Indian Financials: Tryst With Destiny

INSTITUTIONAL SECURITIES
INDIA RESEARCH
FINANCIALS
SECTOR UPDATE
BSE SENSEX: 18436
21 JULY 2011
Indian Financials
Tryst with destiny
Sticky inflation, a long series of policy rate hikes, elevated wholesale funding rates, high commodity prices and a not-soencouraging global economy what more could go wrong for the financials sector? Given the tough operating environment, concerns have emerged around banks ability to deliver business performance in line with Street expectations. Also, the spectre of slippages has raised its head again as economic growth hits a roadblock. In this backdrop, we visit the issues that have a material bearing on financial stock valuations: # 1: A barrage of macro-economic concernshow much more to go? # 2: Slowing growth and elevated interest rates - a red flag on asset quality? # 3: Stress on earnings ahead? # 4: What is the potential downside from current levels? # 5: What is the pecking order within financials?
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A deteriorating operating environment - lower NIMs, tepid credit growth and sluggish fee income - is bound to manifest as lower earnings growth for financials over the next two quarters. Besides, we see delinquencies (and thus credit costs) rising during the period, and estimate NPAs plus restructured loans in the system peaking at 7.8% in FY13 (5.8% in FY11). Reflecting these concerns, financial stocks have corrected (10-25% underperformance since Nov-10) and are now trading at attractive valuations. PSU banks are likely to witness steeper NIM contraction and are also more vulnerable to the asset quality threat due to transfer to system-based recognition of NPAs. Private banks, on the other hand, are in a stronger position owing to better ALMs and lower delinquencies. We believe interest rates are close to peaking out and expect the RBI to take a breather after further hike of 25-50bp in policy rates. Clarity on interest rates should lead to a sharp rebound in stocks. We recommend building positions in private banks ahead of their PSU peers with ICICI Bank and IndusInd Bank as preferred picks. We would wait to enter PSU banks at lower levels post the Q1FY12 results. SBI and Bank of Baroda are our key picks among PSU banks. Comparative valuations
FY12E Companies
ICICI Bank IndusInd Bank Bank of Baroda
Recommendation
Outperformer Outperformer Outperformer
Price (Rs)
1,045 276 897 2,471
Mkt cap FY11-13E earnings (Rs bn)

1,203 129 351 1,569
EPS (Rs)
58.6 16.8 128.1 189.3
P/E (x)
17.8 16.4 7.0 13.1
P/Adj BV (x)
2.0 2.9 1.5 1.6
RoE (%)
11.8 18.9 23.1 17.2
RoA (%)
1.5 1.5 1.3 0.9
CAGR (%)
26.9 33.6 18.5 39.2
State bank of India Outperformer Source: IDFC Securities Research
Pathik Gandotra
Chinmaya Garg
Kavita Kejriwal
Kavitha Rajan For Private Circulation only. Important disclosures appear at the back of this report
pathik.gandotra@idfc.com chinmaya.garg@idfc.com kavita.kejriwal@idfc.com kavitha.rajan@idfc.com 91-22-6622 2525 91-22-6622 2563 91-22-6622 2558 91-22-6622 2697
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# 1: Have macro concerns peaked out? A steep rise in interest rates (~275bp since March 2010), project execution delays, government inaction and higher commodity prices have forced downward adjustment in Indias economic growth expectations (consensus FY12E GDP down from 8.4% in December 2010 to 7.8% currently). Notably, GDP growth for March 2011 came in lower at 7.8% yoy against 8.9% in September 2010. Consider the following: Inflation has persisted at elevated levels 9.4% yoy for June 2011 Policy rate hikes undertaken by the RBI have led to a steep rise in interest rates, especially at the short end of the yield curve Higher borrowing costs have led to a significant slowdown in the rate of capital formation. Gross fixed capital formation was flat yoy as compared to a 17% yoy increase in Q1FY11
Exhibit 1: Inflation likely to stay at elevated levels in the near term before coming off in H2FY12
WPI YoY % 12 9 6 3 -
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Nov-08 Nov-09 Nov-10 Nov-11 Mar-09 Mar-10 Mar-11 May-08 May-09 May-10 May-11 Sep-08 Sep-09 Sep-10 Sep-11 Mar-12 Jul-08 Jul-09 Jul-10 Jan-09 Jan-10 Jan-11 Jul-11 Jan-12
Source: IDFC Securities Research, Office of the economic adviser
Inflation could rise further before coming off

With inflationary pressures getting broad-based and the hike in crude oil prices yet to be fully passed on, headline inflation is likely to remain in the 9-10% range in H1FY12. With the full impact of RBI tightening taking almost four quarters to realize, we expect the impact of past rate hikes to flow through from H2FY12. Thus, while inflation is likely to stay high in H1FY12, we expect it to trend down to 7% by March 2012 led by lag impact of monetary policy. However, persistently high global commodity prices pose an upside risk to our estimates.
See another 25-50bp hike in policy rates

The RBI has indicated that tackling inflation remains its top priority even if it comes at the expense of some growth in the short term. Post the 25bp rate hike effected in policy rates in June-11, we expect the central bank to hike rates by another 25-50bp in FY12 and then pause until the impact of previous rate hikes flows through.
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IDFC SECURITIES
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Exhibit 2: G-Sec yields hovering at 8.2-8.3%

8.6 10 year Gsec yield (%)
8.2
7.8
7.4
7.0
Oct-10
Nov-10
Apr-10
Dec-10
Mar-10
May-10
Aug-10
Mar-11
Apr-11
May-11
Sep-10
Feb-11
Jul-10
Jun-10
Source: IDFC Securities Research and company reports
GDP growth still expected to come in at 7.8-8%

Higher inflation and interest rates could likely put pressure on Indias GDP growth over the next couple of quarters. However, an expected decline in inflation should limit further monetary tightening by the RBI and provide higher visibility on the interest rate cycle. A stable interest rate environment and policy triggers, we believe, would kick-start investment spend in H2FY12. While growth in FY12 is likely to be lower than the 8.5% yoy clocked in FY11, we expect the economy to still expand at a healthy pace (in the range of 7.75-8% yoy).
Exhibit 3: We expect real GDP growth to be healthy in FY12

FY09
(% growth) 12.0 FY10 10.1 9.0 6.6 6.0 4.4 3.0 3.0 0.4 (0.1) (3.0) Agriculture Industry Services GDP 8.0 7.9 6.9 6.8 FY11 10.1 9.4 9.7 8.0 8.5 8.0 FY12E
Our view: With limited upside on inflation from the current levels and a decline likely from Nov-Dec 2011, we believe the interest rate cycle is close to peaking out; we see another 25-50bp policy rate hike in FY12. A pause in rate hikes by the RBI and decline in wholesale borrowing costs should lead to a sharp rebound in financial stocks.
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JULY 2011
IDFC SECURITIES
Jun-11
Jan-11
Jul-11
# 2: Lower economic growth and elevated interest rates - a red flag on asset quality?
Questions on asset quality have emerged

Slowing economic growth and rising interest rates stoke fears pertaining to deterioration of asset quality in Indian banks. At present, gross NPAs for the entire banking system stand at ~2.5% of advances and restructured portfolios at ~3.3% of advances with cumulative stressed assets of 5.8%.
our analysis indicates that 17% of bank credit is vulnerable

Though asset quality is under duress, we expect the deterioration to be manageable. We conclude this based on our analysis of segmental bank credit to arrive at the banking sectors stress level. For the exercise, we have appraised corporate and retail credit (together forming 67% of total bank credit as of FY11) in detail and also assessed the stress in services, agriculture and NBFC segments. Exhibit 4: Identifying the pain points
NBFC 5% Agriculture 12%
50.0 Non stressed
Industry Services Retail loans Agriculture NBFC Total bank credit
Stressed
% of credit under stress 23.6 8.5 8.8 20.0 9.4 17.3
Stressed 17%
Services 18% Industry 47%
40.0 30.0 20.0 10.0
Retail loans Non stressed ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. 18% 83% Industry Services Retail Agriculture NBFC loans
Source: RBI, Capitaline, IDFC Securities Research
We conclude that 17% of banks total outstanding debt faces stress. The screens that we have used to ascertain the stress level capture companies with high leverage, wherein any weakness in profitability is likely to lead to defaults. As not all of these companies would default, we expect a limited proportion of this to slip into NPAs. Corporate credit We have evaluated the balance sheets of ~3,000 listed companies, which account for ~65% of bank credit to the industry. We have screened each sector under a different criterion based on liquidity and leverage ratios. Our analysis indicates that incidence of stress is limited to 22% of the sample debt. We note that strain is concentrated in telecom, construction, air transport service and textiles. Also, these sectors account for a small proportion of the overall banking credit. Retail assets For retail credit, we appraise each category and base our assessment on income demographics as also the inherent risk levels. On the hypothesis of a revival in the economy over the next 2-3 quarters, we do not expect any outsized rise in mortgage delinquencies (~51% of retail credit). On the other hand, unsecured loans have been seasoned and increasing reliance on credit bureaus should curtail defaults. Another factor that merits notice is that banks have already provided aggressively on retail loans over the past couple of years and the incremental hit is likely to be limited. We estimate that ~9% of the overall retail book may be under stress.
4 | JULY 11
IDFC SECURITIES
NPAs + Restructured assets to peak at 7.8% in FY13E

As not all of the stressed credit would default, we expect a proportion of this to convert into NPAs or get restructured. To assess the impact, we use scenario analysis. In base case, we assume that ~50% of the stressed debt would slip into NPAs. This scenario builds in peaking of inflation and interest rates over the next six months, led by softening of commodity prices. Slippages (which may be in the form of either NPA recognition or restructuring) are expected to manifest over the next two years. In that case, we see stressed loans (restructured loans + NPAs) peaking at 7.8% in FY13. In the worst case (wherein interest rates stay elevated for 18-24 months), we expect 75% of the stressed debt to culminate into NPAs over next two years. A large proportion of this debt is likely to get restructured and associated credit costs are expected to be negligible.
Our view: Based on our analysis, stress (NPAs + restructured loans) in the banking system could rise from the current levels. However, we expect a large chunk of the stress to be recognized in Q1 & Q2FY12. This would likely lead to correction in bank stocks (especially PSU banks) as higher slippage gets priced into valuations.
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JULY 2011
IDFC SECURITIES
# 3: Stress on earnings ahead?
Near-term stress points

Financials earnings are likely to face multiple headwinds in H1FY12. While a higher cost of funds would dent NIMs, slippages are likely to remain high (especially for PSU banks), accentuated by adoption of system-based recognition of NPAs. Also, RBIs dictum of higher provisioning requirements in various buckets of NPAs would lead to elevated provision expenses in Q1FY12. We expect banks under our coverage to report muted earnings with a 3% yoy decline in PAT for Q1FY12 due to higher provisions for the restructured portfolios and alignment of NPAs to RBI's recent guidelines. PSU banks (ex-SBI) are estimated to see a 2% yoy dip, in sharp contrast to a 31% yoy rise in private banks earnings. NBFCs are expected to record 12% yoy increase in net profit in Q1FY12. However, earnings should revive in H2FY12 with likely stabilization in interest rates and rebound in NIMs from H1FY12 levels.
Some NIM compression ahead

Most banks in our coverage universe witnessed sequentially lower margins in Q4FY11 due to higher funding costs. In FY12, we expect margins to decline by ~10bp. We see private banks better placed than PSU peers (flat margins yoy vis--vis ~15bp decline for PSU banks) owing to more aggressive rate hikes as also better ALM for the former. A further increase in savings deposit rates or savings rate deregulation poses a risk to our numbers. Exhibit 5: Margin trends FY08-12E
(% Margins) FY08 FY09 FY10 FY11 FY12E 3.2 ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. 3.0 2.8 2.6 2.4 2.2 All banks PSU Banks Private Banks 2.62 2.55 2.64 2.54 2.60 2.97 2.85 2.88 2.73 2.64 2.54 2.56 2.77 3.03
2.92
Provisions to remain high in H1FY12

On the asset quality front, slippages have remained elevated for PSU banks though private banks have seen a steady improvement. We expect asset quality for PSU banks to remain under stress in H1FY12 as they transfer their loans to system-based recognition of NPAs. While large accounts have already been transferred, small and agriculture loans are yet to be shifted. Elevated slippages and the impact of increased provisioning could result in higher provisions for PSU banks in H1FY12. For private banks, we expect asset quality to remain strong.
6 | JULY 11
IDFC SECURITIES
Exhibit 6: Asset quality has witnessed stress

(%) 3.0 2.5 2.0 1.5 1.5 1.0 1.1 0.5 0.0 1.8 2.8 (slippages of % opening advances)
Q2FY11 Slippage to opening advances (%, annualized) Q3FY11 Q4FY11 3.9 3.7
PSU 2.7
1.9 2.1 1.9
Private
4.4
2.6 2.1 1.8

2.2 3.3
3.6
3.1 2.7 2.3 1.9 1.3 2.1 2.3 1.9 1.9 2.4 2.0 1.8 1.5 1.2
2.9 2.5 2.2
1.5
1.1 0.8 0.5 0.5
1.1
1.1 0.70.6
1.2
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
SBI BoB BoI PNB ALBK CBK OBC Union Bank
Stressed assets to rise; restructuring to curtail provisions

According to our analysis, we expect stressed assets (restructured + NPAs) to rise by 220bp to 7.8% by FY13. While the stress would increase hereon, we expect bulk of it to be in the form of restructuring. A higher proportion of restructured loans than NPAs would likely restrict credit costs. Consequently, we expect provisions to decline in H2FY12. Moreover, with 70% coverage achieved, we expect FY12 provision expenses to be lower on yoy basis. Exhibit 7: Lower provisioning costs in FY12E
(Provisions/ ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 average assets %) on 2011-07-24 15:24:14 EDT. DownloadPDF. 1.2 FY09 FY10 FY11 FY12E 1.01 0.9 0.68 0.6 0.62 0.63 0.52 0.52 0.54 0.50 0.71 0.61 0.47 0.91
0.3
All banks PSUs Private Banks
Lower operating expenses to support earnings

Provisions on second pension and gratuity liability had led to a steep rise in banks operating expenses in FY11. With FY12 pension provisions likely to be lower yoy (liability pertaining to retired employees provided in FY11), we expect only a muted rise in employee costs and overall operating expenses in FY12.
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JULY 2011
IDFC SECURITIES
Exhibit 8: Lesser rise in operating expenses to bolster profitability

(% Rise in operating expenses) 60 FY11 FY12E 58
45 38 34 30 21 15 15 7 BoB BoI Canara Bank PNB SBI Union Bank All PSU Banks 6 9 13 14 14 12 27 23
Earnings dowgrades likely?

Currently, we expect earnings growth for our banking coverage to come in at 27% in FY12. Our estimates factor in a lower loan growth and 10-15bp decline in NIMs in FY12. Earnings would be supported by lower operating expenses and provisions compared to the outsized levels witnessed in FY11. However, we see downside risk to our and consensus estimates from a sharper-than-expected contraction in NIMs and elevated slippages in Q1FY12.
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. Exhibit 9: FY12 earnings expectations for financials
(PAT growth %) 40 FY09 FY10 34 30 28 30 30 24 20 15 12 10 18 13 14 FY11 FY12E 33 31
0 All banks
PSU banks
Private Banks
Our view: Contraction in NIMs, elevated slippages and potential MTM losses in Q1FY12 ahead of market estimates could prompt earning downgrades. We expect PSU banks to see a 3% decline in PAT in Q1FY12, while private banks are expected to see a 31% yoy rise in PAT.
8 | JULY 11
IDFC SECURITIES
# 4: Valuations: What is the potential downside from current levels?
Risk-reward favorable we see limited downside risk

Hit by a long trail of negative news flow, the Bankex has corrected by 11% in absolute terms and underperformed the Sensex since November 2010. Current stock prices, we believe, build in the impact of monetary tightening and slowing GDP growth. However, further downside cannot be ruled out in the near term. The ongoing earnings season (Q1FY12) would likely be volatile, and higher delinquencies and earnings downgrades could trigger further correction in stock prices. Exhibit 10: Banks have underperformed Sensex since November 2010
Absolute performance % since Nov-10 HDFCB
IIB Yes Bank PNB BoB ICICIB AxisB BoI ALBK ING Vysya Union Bank Indian Bank SBI CBK Corp Bank OBC
Relative performance % since Nov-10 HDFCB IIB

Yes Bank PNB BoB ICICIB AxisB BoI ALBK ING Vysya Union Bank Indian Bank SBI CBK Corp Bank OBC
10.0
(40.0)
(30.0)
(20.0)
(10.0)
(30.0)
(15.0)
15.0
30.0
Source: IDFC Securities Research and company reports ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF.
Valuations now at long-term averages

Most of the financials stocks are now trading at long-term averages. Notably, stocks have traded below averages only during periods of acute economic stress. With stocks trading close to five-year average price to book values, we expect limited downside from these levels.
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JULY 2011
IDFC SECURITIES
Exhibit 11: Current valuations at long-term averages

6.0 HDFC BanK (P/B 1yr forward) Long term average
3.2
ICICI Bank (P/B 1yr forward)
Long term average
4.5
2.4
3.0
1.6
1.5
0.8
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jul-11
4.4
Axis Bank (P/B 1yr forward)
Long term average
2.4
ING Vysya Bank (P/B 1yr forward)
Long term average
3.3
1.8
2.2
1.2
1.1
0.6
0.0
0.0
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
3.2
SBI (P/B 1yr forward)
Long term average
Jan-11
Jul-11
5.0
Yes Bank (P/B 1yr forward)
Long term average
4.0
2.4
3.0
1.6
2.0
0.8
1.0
0.0
0.0
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-11
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-11
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: Bloomberg, company reports
Our view: We believe that current stock prices factor in the inherent interest rate and credit risk. We expect valuations to rebound on first signs of the interest rate cycle peaking out. We recommend building positions in private banks first. We would wait to enter PSU banks at lower levels, post the declaration of Q1FY12 results.
10 | JULY 11
IDFC SECURITIES
Jan-11
Jul-11
Jul-11
Jan-11
Jul-11
0.0
0.0
# 5: What is the pecking order in financials?
Private banks preferred picks; add weight ahead of PSUs

Our long-term outlook on the sector remains positive and we see a steep rebound in banking stocks ahead as uncertainty dissipates on the macroeconomic environment. However, we recommend building positions in private banks ahead of PSU peers, as the near-term performance of the latter could get clouded by inflation and asset quality concerns. We recommend adding positions to PSU banks selectively on declines, as visibility on interest rates emerges. PSU banks stock performance and earnings have displayed higher sensitivity to interest rates vis--vis private peers. Private banks have exhibited lower earnings volatility, which cushions their multiples. Private banks have displayed better performance than PSU peers in terms of asset quality. We expect PSU banks delinquencies to remain elevated for another two quarters before coming down in H2FY12.
Exhibit 12: Current valuations offer attractive entry points

Price Mkt Cap 2yr EPS cagr 20th July 2011 (Rs bn) PSU Banks Allahaba d Bank Bank of Baroda Bank of India Canara B ank Corporation Bank 203 897 408 526 526 97 351 223 233 78 2 4.6 1 8.5 2 7.2 2 2.1 1 6.8 21.0 25.5 17.8 26.4 21.9 21.9 23.1 18.7 24.8 21.3 22.5 22.8 20.2 24.0 21.4 6.8 8.3 9.0 5.8 5.4 5.3 7.0 7.1 4.7 4.7 4.3 5.9 5.5 3.9 4.0 1.3 1.8 1.5 1.4 1.1 1.1 1.5 1.2 1.1 0.9 1.1 0.9 1.5 1.6 1.2 0.9 1.2 1.0 0.9 0.8 0.9 0.7 1.2 1.4 1.0 FY11-FY13 FY11 RoE (%) FY12E FY13E FY11 PE (x) P/Adj. Book Value FY13E FY12E FY13E FY11 FY12E
Indian B ank 99 1 6.4 23.9 23.7 5.2 4.3 ISIEmergingMarketsPDF in-mdidemo 231 from 115.111.95.19 on 22.3 2011-07-24 15:24:145.8 EDT. DownloadPDF. 1.2 Oriental B ank of Commerce Punjab National Bank State Bank of India Union Ba nk of India Pvt Banks Axis Bank HDFC Bank ICICI B ank Indusind Bank Yes B ank NBFCs Bajaj Auto Finance HDFC LIC Housing Finance Mah & Ma h Finance Magma Fincorp Power Finance Rural Electrification Shri Ram Transport Shriram City Union Finance 726 697 217 700 76 213 224 684 551 27 1,023 103 73 10 244 221 155 27 3 2.5 1 8.0 2 6.5 2 8.1 1 6.8 2 3.7 1 8.1 2 8.0 3 2.2 19.7 21.7 25.8 22.0 26.4 17.7 21.5 28.1 21.9 22.9 22.6 25.9 21.9 16.9 20.2 22.0 28.8 23.7 24.3 23.5 27.1 22.9 19.5 22.5 28.8 25.4 10.8 28.6 10.6 15.7 8.1 9.3 8.6 12.6 11.3 7.8 24.4 8.6 12.1 10.0 7.3 7.3 9.6 8.5 6.1 20.6 6.6 9.6 6.0 6.2 7.7 6.5 2.0 5.9 2.4 2.8 1.7 1.6 1.7 3.1 2.2 1,263 503 1,045 276 319 518 1,170 1,203 129 111 2 7.7 2 9.0 2 6.9 3 3.6 3 3.6 19.3 16.7 9.7 19.3 21.1 21.2 18.6 11.8 18.9 23.5 22.5 20.6 13.4 21.2 25.0 15.2 29.6 23.4 22.3 15.2 11.8 23.0 17.8 16.4 11.2 9.3 17.8 14.5 12.5 8.5 2.7 4.6 2.2 3.4 2.9 348 1,160 2,471 297 102 368 1,569 156 8 5.9 2 1.6 3 9.2 2 7.8 6.8 24.5 12.6 21.0 15.7 24.0 17.2 23.6 16.8 24.0 19.8 23.2 15.4 8.3 19.0 7.5 5.5 6.9 13.1 5.4 4.5 5.6 9.8 4.6 1.0 1.9 2.0 1.5
2.3 3.9 2.0 2.9 2.4
1.9 3.4 1.9 2.4 1.9
1.6 5.2 2.0 2.3 1.3 1.4 1.5 2.4 1.8
1.4 4.5 1.6 1.9 1.1 1.3 2.0 1.4
Our view: ICICI Bank and IndusInd Bank among private banks, and SBI and BoB among PSU banks are our preferred picks in the financials space. We believe these banks offer higher earnings visibility, improving profitability and also attractive valuations.
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JULY 2011
IDFC SECURITIES
Appendix 1.1: Q1FY12 earnings expectations

Seasonal moderation in credit growth but deposit mobilization expected to be robust Higher term deposit costs, increased savings rate and higher CD ratio would result in qoq decline in NIMs; margins could come off by 20-30bp qoq for PSU banks and ~15bp for private banks Growth in other income to be muted on a higher base; led by elevated G-Sec yields, PSU banks more vulnerable to report higher MTM losses Divergent trends in asset quality for PSU and private banks; slippages unlikely to decline materially from the levels witnessed in H1FY11 for PSU banks We estimate a 3% yoy decline in PAT for our coverage universe; PSU banks a drag on the sector while we expect a strong 31% yoy growth in earnings of private banks
Private banks to outshine PSU peers

We expect banks under our coverage to report a 3% yoy decline in PAT for Q1FY12, dented by higher provisions for restructured portfolios and on alignment of NPAs to RBI's recent guidelines. PSU banks (ex-SBI) are expected to see a 2% yoy dip, in sharp contrast to a 31% yoy rise in private banks earnings. NBFCs are expected to record a 12% yoy increase in net profit in Q1FY12. Exhibit 13: Earnings expectation for our coverage universe
PAT Q1FY11 Q4FY11 Q1FY12E yoy growth/change qoq growth/change
38 (9) (9) (23) 31 5 (5) (27) (6) (6) (6) 3 (14) (55) (40) (3) 3 (9) (3) 3 2 8,482 (21) 4 13 (6) 25 (11) (5) Allahabad Bank 3,471 2,576 3,547 2 ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. Axis Bank 7,419 10,201 9,313 26 Bajaj Auto Finance Bank of Baroda Bank of India Canara Bank Corporation Bank HDFC HDFC Bank ICICI Bank Indian Bank IndusInd Bank LIC Housing Finance Magma Fincorp MMFS OBC PFC PNB REC Shri Ram Transport Shriram City Union Finance State Bank of India Union Bank Yes Bank All Banks# Private Banks PSU Banks NBFCs 468 8,592 7,251 10,126 3,330 6,946 8,117 10,260 3,682 1,186 2,120 182 742 3,633 6,529 10,683 5,874 2,889 491 29,142 6,012 1,564 115,217 29,296 85,921 29,692 710 12,944 4,936 8,989 3,453 11,420 11,147 14,521 4,389 1,718 3,148 449 1,566 3,337 6,067 12,008 7,003 3,406 772 209 5,976 2,034 99,462 40,646 58,816 37,428 645 10,009 6,461 9,390 3,277 8,304 10,513 13,673 4,143 1,775 2,705 200 939 3,230 6,265 10,911 6,763 3,506 790 17,910 4,732 2,105 111,974 38,365 73,609 33,147 38 17 (11) (7) (2) 20 30 33 13 50 28 10 27 (11) (4) 2 15 21 61 (39) (21) 35 (3) 31 (14) 12
PSU Banks - ex SBI 56,779 58,607 55,699 (2) Source: IDFC Securities Research and companies; #Bajaj Auto Fin, HDFC Bank, HDFC, IndusInd Bank, LIC HF, Magma Fincorp & Yes bank have reported nos.
12 | JULY 11
IDFC SECURITIES
NIMs likely to come off by 20-25bp

We expect a margin squeeze of 20-25bp qoq across banks owing to the impact of higher savings rate (effective for two months) and the full impact of higher term deposit costs. The impact will be mitigated by higher loan yields owing to PLR and base rate increases as the full effect of the policy rate hikes in May and June 2011 flows through. While public banks are expected to see a 25-30bp sequential contraction in NIMs, private banks are likely to see a 15-20bp decline. NBFCs are estimated to report a NIM decline of ~20bp yoy. However, lower wholesale borrowing costs seen in Q1FY12 would likely alleviate the margin stress over the next couple of quarters. Exhibit 14: NIMs to compress
NIMs
Allahabad Bank Axis Bank Bajaj Auto Finance Bank of Baroda Bank of India Canara Bank Corporation Bank HDFC HDFC Bank ICICI Bank Indian Bank IndusInd Bank LIC Housing Finance
Q1FY11
2.77 3.27 16.76 2.58 2.51 2.60 2.48 3.15 4.22 2.19 3.59 3.34 2.96
Q4FY11
3.17 3.03 13.42 2.76 2.84 2.49 2.74 4.06 4.31 2.51 3.74 3.56 3.30
Q1FY12E
2.87 2.90 12.50 2.55 2.57 2.38 2.35 3.25 4.11 2.35 3.50 3.45 3.05
yoy change (bps)

10 (37) (25) (3) 6 (22) (13) 10 (10) 16 (9) 11 9
qoq change (bps)

(30) (13) (7) (21) (27) (11) (39) (81) (19) (16) (24) (11) (25)
Magma Fincorp 7.79 11.99 7.00 (10) (42) ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 9.70 15:24:14 EDT. DownloadPDF. MMFS 11.08 12.14 (138) (244) OBC 3.05 2.62 2.52 (53) (10) PFC 3.91 3.24 3.15 (76) (9) PNB 3.45 3.36 3.20 (25) (16) Shri Ram Transport 11.51 11.58 11.90 39 32 Shriram City Union Finance 10.88 11.94 11.45 57 (49) State Bank of India 2.72 2.62 2.75 3 13 Union Bank 2.74 3.04 2.80 6 (24) Yes Bank 2.71 2.51 2.49 (22) (2) All Banks# 2.90 2.99 2.83 (7) (16) Private Banks 3.00 3.14 3.00 (0) (14) PSU Banks 2.85 2.94 2.75 (10) (19) NBFCs 6.86 7.22 6.67 (19) (55) Source: IDFC Securities Research and companies; #Bajaj Auto Fin, HDFC Bank, HDFC, IndusInd Bank, LIC HF, Magma Fincorp & Yes bank have reported nos.
Lackluster NII growth ahead

Bank credit has witnessed a seasonal sluggishness, clocking a 1.9% YTD rise yoy (RBI data dated 1 July 2011). Deposit flows gained pace during Q1FY12, with a 3% qoq rise till 1 July 2011 leading to a low incremental CD ratio of ~45%. In line with the industry, we expect credit for banks in our coverage universe to grow at a sedate pace. Modest business volumes, coupled with lower margins, are likely to depress NII growth to 20% for our coverage universe (0.8% qoq). We expect PSU banks NII to increase by 18% yoy in Q1FY12 (0.7% qoq). Private banks are expected to report stronger growth of 22% yoy (1.2% qoq).
13 |
JULY 2011
IDFC SECURITIES
Exhibit 15: NII growth

Net Interest Income
Allahabad Bank Axis Bank Bajaj Auto Finance Bank of Baroda Bank of India Canara Bank Corporation Bank HDFC HDFC Bank ICICI Bank Indian Bank IndusInd Bank LIC Housing Finance Magma Fincorp MMFS OBC PFC PNB REC Shri Ram Transport Shriram City Union Finance State Bank of India
Q1FY11
8,503 15,138 2,229 18,580 17,405 17,270 6,976 9,353 24,011 19,911 9,266 2,957 2,943 902 2,609 10,572 8,580 26,186 7,758 7,306 1,665 73,037
Q4FY11
11,513 17,010 2,709 26,139 23,073 19,729 7,618 13,709 28,395 25,097 11,110 3,881 4,204 1,633 3,960 10,133 8,267 30,290 8,538 8,118 2,483 80,581
Q1FY12E
10,947 17,864 2,891 23,244 22,673 20,198 8,620 11,483 29,140 24,016 10,782 3,959 3,863 1,043 3,404 10,235 8,932 30,708 8,849 8,308 2,659 84,998
yoy growth
28.7 18.0 29.7 25.1 30.3 17.0 23.6 22.8 21.4 20.6 16.4 33.9 31.2 15.6 30.5 (3.2) 4.1 17.3 14.1 13.7 59.7 16.4
qoq growth
(4.9) 5.0 6.7 (11.1) (1.7) 2.4 13.2 (16.2) 2.6 (4.3) (3.0) 2.0 (8.1) (36.1) (14.0) 1.0 8.0 1.4 3.6 2.3 7.1 5.5 (3.0) 7.2 0.8 1.2 0.7 (4.1) (1.7)
Union Bank 13,478 17,165 16,645 23.5 ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. Yes Bank 2,621 3,485 3,735 42.5 All Banks# Private Banks PSU Banks NBFCs 268,776 67,502 201,274 43,346 318,806 81,455 237,351 53,620 321,458 82,408 239,050 51,430 19.6 22.1 18.8 18.7
PSU Banks - ex SBI 128,237 156,770 154,052 20.1 Source: IDFC Securities Research and companies; #Bajaj Auto Fin, HDFC Bank, HDFC, IndusInd Bank, LIC HF, Magma Fincorp & Yes bank have reported nos.
Credit costs to remain elevated for PSU banks

The divergent trends in asset quality of PSU and private banks witnessed over the past fiscal are likely to persist in Q1FY12 as well. PSU banks could see slippages similar to Q4FY11 levels due to migration to system-based recognition of NPAs as well as continued stress in SME loan portfolio. The migration is expected be completed by September 2011. Provisions would remain high as banks will be required to make provisions for revised guidelines on NPAs and restructured loans. Therefore, we continue to build in high credit costs for PSU banks, similar to the levels witnessed in Q4FY11. For private banks, we expect the pace of NPA accretion to remain low.
14 | JULY 11
IDFC SECURITIES
Exhibit 16: Credit cost estimates

Provisions
Allahabad Bank Axis Bank Bajaj Auto Finance Bank of Baroda Bank of India Canara Bank Corporation Bank Dhanlaxmi Bank HDFC HDFC Bank ICICI Bank Indian Bank IndusInd Bank LIC Housing Finance Magma Fincorp MMFS OBC PNB REC Shri Ram Transport State Bank of India Union Bank of India
Q1FY11
1,511 3,330 606 2,513 3,859 2,200 1,266 20 150 5,550 7,978 3,439 487 89 99 543 2,280 5,341 1,281 15,514 1,973
Q4FY11
4,655 2,544 377 5,904 4,776 5,460 2,695 95 250 4,313 3,836 1,268 403 189 139 115 5,605 7,279 1 1,216 41,570 1,533
Q1FY12E
2,861 2,795 463 4,000 6,264 3,480 2,500 161 120 5,051 4,394 2,200 516 150 74 600 3,100 7,869 15 1,350 41,726 5,053
yoy growth/change
89.4 (16.1) (23.6) 59.2 62.3 58.2 97.5 693.5 (20.0) (9.0) (44.9) (36.0) 5.9 67.8 (24.6) 10.5 36.0 47.3 NM 5.4 169.0 156.1
qoq growth/change
(38.5) 9.9 22.9 (32.3) 31.1 (36.3) (7.2) 69.6 (52.0) 17.1 14.6 73.5 28.3 (20.5) (46.5) 420.8 (44.7) 8.1 NM 11.0 0.4 229.7
Yes Bank 126 433 270 115.0 (37.6) ISIEmergingMarketsPDF in-mdidemo from 58,432 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. All Banks# 92,788 92,952 59.1 0.2 Private Banks 17,931 11,666 13,437 (25.1) 15.2 PSU Banks 40,501 81,122 79,514 96.3 (2.0) NBFCs 2,063 1,771 2,235 8.3 26.2 Source: IDFC Securities Research and companies; #Bajaj Auto Fin, HDFC Bank, HDFC, IndusInd Bank, LIC HF, Magma Fincorp & Yes bank have reported nos.
Other income to be muted on a high base

We expect overall non-interest income to increase by 9% yoy for our coverage universe. Fee income is likely to remain moderate owing to seasonality as well as lower credit offtake. Non-fund based income could get further impacted by mark-to-market losses on the investment books. G-Sec yields have remained elevated in the range of 8-8.5% throughout the quarter as the RBI hiked rates by 75bp and inflation stayed high. Trading opportunities have also been limited during the quarter.
15 |
JULY 2011
IDFC SECURITIES
Exhibit 17: Non-fund revenues

Other Income
Allahabad Bank Axis Bank Bajaj Auto Finance Bank of Baroda Bank of India Canara Bank Corporation Bank Dhanlaxmi Bank HDFC HDFC Bank Ltd ICICI Bank Ltd Indian Bank IndusInd Bank LIC Housing Finance Magma Fincorp MMFS OBC PFC PNB REC Shri Ram Transport Shriram City Union Finance
Q1FY11
2,986 10,008 11 6,172 5,859 7,340 2,661 305 623 9,399 16,805 3,555 1,610 434 159 90 2,147 650 8,715 517 67 13
Q4FY11
4,695 14,504 53 8,345 8,231 9,328 4,904 461 2,840 12,558 16,407 2,716 1,816 982 113 107 2,998 61 11,454 1,483 174 14
Q1FY12E
2,703 12,488 60 6,723 6,147 6,475 2,964 397 1,650 11,071 16,891 2,838 2,042 500 167 90 2,405 100 9,231 700 250 10
yoy growth
(9.5) 24.8 445.5 8.9 4.9 (11.8) 11.4 30.0 164.9 17.8 0.5 (20.2) 26.8 15.3 5.0 (0.2) 12.0 (84.6) 5.9 35.4 270.9 (22.3)
qoq growth
(42.4) (13.9) 13.0 (19.4) (25.3) (30.6) (39.6) (13.9) (41.9) (11.8) 3.0 4.5 12.4 (49.1) 47.9 (15.7) (19.8) 64.8 (19.4) -52.8 44.0 (28.3) (12.4) (32.6) (10.3) (15.6) (6.6) (19.7) (41.7)
State Bank of India 36,900 48,155 42,185 14.3 ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. Union Bank of India 4,350 6,006 4,050 (6.9) Yes Bank 1,438 1,868 1,675 16.4 All Banks# 121,504 156,204 131,848 8.5 Private Banks 40,809 49,319 46,068 12.9 PSU Banks 80,695 106,885 85,780 6.3 NBFCs 2,394 5,660 3,300 37.8 Source: IDFC Securities Research and companies; #Bajaj Auto Fin, HDFC Bank, HDFC, IndusInd Bank, LIC HF, Magma Fincorp & Yes bank have reported nos.
16 | JULY 11
IDFC SECURITIES
COMPANIES
17 |
JULY 2011
IDFC SECURITIES
THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK

18 | JULY 11
IDFC SECURITIES
INDIA RESEARCH
COMPANY UPDATE
BSE SENSEX: 18436
21 JULY 2011
ICICI Bank
Profitability with growth
OUTPERFORMER
Rs1045
Mkt Cap: Rs1203bn; US$27.1bn
Backed by a strong liability franchise, ICICI Bank is set to deliver growth with profitability. Consistent delivery on its business plan has paid off, with earnings quality improving significantly in FY11. Fee income has seen traction and CASA has grown, aided by an expanded distribution network. Hereon, margins are likely to improve driven by a changing asset mix and strong liability profile (CASA at 45%). We expect strong loan growth, margin expansion and low credit costs to drive a 27% CAGR in earnings over FY11-13. We see a 350bp rise in core business RoE to ~15% over FY11-13. This, we believe, would drive a structural re-rating of the stock from 1.7x FY12E core book currently to 2.5x. Reiterate Outperformer with a 12- month price target of Rs1,450 (including Rs215/ share for non-banking investments). Profitable growth takes centrestage: We see ICICI Banks loan growth being spearheaded by the corporate segment (34% CAGR over FY11-13E). On the retail portfolio, the bank has redrawn its strategy to focus on the collateralized segment and loan rates have been aligned to the market. We expect the bank to maintain a cautious stance on the international book and proportion of the same in overall book to come off. A prudent shift towards retail liabilities, selective asset growth and softer borrowing costs should drive ~30bp expansion in margins over FY11-13.
ISIEmergingMarketsPDFratios to expand: With lower delinquencies, negligible unsecured loans and a coverage ratio of Banking return in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF.
70%+, we expect the banks provisioning costs to decline sharply. This, we believe, would be a key driver of earnings. Fee income would inch up, led by improved credit offtake, revival in corporate activity and a pick-up in third-party distribution. With all operating metrics falling in line, we see a strong 27% CAGR in earnings for ICICI Bank over FY11-13 and a marked expansion in core banking return ratios. and drive a re-rating of the core business: We expect RoE of the banking business to rise from 11.5% in FY11 to ~15% by FY13. Core RoA is expected to inch up to 1.6% by FY13, which compares favorably with best-inclass peers. Currently, the stock trades at a deep discount to HDFC Bank and Axis Bank. However, we expect the valuation gap with peers to close on account of higher visibility on profitability. This, we believe, would drive a re-rating of the core business from 1.7x FY12E book currently to 2.5x book.
Key valuation metrics

Year to 31 March
Net profit (Rs m) yoy growth (%) Shares in issue (m) EPS (Rs) EPS growth (%) PE (x) Book value (Rs/share) P/ Book (x) RoAE (%)
Price performance
2009
37,581 (9.6) 1,113 33.8 (9.7) 31.5 444.9 2.39 7.8
2010
40,250 7.1 1,115 36.1 6.9 29.4 463.0 2.29 8.0
2011
51,513 28.0 1,152 44.7 23.9 23.7 478.3 2.22 9.7
2012E
30.9 1,152 58.5 30.9 18.1 516.3 2.06 11.8
2013E
23.0 1,152 72.0 23.0 14.8 563.1 1.89 13.3
150 135 120 105 90

Aug-10 Sep-10 Jul-10
ICICI Bank
Sensex
67,422 82,903
Oct-10
Nov-10
Dec-10
Mar-11
Apr-11
May-11
Feb-11
Bloomberg: ICICIBC IN
6m avg daily vol. (m): 4.08 Free Float (%): 100
1-yr High/ Low (Rs): 1279/883
Pathik Gandotra
Chinmaya Garg
Kavita Kejriwal
Kavitha Rajan
For Private Circulation only. Important disclosures appear at the back of this report
19 |
JULY 2011
IDFC SECURITIES
Jun-11
Jan-11
Jul-11
Income statement
Year to 31 Mar (Rs m)
Net interest income yoy growth (%) Other income yoy growth (%) Trading profits Non trading income Net revenue yoy growth (%) Operating expenses yoy growth (%) Operating profit yoy growth (%) Provisions of which NPA provs PBT yoy growth (%) Provision for tax PAT yoy growth (%)
Ratio analysis
FY09
83,666 14.5 76,037 (13.7) 4,430 71,607 159,703 (0.9) 70,451 (13.6) 89,252 12.1 38,083 37,690 51,170 1.2 13,588 37,581 (9.6)
FY10
81,144 (3.0) 74,777 (1.7) 11,810 62,967
FY11
90,169 11.1 66,479 (11.1) -2,150 68,629
FY12E
22.3 80,775 21.5 3,000 77,775
FY13E Year to 31 Mar

Net int. margin/avg assets Non-fund rev./avg assets Operating exp./avg assets Cost/Income Prov./avg customer assets PBT/Average assets RoA RoE Tax/PBT Tier I Capital adequacy Gross NPA Net NPA Provisioning coverage Growth in customer assets Growth in deposits SLR ratio CASA ratio 22.7 93,373 15.6 4,500 88,873
FY09
2.15 2.0 1.8 44.1 1.5 1.3 0.96 7.8 26.6 11.8 4.3 2.1 52.1 (2.9) (10.7) 20.4 28.7
FY10
2.19 2.0 1.6 37.6 1.9 1.4 1.08 8.0 24.7 14.0 5.1 2.2 58.9 (10.4) (7.5) 23.1 41.7
FY11 FY12E FY13E

2.34 1.7 1.72 42.2 0.8 1.8 1.34 9.7 23.8 13.2 4.5 1.1 76.0 24.4 11.7 19.2 45.1 2.51 1.8 1.76 40.5 0.6 2.1 1.5 11.8 27.5 12.4 4.7 1.2 75.9 17.7 21.9 20.0 43.0 2.62 1.8 1.74 39.3 0.7 2.2 1.6 13.3 27.5 11.7 4.7 1.1 78.3 18.2 19.0 20.0 43.0
110,303 135,312
155,920 156,648 (2.4) 58,598 (16.8) 97,322 9.0 43,869 43,622 53,453 4.5 13,203 40,250 7.1 0.5 66,173 12.9 90,475 (7.0) 22,868 19,769 67,607 26.5 16,093 51,513 28.0
191,079 228,685 22.0 77,395 17.0 25.7 20,688 18,949 19.7 89,762 16.0 22.2 24,573 22,581
113,684 138,923
92,995 114,350 37.6 25,574 67,422 30.9 23.0 31,446 82,903 23.0
Shareholding pattern
Public & Others Non Promoter As on 31 Mar (Rs m) FY09 FY10 FY11 FY12E FY13E Corporate Holding 5.5% Advances 2,183,108 1,812,056 2,163,659 2,573,543 3,071,651 3.9% ISIEmergingMarketsPDF in-mdidemo from 19.4 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. yoy growth (%) (3.2) (17.0) 18.9 19.4 Institutions Customer assets 2,405,798 2,155,788 2,682,056 3,156,598 3,731,692 24.0%
yoy growth (%) (2.9) (10.4) 24.4 17.7 18.2 SLR portfolio Cash & bank balances Total assets Networth Deposits yoy growth (%) - Current % - Savings % - Term % Borrowings 633,868 299,666 495,330 684,036 388,737 516,184 641,613 340,901 550,906 787,605 379,526 594,731 929,649 445,643 648,618
Balance sheet
3,793,010 3,633,997 4,062,337 4,744,080 5,570,532 2,183,478 2,020,166 2,256,021 2,749,943 3,271,501 -10.7 9.9% 18.8% 71.3% 928,055 -7.5 15.3% 26.3% 58.3% 11.7 15.4% 29.6% 54.9% 21.9 14.0% 29.0% 57.0% 19.0 14.0% 29.0% 57.0%
Foreign 66.5%
As of March 2011
939,136 1,092,043 1,188,084 1,376,744
20 | JULY 11
IDFC SECURITIES
INDIA RESEARCH
COMPANY UPDATE
BSE SENSEX: 18436
21 JULY 2011
IndusInd Bank
Into the next orbit
OUTPERFORMER
Rs276
Mkt Cap: Rs128.6bn; US$2.9bn
IndusInd Bank (IndusInd) has taken the next stride towards the big league. Having meticulously executed a business plan to drive a marked improvement in operating metrics, IndusInd is now working to accelerate loan growth (31% CAGR over FY11-13E) and grow profitably. The bank is a dominant player in the vehicle finance industry. Besides, presence in rural and semi-urban locations allows it to generate attractive yields of ~16%. Integrated sales and collection efforts have ensured profitable operations in a difficult market. Rising margins, strong fee income, improving operating leverage and lower credit costs should drive RoA expansion to ~1.55% by FY13E. We expect improvement in profitability and strong earnings momentum to drive stock performance. At valuations of 3.0x FY12E adjusted book, we reiterate Outperformer with a 12-month price target of Rs375 (3.2x FY13E adjusted book). Execution par excellence: The strong management has steered a turnaround at IndusInd. The bank has delineated and delivered consistent improvement in each operating metric. NIMs surged by ~200bp from FY08 to 3.4% in FY11, while the ratio of fee income to assets has grown to 1.8% and cost efficiency has improved (cost/ income down from 67% to 48%). These factors have resulted in a stellar ~110bp expansion in RoA to 1.4% in FY11.
Scale with profitability: IndusInd plans to scale up its branch network from 300 to ~750 by FY13. Focus on extracting efficiencies from the franchise would accelerate CASA deposit flow (~31.5% by FY13E), leading to expansion in NIMs to 3.5%. With a favorable liability base and strong distribution network, the bank is well placed to achieve ~31% CAGR in advances over FY11-13E. Rising margins, increasing efficiency and lower provisioning costs are expected to drive a 34% CAGR in PAT over FY11-13E. Emerging as a best-in-class franchise; reiterate Outperformer: Despite improving branch efficiency for the past two years, it still lags that of peers by a wide margin. We see this untapped opportunity driving a sustainable RoA of 1.5%+. We expect stock returns to outpace growth in assets. At valuations of 3.0x FY12E adjusted book, we reiterate Outperformer. Execution of the liability strategy remains a monitorable in view of high interest rates and intense competition for CASA deposits.

As on 31 March
Net profit (Rs m) yoy growth Shares in issue (mn) EPS (Rs) EPS growth (%) PE (x) P/ Adj Book (x) RONW (%) Pathik Gandotra
Price performance
FY09
1,483 97.7 355.2 4.4 87.4 63.7 7.5 11.7 Chinmaya Garg
FY10
3,503 136.1 410.6 9.0 104.8 31.1 52 5.4 19.5
FY11
5,773 64.8 466.0 12.4 37.6 22.6 82 3.4 19.3
FY12E
35.5 466.0 16.8 35.5 17.1 97 3.0 18.9
FY13E
31.7 466.0 22.1 31.7 13.0 116 2.5 21.2
150 135 120 105 90

Indusind Bank
Sensex
7,823 10,306
Oct-10
Nov-10
Dec-10
Mar-11
Apr-11
May-11
Feb-11
Adjusted Book value (Rs/share) 37
Bloomberg: IIB IN 1-yr High/ Low (Rs): 309/181
6m avg daily vol. (m): 1.03 Free Float (%): 80.4
Kavita Kejriwal
Kavitha Rajan
21 |
JULY 2011
IDFC SECURITIES
Jun-11
Jan-11
Jul-11
Income statement
Net interest income yoy growth (%) Other income yoy growth (%) Trading profits Non trading income Net revenue yoy growth (%) Operating expenses yoy growth (%) Operating profit yoy growth (%) Provisions of which NPA provisions PBT yoy growth (%) Provision for tax PAT yoy growth (%)
Ratio analysis
FY09
4,590 52.6 4,563 53.3 1,216 3,347 9,153 53.0 5,470 36.0 3,682 87.7 1,408 1,253 2,275 99.1 792 1,483 97.7
FY10
8,864 93.1 5,535 21.3 1,110 4,424 14,399 57.3 7,360 34.5 7,039 91.1 1,708 1,313 5,331 134.3 1,827 3,503 136.1
FY11
13,765 55.3 7,137 28.9 404 6,733 20,902 45.2 10,085 37.0 10,817 53.7 2,019 1,577 8,798 65.0 3,025 5,773 64.8
FY12E
17,213 25.0 9,624 34.9 1,000 8,624 26,837 28.4 12,706 26.0 14,131 30.6 2,278 1,634 11,853 34.7 4,030 7,823 35.5

23,411 36.0 11,781 22.4 1,000 10,781 35,191 31.1 15,947 25.5 19,244 36.2 3,628 2,921 15,615 31.7 5,309 10,306 31.7 Net int. margin/avg assets Non-fund rev./avg assets Operating exp./avg assets Cost/Income Prov./avg assets PBT/Average assets RoA RoE Tax/PBT Tier I Capital adequacy Gross NPA Net NPA Provisioning coverage Growth in customer assets Growth in deposits SLR ratio CASA ratio
FY09
1.8 1.8 2.1 59.8 0.6 0.9 0.6 11.7 34.8 7.5 1.6 1.1 29.8 23.5 16.1 28.5 19.2
FY10
2.8 1.8 2.3 51.1 0.5 1.7 1.1 19.5 34.3 9.6 1.2 0.5 60.1 30.0 20.8 31.9 23.7
FY11 FY12E FY13E

3.4 1.8 2.5 48.2 0.5 2.2 1.43 19.3 34.4 12.3 1.0 0.3 72.6 35.6 28.7 29.2 27.2 3.3 1.9 2.5 47.3 0.4 2.3 1.51 18.9 34.0 10.4 1.2 0.2 83.8 33.0 30.5 25.0 29.5 3.5 1.8 2.4 45.3 0.5 2.3 1.55 21.2 34.0 9.2 1.6 0.2 89.7 29.4 34.3 25.0 31.5
Public & Others 9.9%
Balance sheet
As on 31 Mar (Rs m) FY09 FY10 FY11 FY12E FY13E
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. Advances 157,706 205,506 261,656 347,774 449,723 Promoters yoy growth (%) 23.3 30.3 27.3 32.9 29.3 19.5%
Customer assets yoy growth (%) SLR portfolio Cash & bank balances Total assets Networth Deposits - Current % - Savings % - Term % Borrowings 158,630 23.5 62,981 19,237 276,147 14,276 221,103 13.4 5.9 80.8 28,170 206,262 279,776 30.0 26,032 21,656 16.5 7.2 76.3 49,343 35.6 40,246 38,249 18.3 8.9 72.8 55,254 85,251 100,219 353,695 456,358 267,102 343,654 372,235 481,522 33.0 51,515 44,427 20.0 9.5 70.5 62,326 29.4 65,939 52,672 21.0 10.5 68.5 67,384
Foreign 51.1% Non Promoter Corporate Holding 11.2%
112,159 150,643 580,522 751,194 448,635 602,572
Institutions 8.3%
As of March 2011
22 | JULY 11
IDFC SECURITIES
INDIA RESEARCH
COMPANY UPDATE
BSE SENSEX: 18436
21 JULY 2011
Bank of Baroda
Consistent performer
OUTPERFORMER
Rs897
Bank of Baroda (BoB) has consistently delivered across all operating metrics, with i) a decline in costs-to-assets ratio, resulting in high operating efficiency; ii) higher contribution of fee income; iii) expansion in margins; and iv) an all-round improvement in asset quality. Consequently, RoE has structurally improved to 26% in FY11 from 13% in FY07 and RoA has expanded by 50bp to 1.3% over FY07-11. With a strong management team and focus on achieving sustainable and profitable growth, BoB has established itself as a premium PSU bank. Going forward, we believe BoBs above-industry loan growth of ~22% and firm focus on quality will drive 18% CAGR in PAT over FY11-13E. We believe the bank deserves to trade at a premium to peers given strong return ratios (23% RoE and 1.2% of RoA in FY11-13) and consistently high earnings. Attractive valuations of 1.4x FY12E P/BV provide a good entry point. Reiterate Outperformer with a 12-month price target of Rs1,250 (~2.0x FY12E adjusted P/BV). Consistent growth with robust NIMs: Over the past three years, BoB has firmly established itself as a top performer across operating metrics (asset quality, margins, coverage and overall profitability). De-emphasizing bulk deposits, stable CASA ratio of 34% and healthy international margins have helped BoB expand margins to 3.4% by Q4FY11. We expect steady loan growth of 22%, albeit a limited decline in margins (~10bp; lower than peers), to lead 22% CAGR in NII over FY11-13. ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. Asset quality one of the best among PSU Banks: BoB scores very high on asset quality among PSU banks, evident in its low gross NPAs and slippages of 1.0-1.1% over the past two years. While slippages have increased in Q4FY11, the rise has been below that of peers. With coverage ratio at a high 86% and minimal exposure to the recent concerns on disseminating sectors (MFI, telecom and real estate), we expect a moderate rise in BoBs provisioning expenses. We expect the ratio of provisions to average assets to decline to 0.3% from 0.4% in FY11. Attractive valuations; reiterate Outperformer: We expect BoBs improving operating metrics, strong management and balance sheet strength to drive a consistent earnings growth of 20-25% yoy over the next few quarters. BoBs return ratios would remain stable at elevated levels RoA of 1.2% and RoE of 23% over FY11-13E. This should drive stock performance going forward. Attractive valuations of 1.4x FY12E P/BV provide a good entry point. Reiterate Outperformer with a 12-month price target of Rs1,250. Key valuation metrics
As on 31 March
Net profit (Rs m) yoy growth (%) Shares in issue (m) EPS (Rs) EPS growth (%) PE (x) Adj. Book value (Rs/share) P/ Adj. Book (x) RoAE (%) Pathik Gandotra
Price performance
FY09
22,272 55.1 364 61.1 55.1 14.7 315.4 2.8 21.3 Chinmaya Garg
FY10
30,583 37.3 364 84.0 37.3 10.7 376.8 2.4 24.5
FY11
42,417 38.7 392 108.3 29.0 8.3 507.1 1.8 25.5
FY12E
18.3 392 128.1 18.3 6.7 618.3 1.4 23.1
FY13E
18.6 392 152.0 18.6 5.6 743.6 1.2 22.8
150 135 120 105 90

Bank of Baroda
Sensex
50,168 59,524
Oct-10
Nov-10
Dec-10
Mar-11
Apr-11
May-11
Feb-11
Bloomberg: BOB IN
1-yr High/ Low (Rs): 1052/711
Kavita Kejriwal
Kavitha Rajan
23 |
JULY 2011
IDFC SECURITIES
Jun-11
Jan-11
Jul-11
Income statement
Ratio analysis
FY09
51,234 31.0 27,577 34.5 9,001 18,576 78,811 32.2 35,761 21.9 43,050 42.1 9,621 2,686 33,429 51.5 11,157 22,272 55.1
FY10
59,395 15.9 27,249 (1.2) 7,233 20,016
FY11
85,503 44.0 28,092 3.1 4,435 23,657
FY12E
23.9 31,639 12.6 4,000 27,639

Net int. margin/avg assets Non-fund rev./avg assets Operating exp./avg assets Prov./avg assets PBT/Average assets RoA RoE Cost/Income Tax/PBT Tier I Capital adequacy Gross NPA Net NPA Provisioning coverage Growth in customer assets Growth in advances Growth in deposits SLR ratio CASA ratio 20.1 35,837 13.3 4,000 31,837
FY09
2.5 1.4 1.8 0.5 1.6 1.1 21.3 45.4 33.4 8.5 1.3 0.3 75.5 35.4 34.9 26.5 20.8 29.6
FY10
2.3 1.1 1.5 0.3 1.7 1.2 24.5 44.0 27.8 9.3 1.4 0.3 74.9 18.1 21.6 25.3 20.0 29.6
FY11 FY12E FY13E

2.7 0.9 1.5 0.4 1.8 1.33 25.5 40.8 24.9 10.0 1.4 0.3 74.9 32.1 30.6 26.7 18.8 28.7 2.6 0.8 1.3 0.3 1.8 1.25 23.1 38.7 31.0 9.4 1.3 0.2 83.0 21.8 23.4 24.3 21.0 29.0 2.6 0.7 1.3 0.3 1.8 1.22 22.8 38.6 31.0 9.0 1.5 0.2 83.0 19.8 19.7 20.0 21.0 29.0
105,896 127,197
86,644 113,594 9.9 38,106 6.6 48,538 12.7 6,972 9,513 42,381 26.8 11,797 30,583 37.3 31.1 46,298 21.5 67,296 38.6 13,313 10,401 56,503 33.3 14,086 42,417 38.7
137,534 163,035 21.1 53,289 15.1 25.2 11,538 7,795 72,708 28.7 22,539 50,168 18.3 18.5 62,933 18.1 18.8 13,836 9,409 86,266 18.6 26,743 59,524 18.6
84,246 100,102
Public & Foreign Others 17.1% As on 31 Mar (Rs m) FY09 FY10 FY11 FY12E FY13E 5.2% ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. Advances 1,439,859 1,750,353 2,286,764 2,822,613 3,379,351
yoy growth (%) Customer assets yoy growth (%) SLR portfolio Cash & bank balances Total assets Networth Deposits - Current % - Savings % - Term % Borrowings 34.9 35.4 411,013 240,871 113,872 7.5 22.1 70.4 56,361 21.6 18.1 494,425 354,671 136,063 7.9 21.8 70.4 61,599 30.6 32.1 598,252 499,341 197,012 7.6 21.1 71.3 129,062 23.4 21.8 797,560 624,176 237,147 8.0 21.0 71.0 161,327 19.7 19.8 957,253 780,220 284,766 8.0 21.0 71.0 201,659 1,501,450 1,773,871 2,343,269 2,853,242 3,419,169
Balance sheet
Institutions 16.0% Promoters 57.0% Non Promoter Corporate Holding 4.7%

As of March 2011
2,274,067 2,783,167 3,583,972 4,428,469 5,331,657 1,923,970 2,410,443 3,054,395 3,797,905 4,558,349
24 | JULY 11
IDFC SECURITIES
INDIA RESEARCH
COMPANY UPDATE
BSE SENSEX: 18436
21 JULY 2011
State Bank of India

On the correct path
OUTPERFORMER
Rs2471
After adopting an aggressive growth posture over the past couple of years, State Bank of India (SBI) is embarking on the path of profitable growth. The bank now aims to improve its asset quality, increase margins and proactively provide for expenses to prevent any large one-off impact on earnings. Balance sheet clean-up undertaken in Q4FY11, termination of teaser rate schemes and a steep rise in base rate (~125bp since May 2011), we believe, are steps in the right direction. We expect the banks operating metrics to gradually improve led by better asset quality, robust NII and increasing cost efficiency. Over FY11-13, we expect 39% CAGR in the banks earnings, and thereby ~30bp increase in RoA to 1%+. Although earnings could face stress in the near term due to higher provisioning requirements and investment depreciation, we remain convinced about SBIs long-term growth potential. Reiterate Outperformer with a 12-month price target of Rs3,000 (corresponding to 1.5x FY13E adjusted book; including Rs188/ share value for subsidiaries). The worst is behind: With aggressive NPA provisions in Q4FY11, we believe that balance sheet clean-up is largely over. Majority of loans have already migrated to system-based recognition, and slippages from this aspect are also expected to be limited. However, we expect provisions to remain high in H1FY12 as the bank provides for one-offs (to shore up coverage ratio and comply with recent RBI provisioning norms), which could dampen near-term profitability. We expect provisions to decline materially only from H2FY12. ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. Earnings to revive: SBI is working towards improving its profitability through better asset quality and higher NIMs. We see the operational outlook turning benign for SBI as; i) slippages come off from Q4FY11 levels; ii) NIMs pick up (management guidance of ~20bp NIM expansion in FY12 - we conservatively estimate a 17bp yoy decline to 2.7%); iii) cost efficiency should improve; and iv) loans are expected to expand by 17-18% over the next couple of years. We expect 39% earnings CAGR over FY11-13. Attractive valuations; reiterate Outperformer: Although we see higher provisioning requirements in the near term, and thereby ~39% decline in Q1FY12E earnings (incremental stress could arise from MTM losses on investment book), we remain convinced about SBIs long-term growth potential. Improved asset quality and higher visibility on earnings, we believe, will drive stock performance.

As on 31 March
Net profit (Rs m) yoy growth Shares in issue (m) EPS (Rs) EPS growth (%) PE (x) Consolidated Bv (Rs/share) P/ Consolidated Book (x) RONW (%) Pathik Gandotra
Price performance
FY09
91,212 35.5 634.9 144.1 12.7 17.2 1063 2.17 17.1 Chinmaya Garg
FY10
91,660 0.5 634.9 634.9 144.4 0.2 17.1 1231 1.89 14.8
FY11
(9.8) 635.0 635.0 130.2 (9.9) 19.0 1240 1.88 12.6
FY12E
45.5 635.0 635.0 189.3 45.5 12.6 1506 1.6 17.2
FY13E
33.2 635.0 635.0 252.2 33.2 9.4 1820 1.35 19.8
145 130 115 100 85

State Bank of India
Sensex
82,645 120,237 160,140
Weighted shares in issue (m) 633.2
Oct-10
Nov-10
Dec-10
Mar-11
Apr-11
May-11
Feb-11
Bloomberg: SBIN IN
1-yr High/ Low (Rs): 3515/2120
Kavita Kejriwal
Kavitha Rajan
25 |
JULY 2011
IDFC SECURITIES
Jun-11
Jan-11
Jul-11
Income statement
Ratio analysis
FY09
208,731 22.6 126,908 46.0 25,673 101,235 335,639 30.5 156,487 24.1 179,152 36.7 37,346 24,750 141,806 35.8 50,594 91,212 35.5
FY10
13.4 17.9 21,168
FY11
37.4 5.7 9,210
FY12E
10.9 17.2 9,300

Net int. margin/avg assets Non-fund rev./avg assets Operating exp./avg assets Cost/Income Prov./avg assets PBT/Average assets RoA RoE Tax/PBT Tier I Capital adequacy GrossNPA Net NPA Provisioning coverage Growth in customer assets Growth in deposits SLR ratio CASA ratio 15.9 17.6 9,450
FY09
2.5 1.5 1.9 46.6 0.4 1.7 1.1 17.1 35.7 9.4 2.9 1.8 38.7 28.1 38.1 30.5 41.6
FY10
2.4 1.5 2.0 52.6 0.4 1.4 0.9 14.8 34.2 9.5 3.1 1.7 44.4 16.5 8.4 28.2 47.3
FY11 FY12E FY13E

2.9 1.4 2.0 47.6 0.9 1.3 0.73 12.6 44.7 7.8 3.3 1.6 51.2 18.9 16.1 24.7 49.4 2.7 1.4 2.0 48.2 0.7 1.4 0.90 17.2 35.0 7.4 3.4 1.1 69.3 16.8 19.2 24.5 45.0 2.6 1.4 1.9 48.3 0.5 1.6 1.01 19.8 35.0 7.2 3.4 0.7 80.7 16.8 20.8 24.0 45.0
236,714 325,264 149,682 158,246
360,740 418,269 185,455 218,107
128,514 149,036 386,396 483,510 15.1 29.8 2.3 51,479 25.1 13.3 38.3 87,921 203,187 230,154 183,209 253,356 43,948 103,813 139,261 149,542 (1.8) 47,600 91,660 0.5 7.4 66,897 82,645 (9.8)
176,155 208,657 546,195 636,376 13.0 14.4 11.7 97,961 80,855 16.5 16.7 16.3 82,831 71,355 263,254 307,177 282,941 329,200
184,980 246,369 23.7 64,743 33.2 86,229
120,237 160,140 45.5 33.2
Public & Others 5.8% Foreign 15.8%
Balance sheet
As on 31 Mar (Rs bn) FY09 FY10 FY11 FY12E FY13E
ISIEmergingMarketsPDF in-mdidemo from 7,567 115.111.95.19 10,338 on 2011-07-24 15:24:14 EDT. DownloadPDF. Advances 5,425 6,319 8,844 Institutions yoy growth (%) 30.2 16.5 19.8 16.9 16.9 16.5%
Customer assets yoy growth (%) SLR portfolio Cash & bank balances Total assets Networth Deposits - Current % - Savings % - Term % Borrowings 5,757 28.1 2,281 1,044 9,644 579 7,421 14.9 26.7 58.4 537 1,338 6,707 16.5 2,277 893 10,466 659 8,041 15.2 32.0 52.7 7,974 18.9 2,312 1,229 12,237 650 9,339 14.0 35.4 50.6 710 9,316 16.8 2,735 1,536 14,546 746 11,130 11.5 33.5 55.0 821 10,885 16.8 3,244 1,920 17,187 874 13,446 11.5 33.5 55.0 1,215
Promoters 59.4%
Non Promoter Corporate Holding 2.4%
As of March 2011
26 | JULY 11
IDFC SECURITIES
Analyst
Pathik Gandotra Shirish Rane Nikhil Vora Nitin Agarwal Chirag Shah Bhoomika Nair Hitesh Shah, CFA Bhushan Gajaria Salil Desai Ashish Shah Probal Sen Chinmaya Garg Abhishek Gupta Saumil Mehta Vineet Chandak Kavita Kejriwal Anamika Sharma Varun Kejriwal Swati Nangalia Nikhil Salvi Kavitha Rajan Dharmendra Sahu Rupesh Sonawale Dharmesh R Bhatt, CMT
Sector/Industry/Coverage
Head of Equities; Financials Co-Head of Research; Construction, Power, Cement Co-Head of Research; Strategy, FMCG, Media, Education, Exchanges, Mid Caps Pharmaceuticals, Real Estate, Agri-inputs Metals & Mining, Telecom, Pipes Logistics, Engineering IT Services Automobiles, Auto ancillaries, Retailing Construction, Power, Cement Construction, Power, Cement Oil & Gas Financials Telecom, Metals & Mining Metals, Pipes Real Estate, Pharmaceuticals, Agri-inputs Financials IT Services FMCG, Mid Caps, Shipping, Aviation Media, Education, Exchanges, Midcaps Construction, Power, Cement Strategy, Financials Database Analyst Database Analyst Technical Analyst
E-mail
pathik.gandotra@idfc.com shirish.rane@idfc.com nikhil.vora@idfc.com nitin.agarwal@idfc.com chirag.shah@idfc.com bhoomika.nair@idfc.com hitesh.shah@idfc.com bhushan.gajaria@idfc.com salil.desai@idfc.com ashish.shah@idfc.com probal.sen@idfc.com chinmaya.garg@idfc.com abhishek.gupta@idfc.com saumil.mehta@idfc.com vineet.chandak@idfc.com kavita.kejriwal@idfc.com anamika.sharma@idfc.com varun.kejriwal@idfc.com swati.nangalia@idfc.com nikhil.salvi@idfc.com kavitha.rajan@idfc.com dharmendra.sahu@idfc.com rupesh.sonawale@idfc.com dharmesh.bhatt@idfc.com
Tel.+91-22-6622 2600
91-22-662 22525 91-22-662 22575 91-22-662 22567 91-22-662 22568 91-22-662 22564 91-22-662 22561 91-22-662 22565 91-22-662 22562 91-22-662 22573 91-22-662 22560 91-22-662 22569 91-22-662 22563 91-22-662 22661 91-22-662 22578 91-22-662 22579 91-22-662 22558 91-22-662 22680 91-22-662 22685 91-22-662 22576 91-22-662 22566 91-22-662 22697 91-22-662 22580 91-22-662 22572 91-22-662 22534
Equity Sales/Dealing
Naishadh Paleja Paresh Shah Vishal Purohit Nikhil Gholani Sanjay Panicker Rajesh Makharia Kalpesh Parekh Suchit Sehgal Pawan Sharma Dipesh Shah Jignesh Shah Suniil Pandit Mukesh Chaturvedi ISIEmergingMarketsPDF Viren Sompura Rajashekhar Hiremath
Designation
Co-Group CEO MD, Dealing MD, Co-Head of Sales MD, Co-Head of Sales Director, Sales Director, Sales Director, Sales AVP, Sales MD, Derivatives Director, Derivatives AVP, Derivatives Director, Sales trading SVP, Sales trading in-mdidemo from SVP, Sales trading VP, Sales trading
E-mail
Tel.+91-22-6622 2500
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Disclaimer This document has been prepared by IDFC Securities Ltd (IDFC SEC). IDFC SEC and its subsidiaries and associated companies are a full-service, integrated investment banking, investment management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavor to update the information herein on reasonable basis, IDFC SEC, its subsidiaries and associated companies, their directors and employees (IDFC SEC and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent IDFC SEC and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved). The investment discussed or views expressed may not be suitable for all investors. Affiliates of IDFC SEC may have issued other reports that are inconsistent with and reach different conclusions from, the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject IDFC SEC and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of, and to observe, such applicable restrictions. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. IDFC SEC and affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell, or may be materially interested in any of the securities mentioned or related securities. IDFC SEC and affiliates may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall IDFC SEC, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of IDFC SEC and affiliates. This document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. IDFC SEC will not treat recipients as customers by virtue of their receiving this report. Explanation of Ratings: 1. Outperformer: More than 5% upside to Index 2. Neutral: Within 0-5% to Index (upside or downside) 3. Underperformer: More than 5% downside to Index Disclosure of interest: 1. IDFC SEC and affiliates may have received compensation from the company covered herein in the past twelve months for issue management, capital structure, mergers & acquisitions, buyback of shares and other corporate advisory services. 2. Affiliates of IDFC SEC may have received a mandate from the subject company. 3. IDFC SEC and affiliates may hold paid up capital of the subject company. 4. IDFC SEC and affiliates, their directors and employees may from time to time have positions or options in the company and buy or sell the securities of the company(ies) mentioned herein. Copyright in this document vests exclusively with IDFC Securities Ltd
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IDFC SECURITIES
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28 | JULY 11
IDFC SECURITIES

Indian Financials: Tryst With Destiny

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INSTITUTIONAL SECURITIES

BSE SENSEX: 18436

Mkt cap FY11-13E earnings (Rs bn)

State bank of India Outperformer Source: IDFC Securities Research

ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF. (3)

Source: IDFC Securities Research, Office of the economic adviser

Inflation could rise further before coming off

See another 25-50bp hike in policy rates

Exhibit 2: G-Sec yields hovering at 8.2-8.3%

Source: IDFC Securities Research and company reports

GDP growth still expected to come in at 7.8-8%

Exhibit 3: We expect real GDP growth to be healthy in FY12

Source: IDFC Securities Research and company reports

Questions on asset quality have emerged

our analysis indicates that 17% of bank credit is vulnerable

Services 18% Industry 47%

40.0 30.0 20.0 10.0

Source: RBI, Capitaline, IDFC Securities Research

NPAs + Restructured assets to peak at 7.8% in FY13E

ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF.

# 3: Stress on earnings ahead?

Near-term stress points

Some NIM compression ahead

Source: IDFC Securities Research and company reports

Provisions to remain high in H1FY12

Exhibit 6: Asset quality has witnessed stress

2.6 2.1 1.8

2.9 2.5 2.2

SBI BoB BoI PNB ALBK CBK OBC Union Bank

Source: IDFC Securities Research and company reports

Stressed assets to rise; restructuring to curtail provisions

All banks PSUs Private Banks

Source: IDFC Securities Research and company reports

Lower operating expenses to support earnings

Exhibit 8: Lesser rise in operating expenses to bolster profitability

Source: IDFC Securities Research and company reports

Earnings dowgrades likely?

# 4: Valuations: What is the potential downside from current levels?

Risk-reward favorable we see limited downside risk

Relative performance % since Nov-10 HDFCB IIB

Valuations now at long-term averages

Exhibit 11: Current valuations at long-term averages

ICICI Bank (P/B 1yr forward)

Long term average

Axis Bank (P/B 1yr forward)

Long term average

ING Vysya Bank (P/B 1yr forward)

Long term average

SBI (P/B 1yr forward)

Long term average

Yes Bank (P/B 1yr forward)

Long term average

Source: Bloomberg, company reports

ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-24 15:24:14 EDT. DownloadPDF.

# 5: What is the pecking order in financials?

Private banks preferred picks; add weight ahead of PSUs

Exhibit 12: Current valuations offer attractive entry points

2.3 3.9 2.0 2.9 2.4

1.9 3.4 1.9 2.4 1.9

1.6 5.2 2.0 2.3 1.3 1.4 1.5 2.4 1.8

1.4 4.5 1.6 1.9 1.1 1.3 2.0 1.4

Source: IDFC Securities Research and company reports