0
0.3
1.7
70.3
8.1
0.7
0.9
0.3
1.7
70.1
6.9
0.7
0.9
0.3
1.7
69.9
6.9
0.6
1,969.8
1.2
2,147.0
1.5
2,364.3
1.8
2,633.9
2.0
Financials
38
IndiaEquityResearch
Financials
September04,2014
ICICIBank
ADD
TargetPrice(INR)1780 Uptrendinprofitabilitytodrivethevaluation
CompanyReport
LastPrice(INR)
1,581
Bloombergcode
ICICIBCIN
Reute rs code
ICBK.BO
Avg.Vol.(3m)(mn)
2.87
4.21
1,619/777
52wkH/L(INR)
27,140
Se nse x
MCAP(INRbn/USDbn)
1,829/30.24
Shareholding(%)
03/14
Promote rs
06/14
ICICIBC has derisked its loan book in recent years; the quality of the
retail book has been resilient, as the bank has focused on secured
retail loans in the past 34 years and cut down on risky retail loans
significantly. Given the strong liability mix (CASA ratio of 43% at the
end of FY14) and increase in yields, partly driven by rising working
capital lending, we forecast NIM expansion to sustain in FY15f,
althoughbyalesserextentof9bpto3.24%.TheincrementalNPLof
ICICIBChasremainedwellbelowthepeakduringFY07FY08(average
of1.25%).APATCAGRof16%wouldlifttheRoEby2.62%to16.7%by
FY17f.OurSep15TPofINR1,780valuesthestockat2.23xtheoneyear
forwardadjustedP/B.WereinitiatecoveragewithanAdd.
0.0
0.0
MFs ,FIs ,Ba nks
23.2
23.3
FIIs
39.9
40.0
LargereboundinNIMduringFY11FY14islikelytosustain
Public
Others
4.6
32.3
4.6
32.1
DuringFY11FY14,theNIMexpanded54bp,drivenbya172bpimprovement
intheyieldonloans,whilecostofdepositsroselowerby101bp.Addressing
structuralissuessuchas,reductionofthedragfromsecuritisationlosses,loan
pricingandreductionofexcessliquidityintheoverseasbranchescontributed
totheimprovementintheyieldonloans.Giventhestrongliabilitymix(CASA
ratio of 43% at the end of Jun14) and increase in yields, partly led by rising
working capital lending, we forecast NIM expansion to sustain in FY15f,
although by a lesser extent of 9bp to 3.24%. The NII/assets is estimated at
2.99%forFY15f,an8bpimprovementyoy.
ICICI Bank
Sensex Reba sed
1,60 0
1,50 0
1,40 0
1,30 0
1,20 0
1,10 0
Despiterise,incrementalNPLwellbelowpeakduringFY07FY09
1,00 0
ICICIBCsincrementalNPLduringFY13FY14hasremainedwellbelowthepeak
during FY07FY08 (average of 1.25%). While the management has guided for
an improvement in FY15f, we assume the incremental addition at 0.25%,
similartothatinFY14.NPLprovision/loanisunlikelytodeclinemateriallyfrom
the current level and is estimated at 0.42% of the loans over FY15fFY17f,
similartothemeanoftheprecedingthreeyears.
90 0
80 0
S e p13
J a n 14
M a y14
S e p 14
StockPerfm.(%)
1m
3m
1yr
Abs olute
7.1
8.4
101.7
Rel.toSens ex
0.6
0.8
52.9
03/14
03/15f
03/16f
0.2
0.2
0.2
18.8
16.3
14.1
0.2
0.2
0.2
98.1
114.9
133.2
Financials(INRbn)
NII
YoY(%)
Opera tingprofit
A.PAT
1,155.0
1,155.0
1,155.0
EPS(INR)
85.0
99.5
115.4
YoY(%)
17.7
17.1
16.0
Equity/Ass ets (%)
12.3
11.6
11.1
P/E(x)
18.6
15.9
13.7
2.5
2.3
2.1
1.7
14.0
1.8
15.0
1.8
15.9
Sho/s
P/B(Adj)(x)
RoA(%)
RoE(%)
Q uarterlyTrends
09/13
12/13
03/14
Op. income (INRbn)
19.9
19.9
19.9
19.9
PAT (INRbn)
23.5
23.5
23.5
23.5
ExpansioninRoEaheadofsomepeers;gapnarrowssignificantly
ICICIBC reported large expansion in its return ratios in the preceding three
yearswithitsRoEandRoAexpandingby40bpand437bp,respectively.The
large gap in RoE with some peers such as AXSB and HDFCB has contracted
significantly.APATCAGRof16%wouldlifttheRoEby2.62%to16.7%byFY17f.
Mostpreferredamongnewbanks;reinitiatewithBuy
We expect the revenue momentum to remain strong, led by sustained high
margins,animprovementinthefeeincomeandstrongretailloangrowth.Even
with elevated NPL provisions/asset, we foresee RoEs rising continuously
throughFY17ftotheupperteens.ICICIBChasderiskeditsloanbookinrecent
years;thequalityoftheretailbookhasbeenresilient,asthebankhasfocused
onsecuredretailloansinthepast34yearsandhascutdownonriskyretail
loanssignificantly.OurSep15TPofINR1,780valuesthestock(consolidated)at
2.28xtheoneyearforwardadjustedP/B.Wereinitiatecoverageonthestock
withanAdd.
06/14
ICICIBank
54bpriseinNIMduringFY11FY14ledby173bpriseinloanyields
ThesharpimprovementintheFY11FY14NIMwaslargelyledbythe172bpimprovementintheyield
onloans.Riseinyieldonloansfarexceededtheincreaseincostofdeposits(roseby101bp),leading
to a 54bp NIM expansion. Focus on structural issues such as reduction of drag from securitisation
losses,loanpricingandtrimmingdownofexcessliquidityintheoverseasbranchescontributedtothe
improvementintheyieldonloans.Theyieldremainedcloseto10%duringFY13FY14.
LargeNIMexpansioncouldsustaininFY15fdrivenbystrongfundingmix
Withtheimprovementledbystructuralchangesalreadyfactoredin,theNIMislikelytobelinkedto
thebanksinterestratecycleandassetliabilitymix.Giventhestrongliabilitymix(CASAratioof43%at
theendofJun14)andincreaseinyields,weforecastNIMexpansiontosustaininFY15f,althoughbya
lesser extent of 9bp to 3.24%. We estimate a CAGR of 15% in the net interest income, following a
CAGR of 18% in the FY15fFY17f loan growth. NII/asset is estimated at 2.99% for FY15f, an 8bp
improvementyoyandislikelytoflattenthereafter.Therecouldbesomebenefitfromtheexpansion
intheoverseasNIMduringFY15f,drivenbyfurtherreductionintheliquidityinoverseasbranches.
Exhibit2: NIM,yield,depositcostfortheyear(%)
Exhibit1: NIM(reported)forthequarter(%)
NIM
Costofdeposits
3.5%
3.4%
3.3%
Yieldonloans
12
3.5
10
3.0
2.5
2.0
3.2%
3.1%
3.0%
2.9%
2.8%
4
Jun12
Dec12
Jun13
Dec13
Jun14
1.5
Mar11
Mar13
Mar15f
Mar17f
FY14incrementalNPLwellbelowpeakduringFY07FY09
TheincrementalNPLhasremainedwellbelowthepeakduringFY07FY08(averageof1.25%).While
the management has guided for an improvement in FY15f, we assume an incremental addition at
0.25%,similartothatinFY14.However,thegrossNPLratioislikelytocontinuetrendingdown.
Exhibit3: IncrementalNPLandNPLratios
IncrementalNPL(RHS)
GrossNPLratio
NetNPLratio
6.0%
2.0%
5.0%
1.5%
4.0%
1.0%
3.0%
0.5%
2.0%
0.0%
1.0%
0.0%
Mar07
Mar08
Mar09
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15f
0.5%
Mar16f Mar17f
Financials
40
ICICIBank
Exhibit4: NPLratiosandslippageratioforthequarter
Slippageratio(RHS)
GNPLratio
Exhibit5: PCR,NPLprovisions/loans
NPLprovision/loans
NNPLratio
PCR(RHS)
4.0%
3.0%
2.5%
90%
3.3%
2.4%
2.0%
80%
2.6%
1.8%
1.5%
70%
1.9%
1.2%
1.0%
60%
1.2%
0.6%
0.5%
50%
0.0%
0.0%
0.5%
Jun12
Dec12
Jun13
Dec13
Jun14
40%
Mar07
Mar09
Mar11
Mar13
Mar15f
Mar17f
Exhibit6: Netrestructuredloans
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
Jun14
Netrestructuredloans
41.72
41.58
45.75
53.15
59.15
68.26
86.02
105.58
112.65
1.3%
1.3%
1.3%
1.5%
1.7%
1.8%
2.2%
2.6%
2.8%
Restructuredloans/customerassets
Theslippageratiointhepastfivequartershasremainedlargelystableatcloseto1.5%.However,the
additiontorestructuredloansincreasedintherecentquartersliftingtheo/snetrestructuredloansto
2.6%ofthecustomerassetsatendFY14.Aspermanagementguidance,theadditiontothestressed
assetsislikelytostabiliseintheneartermanddeclinethereafter.
Weforecastprovisions/loanstostayclosetocurrentleveloverFY15fFY17f
ThebanksPCRdeclined8.2%duetolargewriteoffsandthe20bpyoyriseintheincrementalNPL
duringFY14.TotalwriteoffduringFY14wentup37%yoytoINR22.4bn,contributingabouttwothird
tothePCRdecline.NPLprovisions/loansareunlikelytocontractmateriallyfromthecurrentleveland
areestimatedat0.42%oftheloansoverFY15fFY17f,similartothemeanduringthepastthreeyears.
PCRisestimatedtobecloseto62%.
Forex,dividendincomeoffsetslowdownincorefees
Exhibit7: Segmentswithinotherincomeaspercentageofassets
1.7%
CEB/assets
Dividendincome/assets(RHS)
0.25%
1.4%
0.20%
1.1%
0.15%
0.8%
0.10%
0.5%
0.05%
0.2%
Mar09
Mar10
Forexincome/assets
Mar11
Mar12
Mar13
Mar14
Mar15f
Mar16f
0.00%
Mar17f
Financials
41
ICICIBank
The slowdown in the core fees (commission, exchange and brokerage) in the recent years has been
partlyoffsetbyanincreaseinthedividendincomeandforexincome.ThetransferofINR2.2bnfrom
foreign branches supported noninterest income in 4QFY14. The management mentioned that the
reserves are now INR22bn, though not all of it is realisable immediately. Core fee income growth
seemstobeonaslowrecoverypathat14%yoy.About55%ofthefeeslinkedtoretailloansand15%
linkedtocorporateloanswouldgraduallyseeanuptrendwiththepickupinloangrowth.
ExpansioninRoEduringFY11FY14aheadofsomepeers
Exhibit8: RoE,RoAandasset/equity
RoA(%)
RoE(%;RHS)
Asset/Equity(x;RHS)
2.0
20
1.5
15
1.0
10
0.5
0.0
Mar07
Mar08
Mar09
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15f
Mar16f
0
Mar17f
ICICIBCreportedalargeexpansioninitsreturnratiosintheprecedingthreeyearswithitsRoEandRoA
expandingby437bpand40bp,respectively.ThiswaslargelydrivenbyNIMexpansionandcontrolin
thecreditcost.ThelargegapinRoEwithsomepeershascontractedsignificantly.A437bpriseinthe
RoE was similar to the increase reported by HDFCB. AXSB had the reverse trend with a 190bp
contractioninitsRoEduringthesameperiod.
Exhibit9: RoE(%)
Mar07
Mar08
Mar09
Mar10
Mar11
Mar12
Mar13
Mar14 Mar15f
Mar16f
Mar17f
ICICIBC
13.37
11.75
7.83
7.96
9.65
11.20
13.10
14.02
15.02
15.94
16.65
AXSB
24.10
17.60
19.12
19.15
19.34
20.29
18.53
17.44
17.28
18.02
18.55
HDFCB
19.46
17.74
17.06
16.13
16.75
18.69
20.34
21.28
20.49
19.93
20.47
RoAmayplateauoverFY15fFY17fwithstablecreditcost
After a large expansion in the previous three years, return ratios are likely to flatten over the next
threeyears.Moststructuralimprovementssuchasthereductionofsecuritisationlosses,changeinthe
loanmixandimproveddepositprofilearealreadyfactoredin.Hence,giventhestablecreditcosts,we
donotseealargeexpansionoverFY15fFY17f.However,expansionislikelytosustainwithamarginal
uptrend.
Pickupinrevenuescouldsustaincostincomecloseto38%
Mar07
Mar08
Mar09
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15f
Mar16f
Mar17f
Employeecost/asset
0.54
0.56
0.51
0.52
0.73
0.80
0.77
0.75
0.76
0.76
0.75
Nonemployeecost/asset
1.64
1.58
1.25
1.02
0.97
0.98
1.01
1.07
1.13
1.11
1.10
Cost/asset
2.18
2.14
1.75
1.54
1.70
1.77
1.78
1.82
1.90
1.87
1.85
Costincome
53.2
50.6
44.1
37.6
42.2
43.0
40.6
38.3
38.7
38.4
38.5
Financials
42
ICICIBank
TheretailsegmentislikelytosustainmomentuminFY15f
Weassumethetrendoftheriseinretailloans,asapercentageofdomesticloansto53%attheendof
FY14,tosustaininFY15f.Theslowdowninthecorporatesegmentandsustainedmomentuminselect
secured segments within retail is likely to sustain the retail proportion closer to the current level.
ICICIBCexpectssystemloangrowthatc15%anditsowndomesticloanbookshouldincrease2%4%
fasterthanthat.Theretailbookisexpectedtoremainthekeydriverwithgrowthexpectedataround
20%. Corporate book growth should remain in single digits; any acceleration owing to faster project
implementationisnotexpectedinFY15f.
Exhibit10: Growthinretailloansandretailasapercentageofcustomerassets(%)
Retail/Domesticloans(RHS)
Retailloans(yoy)
Domesticloans(yoy)
25%
56%
20%
54%
15%
52%
10%
50%
5%
48%
0%
46%
Mar11
Mar12
Mar13
Mar14
Mar15f
Mar16f
Mar17f
Tilttowardssecuredloanstostay;loansassumedtoriseat3yearCAGRof18%
Withintheretailcategory,theshareofhomeloansincreasedfromc51%attheendofMar12to54%at
the end of Mar14. During this period, vehicle loans contracted, led by CV loans. Unsecured personal
loanssawacceleration,partlydrivenbytheverylowbase.Thehomeloanssegmentislikelytostaythe
focusareawithintheretailcategory.Thetilttowardsthesecuredsegmentswithinretailislikelytostay
andwithgrowingproportion,itislikelytokeepthecreditcostofthebankundercheck.
Exhibit11: Keysegmentswithinretailaspercentageofretailloans
Mar12
Mar13
Mar14
Mar15f
Mar16f
Retailloans/domesticloans
52.3%
49.5%
53.0%
54.1%
54.0%
Homeloans
50.5%
53.6%
53.5%
54.0%
54.8%
Vehicleloans(CV+auto)
27.6%
24.1%
20.9%
20.2%
19.8%
Personalloans
1.10%
1.50%
3.00%
3.03%
3.07%
2.8%
2.7%
2.5%
2.3%
2.2%
Creditcard
Businessbanking
7.20%
5.90%
6.00%
5.71%
5.46%
Otherretail
10.8%
12.2%
14.1%
14.7%
14.7%
TargetpricevaluesICICIBCat2.28xoneyearforwardbookvalue
WeestimatethemeanoneyearforwardP/EandP/Bforthefiveyearperiodended1Sep14(excluding
thevalueofthesubsidiaries)at11.9xand1.3x,respectively.Wefactora25%premiumtothefiveyear
meanP/EandP/B,astheRoEhasnormalisedintherecenttwoyearsandislikelytorisetothehigh
teensoverthenextthreeyears.WeapplythesetoourforecastEPSandadjustedbookvalueforSep15
to arrive at fair values of INR2,124 and INR1,550, respectively. The P/E and P/Bbased fair values
includesthevalueofsubsidiariesatINR279.5/share.
Financials
43
ICICIBank
Exhibit12: AverageP/EandP/B(x)(02Sep14)
1month
3month
6month
12month
2year
3year
5years
P/E
14.54
14.37
13.84
12.60
12.90
13.05
15.75
P/B
2.05
2.02
1.91
1.70
1.69
1.63
1.73
12month
2years
3years
5years
Source:Company,Bloomberg,IL&FSInstitutionalEquities
Exhibit13: AverageP/EandP/B(x)(standalone)
1month
3month
6month
P/E
12.05
11.84
11.21
9.80
9.84
9.61
11.90
P/B
1.70
1.66
1.55
1.33
1.29
1.20
1.30
Source:Company,Bloomberg,IL&FSInstitutionalEquities
ThetargetpriceofINR1,780isaweightedaverage,whereweassignaweightof30%toourDCFbased
fair value, and 35% each to our P/E and P/Bbased fair values. In the DCF method, we assume the
semiexplicitperiodgrowthat23%.
Exhibit14: P/E,P/B,DCF/SOTPbasedfairvalues
P/E
P/B
DCF/SOTP
Weights
35%
35%
30%
2,124
1,550
1,647
Fairvalue(INR)
1,780
The target price values the stock at 2.28x the oneyear forward adjusted book value. We reinitiate
coveragewithaBuyrating.
Keyriskstoourestimates
f Largelossesfrominfrastructureprojectsmayleadtheprovisionsbeinghigherthanourestimates.
f DelayedrecoveryintheCVloanscouldimpactretailloangrowthmarginally;also,slowpickupinthe
corporateloansegmentcouldimpactloangrowthadversely.
Exhibit15: SumofpartsandDCFbasedvaluations
(INRbn)
Rationale
Stake(%)
Valueoffirm
ValueofICICIBCsstake Value/share(INR)
ICICIPrudentialLifeInsurance
74
107.8
79.8
69.1 3.5xtheequityinvestmentatendMar14
ICICIPrudentialAMC
51
53.4
27.2
23.6
5%ofAUMatendMar14
ICICISecurities
100
3.9
3.9
3.4
1.3xthenetworth
ICICIBankCanada
100
100.0
100.0
86.5
1.8xthenetworth
74
39.9
29.5
25.6
1.6xthenetworth
ICICISecuritiesPrimaryDealership
100
7.4
7.4
6.4
1.0xthenetworth
ICICIHomeFinanceCo.Ltd.
100
22.8
22.8
19.8
1.5xthenetworth
ICICIBankUKPLC.
100
45.2
45.2
39.2
1.2xthenetworth
ICICIBankEurasia.Ltd.LiabilityCo.
100
4.0
4.0
3.5
2.0xthenetworth
ICICIInvestmentManagement
100
0.2
0.2
0.1
1.0xthenetworth
ICICIVentureFundsManagement
100
2.2
2.2
1.9
1.0xthenetworth
ICICISecuritiesInc
100
0.1
0.1
0.1
1.0xthenetworth
ICICISecuritiesHoldingInc
100
0.6
0.6
0.5
ICICILombardGeneralInsurance
Totalvalueofthesubsidiaries(INR)
279.5
1.0xthenetworth
Financials
44
ICICIBank
Exhibit16: 1yearforwardP/EandtargetP/E
1yearforwardP/E(X)
5yearaverage
26
2.5
21
2.1
16
1.7
11
1.3
6
Jan10
Dec10
Nov11
Nov12
Oct13
Sep14
Sep15
0.9
Jan10
Dec10
Nov11
Nov12
5yearaverage
Oct13
Sep14
Sep15
Financials
45
ICICIBank
Fiscalyearending
Netinterestincom e
Feei ncome
Tra di ngprofi t
Otheri ncome
Operatingprofit
Otherprovi s i on
PBT(reported)
Tota l taxes
PAT(reported)
(+)Sha rei na s s oc.earni ngs
Pri orperi odi tems
Sha res outs tandi ng(mn)
Dil.EPS(INR)
03/14
164.8
81.3
5.5
17.4
269.0
103.1
165.9
17.1
9.1
139.7
41.6
98.1
0.0
0.0
0.0
98.1
1,155
84.9
03/15f
191.7
97.7
11.1
14.3
314.8
121.8
193.0
19.7
9.8
163.5
48.7
114.9
0.0
0.0
0.0
114.9
1,155
99.5
03/16f
218.7
114.0
11.6
15.0
359.4
138.1
221.2
20.6
11.0
189.7
56.4
133.2
0.0
0.0
0.0
133.2
1,155
115.4
03/17f
250.6
135.1
12.3
15.7
413.6
159.2
254.5
24.3
12.1
218.0
64.9
153.2
0.0
0.0
0.0
153.2
1,155
132.6
14.4
29.2
1.5
40.4
28.7
16.7
18.8
19.7
22.9
17.7
17.3
16.3
20.1
15.0
17.1
18.3
14.1
16.7
4.3
16.0
61.2
30.2
61.7
36.5
29.8
60.9
31.0
61.3
36.5
29.8
60.9
31.7
61.6
37.1
29.8
60.6
32.7
61.5
37.0
29.8
03/14
11.6
3.5
720.6
732.1
3,319.1
744.0
1,151.1
5,946.4
415.3
1,770.2
3,387.0
44.4
329.4
5,946.4
03/15f
11.6
3.5
785.6
800.7
3,910.3
880.0
1,265.8
6,856.8
535.9
1,929.6
3,971.9
43.0
376.5
6,856.8
03/16f
11.6
3.5
863.2
878.2
4,627.4
1,003.0
1,400.4
7,909.0
621.6
2,113.0
4,699.2
41.8
433.4
7,909.0
03/17f
11.6
3.5
953.3
968.3
5,586.7
1,104.0
1,560.0
9,219.0
731.9
2,368.7
5,573.3
41.5
503.6
9,219.0
102.0
53.3
28.9
23.6
6.8
101.6
49.3
27.0
22.0
6.3
101.6
45.7
25.4
20.9
5.7
99.8
42.4
23.9
19.9
5.1
03/14
2.91
1.44
0.41
4.75
1.82
2.93
0.35
0.01
0.10
0.73
1.73
03/15f
2.99
1.53
0.40
4.91
1.90
3.02
0.36
0.01
0.10
0.76
1.79
03/16f
2.95
1.54
0.37
4.86
1.87
3.00
0.34
0.00
0.09
0.76
1.80
03/17f
2.92
1.58
0.33
4.83
1.85
2.97
0.34
0.00
0.08
0.76
1.79
RoA
As s ets /Equi ty
RoE
1.73
8.09
14.02
1.79
8.37
15.02
1.80
8.83
15.94
1.79
9.31
16.65
03/14
03/15f
03/16f
03/17f
18.6
2.5
2.5
1.5
15.9
2.3
2.3
1.5
13.7
2.1
2.1
1.6
11.9
1.9
1.9
1.8
85.0
21.1
633.9
628.0
23.0
99.5
24.7
693.2
679.3
24.0
115.4
28.6
760.3
742.0
26.0
132.6
32.9
838.3
818.5
29.0
KeyRatios
Growthratios(%)
Loa ns
Feei ncome
Di l .EPS
Operatingratios(%)
Opera ti ngprofi tma rgi n
Netprofi tma rgi n
Effecti veTa xrate
Balancesheet(INRbn
Fiscalyearending
Equi tycapi ta l
Networth
Depos i ts
Tota l borrowi ngs
Totalliabilities
Ca s ha ndba nkba l a nces
Inves tments
Loa ns
Fi xeda s s ets
Otheras s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
SLRInves tment/NDTL
Fiscalyearending
Feei ncome
Otheri ncome
Opera ti ngi ncome
Operatingprofit
Otherprovi s i ons
Ta x
Netprofi t
Fiscalyearending
Valuationratios(x)
P/E(onAvendus EPS)
P/BV
P/Adjus tedBV
Pershareratios(INR)
Yi el dona dvances
Cos tofdepos i ts
Neti nteres tmargi n
Equi ty/As s ets
Loa ns /As s ets
Di vi dendpayout
Interna l ca pi tal growth
Ca pi ta l adequa cy
AssetQuality
Gros s NPLra ti o
NetNPLra ti o
NetNPL/networth
10.0
6.6
5.7
3.1
23.4
2.1
38.3
10.0
6.9
5.7
3.2
23.4
3.5
38.7
10.0
6.8
5.8
3.2
23.9
3.2
38.4
9.9
6.4
5.7
3.1
24.6
3.0
38.5
12.3
68.1
29.8
28.9
10.4
17.7
11.6
68.8
28.1
28.2
11.3
15.0
11.1
70.4
26.7
26.3
12.3
14.1
10.5
71.4
25.7
25.5
13.0
13.2
3.0
1.0
4.5
68.6
10.4
1.7
2.4
0.9
5.2
64.2
10.3
1.5
2.2
0.9
5.6
60.9
9.4
1.3
2.0
0.8
5.4
60.1
9.7
1.2
1,786.9
1.4
1,921.1
1.5
2,118.2
1.6
2,373.0
1.8
Financials
46
IndiaEquityResearch
Financials
September04,2014
PunjabNationalBank
BUY
TargetPrice(INR)1182 ReturningtoNIMexpansion
CompanyReport
LastPrice(INR)
961.1
Bloombergcode
PNBIN
Reute rs code
PNBK.BO
Avg.Vol.(3m)(mn)
1.10
1.05
1,068/400
52wkH/L(INR)
27,140
Se nse x
MCAP(INRbn/USDbn)
347.97/5.75
03/14
06/14
Promote rs
Shareholding(%)
58.9
58.9
MFs ,FIs ,Ba nks
18.5
19.5
FIIs
17.2
17.4
3.9
1.5
3.5
0.8
Public
Others
Withamodestgrowthof9%inloansoverFY13fFY14fandlargepart
of restructured assets reaching the end of moratorium period in
current fiscal, incremental NPL is likely to improve over FY16fFY17f.
Largerestructuredassetsremainkeyriskfactor.Webuildincremental
NPLatanaverageof1.37%,33bplowerthanpreceding3yearsmean.
We buildin elevated NPL provisions, at an average of 1.23% over
FY15fFY17f.22bpNIMexpansioninJun14quarterislikelytosustain
as slippage moderates and cost of funds decline. We forecast 14bp
NIMexpansionlargelydrivenbytheriseinyieldonloans.Weforecast
the 26bp and 489bp recovery in RoA and RoE, respectively over
FY15fFY17f. Despite building in elevated provisions, we forecast a
495bp RoE expansion over FY15fFY17f. Reinitiate coverage with a
Sep15TPof1,182andaBuy.
CoreprofitabilitylikelytorecoverledbyNIMexpansion
Moderationintheadditionofstressedassets,leadingtoeasingofthepressure
on yields, is likely to lead to better NIM in the upcoming quarters. Jun14
quartersaw22bpsequentialimprovementinNIMto3.42%.Thetrendislikely
to sustain with 14bp estimated NIM expansion over FY15fFY17f. Abovethe
line income in the Jun14 quarter provided better visibility for the ensuing
quarters,asincomefromvolatilesources(capitalgains,FXgains&writtenoff
loansrecoveries)waslow.Totalfeeincomegrewby11%yoy,mainlydriven
byLC&BGcommissionincomeandbills&remittances.
1,04 0
88 0
72 0
56 0
DespiteimprovementinNPLs,provisionstostayabovehistoricalavg.
40 0
S e p13
J a n 14
M a y14
Pun. Na tl. Ba nk
S e p 14
Sensex Rebased
StockPerfm.(%)
1m
3m
1yr
Abs olute
0.8
1.1
134.7
5.7
10.3
85.9
Financials(INRbn)
03/14
03/15f
03/16f
NII
161.5
188.2
218.5
Rel.toSens ex
8.7
16.5
16.1
113.8
126.3
149.6
YoY(%)
Opera tingprofit
A.PAT
Sho/s (diluted)
A.EPS(INR)
YoY(%)
33.4
41.7
55.3
362.1
377.1
377.1
93.4
112.9
146.7
31.3
19.8
32.6
6.5
6.5
6.2
Equity/Ass ets (%)

P/E(x)
10.4
8.7
6.6
1.2
1.1
1.0
0.6
10.2
0.7
11.3
0.8
13.3
P/B(Adj)(x)
RoA(%)
RoE(%)
Q uarterlyTrends
Op. income (INRbn)
PAT (INRbn)
09/13
12/13
03/14
49.1
51.6
54.0
5.1
5.1
7.6
8.1
14.1
Themodest9%CAGRinloansoverFY13fFY14fislikelytobenefitbyreducing
theadditiontostressedassets.Guidanceonincrementalslippages,withgross
slippages runrate less than INR 30bn, provides comfort for subsequent
quarters.However,largerestructuredassetsremainkeyriskfactor.Webuildin
incremental NPL at an average of 1.37%, 33bp lower than the preceding 3
yearsmean.WebuildinelevatedNPLprovisions,atanaverageof1.23%over
FY15fFY17f,12bphigherthantheaverageduringlastthreeyears.
Recoveryinprofitability,assetqualitytoliftRoAto1%byFY17f
While we believe the worst is over for margins, given PNBs huge stock of
restructuredloans,wewouldwaitforsomemoreseasoningbeforebuildinga
larger improvement in asset quality. We forecast 25bp improvement in RoA
over FY15fFY17f to 0.90%. Despite having a large restructured book,
managementhasguidedtomaintainingRoAatc.1%inFY15f.
ReinitiatewithaBuy;TPimplies1yrfwdAdj.P/Bof1.15x
We value PNB based on PE, P/B and DCF method. Our DCFbased fair value
stands at INR1,396, wherein we assume a cost of equity of 14% as well as a
semiexplicitandfadeperiodgrowthof16.3%and3%,respectively.Thesemi
explicit period caps the asset/equity at18x. Our Sep15 TP of INR1,182 values
PNB at 1.15x the 1yr fwd adj. book. Reinitiate coverage with a Buy. Further
riseinNPLsdrivenbylargerestructuredloansiskeyriskfactor.
06/14
PunjabNationalBank
Moderationinstressedassetformationlikelytosustain
Guidanceonincrementalslippageprovidescomfort;forsubsequentquarters,grossslippagerunrateis
guided to be less than INR30bn. Fresh buildup in stressed assets loans was at INR 54bn in Jun14
quarterandINR68bnintheprecedingquarter.
Exhibit1: FreshadditiontogrossNPLandrestructuredassetsduringthequarter(INRmn)
120,000
Totaladditiontostressedassets(INRmn)
90,000
60,000
30,000
0
Mar12
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
Jun14
However,recoverytobedelayedduetolargerestructuredassets
Paceofrestructuringhasbeenmoderatinginthepastfourquarters
(INRmn)
Loansrestructured
O/srestructuredloans
Totalrestructuredloans
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
12
40
77
141
28
27
22
32
Jun14
15
255
279
303
321
342
371
313
355
365
8.67%
9.45%
10.20%
10.41%
11.20%
11.81%
9.59%
10.17%
10.49%
WebuildinincrementalNPLatanaverageof1.37%,33bplowerthanthepreceding3yearsmean.
We forecast NPL provisions to stay elevated, at an average of 1.23% over FY15fFY17f, 12bp higher
thantheaverageduringlastthreeyearstoliftthePCRto53.2%.
IncrementalNPL(RHS)
GNPL
NPLprovisions/loans
NNPL
PCR(RHS)
7.0%
2.0%
1.5%
56%
5.6%
1.6%
1.2%
52%
4.2%
1.2%
0.9%
48%
2.8%
0.8%
0.6%
44%
1.4%
0.4%
0.3%
40%
0.0%
0.0%
0.0%
Mar11
Mar13
Mar15f
Mar17f
36%
Mar11
Mar13
Mar15f
Mar17f
Financials
48
PunjabNationalBank
andhighexposuretotheriskysectors
Exhibit5: ExposureofBOBandentirebankingsystemtotheriskysectors
(INRmn)
PNB
Allbanks
Fundbased
%ofdomesticloans
Outstanding
%oftotalloans
29,151
0.94%
353,260
0.59%
227,411
7.36%
3,619,690
6.02%
Energy
327,473
10.60%
4,883,460
8.12%
Total
584,034
18.91%
8,856,410
14.73%
Miningandquarrying
FallinNIMlikelytobearrestedasfundingcost,slippagesmoderate
Moderationintheadditionofstressedassets,leadingtoeasingofthepressureonyields,islikelyto
leadtobetterNIMintheupcomingquarters.Jun14quartersaw22bpsequentialimprovementinNIM
to3.42%.Thetrendislikelytosustainwith14bpestimatedNIMexpansionoverFY15fFY17f.
Exhibit7: CalculatedNIMfortheyear(%)
Costofdeposits(%)
NIM(%,RHS)
Yieldonloans(%)
NIM
3.8
13
3.8
11
3.6
3.4
3.2
3.2
3.0
Jun14
3.0
5
Jun12
Dec12
Jun13
Dec13
3.6
3.4
Mar11
Mar13
Mar15f
Mar17f
NIMexpansion,moderatingNPLstoliftRoAto0.90%byFY17f
Whilewebelievetheworstisoverformargins,givenPNBshugestockofrestructuredloans,wewould
waitforsomemoreseasoningbeforebuildingalargerimprovementinassetquality.Weforecast25
bp improvement in RoA over FY15fFY17f to 0.90%. Despite having a large restructured book,
managementhasguidedtomaintainingRoAatc.1%inFY15f.
Exhibit8: RoA,RoE(%)
30
1.4
RoA
RoE(RHS)
1.2
25
1.0
20
0.8
15
0.6
0.4
Mar11
Mar12
Mar13
Mar14
Mar15f
Mar16f
10
Mar17f
Financials
49
PunjabNationalBank
Retainedearnings,4%dilutiontosustainCET1above8.4%tillFY17f
We assume 4% dilution in FY15f; dilution coupled with 12% CAGR in retained earnings is likely to
sustainCET1above8.4%tillFY17f.Wehaveassumed14.2%CAGRinriskweightedassetsoverFY15f
FY17f. CET 1 was 8.5% and CAR at 11.52% at the end of Jun14. A moderation in the RWA growth is
assumedtosustain,preservingthecorecapital.
Exhibit9: CapitalratiosattheendofJun14(%)
TierI(RHS)
RWA(yoy)
12%
10%
9%
40%
9%
20%
6%
8%
3%
0%
7%
0%
20%
6%
CAR
TierI
CET1
Mar14
TierII
Mar15f
Mar16f
Mar17f
OurTPvaluesPNBat1yearforwardadjustedP/Bof1.15x
1month
3month
6month
12month
2year
3year
5year
6.50
0.85
6.83
0.87
6.33
0.80
5.12
0.66
4.90
0.71
4.94
0.82
5.78
1.18
P/E
P/B
Weights
P/E
P/B
DCF/SOP
TP
35%
964
35%
1,217
30%
1,396
1,182
12monthmovingaverage
5yearaverage
1yearforwardP/E(X)
2.5
10
2.0
1.5
1.0
0.5
Jan10
Dec10
Nov11
Nov12
Oct13
Sep14
Sep15
2
Jan10
Dec10
Nov11
Nov12
5yearaverage
Oct13
Sep14
Sep15
Financials
50
PunjabNationalBank
Our target price is based on the DCF, P/E and P/B methods. Our DCFbased fair value stands at
INR1,396,whereinweassumeacostofequityof14%aswellassemiexplicitandfadeperiodgrowth
of16.3%and3%,respectively.Thesemiexplicitperiodcapstheasset/equityat18xandlinksittothe
growth.OurSep15targetpriceofINR1,182valuesPNBat1.15xtheoneyearforwardadjustedbook
value.WereinitiatecoveragewithaBuyrating.
Riskfactors:
f Large restructured assets, exposure to risky assets can delay the recovery in NPLs even if the
economyrevives.
f NIMexpansioncanbeadverselyimpactedifCASAgetsimpactedduetocompetition.
f HigherthanassumedgrowthinassetsmayleadertolargerdilutionandlowerRoE.
Financials
51
PunjabNationalBank
Fiscalyearending
Netinterestincom e
Feei ncome
Tradi ngprofi t
Otheri ncome
Operatingprofit
Otherprovi s i on
PBT(reported)
Tota l taxes
PAT(reported)
Pri orperi odi tems
Adjustednetincom e
Di l .s hares (mn)
Dil.EPS(INR)
03/14
161.5
31.2
5.5
9.0
207.2
93.4
113.8
45.2
21.8
46.9
13.5
33.4
0.0
0.0
0.0
33.4
33.4
362
362
92.3
03/15f
188.2
36.6
6.9
9.0
240.6
114.2
126.3
50.3
17.2
58.9
17.2
41.7
0.0
0.0
0.0
41.7
41.7
362
377
110.6
03/16f
218.5
43.7
6.9
9.0
278.0
128.4
149.6
57.7
14.0
77.9
22.6
55.3
0.0
0.0
0.0
55.3
55.3
362
377
146.7
03/17f
255.7
50.9
7.8
9.0
323.3
150.9
172.4
58.0
15.2
99.2
28.7
70.5
0.0
0.0
0.0
70.5
70.5
362
377
186.9
13.1
8.7
7.0
35.4
29.6
31.3
15.5
16.5
17.0
11.3
24.8
19.8
16.6
16.1
19.5
14.7
32.6
32.6
16.8
17.0
16.5
0.5
27.4
27.4
77.9
15.1
54.9
16.1
28.7
78.2
15.2
52.5
17.3
29.2
78.6
15.7
53.8
19.9
29.0
79.1
15.7
53.3
21.8
28.9
03/14
3.6
0.0
355.3
359.0
4,514.0
364.0
267.2
5,504.2
452.2
1,437.9
3,492.7
34.2
87.3
5,504.2
03/15f
3.8
0.0
403.4
407.2
5,240.5
358.9
282.1
6,288.7
489.7
1,603.9
4,034.1
33.1
127.9
6,288.7
03/16f
3.8
0.0
448.0
451.7
6,139.0
346.0
303.1
7,239.9
547.0
1,813.4
4,705.4
32.5
141.6
7,239.9
03/17f
3.8
0.0
504.7
508.5
7,199.3
329.1
327.7
8,364.6
620.9
2,053.6
5,496.6
31.6
162.0
8,364.6
77.4
31.9
24.9
23.1
12.6
77.0
30.6
24.2
22.7
12.4
76.6
29.5
23.7
22.4
12.1
76.3
28.5
23.1
22.1
11.7
Growthratios(%)
03/14
3.14
0.61
0.28
4.03
1.81
2.21
0.88
0.15
0.27
0.26
0.65
03/15f
3.19
0.62
0.27
4.08
1.94
2.14
0.85
0.04
0.25
0.29
0.71
03/16f
3.23
0.65
0.23
4.11
1.90
2.21
0.85
0.04
0.17
0.33
0.82
03/17f
3.28
0.65
0.21
4.14
1.93
2.21
0.74
0.04
0.16
0.37
0.90
RoA
As s ets /Equi ty
RoE
0.65
15.66
10.17
0.71
15.98
11.30
0.82
16.28
13.31
0.90
16.74
15.12
03/14
03/15f
03/16f
03/17f
10.41
0.97
1.22
1.21
8.69
0.89
1.10
2.16
6.55
0.80
1.00
2.98
5.14
0.71
0.87
3.79
93.4
93.4
991.4
791.0
11.6
115.2
112.9
1,080.0
871.5
20.8
152.7
146.7
1,198.0
958.2
28.6
194.6
186.9
1,348.5
1,105.0
36.5
KeyRatios
Loa ns
Feei ncome
Adjus tedneti ncome
Di l .EPS
Operatingratios(%)
Operati ngprofi tmargi n
Netprofi tma rgi n
Effecti veTaxra te
Balancesheet(INRbn)
Fiscalyearending
Equi tycapi ta l
Networth
Depos i ts
Tota l borrowi ngs
Totalliabilities
Cas ha ndba nkba l ances
Inves tments
Loa ns
Fi xeda s s ets
Othera s s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
SLRInves tment/NDTL
Fiscalyearending
Feei ncome
Otheri ncome
Opera ti ngi ncome
Operatingprofit
Otherprovi s i ons
Tax
Netprofi t
Fiscalyearending
Valuationratios(x)
P/E(ondi l .EPS)
P/BV
P/Adjus tedBV
Pershareratios(INR)
ReportedBookVal ue(BV)
Yi el dona dva nces
Cos tofdepos i ts
Equi ty/As s ets
Loa ns /As s ets
Di vi dendpa yout
Interna l capi ta l growth
Ca pi ta l a dequacy
AssetQuality
Gros s NPLra ti o
NetNPLra ti o
NetNPL/networth
Bus i nes s perbranch(INRmn)
9.8
7.5
6.0
3.2
15.1
2.7
45.1
10.0
7.7
6.0
3.3
15.2
2.9
47.5
10.0
7.7
5.9
3.3
15.7
2.5
46.2
10.1
7.7
5.9
3.4
15.7
2.4
46.7
6.5
63.5
26.1
12.6
8.9
12.1
6.5
64.1
25.5
18.8
9.4
13.2
6.2
65.0
25.0
19.5
10.9
12.7
6.1
65.7
24.6
19.5
12.6
12.5
5.3
2.9
29.3
47.5
28.0
1.3
5.9
3.1
32.1
48.8
26.7
1.2
6.3
3.3
35.1
50.2
26.4
1.2
6.3
3.0
33.8
53.2
22.7
1.1
1,291.2
0.5
1,437.7
0.6
1,618.3
0.8
1,853.1
1.0
Financials
52
IndiaEquityResearch
Financials
September04,2014
StateBankofIndia
BUY
TargetPrice(INR)2925 FavourableliabilityfranchisetoaidNIMexpansion
CompanyReport
LastPrice(INR)
2,505
Bloombergcode
SBININ
Reuterscode
SBI.BO
Avg.Vol.(3m)(mn)
2.07
Avg.Val.(3m)(INRbn)
5.29
52wkH/L(INR)
2,835/1,455
27,140
Sensex
MCAP(INRbn/USDbn)
1,870/30.92
Shareholding(%)
03/14
06/14
Promoters
58.6
58.6
MFs,FIs,Banks
20.9
20.7
FIIs
9.7
11.1
Public
Others
5.8
5.1
5.0
4.7
2,800
2,450
TherecoveryindomesticNIMintheJun14quarter,ledbyexpansionin
the yield on loans is likely to sustain. Strong liability franchise with
retaildepositsconstituting86%oftotaldepositsiswouldsupportthe
NIM expansion as the pressure from high slippage recedes. We
estimateNPLprovisions/loansat1.1%duringFY15fFY17f,19bplower
thanthepreceding3years.NII,moderaterecoveryinfeesandslowing
burden of provisions is likely to drive 27% CAGR in PAT over FY15f
FY17f. Comfortable Tier1 capital, at 9.9% at endJun14 is unlikely to
necessitateanymaterialdilutioninthenearterm.Improvementinthe
core earnings and gradual decline in NPLs is likely to drive the
valuations.ReinitiatecoveragewithaTPof2,925andaBuy.OutTP
implies1yrfwdadjustedP/Bof1.34x,closetothe5yearmean.
StrongliabilityfranchisetosupportNIMexpansionoverFY15fFY17f
The proportion of CASA and retail term deposits in increased by 5% yoy to
86%ofthetotaldepositsattheendofJun14.Thiscontributedtothereduction
incostoffundsoverthelast34quarters.Coupledwiththeimprovingyieldon
loans, domestic NIM rebounded in the Jun14 quarter after staying stable for
nearly3quarters.Withmoderationinslippageandinterestrates,weestimate
23bpexpansioninNIMtranslatinginto24bpriseintheNII/assets.
Consolidationinmidcorporate,SMEtoreducepressureonslippages
2,100
1,750
1,400
Sep13
Jan14
May 14
St Bk of India
Sep14
Sensex Rebased
1m
3m
1yr
2.8
5.3
69.8
3.7
14.5
20.9
Finan cials(INRbn)
03/14
03/15f
03/16f
NII
492.8
586.5
697.7
11.2
19.0
19.0
Operatingprofit
321.1
384.7
457.9
A.PAT
108.9
140.5
178.2
Sho/s(diluted)
746.6
746.6
781.6
A.EPS(INR)
152.2
188.2
233.2
YoY(%)
29.3
29.0
21.1
6.6
6.2
6.2
17.2
13.3
11.0
1.6
1.4
1.3
RoA(% )
0.7
0.6
RoE(%)
11.4
10.0
Note:ThenumbersareforstandaloneSBIN
0.8
12.7
StockPerfm.(%)
Absolute
Rel.toSensex
YoY(%)
Equity/Assets(%)
P/E(x)
P/B(Adj)(x)
QuarterlyTrends
09/13
12/13
03/14
06/14
Op.income(INRbn)
168.3
194.9
175.0
175.0
22.4
30.4
33.5
33.5
PAT(INRbn)
Midcorporate and SME accounted for c77% of the total slippage during the
lastfourquarter.Thetwosegmentswereonly32%ofthetotalloansatend
Jun14, declining from 37.2% at the end of Mar13. With consolidation in the
midcorporateandSMEduringthelastfourquarters,potentialrevivalinGDP,
slippage is likely to moderate. We assume decline in incremental NPL from
FY16fonwards.Wefactora27bpfallintheincrementalNPLoverFY15fFY17f
to0.80%inFY17ftranslatingintoa19bpfallintheNPLprovisions/loans.
Coreearningslikelytodrive27%CAGRinPAToverFY15fFY17f
NII, moderate recovery in fees and slowing burden of provisions is likely to
drive27%CAGRinPAToverFY15fFY17f.Weestimate20bpimprovementin
theRoAand4%riseinRoEoverFY15fFY17fto0.85%and14.03%,respectively.
ComfortableTier1capital,at9.9%atendJun14isunlikelytonecessitateany
materialdilutioninthenearterm.CET1was9.8%andCARwas12.56%atthe
endofJun14.WeassumemoderationintheRWAgrowth,ata3yearCAGRof
17%preservingthecorecapital.
TPvaluesSBINatAdj.P/Bof1.34x,closetoitsfiveyearmean
ImprovementinthecoreearningsandgradualdeclineinNPLsislikelytodrive
the valuations. Reinitiate coverage with a TP of 2,925 and an Add. Out TP
implies 1yr fwd adjusted P/B of 1.34x, close to the 5year mean. Our
DCF/SOTPbased fair value stands at INR2,644, wherein we assume a cost of
equityof14%aswellasasemiexplicitandfadeperiodgrowthof16%and3%,
respectively. Our Sep15 TP of INR2,925 values SBIN at 1.34x the 1yr fwd adj
P/B. Reinitiate coverage with a Buy. Lowerthanestimated NIM and slow
recoveryinNPLsare keyrisk factors.
StateBankofIndia
StrongliabilitymixtosupportNIMexpansionduringFY15fFY17f
The retail term deposits grew by robust 30% yoy and comprised 48% of total domestic deposits at
endJun14 as compared to 42% a year ago. The retail term deposits and CASA combined comprised
91.6% of domestic deposits; bank expects the share of bulk funding to fall further. Rise in the
proportionofretaildepositscontributedtothereductionincostoffundsoverthelast34quarters.
Coupledwiththeimprovingyieldonloans,domesticNIMreboundedintheJun14quarterafterstaying
stable for nearly 3 quarters. SBIs cumulative domestic NIM improved marginally to 3.54% while
cumulative international NIM declined sharply to 1.08% from 1.42% in the previous quarter thus
drivingasmallsequentialcorrectioninglobalNIM.Domesticcumulativeyieldonloanswitnessedsome
improvementdespitetheshiftinloanmixtowardslargecorporateandretailsegmentswhilecostof
depositswaslargelystablewithretailtermdepositssubstitutingsomehighercostingbulkdeposits.
SBIsdomesticNIMislikelytoremainstableintheneartermbeforestartingtograduallyimproveon
account of incremental shift in loan mix towards betteryielding SME & Mid Corporate segments,
moderation in impaired assets creation and improvement in the pricing power. We estimate 23bp
expansioninNIMtranslatinginto24bpriseintheNII/assetsoverFY15fFY17f.
Exhibit1: Retaildepositsaspercentageofthetotaldeposits
86%
Retailtermdeposit+CASA
84%
82%
80%
78%
Mar12
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
Jun14
12
Exhibit3: EstimatedNIMfortheyear(%)
6.6
4.1
Yieldonloans
Costofdeposits(RHS)
NIM
11
6.2
3.4
10
5.8
2.7
5.4
Jun14
2.0
9
Jun12
Dec12
Jun13
Dec13
Mar11
Mar13
Mar15f
Mar17f
Assetqualitypressuretowanewithconsolidationinbalancesheet
MidcorporateandSMEaccountedfor67%87%ofthetotalslippageduringthelastfourquarters.The
two segments were only 32% of the total loans at endJun14, declining from 37.2% at the end of
Mar13.Withconsolidationin themidcorporateandSMEduringthelast fourquartersandpotential
Financials
54
StateBankofIndia
revivalinGDP,slippageislikelytomoderatefromFY16fonwards.Weassumedeclineinincremental
NPLfromFY16fonwardsandfactora27bpfallintheincrementalNPLoverFY15fFY17fto0.80%in
FY17ftranslatingintoa19bpfallintheNPLprovisions/loans.
Exhibit5: Contributionofsegmentstoslippage
GrossNPLratio
Slippageratio
NetNPLratio
NPLprovisions/loans(%,annualised)
PCR(%,RHS)
6%
2.4
68
5%
2.0
66
4%
1.6
64
3%
1.2
62
2%
0.8
60
1%
0.4
58
0%
0.0
Jun12
Dec12
Jun13
Dec13
Jun14
56
Jun12
Dec12
Jun13
Dec13
Jun14
Restructuredloans(INRbn)
Restructuredloans/loans
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
369
405
347
431
448
524
561
589
Jun14
586
4.03%
4.36%
3.55%
4.12%
4.22%
4.75%
4.88%
4.87%
4.89%
IncrementalNPL
NetNPLratio
GrossNPLra
1.6%
NPLprovision/loans
PCR(RHS)
72%
4.5%
1.2%
64%
3.0%
0.8%
56%
1.5%
0.4%
48%
6.0%
0.0%
0.0%
Mar11
Mar13
Mar15f
Mar17f
40%
Mar11
Mar13
Mar15f
Mar17f
Exhibit9: Segmentwiseslippageduringthequarter
Mar13
Jun13
Sep13
Dec13
Mar14
Jun14
Segmentwiseslippageduringthequarter(INRbn)
Largecorp.
Midcorp.
SME
Agri
Retail
Intl.
2.5
25.7
15.7
10.4
3.0
1.3
58.7
19.1
28.3
39.3
32.5
13.3
5.3
137.7
7.5
48.0
11.6
6.8
1.4
8.4
83.6
10.4
69.5
22.9
4.4
5.0
2.2
114.4
0.7
64.6
4.3
5.4
3.6
0.8
79.5
Mar13
Jun13
Sep13
Dec13
Mar14
Junr14
Shareofeachsegmentintotalslippageduringthequarter
1.9
42.5
24.4
19.6
9.8
1.2
99.3
4%
44%
27%
18%
5%
2%
100%
14%
21%
29%
24%
10%
4%
100%
9%
57%
14%
8%
2%
10%
100%
9%
61%
20%
4%
4%
2%
100%
1%
81%
5%
7%
5%
1%
100%
2%
43%
25%
20%
10%
1%
100%
Financials
55
StateBankofIndia
Exposuretotheriskysectorshigherthanindustryaverage
Exhibit10: ExposureofBOBandentirebankingsystemtotheriskysectors(Mar14)
(INRmn)
SBIN
Allbanks
Fundbased
%ofdomesticloans
Outstanding
%oftotalloans
109,760
1.08%
353,260
0.59%
1,300,664
12.80%
3,619,690
6.02%
914,896
9.00%
4,883,460
8.12%
2,325,320
22.88%
8,856,410
14.73%
Miningandquarrying
Energy
Total
Capitalratiosmaynotnecessitatedilutioninthenearterm
Exhibit11: CapitalratiosattheendofJun14
TierI(RHS)
RWA(yoy)
15
35%
20%
20%
15%
5%
10%
10
5%
10%
0
0%
25%
CAR
TierI
CET1
Mar14
TeirII
Mar15f
Mar16f
Mar17f
ComfortableTier1capital,at9.9%atendJun14isunlikelytonecessitateanymaterialdilutioninthe
nearterm.CET1was9.8%andCARwas12.56%attheendofJun14.Weassumemoderationinthe
RWAgrowth,ata3yearCAGRof17%preservingthecorecapital.
OurTPvaluesSBINat1yearforwardadjustedP/Bof1.34x
Improvement in the core earnings and gradual decline in NPLs is likely to drive the valuations. Re
initiatecoveragewithaTPof2,925andanAdd.OutTPimplies1yrfwdadjustedP/Bof1.34x,closeto
the 5year mean. Our DCF/SOTPbased fair value stands at INR2,644, wherein we assume a cost of
equityof14%aswellasasemiexplicitandfadeperiodgrowthof16%and3%,respectively.OurSep15
target price of INR2,925 values SBIN at 1.34x the 1yr fwd adj. P/B. Reinitiate coverage with a Buy.
LowerthanestimatedNIMandslowrecoveryinNPLsarekeyriskfactors.
1month
3month
6month
12month
2year
3year
5year
9.33
1.25
9.86
1.33
9.22
1.25
8.07
1.08
7.52
1.14
7.44
1.19
8.54
1.39
P/E
P/B
Weights
P/E
P/B
DCF/SOP
TP
35%
2,969
35%
3,121
30%
2,644
2,925
Financials
56
StateBankofIndia
1yearforwardP/E(X)
5yearaverage
2.5
16
2.0
13
1.5
10
1.0
0.5
Jan10
Dec10
Nov11
Nov12
Oct13
Sep14
Sep15
4
Jan10
Dec10
Nov11
Nov12
5yearaverage
Oct13
Sep14
Sep15
Riskfactors:
f IfinternationalNIMtakeslongertorecover,reboundintheglobalNIMmaygetdelayed.
f AgriNPLsmaypulldowntheoverallassetqualityifthemonsoonimpactremainsweak.
f Growthpicksupsignificantlyanddilutionbecomesimminentintheneartermleadingtoalower
thanestimatedRoE.
Financials
57
StateBankofIndia
Financialsandvaluations(standalone)
Fiscalyearending
Netinterestincome
Feeincome
Tradingprofit
Otherincome
Totaloperatingincome
Totaloperatingexpense
Operatingprofit
Provisionforbaddebt
Otherprovision
PBT(reported)
Totaltaxes
PAT(reported)
(+)Shareinassoc.earnings
Less:Minorityinterest
Priorperioditems
Netincome(reported)
Adjustednetincome
Sharesoutstanding(mn)
Dil.shares(mn)
Dil.EPS(INR)
03/14
492.8
145.1
20.8
19.7
678.3
357.3
321.1
142.2
17.1
161.7
52.8
108.9
0.0
0.0
0.0
108.9
108.9
747
747
145.9
03/15f
586.5
164.0
23.4
24.1
798.1
413.3
384.7
155.5
19.5
209.7
69.2
140.5
0.0
0.0
0.0
140.5
140.5
747
747
188.2
03/16f
697.7
193.6
26.3
25.7
943.2
485.3
457.9
167.6
24.3
266.0
87.8
178.2
0.0
0.0
0.0
178.2
178.2
747
782
228.0
03/17f
837.9
230.1
29.9
27.3
1,125.2
573.0
552.2
190.0
28.8
333.4
110.0
223.4
0.0
0.0
0.0
223.4
223.4
747
782
285.8
15.7
11.2
10.1
25.1
22.8
29.3
16.9
19.0
13.1
9.3
29.0
29.0
19.0
19.0
18.0
7.8
26.8
21.1
19.0
20.1
18.9
13.3
25.4
25.4
NII/operatingincome
Feeincome/operatingincome
Operatingprofitmargin
Netprofitmargin
EffectiveTaxrate
72.6
21.4
47.3
16.1
32.7
73.5
20.6
48.2
17.6
33.0
74.0
20.5
48.5
18.9
33.0
74.5
20.5
49.1
19.9
33.0
Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Deposits
Totalborrowings
Otherliabilitiesandprovisions
Totalliabilities
Cashandbankbalances
Investments
Loans
Fixedassets
Otherassets
Totalassets
BusinessRatios(%)
Loan/Deposit
Investment/Deposit
SLRInvestment/Deposit
SLRInvestment/NDTL
Debenture/Investment
03/14
7.5
0.0
1,175.4
1,182.8
13,944.1
1,345.9
1,449.6
17,922.3
1,325.5
3,983.1
12,098.3
80.0
435.5
17,922.3
03/15f
7.5
0.0
1,282.4
1,289.9
16,388.8
1,353.6
1,668.9
20,701.2
1,513.4
4,448.8
14,138.1
87.7
513.1
20,701.2
03/16f
7.8
0.0
1,499.7
1,507.5
19,513.0
1,263.7
1,948.2
24,232.4
1,683.1
5,028.3
16,823.5
95.2
602.3
24,232.4
03/17f
7.8
0.0
1,669.4
1,677.2
23,324.3
1,257.7
2,265.9
28,525.0
1,944.2
5,745.2
20,024.0
102.3
709.3
28,525.0
86.8
28.6
22.1
20.1
8.8
86.3
27.1
21.5
19.8
7.9
86.2
25.8
20.9
19.6
7.0
85.9
24.6
20.4
19.4
6.2
Growthratios(%)
Fiscalyearending
Netinterestincome
Feeincome
Otherincome
Operatingincome
Operatingexpenses
Operatingprofit
Loanlossprovisions
Provisionforinvestments
Otherprovisions
Tax
Netprofit
03/14
2.93
0.86
0.24
4.04
2.13
1.91
0.85
0.03
0.07
0.31
0.65
03/15f
3.03
0.85
0.25
4.13
2.14
1.99
0.81
0.04
0.06
0.36
0.73
03/16f
3.10
0.86
0.23
4.20
2.16
2.04
0.75
0.04
0.07
0.39
0.79
03/17f
3.17
0.87
0.22
4.26
2.17
2.09
0.72
0.04
0.07
0.42
0.85
RoA
Assets/Equity
RoE
0.65
15.47
10.03
0.73 0.79
15.62 16.06
11.37 12.74
0.85
16.57
14.03
KeyRatios
Loans
Netinterestincome
Feeincome
Provisionforbaddebt
Adjustednetincome
AvendusEPS
Operatingratios(%)
Balancesheet(INRbn)
Fiscalyearending
Valuationratios(x)
P/E(ondil.EPS)
P/BV
P/AdjustedBV
Dividendyield(%)
Pershareratios(INR)
BasicReportedEPS(INR)
DilutedReportedEPS(INR)
ReportedBookValue(BV)
AdjustedBookValue(ABV)
Dividendpershare(INR)
Yieldonadvances
Yieldoninvestments
Costofdeposits
Netinterestmargin
Feeincome/Oprevenue
Tradingprofit/Oprevenue
Opexpense/Oprevenue
Equity/Assets
Loans/Assets
Investments/Assets
Dividendpayout
Internalcapital/networth
Capitaladequacy
AssetQuality
GrossNPLratio
NetNPLratio
NetNPL/networth
Loanlossreserve/GrossNPL
Loanprovisions/NII
Loanprovisions/Totalloans
Businessperbranch(INRmn)
Netprofitperemployee(INRmn)
03/14
03/15f
03/16f
03/17f
17.17
1.58
1.58
1.36
13.31
1.45
1.45
1.79
10.99
1.30
1.30
2.30
8.76
1.17
1.17
2.74
152.2
152.2
1,584.3
1,584.3
34.0
188.2
188.2
1,727.7
1,727.7
44.8
238.7
233.2
1,928.8
1,928.8
57.5
299.2
285.8
2,145.9
2,145.9
68.7
9.1
9.4
9.4
9.4
8.5
6.0
3.0
21.4
52.7
0.6
8.3
6.0
3.1
20.6
51.8
0.7
8.2
6.0
3.2
20.5
51.5
0.8
8.1
5.8
3.3
20.5
50.9
0.8
6.6
67.5
22.2
23.3
8.4
12.4
6.2
68.3
21.5
23.8
9.0
12.7
6.2
69.5
20.8
25.2
10.3
12.5
5.9
70.2
20.1
24.0
11.3
11.8
5.0
2.6
18.6
57.9
28.9
1.2
5.2
2.0
21.6
63.7
26.5
1.1
5.2
2.0
22.5
62.8
24.0
1.0
5.1
1.9
22.8
63.7
22.7
0.9
1,641.1 1,831.4 2,080.1 2,412.4

0.5 0.6 0.8 1.0
Financials
58
StateBankofIndia
Financialsandvaluations(consolidated)
Fiscalyearending
Netinterestincome
Feeincome
Tradingprofit
Otherincome
Operatingprofit
Provisionforbaddebt
Otherprovision
PBT(reported)
Totaltaxes
PAT(reported)
Priorperioditems
Netincome(reported)
Adjustednetincome
Dil.shares(mn)
Dil.EPS(INR)
03/14
675.8
185.5
39.5
159.8
1,060.6
633.7
426.9
183.4
24.3
219.2
68.4
150.8
0.0
3.2
0.0
147.7
147.7
747
747
197.8
03/15f
803.2
214.9
44.2
176.2
1,238.5
739.2
499.4
207.2
20.7
271.4
86.9
184.6
0.0
4.3
0.0
180.3
180.3
747
747
241.5
03/16f
942.4
256.0
51.5
206.1
1,455.9
850.6
605.3
228.5
24.2
352.6
112.8
239.8
0.0
5.5
0.0
234.3
234.3
782
782
299.8
03/17f
1120.8
304.4
58.8
242.7
1,726.7
989.9
736.8
259.6
25.9
451.3
144.4
306.9
0.0
6.8
0.0
300.0
300.0
782
782
383.9
13.3
10.5
16.9
36.4
17.7
24.5
17.5
18.8
15.9
13.0
22.4
22.1
19.0
17.3
19.1
10.3
29.9
24.2
19.1
18.9
18.9
13.6
28.0
28.0
NII/operatingincome
Netprofitmargin
EffectiveTaxrate
63.7
17.5
40.3
13.9
31.2
64.8
17.4
40.3
14.6
32.0
64.7
17.6
41.6
16.1
32.0
64.9
17.6
42.7
17.4
32.0
Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Deposits
Totalborrowings
Totalliabilities
Cashandbankbalances
Investments
Loans
Fixedassets
Otherassets
Totalassets
BusinessRatios(%)
Loan/Deposit
Investment/Deposit
SLRInvestment/NDTL
03/14
7.5
0.0
1,515.3
1,522.8
18,388.5
1,570.3
2,478.2
23,959.8
1,671.6
5,787.9
15,782.8
104.3
613.2
23,959.8
03/15f
7.5
0.0
1,675.7
1,683.2
22,037.0
1,581.3
2,680.2
27,981.7
2,121.4
6,508.1
18,541.8
118.6
691.8
27,981.7
03/16f
7.8
0.0
1,966.7
1,974.5
26,235.7
1,592.5
2,970.9
32,773.6
2,433.0
7,409.6
22,073.1
134.8
723.1
32,773.6
03/17f
7.8
0.0
2,229.8
2,237.6
31,248.5
1,637.3
3,362.8
38,486.2
2,794.0
8,482.4
26,279.2
149.0
781.6
38,486.2
85.8
31.5
24.5
22.5
7.4
84.1
29.5
23.3
21.7
7.0
84.1
28.2
22.6
21.3
6.5
84.1
27.1
22.0
20.9
6.0
Growthratios(%)
Fiscalyearending
Netinterestincome
Feeincome
Otherincome
Operatingincome
Operatingexpenses
Operatingprofit
Loanlossprovisions
Otherprovisions
Tax
Netprofit
03/14
2.99
0.82
0.85
4.66
2.80
1.86
0.81
0.03
0.08
0.32
0.62
03/15f
3.10
0.83
0.84
4.77
2.85
1.92
0.80
0.03
0.05
0.36
0.69
03/16f
3.11
0.84
0.84
4.79
2.80
1.99
0.75
0.03
0.05
0.40
0.77
03/17f
3.15
0.85
0.84
4.85
2.78
2.07
0.73
0.02
0.05
0.43
0.84
RoA
Assets/Equity
RoE
0.62
16.63
10.32
0.69 0.77
16.77 17.22
11.56 13.18
0.84
17.57
14.68
KeyRatios
Loans
Netinterestincome
Feeincome
Provisionforbaddebt
Adjustednetincome
Dil.EPS
Operatingratios(%)
Balancesheet(INRbn)
Fiscalyearending
Valuationratios(x)
P/E(ondil.EPS)
P/BV
P/AdjustedBV
Dividendyield(%)
Pershareratios(INR)
Yieldonadvances
Yieldoninvestments
Costofdeposits
Netinterestmargin
Feeincome/Oprevenue
Opexpense/Oprevenue
Equity/Assets
Loans/Assets
Investments/Assets
Dividendpayout
Internalcapital/Networth
Capitaladequacy
AssetQuality
GrossNPLratio
NetNPLratio
NetNPL/networth
Loanprovisions/NII
03/14
03/15f
03/16f
03/17f
12.66
1.23
1.49
1.40
10.37
1.11
1.37
1.82
8.36
0.99
1.22
2.28
6.53
0.87
1.08
2.96
206.5
206.5
2,039.7
1,685.5
35.1
241.5
241.5
2,254.5
1,833.5
45.6
299.8
306.7
2,526.4
2,054.1
57.0
383.9
383.9
2,863.0
2,317.1
74.1
9.5
9.7
9.7
9.8
8.2
6.4
3.1
17.5
3.7
60.1
8.2
6.4
3.2
17.4
3.6
59.7
8.2
6.3
3.2
17.6
3.5
58.4
8.1
6.2
3.2
17.6
3.4
57.3
6.4
65.9
24.2
17.3
9.4
12.4
6.0
66.3
23.3
18.4
9.6
11.4
6.0
67.4
22.6
18.6
11.3
11.1
5.8
68.3
22.0
18.9
12.3
10.5
4.8
2.6
27.4
47.5
27.1
1.2
4.8
2.6
29.8
47.1
25.8
1.1
4.7
2.6
29.7
47.1
24.3
1.0
4.6
2.5
30.3
47.4
23.2
1.0
1,580.2 1,785.6 2,044.8 2,345.7

0.5 0.6 0.8 1.0
Financials
59
IndiaEquityResearch
Financials
September04,2014
AxisBank
ADD
TargetPrice(INR)455 Significantchangeinbusinessmixunderway
CompanyReport
LastPrice(INR)
413.7
Bloombergcode
AXSBIN
Reute rs code
AXBK.BO
Avg.Vol.(3m)(mn)
5.23
2.02
52wkH/L(INR)
415/153
27,140
Se nse x
MCAP(INRbn/USDbn)
975.61/16.13
03/14
06/14
Promote rs
Shareholding(%)
29.5
29.2
MFs ,FIs ,Ba nks
10.1
11.2
FIIs
48.7
48.4
5.8
5.8
5.7
5.6
Public
Others
Whileweforecastrevivalinthecorerevenues,elevatedprovisionsto
recover the 6% fall in PCR over last 3 years is likely to restrict RoA
expansion.Also,thestressedassetsformationisunlikelytodeclinein
FY15f with guidance at INR65bn as against INR56bn in FY14. The
favourablechangeintheassetandliabilitymixoverlastfewyearsis
likelytosustainNIMexpansion;weforecast6bpriseinNIMto3.48%
inFY15f.Changeinloanmixwithrisingretailproportioncouldaugur
wellforthemargin;managementhasguidedriseby7%to45%over3
5years.AXSBhasoutperformedICICIBCandHDFCBby45%and96%in
thelast12months.WithsimilarorlowerRoEthanpeers,webelieve
the outperformance is likely to recede. Reinitiate coverage with a
Sep15TPofINR455andanAddrating.TPvaluesAXSBatanadj.one
yearforwardP/Bof1.98x.LowerthanestimatedNIMiskeyrisk.
Shifttowardsretail,recentfocusonunsecuredretailtoaidyields
Theshifttowardsretailloanscontinueswitha10%increaseintheproportion
of retail loans in the past two years to 33.8% (adjusting for the re
classification).Managementhasguidedriseintheproportionofretailloansto
45%over35yearsandincreaseintheshareofhighyieldingunsecuredloans
withinretailby8%to25%.Thechangeintheretailmixislikelytoaidtheyield
on loans, benefiting margins. We forecast 6bp expansion in NIM to 3.48% in
FY15f.Wefactora3yearCAGRof20%inloans,drivenbyretailloans.
5 00
4 00
3 00
2 00
Dependenceonwholesaledepositscontinuestorecede
100
0
S e p 13
J a n14
M a y14
A xis Bank
S e p 14
Sensex Reba sed
StockPerfm.(%)
1m
3m
1yr
Abs olute
6.9
8.9
164.2
Rel.toSens ex
0.4
0.3
115.4
Financials(INRbn)
03/14
03/15f
03/16f
NII
119.5
139.3
164.8
23.6
16.5
18.3
114.6
133.6
158.7
YoY(%)
Opera tingprofit
A.PAT
62.2
70.8
84.6
2,349.2
2,349.2
2,349.2
A.EPS(INR)
26.5
30.1
36.0
YoY(%)
19.6
13.9
19.4
Sho/s (diluted)
Equity/Ass ets (%)
10.0
9.8
9.4
P/E(x)
15.6
13.7
11.5
2.6
2.2
2.0
1.7
17.4
1.7
17.3
1.7
18.0
P/B(Adj)(x)
RoA(%)
RoE(%)
Q uarterlyTrends
09/13
12/13
03/14
06/14
Op. income (INRbn)
47.0
46.3
53.8
50.0
PAT (INRbn)
13.6
16.0
18.4
16.7
While the savings deposits proportion increased 371bp in the last 2 years to
27.4%,retailtermdepositswentup10%to34%attheendofJun14.Whilewe
forecastamoderationinsavingsdepositsgrowthastermdepositpicksup,the
shift towards retail deposits is likely to sustain. The CASA ratio over Mar15f
Mar17f is estimated to stay within 43%45% with a moderation in savings
depositsbeingoffsetbyareboundinCAdeposits.
ElevatedprovisionstorestrictfurtherRoAexpansion
With a rebound in fees, as corporate loan growth gradually picks up and
marginal expansion in NIM staying at close to the current level, we estimate
core revenues to revive. However, we build in high NPL provisions in our
estimatetorecover6%fallinPCRoverlast3years.Also,additiontostressed
assets in FY15f being similar to that in FY14 could put pressure on the
provisions.WeassumeincrementalNPLat0.34%inFY15f.Consequently,NPL
provision is estimated at 0.67% of loans, 6bp higher yoy. High provision is
likelytorestrictRoAexpansionoverFY15fFY17f.
OurTPvaluesAXSBat1.98adjustedbook;reinitiatewithAdd
Our TP values the stock at an adj. P/B of 1.98x, 6% discount to its fiveyear
mean.TPisaweightedaveragebasedontheP/E,P/BandDCFmethods.DCF
assumessemiexplicitperiodgrowthat23%.WereinitiatewithaSep15TPof
INR455 and an Add. With similar or lower RoE than peers, we believe the
outperformanceislikelytorecede.LowerthanestimatedNIMisakeyrisk.
AxisBank
AxisBank
Thrustonretailcontinueswithchangeintheretailmixunderway
AXSB reorganized its agriculture loan portfolio in Jun14 quarter in an effort to place more focus;
management guided that the rural market offers tremendous business opportunity in a long term.
Farm equipment, warehousing loans, agri. gold loans and others have been clubbed with the retail
portfolio. Including agri loans after the reclassification, retail constitute 38% of total loans, bridging
thegapwithICICIBC.Withintheretailportfolio,agricultureisexpectedtoexpandatafasterpace.
Exhibit1: Yoygrowthintotalandretailloans
Loangrowth
Retailloangrowth
Exhibit2: Proportionofvarioussegments
Retail
60%
100%
50%
80%
40%
60%
30%
40%
20%
20%
10%
Jun12
SME
Agri
Corporate
0%
Dec12
Jun13
Dec13
Jun14
Mar11
Mar12
Mar13
Jun14
Focusshiftstowardshighyieldingunsecuredretailloans
Focusonthehighyieldingunsecuredloans,toimprovetheyieldonloans,hasresultedinthechangein
the retail mix over the last two years. There has been emphasis on increasing the share of non
mortgage loans, driven primarily by LAP, gold loans, personal loans and credit cards. Personal and
creditcardloanstaysignificantlyabovehomeandautoloans.PersonalloansandLAPhadtheirshares
increaseby2%and5%,to8%and9%,respectively,attheendofJun14.
Exhibit3: Yoygrowthinhomeandautoloans
Home
Exhibit4: Yoygrowthinunsecuredloans
Auto
Personal
60%
200%
50%
150%
40%
100%
30%
50%
20%
0%
10%
Jun12
Dec12
Jun13
Dec13
Jun14
50%
Jun12
Dec12
Cards
Jun13
Dec13
Jun14
Riskmitigatedbyc70%ofincrementalloanstoexistingliabilitycustomers
AXSB sources retail loans through 132 asset sale centres as well as 1,716 branches (71% of total
branches)comparedto1,183branchesinthepreviousyear.Themomentuminretailloansissustained
bycrosssellingtointernalcustomers.Aboutathirdoftheincrementalretailloansaresourcedthrough
branchesandexistingliabilitycustomerscontributedontwothirdsoftheincrementalloans.
Financials
61
AxisBank
AxisBank
Liabilitymixgraduallytiltingtowardstheretaildeposits
Deposit growth has remained muted in the past six quarters with 3% sequential contraction in the
Jun14quarter.However,savingsdeposithas beensteadywithitsproportioncloseto27%andCASA
ratio in the range of 42%45% in the last six quarters. Besides strong CASA, Retail term deposits
proportionincreased10%to34%attheendofJun14.
Exhibit5: Quarterlytrendinsavingsdeposits
Exhibit6: TrendintheCASAratio
Growthinsavingsdeposits
Proportionofsavingsdeposits
CASAratio
Retailtermdeposits/Totaldeposits
28%
48%
26%
40%
24%
32%
22%
24%
20%
16%
18%
8%
16%
Jun12
0%
Dec12
Jun13
Dec13
Jun14
Jun12
Dec12
Jun13
Dec13
Jun14
SBdeposits/branchremainedstableatINR340mninthepasttwoyears.DespiteagradualpickupinSB
deposits/branchoverMar15fMar17f,asthe780branchesaddedduringtheprevioustwoyearsyield
results,savingsdepositsareestimatedtoincreaseataCAGRof17.5%;lowerthantheprecedingthree
years.Weassume650branchadditionsoverMar15fMar16f.Also,ascorporateloangrowthpicksup,
the accretion of term deposits would rise. The CASA ratio over Mar15fMar17f is estimated to stay
within43%45%withamoderationinsavingsdepositsbeingoffsetbythereboundinCAdeposits.
Exhibit8: ThreeyearCAGR
Exhibit7: SBdeposits/branch
SBdeposit/branch(INRmn)
SBdeposit/branch(growthYoy,RHS)
Mar09Mar11
Mar12Mar14
Mar15fMar17f
36%
400
10.0%
300
5.0%
200
0.0%
100
5.0%
9%
10.0%
0%
27%
0
Mar10
Mar12
Mar14
Mar16f
18%
CA
Savings
Term
ChangeinassetandliabilitymixtosustainthereboundinNIM
NIM(calculated)expanded27bpduringthepasttwoyearsto3.42%forFY14.AlargepartoftheNIM
expansionwasdrivenbytheriseintheloan/depositratioandFCNRdepositsraisedduringFY14.While
weestimatethelargeNIMexpansiontofadeawayduringMar15fMar17Ff,itislikelytostayabove
historicallevelsduetoahigherCASAratioandchangeintheassetmixwithatilttowardshighyielding
retailloans.Substantialincreaseinretaildepositsinthelasttwoyearswouldleadtomoderationinthe
costoffunds.Weforecast6bpyoyexpansioninNIMduringFY15f.
Financials
62
AxisBank
AxisBank
Exhibit9: NIMforthequarterandCDratio
Exhibit10: CalculatedNIMfortheyear,CDratio
NIM(%)
CDratio(RHS)
NIM(RHS)
Costofdeposits
4.0%
87%
3.8%
84%
3.6%
81%
3.4%
78%
3.2%
75%
Jun12
Dec12
Jun13
Dec13
10.5
4.0
9.0
3.5
7.5
3.0
6.0
2.5
4.5
72%
2.9%
Yieldonloans
2.0
Mar11
Jun14
Mar13
Mar15f
Mar17f
NPLprovisionstorestrictRoAexpansionoverFY15fFY17f
IncrementalNPLtrendsdownbutprovisionstostayelevated
WeassumeincrementalNPLtostaystableinFY15fto0.34%anddecline14bpoverMar16fMar17f.
After a decline in the slippage ratio from 1.48% in Jun13 to 0.56% in Mar14 it increased to 1.17% in
Jun14 quarter. We estimate the NPL provisions/loans to stay elevated, averaging at 0.65% over
Mar15fMar16f, 6bp higher than the preceding threeyear average, to recover the lost ground in
coverageratio.Theprovisioncoverageratio(PCR),excludingthewriteoff,declinedfrom74.5%atthe
endofMar11to67.5%attheendofMar14.
Exhibit12: SlippageratioandgrossNPLaddition
Exhibit11: IncrementalNPL,provisions
IncrementalNPL
NPLprovision/loans(RHS)
GrossNPLaddition(INRmn)
Slippageratio(RHS)
0.36%
0.90%
8,000
2.0%
0.27%
0.80%
6,000
1.6%
0.18%
0.70%
4,000
1.2%
0.09%
0.60%
2,000
0.8%
0.50%
0.00%
Mar11
Mar13
Mar15f
Mar17f
0.4%
Jun12
Dec12
Jun13
Dec13
Jun14
Restructuredloanscontinuestorise
Restructuringhasremainedhighandcontinuestorise.ThetotalamountrestructuredduringFY14was
INR35bn compared to INR21bn in the previous year. Restructured loans, as a percentage of gross
customerassets,increasedfrom1.94%attheendofMar13to2.73%attheendofJun14.
Exhibit13: GrossNPLratiosofsegmentswithinvehiclefinanceandfortotalloans
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
Jun14
O/srestructuredassets(INRbn)
38.27
40.68
42.57
43.68
42.11
48.07
49.00
60.79
62.89
as%ofgrosscustomerassets
1.95
1.95
2.06
1.94
1.87
2.10
2.06
2.39
2.47
as%ofnetloans
2.24
2.36
2.37
2.22
2.13
2.39
2.32
2.64
2.73
Additions(INRbn)
6.28
3.23
3.68
7.91
6.86
10.31
6.70
11.15
4.80
Financials
63
AxisBank
AxisBank
Despitereboundinrevenues,provisionsmaypreventfurtherRoAexpansion
Weforecastareboundincorerevenues,NIIandfeesoverFY15fFY17f,ledbymarginexpansionanda
pickup in fees with a recovery in corporate loan growth. However, we expect the provisions to stay
elevated driven by NPL provisions, higher standard asset provisions due to a rise in the burden for
restructuredandunhedgedforeigncurrencyexposures.CumulativelyINR650mnwasprovidedforun
hedgedFXexposureandSMAIIintheJun14quarter.
Exhibit14: ThreeyearmeanforNII,fees,operatingprofit,NPLprovisionsandRoA
FY13
FY14
FY15f
FY16f
FY17f
NII/assets
3.09
3.30
3.36
3.37
3.32
Fee/assets
1.76
1.65
1.68
1.70
1.73
Otherincome/assets
0.33
0.39
0.36
0.34
0.34
Operatingexpenses/assets
2.21
2.18
2.17
2.17
2.17
3.25
3.22
0.41
0.01
0.37
0.01
Operatingprofit/assets
NPLprovisions/assets
2.97
0.36
3.17
0.36
3.22
0.40
Provisionforinvest.
0.01
0.03
0.01
Otherprovisions
0.18
0.25
0.26
0.25
0.25
Tax
0.76
0.87
0.84
0.85
0.85
RoA
1.66
1.72
1.71
1.73
1.73
OurTPvaluesAXSBat1yearforwardadjustedP/Bof1.98x
OurtargetpriceisbasedontheDCF,P/EandP/Bmethods.OurDCFbasedfairvaluestandsatINR423,
whereweassumeacostofequityof14%,andsemiexplicitandfadeperiodgrowthof23%and3%,
respectively.OurSep15targetpriceofINR455valuesAXSBat1.98xtheoneyearforwardbookvalue,
6%discounttoits5yearmean.WereinitiatecoveragewithanAddrating.
AXSB has outperformed ICICIBC and HDFCB by 45% and 96% in the last 12months. With similar or
lowerRoEthanpeers,webelievetheoutperformanceislikelytorecede.
5yearaverage
1yearforwardP/E(X)
3.5
22
3.0
19
2.5
16
2.0
13
1.5
10
1.0
0.5
Jan10
Dec10
Nov11
Nov12
Oct13
Sep14
4
Jan10
Sep15
Dec10
Nov11
Nov12
5yearaverage
Oct13
Sep14
Sep15
1month
3month
6month
12month
2year
3year
5year
11.94
1.98
12.07
1.99
11.14
1.82
9.68
1.56
9.73
1.68
9.52
1.68
11.52
2.11
P/E
P/B
Financials
64
AxisBank
AxisBank
Weights
P/E
P/B
DCF/SOP
TP
35%
453
35%
484
30%
423
455
Keyrisks
f A largerthanassumed drop in incremental NPLs may result in provisions being lower than our
estimate. Also, if the management uses its discretion to keep PCR lower than historical levels,
provisionscouldbelower,leadingtoanupsiderisktoournetprofitestimate.
f AsurgeintermdepositsanddeclineinCASAratio,drivenbyapickupincorporateloansmayresult
inariskforNIM.Also,asharpdropintheloandepositratiomayleadtoaneartermriskforNIM.
Financials
65
AxisBank
AxisBank
Fiscalyearending
Netinterestincom e
Feei ncome
Tra di ngprofi t
Otheri ncome
Operatingprofit
Otherprovi s i on
PBT(reported)
Tota l ta xes
PAT(reported)
Pri orperi odi tems
Adjustednetincom e
Avendus di l .s hares (mn)
Dil.EPS(INR)
03/14
119.5
59.9
7.0
7.2
193.6
79.0
114.6
13.0
8.1
93.5
31.3
62.2
0.0
0.0
0.0
62.2
62.2
2,349
2,349
26.5
03/15f
139.3
69.8
5.9
8.9
223.8
90.2
133.6
16.7
11.2
105.7
34.9
70.8
0.0
0.0
0.0
70.8
70.8
2,349
2,349
30.1
03/16f
164.8
83.3
6.3
10.5
264.9
106.2
158.7
19.8
12.7
126.2
41.7
84.6
0.0
0.0
0.0
84.6
84.6
2,349
2,349
36.0
03/17f
192.4
100.0
7.4
12.5
312.2
125.8
186.4
21.6
15.0
149.7
49.4
100.3
0.0
0.0
0.0
100.3
100.3
2,349
2,349
42.7
16.8
23.6
8.4
14.8
20.0
19.6
18.0
16.5
16.6
29.1
13.9
13.9
19.2
18.3
19.4
18.4
19.4
19.4
19.4
16.7
20.0
9.1
18.6
18.6
61.7
30.9
59.2
32.1
33.5
62.2
31.2
59.7
31.6
33.0
62.2
31.5
59.9
31.9
33.0
61.6
32.0
59.7
32.1
33.0
03/14
4.7
0.0
377.5
382.2
2,809.7
299.7
340.7
3,832.3
281.6
1,135.5
2,300.7
24.7
89.8
3,832.3
03/15f
4.7
0.0
432.7
437.4
3,315.5
323.4
392.3
4,468.6
315.8
1,294.2
2,714.0
27.3
117.2
4,468.6
03/16f
4.7
0.0
496.4
501.1
3,947.0
369.9
492.6
5,310.7
367.9
1,514.5
3,235.1
30.8
162.4
5,310.7
03/17f
4.7
0.0
575.9
580.6
4,698.9
410.4
590.8
6,280.7
429.8
1,776.9
3,862.3
35.0
176.6
6,280.7
81.9
40.4
26.3
23.7
21.0
81.9
39.0
25.6
23.3
22.1
82.0
38.4
25.0
22.8
22.7
82.2
37.8
24.4
22.5
23.2
Growthratios(%)
03/14
3.30
1.65
0.39
5.35
2.18
3.17
0.36
(0.03)
0.25
0.87
1.72
03/15f
3.36
1.68
0.36
5.39
2.17
3.22
0.40
0.01
0.26
0.84
1.71
03/16f
3.37
1.70
0.34
5.42
2.17
3.25
0.41
0.01
0.25
0.85
1.73
03/17f
3.32
1.73
0.34
5.39
2.17
3.22
0.37
0.01
0.25
0.85
1.73
RoA
As s ets /Equi ty
RoE
1.72
10.14
17.44
1.71
10.13
17.28
1.73
10.42
18.02
1.73
10.72
18.55
03/14
03/15f
03/16f
03/17f
15.6
2.5
2.6
1.2
13.7
2.2
2.2
1.5
11.5
1.9
2.0
1.9
9.7
1.7
1.7
1.9
26.5
26.5
162.7
161.7
4.8
30.1
30.1
186.2
184.7
6.0
36.0
36.0
213.3
212.1
8.0
42.7
42.7
247.1
246.6
8.0
KeyRatios
Loa ns
Feei ncome
Adjus tedneti ncome
Di l .EPS
Operatingratios(%)
Opera ti ngprofi tma rgi n
Netprofi tma rgi n
Effecti veTa xra te
Balancesheet(INRbn)
Fiscalyearending
Equi tycapi ta l
Preferencecapi ta l
Networth
Depos i ts
Tota l borrowi ngs
Otherl i abi l i ti es a ndprovi s i ons
Totalliabilities
Ca s ha ndba nkba l a nces
Inves tments
Loa ns
Fi xeda s s ets
Otheras s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
SLRInves tment/NDTL
Fiscalyearending
Feei ncome
Otheri ncome
Opera ti ngi ncome
Operatingprofit
Otherprovi s i ons
Ta x
Netprofit
Fiscalyearending
Valuationratios(x)
P/E(onAvendus EPS)
P/BV
P/Adjus tedBV
Pershareratios(INR)
Yi el dona dva nces
Cos tofdepos i ts
Equi ty/As s ets
Loa ns /As s ets
Di vi dendpa yout
Interna l ca pi ta l growth
Ca pi ta l a dequa cy
AssetQuality
Gros s NPLrati o
NetNPLra ti o
NetNPL/networth
10.3
7.3
6.1
3.4
28.1
3.6
40.8
10.4
7.4
6.0
3.5
28.0
2.6
40.3
10.3
7.4
5.9
3.5
28.3
2.4
40.1
10.3
7.2
5.9
3.5
28.9
2.4
40.3
10.0
66.8
29.6
20.1
15.0
16.1
9.8
67.5
29.0
22.1
14.4
17.6
9.4
67.5
28.5
24.7
14.6
17.3
9.2
68.0
28.3
20.8
15.9
17.1
1.2
0.4
2.4
67.4
10.8
0.8
1.3
0.5
3.1
66.1
12.0
0.9
1.3
0.4
3.0
69.0
12.0
0.9
1.3
0.4
2.6
72.7
11.2
0.9
2,127.6
1.5
2,190.9
1.5
2,353.3
1.6
2,554.1
1.7
Financials
66
IndiaEquityResearch
Financials
September04,2014
IndusIndBank
ADD
TargetPrice(INR)665 DelayedrecoveryinCVsaneartermoverhang
7.5
8.6
FIIs
43.3
43.6
Return ratios during FY15fFY17f is likely to stay above the historical

average, despite pressure from elevated provisions and peaking
margins.ThereboundintheCVcyclemaybebackendedinFY15f,and
hencethepositiveimpactonNPLsandNPLprovisionsmaybevisible
onlyfromFY16f.LargeincrementalNPLs,mainlyfromtheCVsegment,
arelikelytokeeptheprovisioninglevelhighandrestricttheexpansion
ofRoAto5bpinFY15f.WhiledelayedrecoveryintheCVcycleislikely
to stay a nearterm overhang, sustained RoE above 18% over FY15f
FY17fcouldprovidethevaluationsupport.Atanadj.1yrfwdP/Bof
2.84x,thestocktradesclosetoitsfiveyearmean.Wereinitiatewith
aSep15TPofINR665andanAddrating.TheTPvaluesthestockata
P/Bof2.65x.Lowerthanestimatedfeeiskeyriskfactor.
Public
Others
6.1
27.9
6.8
25.8
EvenwithpressureonNIM,NII/assettostayaheadoflast3yearsavg.
CompanyReport
LastPrice(INR)
616.3
IIBIN
Bloombergcode
Reuterscode
INBK.BO
Avg.Vol.(3m)
985,914
550
Avg.Val.(3m)(INRmn)
623/342
52wkH/L(INR)
27,140
Sensex
MCAP(INRbn/USDbn)
325.33/5.38
Shareholding(%)
Promoters
MFs,FIs,Banks
03/14
06/14
15.2
15.2
Even without material NIM expansion, NII/asset over FY15fFY17f would stay
higher than the last 3 years average, by 15bp. About 30bp NIM expansion
duringFY13FY14wasdrivenbyequityissuanceandliabilitycostcontainment.
Theloan/depositratiopeakedat93.3%atendDec13andthetrendofdecline
inthelasttwoquartersislikelytosustain,exertingpressureontheNIM.Jun14
quarterhad9bpcontractioninNIMdueto10bpriseincostofdepositsand
16bpfallintheyieldonloans.Also,thebankhasbeentrimminghighyielding
CVportfoliosandreplacingthemwithmidcorporateandsmallbusinessloans,
whichmaycontinuetoimpacttheloanyieldinthemediumterm.
660
605
550
495
440
385
Improvingliabilityfranchisebutstillsomedistancetocover
330
Sep13
Jan14
May14
IndusInd Bank
Sep14
Sensex Rebased
StockPerfm.(%)
1m
3m
1yr
Absolute
12.3
13.8
76.9
5.8
4.6
28.1
Rel.toSensex
Financials(INRbn)
03/14
03/15f
03/16f
NII
28.9
35.2
42.7
YoY(%)
29.5
21.9
21.1
Operatingprofit
26.0
31.0
38.0
A.PAT
14.1
17.4
21.6
525.6
525.6
525.6
A.EPS(INR)
26.8
33.1
41.1
YoY(%)
32.0
23.6
24.1
Equity/Assets(%)
10.4
9.9
9.2
P/E(x)
22.9
18.6
15.0
3.6
3.1
2.7
1.8
17.6
1.8
18.7
1.8
19.8
Sho/s(diluted)
P/B(Adj)(x)
RoA(% )
RoE(%)
QuarterlyTrends
09/13
12/13
03/14
06/14
Op.income(INRbn)
11.5
11.2
12.1
14.7
3.3
3.3
3.5
3.6
PAT(INRbn)
ThepaceofgrowthinSBdepositsislikelytoreduceduetoahigherbaseand
pick up in term deposit growth. Also, an increase in the proportion of SB
deposits during FY15fFY17f may stay lower than the preceding three years.
Weassumea3yearCAGRof35.4%insavingsdeposits,liftingtheproportionof
savings deposits by 4.4% to 34%. We assume 498 branch additions over next
threeyearstosupportfurtherimprovementintheliabilitymix.
Webuildinbenefitfromfallingprovisions,costefficienciesfromFY16f
The rebound in the CV cycle may be backended in FY15f, and the impact on
NPLsandNPLprovisionscouldbevisiblefromFY16f.Weassumeincremental
NPLduringFY15fFY17fat35bpandNPLprovisions/loansat65bp,higherthan
the preceding three years average, at 33bp and 56bp, respectively.
Cost/income ratio fell by 3.74% during FY13FY14 to 45.7%. However, cost/
asset continued to rise to 2.73% in FY14. We buildin the improvement from
FY16f.WhileRoAisestimatedtoriseby5bpinFY15f,at1.81%,itislikelyto
staywellaboveitshistoricalaverage.
WevalueIIBat1yearP/Bof2.65x;reinitiatewithAdd
OurtargetpriceisbasedontheDCF,P/EandP/Bmethods.OurDCFbasedfair
valuestandsatINR514,whereweassumeacostofequityof14%aswellasa
semiexplicit and fade period growth of 23% and 3%,respectively. Our Sep15
target price of INR665 values IIB at 2.65x the 1yr fwd P/B. We reinitiate
coveragewithanAddrating. Lowerthanestimatedfeeiskeyrisk factor.
IndusIndBank
IndusIndBank
BackendedreboundinCVsinFY15fcoulddriveCFDinFY16fFY17f
Despite a sharp slowdown in the CV segment in FY14, the threeyear CAGR in consumer finance
division(CFD)loans,at29%,marginallyoutpacedcorporateloangrowth.Theuptrendincorporateloan
growthoverthepasttwoyearshasoffsettheslowdownintheconsumerfinancesegment.Thelarge
slowdownintheCVsegmentoverthepasttwoyearsledtothecontractionintheshareofconsumer
financeby6%yoyto43%attheendofJun14.Weassumetheloangrowthintheconsumerfinance
segment to pick up during FY16fFY17f We assume a threeyear CAGR of 27% in the CFD, outpacing
corporateloangrowth.
Exhibit2: CAGRinloans
Exhibit1: Yoygrowthinloansegments
Corporateandcommercialbanking
Consumerfinance
Totalloans
(Mar11Mar14)
50%
30%
40%
24%
30%
18%
20%
12%
10%
6%
0%
(Mar15fMar17f)
0%
Jun12
Dec12
Jun13
Dec13
Jun14
CBG
CFD
Totalloans
Changeinretailloanmixmayaugurwellduringcyclicaldownturn
Shareofvehicleloanstototalretailloansdeclined11%to86%atendJun14
ThedeclineintheshareofvehicleloanshasbeenpartlyduetotheslowdownintheCVsegmentand2
/3wheelerloans.TheproportionofCVloansdeclined10%inthelasttwoyearsto30.4%attheendof
Jun14. The contraction in the proportion of these segments has also been offset due to the
introductionofnewproductssuchascreditcardandLAP.LAP,introducedinFY12,currentlyaccounts
forc11%ofretailloans.WhiletheCVsegmentislikelytoreboundandseeariseinitsproportion,the
changeintheretailloanmixmaysustainduetotheintroductionofnewproducts.Thediversification
withinretailmayaugurwellforthebankduringcyclicaldownturnsintheCVindustry.
Exhibit3: Yoygrowthinthesegmentswithinconsumerfinance
CV
Utility
Car
2/3wheeler
Equipment
Creditcard,PL
LAP
100%
80%
60%
40%
20%
0%
Mar11
Mar12
Mar13
Mar14
Jun14
Financials
61
IndusIndBank
IndusIndBank
Improvingliabilityfranchisebutstillsomedistancetocover
Despiteadeclineintheyoygrowthinsavingsdeposits,itcontinuestostaywellabovepeers(below
20% yoy). Also, the expansion in the savings deposits proportion over the past two years has
sustained.Singledigittermdepositsgrowth,duetoincreaseinthedependenceonborrowingsinthe
pastthreequarters,hassustainedtheCASAratioofthebankcloserto32%.
Exhibit5: TrendintheCASAratio
Exhibit4: Quarterlytrendinsavingsdeposits
Proportionofsavingsdeposits
Growthinsavingsdeposits(RHS)
CASARATIO(%)
35%
18%
65%
16%
58% 30%
14%
51% 25%
12%
44% 20%
10%
37% 15%
8%
Jun12
Dec12
Jun13
Dec13
30% 10%
Jun14
Jun12
Dec12
Jun13
Dec13
Jun14
WeassumethepaceofgrowthinSBdepositstoreduceduetoahighbaseandpickupintermdeposit
growth.Also,anincreaseintheproportionofSBdepositsduringFY15fFY17fmaystaylowerthanthe
preceding three years. We assume a CAGR of 35.4% in savings deposits between FY15f and FY17f,
liftingtheproportionofsavingsdepositsby4.4%to34%attheendofMar17f.
Exhibit6: CAGRindepositsandchangeinsavingsdepositsproportion
(Mar08Mar11)
(Mar11Mar14)
(Mar14Mar17f)
Demand
51.6%
15.9%
20.0%
Savings
37.1%
48.0%
35.4%
Term
16.0%
17.7%
23.4%
Totaldeposits
21.8%
20.8%
25.0%
2.7%
7.5%
4.4%
Changeinsavingsdepositsproportion(%)
NIMmayhavepeaked,likelytofacepressurewithfallinCDratio
Exhibit7: NIMforthequarterandCDratio
NIM(%)
Exhibit8: CalculatedNIMfortheyear,CDratio
NIM(%)
CDratio(RHS)
CDratio(RHS)
3.8
96%
4.0
98%
3.0
92%
3.5
91%
2.2
88%
3.0
84%
1.4
84%
2.5
77%
80%
2.0
0.6
Jun12
Dec12
Jun13
Dec13
Jun14
70%
Mar11
Mar13
Mar15f
Mar17f
Financials
62
IndusIndBank
IndusIndBank
LargeNIMexpansioninFY13FY14wasdrivenbyequityissuanceandliabilitycostcontainment.The
loan/depositratiomayhavepeakedattheendofDec13,at93.3%.Largedependenceonborrowings
led to a rise in CD ratio. The trend of decline in the CD ratio during the Mar14Jun14 quarter may
sustain and exert pressure on the NIM. A sharp jump in CA deposits of 10% 11% qoq could be
seasonal and temporary in nature. The bank has been trimming highyielding CV portfolios and
replacingthemwithmidcorporateandsmallbusinessloans,whichresultedinadriftinloanyields.
Exhibit9: Costandyieldontheloans
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
Jun14
Costofdeposit(%)
Costoffunds(%)
8.86
7.62
8.68
7.55
8.43
7.29
8.06
6.81
8.18
6.75
8.18
6.96
8.35
7.08
8.08
6.80
8.18
6.85
Yieldonloans(%)
CBG
CFD
13.95
11.78
16.34
13.94
11.84
16.16
13.72
11.63
15.94
13.48
11.39
15.74
13.39
11.26
15.64
13.50
11.54
15.49
13.76
11.89
15.63
13.65
11.64
15.75
13.49
11.55
15.75
DespitethepressureonNIM,NII/assetswellabovehistoricallevel
Exhibit10: 3yearaverageforNII/assets
(%)
FY09FY11
FY12FY14
FY15fFY17f
2.61
3.44
3.59
NII/assets
Feeintensitymaystayabovehistoricalleveldespitemoderation
Capitalising on the opportunities thrown up by the midcorporate segment through its strong
structuring capabilities, IIB has created a successful investment banking practice. Its contribution to
total fees has more than doubled in the past three years to c18% during the Jun14 quarter. The
creationofaseparateoriginationteamfocusingoninvestmentbankingpracticescomplementedbya
projectfinanceunittocapitaliseonrevivingopportunitiesmayofferthebankacompetitiveedge.
Exhibit11: Feesgrowthandfees/operatingincome Exhibit12: Fees/assetsfortheyear(%)
yoygrowthincorefees
Corefees/operatingincome
Fee/assets
2.5
50%
2.0
40%
1.5
1.0
30%
0.5
20%
Jun12
0.0
Dec12
Jun13
Dec13
Jun14
Mar11
Mar13
Mar15f
Mar17f
Exhibit13: Breakupofcorefees(%)
Trade&remittances
Forexincome
Distribution
Generalbanking
Loanprocessing
Investmentbanking
Jun11
13.6
22.6
28.0
12.7
17.7
5.3
Sep11
13.5
24.7
26.9
12.7
18.5
3.8
Dec11
13.3
24.0
26.5
11.1
16.6
8.5
Mar12
11.7
17.4
26.8
11.3
17.7
15.1
Jun12
13.9
23.6
21.0
10.8
19.2
11.6
Sep12
11.5
22.8
23.3
11.5
19.6
11.4
Dec12
13.2
25.2
20.7
10.1
20.1
10.8
Mar13
13.7
21.2
22.8
12.5
16.9
12.9
Jun13
13.9
26.2
19.0
11.0
15.7
14.2
Sep13
12.8
26.4
17.4
8.8
17.7
16.9
Dec13
13.0
30.6
16.3
8.1
18.1
13.8
Mar14
13.6
24.7
17.5
8.5
20.3
15.4
Mar14
13.6
24.7
17.5
8.5
20.3
15.4
Financials
63
IndusIndBank
IndusIndBank
ThebankscorefeeincomeintheJun14quartergrewatarobustpaceat38%yoy,butcontribution
from treasury income, FX income and investment banking was high at INR811mn and could be non
recurring in nature. We forecast average fee/assets of 1.98% during FY15fFY17f, 14bp higher than
theprecedingthreeyearaverage.
Improvementincostratioslimitedduetoplannedexpansion
TheimprovementincostratiosinFY14maynotsustainandtheremaybeamarginaluptrendduring
FY15fFY17f. In line with the managements guidance, we assume a rise in the pace of branch
additions,at498,duringFY15fFY17f,comparedto302intheprecedingthreeyears.Also,weexpecta
marginal uptrend in the average pay per employee during the next three years compared to the
contraction in the last two years. We estimate the average costassets ratio during FY15fFY17f at
2.64%,marginallylowerfrom2.67%,intheprecedingthreeyears.Weforecastthecostincomeratioto
averageat45.2%duringFY15fFY17f,similartothatduringthepastthreeyears.
Exhibit15: NPLprovision/assets,incrementalNPL
Exhibit14: Costratios(%)
Cost/income
IncrementalNPL
Cost/asset(RHS)
Provision/loans(RHS)
55
3.0
0.5%
0.50%
50
2.8
0.4%
0.44%
45
2.6
0.3%
0.38%
40
2.4
0.2%
0.32%
35
2.2
0.1%
0.26%
2.0
0.0%
30
Mar11
Mar13
Mar15f
Mar17f
0.20%
Mar11
Mar13
Mar15f
Mar17f
BenefitfromfallinincrementalNPLslikelyinFY16fFY17f
RecoveryinCVcyclemaybebackendedinFY15f
Exhibit16: PCRandthegrossslippageratio(%)
ProvisionCoverageRatio(%)
Grossslippageratio(RHS)
80
2.1%
76
1.7%
72
1.3%
68
0.9%
64
0.5%
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
Jun14
Financials
64
IndusIndBank
IndusIndBank
Exhibit17: GrossNPLratiosofsegmentswithinvehiclefinanceandfortotalloans
%oftotalloans(Mar14)
Mar13
Jun13
Sep13
Dec13
Mar14
Jun14
CVs
17.45%
1.01%
1.17%
1.08%
1.28%
1.38%
1.44%
Utility
3.72%
0.88%
0.86%
0.76%
0.76%
0.87%
0.84%
Car
4.79%
0.73%
0.70%
0.44%
0.40%
0.52%
0.46%
3wheeler Equipmentfinancing
8.07%
5.18%
0.84%
1.17%
0.83%
1.16%
0.75%
1.17%
0.72%
1.26%
0.92%
1.30%
0.82%
1.58%
Totalloans
1.03%
1.06%
1.11%
1.18%
1.12%
1.11%
There was a gradual deterioration in the asset quality during the past three years, with average
incremental NPLs at 0.33% during FY12FY14, compared to the decline in incremental NPLs in the
precedingthreeyears.ThereboundintheCVcyclemaybebackendedinFY15f,andhencetheimpact
onNPLsandNPLprovisionsmaybevisibleonlyfromFY16f.WeassumeincrementalNPLduringFY15f
FY17f at35bp and NPL provisions/loans at 65bp, higher than the preceding three years average, at
33bpand56bp,respectively.
Provisions,peakingofNIMmayrestrictpaceofriseinRoA,RoE
HighNPLprovisionsandlimitedNIMexpansionislikelytorestricttheextentofriseintheprofitability
ratios,i.e.,RoAandRoE.
Exhibit18: ThreeyearaverageforRoA,RoEandasset/equity
Average,%
Mar09Mar11
Mar12Mar14
Mar15fMar17f
RoA
1.04
1.64
1.82
RoE
16.84
18.21
19.82
Asset/Equity
17.05
11.12
10.92
WevalueIIBat1yearP/Bof2.65x;reinitiatewithAdd
where we assume a cost of equity of 14% and semiexplicit and fade period growth of 23% and 3%,
respectively.OurSep15targetpriceofINR665valuesIIBat2.65xtheoneyearforwardbookvalue.We
reinitiatecoveragewithanAddrating.
5yearaverage
1yearforwardP/E(X)
5.0
25
4.1
20
3.2
15
2.3
10
1.4
Jan10
Dec10
Nov11
Nov12
Oct13
Sep14
Sep15
5
Jan10
Dec10
Nov11
Nov12
5yearaverage
Oct13
Sep14
Sep15
Financials
65
IndusIndBank
IndusIndBank
Exhibit21: AverageP/EandP/B(till1Aep14)
1month
3month
6month
12month
2year
3year
5year
15.25
2.72
15.52
2.75
15.28
2.69
14.55
2.50
15.26
2.84
14.92
2.78
15.29
3.00
P/E
P/B(adjusted)
Weights
P/E
P/B
DCF/SOP
TP
35%
705
35%
753
30%
514
665
Source:Company,IL&FSInstitutionalEquitiesAssumptions:2yearmeanP/EandP/Bbasedfairvalue;assume22%semiexplicitperiodgrowthfortheDCF
Keyrisks
Shortmaturityofretailloans,cyclicalityinCVsegmentmayimpactgrowth
Thebanksexposuretothehomeandcarloanmarketsislimited,asthemanagementhasstayedaway
fromhighlycompetitivemarkets.Thetenureforotherretailloansislessthantwoyearsandasaresult
therearelargerepaymentseveryyear.Thoughthiswouldbeapositiveformargins,thelowertenure
of the retail book and the absence of the highertenure home loans are likely to restrict retail loan
growth.WithCVloansmakingupc17%oftheloanbook,thecyclicalityintheCVbusinessimpactsthe
growthintheretailbook,aswitnessedoverthepastthreeyears.
Executionrisk,earningsrisk
f Strongerthanexpected growth in the corporate banking segment may bring down yields lower
thanourestimatesandresultinadownwardrisktoearnings.
f Continued reduction in incremental NPLs and NPL ratios during FY15fFY16f would reduce the
provisioningrequirementandleadtoanupwardrisktoournetprofitestimates.
f IIBhasplanneddoublingoftheirbranchnetworkoverthenextthreeyearsintheirphaseIIIgrowth
plan.Costratiosmayrisemorethanourestimates,pullingdowntheprofitability.
Financials
66
IndusIndBank
IndusIndBank
Fiscalyearending
Netinterestincome
Feeincome
Tradingprofit
Otherincome
Operatingprofit
Provisionforbaddebt
Otherprovision
PBT(reported)
Totaltaxes
PAT(reported)
Priorperioditems
Netincome(reported)
Adjustednetincome
Dil.shares(mn)
Dil.EPS(INR)
03/14
28.9
17.9
0.5
0.5
47.8
21.9
26.0
3.1
1.5
21.3
7.2
14.1
0.0
0.0
0.0
14.1
14.1
526
526
26.8
03/15f
35.2
20.9
0.6
0.6
57.4
26.3
31.0
4.4
0.6
26.0
8.6
17.4
0.0
0.0
0.0
17.4
17.4
526
526
33.1
03/16f
42.7
25.4
0.7
0.8
69.5
31.5
38.0
4.9
0.8
32.3
10.6
21.6
0.0
0.0
0.0
21.6
21.6
526
526
41.1
03/17f
52.0
30.6
0.9
0.9
84.5
37.4
47.1
6.0
1.0
40.1
13.2
26.9
0.0
0.0
0.0
26.9
26.9
526
526
51.1
24.3
29.5
40.1
42.8
32.7
32.0
23.4
21.9
17.1
40.8
23.6
23.6
26.5
21.1
21.4
10.8
24.1
24.1
25.6
21.9
20.6
22.0
24.4
24.4
60.5
37.4
54.3
29.4
33.8
61.4
36.5
54.1
30.3
33.0
61.4
36.5
54.6
31.1
33.0
61.6
36.3
55.8
31.8
33.0
03/14
5.3
0.0
85.1
90.3
605.0
136.9
38.0
870.3
67.7
215.6
551.0
10.2
25.8
870.3
03/15f
5.3
0.0
99.1
104.3
756.3
154.0
42.8
1,057.3
77.6
257.0
679.7
12.4
30.5
1,057.2
03/16f
5.3
0.0
116.3
121.6
968.0
176.9
49.7
1,316.2
103.0
312.7
859.7
14.9
25.9
1,316.1
03/17f
5.3
0.0
137.8
143.0
1,229.4
207.8
58.1
1,638.3
125.2
382.6
1,079.8
19.2
31.4
1,638.2
91.1
35.6
25.4
20.7
6.4
89.9
34.0
24.5
20.4
6.7
88.8
32.3
23.6
19.9
7.2
87.8
31.1
23.0
19.7
7.5
Growthratios(%)
03/14
3.61
2.23
0.13
5.96
2.73
3.24
0.39
0.11
0.08
0.90
1.76
03/15f
3.66
2.17
0.13
5.95
2.73
3.22
0.46
0.00
0.06
0.89
1.81
03/16f
3.60
2.14
0.12
5.86
2.66
3.20
0.41
0.00
0.07
0.90
1.82
03/17f
3.52
2.07
0.12
5.72
2.53
3.19
0.40
0.00
0.07
0.90
1.82
RoA
Assets/Equity
RoE
1.76
9.99
17.55
1.81 1.82
10.33 10.90
18.66 19.85
1.82
11.52
20.96
KeyRatios
Loans
Netinterestincome
Feeincome
Provisionforbaddebt
Adjustednetincome
Dil.EPS
Operatingratios(%)
NII/operatingincome
Netprofitmargin
EffectiveTaxrate
Balancesheet(INRbn)
Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Deposits
Totalborrowings
Totalliabilities
Cashandbankbalances
Investments
Loans
Fixedassets
Otherassets
Totalassets
BusinessRatios(%)
Loan/Deposit
Investment/Deposit
SLRInvestment/NDTL
Fiscalyearending
Netinterestincome
Feeincome
Otherincome
Operatingincome
Operatingexpenses
Operatingprofit
Loanlossprovisions
Otherprovisions
Tax
Netprofit
Fiscalyearending
Valuationratios(x)
P/E(onAvendusEPS)
P/BV
P/AdjustedBV
Dividendyield(%)
Pershareratios(INR)
Yieldonadvances
Yieldoninvestments
Costofdeposits
Netinterestmargin
Feeincome/Oprevenue
Opexpense/Oprevenue
Equity/Assets
Loans/Assets
Investments/Assets
Dividendpayout
Internalcapitalgrowth
Capitaladequacy
AssetQuality
GrossNPLratio
NetNPLratio
NetNPL/networth
Loanprovisions/NII
03/14
03/15f
03/16f
03/17f
23.0
3.6
3.6
0.6
18.6
3.1
3.1
0.9
15.0
2.7
2.7
1.1
12.1
2.3
2.3
1.4
26.8
26.9
171.8
171.3
3.6
33.1
33.1
198.5
197.6
5.5
41.1
41.1
231.3
230.3
6.8
51.1
51.1
272.1
271.5
8.4
13.3
7.2
7.6
3.8
24.5
1.1
45.7
13.1
6.9
7.4
3.8
26.8
1.0
45.9
13.0
6.7
7.3
3.7
26.6
1.0
45.4
13.0
6.6
7.3
3.6
25.9
1.0
44.2
10.4
64.9
24.8
15.3
15.7
13.8
9.9
65.9
24.3
20.2
15.4
14.5
9.2
67.0
23.8
20.2
16.5
13.7
8.7
67.7
23.4
20.2
17.7
12.9
1.1
0.3
3.8
70.4
10.9
0.8
1.2
0.4
2.5
70.7
12.5
0.9
1.2
0.4
2.7
71.3
11.5
0.9
1.2
0.3
2.6
73.5
11.5
0.9
1,920.3 1,914.7 2,030.8 2,099.3

0.9 1.0 1.2 1.3
Financials
67
IndiaEquityResearch
Financials
September04,2014
BankofIndia
ADD
TargetPrice(INR)312 Largediscounttopeersunlikelytorecede
CompanyReport
LastPrice(INR)
292.0
Bloombergcode
BOIIN
Reuterscode
BOI.BO
Avg.Vol.(3m)(mn)
4.84
Avg.Val.(3m)(INRbn)
1.42
52wkH/L(INR)
357/132
27,140
Sensex
MCAP(INRbn/USDbn)
187.51/3.10
Shareholding(%)
03/14
06/14
Promoters
66.7
66.7
MFs,FIs,Banks
15.5
15.6
FIIs
10.2
9.8
5.6
2.0
5.8
2.1
Public
Others
360
300
240
The earnings impact of improved delinquency is likely to be delayed

and may exert a further strain on capital due to very low provision
coverage ratio. We estimate the mean NPL provision/loans during
FY15fFY17f at 1.13%, similar to that during preceding 3 years
average.Evenwithanassumeddilutionof15%inFY15fandestimated
3yearCAGRof16%inretainedearnings,growthislikelyberestricted
tomidteens.RoEislikelytoremainbelowpeersinthenext23years
on dilution and high NPL provisions. We expect the significant
valuation discount to peers to persist, given its weak fundamentals
andhighvolatilityinearnings.ReinitiatecoveragewithaSep15TPof
INR312andanAdd.TheTPvaluesBOIat1yrfwdadj.P/Bof0.79x.
RecoveryinNIMmaypartlyoffsettheNPLprovisionburden
LowPCRof36%(exc.writeoff)islikelytoexertpressureonprofitability,even
if the asset quality improves. We estimate mean NPL provision/loans during
FY15fFY17f at 1.13%, virtually similar to that in the preceding three years.
ThiswouldliftthePCRratioby345bpto40.7%bytheendofFY17f.Webuild
inmaterialimprovementintheincrementalNPLoverFY16fFY17f. WhileNPL
provisionsmaystayanoverhang,estimated20bpexpansioninNIMfollowing
the moderation in incremental NPL is likely to support the 16% CAGR in PAT
overFY15fFY17f.
Largeimpendingdilutionlikelytostayanoverhang
180
120
Sep13
Jan14
May14
Bank of India
Sep14
Sensex Rebased
1m
3m
1yr
Absolute
7.4
8.1
116.8
Rel.toSensex
0.9
17.3
68.0
Finan cials(INRbn)
03/14
03/15f
03/16f
NII
158.7
StockPerfm.(%)
108.3
131.4
YoY(%)
20.0
21.3
20.7
Operatingprofit
84.2
98.8
120.0
A.PAT
27.3
32.4
42.0
643.0
743.0
743.0
A.EPS(INR)
44.0
46.8
56.5
YoY(%)
7.9
2.9
29.5
Equity/Assets(%)
5.2
5.4
5.1
P/E(x)
6.9
6.7
5.2
P/B(Adj)(x)
0.9
0.8
0.8
0.5
11.2
0.5
11.2
0.6
12.6
Sho/s(diluted)
RoA(% )
RoE(%)
QuarterlyTrends
09/13
12/13
03/14
06/14
Op.income(INRbn)
36.3
38.2
39.6
37.1
6.2
5.9
5.4
8.1
PAT(INRbn)
The Tier I ratio, at 7.25%, was closer to the minimum required according to
BaselIIIrequirementandlowestamongpeers,;CET1was6.84%attheendof
Jun14.Growthinassetwasc22%,significantlyexceedingtheretainedearnings
growth of 4% during FY13fFY14f. This resulted in higher utilisation of capital
andadeclineinCAR.Evenwiththeassumptionofa15%dilutioninFY15f,3
year CAGR in risk weighted assets and retained earnings at 15% and 16%,
respectively,TierI,at7.24%,wouldgetclosertotheminimumrequiredlevelin
FY17frequiringfurtherdilution.
Largediscounttopeersisunlikelytorecedeover12months
Weexpectasignificantvaluationdiscounttopeerstopersist,giventhebanks
weak fundamentals and high volatility in earnings. RoE is likely to stay below
peersoverthenext23yearsondilutionandelevatedNPLprovisions.OurTP
isbasedontheDCF,P/EandP/Bmethods.OurDCFbasedfairvaluesassumea
costofequityof14%,semiexplicitgrowthof6%andfadeperiodgrowthof3%.
WeexpectRoAduringthe semiexplicitperiodat0.80%,anaverageoverthe
last decade. A 25% discount is applied to the fiveyear mean P/E and P/B to
arriveattheP/EandP/Bbasedfairvalues,givenlowcapitalisationratios,the
large impending dilution and lowest RoE among peers. Reinitiate coverage
withaSep15TPofINR312andanAddrating.TheTPvaluesBOIat1yrfwdadj.
P/Bof0.79.DelayedrecoveryinNIMandassetquality,extendingintoFY16f,is
keyriskfactors.
BankofIndia
LowcoverageratiomayimpactprofitabilityevenifNPLsimprove
Slippageratiostaysvolatile
The slippage ratio surged to 3.9% during the Mar14Jun14 quarter, close to the peak of 4.2% in the
Sep12 quarter. However, the slippage ratio was below 2% during the preceding two quarters; the
additiontothegrossNPLstaysveryvolatileforBOI.Largerecoveryinthepasttwoquartershasbeen
drivenbythesaleofNPLstoARCs;BOIsoldINR40bntotheARCsinFY14andINR17.6bnin1QFY14.
SharpfallinPCRdrivenbyhighslippage,changeinprovisioningnorm
Afterasharpcontractionof18%inthePCR(at35.8%)duringthepastthreeyearsattheendofJun14,
BOI has the lowest PCR ratio among peers. During FY14, BOI changed its accounting policy of
provisioning for NPLs classified as SubStandard (secured) from 20% (accelerated provision) to 15%
(minimum provision), which resulted into a write back of NPL provision of INR2.5bn provided until
31Mar13.Hadtheearlieraccountingpolicybeenfollowed,theNPLprovisionforFY14wouldhavebeen
higherbyINR3.25bn.Also,BOIhasutilisedINR1.8bnoffloatingprovision(33%offloatingprovisionof
INR5.43bnheldon31Mar13towardsspecificNPLprovisions).
GrossNPL(%)
Slippageratio(RHS)
Exhibit2: Provisioncoverageratio(%,Jun14)
NetNPL(%)
50
4.0
5%
3.2
4%
2.4
3%
1.6
2%
0.8
1%
0.0
0%
40
30
20
10
Jun12
Dec12
Jun13
Dec13
0
SBI
Jun14
BOB
BOI
PNB
CBK
UNBK
However,lowrestructuredloansaugurwellforincrementaladditiontoNPLs
Exhibit3: Restructuredloansaspercentageoftotalloans
12
0
SBI
BOB
BOI
PNB
CBK
UNBK
Webuildinjust1bpfallin3yearmeanNPLprovisions/loans
Very low coverage ratios are likely to exert pressure on the profitability, even if the asset quality
improves.WeestimatemeanNPLprovision/loansduringFY15fFY17fat1.13%,just1bplowerthan
Financials
76
BankofIndia
the preceding three years average. This would lift the PCR ratio by 345bp to 40.7% by the end of
FY17f. NPL provisions/loans fell 18bp yoy to 1.19% in FY14, partly due to the change in the
provisioningnorm.Weestimateamarginaldeclineof4bpyoyto1.15%inFY15f.
following15bpdeclineinincrementalNPL
TheincrementalgrossNPL(increaseino/sgrossNPLaspercentageofstartingloans)declined8bpyo
y in FY14 to 1.06%. It had surged 64bp in the preceding year. We assume the trend of a declining
incremental NPL in FY14 to continue over FY15fFY17f, largely the reduction being backended. We
assume a 46bp fall in the FY15fFY17f incremental NPL to 0.60%. However, low loan growth could
keepthegrossNPLratiohigher.
IncrementalNPL
NNPLratio
GNPLratio
NPLprovisions/loans
3.9%
PCR(RHS)
1.5%
70%
1.2%
60%
0.9%
50%
0.6%
40%
0.3%
30%
2.9%
1.9%
0.9%
0.1%
0.0%
Mar11
Mar13
Mar15f
Mar17f
20%
Mar11
Mar13
Mar15f
Mar17f
Lowexposuretopowerbuthigherthanindustryaveragetowardsironandsteel
Exhibit6: ExposureofBOBandIndustrytotheriskysectors
(INRmn)
BankofIndia
Allbanks
Fundbased
%ofdomesticloans
Outstanding
%oftotalloans
26,299
1.01%
353,260
0.59%
178,197
6.86%
3,619,690
6.02%
Energy
160,087
6.17%
4,883,460
8.12%
Total
364,582
14.04%
8,856,410
14.73%
Miningandquarrying
LargeimpendingdilutiontopulldownRoEinFY15f
Exhibit7: CapitalratiosattheendofJun14(%)
TierI(RHS)
RWA(yoy)
15
12
30%
10%
24%
9%
18%
8%
12%
7%
6%
6%
6
3
0%
0
CAR
TierI
CET1
TierII
5%
Mar14
Mar15f
Mar16f
Mar17f
Financials
77
BankofIndia
Evenwith15%dilutioninFY15f,TierImayhitlimitinc2years
Tier I ratio, at 7.25%, was closer to the minimum required level of 7%, according to the Basel III
requirement;CET1was6.84%attheendofJun14.Growthinassetswasc22%,significantlyexceeding
theretainedearningsgrowthof4%duringFY13fFY14f.Thishasresultedinthehigherconsumptionof
capitalanddeclineinCAR.Evenwiththeassumption ofa15%dilutionin FY15f, TierIwould hitthe
regulatorylimitinFY17fwithaTierIratioof6.94%.WeassumeRWAandretainedearningstogrowat
athreeyearCAGRof15%and16%,respectivelyduringFY15fFY17f.
Returnratiostostaywellbelowpeersondilution,elevatedNPLprovision
ThelowestcapitalisationratioamongpeersattheendofJun14islikelytoresultinalargedilutionin
FY15f.RoEislikelytoremainbelowpeersoverthenext23yearsowingtothelargerdilutionandhigh
NPLprovisions;lowestPCRamongpeersislikelytoaddtotheburden.With15%dilutioninFY15fand
19%yoygrowthinnetprofit,weestimateRoEat11.2%,closertothatreportedinFY14.Weestimate
anuptrendfromFY16f
Exhibit9: RoE(%)
18
FY14
FY15f
FY16f
15
12
9
6
3
0
BOB
BOI
PNB
SBIN
Largediscounttopeersisunlikelytorecedeover12months
Exhibit10: Discount/premiumofBOBtoPNBandSBIN,P/B(Adjusted)ofBOB
AdjustedP/B(RHS)
DiscounttoBOB
DiscounttoPNB
60%
2.5
40%
2.0
20%
1.5
0%
1.0
20%
0.5
40%
Jun09
Dec09
Aug10
Mar11
Oct11
May12
Nov12
Jul13
Jan14
0.0
Aug14
Financials
78
BankofIndia
OurTPvaluesBOIat1yearforwardadjustedP/Bof0.79x
whereinweassumeacostofequityof14%andsemiexplicitgrowthof6%andfadeperiodgrowthof
3%.Thesemiexplicitperiodcapstheasset/equityat18xandlinksittothegrowth.Wealsoassume
RoAduringthesemiexplicitperiodat0.79x,anaverageinthepastdecade.
A25%discountisappliedtothefiveyearmeanP/EandP/BtoarriveattheP/EandP/Bbasedfair
values,givenlowcapitalisationratios,alargeimpendingdilutionandthelowestRoEamongpeers.Our
blendedSep15targetpriceofINR312valuesBOIat0.79xtheoneyearforwardadjustedbookvalue.
WereinitiatecoverageonthestockwithanAddrating.
1month
3month
6month
12month
2year
3year
5year
4.94
0.75
5.23
0.81
4.84
0.80
4.26
0.72
4.62
0.84
4.99
0.94
5.86
1.20
P/E
P/B
Weights
P/E
P/B
DCF/SOP
TP
35%
269
35%
355
30%
314
312
5yearaverage
1yearforwardP/E(X)
2.5
11
2.0
1.5
1.0
0.5
Jan10
Dec10
Nov11
Nov12
Oct13
Sep14
Sep15
3
Jan10
Dec10
Nov11
Nov12
5yearaverage
Oct13
Sep14
Sep15
Riskfactors:
f Ifeconomicgrowthbouncesback,assetqualitycouldimprovesignificantly,resultinginlowercredit
coststhanourexpectations.
f Dilution required could be higher than our assumption resulting in a lowerthanestimated RoE;
however,underthisscenario,growthmaybehigherthanourestimate.
f Ifthehighinterestratepersists,itcandentthemargin,giventhebankslowCASA.
Financials
79
BankofIndia
Fiscalyearending
Netinterestincome
Feeincome
Tradingprofit
Otherincome
Operatingprofit
Provisionforbaddebt
Otherprovision
PBT(reported)
Totaltaxes
PAT(reported)
Priorperioditems
Netincome(reported)
Adjustednetincome
Dil.shares(mn)
Dil.EPS(INR)
03/14
108.3
21.4
8.0
13.6
151.2
67.0
84.2
39.7
9.1
35.5
8.2
27.3
0.0
0.0
0.0
27.3
27.3
643
643
42.4
03/15f
131.4
26.0
7.0
15.2
179.6
80.8
98.8
46.6
9.0
43.3
10.8
32.4
0.0
0.0
0.0
32.4
32.4
643
743
43.7
03/16f
158.7
30.1
7.8
16.3
212.9
92.9
120.0
54.1
7.6
58.3
16.3
42.0
0.0
0.0
0.0
42.0
42.0
643
743
56.5
03/17f
185.9
34.8
8.7
17.3
246.7
110.1
136.6
60.0
8.8
67.8
19.0
48.8
0.0
0.0
0.0
48.8
48.8
643
743
65.7
28.1
20.0
12.1
6.5
0.7
7.9
15.8
21.3
21.4
17.4
18.9
2.9
15.9
20.7
15.8
16.0
29.5
29.5
15.9
17.1
15.9
11.0
16.2
16.2
71.6
14.1
55.7
18.0
23.0
73.2
14.5
55.0
18.1
25.0
74.5
14.1
56.4
19.7
28.0
75.3
14.1
55.4
19.8
28.0
03/14
6.4
0.0
292.8
299.2
4,769.7
392.2
270.8
5,731.9
613.8
1,141.5
3,707.3
57.9
211.4
5,731.9
03/15f
7.4
0.0
346.3
353.8
5,544.2
385.5
286.7
6,570.2
704.5
1,276.9
4,294.4
62.1
232.3
6,570.2
03/16f
7.4
0.0
377.8
385.2
6,418.0
412.2
318.8
7,534.3
827.8
1,416.6
4,975.4
61.9
252.4
7,534.3
03/17f
7.4
0.0
414.2
421.6
7,429.7
440.6
354.5
8,646.5
940.2
1,578.7
5,766.2
61.1
300.3
8,646.5
77.7
23.9
21.0
19.4
7.3
77.5
23.0
20.4
19.1
6.6
77.5
22.1
19.7
18.5
5.9
77.6
21.2
19.1
18.1
5.3
Growthratios(%)
03/14
2.11
0.42
0.42
2.95
1.31
1.64
0.77
0.01
0.16
0.16
0.53
03/15f
2.14
0.42
0.36
2.92
1.31
1.61
0.76
0.02
0.13
0.18
0.53
03/16f
2.25
0.43
0.34
3.02
1.32
1.70
0.77
0.02
0.09
0.23
0.60
03/17f
2.30
0.43
0.32
3.05
1.36
1.69
0.74
0.02
0.09
0.23
0.60
RoA
Assets/Equity
RoE
0.53
20.97
11.16
0.53 0.60
21.28 21.24
11.22 12.65
0.60
22.10
13.33
KeyRatios
Loans
Netinterestincome
Feeincome
Provisionforbaddebt
Adjustednetincome
Dil.EPS
Operatingratios(%)
NII/operatingincome
Netprofitmargin
EffectiveTaxrate
Balancesheet(INRbn)
Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Deposits
Totalborrowings
Totalliabilities
Cashandbankbalances
Investments
Loans
Fixedassets
Otherassets
Totalassets
BusinessRatios(%)
Loan/Deposit
Investment/Deposit
SLRInvestment/NDTL
Fiscalyearending
Netinterestincome
Feeincome
Otherincome
Operatingincome
Operatingexpenses
Operatingprofit
Loanlossprovisions
Otherprovisions
Tax
Netprofit
Fiscalyearending
Valuationratios(x)
P/E(ondil.EPS)
P/BV
P/AdjustedBV
Dividendyield(%)
Pershareratios(INR)
Yieldonadvances
Yieldoninvestments
Costofdeposits
Netinterestmargin
Feeincome/Oprevenue
Opexpense/Oprevenue
Equity/Assets
Loans/Assets
Investments/Assets
Dividendpayout
Internalcapitalgrowth
Capitaladequacy
AssetQuality
GrossNPLratio
NetNPLratio
NetNPL/networth
Loanprovisions/NII
03/14
03/15f
03/16f
03/17f
6.88
0.63
0.89
2.00
6.69
0.61
0.84
3.78
5.17
0.56
0.78
4.85
4.45
0.51
0.70
5.72
44.0
44.0
465.4
329.4
5.8
50.4
46.8
476.1
345.8
11.0
65.3
56.5
518.5
373.6
14.2
75.9
65.7
567.5
415.0
16.7
8.22
8.05
5.54
2.20
14.1
5.26
44.3
8.38
7.90
5.54
2.24
14.5
3.90
45.0
8.51
7.77
5.49
2.35
14.1
3.67
43.6
8.61
7.68
5.48
2.40
14.1
3.52
44.6
5.2
64.7
19.9
13.8
9.8
10.8
5.4
65.4
19.4
26.5
8.0
11.2
5.1
66.0
18.8
26.3
8.8
10.7
4.9
66.7
18.3
26.6
9.3
10.2
3.2
2.0
28.9
37.3
36.7
1.1
3.6
2.3
31.1
37.0
35.5
1.1
3.8
2.4
33.9
38.3
34.1
1.1
3.8
2.3
34.2
40.7
32.3
1.0
1,824.6 1,930.7 2,054.4 2,200.8

0.6 0.7 0.8 0.8
Financials
80
BankofIndia
AnalystCertification
Thefollowinganalyst(s)is(are)primarilyresponsibleforthisreportand,certifies(y)thattheopinion(s)onthesubjectcompany(ies)anditssecurity(ies)andanyotherviewsor
forecastsexpressedhereinaccuratelyreflecttheirpersonalview(s):ChandanaJha
Disclosures
MeaningofIL&FSBrokingServicesPrivateLimitedsequityresearchratings
Theratingrepresentstheexpectedchangeinthepriceofthestockoverahorizonof12months.
Buy:morethan+15%
Add:+5%to+15%
Reduce:5%to+5%
Sell:lessthan5%
Analystdisclosures
None of the analysts involved in the preparation of this research report or a member of his/her household is an officer, director or supervisory board member of any of the
company(ies)thatis/arethesubjectofthisresearchreport.Noneoftheanalystsinvolvedinthepreparationofthisresearchreportormembersofhis/herhouseholdholdany
financialinterestinthesecuritiesofthecompany(ies)thatis/arethesubjectofthisresearchreport.
Disclaimer
ThisdocumenthasbeenpreparedbyIL&FSBrokingServicesPrivateLimited(IBSPL)formerlyknownasAvendusSecuritiesPrivateLimited.Thisdocumentismeantfortheuseof
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orviewsexpressedmaynotbesuitableforallinvestors.Thisdocumenthasbeenpreparedonthebasisofinformationobtainedfrompubliclyavailable,accessibleresources.IBSPL
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IndiaEquityResearch

Potential uptrend in GDP and cut in rates may be a pleasantmix for

Aug09 Apr11 Dec12

FY15fFY17f FY14 FY12FY14

FY15fFY17f FY14 FY12FY14

FY15fFY17f FY14 FY12FY14 FY15fFY17f

FY15fFY17f FY14 FY12FY14

FY15fFY17f FY14 FY12FY14

FY15fFY17f FY14 FY12FY14 FY15fFY17f

Actual Explicitperiod Semiexplicit Semiexplicit

Actual Explicitperiod Semiexplicit

(FY13fFY15f (FY16fFY25f) (FY13FY14) (FY15fFY17f (FY18fFY27f)

ANDB DBNK OBC

MFs ,FIs ,Ba nks

Equity/As s ets (%)

Op. inco me (INRbn)

A sustained cost advantage and fall in provisions is likely to support

We forecast a CAGR of 24% in PAT over FY15fFY17f, driven by a 14bp NIM

Equity/As s ets (%)

Op. inco me (INRbn)

MFs ,FIs ,Ba nks

Sensex Reba sed

Equity/Ass ets (%)

Op. income (INRbn)

MFs ,FIs ,Ba nks

Equity/Ass ets (%)

1,641.1 1,831.4 2,080.1 2,412.4

1,580.2 1,785.6 2,044.8 2,345.7

MFs ,FIs ,Ba nks

Sensex Reba sed

Equity/Ass ets (%)

Op. income (INRbn)

Return ratios during FY15fFY17f is likely to stay above the historical

1,920.3 1,914.7 2,030.8 2,099.3

The earnings impact of improved delinquency is likely to be delayed

1,824.6 1,930.7 2,054.4 2,200.8

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