Karvy Banking Sector Thematic - breport.myiris.combreport.myiris.com/ksbl/STABANIA_20130116.pdf · i.e. ICICI Bank, HDFC Bank & Axis Bank gave a return of >45% in last one year, the

BANKING It’s Time to Bank on Banks

JANUARY 16, 2013

Hatim Broachwala, CFA +91-22-6184 4329 hatim.broachwala @karvy.com Paresh Jain +91-22-6184 4324 paresh.jain @karvy.com

January 16, 2013

Banking Institutional Equities

India Research

THEME REPORT

Analysts Contact

Hatim Broachwala, CFA

022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

It’s Time to Bank on Banks The Banking sector has given a return of 42%, outperforming the broader

markets by whopping 20%, over last 12 months. While the large private banks

i.e. ICICI Bank, HDFC Bank & Axis Bank gave a return of >45% in last one

year, the PSU banks have notably outperformed over last month.

Key Sectoral Dynamics

Rate Cut – Likely from Q4FY13 Onwards: We expect interest rate to ease

by 125‐150bps in CY13, supported by significant correction in core

inflation, OIS rates and recent RBI’s policy statement. RBI is likely to shift

its focus towards protecting growth as against resisting inflation.

Asset Quality – Expected to Improve from FY14 Onwards: We believe

that the asset quality to start improving from FY14E onwards on the back

of improvement in PMI, series of reforms undertaken recently, likely

decline in slippages and moderation in NPA formations for the PSU banks.

Credit Growth – Likely to Remain Buoyant: Credit growth continues to

remain above RBI’s target despite sluggishness in the economy. We expect

improvement in demand, driven by lower interest rate and improvement

in lending climate.

Outlook & Valuation

Even after the recent rally, most of the PSU Banks are trading at discount to

their mean valuation, while few select banks are even trading closer to their 1‐

SD valuation. We believe that in a scenario of economic revival, the PSU banks

offer an attractive risk reward. We have upgraded our recommendations on

four PSU banks (Canara, PNB, SBI & UBI), and downgraded our stance on two

private sector banks (ING & Karur), while revising the target price of the banks

under our coverage except for CUB.

Valuation Summary

Rating Target Price P/E P/ABV

Company CMP New Old New Old FY14E FY15E FY14E FY15E

Axis Bank 1,424 BUY BUY 1,725 1,330 10.3 8.9 1.9 1.6

Bank of Baroda 878 HOLD HOLD 985 740 5.6 4.6 1.1 0.9

Bank of India 385 BUY BUY 465 395 4.8 4.2 1.0 0.8

Canara Bank 523 HOLD SELL 570 410 5.5 4.7 1.0 0.8

City Union Bank 61 HOLD HOLD 65 65 7.4 5.9 1.6 1.3

HDFC Bank 668 HOLD HOLD 690 630 21.0 18.2 3.8 3.3

ICICI Bank # 1,204 BUY BUY 1,520 1,155 13.6 11.2 1.7 1.5

Indian Overseas Bank 92 SELL SELL 96 70 5.4 4.4 0.7 0.7

ING Vysya Bank 581 HOLD BUY 625 495 12.3 10.2 1.8 1.5

J&K Bank 1,358 BUY BUY 1,560 1,500 6.2 5.3 1.2 1.0

Karur Vysya Bank 556 HOLD BUY 610 535 7.7 6.3 1.6 1.4

Oriental Bank of Commerce 347 HOLD HOLD 365 320 5.8 5.0 0.9 0.8

Punjab National Bank 901 BUY SELL 1045 695 4.9 4.3 1.0 0.9

State Bank of India # 2,490 BUY SELL 2,885 1,980 6.9 5.9 1.5 1.2

Syndicate Bank 144 BUY BUY 175 150 4.4 4.1 0.9 0.7

Union Bank of India 269 BUY HOLD 315 260 4.7 4.0 1.0 0.9

Source: Karvy Institutional Research; # Valuation after adjusting for subsidiaries; CMP is as of 15Jan2013

2

January 16, 2013

Banking

Table of contents. Executive Summary ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 3 Rate Cut – A Key Trigger to Watch Out For ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 4

A. Bankex Rallies on Expectations of Rate Cut ....................................................................................................................... 4 B. Core Inflation below 5% for 1st Time in 32 Months ............................................................................................................ 4 C. Correction in OIS also Suggests Correction in Rates ......................................................................................................... 5 D. RBI Turns Dovish – Expect Policy Rates to Start Easing in Q4FY13 ............................................................................... 6

Asset Quality to Improve from FY14 Onwards ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 7 A. Slippage to Ease Significantly especially for PSU Banks .................................................................................................... 7 B. PMI indicates Improvement in Business Sentiment ........................................................................................................... 7 C. Govt on Reform Mode – Added Optimism .......................................................................................................................... 8 D. NPA Formation Moderating for PSU Banks ...................................................................................................................... 8 E. Credit Cost to Moderate ...................................................................................................................................................... 9 F. Provision Coverage to Improve ............................................................................................................................................ 9

Credit Growth Momentum Continues ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 10 A. Credit Growth remains above RBI’s Target despite Slowdown ........................................................................................ 10 B. Credit Growth – Corporate Segment Rules the Roost ....................................................................................................... 10 C. Visible Slowdown in Credit to Vulnerable Sectors ............................................................................................................ 11 D. Engines for Retail Credit keep Altering ............................................................................................................................ 12 E. Lower Loan Origination – Minimal Default Risk ............................................................................................................. 12 F. Lower Deposit Growth – Pressure on Balance‐sheet ......................................................................................................... 13 G. Liquidation of Excess SLR can Provide Relief ................................................................................................................... 13

NIMs – Marginal Compression is Likely ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 14 A. Positive Correlation between Interest Rate & NIMs ........................................................................................................ 14 B. Improvement in CASA to Annul Sharp Fall in Margins ................................................................................................. 14

Valuations – Seem to be Reasonable ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 15 A. PSU Banks Trading at Discount to Mean Valuation ....................................................................................................... 15 B. ROA & P/ABV Matrix ...................................................................................................................................................... 15

Risk to Our Recommendations ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 16

Companies Section Axis Bank‐Superior Asset Quality & Business Growth; Maintain BUY ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 17

Bank of Baroda‐ Management change can be tricky; Maintain HOLD ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 20 Bank of India‐ Pressure on Asset Quality to Ease, NIMs Set to Improve; Maintain BUY ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 23

Canara Bank‐ Business Growth to Gain Momentum, Pressure on Asset Quality to Ease; Upgrade to HOLD ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 26

City Union Bank‐ Positives Priced‐in; Maintain HOLD ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 29

HDFC Bank‐ Superior Asset Quality, Earning Consistency; Maintain HOLD ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 32

ICICI Bank‐ Improved Asset Quality, NIMs to Sustain at Current Levels; Maintain BUY ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 35

Indian Overseas Bank‐ Worst not yet over; Stock to Continue to Trade at Discount to Peers; Maintain SELL ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 38

ING Vysya Bank‐ Steady Performer, but Positives Priced‐in; Downgrade to HOLD ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 41 J&K Bank‐ Improving Fundamentals – Case for Rerating; Maintain BUY ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 44

Karur Vysya Bank‐ Best in Class, but Positives Priced‐in; Downgrade to HOLD ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 47

Oriental Bank of Commerce‐ Moderate Business Growth amid Contraction in NIMs; Maintain HOLD ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 50

Punjab National Bank‐ Biggest Beneficiary of Likely Economic Turnaround; Upgrade to BUY ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 53

State Bank of India‐ Incremental Slippages & Credit Cost to Move Southwards; Upgrade to BUY ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 56

Syndicate Bank‐ Stable Earning, Better Asset Quality; Maintain BUY ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 59

Union Bank of India‐ Asset Quality Pressure to ease, Rally to Continue; Upgrade to BUY ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 62

3

January 16, 2013

Banking

Executive Summary

Bankex Rallies on Expectations of Rate Cut

Outperforming broader markets by whopping 20%, the Banking sector has given a

return of 42% over last 12 months. While the large private banks i.e. ICICI Bank,

HDFC Bank & Axis Bank gave a return of >45% in last 1 year, the PSU banks have

notably outperformed over last month on expectations of rate cut. Meanwhile, the

core inflation dropping below 5% and the WPI‐based inflation easing to 7.18% in

Dec’12 provide significant elbowroom for the RBI to maneuver policy rates to

protect growth. At the same time, the OIS has corrected by ~100 bps from its recent

high, while Repo rate has been cut by only 50 bps over last 9 months. Again, the

OIS spread on the 3 month tenor has eased notably over last year, which indicates

correction in policy rates as well. Although RBI has Kept key rates unchanged in

mid‐quarter policy review in Dec’12, but it has clearly signaled easing in rates

from Q4FY13 onwards with a view to protecting growth.

Asset Quality to Improve from FY14 Onwards

The incremental slippages of PSU banks in H2FY13 are likely to be significantly

lower than H1FY13, while the asset quality of banks, especially PSU banks is

expected to turnaround from Q1FY14 onwards. At the same time, amidst the

allegation of complete policy paralysis, the series of reforms cleared by the UPA

Government would help the economy to rise from the headwinds, which it has

been facing over the last downturn. Meanwhile, the NPA formation has receded

for the PSU Banks in Q2FY13, while the private banks have done exceedingly well

in terms of asset quality. We believe that the pressures on asset quality would start

easing, going forward. In line with likely improvement in asset quality, we believe

that the overall credit cost – especially of the PSU banks – will decline notably

enabling them to report higher profits, while the credit cost of private banks would

normalize from the current low levels.

Credit Growth Momentum Continues

With likely correction in interest rates and revival in economy, the credit growth is

expected to remain buoyant, going ahead. Though the credit to vulnerable risky

sectors has declined significantly from its high in FY11, the PSU Banks have still

relatively higher exposure to difficult sectors, compared to their private

counterparts. We believe that, the banks are in a position to comfortably absorb

some amount of compression in NIMs, as they are on a cyclical high presently.

Again, even though the CASA has deteriorated for most of the banks over last two

years, we believe that the CASA would take a reversal, thereby providing cushion

against sharper decline in NIMs.

Outlook & Valuation

Even after the recent rally, most of the PSU Banks are trading at significant

discount to their mean valuation, while few select banks are even trading closer to

their 1‐SD valuation. We believe that in a scenario of economic revival, the PSU

banks offer an attractive risk reward. We have upgraded Union Bank of India

(UBI), Punjab National Bank (PNB) & State Bank of India (SBI) to “BUY”, and

Canara Bank to “HOLD”, while downgrading ING Vysya Bank & Karur Vysya

Bank to “HOLD” on account of sharp price run‐up.

4

January 16, 2013

Banking

Rate Cut – A Key Trigger to Watch Out For

A. Bankex Rallies on Expectations of Rate Cut Banking sector has given a return of 42%, outperforming broader markets by a

whopping 20% over last 12 months. The private banks i.e. ICICI Bank, HDFC Bank

& Axis Bank – which continued to be in flavor throughout the year – have given >45%

return in last 12 months. Though the PSU Bank traded weak in the early part of the

year, they have considerably outperformed over last month on expectations of rate

cut.

Exhibit 1: Repo & Bankex 1 year Return

Source: Bloomberg, Karvy Institutional Research

Our View: Bankex has rallied over 20% in just last 6 months, and we believe the

rally can be purely attributed to expectations of rate cut. As the Bankex has a very

strong negative correlation with movement in interest rates, we expect another

125‐150 bps of cut in repo in CY13 would enable Bankex to continue to outperform.

We have upgraded recommendation / target price for stocks under our coverage

universe, factoring in reduction in interest rates.

B. Core Inflation below 5% for 1st Time in 32 Months Core inflation has dropped below 5% for the first time in past 32 months, driven

by decline in prices of cement, iron & semis and steel. Correction in core inflation

has also contributed to easing of headline WPI‐based inflation which stood at

7.18% in Dec’12. Inflation in last nine months has expanded by 4.7% YTD, mainly

due to sharp rise in cereal prices.

Exhibit 2: Inflation


‐100.0

‐50.0

0.0

50.0

100.0

150.0

200.0

0.0

2.0

4.0

6.0

8.0

10.0Dec/02

Jun/03

Dec/03

Jun/04

Dec/04

Jun/05

Dec/05

Jun/06

Dec/06

Jun/07

Dec/07

Jun/08

Dec/08

Jun/09

Dec/09

Jun/10

Dec/10

Jun/11

Dec/11

Jun/12

Dec/12

Repo Bankex Return

(%) (%)

‐

2.00

4.00

6.00

8.00

10.00

12.00

Feb‐10

Apr‐10

Jun‐10

Aug‐10

Oct‐10

Dec‐10

Feb‐11

Apr‐11

Jun‐11

Aug‐11

Oct‐11

Dec‐11

Feb‐12

Apr‐12

Jun‐12

Aug‐12

Oct‐12

Dec‐12

Core Inflation WPI

(%)

5

January 16, 2013

Banking

Our View: Expectation on inflation mainly depends on rainfall, going ahead.

Significant control in core inflation amid consistent ease in WPI‐based inflation –

which is now close to RBI’s comfort level – has given significant elbowroom for

the RBI to maneuver policy rates to protect growth.

C. Correction in OIS also Suggests Correction in Rates Overnight Indexed Swap (OIS) is a very good indicator of interbank credit market.

The fixed leg of the interest rate swap is determined by OIS, which can also be

interpreted as short‐term funding cost for the Indian banks. OIS and Repo rate has

a very high co‐relation of 0.92 over last 8 years. OIS has corrected by ~100 bps from

its recent high, whereas Repo is cut by only 50 bps over last 9 months.

Exhibit 3: Repo & OIS 3M


OIS & G‐Sec: OIS also has a very high correlation with G‐Sec on the 3 month as

well as 1 year tenor.

Exhibit 4: OIS & G‐Sec (3M) are trending downwards


Exhibit 5: OIS & G‐Sec (1Year) are relatively flattish


OIS Spread: OIS spread – the difference between interbank rate (floating leg of OIS

swap) and OIS – is a gauge of perception of risk in credit market and also indicates

market expectations of movement in policy rates. OIS spread on the 3 month tenor

has eased significantly over last year which indicates increase in risk taking ability

as well as correction in policy rates.

3

5

7

9

11

13

0

2

4

6

8

10

May/05

Sep

/05

Jan/06

May/06

Sep

/06

Jan/07

May/07

Sep

/07

Jan/08

May/08

Sep

/08

Jan/09

May/09

Sep

/09

Jan/10

May/10

Sep

/10

Jan/11

May/11

Sep

/11

Jan/12

May/12

Sep

/12

Jan/13

Repo OIS 3m

(%) (%)

0

2

4

6

8

10

12

Jan/05

Jul/05

Jan/06

Jul/06

Jan/07

Jul/07

Jan/08

Jul/08

Jan/09

Jul/09

Jan/10

Jul/10

Jan/11

Jul/11

Jan/12

Jul/12

Jan/13

Gsec 3m OIS 3m

(%)

0

2

4

6

8

10

12

Jan/05

Jul/05

Jan/06

Jul/06

Jan/07

Jul/07

Jan/08

Jul/08

Jan/09

Jul/09

Jan/10

Jul/10

Jan/11

Jul/11

Jan/12

Jul/12

Jan/13

Gsec 1 Yr OIS 1 Yr

(%)

6

January 16, 2013

Banking

Exhibit 6: OIS Spread (3M) Indicates Optimism


Our View: Correction in policy rates is imminent, as the OIS has corrected by ~90

bps from its recent high, while Repo is cut by only 50 bps over last 9 months.

Meanwhile, OIS spread on the 3 month tenor has eased notably over last year,

which indicates rise in risk taking ability and correction in policy rates as well.

D. RBI Turns Dovish – Expect Policy Rates to Start

Easing in Q4FY13 Although the RBI in its mid‐quarter policy review in Dec’12 has kept all its key

rates intact, the guidance has become much more dovish. The RBI seems to be very

comfortable with current inflation situation and will now start focusing on

protecting growth.

RBI’s Statement Mid‐Quarter Policy Review in Dec’12: “Headline inflation has

been below the Reserve Bank’s projected levels over the past two months. The

decline in core inflation has also been comforting. These emerging patterns

reinforce the likelihood of steady moderation in inflation going into 2013‐14,

though inflation may edge higher over the next two months. In view of inflation

pressures ebbing, monetary policy has to increasingly shift focus and respond to

the threats to growth from this point onwards … overall, recent inflation patterns

and projections provide a basis for reinforcing our October guidance about policy

easing in the fourth quarter,” the RBI said in its mid‐quarter policy review in

Dec’12, signaling that the policy rates would start easing in Q4FY13.

Our View: While the outlook for policy rate will be highly dependent on monsoon,

125‐150 bps of cut in repo over CY13 is expected with 50 bps cut in Q3FY policy

review on January 29, 2013.

‐1

0

1

2

3

4

5

6

7

Jan/03

Jun/03

Nov/03

Apr/04

Sep

/04

Feb/05

Jul/05

Dec/05

May/06

Oct/06

Mar/07

Aug/07

Jan/08

Jun/08

Nov/08

Apr/09

Sep

/09

Feb/10

Jul/10

Dec/10

May/11

Oct/11

Mar/12

Aug/12

Jan/13

OIS Spread 3m

(%)

7

January 16, 2013

Banking

Asset Quality to Improve from FY14 Onwards

A. Slippage to Ease Significantly especially for PSU

Banks We expect asset quality of banks, especially PSU banks to turnaround starting

from Q1FY14. As per the information we receive from our recent interaction with

the managements of several PSU banks, the incremental slippages in H2FY13 are

likely to be significantly lower than H1FY13. Incremental recovery / upgradation is

expected to excel and match incremental slippages thereby maintaining absolute

GNPA at current levels.

Exhibit 7: PSU Banks – Slippages to Ease

Source: Company, Karvy Institutional Research

On the other hand, private banks have done exceedingly well in terms of asset

quality. We have conservatively factored slippages to normalize over FY14‐15E.

Exhibit 8: Private Banks – Slippages Already at a Comfortable Levels


Our View: PSU Banks have seen huge increase in slippages in H1FY13. Even after

accounting for relatively better H2FY13, slippages for FY13E will increase

substantially over FY12. We expect asset quality pressure to ease significantly

over FY14‐15E.

B. PMI indicates Improvement in Business Sentiment Improvement in business sentiment as indicated by HSBC PMI surged to a six

month high amid a spike in new orders.

0.0

1.0

2.0

3.0

4.0

5.0

BOB Canara UBI BOI IOB PNB Syndicate SBI OBC

FY12 FY13E FY14E FY15E

(%)

0.0

0.5

1.0

1.5

2.0

ING KVB HDFC J&K Axis ICICI CUB


(%)

8

January 16, 2013

Banking

Exhibit 9: Strengthening PMI


Our View: Improvement in business sentiment would contribute towards banks’

efforts on recovery as well as assist them in containing incremental slippages.

C. Govt on Reform Mode – Added Optimism The UPA Government has been able to clear few landmark bills which were

pending for a considerable period of time. Amidst the allegation of complete

policy paralysis with regard to reforms, the Government surprised everyone

including their most staunch supporters by clearing FDI in Multi‐band Retail,

Aviation, Insurance, & Pension, which along with other reforms spread a wave of

optimism amongst the investors’ community. Meanwhile, amendment to “Banking

Regulation Act & Banking Companies Acquisition & Transfer Act” will enable the RBI

to issue additional bank licenses along with additional powers to regulate banks.

Positive initiatives from government to address fuel issues are expected to bring

faster developments on policy. We also expect regular power tariff hikes by all

states would resolve power sector issues.

Our View: Such series of reforms would help the economy to rise from the

headwinds it has been facing over the last downturn, while the plan for gradual

hike in diesel prices to cut fuel subsidy and thereby moving towards fiscal

consolidation could be seen as the preparatory work for next phase of growth.

D. NPA Formation Moderating for PSU Banks

After series of turbulent quarters, the NPA formation has receded for PSU Banks

in Q2FY13, while the private banks have done exceedingly well in terms of asset

quality. The pressures on asset quality would start easing, as we progress into

policy rate cuts followed by economic recovery.

Exhibit 10: PSU Bank – GNPA has bottomed out


44

49

54

59

64

Dec‐08

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Mar‐12

Jun‐12

Sep‐12

Dec‐12

PMI Index

1.0

2.0

3.0

4.0

5.0

6.0

BOB Canara BOI Syndicate IOB PNB UBI OBC SBI


(%)

9

January 16, 2013

Banking

Exhibit 11: Private Banks – Gross NPA to Normalize


Our View: While the NPAs of PSU banks and ICICI Bank are likely improve; it

would remain flattish for other private banks.

E. Credit Cost to Moderate In line with likely improvement in asset quality, we believe that the overall credit

cost – especially of PSU banks – will decline notably enabling them to report higher

profits, while the credit cost of private banks would normalize from the current

low levels.

Exhibit 12: Credit Cost to Ease


Our View: While the overall credit cost of PSU banks will decline significantly,

the credit cost of private banks would normalize from the current low levels.

F. Provision Coverage to Improve With expected slippage level to ease significantly, we expect provision coverage to

improve even after accounting for lower credit cost. Banks would also like to

buffer up for next down‐cycle.

Exhibit 13: Provision Coverage to Improve


0.0

1.0

2.0

3.0

4.0

Axis CUB HDFC ICICI ING J&K KVB


(%)

0.0

0.5

1.0

1.5

KVB

ING

J&K

HDFC

ICICI

CUB

Can

ara

Axis

BOB

BOI

PNB

UBI

OBC

IOB

Syndicate

SBI


(%)

40.050.060.070.080.090.0100.0

OBC

UBI

PNB

BOI

SBI

IOB

Can

ara

KVB

CUB

BOB

Syndicate

ICICI

Axis

HDFC

ING

J&K


(%)

10

January 16, 2013

Banking

Credit Growth Momentum Continues

A. Credit Growth remains above RBI’s Target despite

Slowdown Even though the credit growth has taken a hit on account of slowdown in the

economy and halt in capex cycle, it remains above the RBI’s FY13 target of 16%.

Exhibit 14: Credit Growing at Decent Pace


Our View: With likely correction in interest rates and revival in economy, credit

growth is expected to remain buoyant, going ahead.

B. Credit Growth – Corporate Segment Rules the Roost Growth in corporate / industry segment is showing a declining trend, yet it

continues to be the fastest growing segment over last five years. After the burst in

unsecured personal loan segment in 2008, the retail segment has grown at a very

modest rate over last five years, though off late it is showing some signs of revival.

Agriculture has been the fastest growing segment this year, whereas services

continue to be sluggish.

Exhibit 15: Growth in Industry Segment – Better than Other Segments

Source: RBI, Karvy Institutional Research

Our View: Within the industry segment, the large corporates have contributed to

bulk of the growth. On account of cautious approach adopted by banks, growth in

small and medium segment has seen a significant downturn.

051015202530

Mar/09

Jun/09

Sep

/09

Dec/09

Mar/10

Jun/10

Sep

/10

Dec/10

Mar/11

Jun/11

Sep

/11

Dec/11

Mar/12

Jun/12

Sep

/12

Dec/12

Credit Growth

(%)

0.0

10.0

20.0

30.0

FY09 FY10 FY11 FY12 Nov‐12

Agriculture Industry Services Retail

(%

11

January 16, 2013

Banking

Exhibit 16: Large Industries Contributed to Growth


C. Visible Slowdown in Credit to Vulnerable Sectors Credit growth to risky sectors like Infrastructure, Metal/Mining & Textiles has

significantly slowed down from its high in FY10‐11.

Exhibit 17: Growth to Troubled Sectors has slowed down


The PSU Banks have relatively higher exposure to vulnerable sectors in

comparison to their private counterparts.

Exhibit 18: Vulnerable Sectors (% of Loan Book) – Pvt Banks are Well‐placed


Our View: Though the credit to vulnerable risky sectors has declined significantly

from its high in FY11, the PSU Banks have still relatively higher exposure to

difficult sectors, compared to their private counterparts.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


Micro/Small Medium Large

(%)

0.0

10.0

20.0

30.0

40.0

50.0


Infrastructure Metal/Mining Textiles

(%)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

HDFC

ING

Axis

BOI

BOB

Syndicate

CUB

J&K

ICICI

PNB

OBC

UBI

KVB

IOB

Can

ara

SBI

Infrastructure Metal/Mining Textiles

(%)

12

January 16, 2013

Banking

D. Engines for Retail Credit keep Altering The mortgage segment has seen a decent growth, despite the recent slowdown on

account of higher real estate prices. After a brief lull in FY09‐10, the auto segment

is growing at brisk rate on the back of strong auto sales, while the education loans

have nosedived after rise in NPA post recession. Following a muted growth in

FY09‐12, the credit cards / personal loans have evidently grown at a higher rate.

Exhibit 19: Growth within Retail Segment


E. Lower Loan Origination – Minimal Default Risk In the following chart, we provide the loans origination by the banks under our

coverage during FY09‐12 period.

Exhibit 20: Loan Origination over FY09‐12


Our View: The banks originating lower loans over last three years are at more

comfortable position than their peers, as the likelihood of default remains high for

loans originated during economic slowdown.

‐10.0

0.0

10.0

20.0

30.0

40.0

50.0


Mortgage Auto Education Credit Cards/Personal

(%)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

ICICI

Syndicate

J&K

SBI

OBC

Can

ara

ING

BOI

UBI

IOB

PNB

HDFC

BOB

Axis

CUB

KVB

Loan Origination over FY09‐12

(%)

13

January 16, 2013

Banking

F. Lower Deposit Growth – Pressure on Balance‐sheet Deposit growth, which has significantly declined over last year, has been putting

pressure on balance sheet of banks.

Exhibit 21: Languishing Deposit Growth


Our View: Credit‐Deposit (CD) ratio has been hovering closer to its all time high

levels. Despite successive OMOs and CRR cuts, deficit in Liquidity Adjustment

Facility (LAF) has remained above the RBI’s comfort zone.

G. Liquidation of Excess SLR can Provide Relief Statutory Liquidity Ratio (SLR) is currently maintained by banks at ~28% is much

in excess of regulatory stipulated 23%. Dspite reduction in SLR by the RBI, banks

have not brought down their SLR ratios.

Exhibit 22: Excess SLR to Compensate for Lower Deposit Growth


Our View: The banks prefer to park funds with government over lending in times

of tough conditions, but with initial signs of economic recovery, the banks can

now utilize excess SLR to fund credit compensating for lower deposit growth.

68.0

70.0

72.0

74.0

76.0

78.0

80.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

Mar/09

May/09

Jul/09

Sep

/09

Nov/09

Jan/10

Mar/10

May/10

Jul/10

Sep

/10

Nov/10

Jan/11

Mar/11

May/11

Jul/11

Sep

/11

Nov/11

Jan/12

Mar/12

May/12

Jul/12

Sep

/12

Nov/12

Deposit Growth CD Ratio (RHS)

(%)

22.0

24.0

26.0

28.0

30.0

32.0

Apr/06

Aug/06

Dec/06

Apr/07

Aug/07

Dec/07

Apr/08

Aug/08

Dec/08

Apr/09

Aug/09

Dec/09

Apr/10

Aug/10

Dec/10

Apr/11

Aug/11

Dec/11

Apr/12

Aug/12

Dec/12

SLR maintained by banks SLR Required by RBI

(%)

14

January 16, 2013

Banking

NIMs – Marginal Compression is Likely

A. Positive Correlation between Interest Rate & NIMs During last interest rate cycle, the Net Interest Margins (NIMs) of the banks have

shown a positive correlation with movement in the interest rates on account of

assets getting reprised faster than deposits.

Exhibit 23: NIMs off‐late has a Positive Co‐Relation with Interest Rates


Our View: As the NIMs are on a cyclical high presently, the banks are in a

position to comfortably absorb some amount of compression.

B. Improvement in CASA to Annul Sharp Fall in

Margins CASA has deteriorated for most of the banks over last 2 years, as in times of high

interest rates canabilzation of saving to term deposits happens.

Exhibit 24: CASA to Improve with Fall in Rates


Our View: With expectation of decline in interest rate, we believe that the CASA

should take a reversal, thereby providing cushion against sharper fall in NIMs.

Also the proposed direct cash transfer scheme would aid banks garner higher float

adding to accumulation of CASA.

2.5

2.6

2.7

2.8

2.9

3

3.1

3.2

0

2

4

6

8

10

Mar/03

Aug/03

Jan/04

Jun/04

Nov/04

Apr/05

Sep

/05

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May/07

Oct/07

Mar/08

Aug/08

Jan/09

Jun/09

Nov/09

Apr/10

Sep

/10

Feb/11

Jul/11

Dec/11

May/12

Oct/12

Repo NIMs

(%)

10.0

20.0

30.0

40.0

50.0

60.0

HDFC

ICICI

SBI

Axis

J&K

PNB

ING

Syndicate

UBI

BOB

BOI

Can

ara

IOB

OBC

KVB

CUB


(%)

15

January 16, 2013

Banking

Valuations – Seem to be Reasonable

A. PSU Banks Trading at Discount to Mean Valuation Even after the recent rally, most of the PSU Banks are trading at discount to their

mean valuation. Few select banks are even trading closer to their 1‐SD valuation.

In a scenario of economic revival, the PSU banks offer an attractive risk reward.

Exhibit 25: Valuations (1 Yr Fwd P/ABV) – Still Attractive


B. ROA & P/ABV Matrix With return ratio to improve, we expect it to be getting reflected in their

valuations.

Exhibit 26: PSU Bank to get re‐rated


Exhibit 27: Private Bank well placed


0

1

2

3

4

5

HDFC

Axis

ING

KVB

ICICI

SBI

CUB

J&K

UBI

BOB

PNB

BOI

Can

ara

OBC

Syndicate

IOB

Mean ‐1 SD Current

(x)

0

0.5

1

1.5

2

0 0.2 0.4 0.6 0.8 1 1.2 1.4

P/ABV FY14 (x)

ROA ‐ FY14E (%)

BOB BOI Canara IOB OBC PNB SBI Syndicate UBI

0

1

2

3

4

5

0 0.5 1 1.5 2 2.5

P/ABV FY14 (x)

ROA ‐ FY14E (%)

Axis CUB HDFC ICICI ING J&K KVB

16

January 16, 2013

Banking

Risk to Our Recommendations

Basel‐III Implementation: Migration to Basel‐III from Apr’13 will enhance the

need for core equity capital and restrict leverage flexibility especially for the

PSU banks.

Provisions for Wage Hike: As the wage hike agreement expired in Nov 12, the

new wage hike agreement would impact profitability of the PSU Banks.

Higher Provision on Restructured Assets: The RBI has increased provision on

restructured assets by 0.75% to 2.75% in the last quarter. In case the proposal

to increase the provision on restructured assets to 5% is implemented, it would

impact profitability of banks. However, excluding the accounts with

satisfactory performance of two years will bring down the quantum of

restructured book.

Banking January 16, 2013

Axis Bank

Bloomberg: AXSB INReuters: AXBK.BO BUY

Institutional Equities

India Research

COMPANY UPDATE

Recommendation

CMP: Rs1,424

Target Price: Rs1,725

Upside (%) 21%

Stock Information Market Cap. (Rs bn / US$ mn) 608/11,141

52‐week High/Low (Rs) 1,431/917

3m ADV (Rs mn /US$ mn) 2,280/41.8

Beta 1.2

Sensex/ Nifty 19,987/6,057

Share outstanding (mn) 427

Stock Performance (%) 1M 3M 12M YTD

Absolute 5.3 27.3 51.6 5.0

Rel. to Sensex 1.8 19.2 22.5 2.1

Performance

Source: Bloomberg

1 Year Forward P/ABV

Source: Karvy Institutional Research

Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

800

1,000

1,200

1,400

1,600

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) Axis Bank (RHS)

‐

2.00

4.00

6.00

Feb‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

Aug‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

(x)

Superior Asset Quality & Business Growth;

Maintain BUY

Axis Bank is currently trading at 15% discount to its five year average

valuation. However, the stock has outperformed the Bankex by 6% over last

one year on account of superior asset quality, management efficiency and

earning momentum.

Business Growth above Industry: Credit growth has slightly slowed down as

against its earlier trends; still it continues to grow above industry. We believe

it has rightly slowed down to support any asset quality pressures in tough

times. The Bank’s majority of the growth has come from retail segment and

large corporates, while the composition of SME loans has come down over

500bps in last three years to 14%.

Stable NIMs: Despite volatile interest rate movement, the Bank’s NIMs remain

stable at ~3.3% over past three years. We expect the ability to maintain its

CASA ratio of >40% would enable it to prevent any major erosion in NIMs.

Strong Non‐Interest Income: Axis Bank is a very strong player in debt capital

markets including placement and syndication of bonds. Post‐acquisition of

Enam, the Bank has positioned itself to offer equity products. Higher growth

in retail fee income has offset lackluster performance in corporate segment.

Resilience in Asset Quality: The Bank has displayed decent resilience in its

asset quality as against market expectations of sharp deterioration. Though the

market is concerned over its larger infrastructure book, its Management is

confident of its quality. We have conservatively built in slightly higher credit

cost, going ahead.

Outlook & Valuation

At the CMP, the stock trades at 10.3x & 8.9x FY14E & FY15E earnings, and at

1.9x & 1.6x P/ABV FY13E & FY14E, respectively. Based on 10% discount to its

historical mean valuation implying 2.0x P/ABV FY15E, we reiterate our “BUY”

recommendation on Axis Bank with unrevised target price of Rs. 1725 per

share.

Key Financials

Rs Mn FY11 FY12 FY13E FY14E FY15E

Net interest income 65,630 80,178 96,188 112,905 131,879

Operating Profit 60,564 73,378 83,652 98,905 114,903

PAT 33,885 42,422 48,483 57,245 66,579

EPS 82.5 102.7 117.3 138.5 161.1

ABV 452.8 540.6 631.2 738.2 873.0

P/E 17.3 13.9 12.2 10.3 8.9

P/ABV 3.2 2.6 2.3 1.9 1.6

Gross NPA 1.1 1.1 1.1 1.3 1.3

Net NPA 0.3 0.3 0.3 0.4 0.3

ROE 19.3 20.3 19.6 19.7 19.5

ROA 1.6 1.6 1.6 1.6 1.5


18

January 16, 2013

Axis Bank

Exhibit 1: Income Statement

FY11 FY12 FY13E FY14E FY15E

Interest Income 151,548 219,947 268,475 306,463 351,022

Interest expense 85,918 139,769 172,288 193,558 219,143


Fees 33,574 43,417 47,759 57,310 68,773

Other Income 9,154 9,854 9,426 12,113 14,642

Net Revenue 108,358 133,449 153,373 182,329 215,294

Operating Expense 47,794 60,071 69,720 83,424 100,391

‐Employee Exp 16,139 20,802 24,561 30,136 36,445

‐Other Exp 31,655 39,269 45,159 53,288 63,946


Investment Profit 3,593 931 4,907 4,410 5,012

Pre‐provision Profit 64,157 74,309 88,560 103,315 119,915

Provisions 12,800 11,431 16,197 17,874 20,543

‐Loan Loss Provisions 11,364 10,996 17,631 18,478 21,377

‐Investment Depreciation 993 581 ‐1,488 ‐658 ‐888

‐Other Provisions 443 ‐146 54 54 54

PBT 51,357 62,878 72,362 85,441 99,372

Taxes 17,472 20,456 23,880 28,195 32,793

PAT 33,885 42,422 48,483 57,245 66,579


Exhibit 2: Balance Sheet


Equity Capital 4,105 4,132 4,132 4,132 4,132

Reserves & Surplus 185,883 223,954 263,493 310,587 365,564

Shareholderʹs Funds 189,988 228,086 267,625 314,719 369,696

Deposits 1,892,378 2,201,044 2,597,232 3,168,623 3,802,348

‐Current deposits 369,171 397,541 437,160 522,868 617,927

‐Saving deposits 408,503 516,680 615,727 787,144 977,262

‐Term deposit 1,114,704 1,286,823 1,544,345 1,858,610 2,207,159

Borrowings 262,679 340,717 394,732 449,778 510,828

‐Sub ordinate debt 69,932 105,740 121,944 138,458 156,773

Other liabilities 82,089 86,430 86,628 92,377 97,094

Total liabilities 2,427,134 2,856,277 3,346,217 4,025,496 4,779,965

Cash/Equivalent 214,087 139,339 189,392 261,579 341,642

Advances 1,424,078 1,697,595 2,022,469 2,468,154 2,962,459

Investments 719,916 931,921 1,030,968 1,173,816 1,332,247

Fixed Assets 22,732 22,593 25,593 28,593 31,593

Other assets 46,321 64,829 77,795 93,354 112,025

Total assets 2,427,134 2,856,277 3,346,217 4,025,496 4,779,965


19

January 16, 2013

Axis Bank

Exhibit 3: Key Ratios

Ratioʹs FY11 FY12 FY13E FY14E FY15E

Growth (%)

NII growth 31.1 22.2 20.0 17.4 16.8

Pre‐provision profit growth 22.4 15.8 19.2 16.7 16.1

PAT growth 34.8 25.2 14.3 18.1 16.3

Business (%)

Deposit growth 33.9 16.3 18.0 22.0 20.0

Advance growth 36.5 19.2 19.1 22.0 20.0

Business growth 35.0 17.6 18.5 22.0 20.0

CD 75.3 77.1 77.9 77.9 77.9

CASA 41.1 41.5 40.5 41.3 42.0

Operating effeciency (%)

Cost‐to‐income 44.1 45.0 45.5 45.8 46.6

Cost‐to‐assets 2.4 2.4 2.4 2.4 2.4

Productivity (Rs mn)

Business per branch 2385.9 2403.6 2535.5 2787.7 3044.5

Business per employee 125.5 122.8 125.7 135.1 144.7

Profit per branch 24.4 26.2 26.6 28.3 30.0

Profit per employee 1.3 1.3 1.3 1.4 1.4

Spreads (%)

Yield on advances 8.4 9.9 10.2 9.7 9.3

Yield on investments 7.0 7.8 8.0 8.0 7.8

Cost of deposits 4.5 6.0 6.1 5.8 5.5

Yield on assets 7.7 8.9 9.2 8.9 8.5

Cost of funds 4.4 5.7 6.0 5.7 5.4

NIMs 3.3 3.2 3.3 3.3 3.2

Capital adequacy (%)

Tier I 9.4 9.5 9.5 9.3 9.2

Tier II 3.2 4.2 4.2 3.9 3.7

Total CAR 12.7 13.7 13.6 13.2 12.9

Asset Quality (%)

Gross NPA 1.1 1.1 1.1 1.3 1.3

Net NPA 0.3 0.3 0.3 0.4 0.3

Provision coverage 74.3 73.8 70.8 69.6 77.4

Provision coverage (incl w/off) 80.9 80.9 79.0 77.9 83.6

Slippage 1.2 1.2 1.1 1.3 1.2

Credit‐cost 0.8 0.6 0.8 0.7 0.7

Return (%)

ROE 19.3 20.3 19.6 19.7 19.5

ROA 1.6 1.6 1.6 1.6 1.5

Per share (Rs)

EPS 82.5 102.7 117.3 138.5 161.1

BV 462.8 552.0 647.7 761.7 894.7

ABV 452.8 540.6 631.2 738.2 873.0

Valuation (x)

P/E 17.3 13.9 12.2 10.3 8.9

P/BV 3.1 2.6 2.2 1.9 1.6

P/ABV 3.2 2.6 2.3 1.9 1.6



Bank Of Baroda

Bloomberg: BOB INReuters: BOB.BO HOLD


India Research

COMPANY UPDATE

Recommendation

CMP: Rs878

Target Price: Rs985

Upside (%) 12%


52‐week High/Low (Rs) 900/606

3m ADV (Rs mn /US$ mn) 543/9.9

Beta 0.9




Absolute 4.3 12.6 20.7 1.3

Rel. to Sensex 0.8 5.4 (2.4) (1.5)

Performance

Source: Bloomberg



Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

600

700

800

900

1,000

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) Bank of Baroda (RHS)

‐

0.50

1.00

1.50

2.00

Feb‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

Aug‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

(x)

Management change can be tricky; Maintain

HOLD

Bank of Baroda (BoB) is currently trading at its five year average valuation.

However, the stock has underperformed the Bankex by 23% over last one

year reflecting incremental stress in last two quarters along with expectation

of further deterioration in asset portfolio in the aftermath of change in

management and partial correction of valuation premium over its peers.

Asset Quality Matrix – Better Placed: Bank of Baroda is better placed

amongst the large PSU banks in terms of total stress assets with Gross NPA

of 2% and restructured assets of 7.2%, though some amount of incremental

deterioration in asset quality is seen in H1FY13. The Bank enjoys comfortable

provision coverage of 76%.

Business Parameters – Good Show: The Bank has grown its business well

above the industry rate. The average growth for last four years has been 26%

in deposits and 28% in advances. But in the process, the Bank’s CASA has

taken a hit of ~500 bps during the same period. Its overseas business has

grown at an even higher average rate of 39% over last four years and now

forms 30% of its total business.

Change in Management – A Key Risk: With the change in management,

concern over deterioration in asset quality has risen. Higher growth in credit

along with resilience in asset quality has been strength, but it can turn into a

risk if slippages start increasing.

Outlook & Valuation


1.1x & 0.9x P/ABV FY14E & FY15E, respectively. Based on its historical mean

valuation implying 1x P/ABV FY15E, we reiterate our “HOLD”

recommendation on Bank of Baroda with upwardly revised target price of

Rs. 985 per share (from Rs. 740 earlier).

Key Financials

Y/E Mar (Rs. mn) FY11 FY12 FY13E FY14E FY15E



PAT 42,417 50,070 51,185 64,798 78,290

EPS (Rs) 108.0 121.4 124.1 157.1 189.8

ABV (Rs) 536.0 649.5 701.9 829.6 984.9

P/E (x) 8.1 7.2 7.1 5.6 4.6

P/ABV (x) 1.6 1.3 1.2 1.1 0.9

Gross NPA (%) 1.4 1.5 2.1 2.2 2.2

Net NPA (%) 0.3 0.5 0.8 0.7 0.6

ROE (%) 23.5 20.7 17.5 19.3 19.7

ROA (%) 1.3 1.2 1.0 1.1 1.1


21

January 16, 2013

Bank Of Baroda



Interest Income 218,859 296,737 358,873 412,454 468,789



Fees 10,206 12,261 13,487 16,185 19,421

Other Income 13,451 15,888 18,830 20,048 22,180

Net Revenue 111,679 131,319 151,579 180,594 212,016


‐Employee Exp 29,168 29,856 30,863 35,365 40,613

‐Other Exp 17,130 21,731 23,904 29,880 37,350


Investment Profit 4,435 6,075 3,249 6,840 8,364


Provisions 13,313 25,549 31,814 34,624 36,620


‐Investment Depreciation 90 2,363 ‐567 ‐753 ‐904

‐Other Provisions 583 3,015 3,920 1,960 1,960

PBT 56,503 60,258 68,246 87,564 105,797

Taxes 14,086 10,188 17,062 22,767 27,507

PAT 42,417 50,070 51,185 64,798 78,290




Equity Capital 3,928 4,124 4,124 4,124 4,124



Deposits 3,054,395 3,848,711 4,618,453 5,542,144 6,650,573


‐Saving deposits 644,540 745,795 861,256 1,045,994 1,267,680

‐Term deposit 2,178,508 2,813,472 3,390,779 4,037,362 4,813,262

Borrowings 223,079 235,730 289,612 354,270 431,860




Cash/Equivalent 499,341 641,686 729,744 826,732 943,117

Advances 2,286,764 2,873,773 3,451,080 4,143,848 4,975,169

Investments 712,606 832,094 1,024,530 1,255,452 1,532,559

Fixed Assets 22,997 23,415 25,415 27,415 29,415

Other assets 62,264 102,247 112,472 123,719 136,091

Total assets 3,583,972 4,473,215 5,343,240 6,377,166 7,616,351


22

January 16, 2013

Bank Of Baroda

Exhibit 3: Ratios


Growth(%)

NII growth 48.2 17.2 15.6 21.0 18.0


PAT growth 38.7 18.0 2.2 26.6 20.8

Business (%)

Deposit growth 26.7 26.0 20.0 20.0 20.0

Advance growth 30.6 25.7 20.1 20.1 20.1

Business growth 28.4 25.9 20.0 20.0 20.0

CD 74.9 74.7 74.7 74.8 74.8

CASA 28.7 26.9 26.6 27.2 27.6

Operating efficiency (%)

Cost‐to‐income 41.5 39.3 36.1 36.1 36.8

Cost‐to‐assets 1.6 1.4 1.2 1.2 1.2






Spreads (%)



Cost of deposits 4.3 5.1 5.3 4.9 4.5

Yield on assets 7.4 8.0 7.9 7.6 7.2

Cost of funds 4.4 5.1 5.2 4.9 4.5

NIMs 3.0 2.8 2.6 2.6 2.6


Tier I 10.0 10.8 8.3 8.1 8.1

Tier II 4.5 3.8 3.0 2.9 2.8

Total CAR 14.5 14.7 11.3 11.1 10.9

Asset Quality (%)

Gross NPA 1.4 1.5 2.1 2.2 2.2

Net NPA 0.3 0.5 0.8 0.7 0.6



Slippage 0.9 1.3 1.6 1.3 1.2

Credit‐cost 0.5 0.6 0.9 0.8 0.7

Return (%)

ROE 23.5 20.7 17.5 19.3 19.7

ROA 1.3 1.2 1.0 1.1 1.1

Per share (Rs)

EPS 108.0 121.4 124.1 157.1 189.8

BV 534.4 666.3 750.0 881.4 1042.0

ABV 536.0 649.5 701.9 829.6 984.9

Valuation (x)

P/E 8.1 7.2 7.1 5.6 4.6

P/BV 1.6 1.3 1.2 1.0 0.8

P/ABV 1.6 1.3 1.2 1.1 0.9



Bank of India

Bloomberg: BOI INReuters: BOI.BO BUY


India Research

COMPANY UPDATE

Recommendation

CMP: Rs385

Target Price: Rs465

Upside (%) 21%




Beta 1.1




Absolute 24.2 26.9 27.6 12.2

Rel. to Sensex 20.0 18.8 3.1 9.1

Performance

Source: Bloomberg



Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

250

300

350

400

450

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) Bank of India (RHS)

‐

0.50

1.00

1.50

2.00

2.50

Feb‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

Aug‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

(x)

Pressure on Asset Quality to Ease, NIMs Set

to Improve; Maintain BUY

Bank of India (BoI) is currently trading at 20% discount to its five year

average valuation. Stock has underperformed the Bankex by 13% over last

one year reflecting pressure on asset quality. However, with the expected

improvement in macro conditions, such huge discount to its peers and to its

own average valuation seems to be unjustified.

Pressure on Asset Quality to Ease: After witnessing improving trend in

H2FY12, Bank of India’s asset quality has shown stress in H1FY13. As per

our recent interaction with BoI’s Management coupled with expected

improvement in economy and likely cut in interest rates, we believe that the

pressure on asset quality would ease from now onwards. Unlike its peers,

Bank of India has relatively lesser exposure to relatively vulnerable sectors

i.e. infrastructure, metals, mining and textiles etc.

NIMs – Set to Improve: Bank of India’s NIMs suffered by over 50 bps over

last three years. We expect the Bank’s NIMs to improve from now onwards

backed by lower proportion of high cost deposits, stable CASA and interest

recognized on recovered NPAs.

RoE Expansion – To Drive Valuation: Bank of India’s average RoE for

FY10‐12 has declined to 14.2% as against 23.3% for FY07‐09 on account of

compression in NIMs and rise in credit cost. We expect the Bank’s RoE

would improve to 18.2%, would lead to improvement in valuations.

Outlook & Valuation


1.0x & 0.8x P/ABV FY14E & FY15E, respectively. Based on 20% discount to

its historical mean valuation implying 1.0x P/ABV FY15E, we reiterate our

“BUY” recommendation on Bank of India with upwardly revised target

price of Rs. 465 per share (from Rs. 395 earlier).

Key Financials




PAT 24,887 26,775 32,790 46,528 52,933

EPS (Rs) 45.5 46.6 57.1 81.0 92.1

ABV (Rs) 290.4 310.7 330.4 394.9 463.0

P/E (x) 8.5 8.3 6.8 4.8 4.2

P/ABV (x) 1.3 1.2 1.1 1.0 0.8

Gross NPA (%) 2.2 2.3 3.2 2.9 2.8

Net NPA (%) 0.9 1.5 1.8 1.6 1.4

ROE (%) 15.8 14.0 14.7 18.2 17.9

ROA (%) 0.8 0.7 0.8 1.0 0.9


24

January 16, 2013

Bank of India



Interest Income 217,517 284,807 323,871 360,924 401,582



Fees 11,811 12,715 12,715 15,258 18,310

Other Income 11,389 16,409 20,147 20,644 23,266

Net Revenue 101,307 112,259 127,414 145,877 169,618


‐Employee Exp 34,754 30,534 30,251 34,383 39,199

‐Other Exp 15,929 18,873 22,648 28,310 35,387




Provisions 18,888 31,165 35,079 26,645 30,745


‐Investment Depreciation 1,369 4,369 ‐1,422 26 ‐135

‐Other Provisions 5,480 3,760 2,000 2,000 2,000

PBT 34,954 35,775 43,145 62,876 71,531

Taxes 10,067 9,000 10,355 16,348 18,598

PAT 24,887 26,775 32,790 46,528 52,933




Equity Capital 5,472 5,745 5,745 5,745 5,745



Deposits 2,988,858 3,182,160 3,723,127 4,356,059 5,096,589


‐Saving deposits 590,968 668,446 749,591 876,177 1,024,283

‐Term deposit 2,229,182 2,334,105 2,739,830 3,182,883 3,701,254

Borrowings 220,214 321,142 388,019 434,618 489,139




Cash/Equivalent 373,101 347,112 430,218 495,805 572,542

Advances 2,130,962 2,488,333 2,921,107 3,427,452 4,019,876

Investments 858,724 867,536 986,549 1,125,794 1,288,710

Fixed Assets 24,807 27,716 29,716 31,716 33,716

Other assets 124,132 114,657 126,123 138,735 152,608

Total assets 3,511,726 3,845,354 4,493,712 5,219,502 6,067,453


25

January 16, 2013

Bank of India

Exhibit 3: Ratios


Growth (%)

NII growth 35.7 6.4 13.7 16.3 16.4


PAT growth 42.9 7.6 22.5 41.9 13.8

Business (%)

Deposit growth 30.1 6.5 17.0 17.0 17.0

Advance growth 26.5 16.8 17.4 17.3 17.3

Business growth 28.6 10.8 17.2 17.1 17.1

CD 71.3 78.2 78.5 78.7 78.9

CASA 25.4 26.7 26.4 26.9 27.4


Cost‐to‐income 50.0 44.0 41.5 43.0 44.0

Cost‐to‐assets 1.8 1.5 1.4 1.4 1.4






Spreads (%)



Cost of deposits 4.6 5.8 5.8 5.4 5.0

Yield on assets 7.7 8.5 8.4 8.0 7.7

Cost of funds 4.7 5.8 5.8 5.5 5.1

NIMs 2.8 2.5 2.5 2.5 2.5


Tier I 8.3 8.6 8.4 8.5 8.4

Tier II 3.8 3.4 3.8 3.8 3.7

Total CAR 12.2 12.0 12.2 12.2 12.2

Asset Quality (%)

Gross NPA 2.2 2.3 3.2 2.9 2.8

Net NPA 0.9 1.5 1.8 1.6 1.4



Slippage 1.5 2.3 2.8 1.8 1.8

Credit‐cost 0.6 0.9 1.2 0.7 0.7

Return (%)

ROE 15.8 14.0 14.7 18.2 17.9

ROA 0.8 0.7 0.8 1.0 0.9

Per share (Rs)

EPS 45.5 46.6 57.1 81.0 92.1

BV 316.0 364.9 410.6 478.0 553.2

ABV 290.4 310.7 330.4 394.9 463.0

Valuation (x)

P/E 8.5 8.3 6.8 4.8 4.2

P/BV 1.2 1.1 0.9 0.8 0.7

P/ABV 1.3 1.2 1.2 1.0 0.8



Canara Bank

Bloomberg: CBK INReuters: CBK.BO HOLD


India Research

COMPANY UPDATE

Recommendation

CMP: Rs523

Target Price: Rs570

Upside (%) 9%




Beta 1.1




Absolute 13.0 21.4 28.2 5.3

Rel. to Sensex 9.2 13.7 3.6 2.3

Performance

Source: Bloomberg



Analysts Contact

Paresh Jain

022 6184 4324

[email protected]


022‐6184 4329

[email protected]

300350400450500550600

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) Canara Bank (RHS)

0.0

1.0

2.0

Apr‐07

Aug‐07

Dec‐07

Apr‐08

Aug‐08

Dec‐08

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Aug‐12

Dec‐12

1yr fwd P/Adj BV Mean + Std Dev

Mean ‐ Std Dev Mean

(x)

Business Growth to Gain Momentum,

Pressure on Asset Quality to Ease; Upgrade to

HOLD

Canara Bank is currently trading at 8% discount to mean valuation, while the

stock has underperformed the Bankex by 19% over last one year reflecting

weak balance sheet growth and concerns over asset quality.

Business Growth to Gain Momentum from H2FY13: Canara Bank’s

business growth has been under severe pressure since FY12. The Bank’s

credit has slowed down with 600 bps growth below system. Its C‐D ratio also

has declined by 700 bps since FY12. We expect business growth to gain

momentum from H2FY13 onwards on the back of lower base. However, the

overall growth in Bank’s loan book will remain muted for FY13 at 11%.

NIMs – Set to Improve The Bank’s NIM in H1FY13 declined by 15bps as

against FY12, partially owing to increase in cost of funds and decline in C‐D

ratio. We expect the Bank’s margin would improve in H2FY13 driven by rise

in CD ratio and reduction in cost of deposits.

Pressure on Asset Quality – Expected to Ease: Canara Bank’s NPAs have

shown deterioration in H1FY12. Though the Bank’s slippage ratio has

increased to 3% in H1FY13, its asset quality remains better than some of its

peers. The Bank’s restructured loan book stood at 7.9% of advances, and we

expect its asset quality to improve from now onwards.

Outlook & Valuation



historical mean valuation implying 0.9x P/ABV FY15E, we have upgraded

our recommendation on Canara Bank to “HOLD” from “SELL” with

upwardly revised target price of Rs. 570 per share (from Rs. 410 earlier).

Key Financials


Net Interest Income 78,233 76,893 78,929 97,872 119,857

Operating profit 58,707 56,195 52,549 67,284 83,122

PAT 40,259 32,827 32,309 41,965 48,959

EPS (Rs) 97.8 74.1 72.9 94.7 110.5

ABV (Rs) 369.7 414.6 458.1 535.3 627.5

P/E (x) 5.3 7.1 7.2 5.5 4.7

P/ABV (x) 1.4 1.3 1.1 1.0 0.8

Gross NPA (%) 1.5 1.7 2.2 2.0 2.0

Net NPA (%) 1.1 1.5 1.7 1.5 1.3

ROE (%) 26.4 17.0 14.7 16.8 16.9

ROA (%) 1.3 0.9 0.8 0.9 0.9


27

January 16, 2013

Canara Bank



Interest Income 230,640 308,506 337,663 361,605 413,674



Fees 7,558 7,969 8,350 9,345 11,111

Other Income 19,472 21,307 20,995 25,464 29,069

Net Revenue 105,263 106,169 108,274 132,681 160,037


‐Employee Exp 29,548 29,731 32,231 37,677 44,195

‐Other Exp 14,645 17,007 19,495 22,870 26,930



Pre‐Provision Profits 61,070 59,432 56,549 72,134 88,912

Provisions 10,811 18,605 16,240 19,669 26,453


‐Investment Depreciation 426 1,539 (3,500) (800) 1,124


PBT 50,259 40,827 40,309 52,465 62,459

Taxes 10,000 8,000 8,000 10,500 13,500

PAT 40,259 32,827 32,309 41,965 48,959




Equity Capital 4,430 4,430 4,430 4,430 4,430



Deposits 2,934,366 3,270,537 3,675,414 4,317,970 5,171,970

Current deposits 245,000 148,185 170,455 203,011 267,315

Saving deposits 586,171 647,922 752,534 922,534 1,122,534

Term deposit 2,108,555 2,474,430 2,752,426 3,192,426 3,782,122

Borrowings 142,616 155,254 179,445 206,172 247,172




Cash/Equivalent 307,081 281,794 352,290 429,509 515,019

Advances 2,112,683 2,324,898 2,559,188 3,010,189 3,609,188

Investments 836,360 1,020,574 1,204,910 1,434,910 1,734,910

Fixed Assets 28,444 28,575 30,454 34,545 38,545

Other assets 74,880 85,760 92,734 101,752 117,752

Total assets 3,359,449 3,741,602 4,239,576 5,010,905 6,015,413


28

January 16, 2013

Canara Bank

Exhibit 3: Ratios


Growth (%)

NII growth 37.7 (1.7) 2.6 24.0 22.5

Pre‐provision profit growth 20.7 (2.7) (4.9) 27.6 23.3

PAT growth 33.2 (18.5) (1.6) 29.9 16.7

Business (%)

Deposit growth 25.1 11.5 12.4 17.5 19.8

Advance growth 24.8 10.0 10.1 17.6 19.9

Business growth 24.9 10.9 11.4 17.5 19.8

CD 72.0 71.1 69.6 69.7 69.8

CASA 28.1 24.3 25.1 26.1 26.9


Cost‐to‐income 42.0 44.0 47.8 45.6 44.4

Cost‐to‐assets 1.5 1.3 1.3 1.3 1.3


Business per branch 1,549.6 1,554.3 1,578.4 1,698.3 1,874.3




Spreads (%)



Cost of deposits 5.4 7.1 7.1 6.2 5.9

Yield on assets 7.9 9.0 8.7 8.0 7.7

Cost of funds 5.5 7.0 7.0 6.2 5.8

NIMs 2.7 2.2 2.0 2.2 2.2


Tier I 10.9 10.4 9.8 9.5 9.1

Tier II 4.5 3.4 3.2 3.1 2.8

Total CAR 15.4 13.8 13.0 12.7 12.0

Asset Quality (%)

Gross NPA 1.5 1.7 2.2 2.0 2.0

Net NPA 1.1 1.5 1.7 1.5 1.3



Slippage 1.8 2.1 2.3 1.7 1.7

Credit‐cost 0.5 0.6 0.7 0.6 0.6

Return (%)

ROE 26.4 17.0 14.7 16.8 16.9

ROA 1.3 0.9 0.8 0.9 0.9

Per share (Rs)

EPS 97.8 74.1 72.9 94.7 110.5

BV 405.0 465.6 525.1 605.3 700.5

ABV 369.7 414.6 458.1 535.3 627.5

Valuation (x)

P/E 5.3 7.1 7.2 5.5 4.7

P/BV 1.3 1.1 1.0 0.9 0.7

P/ABV 1.4 1.3 1.1 1.0 0.8



City Union Bank

Bloomberg: CUBK INReuters: CTBK.BO HOLD


India Research

COMPANY UPDATE

Recommendation

CMP: Rs61

Target Price: Rs65

Upside (%) 7%

Stock Information Market Cap. (Rs bn / US$ mn) 31/568



Beta 0.8




Absolute 7.5 20.1 63.3 8.4

Rel. to Sensex 3.9 12.5 32.0 5.4

Performance

Source: Bloomberg



Analysts Contact

Paresh Jain

022 6184 4324

[email protected]


022‐6184 4329

[email protected]

30

40

50

60

70

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) City Union Bank (RHS)

0.0 0.5 1.0 1.5 2.0 2.5 3.0

Apr‐07

Aug‐07

Dec‐07

Apr‐08

Aug‐08

Dec‐08

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Aug‐12

Dec‐12



(x)

Positives Priced‐in; Maintain HOLD

City Union Bank (CUB) is currently trading at 35% premium to its five year

average valuation, while the stock has outperformed the Bankex by 19% over

last one year reflecting better than the industry growth, healthy NIM and

strong asset quality. The Bank has one of the best return ratios amongst its

peers.

Business Growth – Outperformance to Continue: City Union Bank’s

business growth has surpassed the industry by a significant margin, while

we expect such outperformance to continue, going ahead. The Bank does

majority of its lending to MSMEs, wholesale and retail traders, which is its

niche segment. The Bank’s overall lending book mainly constitutes of high‐

yielding working capital loans (60%) and rest of term loans (40%).

NIMs – Continue to Remain Healthy: City Union Bank has been able to

maintain its NIMs in excess of 3.2% in H1FY13. Though the Bank expects

marginal reduction in yield on advance, it would get offset by reduction in

cost of deposits. We expect the Bank to continue to maintain its NIM ~ 3.2%

in H2FY13.

Asset Quality – to Remain under Control: City Union Bank’s asset quality

continued to show resilience in a deteriorating economic environment.

However, we believe that it would be difficult for the Bank to report further

improvement in its asset quality. Thus, considering marginally higher

slippage ratio, we expect the Bank’s NPA ratio would increase marginally in

FY13. Meanwhile, the Bank has maintained its restructured loan book at 3.2%

which is lesser than peers.

Outlook & Valuation

At CMP, the stock trades at 7.4x & 5.9x FY14E & FY15E earnings, and at 1.6x

& 1.3x P/ABV FY14E & FY15E, respectively. Based on 20% premium to its

mean valuation implying 1.45x P/ABV FY15E, we reiterate our “HOLD”

recommendation on City Union Bank with unrevised target price of Rs. 65

per share.

Key Financials




PAT 2,151 2,803 3,509 4,421 5,489

EPS (Rs) 5.4 6.9 6.5 8.2 10.2

ABV (Rs) 24.0 29.5 31.7 37.7 45.5

P/E (x) 11.3 8.8 9.3 7.4 5.9

P/ABV (x) 2.5 2.1 1.9 1.6 1.3

Gross NPA (%) 1.2 1.0 1.3 1.7 1.7

Net NPA (%) 0.5 0.4 0.6 0.7 0.6

ROE (%) 23.5 24.9 23.2 22.6 23.4

ROA (%) 1.6 1.7 1.7 1.7 1.7


30

January 16, 2013

City Union Bank



Interest Income 12,184 16,968 21,773 25,701 32,131



Fees 303 345 470 589 722

Other Income 1,271 1,726 2,140 2,657 2,997

Net Revenue 5,774 7,069 8,751 10,970 13,618


‐Employee Exp 1,016 1,223 1,431 1,746 2,130

‐Other Exp 1,148 1,575 2,066 2,590 3,239


Investment Profit 66 78 295 402 512


Provisions 790 838 841 1,108 1,388

‐Loan Loss Provisions 673 570 662 960 1,097

‐Investment Depreciation 76 74 (16) (100) 84

‐Other Provisions 41 194 195 248 207

PBT 2,821 3,433 4,413 5,526 6,861

Taxes 670 630 905 1,105 1,372

PAT 2,151 2,803 3,509 4,421 5,489



Y/E Mar (Rs mn) FY11 FY12 FY13E FY14E FY15E

Equity Capital 405 408 539 539 539



Deposits 129,143 163,408 203,808 258,130 326,012


‐Saving deposits 14,407 17,685 22,283 28,967 37,078

‐Term deposit 103,859 133,692 166,847 210,227 264,886

Borrowings 1,862 3,487 5,030 6,400 7,600

‐Sub ordinate debt 400 400 850 1,100 1,100


Total liabilities 145,915 183,507 232,109 292,138 366,887

Cash/Equivalent 12,863 11,361 13,125 15,578 18,378

Advances 92,555 121,375 155,578 200,696 256,890

Investments 36,162 45,862 57,250 69,253 84,224

Fixed Assets 685 977 1,045 1,245 1,545

Other assets 3,650 3,932 5,111 5,367 5,850

Total assets 145,915 183,507 232,109 292,138 366,887


31

January 16, 2013

City Union Bank

Exhibit 3: Ratios


Growth (%)

NII growth 51.0 19.0 22.9 25.8 28.2


PAT growth 40.7 30.3 25.2 26.0 24.2

Business (%)

Deposit growth 25.6 26.5 24.7 26.7 26.3

Advance growth 35.4 31.1 28.2 29.0 28.0

Business growth 29.5 28.5 26.2 27.7 27.0

CD 71.7 74.3 76.3 77.7 78.8

CASA 19.6 18.2 18.1 18.6 18.7


Cost‐to‐income 37.5 39.6 40.0 39.5 39.4

Cost‐to‐assets 1.7 1.7 1.7 1.7 1.6






Spreads (%)



Cost of deposits 6.7 8.0 8.3 7.6 7.4

Yield on assets 1.6 1.7 1.7 1.7 1.7

Cost of funds 6.8 8.0 8.3 7.6 7.4

NIMs 3.3 3.1 3.0 3.0 3.1


Tier I 12.8 11.7 10.8 10.2 9.7

Tier II 0.9 0.9 0.9 1.0 0.8

Total CAR 13.7 12.6 11.8 11.1 10.5

Asset Quality (%)

Gross NPA 1.2 1.0 1.3 1.5 1.5

Net NPA 0.5 0.4 0.6 0.7 0.6



Slippage 1.5 1.3 1.6 1.4 1.1

Credit‐cost 0.8 0.5 0.5 0.5 0.5

Return (%)

ROE 23.5 24.9 23.2 22.6 23.4

ROA 1.6 1.7 1.7 1.7 1.7

Per share (Rs.)

EPS 5.4 6.9 6.5 8.2 10.2

BV 24.9 30.5 33.0 39.5 47.6

ABV 24.0 29.5 31.7 37.7 45.5

Valuation(x)

P/E 11.3 8.8 9.3 7.4 5.9

P/BV 2.4 2.0 1.8 1.5 1.3

P/ABV 2.5 2.1 1.9 1.6 1.3



HDFC Bank

Bloomberg: HDFCB INReuters: HDBK.BO HOLD


India Research

COMPANY UPDATE

Recommendation

CMP: Rs668

Target Price: Rs690

Upside (%) 3%

Stock Information Market Cap. (Rs bn / US$ mn) 1,583/28,980


3m ADV (Rs mn /US$ mn) 1,606/29.4

Beta 1.0


Share outstanding (mn) 2,368


Absolute (3) 5.4 42.3 (1.5)

Rel. to Sensex (6.2) (1.3) 15.0 (4.3)

Performance

Source: Bloomberg



Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

400

500

600

700

800

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) HDFC Bank (RHS)

‐

2.00

4.00

6.00

Feb‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

Aug‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

(x)

Superior Asset Quality, Earning Consistency;

Maintain HOLD

HDFC Bank is currently trading at 15% premium to its five year average

valuation, while the stock has outperformed the Bankex by 3% over last one

year on account of its superior asset quality and earning consistency.

Asset Quality at its best; Credit Cost Expected to be Higher: HDFC Bank’s

asset quality has shown tremendous resilience in last 2‐3 years, while the

Bank’s slippages have declined to 1% for FY12, which is even better than the

reasonable expectations of its Management. The Bank’s Gross NPA remains

stable at 1% with no major restructured asset. We believe that it would be very

difficult for the Bank to further improve on this front, given its composition of

its loan book. Hence, we factor higher credit cost going ahead, assuming it

does not heavily utilizes its floating provision.

Sustaining Business Momentum: HDFC Bank’s credit growth remains strong

and it continues to grow 4‐5% above the industry. However, the growth has

off late come more from the retail segment, whereas corporate segment has

relatively slowed down. The Bank’s CASA – which used to be over 50% – has

declined to ~46% in Q2FY13.

Best‐in‐Class NIMs: Despite difficult conditions, backed by its strong deposit

franchise, the Bank has been able to maintain the NIMs (calculated) of 4.5%,

which is best in the industry. Its cost of funds is one of the lowest at 5.4%. The

Bank’s Management has guided to maintain its NIMs at current levels. Despite

decline in CASA, the Bank has been able to maintain its NIMs on the back of

shift in portfolio mix from corporate to retail.

Outlook & Valuation



valuation implying 3.4x P/ABV FY15E, we reiterate our “HOLD”

recommendation on HDFC Bank with upwardly revised target price of Rs. 690

per share (from Rs. 630 earlier).

Key Financials




PAT 39,264 51,671 65,467 74,682 85,764

EPS (Rs) 16.9 22.0 27.9 31.8 36.5

ABV (Rs) 111.0 132.1 154.9 177.3 202.5

P/E (x) 39.5 30.3 23.9 21.0 18.2

P/ABV (x) 6.0 5.0 4.3 3.8 3.3

Gross NPA (%) 1.0 1.0 1.0 1.1 1.2

Net NPA (%) 0.2 0.2 0.2 0.2 0.2

ROE (%) 16.7 18.7 20.1 19.6 19.4

ROA (%) 1.6 1.7 1.8 1.7 1.7


33

January 16, 2013

HDFC Bank



Interest Income 199,282 272,863 330,893 378,755 432,043



Fees 35,967 42,755 50,451 59,532 70,248

Other Income 7,919 11,626 13,431 16,165 19,451

Net Revenue 149,317 177,348 213,527 249,777 290,633


‐Employee Exp 28,360 33,999 40,391 48,857 59,097

‐Other Exp 43,169 51,900 62,799 74,103 87,441


Investment Profit ‐534 ‐1,944 1,024 1,148 1,310


Provisions 19,067 14,373 15,086 18,139 19,281


‐Provisions for investment 0 934 398 447 528

‐Other Provisions 11,437 5,418 5,006 ‐2,994 ‐2,994

PBT 58,187 75,132 96,275 109,826 126,124

Taxes 18,923 23,461 30,808 35,144 40,360

PAT 39,264 51,671 65,467 74,682 85,764




Equity Capital 4,652 4,693 4,693 4,693 4,693



Deposits 2,085,864 2,467,064 2,960,477 3,552,572 4,263,087


‐Saving deposits 634,478 739,980 912,674 1,149,513 1,433,718

‐Term deposit 986,781 1,273,006 1,544,383 1,781,221 2,065,427

Borrowings 143,941 238,466 245,374 283,268 328,741




Cash/Equivalent 296,689 209,377 257,095 324,594 405,592

Advances 1,599,827 1,954,200 2,348,930 2,822,607 3,391,018

Investments 709,294 974,829 1,073,512 1,221,535 1,399,164

Fixed Assets 21,706 23,472 25,722 27,972 30,222

Other assets 146,010 217,217 249,800 287,269 330,360

Total assets 2,773,526 3,379,095 3,955,058 4,683,977 5,556,356


34

January 16, 2013

HDFC Bank

Exhibit 3: Ratios


Growth (%)

NII growth 25.7 16.6 21.7 16.3 15.4


PAT growth 33.2 31.6 26.7 14.1 14.8

Business (%)

Deposit growth 24.6 18.3 20.0 20.0 20.0

Advance growth 27.1 22.2 20.2 20.2 20.1

Business growth 25.7 20.0 20.1 20.1 20.1

CD 76.7 79.2 79.3 79.5 79.5

CASA 52.7 48.4 47.8 49.9 51.6


Cost‐to‐income 47.9 48.4 48.3 49.2 50.4

Cost‐to‐assets 3.3 3.2 3.1 3.2 3.2






Spreads (%)



Cost of deposits 4.3 5.6 5.8 5.6 5.2

Yield on assets 9.1 10.1 10.1 9.8 9.4

Cost of funds 4.1 5.4 5.4 5.2 4.9

NIMs 4.8 4.5 4.5 4.5 4.4


Tier I 12.2 11.6 11.2 11.0 10.8

Tier II 4.0 4.9 4.3 4.3 4.3

Total CAR 16.2 16.5 15.5 15.3 15.0

Asset Quality (%)

Gross NPA 1.0 1.0 1.0 1.1 1.2

Net NPA 0.2 0.2 0.2 0.2 0.2


Slippage 1.0 0.9 0.8 1.1 1.0

Credit‐cost 0.5 0.4 0.4 0.7 0.6

Return (%)

ROE 16.7 18.7 20.1 19.6 19.4

ROA 1.6 1.7 1.8 1.7 1.7

Per share (Rs)

EPS 16.9 22.0 27.9 31.8 36.5

BV 109.1 127.5 149.6 174.4 202.7

ABV 111.0 132.1 154.9 177.3 202.5

Valuation (x)

P/E 39.5 30.3 23.9 21.0 18.2

P/BV 6.1 5.2 4.5 3.8 3.3

P/ABV 6.0 5.0 4.3 3.8 3.3



ICICI Bank

Bloomberg: ICICIBC INReuters: ICBK.BO BUY


India Research

COMPANY UPDATE

Recommendation

CMP: Rs1,204


Upside (%) 26%



3m ADV (Rs mn /US$ mn) 3,039/55.7

Beta 1.3


Share outstanding (mn) 1,150


Absolute 6.0 14.3 52.6 5.8

Rel. to Sensex 2.5 7.0 23.3 2.8

Performance

Source: Bloomberg



Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

500

700

900

1,100

1,300

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) ICICI Bank (RHS)

‐

1.00

2.00

3.00

4.00

Feb‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

Aug‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

(x)

Improved Asset Quality, NIMs to Sustain at

Current Levels; Maintain BUY

ICICI Bank is currently trading at 10% premium to its five year average,

whereas it is at 20% discount to the stock’s +1SD valuation. Meanwhile, the

stock has also outperformed the Bankex by 8% over last one year on account of

its improving fundamentals. HDFC Bank is trading at 130% premium to ICICI

Bank as against historical average of 100%.

Substantial Improvement in Asset Quality: There has been substantial

improvement in the asset quality of the Bank with Gross NPA improving over

160 bps in last nine quarters vis‐à‐vis industry trend of further deterioration. Its

restructured book at just 1.5% of loan book seems to be at comfortable zone. As

per the Bank’s Management, the credit cost – including restructuring related

provisioning – would remain within 0.75% of loan book in FY13E.

Revival in Balance‐sheet Growth: Picking up the pace, the Bank’s balance‐

sheet growth has started growing marginally above the industry compared to

flattish numbers reported last year. Though the Bank’s retail credit has shown

the initial signs of revival, it has shifted significantly away from the unsecured

retail credit. It has now built a strong CASA base of 40.7% in Q2FY13 from

28.7% in FY09.

Improved NIMs – To Sustain at Current Levels: NIMs for the bank has

improved by 40bps over last three years to 3%, with push from domestic as

well as international segment. Management has guided stable NIMs ahead. We

believe with CASA at comfortable levels, it should not be very difficult for the

Bank to maintain the NIMs at current levels.

Outlook & Valuation

At the CMP, the stock – after adjusting for subsidiaries – trades at 13.6x & 11.2x

FY14E & FY15E earnings, and at 1.7x & 1.5x P/ABV FY14E & FY15E,

respectively. Based on 15% premium to historical mean valuation gap to HDFC

Bank implying 2x P/ABV FY15E for parent & Rs. 200 for its stake in

subsidiaries, we reiterate our “BUY” recommendation on ICICI Bank with

upwardly revised target price of Rs. 1,520 per share (from Rs. 1,155 earlier).

Key Financials




PAT 51,514 64,653 77,909 85,748 103,659

EPS (Rs) 44.7 56.1 67.6 74.4 89.9

ABV (Rs) 457.4 498.5 550.8 602.1 660.0

P/E (x) 22.5 18.0 14.9 13.6 11.2

P/ABV (x) 2.2 2.0 1.8 1.7 1.5

Gross NPA (%) 4.5 3.6 3.4 2.8 2.6

Net NPA (%) 1.1 0.7 0.7 0.6 0.6

ROE (%) 9.7 11.3 12.5 12.5 13.8

ROA (%) 1.3 1.5 1.5 1.5 1.6

Source: Company, Karvy Institutional Research, Valuation after adjusting for subsidiaries

36

January 16, 2013

ICICI Bank



Interest Income 259,741 335,427 393,852 432,507 477,990



Fees 55,146 54,351 57,069 65,629 75,473

Other Income 13,355 21,433 20,643 21,750 22,967

Net Revenue 158,670 183,126 216,570 242,684 276,310


‐Employee Exp 28,169 35,153 38,007 43,100 48,876

‐Other Exp 38,003 43,351 52,838 62,408 66,252


Investment Profit ‐2,022 ‐756 2,470 3,544 5,805


Provisions 22,899 15,892 22,912 26,388 28,775


‐Provisions for investment 2,038 4,132 ‐850 895 1,056


PBT 67,577 87,974 105,283 114,331 138,212

Taxes 16,063 23,321 27,374 28,583 34,553

PAT 51,514 64,653 77,909 85,748 103,659




Equity Capital 11,518 11,528 11,528 11,528 11,528



Deposits 2,256,021 2,555,000 2,963,800 3,556,560 4,267,872


‐Saving deposits 668,690 760,463 883,103 1,060,931 1,274,325

‐Term deposit 1,239,556 1,444,806 1,690,086 2,016,104 2,407,326

Borrowings 1,095,543 1,401,649 1,552,200 1,681,586 1,836,848




Cash/Equivalent 340,901 362,293 410,644 480,754 564,885

Advances 2,163,659 2,537,277 2,946,077 3,449,923 4,054,538

Investments 1,346,860 1,595,600 1,697,800 1,845,990 2,023,818

Fixed Assets 47,442 46,147 49,747 53,347 56,947

Other assets 163,475 195,154 224,427 258,091 296,805

Total assets 4,062,337 4,736,471 5,328,695 6,088,105 6,996,993


37

January 16, 2013

ICICI Bank

Exhibit 3: Ratios


Growth (%)

NII growth 11.1 19.0 29.4 11.8 14.5

Pre‐provision profit growth ‐7.0 14.8 23.4 9.8 18.7

PAT growth 28.0 25.5 20.5 10.1 20.9

Business (%)

Deposit growth 11.7 13.3 16.0 20.0 20.0

Advance growth 19.4 17.3 16.1 17.1 17.5

Business growth 15.3 15.2 16.1 18.6 18.8

CD 95.9 99.3 99.4 97.0 95.0

CASA 45.1 43.5 43.0 43.3 43.6


Cost‐to‐income 41.7 42.9 41.9 43.5 41.7

Cost‐to‐assets 1.9 2.0 2.0 2.0 1.9






Spreads (%)



Cost of deposits 4.7 5.9 6.1 5.8 5.5

Yield on assets 7.6 8.4 8.5 8.3 8.0

Cost of funds 5.1 6.0 5.8 5.5 5.2

NIMs 2.6 2.7 3.0 3.0 3.0


Tier I 13.2 12.7 12.5 11.9 11.4

Tier II 6.4 5.8 5.8 5.6 5.3

Total CAR 19.5 18.5 18.3 17.4 16.7

Asset Quality (%)

Gross NPA 4.5 3.6 3.4 2.8 2.6

Net NPA 1.1 0.7 0.7 0.6 0.6


Slippage 1.4 1.3 1.7 1.4 1.4

Credit‐cost 1.0 0.4 0.8 0.7 0.6

Return (%)

ROE 9.7 11.3 12.5 12.5 13.8

ROA 1.3 1.5 1.5 1.5 1.6

Per share (Rs)

EPS 44.7 56.1 67.6 74.4 89.9

BV 478.3 514.7 569.3 619.1 681.0

ABV 457.4 498.5 550.8 602.1 660.0

Valuation (x)*

P/E 22.5 18.0 14.9 13.6 11.2

P/BV 2.1 2.0 1.8 1.6 1.5

P/ABV 2.2 2.0 1.8 1.7 1.5

Source: Company, Karvy Institutional Research; Note: * After adjusting for subsidiaries


Indian Overseas Bank

Bloomberg: IOB INReuters: IOBK.BO SELL


India Research

COMPANY UPDATE

Recommendation

CMP: Rs92

Target Price: Rs96

Upside (%) 4%




Beta 1.0




Absolute 8.1 15.2 9.0 6.9

Rel. to Sensex 4.5 7.9 (11.9) 3.9

Performance

Source: Bloomberg



Analysts Contact

Paresh Jain

022 6184 4324

[email protected]


022‐6184 4329

[email protected]

60708090100110120

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS)

Indian Overseas Bank (RHS)

0.0

1.0

2.0

Apr‐07

Aug‐07

Dec‐07

Apr‐08

Aug‐08

Dec‐08

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Aug‐12

Dec‐12



(x)

Worst not yet over; Stock to Continue to Trade

at Discount to Peers; Maintain SELL

Indian Overseas Bank (IOB) is currently trading at 30% discount to its five

year average valuation, while the stock has underperformed the Bankex by

35% over last one year reflecting poor margins and continued pressure on

asset quality. As we do not expect asset quality to turn around soon, we

expect the stock to continue to trade at a discount to peers

Increased Slippage Ratio; No Significant Improvement in Asset Quality

Expected soon: The slippage ratio of Indian Overseas Bank has increased

significantly in H1FY13, while we expect similar pressure to continue further

even in H2FY13 too. The Bank’s Gross NPA & Net NPA ratios are currently

at two years high, with provision coverage ratio declining to 58.5%. We do

not expect any significant asset quality improvement before H2FY14. At the

same time, the Bank’s restructured loan book continues to remain elevated at

10%, providing further downside risks to asset quality.

Marginal Improvement in Margins: Indian Overseas Bank’s NIM continues

to remain depressed owing to rise in cost of deposits and decline in yield on

advances. We expect the Bank’s NIM to witness marginal improvement in

H2FY13E (on lower base) on the back of reduction in cost of funds.

Lower RoE to Suppress Valuation: We expect the Bank’s RoE to remain

below 12% throughout FY14 compared to the average of 18% in FY08‐12

period, owing to poor NIM and higher credit costs. Thus we believe that

lower RoE would keep the Bank’s valuations below its historical average.

Outlook & Valuation



its historical mean valuation implying 0.7x P/ABV FY15E, we reiterate our

“SELL” recommendation on Indian Overseas Bank with upwardly revised

target price of Rs. 96 per share (from Rs. 70 earlier).

Key Financials




PAT 10,725 10,501 10,464 13,606 16,551

EPS (Rs) 19.6 13.2 13.1 17.1 20.8

ABV (Rs) 117.5 116.0 110.4 126.9 138.1

P/E (x) 4.7 7.0 7.0 5.4 4.4

P/ABV (x) 0.8 0.8 0.8 0.7 0.7

Gross NPA (%) 2.7 2.7 3.9 3.8 3.6

Net NPA (%) 1.2 1.4 1.9 1.6 1.5

ROE (%) 14.8 11.1 9.4 11.4 12.8

ROA (%) 0.7 0.5 0.4 0.5 0.5


39

January 16, 2013




Interest Income 121,015 178,971 207,812 234,339 269,931



Fees 6,892 8,999 11,064 12,664 14,864

Other Income 5,359 7,812 8,769 10,450 11,905

Net Revenue 54,331 66,972 72,028 86,603 100,168


‐Employee Exp 17,411 20,830 24,126 27,984 33,023

‐Other Exp 8,314 10,801 12,270 15,020 17,820




Provisions 12,684 22,364 22,552 24,961 26,653


‐Investment Depreciation 12 1,716 950 1,054 1,313


PBT 15,922 12,977 13,080 18,639 22,672

Taxes 5,197 2,476 2,616 5,032 6,122

PAT 10,725 10,501 10,464 13,606 16,551




Equity Capital 6,187 7,970 7,970 7,970 7,970



Deposits 1,452,288 1,784,342 2,062,255 2,435,458 2,857,454


Saving deposits 320,556 348,620 388,552 487,552 587,542

Term deposit 1,013,675 1,312,849 1,547,511 1,801,714 2,101,716

Borrowings 193,554 236,138 283,856 320,928 395,928




Cash/Equivalent 120,187 162,611 168,109 205,269 242,469

Advances 1,118,330 1,407,244 1,672,910 1,993,251 2,363,251

Investments 486,105 555,659 644,145 736,145 886,145

Fixed Assets 16,811 17,440 18,542 21,542 24,542

Other assets 46,411 53,527 55,915 60,924 70,924

Total assets 1,787,843 2,196,482 2,559,622 3,017,131 3,587,332


40

January 16, 2013


Exhibit 3: Ratios


Growth (%)

NII growth 32.8 19.2 4.1 21.6 15.6


PAT growth 51.7 (2.1) (0.4) 30.0 21.6

Business (%)

Deposit growth 31.1 22.9 15.6 18.1 17.3

Advance growth 41.6 25.8 18.9 19.1 18.6

Business growth 35.4 24.2 17.0 18.6 17.9

CD 77.0 78.9 81.1 81.8 82.7

CASA 30.2 26.4 25.0 26.0 26.4


Cost‐to‐income 47.3 47.2 50.5 49.7 50.8

Cost‐to‐assets 1.1 1.0 1.0 1.0 1.0






Spreads (%)



Cost of deposits 5.3 6.9 7.3 6.8 6.6

Yield on funds 8.1 9.3 9.0 8.6 8.4

Cost of funds 5.4 6.9 7.0 6.6 6.5

NIMs 2.8 2.6 2.3 2.3 2.3


Tier I 8.2 7.6 7.1 6.5 6.0

Tier II 6.4 4.5 4.9 4.7 4.1

Total CAR 14.5 12.2 12.0 11.1 10.1

Asset Quality (%)

Gross NPA 2.7 2.7 3.9 3.8 3.6

Net NPA 1.2 1.4 1.9 1.6 1.5



Slippage 2.2 2.5 2.9 2.1 2.2

Credit cost 1.1 1.1 1.1 1.0 0.9

Return (%)

ROE 14.8 11.1 9.4 11.4 12.8

ROA 0.7 0.5 0.4 0.5 0.5

Per share (Rs)

EPS 19.6 13.2 13.1 17.1 20.8

BV 132.0 135.3 143.0 155.4 170.3

ABV 117.5 116.0 110.4 126.9 138.1

Valuation(x)

P/E 4.7 7.0 7.0 5.4 4.4

P/BV 0.7 0.7 0.6 0.6 0.5

P/ABV 0.8 0.8 0.8 0.7 0.7



ING Vysya Bank

Bloomberg: VYSB INReuters: VYSB.BO HOLD


India Research

COMPANY UPDATE

Recommendation

CMP: Rs581

Target Price: Rs625

Upside (%) 8%




Beta 1.0




Absolute 16.3 33.1 85.5 9.8

Rel. to Sensex 12.4 24.6 50.0 6.7

Performance

Source: Bloomberg



Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

250

350

450

550

650

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) ING Vysya Bank (RHS)

‐

2.00

4.00

Feb‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

Steady Performer, but Positives Priced‐in;

Downgrade to HOLD

ING Vysya Bank is currently trading at 25% premium to its five year average


year on account of its superior asset quality, earning consistency and

improving efficiency.

Strong Credit Growth with Diversified Loan Book Improving sharply from

moderate growth, ING Vysya Bank’ credit growth has outpaced the industry

by 3‐5% in FY11 & FY12 especially after the appointment of new

management. Meanwhile, the Bank has also guided that such

outperformance to continue, going ahead.

Improving Asset Quality with Lowest Slippage, No Exposure to

Vulnerable Sector: The Bank’s asset quality has shown sharp improving

trends over the past two years compared to sharp deterioration reported by

its peers. The Bank has negligible exposure in any of the ailing sectors like

aviation, SEBs, realty and oil companies, etc. The Bank mainly focuses on the

working capital requirements of corporates, where it has a better control on

its cash‐flow. Its gross NPA of only ~0.3% in SME segment is remarkable.

Operational Leverage to Boost RoA: The Bank has so far been able to

successfully manage its cost by bringing down cost‐to‐income ratio to 59.5%

in FY12 from 83.4% in FY06. The proportion of unionized staff has declined

from 4/5th to 1/3rd of total employee base. As a long‐term strategy, the Bank

plans to bring down cost‐to‐income ratio close to 50% in next three years.

Outlook & Valuation

At the CMP, the stock trades at 12.3x & 10.2x FY14E & FY15E earnings, and

at 1.8x & 1.5x P/ABV FY14E & FY15E, respectively. Based on 20% premium to

its historical mean valuation implying 1.65x P/ABV FY15E, we downgrade

our recommendation on ING Vysya Bank to “HOLD” from “BUY” on the

back of the recent run up in the stock price, with upwardly revised target

price of Rs. 625 per share (from Rs. 495 earlier).

Key Financials




PAT 3,187 4,563 5,733 7,097 8,540

EPS (Rs) 26.3 30.4 38.2 47.3 56.9

ABV (Rs) 209.1 261.5 291.6 330.4 378.0

P/E (x) 22.1 19.1 15.2 12.3 10.2

P/ABV (x) 2.8 2.2 2.0 1.8 1.5

Gross NPA (%) 2.3 1.9 1.8 1.9 2.0

Net NPA (%) 0.4 0.2 0.2 0.3 0.3

ROE (%) 12.9 13.8 13.6 14.9 15.7

ROA (%) 0.9 1.1 1.1 1.2 1.2


42

January 16, 2013

ING Vysya Bank



Interest Income 26,941 38,568 45,881 51,849 58,369



Fees 4,189 4,689 5,158 6,086 7,182

Other Income 1,390 1,878 2,075 2,650 2,988

Net Revenue 15,645 18,650 21,997 25,876 30,080


‐Employee Exp 6,057 6,510 7,357 8,254 9,222

‐Other Exp 4,203 4,592 5,143 5,657 6,223




Provisions 1,518 1,140 1,333 2,274 2,912


‐Provisions for investment 54 (4) ‐ ‐ ‐

‐Other Provisions (254) 48 ‐ ‐ ‐

PBT 4,837 6,539 8,431 10,436 12,559

Taxes 1,650 1,976 2,698 3,340 4,019

PAT 3,187 4,563 5,733 7,097 8,540




Equity Capital 1,210 1,501 1,501 1,501 1,501



Deposits 301,942 351,954 418,825 502,590 603,108


‐Saving deposits 53,515 56,429 69,803 90,745 115,874

‐Term deposit 197,356 231,481 278,291 328,550 388,861

Borrowings 41,469 56,965 65,859 64,435 62,726




Cash/Equivalent 25,214 32,306 40,573 50,038 61,397

Advances 236,021 287,367 347,551 410,375 485,763

Investments 110,207 127,155 140,529 157,282 177,386

Fixed Assets 5,028 5,008 5,133 5,258 5,383

Other assets 13,669 18,169 20,894 24,029 27,633

Total assets 390,139 470,005 554,681 646,982 757,562


43

January 16, 2013

ING Vysya Bank

Exhibit 3: Ratios


Growth (%)

NII growth 21.3 20.0 22.2 16.1 16.2

Pre‐provision profit growth ‐1.0 20.8 27.2 30.2 21.7

PAT growth 31.6 43.2 25.6 23.8 20.3

Business (%)

Deposit growth 16.7 16.6 19.0 20.0 20.0

Advance growth 27.5 21.8 20.9 18.1 18.4

Business growth 21.2 18.8 19.9 19.1 19.3

CD 78.2 81.6 83.0 81.7 80.5

CASA 34.6 34.2 33.6 34.6 35.5


Cost‐to‐income 65.6 59.5 56.8 53.8 51.3

Cost‐to‐assets 3.1 2.8 2.7 2.5 2.4






Spreads (%)



Cost of deposits 4.8 6.6 6.7 6.4 6.0

Yield on assets 8.2 9.8 9.8 9.4 9.0

Cost of funds 5.0 6.7 6.6 6.3 5.9

NIMs 3.1 3.1 3.1 3.1 3.1


Tier I 9.4 11.2 9.9 9.7 9.4

Tier II 3.6 2.8 3.3 2.7 2.2

Total CAR 12.9 14.0 13.2 12.3 11.6

Asset Quality (%)

Gross NPA 2.3 1.9 1.8 1.9 2.0

Net NPA 0.4 0.2 0.2 0.3 0.3


Slippage 1.1 0.7 1.1 1.0 1.0

Credit‐cost 0.7 0.3 0.4 0.5 0.6

Return (%)

ROE 12.9 13.8 13.6 14.9 15.7

ROA 0.9 1.1 1.1 1.2 1.2

Per share (Rs)

EPS 26.3 30.4 38.2 47.3 56.9

BV 216.7 265.0 297.4 337.6 386.3

ABV 209.1 261.5 291.6 330.4 378.0

Valuation (x)

P/E 22.1 19.1 15.2 12.3 10.2

P/BV 2.7 2.2 2.0 1.7 1.5

P/ABV 2.8 2.2 2.0 1.8 1.5



Jammu & Kashmir Bank

Bloomberg: JKBK INReuters: JKBK.BO BUY


India Research

COMPANY UPDATE

Recommendation

CMP: Rs1,358


Upside (%) 15%




Beta 0.8




Absolute (0.2) 17.2 88.6 4.9

Rel. to Sensex (3.6) 9.7 52.5 2.0

Performance

Source: Bloomberg



Analysts Contact Hatim Broachwala, CFA

022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

6408401,0401,2401,4401,640

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) Jammu & Kashmir Bank

‐

0.50

1.00

1.50

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Aug‐12

Dec‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

(x)

Improving Fundamentals – Case for Rerating;

Maintain BUY

Jammu & Kashmir Bank (J&K Bank) is currently trading at 10% premium to

+1SD, while the stock has outperformed the Bankex by 40% over last one year

on account of improvement in business growth, improving margins and

superior asset quality.

Monopolistic Provincial Dominance: With 65% & 70% market share of

state’s total deposits and advances, respectively, J&K Bank continues to be a

dominant player in Jammu & Kashmir. Along with its monopolistic

positioning coupled with upward trajectory trend in GDP growth of the

state, the Bank is well‐placed to take the fullest advantage of the growth.

Business Momentum Keeps Growing: In the aftermath of new management

taking charge, the Bank’s business momentum has picked up considerably,

which is getting reflected in its credit growth and branch expansion. Its NIMs

is one of the highest amongst its peers, which is expected to rise further.

Best‐in‐Class Asset Quality: The Bank’s asset quality has shown sharp

improvement contrary to sharp deterioration reported by its peers owing to

its superior domain expertise along with improving economic environment

within the region.

Superior Return Ratios: J&K Bank enjoys one of the best RoE & RoA profile

compared to its peers, which has consistently improved over past few years

on the back of higher NIMs, operational efficiency and lower slippages

resulting in lower credit cost.

Outlook & Valuation


1.2x & 1.0x P/ABV FY14E & FY15E, respectively. Based on 20% premium to

its historical mean valuation implying 1.1x P/ABV FY15E and 84 for its stake

in MetLife (based on revised deal), we reiterate our “BUY” recommendation

on J&K Bank with upwardly revised target price of Rs. 1,560 per share (from

Rs. 1,500 earlier).

Key Financials




PAT 6,152 8,033 9,883 10,532 12,360

EPS (Rs) 126.8 165.6 203.8 217.2 254.8

ABV (Rs) 706.3 833.8 982.6 1148.3 1338.8

P/E (x) 10.7 8.2 6.6 6.2 5.3

P/ABV (x) 1.9 1.6 1.4 1.2 1.0

Gross NPA (%) 2.0 1.5 1.7 1.8 1.9

Net NPA (%) 0.2 0.1 0.3 0.2 0.2

ROE (%) 19.0 21.2 22.1 20.0 20.1

ROA (%) 1.3 1.5 1.5 1.4 1.4


45

January 16, 2013




Interest Income 37,131 48,356 58,260 66,324 76,314



Fees 1,272 1,291 1,446 1,706 2,013

Other Income 1,452 1,691 1,831 1,984 2,153

Net Revenue 18,160 21,366 25,607 29,694 35,137


‐Employee Exp 5,236 5,214 5,855 6,840 7,988

‐Other Exp 2,353 2,808 3,370 4,044 4,852




Provisions 2,151 1,692 2,189 3,685 4,477


‐Investment Depreciation 410 123 ‐15 ‐11 ‐13


PBT 9,344 12,011 14,862 15,838 18,587

Taxes 3,192 3,978 4,979 5,306 6,227

PAT 6,152 8,033 9,883 10,532 12,360




Equity Capital 485 485 485 485 485



Deposits 446,759 533,469 618,824 730,212 861,651


‐Saving deposits 127,268 159,807 181,146 220,132 266,135

‐Term deposit 265,892 316,318 374,359 438,965 515,199

Borrowings 11,047 12,409 15,738 20,082 25,208




Cash/Equivalent 35,488 44,539 51,053 59,296 69,022

Advances 261,936 330,774 403,326 498,006 609,728

Investments 196,958 216,243 229,046 245,755 265,470

Fixed Assets 3,938 4,203 4,953 5,703 6,453

Other assets 6,762 6,933 7,626 8,389 9,228

Total assets 505,082 602,692 696,004 817,148 959,902


46

January 16, 2013


Exhibit 3: Ratios


Growth

NII growth 37.9 19.1 21.5 16.4 19.1


PAT growth 20.1 30.6 23.0 6.6 17.4

Business (%)

Deposit growth 20.0 19.4 16.0 18.0 18.0

Advance growth 13.6 26.3 21.9 23.5 22.4

Business growth 17.5 21.9 18.3 20.2 19.8

CD 58.6 62.0 65.2 68.2 70.8

CASA 40.5 40.7 39.5 39.9 40.2


Cost‐to‐income 41.8 37.5 36.0 36.7 36.5

Cost‐to‐assets 1.8 1.6 1.5 1.5 1.5






Spreads (%)



Cost of deposits 5.1 5.9 6.0 5.8 5.5

Yield on assets 8.7 9.4 9.6 9.3 9.1

Cost of funds 5.0 5.8 5.9 5.7 5.5

NIMs 3.6 3.6 3.7 3.7 3.7


Tier I 11.3 11.1 10.7 10.6 10.6

Tier II 2.4 2.2 0.8 0.8 0.8

Total CAR 13.7 13.4 11.5 11.5 11.4

Asset Quality (%)

Gross NPA 2.0 1.5 1.7 1.8 1.9

Net NPA 0.2 0.1 0.3 0.2 0.2



Slippage 1.2 1.1 1.1 1.2 1.2

Credit‐cost 0.5 0.3 0.5 0.7 0.7

Return (%)

ROE 19.0 21.2 22.1 20.0 20.1

ROA 1.3 1.5 1.5 1.4 1.4

Per share (Rs)

EPS 126.8 165.6 203.8 217.2 254.8

BV 717.3 844.0 1003.9 1168.4 1361.8

ABV 706.3 833.8 982.6 1148.3 1338.8

Valuation (x)

P/E 10.7 8.2 6.6 6.2 5.3

P/BV 1.8 1.6 1.3 1.1 1.0

P/ABV 1.9 1.6 1.4 1.2 1.0



Karur Vysya Bank

Bloomberg: KVB INReuters: KARU.BO HOLD


India Research

COMPANY UPDATE

Recommendation

CMP: Rs556

Target Price: Rs610

Upside (%) 10%




Beta 0.7




Absolute 10.4 27.0 52.4 (1)

Rel. to Sensex 6.7 19.0 23.2 (3.8)

Performance

Source: Bloomberg



Analysts Contact Paresh Jain

022 6184 4324

[email protected]


022‐6184 4329

[email protected]

300350400450500550600

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) Karur Vysya Bank (RHS)

0.0

0.5

1.0

1.5

2.0

Apr‐07

Aug‐07

Dec‐07

Apr‐08

Aug‐08

Dec‐08

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Aug‐12

Dec‐12

1yr fwd P/Adj BV

Mean + Std Dev

(x)

Best in Class, but Positives Priced‐in;

Downgrade to HOLD

Karur Vysya Bank (KVB) is currently trading at 30% premium to its five year

average valuation, while the stock has outperformed the Bankex by 6% over

last one year reflecting strong growth prospects, better margin and superior

asset quality.

Healthy Growth in Business: The business growth of Karur Vysya Bank

continues to remain above industry growth rate. The Bank’s loan book grew

34% in FY12, while the overall banking industry grew by 18%. We expect the

Bank to continue its high growth momentum in FY12‐15E as well. The key

segments likely to contribute the credit growth of Karur Vysya Bank are:

SME, Agricultural & Personal loans.

NIMs – Expected to Remain Stable: We believe that Karur Vysya Bank’s

NIMs to remain stable in FY13E. Meanwhile, the decline in yield on advances

in H2FY13E is expected to get offset by decline in cost of funds.

Impeccable Asset Quality: Karur Vysya Bank’s asset quality continues to

show improvement with it Gross NPA declining to its lowest level in last

three years. We believe that the Bank’s slippages would marginally increase,

going forward, as it will be difficult for the Bank to improve the asset quality

further. The Bank is currently having a healthy provision coverage ratio of

75% with restructured asset at one of the lowest level amongst its peers at

2.8%.

Outlook & Valuation

At CMP, the stock trades at 7.7x & 6.3x FY14E & FY15E earnings, and at 1.6x

& 1.4x P/ABV FY14E & FY15E, respectively. Based on 20% premium to its

mean valuation implying 1.5x P/ABV FY15E, We downgrade our

recommendation on Karur Vysya Bank to “HOLD” from “BUY” given the

recent run‐up in the stock price, with upwardly revised target price of Rs. 610

per share (from Rs. 535 earlier),.

Key Financials

Y/ E Mar (Rs. mn) FY11 FY12 FY13E FY14E FY15E



PAT 4,156 5,017 6,034 7,697 9,465

EPS (Rs) 44.9 46.8 56.3 71.8 88.3

ABV (Rs) 222.7 246.8 287.4 341.2 408.3

P/E (x) 12.4 11.9 9.9 7.7 6.3

P/ABV (x) 2.5 2.3 1.9 1.6 1.4

Gross NPA (%) 1.3 1.3 1.3 1.4 1.6

Net NPA (%) 0.1 0.3 0.3 0.3 0.4

ROE (%) 22.3 20.8 20.6 22.5 23.1

ROA (%) 1.7 1.5 1.5 1.5 1.5


48

January 16, 2013

Karur Vysya Bank



Interest Income 22,177 32,704 43,561 51,562 62,793



Fees 1,825 2,274 2,880 3,490 4,290

Other Income 818 1,228 1,155 1,685 2,068

Net Revenue 10,312 12,673 15,719 20,206 24,674


‐Employee Exp 2,596 2,994 3,630 4,424 5,348

‐Other Exp 1,710 2,422 3,100 4,010 4,948




Provisions 393 938 255 1,175 1,613

‐Loan Loss Provisions 49 191 615 751 1,025

‐Investment Depreciation 193 413 (434) 312 452


PBT 5,613 6,319 8,734 10,597 12,765

Taxes 1,457 1,302 2,700 2,900 3,300

PAT 4,156 5,017 6,034 7,697 9,465




Equity Capital 945 1,072 1,072 1,072 1,072



Deposits 247,219 321,116 386,483 490,454 620,455


Saving deposits 32,531 36,733 48,933 65,833 82,833

Term deposit 189,665 259,600 307,223 384,223 487,723

Borrowings 5,299 19,726 28,122 32,422 39,422




Cash/Equivalent 17,745 20,355 26,646 32,802 40,002

Advances 178,145 239,492 296,188 375,680 471,680

Investments 77,318 105,061 118,026 145,026 177,026

Fixed Assets 2,106 2,449 2,958 3,945 4,945

Other assets 6,936 8,993 11,026 13,526 16,126

Total assets 282,248 376,349 454,844 570,979 709,779


49

January 16, 2013

Karur Vysya Bank

Exhibit 3: Ratios


Growth (%)

NII growth 35.8 19.6 27.4 28.7 21.9


PAT growth 23.7 20.7 20.3 27.6 23.0

Business (%)

Deposit growth 28.3 29.9 20.4 26.9 26.5

Advance growth 32.5 34.4 23.7 26.8 25.6

Business growth 30.0 31.8 21.8 26.9 26.1

CD 72.1 74.6 76.6 76.6 76.0

CASA 23.3 19.2 20.5 21.7 21.4







Cost‐to‐income 41.8 42.7 42.8 41.7 41.7

Cost‐to‐assets 1.7 1.6 1.6 1.6 1.6

Spreads (%)



Cost of deposits 6.4 7.8 8.1 7.6 7.3

Yield on assets 9.1 10.3 10.8 10.4 10.1

Cost of funds 6.4 7.9 8.4 7.8 7.5

NIMs 3.2 2.9 2.9 3.0 2.9


Tier I 13.1 13.1 10.8 10.2 9.8

Tier II 1.3 1.2 0.9 0.8 0.7

Total CAR 14.4 14.3 11.7 11.0 10.5

Asset Quality (%)

Gross NPA 1.3 1.3 1.3 1.4 1.6

Net NPA 0.1 0.3 0.3 0.3 0.4


Slippage 0.3 0.8 1.1 1.2 1.3

Credit costs 0.0 0.1 0.2 0.2 0.2

Return (%)

ROE 22.3 20.8 20.6 22.5 23.1

ROA 1.7 1.5 1.5 1.5 1.5

Per share (Rs.)

EPS 44.9 46.8 56.3 71.8 88.3

BV 223.8 252.7 292.7 347.0 417.8

ABV 222.7 246.8 287.4 341.2 408.3

Valuation(x)

P/E 12.4 11.9 9.9 7.7 6.3

P/BV 2.5 2.2 1.9 1.6 1.3

P/ABV 2.5 2.3 1.9 1.6 1.4



Oriental Bank of Commerce

Bloomberg: OBC INReuters: ORBC.BO HOLD


India Research

COMPANY UPDATE

Recommendation

CMP: Rs347

Target Price: Rs365

Upside (%) 5%




Beta 1.1




Absolute (1.5) 16.0 53.7 (1)

Rel. to Sensex (4.8) 8.6 24.2 (3.8)

Performance

Source: Bloomberg



Analysts Contact

Paresh Jain

022 6184 4324

[email protected]


022‐6184 4329

[email protected]

200

250

300

350

400

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) OBC (RHS)

0.0

0.5

1.0

1.5

2.0

Apr‐07

Aug‐07

Dec‐07

Apr‐08

Aug‐08

Dec‐08

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Aug‐12

Dec‐12



(x)

Moderate Business Growth amid Contraction

in NIMs; Maintain HOLD

Oriental Bank of Commerce (OBC) is currently trading at five year average


year reflecting improving trend in asset quality in last two quarters.

Moderate Business Growth: The loan growth of Oriental Bank of Commerce

has been marginally lower than the industry in FY10‐12 period. However, we

believe that the Bank’s credit growth to remain weak in FY13 on account of

dismal off‐take in corporate loans.

NIMs Likely to Bounce Back amid Decline in Cost of Funds: Though

Oriental Bank of Commerce’s NIMs contracted marginally to 2.8% in

H1FY13, the Bank’s Management expects the NIMs to bounce back to 2.9%

on account of decline in cost of funds.

Asset Quality witnesses Encouraging Trends: Oriental Bank of Commerce

has been able to contain fresh slippage in H1FY13 enabling it in bringing

down its gross NPA by 25 bps over last two quarters. We expect this trend to

continue even in H2FY13. However, the Bank is expected to restructure loans

worth Rs. 25 bn in H2FY13, which would be a partially downside risk to its

asset quality. The Bank’s restructured loan book is currently at 9.7% of the

advances.

Outlook & Valuation



valuation implying 0.8x P/ABV FY15E, we reiterate our “HOLD”

recommendation on Oriental Bank of Commerce with upwardly revised

target price of Rs. 365 per share (from Rs. 320 earlier).

Key Financials




PAT 15,029 11,416 14,332 17,300 20,387

EPS (Rs) 59.9 39.1 49.1 59.3 69.9

ABV (Rs) 326.3 312.5 358.4 398.6 452.9

P/E (x) 5.8 8.9 7.1 5.8 5.0

P/ABV (x) 1.0 1.1 1.0 0.9 0.8

Gross NPA (%) 2.0 3.2 2.8 2.6 2.4

Net NPA (%) 1.0 2.2 1.8 1.8 1.7

ROE (%) 17.1 10.7 12.3 13.4 14.1

ROA (%) 1.0 0.7 0.7 0.8 0.8


51

January 16, 2013




Interest Income 120,878 158,149 181,358 204,191 236,718



Fees 6,349 7,258 8,390 9,990 11,723

Other Income 3,252 5,144 7,382 7,785 8,738

Net Revenue 51,376 54,560 65,132 77,875 92,374


‐Employee Exp 10,485 13,568 16,251 19,201 22,801

‐Other Exp 8,440 9,586 11,039 13,253 15,616


Investment Profit 754 1,703 2,250 2,850 3,135


Provisions 12,065 17,148 18,733 21,393 25,243


‐Investment Depreciation 963 2,854 870 1,010 1,210


PBT 20,386 14,258 19,109 24,028 28,714

Taxes 5,357 2,842 4,777 6,728 8,327

PAT 15,029 11,416 14,332 17,300 20,387




Equity Capital 2,918 2,918 2,918 2,918 2,918



Deposits 1,390,543 1,559,649 1,803,403 2,114,665 2,502,164


Saving deposits 247,504 282,532 341,864 413,656 492,250

Term deposit 1,049,063 1,183,364 1,349,035 1,564,881 1,846,560

Borrowings 56,392 52,590 95,583 111,225 126,113




Cash/Equivalent 116,181 87,270 125,952 147,634 174,396

Advances 959,082 1,119,777 1,298,941 1,526,256 1,794,877

Investments 495,454 521,013 614,796 731,607 863,296

Fixed Assets 13,978 14,207 15,500 15,230 16,960

Other assets 28,739 39,035 45,341 50,841 60,841

Total assets 1,613,434 1,781,302 2,100,530 2,471,568 2,910,370


52

January 16, 2013


Exhibit 3: Ratios


Growth (%)

NII growth 43.7 0.9 17.1 21.8 19.7

Pre‐provision profit growth 34.0 (3.2) 20.5 20.0 18.8

PAT growth 32.4 (24.0) 25.5 20.7 17.8

Business (%)

Deposit growth 15.6 12.2 15.6 17.3 18.3

Advance growth 14.9 16.8 16.0 17.5 17.6

Business growth 15.3 14.0 15.8 17.4 18.0

CD 69.0 71.8 72.0 72.2 71.7

CASA 24.6 24.1 25.2 26.0 26.2


Cost‐to‐income 36.8 42.4 41.9 41.7 41.6

Cost‐to‐assets 1.3 1.4 1.4 1.4 1.4






Spreads (%)



Cost of deposits 5.8 7.6 7.6 7.1 6.9

Yield on assets 1.0 0.7 0.7 0.8 0.8

Cost of funds 5.7 7.4 7.5 7.0 6.8

NIMs 2.9 2.6 2.6 2.7 2.7


Tier I 11.2 10.1 9.0 8.5 8.1

Tier II 3.0 2.6 2.3 2.0 1.7

Total CAR 14.2 12.7 11.3 10.5 9.8

Asset Quality (%)

Gross NPA 2.0 3.2 2.8 2.6 2.4

Net NPA 1.0 2.2 1.8 1.8 1.7


Provision coverage (incl w/off) 61.5 66.8 72.6 73.1

Slippage 1.7 3.7 2.4 1.6 1.5

Credit‐cost 1.0 1.0 1.2 1.2 1.2

Return (%)

ROE 17.1 10.7 12.3 13.4 14.1

ROA 1.0 0.7 0.7 0.8 0.8

Per share (Rs.)

EPS 59.9 39.1 49.1 59.3 69.9

BV 350.0 379.9 420.0 467.6 525.7

ABV 326.3 312.5 358.4 398.6 452.9

Valuation(x)

P/E 5.8 8.9 7.1 5.8 5.0

P/BV 1.0 0.9 0.8 0.7 0.7

P/ABV 1.1 1.1 1.0 0.9 0.8



Punjab National Bank

Bloomberg: PNB INReuters: PNBK.BO BUY


India Research

COMPANY UPDATE

Recommendation

CMP: Rs901


Upside (%) 16%



3m ADV (Rs mn /US$ mn) 609/11.2

Beta 1.0




Absolute 8.5 9.8 0.7 3.4

Rel. to Sensex 4.8 2.8 (18.6) 0.5

Performance

Source: Bloomberg



Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

6607608609601,0601,160

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) PNB (RHS)

‐

0.50

1.00

1.50

2.00

2.50

Feb‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

Aug‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

(x)

Biggest Beneficiary of Likely Econo

Turnaround; Upgrade to BUY

Punjab National Bank (PNB) is currently trading at 20% discount to its five

year average valuation, while the stock has underperformed the Bankex by

40% over last one year reflecting incremental stress in asset quality along

with its ballooning restructured assets.

Asset Quality Deterioration Drags Valuation: Punjab National Bank is

trading at discount to BoB & UBI mainly on account of higher slippages and

restructuring. In earlier interest rate cycle, PNB has mostly traded at

premium to its PSU peers on account of its better NIMs & ROE profile.

Credit Cost to Ease: On account of deterioration in its asset book, PNB’s

credit cost in H1FY13 is the highest for last 10 years. With expected

improvement in economy and recovery cycle along with interest rate cuts,

the Bank will be the biggest beneficiary.

Best‐in‐Class NIMs: Despite higher slippages and credit cost during the

year, the Bank managed to make RoA of >1% & RoE of >16% in H1FY13, on

account of high margin profile. Even after the slide, the Bank makes NIMs

of >3.5%, backed by healthy CASA, as it operates in cash‐rich northern belt.

Outlook & Valuation



its historical mean valuation implying 1.0x P/ABV FY15E, we upgrade our

recommendation on Punjab National Bank to “BUY” from “SELL” with

upwardly revised target price of Rs. 1,045 per share (from Rs. 695 earlier).

Key Financials




PAT 44,335 48,842 45,567 62,171 70,295

EPS (Rs) 139.9 144.0 134.3 183.3 207.2

ABV (Rs) 648.5 720.5 702.8 870.2 1044.2

P/E (x) 6.4 6.3 6.7 4.9 4.3

P/ABV (x) 1.4 1.3 1.3 1.0 0.9

Gross NPA (%) 1.8 2.9 4.6 4.3 4.2

Net NPA (%) 0.8 1.5 2.5 2.0 1.7

ROE (%) 22.6 19.8 15.4 18.3 17.8

ROA (%) 1.3 1.2 0.9 1.1 1.0


54

January 16, 2013




Interest Income 269,865 364,280 434,572 490,366 552,593



Fees 20,452 23,748 25,648 29,495 33,919

Other Income 12,650 14,767 14,386 17,967 19,916

Net Revenue 151,176 172,659 192,546 225,179 262,495


‐Employee Exp 44,611 47,235 57,817 68,434 81,255

‐Other Exp 19,031 22,792 25,071 30,085 36,103




Provisions 24,920 35,773 48,069 43,426 50,988


‐Investment Depreciation 1,475 2,351 ‐1,370 ‐772 ‐1,001


PBT 65,637 70,370 64,179 87,564 99,007

Taxes 21,302 21,528 18,612 25,394 28,712

PAT 44,335 48,842 45,567 62,171 70,295




Equity Capital 3,168 3,392 3,392 3,392 3,392



Deposits 3,128,987 3,795,885 4,479,144 5,285,390 6,236,761


‐Saving deposits 934,874 1,056,570 1,193,222 1,435,096 1,720,507

‐Term deposit 1,925,737 2,454,592 2,932,874 3,416,621 3,987,443

Borrowings 315,897 372,643 421,419 478,975 546,891




Cash/Equivalent 296,912 288,280 378,052 483,982 608,980

Advances 2,421,067 2,937,748 3,484,355 4,129,352 4,890,448

Investments 951,623 1,226,295 1,362,947 1,524,196 1,714,470

Fixed Assets 31,056 31,689 36,939 42,189 47,439

Other assets 82,594 97,929 117,515 141,018 169,221

Total assets 3,783,252 4,581,941 5,379,808 6,320,737 7,430,559


55

January 16, 2013


Exhibit 3: Ratios


Growth

NII growth 38.5 13.6 13.7 16.5 17.4


PAT growth 13.5 10.2 ‐6.7 36.4 13.1

Business (%)

Deposit growth 25.5 21.3 18.0 18.0 18.0

Advance growth 29.7 21.3 18.6 18.5 18.4

Business growth 27.3 21.3 18.3 18.2 18.2

CD 77.4 77.4 77.8 78.1 78.4

CASA 38.5 35.3 34.5 35.4 36.1


Cost‐to‐income 42.1 40.6 43.0 43.8 44.7

Cost‐to‐assets 2.1 1.8 1.8 1.8 1.8






Spreads (%)



Cost of deposits 4.9 6.2 6.4 6.0 5.6

Yield on assets 8.8 9.4 9.3 9.0 8.6

Cost of funds 4.8 5.8 6.0 5.7 5.3

NIMs 3.8 3.5 3.3 3.3 3.3


Tier I 8.4 9.3 8.1 8.1 8.0

Tier II 4.0 3.4 3.2 3.3 3.3

Total CAR 12.4 12.6 11.3 11.3 11.3

Asset Quality (%)

Gross NPA 1.8 2.9 4.6 4.3 4.2

Net NPA 0.8 1.5 2.5 2.0 1.7



Slippage 2.0 2.5 4.0 2.5 2.5

Credit‐cost 0.9 0.9 1.4 1.0 1.0

Return (%)

ROE 22.6 19.8 15.4 18.3 17.8

ROA 1.3 1.2 0.9 1.1 1.0

Per share (Rs)

EPS 139.9 144.0 134.3 183.3 207.2

BV 678.9 820.1 926.3 1,079.2 1,253.7

ABV 648.5 720.5 702.8 870.2 1,044.2

Valuation (x)

P/E 6.4 6.3 6.7 4.9 4.3

P/BV 1.3 1.1 1.0 0.8 0.7

P/ABV 1.4 1.3 1.3 1.0 0.9



State Bank of India

Bloomberg: SBIN INReuters: SBI.BO BUY


India Research

COMPANY UPDATE

Recommendation

CMP: Rs2,490


Upside (%) 16%


52‐week High/Low (Rs) 2,552/1,748

3m ADV (Rs mn /US$ mn) 5,390/98.7

Beta 1.1




Absolute 7.3 10.0 40.2 4.4

Rel. to Sensex 3.7 2.9 13.3 1.4

Performance

Source: Bloomberg



Analysts Contact


022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

1,6001,8002,0002,2002,4002,600

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec

‐12

Jan‐13

Sensex (LHS) SBI (RHS)

‐

1.00

2.00

3.00

4.00

Feb‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

Aug‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

(x)

Incremental Slippages & Credit Cost to Move

Southwards; Upgrade to BUY

State Bank of India (SBI) is currently trading at 5% discount its five year

average valuation, while the stock has underperformed the Bankex by 5% over

last one year, mainly on account of weak asset quality. Currently, the stock

trades at premium to its peers in line with historical trend.

Credit Cost to Move Southwards: SBI has witnessed huge pressure on its asset

quality with its Gross NPA increasing by 180 bps over last two years.

Resultantly, the Bank has accounted for higher credit cost, while keeping

provision coverage stable. With expectations of gradual recovery in the

economy, we expect incremental slippages and credit cost to start trending

downwards.

Pressure on NIMs is Likely to Continue: SBI’s NIMs (domestic) underwent a

significant compression of ~70 bps over last four quarters. Pressure on its NIMs

is expected to continue, going forward on account of slowdown witnessed in

high‐yielding SME segment and discounts offered in the retail segment.

Overall Growth to Remain Moderate: Overall slowdown in SBI’s corporate

credit is a cause of concern. The Bank has significantly tightened its lending

standards for mid‐corporate and SME segment, which has seen higher

slippages. SBI’s Management has hinted at marginal improvement in new

project proposals. We believe that majority of incremental growth will be

driven by retail and large corporate segments.

Outlook & Valuation

At the CMP, the stock – after adjusting for subsidiaries – trades at 6.9x & 5.9x

FY14E & FY15E earnings, and at 1.5x & 1.2x P/ABV FY14E & FY15E,

respectively. Based on 10% discount to its historical mean valuation implying

1.5x P/ABV FY15E for parent & Rs. 560 for its stake in subsidiaries, we upgrade

our recommendation on State Bank of India to “BUY” from “SELL” with

upwardly revised target price of Rs. 2,885 per share (from Rs. 1,980 earlier).

Key Financials




PAT 82,645 117,073 157,786 185,940 217,646

EPS (Rs) 130.1 174.5 235.2 277.1 324.4

ABV (Rs) 829.0 1015.4 1042.8 1273.5 1550.2

P/E (x) 14.8 11.0 8.2 6.9 5.9

P/ABV (x) 2.3 1.9 1.8 1.5 1.2

Gross NPA (%) 3.3 4.5 5.5 5.3 5.0

Net NPA (%) 1.6 1.8 2.6 2.2 1.9

ROE (%) 12.6 15.7 17.5 17.9 18.1

ROA (%) 0.7 0.9 1.1 1.1 1.1

Source: Company, Karvy Institutional Research, Valuation after adjusting for subsidiaries

57

January 16, 2013

State Bank of India



Interest Income 813,944 1,065,214 1,216,925 1,353,323 1,497,748



Fees 115,633 120,909 133,000 156,940 185,189

Other Income 33,588 32,245 34,445 37,708 41,467

Net Revenue 474,485 586,064 623,322 712,290 815,001


‐Employee Exp 144,802 169,740 178,674 203,428 229,696

‐Other Exp 85,352 90,950 107,321 128,785 154,542


Investment Profit 9,025 ‐9,639 8,359 19,125 21,940


Provisions 103,814 130,902 106,617 113,139 117,863


‐Investment Depreciation 6,468 6,637 ‐5,968 ‐4,106 ‐4,804


PBT 149,542 184,833 239,069 286,062 334,840

Taxes 66,897 67,760 81,284 100,122 117,194

PAT 82,645 117,073 157,786 185,940 217,646




Equity Capital 6,350 6,710 6,710 6,710 6,710

Reserves & Surplus 643,510 832,802 959,186 1,109,800 1,288,194

Shareholderʹs Funds 649,860 839,512 965,896 1,116,510 1,294,904

Deposits 9,339,328 10,436,474 12,210,675 14,286,489 16,715,192

‐Current deposits 1,311,953 984,503 1,161,923 1,473,295 1,837,601

‐Saving deposits 3,303,261 3,691,563 4,135,113 4,757,858 5,486,469

‐Term deposit 4,724,114 5,760,408 6,913,638 8,055,336 9,391,123

Borrowings 1,195,689 1,270,056 1,537,461 1,746,534 1,991,150


Other liabilities 1,052,485 809,150 800,919 786,442 764,985


Cash/Equivalent 1,228,741 971,631 1,185,810 1,436,399 1,729,589

Advances 7,567,194 8,675,789 10,095,149 11,652,010 13,473,538

Investments 2,956,006 3,121,976 3,565,526 4,084,480 4,691,656

Fixed Assets 47,642 54,666 57,666 60,666 63,666

Other assets 437,779 531,130 610,800 702,419 807,782

Total assets 12,237,362 13,355,192 15,514,951 17,935,975 20,766,231


58

January 16, 2013

State Bank of India

Exhibit 3: Ratios


Growth (%)

NII growth 37.4 33.1 5.3 13.5 13.7


PAT growth ‐9.8 41.7 34.8 17.8 17.1

Business (%)

Deposit growth 16.1 11.7 17.0 17.0 17.0

Advance growth 19.8 14.7 16.4 15.4 15.6

Business growth 17.7 13.0 16.7 16.3 16.4

CD 81.0 83.1 82.7 81.6 80.6

CASA 48.7 44.1 42.7 43.0 43.2


Cost‐to‐income 48.5 44.5 45.9 46.6 47.1

Cost‐to‐assets 2.2 2.2 2.1 2.2 2.2






Spreads (%)



Cost of deposits 5.0 5.6 6.0 5.7 5.2

Yield on assets 7.9 9.2 9.1 8.8 8.4

Cost of funds 4.6 5.2 5.6 5.3 5.0

NIMs 3.2 3.7 3.4 3.4 3.3


Tier I 7.8 9.8 9.6 9.6 9.6

Tier II 4.2 4.1 5.3 5.5 5.6

Total CAR 12.0 13.9 14.9 15.1 15.2

Asset Quality (%)

Gross NPA 3.3 4.5 5.5 5.3 5.0

Net NPA 1.6 1.8 2.6 2.2 1.9



Slippage 2.6 3.0 3.9 2.5 2.5

Credit‐cost 1.2 1.4 1.1 1.0 0.9

Return (%)

ROE 12.6 15.7 17.5 17.9 18.1

ROA 0.7 0.9 1.1 1.1 1.1

Per share (Rs)

EPS 130.1 174.5 235.2 277.1 324.4

BV 1023.4 1251.1 1439.5 1663.9 1929.8

ABV 829.0 1015.4 1042.8 1273.5 1550.2

Valuation (x)*

P/E 14.8 11.0 8.2 6.9 5.9

P/BV 1.9 1.5 1.3 1.2 1.0

P/ABV 2.3 1.9 1.8 1.5 1.2

Source: Company, Karvy Institutional Research, * Valuation after adjusting for subsidiaries


Syndicate Bank

Bloomberg: SNDB INReuters: SBNK.BO BUY


India Research

COMPANY UPDATE

Recommendation

CMP: Rs144

Target Price: Rs175

Upside (%) 21%




Beta 1.2




Absolute 9.8 19.8 71.9 12.4

Rel. to Sensex 6.1 12.2 38.9 9.2

Performance

Source: Bloomberg



Analysts Contact

Paresh Jain

022 6184 4324

[email protected]


022‐6184 4329

[email protected]

80

100

120

140

160

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS) Syndicate Bank (RHS)

0.0

0.5

1.0

1.5

2.0

Apr‐07

Aug‐07

Dec‐07

Apr‐08

Aug‐08

Dec‐08

Apr‐09

Aug‐09

Dec‐09

Apr‐10

Aug‐10

Dec‐10

Apr‐11

Aug‐11

Dec‐11

Apr‐12

Aug‐12

Dec‐12



(x)

Stable Earning, Better Asset Quality; Maintain

BUY

Syndicate Bank is currently trading at five year average valuation, while the

stock has outperformed the Bankex by 30% over last one year reflecting stable

earning and better asset quality.

Moderate Growth in Business: We believe that Syndicate Bank would

continue its strategy of growing its loan book marginally below the industry.

Growth in large corporate is expected to remain weak for Syndicate Bank,

whereas segments like Retail, MSME and Agriculture would drive the growth.

We expect Syndicate Bank’s deposit growth to match growth in credit, while

CASA ratio to remain stable at ~30%, going forward.

NIMs to Remain Healthy: Despite difficult conditions, Syndicate Bank has

been able to maintain its NIMs of >3.2% in H1FY13. Though the Bank expects

cost of deposits to decline marginally, this is likely to get offset by decline in

yield on advances.

Stable Asset Quality: Syndicate Bank’s asset quality continues to remain

better than most of the PSU banks. The Bank’s asset quality has seen relatively

lesser deterioration as compared to its peers. Large part of the containment in

slippages is on account of cautious lending approach over past three years,

which has protected the Bank from asset quality worries and declining

margin. Its restructured loan book stood at 7.3% of advances. The Bank’s asset

quality is likely to remain stable in FY13, with healthy provision coverage ratio

of 82%.

Outlook & Valuation



valuation implying 0.9x P/ABV FY14E, we reiterate our “BUY”

recommendation on Syndicate Bank with upwardly revised target price of Rs.

175 per share (from Rs. 150 earlier).

Key Financials




PAT 10,479 13,134 16,344 19,684 21,190

EPS (Rs) 20.0 22.9 27.2 32.7 35.2

ABV (Rs) 101.5 119.7 142.9 168.4 194.5

P/E (x) 7.2 6.3 5.3 4.4 4.1

P/ABV (x) 1.4 1.2 1.0 0.9 0.7

Gross NPA (%) 2.4 2.5 2.4 2.6 2.6

Net NPA (%) 1.0 1.0 1.0 1.0 1.0

ROE (%) 17.6 17.9 18.5 18.8 17.4

ROA (%) 0.7 0.8 0.8 0.8 0.8


60

January 16, 2013

Syndicate Bank



Interest Income 114,509 152,684 176,918 198,312 227,787



Fees 4,422 5,519 6,395 8,475 10,234

Other Income 4,729 5,240 5,805 7,591 8,711

Net Revenue 52,979 61,609 69,638 85,671 102,408


‐Employee Exp 17,733 18,915 21,120 23,781 28,781

‐Other Exp 7,748 9,226 10,771 12,739 15,239


Investment Profit 352 888 1,015 1,480 1,880


Provisions 14,644 19,195 23,603 28,647 32,547


‐Investment Depreciation 387 385 644 988 1,288


PBT 12,854 14,273 14,144 20,504 25,841

Taxes 2,375 1,139 (2,200) 820 4,651

PAT 10,479 13,134 16,344 19,684 21,190




Equity Capital 5,733 6,020 6,020 6,020 6,020



Deposits 1,355,961 1,579,411 1,841,660 2,211,504 2,647,504


‐Saving deposits 312,066 342,959 399,938 488,931 598,931

‐Term deposit 936,507 1,114,238 1,293,046 1,527,546 1,797,546

Borrowings 95,276 105,899 122,880 134,140 171,390




Cash/Equivalent 119,657 138,843 161,439 185,869 219,764

Advances 1,067,819 1,236,202 1,430,735 1,708,131 2,068,131

Investments 350,676 408,151 470,145 547,178 637,178

Fixed Assets 6,927 13,516 19,154 15,544 18,544

Other assets 20,309 27,970 39,250 55,347 65,354

Total assets 1,565,388 1,824,681 2,120,723 2,512,069 3,008,971


61

January 16, 2013

Syndicate Bank

Exhibit 3: Ratios


Growth (%)

NII growth 60.0 16.0 13.0 21.2 19.9


PAT growth 28.8 25.3 24.4 20.4 7.7

Business (%)

Deposit growth 15.9 16.5 16.6 20.1 19.7

Advance growth 18.1 15.8 15.7 19.4 21.1

Business growth 16.8 16.2 16.2 19.8 20.3

CD 78.8 78.3 77.7 77.2 78.1

CASA 30.9 29.5 29.8 30.9 32.1


Cost‐to‐income 48.1 45.7 45.8 42.6 43.0

Cost‐to‐assets 1.7 1.7 1.6 1.6 1.6


Business per branch 971.8 1,039.4 1,115.3 1,231.0 1,369.2




Spreads (%)



Cost of deposits 4.9 6.4 6.5 5.9 5.5

Yield on assets 7.9 9.2 9.2 8.8 8.5

Cost of funds 5.1 6.4 6.5 5.9 5.5

NIMs 3.0 3.1 3.0 3.1 3.1


Tier I 9.3 8.9 8.3 8.1 7.8

Tier II 3.7 3.3 2.6 2.5 2.1

Total CAR 13.0 12.2 10.9 10.6 9.9

Asset Quality (%)

Gross NPA 2.4 2.5 2.4 2.6 2.6

Net NPA 1.0 1.0 1.0 1.0 1.0



Slippage 1.6 2.7 2.9 2.6 2.2

Credit‐cost 0.9 1.2 1.2 1.3 1.2

Return (%)

ROE 17.6 17.9 18.5 18.8 17.4

ROA 0.7 0.8 0.8 0.8 0.8

Per share (Rs)

EPS 20.0 22.9 27.2 32.7 35.2

BV 116.1 133.5 159.4 187.6 217.7

ABV 101.5 119.7 142.9 168.4 194.5

Valuation (x)

P/E 7.2 6.3 5.3 4.4 4.1

P/BV 1.2 1.1 0.9 0.7 0.6

P/ABV 1.4 1.2 1.0 0.9 0.7



Union Bank of India

Bloomberg: UNBK INReuters: UNBK.BO BUY


India Research

COMPANY UPDATE

Recommendation

CMP: Rs269

Target Price: Rs315

Upside (%) 17%




Beta 1.0




Absolute 1.4 31.9 41.6 (1.8)

Rel. to Sensex (2) 23.5 14.4 (4.6)

Performance

Source: Bloomberg



Analysts Contact Hatim Broachwala, CFA

022‐6184 4329

[email protected]

Paresh Jain

022 6184 4324

[email protected]

100

150

200

250

300

15,500

17,500

19,500

21,500

Jan‐12

Feb‐12

Apr‐12

May‐12

Jun‐12

Aug‐12

Sep‐12

Oct‐12

Dec‐12

Jan‐13

Sensex (LHS)

Union Bank of India (RHS)

‐

0.50

1.00

1.50

2.00

2.50

Feb‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

Aug‐12

P/AdjBVPS Mean

+1 SD ‐1 SD

(x)

Asset Quality Pressure to ease, Rally to

Continue; Upgrade to BUY

After the recent rally in stock price, Union Bank of India (UBI) trades very

close to its average valuation, while the stock has outperformed the Bankex by

4% over last one year. We believe it to continue to rally, as it further

improvemes its asset quality.

Pressure on Asset Quality to Ease: After reporting a dismal Q1FY13, UBI was

able to contain its slippages in Q2FY13. The Bank’s Management has guided

that the Bank’s slippages to move towards the Q2FY13 levels, going ahead. The

Bank has offered an OTS scheme pertaining to NPAs prior to FY09 for

outstanding up to Rs. 1 mn in cases where it does not have adequate collateral.

Meanwhile, similar scheme offered for outstanding up to Rs. 0.5 mn received

healthy response in Q2FY13.

Selective Growth in Credit: While UBI’s overall credit in corporate segment is

slowing down, its Management expects a moderate growth in credit of ~17% in

FY13 driven by Retail, Agriculture & SME segment. The Bank is focusing more

in Tier‐II & Tier‐III cities for expanding retail credit. The Bank’s delinquency

experience in the SME segment with Gross NPA of 4.3% is better than its peers.

NIMs – Expected to Remain Stable: UBI’s NIMs declined by 20 bps to 3% over

last year. The UBI’s Management expects that the Bank’s NIMs to stabilize at

current levels, going forward. The pressure on NIMs owing to discounts on

retail segment would be offset by moderate growth in SME segment and by

bringing down the proportion of high cost deposits by ~500 bps over last year.

Outlook & Valuation



historical mean valuation implying 1.0x P/ABV FY15E, we upgrade our

recommendation on Union Bank of India to “BUY” from “HOLD” with

upwardly revised target price of Rs. 315 per share (from Rs. 260 earlier).

Key Financials




PAT 20,819 17,872 22,665 31,755 37,538

EPS (Rs) 39.6 32.4 41.1 57.6 68.1

ABV (Rs) 206.6 208.5 226.2 268.7 316.0

P/E (x) 6.8 8.3 6.6 4.7 4.0

P/ABV (x) 1.3 1.3 1.2 1.0 0.9

Gross NPA (%) 2.4 3.0 3.2 2.9 2.8

Net NPA (%) 1.2 1.7 1.8 1.5 1.4

ROE (%) 18.0 13.2 14.8 18.3 18.7

ROA (%) 1.0 0.7 0.8 1.0 1.0


63

January 16, 2013

Union Bank of India



Interest Income 164,526 211,443 245,727 274,997 311,625



Fees 3,649 3,651 4,199 5,038 6,046

Other Income 12,098 15,272 15,962 20,100 22,906

Net Revenue 77,909 88,012 96,413 114,416 134,570


‐Employee Exp 25,997 24,793 27,575 30,730 34,308

‐Other Exp 13,503 15,082 17,797 21,356 26,695




Provisions 13,496 25,410 21,969 22,226 26,005


‐Investment Depreciation 267 550 55 ‐467 ‐599


PBT 29,553 27,128 32,379 45,364 53,626

Taxes 8,734 9,256 9,714 13,609 16,088

PAT 20,819 17,872 22,665 31,755 37,538




Equity Capital 5,253 5,515 5,515 5,515 5,515



Deposits 2,024,613 2,228,690 2,607,567 3,129,081 3,754,897


‐Saving deposits 446,892 504,289 561,121 691,499 847,953

‐Term deposit 1,381,541 1,531,639 1,815,797 2,154,781 2,561,561

Borrowings 133,160 179,095 199,105 200,573 202,335




Cash/Equivalent 200,985 156,751 195,705 249,324 313,667

Advances 1,509,861 1,778,821 2,081,923 2,473,058 2,942,420

Investments 583,991 623,636 699,411 803,714 928,877

Fixed Assets 22,928 23,358 24,358 25,358 26,358

Other assets 42,080 39,548 43,503 47,853 52,638

Total assets 2,359,845 2,622,114 3,044,900 3,599,308 4,263,961


64

January 16, 2013

Union Bank of India

Exhibit 3: Ratios


Growth (%)

NII growth 48.3 11.1 10.4 17.1 18.3


PAT growth 0.3 ‐14.2 26.8 40.1 18.2

Business (%)

Deposit growth 19.1 10.1 17.0 20.0 20.0

Advance growth 26.5 17.8 17.0 18.8 19.0

Business growth 22.2 13.4 17.0 19.5 19.5

CD 74.6 79.8 79.8 79.0 78.4

CASA 31.8 31.3 30.4 31.1 31.8


Cost‐to‐income 50.7 45.3 47.1 45.5 45.3

Cost‐to‐assets 2.0 1.7 1.7 1.7 1.7






Spreads (%)



Cost of deposits 5.1 6.3 6.4 6.0 5.6

Yield on assets 8.4 9.2 9.3 8.8 8.5

Cost of funds 5.0 6.0 6.3 5.9 5.5

NIMs 3.2 3.0 2.9 2.9 2.9


Tier I 8.7 8.4 8.6 8.3 8.2

Tier II 4.3 3.5 3.6 3.1 2.6

Total CAR 13.0 11.9 12.2 11.4 10.8

Asset Quality (%)

Gross NPA 2.4 3.0 3.2 2.9 2.8

Net NPA 1.2 1.7 1.8 1.5 1.4



Slippage 2.2 2.3 2.3 1.7 1.7

Credit‐cost 0.8 0.9 0.9 0.8 0.8

Return (%)

ROE 18.0 13.2 14.8 18.3 18.7

ROA 1.0 0.7 0.8 1.0 1.0

Per share (Rs)

EPS 39.6 32.4 41.1 57.6 68.1

BV 240.9 263.3 292.6 337.2 391.3

ABV 206.6 208.5 226.2 268.7 316.0

Valuation (x)

P/E 6.8 8.3 6.6 4.7 4.0

P/BV 1.1 1.0 0.9 0.8 0.7

P/ABV 1.3 1.3 1.2 1.0 0.9


Institutional Equities Team Rangachari Muralikrishnan

Head – Institutional Equities /

Research / Strategy +91‐22 61844301 [email protected]

K. Anant Rao Head ‐ Sales‐Trading & Derivatives +91‐22 61844303 [email protected]

Uday Raval Karvy Inc. USA +1 212 2674334 [email protected]

INSTITUTIONAL RESEARCH

Analysts Industry / Sector Desk Phone Email ID

Amey Chalke Pharmaceuticals +91 ‐22 61844325 [email protected]

Dwaipayan Poddar Chief Technical Strategist +91‐22 61844372 [email protected]

Hatim Broachwala, CFA Banking +91‐22 61844329 [email protected]

Kruti Shah Economist +91‐22 61844320 [email protected]

Manoj Kumar Manish Derivatives and Quant Analyst +91‐22 61844327 [email protected]

Maruti Kadam Automobiles / Metals & Mining +91‐22 61844326 [email protected]

Mitul Shah Automobiles +91‐22 61844312 [email protected]

Naveen Trivedi FMCG +91‐22‐61844316 [email protected]

Pallav Agarwal Metals & Mining +91‐22 61844317 [email protected]

Paresh Jain BFSI +91‐22 61844324 [email protected]

Parikshit Kandpal Infra / Real Estate / Strategy +91‐22 61844311 [email protected]

Rahul Sharma Pharmaceuticals +91‐22 61844310 [email protected]

Rahul Singh MidCap +91‐40‐44857911 [email protected]

Rajesh Kumar Ravi Cement & Logistics +91‐22 61844313 [email protected]

Rupesh Sankhe Power/Capital Goods +91‐22 61844315 [email protected]

Vinay Nair Oil & Gas +91‐22 61844319 [email protected]

INSTITUTIONAL SALES

Dinesh Bajaj Sales +91‐22 61844341 [email protected]

R. Sriram Sales +91‐22 61844340 [email protected]

Shabbir Dahodwala Sales (USA) +1‐212‐2674334 [email protected]

Tejash Gandhi Sales +91‐22 61844345 [email protected]

INSTITUTIONAL SALES TRADING & DEALING

Bhavesh Gandhi Institutional Dealer +91‐22 61844368 /69 [email protected]

Prashant Oza Institutional Dealer +91‐22 61844370 /71 [email protected]

Parag Shah Sales Trader +91‐22 61844364 /65 [email protected]

Sriram Jagdish Sales Trader +91‐22 61844366 /67 [email protected]

Gurdarshan Singh Kharbanda Sales Trader +91‐22‐61844368 / 69 [email protected]

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Asim Kumar Mohapatra Editor +91‐22 61844318 [email protected]

Vijayalaxmi L. Moolya Production +91‐22 61844328 [email protected]

For further enquiries please contact:

[email protected]

Tel: +91‐22‐6184 4300

Disclosures Appendix

Analyst certification

The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein

accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their)

compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this

research report.

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Stock Ratings Absolute ReturnsBuy : > 15%Hold : 5‐15%Sell : < 5%

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