banking mfg

Indian Banking Sector

Manish AgarwallaShubhangi Agrawal

December 2008

2

Investment rationale- Credit growth to remain strong as funding through other channels have dried up. - The shift in financial assets of household towards bank deposit due to turmoil in capital market will keep

deposit growth buoyant.- The contraction of liquidity and lack of funding through alternate channels have increased the pricing power of

banks. - The declining yields to provide additional gain in treasury, which will enable the banks to create buffer

provisions towards NPA. - Banks with surplus SLR will be in a better position to manage liquidity.

Key concern- Asset quality of the banks are the biggest concern today specially considering the robust growth in the past

and stress witnessed in certain sectors.- Government interference with the state owned banks may overburden the later with more social responsibility

which could affect its performance and deteriorate the asset quality.

Near term trigger

- Further relaxation in key policy rates will provide as near term trigger for the sector.

• Top Picks: Large Cap –ICICI Bank, SBI; Mid Cap – BOB, UBI, BOI

Sector outlook

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Rating and Valuation matrix

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CMP Tgt Price upside MCap CAGR (08-10E) P/Adj. BV RoE (%)

Rs Rs (%) US$ bn NII % PPP% PAT% FY08 FY09E FY10E FY08 FY09E FY10E

Public Sector Banks

Andhra Bank Buy 58 98 67.2 0.7 10.8 8.3 10.0 0.9 0.8 0.7 20.5 18.3 17.4

Bank of India Buy 276 400 44.9 2.3 21.8 21.4 25.5 1.8 1.4 1.1 24.4 23.5 25.4

BOB Buy 265 350 32.1 2.3 19.5 11.6 20.6 1.1 0.9 0.8 14.6 15.0 15.8

Canara Bank Outperformer 168 219 30.8 1.6 20.0 11.4 16.4 0.9 0.8 0.7 15.0 16.0 16.9

Corp Bank Buy 185 338 83.0 0.6 16.9 13.8 10.4 0.6 0.6 0.5 17.7 17.3 16.5

IOB Buy 70 166 138.1 0.9 14.5 10.7 12.1 0.9 0.7 0.6 27.2 25.7 23.5

Oriental Bank Buy 142 193 35.8 0.8 7.1 1.8 -4.4 0.7 0.6 0.6 6.2 10.9 11.7

PNB Buy 481 574 19.3 3.5 17.8 16.0 22.3 1.5 1.3 1.1 18.0 19.4 19.6

SBI Buy 1238 1614 30.3 15.2 12.8 18.8 30.7 1.4 1.2 1.1 16.7 16.0 16.0

Union Bank Buy 157 184 17.2 1.8 15.7 11.3 22.0 1.4 1.2 0.9 22.1 21.0 21.5

Indian Bank UR 123 184 49.2 1.2 19.4 8.6 14.0 1.1 0.9 0.8 22.3 20.3 20.5

Private Sector Banks

Axis Bank Buy 501 814 62.5 4.2 28.2 27.6 34.5 2.1 1.9 1.7 17.6 15.7 18.0

HDFC Bank Buy 984 1503 52.7 8.1 42.2 32.2 37.8 3.1 2.6 2.3 17.7 15.6 15.7

ICICI Bank Buy 422 795 88.7 10.9 20.8 11.4 8.2 1.1 1.1 1.0 11.6 8.8 9.5

Source: MF Global India Research Estimates

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0

20

40

60

80

100

120

4/1/01 4/1/02 4/1/03 4/1/04 4/1/05 4/1/06 4/1/07 4/1/08

HDFC Bank ICICI Bank Ax is bank SBI

0

20

40

60

80

100

120

140

May

-03

Nov

-03

May

-04

Nov

-04

May

-05

Nov

-05

May

-06

Nov

-06

May

-07

Nov

-07

May

-08

Nov

-08

SBI BOI BOB UBI PNB

Relative P/ABV band

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Source: MF Global India Research Estimates

0

50

100

150

200

250

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

SBI Andhra OBC Canara Corp IOB

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Sector-wise break up of non food credit

Source: RBI

Sectoral break up of industrial credit

Rubber & their prdts. 1%

Other Metal 3%

Gems & J ewellery

3%

Vehicles & Transport Equip. 3%

Infrastructure22%

Construction3%

Engr.6%

Iron and Steel10%

P etroleum & petroleum prdts.

5%

P aper & P aper prdts. 2%

Textiles11%

Food P rocessing

6% Others18%

Chem. & Chem. prdts. 7%

Sectoral break up of services sector

Others39%

Non-Banking Financial

Companies12%

Real Estate Loans 11%

Trade26%

P rofessional and Other

Services 6%

Transport Operators

6%

Non food credit break up (Feb 08)

Services23%

Agriculture and allied

12%

Industries40%

Personal loan 25%

Break up of personal loan

Housing 50%

Consumer durables

2%

Other personal loan 32%

Education4%

Credit cards outstanding

4%

Advance against FDs

8%

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Bank as source of fund to gain market share

Source: SEBI, MF Global India Research Estimates

Item/Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Number of Companies 2024 2031 2201 2201 2214 1064 1431

A. Internal Sources of which: 57.1 65.3 69.8 53.4 55.5 34.4 38.3

a) Reserves and Surplus 6.7 -18.8 18.0 20.0 26.6 13.8 27.6

b) Depreciation 41.8 47.9 37.3 25.7 19.2 14.2 9.3

B. External Sources 42.9 34.7 30.2 46.6 44.5 65.6 61.7

a) Paid up capital 12.8 10.5 9.4 9.3 10.8 22.8 12.8

- Net Issues 4.6 4.7 7.3 4.9 4.1 NA NA

- Premium 8.2 5.8 2.2 3.6 6.4 19.4 12.5

b) Borrowings of which: 9.3 8.8 5.6 17.0 15.3 25.8 31.0

- Debentures 9.5 -1.5 -5.6 -3.5 -1.1 -4.1 -1.1

- From Banks -0.8 21.5 27.1 21.4 15.2 30.7 22.8

- From FIs -3.2 -0.7 -6.2 -5.06 -2.9 NA NA

c) Trade dues & other current liabilities 20.2 14.3 14.8 20.3 18.5 17.0 17.9

C. Total (A+B) 100.0 100.0 100.0 100.0 100.0 100.0 100.0

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Alternate source of fund to dry up

Source: MF Global India Research, RBI

Rs bn Total BFSI Ex-BFSI

1993-94 244 0 244

1994-95 276 0 276

1995-96 208 61 147

1996-97 143 58 85

1997-98 46 22 23

1998-99 56 47 8

1999-00 78 40 38

2000-01 61 31 30

2001-02 75 51 24

2002-03 41 34 6

2003-04 233 54 178

2004-05 283 113 169

2005-06 274 124 149

2006-07 335 22 313

2007-08 870 310 561

Year Total Debt Issues, Rs bn

1995-96 1931996-97 2141997-98 3281998-99 5431999-00 6452000-01 7062001-02 7112002-03 6962003-04 6822004-05 8732005-06 9652006-07 14622007-08 -

Year Rs bn US$ mn

1990-91 2 97

1991-92 3 129

1992-93 10 315

1993-94 18 586

1994-95 41 1314

1995-96 72 2144

1996-97 100 2821

1997-98 132 3557

1998-99 104 2462

1999-00 93 2155

2000-01 184 4029

2001-02 292 6130

2002-03 244 5035

2003-04 199 4322

2004-05 272 6051

2005-06 342 7722

2006-07 884 19531

Resource mobilized through primary market Total Debt Issues

US$ mn

CY04 9467CY05 7801CY06 14888CY07 26097YTD (10 months) 17829

ECBs

FDI

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Business growth to remain strong

Rs bn Credit Gwth Deposit Gwth C/D ratio Incremental Incremental Bank deposit % of bank C/D ratio

credit deposit requirement incremental depositcontributed by contributed by household savinghousing hold saving

March' 92 125592 230758 54March' 93 151982 21% 268572 16% 57 26390 37814 29518 78 69.79March' 94 164418 8% 315132 17% 52 12436 46560 36236 78 26.71March' 95 211560 29% 386859 23% 55 47142 71727 55835 78 65.72March' 96 254015 20% 433819 12% 59 42455 46960 39941 85 90.41March' 97 278401 10% 505599 17% 55 24386 71780 50902 71 33.97March' 98 324079 16% 598485 18% 54 45678 92886 74099 80 49.18March' 99 368837 14% 714025 19% 52 44758 115540 79433 69 38.74March' 00 435958 18% 813345 14% 54 67121 99320 82892 83 67.58March' 01 511434 17% 962618 18% 53 75476 149273 94703 63 50.56March' 02 589723 15% 1103360 15% 53 78289 140742 112936 80 55.63March' 03 729215 24% 1280853 16% 57 139492 177493 123462 70 78.59March' 04 840785 15% 1504416 17% 56 111570 223563 141967 64 49.91March' 05 1100428 31% 1700198 13% 65 259643 195782 158259 81 132.62March' 06 1507077 37% 2109049 24% 71 406649 408851 274864 67 99.46March' 07 1931189 28% 2611933 24% 74 424112 502884 417359 83 84.34March' 08 2361914 22% 3196939 22% 74 430725 585006 406631 70 73.63March' 09e 3073296 30% 3841620 20% 80 711382 644681 496405 77 *110.35March' 10e 3794242 23% 4627125 20% 82 720947 785505 628404 80 **91.78March' 11e 4545945 20% 5543836 20% 82 751703 916711 715034 78 82.00

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Source: RBI

*Considering 350bps cut in CRR and 100 bps cut in SLR**Assuming 100 bps cut in CRR and 100 bps cut in SLR

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Gross domestic savings

HOUSE HOLD SECTORFinancial saving % to GDP physical saving % to GDP total % to GDP Net Domestic Saving % to GDP GDP at curr. price

1980-81 8610 6 10114 7 18724 13 15145 10 1453701981-82 9614 6 10045 6 19659 12 16811 10 1708051982-83 12739 7 8491 4 21230 11 17482 9 1910591983-84 13294 6 12828 6 26122 12 19558 9 2224851984-85 17879 7 14810 6 32689 13 24056 10 2492681985-86 18538 7 18404 7 36942 13 28094 10 2813301986-87 23336 7 18317 6 41653 13 29101 9 3148161987-88 26820 7 29087 8 55907 16 39285 11 3578611988-89 27183 6 39724 9 66907 16 48532 11 4245311989-90 37998 8 44767 9 82765 17 60525 12 4876841990-91 49640 9 55149 10 104789 18 78932 14 5696241991-92 62101 9 41394 6 103495 16 79118 12 6547291992-93 65367 9 57948 8 123315 16 87553 12 7525911993-94 94738 11 54796 6 149534 17 109050 13 8658051994-95 120733 12 68057 7 188790 19 153640 15 10157641995-96 105719 9 95296 8 201015 17 179876 15 11918131996-97 141661 10 79312 6 220973 16 184677 13 13786171997-98 146777 10 123531 8 270308 18 219757 14 15271581998-99 180346 10 149414 9 329760 19 227545 13 17511991999-00 206602 11 205914 11 412516 21 302835 16 19520352000-01 215219 10 239634 11 454853 22 297215 14 21023142001-02 247476 11 256689 11 504165 22 306588 13 22789522002-03 253255 10 315879 13 569134 23 397493 16 24545612003-04 313260 11 357516 13 670776 24 541046 20 27546212004-05 318264 10 406846 13 725110 23 671501 21 31494122005-06 P 420841 12 445915 12 866756 24 848544 24 35803442006-07P 467985 11 517837 12 985822 24 1006956 24 41458102007-08P 525987 11 47131482008-09E 601398 11 *54672522009-10E 718397 12 **59866412010-2011E 790237 12 ***6585305

*Assuming nominal GDP growth of 16%. **Assuming nominal GDP growth of 9.5%.***Assuming nominal GDP growth of 10%

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Source: RBI

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Household saving in financial assets

Year Currency % of bank % of life insu % of P&P % of Claims on % of Shares & % of Trade % of chg in Net

asset deposit asset fund asset fund asset govt asset debtrs asset debt (net) asset fin asset fin asset

1980-81 1625 13 5550 46 915 8 2122 18 712 6 412 3 373 3 12118 8610

1981-82 965 7 5194 38 1037 8 2480 18 1784 13 510 4 643 5 13621 9588

1982-83 2026 13 6661 41 1235 8 2865 18 1243 8 646 4 429 3 16097 12566

1983-84 2776 15 7978 42 1376 7 3052 16 1976 11 555 3 -164 -1 18790 13552

1984-85 2938 12 9859 42 1556 7 3759 16 3107 13 762 3 41 0 23549 17816

1985-86 2220 9 10603 41 1779 7 4188 16 3413 13 1394 5 -44 0 25562 18579

1986-87 3090 10 14510 46 2159 7 5055 16 3092 10 1768 6 -280 -1 31849 23339

1987-88 4815 13 14674 41 2589 7 6509 18 3680 10 813 2 504 1 36106 26819

1988-89 4256 11 14747 37 3423 9 7552 19 5478 14 1136 3 359 1 39958 27132

1989-90 7655 16 13987 29 4415 9 9508 20 6758 14 2655 6 -763 -2 48233 38045

1990-91 6251 11 18777 32 5599 10 11155 19 7883 13 4972 8 -453 -1 58908 49641

1991-92 8157 12 17848 26 7003 10 12501 18 4845 7 6800 10 -414 -1 68045 62048

1992-93 6562 8 29518 37 7114 9 14814 18 3885 5 8212 10 -1398 -2 80354 65298

1993-94 13367 12 36236 33 9548 9 18323 17 6908 6 10067 9 -1190 -1 109618 94759

1994-95 15916 11 55835 38 11370 8 21414 15 13186 9 13473 9 -1148 -1 145501 120731

1995-96 16525 13 39941 32 13894 11 22343 18 9588 8 8839 7 -252 0 124337 105717

1996-97 13643 9 50902 32 16121 10 30390 19 11783 7 6631 4 -708 0 158519 141662

1997-98 12780 7 74099 43 19410 11 32267 19 22162 13 4464 3 -770 0 171740 146821

1998-99 21822 11 79433 38 23428 11 46408 22 28220 14 5105 2 -6870 -3 207103 180330

1999-00 20845 9 82892 35 28644 12 53907 23 28985 12 16308 7 -1023 0 236213 200146

2000-01 15632 6 94703 38 33861 14 47882 19 39007 16 11148 4 183 0 248393 216614

2001-02 28156 9 112936 38 41237 14 46609 16 51938 18 9834 3 -183 0 296582 244855

2002-03 28632 9 123462 38 52009 16 48441 15 56087 17 7122 2 -341 0 322583 262278

2003-04 42675 11 141967 38 52240 14 48952 13 87372 23 9078 2 -114 0 377387 307405

2004-05 36977 9 158259 36 67986 16 56552 13 106420 25 8113 2 -213 0 434300 313734

2005-06P 53071 9 274864 46 83540 14 62581 10 87168 15 31179 5 -222 0 597867 414443

2006-07P 66323 9 417359 54 114889 15 70992 9 40627 5 51396 7 -183 0 768967 486270

2007-08$ 80342 11 406631 55 128877 18 60204 8 -27042 -4 77398 11 -204 0 734653 525987

2008-09E 84136 10 496405 59 134618 16 75723 9 0 42068 5 0 841364 601398

2009-10E 101355 10 628404 62 162169 16 91220 9 0 20271 2 0 1013555 718397

2010-2011E 115328 10 715034 62 184525 16 103795 9 0 23066 2 0 1153281 790237

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Source: RBI

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Source: RBI, MF Global India Research

MTM Profit to boost the profitability of PSB’s

Interest rate sensitivity Rs crs SBI BOI UBI BOB Corp Can HDFC ICICI IOB PNB UTI Andhra OBC Indian Bk

Investments G-Secs 143,472 34,166 28,217 33,871 16,055 43,357 31,666 75,378 24,996 49,060 22,798 14,842 20,770 17468

Total investment 189,501 42,432 34,674 40,453 19,207 50,200 44,195 97,148 27,858 57,721 37,997 15,700 25,700 17,948

% SLR book in HTM 79 95 82 78 95 88 74 75 84 89 83 95 82 68

Investments in HTM category 113,701 32,458 23,113 26,270 15,252 38,152 23,291 56,346 20,894 43,663 18,999 14,100 16,962 11,848

% of Investments in HTM 60 76 67 65 79 76 53 58 75 76 50 90 66 66

Investments in AFS / HFT 29772 1708 5104 7601 803 5205 8375 19032 4102 5397 3800 742 3808 5620

Duration of AFS / HFT 3.0 0.9 2.16 1.9 1.8 1.5 0.8 2 2.0 2.5 2 2.04 2.5 3.34

Modified duration 2.9 0.8 2.1 1.8 1.7 1.4 0.8 1.9 1.9 2.4 1.9 2.0 2.4 3.2

Interest rate hedge 8.65 8.65 8.65 8.65 8.65 8.65 8.00 8.65 8.65 8.65 8.65 8.65 8.65 8.65

Current interest rate on 10 yr G-Sec 7.20 7.20 7.20 7.20 7.20 7.20 7.20 7.20 7.20 7.20 7.20 7.20 7.20 7.20

Expected MTM loss/(gain) (1241) (21) (153) (201) (20) (109) (52) (529) (112) (188) (106) (21) (132) (261)

% of pre-tax earnings -9.8 -0.6 -6.8 -7.5 -1.7 -4.7 -1.5 -4.2 -6.1 -5.3 -0.8 -2.3 -15.2 -20.6

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Cut in policy rate to offset the 75bps decline in PLR

PLR (%) Aug'06 Jan'07 Feb'07 Mar'07 April'07 Aug'07 Feb' 08 June' 08 July' 08 Aug' 08 Nov' 08

Axis NA NA NA NA 15.00 15.00 14.75 15.25 15.25 15.75 15.75

Andhra Bank 11.50 11.75 12.25 12.25 13.00 13.00 12.75 13.25 13.25 14.00 14.00

Bank of Baroda 11.50 12.00 12.50 12.50 13.25 13.25 12.75 13.25 13.25 14.00 13.25

Bank of India 11.50 12.00 12.50 12.50 13.25 13.25 12.75 13.25 13.25 14.00 13.25

Canara Bank 11.50 11.75 12.50 12.50 13.25 13.25 12.75 13.25 13.25 14.00 14.00

Corporation Bank 11.50 12.00 12.50 12.50 13.25 13.25 13.25 13.50 13.50 14.00 13.25

HDFC Bank 11.50 13.00 14.00 14.00 14.75 15.00 15.00 15.25 16.00 16.50 16.50

ICICI Bank 13.25 13.75 14.75 14.75 15.75 15.75 15.75 16.50 16.50 17.25 17.25

Indian Overseasa Bank 11.50 12.00 12.50 12.50 13.25 13.25 13.25 13.50 13.50 14.00 14.00

Punjab National Bank 11.50 11.75 12.25 12.25 13.00 13.00 12.50 13.00 13.00 14.00 13.50

State Bank of India 11.00 11.50 12.25 12.25 12.75 12.75 12.25 12.75 12.75 13.75 13.00

Union Bank of India 11.50 12.00 12.50 12.50 13.25 13.25 12.75 13.25 13.25 14.00 13.50

Yes bank 13.00 13.50 14.00 14.75 15.50 15.50 15.50 16.00 16.50 17.00 17.00

10 year Bond yeild(5) 7.52 7.90 7.76 7.98 7.97 8.17 7.94 7.60 8.69 9.30 7.70

Call Rate(%) 5.55 6.05 7.75 6.00 9.25 9.00 4.13 6.05 8.60 8.88 7.50

Repo Rate(%) 6.50 7.00 7.25 7.50 7.50 7.75 7.75 7.75 8.00 9.00 7.50

Name of the Bank NIMs as Decline in Decrease Yield Yield Diff. Decline Impact of Chg in

on Sep' 08 deposit rate in PLR (%) expected (%) in deposit decline in NIMs

(%) since Sep 08 since Sep 08 for FY09 cost CRR & SLR (%)

(%) (%) (%) (%) (%)

Axis 3.51 0.50 0.75 9.51 9.28 -0.23 0.09 0.15 0.00

Bank of Baroda 2.77 0.50 0.75 8.77 8.52 -0.25 0.10 0.14 -0.01

Bank of India 3.20 0.50 0.75 9.20 8.95 -0.25 0.08 0.14 -0.03

Canara Bank 2.70 0.50 0.75 8.70 8.45 -0.25 0.07 0.19 0.01

HDFC Bank 4.20 0.50 0.75 10.20 10.03 -0.17 0.06 0.12 0.01

ICICI Bank 2.40 0.50 0.75 8.40 8.20 -0.20 0.11 0.14 0.05

Indian Overseas Bank 3.19 0.50 0.75 9.19 8.94 -0.25 0.08 0.19 0.01

Punjab National Bank 3.78 0.50 0.75 9.78 9.53 -0.25 0.05 0.19 -0.01

State Bank of India 3.36 0.50 0.75 9.36 9.11 -0.25 0.03 0.15 -0.07

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Banks with surplus SLR will be in a better position to manage liquidity

Credit growth ytd (%) Incremental credit growth Total SLR % "Release of funds due to

possible due to decline cut in policy rate (Rs bn)

in policy rate (ytd %)

Public sector

Andhra Bank 5 8 14 26.2 29

Bank of India 13 5 18 25.0 61

BOB 12 7 19 26.0 72

Corp Bank 11 9 20 26.5 36

Canara 11 8 19 25.2 85

IOB 14 11 25 27.5 65

Indian Bank 20 12 31 27.7 46

Oriental Bank 10 13 23 28.5 70

PNB 9 9 18 26.0 106

SBI 18 7 26 26.0 304

Union Bank 14 6 20 24.4 47

Private sector

HDFC Bank 18 7 25 25.0 57

Axis 15 7 22 25.0 41

ICICI Bank -2 6 4 25.0 136

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• The asset quality in the industry remained healthy except some increase in slippages for new private sector

banks.

• Rise in the proportion of non mortgage retail portfolio of new private sector banks has led to the increase in the

NPAs. We believe that is to do with banks focus on non collateralized lending which are high risk high yielding

business.

Asset quality has largely remained stable. Slippages seen in non-mortgage retail segment


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GNPA / Advances (% )

0

2

4

6

8

10

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Scheduled Commercial Banks Public Sector BanksOld Private Sector Banks New Private Sector BanksForeign Banks in I ndia

NNPA / Advances (% )

0

1

2

3

4

5

6

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Scheduled Commercial Banks Public Sector BanksOld Private Sector Banks New Private Sector BanksForeign Banks in I ndia

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Scenario Analysis – Banks valuation at different level of NPA


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P/Adj. BV Adj. BV RoE % Earnings gwth % Coverage ratio % GNPA % NNPA %

50% rise in GNPA FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E

Public Sector BanksAndhra Bank 0.77 0.71 72.7 78.4 18.3 17.1 -4.8 2.6 88.3 89.0 1.4 1.8 0.2 0.2Bank of India 1.32 1.10 188.3 227.4 21.3 23.5 13.2 24.1 69.0 69.9 2.1 2.5 0.6 0.8BOB 0.93 0.86 272.2 295.3 13.3 12.8 8.1 5.7 74.7 74.6 2.3 2.8 0.6 0.7Canara Bank 0.78 0.67 211.5 247.8 15.9 15.8 13.2 11.2 0.0 0.0 1.7 2.1 0.8 0.7Corp Bank 0.55 0.49 323.6 362.1 17.3 16.1 11.4 6.1 74.0 73.9 1.6 2.1 0.4 0.5IOB 0.70 0.61 94.6 107.4 25.1 22.1 10.9 4.8 57.0 54.0 2.0 2.5 0.9 1.1Oriental Bank 0.67 0.68 210.4 207.8 10.7 9.7 -23.8 -2.7 48.8 48.7 3.0 3.8 1.5 2.0PNB 1.31 1.24 343.8 365.4 16.9 16.0 8.9 7.3 65.9 61.2 3.4 4.3 1.2 1.7SBI 1.24 1.17 948.6 1001.7 15.9 14.8 20.5 6.6 45.4 44.4 3.2 4.0 1.8 2.2Union Bank 1.10 0.99 131.1 145.9 19.3 17.6 10.7 5.4 90.1 79.2 2.8 3.5 0.3 0.7Indian Bank 0.94 0.82 129.0 147.4 19.4 19.6 6.7 14.3 83.8 87.0 1.5 1.9 0.2 0.2

Private Sector BanksAxis Bank 1.69 1.49 265.6 301.3 14.9 17.3 29.4 31.0 56.2 56.2 0.9 1.0 0.4 0.5HDFC Bank 2.55 2.30 364.3 404.5 14.6 14.7 2.0 30.3 67.1 66.9 2.2 2.5 0.7 0.8ICICI Bank 0.96 0.96 398.3 400.2 8.8 8.8 0.6 5.5 57.4 58.5 4.4 5.7 1.9 2.4

P/Adj. BV Adj. BV RoE % Earnings gwth % Coverage ratio % GNPA % NNPA %

75% rise in GNPA FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E

Public Sector BanksAndhra Bank 0.77 0.76 72.6 74.2 18.3 15.7 -4.8 -6.8 89.5 79.0 1.6 2.4 0.2 0.5Bank of India 1.37 1.21 181.6 205.3 19.8 20.3 4.4 12.6 68.0 68.7 2.4 3.4 0.8 1.1BOB 0.98 1.01 259.7 250.3 12.0 10.6 -3.3 -4.4 69.5 61.5 2.7 3.8 0.8 1.5Canara Bank 0.80 0.74 207.4 221.7 15.8 14.7 12.2 3.4 53.4 54.5 2.0 2.9 0.9 1.3Corp Bank 0.56 0.53 318.6 336.7 16.6 12.1 7.0 -19.3 73.2 73.8 1.9 2.8 0.5 0.7IOB 0.72 0.70 91.1 93.9 22.8 17.0 -0.2 -14.8 59.9 58.5 2.3 3.3 0.9 1.4Oriental Bank 0.71 0.90 198.7 156.4 9.4 5.3 -33.1 -41.6 46.3 38.3 3.5 5.2 1.9 3.2PNB 1.38 1.52 326.4 297.8 13.1 9.5 -17.8 -22.3 70.6 66.0 4.0 5.8 1.2 2.0SBI 1.32 1.46 891.9 803.4 14.9 11.3 12.8 -15.7 42.6 40.5 3.8 5.5 2.2 3.3Union Bank 1.19 1.23 121.1 117.3 18.0 14.5 2.3 -8.5 77.7 64.1 3.3 4.8 0.7 1.7Indian Bank 0.95 0.88 126.8 137.9 18.5 16.5 1.1 -1.0 81.4 81.3 1.8 2.5 0.3 0.5

Private Sector BanksAxis Bank 1.70 1.53 264.1 295.0 14.9 16.0 29.0 20.8 56.7 62.8 1.0 1.4 0.4 0.5HDFC Bank 2.57 2.38 361.3 389.7 14.5 13.2 1.2 16.4 67.6 68.2 2.5 3.4 0.8 1.1ICICI Bank 1.00 1.11 381.2 345.1 8.1 4.9 -7.9 -37.4 51.3 52.0 5.1 7.8 2.5 3.7

16

(Top picks)

- State Bank of India• The core business will witness a strong growth driven by stability in NIMs and growth in fee income. • Fee based income is expected to witness traction given the 100% implementation of CBS and buoyant

corporate credit market. • Currently, 40% of the corporate accounts are rated, which when increased to 100% would provide a capital

release, thus improving the CRAR by 150 bps. This would enable the bank to increase its leverage translating to improvement in return ratios.

- ICICI Bank• ICICI bank is adequately capitalized to take on the underlying growth in the Indian economy.• The bank aims to increase the CASA proportion to the industry average.• The bank has undertaken measures to contain costs and this would keep the operating cost low.• We see ICICI bank as a value buy at current level, as it is trading at less than one time FY10E Adjusted book

value even after assuming NPA level of 9%.

- Bank of Baroda• The core business is shaping up well after the make over process. Credit is expected to grow at a CAGR of

22% over FY08-10 driven by growth in corporate, agriculture and international segment.• The international operation has gained traction and makes up 20% of advances. The rise in corporate

operations has enabled the bank to accelerate its fee income, which is expected to grow at 19% over FY08-10.

• We believe, increase in leverage will improve the RoE whereas RoAs are likely to remain stable.

17

(Top picks)

- Bank of India• Bank of India stands at favorable position in the risk and reward matrix. • The bank tends to provide strong earnings growth on the back of steady credit growth, stable margin,

revision of services charges, hedged investment portfolio and better asset quality with 55% of credit to large corporate.

• The bank has the potential to further increase its RoE with the increase in leverage. • The bank trades at price to book multiple of 1.2x FY09 ABV of Rs 196. We believe that better asset quality

and strong earnings growth will provide a strong upside from the current level. We have a 1-yr price target of Rs400 (+70%).

- Union bank of India• Credit to register a moderate growth of 21% over FY08-10, depicting the conscious move by the bank to

focus on quality growth without compromise on margins . • Non fund based income is expected to register healthy growth over FY08-10 driven by growth in fee income

and forex income. The banks non interest income growth can surprise on positive side in case of strong recovery in written off portfolio.

• We believe the re-balancing exercise initiated by the bank will ease margin pressure and maintain asset quality. This will increase the earning visibility and improve return ratios.

18

Risk-Reward MatrixLow

Hig

hR

EW

AR

D

ICICI BankAxis Bank

BOB; UBISBI; PNB

Low HighRISK

• ICICI Bank is expected to provide high return but at the same time

provides high risk due to increasing slippage and its reliance on

wholesale funding.

• We expect BOB and UBI to provide return of over 30%. In terms of

valuation also the banks are available at less than one time FY10

Adj. Book value even after assuming a high GNPA of 4.1% and 4.8%

compared to the current level of 1.62% & 1.9% respectively.

Company DD outlook Leverage Risk Liquidity Risk NPA Risk Stress on NIM Comment

SBI Strong business growth, but NPA a concern

ICICI Bank Concerns are priced in, less downside from current level

HDFC Bank Merger benefit will take time to flow

Axis Bank Comparatively younger loan book provides high risk

BOB Higher possibility of re-rating

BOI Change in top management a key concern

PNB Growth to remain moderate

– Healthy; – Moderate; – Vulnerable; – High; CF – Cash Flow; DD – Demand

Source:

HDFC Bank; BOI

19

Company data

O/S shares : 359mn

Market cap (Rs) : 162bn

Market cap (USD) : 3.3bn

52 - wk Hi/Lo (Rs) : 1292 / 353

Avg. daily vol. (3mth) : 5.4mn

Face Value (Rs) : 10

Share holding pattern, %

Promoters : 42.4

FII / NRI : 33.3

FI / MF : 10.9

Non Pro. Corp. Holdings : 6.8

Public & Others : 6.6

On a fast track

Investment Rationale Aggressive credit growth driven by stronger corporate relation, focus in international and agri-

segment. The bank is expected to grow its credit portfolio at a CAGR of 35% through FY10E. Margin to stabilize at 3.3% given banks ability to mobilize high CASA deposits. Aggressive

branch expansion and focus on product differentiation and a customer- centric vision will enable the bank to develop strong retail deposit franchisee.

Fee income will continue to witness high growth of 36% through FY10E driven by opportunities in cross-selling, private banking for HNI.

Operating costs to remain stable at 2% of average asset. The bank has low operating cost compared to its peers partly because of the high proportion of wholesale business.

Asset quality has been stable. We have assumed higher provision for NPL in our estimates. Concern for loss on forex derivatives are overdone. The bank declared the total MTM losses of Rs

5.65bn (suffered by its clients at the end of March 2008. Of the total MTM losses suffered by the client, 70% of it is to the clients with rating of A and above. Hence, we do not see significant slippages in derivatives transactions as most of these MTM losses will be honored by the client

Risks Axis bank has emerged as one of the leading Private banks in India under the leadership of Dr. P

J Naik. We believe that the retirement of Dr. Naik on March 2009 may impact bank’s future growth until a dynamic successor is appointed to carry forward the banks to a new league.

Valuation At CMP of Rs501 the stock trades at 1.9x FY09E ABV of Rs268 and 1.7x FY10E ABV of Rs310.

Aggressive branch expansion and focus on product differentiation and a customer- centric vision will enable to maintain high CASA proportion The robust credit and stable margin will enable the bank to achieve strong PAT growth.

Axis Bank (AXSB IN / AXBK.BO)

CO

MP

AN

Y U

PD

ATE

CMP Rs 501 Target Rs 814(+63%)

Dece

mb

er,

20

08

Y/E Mar, Rs mn FY08 FY09E FY10E

NII 25,854 34,496 42,503

PAT 10,710 14,732 19,373

NIM % 2.9 2.8 2.7

ABV per share 238.2 267.1 302.4

RoE, % 17.6 15.7 18.0

EPS, Rs 29.9 41.0 53.6

P/ABV, x 2.1 1.9 1.7

Analyst: Manish [email protected] (+9122 6667 9962)

Banking

Disclaimer & disclosures: This report must be read with the disclaimer and disclosures on the last page that form part of it

50

100

150

200

250

Apr-07 Oct-07 Apr-08 Oct-08

AXIS Bank Rel. to BSE

20

Valuation Summary

Axis

Bank

Y/E Mar FY05 FY06 FY07 FY08 FY09E FY10E

Pre-prov ROE (%) 31.8 34.2 40.2 36.6 31.9 33.7

Pre-prov ROA (%) 1.9 2.2 2.1 2.5 2.4 2.3

Net Profit 3,355 4,851 6,590 10,710 14,732 19,373

% growth 20.5 44.6 35.9 62.5 37.6 31.5

EPS (Rs) 12.3 17.4 23.4 29.9 41.0 53.6

Adj BVPS (Rs) 80.5 95.7 111.3 238.2 267.1 302.4

ROE (%) 18.8 18.3 21.0 17.6 15.7 18.0

P/E (x) 40.9 28.8 21.4 16.7 12.2 9.3

Adj. P/BV (x) 6.2 5.2 4.5 2.1 1.9 1.7

Source: Company, MF Global India Research Estimates

P/E PBV

5x

15x

25x

35x

0

300

600

900

1200

1500

1800

2100

Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08

Rs

1.5x

2.5x

3.5x

4.5x

0

200

400

600

800

1000

1200

1400

1600


Rs

21

Financials

Profit & Loss StatementY/E Mar, Rs mn FY06 FY07 FY08 FY09E FY10E

Interest on Loans 15,280 27,029 47,457 72,608 95,843Interest on Investments 11,981 16,327 21,023 26,910 31,753Others 751 1,261 1,573 1,967 2,262Total Interest Earned 28,012 44,617 70,053 101,485 129,858Total Interest Expended 18,105 29,933 44,200 66,989 87,355Net Interest Income 9,907 14,683 25,854 34,496 42,503Total non interest income 7,296 10,101 17,955 23,044 30,327Total Income 17,203 24,784 43,808 57,540 72,830Personnel Expenses 2,402 3,813 6,702 8,713 10,892Other Expenses 5,735 8,333 14,847 18,936 25,672Total Op expenses 8,137 12,146 21,549 27,649 36,564Net Inc (Loss) before prov 9,067 12,638 22,259 29,891 36,267Provision for NPAs 1,718 1,961 4,975 4,726 4,962Provision for Invst deprn 34 715 822 2,500 1,500Net Inc (Loss) before tax 7,314 9,962 16,463 22,665 29,804Provision for Income Tax 2,464 3,372 5,753 7,933 10,432Net Profit 4,851 6,590 10,710 14,732 19,373


Ratio AnalysisFY06 FY07 FY08 FY09E FY10E

Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 34.2 40.2 36.6 31.9 33.7RoAE (%) 18.3 21.0 17.6 15.7 18.0 Pre-provision Operating ROA (%) 2.1 2.1 2.4 2.4 2.3 RoAB (%) 1.2 1.1 1.2 1.2 1.2 EPS (Rs.) 17.4 23.4 29.9 41.0 53.6 Dividend per share (Rs.) 3.5 4.5 6.0 7.0 8.0 Book Value (Rs.) 103.5 120.8 245.2 276.8 319.7 Adj BV (Rs.) 95.7 111.3 238.2 267.1 302.4 Revenue Analysis Interest income on IBA (%) 6.7 7.5 7.9 8.2 8.3 Interest cost on IBL (%) 4.6 5.3 5.4 5.9 6.0 NIM on IBA / AWF (%) 2.38 2.46 2.90 2.8 2.7 Core fee Inc / AWF (%) 1.4 1.5 1.7 1.8 1.9 Portfolio gains / Total Inc (%) 8.2 2.5 5.3 1.1 0.7 Op.Exp / TI (%) 51.2 50.2 51.8 48.6 50.6 Op.Exp / AWF (%) 2.0 2.0 2.4 2.2 2.3 Employee exps / Op exps (%) 29.5 31.4 31.1 31.5 29.8 Tax / Pre-tax earnings (%) 33.7 33.8 34.9 35.0 35.0 Asset Quality GNPAs / Gr Adv (%) 1.7 1.1 0.7 0.9 1.1 NNPAs / Net Adv (%) 1.0 0.7 0.4 0.4 0.6 Growth Ratio Loans (%) 43.0 65.3 61.8 40.0 27.1 Investments (%) 50.8 25.6 25.7 26.1 16.7 Deposits (%) 26.5 46.8 48.9 35.1 25.4 Networth (%) 19.2 17.9 157.8 13.5 16.1 Net Int Income (%) 35.5 48.2 76.1 33.4 23.2 Non-fund based income (%) 40.4 58.3 65.9 42.5 32.9 Non-Int Exp (%) 40.0 49.3 77.4 28.3 32.2 Profit Before Tax (%) 44.9 36.2 65.2 37.7 31.5 Net profit (%) 44.6 35.9 62.5 37.6 31.5 Asset / Liability ProfileAvg CASA/ Deposits (%) 39.0 39.8 43.2 45.6 45.7 Avg Adv / Avg Dep (%) 51.8 58.9 65.2 68.8 70.3 Avg Invst / Avg Dep (%) 50.7 49.9 42.3 37.9 35.4 Incr Adv / Deposits (%) 79.7 77.5 79.0 77.5 75.2 Avg Cash / Avg Dep (%) 12.4 10.7 13.2 12.9 11.2 Capital AdequacyCapital Adequacy Ratio: 11.1 11.6 13.7 12.0 10.6Tier I (%) 7.3 6.4 10.2 8.9 7.9 Internal Capital Generation rate (%) 16.0 18.4 25.2 13.9 16.6 NNPAs to Equity (%) 7.6 7.8 2.8 3.5 5.4

Balance SheetY/E Mar, Rs mn FY06 FY07 FY08 FY09E FY10E

AssetsCash & Bal with RBI 36,418 69,183 125,042 140,707 159,344Loans, Adv & Int accrued 223,142 368,765 596,611 835,256 1,061,625Investments 219,244 275,391 346,130 436,579 509,307Fixed Assets (Net) 5,677 6,732 9,229 12,229 14,229Other assets 12,829 12,502 18,766 21,581 24,819Total Assets 497,311 732,572 1,095,778 1,446,352 1,769,323

LiabilitiesShare capital 2,787 2,816 3,577 3,595 3,613Reserves and Surplus 26,069 31,206 84,130 95,918 111,909Hybrid Capital 0 4,140 3,986 4,140 4,140Debt 17,886 30,875 30,308 30,914 31,532Borrowing 26,809 51,956 56,240 79,714 83,700Total Deposits 401,780 589,629 878,040 1,185,846 1,486,997Other liab incld prov 21,979 21,951 39,498 46,225 47,432Total Liabilities 497,311 732,572 1,095,778 1,446,352 1,769,323

Axis

Bank

22

Company data

O/S shares : 525mn



52 - wk Hi/Lo (Rs) : 465 / 189




Promoters : 64.5

FII / NRI : 16.0

FI / MF : 11.9



Strong earnings growth

Investment Rationale• Focus on corporate and international credit will translate into an healthy credit growth of ~23%

over FY08-10.• Requisite hike in PLR and re-negotiation of rate with sub-PLR clients will enable the bank to

maintain its margin.• Re-pricing of fee based products will continue the growth movement in CEB segment. The fee

based products are re-priced upward by an average 20%-25% effective from mid of August' 08. • The current account to witness increase in float following banks appointment as trustee bank for

pension scheme. • Lower provisioning will improve profitability. Improvement in the Asset quality (Net NPA at

0.52%) and a hedged investment portfolio (Investment in HTM at 83%) will reduce the provision requirement towards NPA as well as investment depreciation, resulting in an improvement in profitability.

• We believe that the bank will not be affected by the new norms of accounting for farm loan waiver issued by RBI as it has not made any add back of its provision towards farm loan waived during Q1FY09.

Risks Slow down in credit off take will have a negative impact on the earnings growth of the bank

Valuation Bank of India stands at very favorable position in the risk and reward matrix. The bank tends to

provide strong earnings growth on the back of steady credit growth, stable margin, revision of services charges, hedged investment portfolio and better asset quality with 55% of credit to large corporate. The bank has the potential to further increase its RoE with the increase in leverage. The bank trades at price to book multiple of 1.4x FY09 ABV of Rs 200. We believe that better asset quality and strong earnings growth will provide a strong upside from the current level. We have a 1-yr price target of Rs400 (+45%).

Bank of India (BOI IN / BOI.BO)

CO

MP

AN

Y U

PD

ATE

CMP Rs 276 Tgt Rs 400 (+45%)


NII 42,293 51,821 62,698

PAT 20,094 25,390 31,647

NIM % 2.7 2.7 2.7

ABV per share 156.6 196.7 250.6

RoE, % 24.4 23.5 25.4

EPS, Rs 38.2 48.3 60.2

P/ABV, x 1.8 1.4 1.1

Dece

mb

er,

200

8

60

110

160

210

260


BOI Rel. to BSE

23

Valuation Summary

Ban

k o

f In

dia


Pre-prov ROE (%) 35.2 41.2 44.0 44.9 41.1 43.8

Pre-prov ROA (%) 1.7 1.9 1.9 2.4 2.3 2.3

Net Profit (Rs mn) 3,409 7,014 11,232 20,094 25,390 31,647

% growth -66.2 105.8 60.1 78.9 26.4 24.6

EPS (Rs) 7.0 14.4 23.0 38.2 48.3 60.2

Adj BVPS (Rs) 56.2 79.0 104.8 156.6 196.7 250.6

ROE (%) 8.0 14.8 20.6 24.4 23.5 25.4

P/E (x) 39.5 19.2 12.0 7.2 5.7 4.6

Adj. P/BV (x) 4.9 3.5 2.6 1.8 1.4 1.1


P/E PBV

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0

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800


Rs

0.5x

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2.5x

3.5x

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24

Financials


Ban

k o

f In

dia


Interest on Loans 45,730 63,975 92,751 119,185 145,406Interest on Investments 21,613 22,161 26,390 30,942 35,893Others 2,944 3,227 4,411 4,852 5,337Total Interest Earned 70,287 89,363 123,552 154,980 186,636Total Interest Expended 41,531 54,958 81,260 103,158 123,938Net Interest Income 28,756 34,405 42,293 51,821 62,698Total non interest income 11,844 15,630 21,169 21,182 22,950Total Income 40,600 50,034 63,462 73,004 85,648Personnel Expenses 13,281 16,140 16,570 17,960 19,500Other Expenses 7,870 9,944 9,880 10,518 11,570Total Op expenses 21,151 26,084 26,450 28,478 31,070Net Inc (Loss) before prov 19,449 23,950 37,012 44,525 54,578Provision for NPAs 6,241 7,441 8,628 8,714 10,021Provision for Invst deprn 4,051 1,180 1,537 1,500 1,500Net Inc (Loss) before tax 9,157 15,329 26,847 34,311 43,057Provision for Income Tax 2,142 4,097 6,753 8,921 11,410Net Profit 7,014 11,232 20,094 25,390 31,647


Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 41.2 44.0 44.9 41.1 43.8RoAE (%) 14.8 20.6 24.4 23.5 25.4 Pre-provision Operating ROA (%) 1.9 1.9 2.3 2.3 2.3 RoAB (%) 0.7 0.9 1.3 1.3 1.4 EPS (Rs.) 14.4 23.0 38.2 48.3 60.2 Dividend per share (Rs.) 3.4 4.0 4.0 5.0 6.0 Book Value (Rs.) 102.1 120.8 201.4 210.3 263.4 Adj BV (Rs.) 79.0 104.8 156.6 196.7 250.6 Revenue Analysis Interest income on IBA (%) 7.0 7.2 7.9 8.0 8.0 Interest cost on IBL (%) 4.4 4.7 5.5 5.7 5.6 NIM on IBA / AWF (%) 2.9 2.8 2.7 2.7 2.7 Core fee Inc / AWF (%) 0.7 0.7 0.7 0.7 0.7 Portfolio gains / Total Inc (%) 2.9 4.3 6.1 2.5 1.6 Op.Exp / TI (%) 53.6 54.4 44.2 40.0 36.9 Op.Exp / AWF (%) 2.1 2.1 1.7 1.5 1.3 Employee exps / Op exps (%) 62.8 61.9 62.6 63.1 62.8 Tax / Pre-tax earnings (%) 23.4 26.7 25.2 26.0 26.5 Asset Quality GNPAs / Gr Adv (%) 3.8 2.5 1.7 1.7 1.8 NNPAs / Net Adv (%) 1.5 0.8 0.5 0.5 0.4 Growth Ratio Loans (%) 16.4 30.6 33.3 24.8 22.8 Investments (%) 12.6 12.0 17.7 16.0 15.2 Deposits (%) 19.3 27.5 25.2 23.7 21.3 Networth (%) 11.6 18.3 79.6 4.4 25.3 Net Int Income (%) 20.5 19.6 22.9 22.5 21.0 Non-fund based income (%) 9.7 26.9 28.9 11.0 11.1 Non-Int Exp (%) 3.2 23.3 1.4 7.7 9.1 Profit Before Tax (%) 98.3 67.4 75.1 27.8 25.5 Net profit (%) 105.8 60.1 78.9 26.4 24.6 Asset / Liability ProfileAvg CASA/ Deposits (%) 34.7 33.3 31.2 30.9 31.1 Avg Adv / Avg Dep (%) 66.6 67.9 71.8 74.4 75.2 Avg Invst / Avg Dep (%) 35.3 32.0 29.2 27.4 25.9 Incr Adv / Deposits (%) 60.0 76.7 93.7 78.9 81.4 Avg Cash / Avg Dep (%) 10.9 13.4 13.0 11.4 11.2 Capital Adequacy Capital Adequacy Ratio: 11.5 11.6 12.0 11.2 11.1Tier I (%) 7.0 6.5 7.7 8.2 8.5 Internal Capital Generation rate (%) 12.4 19.2 31.3 25.8 25.8 NNPAs to Equity (%) 19.5 10.7 5.6 6.4 4.9


AssetsCash & Bal with RBI 114,460 174,055 177,174 207,450 252,640Loans, Adv & Int accrued 651,737 851,159 1,134,763 1,415,896 1,738,936Investments 324,646 363,583 427,876 496,517 572,235Fixed Assets (Net) 8,100 7,893 24,261 24,761 25,761Other assets 23,800 21,480 24,226 24,396 23,929Total Assets 1,122,743 1,418,170 1,788,300 2,169,021 2,613,501

LiabilitiesShare capital 4,881 4,881 5,259 5,259 5,259Reserves and Surplus 43,384 52,578 83,004 105,318 133,273Hybrid Capital 0 3,695 9,971 10,589 13,269Debt 27,685 43,895 39,488 44,488 46,488Borrowing 58,939 66,208 71,724 80,331 88,115Total Deposits 943,807 1,203,717 1,506,484 1,862,823 2,259,660Other liab incld prov 42,473 41,702 54,737 60,211 67,437Total Liabilities 1,122,743 1,418,170 1,788,300 2,169,021 2,613,501

25

Company data

O/S shares : 364mn

Market cap (Rs) : 91.5bn


52 - wk Hi/Lo (Rs) : 479 / 188




Promoters : 53.8

FII / NRI : 19.5

FI / MF : 18.5



Core business is shaping well

Investment Rationale The core business is shaping up well after the make over process. Credit is expected to grow at a

CAGR of 22% over FY08-10 driven by growth in corporate, agriculture and international segment. The international operation has gained traction and makes up 20% of advances. The rise in

corporate operations has enabled the bank to accelerate its fee income, which is expected to grow at 19% over FY08-10.

We believe, increase in leverage will improve the RoE whereas RoAs are likely to remain stable due to the upward pressure on operating expenses.

The capital adequacy is at a comfortable position of 13% (tier I: 7.8%) with enough headroom available in the tier II category for it to comfortably comply with the new Basel II guidelines. The bank is not adequately leveraged which we believe would improve its RoE as it increases its leverage to support its future growth.

Some of the strategic investments made by the bank can unlock value for the investors. We have an Outperformer rating and a price target of Rs 498

Risks Low credit off take to impact earnings growth Slippages is a concern area

Valuation At CMP of Rs265 the stock trades at 0.9x FY09E ABV of Rs282 and 0.8x FY10E ABV of Rs325.

Focus on corporate business, thrust on building international franchisee, higher turnaround of branch resources and focus on fee based income will drive earnings.

Bank of Baroda (BOB IN / BOB.BO)

CO

MP

AN

Y U

PD

ATE

CMP Rs 265Target Rs 350 (+32%)

Dece

mb

er,

20

08


NII 39,118 46,831 55,865

PAT 14,355 17,554 20,862

NIM % 2.5 2.4 2.4

ABV per share 247.1 282.4 323.9

RoE, % 14.6 15.0 15.8

EPS, Rs 39.3 48.0 57.1

P/ABV, x 1.1 0.9 0.8

50

90

130

170

210

250


BOB Rel. to BSE

26

Valuation Summary

Ban

k o

f B

aro

da


Pre-prov ROE (%) 39.9 30.2 31.8 30.8 28.2 28.5

Pre-prov ROA (%) 2.5 2.0 2.1 1.9 1.7 1.6

Net Profit (Rs mn) 6,855 8,270 10,265 14,355 17,554 20,862

% growth -29.1 20.6 24.1 39.8 22.3 18.8

EPS (Rs) 23.3 22.6 28.1 39.3 48.0 57.1

Adj BVPS (Rs) 162.0 194.3 217.1 247.1 282.4 323.9

ROE (%) 12.7 12.3 12.4 14.6 15.0 15.8

P/E (x) 11.4 11.7 9.4 6.7 5.5 4.6

Adj. P/BV (x) 1.64 1.36 1.22 1.07 0.9 0.8


P/E PBV

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27

Financials


Interest on Loans 37,778 59,374 84,130 109,369 133,430Interest on Investments 29,064 27,689 27,373 32,848 36,789Others 3,658 5,064 6,632 7,295 7,368Total Interest Earned 70,500 92,126 118,135 149,511 177,587Total Interest Expended 38,751 54,266 79,017 102,680 121,723Net Interest Income 31,749 37,861 39,118 46,831 55,865Total non interest income 12,418 13,818 20,510 18,855 19,191Total Income 44,166 51,679 59,628 65,686 75,055Personnel Expenses 15,238 16,441 18,038 20,202 22,222Other Expenses 8,610 9,003 11,305 12,436 15,136Total Op expenses 23,848 25,443 29,343 32,638 37,358Net Inc (Loss) before prov 20,319 26,236 30,286 33,048 37,697Provision for NPAs 3,640 3,951 6,347 5,712 5,826Provision for Invst deprn 7,759 5,742 1,867 940 500Net Inc (Loss) before tax 8,920 16,543 22,072 26,396 31,371Provision for Income Tax 651 6,278 7,716 8,843 10,509Net Profit 8,270 10,265 14,355 17,554 20,862



Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 30.2 31.8 30.8 28.2 28.5RoAE (%) 12.3 12.4 14.6 15.0 15.8 Pre-provision Operating ROA (%) 2.0 2.0 1.9 1.7 1.6 RoAB (%) 0.8 0.8 0.9 0.9 0.9 EPS (Rs.) 22.6 28.1 39.3 48.0 57.1 Dividend per share (Rs.) 5.7 6.9 9.3 9.0 10.0 Book Value (Rs.) 214.6 236.6 302.1 339.6 385.0 Adj BV (Rs.) 194.3 217.1 247.1 282.4 323.9 Revenue Analysis Interest income on IBA (%) 7.0 7.4 7.6 7.8 7.7 Interest cost on IBL (%) 4.2 4.7 5.4 5.7 5.6 NIM on IBA / AWF (%) 3.2 3.1 2.5 2.4 2.4 Core fee Inc / AWF (%) 0.5 0.6 0.5 0.5 0.5 Portfolio gains / Total Inc (%) 7.3 2.7 9.8 4.0 2.7 Op.Exp / TI (%) 58.0 50.6 54.0 51.7 51.1 Op.Exp / AWF (%) 2.4 2.1 1.9 1.7 1.6 Employee exps / Op exps (%) 63.9 64.6 61.5 61.9 59.5 Tax / Pre-tax earnings (%) 7.3 37.9 35.0 33.5 33.5 Asset Quality GNPAs / Gr Adv (%) 4.0 2.5 1.9 1.9 2.1 NNPAs / Net Adv (%) 0.9 0.6 0.5 0.4 0.5 Growth Ratio Loans (%) 38.0 39.6 27.6 22.4 21.1 Investments (%) (5.0) 0.5 24.8 16.3 16.8 Deposits (%) 15.2 33.4 21.7 21.6 19.0 Networth (%) 39.4 10.3 27.7 12.4 13.4 Net Int Income (%) 13.8 19.3 3.3 19.7 19.3 Non-fund based income (%) (2.9) 32.6 21.9 7.6 5.4 Non-Int Exp (%) 11.1 6.7 15.3 11.2 14.5 Profit Before Tax (%) 2.3 85.4 33.4 19.6 18.8 Net profit (%) 20.6 24.1 39.8 22.3 18.8 Asset / Liability ProfileAvg CASA/ Deposits (%) 37.0 35.0 31.9 31.5 31.9 Avg Adv / Avg Dep (%) 55.4 63.1 66.7 68.6 69.4 Avg Invst / Avg Dep (%) 42.2 33.0 29.4 29.0 28.1 Incr Adv / Deposits (%) 132.6 75.2 84.4 72.2 77.9 Avg Cash / Avg Dep (%) 12.9 14.4 14.5 14.5 14.0 Capital Adequacy Capital Adequacy Ratio: 13.7 11.8 12.9 12.3 11.8Tier I (%) 11.0 8.7 7.6 7.4 7.4 Internal Capital Generation rate (%) 11.5 10.2 13.0 15.0 15.8 NNPAs to Equity (%) 6.6 5.8 4.5 4.6 5.1



LiabilitiesShare capital 3,655 3,655 3,655 3,655 3,655Reserves and Surplus 72,539 80,706 91,593 105,298 121,883Rev Res / Foreign Exch Gains 2,250 2,139 15,191 15,191 15,191Debt 22,700 27,191 54,227 74,227 80,227Borrowing 48,022 11,426 39,270 56,848 76,182Total Deposits 943,441 1,258,795 1,532,280 1,863,179 2,217,337Other liab incld prov 41,318 47,551 59,779 43,443 47,958Total Liabilities 1,133,925 1,431,462 1,795,995 2,161,841 2,562,434

Ban

k o

f B

aro

da

28

Company data

O/S shares : 425mn


Market cap (USD) : 9bn

52 - wk Hi/Lo (Rs) : 1825 / 792




Promoters : 19.4

FII / NRI : 49.2

FI / MF : 9.5



Operational Excellence

Investment Rationale The liquidity squeeze has returned the pricing power to the banks. Credit growth on a comparable basis to be around 25%-30% during FY09. Fee income stream to improve by Q4FY09 with the restoration of the third party distribution

business, retail and SME business of erstwhile CBoP. The operating efficiency to show improvement gradually. Cost to income ratio which on a

blended basis stands at 55%-56% is expected to stabilize at 50% level over a period of 18-24 months.

CASA proportion to return to the pre-merger level of 48%-50% over a period of 18-24 months. NIMs are expected to remain at the current level of ~4% during FY09 and expected to increase with the improvement in CASA proportion.

Slippage to increase for few quarters as the two-wheeler and personal loan portfolio of erstwhile CBoP matures in next 2 years. The GNPA is expected to increase marginally from 1.5% to 1.7% over few quarters.

The retail portfolio of HDFC bank (excluding CBoP) remains healthy. Amongst the retail the most vulnerable segment like credit card and personal loan portfolio has also not witnessed stress. Large part of the these portfolios are to the banks internal customer, with decent track record.

Risks Integrating the 400 odd branches of erstwhile CBoP stands as a biggest risk of the bank. The rapid rise in credit off-take in the retail segment could result in slippages. Valuation At CMP of Rs984 the stock trades at 2.6x 1-yr forward ABV of Rs372 and 2.3x 2-yr forward ABV of

Rs424. HDFC Bank has shown remarkable consistency in its earnings growth. HDFC Bank's success story is attributable to the innovative and proactive approach of its high quality management. The bank has a strong funding base of 45% low cost deposits. This is reflected in the premium valuation that it enjoys on the bourses.

HDFC Bank (HDFCB IN / HDBK.BO)

CO

MP

AN

Y U

PD

ATE

CMP Rs 984Target Rs 1503 (+53%)


NII 52,279 83,129 105,640

PAT 15,902 23,027 30,201

NIM % 4.8 4.6 4.8

ABV per share 316.0 372.6 423.2

RoE, % 17.7 15.6 15.7

EPS, Rs 44.9 49.3 64.7

P/ABV, x 3.1 2.6 2.3

Dece

mb

er,

20

08

80

130

180

230


HDFC Bank Rel. to BSE

29

Valuation Summary

HD

FC B

an

k


Pre-prov ROE (%) 37.3 40.3 43.7 42.0 35.4 34.3

Pre-prov ROA (%) 3.0 3.3 3.2 3.5 2.9 3.0

Net Profit (Rs mn) 6,656 8,708 11,415 15,902 23,027 30,201

% growth 30.6 30.8 31.1 39.3 44.8 31.2

EPS (Rs) 21.5 27.8 35.7 44.9 49.3 64.7

Adj BVPS (Rs) 143.9 164.3 195.1 316.0 372.6 423.2

ROE (%) 18.5 17.7 19.5 17.7 15.6 15.7

P/E (x) 45.8 35.4 27.5 21.9 20.0 15.2

Adj. P/BV (x) 6.8 6.0 5.0 3.1 2.6 2.3


P/E PBV

16x

24x

32x

40x

0

500

1000

1500

2000

2500

3000

Apr-03 Apr-05 Apr-07

Rs

2x

3x

4x

5x

0

500

1000

1500

2000

2500

Apr-03 Apr-05 Apr-07

Rs

30

Financials


Interest on Loans 27,002 43,342 69,667 119,156 164,436Interest on Investments 16,317 20,575 28,720 39,014 45,647Others 1,435 2,563 2,762 4,396 5,187Total Interest Earned 44,753 66,479 101,150 162,567 215,270Total Interest Expended 19,295 31,795 48,871 79,437 109,630Net Interest Income 25,458 34,685 52,279 83,129 105,640Total non interest income 11,240 15,162 22,832 32,253 37,681Total Income 36,698 49,847 75,110 115,383 143,321Personnel Expenses 4,868 7,769 13,014 23,117 28,202Other Expenses 12,043 16,439 24,443 40,127 49,275Total Op expenses 16,911 24,208 37,456 63,243 77,477Net Inc (Loss) before prov 19,787 25,639 37,654 52,139 65,844Provision for NPAs 4,798 8,610 12,160 15,238 17,981Provision for Invst deprn 2,452 638 2,683 2,533 2,786Net Inc (Loss) before tax 12,538 16,392 22,811 34,369 45,077Provision for Income Tax 3,830 4,977 6,909 11,342 14,875Net Profit 8,708 11,415 15,902 23,027 30,201



Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 40.3 43.7 42.0 35.4 34.3RoAE (%) 17.7 19.5 17.7 15.6 15.7 Pre-provision Operating ROA (%) 3.2 3.1 3.4 3.1 2.9 RoAB (%) 1.44 1.43 1.47 1.28 1.36 EPS (Rs.) 27.8 35.7 44.9 49.3 64.7 Dividend per share (Rs.) 5.5 7.0 8.5 9.0 9.5 Book Value (Rs.) 169.2 201.4 324.4 384.4 438.0 Adj BV (Rs.) 164.3 195.1 316.0 372.6 423.2 Revenue Analysis Interest income on IBA (%) 7.4 8.3 9.3 9.1 9.7 Interest cost on IBL (%) 3.7 4.6 5.2 5.6 5.5 NIM on IBA / AWF (%) 4.2 4.4 4.8 4.6 4.8 Core fee Inc / AWF (%) 1.9 1.9 1.8 1.7 1.6 Portfolio gains / Total Inc (%) (1.4) (1.4) 3.3 0.1 0.1 Op.Exp / TI (%) 45.4 47.9 51.5 54.9 54.1 Op.Exp / AWF (%) 2.8 3.0 3.5 3.5 3.5 Employee exps / Op exps (%) 28.8 32.1 34.7 36.6 36.4 Tax / Pre-tax earnings (%) 30.5 30.4 30.3 33.0 33.0 Asset Quality GNPAs / Gr Adv (%) 1.5 1.4 1.4 1.9 2.4 NNPAs / Net Adv (%) 0.4 0.4 0.5 0.5 0.5 Growth Ratio Loans (%) 37.1 33.9 35.1 75.5 29.5 Investments (%) 47.6 9.7 57.3 21.0 28.2 Deposits (%) 53.3 23.6 46.3 59.2 28.2 Networth (%) 17.3 21.4 78.7 56.2 13.9 Net Int Income (%) 43.2 36.2 50.7 59.0 27.1 Non-fund based income (%) 64.0 34.7 28.8 57.3 16.9 Non-Int Exp (%) 55.8 43.2 54.7 68.8 22.5 Profit Before Tax (%) 28.0 30.7 39.2 50.7 31.2 Net profit (%) 30.8 31.1 39.3 44.8 31.2 Asset / Liability ProfileAvg CASA/ Deposits (%) 56.6 55.5 54.7 49.5 47.1 Avg Adv / Avg Dep (%) 63.8 63.8 63.1 68.1 67.2 Avg Invst / Avg Dep (%) 52.6 48.5 48.0 42.1 37.5 Incr Adv / Deposits (%) 48.2 88.8 50.8 79.0 71.4 Avg Cash / Avg Dep (%) 12.2 12.6 13.8 14.4 12.8 Capital AdequacyCapital Adequacy Ratio: 11.4 13.0 13.6 11.2 11.2Tier I (%) 8.6 8.3 10.3 8.8 8.6 Internal Capital Generation rate (%) 15.5 17.3 20.0 16.4 14.3 NNPAs to Equity (%) 2.9 3.2 2.6 3.1 3.4

HD

FC B

an

k


AssetsCash & Bal with RBI 69,190 90,467 147,783 215,313 262,712Loans, Adv & Int accrued 350,613 469,448 634,269 1,113,342 1,441,570Investments 293,158 321,573 505,840 611,965 784,793Fixed Assets (Net) 8,551 9,667 11,751 19,149 23,936Other assets 13,553 21,202 32,122 44,598 51,288Total Assets 735,064 912,356 1,331,766 2,004,368 2,564,299

LiabilitiesShare capital 3,131 3,194 3,544 4,671 4,671Reserves and Surplus 49,864 61,138 111,428 174,887 199,897Debt 17,020 30,826 32,491 42,491 62,491Borrowing 28,585 28,154 44,789 68,336 102,504Total Deposits 566,232 700,018 1,024,434 1,630,473 2,090,154Other liab incld prov 70,231 87,027 115,081 83,510 104,581Total Liabilities 735,063 912,356 1,331,766 2,004,368 2,564,299

31

Company data

O/S shares : 1113mn



52 - wk Hi/Lo (Rs) : 1465 / 282




FII / NRI : 65.6

FI / MF : 19.5




NII 73,041 88,904 106,671

PAT 41,577 42,465 48,695

NIM % 2.1 2.2 2.3

ABV per share 389.4 400.1 427.9

RoE, % 11.6 8.8 9.5

EPS, Rs 37.4 37.8 42.9

P/ABV, x 1.1 1.1 1.0

Buy

The recent global financial meltdown has raised concerns on the bank’s overseas assets, hence significantly widening the valuation discount to its peer group. The market has become risk averse due to the collapse of some of the bigger names in the financial world. The bank’s overseas subsidiaries has an asset base of US$ 12bn (11% of the total asset base) and a combined networth of US$ 790mn. The bank is adequately capitalized with CRAR above 13%. We believe that the bank is currently trading below its trough valuation of Rs 540 per share. We see the overhang persisting through the current market dislocation and the potential of a bounce-back much faster when the dust settles down. Our sensitivity analysis shows that the worst case per share valuation of the bank is Rs 540, where we have assumed the value of its overseas subsidiaries at zero. At the CMP of Rs 422, the stock is trading at 1.1x FY09 ABV of Rs 404. The core book is currently trading at a historic low of 0.66x 1-yr forward ABV of Rs346 (assuming a 1-yr forward value of Rs 193 per share for its subsidiaries).

Investment Rationale Corporate lending and international credit will be the key growth drivers, which are expected to

grow at a CAGR of 15% over FY08-10. The bank aims to increase the CASA proportion to the industry average of ~28% by FY10. Growth in fee income will continue to surpass balance sheet growth. The non-banking business will continue to witness a high growth rate. The life insurance

business is expected to grow at a CAGR of ~30% over FY08-10. The bank has undertaken measures to contain costs and this would keep the operating cost low. The bank is adequately capitalized to take on the underlying growth in the Indian economy. We

believe that the increase in leverage will improve the return ratios.

Risks The asset quality remains a concern. But, we believe that it is to do with the banks’ focus on

non-collateralized lending, which are high-risk, high-yield businesses. Further tightening of liquidity will have a negative impact on banks’ cost of funds.

ICICI Bank (ICICIBC IN / ICBK.BO) CMP Rs 422

Target Rs 795 (+89%)

CO

MP

AN

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PD

ATE

Dece

mb

er,

20

08

0

50

100

150

200


ICICI Bank Rel. to BSE

32

Valuation Summary & SOTP


ICIC

I B

ank


Pre-prov ROE (%) 27.7 26.3 24.9 22.3 17.6 19.3

Pre-prov ROA (%) 2.2 2.4 2.1 2.3 2.1 2.1

Net Profit (Rs mn) 20,053 25,400 31,089 41,577 42,465 48,695

% growth 23.9 26.7 22.4 33.7 2.1 14.7

EPS (Rs) 27.2 28.5 34.6 37.4 37.8 42.9

Adj BVPS (Rs) 154.3 241.7 252.1 389.4 400.1 427.9

Adj BVPS (Rs) (banking business) 137.0 223.0 228.4 356.4 363.0 390.1

ROE (%) 18.9 14.3 13.2 11.6 8.8 9.5

P/E (x) 15.5 14.8 12.2 11.3 11.2 9.8

Adj. P/BV (x) 2.73 1.74 1.67 1.08 1.05 0.99

Normal case valuation Share holding Business Valuation/ Valuation Criteria

of ICICI Valuation Rs bn share

ICICI Bank 638.8 502 DDM

ICICI Securities ltd 99.9% 26 23 15 times FY09E PAT of Rs 1.7 bn

ICICI Prudential life insurance company ltd 74.0% 281 187 15 times FY09E NBAP of Rs 18.75 bn

ICICI Lombard General insurance company ltd 74.0% 17 11 15 times FY09E PAT of Rs 1.1bn

ICICI AMC 51.0% 54 25 8% FY10E AUM of Rs680bn

ICICI Venture capital fund management company ltd 100.0% 10 9 8% of FY09E AUM of Rs 124bn

Other banking subsidiary including HFC's 42 38 1x FY09 ABV

795

33

Worst case Valuation


ICIC

I B

ank

Rolling 1-yr forward P/ABV for core banking business

Share holding Business Valuation/ Valuation Criteria

of ICICI Valuation Rs bn share

ICICI Bank 345 one time 1-yr forward ABV of Rs 345

ICICI Securities ltd 99.9% 9 9 10 times 1-yr forward of Rs 950mn (yoy decline of 20%)

ICICI Prudential life insurance company ltd 74.0% 238 159 15 times 1-yr forward NBAP of Rs 15.8bn (14% NBAP margin)

ICICI Lombard General insurance company ltd 74.0% 12 8 10 times 1-yr forward PAT of Rs 1.15bn

ICICI AMC 51.0% 15 7 2% of 1-yr forward AUM of Rs764bn

ICICI Venture capital fund management company ltd 100.0% 3 3 2% of 1-yr forward AUM of Rs 142bn

HFC 9 8 1 times 1-yr forward ABV of Rs 9bn

Overseas banking subsidiaries nil

Total 537

0

200

400

600

800

1000

1200

1400

Ap

r-0

4

Ju

n-0

4

Au

g-0

4

Oct-

04

De

c-0

4

Feb

-0

5

Ap

r-0

5

Ju

n-0

5

Au

g-0

5

Oct-

05

De

c-0

5

Feb

-0

6

Ap

r-0

6

Ju

n-0

6

Au

g-0

6

Oct-

06

De

c-0

6

Feb

-0

7

Ap

r-0

7

Ju

n-0

7

Au

g-0

7

Oct-

07

De

c-0

7

Feb

-0

8

Ap

r-0

8

Ju

n-0

8

Au

g-0

8

Oct-

08 0

50

100

150

200

250

1x 1.5x2x 2.5xprice (excl. sub value) value of subsidiary (per share)

34

Valuation discount / premium to peer group

The bank is trading at a significant discount to its peer group. The discount is an all-time low compared to Axis

bank. The discount has also widened significantly compared to HDFC Bank.


ICIC

I B

ank

HDBK Vs ICBK

0

20

40

60

80

100

120

Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08

HDBK ICBK

Axis Vs ICBK

0

50

100

150

200

250

Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08

Axis ICBK

35

Financials


Interest on Loans 96,850 160,963 226,010 271,212 317,318Interest on Investments 36,927 49,885 74,660 85,859 94,445Others 4,068 9,094 7,213 8,295 9,125Total Interest Earned 137,844 219,943 307,883 365,366 420,888Total Interest Expended 95,974 163,585 234,842 276,462 314,217Net Interest Income 41,870 56,358 73,041 88,904 106,671Total non interest income 49,831 69,279 88,108 87,571 95,704Total Income 91,701 125,637 161,149 176,475 202,374Personnel Expenses 10,823 16,167 20,789 23,699 27,254Other Expenses 34,199 50,738 60,753 68,077 76,292Total Op expenses 45,022 66,906 81,542 91,777 103,546Net Inc (Loss) before prov 46,679 58,731 79,607 84,698 98,828Provision for NPAs 7,947 21,593 27,010 32,412 38,894Provision for Invst deprn 7,767 671 2,036 500 550Net Inc (Loss) before tax 30,966 36,467 50,561 51,786 59,384Provision for Income Tax 5,565 5,378 8,984 9,322 10,689Net Profit 25,400 31,089 41,577 42,465 48,695



Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 26.3 24.9 22.3 17.6 19.3RoAE (%) 14.3 13.2 11.6 8.8 9.5 Pre-provision Operating ROA (%) 2.2 2.0 2.1 2.0 2.0 RoAB (%) 1.3 1.1 1.2 1.0 1.1 EPS (Rs.) 28.5 34.6 37.4 37.8 42.9 Dividend per share (Rs.) 8.5 10.0 11.0 12.0 13.0 Book Value (Rs.) 253.5 274.2 420.8 440.5 463.9 Adj BV (Rs.) 241.7 252.1 389.4 400.1 427.9 RoE of banking business 15.3 14.7 12.0 10.2 11.1Revenue Analysis Interest income on IBA (%) 7.0 7.8 8.7 9.0 9.1 Interest cost on IBL (%) 5.4 6.3 7.4 7.7 7.6 NIM on IBA / AWF (%) 2.1 2.0 2.1 2.2 2.3 Core fee Inc / AWF (%) 1.8 1.8 2.0 2.0 2.0 Portfolio gains / Total Inc (%) 8.2 9.7 13.2 4.1 0.7 Op.Exp / TI (%) 53.1 58.4 57.3 54.2 51.5 Op.Exp / AWF (%) 2.3 2.4 2.3 2.3 2.2 Employee exps / Op exps (%) 24.0 24.2 25.5 25.8 26.3 Tax / Pre-tax earnings (%) 18.0 14.7 17.8 18.0 18.0 Asset Quality GNPAs / Gr Adv (%) 1.5 2.1 3.4 4.2 4.5 NNPAs / Net Adv (%) 0.7 1.0 1.6 1.8 1.4 Growth Ratio Loans (%) 59.9 34.0 15.2 15.0 15.1 Investments (%) 38.7 27.8 22.0 10.9 11.6 Deposits (%) 64.6 39.7 6.2 16.5 16.1 Networth (%) 74.9 9.3 89.8 5.7 6.4 Net Int Income (%) 47.5 34.6 29.6 21.7 20.0 Non-fund based income (%) 49.4 35.6 19.2 16.3 16.9 Non-Int Exp (%) 36.1 48.6 21.9 12.6 12.8 Profit Before Tax (%) 22.5 17.8 38.6 2.4 14.7 Net profit (%) 26.7 22.4 33.7 2.1 14.7 Asset / Liability ProfileAvg CASA/ Deposits (%) 23.1 22.0 23.8 26.2 27.1 Avg Adv / Avg Dep (%) 86.9 84.1 85.4 87.2 85.8 Avg Invst / Avg Dep (%) 47.4 42.1 43.6 45.3 43.4 Incr Adv / Deposits (%) 83.8 75.2 205.5 82.9 84.3 Avg Cash / Avg Dep (%) 11.2 13.6 15.7 15.5 15.8 Capital Adequacy Capital Adequacy Ratio: 13.4 11.3 14.0 12.9 12.5Tier I (%) 9.2 7.4 11.8 10.7 8.9 Internal Capital Generation rate (%) 14.2 9.9 12.1 6.2 6.9 NNPAs to Equity (%) 4.7 8.1 7.5 9.2 7.8


AssetsCash & Bal with RBI 170,402 371,213 380,411 448,885 536,841Loans, Adv & Int accrued 1,461,631 1,958,656 2,256,161 2,594,585 2,986,462Investments 737,017 941,996 1,149,411 1,275,157 1,423,071Fixed Assets (Net) 39,807 39,234 41,089 49,307 59,168Other assets 105,032 135,482 170,879 160,572 160,077Total Assets 2,513,889 3,446,581 3,997,951 4,528,506 5,165,619

LiabilitiesShare capital 8,898 8,993 11,127 11,238 11,350Reserves and Surplus 213,162 234,139 453,575 480,263 511,694Debt 101,444 184,491 182,839 201,122 221,235Borrowing 385,219 512,560 656,484 686,643 788,481Total Deposits 1,664,678 2,325,511 2,470,279 2,878,659 3,343,354Other liab incld prov 136,989 167,827 195,483 220,262 236,505Total Liabilities 2,513,889 3,446,581 3,997,951 4,528,506 5,165,619

ICIC

I B

ank

36

Company data

O/S shares : 545mn



52 - wk Hi/Lo (Rs) : 227 / 60




Promoters : 61.2

FII / NRI : 19.0

FI / MF : 6.5



Fundamentally strong

Investment Rationale The bank expects credit growth of 25% for FY09; though it seems on the higher side but the

demand flow from infrastructure and large corporate is still strong which is expected to drive the credit growth.

Pressure on the margins; expected to stabilize at 3% level down from 3.3% last owing to rise in cost of deposit and pressure on maintaining CASA ratio.

Further, on the assets side, the Bank is focusing on the relatively high yielding retail, SME, infrastructure and agriculture segments to sustain the yields on its advances portfolio.

Focus on non interest Income- IOB has taken timely steps to improve its non-interest income stream by resorting to third party distribution of financial products. The recovery from written off portfolio is expected to remain strong. The bank recovered around Rs 1600 mn last year from written off portfolio. The size of the portfolio currently stands at Rs5.5bn.

The investment portfolio is well hedged currently with 85% of SLR in HTM category. The bank has shifted investment from AFS to HTM during 1st week of April' 08, thus insulating itself to the large extent from MTM losses and also one time hit on account of shifting the portfolio. The duration of AFS portfolio now stands at 2 years (4.5 yrs previously).

The bank plans to raise Tier II capital to augment its capital adequacy which currently stands at 11.96%. It has head room of Rs25bn in Tier II segment and Rs5bn in Tier I segment.

Risks The bank’s focus on SME and mid-sized corporate lending might lead to increase in the slippages Valuation At CMP of Rs70 the stock trades at 0.7x FY09E ABV of Rs97.9 and 0.6x FY10E ABV of Rs119. The

key strength of IOB has been its focus on the SME/SSI sector that enables the bank to register higher NIMs and better returns. The stability in NIMs will provide the steady growth in NII, in line with credit growth. The increasing proportion of investment in HTM category will also reduce the provisioning requirement going forward, thus increasing the earning visibility.

Indian Overseas Bk (IOB IN / IOBK.BO)

CO

MP

AN

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PD

ATE

CMP Rs 70Tgt Rs 166(+138%)


NII 26,795 30,404 35,142

PAT 12,023 13,726 15,104

NIM % 3.0 2.7 2.6

ABV per share 80.4 97.7 115.8

RoE, % 27.2 25.7 23.5

EPS, Rs 22.1 25.2 27.7

P/ABV, x 0.9 0.7 0.6

Dece

mb

er,

20

08

50

90

130

170

210


IOB Rel. to BSE

37

Valuation Summary

Ind

ian O

vers

eas

Ban

k


Pre-prov ROE (%) 56.1 52.4 43.5 45.3 36.3 38.2

Pre-prov ROA (%) 2.7 2.8 2.2 2.2 1.7 1.8

Net Profit (Rs mn) 6,513 7,833 10,084 12,023 13,726 15,104

% growth 27.0 20.3 28.7 19.2 14.2 10.0

EPS (Rs) 12.0 14.4 18.5 22.1 25.2 27.7

Adj BVPS (Rs) 38.8 52.0 66.3 80.4 97.7 115.8

ROE (%) 28.0 27.2 28.1 27.2 25.7 23.5

P/E (x) 5.8 4.8 3.8 3.2 2.8 2.5

Adj. P/BV (x) 1.8 1.3 1.0 0.9 0.7 0.6


P/E PBV

2x

4x

6x

8x

0

50

100

150

200

250


Rs

0.5x

1x

1.5x

2x

0

40

80

120

160

200

240

280


Rs

38

Financials

Source: Company, MF Global India Research Estimates * Inclusive of amortisation costs

Ind

ian O

vers

eas

Ban

k


Interest on Loans 26,291 39,010 55,220 71,786 88,297Interest on Investments 16,733 17,033 22,357 24,592 27,543Others 1,039 2,278 2,106 2,527 2,906Total Interest Earned 44,063 58,321 79,683 98,905 118,746Total Interest Expended 23,391 32,713 52,888 68,501 83,604Net Interest Income 20,672 25,608 26,795 30,404 35,142Total non interest income 7,282 3,870 8,076 5,575 8,427Total Income 27,954 29,478 34,871 35,979 43,569Personnel Expenses 8,936 9,311 9,497 10,447 11,909Other Expenses 3,952 4,567 5,356 6,122 7,113Total Op expenses 12,888 13,878 14,853 16,568 19,022Net Inc (Loss) before prov 15,066 15,600 20,018 19,410 24,547Provision for NPAs 1,938 2,168 1,910 2,578 2,965Provision for Invst deprn 3,272 -302 1,561 -2,100 750Net Inc (Loss) before tax 9,856 13,734 16,547 18,932 20,833Provision for Income Tax 2,023 3,650 4,524 5,206 5,729Net Profit 7,833 10,084 12,023 13,726 15,104


Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 52.4 43.5 45.3 36.3 38.2RoAE (%) 27.2 28.1 27.2 25.7 23.5 Pre-provision Operating ROA (%) 2.7 2.2 2.2 1.7 1.8 RoAB (%) 1.5 1.5 1.3 1.2 1.1 EPS (Rs.) 14.4 18.5 22.1 25.2 27.7 Dividend per share (Rs.) 2.6 3.5 3.5 4.5 5.0 Book Value (Rs.) 58.3 73.2 89.1 107.0 128.9 Adj BV (Rs.) 52.0 66.3 80.4 97.7 115.8 Revenue Analysis Interest income on IBA (%) 8.2 8.4 8.8 8.9 8.8 Interest cost on IBL (%) 4.8 5.1 6.4 6.6 6.5 NIM on IBA / AWF (%) 3.8 3.69 2.96 2.73 2.60 Core fee Inc / AWF (%) 0.7 0.7 0.6 0.6 0.6 Portfolio gains / Total Inc (%) 9.1 8.8 7.0 1.4 1.2 Op.Exp / TI (%) 50.3 51.2 45.6 46.7 44.2 Op.Exp / AWF (%) 2.4 2.0 1.6 1.5 1.4 Employee exps / Op exps (%) 69.3 67.1 63.9 63.1 62.6 Tax / Pre-tax earnings (%) 20.5 26.6 27.3 27.5 27.5 Asset Quality GNPAs / Gr Adv (%) 3.5 2.4 1.6 1.8 2.0 NNPAs / Net Adv (%) 0.7 0.6 0.6 0.7 0.8 Growth Ratio Loans (%) 37.9 35.4 28.4 24.8 21.0 Investments (%) (0.4) 26.7 18.6 16.2 18.4 Deposits (%) 14.1 36.1 22.5 27.1 22.2 Networth (%) 23.4 25.6 21.7 20.0 20.4 Net Int Income (%) 11.4 23.9 4.6 13.5 15.6 Non-fund based income (%) 16.0 (69.7) 286.2 (12.2) 56.2 Non-Int Exp (%) 8.4 7.7 7.0 11.6 14.8 Profit Before Tax (%) 1.4 39.3 20.5 14.4 10.0 Net profit (%) 20.3 28.7 19.2 14.2 10.0 Asset / Liability ProfileAvg CASA/ Deposits (%) 39.3 36.9 34.0 33.3 33.1 Avg Adv / Avg Dep (%) 60.3 66.4 68.6 69.5 68.5 Avg Invst / Avg Dep (%) 41.1 36.9 35.2 33.0 31.1 Incr Adv / Deposits (%) 152.1 67.3 86.1 65.4 66.3 Avg Cash / Avg Dep (%) 9.1 10.6 12.6 12.1 12.4 Capital Adequacy Capital Adequacy Ratio: 13.0 13.3 12.0 11.4 11.0Tier I (%) 8.5 8.2 7.9 7.5 7.3 Internal Capital Generation rate (%) 26.4 26.8 26.1 23.8 21.2 NNPAs to Equity (%) 7.1 6.5 7.5 8.7 10.1


AssetsCash & Bal with RBI 37,072 89,793 103,413 128,658 168,076Loans, Adv & Int accrued 347,562 470,603 604,238 753,997 912,337Investments 194,935 246,938 292,892 340,231 402,936Fixed Assets (Net) 4,577 5,107 5,586 5,686 5,936Other assets 9,431 10,128 12,468 21,524 28,867Total Assets 593,578 822,568 1,018,597 1,250,096 1,518,152

LiabilitiesShare capital 5,448 5,448 5,448 5,448 5,448Reserves and Surplus 25,102 33,276 41,979 52,837 64,754Debt 11,000 26,250 26,250 31,250 36,250Borrowing 5,366 28,962 37,286 46,608 53,599Total Deposits 507,091 690,022 845,172 1,074,124 1,313,088Other liab incld prov 36,346 34,630 30,272 34,529 39,212Total Liabilities 593,578 822,568 992,347 1,250,096 1,518,152

39

Company data

O/S shares : 315mn



52 - wk Hi/Lo (Rs) : 720 / 330




Promoters : 57.8

FII / NRI : 18.6

FI / MF : 17.8



Core earnings to bounce back

Investment Rationale The accelerated growth in advances without a commensurate growth in low cost deposits had

impacted its margins earlier. The reset of its credit target to lower level and focus on low cost deposits will enable the bank to maintain its margins. We expect a credit growth of 22% over FY07-10.

The bank has de-risked its investment book with transfer of securities to the held-to-maturity (HTM) category. This will reduce the vulnerability of reported earnings to rising bond yields, thus improving the predictability of the earnings. The investment book in AFS category now stands at 29% of total investment with duration of this category at 3 yrs.

Higher proportion of business under CBS coverage provides the opportunity for growth in Fee and Commission Income. This also helps control operating costs and brings down Cost/ Income Ratio. Currently 83% of bank’s total business is covered under CBS.

Some of the strategic investments made by the bank can unlock value for the investors.

Risks Asset quality has been a concern for the bank with huge rise in GNPA during H1FY08. But we

believe most of the rise in NPA are technical in nature and would subside going forward.

Valuation At CMP of Rs481 the stock trades at 1.3x FY09E ABV of Rs356 and 1.1x FY10E ABV of Rs447. We

expect the bank to report a steady credit growth of 22% over FY07-10. The cost / income ratio will decline as the braches expand with the same headcount. We expect core earnings to bounce back resulting in an improvement in return ratios.

Punjab National Bk (PNB IN / PNBK.BO)

CO

MP

AN

Y U

PD

ATE

CMP Rs 481Tgt Rs 574 (+19%)


NII 55,342 63,688 76,835

PAT 20,488 25,883 30,621

NIM % 3.1 3.0 3.0

ABV per share 301.1 357.3 426.8

RoE, % 18.0 19.4 19.6

EPS, Rs 65.0 82.1 97.1

P/ABV, x 1.6 1.3 1.1

Dece

mb

er,

20

08

60

80

100

120

140

160


PNB Rel. to BSE

40

Valuation Summary

Punja

b N

ati

onal B

ank


Pre-prov ROE (%) 32.5 32.3 36.5 35.2 33.2 34.5

Pre-prov ROA (%) 1.9 2.1 2.4 2.3 2.1 2.1

Net Profit (Rs mn) 14,110 14,398 15,401 20,488 25,883 30,621

% growth 27.3 2.0 7.0 33.0 26.3 18.3

EPS (Rs) 44.7 45.7 48.8 65.0 82.1 97.1

Adj BVPS (Rs) 235.1 264.2 281.7 301.1 357.3 426.8

ROE (%) 21.4 17.2 15.5 18.0 19.4 19.6

P/E (x) 10.8 10.5 9.9 7.4 5.9 5.0

Adj. P/BV (x) 2.0 1.8 1.7 1.6 1.3 1.1


P/E PBV

3x

6x

9x

12x

0

200

400

600

800

1000

1200

1400

Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08

Rs

0.8x

1.2x

1.6x

2x

0

200

400

600

800

1000


Rs

41

Sum of the Parts Valuation


Punja

b N

ati

onal B

ank

Ownership Valuation of the Value per share Valuation Criteria

business (Rs bn) (Rs)

Banking business 100% 163 518 DDM

Subsidiaries

PNB Gilt 74% 5 12 1x FY 08 book value of Rs 5.24 bn

PNB Housing Finance 100% 2 5 1x FY 08 book value of Rs 1.62 bn

Associate

UTI AMC 25% 20 16 UTI AMC valued at 4% of Current AUM of Rs 450 bn (Equity portion 45%)

Principal PNB AMC 30% 5 5 Principal PNB AMC valued at 4% of current AUM of Rs 150 bn

(Equity portion 25% of AUM)

Relative valuation

Eton-Reliance MF deal valued at 13% of AUM (Equity portion 45-50% )

Rebecco-Canbank MF deal valued at 10% of AUM (Equity portion 25-30%)

UBS-Standard Chartered MF deal valued at 5% of AUM (Equity portion 10-15%)

Total 556

42

Financials


Punja

b N

ati

onal B

ank


Interest on Loans 53,415 76,439 104,391 132,576 159,091Interest on Investments 37,409 32,878 36,113 41,169 47,344Others 2,124 3,040 2,146 2,168 2,385Total Interest Earned 92,948 112,357 142,650 175,913 208,820Total Interest Expended 49,174 60,229 87,309 112,225 131,985Net Interest Income 43,774 52,128 55,342 63,688 76,835Total non interest income 14,782 17,304 19,976 19,508 20,180Total Income 58,556 69,432 75,317 83,196 97,015Personnel Expenses 21,150 23,524 24,615 27,077 29,785Other Expenses 9,082 9,738 10,639 11,800 13,352Total Op expenses 30,232 33,262 35,255 38,877 43,137Net Inc (Loss) before prov 28,324 36,170 40,062 44,319 53,878Provision for NPAs -505 7,518 5,156 6,187 7,424Provision for Invst deprn 8,477 6,961 1,947 -500 750Net Inc (Loss) before tax 20,353 21,691 32,959 38,632 45,703Provision for Income Tax 5,955 6,291 12,472 12,749 15,082Net Profit 14,398 15,401 20,488 25,883 30,621


Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 32.3 36.5 35.2 33.2 34.5RoAE (%) 17.2 15.5 18.0 19.4 19.6 Pre-provision Operating ROA (%) 2.1 2.4 2.2 2.0 2.1 RoAB (%) 1.1 1.0 1.2 1.2 1.2 EPS (Rs.) 45.7 48.8 65.0 82.1 97.1 Dividend per share (Rs.) 6.0 10.0 13.0 14.0 15.0 Book Value (Rs.) 280.4 314.0 373.7 439.1 518.4 Adj BV (Rs.) 264.2 281.7 301.1 357.3 426.8 Revenue Analysis Interest income on IBA (%) 7.0 7.5 8.1 8.2 8.2 Interest cost on IBL (%) 4.1 4.4 5.4 5.7 5.6 NIM on IBA / AWF (%) 3.3 3.5 3.1 3.0 3.0 Core fee Inc / AWF (%) 0.7 0.8 0.9 0.8 0.7 Portfolio gains / Total Inc (%) 8.5 5.7 6.2 3.3 1.7 Op.Exp / TI (%) 56.0 50.6 49.7 48.3 45.2 Op.Exp / AWF (%) 2.3 2.2 2.0 1.8 1.7 Employee exps / Op exps (%) 70.0 70.7 69.8 69.6 69.0 Tax / Pre-tax earnings (%) 29.3 29.0 37.8 33.0 33.0 Asset Quality GNPAs / Gr Adv (%) 4.2 3.5 2.8 2.8 3.0 NNPAs / Net Adv (%) 0.3 0.8 0.6 0.7 0.8 Growth Ratio Loans (%) 23.5 29.4 23.7 22.3 19.1 Investments (%) (18.6) 9.7 19.4 16.7 16.7 Deposits (%) 15.7 16.9 19.0 20.7 19.4 Networth (%) 14.9 11.3 18.0 16.7 17.4 Net Int Income (%) 14.4 19.1 6.2 15.1 20.6 Non-fund based income (%) (32.1) 33.1 14.6 8.4 10.3 Non-Int Exp (%) (14.7) 10.0 6.0 10.3 11.0 Profit Before Tax (%) 6.8 6.6 51.9 17.2 18.3 Net profit (%) 2.0 7.0 33.0 26.3 18.3 Asset / Liability ProfileAvg CASA/ Deposits (%) 47.6 47.4 44.4 43.3 43.8 Avg Adv / Avg Dep (%) 57.3 63.3 68.2 70.1 70.3 Avg Invst / Avg Dep (%) 42.2 34.1 33.2 32.6 31.7 Incr Adv / Deposits (%) 87.6 108.6 85.9 76.9 71.4 Avg Cash / Avg Dep (%) 16.1 15.6 11.2 11.4 11.5 Capital Adequacy Capital Adequacy Ratio: 12.0 12.3 13.5 12.2 11.7Tier I (%) 10.1 8.9 9.0 8.8 8.5 Internal Capital Generation rate (%) 15.9 13.5 16.2 19.9 20.1 NNPAs to Equity (%) 2.2 7.0 6.1 7.3 8.1



LiabilitiesShare capital 3,153 3,153 3,153 3,153 3,153Reserves and Surplus 87,587 98,263 104,673 125,394 150,484Hybrid Capital 0 0 11,000 15,000 15,000Debt 19,350 36,948 50,648 55,648 60,648Borrowing 66,872 19,489 54,466 59,912 65,903Total Deposits 1,198,784 1,401,052 1,667,820 2,013,581 2,404,799Other liab incld prov 73,903 62,382 83,087 104,952 118,895Total Liabilities 1,452,673 1,624,225 1,990,204 2,392,897 2,834,039

43

Company data

O/S shares : 635mn


Market cap (USD) : 15bn

52 - wk Hi/Lo (Rs) : 2429 / 966




Promoters : 59.4

FII / NRI : 18.2

FI / MF : 12.5



Value unlocking and consolidation

Investment Rationale The core business will witness a growth driven by stability in NIMs, restoration of growth in fee

income and cost rationalization. Lower provision for investment depreciation will drive the profitability.

Credit growth is expected to be ~22% through FY10 driven by mid-sized corporate, international business and agri-lending.

Improved technology and moderate credit growth will restore the CASA deposit to +40% level. Roll out of CBS and large branch penetration will enable the bank to compete aggressively for

non government business. We expect the bank’s CEB income to increase at a CAGR of 15% through FY10 on the back of growth in corporate and international business.

Non-banking subsidiary will continue to register strong growth. The infusion of further capital will enable the bank to continue growing. The fund infusion to SBI life could be around Rs 20bn.

Currently, 40% of the corporate accounts are rated, which when increased to 100% would provide a capital release, thus improving the CRAR by 150 bps. This would enable the bank to increase its leverage translating to improvement in return ratios.

Risks Asset quality has remained fairly stable. The decline in top rated client from 12% to 10% in last

one and half years, warrants increase in provisioning requirement. Hence we have assumed higher provision for NPLs in our estimate.

Valuation At CMP of Rs1238 the stock trades at 1.2x 1-yr forward ABV of Rs979 and 1.1x 2-yr forward ABV

of Rs1124. The core business will witness a strong growth driven by stability in NIMs, restoration of growth in fee income and cost rationalization. Along with SBI, it’s Banking Subsidiaries (7 Associate Banks) and other subsidiaries are also recording a decent growth. Positive news flow relating to value unlocking in associate bank including non banking subsidiaries will act as a trigger.

State Bank of India (SBIN IN / SBI.BO)

CO

MP

AN

Y U

PD

ATE

CMP Rs 1238Tgt 1634 Rs (+30%)

Dece

mb

er,

20

08

60

100

140

180

220

260

Apr-07 Sep-07 Feb-08 Jul-08

SBI Rel. to BSE


NII 235,518 267,820 310,866

PAT 89,606 108,798 125,534

NIM % 2.7 2.5 2.5

ABV per share 864 991 1,129

RoE, % 16.7 16.0 16.0

EPS, Rs 142 172 199

P/ABV, x 1.4 1.2 1.1

44

Valuation Summary (Consolidated)

Sta

te B

an

k o

f In

dia


Pre-prov ROE (%) 89.8 42.4 34.7 34.1 30.5 30.9

Pre-prov ROA (%) 5.0 2.4 2.0 2.1 2.0 1.9

Net Profit 54,645 55,298 63,644 89,606 108,798 125,534

% growth #DIV/0! 1.2 15.1 40.8 21.4 15.4

EPS (Rs) 103.8 105.1 120.9 141.9 172.3 198.8

Adj BVPS (Rs) 541.6 617.9 718.6 864.3 991.2 1129.3

Adj BVPS (Rs) (banking business) 536.0 609.0 704.0 841.0 944.0 1072.0

ROE (%) 32.3 15.3 15.4 16.7 16.0 16.0

P/E (x) 11.9 11.8 10.2 8.7 7.2 6.2

Adj. P/BV (x) 2.3 2.0 1.7 1.4 1.2 1.1


P/E PBV

5x

10x

15x

20x

0

1000

2000

3000

4000


Rs

1x

2x

3x

4x

0

1000

2000

3000

4000


Rs

45

Sum of the Parts Valuation


Sta

te B

an

k o

f In

dia

Ownership Value per share Comment

"SBI and its banking subsidiaries " 1394 DDM

SBI Life 74.0% 164 17 times FY09 NBAP of Rs8.24bn

SBI cards 60.0% 19 20 times FY09 PAT of Rs0.98bn

SBI Fund Mgt. 63.0% 24 7% of FY09 AUM of Rs350bn

SBI factors 54.0% 4 20 times FY09 PAT of Rs 0.23bn

SBI Caps 86.2% 29 10 times FY09 PAT of Rs2.12 bn

1,634

46

Financials (Standalone)


Interest on Loans 176,963 248,392 352,281 440,351 528,422Interest on Investments 160,993 104,562 119,442 136,163 155,226Others 21,840 19,470 17,780 19,558 22,492Total Interest Earned 359,796 372,423 489,503 596,073 706,140Total Interest Expended 203,904 221,841 319,291 399,764 475,050Net Interest Income 155,891 150,582 170,212 196,309 231,090Total non interest income 43,850 67,653 86,949 96,789 114,595Total Income 199,741 218,234 257,162 293,099 345,685Personnel Expenses 81,230 79,326 77,859 84,087 92,496Other Expenses 36,021 38,909 48,227 52,399 60,163Total Op expenses 117,251 118,235 126,086 136,486 152,659Net Inc (Loss) before prov 82,490 99,999 131,076 156,612 193,025Provision for NPAs 5,530 20,187 25,679 32,612 34,243Provision for Invst deprn 7,899 3,909 1,008 -3,200 500Net Inc (Loss) before tax 69,061 75,903 104,389 127,200 158,282Provision for Income Tax 24,995 30,490 37,098 44,520 55,399Net Profit 44,067 45,413 67,291 82,680 102,883



Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 31.9 33.9 32.6 29.9 32.3RoAE (%) 17.0 15.4 16.8 15.8 17.2 Pre-provision Operating ROA (%) 1.7 1.9 2.0 2.0 2.1 RoAB (%) 1.0 0.9 1.1 1.1 1.2 EPS (Rs.) 83.7 86.3 106.6 130.9 162.9 Dividend per share (Rs.) 14.0 14.0 21.5 23.0 25.0 Book Value (Rs.) 525.3 594.7 776.5 880.5 1,014.2 Adj BV (Rs.) 432.0 494.8 658.9 757.1 869.7 Revenue Analysis Interest income on IBA (%) 7.8 7.3 8.0 8.0 8.0 Interest cost on IBL (%) 5.0 4.9 5.7 6.0 6.0 NIM on IBA / AWF (%) 3.4 3.0 2.8 2.6 2.6 Core fee Inc / AWF (%) 1.0 1.0 1.1 1.1 1.1 Portfolio gains / Total Inc (%) 3.0 (0.3) 3.8 0.6 0.5 Op.Exp / TI (%) 60.5 54.0 50.9 46.8 44.4 Op.Exp / AWF (%) 2.6 2.3 2.1 1.8 1.7 Employee exps / Op exps (%) 69.3 67.1 61.8 61.6 60.6 Tax / Pre-tax earnings (%) 36.2 40.2 35.5 35.0 35.0 Asset Quality GNPAs / Gr Adv (%) 4.0 3.0 3.1 3.0 3.0 NNPAs / Net Adv (%) 1.9 1.6 1.8 1.5 1.5 Growth Ratio Loans (%) 29.3 28.9 23.5 22.9 19.7 Investments (%) (17.3) (7.8) 27.0 11.8 12.2 Deposits (%) 1.9 14.5 23.4 19.9 19.4 Networth (%) 14.8 13.2 56.7 13.4 15.2 Net Int Income (%) 11.8 (3.4) 13.0 15.3 17.7 Non-fund based income (%) 12.7 20.2 23.1 27.0 22.0 Non-Int Exp (%) 7.6 0.8 6.6 8.2 11.8 Profit Before Tax (%) 5.9 9.9 37.5 21.9 24.4 Net profit (%) 2.4 3.1 48.2 22.9 24.4 Asset / Liability ProfileAvg CASA/ Deposits (%) 43.7 47.6 47.2 46.5 46.7 Avg Adv / Avg Dep (%) 58.0 70.3 74.5 75.5 76.5 Avg Invst / Avg Dep (%) 48.6 39.0 35.6 34.8 32.5 Incr Adv / Deposits (%) 836.9 135.8 77.1 88.3 80.2 Avg Cash / Avg Dep (%) 11.0 11.7 12.2 12.5 12.3 Capital Adequacy Capital Adequacy Ratio 11.9 12.3 12.6 11.3 10.9Tier I (%) 9.4 8.0 8.5 7.6 7.4 Internal Capital Generation rate (%) 15.2 13.8 17.2 13.9 15.7 NNPAs to Equity (%) 17.7 16.8 15.1 14.0 14.2


AssetsCash & Bal with RBI 445,600 519,687 674,663 817,562 940,196Loans, Adv & Int accrued 2,616,415 3,373,365 4,167,682 5,123,298 6,134,125Investments 1,672,591 1,541,692 1,957,994 2,189,067 2,455,750Fixed Assets (Net) 27,529 28,189 33,735 36,735 39,735Other assets 176,560 202,720 381,189 287,622 400,977Total Assets 4,938,695 5,665,652 7,215,263 8,454,285 9,970,783

LiabilitiesShare capital 5,263 5,263 6,315 6,315 6,315Reserves and Surplus 271,178 307,723 484,012 549,700 634,114Debt 49,858 144,307 187,818 150,255 170,255Borrowing 306,412 397,033 517,274 569,002 625,902Total Deposits 3,837,340 4,394,692 5,424,962 6,507,151 7,766,797Other liab incld prov 468,644 399,247 569,807 626,788 702,327Total Liabilities 4,938,695 5,665,652 7,215,263 8,454,285 9,970,783

Sta

te B

an

k o

f In

dia

47

Financials (Consolidated)


Sta

te B

an

k o

f In

dia


Interest on Loans 176,963 248,392 352,281 440,351 528,422Interest on Investments 160,993 104,562 119,442 136,163 155,226Others 21,840 19,470 17,780 19,558 22,492Total Interest Earned 359,796 372,423 489,503 596,073 706,140Total Interest Expended 203,904 221,841 319,291 399,764 475,050Net Interest Income 155,891 150,582 170,212 196,309 231,090Total non interest income 43,850 67,653 86,949 96,789 114,595Total Income 199,741 218,234 257,162 293,099 345,685Personnel Expenses 81,230 79,326 77,859 84,087 92,496Other Expenses 36,021 38,909 48,227 52,399 60,163Total Op expenses 117,251 118,235 126,086 136,486 152,659Net Inc (Loss) before prov 82,490 99,999 131,076 156,612 193,025Provision for NPAs 5,530 20,187 25,679 15,407 33,896Provision for Invst deprn 7,899 3,909 1,008 14,820 0Net Inc (Loss) before tax 69,061 75,903 104,389 126,385 159,129Provision for Income Tax 24,995 30,490 37,098 44,235 55,695Net Profit 44,067 45,413 67,291 82,150 103,434


Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 42.4 34.7 34.1 30.5 30.9RoAE (%) 15.3 15.4 16.7 16.0 16.0 Pre-provision Operating ROA (%) 2.3 1.9 2.0 1.9 1.8 RoAB (%) 0.9 0.9 1.0 1.0 1.0 EPS (Rs.) 105.1 120.9 141.9 172.3 198.8 Dividend per share (Rs.) 14.0 14.0 21.5 23.0 25.0 Book Value (Rs.) 734.1 840.3 1,001.9 1,152.1 1,327.2 Adj BV (Rs.) 617.9 718.6 864.3 991.2 1,129.3 Revenue Analysis Interest income on IBA (%) 7.8 7.5 8.1 8.1 8.1 Interest cost on IBL (%) 5.0 5.0 6.1 6.2 6.1 NIM on IBA / AWF (%) 3.2 3.0 2.7 2.5 2.5 Core fee Inc / AWF (%) 1.0 1.0 1.0 1.0 1.0 Portfolio gains / Total Inc (%) 3.6 2.9 7.0 3.0 2.0 Op.Exp / TI (%) 55.3 59.8 60.6 57.7 55.8 Op.Exp / AWF (%) 2.8 2.8 2.7 2.5 2.3 Employee exps / Op exps (%) 61.2 53.0 43.7 43.6 44.2 Tax / Pre-tax earnings (%) 36.3 38.6 34.1 34.0 34.0 Asset Quality GNPAs / Gr Adv (%) 3.6 2.7 2.6 2.9 3.2 NNPAs / Net Adv (%) 1.7 1.3 1.5 1.4 1.4 Growth Ratio Loans (%) 30.4 30.2 23.8 22.0 20.0 Investments (%) (12.8) (4.6) 26.3 6.1 17.0 Deposits (%) 7.5 17.0 22.0 21.5 20.0 Networth (%) 14.1 14.5 43.0 15.0 15.2 Net Int Income (%) 11.1 (0.7) 8.9 13.7 16.1 Non-fund based income (%) 11.3 24.8 17.4 25.0 22.0 Non-Int Exp (%) 21.9 13.6 19.7 10.1 10.6 Profit Before Tax (%) 8.0 21.2 29.8 21.1 15.4 Net profit (%) 1.2 15.1 40.8 21.4 15.4 Asset / Liability ProfileAvg CASA/ Deposits (%) 41.1 42.9 42.2 41.7 41.6 Avg Adv / Avg Dep (%) 60.5 70.8 75.2 75.7 75.6 Avg Invst / Avg Dep (%) 48.0 38.8 35.9 33.9 31.4 Incr Adv / Deposits (%) 230.3 122.5 82.7 79.6 77.8 Avg Cash / Avg Dep (%) 10.3 11.0 11.4 11.4 11.3 Capital Adequacy Capital Adequacy Ratio 12.6 12.4 12.7 12.2 12.0Tier I (%) 9.6 8.1 8.7 8.7 8.5 Internal Capital Generation rate (%) 14.7 15.1 17.9 15.4 15.6 NNPAs to Equity (%) 15.8 14.5 13.7 14.0 14.9


AssetsCash & Bal with RBI 573,365 724,769 890,284 1,068,341 1,285,420Loans, Adv & Int accrued 3,743,168 4,872,860 6,032,219 7,359,308 8,831,169Investments 2,345,986 2,238,411 2,827,790 3,000,045 3,509,919Fixed Assets (Net) 39,563 39,994 46,628 48,959 51,407Other assets 265,855 275,237 471,727 495,313 520,079Total Assets 6,968,324 8,151,744 10,272,695 11,971,966 14,197,994

LiabilitiesShare capital 5,263 5,263 6,315 6,315 6,315Reserves and Surplus 366,804 420,094 606,049 697,855 804,920Hybrid Capital 0 19,724 36,945 63,265 94,577Debt 90,708 202,236 279,754 321,717 369,974Borrowing 369,749 486,618 660,232 726,255 798,880Total Deposits 5,440,243 6,362,729 7,764,165 9,431,203 11,321,983Other liab incld prov 681,254 638,181 898,955 702,013 774,468Total Liabilities 6,968,324 8,132,020 10,272,695 11,971,966 14,197,994

48

Company data

O/S shares : 505mn



52 - wk Hi/Lo (Rs) : 250 / 96




Promoters : 55.4

FII / NRI : 19.4

FI / MF : 11.9



Focusing on quality growth

Investment Rationale Credit to register a moderate growth of 21% over FY08-10, depicting the conscious move by the

bank to focus on quality growth without compromise on margins . Non fund based income is expected to register healthy growth over FY08-10 driven by growth in

fee income and forex income. The banks non interest income growth can surprise on positive side in case of strong recovery in written off portfolio.

Initiated move in non banking business like life insurance, wealth management etc. We believe that this move will take some time before any benefit starts accruing.

The bank is mulling the possibility of rights issue, but it still has head room of Rs 45bn in both hybrid tier I and tier II.

Risks The bank has been able to control its NPAs over past few years. Any deterioration in asset

quality can lower the earnings growth. Moreover high duration of AFS portfolio pose risk in case of more than expected rise in yields.

Valuation At CMP of Rs157 the stock trades at 1.2x FY09E ABV of Rs 136 and 0.9x FY10E ABV of Rs170. We

believe the re-balancing exercise initiated by the bank will ease margin pressure and improve asset quality. This will increase the earning visibility and improve return ratios.

Union Bank of India (UNBK IN/UNBK.BO)

CO

MP

AN

Y U

PD

ATE

CMP Rs 157Tgt Rs 161 (+17%)


NII 30,864 34,834 41,293

PAT 13,872 16,899 20,636

NIM % 2.8 2.7 2.6

ABV per share 108.8 136.1 169.5

RoE, % 22.1 21.0 21.5

EPS, Rs 27.5 33.5 40.9

P/ABV, x 1.4 1.2 0.9

Dece

mb

er,

20

08

40

80

120

160

200

240


Union Bank Rel. to BSE

49

Valuation Summary

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Pre-prov ROE (%) 42.4 35.9 41.1 41.2 34.4 33.4

Pre-prov ROA (%) 2.2 1.9 2.2 2.4 2.1 2.0

Net Profit (Rs mn) 7,190 6,747 8,448 13,872 16,899 20,636

% growth 1.0 -6.2 25.2 64.2 21.8 22.1

EPS (Rs) 15.6 13.4 16.7 27.5 33.5 40.9

Adj BVPS (Rs) 45.2 64.5 81.8 108.8 136.1 169.5

ROE (%) 24.1 17.2 17.3 22.1 21.0 21.5

P/E (x) 10.1 11.8 9.4 5.7 4.7 3.8

Adj. P/BV (x) 3.5 2.4 1.9 1.4 1.2 0.9


P/E PBV

(Rs)

2x

4x

6x

8x

0

50

100

150

200

250

300

350


(Rs)

0.5x

1x

1.5x

2x

0

50

100

150

200

250

300

350

400

450


50

Financials


Interest on Loans 37,598 50,718 67,310 82,118 98,542Interest on Investments 19,541 21,133 25,159 29,311 34,147Others 1,498 1,971 2,004 2,305 2,650Total Interest Earned 58,637 73,822 94,473 113,733 135,339Total Interest Expended 34,894 45,920 63,609 78,899 94,046Net Interest Income 23,743 27,902 30,864 34,834 41,293Total non interest income 4,940 6,865 10,870 9,972 10,085Total Income 28,683 34,768 41,733 44,806 51,378Personnel Expenses 8,668 8,737 8,453 9,129 10,225Other Expenses 5,356 6,022 7,477 7,985 9,186Total Op expenses 14,024 14,759 15,930 17,114 19,411Net Inc (Loss) before prov 14,659 20,008 25,803 27,692 31,967Provision for NPAs 2,567 4,660 6,650 4,160 3,952Provision for Invst deprn 3,150 1,550 510 1,000 500Net Inc (Loss) before tax 8,941 13,798 18,643 22,532 27,515Provision for Income Tax 2,195 5,350 4,772 5,633 6,879Net Profit 6,747 8,448 13,872 16,899 20,636



Earnings and Valuation Ratios Pre-provision Operating RoAE (%) 35.9 41.1 41.2 34.4 33.4RoAE (%) 17.2 17.3 22.1 21.0 21.5 Pre-provision Operating ROA (%) 1.8 2.1 2.3 2.0 2.0 RoAB (%) 0.9 0.9 1.3 1.3 1.3 EPS (Rs.) 13.4 16.7 27.5 33.5 40.9 Dividend per share (Rs.) 4.0 4.1 4.0 5.0 6.0 Book Value (Rs.) 90.2 102.7 145.5 172.9 206.5 Adj BV (Rs.) 64.5 81.8 108.8 136.1 169.5 Revenue Analysis Interest income on IBA (%) 7.5 7.9 8.6 8.7 8.7 Interest cost on IBL (%) 4.7 5.3 6.2 6.4 6.4 NIM on IBA / AWF (%) 3.0 3.0 2.8 2.7 2.6 Core fee Inc / AWF (%) 0.5 0.5 0.7 0.7 0.6 Portfolio gains / Total Inc (%) 3.4 3.2 7.5 2.3 1.2 Op.Exp / TI (%) 50.6 43.8 41.0 39.1 38.2 Op.Exp / AWF (%) 1.8 1.6 1.5 1.3 1.2 Employee exps / Op exps (%) 61.8 59.2 53.1 53.3 52.7 Tax / Pre-tax earnings (%) 24.5 38.8 25.6 25.0 25.0 Asset Quality GNPAs / Gr Adv (%) 3.9 3.0 2.2 2.3 2.4 NNPAs / Net Adv (%) 1.6 1.0 0.2 0.2 0.2 Growth Ratio Loans (%) 33.1 16.9 19.2 19.3 19.5 Investments (%) 13.7 8.0 21.2 17.3 19.3 Deposits (%) 19.8 15.0 22.2 19.3 20.2 Networth (%) 26.1 13.9 41.6 18.8 19.5 Net Int Income (%) 15.0 17.5 10.6 12.9 18.5 Non-fund based income (%) (21.2) 45.0 37.9 12.6 5.7 Non-Int Exp (%) (0.5) 5.2 7.9 7.4 13.4 Profit Before Tax (%) 46.2 54.3 35.1 20.9 22.1 Net profit (%) (6.2) 25.2 64.2 21.8 22.1 Asset / Liability ProfileAvg CASA/ Deposits (%) 32.4 33.4 34.5 34.6 34.6 Avg Adv / Avg Dep (%) 65.5 70.0 70.1 69.6 69.3 Avg Invst / Avg Dep (%) 36.6 34.6 33.4 33.0 32.6 Incr Adv / Deposits (%) 108.2 80.7 62.9 71.4 68.7 Avg Cash / Avg Dep (%) 9.5 9.3 9.8 9.9 10.3 Capital Adequacy Capital Adequacy Ratio: 11.4 12.8 11.7 11.3 11.3Tier I (%) 7.3 7.8 7.0 6.8 6.9 Internal Capital Generation rate (%) 15.1 15.6 25.0 25.6 25.1 NNPAs to Equity (%) 18.3 11.6 1.7 1.7 1.6


AssetsCash & Bal with RBI 63,905 84,264 100,978 125,580 156,235Loans, Adv & Int accrued 533,800 623,864 743,483 887,291 1,060,200Investments 265,876 287,201 348,042 408,188 486,972Fixed Assets (Net) 8,104 8,250 22,004 24,004 24,504Other assets 19,573 23,195 26,223 24,813 23,855Total Assets 891,258 1,026,775 1,240,731 1,469,875 1,751,767

LiabilitiesShare capital 5,051 5,051 5,051 5,051 5,051Reserves and Surplus 35,874 42,282 51,182 65,126 82,216Hybrid Capital 0 3,000 5,000 8,000 10,000Debt 27,700 31,200 32,500 37,500 42,500Borrowing 39,744 42,155 47,605 49,635 51,869Total Deposits 743,102 854,658 1,044,710 1,246,234 1,497,783Other liab incld prov 35,131 43,866 37,440 41,185 45,303Total Liabilities 891,258 1,026,779 1,240,733 1,469,875 1,751,767

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51

Thanking You

Disclosures and Disclaimers

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