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Indian Banking Sector

Manish Agarwalla
Shubhangi Agrawal
December 2008

BANKING

Sector outlook
Investment rationale
Credit growth to remain strong as funding through other channels have dried up.
The shift in financial assets of household towards bank deposit due to turmoil in capital market will keep
deposit growth buoyant.
The contraction of liquidity and lack of funding through alternate channels have increased the pricing power of
banks.
The declining yields to provide additional gain in treasury, which will enable the banks to create buffer
provisions towards NPA.
Banks with surplus SLR will be in a better position to manage liquidity.
Key concern
Asset quality of the banks are the biggest concern today specially considering the robust growth in the past
and stress witnessed in certain sectors.
Government interference with the state owned banks may overburden the later with more social responsibility
which could affect its performance and deteriorate the asset quality.

Near term trigger

Further relaxation in key policy rates will provide as near term trigger for the sector.

Top Picks: Large Cap ICICI Bank, SBI; Mid Cap BOB, UBI, BOI

Rating and Valuation matrix

CMP Tgt Price

upside

MCap

CAGR (08-10E)

P/Adj. BV

RoE (%)

Rs

Rs

(%)

US$ bn

NII %

PPP%

PAT%

FY08

FY09E

FY10E

FY08

FY09E FY10E

BANKING

Public Sector Banks


Andhra Bank

Buy

58

98

67.2

0.7

10.8

8.3

10.0

0.9

0.8

0.7

20.5

18.3

17.4

Bank of India

Buy

276

400

44.9

2.3

21.8

21.4

25.5

1.8

1.4

1.1

24.4

23.5

25.4

BOB

Buy

265

350

32.1

2.3

19.5

11.6

20.6

1.1

0.9

0.8

14.6

15.0

15.8

Canara Bank

Outperformer

168

219

30.8

1.6

20.0

11.4

16.4

0.9

0.8

0.7

15.0

16.0

16.9

Corp Bank

Buy

185

338

83.0

0.6

16.9

13.8

10.4

0.6

0.6

0.5

17.7

17.3

16.5

IOB

Buy

70

166

138.1

0.9

14.5

10.7

12.1

0.9

0.7

0.6

27.2

25.7

23.5

Oriental Bank

Buy

142

193

35.8

0.8

7.1

1.8

-4.4

0.7

0.6

0.6

6.2

10.9

11.7

PNB

Buy

481

574

19.3

3.5

17.8

16.0

22.3

1.5

1.3

1.1

18.0

19.4

19.6

SBI

Buy

1238

1614

30.3

15.2

12.8

18.8

30.7

1.4

1.2

1.1

16.7

16.0

16.0

Union Bank

Buy

157

184

17.2

1.8

15.7

11.3

22.0

1.4

1.2

0.9

22.1

21.0

21.5

Indian Bank

UR

123

184

49.2

1.2

19.4

8.6

14.0

1.1

0.9

0.8

22.3

20.3

20.5

Axis Bank

Buy

501

814

62.5

4.2

28.2

27.6

34.5

2.1

1.9

1.7

17.6

15.7

18.0

HDFC Bank

Buy

984

1503

52.7

8.1

42.2

32.2

37.8

3.1

2.6

2.3

17.7

15.6

15.7

ICICI Bank

Buy

422

795

88.7

10.9

20.8

11.4

8.2

1.1

1.1

1.0

11.6

8.8

9.5

Private Sector Banks

Source: MF Global India Research Estimates

BANKING

Relative P/ABV band

Source: MF Global India Research Estimates

BANKING

Sector-wise break up of non food credit

Source: RBI

Bank as source of fund to gain market share

Item/Year

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2024

2031

2201

2201

2214

1064

1431

57.1

65.3

69.8

53.4

55.5

34.4

38.3

6.7

-18.8

18.0

20.0

26.6

13.8

27.6

b) Depreciation

41.8

47.9

37.3

25.7

19.2

14.2

B. External Sources

42.9

34.7

30.2

46.6

44.5

65.6

61.7

a) Paid up capital

12.8

10.5

9.4

9.3

10.8

22.8

12.8

- Net Issues

4.6

4.7

7.3

4.9

4.1

NA

NA

- Premium

8.2

5.8

2.2

3.6

6.4

19.4

9.3

8.8

5.6

17.0

15.3

25.8

31.0

- Debentures

9.5

-1.5

-5.6

-3.5

-1.1

-4.1

-1.1

- From Banks

-0.8

21.5

27.1

21.4

15.2

30.7

22.8

- From FIs

-3.2

-0.7

-6.2

-5.06

-2.9

NA

NA

20.2

14.3

14.8

20.3

18.5

17.0

17.9

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Number of Companies

A. Internal Sources of which:

BANKING

a) Reserves and Surplus

b) Borrowings of which:

c) Trade dues & other current liabilities

C. Total (A+B)

Source: SEBI, MF Global India Research Estimates

9.3

12.5

Alternate source of fund to dry up


Resource mobilized through primary market

BANKING

Rs bn

Total

BFSI

Total Debt Issues

Ex-BFSI

1993-94

244

244

1994-95

276

276

1995-96

208

61

147

1996-97

143

58

85

1997-98

46

22

23

1998-99

56

47

1999-00

78

40

38

2000-01

61

31

30

2001-02

75

51

24

2002-03

41

34

2003-04

233

54

178

2004-05

283

113

169

2005-06

274

124

149

2006-07

335

22

313

2007-08

870

310

561

Source: MF Global India Research, RBI

FDI

Year Total Debt Issues, Rs bn


1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08

193
214
328
543
645
706
711
696
682
873
965
1462
-

Rs bn

US$ mn

1990-91

97

1991-92

129

1992-93

10

315

1993-94

18

586

1994-95

41

1314

1995-96

72

2144

1996-97

100

2821

1997-98

132

3557

1998-99

104

2462

1999-00

93

2155

2000-01

184

4029

2001-02

292

6130

US$ mn

2002-03

244

5035

9467
7801
14888
26097
17829

2003-04

199

4322

2004-05

272

6051

2005-06

342

7722

2006-07

884

19531

ECBs

CY04
CY05
CY06
CY07
YTD (10 months)

Year

Business growth to remain strong

BANKING

Rs bn

March' 92
March' 93
March' 94
March' 95
March' 96
March' 97
March' 98
March' 99
March' 00
March' 01
March' 02
March' 03
March' 04
March' 05
March' 06
March' 07
March' 08
March' 09e
March' 10e
March' 11e

Credit

Gwth

Deposit

Gwth

C/D ratio

125592
151982
164418
211560
254015
278401
324079
368837
435958
511434
589723
729215
840785
1100428
1507077
1931189
2361914
3073296
3794242
4545945

21%
8%
29%
20%
10%
16%
14%
18%
17%
15%
24%
15%
31%
37%
28%
22%
30%
23%
20%

230758
268572
315132
386859
433819
505599
598485
714025
813345
962618
1103360
1280853
1504416
1700198
2109049
2611933
3196939
3841620
4627125
5543836

16%
17%
23%
12%
17%
18%
19%
14%
18%
15%
16%
17%
13%
24%
24%
22%
20%
20%
20%

54
57
52
55
59
55
54
52
54
53
53
57
56
65
71
74
74
80
82
82

Incremental
credit

Incremental
deposit
contributed by
housing hold

26390
12436
47142
42455
24386
45678
44758
67121
75476
78289
139492
111570
259643
406649
424112
430725
711382
720947
751703

37814
46560
71727
46960
71780
92886
115540
99320
149273
140742
177493
223563
195782
408851
502884
585006
644681
785505
916711

Bank deposit
requirement
contributed by
saving
29518
36236
55835
39941
50902
74099
79433
82892
94703
112936
123462
141967
158259
274864
417359
406631
496405
628404
715034

% of bank
incremental deposit
household saving

C/D ratio

78
78
78
85
71
80
69
83
63
80
70
64
81
67
83
70
77
80
78

69.79
26.71
65.72
90.41
33.97
49.18
38.74
67.58
50.56
55.63
78.59
49.91
132.62
99.46
84.34
73.63
*110.35
**91.78
82.00

*Considering 350bps cut in CRR and 100 bps cut in SLR


**Assuming 100 bps cut in CRR and 100 bps cut in SLR

Source: RBI

Gross domestic savings

BANKING

Financial saving
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06 P
2006-07P
2007-08P
2008-09E
2009-10E
2010-2011E

HOUSE HOLD SECTOR


% to GDP physical saving
% to GDP

8610
9614
12739
13294
17879
18538
23336
26820
27183
37998
49640
62101
65367
94738
120733
105719
141661
146777
180346
206602
215219
247476
253255
313260
318264
420841
467985
525987
601398
718397
790237

6
6
7
6
7
7
7
7
6
8
9
9
9
11
12
9
10
10
10
11
10
11
10
11
10
12
11
11
11
12
12

10114
10045
8491
12828
14810
18404
18317
29087
39724
44767
55149
41394
57948
54796
68057
95296
79312
123531
149414
205914
239634
256689
315879
357516
406846
445915
517837

7
6
4
6
6
7
6
8
9
9
10
6
8
6
7
8
6
8
9
11
11
11
13
13
13
12
12

total

% to GDP

Net Domestic Saving

18724
19659
21230
26122
32689
36942
41653
55907
66907
82765
104789
103495
123315
149534
188790
201015
220973
270308
329760
412516
454853
504165
569134
670776
725110
866756
985822

13
12
11
12
13
13
13
16
16
17
18
16
16
17
19
17
16
18
19
21
22
22
23
24
23
24
24

15145
16811
17482
19558
24056
28094
29101
39285
48532
60525
78932
79118
87553
109050
153640
179876
184677
219757
227545
302835
297215
306588
397493
541046
671501
848544
1006956

% to GDP GDP at curr. price


10
10
9
9
10
10
9
11
11
12
14
12
12
13
15
15
13
14
13
16
14
13
16
20
21
24
24

145370
170805
191059
222485
249268
281330
314816
357861
424531
487684
569624
654729
752591
865805
1015764
1191813
1378617
1527158
1751199
1952035
2102314
2278952
2454561
2754621
3149412
3580344
4145810
4713148
*5467252
**5986641
***6585305

*Assuming nominal GDP growth of 16%. **Assuming nominal GDP growth of 9.5%.***Assuming nominal GDP growth of 10%

Source: RBI

Household saving in financial assets

BANKING

Year

Currency

% of

bank

% of

life insu

% of

P&P

% of

Claims on

% of

Shares &

asset

deposit

asset

fund

asset

fund

asset

govt

asset

debtrs

% of

Trade

asset debt (net)

% of

chg in

Net

asset

fin asset

fin asset
8610

1980-81

1625

13

5550

46

915

2122

18

712

412

373

12118

1981-82

965

5194

38

1037

2480

18

1784

13

510

643

13621

9588

1982-83

2026

13

6661

41

1235

2865

18

1243

646

429

16097

12566

1983-84

2776

15

7978

42

1376

3052

16

1976

11

555

-164

-1

18790

13552

1984-85

2938

12

9859

42

1556

3759

16

3107

13

762

41

23549

17816

1985-86

2220

10603

41

1779

4188

16

3413

13

1394

-44

25562

18579

1986-87

3090

10

14510

46

2159

5055

16

3092

10

1768

-280

-1

31849

23339

1987-88

4815

13

14674

41

2589

6509

18

3680

10

813

504

36106

26819

1988-89

4256

11

14747

37

3423

7552

19

5478

14

1136

359

39958

27132

1989-90

7655

16

13987

29

4415

9508

20

6758

14

2655

-763

-2

48233

38045

1990-91

6251

11

18777

32

5599

10

11155

19

7883

13

4972

-453

-1

58908

49641

1991-92

8157

12

17848

26

7003

10

12501

18

4845

6800

10

-414

-1

68045

62048

1992-93

6562

29518

37

7114

14814

18

3885

8212

10

-1398

-2

80354

65298

1993-94

13367

12

36236

33

9548

18323

17

6908

10067

-1190

-1

109618

94759

1994-95

15916

11

55835

38

11370

21414

15

13186

13473

-1148

-1

145501

120731

1995-96

16525

13

39941

32

13894

11

22343

18

9588

8839

-252

124337

105717

1996-97

13643

50902

32

16121

10

30390

19

11783

6631

-708

158519

141662

1997-98

12780

74099

43

19410

11

32267

19

22162

13

4464

-770

171740

146821

1998-99

21822

11

79433

38

23428

11

46408

22

28220

14

5105

-6870

-3

207103

180330

1999-00

20845

82892

35

28644

12

53907

23

28985

12

16308

-1023

236213

200146

2000-01

15632

94703

38

33861

14

47882

19

39007

16

11148

183

248393

216614

2001-02

28156

112936

38

41237

14

46609

16

51938

18

9834

-183

296582

244855

2002-03

28632

123462

38

52009

16

48441

15

56087

17

7122

-341

322583

262278

2003-04

42675

11

141967

38

52240

14

48952

13

87372

23

9078

-114

377387

307405

2004-05

36977

158259

36

67986

16

56552

13

106420

25

8113

-213

434300

313734

2005-06P

53071

274864

46

83540

14

62581

10

87168

15

31179

-222

597867

414443

2006-07P

66323

417359

54

114889

15

70992

40627

51396

-183

768967

486270

2007-08$

80342

11

406631

55

128877

18

60204

-27042

-4

77398

11

-204

734653

525987

2008-09E

84136

10

496405

59

134618

16

75723

42068

841364

601398

2009-10E

101355

10

628404

62

162169

16

91220

20271

0 1013555

718397

2010-2011E 115328

10

715034

62

184525

16

103795

23066

0 1153281

790237

Source: RBI

10

MTM Profit to boost the profitability of PSBs

Interest rate sensitivity Rs crs

SBI

UBI

BOB

Corp

Can

HDFC

ICICI

IOB

PNB

UTI Andhra

OBC Indian Bk

Investments G-Secs

143,472

34,166

28,217

33,871

16,055

43,357

31,666

75,378 24,996

49,060

22,798

14,842 20,770

Total investment

189,501

42,432

34,674

40,453

19,207

50,200

44,195

97,148 27,858

57,721

37,997

15,700 25,700

79

95

82

78

95

88

74

84

89

83

113,701

32,458

23,113

26,270

15,252

38,152

23,291

56,346 20,894

43,663

18,999

% SLR book in HTM


Investments in HTM category

BANKING

BOI

75

95

17468
17,948

82

68

14,100 16,962

11,848

% of Investments in HTM

60

76

67

65

79

76

53

58

75

76

50

90

66

66

Investments in AFS / HFT

29772

1708

5104

7601

803

5205

8375

19032

4102

5397

3800

742

3808

5620

Duration of AFS / HFT

3.0

0.9

2.16

1.9

1.8

1.5

0.8

2.0

2.5

2.04

2.5

3.34

Modified duration

2.9

0.8

2.1

1.8

1.7

1.4

0.8

1.9

1.9

2.4

1.9

2.0

2.4

3.2

Interest rate hedge

8.65

8.65

8.65

8.65

8.65

8.65

8.00

8.65

8.65

8.65

8.65

8.65

8.65

8.65

Current interest rate on 10 yr G-Sec

7.20

7.20

7.20

7.20

7.20

7.20

7.20

7.20

7.20

7.20

7.20

7.20

7.20

7.20

(1241)

(21)

(153)

(201)

(20)

(109)

(52)

(529)

(112)

(188)

(106)

(21)

(132)

(261)

-9.8

-0.6

-6.8

-7.5

-1.7

-4.7

-1.5

-4.2

-6.1

-5.3

-0.8

-2.3

-15.2

-20.6

Expected MTM loss/(gain)


% of pre-tax earnings

Source: RBI, MF Global India Research

11

Cut in policy rate to offset the 75bps decline in PLR

BANKING

Name of the Bank

Axis
Bank of Baroda
Bank of India
Canara Bank
HDFC Bank
ICICI Bank
Indian Overseas Bank
Punjab National Bank
State Bank of India

PLR (%)
Axis

NIMs as
on Sep' 08
(%)

Decline in
deposit rate
since Sep 08
(%)

Decrease
in PLR
since Sep 08
(%)

Yield
(%)

Yield
expected
for FY09
(%)

Diff.
(%)

Decline
in deposit
cost
(%)

Impact of
decline in
CRR & SLR
(%)

Chg in
NIMs
(%)

3.51
2.77
3.20
2.70
4.20
2.40
3.19
3.78
3.36

0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50

0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75

9.51
8.77
9.20
8.70
10.20
8.40
9.19
9.78
9.36

9.28
8.52
8.95
8.45
10.03
8.20
8.94
9.53
9.11

-0.23
-0.25
-0.25
-0.25
-0.17
-0.20
-0.25
-0.25
-0.25

0.09
0.10
0.08
0.07
0.06
0.11
0.08
0.05
0.03

0.15
0.14
0.14
0.19
0.12
0.14
0.19
0.19
0.15

0.00
-0.01
-0.03
0.01
0.01
0.05
0.01
-0.01
-0.07

Aug'06

Jan'07

Feb'07

Mar'07

April'07

Aug'07

Feb' 08

June' 08

July' 08

Aug' 08

Nov' 08

NA

NA

NA

NA

15.00

15.00

14.75

15.25

15.25

15.75

15.75

Andhra Bank

11.50

11.75

12.25

12.25

13.00

13.00

12.75

13.25

13.25

14.00

14.00

Bank of Baroda

11.50

12.00

12.50

12.50

13.25

13.25

12.75

13.25

13.25

14.00

13.25

Bank of India

11.50

12.00

12.50

12.50

13.25

13.25

12.75

13.25

13.25

14.00

13.25

Canara Bank

11.50

11.75

12.50

12.50

13.25

13.25

12.75

13.25

13.25

14.00

14.00

Corporation Bank

11.50

12.00

12.50

12.50

13.25

13.25

13.25

13.50

13.50

14.00

13.25

HDFC Bank

11.50

13.00

14.00

14.00

14.75

15.00

15.00

15.25

16.00

16.50

16.50

ICICI Bank

13.25

13.75

14.75

14.75

15.75

15.75

15.75

16.50

16.50

17.25

17.25

Indian Overseasa Bank

11.50

12.00

12.50

12.50

13.25

13.25

13.25

13.50

13.50

14.00

14.00

Punjab National Bank

11.50

11.75

12.25

12.25

13.00

13.00

12.50

13.00

13.00

14.00

13.50

State Bank of India

11.00

11.50

12.25

12.25

12.75

12.75

12.25

12.75

12.75

13.75

13.00

Union Bank of India

11.50

12.00

12.50

12.50

13.25

13.25

12.75

13.25

13.25

14.00

13.50

Yes bank

13.00

13.50

14.00

14.75

15.50

15.50

15.50

16.00

16.50

17.00

17.00

10 year Bond yeild(5)

7.52

7.90

7.76

7.98

7.97

8.17

7.94

7.60

8.69

9.30

7.70

Call Rate(%)

5.55

6.05

7.75

6.00

9.25

9.00

4.13

6.05

8.60

8.88

7.50

Repo Rate(%)

6.50

7.00

7.25

7.50

7.50

7.75

7.75

7.75

8.00

9.00

7.50

Source: RBI, MF Global India Research

12

Banks with surplus SLR will be in a better position to manage


liquidity
Credit growth ytd (%)

Incremental credit growth

Total

SLR %

possible due to decline

"Release of funds due to


cut in policy rate (Rs bn)

in policy rate (ytd %)


Public sector

BANKING

Andhra Bank

14

26.2

29

Bank of India

13

18

25.0

61

BOB

12

19

26.0

72

Corp Bank

11

20

26.5

36

Canara

11

19

25.2

85

IOB

14

11

25

27.5

65

Indian Bank

20

12

31

27.7

46

Oriental Bank

10

13

23

28.5

70

PNB

18

26.0

106

SBI

18

26

26.0

304

Union Bank

14

20

24.4

47

HDFC Bank

18

25

25.0

57

Axis

15

22

25.0

41

ICICI Bank

-2

25.0

136

Private sector

Source: RBI, MF Global India Research

13

Asset quality has largely remained stable. Slippages seen in nonmortgage retail segment

The asset quality in the industry remained healthy except some increase in slippages for new private sector

BANKING

banks.
Rise in the proportion of non mortgage retail portfolio of new private sector banks has led to the increase in the
NPAs. We believe that is to do with banks focus on non collateralized lending which are high risk high yielding
business.

Source: RBI, MF Global India Research

14

Scenario Analysis Banks valuation at different level of NPA


P/Adj. BV

BANKING

50% rise in GNPA

Adj. BV

RoE %

Earnings gwth %

Coverage ratio %

GNPA %

NNPA %

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

Public Sector Banks


Andhra Bank
Bank of India
BOB
Canara Bank
Corp Bank
IOB
Oriental Bank
PNB
SBI
Union Bank
Indian Bank

0.77
1.32
0.93
0.78
0.55
0.70
0.67
1.31
1.24
1.10
0.94

0.71
1.10
0.86
0.67
0.49
0.61
0.68
1.24
1.17
0.99
0.82

72.7
188.3
272.2
211.5
323.6
94.6
210.4
343.8
948.6
131.1
129.0

78.4
227.4
295.3
247.8
362.1
107.4
207.8
365.4
1001.7
145.9
147.4

18.3
21.3
13.3
15.9
17.3
25.1
10.7
16.9
15.9
19.3
19.4

17.1
23.5
12.8
15.8
16.1
22.1
9.7
16.0
14.8
17.6
19.6

-4.8
13.2
8.1
13.2
11.4
10.9
-23.8
8.9
20.5
10.7
6.7

2.6
24.1
5.7
11.2
6.1
4.8
-2.7
7.3
6.6
5.4
14.3

88.3
69.0
74.7
0.0
74.0
57.0
48.8
65.9
45.4
90.1
83.8

89.0
69.9
74.6
0.0
73.9
54.0
48.7
61.2
44.4
79.2
87.0

1.4
2.1
2.3
1.7
1.6
2.0
3.0
3.4
3.2
2.8
1.5

1.8
2.5
2.8
2.1
2.1
2.5
3.8
4.3
4.0
3.5
1.9

0.2
0.6
0.6
0.8
0.4
0.9
1.5
1.2
1.8
0.3
0.2

0.2
0.8
0.7
0.7
0.5
1.1
2.0
1.7
2.2
0.7
0.2

Private Sector Banks


Axis Bank
HDFC Bank
ICICI Bank

1.69
2.55
0.96

1.49
2.30
0.96

265.6
364.3
398.3

301.3
404.5
400.2

14.9
14.6
8.8

17.3
14.7
8.8

29.4
2.0
0.6

31.0
30.3
5.5

56.2
67.1
57.4

56.2
66.9
58.5

0.9
2.2
4.4

1.0
2.5
5.7

0.4
0.7
1.9

0.5
0.8
2.4

P/Adj. BV
75% rise in GNPA

Adj. BV

RoE %

Earnings gwth %

Coverage ratio %

GNPA %

NNPA %

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

FY09E

FY10E

Public Sector Banks


Andhra Bank
Bank of India
BOB
Canara Bank
Corp Bank
IOB
Oriental Bank
PNB
SBI
Union Bank
Indian Bank

0.77
1.37
0.98
0.80
0.56
0.72
0.71
1.38
1.32
1.19
0.95

0.76
1.21
1.01
0.74
0.53
0.70
0.90
1.52
1.46
1.23
0.88

72.6
181.6
259.7
207.4
318.6
91.1
198.7
326.4
891.9
121.1
126.8

74.2
205.3
250.3
221.7
336.7
93.9
156.4
297.8
803.4
117.3
137.9

18.3
19.8
12.0
15.8
16.6
22.8
9.4
13.1
14.9
18.0
18.5

15.7
20.3
10.6
14.7
12.1
17.0
5.3
9.5
11.3
14.5
16.5

-4.8
4.4
-3.3
12.2
7.0
-0.2
-33.1
-17.8
12.8
2.3
1.1

-6.8
12.6
-4.4
3.4
-19.3
-14.8
-41.6
-22.3
-15.7
-8.5
-1.0

89.5
68.0
69.5
53.4
73.2
59.9
46.3
70.6
42.6
77.7
81.4

79.0
68.7
61.5
54.5
73.8
58.5
38.3
66.0
40.5
64.1
81.3

1.6
2.4
2.7
2.0
1.9
2.3
3.5
4.0
3.8
3.3
1.8

2.4
3.4
3.8
2.9
2.8
3.3
5.2
5.8
5.5
4.8
2.5

0.2
0.8
0.8
0.9
0.5
0.9
1.9
1.2
2.2
0.7
0.3

0.5
1.1
1.5
1.3
0.7
1.4
3.2
2.0
3.3
1.7
0.5

Private Sector Banks


Axis Bank
HDFC Bank
ICICI Bank

1.70
2.57
1.00

1.53
2.38
1.11

264.1
361.3
381.2

295.0
389.7
345.1

14.9
14.5
8.1

16.0
13.2
4.9

29.0
1.2
-7.9

20.8
16.4
-37.4

56.7
67.6
51.3

62.8
68.2
52.0

1.0
2.5
5.1

1.4
3.4
7.8

0.4
0.8
2.5

0.5
1.1
3.7

Source: RBI, MF Global India Research

15

(Top picks)

State Bank of India


The core business will witness a strong growth driven by stability in NIMs and growth in fee income.
Fee based income is expected to witness traction given the 100% implementation of CBS and buoyant
corporate credit market.
Currently, 40% of the corporate accounts are rated, which when increased to 100% would provide a capital
release, thus improving the CRAR by 150 bps. This would enable the bank to increase its leverage
translating to improvement in return ratios.

ICICI Bank
ICICI bank is adequately capitalized to take on the underlying growth in the Indian economy.
The bank aims to increase the CASA proportion to the industry average.
The bank has undertaken measures to contain costs and this would keep the operating cost low.
We see ICICI bank as a value buy at current level, as it is trading at less than one time FY10E Adjusted
book value even after assuming NPA level of 9%.

Bank of Baroda
The core business is shaping up well after the make over process. Credit is expected to grow at a CAGR of
22% over FY08-10 driven by growth in corporate, agriculture and international segment.
The international operation has gained traction and makes up 20% of advances. The rise in corporate
operations has enabled the bank to accelerate its fee income, which is expected to grow at 19% over FY0810.
We believe, increase in leverage will improve the RoE whereas RoAs are likely to remain stable.

16

(Top picks)

Bank of India
Bank of India stands at favorable position in the risk and reward matrix.
The bank tends to provide strong earnings growth on the back of steady credit growth, stable margin,
revision of services charges, hedged investment portfolio and better asset quality with 55% of credit to
large corporate.
The bank has the potential to further increase its RoE with the increase in leverage.
The bank trades at price to book multiple of 1.2x FY09 ABV of Rs 196. We believe that better asset quality
and strong earnings growth will provide a strong upside from the current level. We have a 1-yr price target
of Rs400 (+70%).

Union bank of India


Credit to register a moderate growth of 21% over FY08-10, depicting the conscious move by the bank to
focus on quality growth without compromise on margins .
Non fund based income is expected to register healthy growth over FY08-10 driven by growth in fee income
and forex income. The banks non interest income growth can surprise on positive side in case of strong
recovery in written off portfolio.
We believe the re-balancing exercise initiated by the bank will ease margin pressure and maintain asset
quality. This will increase the earning visibility and improve return ratios.

17

Risk-Reward Matrix
RISK

High

Low

High

ICICI Bank
Axis Bank

REWARD

HDFC Bank;
BOI

provides high risk due to increasing slippage and its reliance on


wholesale funding.

BOB; UBI

ICICI Bank is expected to provide high return but at the same time

We expect BOB and UBI to provide return of over 30%. In terms of


valuation also the banks are available at less than one time FY10

SBI; PNB

Adj. Book value even after assuming a high GNPA of 4.1% and

Low

4.8% compared to the current level of 1.62% & 1.9% respectively.

Company

DD outlook

Leverage Risk Liquidity Risk NPA Risk

Stress on NIM Comment

SBI

Strong business growth, but NPA a concern

ICICI Bank

Concerns are priced in, less downside from current level

HDFC Bank

Merger benefit will take time to flow

Axis Bank

Comparatively younger loan book provides high risk

BOB

Higher possibility of re-rating

BOI

Change in top management a key concern

PNB

Growth to remain moderate

Healthy; Moderate; Vulnerable; High; CF Cash Flow; DD Demand

Source:

18

Banking
Analyst: Manish Agarwalla
manish.agarwalla@mfglobal.in (+9122 6667 9962)

Axis Bank (AXSB IN / AXBK.BO)

December, 2008

COMPANY UPDATE

On a fast track

250

CMP Rs 501
Target Rs 814(+63%)

Investment Rationale
Aggressive credit growth driven by stronger corporate relation, focus in international and agrisegment. The bank is expected to grow its credit portfolio at a CAGR of 35% through FY10E.
Margin to stabilize at 3.3% given banks ability to mobilize high CASA deposits. Aggressive
branch expansion and focus on product differentiation and a customer- centric vision will enable
the bank to develop strong retail deposit franchisee.
Fee income will continue to witness high growth of 36% through FY10E driven by opportunities
in cross-selling, private banking for HNI.
Operating costs to remain stable at 2% of average asset. The bank has low operating cost
compared to its peers partly because of the high proportion of wholesale business.
Asset quality has been stable. We have assumed higher provision for NPL in our estimates.
Concern for loss on forex derivatives are overdone. The bank declared the total MTM losses of Rs
5.65bn (suffered by its clients at the end of March 2008. Of the total MTM losses suffered by the
client, 70% of it is to the clients with rating of A and above. Hence, we do not see significant
slippages in derivatives transactions as most of these MTM losses will be honored by the client
Risks
Axis bank has emerged as one of the leading Private banks in India under the leadership of Dr. P
J Naik. We believe that the retirement of Dr. Naik on March 2009 may impact banks future
growth until a dynamic successor is appointed to carry forward the banks to a new league.
Valuation
At CMP of Rs501 the stock trades at 1.9x FY09E ABV of Rs268 and 1.7x FY10E ABV of Rs310.
Aggressive branch expansion and focus on product differentiation and a customer- centric vision
will enable to maintain high CASA proportion The robust credit and stable margin will enable
the bank to achieve strong PAT growth.

Rel. to BSE

200
150
100
50
Apr-07

Oct-07

Apr-08

Oct-08

Company data
O/S shares :

359mn

Market cap (Rs) :

162bn

Market cap (USD) :

3.3bn

52 - wk Hi/Lo (Rs) :

1292 / 353

Avg. daily vol. (3mth) :

5.4mn

Face Value (Rs) :

10

Share holding pattern, %


Promoters :

42.4

FII / NRI :

33.3

FI / MF :

10.9

Non Pro. Corp. Holdings :

6.8

Public & Others :

6.6

Y/E Mar, Rs mn

FY09E

FY10E

NII

25,854

34,496

42,503

PAT

10,710

14,732

19,373

NIM %

FY08

2.9

2.8

2.7

238.2

267.1

302.4

RoE, %

17.6

15.7

18.0

EPS, Rs

29.9

41.0

53.6

ABV per share

P/ABV, x

Disclaimer & disclosures: This report must be read with the disclaimer and disclosures on the last page that form part of it

AXIS Bank

2.1

1.9

1.7

19

Valuation Summary
Y/E Mar
Pre-prov ROE (%)
Pre-prov ROA (%)

FY06

FY07

FY08

FY09E

FY10E

31.8

34.2

40.2

36.6

31.9

33.7

1.9

2.2

2.1

2.5

2.4

2.3

Net Profit

3,355

4,851

6,590

10,710

14,732

19,373

% growth

20.5

44.6

35.9

62.5

37.6

31.5

EPS (Rs)

12.3

17.4

23.4

29.9

41.0

53.6

95.7

111.3

238.2

267.1

302.4

21.0

17.6

15.7

18.0

Adj BVPS (Rs)

Axis Bank

FY05

80.5

ROE (%)

18.8

P/E (x)
Adj. P/BV (x)

18.3

40.9

28.8

21.4

16.7

12.2

9.3

6.2

5.2

4.5

2.1

1.9

1.7

P/E

Source: Company, MF Global India Research Estimates

PBV

20

Financials
Profit & Loss Statement

Axis Bank

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

FY06

15,280
11,981
751
28,012
18,105
9,907
7,296
17,203
2,402
5,735
8,137
9,067
1,718
34
7,314
2,464
4,851

27,029
16,327
1,261
44,617
29,933
14,683
10,101
24,784
3,813
8,333
12,146
12,638
1,961
715
9,962
3,372
6,590

47,457
21,023
1,573
70,053
44,200
25,854
17,955
43,808
6,702
14,847
21,549
22,259
4,975
822
16,463
5,753
10,710

72,608
26,910
1,967
101,485
66,989
34,496
23,044
57,540
8,713
18,936
27,649
29,891
4,726
2,500
22,665
7,933
14,732

95,843
31,753
2,262
129,858
87,355
42,503
30,327
72,830
10,892
25,672
36,564
36,267
4,962
1,500
29,804
10,432
19,373

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
34.2
RoAE (%)
18.3
Pre-provision Operating ROA (%)
2.1
RoAB (%)
1.2
EPS (Rs.)
17.4
Dividend per share (Rs.)
3.5
Book Value (Rs.)
103.5
Adj BV (Rs.)
95.7
Revenue Analysis
Interest income on IBA (%)
6.7
Interest cost on IBL (%)
4.6
NIM on IBA / AWF (%)
2.38
Core fee Inc / AWF (%)
1.4
Portfolio gains / Total Inc (%)
8.2
Op.Exp / TI (%)
51.2
Op.Exp / AWF (%)
2.0
Employee exps / Op exps (%)
29.5
Tax / Pre-tax earnings (%)
33.7
Asset Quality
GNPAs / Gr Adv (%)
1.7
NNPAs / Net Adv (%)
1.0
Growth Ratio
Loans (%)
43.0
Investments (%)
50.8
Deposits (%)
26.5
Networth (%)
19.2
Net Int Income (%)
35.5
Non-fund based income (%)
40.4
Non-Int Exp (%)
40.0
Profit Before Tax (%)
44.9
Net profit (%)
44.6
Asset / Liability Profile
Avg CASA/ Deposits (%)
39.0
Avg Adv / Avg Dep (%)
51.8
Avg Invst / Avg Dep (%)
50.7
Incr Adv / Deposits (%)
79.7
Avg Cash / Avg Dep (%)
12.4
Capital Adequacy
Capital Adequacy Ratio:
11.1
Tier I (%)
7.3
Internal Capital Generation rate (%) 16.0
NNPAs to Equity (%)
7.6

Balance Sheet
Y/E Mar, Rs mn

FY06

FY07

FY08

FY09E

FY10E

Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets

36,418
223,142
219,244
5,677
12,829
497,311

69,183
368,765
275,391
6,732
12,502
732,572

125,042
596,611
346,130
9,229
18,766
1,095,778

140,707
835,256
436,579
12,229
21,581
1,446,352

159,344
1,061,625
509,307
14,229
24,819
1,769,323

Liabilities
Share capital
Reserves and Surplus
Hybrid Capital
Debt
Borrowing
Total Deposits
Other liab incld prov
Total Liabilities

2,787
26,069
0
17,886
26,809
401,780
21,979
497,311

2,816
31,206
4,140
30,875
51,956
589,629
21,951
732,572

3,577
84,130
3,986
30,308
56,240
878,040
39,498
1,095,778

3,595
95,918
4,140
30,914
79,714
1,185,846
46,225
1,446,352

3,613
111,909
4,140
31,532
83,700
1,486,997
47,432
1,769,323

Source: Company, MF Global India Research Estimates

FY07

FY08

FY09E

FY10E

40.2
21.0
2.1
1.1
23.4
4.5
120.8
111.3

36.6
17.6
2.4
1.2
29.9
6.0
245.2
238.2

31.9
15.7
2.4
1.2
41.0
7.0
276.8
267.1

33.7
18.0
2.3
1.2
53.6
8.0
319.7
302.4

7.5
5.3
2.46
1.5
2.5
50.2
2.0
31.4
33.8

7.9
5.4
2.90
1.7
5.3
51.8
2.4
31.1
34.9

8.2
5.9
2.8
1.8
1.1
48.6
2.2
31.5
35.0

8.3
6.0
2.7
1.9
0.7
50.6
2.3
29.8
35.0

1.1
0.7

0.7
0.4

0.9
0.4

1.1
0.6

65.3
25.6
46.8
17.9
48.2
58.3
49.3
36.2
35.9

61.8
25.7
48.9
157.8
76.1
65.9
77.4
65.2
62.5

40.0
26.1
35.1
13.5
33.4
42.5
28.3
37.7
37.6

27.1
16.7
25.4
16.1
23.2
32.9
32.2
31.5
31.5

39.8
58.9
49.9
77.5
10.7

43.2
65.2
42.3
79.0
13.2

45.6
68.8
37.9
77.5
12.9

45.7
70.3
35.4
75.2
11.2

11.6
6.4
18.4
7.8

13.7
10.2
25.2
2.8

12.0
8.9
13.9
3.5

10.6
7.9
16.6
5.4

21

Bank of India

December, 2008

COMPANY UPDATE

Strong earnings growth

BOI

260

(BOI IN / BOI.BO)
CMP Rs 276
Tgt Rs 400 (+45%)

Investment Rationale
Focus on corporate and international credit will translate into an healthy credit growth of ~23%
over FY08-10.
Requisite hike in PLR and re-negotiation of rate with sub-PLR clients will enable the bank to
maintain its margin.
Re-pricing of fee based products will continue the growth movement in CEB segment. The fee
based products are re-priced upward by an average 20%-25% effective from mid of August' 08.
The current account to witness increase in float following banks appointment as trustee bank for
pension scheme.
Lower provisioning will improve profitability. Improvement in the Asset quality (Net NPA at
0.52%) and a hedged investment portfolio (Investment in HTM at 83%) will reduce the
provision requirement towards NPA as well as investment depreciation, resulting in an
improvement in profitability.
We believe that the bank will not be affected by the new norms of accounting for farm loan
waiver issued by RBI as it has not made any add back of its provision towards farm loan waived
during Q1FY09.

Rel. to BSE

210
160
110
60
Apr-07

Oct-07

Apr-08

Oct-08

Company data
O/S shares :

525mn

Market cap (Rs) :

130bn

Market cap (USD) :

3.1bn

52 - wk Hi/Lo (Rs) :

465 / 189

Avg. daily vol. (3mth) :

3.9mn

Face Value (Rs) :

10

Share holding pattern, %


Promoters :

64.5

FII / NRI :

16.0

FI / MF :

11.9

Risks
Slow down in credit off take will have a negative impact on the earnings growth of the bank

Non Pro. Corp. Holdings :

1.1

Public & Others :

6.6

Valuation
Bank of India stands at very favorable position in the risk and reward matrix. The bank tends to
provide strong earnings growth on the back of steady credit growth, stable margin, revision of
services charges, hedged investment portfolio and better asset quality with 55% of credit to
large corporate. The bank has the potential to further increase its RoE with the increase in
leverage. The bank trades at price to book multiple of 1.4x FY09 ABV of Rs 200. We believe that
better asset quality and strong earnings growth will provide a strong upside from the current
level. We have a 1-yr price target of Rs400 (+45%).

Y/E Mar, Rs mn

FY09E

FY10E

NII

42,293

51,821

62,698

PAT

20,094

25,390

31,647

NIM %

FY08

2.7

2.7

2.7

156.6

196.7

250.6

RoE, %

24.4

23.5

25.4

EPS, Rs

38.2

48.3

60.2

ABV per share

P/ABV, x

1.8

1.4

1.1

22

Valuation Summary

Bank of India

Y/E Mar

FY05

FY06

FY07

FY08

FY09E

FY10E

Pre-prov ROE (%)

35.2

41.2

44.0

44.9

41.1

43.8

Pre-prov ROA (%)

1.7

1.9

1.9

2.4

2.3

2.3

Net Profit (Rs mn)

3,409

7,014

11,232

20,094

25,390

31,647

% growth

-66.2

105.8

60.1

78.9

26.4

24.6

7.0

14.4

23.0

38.2

48.3

60.2

79.0

104.8

156.6

196.7

250.6

20.6

24.4

23.5

25.4

EPS (Rs)
Adj BVPS (Rs)

56.2

ROE (%)

8.0

P/E (x)

39.5

19.2

12.0

7.2

5.7

4.6

4.9

3.5

2.6

1.8

1.4

1.1

Adj. P/BV (x)

14.8

P/E

Source: Company, MF Global India Research Estimates

PBV

23

Financials
Profit & Loss Statement

Bank of India

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

FY06

45,730
21,613
2,944
70,287
41,531
28,756
11,844
40,600
13,281
7,870
21,151
19,449
6,241
4,051
9,157
2,142
7,014

63,975
22,161
3,227
89,363
54,958
34,405
15,630
50,034
16,140
9,944
26,084
23,950
7,441
1,180
15,329
4,097
11,232

92,751
26,390
4,411
123,552
81,260
42,293
21,169
63,462
16,570
9,880
26,450
37,012
8,628
1,537
26,847
6,753
20,094

119,185
30,942
4,852
154,980
103,158
51,821
21,182
73,004
17,960
10,518
28,478
44,525
8,714
1,500
34,311
8,921
25,390

145,406
35,893
5,337
186,636
123,938
62,698
22,950
85,648
19,500
11,570
31,070
54,578
10,021
1,500
43,057
11,410
31,647

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
41.2
RoAE (%)
14.8
Pre-provision Operating ROA (%)
1.9
RoAB (%)
0.7
EPS (Rs.)
14.4
Dividend per share (Rs.)
3.4
Book Value (Rs.)
102.1
Adj BV (Rs.)
79.0
Revenue Analysis
Interest income on IBA (%)
7.0
Interest cost on IBL (%)
4.4
NIM on IBA / AWF (%)
2.9
Core fee Inc / AWF (%)
0.7
Portfolio gains / Total Inc (%)
2.9
Op.Exp / TI (%)
53.6
Op.Exp / AWF (%)
2.1
Employee exps / Op exps (%)
62.8
Tax / Pre-tax earnings (%)
23.4
Asset Quality
GNPAs / Gr Adv (%)
3.8
NNPAs / Net Adv (%)
1.5
Growth Ratio
Loans (%)
16.4
Investments (%)
12.6
Deposits (%)
19.3
Networth (%)
11.6
Net Int Income (%)
20.5
Non-fund based income (%)
9.7
Non-Int Exp (%)
3.2
Profit Before Tax (%)
98.3
Net profit (%)
105.8
Asset / Liability Profile
Avg CASA/ Deposits (%)
34.7
Avg Adv / Avg Dep (%)
66.6
Avg Invst / Avg Dep (%)
35.3
Incr Adv / Deposits (%)
60.0
Avg Cash / Avg Dep (%)
10.9
Capital Adequacy
Capital Adequacy Ratio:
11.5
Tier I (%)
7.0
Internal Capital Generation rate (%) 12.4
NNPAs to Equity (%)
19.5

Balance Sheet
Y/E Mar, Rs mn

FY06

FY07

FY08

FY09E

FY10E

Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets

114,460
174,055
177,174
207,450
252,640
651,737
851,159 1,134,763 1,415,896 1,738,936
324,646
363,583
427,876
496,517
572,235
8,100
7,893
24,261
24,761
25,761
23,800
21,480
24,226
24,396
23,929
1,122,743 1,418,170 1,788,300 2,169,021 2,613,501

Liabilities
Share capital
Reserves and Surplus
Hybrid Capital
Debt
Borrowing
Total Deposits
Other liab incld prov
Total Liabilities

4,881
4,881
5,259
5,259
5,259
43,384
52,578
83,004
105,318
133,273
0
3,695
9,971
10,589
13,269
27,685
43,895
39,488
44,488
46,488
58,939
66,208
71,724
80,331
88,115
943,807 1,203,717 1,506,484 1,862,823 2,259,660
42,473
41,702
54,737
60,211
67,437
1,122,743 1,418,170 1,788,300 2,169,021 2,613,501

Source: Company, MF Global India Research Estimates

FY07

FY08

FY09E

FY10E

44.0
20.6
1.9
0.9
23.0
4.0
120.8
104.8

44.9
24.4
2.3
1.3
38.2
4.0
201.4
156.6

41.1
23.5
2.3
1.3
48.3
5.0
210.3
196.7

43.8
25.4
2.3
1.4
60.2
6.0
263.4
250.6

7.2
4.7
2.8
0.7
4.3
54.4
2.1
61.9
26.7

7.9
5.5
2.7
0.7
6.1
44.2
1.7
62.6
25.2

8.0
5.7
2.7
0.7
2.5
40.0
1.5
63.1
26.0

8.0
5.6
2.7
0.7
1.6
36.9
1.3
62.8
26.5

2.5
0.8

1.7
0.5

1.7
0.5

1.8
0.4

30.6
12.0
27.5
18.3
19.6
26.9
23.3
67.4
60.1

33.3
17.7
25.2
79.6
22.9
28.9
1.4
75.1
78.9

24.8
16.0
23.7
4.4
22.5
11.0
7.7
27.8
26.4

22.8
15.2
21.3
25.3
21.0
11.1
9.1
25.5
24.6

33.3
67.9
32.0
76.7
13.4

31.2
71.8
29.2
93.7
13.0

30.9
74.4
27.4
78.9
11.4

31.1
75.2
25.9
81.4
11.2

11.6
6.5
19.2
10.7

12.0
7.7
31.3
5.6

11.2
8.2
25.8
6.4

11.1
8.5
25.8
4.9

24

BOB

Bank of Baroda (BOB IN / BOB.BO)

December, 2008

COMPANY UPDATE

Core business is shaping well

Rel. to BSE

250

CMP Rs 265
Target Rs 350 (+32%)

Investment Rationale
The core business is shaping up well after the make over process. Credit is expected to grow at
a CAGR of 22% over FY08-10 driven by growth in corporate, agriculture and international
segment.
The international operation has gained traction and makes up 20% of advances. The rise in
corporate operations has enabled the bank to accelerate its fee income, which is expected to
grow at 19% over FY08-10.
We believe, increase in leverage will improve the RoE whereas RoAs are likely to remain stable
due to the upward pressure on operating expenses.
The capital adequacy is at a comfortable position of 13% (tier I: 7.8%) with enough headroom
available in the tier II category for it to comfortably comply with the new Basel II guidelines.
The bank is not adequately leveraged which we believe would improve its RoE as it increases its
leverage to support its future growth.
Some of the strategic investments made by the bank can unlock value for the investors.
We have an Outperformer rating and a price target of Rs 498
Risks
Low credit off take to impact earnings growth
Slippages is a concern area
Valuation
At CMP of Rs265 the stock trades at 0.9x FY09E ABV of Rs282 and 0.8x FY10E ABV of Rs325.
Focus on corporate business, thrust on building international franchisee, higher turnaround of
branch resources and focus on fee based income will drive earnings.

210
170
130
90
50
Apr-07

Oct-07

Apr-08

Oct-08

Company data
O/S shares :

364mn

Market cap (Rs) :

91.5bn

Market cap (USD) :

2.2bn

52 - wk Hi/Lo (Rs) :

479 / 188

Avg. daily vol. (3mth) :

1.6mn

Face Value (Rs) :

10

Share holding pattern, %


Promoters :

53.8

FII / NRI :

19.5

FI / MF :

18.5

Non Pro. Corp. Holdings :

1.5

Public & Others :

6.7

Y/E Mar, Rs mn

FY09E

FY10E

NII

39,118

46,831

55,865

PAT

14,355

17,554

20,862

NIM %

FY08

2.5

2.4

2.4

247.1

282.4

323.9

RoE, %

14.6

15.0

15.8

EPS, Rs

39.3

48.0

57.1

ABV per share

P/ABV, x

1.1

0.9

0.8

25

Valuation Summary

Bank of Baroda

Y/E Mar

FY05

FY06

FY07

FY08

FY09E

FY10E

Pre-prov ROE (%)

39.9

30.2

31.8

30.8

28.2

28.5

Pre-prov ROA (%)

2.5

2.0

2.1

1.9

1.7

1.6

Net Profit (Rs mn)

6,855

8,270

10,265

14,355

17,554

20,862

% growth

-29.1

20.6

24.1

39.8

22.3

18.8

EPS (Rs)

23.3

22.6

28.1

39.3

48.0

57.1

Adj BVPS (Rs)

162.0

194.3

217.1

247.1

282.4

323.9

ROE (%)

12.7

12.3

12.4

14.6

15.0

15.8

P/E (x)

11.4

11.7

9.4

6.7

5.5

4.6

Adj. P/BV (x)

1.64

1.36

1.22

1.07

0.9

0.8

P/E

Source: Company, MF Global India Research Estimates

PBV

26

Financials
Profit & Loss Statement

Bank of Baroda

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

FY06

37,778
29,064
3,658
70,500
38,751
31,749
12,418
44,166
15,238
8,610
23,848
20,319
3,640
7,759
8,920
651
8,270

59,374
27,689
5,064
92,126
54,266
37,861
13,818
51,679
16,441
9,003
25,443
26,236
3,951
5,742
16,543
6,278
10,265

84,130
27,373
6,632
118,135
79,017
39,118
20,510
59,628
18,038
11,305
29,343
30,286
6,347
1,867
22,072
7,716
14,355

109,369
32,848
7,295
149,511
102,680
46,831
18,855
65,686
20,202
12,436
32,638
33,048
5,712
940
26,396
8,843
17,554

133,430
36,789
7,368
177,587
121,723
55,865
19,191
75,055
22,222
15,136
37,358
37,697
5,826
500
31,371
10,509
20,862

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
30.2
RoAE (%)
12.3
Pre-provision Operating ROA (%)
2.0
RoAB (%)
0.8
EPS (Rs.)
22.6
Dividend per share (Rs.)
5.7
Book Value (Rs.)
214.6
Adj BV (Rs.)
194.3
Revenue Analysis
Interest income on IBA (%)
7.0
Interest cost on IBL (%)
4.2
NIM on IBA / AWF (%)
3.2
Core fee Inc / AWF (%)
0.5
Portfolio gains / Total Inc (%)
7.3
Op.Exp / TI (%)
58.0
Op.Exp / AWF (%)
2.4
Employee exps / Op exps (%)
63.9
Tax / Pre-tax earnings (%)
7.3
Asset Quality
GNPAs / Gr Adv (%)
4.0
NNPAs / Net Adv (%)
0.9
Growth Ratio
Loans (%)
38.0
Investments (%)
(5.0)
Deposits (%)
15.2
Networth (%)
39.4
Net Int Income (%)
13.8
Non-fund based income (%)
(2.9)
Non-Int Exp (%)
11.1
Profit Before Tax (%)
2.3
Net profit (%)
20.6
Asset / Liability Profile
Avg CASA/ Deposits (%)
37.0
Avg Adv / Avg Dep (%)
55.4
Avg Invst / Avg Dep (%)
42.2
Incr Adv / Deposits (%)
132.6
Avg Cash / Avg Dep (%)
12.9
Capital Adequacy
Capital Adequacy Ratio:
13.7
Tier I (%)
11.0
Internal Capital Generation rate (%) 11.5
NNPAs to Equity (%)
6.6

Balance Sheet
Y/E Mar, Rs mn
Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets

FY06

FY07

FY08

FY09E

FY10E

134,546
182,804
222,993
270,591
300,987
599,118
836,209 1,067,013 1,306,053 1,581,970
362,790
364,442
454,833
528,924
617,579
9,207
10,888
24,270
26,697
29,367
28,264
37,119
26,886
29,574
32,532
1,133,925 1,431,462 1,795,995 2,161,841 2,562,434

Liabilities
Share capital
3,655
3,655
3,655
3,655
3,655
Reserves and Surplus
72,539
80,706
91,593
105,298
121,883
Rev Res / Foreign Exch Gains
2,250
2,139
15,191
15,191
15,191
Debt
22,700
27,191
54,227
74,227
80,227
Borrowing
48,022
11,426
39,270
56,848
76,182
Total Deposits
943,441 1,258,795 1,532,280 1,863,179 2,217,337
Other liab incld prov
41,318
47,551
59,779
43,443
47,958
Total Liabilities
1,133,925 1,431,462 1,795,995 2,161,841 2,562,434

Source: Company, MF Global India Research Estimates

FY07

FY08

FY09E

FY10E

31.8
12.4
2.0
0.8
28.1
6.9
236.6
217.1

30.8
14.6
1.9
0.9
39.3
9.3
302.1
247.1

28.2
15.0
1.7
0.9
48.0
9.0
339.6
282.4

28.5
15.8
1.6
0.9
57.1
10.0
385.0
323.9

7.4
4.7
3.1
0.6
2.7
50.6
2.1
64.6
37.9

7.6
5.4
2.5
0.5
9.8
54.0
1.9
61.5
35.0

7.8
5.7
2.4
0.5
4.0
51.7
1.7
61.9
33.5

7.7
5.6
2.4
0.5
2.7
51.1
1.6
59.5
33.5

2.5
0.6

1.9
0.5

1.9
0.4

2.1
0.5

39.6
0.5
33.4
10.3
19.3
32.6
6.7
85.4
24.1

27.6
24.8
21.7
27.7
3.3
21.9
15.3
33.4
39.8

22.4
16.3
21.6
12.4
19.7
7.6
11.2
19.6
22.3

21.1
16.8
19.0
13.4
19.3
5.4
14.5
18.8
18.8

35.0
63.1
33.0
75.2
14.4

31.9
66.7
29.4
84.4
14.5

31.5
68.6
29.0
72.2
14.5

31.9
69.4
28.1
77.9
14.0

11.8
8.7
10.2
5.8

12.9
7.6
13.0
4.5

12.3
7.4
15.0
4.6

11.8
7.4
15.8
5.1

27

HDFC Bank

Operational Excellence

HDFC Bank

230

(HDFCB IN / HDBK.BO)
CMP Rs 984
Target Rs 1503 (+53%)

Rel. to BSE

180

December, 2008

COMPANY UPDATE

130

Investment Rationale
The liquidity squeeze has returned the pricing power to the banks.
Credit growth on a comparable basis to be around 25%-30% during FY09.
Fee income stream to improve by Q4FY09 with the restoration of the third party distribution
business, retail and SME business of erstwhile CBoP.
The operating efficiency to show improvement gradually. Cost to income ratio which on a
blended basis stands at 55%-56% is expected to stabilize at 50% level over a period of 18-24
months.
CASA proportion to return to the pre-merger level of 48%-50% over a period of 18-24 months.
NIMs are expected to remain at the current level of ~4% during FY09 and expected to increase
with the improvement in CASA proportion.
Slippage to increase for few quarters as the two-wheeler and personal loan portfolio of erstwhile
CBoP matures in next 2 years. The GNPA is expected to increase marginally from 1.5% to 1.7%
over few quarters.
The retail portfolio of HDFC bank (excluding CBoP) remains healthy. Amongst the retail the most
vulnerable segment like credit card and personal loan portfolio has also not witnessed stress.
Large part of the these portfolios are to the banks internal customer, with decent track record.
Risks
Integrating the 400 odd branches of erstwhile CBoP stands as a biggest risk of the bank.
The rapid rise in credit off-take in the retail segment could result in slippages.
Valuation
At CMP of Rs984 the stock trades at 2.6x 1-yr forward ABV of Rs372 and 2.3x 2-yr forward ABV
of Rs424. HDFC Bank has shown remarkable consistency in its earnings growth. HDFC Bank's
success story is attributable to the innovative and proactive approach of its high quality
management. The bank has a strong funding base of 45% low cost deposits. This is reflected in
the premium valuation that it enjoys on the bourses.

80
Apr-07

Oct-07

Apr-08

Oct-08

Company data
O/S shares :

425mn

Market cap (Rs) :

382bn

Market cap (USD) :

9bn

52 - wk Hi/Lo (Rs) :

1825 / 792

Avg. daily vol. (3mth) :

2.5mn

Face Value (Rs) :

10

Share holding pattern, %


Promoters :

19.4

FII / NRI :

49.2

FI / MF :

9.5

Non Pro. Corp. Holdings :

10.4

Public & Others :

11.6

Y/E Mar, Rs mn

FY08 FY09E

FY10E

NII

52,279 83,129 105,640

PAT

15,902 23,027

NIM %

30,201

4.8

4.6

4.8

316.0

372.6

423.2

RoE, %

17.7

15.6

15.7

EPS, Rs

44.9

49.3

64.7

ABV per share

P/ABV, x

3.1

2.6

2.3

28

Valuation Summary

HDFC Bank

Y/E Mar

FY05

FY06

FY07

FY08

FY09E

FY10E

Pre-prov ROE (%)

37.3

40.3

43.7

42.0

35.4

34.3

Pre-prov ROA (%)

3.0

3.3

3.2

3.5

2.9

3.0

Net Profit (Rs mn)

6,656

8,708

11,415

15,902

23,027

30,201

% growth

30.6

30.8

31.1

39.3

44.8

31.2

EPS (Rs)

21.5

27.8

35.7

44.9

49.3

64.7

Adj BVPS (Rs)

143.9

164.3

195.1

316.0

372.6

423.2

ROE (%)

18.5

17.7

19.5

17.7

15.6

15.7

P/E (x)
Adj. P/BV (x)

45.8

35.4

27.5

21.9

20.0

15.2

6.8

6.0

5.0

3.1

2.6

2.3

P/E

Source: Company, MF Global India Research Estimates

PBV

29

Financials
Profit & Loss Statement

HDFC Bank

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

FY06

27,002
16,317
1,435
44,753
19,295
25,458
11,240
36,698
4,868
12,043
16,911
19,787
4,798
2,452
12,538
3,830
8,708

43,342
20,575
2,563
66,479
31,795
34,685
15,162
49,847
7,769
16,439
24,208
25,639
8,610
638
16,392
4,977
11,415

69,667
28,720
2,762
101,150
48,871
52,279
22,832
75,110
13,014
24,443
37,456
37,654
12,160
2,683
22,811
6,909
15,902

119,156
39,014
4,396
162,567
79,437
83,129
32,253
115,383
23,117
40,127
63,243
52,139
15,238
2,533
34,369
11,342
23,027

164,436
45,647
5,187
215,270
109,630
105,640
37,681
143,321
28,202
49,275
77,477
65,844
17,981
2,786
45,077
14,875
30,201

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
40.3
RoAE (%)
17.7
Pre-provision Operating ROA (%)
3.2
RoAB (%)
1.44
EPS (Rs.)
27.8
Dividend per share (Rs.)
5.5
Book Value (Rs.)
169.2
Adj BV (Rs.)
164.3
Revenue Analysis
Interest income on IBA (%)
7.4
Interest cost on IBL (%)
3.7
NIM on IBA / AWF (%)
4.2
Core fee Inc / AWF (%)
1.9
Portfolio gains / Total Inc (%)
(1.4)
Op.Exp / TI (%)
45.4
Op.Exp / AWF (%)
2.8
Employee exps / Op exps (%)
28.8
Tax / Pre-tax earnings (%)
30.5
Asset Quality
GNPAs / Gr Adv (%)
1.5
NNPAs / Net Adv (%)
0.4
Growth Ratio
Loans (%)
37.1
Investments (%)
47.6
Deposits (%)
53.3
Networth (%)
17.3
Net Int Income (%)
43.2
Non-fund based income (%)
64.0
Non-Int Exp (%)
55.8
Profit Before Tax (%)
28.0
Net profit (%)
30.8
Asset / Liability Profile
Avg CASA/ Deposits (%)
56.6
Avg Adv / Avg Dep (%)
63.8
Avg Invst / Avg Dep (%)
52.6
Incr Adv / Deposits (%)
48.2
Avg Cash / Avg Dep (%)
12.2
Capital Adequacy
Capital Adequacy Ratio:
11.4
Tier I (%)
8.6
Internal Capital Generation rate (%) 15.5
NNPAs to Equity (%)
2.9

Balance Sheet
Y/E Mar, Rs mn

FY06

FY07

FY08

FY09E

FY10E

Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets

69,190
350,613
293,158
8,551
13,553
735,064

90,467
147,783
215,313
262,712
469,448
634,269 1,113,342 1,441,570
321,573
505,840
611,965
784,793
9,667
11,751
19,149
23,936
21,202
32,122
44,598
51,288
912,356 1,331,766 2,004,368 2,564,299

Liabilities
Share capital
Reserves and Surplus
Debt
Borrowing
Total Deposits
Other liab incld prov
Total Liabilities

3,131
49,864
17,020
28,585
566,232
70,231
735,063

3,194
3,544
4,671
4,671
61,138
111,428
174,887
199,897
30,826
32,491
42,491
62,491
28,154
44,789
68,336
102,504
700,018 1,024,434 1,630,473 2,090,154
87,027
115,081
83,510
104,581
912,356 1,331,766 2,004,368 2,564,299

Source: Company, MF Global India Research Estimates

FY07

FY08

FY09E

FY10E

43.7
19.5
3.1
1.43
35.7
7.0
201.4
195.1

42.0
17.7
3.4
1.47
44.9
8.5
324.4
316.0

35.4
15.6
3.1
1.28
49.3
9.0
384.4
372.6

34.3
15.7
2.9
1.36
64.7
9.5
438.0
423.2

9.3
5.2
4.8
1.8
3.3
51.5
3.5
34.7
30.3

9.1
5.6
4.6
1.7
0.1
54.9
3.5
36.6
33.0

9.7
5.5
4.8
1.6
0.1
54.1
3.5
36.4
33.0

1.4
0.4

1.4
0.5

1.9
0.5

2.4
0.5

33.9
9.7
23.6
21.4
36.2
34.7
43.2
30.7
31.1

35.1
57.3
46.3
78.7
50.7
28.8
54.7
39.2
39.3

75.5
21.0
59.2
56.2
59.0
57.3
68.8
50.7
44.8

29.5
28.2
28.2
13.9
27.1
16.9
22.5
31.2
31.2

55.5
63.8
48.5
88.8
12.6

54.7
63.1
48.0
50.8
13.8

49.5
68.1
42.1
79.0
14.4

47.1
67.2
37.5
71.4
12.8

13.0
8.3
17.3
3.2

13.6
10.3
20.0
2.6

11.2
8.8
16.4
3.1

11.2
8.6
14.3
3.4

8.3
4.6
4.4
1.9
(1.4)
47.9
3.0
32.1
30.4

30

ICICI Bank

December, 2008

COMPANY UPDATE

(ICICIBC IN / ICBK.BO)

Buy
CMP Rs 422
Target Rs 795 (+89%)

The recent global financial meltdown has raised concerns on the banks overseas assets, hence
significantly widening the valuation discount to its peer group. The market has become risk
averse due to the collapse of some of the bigger names in the financial world. The banks
overseas subsidiaries has an asset base of US$ 12bn (11% of the total asset base) and a
combined networth of US$ 790mn. The bank is adequately capitalized with CRAR above 13%.
We believe that the bank is currently trading below its trough valuation of Rs 540 per share. We
see the overhang persisting through the current market dislocation and the potential of a
bounce-back much faster when the dust settles down. Our sensitivity analysis shows that the
worst case per share valuation of the bank is Rs 540, where we have assumed the value of its
overseas subsidiaries at zero. At the CMP of Rs 422, the stock is trading at 1.1x FY09 ABV of Rs
404. The core book is currently trading at a historic low of 0.66x 1-yr forward ABV of
Rs346 (assuming a 1-yr forward value of Rs 193 per share for its subsidiaries).
Investment Rationale
Corporate lending and international credit will be the key growth drivers, which are expected to
grow at a CAGR of 15% over FY08-10.
The bank aims to increase the CASA proportion to the industry average of ~28% by FY10.
Growth in fee income will continue to surpass balance sheet growth.
The non-banking business will continue to witness a high growth rate. The life insurance
business is expected to grow at a CAGR of ~30% over FY08-10.
The bank has undertaken measures to contain costs and this would keep the operating cost low.
The bank is adequately capitalized to take on the underlying growth in the Indian economy. We
believe that the increase in leverage will improve the return ratios.
Risks
The asset quality remains a concern. But, we believe that it is to do with the banks focus on
non-collateralized lending, which are high-risk, high-yield businesses.
Further tightening of liquidity will have a negative impact on banks cost of funds.

200

IC IC I Bank

Rel. to BSE

150
100
50
0
Apr-07

Oct-07

Apr-08

Oct-08

Company data
O/S shares :

1113mn

Market cap (Rs) :

412bn

Market cap (USD) :

8.3bn

52 - wk Hi/Lo (Rs) :

1465 / 282

Avg. daily vol. (3mth) :

18.2mn

Face Value (Rs) :

10

Share holding pattern, %


FII / NRI :

65.6

FI / MF :

19.5

Non Pro. Corp. Holdings :

6.9

Public & Others :

7.9

Y/E Mar, Rs mn

FY08 FY09E

FY10E

NII

73,041 88,904 106,671

PAT

41,577 42,465

NIM %
ABV per share

48,695

2.1

2.2

2.3

389.4

400.1

427.9

RoE, %

11.6

8.8

9.5

EPS, Rs

37.4

37.8

42.9

P/ABV, x

1.1

1.1

1.0

31

Valuation Summary & SOTP


Y/E Mar

FY05

FY06

FY07

FY08

FY09E

FY10E

Pre-prov ROE (%)

27.7

26.3

24.9

22.3

17.6

19.3

Pre-prov ROA (%)

2.2

2.4

2.1

2.3

2.1

2.1

Net Profit (Rs mn)

20,053

25,400

31,089

41,577

42,465

48,695

23.9

26.7

22.4

33.7

2.1

14.7

% growth

ICICI Bank

EPS (Rs)

27.2

28.5

34.6

37.4

37.8

42.9

Adj BVPS (Rs)

154.3

241.7

252.1

389.4

400.1

427.9

Adj BVPS (Rs) (banking business)

137.0

223.0

228.4

356.4

363.0

390.1

ROE (%)

18.9

14.3

13.2

11.6

8.8

9.5

P/E (x)

15.5

14.8

12.2

11.3

11.2

9.8

Adj. P/BV (x)

2.73

1.74

1.67

1.08

1.05

0.99

Normal case valuation

Share holding
Business
of ICICI
Valuation Rs bn

ICICI Bank

Valuation/
share

638.8

502

Valuation Criteria
DDM

ICICI Securities ltd

99.9%

26

23

ICICI Prudential life insurance company ltd

74.0%

281

187

ICICI Lombard General insurance company ltd

74.0%

17

11

15 times FY09E PAT of Rs 1.1bn

ICICI AMC

51.0%

54

25

8% FY10E AUM of Rs680bn

ICICI Venture capital fund management company ltd

100.0%

10

42

38

Other banking subsidiary including HFC's

15 times FY09E PAT of Rs 1.7 bn


15 times FY09E NBAP of Rs 18.75 bn

8% of FY09E AUM of Rs 124bn


1x FY09 ABV

795

Source: Company, MF Global India Research Estimates

32

Worst case Valuation


Share holding
Business
of ICICI
Valuation Rs bn

ICICI Bank

ICICI Bank

Valuation/
share
345

Valuation Criteria
one time 1-yr forward ABV of Rs 345

ICICI Securities ltd

99.9%

ICICI Prudential life insurance company ltd

74.0%

238

159

ICICI Lombard General insurance company ltd

74.0%

12

10 times 1-yr forward PAT of Rs 1.15bn

ICICI AMC

51.0%

15

2% of 1-yr forward AUM of Rs764bn

ICICI Venture capital fund management company ltd

100.0%

2% of 1-yr forward AUM of Rs 142bn

1 times 1-yr forward ABV of Rs 9bn

HFC
Overseas banking subsidiaries

10 times 1-yr forward of Rs 950mn (yoy decline of 20%)


15 times 1-yr forward NBAP of Rs 15.8bn (14% NBAP margin)

nil

Total

537

Rolling 1-yr forward P/ABV for core banking business

Source: Company, MF Global India Research Estimates

33

ICICI Bank

Valuation discount / premium to peer group

The bank is trading at a significant discount to its peer group. The discount is an all-time low compared to Axis
bank. The discount has also widened significantly compared to HDFC Bank.

Source: Company, MF Global India Research Estimates

34

Financials
Profit & Loss Statement

ICICI Bank

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

FY06

96,850
36,927
4,068
137,844
95,974
41,870
49,831
91,701
10,823
34,199
45,022
46,679
7,947
7,767
30,966
5,565
25,400

160,963
49,885
9,094
219,943
163,585
56,358
69,279
125,637
16,167
50,738
66,906
58,731
21,593
671
36,467
5,378
31,089

226,010
74,660
7,213
307,883
234,842
73,041
88,108
161,149
20,789
60,753
81,542
79,607
27,010
2,036
50,561
8,984
41,577

271,212
85,859
8,295
365,366
276,462
88,904
87,571
176,475
23,699
68,077
91,777
84,698
32,412
500
51,786
9,322
42,465

317,318
94,445
9,125
420,888
314,217
106,671
95,704
202,374
27,254
76,292
103,546
98,828
38,894
550
59,384
10,689
48,695

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
26.3
RoAE (%)
14.3
Pre-provision Operating ROA (%)
2.2
RoAB (%)
1.3
EPS (Rs.)
28.5
Dividend per share (Rs.)
8.5
Book Value (Rs.)
253.5
Adj BV (Rs.)
241.7
RoE of banking business
15.3
Revenue Analysis
Interest income on IBA (%)
7.0
Interest cost on IBL (%)
5.4
NIM on IBA / AWF (%)
2.1
Core fee Inc / AWF (%)
1.8
Portfolio gains / Total Inc (%)
8.2
Op.Exp / TI (%)
53.1
Op.Exp / AWF (%)
2.3
Employee exps / Op exps (%)
24.0
Tax / Pre-tax earnings (%)
18.0
Asset Quality
GNPAs / Gr Adv (%)
1.5
NNPAs / Net Adv (%)
0.7
Growth Ratio
Loans (%)
59.9
Investments (%)
38.7
Deposits (%)
64.6
Networth (%)
74.9
Net Int Income (%)
47.5
Non-fund based income (%)
49.4
Non-Int Exp (%)
36.1
Profit Before Tax (%)
22.5
Net profit (%)
26.7
Asset / Liability Profile
Avg CASA/ Deposits (%)
23.1
Avg Adv / Avg Dep (%)
86.9
Avg Invst / Avg Dep (%)
47.4
Incr Adv / Deposits (%)
83.8
Avg Cash / Avg Dep (%)
11.2
Capital Adequacy
Capital Adequacy Ratio:
13.4
Tier I (%)
9.2
Internal Capital Generation rate (%) 14.2
NNPAs to Equity (%)
4.7

Balance Sheet
Y/E Mar, Rs mn

FY06

FY07

FY08

FY09E

FY10E

Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets

170,402
1,461,631
737,017
39,807
105,032
2,513,889

371,213
380,411
448,885
536,841
1,958,656 2,256,161 2,594,585 2,986,462
941,996 1,149,411 1,275,157 1,423,071
39,234
41,089
49,307
59,168
135,482
170,879
160,572
160,077
3,446,581 3,997,951 4,528,506 5,165,619

Liabilities
Share capital
Reserves and Surplus
Debt
Borrowing
Total Deposits
Other liab incld prov
Total Liabilities

8,898
213,162
101,444
385,219
1,664,678
136,989
2,513,889

8,993
11,127
11,238
11,350
234,139
453,575
480,263
511,694
184,491
182,839
201,122
221,235
512,560
656,484
686,643
788,481
2,325,511 2,470,279 2,878,659 3,343,354
167,827
195,483
220,262
236,505
3,446,581 3,997,951 4,528,506 5,165,619

Source: Company, MF Global India Research Estimates

FY07

FY08

FY09E

FY10E

24.9
13.2
2.0
1.1
34.6
10.0
274.2
252.1
14.7

22.3
11.6
2.1
1.2
37.4
11.0
420.8
389.4
12.0

17.6
8.8
2.0
1.0
37.8
12.0
440.5
400.1
10.2

19.3
9.5
2.0
1.1
42.9
13.0
463.9
427.9
11.1

7.8
6.3
2.0
1.8
9.7
58.4
2.4
24.2
14.7

8.7
7.4
2.1
2.0
13.2
57.3
2.3
25.5
17.8

9.0
7.7
2.2
2.0
4.1
54.2
2.3
25.8
18.0

9.1
7.6
2.3
2.0
0.7
51.5
2.2
26.3
18.0

2.1
1.0

3.4
1.6

4.2
1.8

4.5
1.4

34.0
27.8
39.7
9.3
34.6
35.6
48.6
17.8
22.4

15.2
22.0
6.2
89.8
29.6
19.2
21.9
38.6
33.7

15.0
10.9
16.5
5.7
21.7
16.3
12.6
2.4
2.1

15.1
11.6
16.1
6.4
20.0
16.9
12.8
14.7
14.7

22.0
84.1
42.1
75.2
13.6

23.8
85.4
43.6
205.5
15.7

26.2
87.2
45.3
82.9
15.5

27.1
85.8
43.4
84.3
15.8

11.3
7.4
9.9
8.1

14.0
11.8
12.1
7.5

12.9
10.7
6.2
9.2

12.5
8.9
6.9
7.8

35

Indian Overseas Bk (IOB IN / IOBK.BO)

December, 2008

COMPANY UPDATE

Fundamentally strong

210

CMP Rs 70
Tgt Rs 166(+138%)

Investment Rationale
The bank expects credit growth of 25% for FY09; though it seems on the higher side but the
demand flow from infrastructure and large corporate is still strong which is expected to drive the
credit growth.
Pressure on the margins; expected to stabilize at 3% level down from 3.3% last owing to rise in
cost of deposit and pressure on maintaining CASA ratio.
Further, on the assets side, the Bank is focusing on the relatively high yielding retail, SME,
infrastructure and agriculture segments to sustain the yields on its advances portfolio.
Focus on non interest Income- IOB has taken timely steps to improve its non-interest income
stream by resorting to third party distribution of financial products. The recovery from written
off portfolio is expected to remain strong. The bank recovered around Rs 1600 mn last year from
written off portfolio. The size of the portfolio currently stands at Rs5.5bn.
The investment portfolio is well hedged currently with 85% of SLR in HTM category. The bank
has shifted investment from AFS to HTM during 1st week of April' 08, thus insulating itself to the
large extent from MTM losses and also one time hit on account of shifting the portfolio. The
duration of AFS portfolio now stands at 2 years (4.5 yrs previously).
The bank plans to raise Tier II capital to augment its capital adequacy which currently stands at
11.96%. It has head room of Rs25bn in Tier II segment and Rs5bn in Tier I segment.
Risks
The banks focus on SME and mid-sized corporate lending might lead to increase in the slippages
Valuation
At CMP of Rs70 the stock trades at 0.7x FY09E ABV of Rs97.9 and 0.6x FY10E ABV of Rs119.
The key strength of IOB has been its focus on the SME/SSI sector that enables the bank to
register higher NIMs and better returns. The stability in NIMs will provide the steady growth in
NII, in line with credit growth. The increasing proportion of investment in HTM category will also
reduce the provisioning requirement going forward, thus increasing the earning visibility.

IOB

Rel. to BSE

170
130
90
50
Apr-07

Oct-07

Apr-08

Oct-08

Company data
O/S shares :

545mn

Market cap (Rs) :

35.8bn

Market cap (USD) :

0.8bn

52 - wk Hi/Lo (Rs) :

227 / 60

Avg. daily vol. (3mth) :

0.6mn

Face Value (Rs) :

10

Share holding pattern, %


Promoters :

61.2

FII / NRI :

19.0

FI / MF :

6.5

Non Pro. Corp. Holdings :

1.0

Public & Others :


Y/E Mar, Rs mn

12.3
FY09E

FY10E

NII

26,795

30,404

35,142

PAT

12,023

13,726

15,104

NIM %

FY08

3.0

2.7

2.6

ABV per share

80.4

97.7

115.8

RoE, %

27.2

25.7

23.5

EPS, Rs

22.1

25.2

27.7

P/ABV, x

0.9

0.7

0.6

36

Valuation Summary

Indian Overseas Bank

Y/E Mar

FY05

FY06

FY07

FY08

FY09E

FY10E

Pre-prov ROE (%)

56.1

52.4

43.5

45.3

36.3

38.2

Pre-prov ROA (%)

2.7

2.8

2.2

2.2

1.7

1.8

Net Profit (Rs mn)

6,513

7,833

10,084

12,023

13,726

15,104

% growth

27.0

20.3

28.7

19.2

14.2

10.0

EPS (Rs)

12.0

14.4

18.5

22.1

25.2

27.7

Adj BVPS (Rs)

38.8

52.0

66.3

80.4

97.7

115.8

ROE (%)

28.0

27.2

28.1

27.2

25.7

23.5

P/E (x)

5.8

4.8

3.8

3.2

2.8

2.5

Adj. P/BV (x)

1.8

1.3

1.0

0.9

0.7

0.6

P/E

Source: Company, MF Global India Research Estimates

PBV

37

Financials
Profit & Loss Statement

Indian Overseas Bank

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

FY06

26,291
16,733
1,039
44,063
23,391
20,672
7,282
27,954
8,936
3,952
12,888
15,066
1,938
3,272
9,856
2,023
7,833

39,010
17,033
2,278
58,321
32,713
25,608
3,870
29,478
9,311
4,567
13,878
15,600
2,168
-302
13,734
3,650
10,084

55,220
22,357
2,106
79,683
52,888
26,795
8,076
34,871
9,497
5,356
14,853
20,018
1,910
1,561
16,547
4,524
12,023

71,786
24,592
2,527
98,905
68,501
30,404
5,575
35,979
10,447
6,122
16,568
19,410
2,578
-2,100
18,932
5,206
13,726

88,297
27,543
2,906
118,746
83,604
35,142
8,427
43,569
11,909
7,113
19,022
24,547
2,965
750
20,833
5,729
15,104

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
52.4
RoAE (%)
27.2
Pre-provision Operating ROA (%)
2.7
RoAB (%)
1.5
EPS (Rs.)
14.4
Dividend per share (Rs.)
2.6
Book Value (Rs.)
58.3
Adj BV (Rs.)
52.0
Revenue Analysis
Interest income on IBA (%)
8.2
Interest cost on IBL (%)
4.8
NIM on IBA / AWF (%)
3.8
Core fee Inc / AWF (%)
0.7
Portfolio gains / Total Inc (%)
9.1
Op.Exp / TI (%)
50.3
Op.Exp / AWF (%)
2.4
Employee exps / Op exps (%)
69.3
Tax / Pre-tax earnings (%)
20.5
Asset Quality
GNPAs / Gr Adv (%)
3.5
NNPAs / Net Adv (%)
0.7
Growth Ratio
Loans (%)
37.9
Investments (%)
(0.4)
Deposits (%)
14.1
Networth (%)
23.4
Net Int Income (%)
11.4
Non-fund based income (%)
16.0
Non-Int Exp (%)
8.4
Profit Before Tax (%)
1.4
Net profit (%)
20.3
Asset / Liability Profile
Avg CASA/ Deposits (%)
39.3
Avg Adv / Avg Dep (%)
60.3
Avg Invst / Avg Dep (%)
41.1
Incr Adv / Deposits (%)
152.1
Avg Cash / Avg Dep (%)
9.1
Capital Adequacy
Capital Adequacy Ratio:
13.0
Tier I (%)
8.5
Internal Capital Generation rate (%) 26.4
NNPAs to Equity (%)
7.1

Balance Sheet
Y/E Mar, Rs mn

FY06

FY07

FY08

FY09E

FY10E

Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets

37,072
89,793
103,413
128,658
168,076
347,562 470,603
604,238
753,997
912,337
194,935 246,938
292,892
340,231
402,936
4,577
5,107
5,586
5,686
5,936
9,431
10,128
12,468
21,524
28,867
593,578 822,568 1,018,597 1,250,096 1,518,152

Liabilities
Share capital
Reserves and Surplus
Debt
Borrowing
Total Deposits
Other liab incld prov
Total Liabilities

5,448
5,448
25,102
33,276
11,000
26,250
5,366
28,962
507,091 690,022
36,346
34,630
593,578 822,568

5,448
5,448
5,448
41,979
52,837
64,754
26,250
31,250
36,250
37,286
46,608
53,599
845,172 1,074,124 1,313,088
30,272
34,529
39,212
992,347 1,250,096 1,518,152

Source: Company, MF Global India Research Estimates

* Inclusive of amortisation costs

FY07

FY08

FY09E

FY10E

43.5
28.1
2.2
1.5
18.5
3.5
73.2
66.3

45.3
27.2
2.2
1.3
22.1
3.5
89.1
80.4

36.3
25.7
1.7
1.2
25.2
4.5
107.0
97.7

38.2
23.5
1.8
1.1
27.7
5.0
128.9
115.8

8.4
5.1
3.69
0.7
8.8
51.2
2.0
67.1
26.6

8.8
6.4
2.96
0.6
7.0
45.6
1.6
63.9
27.3

8.9
6.6
2.73
0.6
1.4
46.7
1.5
63.1
27.5

8.8
6.5
2.60
0.6
1.2
44.2
1.4
62.6
27.5

2.4
0.6

1.6
0.6

1.8
0.7

2.0
0.8

35.4
26.7
36.1
25.6
23.9
(69.7)
7.7
39.3
28.7

28.4
18.6
22.5
21.7
4.6
286.2
7.0
20.5
19.2

24.8
16.2
27.1
20.0
13.5
(12.2)
11.6
14.4
14.2

21.0
18.4
22.2
20.4
15.6
56.2
14.8
10.0
10.0

36.9
66.4
36.9
67.3
10.6

34.0
68.6
35.2
86.1
12.6

33.3
69.5
33.0
65.4
12.1

33.1
68.5
31.1
66.3
12.4

13.3
8.2
26.8
6.5

12.0
7.9
26.1
7.5

11.4
7.5
23.8
8.7

11.0
7.3
21.2
10.1

38

Punjab National Bk (PNB IN / PNBK.BO)

December, 2008

COMPANY UPDATE

Core earnings to bounce back

PNB

160

CMP Rs 481
Tgt Rs 574 (+19%)

Investment Rationale
The accelerated growth in advances without a commensurate growth in low cost deposits had
impacted its margins earlier. The reset of its credit target to lower level and focus on low cost
deposits will enable the bank to maintain its margins. We expect a credit growth of 22% over
FY07-10.
The bank has de-risked its investment book with transfer of securities to the held-to-maturity
(HTM) category. This will reduce the vulnerability of reported earnings to rising bond yields, thus
improving the predictability of the earnings. The investment book in AFS category now stands at
29% of total investment with duration of this category at 3 yrs.
Higher proportion of business under CBS coverage provides the opportunity for growth in Fee
and Commission Income. This also helps control operating costs and brings down Cost/ Income
Ratio. Currently 83% of banks total business is covered under CBS.
Some of the strategic investments made by the bank can unlock value for the investors.

Rel. to BSE

140
120
100
80
60
Apr-07

Oct-07

Apr-08

Oct-08

Company data
O/S shares :

315mn

Market cap (Rs) :

141.9bn

Market cap (USD) :

2.9bn

52 - wk Hi/Lo (Rs) :

720 / 330

Avg. daily vol. (3mth) :

1.2mn

Face Value (Rs) :

10

Share holding pattern, %


Promoters :

57.8

FII / NRI :

18.6

Risks
Asset quality has been a concern for the bank with huge rise in GNPA during H1FY08. But we
believe most of the rise in NPA are technical in nature and would subside going forward.

FI / MF :

17.8

Valuation
At CMP of Rs481 the stock trades at 1.3x FY09E ABV of Rs356 and 1.1x FY10E ABV of Rs447.
We expect the bank to report a steady credit growth of 22% over FY07-10. The cost / income
ratio will decline as the braches expand with the same headcount. We expect core earnings to
bounce back resulting in an improvement in return ratios.

Y/E Mar, Rs mn

Non Pro. Corp. Holdings :

1.2

Public & Others :

4.6
FY09E

FY10E

NII

55,342

63,688

76,835

PAT

20,488

25,883

30,621

NIM %
ABV per share

FY08

3.1

3.0

3.0

301.1

357.3

426.8

RoE, %

18.0

19.4

19.6

EPS, Rs

65.0

82.1

97.1

P/ABV, x

1.6

1.3

1.1

39

Valuation Summary

Punjab National Bank

Y/E Mar
Pre-prov ROE (%)

FY05

FY06

FY07

FY08

FY09E

FY10E

32.5

32.3

36.5

35.2

33.2

34.5

Pre-prov ROA (%)

1.9

2.1

2.4

2.3

2.1

2.1

Net Profit (Rs mn)

14,110

14,398

15,401

20,488

25,883

30,621

% growth

27.3

2.0

7.0

33.0

26.3

18.3

EPS (Rs)

44.7

45.7

48.8

65.0

82.1

97.1

Adj BVPS (Rs)

235.1

264.2

281.7

301.1

357.3

426.8

ROE (%)

21.4

17.2

15.5

18.0

19.4

19.6

P/E (x)
Adj. P/BV (x)

10.8

10.5

9.9

7.4

5.9

5.0

2.0

1.8

1.7

1.6

1.3

1.1

P/E

Source: Company, MF Global India Research Estimates

PBV

40

Sum of the Parts Valuation

Punjab National Bank

Ownership
Banking business

Valuation of the Value per share


business (Rs bn)
(Rs)

Valuation Criteria

100%

163

518

DDM

74%

12

1x FY 08 book value of Rs 5.24 bn

100%

1x FY 08 book value of Rs 1.62 bn

UTI AMC

25%

20

16

Principal PNB AMC

30%

Subsidiaries
PNB Gilt
PNB Housing Finance

Associate
UTI AMC valued at 4% of Current AUM of Rs 450 bn (Equity portion 45%)
Principal PNB AMC valued at 4% of current AUM of Rs 150 bn
(Equity portion 25% of AUM)
Relative valuation
Eton-Reliance MF deal valued at 13% of AUM (Equity portion 45-50% )
Rebecco-Canbank MF deal valued at 10% of AUM (Equity portion 25-30%)
UBS-Standard Chartered MF deal valued at 5% of AUM (Equity portion 10-15%)
Total

556

Source: Company, MF Global India Research Estimates

41

Financials
Profit & Loss Statement

Punjab National Bank

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

53,415
37,409
2,124
92,948
49,174
43,774
14,782
58,556
21,150
9,082
30,232
28,324
-505
8,477
20,353
5,955
14,398

76,439
32,878
3,040
112,357
60,229
52,128
17,304
69,432
23,524
9,738
33,262
36,170
7,518
6,961
21,691
6,291
15,401

104,391
36,113
2,146
142,650
87,309
55,342
19,976
75,317
24,615
10,639
35,255
40,062
5,156
1,947
32,959
12,472
20,488

132,576
41,169
2,168
175,913
112,225
63,688
19,508
83,196
27,077
11,800
38,877
44,319
6,187
-500
38,632
12,749
25,883

159,091
47,344
2,385
208,820
131,985
76,835
20,180
97,015
29,785
13,352
43,137
53,878
7,424
750
45,703
15,082
30,621

Balance Sheet
Y/E Mar, Rs mn

FY06

FY07

Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets

247,917
746,274
422,963
10,302
25,217
1,452,673

Liabilities
Share capital
Reserves and Surplus
Hybrid Capital
Debt
Borrowing
Total Deposits
Other liab incld prov
Total Liabilities

3,153
87,587
0
19,350
66,872
1,198,784
73,903
1,452,673

FY08

FY09E

FY10E

156,455
965,965
464,189
10,098
27,517
1,624,225

188,307
229,541
1,195,016 1,461,022
554,091
646,636
23,155
25,471
29,634
30,227
1,990,204 2,392,897

280,094
1,740,165
754,930
28,018
30,831
2,834,039

3,153
98,263
0
36,948
19,489
1,401,052
62,382
1,624,225

3,153
3,153
104,673
125,394
11,000
15,000
50,648
55,648
54,466
59,912
1,667,820 2,013,581
83,087
104,952
1,990,204 2,392,897

3,153
150,484
15,000
60,648
65,903
2,404,799
118,895
2,834,039

Source: Company, MF Global India Research Estimates

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
RoAE (%)
Pre-provision Operating ROA (%)
RoAB (%)
EPS (Rs.)
Dividend per share (Rs.)
Book Value (Rs.)
Adj BV (Rs.)
Revenue Analysis
Interest income on IBA (%)
Interest cost on IBL (%)
NIM on IBA / AWF (%)
Core fee Inc / AWF (%)
Portfolio gains / Total Inc (%)
Op.Exp / TI (%)
Op.Exp / AWF (%)
Employee exps / Op exps (%)
Tax / Pre-tax earnings (%)
Asset Quality
GNPAs / Gr Adv (%)
NNPAs / Net Adv (%)
Growth Ratio
Loans (%)
Investments (%)
Deposits (%)
Networth (%)
Net Int Income (%)
Non-fund based income (%)
Non-Int Exp (%)
Profit Before Tax (%)
Net profit (%)
Asset / Liability Profile
Avg CASA/ Deposits (%)
Avg Adv / Avg Dep (%)
Avg Invst / Avg Dep (%)
Incr Adv / Deposits (%)
Avg Cash / Avg Dep (%)
Capital Adequacy
Capital Adequacy Ratio:
Tier I (%)
Internal Capital Generation rate (%)
NNPAs to Equity (%)

FY06

FY07

FY08

FY09E

FY10E

32.3
17.2
2.1
1.1
45.7
6.0
280.4
264.2

36.5
15.5
2.4
1.0
48.8
10.0
314.0
281.7

35.2
18.0
2.2
1.2
65.0
13.0
373.7
301.1

33.2
19.4
2.0
1.2
82.1
14.0
439.1
357.3

34.5
19.6
2.1
1.2
97.1
15.0
518.4
426.8

7.0
4.1
3.3
0.7
8.5
56.0
2.3
70.0
29.3

7.5
4.4
3.5
0.8
5.7
50.6
2.2
70.7
29.0

8.1
5.4
3.1
0.9
6.2
49.7
2.0
69.8
37.8

8.2
5.7
3.0
0.8
3.3
48.3
1.8
69.6
33.0

8.2
5.6
3.0
0.7
1.7
45.2
1.7
69.0
33.0

4.2
0.3

3.5
0.8

2.8
0.6

2.8
0.7

3.0
0.8

29.4
9.7
16.9
11.3
19.1
33.1
10.0
6.6
7.0

23.7
19.4
19.0
18.0
6.2
14.6
6.0
51.9
33.0

22.3
16.7
20.7
16.7
15.1
8.4
10.3
17.2
26.3

19.1
16.7
19.4
17.4
20.6
10.3
11.0
18.3
18.3

47.4
63.3
34.1
108.6
15.6

44.4
68.2
33.2
85.9
11.2

43.3
70.1
32.6
76.9
11.4

43.8
70.3
31.7
71.4
11.5

13.5
9.0
16.2
6.1

12.2
8.8
19.9
7.3

11.7
8.5
20.1
8.1

23.5
(18.6)
15.7
14.9
14.4
(32.1)
(14.7)
6.8
2.0
47.6
57.3
42.2
87.6
16.1
12.0
10.1
15.9
2.2

12.3
8.9
13.5
7.0

42

State Bank of India (SBIN IN / SBI.BO)

December, 2008

COMPANY UPDATE

Value unlocking and consolidation

SBI

260

CMP Rs 1238
Tgt 1634 Rs (+30%)

Investment Rationale
The core business will witness a growth driven by stability in NIMs, restoration of growth in fee
income and cost rationalization. Lower provision for investment depreciation will drive the
profitability.
Credit growth is expected to be ~22% through FY10 driven by mid-sized corporate,
international business and agri-lending.
Improved technology and moderate credit growth will restore the CASA deposit to +40% level.
Roll out of CBS and large branch penetration will enable the bank to compete aggressively for
non government business. We expect the banks CEB income to increase at a CAGR of 15%
through FY10 on the back of growth in corporate and international business.
Non-banking subsidiary will continue to register strong growth. The infusion of further capital
will enable the bank to continue growing. The fund infusion to SBI life could be around Rs 20bn.
Currently, 40% of the corporate accounts are rated, which when increased to 100% would
provide a capital release, thus improving the CRAR by 150 bps. This would enable the bank to
increase its leverage translating to improvement in return ratios.

Rel. to BSE

220
180
140
100
60
Apr-07

Sep-07

Feb-08

Jul-08

Company data
O/S shares :

635mn

Market cap (Rs) :

742bn

Market cap (USD) :

15bn

52 - wk Hi/Lo (Rs) :

2429 / 966

Avg. daily vol. (3mth) :

4.6mn

Face Value (Rs) :

10

Share holding pattern, %


Promoters :

59.4

FII / NRI :

18.2

FI / MF :

12.5

Risks
Asset quality has remained fairly stable. The decline in top rated client from 12% to 10% in last
one and half years, warrants increase in provisioning requirement. Hence we have assumed
higher provision for NPLs in our estimate.

Non Pro. Corp. Holdings :

3.3

Public & Others :

6.5

NII

235,518

267,820 310,866

Valuation
At CMP of Rs1238 the stock trades at 1.2x 1-yr forward ABV of Rs979 and 1.1x 2-yr forward ABV
of Rs1124. The core business will witness a strong growth driven by stability in NIMs,
restoration of growth in fee income and cost rationalization. Along with SBI, its Banking
Subsidiaries (7 Associate Banks) and other subsidiaries are also recording a decent growth.
Positive news flow relating to value unlocking in associate bank including non banking
subsidiaries will act as a trigger.

PAT

89,606

108,798 125,534

Y/E Mar, Rs mn

NIM %
ABV per share

FY08

2.7

FY09E

FY10E

2.5

2.5

864

991

1,129

RoE, %

16.7

16.0

16.0

EPS, Rs

142

172

199

P/ABV, x

1.4

1.2

1.1

43

Valuation Summary (Consolidated)

State Bank of India

Y/E Mar

FY05

FY06

FY07

FY08

FY09E

FY10E

Pre-prov ROE (%)

89.8

42.4

34.7

34.1

30.5

30.9

Pre-prov ROA (%)

5.0

2.4

2.0

2.1

2.0

1.9

Net Profit

54,645

55,298

63,644

89,606

108,798

125,534

% growth

#DIV/0!

1.2

15.1

40.8

21.4

15.4

EPS (Rs)

103.8

105.1

120.9

141.9

172.3

198.8

Adj BVPS (Rs)

541.6

617.9

718.6

864.3

991.2

1129.3

Adj BVPS (Rs) (banking business)

536.0

609.0

704.0

841.0

944.0

1072.0

ROE (%)

32.3

15.3

15.4

16.7

16.0

16.0

P/E (x)
Adj. P/BV (x)

11.9

11.8

10.2

8.7

7.2

6.2

2.3

2.0

1.7

1.4

1.2

1.1

P/E

Source: Company, MF Global India Research Estimates

PBV

44

Sum of the Parts Valuation


Ownership

Value per share

State Bank of India

"SBI and its banking subsidiaries "

1394

Comment
DDM

SBI Life

74.0%

164

17 times FY09 NBAP of Rs8.24bn

SBI cards

60.0%

19

20 times FY09 PAT of Rs0.98bn

SBI Fund Mgt.

63.0%

24

7% of FY09 AUM of Rs350bn

SBI factors

54.0%

20 times FY09 PAT of Rs 0.23bn

SBI Caps

86.2%

29

10 times FY09 PAT of Rs2.12 bn

1,634

Source: Company, MF Global India Research Estimates

45

Financials (Standalone)
Profit & Loss Statement

State Bank of India

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

176,963
160,993
21,840
359,796
203,904
155,891
43,850
199,741
81,230
36,021
117,251
82,490
5,530
7,899
69,061
24,995
44,067

248,392
104,562
19,470
372,423
221,841
150,582
67,653
218,234
79,326
38,909
118,235
99,999
20,187
3,909
75,903
30,490
45,413

352,281
119,442
17,780
489,503
319,291
170,212
86,949
257,162
77,859
48,227
126,086
131,076
25,679
1,008
104,389
37,098
67,291

440,351
136,163
19,558
596,073
399,764
196,309
96,789
293,099
84,087
52,399
136,486
156,612
32,612
-3,200
127,200
44,520
82,680

528,422
155,226
22,492
706,140
475,050
231,090
114,595
345,685
92,496
60,163
152,659
193,025
34,243
500
158,282
55,399
102,883

Balance Sheet
Y/E Mar, Rs mn

FY08

FY09E

FY10E

Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets

FY06

FY07

445,600
519,687
674,663
2,616,415 3,373,365 4,167,682
1,672,591 1,541,692 1,957,994
27,529
28,189
33,735
176,560
202,720
381,189
4,938,695 5,665,652 7,215,263

817,562
5,123,298
2,189,067
36,735
287,622
8,454,285

940,196
6,134,125
2,455,750
39,735
400,977
9,970,783

Liabilities
Share capital
Reserves and Surplus
Debt
Borrowing
Total Deposits
Other liab incld prov
Total Liabilities

5,263
5,263
6,315
271,178
307,723
484,012
49,858
144,307
187,818
306,412
397,033
517,274
3,837,340 4,394,692 5,424,962
468,644
399,247
569,807
4,938,695 5,665,652 7,215,263

6,315
549,700
150,255
569,002
6,507,151
626,788
8,454,285

6,315
634,114
170,255
625,902
7,766,797
702,327
9,970,783

Source: Company, MF Global India Research Estimates

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
RoAE (%)
Pre-provision Operating ROA (%)
RoAB (%)
EPS (Rs.)
Dividend per share (Rs.)
Book Value (Rs.)
Adj BV (Rs.)
Revenue Analysis
Interest income on IBA (%)
Interest cost on IBL (%)
NIM on IBA / AWF (%)
Core fee Inc / AWF (%)
Portfolio gains / Total Inc (%)
Op.Exp / TI (%)
Op.Exp / AWF (%)
Employee exps / Op exps (%)
Tax / Pre-tax earnings (%)
Asset Quality
GNPAs / Gr Adv (%)
NNPAs / Net Adv (%)
Growth Ratio
Loans (%)
Investments (%)
Deposits (%)
Networth (%)
Net Int Income (%)
Non-fund based income (%)
Non-Int Exp (%)
Profit Before Tax (%)
Net profit (%)
Asset / Liability Profile
Avg CASA/ Deposits (%)
Avg Adv / Avg Dep (%)
Avg Invst / Avg Dep (%)
Incr Adv / Deposits (%)
Avg Cash / Avg Dep (%)
Capital Adequacy
Capital Adequacy Ratio
Tier I (%)
Internal Capital Generation rate (%)
NNPAs to Equity (%)

FY06

FY07

FY08

FY09E

FY10E

31.9
17.0
1.7
1.0
83.7
14.0
525.3
432.0

33.9
15.4
1.9
0.9
86.3
14.0
594.7
494.8

32.6
16.8
2.0
1.1
106.6
21.5
776.5
658.9

29.9
15.8
2.0
1.1
130.9
23.0
880.5
757.1

32.3
17.2
2.1
1.2
162.9
25.0
1,014.2
869.7

8.0
5.7
2.8
1.1
3.8
50.9
2.1
61.8
35.5

8.0
6.0
2.6
1.1
0.6
46.8
1.8
61.6
35.0

8.0
6.0
2.6
1.1
0.5
44.4
1.7
60.6
35.0

3.1
1.8

3.0
1.5

3.0
1.5

23.5
27.0
23.4
56.7
13.0
23.1
6.6
37.5
48.2

22.9
11.8
19.9
13.4
15.3
27.0
8.2
21.9
22.9

19.7
12.2
19.4
15.2
17.7
22.0
11.8
24.4
24.4

47.2
74.5
35.6
77.1
12.2

46.5
75.5
34.8
88.3
12.5

46.7
76.5
32.5
80.2
12.3

12.6
8.5
17.2
15.1

11.3
7.6
13.9
14.0

10.9
7.4
15.7
14.2

7.8
5.0
3.4
1.0
3.0
60.5
2.6
69.3
36.2
4.0
1.9
29.3
(17.3)
1.9
14.8
11.8
12.7
7.6
5.9
2.4
43.7
58.0
48.6
836.9
11.0
11.9
9.4
15.2
17.7

7.3
4.9
3.0
1.0
(0.3)
54.0
2.3
67.1
40.2
3.0
1.6
28.9
(7.8)
14.5
13.2
(3.4)
20.2
0.8
9.9
3.1
47.6
70.3
39.0
135.8
11.7
12.3
8.0
13.8
16.8

46

Financials (Consolidated)
Profit & Loss Statement

State Bank of India

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

176,963
160,993
21,840
359,796
203,904
155,891
43,850
199,741
81,230
36,021
117,251
82,490
5,530
7,899
69,061
24,995
44,067

248,392
104,562
19,470
372,423
221,841
150,582
67,653
218,234
79,326
38,909
118,235
99,999
20,187
3,909
75,903
30,490
45,413

352,281
119,442
17,780
489,503
319,291
170,212
86,949
257,162
77,859
48,227
126,086
131,076
25,679
1,008
104,389
37,098
67,291

440,351
136,163
19,558
596,073
399,764
196,309
96,789
293,099
84,087
52,399
136,486
156,612
15,407
14,820
126,385
44,235
82,150

528,422
155,226
22,492
706,140
475,050
231,090
114,595
345,685
92,496
60,163
152,659
193,025
33,896
0
159,129
55,695
103,434

Balance Sheet
Y/E Mar, Rs mn

FY06

FY07

FY08

FY09E

FY10E

Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets

573,365
724,769
890,284
1,068,341
1,285,420
3,743,168 4,872,860 6,032,219
7,359,308
8,831,169
2,345,986 2,238,411 2,827,790
3,000,045
3,509,919
39,563
39,994
46,628
48,959
51,407
265,855
275,237
471,727
495,313
520,079
6,968,324 8,151,744 10,272,695 11,971,966 14,197,994

Liabilities
Share capital
Reserves and Surplus
Hybrid Capital
Debt
Borrowing
Total Deposits
Other liab incld prov
Total Liabilities

5,263
5,263
6,315
6,315
6,315
366,804
420,094
606,049
697,855
804,920
0
19,724
36,945
63,265
94,577
90,708
202,236
279,754
321,717
369,974
369,749
486,618
660,232
726,255
798,880
5,440,243 6,362,729 7,764,165
9,431,203 11,321,983
681,254
638,181
898,955
702,013
774,468
6,968,324 8,132,020 10,272,695 11,971,966 14,197,994

Source: Company, MF Global India Research Estimates

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
RoAE (%)
Pre-provision Operating ROA (%)
RoAB (%)
EPS (Rs.)
Dividend per share (Rs.)
Book Value (Rs.)
Adj BV (Rs.)
Revenue Analysis
Interest income on IBA (%)
Interest cost on IBL (%)
NIM on IBA / AWF (%)
Core fee Inc / AWF (%)
Portfolio gains / Total Inc (%)
Op.Exp / TI (%)
Op.Exp / AWF (%)
Employee exps / Op exps (%)
Tax / Pre-tax earnings (%)
Asset Quality
GNPAs / Gr Adv (%)
NNPAs / Net Adv (%)
Growth Ratio
Loans (%)
Investments (%)
Deposits (%)
Networth (%)
Net Int Income (%)
Non-fund based income (%)
Non-Int Exp (%)
Profit Before Tax (%)
Net profit (%)
Asset / Liability Profile
Avg CASA/ Deposits (%)
Avg Adv / Avg Dep (%)
Avg Invst / Avg Dep (%)
Incr Adv / Deposits (%)
Avg Cash / Avg Dep (%)
Capital Adequacy
Capital Adequacy Ratio
Tier I (%)
Internal Capital Generation rate (%)
NNPAs to Equity (%)

FY06

FY07

FY08

FY09E

FY10E

42.4
15.3
2.3
0.9
105.1
14.0
734.1
617.9

34.7
15.4
1.9
0.9
120.9
14.0
840.3
718.6

34.1
16.7
2.0
1.0
141.9
21.5
1,001.9
864.3

30.5
16.0
1.9
1.0
172.3
23.0
1,152.1
991.2

30.9
16.0
1.8
1.0
198.8
25.0
1,327.2
1,129.3

7.8
5.0
3.2
1.0
3.6
55.3
2.8
61.2
36.3

7.5
5.0
3.0
1.0
2.9
59.8
2.8
53.0
38.6

8.1
6.1
2.7
1.0
7.0
60.6
2.7
43.7
34.1

8.1
6.2
2.5
1.0
3.0
57.7
2.5
43.6
34.0

8.1
6.1
2.5
1.0
2.0
55.8
2.3
44.2
34.0

3.6
1.7

2.7
1.3

2.6
1.5

2.9
1.4

3.2
1.4

23.8
26.3
22.0
43.0
8.9
17.4
19.7
29.8
40.8

22.0
6.1
21.5
15.0
13.7
25.0
10.1
21.1
21.4

20.0
17.0
20.0
15.2
16.1
22.0
10.6
15.4
15.4

42.2
75.2
35.9
82.7
11.4

41.7
75.7
33.9
79.6
11.4

41.6
75.6
31.4
77.8
11.3

12.7
8.7
17.9
13.7

12.2
8.7
15.4
14.0

12.0
8.5
15.6
14.9

30.4
(12.8)
7.5
14.1
11.1
11.3
21.9
8.0
1.2
41.1
60.5
48.0
230.3
10.3
12.6
9.6
14.7
15.8

30.2
(4.6)
17.0
14.5
(0.7)
24.8
13.6
21.2
15.1
42.9
70.8
38.8
122.5
11.0
12.4
8.1
15.1
14.5

47

Union Bank of India

COMPANY UPDATE

Focusing on quality growth

240

(UNBK IN/UNBK.BO)
CMP Rs 157
Tgt Rs 161 (+17%)

Investment Rationale
Credit to register a moderate growth of 21% over FY08-10, depicting the conscious move by the
bank to focus on quality growth without compromise on margins .
Non fund based income is expected to register healthy growth over FY08-10 driven by growth in
fee income and forex income. The banks non interest income growth can surprise on positive
side in case of strong recovery in written off portfolio.
Initiated move in non banking business like life insurance, wealth management etc. We believe
that this move will take some time before any benefit starts accruing.
The bank is mulling the possibility of rights issue, but it still has head room of Rs 45bn in both
hybrid tier I and tier II.

Union Bank

Rel. to BSE

200
160
120
80
40
Apr-07

Oct-07

Apr-08

Oct-08

Company data
O/S shares :

505mn

Market cap (Rs) :

72.3bn

Market cap (USD) :

1.5bn

52 - wk Hi/Lo (Rs) :

250 / 96

Avg. daily vol. (3mth) :

1.7mn

December, 2008

Face Value (Rs) :

Risks
The bank has been able to control its NPAs over past few years. Any deterioration in asset
quality can lower the earnings growth. Moreover high duration of AFS portfolio pose risk in case
of more than expected rise in yields.
Valuation
At CMP of Rs157 the stock trades at 1.2x FY09E ABV of Rs 136 and 0.9x FY10E ABV of Rs170.
We believe the re-balancing exercise initiated by the bank will ease margin pressure and
improve asset quality. This will increase the earning visibility and improve return ratios.

10

Share holding pattern, %


Promoters :

55.4

FII / NRI :

19.4

FI / MF :

11.9

Non Pro. Corp. Holdings :

1.6

Public & Others :


Y/E Mar, Rs mn

11.8
FY08 FY09E

FY10E

NII

30,864 34,834

41,293

PAT

13,872 16,899

20,636

NIM %

2.8

2.7

2.6

108.8

136.1

169.5

RoE, %

22.1

21.0

21.5

EPS, Rs

27.5

33.5

40.9

ABV per share

P/ABV, x

1.4

1.2

0.9

48

Valuation Summary

Union Bank of India

Y/E Mar

FY05

FY06

FY07

FY08

FY09E

FY10E

Pre-prov ROE (%)

42.4

35.9

41.1

41.2

34.4

33.4

Pre-prov ROA (%)

2.2

1.9

2.2

2.4

2.1

2.0

Net Profit (Rs mn)

7,190

6,747

8,448

13,872

16,899

20,636

1.0

-6.2

25.2

64.2

21.8

22.1

EPS (Rs)

15.6

13.4

16.7

27.5

33.5

40.9

Adj BVPS (Rs)

45.2

64.5

81.8

108.8

136.1

169.5

22.1

21.0

21.5

% growth

ROE (%)

24.1

P/E (x)
Adj. P/BV (x)

17.2

17.3

10.1

11.8

9.4

5.7

4.7

3.8

3.5

2.4

1.9

1.4

1.2

0.9

P/E

Source: Company, MF Global India Research Estimates

PBV

49

Financials
Profit & Loss Statement

Union Bank of India

Y/E Mar, Rs mn
Interest on Loans
Interest on Investments
Others
Total Interest Earned
Total Interest Expended
Net Interest Income
Total non interest income
Total Income
Personnel Expenses
Other Expenses
Total Op expenses
Net Inc (Loss) before prov
Provision for NPAs
Provision for Invst deprn
Net Inc (Loss) before tax
Provision for Income Tax
Net Profit

Ratio Analysis
FY06

FY07

FY08

FY09E

FY10E

FY06

37,598
19,541
1,498
58,637
34,894
23,743
4,940
28,683
8,668
5,356
14,024
14,659
2,567
3,150
8,941
2,195
6,747

50,718
21,133
1,971
73,822
45,920
27,902
6,865
34,768
8,737
6,022
14,759
20,008
4,660
1,550
13,798
5,350
8,448

67,310
25,159
2,004
94,473
63,609
30,864
10,870
41,733
8,453
7,477
15,930
25,803
6,650
510
18,643
4,772
13,872

82,118
29,311
2,305
113,733
78,899
34,834
9,972
44,806
9,129
7,985
17,114
27,692
4,160
1,000
22,532
5,633
16,899

98,542
34,147
2,650
135,339
94,046
41,293
10,085
51,378
10,225
9,186
19,411
31,967
3,952
500
27,515
6,879
20,636

Earnings and Valuation Ratios


Pre-provision Operating RoAE (%)
35.9
RoAE (%)
17.2
Pre-provision Operating ROA (%)
1.8
RoAB (%)
0.9
EPS (Rs.)
13.4
Dividend per share (Rs.)
4.0
Book Value (Rs.)
90.2
Adj BV (Rs.)
64.5
Revenue Analysis
Interest income on IBA (%)
7.5
Interest cost on IBL (%)
4.7
NIM on IBA / AWF (%)
3.0
Core fee Inc / AWF (%)
0.5
Portfolio gains / Total Inc (%)
3.4
Op.Exp / TI (%)
50.6
Op.Exp / AWF (%)
1.8
Employee exps / Op exps (%)
61.8
Tax / Pre-tax earnings (%)
24.5
Asset Quality
GNPAs / Gr Adv (%)
3.9
NNPAs / Net Adv (%)
1.6
Growth Ratio
Loans (%)
33.1
Investments (%)
13.7
Deposits (%)
19.8
Networth (%)
26.1
Net Int Income (%)
15.0
Non-fund based income (%)
(21.2)
Non-Int Exp (%)
(0.5)
Profit Before Tax (%)
46.2
Net profit (%)
(6.2)
Asset / Liability Profile
Avg CASA/ Deposits (%)
32.4
Avg Adv / Avg Dep (%)
65.5
Avg Invst / Avg Dep (%)
36.6
Incr Adv / Deposits (%)
108.2
Avg Cash / Avg Dep (%)
9.5
Capital Adequacy
Capital Adequacy Ratio:
11.4
Tier I (%)
7.3
Internal Capital Generation rate (%) 15.1
NNPAs to Equity (%)
18.3

Balance Sheet
Y/E Mar, Rs mn
Assets
Cash & Bal with RBI
Loans, Adv & Int accrued
Investments
Fixed Assets (Net)
Other assets
Total Assets
Liabilities
Share capital
Reserves and Surplus
Hybrid Capital
Debt
Borrowing
Total Deposits
Other liab incld prov
Total Liabilities

FY06

FY07

FY08

FY09E

FY10E

63,905
84,264
533,800
623,864
265,876
287,201
8,104
8,250
19,573
23,195
891,258 1,026,775

100,978
125,580
743,483
887,291
348,042
408,188
22,004
24,004
26,223
24,813
1,240,731 1,469,875

156,235
1,060,200
486,972
24,504
23,855
1,751,767

5,051
5,051
35,874
42,282
0
3,000
27,700
31,200
39,744
42,155
743,102
854,658
35,131
43,866
891,258 1,026,779

5,051
5,051
51,182
65,126
5,000
8,000
32,500
37,500
47,605
49,635
1,044,710 1,246,234
37,440
41,185
1,240,733 1,469,875

5,051
82,216
10,000
42,500
51,869
1,497,783
45,303
1,751,767

Source: Company, MF Global India Research Estimates

FY07

FY08

FY09E

FY10E

41.1
17.3
2.1
0.9
16.7
4.1
102.7
81.8

41.2
22.1
2.3
1.3
27.5
4.0
145.5
108.8

34.4
21.0
2.0
1.3
33.5
5.0
172.9
136.1

33.4
21.5
2.0
1.3
40.9
6.0
206.5
169.5

7.9
5.3
3.0
0.5
3.2
43.8
1.6
59.2
38.8

8.6
6.2
2.8
0.7
7.5
41.0
1.5
53.1
25.6

8.7
6.4
2.7
0.7
2.3
39.1
1.3
53.3
25.0

8.7
6.4
2.6
0.6
1.2
38.2
1.2
52.7
25.0

3.0
1.0

2.2
0.2

2.3
0.2

2.4
0.2

16.9
8.0
15.0
13.9
17.5
45.0
5.2
54.3
25.2

19.2
21.2
22.2
41.6
10.6
37.9
7.9
35.1
64.2

19.3
17.3
19.3
18.8
12.9
12.6
7.4
20.9
21.8

19.5
19.3
20.2
19.5
18.5
5.7
13.4
22.1
22.1

33.4
70.0
34.6
80.7
9.3

34.5
70.1
33.4
62.9
9.8

34.6
69.6
33.0
71.4
9.9

34.6
69.3
32.6
68.7
10.3

12.8
7.8
15.6
11.6

11.7
7.0
25.0
1.7

11.3
6.8
25.6
1.7

11.3
6.9
25.1
1.6

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Thanking You

Disclosures and Disclaimers


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