IndiaBanks GoldilocksWithAMinorBump20230310 PDF

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10 March 2023 India
EQUITIES India Banks

Macquarie Financials Coverage Universe Goldilocks with a minor bump
CMP FY24E FY24E TP TSR
Reco (Rs) ROE(%) P/BV (Rs.) (%)
Key points
Private banks
AXSB N 861 16.1 1.8 940 9%  Low credit costs to continue to drive multi-year high ROAs.
HDFCB OP 1,631 17.7 2.8 2,110 29%  EPS upgrade cycle continues; we raise EPS by 3-9% for FY23E-25E. We
ICICIBC OP 872 17.0 2.7 1,145 31% increase TPs across most banks as we roll forward to FY25E valuations.
IIB
KMB
OP
N
1,174
1,740
15.8
14.0
1.5
2.8
1,510
1,860
29%
7%  HDFCB and IIB are our top picks.
YES UP 17 3.9 1.2 10 -40%
ROAs to remain at multi-year highs; We continue to like banks
CUBK OP 142 13.4 1.2 175 24%
PSU banks • We believe the goldilocks scenario for private sector banks in India will continue
BOB N 174 12.6 0.9 180 3% for the next 2 years due to strong asset-quality outcomes. The risk arising from a
SBIN OP 565 16.4 1.3 695 23% large conglomerate’s exposure is easily manageable, in our view, as banks carry
NBFCs
prudential buffers. We expect ROAs to remain at multi-year highs despite margin
HDFC OP 2,679 12.2 3.3 3,060 14%
LICHF OP 359 12.1 0.7 430 20% compression due to offsets coming from lower treasury losses, better operating
SHTF N 1,270 13.4 1.1 1,380 9% leverage, and benign credit costs. PSU banks, on the contrary, have seen their
MMFS N 254 11.1 1.6 215 -15% ROAs peaking, and we expect their ROAs to come off by 15-20bps over the next
CIFC OP 767 19.1 3.8 860 12% 2 years due to some normalisation of credit costs and higher expense ratios.
SBI Cards OP 750 24.5 5.8 1,000 33%
BAFIN UP 5,997 20.8 5.7 5,200 -13% • Raise earnings and TPs; HDFC Bank and IIB are our top picks: Despite
Insurance concerns of a slowdown in loan growth and margin compression, the earnings
HDFC Life OP 495 18.6 2.3 655 32% upgrade cycle continues for the banking sector. We raise our earnings by 3-
IPRU Life OP 407 15.5 1.4 580 42% 9% for FY23E-25E for private sector banks on better margins and lower credit
SBI Life OP 1,129 20.3 2.0 1,580 40%
costs. We expect core PPOP growth to be around 16-18% for HDFC Bank and
LIC OP 603 10.0 0.6 850 41%
ILOM UP 1,093 17.4 4.4 995 -9% IIB vs. ~12% for all banks. They are our top picks in the sector.
Microfinance
Core PPOP growth to fall – We are not worried about this
Bandhan OP 230 21.8 1.5 370 61%
Fintech • Loan growth to slow down and margins to fall but remain at healthy
One97 OP 620 -11.8 3.2 800 29% levels: In the last rising rate cycle, when rates went up +350bps, margins for
Source: Bloomberg, Company Data, Macquarie Research, banks went up ~50bps over a period of 3 years, as loans also repriced with a
March 2023
Note: For life insurance companies, P/BV is P/EV and lag and banks were on an opaque base/PLR rate system of repricing of loans.
ROE is ROEV With the more transparent and immediate loan repricing system driven by
Prices as of 8 March 2023 repo-rate linked loans, bank margins have gone up 50-60bps in a single year.
With deposit-repricing catching up with a lag, we expect around 15-20bps
ROA (%) for the banking sector at all time high compression in NIMs for banks in FY24E. We think loan growth is likely to
levels slow down from a system level of 16-17% currently to 13-14% driven by lower
2.5% working capital demand and a general economic slowdown.
2.0% • Credit costs – the big support to ROA: While margins may compress, there
1.5% are offsets in the form of lower treasury losses, lower cost ratios and continued
1.0%
low credit costs, which will support ROA, in our view. Banks in India carry an
excess provisioning buffer of 30-100bps, which acts as a cushion for FY24E
0.5%
earnings/ROA. We are also not worried about exposures to a particular large
0.0%
conglomerate group, as exposure levels are small. Banks have sufficient
-0.5%
buffers to manage the stress, in our view.
• Overall ROA and ROE levels to remain high: In FY23E, banks in India
Private Banks Public Banks
reported the highest levels of ROA seen in the past decade, and we expect
Source: Company data, Macquarie Research, March 2023 that to continue. We think rising leverage will keep ROEs in the 15-18% range,
implying that book value will continue to compound at those levels. Even if one
Analysts argues for no rerating from the current levels, banks remain strong ‘power of
Macquarie Capital Securities (India) Pvt. Ltd. compounding’ stories with a high degree of earnings visibility, in our view.
Suresh Ganapathy, CFA +9122 6720 4078
suresh.ganapathy@macquarie.com Attractive valuations on multi-year-high profitability levels
Param Subramanian +9122 6720 4099 • Private banks are trading at ~15% discount to 10Y historical averages despite all-
param.subramanian2@macquarie.com time high ROAs. We are bullish on this sector. HDFCB and IIB are our top picks.
Please refer to page 23 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
Macquarie Research India Banks
Earnings upgrade cycle continuing

Over the past 12 months, Banks have continued to see earnings upgrades. If one looks at the charts
below, across the board, banks have seen earnings upgrades due to two key aspects: better performance
on margins and better performance on asset quality, amid sustained low credit costs. This is in sharp
contrast to most other sectors, which have witnessed earnings downgrades over the past 6 months.
Fig 1 Earnings upgrade cycle for financials continues
EPS rebased, FY20 = 100 FY23 ∆ FY24 ∆
FY21 FY22 FY23 FY24 1M prior 3M prior 6M prior 1M prior 3M prior 6M prior
MSCI India 99 130 147 175 0% -4% -6% 0% -2% -2%
Y-o-Y change -1% 31% 13% 19%
Financials 84 132 173 207 0% 3% 4% 0% 3% 4%
Information Technology 113 125 136 153 0% 0% -2% 0% 0% -3%
Energy 104 130 131 158 -2% -11% -17% -1% -5% -8%
Materials 140 238 209 207 0% -9% -11% 1% -6% -7%
Consumer Staples 94 104 118 137 0% 0% 2% 0% 0% 3%
Consumer Discretionary 63 65 114 181 0% -11% -13% 0% -5% -3%
Healthcare 102 115 126 152 0% -1% -3% 0% -1% -2%
Industrials 79 90 121 164 0% -2% -2% 0% 0% 2%
Utilities 91 81 87 99 0% -3% -3% 0% -2% -2%
Communication Services -147 507 1279 1962 -1% -8% -67% -3% -8% -13%
Source: FactSet, Macquarie Research, March 2023
Fig 2 Private sector banks FY23 EPS upward revisions Fig 3 Private sector banks FY24 EPS upward revisions
140 140
130 130
120
120
110
110
100
100
90
90
80
Oct-22
Jul-21
Oct-21
Nov-21
Dec-21
Nov-22
Dec-22
Apr-21
Aug-21
Sep-21
Apr-22
Aug-22
Sep-22
Jun-21
Jan-22
Jun-22
Jul-22
Jan-23
May-21
May-22
Feb-21
Mar-21
Feb-22
Mar-22
80
Apr-21
Aug-21
Sep-21
Oct-21
Nov-21
Dec-21
Apr-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
Jun-21
Jan-22
Jun-22
Jan-23
May-21
May-22
Mar-21
Mar-22
Jul-22
Feb-21
Jul-21
Feb-22
HDFCB FY24 ICICIBC FY24 AXSB FY24

HDFCB FY23 ICICIBC FY23 AXSB FY23
KMB FY24 IIB FY24
KMB FY23 IIB FY23
Source: Bloomberg, Macquarie Research, March 2023 Source: Bloomberg, Macquarie Research, March 2023
Fig 4 PSU banks FY23 EPS upward revisions Fig 5 Private sector banks FY24 EPS upward revisions
140 140
130 130
120 120
110 110
100 100
90 90
80 80
Oct-22
Jul-21
Oct-21
Nov-21
Dec-21
Nov-22
Dec-22
Apr-21
Aug-21
Sep-21
Apr-22
Aug-22
Sep-22
Jun-21
Jan-22
Jun-22
Jul-22
Jan-23
May-21
May-22
Feb-21
Mar-21
Feb-22
Mar-22
Apr-21
Aug-21
Sep-21
Oct-21
Nov-21
Dec-21
Apr-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
Jun-21
Jan-22
Jun-22
Jan-23
May-21
May-22
Mar-21
Mar-22
Jul-22
Feb-21
Jul-21
Feb-22
SBIN FY23 BOB FY23

SBIN FY24 BOB FY24
Source: Bloomberg, Macquarie Research, March 2023 Source: Bloomberg, Macquarie Research, March 2023
10 March 2023 2
Raise EPS estimates; below consensus for PSU banks

We raise FY23-25E EPS estimates for private sector banks by 3-9% on average driven mainly on better
margin assumptions and lower credit cost. Our EPS estimates are more or less in line with consensus
(VisibleAlpha) estimates for private sector banks. However, for PSU banks, we are 11-13% below
consensus on account of higher credit costs that we assume.
Fig 6 We increase EPS estimates driven mainly by upward revisions in margins and downward
revisions in credit costs
EPS New Earlier Difference
FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Private Sector Banks

Axis 69.7 74.0 82.7 60.1 70.0 78.8 16.0% 5.7% 5.0%
HDFCB 80.0 96.6 116.3 80.1 96.2 116.5 -0.2% 0.4% -0.1%
ICICI 45.5 52.0 58.1 41.8 48.2 56.6 9.0% 8.0% 2.6%
IndusInd 95.9 117.1 138.6 92.7 115.9 136.8 3.4% 1.0% 1.4%
Kotak Consolidated 74.9 81.3 89.7 64.7 71.0 80.5 15.9% 14.5% 11.4%
Average Private Sector 9.4% 4.8% 3.4%
City Union Bank 13.4 14.4 16.1 12.6 15.0 17.3 6.3% -4.0% -6.9%
YES Bank 0.34 0.55 0.86 0.60 0.89 1.08 -43.3% -38.2% -20.4%
PSU banks
BOB 27.1 25.2 26.9 19.6 21.7 24.5 38.6% 16.3% 10.0%
SBI Consolidated 66.8 68.3 76.5 57.6 68.0 75.3 15.9% 0.6% 1.7%
Average PSU banks 27.3% 8.5% 5.9%
Source: Macquarie Research, March 2023
For City Union Bank, the EPS cuts are due to higher credit costs that we have factored as we assume a
normalisation of provisioning coverage towards 70% over the next couple of years. For YES Bank, the
EPS cuts are very sharp due to higher credit costs and mainly due to factoring of equity dilution.
Fig 7 Our estimates are below consensus for PSU banks

Net Profit Macquarie VisibleAlpha Difference
FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Private Sector Banks

Axis 213,941 227,039 253,955 210,204 230,523 272,435 1.8% -1.5% -6.8%
HDFCB 443,389 535,622 645,124 442,987 537,250 647,336 0.1% -0.3% -0.3%
ICICI 316,471 361,627 403,941 314,280 358,466 411,651 0.7% 0.9% -1.9%
IndusInd 74,291 90,678 107,376 75,342 91,206 106,311 -1.4% -0.6% 1.0%
Kotak Standalone 108,804 116,137 131,368 103,227 116,197 135,574 5.4% -0.1% -3.1%
Average Private Sector 1.3% -0.3% -2.2%
PSU banks
BOB 140,477 130,670 139,503 132,894 145,552 159,699 5.7% -10.2% -12.6%
SBI Standalone 484,144 482,530 520,064 479,939 544,456 594,565 0.9% -11.4% -12.5%
Average PSU banks 3.3% -10.8% -12.6%
Source: VisibleAlpha, Company data, Macquarie Research, March 2023
10 March 2023 3
Increase TPs mainly on account of rolling forward to FY25E from FY24E

We increase TPs across most banks mainly on account of rolling forward to FY25E based valuation. In
some specific cases there has been a cut in TP or lower than expected increase in TP as we have altered
target P/BV multiples wherever required.
Fig 8 Key reasons for our target price changes

Earlier TP Current TP Change Rating Comments
Pvt Sector
Axis Bank 790 940 19% Neutral Rolling forward to FY25E based valuation and small increase in P/BV multiple
City Union Bank 220 175 -20% Outperform Cutting multiple from 1.8x to 1.5x on account of lower ROE and higher COE
HDFC Bank 2,005 2,110 5% Outperform Rolling forward to FY25E based valuation offset by lower subsidiary valuations and
cutting target multiple from 3.3x to 3.0x
ICICI Bank 1,050 1,145 9% Outperform Rolling forward to FY25E based valuation offset by lower subsidiary valuations
IndusInd Bank 1,400 1,510 8% Outperform Rolling forward to FY25E based valuation and slight adjustment to cost of equity
Kotak Bank 1,860 1,860 0% Neutral Cutting down sustainable ROE to 19% from 21% owing to lower leverage
assumptions
YES Bank 9 10 11% Underperform Rolling forward to FY25E based valuation and slight adjustment to COE
PSU banks
SBI 695 695 0% Outperform Roll forward offset by lower subsidiary valuation and slight reduction in multiple
from 1.3x to 1.2x
BOB 155 180 16% Neutral Rolling forward to FY25E based valuation and increase in target multiple from 0.7x
to 0.8x
Source: Company data, Macquarie Research, March 2023
Fig 9 Key risks to our TP

Private Sector Banks Risks
Axis Bank Upside risks include better-than-expected performance in margins. Downside risks includes
failure to integrate Citi properly thereby dragging down ROE
City Union Bank Downside risks include lower margins, higher credit costs resulting in ROA being lower than
1.5%
HDFC Bank Downside risks include failure to integrate HDFC Ltd well thereby resulting in longer term lower
ROA profile
ICICI Bank Downside risks include lower growth
IndusInd Bank Downside risks include lower growth and higher credit costs
Kotak Bank Upside risks include higher loan growth and stable margins. Downside risks include sharp fall in
margins
YES Bank Upside risks include higher ROA and ROE driven by higher margins and lower opex
PSU banks Risks
SBI Downside risks include sharp deterioration in asset quality
BOB Upside risks include ROA sustaining at 1%. Downside risks include sharp deterioration in asset
quality
Source: Macquarie Research, March 2023
10 March 2023 4
Fig 10 Valuation matrix of financials coverage universe

Valuation Matrix EPS Growth (%) P/E (x) P/BV (x) ROE (%) CMP Reco TP TSR
FY24E FY25E FY24E FY25E FY24E FY25E FY24E FY25E Rs Rs (%)
Private sector banks

Axis Bank 6% 12% 11.7 10.5 1.8 1.6 16.1 16.2 861 N 940 9%
HDFC Bank 21% 20% 16.9 14.0 2.8 2.4 17.7 18.2 1,631 OP 2,110 29%
ICICI Bank 14% 12% 16.8 15.0 2.7 2.3 17.0 16.5 872 OP 1,145 31%
IndusInd Bank 22% 18% 10.2 8.6 1.5 1.3 15.8 16.3 1,174 OP 1,510 29%
Kotak Bank - consol 8% 10% 21.4 19.4 2.8 2.5 14.0 13.6 1,740 N 1,860 7%
YES Bank 81% 63% 25.3 15.5 1.2 1.1 3.9 5.8 17 UP 10 -40%
City Union Bank 7% 12% 10.0 8.9 1.2 1.1 13.4 13.2 142 OP 175 24%
Public sector banks
Bank of Baroda -7% 7% 6.9 6.5 0.9 0.8 12.6 12.0 174 N 180 3%
SBI - consol 2% 12% 8.3 7.4 1.3 1.2 16.4 17.0 565 OP 695 23%
NBFCs and HFCs
HDFC Ltd 12% 14% 28.8 25.3 3.3 3.1 12.2 13.0 2,679 OP 3,060 14%
LIC Housing Finance 31% 11% 5.8 5.2 0.7 0.6 12.1 12.2 359 OP 430 20%
Shriram Transport 12% 13% 8.3 7.3 1.1 0.9 13.4 13.6 1,270 N 1,380 9%
M&M Financial 29% 19% 14.8 12.5 1.6 1.4 11.1 12.0 254 N 215 -15%
Cholamandalam 23% 23% 21.9 17.8 3.8 3.2 19.1 19.6 767 OP 860 12%
SBI Cards 21% 30% 26.4 20.3 5.8 4.6 24.5 25.4 750 OP 1,000 33%
Bajaj Finance 13% 21% 29.8 24.7 5.7 4.7 20.8 20.9 5,997 UP 5,200 -13%
Insurance
HDFC Life 21% 21% 15.0 10.7 2.3 1.9 18.6 18.8 495 OP 655 32%
IPRU Life 18% 16% 5.8 3.1 1.4 1.2 15.5 15.6 407 OP 580 42%
SBI Life 16% 20% 10.1 6.9 2.0 1.7 20.3 20.4 1,129 OP 1,580 40%
LIC 20% 18% -21.6 -22.7 0.6 0.6 10.0 9.5 603 OP 850 41%
ICICI Lombard 26% 12% 27.1 24.2 4.4 3.9 17.4 17.1 1,093 UP 995 -9%
Microfinance
Bandhan 92% 23% 7.8 6.3 1.5 1.3 21.8 22.0 230 OP 370 61%
Source: Bloomberg, Company data, Macquarie Research, March 2023; Prices as of 8 March 2023
10 March 2023 5
Credit growth: Slowdown expected FY24E at 13-14% vs. FY23E at ~16-17%

The consensus expectation is that we will be having a slowdown in overall economic growth in FY24E.
While FY23E nominal GDP growth is expected to be around ~13-14%, the estimates for FY24E nominal
GDP growth are around 10.5-11.5% as per RBI/Government. Hence there is expected to be some
slowdown in the economy. Now the long-term credit multiplier has been around 1.3x. This multiplier has
been around sub-1.0x over FY15-20 due to various reasons (deleveraging of corporates, demonetisation
etc) but we expect this to inch up to 1.2x for FY23E. If we keep the same multiple of 1.2x, then we get a
credit growth of around ~13-14% for FY24E based on the nominal GDP growth projections by
RBI/Government.
Fig 11 Long term credit multiplier has been ~1.3x
3.50
3.00
Avg multiplier = 1.3
2.50
2.00
1.50
1.00
0.50
Demonetisation 0.44
-
FY20
FY72
FY74
FY76
FY78
FY80
FY82
FY84
FY86
FY88
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16
FY18
Credit Multiplier Average Credit Multiplier
Source: RBI, Macquarie Research, March 2023
A bottom-up analysis by assuming much slower growth in industry and services sector also results in a
growth rate for credit closer to 13% in our view for FY24E.
Fig 12 Bottom-up analysis also reveals that a 13% credit growth for FY24E is possible
Banking industry
loans o/s (Rs trn) Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23E Mar-24E
Industry 20 22 25 27 27 27 27 29 30 29 32 34 37
Services 10 11 13 14 15 18 21 24 27 28 30 37 43
Retail loans 8 9 10 12 14 16 19 22 27 30 34 41 48
Agri loans 5 6 7 8 9 10 10 11 12 13 15 17 19
Others (0) - - 0 - 0 0 - 7 8 8 10 11
Total 43 49 56 60 65 71 77 86 103 109 118 138 157
Industry loan
growth (%) Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23E Mar-24E
Industry 13% 13% 5% 3% -2% 1% 7% 3% -1% 8% 9% 6%

Services 11% 16% 6% 9% 17% 14% 18% 12% 3% 9% 21% 15%
Retail loans 17% 15% 13% 19% 16% 18% 16% 22% 11% 13% 20% 18%
Agri loans 13% 13% 14% 15% 12% 4% 8% 9% 10% 10% 14% 12%
Total 14% 14% 8% 9% 8% 8% 12% 20% 6% 9% 17% 13%
We now factor a slowdown in loan growth in our estimates.
• For private sector banks, we factor loan growth of 17% for FY24E vs. 20% in FY23E
• For PSU banks the loan growth slowdown will likely be sharper as they have larger exposure to the
corporate growth compared to retail for private sector banks
• We expect retail loan book growth to be still strong at 18% YoY for FY24E.
10 March 2023 6
Fig 13 Loan growth slowdown factored into our estimates
30%
25%
20%
20% 17%
15%
10% 18%
13%
5%
0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23EFY24EFY25E
Source: RBI, Company data, Macquarie Research, March 2023
10 March 2023 7
Margins – compression ahead – We expect a ~15-20bps compression

During the previous rising rate cycle (see chart below) when rates went up ~375bps over a period of 3
years, margins increased by ~50bps but with a lag. If you look at the current trends, rates have gone up
some ~250bps over the past 12 months with NIM increase almost immediate to the extent of 50-60bps.
Fig 14 Margins went up a cumulative 50bps over a period of 3yrs for a ~375bps hike
Average Repo rate Pvt. Banks average margins
9.00% 4.60%
8.50%
4.40%
8.00%
4.20%
3.91%
7.00%
4.00%
6.00% 3.80%
3.60%
5.00%
3.40%
3.36%
4.00%
4.81% 3.20%
3.00% 3.00%
4Q07
1Q16
1Q07
3Q08
2Q09
1Q10
4Q10
3Q11
2Q12
1Q13
4Q13
3Q14
2Q15
4Q16
3Q17
2Q18
1Q19
4Q19
3Q20
2Q21
1Q22
4Q22
3Q23
Source: RBI, Company Data, Macquarie Research, March 2023
A closer look reveals that banks today are now linked on EBLR (external benchmark linked rate) loans or
repo-rate-linked loans where the rates change immediately. The issue is that in the previous rising rate
cycle, banks were linked to a non-transparent base rate and/or PLR (prime late lending rate) system where
the rates changed with a lag. In fact, RBI introduced the base Rate system with effect from July 1, 2010,
which replaced the Benchmark Prime Lending Rate (BPLR) system.
So, loan repricing also happened with a lag along with deposit repricing result in a slow increase in
margins.
Fig 15 Banks – A lot of loans are linked to repo (EBLR) Fig 16 Axis - Historical loan book composition rate-wise
Loan book composition by rate category Axis Bank Loan Composition (%)
100%
100%
7% 90% 17% 15% 20%
90% 25% 26% 29%
13% 32% 32%
30% 31% 32% 80% 14%
80% 45% 41% 14% 13%
70% 9% 9% 6%
70% 4% 4% 3%
2%
7% 60% 10% 4% 2%
60% 14% 18% 13%
21% 50% 50% 42% 23% 22%
50% 22% 36%
27% 40%
40% 27% 69%
30% 56%
30% 55% 49% 52%
45% 20% 37% 39%
20% 39% 29%
28% 34% 30% 10% 25%
10%
0%
0% Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Dec-22
HDFCB ICICIBC KMB AXSB SBIN BOB
Repo linked Other EBLR linked
EBLR linked MCLR linked Other floating Fixed rate MCLR linked Base rate linked
Foreign currency - floating Fixed rate
Source: Company Data, Macquarie Research, March 2023 Source: Company Data, Macquarie Research, March 2023
10 March 2023 8
Fig 17 Deposit rates in the critical 1-3yr bucket have moved Fig 18 HDFC Bank – Bulk of deposit rates hikes have
up ~200bps from bottom happened in the Sep’22 to Feb’23 period
HDFC Bank - Rise in Retail Deposit rates during

Trend in 1-3 year bucket retail deposit rates (%)
9.0% 8.0% FY23
7.0% 7.1%
8.5% 7.0%
8.0% 5.8%
6.0% 5.5%
7.5% 5.2%
7.0% 5.0%
6.5% 4.0%
6.0%
3.0%
5.5%
5.0% 2.0%
Nov-16
Dec-18
Oct-19
Nov-21
Aug-15
Apr-17
Sep-17
Aug-20
Apr-22
Sep-22
Jan-16
Jun-16
Jan-21
Jun-21
May-19
Mar-15
Feb-18
Mar-20
Feb-23
Jul-18
1.0%
0.0%
HDFCB SBIN Mar-22 Jun-22 Sep-22 Dec-22 Feb-23
As of now we have seen already a 50-60bps increase in NIMs flowing across the banking system for a
250bps repo rate hike. The impact has almost been immediate whereas bulk of deposit rate hikes have
happened between Sep-2022 to Feb-2023. Hence, we are yet to see repricing of deposits happening and
flowing through the interest costs of banks which will happen with a lag. The impact will be more
pronounced in our view from 2HFY24E onwards.
Liquidity conditions to remain tight

The issue also is that the gap between loan growth and deposit growth still remains high. Banks also have
been funding credit growth by running down their excess liquidity which now seems to be reaching an end
going by the liquidity coverage ratio (LCR). This process was adding to margins as there was less
pressure to raise resources. However, we believe, the pressure to raise resources to fund credit growth will
remain thereby keeping a check on deposit rates in our view.
Fig 19 Gap between loan growth and deposit growth is still Fig 20 LDRs (loan to deposit) ratios almost touching peak
high levels now
40% 80% 78.6%

35%
77% 75.3%
30%
25% 74%
20% 16.1% 74.0%
15% 71%
10% 70.2%
68%
5% 10.2%
0% 65%
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Feb-18
Feb-19
Feb-20
Feb-21
Feb-22
Feb-23
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Feb-18
Feb-19
Feb-20
Feb-21
Feb-22
Feb-23
Deposits - YoY Growth (%) Advances - YoY Growth (%) LDR Ratio (%)
Source: RBI, Macquarie Research, March 2023 Source: Company RBI, Macquarie Research, March 2023
10 March 2023 9
Fig 21 Gap between deposit growth and loan growth (bps) has come down a bit of late
Gap between deposit growth and loan growth (bps)

1,500
Demonetization
943 1,009
1,000 670
Post GFC
500
0
(585)
-500
-1,000
(1,048)
-1,500
Dec-12
Jun-09
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Jun-08
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-22
Source: Company Data, Macquarie Research, March 2023
Fig 22 Liquidity coverage ratio (%) – LCRs have been coming down
Liquidity coverage ratio (%)

170%
160%
160%
150% 148%
140% 135%
142%
130%
124%
120%
119%
110%
100%
90%
80%
FY17 FY18 FY19 FY20 FY21 FY22 3QFY23
Pvt bank average PSU Bank average Overall banks average
Hence, we believe margins should compress in FY24E over FY23E. Here are some important
assumptions we make here.
• We are currently assuming no further repo rate hikes to be done in FY24E. If there are significant rate
hikes, say 50bps and above, then our FY24E margin assumptions are conservative and there are
upside risks to our estimates.
• We don’t make any significant increase in loan yields for FY24E over FY23. While some can argue that
Marginal Cost of Funds Based Landing Rate (MCLR) repricing is still left, in a falling loan growth
environment, banks won’t have enough pricing power. While MCLR itself could move upwards, spreads
over MCLR will be altered (read reduced) to protect loan growth to some extent in our view.
• The room to drive loan growth by selling investment portfolio is limited. In our view, deposit growth has
to catch up further. Deposit growth is still lagging loan growth and we do expect some continued
pressure on deposit rates even in FY24E. Banks will still tinker around bulk deposit rates and select
deposit rates in certain deposit maturity buckets. So upward pressure on funding costs will likely persist.
• The peak margin will be achieved in 4QFY23 in our view. Since bulk of deposit rate hikes will likely
happen from Sep’2023 onwards, 2HFY24E could see a sharp fall in margins over 2HFY23. 1HFY24E
could still see some NIM compression over 2HFY23 but that will likely be slow and gradual.
10 March 2023 10
Fig 23 Expect NIMs to moderate 15-20bps across banks
NIM (%)
5.0%
4.42%
4.5%
4.0%
4.27%
3.5% 3.35%
3.0%
3.13%
2.5%
2.0%
10 March 2023 11
Core operating profit growth to be a bit subdued in FY24

We expect FY23 to be a year when banks have very strong PPOP (pre-provision operating profits) as well
as core PPOP growth mainly driven by sharply rising margin. Core PPOP growth will likely be even better
than PPOP growth as PPOP growth is affected by sharply rising bond yields.
Fig 24 10y bond yields have peaked more or less Fig 25 Yield curve also has flattened
Government bond yield -10 Y Yield Curve - G-secs

8.0
(%) 7.4
10.0 7.4
7.5 7.2
9.0 7.0
6.8
6.5 6.3
8.0
6.0 6.2
6.0
7.0 5.5
5.0
6.0
4.5 4.7
5.0 4.0
Tenure (yrs)
3.7
4.0 3.5
1yr 5yr 10yr
Feb-13
Feb-19
Feb-05
Feb-07
Feb-09
Feb-11
Feb-15
Feb-17
Feb-21
Feb-23
Feb-23 Mar-22 Mar-21
With bond yields unlikely to rise meaningfully from current levels in our view, and yield curve already
flattened, treasury profits are unlikely to play a dent and hence non-interest income levels could offset
some pressure coming on margins. However overall core-PPOP growth (which doesn’t include treasury
gains) will likely be subdued mainly due to a fall in margins that we expect to happen in FY24E and
slowing loan growth levels across the board resulting in weaker NII growth for FY24E.
Fig 26 Core PPOP growth to be much weaker in FY24E compared to FY23E

PPOP Growth (%) FY22 FY23E FY24E FY25E
HDFC Bank 11.7% 12.2% 20.1% 19.8%

ICICI Bank 7.8% 25.5% 14.6% 12.4%
Axis Bank 7.0% 31.5% 9.9% 15.2%
Kotak Bank 2.5% 23.9% 13.3% 13.7%
IndusInd Bank 9.5% 12.4% 18.3% 17.9%
City Union Bank 8.7% 18.4% 12.5% 15.1%
Yes Bank -37.3% 11.9% 32.8% 37.5%
Average Private Banks 7.7% 21.1% 15.2% 15.8%
BoB 5.6% 23.0% 3.5% 12.3%
SBI -4.8% 25.7% 7.4% 13.2%
Average Public Banks 0.4% 24.3% 5.5% 12.7%
Core PPOP Growth (%) FY22 FY23E FY24E FY25E

HDFC Bank 15.5% 17.9% 16.8% 19.8%
ICICI Bank 23.5% 27.6% 13.1% 12.2%
Axis Bank 5.5% 38.8% 7.4% 14.7%
Kotak Bank 8.7% 21.9% 6.6% 12.5%
IndusInd Bank 19.6% 13.3% 17.6% 17.8%
City Union Bank 9.0% 20.1% 11.9% 13.2%
Yes Bank -30.0% 16.6% 28.4% 36.2%
Average Private Banks 14.6% 23.9% 12.3% 15.4%
BoB 19.5% 28.7% 2.2% 11.5%
SBI -1.3% 35.5% 0.9% 12.5%
Average Public Banks 9.1% 32.1% 1.6% 12.0%
10 March 2023 12
Asset quality – the biggest comfort

The best levels in a decade
The biggest comfort that we have with the banking system today in India is that the gross stressed assets
for banks in India is at a decade low level and we expect this to decline further going ahead. Much of the
stress with respect to large corporate groups have been cleaned up over the years and banks have also
beefed up their NPL coverage ratios and they are now at all time high levels. Our channel checks with
India’s largest credit bureaus reveal that retail stress is low and has stabilised post Covid related
challenges. The recent rise in rates and some dent in demand in certain segments of the urban/rural
economy hasn’t affected retail asset quality.
Fig 27 System gross stressed assets at a decade low level
System NPLs (%)

20
16
0.9
12
2.5
0.4
0.4
0.9
19.1
3.9
1.6
1.5
15.3
6.5
8
14.3
13.9
6.0
13.3
13.1
5.9
12.1
11.2
11.1
10.4
4.7
9.3
9.1
4.2
8.8
8.2
3.5
7.5
4
2.3 2.7
7.3
7.2
5.8
5.2
5.0
4.6
4.1
3.6
3.3
3.1
2.5
2.4
2.4
2.3
Sep-22
FY98
FY22
FY94
FY95
FY96
FY97
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
GNPA (%) Std Restructured (%)
Fig 28 NPL coverage ratio of banks at all time high level
75% 73%
69%
70% 66%
64%
65% 62% 63%
60% 61%
60% 56% 57%
54% 54% 54%
55% 52%
49% 50% 49% 50%
50% 47% 47%
45%
43%
45%
40%
FY09
FY20
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY21
FY22
System -NPL coverage ratio
Historically, as shown below, the correlation between interest rates and asset quality has been patchy.
Ultimately, asset quality for banks in India is more a function of growth, over-leveraging in certain
segments, structural issues building up in certain sectors etc rather than level of rates in our view.
10 March 2023 13
Fig 29 Repo rate vs banking system NPLs – correlation has been weak
9.0% 14.0%
8.0% 12.0%
10.0%
7.0%
8.0%
6.0%
6.0%
5.0%
4.0%
4.0% 2.0%
3.0% 0.0%
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
1Q19
3Q19
1Q20
3Q20
1Q21
3Q21
1Q22
3Q22
1Q23
3Q23
Average Repo rate - LHS Pvt. Banks average GNPA PSU Banks average GNPA
Have contingent buffers acting as a cushion

The good part about private sector banks in India is that they have been making contingent provisions over
the years and have been building good buffers especially during the Covid period.
Fig 30 Contingent provisions as % of loans – Private sector banks have buffers
Contingent provisions as % loans

2.5%
2.0%
2.0%
1.5%
1.5%
1.2%
1.0%
1.0% 0.8% 0.8%
0.6% 0.6%
0.5%
0.5% 0.3% 0.3%
0.1%
0.0%
HDFC Bank ICICI Bank Axis Bank Kotak Bank IndusInd Bank SBI
FY21 FY22 3QFY23
Not only that, but many of them have also made some provisions even during FY23 and the management
teams have the discretion to not make those provisions in FY24/25E or possibly even dip into the
outstanding stock of provisions which implies benign credit costs continuing even in FY24/25E levels.
Fig 31 Some private sector banks have been making contingent provisions in FY23
Contingency provisions Annualised credit cost
9MFY23 P&L provisions Of which contingency as % of total provisions Annualised credit adjusting for contingency
Company made (Rs bn) provisions (Rs bn) in 9MFY23 cost (9MFY23) provisions made
HDFC Bank 90 -3 -3% 0.8% 0.8%

ICICI Bank 50 41 80% 0.9% 0.2%
Axis Bank 23 3 14% 0.4% 0.3%
10 March 2023 14
Exposure to a large conglomerate group – not much of a concern

There have been some concerns from investors on exposure to a particular large conglomerate group over
the past few months. Based on the official disclosures, the total exposure including unfunded exposure is
just around ~1% of the total loan book which we believe is comfortable. Moreover, the promoters of the
large conglomerate group could raise closer to ~2bn USD thereby reducing some concerns of promoter
leverage. Having said that, usually banks see a slippage of 1.5-2.0% of loans every year. As of now, the
large conglomerate group has been servicing debt well and making timely repayments. In our view, the
stress, even if it manifests in the form of NPLs on the books of banks, could be spread over couple of
years and not all/entire exposure will go bad in the same year. Hence, we don’t see any issue,
fundamentally, on credit cost for Indian banks.
Fig 32 Companies that have disclosed exposure to the large conglomerate group
Company Equity/Inv Debt _funded Non funded Total AUM/Loan book As a %
LIC 301.3 57.9 359.2 41,660 0.9%

PNB 0.4 69.6 70.0 8,568 0.8%
IIB - 18.5 23.0 41.5 2,728 1.5%
BOB 53.8 8,907 0.6%
SBI 270.0 30,582 0.9%
Axis 5.3 23.6 63.3 92.2 7,621 1.2%
ECL implications – not major impact on long term credit costs

RBI recently released a discussion paper on ECL (expected credit loss) based approach for loan loss
provisioning by Indian banks.
In the current incurred approach, banks make provisions after 90 days past due, recognising NPLs and
providing as per RBI’s formula on 15% on secured assets NPLs and 25% on unsecured assets and
progressively increasing to 100% based on tenure of NPLs. Under the ECL method, stage 1 to stage 3
assets are identified based on overdue position of loans and provisions are made based on ECL = PD
(probability of default) * LGD (loss given default) * EAD (Exposure at default). So, it recognises the
problems earlier and provides earlier thereby making the system more resilient over the longer run.
One-time transitory impact could be high; unlikely to see any significant change to long term credit
costs assumptions:
As per India Ratings, there could be one-time significant impact on provisions and profits coming from
addition of provisioning requirements on several items like off-balance sheet items, overdue loans,
investment book, undrawn sanctioned lines etc. However, if a 5-year transition period is given, the impact
on profits and capital is manageable. Banks in India now are in a better position to transition to the new
ECL norms considering their improved PPOP (pre-provision operating profit) levels, asset quality (NPL
coverage, slippages etc) and capital levels.
PSU banks have a larger proportion of standard but overdue loans while small finance banks have seen
defaults in microfinance (unsecured segment) over the last several years which can necessitate higher
stage-2 provisions under IFRS/IND-AS/ECL framework. Consequently, the impact on profits as well as
capital could be higher for them. PSU banks also are relatively under-prepared in terms of implementation.
10 March 2023 15
Fig 33 Impact is more on PSU banks and small finance banks from new ECL norms
Source: India Ratings, Macquarie Research, March 2023
A closer look at HDFC Bank’s provision under IFRS9 which follows ECL methodology reveals that
provisions under ECL methodology was much lower than IND-GAAP. Hence, we aren’t much worried
about implications of ECL norms and their impact on private sector banks in particular.
Fig 34 HDFC Bank’s IFRS provisions (impairment charges) are much lower than IND-GAAP
Provisions as per IFRS9/ECL Provisions as per IND-GAAP Change
FY21 FY22 FY21 FY22 FY21 FY22
HDFCB 154,233 126,980 188,403 179,253 -18% -29%
NBFCs, when they transitioned to the ECL approach, reported much lower ECL provisions. Issue here is
RBI in subsequent years prescribed a floor for such provisions which was higher of RBI incurred loss-
based rules and ECL rules. In the proposed structure, RBI has further tightened the rules arguing that the
regulatory floor is likely to be higher than the current RBI’s incurred loss-based rules. Also, some
provisions are even tighter than IFRS9 which can further exacerbate the impact. For example. the
assessment of significant increase in credit risk should be at the level of each counterparty and not at the
instrument level as per RBI and this is more conservative than IFRS9. Current ECL approach
recommended by RBI is much more complex with more variables. Also, NBFCs were largely in retail which
saw a much favourable cycle compared to banks which have seen very adverse corporate cycle.
Fig 35 NBFCs IND-AS provisions were much lower than IND-GAAP when they transitioned
FY18 Provisions IND-GAAP IND-AS (ECL) Change
BAF 10,300 10,305 0%

MMFS 12,266 5,681 -54%
CIFC 14,833 14,014 -6%
SHTF 31,221 17,223 -45%
HDFC 20300 21,150 4%
10 March 2023 16
What are the timelines here?
RBI’s discussion paper opened for comments post which draft paper will be issued and will be open for
comments and then a final circular. RBI also has stated that they will at least give one year timeframe for
implementation. Also, banks will be provided an option to phase out the effect of increased provisions on
Common Equity Tier I capital, over a maximum period of five years. The impact could be felt in FY26
accounts and banks will have to start preparing in FY25 in our view.
Overall, we expect to credit costs to remain benign; expect some pick-up for PSU banks
Since private sector banks have sufficient cushion in terms of contingent provisions on the balance sheet,
as well as they can decide not to make contingent provisions through the P&L in FY24E/25E, we believe,
their credit cost levels will likely remain more or less flat whereas PSU banks can see some normalisation
of credit costs (though much lower than previous levels) driven by some delinquencies in the retail and
SME portfolio. Consequently, we believe, FY23E will be the peak level of ROA for PSU banks and see
some moderation. Refer the details on ROA section.
Fig 36 Credit costs to remain largely benign for banks in India and support ROA levels
Credit Costs (%)

4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
10 March 2023 17
Comfortable capital levels and strong return ratios

Private sector banks now have very healthy CET1 ratios at 15%+ implying much less chances of an equity
capital raise which should support rising ROEs.
PSU banks in contrast have lower CET1 ratios around 10% and hence may require raising equity capital in
the near to medium term.
Fig 37 Private sector banks have very healthy CET1 ratios
18.0% Private Banks CET1 ratio Public Banks CET1 ratio

17.0%
16.0%
15.0%
14.0%
13.0%
12.0%
11.0%
10.0%
9.0%
8.0%
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 9MFY23
Due to some normalisation of margins, credit costs and operating costs for PSU banks, we expect a
moderation in ROA and ROE levels for them from decade high levels. Private sector banks in contrast
should continue to see strong trends in ROA sustaining thereby arguing for multiples to sustain at current
levels and possibly see some re-rating in select banks in our view.
Fig 39 …and so should ROE be with some moderation for

Fig 38 ROA to remain at high levels… PSUs
2.5% 20.0%
2.0% 15.0%
1.5% 10.0%
1.0% 5.0%
0.5% 0.0%
0.0% -5.0%
-0.5% -10.0%
Private Banks Public Banks Private Banks Public Banks
Source: Company data, Macquarie Research, March 2023 Source: Company data, Macquarie Research, March 2023
ROA for FY24-25E to be still at high levels for private sector banks
A closer look at the DuPont analysis for private sector banks reveals that, while margins will likely come
down, it will likely be offset by higher non-interest income (read treasury gains) and lower cost ratios while
provisions will likely remain stable thereby resulting in them maintaining their record levels of ROA seen in
FY23 so far.
For PSU banks, on the other hand, we expect some moderation in ROAs driven by falling margins, rising
operating expenses and some normalisation of provisions/credit costs as they don’t carry sufficient
contingent buffers.
ROE levels will likely continue to remain healthy thereby aiding book value growth. Note that we haven’t
factored any capital raising for SBI due to which the leverage ratios are inflated.
10 March 2023 18
Fig 40 Private sector banks to continue maintaining their all-time high ROA levels of ~2%
Private Banks Average FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Net interest income/ avg. total assets 3.46% 3.56% 3.66% 3.68% 3.77% 3.61% 3.51% 3.49% 3.67% 3.71% 3.70% 4.12% 4.03% 4.03%
Non-interest income/ avg. total assets 1.86% 1.85% 1.93% 2.02% 2.03% 2.11% 1.89% 1.75% 1.81% 1.55% 1.57% 1.52% 1.62% 1.63%
Non-operating profit/ avg. total assets 5.31% 5.41% 5.59% 5.70% 5.80% 5.72% 5.40% 5.24% 5.48% 5.26% 5.27% 5.64% 5.65% 5.66%
Operating expenses/ avg. total assets 2.57% 2.54% 2.48% 2.54% 2.61% 2.47% 2.38% 2.30% 2.35% 2.12% 2.28% 2.49% 2.45% 2.43%
Operating profit/ avg. total assets 2.75% 2.88% 3.11% 3.16% 3.19% 3.25% 3.02% 2.93% 3.13% 3.14% 2.99% 3.15% 3.20% 3.23%
Provisions/ Avg. total assets 0.37% 0.40% 0.47% 0.42% 0.80% 1.15% 1.22% 1.20% 1.33% 1.38% 0.81% 0.51% 0.55% 0.58%
(1 - tax rate) 69.0% 69.4% 67.1% 67.2% 69.0% 70.4% 103.0% 70.7% 61.9% 75.9% 75.3% 75.1% 75.1% 75.1%
Return on avg. total assets 1.63% 1.71% 1.77% 1.83% 1.63% 1.45% 1.24% 1.17% 1.23% 1.34% 1.64% 1.99% 1.99% 1.99%
Avg. total assets/ average equity 10.2 9.9 9.4 9.2 8.9 8.9 9.0 9.2 9.2 8.6 8.3 8.2 8.1 8.2
Return on equity 16.6% 17.0% 16.7% 16.8% 14.7% 12.6% 10.7% 10.4% 10.6% 11.1% 13.2% 16.0% 15.9% 16.0%
Fig 41 PSU banks to see some moderation over FY23E levels
Public Banks Average FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Net interest income/ avg. total assets 2.95% 2.65% 2.46% 2.39% 2.21% 2.21% 2.31% 2.48% 2.70% 2.55% 2.61% 2.88% 2.68% 2.66%
Non-interest income/ avg. total assets 0.98% 0.91% 0.92% 0.91% 1.00% 1.19% 1.19% 0.92% 1.12% 1.07% 0.90% 0.70% 0.74% 0.74%
Non-operating profit/ avg. total assets 3.93% 3.56% 3.38% 3.30% 3.21% 3.41% 3.51% 3.40% 3.83% 3.62% 3.51% 3.58% 3.43% 3.40%
Operating expenses/ avg. total assets 1.65% 1.60% 1.66% 1.57% 1.70% 1.60% 1.69% 1.73% 1.92% 1.86% 1.87% 1.78% 1.76% 1.73%
Operating profit/ avg. total assets 2.28% 1.96% 1.73% 1.73% 1.51% 1.81% 1.81% 1.68% 1.91% 1.76% 1.64% 1.80% 1.67% 1.67%
Provisions/ Avg. total assets 0.82% 0.80% 0.79% 0.84% 1.68% 1.33% 2.26% 1.61% 1.67% 1.19% 0.79% 0.48% 0.56% 0.62%
(1 - tax rate) 73.2% 81.7% 75.0% 65.3% 76.4% 63.3% 64.7% 57.9% 13.8% 44.5% 75.3% 73.0% 74.0% 74.0%
Return on avg. total assets 1.07% 0.93% 0.70% 0.59% -0.16% 0.31% -0.28% 0.04% 0.22% 0.28% 0.63% 0.96% 0.82% 0.78%
Avg. total assets/ average equity 17.0 16.4 16.6 16.8 16.7 16.1 16.0 16.1 16.3 16.5 16.4 16.4 16.5 16.7
Return on equity 18.2% 15.3% 11.7% 9.8% -3.1% 4.9% -4.5% 0.7% 3.6% 4.8% 10.4% 15.7% 13.5% 13.0%
10 March 2023 19
Valuations cheap in context of all time high ROA

Despite ROA being 40bps higher than historical averages and at all time high levels for private sector
banks, valuations in terms of P/BV are 15% below historical averages. Hence valuations are quite
compelling in our view considering the strong fundamentals the sector enjoys.
Fig 42 Private sector banks ROA at all time high levels
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Source: Bloomberg, Company data, Macquarie Research, March 2023
Note that the following P/BV metrics is based on reported P/BV and doesn’t make any adjustments for sum
of parts valuation. It is difficult to factor historical core P/BV averages for comparison because we use
market prices for computation of core P/BV and most of the subsidiaries that we factor for sum of parts
valuation don’t have a 10yr plus listing history. Also in many cases, sum of parts valuation wasn’t even
used to value the companies. For the sake of simplicity, we have retained the reported P/BV. On a core
P/BV, the valuations could have even be cheaper considering subsidiaries contribution wasn’t significant
for some banks five years ago.
For PSU banks, valuations are 15% more expensive with respect to historical averages owing to recent
sharp re-rating in them. We believe ROAs have peaked for them and expect compression from current
1.0% levels to 80bps over the next couple of years.
Fig 43 Despite stronger RoA outlook than history, private banks are trading cheaper than their 10-
year average P/B multiples
Average fwd
Average ROA P/BV ROA P/BV
Bank (FY12-FY22) (last 10 years) FY24E ROA FY24 P/BV deviation deviation
HDFC Bank 1.8% 3.3 2.0% 2.8 0.1% -15%

ICICI Bank 1.3% 2.0 2.2% 2.7 0.8% 34%
Axis Bank 1.1% 2.2 1.7% 1.8 0.6% -18%
Kotak Bank 1.8% 3.2 2.3% 2.8 0.5% -12%
IndusInd Bank 1.5% 2.7 1.9% 1.5 0.3% -44%
City Union Bank 1.4% 2.0 1.5% 1.2 0.0% -37%
Average Private Banks 1.5% 2.6 1.9% 2.1 0.4% -15%
BoB 0.3% 0.8 0.8% 0.9 0.5% 8%
SBI 0.5% 1.1 0.8% 1.3 0.3% 21%
Average PSU banks 0.4% 0.9 0.8% 1.1 0.4% 15%
Source: Bloomberg, Macquarie Research, March 2023
10 March 2023 20
A look at the figure below clearly reveals that IIB is the cheapest stock relative to ROA and Kotak is the
most expensive. Kotak’s ROA is also high because of contribution from free funds (read equity) which is
keeping margins and ROA at high levels. The true normalised level of ROA is closer to 2.1% in line with
HDFC Bank and ICICI Bank and hence valuations look expensive and we have a Neutral rating on the
stock and continue to remain a bit cautious on the name.
Fig 44 Banking sector – Forward P/BV vs RoA comparison – IIB looks cheapest relative to ROA
4.0 KMB
FY24E P/BV (x)
3.5
3.0 HDFCB
2.5
2.0 ICICI
SBI AXSB
1.5 YES CUBK IIB
1.0 BOB
0.5
FY24E RoA (%)
-
0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
Source: Bloomberg, Macquarie Research, March 2023

Note: Valuations for HDFCB, ICICI and Axis are based on core P/BV
Fig 45 HDFCB – 1yr forward P/BV trends Fig 46 ICICI – 1yr forward P/BV trends
5.1 3.5
5.3
4.8 3.0
4.3 3.7 2.5

3.8 2.0
3.2
3.3
1.5
2.8
1.0
2.3 2.7
1.8 0.5
1.8
1.3 0.0
Mar-04
Mar-03
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
P/BV (x) Avg +1 STd. Dev -1 STd. Dev P/BV Average +1 STd. Dev -1 STd. Dev
Source: Bloomberg, Company data, Macquarie Research, March 2023 Source: Bloomberg, Company data, Macquarie Research, March 2023
10 March 2023 21
Fig 47 Axis – 1yr forward P/BV trends Fig 48 IIB – 1yr forward P/BV trends
5.0 5.0
4.8 4.5
4.5
4.0
4.0
3.3
3.5
2.80 3.0
3.0 2.4
2.5 2.0
2.0
2.13
1.5 1.0 1.5
1.46
1.0
0.8 0.6
0.5 0.0
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
P/BV Average +1 STd. Dev -1 STd. Dev P/BV +1 STd. Dev -1 STd. Dev Average
Fig 49 KMB – 1yr forward P/BV trends Fig 50 CUBK – 1yr forward P/BV trends
5.0 3.5
4.4
4.5
3.0
4.0 3.6
3.5 2.5
3.0 2.0
2.5
2.5
1.5
2.0
1.5 1.0
1.0 1.3
0.5
0.5 0.5
0.0 0.0
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
P/BV Average +1 STd. Dev -1 STd. Dev P/BV Average +1 STd. Dev -1 STd. Dev
Fig 51 SBI – 1yr forward P/BV trends Fig 52 BOB – 1yr forward P/BV trends
3.0 2.0 1.9

2.8 1.8
2.5
1.6
2.0 1.4 1.2

1.5 1.2
0.9
1.5 1.0
0.8 0.6
1.0 1.2
0.6
0.8 0.4
0.5
0.5 0.2
0.0 0.0
Mar-03
Mar-15
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
P/BV Average +1 STd. Dev -1 STd. Dev P/BV Average +1 STd. Dev -1 STd. Dev
10 March 2023 22
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie – Asia and USA This is calculated from the volatility of historical All "Adjusted" data items have had the following
Outperform – expected return >10% price movements. adjustments made:
Neutral – expected return from -10% to +10% Added back: goodwill amortisation, provision for
Underperform – expected return <-10% Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging,
expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense
Macquarie – Australia/New Zealand – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property
Outperform – expected return >10% speculative. revals, appraisal value uplift, preference dividends &
Neutral – expected return from 0% to 10% minority interests
Underperform – expected return <0% High – stock should be expected to move up or
down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa*
Note: expected return is reflective of a Medium Volatility be aware this stock could be speculative. ROA = adjusted ebit / average total assets
stock and should be assumed to adjust proportionately ROA Banks/Insurance = adjusted net profit /average
with volatility risk Medium – stock should be expected to move up total assets
or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average
move up or down at least 25–30% in a year. number of shares
Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
down at least 15–25% in a year. are modelled under IFRS (International Financial
* Applicable to select stocks in Asia/Australia/NZ Reporting Standards).
Recommendations – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Recommendation proportions – For quarter ending 31 Dec 2022

AU/NZ Asia USA
Outperform 55.17% 62.10% 68.04% (for global coverage by Macquarie, 2.41% of stocks followed are investment banking clients)
Neutral 37.59% 25.07% 28.87% (for global coverage by Macquarie, 2.52% of stocks followed are investment banking clients )
Underperform 7.24% 12.82% 3.09% (for global coverage by Macquarie, 0.00% of stocks followed are investment banking clients )
12-month target price methodology

AXSB IN: Rs940.00 based on a Gordon Growth Model methodology
BOB IN: Rs180.00 based on a Gordon Growth methodology
CUBK IN: Rs175.00 based on a Price to Book methodology
HDFCB IN: Rs2,110.00 based on a Gordon growth methodology
ICICIBC IN: Rs1,145.00 based on a Sum of Parts methodology
IIB IN: Rs1,510.00 based on a DDM methodology
YES IN: Rs10.00 based on a Gordon growth methodology
Company-specific disclosures:
AXSB IN: Macquarie Group Limited together with its affiliates may have a beneficial interest in the debt securities of the companies mentioned in this
report. BOB IN: Macquarie Group Limited together with its affiliates may have a beneficial interest in the debt securities of the companies mentioned in
this report. HDFCB IN: Macquarie Group Limited together with its affiliates may have a beneficial interest in the debt securities of the companies
mentioned in this report. ICICIBC IN: Macquarie Group Limited together with its affiliates may have a beneficial interest in the debt securities of the
companies mentioned in this report. During the past 12 months, Macquarie Group Limited or one of its affiliates provided securities services to ICICI
Bank for which it received compensation for Broking services. IIB IN: Macquarie Group Limited together with its affiliates may have a beneficial interest
in the debt securities of the companies mentioned in this report. YES IN: Macquarie Group Limited together with its affiliates may have a beneficial
interest in the debt securities of the companies mentioned in this report.
A reference to “Macquarie” is a reference to the entity within the Macquarie Group of companies (comprising Macquarie Group Limited and its worldwide
affiliates and subsidiaries) that is relevant to this disclosure.
Important disclosure information regarding the subject companies covered in this report is available publicly at
www.macquarie.com/research/disclosures. Clients receiving this report can additionally access previous recommendations (from the year prior to
publication of this report) issued by this report’s author at https://www.macquarieinsights.com.
Target price risk disclosures:
AXSB IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global
economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates,
foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to
manage certain of these exposures.
BOB IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
CUBK IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
HDFCB IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
10 March 2023 23
ICICIBC IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
IIB IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
YES IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
Sensitivity analysis:
Clients receiving this report can request access to a model which allows for further in-depth analysis of the assumptions used, and recommendations
made, by the author relating to the subject companies covered. To request access please contact insights@macquarie.com.
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10 March 2023 India

EQUITIES India Banks

Earnings upgrade cycle continuing

Fig 1 Earnings upgrade cycle for financials continues

EPS rebased, FY20 = 100 FY23 ∆ FY24 ∆

HDFCB FY24 ICICIBC FY24 AXSB FY24

SBIN FY23 BOB FY23

Raise EPS estimates; below consensus for PSU banks

Private Sector Banks

Fig 7 Our estimates are below consensus for PSU banks

Private Sector Banks

Increase TPs mainly on account of rolling forward to FY25E from FY24E

Fig 8 Key reasons for our target price changes

Fig 9 Key risks to our TP

Fig 10 Valuation matrix of financials coverage universe

Private sector banks

Credit growth: Slowdown expected FY24E at 13-14% vs. FY23E at ~16-17%

Fig 11 Long term credit multiplier has been ~1.3x

Source: RBI, Macquarie Research, March 2023

Industry 13% 13% 5% 3% -2% 1% 7% 3% -1% 8% 9% 6%

We now factor a slowdown in loan growth in our estimates.

Fig 13 Loan growth slowdown factored into our estimates

Private Banks Public Banks

Source: RBI, Company data, Macquarie Research, March 2023

Margins – compression ahead – We expect a ~15-20bps compression

Average Repo rate Pvt. Banks average margins

HDFC Bank - Rise in Retail Deposit rates during

Liquidity conditions to remain tight

40% 80% 78.6%

Gap between deposit growth and loan growth (bps)

Liquidity coverage ratio (%)

Pvt bank average PSU Bank average Overall banks average

Source: Company Data, Macquarie Research, March 2023

Fig 23 Expect NIMs to moderate 15-20bps across banks

Private Banks Public Banks

Source: Company data, Macquarie Research, March 2023

Core operating profit growth to be a bit subdued in FY24

Government bond yield -10 Y Yield Curve - G-secs

Feb-23 Mar-22 Mar-21

Fig 26 Core PPOP growth to be much weaker in FY24E compared to FY23E

HDFC Bank 11.7% 12.2% 20.1% 19.8%

Core PPOP Growth (%) FY22 FY23E FY24E FY25E

Asset quality – the biggest comfort

Fig 27 System gross stressed assets at a decade low level

System NPLs (%)

Source: RBI, Macquarie Research, March 2023

Fig 28 NPL coverage ratio of banks at all time high level

System -NPL coverage ratio

Source: RBI, Macquarie Research, March 2023

Source: RBI, Macquarie Research, March 2023

Have contingent buffers acting as a cushion

Fig 30 Contingent provisions as % of loans – Private sector banks have buffers

Contingent provisions as % loans

FY21 FY22 3QFY23

Source: Company Data, Macquarie Research, March 2023

HDFC Bank 90 -3 -3% 0.8% 0.8%

Exposure to a large conglomerate group – not much of a concern

LIC 301.3 57.9 359.2 41,660 0.9%

ECL implications – not major impact on long term credit costs

Source: India Ratings, Macquarie Research, March 2023

BAF 10,300 10,305 0%

What are the timelines here?