Goldman Sachs India Financials 2020

16 April 2019 | 1:14AM IST
India Financials
Confidence returns but valuations high; Focus on

operational strength - Buy HDBK (CL)/ICBK (add to CL)
Our India banks coverage has rallied by c.12% over the last 3 months with SOE Rahul Jain
+91(22)6616-9161 | rahul.m.jain@gs.com
banks/NBFCs outperforming Bank Nifty (up 9%), which we believe was partly driven Goldman Sachs India SPL
by easing liquidity conditions and no negative developments within the NBFC space. Abhijeet Sakhare
+91(22)6616-9045 |
While liquidity and NPL risks seem to have dissipated for now, we remain selective abhijeet.sakhare@gs.com
Goldman Sachs India SPL
and focus on stocks with strong operational outlook (HDBK/ICBK, on CL). We see
Mayank Bukrediwala
the following three debates shaping up in the sector to drive stock performance: +91(22)6616-9169 |
mayank.bukrediwala@gs.com
1) Can SOE banks repeat the performance of 2003? One of the key investor Abhisek Minda
For the exclusive use of GOVIND.SHARMA@S2AR.COM
+91(80)6637-8718 |
questions has been whether SOE valuations can continue to re-rate and if the abhisek.minda@gs.com
current cycle can play out the way it did in 2003-2007. We believe SOE banks will be
one of the key beneficiaries of moderating credit costs as recovery picks up pace.
However, we argue that ROAs have settled for lower with an acceleration in market
share loss in lending/deposits. With valuations having re-rated for select SOE banks,
we prefer SBI (Buy) and downgrade PNB to Sell from Neutral on valuations and
low capital adequacy/exposure to agri/SME.
2) How to position within NBFCs? Even with the funding situation normalized,
NBFCs have been structurally settling for lower ROA/ROEs due to lower leverage
and higher liquidity/tighter ALMs. While funding costs for AAA-rated borrowers have
declined, the credit spreads for AAA vs. AA rated borrowers have expanded. We
prefer NBFCs with the ability to defend profitability and sustain healthy growth with
b47d88593be0454aab7aeee3c4c30dd9
comfortable valuations as regulatory uncertainty prevails; Prefer HDFC (Buy),
downgrade LICH to Sell from Neutral on valuations and profitability outlook.
3) How are the private banks placed? Within private banks, apart from credit
costs, the focus would shift to operational performance, strength of liability franchise
and geographical footprint. We prefer names with either low valuations coupled with
improving operational performance or strong retail franchise such as Buy-rated HDBK
(on CL) within our coverage. While ICBK has seen strong credit cost recovery, we
expect loan growth recovery, strong liability franchise and productivity improvement
to drive c.20% PPOP CAGR over FY19-21E, we add ICBK to the Conviction List
with our new 12m TP of Rs492 implying a 13.5X FY20 P/E / 2.1X FY20 P/B. We
downgrade IDFB to Sell from Neutral on valuation and execution/credit cost risks.
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Goldman Sachs India Financials
Table of Contents
PM Summary 3
What has happened? 5
How strong can the recovery be in Asset quality? 8
Can SOE banks repeat 2003 10
Shifting debate to operational performance rather than just credit costs 13
How to position? 17
Summary of Target Price and Rating changes 29
Disclosure Appendix 35
16 April 2019 2
PM Summary
Our India banks coverage has rallied by c.12% over the last 3mth with SOE banks and
NBFCs outperforming Bank Nifty, partly driven by easing liquidity conditions (improving
credit spreads). However, we see three broad factors that could determine stock
performance: (1) SOE Banks: this cycle is different from previous cycle (2003-07) in
terms of ROA/Business growth, (2) operational performance to be a key driver for
share performance than just the credit cost, and (3) more pricing power to private
banks with deeper footprint such as HDBK/ICBK as NBFCs continue to change their
strategy to suit market conditions. We downgrade PNB, LICH, IDFC Bank to Sell; add
ICICI Bank (Buy) to Conviction List.
What is top of the mind?

n SOE Banks have rallied by c.25% since mid-Feb following rate cuts by the RBI and
the positive momentum on NPL resolution. However, Investors continue to question
whether valuations can continue to re-rate and can the current cycle play out the
way it did in 2003-2007;
n As credit spreads (G-sec vs. Corporate bonds) moderate, NBFCs (incl. HFCs) also
rallied with valuations rallying up c.30% from lows of Oct-18 in certain cases even
though the trajectory on sustainable ROEs have settled for lower due to moderating
ROAs and lower leverage;
n Investors broadly believe that the credit costs argument is well flagged and
reflecting in earnings improvement, and are questioning how long could the rally
sustain on the back of lower credit costs argument and which factors will come into
play post moderation in credit costs.
How strong can the asset quality recovery cycle be?
n With currently stressed book for SOE banks under coverage at c.US$52bn (12% of
loans) and expected recovery at c.35% (GS estimate), we believe a potential
addition to the profits would be c.US$500mn-1bn for our SOE coverage over
3Q’19-FY21 (v/s aggregate MCap of SOE banks at US$53bn). Post the
implementation of the Bankruptcy code (IBC) in 2016, so far average recoveries from
88 cases have been to the tune of 54% of the principal amount;
n The NPLs declined by c.33% cumulatively over FY02-07 on the back of lower NPL
formation and higher recoveries/write-offs;
n This led to a reduction in credit costs for select large SOE banks by c.200bps over
FY04-07. We are baking in a c270bps (FY18-21E) decline in credit costs during this
cycle;
n Core returns on Assets (ROAs) improved c.70bps (FY04-07) for SOE banks while we
are now expecting ROAs to recover to 0.8% by FY21E, implying 160bps
improvement since FY18.
16 April 2019 3
Can SOE banks repeat 2003?

n Even though we expect SOE banks to show improvement in profitability due to a
sharp fall in credit costs (as discussed above), the key debate would be how much
can the ROEs expand by given limited scope in improvement in the ROAs as well as
capital constraints;
n In 2003, SOE banks had 75% / 80% market share in both lending and deposits and
that allowed them to participate in ensuing credit growth in the system, improving
topline as well as ROAs;
n However, PVT banks now account for 30% of deposits in Metro & Urban areas
(c70% of total deposits) and have been incrementally garnering larger market share
(c60% over 4Q’16 to 2Q’19). Additionally, even in credit growth, we expect retail
growth to be faster than the overall corporate credit growth due to limited PVT
capex, limiting the strong growth momentum.
n Further, even though we believe ROAs and ROEs would improve, we expect them
to be lower than the last cycle due to tighter capital constraints and cap in lending
growth.
n Within our SOE banks coverage, we reiterate Buy on SBI and downgrade PNB
to Sell.
Premium for large franchises; scale and efficiency to drive shareholder returns
n We see corporate-centric banks to be on course to see moderation in credit costs.
We are projecting a c.260bps correction in credit costs over FY18-21E to c.95bps of
loans;
n However, we see the debate shifting towards operational performance as:
o With PVT banks already having a large market share in larger states (refer our
report HDFC Bank (HDBK.BO): Strengthening visibility, accelerating growth =
a US$200bn franchise?), the delta in growth coupled with premium
profitability would be driven by tier 2/3 towns;
o Garnering market share in deposits would be the key to drive a profitable
growth going forward; and
o Scale and efficiency is expected to drive incremental shareholder returns
going forward
How to position? Adding ICBK (Buy) to CL, Downgrading PNB/IDFC Bank/LIC Housing to
Sell from Neutral
n Within our broader India Financials coverage, we change target prices by -1% to
18% as we refresh our line of best fit incorporating FY20 ROEs/EPS. Some of the
key recommendation changes include:
o Add ICICI Bank (Buy) to CL on: (1) continued improvement in credit costs,
(2) pick up in lending growth and operating profits growth and (3) it being a
strong second in terms of penetration in deeper geographies (See our
standalone report – ICICI Bank (ICBK.BO): Not just a play on credit cycle turn;
banking on franchise strength – Add to CL for details);
16 April 2019 4
o Downgrade IDFC Bank to Sell as: (1) we expect the turnaround story on the
shift in asset/liability mix towards retail to take time to generate shareholder
returns, (2) key challenges remain in terms of deposit mobilization and lower
cost of fund which are key to drive profitability and (3) potential asset quality
issues in erstwhile Capital First loan book and our belief that management’s
implied assumption (based on guidance on key DuPont metrics) on future
credit costs seems to be benign. We expect the bank to generate 4-7% ROE
over FY20-22E, less than cost of equity for the next three years and therefore
we find risk-reward skewed to the downside, implying 18% downside vs 2%
average upside for our coverage.
o Downgrade PNB to Sell on: (1) concerns around potential increase in NPLs
in SME and Agri portfolio (35% of loan book) and (2) even though we expect
credit costs to decline by c.260bps over FY20-21E to 1.5% vs. 4.3% in
9M’19, lower operating profits and capital challenges would mean lower ROEs
as well. Based on our estimated ROEs at c.10% over FY20-21E, we see PNB
trading at lower valuations at 0.6X FY20 BVPS vs 0.75X currently, implying
21% downside.
o Downgrade LICH to Sell : While moderating interest rate should present a
benign operating environment for the NBFC/HFCs, structurally we see LICH’s
profitability settling at lower levels due to: (1) higher liquidity on balance sheet,
(2) higher capital on the balance sheet implying lower ROEs (3) continued
weakness in the LAP (loans against property) portfolio (LIC is the largest
player with a LAP book of US$4.3bn as of 3Q’19, 17% of the loan book) with
30day delinquencies for the industry at 8%. Given our outlook for its lower
ROEs vs long-term avg of 20%, we believe fair valuation multiple to be 1.2X
FY20 book vs long-term avg of 1.9X, implying a potential downside of 20%.
Prices in this report are as of April 11, 2019, unless otherwise specified.
What has happened?
1) Over the last six months, the banking system liquidity has been comfortable due to
aggressive OMOs done by the RBI. RBI recently allowed additional 200 bps carve-out
from SLR, creating further space for lending/investments for further OMOs.
2) Risk aversion has moderated leading to improvement in credit spreads and lowering
cost of funds for NBFCs. However, credit separation in the funding market has led to
elevated spreads for lower rated borrowers (A/AA) vs AAA rated borrowers, with
spreads between AAA/AA widening to 90bps in Jan-19 from c.50bps in Jul-18.
3) Loan to Deposit ratios still remains a major challenge. PVT banks are competing
for deposit market share, leading to c.50bps differential in weighted average
deposit rates vs SOEs in Feb-19 vs. 10bps avg difference over last six years.
4) NBFCs have changed borrowing profile from short term to long term coupled with
aggressive securitization. Retail loan securitization in 2H’19 was nearly 4X of 1H’19.
16 April 2019 5
Comfortable liquidity position + moderating risk aversion leading to improving

credit spreads
Exhibit 1: Banking system liquidity has turned positive but remains Exhibit 2: While the AAA spreads (vs 10Y Gsec) have moderated by
relatively tight, partly driven by seasonality c.50bps in recent weeks...
Banking system liquidity - (1M rolling avg) AAA vs G-Sec spreads
Spread - AAA (5Y) vs Gsec (5Y) Spread - AAA (5Y) vs Gsec (10Y)
2,000
2.00
1,000
1.60
-
(1,000) 1.20
(2,000)
0.80
(3,000)
0.40
(4,000)
-
(5,000)
Jul-18
Jan-17
Jun-17
Jul-17
Jan-18
Jun-18
Jan-19
Apr-17
Nov-17
Dec-17
Nov-18
Dec-18
Feb-17
Mar-17
May-17
Sep-17
Feb-18
Mar-18
Apr-18
Aug-18
Feb-19
Aug-17
Oct-17
May-18
Mar-19
Sep-18
Oct-18
Source: Bloomberg Source: Bloomberg

Exhibit 3: Spreads on AA continue to remain relatively more Exhibit 4: AAA rated HFCs have seen sharpest borrowing cost
elevated... reduction and are now borrowing at rates below the NBFC crisis
AA vs AAA and G-Sec spread unlike other borrower categories
NBFC / HFC AAA, AA yields
Spread - AA vs Gsec Spread - AA vs AAA (RHS) NBFC AA HFC AA NBFC AAA HFC AAA
2.40 0.90 10.0
2.00 0.75 9.5
1.60 0.60
9.0
1.20 0.45
8.5
0.80 0.30
8.0
0.40 0.15
7.5
- -
7.0
Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19
Source: Bloomberg Source: CARE Ratings
16 April 2019 6
Exhibit 5: While CP borrowing cost has normalized to some extent, the differential vs CP cost for
non-NBFCs has widened significantly
CP borrowing cost for NBFC, HFC and non-NBFCs
HFC NBFC Non-NBFCs
8.8
8.6
8.4
8.2
8.0
7.8
7.6 30bps
75bps
7.4
7.2
7.0
Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19
Source: CARE Ratings
Loan Deposit ratio continues to be a challenge
Exhibit 6: Skewed share gains in deposits vs. credits have led to an Exhibit 7: ...driving cost of deposits higher for private sector banks
increased LD ratio for PVT banks... Term Deposit rate (weighted avg) differential SOE vs PVT
Loan to Deposit ratio - PVT , SOE and System
Pvt SOE System SOE Banks PVT Banks
95% 93% 7.5 (%)
90%
7.0
85%
80%
6.5
75%
70%
6.0
65%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Q3’19
Q3’19 data calculated using growth trend from quarterly RBI reporting over annual series Source: RBI
Source: RBI, Goldman Sachs Global Investment Research
NBFC borrowing profile shifting to longer term instruments coupled with high
securitization volumes
16 April 2019 7
Exhibit 8: Shift in incremental borrowings to bonds from CP will Exhibit 9: NBFCs and HFCs have resorted to aggressive sell-down
increase borrowing cost, while mitigating ALM risks of loans to gather liquidity, potentially increasing the risk of credit
Breakdown of market based incremental borrowings (Rs bn) - Bonds + rating downgrades due to lower share of retail loans on balance
CPs sheet
Retail securitization volumes (Rs bn)
Bonds CPs 250

217
100%
197
200
80%
683
616
992 150
547
60% 1,161
1,577 1,663 110
100
40% 75
67
58
776
20% 456 50
245 454
277 273 275
0% -
Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 FY16 FY17 FY18 1HFY19 3Q’19 4Q’19
Source: CARE Ratings Source: Rating agencies

How strong can the recovery be in Asset quality?
1) One of the key investor questions we have been getting is how long and strong this
asset quality cycle could be? Looking at past trends, we believe the recovery can be
quite strong with a sequential decline in outstanding NPLs over years supported by
lower delinquencies and higher resolution of bad loans.
2) We expect this to lead to moderation in credit costs by 270bps – similar to previous

cycle of FY03-07, leading to improvement in ROAs.
3) and also leading to growth in BVPS of 11-12% CAGR and ROE of c.5-15% in
FY20-21E vs. cost of equity at 14.1%-15.4%.
4) However, key challenges such as lack of visibility on growth given market share loss
and capital constraints remain.
Decline in NPLs in this cycle is similar to past cycles
16 April 2019 8
Exhibit 10: Current NPL recovery cycle is similar to FY03-06 cycle...

GNPL , GNPL + Rest. movement comp in FY17-20E (SOE banks under coverage) vs last improvement cycle (Overall
SOE banks)
GNPL, yoy GNPL + Rest., yoy
25% 120%
** Our expectations in
20% *NPL dynamics in last cycle
current cycle
15%
80%
10%
5%
0% 40%
-5%
-10%
0%
-15%
-20%
-25% -40%
FY97 FY99 FY01 FY03 FY05 FY07 FY16 FY17 FY18 FY19E FY20E FY21E
* Includes entire PSU banks sector, **Includes PSU banks under our coverage
Source: RBI, Goldman Sachs Global Investment Research, Company data
With similar moderation in credit costs...
Exhibit 11: ...leading to sharp credit cost declines for corporate-focused banks
Credit costs - SOE and Corp Pvt Banks
(%) SOE banks Corp. PVT banks

4.0
Improving
Improving asset quality Stable asset quality Deteriorating asset
3.5 asset quality
quality
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19E
Source: Company data, Goldman Sachs Global Investment Research
..which leads to RoA and BVPS growth improvement
16 April 2019 9
Exhibit 12: Declining credit costs will drive core ROA improvement Exhibit 13: ROA improvement to drive BVPS growth of 11-12% over
for SOE banks, albeit lower than the previous cycle due to FY19-21E for SOE banks
constraints on capital and loan growth opportunity BVPS CAGR during different time periods, SOE banks
Core ROAs (PAT - Cap gains), SOE Banks
SBI BOB PNBK

(%) SBI BOB PNBK
Improving asset Deteriorating asset
3.0 25% quality quality Improving asset
Improving asset Stable asset quality Deteriorating asset Improving asset quality
2.0 quality quality quality 20%
1.0 15%
0.0 10%
-1.0 5%
-2.0 0%
-3.0 -5%
-10%
FY03-07 FY12-17 FY17-19E FY19-21E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
Exhibit 14: Corporate-focused PVT and SOE banks will benefit from Exhibit 15: We expect ICBK to be ahead of AXBK in balance sheet
declining credit costs; we expect credit costs to normalize cleanup in FY19E, leading to lower credit cost to PPOP over next 2
Credit cost (% of loans) trajectory - ICBK/AXBK/SOE banks years
Credit cost to PPOP differential - ICBK vs AXBK
(%) ICBK AXBK SOE Banks ICBK AXBK
4.0 80% 74%

3.5 65%
3.0
60%
2.5
2.0
40% 36%
1.5 32%
26% 24%
1.0
20% 16% 16%
0.5
0.0
-0.5 0%
FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19E FY21E FY19E FY20E FY21E FY19-21E
Source: Company data, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Can SOE banks repeat 2003
1) SOE banks have rallied c.10% over the last three months and valuations have gone
closer to 0.9X 1Y fwd PB (i.e. Sep-18 levels) and up c.25% from bottom. Although this
would still appear attractive, however, if coupled with 1) sustainability of ROA trajectory,
and 2) growth trajectory, we believe investors will have to be selective in positioning
within SOE ROA recovery theme.
2) SOE banks have been losing market share in both lending and deposits, a trend that
we expect to continue given their relative lack of franchise/expertise in most of retail
segments such as home loans, car loans, credit cards, etc. as well as lack of visibility on
corporate capex. Deposit market share has been stickier but as PVT banks expand
geographical presence they could replicate the market share gains seen in urban/metro
areas, in our view.
16 April 2019 10
3) Within SOE banks, we prefer SBI as we believe SBI is well positioned in improving its
ROAs back to 1% levels driven by lower credit costs, improvement in NIMs and
operating efficiency as growth picks up.
Different Growth trajectory given losing share in lending / deposit
Exhibit 16: Capital constraints and lack of strong franchise in retail Exhibit 17: Market share loss for SOE banks (c.10 pc pts) over the
segments (excl SBI) will cap loan growth recovery for SOE banks last 10 years will likely continue unless SOE banks see strong
in the current cycle; a strong capex recovery can drive higher capitalization, which is unlikely given the fiscal constraints
growth but low capital is a key impediment SOE Banks (overall) share in lending and deposit
Loan growth of SOE Banks under coverage
35% Lending Deposit
80%
30%
25% 76%
20%
72%
15%
68%
10%
64%
5%
0% 60%
FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19E FY21E FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 Q3’19
Source: Company data, Goldman Sachs Global Investment Research Source: RBI
Exhibit 18: Larger PVT banks gaining deposit market share in major states especially in metro/urban areas
Share of incremental deposits within states, FY15-1Q’19
HDBK ICBK AXBK SOE+other
19% 11% 6% Bihar
15% 8% 5% Kerala
13% 6% 3% West Bengal
13% 7% 4% Uttar Pradesh
8% 5% 4% Madhya Pradesh
8% 5% 2% Tamil Nadu
7% 7% 3% Karnataka
7% 3% 3% Gujarat
3% 6% 2% Telangana
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Govt website, RBI
16 April 2019 11
Exhibit 19: SOE banks (ex SBI) have lost greater market share in lending driven by their lack of expertise in
retail segments even as PVT banks have built deeper geographical presence
Share of incremental lending within states, FY15-1Q’19
HDBK ICBK AXBK SOE+others
26% 8% 10% Madhya Pradesh
23% 18% 17% Bihar
23% 12% 12% Kerala
22% 7% 7% Karnataka
21% 14% 13% Telangana
19% 7% 7% Gujarat
15% 6% 8% Uttar Pradesh
11% 6% 4% Maharashtra
11% 14% 2% West Bengal
9% 7% 4% Tamil Nadu
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Govt webstie, RBI
Exhibit 20: Loan-deposit ratio at the start of current recovery cycle Exhibit 21: SOE banks have seen significant market share loss in
is much higher than FY03 (c.20 ppts higher), which along with urban+metro areas
falling deposit market share will cap loan growth for SOE banks O/S and Incremental share of deposits (4Q’16 - 2Q’19)
SOE Banks Loan to Deposit Ratio
80% O/S share Incremental share PVT SOE

Rs 23.8tn Rs 7.4tn Rs 54.7tn Rs5.2tn
75%
9%
70%
65% 57%
65% Urban+ 65%
60% Metro
55% 83%
50%
40%
45% 31% 28%
40%
FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 Q3’19 SA Term
Source: RBI SA=Savings deposits; Term=Term deposits
Source: RBI
Improving RoA trajectory
16 April 2019 12
Exhibit 22: While core ROA for SOE banks will recover closer to FY07 levels...
Core RoA - SOE vs PVT Banks in coverage
SOE PVT
% Improving asset Stable asset Deteriorating Improving asset
2 quality quality asset quality quality
88bps
1
165bps
0
-1
Exhibit 23: ...resulting in valuation recovery but we expect only SBI to outperform given its capital/liability
strengths even though optically the entire PSU pack looks attractive
PSU vs PVT banks under coverage; 1yr fwd. PB disc. vs ROA differential
(X)
PSU vs PVT 1yr fwd PB (LHS) PSU/ PVT 1yr fwd ROA (RHS)
0% 1.2
-10% 1.0
PB: Current discount of 69% vs 39%
disc. in FY03-07 0.8
-20%
0.6
-30%
0.4
-40%
0.2
-50%
0.0
-60%
-0.2
-70% -0.4
-80% -0.6
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY10
Source: Datastream, Company data, Goldman Sachs Global Investment Research
Shifting debate to operational performance rather than just credit costs
Given that asset quality story has been well acknowledged by the markets and we are
now seeing both lower stress formation and positive development in certain large NPL
cases (such as Essar Steel), we think the key to outperformance going forward would
be operational performance.
While on one hand SOE banks are losing market share in advances on an overall basis
(Exhibit 27), they continue to dominate market share in deposits, particularly in
rural/semi-urban deposits.
16 April 2019 13
On the other hand, PVT banks have seen widening of Loan Deposit ratio, despite
gaining share in metro/urban deposits. We believe from a longer term perspective
deposit mobilization is critical, as:
a) Although within urban / metro markets, PVT banks have gained market share in
deposits and loans during FY16-3Q’19, but the difference is stark in rural / semi urban
which accounts for a third of system’s deposits and where SOEs still have a major
market share.
b) Some markets remain still remain skewed towards SOEs such as Uttar Pradesh
which in turn have a high share of rural/semi-urban share.
Even on retail lending, we see scope for further market share gains for PVT banks
narrowing as they form about 16-61% of O/S retail in the system and within larger
states the market share is even higher.
Operating profitability the key to out-performance going forward

Exhibit 24: Credit cost to PPOP for corp PVT banks will converge with retail PVT banks; whereas
challenges in operating profitability will lead to relatively higher ratio for SOE banks
Credit cost to PPOP
(X) SOE banks Corp. PVT banks Retail PVT Banks

1.40
Improving asset quality Stable asset quality Deteriorating asset Improving asset
1.20 quality
quality
1.00
0.80
0.60
0.40
0.20
0.00
-0.20
FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19E FY21E
Exhibit 25: While we expect core PPOP to asset will recover for Exhibit 26: We see SOE banks operational performance to remain
SOE and corp PVT banks, we see c.90bps differential to persist below previous recovery cycle as reflected from 1) lower loan
Core PPOP to Asset - SOE Banks growth...
Loan CAGR - FY03-07 vs FY18-21E
SOE ICBK+AXBK) BOB PNBK SBI
3.2 30%
%
24% 25%
25% 24%
2.8
20%
2.3
15% 14%
1.9
9%
10%
6%
1.4
5%
1.0 0%
FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20E FY03-07 FY18-21E
16 April 2019 14
Exhibit 27: ...2) lower margins, although a recovery from FY18 lows Exhibit 28: ...3) a relatively weaker liability franchise vs past given
as asset quality improves and growth kicks in... competition from PVT banks, which we expect to further decline
NIM comparison FY03-07 vs FY18-21E going forward
CASA to Laibilities - SOE Banks under coverage
BOB PNBK SBI 42%

(%)
4.5
40%
4.0
38%
3.5
36%
3.0
34%
2.5
2.0 32%
1.5 30%
FY03 FY04 FY05 FY06 FY07 FY18 FY19E FY20E FY21E FY03 FY05 FY07 FY10 FY12 FY14 FY16 FY18 FY20E
Deposit mobilization key

Exhibit 29: PVT banks have gained significant market share from SOEs in urban/metro areas; next leg of market share loss in
rural/semi-urban areas will weaken SOE banks franchise even further, in our view
Market share gains by PVT and SOE banks - FY16-Q2’19 - Credit and Deposit
439 Rural + Semi-urban 785 Urban + Metropolitan

569
156
-143
-613 -573
-721
PVT SOE PVT SOE PVT SOE PVT SOE
Credit Deposit Credit Deposit
Source: RBI
Exhibit 30: Deposit market share loss for SOE banks could accelerate as PVT banks compete with higher capital, better rates and
increasing penetration
Change in share of deposits
Deposit - 1Q’19 Deposit share - 1Q19 Chg in Deposit share (FY15-1Q19)
Total (Rs bn) HDFCB ICBK AXBK SOE HDFCB ICBK AXBK SOE
Maharashtra 23,052 11% 6% 6% 53% 4.7% 1.1% 1.4% -0.1%
Tamil Nadu 7,296 7% 5% 3% 61% 2.0% 0.6% 0.4% -5.5%
Gujarat 6,342 8% 5% 4% 74% 2.3% 1.1% 0.3% -5.0%
Karnataka 8,414 7% 5% 3% 59% 1.9% 0.2% -0.1% -5.3%
Uttar Pradesh 9,456 4% 3% 2% 79% 1.5% 0.6% 0.1% -3.2%
Madhya Pradesh 3,445 3% 2% 2% 83% 1.3% 0.7% 0.5% -3.8%
West Bengal 7,235 4% 4% 4% 76% 0.8% 0.9% -0.5% -2.9%
Kerala 4,551 4% 2% 2% 57% 1.2% 0.5% 0.5% -1.1%
Bihar 3,144 2% 3% 2% 80% 0.5% 1.6% 0.1% -1.0%
Telangana 4,215 8% 6% 4% 66% 3.1% 1.3% 0.6%
Widening LD ratio for PVT banks and increasing deposit rate gap
16 April 2019 15
Exhibit 31: Skewed share gains in deposits vs. credits have led to Exhibit 32: ...driving cost of deposits higher for private sector banks
increased LD ratio for PVT banks... Term Deposit rate (weighted avg) differential
Loan Deposit ratio
Pvt SOE System SOE Banks PVT Banks
95% 93% 7.5 (%)
90%
7.0
85%
80%
6.5
75%
70%
6.0
65%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Q3’19
Source: RBI Source: RBI
Exhibit 33: Wide differential in productivity improvement for PVT vs Exhibit 34: Stronger banks garnering higher market share in retail
SOE banks term deposits

Deposit per branch growth in top states (2yr CAGR) Retail term deposits - market share
25% Share of incremental (FY17-3Q’19) O/S market share
21% 25%
20%
20%
15%
15%
13% 10%
10%
5%
10%
0%
6%
5% -5%
-10%
0%
HDFCB ICBK AXBK SOE
Assuming 75% of term deposit for SOE banks to be retail in nature (Canara is as reported by
Source: RBI, Govt websites company)
Scope for further market share gains in retail for PVT banks narrowing
16 April 2019 16
Exhibit 35: PVT banks have gained c.10ppts of market share in retail lending (across top states forming c.90% of loans) with the Western &
Southern belt contributing c.75% of the incremental gains
Retail advances market share - PVT banks
State contribution of State contribution of
State share of
States PVT Bank market share in state incremental share of PVT incremental share of SOE
overall Retail adv
banks banks
1Q’19 FY15 1Q’19 Chg FY15 - 1Q’19 FY15 - 1Q’19
Maharashtra 25% 50% 61% 11% 41% 14%
Tamil Nadu 12% 33% 44% 11% 13% 7%
Karnataka 9% 25% 32% 6% 7% 10%
Gujarat 5% 27% 38% 11% 6% 6%
Telangana 5% 21% 32% 11% 5% 6%
Kerala 5% 27% 33% 5% 4% 5%
Uttar Pradesh 5% 14% 22% 8% 4% 7%
Delhi 4% 24% 36% 12% 3% 1%
Rajasthan 3% 12% 22% 10% 3% 5%
Haryana 3% 19% 32% 13% 3% 2%
Andhra Pradesh 5% 12% 16% 4% 2% 8%
West Bengal 3% 14% 19% 5% 2% 5%
Jammu & Kashmir 1% 76% 73% -3% 2% 1%
Punjab 2% 13% 23% 10% 1% 2%
Madhya Pradesh 3% 10% 16% 6% 1% 4%

Total 87% 30% 40% 10% 93% 82%
Overall O/S Pvt O/S Incremental PvT Incremental SOE
Retail Loan (RS bn) 18,920 3,129 6,996 3,868 3,915
Source: RBI
How to position?
Add ICICI Bank (BUY) to CL

We add ICICI bank (Buy) to our conviction list as we expect reduction in credit costs
(c.250bps reduction in FY20E) coupled with loan growth acceleration (c.20% in
FY20-21E i.e. 2X of FY16-18) and NIM recovery (c.30bps over FY20-21E) can potentially
drive 1.8% ROA and 17% ROE by FY21E.
Our analysis of state-wise deposit and advances market share indicates that ICBK is a
strong second player among PVT banks (after HDBK). Given new management’s focus
on retail businesses and closure on asset quality issues, we expect ICBK to be a strong
competitor with a long-runway to improve cross-sell and productivity.
We make minor changes to our estimates (FY20-21E EPS change of c.-1%) but our
12-month TP is revised on the back of higher RORWAs in 3-stage P/E based valuation
methodology leading to higher multiple (2.1x vs 1.9x previously) and we remove the cost
of equity (COE) discount on FY20 EPS as we roll forward our valuation year to FY20.
Key risks include: (1) any slippage in execution, (2) delinquencies in retail lending, (3) lack
of progress in productivity metrics across deposits, lending and fees, (4) any risk-off
sentiments due to macro concerns, and (5) any further regulatory oversight in the
context of previous management.
16 April 2019 17
Exhibit 36: Higher PPOP and credit cost recovery will drive ROA improvement to 1.8% by FY21
ICICI Bank - Du Pont analysis (%)
FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Net interest income 3.1 3.1 2.9 2.8 2.9 3.0 3.2
Other income 2.0 2.2 2.6 2.1 1.6 1.5 1.4
Total income 5.0 5.3 5.5 4.9 4.5 4.5 4.6
Operating expenses 1.9 1.9 2.0 2.0 1.8 1.8 1.8
PPOP 3.1 3.4 3.5 2.9 2.6 2.7 2.8
Core PPOP 2.9 2.9 2.4 2.2 2.4 2.5 2.7
Loan loss provisions 0.5 1.6 1.9 1.8 1.9 0.4 0.4
Pre-tax ROA 2.6 1.8 1.5 0.9 0.7 2.3 2.4
(1- tax rate) 70.6 79.8 86.9 91.2 75.9 75.0 75.0
ROA 1.8 1.4 1.3 0.8 0.5 1.7 1.8
Average assets/average equity 8.1 8.0 7.9 8.0 8.7 9.1 9.5
ROE 14.5 11.4 10.3 6.6 4.3 15.4 16.9
Exhibit 37: ICBK scores well on RORWA vs PB matrix, offering a Exhibit 38: ICBK’s valuations are attractive vs peers on PB vs ROA
strong re-rating potential based on peer bank valuations matrix

PB vs RoRWA for banks under coverage (FY20) PB vs ROA (FY21)
4.0 4.0
KMB
3.5
IIB HDBK
3.2 KTKM
3.0 INBK
HDBK
AXBK
2.5
2.4
AXBK
2.0
YES
ICBK 1.6 YES
1.5
IDFB IDFC ICBK
1.0 SBI
SBI
BOB 0.8
0.5 PNB PNB
BOB
- -
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
ICBK is a strong second among PVT banks
16 April 2019 18
Exhibit 39: ICBK has strong presence in franchise business such a home loans, credit cards and retail
deposits
ICBK’s market share in select segments (%)
14%
13%
12%
10%
9%
8%
7%
6% 5%
4%
2%
0%
Credit cards Home loans Retail term Savings deposit
Source: Company data, RBI
De-risking of lending portfolio largely done
Exhibit 40: We expect legacy corporate loan book to halve Exhibit 41: ...with losses reversing from FY20 onwards
between FY18 to FY21... PBT contribution
Loan break-up (%)
Legacy corporate loans Other wholesale (incl SME) Retail Wholesale Retail Treasury
100% 350
300 13
80% 250
12
57% 60% 61% 200
63%
240
60% 150 11
10 184
100
131 153
40% 50
44 54
27% -
29% 29% (71)
20% 28% (50) (103)
(100)
16% 12% 10% 8%
0% (150)
FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E
Legacy corporate book = BBB and below book
16 April 2019 19
Exhibit 42: We expect NIM (c.35bps) and loan growth (c.10 ppts) Exhibit 43: ...driving 21% core PPOP CAGR over FY19-21E
recovery from current levels through FY21E to drive c.500bps Core PPOP growth (%)
cost-income ratio improvement...
Cost-income and cost-assets ratio (%)
Core cost-income ratio Opex-assets ratio (RHS) Core PPOP growth (%)
46.0 2.0 2.0 2.1 30%
25%
23%
2.0 25%
18% 19%
44.0 2.0 20%
16%
1.9 15%
1.8 10%
42.0
1.9 10% 6%
1.8
1.8 1.8 5%
40.0
1.8 0%
38.0 1.7 -5%

-11%
1.7 -10%
45.2 45.3 43.3 41.9 40.1
36.0 1.6 -15%
FY17 FY18 FY19E FY20E FY21E FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Exhibit 44: We expect valuation differential of ICBK vs AXBK to

reduce further as operating profit growth gap narrows down
P/core PPOP vs 1yr fwd. core PPOP growth
P/core PPOP (LHS) 1yr fwd. PPOP growth
50% 10%
5%
30%
0%
10% -5%
-10%
-10% -15%
-20%
-30%
-25%
-50% -30%
FY09 FY11 FY13 FY15 FY17 FY19
Source: Datastream, Goldman Sachs Global Investment Research, Company data
ICBK.BO 12m Price Target: Rs492 Price: Rs392.75 Upside: 25.3%
Buy GS Forecast
3/18 3/19E 3/20E 3/21E
Market cap: Rs2.5tr / $36.3bn Revenue (Rs mn) New 404,454.8 415,149.1 479,959.5 579,398.1
Enterprise value: -- Revenue (Rs mn) Old 404,454.8 415,149.1 482,137.7 583,405.3
3m ADTV: NA EBITDA (Rs mn) -- -- -- --
India EBIT (Rs mn) -- -- -- --
India Banks: EPS (Rs) New 10.54 7.18 28.09 34.89
EPS (Rs) Old 10.54 7.18 28.35 35.36
M&A Rank: 3 P/E (X) 28.2 54.7 14.0 11.3
Dividend yield (%) 0.5 0.6 2.5 3.1
Net debt/EBITDA (X) -- -- -- --
6/18 9/18 12/18E 3/19E

EPS (Rs) (0.19) 1.41 2.49 3.46
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 15 Apr 2019 close.
16 April 2019 20
Downgrade IDFC Bank to Sell from Neutral as valuations appear ahead of fundamentals
n We believe IDFB’s 1.3X FY20 PB valuation does not completely capture the near to
mid-term execution risk of its branch expansion strategy which could lead to
operating costs upfront while we expect deposit growth will happen with a lag. A
longer than expected delay in progress on gathering retail deposits (i.e. lower
cost of funds) may lead to the bank increasing risk on the lending book.
n While we believe that the shift in strategy by the new management to open
branches more aggressively (vs. selectively earlier) is in the right direction as it
would help IDFB build stable retail deposit base over the long-term, we see the
competition in deposit and credit as becoming a serious challenge for smaller banks
(such as IDFB) as larger banks continue to expand their market share.
n We also have concerns on the potential asset quality risks in the erstwhile Capital
First (IDFB acquired it in FY19) book which has grown at c.30%CAGR over FY15-18,
largely in the LAP and unsecured business loan segments. Industry data (CIBIL
Transunion) as of Mar-19 indicates early delinquencies (30+ days due) has touched
8%, up 180bps yoy (c.10% on 1Y lagged basis). Further, management expectations
of benign future credit costs in the medium term seem to be lower than the
historical credit costs trajectory in the retail/SME business at the erstwhile Capital
First.
n While they trade at similar valuations on P/B basis we find the risk-reward to be
more attractive for other stocks under coverage with similar valuations such as ICBK
(Buy, on CL) and SBI (Buy). At our unchanged 3-stage P/E based 12 month TP of
Rs45, we see 18% downside for IDFB, one of the highest downsides in our
coverage (vs. +2% average upside for our sector, incl. average upside of 20% on
Buy rated names and 1% on Neutral rated names). We revise our earnings
downwards by 3/8% for FY20/21E on higher operating expense/credit costs which is
partly offset by removal of COE discount on FY20E EPS as we roll forward our
valuation year to FY20.
n What would make us more positive? Strong execution on retail deposit growth
and consequent decline in cost of funds could lead to higher operating profit growth,
which if coupled with stable asset quality (esp. in LAP/business loans) could lead us
to ascribe higher multiples, even though near-term earnings would still remain under
pressure.
n Where are we vs consensus? Our FY20-21 EPS estimates are 30-35% below
Bloomberg consensus. While we believe the consensus estimates may not be fully
baking in the recently concluded merger, we have seen a clear downward revision
trend in consensus forecasts since Aug 2018 (Exhibit 47/48).
n Upside risks: Our rating/valuation have an upside risk if management is able to
deliver stronger than expected progress in retail deposit leading to faster than
expected NIM improvement. A more benign asset quality trends leading to lower
credit costs will lead to upside risks to our estimates. In both the scenarios, market
may ascribe higher than multiple than our target multiple.
16 April 2019 21
Exhibit 45: Branch expansion strategy over the next few years will likely drag on the opex ratio leading to
ROEs below COE over the medium-term
Du Pont analysis and key ratios for IDFC Bank
FY19E FY20E FY21E FY22E FY23E FY24E

Net interest income 2.0 3.2 3.8 4.2 4.6 5.0
Other income 0.7 0.8 0.8 0.9 1.1 1.1
Total income 2.7 4.0 4.6 5.1 5.7 6.1
Operating expense 2.1 2.8 3.1 3.3 3.3 3.2
Provisions 0.7 0.7 0.9 1.1 1.1 1.2
RoA (1.1) 0.4 0.4 0.6 0.9 1.2
Leverage 8.8 9.6 10.5 11.7 12.9 13.3
RoE (10.0) 3.5 4.2 6.5 11.6 16.4
Ratios (%)
Yield on loans 11.3 12.7 13.0 13.5 13.9 14.1
Cost of funds 7.3 7.5 7.1 6.9 6.8 6.8
NIM 2.1 3.4 4.0 4.5 4.9 5.2
CASA (% of liabilities) 6.3 11.1 16.7 18.7 19.2 19.5
Cost-income 78.6 69.1 68.7 63.7 57.6 51.8
Credit costs 1.2 1.4 1.5 1.8 1.8 1.8
Gross NPL 1.6 1.9 2.0 2.1 2.3 2.6
Net NPL 0.7 0.7 0.6 0.2 0.3 0.5
Source: Goldman Sachs Global Investment Research
Exhibit 46: We expect liability mix to be dominated by wholesale sources as we see the shift to retail
liabilities to happen with a lag
Liability mix (%)
Other borrowings Other wholesale deposit Retail TD SA CA
100
3 4 7 7 7 7
4 7
90 6
10 12 12 12
12
80
36
34 18
70 30 20 20 21
60 36
50
37
40 41
42
44
30 59 57 57
20 42
28
10 21 18 15
-
FY17 FY18 FY19E FY20E FY21E FY22E FY23E FY24E
16 April 2019 22
Exhibit 47: Funding profile is highly skewed towards wholesale Exhibit 48: Share of retail loans has increased to 35% from <10%
sources of borrowing post merger with Capital First
Break-up of deposits and borrowings as of 3Q’19 (%) Break-up of loan book as of 3Q’19 (%)
Other short- Stressed equity,

term Legacy infra SR
CASA 12% bonds Inorganic PSL 3%
8%
5% 32%
Retail term
deposit
6% Retail
35%
Wholesale
term
deposit Wholesale
19% Certificate of 54%
deposit Money market
17% 9%
Source: Company data Source: Company data
Exhibit 49: We expect retail share to ramp up to c.75% by FY24E Exhibit 50: Capital First had seen its credit costs rise to 2.7% in
from 45% in FY19E FY18 from 1.7% in FY16; continued seasoning of this book will put
Loan mix (%) pressure on credit costs
Credit costs trajectory for Capital First and for merged bank (%)
Rural SME Consumer Non-infra Infra Capital First credit cost Merged bank credit costs
100% 3%
12% 3.0% 2.7%
25% 20% 2.5%
80% 2.4%
2.5%
27%
60% 30% 2.0% 1.8% 1.8% 1.8%

41% 1.7%
1.5%
30% 1.5% 1.4%
40% 1.2%
22%
1.0%
20% 27%
22%
17%
0.5%
6% 8% 9%
1H’19
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
0%
FY19 FY21 FY24
Source: Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
Exhibit 51: FY20 consensus EPS has been revised down by c.40% Exhibit 52: FY21 consensus EPS has been revised down by c.30%
since August 2018 since August 2018
FY20 consensus EPS FY21 consensus EPS revision
4.00 4.00
3.80
3.50 3.60
3.40
3.00 3.20
3.00
2.50 2.80
2.60
2.00 2.40
2.20
1.50 2.00
Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19
Source: Datastream Source: Datastream
16 April 2019 23
Exhibit 53: IDFC Bank Summary Financials

IDFC Bank Ltd.
Profit model (Rs mn) FY19E FY20E FY21E Balance sheet (Rs mn) FY19E FY20E FY21E
Net interest income 29,509 57,684 74,245 Net loans and advances 859,368 950,776 1,129,437
Non-interest income 10,292 14,461 16,451 Total assets 1,690,341 1,875,574 2,084,050
Fee income 8,556 12,671 14,561
Treasury income 1,090 1,090 1,090
Other income 646 700 800 Customer deposits 650,673 987,688 1,361,408
Operating revenue 39,800 72,145 90,696 Current Accounts 95,442 187,956 316,403
Operating expenses (31,296) (49,857) (62,274) Savings accounts
Employee expenses (11,386) (17,746) (23,219) Total equity 184,214 186,540 190,267
Other expenses (19,910) (32,112) (39,055) Total Liabilities 1,506,126 1,689,034 1,893,783
Preprovision oper profits 8,504 22,287 28,423
Total provision charge (10,627) (12,835) (16,942) YoY growth (%) FY19E FY20E FY21E
NPL Provisions (10,231) (12,835) (16,942) Loans 74.0 10.6 18.8
Other Provisions (396) 0 0 Assets 50.7 11.0 11.1
Pretax profit (28,117) 9,452 11,481 Customer deposits 61.8 51.8 37.8
Tax 11,309 (2,930) (3,559) CASA NM NM NM
Net profit (16,807) 6,522 7,922 Equity 25.5 1.3 2.0
Liabilities 54.5 12.1 12.1
YoY growth (%) FY19E FY20E FY21E
Net interest income 46.3 95.5 28.7
Non-interest income 1.6 40.5 13.8 Key Ratios (%) FY19E FY20E FY21E
Fee income 185.9 48.1 14.9 Net interest margin 2.22 2.13 3.45
Operating revenue 31.3 81.3 25.7 Non interest income/Total income 33.4 25.9 20.0
Operating expenses 145.1 59.3 24.9 Cost-income ratio 42.1 78.6 69.1
Preprovision Oper profit (51.5) 162.1 27.5 Provision charge/total loans 0.57 1.24 1.35
Provision charges 276.2 20.8 32.0 CASA ratio
Pretax profit (291.1) (133.6) 21.5 Loan/deposit ratio 132 96 83
Net profit (264.8) (138.8) 21.5 Tier 1 Capital ratio 16.9 17.4 14.5
Market dimensions FY19E FY20E FY21E
No of branches 240 500 700 Asset Quality FY19E FY20E FY21E

No of staff (000s) 11.1 16.7 20.4 Gross NPL 8,688 8,454 9,854
Gross NPL ratio (%) 1.01 0.88 0.86
Dupont analysis (% of assets) FY19E FY20E FY21E
Fee income 0.58 0.71 0.74
Non-interest income 0.70 0.81 0.83
Operating revenue 2.69 4.05 4.58 Valuation FY19E FY20E FY21E
Operating expenses 2.12 2.80 3.15 P/E basic (X) 39.6 32.6
Preprovision Operating profit 0.58 1.25 1.44 P/B (X) 1.4 1.4 1.4
Loan loss provisions 0.69 0.72 0.86 Per Share data FY19E FY20E FY21E
Pretax profits (1.90) 0.53 0.58 EPS (Rs.) (3.5) 1.4 1.7
ROA (%) (1.14) 0.37 0.40 DPS (Rs.) 0.8 0.8 0.8
x leverage 8.8 9.6 10.5 BVPS (Rs.) 38.5 39.0 39.8
= ROE (%) (10.0) 3.5 4.2 No. of shares (mn) 4,781.5 4,781.5 4,781.5
IDFB.BO 12m Price Target: Rs45 Price: Rs53.95 Downside: 16.6%
Sell GS Forecast
3/18 3/19E 3/20E 3/21E
Market cap: Rs183.0bn / $2.6bn Revenue (Rs mn) New 29,159.9 39,800.2 72,144.5 90,696.4
India Banks: EPS (Rs) New 2.52 (3.52) 1.36 1.66
EPS (Rs) Old 2.52 0.15 1.41 1.80
M&A Rank: 3 P/E (X) 22.6 NM 39.6 32.6
Dividend yield (%) 1.3 1.4 1.4 1.4
9/18 12/18 3/19E E

EPS (Rs) (1.09) (3.22) 0.10 --
LICHF: Downgrade to Sell from Neutral on lower structural profitability

n Structural challenges remain despite lower funding cost. While moderating
interest rates should present a benign operating environment for the NBFC/HFCs,
structurally we see LICH’s profitability settling at lower levels due to: (1) higher
liquidity on its balance sheet driven by potential regulatory risks (as indicated during
16 April 2019 24
our interactions with companies/regulator), (2) higher capital on the balance sheet
driven by recent regulatory actions, implying lower ROEs, and (3) continued
weakness in the LAP portfolio (LIC is the largest player with a LAP book of
US$4.3bn, 17% of the loan book as of 3Q’19) with 30day delinquencies for the
industry at c.8% as of Dec-18 (up 180bps yoy).
n Exposure to LAP a risk. LICH’s customer segment (mainly salaried consumers) is
highly competitive with other banks having higher funding cost advantage due to
low cost deposits. With other loan growth drivers (LAP, developer loans) slowing
down, we expect LICH will have to compromise on growth/NIMs, thus limiting the
benefit of lower cost of borrowing.
n Based on our expectations of lower ROEs, we believe a fair valuation multiple for
LICH to be 1.2X FY20 book vs. 1.4X currently, implying a downside of c.20% from
current levels. At our revised 3-stage P/E based 12-month TP of Rs437 (from Rs423),
we see 18% downside for LICH, one of the highest downsides in our coverage (vs.
+2% average upside for our sector, incl. average upside of 20% on Buy rated names
and 1% on Neutral rated names). We make minor changes to our FY20/21E EPS
(0-1%) and our TP revision reflects removal of COE discount on FY20E EPS.
n What would make us more positive? Market share gains by LICH in the context of
a potential pullback by smaller NBFCs and decline in bond borrowing cost along with
stable asset quality performance (esp. LAP/developer loans) could lead to earning
upgrades and upward revision in multiples.
n Where are we vs consensus? Our EPS estimates for FY20-21 are 2-5% higher than
Bloomberg consensus which we believe is likely driven by our c.150 bps higher loan
growth assumption vs consensus for these years. Our Sell rating is predicated on
structural challenges (lower leverage/higher liquidity requirements) leading us to
assign lower sustainable leverage in our valuation framework and thus leading to
lower target multiples, see Exhibit 59 for details.
n Upside risks: Decline in funding cost coupled with better pricing power could lead to
higher than expected NIM and loan growth and ROAs. Lower than expected credit
costs from LAP can lead to better than expected ROAs thus potentially leading to
higher multiples.
16 April 2019 25
Exhibit 54: While funding cost pressures have eased, we expect Exhibit 55: NHB’s recently proposed leverage cap (12X) will lead to
structural issues such as higher liquidity and lower leverage will lower sustainable leverage and ROEs for LICH, in our view
cap ROE improvement LICH - Leverage (borrowings/net worth)
LICH - ROA and ROE (%)
ROE ROA Leverage Leverage cap by NHB
25.0 1.6 13.0
1.5
20.0 12.0
1.4
15.0 11.0
1.3
10.0 10.0
1.2
5.0 9.0
1.1
0.0 1.0 8.0

FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Exhibit 56: We expect LICH’s low coverage ratio for stage-1&2 loans will put pressure on near-term profitability
Comparison of provision on stage1-3 loans (%)
Stage-3 Provision Stage-1&2 Provision Total provision
HDFC 1.4 39.8 98.6 0.8 1.3
LICHF 1.3 68.2 98.8 0.0 0.9
PNBHF 0.5 22.7 99.5 0.5 0.6
DHFL 1.1 29.5 98.9 0.7 1.0
IBHF 0.8 25.0 99.2 0.5 0.7
Source: Company data
Exhibit 57: LICH has the highest exposure to LAP loans; current Exhibit 58: With 17% of loan book in LAP, deterioration (as
NPLs in book is about 1.5% indicated by CIBIL data) will hurt ROEs given higher leverage
LAP loans for NBFCs (Rs bn) LAP share in AUM mix (%)
350 25%
300
20%
250
200 15%
150
10%
100
5%
50
0 0%
Source: Company data Source: Company data
16 April 2019 26
Exhibit 59: LICH Summary Financials

LIC Housing Finance
Net interest income 41,761 50,209 59,511 Net loans and advances 1,928,206 2,242,385 2,592,227
Fee income 1,001 986 1,134
Treasury income 200 500 500
Other income 0 0 0 Customer deposits 79,936 95,924 105,516
Operating revenue 42,962 51,695 61,145 Current Accounts 0 0 0
Operating expenses (4,429) (5,165) (6,155) Savings accounts
Other Provisions 0 0 0 Assets 30.3 16.1 15.4
Pretax profit 33,272 38,443 45,572 Customer deposits 26.5 20.0 10.0
Tax (9,419) (11,533) (13,672) CASA NM NM NM
Net profit 23,852 26,910 31,900 Equity 48.8 13.0 13.8
Non-interest income (25.1) 23.8 10.0 Key Ratios (%) FY19E FY20E FY21E
Fee income (9.2) (1.4) 15.0 Net interest margin 2.59 2.27 2.36
Operating expenses (27.6) 16.6 19.2 Cost-income ratio 16.1 10.3 10.0
Preprovision Oper profit 20.7 20.8 18.2 Provision charge/total loans 0.19 0.33 0.40
Provision charges 124.5 42.0 15.6 CASA ratio
Pretax profit 12.6 15.5 18.5 Loan/deposit ratio 2,412 2,338 2,457
Net profit 23.5 12.8 18.5 Tier 1 Capital ratio 13.1 12.6 12.3
Total Capital ratio 16.9 16.5 16.3

No of branches 298 308 318 Asset Quality FY19E FY20E FY21E
Gross NPL ratio (%) 1.00 0.95 0.94
Dupont analysis (% of assets) FY19E FY20E FY21E Net NPL 9,087 3,846 -1,262
Net interest income 2.27 2.36 2.42 Net NPL ratio (%) 0.47 0.17 (0.05)
Fee income 0.05 0.05 0.05 Provision coverage ratio (%) 53.3 82.0 105.1
Operating expenses 0.24 0.24 0.25 P/E basic (X) 11.2 9.9 8.4
Pretax profits 1.81 1.81 1.85 EPS (Rs.) 47.2 53.3 63.2
ROA (%) 1.29 1.27 1.30 DPS (Rs.) 9.3 10.5 19.0
= ROE (%) 16.4 15.3 16.0 No. of shares (mn) 505.0 505.0 505.0
LICH.BO 12m Price Target: Rs437 Price: Rs530.1 Downside: 17.6%
Sell
GS Forecast
3/18 3/19E 3/20E 3/21E
India Banks: EPS (Rs) New 39.40 47.23 53.29 63.17
EPS (Rs) Old 39.40 47.39 52.68 61.25
M&A Rank: 3 P/E (X) 16.0 11.2 9.9 8.4
Dividend yield (%) 1.1 1.8 2.0 3.6
9/18 12/18 3/19E E

EPS (Rs) 11.35 11.81 12.83 --
Downgrade PNB to Sell from Neutral lower capital adequacy and agri/SME exposure
Downgrade PNB to Sell on: (1) concerns around NPLs in SME and Agri portfolio (35%
of loan book) - we see these as segments with higher NPL risks (see our report) and (2)
even though we expect credit costs for PNB to decline by c.260bps over FY20-21E,
16 April 2019 27
lower operating profits as low capital adequacy ratio (CET-1 of c.8%) would cap loan
growth and imply lower ROEs as well. Based on our estimated ROEs at c.10% over
FY20-21E vs. 2% in 3Q’19 and <0% in FY18, we expect to see PNB trading at lower
valuations at 0.6X FY20 BVPS vs. 0.8X currently.
At our revised Gordon Growth plus SOTP based 12-month TP of Rs74 (from Rs70), PNB
offers 25% downside (vs. +2% average upside for our sector, incl. average upside of
20% on Buy rated names and 1% on Neutral rated names). We revise our estimates
marginally (5%/0% EPS in FY20/21E) and our TP revision reflects removal of COE
discount of FY20E book value as we roll forward our valuation year to FY20.
What would make us more positive? Any sustained capital support by the
government could lead to stronger than expected loan growth for PNB (we estimate 6%
CAGR over FY19-21E) and margin recovery due to higher than expected NPL
recoveries/CASA growth could lead us to revise our forecasts upwards and assign
higher multiples (on the back of higher RoRWAs).
Where are we vs consensus? Our BVPS for FY20/21 is 2/4% below consensus. Our
0.6X target FY20 PB multiple vs 0.7X implied by consensus likely reflects our
expectations of lower loan growth prospects and possibly higher credit costs growth
given capital constraints.
Upside risks: Key upside risks to our TP/rating is stronger than expected loan growth
led by supportive macro and/or government capital support leading to stronger balance
sheet. This could lead to higher than expected ROAs and multiples.
Exhibit 60: PNB’s weak core operating profit will likely continue to drag return ratios
PNB Du Pont analysis (%)
FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Net interest income adjusted 2.9 2.4 2.2 2.0 2.2 2.5 2.6
Other income 1.0 1.1 1.4 1.2 1.2 0.7 0.7
Total income 3.9 3.5 3.6 3.2 3.4 3.3 3.3
Operating expenses 1.8 1.6 1.4 2.6 1.6 1.5 1.5
PPOP 2.1 1.9 2.2 0.6 1.8 1.8 1.8
Loan loss provisions 1.5 2.7 1.8 3.0 2.4 0.9 0.8
Investment Depreciation (0.1) 0.1 0.1 0.3 0.2 - -
RoA pre-tax/prov/treasury/extr. 1.9 1.7 1.8 0.2 1.4 1.7 1.8
ROA 0.5 (0.6) 0.2 (1.7) (0.5) 0.6 0.7
Avg assets/avg equity 15.4 16.4 17.3 17.9 17.1 15.4 14.9
ROE 8.2 (10.3) 3.3 (29.6) (8.8) 9.7 10.2
16 April 2019 28
Exhibit 61: PNBK Summary Financials

Punjab National Bank
Net interest income 177,632 210,984 231,345 Net loans and advances 4,577,737 4,833,415 5,111,151
Fee income 40,676 42,710 46,981
Treasury income 30,263 6,960 4,176
Other income 20,994 13,078 13,437 Customer deposits 6,713,650 7,021,114 7,424,558
Operating revenue 269,565 273,732 295,939 Current Accounts 385,536 399,315 414,218
Operating expenses (113,499) (124,586) (133,984) Savings accounts 2,397,059 2,555,045 2,727,595
Other Provisions (32,870) 0 0 Assets 13.3 5.2 6.0
Pretax profit (63,787) 76,645 87,333 Customer deposits 8.0 4.6 5.7
Tax 22,950 (23,760) (27,073) CASA 7.0 6.2 6.3
Net profit (40,837) 52,885 60,259 Equity 23.5 10.2 8.4
Non-interest income (7.2) (31.7) 2.9 Key Ratios (%) FY19E FY20E FY21E
Fee income 49.1 5.0 10.0 Net interest margin 2.16 2.25 2.52
Operating expenses 21.0 9.8 7.5 Cost-income ratio 37.7 42.1 45.5
Preprovision Oper profit 0.6 (4.4) 8.6 Provision charge/total loans 3.22 4.80 1.50
Provision charges 62.8 (67.0) 2.9 CASA ratio 41.4 42.1 42.3
Pretax profit (417.1) (220.2) 13.9 Loan/deposit ratio 68 69 69
Net profit (408.2) (229.5) 13.9 Tier 1 Capital ratio 9.2 9.6 9.8
Total Capital ratio 12.0 12.2 12.3

No of branches 7,011 7,061 7,111 Asset Quality FY19E FY20E FY21E
Gross NPL ratio (%) 14.46 10.59 7.18
Dupont analysis (% of assets) FY19E FY20E FY21E Net NPL 349,176 251,675 152,052
Net interest income 2.25 2.52 2.62 Net NPL ratio (%) 7.63 5.21 2.97
Fee income 0.51 0.51 0.53 Provision coverage ratio (%) 51.8 54.2 60.8
Operating expenses 1.43 1.49 1.52 P/E basic (X) 8.2 7.2
Pretax profits (0.81) 0.92 0.99 EPS (Rs.) (8.8) 11.4 13.0
ROA (%) (0.52) 0.63 0.68 DPS (Rs.) -- 2.3 2.6
= ROE (%) (8.8) 9.7 10.2 No. of shares (mn) 4,646.6 4,646.6 4,646.6
PNBK.BO 12m Price Target: Rs74 Price: Rs93.8 Downside: 21.1%
Sell
GS Forecast
3/18 3/19E 3/20E 3/21E
India Banks: EPS (Rs) New (44.49) (8.79) 11.38 12.97
EPS (Rs) Old (44.49) (18.81) 16.40 19.57
M&A Rank: 3 P/E (X) NM NM 8.2 7.2
Dividend yield (%) 0.0 0.0 2.4 2.8
9/18 12/18 3/19E E

EPS (Rs) (14.75) 0.65 2.46 --
Summary of Target Price and Rating changes
We make minor changes to our estimates for our coverage stocks but our TPs for private
banks and NBFCs is revised on the back of higher RORWAs in 3-stage P/E based
16 April 2019 29
valuation methodology leading to higher multiple. We also remove the cost of equity
(COE) discount on FY20 EPS as we roll forward our valuation year to FY20E. For SOE
banks 1) we remove the COE equity discount on FY20E BVPS and for BOB we bake in
the consolidated financials post the merger completion with Dena and Vijaya Bank.
Exhibit 62: Summary of 12-month TP changes
New New TP Old

Old Rating % Change % Up / Downside TP Methodology
Rating (Rs.) TP (Rs.)
PVT Banks
AXBK Neutral Neutral 748 710 5% -2% PE framework + SOTP
HDBK Buy* Buy* 2,787 2,738 2% 22% PE framework + SOTP
ICBK Buy* Buy 492 451 9% 25% PE framework + SOTP
IDFB Sell Neutral 45 45 -1% -17% PE framework
INBK Neutral Neutral 1,948 1,738 12% 12% PE framework
KTKM Buy Buy 1,484 1,455 2% 8% PE framework + SOTP
YESB Neutral Neutral 248 210 18% -7% PE framework
BANH Neutral Neutral 593 565 5% 11% PE framework
SOE Banks
BOB Neutral Neutral 128 115 11% -2% Gordon Growth + SOTP
PNBK Sell Neutral 74 70 6% -21% Gordon Growth + SOTP
SBI Buy Buy 390 369 6% 24% Gordon Growth + SOTP
NBFC
BJFN Neutral Neutral 2,899 2,670 9% -4% PE framework
HDFC Buy Buy 2,343 2,210 6% 16% PE framework + SOTP
LICH Sell Neutral 437 423 3% -18% PE framework
MMFS Sell Sell 327 304 7% -23% PE framework + SOTP
SRTR Neutral Neutral 1,235 1,231 0% 1% PE framework
* Denotes on GS Conviction List, Closing price as of Apr 11, 2019
16 April 2019 30
Exhibit 63: Summary of EPS, TP and valuation multiple changes
New % change
Target FY20 Target FY20
PVT Banks FY20 PE FY20 PE
Price EPS Price EPS
Axis Bank 748 47 14.7 5% -2% 8%
ICICI Bank 492 28 13.4 9% -1% 13%
HDFC Bank 2,786 98 26.6 2% 0% 2%
Indusind Bank 1,948 91 21.4 12% 5% 6%
Yes Bank 248 23 10.7 18% 8% 9%
Kotak Mahindra Bank 1,484 35 30.9 2% 0% 3%
IDFC Bank 45 1 31.2 -1% -3% 2%
Bandhan Bank 593 22 26.9 5% 0% 5%
NBFCs
Bajaj Finance 2,899 98 28.9 9% 5% 3%
Mahindra Finance 327 27 10.3 7% 0% 9%

HDFC Ltd 2,343 51 22.7 6% 0% 13%
LIC Housing Finance 437 53 8.2 3% 1% 2%
Shriram Transport Finance 1,235 121 10.2 0% 0% 0%
HDFC EPS is as of core (standalone) business
Source: Datastream, Goldman Sachs Global Investment Research
Exhibit 64: We refresh our regression based line of best fit in our 3-stage based valuation framework as we update our estimates
3 Stage PE based framework
Stage 1 - Returns (Adj. ROE) Stage 2 - COE Stage 3 - Growth
Base Multiple Derivation Premium/Discount to factor in COE emium/discount to factor forecast growth vs pa
Lending
PB v Adj. ROE regression culation based on Forecast EPS CAGR vs Med Target PE
Gordon growth based premium/discount calc. business SOTP 12m TP
(FY20Ex)
Value (Rs) (Rs)
(A*(1+B)*(1+C))
EPS CAGR Forecast (Rs)
Adj. ROE Sector line Implied Gordon Prem/ Prem/Disc
PB (FY20E) COE Historical EPS CAGR
(FY19-20) Based PB PE (A) growth PB Disc (B) (’C)
Median (FY16-21)
PVT Banks
2.24 25.6% 2.35 15.43 15.1 2.31 -5% 13.0 11.61 0% 14.65 688 60 748
Axis Bank
1.41 24.3% 2.15 14.93 15.4 2.26 -10% 14.0 18.07 0% 13.4 378 114 492
ICICI Bank
3.30 36.4% 4.01 25.66 13.3 2.83 15% 22.8 19.90 -10% 26.6 2,598 188 2,787
HDFC Bank
3.35 33.5% 3.57 20.42 14.0 2.58 5% 23.9 25.73 0% 21.4 1,948 1,948
Indusind Bank
1.83 24.8% 2.22 14.10 14.8 2.38 -5% 28.2 20.25 -20% 10.7 248 248
Yes Bank
3.71 36.8% 4.07 29.42 13.8 2.66 5% 20.4 31.48 0% 30.9 1,081 403 1,484
Kotak Mahindra Bank
1.35 17.1% 1.04 29.69 14.0 2.58 5% 0% 31.2 43 2 45

IDFC Bank
4.78 44.5% 5.25 26.90 14.6 2.44 0% 0% 26.9 593 593
Bandhan Bank
NBFCs
7.05 45.9% 5.47 24.11 12.5 2.95 0% 25.72 39.84 20% 28.9 2,835 2,899
Bajaj Finance
1.90 19.8% 1.45 10.45 13.3 2.66 -10% 16.44 22.47 10% 10.3 282 45 327
Mahindra Finance
2.15 28.0% 2.71 20.61 11.7 3.3 10% 15.34 15.85 0% 22.7 1,150 1,193 2,343
HDFC Ltd
1.44 20.8% 1.61 11.15 12.2 3.1 5% 20.96 13.94 -30% 8.2 437 437
LIC Housing Finance
1.53 20.5% 1.56 10.22 12.5 2.9 0% 18.28 21.79 0% 10.2 1,235 1,235
Shriram Transport Finance
Adj ROE : RoRWA * Optimal Leverage
HDFC EPS is as of core business
Source: Datastream, Goldman Sachs Global Investment Research
16 April 2019 31
Exhibit 65: We revise SOE banks TP; for BOB we bake in consolidated financials post merger completion with Vijaya Bank and Dena Bank
SOE banks TP methodology
SOE Banks Gordon Growth model (PB calc.) BVPS (Rs) SOTP valuation
Adj FY20E ROE Terminal Bank value (I * II) 12m TP
COE (%) P/B (I) FY20E Subs Value (Rs)
(%) Growth (%) (Rs) (Rs)
State Bank of India 15.6 14.1 5 1.2 254 298 92 390
Bank of Baroda 12.4 15.4 5 0.7 176 125 2 128
Punjab National Bank 11.0 15.4 5 0.6 116 67 12 74

Adj. ROE = RORWA * Optimal leverage ;
Exhibit 66: Current PB (FY20E) vs Adj. ROE (FY20-21E) Exhibit 67: Target PB (FY20E) vs Adj. ROE (FY20-21E)
8.0 PB on Line of Best Fit Current PB 7.0 PB on Line of Best Fit Target PB
BJFN Buy Rated
7.0 Buy BJFN
6.0
Sell Rated
6.0 Sell Rated
5.0 BANH
KTKM
5.0
P/B (FY20E)
P/B (FY20E)
4.0 INBK
BANH
4.0 HDFC HDBK
KTKM
3.0
3.0 SRTR ICBK

AXBK INBK HDBK
MMFS AXBK
2.0
2.0 HDFC MMFS
IDFB R squared : 91% YESB
1.0 SRTR 1.0 LICH
YESB
LICH ICBK Adj. ROE = RoRWA*Optimal Leverage IDFB
0.0 0.0
15% 20% 25% 30% 35% 40% 45% 50% 15% 20% 25% 30% 35% 40% 45% 50%
Adj ROE (FY20-21E) Adj ROE (FY20-21E)
Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research
Exhibit 68: 12M fwd PB multiple (based on consensus) comparison across NBFCs
Valuations of NBFCs
HDFC LICHF BAF MMFS STFC DHFL IBHFL SCUF SUF PNBHF Chola Magma Repco CanFin Avg.
Average 5.0 2.0 5.9 2.7 1.9 1.4 2.7 2.2 3.6 2.5 3.3 1.2 1.7 3.4 2.8
Maximum 6.2 3.0 8.3 3.4 2.5 2.2 3.9 3.1 4.3 3.6 4.3 1.8 2.4 6.1 3.9
Minimum 3.8 1.2 3.8 1.9 1.3 0.3 1.3 1.4 2.7 1.4 2.4 0.7 1.1 1.6 1.7
Current 4.5 1.6 7.3 2.2 1.6 0.4 1.9 1.6 3.2 1.8 3.1 1.1 1.6 2.4 2.4
Min since Sep-18 3.8 1.2 5.3 2.0 1.3 0.3 1.3 1.4 3.0 1.4 2.4 0.7 1.1 1.6 1.8
vs avg -10% -22% 23% -18% -16% -68% -32% -25% -11% -28% -7% -11% -9% -28% -13%
vs min 17% 28% 92% 12% 23% 51% 43% 15% 18% 29% 29% 48% 41% 52% 41%
vs max -27% -46% -13% -36% -36% -80% -52% -48% -26% -51% -29% -40% -34% -60% -39%
vs min since Sep 17% 28% 38% 10% 23% 51% 43% 15% 9% 29% 29% 48% 41% 52% 31%
Source: Datastream
16 April 2019 32
Exhibit 69: Risks and valuation methodology
Rating 12m TP (Rs) Risks TP Methodology
PVT Banks
Downside: Increased challenges on liquidity, potential increase in NPL slippages, lower-

YESB Neutral 248 than-expected growth. PE Framework
Upside: Marginal impact on loan/fee income growth
HDBK Buy* 2,787 Sustained Macro slowdown, higher NPLs in unsecured loan book and agri loans PE Framework + SOTP
Sustained uncertainty regarding outcome of enquiry, negative asset quality surprises,

ICBK Buy* 492 PE Framework + SOTP
deterioration in operating performance
Downside: Successful execution, asset quality, competitive landscape and any delay in
AXBK Neutral 748 PE Framework + SOTP
corporate NPL resolution; Upside: Better margins, fee income on better cross sell
IDFB Sell 45 Stronger execution in retail, better-than-expected asset quality PE Framework + SOTP
Downside: Higher than expected loan growth/ROAs, higher corporate or retail NPLs,
INBK Neutral 1,948 lower NIMs due to higher funding cost PE Framework
Upside: Strong loan growth esp. in retail/CV; higher NIMs and decline in credit costs
KTKM Buy 1,484 Slower than expected loan growth, weaker than expected pick up in profitability PE Framework + SOTP
Downside: Asset quality deterioration, Slower than expected growth Upside: Reduction
BANH Neutral 593 in promoter stake without business disruption; sustained strong growth with stable PE Framework
NIMs and low NPLs
SOE Banks
More than estimated delinquencies from corporate portfolio, higher haircuts on NPLs,
SBI Buy 390 Gordon Growth + SOTP
reduction in profitability to gain market share
Downside: Merger related challenges lead to growth slowdown; higher NPLs on
BOB Neutral 128 alignment of books Gordon Growth + SOTP
Upside: Better than expected execution, higher than expected growth
Higher than expected recovery from liability related to fraudulent transactions, higher
PNBK Sell 74 Gordon Growth + SOTP
growth
NBFC
Lower competition from banks, further decline in market borrowing rates; low stress in
LICH Sell 437 PE Framework
LAP loans
Downside: Weaker growth in SME segment, higher than expected credit costs in
PE Framework + M&A
BJFN Neutral 2,899 mortgage and unsecured loans
component
Upside: Continued strong loan growth with stable NPLs
Downside: Growth challenges due to decline in CV demand, merger risk with SCUF,
SRTR Neutral 1,235 corporate guarantee to SVL PE Framework
Upside: Strong CV cycle with low NPLs
MMFS Sell 327 Faster than expected recovery in rural India, better NPLs trends and NIMs PE Framework + SOTP
Potential increase in hold-co discount, lower spreads on contraction in developer

HDFC Buy 2,343 PE Framework + SOTP
lending spread, asset quality deterioration in non-retail
* denotes stock on conviction list
Source: Goldman Sachs Global Investment Research, Datastream
16 April 2019 33
Exhibit 70: Sector valuation summary
12m TP/ Upside/

Market Cap 4/11/2019 Valuation Downside P/B (X) P/E (X) ROA (%) ROE (%)
Potential
Rating (US$ mn) Price (Rs) (Rs) (%) FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E
SOE banks
BOB Neutral 4,945 129 128 -1% 0.8 0.7 13.7 15.0 0.4 0.3 6% 5%
PNB Neutral 5,089 93 74 -20% 0.9 0.8 (10.6) 8.1 (0.5) 0.6 -9% 10%
PNB standalone valuation 85 67 0.8 0.8 (9.7) 7.5 (0.5) 0.6 -9% 10%
SBI Buy 40,135 315 390 24% 1.4 1.2 62.5 8.5 0.1 0.9 2% 14%
SBI standalone valuation 214 289 1.0 0.8 47.0 5.9 0.1 0.9 2% 15%
Private banks
Axis Neutral 27,903 752 748 -1% 2.8 2.4 42.9 16.0 0.6 1.4 7% 16%
HDFCB Buy* 89,637 2,257 2,787 23% 4.1 3.6 29.2 23.1 1.8 1.9 16% 17%
HDFCB Standalone 2,069 2,599 3.8 3.3 26.8 21.1 1.8 1.9 16% 17%
ICICIB Buy 36,945 390 492 26% 2.3 2.0 54.4 13.9 0.5 1.7 4% 15%
ICICI Bank standalone valuation 276 378 1.8 1.5 54.5 10.7 0.5 1.7 3% 15%
IndusInd Bank Neutral 15,177 1,741 1,948 12% 4.0 3.3 27.0 18.3 1.7 1.9 16% 20%
IDFC Bank Sell 3,173 55 45.00 -17% 1.4 1.4 (15.5) 40.0 (1.1) 0.4 -10% 4%
KMB Buy 36,862 1,342 1,484 11% 6.0 5.3 52.1 38.3 1.7 1.9 12% 15%
KMB standalone valuation 909 1,051 4.2 3.7 35.9 26.4 1.7 1.9 12% 15%
Yes Bank Neutral 8,655 269 248 -8% 2.1 1.8 14.2 11.6 1.2 1.2 16% 17%
Bandhan Bank Neutral 9,383 540 593 10% 5.8 4.8 33.1 24.5 3.7 3.9 19% 21%
NBFC’s
Bajaj Finance Neutral 25,068 3,049 2,899 -5% 9.0 7.1 44.1 31.1 3.8 3.8 22% 25%
HDFC Buy 50,857 2,021 2,343 16% 4.5 4.2 37.1 33.2 2.2 2.2 14% 13%
HDFC standalone valuation 828 1,150 2.4 2.1 19.4 16.3 1.7 1.8 13% 14%
LIC Housing Finance Sell 3,991 533 437 -18% 1.6 1.44 11.3 10.0 1.3 1.3 16% 15%
Mah & Mah Fin. Serv Sell 3,647 417 327 -21% 2.4 2.1 17.9 15.3 2.4 2.3 14% 15%
Mah & Mah Fin. Serv Standalone 372 282 2.12 1.9 15.9 13.6 2.4 2.3 14% 15%
Shriram Transport Neutral 4,050 1,210 1,235 2% 1.8 1.5 11.6 10.0 2.3 2.2 17% 16%
Source: Goldman Sachs Global Investment Research, Datastream
16 April 2019 34
Disclosure Appendix
Reg AC
We, Rahul Jain, Abhijeet Sakhare, Mayank Bukrediwala and Abhisek Minda, hereby certify that all of the views expressed in this report accurately
reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is
or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
GS Factor Profile
The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its
sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial
Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specific metrics for each stock. The
normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may
vary depending on the fiscal year, industry and region, but the standard approach is as follows:
Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a
higher percentile indicating a higher growth company. Financial Returns is based on a stock’s forward-looking ROE, ROCE and CROCI (for financial
stocks, only ROE), with a higher percentile indicating a company with higher financial returns. Multiple is based on a stock’s forward-looking P/E, P/B,
price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile
indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns
percentile and (100% - Multiple percentile).
Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs
for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics).
For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative.
M&A Rank
Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary
across sectors and regions) to incorporate the potential that certain companies could be acquired. We then assign a M&A rank as a means of scoring
companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2
representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard
departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not
factor into our price target, and may or may not be discussed in research.
Quantum
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in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.
GS SUSTAIN
GS SUSTAIN is a global investment strategy focused on the generation of long-term alpha through identifying high quality industry leaders. The GS
SUSTAIN 50 list includes leaders we believe to be well positioned to deliver long-term outperformance through superior returns on capital, sustainable
competitive advantage and effective management of ESG risks vs. global industry peers. Candidates are selected largely on a combination of
quantifiable analysis of these three aspects of corporate performance.
Disclosures
Coverage group(s) of stocks by primary analyst(s)
Rahul Jain: India Banks. Mayank Bukrediwala: India Insurance.
India Banks: Axis Bank, Bajaj Finance, Bandhan Bank Ltd., Bank of Baroda, HDFC Bank, Housing Development Finance Corp., ICICI Bank, IDFC Bank
Ltd., IndusInd Bank, Kotak Mahindra Bank, LIC Housing Finance, Mahindra & Mahindra Financial Svcs, Punjab National Bank, Shriram Transport
Finance, State Bank of India, Yes Bank.
India Insurance: Bajaj Finserv Ltd., HDFC Life, ICICI Prudential Life Insurance Co., SBI Life.
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Compendium report: please see disclosures at https://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this
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Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global Equity coverage universe
Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell
Global 35% 53% 12% 66% 58% 52%
As of April 1, 2019, Goldman Sachs Global Investment Research had investment ratings on 2,840 equity securities. Goldman Sachs assigns stocks as
Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for
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investment banking services within the previous twelve months.
16 April 2019 35
Price target and rating history chart(s)

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16 April 2019 36
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Goldman Sachs India Financials 2020

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16 April 2019 | 1:14AM IST

Conﬁdence returns but valuations high; Focus on

What has happened? 5

How strong can the recovery be in Asset quality? 8

Can SOE banks repeat 2003 10

Shifting debate to operational performance rather than just credit costs 13

Summary of Target Price and Rating changes 29

What is top of the mind?

How strong can the asset quality recovery cycle be?

Can SOE banks repeat 2003?

Comfortable liquidity position + moderating risk aversion leading to improving

Source: Bloomberg Source: Bloomberg

2.40 0.90 10.0

2.00 0.75 9.5

Source: Bloomberg Source: CARE Ratings

HFC NBFC Non-NBFCs

Source: CARE Ratings

Loan Deposit ratio continues to be a challenge

Pvt SOE System SOE Banks PVT Banks

95% 93% 7.5 (%)

Bonds CPs 250

Source: CARE Ratings Source: Rating agencies

How strong can the recovery be in Asset quality?

2) We expect this to lead to moderation in credit costs by 270bps – similar to previous

Decline in NPLs in this cycle is similar to past cycles

Exhibit 10: Current NPL recovery cycle is similar to FY03-06 cycle...

GNPL, yoy GNPL + Rest., yoy

Source: RBI, Goldman Sachs Global Investment Research, Company data

With similar moderation in credit costs...

(%) SOE banks Corp. PVT banks

Source: Company data, Goldman Sachs Global Investment Research

..which leads to RoA and BVPS growth improvement

SBI BOB PNBK

(%) ICBK AXBK SOE Banks ICBK AXBK

4.0 80% 74%

Can SOE banks repeat 2003

Different Growth trajectory given losing share in lending / deposit

HDBK ICBK AXBK SOE+other

19% 11% 6% Bihar

13% 7% 4% Uttar Pradesh

Source: Govt website, RBI

HDBK ICBK AXBK SOE+others

26% 8% 10% Madhya Pradesh

23% 18% 17% Bihar

23% 12% 12% Kerala

21% 14% 13% Telangana

15% 6% 8% Uttar Pradesh

11% 14% 2% West Bengal

Source: Govt webstie, RBI

80% O/S share Incremental share PVT SOE

Source: RBI SA=Savings deposits; Term=Term deposits

Improving RoA trajectory

Source: Company data, Goldman Sachs Global Investment Research

Source: Datastream, Company data, Goldman Sachs Global Investment Research

Shifting debate to operational performance rather than just credit costs

Operating proﬁtability the key to out-performance going forward

(X) SOE banks Corp. PVT banks Retail PVT Banks

Source: Company data, Goldman Sachs Global Investment Research

SOE ICBK+AXBK) BOB PNBK SBI

BOB PNBK SBI 42%

Deposit mobilization key

439 Rural + Semi-urban 785 Urban + Metropolitan

Pvt SOE System SOE Banks PVT Banks