indian banks - psu banks[1]
TRANSCRIPT
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abcGlobal Research
Risk-reward shifts into reward territory;
we see positives outweighing near-termconcerns as the credit cycle turns
We turn OW(V) on most PSU banks, as
we believe credit and earnings growth
surprises are just around the corner
We prefer Canara, PNB, Union in PSUs;
Axis, HDFC Bank in the private space
We change to a favourable PSU stanceprompted by the
recent turn in the credit cycle, a rise in short-term rates, and
our analysis of valuation metrics in an upcycle. Our scorecard
reveals that top-line growth, margins, profitability, valuations,
and shareholding patterns are now aligned to favour stock
outperformance in the banking sector over the next 12 months,
with a few exceptions.
Concerns remain on asset quality trends, rising bond yields,
and potential capital constraints, but these are fairly near
term, and we see the positives outweighing them over the
next two years as the credit cycle picks up steam.
Stocks that we favour to play the upcycle include relatively
small bank stocks with lower LDRs and higher CASA, as
well as those that have underperformed and now trade at a
discount to peers. In a nutshell, we prefer ‘tigers’ to ‘elephants’
at this point in the credit cycle.
PSU bank valuations likely to re-rate given that (1) FII
ownership is well below regulatory limits, with domestic
institutions taking up the slack, (2) the inverse correlation
with bond yields has broken down, and (3) ROEs of PSUsare likely to reach a range of 25-30% (ex-SBI) by FY12.
The most significant upside catalysts have historically
been credit and earnings growth surprises and, on the
downside, tightening liquidity. A combination of earnings
surprises and quickly expanding PE multiples in an upcycle
are likely to outweigh tightening liquidity-related concerns.
‘Tigers’ we like are Axis Bank, HDFC Bank, Canara Bank,
and Union Bank. We also foresee upside in PNB, BOB, and
ICICI. All are rated OW(V). We upgrade PNB and BOB to
OW(V) and SBI to N(V).
Banks
India Commercial Banks
Indian banksPSU banks: Potential to re-rate
Valuation summary
Bloombergticker
(IN)
Currentshareprice(INR)
Oldtargetprice(INR)
Newtargetprice(INR)
Pot’ltotal
return(%)
OldHSBCrating
NewHSBCrating
Bank of Baroda BOB 577 577 689 21 N(V) OW(V)Canara Bank CBK 382 445 534 43 OW(V) OW(V)Punjab Nat’l Bank PNB 891 901 1,163 33 N(V) OW(V)State Bank of India SBIN 1,957 2,038 2,033 5 UW(V) N(V)Union Bank of India UNBK 247 335 302 24 OW(V) OW(V)Axis Bank AXSB 1,067 1,389 1,389 31 OW(V) OW(V)HDFC Bank HDFCB 1,656 2,068 2,068 26 OW(V) OW(V)ICICI Bank ICICIBC 841 1,025 1,025 23 OW(V) OW(V)HDFC HDFC 2,457 2,657 2,657 10 N(V) N(V)
Source: Company data, HSBC; prices as of 17 February 2010
19 February 2010
Sachin Sheth*
Analyst
HSBC Securities & Capital Markets (India) Private Limited
+91 22 2268 1224 [email protected]
Todd Dunivant*
Head of Banks Research, Asia Pacific
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6599 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to NYSE and/or NASDregulations
Issuer of report: HSBC Securities and Capital Markets (India)Private Limited
Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it
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The score – net positive
At the current inflection point of the credit cycle,
we find that there are several positives to look
forward to in FY11, which we believe are being
partly ignored by the market given its near-term
focus on NPL and growth related issues. We
present our scorecard below, which summarises
the key positive and negative potential catalysts
likely to play out over the next 12 months within
our coverage universe.
Key takeaways are as follows:
1. A rising tide lifts many boats. When credit
cycles turn upward, it is not only loan volumes
that benefit, but also margins and asset quality.
2. Tigers vs elephants. We believe the best way
to play the cycle at its inflection point is to buy
shares in banks that are relatively small, with
relatively low loan-deposit ratios and relatively
high CASA deposits, so that they can leverage up
growth and margins more quickly.
Investment summary
Credit cycle’s turn offers entry point into bank stocks
Near-term risks of NPLs likely to be outweighed by many positives
Earnings and credit growth surprises are key potential catalysts
Table 1: Scorecard
Positive catalysts Comments Stock winners
Accelerating credit growth Credit growth, LDR leverage, CASA mix and marginswould improve
BOB, Union better placed on first three factors, Canaraand PNB on margins; HDBK and Axis from privatesegment
New base-rate based lending High mix of large corporate and lower mix of SME is
likely to be favourable to y ields
BOB and HDBK are the biggest beneficiaries; Canara,
Axis stand to benefit lessProfitability While PSU valuations have never matched the potentialof their ROE, we see more domestic institutions focusingon ROE trends to re-rate these stocks up over themedium term
Canara, PNB offer highest delta in ROA, ROE overthree years; ICICI in the private space
Valuations PE re-rating potential in a credit upcycle along withrecent underperformers is the key criteria
PNB, Canara in PSU and Axis, HDBK in privatesegment
FII shareholdings Greater the gap to 18% holdings, higher the potentialbuying power; However, domestic institutions have madeup for FIIs over the past three years
Canara has biggest opportunity at 11.5% FII holdings;However domestics have made up for the 3-year fall inFII holdings; SBI, BOB show a net reduction ininstitutional holdings along with FII selling
Negative catalysts Comments Stock losers
NPL overhang Extent of restructured loans, Existing coverage PNB, SBI, Union have highest proportion ofrestructured loans and SBI has lowest coverage;Canara’s coverage is also borderline per RBI definition
Capital constraints Low government holdings would be focus area, even
including quasi-government holders such as LIC
Union is most vulnerable from our coverage universe
followed by BOB
CONCLUSION Credit growth, NPLs likely to be most relevantparameters going ahead
Canara, PNB top picks in PSU space, Axis & HDBKin private space
Source: HSBC estimates
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3. Positive double whammy on valuations. In
addition to upwards earnings surprises, we
observe that PE multiples of bank stocks tend to
expand during credit upcycles and it becomes the
measure of choice over prict to book (PB),
particularly as asset quality risks fade.
4. The case for re-rating PSU banks appears to
be gaining momentum, particularly given that FII
holdings have fallen well below regulatory limits
and are no longer a constraint at many banks.Domestic institutional ownership has effectively
taken up that slack. Much of this domestic base
believes that the gap between PSU and private
bank multiples should narrow. Given the lack of
ownership constraints at their end, this credit
upcycle may well see a move towards this.
5. The NPL question. This remains an overhang
for much of the sector given the global
environment impacting SME exporters in India as
well as potential slippages in the restructured
portfolio, particularly for banks with relatively
lower coverage ratios like SBI.
6. Capital constraints and low government
shareholdings are a potentially worrying
combination for some banks with relatively low tier-
1 ratios along with government holdings near the
51% floor – e.g., Union and BOB. The solution
could be a combination of two things: more hybrid
issuance and the government holdings (including
quasi-government entity holdings) as part of total
holdings, in which case the holdings of Life
Insurance Corporation of India (LIC) in many of
these banks would provide a buffer.
In conclusion, we see the highest upsides to our
12-month target returns in Canara and PNB in the
PSU space and Axis and HDFC Bank in the
private space. In fact, we now have a majority of
OW(V) ratings in our universe of nine stocks.
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Accelerating credit growth
We believe we are at – or just past – the inflection
point in the current credit cycle – effectively near
the bottom of a cycle, which we think could peak
at 25% over the next few years. This not just a
low-base effect, as can be seen in Chart 2.
Recent industrial production data, along with our
economist’s forecast of GDP growth over the next
two years prompts us to peg FY11 credit growth
at 25% and FY12 at 22%. The historical
correlation of GDP and credit growth is fairly
robust, as is the correlation of industrialproduction and loan growth.
Recent industrial production data, along with our
economists’ forecast of GDP growth over the next
two years, prompt us to peg credit growth at 25%
for FY11 and 22% for FY12.
Chart 3:Nominal GDP growth vs system loan growth
-
2.0
4.0
6.0
8.0
10.012.0
14.0
16.0
18.0
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Nominal GDPgrowth Sy stem Loan Grow th
Source: CSO, HSBC
PSU Banks: Potential tore-rate
Accelerating loan growth benefits volumes, margins, asset quality
Valuations: PE expands quicker than PB in an upcycle
FII ownership is no longer a constraint
Chart 1: System loan, deposit growth, y-o-y
5%
10%
15%
20%
25%
30%
35%
M a r - 0 3
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Deposit growth Loan grow th
Source: RBI, HSBC
Chart 2: System loan growth, y-t-d
Loan growth, YTD
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
FY04 FY05 FY06 FY07 FY08 FY09 FY10
current trends
Nov08 liquidity crisis
Source: RBI, HSBC
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Chart 4:IIP growth vs system loan growth
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6.0
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16.0
A p r - 9 5
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I IP gr ow th ( 3m ma) S ys tem Lo an Gr ow th
Source: CSO, HSBC
Initial signs of a credit pick-up have been
catalysed by tightening liquidity, which has led to
higher short-term rates, leading corporates to shift
towards bank funding vs CP-funding.
Chart 5:CP rates vs liquidity – inverse correlation
(15,000)
(10,000)
(5,000)
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5,000
10,000
15,000
20,000
25,000
30,000
M a y - 0 5
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RSP ORRPO I NDEX 3 M CP (RHS , in verse scale)
Source: Bloomberg, HSBC
This is evident in the shift during October-
December 2009, when a greater part of corporate
funding came from banks vs CPs.
In past credit upcycles, we have seen interest rates
increase with a lag. Typically, banks’ lending
portfolios reprice ahead of deposits leading to
margin expansion. In addition, NPL ratios tend to
reduce as does loan loss provisioning. All of this
leads to improving earnings growth and
profitability which we believe leads to expanding
valuation multiples (discussed in detail later).
Thus, banks which have a higher leverage to
growth (lower LDR ratios) benefit more in anupcycle, and those with higher CASA deposit mix
tend to see a quicker margin expansion
particularly in the first year of the upcycle. Banks
we believe can benefit in this upcycle include
Canara and Union Bank from the PSU space and
Axis, HDFC Bank in the private space.
Valuations: Positive double whammy
We observe that during credit upcycles, PE
multiples tend to expand quicker than PB
multiples for PSU bank stocks. We attempt to
factor this into our 12 month target prices and
arrive at OW(V) recommendations for all but 1 of
our 8 banks under coverage (ie. SBI).
Chart 6: BOB
4x
5x
6x
7x
8x
9x
10x
M a r - 9 7
M a r - 9 8
M a r - 9 9
M a r - 0 0
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5
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25
30
35
40
PE/PB Sy stem Loan gr (%) RHS
Source: Company data, Bloomberg, HSBC
Table 2: Flow of resources to commercial sector – y-o-ycontribution to growth
Funding Source 1H10 3Q FY10
Bank credit 32% 49%Equity issues 4% 2%Pvt placements 10% 19%
CP issuance 15% -1%
HFC credit 2% 1%FI credit -1% 1%NBFC credit 5% -6%LIC credit 5% 7%ECB/FCCB 2% 7%ADR/GDR issues 4% 1%Overseas short-term credit -2% 5%
FDI 23% 17%Total 100% 100%
Source: RBI, HSBC
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Chart 7: Canara
3.0x
3.5x
4.0x
4.5x
5.0x
5.5x
6.0x
D e c - 0 2
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PE/PB Sy stem Loan gr (%) RHS
Source: Company data, Bloomberg, HSBC
Chart 8: PNB
3.0x
3.5x
4.0x
4.5x
5.0x
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6.0x
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7.0x
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PE/PB Sy stem Loan gr (%) RHS
Source: Company data, Bloomberg, HSBC
Chart 9: SBI
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
M a r - 9 6
M a r - 9 7
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M a r - 0 0
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5
10
15
20
25
30
35
PE/PB Sy stem Loan gr (%) RHS
Source: Company data, Bloomberg, HSBC
Chart 10: Union
3.0x
3.5x
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
M a r - 0 0
M a r - 0 1
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5
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25
30
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40
PE/PB System Loan gr (%) RHS
Source: Company data, Bloomberg, HSBC
Our target prices are weighted 75% by PE, 15%
by PB and 10% by DCF/SOTP. Given the above
observations, we raise our target PE multiples forPSU banks to a range of 5.5-10.5x vs our earlier
range of 5.5-9.5x.
Alongwith the earnings changes we estimate for
these PSU banks (exhibited in detail in individual
company sections), we see 12-month potential
returns of 21-43% for our OW(V) rated stocks
and 5% for SBI. Accordingly, we upgrade BOB
and PNB to OW(V) from N(V) and SBI to N(V)
from UW(V).
Recent stock price behaviour shows that our PSU
bank index has underperformed the Sensex over
the last 1 and 3 months vs the private index,
which has outperformed. We see this as an
opportune entry point, as the balance appears to
be tilted in favour of these stocks per our
scorecard discussed earlier.
Table 3: Summary of earnings estimate and target price changes
Ticker New TP % chg ______ EPS change _______ _______ BV change________ _ PE multiple___ __PB multiple __FY10e FY11e FY12e FY10e FY11e FY12e New Old New Old
BOB IN 689 20% 3% -5% -5% 0% -2% -4% 8.0 6.7 1.2 1.0CBK IN 534 20% 21% 12% 2% 5% 6% 4% 5.6 5.5 1.2 1.1PNB IN 1,163 29% -1% 22% 25% 0% 5% 10% 7.5 7.0 1.3 1.3SBIN IN 2,033 0% -19% -13% -16% -4% -6% -9% 10.5 9.7 1.6 1.5UNBK IN 302 -10% -13% -8% -5% -1% -1% -1% 6.1 7.0 1.3 1.2
Source: HSBC
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Chart 11: PSU vs Pvt banks index relative to Sensex
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100
150
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300
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450
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R elativ e PSU Index Relativ e Pv t Index
Source: Bloomberg, HSBC
The case for re-rating PSU banks
As discussed in our report of 10 September 2009,
Indian banks: Stock picks for an economic
recovery, we struggle to understand why PSU
banks trade at half or more of the multiples of
private banks despite superior and less volatile
ROEs. One of the reasons we have suggested is a
lack of autonomy, given the level of government
ownership at these banks.
Another issue we observe is that the lack of FII
shareholding limits available during 2005-08 led
to underperformance of these PSU bank stocks as
FII buying in these names tended to be stock
catalysts and lack of further buying led to
underperformance.
Chart 12: BOB
0
50
100
150
200
250
300
M a r - 0 1
J a n - 0 2
D e c - 0 2
O c t - 0 3
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4%
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8%
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22%
B oB rel to sensex BoB F II%
Source: BSE, Bloomberg, HSBC
Chart 13: Canara
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180
M a r - 0 3
N o v - 0 3
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D e c - 0 9
0%
3%
6%
9%
12%
15%
18%
21%
Canar a r el to sensex Cana ra FII%
Source: BSE, Bloomberg, HSBC
Chart 14: PNB
0
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400
500
600
J u n - 0 2
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0%
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9%
12%
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21%
P NB rel to s ens ex PNB F II%
Source: BSE, Bloomberg, HSBC
Chart 15: SBI
80
100
120
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160
180
200
220
240
M a r - 0 1
J a n - 0 2
D e c - 0 2
O c t - 0 3
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D e c - 0 9
10%
12%
14%
16%
18%
20%
22%
S BI rel to sens ex SBI FII%
Source: BSE, Bloomberg, HSBC
Chart 16: Union
50
100
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250
M a r - 0 3
N o v - 0 3
J u l - 0 4
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N o v - 0 5
J u l - 0 6
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D e c - 0 9
0%
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9%
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21%
U ni on re l to sen sex U ni on FII%
Source: BSE, Bloomberg, HSBC
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Starting 2008, most of these PSU banks saw their
FII shareholdings fall well below the holdings
limit, barring PNB. However, after an initial bout
of underperformance, many of these stocks have
seen their domestic institutional ownership
increase leading to outperformance (see Table 5).
Thus, if the fundamental factors such as
profitability, growth are improving for these
stocks, we believe we could be headed for a
structurally lower discount of these stocks vsprivate banking peers.
Chart 17: PSU discount to private banks
-75%
-70%
-65%
-60%
-55%
-50%
-45%
-40%
J a n - 0 4
J
u l - 0 4
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J
u l - 0 5
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u l - 0 8
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u l - 0 9
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P/ B - PSU dis ct to Pv t P /E - P SU dis ct to Pv t
Source: Bloomberg, Company data, HSBC
NPL overhang
Among the biggest concerns for investors is the
uncertainty of NPLs, particularly those potentially
emanating from the restructured loan books of
PSU banks, rather than private banks which have
a smaller proportion.
Table 4: Restructured loan trends (as % of loan book)
Mar-09 Jun-09 Sep-09 Dec-09
BOB 1.8 3.0 3.1 3.1Canara 1.5 3.7 3.7 3.8PNB 2.6 5.7 6.1 6.2SBI 2.4 3.9 4.4 4.2Union 3.1 4.8 4.6 4.4Axis 2.0 3.2 2.9 2.7HDFC Bank 0.1 0.6 0.6 0.4ICICI Bank 2.7 2.1 2.5 3.0
Source: Company data, HSBC
While a 10-15% slippage on this book is unlikely
to significantly lower economic value, banks with
lower coverage ratios are likely to be impacted
more adversely – e.g., SBI.
An economic recovery is likely to help their cause
through FY11.
Capital constraints
Given the credit upcycle, we expect banks to plan
their capital requirements ahead of time. However,
there are a few banks for which the 51% government
holdings floor is approaching fast and could be
breached if the bank were to issue a reasonable
amount of fresh equity to sustain growth through
this cycle. Examples are Union Bank and, to some
extent, BOB.
One way the government may tackle this (apart
from lowering the 51% floor, which would need
the approval of Parliament – unlikely to be obtained)
is to include quasi-government entities such as LIC
and other state-run institutions in the definition of
government holdings. In this event, the LIC can
subscribe to fresh issuance and maintain total
government holdings at 51%. A table showing the
combined holdings across banks follows.
Table 5: Insitutional ownership of PSU Banks
BOB BOB BOB Canara Canara Canara PNB PNB PNB SBI SBI SBI Union Union UnionTotal FII Local Total FII Local Total FII Local Total FII Local Total FII Local
Dec-06 35% 20% 15% 21% 17% 4% 34% 20% 14% 33% 20% 13% 29% 20% 9%Dec-09 33% 14% 19% 21% 12% 10% 37% 19% 18% 31% 15% 16% 30% 16% 14%Change -2% -6% 4% 0% -5% 6% 3% -1% 4% -2% -5% 3% 1% -4% 4%
Source: BSE, HSBC
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Thus we see that, within our coverage universe,
Union and BOB are at total government holdings
of about 60% giving them some breathing room.
Table 6: Government holdings in PSU banks, December 2009
_________________ Quasi-government __________________Govt LIC GIC Other General Ins. Cos. SIDBI
Andhra 51.6 51.6Dena 51.2 5.18 56.4Union 55.4 4.4 59.8BOB 53.8 7.3 61.1Vijaya 53.9 8.14 62.0IDBI Bank 52.7 11.8 1.2 2.1 64.5PNB 57.8 8.5 66.3OBC 51.1 15.4 1.1 66.5Allahabad 55.2 11.6 66.9SBI 59.4 9.5 68.9IOB 61.2 9.03 70.3UCO 63.6 7.19 70.8Synidcate 66.5 9.58 76.1Canara 73.2 4.6 77.8Indian bank 80.0 80.0Bank of Maharashtra 76.8 3.6 80.4Corporation 57.2 26.3 83.5Central bank 80.2 6.3 86.5
Source: BSE, HSBC
Table 7: Valuation summary (INR/sh)
_______HSBC PE _______ ______ HSBC PB________RIC code Company Mkt Price Target price Potential
total returnRating MCAP FY10e FY11e FY10e FY11e
BOB.BO BOB 577 689 21% Overweight (V) 4,518 7.4 6.2 1.5 1.3CNBK.BO Canara 382 534 43% Overweight (V) 3,436 4.6 3.9 1.2 1.0PNBK.BO PNB 891 1,163 33% Overweight (V) 6,085 7.54 5.19 1.75 1.37SBI.BO SBI 1,957 2,033 5% Neutral (V) 26,496 13.2 9.5 1.9 1.6UNBK.BO Union 247 302 24% Overweight (V) 2,697 6.76 4.81 1.5 1.1AXBK.BO Axis 1,067 1,389 31% Overweight (V) 9,008 16.7 12.8 2.7 2.3HDBK.BO HDBK 1,656 2,068 26% Overweight (V) 15,938 25.8 19.3 3.7 3.2
ICBK.BO ICBK 841 1,025 23% Overweight (V) 20,159 23.2 18.7 1.9 1.8HDFC.BO HDFC 2,457 2,657 10% Neutral (V) 15,105 24.4 19.7 4.8 4.2
Note: Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppt above and below the hurdle rate of 10.5% for Indian stocks. Our target prices provided upside potential that is above, below, or within theNeutral band of our model; therefore, we rate t he stocks OW(V), UW(V), or N(V), as indicated in the “Rating” column abo ve.Source: Company data, HSBC estimates
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Positive potential catalysts: Margin expansion in
FY11 as loan book reprices more quickly than
deposits. Higher proportion of corporate loans and
smaller proportion of SME loans likely to benefit
BOB vs peers after base rates come into play.
Negative potential catalysts: Does not enjoy
the same leeway as peers for raising further
capital without violating government holdingnorms, especially if the credit cycle is stronger
than expected.
Valuation: Not among the cheapest PSU bank
stocks, scope for re-rating is limited.
Earnings outlook: 25% CAGR in earnings over
the next three years up to FY12e, led by higher
loan growth and margins.
Key risks: (1) BOB’s relatively higher growth
vs peers has not yet resulted in visibly
deteriorating asset quality – which remains an
overhang in the uncertain environment. (2)
Slower-than-expected economic growth recovery
is a risk to stock outperformance.
Bank of Baroda (BOB)
Largest increase in CASA mix going ahead vs peer PSUs
New base rate norms favourable for BOB vs peers
12-mth potential return of 21%; upgrade to OW(V)
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Year to 3/2009a 3/2010e 3/2011e 3/2012e
P&L summary(INRm)
Net interest income 51,234 59,185 80,937 103,866Non-interest income 27,577 26,773 32,074 39,172Net fees/commissions 7,455 8,022 9,414 11,784Trading profits 9,324 6,734 8,037 9,901Other 10,798 12,017 14,623 17,487Total operating income 78,811 85,958 113,011 143,038Operating expense 35,761 39,812 46,288 54,322Staff costs 23,481 26,383 30,340 35,498Other oper expenese 12,279 13,430 15,948 18,824PPOP 43,050 46,146 66,723 88,716Provisions 9,621 6,656 17,760 20,434Bad debt 2,686 10,197 12,144 15,179Other 6,935 (3,540) 5,616 5,254
Other non-oper profit(loss)HSBC PBT 33,429 39,489 48,963 68,282Exceptionals - - - -Profit-before tax 33,429 39,489 48,963 68,282Taxation 11,157 11,057 14,689 23,899PAT 22,272 28,432 34,274 44,383Minorities + pref dividend - - - -Attributable profit 22,272 28,432 34,274 44,383HSBC attributable profit 22,272 28,432 34,274 44,383 Balance sheet summary (INRm)
Total assets 2,274,067 2,750,271 3,375,426 4,168,230Customer loans (net) 1,439,859 1,768,751 2,237,306 2,777,152Investment assets 524,459 632,729 744,275 884,520Other_assets 309,750 348,790 393,844 506,557Total liabilities 2,145,712 2,596,739 3,191,955 3,945,955
Customer deposits 1,923,970 2,359,235 2,908,283 3,593,887Debt securities issued 56,361 31,802 34,447 37,314Other liabilities 165,381 205,703 249,225 314,753Total capital 128,355 153,532 183,470 222,275Ordinary equity 128,355 153,532 183,470 222,275Minorities + other capitalIEA (avg) 1,952,925 2,414,464 2,941,297 3,631,098IBL (avg) 1,847,330 2,277,861 2,778,487 3,421,793 Capital adequacy (%)
RWA (INRm) 1,303,249 1,563,752 1,920,542 2,332,662Core tier 1 8.5% 8.1% 7.4% 7.7%Total t ier 1 8.5% 9.1% 8.2% 8.4%Total capital 14.1% 14.6% 13.5% 13.6%
ROAA deconstruction
Net interest income 2.52 2.36 2.64 2.75Total interest income 7.42 6.90 7.39 7.95Total interest expense 4.90 4.54 4.74 5.20Net fees and commissions 0.37 0.32 0.31 0.31Other income 0.99 0.75 0.74 0.73Operat ing income 3.87 3.42 3.69 3.79Operat ing expenses 1.76 1.58 1.51 1.44Staf f costs 1.15 1.05 0.99 0.94Other oper exp 0.60 0.53 0.52 0.50PPOP 2.12 1.84 2.18 2.35Provis ions 0.47 0.26 0.58 0.54Non-op items - - - -PBT 1.64 1.57 1.60 1.81Taxation 0.55 0.44 0.48 0.63PAT 1.09 1.13 1.12 1.18
Year to 3/2009a 3/2010e 3/2011e 3/2012eGrowth (y-o-y %)
Net interes t income 31.0 15.5 36.8 28.3Non-interest income 34.5 (2.9) 19.8 22.1Operat ing expense 21.9 11.3 16.3 17.4PPOP 42.1 7.2 44.6 33.0Provisions 17.1 (30.8) 166.8 15.1PBT 51.5 18.1 24.0 39.5PAT 55.1 27.7 20.5 29.5 Customer loans (net) 34.9 22.8 26.5 24.1Total assets 26.6 20.9 22.7 23.5RWA 17.2 20.0 22.8 21.5Customer depos its 26.5 22.6 23.3 23.6
Ratios (%)
NIM 2.62 2.45 2.75 2.86Gross yield 7.73 7.18 7.69 8.26Cost of funds 5.40 5.01 5.23 5.73Spread 2.33 2.17 2.46 2.53
NPL/gross loans 1.27 1.43 1.29 1.17Credit cost 0.2 0.6 0.6 0.6Coverage 43.9 79.2 73.6 73.0NPL/RWA 1.4 1.6 1.5 1.4Provsion/RWA 0.6 1.3 1.1 1.0Net write-off/RWA - - - -NPL/NTE 14.4 16.7 15.9 14.7Net loans/total assets 63.3 64.3 66.3 66.6RWA/total assets 57.3 56.9 56.9 56.0Loans/deposits 74.8 75.0 76.9 77.3Avg IEA/avg total assets 96.0 96.1 96.0 96.3Avg IBL/avg total liab 96.4 96.1 96.0 95.9
Cost/income 45.4 46.3 41.0 38.0Non-int income/total income 35.0 17.3 17.4 17.9ROAA (including goodwill) 1.09 1.13 1.12 1.18ROAE (including goodwill) 21.1 22.6 22.5 23.9Return on avg tier 1 22.8 22.5 22.9 25.1Leverage (x) 19.3 20.0 20.1 20.3
Valuation data
PE (diluted EPS) 9.5 7.4 6.2 4.8P/PPOP 4.9 4.6 3.2 2.4PB 1.9 1.5 1.3 1.0P/NTE 1.9 1.5 1.3 1.0Dividend yield (x) 1.8 1.9 2.1 2.6P/deposits 0.1 0.1 0.1 0.1
P/assets 0.1 0.1 0.1 0.1
*Based on HSBC EPS (diluted)
Price relative
114
214
314
414
514
614
714
814
2008 2009 2010 2011
114
214
314
414
514
614
714
814
Bank of Baroda Rel to BOMBAY SE SENSITIVE INDEX
Source: HSBC
Financials & valuation
Bank of Baroda – BOB IN – Overweight (V) Target price INR689
Per share data (INR)
EPS reported (diluted) 60.9 77.8 93.8 121.4HSBC EPS (diluted) 60.9 77.8 93.8 121.4DPS 10.5 11.0 12.0 15.0NAV 311.5 376.4 456.2 560.0NAV (including goodwill) 311.5 376.4 456.2 560.0
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Chart 18: PE/PB vs system loan growth
4x
5x
6x
7x
8x
9x
10x
M a r - 9 7
J
u l - 9 8
O
c t - 9 9
F e
b - 0 1
M a
y - 0 2
S e
p - 0 3
D e c - 0 4
M a r - 0 6
J
u l - 0 7
O
c t - 0 8
F e
b - 1 0
-
5
10
15
20
25
30
35
40
PE/PB Sy stem Loan gr (%) RHS
Source: Company data, HSBC
Chart 19: Rolling PE Chart 20: Rolling PB
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
M a
r - 9 7
J u l - 9 8
O c t - 9 9
F e
b - 0 1
M a
y - 0 2
S e
p - 0 3
D e
c - 0 4
M a
r - 0 6
J u l - 0 7
O c t - 0 8
F e
b - 1 0
Rolling P/E Av erage 5 y earAv erage 10 y ear
0.0x
0.5x
1.0x
1.5x
2.0x
M a r - 9 7
J u l - 9 8
O c t - 9 9
F e b - 0 1
M a y - 0 2
S e p - 0 3
D e c - 0 4
A p r - 0 6
J u l - 0 7
O c t - 0 8
F e b - 1 0
Rolling P/B Av erage 5 y ear
Average 10 year
Source: Company data, HSBC Source: Company data, HSBC
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Table 8: 3Q FY10 highlights
3Q FY10
Loans growth (y-o-y) 23.5%Deposit growth (y-o-y) 27.6%LDR 72.6%Incremental LDR 63.9%CASA 31.0%Loan mix:
International advances 25.7%Domestic advances 74.3%Retail advances 14.3%SME advances 13.0%Farm credit 12.0%Corporate advances 35.0%
Margins 3.0%FII Holding 14.2%Domestic institutional and government (incl LIC) s/h 19.0%Gross NPLs 1.4%Coverage ratio 78.4%
Source: Company data, HSBC
Table 9: Old vs new estimates
2010e (new) Change 2011e (new) Change 2012e (new) Change
Whats ChangedTotal interest income 173,316 -3.1% 226,214 4.3% 299,896 13.3%Interest expenses 114,131 -0.7% 145,277 4.8% 196,030 18.4%Net interest income (NII) 59,185 -7.5% 80,937 3.4% 103,866 4.7%P/(L) on sale of investments 6,365 -45.1% 7,574 -42.2% 9,366 -42.0%P/(L) on exchange transactions 4,813 -33.5% 6,009 -40.1% 7,522 -34.6%Fee and other income 15,595 -9.1% 18,491 -11.7% 22,285 -11.0%Non-interest income ex-treasury 20,408 -16.3% 24,500 -20.9% 29,807 -18.4%Total non-interest income 26,773 -25.6% 32,074 -27.3% 39,172 -25.6%Total income 85,958 -14.0% 113,011 -7.7% 143,038 -5.8%Operating expenses 39,812 -1.2% 46,288 3.4% 54,322 7.1%Pre-provisioning profits 46,146 -22.7% 66,723 -14.0% 88,716 -12.3%Core PPP 39,781 -17.2% 59,149 -8.3% 79,350 -6.6%Provisions for NPAs 10,197 -21.3% 12,144 -29.4% 15,179 -34.7%Provisions for std. assets 1,504 -46.4% 1,691 -45.3% 1,955 -54.8%Provisions on investments (5,846) -1009.1% 2,923 405.1% 2,046 292.8%
Other provisions 802 1,002 1,254Total provisions 6,656 -61.3% 17,760 -18.8% 20,434 -30.4%PBT 39,489 -7.0% 48,963 -12.1% 68,282 -4.9%Tax 11,057 -25.6% 14,689 -24.7% 23,899 -4.9%PAT 28,432 3.0% 34,274 -5.4% 44,383 -4.9%
Balance sheetDeposits 2,359,235 -0.4% 2,908,283 0.1% 3,593,887 -3.1%Net advances 1,768,751 -0.4% 2,237,306 0.0% 2,777,152 -3.3%Total assets 2,750,271 0.2% 3,375,426 0.5% 4,168,230 -2.5%
Net interest margin 2.44% -0.19% 2.73% 0.09% 2.84% 0.17%Book value 376.44 -0.33% 456.17 -2.41% 560.04 -4.38%EPS 77.78 3.02% 93.77 -5.39% 121.42 -4.86%ROA 1.13% 0.03% 1.12% -0.07% 1.18% -0.05%ROE 22.6% 0.70% 22.5% -0.93% 23.9% -0.34%
Tax rate 28.0% -7.00% 30.0% -5.00% 35.0% 0.00%Cost income 46.3% 6.01% 41.0% 4.38% 38.0% 4.57%Core cost income 50.0% 4.42% 43.9% 2.93% 40.6% 3.25%
Source: Company data, HSBC
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Valuation and risksWe have lowered our loan growth assumptions for
FY12e by 3.3% and also deposits by 3.1%. We
have revised NIM estimate by -19bp in 2010, +9
in FY11 and +17bp in FY12. Also, Non interest
income estimate has been lowered by 25.6%,
27.3% and 25.6% I n FY10, FY11 and FY12,
respectively. As a result, we are revising our net
profit forecast by +3% in 2010, -5.4% in 2011,
and +4.9% in 2012, respectively.
We value BOB using a combination of economic
profit model (EPM), PE, and PB methodologies.
We assign a 75% weight to the PE and 15% to
P/B and 10% to DCF components. The three-
stage EPM uses explicit forecasts until FY12e
followed by 10 years of semi-explicit forecasts,
where we assume 8% loan CAGR and a 20%
dividend payout. The final stage of 12 years (fadeperiod) assumes convergence of ROE and COE.
We assume a risk free rate of 8%, beta of 1, and
equity risk premium of 6%, translating into a cost
of equity of 14%. Our EPM value is INR536.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10ppt
above and below the hurdle rate of 10.5% for
India. Our target price of INR689 (INR577
earlier) suggests a 21% potential total return,
including prospective dividend yield, which is
above the Neutral band of 0.5-20.5% around the
current share price. We therefore upgrade BOB
shares from Neutral (V) to Overweight (V).
Table 10: Earnings outlook (% y-o-y)
FY10 FY11 FY12
Income statementInterest income 15% 31% 33%Interest expense 14% 27% 35%Net interest income 16% 37% 28%Other income – ex treasury 10% 20% 22%Treasury gain -23% 19% 24%Total other income 0% 20% 22%Operating income 10% 31% 27%Core operating income 14% 32% 27%Operating expense 18% 16% 17%Operating profit 4% 45% 33%Core operating profit 11% 49% 34%Loan loss provisions 365% 19% 25%Other provisions -141% -259% -6%Total provisions -38% 167% 15%Pre tax profit 18% 24% 39%Tax -1% 33% 63%Net profit 28% 21% 29%Core PBT 32% 25% 42%Balance sheetAdvances 23% 26% 24%Deposits 23% 23% 24%Gross NPLs 39% 14% 12%Net NPLs 18% 44% 14%Total assets 21% 23% 23%
Source: Company data, HSBC
Table 11: Valuation summary
PE-based TP PB-based TP DCF value Weighted TP Potential total return
New 739 539 536 689 21%Old 611 438 525 577
Source: Company data, HSBC
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Positive potential catalysts: Significant
improvement in margins, led by robust balance
sheet growth; enjoys among the biggest expansion
in ROA, ROE within our PSU universe; lowest FII
holdings of 11.5% offers highest scope vs peers.
Negative potential catalysts: Low coverage ratio
(per earlier definition) likely to put pressure on
earnings given higher provisioning requirements;
higher proportion of SME and relatively low
proportion of corporate loans vs peers likely to
place it at a relative disadvantage after base rate is
implemented.
Valuations: At 3.9x PE, it trades at a large
discount of 24% to its five-year average, offering
the highest potential 12-month return (43%) in our
coverage universe.
Earnings outlook: A 33% CAGR in earnings
over the next three years up to FY12e, led by
higher loan growth and margins, but partlyneutralised by higher provisioning.
Key risks: (1) Higher-than-expected slippage
likely to pressurise earnings via higher provisioning
given low coverage. (2) Retirement of chairman in
July 2010 may introduce uncertainties on several
policy fronts in investors’ perception.
Canara Bank (CBK)
Among the best margin accretion prospects vs peers
Also has among the best & highest improvement in ROE
Largest discount to peer multiples offers highest 12-month
potential returns of 43%; Reiterate OW(V)
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Year to 3/2009a 3/2010e 3/2011e 3/2012e
P&L summary(INRm)
Net interest income 47,178 56,463 75,347 98,718Non-interest income 23,112 31,573 32,864 38,283Net fees/commissions 6,388 9,287 11,514 12,965Trading profits 7,125 9,759 7,048 8,245Other 9,599 12,527 14,303 17,073Total operating income 70,290 88,036 108,211 137,001Operating expense 30,652 32,727 38,333 44,260Staff costs 18,772 19,894 22,618 26,157Other oper expenese 11,881 12,833 15,715 18,103PPOP 39,638 55,309 69,878 92,742Provisions 13,914 12,430 16,858 25,601Bad debt 9,000 11,666 15,430 23,703Other 4,914 764 1,428 1,898
Other non-oper profit(loss)HSBC PBT 25,724 42,879 53,020 67,140Exceptionals - - - -Profit-before tax 25,724 42,879 53,020 67,140Taxation 5,000 8,763 12,426 17,750PAT 20,724 34,116 40,594 49,390Minorities + pref dividend - - - -Attributable profit 20,724 34,116 40,594 49,390HSBC attributable profit 20,724 34,116 40,594 49,390 Balance sheet summary (INRm)
Total assets 2,196,458 2,735,738 3,362,258 3,967,745Customer loans (net) 1,382,194 1,713,570 2,124,317 2,590,177Investment assets 577,769 675,876 801,838 925,857Other_assets 236,495 346,292 436,103 451,710Total liabilities 2,074,380 2,596,973 3,182,670 3,737,963
Customer deposits 1,868,925 2,337,669 2,867,604 3,388,262Debt securities issued 70,566 98,386 122,441 119,258Other liabilities 134,889 160,919 192,625 230,442Total capital 122,078 139,899 179,589 229,782Ordinary equity 122,078 139,899 179,589 229,782Minorities + other capitalIEA (avg) 1,925,054 2,377,082 2,945,035 3,544,856IBL (avg) 1,833,913 2,276,475 2,817,373 3,373,146 Capital adequacy (%)
RWA (INRm) 1,251,311 1,448,114 1,744,586 2,083,181Core tier 1 8.0% 8.6% 9.1% 9.6%Total t ier 1 8.0% 8.6% 9.1% 9.6%Total capital 14.1% 14.0% 13.6% 13.4%
Year to 3/2009a 3/2010e 3/2011e 3/2012eGrowth (y-o-y %)
Net interes t income 33.4 19.7 33.4 31.0Non-interest income 4.4 36.6 4.1 16.5Operat ing expense 9.8 6.8 17.1 15.5PPOP 33.9 39.5 26.3 32.7Provisions 32.0 (10.7) 35.6 51.9PBT 35.0 66.7 23.7 26.6PAT 32.4 64.6 19.0 21.7 Customer loans (net) 28.9 24.0 24.0 21.9Total assets 21.7 24.6 22.9 18.0RWA 7.7 15.7 20.5 19.4Customer depos its 21.3 25.1 22.7 18.2
Ratios (%)
NIM 2.45 2.38 2.56 2.78Gross yield 8.89 8.39 8.77 9.16Cost of funds 6.76 6.28 6.49 6.70Spread 2.13 2.11 2.28 2.46 NPL/gross loans 1.6 1.7 1.5 1.4Credit cost 0.7 0.8 0.8 1.0Coverage 30.4 29.8 34.6 42.6NPL/RWA 1.7 2.0 1.8 1.7Provsion/RWA 0.5 0.6 0.6 0.7Net write-off/RWA - - - -NPL/NTE 17.8 20.5 17.9 15.3Net loans/ total assets 62.9 62.6 63.2 65.3RWA/total assets 57.0 52.9 51.9 52.5Loans/deposits 74.0 73.3 74.1 76.4Avg IEA/avg total assets 96.2 96.4 96.6 96.7Avg IBL/avg total liab 97.2 97.5 97.5 97.5 Cost/income 43.6 37.2 35.4 32.3Non-int income/total income 32.9 17.3 17.4 17.9ROAA (inc luding goodwill ) 1.04 1.38 1.33 1.35ROAE (inc luding goodwill ) 22.6 29.7 27.7 26.7Return on avg tier 1 22.8 30.3 28.6 27.5Leverage (x) 21.8 21.5 20.8 19.8
Valuation data
PE (diluted EPS) 7.6 4.6 3.9 3.2P/PPOP 4.0 2.8 2.2 1.7PB 1.6 1.2 1.0 0.8P/NTE 1.6 1.2 1.0 0.8Dividend yield (x) 2.1 2.9 3.4 3.9P/deposits 0.08 0.07 0.05 0.05P/assets 0.07 0.06 0.05 0.04
*Based on HSBC EPS (diluted)
Price relative
100
150
200
250
300
350
400
450
500
550
2008 2009 2010 2011
100
150
200
250
300
350
400
450
500
550
Canara Bank Rel to BOMBAY SE SENSITIVE INDEX
Source: HSBC
Financials & valuation
Canara Bank – CBK IN – Overweight (V) Target price INR534
Per share data (INR)
EPS reported (diluted) 50.5 83.2 99.0 120.5HSBC EPS (diluted) 50.5 83.2 99.0 120.5DPS 8.0 11.0 13.0 15.0NAV 244.9 315.2 399.0 501.9NAV (including goodwill) 244.9 315.2 399.0 501.9
ROAA deconstruction
Net interest income 2.36 2.29 2.47 2.69Total interest income 8.56 8.08 8.47 8.86Total interest expense 6.20 5.80 6.00 6.16Net fees and commissions 0.32 0.38 0.38 0.35Other income 0.84 0.90 0.70 0.69Operat ing income 3.51 3.57 3.55 3.74Operat ing expenses 1.53 1.33 1.26 1.21Staf f costs 0.94 0.81 0.74 0.71Other oper exp 0.59 0.52 0.52 0.49
PPOP 1.98 2.24 2.29 2.53Provis ions 0.70 0.50 0.55 0.70Non-op items - - - -PBT 1.29 1.74 1.74 1.83Taxation 0.25 0.36 0.41 0.48PAT 1.04 1.38 1.33 1.35
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Chart 21: PE/PB vs system loan growth
3.0x
3.5x
4.0x
4.5x
5.0x
5.5x
6.0x
D e c - 0 2
J u
n - 0 3
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n - 0 4
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5
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25
30
35
PE/PB Sy stem Loan gr (%) RHS
Source: Company data, HSBC
Chart 22: Rolling PE Chart 23: Rolling PB
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
D e
c - 0 2
D e
c - 0 3
D e
c - 0 4
D e
c - 0 5
D e
c - 0 6
D e
c - 0 7
D e
c - 0 8
D e
c - 0 9
Rolling P/E Av erage 5 y ear
0.0x
0.5x
1.0x
1.5x
2.0x
D e
c - 0 2
D e
c - 0 3
D e
c - 0 4
D e
c - 0 5
D e
c - 0 6
D e
c - 0 7
D e
c - 0 8
D e
c - 0 9
Rolling P/B Av erage 5 y ear
Source: Company data, HSBC Source: Company data, HSBC
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Table 12: 3Q FY10 highlights
3Q FY10
Productivity:Loans growth (y-o-y) 14.3%Deposit growth (y-o-y) 19.5%LDR 70.6%Incremental LDR 54.3%CASA 28.7%Loan mix:Retail advances 14.6%SME advances 19.3%Farm credit 15.5%Corporate advances 50.6%
Assets quality:Gross NPLs 1.8%Coverage ratio 24.5%
Margins:NIM 2.7%Shareholdings:
FII Holding 11.5%Domestic institutional and government (incl LIC) 9.7%
Source: [HSBC, Company data]
Table 13: Old vs new estimates
2010e (new) Change 2011e (new) Change 2012e (new) Change
Total interest income 199,377 -3.6% 258,200 4.0% 324,626 7.7%Interest expenses 142,914 -2.4% 182,853 6.0% 225,908 11.0%Net interest income (NII) 56,463 -6.4% 75,347 -0.7% 98,718 0.7%P/(L) on sale of investments 9,402 115.5% 6,650 29.9% 7,775 19.5%P/(L) on revaluation of investments - - -P/(L) on exchange transactions 4,254 0.0% 4,193 0.0% 4,822 0.0%Fee and other income 17,917 0.9% 22,021 1.6% 25,686 -0.2%Non-interest income ex-treasury 22,171 0.7% 26,214 1.3% 30,508 -0.2%Total non-interest income 31,573 19.7% 32,864 6.0% 38,283 3.3%Total income 88,036 1.5% 108,211 1.3% 137,001 1.4%Operating expenses 32,727 0.3% 38,333 3.0% 44,260 8.7%Pre-provisioning profits 55,309 2.3% 69,878 0.3% 92,742 -1.7%Provisions for NPAs 11,666 -15.9% 15,430 -4.3% 23,703 24.8%Provisions for std. assets 1,409 -42.1% 1,636 -45.1% 1,862 -53.6%Provisions on investments (799) -200.0% (400) -200.0% (200) -200.0%
Other provisions 155 0.9% 192 1.7% 236 -0.2%Total provisions 12,430 -28.0% 16,858 -14.4% 25,601 9.2%PBT 42,879 16.4% 53,020 6.1% 67,140 -5.4%Tax 8,763 1.5% 12,426 -9.4% 17,750 -20.4%PAT 34,116 21.0% 40,594 11.9% 49,390 1.5%
Balance sheetDeposits 2,337,669 1.3% 2,867,604 1.2% 3,388,262 -1.9%Net advances 1,713,570 1.7% 2,124,317 1.7% 2,590,177 -1.6%Total assets 2,735,738 1.3% 3,362,258 1.3% 3,967,745 -1.4%
Net interest margin 2.36% -0.18% 2.55% -0.05% 2.77% 0.02%Book value 315.21 4.80% 399.01 5.95% 501.92 4.01%EPS 83.21 20.98% 99.01 11.95% 120.46 1.54%ROA 1.38% 0.23% 1.33% 0.13% 1.35% 0.02%ROE 29.7% 4.50% 27.7% 1.61% 26.7% -0.88%
Tax rate 20.4% -3.00% 23.4% -4.00% 26.4% -5.00%Cost income 37.2% -0.46% 35.4% 0.62% 32.3% 2.17%Core cost income 41.6% 1.99% 37.7% 1.18% 34.2% 2.59%
Source: Company data, HSBC
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Valuation and risksWe have revised our loan growth assumptions for
FY10-12e by +1.7%, +1.7% and -1.6% to 24%,
24% and 21.9%. Also, deposits estimates for
FY10-12e have been revised to 25.1%,22.7% and
18.2% from 23.4%, 22.8% and 21.9%. We have
raised estimate for P& L on investments by
115.5%, 29.9% and 19.5% to INR9.4bn,
INR6.65bn and INR7.8bn during FY10-12e. As a
result, we are revising our net profit forecast by
+21% in 2010, +11.9% in 2011, and +1.5% in
2012, respectively.
We value Canara bank using a combination of
economic profit model (EPM), PE, and PB
methodologies. We assign a 75% weight to the PE
and 15% to P/B and 10% to DCF components.
The three-stage EPM uses explicit forecasts untilFY12e followed by 10 years of semi-explicit
forecasts, where we assume 8% loan CAGR and a
20% dividend payout. The final stage of 12 years
(fade period) assumes convergence of ROE and
COE. We assume a risk free rate of 8%, beta of 1,
and equity risk premium of 6%, translating into a
cost of equity of 14%. Our EPM value is INR530.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10ppt above
and below the hurdle rate of 10.5% for India. Our
target price of INR534 (INR445 earlier) suggests a
43% potential total return, including prospective
dividend yield, which is above the Neutral band of
0.5-20.5% around the current share price. We
therefore reiterate our Overweight (V) rating.
Table 14: Earnings outlook (% y-o-y)
FY10e FY11e FY12e
Income statementInterest income 16% 30% 26%Interest expense 15% 28% 24%Net interest income 20% 33% 31%Other income – ex treasury 41% 18% 16%Treasury gain 27% -29% 17%Total other income 37% 4% 16%Operating income 25% 23% 27%Core operating income 25% 29% 27%Operating expense 7% 17% 15%Operating profit 40% 26% 33%Core operating profit 42% 38% 34%Loan loss provisions 30% 32% 54%Other provisions -84% 87% 33%Total provisions -11% 36% 52%Pre tax profit 67% 24% 27%Tax 75% 42% 43%Net profit 65% 19% 22%Core PBT 83% 39% 28%Balance sheetAdvances 24% 24% 22%Deposits 25% 23% 18%
Gross NPLs 32% 12% 10%Net NPLs 33% 4% -3%Total assets 25% 23% 18%
Source: Company data, HSBC
Table 15: Valuation summary
PE-based TP PB-based TP DCF value Weighted TP Potential total return
New 547 470 530 534 43%Old 450 386 491 445
Source: Company data, HSBC
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Positive potential catalysts: Margin expansion in
FY11 as loan book reprices quicker than deposits;
superior coverage ratio likely to put lower pressure
on provisioning costs going ahead; thus, PNB
enjoys among the biggest expansion in ROA and
ROE within our PSU universe.
Negative potential catalysts: PNB has the
highest proportion of restructured loans on its
book; this is partially offset by a superior
coverage ratio.
Valuations: On PE basis, it trades at among the
largest discounts of 21% to its five-year average
offering significant upside to a potential re-rating.
Earnings outlook: 30% CAGR in earnings overthe next three years up to FY12e, led by higher loan
growth and margins and lower provisions growth.
Key risks: (1) Higher-than-expected slippage in
its restructured book, (2) Lower CASA mix of
deposits leading to lower margins improvement.
Punjab National Bank (PNB)
Significant margin improvement prospects
Among the highest improvement in profitability vs peers
Potential total stock returns of 33% over 12 months; upgrade to
OW(V) from N(V)
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Year to 3/2009a 3/2010e 3/2011e 3/2012e
P&L summary(INRm)
Net interest income 70,309 86,431 116,078 139,709Non-interest income 29,197 30,684 36,741 44,585Net fees/commissions 13,766 13,695 17,309 21,427Trading profits 6,940 7,878 8,615 10,278Other 8,491 9,111 10,816 12,880Total operating income 99,505 117,116 152,819 184,294Operating expense 42,062 48,205 56,176 66,225Staff costs 29,244 32,861 38,431 45,339Other oper expenese 12,818 15,344 17,745 20,886PPOP 57,443 68,910 96,643 118,069Provisions 9,774 13,031 15,603 16,036Bad debt 8,211 10,424 11,341 11,918Other 1,563 2,607 4,119
Other non-oper profit(loss)HSBC PBT 47,669 55,879 81,040 102,032Exceptionals - - - -Profit-before tax 47,669 55,879 81,040 102,032Taxation 16,760 18,620 26,953 33,918PAT 30,909 37,259 54,087 68,114Minorities + pref dividend - - - -Attributable profit 30,909 37,259 54,087 68,114HSBC attributable profit 30,909 37,259 54,087 68,114 Balance sheet summary (INRm)
Total assets 2,469,186 2,948,876 3,445,691 4,122,304Customer loans (net) 1,547,030 1,876,839 2,344,929 2,881,136Investment assets 633,852 733,760 827,559 952,454Other_assets 288,304 338,278 273,203 288,714Total liabilities 2,322,650 2,763,636 3,210,294 3,823,218
Customer deposits 2,097,605 2,531,289 2,970,796 3,575,835Debt securities issued 43,744 43,744 43,744 43,744Other liabilities 181,301 188,603 195,754 203,639Total capital 146,536 185,241 235,398 299,086Ordinary equity 146,536 185,241 235,398 299,086Minorities + other capitalIEA (avg) 2,143,379 2,602,992 3,069,702 3,641,504IBL (avg) 2,025,233 2,466,813 2,906,185 3,431,513 Capital adequacy (%)
RWA (INRm) 1,536,739 1,843,052 2,231,485 2,676,447Core tier 1 9.0% 9.1% 8.7% 9.4%Total t ier 1 9.0% 9.1% 8.7% 9.4%Total capital 14.0% 13.4% 12.4% 12.6%
Year to 3/2009a 3/2010e 3/2011e 3/2012eGrowth (y-o-y %)
Net interes t income 27.0 22.9 34.3 20.4Non-interest income 46.2 5.1 19.7 21.3Operat ing expense 19.3 14.6 16.5 17.9PPOP 43.4 20.0 40.2 22.2Provisions 37.6 33.3 19.7 2.8PBT 44.6 17.2 45.0 25.9PAT 50.9 20.5 45.2 25.9 Customer loans (net) 29.5 21.3 24.9 22.9Total assets 24.1 19.4 16.8 19.6RWA 20.3 19.9 21.1 19.9Customer depos its 26.0 20.7 17.4 20.4
Ratios (%)
NIM 3.28 3.32 3.78 3.84Gross yield 9.02 8.45 9.14 9.56Cost of funds 6.07 5.41 5.66 6.07Spread 2.95 3.04 3.48 3.49 NPL/gross loans 1.8 1.8 1.7 1.6Credit cost 0.6 0.6 0.5 0.5Coverage 90.5 74.6 80.9 81.3NPL/RWA 1.8 1.9 1.8 1.8Provsion/RWA 1.6 1.4 1.5 1.4Net write-off/RWA - - - -NPL/NTE 18.9 18.5 17.0 15.8Net loans/ total assets 62.7 63.6 68.1 69.9RWA/total assets 62.2 62.5 64.8 64.9Loans/deposits 73.8 74.1 78.9 80.6Avg IEA/avg total assets 96.1 96.1 96.0 96.2Avg IBL/avg total liab 96.7 97.0 97.3 97.6 Cost/income 42.3 41.2 36.8 35.9Non-int income/total income 29.3 17.3 17.4 17.9ROAA (inc luding goodwill ) 1.39 1.38 1.69 1.80ROAE (inc luding goodwill ) 25.8 25.5 29.6 29.2Return on avg tier 1 24.5 24.4 29.9 30.6Leverage (x) 18.6 18.6 17.5 16.2
Valuation data
PE (diluted EPS) 9.09 7.54 5.19 4.12P/PPOP 4.89 4.08 2.91 2.38PB 2.14 1.75 1.37 1.07P/NTE 2.14 1.75 1.37 1.07Div idend y ield (x ) 2.25 2.47 3.03 3.37P/deposits 0.13 0.11 0.09 0.08P/assets 0.11 0.10 0.08 0.07
*Based on HSBC EPS (diluted)
Price relative
186
386
586
786
986
1186
2008 2009 2010 2011
186
386
586
786
986
1186
Punjab National Bank Rel to BOMBAY SE SENSITIVE INDEX
Source: HSBC
Financials & valuation
Punjab National Bank – PNB IN – Overweight (V) Target price INR1,163
Per share data (INR)
EPS reported (diluted) 98.0 118.2 171.5 216.0HSBC EPS (diluted) 98.0 118.2 171.5 216.0DPS 20.0 22.0 27.0 30.0NAV 416.7 509.2 649.1 830.0NAV (including goodwill) 416.7 509.2 649.1 830.0
ROAA deconstruction
Net interest income 3.15 3.19 3.63 3.69Total interest income 8.67 8.11 8.78 9.20Total interest expense 5.51 4.92 5.15 5.51Net fees and commissions 0.62 0.51 0.54 0.57Other income 0.69 0.63 0.61 0.61Operat ing income 4.46 4.32 4.78 4.87Operat ing expenses 1.89 1.78 1.76 1.75Staf f costs 1.31 1.21 1.20 1.20Other oper exp 0.57 0.57 0.55 0.55
PPOP 2.58 2.54 3.02 3.12Provis ions 0.44 0.48 0.49 0.42Non-op items - - - -PBT 2.14 2.06 2.53 2.70Taxation 0.75 0.69 0.84 0.90PAT 1.39 1.38 1.69 1.80
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Chart 24: PE/PB vs system loan growth
3.0x
3.5x
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
A p
r - 0 2
F e
b - 0 3
N o v - 0 3
S e
p - 0 4
J u
n - 0 5
M a
r - 0 6
J a
n - 0 7
O c t - 0 7
A u
g - 0 8
M a y - 0 9
F e
b - 1 0
5
10
15
20
25
30
35
PE/PB Sy stem Loan gr (%) RHS
Source: Company data, HSBC
Chart 25: Rolling PE Chart 26: Rolling PB
0x
2x
4x
6x
8x
10x
A p r - 0 2
F e
b - 0 3
N o
v - 0 3
S e
p - 0 4
J u
n - 0 5
M a
r - 0 6
J a
n - 0 7
O c t - 0 7
A u
g - 0 8
M a
y - 0 9
F e
b - 1 0
Rolling P/E Av erage 5 y ear
0.0x
0.5x
1.0x
1.5x
2.0x
A p r - 0 2
F e
b - 0 3
N o
v - 0 3
S e
p - 0 4
J u
n - 0 5
M a
r - 0 6
J a
n - 0 7
O c t - 0 7
A u
g - 0 8
M a
y - 0 9
F e
b - 1 0
Rolling P/B Av erage 5 y ear
Source: Company data, HSBC Source: Company data, HSBC
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Table 16: 3Q FY10 highlights
3Q FY10Productivity:
Loans growth (y-o-y) 20.3%Deposit growth (y-o-y) 18.7%LDR 72.8%Incremental LDR 78.0%CASA 39.5%
Loan mix:Retail advances 10.5%SME advances 19.2%Farm credit 16.0%Corporate advances 54.4%
Assets Quality:Gross NPLs 1.8%
Coverage ratio 74.3%Margins:NIM 3.8%
Shareholdings:FII Holding 19.1%Domestic institutional and government (incl LIC) 18.3%
Source: Company data, HSBC
Table 17: Old vs new estimates
2010e (new) Change 2011e (new) Change 2012e (new) Change
Total interest income 219,826 -4.0% 280,601 3.3% 348,067 5.7%Interest expenses 133,394 -7.2% 164,523 -2.8% 208,358 1 .9%Net interest income (NI I) 86,431 1.4% 116,078 13.4% 139,709 11.8%P/ (L) on sale of investments 7,522 -15.4% 8,197 0.3% 9,790 22.1%P/(L) on revaluation of investments – – –P/ (L) on exchange transact ions 3,104 -16.7% 3,570 0.0% 4,105 11.1%Fee and other income 20,058 -3.7% 24,974 -2.8% 30,690 -3.2%Non- interest income ex-t reasury 23,162 -5.7% 28,544 -2.5% 34,795 -1.7%Total non-interest income 30,684 -8.3% 36,741 -1.9% 44,585 2.7%Total income 117,116 -1.3% 152,819 9.3% 184,294 9.5%Operating expenses 48,205 -6.3% 56,176 -5.1% 66,225 -2.7%Pre-provis ioning prof its 68,910 2.5% 96,643 19.9% 118,069 17.8%Provis ions for NPAs 10,424 50.0% 11,341 27.3% 11,918 0.6%Provis ions for std. assets 1,265 -46.7% 1,840 -41.7% 2,096 -50.7%Provisions on investments 1,000 0.0% 2,000 33.3% 1,500 -25.0%
Other provisions 342 0.1% 422 0.9% 523 0.5%Total provis ions 13,031 22.2% 15,603 11.6% 16,036 -13.9%PBT 55,879 -1.2% 81,040 21.6% 102,032 25.0%Tax 18,620 -1.2% 26,953 21.4% 33,918 24.8%PAT 37,259 -1.2% 54,087 21.7% 68,114 25.1%
Balance sheetDeposi ts 2,531,289 -0.2% 2,970,796 1.1% 3,575,835 -1.2%Net advances 1,876,839 0.1% 2,344,929 1.5% 2,881,136 -0.4%Total assets 2,948,876 -0.1% 3,445,691 1.2% 4,122,304 -0.5%
Net interest margin 3.30% 0.05% 3.75% 0.42% 3.81% 0.39%Book value 509.17 0.18% 649.12 5.11% 830.05 9.91%EPS 118.17 -1.18% 171.54 21.72% 216.03 25.06%ROA 1.38% -0.02% 1.69% 0.29% 1.80% 0.36%ROE 25.5% -0.33% 29.6% 4.58% 29.2% 4.04%
Tax rate 33.3% 0.00% 33.3% -0.05% 33.2% -0.05%Cost income 41.2% -2.20% 36.8% -5.58% 35.9% -4.51%Core cost income 44.0% -2.89% 38.8% -6.12% 38.0% -4.51%
Source: Company data, HSBC
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Valuation and risks
We have revised our loan and deposit growth
assumptions for FY11 from 23.2% and 15.9% to
17.4% and 24.9%. Also, we have raised NIM
estimate by 42bps and 39bp in FY11& FY12
respectively..As a result, we are revising our net
profit forecast by +21.7% in 2011 and 25.1% in
2012, respectively.
We value PNB using a combination of economicprofit model (EPM), PE, and PB methodologies.
We assign a 75% weight to the PE and 15% to
P/B and 10% to DCF components. We value
PNBK using a combination of economic profit
model (EPM), PE, and PB methodologies. The
three-stage EPM uses explicit forecasts until
FY12e followed by 10 years of semi-explicit
forecasts, where we assume 11% loan CAGR and
a 20% dividend payout. The final stage of 12
years (fade period) assumes convergence of ROE
and COE. We assume a risk free rate of 8%, beta
of 1, and equity risk premium of 6%, translating
into a cost of equity of 14%. Our EPM value is
INR987.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10ppt
above and below the hurdle rate of 10.5% for
India. Our target price of INR1,163 (INR901
earlier) suggests a 33% potential total return,
including prospective dividend yield, which is
above the Neutral band of 0.5-20.5% around the
current share price. We therefore upgrade PNB
from Neutral (V) to Overweight (V) rating.
Table 18: Earnings outlook (% y-o-y)
FY10e FY11e FY12e
Income statementInterest income 14% 28% 24%Interest expense 8% 23% 27%Net interest income 23% 34% 20%Other income – ex treasury 3% 23% 22%Treasury gain 13% 9% 19%Total other income 5% 20% 21%Operating income 18% 30% 21%Core operating income 18% 32% 21%Operating expense 15% 17% 18%Operating profit 20% 40% 22%Core operating profit 21% 44% 22%Loan loss provisions -32% 9% 5%Other provisions -146% 63% -3%Total provisions 34% 20% 3%Pre tax profit 17% 45% 26%Tax 11% 45% 26%Net profit 21% 45% 26%Core PBT 18% 51% 27%Balance sheetAdvances 21% 25% 23%Deposits 21% 17% 20%CASA mixGross NPLs 37% 17% 18%Net NPLs 231% -13% 15%Total assets 19% 17% 20%
Source: Company data, HSBC
Table 19: Valuation summary
PE-based TP PB-based TP DCF value Weighted TP Potential total return
New 1,253 829 987 1,163 33%Old 937 755 855 901
Source: Company data, HSBC
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Positive potential catalysts: SBI’s large balance
sheet would get a significant leg-up from the
credit upcycle as growth and margins improve.
Negative potential catalysts: Cost increasesgiven its branch expansion plans likely to put
pressure on earnings in FY12e capping growth
and profitability prospects; Likely to face more
pressures vs peers on repricing its loan book
upwards during the credit upcycle; Lower-than-
peers coverage ratio likely to put more pressure
on provisioning.
Valuations: Most expensive PSU bank stock, at
9.5x PE, offering little room for re-rating given
lower-than-peers growth and ROE prospects.
Earnings outlook: 18% CAGR in earnings over the
next three years up to FY12e, led by higher loan
growth and margins partially dampened by higher
costs; ROE, too, is increasing, to 18.5% by FY12e.
Key risks: (1) On the upside, aggressive market
share expansion likely to result in higher-than-
anticipated earnings growth. (2) On the downside,
higher than expected slippage in restructured
loans likely to put pressure on earnings given low
coverage vs peers.
State Bank of India(SBIN)
Big beneficiary of improving growth and margins
But high cost increases dampens growth and profitability outlook
Most expensive PSU bank stock; recent underperformance offers
scope to upgrade to N(V); entry point at INR1,700
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Year to 3/2009a 3/2010e 3/2011e 3/2012e
P&L summary(INRm)
Net interest income 208,731 224,571 311,046 363,273Non-interest income 126,908 145,585 180,790 225,501Net fees/commissions 76,172 98,385 123,748 153,127Trading profits 29,769 24,924 21,669 26,684Other 20,967 22,276 35,373 45,689Total operating income 335,639 370,156 491,836 588,774Operating expense 156,487 193,871 239,396 297,176Staff costs 97,473 123,097 156,538 200,855Other oper expenese 59,014 70,774 82,858 96,321PPOP 179,152 176,285 252,439 291,598Provisions 37,346 32,366 53,614 58,445Bad debt 24,750 33,186 44,234 49,606Other 12,596 (820) 9,381 8,839
Other non-oper profit(loss)HSBC PBT 141,806 143,919 198,825 233,153Exceptionals - - - -Profit-before tax 141,806 143,919 198,825 233,153Taxation 50,594 49,824 68,462 80,437PAT 91,212 94,096 130,363 152,716Minorities + pref dividend - - - -Attributable profit 91,212 94,096 130,363 152,716HSBC attributable profit 91,212 94,096 130,363 152,716 Balance sheet summary (INRm)
Total assets 9,644,321 11,171,150 13,381,489 15,247,335Customer loans (net) 5,425,032 6,500,465 8,058,125 9,747,379Investment assets 2,759,540 3,109,862 3,486,975 3,380,555Other_assets 1,459,749 1,560,823 1,836,390 2,119,400Total liabilities 9,064,844 10,523,783 12,616,737 14,341,013Customer deposits 7,420,731 8,659,826 10,522,693 13,095,211Debt securities issued 537,137 590,302 616,570 644,152Other liabilities 1,106,976 1,273,655 1,477,473 601,649Total capital 579,477 652,026 760,101 890,528Ordinary equity 579,477 652,026 760,101 890,528Minorities + other capitalIEA (avg) 7,900,602 9,881,152 11,647,979 13,563,235IBL (avg) 7,360,671 9,134,850 10,807,470 12,985,851 Capital adequacy (%)
RWA (INRm) 7,719,190 8,920,061 10,591,757 12,361,693Core tier 1 9.4% 8.2% 7.8% 7.7%Total ti er 1 9.4% 8.2% 7.8% 7.7%Total capital 14.3% 13.1% 12.0% 11.3%
ROAA deconstruction
Net interest income 2.48 2.16 2.53 2.54Total interest income 7.57 7.03 7.52 7.82Total interest expense 5.09 4.88 4.99 5.28Net fees and commissions 0.90 0.95 1.01 1.07Other income 0.60 0.45 0.46 0.51Operat ing income 3.98 3.56 4.01 4.11Operat ing expenses 1.86 1.86 1.95 2.08Staf f costs 1.16 1.18 1.28 1.40Other oper exp 0.70 0.68 0.67 0.67PPOP 2.13 1.69 2.06 2.04
Provis ions 0.44 0.31 0.44 0.41Non-op items - - - -PBT 1.68 1.38 1.62 1.63Taxation 0.60 0.48 0.56 0.56PAT 1.08 0.90 1.06 1.07
Year to 3/2009a 3/2010e 3/2011e 3/2012eGrowth (y-o-y %)
Net interes t income 22.6 7 .6 38.5 16.8Non-interest income 46.0 14.7 24.2 24.7Operat ing expense 24.1 23.9 23.5 24.1PPOP 36.7 (1.6) 43.2 15.5Provisions 39.9 (13.3) 65.7 9.0PBT 35.8 1.5 38.2 17.3PAT 35.5 3.2 38.5 17.1Customer loans (net) 30.2 19.8 24.0 21.0Total assets 33.7 15.8 19.8 13.9RWA (0.0) 15.6 18.7 16.7Customer depos its 38.1 16.7 21.5 24.4
Ratios (%)
NIM 2.64 2.27 2.67 2.68Gross yield 8.07 7.41 7.93 8.25Cost of funds 5.83 5.56 5.67 5.82Spread 2.24 1.85 2.26 2.43 NPL/gross loans 2.8 3.08 2.88 2.59Credit cost 0.5 0.6 0.6 0.6Coverage 38.72 40.5 44.2 50.4NPL/RWA 2.0 2.3 2.2 2.1Provsion/RWA 0.8 0.9 1.0 1.0Net write-off/RWA - - - -NPL/NTE 26.9 31.1 31.0 28.7Net loans/ total assets 56.3 58.2 60.2 64.0RWA/total assets 80.0 79.8 79.2 81.1Loans/deposits 73.1 75.1 76.6 74.4Avg IEA/avg total assets 93.7 94.9 94.9 94.8Avg IBL/avg total liab 93.2 93.3 93.4 96.3 Cost/income 46.6 52.4 48.7 50.5Non-int income/total income 37.8 17.3 17.4 17.9ROAA (inc luding goodwill ) 1.08 0.90 1.06 1.07ROAE (inc luding goodwill ) 17.1 15.3 18.5 18.5Return on avg tier 1 13.2 12.9 16.7 17.2Leverage (x) 15.8 16.9 17.4 17.3
Valuation data
PE (diluted EPS) 13.6 13.2 9.5 8.1P/PPOP 6.9 7.0 4.9 4.3PB 2.1 1.9 1.6 1.4P/NTE 2.1 1.9 1.6 1.4Dividend yield (x) 1.5 1.5 1.5 1.5P/deposits 0.17 0.14 0.12 0.09P/assets 0.13 0.11 0.09 0.08
*Based on HSBC EPS (diluted)
Price relative
634
1134
1634
2134
2634
3134
2008 2009 2010 2011
634
1134
1634
2134
2634
3134
State Bank of India Rel to BOMBAY SE SENSITIVE INDEX
Source: HSBC
Financials & valuation
State Bank of India – SBIN IN – Neutral (V) Target price INR2,033
Per share data (INR)
EPS reported (diluted) 143.7 148.2 205.3 240.5
HSBC EPS (diluted) 143.7 148.2 205.3 240.5DPS 29.0 29.0 30.0 30.0NAV 912.7 1,027.0 1,197.2 1,402.7NAV (including goodwill) 912.7 1,027.0 1,197.2 1,402.7
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Chart 27: PE/PB vs system loan growth
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
11.0x
12.0x
M a r - 9 6
A u
g - 9 7
J a
n - 9 9
J u
n - 0 0
O
c t - 0 1
M a r - 0 3
A u
g - 0 4
D e c - 0 5
M a
y - 0 7
O
c t - 0 8
F e
b - 1 0
-
5
10
15
20
25
30
35
PE/PB Sy stem Loan gr (%) RHS
Source: Company data, HSBC
Chart 28: Rolling PE Chart 29: Rolling PB
0x
3x
6x9x
12x
15x
18x
M a r - 9 6
A u g - 9 7
J a n - 9 9
J u n - 0 0
O c t - 0 1
M a r - 0 3
A u g - 0 4
D e c - 0 5
M a y - 0 7
O c t - 0 8
F e b - 1 0
Rolling P/E Av erage 5 y ear
Average 10 year
0.0x0.3x0.6x0.9x1.2x1.5x1.8x2.1x2.4x2.7x
M a r - 9 6
A u g - 9 7
J a n - 9 9
J u n - 0 0
O c t - 0 1
M a r - 0 3
A u g - 0 4
D e c - 0 5
M a y - 0 7
O c t - 0 8
F e b - 1 0
Rolling P/B Av erage 5 y ear
Average 10 year
Source: Company data, HSBC Source: Company data, HSBC
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Table 20: 3Q FY10 highlights
3Q FY10
Productivity:Loans growth (y-o-y) 18.9%
Deposit growth (y-o-y) 11.3%LDR 77.7%Incremental LDR 122.0%CASA 42.7%Loan mix:
International Advances 15.7%Domestic AdvancesRetail Advances 21.8%SME Advances 17.2%Farm credit 10.2%Corporate Advances 35.2%Assets Quality:Gross NPLs 3.1%Coverage ratio 40.2%Margins:NIM 2.8%Shareholdings:FII Holding 15.0%
Domestic institutional and government (incl LIC) 15.8%
Source: Company data, HSBC
Table 21: Old vs new estimates
2010e (new) Change 2011e (new) Change 2012e (new) Change
Total interest income 732,015 -7.4% 923,390 -5.8% 1,119,519 -7.1%Interest expenses 507,444 -4.0% 612,344 -2.8% 756,246 -2.3%Net interest income (NII) 224,571 -14.4% 311,046 -11.0% 363,273 -15.8%P/(L) on sale of investments 20,543 -37.0% 16,492 -56.5% 20,603 -47.8%P/(L) on Revaluationa of Investments (5) 0.0% (5) 0.0% (4) 0.0%P/(L) on exchange transactions 12,619 14.3% 26,058 75.0% 37,338 88.9%Fee and other income 112,423 -4.4% 138,239 -8.3% 167,560 -8.6%Non-interest income ex-treasury 125,042 -2.8% 164,298 -0.8% 204,898 0.9%Total non-interest income 145,585 -9.7% 180,790 -11.2% 225,501 -7.0%Total income 370,156 -12.6% 491,836 -11.1% 588,774 -12.7%Operating expenses 193,871 -0.5% 239,396 -4.7% 297,176 -6.2%Pre-provisioning profits 176,285 -23.0% 252,439 -16.4% 291,598 -18.4%Provis ions for NPAs 33,186 -36.4% 44,234 -41.9% 49,606 -47.5%Provis ions for std. assets 3,642 -54.5% 5,331 -46.4% 5,585 -53.7%Provis ions on investments (5,655) -350.0% 2,594 -11.0% 1,474 -58.9%
Other provisions 1,193 1,456 1,781Total provis ions 32,366 -49.2% 53,614 -40.8% 58,445 -47.8%PBT 143,919 -12.9% 198,825 -5.9% 233,153 -4.9%Tax 49,824 -12.4% 68,462 -5.9% 80,437 -5.0%PAT 94,096 -13.1% 130,363 -6.0% 152,716 -4.9%
Balance sheetDeposits 8,659,826 -6.3% 10,522,693 -8.6% 13,095,211 -10.7%Net advances 6,500,465 -3.4% 8,058,125 -3.4% 9,747,379 -5.7%Total assets 11,171,150 -5.5% 13,381,489 -7.5% 15,247,335 -9.5%
Net interest margin 2.25% -0.30% 2.65% -0.13% 2.66% -0.23%Book value 1,027.01 -2.79% 1,197.23 -4.06% 1,402.67 -4.84%EPS 148.20 -13.13% 205.33 -5.96% 240.54 -4.92%ROA 0.90% -0.11% 1.06% 0.01% 1.07% 0.04%ROE 15.3% -2.05% 18.5% -0.49% 18.5% -0.09%
Tax rate 34.6% 0.20% 34.4% 0.02% 34.5% -0.01%Cost income 52.4% 6.39% 48.7% 3.26% 50.5% 3.47%Core cost income 55.5% 5.63% 50.4% 1.60% 52.3% 2.37%
Source: Company data, HSBC
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Valuation and risks
We have revised our loan growth assumptions for
FY10-12e to 19.8%,24% and 21% from 24%
earlier. Also, deposit forecasts have been changed
to 16.7%, 21.5% and 24.4% from 24.5%, 24.6%
and 27.4%, respectively. Also, NIM forecasts
have been lowered by 30bp, 13bp and 23bp for
FY10-12e.In addition, provision expenses forecast
have been increased by 49.2%, 40.8% and 47.8%
for FY10-12, respectively. As a result, we arelowering our net profit forecast by -13.1% in
2010, -6% in 2011 and -4.9% in 2012,
respectively.
We value SBI using a combination of economic
profit model (EPM), PE, and PB methodologies.
We assign a 75% weight to the PE and 15% to
P/B and 10% to DCF components. The three-
stage EPM uses explicit forecasts until FY12e
followed by 10 years of semi-explicit forecasts,
where we assume 8% loan CAGR and a 20%
dividend payout. The final stage of 12 years (fade
period) assumes convergence of ROE and COE.
We assume a risk free rate of 8%, beta of 1, and
equity risk premium of 6%, translating into a cost
of equity of 14%. Our EPM value is INR1,698
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10pptabove and below the hurdle rate of 10.5% for
India. Our target price of INR2,033 (INR2,038
earlier) suggests a 5% potential total return,
including prospective dividend yield, which is
within the Neutral band of 0.5-20.5% around the
current share price. We therefore raise our rating
to Neutral (V) from Underweight (V).
Table 22: Earnings outlook (% y-o-y)
(INRbn) FY10e FY11e FY12e
Income statementInterest income 15% 26% 21%Interest expense 18% 21% 24%Net interest income 8% 39% 17%Other income – ex treasury 24% 31% 25%Treasury gain -20% -20% 25%Total other income 15% 24% 25%Operating income 10% 33% 20%Core operating income 13% 36% 20%Operating expense 24% 23% 24%Operating profit -2% 43% 16%Core operating profit 2% 51% 15%Loan loss provisions 41% 33% 12%Other provisions -106% -1243% -6%Total provisions -13% 66% 9%Pre tax profit 1% 38% 17%Tax -2% 37% 17%Net profit 3% 39% 17%Core PBT 6% 48% 17%Balance sheetAdvances 20% 24% 21%Deposits 17% 22% 24%CASA mixGross NPLs 30% 16% 9%Net NPLs 26% 9% -3%Total assets 16% 20% 14%
Source: Company data, HSBC
Table 23: Valuation summary
PE-based TP PB-based TP DCF value Weighted TP Potential total return
New 2,106 1,893 1,698 2,033 5%Old 2,115 1,811 1,802 2,038
Source: Company data, HSBC
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Positive potential catalysts: Union’s historically
lower balance sheet growth now positions it for a
significant leverage up the credit cycle; accordingly,
margin and ROE expansion likely to be significant;
enjoys among the biggest expansion in ROA, ROE
within our PSU universe.
Negative potential catalysts: Second-highest
proportion of restructured loans on its book in ouruniverse; relatively low scope to raise fresh equity
given low government shareholdings.
Valuations: On a PE basis, it trades at significant
discounts of 17% to its five-year average offering
24% upside to a potential re-rating.
Earnings outlook: 25% CAGR in earnings over
the next three years up to FY12e, led by higher
loan growth and margins.
Key risks: (1) Higher-than-expected slippage in
its restructured book. (2) May not be able to ramp
up growth levels given equity raising constraints
because of lower government holdings.
Union Bank (UNBK)
Among the most leveraged PSU Banks to a credit upcycle
Significant ROE expansion expected up to 27% by FY12e
24% potential returns over 12 mths; Reiterate OW(V)
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Year to 3/2009a 3/2010e 3/2011e 3/2012e
P&L summary(INRm)
Net interest income 38,136 39,653 59,823 76,580Non-interest income 14,826 20,261 23,372 29,360Net fees/commissions 3,133 4,109 5,273 6,825Trading profits 3,215 6,684 6,126 7,277Other 8,478 9,467 11,973 15,258Total operating income 52,961 59,913 83,195 105,941Operating expense 22,141 24,463 28,487 33,431Staff costs 11,519 12,564 14,788 17,446Other oper expenese 10,622 11,899 13,699 15,985PPOP 30,820 35,451 54,708 72,509Provisions 7,255 10,140 16,534 20,086Bad debt 5,465 7,487 11,073 14,786Other 1,790 2,652 5,461 5,300
Other non-oper profit(loss)HSBC PBT 23,566 25,311 38,174 52,423Exceptionals - - - -Profit-before tax 23,566 25,311 38,174 52,423Taxation 6,300 6,834 12,216 18,348PAT 17,266 18,477 25,959 34,075Minorities + pref dividend - - - -Attributable profit 17,266 18,477 25,959 34,075HSBC attributable profit 17,266 18,477 25,959 34,075 Balance sheet summary (INRm)
Total assets 1,609,755 1,997,766 2,441,394 3,011,466Customer loans (net) 965,342 1,141,979 1,430,360 1,819,691Investment assets 429,970 560,299 664,940 790,448Other_assets 214,443 295,487 346,093 401,327Total liabilities 1,522,352 1,894,840 2,315,465 2,854,417
Customer deposits 1,387,028 1,669,220 2,082,481 2,570,211Debt securities issued 38,849 41,566 45,024 48,772Other liabilities 96,474 184,054 187,959 235,434Total capital 87,404 102,925 125,929 157,049Ordinary equity 87,404 102,925 125,929 157,049Minorities + other capitalIEA (avg) 1,364,195 1,714,858 2,096,199 2,595,696IBL (avg) 1,315,778 1,632,168 1,987,272 2,457,407 Capital adequacy (%)
RWA (INRm) 953,840 1,140,756 1,570,413 1,917,944Core tier 1 8.2% 8.3% 7.5% 7.7%Total t ier 1 8.2% 8.3% 7.5% 7.7%Total capital 13.3% 14.0% 12.4% 12.5%
Year to 3/2009a 3/2010e 3/2011e 3/2012eGrowth (y-o-y %)
Net interes t income 33.6 4 .0 50.9 28.0Non-interest income 12.3 36.7 15.4 25.6Operat ing expense 39.0 10.5 16.4 17.4PPOP 19.4 15.0 54.3 32.5Provisions 0.8 39.8 63.1 21.5PBT 26.7 7.4 50.8 37.3PAT 24.5 7.0 40.5 31.3 Customer loans (net) 30.0 18.3 25.3 27.2Total assets 29.8 24.1 22.2 23.4RWA 8.6 19.6 37.7 22.1Customer depos its 33.5 20.3 24.8 23.4
Ratios (%)
NIM 2.80 2.31 2.85 2.95Gross yield 8.72 7.72 8.33 8.82Cost of funds 6.14 5.68 5.77 6.20Spread 2.58 2.04 2.55 2.62 NPL/gross loans 2.0 1.9 1.7 1.4Credit cost 0.6 0.7 0.9 0.9Coverage 82.9 72.0 71.1 72.8NPL/RWA 2.0 1.9 1.5 1.3Provsion/RWA 1.7 1.4 1.1 1.0Net write-off/RWA - - - -NPL/NTE 22.0 21.5 19.1 16.2Net loans/ total assets 60.0 57.2 58.6 60.4RWA/total assets 59.3 57.1 64.3 63.7Loans/deposits 69.6 68.4 68.7 70.8Avg IEA/avg total assets 95.7 95.1 94.4 95.2Avg IBL/avg total liab 97.9 95.5 94.4 95.1 Cost/income 41.8 40.8 34.2 31.6Non-int income/total income 28.0 17.3 17.4 17.9ROAA (inc luding goodwill ) 1.21 1.02 1.17 1.25ROAE (inc luding goodwill ) 27.2 23.6 26.6 27.3Return on avg tier 1 24.8 21.4 24.5 25.6Leverage (x) 22.5 23.0 22.7 21.9
Valuation data
PE (diluted EPS) 7.23 6.75 4.81 3.66P/PPOP 4.05 3.52 2.28 1.72PB 1.77 1.45 1.14 0.89P/NTE 1.77 1.45 1.14 0.89Div idend y ield (x ) 2.02 2.02 2.02 2.02P/deposits 0.09 0.07 0.06 0.05P/assets 0.08 0.06 0.05 0.04
*Based on HSBC EPS (diluted)
Price relative
67
117
167
217
267
317
367
2008 2009 2010 2011
67
117
167
217
267
317
367
Union Bank Of India Rel to BOMBAY SE SENSITIVE INDEX
Source: HSBC
Financials & valuation
Union Bank of India – UNBK IN – Overweight (V) Target price INR302
Per share data (INR)
EPS reported (diluted) 34.2 36.6 51.4 67.5HSBC EPS (diluted) 34.2 36.6 51.4 67.5DPS 5.0 5.0 5.0 5.0NAV 139.7 170.4 215.9 277.5NAV (including goodwill) 139.7 170.4 215.9 277.5
ROAA deconstruction
Net interest income 2.68 2.20 2.70 2.81Total interest income 8.34 7.34 7.86 8.39Total interest expense 5.67 5.14 5.17 5.58Net fees and commissions 0.22 0.23 0.24 0.25Other income 0.82 0.90 0.82 0.83Operat ing income 3.72 3.32 3.75 3.89Operat ing expenses 1.55 1.36 1.28 1.23Staf f costs 0.81 0.70 0.67 0.64Other oper exp 0.75 0.66 0.62 0.59
PPOP 2.16 1.97 2.46 2.66Provis ions 0.51 0.56 0.74 0.74Non-op items - - - -PBT 1.65 1.40 1.72 1.92Taxation 0.44 0.38 0.55 0.67PAT 1.21 1.02 1.17 1.25
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Chart 30: PE/PB vs system loan growth
3.0x
3.5x
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
S e
p - 0 2
M a
y - 0 3
F e
b - 0 4
N o
v - 0 4
A u
g - 0 5
M a
y - 0 6
F e
b - 0 7
N o
v - 0 7
A u
g - 0 8
M a
y - 0 9
F e
b - 1 0
5
10
15
20
25
30
35
40
PE/PB Sy stem Loan gr (%) RHS
Source: Company data, HSBC
Chart 31: Rolling PE Chart 32: Rolling PB
0x
2x
4x
6x
8x
10x
S
e p - 0 2
J
u n - 0 3
M
a r - 0 4
D
e c - 0 4
S
e p - 0 5
M
a y - 0 6
F
e b - 0 7
N
o v - 0 7
A
u g - 0 8
A
p r - 0 9
J
a n - 1 0
Rolling P/E Av erage 5 y earAverage 7 year
0.0x
0.5x
1.0x
1.5x
2.0x
S e p - 0 2
J u n - 0 3
M a r - 0 4
D e c - 0 4
S e p - 0 5
J u n - 0 6
M a r - 0 7
D e c - 0 7
A u g - 0 8
M a y - 0 9
F e b - 1 0
Rolling P/B Av erage 5 y ear
Av erage 7 year
Source: Company data, HSBC Source: Company data, HSBC
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Table 24: 3Q FY10 highlights
3Q FY10
Productivity:Loans growth (y-o-y) 14.6%Deposit growth (y-o-y) 16.5%LDR 70.5%Incremental LDR 63.2%CASA 32.3%
Loan mix:Retail Advances 11.1%SME Advances 19.4%Farm credit 16.5%Corporate Advances 53.1%
Assets quality:Gross NPLs 2.0%Coverage ratio 70.7%
Margins:NIM 2.7%
Shareholdings:FII Holding 16.2%Domestic institutional and government (incl LIC) 13.5%
Source: Company data, HSBC
Table 25: Old vs new estimates
2010e (new) Change 2011e (new) Change 2012e (new) Change
Total interest income 132,368 -11.8% 174,562 -4.3% 228,835 2.2%Interest expenses 92,715 -9.3% 114,739 -4.8% 152,254 3.3%Net interest income (NI I) 39,653 -17.2% 59,823 -3.4% 76,580 0.2%P/ (L) on sale of investments 6,684 40.5% 6,126 7.1% 7,277 6.7%P/(L) on Revaluationa of Investments – #DIV/0! – #DIV/0! – #DIV/0!P/(L) on exchange t ransactions 3,161 -34.4% 4,244 -28.7% 5,688 -24.3%Fee and other income 10,415 -14.6% 13,001 -13.3% 16,396 -16.2%Non-interest income ex-treasury 13,576 -20.2% 17,246 -17.7% 22,083 -18.5%Total non-interest income 20,261 -6.9% 23,372 -12.4% 29,360 -13.4%Total income 59,913 -14.0% 83,195 -6.1% 105,941 -4.0%Operat ing expenses 24,463 -5.3% 28,487 -6.7% 33,431 -6.8%Pre-provis ioning prof its 35,451 -19.1% 54,708 -5.8% 72,509 -2.7%Provis ions for NPAs 7,487 -14.1% 11,073 -3.3% 14,786 -3.3%Provis ions for std. assets 656 -56.0% 1,143 -47.1% 1,548 -47.0%Provis ions on inves tments 1,470 218.2% 3,675 783.8% 2,940 685.6%
Other provisions 527 643 813Total provis ions 10,140 -9.5% 16,534 12.6% 20,086 3.4%PBT 25,311 -22.5% 38,174 -12.0% 52,423 -4.8%Tax 6,834 -40.2% 12,216 -19.6% 18,348 -4.8%PAT 18,477 -12.9% 25,959 -8.0% 34,075 -4.8%
Balance sheetDeposits 1,669,220 0.0% 2,082,481 0.0% 2,570,211 0.0%Net advances 1,141,979 -3.0% 1,430,360 -2.7% 1,819,691 -2.5%Total assets 1,997,766 -0.1% 2,441,394 -0.1% 3,011,466 0.0%
Net interest margin 2.31% -0.48% 2.84% -0.10% 2.94% 0.01%Book value 170.39 -1.11% 215.93 -1.30% 277.54 -0.99%EPS 36.58 -12.91% 51.39 -7.96% 67.46 -4.83%ROA 1.02% -0.15% 1.17% -0.10% 1.25% -0.06%ROE 23.6% -3.33% 26.6% -1.95% 27.3% -1.07%
Tax rate 27.0% -8.00% 32.0% -3.00% 35.0% 0.00%Cost income 40.8% 3.75% 34.2% -0.23% 31.6% -0.93%Core cost income 46.0% 6.16% 37.0% 0.11% 33.9% -0.75%
Source: Company data, HSBC
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Valuation and risks
We have revised our loan growth assumptions for
FY10 to 18.3% from 21.9%. Also, margin
estimate trimmed by 48bp and 10bp in 2010 and
2011, respectively. Also, we have lowered
estimate for non interest income by 6.9% , 12.4%
and 13.4% to INR20.2bn , INR17.2bn and
INR22bn, respectively. Provision estimates have
been revised by -9.5% in 2010, +12.6% in 2011
and +3.4% in 2012.As a result, we are revisingour net profit forecast by +21% in 2010, +11.9%
in 2011 and +1.5% in 2012, respectively.
We value Union bank using a combination of
economic profit model (EPM), PE, and PB
methodologies. We assign a 75% weight to the PE
and 15% to P/B and 10% to DCF components.
The three-stage EPM uses explicit forecasts until
FY12e followed by 10 years of semi-explicit
forecasts, where we assume 8% loan CAGR and a
20% dividend payout. The final stage of 12 years
(fade period) assumes convergence of ROE and
COE. We assume a risk free rate of 8%, beta of 1,
and equity risk premium of 6%, translating into a
cost of equity of 14%. Our EPM value is INR308.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10ppt
above and below the hurdle rate of 10.5% forIndia. Our target price of INR302 (INR335
earlier) suggests a 24% potential total return,
including prospective dividend yield, which is
above the Neutral band of 0.5-20.5% around the
current share price. We therefore reiterate our
Overweight (V) rating on Union Bank shares.
Table 26: Earnings outlook (% y-o-y)
FY10e FY11e FY12e
Income statementInterest income 11% 32% 31%Interest expense 15% 24% 33%Net interest income 4% 51% 28%Other income – ex treasury 17% 27% 28%Treasury gain 110% -8% 19%Total other income 37% 15% 26%Operating income 13% 39% 27%Core operating income 7% 45% 28%Operating expense 10% 16% 17%Operating profit 15% 54% 33%Core operating profit 4% 69% 34%Loan loss provisions 37% 48% 34%Other provisions 39% 106% -3%Total provisions 37% 63% 21%Pre tax profit 8% 51% 37%Tax 11% 79% 50%Net profit 7% 40% 31%Core PBT -8% 72% 41%Balance sheetAdvances 18% 25% 27%Deposits 20% 25% 23%CASA mixGross NPLs 15% 8% 6%Net NPLs 90% 12% 0%Total assets 24% 22% 23%
Source: Company data, HSBC
Table 27: Valuation summary
PE-based TP PB-based TP DCF value Weighted TP Potential total return
New 306 276 308 302 24%Old 359 244 292 335
Source: Company data, HSBC
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Sachin Sheth and Todd Dunivant
Important disclosuresStock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: (1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12-month horizon; and
(2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical
or event-driven techniques on a 0- to 3-month horizon and which may differ from our long-term investment rating. HSBC has
assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC
publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research.
Details of these short-term investment opportunities can be found under the Reports section of this website.
HSBC believes an investor’s decision to buy or sell a stock should depend on individual circumstances such as the investor’s
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts’ views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the risk free rate for that stock’s domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5ppt over the next 12
months (or 10ppt for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to
underperform its required return by at least 5ppt over the next 12 months (or 10ppt for a stock classified as Volatile*). Stocks
between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any ‘material change’ (initiation of coverage, change of
volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management
review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without
necessarily triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
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month’s average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,however, volatility has to move 2.5ppt past the 40% benchmark in either direction for a stock’s status to change.
Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target
price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and
the last 20% as Underweight. The performance horizon is two years. The notional target price was defined as the midpoint of
the analysts’ valuation for a stock.
From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which identified
themes and trends in industries, but did not make a conclusion as to the investment action that potential investors should take.
Prior to 15 November 2004, HSBC’s ratings system was based upon a two-stage recommendation structure: a combination of
the analysts’ view on the stock relative to its sector and the sector call relative to the market, together giving a view on the
stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts.For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The
target price was the level the stock should have traded at if the market accepted the analysts’ view of the stock.
Rating distribution for long-term investment opportunities
As of 19 February 2010, the distribution of all ratings published is as follows:
Overweight (Buy) 46% (12% of these provided with Investment Banking Services)
Neutral (Hold) 38% (12% of these provided with Investment Banking Services)
Underweight (Sell) 16% (11% of these provided with Investment Banking Services)
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
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HSBC & Analyst disclosuresDisclosure checklist
Company Ticker Recent price Price Date Disclosure
AXIS BANK LTD AXBK.BO 1098.50 19-Feb-2010 4, 7BANK OF BARODA BOB.NS 589.10 19-Feb-2010 6, 7CANARA BANK CNBK.BO 379.00 19-Feb-2010 6, 7HDFC HDFC.NS 2480.95 19-Feb-2010 6HDFC BANK HDBK.NS 1683.75 19-Feb-2010 4, 6, 7ICICI BANK ICBK.NS 840.05 19-Feb-2010 1, 2, 4, 5, 6, 7, 11PUNJAB NATIONAL BANK PNBK.BO 896.00 19-Feb-2010 6, 7STATE BANK OF INDIA SBI.NS 1942.40 19-Feb-2010 4, 6, 7UNION BANK OF INDIA UNBK.BO 242.75 19-Feb-2010 7
Source: HSBC
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company.
4 As of 31 January 2010 HSBC beneficially owned 1% or more of a class of common equity securities of this company.5 As of 31 December 2009, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 December 2009, this company was a client of HSBC or had during the preceding 12 month period been a clientof and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7 As of 31 December 2009, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-securities services.8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, asdetailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of thiscompany, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or insecurities in respect of this company
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 This report is dated as at 19 February 2010.2 All market data included in this report are dated as at close 17 February 2010, unless otherwise indicated in the report.3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Researchoperate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrierprocedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.4 As of 31 January 2010, HSBC beneficially owned 2% or more of a class of common equity securities of the following
company(ies) : HDFC BANK
5 As of 31 January 2010, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securitiesmanaged by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of,1% or more of the total capital of the subject companies securities in the market for the following Company(ies) : STATEBANK OF INDIA , ICICI BANK , AXIS BANK LTD , HDFC BANK
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Disclaimer
* Legal entities as at 31 January 2010
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking
Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC
Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; ‘DE’ HSBC Trinkaus &
Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets
(India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities
Egypt S.A.E., Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The
Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and
Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai BankingCorporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’
HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv,
‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC
México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. – Banco
Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited.
Issuer of report
HSBC Securities and Capital Markets
(India) Private Limited
Registered Office
52/60 Mahatma Gandhi Road
Fort, Mumbai 400 001, India
Telephone: +91 22 2267 4921
Fax: +91 22 2263 1983
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Carlo DigrandiGlobal Industry Head, FIG +44 20 7991 6843 [email protected]
Banks
EuropeRobin DownAnalyst, Global Sector Head, Banks +44 20 7991 6926 [email protected]
Matthew Czepliewicz+44 20 7991 6709 [email protected]
Peter Toeman+44 20 7991 6791 [email protected]
Dimitris Haralabopoulos+30 210 696 5214 [email protected]
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Aybek Islamov+44 20 7992 3624 [email protected]
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CEEMEALevent Bayar
+90 212 376 4617 [email protected]
Latin AmericaVictor Galliano+1 212 525 5253 [email protected]
Mariel SantiagoFinancials
+1 212 525 5418 [email protected]
AsiaTodd DunivantAnalyst, Head of Banks, Asia-Pacific +852 2996 6599 [email protected]
York Pun+852 2822 4396 [email protected]
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Insurance
EuropeKailesh MistryAnalyst, Head of European Insurance
+44 20 7991 6756 [email protected]
Dhruv Gahlaut+44 207 991 6728 [email protected]
Thomas Fossard+33 1 56 52 43 40 [email protected]
AsiaJames GarnerAnalyst, Head of Asian Insurance
+852 6394 7866 [email protected]
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Real Estate
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North AmericaVan HesserGlobal Head of Credit Research, US Banks +1 212 525 3114 [email protected]
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R. Scott FrostInsurance
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Global Financial Institution Group
Research Team