industry outlook: deceit sleeps with greed 3 - quant · pdf filedeceit sleeps with greed ......

Bankometer: A fortnightly overview on Indian banking system September 14, 2016 1 Deceit sleeps with greed

September 14, 2016

Jignesh Shial [email protected]

+91 22 4088 0254

September’16 – Volume I

Bankometer: A fortnightly overview on Indian banking system September 14, 2016 2

Industry Outlook: Deceit sleeps with greed 3

IPO Note: ICICI Prudential Life Insurance: Noble business at fair valuations, SUBSCRIBE 4

quant Observation: Yes Bank QIP deferred.. Deceit sleeps with greed.. 5

quant Observation: RBI flourishing with reforms.. ‘blessing in disguise’ for banks? 6

quant Event Update: RBI’s Unified Payment Interface activated, a step further towards cashless economy 7

quant Event Update: RBI releases guidelines on sale of stressed assets by banks 8

Business Momentum: Fortnightly Credit – Deposit Growth 9

Credit Allocation: Sectoral Deployment of Bank Credit 10

Liquidity Check: Liquidity Operations by RBI 11

Call Money Rate: Movement in LAF window 12

Other Borrowings: Commercial Paper/Debentures/Bonds Issued 13

Key Ratios: Credit/Deposit along with Investment/Deposit 14

Stock Price Movements: Fortnightly – Year to Date 15

Valuation Parameters: P/Book to RoEs 17

Valuation Parameters: P/Book to RoAs 20

Recommendations 23

Disclaimer 24

Table of content


Industry Outlook Deceit sleeps with greed

Credit growth for fortnight ending August 19, 2016 remained flat fortnightly to ~9.2% against ~9.8% on August 5, 2016.

RBI has restated the numbers for previous fortnight – earlier the apex bank has reported sudden spike in system credit growth to ~11%

which is now normalized to ~9.5%.

On liability franchise, deposit growth during the fortnight also remained flat at ~9.6% against ~9.9% during previous fortnight.

Interestingly the growth in demand deposits is relatively healthier at ~10.4% against time deposits at ~8.5%. Thus, depositors are holding

short term money with banks which might get deployed to other investment classes considering probability of better returns.

Saddled with large delinquencies and elevated credit costs, ICICI Bank has been forced to dilute its holding in its insurance arm, ICICI

Prudential Life Insurance company through IPO.

At upper band, the company is valued at Rs477.2bn, quoting at 9.6x risk weighted received premium (RWRP) for FY16 which is quite low

compared to our estimate of ~15x for our ICICI bank SOTP valuation. Considering healthy business momentum, rising penetration for

insurance sector as well reasonable valuations for the company, we recommend SUBSCRIBE to the issue.

Yes Bank has withdrawn its institutional share sale program citing misinterpretation of regulatory guidelines related to qualified institutional

placements (QIP). With subdued Tier I at ~10.3% and elevated Tier I leverage ratio at ~8.5x, if the bank intends to manage its current growth

trajectory, capital raising is more of a necessity, failing which the bank can witness growth tapering down from 3QFY17.

Situation for Yes Bank management remains vulnerable and they need to arrive at the solution at a faster pace. Being greedy is a

necessity for any business, however the greed should always be under check. We maintain our REDUCE rating on the stock with target

price of Rs1036 considering uncertainty over capital raising plans and unfavourable risk reward scenario.

Our preference stays with either banks with better asset quality although expensive valuations else for banks even with volatile asset

quality but offering attractive risk reward.

We recommend HDFC Bank and IndusInd Bank from the private banking space. Among PSU Banks, we like SBI, Canara Bank and Bank of

Baroda with its relatively diversified asset book, transparent management practices as well as favourable risk reward opportunities.

Among NBFC space, we prefer Shriram Transport Finance considering improvement in CV cycle. We also like HDFC Limited considering

limited earnings volatility as well as potential gains through listing of subsidiary.


IPO Note ICICI Prudential Life Insurance: Noble business at fair valuations, SUBSCRIBE

Forced dilution for promoter but business momentum is healthy: We continue to believe that ICICI bank, promoter of the company, being

saddled with large delinquencies and elevated credit costs is forced to dilute its holding in the company. The bank will offload another 6%

over the next three years. However, business momentum of the company is superiorly healthy with 13th month persistency ratio in fiscal

2016 was 82.4%, which was one of the highest in the sector. The overall market share of the company was 11.3% on retail weighted received

premium in FY16.

First individually listed insurance company – existing shareholders of ICICI Bank also would be rewarded: ICICI Prudential Life Insurance

Company (IPru Life) is the largest private sector life insurer in India by total premium and assets under management. It would be the first

company to get listed individually on exchanges. While this would be the first IPO from a life insurer in India, the total amount of money to

be raised by the private life insurer will also be the highest after the state owned Coal India raised over Rs 150bn through its maiden IPO in

2010. The IPO is an offer-for-sale of over 181.3mn shares by its promoter, ICICI Bank. To reward bank’s existing share holders, the

management has set a preference up to 10% of IPru Life’s shares earmarked for shareholders of ICICI Bank.

Higher concentration over bancassurance and unit linked policies remains major risk – Management focused towards bring granularity:

IPru Life’s retail APE from bancassurance partners (ICICI Bank and Standard Chartered Bank) represented ~58.6% of total retail APE in FY16.

The retail APE through ICICI Bank represented ~54.9% of total retail APE for FY16E. Similarly, the company had Rs1.04 trillion of assets under

management as on March’16 with ~72.4% consisting of unit linked assets. With recent change in policies from IRDA regarding multiple

bancassurance partners and restrictions over unit linked policies, the company continues to face major risk over future revenues. However,

ICICI bank being main promoter of the company as well as management’s commitment towards increasing share of traditional plans

provides desired comfort over sustainability of business model of the company.

Valuation reasonable – We recommend SUBSCRIBE to IPO: The Company has announced a price band of Rs 300-334. At the upper band, the

issue will fetch Rs 60.6bn, while at the lower end, it will garner Rs 54.4bn. At upper band, the company is valued at Rs477.2bn, quoting at

9.6x risk weighted received premium (RWRP) for FY16 which is quite low compared to our estimate of ~15x for our ICICI bank SOTP

valuation. The valuation is also reasonable considering recent merger of Max life with HDFC life has quoted the value for HDFC Life Insurance

at Rs470bn with market share of ~7.6% against IPru Life’s share of ~11.3%. Considering healthy business momentum, rising penetration for

insurance sector as well reasonable valuations for the company, we recommend SUBSCRIBE to the issue.

Risks: Significant deterioration in return ratios and a material slowdown in business growth would be the key risks to our call.


quant observation Yes Bank QIP deferred.. Deceit sleeps with greed..

Yes Bank has withdrawn its institutional share sale program citing misinterpretation of regulatory guidelines related to qualified

institutional placements (QIP). The bank, which opened its QIP issue on Wednesday September 7, then informed stock exchanges on

Thursday September 8, that it had deferred its plans to raise funds.

Instead of discussing reasons and excuses for deferment, lets understand the after effect of this event.

Yes Bank has delivered robust credit growth (average of ~30.6% in past 9 quarters) mainly supported by healthy disbursements towards

corporate and SME segments.

Overall CAR stays at ~15.5% as on June 30, 2016 however Tier I proportion is relatively subdued at ~10.3% against ~10.9% year ago. Tier I

leverage ratio is already elevated at ~8.5x.

If the bank intends to manage its current growth trajectory, required Tier I ratio would be ~12% to avoid further dilution for next 2 years.

Hence capital raising is more of a necessity, failing which the bank can witness growth tapering down from 3QFY17.

Ideal situation for raising capital for any bank is when they do not need any. However for Yes Bank, the situation is little adverse.

At the previous floor price of Rs1380, the bank would be trading at 3.2x P/Adjusted FY18E book, a valuation generally allotted to a relatively

safer banks like HDFC Bank and IndusInd Bank.

With 90% of lending book comprising of either corporate or SME lending, there would be limited demand for Yes Bank at such an

expensive valuations.

The management might opt for other routes for capital raising such as preferential allotment else rights issue, however both these routes

are time consuming and are priced at relatively lower valuations.

Situation for Yes Bank management remains vulnerable and they need to arrive at the solution at a faster pace.

Being greedy is a necessity for any business, however the greed should always be under check. QIP offered at a reasonable pricing would

always have decent takers, however the situation for Yes bank is otherwise.

We maintain our REDUCE rating on the stock with target price of Rs1036 considering uncertainty over capital raising plans and

unfavorable risk reward scenario.


quant observation RBI flourishing with reforms.. ‘blessing in disguise’ for banks?

Partial Credit Enhancement- measure to address the issue of financing of long gestation infrastructure projects for banks: Long term

infrastructure projects globally been financed by insurance companies and pension funds considering ALM perspective. However given the

rating restrictions, most of such long term infra lending has been financed by banks. PCE addresses this problem by involving banks in

offering credit enhancement for bonds to enable the credit enhanced bonds suitable for investment by pension funds and insurance

companies. Thus, banks gradually can reduce their higher risk weighted infra portfolio through this route.

Accepting corporate bonds under Liquidity Adjustment Facility (LAF) of RBI – replacing low yield G sec to high yield Corporate bonds

would support margins and accelerate treasury gains: The implementation of the announced measure should lead to significant demand for

high rated corporate bonds from banks’ as they may choose to switch their excess SLR holdings with higher yielding corporate bonds. This

would not only support margins for banks would also accelerate treasury gains in current declining interest rate scenario.

The Reserve Bank of India (RBI) asked banks to set aside an additional provision of 3% on incremental exposure of the banking system

along with an additional risk weight of 75% on exposure to large borrowers if they cross a certain threshold. Essentially, this means that

banks will set aside more capital to lend to these borrowers, which in turn may increase the cost of funds for the companies. However we

believe that this would ensure that traditional lazy banking attitude (through consortium lending platform) for many bankers would be

limited and bankers would be forced to find new avenues for credit disbursement.

The central bank will allow commercial banks to issue rupee bonds in overseas markets — known as Masala bonds, both for their capital

requirement and for financing infrastructure and affordable housing. Positive for banks with weak adequacy to tap offshore markets in

order to meet their capital requirements. PSU banks would be at a greater advantage since they would be able to raise capital globally by

offering an attractive rates amid lower yields globally.

RBI has increased the risk weight for banks having aggregate exposure of more than Rs2bn to unrated borrowers to 150%. In case a

borrower was rated earlier and rating was withdrawn later, it would attract the new risk weight of 150%. Again a valid step undertaken by

the central bank since major of recent year slippages had been contributed by such unrated corporate/SMEs. With rise in charge on capital,

bankers would be compelled to get such borrowers being formally rated. This would be major Positive for rating agencies (ICRA, CARE,

CRISIL) since they would get additional source of revenue through this reform.


quant Event Update RBI’s Unified Payment Interface activated, a step further towards cashless economy

The National Payments Corporation of India (NPCI) has launched the platform for its Unified Payment Interface (UPI).

UPI, is a system that allows for instantaneous transfer of money using a virtual payment address. UPI will usher in low cost, high-volume

payments and create a new ecosystem where customers and merchants will come together for faster and simpler electronic payments. The

system was unveiled in April’16 with 36 banks signed up to be part of UPI. However, as of now only 21 are ready to go live.

Our View:

UPI is a step closer towards cashless economy which remains an ultimate aim for country like ours, where black money remained one of

the biggest hurdle for growth.

It is likely to benefit overall payments ecosystem, as the payments service can be provided by banks to the merchant with an entry level

smart phone and there is no need to install a PoS machine. Thus, it is likely to reduce the overall merchant acquisition cost for the banks.

As per data published by the Reserve Bank of India (RBI) in March 2016, cumulatively, Indians made more than 730 million withdrawals from

200,000 ATMs. Even if we take just 5 minutes per withdrawal on an average, we are wasting more than 60 million man-hours a month.

India continues to have low credit card penetration and low debit card activation leading to a poor reach of electronic payments—still in

single digits. With debit cards mostly used at ATMs to withdraw cash, it is clear that they are being used more like a substitute to cash

than as a true payment instrument.

The data also reveals that the currency with public stands at Rs.16.8 trillion, more than 95% of the total currency in circulation. This implies

that almost the entire amount is in daily circulation, which is reflected in the cost, Rs.37.6bn, just to print the paper notes.

Furthermore, banks have added close to 18,000 ATMs in FY16. The cost of maintaining these ATMs along with the capital expenditure

(capex) for new ATMs is a whopping Rs.158bn.

Last but not the least, high cash usage gives rise to the black money menace. Even by broad estimates, the direct cost of running a cash-

based economy is close to 0.25% of India’s gross domestic product (GDP). Thus, there is a massive direct benefit of moving towards

cashless transactions in India. But it is the indirect benefits that perhaps carry a greater significance.


quant Event Update RBI releases guidelines on sale of stressed assets by banks

The Reserve Bank of India (RBI) has amended certain guidelines relating to sale of non performing assets (NPAs) by banks to Securitisation

Companies (SCs)/ Reconstruction Companies (RCs) in order to further strengthen banks’ ability to resolve their stressed assets effectively.

Banks shall identify and list internally the specific financial assets identified for sale to other institutions, including SCs/RCs at least once in a

year.

Prospective buyers are not restricted to SCs/RCs but also includes other banks/NBFCs/FIs etc who already has the necessary capital and

expertise in resolving stressed assets.

In order to attract a wide variety of buyers and for a better price discovery, the invitation for bids should preferably be through an open

auction process (including e-auctions).

Our View:

With RBI allowing NBFCs to buy stressed assets from bank, the overall gambit for stressed assets resolution has widened considerably.

However how many NBFCs would be keen on opting stressed assets from bank would be a questionable issue for a while.

IFCs like PFC, REC or even IDFC and SREI Infra may opt for such stressed assets however agreeable valuations of such assets would always

remain a debatable issue among all parties.

E auction of assets would bring in further transparency in the asset sale and would also boost buyers confidence further.

Additional provision on existing SRs would further pressurize banks profitability although banks are anyhow mandated to recognize this

assets on mark to market basis on regular intervals.


10.7%

8.6%

5%

7%

9%

11%

13%

15%

17%System Deposit Growth (All Scheduled Banks …

8.4%9.2%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15% System Credit Growth (All Scheduled Banks %)

Business Momentum: Fortnightly Credit – Deposit Growth Credit uptick stable – growth in demand deposit continued outpacing time deposits

Credit growth for fortnight ending August 19, 2016 remained flat

fortnightly to ~9.2% against ~9.8% on August 5, 2016.

RBI has restated the numbers for previous fortnight – earlier the

apex bank has reported sudden spike in system credit growth to

~11% which is now normalized to ~9.5%.

‘Corporate sector’ although being the largest contributor to credit

growth, still is unable to witness any improvements due to sluggish

capex cycle.

Low commodity prices along with slower Private Capex affected

the credit uptick however with decent monsoon spanning across

India, the future trend is likely to be encouraging.

Source: RBI, quant Global Research estimates

Deposit growth during the fortnight also remained flat at ~9.6%

against ~9.9% during previous fortnight.

Interestingly the growth in demand deposits is relatively

healthier at ~10.4% against time deposits at ~8.5%.

Thus, depositors are holding short term money with banks which

might get deployed to other investment classes over period of

time considering probability of better returns.

With sluggish growth in deposits, system Credit Deposit ratio is

likely to remain elevated in near term. (Refer slide 13).


Fortnightly credit growth for all scheduled banks

Fortnightly deposit growth for all scheduled banks

‘Credit cycle witnessed a sharp uptick indicating gradual pickup in economy and healthy monsoon season spread across the country’


14%

13%13%13%

10%

9%

11%

10%

10%

9% 9%9%

8%9%

8% 8% 8%8%

8%9%8%

10%10%

9%

8%8%

7%8%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%Gross Bank Credit Non Food Credit Food Credit

14%

13%13%13%

10%

9%

11%11%

10%9% 9% 9% 8%

9%8% 8% 8% 9%

8%9% 9%

10%10%9%

8% 8%8%

8%

0%

5%

10%

15%

20%

25%

0%

2%

4%

6%

8%

10%

12%

14%

16% Non Food Credit Agri Industry Services Personal

Credit Allocation: Sectoral Deployment of Bank Credit Weak pickup in industry credit led to slower momentum in credit growth

Total gross bank credit growth remained flat during July’16 on

monthly basis at ~7.7% against ~7.4% in June’16, however is

inline with fortnightly trends emerging during same period.

Food credit continued witnessing sharp decline of ~28.2% y-y

against decline of ~27.3% during June 2016. Non-food credit

growth also remained weak at ~8.3%.

Apart from sluggish economic growth, higher cost of funds, tight

liquidity situations and availability of alternate low cost capital

instruments (Bonds, CP etc) could have been few of the reasons

for low credit demand.


Credit pick up across ‘industry’ segment remained subdued at

~0.6%, primarily reflecting weak domestic environment.

Personal loan remains the main survivor for banks with growth of

~18.8% y-y primarily due to low base effect and rising focus of

private banks on this segment.

Service segment witnessed a stable growth of ~10.8% y-y.

Dip in food and agri lending is likely to witness pickup only post

healthy monsoon season.


Monthly movement in gross bank credit along with Food – Non Food Credit

Monthly movement in non food credit along with sectoral bifurcation

‘Industry credit remained weaker which dragged overall credit growth momentum downwards‘


4.13.8

4.2

5.3

3.1

-0.4

0.40.8

6.6

5.4

4.1

1.6

0.4

4.4

1.0

-5.2

-2.6-0.4

0.9

4.14.7

5.4

6.7

7.8

1.5

4.9

-1.8

-3.1

0%

2%

4%

6%

8%

10%

12%

14%

16%

-6

-4

-2

0

2

4

6

8

10

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-1

5

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Net Infusion by RBI (Rs trillion) Credit Growth

192.7

153.5

111.1

0.0 4.348.3

16.90.0

56.261.4

188.1166.2

26.33.1 7.1

45.3

0.010.5

136.9

70.658.122.34.5

-192.7-153.5

-111.1

-414.1

-300.0

-250.1

-255.0

0.0

-500.0

-400.0

-300.0

-200.0

-100.0

-

100.0

200.0

300.0

0

100

200

300

400

500

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-1

5

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

OMO Sale OMO Purchase Net OMO (Rs billion)

Liquidity Check: Liquidity Operations by RBI Healthy trends in liquidity infusion by RBI continues

With ease in credit pick up during the month of July’16, overall

liquidity infusion witnessed a negative trend.

The net withdrawal during July’16 had been ~3.1tn indicating

sufficient liquidity available in the system.

With government spending normalizing in the beginning of

current financial year, the overall liquidity positions had seen an

easing. Hence we might witness lower OMOs in coming fiscal.


With sufficient liquidity in the system, RBI has not opted for any

OMO operations during the month of July 2016.

With RBI keeping average ex ante liquidity deficit in the system to

a position closer to neutrality, system liquidity is likely to remain

healthy in coming quarters.


Net infusion by RBI through Repo/MSF window along with movement in credit growth on monthly basis

Monthly data on OMO operations by RBI


6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-1

5

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Call Money Rate (Wtd Avg %) Linear (Call Money Rate (Wtd Avg %))

3.02.8

3.2

4.1

2.8

1.71.8

2.0

3.43.6

2.5 2.42.3

3.3

1.6

0.7

1.1

2.3

2.7

3.13.0

3.4

3.02.9

1.9

3.2

1.2

1.01.2

0.81.3 1.2

2.1

1.5

0.9 0.9 1.0

1.6

2.5

3.0

1.51.7

1.3 1.2

1.71.4 1.4 1.6 1.6

1.0

3.3 3.2

1.1

2.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-1

5

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Repo Reverse Repo MSF (Rs in trillion)

Call Money Rate: Movement in LAF window With ease in liquidity positions, call money rates continue to slide southwards

With RBI pushing for neutral negativity, consistency in OMO HAS

increased from the exchequer in order to maintain sufficient

liquidity in the system. (Refer slide 10).

With sufficient liquidity infusion by the reserve bank along with

ease in short term credit demand, the overall rate scenario had

been easing out.

Weighted average Call money rate stood at ~6.38% as on

September 2, 2016 against ~7.1% last year.



Repo transactions during June 2016 witnessed a declining trends

on monthly basis at Rs1.1tn as against Rs1.2tn last month.

This indicates steady trend in credit growth which was also

reflected in credit data for past few fortnights.

The quantum for reverse repo rises at par with reducing demand

for Repo withdrawals

MSF withdrawals also remained limited reflecting unviable rates

offered on MSFs.

Monthly movement in Call Money Rate

Monthly data on Repo/Reverse Repo transactions with MSF facility situation

‘Tight liquidity led to sharp movement in call money rates on either sides.. However the trend is stabilised now’


2

4

6

8

10

12

14

16

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5 CP outstanding (Rs. In tn) Lowest Rate Highest Rate

4.5

13.0

5.0

2.0

6.0

3.0

6.4

4.0

25.7

5.1

12.8

-

4.4

- -

9.9

3.3 4.1

- -1.6

-

5.4

- -

7.0

2.1

- -

6.9

12.3

-

5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Debentures (Rs. In bn)

Other Borrowings: Commercial Paper/Debentures/Bonds Issued CP demand picking up with easing liquidity position; other borrowings rise

With ease in liquidity situation, demand for commercial paper

remained stable during July 2016 with consistent decline in rates.

O/s CP balances inched up to Rs3.8tn as on July 2016 against

Rs3.4tn during June 2016.

The lowest rate offered during the month had been ~6.4% which is

far lower compared to base rate offered by any bank.

We believe that with bank rates remaining at relatively elevated

levels, demand for CPs are expected to remain higher.

Also ease in liquidity to smoothen CP pricing lower.



Borrowings through debenture route emerged during the July 2016

with one company issuing non convertible debentures worth

Rs5bn.

There were no borrowings made using preference shares, and

bonds during the month.

Monthly position of O/s commercial paper borrowings along with highest/lowest rates offered

Corporate borrowings through Debentures


29.3

26

444142

3334

39

45

51

41

34

3937

4240 41 42

14

34

52

46 45 45

38

3235

39

31 33

2827

18

-13

60

32

41

50

56

505052

5555

505050

-20

-10

0

10

20

30

40

50

60

70

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-1

5

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Investment-Deposit Ratio Incremental Investment-Deposit Ratio

38 40

33

52

4438

34

47 494753

5659

62

82

4650

3833 33

4744

52

66 74

7578

82

74

-11

422

-5

2

12

51111

-20

0

20

40

60

80

100 Credit-Deposit Ratio Incremental Credit-Deposit Ratio

Key Ratios: Credit/Deposit along with Investment/Deposit Trend in CD and ID ratio to be similar to last year

Credit deposit (CD) ratio during the fortnight remained stable at

~74.8% as on September 2, 2016.

Like previous years, at the beginning of any financial year, growth

in deposit outpaces overall demand for credit which in turn results

in to gradual decline in CD ratio for the industry.

Incremental CD ratio declined to 6.5% as against ~10.8% during

previous fortnight.

Similar to last year, we expect gradual rise in incremental CD ratio

by financial year end.


Investment deposit (ID) ratio remained stable at ~29% as on

September 2, 2016.

Incremental ID ratio rose to ~49.6% against -13% as on April 1,

2016 indicating a shift in investment book.

Similar to last year, incremental ID ratio is anticipated to decline by

the end of the fiscal, after which it is expected to rise again

Monthly Credit/Deposit ratio along with incremental CD ratio

Monthly Investment/Deposit ratio along with incremental ID ratio



72.9

34.8

34.3

33.9

29.7

22.8

22.6

22.5

17.7

17.3

14.9

12.3

12.0

10.1

9.9

9.7

7.6

5.7

3.0

Yes Bank

STFC

Axis Bank

Canara Bank

ICICI Bank

PFC

PNB

Indusind Bank

Bank Nifty

HDFC Bank

SBI

PSU Bank Nifty

LIC HF

HDFC Limited

Nifty

REC

BOB

BoI

Union Bank of India

17.3

11.9

8.6

6.9

5.9

3.7

3.6

3.3

3.0

2.7

1.4

1.2

1.2

1.1

0.5

(0.1)

(0.5)

(6.4)

(8.6)

Canara Bank

PNB

ICICI Bank

Union Bank of India

BoI

LIC HF

Axis Bank

PSU Bank Nifty

Bank Nifty

BOB

HDFC Bank

Nifty

HDFC Limited

SBI

PFC

Indusind Bank

REC

Yes Bank

STFC

Stock Returns Fortnightly – Year to Date

Source: Bloomberg, quant Global Research estimates Source: Bloomberg, quant Global Research estimates

Fortnightly Price Change (%) Year to Date Price Change (%)

Bankometer: A fortnightly overview on Indian banking system September 14, 2016 16 Wednesday, September 14, 2016

Valuation Parameters

September 14, 2016


y = 0.167x - 0.4666R² = 0.2137

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

10.0 15.0 20.0 25.0

FY1

7 P

/B

FY18RoE

IndusIndHDFC Bank

DCB

Axis

Yes

Kotak

City Union

ICICI

Federal

y = 0.1857x - 0.1567R² = 0.2423

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

8.0 13.0 18.0 23.0

FY16

P/B

FY17RoE

IndusInd

HDFC Bank

ICICI

Axis

Yes

Kotak

City Union

DCB

Federal

Valuation Parameters: P/Book to RoEs Private Banks

On P/RoE basis, HDFC Bank, IndusInd Bank and Kotak Bank remain expensive with trading above the average trend line whereas other

private banks are available at fair value, trading below trend line. However we maintain our BUY on HDFC Bank and IndusInd Bank

considering robust business growth coupled with lower volatile asset book.

From banks with cheaper valuations, we prefer only City Union Bank (CUBK) (Not Rated) considering their healthy return ratios and relatively

stable asset quality profile. We also like the best in class management abilities of these bank which would ensure smooth sailing of their

business compared to most peers.

Source: Bloomberg, quant Global Research estimates

Price/Book to RoE comparison – FY17 Valuation with FY18 RoEs Price/Book comparison to RoE comparison – FY18 Valuation with FY19 RoEs



y = 0.0633x + 0.0144R² = 0.6104

-

0.2

0.4

0.6

0.8

1.0

1.2

- 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

FY1

7 P

/B

FY18RoE

BOICanara

BOB

PNB

UBI

SBI

OBC

IDBI

y = 0.0973x - 0.1258R² = 0.6198

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

- 2.0 4.0 6.0 8.0 10.0 12.0

FY16

P/B

FY17RoE

BOI

Canara

BOB

PNB

UBI

SBI

IDBI

OBC

Valuation Parameters: P/Book to RoEs PSU Banks

On P/RoE basis, SBI, BOB and BOI remain expensive with trading above the average trend line whereas other public banks are available at fair

value, trading below trend line. We like SBI and BOB primarily on back of transparent management practices and relatively stable asset

book. However we reiterate our SELL rating on Bank of India based on higher stress on asset book and expensive valuations.

We also prefer Canara Bank mainly on back of cheap valuations and attractive risk reward. We would avoid other low valued PSU Banks

considering higher risk to credit cost and lackluster credit growth.





y = 0.3316x - 2.5769R² = 0.4683

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

- 5.0 10.0 15.0 20.0 25.0 30.0

FY1

6 P

/B

FY17RoE

HDFC Ltd

Ujjivan

STFC LICHF

SKS Micro Finanace

Bajaj Finance

M&M FInance

PFCRECL

y = 0.2738x - 2.2862R² = 0.5646

-

1.0

2.0

3.0

4.0

5.0

6.0

- 5.0 10.0 15.0 20.0 25.0 30.0

FY17

P/B

FY18RoE

Bajaj Finance

HDFC Ltd

Ujjivan

STFCLICHF

PFC RECL

M&M Finance

SKS Micro Finanace

Valuation Parameters: P/Book to RoEs NBFCs

On P/RoE basis, HDFC Ltd, Bajaj Finance, M&M Finance and Ujjivan remain expensive with trading above the average trend line whereas

other NBFCs are available at fair value, trading below trend line.

Shriram Transport Finance remains our top pick among low valued NBFCs considering their improving growth cycle and expanding business.





y = 2.3863x - 0.8059R² = 0.4686

-

1.0

2.0

3.0

4.0

5.0

6.0

- 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0

FY16

P/B

FY17RoA

IndusInd

HDFC Bank

Axis

Yes

Kotak

ICICI

City Union

Federal

DCB

y = 1.8912x - 0.4892R² = 0.4278

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1

FY17

P/B

FY18RoA

IndusInd

HDFC Bank

ICICI

Axis

Yes

Kotak

City Union

Federal

DCB

Valuation Parameters: P/Book to RoAs Private Banks

On P/RoA basis, HDFC Bank, DCB Bank and Kotak Bank remain expensive with trading above the average trend line whereas other private

banks are available at fair value, trading below trend line.

From banks with cheaper valuations, we prefer Axis Bank and Yes Bank considering their improving return ratios and relatively stable asset

quality profile. We also like the best in class management abilities of these bank which would ensure smooth sailing of their business

compared to most peers.


Price/Book to RoA comparison – FY17 Valuation with FY18RoAs Price/Book comparison to RoA comparison – FY18 Valuation with FY19 RoAs



y = 1.5232x - 0.0268R² = 0.5097

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

- 0.1 0.2 0.3 0.4 0.5 0.6 0.7

FY16

P/B

FY17RoA

SBI

BOB

BOIUBI

PNB

Canara

OBC

IDBI

y = 1.1831x - 0.0426R² = 0.6288

-

0.2

0.4

0.6

0.8

1.0

1.2

- 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

FY17

P/B

FY18RoA

SBI

BOB

BOI

IDBI

PNB

UBI

Canara

OBC

Valuation Parameters: P/Book to RoAs PSU Banks

On P/RoA basis, SBI, BOB, PNB and BOI remain expensive with trading above the average trend line whereas other public banks are available

at fair value, trading below trend line. We like SBI and BOB primarily on back of transparent management practices and relatively stable

asset book. However we reiterate our SELL rating on Bank of India based on higher stress on asset book and expensive valuations.

We also prefer Canara Bank mainly due to cheap valuations and attractive risk reward. We would avoid other low valued PSU Banks

considering higher risk to credit cost and lackluster credit growth.


Price/Book to RoA comparison – FY17 Valuation with FY18 RoAs Price/Book comparison to RoA comparison – FY18 Valuation with FY19 RoAs



y = 1.6374x - 0.7949R² = 0.3988

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

FY16

P/B

FY17RoA

Bajaj Finance

SKS Micro Finance

Ujjivan

M&M Finance

RECLPFC

LICHF

HDFC Ltd

STFC

y = 1.2854x - 0.4135R² = 0.4145

-

1.0

2.0

3.0

4.0

5.0

6.0

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

FY17

P/B

FY18RoA

HDFC Ltd

STFCLICHF

Bajaj Finance

SKS Micro Finance

M&M Finance

Ujjivan

RECL

PFC

Valuation Parameters: P/Book to RoAs NBFCs

On P/RoA basis, HDFC Ltd, Bajaj Finance, M&M Finance and LIC Housing remain expensive with trading above the average trend line whereas

other NBFCs are available at fair value, trading below trend line.

Shriram Transport Finance remains our top pick among NBFCs considering their improving growth cycle and expanding business.


Price/Book to RoA comparison – FY17 Valuation with FY18 RoAs Price/Book comparison to RoA comparison – FY18 Valuation with FY19 RoAs



Recommendations

Note: pricing as on 14 September 2016; Source: Company data, quant Global Research estimates

Bloomberg Market Cap CMP* Px target Upside/

Code (Rsmn) (Rs) (Rs) downside (%) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E

Axis Bank AXSB IN REDUCE 1,413,199 592 481 (18.8) 34.4 31.4 41.2 17.2 18.9 14.4 2.8 2.6 2.3 16.8 13.4 15.6

HDFC Bank HDFCB IN BUY 3,240,376 1,280 1,391 8.6 48.3 58.3 73.0 26.5 21.9 17.5 4.6 4.0 3.4 18.3 19.0 20.3

ICICI Bank ICICIBC IN REDUCE 1,560,098 268 257 (4.1) 16.7 16.3 17.7 16.1 16.5 15.2 2.1 2.0 1.8 11.4 10.3 10.5

Indus Ind Bank IIB IN BUY 712,490 1,196 1,290 7.8 39.3 51.0 61.3 30.5 23.4 19.5 4.0 3.5 3.0 16.1 15.6 16.3

Yes Bank YES IN REDUCE 507,345 1,205 958 (20.5) 59.3 70.7 85.6 20.3 17.0 14.1 3.8 3.3 2.8 19.9 19.9 20.5

Bank of Baroda BOB IN BUY 372,698 162 176 8.9 (23.9) 11.1 17.3 (6.8) 14.5 9.4 1.9 1.7 1.3 NA 6.1 9.0

Bank of India BOI IN SELL 108,255 116 85 (27.0) (76.9) (18.6) 7.6 (1.5) (6.2) 15.3 0.6 2.0 1.3 NA NA 2.0

Canara Bank CBK IN BUY 161,268 297 310 4.3 (53.6) 27.3 62.1 (5.5) 10.9 4.8 1.4 1.4 1.0 8.9 4.5 9.6

Punjab National Bank PNB IN SELL 269,406 137 88 (35.8) (20.8) 9.6 15.8 (6.6) 14.3 8.7 9.1 10.2 2.6 NA 4.7 7.5

SBI SBIN IN BUY 1,962,042 253 270 6.7 13.0 18.9 30.9 19.5 13.4 8.2 2.2 1.9 1.6 6.9 9.3 13.4

Union Bank UNBK IN ACCUMULATE 96,964 141 144 1.8 28.1 29.4 49.0 5.0 4.8 2.9 0.9 0.9 0.7 6.3 6.1 9.6

HDFC HDFC IN ACCUMULATE 2,211,849 1,399 1,454 3.9 44.1 53.0 58.7 31.7 26.4 23.8 6.8 5.9 5.2 21.8 23.3 22.6

LIC Hous ing Finance LICHF IN ACCUMULATE 282,788 560 618 10.3 33.3 38.6 46.9 16.8 14.5 11.9 3.2 2.7 2.3 19.8 19.6 20.2

Power Finance Corporation POWF IN SELL 312,454 118 86 (27.6) 23.2 21.0 20.8 5.1 5.6 5.7 1.1 1.0 0.9 18.0 14.9 13.7

Rura l Electri fication Corporation RECL IN SELL 224,005 227 190 (16.0) 57.0 40.7 37.7 4.0 5.6 6.0 0.8 0.8 0.8 21.0 13.8 12.5

Shri ram Transport Finance SHTF IN BUY 266,633 1,175 1,430 21.7 51.9 81.7 101.4 22.6 14.4 11.6 3.0 2.7 2.3 12.2 17.0 18.1

RatingEPS (Rs) P/E (x) P/B (x) ROE (%)


Disclaimer

DISCLOSURES AND DISCLAIMER

quant Broking Private Limited, Mumbai, India (Hereinafter referred to as “QBPL”) is Registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited (Formerly know as MCX Stock Exchange). QBPL is also registered as Depository Participant with NSDL. QBPL has applied for Registration to SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014. QBPL or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market.

ANALYST(S) CERTIFICATION

“I, Jignesh Shial, Research Analyst hereby certify that all of the views expressed in this Research Report accurately reflect my personal views about all of the issuers and their securities and no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.”

As per the declarations given by the Research Analyst(s) and/or any of his family members do not serve as an officer, director or any way connected to the company/companies mentioned in this report. Further, as declared by him/them, he/they has/have not received any compensation from the above companies in the preceding twelve months. He/they do not hold any shares by him/them or through his or their relatives. Our entire research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the Research Analyst or member of which the Research Analyst knows of has reason to know at the time of publication of the research report or at the time of the public appearance.

The Research Analyst(s) are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of quant Broking Private Limited (QBPL), and have no bearing whatsoever on any recommendation that they have given in the Research Report.

This Research Report (hereinafter called “Report”) is meant solely for use by the recipient and is not for circulation. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein.

RATINGS AND OTHER DEFINITIONS INSTITUTIONAL EQUITIES RESEARCH COVERAGE UNIVERSE – DISTRIBUTION OF RATINGS STOCK RATING SYSTEM

BUY. We expect the stock to del iver >15% absolute returns .

ACCUMULATE. We expect the stock to del iver 6-15% absolute returns .

REDUCE. We expect the stock to del iver +5% to -5% absolute returns .

SELL. We expect the stock to del iver negative absolute returns of >5%.

Not Rated (NR). We have no investment opinion on the stock.

SECTOR RATING SYSTEM

Overweight. We expect the sector to relatively outperform the Sensex.

Underweight. We expect the sector to relatively underperform the Sensex.

Neutral. We expect the sector to relatively perform in l ine with the Sensex.

30%

37%

23%

10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Buy Accumulate Reduce Sell


Disclaimer

This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by QBPL to be reliable. QBPL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information, opinions/views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, affiliates or representatives of QBPL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information/opinions/views contained in this Report. This Report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this Report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. Though disseminated to clients simultaneously, not all clients may receive this report at the same time. The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies.

Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. This information is subject to change without any prior notice. QBPL or any of its affiliates/group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. QBPL is committed to providing independent and transparent recommendation to its clients. Neither QBPL nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information.

The price and value of the investments referred to in this Report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. QBPL does not provide tax advice to its clients, and all investors are strongly advised to consult with their tax advisers regarding taxation aspects of any potential investment. Opinions expressed are our current opinions as of the date appearing on this Research only. We do not undertake to advise you as to any change of our views expressed in this Report.

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Regn. No.:

CAPITAL MARKET SEBI REGN. NO.: BSE: INB011419430 EQUITY DERIVATIVES SEBI REGN. NO.: BSE: INF011419430

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Rashmikant Talati

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Title

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mumbai 400 021, india

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Thank you

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