key conclusions revolution explosion digital digital data

KEY CONCLUSIONS

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

Equity Research Asia Pacific Region

Diversified Financials

29 June 2016

India Financials Sector SECTOR REVIEW

The Ideas Engine

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Credit Suisse’s unique

insights and investment ideas.

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The quick and the dead India's financial landscape is set for a dramatic transformation with the advent of

instantaneous, cashless, paperless, presenceless financial transactions.

Enablers in place: Advent of Unified Payment Interface (UPI) and adoption

of the Aadhaar (1 bn-plus enrolled), has created a backbone for

instantaneous, inter-operable, cashless financial transactions. The Indian

payment system will now leapfrog to digital where cost of transactions will be

near zero, customer ownership will rest with best interface providers and

incumbency of deposits will be challenged.

New business models will emerge: Business models will be redefined and

unserved markets open up as financial providers move from being data poor to

data rich. We estimate the consumer and SME loan market will grow from

US$600 bn to US$3,020 bn in the next ten years. As barriers of access and

reach break a digitally empowered customer with instantaneous authentication

through Aadhaar, inter-operable payments and app-based delivery of services

will be able to compare and contrast products from multiple providers.

Survival of the quickest—US$600bn up for grabs: Those that are able to

transform (The Quick) will not only survive but capture increasing market

share. We expect private bank market share to rise from the current 23% to

37% over the next ten years as private banks are nimbler and currently have a

disproportionate share of digital channels. HDFC Bank, ICICI Bank and Axis

are our preferred picks to play the potential US$600 bn market-cap gain.

Figure 1: Financial sector market share will be re-distributed

Source: Credit Suisse research

Foreword by Mr Nandan Nilekani, ex-Chairman UIDAI, co-founder,

Infosys

RESEARCH ANALYSTS

Ashish Gupta 91 22 6777 3895 [email protected]

Sunil Tirumalai 91 22 6777 3714 [email protected]

Kush Shah 91 22 6777 3862 [email protected]

Prashant Kumar 91 22 6777 3942 [email protected]

Rohit Kadam, CFA 91 22 6777 3824 [email protected]

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Aadhaar

UPI

Smartphones

Digital data explosion

Digital revolution

Unserved segments to open up

Traditional products will get

disrupted

PSU incumbent market share loss

to accelerate

Rapid shift to non-cash economy

From ‘data poor’ to ‘data rich’

Partnerships between nimble private players

IDEAS ENGINE SERIES

IDEAS ENGINE 2

India Financials Sector

Focus table and charts Figure 2: India likely to skip a couple of generations in banking Figure 3: Under UPI, smartest apps to steal customer ownership Figure 4: Cost of intermediation high in India

Source: RBI, Credit Suisse research Source: Credit Suisse research Marginal spreads = base rate – marginal deposit cost (60%*1Y

deposit rate + 40% * CASA). Source: Company data, CS estimates

Figure 5: Multiple products to witness disruption Figure 6: Digital boost for retail lending Figure 7: US$600bn opportunity up for grabs

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Branch banking

Cards -Credit/Debit

Internet Banking

Mobile Banking

Evolution of banking - developed markets

High mobile penetration and low cost driving

direct shift Indian banking evolution

Number of branches -125,863

Share in customer txns -32%

Number of cards -645mn

Share in customer pymts - 4%

Number of users -110mn

Share in customer pymts - 39%

Number of mobile users -55mn

Share in customer pymts - 1.5%

Sender’sBank

Receiver’sBank

Sender’sBank

Receiver’sBank

Payments app

Payments app

Traditional payments

New age payments

1.5

2.5

3.5

4.5

5.5

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

SBI marginal spread (%)

Savings account

Current accounts

Fixed deposits

Remittance

Bill payment

Cash management

Credit Cards

MFs

Insurance distribution

POS terminals

Cust

om

er

engagem

ent →

Profitability →

At risk -

500

1,000

1,500

2,000

2,500

3,000

3,500

FY09 FY16 FY26E

Retail loan assets in India (US$ bn)

Others Mortgage Auto CV's Personal Gold SME & small business

USD 620 bn

USD 3020 bn

USD 279 bn

5x in 10 years

15% CAGR

Pvt Banks, USD127bn

Total Mcap USD600bn

FY16 FY26

Asset CAGR of 18% and Mcap to asset of 25%

NBFCs, USD41bn

Fintech, USD2bn

Mcap for target segment

IDEAS ENGINE 3


Valuation table Figure 8: Valuation summary

CS

Rating

CMP Mkt cap

(US$ bn)

P/B (x) P/adj B (x) EPS (Rs) EPS growth (%) P/E (x) ROE (%) P/PPoP (x)

Rs FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E

Private sector

Axis O 515 18.1 2.0 1.8 2.1 1.8 39 45 8 16 13 11 16 17 7 6

HDFC Bank O 1,168 43.7 3.5 3.0 3.5 3.0 59 73 22 24 20 16 19 20 12 9

ICICI O 233 20.0 1.4 1.3 1.6 1.4 21 24 23 18 11 10 13 14 7 6

Kotak Mahindra N 743 20.1 3.6 3.1 3.6 3.1 28 35 46 26 27 21 14 15 17 14

Yes Bank N 1,069 6.6 2.8 2.3 2.9 2.4 75 92 24 23 14 12 21 22 9 7

J&K Bank O 68 0.5 0.5 0.4 0.6 0.6 15 17 72 18 5 4 11 12 2 2

IndusInd O 1,085 9.5 3.2 2.8 3.3 2.8 51 65 30 26 21 17 16 18 13 11

Public sector

Bank of Baroda N 154 5.2 1.0 0.9 1.2 1.1 7 15 nm 123 23 10 4 9 5 4

Bank of India U 100 1.4 0.3 0.3 1.5 1.1 11 22 nm 101 9 4 3 7 1 1

PNB U 104 3.0 0.5 0.5 1.1 0.9 13 17 nm 29 8 6 7 8 2 2

SBI N 216 24.8 0.9 0.8 1.2 1.1 23 32 37 36 9 7 9 12 4 4

Union Bank O 127 1.3 0.4 0.4 0.9 0.7 22 32 7 48 6 4 7 10 2 1

IOB U 27 0.7 0.4 0.4 0.9 0.8 -1 -2 nm nm -24 -12 -2 -3 3 3

Non-bank fin

Bajaj Finance U 7,658 6.1 4.6 3.5 4.7 3.6 326 404 37 24 23 19 21 21

HDFC O 1,229 28.7 5.1 4.6 5.1 4.6 58 58 29 1 21 21 25 23 14 14

IDFC O 48 1.1 0.7 0.7 0.7 0.7 5 6 nm 18 10 8 7 8 4 3

Indiabulls O 665 4.1 2.3 2.0 2.4 2.0 71 89 29 26 9 7 26 29

LIC Housing Fin O 498 3.7 2.3 1.9 2.3 1.9 46 59 39 28 11 8 24 25

M&M Finance O 311 2.6 2.4 2.0 3.0 2.5 24 30 73 27 13 10 20 21

SCUF O 1,605 1.6 2.0 1.7 2.3 2.0 124 164 48 32 13 10 17 19

Shriram Transport O 1,154 3.9 2.3 2.0 2.5 2.2 75 111 43 48 15 10 16 20 6 5

SKS Microfinance N 695 1.3 4.3 3.1 4.3 3.1 54.8 62.5 128 14 13 11 41 32

Core business

ICICI O 162 13.9 1.1 1.0 1.2 1.1 18 21 26 19 9 8 12 13 5 4

HDFC O 488 11.4 2.6 2.3 2.6 2.3 36 47 14 32 14 10 21 24 7 7

Note: Priced as of 27 June 2016. Source: Thomson Reuters, company data, Credit Suisse estimates

IDEAS ENGINE 4


Foreword by Mr Nandan Nilekani Once in a while a major disruption or discontinuity happens which has huge consequences. In

2007, the internet and the mobile phone came together in a whole new product called the

smartphone. This phone, with its own operating system like iOS or Android, could support OTT

(Over The Top) applications. The messaging solution for the smartphone did not come from the

giant telecom or internet companies. Instead it came from WhatsApp, a start-up. WhatsApp

does 30 billion messages a day, whereas all the telecom companies put together do 20 billion

SMS messages per day. Such is the power of disruption!

Such a ‘WhatsApp’ moment is now upon us in Indian Banking. This discontinuity has been

caused by several things coming together. Smartphones are growing dramatically and are

expected to reach a penetration of 700 million by 2020. Over 1 billion Indian residents now

have Aadhaar, an online biometric identity. The Government promoting financial inclusion

through Jhan Dhan Yojana, has led to over 200 million new bank accounts being opened. With

RBI giving licences to over 20 new banks, including small banks and payment banks, the

competitive intensity of the sector is set to increase. One can visualise a future where every

adult Indian has an Aadhaar number, a smartphone and a bank account. Already over 280

million Indian residents have an Aadhaar linked bank account and around 1 billion DBT (Direct

Benefit Transfer) transactions have happened, whose value is in the billions of dollars.

On top of this, a set of powerful open and programmable capabilities that are collectively

referred to as the ‘India Stack’ by the think-tank iSPIRT has been created over the last seven

years. Aadhaar provides on-line authentication using one’s fingerprint or iris, which can be done

from anywhere. This can make transactions ‘presence less’. The eKYC feature of Aadhaar

enables a bank account to be opened instantly, just by using the Aadhaar number and one’s

biometric. The e-sign feature enables on-line documents to be digitally signed with Aadhaar.

The ‘digital locker’ system enables the storage of such electronic documents safely and

securely. All this can make the entire banking process ‘paperless’.

The final two layers of the India Stack have great relevance to the future of Banking. The UPI

(Unified Payment Interface) layer, a product built by NPCI (National Payment Corporation of

India, a non-profit company collectively owned by banks and set up in 2009) will revolutionise

payments and accelerate the move towards a ‘cashless’ economy. So ‘pushing’ or ‘pulling’

money from a smartphone will be as easy as sending or receiving an email. This product from

NPCI is the latest in several payment systems that they have developed, from the National

Financial Switch, National Automated Clearing House, and RuPay cards, to the Aadhaar

Payment Bridge, Aadhaar-enabled Payment System and IMPS, a real-time payment system.

The move to ‘cashless’ will be accelerated by Aadhaar-enabled biometric smartphones. So

credential checking in banking will move from ‘proprietary’ approaches (debit card + PIN) to

‘open’ approaches (mobile phone + Aadhaar authentication). So the holy grail of one click two

factor authentication, now available only to giants like Apple, will be available to kids in a garage

to develop innovative solutions.

Finally as India goes from being data poor to data rich in the next 2-3 years, the Electronic

Consent layer of the India Stack will enable consumers and business to harness the power of

their own data to get fast, convenient and affordable credit . Such a use of digital footprints will

bring millions of consumers and small businesses (who are in the informal sector) to join the

formal economy to avail of affordable and reliable credit.

And as data becomes the new currency, financial institutions will be willing to forego transaction

fees to get rich digital information on their customers. The elimination of these fees will further

accelerate the move to a cashless economy as merchant payments will also become digital.

This will also shift the business models in banking from low volume, high value, high cost, and

high fees, to high volume, low value, low cost, and no fees. This will lead to a dramatic upsurge

in accessibility and affordability, and the market force of customer acquisition and the social

purpose of mass inclusion will converge.

These gale winds of disruption and innovation brought upon by technology, regulations and

government action, will fundamentally alter the banking industry. Payments, liabilities and assets

will all undergo dramatic transformation as switching costs reduce and incumbents are

threatened. As this insightful report from Credit -Suisse has so well explained, there is a

US$ 600 billion market capitalisation opportunity waited to be created in the next ten years.

This will be shared between existing public and private banks, the new banks and new age

NBFCs. It may even go to non-banking platform players, which use the power of data to fine-

tune credit risk and pricing, and make money from customer ownership and risk arbitrage.

The Public Sector banks which occupy the commanding heights of the economy with a 70%

market share, will be particularly challenged. Even as they deal with the inheritance of their

losses, they will have to cope with, and master, enormous digital disruption. This will require

their owners, the Government to give them the autonomy and freedom to experiment and

innovate.

To quote Shakespeare ( in Julius Caesar) ‘There is a tide in the affairs of men. Which, taken at

the flood, leads on to fortune'; The US$600 billion opportunity is here! The WhatsApp

revolution went unnoticed by incumbents. Normally such disruptive changes (like bubbles!) are

only recognised after they have happened. In this case, the forces of change are evident and

can be anticipated. The opportunity for the Indian Banking sector has been called, and it is

equally accessible to incumbents, both in the public and private sector, to new banks, to

NBFCs and to tech companies. The future will belong to those who show speed, imagination

and the boldness to embrace change!

Mr Nandan Nilekani is ex-Chairman of UIDAI (Unique Identification Authority of India)

and the co-founder of Infosys.

IDEAS ENGINE 5


The quick and the dead

Gamechangers in place

The Indian financial landscape is set for a dramatic transformation as instantaneous, cashless,

paperless financial transactions have been enabled with the advent of Unified Payment

Interface (UPI). Aug-2016 is likely to see the launch of the largest Payment Bank (Paytm) as

well as UPI-powered payment interfaces from the top private banks in the country. On the back

of this, the Indian payment system will leapfrog the card, internet banking era, to digital where

cost of transactions will be near zero, customer ownership will rest with the best interface

provider and incumbency of deposits will be challenged.

Aadhaar (1 bn+ enrolled) has created a platform for instantaneous, paperless identification and

authentication. The advent of United Payment Interface (UPI) allows digital payments to be

inter-operable among banks and instantaneous transfer of money using phones/aliases rather

than bank accounts. With virtually all bank deposit holders likely to own a smartphone by

2020, a digital revolution has been anticipated in India. India has already adopted digital

platforms in e-commerce (28 mn shoppers), social media (135 mn, India #2 for FB), and travel.

From data poor to data rich

Financiers will get a flood of data through transactions made through their interface (apps), the

digital footprint left by individuals, smartphone data and on-line tax information (3-5 bn invoices

will go digital with GST). Business models for Indian financial companies will be redefined as

new/unserved markets open up. We expect penetration of consumer debt to rise to 25% of

GDP from the current 17% on the back of new data availability and this will help consumers

and the SME lending market will grow from US$620 bn to US$3,020 bn over the next decade.

Even as new revenue streams emerge for banks, they will witness disintermediation of others

and compression in spreads in many others.

As financial transactions break down the barriers of access and reach, we believe traditional

'one-stop-shop' banking models may be difficult to sustain. Instead, players may find areas of

core strengths to focus on, while partnering with other specialists for giving an all-round

customer experience. A digitally empowered customer with instantaneous authentication

through Aadhaar, inter-operable payments and app-based delivery of services will be able to

compare and contrast products from multiple providers, and select the best in the market to

tailor his/her own 'Super-bank'.

Survival of the quickest

As the twin forces of disintermediation and digitisation accelerate the pace of change, The

Quick (banks able to transform) will not only survive but capture increasing market share, while

The Dead (banks unable to cope with the change) will get marginalised. We estimate that with

the opening of new markets, financiers now have a US$600 bn market cap opportunity to play

for and expect the private banks, NBFCs and fin-tech players will be the prime beneficiaries.

Historically as well, private banks have proven to be nimble and captured a high share in new

segments such as consumer lending, credit cards, among others. Therefore, compared to their

22% deposit market share, they have 40%/77% share in consumer loans, credit cards. And

while these are still early days, they have a disproportionate share of digital channels. Private

banks' market share has moved up 1% each year for the past 15 years to 23% now (even

when PSUs were not constrained for capital or from NPAs). As the pace of market share gain

accelerates, we expect private banks' to be the likely winners with share rising to 37% in the

next decade—an asset growth opportunity of 5x.

Therefore, we believe that the larger private banks (HDFC Bank, ICICI and Axis Bank) are well

positioned to drive faster growth and improved profitability on the back of this. HDFC Bank with

a 5% deposit share has 18% share in electronic (RTGS) transfers and 24% share in credit

card transactions. ICICI Bank also has a high share on digital channels (22% in mobile

banking).

Figure 9: The India stack

Source: Nandan Nilekani "The coming great disruption", Credit Suisse research

Jan-Dhan – banking for all

219 mn bank accounts

opened so far

Zero balance accounts

now only 26%

~50% accounts

Aadhaar linked

Unique Identity for every Indian

~1bn Aadhaar cards

issued (~80%+ of

population)

Mobile connectivity

More than 650mn

mobile phone users

Smartphone

penetration at ~20% -

rising at a fast pace

~700mn smartphone

users by 2020

Consent layer

Cashless layer

Paperless layer

Presence-less

Provides a modern privacy sharing network

Game changing electronic payment systems

Rapidly growing base of paperless systems

Unique digital biometric identity

Indi

a St

ack

IDEAS ENGINE 6


HDFC Bank (HDBK.BO / HDFCB IN)

From incumbent to disruptor

Ashish Gupta / Research Analyst / 91 22 6777 3895 / [email protected]

Prashant Kumar / Research Analyst / 91 22 6777 3942 / [email protected]

■ Dominant market share in digital channels. HDFC Bank, with its digital focus, has

acquired a disproportionate share in key payment channels such as merchant acquiring

business (~40%), credit card transactions (~24%), and POS terminals (31%), which gives

it valuable insights into customer transaction data. HDFC has been one of the first banks to

establish an internal data warehouse integrated with CRM solutions. This, coupled with

robust analytics and digital infrastructure, has enabled it to offer digital products with

minimal human intervention such as ten-second personal loans. This should continue to be

its source of competitive advantage over its peers as it would be difficult for its peers to

replicate a similar information infrastructure quickly.

■ Well placed to extend market share gains. HDFC Bank, in FY16, moved to the #2

spot in terms of loan book size (behind SBI) from #6 last year. HDFC Bank has steadily

gained market share from 0.8% in FY00 to 6.4% in FY16 as its growth strategies have

been more consistent than its private sector peers. Market share gains for the bank have

accelerated as aggressive investment in franchise expansion (network footprint up 80% in

three years) and digital platform are yielding results.

■ Key beneficiary of continued strength in consumer lending cycle. The consumer

lending cycle is expected to stay strong (5x over next ten years), and HDFC bank is going

to be one of the biggest beneficiaries given its market leadership position in most of the

retail segments. The bank's dominant position in the digital payments space gives it the

ability to drive strong cross-sell. The bank is already seeing strong traction for select

digitised products launched so far.

■ Improving operating leverage to boost profitability. The digital strategy of the bank is

likely to yield positive operating leverage benefits as customer transactions move to low-cost

digital channels and positively impact growth. With the bank expected to deliver 22%

earnings CAGR and 20%+ ROE, at 3.3x book, we maintain our OUTPERFORM rating.

Increase TP to Rs1,470 (earlier Rs1,360).

Rating OUTPERFORM* Price (29 Jun 16, Rs) 1,167.85 Target price (Rs) (from 1,360.00) 1,470.00¹ Upside/downside (%) 25.9 Mkt cap (Rs mn) 2,960,560 (US$

43,689) Number of shares (mn) 2,535.05 Free float (%) 79.6 52-week price range 1,189.8 - 946.7 ADTO - 6M (US$ mn) 24.3 *Stock ratings are relative to the coverage universe in each analyst's or each

team's respective sector.

¹Target price is for 12 months.

Share price performance

The price relative chart measures performance against the S&P BSE

SENSEX IDX which closed at 26740.39 on 29/06/16

On 29/06/16 the spot exchange rate was Rs67.77/US$1

Performance over 1M 3M 12M Absolute (%) -1.0 9.0 9.4 Relative (%) -1.1 3.5 13.2

Financial and valuation metrics

Year 3/15A 3/16E 3/17E 3/18E Pre-prov op profit (Rs mn) 206,318.5 254,930.7 316,744.1 394,557.5 Pre -tax profit (Rs mn) 186,379.4 228,362.3 283,192.4 351,534.6 Net attributable profit (Rs mn) 122,962.3 150,719.1 186,907.0 232,012.9 EPS (CS adj.) (Rs) 48.64 59.62 73.93 91.77 Change from previous EPS (%) n.a. -0.11 -0.32 Consensus EPS (Rs) n.a. 59.2 72.7 89.5 EPS growth (%) 15.2 22.6 24.0 24.1 P/E (x) 24.0 19.6 15.8 12.7 Dividend yield (%) 0.9 1.1 1.3 1.3 CS adj. BVPS (Rs) 287.5 333.0 389.4 463.6 P/B (x) 4.06 3.51 3.00 2.52 ROE (%) 18.3 19.2 20.5 21.5 ROA (%) 1.9 1.9 1.9 1.9 Tier 1 ratio (%) 13.2 12.5 11.9 11.5

Source: Company data, Thomson Reuters, Credit Suisse estimates.

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Price (LHS) Rebased Rel (RHS)

IDEAS ENGINE 7


ICICI Bank (ICBK.BO / ICICIBC IN)

Digital to drive retail push



■ Among the top-three players in most digital channels. ICICI Bank has been among the first

to launch new products ahead of peers (tab banking, wallet, NFC cards) and the initiatives

have resulted in ~70% of its customer transactions happening through digital channels. The

bank is among the top-three players along with HDFC Bank and SBI in most of the

payment channels. Even for lending products, the bank has reduced turnaround time for

core products, such as mortgage, to eight hours and has started offering most of the

products through digital channels.

■ Corporate stress clouding strength in retail. Stress on its corporate business is clouding the

strength in its retail business, which is seeing fairly strong traction with retail loan growth at

23% YoY. The share of retail loans is expected to cross ~50% over the next two years.

Retail liability growth has been strong as well (CASA growth of 23%) with the CASA ratio

improving to ~46%, probably the highest among private sector banks.

■ Profitability to stay healthy even with the clean-up. The bank has created a large

provisioning cushion (~0.8% of loans) and is expected to realise gains from the listing of its

life insurance subsidiary in FY17. This can allow the bank to maintain double-digit ROEs

while making provisions for stressed loans. Further, the bank can benefit from an

improvement in the economic outlook especially for steel and power sectors. The resolution

of the some of its large stress accounts under the revised stress management framework

by the RBI could result in better-than-expected recoveries.

■ Recognition to drive rerating. NPL recognition and the credit cost of the bank are likely

to stay elevated; however, adequate capital (Tier 1 ~13.1%) and healthy pre-provisions

profitability (PPoP ROA ~2.5%) provide it the ability to absorb the provisioning impact.

Therefore, as the book cleans up and the gap between reported and adjusted book narrows

over the next two years, its 1.1x core book multiple can expand. Maintain Outperform with

increased TP of Rs308 (Rs292 earlier).

Rating OUTPERFORM* Price (29 Jun 16, Rs) 236.50 Target price (Rs) (from 295.00) 308.00¹ Upside/downside (%) 30.2 Mkt cap (Rs mn) 1,375,749 (US$ 20,302) Number of shares (mn) 5,817.12 Free float (%) 57.0 52-week price range 317.4 - 183.4 ADTO - 6M (US$ mn) 71.1 *Stock ratings are relative to the coverage universe in each analyst's or each







Performance over 1M 3M 12M Absolute (%) -3.4 -0.0 -23.2 Relative (%) -3.4 -5.5 -19.5


Year 3/16A 3/17E 3/18E 3/19E Pre-prov op profit (Rs mn) 238,007.8 232,484.3 278,345.5 305,412.5 Pre -tax profit (Rs mn) 121,329.7 168,798.5 192,718.7 221,802.8 Net attributable profit (Rs mn) 96,635.4 117,948.6 138,536.3 154,991.7 EPS (CS adj.) (Rs) 16.62 20.28 23.82 26.65 Change from previous EPS (%) n.a. -0.88 -0.96 -0.29 Consensus EPS (Rs) n.a. 18.4 22.2 26.9 EPS growth (%) -13.5 22.1 17.5 11.9 P/E (x) 14.2 11.7 9.9 8.9 Dividend yield (%) 2.4 2.6 3.0 3.2 CS adj. BVPS (Rs) 154.3 168.6 185.6 204.9 P/B (x) 1.53 1.40 1.27 1.15 ROE (%) 11.4 12.6 13.5 13.7 ROA (%) 1.4 1.5 1.6 1.5 Tier 1 ratio (%) 13.0 12.7 12.1 11.3


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IDEAS ENGINE 8


Axis Bank Limited (AXBK.BO / AXSB IN) Digital complementing retail-focused strategy



■ Developing digital strategy from scratch. Its focus on the digital approach has been a key enabler of Axis Bank's retail strategy as the share of retail business for the bank has increased to 65% in FY16 from 43% as of FY11. The share of digital transactions crossed 50% in FY15 and has been growing at a fast clip (37% YoY vs 16% YoY overall). On the lending side, the bank has launched pre-approved personal and car loans for existing customers and is evaluating the possibility of extending it to non-bank customers. It has ~2.5 mn retail loan customers indicating further potential to grow its loan book internally. The bank has launched multiple mobility solutions for corporate clients for on-the-go transactions and expects significant productivity gains from it.

■ Clean-up of books a positive. Management has disclosed stressed asset watchlist at 6.7% of loan book; NPL slippages and credit cost are likely to be high during the clean-up for FY17/18. However, this stress exposure is now ring-fenced and the cost of clean-up is now at a manageable 9% of book value. While ROEs are likely to come down to 15-16% during the period, visibility on clean-up of the book is a positive.

■ Healthy pre-provisions profitability to help absorb credit cost. While the bank will see an increase in NPL and provisions, its healthy pre-provision profitability (PPoP ROA of ~3.0%) enables it to withstand the impact while maintaining healthy ROEs. Given its 12.5% Tier 1 and healthy pre-provision profitability, the bank should be able to support 20% loan growth without needing equity dilution.

■ Well placed in current environment. The bank continues to deliver strong loan growth

(20% CAGR) driven by continued strength in retail loan growth (24% YoY). As a large part

of the banking system continues to struggle for capital, the bank is well placed to extend its

market share gains and earnings are likely to accelerate post the clean-up. We maintain our

OUTPERFORM rating as we increase our TP to Rs592 (from Rs528 earlier).

Rating OUTPERFORM* Price (29 Jun 16, Rs) 517.35 Target price (Rs) (from 528.00) 592.00¹ Upside/downside (%) 14.4 Mkt cap (Rs mn) 1,235,058 (US$ 18,226) Number of shares (mn) 2,387.28 Free float (%) 62.7 52-week price range 608.8 - 373.6 ADTO - 6M (US$ mn) 73.7 *Stock ratings are relative to the coverage universe in each analyst's or each







Performance over 1M 3M 12M Absolute (%) 0.8 16.4 -7.4 Relative (%) 0.7 10.9 -3.6


Year 3/16A 3/17E 3/18E 3/19E Pre-prov op profit (Rs mn) 149,203.7 171,383.4 194,906.7 229,606.5 Pre -tax profit (Rs mn) 128,204.8 129,663.6 147,136.1 175,096.1 Net attributable profit (Rs mn) 85,952.5 89,467.9 101,523.9 119,065.3 EPS (CS adj.) (Rs) 36.07 37.45 42.49 49.83 Change from previous EPS (%) n.a. 0.14 -0.06 -0.02 Consensus EPS (Rs) n.a. 37.1 44.8 53.2 EPS growth (%) 16.0 3.8 13.5 17.3 P/E (x) 14.3 13.8 12.2 10.4 Dividend yield (%) 1.2 1.3 1.4 1.7 CS adj. BVPS (Rs) 222.5 252.4 286.1 325.4 P/B (x) 2.32 2.05 1.81 1.59 ROE (%) 17.6 15.8 15.8 16.3 ROA (%) 1.7 1.6 1.5 1.5 Tier 1 ratio (%) 12.5 12.1 11.8 11.5


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Companies Mentioned (Price as of 29-Jun-2016)

Aditya Birla Nuv (ABRL.BO, Rs1183.25) Amazon com Inc. (AMZN.OQ, $707.95) Apple Inc (AAPL.OQ, $93.59) Axis Bank Limited (AXBK.BO, Rs517.35, OUTPERFORM, TP Rs592.0) BFS (BJFS.NS, Rs2298.1) Bajaj Finance Ltd (BJFN.BO, Rs7681.9, UNDERPERFORM, TP Rs5500.0) Bharat Financial Inclusion Ltd. (SKSM.BO, Rs735.15) Capital Firs (CAPF.NS, Rs547.8) DBS Group Holdings Ltd (DBSM.SI, S$15.53) Equitas Hldg (EQHL.NS, Rs177.3) Facebook Inc. (FB.OQ, $112.7) Google (GOOAV.OQ, $568.67) HDFC Bank (HDBK.BO, Rs1167.85, OUTPERFORM, TP Rs1470.0) ICICI Bank (ICBK.BO, Rs236.5, OUTPERFORM, TP Rs308.0) Indiabulls Housing Finance Ltd (INBF.BO, Rs661.25) IndusInd Bank (INBK.BO, Rs1101.9, OUTPERFORM, TP Rs1301.0) L&T Finance Holdings Limited (LTFH.BO, Rs77.4) LIC Housing Finance Ltd (LICH.BO, Rs491.0) Mahindra and Mahindra Financial Services Ltd (MMFS.BO, Rs320.7) MasterCard Inc. (MA.N, $90.42) Microsoft Corporation (MSFT.OQ, $49.44) Shriram City Union Finance Ltd (SHCU.BO, Rs1603.0) Shriram Transport Finance Co Ltd (SRTR.BO, Rs1143.8) State Bank Of India (SBI.BO, Rs217.2, NEUTRAL, TP Rs185.0) Ujjivan (UJVF.NS, Rs400.3) Vivendi (V.N^H06, $33.37)

Disclosure Appendix

Important Global Disclosures

Ashish Gupta and Sunil Tirumalai each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

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3-Year Price and Rating History for Axis Bank Limited (AXBK.BO)

AXBK.BO Closing Price Target Price

Date (Rs) (Rs) Rating

18-Jul-13 247.68 360.00 O

18-Oct-13 231.46 290.00

28-Apr-14 306.00 360.00

19-May-14 370.97 432.00

11-Jun-14 388.26 472.00

18-Nov-14 473.95 567.00

13-Jan-15 502.80 593.00

27-Jan-15 592.30 680.00

21-Apr-15 523.65 614.00

30-Apr-15 567.85 654.00

27-Oct-15 521.30 626.00

20-Jan-16 388.65 478.00

21-Apr-16 467.60 528.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

3-Year Price and Rating History for Bajaj Finance Ltd (BJFN.BO)

BJFN.BO Closing Price Target Price


13-Jan-15 3481.00 4350.00 O *

19-Mar-15 4035.05 4700.00

20-May-15 4499.15 5150.00

13-Jul-15 5102.70 4800.00 N

20-Oct-15 5306.05 5000.00

07-Jan-16 6112.95 5200.00

03-Feb-16 6380.50 5600.00

20-Apr-16 7216.15 5500.00 U

* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM

N EU T RA L

U N D ERPERFO RM

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3-Year Price and Rating History for HDFC Bank (HDBK.BO)

HDBK.BO Closing Price Target Price


17-Jul-13 662.65 770.00 O

22-Apr-14 726.35 840.00

19-May-14 811.80 1009.00

18-Nov-14 932.40 1099.00

13-Jan-15 963.55 1178.00

04-Feb-15 1067.25 R

10-Feb-15 1055.60 1178.00 O

16-Feb-15 1067.10 1240.00

21-Oct-15 1094.80 1360.00


O U T PERFO RM

REST RICT ED

3-Year Price and Rating History for ICICI Bank (ICBK.BO)

ICBK.BO Closing Price Target Price


31-Jul-13 181.86 215.00 N

28-Oct-13 202.91 207.20

28-Apr-14 254.77 236.00

19-May-14 294.22 285.00

30-Oct-14 322.30 314.80

18-Nov-14 336.20 342.40

13-Jan-15 341.00 363.00

21-Apr-15 310.85 306.00

29-Jan-16 230.10 258.00

21-Apr-16 253.05 295.00 O


N EU T RA L

O U T PERFO RM

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3-Year Price and Rating History for IndusInd Bank (INBK.BO)

INBK.BO Closing Price Target Price


10-Jul-13 495.70 465.00 N

17-Jul-13 453.40 416.00 U

14-Oct-13 427.35 401.00

17-Apr-14 498.65 444.00

19-May-14 561.25 690.00 O

11-Sep-14 628.35 732.00

18-Nov-14 721.90 847.00

13-Jan-15 822.55 946.00

25-Jun-15 864.75 R

29-Jun-15 866.50 946.00 O

13-Jul-15 923.90 1080.00

22-Apr-16 979.75 1165.00


N EU T RA L

U N D ERPERFO RM

O U T PERFO RM

REST RICT ED

3-Year Price and Rating History for State Bank Of India (SBI.BO)

SBI.BO Closing Price Target Price


13-Aug-13 162.07 141.70 N

17-Feb-14 147.34 137.40

19-May-14 257.00 204.90

26-May-14 269.98 240.50

18-Nov-14 293.96 263.00

08-Jan-15 304.70 294.00

21-Apr-15 289.05 263.00

25-May-15 277.70 247.00

11-Feb-16 154.20 162.00

29-May-16 195.55 185.00


N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most att ractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country o r regional benchmark; prior to 2nd October 2012 U.S. and Canadian

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ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s co verage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less tha n or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underper form ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 56% (39% banking clients)

Neutral/Hold* 34% (18% banking clients)

Underperform/Sell* 10% (40% banking clients)

Restricted 0%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy o r sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Axis Bank Limited (AXBK.BO)

Method: Our target price of Rs592 is based on 2x FY18 book value, at 10% discount to historical trading average multiple (ten-year). Our OUTPERFORM rating is driven by: (1) strong traction in retail business with change in mix towards retail and (2) healthy pre-provisions profitability allowing bank to create NPL provisions w/o impacting profitability.

Risk: Key risks to our Rs592 target price and OUTPERFORM rating for Axis Bank include: (1) a significant slowdown in lending in a high interest rate environment; (2) a substantial deterioration in the asset quality environment; (3) a significant increase in competition; and (4) a sharp rise in wholesale deposit rates.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Bajaj Finance Ltd (BJFN.BO)

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Method: Our 12M forward Rs5,500 target price for Bajaj Finance is based on 14x P/E (historical average) multiple over 24M forward EPS (earnings per share) of Rs404. While Bajaj's performance on growth and asset quality has been commendable in recent quarters, we believe the current valuations demand these trends to continue long term which we think is at risk. We thus rate the stock UNDERPERFORM.

Risk: Risks to our target price of Rs5,500 and our UNDERPERFORM rating for Bajaj Finance Ltd include: (1) Continued strong growth rates as against our expectation of slowdown; and (2) rapid success in the company's new segments.

Target Price and Rating Valuation Methodology and Risks: (12 months) for HDFC Bank (HDBK.BO)

Method: Our target price of Rs1,470 is based on valuing HDFC Bank at 20x FY18 earnings, in line with long-term historical average. Our OUTPERFORM rating is driven from (1) the bank being one of the biggest beneficiaries of the strong consumer lending cycle, (2) no asset quality overhang; and (3) strong balance sheet liquidity and capital.

Risk: Key risks to our target price of Rs1,470 and rating of OUTPERFORM for HDFC Bank are a reversal in asset environment, significant increase in competition, high stock valuations and significant slowdown in consumer lending.

Target Price and Rating Valuation Methodology and Risks: (12 months) for ICICI Bank (ICBK.BO)

Method: We value ICICI Bank based on sum-of-the-parts to arrive at our target price of Rs308. We value the core bank at 1.6x FY18E adj book value at 20% discount to its historical average multiple on rising asset quality concerns. Our OUTPERFORM rating is driven by: (1) accelerated NPL recognition leading to de-risking and (2) better pre-provision profitability and capital buffer against problem loans.

Risk: Key risks to our Rs308 target price and OUTPERFORM rating for ICICI Bank are: (1) significant slowdown in corporate loan demand; (2) substantial deterioration in the asset quality environment; and (3) deterioration in retail asset quality cycle.

Target Price and Rating Valuation Methodology and Risks: (12 months) for IndusInd Bank (INBK.BO)

Method: Our Rs1,301 target price for IndusInd Bank has been arrived at on the basis of 3.3x FY18E book value, in line with the long term average trading multiple for HDFC Bank, India's largest private retail focused bank and its closest competitor. Our OUTPERFORM rating is driven by: (1) the bank benefitting from the strong consumer lending cycle, (2) limited asset quality stress and (3) strong balance sheet and capital position.

Risk: Risks to our target price of Rs1,301 and OUTPERFORM rating for IndusInd Bank include slower recovery in the CV cycle and asset quality pressure on the corporate loan book.

Target Price and Rating Valuation Methodology and Risks: (12 months) for State Bank Of India (SBI.BO)

Method: Our target price for State Bank of India of Rs185 is based on sum-of-the-parts, valuing the core banking book at 1x FY18 adj consolidated book, at 25% discount to its historical average multiple. Our NEUTRAL rating is driven by: (1) lower core operating profit growth compared to peers on weaker topline momentum and (2) rising asset quality stress from unrecognised corporate stress loans.

Risk: Key risks to our Rs185 target price and NEUTRAL rating for SBI on the downside are: (1) significant slowdown in lending in a high interest rate environment, (2) substantial deterioration in asset quality environment and (3) slower international growth. Key risks to the upside are: (1) sharper-than-expected pick-up in economic growth, (2) quick recovery in corporate profitability & asset quality and (3) sharp pick-up in corporate credit demand.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (INBK.BO, AAPL.OQ, SKSM.BO, FB.OQ, AMZN.OQ, DBSM.SI, MSFT.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (INBK.BO, AAPL.OQ, FB.OQ, MSFT.OQ) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (INBK.BO, AAPL.OQ) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (INBK.BO, AAPL.OQ, FB.OQ, MSFT.OQ) within the past 12 months

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Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (INBK.BO, AAPL.OQ, SKSM.BO, FB.OQ, AMZN.OQ, DBSM.SI, SHCU.BO, MSFT.OQ) within the next 3 months.

As of the date of this report, Credit Suisse makes a market in the following subject companies (AAPL.OQ, FB.OQ, AMZN.OQ, MSFT.OQ).

Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014

Credit Suisse may have interest in (LTFH.BO, BJFS.NS, CAPF.NS, ABRL.BO, EQHL.NS, UJVF.NS, HDBK.BO, ICBK.BO, AXBK.BO, SBI.BO, INBK.BO, BJFN.BO, SRTR.BO, INBF.BO, SKSM.BO, MMFS.BO, LICH.BO, SHCU.BO)

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (AXBK.BO, INBF.BO, SKSM.BO).

Prashant Kumar, the author of this report, has a financial interest in IDFC Bank Ltd(IDFB.BO)

Credit Suisse has a material conflict of interest with the subject company (FB.OQ) . Credit Suisse has been named as a defendant in various putative shareholder class-action lawsuits relating to Facebook, Inc.’s May 2012 initial public offering. Credit Suisse’s practice is not to comment in research reports on pending litigations to which it is a party. Nothing in this report should be construed as an opinion on the merits or potential outcome of the lawsuits.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

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Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (HDBK.BO, INBK.BO, AAPL.OQ, SKSM.BO, FB.OQ) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

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Credit Suisse Securities (India) Private Limited ................... Ashish Gupta ; Sunil Tirumalai ; Kush Shah ; Prashant Kumar ; Rohit Kadam, CFA

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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