Financial services

Table of contents
Headed for next cycle of growth ......................................................................................... 4 Looking ahead: Further scope for RoA improvement .................................................... 15 DuPont convergence a key trend ...................................................................................... 15 Previous decade: Inefficiency to efficiency........................................................................ 15 Next decade: Further scope for RoA improvement ........................................................... 16 How to play the next cycle: Learning from our across-the-cycle analysis ................... 21 How to play the next cycle ................................................................................................. 21 Our sector call: Outperform ............................................................................................... 26

Companies
ICICI Bank ............................................................................................................................ 39 Axis Bank ............................................................................................................................. 51 Punjab National Bank ......................................................................................................... 61 Union Bank of India ............................................................................................................ 71 HDFC Bank........................................................................................................................... 81 Bank of Baroda .................................................................................................................... 91 Bank of India ...................................................................................................................... 101 State Bank of India ............................................................................................................ 111

2 July 2010

Indiabulls Research

2

Institutional
Initiating coverage

Banking sector
Eq 2 July 2010
India

Next cycle of growth
The banking sector is headed for its next cycle with balance sheet pickup imminent in 2HFY11 after an adjustment phase of two years. Earning drivers look quite healthy with higher earnings growth driven by uptick in credit, stable margins, improving asset quality, and lower MTM losses. Our benchmarking analysis suggests there is further scope for RoA improvement within the sector, which would drive valuations ahead. We initiate coverage of the sector with Outperform rating. Headed for next cycle of growth
Balance sheet pick-up is imminent after the adjustment phase of the last two years. We expect a healthy loan growth of 22%, loan restructuring worries to fade off after 1HFY11 as a year passes by since the major restructuring done under RBI’s special dispensation scheme, lower MTM losses with banks having derisked their treasury portfolios and stable margins as pricing power comes back to banks with increasing credit growth and decreasing liquidity in the system.

Financial services
Recommendation summary Company ICICI Bk Axis Bk PNB Union Bk HDFC Bk BOB BOI SBI Reco OP OP OP OP OP Neutral Neutral Neutral TP 1,052 1,529 1,276 381 2,297 803 343 2,520 Upside (%) 25 24 25 21 20 12 (4) 11

Looking ahead: Further scope for RoA improvement
Benchmarking the efficient banks in core lending and fee income operations leaves further scope for RoA improvement for the banks going ahead. We believe Dupont convergence between RoA leaders and RoA laggards, wherein RoA laggards to show significant improvement in operational parameters, is a key trend to watch out for. Our across-the-cycle analysis suggests that such structural improvements in RoA composition will drive the valuations.

Source: Indiabulls research. Performance (%) 1m ICICI Bk Axis Bk PNB Union Bk HDFC Bk BOB BOI SBI Nifty 0.4 4.4 2.3 11.1 2.8 1.5 10.9 2.4 5.7 3m (11.7) 5.1 0.4 3.5 (1.6) 10.8 3.1 7.6 (0.7) 1yr 15.3 41.9 49.2 26.3 26.9 59.5 (0.0) 27.1 21.0

How to play the next cycle: Learning from our across-the-cycle analysis
RoA leaders (who consistently delivered above Industry RoA) are likely to emerge as multi-year alpha bets. RoA laggards (who consistently delivered below Industry RoA) can be significant outperformers if and when they are able to improve their performance. Also, RoA cyclical behaviour generally lasts 3-4 years on an average and our analysis suggests RoA direction is the key for stock performance.

Our sector call: Outperform
As the sector heads for a new cycle of growth, we expect stocks to trade at a premium to the past five years’ valuations driven by higher profitability and RoE. We initiate ICICI Bank, Axis, PNB, Union, HDFC Bank with Outperform, and BoB, BoI, and SBI with Neutral rating.

Source: Bloomberg.

Figure 1:
Units as shown

Valuation summary P/ABV (x) FY11E FY12E P/E (x) FY11E FY12E 19 17 7 7 24 7 8 13 14 13 6 5 18 6 6 10 RoE (%) FY11E 9 17 24 21 16 21 16 16

FY12E 11 19 24 22 18 22 18 18

Saikiran Pulavarthi
saikiran.pulavarthi@indiabulls.com +91 22 3980 5203

Deepak Agrawal
deepak.agrawal@indiabulls.com +91 22 3980 5496

ICICI Axis PNB Union HDFC Bk BoB BoI SBI

1.7 2.8 1.7 1.6 3.7 1.6 1.4 2.2

1.6 2.4 1.4 1.2 3.2 1.3 1.2 1.9

Source: Company, Indiabulls research.

Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.

Financial services

Headed for next cycle of growth
Balance sheet pick-up is imminent after the adjustment phase of the last two years. We expect a healthy loan growth after the credit drought of FY10, fading-away of loan restructuring worries after 1HFY11 as a year passes by since the major restructuring done under RBI’s special dispensation scheme. In terms of earnings, we see FY11E PAT growth rates at 17% if no big downside occurs as NIMs have peaked and trading gains lowered. We expect earnings growth to pick up to 27% in FY12E.

Loan growth at CAGR 22% during FY10-12E
We build in system loan growth at CAGR 22% during FY10-12E after a credit drought in FY10 assuming a 1.5x consensus nominal GDP multiplier, in line with long term historical average (refer Figure 2). We do not foresee credit growth to nominal GDP growth ratio above 1.5x (against 2x in the last decade) as last decade’s high credit growth was supported by very low bank credit penetration which is not the case at present (refer Figures 7 & 8). Figure 2: Credit growth to nominal GDP growth ratio
x

2.5 2.0 1.5 1.0 0.5 0.0 Avg since 1951
Source: RBI, Indiabulls research.

1.8 1.4

2.0 1.5

Avg since 1981

Avg since 1991

Avg since 2001

What will drive credit growth in FY11-FY12?
We believe infrastructure and retail segments to be the growth drivers in FY11-FY12E in addition to corporate capex which continues to remain subdued post the recent crisis.

Infrastructure to contribute 25% of incremental credit · Infrastructure is expected to contribute 25% of incremental credit in FY11 backed by
strong demand from segments like power, roads and telecom.

· · · ·

Planning Commission estimates have put demand from infrastructure projects at Rs1080bn in FY11 backed by very strong growth from power and road projects. Private participation has increased in the infrastructure space. Healthy capital markets have also enabled projects to attract equity capital, which helps in boosting demand for credit. Considering that real interest rates continue to remain negative, we believe demand from infrastructure projects should continue to remain buoyant until FY12.

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Indiabulls Research

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Financial services

Figure 3: Infrastructure to witness significant investments in the current plan
Rs bn

FY07–08* FY08–09* FY09–10* FY10–11* FY11–12* Total Eleventh Plan Centre 1,126 1,283 1,485 1,721 2,040 7,656 Central Budget 294 335 388 450 533 2,000 Internal Generation (IEBR) 250 284 329 381 452 1,697 Borrowings (IEBR) 582 664 768 890 1,055 3,959 States 795 990 1,250 1,602 2,072 6,709 States Budgets 527 656 828 1,062 1,373 4,447 Internal Generation (IEBR) 80 100 126 162 210 679 Borrowings (IEBR) 188 234 295 378 489 1,584 Private 782 943 1,157 1,468 1,847 6,196 Internal Accruals/Equity 235 287 347 440 554 1,859 Borrowings 547 660 810 1,027 1,293 4,337 Total Projected Investment 2,703 3,216 3,893 4,791 5,959 20,562 Non-Debt 1,386 1,659 2,019 2,495 3,122 10,681 Debt 1,317 1,557 1,883 2,296 2,837 9,880 O/w Bank credit 498 632 801 1,016 1,289 4,237
Source: Planning Commission. Note: *At FY07-08 price.

Figure 4: Domestic banks to play dominant role in infrastructure funding
Rs bn

Domestic Bank Credit Non-Bank Finance Companies Pension/Insurance Companies External Commercial Borrowing (ECB) Likely Total Debt Resources Estimated Requirement of Debt Gap between Estimated Requirement and likely debt resources
Source: Planning Commission. Note: *At FY07-08 price.

FY07–08* FY08–09* FY09–10* FY10–11* FY11–12* Total Eleventh Plan 498 632 801 1,016 1,289 4,237 239 315 416 549 724 2,242 91 100 110 121 133 554 196 218 242 269 299 1,223 1,024 1,264 1,569 1,954 2,444 8,255 1,317 1,557 1,873 2,296 2,837 9,880 293 293 305 341 393 1,625

Secured Retail to aid credit growth further · Retail is likely to maintain a steady pick-up in credit volumes. Structural shift in the retail
business model with focus on secured products is likely to drive growth ahead

· · · ·

We expect the strong momentum in secured retail lending to continue as consumption trends are showing significant uptick. Auto loans are showing a high growth and housing loans too registered a significant growth in the last two years. Significant beneficiaries during the period were: HDFC Bank, ICICI Bank and SBI – all predominant players in this segment. However we don’t expect unsecured lending to see any major pick-up in the next few years as a hangover of the high delinquencies in the last cycle.

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Financial services

Figure 5: Housing loan portfolio
Rs mn

FY09 % YoY FY10 % YoY

Axis 104,338 35 147,427 41

BoB 82,650 14 103,130 25

BoI 63,152 15 71,500 13

PNB 93,070 14 106,120 14

HDFC Bk 50,690 N.A.* 87,000 72

ICICI 577,651 -13 468,000 -19

SBI 545,674 21 711,930 30

Union 66,210 28 81,150 23

Source: Company, Indiabulls research. Note: *HDFC Bk started doing housing loans in FY09.

Figure 6: Increasing annual car sales in India – positive for retail lenders
Nos.

1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 FY06 FY07 FY08 Passenger Vehicles
Source: SIAM, Indiabulls research.

FY09

FY10

Why we think 30% credit growth achieved in last cycle is unlikely in FY11-12 · We think it is too early to expect credit growth to reach 30% like in the last cycle (2x
nominal GDP multiplier).

·

IMF analysis suggests that, internationally, significant improvement in credit to GDP ratio would lead to a credit crisis (See Figure 8). The same assessment is also evident from the tone of the RBI deputy governor. The study reflects the fact that if Credit/GDP ratio breaches 50% with a faster average annual increase in Credit/GDP ratio, countries are at risk of creating credit bubbles. Countries highlighted in black have had problems as most of them had seen a very sharp increase in Credit/GDP ratio over short span of time which lead to problems in the past. India is closer to 50% in terms of Credit/GDP ratio and 4% avg increase in Credit / GDP ratio in last 4 years (Refer Figure 7). Considering the above mentioned statistical evidence, we are factoring Credit to GDP ratio at 1.5x below the average of 2x since FY01.

·

·

·

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Indiabulls Research

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Financial services

“In the context of the macroeconomic trend of high services sector growth which includes the banking sector growth, I feel that the services growth needs to be well supported by growth from the real sectors of the economy. Financial leverage cannot bring perpetual prosperity. Banks need to keep this in mind, and I am telling this as a banker, as well as a central banker,” Dr. K. C. Chakrabarty, Dy. Governor, st RBI, 31 August 2009, at New Delhi

Figure 7: Scope for further financial deepening highly contingent on real economy
%

40.0 30.0 20.0 10.0 0.0

59.8 49.8 39.8 29.8 19.8

1-Jan-51

1-Jan-54

1-Jan-57

1-Jan-60

1-Jan-63

1-Jan-66

1-Jan-69

1-Jan-72

1-Jan-75

1-Jan-78

1-Jan-87

1-Jan-90

1-Jan-93

1-Jan-96

1-Jan-99

1-Jan-02

1-Jan-05

(10.0) (20.0)

1-Jan-08

1-Jan-81

1-Jan-84

9.8 (0.2)

Growth in credit (LHS)
Source: RBI, Indiabulls research.

Credit / GDP (RHS)

Linear (Credit / GDP (RHS))

Figure 8: Significant increase in credit to GDP ratio above 50% can result in credit crisis
%

India

Source: IMF. Note: Crisis countries are depicted in Italics Biggest average annual three-year increase before crisis for crisis countries. 2002-04 for other countries.

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Financial services

Loan growth assumptions for companies under coverage
We expect HDFC Bank and Axis Bank to exceed the industry’s loan growth rate. Among PSU banks, we expect BoB to be in line with industry growth rate; SBI, PNB, and Union to marginally exceed it, and BoI to lag. Figure 9: Our loan growth assumptions
%

Loan growth FY08 FY09 FY10 FY11E FY12E

Axis 61.8 36.7 27.9 25.0 25.0

BoB 27.6 34.9 21.6 22.0 22.0

BoI 33.3 25.9 19.9 20.0 22.0

HDFC Bk 35.1 55.9 30.0 30.0 30.0

ICICI 15.2 -3.2 -17.0 15.0 19.6

PNB 23.7 29.5 20.6 23.0 23.0

SBI 23.5 30.2 16.5 23.0 23.0

Union 19.2 30.0 23.4 23.0 23.0

Source: Company, Indiabulls research.

·

ICICI: We expect ICICI Bank to build domestic loan growth of 20% and 25% for FY11E and FY12E respectively while its international loan book is likely to be flattish in absolute terms. Axis Bank: This bank’s loan growth rate is likely to moderate to 25% during FY11FY12E vs. CAGR of 46% during FY06-10 considering its size. However, we build in further market share gain considering its strength in infrastructure lending. PNB: A 23% growth rate, marginally higher than the industry rate, can be expected from PNB primarily on account of its superior capital position and balance sheet strength to fund bigger infrastructure projects. Union Bank: Focus on retail and SME to drive UBI’s loan growth rate to 23%. Higher growth rates are constrained by relatively weak capital position (Tier 1 at 7.9%). HDFC Bank: Higher than industry growth rates of 30% can be expected to be sustained with increased buoyancy in secured retail lending. We also expect HDFC Bank’s base rate to be lower than its peer group, which could give HDFC Bank a competitive advantage for gaining market share. BoB: We expect BoB’s steady performance to continue through the next two years in line with industry growth rates. BoI: Asset quality pressures are likely to keep BoI’s growth momentum below the industry in FY11E. We expect growth to come by in FY12E. SBI: We expect SBI to register marginally higher than industry growth rates due to its strengths in underwriting large infrastructure projects, continued aggression in retail lending, and increased economic activity in rural areas.

·

·

·

·

· · ·

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Indiabulls Research

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Financial services

Margins to be flattish on a high base ·
We expect sector-wide margins to be to be flattish as further benefits of liability repricing are unlikely. Given that liquidity in the system is drying out, we believe pricing power would be back with banks. Improvement in yields on assets will cover up pressures on the liability side, viz., interest calculation on daily savings balances. We expect SBI and Union Bank, whose margins were under pressure last year primarily on account of excess liquidity in the balance sheet, to show NIM improvements. PNB and Axis Bank can be expected to show marginal moderation in NIMs due to excessive dependence on wholesale funds.

· ·

Figure 10: Our margin assumptions
%

NIM FY08 FY09 FY10 FY11E FY12E

Axis 3.1 3.0 3.4 3.3 3.3

BoB 2.5 2.6 2.4 2.5 2.5

BoI 2.7 2.8 2.4 2.4 2.6

HDFC Bk 4.9 4.6 4.3 4.3 4.3

ICICI 2.1 2.4 2.3 2.4 2.5

PNB 3.3 3.3 3.3 3.3 3.3

SBI 2.8 2.6 2.4 2.6 2.8

Union 2.8 2.9 2.4 2.8 2.9

Source: Company, Indiabulls research.

Peak loan deposit spread to sustain with credit growth in the system
We believe current peak loan deposit spreads will sustain this time around. We expect pricing power, which was missing in the last eight quarters, to be back with the banks as liquidity tightens in the market. Currently, OIS spreads and CD rates have both increased by 150 bps indicating that overnight liquidity conditions are also tightening, which would bring pricing power back to the banks.

Figure 11: Peak spreads to sustain as pricing power likely to be back with banks due to liquidity drying out
%

15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Average lending rates
Source: Company, Indiabulls research.

6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0

Lending spread

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Financial services

Figure 12: 5-year OIS spreads peaking...
%

Figure 13: .... implying upward move of CD rates, bringing pricing power back to banks
%

6 5 4 3 2 1 0 11/3/2009 1/3/2010 3/3/2010 5/3/2010

8 7 7 6 6 5 5 4 4 3 11/23/2009 1/23/2010 3/23/2010 5/23/2010

Source: Bloomberg, Indiabulls research.

Source: Bloomberg, Indiabulls research.

Deposit rates expected move higher in few months as CD ratio is closer to 72% vs. 48% in last cycle · We expect this time around deposit rates would move higher in a few months unlike
in the last cycle when deposit rates moved up with a two-year lag.

·

The current banking system CD ratio at 72% leaves no further room for funding credit without deposit raising, unlike in the last cycle when the CD ratio was at 48% and the banking system was able to fund a 25% credit growth without raising deposits for two years.

Figure 14: Deposit rates are driven by the CD ratio
%

90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

10.0 8.0 6.0 4.0 2.0 0.0

Source: Company, Bloomberg.

2 July 2010

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
CD Ratio (%) SBI 1 yr Deposit rates

Indiabulls Research

10

Financial services

Figure 15: Deposit rates to inch upwards as CD ratios peaked
%

85.0 75.0 65.0 55.0 45.0 35.0 25.0

Source: Bloomberg.

10-15bps impact on NIMs from daily interest calculation on SB deposits
We believe the impact of daily interest calculation on SB deposits would be minimal as higher interest rates would make such deposits attractive for investors to keep more money. However, we have factored in 10-15 bps margin contraction assuming there is no incremental flows into SB deposits after the change in interest rate calculation.

Figure 16: Savings bank deposits as % of total deposits high in private sector banks
%

60

We build in 10 to 20 bps impact on margins on account of daily calculation of interest rates on SB deposits with effect from 1 April 2010

50 40 30 20 10 0 Axis HDFC Bk ICICI 24 22 15 11 SBI CA
Source: Company, Indiabulls research.

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
CD Ratio (%) ID Ratio (%)

23

30 26 32 31 23 10 Union

22 8 BoB

21 7 BoI

10 PNB SA

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Financial services

Fee Income · ·
Building in fee income growth in sync with credit growth, but believe there is no further scope for its improvement as percentage of assets in FY11-12E Building in lower growth for Banks with higher reliance on sale of third party products like HDFC Bk due to expected changes in regulation

HDFC Bank’s high dependence on third party distribution is likely to result in low fee income growth going ahead

Figure 17: Building in fee income in line with credit growth...
%

Fee income growth FY08 FY09 FY10 FY11E FY12E
Source: Company, Indiabulls research.

Axis 88 64 20 25 25

BoB 14 38 20 23 23

BoI 31 39 0 20 20

HDFC Bk 35 34 15 20 25

ICICI 26 5 -13 15 20

PNB 14 24 21 25 25

SBI 23 29 27 24 20

Union 85 34 33 25 25

Figure 18: ... unlikely to improve further as % of assets
%

FY06 Axis Bank Bank of Baroda Bank of India HDFC Bank ICICI Bank Punjab National Bank State Bank of India Union Bank
Source: Company, Indiabulls research.

FY07 1.1 0.3 0.4 1.5 1.4 0.6 0.8 0.3

FY08 1.4 0.3 0.4 1.4 1.5 0.6 0.8 0.4

FY09 1.7 0.3 0.5 1.3 1.7 0.6 0.8 0.4

FY10 1.6 0.3 0.4 1.3 1.6 0.6 0.9 0.5

FY11E 1.6 0.3 0.4 1.2 1.6 0.6 1.0 0.5

FY12E 1.6 0.3 0.4 1.2 1.5 0.6 1.0 0.5

1.0 0.3 0.5 1.5 1.3 0.5 0.8 0.2

We believe regulation of third party distribution would put fee income under pressure. Figure 19: Highest dependence for HDFC Bank on insurance payouts
%

HDFC Bank * ICICI Bank State Bank of India Axis Bank
Source: Company, Indiabulls research. Note:* includes expenses reimbursement.

FY09 22.9 3.6 0.8 5.5

FY10 19.3 3.9 2.2 4.0

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Treasury income to moderate in FY11-FY12E · · ·
We believe opportunities for treasury gains in the past year were pretty high with equity market returns at 80% and volatility in G-Sec yields. We expect opportunities in equity and debt markets would be limited going forward and not building in huge treasury gains. PSU banks are now more conservative in building their AFS portfolios unlike earlier periods, which explains low treasury numbers for FY11-FY12E.

Figure 20: Building in lower treasury income
%

Trading income as % of PBT FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Axis 16 18 14 13 21 9 6

BoB 28 (4) 24 27 15 5 4

BoI 12 13 14 18 24 6 5

HDFC Bk (4) (4) 10 12 8 7 2

ICICI 29 31 26 8 22 9 7

PNB 15 21 13 14 13 7 6

SBI Union 9 7 (1) 5 9 20 18 17 15 20 10 7 5 6

Source: Company, Indiabulls research.

Asset quality: Worst seems over
We may see some slippages from restructured advances into NPAs as a year of seasoning (Q1FY11) would get completed after the restructuring under RBI’s special dispensation. With the overall economy improving, slippages are expected to be much less then initial estimates of 25-30%.

· · · ·

HDFC Bank emerges a clear leader with 0.3% advances restructured and almost negligible slippages. ICICI Bank restructured 2.3% of advances. Even though the slippages number is not available, we are factoring minimal slippages considering that the asset quality problems in retail advances have faded off. PNB and BoB continue to have reasonable asset quality with slippages at less than 10%. BoB had additional restructuring in its International operations of Rs18bn adjusted for which 4% of the advances have been restructured vs. 3% earlier. BoI continues to remain under pressure with 15% of restructured advances slipping into NPAs. We expect further slippages in next two quarters.

Figure 21: Restructured book behaved well until FY10
Mn

HDFC Bk Axis ICICI SBI Union BOB PNB BOI

Total Advances 1,258,306 1,043,431 1,812,060 6,319,140 1,193,153 1,750,353 1,866,010 1,684,907

Cumulative Restructured Advances 3,774 22,861 41,960 167,960 47038.5 70,618 120,965 110,574

Restructured / Total 0.30 2.19 2.32 2.66 3.94 4.03 6.48 6.56

Slipped into NPAs NA* 2,830 NA* 16,160 4,813 4,179 7,750 16,150

% Slipped 0.00 12.38 0.00 9.62 10.23 5.92 6.41 14.61

Source: Company, Indiabulls research. Note: * not available.

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Figure 22: Restructuring as % of total advances
%

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 HDFC Bk Axis ICICI SBI Union BOB PNB BOI Restructured / Total advances
Source: Company, Indiabulls research.

·

Factoring in ~10% additional slippages from Restructured accounts in FY11 and expect provision charges to moderate primarily on account of an improving economic scenario. Slippages from restructuring advances stood at 10-15% at end-FY10 for the banks under coverage. The asset quality improvement at ICICI Bank is expected to be quite high on account of successful management of problems in the retail loans portfolio.

· ·

Figure 23: Provision charges as % of loans
%

HDFC Bk Axis ICICI SBI Union BoB PNB BoI
Source: Company, Indiabulls research.

FY10 1.6 1.3 2.4 0.8 0.6 0.5 0.6 1.0

FY11E 1.2 1.3 1.7 0.6 0.6 0.5 0.5 1.0

FY12E 1.2 1.3 1.5 0.5 0.6 0.4 0.5 1.0

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Looking ahead: Further scope for RoA improvement
After a decade of balance sheet restructuring, we expect further RoA improvement to be driven by fundamental improvements in lending operations, profile of deposits, and fee income. To identify the scope for improvement further ahead, we have benchmarked all the banks with the best bank under lending operations (HDFC Bank) and-non lending operations (Axis Bank). We believe while DuPont convergence is a key trend to watch for, we understand that convergence would be limited by business models and competitive advantages. RoA improvement is the key for valuation rerating.

DuPont convergence a key trend
We have seen DuPont convergence trends in PNB and HDFC Bank. While HDFC Bank has shown sustenance, PNB registered a dramatic improvement to converge its DuPont with HDFC Bank. Figure 24: DuPont convergence
%

NII/avg. total assets Provisions/Avg. total assets Risk Adj Margins Non-Interest Income/avg total assets Net Income/avg. total assets Operating Expenses/avg. total assets PBT/Avg assets (1-Tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

HDFC Bk FY00 FY10 3.8 4.1 (0.8) (1.1) 3.0 3.1 1.6 1.9 4.6 5.0 (2.1) (2.9) 2.5 2.1 38.4 31.2 1.5 1.5 14.5 11.1 21.8 16.2

PNB FY00 2.7 (0.4) 2.3 1.2 3.5 (2.6) 0.9 23.3 0.7 28 19.6

FY10 3.2 (0.5) 2.8 1.2 4.0 (1.8) 2.2 32.5 1.5 16.7 25.1

Previous decade: Inefficiency to efficiency
In the last decade (FY00-10), the sector’s RoA improved from 0.5% to 1.1% as the private sector showed higher growth while PSUs improved their cost-efficiencies. The excellent performance of the past decade was enabled by:

· · · ·

In private sector: High growth albeit on a low base, consistent dilutions at premium valuations; technology; new business segments; great fee income performance. Among PSUs: Weeding out of cost inefficiencies; clean-up of asset quality with aid from regulatory support, and technology. Macro economy: Significant improvement in Credit / GDP ratio led to 30% CAGR loan growth in the last decade. Regulatory support: Banks were given the option to put in a higher % of G-Secs in their HTM portfolio, which reduced volatility in the P&L accounts and easy monetary policy.

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Figure 25: RoA improvement in the last decade was phenomenal
%

1.2 0.9 0.6 0.3 0.0 (0.3) (0.6) (0.9) (1.2) (1.5)

FY79

FY81

FY83

FY87

FY90

FY92

FY94

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY85

RoA
Source: RBI, Company, Indiabulls research.

Next decade: Further scope for RoA improvement
Benchmarking the efficient banks in core lending and fee income operations leaves further scope for RoA improvement for the banks going ahead.

·

Our across-the-cycle analysis suggests that HDFC Bank and PNB demonstrate better performance in core lending operations, while Axis Bank and ICICI Bank emerge as clear winners in fee income performance. HDFC Bank and Axis Bank are the clear leaders and are in the top quartile with high scores both in fee based income and core lending operations. ICICI Bank continues to be very strong on fee income generation but has been a laggard on core lending which is expected to improve significantly going ahead with improving margins and asset quality. SBI has shown a margin of improvement both on core lending and fee income while, in the near term, asset quality pressures are likely to keep lending operations under pressure. PNB and Union Bank have good scope for improvement in fee-based income while BoI appears in the bottom quartile and is expected to improve its lending operations primarily on its experience of asset quality stress in FY10.

· ·

·

·

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Indiabulls Research

FY10
16

Financial services

Figure 26: Competitive position of banks under coverage
High
PNB HDFC Bk

Lending ops

Quadrant 3
Union BoB

Quadrant 4

Axis

SBI

Quadrant 1

BoI

ICICI

Quadrant 2 High

Fee income
Source: Company, Indiabulls research.

Identifying RoA leaders and laggards

· ·

Strength of core lending operations by computing Net Interest Income less Provisions as % of average assets Efficiency in generating fee based for which we have used Fee income less employee costs as % of average assets as fee income is driven by investment in people.

Strength of core lending operations
In order to better appreciate the strengths in the core lending business, we have computed NII less provisions as % of average assets. Our findings are:

· · ·

PNB and HDFC Bank emerged as winners in core lending operations across the cycle. Axis Bank is also quite strong but lower than HDFC Bank and PNB. The relative weak performance gets compensated by its pretty strong fee income performance Union Bank and BoB’s domestic lending spreads are marginally lower than Axis Bank’s, even though their headline numbers appear relatively weak due to their international operations. BoI has exhibited structurally weak performance. Improvements during FY06-09 aided by higher-than-system credit growth faded off primarily due to asset quality problems. We expect this poor performance to continue in the next few quarters ICICI Bank headed for structural improvement in its lending operations, aided by changes in loan mix and improving liability franchise, which is the key driver for rerating

·

·

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Figure 27: (NII - provisions) as % of average assets
%

ICICI Axis PNB Union BoB HDFC Bk BoI

FY00 1.0 0.8 2.1 2.6 2.1 2.1 1.5

FY01 2.1 0.6 3.3 2.8 2.5 3.3 2.1

FY02 0.5 0.0 2.7 2.3 2.1 2.7 1.5

FY03 (0.3) 1.1 2.7 2.5 2.1 2.7 1.6

FY04 1.2 1.3 3.1 2.4 1.9 3.1 1.6

FY05 1.7 2.2 3.0 2.4 1.5 3.0 1.4

FY06 1.3 1.9 2.9 2.3 2.1 2.9 1.8

FY07 1.2 1.9 3.0 2.4 2.1 3.0 2.0

FY08 1.2 2.2 2.7 1.8 2.0 3.1 2.0

FY09 1.2 2.1 2.7 2.1 2.0 3.2 2.1

FY10 1.0 2.4 2.8 1.9 2.0 3.1 1.4

FY11E 1.3 2.3 2.8 2.2 2.1 3.1 1.6

FY12E 1.5 2.4 2.8 2.3 2.1 3.3 1.7

Source: Capitaline, Indiabulls research.

Efficiency in generating fee based income as measured by (Fee income less employee costs) as % of average assets
We have used Fee income less employee costs to determine the efficiency in generating fee based income as we believe investment in people drive the growth for this segment. In the last three years, the improvement has been marginal and we expect the same trend to continue. Key findings:-

· · · ·

Private banks have significantly high fee income spreads than PSU banks although improvement in PSU banks in the past decade was phenomenal. Axis Bank and ICICI Bank emerge as clear winners in fee income performance SBI emerges as a leader among PSU banks under coverage; however it falls far below its private sector peers. PSU managements recognise the importance of HR in generating fee income and have therefore started investing in people. However, structural improvement in the next two years seems unlikely as the investment in HR would take longer to bear fruit.

Figure 28: Improvement at PSUs was phenomenal
%

Axis Bank Bank of Baroda Bank of India HDFC Bank ICICI Bank Axis Bank outperformed all its Punjab Natl.Bank peers in the past two years St Bk of India Union Bank PSU average Pvt average Total average HDFC Bank’s performance in the past few years was poor due to the CBoP merger and highly skewed retail business model

FY01 0.7 (1.4) (1.8) 0.4 0.6 (1.8) (1.2) (1.7) (1.2) 0.2 (1.1)

FY02 0.4 (1.1) (1.2) 0.3 0.1 (1.3) (0.7) (1.3) (0.9) 0.0 (0.8)

FY03 0.3 (1.1) (1.0) 0.3 0.4 (1.3) (0.7) (1.1) (0.9) 0.2 (0.7)

FY04 0.3 (1.1) (1.0) 0.3 0.4 (1.2) (0.8) (1.1) (0.9) 0.2 (0.7)

FY05 0.5 (1.2) (0.9) 0.7 0.8 (1.3) (0.8) (1.0) (0.9) 0.5 (0.6)

FY06 0.6 (1.1) (0.8) 0.9 0.9 (1.0) (0.9) (0.8) (0.8) 0.7 (0.5)

FY07 0.6 (0.9) (0.8) 0.6 0.9 (0.9) (0.6) (0.6) (0.6) 0.6 (0.3)

FY08 FY09 0.7 0.9 (0.8) (0.8) (0.5) (0.4) 0.4 0.1 0.9 0.9 (0.7) (0.7) (0.3) (0.3) (0.5) (0.6) (0.5) (0.4) 0.6 0.6 (0.2) (0.2)

FY10 0.8 (0.6) (0.5) 0.3 0.8 (0.5) (0.3) (0.5) (0.4) 0.5 (0.2)

Source: Company, Indiabulls research.

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Analysing the trend in growth of fee income as % of average assets · Fee income at private banks has shown a remarkable improvement over PSU
banks from FY02 to FY10.

· · ·

This has been aided by core banking solutions, aggressive selling of third party products and debt syndication capabilities offered by private banks. However FY07 onwards fee income as % of average assets has been stagnant at around 1.3% We expect fee income growth to mirror credit growth, but is unlikely to improve as % of average assets as there are pressures on fee based income due to reduction in margins on sale of third party products and increased competition from PSU players aided by investment in technology led initiatives.

Figure 29: Fee income growth at private banks has been phenomenal
%

1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Pvt Fee income / Avg assets
Source: Company, Indiabulls research.

PSU Fee income / Avg assets

Analysing the trend in Staff cost as % of average assets · Staff costs have declined from 1.9% in FY01 to 1% in FY10 for PSU banks clearly
demonstrating the fact that PSU banks have worked hard to weed out the efficiencies.

·

Private staff costs have increased from 0.6% in FY01 to 0.8% in FY10 as they have invested in employees in enhancing their product offerings as can be seen from the growth in fee based income Employee training and recruitment would be a focus for the next few years as the PSU banking sector heads for a series of retirements. Also, new employees come at much lower costs but to sustain the productivity-levels of retired employees, PSU banks would need to hire more people. PSU banks will find it difficult to reduce staff costs as % of average assets and instead would focus on increasing fee based income by adding new employees which would lead to an increase in staff costs. Private banks will be able to maintain staff costs as % of average assets at current levels.

·

·

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Financial services

Figure 30: PSU staff costs vs. private staff costs as % of average assets
%

2.0 1.5 1.0 0.5 0.0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

PSU Staff costs / avg assets
Source: Company, Indiabulls research.

Pvt Staff costs / avg assets

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Financial services

How to play the next cycle: Learning from our across-the-cycle analysis
How to play the next cycle
RoA leaders (who consistently delivered above-industry RoA) have turned out to be multiyear alpha bets. RoA laggards (who consistently delivered below-industry RoA) can be significant outperformers as they improve their performance. Also, RoA cyclical behaviour generally lasts for 3-4 years on an average and our analysis suggests RoA direction is the key for stock performance.

Our across the cycle analysis
We analyzed deviation in systemic RoA and company-specific RoA over a 15-year period and bucketed out-performance/underperformance. Key findings from the across the cycle analysis:

· · · · ·

RoA leaders – HDFC Bk, ICICI, Axis, PNB, Union RoA laggards – BoB, SBI, BoI HDFC Bank tops the chart and leads the private banks PNB and Union Bank are leaders within the PSU space ICICI Bank appears strong, notwithstanding its lukewarm performance over the last five years

Figure 31: Number of years of RoA outperformance/underperformance
Nos.

High Inline Low

HDFC Bk 15 0 (1)

ICICI 11 3 (2)

Axis 11 4 (1)

PNB 10 5 (1)

Union 9 2 (5)

BoB 7 4 (5)

SBI 5 4 (7)

BoI 6 2 (8)

Source: Company, Indiabulls research.

RoA leaders
We have seen that RoA leaders generated relatively higher returns than RoA laggards in the long run. We expect this trend to continue. Figure 32: Structurally strong franchises provide significant alpha performance in the long term
%

ICICI HDFC Bk PNB SBI BoI BoB Union Axis

10-year CAGR returns (incl dividend) (excl dividend) 31 29 28 27 45 43 29 27 41 35 29 23 46 41 49 45

5-year CAGR returns (incl dividend) (excl dividend) 21 19 28 27 20 17 32 30 35 33 19 16 23 19 41 40

Source: Company, Indiabulls research.

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RoA laggards
RoA laggards during their journey from RoA underperformance to RoA outperformance turn out to be alpha bets in the medium term. Figure 33: For short-term outperformance, one needs to keep an eye on turnaround candidates. Classic case was BoI during FY06-08
Yearly stock price returns (%)

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

SBI BoB BoI Union* PNB* 96 99 73 109 141 80 110 79 222 118 176 149 209 245 131 179 307 107 83 150 187 120 147 101 128 107 117 106 96 130 86 102 179 141 163 141 112 70 92 84 111 89 181 262 142 186 234

Winner BoB BoB BoI BoB PNB Union SBI BoI SBI Union BoB

Loser BoI BoI BoB SBI BoI BoB BoB Union PNB SBI BoI

Winner (excl SBI) BoB BoB BoI BoB PNB Union BoI BoI BoI Union BoB

Loser (excl SBI) BoI BoI BoB BoI BoI BoB BoB Union PNB BoI BoI

Source: Company, Indiabulls research. Note: * Listed since FY04.

Timing the RoA laggards
Company’s peak RoA outperformance over industry to lowest RoA underperformance and vice-versa generally lasts between 3-4 years. ICICI Bank (FY02-05: improvement, FY05-09: deceleration), Axis Bank (FY01-05: deceleration, FY07-10: improvement), PNB (FY01-04 and FY05-08: deceleration). We expect this pattern to continue.

Figure 34: ICICI Bank: Worst seems to be over
ICICI Bank RoA – Industry RoA (%)

Figure 35: Axis Bank: Becoming stronger by the day
Axis Bank RoA – Industry RoA (%)

2.0 1.5 1.0 0.5 0.0 (0.5) (1.0)

Cycle 1: FY02-05, increase in RoA Cycle 2: FY06-09, decrease in RoA

1.0 0.8 0.6 0.4 0.2 0.0 (0.2) (0.4)

Cycle 1: FY01-04, decrease in RoA Cycle 2: FY08-10, increase in RoA

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

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FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

22

Financial services

Figure 36: PNB: A clear winner in the PSU space
PNB Bank RoA – Industry RoA (%) Cycle 1: FY01-04, decrease in RoA Cycle 2: FY05-08, decrease in RoA

Figure 37: Union Bank: Another clear PSU winner
Union Bank RoA – Industry RoA (%) Cycle 1: FY00-03, increase in RoA Cycle 2: FY06-09, increase in RoA

0.5 0.4 0.3 0.2 0.1 0.0 (0.1) (0.2) (0.3) (0.4) (0.5)

0.6 0.4 0.2 0.0

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

(0.2) (0.4) (0.6)

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

Figure 38: HDFC Bank: Steady, as always
HDFC Bank RoA less Industry RoA (%)

Figure 39: BoB: Of late, improvement is causing excitement
BoB RoA less Industry RoA (%)

3.0 2.5 2.0 1.5 1.0 0.5 0.0

Cycle 1: FY01-04, decrease in RoA Cycle 2: FY07-09, decrease in RoA

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

(0.5)

0.6 0.5 0.4 0.3 0.2 0.1 0.0 (0.1) (0.2) (0.3) (0.4)

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

Figure 40: BoI: Falling off the cliff
BoI RoA less Industry RoA (%)

Figure 41: SBI: Growth at the cost of profitability
SBI RoA less Industry RoA (%)

1.0 0.8 0.6 0.4 0.2 0.0

Cycle 1: FY01-03, increase in RoA Cycle 2:FY05-09, increase in RoA

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

(0.4) (0.6)

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

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FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

(0.2)

0.6 0.5 0.4 0.3 0.2 0.1 0.0 (0.1) (0.2) (0.3)

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
Cycle 1: FY00-04, decrease in RoA Cycle 2: FY05-08, decrease in RoA

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
Cycle 1: FY99-01, decrease in RoA Cycle 2: FY08-10, increase in RoA

23

Financial services Stocks with cyclical improvement in RoA performance from below to above industry rates give significant outperformance both on account of higher earnings growth and valuation rerating.

Figure 42: BOI’s stupendous earnings growth and RoA improvement...
%

Figure 43: ...led to significant outperformance
%

120 100 80 60 40 20 0 FY06 FY07 PAT growth (LHS)
Source: Company, Indiabulls research.

2.0 1.5 1.0 0.5 FY08 FY09 RoA (RHS)

500 400 300 200 100 0 Jan-05 Jan-06 BoI Jan-07 Sensex Jan-08 Bankex Jan-09

Source: Company, Indiabulls research.

Consistent RoA improvement over the years aid the stocks to trade at a premium to the peer group. Figure 44: Axis has shown consistent RoA improvement…
%

Figure 45: … leading to outperformance…
%

250
80 60 40 20 0 FY08 FY09 PAT growth (LHS) FY10 FY11E RoA (RHS) 2.0 1.5 1.0 0.5 0.0

200 150 100 50 0

Axis

Sensex

Bankex

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

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Financial services

Figure 46: … driven by valuation re-rating for Axis
x

2,000 1,500 1,000 500 0 Jun-00 Jun-02 Price
Source: Company, Indiabulls research.

4x 3x 2x 1x

Jun-04 1x 2x

Jun-06 3x

Jun-08 4x

Jun-10

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Financial services

Our sector call: Outperform
As we head for a new cycle of growth in the banking sector, we expect stocks to trade at a premium on the last five years’ valuations as a result of higher profitability. Initiate ICICI Bank, Axis Bank, PNB, Union Bank, HDFC Bank with Outperform, and BoB, BoI and SBI with Neutral. We expect FY10-12E PAT CAGR of the banks under our coverage to be at 23% aided by the return of pricing power to banks, improvement in asset quality, and higher balance sheet growth. Figure 47: Valuation summary
Units as shown

P/Adj BV (x) Company M.cap (Rs bn) ICICI 936 Axis 496 PNB 322 Union 158 BoB 263 HDFC Bk 873 BoI 188 SBI 1,435 FY10 1.9 3.2 2.1 1.9 2.0 4.1 1.7 2.5 FY11E 1.7 2.8 1.7 1.6 1.6 3.7 1.4 2.2 FY12E 1.6 2.4 1.4 1.2 1.3 3.2 1.2 1.9 FY10 23.3 19.7 7.8 7.6 8.6 29.6 10.8 15.7

P/E (x) FY11E 18.5 16.8 6.9 6.6 7.5 24.1 7.9 12.5 FY12E 14.5 13.4 5.6 5.2 6.0 18.1 6.1 9.9

RoE (%) FY10 FY11E FY12E 8.0 9.5 11.3 18.5 17.2 18.7 25.5 23.5 23.8 21.9 21.0 21.9 21.9 21.2 22.0 16.1 15.8 18.3 12.6 15.6 17.7 14.8 16.4 18.2

RoA (%) FY10 FY11E FY12E 1.1 1.3 1.4 1.7 1.4 1.5 1.5 1.4 1.4 1.2 1.1 1.2 1.2 1.1 1.1 1.5 1.4 1.5 0.7 0.8 0.9 0.9 1.0 1.1

Source: Company, Indiabulls research.

Current valuations are at discount to historical peaks
Stocks are currently trading at discount from peak valuations and we believe further scope for re-rating would be driven by higher RoE than 5yr average and profitability. PNB and Union Bank are expected to trade at a premium to their historical average considering a significant improvement in their RoEs of the early cycles. We expect PAT CAGR of the banks under our coverage to be at 21% for FY11-FY12E driven by asset quality improvement, growth in advances, and high economic activity.

Figure 48: Valuations vs history
x (unless otherwise stated)

1 year Average fwd PB FY05-10 Axis 2.78 2.40 BoI 1.43 1.30 BoB 1.63 1.00 HDFC Bk 3.65 3.40 ICICI 1.75 2.00 PNB 1.68 1.40 SBI 2.23 1.90 Union 1.56 1.30

Peak 4.40 2.00 1.60 5.40 3.60 1.80 3.10 1.90

% Diff from peak -37 -28 2 -32 -51 -7 -28 -18

% Diff from avg 16 10 63 7 -13 20 18 20

RoE FY05-10 (%) 18.8 17.6 15.4 17.8 12.0 18.3 16.7 20.1

RoE FY11-12 (%) 18.0 16.7 21.6 17.0 10.4 23.7 15.4 21.9

Rating Outperform Neutral Neutral Outperform Outperform Outperform Neutral Outperform

Source: Bloomberg, Indiabulls research.

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Financial services

Figure 49: Summary RoA Sustenance Near term Valuation Comments ++ +++ ++++++ Last 5 years lost their steam in RoA sustenance Balance sheet adjustment is over, BoR might put under pressure but structurally in the right direction Valuations are not expensive +++++ +++++ +++ Proven consistently right Balance sheet manoeuvrability is pretty strong Valuations are below their historical peaks +++++ ++++ ++++ Clearly a winner in sustenance Expect earnings growth to be relatively higher on the high base of FY10. Market is concerned about asset quality pressures Relatively undervalued +++++ ++++ +++++ Clearly a winner in sustenance Core performance is further expected to improve yoy as bank's 1HFY10 was under pressure Valuations does not price in the inherent profitability +++++ +++++ +++ A clear winner in sustenance Expect CBOP merger productivity to drive growth going ahead Valuations are reasonable +++++ +++++ +++ Loser in sustenance but significant improvement seen in the recent past Expect next two years' earnings growth to be pretty strong at 19% Valuations are at the higher end of the trading band +++ +++ ++++ Loser in sustenance Balance sheet restructuring mode, expected to continue in the medium term Valuations are in line with historical average. Any improvement in asset quality will be the key trigger + ++ +++ Last four years growth has come at the cost of profitability Asset quality, incremental provision charges to meet 70% cover to put earnings under pressure. But improving NIM with credit growth to act as a saviour

ICICI Bank

Axis Bank PNB

Union Bank

HDFC Bank BoB BoI

SBI

Source: Company, Indiabulls research.

ICICI Bank
Outperform. One of the largest retail franchises with extensive branch network has been this bank’s strength. We believe its recent balance sheet adjustment phase is nearing completion. We expect the bank’s profitability growth strategy to result in a higher earnings growth, which we have factored in. The factors are: 1) high earnings growth due to NIM improvement aided by structural improvement in liability franchise, 2) lower provision charges as asset quality pressures are at near-end, and 3) growth in domestic loan book to kick at a higher rate after a degrowth phase during FY08-10. We believe the market is not factoring in the structural growth and multiple earning upgrades. Key risk to the call is that the BoR merger might pull the bank again in the adjustment phase; however we believe the recent correction of 6-7% prices in the risk.

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Financial services Figure 50: Significant ROA improvement
%

Return on equity decomposition NII/avg. total assets Non-Interest Income/avg total assets Employee exp Non- Employee exp Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY09 2.17 1.97 -0.51 -1.32 2.45 -0.99 24.07 1.11 7.9 8.8

FY10 2.19 2.01 -0.52 -1.06 2.62 -1.18 24.70 1.08 7.3 8.0

FY11E 2.29 2.18 -0.56 -1.16 2.74 -0.95 28.00 1.29 7.3 9.5

FY12E 2.38 2.26 -0.60 -1.25 2.79 -0.84 28.00 1.40 8.0 11.3

Figure 51: FY10 saw the worst in terms of NPAs. Expect significant improvement on the back of focus on secured lending
Units as shown

Figure 52: Factoring marginal increase in margins for FY11 & FY12 as the bank starts growing its advances after stagnation in FY10
%

6.0 4.0 2.0 0.0 2.0 0.7 3.5 2.4 1.0 1.5 4.2 2.0

5.1 1.9

4.7

4.2

80 60 40 20 -

2.6 2.4 2.2 2.0 1.8 FY06 FY07 FY08 FY09 FY10 FY11E FY12E NIMs - LHS Average cost of funds - RHS Average yield on assets - RHS
Source: Company, Indiabulls research.

10.0

1.4

1.2

5.0

FY06 FY07 FY08 FY09 FY10 FY11E FY12E Provision coverage % - RHS Gross NPL % - LHS Net NPL % - LHS
Source: Company, Indiabulls research.

0.0

Figure 53: ICICI Bank: Scope of further RoE improvement to drive valuations ahead
x

45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Jun-04 Jun-05 Jun-06 ICICI PE
Source: Company, Indiabulls research.

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jun-07 Jun-08 Jun-09 Jun-10

ICICI PBV (RHS)

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Financial services We value the core banking business of ICICI Bank using Gordon growth model at 2xFY12E ABV which works out to Rs 822 and valuation of subsidiaries at Rs 230 which gives us a TP of Rs 1052 an upside of 24% from current levels.

Axis Bank
Outperform. Axis is one of the fastest-growing, highly profitable, and competitive private sector banks in India. After a high-growth period, we expect this bank’s business to consolidate in the medium term and substantially ease out its growth rates vis-a-vis its historically high levels. Axis Bank’s asset quality remained stable during last year’s challenging times despite concerns about the potential follow-through of its recent high growth. We believe the general economic stability should limit significant asset quality pressure and that Axis Bank stands to gain disproportionately from opportunities in the banking sector. Figure 54: RoE to improve as capital gets deployed
%

RoAE Tier 1 CAR

FY08 16.3 10.2

FY09 19.8 9.4

FY10 18.5 11.2

FY11E 17.2 10.3

FY12E 18.7 9.6

Source: Company, Indiabulls research.

Figure 55: Axis Bank: Higher than industry growth to drive stock returns
x

30.0 25.0 20.0 15.0 10.0 5.0 0.0 Jun-04 Jun-05 Jun-06 Axis PE
Source: Company, Indiabulls research.

5.0 4.0 3.0 2.0 1.0 0.0 Jun-07 Jun-08 Jun-09 Jun-10

Axis PBV (RHS)

We value the core banking business of Axis Bank using Gordon growth model at 2.9xFY12E ABV which works out to a TP of Rs 1524, an upside of 26% from current levels.

Punjab National Bank
Outperform. PNB has good profitability (23% RoE) and relatively high net interest margins. We believe PNB has been able to maintain its growth along with its higher-than-industry NIMs. While we expect NIMs to drift downwards, they are still likely to remain significantly above industry. PNB has shown significant growth in fee income, led by its strong technology platform and greater management focus. Asset quality has held up reasonably well despite its greater SME and agricultural focus and higher restructured book. Key risks to the call are sustainability of NIMs going ahead in a rising interest rate environment and asset quality.

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Figure 56: RoA & RoE among the best in the Industry with steady improvement
%

NII/avg. total assets Non-Interest Income/avg total assets Net Income/avg. total assets Operating Expenses/avg. total assets Employee exp / avg assets Non- Employee exp / avg assets Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY09 3.2 1.3 4.5 -1.9 -1.3 -0.6 2.6 -0.4 35 1.42 16 22.9

FY10 3.2 1.2 4.4 -1.8 -1.2 -0.6 2.7 -0.5 33 1.50 17 24.9

FY11E 3.3 1.0 4.3 -1.7 -1.2 -0.6 2.5 -0.4 33 1.40 17 23.5

FY12E 3.2 1.0 4.2 -1.7 -1.2 -0.5 2.5 -0.4 33 1.39 17 23.8

Figure 57: PNB: Historical premium valuations to stay due to higher RoA vs PSU peers
x

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jun-04 Jun-05 Jun-06 PNB PE
Source: Company, Indiabulls research.

2.0 1.5 1.0 0.5 0.0 Jun-07 Jun-08 Jun-09 Jun-10

PNB PBV (RHS)

PNB stock should trade at a premium to historical average multiples, due to significant improvement in RoE from 18% (average during FY05-10) to 23% in the next two years. We value the core banking business of PNB using Gordon growth model at 1.7xFY12E ABV which gives us a TP of Rs 1276, an upside of 23% from current levels.

Union Bank of India
Outperform. Union Bank’s key strengths are its cost efficient large distribution network as operating costs (as a proportion of assets) below industry average, good technology ahead of its peer group in implementation, and a clean balance sheet with low gross and net NPLs (improving above industry levels). NII growth should be higher on a low base as NIMs in the last year have been impacted by dependence on bulk deposits. Key risks lie in its low balance sheet liquidity, and the need to grow term deposits rapidly to fund loan growth; relatively lower capital cushion, which is likely to moderate asset growth.

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Financial services

Figure 58: FY10 margins were lower due to excess liquidity. Margins are expected to come back to reasonable levels FY11 onwards
%

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY06

12.0 10.4 7.4 4.9 5.9 6.7 9.1 8.9 6.8 5.7 6.0 7.7 8.4 8.6 5.9 10.0 8.0 6.0 4.0 2.0 0.0 FY07 FY08 FY09 FY10 FY11E FY12E

NIMs - LHS

Average cost of funds - RHS

Average yield on assets - RHS

Source: Company, Indiabulls research.

Figure 59: ROEs continue to remain healthy
%

NII/avg. total assets Non-Interest Income/avg total assets Net Income/avg. total assets Operating Expenses/avg. total assets Employee exp / avg assets Non- Employee exp / avg assets Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY09 2.7 1.0 3.7 -1.5 -0.8 -0.7 2.2 -0.5 26 1.2 18 21.5

FY10 2.4 1.1 3.5 -1.4 -0.8 -0.7 2.1 -0.5 27 1.2 19 21.9

FY11E 2.5 0.8 3.3 -1.4 -0.8 -0.6 1.9 -0.6 28 0.9 19 18.0

FY12E 2.6 0.8 3.4 -1.4 -0.8 -0.7 2.0 -0.6 28 1.0 19 19.5

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31

Financial services

Figure 60: Union Bank: High growth to drive stock returns
x

12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jun-04 Jun-05 Jun-06 Union PE
Source: Company, Indiabulls research.

2.5 2.0 1.5 1.0 0.5 0.0 Jun-07 Jun-08 Jun-09 Jun-10

Union PBV (RHS)

We value the core banking business of Union Bank using Gordon growth model at 1.5xFY12E ABV which gives us TP of Rs 379, an upside of 19% from current levels.

HDFC Bank
Outperform. Consistent and steady operating performance has been the hallmark of HDFC Bank. The underlying strength of its business model backed by high CASA deposits, higher proportion of advances in the retail segment coupled with lower NPAs make HDFC Bank business model unique and difficult to replicate. The bank offers the best play on the India consumption story. With high visibility in core earnings growth as provision charges trend downwards with the CBoP adjustment phase getting done and cost leverage expected to kick-in with CBoP branches becoming more productive, balance sheet adjustment is already done during Q4FY10 by the bank to factor in daily calculation of interest on savings balances. In the event of volatility in the market, HDFC Bank would be seen as safe haven in a flight to safety. Figure 61: Consistent performance of RoA over the years
%

NII/avg. assets Non-Int Inc/avg assets Net Income/avg. assets Employee exp / avg assets Non- Employee exp / avg assets Op Profit /avg. assets Provisions/Avg. assets (1-tax rate) Return on Assets Avg. assets/avg equity (x) Return on Equity
Source: Company, Indiabulls research.

FY09 4.4 1.9 6.3 -1.3 -1.9 3.0 -1.1 32 1.3 13 16.9

FY10 4.1 1.9 6.0 -1.1 -1.7 3.2 -1.1 31 1.5 11 16.1

FY11E 4.1 1.8 5.9 -1.1 -1.7 3.1 -1.0 31 1.4 11 15.8

FY12E 4.3 1.7 6.0 -1.1 -1.7 3.3 -1.0 32 1.5 12 18.3

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Financial services

Figure 62: Underwriting standards continue to remain best in the Industry
%

2.5 2.0 1.5 1.0 0.5 0.0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E 0.4 0.4 0.5 1.4 1.4 1.4 0.6 0.5 2.0 1.6

71 70 1.4 69 1.3 68 67 0.4 66 65

0.4

Provision coverage % - RHS
Source: Company, Indiabulls research.

Gross NPL % - LHS

Net NPL % - LHS

Figure 63: HDFC Bank: Higher than industry growth, and superior RoE to drive valuations ahead
x

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Jun-04 Jun-05 Jun-06 HDFC Bk PE
Source: Company, Indiabulls research.

6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jun-07 Jun-08 HDFC Bk PBV (RHS) Jun-09 Jun-10

We value the core banking business of HDFC Bank using Gordon growth model at 3.9xFY12E ABV which gives us a TP of Rs 2357, an upside of 18% from current levels.

Bank of Baroda
Neutral. BoB’s traditional banking model of strong retail franchise backed by strong credit appraisal standards has ensured strong performance of domestic business. International business with its focus on Indian corporates remains highly profitable. Management stability with clear focus on profitable growth makes BoB the best pick in the Indian banking space. Significant outperformance in the last one year and FII ownership already hitting the threshold limits leave little margin of error in valuations. Our target multiple continues to be in line with those for SBI and PNB and we believe its valuation discount will fade off as a result of its recent performance being pretty strong for a bank of its size and its superior management quality.

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Financial services

Figure 64: RoAs unlikely to improve from current levels
%

NII/avg. total assets Non-Interest Income/avg total assets Net Income/avg. total assets Emp NonEmp Operating Expenses/avg. total assets Operating Profit /avg. total assets Provisions/Avg. total assets PBT/ Avg Assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY09 2.5 1.4 3.9 -1.2 -0.6 -1.8 2.1 -0.5 1.6 33 1.1 17 18.7

FY10 2.3 1.0 3.3 -0.9 -0.6 -1.5 1.9 -0.2 1.6 28 1.2 19 21.9

FY11E 2.4 0.8 3.3 -0.8 -0.5 -1.3 1.9 -0.3 1.6 30 1.1 19 21.2

FY12E 2.4 0.8 3.2 -0.8 -0.5 -1.3 1.9 -0.3 1.6 30 1.1 19 22.0

Figure 65: BoB: Historical high valuation driven by improvement in inherent profitability
x

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jun-04 Jun-05 Jun-06 BoB PE
Source: Company, Indiabulls research.

1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Jun-07 Jun-08 Jun-09 Jun-10

BoB PBV (RHS)

Structural improvement in RoE from 16% (average FY05-10) to 22% (FY11-FY12) has resulted in a 70% premium on historical average multiples. We value the core banking business of BoB using Gordon growth model at 1.5xFY12E ABV which gives us a TP of Rs 803, an upside of 14% from current levels.

Bank of India
Neutral. BoI’s key strengths are in its large balance sheet, distribution, and low operating costs below industry average. After an explosive growth during FY06-08, this bank has witnessed significant asset quality concerns with its restructuring book higher than the industry average putting earnings under significant pressure. We expect further asset quality pressures, but NIMs should improve as high-cost deposits are expected to be re-priced and provision charges are expected to be back at the average cycle level. BoI’s CMP does not carry any downside risk, in our view, as the stock is trading at historical low multiples;

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Financial services however, rerating is highly dependent on an improvement in its asset quality – an aspect in which the bank has continuously disappointed for three successive quarters. Figure 66: Asset quality concerns persist though we believe that the worse is over for the Bank
%

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY06

3.7 2.4 1.5 0.9 2.9 1.7 0.5 FY08 FY09 1.7 0.4 FY10 1.3

3.0

3.0

1.0

1.1

80 70 60 50 40 30 20 10 0

FY07

FY11E

FY12E

Provision coverage ratio - RHS
Source: Company, Indiabulls research.

Gross NPL ratio - LHS

Net NPL ratio - LHS

Figure 67: BoI’s valuation at historical average unlikely to rerate as asset quality pressures to sustain
x

12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jun-04 Jun-05 Jun-06 BoI PE
Source: Company, Indiabulls research.

2.5 2.0 1.5 1.0 0.5 0.0 Jun-07 Jun-08 Jun-09 Jun-10

BoI PBV (RHS)

We value the core banking business of BoI using Gordon growth model at 1.2xFY12E ABV which gives us a TP of Rs 343, an upside of 2% from current levels.

State Bank of India
Neutral. SBI has aggressively restructured in terms of manpower, technology and business focus during the last four years. It should be a significant beneficiary of the expected increase in loan demand in India, spread across the consumer and the industrial segments. SBI has also invested aggressively in its technology platform and its five subsidiary banks, and has restructured itself to lead and participate in the strong economic and business environment. We expect SBI to generate a RoE in the 15-17% level, and be more aggressive in leveraging capital that it is in the process of raising. However, weak asset quality due to higher-than-industry growth in the last few years and low provision coverage can act as a dampener.

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Financial services

Figure 68: RoA improving still lower then most of the Larger Banks & below industry average
%

FY08 FY09 FY10 FY11E FY12E

Axis 1.2 1.4 1.7 1.4 1.5

BoB 0.9 1.1 1.2 1.1 1.1

BoI HDFC Bk 1.2 1.3 1.5 1.3 0.7 1.5 0.8 1.4 0.9 1.5

ICICI 1.1 1.1 1.1 1.3 1.4

PNB 1.1 1.4 1.5 1.4 1.4

SBI Union Average 1.0 1.2 1.1 1.1 1.2 1.3 0.9 1.2 1.2 1.0 0.9 1.2 1.1 1.0 1.2

Source: Company, Indiabulls research.

Figure 69: PAT to be under pressure due to higher provisions inspite of improvement in NII
Rs bn

400 350 300 250 200 150 100 50 FY05 FY06 NII - LHS
Source: Company, Indiabulls research.

35 30 25 20 15 10 5 0 FY07 FY08 PAT - LHS FY09 FY10 FY11E FY12E

Provisions as % of NII - RHS

Figure 70: SBI: Valuation at higher end of historical average
x

20.0 15.0 10.0 5.0 0.0 Jun-04 Jun-05 Jun-06 SBI PE
Source: Company, Indiabulls research.

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jun-07 Jun-08 Jun-09 Jun-10

SBI PBV (RHS)

We value the core banking business of SBI using Gordon growth model at 1.7xFY12E ABV at Rs 2004 and valuation of subsidiaries at Rs 657 which gives us a TP of Rs 2661, an upside of 11% from current levels.

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Financial services

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Institutional
Initiating coverage

ICICI Bank
2 July Eq 2010 India

Outperform

In the right direction
ICICI Bank offers the best play in the private banking space considering that margins will improve on a growing balance sheet, NPA accretion will continue to come down as bank moves towards secured lending, credit underwriting standards improve, and higher CAR provides the fuel for growing the balance sheet size. Outperform. Will they get it right this time?
We believe the answer is Yes as the bank has transformed from an aggressive growth-centric bank to a profitability-centric bank. We believe branches opened by ICICI Bank in FY10 will help it have better access to low cost deposits, further improving margins which are currently below industry average. Asset quality which, in our view, has been the biggest concern for ICICI Bank will show consistent improvement over the course of the year, with slippages remaining low

Financial services
Price: Rs 841 Target price: Rs 1,052
Stock details Bloomberg code MCap Rs/US$ mn Outstanding shares (mn) 52-wk H/L (Rs) 3m avg trd vol (US$ mn) Nifty / Sensex ICICIBC IN 938,603/20,174 1,115 1010/606 93.9 5251/17509

Improving asset quality
Shareholding pattern (%)
100% 50% 0% Mar-07 Promoters 10 25 65 0 Mar-08 Mar-09 Mar-10 FIIs DIIs Public & Others

The reasons are: lower restructured book, stabilisation of retail NPLs, increased focus on secured retail products (housing and auto loans) along with a domestic corporate loan book to keep further slippages under check. We are building in higher provision charges for FY11E at 1.4% of loans considering 70% provision coverage ratio to be achieved by Sep’10.

Banking business RoE set to improve
Core RoE of standalone banking business is expected to improve to 14% by FY12E vs. 10% for FY10, with a strategy shift driven by high CASA, higher proportion of secured advances and lower provision charges. We believe the balance sheet is poised to ride the next leg of growth and can expect further positive upside risks on balance sheet growth going ahead, which could further propel RoE.

Stock performance (%) 1m Absolute Nifty 140 120 100 80 Jul-09 Nov-09 Nifty Index Mar-10 Jul-10 ICICI 3m 1yr

0.4 (11.7) 15.3 5.7 (0.7) 21.0

Valuation
We value the core bank at 2x ABV using single-stage Gordon growth model and subsidiaries at Rs. 252 per share (insurance at 13x NBAP multiple) to arrive at a target price of Rs. 1,052. ICICI Bank now trades at the lower end of the historical P/ABV multiple. Improving RoEs, stabilising asset quality and international business to act as catalysts for re-rating. Outperform.

Figure 71: Key financials
Rs million, year-end March

Source: Bloomberg, Prowess.

Saikiran Pulavarthi
saikiran.pulavarthi@indiabulls.com +91 22 3980 5203

Deepak Agrawal
deepak.agrawal@indiabulls.com +91 22 3980 5496

Net interest income Non interest income Pre provision profits PAT EPS (Rs.) EPS (consensus) (28) EPS growth ROE (%) PE (x) ROA (%) P/ABV (x)
Source: Company , Indiabulls research.

FY08 73,041 88,108 79,606 41,577 38.7 11.2 11.0 17.9 1.1 1.8

FY09 83,667 76,042 94,542 42,871 33.8 (12.8) 8.8 15.7 1.1 1.3

FY10 81,140 74,777 97,319 40,247 36.2 36.6 7.1 8.0 22.6 1.1 1.9

FY11E 89,490 77,444 107,146 50,497 45.4 43.7 25.5 9.5 18.5 1.3 1.7

FY12E 109,971 90,154 128,881 64,792 58.2 55.8 28.3 11.3 18.5 1.4 1.6

Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.

ICICI Bank

Figure 72: FY10 saw the worst in terms of NPAs. We expect significant improvement on the back of the focus on secured lending
Units as shown

6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY06 FY07 FY08 FY09 2.0 0.7 2.4 1.0 1.5 3.5 4.2

5.1

4.7

4.2

2.0

1.9

1.4

1.2

80 70 60 50 40 30 20 10 -

FY10

FY11E

FY12E

Provision coverage % - RHS
Source: Company, Indiabulls research.

Gross NPL % - LHS

Net NPL % - LHS

Figure 73: ICICI is back on the growth path after 17% decline in advances in FY10. Factoring 15% growth in FY11 & 20% growth in FY12 for overall advances
Units as shown

3000 2500 2000 1500 1000 500 0 FY06

60 34 15 (3) (17) FY07 FY08 FY09 FY10 FY11E FY12E

15

20

70 60 50 40 30 20 10 (10) (20) (30)

Net loans & advances (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

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ICICI Bank

Figure 74: Massive branch roll out in FY10 and stagnant Balance Sheet has led to sharp spike in CASA %. Expect CASA to move down once the Balance Sheet starts growing
Units as shown

3,000 2,500 2,000 1,500 1,000 500 0 FY06 FY07 FY08 FY09 FY10 23 22 26 29

42

40

38

45 40 35 30 25 20 15 10 5 0

FY11E

FY12E

Number of branches - LHS
Source: Company, Indiabulls research.

CASA % - RHS

Figure 75: Factoring marginal increase in margins for FY11-FY12E as the bank starts growing its advances after stagnation in FY10
Units as shown

2.6 2.5 2.4 2.3 2.2 2.1 2.0 1.9 FY06 NIMs - LHS FY07 FY08 FY09 FY10 FY11E FY12E

10.0 8.0 6.0 4.0 2.0 0.0

Average cost of funds - RHS

Average yield on assets - RHS

Source: Company, Indiabulls research.

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ICICI Bank

Figure 76: Arriving at our loan growth and margin assumptions
%

Domestic International

FY10 75.0 25.0 100.0

FY11E 90.0 25.0 115.0 20.0 0 15.0

FY12E 112.5 25.0 137.5 25.0 0 19.6 3.1 0.7 2.7

Domestic growth International growth Overall loan growth Domestic NIMs International NIM Overall NIMs
Source: Company, Indiabulls research.

3.1 0.7 2.5

3.0 0.7 2.5

Figure 77: Fee income growth to be in line with advances growth
Units as shown

90 80 70 60 50 40 30 20 10 0 FY06

57

49 26 5 (13) FY07 FY08 FY09 FY10 FY11E FY12E 15 20

70 60 50 40 30 20 10 0 (10) (20)

Fee income (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

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ICICI Bank

Figure 78: Strong capabilities both on retail and corporate products will help sustain current levels
Units as shown

42 41 40 39 38 37 36 35 34 33 FY06

1.3

1.4

1.5

1.7

2.0 1.6 1.6 1.5 1.5 1.0 0.5 0.0

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income/total income (%) - LHS
Source: Company, Indiabulls research.

Fee income/total assets (%) - RHS

Figure 79: Contribution of Trading Profits going down. Performance driven by core operations
Units as shown

100 80 60 40 20 0 FY06

29

35 31 26 22 30 25 20 15 8 9 7 FY12E 10 5 0 FY07 FY08 FY09 FY10 FY11E

Trading profits (Rs bn) - LHS
Source: Company, Indiabulls research.

PBT (Rs bn) - LHS

Trading profits / PBT (%) - RHS

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ICICI Bank

Figure 80: Massive cost-cutting measures implemented in FY10 as ICICI Bank moves away from DSA to a branch-driven model. we expect marginal uptick in cost ratios going forward due to branch expansion
Units as shown

60 50 40 30 20 10 0 FY06

2.3

2.3

2.2 1.7 1.6 1.7 1.9

2.5 2.0 1.5 1.0 0.5 0.0

FY07

FY08

FY09

FY10

FY11E

FY12E

Cost income ratio (%) - LHS
Source: Company, Indiabulls research.

Opex/average assets (%) - RHS

Figure 81: Significant improvement in ROE
%

20.0 15.0 10.0 5.0 0.0

17.3 15.5

15.3 13.2 12.1 11.0 11.2 8.8 10.3 7.9 12.3 9.5

14.3 11.3

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Standalone ROE adjusted for investments in all subsidiaries
Source: Company, Indiabulls research.

Reported ROE

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ICICI Bank

Figure 82: P/E band
Rs

Figure 83: PBV band
Rs

2,000 1,500 1,000 500 0 Jun-00 Price Jun-02 Jun-04 10x Jun-06 20x Jun-08 30x

40x 30x 20x 10x

2,000 1,500 1,000 500 0

4x 3x 2x 1x Jun-02 Price Jun-04 1x Jun-06 2x Jun-08 3x Jun-10 4x

Jun-10 40x

Jun-00

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

Figure 84: ICICI Bank's Dupont analysis
%

Return on Equity Decomposition NII/avg. total assets Non-Interest Income/avg total assets Employee exp Non- Employee exp Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY07 2.0 2.4 (0.6) (1.8) 2.1 (0.8) 14.7 1.1 12 13.2

FY08 2.0 2.4 (0.6) (1.7) 2.2 (0.8) 17.8 1.1 10 11.0

FY09 2.2 2.0 (0.5) (1.3) 2.5 (1.0) 24.1 1.1 8 8.8

FY10 2.2 2.0 (0.5) (1.1) 2.6 (1.2) 24.7 1.1 7 8.0

FY11E 2.3 2.2 (0.6) (1.2) 2.7 (0.9) 28.0 1.3 7 9.5

FY12E 2.4 2.3 (0.6) (1.3) 2.8 (0.8) 28.0 1.4 8 11.3

2 July 2010

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ICICI Bank

Figure 85: SOTP
Units as shown

Particulars ICICI bank ICICI Securities Limited ICICI Prudential Life Insurance Co. Ltd. ICICI Lombard General Insurance Co. Ltd. ICICI Prudential Asset Management Co. Ltd. ICICI Bank UK PLC ICICI Bank Canada Others (incl Home finance and Ventures, PD) Subsidiaries - Total Holding co discount (10%) Value of the BANK
Source: Company, Indiabulls research.

% stake 100% 74% 74% 50% 100% 100%

Value (Rs. bn) 915 27 130 6 21 28 42 25 280 28 1,167

Rs. per share 822 24 117 10 19 25 38 23 256 26 1,052

Valuation methodology 2x core Adj BV on single stage gordon growth model 15x FY12E Profits 13x FY11E NBAP 4% of AUM Valued at 1x BV Valued at 1x BV Ventures valued as 4% of AUM, PD and Home Finance at 10x FY10 PAT

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ICICI Bank

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ICICI Bank

Figure 86: Summary financials
Rs million, year-end March

Profit and loss Interest income Interest expense Net interest income YoY growth (%) Non interest income YoY growth (%) Fee & other income Gains / (losses) on securities Total net income Total operating expenses YoY growth (%) Employee expenses Other operating expenses Pre-provision profit (pre-excep) Exceptionals Pre-provision profit NPA provisions Provisions for depn on invest Other provisions Provisions Profit before tax Taxes Net profit Exceptionals (Post tax) Adj net profit Balance sheet Cash and balance with RBI Inter-bank borrowings Loans & advances Investments Interest earning assets Fixed assets Other assets Total assets Customer deposits O/w CASA Borrowings Interest bearing liabilities Other liabilities Equity capital Reserves Total liabilities

FY08 307,883 234,842 73,041 30 88,108 27 75,210 12,898 161,148 81,542 22 20,789 60,753 79,606 0 79,606 25,420 623 3,003 29,046 50,561 8,984 41,577 0 41,577

FY09 310,926 227,259 83,667 15 76,042 (14) 71,610 4,432 159,709 70,451 (14) 19,717 50,734 94,542 0 94,542 37,500 977 (395) 38,083 56,460 13,588 42,871 0 42,871

FY10 257,066 175,926 81,140 (3) 74,777 (2) 62,970 11,807 155,917 58,598 (17) 19,258 39,340 97,319 0 97,319 43,621 (27) 274 43,868 53,451 13,203 40,247 0 40,247

FY11E 274,800 185,310 89,490 10 77,444 4 71,444 6,000 166,933 67,359 15 21,988 45,371 107,146 0 107,146 35,063 0 1,948 37,011 70,135 19,638 50,497 0 50,497

FY12E 329,994 220,023 109,971 23 90,154 16 84,154 6,000 200,125 85,563 27 27,663 57,900 128,881 0 128,881 36,604 0 2,288 38,891 89,989 25,197 64,792 0 64,792

293,774 86,636 2,256,160 1,114,540 3,751,110 41,094 205,746 3,997,950 2,444,310 637,806 863,990 3,308,300 224,950 11,130 453,570 3,997,950

175,364 124,302 2,183,110 1,030,580 3,513,356 38,016 241,636 3,793,008 2,183,478 626,678 928,050 3,111,528 186,150 11,133 484,200 3,793,008

238,740 150,000 1,812,060 1,208,930 3,409,730 40,000 224,270 3,634,000 2,020,170 842,411 911,500 2,931,670 186,150 11,150 505,030 3,634,000

275,298 175,000 2,083,869 1,400,367 3,934,534 42,000 204,697 4,181,231 2,340,069 926,652 1,103,913 3,443,981 186,150 11,150 539,949 4,181,231

367,772 190,000 2,491,583 1,734,597 4,783,951 44,000 227,367 5,055,318 2,898,580 1,111,982 1,371,386 4,269,967 186,150 11,150 588,051 5,055,318

Source: Company, Indiabulls research.

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ICICI Bank

Summary financials (cont’d)
Rs million, year-end March

Balance sheet structure ratios (%) Loans/deposits Investments /deposits CASA ratio Loan growth Deposit growth Operating ratios (%) NIM Non-interest income/Net income Employee costs as % of total op costs Cost/income Operating cost growth Total prov as % of avg. loans Tax rate Credit quality ratios (%) Gross NPA (Rs mn) Net NPA (Rs mn) Gross NPA Net NPA NPA provisions/avg loans NPA coverage ratio Capital adequacy ratios (%) Total CAR Tier 1 CAR Profitability ratios (%) RoAE RoAA Valuation ratios BVPS (Rs) Price/BV (x) Adjusted BVPS (Rs) Price/Adj. BV (x) EPS (Rs) P/E (x) Dividend yield
Source: Company, Indiabulls research.

FY08 92 46 26 15 6

FY09 100 47 29 -3 -11

FY10 90 60 42 -17 -7

FY11E 89 60 40 15 16

FY12E 86 60 38 20 24

2.1 55 25 51 21.9 1.4 18

2.4 48 28 41 -13.6 1.7 24

2.3 48 33 38 -16.8 2.2 25

2.4 46 33 39 15.0 1.9 28

2.5 45 32 40 27.0 1.7 28

75,795 34,906 3.5 1.5 1.4 57

99,290 45,539 4.2 2.0 1.7 53

94,807 36,432 5.1 1.9 2.2 63

97,662 22,912 4.7 1.1 1.9 77

105,583 16,499 4.2 0.7 1.7 84

14.9 11.3

15.5 11.8

19.4 14.0

17.9 13.2

16.0 12.1

11.0 1.1

8.8 1.1

8.0 1.1

9.5 1.3

11.3 1.4

418 2.3 395 1.8 38.7 18 1.6

445 1.2 416 1.3 33.8 16 2.1

464 1.8 439 1.9 36.2 23 1.5

495 1.7 481 1.7 45.4 19 1.7

539 1.6 528 1.6 58.2 19 1.8

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ICICI Bank

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Institutional
Initiating coverage

Axis Bank
Eq 2010 2 July
India

Outperform

Growth to stability
Axis bank is one of the fast growing, highly profitable and competitive private sector banks in India has entered a new phase of stable growth. We expect loan growth at 25% CAGR over FY10-12 vs. a very high CAGR of 46% during FY04-08. The bank has successfully manoeuvred a stable growth strategy during FY10 under its new management. A large retail franchise, and focus on corporate advances backed by a strong fee income from corporates and retail segments enable Axis to play a direct role in the Indian CAPEX story. Outperform. Advances: Shifting gears
After an high growth period (46% CAGR during FY05-10), we expect bank’s business to consolidate in the medium term (25% CAGR) across FY10-12E and stands to gain disproportionately from opportunities in the banking sector with a strong liability franchise and underwriting capabilities in infrastructure segment.

Financial services
Price: Rs 1,234 Target price: Rs 1,529
Stock details Bloomberg code MCap Rs/US$ mn Outstanding shares (mn) 52-wk H/L (Rs) 3m avg trd vol (US$ mn) Nifty / Sensex AXSB IN 502,023/10,785 407 1,320/705 51.9 5251/17509

Asset quality: All is well
Shareholding pattern (%)
100% 50% 0% Mar-07 Promoters Mar-08 Mar-09 Mar-10 FIIs DIIs Public & Others 13 7 42 39

The bank’s advances book performed well under the testing times of FY08-10. Its restructured book at 2.2% is relatively lower than PSU banks and slippages from the restructured book are expected to be at 20%, in line with the industry. However, we are building in higher provision charges than the peer group at 1.4% primarily on account of slippages from restructured advances.

Fee income: The key differentiator
Relatively high fee income as percentage of average assets is the key differentiator for Axis bank. Its diversified fee income streams have shown consistent performance on a growing balance sheet. We believe the bank’s strengths in loan syndication, leveraging strong liability franchise, and SME relationships to drive fee income growth are hard to be replicated.

Stock performance (%) 1m Absolute Nifty 170 140 110 80 Jul-09 Nov-09 Nifty Index Source: Bloomberg, Prowess. Mar-10 Jul-10 Axis 4.4 3m 5.1 1yr 41.9

Valuations
Axis trades at 2.4xFY12E ABV and 13xFY12E earnings. Steady growth in advances, asset quality issued fading out and improving RoEs make Axis an attractive play on the Indian CAPEX story. We initiate coverage on Axis Bank with an Outperform rating and value the bank using two stage Gordon growth model with a target price of Rs1524.

5.7 (0.7) 21.0

Figure 87: Key financials
Rs million, year-end March

FY08 Net interest income Non interest income Pre provision profits PAT EPS (Rs.) EPS (consensus) (37) EPS growth ROE (%) PE (x) ROA (%) P/ABV (x)
Source: Company , Indiabulls research.

FY09 36,860 28,948 37,228 18,133 50.6 59.2 19.8 24.4 1.4 4.4

FY10 50,045 39,452 52,408 25,148 62.6 60.7 23.6 18.5 19.7 1.7 3.2

FY11E 64,998 42,169 62,277 29,513 73.4 74.6 17.4 17.2 16.8 1.4 2.8

FY12E 81,613 50,915 77,859 36,899 91.8 94.3 25.0 18.7 13.4 1.5 2.4

25,852 17,959 22,145 10,592 31.8 36.3 16.3 38.8 1.2 5.1

Saikiran Pulavarthi
saikiran.pulavarthi@indiabulls.com +91 22 3980 5203

Deepak Agrawal
deepak.agrawal@indiabulls.com +91 22 3980 5496

Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.

Axis Bank

Figure 88: Asset growth has been moderating after very high growth in FY06-08
Units as shown

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 FY06

65 43

62 37

70 60 50 40 28 25 25 30 20 10 0

FY07

FY08

FY09

FY10

FY11E

FY12E

Net loans & advances (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

Figure 89: Comfortable provision coverage ratio will rule out spike in provisions
%

2.5 2.0 1.5 1.0 0.5 0.0 FY06 FY07 FY08 FY09 FY10 FY11E 1.7 1.0 1.1 0.7 0.8 0.4 1.0 0.4 1.2 1.7

2.0

0.4

0.5

0.6

80 70 60 50 40 30 20 10 0

FY12E

Provision coverage ratio - RHS
Source: Company, Indiabulls research.

Gross NPL % - LHS

Net NPL % - LHS

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Axis Bank

Figure 90: Factoring lower CASA % in FY11 on the back of revival in demand for credit, which will lead to faster growth in demand deposits
Units as shown

1,200 1,000 800 600 400 200 0 FY06 FY07 FY08 FY09 FY10 40 40 46 43

47 45

48 45 46 44 42 40 38 36 FY11E FY12E

CASA (Rs bn) - LHS
Source: Company, Indiabulls research.

CASA % - RHS

Figure 91: NIMs will continue to be strong on the back of strong CASA growth
Units as shown

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY06 NIMs - LHS FY07 FY08 FY09 FY10 FY11E FY12E

10 8 6 4 2 0

Average cost of funds - RHS

Average yield on assets - RHS

Source: Company, Indiabulls research.

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Axis Bank

Figure 92: Fee income growth to be in line with growth in advances
Units as shown

50 40 30 20 10 0 FY06 FY07 48 63

88 64 25 25 FY11E FY12E

100 80 60 40 20 0 20

FY08

FY09

FY10

Fee income (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

Figure 93: High proportion of fee income has differentiated Axis Bank
Units as shown

40 35 30 25 20 15 10 5 0

1.4 1.0 1.1

1.7

1.6

1.6

1.6

1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income/total income (%) - LHS
Source: Company, Indiabulls research.

Fee income/total assets (%) - RHS

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Axis Bank

Figure 94: Contribution of trading profits going down, performance driven by core operations
Units as shown

60 50 40 30 20 10 0 FY06 FY07 FY08 FY09 FY10 18 16 14

21 13 9 6

24 21 18 15 12 9 6 3 0

FY11E

FY12E

Trading profits (Rs bn) - LHS
Source: Company, Indiabulls research.

PBT (Rs bn) - LHS

Trading profits / PBT (%) - RHS

Figure 95: Operating costs lower compared to other private sector banks due to wholesale banking business model
%

52 50 48 46 44 42 40 38 36 FY06

2.4 1.9 2.0

3.0 2.2 2.4 2.2 2.1 2.5 2.0 1.5 1.0 0.5 0.0

FY07

FY08

FY09

FY10

FY11E

FY12E

Cost income ratio (%) - LHS
Source: Company, Indiabulls research.

Opex/average assets (%) - RHS

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Axis Bank

Figure 96: PE band
Rs

Figure 97: PVB band
Rs

1,800 1,200 600 0 Jun-00 Jun-02 Price Jun-04 5x Jun-06 11x Jun-08 17x

23x 17x 11x 5x Jun-10 23x

2,000 1,500 1,000 500 0 Jun-00 Jun-02 Price Jun-04 1x Jun-06 2x Jun-08 3x

4x 3x 2x 1x Jun-10 4x

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

Figure 98: Axis’s DuPont analysis
%

Return on Equity Decomposition NII/avg. total assets Non-Interest Income/avg total assets Employee exp / avg assets Non- Employee exp / avg assets Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY07 2.4 1.6 (0.6) (1.3) 2.0 (0.4) 34.0 1.0 20 20.9

FY08 2.8 2.0 (0.8) (1.6) 2.4 (0.6) 35.2 1.2 14 16.3

FY09 2.8 2.2 (0.8) (1.4) 2.8 (0.7) 34.8 1.4 14 19.8

FY10 3.3 2.6 (0.8) (1.6) 3.5 (0.9) 34.7 1.7 11 18.5

FY11E 3.2 2.1 (0.8) (1.4) 3.1 (0.8) 34.5 1.4 12 17.2

FY12E 3.2 2.0 (0.8) (1.4) 3.1 (0.8) 34.5 1.5 13 18.7

Figure 99: Valuation summary
%

CoE Rf G - growth phase Beta Market Return Growth (Gn) Normalised RoE Initial Payout ratio (P) Perpetual Payout ratio (Pn) Target P/Adj BV - Two Stage Premium / (Discount) Assigned Multiple
Source: Company, Indiabulls research.

Axis 14.0 7.7 30.0 1.0 14.0 5.0 19.0 20 30 2.3 30.0 3.0

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Axis Bank

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Axis Bank

Figure 100: Summary financials
Rs million, year-end March

Profit and loss Interest income Interest expense Net interest income YoY growth (%) Non interest income YoY growth (%) Fee & other income Gains / (losses) on securities Total net income Total operating expenses YoY growth (%) Employee expenses Other operating expenses Pre-provision profit Loan loss provisions Provisions for depn on invest Other provisions Provisions Profit before tax Taxes Net profit Exceptionals (Post tax) Adj net profit Balance sheet Cash and balance with RBI Inter-bank borrowings Loans & advances Investments Interest earning assets Fixed assets Other assets Total assets Customer deposits O/w CASA Borrowings Interest bearing liabilities Other liabilities Equity capital Reserves Total liabilities
Source: Company, Indiabulls research.

FY08 70,051 44,198 25,852 76 17,959 78 15,908 2,051 43,811 21,666 78 7,521 14,146 22,145 3,440 65 2,291 5,796 16,349 5,757 10,592 0 10,592

FY09 108,353 71,493 36,860 43 28,948 61 29,260 2,802 65,808 28,580 32 9,976 18,604 37,228 7,322 1,078 997 9,397 27,831 9,698 18,133 0 18,133

FY10 116,380 66,335 50,045 36 39,452 36 30,852 7,330 89,497 37,089 30 12,551 24,539 52,408 13,570 (220) 545 13,892 38,516 13,368 25,148 0 25,148

FY11E 164,017 99,019 64,998 30 42,169 7 35,847 3,100 107,167 44,890 21 15,444 29,446 62,277 16,434 0 785 17,219 45,058 15,545 29,513 0 29,513

FY12E 209,415 127,802 81,613 26 50,915 21 41,637 3,100 132,528 54,669 22 19,334 35,335 77,859 20,543 0 981 21,524 56,335 19,436 36,899 0 36,899

73,056 51,986 596,611 337,051 1,058,703 9,228 27,845 1,095,776 876,193 400,253 56,240 932,434 1,008,123 3,577 83,941 1,095,776

94,192 55,977 815,568 463,303 1,429,040 10,729 37,451 1,477,220 1,173,741 506,437 101,855 1,275,595 1,375,072 3,590 98,546 1,477,219

94,739 57,326 1,043,431 559,748 1,755,244 12,224 39,011 1,806,479 1,413,000 660,300 171,696 1,584,696 1,646,030 4,020 156,393 1,806,443

137,626 57,326 1,304,289 715,047 2,214,288 13,447 39,011 2,266,745 1,811,513 815,181 206,035 2,017,547 2,083,874 4,020 178,851 2,266,745

186,364 57,326 1,630,361 893,809 2,767,860 14,791 39,011 2,821,661 2,264,391 1,018,976 247,242 2,511,632 2,610,357 4,020 207,285 2,821,661

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Axis Bank

Summary financials (cont'd)
Rs million, year-end March

Balance sheet structure ratios (%) Loans/deposits Investments/deposits CASA ratio Loan growth Deposit growth Operating ratios (%) NIM Non-interest income/net income Employee costs as % of total op costs Cost/income Operating cost growth Total prov as % of avg. loans Tax rate Credit quality ratios (%) Gross NPA (Rs mn) Net NPA (Rs mn) Gross NPA Net NPA Slippage NPA coverage ratio Capital adequacy ratios (%) Total CAR Tier 1 CAR Profitability ratios (%) RoAE RoAA Valuation ratios BVPS (Rs) Price/BV (x) Adjusted BVPS (Rs) Price/Adj. BV (x) EPS (Rs) P/E (x) Dividend yield
Source: Company, Indiabulls research.

FY08 68 38 46 62 49

FY09 69 39 43 37 34

FY10 74 39 47 28 20

FY11E 72 39 45 25 28

FY12E 72 39 45 25 25

3.1 41.0 34.7 49.5 77.7 1.3 35.2

3.0 44.0 34.9 43.4 31.9 1.4 34.8

3.4 44.1 33.8 41.4 29.8 1.6 34.7

3.3 39.3 34.4 41.9 21.0 1.5 34.5

3.3 38.4 35.4 41.3 21.8 1.5 34.5

4,946 2,483 0.8 0.4 0.8 50

8,978 3,270 1.0 0.4 1.3 64

13,195 4,442 1.2 0.4 2.1 66

23,074 6,702 1.7 0.5 1.9 71

33,119 9,125 2.0 0.6 1.9 72

13.7 10.2

13.9 9.4

15.8 11.2

13.9 10.3

12.7 9.6

16.3 1.2

19.8 1.4

18.5 1.7

17.2 1.4

18.7 1.5

245 5.0 240 5.1 31.8 39 0.5

285 4.3 278 4.4 50.6 24 0.8

399 3.1 391 3.2 62.6 20 1.0

455 2.7 443 2.8 73.4 17 1.2

526 2.3 510 2.4 91.8 13 1.5

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Axis Bank

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Institutional
Initiating coverage

Punjab National Bank
Eq 2010 2 July
India

Outperform

Structurally strong retail franchise
We believe PNB will be to maintain its growth along with its higher-thanindustry NIMs (3.3%) and RoEs (above 23%). Asset quality has held up reasonably well despite its greater SME and agricultural focus and higher restructured book. Earnings growth is expected to be healthy at 25% over FY11-12 on the back of strong demand for credit and healthy growth in fee-based income with controlled rise in NPAs. We initiate with an Outperform and a target price of Rs 1,276 an upside of 25% from current levels. Superior core performance
Ability to sustain superior NIMs in a volatile interest rate scenario demonstrates structurally strong liability franchise with superior RoAs at 1.5% for FY10. Fee-based income has been a key focus area which can be seen from its 23% CAGR growth over FY08-10 and we expect further improvement as PNB leverages technology more efficiently and increases cross-selling of products.

Financial services
Price: Rs 1,020 Target price: Rs 1,276
Stock details Bloomberg code MCap Rs/US$ mn Outstanding shares (mn) 52-wk H/L (Rs) 3m avg trd vol (US$ mn) Nifty / Sensex PNB IN 321,719/6,914 315 1,145/598 7.5 5251/17509

Shareholding pattern (%)
100% 50% 0% Mar-07 Promoters Mar-08 Mar-09 Mar-10 FIIs DIIs Public & Others 5 18 19 58

Asset quality continues to remain healthy
PNB restructured Rs120bn worth of advances up to March 2010 constituting 6.4% of advances of which Rs7.7bn (6.4% of restructured advances) slipped into NPAs. We expect less than 20% slippages from restructured accounts in FY11 on the back of an improving economy and expect the bank to maintain gross NPAs at less than 2% from 1.7% in FY10. We believe the seasoning of restructured advances would bring comfort to investors after 1QFY11.

Valuation
Stock performance (%) 1m Absolute Nifty 170 140 110 80 Jul-09 Nov-09 Nifty Index Source: Bloomberg, Prowess. Mar-10 Jul-10 PNB 2.3 3m 0.4 1yr 49.2

5.7 (0.7) 21.0

The stock trades at 1.4xFY12E ABV and 5.6xFY12E earnings. The stock now trades at a higher end of its historical range. Of late, the valuation gap between BoB and PNB has faded off primarily on account of asset quality concerns. We recommend switch to PNB from BoB as its strong retail franchise, superior operating performance, and strong asset quality will sustain premium valuations assigned to PNB with asset quality concerns fading off after 1HFY11. Initiate coverage on PNB with an Outperform rating and value the bank using the Gordon growth model with a target price of Rs1,276. Superior management quality, stable and long tenure should ensure strategic continuity and investor comfort.

Figure 101: Key financials
Rs million, year-end March

Saikiran Pulavarthi
saikiran.pulavarthi@indiabulls.com +91 22 3980 5203

Deepak Agrawal
deepak.agrawal@indiabulls.com +91 22 3980 5496

Net interest income Non interest income Pre provision profits PAT EPS (Rs.) EPS (consensus) (14) EPS growth ROE (%) PE (x) ROA (%) P/ABV (x)

FY08 55,342 19,976 40,115 20,541 65.1 78.1 18.1 15.7 1.1 3.1

FY09 70,308 29,176 57,733 31,203 99.0 51.9 22.9 10.3 1.4 2.5

FY10 87,838 32,229 73,976 41,507 131.6 115.4 33.0 25.5 7.8 1.5 2.1

FY11E 107,942 33,639 83,698 46,353 147.0 136.9 11.7 23.5 6.9 1.4 1.7

FY12E 133,292 39,997 102,821 57,007 180.8 169.2 23.0 23.8 5.6 1.4 1.4

Source: Company , Indiabulls research.

Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.

Punjab National Bank

Figure 102: Asset quality steadily improving
Units as shown

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY06

4.1 3.4 2.7 1.8 0.7 0.3 FY07 FY08 0.6 FY09 2.0 0.6 0.2 FY10 FY11E 2.1 0.6 2.2

0.6 FY12E

100 90 80 70 60 50 40 30 20 10 -

Provision coverage % - RHS
Source: Company, Indiabulls research.

Gross NPL % - LHS

Net NPL % - LHS

Figure 103: Consistent growth in advances has made PNB one of the steady performers
Units as shown

3,000 2,500 2,000 1,500 1,000 500 FY06 24

29 24

35 29 21 23 30 23 25 20 15 10 5 0

FY07

FY08

FY09

FY10

FY11E

FY12E

Net loans & advances (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

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Punjab National Bank

Figure 104: CASA levels much higher than Industry average of 34%
Units as shown

1,600 1,400 1,200 1,000 800 600 400 200 0

49

60 46 43 38 41 40 50 40 40 30 20 10 0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

CASA (Rs bn) - LHS
Source: Company, Indiabulls research.

CASA % - RHS

Figure 105: High CASA % coupled with reasonable growth in advances ensures that margins remain strong
Units as shown

3.7 3.6 3.5 3.4 3.3 3.2 3.1 3.0 FY06 NIMs - LHS FY07 FY08 FY09 FY10 FY11E FY12E

10 9 8 7 6 5 4 3 2 1 0

Average cost of funds - RHS

Average yield on assets - RHS

Source: Company, Indiabulls research.

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Punjab National Bank

Figure 106: Reaping the benefits of increased cross-selling and corporate relationships
Units as shown

30 25 20 15 10 5 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E 8.9 14.0 28.9 24.4 21.4 25.0 25.0

35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Fee income (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

Figure 107: Improving fee income as % of total income seems a tough task
Units as shown

15.5 15.0 14.5 14.0 13.5 13.0 12.5 12.0 11.5 11.0 FY06

0.6 0.6 0.6 0.5 0.6 0.6 0.6

0.62 0.60 0.58 0.56 0.54 0.52 0.50 0.48 0.46

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income/total income (%) - LHS
Source: Company, Indiabulls research.

Fee income/total assets (%) - RHS

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Punjab National Bank

Figure 108: Contribution of trading profits going down as core operations drive performance
Units as shown

90 80 70 60 50 40 30 20 10 0 FY06

25 21 15 13 14 13 7 6 20 15 10 5 0 FY07 FY08 FY09 FY10 FY11E FY12E

Trading profits (Rs bn) - LHS
Source: Company, Indiabulls research.

PBT (Rs bn) - LHS

Trading profits/PBT (%) - RHS

Figure 109: Further cost leverage from current levels will be a challenge as banks need to invest for future growth
Units as shown

60 50 40 30 20 10 0 FY06

2.2

2.2

2.5 2.0 1.9 1.8 1.7 1.7 2.0 1.5 1.0 0.5 0.0

FY07

FY08

FY09

FY10

FY11E

FY12E

Cost income ratio (%) - LHS
Source: Company, Indiabulls research.

Opex/average assets (%) - RHS

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Punjab National Bank

Figure 110: PE band
Rs

Figure 111: PBV band
Rs

1,800 1,500 1,200 900 600 300 0 Jun-04 Price Jun-06 3x 6x Jun-08 9x

12x 9x 6x 3x

1,250 1,000 750 500 250 0 Jun-04 Price Jun-06 0.5x 1.0x Jun-08 1.5x

2.0x 1.5x 1.0x 0.5x Jun-10 2.0x

Jun-10 12x

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

Figure 112: PNB's Dupont analysis
%

Return on Equity Decomposition NII/avg. total assets Non-Interest Income/avg total assets Employee exp / avg assets Non- Employee exp / avg assets Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY07 3.4 1.1 (1.5) (0.6) 2.4 (0.9) 35.3 0.9 16 14.2

FY08 3.1 1.1 (1.4) (0.6) 2.2 (0.4) 37.8 1.1 16 18.1

FY09 3.2 1.3 (1.3) (0.6) 2.6 (0.4) 34.9 1.4 16 22.9

FY10 3.2 1.2 (1.2) (0.6) 2.7 (0.5) 32.5 1.5 17 24.9

FY11E 3.3 1.0 (1.2) (0.6) 2.5 (0.4) 33.0 1.4 17 23.5

FY12E 3.2 1.0 (1.2) (0.5) 2.5 (0.4) 33.0 1.4 17 23.8

Figure 113: Valuation summary
%

CoE Rf Beta Market Return Growth (Gn) Normalised RoE Target P/Adj BV - Single Stage Premium / (Discount) Assigned Multiple
Source: Company, Indiabulls research.

PNB 13.4 7.7 0.9 14.0 5.0 18.0 1.5 10.0 1.7

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Punjab National Bank

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Punjab National Bank

Figure 114: Summary financials
Rs million, year-end March

Profit and loss Interest income Interest expense Net interest income YoY growth (%) Non interest income YoY growth (%) Fee & other income Gains / (Losses) on securities Total net income Total operating expenses YoY growth (%) Employee expenses Other operating expenses Pre-provision profit (pre-excep) Exceptionals Pre-provision profit Loan loss provision Provisions for depn on invest Other provisions Provisions Profit before tax Taxes Net profit Exceptionals (Post tax) Adj net profit Balance sheet Cash and balance with RBI Inter-bank borrowings Loans & advances Investments Interest earning assets Fixed assets Other assets Total assets Customer deposits O/w CASA Borrowings Interest bearing liabilities Other liabilities Equity capital Reserves Total liabilities

FY08 142,650 87,308 55,342 6.2 19,976 15.7 15,545 4,431 75,317 35,254 6.0 24,615 10,639 40,115 40,115 2,771 1,042 3,291 7,103 33,012 12,472 20,541 4,978 25,519

FY09 193,262 122,954 70,308 27.0 29,176 47.2 22,529 6,647 99,484 42,062 19.3 29,244 12,818 57,733 57,733 8,206 2,163 3,726 9,769 47,964 16,760 31,203 31,203

FY10 217,278 129,440 87,838 24.9 32,229 9.3 24,199 8,030 120,067 47,619 13.2 31,211 16,408 72,448 1,528 73,976 10,350 1,740 2,125 12,475 61,501 19,994 41,507 (1,528) 39,979

FY11E 276,494 168,552 107,942 22.9 33,639 4.4 28,639 5,000 141,581 57,883 21.6 39,014 18,869 83,698 83,698 12,484 2,030 14,514 69,184 22,831 46,353 46,353

FY12E 349,188 215,896 133,292 23.5 39,997 18.9 34,997 5,000 173,289 70,467 21.7 48,768 21,699 102,821 102,821 15,355 2,382 17,737 85,085 28,078 57,007 57,007

152,581 35,725 1,195,016 539,917 1,923,239 23,155 43,808 1,990,203 1,664,572 715,609 54,465 1,719,038 1,867,020 3,153 120,030 1,990,203

170,582 43,549 1,547,030 633,851 2,395,013 23,971 50,202 2,469,190 2,097,600 814,599 43,743 2,141,343 2,322,644 3,153 143,383 2,469,180

204,451 52,359 1,866,010 747,990 2,870,810 23,971 50,202 2,944,983 2,493,300 1,018,500 91,983 2,585,283 2,766,584 3,153 175,246 2,944,983

223,873 55,202 2,295,192 1,042,698 3,616,965 23,971 50,202 3,691,138 3,066,759 1,226,704 227,253 3,294,012 3,475,313 3,153 212,673 3,691,138

275,364 67,898 2,823,087 1,282,519 4,448,867 23,971 50,202 4,523,040 3,772,114 1,508,845 306,614 4,078,727 4,260,028 3,153 259,860 4,523,040

Source: Company, Indiabulls research.

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Punjab National Bank

Summary financials (cont'd)
Rs million, yea-end March

Balance sheet structure ratios (%) Loans/deposits Investments / deposits CASA ratio Loan growth Deposit growth Operating ratios (%) NIM Non-interest income/Net income Employee costs as % of total op costs Cost/income Operating cost growth Total prov as % of avg. loans Tax rate Credit quality ratios (%) Gross NPA (Rs mn) Net NPA (Rs mn) Gross NPA Net NPA Slippage NPA coverage ratio Capital adequacy ratios (%) Total CAR Tier 1 CAR Profitability ratios (%) RoAE RoAA Valuation ratios BVPS (Rs) Price/BV (x) Adjusted BVPS (Rs) Price/Adj. BV (x) EPS (Rs) P/E (x) Dividend yield
Source: Company, Indiabulls research.

FY08 71.8 32.4 43.0 23.7 19.0

FY09 73.8 32.1 38.8 29.5 26.0

FY10 74.8 30.0 40.8 20.6 18.9

FY11E 74.8 34.0 40.0 23.0 23.0

FY12E 74.8 34.0 40.0 23.0 23.0

3.3 26.5 69.8 46.8 6.0 0.7 37.8

3.3 29.3 69.5 42.3 19.3 0.7 34.9

3.3 26.8 65.5 39.7 (13.2) 0.9 32.5

3.3 23.8 67.4 40.9 21.6 1.1 33.0

3.3 23.1 69.2 40.7 21.7 1.1 33.0

33,193 7,538 2.7 0.6 1.8 77

27,673 2,639 1.8 0.2 1.3 90

37,320 11,196 2.0 0.6 4.0 70

48,199 13,496 2.1 0.6 5.0 72

62,108 16,148 2.2 0.6 5.0 74

13.5 9.0

14.0 9.0

14.2 9.1

13.4 9.4

12.8 9.5

18.1 1.1

22.9 1.4

25.5 1.5

23.5 1.4

23.8 1.4

342 3.0 325 3.1 65 16 1.3

417 2.4 411 2.5 99 10 2.0

518 2.0 493 2.1 132 8 2.2

636 1.6 607 1.7 147 7 2.4

786 1.3 750 1.4 181 6 2.6

2 July 2010

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69

Punjab National Bank

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70

Institutional
Initiating coverage

Union Bank of India
Eq 2010 2 July
India

Outperform

Transitioning from Midcap to Largecap
Union Bank (UBI) continues its aggressive growth phase with 23% CAGR growth expected in advances over FY10-12 in line with growth rates of FY07-10. The bank has leveraged technology to offer differentiated offerings to customers. Strong growth in business with increased focus on Infrastructure, retail and MSME advances, growing traction from fee-based income, and expected improvement in asset quality make UBI attractive. We initiate with an Outperform and a target price of Rs.381 Advances: In top gear
Advances are expected to grow at over 23% over FY11-12 in line with growth rates of FY07-10. UBI has been building capability in the infrastructure segment and we expect this segment to contribute 20% of advances in next few years. Retail advances (up 34% yoy) and the MSME segment (up 40%) yoy in FY10 will continue to show strong growth going ahead.

Financial services
Price: Rs 314 Target price: Rs 381
Stock details Bloomberg code MCap Rs/US$ mn Outstanding shares (mn) 52-wk H/L (Rs) 3m avg trd vol (US$ mn) Nifty / Sensex UNBK IN 158,355/3,403 505 349/200 4.6 5251/17509

Shareholding pattern (%)
100% 50% 0% Mar-07 Promoters Mar-08 Mar-09 Mar-10 FIIs DIIs Public & Others 14 13 17 55

Fee-based income: Building new products to sustain growth
Fee-based income has grown at 47% CAGR over FY07-10 on the back of strong technology to offer differentiated offerings to retail and corporate customers. Fee income as % of total income has gone up from 8% in FY07 to 15% in FY09. UBI has been building capabilities in the infrastructure finance space and entering new products like debt syndication and transaction banking, which will help sustain growth in this segment.

Asset quality: Expected to improve from current levels
Stock performance (%) 1m Absolute Nifty 130 120 110 100 90 80 Jul-09 Nov-09 Nifty Index Mar-10 Jul-10 Union 11.1 3m 3.5 1yr 26.3

5.7 (0.7) 21.0

UBI restructured 4% of advances (Rs49.5bn) under the RBI scheme up to FY10 of which Rs4.8bn (~10%) slipped into NPAs. Gross NPAs increased from 1.96% in FY09 to 2.2% in FY10. Asset quality continues to remain healthy and management has guided Gross NPAs at ~2.1% for FY11, which we believe should be attainable as we do not expect any major slippages from restructured advances.

Valuation
UBI trades at 1.2xFY12E ABV and 5.2xFY12E earnings with an RoE of 21.9% in FY12E. Transition from midcap to large cap will improve the multiple the bank commands. Strong growth in earnings and improvement in asset quality make UBI an attractive proposition. Outperform. Figure 115: Key financials
Rs million, year-end March

Source: Bloomberg, Prowess.

Saikiran Pulavarthi
saikiran.pulavarthi@indiabulls.com +91 22 3980 5203

Deepak Agrawal
deepak.agrawal@indiabulls.com +91 22 3980 5496

Net interest income Non interest income Pre provision profits PAT EPS (Rs.) EPS (consensus) (1) EPS growth ROE (%) PE (x) ROA (%) P/ABV (x)
Source: Company , Indiabulls research.

FY08 28,537 13,197 25,804 13,871 27.5 64.1 22.1 11.4 1.2 2.9

FY09 38,136 14,835 30,830 17,280 34.2 24.6 21.5 9.2 1.2 2.3

FY10 41,924 19,750 36,596 20,745 41.1 38.7 20.1 21.9 7.6 1.2 1.9

FY11E 58,588 17,290 45,528 24,095 47.7 46.0 16.1 21.0 6.6 1.1 1.6

FY12E 73,453 20,488 57,284 30,424 60.2 55.5 26.3 21.9 5.2 1.2 1.2

Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.

Union Bank of India

Figure 116: Advances growth continues in top gear
Units as shown

2,000 1,500 1,000 500 0 FY06

33

30 23 17 19 23 23

35 30 25 20 15 10 5 0

FY07

FY08

FY09

FY10

FY11E

FY12E

Net loans & advances (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

Figure 117: Healthy growth in CASA over the years
Units as shown

900 800 700 600 500 400 300 200 100 0

34

35

33 32 30

34

32

36 35 34 33 32 31 30 29 28 27

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

CASA (Rs bn) - LHS
Source: Company, Indiabulls research.

CASA % - RHS

2 July 2010

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72

Union Bank of India

Figure 118: FY10 margins were lower due to excess liquidity. Margins are expected to come back to reasonable levels FY11 onwards
Units as shown

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY06

12.0 10.4 7.4 4.9 5.9 6.7 9.1 8.9 6.8 5.7 5.9 7.7 8.2 10.0 8.5 6.1 8.0 6.0 4.0 2.0 0.0 FY07 FY08 FY09 FY10 FY11E FY12E

NIMs - LHS

Average cost of funds - RHS

Average yield on assets - RHS

Source: Company, Indiabulls research.

Figure 119: New income streams like loan syndication and transaction banking are driving growth
Units as shown

16 14 12 10 8 6 4 2 0

85

23

26

34

33

25

25

90 80 70 60 50 40 30 20 10 0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

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Union Bank of India

Figure 120: Improving fee income as % of total income seems a tough task
Units as shown

18 16 14 12 10 8 6 4 2 0

0.4 0.2 0.3

0.4

0.5

0.5

0.5

0.6 0.5 0.4 0.3 0.2 0.1 0.0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income/total income (%) - LHS
Source: Company, Indiabulls research.

Fee income/total assets (%) - RHS

Figure 121: Contribution of trading profits declining as core operations drive performance
Units as shown

60 50 40 30 20 10 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E Trading profits (Rs bn) - LHS
Source: Company, Indiabulls research.

25 20 17 7 7 5 20 20 15 10 6 5 0 PBT (Rs bn) - LHS Trading profits / PBT (%) - RHS

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74

Union Bank of India

Figure 122: Further improvement from the current levels will be a challenge as UBI needs to invest for future growth
Units as shown

60 50 40 30 20 10 0 FY06

1.7

2.0 1.5 1.4 1.5 1.4 1.4 1.4 1.5 1.0 0.5 0.0 FY07 FY08 FY09 FY10 FY11E FY12E

Cost income ratio (%) - LHS
Source: Company, Indiabulls research.

Opex/average assets (%) - RHS

Figure 123: Concerns on asset quality fading
Units as shown

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY06

100 3.8 2.9 2.2 1.6 1.0 FY07 FY08 0.2 FY09 0.3 FY10 FY11E 2.0 2.2 0.8 2.3 2.3 80 60 40 20 0 FY12E

0.8

0.7

Provision coverage ratio - RHS
Source: Company, Indiabulls research.

Gross NPL ratio - LHS

Net NPL ratio - LHS

2 July 2010

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75

Union Bank of India

Figure 124: PE band
Rs

Figure 125: PE band
Rs

500 375 250 125 0 Jun-04 Price Jun-06 4x 6x Jun-08 8x

10x 8x 6x 4x

400 300 200 100 0

2.0x 1.5x 1.0x 0.5x

Jun-10 10x

Jun-04 Price

Jun-06 0.5x 1.0x

Jun-08 1.5x

Jun-10 2.0x

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

Figure 126: Union Bank's DuPont analysis
%

Return on Equity Decomposition NII/avg. total assets Non-Interest Income/avg total assets Employee exp / avg assets Non- Employee exp / avg assets Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY07 2.7 0.9 (0.9) (0.6) 2.1 (0.6) 38.8 0.9 20 17.3

FY08 2.4 1.1 (0.7) (0.6) 2.2 (0.6) 25.1 1.2 19 22.1

FY09 2.7 1.0 (0.8) (0.7) 2.2 (0.5) 26.3 1.2 18 21.5

FY10 2.4 1.1 (0.8) (0.7) 2.1 (0.5) 26.8 1.2 19 21.9

FY11E 2.7 0.8 (0.8) (0.6) 2.1 (0.6) 28.0 1.1 19 21.0

FY12E 2.9 0.8 (0.8) (0.7) 2.2 (0.6) 28.0 1.2 18 21.9

Figure 127: Valuation summary
%

CoE Rf Beta Market Return Growth (Gn) Normalised RoE Target P/Adj BV - Single Stage Premium / (Discount) Assigned Multiple
Source: Company, Indiabulls research.

Union 13.8 7.7 1.0 14.0 5.0 18.0 1.5 1.5

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Union Bank of India

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Union Bank of India

Figure 128: Summary financials
Rs million, year-end March

Profit and loss Interest income Interest expense Net interest income YoY growth (%) Non interest income YoY growth (%) Fee & other income Gains / (Losses) on securities Total net income Total operating expenses YoY growth (%) Employee expenses Other operating expenses Pre-provision profit Loan loss provisions Provisions for depn on invest Other provisions Provisions Profit before tax Taxes Net profit Exceptionals (Post tax) Adj net profit Balance sheet Cash and balance with RBI Inter-bank borrowings Loans & advances Investments Interest earning assets Fixed assets Other assets Total assets Customer deposits O/w CASA Borrowings Interest bearing liabilities Other liabilities Equity capital Reserves Total liabilities

FY08 92,146 63,610 28,537 8 13,197 57 6,330 5097 41,734 15,930 8 8,453 7,477 25,804 5,852 300 1,137 7,289 18,515 4,644 13,871 (2) 13,869

FY09 118,894 80,758 38,136 34 14,835 12 8,180 5170 52,971 22,140 39 11,518 10,622 30,830 5,460 (390) 2,300 7,370 23,460 6,180 17,280 0 17,280

FY10 133,027 91,103 41,924 10 19,750 33 10,620 7300 61,674 25,078 13 13,545 11,534 36,596 6,990 (1,170) 2,440 8,260 28,336 7,580 20,745 0 20,745

FY11E 175,160 116,572 58,588 40 17,290 (12) 13,192 3000 75,878 30,350 21 16,509 13,840 45,528 9,313 0 2,750 12,063 33,466 9,370 24,095 0 24,095

FY12E 212,906 139,452 73,453 25 20,488 18 16,390 3000 93,942 36,657 21 20,049 16,608 57,284 11,454 0 3,575 15,029 42,255 11,831 30,424 0 30,424

94,547 6,431 743,483 338,224 1,182,685 22,004 36,041 1,240,730 1,038,586 362,040 47,605 1,086,191 1,167,255 5,051 68,426 1,240,732

89,920 69,929 965,342 429,967 1,555,158 23,352 31,242 1,609,752 1,387,028 417,112 38,849 1,425,877 1,522,351 5,051 82,352 1,609,754

124,682 33,084 1,193,153 544,035 1,894,955 23,054 33,609 1,951,618 1,696,402 539,572 92,153 1,788,555 1,847,380 5,051 99,187 1,951,618

124,682 40,458 1,467,578 622,346 2,255,065 24,207 35,289 2,314,562 2,074,488 684,581 53,881 2,128,369 2,189,199 5,051 120,311 2,314,562

124,682 48,550 1,805,121 746,816 2,725,169 25,417 37,054 2,787,640 2,489,386 846,391 78,594 2,567,979 2,634,809 5,051 147,780 2,787,640

Source: Company, Indiabulls research.

2 July 2010

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78

Union Bank of India

Summary financials (cont'd)
Rs million, year-end March

Balance sheet structure ratios (%) Loans/deposits Investments / Deposits CASA ratio Loan growth Deposit growth Operating ratios (%) NIM Non-interest income/net income Employee costs as % of total op costs Cost/Income Operating cost growth Total prov as % of avg. loans Tax rate Credit quality ratios (%) Gross NPA (Rs mn) Net NPA (Rs mn) Gross NPA Net NPA Slippage NPA coverage ratio Capital adequacy ratios (%) Total CAR Tier 1 CAR Profitability ratios (%) RoAE RoAA Valuation ratios BVPS (Rs) Price/BV (x) Adjusted BVPS (Rs) Price/Adj. BV (x) EPS (Rs) P/E (x) Dividend yield
Source: Company, Indiabulls research.

FY08 72 33 35 19 22

FY09 70 31 30 30 34

FY10 70 31 32 23 23

FY11E 71 30 33 23 22

FY12E 73 30 34 23 20

2.8 32 53 38 8 1.1 25

2.9 28 52 42 39 0.9 26

2.4 32 54 41 13 0.8 27

2.8 23 54 40 21 0.9 28

2.9 22 55 39 21 0.9 28

16,566 1,276 2.2 0.2 1.1 92

19,234 3,259 2.0 0.3 1.4 83

26,714 9,650 2.2 0.8 1.7 64

34,068 11,420 2.3 0.8 1.5 66

42,202 12,128 2.3 0.7 1.5 71

12.5 7.5

12.0 7.4

12.5 7.9

12.5 8.3

12.2 8.4

22.1 1.2

21.5 1.2

21.9 1.2

21.0 1.1

21.9 1.2

111 2.8 110 2.9 27.5 11 1.3

140 2.2 135 2.3 34.2 9 1.6

173 1.8 161 1.9 41.1 8 1.8

215 1.5 200 1.6 47.7 7 1.6

269 1.2 254 1.2 60.2 5 1.6

2 July 2010

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79

Union Bank of India

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2 July 2010

Indiabulls Research

80

Institutional
Initiating coverage

HDFC Bank
Eq 2010 2 July
India

Outperform

Steady as always
Consistent and steady operating performance has been the hallmark of HDFC Bank. The underlying strength of its business model backed by high CASA deposits, higher proportion of advances in the retail segment coupled with lower NPAs make HDFC Bank’s business model unique and difficult to replicate. The bank offers the best play on the India consumption story. We initiate with an Outperform and a target price of Rs 2,297. Inherent strength of business model
HDFC operates differently from the traditional business model followed by most banks in India. It has 55% retail advances with minimal housing loans vs. 20-25% for most other banks. NIMs at 4.3% are a result of high yields on retail advances and 52% CASA deposits. Its fee income forms 23% of total income, which is a healthy sign considering the fact that HDFC Bank does not operate in the debt syndication space like ICICI Bank and Axis Bank.

Financial services
Price: Rs 1,907 Target price: Rs 2,297
Stock details Bloomberg code MCap Rs/US$ mn Outstanding shares (mn) 52-wk H/L (Rs) 3m avg trd vol (US$ mn) Nifty / Sensex HDFCB IN 876,814/18,842 460 2010/1333 30.2 5251/17509

Shareholding pattern (%)
100% 20 12 44 24 Mar-07 Promoters Mar-08 FIIs DIIs Mar-09 Mar-10

Asset quality: Better times ahead
HDFC Bank’s gross NPAs have declined from 2% in FY09 to 1.6% in FY10 as advances of Centurion bank of Punjab (CBoP) were run down. Only 0.3% of the advances were restructured, which speaks of superior credit underwriting standards.

50%

Time to bear fruits from CBoP merger
Based on our calculations, CBoP was an expensive merger for HDFC Bank. However, HDFC Bank took up the challenge of cleaning up CBoP’s portfolio of advances and bringing the acquired bank to HDFC Bank standards in terms of operating parameters. CASA levels which had declined to 44% have increased to 52% in FY10. Similarly NPAs declined from 2% in FY09 to 1.6% in FY10. Cost income ratio has been brought down from 52% in FY09 to 47% in FY10.

0%

Public & Others

Stock performance (%) 1m Absolute Nifty 140 120 100 80 Jul-09 Nov-09 Nifty Index Mar-10 Jul-10 HDFC Bk 3m 1yr

2.8 (1.6) 26.9 5.7 (0.7) 21.0

Valuation
The stock trades at 3.2xFY12E ABV and 16xFY12E earnings. The stock now trades at a slight premium to its historical average and a significant premium to peer banks. A unique business model which is hard to replicate for peer banks, strong core operating performance, and very strong asset quality make HDFC Bank the best play on the India consumption story. We initiate coverage on HDFC Bank with an outperform rating and value the bank using the Gordon growth model with a target price of Rs2,297. Figure 129: Key financials
Rs million, year-end March

Source: Bloomberg, Prowess.

FY08 Net interest income Non interest income Pre provision profits PAT EPS (Rs.) EPS (consensus) (1) EPS growth ROE (%) PE (x) ROA (%) P/ABV (x) 52,297 23,758 37,791 15,927 46 26.3 17.8 28 1.3 5.8

FY09 74,211 32,906 51,788 22,448 53 15.4 16.9 20 1.3 5.5

FY10 83,878 38,076 64,311 29,502 64 65 22.3 16.1 25 1.5 4.1

FY11E 103,921 44,984 78,255 36,174 79 85 22.6 15.8 21 1.4 3.7

FY12E 135,342 53,021 102,543 48,155 105 110 33.1 18.3 16 1.5 3.2

Saikiran Pulavarthi
saikiran.pulavarthi@indiabulls.com +91 22 3980 5203

Deepak Agrawal
deepak.agrawal@indiabulls.com +91 22 3980 5496

Source: Company , Indiabulls research.

Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.

HDFC Bank

Figure 130: HDFC Bank’s underwriting standards remain best in the industry
Units as shown

2.5 2.0 1.5 1.0 0.5 0.0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E 0.4 0.4 0.5 1.4 1.4 1.4 0.6 0.5 2.0 1.6

71 70 1.4 69 1.3 68 67 0.4 66 65

0.4

Provision coverage % - RHS
Source: Company, Indiabulls research.

Gross NPL % - LHS

Net NPL % - LHS

Figure 131: Factoring 30% growth in advances backed by strong demand from retail segment
Units as shown

2,500 2,000 1,500 1,000 500 0 FY06 FY07 FY08 FY09 37 34 35

56 30

60 50 30 40 30 30 20 10 0 FY10 FY11E FY12E

Net loans & advances (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

2 July 2010

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HDFC Bank

Figure 132: CASA % expected to come down marginally due to uptick in credit, which will skew the proportion towards term deposits
Units as shown

1,600 1,400 1,200 1,000 800 600 400 200 0

55

58

70 54 44 52 50 60 50 50 40 30 20 10 0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

CASA (Rs bn) - LHS
Source: Company, Indiabulls research.

CASA % - RHS

Figure 133: Do not expect any drop in margins as retail advances continue to see healthy growth
Units as shown

5.0 4.8 4.6 4.4 4.2 4.0 3.8 FY06 NIMs - LHS FY07 FY08 FY09 FY10 FY11E FY12E

12.0 10.0 8.0 6.0 4.0 2.0 0.0

Average cost of funds - RHS

Average yield on assets - RHS

Source: Company, Indiabulls research.

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HDFC Bank

Figure 134: Fee income growth to be in line with growth in advances
Units as shown

45 40 35 30 25 20 15 10 5 0 FY06

78

26

35

34 15

20

25

90 80 70 60 50 40 30 20 10 0

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

Figure 135: Fee income growth may be strained as insurance payouts to come under pressure due to expected regulatory tussle
Rs million

Insurance commission Marketing & sales promotion Total payouts from HDFC Std Life % of Total fee income % of PBT
Source: Company, Indiabulls research.

FY08 1,294 262 1,557 7

FY09 2,050 3,569 5,619 23 17

FY10 3,310 2,158 5,468 19 13

FY11E 3,968 1,500 5,468 16 10

Figure 136: Highly skewed retail business model explains high NIM and low fee income...
Units as shown

35 30 25 20 15 10 5 0

1.5

1.5

1.4

1.3

1.3

1.2

1.2

1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income/total income (%) - LHS
Source: Company, Indiabulls research.

Fee income/total assets (%) - RHS

2 July 2010

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HDFC Bank

Figure 137: Contribution of trading profits going down. Performance driven by core operations
Units as shown

500 400 300 200 100 0 (100) FY06 FY07 (4) (4) FY08 FY09 10

12 8 7 2

15 10 5 0 (5) FY10 FY11E FY12E (10)

Trading profits (Rs bn) - LHS
Source: Company, Indiabulls research.

PBT (Rs bn) - LHS

Trading profits / PBT (%) - RHS

Figure 138: Operating costs higher compared to other private sector banks due to retail banking business model
Units as shown

55 50 45 40 FY06

2.7 2.3

2.5 2.3

2.7

2.8

2.7

3.0 2.5 2.0 1.5 1.0 0.5 -

FY07

FY08

FY09

FY10

FY11E

FY12E

Cost income ratio (%) - LHS
Source: Company, Indiabulls research.

Opex/average assets (%) - RHS

2 July 2010

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HDFC Bank

Figure 139: PE band
Rs

Figure 140: PBV band
Rs

3,000 2,500 2,000 1,500 1,000 500 0 Jun-00 Jun-02 Jun-04 11x Jun-06 19x Jun-08 27x

35x 27x 19x 11x

3,000 2,500 2,000 1,500 1,000 500 0

5x 4x 3x 2x

Jun-10 35x

Jun-00

Jun-02 Price

Jun-04 2x

Jun-06 3x

Jun-08 4x

Jun-10 5x

Price

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

Figure 141: HDFC Bank's DuPont analysis
%

Dupont NII/avg. assets Non-Int Inc/avg assets Employee exp / avg assets Non- Employee exp / avg assets Op Profit /avg. assets Provisions/Avg. assets (1-tax rate) Return on Assets Avg. assets/avg equity (x) Return on Equity
Source: Company, Indiabulls research.

FY07 4.1 1.9 (0.9) (2.0) 3.0 (1.1) 30.5 1.3 14 19.5

FY08 4.4 2.0 (1.1) (2.1) 3.2 (1.2) 30.6 1.3 13 17.8

FY09 4.4 1.9 (1.3) (1.9) 3.0 (1.1) 32.0 1.3 13 16.9

FY10 4.1 1.9 (1.1) (1.7) 3.2 (1.1) 31.2 1.5 11 16.1

FY11E 4.1 1.8 (1.1) (1.7) 3.1 (1.0) 31.0 1.4 11 15.8

FY12E 4.3 1.7 (1.1) (1.7) 3.3 (1.0) 32.0 1.5 12 18.3

Figure 142: Valuation summary
Units as shown

CoE Rf Beta Market Return Growth (Gn) Normalised RoE Target P/Adj BV - Single Stage Premium / (Discount) Assigned Multiple
Source: Company, Indiabulls research.

HDFC Bk 12.9 7.7 0.8 14.0 5.0 19.0 1.8 30.0 3.8

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HDFC Bank

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HDFC Bank

Figure 143: Summary financials
Rs million, year-end March

Profit and loss Interest income Interest expense Net interest income YoY growth (%) Non interest income YoY growth (%) Fee income Gains / (Losses) on securities Others Total net income Total operating expenses YoY growth (%) Employee costs Other operating expenses Pre-provision profit Loan loss provisions Provisions for depn on invest Other provisions Provisions Profit before tax Taxes Net profit Exceptionals (Post tax) Adj net profit Balance sheet Cash and balance with RBI Inter-bank borrowings Loans & advances Investments Interest earning assets Fixed assets Other assets Total assets Customer deposits O/w CASA Borrowings Interest bearing liabilities Other liabilities Total liabilities Equity capital Reserves Total liabilities
Source: Company, Indiabulls research.

FY08 101,170 48,874 52,297 51 23,758 51 18,299 2,303 3,156 76,054 38,264 55 13,384 24,879 37,791 10,264 2,684 14,844 22,946 7,020 15,927 0 15,927

FY09 163,321 89,111 74,211 42 32,906 39 24,573 3,867 4,466 107,116 55,328 45 22,382 32,946 51,788 16,058 1,528 18,791 32,997 10,549 22,448 0 22,448

FY10 161,728 77,850 83,878 13 38,076 16 28,307 3,451 6,318 121,954 57,643 4 22,891 34,753 64,311 19,805 1,600 21,405 42,906 13,404 29,502 0 29,502

FY11E 206,387 102,467 103,921 24 44,984 18 33,968 3,451 7,565 148,904 70,649 23 28,217 42,432 78,255 20,696 1,600 25,829 52,426 16,252 36,174 0 36,174

FY12E 272,114 136,772 135,342 30 53,021 18 42,461 1,500 9,060 188,363 85,820 21 33,217 52,603 102,543 24,983 1,600 31,726 70,816 22,661 48,155 0 48,155

125,532 22,252 634,269 493,935 1,275,988 11,751 44,027 1,331,766 1,007,689 549,139 44,789 1,052,478 164,319 1,216,797 3,544 111,428 1,331,769

135,272 39,794 988,831 588,175 1,752,072 17,067 63,568 1,832,707 1,428,113 633,597 26,858 1,454,972 227,261 1,682,232 4,254 146,219 1,832,705

154,833 144,591 1,258,306 586,076 2,143,806 21,228 59,551 2,224,586 1,674,044 871,540 129,157 1,803,201 206,189 2,009,390 4,577 210,619 2,224,586

158,079 112,914 1,671,124 790,396 2,732,513 22,926 53,879 2,809,318 2,258,275 1,129,138 90,410 2,348,685 216,498 2,565,183 4,577 239,558 2,809,318

234,861 146,788 2,172,461 1,027,515 3,581,624 24,531 -28,490 3,577,665 2,935,758 1,467,879 99,451 3,035,208 259,798 3,295,006 4,577 278,082 3,577,665

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HDFC Bank

Summary financials (cont'd)
Rs million, year-end March

Balance sheet structure ratios (%) Loans / deposits Investments / Deposits CASA ratio Loan growth Deposit growth Operational ratios (%) Net interest margin Non-int inc as % of total inc Core fee income growth Emp costs as % of total op costs Cost to income ratio Operating cost growth Total prov as % avg loans Tax rate Credit quality ratios (%) Gross NPA (Rs mn) Net NPA (Rs mn) Gross NPA Net NPA NPA coverage ratio Capital adequacy ratios (%) Total CAR Tier 1 CAR Profitability ratios (%) RoAE RoAA Valuation ratios BVPS (Rs) Price/BV (x) Adj BV per share (Rs) P/ Adj BV (x) EPS (Rs) P/E (x) Dividend yield (%)
Source: Company, Indiabulls research.

FY08 63 49 54 35 48

FY09 69 41 44 56 42

FY10 75 35 52 30 16

FY11E 74 35 50 30 36

FY12E 74 35 50 30 30

4.9 31 35 35 50 55 3 31

4.6 31 34 40 52 45 2 32

4.3 31 15 40 47 4 2 31

4.3 30 20 40 47 23 2 31

4.3 28 25 39 46 21 2 32

9,070 2,985 1.4 0.5 67

19,881 6,276 2.0 0.6 68

19,881 6,276 1.6 0.5 68

23,572 7,072 1.4 0.4 70

28,437 8,531 1.3 0.4 70

13.6 10.3

15.7 10.6

18.3 14.0

15.9 12.6

14.6 11.8

17.8 1.3

16.9 1.3

16.1 1.5

15.8 1.4

18.3 1.5

334 5.7 328 5.8 46 28 0.4

354 5.4 344 5.5 53 20 0.5

470 4.1 461 4.1 64 25 0.6

533 3.6 523 3.7 79 21 0.8

618 3.1 604 3.2 105 16 1.1

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HDFC Bank

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Institutional
Initiating coverage

Bank of Baroda
Eq 2010 2 July
India

Neutral

Improvement unlikely from current levels
Bank of Baroda (BoB) has outperformed its peers with high earnings growth driven by cost efficiencies, enviable fee income performance, and better asset quality. We believe further RoA improvement is unlikely from current levels. BoB currently trades at a 60% premium to its historical average and in line with PNB and SBI. We recommend Neutral rating on the stock with target price of Rs803. RoA improvement unlikely
We believe that further RoA improvement (0.8% in FY05 to 1.2% in FY10 ) is unlikely from current levels as fee income growth is set to moderate after a 28% CAGR fee income and on account of consistent improvement in asset quality and controlled rise in operating expenses. Also, earnings growth should moderate to 20% CAGR during FY10-12E after a 44% CAGR in FY07-10

Financial services
Price: Rs 720 Target price: Rs 803
Stock details Bloomberg code MCap Rs/US$ mn Outstanding shares (mn) 52-wk H/L (Rs) 3m avg trd vol (US$ mn) Nifty / Sensex BOB IN 262,127/5,632 364 755/360 11.0 5251/17509

International business: Difficult to sustain growth momentum
In its international ops, the bank registered a 1.42% RoA and 24% RoE in FY10, which are superior to the corresponding domestic figures. The superior international performance was primarily aided by high fee income (36% of total fee income), superior cost leverage (CI ratio at 22%) and better asset quality (GNPAs at 0.47%). Restructured advances at Rs17.9bn (4.1% of international advances) are at a higher end, which will mean higher provisions in FY11 and pressure on profits. BoB may find it extremely difficult to sustain its current growth momentum in international business as players like ICICI have started becoming aggressive after having vacated the space for most part of FY10.

Shareholding pattern (%)
100% 12 18 17 54 0% Mar-07 Promoters Mar-08 Mar-09 Mar-10 FIIs DIIs Public & Others

50%

Valuations
Stock performance (%) 1m Absolute Nifty 170 140 110 80 Jul-09 Nov-09 Nifty Index Source: Bloomberg, Prowess. Mar-10 Jul-10 BOB 1.5 3m 10.8 1yr 59.5

5.7 (0.7) 21.0

BoB now trades at 60% premium to its historical average both on P/E and P/ABV parameters. Positive triggers are absent since RoA improvement is unlikely, International business is likely to see pressure on margins and current valuations at an all-time high for the stock leave limited room for upside. We initiate coverage on BoB with a neutral rating and value the bank using the Gordon growth model with a target price of Rs803.

Figure 144: Key financials
Rs million, year-end March

Saikiran Pulavarthi
saikiran.pulavarthi@indiabulls.com +91 22 3980 5203

Deepak Agrawal
deepak.agrawal@indiabulls.com +91 22 3980 5496

Net interest income Non interest income Pre provision profits PAT EPS (Rs.) EPS (consensus) (11) EPS growth ROE (%) PE (x) ROA (%) P/ABV (x)
Source: Company , Indiabulls research.

FY08 39,118 20,510 29,285 14,355 39.3 39.9 14.6 18.3 0.9 2.8

FY09 51,234 27,580 43,054 22,277 61.1 55.6 18.7 11.8 1.1 2.3

FY10 59,395 27,249 48,538 30,607 83.7 76.1 37.0 21.9 8.6 1.2 2.0

FY11E 75,722 26,028 60,542 35,073 96.0 89.9 14.6 21.2 7.5 1.1 1.6

FY12E 93,391 30,385 73,647 43,553 119.2 108.1 24.2 22.0 6.0 1.1 1.3

Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.

Bank of Baroda

Figure 145: Remarkable improvement in asset quality on sustainable basis
%

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

3.9 2.5 1.8 0.8 0.6 FY07 FY08 0.5 FY09 1.3 0.3 FY10 1.4 0.3 1.5 0.4 FY11E 1.5 0.4 FY12E

80 70 60 50 40 30 20 10 -

FY06

Provision coverage % - RHS
Source: Company, Indiabulls research.

Gross NPL % - LHS

Net NPL % - LHS

Figure 146: Restructured advances have peaked out, do not expect any major slippages into NPAs with overall macro environment improving
Rs mn

Opening Restructured Upgradation Closing Cumulative slipped into NPAs
Source: Company, Indiabulls research.

Mar-09 26,590 26,590

Jun-09 26,590 18,942 45,532

Sep-09 45,532

Dec-09 45,532 2,483 48,015 1,874

Mar-10 48,015 4,633 52,648 4,179

45,532

Figure 147: Asset growth has been moderating after very high growth achieved in FY06 to FY09 in line with overall demand for credit
Units as shown

3,000 2,500 2,000 1,500 1,000 500 0 FY06 38

40 28

35 22 22 22

45 40 35 30 25 20 15 10 5 0

FY07

FY08

FY09

FY10

FY11E

FY12E

Net loans & advances (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

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Bank of Baroda

Figure 148: Will be difficult for BoB to improve CASA from current levels
Units as shown

1,200 1,000 800 600 400 200 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E 38 33 31 31 30 31 31

40 35 30 25 20 15 10 5 0

CASA (Rs bn) - LHS
Source: Company, Indiabulls research.

CASA % - RHS

Figure 149: Margins to be maintained on the back of improving demand for credit
%

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY06 NIMs - LHS FY07 FY08 FY09 FY10 FY11E FY12E

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

Average cost of funds - RHS

Average yield on assets - RHS

Source: Company, Indiabulls research.

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Bank of Baroda

Figure 150: Growth in fee-based income driven by new streams like loan syndication and transaction banking
Units as shown

16 14 12 10 8 6 4 2 0

38 31 20 14 23 23

40 30 20 10 0

5

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

Figure 151: Growth to remain healthy, backed by new product offerings
Units as shown

12 10 8 6 4 2 0 FY06 0.3

0.3

0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

0.3

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income /total income (%) - LHS
Source: Company, Indiabulls research.

Fee income /total assets (%) - RHS

2 July 2010

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Bank of Baroda

Figure 152: Contribution of trading profits declining. Performance driven by core operations
Units as shown

70 60 50 40 30 20 10 0 (10)

28 24

27 15 5 4

FY06

FY07

(4)

FY08

FY09

FY10

FY11E

FY12E

30 25 20 15 10 5 0 (5) (10)

Trading profits (Rs bn) - LHS

PBT (Rs bn) - LHS

Trading profits / PBT (%) - RHS

Source: Company, Indiabulls research.

Figure 153: Further improvement from the current levels will be a challenge as BoB needs to invest for future growth
%

60 50 40 30 20 10 0

2.4 2.0 1.9 1.8 1.5

3.0 2.5 2.0 1.3 1.3 1.5 1.0 0.5 0.0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Cost income ratio (%) - LHS
Source: Company, Indiabulls research.

Opex/average assets (%) - RHS

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Bank of Baroda

Figure 154: P/E band
Rs

Figure 155: PBV band
Rs

1,200 900 600 300 0 Jun-00 Jun-02 Jun-04 3x Jun-06 6x Jun-08 9x

12x 9x 6x 3x

750 500 250 0

1.6x 1.2x 0.8x 0.4x

Jun-10 12x

Jun-00

Jun-02 Price

Jun-04 0.4x

Jun-06 0.8x

Jun-08 1.2x

Jun-10 1.6x

Price

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

Figure 156: BoB’s DuPont analysis
%

NII/avg. total assets Non-Interest Income/avg total assets Emp NonEmp Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY07 2.8 1.1 (1.3) (0.7) 1.9 (0.6) 38.0 0.8 16 12.4

FY08 2.4 1.3 (1.2) (0.7) 1.8 (0.4) 35.0 0.9 16 14.6

FY09 2.5 1.4 (1.2) (0.6) 2.1 (0.5) 33.4 1.1 17 18.7

FY10 2.3 1.0 (0.9) (0.6) 1.9 (0.2) 27.8 1.2 19 21.9

FY11E 2.4 0.8 (0.8) (0.5) 1.9 (0.3) 30.0 1.1 19 21.2

FY12E 2.4 0.8 (0.8) (0.5) 1.9 (0.3) 30.0 1.1 19 22.0

Figure 157: Valuation summary
%

CoE Rf Beta Market Return Growth (Gn) Normalised RoE Target P/Adj BV - Single Stage Premium / (Discount) Assigned Multiple
Source: Company, Indiabulls research.

BOB 13.7 7.7 1.0 14.0 5.0 18.0 1.5 1.5

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Bank of Baroda

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Bank of Baroda

Figure 158: Summary financials
Rs million, year-end March

Income statement Interest Income Interest Expense Net Interest Income YoY Growth (%) Non-Interest Income YoY Growth (%) Fee & Other Income Gains / (Losses) on Securities Total Net Income Total Operating Expenses YoY Growth (%) Employee Expenses Other Operating Expenses Pre-provision Profit Loan Loss provisions Provisions for Depn on Invest Other Provisions Provisions Profit Before Tax Taxes Net Profit Exceptionals (Post Tax) Adj Net Profit Balance sheet Cash and balance with RBI Inter-bank borrowings Loans & Advances Investments Interest Earning Assets Fixed Assets Other Assets Total Assets Customer Deposits o/w CASA Borrowings Interest Bearing Liabilities Other Liabilities Equity Capital Reserves Total Liabilities
Source: Company, Indiabulls research.

FY08 118,135 79,017 39,118 9.3 20,510 43.0 15,190 5,320 59,628 30,343 17 19,038 11,305 29,285 4,360 418 2,436 7,214 22,072 7,716 14,355 0 14,355

FY09 150,916 99,682 51,234 31.0 27,580 34.5 18,580 9,000 78,814 35,760 18 23,481 12,279 43,054 3,370 5,370 880 9,620 33,434 11,157 22,277 0 22,277

FY10 166,983 107,589 59,395 15.9 27,249 (1.2) 20,843 6,406 86,644 38,106 7 23,509 14,597 48,538 9,555 (3,807) 1,225 6,134 42,404 11,797 30,607 0 30,607

FY11E 216,272 140,550 75,722 27.5 26,028 (4.5) 23,466 2,563 101,751 41,209 8 25,438 15,771 60,542 9,714 0 723 10,438 50,104 15,031 35,073 0 35,073

FY12E 270,257 176,866 93,391 23.3 30,385 16.7 28,078 2,306 123,776 50,129 22 30,944 19,185 73,647 10,666 0 761 11,428 62,219 18,666 43,553 0 43,553

93,697 129,296 1,067,013 438,701 1,728,707 24,270 43,018 1,795,995 1,520,341 474,724 39,270 1,559,612 125,944 3,655 106,784 1,795,995

105,963 134,908 1,439,860 524,459 2,205,190 23,097 45,781 2,274,068 1,923,970 569,384 56,361 1,980,331 165,381 3,655 124,700 2,274,068

135,400 219,271 1,750,353 611,824 2,716,847 22,848 43,472 2,783,167 2,410,443 714,680 133,500 2,543,943 88,160 3,655 147,409 2,783,167

165,188 267,510 2,135,430 801,622 3,369,751 25,132 45,646 3,440,529 2,940,740 911,629 231,706 3,172,446 88,160 3,655 176,267 3,440,529

201,529 326,363 2,605,225 977,979 4,111,096 27,646 47,928 4,186,670 3,587,703 1,112,188 294,276 3,881,979 88,160 3,655 212,876 4,186,670

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Bank of Baroda

Summary financials (cont'd)
Rs million, year-end March

Balance Sheet Structure Ratios (%) Loans/Deposits Investments / Deposits CASA Ratio Loan Growth Deposit Growth Operating Ratios (%) NIM Non-interest income/Net income Employee Costs as % of Total Op Costs Cost/Income Operating cost growth Total prov as % of avg. loans Tax Rate Credit Quality Ratios (%) Gross NPA Net NPA Slippage NPA coverage ratio Capital Adequacy Ratios (%) Total CAR Tier 1 CAR Profitability Ratios (%) RoAE RoAA Valuation Ratios BVPS (Rs) Price/BV (x) Adjusted BVPS (Rs) Price/Adj. BV (x) EPS (Rs) P/E (x) Dividend Yield
Source: Company, Indiabulls research.

FY08 70 29 31 28 22

FY09 75 27 30 35 27

FY10 73 27 31 22 25

FY11E 73 27 31 22 22

FY12E 73 27 31 22 22

2.5 34 63 51 17.2 0.8 35

2.6 35 66 45 17.9 0.8 33

2.4 31 62 44 6.6 0.4 28

2.5 26 62 41 8.1 0.5 30

2.5 25 62 41 21.6 0.5 30

19,814 4,936 1.8 0.5

18,429 4,512 1.3 0.3

24,007 6,023 1.4 0.3

32,445 8,393 1.5 0.4

41,793 12,243 1.6 0.5

12.9 7.6

14.1 8.5

14.3 9.7

13.5 9.1

13.4 9.0

14.6 0.9

18.7 1.1

21.9 1.2

21.2 1.1

22.0 1.1

265 2.7 257 2.8 39 18 1.1

316 2.3 309 2.3 61 12 1.3

380 1.9 368 2.0 84 9 2.1

459 1.6 442 1.6 96 7 2.4

559 1.3 535 1.3 119 6.0 2.6

2 July 2010

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Bank of Baroda

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2 July 2010

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Institutional
Initiating coverage

Bank of India
Eq 2010 2 July
India

Neutral

Pain before gain
We expect Bank of India’s (BoI) earnings growth to be healthy at 32% CAGR for FY11-12E albeit on a lower base of FY10. The bank’s core operational performance seems poised to improve with better NIMs, fee income growth to mirror loan growth, and MTM losses to be contained, but we believe more pain is in store on the asset quality front. With current valuations near to average cycle, we recommend Neutral rating on the stock with a target price of Rs. 343.
BOI IN 187,488/4,029 525 475/295 5.8 5251/17509

Financial services
Price: Rs 357 Target price: Rs 343
Stock details Bloomberg code MCap Rs/US$ mn Outstanding shares (mn) 52-wk H/L (Rs) 3m avg trd vol (US$ mn) Nifty / Sensex

Earnings growth at 32% CAGR for FY11-12E
Earnings growth to be healthy at 32% CAGR for FY11-12E albeit on a lower base of FY10. After its dismal performance during FY10, the bank can be expected to register RoA at 0.9% in FY12E and show a 10 bps improvement each in the next two years.

Core performance to improve
We expect BoI’s core operational performance to improve with gradual improvement in NIMs as re-pricing of deposits will aid margins in FY11 and asset quality will stabilise in FY12, Fee income growth should mirror credit growth and MTM losses on investment portfolio should be minimal as the bank has reduced the duration of its AFS book during the 1QFY11.

Shareholding pattern (%)
100% 8 12 15 64

50%

Asset quality: More pain left
The bank’s asset quality has been consistently disappointing for the past four quarters. An18% slippage on its restructured assets portfolio at such a nascent stage of the restructuring raises further concerns on the asset quality. Therefore, in our view, more slippage from the restructured assets portfolio cannot be ruled out.

0% Mar-07 Promoters Mar-08 Mar-09 Mar-10 FIIs DIIs Public & Others

Stock performance (%) 1m Absolute Nifty 140 120 100 80 Jul-09 Nov-09 Nifty Index Source: Bloomberg, Prowess. Mar-10 Jul-10 BOI 10.9 3m 1yr

Valuations artificially cheap: Recommend Neutral
3.1 (0.0)

5.7 (0.7) 21.0

Current valuations at 1.2x FY12E ABV appear cheap; however one should wait and watch the asset quality, restructured book behaviour in the next two quarters before entering the stock. We recommend neutral on the stock with a target price of Rs 343.

Figure 159: Key financials
Rs million, year-end March

Saikiran Pulavarthi
saikiran.pulavarthi@indiabulls.com +91 22 3980 5203

Deepak Agrawal
deepak.agrawal@indiabulls.com +91 22 3980 5496

Net interest income Non interest income Pre provision profits PAT EPS (Rs.) EPS (consensus) (15) EPS growth ROE (%) PE (x) ROA (%) P/ABV (x)
Source: Company , Indiabulls research.

FY08 42,293 21,169 37,012 20,094 38.2 66.1 24.4 9.3 1.2 2.2

FY09 54,994 30,520 54,573 30,078 57.2 49.7 25.0 6.2 1.5 1.7

FY10 57,560 26,180 47,059 17,422 33.1 38.5 (42.1) 12.6 10.8 0.7 1.7

FY11E 69,822 25,862 55,546 23,652 45.0 46.0 35.8 15.6 7.9 0.8 1.4

FY12E 85,822 30,206 70,131 30,571 58.1 58.5 29.3 17.7 6.1 0.9 1.2

Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.

Bank of India

Figure 160: Asset quality concerns led to moderate growth in FY10. Expect modest growth in FY11E
Units as shown

3,000 2,500 2,000 1,500 1,000 500 0 FY06 FY07 FY08 17 31

33 26 20 20 22

35 30 25 20 15 10 5 0 FY09 FY10 FY11E FY12E

Net loans & advances (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

Figure 161: We are factoring marginal improvement in CASA from FY10 levels
Units as shown

1,200 1,000 800 600 400 200 0 FY06 FY07 FY08 FY09 FY10 FY11E 35 32 30

31 31 26 29

40 35 30 25 20 15 10 5 0

FY12E

CASA (Rs bn) - LHS
Source: Company, Indiabulls research.

CASA % - RHS

2 July 2010

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102

Bank of India

Figure 162: Repricing of high cost deposits will be over in FY11E, which will lead to improvement in margins from FY12E
Units as shown

2.9 2.8 2.7 2.6 2.5 2.4 2.3 2.2 2.1 FY06 NIMs - LHS FY07 FY08 FY09 FY10 FY11E FY12E

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

Average cost of funds - RHS

Average yield on assets - RHS

Source: Company, Indiabulls research.

Figure 163: Fee-based income was strong over the last credit cycle from FY06-FY09 in line with growth in advances
Units as shown

18 16 14 12 10 8 6 4 2 0

39 31 20 15 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E 20

15

45 40 35 30 25 20 15 10 5 0

Fee income (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

2 July 2010

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103

Bank of India

Figure 164: Improving fee income % from current levels seems a tough task
Units as shown

14 13 12 11

0.5

0.4

0.4

0.5 0.4

0.6 0.4 0.4 0.5 0.4 0.3 0.2 0.1 0.0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Fee income/total income (%) - LHS
Source: Company, Indiabulls research.

Fee income/total assets (%) - RHS

Figure 165: Factoring much lower treasury income on the back of rising interest rates
Units as shown

50 45 40 35 30 25 20 15 10 5 0

24 13 18 14 6 5

25 20 15 10 5 0

12

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Trading profits (Rs bn) - LHS
Source: Company, Indiabulls research.

PBT (Rs bn) - LHS

Trading profits / PBT (%) - RHS

2 July 2010

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104

Bank of India

Figure 166: Further improvement in cost-income ratio from current levels will be a challenge as the bank need to invest for future growth
Units as shown

60 50 40 30 20 10 0

2.0

2.1 1.6 1.5 1.5 1.4

2.5 2.0 1.3 1.5 1.0 0.5 0.0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Cost income ratio (%) - LHS
Source: Company, Indiabulls research.

Opex/average assets (%) - RHS

Figure 167: Gradual improvement in RoAs and RoEs building
Units as shown

30 25 20 15 10 5 0 FY06 FY07 FY08 FY09 RoE
Source: Company, Indiabulls research.

1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 FY10 RoA FY11E FY12E

2 July 2010

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Bank of India

Figure 168: Asset quality concerns to persist for the next few quarters
Units as shown

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY06

3.7 2.4 1.5 0.9 2.9 1.7 0.5 FY08 FY09 1.7 0.4 FY10 1.3

3.0

3.0

1.0

1.1

80 70 60 50 40 30 20 10 0

FY07

FY11E

FY12E

Provision coverage ratio - RHS
Source: Company, Indiabulls research.

Gross NPL ratio - LHS

Net NPL ratio - LHS

Figure 169: PE band
Rs

Figure 170: PBV band
Rs

700 600 500 400 300 200 100 0 Jun-00 Jun-02 Price Jun-04 3x Jun-06 6x Jun-08 9x 12x

12x 9x 6x 3x Jun-10

700 600 500 400 300 200 100 0 Jun-00 Jun-02 Price Jun-04 3x Jun-06 6x Jun-08 9x 12x

12x 9x 6x 3x Jun-10

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

2 July 2010

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106

Bank of India

Figure 171: BoI’s DuPont analysis
%

Return on Equity Decomposition NII/avg. total assets Non-Interest Income/avg total assets Employee exp / avg assets Non- Employee exp / avg assets Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY07 2.7 1.2 (1.3) (0.8) 1.9 (0.7) 26.7 0.9 23 20.6

FY08 2.6 1.3 (1.0) (0.6) 2.3 (0.6) 25.2 1.2 20 24.4

FY09 2.7 1.5 (0.9) (0.6) 2.7 (0.6) 27.8 1.5 17 25.0

FY10 2.3 1.0 (0.9) (0.5) 1.9 (0.9) 30.2 0.7 18 12.6

FY11E 2.4 0.9 (0.8) (0.5) 1.9 (0.7) 30.0 0.8 20 15.6

FY12E 2.5 0.9 (0.8) (0.5) 2.0 (0.8) 30.0 0.9 20 17.7

Figure 172: Valuation summary
%

CoE Rf Beta Market Return Growth (Gn) Normalised RoE Target P/Adj BV - Single Stage Premium / (Discount) Assigned Multiple
Source: Company, Indiabulls research.

BoI 15.9 7.7 1.3 14.0 5.0 18.0 1.2 1.2

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Bank of India

Figure 173: Summary financials
Rs million, year-end March

Profit and loss Interest income Interest expense Net interest income YoY growth (%) Non interest income YoY growth (%) Fee & other income Gains / (Losses) on securities Total net income Total operating expenses YoY growth (%) Employee expenses Other operating expenses Pre-provision profit Loan loss provisions Provisions for depn on invest Other provisions Provisions Profit before tax Taxes Net profit Exceptionals (Post tax) Adj net profit Balance sheet Cash and balance with RBI Inter-bank borrowings Loans & advances Investments Interest earning assets Fixed assets Other assets Total assets Customer deposits O/w CASA Borrowings Interest bearing liabilities Other liab / Pref capital Equity capital Reserves Total liabilities
Source: Company, Indiabulls research.

FY08 123,552 81,260 42,293 22.9 21,169 35.4 17,507 3,662 63,462 26,450 1 16,570 9,880 37,012 6,973 834 2,358 10,165 26,847 6,753 20,094 0 20,094

FY09 163,474 108,480 54,994 30.0 30,520 44.2 23,060 7,460 85,514 30,941 17 19,374 11,567 54,573 6,230 4,740 1,954 12,924 41,649 11,571 30,078 0 30,078

FY10 178,780 121,220 57,560 4.7 26,180 (14.2) 20,240 5,940 83,740 36,681 19 22,961 13,720 47,059 17,542 2,435 2,132 22,109 24,950 7,528 17,422 0 17,422

FY11E 216,780 146,958 69,822 21.3 25,862 (1.2) 23,862 2,000 95,684 40,137 9 24,497 15,641 55,546 20,729 0 1,028 21,757 33,789 10,137 23,652 0 23,652

FY12E 263,014 177,192 85,822 22.9 30,206 16.8 28,206 2,000 116,028 45,897 14 27,753 18,143 70,131 25,101 0 1,357 26,458 43,673 13,102 30,571 0 30,571

117,419 59,755 1,134,763 418,029 1,729,966 24,261 34,073 1,788,300 1,500,120 459,116 71,724 1,571,844 110,562 5,259 100,635 1,788,299

89,153 128,460 1,429,094 526,072 2,172,778 25,319 56,920 2,255,018 1,897,085 507,752 94,869 1,991,954 128,114 5,259 129,690 2,255,017

156,026 156,275 1,684,907 670,802 2,668,010 25,319 58,136 2,749,665 2,297,619 636,273 223,999 2,521,618 85,746 5,259 137,041 2,749,665

134,572 68,678 2,055,803 780,946 3,039,999 31,476 102,013 3,173,488 2,674,883 789,090 246,399 2,921,282 91,513 5,259 155,434 3,173,488

134,572 68,678 2,508,079 952,754 3,664,083 31,476 102,013 3,797,573 3,263,357 1,011,641 258,719 3,522,076 91,069 5,259 179,168 3,797,573

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Bank of India

Summary financials (cont'd)
Rs million, year-end March

Balance sheet structure ratios (%) Loans/deposits Investments / Deposits CASA ratio Loan growth Deposit growth Operating ratios (%) NIM Non-interest income/net income Employee costs as % of total op costs Cost/income Operating cost growth Total prov as % of avg. loans Tax rate Credit quality ratios (%) Gross NPA (Rs mn) Net NPA (Rs mn) Gross NPA Net NPA Slippage NPA coverage ratio Capital adequacy ratios (%) Total CAR Tier 1 CAR Profitability ratios (%) RoAE RoAA Valuation ratios BVPS (Rs) Price/BV (x) Adjusted BVPS (Rs) Price/Adj. BV (x) EPS (Rs) P/E (x) Dividend yield (%)
Source: Company, Indiabulls research.

FY08 75.6 27.9 30.6 33.3 25.1

FY09 75.3 27.7 26.8 25.9 26.5

FY10 73.3 29.2 27.7 19.9 17.5

FY11E 76.9 29.2 29.5 20 20.0

FY12E 76.9 29.2 31.0 22 22.0

2.7 33.4 62.6 41.7 1.4 1.1 25.2

2.8 35.7 62.6 36.2 17.0 1.0 27.8

2.4 31.3 62.6 43.8 18.6 1.4 30.2

2.4 27.0 61.0 41.9 9.4 1.2 30.0

2.6 26.0 60.5 39.6 14.3 1.2 30.0

1,931 592 1.7 0.5 1.4 69

2,471 628 1.7 0.4 1.6 75

4,884 2,208 2.9 1.3 2.5 55

6,321 2,169 3.0 1.0 2.2 66

7,939 2,807 3.0 1.1 2.2 65

13.0 8.2

13.2 8.7

12.9 8.5

12.6 8.5

12.0 8.3

24.4 1.2

25.0 1.5

12.6 0.7

15.6 0.8

17.7 0.9

168 2.1 160 2.2 38 9 1.1

224 1.6 216 1.7 57 6 2.2

243 1.5 214 1.7 33 11 2.0

278 1.3 250 1.4 45 8 2.8

324 1.1 286 1.2 58 6 3.6

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Bank of India

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Institutional
Initiating coverage

State Bank of India
Eq 2010 2 July
India

Neutral

A mixed bag
SBI’s headline PAT numbers will show a healthy growth albeit on a lower base aided by NIM expansion, but it will be constrained by higher provision charges, asset quality pressures, and imminent management transition. We recommend Neutral rating on SBI and believe capital raising is a key trigger for the stock to be back in the reckoning. Shifting gears from growth to profitability...
SBIN IN 1,436,265/30,868 635 2,630/1,511 98.4 5251/17509

Financial services
Price: Rs 2,262 Target price: Rs 2,520
Stock details Bloomberg code MCap Rs/US$ mn Outstanding shares (mn) 52-wk H/L (Rs) 3m avg trd vol (US$ mn) Nifty / Sensex

RoE declined from 15.5% in FY07 to 14.8% in FY10 (adjusted for treasury gains, RoE has declined from 15.4% in FY07 to 12.5% in FY10) due to aggressive growth strategy, operating expenses having grown at 20% CAGR on the back of massive ATM and branch expansion, and increased headcount. Market share gain strategy in most segments has resulted in sub-optimal margins which we believe will change going forward.

... but asset quality pressures and provision will be a overhang in FY11E
FY11 will see pressure in terms of headline numbers as we expect further slippages of ~10% from restructured accounts and additional provisions to meet 70% provision coverage ratio which if provided completely will have an impact of Rs50bn in FY11E. We are factoring further 10% slippages in FY11. Corporate advances continue to be under pressure with Rs 10bn of slippages in 4QFY10 and we expect further slippages.

Shareholding pattern (%)
100% 9 17 14 59

50%

0% Mar-07 Promoters Mar-08 Mar-09 Mar-10 FIIs DIIs Public & Others

... NIM improvement a saviour
NIMs are expected to improve from 2.4% in FY10 to 2.6% in FY11 and further to 2.8% in FY12 on the back of repricing of deposits and reduction in surplus liquidity for the Bank. Yield on advances are expected to remain strong as demand for infrastructure segment continues to remain strong and demand from corporates is expected to pick up in FY11.

Stock performance (%) 1m Absolute Nifty 140 110 80 Jul-09 Nov-09 Nifty Index Source: Bloomberg, Prowess. Mar-10 Jul-10 SBI 2.4 3m 7.6 1yr 27.1

5.7 (0.7) 21.0

Valuation
SBI trades at 1.6xFY12E ABV (adjusted for value of subsidiaries) and 10xFY12E earnings with an RoE of 18.2% in FY12. Management has given guidance for 25% growth in profit for FY11 which appears a tall task considering the bad debt provisions to be made in FY11. Also, a planned equity dilution will lead to decline in profitability ratios. Our SOTP target price for the stock at Rs.2,520 leaves limited room upside from current levels. Neutral Figure 174: Key financials
Rs million, year-end March

Saikiran Pulavarthi
saikiran.pulavarthi@indiabulls.com +91 22 3980 5203

Deepak Agrawal
deepak.agrawal@indiabulls.com +91 22 3980 5496

Net interest income Non interest income Pre provision profits PAT EPS (Rs.) EPS (consensus) (27) EPS growth ROE (%) PE (x) ROA (%) P/ABV (x)
Source: Company, Indiabulls research.

FY08 170,212 86,949 131,076 67,292 106 22.9 16.8 21.3 1.0 3.3

FY09 208,731 126,908 179,152 91,213 144 35.5 17.1 15.7 1.1 2.8

FY10 236,714 149,472 183,000 91,451 144 156 0.3 14.8 15.7 0.9 2.5

FY11E 288,797 175,696 228,432 114,605 181 171 25.3 16.4 12.5 1.0 2.2

FY12E 362,721 199,069 280,709 144,699 228 212 26.3 18.2 9.9 1.1 1.9

Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.

State Bank of India

Figure 175: SBI’s provision coverage needs to be taken to 70% by FY11, which will put pressure on profits
Units as shown

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

6.0 3.9 2.6 1.8

70 60 50 2.9 1.6 3.0 1.8 2.9 1.8 3.0 1.7 3.1 1.2 FY11E 40 2.9 1.1 FY12E 30 20 10 0

FY05

FY06

FY07

FY08

FY09

FY10

Provision coverage % - RHS
Source: Company, Indiabulls research.

Gross NPL % - LHS

Net NPL % - LHS

Figure 176: Factoring 200bps higher growth in advances than industry for FY11FY12
Units as shown

10,000 8,000 6,000 4,000 2,000 0 FY05

29

35 29 24 16 30 23 30 22 25 20 15 10 5 0

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

Net Loans & Advances (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

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State Bank of India

Figure 177: Highest CASA % among PSU banks
Units as shown

5,000 4,000 3,000 2,000 1,000 0 FY05 FY06 41 48

48 47 43 45 42 45

50 48 46 44 42 40 38 36

FY07

FY08

FY09

FY10 CASA % - RHS

FY11E

FY12E

CASA (Rs bn) - LHS
Source: Company, Indiabulls research.

Figure 178: Margins are expected to improve as surplus liquidity drains
Units as shown

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

NIMs - LHS

Average cost of funds - RHS

Average yield on assets - RHS

Source: Company, Indiabulls research.

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State Bank of India

Figure 179: PAT to be under pressure due to higher provisions inspite of improvement in NII
Rs bn

400 350 300 250 200 150 100 50 FY05 FY06 NII - LHS
Source: Company, Indiabulls research.

35 30 25 20 15 10 5 0 FY07 FY08 PAT - LHS FY09 FY10 FY11E FY12E

Provisions as % of NII - RHS

Figure 180: SBI leveraging on technology and syndication capabilities
Units as shown

160 140 120 100 80 60 40 20 0

35 29 20 14 13 23 27 24 20 30 25 20 15 10 5 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Fee income (Rs bn) - LHS
Source: Company, Indiabulls research.

YoY growth % - RHS

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State Bank of India

Figure 181: Expect SBI to sustain fee income at current levels
Units as shown

30 25 20 15 10 5 FY05 FY06 FY07 FY08 FY09 0.8 0.8 0.8 0.8 0.8

0.9

1.0

1.0

1.2 1.0 0.8 0.6 0.4 0.2 -

FY10

FY11E

FY12E

Fee income/total income (%) - LHS
Source: Company, Indiabulls research.

Fee income/total assets (%) - RHS

Figure 182: Factoring much lower growth on the back of rising interest rate scenario
Units as shown

250 200 150 100 50 0 (50) FY05 FY06 FY07 (1) FY08 FY09 9 9

18 15 10 5

20 15 10 5 0 FY10 FY11E FY12E -5

Trading profits (Rs bn) - LHS
Source: Company, Indiabulls research.

PBT (Rs bn) - LHS

Trading profits / PBT (%) - RHS

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State Bank of India

Figure 183: PE band
Rs

Figure 184: PBV band
Rs

3,000 2,500 2,000 1,500 1,000 500 0 Jun-00 Jun-02 Jun-04 4x Jun-06 8x Jun-08 12x

16x 12x 8x 4x Jun-10 16x

2,500 2,000 1,500 1,000 500 0 Jun-00 Jun-02 Jun-04 0.5x Jun-06 1.0x Jun-08 1.5x

2.0x 1.5x 1.0x 0.5x

Price

Jun-10 2.0x

Price

Source: Company, Indiabulls research.

Source: Company, Indiabulls research.

Figure 185: SBI's DuPont analysis
%

Return on Equity Decomposition NII/avg. total assets Non-Interest Income/avg total assets Employee exp / avg assets Non- Employee exp / avg assets Operating Profit /avg. total assets Provisions/Avg. total assets (1-tax rate) Return on Assets Avg. total assets/average equity (x) Return on Equity
Source: Company, Indiabulls research.

FY07 2.8 1.3 (1.5) (0.7) 1.9 (0.4) 40.4 0.9 18 15.4

FY08 2.6 1.4 (1.2) (0.7) 2.0 (0.4) 35.5 1.0 16 16.8

FY09 2.5 1.5 (1.2) (0.7) 2.1 (0.4) 35.7 1.1 16 17.1

FY10 2.3 1.5 (1.3) (0.7) 1.8 (0.4) 34.2 0.9 16 14.8

FY11E 2.5 1.5 (1.3) (0.8) 2.0 (0.5) 34.2 1.0 16 16.4

FY12E 2.7 1.5 (1.3) (0.8) 2.1 (0.4) 34.2 1.1 17 18.2

Figure 186: Valuation summary
%

CoE Rf Beta Market Return Growth (Gn) Normalised RoE Target P/Adj BV - Single Stage Premium / (Discount) Assigned Multiple
Source: Company, Indiabulls research.

SBI 14.6 7.7 1.1 14.0 5.0 17.0 1.2 30.0 1.6

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State Bank of India

Figure 187: SOTP
Units as shown

Particulars SBI - Standalone Banking Subs State Bank of Hyderabad State Bank of Patiala State Bank of Travancore State Bank of Bikaner State Bank of Mysore State Bank of Indore SBI Life Others Holding Co disc Non Bkg Subs Value after discount Value (Rs.) CMP Upside (%)
Source: Company, Indiabulls research.

Value (Rs. Bn) 1,197 261

Value per share (Rs.) Valuation Methodology 1,887 1.6x FY12E Adj BV 412 124 86 59 51 48 43 162 83 10% 221 2,519 2,262 11.4

1.5 x FY12E Adj BV 1.3 x FY12E Adj BV 1.5 x FY12E Adj BV 1.5 x FY12E Adj BV 1.3 x FY12E Adj BV 1.3 x FY12E Adj BV 15x FY12E NBAP NBAP Margin 17%

53 283 1,480

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State Bank of India

Figure 188: Summary financials
Rs million, year-end March

Profit and loss Interest income Interest expense Net interest income YoY growth (%) Non interest income YoY growth (%) Fee & other income Gains / (Losses) on securities Total income Total operating expenses YoY growth (%) Employee expenses Other operating expenses Pre-provision profit (pre-excep) Exceptionals Pre-provision profit Loan loss provisions Provisions for depn on invest Other provisions Provisions Profit before tax Taxes Net profit Exceptionals (Post tax) Adj net profit Balance sheet Cash and balance with RBI Inter-bank borrowings Loans & advances Investments Interest earning assets Fixed assets Other assets Total assets Customer deposits O/w CASA Borrowings Interest bearing liabilities Other liabilities Equity capital Reserves Total liabilities
Source: Company, Indiabulls research.

FY08 489,503 319,291 170,212 13.0 86,949 28.5 77,375 9,574 257,161 126,085 6.6% 77,859 48,227 131,076 131,076 20,009 (887) 7,564 26,687 104,389 37,098 67,292 0 67,292

FY09 647,384 438,653 208,731 22.6 126,908 46.0 101,270 25,638 335,639 156,487 24.1% 97,473 59,014 179,152 179,152 24,750 7,072 5,524 37,346 141,807 50,594 91,213 0 91,213

FY10 709,939 473,225 236,714 13.4 149,472 17.8 128,407 21,065 386,187 203,187 29.8% 127,547 75,640 183,000 183,000 51,478 (9,686) 2,156 43,948 139,052 47,600 91,451 0 91,451

FY11E 871,245 582,448 288,797 22.0 175,696 17.5 158,844 16,852 464,493 236,062 16.2% 146,806 89,256 228,432 228,432 46,361 0 7,814 54,174 174,257 59,652 114,605 0 114,605

FY12E 1,077,499 714,778 362,721 25.6 199,069 0.0 188,958 10,111 561,790 281,080 0.0% 173,974 107,107 280,709 280,709 51,765 0 8,930 60,695 220,014 75,316 144,699 0 144,699

515,346 159,317 4,167,682 1,895,012 6,737,357 33,735 444,170 7,215,262 5,374,039 2,523,628 517,274 5,891,313 833,623 6,315 484,012 7,215,262

555,462 488,576 5,425,032 2,759,540 9,228,609 38,380 377,330 9,644,319 7,420,731 3,089,778 537,140 7,957,871 1,106,971 6,350 573,128 9,644,319

612,910 348,930 6,319,140 2,857,900 10,138,880 44,130 351,130 10,534,140 8,041,160 3,465,630 1,031,020 9,072,180 803,370 6,350 653,140 10,535,040

649,685 366,677 7,772,542 3,254,257 12,043,161 48,543 386,243 12,477,947 9,166,922 4,125,115 1,671,109 10,838,032 903,370 6,350 730,196 12,477,947

688,666 418,012 9,482,501 3,709,853 14,299,032 53,397 424,867 14,777,297 10,450,292 4,702,631 2,469,112 12,919,404 1,003,370 6,350 848,173 14,777,297

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State Bank of India

Summary financials (cont'd)
Rs million, year-end March

Balance sheet structure ratios (%) Loans/deposits Investments / Deposits CASA ratio Loan growth Deposit growth Operating ratios (%) NIM Non-interest income/net income Employee costs as % of total op costs Cost/income Operating cost growth Total prov as % of avg. loans Tax Rate Credit quality ratios (%) Gross NPA (Rs mn) Net NPA (Rs mn) Gross NPA Net NPA Slippage NPA coverage ratio Capital adequacy ratios (%) Total CAR Tier 1 CAR Profitability ratios (%) RoAE RoAA Valuation ratios BVPS (Rs) Price/BV (x) Adjusted BVPS (Rs) Price/Adj. BV (x) EPS (Rs) P/E (x) Dividend yield
Source: Company, Indiabulls research.

FY08 77.6 35.3 47.0 23.5 23.4

FY09 73.1 37.2 41.6 30.2 38.1

FY10 78.6 35.5 43.1 16.5 10.0

FY11E 84.8 35.5 45.0 23.0 14.0

FY12E 90.7 35.5 45.0 22.0 14.0

2.8 34 62 49 7 0.7 36

2.6 38 62 47 24 0.8 36

2.4 39 63 53 -30 0.7 34

2.6 38 62 51 16 0.7 34

2.8 35 62 50 19 0.7 34

99,982 52,577 3.0 1.8 2.1 41

128,373 74,243 2.9 1.8 2.3 38

157,133 96,773 3.0 1.7 2.0 44

195,343 108,703 3.1 1.2 2.5 61

241,468 94,211 2.9 1.1 2.3 62

12.5 8.5

14.3 9.4

13.4 9.5

12.1 6.7

11.8 6.5

16.8 1.0

17.1 1.1

14.8 0.9

16.4 1.0

18.2 1.1

773 2.9 691 3.3 106 21 0.9

913 2.5 807 2.8 144 16 1.3

1,039 2.2 920 2.5 144 16 1.3

1,161 1.9 1012 2.2 181 13 1.6

1,347 1.7 1179 1.9 228 10 1.6

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State Bank of India

Key to Indiabulls Institutional Equities recommendations:
Outperform= Expected total return is more than 15% Neutral= Expected total return is less than 15% but more than zero. Underperform= Expected total return is negative

DISCLOSURES
This document has been prepared by the Research Division of Indiabulls Securities Limited, Mumbai, India (ISL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior written permission of ISL This material is for the general information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of ISL. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. You are advised to independently evaluate the investments and strategies discussed herein and also seek the advice of your financial adviser. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. No independent verification has been made nor is its accuracy or completeness guaranteed. Any opinions expressed herein reflect judgments at this date and are subject to change without notice. ISL and any/all of its group companies or directors or employees reserves its right to suspend the publication of this report and are not under any obligation to tell you when opinions or information in this report change. In addition, ISL has no obligation to continue to publish reports on all the stocks currently under its coverage or to notify you in the event it terminates its coverage. Neither ISL nor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage that may arise to any person from any error or otherwise in the information contained in this report. The analyst for this report certifies that all views expressed in this report accurately reflect his or her personal views about the subject stock and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. The information given herein should be treated as only a factor, while making investment decision. This report does not provide individually tailor-made investment advice. ISL shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of National Stock Exchange or Bombay Stock Exchange.

Copyright 2010 Indiabulls Securities Limited. All rights reserved. This report or any portion hereof may not be reprinted be it photocopying or otherwise, sold or redistributed in any form and manner without the written consent of ISL.

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