%5bkotak%5d bfsi%2c june 2%2c 2015 - quarterly review 4qfy15

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

Earnings slips into negative zone; NII growth tracking weak loan growth

After a few quarters of positive growth in earnings, 4QFY15 was a disappointment with a

decline of 3% yoy (ex-SBI at -9% yoy). Revenues grew 14% yoy with NII growth at 10% yoy

and non-interest income growth at 24% yoy. NII growth for private banks was stronger at 18%

yoy and weaker for public banks at 5% yoy, reflecting the weak trends on loan growth. We are

yet to see any slowdown in provisions for bad loans which grew 36% yoy with slippages mainly

from restructured loans. Among public banks, SBI declared strong results while Axis, HDFC

Bank and Yes Bank did likewise among private banks.

Loan growth still weak as recovery is still elusive; revenue growth sees support from treasury

Loan growth (under coverage) slowed to 11% yoy (Exhibit 24), the slowest in recent years as

demand for corporate loans slowed sharply and alternate channels opened up meaningfully.

Divergence further expanded between public (8% yoy) and private banks (18% yoy) primarily

due to the nature of the loan portfolio and private banks looking to rebuild growth in the

corporate segment. We see loan growth, and consequently revenue growth, as a key challenge

that is likely to continue in FY2016-17 as there is a lack of evidence of corporate demand (~45%

of loans) at this stage as bank pipelines show negligible sanctions. Revenue growth and

earnings growth should sustain/improve as the treasury book shows positive contribution.

Impairment ratios weak as expected; recovery and upgradation improve qoq

Fresh impairments were high qoq at 6.8% of loans with slippages largely unchanged at 3%

and fresh restructuring at 3.8% of loans. Gross NPLs increased 6% qoq (flat qoq) to 3.7% (4.7%

for public and 2.1% for private banks). Gross NPLs were flat qoq and can be explained by

better trends on recovery/upgradation (Exhibit 10) and flat write-offs (Exhibit 9) a trend that

we would define as seasonal more than cyclical improvement. Outstanding restructured loans

increased 30 bps qoq to 5% of loans. Fresh restructuring was higher as most banks/borrowers

used the underlying opportunity to complete their pending restructuring.

NBFCs: mixed trends in business; overall trends remain weak

Most NBFCs continued to report weakness in core earnings on the back of slowing growth and

higher NPLs. Select players reported sharp bounce back in NPL collections or growth but guided

for moderation in 1HFY16. Defensives players (HDFC, LICHF and Bajaj Finance) remained strong.

Trends in auto finance NBFCs were mixed: Cholamandalam, Magma, MMFS, L&T Finance

reported stable or marginally improvements; Shriram Transport reported marginal weakness

and its equipment finance subsidiary reported sharp deterioration. We remain most positive on

housing finance (HDFC, LICHF and Dewan) and would like to play the CV recovery through

Cholamandalam and other multi product NBFCs.

Banks/Financial Institutions India

Weak earnings; impairment ratios rise marginally. The quarter was even more

disappointing than the 3% yoy decline in earnings suggests. Earnings declined largely

on the back of weak NII growth (10% yoy) and high provisions (38% yoy). Impairment

ratios increased by 40 bps qoq to 10.9% with fresh impairments at 6.8% of loans.

NBFCs delivered a mixed performance with improved collections for most auto finance/

multi product NBFCs and sharp deterioration for others. We remain most positive on

housing finance (HDFC, LICHF and Dewan) and would like to play the CV recovery

through Cholamandalam and other multi product NBFCs.

ATTRACTIVE

JUNE 02, 2015

UPDATE

BSE-30: 27,849

QUICK NUMBERS

Earnings declined

3% yoy; NII grew

10% yoy

Gross NPLs at 3.9%

and restructured

loans at 5% for

banks under

coverage

Loan growth at 11%

yoy; public banks at

8% yoy

M.B. Mahesh, CFA [email protected]

Mumbai: +91-22-4336-0886

Nischint Chawathe [email protected]

Mumbai: +91-22-4336-0887

Abhijeet Sakhare [email protected]

Mumbai: +91-22-4336-0889

India Banks/Financial Institutions

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 1: Consolidated PAT for banks under coverage decreased 3% yoy Consolidated earnings for banks under coverage, March fiscal year-ends, 4QFY14-4QFY15 (` bn)

4QFY14 3QFY15 4QFY15 QoQ (%) YoY (%)

NII 449 477 493 3.3 9.7

Non interest income 215 207 267 29.3 24.2

Total income 664 684 760 11.1 14.4

Provisions 155 148 215 44.5 38.2

Loan loss provisions 139 142 190 33.3 36.4

PAT 155 144 151 5.0 (2.5)

PAT (ex-SBI) 124 115 114 (0.9) (8.7)

Source: Company, Kotak Institutional Equities

Exhibit 2: PAT growth was negative in last quarter for the sector Growth in PAT, March fiscal year-ends, 4QFY11-4QFY15 (%)

(30)

-

30

60

90

120

4Q

FY11

1Q

FY12

2Q

FY12

3Q

FY12

4Q

FY12

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

Public Private Sector


Exhibit 3: NII growth slowed to 10% yoy Growth in NII, March fiscal year-ends, 4QFY11-4QFY15 (%)

0

8

16

24

32

40

4Q

FY11

1Q

FY12

2Q

FY12

3Q

FY12

4Q

FY12

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

Public Private Sector


Exhibit 4: Loan-loss provisions increased significantly Loan-loss provisions, March fiscal year-ends, 4QFY11-4QFY15 (` bn)

0

40

80

120

160

200

4Q

FY11

1Q

FY12

2Q

FY12

3Q

FY12

4Q

FY12

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

Public Private



KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 5: Impaired loans increased for public banks this quarter Public banks (under coverage), March fiscal year-ends, 4QFY13-4QFY15 (%)

3.8 4.3 4.4 4.4 4.1 4.2 4.4 4.7 4.7

5.3 5.5 5.7 5.5 5.6 5.8

5.9 5.8 6.2

-

2.4

4.8

7.2

9.6

12.0

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

Gross NPL Restructured loans


Exhibit 6: Private banks saw a marginal increase this quarter Private banks (under coverage), March fiscal year-ends, 4QFY13-4QFY15 (%)

1.8 1.8 1.9 1.8 1.7 2.0 2.0 2.0 2.1

1.6 1.7 1.8 1.8 2.0

2.1 2.0 2.0 2.1

-

0.9

1.8

2.7

3.6

4.5

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

Gross NPL Restructured loans


Fresh impairments rise sharply; recovery/upgradation improve qoq

Broad trends on outstanding impairment ratios worsened marginally for the quarter. The

previous few quarters show a steady improvement in fresh impairment ratios, though the

trend was not visible this quarter, which was partly expected considering that this was the

last quarter where the sunset clause of maintaining existing classification of freshly

restructured loans was available.

Fresh impairments increased 250 bps qoq at 6.8% of loans with slippages at 3% and fresh

restructuring at 3.8% of loans. The qualitative assessment of the slippages for the quarter

suggests that a large share of slippages for banks is coming from the increasing rate of

failures of previous restructured loans, especially from the iron and steel sector.

SBI and BoB amongst public banks and Axis Bank in private banks reported better

performance on fresh impairment ratios. PNB, Canara Bank and BoI had a very disappointing

quarter with a large rise in fresh impairments.

Outstanding gross impairment levels (gross NPLs and restructured loans) increased 30 bps

qoq at 8.9% of loans. Public banks, having reported few quarters of improvement, saw their

overall impaired loans at 11% (40 bps qoq) while the same for private banks increased 10

bps qoq to 4.2% of loans.

Overall gross NPLs were flat qoq at 3.7% of loans (flat at 4.7% of loans for public banks and



Management, especially for public banks, continue to highlight that a disproportionate

bandwidth is towards impairment management but the efforts can pay-off only when there

is recovery in the economy, which at this stage appears to be promising. The earliest sign

that we would need to read to gain confidence on the impairment cycle would be the

reduction in slippages which at this stage is not visible though one would argue that it has

probably stabilized. We should, after a few quarters, notice stronger trends on

recovery/upgrades.

Provision coverage has shown a decline, albeit nothing substantial. Among banks, SBI

reported one of the sharpest improvements in provision coverage ratios while ICICI Bank

reported the steepest decline qoq.

Exhibit 7: Gross NPLs increased 5.5% qoq, ratio flat qoq Gross NPLs and net NPLs, March fiscal year-ends, 4QFY14-4QFY15

1QFY15 2QFY15 3QFY15 4QFY15 1QFY15 2QFY15 3QFY15 4QFY15 1QFY15 2QFY15 3QFY15 4QFY15 1QFY15 2QFY15 3QFY15 4QFY15

Public banks

BoB 121 131 155 163 3.1 3.3 3.9 3.7 60 67 83 81 1.6 1.7 2.1 1.9

BoI 125 141 167 222 3.3 3.5 4.1 5.4 80 91 101 135 2.1 2.3 2.5 3.4

Canara 82 92 106 130 2.7 2.9 3.4 3.9 62 72 76 87 2.0 2.3 2.4 2.7

OBC 60 66 77 77 4.3 4.7 5.4 5.2 42 45 51 48 3.1 3.3 3.7 3.3

PNB 196 208 222 257 5.5 5.7 6.0 6.6 105 116 138 154 3.0 3.3 3.8 4.1

SBI 604 607 620 567 4.9 4.9 4.9 4.3 319 330 345 276 2.7 2.7 2.8 2.1

Union 102 115 126 130 4.3 4.7 5.1 5.0 58 64 71 69 2.5 2.7 3.0 2.7

Old private

CUBK 3 3 4 3 1.9 2.0 2.1 1.9 2 2 2 2 1.3 1.3 1.3 1.3

DCB 1 2 2 2 1.8 1.9 1.9 1.8 1 1 1 1 1.0 1.1 1.0 1.0

Federal 10 10 11 11 2.2 2.1 2.2 2.0 3 3 3 4 0.7 0.7 0.7 0.7

KVB 5 5 7 7 1.3 1.4 1.9 1.9 2 2 3 3 0.5 0.6 0.7 0.8

J&K 27 28 27 28 5.8 6.0 5.8 6.0 14 12 14 12 3.2 2.8 3.2 2.8

New private

Axis 35 36 39 41 1.3 1.3 1.3 1.3 11 12 13 13 0.4 0.4 0.4 0.4

HDFC Bank 34 34 35 34 1.1 1.0 1.0 0.9 10 9 9 9 0.3 0.3 0.3 0.2

ICICI 110 117 132 152 3.2 3.2 3.5 3.9 34 39 48 63 1.0 1.1 1.3 1.6

IndusInd 7 7 7 6 1.1 1.1 1.1 0.8 2 2 2 2 0.3 0.3 0.3 0.3

Yes 2 2 3 3 0.3 0.4 0.4 0.4 0 1 1 1 0.1 0.1 0.1 0.1

Total 1,523 1,602 1,737 1,833 3.6 3.7 3.9 3.9 805 869 959 960 1.9 2.0 2.2 2.0

Change qoq (%) 3.6 5.2 8.4 5.5 6.2 7.9 10.3 0.2

Public banks 1,290 1,359 1,472 1,546 4.2 4.4 4.7 4.7 726 786 864 850 2.4 2.5 2.7 2.6

Private banks 233 243 265 287 2.0 2.0 2.0 2.1 80 84 95 110 0.7 0.7 0.7 0.8

Gross NPLs (Rs bn) Gross NPLs (%) Net NPLs (Rs bn) Net NPLs (%)


Exhibit 8: Fresh impairments were higher than previous quarter Fresh additions to NPLs and restructured loans, March fiscal year-ends, 4QFY14-4QFY15

4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15

Bank of Baroda 1.3 2.1 1.9 3.1 1.3 1.2 1.0 1.2 1.6 3.8

Bank of India 3.8 4.0 3.0 3.3 6.4 2.5 1.7 1.4 0.7 2.7

Canara Bank 2.8 3.4 4.1 2.9 3.4 1.9 1.8 1.2 1.4 4.2

Oriental Bank of Commerce 3.4 4.1 2.8 3.8 2.1 2.9 2.5 2.0 6.0 4.7

Punjab National Bank 5.1 3.4 4.4 5.7 7.8 3.7 1.7 3.7 2.7 8.3

State Bank of India 2.6 3.3 2.5 2.3 1.5 2.6 1.2 1.1 1.3 3.7

Union Bank 2.0 2.1 3.2 2.8 2.4 2.4 0.8 1.2 2.0 3.6

Axis Bank 0.5 1.1 1.5 1.1 0.9 1.9 0.8 0.9 0.2 2.2

ICICI Bank 1.5 1.4 1.8 2.4 3.4 2.5 1.6 0.9 1.9 1.3

Total 2.6 2.9 2.8 2.9 3.0 2.4 1.4 1.4 1.6 3.8

Total (ex SBI) 2.6 2.7 2.9 3.2 3.7 2.4 1.5 1.6 1.8 3.8

Fresh slippages (%) Fresh restructuring (%)




Exhibit 9: Banks made higher write-offs during the quarter Write-off of loans, March fiscal year-ends, 4QFY14-4QFY15


Bank of Baroda 4,866 4,986 3,680 3,280 3,689 0.5 0.5 0.4 0.3 0.3

Bank of India 5,480 8,150 1,550 640 (2,330) 0.6 0.9 0.2 0.1 (0.2)

Canara Bank 4,030 8,000 10,540 200 (4,010) 0.5 1.1 1.4 0.0 (0.5)

Oriental Bank of Commerce 3,652 4,371 778 397 3,703 1.0 1.3 0.2 0.1 1.0

Punjab National Bank 8,740 7,490 10,700 10,820 13,540 1.0 0.9 1.2 1.2 1.4

State Bank of India 56,980 65,600 47,870 50,960 48,740 1.9 2.2 1.6 1.7 1.5

Union Bank 2,220 2,880 1,800 2,180 2,450 0.4 0.5 0.3 0.4 0.4

Axis Bank 140 2,120 5,970 1,940 2,140 0.0 0.4 1.0 0.3 0.3

ICICI Bank 7,190 3,920 5,390 2,360 5,950 0.8 0.5 0.6 0.3 0.6

Total 93,299 107,518 88,278 72,777 73,872 1.0 1.2 1.0 0.8 0.8

Write-offs (Rs mn) Write-offs (% of advances)


Exhibit 10: Strong recovery in 4QFY15, particularly for SBI and PNB Recoveries and upgradation of loans, March fiscal year-ends, 4QFY14-4QFY15

4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15

Bank of Baroda 8,572 13,125 5,137 3,186 1,816 0.4 0.9 1.4 0.5 0.3 0.2

Bank of India 12,155 22,911 12,214 7,254 12,874 1.2 1.3 2.4 1.2 0.7 1.3

Canara Bank 22,357 12,057 11,193 8,627 7,396 1.5 3.0 1.6 1.4 1.1 0.9

Oriental Bank of Commerce 4,063 6,291 2,397 2,773 3,929 1.1 1.2 1.8 0.7 0.8 1.1

Punjab National Bank 12,948 14,862 17,350 26,515 25,866 1.0 1.5 1.7 1.9 2.9 2.7

State Bank of India 84,430 45,411 26,349 6,679 51,611 1.0 2.8 1.5 0.9 0.2 1.6

Union Bank 1,905 3,179 5,582 3,856 8,672 0.5 0.3 0.5 0.9 0.6 1.3

Axis Bank 1,488 971 1,642 2,255 1,874 0.2 0.3 0.2 0.3 0.3 0.3

ICICI Bank 4,160 3,560 4,400 5,070 6,540 0.5 0.5 0.5 0.5 0.6 0.7

Total 152,077 122,368 86,263 66,216 120,579 0.9 1.7 1.4 1.0 0.7 1.2

Ex SBI 67,647 76,957 59,914 59,537 68,967 0.8 1.2 1.3 1.0 1.0 1.1

Recovery/upgradation (% of advances)Recovery and upgradation (Rs mn)


Exhibit 11: Nearly 30% of textiles and 25% of iron and steel exposure have been restructured or have slipped into NPLs NPL and restructured loans in textiles and iron and steel across select banks, March fiscal year-end, 4QFY15 (%)

Total

exposure

Total

exposure

(% of loan

book)

(% of total

expoure)

(% of

restructured

loans)

(% of total

expoure)

(% of

NPLs)

(% of loan

book)

(% of total

expoure)

(% of

restructured

loans)

(% of total

expoure) (% of NPLs)

IOB 4.1 10.1 3.7 14.6 7.1 6.3 28.7 16.2 12.3 9.3

OBC (A) 4.8 11.6 4.1 13.3 12.2 6.5 21.3 10.3 11.3 14.2

PNB 3.1 12.1 3.7 8.6 3.9 6.2 23.6 14.6 10.1 9.3

SBI 3.2 15.7 24.3 8.4 6.3 6.0 18.4 53.9 7.3 10.4

Notes:

(a) Restructured loans amount assumed to be same as 3QFY15.

Textiles Iron & steel

Restructutred loans NPLs Restructutred loans NPLs




Exhibit 12: Loan loss provisions increased for most banks Loan loss provision ratio, March fiscal year-ends, 4QFY14-4QFY15 (%)

4QFY14 1QFY15 2QFY15 3QFY15 4QFY15

Public banks

Bank of Baroda 0.6 0.8 0.6 1.2 1.4

Bank of India 1.5 1.0 0.9 1.5 2.3

Canara Bank 1.0 1.5 1.1 1.4 1.2

Oriental Bank of Commerce 2.1 1.7 1.3 1.6 1.8

Punjab National Bank 2.4 1.4 2.0 2.1 3.8

State Bank of India 1.9 1.3 1.3 1.5 1.9

Union Bank 1.2 0.7 1.1 1.3 1.2

Old private banks

City Union Bank 0.6 1.1 1.2 0.6 0.7

DCB 0.5 0.6 0.4 0.4 0.5

Federal Bank 0.3 0.4 0.5 0.5 0.3

Karur Vysya Bank 0.1 1.5 0.8 1.7 1.8

J&K Bank 0.3 1.8 3.1 1.8 3.1

New private banks

Axis Bank 0.7 0.6 1.1 0.6 0.5

HDFC Bank 0.4 0.5 0.6 0.6 0.6

ICICI Bank 0.8 0.8 0.8 1.0 1.3

Yes Bank 0.3 0.5 0.3 0.3 0.6

IndusInd Bank 0.5 0.6 0.4 0.7 0.5


Exhibit 13: Provision coverage ratio trends were mixed Provision coverage ratio, March fiscal year-ends, 4QFY14-4QFY15 (%)


Public banks

BoB 49.2 50.2 48.7 46.3 50.4 65.5 66.7 65.4 62.4 65.0

BoI 37.5 35.8 35.6 39.7 39.1 58.7 58.1 56.3 56.6 52.4

Canara 21.2 24.6 21.8 28.5 33.0 60.1 60.1 58.7 59.4 57.3

OBC 30.5 29.3 32.0 33.8 37.2 60.2 59.1 59.0 57.4 60.6

PNB 47.5 46.6 44.0 37.9 40.1 59.1 60.0 59.1 57.3 58.2

SBI 49.5 47.2 45.7 44.4 51.4 62.9 62.7 63.2 63.6 69.1

Union 44.2 43.7 43.7 43.5 46.9 59.9 58.9 58.0 57.3 59.2

Old private banks

City Union Bank 32.7 33.7 35.3 38.9 30.7 62.0 61.1 62.0 62.0 58.0

DCB 46.5 46.1 44.1 46.9 43.2 80.5 79.1 76.8 77.1 74.7

Federal Bank 70.4 70.1 69.1 68.8 64.7 84.1 84.9 85.1 85.0 83.9

Karur Vysya Bank 49.9 59.5 56.8 62.3 58.5 75.0 75.0 75.0 75.1 75.2

J&K Bank 87.0 48.7 49.3 46.3 55.3 90.3 55.1 54.9 51.0 59.0

New private banks

Axis Bank 67.4 67.8 67.3 67.9 68.0

HDFC Bank 72.6 70.0 72.7 73.9 73.9

ICICI Bank 68.8 68.4 65.8 63.5 58.5

Yes 85.1 78.4 75.8 76.8 72.0

IndusInd Bank 70.4 70.1 70.2 70.0 62.6

Ex write-off Inc write-off




Exhibit 14: We factor loan loss provisions to reduce gradually Loan-loss provisions, March fiscal year-ends, 2009-17E (%)

0.0

0.4

0.8

1.2

1.6

2.0

2009

2010

2011

2012

2013

2014

2015

2016E

2017E

Private PSU

Notes:

(a) City Union Bank, DCB, ING Vysya and Karur Vysya Bank not included from banks under coverage.

Source: Company, Kotak Institutional Equities estimates

Restructured loans shows an increase of 30 bps qoq; net NPL and restructured loans

increase 20 bps at ~7% of loans

Overall restructured loans increased by 30 bps qoq 5% of loans. Public banks reported an

increase of 40 bps qoq to 6.2% of loans while the share of restructured loans for private

banks increased by 10 bps to 2.1% of loans.

The increase on a sequential basis was broadly on expected lines. Loans restructured in the

SEB segment came off to 46% from 50% in the past few quarters. There would be no

further fresh disbursements from FY2016 to the SEB as a part of the financial restructuring

package.

Overall stress (net NPL and restructured loans) stands at 2.9% of loans (10 bps qoq) for

private banks and 8.8% of loans (20 bps increase qoq) for public banks. There are some

early signs that the pipeline for fresh restructuring is gradually easing across all banks.

However, it would be incorrect to extrapolate considering that incremental cases for

restructuring would be of a very large ticket size.

The transitional costs of the provisioning requirements on new restructured guidelines

continued to bite earnings as they would have to have make ~5% on the incremental loans

restructured and move the outstanding stock of restructured to 5% by FY2015. We do note

that there are high slippages into NPL from the restructured loan portfolio as the

restructuring package implemented in these corporate portfolios has not been successful.



Exhibit 15: Restructured loans and net NPLs to total loans are at about 9% for public banks, 3% for private banks Restructured loans and net NPLs, March fiscal year-ends, 4QFY14-4QFY15 (%)

4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15

Public banks

BoB 5.2 6.0 5.8 5.9 6.1 1.5 1.6 1.7 2.1 1.9 6.7 7.6 7.6 8.0 7.9

BoI 5.5 5.5 5.5 4.9 4.9 2.0 2.1 2.3 2.5 3.4 7.5 7.6 7.8 7.4 8.3

Canara 7.7 7.9 7.9 8.1 8.6 2.0 2.0 2.3 2.4 2.7 9.7 10.0 10.2 10.6 11.2

OBC 9.8 11.6 11.3 12.7 13.6 2.8 3.1 3.3 3.7 3.3 12.6 14.7 14.5 16.3 16.9

PNB 10.2 9.8 10.2 9.5 10.1 2.9 3.0 3.3 3.8 4.1 13.0 12.8 13.4 13.3 14.1

SBI 3.6 3.5 3.6 3.8 4.3 2.6 2.7 2.7 2.8 2.1 6.1 6.2 6.4 6.6 6.4

Union 5.3 5.0 6.6 5.0 5.2 2.3 2.5 2.7 3.0 2.7 7.6 7.5 9.3 7.9 5.2

Old private banks

City Union 1.7 1.6 1.5 1.5 1.4 1.2 1.3 1.3 1.3 1.3 2.9 2.9 2.8 2.8 2.7

DCB 1.0 0.9 1.0 1.2 0.5 0.9 1.0 1.1 1.0 1.0 2.0 1.9 2.1 2.2 1.5

Federal 5.3 5.5 5.0 5.1 5.6 0.7 0.7 0.7 0.7 0.7 6.1 6.2 5.7 5.7 6.3

Karur Vysya 4.1 4.3 4.5 4.7 5.4 0.4 0.5 0.6 0.7 0.8 4.5 4.8 5.1 5.4 6.2

J&K 3.4 3.0 2.8 4.1 5.5 0.2 2.2 2.5 3.2 2.8 3.6 5.2 5.3 7.3 8.3

Private

Axis 2.4 2.5 2.5 2.4 2.7 0.4 0.4 0.4 0.4 0.4 2.8 2.9 2.9 2.8 3.2

HDFC Bank 0.2 0.2 0.1 0.1 0.1 0.3 0.3 0.3 0.3 0.2 0.5 0.5 0.4 0.4 0.3

ICICI 3.1 3.2 3.0 3.2 2.8 1.0 1.0 1.1 1.3 1.6 4.1 4.2 4.1 4.5 4.5

IndusInd 0.3 0.4 0.5 0.6 0.5 0.3 0.3 0.3 0.3 0.3 0.7 0.7 0.9 0.9 0.8

Yes 0.2 0.2 0.2 0.3 0.5 0.1 0.1 0.1 0.1 0.1 0.2 0.3 0.3 0.4 0.6

Total 4.7 4.7 4.8 4.7 5.0 1.8 1.9 2.0 2.2 2.1 6.5 6.7 6.9 6.9 7.1

Public banks 5.6 5.8 5.9 5.8 6.2 2.3 2.4 2.6 2.8 2.6 7.9 8.2 8.5 8.6 8.8

Private banks 2.0 2.1 2.0 2.0 2.1 0.5 0.7 0.7 0.8 0.8 2.6 2.7 2.7 2.8 2.9

Restructured loans (%) Net NPL and restructured loans (%)Net NPLs (%)


Exhibit 16: Proportion of SEB restructured loans declined to 47% from 50% earlier led by implementation of FRP packages for SEBs March fiscal year-end, 4QFY15 (%)

(Rs bn) (Rs bn)

(% of

loans)

(% of

loans)

(% of

loans)

(% of

loans)

(% of

loans)

(% of

loans)

(% of

loans)

(% of SEB

loans)

Andhra Bank 1,296 199 15.4 3.6 7.2 11.1 2.9 0.4 7.7 82.2

Allahabad Bank 1,531 248 16.2 3.4 5.8 10.9 2.1 0.2 8.6 61.0

BOB (B) 4,281 357 8.3 1.5 3.0 6.1 0.7 0.3 5.0 46.1

BOI 4,020 490 12.2 3.7 4.6 5.0 1.0 0.6 3.5 25.7

Central Bank (B) 1,950 410 21.0 9.4 4.4 16.7 7.4 0.6 8.7 78.5

Corporation Bank 1,451 238 16.4 2.7 6.9 7.3 1.6 0.6 5.1 60.5

Dena Bank 806 153 19.0 9.0 3.4 12.2 4.6 0.2 7.4 51.6

IDBI Bank 2,084 572 27.5 12.0 8.0 0.2 7.8

Indian Bank (B) 1,288 230 17.8 3.3 6.6 7.7 3.1 0.5 4.1 91.1

IOB (A) 1,790 280 15.7 5.4 5.7 11.1 1.1 0.4 9.6 20.5

OBC 1,480 335 22.6 4.7 8.7 13.6 3.7 0.8 9.1 78.8

PNB 3,805 637 16.7 2.8 7.0 10.1 1.5 0.4 8.1 54.8

SBI (B) 13,354 1,773 13.3 0.8 7.2 5.3 0.3 0.1 4.9 35.5

Vijaya Bank 877 234 26.7 8.4 9.6 7.1 2.8 4.2 33.6

Syndicate bank 2,058 255 12.4 5.6 2.7 5.2 2.1 0.4 2.8 36.9

Total 48,000 7,442 15.5 3.4 6.1 8.0 1.5 0.3 6.2 46.1

Notes:

(A) Exposure to power extrapolated proportionate to increase in infrastructure book

(B) Assumed infrastructure exposures and SEB restructured loans same as previous quarter

(C) We have assumed exposure to be equal to last quarter where data is not available

Power

Total loans Infra exposure SEB Non-SEB SEB Aviation Others

Restructured loans (% of loans)

SEB

restructuringTotal




NBFCS: MIXED RESULTS; OVERALL TRENDS WEAK

Most NBFCs continued to report weakness in core earnings on the back of slowing growth and higher NPLs.

NIM improved marginally due to seasonal trends and lower incremental borrowings cost.

Key highlights

Sharp bounce back in select players. Some of the NBFCs like Mahindra Finance

reported a sharp bounce back in collections. High (31% qoq) loan growth for SKS (on the

back of weak traction in past three quarters) and 6% qoq loan growth (on the back of

flat loan book in last seven quarters) for Muthoot was reassuring.

Defensives remain strong. Housing finance companies (HDFC, LICHF) and Bajaj Finance

continued to deliver strong and stable performance though marginally tempered by

seasonal factors.

Divergent trends in CV collections. Cholamandalam, Magma, L&T Finance reported

stable or marginally improvement in collections. However, collections remained weak at

Shriram Transport Finance. The sharp rise in NPL (GNPL ratio of 15% from 3% qoq) in

Shrirams equipment finance subsidiary) rattled the street, raising concerns about

significant slippages for other players however, most other listed players have not

reported any such sharp deterioration.

Business momentum picked up

Most NBFCs reported improvement in business momentum during 4QFY15 though this may

not be construed as a sign of recovery in the sector.

Housing finance companies (HDFC, LICHF and Dewan) continue to report strong retail

loan growth. Market share gains over the last few quarters have also boosted growth for

these players. Reported yoy loan growth and disbursements growth has accelerated by

~1% yoy between 3QFY15 and 4QFY15.

CV finance companies reported slightly better business growth due to a pick-up in CV

sales in 2HFY15. HCV sales picked up during the quarter; while this benefitted banks

(catering to large fleet operators), some of the NBFCs (catering to smaller operators)

reported higher growth as well. This was likely due to financing of vehicles sold down to

small fleet operators from large fleet operators.

Bajaj Finance continued to report high loan growth (up 35%) yoy driven by 14 business

lines across consumer as well as business loan verticals.

SKS report high loan growth (31% qoq) due to an increase in ticket size and higher

momentum in 4Q.

Muthoot reported 6% qoq loan growth as compared to a flat performance in the past

few quarters as disbursements picked up gradually as its marketing efforts ramped up.

Reported loan growth declined for several players (Cholamandalam, Magma, Mahindra

Finance and L&T Finance) as business momentum has been weak for several quarters while

repayments remain stable/high.



Exhibit 17: Loan growth remains weak Yoy loan growth, 4QFY14-4QFY15 (%)

4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 Comments

Bajaj F inance 37 40 41 37 35 Loan growth remains high

Cholamandalam 22 18 17 12 9 Retains cautious stance

DHFL 24 28 28 27 Loan growth continues

HDFC 16 15 15 14 16 Improving trend in retail busienss

IDFC 5 (8) (4) (3) (10) Loan book down sharply

LIC Housing F inance 17 17 17 18 19 Disbursements remain high

Mahindra F inance 23 17 13 10 11 Loan growth weak

Magma Finance 10 12 13 13 9 Slow ing down

Muthoot F inance (16) (17) (11) (2) 7 Loan book up 6% qoq

Power F inance Corporation 18 17 16 16 15 Business gradually slow ing down

Rural Electrification Corporation 17 17 17 19 21 Remains stable

Shriram City Union F inance (7) (2) 3 8 14 Growth improves on low base

Shriram Transport F inance 7 4 3 7 11 Strong yoy growth in disbursements

SKS Microfinance 41 39 50 35 47 Strong growth in ticket size

Source: Kotak Institutional Equities , Company

Exhibit 18: Trends in disbursements were better qoq Disbursements, 4QFY13-4QFY15 (%)

4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15

Bajaj Finance 21 32 20 45 38 48 50 NA NA

Cholamandalam 33 29 6 7 (3) (3) 7 (7) (5)

DHFL - 11 11 10 64 20 31 22 10

HDFC 30 17 19 13 3 18 22 1 17

L&T Finance 7 25 5 9 7 (2) 5 (3) 2

LICHF -retail 18 13 (0) 6 3 15 23 23 24

Mahindra Finance 27 32 5 8 (11) (13) (2) (8) 7

Magma Fincorp (18) (13) 3 6 28 33 9 14 (12)

Shriram City NA (21) (27) (4) 9 18 17 9 5

Shriram Transport 55 48 18 (8) (10) (6) 13 39 31


NIM rise and NPLs decline qoq

NIM improved for most players on a qoq basis. Seasonally, NPLs decline and collections

improve in most segments likely due to managements focus on recoveries. Higher income in

semi urban/rural India after the harvest season is also one of the reasons.

Borrowings cost down. Borrowings cost of most players has declined marginally. Large

and high-rated NBFCs shifted funds from bond markets at competitive rates. For instance,

LICHFs bond yield was down 150 bps in 2HFY15.

Lower growth = lower decline in borrowings cost. Lower loan growth implies that

incremental borrowings are low and hence reduction in average borrowings cost is lower.

Lower loan sell down. Share of loan sell down has declined yoy for most players due to

change in guidelines for bank classification of RIDF bonds. This is weighing negatively on

NIM.



Exhibit 19: NIM- mixed trends NIM (KS- calculations), 4QFY14-4QFY15 (%)

4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 Comments

Bajaj F inance 8.7 10.0 8.5 10.6 8.8 Seasonal weakness in NIM

Cholamandalam 6.9 6.7 6.9 7.6 7.2 Change in classification on EIS

DHFL 2.6 2.9 2.8 2.8 2.7 Stable qoq

HDFC 4.3 3.3 3.4 3.6 4.1 Strong seasonal trends

IDFC 4.1 4.2 3.8 4.3 3.4 Lower debt market gains

LIC Housing F inance 2.4 2.2 2.2 2.2 2.5 Seasonal trends at work

Mahindra F inance 10.2 9.1 9.5 9.1 10.7 Seaonally strong NIM

Magma Fincorp 5.5 5.2 5.3 5.9 5.9

Lower share of loan securitization and

higher share of high-y ield loans

Muthoot F inance 10.4 10.0 10.0 9.5 9.7 NIM up marginlly qoq

Power F inance Corporation 4.9 4.8 5.1 5.0 4.8 NIM remains high

Rural Electrification Corporation 5.0 5.0 5.2 5.2 5.1 NIM remains high

Shriram Transport F inance 6.9 7.2 7.3 7.5 7.5 Stable qoq

Shriam City Union F inance 13.3 13.5 13.3 14.3 13.7 Higher share of gold loans

SKS Microfinance 9.5 11.2 13.6 10.9 9.9 Cash distorted calculated ratio


Exhibit 18: Share of off-balance sheet loans lower yoy Off-balance sheet loans as % of total AUM, March fiscal year-end, 4QFY14-4QFY15 (%)


DHFL 9 9 9 9 10

Mahindra Finance 7 6 5 5 5

Magma Finance 36 33 32 30 32

Shriram City Union Finance 13 11 8 6 6

Shriram Transport Finance 31 26 21 14 17

SKS Microfinance 39 21 5 14 30


Exhibit 20: NPLs decline qoq for most players Gross NPLs of NBFCs, 4QFY13-4QFY15 (%)


Bajaj Finance 1.0 1.1 1.1 1.2 1.2 1.1 1.4 1.5 1.5

Cholamandalam 1.1 1.1 1.4 1.7 1.9 2.4 2.6 2.8 3.1

DHFL 0.7 0.8 0.8 0.9 0.8 0.8 0.8 0.8 0.8

HDFC 0.7 0.8 0.8 0.8 0.7 0.7 0.7 0.7 0.7

IDFC 0.2 0.4 0.3 0.6 0.6 0.6 0.6 0.7 0.7

LIC Housing Finance 0.6 0.8 0.7 0.8 0.7 0.8 0.6 0.6 0.5

LTF Holdings 2.03 2.54 2.89 2.93 3.18 3.57 2.96 3.01 2.25

L&T Finance 2.5 3.4 3.4 3.5 3.4 3.8 3.5 3.9 3.0

L&T Infra Finance 1.5 1.5 2.4 2.4 3.1 3.5 2.5 2.3 1.8

Magma Finance - - 1.3 1.6 2.2 2.9 3.6 3.6 4.1

Mahindra Finance 3.0 4.2 4.1 4.8 4.4 6.2 6.3 7.1 5.9

Muthoot Finance 2.0 2.1 1.9 1.6 1.9 1.9 2.1 1.9 2.2

Power Finance Corporation 0.7 0.7 0.7 0.7 0.7 1.0 1.0 1.0 1.1

Rural Electrification Corporation 0.4 0.4 0.4 0.3 0.3 0.9 0.8 0.8 0.7

Shriram Transport Finance 3.2 3.1 3.3 3.6 3.9 3.7 3.7 3.6 3.8

Shriram City Union Finance 2.2 2.3 2.5 2.5 2.7 2.9 2.9 3.0 3.1

SKS Microfinance 0.5 0.3 0.2 0.1 0.1 0.2 0.1 0.1 0.1




Impaired loans rise for PFC and REC Impaired loans, March fiscal year-end, 1QFY14-4QFY15 (Rs bn)

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15

PFC

Gross NPLs 12 12 12 12 20 20 20 24

Rescheduled/ restructured loans 101 115 133 116 127 156 175 205

Total impaired loans 113 127 144 128 147 176 195 229

(% of loan book) 7 7 8 7 8 9 10 11

REC

Gross NPLs 5 5 5 5 13 13 13 13

Rescheduled/ restructured loans 337 337 337 337 337 30 95 164

Total impaired loans 342 342 342 342 350 43 108 178

(% of loan book) 26 25 24 23 23 3 6 10

Notes:

PFC

(b) ) If the loan repayment scheudule is revised due to change in cash flow forecasts, the loan is classified as 'restructured'.

REC

(a) If the commission date of a private sector project project is postponed by a single day,the loan is classified as 'rescheduled'.

(a) 1QFY14-1QFY15: If the commission date of a private/ public sector project is postponed or loan repayment schedule is revised by a

single day, the project is classified as 'rescheduled'.

(b) 2QFY15-4QFY15: If the commission date of a private/ public sector project is postponed by over two years or loan repayment

schedule is revised, the loans is classified as 'restructured'.


Exhibit 21: Earnings growth trend mixed for NBFCs Core PBT growth for NBFCs, 4QFY14-4QFY15 (%)


Bajaj Finance 16 20 18 33 24

Cholamandalam 12 2 7 21 48

DHFL 33 40 40 24 5

HDFC 13 18 21 12 12

IDFC 16 2 (5) 12 (21)

LICHF 21 13 9 18 17

Mahindra Finance 1 (19) (6) (17) 5

Magma Finance (22) (18) 15 29 36

Muthoot Finance (20) (7) (20) (20) (8)

PFC 15 16 12 11 13

REC 26 16 33 21 17

Shriram Transport (7) 1 4 10 16



Core PBT (%)


Exhibit 22: Earnings growth trend mixed for NBFCs PAT growth for NBFCs, 4QFY14-4QFY15 (%)


Bajaj Finance 11 20 18 33 27

Cholamandalam 6 2 6 21 49

DHFL 7 22 18 17 13

HDFC 11 21 14 18 15

IDFC (47) (14) (14) (16) 49

LICHF 17 14 21 16 10

Mahindra Finance (7) (19) (6) (17) 7

Magma Finance 1 1 31 25 18

Muthoot Finance (20) (7) (20) (20) (8)

PFC 9 21 11 1 11

REC 24 11 35 12 (8)

Shriram Transport (17) (10) (8) 4 7



PAT (%)


Summary of takeaways for select NBFCs

Bajaj Finance reported 27% growth in earnings supported by 35% growth in loan book

(Rs324 bn). Calculated NIM declined due to the shift to lower-yield loans. The company

made extra provisions of Rs174 mn as an impact of change in provisioning policy this

pulled down growth in reported earnings.

Cholamandalams (Chola) 4QFY15 PAT was up 21% yoy driven by high income on

recoveries (interest income including penal charges). Provisions were strong as well;

Cholas management indicated that delinquency resolution in early buckets (0-4 months)

was strong and substantially lower yoy but delinquencies in the past two months slipped

into the NPL category.



Dewan Housing Finances (Dewan) comparable PAT was up 20% yoy on the back of 27%

yoy loan growth to Rs568 bn. Calculated NIM were stable yoy at 2.7% as the company

has likely fully passed on the benefit of lower borrowings cost to its borrowers.

HDFC reported PAT (before DTL) was up 15% yoy. Overall loan book (including

outstanding loans sold to banks) was up 16% yoy to Rs2.53 tn. Individual loan book was

up 18% yoy. Non-individual loan book was up 13% yoy, higher than 8-11% yoy over the

past seven quarters. Calculated NIM (4.1%) was down 20 bps yoy but up 50 bps qoq due

to liability-side benefits.

LICHF reported 17% yoy growth in comparable earnings and 22% growth in NII on the

back of stable (19%) loan growth and marginal yoy NIM expansion.

L&T Finance (the retail and mid-market business of L&T Finance Holdings) 14% PBT

growth yoy. The sharp (45%) decline in CV/CE loans and weak business loans has offset

high growth in tractor and microfinance (leading to flat loan book) but such a strategy

boosted asset yields (up 40 bps yoy). The company made extra provisions (which

accounted for about half the provisions during the quarter) to prepare for 150 days past

due (dpd) NPL recognition from FY2017. The company will follow 150 dpd guidelines

from 1QFY15.

L&T Infra Finance reported strong loan growth of 27% yoy (from renewable projects,

roads and operating assets). Incremental trends are little weaker as seen from

disbursements (+2% yoy and -36% qoq). NIM was flat but high provisions (statutory and

extra provisions) affected earnings.

Sharp rise in impaired loans for PFC (and REC) were the key highlight of 4Q results. PFCs

impaired loans increased sharply led by large (17% qoq) rise in rescheduled loans. RECs

restructured loans were up 72% qoq; the restructured loan book in the public sector

increased by 23% yoy to Rs117 bn and the company restructured loans of about Rs47 bn

(NIL earlier) in the private sector.

Magma Fincorp (Magma) reported PBT growth of 36% largely supported by (1) lower

provisions due to relaxation of the NPL norms and (2) 19% yoy growth in NII (supported

by 11% loan growth and NIM expansion). Cost-to-income ratio increased to 61% in

4QFY15 from 56% in 3QFY15. The tax rate was higher at 23% from 17% in 3QFY15

and 10% in 4QFY14 due to the lower share of loan securitization, which in turn boosted

NIM to some extent.

Mahindra Finances (MMFS) PAT was up 7% yoy but 13% ahead of estimates. Strong

NPL recoveries in March led to 17% qoq decline in gross NPLs, thus reducing provisioning

expenses (down 45% qoq) and boosting NIM (write-back of interest reversals boosted

asset yields by 35 bps qoq). MMFSs strong recovery efforts and reversion of high

delinquencies in 3QFY15 is likely to have driven strong collections performance, in our

view.

Muthoot Finances (Muthoot) PAT was down 9% yoy but up 7% qoq. Loan growth

picked up sharply (up 6% qoq to Rs234 bn). NIM expanded as well (20 bps qoq). The

company continued its focus on reducing its operating expenses opex ratio was lower

at 5.1% of loans from 5.4% qoq.

Shriram City Union Finance (SCUF) reported 5% growth in PBT. NII, up 14% yoy, was

supported by similar (14%) loan growth even as NIM (13.7%) was stable yoy. Cost-to-

income ratio was up 400 bps yoy and 230 bps above estimates to 41% due to increase in

number of employees on roll.



SKS Microfinances business momentum picked up sharply in 4QFY15 with 31% qoq

loan growth due to the average size/loan increase of 25% qoq. Long-term loans (loan

with tenure of 104 weeks for borrowers, who have completed at least two loan cycles)

contributed 31% of the qoq loan growth. Greater liquidity on balance sheet, higher loan

sell-down (which calls for higher cash collateral) pulled down calculated NIM (9.9% as

compared to 10.9% in 3QFY15) Consequently, PAT was lower qoq at Rs405 mn (Rs412

in 3QFY15).

Shriram Transport Finance reported subdued earnings due to high (32%) rise in credit

cost. NII was up 19% yoy on the back of 11% loan growth (up 7% in 3QFY15) and yoy

NIM expansion. Large losses in the subsidiary company due to a sharp rise in NPLs (15%

from 3% qoq) was the key reason for disappointment.

Loan growth slowdown is the emerging challenge for banks

Growth remained similar to industry average for the banks under coverage at 11% yoy.

Public banks continued to report a noticeable slowdown with growth at 8% yoy; the

corporate segment is witnessing the maximum slowdown as the fresh capex cycle is not

showing any improvement and there is some shift in lending to money market instruments

owning to a sharp change in the liquidity environment.

Loan growth for private banks remained healthy at 18% yoy and similar to the previous

quarter levels. Select banks like Axis Bank, Yes Bank, IndusInd Bank and HDFC Bank seeing a

large growth in the corporate loan portfolio.

We note that old private banks, CUBK and Federal Bank have reported an improvement in

loan growth despite growth in gold loans being a major challenge. These banks continue to

focus on SME loans for incremental growth. KVB and J&K Bank reported a modest or weak

growth.

Most of the other public and private banks have shifted focus towards lending to retail and

SME. We believe that this is likely to be the biggest source of concern in FY2015 as fresh

sanctions have not shown any improvements, repayments are increasing from existing loans

while retail, where banks have shifted focus contributes to only 20% of the overall loans for

the sector. Public banks are likely to struggle more as their ability to shift to retail is

challenging and growth in the corporate segment is likely to remain weak for a few more

quarters.

Exhibit 23: Loan growth has been weak at 11% yoy in recent months Yoy growth in loans, March fiscal year-ends, 2012-2015 (%)

5

10

15

20

25

30

Apr

May

Jun

Jul

Aug

Sep Oct

Nov

Dec

Jan

Feb

Mar

2012 2013 2014 2015




Exhibit 24: Loan growth for banks under coverage was at 11% yoy Yoy growth in loans, March fiscal year-ends, 4QFY13-4QFY15 (%)


Public banks

Bank of Baroda 14.2 12.4 16.3 17.7 21.0 18.8 13.5 11.7 7.8

Bank of India 16.5 17.1 29.4 27.2 28.4 23.3 18.5 15.1 9.4

Canara Bank 4.2 10.8 30.3 31.8 24.3 21.2 10.6 8.5 9.6

Oriental Bank of Commerce 16.3 12.4 9.2 8.4 8.1 8.1 8.1 5.5 5.2

Punjab National Bank 5.1 3.6 6.5 9.7 13.1 13.9 13.8 11.1 9.0

State Bank of India 20.5 15.7 19.1 17.4 15.7 13.0 9.6 7.4 7.5

Union Bank 17.1 16.5 25.5 19.9 10.6 18.1 10.3 8.9 12.1

Old private banks

CUBK 25.6 20.5 16.8 9.0 6.4 5.0 7.7 7.2 11.5

DCB 24.6 18.8 17.8 23.4 23.6 28.1 31.7 28.9 28.6

Federal Bank 16.8 8.5 16.3 5.4 (1.5) 9.1 14.8 15.3 18.1

KVB 22.7 25.8 24.3 21.2 15.2 11.9 11.3 8.0 5.5

J&K Bank 18.5 21.1 35.3 21.5 18.3 10.3 (3.9) 2.4 (3.9)

New private banks

Axis Bank 16.0 15.8 16.9 17.8 16.8 16.3 20.3 23.2 22.2

HDFC Bank 22.7 21.2 16.0 22.9 26.4 20.7 21.8 17.0 20.6

ICICI Bank 14.4 12.3 15.5 16.0 16.7 15.2 13.8 12.8 14.4

Yes Bank 23.7 24.3 13.6 14.7 18.4 23.2 30.0 32.4 35.8

IndusInd Bank 26.4 27.3 24.2 23.7 24.3 23.7 22.4 21.7 24.8

Public sector 15.0 13.3 19.3 18.7 17.5 16.0 11.7 9.5 8.4

Private sector 18.5 17.2 17.3 18.3 18.7 17.0 17.5 16.9 18.4

Total 15.9 14.3 18.8 18.6 17.8 16.3 13.3 11.5 11.1




Exhibit 25: Industry loan growth is slowing down gradually Break-up of loans and growth across segments, March fiscal year-ends, 2012-2015 (%)

2012 2013 2014 2015 2012 2013 2014

2012-

2015

CAGR 2012 2013 2014

2012-

2015

Agriculture & Allied 12.7 12.1 12.0 12.7 13.3 7.7 13.5 12.0 10.5 7.4 11.4 12.7

Priority Sector 33.1 31.6 33.7 33.5 12.1 8.2 22.0 12.4 25.1 20.5 48.6 34.3

Agriculture & Allied Activities 12.7 12.1 12.0 12.7 13.3 7.7 13.5 12.0 10.5 7.4 11.4 12.7

Micro & Small Enterprises 11.6 11.5 13.5 13.3 12.3 12.5 33.6 17.3 9.0 11.0 27.1 17.6

Manufacturing 5.5 5.8 6.9 6.3 12.2 20.0 35.5 17.4 4.2 8.3 14.5 8.4

Services 6.1 5.7 6.6 7.0 12.5 5.8 31.6 17.2 4.8 2.7 12.6 9.2

Housing 6.2 5.5 5.5 5.4 10.7 0.3 13.5 6.7 4.2 0.1 5.2 3.3

Weaker Sections 5.4 5.6 6.9 6.7 18.1 17.1 41.3 20.2 5.9 7.0 16.2 9.8

Industry 45.2 45.8 45.3 44.1 20.3 14.9 13.1 11.2 53.7 50.6 42.0 41.5

Mining & Quarrying 0.8 0.7 0.6 0.6 27.6 6.6 2.0 3.0 1.2 0.4 0.1 0.2

Food processing 2.2 2.4 2.7 2.9 22.1 24.5 26.1 22.4 2.8 4.0 4.4 4.5

Textiles 3.7 3.8 3.7 3.4 9.4 14.9 11.1 8.4 2.2 4.2 2.9 2.5

Rubber, Plastic & their Products 0.7 0.6 0.7 0.6 15.7 4.1 18.0 8.3 0.7 0.2 0.8 0.5

Glass & Glassware 0.1 0.2 0.2 0.1 14.8 18.5 17.0 12.0 0.1 0.2 0.2 0.1

Cement 0.9 0.9 1.0 0.9 24.9 24.0 18.0 14.9 1.2 1.6 1.2 1.1

Basic metals 6.1 6.5 6.5 6.4 22.4 19.7 15.2 13.8 7.9 9.0 6.9 7.1

Construction 1.1 1.1 1.1 1.2 11.9 7.3 17.7 14.8 0.8 0.6 1.3 1.4

Infrastructure 14.7 15.0 15.1 15.3 20.5 15.7 15.1 13.6 17.6 17.3 15.8 16.8

Power 7.7 8.5 8.8 9.2 23.9 25.5 17.4 19.0 10.5 14.8 10.4 13.0

Telecom 2.2 1.8 1.6 1.5 0.5 (6.8) 3.0 (0.6) 0.1 (1.1) 0.4 (0.1)

Roads 2.6 2.7 2.8 2.8 22.1 18.2 19.9 14.8 3.3 3.5 3.7 3.3

Other Infrastructure 2.2 1.9 1.9 1.8 32.2 0.5 9.3 4.1 3.8 0.1 1.3 0.7

Services 23.7 23.7 24.0 23.4 14.4 13.1 16.1 11.5 21.0 23.3 26.6 22.5

Transport 1.8 1.6 1.6 1.5 9.1 4.2 12.4 4.9 1.0 0.6 1.4 0.7

Professional Services 1.1 1.2 1.3 1.2 5.0 18.8 25.3 16.3 0.4 1.6 2.1 1.6

Trade 5.2 5.7 5.8 6.0 21.1 22.4 17.0 17.1 6.4 8.8 6.7 7.8

Real Estate 2.6 2.6 2.8 2.8 15.6 11.9 22.4 14.2 2.5 2.3 4.1 3.2

NBFCs 5.3 5.3 5.3 5.2 23.9 14.1 13.2 11.2 7.2 5.6 4.9 4.9

Personal Loans 18.4 18.4 18.6 19.8 12.9 13.6 15.5 14.8 14.8 18.8 20.0 23.2

Housing 9.4 9.4 9.7 10.4 12.3 13.2 18.4 16.1 7.3 9.3 12.1 13.0

Vehicle 2.1 2.3 2.3 2.5 22.2 24.5 17.4 19.0 2.7 3.8 2.8 3.5

Other Personal Loans 3.7 3.6 3.6 3.9 8.1 11.1 12.6 14.2 2.0 3.1 3.2 4.5

Incremental contributionGrowth yoyProportion of loans

Source: RBI, Kotak Institutional Equities

Pressure on NIM across banks; lending yields under pressure

NIM performance across banks was weak. Only a few banks reported an increase and were

primarily from regional banks. Most private sector banks reported flat performance in NIM

qoq while most public banks showed a marginal deterioration. Across the board, public

banks reported a fall in lending yields primarily due to higher share of de-recognition due to

the sharp rise in restructured loans qoq. Also, slippages were higher from the restructured

loans, which implies higher share of income de-recognition.

We note that trends on the cost of funds (reported) were broadly stable or have started to

decline qoq. Our outlook on NIM is broadly negative. We expect costs of funds to come off,

while lending yields are likely to remain weak as bargaining power remains in favor of

borrowers. On the retail side, a bulk of the growth is coming from housing where yields are

low.



Exhibit 26: Margins were under pressure for most banks, especially public banks NIM and yoy growth in NII for banks, March fiscal year-ends, 4QFY14-4QFY15 (%)


Public banks

Bank of Baroda 2.3 2.4 2.4 2.2 2.2 11.0 15.2 17.5 7.5 1.5

Bank of India 2.3 2.2 2.3 2.2 2.1 23.1 5.9 19.9 2.2 (6.6)

Canara Bank 2.3 2.3 2.2 2.2 2.3 21.3 22.0 8.1 6.9 (1.9)

OBC 2.7 2.6 2.6 2.7 2.6 7.8 (4.9) (2.7) 5.4 (0.8)

Punjab National Bank 3.2 3.4 3.2 3.2 2.8 5.9 12.1 3.4 0.3 (5.3)


Union Bank 2.6 2.6 2.5 2.5 2.4 3.7 10.9 6.6 8.0 3.4

Old private banks

City Union Bank 3.3 3.3 3.5 3.5 3.4 6.6 (0.3) 8.6 6.2 10.8

DCB 3.6 3.7 3.7 3.7 3.8 22.7 67.2 28.9 29.7 29.6

Federal Bank 3.6 3.3 3.4 3.2 3.3 30.3 10.7 10.5 7.6 (0.3)

Karur Vysya Bank 2.7 2.7 2.7 3.1 3.2 12.2 2.5 13.1 28.2 14.1

J&K Bank 4.1 3.7 3.9 3.7 3.9 10.7 (2.5) (2.7) (1.2) (2.7)

New private banks

Axis Bank 3.9 3.9 4.0 4.0 3.8 18.8 15.5 20.0 20.3 20.0

HDFC Bank 4.4 4.4 4.5 4.4 4.4 15.3 17.0 23.1 23.0 21.4

ICICI Bank 3.4 3.4 3.4 3.5 3.6 14.5 17.6 15.2 13.1 16.6

IndusInd Bank 3.8 3.7 3.6 3.7 3.7 18.1 17.8 19.0 18.0 18.4

Yes Bank 3.0 3.0 3.2 3.2 3.2 12.8 13.1 27.4 36.6 35.8

NII yoy growth (%)NIM (%)


Exhibit 27: Deposit growth has been subdued as well in recent quarters Yoy growth in deposits, March fiscal year-ends, 2012-2015 (%)

10

13

16

19

22

25

Apr

May

Jun

Jul

Aug

Sep Oct

Nov

Dec

Jan

Feb

Mar

2012 2013 2014 2015

Source: RBI



Exhibit 28: Short-term rates came off by ~40 bps YTD CP and CD rates, February 2012 February 2015 (%)

7.0

8.4

9.8

11.2

12.6

14.0

May-

12

Aug-1

2

Nov-

12

Feb-1

3

May-

13

Aug-1

3

Nov-

13

Feb-1

4

May-

14

Aug-1

4

Nov-

14

Feb-1

5

May-

15

CP rate CD rate

Source: Bloomberg, Kotak Institutional Equities

Exhibit 29: Liquidity has been comfortable Net Reverse Repo, Jan 2014- May 2015 (` bn)

(1,400)

(1,000)

(600)

(200)

200

600

1,000

1,400

1,800

2,200

Jan-1

4

Feb-1

4

Mar-

14

Apr-

14

May-

14

Jun-1

4

Jul-14

Aug-1

4

Sep-1

4

Oct

-14

Nov-

14

Dec

-14

Jan-1

5

Feb-1

5

Mar-

15

Apr-

15

May-

15

Net LAF MSF

Source: Bloomberg, Kotak Institutional Equities

Exhibit 30: Yields for AAA-rated corporate bonds have declined ~12 bps YTD Yields on 5-year corporate bonds and 10-year G-Secs in India, May 2014- May 2015 (%)

7.5

8.1

8.7

9.3

9.9

10.5

May-

14

Jun-1

4

Jul-14

Aug-1

4

Sep-1

4

Oct

-14

Nov-

14

Dec

-14

Jan-1

5

Feb-1

5

Mar-

15

Apr-

15

May-

15

5-Year AAA 5-Year AA 10-Year G Sec

Source: Kotak Institutional Equities, Company



Exhibit 31: Deposit growth declined for most banks, CASA ratios improved Yoy growth in deposits and CASA ratio, March fiscal year-ends, 4QFY14-4QFY15 (%)


Public banks

Bank of Baroda 20.0 18.1 16.9 12.1 8.6 31.8 31.3 31.9 32.4 33.0

Bank of India 24.9 20.7 19.9 16.8 11.5 30.0 28.4 28.4 28.7 29.5

Canara Bank 18.2 12.3 17.8 13.1 12.6 25.9 24.2 23.7 24.1 25.5

Oriental Bank of Commerce 10.0 5.8 6.4 8.4 5.4 24.3 24.1 24.9 23.7 24.2

Punjab National Bank 15.3 12.1 16.7 15.1 11.1 41.3 39.9 39.9 39.4 40.6


Union Bank 12.9 9.5 4.6 9.7 6.4 29.5 29.1 28.7 28.7 29.2

Old private banks

City Union Bank 8.4 9.1 10.0 9.9 9.3 17.8 18.1 18.5 16.9 19.2

DCB 23.5 26.8 24.0 23.5 22.1 25.0 25.4 25.5 23.8 23.4

Federal Bank 3.7 8.5 13.7 13.5 18.6 30.8 30.8 30.6 30.5 30.4

Karur Vysya Bank 13.2 5.6 3.4 3.2 2.1 20.6 21.0 21.8 21.5 22.0

J&K Bank 8.0 9.1 (5.2) 1.2 (5.2) 39.1 41.5 41.8 41.5 41.8

New private banks

Axis Bank 11.2 14.1 11.1 11.0 14.8 45.0 42.4 44.5 43.1 44.8

HDFC Bank 24.0 22.7 24.8 18.6 22.7 44.8 43.0 43.2 40.9 44.0

ICICI Bank 13.4 15.3 13.9 12.1 8.9 42.9 43.0 43.7 44.0 45.5

IndusInd Bank 11.8 14.8 24.4 23.3 22.5 32.5 33.3 33.9 34.1 34.1

Yes Bank 10.8 16.7 18.6 21.0 22.9 22.2 22.3 22.5 22.6 23.1

Deposit growth (%) CASA ratio (%)


Exhibit 32: Lending yields declined for most banks qoq Yield on advances, March fiscal year-ends, 4QFY14-4QFY15 (%)


Public banks

Bank of Baroda 8.2 8.3 8.4 8.1 7.7

Bank of India 8.5 8.5 8.6 8.4 8.4




Union Bank 10.5 10.5 10.6 10.4 10.2

Old private banks

City Union Bank 13.1 13.0 13.6 13.1 13.1

DCB 12.9 12.8 12.6 12.5 12.6

Federal Bank (a) 11.6 11.8 11.7 11.6 11.2

Karur Vysya Bank 12.0 12.3 12.3 12.3 11.7

J&K Bank 12.3 11.3 11.4 11.3 11.4

New private banks

Axis Bank (a) 10.5 10.6 10.6 10.3 10.4

HDFC Bank (a) 11.3 11.4 11.4 11.3 11.0

ICICI Bank (a) 9.9 9.8 10.0 9.8 9.8

IndusInd Bank 13.7 13.5 13.3 13.0 12.8

Yes Bank 12.4 12.5 12.2 12.2 12.0

Notes:

(a) Yields are KS estimates for Axis Bank, HDFC Bank, ICICI Bank and Federal Bank.

Source: Company, Kotak Institutional Equities estimates



Exhibit 33: Cost of funds/deposits declined for most banks Cost of funds/deposits, March fiscal year-ends, 4QFY14-4QFY15 (%)


Public banks

Bank of Baroda 5.3 5.2 5.2 5.2 5.2

Bank of India 5.6 5.7 5.8 5.7 5.7

Canara Bank 7.4 7.4 7.4 7.4 7.4




Union Bank 7.3 7.2 7.4 7.3 7.3

Old private banks

City Union Bank 8.3 8.3 8.2 8.0 8.1

DCB 7.9 7.8 7.7 7.8 7.9

Federal Bank 8.3 7.9 8.0 7.9 7.5

Karur Vysya Bank 8.1 8.1 8.2 8.0 7.7

J&K Bank 6.7 6.7 6.5 6.7 6.5

New private banks

Axis Bank 6.2 6.2 6.2 6.2 6.3

HDFC Bank 5.8 5.9 6.0 6.1 5.9

ICICI Bank 6.0 6.0 6.1 6.0 5.9

IndusInd Bank 6.8 6.9 6.7 6.6 6.5

Yes Bank 8.4 8.5 8.3 8.1 7.8


Exhibit 34: Most banks have cut fixed deposit rates Retail term deposit rates for various maturities, April/May 2015 (%)

7-14

days

15-30

days

31-45

days

46-90

days

91-179

days

180-269

days

270-364

days

1 Year- less

than 2 years

2 Year- less

than 3 years

3 years and

above

Allahabad Bank 5.00 5.50 6.50 7.50 8.50 8.50 8.50 8.75 8.60 8.6-8.5

Andhra Bank 6.50 6.50 6.50 6.75 8.00 8.25 8.25 8.50 8.50 8.25

Bank of Baroda 4.50 4.50 4.50 6.50 7.00 7.75 8.25 8.50 8.50 8.50-8.00

Bank of India 4.00 4.50 4.50 6.50 7.00 7.75 8.25 8.50 8.50 8.5-8

Canara Bank 4.00 4.50 6.00 6.50 7.00 7.75 8.00 8.50 8.50 8.25-8.00

Corporation Bank 5.50 6.00 6.00 6-7.5 7.50 8.00 8.25 8.50 8.50 8.50

OBC 4.00 4.50 6.00 6.75 7.75 8.00 8.00 8.50 8.25 8.25

Punjab National Bank 4.50 4.50 5.00 6.50 7.00 7.75 7.75 8.50 8.50 8.5-8.25

State Bank of India 6.00 6.00 6.00 7.00 7.00 7.25-7.50 7.50 8.00-8.25 8.25 8.25-8.00

Union Bank of India 4.00 4.75 6.00 7.00 7.25-7.5 8.25 8.25 8.50 8.50 8.50

ICICI Bank 4.50 4.75 5.50 7.0-7.75 7.75 7.75 7.75 8.0-8.75 8.75 8.75-8.5

Axis Bank 3.50 3.50 6.00 7.50 7.5-8.25 8.50 8.50 8.50 8.50 8.50

HDFC Bank 3.50 5.00 6.00 7.50 8.00 8.25 8.25 8.50 8.25 8.25

Federal Bank 4.00 5.00 5.00 7-7.5 7.50 7.50 7.50 8.40 8.25 8.25

Yes Bank 5.75 5.75 5.75 7.50 8.00 8.25 8.50 8.50 8.50 8.50




Exhibit 35: Base rates declined for most banks in 4QFY15

Base rates (%) Aug-11 Oct-11 Dec-11 Apr-12 May-12 Aug-12 Jan-13 Feb-13 Jul-13 Aug-13 Sep-13 Nov-13 Jan-14 Apr-14 Oct-14 Jan-15 Apr-15

Public banks

Andhra Bank 10.75 10.50 10.25 10.00 10.25

Bank of Baroda 10.75 10.50 10.25 10.00

Bank of India 10.75 10.50 10.25 10.00 10.25 10.20 9.95

Canara Bank 10.75 10.50 10.25 9.95 10.20 10.00

Indian Bank 10.75 10.50 10.20 10.25

IOB 10.75 10.50 10.25

OBC 10.75 10.65 10.50 10.40 10.25 10.00

PNB 10.75 10.50 10.25 10.00

SBI 10.00 9.80 9.70 9.80 10.00 9.85

Union Bank 10.75 10.65 10.50 10.25 10.00 10.25 10.00

Private banks

Axis Bank 10.00 10.25 10.15 9.95

ICICI Bank 10.00 9.75 10.00 9.75

HDFC Bank 10.00 9.80 9.70 9.70 9.60 9.80 10.00 9.85

Yes Bank 10.50 10.75

IndusInd Bank 10.50 10.75 11.00


Contribution from non-interest income accelerates; treasury contribution

sharply rises qoq

Non-interest income grew sharply for all banks as the contribution from treasury improved

sharply. However, on a yoy basis, a few banks reported gains on the sale of loans to ARC

reversed in FY2015. Performance of non-interest income growth, excluding treasury, was

disappointing.

Private banks had a relatively better quarter, barring ICICI Bank. A large part of this

improvement qoq appears to have come from the retail segment where banks have seen a

higher contribution from distribution of wealth management products. Amongst public

banks, SBI did relatively well on the back of strong growth in government-related

transactions.

Credit related fees remain a big challenge for banks. Corporate activity has been subdued

and this typically should give early indication on the growth in loans in subsequent quarters.

Discussions with most banks indicate that sanctions have still not picked up pace as the

corporate segment is still looking at maintaining current portfolios of assets rather than

planning expansion.

Contribution levels from treasury showed improvement. The contribution of treasury gains

to PBT increased to 27% of PBT from 18% of PBT in 3QFY15. With yields showing a

softening bias, we believe the contribution is likely to increase hereon.



Exhibit 36: Contribution from non-treasury non-interest income remained under pressure for

several banks, particularly PSU banks Yoy growth in non-interest (ex-treasury) income, March fiscal year-ends, 4QFY14-4QFY15 (%)


Public banks

Bank of Baroda 37.0 (2.5) (5.0) 5.2 (24.4)

Bank of India (11.3) 19.0 (17.9) (21.7) 9.2

Canara Bank 31.9 17.8 24.4 12.9 (17.9)

Oriental Bank of Commerce 84.9 39.5 0.3 (0.4) (44.1)

Punjab National Bank 33.2 (3.8) 63.0 14.8 4.1


Union Bank 7.9 14.5 42.7 2.5 24.4

Old private banks

City Union Bank (1.0) 37.9 47.4 26.8 (9.9)

DCB 10.7 3.8 24.9 15.1 28.0

Federal Bank (0.6) (7.9) 12.8 3.4 52.4

Karur Vysya Bank 37.7 11.0 24.2 10.8 0.5

J&K Bank (27.7) 16.2 148.8 14.9 148.8

New private banks

Axis Bank 12.8 6.7 (4.8) 6.3 20.8

HDFC Bank 13.2 5.8 (3.3) 8.2 20.3

ICICI Bank 29.1 18.3 15.9 12.5 1.4

Yes Bank 33.2 19.2 14.6 35.8 27.9

IndusInd Bank 28.1 32.9 30.8 22.4 28.7


Exhibit 37: Investment gains were strong for most banks Treasury income (` mn) and treasury-to-PBT (%) of banks, March fiscal year-ends, 4QFY14-4QFY15


Public banks

Bank of Baroda 893 2,242 1,790 2,436 3,603 6.3 11.5 11.8 22.6 41.1

Bank of India 830 2,430 1,530 3,200 2,150 18.5 20.8 13.1 112.4 (25.9)

Canara Bank 748 909 1,440 3,010 5,090 9.5 9.0 17.7 31.5 70.4

Oriental Bank of Commerce 267 1,242 628 2,048 2,217 5.9 20.7 29.4 (2,662.8) (129.4)

Punjab National Bank 2,610 2,190 2,280 2,880 6,230 25.2 10.0 20.6 22.4 (98.7)

State Bank of India 4,011 5,868 4,528 9,195 16,589 8.5 11.1 10.9 22.6 28.5

Union Bank 830 990 750 2,520 2,830 15.9 10.1 16.6 41.1 44.1

Old private banks

City Union Bank 149 223 249 400 421 13.0 17.2 21.1 28.3 32.0

DCB 26 43 40 126 68 6.6 7.4 8.7 25.2 12.7

Federal Bank 400 401 420 770 950 11.0 12.2 11.5 19.3 22.1

Karur Vysya Bank 2 30 37 307 336 0.2 2.3 3.3 19.6 51.6

J&K Bank 210 153 543 153 543 5.0 9.5 27.9 9.5 27.9

New private banks

Axis Bank 2,170 2,600 2,710 3,290 2,750 7.9 10.4 11.1 11.7 8.3

HDFC Bank 333 250 951 2,655 1,961 1.0 0.7 2.6 6.3 4.7

ICICI Bank 2,450 3,880 1,370 4,430 7,260 6.6 10.2 3.6 10.9 17.6

IndusInd Bank 811 899 490 885 899 13.5 14.1 7.5 13.1 12.1

Yes Bank - - - 100 207 - - - 1.3 2.6

Total 16,738 24,349 19,755 38,405 54,105 7.7 9.8 9.2 17.7 26.5

Total - public 10,188 15,871 12,945 25,289 38,710 10.8 12.0 13.7 30.6 60.2

Total - private 6,550 8,478 6,810 13,116 15,395 5.4 7.2 5.6 9.7 11.0

Treasury profits (Rs mn) Treasury profits as % of PBT


Cost control continued to support earning growth

Growth in operating expenses accelerated in 4QFY15 primarily on account of high staff

costs. However, this is primarily led by a few factors (1) wage settlement and (2) its

subsequent impact on retirement costs as well as the impact of the decline in interest rates

on retirement expenses. Operating expenses growth was broadly similar for private and

public banks at 17% yoy.



There were apprehensions that the decline in interest rates would result in higher staff costs

but it appears that the final impact was materially lower than initially expected. We would

probably need to see the assumptions made by banks while calculating retirement expenses

to understand this better.

Cost-to-income ratio declined >250 bps to 47% for public banks while private banks

reported a stable ratio of 41%. We are a bit more positive on public banks cost-income

ratio as the peak of NIM correction appears to be complete. Meanwhile, costs led by these

one-off charges are likely to remain for another quarter before growth comes off sharply

and contribution from treasury income to boost non-interest income is likely to show

improvement from current levels. Also, FY2016 would have no amortization of prior costs

items like the pension/gratuity.

Exhibit 38: Increased growth in operating expenses for most banks Yoy growth in operating expenses, March fiscal year-ends, 4QFY14-4QFY15 (%)


Public banks

Bank of Baroda 2.6 12.3 14.1 13.7 (5.2)

Bank of India 31.4 7.4 24.7 19.3 29.4

Canara Bank 23.1 24.8 14.6 18.3 20.7

Oriental Bank of Commerce (6.8) (8.9) 2.1 11.5 4.6


State Bank of India (0.0) 3.3 2.2 5.6 22.1

Union Bank 28.7 14.6 16.5 11.0 7.0

Old private banks

City Union Bank 20.9 19.2 16.7 14.3 (4.4)

DCB 16.5 20.0 20.9 26.2 29.5

Federal Bank 24.8 13.7 16.0 18.4 20.0

Karur Vysya Bank 24.7 11.1 7.5 6

%5bkotak%5d bfsi%2c june 2%2c 2015 - quarterly review 4qfy15

Documents