indian financials[1]

8/3/2019 Indian Financials[1]

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Sticky inflation, a long series of policy rate hikes, elevated wholesale funding rates, high commodity prices and a not-so-encouraging global economy what more could go wrong for the financials sector? Given the tough operatingenvironment, concerns have emerged around banks ability to deliver business performance in line with Streetexpectations. Also, the spectre of slippages has raised its head again as economic growth hits a roadblock. In thisbackdrop, we visit the issues that have a material bearing on financial stock valuations:# 1: A barrage of macro-economic concernshow much more to go?

# 2: Slowing growth and elevated interest rates - a red flag on asset quality?

# 3: Stress on earnings ahead?

# 4: What is the potential downside from current levels?

# 5: What is the pecking order within financials?

A deteriorating operating environment - lower NIMs, tepid credit growth and sluggish fee income - is bound to manifestas lower earnings growth for financials over the next two quarters. Besides, we see delinquencies (and thus credit costs)rising during the period, and estimate NPAs plus restructured loans in the system peaking at 7.8% in FY13 (5.8% inFY11). Reflecting these concerns, financial stocks have corrected (10-25% underperformance since Nov-10) and arenow trading at attractive valuations. PSU banks are likely to witness steeper NIM contraction and are also morevulnerable to the asset quality threat due to transfer to system-based recognition of NPAs. Private banks, on the otherhand, are in a stronger position owing to better ALMs and lower delinquencies. We believe interest rates are close topeaking out and expect the RBI to take a breather after further hike of 25-50bp in policy rates. Clarity on interest ratesshould lead to a sharp rebound in stocks. We recommend building positions in private banks ahead of their PSU peerswith ICICI Bank and IndusInd Bank as preferred picks. We would wait to enter PSU banks at lower levels post theQ1FY12 results. SBI and Bank of Baroda are our key picks among PSU banks.Comparative valuations

FY12E

Companies Recommendatio n Price Mkt cap FY11-13E earnings EPS P/E P/Adj BV RoE RoA

(Rs) (Rs bn) CAGR (%) (Rs) (x) (x) (%) (%)

ICICI Bank Outperformer 1,045 1,203 26.9 58.6 17.8 2.0 11.8 1.5

IndusInd Bank Outperformer 276 129 33.6 16.8 16.4 2.9 18.9 1.5

Bank of Baroda Outperformer 897 351 18.5 128.1 7.0 1.5 23.1 1.3

State bank of India Outperformer 2,471 1,569 39.2 189.3 13.1 1.6 17.2 0.9

Source: IDFC Securities Research

Indian FinancialsTryst with destiny

INSTITUTIONAL SECURITIES

INDIA RESEARCH FINANCIALS SECTOR UPDATE BSE SENSEX: 18436 21 JULY 2011

For Private Circulation only.Important disclosures appear at the back of this repor

SEBI Registration Nos.: INB23 12914 37, INF23 12914 37, INB01 12914 33, INF01 12914 33.

Pathik [email protected]

91-22-6622 2525

Chinmaya [email protected]

91-22-6622 2563

Kavita [email protected]

91-22-6622 2558

Kavitha [email protected]

91-22-6622 2697

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2 | JULY 11 IDFC SECURITIES

# 1: Have macro concerns peaked out?A steep rise in interest rates (~ 275bp since March 2010), project execution delays, government inaction and higher

commodity prices have forced downward adjustment in Indias economic growth expectations (consensus FY12E GDP

down from 8.4% in December 2010 to 7.8% currently). Notably, GDP growth for March 2011 came in lower at 7.8% yoy

against 8.9% in September 2010. Consider the following:

Inflation has persisted at elevated levels 9.4% yoy for June 2011

Policy rate hikes undertaken by the RBI have led to a steep rise in interest rates, especially at the short end of the

yield curve

Higher borrowing costs have led to a significant slowdown in the rate of capital formation. Gross fixed capital

formation was flat yoy as compared to a 17% yoy increase in Q1FY11

Exhibit 1: Inflation likely to stay at elevated levels in the near term before com ing off in H2FY12

(3)

-

3

6

9

12

May-0

8

Jul-08

Sep-0

8

Nov-0

8

Jan-0

9

Mar-09

May-0

9

Jul-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-10

May-1

0

Jul-10

Sep-1

0

Nov-1

0

Jan-1

1

Mar-11

May-1

1

Jul-11

Sep-1

1

Nov-1

1

Jan-1

2

Mar-12

WPI YoY %

Source: IDFC Securities Research, Office of the economic adviser

Inflation could rise further before coming offWith inflationary pressures getting broad-based and the hike in crude oil prices yet to be fully passed on, headline

inflation is likely to remain in the 9-10% range in H1FY12. With the full impact of RBI tightening taking almost four

quarters to realize, we expect the impact of past rate hikes to flow through from H2FY12. Thus, while inflation is likely to

stay high in H1FY12, we expect it to trend down to 7% by March 2012 led by lag impact of monetary policy. However,

persistently high global commodity prices pose an upside risk to our estimates.

See another 25-50bp hike in policy ratesThe RBI has indicated that tackling inflation remains its top priority even if it comes at the expense of some growth in the

short term. Post the 25bp rate hike effected in policy rates in June-11, we expect the central bank to hike rates by

another 25-50bp in FY12 and then pause until the impact of previous rate hikes flows through.




3/28


Exhibit 2: G-Sec yields hovering at 8.2-8.3%

7.0

7.4

7.8

8.2

8.6

Mar-10

Apr-10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-10

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-11

Apr-11

May-1

1

Jun-1

1

Jul-11

10 year Gsec yield (%)

Source: IDFC Securities Research and company reports

GDP growth still expected to come in at 7.8-8%Higher inflation and interest rates could likely put pressure on Indias GDP growth over the next couple of quarters.

However, an expected decline in inflation should limit further monetary tightening by the RBI and provide higher

visibility on the interest rate cycle. A stable interest rate environment and policy triggers, we believe, would kick-start

investment spend in H2FY12. While growth in FY12 is likely to be lower than the 8.5% yoy clocked in FY11, we expect

the economy to still expand at a healthy pace (in the range of 7.75-8% yoy).

Exhibit 3: We expect real GDP growth to be healthy in FY12

(0.1)

4.4

10.1

6.8

0.4

8.0

10.1

8.0

6.6

7.9

9.4

8.5

3.0

6.9

9.7

8.0

(3.0)

-

3.0

6.0

9.0

12.0

Agriculture Industry Services GDP

FY09 FY10 FY11 FY12E

(% growth)


Our view: With limited upside on inflation from the current levels and a decline likely from Nov-Dec 2011, we believe theinterest rate cycle is close to peaking out; we see another 25-50bp policy rate hike in FY12. A pause in rate hikes by the

RBI and decline in wholesale borrowing costs should lead to a sharp rebound in financial stocks.




4/28


# 2: Lower economic growth and elevated interest rates - a red flag on asset quality?Questions on asset quality have emergedSlowing economic growth and rising interest rates stoke fears pertaining to deterioration of asset quality in Indian

banks. At present, gross NPAs for the entire banking system stand at ~ 2.5% of advances and restructured portfolios

at ~ 3.3% of advances with cumulative stressed assets of 5.8%.

our analysis indicates that 17% of bank credit is vulnerableThough asset quality is under duress, we expect the deterioration to be manageable. We conclude this based on our

analysis of segmental bank credit to arrive at the banking sectors stress level. For the exercise, we have appraised

corporate and retail credit (together forming 67% of total bank credit as of FY11) in detail and also assessed the stress

in services, agriculture and NBFC segments.

Exhibit 4: Identifying the pain points

Source: RBI, Capitaline, IDFC Securities Research

We conclude that 17% of banks total outstanding debt faces stress. The screens that we have used to ascertain the

stress level capture companies with high leverage, wherein any weakness in profitability is likely to lead to defaults. Asnot all of these companies would default, we expect a limited proportion of this to slip into NPAs.

Corporate creditWe have evaluated the balance sheets of ~ 3,000 listed companies, which account for ~ 65% of bank credit to the

industry. We have screened each sector under a different criterion based on liquidity and leverage ratios. Our analysis

indicates that incidence of stress is limited to 22% of the sample debt. We note that strain is concentrated in telecom,

construction, air transport service and textiles. Also, these sectors account for a small proportion of the overall banking

credit.

Retail assetsFor retail credit, we appraise each category and base our assessment on income demographics as also the inherent

risk levels. On the hypothesis of a revival in the economy over the next 2-3 quarters, we do not expect any outsized rise

in mortgage delinquencies (~ 51% of retail credit). On the other hand, unsecured loans have been seasoned and

increasing reliance on credit bureaus should curtail defaults. Another factor that merits notice is that banks have

already provided aggressively on retail loans over the past couple of years and the incremental hit is likely to be

limited. We estimate that ~ 9% of the overall retail book may be under stress.

Agriculture

12%

Services

18%

Retail loans

18%

Industry

47%

NBFC

5% Stressed

17%

Non stressed

83%-

10.0

20.0

30.0

40.0

50.0

Industry Services Retail

loans

Agriculture NBFC

Non stressed Stressed

17.3otal bank credit9.4NBFC

20.0Agriculture

8.8Retail loans

8.5Services23.6Industry

% of credit under stress

17.3otal bank credit9.4NBFC

20.0Agriculture

8.8Retail loans

8.5Services23.6Industry

% of credit under stress




5/28


NPAs + Restructured assets to peak at 7.8% in FY13EAs not all of the stressed credit would default, we expect a proportion of this to convert into NPAs or get restructured. To

assess the impact, we use scenario analysis. In base case, we assume that ~ 50% of the stressed debt would slip into

NPAs. This scenario builds in peaking of inflation and interest rates over the next six months, led by softening of

commodity prices. Slippages (which may be in the form of either NPA recognition or restructuring) are expected to

manifest over the next two years. In that case, we see stressed loans (restructured loans + NPAs) peaking at 7.8% inFY13. In the worst case (wherein interest rates stay elevated for 18-24 months), we expect 75% of the stressed debt to

culminate into NPAs over next two years. A large proportion of this debt is likely to get restructured and associated

credit costs are expected to be negligible.

Our view: Based on our analysis,stress (NPAs + restructured loans) in the banking system could rise from the currentlevels. However, we expect a large chunk of the stress to be recognized in Q1 & Q2FY12. This would likely lead to

correction in bank stocks (especially PSU banks) as higher slippage gets priced into valuations.




6/28


# 3: Stress on earnings ahead?Near-term stress pointsFinancials earnings are likely to face multiple headwinds in H1FY12. While a higher cost of funds would dent NIMs,

slippages are likely to remain high (especially for PSU banks), accentuated by adoption of system-based recognition

of NPAs. Also, RBIs dictum of higher provisioning requirements in various buckets of NPAs would lead to elevatedprovision expenses in Q1FY12. We expect banks under our coverage to report muted earnings with a 3% yoy decline

in PAT for Q1FY12 due to higher provisions for the restructured portfolios and alignment of NPAs to RBI's recent

guidelines. PSU banks (ex-SBI) are estimated to see a 2% yoy dip, in sharp contrast to a 31% yoy rise in private banks

earnings. NBFCs are expected to record 12% yoy increase in net profit in Q1FY12.

However, earnings should revive in H2FY12 with likely stabilization in interest rates and rebound in NIMs from H1FY12

levels.

Some NIM compression aheadMost banks in our coverage universe witnessed sequentially lower margins in Q4FY11 due to higher funding costs. In

FY12, we expect margins to decline by ~ 10bp. We see private banks better placed than PSU peers (flat margins yoy

vis--vis ~ 15bp decline for PSU banks) owing to more aggressive rate hikes as also better ALM for the former. A

further increase in savings deposit rates or savings rate deregulation poses a risk to our numbers.

Exhibit 5: Margin trends FY08-12E

2.55 2.54 2.562.62 2.60

2.642.64

2.54

2.77

2.922.88

2.97

2.85

2.73

3.03

2.2

2.4

2.6

2.8

3.0

3.2

(% Margins)

All banks PSU Banks Private Banks

FY08 FY09 FY10 FY11 FY12E


Provisions to remain high in H1FY12On the asset quality front, slippages have remained elevated for PSU banks though private banks have seen a steady

improvement. We expect asset quality for PSU banks to remain under stress in H1FY12 as they transfer their loans to

system-based recognition of NPAs. While large accounts have already been transferred, small and agriculture loansare yet to be shifted. Elevated slippages and the impact of increased provisioning could result in higher provisions for

PSU banks in H1FY12. For private banks, we expect asset quality to remain strong.




7/28


Exhibit 6: Asset quality has witnessed stress


Stressed assets to rise; restructuring to curtail provisionsAccording to our analysis, we expect stressed assets (restructured + NPAs) to rise by 220bp to 7.8% by FY13. Whilethe stress would increase hereon, we expect bulk of it to be in the form of restructuring. A higher proportion of

restructured loans than NPAs would likely restrict credit costs. Consequently, we expect provisions to decline in

H2FY12. Moreover, with 70% coverage achieved, we expect FY12 provision expenses to be lower on yoy basis.

Exhibit 7: Lower provisioning costs in FY12E

0.62

0.52

0.91

0.63

0.50

1.01

0.68 0.710.61

0.520.54

0.47

-

0.3

0.6

0.9

1.2

(Provisions/ average assets %)

All banks PSUs Private Banks



Lower operating expenses to support earningsProvisions on second pension and gratuity liability had led to a steep rise in banks operating expenses in FY11. WithFY12 pension provisions likely to be lower yoy (liability pertaining to retired employees provided in FY11), we expect

only a muted rise in employee costs and overall operating expenses in FY12.

1.5

1.81.9 2.1

1.9

2.1

1.8

2.6

2.82.7

1.5

1.1

1.1

0.80.5

0.50.0

0.5

1.0

1.5

2.0

2.5

3.0

(%)(slippages of % opening advances)

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

PSU Private

2.7

0.7

1.91.9

2.4

2.0

1.5

3.6

2.3

0.6

1.1

1.9 1.8

1.2

2.22.5

3.1

1.3

2.12.3

3.73.9

2.9

1.2

-

1.1

2.2

3.3

4.4

Slippage to opening advances (%, annualized)

SBI BoB BoI PNB ALBK CBK OBC Union

Bank

Q2FY11 Q3FY11 Q4FY11




8/28


Exhibit 8: Lesser rise in operating expenses to bolster profitability

21

38

27

34

13

58

23

15

76

9

14 14

12

-

15

30

45

60

(% Rise in operating expenses)

BoB BoI Canara Bank PNB SBI Union Bank All PSU Banks

FY11 FY12E


Earnings dowgrades likely?Currently, we expect earnings growth for our banking coverage to come in at 27% in FY12. Our estimates factor in a

lower loan growth and 10-15bp decline in NIMs in FY12. Earnings would be supported by lower operating expenses and

provisions compared to the outsized levels witnessed in FY11. However, we see downside risk to our and consensusestimates from a sharper-than-expected contraction in NIMs and elevated slippages in Q1FY12.Exhibit 9: FY12 earnings expectations fo r financials

28

34

1415

12

24

18

13

33

30 3031

0

10

20

30

40

(PAT growth %)

All banks PSU banks Private Banks



Our view:Contraction in NIMs, elevated slippages and potential MTM losses in Q1FY12 ahead of market estimates could prompt earning downgrades. We expect PSU banks to see a 3% decline in PAT in Q1FY12, while private banks are

expected to see a 31% yoy rise in PAT.




9/28


# 4: Valuations: What is the potential downside from current levels?Risk-reward favorable we see limited downside riskHit by a long trail of negative news flow, the Bankex has corrected by 11% in absolute terms and underperformed the

Sensex since November 2010. Current stock prices, we believe, build in the impact of monetary tightening and slowing

GDP growth. However, further downside cannot be ruled out in the near term. The ongoing earnings season (Q1FY12)would likely be volatile, and higher delinquencies and earnings downgrades could trigger further correction in stock

prices.

Exhibit 10: Banks have underperform ed Sensex since November 2010


Valuations now at long-term averagesMost of the financials stocks are now trading at long-term averages. Notably, stocks have traded below averages only

during periods of acute economic stress. With stocks trading close to five-year average price to book values, we expect

limited downside from these levels.

Absolute performance %since Nov-10

(40.0) (30.0) (20.0) (10.0) - 10.0

OBC

Corp Bank

CBK

SBI

Indian Bank

Union Bank

ING Vysya

ALBK

BoI

AxisB

ICICIB

BoB

PNB

Yes Bank

IIB

HDFCB

Relative performance %since Nov-10

(30.0) (15.0) - 15.0 30.0

OBC

Corp Bank

CBK

SBI

Indian Bank

Union Bank

ING VysyaALBK

BoI

AxisB

ICICIB

BoB

PNB

Yes Bank

IIB

HDFCB




10/28


Exhibit 11: Current valuations at long-term averages

Source: Bloomberg, company reports

Our view: We believe that current stock prices factor in the inherent interest rate and credit risk. We expect valuations torebound on first signs of the interest rate cycle peaking out. We recommend building positions in private banks first. We

would wait to enter PSU banks at lower levels, post the declaration of Q1FY12 results.

0.0

1.5

3.0

4.5

6.0

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

HDFC BanK (P/B 1yr forward) Long term average

0.0

0.8

1.6

2.4

3.2

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

ICICI Bank (P/B 1yr forward) Long term average

0.0

1.1

2.2

3.3

4.4

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

Axis Bank (P/B 1yr forward) Long term average

0.0

0.6

1.2

1.8

2.4

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

ING Vysya Bank (P/B 1yr forward) Long term average

0.0

0.8

1.6

2.4

3.2

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

SBI (P/B 1yr forward) Long term average

0.0

1.0

2.0

3.0

4.0

5.0

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

Yes Bank (P/B 1yr forward) Long term average




11/28


# 5: What is the pecking order in financials?

Private banks preferred picks; add weight ahead of PSUs

Our long-term outlook on the sector remains positive and we see a steep rebound in banking stocks ahead as

uncertainty dissipates on the macroeconomic environment. However, we recommend building positions in private

banks ahead of PSU peers, as the near-term performance of the latter could get clouded by inflation and asset quality

concerns. We recommend adding positions to PSU banks selectively on declines, as visibility on interest rates emerges.

PSU banks stock performance and earnings have displayed higher sensitivity to interest rates vis--vis private

peers. Private banks have exhibited lower earnings volatility, which cushions their multiples.

Private banks have displayed better performance than PSU peers in terms of asset quality. We expect PSU banks

delinquencies to remain elevated for another two quarters before coming down in H2FY12.

Exhibit 12: Current valuations offer attractive entry points


Our view:ICICI Bank and IndusInd Bank among private banks, and SBI and BoB among PSU banks are our preferredpicks in the financials space. We believe these banks offer higher earnings visibility, improving profitability and also

attractive valuations.

1.41.82.26.58.511.325.423.721.932.227551Shriram City Union Finance

2.02.43.17.79.612.628.828.828.128.0155684Shri Ram Transport

1.31.51.76.27.38.622.522.021.518.1221224Rural Electrification

-1.41.6-7.39.3-20.217.723.7244213Power Finance

1.11.31.76.010.08.119.516.926.416.81076Magma Fincorp

1.92.32.89.612.115.722.921.922.028.173700Mah & Mah Finance

1.62.02.46.68.610.627.125.925.826.5103217LIC Housing Finance

4.55.25.920.624.428.623.522.621.718.01,023697HDFC

1.41.62.06.17.810.824.322.919.732.527726Bajaj Auto Finance

NBFCs

1.92.42.98.511.215.225.023.521.133.6111319Yes Bank

2.42.93.412.516.422.321.218.919.333.6129276Indusind Bank

1.92.02.214.517.823.413.411.89.726.91,2031,045ICICI Bank

3.43.94.617.823.029.620.618.616.729.01,170503HDFC Bank

1.92.32.79.311.815.222.521.219.327.75181,263Axis Bank

Pvt Banks

1.01.21.54.65.47.523.223.621.027.8156297Union Bank of India

1.41.62.09.813.119.019.817.212.639.21,5692,471State Bank of India

1.21.51.95.66.98.324.024.024.521.63681,160Punjab National Bank

0.70.91.04.55.515.416.815.76.885.9102348Oriental Bank of Commerce

0.91.11.24.35.25.823.723.922.316.499231Indian Bank

0.80.91.14.04.75.421.421.321.916.878526Corporation Bank

0.91.11.43.94.75.824.024.826.422.1233526Canara Bank

1.01.21.55.57.19.020.218.717.827.2223408Bank of India

1.21.51.85.97.08.322.823.125.518.5351897Bank of Baroda

0.91.11.34.35.36.822.521.921.024.697203Allahabad Bank

PSU BanksFY13EFY12EFY11FY13EFY12EFY11FY13EFY12EFY11FY11-FY13(Rs bn)20

th

July 2011

P/Adj. Book ValuePE (x)RoE (%)2yr EPS cagrMkt CapPrice

1.41.82.26.58.511.325.423.721.932.227551Shriram City Union Finance

2.02.43.17.79.612.628.828.828.128.0155684Shri Ram Transport

1.31.51.76.27.38.622.522.021.518.1221224Rural Electrification

-1.41.6-7.39.3-20.217.723.7244213Power Finance

1.11.31.76.010.08.119.516.926.416.81076Magma Fincorp

1.92.32.89.612.115.722.921.922.028.173700Mah & Mah Finance

1.62.02.46.68.610.627.125.925.826.5103217LIC Housing Finance

4.55.25.920.624.428.623.522.621.718.01,023697HDFC

1.41.62.06.17.810.824.322.919.732.527726Bajaj Auto Finance

NBFCs

1.92.42.98.511.215.225.023.521.133.6111319Yes Bank

2.42.93.412.516.422.321.218.919.333.6129276Indusind Bank

1.92.02.214.517.823.413.411.89.726.91,2031,045ICICI Bank

3.43.94.617.823.029.620.618.616.729.01,170503HDFC Bank

1.92.32.79.311.815.222.521.219.327.75181,263Axis Bank

Pvt Banks

1.01.21.54.65.47.523.223.621.027.8156297Union Bank of India

1.41.62.09.813.119.019.817.212.639.21,5692,471State Bank of India

1.21.51.95.66.98.324.024.024.521.63681,160Punjab National Bank

0.70.91.04.55.515.416.815.76.885.9102348Oriental Bank of Commerce

0.91.11.24.35.25.823.723.922.316.499231Indian Bank

0.80.91.14.04.75.421.421.321.916.878526Corporation Bank

0.91.11.43.94.75.824.024.826.422.1233526Canara Bank

1.01.21.55.57.19.020.218.717.827.2223408Bank of India

1.21.51.85.97.08.322.823.125.518.5351897Bank of Baroda

0.91.11.34.35.36.822.521.921.024.697203Allahabad Bank

PSU BanksFY13EFY12EFY11FY13EFY12EFY11FY13EFY12EFY11FY11-FY13(Rs bn)20

th

July 2011

P/Adj. Book ValuePE (x)RoE (%)2yr EPS cagrMkt CapPrice




12/28


Append ix 1.1: Q1FY12 earnings expectations

Seasonal moderation in credit growth but deposit mobilization expected to be robust Higher term deposit costs, increased savings rate and higher CD ratio would result in qoq decline in NIMs;margins could come off by 20-30bp qoq for PSU banks and ~ 15bp for private banks Growth in other income to be muted on a higher base; led by elevated G-Sec yields, PSU banks more vulnerableto report higher MTM losses Divergent trends in asset quality for PSU and private banks; slippages unlikely to decline materially from the levelswitnessed in H1FY11 for PSU banks We estimate a 3% yoy decline in PAT for our coverage universe; PSU banks a drag on the sector while we expecta strong 31% yoy growth in earnings of private banksPrivate banks to outshine PSU peers

We expect banks under our coverage to report a 3% yoy decline in PAT for Q1FY12, dented by higher provisions for

restructured portfolios and on alignment of NPAs to RBI's recent guidelines. PSU banks (ex-SBI) are expected to see a

2% yoy dip, in sharp contrast to a 31% yoy rise in private banks earnings. NBFCs are expected to record a 12% yoy

increase in net profit in Q1FY12.

Exhibit 13: Earnings expectation for our coverage universe

PAT Q1FY11 Q4FY11 Q1FY12E yoy grow th/change qoq grow th/change

Allahabad Bank 3,471 2,576 3,547 2 38

Axis Bank 7,419 10,201 9,313 26 (9)

Bajaj Auto Finance 468 710 645 38 (9)

Bank of Baroda 8,592 12,944 10,009 17 (23)

Bank of India 7,251 4,936 6,461 (11) 31

Canara Bank 10,126 8,989 9,390 (7) 5

Corporation Bank 3,330 3,453 3,277 (2) (5)HDFC 6,946 11,420 8,304 20 (27)

HDFC Bank 8,117 11,147 10,513 30 (6)

ICICI Bank 10,260 14,521 13,673 33 (6)

Indian Bank 3,682 4,389 4,143 13 (6)

IndusInd Bank 1,186 1,718 1,775 50 3

LIC Housing Finance 2,120 3,148 2,705 28 (14)

Magma Fincorp 182 449 200 10 (55)

MMFS 742 1,566 939 27 (40)

OBC 3,633 3,337 3,230 (11) (3)

PFC 6,529 6,067 6,265 (4) 3

PNB 10,683 12,008 10,911 2 (9)

REC 5,874 7,003 6,763 15 (3)

Shri Ram Transport 2,889 3,406 3,506 21 3Shriram City Union Finance 491 772 790 61 2

State Bank of India 29,142 209 17,910 (39) 8,482

Union Bank 6,012 5,976 4,732 (21) (21)

Yes Bank 1,564 2,034 2,105 35 4

All Banks# 115,217 99,462 111,974 (3) 13

Private Banks 29,296 40,646 38,365 31 (6)

PSU Banks 85,921 58,816 73,609 (14) 25

NBFCs 29,692 37,428 33,147 12 (11)

PSU Banks - ex SBI 56,779 58,607 55,699 (2) (5)

Source: IDFC Securities Research and companies; #Bajaj Auto Fin, HDFC Bank, HDFC, IndusInd Bank, LIC HF, Magma Fincorp & Yes bank have reported nos.




13/28


NIMs likely to come off by 20-25bpWe expect a margin squeeze of 20-25bp qoq across banks owing to the impact of higher savings rate (effective for

two months) and the full impact of higher term deposit costs. The impact will be mitigated by higher loan yields owing

to PLR and base rate increases as the full effect of the policy rate hikes in May and June 2011 flows through. While

public banks are expected to see a 25-30bp sequential contraction in NIMs, private banks are likely to see a 15-20bp

decline. NBFCs are estimated to report a NIM decline of ~ 20bp yoy. However, lower wholesale borrowing costs seenin Q1FY12 would likely alleviate the margin stress over the next couple of quarters.

Exhibit 14: NIMs to compress

NIMs Q1FY11 Q4FY11 Q1FY12E yoy change (bps) qoq change (bps)

Allahabad Bank 2.77 3.17 2.87 10 (30)

Axis Bank 3.27 3.03 2.90 (37) (13)

Bajaj Auto Finance 16.76 13.42 12.50 (25) (7)

Bank of Baroda 2.58 2.76 2.55 (3) (21)

Bank of India 2.51 2.84 2.57 6 (27)

Canara Bank 2.60 2.49 2.38 (22) (11)

Corporation Bank 2.48 2.74 2.35 (13) (39)

HDFC 3.15 4.06 3.25 10 (81)HDFC Bank 4.22 4.31 4.11 (10) (19)

ICICI Bank 2.19 2.51 2.35 16 (16)

Indian Bank 3.59 3.74 3.50 (9) (24)

IndusInd Bank 3.34 3.56 3.45 11 (11)

LIC Housing Finance 2.96 3.30 3.05 9 (25)

Magma Fincorp 7.79 11.99 7.00 (10) (42)

MMFS 11.08 12.14 9.70 (138) (244)

OBC 3.05 2.62 2.52 (53) (10)

PFC 3.91 3.24 3.15 (76) (9)

PNB 3.45 3.36 3.20 (25) (16)

Shri Ram Transport 11.51 11.58 11.90 39 32

Shriram City Union Finance 10.88 11.94 11.45 57 (49)

State Bank of India 2.72 2.62 2.75 3 13

Union Bank 2.74 3.04 2.80 6 (24)

Yes Bank 2.71 2.51 2.49 (22) (2)

All Banks# 2.90 2.99 2.83 (7) (16)

Private Banks 3.00 3.14 3.00 (0) (14)

PSU Banks 2.85 2.94 2.75 (10) (19)

NBFCs 6.86 7.22 6.67 (19) (55)


Lackluster NII growth aheadBank credit has witnessed a seasonal sluggishness, clocking a 1.9% YTD rise yoy (RBI data dated 1 July 2011). Deposit

flows gained pace during Q1FY12, with a 3% qoq rise till 1 July 2011 leading to a low incremental CD ratio of ~ 45%. In

line with the industry, we expect credit for banks in our coverage universe to grow at a sedate pace. Modest businessvolumes, coupled with lower margins, are likely to depress NII growth to 20% for our coverage universe (0.8% qoq). We

expect PSU banks NII to increase by 18% yoy in Q1FY12 (0.7% qoq). Private banks are expected to report stronger

growth of 22% yoy (1.2% qoq).




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Exhibit 15: NII growth

Net Interest Income Q1FY11 Q4FY11 Q1FY12E yoy grow th qoq grow th

Allahabad Bank 8,503 11,513 10,947 28.7 (4.9)

Axis Bank 15,138 17,010 17,864 18.0 5.0

Bajaj Auto Finance 2,229 2,709 2,891 29.7 6.7

Bank of Baroda 18,580 26,139 23,244 25.1 (11.1)Bank of India 17,405 23,073 22,673 30.3 (1.7)

Canara Bank 17,270 19,729 20,198 17.0 2.4

Corporation Bank 6,976 7,618 8,620 23.6 13.2

HDFC 9,353 13,709 11,483 22.8 (16.2)

HDFC Bank 24,011 28,395 29,140 21.4 2.6

ICICI Bank 19,911 25,097 24,016 20.6 (4.3)

Indian Bank 9,266 11,110 10,782 16.4 (3.0)

IndusInd Bank 2,957 3,881 3,959 33.9 2.0

LIC Housing Finance 2,943 4,204 3,863 31.2 (8.1)

Magma Fincorp 902 1,633 1,043 15.6 (36.1)

MMFS 2,609 3,960 3,404 30.5 (14.0)

OBC 10,572 10,133 10,235 (3.2) 1.0

PFC 8,580 8,267 8,932 4.1 8.0

PNB 26,186 30,290 30,708 17.3 1.4

REC 7,758 8,538 8,849 14.1 3.6

Shri Ram Transport 7,306 8,118 8,308 13.7 2.3

Shriram City Union Finance 1,665 2,483 2,659 59.7 7.1

State Bank of India 73,037 80,581 84,998 16.4 5.5

Union Bank 13,478 17,165 16,645 23.5 (3.0)

Yes Bank 2,621 3,485 3,735 42.5 7.2

All Banks# 268,776 318,806 321,458 19.6 0.8

Private Banks 67,502 81,455 82,408 22.1 1.2

PSU Banks 201,274 237,351 239,050 18.8 0.7

NBFCs 43,346 53,620 51,430 18.7 (4.1)

PSU Banks - ex SBI 128,237 156,770 154,052 20.1 (1.7)


Credit costs to remain elevated for PSU banksThe divergent trends in asset quality of PSU and private banks witnessed over the past fiscal are likely to persist in

Q1FY12 as well. PSU banks could see slippages similar to Q4FY11 levels due to migration to system-based recognition

of NPAs as well as continued stress in SME loan portfolio. The migration is expected be completed by September 2011.

Provisions would remain high as banks will be required to make provisions for revised guidelines on NPAs and

restructured loans. Therefore, we continue to build in high credit costs for PSU banks, similar to the levels witnessed in

Q4FY11. For private banks, we expect the pace of NPA accretion to remain low.




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Exhibit 16: Credit cost esti mates

Provis ions Q1FY11 Q4FY11 Q1FY12E yoy grow th/change qoq grow th/change

Allahabad Bank 1,511 4,655 2,861 89.4 (38.5)

Axis Bank 3,330 2,544 2,795 (16.1) 9.9

Bajaj Auto Finance 606 377 463 (23.6) 22.9

Bank of Baroda 2,513 5,904 4,000 59.2 (32.3)Bank of India 3,859 4,776 6,264 62.3 31.1

Canara Bank 2,200 5,460 3,480 58.2 (36.3)

Corporation Bank 1,266 2,695 2,500 97.5 (7.2)

Dhanlaxmi Bank 20 95 161 693.5 69.6

HDFC 150 250 120 (20.0) (52.0)

HDFC Bank 5,550 4,313 5,051 (9.0) 17.1

ICICI Bank 7,978 3,836 4,394 (44.9) 14.6

Indian Bank 3,439 1,268 2,200 (36.0) 73.5

IndusInd Bank 487 403 516 5.9 28.3

LIC Housing Finance 89 189 150 67.8 (20.5)

Magma Fincorp 99 139 74 (24.6) (46.5)

MMFS 543 115 600 10.5 420.8

OBC 2,280 5,605 3,100 36.0 (44.7)

PNB 5,341 7,279 7,869 47.3 8.1

REC - 1 15 NM NM

Shri Ram Transport 1,281 1,216 1,350 5.4 11.0

State Bank of India 15,514 41,570 41,726 169.0 0.4

Union Bank of India 1,973 1,533 5,053 156.1 229.7

Yes Bank 126 433 270 115.0 (37.6)

All Banks# 58,432 92,788 92,952 59.1 0.2

Private Banks 17,931 11,666 13,437 (25.1) 15.2

PSU Banks 40,501 81,122 79,514 96.3 (2.0)

NBFCs 2,063 1,771 2,235 8.3 26.2


Other income to be muted on a high baseWe expect overall non-interest income to increase by 9% yoy for our coverage universe. Fee income is likely to remain

moderate owing to seasonality as well as lower credit offtake. Non-fund based income could get further impacted by

mark-to-market losses on the investment books. G-Sec yields have remained elevated in the range of 8-8.5%

throughout the quarter as the RBI hiked rates by 75bp and inflation stayed high. Trading opportunities have also been

limited during the quarter.




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Exhibit 17: Non-fund revenues

Other Income Q1FY11 Q4FY11 Q1FY12E yoy growt h qoq grow th

Allahabad Bank 2,986 4,695 2,703 (9.5) (42.4)

Axis Bank 10,008 14,504 12,488 24.8 (13.9)

Bajaj Auto Finance 11 53 60 445.5 13.0

Bank of Baroda 6,172 8,345 6,723 8.9 (19.4)Bank of India 5,859 8,231 6,147 4.9 (25.3)

Canara Bank 7,340 9,328 6,475 (11.8) (30.6)

Corporation Bank 2,661 4,904 2,964 11.4 (39.6)

Dhanlaxmi Bank 305 461 397 30.0 (13.9)

HDFC 623 2,840 1,650 164.9 (41.9)

HDFC Bank Ltd 9,399 12,558 11,071 17.8 (11.8)

ICICI Bank Ltd 16,805 16,407 16,891 0.5 3.0

Indian Bank 3,555 2,716 2,838 (20.2) 4.5

IndusInd Bank 1,610 1,816 2,042 26.8 12.4

LIC Housing Finance 434 982 500 15.3 (49.1)

Magma Fincorp 159 113 167 5.0 47.9

MMFS 90 107 90 (0.2) (15.7)

OBC 2,147 2,998 2,405 12.0 (19.8)

PFC 650 61 100 (84.6) 64.8

PNB 8,715 11,454 9,231 5.9 (19.4)

REC 517 1,483 700 35.4 -52.8

Shri Ram Transport 67 174 250 270.9 44.0

Shriram City Union Finance 13 14 10 (22.3) (28.3)

State Bank of India 36,900 48,155 42,185 14.3 (12.4)

Union Bank of India 4,350 6,006 4,050 (6.9) (32.6)

Yes Bank 1,438 1,868 1,675 16.4 (10.3)

All Banks# 121,504 156,204 131,848 8.5 (15.6)

Private Banks 40,809 49,319 46,068 12.9 (6.6)

PSU Banks 80,695 106,885 85,780 6.3 (19.7)

NBFCs 2,394 5,660 3,300 37.8 (41.7)





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19/28


Key valuation metrics

Year to 31 March 2009 2010 2011 2012E 2013E

Net profit (Rs m) 37,581 40,250 51,513 67,422 82,903

yoy growth (%) (9.6) 7.1 28.0 30.9 23.0

Shares in issue (m) 1,113 1,115 1,152 1,152 1,152EPS (Rs) 33.8 36.1 44.7 58.5 72.0

EPS growth (%) (9.7) 6.9 23.9 30.9 23.0

PE (x) 31.5 29.4 23.7 18.1 14.8

Book value (Rs/share) 444.9 463.0 478.3 516.3 563.1

P/ Book (x) 2.39 2.29 2.22 2.06 1.89

RoAE (%) 7.8 8.0 9.7 11.8 13.3

Price performance

Bloomberg: ICICIBC IN 6m avg daily vol. (m): 4.08

1-yr High/ Low (Rs): 1279/883 Free Float (%): 100

Backed by a strong liability franchise, ICICI Bank is set to deliver growth with profitability. Consistent delivery onits business plan has paid off, with earnings quality improving significantly in FY11. Fee income has seen tractionand CASA has grown, aided by an expanded distribution network. Hereon, margins are likely to improve drivenby a changing asset mix and strong liability profile (CASA at 45%). We expect strong loan growth, marginexpansion and low credit costs to drive a 27% CAGR in earnings over FY11-13. We see a 350bp rise in corebusiness RoE to ~ 15% over FY11-13. This, we believe, would drive a structural re-rating of the stock from 1.7xFY12E core book currently to 2.5x. Reiterate Outperformer with a 12- month price target of Rs1,450 (includingRs215/ share for non-banking investments).Profitable growth takes centrestage: We see ICICI Banks loan growth being spearheaded by the corporatesegment (34% CAGR over FY11-13E). On the retail portfolio, the bank has redrawn its strategy to focus on the

collateralized segment and loan rates have been aligned to the market. We expect the bank to maintain a

cautious stance on the international book and proportion of the same in overall book to come off. A prudent shift

towards retail liabilities, selective asset growth and softer borrowing costs should drive ~ 30bp expansion in

margins over FY11-13.

Banking return ratios to expand: With lower delinquencies, negligible unsecured loans and a coverage ratio of70%+ , we expect the banks provisioning costs to decline sharply. This, we believe, would be a key driver of

earnings. Fee income would inch up, led by improved credit offtake, revival in corporate activity and a pick-up in

third-party distribution. With all operating metrics falling in line, we see a strong 27% CAGR in earnings for ICICI

Bank over FY11-13 and a marked expansion in core banking return ratios.

and drive a re-rating of the core business: We expect RoE of the banking business to rise from 11.5% in FY11to ~ 15% by FY13. Core RoA is expected to inch up to 1.6% by FY13, which compares favorably with best-in-

class peers. Currently, the stock trades at a deep discount to HDFC Bank and Axis Bank. However, we expect

the valuation gap with peers to close on account of higher visibility on profitability. This, we believe, would drive a

re-rating of the core business from 1.7x FY12E book currently to 2.5x book.

90

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ICICI Bank Sensex

OUTPERFORMER

ICICI BankProfitability with growth Rs1045

Mkt Cap: Rs1203bn; US$27.1bn

INDIA RESEARCH COMPANY UPDATE BSE SENSEX: 18436 21 JULY 2011

For Private Circulation only.Important disclosures appear at theback of this report

Pathik [email protected] 2525

Chinmaya [email protected] 2563

Kavita [email protected] 2558

Kavitha [email protected] 2697




20/28


Income statement

Year to 31 Mar (Rs m) FY09 FY10 FY11 FY12E FY13E

Net interest income 83,666 81,144 90,169 110,303 135,312

yoy growth (%) 14.5 (3.0) 11.1 22.3 22.7

Other income 76,037 74,777 66,479 80,775 93,373

yoy growth (%) (13.7) (1.7) (11.1) 21.5 15.6

Trading profits 4,430 11,810 -2,150 3,000 4,500

Non trading income 71,607 62,967 68,629 77,775 88,873

Net revenue 159,703 155,920 156,648 191,079 228,685

yoy growth (%) (0.9) (2.4) 0.5 22.0 19.7

Operating expenses 70,451 58,598 66,173 77,395 89,762

yoy growth (%) (13.6) (16.8) 12.9 17.0 16.0

Operating profit 89,252 97,322 90,475 113,684 138,923

yoy growth (%) 12.1 9.0 (7.0) 25.7 22.2

Provisions 38,083 43,869 22,868 20,688 24,573

of which NPA provs 37,690 43,622 19,769 18,949 22,581

PBT 51,170 53,453 67,607 92,995 114,350

yoy growth (%) 1.2 4.5 26.5 37.6 23.0

Provision for tax 13,588 13,203 16,093 25,574 31,446

PAT 37,581 40,250 51,513 67,422 82,903

yoy growth (%) (9.6) 7.1 28.0 30.9 23.0

Balance sheet

As on 31 Mar (Rs m) FY09 FY10 FY11 FY12E FY13E

Advances 2,183,108 1,812,056 2,163,659 2,573,543 3,071,651

yoy growth (%) (3.2) (17.0) 19.4 18.9 19.4

Customer assets 2,405,798 2,155,788 2,682,056 3,156,598 3,731,692

yoy growth (%) (2.9) (10.4) 24.4 17.7 18.2

SLR portfolio 633,868 684,036 641,613 787,605 929,649

Cash & bank balances 299,666 388,737 340,901 379,526 445,643

Total assets 3,793,010 3,633,997 4,062,337 4,744,080 5,570,532

Networth 495,330 516,184 550,906 594,731 648,618

Deposits 2,183,478 2,020,166 2,256,021 2,749,943 3,271,501

yoy growth (%) -10.7 -7.5 11.7 21.9 19.0

- Current % 9.9% 15.3% 15.4% 14.0% 14.0%

- Savings % 18.8% 26.3% 29.6% 29.0% 29.0%

- Term % 71.3% 58.3% 54.9% 57.0% 57.0%

Borrowings 928,055 939,136 1,092,043 1,188,084 1,376,744

Ratio analysis

Year to 31 Mar FY09 FY10 FY11 FY12E FY13E

Net int. margin/avg assets 2.15 2.19 2.34 2.51 2.62

Non-fund rev./avg assets 2.0 2.0 1.7 1.8 1.8

Operating exp./avg assets 1.8 1.6 1.72 1.76 1.74

Cost/Income 44.1 37.6 42.2 40.5 39.3

Prov./avg customer assets 1.5 1.9 0.8 0.6 0.7PBT/Average assets 1.3 1.4 1.8 2.1 2.2

RoA 0.96 1.08 1.34 1.5 1.6

RoE 7.8 8.0 9.7 11.8 13.3

Tax/PBT 26.6 24.7 23.8 27.5 27.5

Tier I Capital adequacy 11.8 14.0 13.2 12.4 11.7

Gross NPA 4.3 5.1 4.5 4.7 4.7

Net NPA 2.1 2.2 1.1 1.2 1.1

Provisioning coverage 52.1 58.9 76.0 75.9 78.3

Growth in customer assets (2.9) (10.4) 24.4 17.7 18.2

Growth in deposits (10.7) (7.5) 11.7 21.9 19.0

SLR ratio 20.4 23.1 19.2 20.0 20.0

CASA ratio 28.7 41.7 45.1 43.0 43.0

Shareholding pattern

Foreign

66.5%

Institutions

24.0%

Non Promoter

Corporate Holding

3.9%

Public &

Others

5.5%

As of March 2011




21/28


IndusInd Bank (IndusInd) has taken the next stride towards the big league. Having meticulously executed abusiness plan to drive a marked improvement in operating metrics, IndusInd is now working to accelerate loangrowth (31% CAGR over FY11-13E) and grow profitably. The bank is a dominant player in the vehicle financeindustry. Besides, presence in rural and semi-urban locations allows it to generate attractive yields of ~ 16%.Integrated sales and collection efforts have ensured profitable operations in a difficult market. Rising margins,strong fee income, improving operating leverage and lower credit costs should drive RoA expansion to ~ 1.55%by FY13E. We expect improvement in profitability and strong earnings momentum to drive stock performance. Atvaluations of 3.0x FY12E adjusted book, we reiterate Outperformerwith a 12-month price target of Rs375 (3.2xFY13E adjusted book).Execution par excellence: The strong management has steered a turnaround at IndusInd. The bank hasdelineated and delivered consistent improvement in each operating metric. NIMs surged by ~ 200bp from FY08

to 3.4% in FY11, while the ratio of fee income to assets has grown to 1.8% and cost efficiency has improved

(cost/ income down from 67% to 48%). These factors have resulted in a stellar ~ 110bp expansion in RoA to 1.4%

in FY11.

Scale with profitability: IndusInd plans to scale up its branch network from 300 to ~ 750 by FY13. Focus onextracting efficiencies from the franchise would accelerate CASA deposit flow (~ 31.5% by FY13E), leading to

expansion in NIMs to 3.5%. With a favorable liability base and strong distribution network, the bank is well placed

to achieve ~ 31% CAGR in advances over FY11-13E. Rising margins, increasing efficiency and lower provisioning

costs are expected to drive a 34% CAGR in PAT over FY11-13E.

Emerging as a best-in-class franchise; reiterate Outperformer: Despite improving branch efficiency for the pasttwo years, it still lags that of peers by a wide margin. We see this untapped opportunity driving a sustainable RoA

of 1.5%+ . We expect stock returns to outpace growth in assets. At valuations of 3.0x FY12E adjusted book, we

reiterate Outperformer. Execution of the liability strategy remains a monitorable in view of high interest rates and

intense competition for CASA deposits.


As on 31 March FY09 FY10 FY11 FY12E FY13E

Net profit (Rs m) 1,483 3,503 5,773 7,823 10,306

yoy growth 97.7 136.1 64.8 35.5 31.7

Shares in issue (mn) 355.2 410.6 466.0 466.0 466.0

EPS (Rs) 4.4 9.0 12.4 16.8 22.1

EPS growth (%) 87.4 104.8 37.6 35.5 31.7

PE (x) 63.7 31.1 22.6 17.1 13.0

Adjusted Book value (Rs/share) 37 52 82 97 116

P/ Adj Book (x) 7.5 5.4 3.4 3.0 2.5

RONW (%) 11.7 19.5 19.3 18.9 21.2

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Indusind Bank Sensex

Price performance

Bloomberg: IIB IN 6m avg daily vol. (m): 1.03

1-yr High/ Low (Rs): 309/181 Free Float (%): 80.4

OUTPERFORMER

IndusInd BankInto the next orbit Rs276

Mkt Cap: Rs128.6bn; US$2.9bn










22/28


Income statement



yoy growth (%) 52.6 93.1 55.3 25.0 36.0

Other income 4,563 5,535 7,137 9,624 11,781

yoy growth (%) 53.3 21.3 28.9 34.9 22.4Trading profits 1,216 1,110 404 1,000 1,000


Net revenue 9,153 14,399 20,902 26,837 35,191

yoy growth (%) 53.0 57.3 45.2 28.4 31.1


yoy growth (%) 36.0 34.5 37.0 26.0 25.5


yoy growth (%) 87.7 91.1 53.7 30.6 36.2

Provisions 1,408 1,708 2,019 2,278 3,628

of which NPA provisions 1,253 1,313 1,577 1,634 2,921

PBT 2,275 5,331 8,798 11,853 15,615

yoy growth (%) 99.1 134.3 65.0 34.7 31.7

Provision for tax 792 1,827 3,025 4,030 5,309

PAT 1,483 3,503 5,773 7,823 10,306

yoy growth (%) 97.7 136.1 64.8 35.5 31.7

Balance sheet


Advances 157,706 205,506 261,656 347,774 449,723

yoy growth (%) 23.3 30.3 27.3 32.9 29.3

Customer assets 158,630 206,262 279,776 372,235 481,522

yoy growth (%) 23.5 30.0 35.6 33.0 29.4

SLR portfolio 62,981 85,251 100,219 112,159 150,643


Total assets 276,147 353,695 456,358 580,522 751,194

Networth 14,276 21,656 38,249 44,427 52,672

Deposits 221,103 267,102 343,654 448,635 602,572

- Current % 13.4 16.5 18.3 20.0 21.0

- Savings % 5.9 7.2 8.9 9.5 10.5

- Term % 80.8 76.3 72.8 70.5 68.5

Borrowings 28,170 49,343 55,254 62,326 67,384

Ratio analysis





Cost/Income 59.8 51.1 48.2 47.3 45.3Prov./avg assets 0.6 0.5 0.5 0.4 0.5

PBT/Average assets 0.9 1.7 2.2 2.3 2.3

RoA 0.6 1.1 1.43 1.51 1.55

RoE 11.7 19.5 19.3 18.9 21.2

Tax/PBT 34.8 34.3 34.4 34.0 34.0


Gross NPA 1.6 1.2 1.0 1.2 1.6

Net NPA 1.1 0.5 0.3 0.2 0.2


Growth in customer assets 23.5 30.0 35.6 33.0 29.4

Growth in deposits 16.1 20.8 28.7 30.5 34.3

SLR ratio 28.5 31.9 29.2 25.0 25.0

CASA ratio 19.2 23.7 27.2 29.5 31.5


Foreign

51.1%

Promoters

19.5%

Institutions

8.3%

Non PromoterCorporate

Holding11.2%

Public &

Others

9.9%

As of March 2011




23/28


Bank of Baroda (BoB) has consistently delivered across all operating metrics, with i) a decline in costs-to-assetsratio, resulting in high operating efficiency; ii) higher contribution of fee income; iii) expansion in margins; and iv)an all-round improvement in asset quality. Consequently, RoE has structurally improved to 26% in FY11 from13% in FY07 and RoA has expanded by 50bp to 1.3% over FY07-11. With a strong management team and focuson achieving sustainable and profitable growth, BoB has established itself as a premium PSU bank. Goingforward, we believe BoBs above-industry loan growth of ~ 22% and firm focus on quality will drive 18% CAGR inPAT over FY11-13E. We believe the bank deserves to trade at a premium to peers given strong return ratios (23%RoE and 1.2% of RoA in FY11-13) and consistently high earnings. Attractive valuations of 1.4x FY12E P/BVprovide a good entry point. Reiterate Outperformer with a 12-month price target of Rs1,250 (~ 2.0x FY12Eadjusted P/BV).Consistent growth with robust NIMs: Over the past three years, BoB has firmly established itself as a topperformer across operating metrics (asset quality, margins, coverage and overall profitability). De-emphasizing

bulk deposits, stable CASA ratio of 34% and healthy international margins have helped BoB expand margins to

3.4% by Q4FY11. We expect steady loan growth of 22%, albeit a limited decline in margins (~ 10bp; lower than

peers), to lead 22% CAGR in NII over FY11-13.

Asset quality one of the best among PSU Banks: BoB scores very high on asset quality among PSU banks,evident in its low gross NPAs and slippages of 1.0-1.1% over the past two years. While slippages have increased

in Q4FY11, the rise has been below that of peers. With coverage ratio at a high 86% and minimal exposure to the

recent concerns on disseminating sectors (MFI, telecom and real estate), we expect a moderate rise in BoBs

provisioning expenses. We expect the ratio of provisions to average assets to decline to 0.3% from 0.4% in FY11.

Attractive valuations; reiterate Outperformer: We expect BoBs improving operating metrics, strong managementand balance sheet strength to drive a consistent earnings growth of 20-25% yoy over the next few quarters.

BoBs return ratios would remain stable at elevated levels RoA of 1.2% and RoE of 23% over FY11-13E. This

should drive stock performance going forward.Attractive valuations of 1.4x FY12E P/BV provide a good entrypoint. Reiterate Outperformer with a 12-month price target of Rs1,250.

OUTPERFORMER

Bank of BarodaConsistent performer Rs897





Net profit (Rs m) 22,272 30,583 42,417 50,168 59,524

yoy growth (%) 55.1 37.3 38.7 18.3 18.6

Shares in issue (m) 364 364 392 392 392

EPS (Rs) 61.1 84.0 108.3 128.1 152.0

EPS growth (%) 55.1 37.3 29.0 18.3 18.6

PE (x) 14.7 10.7 8.3 6.7 5.6

Adj. Book value (Rs/share) 315.4 376.8 507.1 618.3 743.6

P/ Adj. Book (x) 2.8 2.4 1.8 1.4 1.2

RoAE (%) 21.3 24.5 25.5 23.1 22.8

90

105

120

135

150

Jul-10

Aug-1

0

Sep-1

0

Oc

t-10

Nov-1

0

Dec-1

0

Jan-1

1

Fe

b-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Bank of Baroda Sensex

Price performance

Bloomberg: BOB IN 6m avg daily vol. (m): 0.41










24/28


Income statement



yoy growth (%) 31.0 15.9 44.0 23.9 20.1

Other income 27,577 27,249 28,092 31,639 35,837

yoy growth (%) 34.5 (1.2) 3.1 12.6 13.3Trading profits 9,001 7,233 4,435 4,000 4,000


Net revenue 78,811 86,644 113,594 137,534 163,035

yoy growth (%) 32.2 9.9 31.1 21.1 18.5


yoy growth (%) 21.9 6.6 21.5 15.1 18.1


yoy growth (%) 42.1 12.7 38.6 25.2 18.8

Provisions 9,621 6,972 13,313 11,538 13,836


PBT 33,429 42,381 56,503 72,708 86,266

yoy growth (%) 51.5 26.8 33.3 28.7 18.6


PAT 22,272 30,583 42,417 50,168 59,524

yoy growth (%) 55.1 37.3 38.7 18.3 18.6

Balance sheet


Advances 1,439,859 1,750,353 2,286,764 2,822,613 3,379,351

yoy growth (%) 34.9 21.6 30.6 23.4 19.7

Customer assets 1,501,450 1,773,871 2,343,269 2,853,242 3,419,169

yoy growth (%) 35.4 18.1 32.1 21.8 19.8

SLR portfolio 411,013 494,425 598,252 797,560 957,253


Total assets 2,274,067 2,783,167 3,583,972 4,428,469 5,331,657

Networth 113,872 136,063 197,012 237,147 284,766

Deposits 1,923,970 2,410,443 3,054,395 3,797,905 4,558,349

- Current % 7.5 7.9 7.6 8.0 8.0

- Savings % 22.1 21.8 21.1 21.0 21.0

- Term % 70.4 70.4 71.3 71.0 71.0

Borrowings 56,361 61,599 129,062 161,327 201,659

Ratio analysis





Prov./avg assets 0.5 0.3 0.4 0.3 0.3PBT/Average assets 1.6 1.7 1.8 1.8 1.8

RoA 1.1 1.2 1.33 1.25 1.22

RoE 21.3 24.5 25.5 23.1 22.8

Cost/Income 45.4 44.0 40.8 38.7 38.6

Tax/PBT 33.4 27.8 24.9 31.0 31.0


Gross NPA 1.3 1.4 1.4 1.3 1.5

Net NPA 0.3 0.3 0.3 0.2 0.2



Growth in advances 34.9 21.6 30.6 23.4 19.7


SLR ratio 20.8 20.0 18.8 21.0 21.0

CASA ratio 29.6 29.6 28.7 29.0 29.0


Foreign

17.1%

Promoters

57.0%

Institutions

16.0%

Non PromoterCorporate Holding

4.7%

Public &

Others

5.2%

As of March 2011




25/28


After adopting an aggressive growth posture over the past couple of years, State Bank of India (SBI) isembarking on the path of profitable growth. The bank now aims to improve its asset quality, increase marginsand proactively provide for expenses to prevent any large one-off impact on earnings. Balance sheet clean-upundertaken in Q4FY11, termination of teaser rate schemes and a steep rise in base rate (~ 125bp since May2011), we believe, are steps in the right direction. We expect the banks operating metrics to gradually improveled by better asset quality, robust NII and increasing cost efficiency. Over FY11-13, we expect 39% CAGR in thebanks earnings, and thereby ~ 30bp increase in RoA to 1%+ . Although earnings could face stress in the nearterm due to higher provisioning requirements and investment depreciation, we remain convinced about SBIslong-term growth potential. Reiterate Outperformer with a 12-month price target of Rs3,000 (corresponding to1.5x FY13E adjusted book; including Rs188/ share value for subsidiaries).The worst is behind: With aggressive NPA provisions in Q4FY11, we believe that balance sheet clean-up islargely over. Majority of loans have already migrated to system-based recognition, and slippages from this

aspect are also expected to be limited. However, we expect provisions to remain high in H1FY12 as the bank

provides for one-offs (to shore up coverage ratio and comply with recent RBI provisioning norms), which could

dampen near-term profitability. We expect provisions to decline materially only from H2FY12.

Earnings to revive: SBI is working towards improving its profitability through better asset quality and higher NIMs.We see the operational outlook turning benign for SBI as; i) slippages come off from Q4FY11 levels; ii) NIMs pick

up (management guidance of ~ 20bp NIM expansion in FY12 - we conservatively estimate a 17bp yoy decline to

2.7%); iii) cost efficiency should improve; and iv) loans are expected to expand by 17-18% over the next couple of

years. We expect 39% earnings CAGR over FY11-13.

Attractive valuations; reiterate Outperformer: Although we see higher provisioning requirements in the near term,and thereby ~ 39% decline in Q1FY12E earnings (incremental stress could arise from MTM losses on investment

book), we remain convinced about SBIs long-term growth potential. Improved asset quality and higher visibility

on earnings, we believe, will drive stock performance.

OUTPERFORMER

State Bank of IndiaOn the correct path Rs2471





Net profit (Rs m) 91,212 91,660 82,645 120,237 160,140

yoy growth 35.5 0.5 (9.8) 45.5 33.2

Shares in issue (m) 634.9 634.9 635.0 635.0 635.0

Weighted shares in issue (m) 633.2 634.9 635.0 635.0 635.0

EPS (Rs) 144.1 144.4 130.2 189.3 252.2

EPS growth (%) 12.7 0.2 (9.9) 45.5 33.2

PE (x) 17.2 17.1 19.0 12.6 9.4

Consolidated Bv (Rs/share) 1063 1231 1240 1506 1820

P/ Consolidated Book (x) 2.17 1.89 1.88 1.6 1.35

RONW (%) 17.1 14.8 12.6 17.2 19.8

85

100

115

130

145

Jul-10

Aug-1

0

Sep-1

0

Oc

t-10

Nov-1

0

Dec-1

0

Jan-1

1

Fe

b-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

State Bank of India Sensex

Price performance

Bloomberg: SBIN IN 6m avg daily vol. (m): 2.55










26/28


Income statement



yoy growth (%) 22.6 13.4 37.4 10.9 15.9

Other income 126,908 149,682 158,246 185,455 218,107

yoy growth (%) 46.0 17.9 5.7 17.2 17.6Trading profits 25,673 21,168 9,210 9,300 9,450


Net revenue 335,639 386,396 483,510 546,195 636,376

yoy growth (%) 30.5 15.1 25.1 13.0 16.5


yoy growth (%) 24.1 29.8 13.3 14.4 16.7


yoy growth (%) 36.7 2.3 38.3 11.7 16.3

Provisions 37,346 43,948 103,813 97,961 82,831


PBT 141,806 139,261 149,542 184,980 246,369

yoy growth (%) 35.8 (1.8) 7.4 23.7 33.2


PAT 91,212 91,660 82,645 120,237 160,140

yoy growth (%) 35.5 0.5 (9.8) 45.5 33.2

Balance sheet

As on 31 Mar (Rs bn) FY09 FY10 FY11 FY12E FY13E

Advances 5,425 6,319 7,567 8,844 10,338

yoy growth (%) 30.2 16.5 19.8 16.9 16.9

Customer assets 5,757 6,707 7,974 9,316 10,885

yoy growth (%) 28.1 16.5 18.9 16.8 16.8

SLR portfolio 2,281 2,277 2,312 2,735 3,244

Cash & bank balances 1,044 893 1,229 1,536 1,920

Total assets 9,644 10,466 12,237 14,546 17,187

Networth 579 659 650 746 874

Deposits 7,421 8,041 9,339 11,130 13,446

- Current % 14.9 15.2 14.0 11.5 11.5

- Savings % 26.7 32.0 35.4 33.5 33.5

- Term % 58.4 52.7 50.6 55.0 55.0

Borrowings 537 710 821 1,215

1,338

Ratio analysis





Cost/Income 46.6 52.6 47.6 48.2 48.3Prov./avg assets 0.4 0.4 0.9 0.7 0.5

PBT/Average assets 1.7 1.4 1.3 1.4 1.6

RoA 1.1 0.9 0.73 0.90 1.01

RoE 17.1 14.8 12.6 17.2 19.8

Tax/PBT 35.7 34.2 44.7 35.0 35.0


GrossNPA 2.9 3.1 3.3 3.4 3.4

Net NPA 1.8 1.7 1.6 1.1 0.7




SLR ratio 30.5 28.2 24.7 24.5 24.0

CASA ratio 41.6 47.3 49.4 45.0 45.0


Foreign

15.8%

Promoters

59.4%

Institutions

16.5%

Non Promoter

Corporate Holding

2.4%

Public &

Others

5.8%

As of March 2011




27/28


Disclaimer

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The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavor to update the information herein on reasonable basis,IDFC SEC, its subsidiaries and associated companies, their directors and employees (IDFC SEC and affiliates) are under no obligation to update or keep the information current. Also,there may be regulatory, compliance, or other reasons that may prevent IDFC SEC and affiliates from doing so. We do not represent that information contained herein is accurate orcomplete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investmentdecision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at anindependent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved). The investment discussed or views expressedmay not be suitable for all investors.

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Explanation of Ratings:

1. Outperformer: More than 5% upside to Index

2. Neutral: Within 0-5% to Index (upside or downside)

3. Underperformer: More than 5% downside to Index

Disclosure of interest:

1. IDFC SEC and affiliates may have received compensation from the company covered herein in the past twelve months for issue management, capital structure, mergers &

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Analyst Sector/Industry/Coverage E-mail Tel.+ 91-22-6622 2600Pathik Gandotra Head of Equities; Financials [email protected] 91-22-662 22525

Shirish Rane Co-Head of Research; Construction, Power, Cement [email protected] 91-22-662 22575

Nikhil Vora Co-Head of Research; Strategy, FMCG, Media, Education, Exchanges, Mid Caps [email protected] 91-22-662 22567

Nitin Agarwal Pharmaceuticals, Real Estate, Agri-inputs [email protected] 91-22-662 22568

Chirag Shah Metals & Mining, Telecom, Pipes [email protected] 91-22-662 22564

Bhoomika Nair Logistics, Engineering [email protected] 91-22-662 22561

Hitesh Shah, CFA IT Services [email protected] 91-22-662 22565

Bhushan Gajaria Automobiles, Auto ancillaries, Retailing bhushan.gajaria@idfc .com 91-22-662 22562

Salil Desai Construction, Power, Cement [email protected] 91-22-662 22573

Ashish Shah Construction, Power, Cement [email protected] 91-22-662 22560Probal Sen Oil & Gas [email protected] 91-22-662 22569

Chinmaya Garg Financials chinmaya.garg@id fc.com 91-22-662 22563

Abhishek Gupta Telecom, Metals & Mining [email protected] 91-22-662 22661

Saumil Mehta Metals, Pipes [email protected] 91-22-662 22578

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Anamika Sharma IT Services [email protected] 91-22-662 22680

Varun Kejriwal FMCG, Mid Caps, Shipping, Aviation [email protected] 91-22-662 22685

Swati Nangalia Media, Education, Exchanges, Midcaps [email protected] 91-22-662 22576

Nikhil Salvi Construction, Power, Cement [email protected] 91-22-662 22566

Kavitha Rajan Strategy, Financials [email protected] 91-22-662 22697

Dharmendra Sahu Database Analyst [email protected] 91-22-662 22580

Rupesh Sonawale Database Analyst [email protected] 91-22-662 22572

Dharmesh R Bhatt, CMT Technical Analyst [email protected] 91-22-662 22534

Equity Sales/Dealing Designation E-mail Tel.+ 91-22-6622 2500Naishadh Paleja Co-Group CEO [email protected] 91-22-6622 2522

Paresh Shah MD, Dealing [email protected] 91-22-6622 2508

Vishal Purohit MD, Co-Head of Sales vishal.purohit@idfc .com 91-22-6622 2533Nikhil Gholani MD, Co-Head of Sales [email protected] 91-22-6622 2529

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Suchit Sehgal AVP, Sales suchit.sehgal@id fc.com 91-22-6622 2532

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Dipesh Shah Director, Derivatives [email protected] 91-22-6622 2693

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Suniil Pandit Director, Sales trading [email protected] 91-22-6622 2524

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28/28

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