banking sector 2012 sector analysis

Post on 04-Apr-2018

237 views

Category:

Documents

0 download

Embed Size (px)

TRANSCRIPT

  • 7/29/2019 Banking Sector 2012 sector analysis

    1/84

    Banking SectorValuation gap between private and public sector banks to narrow going ahead

    December 10, 20

    Kanika Thacker

    [email protected]

    Phone: +91-022-6631 8632

    Amit Jain

    [email protected]

    Phone: +91-022-6113 1355

  • 7/29/2019 Banking Sector 2012 sector analysis

    2/84

    Banking Sect

    Valuation gap between private and public sector banks to narrow goingah

    PSU banks appear to have lost favor amongst investors due to concerns relating to asset quality, change in managem

    and capital adequacy. As a result, the valuation gap between public and private banks has widened with public b

    trading at ~62% discount to private banks as compared to historical averages of ~50%. We believe that markets seem

    be over-reacting and asset quality concerns appear to be priced in. The high restructured books of public sector b

    which have acted as a dampener, on investor sentiments do not seem nearly as threatening once we exclude, SEB

    Air India restructuring which is unlikely to slip into non performing asset category. Based on our calculations, the ave

    impact from slippages of 15% from restructured books adjusted for Air India and SEBs is ~9% on the FY14E adjusted

    worth of banks. We expect these losses to be more than adequately compensated by gains from treasury books (~2

    positive impact on adjusted networth of banks with a 100 bps decline in yields), recoveries and upgradations f

    cumulative slippages of FY10-13E (The average impact from recoveries (50%) is ~14% on FY14E adjusted net wort

    our PSU banking universe) and recoveries from written off accounts (The average impact from recoveries (15%) is ~3

    on FY14E adjusted net worth of our PSU banking universe). As a result we do not expect the adjusted book value

    banks to decline further from current levels. Despite the recent run up, several public sector banks are trading betheir long term one year forward P/ABV multiples and we expect valuations to move towards long term averages.

    Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped a

    likely to see some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market exp

    the RBI to start the easing process which means yields dont have much upside risk (unless crude see a sharp up mo

    However while the market would want to play on likely lower bond yields, it is skeptical about the rising risk of n

    performing assets. However we believe though slippages will remain higher than historical averages, recoveries an

    gradations will keep a check on net slippages in the coming quarters. Moreover with policy reforms and li

    improvement in economic activity during FY14 vs. FY13, we believe the gap between private and PSU banks will nar

    going ahead.

    p

    Recommendation summary for public sector banks

    Bank

    Target

    Price

    %

    Upside Recommendation P/ABV ROAA ROAE

    FY13E FY14E FY13E FY14E FY13E FY14

    SBI 2590 13 Outperform 1.6 1.3 1.0% 1.0% 16.6% 18.2%

    PNB 1001 22 Outperform 1.3 1.1 1.0% 1.1% 16.4% 18.7%

    Union Bank 231 -9 Reduce 1.4 1.2 0.8% 0.8% 13.9% 15.3%

    BOB 877 11 Neutral 1.2 1.0 1.1% 1.1% 17.4% 17.0%BOI 311 6 Hold 1.1 0.9 0.6% 0.7% 11.2% 14.3%

    Corp. Bank 545 27 Buy 0.8 0.7 0.9% 0.9% 17.6% 18.3%

    Canara Bank 549 13 Hold 1.2 1.1 0.8% 0.9% 14.0% 15.5%

    Indian Bank 232 23 Buy 0.9 0.7 1.3% 1.4% 17.7% 18.6%

    Allahabad Bank 190 19 Buy 0.9 0.8 0.9% 1.0% 15.7% 18.1%

    OBC 371 6 Hold 0.9 0.8 0.8% 0.8% 11.6% 13.1%

    IDBI Bank 113 3 Hold 0.9 0.9 0.7% 0.6% 10.3% 10.2%Source: Sunidhi Research, * CMP as of Dec 6

  • 7/29/2019 Banking Sector 2012 sector analysis

    3/84

    Banking Se

    Sunidhi Research |

    Executive summary

    Recoveries likely to improve going ahead

    Recoveries/Upgrades rate currently trending at 10 year low at 20% for select banks vs. 10 year average of 60%, whereas st

    estimates are factoring in low recoveries in line with those seen in FY12 and H1FY13. Thus a pickup in recoveries could prove to b

    re-rating factor for public sector banks in next two years. We have analyzed the upside to currently estimated net worth for se

    public sector banks under three recovery scenario (Rate of recovery/Upgrade moving to 40%, 50% and 60% of cumulative slippa

    of FY10-13E). The average impact from recoveries (50%) is ~14% on FY14E adjusted net worth of our PSU banks universe.

    Written off book at 22% of networth can prove to be a hidden gem

    The second biggest helping hand would most likely come from the written off books of banks. Based on our calculations, the av er

    prudentially written off book for PSBs in our study stands at 22% of FY14 adjusted net-worth. We have analyzed the upside tonetworth on account of recovery from written off accounts. The average impact from recoveries (15%) is ~3.2% on FY14E adjus

    net worth of our PSU banks universe.

    Historical trend in recovery/upgrades to slippage vs. GDP

    Source: Company, Sunidhi Research

    Write off book as % of Adj. Networth

    Source: Company, Sunidhi Research

    Restructured book largely seasoned or government guaranteed

    The higher restructuring for public sector banks is partly due to restructuring in FY09-10 under the RBIs special dispensation sche

    and partly due to Air India and SEBs restructuring which is unlikely to slip into NPA category. The restructured book excluding seasoned and government guaranteed portion would indicate much lower stress in the book as compared to stress visible pr

    facie. We have analyzed the downside to the adjusted net-worth of banks on account of slippages from the restructured b

    excluding Air India and SEB exposure. The average impact from slippage of 15% is ~9% on the FY14E adjusted net-worth of ba

    (20% slippage would have an impact of 12%).

    Restructured book vs. restructured excluding AI and SEB exposure

    Source: Company, Sunidhi Research

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    12.0%

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

    PNB UBI GDP (RHS)

    0%

    5%

    10%

    15%20%

    25%

    30%

    35%

    40%

    45%

    Write off book as pe rce ntage to adjusted networth

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    12.0%

    14.0%

    Allahabad

    Indian

    OBC

    PNB

    Corp

    BOI

    IDBI

    BOB

    Canara

    UBI

    SBI

    Restructured (%) Restructured ex SEB / AI (%)

  • 7/29/2019 Banking Sector 2012 sector analysis

    4/84

    Banking Se

    Sunidhi Research |

    Select indicators suggest a revival in manufacturing

    Select indicators (such as trend in new order book, raw material inventories and manufacturing PMI) along with recent governm

    measures suggest that manufacturing activity could see a revival henceforth, which would have a positive bearing on GDP growt

    revival in manufacturing and GDP growth would lead to lower non-performing assets for banks.

    Trend in GFCF

    Source:RBI

    Trend in manufacturing PMI

    Source:Markit economics

    Trend in M1 growth

    Source: RBI

    Investment recovery likely with policy initiative

    A majority of the companies with stalled project studied by our economy team reported that policy issues such as land acquisit

    delay in environmental clearance, mining policy, fuel linkages and spectrum pricing were the main reason for the high incidence

    stalled projects in the economy. These together accounts for about 68% of total stalled projects. Majority of these stalled proj

    are in power, roads and mining sectors which remain the major stress points for banks.

    Reasons for total stalled projects

    Source:CMIE

    Stalled project by Industry

    Source: MIE

    -5%

    0%

    5%

    10%

    15%

    20%

    25%

    Q3FY10

    Q4FY10

    Q1FY11

    Q2FY11

    Q3FY11

    Q4FY11

    Q1FY12

    Q2FY12

    Q3FY12

    Q4FY12

    Q1FY13

    Q2FY13

    Gross Fixed Capital Formation

    30

    35

    40

    45

    50

    55

    60

    65

    Oct-08

    Jan-09

    Apr-09

    Jul-09

    Oct-09

    Jan-10

    Apr-10

    Jul-10

    Oct-10

    Jan-11

    Apr-11

    Jul-11

    Oct-11

    Jan-12

    Apr-12

    Jul-12

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    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

    M1 Growth

    Environmental ,

    12.5%

    Financial , 6.2%

    Government,

    11.8%

    Land

    Acquisition ,

    27.7%

    Raw

    Material ,

    15.9%

    Management,

    6.2%

    Legal, 1.1%

    Others,

    18.6%

    Cement , 1.37% Real Estate ,

    8.98%

    IT, 1.09%

    Power, 36.38%

    Transport,

    11.23%

    Metals &

    Mininig ,

    16.52%

    Telecomunicati

    on, 4.36%

    Oil & Gas,

    10.99%

    Irrigation,

    0.39%

    Others, 8.70%

  • 7/29/2019 Banking Sector 2012 sector analysis

    5/84

    Banking Se

    Sunidhi Research |

    In the last couple of months, we have seen some concrete policy intentions towards solving these issues with FinMins fast t

    reform initiatives. Clearance of the most conflicting issue of retail FDI in both the houses reflects would help the current governm

    to fast track its most pending decisions. Some of the important measures which can change the investment climate of the coun

    include new FSAs expected to be signed by Coal India with better pricing mechanism, proposal to set up a Committee

    Infrastructure, the State Electricity Distribution Responsibility Bill and setting up a National Investment Board (NIB). These along w

    step towards financial restructuring scheme of discoms are likely to bring financial turnaround of discoms. Hence, the recent po

    initiatives such as permitting FDI in retail trade, civil aviation and power trading exchanges and rationalization of diesel prices

    help improve the investment climate.

    Decline in interest rates to improve investment climate

    It is expected that RBI is likely to move toward easy monetary policy in coming few quarters which would be the biggest trigger

    change in investment climate. This would make lot of project viable and along with policy initiatives would improve debt servi

    capability of corporates.

    SBI base rate is currently ~50bps higher than 1 year CP rates

    indicating room for base rate to decline by 25-50bps in near

    term

    Source: Bloomberg, Sunidhi Research

    Also, 1 year CP is at only 100 bps premium to 1 year risk free r

    which is generally a base level reflecting that risk premium ha

    declined

    Source: Bloomberg, Sunidhi Research

    Price performance of PSBs are highly correlated to risky yields

    Historically, we have observed that valuation of PSBs is highly correlated to high risk corporate bond yields (1 Year BBB corpor

    bond yield). This is largely due to the fact that BBB bond yield is best barometer for asset quality stress as well as liquidity. In casfalling BBB bond yield, PSB stock price rallies due to a) expected improvement in liquidity scenario which would help banks

    improve margins b) likely improvement in the economy to reduce asset quality stress and c) falling interest rate would result in g

    in bond book. Considering SBI as proxy for PSBs, as we can see from chart below that SBI has rallied faster than the pace of fa

    BBB bond yields and vice versa (we consider inverse BBB bond yield for simplicity).

    Bond yields vs. SBI price performance

    Source: Bloomberg, Sunidhi Research

    -300

    -250

    -200

    -150-100

    -50

    0

    50

    100

    Jul-10

    Sep-1

    0

    Nov-1

    0

    Jan-1

    1

    Mar-

    11

    May-1

    1

    Jul-11

    Sep-1

    1

    Nov-1

    1

    Jan-1

    2

    Mar-

    12

    May-1

    2

    Jul-12

    Sep-1

    2

    Nov-1

    2

    Spread

    0.0

    1.0

    2.0

    3.0

    4.0

    5.0

    6.0

    7.0

    8.0

    9.0

    Sep-0

    5

    Feb-0

    6

    Jul-06

    Dec-0

    6

    May-0

    7

    Oct-0

    7

    Mar-

    08

    Aug-0

    8

    Jan-0

    9

    Jun-0

    9

    Nov-0

    9

    Apr-

    10

    Sep-1

    0

    Feb-1

    1

    Jul-11

    Dec-1

    1

    May-1

    2

    1 Year CP rat e premium to 1 Year Gsec yield

    -15

    -14

    -13

    -12

    -11

    -10

    -9

    -8

    -7

    -6

    -100%

    -50%

    0%

    50%

    100%

    150%

    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

    Inverse 1 year BBB Corp Bond Yield - RHS SBI Price performance (YoY %)

  • 7/29/2019 Banking Sector 2012 sector analysis

    6/84

    Banking Se

    Sunidhi Research |

    Valuation gap between private and PSU banks to narrow going ahead

    Historically public sector banks have traded at a ~50% discount to new private sector banks. Post the recent run up in private sec

    banking stocks, the discount has widened significantly with public sector banks trading at ~62% discount to private banks. T

    despite the challenging environment we harbor a positive bias towards public sector banks due to their reasonable valuations.

    Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped and is likely to

    some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market expects the RBI to start

    easing process which means yields dont have much upside risk (unless crude see a sharp upmove). However while the mar

    would want to play on likely lower bond yields, it is skeptical about the rising risk of non-performing assets. However we bel

    though slippages will remain higher than historical averages, recoveries and up gradations will keep a check on net slippages in coming quarters. Moreover with policy reforms and likely improvement in economic activity during FY14 vs. FY13, we believe

    gap between private and PSU banks will narrow going ahead.

    Additionally, a long term theme supporting valuations of public sector banks is their lower weight in indices in comparison to t

    market share.

    Public banks account for around two-thirds of the market on different parameters yet they are severely under-represented

    Market share Represented in ownership

    Deposits Advances Total Assets NII PAT Bankex (BSE) Bank Nifty (NSE) Mc

    Private Sector Banks 19% 19% 21% 23% 31% 77.2% 76.0% 57.

    PSBs 81% 81% 79% 77% 69% 22.8% 24.1% 43.

    PSB ex SBI 64% 62% 61% 56% 53% 10.3% 10.0% 25.

    Source: Company, Exchanges, Sunidhi Research

    Trend in ownership pattern for public sector banks

    Ownership (PSBs)

    Q2FY13 Q2FY12 Q2FY11

    Non promoter 26.60% 26.10% 28.21%

    FII 9.84% 10.08% 13.45%

    Insurance + MF 14.59% 15.02% 13.98%

    Ownership (PSB ex SBI)

    Non promoter 26.76% 25.32% 27.21%

    FII 10.33% 11.10% 13.05%

    Insurance + MF 12.02% 12.68% 12.81%

    Source: Capitaline, Sunidhi Research

    Valuation Summary

    ABV P/ABV Peak 5 yr

    1 yr fwd

    valuation

    Trough 5

    yr 1 yr

    fwd val.

    Average

    5 yr 1 yr

    fwd val.

    ROAA ROAE

    CMP FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14

    Private sector

    xis Bank 1365 632.2 736.7 2.2 1.9 3.4 0.9 2.2 1.7% 1.6% 20.6% 19.5

    ICICI Bank* 1135 437.5 493.5 2.1 1.9 3.1 1.1 2.3 1.6% 1.6% 16.3% 17.1

    es Bank 467 162.1 199.9 2.9 2.3 3.2 0.6 2.0 1.5% 1.5% 23.9% 23.4

    HDFC Bank 694 146.2 171.6 4.7 4.0 4.5 2.0 3.3 1.8% 1.8% 20.0% 20.8

    Federal Bank 481 358.7 409.4 1.3 1.2 1.6 0.5 1.0 1.3% 1.3% 14.1% 14.9

    Ing Vysya Bk 494 287.5 327.3 1.7 1.5 2.3 0.8 1.4 1.1% 1.1% 13.8% 14.6

    Public sector

    SBI (conso) 2307 1471.9 1726.4 1.6 1.3 2.7 0.9 1.7 1.0% 1.0% 16.6% 18.2PNB 822 613.2 770.2 1.3 1.1 2.0 0.8 1.4 1.0% 1.1% 16.4% 18.7

    Union Bank 253 182.8 209.6 1.4 1.2 2.2 0.9 1.4 0.8% 0.8% 13.9% 15.3

    BOB 792 686.8 797.7 1.2 1.0 2.0 0.7 1.3 1.1% 1.1% 17.4% 17.0

    BOI 294 261.4 310.6 1.1 0.9 2.1 0.9 1.5 0.6% 0.7% 11.2% 14.3

    Corporation 429 539.7 605.5 0.8 0.7 2.2 0.5 1.0 0.9% 0.9% 17.6% 18.3

    Canara 481 406.5 457.6 1.2 1.1 2.4 0.7 1.4 0.8% 0.9% 14.0% 15.5

    Indian Bank 189 211.9 257.2 0.9 0.7 1.6 0.6 1.0 1.3% 1.4% 17.7% 18.6

    llahabad Bk 159 170.4 210.7 0.9 0.8 1.6 0.5 0.9 0.9% 1.0% 15.7% 18.1

    OBC 350 369.5 412.5 0.9 0.8 1.5 0.4 0.9 0.8% 0.8% 11.6% 13.1

    IDBI Bank 110 116.1 126.1 0.9 0.9 1.5 0.5 1.0 0.7% 0.6% 10.3% 10.2

    *Adjusted for subsidiary valuation **Prices as on 6th

    Dec 2012 Source: Sunidhi Research

  • 7/29/2019 Banking Sector 2012 sector analysis

    7/84

    Banking Se

    Sunidhi Research |

    Impact on ABV based on key rationale

    Rs bn

    Allahabad

    Bank BOB BOI

    Canara

    Bank

    Corp.

    Bank

    IDBI

    Bank

    Indian

    Bank OBC PNB UBI SBI

    Networth with 100% buildup in

    coverage (Ex Reval) (FY14) (A) 105 329 178 203 90 161 111 120 261 115 1,159

    Stress Restructured Loans ex AI

    and SEB (Q2FY13) 72 167 135 79 52 117 72 58 186 66 392

    Default Rate (assumed 15%) (B) 11 25 20 12 8 18 11 9 28 10 59

    Impact as % of Adj Networth 10% 8% 11% 6% 9% 11% 10% 7% 11% 9% 5%Upside on Recoveries/Upg. Rate

    at 50% (C) 16 29 37 (7) 7 29 16 13 80 27 51

    Impact as % of Adj Networth 15% 9% 21% -3% 8% 18% 14% 11% 31% 23% 4%

    Upside on Recovery in Written

    Off Accounts at 15% (D) 4 6 7 12 2 6 4 5 5 4 17

    Impact as % of Adj Networth 4% 2% 4% 6% 2% 4% 3% 4% 2% 4% 1%

    Upside from Gain in Tr. Book on

    100bps Change in Yields (E) 3 6 9 10 2 1 1 3 9 2 15

    Impact as % of Adj Networth 3% 2% 5% 5% 3% 1% 1% 2% 3% 2% 1%

    Impact on Networth

    (F=C+D+E+F-B) 12 17 33 3 4 18 9 12 66 23 24

    Impact as % of Networth 11.2% 5.1% 18.5% 1.6% 4.6% 11.3% 8.5% 9.9% 25.1% 19.8% 2.1%

    Adjusted Networth (A+F) 117 346 212 206 94 179 120 132 327 138 1,183

    Market Capitalization 80 327 169 215 64 140 81 102 279 139 1,548

    P/ABV 0.75 0.99 0.95 1.06 0.71 0.87 0.73 0.85 1.07 1.20 1.34

    P/ABV (with above

    adjustments) 0.68 0.94 0.80 1.04 0.68 0.78 0.68 0.77 0.85 1.01 1.31

    Disc. to SBI (avg FY14 P/ABV)

    - On P/ABV -44% -26% -29% -21% -47% -35% -45% -36% -20% -10%

    - On P/ABV (With Adj) -48% -28% -39% -20% -48% -40% -48% -41% -35% -23%

    Disc. to private banks (average

    FY14 P/ABV)

    - On P/ABV -64% -53% -55% -49% -66% -59% -65% -59% -49% -43% -36%

    - On P/ABV (With Adj) -68% -55% -62% -50% -68% -63% -68% -63% -59% -52% -38%

    Source: Sunidhi Research

  • 7/29/2019 Banking Sector 2012 sector analysis

    8/84

    Banking Se

    Sunidhi Research |

    Table of Contents

    Particulars Page No

    Valuation gap between public and private banks has increased 08

    Is the market over-reacting? 10

    Treasury gains to boost profitability & provide a buffer for provisioning 16

    Recoveries likely to improve going ahead 18

    Written off book at 22% of networth can prove to be a hidden gem 19

    Restructured book largely seasoned or government guaranteed 19

    Select indicators suggest a revival in manufacturing 21

    Narrow Money (M1) is directly linked to corporate sales 22

    Investment recovery likely with policy initiative 22

    So can the tide turn? 23

    Policy reform Hopes come alive after both houses cleared FDI retail 25

    Cabinet Committee on Investment (CCI) One step forward 26Coal price pooling by Coal India Ltd may change the face of Indian power sector and could lead to

    reduction of asset quality stress 26

    Decline in interest rate to improve investment climate 29

    Price performance of PSBs are highly correlated to risky yields 31

    Valuation gap between private and PSU banks to narrow going ahead 31

    Sunidhis banking performance indicator (SBPI) 32

    Key risks 34

    Company Section

    Allahabad Bank 39

    Bank Of Baroda 43

    Bank Of India 47

    Canara Bank 51

    Corporation Bank 55

    IDBI Bank 59

    Indian Bank 63

    Oriental Bank Of Commerce 67

    Punjab National Bank 71State Bank Of India 75

    Union Bank Of India 79

  • 7/29/2019 Banking Sector 2012 sector analysis

    9/84

    Banking Se

    Sunidhi Research |

    Valuation gap between public and private banks has increased

    The Indian economy is going through challenging times consisting of volatility in liquidity, cru

    inflation and growth. This has taken a toll on the prospects of the banking sector which is plag

    with uncertainty relating to the monetary policy actions of the RBI and slower credit grow

    Additionally, elevated interest rates are impacting the net interest margins and asset quality

    banks.

    We believe that the macro concerns are unlikely to reverse in the near term. Hence we exp

    sharp volatility in the PSU banking space and cannot deny further downward risks to magrowth and stock prices. Due to the absence of any near term trigger, this segment may rem

    volatile, however currently valuations are below long term averages for several public se

    banks which has led to a widening in the discount between them and their private se

    counterparts. Historically public sector banks have traded at a ~50% discount to new priv

    sector banks. Post the recent run up in private sector banking stocks, the discount has wide

    significantly with public sector banks trading at ~62% discount to private banks. Thus despite

    challenging environment we harbor a positive bias towards public sector banks due to t

    reasonable valuations.

    Of the two important drivers of PSU banks stock performance, the first - bond rates already se

    to have topped and is likely to see some easing going ahead, whereas concerns still remain in

    second - NPA. Currently, the market expects the RBI to start the easing process which me

    yields dont have much upside risk (unless crude see a sharp upmove). However while the mawould want to play on likely lower bond yields, it is skeptical about the rising risk of n

    performing assets.

    Valuation summary

    ABV P/ABVPeak 5 yr

    1 yr fwd

    valuation

    Trough 5

    yr 1 yr

    fwd

    valuation

    Average

    5 yr 1 yr

    fwd

    valuation

    ROAA ROAE

    CMP FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY1

    Private sector

    Axis Bank 1365 632.2 736.7 2.2 1.9 3.4 0.9 2.2 1.7% 1.6% 20.6% 19.

    ICICI Bank* 1135 437.5 493.5 2.1 1.9 3.1 1.1 2.3 1.6% 1.6% 16.3% 17.

    Yes Bank 467 162.1 199.9 2.9 2.3 3.2 0.6 2.0 1.5% 1.5% 23.9% 23.

    HDFC Bank 694 146.2 171.6 4.7 4.0 4.5 2.0 3.3 1.8% 1.8% 20.0% 20.

    Federal Bank 481 358.7 409.4 1.3 1.2 1.6 0.5 1.0 1.3% 1.3% 14.1% 14.

    Ing Vysya Bank 494 287.5 327.3 1.7 1.5 2.3 0.8 1.4 1.1% 1.1% 13.8% 14.

    Public sector

    SBI (Conso) 2307 1471.9 1726.4 1.6 1.3 2.7 0.9 1.7 1.0% 1.0% 16.6% 18.

    PNB 822 613.2 770.2 1.3 1.1 2.0 0.8 1.4 1.0% 1.1% 16.4% 18.

    Union Bank 253 182.8 209.6 1.4 1.2 2.2 0.9 1.4 0.8% 0.8% 13.9% 15.

    BOB 792 686.8 797.7 1.2 1.0 2.0 0.7 1.3 1.1% 1.1% 17.4% 17.

    BOI 294 261.4 310.6 1.1 0.9 2.1 0.9 1.5 0.6% 0.7% 11.2% 14.

    Corporation 429 539.7 605.5 0.8 0.7 2.2 0.5 1.0 0.9% 0.9% 17.6% 18.

    Canara 481 406.5 457.6 1.2 1.1 2.4 0.7 1.4 0.8% 0.9% 14.0% 15.

    Indian Bank 189 211.9 257.2 0.9 0.7 1.6 0.6 1.0 1.3% 1.4% 17.7% 18.

    Allahabad Bank 159 170.4 210.7 0.9 0.8 1.6 0.5 0.9 0.9% 1.0% 15.7% 18.

    OBC 350 369.5 412.5 0.9 0.8 1.5 0.4 0.9 0.8% 0.8% 11.6% 13.

    IDBI Bank 110 116.1 126.1 0.9 0.9 1.5 0.5 1.0 0.7% 0.6% 10.3% 10.*Adjusted for subsidiary valuation **Prices as on 6

    thDec 2012

    Source: Sunidhi Research

  • 7/29/2019 Banking Sector 2012 sector analysis

    10/84

    Banking Se

    Sunidhi Research |

    Long term average 1 year forward P/ABV Average FY13E P/ABV

    2.5

    1.2

    0

    0.5

    1

    1.5

    2

    2.5

    3

    New Pvt Banks Public Banks

    2.9

    1.1

    0

    1

    2

    3

    4

    New Pvt Banks Public Banks

    Source: Capitaline, Sunidhi Research Source: Capitaline, Sunidhi Research

    This time its different

    Our quest for understanding the reason for the widening valuation gap leads us to que

    whether every economical downturn has led to investors switching from public banks to pr

    banks, thus leading to an increase in the valuation gap between the two. An evaluation of

    valuations in FY08 reveals that the answer to this question is in the negative. In FY08, valuatioboth public and private banks came off to leave the gap in line with the average of ~50%.

    Exhibit 1: Average FY08 P/ABV

    2.0

    1.0

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    New Pvt Banks Public Banks

    Source: Capitaline, Sunidhi ResearchScams, asset quality issues and policy paralysis have led to negative sentiments towa

    all PSUs

    Scams, asset quality issues and policy paralysis have led to negative sentiments towards all pcompanies not only banks. This is depicted through the returns of the BSE PSU index which

    considerably underperformed the sensex over the past year.

  • 7/29/2019 Banking Sector 2012 sector analysis

    11/84

    Banking Se

    Sunidhi Research |

    BSE PSU and Sensex returns BSE PSU and Sensex returns

    Source: Capitaline, Sunidhi Research

    Is the market over-reacting?The downtrend in PSU stocks over the past year leads us to question whether the market is oreacting to news flows relating to scams and policy deadlocks. According to behavioral econom

    investors often fall prey to over-reaction and availability bias. This occurs when investors over-

    to new information which is easily available thus creating a larger than justified impact on s

    prices which is usually corrected in the future.

    -15.0%

    -10.0%

    -5.0%

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    Dec-11

    Jan-12

    Feb-12

    Mar-12

    Apr-12

    May-12

    Jun-12

    Jul-12

    Aug-12

    Sep-12

    Oct-12

    Nov-12

    BSE PSU BSE Se nse x

    0.0

    2.0

    4.0

    6.0

    8.0

    10.0

    12.0

    14.0

    16.0

    18.0

    20.0

    1 day 1 Week 1 Month 3 Months 6 Months 1 Year

    BSE PSU BSE Sensex

    Winners & Losers

    In 1985, behavioral finance academics Werner De Bondt and Richard Thaler released a stud

    the Journal of Finance called "Does the Market Overreact?" In this study, the two exami

    returns on the New York Stock Exchange for a three-year period. From these stocks, t

    separated the best 35 performing stocks into a "winners portfolio" and the worst 35 perform

    stocks were then added to a "losers portfolio". De Bondt and Thaler then tracked e

    portfolio's performance against a representative market index for three years.

    Surprisingly, it was found that the losers portfolio consistently beat the market index, while

    winners portfolio consistently underperformed. In total, the cumulative difference between

    two portfolios was almost 25% during the three-year time span. In other words, it appears

    the original "winners" would became "losers", and vice versa.

    So what happened? In both the winners and losers portfolios, investors essentially overreac

    In the case of loser stocks, investors overreacted to bad news, driving the stocks' share p

    down disproportionately. After some time, investors realized that their pessimism was

    entirely justified, and these losers began rebounding as investors came to the conclusion

    the stock was underpriced. The exact opposite is true with the winners portfolio: inves

    eventually realized that their exuberance wasn't totally justified.

    According to the availability bias, people tend to heavily weight their decisions toward m

    recent information, making any new opinion biased toward that latest news

  • 7/29/2019 Banking Sector 2012 sector analysis

    12/84

    Banking Se

    Sunidhi Research |

    Bridging the gapWe believe that the widening valuation gap between private and public sector banks is like

    close in and move towards the mean of ~50%. This is because problems associated with p

    sector banks such as bureaucracy and corruption have always been known which is why p

    banks trade at such a steep discount to private banks. The widening gap appears to be an o

    reaction to policy paralysis and asset quality issues which is likely to correct. The correction c

    take place in three ways:

    Valuations of private sector banks could come offValuations of private sector banks could come off by ~12%. Probability of this happening is

    because valuations are close to the mean. To safeguard against this we should stay with che

    private sector banks like Axis Bank and ICICI Bank.

    Adjusted book values of public sector banks could correct by 12%

    Adjusted book values of public sector banks could correct by 12%. This could happen through

    erosion of book value due to higher slippages. However the probability of this happening is low

    to the reasons discussed in the following section.

    Valuations of public sector banks could increase by 12%

    Adjusted book values of public sector banks could increase by 12%. We believe that this is the likely scenario. As a result we are positive on the public sector banking space.

    Downside to public sector bank valuations appear limited from current levels

    We believe that the downside to public sector bank valuations appear limited from current lev

    due to the following reasons:

    Estimates are already factoring in accelerated slippages for public sector banks

    Estimates are already factoring in accelerated slippages for public sector banks, significa

    higher than the average slippages seen over the past five years.

    Expected Slippage rate

    Bank FY13E FY14E

    5 Yr average slippage

    ratio

    Allahabad Bank 3.2% 2.5% 2.0%

    Bank of Baroda 1.9% 1.5% 1.2%

    Bank of India 3.3% 2.4% 2.0%

    Canara Bank 2.8% 2.3% 2.1%

    Corporation Bank 1.8% 1.6% 1.1%

    IDBI Bank 1.8% 1.7% 1.4%

    Indian Bank 2.3% 2.2% 1.4%

    Punjab National Bank 4.2% 2.5% 2.1%

    State Bank of India 4.0% 2.8% 2.7%

    Union Bank of India 2.5% 2.2% 1.9%

    OBC 2.6% 2.3% 2.0%

    Source: Company, Sunidhi estimates

    In order for adjusted book values of public sector banks to come off by 12% due to asset qua

    deterioration the slippage rates for public banks will have to increase significantly in FY

    trending towards their ten year peaks.

  • 7/29/2019 Banking Sector 2012 sector analysis

    13/84

    Banking Se

    Sunidhi Research |

    FY14E slippage rate assuming ABV deterioration of 12%

    Bank

    FY14E slippage

    rate

    FY14E slippage

    rate for ABV to

    come off by 12%

    10 year peak

    slippage rate

    Allahabad Bank 2.5% 3.8% 3.9%

    Bank of Baroda 1.5% 2.9% 3.0%

    Bank of India 2.4% 3.3% 2.9%Canara Bank 2.3% 3.4% 4.6%

    Corporation Bank 1.6% 2.7% 1.9%

    IDBI Bank 1.7% 2.9% 4.2%

    Indian Bank 2.2% 3.8% 2.5%

    Punjab National Bank 2.5% 3.6% 4.5%

    State Bank of India 2.8% 4.4% 3.6%

    Union Bank of India 2.2% 3.0% 3.2%

    OBC 2.3% 3.8% 9.5%

    Source: Sunidhi estimates

  • 7/29/2019 Banking Sector 2012 sector analysis

    14/84

    Banking Se

    Sunidhi Research |

    Why is this situation unlikely?We believe that the above situation appears unlikely based on the following factors:

    An improvement in growth could lead to asset quality improvement

    Asset quality, as the chart below suggests, is inversely proportional to GDP growth, thus as

    quality is likely to witness an improvement once GDP growth starts to look up. GDP growth wh

    stood at ~8.5% in FY10 and FY11 came off to 6.5% in FY12 and H1FY13. The slowdown in G

    growth was due to several reasons including a slowdown in agricultural growth, Inflation an

    slowdown in investments due to policy paralysis. Addressing these factors could help bring

    economy back on the growth path.

    Trend in GDP growth and asset quality

    2.0%

    2.5%

    3.0%

    3.5%

    4.0%

    4.5%

    5.0%

    5.5%

    5.0%

    5.5%

    6.0%

    6.5%

    7.0%

    7.5%

    8.0%

    8.5%

    9.0%

    9.5%

    10.0%

    FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

    GDP growth (LHS) % GNPA (RHS)

    Source: RBI, Sunidhi Research

    Delayed rainfall impacted Kharif but Rabi crop expected to be good

    The south-west monsoon which was deficient and unevenly distributed in June and July h

    adversely impacted sowing of the Kharif crop. However, higher than LPA rainfall in the monthAugust and September significantly brought down the cumulative rainfall deficit to 92% of

    (upto September 30). The good rainfall towards the end of the season has improved soil moist

    content and reservoir levels, thus raising prospects for a good Rabi crop.

    However, the production weighted rainfall index (PRN) constructed by RBI indicated a deficie

    of 13%. Deficient rainfall resulted in shortfall in area sown for several crops especially cereals

    pulses. Despite higher food inflation, we do not expect higher NPAs on account of the same

    lately banks have begun to secure agricultural loans against securities such as gold. This has n

    turned into a significant part of current exposure. (E.g. 45% of SBIs agriculture exposur

    secured with gold). Hence, default risk from this book is significantly mitigated. We can see th

    the reducing proportion of priority sector NPAs in FY12 as compared to FY11.

  • 7/29/2019 Banking Sector 2012 sector analysis

    15/84

    Banking Se

    Sunidhi Research |

    Trend in monthly rainfall (% of LPA)

    72%

    87%

    101%111%

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    Jun-12 Jul-12 Aug-12 Sep-12

    Source: IMD, Sunidhi Research

    Trend in IMD rainfall assessment and RBI PRN

    Source: RBI, Sunidhi Research

    Rabi Crop Sowing (as on 30.11.2012)

    Source: PIB, Sunidhi Research

    Trend in composition of NPAs

    47.2% 47.5% 49.1% 54.1%59.9% 63.9% 54.9% 53.8% 58.1% 50.0%

    50.7% 51.2% 50.0% 43.7%38.8% 35.4% 44.0% 45.3% 41.5% 49.1%

    0.0%

    20.0%

    40.0%

    60.0%

    80.0%

    100.0%

    120.0%

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    Priority Non Priority Public

    Source: RBI, Sunidhi Research

    Unsecured loan books for all banks have come off in FY12

    Banks have brought down their unsecured loan books in FY12 as compared to FY11.

    proportion of unsecured loans has come off to 17.4% in FY12 as compared to 19.4% in FY11.

    outstanding unsecured loan book for new private and public banks stands at par at ~17.

    Meanwhile outstanding unsecured loan book for old private banks is significantly lower at 12%

    reduction in unsecured loans could lead to lower slippages and higher recoveries going ahead.

    Crops Area Sown (2012-13) Area Sown (2011-12) YoY% Cha nge

    Wheat 157.89 162.5 -2.8%

    Rice (Rabi) 0.85 1.05 -19.0%

    Coarse Cereals 46.15 44.83 2.9%

    Pulses 102.49 109.56 -6.5%

    Oilseeds 66.84 66.76 0.1%

    Total Rabi Area 374.22 384.70 -2.7%

    (Area in la kh hectare)

  • 7/29/2019 Banking Sector 2012 sector analysis

    16/84

    Banking Se

    Sunidhi Research |

    Trend in unsecured loan book for all listed banks

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    25.0%

    30.0%

    2008 2009 2010 2011 2012

    All Banks Public New Pvt Old Pvt

    Source: RBI, Sunidhi Research

    Cautious lending by banks to risky segments could lead to lower slippages ahead

    Loan book growth slowed to 16.9% for the fortnight ended Nov 16, 2012 down from +19.3%

    growth seen in Mar12. A slowdown in demand coupled with banks being selective about lend

    to risky segments has caused the slowing in loan book growth. The cautious stance adopted

    banks towards lending is likely to result in lower slippages going ahead. The deposit growth for

    period stood lower than credit growth at 13.4% yoy, however the gap between credit and dep

    growth has started narrowing suggesting an improvement in liquidity.

    Trend in loan book and deposit growth Trend in LAF borrowings

    Source: RBI, Sunidhi Research Source: RBI, Sunidhi Research

    Credit Deposit growth spread

    Source: RBI, Sunidhi Research

    10.0%

    12.0%

    14.0%

    16.0%

    18.0%

    20.0%

    22.0%

    24.0%

    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

    Cre dit g row th (% yoy) De pos it g row th (% yoy)

    -2,500.0

    -2,000.0

    -1,500.0

    -1,000.0

    -500.0

    0.0

    500.0

    1,000.0

    1,500.0

    Jan-1

    0

    Mar-10

    May-10

    Jul-10

    Sep-10

    Nov-1

    0

    Jan-11

    Mar-11

    May-1

    1

    Jul-11

    Sep-11

    Nov-11

    Jan-12

    Mar-

    12

    May-12

    Jul-12

    Sep-1

    2

    Rs

    billions

    -2.0%

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    pr-10

    Jun-10

    -ct-

    ec-

    Fe

    -r-

    J

    - -ct-

    ec- - -

    J

    - -t-

    Credit Deposit growth spread

  • 7/29/2019 Banking Sector 2012 sector analysis

    17/84

    Banking Se

    Sunidhi Research |

    Treasury gains to boost profitability & provide a buffer for provisioningThe ten year G-Sec yields have remained at elevated levels over the past year owing to the R

    reluctance in cutting the repo rate. However the RBI has indicated that it is looking at reducing

    repo rate in the last quarter of FY13. OIS spreads are factoring in around 100bps reduction in

    repo rate within the next one year. A reduction in the yields could lead to writebacks on

    investment depreciation provision undertaken by public sector banks. In the table below we h

    calculated the impact of a 100 bps reduction in repo rate on the PAT and networth of se

    banks. According to our analysis, a 100 bps reduction in the yields would positively impact

    FY14 adjusted networth of PSBs by ~2-5% and FY14 PAT by 6-28% depending on banks AFS b

    and duration. These writebacks would also provide some room for public sector banks to m

    higher loan loss provisions.

    Trend in 10 year G-Sec yields Trend in Spot OIS and 1yr Fwd OIS rates

    Source: RBI, Sunidhi Research

    Impact of a 100 bps reduction in yields on PAT and networth of public sector banks

    Rs Bn

    Impact on PAT Impact on

    Networth

    InvestmentsBook

    HTM AFS SLRAFS

    Other intsensitive AFS

    AFS Modduration (yrs)

    -1%yields

    FY13E FY14E FY13E FY

    Allahabad Bank 583.1 373.5 210 45 132 2.8 3.1 17.6% 13.3% 2.6%

    Bank of Baroda 983.8 NA NA 149 61 3.5 6.3 12.3% 11.0% 2.0%

    Bank of India 867.5 600.3 266 169 98 4.3 9.3 39.2% 27.9% 4.0%

    Canara Bank 1207.2 758.0 437 145 234 3.8 9.9 29.6% 23.8% 3.9%

    Corporation Bank 535.8 392.5 140 69 53 2.4 2.3 14.8% 12.5% 2.4%

    IDBI Bank 694.8 581.8 113 27 61 1.5 0.8 4.0% 3.7% 0.4%

    Indian Bank 423.9 281.0 141 42 79 1.2 1.0 4.9% 4.0% 0.8%

    Oriental Bank of

    Commerce 554.0 474.4 79 52 22 4.1 2.6 18.0% 14.4% 2.0%

    Punjab National Bank 1291.8 938.6 353 160 154 3.7 8.7 17.8% 13.5% 2.7%

    Union Bank of India 720.5 564.4 156 98 47 1.7 2.1 9.9% 8.1% 1.3%

    State Bank of India 3715.3 2838.3 877 432 356 2.4 14.6 7.6% 5.8% 1.2%

    Source: Company, Sunidhi research

    In addition to MTM write backs, banks treasury gains too will help boost profits. Banks w

    higher yield on investments are more likely to book higher treasury gains once interest rates s

    trending down.

    7.5

    7.7

    7.9

    8.1

    8.3

    8.5

    8.7

    8.9

    Jun-11

    Jul-11

    Aug-11

    Sep-11

    Oct-11

    Nov-11

    Dec-11

    Jan-12

    Feb-12

    Mar-12

    Apr-12

    May-12

    Jun-12

    Jul-12

    Aug-12

    Sep-12

    Oct-12

    1 year Gsec Yield

    4.0

    5.0

    6.0

    7.0

    8.0

    9.0

    10.0

    Dec-09

    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

    Spot OIS 1 Year Forward OIS

  • 7/29/2019 Banking Sector 2012 sector analysis

    18/84

    Banking Se

    Sunidhi Research |

    Yield on investment (Q2FY13)

    Source: Company, Sunidhi research

    Although, it has been on the agenda of the RBI to bring down its statutory liquidity ratio (S

    over the past 15 years, it has only been reduced by 200 bps. In July 2012, the RBI brought down

    SLR by 100 bps to 23%. A sudden and sharp fall in SLR holding of banks is unlikely considering

    steep U-turn in the budget deficit trend resulting in a massive rise in government bond issuan

    but the SLR cut is definitely a move in the right direction by the RBI. While banks have volunta

    increased their SLR holdings especially PSU Banks (to fund government issues and as a

    aversion measure), their bond holding is unlikely to remain in this range over the next few ye

    once the fiscal situation improves or FII investment limit is hiked. A reduction in the SLR wo

    help boost profitability of banks, which could in turn be used to shore up provision cover

    ratios.

    Current SLR vs. mandatory SLR requirement for public banks

    Source: Company, Sunidhi research

    8.1

    7.9 7.97.8 7.8

    7.7

    7.57.4 7.4

    7.2

    7.0

    6.6

    6.8

    7.0

    7.2

    7.4

    7.6

    7.8

    8.0

    8.2

    8.4

    Canara

    BOI

    PNB

    Allahabad

    BOB

    Corp

    OBC

    Indian

    UBI

    SBI

    IDBI

    20.0%

    22.0%

    24.0%

    26.0%

    28.0%

    30.0%

    32.0%

    34.0%

    SLR/DTL Required SLR

  • 7/29/2019 Banking Sector 2012 sector analysis

    19/84

    Banking Se

    Sunidhi Research |

    Recoveries likely to improve going ahead Historically trends show that recoveries and up-gradations move in line with GDP growth.

    have analyzed past trends for recoveries from FY03-12 for PNB and UBI (reductions exclud

    write-off and asset sale). Data for these banks reveals that these are trending at 10 year low

    ~20% as compared to long term average of ~62%. Going ahead we expect recoveries to impr

    and move closer to long term averages which along with higher write-offs and asset sales wo

    boost profits.

    Historical trend in recovery / upgrades to slippage compared to GDP

    Source: Company, Sunidhi research

    Street estimates are factoring in low recoveries in line with those seen in FY12 and H1FY13. Th

    pickup in recoveries could prove to be a re-rating factor for public sector banks in next two ye

    We have analyzed the upside to currently estimated net worth for select public sector ba

    under three recovery scenario (Rate of recovery/Upgrade moving to 40%, 50% and 60%

    cumulative slippages during FY10-13E). The average impact from recoveries (50%) is ~14%

    FY14E adjusted net worth. The results are highlighted in the table below.

    Impact of recoveries on adjusted net-worth

    Bank

    Cumulative recovery/Up

    gradation rate Upside (Rs bn) Upside to Adj. NW (FY14 )

    FY10-13 @ 40% @ 50% @ 60% @ 40% @ 50% @ 60

    Allahabad Bank 32% 6.8 15.6 24.4 6% 15% 23%

    Bank of Baroda 27% 16.9 29.4 42.0 5% 9% 13%

    Bank of India 32% 16.6 37.4 58.2 9% 21% 33%

    Canara Bank 54% (24.9) (7.0) 10.9 -12% -3% 5%

    Corporation Bank 33% 3.0 7.4 11.8 3% 8% 13%

    IDBI Bank 19% 19.5 28.8 38.1 13% 19% 26%

    Indian Bank 22% 10.1 15.6 21.2 9% 14% 19%

    Punjab National Bank 20% 53.6 79.8 106.0 21% 31% 41%

    Union Bank of India 30% 13.6 26.6 39.6 14% 26% 39%

    State Bank of India 44% (38.5) 50.9 140.4 -3% 4% 12%

    Oriental Bank of Commerce 36% 3.6 13.1 22.6 3% 11% 19%

    Source: Sunidhi research

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    12.0%

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

    PNB UBI GDP (RHS)

  • 7/29/2019 Banking Sector 2012 sector analysis

    20/84

    Banking Se

    Sunidhi Research |

    Written off book at 22% of networth can prove to be a hidden gem The second biggest helping hand would most likely come from the written off books of ba

    Based on our calculations, the average prudentially written off book for PSBs in our study sta

    at 22% of FY14 adjusted net-worth. Since the written off book in our calculation is only accou

    which are written off from the head office and not from branches, the reason behind a majorit

    the write offs are to report better asset quality number and for tax benefits. Hence, we bel

    that ~15-20% recovery from this book is the most likely probability considering the large

    between the demand from ARC and prices expected by the banks management. We h

    analyzed the upside to the networth on account of recovery from written off accounts.

    average impact from recoveries (15%) is ~3.2% on FY14E adjusted net worth.

    Impact of recoveries from written off accounts on FY14E net-worth

    Impact on FY14E NW

    (Rs bn)

    Write offs O/S

    (Q2FY13)

    Adj NW (FY14) % of Adj NW

    (FY14)

    Recovery at 15% Recovery at 20%

    Allahabad Bank 26.3 105.4 25% 3.7% 5.0%

    Bank of Baroda 39.3 328.9 12% 1.8% 2.4%

    Bank of India 44.9 178.4 25% 3.8% 5.0%

    Canara Bank 80.4 202.7 40% 6.0% 7.9%

    Corporation Bank 14.6 89.7 16% 2.4% 3.3%

    IDBI Bank 40.8 148.4 28% 4.1% 5.5%

    Indian Bank 23.6 110.6 21% 3.2% 4.3%

    Punjab National Bank 32.3 261.2 12% 1.9% 2.5%

    Union Bank of India 27.5 100.6 27% 4.1% 5.5%

    State Bank of India 115.6 1158.5 10% 1.5% 2.0%

    Oriental Bank of Commerce 32.7 120.4 27% 4.1% 5.4%

    Source: Company, Sunidhi research

    Restructured book largely seasoned or government guaranteedThe higher restructuring for public sector banks is partly due to restructuring in FY09-10 under

    RBIs special dispensation scheme and partly due to Air India and SEBs restructuring whic

    unlikely to slip into NPA category. Most of the outstanding restructured book of FY09-1

    performing and the weaker part has already slipped into NPA. Slippages from the performrestructured book of 2009-10 is likely to be very low as these assets are already servicing th

    debt post the expiry of the moratorium period. Also, we dont see any slippage from Air Indi

    SEB accounts in next two years due to moratorium.

    Additionally, considering that the large proportion of SEB and Air India restructuring is alre

    completed, we expect incremental restructuring to come off from H2FY13. However, stand

    asset provisioning on restructured book is likely to remain high due to the RBIs intention

    increasing the provisions on the same.

    Public sector banks restructured book o/s (Q2FY13)

    Rs bn Restructured

    loans OS

    % of

    loan

    book

    SEB Air

    India

    OS Rest

    ex

    SEB/AI

    Advances %

    lo

    bo

    Allahabad Bank 127.5 11.5% 49.2 5.8 72.5 1108.5 6.

    Bank Of Baroda 210.8 7.2% 20.0 24.0 166.8 2921.8 5.

    Bank Of India 194.2 7.6% 29.0 30.0 135.2 2561.5 5.

    Canara Bank 148.9 6.9% 55.0 15.0 78.9 2157.5 3.

    Corporation Bank 88.7 9.0% 39.0 13.0 52.0 981.6 5.

    IDBI Bank Ltd 125.3 7.5% 0.0 8.0 117.3 1663.7 7.

    Indian Bank 103.5 10.9% 23.5 8.0 72.0 950.0 7.

    OBC 114.8 9.7% 41.0 16.3 57.5 1178.2 4.

    PNB 278.5 9.4% 70.0 23.0 185.5 2947.9 6.

    Union Bank 100.1 5.8% 34.0 0.0 66.1 1729.0 3.

    SBI 404.5 4.4% 0.0 13.0 391.5 9269.2 4.

    Source: Company, Sunidhi research

  • 7/29/2019 Banking Sector 2012 sector analysis

    21/84

    Banking Se

    Sunidhi Research |

    Public sector banks restructured book o/s (Q2FY13)

    Source: Company, Sunidhi research

    The restructured book excluding the seasoned and government guaranteed portion wo

    indicate much lower stress in the book as compared to stress visible prima facie. We h

    analyzed the downside to the adjusted net-worth of banks on account of slippages from

    restructured book excluding Air India and SEB exposure. The average impact from slippage of 1

    is ~9% on the FY14E adjusted net-worth of banks (20% slippage would have an impact of 12%).

    Impact of slippages from restructured book ex AI and SEBs on adjusted net-worth

    Restructured

    loans OS

    OS Rest ex

    SEB/AI

    Slippages at

    15% of

    restructured

    ex AI & SEB

    Slippages at 20%

    of restructured ex

    AI & SEB

    Adj Net

    worth

    (FY14)

    Impact on Adj

    NW assuming

    15% slippages

    Impact on Adj NW

    assuming 20%

    slippages

    Allahabad Bank 127.5 72.5 10.9 14.5 105.4 10% 14%Bank Of Baroda 210.8 166.8 25.0 33.4 328.9 8% 10%

    Bank Of India 194.2 135.2 20.3 27.0 178.4 11% 15%

    Canara Bank 148.9 78.9 11.8 15.8 202.7 6% 8%

    Corp Bank 88.7 52.0 7.8 10.4 89.7 9% 12%

    IDBI Bank Ltd 125.3 117.3 17.6 23.5 148.4 12% 16%

    Indian Bank 103.5 72.0 10.8 14.4 110.6 10% 13%

    OBC 114.8 57.5 8.6 11.5 120.4 7% 10%

    PNB 278.5 185.5 27.8 37.1 261.2 11% 14%

    SBI 404.5 391.5 58.7 78.3 1158.5 5% 7%

    Union Bank 100.1 66.1 9.9 13.2 100.6 10% 13%

    Source: Company, Sunidhi research

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    12.0%

    14.0%

    Allahabad

    Indian

    OBC

    PNB

    Corp

    BOI

    IDBI

    BOB

    Canara

    UBI

    SBI

    Restructured (%) Restructured ex SEB / AI (%)

  • 7/29/2019 Banking Sector 2012 sector analysis

    22/84

    Banking Se

    Sunidhi Research |

    Select indicators suggest a revival in manufacturingSelect indicators (such as trend in new order book, raw material inventories, GFCF

    manufacturing PMI) along with recent government measures suggest that manufacturing acti

    could see a revival henceforth, which would have a positive bearing on GDP growth. A reviva

    manufacturing and GDP growth would lead to lower non-performing assets for banks.

    Average growth in new orders for Q1FY13 stood at 19.4% yoy and 3% qoq as compared to 3

    yoy and 2.8% qoq in Q4FY12. Additionally raw material inventory to sales ratio has increased

    faster pace as compared to finished goods inventory thus suggesting an increase in manufactu

    going ahead. The HSBC manufacturing PMI has been largely stable at ~53 over the past f

    months suggesting that it could have bottomed out. Capacity utilization too is close to recent l

    at ~72%, leading us to believe that it could witness a revival from these levels.

    Trend in manufacturing PMI Trend in Mfg IIP and capacity utilization

    52.9

    30

    35

    40

    45

    50

    55

    60

    65

    Oc

    t-08

    Jan-0

    9

    Apr-

    09

    Jul-09

    Oc

    t-09

    Jan-1

    0

    Apr-

    10

    Jul-10

    Oc

    t-10

    Jan-1

    1

    Apr-

    11

    Jul-11

    Oc

    t-11

    Jan-1

    2

    Apr-

    12

    Jul-12

    Oc

    t-12

    6

    7

    77

    7

    7

    8

    8

    8

    -15

    -10

    -5

    0

    5

    10

    15

    20

    Q1FY10

    Q2FY10

    Q3FY10

    Q4FY10

    Q1FY11

    Q2FY11

    Q3FY11

    Q4FY11

    Q1FY12

    Q2FY12

    Q3FY12

    Q4FY12

    Q1FY13

    Detrended Qtl -IIP MFG LHS CU RHS

    Source Markit economics, Sunidhi Research Source RBI, Sunidhi Research

    Gross Fixed Capital Formation (GFCF) (a gauge of investment in the economy) grew at a rob

    pace 8.7% in Q2FY13 which is showing a sign of pick up largely led by higher governmexpenditure. Government Fixed Capital Expenditure (GFCE) started showing good strength an

    likely to support economic activity in FY14 considering historical trend of higher governm

    expenditure before election year.

    Trend in GFCF

    Source RBI, Sunidhi Research

    Trend in GFCE

    Source RBI, Sunidhi Research

    -5%

    0%

    5%

    10%

    15%

    20%

    25%

    Q3FY10

    Q4FY10

    Q1FY11

    Q2FY11

    Q3FY11

    Q4FY11

    Q1FY12

    Q2FY12

    Q3FY12

    Q4FY12

    Q1FY13

    Q2FY13

    Gross Fixed Capita l Formation

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    14%

    Q3FY10

    Q4FY10

    Q1FY11

    Q2FY11

    Q3FY11

    Q4FY11

    Q1FY12

    Q2FY12

    Q3FY12

    Q4FY12

    Q1FY13

    Government Final Consu mption Expenditure

  • 7/29/2019 Banking Sector 2012 sector analysis

    23/84

    Banking Se

    Sunidhi Research |

    Narrow Money (M1) is directly linked to corporate sales

    Improvement in narrow money growth could be considered as a primary indicator of a reviva

    economic activity. M1 represent demand deposit of corporate and currency with public. Si

    both together reflect the core liquidity in the system, improvement in M1 growth generally re

    in improvement in economic activity and sales of corporates. Higher currency with public wo

    mean better spending capability and higher demand deposit with corporates is generall

    precursor to either better production or higher capex.

    Trend in M1 growth

    Source: RBI, Sunidhi Research

    Trend in new order book Trend in inventory / sales

    -15

    -10

    -5

    0

    5

    10

    15

    20

    25

    Q1FY10

    Q2FY10

    Q3FY10

    Q4FY10

    Q1FY11

    Q2FY11

    Q3FY11

    Q4FY11

    Q1FY12

    Q2FY12

    Q3FY12

    Q4FY12

    Q1FY13

    %

    Avg New Order book (QoQ) Avg New Order book (YoY)

    0

    5

    10

    15

    20

    25

    30

    35

    Q1FY10

    Q2FY10

    Q3FY10

    Q4FY10

    Q1FY11

    Q2FY11

    Q3FY11

    Q4FY11

    Q1FY12

    Q2FY12

    Q3FY12

    Q4FY12

    Q1FY13

    %

    FG Inv/Sales RM Inv/Sales

    Source: RBI, Sunidhi Research Source: RBI, Sunidhi Research

    Investment recovery likely with policy initiativeIndex of Industrial Production (IIP) has seen a sharp deceleration during April-Sept 2012 whic

    mostly led by capital goods, mining and power. Capital goods remained the biggest cul

    indicating slowdown in investment activity and slowing external demand. Mining sector contin

    to contract due to regulatory and environmental issues. Power generation moderated on acco

    of shortages in coal supply and uneven monsoon conditions. Ex capital goods, growth rate of

    declined but still positive.

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    M1 Growth

    M1 Growth

  • 7/29/2019 Banking Sector 2012 sector analysis

    24/84

    Banking Se

    Sunidhi Research |

    Trend in IIP growth

    -10

    -5

    0

    5

    10

    15

    20

    Sep-08

    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

    Source RBI, Sunidhi Research

    Trend in IIP growth ex capital goods

    Source RBI, Sunidhi Research

    The major reasons behind the slowdown in growth are high interest rates, fuel un-availability

    government policy paralysis. Despite large new power capacity additions witnessed during

    Eleventh Plan (about 55 GW of new capacity created), majority of it was in thermal power wh

    was impacted by coal shortages resulting in lower utilization rates. In the absence of commitFuel Supply Agreements (FSAs), demand-supply gap is expected to elevate further during

    Twelfth Plan and new powers project are expected to face further clearances problem. Thi

    further exaggerated by stress in power distribution with large accumulated losses of discoms. T

    demands fast decisions to improve investment in the sector, especially by easing po

    constraints and removing major supply bottlenecks.

    So can the tide turn?A majority of the companies with stalled project studied by our economy team reported t

    policy issues such as land acquisition delay in environmental clearance, mining policy, fuel linka

    and spectrum pricing were the main reason for the high incidence of stalled projects in

    economy. These together accounts for about 68% of total stalled projects. Of the 191 proj

    studied, about 93 projects entailing an investment close to Rs 6.7 tn in the infrastructure sp

    were stalled for various reasons. The most prominent reason being the problem of l

    acquisition with projects worth Rs. 3.1 tn. Next biggest issues being raw material unavailab

    like fuel & bauxite and environmental clearance. Three biggest sectors largely impacted by pro

    stalled are Power, Transport (mainly roads) and Metal & Mining accounting for 64% of t

    stalled projects. These sectors remain the biggest stress sector for banks and are reflected in la

    proportion into restructured book.

    Trend in stalled projects

    Reasons for total stalled projects

    Source Capitaline, Sunidhi Research

    Stalled project by Industry

    Source Capitaline, Sunidhi Research

    -10.00%

    -5.00%

    0.00%

    5.00%

    10.00%

    15.00%

    Dec'07

    Mar'08

    Jun'08

    Sep'08

    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

    Sept'12

    IIP (excluding capital goods)

    Environmental ,

    12.5%

    Financial , 6.2%

    Government,

    11.8%

    Land

    Acquisition ,

    27.7%

    Raw

    Material ,

    15.9%

    Management,

    6.2%

    Legal, 1.1%

    Others,

    18.6%

    Cement , 1.37% Real Estate ,

    8.98%

    IT, 1.09%

    Power, 36.38%

    Transport,

    11.23%

    Metals &

    Mininig ,

    16.52%

    Telecomunicati

    on, 4.36%

    Oil & Gas,

    10.99%

    Irrigation,

    0.39%

    Others, 8.70%

  • 7/29/2019 Banking Sector 2012 sector analysis

    25/84

    Banking Se

    Sunidhi Research |

    In last couple of months, we have seen some concrete policy intentions towards solving th

    issues with FinMins fast track reform initiatives. Clearance of the most conflicting issue of re

    FDI in both the houses reflects would help the current government to fast track its most pend

    decisions. Some of the important measures which can change the investment climate of

    country include new FSAs expected to be signed by Coal India with better pricing mechani

    proposal to set up a Committee on Infrastructure, the State Electricity Distribution Responsib

    Bill and setting up a Cabinet Committee on Investment (CCI) or NIB. These along with step towa

    financial restructuring scheme of discoms are likely to bring financial turnaround of disco

    Hence, the recent policy initiatives such as permitting FDI in retail trade, civil aviation & pow

    trading exchanges and rationalization of diesel prices will help improve the investment climate

    High incidence of stalled projects in the Power sector, Road and Mining sector which is bigg

    stress point for banks

    Out of the total stalled projects amounting to Rs 11.4 tn since 2008 (191 projects of more than

    10 bn) Rs 6.9 tn which is about 60% are projects started implementation and are stalled. M

    than 80% of these are in from sectors such as Power, Metals & Mining, Real Estate and Transp

    sector (i.e. Rs 5.5 tn). Of the balance 45% (Rs 4.5 tn) of the projects (i.e. project that have not s

    any investment) 50% contributed by Power and Metals & Mining sector. Hence, the high incide

    of stalled projects in power and metals & mining sector indicates slow pace of growth in

    investment activity and is the major reason for the stress in books of banks.

    Trend in stalled projects

    Stalled project by Industry

    Source Capitaline, Sunidhi Research

    Implementation Stalled by Industry

    Source CMIE, Sunidhi Research

    Announced & Stalled by Industry

    Source CMIE, Sunidhi Research

    Cement , 1.37% Real Estate ,

    8.98%

    IT, 1.09%

    Power, 36.38%

    Transport,

    11.23%

    Metals &

    Mininig ,

    16.52%

    Telecomunicati

    on, 4.36%

    Oil & Gas,

    10.99%

    Irrigation,

    0.39%

    Others, 8.70%

    Cement , 1.02% Real Estate

    , 11.79%

    IT, 1.81%

    Power, 38.79%

    Transport,

    17.04%

    Metals &

    Mining, 13.92%

    Telecomunicati

    on, 7.02%

    Irrigation ,

    0.64%

    Others, 7.97% Cement , 1.92% Real Estate ,4.72%

    Power, 33.00%

    Transport

    Services , 2.33%

    Metals & Mining

    , 20.72%Telecomunicatio

    n, 0.27%

    Oil & Gas,

    15.77%

    Others, 21.27%

  • 7/29/2019 Banking Sector 2012 sector analysis

    26/84

    Banking Se

    Sunidhi Research |

    Further, bulk of the stalled projects (~84% including foreign private players) is a private sec

    initiative as shown in chart below. Of which, 60 private companies have deferred infra proje

    worth Rs 5.2 tn, accounting for 56.7% of the total private sector stalled projects.

    Trend in stalled projects

    Stalled project by ownership

    Source CMIE, Sunidhi Research

    Implementation Stalled by Ownership

    Source CMIE, Sunidhi Research

    Policy reform Hopes come alive after both houses cleared FDI retail

    Fast tracking of the policy reform could result in clearance of some of the major project wh

    would result improvement in investment climate in the economy and better asset quality amo

    banks. Of the 191 stalled projects, the most prominent reason for them being stalled are

    problem of land acquisition with projects worth Rs 3.1 tn stuck on account of unavailability

    land. Among project implemented and stalled, almost 60% (about Rs 4tn) are stalled due to po

    issues such as land acquisition, delay in environmental clearance, mining policy, fuel linkages

    spectrum pricing. However, in case of project announced and stalled, policy issues accounts

    about 40% of total stalled projects (Rs 1.8 tn). Raw material unavailability (like fuel & bau

    shortage) is another major reason responsible for current slowdown in investments, with proje

    worth Rs 1.8 tn stuck on account of the same.

    Trend in stalled projects

    Reasons for total Stalled

    Source CMIE, Sunidhi Research

    Central

    Government,

    10.14%Government

    State, 5.90%Government

    Local Bodies,

    0.26%

    Indian Private

    Sector, 80.60%

    Foreign

    Private Sector,

    3.10%

    Central

    Government,

    11.2%

    GovernmentState, 9.3%

    Government

    Local Bodies,

    0.4%

    Indian Private

    Sector, 78.5%

    Foreign

    Private Sector,

    0.5%

    Environmental ,

    12.5%

    Financial , 6.2%

    Government,

    11.8%

    Land

    Acquisition ,

    27.7%

    Raw

    Material ,

    15.9%

    Management,

    6.2%

    Legal, 1.1%

    Others,

    18.6%

  • 7/29/2019 Banking Sector 2012 sector analysis

    27/84

    Banking Se

    Sunidhi Research |

    Reasons for Announced & Stalled

    Source CMIE, Sunidhi Research

    Reasons for Implementation Stalled

    Source CMIE, Sunidhi Research

    Cabinet Committee on Investment (CCI) or NIB One step forwardTo speed up clearances of big infrastructure projects, Finance Minister P. Chidambaram in Sep

    pitched for the setting up of a Cabinet Committee on Investment (CCI) or NIB headed by the Pr

    Minister and has ministers from key ministry like Law, Finance and Justice as its members. As

    the proposal once the final decision is taken by the NIB, no other ministry or governm

    department will have the authority to challenge this clearance or delay in the proj

    implementation. Considering most of the major ministries from centre and state would be pa

    the board, CCI will supersede the various lines of clearance and would fast track the process.

    study shows that of the 93 infrastructure projects stalled having an outlay of more than `10

    projects worth Rs 1.3 tn have been held up for want of environment clearance. This amo

    would move up to Rs 1.6 tn if we consider RBI definition of Infrastructure which includes Min

    sector. The formation of the proposed NIB will help in fast tracking the clearances of th

    investments and bring to the main stream.

    Coal price pooling by Coal India Ltd may change the face of Indian pow

    sector and could lead to reduction of asset quality stress

    Availability of coal for thermal power stations is a matter of concern. According to working grfor 12th five year plan, coal requirement for power sector is expected to be around 682

    tonnes (at 100% PLF) by FY17. Against the requirement of 682 mn tonnes, 54 mn tonne

    expected to be imported by thermal power stations designed to use imported coal. SCCL

    confirmed supply of 35 mn tonnes and c.100 mn tonnes are expected to be available from cap

    coal blocks. Thus 493mn tonnes need to be made available by CIL to power stations. Conside

    312mn tonnes supplied by CIL in FY12, CIL needs to supply at a CAGR of 10% over next five ye

    to meet power sector demand in India. With new FSAs; where in CIL takes the onus of impor

    coal on behalf of power utilities we can expect huge imports by CIL in near future.

    Environmental ,

    19.47%

    Financial ,

    2.25%

    Government,

    13.38%

    Land

    Acquisition ,

    26.56%

    Raw

    Material ,21.46%

    Management,

    6.31%

    Legal, 1.78%Others, 8.79%

    Environmental ,

    1.59%Financial ,

    12.31%

    Government,

    9.30%

    Land

    Acquisition ,

    29.59%

    Raw Material ,

    7.30%

    Management,

    6.02%

    Others, 33.90%

  • 7/29/2019 Banking Sector 2012 sector analysis

    28/84

    Banking Se

    Sunidhi Research |

    Potential demand for coal in India to be met by CIL

    Projected coal dema

    (Mn tonne

    Sector 2016-

    Electricity (A)-Realistic assumption (against 842 mn tonnes) 6

    Iron & Steel 1

    Cement

    Others 1

    Non Electricity (B) 2Total (A+B) 11

    Coal Availability from

    SCCL

    Captive Blocks for Power utilities 1

    Imported coal for TPS's designed on imported coal

    Total Coal availability, excl. CIL 1

    Potential demand to be met by CIL for Power 4

    Production by CIL in FY12 3

    CAGR growth required for CIL 10

    Source: Working Group, Sunidhi Research

    CIL takes the onus of meeting the demand by bridging it with imported coal

    Total requirement of coal from power plants is expected at c.682 mn tonnes by FY2016-17,

    with FSA/LOA signed at 85%, total requirement is trimmed c.583mn tonnes by FY2016-17. CIL w

    its new FSAs has committed to supply 80% of its FSA qty without attracting any penalty un

    which 65% would be met by its indigenous production and remaining 15% through imported c

    CIL supplied 312 mn tonnes to power sector in FY12. To meet 65% FSA qty it has to mainta

    CAGR of 7%, failing which it would have to divert e-auction coal to power sector.

    FSA commitment by CIL

    ear of Commissioning

    Capacity

    (MW)

    FSA/LOA

    Quantity CIL Dispatch FY12

    M

    Tonn

    (MT) Sector

    Units commissioned by 31.3.2009 67,370 304.8 Power 312

    2009-10 5,395 24.4 Steel 4

    2010-11 6,205 24.9 Cement 62011-12 16,671 71.7 Fertilizer 2

    2012-13 9,835 39.6 Others 107

    2013-14 10,845 44.2 Total 433

    2014-15 11,127 46.9 Total FSA's Qty 582

    2015-16 5,502 23.9 At 80% commitment 466

    2016-17 660 2.3 At 65% commitment 378

    otal 133,610 583 Dispatch by CIL to power utilities in FY12 3

    Source:Ministry of Coal, Sunidhi Research Implied CAGR for achieving 80% FSA target 14Implied CAGR for achieving 65% FSA target 7

    If supply at 65% of FSA then total imports by CIL

    during FY16-17

    As per CIL guidance, it expects CAGR growth of 5% in production till FY2016-17. However s

    supply growth is not enough to meet power sectors coal requirement which is expected

    increase by CAGR of 10%. Thus by new FSA it has tried to bridge the gap with imports.

  • 7/29/2019 Banking Sector 2012 sector analysis

    29/84

    Banking Se

    Sunidhi Research |

    2016-17 road maps for coal demand and supply by CIL

    Particulars (mn tonne) FY13 FY14 FY15 FY16 FY1

    Existing +Completed Projects 227.39 222.56 202.35 197.26 192.4

    Ongoing Projects 233.76 254.31 272.69 288.26 300.1

    Future Projects 2.95 8.78 32.71 44.78 63.

    TOTAL (A) 464 486 508 530 55

    YoY Growth 5% 5% 4% 5%

    Power demand (CEA) 466 545 631 663 68

    FSA for power 396 463 536 564 58

    At 80% (B) 317 371 429 451 46

    At 65% (C) 257 301 349 366 37

    Imports (D) (B-C) 59 69 80 85 8

    Other user industry (A-C) 207 185 159 164 18

    Source: Working Group Committee, Sunidhi Research

    Coal pool pricing (CPP) could be a better option

    We believe Coal price pooling could be a better option for the industry as coal availability is

    major issue rather than coal price. Domestic coal is available at significant lower prices wh

    compared to imported prices (40% discount). We believe coal pool pricing could lead to price h

    of merely 8% in coal prices in contrast to nearly 60-70% price hike for power plants solely ba

    on imported coal. Such higher power cost poses more problem rather than 8% hike in ovecosts (as per our Metal analyst calculation).

    Price hike which SEBs need to approve

    400-4300 Kcal

    Imported coal 5300 Kcal CN

    (equivalent basis

    Domestic coal 810

    Taxes (as per Annual report) 291

    ROM cost 1101 200

    Freight

    cost at 300kms 1431 233

    cost at 500kms 1651 255

    weightage 0.8 0.

    1321 46

    Weighted avg price 178

    price at 500 kms 165

    Price difference 8%

    Source: Sunidhi Research

    Who gains? Private sector power plants tend to gain

    Price pooling will fulfill the FSA requirements of nearly one third of the countrys thermal po

    capacity, the bulk of which is in pvt sector. The cost of the coal is proposed to be subsidized

    existing generation utilities, mostly in the public sector. Once the price pooling model is adop

    power tariffs for plants located in the East are expected to increase more in comparison to

    units that are in the coastal regions of the West ; as plants in the Eastern belt of India mostly

    domestic coal.

    Implementation of CPP would be significantly positive for the banking sector

    Coal pool pricing thus if implemented can change the face of Indian power sector by assuring

    supply of feed stock. This in turn would be hugely positive for Indian banking sector whic

    reeling under the asset quality stress from power sector. Though the coal pooling p

    mechanism would take time to get implemented but it assures the long term sustainability of

    upcoming and already installed power plants.

    Banks with highest exposure in Infra and Iron & Steel tend to benefit most if even a part of

    above steps are taken as this would reduce stressed assets.

  • 7/29/2019 Banking Sector 2012 sector analysis

    30/84

    Banking Se

    Sunidhi Research |

    Banks exposure to infrastructure and Iron & Steel sectors

    Infrastructure Iron & Steel Total

    Stress sector

    infra and met

    UCO 27% 9% 37% 9

    P&SB 26% 3% 29% 5

    Andhra 21% 6% 27% 10

    OBC 19% 7% 26% 9

    United 17% 8% 25% 4

    Central 21% 3% 25% 5

    SBI 15% 9% 24% 10

    Canara 19% 4% 23% 8

    PNB 16% 6% 22% 4

    BOM 17% 4% 21% 4

    Union 16% 4% 20% 5

    Indian 16% 3% 19% 5

    Corp 16% 3% 18% 5

    Syndicate 13% 3% 16% 3

    BOI 11% 5% 16% 6BOB 10% 4% 14% 6

    Source: Company, Sunidhi Research

    Decline in interest rate to improve investment climateIt is expected that the RBI is likely to move towards an easy monetary policy in the coming

    quarters which would be the biggest trigger for a change in the investment climate. This wo

    make a lot of projects viable and along with policy initiatives would improve the debt servic

    capability of banks. As indicated by the charts below, we believe that there is room for inte

    rates to go lower and harbor expectations of easing in the coming few quarter.

    RBI should start softening soon

    SBI base rate is currently ~50bps higher than 1 year CP rates

    indicating room for base rate to decline by 25-50bps in near

    term

    Also, 1 year CP is at only 100 bps premium to 1 year risk free rat

    which is generally a base level reflecting that risk premium has

    declined

    Source: Bloomberg, Sunidhi Research Source: Bloomberg, Sunidhi Research

    -300

    -250

    -200

    -150

    -100

    -50

    0

    50

    100

    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

    Spread

    0.0

    1.02.0

    3.0

    4.0

    5.0

    6.0

    7.0

    8.0

    9.0

    Sep-0

    5

    Feb-0

    6

    Jul-06

    Dec-

    06

    May-0

    7

    Oc

    t-07

    Mar-

    08

    Aug-0

    8

    Jan-0

    9

    Jun-0

    9

    Nov-0

    9

    Apr-

    10

    Sep-1

    0

    Feb-1

    1

    Jul-11

    Dec-

    11

    May-1

    2

    1 Year CP rate p remium to 1 Year Gsec yield

  • 7/29/2019 Banking Sector 2012 sector analysis

    31/84

    Banking Se

    Sunidhi Research |

    Banks bulk deposit cost has fallen

    Source:Bloomberg, Sunidhi Research

    OIS yield curve still negative although Gsec yield curve turned

    positive indicating rate cut hopes

    Source:Bloomberg, Sunidhi Research

    Break in sticky upward trend of core inflation a major positive in Oct WPWPI inflation for Oct 12 eased to the lowest this fiscal to 7.45% against a reading of 7.81% in S

    The ease was broad based with major groups of primary articles, fuel & power and manufactu

    products marking a dip. One positive aspect of the Oct WPI number has been that the st

    upward trend in core inflation (manufactured products ex food inflation) broke with the c

    inflation falling below the 5.5% (at 5.2%) for the first time in last 3 months, with the MoM W

    core inflation rising by a mere 0.1% in Oct. Going forward, we believe that the downward press

    on the Primary Articles Inflation will continue on account of ease in food prices with bet

    prospects of rabi food output. Food inflation has already eased to 6.6% in Oct from the annual

    of 9.5%. The manufactured group of inflation could also continue with its downward trend

    slowing demand in the economy adds to the easing pressure on the manufactured inflation.

    Trend in Core Inflation

    Source: CSO, Sunidhi Research

    Trend in CPI

    Source: CSO, Sunidhi Research

    Signs of easing in the WPI inflation and bleak outlook on domestic industrial activity has rai

    hopes for some interest rate action by financial year end.

    -3.0

    -2.0

    -1.00.0

    1.0

    2.0

    3.0

    4.0

    5.0

    6.0

    7.0

    Jul-07

    Nov-07

    Mar-08

    Jul-08

    Nov-08

    Mar-09

    Jul-09

    Nov-09

    Mar-10

    Jul-10

    Nov-10

    Mar-11

    Jul-11

    Nov-11

    Mar-12

    Jul-12

    1 Year Gsec premium to 1 Year CoD

    -300

    -200

    -100

    0

    100

    200

    300

    400

    Jan-02

    Aug-02

    Mar-03

    Oct-03

    May-04

    Dec-04

    Jul-05

    Feb-06

    Sep-06

    Apr-07

    Nov-07

    Jun-08

    Jan-09

    Aug-09

    Mar-10

    Oct-10

    May-11

    Dec-11

    Jul-12

    10 Yr - 1 Yr OIS Spread

    -4.0%

    -2.0%

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11

    WPI Core Inflation WPI Core Inflation (6 months MA)

    3.5

    4.5

    5.5

    6.5

    7.5

    8.5

    9.5

    10.5

    11.5

    12.5

    13.5

    Overall CPI Food Fuel Excluding Food and Fuel

  • 7/29/2019 Banking Sector 2012 sector analysis

    32/84

    Banking Se

    Sunidhi Research |

    Price performance of PSBs are highly correlated to risky yieldsHistorically, we have observed that valuation of PSBs is highly correlated to high risk corpor

    bond yields (1 Year BBB corporate bond yield). This is largely due to the fact that BBB bond yie

    best barometer for asset quality stress as well as liquidity. In case of falling BBB bond yield,

    stock price rallies due to a) expected improvement in liquidity scenario which would help bank

    improve margins b) likely improvement in the economy to reduce asset quality stress and c) fal

    interest rate would result in gain in bond book. Considering SBI as proxy for PSBs, as we can

    from chart below that SBI has rallied faster than the pace of fall in BBB bond yields and vice ve(we consider inverse BBB bond yield for simplicity).

    Source:Bloomberg, Sunidhi Research

    Valuation gap between private and PSU banks to narrow going aheadHistorically public sector banks have traded at a ~50% discount to new private sector banks. P

    the recent run up in private sector banking stocks, the discount has widened significantly w

    public sector banks trading at ~62% discount to private banks. Thus despite the challengenvironment we harbor a positive bias towards public sector banks due to their reasona

    valuations.

    Of the two important drivers of PSU banks stock performance, the first - bond rates already se

    to have topped and is likely to see some easing going ahead, whereas concerns still remain in

    second - NPA. Currently, the market expects the RBI to start the easing process which me

    yields dont have much upside risk (unless crude see a sharp upmove). However while the ma

    would want to play on likely lower bond yields, it is skeptical about the rising risk of n

    performing assets. We believe that though slippages will remain high as compared to hist

    averages recoveries and up gradations will keep a check on net slippages in the coming quart

    Moreover with more policy reforms and likely improvement in economic activity during FY14

    FY13, we believe the gap between private and PSU banks to narrow going ahead.

    Banks represent 20% of the weight-age in the BSE Sensex and 19.4% in the BSE100 given

    sectors involvement in every aspect of Indias growth. Howe ver, within the sector

    composition is largely tilted towards private sector banks. Meanwhile public sector ba

    dominate all major banking parameters including profits, business etc. This analysis is furt

    heightened on comparing the weight-age of PSBs ex SBI. On comparison of market share in b

    parameters such as credit, deposits etc, PSBs (ex SBI) represent 55-60% of the share in FY12 vs

    index weight-age of just ~10% in the Bankex and the Bank nifty. In terms of the Sensex and

    BSE100, banks represent 19-20% weight-age represented largely by private banks at 15-1

    where as PSBs (ex SBI) weight-age is only 2% in BSE100 and zero in the Sensex.

    The following chart depicts the difference in representation of PSBs and private banks in term

    market share and representation in stock indices

    -15

    -14

    -13

    -12

    -11

    -10

    -9

    -8

    -7

    -6

    -100%

    -50%

    0%

    50%

    100%

    150%

    May-0

    5

    Sep-0

    5

    Jan-0

    6

    May-0

    6

    Sep-0

    6

    Jan-0

    7

    May-0

    7

    Sep-0

    7

    Jan-0

    8

    May-0

    8

    Sep-0

    8

    Jan-0

    9

    May-0

    9

    Sep-0

    9

    Jan-1

    0

    May-1

    0

    Sep-1

    0

    Jan-1

    1

    May-1

    1

    Sep-1

    1

    Jan-1

    2

    May-1

    2

    Sep-1

    2

    Inverse 1 year BBB Corp Bond Yie ld - RHS SBI Price performance (YoY %)

  • 7/29/2019 Banking Sector 2012 sector analysis

    33/84

    Banking Se

    Sunidhi Research |

    Public banks account for around two-thirds of the market on different parameters yet they are severely under-represented

    Market share Represented in ownership

    Deposits Advances Total Assets NII PAT Bankex (BSE) Bank Nifty (NSE) Mc

    Private Sector Banks 19% 19% 21% 23% 31% 77.2% 76.0% 57.

    PSBs 81% 81% 79% 77% 69% 22.8% 24.1% 43.

    PSB ex SBI 64% 62% 61% 56% 53% 10.3% 10.0% 25.

    Source: Company, Exchanges, Sunidhi Research

    The basic reason behind this is large government ownership and restrictions on the maximforeign investor holding resulting in lower free float. This has also led to under ownership

    institutional investors.

    Trend in ownership pattern for public sector banks

    Ownership (PSBs)

    Q2FY13 Q2FY12 Q2FY11

    Non promoter 26.60% 26.10% 28.21%

    FII 9.84% 10.08% 13.45%

    Insurance + MF 14.59% 15.02% 13.98%

    Ownership (PSB ex SBI)

    Non promoter 26.76% 25.32% 27.21%

    FII 10.33% 11.10% 13.05%Insurance + MF 12.02% 12.68% 12.81%

    Source: Capitaline, Sunidhi Research

    According to Sunidhis banking performance indicator for Q2FY13, the top five positions are

    occupied by private sector banks. However while assigning a weight of 25% to valuations and 7

    to the ranking in accordance to SBPI, select public sector banks such as Bank of Baroda a

    Syndicate Bank also appear in the top five.

    Sunidhis banking performance indicator (SBPI)

    Bank

    Total

    Rank

    (Q2FY13)

    Total

    Rank

    (Q1FY13)

    Asset

    quality

    Rank CAR Rank

    Operational

    efficiency

    Rank

    Profitability

    score Rank

    Quarterl

    performan

    rank

    Yes Bank Ltd. 1 1 1 4 13 2 1

    Axis Bank Ltd. 2 5 4 8 1 3 2

    HDFC Bank Ltd. 3 2 2 2 4 12 5

    IndusInd Bank Ltd. 4 3 3 10 12 1 6

    Kotak Mahindra Bank Ltd. 5 7 5 3 17 18 3

    Bank Of Baroda 6 8 8 7 7 5 10

    Federal Bank Ltd. 7 9 6 1 8 17 12

    ICICI Bank Ltd. 8 4 7 19 2 22 4

    IDBI Bank Ltd 9 18 11 13 21 9 9

    Syndicate Bank 10 10 9 20 19 4 7

    Oriental Bank of Commerce 11 12 15 11 9 16 11

    Canara Bank 12 15 13 5 16 11 14

    Indian Bank 13 6 14 14 6 14 16

    Union Bank Of India 14 22 12 21 14 13 13SBI 15 14 17 12 5 7 20

    Bank Of India 16 21 16 22 11 21 8

    Vijaya Bank Ltd 17 17 10 9 23 20 15

    Punjab National Bank 18 11 21 18 3 10 19

    Indian Overseas Bank 19 20 20 6 22 6 21

    Allahabad Bank 20 13 19 15 10 19 22

    Andhra Bank 21 16 18 16 15 8 23

    UCO Bank 22 19 22 17 20 23 18

    Central Bank Of India 23 23 23 23 18 15 17

    Source: Company, Sunidhi Research

  • 7/29/2019 Banking Sector 2012 sector analysis

    34/84

    Banking Se

    Sunidhi Research |

    SBPI ranking including valuation

    Bank Total Rank

    P/ABV

    FY13E Valuation Rank

    Total Rank plus

    valuation rank

    Total Rank

    valuation

    Yes Bank Ltd. 1 2.9 20 6 1

    Axis Bank Ltd. 2 2.2 18 6 2

    Bank Of Baroda 6 1.2 11 7 3

    HDFC Bank Ltd. 3 4.7 23 8 4

    Syndicate Bank 10 0.9 3 8 5

    IndusInd Bank Ltd. 4 3.8 22 9 6

    Federal Bank Ltd. 7 1.3 14 9 7

    IDBI Bank Ltd 9 0.9 9 9 8

    Kotak Mahindra Bank Ltd. 5 2.9 21 9 9

    Oriental Bank of Commerce 11 0.9 8 10 10

    ICICI Bank Ltd. 8 2.1 17 10 11

    Indian Bank 13 0.9 4 11 12

    Canara Bank 12 1.2 12 12 13

    Union Bank Of India 14 1.4 15 14 14

    Indian Overseas Bank 19 0.7 1 15 15

    Bank Of India 16 1.1 10 15 16

    SBI 15 1.6 16 15 17Allahabad Bank 20 0.9 7 17 18

    Punjab National Bank 18 1.3 13 17 19

    Andhra Bank 21 0.9 6 17 20

    Vijaya Bank Ltd 17 2.2 19 18 21

    Central Bank Of India 23 0.8 2 18 22

    UCO Bank 22 0.9 5 18 23

    Source: Company, Sunidhi Research *Prices as on 6th

    Dec

  • 7/29/2019 Banking Sector 2012 sector analysis

    35/84

    Banking Se

    Sunidhi Research |

    Key risksThe government reforms initiated in September including FDI in retail, aviation, diesel price hik

    SEB restructuring etc, have helped improve investors sentiment and portfolio flows. They h

    also helped to reduce risks of downgrades and sharp rupee depreciation. However, some crit

    economic issues still persist which remain the key downside risk to the banking sector wh

    includes fiscal deficit, inflation, CAD issue, liquidity risk. Although some of the policy initiative

    direct cash transfer would reduce the stress marginally but weak global financial conditions

    higher pre budget spending could worsen the conditions. Hence, this would require

    improvement in the external condition in addition to continued policy action by the governmand central bank.

    Pre-election spending could lead to fiscal slippages

    We expect the fiscal deficit (state + centre deficit) to be around 8.5% given only select measu

    taken by the government to contain the fiscal deficit. Also, considering we are approaching

    election year (2014), we could see a sharp rise in government expenditure whereas incom

    largely inelastic. Historically, government expenditure rises at a faster pace during an election y

    as per the chart below. Consistent high crude prices could result in risks of a higher sub

    burden. Similarly, fertilizer and food subsidy bills are also likely to surprise on the upside. Wea

    than expected tax revenues along with higher expenditure and more budget deficit for the st

    are likely to result in poor fiscal deficit numbers.

    Trend in central government expenditure

    *Circles re