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IndiaEquityResearch

Financials

September04,2014

Banks

Returningintothe'normal'zone

SectorReport

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


banksinFY16.RecedingpressureonNPLsfromFY16fonwards,revival
in core revenues led by NIM, is likely to drive RoA expansion of PSU
banksbyupto25bpoverFY15fFY17f.Despitethesharprally,P/Bof
PSUbanksis15%belowthe5yearmean.Thetrendincontractionof
discount to new banks, which besgan about an year ago, is likely to
sustain.WereinitiatecoverageonBOB,BOI,PNB,SBIN,AXSB,HDFCB,
ICICIBCandIIB.Thepotentialupsideofupto21%inPSUbanksexceeds
thereturninnewprivatebanksover12months.Wepreferbankswith
superior capitalization and asset quality among the PSU banks. BOB,
ICICIBCandHDFCBareourpreferredpicks.

BankofBaroda(BOBIN)
Rating
CMP(INR)

BUY
886.0

TargetPrice(INR)
52wkH/L(INR)

1,076
1,010/450

BankofIndia(BOIIN)
Rating

ADD
292.0
312
357/132

CMP(INR)
TargetPrice(INR)
52wkH/L(INR)
PunjabNationalBank(PNBIN)
Rating
CMP(INR)
TargetPrice(INR)

BUY
961.1
1,182

52wkH/L(INR)
StateBankofInida(SBININ)

1,068/400

Rating
CMP(INR)

BUY
2,505

TargetPrice(INR)
52wkH/L(INR)

2925
2,835/1,455

AxisBank(AXSBIN)
Rating

ADD

CMP(INR)
TargetPrice(INR)
52wkH/L(INR)
HDFCBank(HDFCBIN)
Rating

413.7
455
415/153

CMP(INR)
TargetPrice(INR)
52wkH/L(INR)
ICICIBank(ICICIBCIN)

856.7
1,004
865/557

BUY

LargeupgradetoGDP,byupto3%duringFY09FY10wasaccompaniedbyc2.4x
expansionintheP/BofPSUbanks.Currentconsensusforecastfactorsrevivalin
GDP by 1.6% to 6.3% in FY16; there was 20bp upgrade to the FY16 GDP
forecastinthelast3months.PSUbankscouldbealargerbeneficiaryofGDP
revival due to larger exposure to the corporate sector compared to the new
private banks. While high food inflation is likely to keep the interest rates
elevated in CY14, potential cut in FY16 coupled with the uptrend in GDP is
expectedtobeapleasantmixforbanks.

StressonassetqualityintensebutincrementalNPLmoderating
The 4quarter moving average for incremental NPL ratio declined during the
last four quarters by 0.56bp. This is in sharp contrast to those in the new
private banks, which had an increase of 10bp during Jun13Jun14. While the
NPLstressislikelytostayinFY15f,weassumeanimprovementinincremental
NPL during FY15fFY17f, by upto 0.72%. However, recovery in NPL ratios and
NPLprovisionsmaybedelayedduetosubduedloangrowthandfallinthePCR.

RiseinNIMmayrevivecorerevenuesofPSUbanksoverFY15fFY17f

Rating
CMP(INR)

ADD
1,581

TargetPrice(INR)
52wkH/L(INR)

1,780
1,619/777

IndusIndBank(IIBIN)
Rating
CMP(INR)

ADD
616.3

TargetPrice(INR)
52wkH/L(INR)

665
623/342

Valuations

PotentialriseinGDPandcutinratesapleasantmixforbanksinFY16

P/E
FY15f

FY16f

P/B(Adj.)
FY15f
FY16f

BOB
BOI

7.45
6.69

6.31
5.17

1.09
0.84

0.96
0.78

PNB
SBIN

8.69
13.31

6.55
10.99

1.10
1.45

1.00
1.30

AXSB
HDFCB
ICICIBC
IIB

13.72
19.11
15.90
18.61

11.49
15.38
13.71
14.99

2.24
3.34
2.33
3.12

1.95
2.85
2.13
2.68

Pleaserefertothedisclaimertowardstheendofthedocument.

CurrentearningsexpectationforPSUbanksforFY15FY16isabovethatforthe
newbankswithFY16fPATgrowthforecastbeingupgradedbyc6%inthelast
12 months. With the gradual moderation in the addition to NPLs, the sharp
dropinyieldonloansislikelytogetarrested,benefittingthemargins.Reducing
bulkdepositsinthelasttwoyearsislikelytomoderatetheircostoffunds.We
forecastanexpansionintheRoAofupto25bpoverFY15fFY17fforthePSU
banksunderourcoverage,aheadofthepotentialrisefornewbanks.

LargerpotentialupsideinPSUbanksoverthe12monthsperiod
The rally in CY14 follows the highest annual underperformance in a decade.
Discount of PSU banks to new banks contracted by 8% during Oct13Sep14,
afterpeakingoutat78%inOct13.Despitethefall,thediscountstaysbelowthe
5year mean. Improving fundamentals is likely to sustain the outperformance
of PSU banks. The potential supside of upto 21% in PSU banks exceeds the
upside in private banks over 12months. BOB, ICICIBC and HDFCB are our
preferred picks. Lack of roadmap on capitalization of PSU banks, delayed
recoveryinassetqualityarekeyriskfactors.
ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com

Banks

TableofContents

PotentialriseinGDPandcutinratesapleasantmixforbanks ........................................................ 3
UpgradestotheFY09,FY10GDPforecastbyuptoc3% ....................................................................3
wascoupledwiththec2.4xexpansionintheP/BofCNXPSBK .........................................................3
Currentforecastbuilds1.6%riseinGDPoverFY15FY16 .....................................................................4
Lessscopeforriseinthereporateasgapwith1yrGsecyieldfalls ...................................................4
WhileCPItargetforJan15issettobeachieved................................................................................5
foodinflationmaykeeptheinterestrateshighinCY14 ...................................................................5
RatescutmaybebackendedinFY15...................................................................................................6

StressonassetqualityintensebutincrementalNPLtrendingdown................................................ 7
IncrementalNPLofPSUbanksareondownwardtrajectory.............................................................7
andstressedassetsvirtuallystableforthelastsevenquarters ........................................................7
WeassumemoderationintheincrementalNPLinFY16fFY17f .......................................................8
butsubduedloangrowthlikelytodelaytherecoveryinNPLratios .................................................8

NIMexpansionmayrevivecorerevenuesoverFY15fFY17f .......................................................... 10
OurFY15fPATforecastforPSUbanksismarginallybelowconsensus ...............................................10
PSUbanksPATgrowthforecasttoexceednewbanksforFY15FY16 ...............................................10
Fallinrates,moderationinslippagetosupportNIMexpansion ........................................................11
EdgeinSBdepositshasslippedfornewprivatebanks.......................................................................12
Retailpartlyoffsetthelargeslowdowninthecorporateloans ..........................................................13
PSUbanksseerevivalinretailloangrowthaheadoffewnewbanks.................................................14
NII/assets,fallinprovisionstodriveRoAexpansionofPSUbanks .....................................................14

FallinthevaluationgapbetweenPSBsandnewbankscouldsustain............................................ 16
RallyinCY14ontheheelsoflargestunderperformancein10years..................................................16
Evenaftertherally,P/BofCNXPSBKc15%belowthe5yearmean ...................................................17
Reforms,reboundinassetqualitycouldfurthershrinkvaluationgap ...............................................17

LargerpotentialupsideinPSUbanksoverthe12months ............................................................. 19
DCFassumereturntonormalRoAoversemiexplicitperiodforPSBs ...............................................19
Potentialupsideofupto21%forPSUbanksover12months ............................................................19
Riskfactors ..........................................................................................................................................20
Annexure:StockselectionwithinPSUbanksbasedonthefilters ......................................................21

Companies
BankofBaroda.24
HDFCBank31
ICICIBank39
PunjabNationalBank47
StateBankofIndia..53
AxisBank......60
IndusIndBank.67
BankofIndia75

Financials

Banks

PotentialriseinGDPandcutinratesapleasantmixforbanks
Large upgrade to GDP, by upto 3% during FY09FY10 was accompanied by c2.4x expansion in the P/B of PSU banks.
CurrentconsensusforecastfactorsrevivalinGDPby1.6%to6.3%inFY16,with20bpupgradetotheFY16GDPforecast
inthelast3months.PSUbankscouldbealargerbeneficiaryofGDPrevivalduetolargerexposuretothecorporate
sectorcomparedtothenewprivatebanks.Thereislessscopeforfurtherriseinthereporateasgapwith1yrGsec
yield has contracted. In recent monetary policy, RBI indicated the peaking of interest rates. CPI and WPI have
moderated and stay close to the comfort zone of RBI. While high food inflation is likely to keep the interest rates
elevatedinCY14,potentialcutinFY16coupledwiththeuptrendinGDPislikelytosustaintherecentexpansioninP/B.

UpgradestotheFY09,FY10GDPforecastbyuptoc3%
The reported GDP (revised estimate) for FY09FY10 was significantly higher than the consensus
forecast.WeassumealagofthirteenmonthsfortheGDPtobereportedasfinalrevisedestimatefrom
thefiscalend.ThemonthlytimeseriesforecastfortherealGDPgrowthforFY09wasupgradedfrom
4% in Mar09 to 7% in Jul09. The reported revised GDP was closer, at 6.7%. Similarly, FY10 GDP was
upgradedfrom6.3%inOct09to8.2%inMar10.

wascoupledwiththec2.4xexpansionintheP/BofCNXPSBK
ThedurationoflargeGDPupgradeswascoupledwithlargeexpansionintheP/BofPSUbanks.TheP/B
ofCNXPSBKincreasedfrom0.69xattheendofMar09andpeakedat1.65xinOct10.

Uptoc3.5%fallintheFY11FY13GDPforecastcoupledwiththefallinP/B
ForFY11,fromthepeakof9.0%inJan11,GDPforecastdeclinedto7.75%inMar11.ThereportedGDP
was1.4%higherat8.91%.TherewaslargedowngradetotheGDPforecastforFY12from8.7%inJun11
to5.2%inMar13.However,thereportedGDPwashigherat6.69%.FY13GDPat4.7%wasabout2.2%
lower than the forecast in Jul12. The P/B of CNXPSBK declined from 1.33x in Jan11 to 0.56x at end
Feb14.
Exhibit1: GDPgrowthforecastand1yearforwardP/BofCNXPSBK
10

2.0

1.5

1.0

0.5
P/B(CNXPSBK,RHS)
FY10
FY13

2
Oct07

Oct08

FY08
FY11

Oct09

Sep10

FY09
FY12

Sep11

Sep12

Aug13

0.0
Aug14

Source:Bloomberg,IL&FSInstitutionalEquities

RBIindicatespositivebiastowardsFY15centralestimateof5.5%
ThecurrentforecastforrealGDPgrowthforFY14,FY15andFY16isbetween4.7%and6.3%,withina
narrowrangeof1.6%.FY16GDPhasbeenupgradedby20bpsinceMay14.RBI,initsAnnualMonetary
policyApril2014hadstatedthatcontingentuponthedesiredinflationoutcome,realGDPgrowthis
projected to pick up from a little below 5% in 201314 to a range of 5 to 6% in 201415 albeit with
downside risks to the central estimate of 5.5% However, in its latest Bimonthly monetary policy
there was a positive bias towards the GDP guidance prospects for reinvigoration of growth have

Financials

Banks

improvedmodestly.Thefirmingupofexportgrowthshouldsupportmanufacturingandservicesector
activity.Iftherecentpickupinindustrialactivityissustainedinanenvironmentconducivetotherevival
ofinvestmentandunlockingofstalledprojects,withongoingfiscalconsolidationreleasingresourcesfor
private enterprise, external demand picking up and international crude prices stabilising, the central
estimate of real GDP growth of 5.5% within a likely range of 5 to 6% that was set out in the April
projectionfor201415canbesustained.

Currentforecastbuilds1.6%riseinGDPoverFY15FY16
FY16GDPhasbeenupgradedby20bpsinceMay14
Exhibit2: GDPgrowthforecastand1yearforwardP/BofCNXPSBK
10

2.0
P/B(CNXPSBK,RHS)

FY14

FY15

FY16

1.5

1.0

0.5

2
Jul12

Nov12

Feb13

May13

Aug13

Nov13

Feb14

May14

0.0
Aug14

Source:Bloomberg,IL&FSInstitutionalEquities

PSUbankscouldbelargerbeneficiaryoftherevivalinGDP
We believe the impending uptrend in GDP is likely to sustain the gradual expansion in valuation of
banks. PSU banks could be a larger beneficiary of GDP revival due to their larger exposure to the
corporatesectorcomparedtothenewprivatebanks.TheP/BofCNXPSBK,despitesharpriseinCY14,
at0.85xon02Sep14staysbelowthe5yearmean.

Lessscopeforriseinthereporateasgapwith1yrGsecyieldfalls
OneyearGsecyieldcloselytrackstherepoinnormaltimeswithformerbeingtheleadindicatorfor
thereporate.ThedeclineinthegapbetweenoneyearGsecyieldandreporatewithfallinthespread
closeto5yearmeanof39bpleaveslessscopeforanysignificantriseinthereporate.
Exhibit3: 1yrGsecandReporate

Exhibit4: Spreadbetween1yrGsecandRepo
4.2

11.0
1yrGsec(%)

Reporate(%)

9.5

2.8

8.0

1.4

6.5

0.0

5.0

1.4

3.5
Mar06 Dec07

2.8
Mar06 Dec07

Aug09 Apr11 Dec12

Source:IIL&FSInstitutionalEquities

Aug14

Spread(1yrGsecandRepo)
5yrsmean
Aug09

Apr11

Dec12

Aug14

Source:IL&FSInstitutionalEquities

Financials

Banks

Exhibit5: CPI(%)

Exhibit6: FoodsegmentinCPI(%)

25%

CPI(yoy,RHS)

CPI(mom,annualised)
13%

34%

Food(mom,annualised)
17%

15%

11%

18%

14%

5%

9%

2%

11%

5%

7%

14%

15%
Jan12

Jun12

Nov12

Apr13

Sep13

Feb14

5%
Jul14

Source:IIL&FSInstitutionalEquities

Food(33.8,yoy,RHS)

8%

30%
Jan12

Jun12

Nov12

Apr13

Sep13

Feb14

5%
Jul14

Source:IL&FSInstitutionalEquities

WhileCPItargetforJan15issettobeachieved
AccordingtotheUrijitPatelCommitteetoreviseandstrengthenthemonetarypolicyframework in
view of the elevated level of current CPI inflation and hardened inflation expectations, supply
constraintsandweakoutputperformance,thetransitionpathtothetargetzoneshouldbegraduated
tobringingdowninflationfromthecurrentlevelof10%to8%overaperiodnotexceedingthenext12
months and 6% over a period not exceeding the next 24 month period before formally adopting the
recommendedtargetof4percentinflationwithabandof+/2%..CPI(combined)hasdeclinedfrom
9.87%inDec13to7.42%inJul14.

foodinflationmaykeeptheinterestrateshighinCY14
While we may see rise in retail inflation driven largely by food, in the nearterm due to inadequate
rainfall, CPI may moderate towards the end of FY15. In the latest Annual Monetary Policy, RBI has
stated the risks to achieving the inflation of 8% by Jan15 such as lessthannormal monsoon due to
possibleelninoeffects,uncertaintyonthesettingofMSPforagricommoditiesandthesettingofother
administered prices, especially of fuel, fertilizer and electricity; the outlook for fiscal policy; geo
politicaldevelopmentsandtheirimpactoninternationalcommodityprices.However,therewillalso
beadownwardpullonCPIinflationexertedbybaseeffectsofhighinflationduringJunNov13.
Exhibit7: YoychangeinWPIanditssegments
WPI
Fuel(inc.crude,15.8)
15.5%

Exhibit8: Mom(annualized)changeinWPIsegments

Food(24.3)
Manufactured(exc.food,55)

Food(24.3)
Manufactured(exc.food,55)

Fuel(inc.crude,15.8)

60%

11.5%

30%

7.5%

0%

3.5%

30%

0.5%
Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 Apr14 Jul14

60%
Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 Apr14 Jul14

Source:IIL&FSInstitutionalEquities

Source:IIL&FSInstitutionalEquities

Financials

Banks

RatescutmaybebackendedinFY15
Nearterm rise in food Inflation may lead to the upward pressure on inflation. Hence, despite the
moderation in WPI and CPI, the interest rate cut may be backended in FY15 after the impact from
factorssuchasmonsoonsandbaseeffectplaysout.

FallinWPIfortwoconsecutivemonthsinJun14Jul14
WPI surged to 6.01% in May14 after the decline in Apr14 to 5.2% and staying below 5.7% in the
precedingfourconsecutivemonths.However,therehasbeenadeclineinthetwoconsecutivemonths
of Jun14Jul14. The Food segment24.3% weight in the Wholesale Price Index (WPI) has remained
closerto7%forfivemonths.Themomchange(annualised),revealsthesteepriseinfoodpricesin
May14andJul14andmaykeeptheWPIhighinthenearterm.
Exhibit9: Reporate,1yearGsecyield,CPI(%)andWPIinflation(%)
12

12

10

10

6
Reporate

1yrGsecyield

CPI(yoy,RHS)
WPI(yoy,RHS)
4
4
Jan12 Mar12May12 Jul12 Sep12 Nov12 Jan13 Mar13May13 Jul13 Sep13 Nov13 Jan14 Mar14May14 Jul14
Source:Company,AvendusResearch

Financials

Banks

StressonassetqualityintensebutincrementalNPLtrendingdown
The intense stress on the asset quality of PSU banks is visible in nearly the decade high stressed assets and low
provisioncoverage.However,thepaceofnetadditiontostressedassetismoderating.Thefourquartermovingaverage
forincrementalNPLratiodeclinedduringthelastfourquartersby0.56bp.Thisisinsharpcontrasttothoseinthenew
privatebanks,whichhadanincreaseof10bpduringJun13Jun14.WhilethestressislikelytostayinFY15f,weassume
animprovementinincrementalNPLduringFY15fFY17f,byupto0.72%.However,therecoveryinNPLratiosandNPL
provisionsmaybedelayedduetosubduedloangrowthandburdenduetosharpfallinthePCR;thePCRofthefifteen
largestPSUbanksdeclinedfrom61.7%attheendofSep08to42.4%attheendofJun14.

IncrementalNPLofPSUbanksareondownwardtrajectory
The incremental NPL (change in outstanding gross NPL over four quarters as percentage of starting
loans)of15PSUbanksdeclinedforthethirdconsecutivequarterinMar14,thisbeingthefirstdecline
forthreeconsecutivequartersinnineteenquarters.Mar14beingcyclicallybetterquarter,therewas
riseinJun14quarterbutstayedwellbelowthepeak.TheincrementalNPLmayhavepeakedat0.72%
inJun13quarterbeforedecliningthereafter.ThedeclinewaslargelydrivenbySBI,BOB,CanaraBank,
AndhraBank,CentralBankandIDBIBank.Largewriteoffandsaleto ARCspartlycontributedto the
declineinnetadditionsinthelastfewquarters.

Newprivatebankshadthereverse,risingtrendfor5consecutivequarters
ThetrendinincrementalNPLfornewprivatebankshasbeenmovinginthedirectionoppositetothat
ofthePSUbanks.Therehasbeenaconsistentriseintheratiointhelastfivequartersfrom0.12%in
theDec12quarterto0.34%intheMar14quarterbeforemoderatingintheJun14quarter.Theincrease
hasbeendrivenbyICICIBank,KotakMahindraBankandYesBank.HDFCBankandIndusIndBankhad
thereversetrendwithinnewbankswithdeclineintheirincrementalNPLratiooverpastfivequarters.
Exhibit10: IncrementalNPL(4qtrsmovingaverage)
0.8%
Newprivatebanks

PSUbanks

0.6%

0.4%

0.2%

0.0%
Dec09

Jun10

Dec10

Jun11

Dec11

Jun12

Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

andstressedassetsvirtuallystableforthelastsevenquarters
The stressed asset (Gross NPL and restructured loans) of the group of fifteen largest PSU Banks has
remainedclosetoc11%inthelasteightquarters.Restructuredloanofagroupofthefifteenlargest
PSUbankshasremainedwithinarangeof6.5%to7.5%inthelasttenquarters.Afterneardoublingin
FY13to6.5%ofloans,therestructuredloansaspercentageofloanshaslargelystabilized.Thegross
NPLratiohasalsoremainedwithinaverynarrowrangeof4.3%4.5%inthelastfourquarters.After
sharpriseby80bpand67bpinFY12andFY13,respectively,thepaceofrisehassloweddowninFY14.
Thetotalstressedassetshavedeclinedinthepastthreequartersfrom11.7%attheendofJun13to

Financials

Banks

Exhibit11: Stressedassets(%)

Exhibit12: PCR(%,excludingwriteoff)

12.0

450%

90

8.0

300%

70

4.0

150%

50

RatioofPSU/New(RHS)
PSU
New

Newprivatebanks
0.0
0%
Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec13 Jun14
Source:Company,IL&FSInstitutionalEquities

PSUBanks

30
Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec13 Jun14
Source:Company,IL&FSInstitutionalEquities

11.2% at the end of Jun14. While the has been partly driven by sale of asset by banks to ARCs, the
stressedasstsasremainedvirtuallystableandwithinaverynarrowrangeof10.6%11.5%inthelast
eightquarters.

WeassumemoderationintheincrementalNPLinFY16fFY17f
We assume the incremental NPL in FY15f to stay close to the average during FY13FY14 for the PSU
banksunderourcoverage.ThesignificantimprovementintheassetqualityislikelyinFY16fFY17f.For
thePSUbanksunderourcoverage(SBIN,BOB,BOI,PNB),weassumedeclineinincrementalNPLover
FY15fFY16fbyupto0.72bp.However,despitetheimprovementinassetquality,wedonotexpect
theincrementalNPLratiotofalltothepreFY12level.Forthenewbanks,weassumetheincremental
NPLtoremainlargelystablewithupto5bpriseassumedforICICIBCandIIBduetolargeincremental
restructuringintherecentquartersanddelayedrecoveryintheCVcycle.
Exhibit14: IncrementalNPL(%)

Exhibit13: IncrementalNPL(%)
FY10FY12
2.0%

FY13FY14

FY15f

FY16FFY17f

FY10FY12
1.8%

FY13FY14

FY15f

FY16FFY17f

1.5%

1.6%

1.2%

1.2%

0.9%
0.8%

0.6%

0.4%

0.3%

0.0%

0.0%
SBI(s)

PNB

Source:IL&FSInstitutionalEquities

BOB

BOI

ICICIBC

AXSB

HDFCB

IIB

Source:IL&FSInstitutionalEquities

butsubduedloangrowthlikelytodelaytherecoveryinNPLratios
WhiletheremaybefallinthepaceofnetadditiontogrossNPLs,thereboundintheNPLratiosand
NPL provisions may be delayed. Moderation in loan growth may partly keep the gross NPL ratio at
higher level. For the PSU banks under our coverage, we estimate the rise in gross NPL ratios. Loan
growthoverFY15FY17isassumedtogrowthintherangeof15%18%,constrainedduetolargecapital
requirementsevenifthereisarecoveryintheinvestmentcycle.

Financials

Banks

Exhibit15: GrossNPLratio
FY10FY12
7.5%

FY13FY14

Exhibit16: GrossNPLratio
FY15f

FY16FFY17f

FY10FY12
7.5%

6.0%

6.0%

4.5%

4.5%

3.0%

3.0%

1.5%

1.5%

0.0%

FY13FY14

FY15f

FY16FFY17f

0.0%
SBI(s)

PNB

BOB

BOI

Source:IL&FSInstitutionalEquities

ICICIBC

AXSB

HDFCB

IIB

Source:IL&FSInstitutionalEquities

LowPCRiskeeptheprovisioningburdenhigh
ThePCR(excludingwriteoff)ofthefifteenlargestPSUbanks(referexhibit19)declinedfrom61.7%at
theendofSep08to42.4attheendofJun14.SBI,BOBandIDBIbankarebestplacedamongPSUbanks
withtheirPCRbeingcloseto50%.
Exhibit18: PCR(%)

Exhibit17: PCR(%)
FY10FY12

FY13FY14

FY15f

FY16FFY17f

FY10FY12

80

80

60

60

40

40

20

20

FY13FY14

FY15f

FY16FFY17f

AXSB

HDFCB

IIB

0
SBI(s)

PNB

BOB

BOI

Source:IL&FSInstitutionalEquities

ICICIBC

Source:IL&FSInstitutionalEquities

Except SBI, we do not forecast the NPL provisions/ loans to decline to preFY13 level. Even with an
improvementtheprovisioningburdenislikelytostayhighduetopossibleincreaseintheprovisionson
restructuredloansandverylowcoverageratio.
Exhibit20: NPLprovisions/loans(%)

Exhibit19: NPLprovisions/loans(%)
FY10FY12
1.5

FY13FY14

FY15f

FY16FFY17f

FY10FY12
1.5

1.2

1.2

0.9

0.9

0.6

0.6

0.3

0.3

0.0
SBI(s)

PNB

Source:IL&FSInstitutionalEquities

BOB

BOI

FY13FY14

FY15f

FY16FFY17f

0.0
ICICIBC

AXSB

HDFCB

IIB

Source:IL&FSInstitutionalEquities

Financials

Banks

NIMexpansionmayrevivecorerevenuesoverFY15fFY17f
Current earnings expectation for PSU banks for FY15FY16 is above that for the new banks with FY16f PAT growth
forecastbeingupgradedbyc6%inthelast12months.WiththegradualmoderationintheadditiontoNPLs,thesharp
dropinyieldonloansislikelytogetarrested,benefittingthemargins.ThesignificantleadinSBdepositsproportionof
thenewprivatebanksoverPSUbankshasdeclinedoverthelasttwoyears.TheyoySBdepositsgrowthofPSUbanks
declinedfrom20%28%inFY11to13%18%inFY14PSUbanksundercoverage.Theslowdownhasbeenlargerforthe
newprivatebanksfrom21%60%to17%41.WeforecastanexpansionintheRoAofupto25bpoverFY15fFY17ffor
thefourlargePSUbanksunderourcoverage.EasingofpressureoncorerevenuesanddeclineinNPLprovisionsasnet
additiontogrossNPLrecedes,islikelytodrivetheRoAexpansion.

OurFY15fPATforecastforPSUbanksismarginallybelowconsensus
Exhibit21: ConsensusandourforecastforthePSUbanksinourcoverage
(INRmn)

Ourforecast

Consensus

Variationwithconsensus

FY15f

FY16f

FY17f

FY15f

FY16f

FY17f

FY15f

FY16f

FY17f

184,586

239,780

306,884

179,017

220,181

267,885

3%

9%

15%

PNB

41,708

55,299

70,475

48,187

59,623

74,838

13%

7%

6%

BOB

52,863

62,397

75,354

53,799

64,907

76,731

2%

4%

2%

SBI

BOI
Total

32,439

41,996

48,804

32,870

41,335

53,601

1%

2%

9%

311,596

399,471

501,517

313,872

386,045

473,055

1%

3%

6%

Source:Company,IL&FSInstitutionalEquities

Exhibit22: Consensusandourforecastforthenewbanksinourcoverage
(INRmn)

Ourforecast

Consensus

Variationwithconsensus

FY15f

FY16f

FY17f

FY15f

FY16f

FY17f

FY15f

FY16f

FY17f

70,821

84,574

100,323

71,874

85,548

103,537

1%

1%

3%

HDFCB

108,103

134,265

162,107

104,166

128,848

160,184

4%

4%

1%

ICICIBC

114,874

133,235

153,153

112,047

132,073

157,042

3%

1%

2%

AXSB

IIB
Total

17,409

21,611

26,880

17,692

22,196

27,901

2%

3%

4%

311,207

373,685

442,463

305,779

368,666

448,665

2%

1%

1%

Source:Company,IL&FSInstitutionalEquities

PSUbanksPATgrowthforecasttoexceednewbanksforFY15FY16
Exhibit23: YoyPATgrowth(CNXPSBK)
FY14

Exhibit24: YoyPATgrowth(Newprivatebanks)

FY15f

FY16f

FY14

30

30

20

20

10

10

10

10

20
May13 Aug13 Oct13 Dec13 Feb14
Source:Bloomberg,IL&FSInstitutionalEquities

Apr14

Jun14

Aug14

FY15f

20
May13 Aug13 Oct13 Dec13 Feb14

FY16f

Apr14

Jun14

Aug14

Source:Bloomberg,IL&FSInstitutionalEquities

Financials

10

Banks

PATgrowthforecastbytheconsensusforFY15FY16forPSUbanksisabovethatforthenewprivate
banks.FY15fPATgrowthforecasthasbeenupgradedfortheCNXPSBK,withanincreasefrom19.4%in
Sep13 to 25.1% in Sep14. The consistent upgrade has been on the low base and downgrade in FY14
PATgrowth.FY16fPATgrowthforecasthasalsoseenanupwardtrajectory.Newbankshaveastable
PATgrowthforecastforFY15FFY16f,inthenarrowrangeof18%20%.Whilethereexistarisktothe
earningsofPSUbanksposedbyhigherNPLprovisions,itisforecasttostaywellabovethatinFY14.

Fallinrates,moderationinslippagetosupportNIMexpansion
WiththegradualpickupinloansandmoderationintheadditiontoNPLs,thesharpdropinyieldon
loansforthePSUbanksislikelytogetarrested.WeforecastgradualrecoveryinNIMofthePSUbanks.
SBINislikelytoseelargestexpansioninNIMduetotheirstrongliabilityfranchise.
New banks had large NIM expansion over the last two years and we estimate it to have peaked for
mostofthem.HighCASA,strongtilttowardshighyieldingretailloanspartlycontributedtotherising
NIMofthenewbanks.
Exhibit26: NIM(calculatedfortheyear,%)

Exhibit25: NIM(calculatedfortheyear,%)
SBI(s)

PNB

BOB

BOI

3.8

ICICIBC

AXSB

HDFCB

IIB

4.8
4.3

3.3
3.8
2.8

3.3
2.8

2.3
2.3
1.8
Mar10

Mar12

Mar14

1.8
Mar10

Mar16f

Mar12

Mar14

Source:IL&FSInstitutionalEquities

Source:IL&FSInstitutionalEquities

Exhibit27: Yieldonloans(%)

Exhibit28: Costofdeposits

SBI(S)

PNB

BOB

BOI

SBI(S)

11

10

7
Mar10

Mar12

Mar14

Source:IL&FSInstitutionalEquities

Mar16f

4
Mar10

PNB

Mar12

Mar16f

BOB

Mar14

BOI

Mar16f

Source:IL&FSInstitutionalEquities

NIMdeclineofPSUbanksinlasteightquartersweredrivenbyhostoffactors
TherewaslargedeclineinNIMofthePSUbanksduringFY13FY14withthecontractioninfourlargest
PSU banks byupto 60bp over last two years, largest being for SBI and BOB. High cost of funds, low
yieldsduetotheinabilitytopassonratehikefollowinglackofloandemandandinterestreversalon
accountofhighslippageledtothesharpcontractionintheNIMofPSUbanks.

Financials

11

Banks

Exhibit29: Loan/depositsratioofallbanks
Incr.loans/deposits

Exhibit30: Loangrpwthanddepositsgrowth
Loangrowth

Loans/deposits(RHS)

1080%

79.0%

860%

77.5%

31%

640%

76.0%

26%

420%

74.5%

21%

200%

73.0%

16%

20%

71.5%

11%

240%
Jun08

Jul09

Jul10

Jul11

Aug12

Aug13

70.0%
Aug14

Source:IL&FSInstitutionalEquities

Depositgrowth

36%

6%
Jun08

Jul09

Jul10

Jul11

Aug12

Aug13

Aug14

Source:IL&FSInstitutionalEquities

Normalizationofloan/depositratiomayhavelimitedimpactonPSUbanks
Theloan/depositratioofbankssawsignificantrisefrom70%attheendofCY09toc78%attheendof
Mar14.However,ithasdeclinedsinceMar14to76.1%.TheimpactonNIMduetofallinloandeposit
ratio may be limited for PSU banks. However, several new private banks replaced deposit with
borrowingsinFY14tomanagetheircostoffunds.Thetrendmayreverseandputneartermpressure
ontheirNIM.

EdgeinSBdepositsgrowthhasslippedfornewprivatebanks
The significant lead in SB deposits proportion of the new private banks over PSU banks has declined
over the last two years. Also, there has been rise in the SB deposits proportion of PSU banks in the
recent years, partly driven by low accretion of term deposits following sharp slowdown in corporate
loans.
Exhibit31: SBdepositsproportionattheendofMar14
40%

32%

24%

16%

8%

0%
SBI(s)

PNB

BOB

BOI

ICICIBC

AXSB

HDFCB

IIB

Source:Company,IL&FSInstitutionalEquities

Declineininflation,interestratesmayarrestthedeclineinSBdepositsgrowth
TheyoySBdepositsgrowthdeclinedfrom15%30%inFY10toc15%inFY14formostPSUbanks.The
slowdownhasbeenlargerforthenewprivatebankswiththeirSBdepositsgrowthalignedtothatof
thePSUbanksfrom30%45%inFY10toc15%,exceptforIIB.Wedonotexpectsignificantrevivalin

Financials

12

Banks

growthandproportioninFY15f.Fallininflation,declineininterestratesmaybebackendedinFY15
andthisislikelytoleadtothereboundinSBdepositsinFY16.
Exhibit33: SBdepositsgrowth

Exhibit32: SBdepositsgrowth
SBI(s)

PNB

BOB

BOI

ICICIBC

60%

60%

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%
Mar10

Mar12

Mar14

Mar16f

Source:IL&FSInstitutionalEquities

0%
Mar10

AXSB

Mar12

HDFCB

Mar14

IIB

Mar16f

Source:IL&FSInstitutionalEquities

Retailpartlyoffsetthelargeslowdowninthecorporateloans
Largecorporateloanshadsteadydeclineintheircontributiontoloangrowth
Exhibit34: Contributiontononfoodcreditgrowth Exhibit35: Contributiontononfoodcreditgrowth
FY12

FY13

FY12

FY14

FY13

FY14

20%

60%

15%

45%

10%
30%
5%
15%

0%
5%

0%
Micro&small

Medium

Power

Large

Telecom

Roads

OtherInfra

Source:IL&FSInstitutionalEquities

Source:IL&FSInstitutionalEquities

CREandhousingloanscontributiontoloangrowthroseoverFY12FY14
Exhibit36: Contributiontononfoodcredit
FY12

FY13

FY14

Exhibit37: Contributiontononfoodcredit

10.0%

15%

7.5%

11%

5.0%

7%

2.5%

3%

0.0%

FY12

FY13

Consumer

Housing

FY14

1%
CRE

Source:IL&FSInstitutionalEquities

Trade

Vehicle

Source:IL&FSInstitutionalEquities

Financials

13

Banks

Thesharpslowdown inthecorporatesegmentledtothefallinthecontributionoflargeindustryto
incremental nonfood loan growth, from 50.8% in FY12 to 42.1% in FY14. The small and midsize
industryresumedtheirgrowthaftertheperiodofconsolidationduringFY12FY13.Industrywas45.3%
of nonfood loans at the end of Mar14, large industry being 36.7% of total nonfood loans. The
decelerationincorporatesegmentwaspartlyoffsetbyfewsegmentswithinretail.Housingloanshada
steady rise in their contribution to nonfood loan growth from 8.2% in FY12 to 12.1% in FY14.
Commercialrealestate(CRE)hashadincreaseintheirmomentuminthelastthreeyears.

PSUbanksseerevivalinretailloangrowthaheadoffewnewbanks
TheretailloangrowthofPSUbankshadareboundinFY14,largelydrivenbyhousingloans.PNB,BOB
andBOIreportedretailloangrowthinFY14higherthanthatforHDFCBank,IndusIndBankandsimilar
to ICICI Bank. The sharp slowdown in retail loans of new private banks was largely driven by the
slowdowninthevehicleloansegmentandislikelytoreviveforward.However,PSUbankshavebeen
morecompetitiveintheretailsegmentandcouldsustaintheuptrend.
Exhibit39: Retailloangrowth

Exhibit38: Retailloangrowth
SBI(s)

PNB

BOB

ICICIBC

BOI

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%
Mar11

Mar12

Mar13

0%
Mar11

Mar14

Source:IL&FSInstitutionalEquities

AXSB

Mar12

HDFCB

Mar13

IIB

Mar14

Source:IL&FSInstitutionalEquities

NII/assets,fallinprovisionstodriveRoAexpansionofPSUbanks
We forecast an expansion in the RoA of up to 24bp over FY15fFY17f for the four large PSU banks
under our coverage universe. While the pressure on core revenues may ease for most PSU banks,
declineinNPLprovisionsasthenetadditiontogrossNPLrecedes,islikelytodrivetheRoAexpansion.
WhileourforecastassumesafallinincrementalNPLsandNPLprovisionsafterFY14,theprovisionsare
estimatedhigherthanthepreFY13leveltorecoverthePCRratio.

Exhibit40: DupontofPSUbanksundercoverage

SBIN

PNB

Change
FY14 FY12FY14

BOB

Change

FY15fFY17f FY14 FY12FY14

BOI

Change

FY15fFY17f FY14 FY12FY14

Change

FY15fFY17f FY14 FY12FY14 FY15fFY17f

Netinterestincome 2.93

0.08

0.24

3.14

0.36

0.14

1.98

0.78

0.13

2.11

0.44

0.19

Feebasedincome

0.28

0.01

0.61

0.11

0.05

0.41

0.07

0.00

0.42

0.13

0.01
0.10

0.86

Otherincome

0.24

0.00

0.02

0.28

0.07

0.07

0.33

0.07

0.00

0.42

0.11

Operatingrevenue

4.04

0.21

0.22

4.03

0.54

0.12

2.72

0.92

0.14

2.95

0.46

0.10

Operatingexpenses

2.13

0.11

0.04

1.81

0.07

0.12

1.18

0.27

0.06

1.31

0.35

0.06

Operatingprofit

1.91

0.31

0.18

2.21

0.47

0.00

1.54

0.65

0.08

1.64

0.11

0.05

Loanlossprovisions 0.85

0.11

0.13

0.88

0.28

0.13

0.49

0.15

0.03

0.77

0.43

0.03

Provisionforinvest.

0.02

0.00

0.15

0.11

0.12

0.03

0.03

0.01

0.01

0.03

0.00
0.07

0.03

Otherprovisions

0.07

0.05

0.01

0.27

0.17

0.11

0.11

0.03

0.02

0.16

0.06

Tax

0.31

0.27

0.10

0.26

0.37

0.11

0.16

0.28

0.09

0.16

0.17

0.08

Netprofit

0.65

0.08

0.20

0.65

0.66

0.25

0.75

0.58

0.04

0.53

0.28

0.07

Source:Company,IL&FSInstitutionalEquities

Financials

14

Banks

WeforecastpeakingoftheRoAformostnewprivatebanks
Contrary to the trend in PSU banks, we believe the RoA of new private banks could have peaked in
FY14 and is likely to see marginal moderation. The peaking of NII/assets, largely stable NPL
provision/assetsislikelytoresultinthemarginalcontractionintheirRoA.Declineinthehighyielding
retailloanproportion,fallintheyieldonloansintheneartermwithfallininterestratesislikelytoput
pressureontheyields.NPLprovisionhasalowbaseandevenwiththedeclineinincrementalNPL,we
donotseesignificantdeclineinNPLprovisions/assetsoverFY15fFY17f.
Exhibit41: DuPontofnewprivatebanks

AXSB

ICICIBC

Change
FY14 FY12FY14

Netinterestincome 3.30

0.20

Feebasedincome

1.65

0.20

Otherincome

0.39

0.06

FY15fFY17f FY14 FY12FY14


0.02

HDFCB

Change

2.91

0.58

0.07

1.44

0.23

0.05

0.41

0.35

FY15fFY17f FY14 FY12FY14


0.01

IIB

Change

Change

FY15fFY17f FY14 FY12FY14 FY15fFY17f

4.14

0.07

0.14

3.61

0.21

0.08

0.14

1.60

0.21

0.08

2.23

1.21

0.15

0.07

0.18

0.25

0.05

0.13

0.62

0.01

Operatingrevenue

5.35

0.06

0.04

4.75

0.70

0.08

5.92

0.03

0.16

5.96

0.80

0.24

Operatingexpenses

2.18

0.07

0.01

1.82

0.12

0.04

2.70

0.16

0.03

2.73

0.24

0.20

Operatingprofit

3.17

0.14

0.05

2.93

0.58

0.04

3.22

0.13

0.19

3.24

0.57

0.05

Loanlossprovisions 0.36

0.09

0.01

0.35

0.17

0.00

0.37

0.06

0.07

0.39

0.01

0.01

Provisionforinvest. 0.03

0.07

0.04

0.01

0.04

0.01

0.07

0.07

0.07

0.11

0.09

0.11
0.01

Otherprovisions

0.25

0.15

0.00

0.10

0.08

0.02

0.06

0.40

0.01

0.08

0.00

Tax

0.87

0.04

0.01

0.73

0.32

0.02

0.96

0.21

0.02

0.90

0.15

0.00

Netprofit

1.72

0.12

0.01

1.73

0.40

0.05

1.90

0.33

0.19

1.76

0.33

0.06

Source:Company,IL&FSInstitutionalEquities

Financials

15

Banks

FallinthevaluationgapbetweenPSBsandnewbanksmaysustain
Despite the large outperformance, valuations of banks stay well below the 5year high. Strong outperformance in
CY2014 has lifted the depressed valuation of banks close to their 5year mean. The rally in CY14 follows the
underperformance of 37% and 18% of CNXPSBK and Bankex, respectively, during 2013, highest during the year in a
decade.Also,thedurationofunderperformancewaslongestin2013,ateightmonths.DiscountofPSUbankstonew
banks contracted by 8% during Oct13Sep14, after peaking out at 78% in Oct13. Despite the fall, the discount stays
below the 5year mean and well below the 5year peak of 46%. We believe there could be a gradual and extended
outperformanceofPSUbanksoverthenext12monthsleadingtofurthercontractioninthediscount.
Exhibit42: RelativeperformanceofBankIndicesandkeyfundamentalindicators

NoofMonths
NoofMonths
Increase/
duringwhich
duringwhich
Underperformance/
Underperformance/ (decrease)inthe
BANKEX
CNXPSBK
underperformed outperformance underperformed outperformance
RepoRate

RealGDP
(Avg.for4qtrs)

GrossNPLratio
(AllBanks)

2004

16%

17%

1.00

7.34

7.19

2005

6%

17%

0.25

9.22

4.91

2006

7%

24%

1.00

9.60

3.47

2007

14%

15%

0.50

9.66

2.65

2008

0%

11%

1.25

8.17

2.39

2009

3%

2%

1.75

6.42

2.45

2010

16%

16%

1.50

9.78

2.51

2011

7%

17%

2.25

7.27

2.36

2012

31%

13%

0.50

4.94

2.94

2013

18%

37%

0.25

2014(ytd)

14%

12%

0.25

4.70
5.16

3.42
4.32

Source:Bloomberg,RBI,IL&FSInstitutionalEquitiesNote:GrossNPLratioisattheendoffiscalyear

RallyinCY14ontheheelsoflargestunderperformancein10years
Thedepressedvaluationandthefavorableelectionoutcomeresultedinthelargeoutperformanceof
banksinCY14.TherecentrunupinbankstocksduringCY14followedthestrongestunderperformance
of banks in a calendar year in the last ten years. Also, the duration of the underperformance was
longestin2013,withtheBankexandCNXPSBKunderperformingbenchmarkIndicesfor8monthsby
18%and37%,respectivelyfollowingsmallcutininterestratebutlargefallintheGDPgrowth.
Exhibit43: WeeklyrelativeperformanceofCNXPSBK
WeeklychangeofCNXPSBKrelativetoCNXNifty(RHS)

CNXPSBK

4,710

7.8%

4,230

5.0%

3,750

2.2%

3,270

0.6%

2,790

3.4%

2,310

6.2%

1,830
9.0%
Apr11 Jul11 Oct11 Jan12 Apr12 Jul12 Oct12 Jan13 Apr13 Aug13 Nov13 Feb14 May14 Aug14
Source:Company,AvendusResearch

Financials

16

Banks

Evenaftertherally,P/BofCNXPSBKc15%belowthe5yearmean
TherallyinPSUbankshasliftedtheP/BofCNXPSBKto0.85xon02Sep14,closetotheirfiveyearmean
of1.0x.TheP/BofPSUbanksmayhavebottomedoutatthedecadelowvaluationof0.49xon3Sep13
andhasbeenseeinggradualrecoverythereafter.TherapidbouncesinceFeb14haslifteditsP/Bclose
to15%belowthefiveyearmean.DespitelargeoutperformancetoNiftyof12%inCY14(ytd),theP/B
isstillbelowthe5yearmeanandwellbelowthepeakinFeb08andNov10.

Newprivatebanksc11%abovetheir5yearmeanof2.28x
However,newprivatebankssawtheirvaluationrise11%abovetheir5yearmean(2.28x)to2.54xon
02Sep14butbelowthepeakof2.99xinNov10.
Exhibit44: OneyearforwardP/BofCNXPSBKandnewprivatebanks
4
CNXPSBK
3

NPVT
Avg(Sep09Sep14)

2
Avg(Sep09Sep14)
1

0
Apr04

May05

Jul06

Sep07

Nov08

Jan10

Mar11

May12

Jun13

Aug14

Source:Bloomberg,IL&FSInstitutionalEquities

Reforms,reboundinassetqualitymayfurthershrinkvaluationgap
ThereportbyDrP.J.NayaktoreviewthegovernanceofboardsofbanksinIndiaentailsmeasuresto
improve the structural framework of the PSU banks. The committee has recommended the new
governance structure including reduction of the government shareholding in banks to avoid capital
support from government. Other key recommendations include: elimination of constrains which are
applicableonlytothePSUbankssuchasdualregulation,shorttenorsofCMDsandEDs,compensation
constrains,externalvigilanceenforcementandapplicabilitytoRTIAct.Whilereformscouldbealong
drawnprocess,theintroductionofsomeoftheseproposalsandgradualturnaroundintheNPLcycle
maysustainthecontractioninthevaluationgapwithnewbanksclosertothelongtermmeanoverthe
next12years.

DiscountofPSUtonewbanksbottomedmuchearlierthantherallyin2014
Theimprovedoutlookfortheeconomyfollowingthestableelectionoutcomeanddepressedvaluation
ledtothelargeoutperformanceofPSUbankstothenewprivatebanksinMay14Jun14.Drivenbythe
sharp rise in NPLs and concern over the capital constrain, the discount of PSU to new banks had
increasedtoadecadehighof78%.Ithascontractedthereafterto71%on02Sep14butstayshigher
thanthe5yearaverageof63%.TheoutperformanceofthePSUbanksmayextendfurtherovernext
12months.

Financials

17

Banks

Exhibit45: DiscountofCNXPSBKtonewprivatebanksinP/B
20%
DiscountofPSUbanksoverNPVT
30%
40%
50%

Avg(Apr04Aug14)
Avg(Aug09Aug14)

60%
70%

28Oct13,78%
80%
Apr04

May05

Jul06

Sep07

Nov08

Dec09

Feb11

Apr12

Jun13

Aug14

Source:Bloomberg,IL&FSInstitutionalEquities

Financials

18

Banks

LargerpotentialupsideinPSUbanksoverthe12months
WehavevaluedbanksusingacombinationofDCF,P/EandP/B.OurthreestageDCFusesexplicitforecastsuntilFY17,
followedby10yearsofsemiexplicitforecasts.Wehavecappedleverageratioforthesemiexplicitperiodat18xforthe
PSUbanksandlinkedtheloangrowthtothetargetasset/equity.Hence,thesemiexplicitgrowthforthePSUbanksis
assumedtobeintherangeof6%14%.WereinitiatecoverageonBankofIndia,BankofBaroda,PunjabNationalBank
StateBankofIndia,AxisBank,HDFCBank,ICICIBankandIndusIndBank.TheestimatedpotentialupsideinPSUbanks
exceedsthereturninnewbanksoverthe12monthsperiod.ThepotentialupsideinPSUbanksisupto21%.Weprefer
banksthatarebettercapitalizedandaresuperiorinassetquality.OurmostpreferredpickamongPSUbanksisBankof
BarodaandICICIBankamongnewprivatebanks.

DCFassumereturntonormalRoAoversemiexplicitperiodforPSBs
We have valued banks using a combination of DCF, P/E and P/B. Our threestage DCF uses explicit
forecastsuntilFY17,followedby10yearsofsemiexplicitforecasts,wherewelinkloangrowthtothe
leverageratioandassumedividendpayoutof20%.Thefinalstageof12yearsassumesconvergenceof
RoEandCoE(assumedtobe14%).TheRoAisassumedtoconvergetothe10yearaverageforthePSU
banksand1.2%forthenewprivatebanksattheendofthesemiexplicitperiod.
WehaveestimatedthemeanP/EandP/Bforthefiveyearperiodended02Sep14.Weapplytheseto
our oneyear forward EPS and adjusted book value forecast to arrive at our P/E and P/Bbased fair
value.Ourtargetpriceisaweightedaverage,whereweassignaweightof30%toourDCFvalueand
35%eachtoourP/EandP/Bvalues.

Caponleverageratioduringsemiexplicitperiodimplieslowergrowth
Wehavecappedleverageratioforthesemiexplicitperiodat18xforthePSUbanksandlinkedtheloan
growthtothetargetasset/equity.Hence,thesemiexplicitgrowthforthePSUbanksisassumedtobe
in the range of 6%14%. New private banks, being well capitalized are assumed to keep growing at
fasterpacethantheirPSUcounterparts.

Potentialupsideofupto21%forPSUbanksover12months
We reinitiate coverage on Bank of India, Bank of Baroda, Punjab National Bank State Bank of India,
AxisBank,HDFCBank,ICICIBankandIndusIndBank.OurmostpreferredpickamongPSUbanksisBank
ofBarodaandamongprivatebanksisHDFCBankandICICIBCwithlargestpotentialupside.Weapply
25% discount to the 5year mean P/E and P/B for BOI given large volatility in its NPLs and low
capitalizationratios.Also,weapply25%premiumtothe5yearmeanP/EandP/BforICICIBCgivenits
significantlreboundinRoEoverlast3years.

Exhibit46: AssumptionsfortheDCFbasedfairvalues

RoA(%)

Growth(%,CAGR)

Actual Explicitperiod Semiexplicit Semiexplicit

(FY13FY14)

(FY15fFY17f (FY18fFY27f)

Asset/Equity(Mean)

Actual Explicitperiod Semiexplicit

(FY27f) (FY13FY14)

Actual

Explicit
period Semiexplicit

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

BOI

0.59

0.580.71

0.80

22.1%

15.9%

5.9%

20.3

21.5

18.0

BOB

0.83

0.770.90

0.98

17.5%

17.0%

11.3%

17.9

19.3

18.0

PNB

0.83

0.810.96

1.00

9.0%

16.3%

16.2%

16.0

16.3

18.4

SBIN

0.76

0.760.92

0.95

16.5%

18.5%

13.5%

16.9

17.2

17.9

AXSB

1.69

1.721.44

1.21

16.4%

18.6%

22.7%

10.7

10.4

14.3

HDFCB

1.86

2.051.71

1.21

25.1%

20.2%

20.9%

11.2

9.7

11.8

ICICIBC

1.69

1.801.47

1.21

15.1%

17.6%

22.8%

8.0

8.8

14.1

IIB

1.69

1.821.22

1.21

26.5%

25.2%

22.9%

10.5

10.9

14.6

Source:Company,IL&FSInstitutionalEquities

Financials

19

Banks

Exhibit47: AverageP/EandadjustedP/B(02Sep14)

P/E

P/B

3M

6M

1year

2years

3years

5years

3M

6M

1year

2years

3years

5years

BOI

4.94

5.23

4.84

4.26

4.62

4.99

0.75

0.81

0.80

0.72

0.84

0.94

BOB

6.58

6.58

6.48

5.75

5.48

5.44

1.03

1.02

0.99

0.86

0.89

0.97

PNB

6.50

6.83

6.33

5.12

4.90

4.94

0.85

0.87

0.80

0.66

0.71

0.82

SBI

9.33

9.86

9.22

8.07

7.52

7.44

1.25

1.33

1.25

1.08

1.14

1.19

AXSB

11.94

12.07

11.14

9.68

9.73

9.52

1.98

1.99

1.82

1.56

1.68

1.68

HDFCB

17.51

17.76

17.28

16.66

17.68

18.03

3.03

3.16

3.30

3.27

3.49

3.48

ICICIBC

14.54

14.37

13.84

12.60

12.90

13.05

2.05

2.02

1.91

1.70

1.69

1.63

IIB

15.25

15.52

15.28

14.55

15.26

14.92

2.72

2.75

2.69

2.50

2.84

2.78

Source:Company,IL&FSInstitutionalEquities

Exhibit48: PE,P/BandDCFbasedfairvaluesandthetargetprice

PE

PB

DCF/SOP

Weights

35%

35%

30%

PE

P/B

PE

P/B

BOI

269

355

314

312

292

7%

Add

5.11

0.79

5.83

0.81

BOB

953

1,179

1,101

1,076

886

21%

Buy

6.95

1.10

6.84

1.02

PNBK

964

1,217

1,396

1,182

961

23%

Buy

7.09

1.15

7.47

1.05

2,970

3,119

2,644

2,925

2,501

17%

Buy

8.62

1.34

9.31

1.29

SBI

TP

CMP(03Sep14)

Upside

Rating

Targetvaluation

Currentvaluation

453

484

423

455

414

10%

Add

11.56

1.98

12.51

2.08

HDFCB

1,198

1,179

575

1,004

860

17%

Buy

16.34

3.07

17.11

3.09

ICICIBC

2,124

1,550

1,647

1,780

1,579

13%

Add

14.36

2.28

14.70

2.22

705

753

514

665

616

8%

Add

14.41

2.65

16.59

2.88

AXSB

IndusInd

Source:Company,IL&FSInstitutionalEquities

Riskfactors
f Delay in the roadmap for the capitalization of PSU banks may stay an overhang. Basel III
requirementswouldpressureontheloangrowtheveniftheinvestmentcyclepicksup.
f Delay in the recovery in NPL cycle and elevated slippage extending into FY16 may pull down the
profitability.
f RegulatorychangessuchasmandatinghigherPCRrequirementsmayimpacttheprofitability.
f Elevatedinterestratesin2016mayextendtheNPLcycle,mainlyintheSMEsegmentanddelaythe
revivalintreasuryincome.

Financials

20

Banks

Annexure:StockselectionwithinPSUbanksbasedonthefilters
ChangeinNetNPL/Networth(Mar12Mar14)

Exhibit49: NetNPL/NetworthVschangeinnetNPL/NetworthbetweenMar12Mar14
40
ALBK
30

ANDB
CRPBK

20
BOMH

IOB

DBK

PNB

INBK SNDB

10

BOB

OBC

IDBI
BOI SBI

CBK

UNBK

VJYK

CBOI

UCO

0
15

20

25

30
35
NetNPL/Networth(%,Mar14)

40

45

50

Source:Company,IL&FSInstitutionalEquities

RiseinGrossNPLratiobasedon2yearagoloans

Exhibit50: GrossNPLratio(Mar14)VschangeingrossNPLratiobasedon2yearagoloans(Mar12)
2.5

2.0

SBI

BOMH

ANDB

BOI
1.5

INBK
SNDB

BOB

DBK

IOB

ALBK
CBOI

PNB

CRPBK
OBC

VJYK

1.0

UNBK

UCO

CBK

IDBI

0.5
2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

GrossNPLratio(Mar14)

Source:Company,IL&FSInstitutionalEquities

Exhibit51: RoE(FY15f)VsP/B(FY15f)basedonconsensus(02Sep14)
1.7
SBIN

1.5

P/B(FY15)

1.3
1.1

CBK

0.7
IOB
0.5
3

BOB

PNB

CBOI

0.9

ANDB DBNK OBC


IDBI

CRPBK
7

UNBK

UCO

BOI

SNDB

INBK ALBK

9
11
RoEbasedonconsensus(FY15f)

13

15

17

Source:Company,IL&FSInstitutionalEquities

Financials

21

Banks

ChangeinPricebetween14Feb142Sep14

Exhibit52: P/B(FY15f)Vschangeinpricebetween14Feb14and02Sep14
121
UNBK
108
95
CBK

82

PNB

OBC
69

ALBK

56

BOB

BOI
INBK

SNDB

SBIN

CBOI

43ANDB

IDBI
DBNK CRPBK
30
0.5

VJYK
0.7

UCO
0.9

1.1

1.3

1.5

P/B(FY15)

Source:Company,AvendusResearch

Financials

22

Banks

Thispagehasbeenintentionallyleftblank

Financials

23

IndiaEquityResearch
Financials

September04,2014

BankofBaroda

BUY

TargetPrice(INR)1076 Superiorassetquality,RoEtodriveoutperformance
CompanyReport
LastPrice(INR)

886.0
BOBIN

Bloombergcode

BOB.BO

Reuters code
Avg.Vol.(3m)(mn)

1.57

Avg.Va l.(3m)(INRbn)

1.37
1,010/450

52wkH/L(INR)

27,140

Se ns ex
MCAP(INRbn/USDbn)

380.46/6.29

Shareholding(%)

03/14

06/14

Promote rs

56.3

56.3

MFs ,FIs ,Ba nks

18.6

17.7

FIIs

15.6

17.0

4.7
4.9

4.7
4.4

Public
Others
StockChart(RelativetoSensex)
920
850
780
7 10

Moderationintheaccretionofstressedassetsinthelastfewquarters
is likely to sustain. We assume a 37bp reduction in the incremental
NPL,translatinginto8bpfallinNPLprovision/loansoverFY15fFY17f.
RiseinPCRduringthelastfewquartershaslifteditabovepeersandis
likelytoreducetheincrementalprovisioningburden.Acontractionin
the NIM over the past two years is likely to get arrested, as interest
rates and slippage moderate. Large cut in bulk deposits is likely to
sustain the cost at lower level, supporting NIM. Despite buildingin
elevatedprovisions,weforecasta206bpRoEexpansionoverFY15f
FY17f. BOB is our most preferred stock among PSBs due to superior
asset quality, Tier I ratio and RoE. Reinitiate coverage with a TP of
1,076andaBuyrating.TheTPimplies1yrfwdadjustedP/Bof1.1x.
RecentriseinthePCRandmoderatingNPLstoeaseprovisionburden
RiseinthePCRcoupledwithmoderatingadditiontostressedassetsislikelyto
lowertheprovisioningburdenoverFY15fFY17f.Overthelast3quarters,PCR
has increased by 8.2% to 50.2% at endJun14, highest among the PSBs.
IncrementalgrossNPLdeclined4bpyoyto1.17%inFY14afterrisingsharply
by79bpintheprecedingtwoyears.Wefactora37bpfallintheincremental
NPL over FY15fFY17f to 0.80% in FY17 translating into a 8bp fall in the NPL
provisions/loans. However, improvement in asset quality is builtin during
FY16fFY17fasweassumethestresstocontinueinthecurrentfiscal.

CoreprofitabilitytorevivewithgradualNIMexpansion

640

StockPerfm.(%)

1m

3m

1yr

Abs olute

0.9

1.9

92.1

NIMexpansionandlikelypickupincorefeesisestimatedtoexpandRoAand
RoE to c0.80% and c16%, respectively in FY17f. With softening interest rates
andslippage,thelargeNIMcontractionoverthelasttwoyearsislikelytoget
arrested,ascostofdepositsmoderatesandyieldimproves.Weforecast13bp
NIM expansion over the next three years. The share of CDs to term deposits
declined3.5%qoqto4.0%atendJune14,partlycontributingto10bpqoq
expansioninNIM.WeforecastthePATtoriseata3yearCAGRof18.4%.

Rel.toSe ns ex

7.4

7.3

43.2

DilutionrequiredlikelytostaylowerthanthepeersoverFY15fFY17f

Financials(INRbn)

03/14

03/15f

03/16f

NII

119.7

143.6

167.7

5.7

20.0

16.8

92.9

111.7

129.1

570
500
S e p 13

J a n 14

M a y14

Bank of Baroda

S e p 14

Sensex Rebased

45.4

52.9

62.4

Sho/s (dilute d)

430.7

444.7

444.7

BOBiscapitalisedbetterthanpeersandisunlikelytorequirelowerdilutionin
thenearterm.Weassume3%dilutioninFY15f,likelytobethroughbudgetary
allocation. CET 1 was 8.95% and CAR was 12.28% at the end of Mar14. The
pickup in retained earnings growth is likely to sustain CET 1 above 8.4% over
the next 3 years. Also, moderation in RWA growth is assumed tosustain at a
lowerlevel3yearCAGRof16%preservingthecorecapital.

A.EPS(INR)

106.4

120.8

140.3

MostpreferredamongPSBs;TPvaluesBOBatAdj.P/Bof1.1x

0.6

12.7

18.0

Equity/As s ets (%)

5.5

5.5

5.3

P/E(x)

8.4

7.5

6.3

P/B(Adj)(x)

1.2

1.1

1.0

0.8
13.8

0.7
14.1

0.8
14.7

YoY(%)
Ope ra tingprofit
A.PAT

YoY(%)

RoA(%)
RoE(%)
Q uarterlyTrends

09/13

12/13

03/14

06/14

Op. inco me (INRbn)

38.7

39.9

44.5

43.5

11.7

10.5

11.6

13.6

PAT (INRbn)

Pleaserefertothedisclaimertowardstheendofthedocument.

BOBisourmostpreferredstockamongPSBsduetosuperiorassetquality,Tier
I ratio and RoE. We value P/E, P/B and DCF to arrive at the blended TP of
INR1,075. Our DCF assumes a cost of equity of 14% and semiexplicit, fade
periodgrowthof11.4%and3%,respectively.Thesemiexplicitperiodcapsthe
asset/equityat18x.OurSep15TPofINR1,076valuesBOBat1yrfwdadjusted
P/B of 1.1x. Reinitiate coverage with a Buy. Lowerthanestimated NIM and
slowrecoveryinNPLsare keyrisk factors.
ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com

BankofBaroda

SustainedriseinthePCRlikelytoeasetheincrementalprovisions
Afterasharpcontractionof23%inthePCRbetweenMar12Sep13,PCRhasrecoveredinthelastthree
quartersby8.2%to50.2%attheendofJun14,partlybenefitingfromthemoderationinslippageand
marginalrecoveryinthecorerevenues.BOBsPCRstayswellabovemostpeerssuchasBOI(37.5%),
PNB(47%),CBK(21.2%)andUNBK(44.2%),andisinlinewithSBIN.
Exhibit2: Provisioncoverageratio

Exhibit1: SlippageandNPLratios
GrossNPLratio
Slippageratio

NetNPLratio

Provisioncoverageratio(exc.writeoff)

3.5%

70%

2.8%

60%

2.1%

50%

1.4%

40%

0.7%

30%

0.0%

20%
Jun12

Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

Jun12

Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

Slippageratio,despitesomevolatility,stayswellbelowthepeak
AdditionstothegrossNPLdecreasedinthethreeconsecutivequartersto1.23%intheMar14quarter
(annualised)beforerisingto2.3%intheJun14quarter,drivenbyslippageintheSMEandagri.While
slippage is likely to stay elevated in FY15f as most restructured loans are nearing their moratorium
period,weassumeittostaybelowthepeak.However,NPLratiosarelikelytostayhighduetoslow
pickpickintheloangrowth.

Paceofrestructuringhasbeenmoderatinginthepastfourquarters
The addition to the stock of restructured loans has been trending down in the last few quarters.
However,thepercentageofrestructuredloansaspercentageofloansincreasedintheJun14quarter
largelydueto4%sequentialcontractionintheoutstandingloans.
Exhibit3: Restructuredloans

Loansrestructured(INRbn)
Domestic

Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

7.71

9.33

15.87

35.25

19.97

14.84

12.13

17.03

Jun14
9.86

8.03%

8.40%

9.08%

8.31%

9.72%

9.60%

9.39%

8.29%

8.81%

Overseas

4.17%

4.70%

4.82%

3.83%

3.98%

4.08%

3.57%

3.19%

3.20%

Totalrestructuredloans

6.82%

7.21%

7.68%

6.89%

7.83%

7.83%

7.49%

6.68%

7.01%

Source:Company,IL&FSInstitutionalEquities

Exposuretotheriskysectorslowerthantheindustryaverage
Exhibit4: ExposureofBOBandIndustrytotheriskysectors(Mar14)
(INRmn)

BankofBaroda

Allbanks

Fundbased

%ofdomesticloans

Outstanding

%oftotalloans

25,580

0.92%

353,260

0.59%

BasicMetalandmetalproducts

161,811

5.82%

3,619,690

6.02%

Energy

187,543

6.75%

4,883,460

8.12%

Total

374,933

13.49%

8,856,410

14.73%

Miningandquarrying

Source:Company,IL&FSInstitutionalEquities

Financials

25

BankofBaroda

Weestimate20bpfallinprovisionsfollowingslowingNPLaddition
IncrementalgrossNPL(riseino/sgrossNPLasapercentageofstartingloans)declined4bpyoyin
FY14 to 1.17%. It increased 79bp in the preceding two years. We assume stable incremental NPL in
FY15f as the stress may sustain due to large restructured loans nearing their moratorium period.
However,wefactora37bpfallintheincrementalNPLoverFY16fFY17fto0.80%inFY17f.However,
moderationintheloangrowthmayleadtothe86bpriseinthegrossNPLratioto3.80%.

However,fallinNPLprovision/loansisestimatedtobelower,at8bp
We build in higher NPL provisions in our estimate to bring the PCR ratio closer to its historical level.
Historically,BOBsPCRhasremainedabovepeers.NPLprovisions/loansdeclined19bpyoyto0.80%
in FY14. We estimate a decline of 8bp to 0.72% FY15fFY17f and estimate 7.5% rise in the PCR to
56.7%. The threeyear average NPL provisions/loan is estimated at 0.76%, just 4bp lower than the
precedingthreeyearsaverage.
Exhibit6: NPLprovision/loan,PCR

Exhibit5: NPLratioandincrementalNPL
IncrementalNPL
NNPLratio

GNPLratio

NPLprovision/loans

PCR(RHS)

4.0%

1.0%

80%

3.2%

0.8%

70%

2.4%

0.6%

60%

1.6%

0.4%

50%

0.8%

0.2%

40%

0.0%

30%

0.0%
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Mar11

Mar13

Mar15f

Mar17f

Source:IL&FSInstitutionalEquities

FallinNIMlikelytobearrestedasfundingcost,slippagesmoderate
Withthesharpreductioninthehighcostbulkdeposits(CDs/termdepositsat4%attheendofJun14)
andstableCASA,weestimate11bpfallinthecostofdeposits.Also,yieldsarelikelytobenefit,asthe
slippagetrendsdownward.ThelargeNIMcontraction,by60bp,seenoverthepasttwoyearsreversed
intheJun14quarterandislikelytosustain.Weestimate5bpexpansioninFY15f.
Exhibit8: CalculatedNIMfortheyear(%)

Exhibit7: NIM,depositcost,yield(quarterly)
Costofdeposits
NIM(RHS)

Yieldonloans

NIM

10

3.0

3.0

2.8

2.5

2.6

2.0

2.4

1.5

2.2

1.0

2.0
Jun14

0.5

5
Jun12

Dec12

Jun13

Dec13

Source:Company,IL&FSInstitutionalEquities

Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Financials

26

BankofBaroda

EstimatedretainedearningscouldsustainCET1above8%tillFY17f
BOB is capitalised better than peers and is unlikely to require dilution in the near term. CET 1 was
8.95%andCARat12.28%attheendofMar14.TierIwas9.06%andCARat11.91%attheendofJun14
(withoutaddingbackquarterlynetprofit).3%dilutioninFY15fandpickupinretainedearninggrowth
islikelytosustainCET1above8.4%overthenextthreeyears.Also,amoderationintheRWAgrowthis
assumedtosustain,preservingthecorecapital.WeassumeRWAtoriseatathreeyearCAGRof16%.
Exhibit9: CapitalratiosattheendofJun14

Exhibit10: GrowthinRWA,retainedearnings,TierI
TierI(RHS)
Retainedearnings(yoy)
RWA(yoy)

15
12

10%

9%

20%
15%

8%

10%
7%

5%

6%

0%

5%
CAR

TierI

CET1

Source:Company,IL&FSInstitutionalEquities

TierII

Mar14

Mar15f

Mar16f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Despiteelevatedprovisions,scopeforRoEandRoAexpansion
Exhibit11: RoA,RoE
RoA

RoE(RHS)

1.4

30

1.2

24

1.0

18

0.8

12

0.6

0.4
Mar11

Mar12

Mar13

Mar14

Mar15f

Mar16f

0
Mar17f

Source:Company,IL&FSInstitutionalEquities

We forecast an expansion in the return ratios over FY15fFY17f, driven by the peaking of NPLs and
gradual NIM expansion. RoA and RoE is estimated to expand 4bp and 206bp, to 0.8% and 15.9%,
respectively.TheimprovementinprofitabilityisestimateddespitefactoringelevatedNPLprovisions.

Financials

27

BankofBaroda

MostpreferredamongPSBsonundemandingcurrentvaluation...
Exhibit12: Discount/premiumofBOBtoPNBandSBIN,adjustedP/BofBOB
AdjustedP/B(RHS)

PremiumtoPNB

DiscounttoSBI

60%

2.5

40%

2.0

20%

1.5

0%

1.0

20%

0.5

40%
Jun09

Dec09

Aug10

Mar11

Oct11

May12

Nov12

Jul13

Jan14

0.0
Aug14

Source:Company,IL&FSInstitutionalEquities

andhigherprofitability
Higher RoE could drive the relative outperformance of BOB. With superior asset quality and
profitability compared to peers, a sharp recent fall in its premium to PNB and rise in its discount to
SBINcouldreverse.BOBisourmostpreferredstockamongPSBs.
Exhibit13: RoEofBOBandpeers

BOB
BOI
PNB
SBIN

FY13

FY14

FY15f

FY16f

FY17f

15.68
12.95
16.48
15.43

13.80
11.16
10.17
10.03

14.09
11.22
11.30
11.37

14.70
12.65
13.31
12.74

15.87
13.33
15.12
14.03

Source:Company,IL&FSInstitutionalEquities

OurTPvaluesBOBat1yearforwardadjustedP/Bof1.1x
Our target price is based on the DCF, P/E and P/B methods. Our DCFbased fair value stands at
INR1,076,whereinweassumeacostofequityof14%aswellassemiexplicitandfadeperiodgrowth
of11%and3%,respectively.Thesemiexplicitperiodcapstheasset/equityat18xandlinksittothe
growth. Our Sep15 target price of INR1,076 values BOB at 1.1x the oneyear forward adjusted book
value.WereinitiatecoveragewithaBuyrating.
Exhibit14: AverageP/EandP/B(till2Sep13)

1month

3month

6month

12month

2year

3year

5year

6.58
1.03

6.58
1.02

6.48
0.99

5.75
0.86

5.48
0.89

5.44
0.97

6.15
1.20

P/E
P/B

Source:Company,IL&FSInstitutionalEquities

Exhibit15: P/E,P/BandDCFbasedTP,andweightedaverageTP

Weights

P/E

P/B

DCF/SOP

TP

35%
952

35%
1,179

30%
1,101

1,076

Source:Company,IL&FSInstitutionalEquities

Financials

28

BankofBaroda

Exhibit16: OneyearforwardP/BandtargetP/B
1yearforwardP/ABV(X)
12monthsmovingaverage

Exhibit17: OneyearforwardP/EandtargetP/E

5yearaverage

1yearforwardP/E(X)
12monthsmovingaverage

5yearaverage

10

2.4
2.0

1.6
6
1.2
4

0.8
0.4
Jan10

Dec10

Nov11

Nov12

Oct13

Source:Company,IL&FSInstitutionalEquities

Sep14

Sep15

2
Jan10

Dec10

Nov11

Nov12

Oct13

Sep14

Sep15

Source:Company,IL&FSInstitutionalEquities

Riskfactors:
f Some of the large exposures become delinquent, leading to higherthanestimated slippage and
NPLprovisions.
f SustainedmonetarytightnessoverFY15FY16islikelytohurtmarginsduetohighercostoffunds,
giventhelowCASAofthebank.
f Growthpicksupsignificantlyanddilutionbecomesimminentintheneartermleadingtoalower
thanestimatedRoE.

Financials

29

BankofBaroda

Financialsandvaluations
Incomestatement(INRbn)
Fiscalyearending
Netinterestincom e
Feei ncome
Tradi ngprofi t
Otheri ncome
Totaloperatingincom e
Tota l opera ti ngexpens e
Operatingprofit
Provi s i onforba ddebt
Otherprovi s i on
PBT(reported)
Tota l taxes
PAT(reported)
(+)Sha rei na s s oc.ea rni ngs
Les s :Mi nori tyi nteres t
Pri orperi odi tems
Neti ncome(reported)
Adjustednetincom e
Sha res outs ta ndi ng(mn)
Di l .s hares (mn)
DilEPS(INR)

DecompositionofRoA(%)

03/14
119.7
24.8
7.4
12.4
164.3
71.4
92.9
29.4
8.6
55.0
9.6
45.4
0.0
0.0
0.0
45.4
45.4
430.7
430.7
105.4

03/15f
143.6
27.7
8.1
14.8
194.1
82.4
111.7
35.7
6.5
69.6
16.7
52.9
0.0
0.0
0.0
52.9
52.9
430.7
444.7
118.9

03/16f
167.7
32.8
9.9
17.2
227.6
98.4
129.1
38.2
8.8
82.1
19.7
62.4
0.0
0.0
0.0
62.4
62.4
430.7
444.7
140.3

03/17f
200.0
39.2
11.1
20.0
270.4
117.6
152.8
43.3
10.4
99.2
23.8
75.4
0.0
0.0
0.0
75.4
75.4
430.7
444.7
169.5

21.0
5.7
20.2
4.3
1.3
0.6

15.6
20.0
11.7
21.5
16.4
12.7

17.7
16.8
18.6
7.1
18.0
18.0

17.8
19.3
19.6
13.3
20.8
20.8

72.8
15.1
56.6
27.6
17.4

74.0
14.3
57.5
27.2
24.0

73.7
14.4
56.7
27.4
24.0

74.0
14.5
56.5
27.9
24.0

03/14
4.3
0.0
355.5
359.9
5,688.9
191.2
355.0
6,595.0
1,308.8
1,161.1
3,970.1
27.3
127.7
6,595.0

03/15f
4.4
0.0
407.4
411.8
6,599.2
168.2
340.0
7,519.2
1,427.7
1,326.1
4,589.7
29.9
145.8
7,519.2

03/16f
4.4
0.0
453.8
458.2
7,712.2
178.2
371.3
8,719.9
1,632.3
1,489.5
5,404.1
31.7
162.2
8,719.9

03/17f
4.4
0.0
508.2
512.7
9,069.9
187.5
408.4
10,178.5
1,904.0
1,692.6
6,366.5
33.0
182.4
10,178.5

69.8
20.4
17.0
16.5
3.4

69.5
20.1
17.0
16.6
2.9

70.1
19.3
16.6
16.2
2.6

70.2
18.7
16.2
15.9
2.3

Growthratios(%)

Fiscalyearending
Neti nteres ti ncome
Feei ncome
Otheri ncome
Opera ti ngi ncome
Opera ti ngexpens es
Operatingprofit
Loanl os s provi s i ons
Provi s i onfori nves tments
Otherprovi s i ons
Ta x
Netprofi t

03/14
1.98
0.41
0.33
2.72
1.18
1.54
0.49
0.03
0.11
0.16
0.75

03/15f
2.03
0.39
0.32
2.75
1.17
1.58
0.51
0.01
0.08
0.24
0.75

03/16f
2.07
0.40
0.33
2.80
1.21
1.59
0.47
0.02
0.09
0.24
0.77

03/17f
2.12
0.42
0.33
2.86
1.24
1.62
0.46
0.02
0.09
0.25
0.80

RoA
As s ets /Equi ty
RoE

0.75
18.34
13.80

0.75
18.80
14.09

0.77
19.13
14.70

0.80
19.90
15.87

03/14

03/15f

03/16f

03/17f

8.40
1.06
1.21
2.84

7.45
0.96
1.09
3.39

6.31
0.86
0.96
4.06

5.23
0.77
0.85
5.30

106.4
106.4
835.6
731.4
25.2

122.7
120.8
926.1
810.0
30.0

144.9
140.3
1,030.4
919.6
36.0

175.0
169.5
1,152.9
1,043.8
47.0

KeyRatios

Loa ns
Neti nteres ti ncome
Feei ncome
Provi s i onforba ddebt
Adjus tedneti ncome
Di l .EPS

Operatingratios(%)
NII/opera ti ngi ncome
Feei ncome/operati ngi ncome
Operati ngprofi tma rgi n
Netprofi tma rgi n
Effecti veTaxra te

Balancesheet(INRbn)

Fiscalyearending
Equi tycapi ta l
Preferencecapi ta l
Res erves ands urpl us
Networth
Depos i ts
Tota l borrowi ngs
Otherl i a bi l i ti es andprovi s i ons
Totalliabilities
Cas ha ndba nkbal a nces
Inves tments
Loa ns
Fi xeda s s ets
Othera s s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
Inves tment/Depos i t
SLRInves tment/Depos i t
SLRInves tment/NDTL
Debenture/Inves tment

Fiscalyearending
Valuationratios(x)
P/E(ondi l .EPS)
P/BV
P/Adjus tedBV
Di vi dendyi el d(%)
Pershareratios(INR)
Ba s i cReportedEPS(INR)
Di l utedReportedEPS(INR)
ReportedBookVa l ue(BV)
Adjus tedBookVal ue(ABV)
Di vi dendpers ha re(INR)
Return/ProfitabilityRatios(%)
Yi el dona dva nces
Yi el doni nves tments
Cos tofdepos i ts
Neti nteres tmargi n
Feei ncome/Oprevenue
Tra di ngprofi t/Oprevenue
Opexpens e/Oprevenue
CapitalizationRatios(%)
Equi ty/As s ets
Loans /As s ets
Inves tments /As s ets
Di vi dendpa yout
Interna l ca pi ta l growth
Ca pi ta l a dequa cy
AssetQuality
Gros s NPLra ti o
NetNPLra ti o
NetNPL/networth
Loanl os s res erve/Gros s NPL
Loanprovi s i ons /NII
Loanprovi s i ons /Tota l l oa ns
Productivity/Efficiencyratios
Bus i nes s perbra nch(INRmn)
Netprofi tperempl oyee(INRmn

7.69
7.32
4.84
2.03
15.07
4.53
43.44

7.81
7.39
4.73
2.08
14.25
4.16
42.47

7.86
7.40
4.74
2.11
14.41
4.33
43.26

7.97
7.41
4.76
2.16
14.50
4.12
43.50

5.46
60.20
17.61
23.86
10.81
12.28

5.48
61.04
17.64
25.24
10.98
10.67

5.25
61.97
17.08
25.66
11.26
10.26

5.04
62.55
16.63
27.74
11.88
9.74

2.94
1.52
17.5
49.2
24.5
0.74

3.55
1.80
20.6
50.2
24.9
0.78

3.69
1.73
20.7
54.1
22.8
0.71

3.80
1.68
21.0
56.7
21.6
0.68

1,981.7
0.99

2,121.5
1.11

2,353.1
1.28

2,627.9
1.51

Financials

30

IndiaEquityResearch
Financials

September04,2014

HDFCBank

BUY

TargetPrice(INR)1004 Sharpfallinvaluationpremiumunlikelytosustain
CompanyReport
LastPrice(INR)

856.7

Bloombergcode

HDFCBIN

Reuters code

HDBK.BO

Avg.Vol.(3m)(mn)

1.99

Avg.Va l.(3m)(INRbn)

1.64
865/557

52wkH/L(INR)

27,140

Se ns ex
MCAP(INRbn/USDbn)

2,067/34.18

Shareholding(%)

03/14

06/14

22.6

22.6

9.9

10.1

FIIs

34.1

33.9

Public
Others

8.0
25.4

8.1
25.4

Promote rs
MFs ,FIs ,Ba nks

StockChart(RelativetoSensex)
920

840

760

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


RoAexpansionoverFY15fFY17f.DuringFY14,alargedeclineof32bp
inthecost/assetratiooverFY13FY14offsettheweaknessinfeesand
NIM.Retailloangrowthislikelytoreboundwiththebottomingofthe
vehicle loans in the 2HFY15. The retail loan proportion is likely to
stabilise near 49%. The asset quality cycle is poised to stabilise; we
forecast a 0.15% incremental NPL by Mar16f, 12bp fall over FY14. A
sharpdropinthevaluationpremiumoverpeersisinconflictwithits
superiorreturnratios.OurSep15TPofINR1,004valuesthestockata
P/Eof16.3xandP/Bof3.07x,15%discounttoits5yearmean.Were
initiatecoveragewithaBuyrating.
Sharpfallinvaluationpremiumtopeersunlikelytosustain
The valuation premium of HDFCB to AXSB and ICICIBC in P/B (adjusted) has
fallen by c60% in the past six months, well below the fiveyear mean. Higher
NIM and low credit cost has sustained superior RoA and RoE of HDFCB
compared to peers. The average (FY13FY14) RoA and RoE of HDFCB were
higherthanpeersbyupto0.17%and7.25%,respectively.Thesuperiorasset
quality and NIM is unlikely to fade away. Hence, a sharp fall in the valuation
premium of HDFCB to peers is unlikely to sustain and the current valuation
couldprovidereasonablereturnwithrelativeoutperformanceover12months.

Assetqualitypoisedtostabilisewithgradualreboundinretailsegment

680

600

520
S e p 13

J a n 14

M a y14

HD FC Bank

S e p 14

Sensex Rebased

StockPerfm.(%)

1m

3m

1yr

Abs olute

5.1

3.9

52.3

1.5

5.3

3.4

Financials(INRbn)

03/14

03/15f

03/16f

NII

184.8

227.9

276.0

16.9

23.3

21.1

143.6

179.9

219.4

Rel.toSe ns ex

YoY(%)
Ope ra tingprofit
A.PAT
Sho/s (dilute d)

84.8

108.1

134.3

2,399.1

2,411.1

2,411.1

The asset quality in the CV/CE portfolio has likely peaked, but should stay
stable rather than improve until there is a material change in the underlying
industryconditions.WeforecastanincrementalNPLof0.15%adeclineof12
bpoverFY14byFY16f.WithlowNPLsandastrongcapitalposition,HDFCBis
wellplacedtoreboundingrowth,asdemandpicksup.Weexpecttotalloans
andretailloanstoincreaseata3yearCAGRof21%and20%,respectively.

Significantleverspresenttosustaincostratioimprovement
Despite assuming normalised employee addition and a rise in the average
pay/employee, a 32bp fall in the costasset ratio in the past two years may
sustainduringFY15fFY17f.Thereisscopeforcost/incomeratioimprovement,
ledbytheoperatingleverage,derivingbenefitsfromsignificantinvestmentsin
distribution (including branches) that is yet to reach full productivity. Some
structural techbased improvements in process, led by digitisation, could
translateintostructuralcostbenefits.Weforecastthecostincomeratiotostay
closeto44%,lowerthanthelastthreeyearaverageof48%.

A.EPS(INR)

35.5

44.9

55.7

CAGRof24%inPATlikelytodrive19bpRoAexpansion

YoY(%)

25.0

26.9

24.2

8.8

10.5

10.3

24.2

19.1

15.4

4.7

3.3

2.8

1.9
21.3

2.0
20.5

2.1
19.9

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


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

Equity/As s ets (%)


P/E(x)
P/B(Adj)(x)
RoA(%)
RoE(%)
Q uarterlyTrends

09/13

12/13

03/14

06/14

Op. inco me (INRbn)

63.4

63.2

67.8

69.5

PAT (INRbn)

18.4

19.8

23.3

23.2

Pleaserefertothedisclaimertowardstheendofthedocument.

ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com

HDFCBank

Pickupinretailloanslikelyasvehicleloansbottomout
Retail loans reported a sharp slowdown in FY14 due to the slump in the vehicle loan segment. As a
percentageofnetloans,retailloanswere49%attheendofMar14,decliningfromapeakof57%at
the end of Mar12. Retail loans increased at a CAGR of 18% over FY13FY14, largely driven by
unsecuredloanspersonalloansandcreditcards;theytogethercomprise22%ofretailloans.While
creditcardsroseataCAGRof33%,personalloansandbusinessbankingwentupatCAGRsof21%and
16%,respectively.HDFCBhastheoptionofretainingc70%ofmortgagesthatthebankoriginatesfor
theparentHDFC(HDFCIN,NR).ThemortgagebooksizewasINR193bnattheendofMar14;HDFCB
originatescINR5bnmortgagespermonthandwebelieve,itislikelytoaidloangrowth.
Exhibit1: Breakupofretailloans
Auto

CV

PL

BB

Home

Creditcard

Others

100%
13.0%

16.8%

6.5%
75%

8.2%

13.3%

12.9%

17.4%

16.7%

50%
13.0%

13.6%

12.2%

9.6%

25%
24.6%

22.1%

Mar12

Mar14

0%

Source:Company,IL&FSInstitutionalEquities

VehicleloanhasseenasignificantslowdowninthepasttwoyearswiththeCAGRinCV/CEandauto
loansat5%and12%,respectively.Commercialvehicleloans,asapercentageofretailandtotalloans,
havebeendecliningconsistentlyoverthepasttwoyears.Theshareinretailloansdeclinedfrom12.2%
attheendofMar12to8.9%attheendofJun14.
Exhibit2: Growthinretailloansandretailasapercentageofnetloans
Retail/netloans(RHS)

Totalloangrowth

Retailloangrowth

40%

57%

32%

54%

24%
51%
16%
48%

8%
0%

45%
Mar12

Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

Source:Company,IL&FSInstitutionalEquities

CAGRof20%assumedinretailloansduringFY15fFY17f
WithlowNPLsandstrongcapitalposition,HDFCBiswellplacedtoreboundingrowth,asdemandpicks
up; the competitions ability to absorb elevated demand may be limited. During FY15fFY17f, we
expecttotalloanstoriseataCAGRof21%andretailloansat20%.

Financials

32

HDFCBank

Exhibit3: CAGRinloans

Mar11Mar12

Mar13Mar14

Mar15Mar17f

Totalloans

23.7%

23.9%

20.7%

Retailloans

39.8%

18.2%

19.8%

Source:Company,IL&FSInstitutionalEquities

SBdepositstogaintractionasnewlyopenedbranchesyieldbenefits
The pace of branch additions has increased in the past three years ended Mar14 with 1,417 branch
additions, much higher than the 574 branches added in the preceding two years (Mar09Mar11).
During FY14, 74% of the banks branches opened in the semiurban and rural regions; this lifted the
shareofsemiurbanandruralbranchesfrom53%attheendofMar13to55%attheendofMar14.The
SB deposits grew at a CAGR of 18% during FY12FY14, moderating from 35% in the preceding two
years, partly due to high inflation. The CAGR in SB deposits may begin to pick up, as inflation
moderates and large branch expansion undertaken in the last three years yield benefits. While we
assume branch addition to moderate in the forthcoming years, we forecast a CAGR of 20% in SB
depositsduringFY15fFY17f.WeexpecttheCASAratiotoremainwithin45%47%overFY15fFY17f.
Exhibit5: CAGRinsavingsdeposits

Exhibit4: Savingsdeposits
SBdepositsgrowth
SBdepositsproportion(RHS)

CAGRinSBdeposits

Branchesadded

25%

30%

35%

1500

20%

29%

28%

1300

15%

28%

21%

1100

10%

27%

14%

900

5%

26%

7%

700

25%

0%

0%
Jun12

Dec12

Jun13

Dec13

500
Mar09Mar11Mar11Mar14Mar14Mar17f

Jun14

Source:Company,IL&FSInstitutionalEquities

Source:Company,IL&FSInstitutionalEquities

Significantleverspresenttosustainimprovementincostratios
DeclineincostratioexceededfallinfeeintensityoverFY12FY14
Exhibit6: Cost/asset,fee/assetandNII/assetratios(%)
4.6

3.8
Fee/assets

Cost/assets

NII/asset(RHS)

3.1

4.3

2.4

4.0

1.7

3.7

1.0
Mar10

Mar11

Mar12

Mar13

Mar14

Mar15f

Mar16f

3.4
Mar17f

Source:Company,IL&FSInstitutionalEquities

Financials

33

HDFCBank

During the two years ended Mar14, HDFCBs cost/asset ratio decreased 32bp, while the fee/asset
ratiofell21bpandtheNII/assetratiodeclinedmarginallyby6bp.Thus,therelativeadvantageoffees
andNIIovercosthasincreasedby5bp.
Exhibit7: Costratios(%)
Mar10

Mar11

Mar12

Mar13

Employeecost/asset

Mar14 Mar15f

Mar16f

Mar17f

1.13

1.13

1.11

1.07

0.94

Nonemployeecost/asset

1.80

1.73

1.91

1.97

1.76

0.94

0.96

0.98

1.68

1.71

Totalcost/asset

2.93

2.86

3.02

3.04

1.70

2.70

2.62

2.66

2.68

Costincome

48.0

48.1

49.7

49.6

45.6

44.5

44.1

43.8

Source:Company,IL&FSInstitutionalEquities

Despitenormalisedemployeeaddition,riseinaveragepay/employee
DuringFY14,HDFCBsoperatingexpenseincreasedjust7%;employeecostwentupevenlower,justby
5%yoy,partlydrivenbythedeclineinnumberofemployeesby900to68,165attheendofMar14.
This follows a large net addition of 13,200 employees in the past two years. We assume addition of
employeestobenormalisedwith11,338netadditionsduringFY15fFY17f.Ourforecastassumesthe
average pay per employee to grow at an accelerated pace of 17% (compared to just 5% in the
precedingthreeyearsoverthenextthreeyears,astheeconomyrebounds).

improvementincostratiosforecasttosustainduringFY15fFY17f
Withanincreaseinthepaceofrevenueandassetgrowth,theimprovementincostratiosisforecastto
sustain. The biggest driver in sustaining cost ratios would be the operating leverage. The bank has
madesignificantinvestmentsoverthelastfewyearsindistribution(includingbranches)andthatisyet
to reach full productivity. This operating leverage impact should last another 12 years at least. The
strongcostcuttingexerciseoverthepastyearorsohasalsoyieldedresults.Someofthisisvulnerable
tobeingunwoundwhengrowthreturns,butthemanagementbelievesthatsomeofthiscostcontrol
willremain.Therearesomestructuraltechbasedimprovementsinprocess,largelyledbydigitisation.
Theprimarybenefithasbeen inbettercustomerserviceandfasterturnaroundtimes,butthiscould
translateintosignificantstructuralcostbenefitsoverthelongterm.

DecliningprovisionstosupportRoAexpansionoverFY15fFY17f
IncrementalNPLforecastat0.17%,4bplowerthanpast3yearaverage
TheassetqualityintheCV/CEportfoliohaslikelypeaked,butshouldstaystableratherthanimprove
untilthereisamaterialchangeinunderlyingindustryconditions.
Exhibit8: NPLratiosandincrementalNPL(%)
GNPLratio
NNPLratio
IncrementalNPL(RHS)

Exhibit9: Provisions/assetsandPCR

1.2%

0.27%

NPLprovisions/assets
Otherprovisions(exc.taxandinvest.)/assets
NPLprovisions/grossNPL
0.48%
85%

0.9%

0.17%

0.36%

80%

0.6%

0.07%

0.24%

75%

0.3%

0.03%

0.12%

70%

0.13%

0.00%

0.0%
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

65%
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Theassetqualityinotherretailloansisstillstrong,creditcostsanddelinquencieshavebeenrisingover
thepastyearorso,butthemanagementseesthataspartofthenormalisationprocess.Therecouldbe
somemoreuptickiftheeconomystaysweak,butthemanagementdoesnotexpectanalarmingspike,

Financials

34

HDFCBank

given the overall standards of credit control. The overall corporate loan portfolio is likely to remain
stable;apartfromsomeaccountspecificrisks,theoverallportfolioisstable.Weassumeincremental
NPL to decline 12bp to 0.15% over FY15fFY16f. The average incremental NPL for FY15fFY17f is
assumed at 0.17%, 4bp lower than the preceding three years. The gross NPL ratio is estimated to
decline7bpto0.98%bytheendofFY17f.Theprovisioncoverageratioisforecasttoremainatc70%
duringFY15fFY17f.TheNPLprovision/assetsincreased6bpto0.37%;weforecasta7bpdeclineover
the next three years, following the softening in the incremental NPL. A large rise in other provisions
during FY11FY12 was driven by a floating provision of INR13.7bn. We assume the decline in other
provisionswiththenormalisationofNPLsinthepasttwoyearstosustainandremaincloseto5bp.

CAGRof24%inPATlikelytodrive19bpRoAexpansion
We forecast a CAGR of 24% in PAT over FY15fFY17f, driven by a 14bp NIM expansion, sustainable
costadvantageandthedecliningburdenofprovisions.Adecreaseinprovisionsisbelievedtosupport
earningsgrowthandRoAexpansion.AriseinRoAinthepastfouryearsisbelievedtosustainduring
thefollowingthreeyearswithaforecastedexpansionof19bpto2.09%.TheRoEislikelytostayclose
tothe21%level.
Exhibit10: TrendinRoEandRoA
Asset/Equity

RoE

RoA

25

2.20

20

2.00

15

1.80

10

1.60

1.40

1.20
Mar10

Mar11

Mar12

Mar13

Mar14

Mar15f

Mar16f

Mar17f

Source:Company,IL&FSInstitutionalEquities

ValuationpremiumofHDFCBtopeerswellbelow3yearmean
Exhibit11: ValuationpremiumofHDFCBoverAXSBandICICIBCinadjustedP/B
280%
AXSB

ICICIBC

210%

140%

70%

0%
Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14 Sep14
Source:Company,IL&FSInstitutionalEquities

Financials

35

HDFCBank

ThevaluationpremiumofHDFCBtopeers,intheadjustedP/Bhascontractedsignificantlyinthelast
sixmonths.ThepremiumofHDFCBtoICICIBCcontractedbyc74%andtoAXSBbyc79%toc42%and
c50%,respectively,inthepastsixmonths;thiswaswellbelowthethreeyearmean.

SustainedhigherRoA,RoEtoreversethefallinvaluationpremium
HighermarginsandlowcreditcosthaveledtoasustainedsuperiorRoAforHDFCBcomparedtopeers.
Thecompetitiveedgeinassetqualityandlowcostfundsisunlikelytofadeawayoverthenextthree
years.Hence,asharpfallinthevaluationpremiumofHDFCBtopeersisunlikelytosustain.
Exhibit13: AverageRoA(%)

Exhibit12: AverageRoE(%)
AXSB

HDFCB

AXSB

ICICIBC

21

2.1

14

1.4

0.7

HDFCB

ICICIBC

0.0
FY13FY14

FY15fFY17f

FY13FY14

Source:Company,IL&FSInstitutionalEquities

FY15fFY17f

Source:Company,IL&FSInstitutionalEquities

Targetpricevaluesstockat3.07x,1yearforwardadj.P/B
WevalueHDFCBcombiningtheDCF,P/EandP/Bmethods.OurthreestageDCFusesexplicitforecasts
untilFY17,followedby10yearsofsemiexplicitforecasts,whereweassumeaCAGRof21%inloans
and a dividend payout of 20%. We also assume the RoA at the end of the semiexplicit period to
converge to 1.2% (fiveyear average for new private banks). The final stage of 12 years assumes the
convergenceofRoEandCoE(expectedtobe14%).ThismethodresultsinafairvalueofINR575.
WeestimatethemeanoneyearforwardP/EandP/Bforthefiveyearperiodended02Sep14at19.5x
and3.6x,respectively.WeapplythesetoourforecastedEPSandP/BforSep15toarriveatfairvalues
of INR1,198 and INR1,179, respectively. Our Sep15 TP of INR1,004 is a weighted average, where we
assignaweightof30%toourDCFvalueand35%eachtoourP/EandP/Bvalues.
Exhibit15: OneyearforwardP/BandtargetP/B

Exhibit14: OneyearforwardP/E(x)andtargetP/E
1yearforwardP/E(X)
12monthsmovingaverage

5yearaverage

1yearforwardP/ABV(X)
12monthsmovingaverage

30

5.0

25

4.3

20

3.6

15

2.9

10
Jan10

Dec10

Nov11

Nov12

Oct13

Source:Bloomberg,IL&FSInstitutionalEquities

Sep14

Sep15

2.2
Jan10

Dec10

Nov11

Nov12

5yearaverage

Oct13

Sep14

Sep15

Source:Bloomberg,IL&FSInstitutionalEquities

Financials

36

HDFCBank

Exhibit16: AverageP/EandP/B(till02Sep14)

1month

3month

6month

12month

2year

3year

5year

17.51
3.03

17.76
3.16

17.28
3.30

16.66
3.27

17.68
3.49

18.03
3.48

19.49
3.60

P/E
P/B

Source:Company,IL&FSInstitutionalEquities

Exhibit17: P/E,P/BandDCFbasedTP,andweightedaverageTP

Weights

P/E

P/B

DCF/SOP

TP

35%
1,198

35%
1,179

30%
575

1,004

Source:Company,IL&FSInstitutionalEquities

Keyriskstoourestimates
f LowerthanestimatedsavingsdepositsgrowthinFY15fandFY16fmaydecreasetheproportionof
savingsdeposits,leadingtolowerNIMexpansion.
f NPLratiosmayriseinlinewithhigherthanestimatedincrementalNPLs.Loanlossprovisionsmay
behigherunderthisscenario,resultinginadownwardrisktoearnings.
f A rebound in fee intensity may be higher than our estimates, resulting in an upward risk to
earnings.

Financials

37

HDFCBank

Financialsandvaluations
Incomestatement(INRbn)
Fiscalyearending
Netinterestincom e
Feei ncome
Tradi ngprofi t
Otheri ncome
Totaloperatingincom e
Tota l opera ti ngexpens e
Operatingprofit
Provi s i onforbaddebt
Otherprovi s i on
PBT(reported)
Tota l taxes
PAT(reported)
(+)Sha rei na s s oc.ea rni ngs
Les s :Mi nori tyi nteres t
Pri orperi odi tems
Neti ncome(reported)
Adjustednetincom e
Sha res outs ta ndi ng(mn)
Di l .s hares (mn)
DilEPS(INR)

DecompositionofRoA(%)

03/14
184.8
71.4
4.6
3.3
264.0
120.4
143.6
16.3
0.5
127.7
42.9
84.8
0.0
0.0
0.0
84.8
84.8
2,399
2,399
35.3

03/15f
227.9
87.7
3.3
3.1
322.1
142.2
179.9
18.4
2.5
159.0
50.9
108.1
0.0
0.0
0.0
108.1
108.1
2,411
2,411
44.8

03/16f
276.0
108.2
3.9
3.9
392.0
172.6
219.4
18.9
3.0
197.4
63.2
134.3
0.0
0.0
0.0
134.3
134.3
2,411
2,411
55.7

03/17f
332.1
130.5
4.6
4.8
472.0
207.1
264.8
22.8
3.6
238.4
76.3
162.1
0.0
0.0
0.0
162.1
162.1
2,411
2,411
67.2

26.4
16.9
11.5
32.3
26.0
25.0

20.2
23.3
23.0
12.9
27.5
26.9

20.3
21.1
23.3
2.7
24.2
24.2

20.8
20.3
20.6
20.5
20.7
20.7

70.0
27.0
54.4
32.1
33.6

70.8
27.2
55.9
33.6
32.0

70.4
27.6
56.0
34.3
32.0

70.4
27.7
56.1
34.3
32.0

03/14
4.8
0.0
430.0
434.8
3,673.4
233.8
574.0
4,916.0
395.8
1,209.5
3,030.0
29.4
251.2
4,916.0

03/15f
4.8
0.0
615.5
620.4
4,415.4
232.0
662.9
5,930.7
532.2
1,425.6
3,642.2
31.2
299.6
5,930.7

03/16f
4.8
0.0
722.2
727.0
5,320.6
253.2
764.7
7,065.4
615.8
1,676.6
4,380.3
33.8
358.9
7,065.4

03/17f
4.8
0.0
852.1
856.9
6,437.9
282.5
876.4
8,453.7
696.1
1,998.4
5,291.0
38.1
430.1
8,453.7

82.5
32.9
25.3
23.8
1.0

82.5
32.3
24.8
23.6
1.1

82.3
31.5
24.1
23.0
1.1

82.2
31.0
23.7
22.7
1.0

Growthratios(%)

03/14
4.14
1.60
0.18
5.92
2.70
3.22
0.37
(0.07)
0.06
0.96
1.90

03/15f
4.20
1.62
0.12
5.94
2.62
3.32
0.34

0.05
0.94
1.99

03/16f
4.25
1.67
0.12
6.03
2.66
3.38
0.29

0.05
0.97
2.07

03/17f
4.28
1.68
0.12
6.08
2.67
3.41
0.29

0.05
0.98
2.09

RoA
As s ets /Equi ty
RoE

1.90
11.19
21.28

1.99
10.28
20.49

2.07
9.65
19.93

2.09
9.80
20.47

03/14

03/15f

03/16f

03/17f

24.2
4.7
4.7
0.8

19.1
3.3
3.3
0.9

15.4
2.8
2.8
1.1

12.7
2.4
2.4
1.3

35.5
35.5
181.2
180.9
7.2

44.9
44.9
257.3
256.6
8.0

55.7
55.7
301.5
300.7
9.8

67.2
67.2
355.4
354.4
11.4

KeyRatios

Loa ns
Neti nteres ti ncome
Feei ncome
Provi s i onforbaddebt
Adjus tedneti ncome
Di l .EPS

Operatingratios(%)
NII/opera ti ngi ncome
Feei ncome/opera ti ngi ncome
Operati ngprofi tmargi n
Netprofi tma rgi n
Effecti veTaxra te

Balancesheet(INRbn)

Fiscalyearending
Equi tycapi ta l
Preferenceca pi ta l
Res erves ands urpl us
Networth
Depos i ts
Tota l borrowi ngs
Otherl i a bi l i ti es a ndprovi s i ons
Totalliabilities
Cas ha ndba nkba l ances
Inves tments
Loa ns
Fi xeda s s ets
Othera s s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
Inves tment/Depos i t
SLRInves tment/Depos i t
SLRInves tment/NDTL
Debenture/Inves tment

Fiscalyearending
Neti nteres ti ncome
Feei ncome
Otheri ncome
Opera ti ngi ncome
Opera ti ngexpens es
Operatingprofit
Loa nl os s provi s i ons
Provi s i onfori nves tments
Otherprovi s i ons
Tax
Netprofi t

Fiscalyearending
Valuationratios(x)
P/E(onAvendus EPS)
P/BV
P/Adjus tedBV
Di vi dendyi el d(%)
Pershareratios(INR)
Ba s i cReportedEPS(INR)
Di l utedReportedEPS(INR)
ReportedBookVal ue(BV)
Adjus tedBookVa l ue(ABV)
Di vi dendpers ha re(INR)
Return/ProfitabilityRatios(%)
Yi el dona dva nces
Yi el doni nves tments
Cos tofdepos i ts
Neti nteres tma rgi n
Feei ncome/Oprevenue
Tra di ngprofi t/Oprevenue
Opexpens e/Oprevenue
CapitalizationRatios(%)
Equi ty/As s ets
Loa ns /As s ets
Inves tments /As s ets
Di vi dendpa yout
Interna l capi ta l growth
Ca pi ta l a dequacy
AssetQuality
Gros s NPLra ti o
NetNPLra ti o
NetNPL/networth
Loa nl os s res erve/Gros s NPL
Loa nprovi s i ons /NII
Loa nprovi s i ons /Tota l l oa ns
Productivity/Efficiencyratios
Bus i nes s perbranch(INRmn)
Netprofi tperempl oyee(INRmn

11.7
7.8
5.9
4.4
21.7
1.7
45.6

11.8
7.5
5.9
4.5
21.9
1.0
44.1

11.7
7.5
5.9
4.5
21.7
1.0
44.0

11.6
7.4
5.8
4.5
21.7
1.0
43.9

8.8
61.9
24.6
23.7
17.9
16.1

10.5
61.7
24.0
20.9
19.7
17.9

10.3
62.2
23.7
20.6
17.2
17.4

10.1
62.8
23.6
19.8
17.9
16.9

1.0
0.3
1.9
72.4
8.8
0.7

1.0
0.3
1.7
70.3
8.1
0.7

0.9
0.3
1.7
70.1
6.9
0.7

0.9
0.3
1.7
69.9
6.9
0.6

1,969.8
1.2

2,147.0
1.5

2,364.3
1.8

2,633.9
2.0

Financials

38

IndiaEquityResearch
Financials

September04,2014

ICICIBank

ADD

TargetPrice(INR)1780 Uptrendinprofitabilitytodrivethevaluation
CompanyReport
LastPrice(INR)

1,581

Bloombergcode

ICICIBCIN

Reute rs code

ICBK.BO

Avg.Vol.(3m)(mn)

2.87

Avg.Va l.(3m)(INRbn)

4.21
1,619/777

52wkH/L(INR)

27,140

Se nse x
MCAP(INRbn/USDbn)

1,829/30.24

Shareholding(%)

03/14

Promote rs

06/14

ICICIBC has derisked its loan book in recent years; the quality of the
retail book has been resilient, as the bank has focused on secured
retail loans in the past 34 years and cut down on risky retail loans
significantly. Given the strong liability mix (CASA ratio of 43% at the
end of FY14) and increase in yields, partly driven by rising working
capital lending, we forecast NIM expansion to sustain in FY15f,
althoughbyalesserextentof9bpto3.24%.TheincrementalNPLof
ICICIBChasremainedwellbelowthepeakduringFY07FY08(average
of1.25%).APATCAGRof16%wouldlifttheRoEby2.62%to16.7%by
FY17f.OurSep15TPofINR1,780valuesthestockat2.23xtheoneyear
forwardadjustedP/B.WereinitiatecoveragewithanAdd.

0.0

0.0

MFs ,FIs ,Ba nks

23.2

23.3

FIIs

39.9

40.0

LargereboundinNIMduringFY11FY14islikelytosustain

Public
Others

4.6
32.3

4.6
32.1

DuringFY11FY14,theNIMexpanded54bp,drivenbya172bpimprovement
intheyieldonloans,whilecostofdepositsroselowerby101bp.Addressing
structuralissuessuchas,reductionofthedragfromsecuritisationlosses,loan
pricingandreductionofexcessliquidityintheoverseasbranchescontributed
totheimprovementintheyieldonloans.Giventhestrongliabilitymix(CASA
ratio of 43% at the end of Jun14) and increase in yields, partly led by rising
working capital lending, we forecast NIM expansion to sustain in FY15f,
although by a lesser extent of 9bp to 3.24%. The NII/assets is estimated at
2.99%forFY15f,an8bpimprovementyoy.

StockChart(RelativetoSensex)
ICICI Bank

Sensex Reba sed

1,60 0
1,50 0
1,40 0
1,30 0
1,20 0
1,10 0

Despiterise,incrementalNPLwellbelowpeakduringFY07FY09

1,00 0

ICICIBCsincrementalNPLduringFY13FY14hasremainedwellbelowthepeak
during FY07FY08 (average of 1.25%). While the management has guided for
an improvement in FY15f, we assume the incremental addition at 0.25%,
similartothatinFY14.NPLprovision/loanisunlikelytodeclinemateriallyfrom
the current level and is estimated at 0.42% of the loans over FY15fFY17f,
similartothemeanoftheprecedingthreeyears.

90 0
80 0
S e p13

J a n 14

M a y14

S e p 14

StockPerfm.(%)

1m

3m

1yr

Abs olute

7.1

8.4

101.7

Rel.toSens ex

0.6

0.8

52.9

03/14

03/15f

03/16f

0.2

0.2

0.2

18.8

16.3

14.1

0.2

0.2

0.2

98.1

114.9

133.2

Financials(INRbn)
NII
YoY(%)
Opera tingprofit
A.PAT

1,155.0

1,155.0

1,155.0

EPS(INR)

85.0

99.5

115.4

YoY(%)

17.7

17.1

16.0

Equity/Ass ets (%)

12.3

11.6

11.1

P/E(x)

18.6

15.9

13.7

2.5

2.3

2.1

1.7
14.0

1.8
15.0

1.8
15.9

Sho/s

P/B(Adj)(x)
RoA(%)
RoE(%)
Q uarterlyTrends

09/13

12/13

03/14

Op. income (INRbn)

19.9

19.9

19.9

19.9

PAT (INRbn)

23.5

23.5

23.5

23.5

Pleaserefertothedisclaimertowardstheendofthedocument.

ExpansioninRoEaheadofsomepeers;gapnarrowssignificantly
ICICIBC reported large expansion in its return ratios in the preceding three
yearswithitsRoEandRoAexpandingby40bpand437bp,respectively.The
large gap in RoE with some peers such as AXSB and HDFCB has contracted
significantly.APATCAGRof16%wouldlifttheRoEby2.62%to16.7%byFY17f.

Mostpreferredamongnewbanks;reinitiatewithBuy
We expect the revenue momentum to remain strong, led by sustained high
margins,animprovementinthefeeincomeandstrongretailloangrowth.Even
with elevated NPL provisions/asset, we foresee RoEs rising continuously
throughFY17ftotheupperteens.ICICIBChasderiskeditsloanbookinrecent
years;thequalityoftheretailbookhasbeenresilient,asthebankhasfocused
onsecuredretailloansinthepast34yearsandhascutdownonriskyretail
loanssignificantly.OurSep15TPofINR1,780valuesthestock(consolidated)at
2.28xtheoneyearforwardadjustedP/B.Wereinitiatecoverageonthestock
withanAdd.

06/14

ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com

ICICIBank

54bpriseinNIMduringFY11FY14ledby173bpriseinloanyields
ThesharpimprovementintheFY11FY14NIMwaslargelyledbythe172bpimprovementintheyield
onloans.Riseinyieldonloansfarexceededtheincreaseincostofdeposits(roseby101bp),leading
to a 54bp NIM expansion. Focus on structural issues such as reduction of drag from securitisation
losses,loanpricingandtrimmingdownofexcessliquidityintheoverseasbranchescontributedtothe
improvementintheyieldonloans.Theyieldremainedcloseto10%duringFY13FY14.

LargeNIMexpansioncouldsustaininFY15fdrivenbystrongfundingmix
Withtheimprovementledbystructuralchangesalreadyfactoredin,theNIMislikelytobelinkedto
thebanksinterestratecycleandassetliabilitymix.Giventhestrongliabilitymix(CASAratioof43%at
theendofJun14)andincreaseinyields,weforecastNIMexpansiontosustaininFY15f,althoughbya
lesser extent of 9bp to 3.24%. We estimate a CAGR of 15% in the net interest income, following a
CAGR of 18% in the FY15fFY17f loan growth. NII/asset is estimated at 2.99% for FY15f, an 8bp
improvementyoyandislikelytoflattenthereafter.Therecouldbesomebenefitfromtheexpansion
intheoverseasNIMduringFY15f,drivenbyfurtherreductionintheliquidityinoverseasbranches.
Exhibit2: NIM,yield,depositcostfortheyear(%)

Exhibit1: NIM(reported)forthequarter(%)

NIM
Costofdeposits

3.5%
3.4%
3.3%

Yieldonloans

12

3.5

10

3.0

2.5

2.0

3.2%
3.1%
3.0%
2.9%
2.8%

4
Jun12

Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

1.5
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

FY14incrementalNPLwellbelowpeakduringFY07FY09
TheincrementalNPLhasremainedwellbelowthepeakduringFY07FY08(averageof1.25%).While
the management has guided for an improvement in FY15f, we assume an incremental addition at
0.25%,similartothatinFY14.However,thegrossNPLratioislikelytocontinuetrendingdown.
Exhibit3: IncrementalNPLandNPLratios
IncrementalNPL(RHS)

GrossNPLratio

NetNPLratio

6.0%

2.0%

5.0%

1.5%

4.0%
1.0%
3.0%
0.5%
2.0%
0.0%

1.0%
0.0%
Mar07

Mar08

Mar09

Mar10

Mar11

Mar12

Mar13

Mar14

Mar15f

0.5%
Mar16f Mar17f

Source:Company,IL&FSInstitutionalEquities

Financials

40

ICICIBank

Exhibit4: NPLratiosandslippageratioforthequarter
Slippageratio(RHS)

GNPLratio

Exhibit5: PCR,NPLprovisions/loans
NPLprovision/loans

NNPLratio

PCR(RHS)

4.0%

3.0%

2.5%

90%

3.3%

2.4%

2.0%

80%

2.6%

1.8%

1.5%

70%

1.9%

1.2%

1.0%

60%

1.2%

0.6%

0.5%

50%

0.0%

0.0%

0.5%
Jun12

Dec12

Jun13

Dec13

Jun14

40%
Mar07

Source:Company,IL&FSInstitutionalEquities

Mar09

Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Exhibit6: Netrestructuredloans

Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

Jun14

Netrestructuredloans

41.72

41.58

45.75

53.15

59.15

68.26

86.02

105.58

112.65

1.3%

1.3%

1.3%

1.5%

1.7%

1.8%

2.2%

2.6%

2.8%

Restructuredloans/customerassets
Source:Company,IL&FSInstitutionalEquities

Theslippageratiointhepastfivequartershasremainedlargelystableatcloseto1.5%.However,the
additiontorestructuredloansincreasedintherecentquartersliftingtheo/snetrestructuredloansto
2.6%ofthecustomerassetsatendFY14.Aspermanagementguidance,theadditiontothestressed
assetsislikelytostabiliseintheneartermanddeclinethereafter.

Weforecastprovisions/loanstostayclosetocurrentleveloverFY15fFY17f
ThebanksPCRdeclined8.2%duetolargewriteoffsandthe20bpyoyriseintheincrementalNPL
duringFY14.TotalwriteoffduringFY14wentup37%yoytoINR22.4bn,contributingabouttwothird
tothePCRdecline.NPLprovisions/loansareunlikelytocontractmateriallyfromthecurrentleveland
areestimatedat0.42%oftheloansoverFY15fFY17f,similartothemeanduringthepastthreeyears.
PCRisestimatedtobecloseto62%.

Forex,dividendincomeoffsetslowdownincorefees
Exhibit7: Segmentswithinotherincomeaspercentageofassets
1.7%

CEB/assets

Dividendincome/assets(RHS)
0.25%

1.4%

0.20%

1.1%

0.15%

0.8%

0.10%

0.5%

0.05%

0.2%
Mar09

Mar10

Forexincome/assets

Mar11

Mar12

Mar13

Mar14

Mar15f

Mar16f

0.00%
Mar17f

Source:Company,IL&FSInstitutionalEquities

Financials

41

ICICIBank

The slowdown in the core fees (commission, exchange and brokerage) in the recent years has been
partlyoffsetbyanincreaseinthedividendincomeandforexincome.ThetransferofINR2.2bnfrom
foreign branches supported noninterest income in 4QFY14. The management mentioned that the
reserves are now INR22bn, though not all of it is realisable immediately. Core fee income growth
seemstobeonaslowrecoverypathat14%yoy.About55%ofthefeeslinkedtoretailloansand15%
linkedtocorporateloanswouldgraduallyseeanuptrendwiththepickupinloangrowth.

ExpansioninRoEduringFY11FY14aheadofsomepeers
Exhibit8: RoE,RoAandasset/equity
RoA(%)

RoE(%;RHS)

Asset/Equity(x;RHS)

2.0

20

1.5

15

1.0

10

0.5

0.0
Mar07

Mar08

Mar09

Mar10

Mar11

Mar12

Mar13

Mar14

Mar15f

Mar16f

0
Mar17f

Source:Company,IL&FSInstitutionalEquities

ICICIBCreportedalargeexpansioninitsreturnratiosintheprecedingthreeyearswithitsRoEandRoA
expandingby437bpand40bp,respectively.ThiswaslargelydrivenbyNIMexpansionandcontrolin
thecreditcost.ThelargegapinRoEwithsomepeershascontractedsignificantly.A437bpriseinthe
RoE was similar to the increase reported by HDFCB. AXSB had the reverse trend with a 190bp
contractioninitsRoEduringthesameperiod.
Exhibit9: RoE(%)

Mar07

Mar08

Mar09

Mar10

Mar11

Mar12

Mar13

Mar14 Mar15f

Mar16f

Mar17f

ICICIBC

13.37

11.75

7.83

7.96

9.65

11.20

13.10

14.02

15.02

15.94

16.65

AXSB

24.10

17.60

19.12

19.15

19.34

20.29

18.53

17.44

17.28

18.02

18.55

HDFCB

19.46

17.74

17.06

16.13

16.75

18.69

20.34

21.28

20.49

19.93

20.47

Source:Company,IL&FSInstitutionalEquities

RoAmayplateauoverFY15fFY17fwithstablecreditcost
After a large expansion in the previous three years, return ratios are likely to flatten over the next
threeyears.Moststructuralimprovementssuchasthereductionofsecuritisationlosses,changeinthe
loanmixandimproveddepositprofilearealreadyfactoredin.Hence,giventhestablecreditcosts,we
donotseealargeexpansionoverFY15fFY17f.However,expansionislikelytosustainwithamarginal
uptrend.

Pickupinrevenuescouldsustaincostincomecloseto38%

Mar07

Mar08

Mar09

Mar10

Mar11

Mar12

Mar13

Mar14

Mar15f

Mar16f

Mar17f

Employeecost/asset

0.54

0.56

0.51

0.52

0.73

0.80

0.77

0.75

0.76

0.76

0.75

Nonemployeecost/asset

1.64

1.58

1.25

1.02

0.97

0.98

1.01

1.07

1.13

1.11

1.10

Cost/asset

2.18

2.14

1.75

1.54

1.70

1.77

1.78

1.82

1.90

1.87

1.85

Costincome

53.2

50.6

44.1

37.6

42.2

43.0

40.6

38.3

38.7

38.4

38.5

Source:Company,IL&FSInstitutionalEquities

Financials

42

ICICIBank

TheretailsegmentislikelytosustainmomentuminFY15f
Weassumethetrendoftheriseinretailloans,asapercentageofdomesticloansto53%attheendof
FY14,tosustaininFY15f.Theslowdowninthecorporatesegmentandsustainedmomentuminselect
secured segments within retail is likely to sustain the retail proportion closer to the current level.
ICICIBCexpectssystemloangrowthatc15%anditsowndomesticloanbookshouldincrease2%4%
fasterthanthat.Theretailbookisexpectedtoremainthekeydriverwithgrowthexpectedataround
20%. Corporate book growth should remain in single digits; any acceleration owing to faster project
implementationisnotexpectedinFY15f.
Exhibit10: Growthinretailloansandretailasapercentageofcustomerassets(%)
Retail/Domesticloans(RHS)

Retailloans(yoy)

Domesticloans(yoy)

25%

56%

20%

54%

15%

52%

10%

50%

5%

48%

0%

46%
Mar11

Mar12

Mar13

Mar14

Mar15f

Mar16f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Tilttowardssecuredloanstostay;loansassumedtoriseat3yearCAGRof18%
Withintheretailcategory,theshareofhomeloansincreasedfromc51%attheendofMar12to54%at
the end of Mar14. During this period, vehicle loans contracted, led by CV loans. Unsecured personal
loanssawacceleration,partlydrivenbytheverylowbase.Thehomeloanssegmentislikelytostaythe
focusareawithintheretailcategory.Thetilttowardsthesecuredsegmentswithinretailislikelytostay
andwithgrowingproportion,itislikelytokeepthecreditcostofthebankundercheck.
Exhibit11: Keysegmentswithinretailaspercentageofretailloans

Mar12

Mar13

Mar14

Mar15f

Mar16f

Retailloans/domesticloans

52.3%

49.5%

53.0%

54.1%

54.0%

Homeloans

50.5%

53.6%

53.5%

54.0%

54.8%

Vehicleloans(CV+auto)

27.6%

24.1%

20.9%

20.2%

19.8%

Personalloans

1.10%

1.50%

3.00%

3.03%

3.07%

2.8%

2.7%

2.5%

2.3%

2.2%

Creditcard
Businessbanking

7.20%

5.90%

6.00%

5.71%

5.46%

Otherretail

10.8%

12.2%

14.1%

14.7%

14.7%

Source:Company,IL&FSInstitutionalEquities

TargetpricevaluesICICIBCat2.28xoneyearforwardbookvalue
WeestimatethemeanoneyearforwardP/EandP/Bforthefiveyearperiodended1Sep14(excluding
thevalueofthesubsidiaries)at11.9xand1.3x,respectively.Wefactora25%premiumtothefiveyear
meanP/EandP/B,astheRoEhasnormalisedintherecenttwoyearsandislikelytorisetothehigh
teensoverthenextthreeyears.WeapplythesetoourforecastEPSandadjustedbookvalueforSep15
to arrive at fair values of INR2,124 and INR1,550, respectively. The P/E and P/Bbased fair values
includesthevalueofsubsidiariesatINR279.5/share.

Financials

43

ICICIBank

Exhibit12: AverageP/EandP/B(x)(02Sep14)

1month

3month

6month

12month

2year

3year

5years

P/E

14.54

14.37

13.84

12.60

12.90

13.05

15.75

P/B

2.05

2.02

1.91

1.70

1.69

1.63

1.73

12month

2years

3years

5years

Source:Company,Bloomberg,IL&FSInstitutionalEquities

Exhibit13: AverageP/EandP/B(x)(standalone)

1month

3month

6month

P/E

12.05

11.84

11.21

9.80

9.84

9.61

11.90

P/B

1.70

1.66

1.55

1.33

1.29

1.20

1.30

Source:Company,Bloomberg,IL&FSInstitutionalEquities

ThetargetpriceofINR1,780isaweightedaverage,whereweassignaweightof30%toourDCFbased
fair value, and 35% each to our P/E and P/Bbased fair values. In the DCF method, we assume the
semiexplicitperiodgrowthat23%.
Exhibit14: P/E,P/B,DCF/SOTPbasedfairvalues

P/E

P/B

DCF/SOTP

Weights

35%

35%

30%

2,124

1,550

1,647

Fairvalue(INR)

1,780

Source:Company,IL&FSInstitutionalEquities

The target price values the stock at 2.28x the oneyear forward adjusted book value. We reinitiate
coveragewithaBuyrating.

Keyriskstoourestimates
f Largelossesfrominfrastructureprojectsmayleadtheprovisionsbeinghigherthanourestimates.
f DelayedrecoveryintheCVloanscouldimpactretailloangrowthmarginally;also,slowpickupinthe
corporateloansegmentcouldimpactloangrowthadversely.
Exhibit15: SumofpartsandDCFbasedvaluations
(INRbn)

Rationale

Stake(%)

Valueoffirm

ValueofICICIBCsstake Value/share(INR)

ICICIPrudentialLifeInsurance

74

107.8

79.8

69.1 3.5xtheequityinvestmentatendMar14

ICICIPrudentialAMC

51

53.4

27.2

23.6

5%ofAUMatendMar14

ICICISecurities

100

3.9

3.9

3.4

1.3xthenetworth

ICICIBankCanada

100

100.0

100.0

86.5

1.8xthenetworth

74

39.9

29.5

25.6

1.6xthenetworth

ICICISecuritiesPrimaryDealership

100

7.4

7.4

6.4

1.0xthenetworth

ICICIHomeFinanceCo.Ltd.

100

22.8

22.8

19.8

1.5xthenetworth

ICICIBankUKPLC.

100

45.2

45.2

39.2

1.2xthenetworth

ICICIBankEurasia.Ltd.LiabilityCo.

100

4.0

4.0

3.5

2.0xthenetworth

ICICIInvestmentManagement

100

0.2

0.2

0.1

1.0xthenetworth

ICICIVentureFundsManagement

100

2.2

2.2

1.9

1.0xthenetworth

ICICISecuritiesInc

100

0.1

0.1

0.1

1.0xthenetworth

ICICISecuritiesHoldingInc

100

0.6

0.6

0.5

ICICILombardGeneralInsurance

Totalvalueofthesubsidiaries(INR)

279.5

1.0xthenetworth

Source:Company,IL&FSInstitutionalEquities

Financials

44

ICICIBank

Exhibit16: 1yearforwardP/EandtargetP/E
1yearforwardP/E(X)
12monthsmovingaverage

Exhibit17: OneyearforwardP/BandtargetP/B

5yearaverage

1yearforwardP/ABV(X)
12monthsmovingaverage

26

2.5

21

2.1

16

1.7

11

1.3

6
Jan10

Dec10

Nov11

Nov12

Source:Company,IL&FSInstitutionalEquities

Oct13

Sep14

Sep15

0.9
Jan10

Dec10

Nov11

Nov12

5yearaverage

Oct13

Sep14

Sep15

Source:Company,IL&FSInstitutionalEquities

Financials

45

ICICIBank

Financialsandvaluations
Incomestatement(INRbn)
Fiscalyearending
Netinterestincom e
Feei ncome
Tra di ngprofi t
Otheri ncome
Totaloperatingincom e
Tota l opera ti ngexpens e
Operatingprofit
Provi s i onforba ddebt
Otherprovi s i on
PBT(reported)
Tota l taxes
PAT(reported)
(+)Sha rei na s s oc.earni ngs
Les s :Mi nori tyi nteres t
Pri orperi odi tems
Neti ncome(reported)
Sha res outs tandi ng(mn)
Dil.EPS(INR)

DecompositionofRoA(%)

03/14
164.8
81.3
5.5
17.4
269.0
103.1
165.9
17.1
9.1
139.7
41.6
98.1
0.0
0.0
0.0
98.1
1,155
84.9

03/15f
191.7
97.7
11.1
14.3
314.8
121.8
193.0
19.7
9.8
163.5
48.7
114.9
0.0
0.0
0.0
114.9
1,155
99.5

03/16f
218.7
114.0
11.6
15.0
359.4
138.1
221.2
20.6
11.0
189.7
56.4
133.2
0.0
0.0
0.0
133.2
1,155
115.4

03/17f
250.6
135.1
12.3
15.7
413.6
159.2
254.5
24.3
12.1
218.0
64.9
153.2
0.0
0.0
0.0
153.2
1,155
132.6

14.4
29.2
1.5
40.4
28.7

16.7
18.8
19.7
22.9
17.7

17.3
16.3
20.1
15.0
17.1

18.3
14.1
16.7
4.3
16.0

61.2
30.2
61.7
36.5
29.8

60.9
31.0
61.3
36.5
29.8

60.9
31.7
61.6
37.1
29.8

60.6
32.7
61.5
37.0
29.8

03/14
11.6
3.5
720.6
732.1
3,319.1
744.0
1,151.1
5,946.4
415.3
1,770.2
3,387.0
44.4
329.4
5,946.4

03/15f
11.6
3.5
785.6
800.7
3,910.3
880.0
1,265.8
6,856.8
535.9
1,929.6
3,971.9
43.0
376.5
6,856.8

03/16f
11.6
3.5
863.2
878.2
4,627.4
1,003.0
1,400.4
7,909.0
621.6
2,113.0
4,699.2
41.8
433.4
7,909.0

03/17f
11.6
3.5
953.3
968.3
5,586.7
1,104.0
1,560.0
9,219.0
731.9
2,368.7
5,573.3
41.5
503.6
9,219.0

102.0
53.3
28.9
23.6
6.8

101.6
49.3
27.0
22.0
6.3

101.6
45.7
25.4
20.9
5.7

99.8
42.4
23.9
19.9
5.1

03/14
2.91
1.44
0.41
4.75
1.82
2.93
0.35
0.01
0.10
0.73
1.73

03/15f
2.99
1.53
0.40
4.91
1.90
3.02
0.36
0.01
0.10
0.76
1.79

03/16f
2.95
1.54
0.37
4.86
1.87
3.00
0.34
0.00
0.09
0.76
1.80

03/17f
2.92
1.58
0.33
4.83
1.85
2.97
0.34
0.00
0.08
0.76
1.79

RoA
As s ets /Equi ty
RoE

1.73
8.09
14.02

1.79
8.37
15.02

1.80
8.83
15.94

1.79
9.31
16.65

03/14

03/15f

03/16f

03/17f

18.6
2.5
2.5
1.5

15.9
2.3
2.3
1.5

13.7
2.1
2.1
1.6

11.9
1.9
1.9
1.8

85.0
21.1
633.9
628.0
23.0

99.5
24.7
693.2
679.3
24.0

115.4
28.6
760.3
742.0
26.0

132.6
32.9
838.3
818.5
29.0

KeyRatios

Growthratios(%)
Loa ns
Neti nteres ti ncome
Feei ncome
Provi s i onforba ddebt
Di l .EPS

Operatingratios(%)
NII/opera ti ngi ncome
Feei ncome/opera ti ngi ncome
Opera ti ngprofi tma rgi n
Netprofi tma rgi n
Effecti veTa xrate

Balancesheet(INRbn
Fiscalyearending
Equi tycapi ta l
Preferenceca pi ta l
Res erves ands urpl us
Networth
Depos i ts
Tota l borrowi ngs
Otherl i a bi l i ti es a ndprovi s i ons
Totalliabilities
Ca s ha ndba nkba l a nces
Inves tments
Loa ns
Fi xeda s s ets
Otheras s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
Inves tment/Depos i t
SLRInves tment/Depos i t
SLRInves tment/NDTL
Debenture/Inves tment

Fiscalyearending
Neti nteres ti ncome
Feei ncome
Otheri ncome
Opera ti ngi ncome
Opera ti ngexpens es
Operatingprofit
Loa nl os s provi s i ons
Provi s i onfori nves tments
Otherprovi s i ons
Ta x
Netprofi t

Fiscalyearending
Valuationratios(x)
P/E(onAvendus EPS)
P/BV
P/Adjus tedBV
Di vi dendyi el d(%)
Pershareratios(INR)
Ba s i cReportedEPS(INR)
Di l utedReportedEPS(INR)
ReportedBookVa l ue(BV)
Adjus tedBookVa l ue(ABV)
Di vi dendpers ha re(INR)
Return/ProfitabilityRatios(%)
Yi el dona dvances
Yi el doni nves tments
Cos tofdepos i ts
Neti nteres tmargi n
Feei ncome/Oprevenue
Tra di ngprofi t/Oprevenue
Opexpens e/Oprevenue
CapitalizationRatios(%)
Equi ty/As s ets
Loa ns /As s ets
Inves tments /As s ets
Di vi dendpayout
Interna l ca pi tal growth
Ca pi ta l adequa cy
AssetQuality
Gros s NPLra ti o
NetNPLra ti o
NetNPL/networth
Loa nl os s res erve/Gros s NPL
Loa nprovi s i ons /NII
Loa nprovi s i ons /Tota l l oa ns
Productivity/Efficiencyratios
Bus i nes s perbra nch(INRmn)
Netprofi tperempl oyee(INRmn

10.0
6.6
5.7
3.1
23.4
2.1
38.3

10.0
6.9
5.7
3.2
23.4
3.5
38.7

10.0
6.8
5.8
3.2
23.9
3.2
38.4

9.9
6.4
5.7
3.1
24.6
3.0
38.5

12.3
68.1
29.8
28.9
10.4
17.7

11.6
68.8
28.1
28.2
11.3
15.0

11.1
70.4
26.7
26.3
12.3
14.1

10.5
71.4
25.7
25.5
13.0
13.2

3.0
1.0
4.5
68.6
10.4
1.7

2.4
0.9
5.2
64.2
10.3
1.5

2.2
0.9
5.6
60.9
9.4
1.3

2.0
0.8
5.4
60.1
9.7
1.2

1,786.9
1.4

1,921.1
1.5

2,118.2
1.6

2,373.0
1.8

Financials

46

IndiaEquityResearch
Financials

September04,2014

PunjabNationalBank

BUY

TargetPrice(INR)1182 ReturningtoNIMexpansion
CompanyReport
LastPrice(INR)

961.1

Bloombergcode

PNBIN

Reute rs code

PNBK.BO

Avg.Vol.(3m)(mn)

1.10

Avg.Va l.(3m)(INRbn)

1.05
1,068/400

52wkH/L(INR)

27,140

Se nse x
MCAP(INRbn/USDbn)

347.97/5.75
03/14

06/14

Promote rs

Shareholding(%)

58.9

58.9

MFs ,FIs ,Ba nks

18.5

19.5

FIIs

17.2

17.4

3.9
1.5

3.5
0.8

Public
Others

Withamodestgrowthof9%inloansoverFY13fFY14fandlargepart
of restructured assets reaching the end of moratorium period in
current fiscal, incremental NPL is likely to improve over FY16fFY17f.
Largerestructuredassetsremainkeyriskfactor.Webuildincremental
NPLatanaverageof1.37%,33bplowerthanpreceding3yearsmean.
We buildin elevated NPL provisions, at an average of 1.23% over
FY15fFY17f.22bpNIMexpansioninJun14quarterislikelytosustain
as slippage moderates and cost of funds decline. We forecast 14bp
NIMexpansionlargelydrivenbytheriseinyieldonloans.Weforecast
the 26bp and 489bp recovery in RoA and RoE, respectively over
FY15fFY17f. Despite building in elevated provisions, we forecast a
495bp RoE expansion over FY15fFY17f. Reinitiate coverage with a
Sep15TPof1,182andaBuy.
CoreprofitabilitylikelytorecoverledbyNIMexpansion
Moderationintheadditionofstressedassets,leadingtoeasingofthepressure
on yields, is likely to lead to better NIM in the upcoming quarters. Jun14
quartersaw22bpsequentialimprovementinNIMto3.42%.Thetrendislikely
to sustain with 14bp estimated NIM expansion over FY15fFY17f. Abovethe
line income in the Jun14 quarter provided better visibility for the ensuing
quarters,asincomefromvolatilesources(capitalgains,FXgains&writtenoff
loansrecoveries)waslow.Totalfeeincomegrewby11%yoy,mainlydriven
byLC&BGcommissionincomeandbills&remittances.

StockChart(RelativetoSensex)
1,04 0

88 0

72 0

56 0

DespiteimprovementinNPLs,provisionstostayabovehistoricalavg.

40 0
S e p13

J a n 14

M a y14

Pun. Na tl. Ba nk

S e p 14

Sensex Rebased

StockPerfm.(%)

1m

3m

1yr

Abs olute

0.8

1.1

134.7

5.7

10.3

85.9

Financials(INRbn)

03/14

03/15f

03/16f

NII

161.5

188.2

218.5

Rel.toSens ex

8.7

16.5

16.1

113.8

126.3

149.6

YoY(%)
Opera tingprofit
A.PAT
Sho/s (diluted)
A.EPS(INR)
YoY(%)

33.4

41.7

55.3

362.1

377.1

377.1

93.4

112.9

146.7

31.3

19.8

32.6

6.5

6.5

6.2

Equity/Ass ets (%)


P/E(x)

10.4

8.7

6.6

1.2

1.1

1.0

0.6
10.2

0.7
11.3

0.8
13.3

P/B(Adj)(x)
RoA(%)
RoE(%)
Q uarterlyTrends
Op. income (INRbn)
PAT (INRbn)

09/13

12/13

03/14

49.1

51.6

54.0

5.1

5.1

7.6

8.1

14.1

Pleaserefertothedisclaimertowardstheendofthedocument.

Themodest9%CAGRinloansoverFY13fFY14fislikelytobenefitbyreducing
theadditiontostressedassets.Guidanceonincrementalslippages,withgross
slippages runrate less than INR 30bn, provides comfort for subsequent
quarters.However,largerestructuredassetsremainkeyriskfactor.Webuildin
incremental NPL at an average of 1.37%, 33bp lower than the preceding 3
yearsmean.WebuildinelevatedNPLprovisions,atanaverageof1.23%over
FY15fFY17f,12bphigherthantheaverageduringlastthreeyears.

Recoveryinprofitability,assetqualitytoliftRoAto1%byFY17f
While we believe the worst is over for margins, given PNBs huge stock of
restructuredloans,wewouldwaitforsomemoreseasoningbeforebuildinga
larger improvement in asset quality. We forecast 25bp improvement in RoA
over FY15fFY17f to 0.90%. Despite having a large restructured book,
managementhasguidedtomaintainingRoAatc.1%inFY15f.

ReinitiatewithaBuy;TPimplies1yrfwdAdj.P/Bof1.15x
We value PNB based on PE, P/B and DCF method. Our DCFbased fair value
stands at INR1,396, wherein we assume a cost of equity of 14% as well as a
semiexplicitandfadeperiodgrowthof16.3%and3%,respectively.Thesemi
explicit period caps the asset/equity at18x. Our Sep15 TP of INR1,182 values
PNB at 1.15x the 1yr fwd adj. book. Reinitiate coverage with a Buy. Further
riseinNPLsdrivenbylargerestructuredloansiskeyriskfactor.

06/14

ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com

PunjabNationalBank

Moderationinstressedassetformationlikelytosustain
Guidanceonincrementalslippageprovidescomfort;forsubsequentquarters,grossslippagerunrateis
guided to be less than INR30bn. Fresh buildup in stressed assets loans was at INR 54bn in Jun14
quarterandINR68bnintheprecedingquarter.
Exhibit1: FreshadditiontogrossNPLandrestructuredassetsduringthequarter(INRmn)
120,000
Totaladditiontostressedassets(INRmn)
90,000

60,000

30,000

0
Mar12

Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

Jun14

Source:Company,IL&FSInstitutionalEquities

However,recoverytobedelayedduetolargerestructuredassets
Paceofrestructuringhasbeenmoderatinginthepastfourquarters
Exhibit2: Restructuredloans
(INRmn)
Loansrestructured
O/srestructuredloans
Totalrestructuredloans

Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

12

40

77

141

28

27

22

32

Jun14
15

255

279

303

321

342

371

313

355

365

8.67%

9.45%

10.20%

10.41%

11.20%

11.81%

9.59%

10.17%

10.49%

Source:Company,IL&FSInstitutionalEquities

Weestimate20bpfallinprovisionsfollowingslowingNPLaddition
WebuildinincrementalNPLatanaverageof1.37%,33bplowerthanthepreceding3yearsmean.
We forecast NPL provisions to stay elevated, at an average of 1.23% over FY15fFY17f, 12bp higher
thantheaverageduringlastthreeyearstoliftthePCRto53.2%.
Exhibit3: NPLratioandincrementalNPL
IncrementalNPL(RHS)

GNPL

Exhibit4: NPLprovision/loan,PCR
NPLprovisions/loans

NNPL

PCR(RHS)

7.0%

2.0%

1.5%

56%

5.6%

1.6%

1.2%

52%

4.2%

1.2%

0.9%

48%

2.8%

0.8%

0.6%

44%

1.4%

0.4%

0.3%

40%

0.0%

0.0%

0.0%
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

36%
Mar11

Mar13

Mar15f

Mar17f

Source:IL&FSInstitutionalEquities

Financials

48

PunjabNationalBank

andhighexposuretotheriskysectors
Exhibit5: ExposureofBOBandentirebankingsystemtotheriskysectors
(INRmn)

PNB

Allbanks

Fundbased

%ofdomesticloans

Outstanding

%oftotalloans

29,151

0.94%

353,260

0.59%

BasicMetalandmetalproducts

227,411

7.36%

3,619,690

6.02%

Energy

327,473

10.60%

4,883,460

8.12%

Total

584,034

18.91%

8,856,410

14.73%

Miningandquarrying

Source:Company,IL&FSInstitutionalEquities

FallinNIMlikelytobearrestedasfundingcost,slippagesmoderate
Moderationintheadditionofstressedassets,leadingtoeasingofthepressureonyields,islikelyto
leadtobetterNIMintheupcomingquarters.Jun14quartersaw22bpsequentialimprovementinNIM
to3.42%.Thetrendislikelytosustainwith14bpestimatedNIMexpansionoverFY15fFY17f.
Exhibit7: CalculatedNIMfortheyear(%)

Exhibit6: NIM,depositcost,yield(quarterly)
Costofdeposits(%)
NIM(%,RHS)

Yieldonloans(%)

NIM
3.8

13

3.8

11

3.6

3.4

3.2

3.2

3.0
Jun14

3.0

5
Jun12

Dec12

Jun13

Dec13

Source:Company,IL&FSInstitutionalEquities

3.6
3.4

Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

NIMexpansion,moderatingNPLstoliftRoAto0.90%byFY17f
Whilewebelievetheworstisoverformargins,givenPNBshugestockofrestructuredloans,wewould
waitforsomemoreseasoningbeforebuildingalargerimprovementinassetquality.Weforecast25
bp improvement in RoA over FY15fFY17f to 0.90%. Despite having a large restructured book,
managementhasguidedtomaintainingRoAatc.1%inFY15f.
Exhibit8: RoA,RoE(%)
30

1.4
RoA

RoE(RHS)

1.2

25

1.0
20
0.8
15

0.6

0.4
Mar11

Mar12

Mar13

Mar14

Mar15f

Mar16f

10
Mar17f

Source:Company,IL&FSInstitutionalEquities

Financials

49

PunjabNationalBank

Retainedearnings,4%dilutiontosustainCET1above8.4%tillFY17f
We assume 4% dilution in FY15f; dilution coupled with 12% CAGR in retained earnings is likely to
sustainCET1above8.4%tillFY17f.Wehaveassumed14.2%CAGRinriskweightedassetsoverFY15f
FY17f. CET 1 was 8.5% and CAR at 11.52% at the end of Jun14. A moderation in the RWA growth is
assumedtosustain,preservingthecorecapital.
Exhibit10: GrowthinRWA,retainedearnings,TierI

Exhibit9: CapitalratiosattheendofJun14(%)

TierI(RHS)
Retainedearnings(yoy)
RWA(yoy)

12%
10%

9%

40%

9%

20%

6%
8%
3%

0%

7%

0%

20%

6%
CAR

TierI

CET1

Mar14

TierII

Source:Company,IL&FSInstitutionalEquities

Mar15f

Mar16f

Mar17f

Source:Company,IL&FSInstitutionalEquities

OurTPvaluesPNBat1yearforwardadjustedP/Bof1.15x
Exhibit11: AverageP/EandP/B(till02Sep14)

1month

3month

6month

12month

2year

3year

5year

6.50
0.85

6.83
0.87

6.33
0.80

5.12
0.66

4.90
0.71

4.94
0.82

5.78
1.18

P/E
P/B

Source:Company,IL&FSInstitutionalEquities

Exhibit12: P/E,P/BandDCFbasedTP,andweightedaverageTP

Weights

P/E

P/B

DCF/SOP

TP

35%
964

35%
1,217

30%
1,396

1,182

Source:Company,IL&FSInstitutionalEquities

Exhibit13: OneyearforwardP/BandtargetP/B
1yearforwardP/ABV(X)
12monthmovingaverage

Exhibit14: OneyearforwardP/EandtargetP/E

5yearaverage

1yearforwardP/E(X)
12monthmovingaverage

2.5

10

2.0

1.5

1.0

0.5
Jan10

Dec10

Nov11

Nov12

Source:Company,IL&FSInstitutionalEquities

Oct13

Sep14

Sep15

2
Jan10

Dec10

Nov11

Nov12

5yearaverage

Oct13

Sep14

Sep15

Source:Company,IL&FSInstitutionalEquities

Financials

50

PunjabNationalBank

Our target price is based on the DCF, P/E and P/B methods. Our DCFbased fair value stands at
INR1,396,whereinweassumeacostofequityof14%aswellassemiexplicitandfadeperiodgrowth
of16.3%and3%,respectively.Thesemiexplicitperiodcapstheasset/equityat18xandlinksittothe
growth.OurSep15targetpriceofINR1,182valuesPNBat1.15xtheoneyearforwardadjustedbook
value.WereinitiatecoveragewithaBuyrating.

Riskfactors:
f Large restructured assets, exposure to risky assets can delay the recovery in NPLs even if the
economyrevives.
f NIMexpansioncanbeadverselyimpactedifCASAgetsimpactedduetocompetition.
f HigherthanassumedgrowthinassetsmayleadertolargerdilutionandlowerRoE.

Financials

51

PunjabNationalBank

Financialsandvaluations
Incomestatement(INRbn)
Fiscalyearending
Netinterestincom e
Feei ncome
Tradi ngprofi t
Otheri ncome
Totaloperatingincom e
Tota l opera ti ngexpens e
Operatingprofit
Provi s i onforbaddebt
Otherprovi s i on
PBT(reported)
Tota l taxes
PAT(reported)
(+)Sha rei na s s oc.ea rni ngs
Les s :Mi nori tyi nteres t
Pri orperi odi tems
Neti ncome(reported)
Adjustednetincom e
Sha res outs ta ndi ng(mn)
Di l .s hares (mn)
Dil.EPS(INR)

DecompositionofRoA(%)

03/14
161.5
31.2
5.5
9.0
207.2
93.4
113.8
45.2
21.8
46.9
13.5
33.4
0.0
0.0
0.0
33.4
33.4
362
362
92.3

03/15f
188.2
36.6
6.9
9.0
240.6
114.2
126.3
50.3
17.2
58.9
17.2
41.7
0.0
0.0
0.0
41.7
41.7
362
377
110.6

03/16f
218.5
43.7
6.9
9.0
278.0
128.4
149.6
57.7
14.0
77.9
22.6
55.3
0.0
0.0
0.0
55.3
55.3
362
377
146.7

03/17f
255.7
50.9
7.8
9.0
323.3
150.9
172.4
58.0
15.2
99.2
28.7
70.5
0.0
0.0
0.0
70.5
70.5
362
377
186.9

13.1
8.7
7.0
35.4
29.6
31.3

15.5
16.5
17.0
11.3
24.8
19.8

16.6
16.1
19.5
14.7
32.6
32.6

16.8
17.0
16.5
0.5
27.4
27.4

77.9
15.1
54.9
16.1
28.7

78.2
15.2
52.5
17.3
29.2

78.6
15.7
53.8
19.9
29.0

79.1
15.7
53.3
21.8
28.9

03/14
3.6
0.0
355.3
359.0
4,514.0
364.0
267.2
5,504.2
452.2
1,437.9
3,492.7
34.2
87.3
5,504.2

03/15f
3.8
0.0
403.4
407.2
5,240.5
358.9
282.1
6,288.7
489.7
1,603.9
4,034.1
33.1
127.9
6,288.7

03/16f
3.8
0.0
448.0
451.7
6,139.0
346.0
303.1
7,239.9
547.0
1,813.4
4,705.4
32.5
141.6
7,239.9

03/17f
3.8
0.0
504.7
508.5
7,199.3
329.1
327.7
8,364.6
620.9
2,053.6
5,496.6
31.6
162.0
8,364.6

77.4
31.9
24.9
23.1
12.6

77.0
30.6
24.2
22.7
12.4

76.6
29.5
23.7
22.4
12.1

76.3
28.5
23.1
22.1
11.7

Growthratios(%)

03/14
3.14
0.61
0.28
4.03
1.81
2.21
0.88
0.15
0.27
0.26
0.65

03/15f
3.19
0.62
0.27
4.08
1.94
2.14
0.85
0.04
0.25
0.29
0.71

03/16f
3.23
0.65
0.23
4.11
1.90
2.21
0.85
0.04
0.17
0.33
0.82

03/17f
3.28
0.65
0.21
4.14
1.93
2.21
0.74
0.04
0.16
0.37
0.90

RoA
As s ets /Equi ty
RoE

0.65
15.66
10.17

0.71
15.98
11.30

0.82
16.28
13.31

0.90
16.74
15.12

03/14

03/15f

03/16f

03/17f

10.41
0.97
1.22
1.21

8.69
0.89
1.10
2.16

6.55
0.80
1.00
2.98

5.14
0.71
0.87
3.79

93.4
93.4
991.4
791.0
11.6

115.2
112.9
1,080.0
871.5
20.8

152.7
146.7
1,198.0
958.2
28.6

194.6
186.9
1,348.5
1,105.0
36.5

KeyRatios

Loa ns
Neti nteres ti ncome
Feei ncome
Provi s i onforbaddebt
Adjus tedneti ncome
Di l .EPS

Operatingratios(%)
NII/opera ti ngi ncome
Feei ncome/opera ti ngi ncome
Operati ngprofi tmargi n
Netprofi tma rgi n
Effecti veTaxra te

Balancesheet(INRbn)

Fiscalyearending
Equi tycapi ta l
Preferenceca pi ta l
Res erves ands urpl us
Networth
Depos i ts
Tota l borrowi ngs
Otherl i a bi l i ti es a ndprovi s i ons
Totalliabilities
Cas ha ndba nkba l ances
Inves tments
Loa ns
Fi xeda s s ets
Othera s s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
Inves tment/Depos i t
SLRInves tment/Depos i t
SLRInves tment/NDTL
Debenture/Inves tment

Fiscalyearending
Neti nteres ti ncome
Feei ncome
Otheri ncome
Opera ti ngi ncome
Opera ti ngexpens es
Operatingprofit
Loa nl os s provi s i ons
Provi s i onfori nves tments
Otherprovi s i ons
Tax
Netprofi t

Fiscalyearending
Valuationratios(x)
P/E(ondi l .EPS)
P/BV
P/Adjus tedBV
Di vi dendyi el d(%)
Pershareratios(INR)
Ba s i cReportedEPS(INR)
Di l utedReportedEPS(INR)
ReportedBookVal ue(BV)
Adjus tedBookVa l ue(ABV)
Di vi dendpers ha re(INR)
Return/ProfitabilityRatios(%)
Yi el dona dva nces
Yi el doni nves tments
Cos tofdepos i ts
Neti nteres tma rgi n
Feei ncome/Oprevenue
Tra di ngprofi t/Oprevenue
Opexpens e/Oprevenue
CapitalizationRatios(%)
Equi ty/As s ets
Loa ns /As s ets
Inves tments /As s ets
Di vi dendpa yout
Interna l capi ta l growth
Ca pi ta l a dequacy
AssetQuality
Gros s NPLra ti o
NetNPLra ti o
NetNPL/networth
Loa nl os s res erve/Gros s NPL
Loa nprovi s i ons /NII
Loa nprovi s i ons /Tota l l oa ns
Productivity/Efficiencyratios
Bus i nes s perbranch(INRmn)
Netprofi tperempl oyee(INRmn

9.8
7.5
6.0
3.2
15.1
2.7
45.1

10.0
7.7
6.0
3.3
15.2
2.9
47.5

10.0
7.7
5.9
3.3
15.7
2.5
46.2

10.1
7.7
5.9
3.4
15.7
2.4
46.7

6.5
63.5
26.1
12.6
8.9
12.1

6.5
64.1
25.5
18.8
9.4
13.2

6.2
65.0
25.0
19.5
10.9
12.7

6.1
65.7
24.6
19.5
12.6
12.5

5.3
2.9
29.3
47.5
28.0
1.3

5.9
3.1
32.1
48.8
26.7
1.2

6.3
3.3
35.1
50.2
26.4
1.2

6.3
3.0
33.8
53.2
22.7
1.1

1,291.2
0.5

1,437.7
0.6

1,618.3
0.8

1,853.1
1.0

Financials

52

IndiaEquityResearch
Financials

September04,2014

StateBankofIndia

BUY

TargetPrice(INR)2925 FavourableliabilityfranchisetoaidNIMexpansion
CompanyReport
LastPrice(INR)

2,505

Bloombergcode

SBININ

Reuterscode

SBI.BO

Avg.Vol.(3m)(mn)

2.07

Avg.Val.(3m)(INRbn)

5.29

52wkH/L(INR)

2,835/1,455
27,140

Sensex
MCAP(INRbn/USDbn)

1,870/30.92

Shareholding(%)

03/14

06/14

Promoters

58.6

58.6

MFs,FIs,Banks

20.9

20.7

FIIs

9.7

11.1

Public
Others

5.8
5.1

5.0
4.7

StockChart(RelativetoSensex)
2,800

2,450

TherecoveryindomesticNIMintheJun14quarter,ledbyexpansionin
the yield on loans is likely to sustain. Strong liability franchise with
retaildepositsconstituting86%oftotaldepositsiswouldsupportthe
NIM expansion as the pressure from high slippage recedes. We
estimateNPLprovisions/loansat1.1%duringFY15fFY17f,19bplower
thanthepreceding3years.NII,moderaterecoveryinfeesandslowing
burden of provisions is likely to drive 27% CAGR in PAT over FY15f
FY17f. Comfortable Tier1 capital, at 9.9% at endJun14 is unlikely to
necessitateanymaterialdilutioninthenearterm.Improvementinthe
core earnings and gradual decline in NPLs is likely to drive the
valuations.ReinitiatecoveragewithaTPof2,925andaBuy.OutTP
implies1yrfwdadjustedP/Bof1.34x,closetothe5yearmean.
StrongliabilityfranchisetosupportNIMexpansionoverFY15fFY17f
The proportion of CASA and retail term deposits in increased by 5% yoy to
86%ofthetotaldepositsattheendofJun14.Thiscontributedtothereduction
incostoffundsoverthelast34quarters.Coupledwiththeimprovingyieldon
loans, domestic NIM rebounded in the Jun14 quarter after staying stable for
nearly3quarters.Withmoderationinslippageandinterestrates,weestimate
23bpexpansioninNIMtranslatinginto24bpriseintheNII/assets.

Consolidationinmidcorporate,SMEtoreducepressureonslippages

2,100

1,750

1,400
Sep13

Jan14

May 14

St Bk of India

Sep14

Sensex Rebased

1m

3m

1yr

2.8

5.3

69.8

3.7

14.5

20.9

Finan cials(INRbn)

03/14

03/15f

03/16f

NII

492.8

586.5

697.7

11.2

19.0

19.0

Operatingprofit

321.1

384.7

457.9

A.PAT

108.9

140.5

178.2

Sho/s(diluted)

746.6

746.6

781.6

A.EPS(INR)

152.2

188.2

233.2

YoY(%)

29.3

29.0

21.1

6.6

6.2

6.2

17.2

13.3

11.0

1.6

1.4

1.3

RoA(% )
0.7
0.6
RoE(%)
11.4
10.0
Note:ThenumbersareforstandaloneSBIN

0.8
12.7

StockPerfm.(%)
Absolute
Rel.toSensex

YoY(%)

Equity/Assets(%)
P/E(x)
P/B(Adj)(x)

QuarterlyTrends

09/13

12/13

03/14

06/14

Op.income(INRbn)

168.3

194.9

175.0

175.0

22.4

30.4

33.5

33.5

PAT(INRbn)

Pleaserefertothedisclaimertowardstheendofthedocument.

Midcorporate and SME accounted for c77% of the total slippage during the
lastfourquarter.Thetwosegmentswereonly32%ofthetotalloansatend
Jun14, declining from 37.2% at the end of Mar13. With consolidation in the
midcorporateandSMEduringthelastfourquarters,potentialrevivalinGDP,
slippage is likely to moderate. We assume decline in incremental NPL from
FY16fonwards.Wefactora27bpfallintheincrementalNPLoverFY15fFY17f
to0.80%inFY17ftranslatingintoa19bpfallintheNPLprovisions/loans.

Coreearningslikelytodrive27%CAGRinPAToverFY15fFY17f
NII, moderate recovery in fees and slowing burden of provisions is likely to
drive27%CAGRinPAToverFY15fFY17f.Weestimate20bpimprovementin
theRoAand4%riseinRoEoverFY15fFY17fto0.85%and14.03%,respectively.
ComfortableTier1capital,at9.9%atendJun14isunlikelytonecessitateany
materialdilutioninthenearterm.CET1was9.8%andCARwas12.56%atthe
endofJun14.WeassumemoderationintheRWAgrowth,ata3yearCAGRof
17%preservingthecorecapital.

TPvaluesSBINatAdj.P/Bof1.34x,closetoitsfiveyearmean
ImprovementinthecoreearningsandgradualdeclineinNPLsislikelytodrive
the valuations. Reinitiate coverage with a TP of 2,925 and an Add. Out TP
implies 1yr fwd adjusted P/B of 1.34x, close to the 5year mean. Our
DCF/SOTPbased fair value stands at INR2,644, wherein we assume a cost of
equityof14%aswellasasemiexplicitandfadeperiodgrowthof16%and3%,
respectively. Our Sep15 TP of INR2,925 values SBIN at 1.34x the 1yr fwd adj
P/B. Reinitiate coverage with a Buy. Lowerthanestimated NIM and slow
recoveryinNPLsare keyrisk factors.
ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com

StateBankofIndia

StrongliabilitymixtosupportNIMexpansionduringFY15fFY17f
The retail term deposits grew by robust 30% yoy and comprised 48% of total domestic deposits at
endJun14 as compared to 42% a year ago. The retail term deposits and CASA combined comprised
91.6% of domestic deposits; bank expects the share of bulk funding to fall further. Rise in the
proportionofretaildepositscontributedtothereductionincostoffundsoverthelast34quarters.
Coupledwiththeimprovingyieldonloans,domesticNIMreboundedintheJun14quarterafterstaying
stable for nearly 3 quarters. SBIs cumulative domestic NIM improved marginally to 3.54% while
cumulative international NIM declined sharply to 1.08% from 1.42% in the previous quarter thus
drivingasmallsequentialcorrectioninglobalNIM.Domesticcumulativeyieldonloanswitnessedsome
improvementdespitetheshiftinloanmixtowardslargecorporateandretailsegmentswhilecostof
depositswaslargelystablewithretailtermdepositssubstitutingsomehighercostingbulkdeposits.
SBIsdomesticNIMislikelytoremainstableintheneartermbeforestartingtograduallyimproveon
account of incremental shift in loan mix towards betteryielding SME & Mid Corporate segments,
moderation in impaired assets creation and improvement in the pricing power. We estimate 23bp
expansioninNIMtranslatinginto24bpriseintheNII/assetsoverFY15fFY17f.
Exhibit1: Retaildepositsaspercentageofthetotaldeposits
86%
Retailtermdeposit+CASA
84%

82%

80%

78%
Mar12

Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

Jun14

Source:Company,IL&FSInstitutionalEquities

Exhibit2: NIM,depositcost,yield(quarterly)
12

Exhibit3: EstimatedNIMfortheyear(%)
6.6

4.1

Yieldonloans
Costofdeposits(RHS)

NIM

11

6.2

3.4

10

5.8

2.7

5.4
Jun14

2.0

9
Jun12

Dec12

Jun13

Dec13

Source:Company,IL&FSInstitutionalEquities

Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Assetqualitypressuretowanewithconsolidationinbalancesheet
MidcorporateandSMEaccountedfor67%87%ofthetotalslippageduringthelastfourquarters.The
two segments were only 32% of the total loans at endJun14, declining from 37.2% at the end of
Mar13.Withconsolidationin themidcorporateandSMEduringthelast fourquartersandpotential

Financials

54

StateBankofIndia

revivalinGDP,slippageislikelytomoderatefromFY16fonwards.Weassumedeclineinincremental
NPLfromFY16fonwardsandfactora27bpfallintheincrementalNPLoverFY15fFY17fto0.80%in
FY17ftranslatingintoa19bpfallintheNPLprovisions/loans.
Exhibit5: Contributionofsegmentstoslippage

Exhibit4: SlippageandNPLratios
GrossNPLratio
Slippageratio

NetNPLratio

NPLprovisions/loans(%,annualised)
PCR(%,RHS)

6%

2.4

68

5%

2.0

66

4%

1.6

64

3%

1.2

62

2%

0.8

60

1%

0.4

58

0%

0.0
Jun12

Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

56
Jun12

Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

Exhibit6: Restructuredloans

Restructuredloans(INRbn)
Restructuredloans/loans

Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

369

405

347

431

448

524

561

589

Jun14
586

4.03%

4.36%

3.55%

4.12%

4.22%

4.75%

4.88%

4.87%

4.89%

Source:Company,IL&FSInstitutionalEquities

Weestimate19bpfallinprovisionsfollowingslowingNPLaddition
Exhibit7: NPLratioandincrementalNPL
IncrementalNPL
NetNPLratio

Exhibit8: NPLprovision/loan,PCR

GrossNPLra
1.6%

NPLprovision/loans

PCR(RHS)
72%

4.5%

1.2%

64%

3.0%

0.8%

56%

1.5%

0.4%

48%

6.0%

0.0%

0.0%
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

40%
Mar11

Mar13

Mar15f

Mar17f

Source:IL&FSInstitutionalEquities

Exhibit9: Segmentwiseslippageduringthequarter

Mar13

Jun13

Sep13

Dec13

Mar14

Jun14

Segmentwiseslippageduringthequarter(INRbn)

Largecorp.
Midcorp.
SME
Agri
Retail
Intl.

2.5
25.7
15.7
10.4
3.0
1.3
58.7

19.1
28.3
39.3
32.5
13.3
5.3
137.7

7.5
48.0
11.6
6.8
1.4
8.4
83.6

10.4
69.5
22.9
4.4
5.0
2.2
114.4

0.7
64.6
4.3
5.4
3.6
0.8
79.5

Mar13

Jun13

Sep13

Dec13

Mar14

Junr14

Shareofeachsegmentintotalslippageduringthequarter
1.9
42.5
24.4
19.6
9.8
1.2
99.3

4%
44%
27%
18%
5%
2%
100%

14%
21%
29%
24%
10%
4%
100%

9%
57%
14%
8%
2%
10%
100%

9%
61%
20%
4%
4%
2%
100%

1%
81%
5%
7%
5%
1%
100%

2%
43%
25%
20%
10%
1%
100%

Source:Company,IL&FSInstitutionalEquities

Financials

55

StateBankofIndia

Exposuretotheriskysectorshigherthanindustryaverage
Exhibit10: ExposureofBOBandentirebankingsystemtotheriskysectors(Mar14)
(INRmn)

SBIN

Allbanks

Fundbased

%ofdomesticloans

Outstanding

%oftotalloans

109,760

1.08%

353,260

0.59%

1,300,664

12.80%

3,619,690

6.02%

914,896

9.00%

4,883,460

8.12%

2,325,320

22.88%

8,856,410

14.73%

Miningandquarrying
BasicMetalandmetalproducts
Energy
Total
Source:Company,IL&FSInstitutionalEquities

Capitalratiosmaynotnecessitatedilutioninthenearterm
Exhibit11: CapitalratiosattheendofJun14

Exhibit12: GrowthinRWA,retainedearnings,TierI
TierI(RHS)
RWA(yoy)
Retainedearnings(yoy)

15
35%

20%

20%

15%

5%

10%

10

5%

10%
0

0%

25%
CAR

TierI

CET1

Mar14

TeirII

Source:Company,IL&FSInstitutionalEquities

Mar15f

Mar16f

Mar17f

Source:Company,IL&FSInstitutionalEquities

ComfortableTier1capital,at9.9%atendJun14isunlikelytonecessitateanymaterialdilutioninthe
nearterm.CET1was9.8%andCARwas12.56%attheendofJun14.Weassumemoderationinthe
RWAgrowth,ata3yearCAGRof17%preservingthecorecapital.

OurTPvaluesSBINat1yearforwardadjustedP/Bof1.34x
Improvement in the core earnings and gradual decline in NPLs is likely to drive the valuations. Re
initiatecoveragewithaTPof2,925andanAdd.OutTPimplies1yrfwdadjustedP/Bof1.34x,closeto
the 5year mean. Our DCF/SOTPbased fair value stands at INR2,644, wherein we assume a cost of
equityof14%aswellasasemiexplicitandfadeperiodgrowthof16%and3%,respectively.OurSep15
target price of INR2,925 values SBIN at 1.34x the 1yr fwd adj. P/B. Reinitiate coverage with a Buy.
LowerthanestimatedNIMandslowrecoveryinNPLsarekeyriskfactors.
Exhibit13: AverageP/EandP/B(till02Sep14)

1month

3month

6month

12month

2year

3year

5year

9.33
1.25

9.86
1.33

9.22
1.25

8.07
1.08

7.52
1.14

7.44
1.19

8.54
1.39

P/E
P/B

Source:Company,IL&FSInstitutionalEquities

Exhibit14: P/E,P/BandDCFbasedTP,andweightedaverageTP

Weights

P/E

P/B

DCF/SOP

TP

35%
2,969

35%
3,121

30%
2,644

2,925

Source:Company,IL&FSInstitutionalEquities

Financials

56

StateBankofIndia

Exhibit15: OneyearforwardP/BandtargetP/B
1yearforwardP/ABV(X)
12monthmovingaverage

Exhibit16: OneyearforwardP/EandtargetP/E
1yearforwardP/E(X)
12monthmovingaverage

5yearaverage

2.5

16

2.0

13

1.5

10

1.0

0.5
Jan10

Dec10

Nov11

Nov12

Oct13

Source:Company,IL&FSInstitutionalEquities

Sep14

Sep15

4
Jan10

Dec10

Nov11

Nov12

5yearaverage

Oct13

Sep14

Sep15

Source:Company,IL&FSInstitutionalEquities

Riskfactors:
f IfinternationalNIMtakeslongertorecover,reboundintheglobalNIMmaygetdelayed.
f AgriNPLsmaypulldowntheoverallassetqualityifthemonsoonimpactremainsweak.
f Growthpicksupsignificantlyanddilutionbecomesimminentintheneartermleadingtoalower
thanestimatedRoE.

Financials

57

StateBankofIndia

Financialsandvaluations(standalone)
Incomestatement(INRbn)
Fiscalyearending
Netinterestincome
Feeincome
Tradingprofit
Otherincome
Totaloperatingincome
Totaloperatingexpense
Operatingprofit
Provisionforbaddebt
Otherprovision
PBT(reported)
Totaltaxes
PAT(reported)
(+)Shareinassoc.earnings
Less:Minorityinterest
Priorperioditems
Netincome(reported)
Adjustednetincome
Sharesoutstanding(mn)
Dil.shares(mn)
Dil.EPS(INR)

DecompositionofRoA(%)
03/14
492.8
145.1
20.8
19.7
678.3
357.3
321.1
142.2
17.1
161.7
52.8
108.9
0.0
0.0
0.0
108.9
108.9
747
747
145.9

03/15f
586.5
164.0
23.4
24.1
798.1
413.3
384.7
155.5
19.5
209.7
69.2
140.5
0.0
0.0
0.0
140.5
140.5
747
747
188.2

03/16f
697.7
193.6
26.3
25.7
943.2
485.3
457.9
167.6
24.3
266.0
87.8
178.2
0.0
0.0
0.0
178.2
178.2
747
782
228.0

03/17f
837.9
230.1
29.9
27.3
1,125.2
573.0
552.2
190.0
28.8
333.4
110.0
223.4
0.0
0.0
0.0
223.4
223.4
747
782
285.8

15.7
11.2
10.1
25.1
22.8
29.3

16.9
19.0
13.1
9.3
29.0
29.0

19.0
19.0
18.0
7.8
26.8
21.1

19.0
20.1
18.9
13.3
25.4
25.4

NII/operatingincome
Feeincome/operatingincome
Operatingprofitmargin
Netprofitmargin
EffectiveTaxrate

72.6
21.4
47.3
16.1
32.7

73.5
20.6
48.2
17.6
33.0

74.0
20.5
48.5
18.9
33.0

74.5
20.5
49.1
19.9
33.0

Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Deposits
Totalborrowings
Otherliabilitiesandprovisions
Totalliabilities
Cashandbankbalances
Investments
Loans
Fixedassets
Otherassets
Totalassets
BusinessRatios(%)
Loan/Deposit
Investment/Deposit
SLRInvestment/Deposit
SLRInvestment/NDTL
Debenture/Investment

03/14
7.5
0.0
1,175.4
1,182.8
13,944.1
1,345.9
1,449.6
17,922.3
1,325.5
3,983.1
12,098.3
80.0
435.5
17,922.3

03/15f
7.5
0.0
1,282.4
1,289.9
16,388.8
1,353.6
1,668.9
20,701.2
1,513.4
4,448.8
14,138.1
87.7
513.1
20,701.2

03/16f
7.8
0.0
1,499.7
1,507.5
19,513.0
1,263.7
1,948.2
24,232.4
1,683.1
5,028.3
16,823.5
95.2
602.3
24,232.4

03/17f
7.8
0.0
1,669.4
1,677.2
23,324.3
1,257.7
2,265.9
28,525.0
1,944.2
5,745.2
20,024.0
102.3
709.3
28,525.0

86.8
28.6
22.1
20.1
8.8

86.3
27.1
21.5
19.8
7.9

86.2
25.8
20.9
19.6
7.0

85.9
24.6
20.4
19.4
6.2

Growthratios(%)

Fiscalyearending
Netinterestincome
Feeincome
Otherincome
Operatingincome
Operatingexpenses
Operatingprofit
Loanlossprovisions
Provisionforinvestments
Otherprovisions
Tax
Netprofit

03/14
2.93
0.86
0.24
4.04
2.13
1.91
0.85
0.03
0.07
0.31
0.65

03/15f
3.03
0.85
0.25
4.13
2.14
1.99
0.81
0.04
0.06
0.36
0.73

03/16f
3.10
0.86
0.23
4.20
2.16
2.04
0.75
0.04
0.07
0.39
0.79

03/17f
3.17
0.87
0.22
4.26
2.17
2.09
0.72
0.04
0.07
0.42
0.85

RoA
Assets/Equity
RoE

0.65
15.47
10.03

0.73 0.79
15.62 16.06
11.37 12.74

0.85
16.57
14.03

KeyRatios

Loans
Netinterestincome
Feeincome
Provisionforbaddebt
Adjustednetincome
AvendusEPS

Operatingratios(%)

Balancesheet(INRbn)

Fiscalyearending
Valuationratios(x)
P/E(ondil.EPS)
P/BV
P/AdjustedBV
Dividendyield(%)
Pershareratios(INR)
BasicReportedEPS(INR)
DilutedReportedEPS(INR)
ReportedBookValue(BV)
AdjustedBookValue(ABV)
Dividendpershare(INR)
Return/ProfitabilityRatios(%)
Yieldonadvances
Yieldoninvestments
Costofdeposits
Netinterestmargin
Feeincome/Oprevenue
Tradingprofit/Oprevenue
Opexpense/Oprevenue
CapitalizationRatios(%)
Equity/Assets
Loans/Assets
Investments/Assets
Dividendpayout
Internalcapital/networth
Capitaladequacy
AssetQuality
GrossNPLratio
NetNPLratio
NetNPL/networth
Loanlossreserve/GrossNPL
Loanprovisions/NII
Loanprovisions/Totalloans
Productivity/Efficiencyratios
Businessperbranch(INRmn)
Netprofitperemployee(INRmn)

03/14

03/15f

03/16f

03/17f

17.17
1.58
1.58
1.36

13.31
1.45
1.45
1.79

10.99
1.30
1.30
2.30

8.76
1.17
1.17
2.74

152.2
152.2
1,584.3
1,584.3
34.0

188.2
188.2
1,727.7
1,727.7
44.8

238.7
233.2
1,928.8
1,928.8
57.5

299.2
285.8
2,145.9
2,145.9
68.7

9.1

9.4

9.4

9.4

8.5
6.0
3.0
21.4
52.7
0.6

8.3
6.0
3.1
20.6
51.8
0.7

8.2
6.0
3.2
20.5
51.5
0.8

8.1
5.8
3.3
20.5
50.9
0.8

6.6
67.5
22.2
23.3
8.4
12.4

6.2
68.3
21.5
23.8
9.0
12.7

6.2
69.5
20.8
25.2
10.3
12.5

5.9
70.2
20.1
24.0
11.3
11.8

5.0
2.6
18.6
57.9
28.9
1.2

5.2
2.0
21.6
63.7
26.5
1.1

5.2
2.0
22.5
62.8
24.0
1.0

5.1
1.9
22.8
63.7
22.7
0.9

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


0.5 0.6 0.8 1.0

Financials

58

StateBankofIndia

Financialsandvaluations(consolidated)
Incomestatement(INRbn)
Fiscalyearending
Netinterestincome
Feeincome
Tradingprofit
Otherincome
Totaloperatingincome
Totaloperatingexpense
Operatingprofit
Provisionforbaddebt
Otherprovision
PBT(reported)
Totaltaxes
PAT(reported)
(+)Shareinassoc.earnings
Less:Minorityinterest
Priorperioditems
Netincome(reported)
Adjustednetincome
Sharesoutstanding(mn)
Dil.shares(mn)
Dil.EPS(INR)

DecompositionofRoA(%)

03/14
675.8
185.5
39.5
159.8
1,060.6
633.7
426.9
183.4
24.3
219.2
68.4
150.8
0.0
3.2
0.0
147.7
147.7
747
747
197.8

03/15f
803.2
214.9
44.2
176.2
1,238.5
739.2
499.4
207.2
20.7
271.4
86.9
184.6
0.0
4.3
0.0
180.3
180.3
747
747
241.5

03/16f
942.4
256.0
51.5
206.1
1,455.9
850.6
605.3
228.5
24.2
352.6
112.8
239.8
0.0
5.5
0.0
234.3
234.3
782
782
299.8

03/17f
1120.8
304.4
58.8
242.7
1,726.7
989.9
736.8
259.6
25.9
451.3
144.4
306.9
0.0
6.8
0.0
300.0
300.0
782
782
383.9

13.3
10.5
16.9
36.4
17.7
24.5

17.5
18.8
15.9
13.0
22.4
22.1

19.0
17.3
19.1
10.3
29.9
24.2

19.1
18.9
18.9
13.6
28.0
28.0

NII/operatingincome
Feeincome/operatingincome
Operatingprofitmargin
Netprofitmargin
EffectiveTaxrate

63.7
17.5
40.3
13.9
31.2

64.8
17.4
40.3
14.6
32.0

64.7
17.6
41.6
16.1
32.0

64.9
17.6
42.7
17.4
32.0

Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Deposits
Totalborrowings
Otherliabilitiesandprovisions
Totalliabilities
Cashandbankbalances
Investments
Loans
Fixedassets
Otherassets
Totalassets
BusinessRatios(%)
Loan/Deposit
Investment/Deposit
SLRInvestment/Deposit
SLRInvestment/NDTL
Debenture/Investment

03/14
7.5
0.0
1,515.3
1,522.8
18,388.5
1,570.3
2,478.2
23,959.8
1,671.6
5,787.9
15,782.8
104.3
613.2
23,959.8

03/15f
7.5
0.0
1,675.7
1,683.2
22,037.0
1,581.3
2,680.2
27,981.7
2,121.4
6,508.1
18,541.8
118.6
691.8
27,981.7

03/16f
7.8
0.0
1,966.7
1,974.5
26,235.7
1,592.5
2,970.9
32,773.6
2,433.0
7,409.6
22,073.1
134.8
723.1
32,773.6

03/17f
7.8
0.0
2,229.8
2,237.6
31,248.5
1,637.3
3,362.8
38,486.2
2,794.0
8,482.4
26,279.2
149.0
781.6
38,486.2

85.8
31.5
24.5
22.5
7.4

84.1
29.5
23.3
21.7
7.0

84.1
28.2
22.6
21.3
6.5

84.1
27.1
22.0
20.9
6.0

Growthratios(%)

Fiscalyearending
Netinterestincome
Feeincome
Otherincome
Operatingincome
Operatingexpenses
Operatingprofit
Loanlossprovisions
Provisionforinvestments
Otherprovisions
Tax
Netprofit

03/14
2.99
0.82
0.85
4.66
2.80
1.86
0.81
0.03
0.08
0.32
0.62

03/15f
3.10
0.83
0.84
4.77
2.85
1.92
0.80
0.03
0.05
0.36
0.69

03/16f
3.11
0.84
0.84
4.79
2.80
1.99
0.75
0.03
0.05
0.40
0.77

03/17f
3.15
0.85
0.84
4.85
2.78
2.07
0.73
0.02
0.05
0.43
0.84

RoA
Assets/Equity
RoE

0.62
16.63
10.32

0.69 0.77
16.77 17.22
11.56 13.18

0.84
17.57
14.68

KeyRatios

Loans
Netinterestincome
Feeincome
Provisionforbaddebt
Adjustednetincome
Dil.EPS

Operatingratios(%)

Balancesheet(INRbn)

Fiscalyearending
Valuationratios(x)
P/E(ondil.EPS)
P/BV
P/AdjustedBV
Dividendyield(%)
Pershareratios(INR)
BasicReportedEPS(INR)
DilutedReportedEPS(INR)
ReportedBookValue(BV)
AdjustedBookValue(ABV)
Dividendpershare(INR)
Return/ProfitabilityRatios(%)
Yieldonadvances
Yieldoninvestments
Costofdeposits
Netinterestmargin
Feeincome/Oprevenue
Tradingprofit/Oprevenue
Opexpense/Oprevenue
CapitalizationRatios(%)
Equity/Assets
Loans/Assets
Investments/Assets
Dividendpayout
Internalcapital/Networth
Capitaladequacy
AssetQuality
GrossNPLratio
NetNPLratio
NetNPL/networth
Loanlossreserve/GrossNPL
Loanprovisions/NII
Loanprovisions/Totalloans
Productivity/Efficiencyratios
Businessperbranch(INRmn)
Netprofitperemployee(INRmn)

03/14

03/15f

03/16f

03/17f

12.66
1.23
1.49
1.40

10.37
1.11
1.37
1.82

8.36
0.99
1.22
2.28

6.53
0.87
1.08
2.96

206.5
206.5
2,039.7
1,685.5
35.1

241.5
241.5
2,254.5
1,833.5
45.6

299.8
306.7
2,526.4
2,054.1
57.0

383.9
383.9
2,863.0
2,317.1
74.1

9.5

9.7

9.7

9.8

8.2
6.4
3.1
17.5
3.7
60.1

8.2
6.4
3.2
17.4
3.6
59.7

8.2
6.3
3.2
17.6
3.5
58.4

8.1
6.2
3.2
17.6
3.4
57.3

6.4
65.9
24.2
17.3
9.4
12.4

6.0
66.3
23.3
18.4
9.6
11.4

6.0
67.4
22.6
18.6
11.3
11.1

5.8
68.3
22.0
18.9
12.3
10.5

4.8
2.6
27.4
47.5
27.1
1.2

4.8
2.6
29.8
47.1
25.8
1.1

4.7
2.6
29.7
47.1
24.3
1.0

4.6
2.5
30.3
47.4
23.2
1.0

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


0.5 0.6 0.8 1.0

Financials

59

IndiaEquityResearch
Financials

September04,2014

AxisBank

ADD

TargetPrice(INR)455 Significantchangeinbusinessmixunderway
CompanyReport
LastPrice(INR)

413.7

Bloombergcode

AXSBIN

Reute rs code

AXBK.BO

Avg.Vol.(3m)(mn)

5.23

Avg.Va l.(3m)(INRbn)

2.02

52wkH/L(INR)

415/153
27,140

Se nse x
MCAP(INRbn/USDbn)

975.61/16.13
03/14

06/14

Promote rs

Shareholding(%)

29.5

29.2

MFs ,FIs ,Ba nks

10.1

11.2

FIIs

48.7

48.4

5.8
5.8

5.7
5.6

Public
Others

Whileweforecastrevivalinthecorerevenues,elevatedprovisionsto
recover the 6% fall in PCR over last 3 years is likely to restrict RoA
expansion.Also,thestressedassetsformationisunlikelytodeclinein
FY15f with guidance at INR65bn as against INR56bn in FY14. The
favourablechangeintheassetandliabilitymixoverlastfewyearsis
likelytosustainNIMexpansion;weforecast6bpriseinNIMto3.48%
inFY15f.Changeinloanmixwithrisingretailproportioncouldaugur
wellforthemargin;managementhasguidedriseby7%to45%over3
5years.AXSBhasoutperformedICICIBCandHDFCBby45%and96%in
thelast12months.WithsimilarorlowerRoEthanpeers,webelieve
the outperformance is likely to recede. Reinitiate coverage with a
Sep15TPofINR455andanAddrating.TPvaluesAXSBatanadj.one
yearforwardP/Bof1.98x.LowerthanestimatedNIMiskeyrisk.
Shifttowardsretail,recentfocusonunsecuredretailtoaidyields
Theshifttowardsretailloanscontinueswitha10%increaseintheproportion
of retail loans in the past two years to 33.8% (adjusting for the re
classification).Managementhasguidedriseintheproportionofretailloansto
45%over35yearsandincreaseintheshareofhighyieldingunsecuredloans
withinretailby8%to25%.Thechangeintheretailmixislikelytoaidtheyield
on loans, benefiting margins. We forecast 6bp expansion in NIM to 3.48% in
FY15f.Wefactora3yearCAGRof20%inloans,drivenbyretailloans.

StockChart(RelativetoSensex)
5 00

4 00

3 00

2 00

Dependenceonwholesaledepositscontinuestorecede
100

0
S e p 13

J a n14

M a y14

A xis Bank

S e p 14

Sensex Reba sed

StockPerfm.(%)

1m

3m

1yr

Abs olute

6.9

8.9

164.2

Rel.toSens ex

0.4

0.3

115.4

Financials(INRbn)

03/14

03/15f

03/16f

NII

119.5

139.3

164.8

23.6

16.5

18.3

114.6

133.6

158.7

YoY(%)
Opera tingprofit
A.PAT

62.2

70.8

84.6

2,349.2

2,349.2

2,349.2

A.EPS(INR)

26.5

30.1

36.0

YoY(%)

19.6

13.9

19.4

Sho/s (diluted)

Equity/Ass ets (%)

10.0

9.8

9.4

P/E(x)

15.6

13.7

11.5

2.6

2.2

2.0

1.7
17.4

1.7
17.3

1.7
18.0

P/B(Adj)(x)
RoA(%)
RoE(%)
Q uarterlyTrends

09/13

12/13

03/14

06/14

Op. income (INRbn)

47.0

46.3

53.8

50.0

PAT (INRbn)

13.6

16.0

18.4

16.7

Pleaserefertothedisclaimertowardstheendofthedocument.

While the savings deposits proportion increased 371bp in the last 2 years to
27.4%,retailtermdepositswentup10%to34%attheendofJun14.Whilewe
forecastamoderationinsavingsdepositsgrowthastermdepositpicksup,the
shift towards retail deposits is likely to sustain. The CASA ratio over Mar15f
Mar17f is estimated to stay within 43%45% with a moderation in savings
depositsbeingoffsetbyareboundinCAdeposits.

ElevatedprovisionstorestrictfurtherRoAexpansion
With a rebound in fees, as corporate loan growth gradually picks up and
marginal expansion in NIM staying at close to the current level, we estimate
core revenues to revive. However, we build in high NPL provisions in our
estimatetorecover6%fallinPCRoverlast3years.Also,additiontostressed
assets in FY15f being similar to that in FY14 could put pressure on the
provisions.WeassumeincrementalNPLat0.34%inFY15f.Consequently,NPL
provision is estimated at 0.67% of loans, 6bp higher yoy. High provision is
likelytorestrictRoAexpansionoverFY15fFY17f.

OurTPvaluesAXSBat1.98adjustedbook;reinitiatewithAdd
Our TP values the stock at an adj. P/B of 1.98x, 6% discount to its fiveyear
mean.TPisaweightedaveragebasedontheP/E,P/BandDCFmethods.DCF
assumessemiexplicitperiodgrowthat23%.WereinitiatewithaSep15TPof
INR455 and an Add. With similar or lower RoE than peers, we believe the
outperformanceislikelytorecede.LowerthanestimatedNIMisakeyrisk.
ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com

AxisBank

AxisBank

Thrustonretailcontinueswithchangeintheretailmixunderway
AXSB reorganized its agriculture loan portfolio in Jun14 quarter in an effort to place more focus;
management guided that the rural market offers tremendous business opportunity in a long term.
Farm equipment, warehousing loans, agri. gold loans and others have been clubbed with the retail
portfolio. Including agri loans after the reclassification, retail constitute 38% of total loans, bridging
thegapwithICICIBC.Withintheretailportfolio,agricultureisexpectedtoexpandatafasterpace.
Exhibit1: Yoygrowthintotalandretailloans
Loangrowth

Retailloangrowth

Exhibit2: Proportionofvarioussegments
Retail

60%

100%

50%

80%

40%

60%

30%

40%

20%

20%

10%
Jun12

SME

Agri

Corporate

0%
Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

Mar11

Mar12

Mar13

Jun14

Source:Company,IL&FSInstitutionalEquities

Focusshiftstowardshighyieldingunsecuredretailloans
Focusonthehighyieldingunsecuredloans,toimprovetheyieldonloans,hasresultedinthechangein
the retail mix over the last two years. There has been emphasis on increasing the share of non
mortgage loans, driven primarily by LAP, gold loans, personal loans and credit cards. Personal and
creditcardloanstaysignificantlyabovehomeandautoloans.PersonalloansandLAPhadtheirshares
increaseby2%and5%,to8%and9%,respectively,attheendofJun14.
Exhibit3: Yoygrowthinhomeandautoloans
Home

Exhibit4: Yoygrowthinunsecuredloans

Auto

Personal

60%

200%

50%

150%

40%

100%

30%

50%

20%

0%

10%
Jun12

Dec12

Jun13

Dec13

Source:Company,IL&FSInstitutionalEquities

Jun14

50%
Jun12

Dec12

Cards

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

Riskmitigatedbyc70%ofincrementalloanstoexistingliabilitycustomers
AXSB sources retail loans through 132 asset sale centres as well as 1,716 branches (71% of total
branches)comparedto1,183branchesinthepreviousyear.Themomentuminretailloansissustained
bycrosssellingtointernalcustomers.Aboutathirdoftheincrementalretailloansaresourcedthrough
branchesandexistingliabilitycustomerscontributedontwothirdsoftheincrementalloans.

Financials

61

AxisBank

AxisBank

Liabilitymixgraduallytiltingtowardstheretaildeposits
Deposit growth has remained muted in the past six quarters with 3% sequential contraction in the
Jun14quarter.However,savingsdeposithas beensteadywithitsproportioncloseto27%andCASA
ratio in the range of 42%45% in the last six quarters. Besides strong CASA, Retail term deposits
proportionincreased10%to34%attheendofJun14.
Exhibit5: Quarterlytrendinsavingsdeposits

Exhibit6: TrendintheCASAratio

Growthinsavingsdeposits
Proportionofsavingsdeposits

CASAratio
Retailtermdeposits/Totaldeposits

28%

48%

26%

40%

24%

32%

22%

24%

20%

16%

18%

8%

16%
Jun12

0%
Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

Jun12

Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

SBdeposits/branchremainedstableatINR340mninthepasttwoyears.DespiteagradualpickupinSB
deposits/branchoverMar15fMar17f,asthe780branchesaddedduringtheprevioustwoyearsyield
results,savingsdepositsareestimatedtoincreaseataCAGRof17.5%;lowerthantheprecedingthree
years.Weassume650branchadditionsoverMar15fMar16f.Also,ascorporateloangrowthpicksup,
the accretion of term deposits would rise. The CASA ratio over Mar15fMar17f is estimated to stay
within43%45%withamoderationinsavingsdepositsbeingoffsetbythereboundinCAdeposits.
Exhibit8: ThreeyearCAGR

Exhibit7: SBdeposits/branch
SBdeposit/branch(INRmn)
SBdeposit/branch(growthYoy,RHS)

Mar09Mar11

Mar12Mar14

Mar15fMar17f

36%

400

10.0%

300

5.0%

200

0.0%

100

5.0%

9%

10.0%

0%

27%

0
Mar10

Mar12

Mar14

Mar16f

Source:Company,IL&FSInstitutionalEquities

18%

CA

Savings

Term

Source:Company,IL&FSInstitutionalEquities

ChangeinassetandliabilitymixtosustainthereboundinNIM
NIM(calculated)expanded27bpduringthepasttwoyearsto3.42%forFY14.AlargepartoftheNIM
expansionwasdrivenbytheriseintheloan/depositratioandFCNRdepositsraisedduringFY14.While
weestimatethelargeNIMexpansiontofadeawayduringMar15fMar17Ff,itislikelytostayabove
historicallevelsduetoahigherCASAratioandchangeintheassetmixwithatilttowardshighyielding
retailloans.Substantialincreaseinretaildepositsinthelasttwoyearswouldleadtomoderationinthe
costoffunds.Weforecast6bpyoyexpansioninNIMduringFY15f.

Financials

62

AxisBank

AxisBank

Exhibit9: NIMforthequarterandCDratio

Exhibit10: CalculatedNIMfortheyear,CDratio

NIM(%)
CDratio(RHS)

NIM(RHS)
Costofdeposits

4.0%

87%

3.8%

84%

3.6%

81%

3.4%

78%

3.2%

75%

Jun12

Dec12

Jun13

Dec13

10.5

4.0

9.0

3.5

7.5

3.0

6.0

2.5

4.5

72%

2.9%

Yieldonloans

2.0
Mar11

Jun14

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Source:Company,IL&FSInstitutionalEquities

NPLprovisionstorestrictRoAexpansionoverFY15fFY17f
IncrementalNPLtrendsdownbutprovisionstostayelevated
WeassumeincrementalNPLtostaystableinFY15fto0.34%anddecline14bpoverMar16fMar17f.
After a decline in the slippage ratio from 1.48% in Jun13 to 0.56% in Mar14 it increased to 1.17% in
Jun14 quarter. We estimate the NPL provisions/loans to stay elevated, averaging at 0.65% over
Mar15fMar16f, 6bp higher than the preceding threeyear average, to recover the lost ground in
coverageratio.Theprovisioncoverageratio(PCR),excludingthewriteoff,declinedfrom74.5%atthe
endofMar11to67.5%attheendofMar14.
Exhibit12: SlippageratioandgrossNPLaddition

Exhibit11: IncrementalNPL,provisions
IncrementalNPL
NPLprovision/loans(RHS)

GrossNPLaddition(INRmn)
Slippageratio(RHS)

0.36%

0.90%

8,000

2.0%

0.27%

0.80%

6,000

1.6%

0.18%

0.70%

4,000

1.2%

0.09%

0.60%

2,000

0.8%

0.50%

0.00%
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

0.4%
Jun12

Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

Restructuredloanscontinuestorise
Restructuringhasremainedhighandcontinuestorise.ThetotalamountrestructuredduringFY14was
INR35bn compared to INR21bn in the previous year. Restructured loans, as a percentage of gross
customerassets,increasedfrom1.94%attheendofMar13to2.73%attheendofJun14.
Exhibit13: GrossNPLratiosofsegmentswithinvehiclefinanceandfortotalloans

Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

Jun14

O/srestructuredassets(INRbn)

38.27

40.68

42.57

43.68

42.11

48.07

49.00

60.79

62.89

as%ofgrosscustomerassets

1.95

1.95

2.06

1.94

1.87

2.10

2.06

2.39

2.47

as%ofnetloans

2.24

2.36

2.37

2.22

2.13

2.39

2.32

2.64

2.73

Additions(INRbn)

6.28

3.23

3.68

7.91

6.86

10.31

6.70

11.15

4.80

Source:Company,IL&FSInstitutionalEquities

Financials

63

AxisBank

AxisBank

Despitereboundinrevenues,provisionsmaypreventfurtherRoAexpansion
Weforecastareboundincorerevenues,NIIandfeesoverFY15fFY17f,ledbymarginexpansionanda
pickup in fees with a recovery in corporate loan growth. However, we expect the provisions to stay
elevated driven by NPL provisions, higher standard asset provisions due to a rise in the burden for
restructuredandunhedgedforeigncurrencyexposures.CumulativelyINR650mnwasprovidedforun
hedgedFXexposureandSMAIIintheJun14quarter.
Exhibit14: ThreeyearmeanforNII,fees,operatingprofit,NPLprovisionsandRoA

FY13

FY14

FY15f

FY16f

FY17f

NII/assets

3.09

3.30

3.36

3.37

3.32

Fee/assets

1.76

1.65

1.68

1.70

1.73

Otherincome/assets

0.33

0.39

0.36

0.34

0.34

Operatingexpenses/assets

2.21

2.18

2.17

2.17

2.17

3.25

3.22

0.41
0.01

0.37
0.01

Operatingprofit/assets
NPLprovisions/assets

2.97
0.36

3.17
0.36

3.22
0.40

Provisionforinvest.

0.01

0.03

0.01

Otherprovisions

0.18

0.25

0.26

0.25

0.25

Tax

0.76

0.87

0.84

0.85

0.85

RoA

1.66

1.72

1.71

1.73

1.73

Source:Company,IL&FSInstitutionalEquities

OurTPvaluesAXSBat1yearforwardadjustedP/Bof1.98x
OurtargetpriceisbasedontheDCF,P/EandP/Bmethods.OurDCFbasedfairvaluestandsatINR423,
whereweassumeacostofequityof14%,andsemiexplicitandfadeperiodgrowthof23%and3%,
respectively.OurSep15targetpriceofINR455valuesAXSBat1.98xtheoneyearforwardbookvalue,
6%discounttoits5yearmean.WereinitiatecoveragewithanAddrating.
AXSB has outperformed ICICIBC and HDFCB by 45% and 96% in the last 12months. With similar or
lowerRoEthanpeers,webelievetheoutperformanceislikelytorecede.
Exhibit16: OneyearforwardP/EandtargetP/E

Exhibit15: OneyearforwardP/BandtargetP/B
1yearforwardP/ABV(X)
12monthsmovingaverage

5yearaverage

1yearforwardP/E(X)
12monthsmovingaverage

3.5

22

3.0

19

2.5

16

2.0

13

1.5

10

1.0

0.5
Jan10

Dec10

Nov11

Nov12

Oct13

Sep14

Source:Company,IL&FSInstitutionalEquities

4
Jan10

Sep15

Dec10

Nov11

Nov12

5yearaverage

Oct13

Sep14

Sep15

Source:Company,IL&FSInstitutionalEquities

Exhibit17: AverageP/EandP/B(till2Sep14)

1month

3month

6month

12month

2year

3year

5year

11.94
1.98

12.07
1.99

11.14
1.82

9.68
1.56

9.73
1.68

9.52
1.68

11.52
2.11

P/E
P/B

Source:Company,IL&FSInstitutionalEquities

Financials

64

AxisBank

AxisBank

Exhibit18: P/E,P/BandDCFbasedTP,andweightedaverageTP

Weights

P/E

P/B

DCF/SOP

TP

35%
453

35%
484

30%
423

455

Source:Company,IL&FSInstitutionalEquities

Keyrisks
f A largerthanassumed drop in incremental NPLs may result in provisions being lower than our
estimate. Also, if the management uses its discretion to keep PCR lower than historical levels,
provisionscouldbelower,leadingtoanupsiderisktoournetprofitestimate.
f AsurgeintermdepositsanddeclineinCASAratio,drivenbyapickupincorporateloansmayresult
inariskforNIM.Also,asharpdropintheloandepositratiomayleadtoaneartermriskforNIM.

Financials

65

AxisBank

AxisBank

Financialsandvaluations
Incomestatement(INRbn)
Fiscalyearending
Netinterestincom e
Feei ncome
Tra di ngprofi t
Otheri ncome
Totaloperatingincom e
Tota l opera ti ngexpens e
Operatingprofit
Provi s i onforba ddebt
Otherprovi s i on
PBT(reported)
Tota l ta xes
PAT(reported)
(+)Sha rei na s s oc.ea rni ngs
Les s :Mi nori tyi nteres t
Pri orperi odi tems
Neti ncome(reported)
Adjustednetincom e
Sha res outs ta ndi ng(mn)
Avendus di l .s hares (mn)
Dil.EPS(INR)

DecompositionofRoA(%)

03/14
119.5
59.9
7.0
7.2
193.6
79.0
114.6
13.0
8.1
93.5
31.3
62.2
0.0
0.0
0.0
62.2
62.2
2,349
2,349
26.5

03/15f
139.3
69.8
5.9
8.9
223.8
90.2
133.6
16.7
11.2
105.7
34.9
70.8
0.0
0.0
0.0
70.8
70.8
2,349
2,349
30.1

03/16f
164.8
83.3
6.3
10.5
264.9
106.2
158.7
19.8
12.7
126.2
41.7
84.6
0.0
0.0
0.0
84.6
84.6
2,349
2,349
36.0

03/17f
192.4
100.0
7.4
12.5
312.2
125.8
186.4
21.6
15.0
149.7
49.4
100.3
0.0
0.0
0.0
100.3
100.3
2,349
2,349
42.7

16.8
23.6
8.4
14.8
20.0
19.6

18.0
16.5
16.6
29.1
13.9
13.9

19.2
18.3
19.4
18.4
19.4
19.4

19.4
16.7
20.0
9.1
18.6
18.6

61.7
30.9
59.2
32.1
33.5

62.2
31.2
59.7
31.6
33.0

62.2
31.5
59.9
31.9
33.0

61.6
32.0
59.7
32.1
33.0

03/14
4.7
0.0
377.5
382.2
2,809.7
299.7
340.7
3,832.3
281.6
1,135.5
2,300.7
24.7
89.8
3,832.3

03/15f
4.7
0.0
432.7
437.4
3,315.5
323.4
392.3
4,468.6
315.8
1,294.2
2,714.0
27.3
117.2
4,468.6

03/16f
4.7
0.0
496.4
501.1
3,947.0
369.9
492.6
5,310.7
367.9
1,514.5
3,235.1
30.8
162.4
5,310.7

03/17f
4.7
0.0
575.9
580.6
4,698.9
410.4
590.8
6,280.7
429.8
1,776.9
3,862.3
35.0
176.6
6,280.7

81.9
40.4
26.3
23.7
21.0

81.9
39.0
25.6
23.3
22.1

82.0
38.4
25.0
22.8
22.7

82.2
37.8
24.4
22.5
23.2

Growthratios(%)

03/14
3.30
1.65
0.39
5.35
2.18
3.17
0.36
(0.03)
0.25
0.87
1.72

03/15f
3.36
1.68
0.36
5.39
2.17
3.22
0.40
0.01
0.26
0.84
1.71

03/16f
3.37
1.70
0.34
5.42
2.17
3.25
0.41
0.01
0.25
0.85
1.73

03/17f
3.32
1.73
0.34
5.39
2.17
3.22
0.37
0.01
0.25
0.85
1.73

RoA
As s ets /Equi ty
RoE

1.72
10.14
17.44

1.71
10.13
17.28

1.73
10.42
18.02

1.73
10.72
18.55

03/14

03/15f

03/16f

03/17f

15.6
2.5
2.6
1.2

13.7
2.2
2.2
1.5

11.5
1.9
2.0
1.9

9.7
1.7
1.7
1.9

26.5
26.5
162.7
161.7
4.8

30.1
30.1
186.2
184.7
6.0

36.0
36.0
213.3
212.1
8.0

42.7
42.7
247.1
246.6
8.0

KeyRatios

Loa ns
Neti nteres ti ncome
Feei ncome
Provi s i onforba ddebt
Adjus tedneti ncome
Di l .EPS

Operatingratios(%)
NII/opera ti ngi ncome
Feei ncome/opera ti ngi ncome
Opera ti ngprofi tma rgi n
Netprofi tma rgi n
Effecti veTa xra te

Balancesheet(INRbn)
Fiscalyearending
Equi tycapi ta l
Preferencecapi ta l
Res erves ands urpl us
Networth
Depos i ts
Tota l borrowi ngs
Otherl i abi l i ti es a ndprovi s i ons
Totalliabilities
Ca s ha ndba nkba l a nces
Inves tments
Loa ns
Fi xeda s s ets
Otheras s ets
Totalassets
BusinessRatios(%)
Loa n/Depos i t
Inves tment/Depos i t
SLRInves tment/Depos i t
SLRInves tment/NDTL
Debenture/Inves tment

Fiscalyearending
Neti nteres ti ncome
Feei ncome
Otheri ncome
Opera ti ngi ncome
Opera ti ngexpens es
Operatingprofit
Loa nl os s provi s i ons
Provi s i onfori nves tments
Otherprovi s i ons
Ta x
Netprofit

Fiscalyearending
Valuationratios(x)
P/E(onAvendus EPS)
P/BV
P/Adjus tedBV
Di vi dendyi el d(%)
Pershareratios(INR)
Ba s i cReportedEPS(INR)
Di l utedReportedEPS(INR)
ReportedBookVa l ue(BV)
Adjus tedBookVa l ue(ABV)
Di vi dendpers ha re(INR)
Return/ProfitabilityRatios(%)
Yi el dona dva nces
Yi el doni nves tments
Cos tofdepos i ts
Neti nteres tma rgi n
Feei ncome/Oprevenue
Tra di ngprofi t/Oprevenue
Opexpens e/Oprevenue
CapitalizationRatios(%)
Equi ty/As s ets
Loa ns /As s ets
Inves tments /As s ets
Di vi dendpa yout
Interna l ca pi ta l growth
Ca pi ta l a dequa cy
AssetQuality
Gros s NPLrati o
NetNPLra ti o
NetNPL/networth
Loa nl os s res erve/Gros s NPL
Loa nprovi s i ons /NII
Loa nprovi s i ons /Tota l l oa ns
Productivity/Efficiencyratios
Bus i nes s perbra nch(INRmn)
Netprofi tperempl oyee(INRmn

10.3
7.3
6.1
3.4
28.1
3.6
40.8

10.4
7.4
6.0
3.5
28.0
2.6
40.3

10.3
7.4
5.9
3.5
28.3
2.4
40.1

10.3
7.2
5.9
3.5
28.9
2.4
40.3

10.0
66.8
29.6
20.1
15.0
16.1

9.8
67.5
29.0
22.1
14.4
17.6

9.4
67.5
28.5
24.7
14.6
17.3

9.2
68.0
28.3
20.8
15.9
17.1

1.2
0.4
2.4
67.4
10.8
0.8

1.3
0.5
3.1
66.1
12.0
0.9

1.3
0.4
3.0
69.0
12.0
0.9

1.3
0.4
2.6
72.7
11.2
0.9

2,127.6
1.5

2,190.9
1.5

2,353.3
1.6

2,554.1
1.7

Financials

66

IndiaEquityResearch
Financials

September04,2014

IndusIndBank

ADD

TargetPrice(INR)665 DelayedrecoveryinCVsaneartermoverhang

7.5

8.6

FIIs

43.3

43.6

Return ratios during FY15fFY17f is likely to stay above the historical


average, despite pressure from elevated provisions and peaking
margins.ThereboundintheCVcyclemaybebackendedinFY15f,and
hencethepositiveimpactonNPLsandNPLprovisionsmaybevisible
onlyfromFY16f.LargeincrementalNPLs,mainlyfromtheCVsegment,
arelikelytokeeptheprovisioninglevelhighandrestricttheexpansion
ofRoAto5bpinFY15f.WhiledelayedrecoveryintheCVcycleislikely
to stay a nearterm overhang, sustained RoE above 18% over FY15f
FY17fcouldprovidethevaluationsupport.Atanadj.1yrfwdP/Bof
2.84x,thestocktradesclosetoitsfiveyearmean.Wereinitiatewith
aSep15TPofINR665andanAddrating.TheTPvaluesthestockata
P/Bof2.65x.Lowerthanestimatedfeeiskeyriskfactor.

Public
Others

6.1
27.9

6.8
25.8

EvenwithpressureonNIM,NII/assettostayaheadoflast3yearsavg.

CompanyReport
LastPrice(INR)

616.3
IIBIN

Bloombergcode
Reuterscode

INBK.BO

Avg.Vol.(3m)

985,914
550

Avg.Val.(3m)(INRmn)

623/342

52wkH/L(INR)

27,140

Sensex
MCAP(INRbn/USDbn)

325.33/5.38

Shareholding(%)
Promoters
MFs,FIs,Banks

03/14

06/14

15.2

15.2

Even without material NIM expansion, NII/asset over FY15fFY17f would stay
higher than the last 3 years average, by 15bp. About 30bp NIM expansion
duringFY13FY14wasdrivenbyequityissuanceandliabilitycostcontainment.
Theloan/depositratiopeakedat93.3%atendDec13andthetrendofdecline
inthelasttwoquartersislikelytosustain,exertingpressureontheNIM.Jun14
quarterhad9bpcontractioninNIMdueto10bpriseincostofdepositsand
16bpfallintheyieldonloans.Also,thebankhasbeentrimminghighyielding
CVportfoliosandreplacingthemwithmidcorporateandsmallbusinessloans,
whichmaycontinuetoimpacttheloanyieldinthemediumterm.

StockChart(RelativetoSensex)
660
605
550
495
440
385

Improvingliabilityfranchisebutstillsomedistancetocover

330

Sep13

Jan14

May14

IndusInd Bank

Sep14

Sensex Rebased

StockPerfm.(%)

1m

3m

1yr

Absolute

12.3

13.8

76.9

5.8

4.6

28.1

Rel.toSensex
Financials(INRbn)

03/14

03/15f

03/16f

NII

28.9

35.2

42.7

YoY(%)

29.5

21.9

21.1

Operatingprofit

26.0

31.0

38.0

A.PAT

14.1

17.4

21.6

525.6

525.6

525.6

A.EPS(INR)

26.8

33.1

41.1

YoY(%)

32.0

23.6

24.1

Equity/Assets(%)

10.4

9.9

9.2

P/E(x)

22.9

18.6

15.0

3.6

3.1

2.7

1.8
17.6

1.8
18.7

1.8
19.8

Sho/s(diluted)

P/B(Adj)(x)
RoA(% )
RoE(%)
QuarterlyTrends

09/13

12/13

03/14

06/14

Op.income(INRbn)

11.5

11.2

12.1

14.7

3.3

3.3

3.5

3.6

PAT(INRbn)

Pleaserefertothedisclaimertowardstheendofthedocument.

ThepaceofgrowthinSBdepositsislikelytoreduceduetoahigherbaseand
pick up in term deposit growth. Also, an increase in the proportion of SB
deposits during FY15fFY17f may stay lower than the preceding three years.
Weassumea3yearCAGRof35.4%insavingsdeposits,liftingtheproportionof
savings deposits by 4.4% to 34%. We assume 498 branch additions over next
threeyearstosupportfurtherimprovementintheliabilitymix.

Webuildinbenefitfromfallingprovisions,costefficienciesfromFY16f
The rebound in the CV cycle may be backended in FY15f, and the impact on
NPLsandNPLprovisionscouldbevisiblefromFY16f.Weassumeincremental
NPLduringFY15fFY17fat35bpandNPLprovisions/loansat65bp,higherthan
the preceding three years average, at 33bp and 56bp, respectively.
Cost/income ratio fell by 3.74% during FY13FY14 to 45.7%. However, cost/
asset continued to rise to 2.73% in FY14. We buildin the improvement from
FY16f.WhileRoAisestimatedtoriseby5bpinFY15f,at1.81%,itislikelyto
staywellaboveitshistoricalaverage.

WevalueIIBat1yearP/Bof2.65x;reinitiatewithAdd
OurtargetpriceisbasedontheDCF,P/EandP/Bmethods.OurDCFbasedfair
valuestandsatINR514,whereweassumeacostofequityof14%aswellasa
semiexplicit and fade period growth of 23% and 3%,respectively. Our Sep15
target price of INR665 values IIB at 2.65x the 1yr fwd P/B. We reinitiate
coveragewithanAddrating. Lowerthanestimatedfeeiskeyrisk factor.
ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com

IndusIndBank

IndusIndBank

BackendedreboundinCVsinFY15fcoulddriveCFDinFY16fFY17f
Despite a sharp slowdown in the CV segment in FY14, the threeyear CAGR in consumer finance
division(CFD)loans,at29%,marginallyoutpacedcorporateloangrowth.Theuptrendincorporateloan
growthoverthepasttwoyearshasoffsettheslowdownintheconsumerfinancesegment.Thelarge
slowdownintheCVsegmentoverthepasttwoyearsledtothecontractionintheshareofconsumer
financeby6%yoyto43%attheendofJun14.Weassumetheloangrowthintheconsumerfinance
segment to pick up during FY16fFY17f We assume a threeyear CAGR of 27% in the CFD, outpacing
corporateloangrowth.
Exhibit2: CAGRinloans

Exhibit1: Yoygrowthinloansegments
Corporateandcommercialbanking
Consumerfinance
Totalloans

(Mar11Mar14)

50%

30%

40%

24%

30%

18%

20%

12%

10%

6%

0%

(Mar15fMar17f)

0%
Jun12

Dec12

Jun13

Dec13

Source:Company,IL&FSInstitutionalEquities

Jun14

CBG

CFD

Totalloans

Source:Company,IL&FSInstitutionalEquities

Changeinretailloanmixmayaugurwellduringcyclicaldownturn
Shareofvehicleloanstototalretailloansdeclined11%to86%atendJun14
ThedeclineintheshareofvehicleloanshasbeenpartlyduetotheslowdownintheCVsegmentand2
/3wheelerloans.TheproportionofCVloansdeclined10%inthelasttwoyearsto30.4%attheendof
Jun14. The contraction in the proportion of these segments has also been offset due to the
introductionofnewproductssuchascreditcardandLAP.LAP,introducedinFY12,currentlyaccounts
forc11%ofretailloans.WhiletheCVsegmentislikelytoreboundandseeariseinitsproportion,the
changeintheretailloanmixmaysustainduetotheintroductionofnewproducts.Thediversification
withinretailmayaugurwellforthebankduringcyclicaldownturnsintheCVindustry.
Exhibit3: Yoygrowthinthesegmentswithinconsumerfinance
CV

Utility

Car

2/3wheeler

Equipment

Creditcard,PL

LAP

100%
80%
60%
40%
20%
0%
Mar11

Mar12

Mar13

Mar14

Jun14

Source:Company,IL&FSInstitutionalEquities

Financials

61

IndusIndBank

IndusIndBank

Improvingliabilityfranchisebutstillsomedistancetocover
Despiteadeclineintheyoygrowthinsavingsdeposits,itcontinuestostaywellabovepeers(below
20% yoy). Also, the expansion in the savings deposits proportion over the past two years has
sustained.Singledigittermdepositsgrowth,duetoincreaseinthedependenceonborrowingsinthe
pastthreequarters,hassustainedtheCASAratioofthebankcloserto32%.
Exhibit5: TrendintheCASAratio

Exhibit4: Quarterlytrendinsavingsdeposits
Proportionofsavingsdeposits
Growthinsavingsdeposits(RHS)

CASARATIO(%)
35%

18%

65%

16%

58% 30%

14%

51% 25%

12%

44% 20%

10%

37% 15%

8%
Jun12

Dec12

Jun13

Dec13

30% 10%
Jun14
Jun12

Source:Company,IL&FSInstitutionalEquities

Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

WeassumethepaceofgrowthinSBdepositstoreduceduetoahighbaseandpickupintermdeposit
growth.Also,anincreaseintheproportionofSBdepositsduringFY15fFY17fmaystaylowerthanthe
preceding three years. We assume a CAGR of 35.4% in savings deposits between FY15f and FY17f,
liftingtheproportionofsavingsdepositsby4.4%to34%attheendofMar17f.
Exhibit6: CAGRindepositsandchangeinsavingsdepositsproportion
(Mar08Mar11)

(Mar11Mar14)

(Mar14Mar17f)

Demand

51.6%

15.9%

20.0%

Savings

37.1%

48.0%

35.4%

Term

16.0%

17.7%

23.4%

Totaldeposits

21.8%

20.8%

25.0%

2.7%

7.5%

4.4%

Changeinsavingsdepositsproportion(%)
Source:Company,IL&FSInstitutionalEquities

NIMmayhavepeaked,likelytofacepressurewithfallinCDratio
Exhibit7: NIMforthequarterandCDratio
NIM(%)

Exhibit8: CalculatedNIMfortheyear,CDratio
NIM(%)

CDratio(RHS)

CDratio(RHS)

3.8

96%

4.0

98%

3.0

92%

3.5

91%

2.2

88%

3.0

84%

1.4

84%

2.5

77%

80%

2.0

0.6
Jun12

Dec12

Jun13

Dec13

Source:Company,IL&FSInstitutionalEquities

Jun14

70%
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Financials

62

IndusIndBank

IndusIndBank

LargeNIMexpansioninFY13FY14wasdrivenbyequityissuanceandliabilitycostcontainment.The
loan/depositratiomayhavepeakedattheendofDec13,at93.3%.Largedependenceonborrowings
led to a rise in CD ratio. The trend of decline in the CD ratio during the Mar14Jun14 quarter may
sustain and exert pressure on the NIM. A sharp jump in CA deposits of 10% 11% qoq could be
seasonal and temporary in nature. The bank has been trimming highyielding CV portfolios and
replacingthemwithmidcorporateandsmallbusinessloans,whichresultedinadriftinloanyields.
Exhibit9: Costandyieldontheloans
Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

Jun14

Costofdeposit(%)
Costoffunds(%)

8.86
7.62

8.68
7.55

8.43
7.29

8.06
6.81

8.18
6.75

8.18
6.96

8.35
7.08

8.08
6.80

8.18
6.85

Yieldonloans(%)
CBG
CFD

13.95
11.78
16.34

13.94
11.84
16.16

13.72
11.63
15.94

13.48
11.39
15.74

13.39
11.26
15.64

13.50
11.54
15.49

13.76
11.89
15.63

13.65
11.64
15.75

13.49
11.55
15.75

Source:Company,IL&FSInstitutionalEquities

DespitethepressureonNIM,NII/assetswellabovehistoricallevel
Exhibit10: 3yearaverageforNII/assets
(%)

FY09FY11

FY12FY14

FY15fFY17f

2.61

3.44

3.59

NII/assets
Source:Company,AvendusResearch

Feeintensitymaystayabovehistoricalleveldespitemoderation
Capitalising on the opportunities thrown up by the midcorporate segment through its strong
structuring capabilities, IIB has created a successful investment banking practice. Its contribution to
total fees has more than doubled in the past three years to c18% during the Jun14 quarter. The
creationofaseparateoriginationteamfocusingoninvestmentbankingpracticescomplementedbya
projectfinanceunittocapitaliseonrevivingopportunitiesmayofferthebankacompetitiveedge.
Exhibit11: Feesgrowthandfees/operatingincome Exhibit12: Fees/assetsfortheyear(%)
yoygrowthincorefees
Corefees/operatingincome

Fee/assets
2.5

50%
2.0
40%

1.5
1.0

30%
0.5
20%
Jun12

0.0
Dec12

Jun13

Dec13

Jun14

Source:Company,IL&FSInstitutionalEquities

Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Exhibit13: Breakupofcorefees(%)

Trade&remittances
Forexincome
Distribution
Generalbanking
Loanprocessing
Investmentbanking

Jun11
13.6
22.6
28.0
12.7
17.7
5.3

Sep11
13.5
24.7
26.9
12.7
18.5
3.8

Dec11
13.3
24.0
26.5
11.1
16.6
8.5

Mar12
11.7
17.4
26.8
11.3
17.7
15.1

Jun12
13.9
23.6
21.0
10.8
19.2
11.6

Sep12
11.5
22.8
23.3
11.5
19.6
11.4

Dec12
13.2
25.2
20.7
10.1
20.1
10.8

Mar13
13.7
21.2
22.8
12.5
16.9
12.9

Jun13
13.9
26.2
19.0
11.0
15.7
14.2

Sep13
12.8
26.4
17.4
8.8
17.7
16.9

Dec13
13.0
30.6
16.3
8.1
18.1
13.8

Mar14
13.6
24.7
17.5
8.5
20.3
15.4

Mar14
13.6
24.7
17.5
8.5
20.3
15.4

Source:Company,IL&FSInstitutionalEquities

Financials

63

IndusIndBank

IndusIndBank

ThebankscorefeeincomeintheJun14quartergrewatarobustpaceat38%yoy,butcontribution
from treasury income, FX income and investment banking was high at INR811mn and could be non
recurring in nature. We forecast average fee/assets of 1.98% during FY15fFY17f, 14bp higher than
theprecedingthreeyearaverage.

Improvementincostratioslimitedduetoplannedexpansion
TheimprovementincostratiosinFY14maynotsustainandtheremaybeamarginaluptrendduring
FY15fFY17f. In line with the managements guidance, we assume a rise in the pace of branch
additions,at498,duringFY15fFY17f,comparedto302intheprecedingthreeyears.Also,weexpecta
marginal uptrend in the average pay per employee during the next three years compared to the
contraction in the last two years. We estimate the average costassets ratio during FY15fFY17f at
2.64%,marginallylowerfrom2.67%,intheprecedingthreeyears.Weforecastthecostincomeratioto
averageat45.2%duringFY15fFY17f,similartothatduringthepastthreeyears.
Exhibit15: NPLprovision/assets,incrementalNPL

Exhibit14: Costratios(%)
Cost/income

IncrementalNPL

Cost/asset(RHS)

Provision/loans(RHS)

55

3.0

0.5%

0.50%

50

2.8

0.4%

0.44%

45

2.6

0.3%

0.38%

40

2.4

0.2%

0.32%

35

2.2

0.1%

0.26%

2.0

0.0%

30
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

0.20%
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

BenefitfromfallinincrementalNPLslikelyinFY16fFY17f
RecoveryinCVcyclemaybebackendedinFY15f
Exhibit16: PCRandthegrossslippageratio(%)
ProvisionCoverageRatio(%)

Grossslippageratio(RHS)

80

2.1%

76

1.7%

72

1.3%

68

0.9%

64

0.5%
Jun12

Sep12

Dec12

Mar13

Jun13

Sep13

Dec13

Mar14

Jun14

Source:Company,IL&FSInstitutionalEquities

Financials

64

IndusIndBank

IndusIndBank

Exhibit17: GrossNPLratiosofsegmentswithinvehiclefinanceandfortotalloans

%oftotalloans(Mar14)
Mar13
Jun13
Sep13
Dec13
Mar14
Jun14

CVs
17.45%
1.01%
1.17%
1.08%
1.28%
1.38%
1.44%

Utility
3.72%
0.88%
0.86%
0.76%
0.76%
0.87%
0.84%

Car
4.79%
0.73%
0.70%
0.44%
0.40%
0.52%
0.46%

3wheeler Equipmentfinancing
8.07%
5.18%
0.84%
1.17%
0.83%
1.16%
0.75%
1.17%
0.72%
1.26%
0.92%
1.30%
0.82%
1.58%

Totalloans
1.03%
1.06%
1.11%
1.18%
1.12%
1.11%

Source:Company,IL&FSInstitutionalEquities

There was a gradual deterioration in the asset quality during the past three years, with average
incremental NPLs at 0.33% during FY12FY14, compared to the decline in incremental NPLs in the
precedingthreeyears.ThereboundintheCVcyclemaybebackendedinFY15f,andhencetheimpact
onNPLsandNPLprovisionsmaybevisibleonlyfromFY16f.WeassumeincrementalNPLduringFY15f
FY17f at35bp and NPL provisions/loans at 65bp, higher than the preceding three years average, at
33bpand56bp,respectively.

Provisions,peakingofNIMmayrestrictpaceofriseinRoA,RoE
HighNPLprovisionsandlimitedNIMexpansionislikelytorestricttheextentofriseintheprofitability
ratios,i.e.,RoAandRoE.
Exhibit18: ThreeyearaverageforRoA,RoEandasset/equity
Average,%

Mar09Mar11

Mar12Mar14

Mar15fMar17f

RoA

1.04

1.64

1.82

RoE

16.84

18.21

19.82

Asset/Equity

17.05

11.12

10.92

Source:Company,IL&FSInstitutionalEquities

WevalueIIBat1yearP/Bof2.65x;reinitiatewithAdd
OurtargetpriceisbasedontheDCF,P/EandP/Bmethods.OurDCFbasedfairvaluestandsatINR514,
where we assume a cost of equity of 14% and semiexplicit and fade period growth of 23% and 3%,
respectively.OurSep15targetpriceofINR665valuesIIBat2.65xtheoneyearforwardbookvalue.We
reinitiatecoveragewithanAddrating.
Exhibit20: OneyearforwardP/EandtargetP/E

Exhibit19: OneyearforwardP/BandtargetP/B
1yearforwardP/ABV(X)
12monthsmovingaverage

5yearaverage

1yearforwardP/E(X)
12monthsmovingaverage

5.0

25

4.1

20

3.2

15

2.3

10

1.4
Jan10

Dec10

Nov11

Nov12

Source:Company,IL&FSInstitutionalEquities

Oct13

Sep14

Sep15

5
Jan10

Dec10

Nov11

Nov12

5yearaverage

Oct13

Sep14

Sep15

Source:Company,IL&FSInstitutionalEquities

Financials

65

IndusIndBank

IndusIndBank

Exhibit21: AverageP/EandP/B(till1Aep14)

1month

3month

6month

12month

2year

3year

5year

15.25
2.72

15.52
2.75

15.28
2.69

14.55
2.50

15.26
2.84

14.92
2.78

15.29
3.00

P/E
P/B(adjusted)

Source:Company,IL&FSInstitutionalEquities

Exhibit22: P/E,P/BandDCFbasedTP,andweightedaverageTP

Weights

P/E

P/B

DCF/SOP

TP

35%
705

35%
753

30%
514

665

Source:Company,IL&FSInstitutionalEquitiesAssumptions:2yearmeanP/EandP/Bbasedfairvalue;assume22%semiexplicitperiodgrowthfortheDCF

Keyrisks
Shortmaturityofretailloans,cyclicalityinCVsegmentmayimpactgrowth
Thebanksexposuretothehomeandcarloanmarketsislimited,asthemanagementhasstayedaway
fromhighlycompetitivemarkets.Thetenureforotherretailloansislessthantwoyearsandasaresult
therearelargerepaymentseveryyear.Thoughthiswouldbeapositiveformargins,thelowertenure
of the retail book and the absence of the highertenure home loans are likely to restrict retail loan
growth.WithCVloansmakingupc17%oftheloanbook,thecyclicalityintheCVbusinessimpactsthe
growthintheretailbook,aswitnessedoverthepastthreeyears.

Executionrisk,earningsrisk
f Strongerthanexpected growth in the corporate banking segment may bring down yields lower
thanourestimatesandresultinadownwardrisktoearnings.
f Continued reduction in incremental NPLs and NPL ratios during FY15fFY16f would reduce the
provisioningrequirementandleadtoanupwardrisktoournetprofitestimates.
f IIBhasplanneddoublingoftheirbranchnetworkoverthenextthreeyearsintheirphaseIIIgrowth
plan.Costratiosmayrisemorethanourestimates,pullingdowntheprofitability.

Financials

66

IndusIndBank

IndusIndBank

Financialsandvaluations
Incomestatement(INRbn)
Fiscalyearending
Netinterestincome
Feeincome
Tradingprofit
Otherincome
Totaloperatingincome
Totaloperatingexpense
Operatingprofit
Provisionforbaddebt
Otherprovision
PBT(reported)
Totaltaxes
PAT(reported)
(+)Shareinassoc.earnings
Less:Minorityinterest
Priorperioditems
Netincome(reported)
Adjustednetincome
Sharesoutstanding(mn)
Dil.shares(mn)
Dil.EPS(INR)

DecompositionofRoA(%)

03/14
28.9
17.9
0.5
0.5
47.8
21.9
26.0
3.1
1.5
21.3
7.2
14.1
0.0
0.0
0.0
14.1
14.1
526
526
26.8

03/15f
35.2
20.9
0.6
0.6
57.4
26.3
31.0
4.4
0.6
26.0
8.6
17.4
0.0
0.0
0.0
17.4
17.4
526
526
33.1

03/16f
42.7
25.4
0.7
0.8
69.5
31.5
38.0
4.9
0.8
32.3
10.6
21.6
0.0
0.0
0.0
21.6
21.6
526
526
41.1

03/17f
52.0
30.6
0.9
0.9
84.5
37.4
47.1
6.0
1.0
40.1
13.2
26.9
0.0
0.0
0.0
26.9
26.9
526
526
51.1

24.3
29.5
40.1
42.8
32.7
32.0

23.4
21.9
17.1
40.8
23.6
23.6

26.5
21.1
21.4
10.8
24.1
24.1

25.6
21.9
20.6
22.0
24.4
24.4

60.5
37.4
54.3
29.4
33.8

61.4
36.5
54.1
30.3
33.0

61.4
36.5
54.6
31.1
33.0

61.6
36.3
55.8
31.8
33.0

03/14
5.3
0.0
85.1
90.3
605.0
136.9
38.0
870.3
67.7
215.6
551.0
10.2
25.8
870.3

03/15f
5.3
0.0
99.1
104.3
756.3
154.0
42.8
1,057.3
77.6
257.0
679.7
12.4
30.5
1,057.2

03/16f
5.3
0.0
116.3
121.6
968.0
176.9
49.7
1,316.2
103.0
312.7
859.7
14.9
25.9
1,316.1

03/17f
5.3
0.0
137.8
143.0
1,229.4
207.8
58.1
1,638.3
125.2
382.6
1,079.8
19.2
31.4
1,638.2

91.1
35.6
25.4
20.7
6.4

89.9
34.0
24.5
20.4
6.7

88.8
32.3
23.6
19.9
7.2

87.8
31.1
23.0
19.7
7.5

Growthratios(%)

03/14
3.61
2.23
0.13
5.96
2.73
3.24
0.39
0.11
0.08
0.90
1.76

03/15f
3.66
2.17
0.13
5.95
2.73
3.22
0.46
0.00
0.06
0.89
1.81

03/16f
3.60
2.14
0.12
5.86
2.66
3.20
0.41
0.00
0.07
0.90
1.82

03/17f
3.52
2.07
0.12
5.72
2.53
3.19
0.40
0.00
0.07
0.90
1.82

RoA
Assets/Equity
RoE

1.76
9.99
17.55

1.81 1.82
10.33 10.90
18.66 19.85

1.82
11.52
20.96

KeyRatios

Loans
Netinterestincome
Feeincome
Provisionforbaddebt
Adjustednetincome
Dil.EPS

Operatingratios(%)
NII/operatingincome
Feeincome/operatingincome
Operatingprofitmargin
Netprofitmargin
EffectiveTaxrate

Balancesheet(INRbn)
Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Deposits
Totalborrowings
Otherliabilitiesandprovisions
Totalliabilities
Cashandbankbalances
Investments
Loans
Fixedassets
Otherassets
Totalassets
BusinessRatios(%)
Loan/Deposit
Investment/Deposit
SLRInvestment/Deposit
SLRInvestment/NDTL
Debenture/Investment

Fiscalyearending
Netinterestincome
Feeincome
Otherincome
Operatingincome
Operatingexpenses
Operatingprofit
Loanlossprovisions
Provisionforinvestments
Otherprovisions
Tax
Netprofit

Fiscalyearending
Valuationratios(x)
P/E(onAvendusEPS)
P/BV
P/AdjustedBV
Dividendyield(%)
Pershareratios(INR)
BasicReportedEPS(INR)
DilutedReportedEPS(INR)
ReportedBookValue(BV)
AdjustedBookValue(ABV)
Dividendpershare(INR)
Return/ProfitabilityRatios(%)
Yieldonadvances
Yieldoninvestments
Costofdeposits
Netinterestmargin
Feeincome/Oprevenue
Tradingprofit/Oprevenue
Opexpense/Oprevenue
CapitalizationRatios(%)
Equity/Assets
Loans/Assets
Investments/Assets
Dividendpayout
Internalcapitalgrowth
Capitaladequacy
AssetQuality
GrossNPLratio
NetNPLratio
NetNPL/networth
Loanlossreserve/GrossNPL
Loanprovisions/NII
Loanprovisions/Totalloans
Productivity/Efficiencyratios
Businessperbranch(INRmn)
Netprofitperemployee(INRmn)

03/14

03/15f

03/16f

03/17f

23.0
3.6
3.6
0.6

18.6
3.1
3.1
0.9

15.0
2.7
2.7
1.1

12.1
2.3
2.3
1.4

26.8
26.9
171.8
171.3
3.6

33.1
33.1
198.5
197.6
5.5

41.1
41.1
231.3
230.3
6.8

51.1
51.1
272.1
271.5
8.4

13.3
7.2
7.6
3.8
24.5
1.1
45.7

13.1
6.9
7.4
3.8
26.8
1.0
45.9

13.0
6.7
7.3
3.7
26.6
1.0
45.4

13.0
6.6
7.3
3.6
25.9
1.0
44.2

10.4
64.9
24.8
15.3
15.7
13.8

9.9
65.9
24.3
20.2
15.4
14.5

9.2
67.0
23.8
20.2
16.5
13.7

8.7
67.7
23.4
20.2
17.7
12.9

1.1
0.3
3.8
70.4
10.9
0.8

1.2
0.4
2.5
70.7
12.5
0.9

1.2
0.4
2.7
71.3
11.5
0.9

1.2
0.3
2.6
73.5
11.5
0.9

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


0.9 1.0 1.2 1.3

Financials

67

IndiaEquityResearch
Financials

September04,2014

BankofIndia

ADD

TargetPrice(INR)312 Largediscounttopeersunlikelytorecede
CompanyReport
LastPrice(INR)

292.0

Bloombergcode

BOIIN

Reuterscode

BOI.BO

Avg.Vol.(3m)(mn)

4.84

Avg.Val.(3m)(INRbn)

1.42

52wkH/L(INR)

357/132
27,140

Sensex
MCAP(INRbn/USDbn)

187.51/3.10

Shareholding(%)

03/14

06/14

Promoters

66.7

66.7

MFs,FIs,Banks

15.5

15.6

FIIs

10.2

9.8

5.6
2.0

5.8
2.1

Public
Others

StockChart(RelativetoSensex)
360

300

240

The earnings impact of improved delinquency is likely to be delayed


and may exert a further strain on capital due to very low provision
coverage ratio. We estimate the mean NPL provision/loans during
FY15fFY17f at 1.13%, similar to that during preceding 3 years
average.Evenwithanassumeddilutionof15%inFY15fandestimated
3yearCAGRof16%inretainedearnings,growthislikelyberestricted
tomidteens.RoEislikelytoremainbelowpeersinthenext23years
on dilution and high NPL provisions. We expect the significant
valuation discount to peers to persist, given its weak fundamentals
andhighvolatilityinearnings.ReinitiatecoveragewithaSep15TPof
INR312andanAdd.TheTPvaluesBOIat1yrfwdadj.P/Bof0.79x.
RecoveryinNIMmaypartlyoffsettheNPLprovisionburden
LowPCRof36%(exc.writeoff)islikelytoexertpressureonprofitability,even
if the asset quality improves. We estimate mean NPL provision/loans during
FY15fFY17f at 1.13%, virtually similar to that in the preceding three years.
ThiswouldliftthePCRratioby345bpto40.7%bytheendofFY17f.Webuild
inmaterialimprovementintheincrementalNPLoverFY16fFY17f. WhileNPL
provisionsmaystayanoverhang,estimated20bpexpansioninNIMfollowing
the moderation in incremental NPL is likely to support the 16% CAGR in PAT
overFY15fFY17f.

Largeimpendingdilutionlikelytostayanoverhang
180

120
Sep13

Jan14

May14

Bank of India

Sep14

Sensex Rebased

1m

3m

1yr

Absolute

7.4

8.1

116.8

Rel.toSensex

0.9

17.3

68.0

Finan cials(INRbn)

03/14

03/15f

03/16f

NII

158.7

StockPerfm.(%)

108.3

131.4

YoY(%)

20.0

21.3

20.7

Operatingprofit

84.2

98.8

120.0

A.PAT

27.3

32.4

42.0

643.0

743.0

743.0

A.EPS(INR)

44.0

46.8

56.5

YoY(%)

7.9

2.9

29.5

Equity/Assets(%)

5.2

5.4

5.1

P/E(x)

6.9

6.7

5.2

P/B(Adj)(x)

0.9

0.8

0.8

0.5
11.2

0.5
11.2

0.6
12.6

Sho/s(diluted)

RoA(% )
RoE(%)
QuarterlyTrends

09/13

12/13

03/14

06/14

Op.income(INRbn)

36.3

38.2

39.6

37.1

6.2

5.9

5.4

8.1

PAT(INRbn)

Pleaserefertothedisclaimertowardstheendofthedocument.

The Tier I ratio, at 7.25%, was closer to the minimum required according to
BaselIIIrequirementandlowestamongpeers,;CET1was6.84%attheendof
Jun14.Growthinassetwasc22%,significantlyexceedingtheretainedearnings
growth of 4% during FY13fFY14f. This resulted in higher utilisation of capital
andadeclineinCAR.Evenwiththeassumptionofa15%dilutioninFY15f,3
year CAGR in risk weighted assets and retained earnings at 15% and 16%,
respectively,TierI,at7.24%,wouldgetclosertotheminimumrequiredlevelin
FY17frequiringfurtherdilution.

Largediscounttopeersisunlikelytorecedeover12months
Weexpectasignificantvaluationdiscounttopeerstopersist,giventhebanks
weak fundamentals and high volatility in earnings. RoE is likely to stay below
peersoverthenext23yearsondilutionandelevatedNPLprovisions.OurTP
isbasedontheDCF,P/EandP/Bmethods.OurDCFbasedfairvaluesassumea
costofequityof14%,semiexplicitgrowthof6%andfadeperiodgrowthof3%.
WeexpectRoAduringthe semiexplicitperiodat0.80%,anaverageoverthe
last decade. A 25% discount is applied to the fiveyear mean P/E and P/B to
arriveattheP/EandP/Bbasedfairvalues,givenlowcapitalisationratios,the
large impending dilution and lowest RoE among peers. Reinitiate coverage
withaSep15TPofINR312andanAddrating.TheTPvaluesBOIat1yrfwdadj.
P/Bof0.79.DelayedrecoveryinNIMandassetquality,extendingintoFY16f,is
keyriskfactors.

ChandanaJha,+9102266842854
chandana.jha@ilfsindia.com

BankofIndia

LowcoverageratiomayimpactprofitabilityevenifNPLsimprove
Slippageratiostaysvolatile
The slippage ratio surged to 3.9% during the Mar14Jun14 quarter, close to the peak of 4.2% in the
Sep12 quarter. However, the slippage ratio was below 2% during the preceding two quarters; the
additiontothegrossNPLstaysveryvolatileforBOI.Largerecoveryinthepasttwoquartershasbeen
drivenbythesaleofNPLstoARCs;BOIsoldINR40bntotheARCsinFY14andINR17.6bnin1QFY14.

SharpfallinPCRdrivenbyhighslippage,changeinprovisioningnorm
Afterasharpcontractionof18%inthePCR(at35.8%)duringthepastthreeyearsattheendofJun14,
BOI has the lowest PCR ratio among peers. During FY14, BOI changed its accounting policy of
provisioning for NPLs classified as SubStandard (secured) from 20% (accelerated provision) to 15%
(minimum provision), which resulted into a write back of NPL provision of INR2.5bn provided until
31Mar13.Hadtheearlieraccountingpolicybeenfollowed,theNPLprovisionforFY14wouldhavebeen
higherbyINR3.25bn.Also,BOIhasutilisedINR1.8bnoffloatingprovision(33%offloatingprovisionof
INR5.43bnheldon31Mar13towardsspecificNPLprovisions).
Exhibit1: SlippageandNPLratios
GrossNPL(%)
Slippageratio(RHS)

Exhibit2: Provisioncoverageratio(%,Jun14)

NetNPL(%)

50

4.0

5%

3.2

4%

2.4

3%

1.6

2%

0.8

1%

0.0

0%

40
30
20
10

Jun12

Dec12

Jun13

Dec13

0
SBI

Jun14

BOB

BOI

PNB

CBK

UNBK

Source:Company,IL&FSInstitutionalEquities

Source:Company,IL&FSInstitutionalEquities

However,lowrestructuredloansaugurwellforincrementaladditiontoNPLs
Exhibit3: Restructuredloansaspercentageoftotalloans
12

0
SBI

BOB

BOI

PNB

CBK

UNBK

Source:Company,IL&FSInstitutionalEquities

Webuildinjust1bpfallin3yearmeanNPLprovisions/loans
Very low coverage ratios are likely to exert pressure on the profitability, even if the asset quality
improves.WeestimatemeanNPLprovision/loansduringFY15fFY17fat1.13%,just1bplowerthan

Financials

76

BankofIndia

the preceding three years average. This would lift the PCR ratio by 345bp to 40.7% by the end of
FY17f. NPL provisions/loans fell 18bp yoy to 1.19% in FY14, partly due to the change in the
provisioningnorm.Weestimateamarginaldeclineof4bpyoyto1.15%inFY15f.

following15bpdeclineinincrementalNPL
TheincrementalgrossNPL(increaseino/sgrossNPLaspercentageofstartingloans)declined8bpyo
y in FY14 to 1.06%. It had surged 64bp in the preceding year. We assume the trend of a declining
incremental NPL in FY14 to continue over FY15fFY17f, largely the reduction being backended. We
assume a 46bp fall in the FY15fFY17f incremental NPL to 0.60%. However, low loan growth could
keepthegrossNPLratiohigher.
Exhibit5: NPLprovision/loan,PCR

Exhibit4: NPLratioandincrementalNPL
IncrementalNPL
NNPLratio

GNPLratio

NPLprovisions/loans

3.9%

PCR(RHS)

1.5%

70%

1.2%

60%

0.9%

50%

0.6%

40%

0.3%

30%

2.9%
1.9%
0.9%
0.1%

0.0%
Mar11

Mar13

Mar15f

Mar17f

Source:Company,IL&FSInstitutionalEquities

20%
Mar11

Mar13

Mar15f

Mar17f

Source:IL&FSInstitutionalEquities

Lowexposuretopowerbuthigherthanindustryaveragetowardsironandsteel
Exhibit6: ExposureofBOBandIndustrytotheriskysectors
(INRmn)

BankofIndia

Allbanks

Fundbased

%ofdomesticloans

Outstanding

%oftotalloans

26,299

1.01%

353,260

0.59%

BasicMetalandmetalproducts

178,197

6.86%

3,619,690

6.02%

Energy

160,087

6.17%

4,883,460

8.12%

Total

364,582

14.04%

8,856,410

14.73%

Miningandquarrying

Source:Company,IL&FSInstitutionalEquities

LargeimpendingdilutiontopulldownRoEinFY15f
Exhibit7: CapitalratiosattheendofJun14(%)

Exhibit8: GrowthinRWA,retainedearnings,TierI
TierI(RHS)
Retainedearnings(yoy)
RWA(yoy)

15
12

30%

10%

24%

9%

18%

8%

12%

7%

6%

6%

6
3

0%

0
CAR

TierI

CET1

Source:Company,IL&FSInstitutionalEquities

TierII

5%
Mar14

Mar15f

Mar16f

Mar17f

Source:Company,IL&FSInstitutionalEquities

Financials

77

BankofIndia

Evenwith15%dilutioninFY15f,TierImayhitlimitinc2years
Tier I ratio, at 7.25%, was closer to the minimum required level of 7%, according to the Basel III
requirement;CET1was6.84%attheendofJun14.Growthinassetswasc22%,significantlyexceeding
theretainedearningsgrowthof4%duringFY13fFY14f.Thishasresultedinthehigherconsumptionof
capitalanddeclineinCAR.Evenwiththeassumption ofa15%dilutionin FY15f, TierIwould hitthe
regulatorylimitinFY17fwithaTierIratioof6.94%.WeassumeRWAandretainedearningstogrowat
athreeyearCAGRof15%and16%,respectivelyduringFY15fFY17f.

Returnratiostostaywellbelowpeersondilution,elevatedNPLprovision
ThelowestcapitalisationratioamongpeersattheendofJun14islikelytoresultinalargedilutionin
FY15f.RoEislikelytoremainbelowpeersoverthenext23yearsowingtothelargerdilutionandhigh
NPLprovisions;lowestPCRamongpeersislikelytoaddtotheburden.With15%dilutioninFY15fand
19%yoygrowthinnetprofit,weestimateRoEat11.2%,closertothatreportedinFY14.Weestimate
anuptrendfromFY16f
Exhibit9: RoE(%)
18
FY14

FY15f

FY16f

15
12
9
6
3
0
BOB

BOI

PNB

SBIN

Source:Company,IL&FSInstitutionalEquities

Largediscounttopeersisunlikelytorecedeover12months
Exhibit10: Discount/premiumofBOBtoPNBandSBIN,P/B(Adjusted)ofBOB
AdjustedP/B(RHS)

DiscounttoBOB

DiscounttoPNB

60%

2.5

40%

2.0

20%

1.5

0%

1.0

20%

0.5

40%
Jun09

Dec09

Aug10

Mar11

Oct11

May12

Nov12

Jul13

Jan14

0.0
Aug14

Source:Company,IL&FSInstitutionalEquities

Financials

78

BankofIndia

OurTPvaluesBOIat1yearforwardadjustedP/Bof0.79x
OurtargetpriceisbasedontheDCF,P/EandP/Bmethods.OurDCFbasedfairvaluestandsatINR314,
whereinweassumeacostofequityof14%andsemiexplicitgrowthof6%andfadeperiodgrowthof
3%.Thesemiexplicitperiodcapstheasset/equityat18xandlinksittothegrowth.Wealsoassume
RoAduringthesemiexplicitperiodat0.79x,anaverageinthepastdecade.
A25%discountisappliedtothefiveyearmeanP/EandP/BtoarriveattheP/EandP/Bbasedfair
values,givenlowcapitalisationratios,alargeimpendingdilutionandthelowestRoEamongpeers.Our
blendedSep15targetpriceofINR312valuesBOIat0.79xtheoneyearforwardadjustedbookvalue.
WereinitiatecoverageonthestockwithanAddrating.
Exhibit11: AverageP/EandP/B(till2Sep14)

1month

3month

6month

12month

2year

3year

5year

4.94
0.75

5.23
0.81

4.84
0.80

4.26
0.72

4.62
0.84

4.99
0.94

5.86
1.20

P/E
P/B

Source:Company,IL&FSInstitutionalEquities

Exhibit12: P/E,P/BandDCFbasedTP,andweightedaverageTP

Weights

P/E

P/B

DCF/SOP

TP

35%
269

35%
355

30%
314

312

Source:Company,IL&FSInstitutionalEquities

Exhibit13: OneyearforwardP/BandtargetP/B
1yearforwardP/ABV(X)
12monthsmovingaverage

Exhibit14: OneyearforwardP/EandtargetP/E

5yearaverage

1yearforwardP/E(X)
12monthsmovingaverage

2.5

11

2.0

1.5

1.0

0.5
Jan10

Dec10

Nov11

Nov12

Oct13

Source:Company,IL&FSInstitutionalEquities

Sep14

Sep15

3
Jan10

Dec10

Nov11

Nov12

5yearaverage

Oct13

Sep14

Sep15

Source:Company,IL&FSInstitutionalEquities

Riskfactors:
f Ifeconomicgrowthbouncesback,assetqualitycouldimprovesignificantly,resultinginlowercredit
coststhanourexpectations.
f Dilution required could be higher than our assumption resulting in a lowerthanestimated RoE;
however,underthisscenario,growthmaybehigherthanourestimate.
f Ifthehighinterestratepersists,itcandentthemargin,giventhebankslowCASA.

Financials

79

BankofIndia

Financialsandvaluations
Incomestatement(INRbn)
Fiscalyearending
Netinterestincome
Feeincome
Tradingprofit
Otherincome
Totaloperatingincome
Totaloperatingexpense
Operatingprofit
Provisionforbaddebt
Otherprovision
PBT(reported)
Totaltaxes
PAT(reported)
(+)Shareinassoc.earnings
Less:Minorityinterest
Priorperioditems
Netincome(reported)
Adjustednetincome
Sharesoutstanding(mn)
Dil.shares(mn)
Dil.EPS(INR)

DecompositionofRoA(%)

03/14
108.3
21.4
8.0
13.6
151.2
67.0
84.2
39.7
9.1
35.5
8.2
27.3
0.0
0.0
0.0
27.3
27.3
643
643
42.4

03/15f
131.4
26.0
7.0
15.2
179.6
80.8
98.8
46.6
9.0
43.3
10.8
32.4
0.0
0.0
0.0
32.4
32.4
643
743
43.7

03/16f
158.7
30.1
7.8
16.3
212.9
92.9
120.0
54.1
7.6
58.3
16.3
42.0
0.0
0.0
0.0
42.0
42.0
643
743
56.5

03/17f
185.9
34.8
8.7
17.3
246.7
110.1
136.6
60.0
8.8
67.8
19.0
48.8
0.0
0.0
0.0
48.8
48.8
643
743
65.7

28.1
20.0
12.1
6.5
0.7
7.9

15.8
21.3
21.4
17.4
18.9
2.9

15.9
20.7
15.8
16.0
29.5
29.5

15.9
17.1
15.9
11.0
16.2
16.2

71.6
14.1
55.7
18.0
23.0

73.2
14.5
55.0
18.1
25.0

74.5
14.1
56.4
19.7
28.0

75.3
14.1
55.4
19.8
28.0

03/14
6.4
0.0
292.8
299.2
4,769.7
392.2
270.8
5,731.9
613.8
1,141.5
3,707.3
57.9
211.4
5,731.9

03/15f
7.4
0.0
346.3
353.8
5,544.2
385.5
286.7
6,570.2
704.5
1,276.9
4,294.4
62.1
232.3
6,570.2

03/16f
7.4
0.0
377.8
385.2
6,418.0
412.2
318.8
7,534.3
827.8
1,416.6
4,975.4
61.9
252.4
7,534.3

03/17f
7.4
0.0
414.2
421.6
7,429.7
440.6
354.5
8,646.5
940.2
1,578.7
5,766.2
61.1
300.3
8,646.5

77.7
23.9
21.0
19.4
7.3

77.5
23.0
20.4
19.1
6.6

77.5
22.1
19.7
18.5
5.9

77.6
21.2
19.1
18.1
5.3

Growthratios(%)

03/14
2.11
0.42
0.42
2.95
1.31
1.64
0.77
0.01
0.16
0.16
0.53

03/15f
2.14
0.42
0.36
2.92
1.31
1.61
0.76
0.02
0.13
0.18
0.53

03/16f
2.25
0.43
0.34
3.02
1.32
1.70
0.77
0.02
0.09
0.23
0.60

03/17f
2.30
0.43
0.32
3.05
1.36
1.69
0.74
0.02
0.09
0.23
0.60

RoA
Assets/Equity
RoE

0.53
20.97
11.16

0.53 0.60
21.28 21.24
11.22 12.65

0.60
22.10
13.33

KeyRatios

Loans
Netinterestincome
Feeincome
Provisionforbaddebt
Adjustednetincome
Dil.EPS

Operatingratios(%)
NII/operatingincome
Feeincome/operatingincome
Operatingprofitmargin
Netprofitmargin
EffectiveTaxrate

Balancesheet(INRbn)
Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Deposits
Totalborrowings
Otherliabilitiesandprovisions
Totalliabilities
Cashandbankbalances
Investments
Loans
Fixedassets
Otherassets
Totalassets
BusinessRatios(%)
Loan/Deposit
Investment/Deposit
SLRInvestment/Deposit
SLRInvestment/NDTL
Debenture/Investment

Fiscalyearending
Netinterestincome
Feeincome
Otherincome
Operatingincome
Operatingexpenses
Operatingprofit
Loanlossprovisions
Provisionforinvestments
Otherprovisions
Tax
Netprofit

Fiscalyearending
Valuationratios(x)
P/E(ondil.EPS)
P/BV
P/AdjustedBV
Dividendyield(%)
Pershareratios(INR)
BasicReportedEPS(INR)
DilutedReportedEPS(INR)
ReportedBookValue(BV)
AdjustedBookValue(ABV)
Dividendpershare(INR)
Return/ProfitabilityRatios(%)
Yieldonadvances
Yieldoninvestments
Costofdeposits
Netinterestmargin
Feeincome/Oprevenue
Tradingprofit/Oprevenue
Opexpense/Oprevenue
CapitalizationRatios(%)
Equity/Assets
Loans/Assets
Investments/Assets
Dividendpayout
Internalcapitalgrowth
Capitaladequacy
AssetQuality
GrossNPLratio
NetNPLratio
NetNPL/networth
Loanlossreserve/GrossNPL
Loanprovisions/NII
Loanprovisions/Totalloans
Productivity/Efficiencyratios
Businessperbranch(INRmn)
Netprofitperemployee(INRmn)

03/14

03/15f

03/16f

03/17f

6.88
0.63
0.89
2.00

6.69
0.61
0.84
3.78

5.17
0.56
0.78
4.85

4.45
0.51
0.70
5.72

44.0
44.0
465.4
329.4
5.8

50.4
46.8
476.1
345.8
11.0

65.3
56.5
518.5
373.6
14.2

75.9
65.7
567.5
415.0
16.7

8.22
8.05
5.54
2.20
14.1
5.26
44.3

8.38
7.90
5.54
2.24
14.5
3.90
45.0

8.51
7.77
5.49
2.35
14.1
3.67
43.6

8.61
7.68
5.48
2.40
14.1
3.52
44.6

5.2
64.7
19.9
13.8
9.8
10.8

5.4
65.4
19.4
26.5
8.0
11.2

5.1
66.0
18.8
26.3
8.8
10.7

4.9
66.7
18.3
26.6
9.3
10.2

3.2
2.0
28.9
37.3
36.7
1.1

3.6
2.3
31.1
37.0
35.5
1.1

3.8
2.4
33.9
38.3
34.1
1.1

3.8
2.3
34.2
40.7
32.3
1.0

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


0.6 0.7 0.8 0.8

Financials

80

BankofIndia

AnalystCertification
Thefollowinganalyst(s)is(are)primarilyresponsibleforthisreportand,certifies(y)thattheopinion(s)onthesubjectcompany(ies)anditssecurity(ies)andanyotherviewsor
forecastsexpressedhereinaccuratelyreflecttheirpersonalview(s):ChandanaJha

Disclosures
MeaningofIL&FSBrokingServicesPrivateLimitedsequityresearchratings
Theratingrepresentstheexpectedchangeinthepriceofthestockoverahorizonof12months.
Buy:morethan+15%
Add:+5%to+15%
Reduce:5%to+5%

Sell:lessthan5%

Analystdisclosures
None of the analysts involved in the preparation of this research report or a member of his/her household is an officer, director or supervisory board member of any of the
company(ies)thatis/arethesubjectofthisresearchreport.Noneoftheanalystsinvolvedinthepreparationofthisresearchreportormembersofhis/herhouseholdholdany
financialinterestinthesecuritiesofthecompany(ies)thatis/arethesubjectofthisresearchreport.

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Financials

81