Initiating Coverage Report - BFSI Sector

1

July 25, 2012

BANKING, FINANCIAL SERVICES & INSURANCE Challenging Times Ahead..............

Initiating

Coverage

Regulatory Dynamics:

Over the last 12 months regulators have tightened their grip on the Indian

Financial Sector through spate of regulation. Some of which include Basel III

norms, De-regulation of saving rates, multiple regulation for gold financer,

separate regulatory framework for microfinance institutions, final guidelines

on securitization.

Interest Rates finally reduced by 50bps. CRR cut might come later.

The Reserve bank of India finally cut the key Repo rates by 50 bps in the Annual

Monetary Policy announced on 17thApril. Increasing calls by the government to

cut interest rates and a capex crisis as reported in recent government reports

have finally been heeded by the central bank.

Q4 FY2012: Asset Quality Woes:

Asset quality remians the main focus for financial sector with most banks

reporting higher slippages. High restructuring during Q4 FY2012 was largely

attributable to Air India and State Electricity Boards (SEB). Large private banks

continued their impressive performance, with robust earnings growth of 27.5%

yoy.

Valuation & Views:

Asset quality Going ahead, with inflation levels expected to ease, financial

savings should strengthen leading to higher deposit accretion, allowing banks

to reduce their deposit rates. Further, with proposed Basel-III norms making

capital requirements stricter, banks are expected to continue focusing on

margins rather than balance sheet growth. Hence, notwithstanding any short-

term repricing-related NIM impact, overall we have a neutral outlook on the

sector’s margins.

Considering the recent sharp decline in the markets, the banking sector’s

valuations have become cheap. Even structurally stronger banks and those

having a cyclically better asset quality profile and strong earnings trajectory are

available at cheap valuations in our view.

Gross NPA trend in banking sector

Banking Indicators

Particulars (%)

Latest yoy credit growth 15.7

Latest yoy deposit growth 11.9

Credit to deposit ratio 76.6

Monthly avg 1yr G-Sec 8.1

Monthly avg 1yr CP 9.9

Policy Rates

Particulars (%)

Repo Rate 8.0

Reverse repo rate 7.0

Cash Reserve Ratio 4.75

Statutory liquidity ratio 24.0

July 25, 2012

ERC-IIFT | Equity | BFSI

2

INDUSTRY STRUCTURE

Banking

The Banking Industry, comprising nearly 90% of the total financial services

sector of the country, serves as a financial intermediary by accepting capital

surpluses as deposits and pools those funds to provide credit to the

participants with capital deficit. Because of the important role depository

institutions play in the financial system, the banking industry is highly

regulated, with certain government restrictions on financial activities by banks.

Mainly banks are classified as either PSU or Private. Currently, in India 165

scheduled commercial banks exist including 26 public sector banks, 21 private

banks and 32 foreign banks. They have a combined network of over 71,000

offices and 9, 44,000 employees.

In terms of quality of assets and capital adequacy, Indian banks are considered

to have clean, strong and transparent balance sheets relative to other banks in

comparable economies in its region. Since Indian economy is witnessing strong

growth the demand for banking services, especially retail banking, mortgages

and investment services are expected to be strong.

Insurance

In Indian insurance sector, although there are 24 general insurance companies

and 23 life insurance companies operating in the country, the incumbents still

continues to dominate even 12 years after the opening-up of the sector in

2000.The country’s largest life insurer, Life Insurance Corporation of India (LIC),

had a share of 69.78% in total premium for 2010-11. Similarly, the four public-

sector non-life insurers – New India Assurance, National Insurance, Oriental

Insurance and United India Insurance – had a combined market share of

58.22% for 2010-11.

The industry, growing at a speedy rate of 15-20% but already reeling under the

pressure of high upfront cost of a nationwide expansion, is now also facing the

problem of dwindling volumes as policy lapses are increasing every year. In a

price-sensitive market like India, growing competition has plummeted the

premium rates to making it imperative for the insurance companies to work on

razor-thin expenses ratios. Also, the period to break-even in life-insurance

business has risen to about 13-15 years now.

For Key Points……………………………

33% 11%

2%

26%

33%

3%

22%

29%

19%

20% 27%

76%

0%

30%

60%

90%

Public Sector Banks

Private Banks Foreign Banks

Location of Bank Branches

Metropolitan Urban Semi-Urban Rural

Source: RBI, IRDA, Edelweiss Research

20

30

40

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 No

n-l

ife

Insu

ran

ce P

rem

ium

Lif

e In

sura

nce

Pre

miu

m Total Premiums (Rs '000 cr)

Life Non-life

Public Sector Banks 77%

Private Banks 18%

Foreign Banks

5%

Total Business of Banking Industry

Fire 11%

Marine 6%

Motor 43%

Health 23%

Others 17%

Segment-wise 2011 Gross Non-life Insurance Premium (Within India)

July 25, 2012


3

SECTOR SNAPSHOT

Market Performance

Overall the Bankex has performed quite similarly as compared to the broader

index-Sensex. However, in the last week, due to the recent ratings cut by Fitch,

the Bankex has seen a huge decline.

Growth Position

Demand for working capital continued to drive loan book growth for most of

the banks. Almost all the banks reported good loan growth in Q4FY12.

However, the overall banking result for Q4FY12 was a mixed bag. Most of the

private banks emerged as clear winners owing to strong performance in asset

quality, business growth and core profitability. The PSU banks continued to

bear the brunt of asset quality concerns which only got aggravated with

significant increase in their restructuring book.

Margin Position

On margin front, majority of banks reported decrease in margins. Bank of India,

ICICI Bank and Syndicate Bank recorded improvement in margin on QoQ basis.

On YoY basis, most of banks reported decline in margins except for Axis Bank,

ICICI Bank, SBI and Syndicate Bank.

MAJOR SECTOR CONSTITUENTS

Company PE (x) P/BV (x) EV/Sales

(x) EV/EBITDA

(x) Dividend Yield (%)

SBI 9.48 1.34 10.78 13.76 1.65

HDFC 24.75 4.16 13.68 16.18 0.80

ICICI 13.12 1.57 13.11 13.70 1.98

Kotak Mahindra 23.17 3.27 12.32 14.17 0.11

Axis Bank 10.14 1.83 12.81 13.68 1.59

Bank of India 7.35 0.97 11.73 14.00 2.06

IndusInd Bank 18.46 3.27 14.12 18.16 0.63

Yes Bank 12.32 2.51 11.33 12.61 1.20

Federal Bank 9.72 1.31 10.25 13.00 1.98

Central Bank 13.04 0.63 10.47 13.57 2.56

-3.39

6.13

-2.20 -4

-2

0

2

4

6

1 Week 1 Month 1 Year

Market Performance (%)

34 37

29.00

0

10

20

30

40

Sales EBITDA Net Profit

Growth (%)

14 x

2 x

14 x

0 x

4 x

8 x

12 x

16 x

P/E P/BV EV/EBITDA

Valuation (x)

Source: Edelweiss Research

Market data as on 22-Jun-2012

July 25, 2012


4

FACTORS AFFECTING THE INDUSTRY

Demand

The demand for credit is directly linked to the industrial and economic growth

of the country. The banking industry growth has a positive correlation with the

country's gross domestic product (GDP) and has a multiplier effect of 2x to real

GDP.

With continuous slowdown in economy and increasingworries about asset

quality, overall profitability of the banks are likely to remain under pressure in

thenear future.

Supply

Supply of liquidity is dependent upon several economic variables such as RBI

policies, economic growth and inflation.

Weaker rupee, inactive government policy and much higherfiscal deficit poses

a risk to easing of inflation.Higher the inflation, interest rates and slower the

economic growth , less is the off take of credit in the market and vice versa.

Barriers to entry

Entry barriers are high in banking sector as one will require banking license

from RBI which is allotted after stringent due diligence. Also huge capital

investment would be needed to fund the elaborate infrastructure required for

opening branches.

Competition

There is high competition in the banking sector as there are many private

banks, public banks, co-operative banks, NBFC's and also private lenders. RBI is

also looking at issuing new licenses which will further intensify competition in

the sector.

KEY GROWTH DRIVERS

High Growth of Indian Economy

The growth of the banking industry is closely linked with the growth of the

overall economy. Economic growth is backed by stellar growth in

infrastructure, industry, services and agriculture. This is expected to boost

the corporate credit growth in the economy and provide opportunities to

banks to lend to fulfill these requirements in the future.

5

7

9

11

3Q

FY0

9

4Q

FY0

9

1Q

FY1

0

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

2Q

FY1

1

3Q

FY1

1

4Q

FY1

1

1Q

FY1

2

2Q

FY1

2

3Q

FY1

2

GDP growth (%)

5

7

9

11

Ma…

Jun

-…

Jul-

11

Au

g…

Sep

…

Oct

-…

No

v…

Dec

…

Jan

-…

Feb

…

Mar

…

Ap

r…

Inflation- WPI (%)

July 25, 2012


5

Rising per capita income

The rising per capita income will drive the growth of retail credit. Indians

have a conservative outlook towards credit except for housing and other

necessities. However, with an increase in disposable income and increased

exposure to a range of products, consumers have shown a higher

willingness to take credit, particularly, young customers.

New Mobile banking channels

New channels used to offer banking services will drive the growth of

banking industry exponentially in the future by increasing productivity and

acquiring new customers. During the last decade, banking through ATMs

and internet has shown a tremendous growth, which is still in the growth

phase. After ATMs, mobile banking is expected to give another push to this

industry growth in a big way, with the help of new 3G and smart phone

technology.

This can be looked at as branchless banking and so will also reduce costs as

there is no need for physical infrastructure and human resources.

Financial Inclusion Program

Currently, in India, 41% of the adult population don’t have bank accounts,

which indicates a large untapped market for banking players. Under the

Financial Inclusion Program, RBI is trying to tap this untapped market.

The RBI has also taken many initiatives such as Financial Literacy Program,

and using Information and Communication Technology to spread general

banking concepts to people in the under-banked areas. All these initiatives

of promoting rural banking are taken with the help of mobile banking, self

help groups, microfinance institutions, etc.

RISK PROFILE

Recent Ratings Revision

Fitch Ratings has revised the outlook on the 'BBB-' Long-Term (LT) Foreign

Currency (FC) Issuer Default Rating (IDR) of 8 India-based financial institutions

to Negative from Stable.

The Outlook revision of the financial institutions reflects their close linkages

with the sovereign by virtue of their high exposure to domestic counterparties

and holdings of domestic sovereign debt.

July 25, 2012


6

The position of banks is better in this regard because of their reasonable

customer deposit base, established domestic franchises and adequate

capitalisation. The non-banks, however, lack the funding advantage, which puts

them more at risk during times of increased market volatility.

SECTOR PERFORMANCE

Asset Quality: No signs of bottoming out

Deterioration in asset quality continued during Q4FY12 for most of the PSU

banks owing to higher slippages and SEB and Air India restructuring. However

higher recovery and up-gradation were the saving grace for the banks. Gross

NPA figures increased for most of the PSU Banks sequentially. However, SBI,

Andhra Bank and BOI reported decline in Gross NPA sequentially. Private Banks

fared better than the PSU Banks with most of them reporting a decline in Gross

NPA, major among them being Axis Bank, DCB, HDFC, ICICI and Karur Vysya

Bank. IndusInd and Corporation Bank reported marginal increase in Gross NPAs

as compared to significant increase witnessed by most of the peers.

Gold loans as an asset segment have become attractive for banks post the

clamp down by RBI on the run-a-way growth of gold loan NBFCs (LTV cap of

60%). Moreover, with risk weightings being assigned to gold loans at near zero

levels (in case of LTV lower than 70%), mid-size south-based banks such as SIB,

Federal Bank, UCO Bank and Indian Bank are expected to further build up their

gold loan portfolios to prop up their yields.

(Source: RBI)

3.02 2.87 2.80

2.70 2.57

2.36 2.47

2.24 2.17 2.00

2.33 2.24

2.34 2.42 2.35

2.25 2.33

2.87

3.04 3.00

1.50

1.80

2.10

2.40

2.70

3.00

3.30

Gross NPA Trends (%)

Pvt Banks PSU Banks

July 25, 2012


7

Industry wise Distribution of Credit- Mar 2012

Sector Rs. Cr. % of total % change YoY

Agriculture 522,623 12.2 13.5

Industry - Micro & Small - Medium - Large

1,965,874 259,191 205,642

1,501,041

45.8 6.0 4.8

35.0

21.3 13.1 11.4 24.3

Services 1,032,992 24.1 14.7

Personal Loans - Housing - Vehicle

768,256 388,017 94,904

17.9 9.0 2.2

12.1 12.1 19.7

Total 4,289,745 100.0 17.0

(Source: RBI)

As can be observed from the table above, Industry sector was the major driver

for the credit growth.

Earnings Performance - 4Q

Public sector banks posted moderate eanings performance in 4QFY2012,

withlarger banks performing far better than the smaller banks. Furthermore,

Private banks continued their impressive performance with impressive earnings

growthof 27.5% YoY. The positive performance was led by ICICI, Axis Bank and

Yes Bank, with strongperformance on the operating as well as asset-quality

metrics.

(Source: Edelweiss Research)

35.1

-7.8

8.6 10.8

7.5 8.5 4.6 7.9 6.4 6.4

3.0 5.1

-10

0

10

20

30

40

Large PSU Mid PSU New Pvt Old Pvt

QoQ growth (%)

Net Profits Advances Deposits

July 25, 2012


8

Also, most of the banks saw low Net Interest Margins on QoQ basis because of

meeting the priority sector lending targets. The banks which were highly

dependent onborrowing got hurt by higher cost of funds resulting from higher

interest rate in the year end. Moreover,many of the PSU banks have reported

interest income reversal which also led to decline in Net Interest Margins

onsequential basis.

Banking Sector Earning Review (Q4 in percent)

(Source: RBI)

Bank NIM Net profit

margin Gross NPA

Restructuring %

SBI 3.9 11.9 4.4 4.2

Union Bank of India 3.3 11.9 3.0 6.6

PNB 3.5 13.0 2.9 8.5

Bank of India 2.9 10.9 2.3 7.0

Canara Bank 2.5 9.2 1.7 3.4

Bank of Baroda 3.0 16.8 1.5 5.3

Central Bank 2.6 -2..0 4.8 11.5

Corporation Bank 2.4 8.8 0.9 4.6

IOB 2.7 9.8 2.7 8.8

United Bank 3.0 6.3 3.4 4.9

Andhra Bank 3.3. 10.5 2.1 7.2

Indian Bank 3.2 9.9 2.0 9.8

OBC 2.7 5.8 3.2 8.4

Dena Bank 3.2 11.8 1.7 6.0

UCO Bank 2.7 6.0 3.5 6.3

Allahabad Bank 3.2 8.8 1.8 5.7

Axis Bank 3.6 16.7 1.1 1.8

ICICI Bank 3.3 16.7 3.8 1.7

HDFC Bank 4.2 16.4 1.0 0.4

Kotak Bank 4.8 12.1 1.2 0.1

IndusInd Bank 3.3 12.6 1.0 0.3

Yes Bank 2.8 13.2 0.2 0.5

SIB 3.1 11.3 1.0 3.7

CUB 3.4 13.4 1.0 0.2

Federal Bank 3.6 14.5 3.4 6.4

Ing Vyasa 3.3 10.1 1.9 1.4

DCB 3.1 7.7 4.4 0.1

IDBI 2.1 11.2 2.5 5.5

For Key Points……………………………

July 25, 2012


9

Major events and news flow:

Following the 50‐bp cut in the repo rate, several banks reduced their benchmark

lending rates. However, banks with relatively low rates such as Axis Bank and

SBIN did not reduce their benchmark rates. RBI released guidelines for the

implementation of Basel III regulations, which would be in effect from 01Jan13

in a phased manner. SCBs would need to maintain a minimum common equity

of 9% of risk weighted assets, as per the Basel III guidelines compared to 8%

currently. The Union Cabinet approved the increase in the voting rights limit for

private sector banks from 10% to 26%, as part of the changes in the Banking

Laws (Amendment) Bill, 2011.

Voting rights limit in private banks increased from 10% to 26%

The Union Cabinet approved the increase in the voting rights limit for private

sector banks from 10% to 26%, as part of the changes in the Banking Laws

(Amendment) Bill, 2011. To buy an equity stake more than 5%, the RBI’s

approval is mandatory. The other provisions of the bill include an increase in

voting rights of an entity in a nationalized bank to 10% from 1%; power to the

RBI to supersede the board for up to a year, if it is not deemed to be working in

depositors’ interests; power to the central bank to ask for information from

banks’ associate companies; and taking of bank mergers and acquisitions

outside the purview of the Competition Commission of India.

Finance Ministry may limit high cost deposits raised in last quarter

The finance ministry may restrict bulk deposits that PSU banks can raise in the

last quarter of the financial year. PSU banks raised almost a third of their total

deposits for FY12 in Mar12. It has been suggested that bulk deposits, which

were raised at higher than published rates, and certificate of deposits that were

increased in the last quarter of the financial year should not be more than 20%

of the total deposits in the year. Also, at any point in time, bulk deposits raised

at more than the published rate should not be more than 20% of the total

deposits.

RBI guidelines for implementation of Basel III to impact profitability:

RBI released guidelines for the implementation of Basel III regulations, which

would take effect from 01-Jan-13 in a phased manner, and would be fully

implemented by 31-Mar-18. The minimum common equity (MCE), Tier I and

total capital requirements will be phased‐in during 01-Jan-13 to 31-Mar-15.

July 25, 2012


10

SCBs would need to maintain a 9% MCE of risk weighted assets (RWA)

compared to 8% currently, as per Basel III guidelines. The Tier I capital would

consist predominantly of common equity, while qualifying instruments for Tier I

capital apart from common equity and for Tier II capital will be strengthened

Capital Structure of Private Banks

(Based on descending order of CET1 of FY11)

(Source: Company Reports)

Capital Structure of PSU

(Based on descending order of CET1 of FY11)

(Source: Company Reports)

Impact on sector:

(a) Most of the banks in India are already above minimum CET1 of 5.5% and on aggregate basis at Tier I of 8% or above [BASEL III requirement of 7% (CET1 of 5.5% and AT1 of 1.5%) and current regulatory requirement of 6%] and hence, transition should not be an issue in the near term

(b) Higher share of CET1 and fall in leverage will lead to a fall in RoEs of select PSU banks

Bank CRAR Tier1 CET1 AT1 T2

ICICI 19.5 13.2 12.4 0.8 6.3

HDFC 16.2 12.2 12.1 0.1 4.0

JKBK 13.7 11.3 11.3 0.0 2.4

Axis 12.7 9.4 9.2 0.2 3.2

Yes 16.5 9.7 8.5 1.1 6.8

Bank CRAR Tier1 CET1 AT1 T2

ANDBK 14.4 9.7 9.4 0.3 4.7

BOB 14.5 10.0 9.1 0.9 4.5

PJSB 13.6 9.3 8.2 1.0 4.3

UNBK 13.8 8.7 7.9 0.8 4.3

PNB 12.4 8.4 7.6 0.8 4.0

SBIN 12.3 8.0 7.4 0.6 4.2

IOB 14.6 8.2 7.4 0.7 6.4

BOI 12.2 8.3 7.3 1.0 3.8

CBOI 13.8 8.5 6.6 1.9 5.3

BOMH 13.4 8.0 6.2 1.9 5.3

IDBI 13.6 8.0 6.1 1.9 5.6

UCO 13.7 8.5 5.8 2.7 5.2

July 25, 2012


11

(c) Currently, RBI mandates banks to keep the dividend payout ratio below 40%

depending upon its CRAR of last 3 year and performance on NNPA front. Banks are given flexibility under BASEL III for dividend payout and it can also be as high as 100% payout. This is positive in case of ICICIBC and FB considering the release of capital from Insurance venture and excess capitalisation.

Loan Growth: Syndrome

Demand for working capital continued to drive loan book growth for most of

the banks. Almost all the banks reported good loan growth in Q4FY12. Overall

industry advances grew 17% YoY as on 31st March 2012 with most of the

growth coming in the last fortnight of the year (2.8% on Fortnight basis).

Indusind Bank, DCB, South Indian Bank, HDFC Bank, Dena Bank, City Union

Bank, Bank of Baroda, Kotak reported above industry growth in FY12. However,

Canara Bank, OBC, Bank of India reported YoY growth below industry average.

Loan book increased sequentially for almost all banks. However, some banks

like Indian Bank (3.6%), ICICI (3.1%), OBC (2.1%), HDFC Bank (1.3%) and Kotak

(-1.7%) reported minimal growth on sequential basis. Banks like DCB (22.7%),

Dena (19.3%), UBI (15.9%), Axis (14.1%), PNB (11.9%), Allahabad Bank (10.4%)

and BoB (10.2%) reported good growth sequentially (double digit). Growth in

deposits remained subdued for the entire banking industry.

CASA growth: Players with high savings rate gains

Aggregate CASA grew at lower pace for most of the banks due to rising

differential between savings and term deposit rates. Further the term deposit

growth continued to outpace the growth in overall deposits adding pressure to

the CASA ratio. Private Banks like YES Bank, Kotak and Indusind Bank were the

only bank which witnessed a sharp improvement in CASA growth (55.6%, 41.1%

and 23.9% on YoY basis respectively).

Restructured Books:

Along with the NPAs, the restructured loan book of the banks have also

increased and rather to a greater extent. The proportion of restructured loans

as compared to total advances is significantly high in case of PSU Banks with the

worst among them being Central bank of India, Indian Bank, IOB, PNB, OBC,

Andhra Bank, UCO bank. As compared to other PSU banks Dena Bank, Bank of

Baroda, SBI and Allahabad bank have comparatively lower proportion of

restructured book. Amongst the Private Banks, Federal Bank and ICICI Bank have

high proportion of restructured loans. However, there are few banks which have

Loan-Deposit Ratio

(Source: Bloomberg)

Y-o-Y Loan Growth

(Source: Bloomberg)

NPL Ratio

(Source: Bloomberg)

July 25, 2012


12

been maintaining a healthy asset quality with minimal restructured book. The

banks performing well in terms of restructured book are Kotak, DCB, City Union

Bank, IndusInd, HDFC and Yes Bank (all being Private banks).

Moreover, with more and more corporate filing for restructuring, the

restructured loan book continues to remain under pressure with an increasing

trend. It has been seen that on an average basis maximum 10% of the

restructured book tend to fall to NPA.

Net Interest Margins:

Most of the banks saw lower NIMs on QoQ basis as the banks had to meet up its

target of meeting priority sector lending norms which led to decline in NIMs.

The banks which were highly dependent on borrowing got hurt by higher cost of

funds resulting from higher interest rate in the year end. Moreover, many of the

PSU banks have reported interest income reversal which also led to decline in

NIMs on sequential basis. Going forward, we believe that the pressure on NIMs

will continue to remain at least in Q1FY12. Most of the banks have reduced their

Base rate and BPLR which is expected to impact the margins of the banks going

forward. Moreover, increasing proportion of high cost deposits (bulk) will also

impact the margins in near term. However, there can be some respite in the

margins resulting from the benefit arising from the reduction in CRR.

NIM and y-o-y NII growth of PSB & PSU Banks

Cost-Deposit Ratio (Public Sector Banks)

(Source: Company reports)

Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12

PSB’s

NIM (%) 3.28 3.41 3.19 3.07 3.22 3.25 3.10

NII Growth (%) 51.2 43.5 26.4 21.1 16.6 12.0 17.0

PSU’s

NIM (%) 3.49 3.50 3.48 3.38 3.44 3.45 3.56

NII Growth (%) 25.8 22.9 22.2 19.8 18.4 17.2 21.4

Mar 11 Jun 11 Sep 11 Dec 11 Mar 12

PSB’s

SBIN 5.26 5.66 5.83 5.90 5.95

PNB 5.64 6.28 6.52 6.74 6.80

BOB 4.79 5.36 5.61 5.65 5.81

BOI 5.32 6.01 6.09 5.96 5.98

CBK 5.80 7.05 7.13 7.27 7.35

PSB 5.32 5.94 6.11 6.18 6.25

July 25, 2012


13

Yield on loans (%)

(Source: Company reports)

Low growth in operating expenses for PSBs partly due to high base:

PSBs provided for the one‐time pension liability towards retired employees in

the last quarter of FY11. Therefore, the y‐o‐y growth in operating expenses and

the cost‐income ratio of PSBs rose sharply in the Mar11 quarter. Marginal

decline in the operating expense in the Mar12 quarter was partly due to the high

base. The cost‐income ratio remained stable in the last three quarters.

Y-O-Y Cost Income and Operating Growth for PSB’s

Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 PSB’s

SBIN 9.56 10.43 10.78 10.93 11.05

PNB 10.83 11.38 11.92 11.97 11.40

BOB 8.74 9.11 9.64 9.64 9.33

BOI 8.81 8.89 9.41 9.41 9.73

CBK 9.73 10.50 10.72 10.72 10.93

PSB 9.55 10.19 10.19 10.60 10.66

Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12

PSB’s (%)

Operating

expense growth 31.8 20.7 38.8 17.9 11.3 11.7 -0.9

Cost-income

ratio 44.3 42.6 49.7 43.1 43.2 43.1 43.4

July 25, 2012


14

Pre‐provision profit revives for PSBs after staying low for 4Qs

Driven by strong NII growth and moderation in operating expenses, the y‐o‐y

pre‐provision growth of PSBs revived during the Mar12 quarter after staying low

in the preceding four consecutive quarters. The revival was driven by SBIN, BOI

and UNBK. However, pre‐provision profit growth declined sharply for BOB to

c5% after remaining above 20% in the preceding eight quarters. There was also a

steep decline in Canara Bank and Andhra Bank. NPL provisions for PSBs went up

c12.7% y‐o‐y (above 40% in the preceding three quarters), resulting in a 72%

y‐o‐y and 21.5% q‐o‐q growth in the net profit. While Canara Bank contracted,

among large PSBs, INBK, CBOI and OBC, among the mid‐size PSBs, reported a

large decline in their net profit; this was largely due to high NPL provisions

(Source: Company reports, RBI, Bloomberg)

Underperformance of Indian Bank in sync with European counterparts:

(Price Performance during the month in %)

IN USD Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12

India

Nifty Index -5.8 20.5 4.5 -5.2 -4.2 -12.3

Sensex Index -5.7 19.2 4.2 -5.5 -3.8 -12.5

CNXPSBK Index -13.4 34.9 9.4 -8.4 -5.3 -13.1

Bankex index -8.6 33.4 6.1 -5.4 -2.7 -14.0

Europe

UKX Index -0.1 3.5 4.6 -1.4 1.0 -11.9

FTSE350 Index -1.4 12.8 8.5 -1.4 -1.2 -16.2

Europe Banks -2.5 14.6 8.9 -0.5 -7.4 -17.3

Non British Banks -3.7 13.3 9.4 0.1 -14.4 -18.1

US

SPX Index 0.9 4.4 4.1 3.1 -0.7 -6.3

US Banks 2.4 11.9 8.0 11.7 -5.0 -12.9

(Source: Bloomberg)

Mar 11 Jun 11 Sep 11 Dec 11 Mar 12

PSB’s (%)

Pre-provision profit 13.1 13.9 16.5 9.6 27/9

Net profit growth (%) -4.6 -16.6 3.5 -1.9 72.2

Net profit growth (exc SBIN) 25.7 -4.4 0.4 -8.2 17.3

Private Banks

Pre-provision profit 13.4 10.9 15.3 18.2 20.5

Net profit growth (%) 36.5 31.1 26.1 25.0 26.8

July 25, 2012


15

During Mar12–May12, there was a 99.7% correlation in the P/B discount of

CNXPSBK and European banks to the UKX Index and Nifty; this points to the

strong link in relative valuations, despite diverse profitability, asset quality and

macro economic conditions.

European banks, mainly non‐British banks, underperformed the benchmark

UKX Index significantly in Apr12–May12 after their outperformance in the

preceding three months. During May12, the higher financials uncertainty over

the European crisis raised the underperformance of European and non‐British

banks to c5.4% and c6.2%, respectively. Discount in the P/B of European banks

and non‐British banks to the UKX Index increased in Apr12–May12 by up to

5.5% to 54.2% and 64.6%, respectively, on 31ay12.

Select Interest rates:

% +/- basis point

Government Bonds 31May12 Since 30Apr12 Y-T-D

10-year 8.5 -17.2 -6.9

4-year 8.3 -3.2 7.6

1-year 8.1 3.7 -34.3

Source: Bloomberg

Select Bond Yields

% +/- basis point

AAA Bonds 31May12 Since 30Apr12 Y-T-D

3-year 9.5 2.3 -5.0

1-year 9.7 5.0 19.8

3-month 9.9 9.6 34.7

% +/- basis point

BBB Bonds 31May12 Since 30Apr12 Y-T-D

3-year 12.0 12.0 39.5

1-year 12.2 4.1 29.5

3-month 12.3 8.3 44.1

Inter-bank call rate (%)

Yield on AAA Bonds

Cash Reserve Ratio (%)

Source: Bloomberg

16

July 25, 2012


ICICI BANK

ICICI Bank Q4FY12 results reflected material improvement in its operating

matrix through a stable loan growth, NIM expansion (both domestic and

international), CASA retention, sequential improvement in asset quality and

lower credit cost.

NIM Expansion

Q4FY12 NIM at 3.01% (+31bps QoQ) was aided by +33bps QoQ improvement

in domestic NIM to 3.3% and +12bps QoQ increase in international NIM to

1.52%.

Domestic NIM was aided by:

a) Full impact of base rate hike

b) Higher investment income as there was no securitization loss

c) Lower domestic deposits during the quarter

d) Change in domestic portfolio mix in favor of SME and retail deposits

CASA

An increasing branch network with focus at garnering CASA deposits has

enabled ICICI Bank retain its CASA ratio at 40+ levels for past several

quarters. Q4FY12 CASA ratio came in at 43.5% (avg 39%), with growth in

CASA deposits at 9.2% YoY.

NPA trends

An analysis of the profile of ICICI Bank’s NPAs suggests that the aging of NPAs

for ICICI Bank is almost over. Amongst most of the private and PSU banks,

ICICI Bank is one of the few banks where migration of NPAs from sub-

standard and D1 category to the lower categories has already happened.

Hence, going forward there will be very minimal requirement of provisions

for D2/3 and loss category and the provision costs will largely go towards

fresh slippages only.

Valuation & Views

The bank has capitalized the current phase of growth moderation towards

branch expansion and moderation in growth. We believe that the loan book

contraction is now over, and we expect the loan book to grow in high teens

(19.8% CAGR during FY12-14E) driven by domestic corporate, retail, industrial

capex & working capital requirements in the next financial year. Given the

adequate capitalization, we see it better placed verses other banks to sustain

credit growth in case of an economic recovery. We also believe that the

current valuations are close to the bottom, hence offer an opportunity to add

to the positions.

Closing Price (Rs.) 852.05

52-wk High (Rs.) 1,111.00

52-wk Low (Rs.) 641.00

Market Cap (Rsbn) 981.90

Shares O/s (m) 1,152.87

P/E (TTM) 28.29

EPS (TTM) 30.10

Financial Performance

1Y 3Y 5Y

Sales growth (%) 26.31 1.58 9.62

EPS growth (%) 24.06 27.24 16.52

Dvd. growth (%) 17.86 14.47 10.53

Price Comparison Vs BSE Sensex

FII/NRI 63%

Institutions

27%

Private Co 4%

Public 6%

Shareholding Pattern (Mar-12)

Source: Company data, Reuters

Note: Market data (BSE Sensex) as on 22-Jun-12

17

July 25, 2012


STATE BANK OF INDIA

SBI Q4FY12 results reflected strong improvement in core operating

performance, one of the lowest net stress loans (NSLs) amongst all public

sector banks, and one of the highest earnings CAGR of ~25% over FY12-14

Advances growth & CASA mix

During Q4FY2012, the bank’s net advances grew by 14.7% YoY, driven by

healthy 24.1% YoY growth in International loan book, 23.3% YoY growth in

Agricultural advances and 16.3% YoY growth in SME loans. Overall deposits

accretion remained moderate during 4QFY2012, registering a growth of

11.7% YoY.

Domestic saving deposits growth was modest at 11.3% YoY which coupled

with 8.2% YoY decline witnessed in volatile domestic current account

deposits lead the domestic CASA deposits to grow at subdued pace of 6.4%

YoY. SBI has a strong CASA franchise (over 45%) on account of its huge

nationwide branch network (14,097 as of FY2012). Even in FY2012, the bank

domestic CASA ratio stood at 46.6%, highest amongst all other PSU banks.

Improvement in NPA ratios

On the asset-quality front, the bank’s annualized slippage ratio for the

quarter came at 2.3%, significantly lower than 4.3% witnessed in 3QFY2012

and 4.2%registered in 2QFY2012. Almost 90.1% slippages were witnessed in

the Corporate, SME and Agriculture segments. The NPA ratios improved

sequentially with both gross and net NPA levels decreasing on an absolute

basis by 1.1% and 15.9% qoq, respectively.

The bank restructured accounts worth Rs.5,134cr during 4QFY2012 which

included Air India’s Rs.1,215cr and took their total restructured book to

Rs.42,744cr.The slippages from the restructured book during 4QFY2012

stood at Rs.1,361cr.

Valuation & Views

We expect SBI to outperform on account of its stronger core competitiveness

and ample levers to deliver healthy operating income growth while managing

its provisioning requirements. Also, considering the bank’s dominant position

and reach, high fee income, superior earnings quality and recent signs of

improvement in asset quality, we believe that the stock is currently

undervalued.

Closing Price (Rs.) 2,156.75

52-wk High (Rs.) 2,959.65

52-wk Low (Rs.) 1,576.00

Market Cap (Rsbn) 1,447.98

Shares O/s (m) 671.04

P/E (TTM) 8.93

EPS (TTM) 241.53


1Y 3Y 5Y

Sales growth (%) 29.53 17.10 22.04

EPS growth (%) 43.54 11.84 14.89

Dvd. growth (%) 16.67 6.47 21.52


Promoter 62% Foreign

11%

Domestic Inst 17%

Others 10%




July 25, 2012


HDFC BANK

18

HDFC Q4FY12 reflected stable growth in non-interest income and lower

provisioning compensated for higher operating costs. The margins and asset

quality saw sequential improvement, thereby, aiding bottom-line.

Branch Network Expansion

During Q4 2012, the bank has opened 343 branches and 1803 ATMs, taking the

total branch network to 2544 branches and 8913 ATMs. The management has

indicated that the growth trend on branch expansion is likely to moderate

going forward. Around 250-300 branches are expected to be opened in FY13.

Growth in Credit book– Higher than industry

HDFC’s credit book expanded 22.2% YoY to Rs. 1.95tn. The growth was

primarily lead by expansion in retail loans which grew by 33.7% YoY. During the

quarter, HDFC’s credit growth was slightly higher than the deposit growth,

resulting in a 251-bps increase in the credit-deposit ratio to 79.2% from 76.7%

in Q4 FY11 and hence aided margin.

Impressive CASA growth

CASA grew 6% QoQ and 9% YoY led by a 5% QoQ and 17% YoY growth in

savings account deposits. Savings account customer acquisition remained

strong with around 21% YoY growth in such accounts. Management is not

contemplating to increase SA deposit rate as of now.

Stable asset quality

Despite tough times and concerns on rising NPA levels, HDFC bank reported

another quarter of stable asset quality. NNPA at Rs. 3.5bn declined by around

12% QoQ. PCR too remained stable at 82%.Restructured loan portfolio stands

at 0.4% of gross advances.

Valuation & Views

HDFC bank delivered a quarter of healthy operating metrics with impressive

margin expansion, healthy loan and deposit growth, stable asset quality and

adequate capital with idle return ratios and exponential increase in its reach.

We believe with the branch expansion seen in this quarter, the benefits in the

form of higher loan/deposit/fee income growth will be reaped in the coming

quarters.


52-wk High (Rs.) 569.90

52-wk Low (Rs.) 400.45

Market Cap (Rsbn) 1,275.75

Shares O/s (m) 2,355.92

P/E (TTM) 72.51

EPS (TTM) 7.77


1Y 3Y 5Y

Sales growth (%) 37.73 19.16 32.95

EPS growth (%) 30.20 28.29 25.06

Dvd. growth (%) 30.30 29.07 25.16


Promoters

23%

FII/NRI 48%

Institutions

11%

Private Co 9%

Public 9%




19

July 25, 2012


YES BANK

Yes Bank Q4FY12 were largely in line with the broker estimates with a

healthy 26% QoQ growth in non-interest income and lower provisioning

compensating for higher operating costs.

Share of retail segment increasing

The bank added 31 branches in Q4FY12. Also, over the past two-quarters,

through enhanced branch reach and early entry benefit in the form of de-

regulation of saving bank interest rates, the bank has made significant

improvement in its retail balance sheet franchise. Share of CASA and retail

deposits (sticky deposits) has increased to around 32% of total deposits.

Asset quality under control

Unlike some stress witnessed in 2008-09 credit cycle, Yes Bank’s asset quality

has held up relatively well in the current credit cycle. GNPA / NNPA at 0.2% /

0.05% continue to remain well under control for the bank. PCR too remained

at healthy 79% levels. The restructured book forms a meager 0.5% of advances

with pipeline being non-perturbing.

Higher Operating Costs

The bank has added 142 branches in FY12 and increasing its headcount by

around 1,700 employees. During Q4, it has added 31 branches and hired

around 600 employees. Resultantly, Operating expenditure at Rs2.8bn was up

52% YoY (18% QoQ). With planned branch addition (around 100 branches p.a)

and higher head count, the Opex will remain high in the coming quarters.

Valuation & Views

Yes Bank’s focus towards enhancing its retail franchise has held up well in form

of material improvement in its CASA and retail deposits as well as SME and

retail loan portfolio (around 18% of total loans). Also, the increasing share of

credit substitutes has compensated for lower loan growth.

While the bank remains adequately capitalized, the increasing share of tier-II

capital (+140bps QoQ) to 8% remains a concern.

We remain positive on the bank given its smooth transition as a diversified

balance sheet player with stable asset quality and ability to deliver superior

returns.


52-wk High (Rs.) 389.40

52-wk Low (Rs.) 230.55



P/E (TTM) 12.70

EPS (TTM) 27.12


1Y 3Y 5Y

Sales growth (%) 56.06 46.61 60.75

EPS growth (%) 33.98 38.84 52.07

Dvd. growth (%) 60.00 - -




Promoters 26%

FII/NRI 52%

Institutions 11%

Private Co 1%

Public 10%


July 25, 2012


SYNDICATE BANK

20

Syndicate Bank Q4FY12 reported a 8.5% QoQ decline in its net profit on

account of increased provisioning expense. Also, the Net Interest margin

improved marginally (15bps QoQ).

Business growth moderate

During the quarter, business growth for the bank remained moderate. Advances

grew by 15.8% YoY to Rs. 123,620cr, aided by healthy growth of 17.6% and

29.7%YoY in agriculture and weaker section credit, respectively. Growth in

deposits was relatively high compared to growth in advances at 16.5% YoY,

mainly on account of a 24.2% growth in term deposits.

Asset quality deteriorating

The bank’s asset quality deteriorated sequentially with both gross and net NPAs

for the bank increasing. While gross NPAs increased from 2.3% to 2.5%,net NPA

ratio increased from 0.9% to 1.0%.

Also, the bank increased its provisioning coverage (one of the few PSU banks to

do so)to 80.1% in 4QFY2012 from 78.5% in 3QFY2012. If the bank had not

increased its provisioning coverage, PBT would have been higher by Rs. 97cr

(38.4% YoY).

The bank restructured around Rs. 1,700cr of loans during the quarter (majorly

Air India’s around Rs. 1,000cr), taking its outstanding restructured advances to

Rs. 6,200cr (~4.8% of the overall loan book).

Operating costs increasing

For Q4FY12, the bank’s operating expenses increased on a YoY basis by 13.7%

driven by a 14.1% YoY increase in staff expenses. Cost-to-income ratio further

increased to 51.7% from 41.1% witnessed in last quarter. Operating expense to

average assets increased to 1.9% in Q4FY12 from 1.6% in Q3FY12.

Valuation & Views

Although the bank witnessed a surge in slippages in the last quarter, asset-

quality pressures are likely to be well within manageable levels for Syndicate

Bank, as evident from the comfortable provisioning coverage for the bank at

80.1% as of FY2012.

Valuations appear cheap compared to its peers, which are trading at higher

multiples, although they have similar or poorer fundamentals.


52-wk High (Rs.) 124.85

52-wk Low (Rs.) 67.45



P/E (TTM) 4.64

EPS (TTM) 22.91


1Y 3Y 5Y

Sales growth (%) 33.34 17.03 20.38

EPS growth (%) 14.32 9.39 10.80

Dvd. growth (%) 2.70 8.20 6.30




Promoters 70%

FII/NRI 4%

Institutions 12%

Public 14%


Please send your feedback and queries to:

[email protected] or [email protected]

ALL RIGHTS RESERVED, EQUITY RESEARCH CELL

Indian Institute of Foreign Trade

New Delhi | Kolkata

.

RESEARCH TEAM (BFSI SECTOR)

Madhav Purohit Senior Analyst [email protected]

Sakshi Garg Senior Analyst [email protected]

Akash S Senior Analyst [email protected]

ERC COORDINATORS

Amit Gupta +91 9718791688 [email protected]

Firasat Ali +91 8860837105 [email protected]

Vipul Agarwal +91 8860340536 [email protected]

Disclaimer: This document has been prepared by the Equity Research Cell at Indian Institute of Foreign Trade, New Delhi and is meant for

use by the recipient only as information and is not for circulation. Equity Research Cell at IIFT is a student run organization and the reports

are for academic purposes. This document is not to be reported or copied or made available to others without prior permission of ERC-IIFT.

It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report

has been obtained from sources that are considered to be reliable. However, ERC-IIFT has not independently verified the accuracy or

completeness of the same. Neither ERC nor any of its members, accept any responsibility of whatsoever nature for the information,

statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware

that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or

otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from

an independent expert/advisor.

Documents

Initiating Coverage Report - BFSI Sector