nomura- india banks errclub- making sense of the “stress”

Anchor themes

Large asset quality risks across metals and infrastructure conglomerates and corporates have yet to be recognized. Our exposure analysis indicates the risk seems to be priced in for private corporate banks, but adjusted valuations for PSUs are not cheap. Investors need to remain selective on PSUs.

Nomura vs consensus

We are 5-6% below consensus on FY16/17F PAT estimates.

Research analysts

India Banks

Adarsh Parasrampuria - NFASL [email protected] +91 22 4037 4034

Amit Nanavati - NFASL [email protected] +91 22 4037 4361

India banks

EQUITY: BANKS

Making sense of the “stress”

Stress discounted for private banks; sensitivity indicates need to remain selective on PSUs

INR6tn of unrecognised stress – Sensitivity analysis Large unrecognised exposure to stressed metals/infra and other corporates remains a key investor concern and 5:25 refinancing is providing leeway to delay recognition and impact on the P&Ls. In this report, we undertake a analysis of the ultimate loss given default (LGD) relating to these stressed names and ascertain what is and is not priced in for banks.

We estimate that some INR6tn in stressed assets at metals (INR1.4tn) and infra SPVs (INR2tn) and infra conglomerates (INR1.6tn) and large corporates/real estate (INR1tn) is yet to be recognised as impaired, which is equal to 75% of current system’s NPA+restructuring.

We estimate 15-20% of these loans have already been pushed out using 5:25 refinancing and more will likely follow. Thus, we believe adjusting bank books for the ultimate LGD best assesses the potential impact.

Our LGD assumptions vary from 0% for hydro power and airports to 20-30% for coal power assets, and a much higher 40-60% for gas power, overseas coal, steel and infra conglomerate parent debt. Overall, an LGD of ~30% implies a INR1.7tn hit to banks on these assets.

How are banks relatively placed? While there is exposure to stressed non-infra loans, private corporate banks

and PSU banks have similar exposure to large metal/infra names.

We estimate an LGD of 15-23% of net worth for corporate private banks. ICICI’s LGD is higher at ~23% of net worth due to its higher overseas coal and JPA exposure. LGD for Axis/Yes is lower at 15-18% of net worth.

LGD for PSU banks in these accounts is 15-30% of net worth. BOB is best placed with LGD of 13%, while PNB and BOI are worst placed. SBI parent is better placed, but including subs its exposure is only marginally better.

Risk discounted in private banks: stay selective on PSUs For private corporate banks, valuations adjusted for stressed loans are 10-

15% below mean valuations; hence the concerns seem priced in. ICICI's higher exposure vs Axis/Yes is reflected in a ~20% discount.

For PSUs, the book adjustment is much larger at 30-55% with a 15-25% hit from these accounts and a 15-30% book hit from higher coverage on NPA and restructuring. Adjusting the stress, PSU valuations are not cheap. We see a need to remain selective and prefer SBI and avoid PNB/BOI.

With the recent correction, we think private banks, especially Axis and ICICI, offer a good entry opportunity and are our top pick along with HDFCB.

Fig. 1: India banks: Stocks for action

Source: Bloomberg, Nomura estimates. Pricing as of 14 September 2015.

Company Ticker Rating Mcap (USDbn) Avg. TO (USDmn) Target Price Current Price Upside

ICICI ICICIBC IN BUY 23.3 64.6 350 272 28.5%

Axis AXSB IN BUY 17.3 62.7 625 496 26.0%

SBI SBIN IN BUY 26.4 64.1 290 235 23.3%

Yes YES IN BUY 4.5 45.3 870 732 18.9%

BOB BOB IN BUY 6.1 14.8 210 187 12.6%

PNB PNB IN Neutral 3.7 12.8 140 137 2.2%

BOI BOI IN Neutral 1.4 7.6 140 136 2.9%

Global Markets Research

16 September 2015

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | India banks 16 September 2015

2

Contents

Investment summary ....................................................................................... 3

Our thesis in charts .......................................................................................... 4

Current stress may not be felt by P&Ls soon .................................................. 5

What we consider in our sensitivity and our rationale for loss given defaults

across segments .............................................................................................. 7

Private Banks discounting the hit; need to remain selective on PSU banks . 10

How does it all stack up: Corporate banks factoring in the hit, still need to be

selective on PSUs .......................................................................................... 12

Sector view: Positive on private banks; still remain selective on PSUs: ....... 14

Axis Bank ............................................................................................. 16

ICICI Bank ............................................................................................ 19

Yes Bank .............................................................................................. 23

State Bank of India ............................................................................... 26

Bank of Baroda ..................................................................................... 29

Bank of India ........................................................................................ 32

Punjab National Bank ........................................................................... 35

Appendix A-1 ........................................................................................ 38


3

Investment summary

While many stressed names have been recognised in the past two to three years, we

believe that some of the larger stressed metal/infra special purpose vehicles (SPVs) and

corporates have yet to be recognised. While the government is trying to resolve project

bottlenecks, weak balance sheets plague many infra conglomerates plus the commodity

downcycle will likely delay the expected recovery in asset quality. That said, in the near

term we expect banks to likely opt to manage some of these accounts through the 5:25

refinancing provided by the regulator. We believe some of these companies have

unsustainable debt levels and so the banks will likely eventually need to take a hit on

these accounts. In this report, we have done our best to estimate:

• The part of the stress still not recognised – We believe there could be INR6tn of

debt not recognised as NPAs or restructuring. This is 75% of current system NPA and

restructured book.

• Loss given default (LGD) – While asset classes will differ significantly in ultimate

LGDs, overall we estimate a ~30% LGD in these accounts.

• Bank exposure – We look at MCA data to find bank exposure to these assets, which

show that private corporate banks have similar exposure as PSU banks.

• Bank-wise LGD and how valuations stack after factoring these hits: For private

banks, we estimate the impact to their net worth at 15-25%. For PSUs, the LGD is not

very different (20-25% of net worth), but overall book adjustments will be larger when

factoring in high provisioning for NPAs and restructured loans.

Overall, we expect an elongated credit cost cycle. Private corporate bank

valuations adjusted for the stress are below long-term averages; hence we are

positive on Axis and ICICI particularly following the recent correction. For PSUs,

adjusted valuations are not attractive, so we remain selective, with SBI as our

preferred pick.

Fig. 2: Potential stress seems to be priced in for corporate private banks but adjusted PSU multiples are closer to long-term averages, indicating that the potential stress is not fully priced in

Source: Bloomberg, Company data, Nomura estimates

Book Impact ICICI Axis Yes HDFCB Kotak IIB SBI PNB BOB BOI Union

Reported book FY17F 149 255 382 332 173 336 266 243 212 389 300

Book Impact on banks -22.1% -11.3% -10.9% 1.4% -1.8% -0.9% -30.2% -55.5% -28.8% -58.6% -40.5%

Deep dive sensitivity+SEB -18.2% -11.2% -13.3% -0.6% -0.2% -1.2% -15.0% -24.0% -12.1% -28.5% -20.1%

70% NPL coverage+ARC -1.8% 2.0% 3.3% 2.1% -1.4% 0.9% -5.7% -16.3% -6.1% -16.2% -11.1%

Restructured book -2.2% -2.1% -0.9% 0.0% -0.1% -0.6% -9.5% -15.2% -10.6% -13.9% -9.3%

Adjusted book FY17F 116 225 334 336 170 329 178 108 148 115 169

P/B at current price

Reported book - FY17F 1.38 1.94 1.92 3.06 3.23 2.60 0.78 0.56 0.88 0.35 0.57

Adjusted book - FY17F 1.78 2.20 2.19 3.03 3.28 2.66 1.17 1.27 1.26 1.19 1.02

P/B at Target price



Long term 1 yr frd P/B (04-now ) 1.87 2.16 2.36 3.43 2.79 2.13 1.28 1.29 1.04 1.08 1.09

2004-07 average 1 yr frd P/B 2.10 2.47 3.21 3.65 2.68 1.95 1.20 1.45 1.00 1.16 1.25

At current valuation

Reported book FY17 P/B v/s LT average -26% -10% -19% -11% 16% 22% -39% -56% -15% -68% -47%

Adjusted book FY17 P/B v/s 04-07 multiple -15.3% -10.9% N/A -16.9% 22.5% 36.9% -2.0% -12.5% N/A 2.5% -18.7%

At Target multiples

Reported book FY17 P/B v/s LT average 1.8% 13.5% -3.4% 5.1% 37.5% 42.7% -22.6% -55.3% -4.4% -66.8% -39.0%

Adjusted book FY17 P/B v/s 07-07 multiple 17.0% 12.3% N/A -2.0% 45.5% 60.3% 23.9% -10.7% N/A 5.6% -5.7%


4

Our thesis in charts

Fig. 3: Plenty of stress yet to be recognised – 75% of current system NPA and restructured book

Source: MCA, Nomura research

Fig. 4: We estimate 30% LGD for these assets in the long run

Source: Nomura estimates

Fig. 5: Unrecognised stress ~15-30% of banks’ current net worth


Fig. 6: Book adjustment much higher for PSU banks after adequate provisions for NPAs and restructured book


Fig. 7: Private banks trading at discount after adjusting for stress, PSUs trading in line with long-term averages

Source: Bloomberg, Nomura estimates

INRbn Exposure % of loans

Metal exposure to stressed groups 1,427 2.4%

Infra conglomerates (Top-4) 1,555 2.6%

Infra SPVs (ex Infra conglomerates) 1,957 3.2%

Corporates and Real Estate (ex infra) 1,004 1.7%

Total potential stress 5,943 9.8%

Banks NPAs 3209 5.3%

Banks -Restructured book 4,368 7.2%

NPA of Infra Finance companies 249 NA

Total recognised stress 7827 12.5%

Potential stress as a % of current NPA

+ Restructuring 76%

Sector LGD %

Airports 0%

Pow er - Coal 20%

Pow er -Coal - IPPs 30%

Pow er - Coal international 60%

Pow er - Gas 60%

Pow er - Hydro 0%

Roads 15%

Infra Conglomerate - Parent 50%

Real Estate 15%

Steel 40%

Corporates ex-Steel 20%

Divestments 0%

Total LGD 28.8%

INRbn

Exposure to

stressed assets

LGD on stressed

assets

Total stressed

assets

Infra

conglo

Ex infra Corp.

and CRE

Infra

Corporates Metals

Total System 5,943 1,709 20.4% 5.1% 2.3% 6.0% 6.8%

Private banks 880 280 11.2% 4.5% 1.4% 2.4% 2.6%

ICICI/Axis/Yes 783 248 19.8% 8.4% 2.5% 4.2% 4.0%

Other private banks 96 33 2.6% 0.6% 0.3% 0.5% 1.1%

PSUs 3,631 1,088 23.4% 5.2% 2.4% 5.8% 9.8%

IDFC/PFC/REC 507 139 18.7% 5.1% 1.9% 11.8% 0.0%

Other Institutions 925 201

% of FY15 Networth

-18%-11% -13% -15%

-24%

-12%

-28%-20%

-2%

2% 3%

-6%

-16%

-6%

-16%

-11%-2%

-2% -1%

-9%

-15%

-11%

-14%

-9%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

ICICI Axis Yes SBI PNB BOB BOI Union

Deep dive sensitivity+SEB 70% NPL coverage+ARC

Restructured book

P/B (FY17F

Reported

book)

P/B (FY17F

Adjusted

book)

Reported

book

FY17 P/B

v/s LT

average

Adjusted

book

FY17 P/B

v/s 04-07

multiple

ICICI 1.38 1.78 -26.3% -15.3%

Axis 1.94 2.20 -10.0% -10.9%

Yes 1.92 2.19 -18.8% N/A

SBI 0.78 1.17 -38.8% -2.0%

PNB 0.56 1.27 -56.2% -12.5%

BOI 0.35 1.19 -67.8% 2.5%

Union 0.57 1.02 -47.4% -18.7%


5

Current stress may not be felt by P&Ls soon

No material resolution of large asset quality risks: The current government has been

taking steps to improve the investment climate and remove roadblocks to projects across

the value chain, but what we see is that still large risks in Infrastructure SPVs and

conglomerates, metals and now also SEBs remains for the banking system. For metals,

the outlook has deteriorated in the last 12 months given the fall in global commodity

prices and in Infrastructure weak promoter company balance sheets remain a key issue

and leverage ratios of most of the Infra conglomerates has only deteriorated.

1) Infra conglomerates: Financial position has deteriorated: Interest coverage has

dropped to 0.7x in FY15 from 0.9x in FY14 and debt/equity is up to ~16.5x from

14.5x in FY14. While there has been some success in selling down assets by these

Infra conglomerates, sales are largely of cash generating assets and also

improvement in some of their stressed assets is slower than expected.

Fig. 8: Interest coverage for infra conglomerates has been deteriorating

Source: ACE Equity, Nomura research

Fig. 9: Debt/Equity ratio also fails to improve despite asset sales


2) Commodity names: Could lead to high a LGD: the global commodity downcycle

is having significant impact on the profitability of most metal companies. In a low-

price commodity regime, longer-term losses given defaults could be high in some of

these names.

Fig. 10: Interest coverage of even large metal names now challenged


Fig. 11: Debt levels very high of some of the metal companies – could lead to high loss given default (LGD)

Source: MCA, RBI, Nomura research

3) Infra SPVs (ex conglomerates): Project-level issues remain on gas plants and

even profitability of coal power plants is a worry after the auctions as pointed out by

IDFC in their 1Q16 results conference call (the company having increased its own

LGD assumptions). Some independent power producer-run power plants will not be

able to receive any balance sheet support from parent.

(1.0)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY09 FY10 FY11 FY12 FY13 FY14 FY15

JPA IVRCL GVKGMR Lanco

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY09 FY10 FY11 FY12 FY13 FY14 FY15

JPA IVRCL GVK GMR

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Dec-1

1

Ma

r-12

Jun

-12

Se

p-1

2

Dec-1

2

Ma

r-13

Jun

-13

Se

p-1

3

Dec-1

3

Ma

r-14

Jun

-14

Se

p-1

4

Dec-1

4

Ma

r-15

Jun

-15

Metals IC - Large companies

Metals IC - Medium companies

Metals IC - Small companies

Metal companies

Total Debt

(INRbn)

% of sector's

system loans

Bhushan Steel 381 13%

Bhushan pow er & steel 317 11%

Monnet Ispat 98 3%

MSP Steel 5 0%

Adhunik Metaliks 49 2%

Concast Group 34 1%

Loha Ispat 7 0%

Essar Steel 536 19%

Total 1,427 50%

Total sector's system loans 2861 100%


6

4) Slippage from restructured books: For PSUs, we have highlighted that relapse

risk remains very high, which will keep credit costs elevated in our view. Slippage

from restructured books has increased to ~30% of total slippages in FY15 compared

to ~15% in FY13/14.

Fig. 12: Slippage from restructured books have risen

Source: Company data, Nomura research

5) SEB debt: Restructuring related moratorium coming to an end. While SEB debt

carries some sovereign guarantee and is unlikely to become an NPA any time soon,

we believe that a large part of this debt is exiting its moratorium in FY16 and, given

the weak financials of these SEBs, the Reserve bank of India (RBI) may have to

give an exception to prevent these SEBs from becoming NPAs.

Fig. 13: Financial position of SEBs under FRP have not improved significantly

Source: PFC report, Nomura research

Fig. 14: Banks do have large exposure to SEBs part of which they have restructured as well


But these stresses may not affect P&Ls in the near term – the 5:25 leeway

While our interest coverage analysis indicates stability in overall interest coverage for

corporate India, the assets above have seen a deterioration in their debt servicing that

are large relative to the size of the current stressed book (NPA + restructured book).

While this would imply that incremental stress in the next 12-18 months should not ebb,

the RBI’s leeway given to refinance (5:25 restructuring), provides a way to push out

these asset-quality worries for the time being. This will likely shield banks’ P&Ls in the

interim as well.

Since large part of the stressed book can be re-financed and the P&L in the near

term will not reflect the real asset quality challenges, we believe running

sensitivity on this exposure for their ultimate LGDs is the best way to factor in the

relative stress for banks.

FY13 FY14 1HFY15 2HFY15 FY15 1Q16 FY13 FY14 1HFY15 2HFY15 FY15 1Q16

SBI 0.26% 0.66% 0.49% 0.52% 0.49% 0.37% 8.7% 19.8% 16.7% 28.7% 21.5% 16.2%

PNB 0.30% 0.50% 1.64% 2.35% 1.94% 0.89% 7.1% 14.6% 44.6% 35.1% 38.4% 25.0%

BOB 0.63% 0.49% 0.62% 0.88% 0.72% 0.34% 30.0% 28.7% 30.9% 40.8% 36.3% 18.3%

BOI 0.57% 0.41% 1.13% 1.55% 1.32% 2.33% 22.6% 17.5% 33.3% 28.2% 30.1% 35.2%

Union 0.48% 0.89% 0.71% 0.41% 0.54% 1.00% 25.1% 37.0% 26.1% 16.1% 21.1% 41.0%

Total 13.3% 20.8% 26.7% 30.8% 28.9% 25.6%

Slippages from restructuring (% of loans) % slippages from restructured book

SEB losses (INRbn) FY10 FY11 FY12 FY13

Haryana (15.9) (10.8) (132.0) (36.5)

Punjab (13.0) (16.4) (4.6) 0.5

Rajasthan (110.1) (213.7) (195.7) (123.5)

UP (52.6) (39.7) (92.3) (97.8)

AP (36.4) (21.8) (40.2) (175.2)

Karnataka (4.3) 0.1 (0.8) (9.1)

TN (103.0) (119.1) (133.1) (120.6)

MP (33.4) (21.6) (29.2) (44.5)

INRbn

SEB

exposure

% of FY15

Loans

Of which

restructured

%

restructured

Union 105 4.1% 57 53.9%

BOI 151 3.7% 40 26.5%

PNB 107 2.8% 58 54.4%

BOB 52 1.2% 35 67.3%

SBI 107 0.8% 38 35.5%


7

Fig. 15: 5:25 restructuring announced – pushing out some of the current stress

Source: Media reports (Mint, Financial express, Money control), Nomura research

Fig. 16: The pool of problem assets pretty large


What we consider in our sensitivity and our rationale for loss given defaults across segments

The list is INR6trn – 75% of banking system’s current stressed book (NPAs +

restructured book): We have included debts of ~INR1.4trn form steel; INR1.5trn from

four Infra conglomerates; INR2.0trn from Infra SPVs (ex-Infra conglomerates) and

INR1.0trn from some stressed corporates including some real estate names. This

aggregates to INR6trn and equates to 75% of the FY15 system stressed loans

(Gross NPAs + Restructuring).

We believe this set of exposure largely represents the possible stress remaining to be

recognised for the banking system, and that a large part of it is eligible for 5:25 re-

financing and so may not affect P&Ls for now. While we have tried to exclude exposure

that is already part of the restructured book for banks, there may be some overlap but we

believe this to be negligible given the scale of the numbers involved (please see

Appendix 1 for details on what has been included in our stressed list for sensitivity).

Fig. 17: Unrecognised stress still very large - ~75% of system NPA + Restructuring


Assessing loss given default (LGD) in different asset classes: As discussed above

we thus think that adjusting book value of banks for loss given defaults in this stressed

accounts would be the best adjustment to determine what is priced in and what is not.

Company INR bn

Bhushan Steel 350

Lanco Kondapalli II and III 24

GMR - Odisha pow er plant 40

Essar steel 150

Adani Pow er 150

Uttam Galva Metallics 13

Jaypee - Yamuna Expressw ay 103

Vedanta 102

RPow er - Butibori and Rosa 65

Torrent Pow er 13

Lanco Udupi 49

Krishnapatnam Port 46

JSW Energy - JPVL's Hydro plants 60

Tata pow er - Mundra UMPP 100

Total referrals under 5:25 scheme 1,265

Stressed names (%) 88.3%

INRbn Exposure % of loans

Metal exposure to stressed groups 1,427 2.4%

Infra conglomerates (Top-4) 1,555 2.6%

Infra SPVs (ex Infra conglomerates) 1,957 3.2%

Corporates and Real Estate (ex infra) 1,004 1.7%

Total potential stress 5,943 9.8%





Potential stress as a % of current NPA

+ Restructuring 76%

INRbn Exposure % of loans % of Networth

Metal exposure to stressed groups 1,427 2.4% 17.0%

Infra conglomerates (Top-4) 1,555 2.6% 18.6%

Infra SPVs (ex Infra conglomerates) 1,957 3.2% 23.4%

Corporates and Real Estate (ex infra) 1,004 1.7% 12.0%

Total potential stress 5,943 9.8% 70.9%





Potential stress as a % of current NPA +

Restructuring 76%


8

Fig. 18: Loss given default assumptions across asset classes


Fig. 19: Rationale for our loss given default assumptions

Source: Nomura research

0% 0% 0%

15% 15%

20% 20%

30%

40%

50%

60% 60%

28.8%

0%

10%

20%

30%

40%

50%

60%

70%LGD %

Sector LGD % Rationale

Airports 0.0%4 major airports run by GVK/GMR w hose B/S look stretched but its airports assets are

making money and hence can be disposed off even if parent B/S remains stretched

Pow er - Hydro 0.0%Barring 1-2 hydro assets, most assets are able to service interest - even in case of JPA's

sale of Hydro assets the sale is happening at Equity value of +1x

Divestments 0.0%Some assets have been divested or process of being divested to better B/S companies and

hence w e assume no w rite-off in those cases

Roads 15.0%Write offs low as most assets don't have any linkage/ raw material issues like pow er plants -

Low er interest rates should aid profitability as w ell

Real Estate 15.0%No large defaults as yet but low real estate volumes a concern - LGD low because of

collateral of property

Pow er - Coal 20.0%

Improving coal availability a positive in the long run but project over-runs and now no pass

through of auction coal cost is an issue - IDFC inched up their LGD expectation from coal

pow er plants recently

Corporates ex-Steel 20.0%Past LGD for Indian banks is ~40-45% - We assume low er slippages as some corporates

w ill be able to divest or w ould benefit from a recovery

Pow er -Coal - IPPs 30.0% Higher LGD v/s other coal assets as parent B/S support could be low er in these cases

Steel 40.0%Longer term debt of some of the steel names like Essar/Bhushan looks unsustainable

w ithout considering a commodity boom again.

Infra Conglomerate - Parent 50.0%Infra conglomerate parent B/S funding used for cost over-runs, equity funding and hence

asset backing is low er and hence w e assume high Loss given default here.

Pow er - Coal international 60.0%

Most coal acquisitions happened in commodity boom time and asset values have come off

signif icantly since then. Also debt funding required to scale up and optimise production here

looks diff icult to tie-up

Pow er - Gas 60.0%Near term w e don't see a solution to the gas assets - Govt's solution of pooling gas can

meet only a very small part of interest obligations

Total LGD 28.8%


9

We arrive at a LGD of ~30% of this INR6trn of stresses exposure

• Based on our above assumptions, on a system level we arrive at a total LGD of ~30-

35% of the accounts mentioned above, aggregating to a ~INR2trn impact on banks and

non-bank financial companies (NBFCs) from these accounts.

• The 30% LGD ratio is lower than the 40-50% Indian banks have faced in the past due

to: 1) the long gestation of these stressed assets (mostly Infra); and 2) divestments that

will reduce the risk profile of some of these assets.

• The 30% LGD is not significantly different from the provisioning IDFC has talked about.

Of its ~16% of stressed exposure, there is 2% of equity exposure and ~3.0-3.5% of gas

exposure where write-offs will be larger. Adjusting for these higher LGD, IDFC’s

assumed LGD is ~35-40% against 30% in our analysis.

Fig. 20: We arrive at an LGD of ~INR1.7trn in these stressed accounts over time

Source: MCA, Company data, Nomura research

Fig. 21: Longer-term, system-level LGDs have been 40-50% in the past

Source: RBI, Nomura research

Fig. 22: IDFC’s provisioning assume a LGD of 45%, excluding gas and equity it is 30-35%


INRbn LGD INRbn LGD (%) % of Networth

Metal exposure to stressed groups 571 40.0% 6.8%

Infra conglomerates (Top-4) 430 27.6% 5.1%

Infra SPVs (ex Infra conglomerates) 505 25.8% 6.0%

Corporates and Real Estate (ex infra) 196 19.5% 2.3%

Total potential stress 1,702 28.8% 20.4%

Banks NPAs 3209 70%

Banks -Restructured book 4,368 40%

PSU Banks Ultimate Loss given

Default (FY02-14) - INRbn FY02-14 FY02-04 FY12-04

Total Slippages 6,372 498 3,765

Total Reductions 4,637 530 2,236

Estimated Write offs 1,734 237 742

Total Recoveries/Upgrades 2,903 293 1,494

Recoveries/upgrades (% of

Slippages) 45.6% 58.7% 39.7%

Thru cycle loss given default 54.4% 41.3% 60.3%

Gross Slippages 2.28% 3.06% 2.84%

Total Reductions 2.04% 3.21% 1.68%

Implied Write offs 0.84% 1.43% 0.55%

Recovery/Upgrades 1.21% 1.78% 1.12%

Net Slippages (ex- Write offs) 1.07% 1.27% 1.72%

Credit Costs (only NPA) 1.00% 1.79% 1.01%

% of loans LGD

IDFC's reported stressed book 8.50%

Provision created 9.0% 56%

IDFC's total stressed book 16.0%

Of w hich Equity 2.5% 60%

Of w hich Gas assets 3.1% 60%

Other stressed assets 10.4% 35%


10

Private Banks discounting the hit; need to remain selective on PSU banks

We start with a caveat: We base our bank-wise exposure and LGD analysis on detail of

the exposure provided by the ministry of corporate affairs (MCA). While the MCA

reasonably captures consortium-lending exposures, we may miss bilateral exposure

taken by some banks given separate fixed asset charges filed for each of these lendings.

However, overall in the past, the quantum and magnitude of exposure as provided by the

MCA has been not too different from actual bank exposure – so analysis based on this

data is useful, in our view.

Exposure analysis to the above names and key observations:

• Exposure to some of the Metal/Infra conglomerate names is not dramatically different

between PSU banks and private corporate banks like ICICI/Axis/Yes bank – Gross

NPAs + restructuring of Axis/ICICI/Yes is 50-60% lower than PSU banks but their

exposure to the above mentioned assets is only 10-15% lower (as % of net worth) and

LGDs are 5-10% lower (as % of their net worth).

• Within the private banks, ICICI Bank has the highest exposure according to the data.

The biggest difference is ICICI Bank’s large international coal exposure and high

exposure to the JPA group. Excluding these assets, exposure of ICICI Bank is similar

to Axis Bank and Yes Bank.

• Among our covered retail banks, their exposure to these stressed names is <0.5% in

the case of HDFCB and Kotak and ING Vysya Bank. IndusInd Bank’s exposure is also

negligible at ~1% of loans, part of which could have been recognised when it sold down

assets to ARCs (asset reconstruction companies).

• Within PSU banks, BOB clearly stacks up as the best, and PNB the worst. For SBI,

exposure of its subsidiaries is higher in these accounts than the parent. Union and BOI

are middle of the pack, but on a relative basis Union is better placed than BOI.

• Among non-covered PSU banks, IDBI/ United and UCO are worst placed.

• Within NBFCs, IDFC’s exposure is similar to the high stressed book disclosure that

IDFC made – while IDFC has provided for this in terms of credit cost, the interest

reversal impact of this may be large, in our view.

Fig. 23: Exposure to stressed assets – PSU banks have high exposure but even exposure of private banks like ICICI/Axis/Yes is not very different


Fig. 24: Loss given default for banks in these accounts – ICICI Bank similar to PSUs; Axis and Yes Bank lower. Within PSUs – BOB is best, PNB the worst


INRbn

Exposure to

stressed assets

Total stressed

assets

Infra

conglo

Ex infra Corp.

and CRE Infra SPVs Metals

Total System 5,943 7.6% 2.0% 1.3% 2.5% 1.8%

Private banks 880 5.9% 2.5% 0.9% 1.5% 1.1%

ICICI/Axis/Yes 783 10.5% 4.7% 1.6% 2.6% 1.7%

Other private banks 96 1.3% 0.2% 0.2% 0.4% 0.5%

PSUs 3,631 6.6% 1.6% 1.0% 1.9% 2.1%

IDFC/PFC/REC 507 11.3% 3.5% 1.0% 7.5% 0.0%

Other Institutions 925

% of FY15 loans

INRbn

LGD on stressed

assets

Total stressed

assets

Infra

conglo

Ex infra Corp.

and CRE

Infra

Corporates Metals

Total System 1,709 20.4% 5.1% 2.3% 6.0% 6.8%

Private banks 280 11.2% 4.5% 1.4% 2.4% 2.6%

ICICI/Axis/Yes 248 19.8% 8.4% 2.5% 4.2% 4.0%

Other private banks 33 2.6% 0.6% 0.3% 0.5% 1.1%

PSUs 1,088 23.4% 5.2% 2.4% 5.8% 9.8%

IDFC/PFC/REC 139 18.7% 5.1% 1.9% 11.8% 0.0%

Other Institutions 201

% of FY15 Networth


11

Fig. 25: Bank-wise LGDs to each segments – Corporate private banks have higher exposure to infra conglomerates while PSUs have higher risks towards the metal sector and infra SPVs


INRbn

LGD on stressed

assets

Total stressed

assets

Infra

conglo

Ex infra Corp.

and CRE

Infra

Corporates Metals

Total System 1,709 20.4% 5.1% 2.3% 6.0% 6.8%

Corporate Private Banks

Axis 68 15.2% 3.6% 1.7% 4.6% 5.2%

ICICI 158 23.0% 11.2% 2.9% 4.5% 3.4%

Yes 21 18.1% 10.4% 3.2% 1.1% 3.2%

Other Private Banks

IIB 2 2.3% 0.5% 0.5% 0.7% 0.7%

HDFCB 5 0.9% 0.0% 0.0% 0.3% 0.4%

KVB 3 6.0% 1.5% 0.0% 0.9% 3.6%

Federal 3 4.0% 0.3% 0.1% 1.3% 2.3%

Karnataka 2 6.3% 3.8% 2.0% 0.5% 0.0%

SIB 3 9.0% 1.4% 4.1% 0.8% 2.7%

Kotak 1 0.3% 0.0% 0.0% 0.3% 0.0%

ING 1 1.4% 1.0% 0.2% 0.0% 0.1%

J&K 12 20.1% 6.2% 0.9% 2.1% 11.0%

PSUs

SBI+Subs 292 19.1% 2.1% 1.4% 6.3% 8.9%

SBI 198 16.4% 1.6% 0.9% 6.2% 7.4%

BOB 50 12.9% 3.5% 0.8% 3.0% 5.7%

PNB 98 26.1% 3.6% 2.6% 6.1% 13.5%

BOI 76 27.4% 9.9% 2.4% 5.2% 9.8%

Canara 64 24.3% 5.8% 2.0% 4.1% 12.4%

Union 38 20.7% 3.2% 1.6% 5.8% 10.2%

Corp 28 26.4% 7.4% 4.2% 4.8% 10.0%

Andhra 26 27.7% 12.2% 5.0% 4.9% 5.6%

BOM 17 24.3% 4.6% 5.5% 2.1% 12.2%

ALBK 29 24.9% 5.9% 1.7% 3.3% 13.9%

Dena 8 11.5% 1.5% 1.7% 1.5% 6.8%

OBC 26 20.0% 4.0% 3.1% 4.8% 7.9%

Vijaya 9 15.7% 1.3% 3.4% 6.3% 5.6%

Indian 14 10.9% 2.1% 0.5% 3.6% 4.5%

IOB 38 27.4% 8.2% 1.7% 3.5% 13.6%

Syndicate 25 20.6% 2.3% 2.5% 2.2% 13.4%

Central 32 20.5% 6.3% 2.0% 3.5% 8.5%

Uco 43 35.7% 7.4% 5.0% 9.6% 13.6%

United 27 50.9% 18.1% 5.6% 12.3% 14.9%

PSB 10 21.7% 10.9% 2.0% 3.5% 5.4%

IDBI 136 60.2% 20.4% 8.6% 17.3% 13.0%

NBFCs/Institutions

REC 54 21.8% 5.1% 2.2% 14.4% 0.0%

PFC 59 18.2% 2.2% 1.7% 14.3% 0.0%

IDFC 27 15.5% 10.4% 1.9% 3.1% 0.0%

IFCI 13 18.3% 6.5% 3.9% 5.4% 1.8%

% of FY15 Networth


12

How does it all stack up: Corporate banks factoring in the hit, still need to be selective on PSUs

We highlight that some the stress identified above will likely impact bank P&Ls in the

long run. We thus adjust book values for the stress already recognised (NPAs +

restructuring) and the stress that remains largely as yet unrecognised.

• For NPAs, we increase coverage to ~70% – mostly PSUs affected.

• For restructured accounts – We estimate that ~20% of restructured accounts ex-Air

India and SEBs have turned bad, and we further take a ~20% charge in the

restructured book – mostly PSU banks affected again due to high level of restructuring.

• SEB exposure – While these accounts are less likely to turn bad, we believe there

could be NPV losses and hence take a 15% credit charge on SEB exposures – here

also it is mainly PSU banks that are affected.

• For unrecognised stress – We take our LGD estimate as credit charges that banks

will have to take – here the effect is felt by both private and PSU banks.

Key observations:

• Corporate private banks: The book impact is between 13-22% of their banking net

worth. The impact is lower for Axis and Yes Bank at 12-13% of their net worth as their

exposure to the unrecognised names is lower than that of ICICI Bank (22%).

• PSU banks: The book impact for PSU banks is much higher at 30-55% of their net

worth. In the case of PSU banks >50% of the book effect is from write-downs from

already recognised stress (NPAs + restructuring).

• Among PSU banks, the book adjustment is least for BOB and SBI at ~30% of their net

worth, where it is highest for PNB/BOI at ~55%.

• For retail private banks, the book adjustment required is negligible at <1% of their net

worth. This was one of the reasons for our recent upgrade of Kotak Bank; the stock

came off ~20% lower after the recent correction.

Fig. 26: Detailed book adjustment and sensitivity

Source: Company data, Nomura estimates

INRmn ICICI Axis Yes SBI PNB BOB BOI Union

Mar-17 Reported book 149 255 382 266 243 212 389 300

P/B on reported book 1.83 2.45 2.28 0.99 0.58 0.99 0.36 0.67

Impact from adjusting to 70% NPA coverage:

Gross NPAs (1Q16) 151,376 42,512 3,683 705,260 253,974 172,740 268,892 141,436

Net NPAs (1Q16) 63,333 14,613 1,067 358,364 153,936 84,700 157,890 76,338

Coverage (%) 58.2% 65.6% 71.0% 49.2% 39.4% 51.0% 41.3% 46.0%

Intended coverage (%) 70% 70% 70% 70% 70% 70% 70% 70%

% impact from 70% coverage adjustment -2.1% 1.8% 2.5% -7.1% -16.3% -6.9% -22.2% -12.7%

Mar-17 Price to adj. book 1.87 2.40 2.22 1.07 0.69 1.06 0.46 0.76

Impact from slippages on Restructured book

Restructured book - 1Q16 126,040 85,150 5,671 1,023,630 436,340 312,569 298,830 191,280

Restructured book (ex AI +SEBs) 126,040 85,150 5,671 973,670 362,340 253,569 242,830 124,650

Additional slippgaes (%) - Ex AI +SEBs 15.0% 15.0% 25.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Additional slippgaes ex AI +SEB 18,906 12,773 1,418 194,734 72,468 50,714 48,566 24,930

SEB exposures - Loans - - - 107,000 107,000 52,000 151,000 105,000

Additional slippages from SEBs - - - 16,050 16,050 7,800 22,650 15,750

% impact from restructured book slippages -2.2% -2.1% -0.9% -10.3% -18.6% -12.2% -20.5% -15.2%

M ar-17 Price to adj. book 1.91 2.46 2.24 1.20 0.89 1.22 0.63 0.92

Deep dive sensitivity

Total exposure to stressed names 495,109 222,186 66,034 936,687 331,273 159,077 238,109 133,778

Hit based on our LGD assumptions 158,438 67,894 21,189 292,409 98,214 50,072 76,453 38,022

% impact from stressed book -18% -11% -13% -14% -21% -10% -22% -14%

M ar-17 Price to Adj.book 2.36 2.77 2.58 1.45 1.30 1.41 1.02 1.15


13

Valuations discount most of the pain for corporate private banks; our sensitivity

suggests a need to remain selective on PSUs:

Corporate banks pricing in the stress

• Adjusted for the stress, current valuations of corporate private banks are at a 5-10%

discount to their long-term averages and hence we believe the stress is discounted in

current stock prices, assuming our LGD estimates are accurate.

• Our revised TPs imply multiples ~5-10% higher than average long-term multiples for

corporate private banks, mainly because of granularity that the corporate banks have

built in their liability and asset franchise over the last five to seven years.

PSU banks – remain selective

• While PSU banks are trading at deep discounts of 40-70% to their long-term average

multiples, adjusted for their stress, valuations are trading just below the long-term

average in a few cases and at average valuations in others.

• Our revised TPs imply multiples closer to their long-term averages. Since upside in

PSU banks after factoring in the stress is lower, investors need to be selective.

• SBI is our preferred PSU pick (trading at 12% below its long-term average multiples).

PNB/BOI (Neutral) remains our least preferred picks, despite their low multiples.

Fig. 27: Potential stress seems to be priced in for corporate private banks but adjusted multiples for PSUs are closer to long-term averages, indicating that the potential stress in not fully priced in


Fig. 28: Private banks valuations pre and post book adjustment

At current prices


Fig. 29: PSU bank valuations pre and post book adjustment

At current prices


ICICI Axis Yes HDFCB Kotak IIB SBI PNB BOB BOI Union

P/B at current price



P/B at Target price



Long term 1 yr frd P/B (04-now ) 1.87 2.16 2.36 3.43 2.79 2.13 1.28 1.29 1.04 1.08 1.09

2004-07 average 1 yr frd P/B 2.10 2.47 3.21 3.65 2.68 1.95 1.20 1.45 1.00 1.16 1.25

At current valuation

Reported book FY17 P/B v/s LT average -26% -10% -19% -11% 16% 22% -39% -56% -15% -68% -47%

Adjusted book FY17 P/B v/s 04-07 multiple -15.3% -10.9% N/A -16.9% 22.5% 36.9% -2.0% -12.5% N/A 2.5% -18.7%

At Target multiples

Reported book FY17 P/B v/s LT average 1.8% 13.5% -3.4% 5.1% 37.5% 42.7% -22.6% -55.3% -4.4% -66.8% -39.0%

Adjusted book FY17 P/B v/s 07-07 multiple 17.0% 12.3% N/A -2.0% 45.5% 60.3% 23.9% -10.7% N/A 5.6% -5.7%

1.4

1.9 1.9

3.1

3.2

2.6

1.8

2.2 2.2

3.0

3.3

2.7

1.0

1.5

2.0

2.5

3.0

3.5

ICICI Axis Yes HDFCB Kotak IIB

Reported book - FY17F

Adjusted book - FY17F

0.8

0.6

0.9

0.3

0.6

1.2

1.3 1.31.2

1.0

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

SBI PNB BOB BOI Union

Reported book - FY17F Adjusted book - FY17F


14

Sector view: Positive on private banks; still remain selective on PSUs:

• We revise down (by 5-10%) our target prices for corporate private banks and PSUs to

adjust for the potential stress from accounts not yet recognised.

• For corporate private banks we see highest upsides for Axis and ICICI Bank (~30%

upside) to our new TP. While near-term asset quality challenges remain, we believe the

market is factoring in the complete risk as valuations adjusted for stress are 5-10%

lower than long-term averages.

• We continue to remain positive on most retail banks. We recently also upgraded Kotak

given the ~20% correction in stock price. Our order of preference is: HDFCB > Kotak >

IndusInd.

• While PSU banks are down 25-50% YTD, we still believe investors need to remain

selective. Adjusted for stress levels, SBI is our preferred choice, but for a recovery

theme Axis and ICICI Bank are preferred over the PSUs.

• We have factored in the credit cost impact for banks stemming from these as yet

unrecognised stressed names. Provisions on these will also have an impact on net

interest income (NII) which will depend upon the timing of the recognition, and that

remains difficult to predict – we provide below a sensitivity of profitability for banks due

to the NII impact of higher stress.

• Overall Axis/ICICI/HDFCB is our top pick currently. Within corporate private

banks we prefer Axis/ICICI over Yes bank. Within retail private banks we prefer

HDFCBB over Kotak/IIB. We currently have a BUY on all six private banks we

cover. Within PSU banks, SBI is our preferred pick and we would continue to

avoid PNB/BOI.

Fig. 30: Bank valuations and our revised PTs

Source: Bloomberg, Nomura estimates

Fig. 31: Higher stress in the long run will have a NII impact as well


P/B P/E ROE

Company Rating Old PT PT Change Upside FY17F FY17F FY17F FY16F FY17F FY16F FY17F FY16F FY17F

Axis BUY 660 625 -5.3% 26% 1.95 11.2 18.8% 86.5 110.4 85.0 105.3 -1.7% -4.7%

HDFCB BUY 1200 1200 0.0% 18% 3.11 16.9 19.5%

ICICI BUY 380 350 -7.9% 28% 1.45 8.6 14.9% 122.7 146.0 122.7 140.3 0.0% -3.9%

Kotak Buy 750 750 0.0% 16% 2.79 19.4 15.4%

IndusInd BUY 1025 1025 0.0% 17% 2.61 17.5 15.9%

Yes BUY 960 870 -9.4% 19% 1.93 10.5 19.7% 24.4 30.2 24.4 29.1 0.0% -3.6%

PNB Neutral 155 140 -9.7% 2% 0.67 5.5 11.1% 40.9 53.1 39.6 48.9 -3.2% -7.9%

BOI BUY 160 140 -12.5% 3% 0.53 5.1 7.3% 19.8 31.7 16.7 24.0 -15.6% -24.2%

BOB BUY 210 210 0.0% 13% 0.96 7.3 12.8% 49.1 63.2 43.5 57.4 -11.5% -9.2%

Union BUY 200 200 0.0% 16% 0.65 5.2 12.1%

SBI BUY 335 290 -13.4% 23% 0.83 6.5 12.8% 163.9 208.9 163.9 195.5 0.0% -6.4%

No Change

PAT Old (INRbn) PAT New (INRbn) Change

No Change

No Change

No Change

INRmn ICICI Axis Yes SBI PNB BOB BOI Union

NII - FY17F 241,115 201,060 54,632 886,104 191,232 166,015 139,276 104,379

Interest reversal impact 15,844 6,789 2,119 29,241 9,821 5,007 7,645 3,802

NII post interest reversal 225,271 194,271 52,513 856,863 181,411 161,008 131,631 100,576

Interest reversal % of PBT 7.9% 4.3% 4.9% 8.1% 13.7% 6.1% 22.9% 8.9%

RORWA - FY17F 2.09% 2.22% 2.02% 1.30% 1.07% 1.28% 0.60% 1.01%

ROA post interest reversal 1.98% 2.15% 1.95% 1.22% 0.97% 1.23% 0.50% 0.94%


15

Appendix 1: Names included in our Exposure analysis

Fig. 32: List of companies/projects included in our sensitivity analysis

Source: Nomura research

Metals Infra conglo Infra SPVs

Corporates and Real

Estate (ex infra)

Bhushan Steel Lanco (Anapara) Tata (Mundra UMPP) Tecpro Systems

Bhushan pow er & steel Lanco (Kondapalli) Lanco/Adani (Udupi Pow er) Rcom

Monnet Ispat Lanco (Amarkantak) Abhijit (MADC Nagpur - Mihan) Jet Airw ays

MSP Steel Lanco (Vidarbha ) Abhijit (Chandw a) Videocon

Adhunik Metaliks Lanco (Teesta) Abhijit (Banka - Bihar) Empee Sugar

Concast Group Lanco (Babandh) KSK (Mahanadi - Chattisgarh) C Mahendra exports

Loha Ispat Lanco (Griff in) Rpow er (Butibori) Pipapav Defence

Essar Steel Lanco (Parent) Rpow er (Sasan UMPP) Shriram EPC

GMR (Ambala-Chandigarh) CESC (Chandrapur - Maha) Tulsyan NEC

GMR (Rajamundry I/II) Indiabulls (Nashik - Phase I) Amtek Auto

GMR (Chattisgarh) Indiabulls (Amravati - Phase I) Castex

GMR (Kamalanga) Indiabulls (Amravati - Phase II) Ramky Infra

GMR (Emco energy) Indiabulls (Nashik - Phase II) Essar pow er

GMR (Vemagiri) Adani (Mundra UMPP) Essar port

GMR (Kakinada) Adani (Tiroda) Essar shipping

GMR (Delhi Airport) JSW (Ratnagiri)

GMR (Hyderabad airport) SKS Ispat pow er (Chattisgarh) Unitech Ltd

GMR Infra Parent Bajaj Hindustan (Lalitpur Pow er) HDIL

GVK (Alkananda -Tehri) Coal and Oil Group (Coastal Energen ) DB Realty

GVK (Goindw al Sahib- Punjab) Monnet Ispat (Malibrahmani TPP) Hubtow n

GVK (Gautami Pow er- AP) Ind Bharat (Orissa) Parasvanath

GVK (Jegurupadu) Avantha Pow er (Seoni,Madhya Pradesh) Omaxe

JPA (Parent) Moser Baer (Anuppur, MP) Ansal Properties

JPVL (Vishnuprayag) RKM pow er gen (Uchpinda TPP)

JPVL (Karchana) Visa Pow er (Raigarh TPP(Visa))

JPVL (Baspa II) DB Pow er (Baradarha TPP)

JPVL (Bina) East Coast Energy (Bhavanpadu TPP)

JPVL (Bara) NCC / Gayathri (NCC Pow er Projects Ltd)

JPVL (Nigre) Vizag Bottling Co (Konaseema)

Jaypee Infratech Rpow er (Samalkot -AP)

Jaypee sports NTPC & GAIL (Dabhol)

JPA (Parent - NCD) Others (Kashipur CGT)

Others (Beta Infratech)

Torrent Pow er (Sugen - Torrent)

Torrent Pow er (Dahej Pow er)

Soma (Panipat-Jalandhar)

Soma-Maytas-NCC (Silk Rd Jn-Electronic City Jn)

IVRCL (Kumarapalayam-Chengapally)

IVRCL (Salem-Kumarapalayam)

Madhucon (Karur-Dindigul)

Madhucon (Trichy-Thanjavur)

Madhucon (Madurai-Tuticorin)

Reliance Infra (Gurgaon-Faridabad)

HCC (Delhi-Agra Section)

IVRCL (Jalhandar-Amritsar)

HCC (Raiganj-Dalkhola)

HCC (Farakka-Raiganj)

DSC Limited (Delhi-Gurgaon Expressw ay)

DSC Limited (Kundli-Manesar-Palw al)

DSC Limited (Delhi-Gurgaon Expressw ay)

Rating Remains Buy

Target price Reduced from 660 INR 625

Closing price 14 September 2015 INR 496

Potential upside +26%

Anchor themes


Nomura vs consensus

Our FY16/17F PAT is 1-3% below consensus.

Research analysts

India Banks



Axis Bank AXBK.NS AXSB IN

EQUITY: BANKS

Remains preferred private bank

Relatively lower exposure to stressed names

Action: Stress discounted in the price

Axis Bank remains our preferred private corporate bank for its improving

granularity in assets/liabilities, better growth, and relatively lower exposure in

large stressed names. Our sensitivity indicates a loss given default (LGD) of

11% of the bank’s FY17 net worth, vs 15-30% for peers. We thus think the

recent ~20-25% correction offers a good opportunity to buy Axis Bank. We

maintain our Buy rating with a revised TP of INR625/share.

Stress test outcome: We estimate a loss given default of INR68bn for Axis

Bank in these stressed accounts, which is ~11% of its FY17F net worth. In

this regard, Axis is better placed than peers, where we estimate a LGD of

13-22% of FY17F net worth. Axis has less exposure in infra conglomerates

than ICICI Bank, and less exposure to stressed metal names and ex-infra

corporates than PSU banks. Also, unlike most other private corporate

banks, Axis has ~INR12.5bn in floating provisions stock, which is about

20% of our estimate of its LGD in these accounts.

Structural improvement in B/S continues and better placed on growth:

1) Axis Bank’s granularity of assets (more retail), liabilities (higher CASA+

retail term deposit ratio), and fees (increase in retail fee share) has been

improving, aiding overall profitability and lowering the business risk profile,

while CASA momentum has moderated in the past 12-15 months; 2) Axis

will likely continue to deliver better mix of growth given the increase in its

retail mix and lower overseas book mix than most corporate banks.

Multiples reasonable now adjusted for the stress; maintain Buy

Axis Bank shares are trading at 1.95x FY17F book and look reasonable when

adjusted for our stress test valuation at 2.2x FY17F book (~10-15% discount

to FY04-07 multiple). Hence, we maintain Buy. While growth will certainly lag

the FY04-07 period, Axis Bank’s profitability has improved significantly to

offset the impact of slower growth. We marginally revise our earnings down by

2-4% and our TP by 6% to factor in part of the impact from our stress test.

Year-end 31 Mar FY15

FY16F

FY17F

FY18F

Currency (INR) Actual Old New Old New Old New

PPOP (mn) 133,854 159,452 158,965 195,829 190,398

225,788

Reported net profit (mn) 73,578 86,455 84,980 110,442 105,280

128,352

Normalised net profit (mn) 73,578 86,455 84,980 110,442 105,280

128,352

FD normalised EPS 31.04 36.47 35.85 46.59 44.41

54.15

FD norm. EPS growth (%) 18.3 17.5 15.5 27.7 23.9

21.9

FD normalised P/E (x) 16.0 N/A 13.8 N/A 11.2 N/A 9.2

Price/adj. book (x) 2.6 N/A 2.3 N/A 1.9 N/A 1.6

Price/book (x) 2.6 N/A 2.3 N/A 1.9 N/A 1.6

Dividend yield (%) 0.9 N/A 1.1 N/A 1.2 N/A 1.6

ROE (%) 17.8 17.9 17.6 19.5 18.8

19.4

ROA (%) 1.7 1.7 1.7 1.8 1.8

1.7



16 September 2015


Nomura | Axis Bank 16 September 2015

17

Key data on Axis Bank Relative performance chart

Source: Thomson Reuters, Nomura research

Notes:

Performance (%) 1M 3M 12M

Absolute (INR) -12.9 -10.0 19.0 M cap (USDmn) 17,775.3

Absolute (USD) -14.6 -13.1 8.8 Free float (%) 36.0

Rel to MSCI India -5.0 -8.8 23.3 3-mth ADT (USDmn) 64.4

Profit and loss (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18F

Interest income 306,412 354,786 426,293 504,744 608,592

Interest expense -186,895 -212,545 -256,222 -303,684 -369,800

Net interest income 119,516 142,241 170,071 201,060 238,792

Net fees and commissions 53,956 61,549 72,012 86,415 103,698

Trading related profits 3,276 9,949 7,500 7,500 7,500

Other operating revenue 16,820 12,153 14,510 17,403 20,636

Non-interest income 74,052 83,651 94,023 111,318 131,834

Operating income 193,569 225,892 264,093 312,378 370,627

Depreciation -3,639 -4,057 -4,462 -4,909 -5,399

Amortisation

Operating expenses -49,355 -56,831 -66,492 -77,796 -93,355

Employee share expense -26,013 -31,150 -34,174 -39,276 -46,084

Pre-provision op profit 114,561 133,854 158,965 190,398 225,788

Provisions for bad debt -17,810 -19,970 -31,252 -32,176 -32,894

Other provision charges -3,261 -3,307 0 0 0

Operating profit 93,490 110,578 127,713 158,221 192,894

Other non-op income

Associates & JCEs

Pre-tax profit 93,490 110,578 127,713 158,221 192,894

Income tax -31,313 -36,999 -42,733 -52,941 -64,543

Net profit after tax 62,177 73,578 84,980 105,280 128,352

Minority interests

Other items

Preferred dividends

Normalised NPAT 62,177 73,578 84,980 105,280 128,352

Extraordinary items 0 0 0 0 0

Reported NPAT 62,177 73,578 84,980 105,280 128,352

Dividends -11,011 -13,090 -14,672 -16,872 -19,403

Transfer to reserves 51,166 60,489 70,308 88,408 108,948

Growth (%)

Net interest income 23.6 19.0 19.6 18.2 18.8

Non-interest income 13.0 13.0 12.4 18.4 18.4

Non-interest expenses 17.9 15.1 17.0 17.0 20.0

Pre-provision earnings 23.1 16.8 18.8 19.8 18.6

Net profit 20.0 18.3 15.5 23.9 21.9

Normalised EPS 19.0 18.3 15.5 23.9 21.9

Normalised FDEPS 19.0 18.3 15.5 23.9 21.9

Loan growth 16.8 22.2 21.0 22.0 23.0

Interest earning assets 16.5 21.8 21.0 22.0 23.0

Interest bearing liabilities 11.7 21.4 16.8 22.6 23.5

Asset growth 12.5 20.5 16.8 22.1 23.1

Deposit growth 11.2 14.8 15.6 23.7 25.5


Balance sheet (INRmn) As at 31 Mar FY14 FY15 FY16F FY17F FY18F

Cash and equivalents 240,741 318,836 240,882 299,702 375,589

Inter-bank lending

Deposits with central bank 41,647 42,154 49,703 61,840 77,499

Total securities

Other int earning assets

Gross loans 2,321,881 2,838,765 3,443,505 4,205,413 5,171,202

Less provisions -21,214 -27,935 -42,400 -56,065 -67,504

Net loans 2,300,668 2,810,830 3,401,105 4,149,348 5,103,698

Long-term investments 1,135,484 1,323,428 1,559,307 1,903,356 2,340,172

Fixed assets 24,102 25,143 26,184 27,225 28,266

Goodwill

Other intangible assets

Other non IEAs 89,808 98,932 116,649 145,132 181,881

Total assets 3,832,449 4,619,324 5,393,830 6,586,603 8,107,104

Customer deposits 2,809,446 3,224,419 3,728,439 4,613,805 5,791,912

Bank deposits, CDs,

debentures

452,639 656,001 749,218 844,869 942,390

Other int bearing liabilities 50,270 141,582 221,582 301,582 381,582

Total int bearing liabilities 3,312,355 4,022,002 4,699,238 5,760,256 7,115,884

Non-int bearing liabilities 137,889 150,557 177,519 220,866 276,791

Total liabilities 3,450,244 4,172,559 4,876,757 5,981,122 7,392,675

Minority interest

Common stock 4,698 4,741 4,741 4,741 4,741

Preferred stock

Retained earnings 377,506 442,024 512,332 600,740 709,688

Reserves for credit losses

Proposed dividends

Other equity

Shareholders' equity 382,205 446,765 517,073 605,481 714,429

Total liabilities and equity 3,832,449 4,619,324 5,393,830 6,586,603 8,107,104

Non-perf assets 31,464 41,102 65,231 82,449 99,271

Balance sheet ratios (%)

Loans to deposits 82.6 88.0 92.4 91.1 89.3

Equity to assets 10.0 9.7 9.6 9.2 8.8

Asset quality & capital

NPAs/gross loans (%) 1.4 1.4 1.9 2.0 1.9

Bad debt charge/gross

loans (%)

0.77 0.70 0.91 0.77 0.64

Loss reserves/assets (%) 0.55 0.60 0.79 0.85 0.83

Loss reserves/NPAs (%) 67.4 68.0 65.0 68.0 68.0

Tier 1 capital ratio (%) 12.8 12.1 11.7 11.3 10.9

Total capital ratio (%) 17.0 15.2 15.1 14.9 14.4

Per share

Reported EPS (INR) 26.23 31.04 35.85 44.41 54.15

Norm EPS (INR) 26.23 31.04 35.85 44.41 54.15

FD norm EPS (INR) 26.23 31.04 35.85 44.41 54.15

DPS (INR) 4.00 4.60 5.29 6.08 8.19

PPOP PS (INR) 48.33 56.47 67.06 80.32 95.25

BVPS (INR) 162.69 188.47 218.13 255.42 301.38

ABVPS (INR) 162.62 188.39 217.83 255.26 301.18

NTAPS (INR) 162.69 188.47 218.13 255.42 301.38

Valuations and ratios

Reported P/E (x) 18.9 16.0 13.8 11.2 9.2

Normalised P/E (x) 18.9 16.0 13.8 11.2 9.2

FD normalised P/E (x) 18.9 16.0 13.8 11.2 9.2

Dividend yield (%) 0.8 0.9 1.1 1.2 1.6

Price/book (x) 3.0 2.6 2.3 1.9 1.6

Price/adjusted book (x) 3.1 2.6 2.3 1.9 1.6

Net interest margin (%) 5.49 5.48 5.40 5.25 5.08

Yield on assets (%) 14.08 13.66 13.52 13.18 12.96

Cost of int bearing liab (%) 5.95 5.80 5.88 5.81 5.74

Net interest spread (%) 8.13 7.86 7.65 7.37 7.22

Non-interest income (%) 38.3 37.0 35.6 35.6 35.6

Cost to income (%) 40.8 40.7 39.8 39.0 39.1

Effective tax rate (%) 33.5 33.5 33.5 33.5 33.5

Dividend payout (%) 17.7 17.8 17.3 16.0 15.1

ROE (%) 17.4 17.8 17.6 18.8 19.4

ROA (%) 1.72 1.74 1.70 1.76 1.75

Operating ROE (%) 26.2 26.7 26.5 28.2 29.2

Operating ROA (%) 2.58 2.62 2.55 2.64 2.63


Nomura | Axis Bank 16 September 2015

18

Fig. 33: Axis Bank: Key changes to FY16/17F estimates


Valuation: Axis Bank shares are trading at 1.95x FY17F book and look reasonable

when adjusted for our stress test valuation at 2.2x FY17F book (~10-15% discount to

FY04-07 multiple). Hence, we maintain Buy. While growth will certainly lag the FY04-07

period, Axis Bank’s profitability has improved significantly to offset the impact of slower

growth. We marginally revise our earnings down by 2-4% and our TP by 6% to factor in

part of the impact from our stress test.

Risks: 1) A slower-than-expected recovery in corporate capex execution, and 2) higher-

than-expected delinquency.

Fig. 34: Axis Bank: ROA decomposition – we expect profitability to improve further with improvement in credit costs


Fig. 35: Axis Bank: TP of INR625 implies 2.45x Mar-17F book of INR255


Fig. 36: Axis: Valuation reasonable now adjusting for stress

1yr fwd P/B chart

Source: Company data, Bloomberg, Nomura estimates

INRmn FY16F FY17F FY16F FY17F FY16F FY17F

NII 170,558 206,492 170,071 201,060 -0.3% -2.6%

Loan grow th 22.0% 22.0% 21.0% 22.0% -100bps 0bps

Fee grow th 17.3% 20.0% 17.3% 20.0% 0bps 0bps

PPOP 159,452 195,829 158,965 190,398 -0.3% -2.8%

PAT 86,455 110,442 84,980 105,280 -1.7% -4.7%

NIM% 3.48% 3.51% 3.49% 3.45% 1bps -7bps

LLPs 0.95% 0.78% 1.01% 0.85% 6bps 7bps

GNPA% 1.80% 1.80% 1.89% 1.96% 10bps 16bps

Slippages 39,743 39,902 42,581 43,044 7.1% 7.9%

ROA 1.77% 1.88% 1.74% 1.81% -2bps -7bps

ROE 17.9% 19.5% 17.6% 18.8% -28bps -78bps

New Variance%Old

Du-pont table FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16F FY17F FY18F

Net Interest Income/Assets 2.96% 3.42% 3.39% 3.29% 3.27% 3.46% 3.46% 3.49% 3.45% 3.34%

Fees/Assets 2.11% 2.22% 2.21% 2.18% 2.02% 2.05% 1.80% 1.78% 1.78% 1.74%

Investment profits/Assets 0.23% 0.49% 0.19% 0.04% 0.20% 0.09% 0.24% 0.15% 0.13% 0.10%

Net revenues/Assets 5.30% 6.13% 5.78% 5.51% 5.48% 5.60% 5.50% 5.42% 5.36% 5.18%

Operating Expense/Assets -2.31% -2.57% -2.47% -2.46% -2.34% -2.29% -2.24% -2.16% -2.09% -2.02%

Provisions/Assets -0.75% -0.95% -0.66% -0.47% -0.59% -0.61% -0.57% -0.64% -0.55% -0.46%

Taxes/Assets -0.78% -0.92% -0.90% -0.84% -0.80% -0.91% -0.90% -0.88% -0.91% -0.90%

Total Costs/Assets -3.84% -4.44% -4.03% -3.77% -3.73% -3.80% -3.71% -3.68% -3.55% -3.39%

ROA 1.46% 1.69% 1.75% 1.74% 1.75% 1.80% 1.79% 1.74% 1.81% 1.79%

Equity/Assets 7.62% 8.97% 9.05% 8.57% 9.45% 10.33% 10.09% 9.89% 9.62% 9.22%

ROE 19.1% 18.9% 19.3% 20.3% 18.5% 17.4% 17.8% 17.6% 18.8% 19.4%

RORWA 1.86% 1.98% 2.01% 1.98% 2.11% 2.28% 2.30% 2.18% 2.22% 2.21%

Valuation assumptions New Old

Cost of Equity 13.3% 13.3%

Terminal grow th 5.0% 5.0%

Normalised ROE 21.1% 21.1%

Stage 2 grow th 20.0% 20.0%

Mar-16 PT 625 660

Implied Mar-17 P/B 2.45 2.56

Implied Mar-17 P/E 14.1 14.2 0.5

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Axis

Rating Remains Buy



Potential upside +28.5%

Anchor themes


Nomura vs consensus

Our FY16F PAT estimate is 3-6% below consensus on our higher credit cost estimates.

Research analysts

India Banks



ICICI Bank ICBK.NS ICICIBC IN

EQUITY: BANKS

Higher stress but discounted in price

We see risk-reward similar to Axis Bank now

Action: Higher stress but discounted in the price, in our view

ICICI Bank has underperformed its private peers in the past 12 months largely

due to asset quality risks and, to some extent, slower growth. Our sensitivity

analysis does indicate that ICICI Bank has some concentrated exposure to

two to three infra conglomerates and their LGD would be +20% of FY17 net

worth, which is higher than Axis/Yes Bank. The ~30% discount in valuations to

Axis Bank does factor in the extra risk, and adjusted for the stress, valuations

are at a 15% discount and hence we still find relative risk-reward becoming

favourable. We reaffirm our Buy rating, with a revised target price of INR350.

Our stress test outcome: We estimate a loss given default LGD of

INR158bn for ICICI Bank in its stressed accounts, which are ~18% of its

FY17 net worth. We think ICICI is worst-placed among private corporate

banks for which we estimate an LGD at 11-22% of FY17 net worth. Key

reason for a higher LGD than its peers is its higher exposure to infra

conglomerates; excluding these, its exposure is similar to Axis in other risky

segments.

Operating metrics improving: 1) ICICI’s growth differential vs peers had

expanded, but with retail growing at ~25% y-y and the corporate book

growing from a lower base, we now believe the growth differential will likely

narrow, though still remain below private peers. 2) ICICI Bank lost CASA

market share in FY09-13 due to lower SME connect. Incremental CASA

market share in the past 12 months has improved and continued

performance on this metric should drive a re-rating, in our opinion.

Risk remains, but in the price; maintain Buy

ICICI’s exposure to risky accounts is higher and even adjusting for the higher

stress, valuations are at a 15-20% discount to peers like Axis/Yes. While the

charge-offs in some of ICICI’s exposures could be large, current valuations at

1.4x FY17 book discount the risks and hence we maintain our Buy rating.


FY16F

FY17F

FY18F


PPOP (mn) 197,199 218,280 218,280 249,209 246,646 294,750 288,583

Reported net profit (mn) 111,754 122,718 122,718 145,951 140,288 176,892 169,966

Normalised net profit (mn) 111,754 122,718 122,718 145,951 140,288 176,892 169,966

FD normalised EPS 19.15 21.03 21.03 25.01 24.04 30.31 29.13

FD norm. EPS growth (%) 13.4 9.8 9.8 18.9 14.3 21.2 21.2





ROE (%) 14.5 14.5 14.5 15.5 14.9 16.8 16.2

ROA (%) 1.8 1.8 1.8 1.8 1.7 1.9 1.8



16 September 2015


Nomura | ICICI Bank 16 September 2015

20

Key data on ICICI Bank Relative performance chart


Notes:


Absolute (INR) -10.0 -8.0 -12.9 M cap (USDmn) 23,828.9

Absolute (USD) -11.7 -11.1 -20.4 Free float (%) 90.3

Rel to MSCI India -2.0 -6.8 -8.7 3-mth ADT (USDmn) 65.1


Interest income 441,782 490,911 552,888 625,321 726,876








Depreciation -5,760 -6,239 -6,738 -7,277 -7,859

Amortisation







Other non-op income

Associates & JCEs

Pre-tax profit 139,677 158,199 175,311 200,411 242,809

Income tax -41,577 -46,446 -52,593 -60,123 -72,843


Minority interests

Other items

Preferred dividends

Normalised NPAT 98,100 111,754 122,718 140,288 169,966


Reported NPAT 98,100 111,754 122,718 140,288 169,966

Dividends -31,259 -33,951 -37,282 -42,620 -51,636


Growth (%)





Net profit 17.8 13.9 9.8 14.3 21.2

Normalised EPS 17.3 13.9 9.8 14.3 21.2


Loan growth 16.7 14.4 16.0 18.0 19.0



Asset growth 10.8 8.7 15.8 15.6 17.2

Deposit growth 13.4 8.9 18.8 16.9 19.5




Inter-bank lending

Deposits with central bank

Total securities 248,947 233,295 274,911 320,521 379,782


Gross loans 3,459,105 3,963,612 4,606,617 5,447,998 6,483,608

Less provisions -72,079 -88,392 -111,361 -143,596 -171,369

Net loans 3,387,026 3,875,221 4,495,256 5,304,402 6,312,238


Fixed assets 46,781 47,255 47,729 48,203 48,677

Goodwill


Other non IEAs 327,094 249,972 294,562 343,432 406,929

Total assets 5,946,416 6,461,294 7,480,386 8,648,835 10,132,951


Bank deposits, CDs,

debentures

1,432,481 1,505,319 1,629,074 1,811,527 2,018,622





Minority interest

Common stock 11,616 11,671 11,671 11,671 11,671

Preferred stock

Retained earnings 720,517 792,623 878,059 975,727 1,094,057


Proposed dividends

Other equity

Shareholders' equity 732,133 804,294 889,730 987,398 1,105,728


Non-perf assets 105,058 150,947 202,474 239,327 272,015



Equity to assets 12.3 12.4 11.9 11.4 10.9


NPAs/gross loans (%) 3.0 3.8 4.4 4.4 4.2


loans (%)

0.65 0.79 0.93 0.85 0.71





Per share

Reported EPS (INR) 16.81 19.15 21.03 24.04 29.13

Norm EPS (INR) 16.81 19.15 21.03 24.04 29.13

FD norm EPS (INR) 16.89 19.15 21.03 24.04 29.13

DPS (INR) 4.60 4.97 5.46 6.24 8.85

PPOP PS (INR) 28.44 33.79 37.41 42.27 49.45

BVPS (INR) 126.05 137.83 152.47 169.21 189.48

ABVPS (INR) 125.98 137.20 151.38 168.32 188.76

NTAPS (INR) 126.05 137.83 152.47 169.21 189.48


Reported P/E (x) 16.2 14.2 13.0 11.3 9.4

Normalised P/E (x) 16.2 14.2 13.0 11.3 9.4


Dividend yield (%) 1.7 1.8 2.0 2.3 3.2

Price/book (x) 2.2 2.0 1.8 1.6 1.4



Yield on assets (%) 12.98 12.68 12.45 12.03 11.80




Cost to income (%) 38.3 36.8 37.1 37.2 36.5


Dividend payout (%) 31.9 30.4 30.4 30.4 30.4

ROE (%) 14.0 14.5 14.5 14.9 16.2

ROA (%) 1.73 1.80 1.76 1.74 1.81

Operating ROE (%) 20.0 20.6 20.7 21.4 23.2

Operating ROA (%) 2.47 2.55 2.51 2.49 2.59



21

Fig. 37: ROA break-down – We expect ROEs to inch up to ~15% by FY17F


Fig. 38: Key changes to our FY16/17F estimates


Valuation: ICICI’s exposure to risky accounts is higher, and even adjusting for the

higher stress, valuations are at a 15-20% discount to peers like Axis/Yes. While charge-

offs in some of ICICI’s larger exposures could be significant we think current valuations

at 1.4x FY17 book discount the risks, and hence we maintain our Buy rating.

Risks: 1) Some asset quality risks: legacy gas assets and overseas coal assets funded

by ICICI; 2) slower-than-expected turnaround of GDP growth.

Fig. 39: TP of INR350


Fig. 40: Our TP implies 1.95x Mar-17 book


ROA decomposition FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16F FY17F FY18F


Fees/Assets 1.73% 1.91% 1.89% 1.82% 1.65% 1.80% 1.81% 1.78% 1.79% 1.79%

Investment profits/Assets 0.36% 0.25% -0.06% -0.02% 0.10% 0.17% 0.26% 0.22% 0.18% 0.15%




Taxes/Assets -0.37% -0.38% -0.44% -0.56% -0.64% -0.78% -0.79% -0.79% -0.78% -0.81%


ROA 1.03% 1.16% 1.42% 1.55% 1.75% 1.85% 1.90% 1.85% 1.82% 1.90%

Equity/Assets 13.22% 14.61% 14.70% 13.84% 13.34% 13.20% 13.09% 12.73% 12.19% 11.67%

ROE 7.8% 8.0% 9.7% 11.2% 13.1% 14.0% 14.5% 14.5% 14.9% 16.2%

RORWA 1.05% 1.24% 1.62% 1.75% 1.98% 2.09% 2.14% 2.10% 2.09% 2.17%


NII 213,986 243,677 213,986 241,115 0.0% -1.1%

Loan grow th 16.0% 17.9% 16.0% 17.9% 0.0% 0.0%


PPOP 203,863 235,512 203,863 232,950 0.0% -1.1%

PAT 122,718 145,951 122,718 140,288 0.0% -3.9%

NIM% 3.22% 3.17% 3.22% 3.13% 0bps -3bps

LLPs 1.03% 0.83% 1.03% 0.94% 0bps 11bps

GNPA% 4.40% 4.23% 4.40% 4.39% 0bps 16bps

Slippages 95,127 82,919 95,127 92,132 0.0% 11.1%

ROA 1.85% 1.90% 1.85% 1.82% 0bps -7bps

ROE 14.5% 15.5% 14.5% 14.9% 0bps -57bps

Old New Variance%






Lending business value 284 314

Mar-16 PT 350 380

Implied Mar-17 P/E 13.2 13.9


Susbdiary valuation 66 66

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22

Fig. 41: Subsidiary valuation


Valuation basisValue of sub -

[A] (INRmn)

ICICIBC's

share [B]

ICICI share

(INRmnn)

Per share of

parent

Per share of

parent - Old

Life Insurance Appraisal value 311,500 74% 230,510 40 38

Asset Management 4% of AUM 62,911 51% 32,085 6 5

ICICI Securities PE of 12x Mar-17 46,658 100% 46,658 8 3

ICICI Home Finance PE of 10x Mar-17 19,800 100% 19,800 3 3

General Insurance 7x Mar-17 PAT 49,620 74% 36,719 6 6

Foreign subsidiaries 0.75x Mar-17 book 86,751 100% 86,751 15 14

Total Subsidiary value 452,522 78 69

Value post holding discount (15%) 384,644 66 59

Rating Remains Buy




Anchor themes


Nomura vs consensus

Our FY16/17F PAT estimate is 3-7% below consensus.

Research analysts

India Banks



Yes Bank YESB.NS YES IN

EQUITY: BANKS

Not as bad as perceived

Large exposure to some groups, but risks look manageable

Exposed to stressed groups, but risks look manageable

Yes Bank’s asset quality perception has taken a hit in the past three to six

months, with some large exposure to infra conglomerates. While our exposure

analysis suggests that Yes does have material exposure to some of the infra

names, its exposure is less than that of the PSUs banks/ICICI (as a

percentage of net worth). Adjusted for our stress test, Yes Bank’s valuation at

2.1x FY17 book looks reasonable and hence we reaffirm our Buy rating. We

prefer Axis (AXSB IN, Buy) /ICICI (ICICIBC, Buy) on a relative basis, however,

given there is no valuation gap with Axis and a ~30% premium over ICICI.

Our stress test outcome: We estimate a loss given default of INR21bn for

Yes Bank in its stressed accounts, which is ~13% of its FY17 net worth. We

believe Yes Bank is better placed than ICICI Bank, given its mix of high

exposure to infra conglomerates and lower exposure than peers to metal

names and infra SPVs. While credit charges in these accounts could lead to

a spike in Yes Bank’s credit cost, its 50bp of floating provisions (on loans)

and better collateral, according to management, provides some comfort.

Growth outcome better; liability profile remains the key: 1) Given Yes

Bank’s smaller size we believe it should be able to deliver faster growth

than larger private peers, and PSUs share loss offers additional opportunity.

2) While SA accretion has improved in the past three years since

deregulation, its overall share of total retail deposits is significantly lower

than peers and delivery here remains key to sustained margin improvement.

Multiples reasonable now adjusted for the stress; maintain Buy

Yes Bank currently trades at 1.9x FY17 book, and adjusted for our stress test,

valuations at 2.2x FY17 book look reasonable to us. Hence, we reaffirm our

Buy rating. While we expect growth to largely lag the FY04-07 period, this is

well reflected in current valuation multiples, in our opinion. We marginally

revise our FY16/17F PAT estimates down by 2-4% and our target price by 9%

to factor in part of the impact suggested by our stress test.


FY16F

FY17F

FY18F


PPOP (mn) 32,496 41,484 41,484 50,971 50,927 64,736 62,521









ROE (%) 21.3 19.3 19.3 20.4 19.7 19.9 19.3

ROA (%) 1.6 1.6 1.6 1.7 1.6 1.8 1.7



16 September 2015


Nomura | Yes Bank 16 September 2015

24

Key data on Yes Bank Relative performance chart


Notes:


Absolute (INR) -8.2 -9.2 15.6 M cap (USDmn) 4,615.1

Absolute (USD) -10.0 -12.3 5.6 Free float (%) 90.3

Rel to MSCI India -0.2 -8.0 19.9 3-mth ADT (USDmn) 42.9


Interest income 99,814 115,720 141,016 170,353 207,056



Net fees and commissions 12,609 19,765 0 0 0


Other operating revenue 2,945 -721 23,397 28,879 34,590



Depreciation -632 -850 -935 -1,029 -1,132

Amortisation





Other provision charges -980 346 0 0 0


Other non-op income

Associates & JCEs

Pre-tax profit 23,268 29,101 35,926 42,863 55,229

Income tax -7,085 -9,047 -11,496 -13,717 -17,674


Minority interests

Other items

Preferred dividends

Normalised NPAT 16,183 20,054 24,430 29,146 37,555


Reported NPAT 16,183 20,054 24,430 29,146 37,555

Dividends -3,376 -4,525 -5,132 -5,865 -7,230


Growth (%)





Net profit 24.4 23.9 21.8 19.3 28.9

Normalised EPS 7.4 23.9 21.8 8.9 28.9


Loan growth 18.4 35.8 29.0 25.0 26.0



Asset growth 10.0 24.9 20.1 21.3 22.4

Deposit growth 10.8 22.9 24.0 25.2 23.5




Inter-bank lending




Gross loans 557,818 757,755 980,131 1,229,268 1,550,436

Less provisions -1,489 -2,257 -5,538 -11,027 -15,452

Net loans 556,330 755,498 974,593 1,218,241 1,534,983

Long-term investments 409,504 466,052 503,260 577,518 670,754

Fixed assets 2,938 3,193 3,448 3,703 3,958

Goodwill


Other non IEAs 62,470 61,389 70,598 81,187 93,366

Total assets 1,090,158 1,361,704 1,635,510 1,983,420 2,428,019

Customer deposits 741,920 911,759 1,130,625 1,416,016 1,749,218

Bank deposits, CDs,

debentures

181,588 194,994 219,994 246,994 273,994


Total int bearing liabilities 955,063 1,173,962 1,417,829 1,730,220 2,090,422



Minority interest

Common stock 3,606 4,177 4,177 4,177 4,577

Preferred stock



Proposed dividends

Other equity



Non-perf assets 1,749 3,134 6,923 13,784 19,315



Equity to assets 6.5 8.6 8.3 8.0 9.5


NPAs/gross loans (%) 0.3 0.4 0.7 1.1 1.2


loans (%)

0.47 0.49 0.57 0.66 0.47





Per share

Reported EPS (INR) 38.74 48.00 58.48 63.67 82.04

Norm EPS (INR) 38.74 48.00 58.48 63.67 82.04

FD norm EPS (INR) 44.87 48.00 58.48 69.77 82.04

DPS (INR) 9.36 10.83 12.28 14.04 15.79

PPOP PS (INR) 64.36 77.79 99.31 111.26 136.59

BVPS (INR) 197.48 279.60 325.80 381.53 501.82

ABVPS (INR) 197.48 278.62 324.97 379.88 499.71

NTAPS (INR) 197.48 279.60 325.80 381.53 501.82


Reported P/E (x) 18.9 15.2 12.5 11.5 8.9

Normalised P/E (x) 18.9 15.2 12.5 11.5 8.9


Dividend yield (%) 1.3 1.5 1.7 1.9 2.2

Price/book (x) 3.7 2.6 2.2 1.9 1.5



Yield on assets (%) 18.99 16.54 15.61 15.47 14.98




Cost to income (%) 39.4 41.3 40.4 40.1 39.6


Dividend payout (%) 20.9 22.6 21.0 20.1 19.3

ROE (%) 25.0 21.3 19.3 19.7 19.3

ROA (%) 1.56 1.64 1.63 1.61 1.70

Operating ROE (%) 36.0 31.0 28.4 29.0 28.4

Operating ROA (%) 2.24 2.37 2.40 2.37 2.50


Nomura | Yes Bank 16 September 2015

25

Fig. 42: We expect ROEs to inch back to ~20% levels by FY17F




Valuation: Yes Bank currently trades at 1.9x FY17 book (BVPS: INR380), and adjusted

for our stress test, valuations at 2.2x FY17 book look reasonable to us. Hence, we

maintain our Buy rating. While growth will lag the FY04-07 period, we think this is well

reflected in current valuation multiples. We marginally revise our FY16/17F PAT

estimates down by 2-4% and our target price by 9% to factor in part of the impact

suggested by our stress test.

Risks: Lower-than-expected NIM expansion and loan growth, sharp deterioration in

asset quality, and slower-than-expected SA growth.







Fees/Assets 1.53% 1.69% 1.46% 1.36% 1.35% 1.58% 1.64% 1.64% 1.67% 1.64%

Investment profits/Assets 0.79% 0.35% -0.10% 0.06% 0.19% 0.17% 0.12% 0.11% 0.09% 0.07%




Taxes/Assets -0.86% -0.88% -0.80% -0.78% -0.77% -0.72% -0.78% -0.80% -0.79% -0.84%


ROA 1.62% 1.69% 1.58% 1.62% 1.59% 1.65% 1.73% 1.71% 1.68% 1.78%

Equity/Assets 7.83% 8.34% 7.50% 7.00% 6.42% 6.58% 8.10% 8.85% 8.54% 9.20%

ROE 20.7% 20.3% 21.1% 23.1% 24.8% 25.0% 21.3% 19.3% 19.7% 19.3%

RORWA 1.79% 2.17% 2.12% 2.05% 2.18% 2.25% 2.23% 2.09% 2.02% 2.12%


NII 44,663 54,677 44,663 54,632 0.0% -0.1%

Loan grow th 24.7% 23.0% 24.7% 23.0% 0bps 0bps


PPOP 41,484 50,971 41,484 50,927 0.0% -0.1%

PAT 24,430 30,243 24,430 29,146 0.0% -3.6%

NIM% 3.12% 3.16% 3.12% 3.16% 0bps 0bps

LLPs 0.64% 0.59% 0.64% 0.74% 0bps 14bps

GNPA% 0.71% 0.96% 0.71% 1.12% 0bps 16bps

Slippages 7,578 9,801 7,578 11,762 0.0% 20.0%

ROA 1.71% 1.75% 1.71% 1.68% 0bps -6bps

ROE 19.3% 20.4% 19.3% 19.7% 0bps -67bps

Old New Variance%





Normalised ROEs 18.9% 18.9%

Mar-16 PT 870 960


Implied Mar-17 P/E 12.5 13.3 0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jul-0

5N

ov-0

5M

ar-

06

Jul-0

6N

ov-0

6M

ar-

07

Jul-0

7N

ov-0

7M

ar-

08

Jul-0

8N

ov-0

8M

ar-

09

Jul-0

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ov-0

9M

ar-

10

Jul-1

0N

ov-1

0M

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11

Jul-1

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ov-1

1M

ar-

12

Jul-1

2N

ov-1

2M

ar-

13

Jul-1

3N

ov-1

3M

ar-

14

Jul-1

4N

ov-1

4M

ar-

15

Jul-1

5

Yes Bank

Rating Remains Buy




Anchor themes


Nomura vs consensus

Our FY16/17F PAT estimates are 2-6% below consensus.

Research analysts

India Banks



State Bank of India SBI.NS SBIN IN

EQUITY: BANKS

Preferred PSU bank

Liability franchise, capital levels and relatively better underwriting are key positives Action: Preferred PSU bank; maintain Buy

SBI’s recent underperformance was due to asset quality concerns and recent

net interest margin (NIM) and PPOP weakness. Our stress test indicates that

SBI’s loss-given-default (LGD) from large stressed names is lower than most

PSU banks, but higher than BOB (BOB IN, Buy) especially after including

exposure to its subsidiaries which is higher risk. While we think the NIM

pressure will likely be sector wide, its best-in-class liability franchise should

help lower the long-term impact on its NIM, in our view. Also, adjusting for the

stress test, valuations are now at a discount to BOB and similar to PNB;

hence, SBI is our preferred PSU bank.

Stress test outcome: We estimate a loss-given-default (LGD) of INR198bn

for SBI (INR292bn including subsidiaries) in its stressed accounts, which

are ~12% of its FY17F net worth. SBI (parent) LGD is ~12% of FY17 net

worth which increases to ~14% of FY17F net worth including subsidiaries,

which is still better than most peers at 14-22% of FY17F net worth. SBI has

the lowest exposure to infra conglomerates of our covered PSU banks but

its exposure to metals and infra SPVs is similar to peers.

Capital+ Liability franchise remains a key advantage: SBI’s 1Q16 miss

on NIMs/PPOP was due to higher deposit growth despite lower term-deposit

rates, which is not negative in the long run and highlights its superior liability

franchise.Tier-1 of ~10% remains best among PSU banks and should help

SBI deliver better growth than peers over the next three years. Maintain Buy, TP cut to INR290

While SBI currently trades at 0.8x FY17F reported book, adjusted for our

stress test its valuations are at 1.2x FY17F adjusted book (similar to the FY04-

07 multiple). Overall, we like SBI’s superior liability franchise, capital levels

and better underwriting, and hence we maintain our Buy rating. We revise our

FY16/17F PAT estimates down by 0-6% and cut our TP by 13% to factor in

part of the impact from our stress test.


FY16F

FY17F

FY18F


PPOP (mn) 389,135 402,783 402,783 461,136 449,950 528,310 523,765









ROE (%) 10.6 12.0 12.0 13.5 12.7 14.8 14.4

ROA (%) 0.7 0.8 0.8 0.9 0.8 1.0 0.9



16 September 2015


Nomura | State Bank of India 16 September 2015

27

Key data on State Bank of India Relative performance chart


Notes:






Interest income 1,363,508 1,523,971 1,667,177 1,825,493 2,058,955

Interest expense -870,686 -973,818 -1,083,208

-1,176,450

-1,304,100 Net interest income 492,822 550,153 583,969 649,043 754,855





Operating income 678,351 775,911 830,088 925,580 1,068,673

Depreciation -13,339 -11,165 -12,818 -13,313 -15,104

Amortisation





Other provision charges -4,511 1,201 0 0 0


Other non-op income

Associates & JCEs

Pre-tax profit 161,739 193,140 241,575 288,241 370,182

Income tax -52,827 -62,124 -77,704 -92,714 -119,071


Minority interests

Other items

Preferred dividends

Normalised NPAT 108,912 131,016 163,871 195,527 251,111


Reported NPAT 108,912 131,016 163,871 195,527 251,111

Dividends -26,208 -30,779 -37,685 -45,969 -55,982


Growth (%)





Net profit -22.8 20.3 25.1 19.3 28.4

Normalised EPS -22.8 18.7 23.0 17.6 28.4

Normalised FDEPS -29.3 20.3 23.4 17.4 26.5

Loan growth 15.7 7.5 11.0 14.0 15.0



Asset growth 14.4 14.3 10.1 12.8 13.9

Deposit growth 15.9 13.1 10.8 12.8 14.2




Inter-bank lending

Deposits with central

bank

Total securities 600,505 1,599,181 1,525,658 1,719,800 1,962,273

Other int earning

assets

Gross loans 12,403,380 13,291,612 14,780,843 16,871,643 19,397,936

Less provisions -305,093 -291,348 -350,550 -421,109 -479,822

Net loans 12,098,287 13,000,264 14,430,293 16,450,534 18,918,114


Fixed assets 80,022 93,292 109,216 128,325 151,256

Goodwill


Other non IEAs 435,459 684,696 653,216 736,339 840,155

Total assets 17,922,346 20,477,138 22,541,996 25,432,238 28,978,887


Bank deposits, CDs,

debentures

1,748,507 2,016,597 2,291,373 2,592,329 2,893,527

Other int bearing

liabilities

82,802 34,906 34,906 34,906 34,906

Total int bearing

liabilities

15,775,394 17,819,435 19,791,246 22,325,208 25,428,502

Non-int bearing

liabilities

964,129 1,373,321 1,310,182 1,476,904 1,685,131


Minority interest

Common stock 7,467 7,466 7,567 7,692 7,806

Preferred stock

Retained earnings 1,175,357 1,276,917 1,433,001 1,622,434 1,857,448

Reserves for credit

losses

Proposed dividends

Other equity

Shareholders' equity 1,182,823 1,284,382 1,440,568 1,630,126 1,865,254

Total liabilities and

equity

17,922,346 20,477,138 22,541,996 25,432,238 28,978,887

Non-perf assets 613,061 564,261 637,364 726,049 827,279

Balance sheet ratios

(%)


Equity to assets 6.6 6.3 6.4 6.4 6.4

Asset quality &

capital

NPAs/gross loans (%) 4.9 4.2 4.3 4.3 4.3


loans (%)

1.25 1.48 1.09 0.96 0.79

Loss reserves/assets

(%)

1.70 1.42 1.56 1.66 1.66

Loss reserves/NPAs

(%)

49.8 51.6 55.0 58.0 58.0



Per share

Reported EPS (INR) 14.59 17.31 21.30 25.05 32.17

Norm EPS (INR) 14.59 17.31 21.30 25.05 32.17

FD norm EPS (INR) 14.59 17.55 21.66 25.42 32.17

DPS (INR) 3.00 3.55 4.26 5.11 7.17

PPOP PS (INR) 43.01 51.42 52.36 57.64 67.09

BVPS (INR) 158.42 172.04 190.37 211.92 238.94

ABVPS (INR) 156.77 170.65 189.14 210.82 237.70

NTAPS (INR) 158.42 172.04 190.37 211.92 238.94

Valuations and

ratios

Reported P/E (x) 16.1 13.6 11.0 9.4 7.3

Normalised P/E (x) 16.1 13.6 11.0 9.4 7.3


Dividend yield (%) 1.3 1.5 1.8 2.2 3.0

Price/book (x) 1.5 1.4 1.2 1.1 1.0



Yield on assets (%) 11.48 11.17 10.91 10.70 10.55

Cost of int bearing liab

(%)

5.90 5.80 5.76 5.59 5.46


Non-interest income

(%)

27.4 29.1 29.6 29.9 29.4

Cost to income (%) 52.7 49.8 51.5 51.4 51.0


Dividend payout (%) 24.1 23.5 23.0 23.5 22.3

ROE (%) 10.0 10.6 12.0 12.7 14.4

ROA (%) 0.65 0.68 0.76 0.82 0.92

Operating ROE (%) 14.9 15.7 17.7 18.8 21.2

Operating ROA (%) 0.96 1.01 1.12 1.20 1.36


Nomura | State Bank of India 16 September 2015

28

Fig. 46: ROA break-down – We expect SBI to deliver +14% ROE by FY18F




Valuation: While SBI currently trades at 0.8x FY17F reported book (BVPS: INR251),

adjusted for our stress test it trades at 1.2x FY17F adjusted book (similar to the FY04-07

multiple). Overall, we like SBI’s superior liability franchise, capital levels and better

underwriting and hence we reiterate Buy. We revise our FY16/17F PAT estimates down

by 0-6% and cut our TP by 13% to factor in part of the impact from our stress test.

Risks: Risks include slower-than-expected recovery of the corporate credit cycle.



Fig. 49: Our TP implies 1.05x Mar-17F book




Fees/Assets 1.27% 1.33% 1.36% 1.25% 1.07% 1.01% 1.02% 1.04% 1.07% 1.09%

Investment profits/Assets 0.32% 0.22% 0.08% -0.08% 0.08% 0.13% 0.20% 0.14% 0.12% 0.11%




Taxes/Assets -0.63% -0.49% -0.61% -0.55% -0.42% -0.32% -0.33% -0.37% -0.40% -0.45%


ROA 1.14% 0.95% 0.76% 0.95% 1.01% 0.67% 0.71% 0.79% 0.84% 0.96%

Equity/Assets 6.70% 6.40% 5.98% 6.07% 6.56% 6.68% 6.65% 6.57% 6.63% 6.65%

ROE 17.1% 14.8% 12.6% 15.7% 15.4% 10.0% 10.6% 12.0% 12.7% 14.4%

RORWA 1.63% 1.43% 1.10% 1.41% 1.53% 1.02% 1.12% 1.28% 1.37% 1.54%


NII 583,969 660,222 583,969 649,043 0.0% -1.7%


PPOP 402,783 461,136 402,783 449,950 0.0% -2.4%

PAT 163,871 208,930 163,871 195,527 0.0% -6.4%

NIM% 2.82% 2.85% 2.82% 2.80% 0bps -5bps

LLPs 1.18% 0.99% 1.18% 1.05% 0bps 6bps

GNPA% 4.31% 4.22% 4.31% 4.30% 0bps 9bps

Slippages 259,186 280,836 259,186 295,617 0.0% 5.3%

ROA 0.79% 0.90% 0.79% 0.84% 0bps -6bps

ROE 12.0% 13.5% 12.0% 12.7% 0bps -81bps

Old New Variance%






Mar-16 PT 290 335



Per Share Per Share

Price Target - Mar-16 290 335

Insurance Valuation 13 13

Capital market businesses 14 14

Total Subsidiary valuation 26 26

Lending business valuation 264 309

0.50.70.91.11.31.51.71.92.12.32.5

Ap

r-05

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SBI

Rating Remains Buy

Target price Remains INR 210



Anchor themes


Nomura vs consensus

Our FY16/17F PAT estimates are 3-5% below consensus, as we build in lower NIMs.

Research analysts

India Banks



Bank of Baroda BOB.NS BOB IN

EQUITY: BANKS

Lowest risk within PSU banks

Valuations now at a premium to SBI, and hence lower in the relative pecking order

Action: Lower risk within PSU banks; maintain Buy

BOB’s asset quality and delinquent loans are the best among the PSU banks,

and our sensitivity analysis indicates its incremental risk is the lowest. Part of

its superior underwriting is reflected in its premium valuations vs peers. Its

underwriting and new private sector management make it a good long-term

investment within the group, in our view. On a relative basis, we prefer SBI

(SBIN IN, Buy) due to lower valuations and better liability franchise.


in its stressed accounts, which is ~10% of its FY17F net worth. This

compares well with the group, with LGDs of 15-25% of FY17F net worth.

BOB has lower exposure to most segments (particularly metals), and its

concentration risk in infra SPV debt is the lowest among peers, which is

consistent with our view of BOB being the most prudent underwriter.

Management change a positive; overseas margins remain a key drag:

Relatively better underwriting in the past and recent management change

are certainly positives for BOB over the medium term. Near term, we see

two challenges: 1) Overseas margins are under pressure and new

management will have to address the profitability gap and 2) BOB’s pension

provisioning over the past two years has been weaker than peers and is

likely to lead to higher opex growth in FY16/17F vs peers.

Maintain Buy and TP of INR210

While BOB currently trades at 0.9x FY17F reported book, adjusted for our

stress test its valuations are 1.3x FY17F adjusted book. BOB’s better

underwriting/profitability, vs the FY04-07 cycle has led to its premium

valuations vs peers, and is likely to be sustained in view of its better capital

position and management change. We lower FY16/17F PAT estimates by 9-

11% on lower NIMs in the international book but maintain our INR210 TP.


FY16F

FY17F

FY18F


PPOP (mn) 99,151 111,239 101,303 132,886 120,664

139,707


73,472


73,472


32.49

FD norm. EPS growth (%) -27.1 44.6 27.9 25.9 29.1

28.0





ROE (%) 9.2 11.8 10.7 13.6 12.8

14.5

ROA (%) 0.5 0.7 0.6 0.8 0.7

0.8



16 September 2015


Nomura | Bank of Baroda 16 September 2015

30

Key data on Bank of Baroda Relative performance chart


Notes:


Absolute (INR) 1.2 26.9 -1.3 M cap (USDmn) 6,216.0

Absolute (USD) -0.8 22.6 -9.8 Free float (%) 36.0

Rel to MSCI India 9.2 28.1 3.0 3-mth ADT (USDmn) 25.2


Interest income 389,397 429,636 453,498 490,310 546,495








Depreciation -3,450 -3,404 -3,744 -4,119 -4,531

Amortisation







Other non-op income

Associates & JCEs

Pre-tax profit 54,973 54,206 62,099 82,002 104,961

Income tax -9,563 -20,223 -18,630 -24,601 -31,489


Minority interests

Other items

Preferred dividends

Normalised NPAT 45,410 33,983 43,469 57,401 73,472


Reported NPAT 45,410 33,983 43,469 57,401 73,472

Dividends -10,864 -8,517 -10,350 -12,701 -12,701


Growth (%)


Non-interest income 22.9 -1.4 6.1 14.3 12.2



Net profit 1.3 -25.2 27.9 32.0 28.0

Normalised EPS -0.6 -27.1 27.9 29.1 28.0

Normalised FDEPS -0.6 -27.1 27.9 29.1 28.0

Loan growth 21.0 7.8 11.0 13.0 14.0



Asset growth 20.6 8.4 8.0 12.5 13.6

Deposit growth 20.0 8.6 8.0 12.9 14.1




Inter-bank lending 1,286,594 1,450,893 1,296,466 1,461,425 1,665,391


Total securities


Gross loans 4,028,470 4,362,571 4,857,634 5,500,155 6,273,022

Less provisions -58,411 -81,920 -106,111 -130,934 -152,110

Net loans 3,970,058 4,280,651 4,751,523 5,369,221 6,120,912


Fixed assets 16,815 18,876 20,936 22,996 25,057

Goodwill


Other non IEAs 127,740 133,757 119,520 134,728 153,531

Total assets 6,584,519 7,140,013 7,714,670 8,680,593 9,862,319


Bank deposits, CDs,

debentures

368,109 352,632 379,566 407,938 437,121

Other int bearing liabilities 21 11 11 11 11




Minority interest

Common stock 4,307 4,423 4,423 4,523 4,523

Preferred stock



Proposed dividends

Other equity



Non-perf assets 118,759 162,614 204,059 238,062 276,563



Equity to assets 5.3 5.4 5.5 5.5 5.4


NPAs/gross loans (%) 2.9 3.7 4.2 4.3 4.4


loans (%)

0.86 0.99 0.81 0.70 0.55





Per share

Reported EPS (INR) 21.09 15.37 19.66 25.38 32.49

Norm EPS (INR) 21.09 15.37 19.66 25.38 32.49

FD norm EPS (INR) 21.09 15.37 19.66 25.38 32.49

DPS (INR) 5.05 3.85 4.68 5.62 5.62

PPOP PS (INR) 43.15 44.83 45.81 53.36 61.78

BVPS (INR) 162.22 175.66 190.63 210.61 237.48

ABVPS (INR) 150.50 160.81 173.42 194.07 218.25

NTAPS (INR) 162.22 175.66 190.63 210.61 237.48


Reported P/E (x) 8.8 12.1 9.5 7.3 5.7

Normalised P/E (x) 8.8 12.1 9.5 7.3 5.7


Dividend yield (%) 2.7 2.1 2.5 3.0 3.0

Price/book (x) 1.1 1.1 1.0 0.9 0.8



Yield on assets (%) 8.31 7.82 7.70 7.61 7.48




Cost to income (%) 43.4 43.6 46.7 45.0 44.3


Dividend payout (%) 23.9 25.1 23.8 22.1 17.3

ROE (%) 13.8 9.2 10.7 12.8 14.5

ROA (%) 0.75 0.50 0.59 0.70 0.79

Operating ROE (%) 16.7 14.7 15.3 18.3 20.7

Operating ROA (%) 0.91 0.79 0.84 1.00 1.13


Nomura | Bank of Baroda 16 September 2015

31

Fig. 50: ROA break-down – We expect BOB to deliver +14% ROE by FY18F




Valuation: While BOB currently trades at 0.9x FY17F reported book (BVPS: INR194),

adjusted for our stress test its valuations are at 1.3x FY17F adjusted book. BOB’s better

underwriting/profitability vs the FY04-07 cycle has led to its premium valuations vs peers,

and is likely to be sustained due to its better capital position and recent management

change, in our view. We lower FY16/17F PAT estimates by 9-11% on lower NIMs in the

international book, but maintain our TP of INR210.

Risks: 1) Longer-than-expected asset quality pressure and 2) slower-than-expected

pick-up in economic activity.







Fees/Assets 0.94% 0.85% 0.76% 0.72% 0.62% 0.63% 0.51% 0.52% 0.54% 0.55%





Taxes/Assets -0.57% -0.48% -0.45% -0.26% -0.07% -0.16% -0.30% -0.26% -0.31% -0.35%


ROA 1.13% 1.24% 1.36% 1.28% 0.92% 0.77% 0.51% 0.60% 0.71% 0.81%

Equity/Assets 5.37% 5.13% 5.40% 5.87% 5.90% 5.58% 5.49% 5.56% 5.58% 5.57%

ROE 21.1% 24.2% 25.3% 21.7% 15.7% 13.8% 9.2% 10.7% 12.8% 14.5%

RORWA 1.78% 2.12% 2.32% 2.16% 1.60% 1.37% 0.92% 1.09% 1.28% 1.45%


NII 150,309 176,315 143,363 166,015 -4.6% -5.8%

Loan grow th 11.0% 13.0% 11.0% 13.0% 0.0% 0.0%

PPOP 111,239 132,886 101,303 120,664 -8.9% -9.2%

PBT 70,193 90,345 62,099 82,002 -11.5% -9.2%

PAT 49,135 63,241 43,469 57,401 -11.5% -9.2%

NIM% 2.04% 2.14% 1.97% 2.06% -7bps -8bps

LLPs 0.91% 0.84% 0.87% 0.76% -4bps -8bps

GNPA% 4.20% 4.33% 4.20% 4.33% 0bps 0bps

Slippages% 1.90% 1.70% 1.90% 1.70% 0bps 0bps

ROA 0.67% 0.77% 0.60% 0.71% -7bps -6bps

ROE 11.8% 13.6% 10.7% 12.8% -106bps -78bps

Variance%NewOld






Mar-16 PT 210 210


Implied Mar-17 P/E 8.27 7.53 0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

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BOB

Rating Remains Neutral




Anchor themes


Nomura vs consensus

Our FY16/17F PAT is 7-8% below consensus as we factor in higher asset quality pressures for BOI.

Research analysts

India Banks



Bank of India BOI.BO BOI IN

EQUITY: FINANCIALS

Many problems to take care of

Weak underwriter + weak capital position

Action: Many problems to take care of

BOI, along with PNB, clearly are the weakest underwriters among large PSU

banks, and like PNB, even our estimate of BOI’s LGD (loss given default) to

the unrecognised stressed names is highest at 22% of FY17 net worth. BOI’s

total net worth adjustments are highest among peers at ~60%, due to high

share of NPA plus restructuring, large ARC sales and now higher exposure in

these stressed names. While valuations on FY17F P/B look cheap at 0.35x,

adjusted valuation at 1.2x FY17F book looks demanding, especially with

RORWAs at <0.5%. We retain our cautious view on BOI.

• Stress test outcome: We estimate a loss given default of INR76bn for BOI in these stressed accounts, which is ~22% of its FY17F net worth. BOI is one of the worst placed within our covered PSUs with LGDs of 15-25% of FY17F net worth. More importantly, it has significantly higher exposure towards infra conglomerates vs PSU peers, while it has similar exposure to other risky segments. BOI has been significantly disappointing on asset quality in the past two quarters, which can be explained by its higher exposures in these risky segments. On the back of this, we expect ROEs to continue to remain sup-par (<10% till FY18F) for BOI.

• Profitability to remain weak: With ~12% of NPAs plus restructuring, profitability has been significantly impacted and with still more to come, we expect ROA to remain <0.5% over the next two years for BOI.

Multiples marginally above FY04-07 cycle adjusted for stress; Neutral

While BOI currently trades at 0.35x FY17F reported book, adjusted for our

stress test it trades at 1.2x FY17F adjusted book and hence we maintain

Neutral. We think asset quality pressure will be higher for BOI vs peers and

hence we inch up our credit cost estimates, and additional recognition of these

stress assets will lead to interest reversals impacting NIMs. Overall, we revise

our FY16/17F PAT estimates down by 15-25% and cut our TP by 12% to

factor in part of the impact from our stress test.


FY16F

FY17F

FY18F


PPOP (mn) 74,878 84,131 79,850 96,878 91,813 109,879 103,656




FD norm. EPS growth (%) -39.4 -2.1 -17.4 40.9 26.6 33.6 39.0





ROE (%) 6.3 6.7 5.7 9.4 7.3 11.7 9.6

ROA (%) 0.3 0.3 0.3 0.5 0.4 0.6 0.5



16 September 2015


Nomura | Bank of India 16 September 2015

33

Key data on Bank of India Relative performance chart


Notes:






Interest income 379,101 434,299 462,505 494,830 542,298








Depreciation -2,279 -2,854 -3,025 -3,207 -3,399

Amortisation





Other provision charges -1,241 504 0 0 0


Other non-op income

Associates & JCEs

Pre-tax profit 35,443 17,942 23,169 33,358 48,971

Income tax -8,158 -861 -6,487 -9,341 -13,713


Minority interests

Other items

Preferred dividends

Normalised NPAT 27,285 17,081 16,682 24,017 35,259


Reported NPAT 27,285 17,081 16,682 24,017 35,259

Dividends -3,757 -3,997 -5,059 -6,330 -7,352


Growth (%)


Non-interest income 14.0 -1.4 0.8 8.2 11.7


Pre-provision earnings 12.9 -11.1 6.6 15.0 12.9

Net profit -0.8 -37.4 -2.3 44.0 46.8

Normalised EPS -4.0 -47.1 -14.1 36.3 46.8

Normalised FDEPS -8.0 -39.4 -17.4 26.6 39.0

Loan growth 28.1 8.4 7.0 10.0 12.0



Asset growth 26.1 8.0 5.2 9.5 12.0

Deposit growth 24.9 11.5 4.9 9.2 12.1




Inter-bank lending




Gross loans 3,751,849 4,107,012 4,424,945 4,892,750 5,493,988

Less provisions -44,514 -86,757 -123,272 -160,910 -194,326

Net loans 3,707,335 4,020,256 4,301,673 4,731,841 5,299,662


Fixed assets 20,439 23,304 24,304 25,304 26,304

Goodwill


Other non IEAs 211,363 145,902 150,292 163,829 184,655

Total assets 5,694,484 6,151,419 6,472,242 7,088,029 7,939,098


Bank deposits, CDs,

debentures

414,502 346,748 356,129 389,691 426,743





Minority interest

Common stock 6,434 6,649 7,861 8,942 9,442

Preferred stock



Proposed dividends

Other equity



Non-perf assets 118,686 221,932 308,180 365,704 404,846



Equity to assets 4.6 4.5 4.8 4.9 4.9


NPAs/gross loans (%) 3.2 5.4 7.0 7.5 7.4


loans (%)

1.27 1.40 1.28 1.19 1.00





Per share

Reported EPS (INR) 41.04 21.73 18.65 25.44 37.34

Norm EPS (INR) 41.04 21.73 18.65 25.44 37.34

FD norm EPS (INR) 42.41 25.69 21.22 26.86 37.34

DPS (INR) 5.84 6.01 6.43 7.08 7.79

PPOP PS (INR) 126.68 95.25 89.29 97.24 109.78

BVPS (INR) 406.90 419.47 395.02 389.41 408.93

ABVPS (INR) 347.67 318.48 280.69 286.57 317.94

NTAPS (INR) 406.90 419.47 395.02 389.41 408.93


Reported P/E (x) 3.3 6.3 7.3 5.3 3.6

Normalised P/E (x) 3.3 6.3 7.3 5.3 3.6


Dividend yield (%) 4.3 4.4 4.7 5.2 5.7

Price/book (x) 0.3 0.3 0.3 0.3 0.3



Yield on assets (%) 10.26 10.00 9.87 9.76 9.63




Cost to income (%) 44.3 51.9 52.1 50.5 49.6


Dividend payout (%) 13.8 23.4 30.3 26.4 20.9

ROE (%) 11.2 6.3 5.7 7.3 9.6

ROA (%) 0.53 0.29 0.26 0.35 0.47

Operating ROE (%) 14.5 6.6 7.9 10.1 13.3

Operating ROA (%) 0.69 0.30 0.37 0.49 0.65


Nomura | Bank of India 16 September 2015

34

Fig. 54: ROA break-down – ROEs will likely remain <10% till FY18F


Fig. 55: Key changes in FY16/17F estimates


Valuation: While BOI currently trades at 0.35x FY17F reported book, adjusted for our

stress test it trades at 1.2x FY17F adjusted book and hence we maintain Neutral. We

think asset quality pressure will be higher for BOI vs peers and hence we inch up our

credit cost estimates, and additional recognition of these stress assets will lead to

interest reversals impacting NIMs. Overall, we revise our FY16/17F PAT estimates down

by 15-25% and cut our TP by 12% to factor in part of the impact from our stress test.

Risks: Slower-than-expected economic recovery impacting asset quality and aggressive

growth will be the key downside risk and any material improvement in asset quality

trends will be the key upside risk.







Fees/Assets 1.18% 0.84% 0.83% 0.85% 0.82% 0.71% 0.58% 0.56% 0.58% 0.58%





Taxes/Assets -0.59% -0.31% -0.36% -0.26% -0.06% -0.17% -0.02% -0.11% -0.14% -0.19%


RoA 1.54% 0.72% 0.89% 0.78% 0.68% 0.55% 0.30% 0.27% 0.36% 0.48%

Equity/Assets 5.28% 5.08% 5.13% 5.20% 5.25% 4.97% 4.72% 4.80% 4.99% 5.02%

RoE 29.2% 14.2% 17.3% 15.0% 12.9% 11.2% 6.3% 5.7% 7.3% 9.6%


NII 126,101 142,184 123,881 139,276 -1.8% -2.0%


Fee grow th 6.5% 10.1% 4.9% 10.1% -155bps 3bps

PPOP 84,131 96,878 79,850 91,813 -5.1% -5.2%

PAT 19,764 31,667 16,682 24,017 -15.6% -24.2%

NIM% 2.05% 2.16% 2.02% 2.11% -3bps -5bps

LLPs 1.36% 1.17% 1.36% 1.29% 0bps 12bps

GNPA% 6.96% 7.39% 6.96% 7.47% 0bps 8bps

Slippages 156,066 132,748 156,066 137,173 0.0% 3.3%

ROA 0.32% 0.48% 0.27% 0.36% -5bps -12bps

ROE 6.7% 9.4% 5.7% 7.3% -104bps -211bps

New Variance%Old






Mar-16 PT 140 160



0.30.50.70.91.11.31.51.71.92.12.3

Ap

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5D

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05

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r-06

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BOI

Rating Remains Neutral



Potential upside +2%

Anchor themes


Nomura vs consensus

Our FY16F/17F PAT estimates are 2-5% below consensus as we assume higher credit costs.

Research analysts

India Banks



Punjab National Bank PNBK.NS PNB IN

EQUITY: BANKS

Share of incremental stress also highest

Valuations reflect weak underwriting – Adjusted valuations not cheap

Action: Share of incremental stress highest; least preferred PSU

PNB’s FY15 impaired loan ratio of 17% is the highest among the large PSU

banks, and our stress test sensitivity indicates that its share of incremental

stress should also remain the highest thus highlighting its weak underwriting.

As we expect a much delayed recovery/upgrade cycle this time, we do not see

merit in buying the most stressed PSU bank. While current valuations at 0.55x

FY17F book (BVPS: INR204) may look cheap, but adjusted for higher stress,

PNB’s valuation at 1.24x FY17F book is the highest among PSU banks. PNB

remains our least preferred PSU bank.


for PNB in its stressed accounts, which is ~21% of its FY17F net worth.

PNB is one of the worst placed within our covered PSUs, with LGD of 15-

25% of FY17F net worth. It has higher exposure to infra conglomerates and

the metals sector vs. PSU peers. This, coupled with a higher percentage of

unprovided NPAs and restructured book leads to a more than a 50% write-

off of its FY17F net worth, vs. SBI and BOB at ~30% each.

Not the time to buy the worst underwriter: In this credit cycle, most of the

stressed names have a high gestation period, and hence we do not expect

a meaningful recovery/upgrade cycle that PNB could benefit from given its

large book of impaired loans.

Multiples marginally above FY04-07 cycle adjusted for stress; maintain

Neutral

While PNB currently trades at 0.7x FY17F reported book, adjusted for our

stress test it trades at 1.3x FY17F adjusted book (~10% below the FY04-07

multiple) with significantly lower profitability, and hence we reiterate our

Neutral rating. We think, asset quality pressure will likely be higher for PNB

and even relapse risk from the restructured book remains high. Overall, we

revise FY16/17F PAT down by 3-8% and cut our TP by 9% to INR140 to

reflect part of the impact from our stress test.


FY16F

FY17F

FY18F


PPOP (mn) 119,548 127,945 127,833 142,546 140,279

151,099


59,485


59,485


30.35

FD norm. EPS growth (%) -10.6 33.5 29.2 22.9 16.9

21.7





ROE (%) 8.5 10.4 10.1 12.0 11.1

12.0

ROA (%) 0.5 0.6 0.6 0.7 0.7

0.8



16 September 2015


Nomura | Punjab National Bank 16 September 2015

36

Key data on Punjab National Bank Relative performance chart


Notes:


Absolute (INR) -17.5 4.0 -30.3 M cap (USDmn) 3,833.7

Absolute (USD) -19.1 0.4 -36.3 Free float (%) 36.0

Rel to MSCI India -9.5 5.2 -26.0 3-mth ADT (USDmn) 13.2


Interest income 432,233 463,154 506,793 558,376 614,429








Depreciation -3,524 -3,702 -3,887 -4,082 -4,286

Amortisation





Other provision charges -8,028 4,728 -942 -942 -942


Other non-op income

Associates & JCEs

Pre-tax profit 46,905 39,573 58,177 71,866 87,478

Income tax -13,479 -8,957 -18,617 -22,997 -27,993


Minority interests

Other items

Preferred dividends

Normalised NPAT 33,426 30,616 39,560 48,869 59,485


Reported NPAT 33,426 30,616 39,560 48,869 59,485

Dividends -4,236 -7,160 -7,160 -7,567 -7,567


Growth (%)





Net profit -29.6 -8.4 29.2 23.5 21.7

Normalised EPS -31.3 -10.6 29.2 16.9 21.7

Normalised FDEPS -31.3 -10.6 29.2 16.9 21.7

Loan growth 13.1 9.0 9.0 11.0 12.0



Asset growth 15.0 9.6 12.1 10.3 11.4

Deposit growth 15.3 11.1 11.9 9.3 10.9




Inter-bank lending 0 0 0 0 0




Gross loans 3,582,322 3,908,328 4,272,158 4,755,268 5,334,570

Less provisions -89,631 -102,984 -124,333 -151,182 -177,994

Net loans 3,492,691 3,805,344 4,147,825 4,604,086 5,156,576


Fixed assets 20,116 21,639 23,639 25,639 27,639

Goodwill


Other non IEAs 87,271 120,312 134,405 146,805 162,699

Total assets 5,490,117 6,019,461 6,750,260 7,443,118 8,294,929


Bank deposits, CDs,

debentures

471,896 451,332 520,763 598,815 689,344





Minority interest

Common stock 3,621 3,709 3,709 3,920 3,920

Preferred stock



Proposed dividends

Other equity



Non-perf assets 188,801 256,949 296,032 321,665 349,008



Equity to assets 6.3 6.3 6.1 6.3 6.3


NPAs/gross loans (%) 5.3 6.6 6.9 6.8 6.5


loans (%)

1.64 2.17 1.61 1.42 1.17





Per share

Reported EPS (INR) 18.46 16.51 21.33 24.94 30.35

Norm EPS (INR) 18.46 16.51 21.33 24.94 30.35

FD norm EPS (INR) 18.46 16.51 21.33 24.94 30.35

DPS (INR) 2.34 3.86 3.86 3.86 3.86

PPOP PS (INR) 62.89 64.46 68.93 71.58 77.10

BVPS (INR) 190.50 203.24 220.71 240.14 266.63

ABVPS (INR) 185.92 195.17 212.03 232.83 260.09

NTAPS (INR) 190.50 203.24 220.71 240.14 266.63


Reported P/E (x) 7.4 8.3 6.4 5.5 4.5

Normalised P/E (x) 7.4 8.3 6.4 5.5 4.5


Dividend yield (%) 1.7 2.8 2.8 2.8 2.8

Price/book (x) 0.7 0.7 0.6 0.6 0.5



Yield on assets (%) 12.45 11.46 11.15 11.16 11.03




Cost to income (%) 45.1 46.7 45.2 45.5 46.3


Dividend payout (%) 12.7 23.4 18.1 15.5 12.7

ROE (%) 10.2 8.5 10.1 11.1 12.0

ROA (%) 0.65 0.53 0.62 0.69 0.76

Operating ROE (%) 14.3 11.0 14.8 16.3 17.6

Operating ROA (%) 0.91 0.69 0.91 1.01 1.11


Nomura | Punjab National Bank 16 September 2015

37

Fig. 58: ROA break-down – We expect PNB to deliver ROEs lower than cost of equity till FY18F




Valuation methodology: While PNB currently trades at 0.7x FY17 reported book

(BVPS: INR204), adjusted for our stress test it trades at 1.3x FY17 adjusted book (~10%

below FY04-07 multiple) with significantly lower profitability; hence, we reiterate our

Neutral rating. We think asset quality pressure will likely be higher for PNB and even

relapse risk from the restructured book remains high. Overall, we reduce FY16/17F PAT

estimates by 3-8% and cut our TP by 9% to INR140 to factor in part of the impact from

our stress test.

Risks: Better-than-expected economic recovery will be a key upside risk. Downside risk

will be higher slippages from the restructured book.







Fees/Assets 1.04% 1.05% 1.01% 0.95% 0.82% 0.80% 0.86% 0.85% 0.85% 0.84%





Taxes/Assets -0.78% -0.76% -0.65% -0.53% -0.39% -0.27% -0.16% -0.30% -0.33% -0.36%


ROA 1.43% 1.48% 1.35% 1.20% 1.04% 0.67% 0.54% 0.63% 0.71% 0.77%

Equity/Assets 5.54% 5.57% 5.54% 5.71% 6.32% 6.55% 6.41% 6.31% 6.35% 6.46%

ROE 25.8% 26.6% 24.4% 21.1% 16.5% 10.2% 8.5% 10.1% 11.1% 12.0%

RORWA 2.19% 2.27% 2.02% 1.81% 1.54% 0.96% 0.80% 0.95% 1.07% 1.17%


NII 177,033 198,059 172,723 191,232 -2.4% -3.4%

Loan grow th 10.1% 11.1% 9.2% 11.1% -96bps 0bps


PPOP 127,945 142,546 127,833 140,279 -0.1% -1.6%

PAT 40,860 53,088 39,560 48,869 -3.2% -7.9%

NIM% 2.83% 2.83% 2.77% 2.76% -6bps -7bps

LLPs 1.67% 1.44% 1.73% 1.54% 5bps 10bps

GNPA% 7.33% 7.04% 6.93% 6.76% -40bps -27bps

Slippages 136,791 117,755 136,791 115,348 0.0% -2.0%

ROA 0.65% 0.76% 0.63% 0.71% -2bps -5bps

ROE 10.4% 12.0% 10.1% 11.1% -31bps -87bps

NewOld Variance%






Mar-16 PT 140 155


Implied Mar-17 P/E 5.6 5.7 0.4

0.6

0.8

1.0

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1.4

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PNB


38

Appendix A-1

Analyst Certification

We, Adarsh Parasrampuria and Amit Nanavati, hereby certify (1) that the views expressed in this Research report accurately

reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of

our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this

Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by

Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more

Nomura Group companies.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Previous rating Date of change Sector rating

Axis Bank AXSB IN INR 482 15-Sep-2015 Buy Rating Suspended 08-Jul-2014 N/A

Bank of Baroda BOB IN INR 182 15-Sep-2015 Buy Rating Suspended 08-Jul-2014 N/A

Bank of India BOI IN INR 137 15-Sep-2015 Neutral Buy 30-Jul-2015 N/A

ICICI Bank ICICIBC IN INR 268 15-Sep-2015 Buy Rating Suspended 08-Jul-2014 N/A

Punjab National Bank PNB IN INR 135 15-Sep-2015 Neutral Reduce 06-Jan-2015 N/A

State Bank of India SBIN IN INR 234 15-Sep-2015 Buy Rating Suspended 08-Jul-2014 N/A

Yes Bank YES IN INR 729 15-Sep-2015 Buy Rating Suspended 08-Jul-2014 N/A

Rating and target price changes

Issuer Ticker Old stock rating New stock rating Old target price New target price

Axis Bank AXSB IN Buy Buy INR 660 INR 625

Bank of India BOI IN Neutral Neutral INR 160 INR 140

ICICI Bank ICICIBC IN Buy Buy INR 380 INR 350

Punjab National Bank PNB IN Neutral Neutral INR 155 INR 140

State Bank of India SBIN IN Buy Buy INR 335 INR 290

Yes Bank YES IN Buy Buy INR 960 INR 870

Axis Bank: Valuation Methodology TP of INR625 implies 2.45x Mar-17F book of INR255. The benchmark index for this stock is the MSCI India.

Axis Bank: Risks that may impede the achievement of the target price 1) A slower-than-expected recovery in corporate capex execution; and 2) higher-than-expected delinquency.

Bank of India: Valuation Methodology Our TP of INR140 is based on 0.55x FY17F adjusted book of INR255. The benchmark index for this stock is MSCI India.

Bank of India: Risks that may impede the achievement of the target price Slower-than-expected economic recovery

impacting asset quality and aggressive growth will be the key downside risk and any material improvement in asset quality trends will be the key upside risk.

ICICI Bank: Valuation Methodology Our TP of INR350 is based on 1.9x Mar-17F book of INR165 for the lending business and INR66 of subsidiary valuations. The benchmark index for this stock is MSCI India.

ICICI Bank: Risks that may impede the achievement of the target price 1) Some lumpy asset quality risks: legacy gas assets and overseas coal assets funded by ICICI and 2) slower-than-expected turnaround of GDP growth.

Punjab National Bank: Valuation Methodology Our TP of INR140 is based on 0.7x Mar-17F book of INR204. The benchmark

index for this stock is MSCI India.


39

Punjab National Bank: Risks that may impede the achievement of the target price A better than expected economic recovery will be a key upside risk. A downside risk will be higher slippages from the restructured book.

State Bank of India: Valuation Methodology Our target price of INR290 is based on 1.05x FY17F book (BVPS: INR251) after

deducting for subsidiary value of INR26. The benchmark index for this stock is MSCI India.

State Bank of India: Risks that may impede the achievement of the target price Risks include slower-than-expected recovery of corporate credit cycle. Upside risk include any sharp up-tick in marco thereby reducing the underlying stress.

Yes Bank: Valuation Methodology Our TP of INR870 implies 2.3x Mar-17F ABVPS of INR380. The benchmark index for this stock is MSCI India.

Yes Bank: Risks that may impede the achievement of the target price Lower-than-expected NIM expansion and loan

growth, sharp deterioration in asset quality and slower-than-expected SA growth.

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STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

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SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

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