banking sector update_230611

8/6/2019 Banking Sector Update_230611

1/25Emkay Global Financial Services Ltd 1

.

June 23, 2011

Allahabad Bank - ALBK Accumulate

CMP: Rs192 TP: Rs215

Andhra Bank - ANDB Accumulate


Axis Bank - AXSB Hold

CMP: Rs1,244 TP: Rs1,380

Bank of Baroda - BOB Hold


Bank of India - BOI HoldCMP: Rs407 TP: Rs450

Canara Bank - CBK Hold


Corp. Bank - CRPBK Accumulate


HDFC Bank - HDFCB Hold

CMP: Rs2,332 TP: Rs2,540

ICICI Bank ICICIB Accumulate

CMP: Rs1,031 TP: Rs1,200

Punjab Natl. Bank - PNB Accumulate

CMP: Rs1,041 TP: Rs1,270

State Bank of India - SBIN Hold

CMP: Rs2,160 TP: Rs2,300

South Indian Bank - SIB Accumulate

CMP: Rs24 TP: Rs30

Union Bk of India - UNBK Accumulate


United Bk of India -UNTDB Accumulate

CMP: Rs94 TP: Rs110

Yes Bank - YES Accumulate


Kashyap Jhaveri

[email protected]+91 22 6612 1249

Pradeep Agrawal

[email protected]

+91 22 6612 1340

Se

ctorUpdate

Banking

Troubling times ahead

CAGR in net interest income and pre-provision profit to halve

to 12% and 11% respectively for PSU banks in FY11-13E

compared to FY09-11

NIMs for PSU banks to dip by 20bps in FY12E due to maturity

mismatch in assets and liabilities. Contraction to continue in

FY13E (11bps) driven by slower credit growth and drop in LDR

We are yet to factor in the risk of rise in credit costs and drop

in NIMs due to any increase in savings bank (SB) rate in

FY13E. These two could further deteriorate the growth rates

We prefer ICICIB, HDFCB, SIB and PNB over ANDB, BOB, SBI

and YES

NII and earnings growth to decelerate for PSU banksThe FY09-11 period has been a golden earnings period for PSU banks driven by 28%

CAGR in net interest income (NII) and 20% CAGR in pre-provision profit (PPP) (25% if

adjusted for pension costs). However, we expect the CAGR in NII and PPP( adjusted for

pension costs) to decelerate sharply to 12% and 11% respectively over FY11-13E. We

expect private sector peers to still witness a strong 20% CAGR in NII and PPP over the

same period.

Duration management and costs to decide the quantum for FY12E

Historical evidence (net interest margins (NIMs) contraction cycle of FY05-08) suggests

that the NIMs are more resilient for banks where (1) the maturity mismatch between

assets and liabilities is low and (2) where NIMs are driven more by the lower cost of

funds than the higher yield on advances. Thus, we expect a lower 18-19bps contraction

in NIMs for HDFCB, ICICIB, PNB, UBI and SIB for FY12E due to their strong standing

on the above mentioned factors compared to a 28-32bps contraction for ALBK, ANDB,

AXSB, BOB and YES.

NIMs contraction to continue in FY13E

We expect the NIMs of PSU banks to further contract by 10-16bps in FY13E as we

expect loan deposit ratios (LDR) to fall by 130-220bps. We expect sharp deceleration in

credit growth to 17-18% compared to 20-24% in FY12. We believe that current slow

down in investment demand and lagged impact of recent rate hikes on consumption

demand over next few quarters will result in lower credit growth. However, with deposit

rates moving up, we expect the deposit growth to remain high at 20%, resulting in lower

LDRs for PSU banks.

Increase in provision estimates and SB rate add further risk to earnings

Over the last two years, PSU banks have increased their exposures to infrastructure

sector (particularly power) and SME sector by 470bps and 200bps respectively. The

banks which have aggressively grown these portfolios are exposed to the potential risk

of NPAs. We have not factored in these risks in our numbers as we have kept our credit

costs for FY12-13E lower than FY11. Another risk to our numbers can arise from further

increase in SB rates if the reserve bank of India (RBI) decides to do so. A 50bps

increase in SB rates can impact NIMs of banks further by 11-18bps in FY13E.

Prefer low maturity mismatch and low exposure to above sectors

We would prefer ICICIB, SIB, HDFCB and PNB in that order over ANDB, BOB, SBI and

YES. We prefer the former banks as they meet our above highlighted criteria for softer

impact on NIMs viz., (1) low maturity mismatch, (2) control over cost of funds, (3) asset

quality criteria of low NPLs/net worth, high tier I adjusted for NPLs and (4) low exposure

to infrastructure and SME sector (except for PNB).


2/25

Banking Sector Update

Emkay Research 23 June 2011 2

Investment Summary

We expect prolonged deceleration in NII growth till FY13E

We believe that the headwinds for the banking sector are likely to worsen over FY11-13E

as we expect a sharp NIM contraction cycle to trigger off in FY12E and expect the same to

continue in FY13E.We expect the NII growth to decelerate to 10.9% for PSU banks in FY12E and further

remain modest at 13.4% in FY13E.

The deceleration in NII growth is likely to be driven by a 20bps contraction in the NIMs for

PSU banks in FY12E. We expect the contraction to be largely driven by lagged re-pricing of

deposits and duration mismatch between assets and liabilities. We expect the NIMs to

further contract by 11bps in FY13E for PSU banks driven by slower credit growth and drop

in loan-deposit ratios. Thus over FY11-13E, we expect the NIMs of PSU banks to contract

by 31bps in total.

For the private sector peers, we expect the NII CAGR to remain stable at 18.4% over FY11-

13E, compared to 17.2% over FY09-11. However, excluding ICICI Bank, the CAGR

moderates from 25.6% to 20%. We expect the deceleration to be much lower for privatesector banks due to their low cost of deposits and robust asset and liability management

(ALM).

NII CAGR over FY11-13E to be less than half of FY09-11% yoy FY10 FY11 FY12E FY13E CAGR FY09-11 CAGR FY11-13E

ALBK 22.8 51.7 10.8 13.1 36.5 11.9

ANDB 34.9 46.8 9.9 13.6 40.7 11.7

AXSB 35.8 31.1 16.4 17.9 33.4 17.2

BOB 15.9 48.2 9.9 14.6 31.1 12.2

BOI 4.7 35.7 11.5 13.4 19.2 12.4

CBK 20.4 37.7 12.7 11.0 28.8 11.8

CRPBK 30.7 33.0 13.9 16.8 31.9 15.4

HDFCB 13.0 25.7 19.1 22.5 19.2 20.8

ICICIB -3.0 11.1 15.4 15.1 3.8 15.2

PNB 21.2 38.5 17.1 18.9 29.6 18.0

SBI 13.4 37.4 7.6 11.2 24.8 9.4

SIB 8.7 39.2 22.9 16.6 23.0 19.7

UBI 9.9 48.3 12.3 12.6 27.7 12.4

UNTDB 19.8 56.3 16.1 13.9 36.8 15.0

YES 54.1 58.2 27.2 24.3 56.2 25.7

Total PSU 15.9 40.4 10.9 13.4 27.5 12.1

Total Private 11.5 23.2 17.8 19.0 17.2 18.4

Total Private ex ICICIB 21.5 29.8 18.9 20.8 25.6 19.8

Total 14.6 35.8 12.6 14.8 24.8 13.7

Source: Companies, Emkay Research


3/25



Banks with weaker ALMs will see sharper contraction in NIMs in FY12

We believe that the contraction in NIMs and consequent slow down in the NII growth in

FY12E would be higher for the banks where

Maturity mismatch is higher in medium term maturity (upto 1 year)

The NIMs are largely driven by higher yields than lower cost of funds

LDR is significantly higher than the system

If one analyses the NIM trends in the last NIMs contraction cycle between FY05-08, the

banks with strong performance on the above factors have clearly shown better resilience in

NIMs and vice versa. Thus, the NIMs of banks like HDFCB, ICICB and PNB clearly showed

much better resilience than the other banks during that period.

We expect a lower 18-19bps contraction in NIMs for HDFCB, ICICIB, PNB, UBI, UNTDB

and SIB for FY12E compared to a 28-32bps contraction for ALBK, ANDB, BOB and AXSB.

NIMs contraction to continue further in FY13E

We expect the NIMs for PSU banks to further contract by 11bps in FY13E. The contraction

in NIMs is likely to be driven by a lower loan growth of 17% (vs 20-24% in FY12E) and a

130-220bps drop in the LDR. We expect the loan growth to decelerate significantly inFY13E driven by deceleration in the investments cycle and lower GDP growth.

Net interest margins (%)

% Change in bps

FY09 FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E

ALBK 2.39 2.42 2.95 2.66 2.51 3 53 -28 -16

ANDB 2.60 2.76 3.23 2.94 2.79 16 47 -29 -15

AXSB 2.86 3.05 3.10 2.79 2.64 18 5 -31 -15

BOB 2.52 2.35 2.76 2.44 2.33 -17 42 -32 -11

BOI 2.72 2.30 2.49 2.27 2.18 -42 19 -22 -10

CBK 2.36 2.34 2.60 2.41 2.26 -1 26 -19 -15

CRPBK 2.21 2.23 2.30 2.09 2.03 2 8 -21 -6

HDFCB 4.69 4.13 4.22 4.04 4.03 -56 8 -18 -1

ICICIB 2.15 2.18 2.34 2.36 2.34 4 16 2 -2

PNB 3.15 3.14 3.50 3.31 3.26 -2 36 -19 -5

SBI 2.48 2.35 2.85 2.64 2.52 -13 51 -21 -13

SIB 2.79 2.48 2.71 2.70 2.66 -32 24 -1 -4

UBI 2.67 2.35 2.88 2.70 2.57 -32 53 -18 -13

UNTDB 2.00 2.00 2.68 2.74 2.64 0 68 6 -10

YES 2.56 2.66 2.61 2.33 2.24 9 -4 -28 -10

Total PSU 2.51 2.42 2.83 2.62 2.51 -9 40 -20 -11

Total Private 3.01 2.90 3.00 2.84 2.78 -11 10 -15 -6

Total 2.68 2.58 2.88 2.70 2.60 -9 30 -19 -10



4/25



Pre-provision profits of PSU banks to grow at just 11% for FY11-13E

The pre-provision profit (adjusted for pension costs) of PSU banks have grown at a CAGR

of 25% over FY09-11, driven by expanding CDR, improving NIMs and a strong loan growth.

However, we expect the pre-provision profits (adjusted for pension costs in FY11) to grow

at a CAGR of just 11% over FY11-13E. The deceleration in operating earnings would be

largely driven by the compression in NIMs

We expect the PPP for private banks (ex ICICI Bank) to decelerate to about 21% overFY11-13E from 27% in FY09-11.

We expect a much sharper deceleration for banks like ALBK, ANDB and BOB due to

sharper contraction in NIMs. We expect HDFCB, ICICIB, PNB, UNTDB and SIB to show

slightly better growth in the operating profits.

Pre-provision profit CAGR over FY11-13E to be much lower than in FY09-11 (Adjusted for pension liabilities)

% yoy FY10 FY11 FY12E FY13E CAGR FY09-11 CAGR FY11-13E

ALBK 26.0 35.5 8.7 11.1 30.7 9.9

ANDB 34.3 43.3 9.6 15.0 38.7 12.3

AXSB 40.7 22.4 16.8 18.4 31.2 17.6

BOB 10.5 50.8 9.6 14.7 29.1 12.1

BOI -16.6 40.7 11.5 13.6 8.3 12.5

CBK 24.5 37.1 2.7 8.8 30.7 5.7

CRPBK 11.0 37.7 11.4 12.3 23.6 11.9

HDFCB 24.2 20.1 19.3 29.1 22.1 24.1

ICICIB 9.0 -7.0 20.8 16.3 0.7 18.5

PNB 15.5 40.9 17.1 17.8 27.6 17.5

SBI -5.1 60.3 6.6 9.7 23.4 8.1

SIB 14.5 27.9 32.6 20.0 21.0 26.2

UBI 13.3 34.6 19.5 9.9 23.5 14.6

UNTDB 19.0 101.2 9.9 20.5 54.8 15.1

YES 57.1 37.9 33.8 18.9 47.2 26.1

Total PSU 4.8 48.6 9.7 12.2 24.8 10.9

Total Private 21.0 9.8 20.2 21.0 15.3 20.6

Total Private ex ICICI 31.9 22.5 19.8 23.7 27.1 21.7

Total 9.2 36.8 12.2 14.5 22.3 13.4


Prefer banks with low risk to margins and asset quality



impact on NIMs, viz.,

Low maturity duration mismatch

Control over cost of funds

Low NPLs/net worth and high tier I adjusted for NPLs

Low exposure to infrastructure and SME sector (except for PNB)


5/25



Interest rates scenario likely to remain tight for FY12E

Expect inflation to remain above RBIs target rate

We believe that non-food inflation now poses a bigger risk to inflation, than that of food

inflation. Notwithstanding, a likely good monsoon and a possible drop in average food

inflation from the high of 15.8% in FY11 to 9.1% in FY12, we expect the overall average

inflation for FY12 at 8.8% and year end inflation at 7%. This is above the RBIs target rate,driven by sharp increase in the non-food inflation in medium term. We expect this to

translate into a further 50-75bps increase in the policy rates.

Inflation (% yoy) Inflation ex food (% yoy)

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

FY10 FY11 FY12

-6.0

-3.0

0.0

3.0

6.0

9.0

12.0

Apr

May

Jun Ju

l

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

FY10 FY11 FY12

Source: Office of economic advisor, Emkay Research

Government borrowing programme can move up by 20%

We believe that the government is most likely to miss its fiscal deficit target of Rs4.1tn for

FY12E and consequently we also expect it to overshoot its budgeted borrowing

programme. The success of its Rs4.1tn budgeted deficit hinges on the fall through of the

divestment programme of Rs400bn and restraining of subsidies, both of which, look

impossible as of now.The fuel subsidies pegged at Rs 297bn are likely to cross at least Rs700bn according to our

estimates, unless the government hikes the fuel product prices. However, on the flip side,

increase in fuel product prices can push up inflation too. The fertilizer subsidies, according

to our estimates, are likely to cross the Rs500bn mark compared to Rs200bn provided in

the budget. Based on these two, we believe that the government is likely to overshoot its

borrowing programme by ~Rs700bn or at least 20% higher.


6/25



Government accounts

Rs bn FY12BE FY11RE % yoy chg

Revenue receipt 7,899 7,838 0.8

Tax (net) 6,645 5,637 17.9

Non tax 1,254 2,201 -43.0

Capital receipt 550 317 73.3

Recovery of loans 150 90 66.9

Others 400 227 0.0

Total receipt 8,449 8,156 3.6

Non-plan expenditure 8,162 8,216 -0.7

Revenue 7,336 7,267 0.9

Interest 2,680 2,408 11.3

Capital 826 948 -12.8

Plan expenditure 4,415 3,950 11.8

Revenue 3,636 3,269 11.2

Capital 779 681 14.5

Total expenditure 12,577 12,166 3.4

Revenue 10,972 10,537 4.1

Capital 1,606 1,629 -1.4

Fiscal surplus/(deficit) -4,128 -4,010 2.9

As % of GDP -4.6 -5.1

Revenue surplus/(deficit) -3,073 -2,698 13.9

As % of GDP -3.4 -3.4

Primary surplus/(deficit) -1,448 -1,602 -9.6

As % of GDP -1.6 -2.0

Government borrowing (net) 3,430.0 3,354.0

Source: Controller General of Accounts, Emkay ResearchGovernment borrowing programme

Rs bn FY12E

Budgeted fiscal deficit target -4,128

Budgeted subsidies

Fuel 297

Fertilisers 203

Total 500

Expected subsidies

Fuel 500

Fertilisers 700

Total 1,200

Extra subsidies needed 700

Likely fiscal deficit -4,828

Likely borrowings 4,130

Source: Controller General of Accounts, Emkay Research


7/25



Liquidity likely to remain in shortfall

We believe that with very low real interest rates and higher than expected government

borrowing, the liquidity is likely to remain tight for FY12E. We expect the liquidity shortfall for

FY12E to be at 1.7% of deposits.

Liquidity position

Rs bnDeposits at the end of FY11 52,047

Growth in FY12 17.0%

Incremental deposits in FY12E 8,848

CRR @ 6.5% 531

SLR @ 24%/50% of govt borrowing 2,124

Net money available 6,194

Profit for FY12E assuming 1.2% RoA 720

Total money available 6,914

Credit o/s at the end of FY11 39,387

Credit growth expected 20.0%

Incremental credit in FY12E 7,877

Net shortfall -964

Net shortfall as % of FY12E deposits -1.6

Source: RBI, Emkay Research

Real rates still very low and have scope to move up

We believe that the nominal interest rates and especially, the deposit rates still have scope

to move up. The real returns to the depositor on one-year deposit is still just ~60bps and is

likely to move up to 225bps by Mar-12 if our inflation estimates turn out to be true. That

would still be far below the lowest of the previous peaks (320bps).

The real lending rates on the other hand are already at 8%+ and according to our estimates

are likely to reach up to 9.2% by FY12, which is close to the previous peaks, except forFY10.

Real deposits rates (%) # Real lending rates (%) ##

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

Jan-05

Aug-05

Mar-06

Oct-06

May-07

Dec-07

Jul-08

Feb-09

Sep-09

Apr-10

Nov-10

FY12E

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Jan-05

Aug-05

Mar-06

Oct-06

May-07

Dec-07

Jul-08

Feb-09

Sep-09

Apr-10

Nov-10

FY12E

Source: Companies. Emkay Research # real deposit rates = 1 year deposit rate total inflation ## real lending rates = PLR manufacturing inflation

Secondly, post the rate hike of 50bps in the annual monetary policy statement for 2011-12,

most of the banks raised their BPLRs by 50bps while keeping long term deposit rates

unchanged. We expect the banks to raise their medium to long term deposits rates in

Q2/Q3FY12 to boost the deposit growth led by onset of credit offtake season.


8/25



Flat yield curve does not augur well for margins

Anecdotal evidence suggests that a flat yield curve has negative impact on the banks

margins with a lag of 2-3 quarters. This trend is clearly visible on three occasions in the

near past, i.e., in H1CY07, H2FY08 and H1CY09.

Logically too, the flat yield curve scenario does not augur well for banks, which usually

borrow between 1-3 years and various lending and investment portfolios have maturity of 2-

5 years. Thus, a flat yield curve would tend to compress margins. Since May-11, the yieldcurve has again started flattening out and thus, may have negative impact on the NIMs of

the banks.

G-Sec spreads and NIMs SBI G-Sec spreads and NIMs BOB

-300

-200

-100

0

100

200

300

Jun-06

Oct-06

Mar-07

Jul-07

Oct-07

Mar-08

Jul-08

Oct-08

Mar-09

Jul-09

Nov-

Mar-10

Jul-10

Nov-

Mar-11

1.5

2

2.5

3

3.5

Spreads SBI - NIM (RHS)

bps(%)

-300

-200

-100

0

100

200

300

Jun-06

Oct-06

Mar-07

Jul-07

Oct-07

Mar-08

Jul-08

Oct-08

Mar-09

Jul-09

Nov-

Mar-10

Jul-10

Nov-

Mar-11

2

2.5

3

3.5

4

Spreads BoB - NIM (RHS)

bps (%)

Source: Companies. Emkay Research

G-Sec spreads and NIMs PNB G-Sec spreads and NIMs ALBK

-300

-200-100

0

100

200

300

Jun-06

Oct-06

Mar-07

Jul-07

Oct-07

Mar-08

Jul-08

Oct-08

Mar-09

Jul-09

Nov-

Mar-10

Jul-10

Nov-

Mar-11

2.5

3

3.5

4

Spreads PNB - NIM (RHS)

bps (%)

-300

-200-100

0

100

200

300

Jun-06

Oct-06

Mar-07

Jul-07

Oct-07

Mar-08

Jul-08

Oct-08

Mar-09

Jul-09

Nov-09

Mar-10

Jul-10

Nov-10

Mar-11

2

2.5

3

3.5

4

Spreads Albk - NIM (RHS)

bps (%)



9/25



Prefer banks with better ALM and comfortable CDR in FY12E

Better ALM banks to witness lower pressure in FY12E

We believe that with the interest rate scenario likely to remain tight for FY12E, the pressure

on NIMs is inevitable. However, the quantum of compression would depend upon the

duration management of assets and liabilities and whether the NIMs are driven more by

control over cost of funds or by higher yield on advances.

We clearly believe that the banks which have lower duration mismatch in the medium term,

i.e. upto one year maturity and where the NIMs are driven more by control over cost of

funds will see lower pressure on NIMs.

A lower maturity duration gap would provide resilience to NIMs

Over the past one year, the average maturity duration gap (rate sensitive assets lessrate

sensitive liabilities) upto one year maturity for the banks under coverage has gone up by

~2%. The maturity gap as % of RSA has gone up from 12% in FY10 to 14% in FY11.

A lower maturity duration gap would provide more resilience to the NIMs as the re-pricing of

both, assets as well as liabilities would happen together.

ALM mismatch upto 1 year as % RSA Maturity duration (in years)

-30.0

-20.0

-10.0

0.0

10.0

20.0

HDFCB

SIB

CRPBK

UBI

ICICIB

PNB

CBK

Average

BOI

SBI

UNTDB

AXSB

ANDB

ALBK

YES

BOB

FY11 FY10

`

0.0

0.5

1.0

1.5

2.0

2.5

3.0

U

NTDB

UBI

SBI

PNB

AXSB

H

DFCB

CBK

Av

erage

BOI

C

RPBK

BOB

SIB

ICICIB

ALBK

ANDB

YES

Deposits Advances


Deposits maturing in H1FY12 as % of total Advances maturing in H1FY12 as % of total

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

YES

BOI

ALBK

BOB

ANDB

CRPBK

AXSB

SIB

Average

CBK

ICICIB

UBI

HDFCB

PNB

UNTDB

SBI

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

BOI

YES

CRPBK

SIB

CBK

UBI

BOB

HDFCB

Average

ANDB

ALBK

SBI

UNTDB

PNB

AXSB

ICICIB

`



10/25



NIMs driven by cost of funds and not only yields

We believe that from hereon, it will be difficult for banks to pass on the higher funding costs

to the borrowers even as, very low real interest rates may force the deposit costs to move

higher. It is clearly visible at least in the short end deposits, where most of the banks have

jacked up short term deposit rates between 150-200bps in June-2011.

Cost of funds (%) CASA (%)

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Yes

SIB

BOI

ALBK

CBK

ANDB

UNTDB

CRPBK

BOB

UBI

PNB

Average

ICICIB

SBI

AXSB

HDFCB

0.0

10.0

20.0

30.0

40.0

50.0

60.0

HDFCB

SBI

ICICIB

AXSB

UNTDB

Average

PNB

SIB

BOB

ALBK

UBI

ANDB

BOI

CBK

CRPBK

YES

`Source: Companies. Emkay Research

Looking at the yield on advances for banks under our coverage, the benefits of increase in

the base rate or BPLR in the past seem to have already accrued to banks, implying that the

yields are likely to remain sticky from here, whereas the lagged re-pricing of deposits will

continue.

Yield on advances (%)

7.0

7.5

8.0

8.59.0

9.5

10.0

10.5

11.0

BOI

BOB

SIB

YES

HDFCB

ANDB

ALBK

PNB

UNTDB

CBK

Average

UBI

SBI

CRPBK

AXSB

ICICIB

Source: Company, Emkay Research

Historical evidence too, supports strong ALMs

If one looks at historical performance also, the ALMs and the drivers of NIMs (whether it is

cost of funds or yield on advances) have a strong bearing on the NIMs performance ofbanks.

During the last NIM compression cycle for FY05-08, the banks which had weaker ALMs and

where the NIMs were largely driven by higher yield on advances, had to bear the biggest

drag on the NIMs.


11/25



NIMs trend in the last compression cycle

FY06 Cost of

deposits

Yield on

advances

Maturity

Mismatch*

Is cost of

funds higher

than average

Is yield on

advances

higher than

average

ALM mismatch NIM

contraction

during FY05-08

ALBK 4.7 8.7 -10.3 Yes Yes Low 120

ANDB 4.5 8.9 -16.4 Yes Yes High 85

AXSB 4.3 8.1 -17.6 No No High -47

BOB 4.5 8.7 -20.0 Yes Yes High 76

BOI 4.7 9.5 -21.3 Yes Yes High -13

CBK 4.5 7.8 -17.6 Yes No High 97

CRPBK 4.3 7.8 -5.2 No No Low 104

HDFCB 3.4 8.9 5.2 No Yes Low -87

ICICIB 4.4 8.2 -23.2 No No High -27

PNB 4.1 7.9 2.8 No No No 27

SBI 4.8 7.4 -8.1 Yes No Low 57

UBI 4.6 8.0 -21.3 Yes No High 44YES 4.8 8.6 -22.7 Yes Yes High 45

Source: Companies, Emkay Research * ALM maturity mismatch upto 1 year maturity

Comfortable CDR is welcome

A part of NIMs expansion or stability last year was also attributable to the rising CDRs as

the CDR for the banks under our coverage expanded by 200bps in FY11, thereby adding 8-

10bps to the overall margins. For most of the banks under our coverage, the advances

growth was between 1.2-1.9x deposit growth. We believe that further improvement in the

CDR will be almost impossible from hereon.

Growth in FY11 (%) CDR (%)

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

UNTDB

ICICIB

ANDB

CRPBK

UBI

ALBK

SBI

PNB

Average

BOB

HDFCB

AXSB

SIB

CBK

BOI

YES

0.5

0.8

1.1

1.4

1.7

2.0

Advances Depos its Dep/Adv (RHS)

60

65

70

75

80

85

ANDB

PNB

HDFCB

ICICIB

AXSB

YES

UBI

CRPBK

Average

BOB

SBI

CBK

ALBK

SIB

UNTDB

BOI

FY10 FY11`


Factors highlighted above to decide quantum of NIMs compression

We believe that considering the historical evidence in conjunction with the maturity duration

gap and margin drivers of the banks as of date, banks like ICICIB, HDFCB, PNB, SIB and

UBI will show a very robust resilience to the NIMs. We expect sharper correction in NIMs for

ALBK, ANDB, AXSB, BOB and YES.


12/25



ALM Mismatch* (%) Is cost of deposits

higher than average

Is yield on advances

higher than average

Is CDR high

or low

NIMs compression

expected in FY12E

ALBK High Yes Yes Low -28

ANDB High Yes Yes High -29

AXSB High No No High -31

BOB High Yes Yes Low -32

BOI Low Yes Yes Low -22

CBK Low Yes No Low -19

CRPBK Low Yes No High -19

HDFCB Low No Yes High -20

ICICIB Low No No High 2

PNB Low No Yes High -19

SBI High No No Low -21

SIB Low Yes Yes Low -1

UBI Low No No High -18

UNTDB Low Yes Yes Low 6

YES High Yes Yes High -28

Source: Companies, Emkay Research * ALM mismatch upto 1 year maturity


13/25



Contraction cycle to be prolonged and to run into FY13E

We expect lower credit growth in FY13E

We expect the credit growth to be lower at 17-18% for FY13E compared to 22-24% growth

in FY10-12E for the banks under our coverage. We expect a slow down in credit growth in

FY13E driven by a slow down in both investment and consumption demand.

Capital formation growth at its lowest

The gross fixed capital formation (GFCF) part of GDP has seen a significant slow down

over H2FY11 with the growth rate dwindling to just 7% yoy (nominal) for Q4FY11 (the

lowest since Sep-09). Historically, credit growth moves with a lag effect of 12 months to the

growth in fixed capital formation as seen between Jun-00 to Jun-01, Dec-04 to Dec-05 and

Jun-07 to Jun-08. Since the current investment demand has started slowing down from

Dec-10 onwards, the slow down in the credit growth will be seen from Dec-11 onwards.

Growth in GFCF (% yoy, nominal, base = 2004-05) % yoy change

0

5

10

15

2025

30

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

Actual 12MMA

0

10

20

3040

50

Jun-00

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

GFCF Non-food credit`

Source: CSO, RBI, Emkay Research

Consumption demand to followThe growth in private final consumption expenditure (PFCE) was still going strong at 16-

17% (nominal) till Q4FY11. However, we believe that the lag impact of rising rates will start

slowing down the same in a big way in the next few quarters as can be seen historically

from the chart below.

Trend between interest rates and PFCE (%)

0.00

5.00

10.00

15.00

20.00

25.00

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

0.00

2.00

4.00

6.00

8.00

10.00

12.00

PFCE-yoy chg (LHS) Repo rate (RHS)


But, deposit growth may not slow down

We expect the deposit growth rate for banks under our coverage to still remain high at 20-

22%. Our view comes from the fact that historically, the domestic savings moving to

deposits as % of GDP has always followed deposit rates.


14/25



Deposit growth and rates (%) Change in household bank deposits as % of GDP

101214161820222426

Mar-92

Mar-93

Mar-94

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

0

2

4

6

8

10

12

14

Deposit grow th - LHS Deposit rates - RHS

0.0

1.0

2.0

3.0

4.0

5.0

Mar-93

Mar-94

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

5

7

9

11

13

15

Chg in household dep to GDP- LHS

1 year deposit rate - RHS


We expect pressure on FY13E NIMs, driven by lower CDRs

We expect the NIMs in FY13E for PSU banks and private banks to drop further by 10-16bps

as we expect 130-220bps contraction in CDR and also, as further lagged re-pricing of

deposits continue.

Change in CDR and NIMs in FY13E% CDR NIMs

FY12E FY13E chg in bps chg in bps

ALBK 70.9 69.2 -169 -16

ANDB 76.6 74.6 -197 -15

AXSB 72.8 70.8 -199 -15

BOB 73.0 71.0 -200 -11

BOI 70.9 69.2 -169 -10

CBK 73.0 71.3 -172 -15

CRPBK 73.7 72.4 -127 -6HDFCB 74.0 72.1 -185 -1

ICICIB 75.0 74.0 -100 -2

PNB 77.7 75.5 -220 -5

SBI 70.9 69.2 -169 -13

SIB 71.3 71.0 -32 -4

UBI 75.9 74.6 -131 -13

UNTDB 70.9 69.2 -169 -10

YES 73.2 73.0 -18 -10



15/25



We have not factored in the risk of increase in SB rate

The RBI has for long been pondering over the idea of deregulating the SB rate. As a step

towards the same, it raised the SB rate by 50bps in its annual monetary policy statement for

2011-12. Any further increase in the SB rate could further impact our margin assumptions

by 11-18bps in FY13E.

Impact of 50bps rise in SB rate

SB account to total deposits (%) Impact in bps

ALBK 26.5 13

ANDB 21.3 11

AXSB 21.6 11

BOB 21.1 11

BOI 19.8 10

CNBK 19.9 10

CRPBK 13.9 7

HDFCB 30.4 15

ICICI Bank 29.6 15

PNB 29.9 15

SBI 35.4 18

SIB 17.5 9

UNBK 22.1 11

UNTDB 29.8 15

YES 1.8 1



16/25



We have not yet factored rise in provisions costs

Tier I ratios have failed to pick up for PSU banks despite capital infusion

Over the past year, most of the banks have taken refuge under RBIs benevolence in

allowing old technical write offs to be included in calculation of the provision coverage ratio.

As a result they have managed to reach the stipulated 70% coverage despite making lesser

provisions during FY11.

The pitfalls of the practice are clearly reflected in the fact that for most of the PSU banks

under our coverage, though the provision coverage has remained above the RBI limit of

70%,

The reported PCR has fallen dramatically for many of them

Net NPLs to net worth ratio has gone up significantly

Risk adjusted tier I CAR has failed to improve significantly despite government infusingfresh capital

As we highlighted earlier, RBIs tweaking of 70% PCR norms has resulted in lower

provisions through profit and loss account and has done clear damage to the tier I CAR of

the banks.

Despite hefty equity capital infusion by the government in PSU banks, the tier I CAR

adjusted for NPLs for most of them has hardly improved. We believe that few of them like

SBI, BOI, UNTDB and UBI may have to raise fresh capital in the near to medium term.

Net NPLs/Net worth (%) Tier I CAR adjusted for NPLs (%)

0.0

4.0

8.0

12.0

16.0

20.0

SBI

UNTDB

UBI

CBK

BOI

PNB

Average

ALBK

CRPBK

ICICIB

ANDB

BOB

SIB

AXSB

HDFCB

YES

6.07.08.0

9.010.0

11.012.013.014.0

ICICIB

HDFCB

SIB

YES

BOB

CBK

AXSB

ANDB

CRPBK

ALBK

PNB

UBI

BOI

UNTDB

SBI

FY11 FY10


Reported PCR has fallen for most of the banks (%) Credit cost as % of assets

20.030.040.050.060.070.0

80.090.0

100.0

ALBK

ANDB

AXSB

BOB

BOI

CBK

CRPBK

HDFCB

ICICIB

PNB

SIB

SBI

UBI

UNTDB

YES

Dec-09 Mar-11

0.0

0.5

1.0

1.5

2.0

2.5

ALBK

ANDB

AXSB

BOB

BOI

CBK

CRPBK

HDFCB

ICICIB

PNB

SIB

SBI

UBI

UNTDB

YES

FY10 FY11



17/25



Rising exposure to infrastructure risks rising after strong growth in past

Loans to infrastructure sector, especially power, have been one of the key drivers of credit

growth over the last two years. Loans to infrastructure have grown at a CAGR of 37% over

FY08-11 with the proportion of the same in total credit going up by 470bps to 13.4% over

the same period. Within infrastructure, the loans to power sector have grown at a CAGR of

41.5% over FY08-11 with its proportion in the total loans going up by 280bps over the same

period. However, with significant rise in the losses of state electricity boards (SEBs), webelieve that the risks of NPAs or probability of restructuring the loans from the power sector

exposure are rising. The risks of NPAs or restructuring can come not only from direct

exposure to the SEBs but also from the fact that the health of merchant power producers

depends upon the health of these SEBs.

Loans to infrastructure Loans to power sector

8.7

13.4

11.7

9.7

1,500.0

2,500.0

3,500.0

4,500.0

5,500.0

FY08 FY09 FY10 FY11

8.0

9.0

10.0

11.0

12.0

13.0

14.0

Rsbn - LHS % of total - RHS

CAGR 36.9%

5.8

6.8

4.54.0

0.0

1,000.0

2,000.0

3,000.0

FY08 FY09 FY10 FY11

3.0

4.0

5.0

6.0

7.0

8.0

Rsbn - LHS % of total - RHS

CAGR 41.5%

Source: Companies. Emkay Research.

Infrastructure loans as % of total loans Loans to power as % of total loans

0.0

5.0

10.0

15.0

20.0

ALBK

ANDB

CRPBK

UNTDB

CBK

PNB

UBI

AXSB

BOI

SBI

BOB

HDFCB

ICICIB

0.0

5.0

10.0

15.0

ALBK

UNTDB

ANDB

CRPBK

PNB

BOI

ICICIB

AXSB

SBI

BOB

HDFCB


We believe that with their significantly higher exposure to infrastructure and power sector,

ALBK, ANDB, UNTDB, PNB and CRPBK are running significant risk of restructuring these

advances due to deteriorating health of SEBs. Our interaction with the banks, NBFCs,

merchant power producers and fuel suppliers reveal the following pitfalls in the sector

ALM mismatch

The loans to infrastructure sector at times carry moratorium period along with no immediate

rate reset clause till commercial commencement of the projects, giving rise to ALM

mismatch

Dire financial state of SEBs

Over the past few years, the losses of the state electricity boards have risen sharply driven

by the rising cost of power, lower tariffs and obligations to supply subsidized power. The

cumulative losses of the SEBs as % of the GDP have now gone up to 1.1%.


18/25



SEB losses without subsidy

0.7 0.8 0.8

1.11.1

1.11.1

1.1

0

200

400600

800

1,000

1,200

1,400

FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

0.5

0.7

0.9

1.1

1.3

1.5Rs bn - LHS % of GDP - RHS


We believe that despite the state guarantees and escrow account mechanism, the banks

and NBFCs may still have to bear some brunt of the deteriorating health of SEBs as

We believe that the states themselves are in no position to bail out the SEBs. The overallstate level fiscal deficit as % of GDP for FY11BE is as high as 4% and the outstanding

debt at 37% of GDP, limiting the states ability to bail out these SEBs

In four out of six states which make maximum losses, the fiscal position is even worsethan the average

Fiscal position of statesFY11BE GFD/GDP (%) Debt/GDP (%)

Madhya Pradesh 4.3 40.5

Maharashtra 2.9 28.3

Rajasthan 5.1 60.0

Tamil Nadu 3.9 26.3

Uttar Pradesh 4.8 49.5

Jammu and Kashmir 4.5 65.1Source: Planning Commission, Emkay Research

We believe that the escrow account may not fully cover the repayments if the employeebenefits will have first charge on the finances of SEBs

We believe that the restructuring package for SEBs is clearly a must as of now and some

brunt of the same may have to be borne by the banks.

Impact of SEB losses on private merchant power producers

According to our power and utilities analyst, more than two-thirds of the incremental losses

of the SEBs have been contributed by sharp increases in the merchant power rates. These

rates would be unsustainable if the SEBs continue to incur significant losses. Our power

and utility analyst believes that the sustainable merchant power rates are between Rs2.7-3.0/unit, at which more than half of the merchant power producers would hardly make money.

SEB losses for FY08-10 (Rs bn)

0

50

100

150

200

250

300

350

400

Increase in SEB losses Contribution by merchant pow er prices

Source: CERC, Discoms annual reports, 13th Finance Commission report, Emkay Research


19/25



Rising SME exposure

Over FY08-11, a part of NIM expansion for many banks was also driven by sharp

expansion in the SME loans. The SME loans as % of total loans for banks under our

coverage (ex-SBI) has gone up from 13.9% in FY09 to 15.6% in FY11, recording a CAGR

of 33%. This is much higher than overall advances growth of 23% over the same period.

We have seen in the past that banks which have grown the SME book aggressively have

witnessed the problems of NPAs (case in point being UBI and BOI). As these loans havebeen created over the past two years, we have not seen their true slippage behaviour.

Banks like ALBK, CRPBK, UNTDB and AXBS have grown their SME loans at very high

double digit rates over last two years, exposing them to potential risk of NPAs..

SME loans CAGR over FY09-11 (%) SME loans as % of total loans

0.0

10.020.0

30.0

40.0

50.0

60.0

70.0

ALBK

CRPBK

UNTDB

AXSB

ANDB

PNB

BOB

Average

ex-SBI

CBK

UBI

BOI

10.0

12.0

14.0

16.0

18.0

20.0

PNB

CBK

BOI

UBI

SBI

Average

ex-SBI

ANDB

ALBK

UNTDB

CRPBK

AXSB


We have not built in any rise in credit costs yet

While the behaviour of loans in infrastructure and SME segment is yet to be seen, we are

still building in lower than FY11 provision costs for banks under our coverage for FY12E.

Any increase in the provision costs could entail further downside to our numbers.

Provision costs to total year ending loans

% FY10 FY11 FY12E FY13E

ALBK 1.3 1.0 0.8 0.8

ANDB 0.5 0.7 0.7 0.8

AXSB 1.1 0.6 0.6 0.6

BOB 0.4 0.5 0.4 0.4

BOI 1.0 0.5 0.7 0.7

CBK 0.9 0.5 0.4 0.4

CRPBK 0.5 0.6 0.6 0.6

HDFCB 2.1 0.9 0.5 0.5

ICICIB 2.3 1.3 1.0 0.9

PNB 0.5 0.8 1.0 1.0

SIB 0.5 0.3 0.3 0.3

SBI 0.9 1.5 1.1 1.1

UBI 0.5 1.0 0.6 0.6

UNTDB 0.6 1.2 1.2 1.1

YES 0.5 0.1 0.2 0.2


20/25



Financials

Earnings growth, RoAs and RoEs to be much lower than recent past

We expect the overall earnings growth (adjusted for pension costs) of PSU banks for

FY12E to decelerate significantly to just about 12.9% (7.3% excluding SBI) We expect a

13.4% CAGR (12.1% excluding SBI) in earnings over FY11-13E compared to 20% (29%

excluding SBI) over FY09-11.

For private banks, we expect the earnings to grow at a CAGR of 23% over FY11-13E

compared to 27% over FY09-11.

Net profit (excluding pension costs) to grow at a much slower CAGR for PSU banks

% yoy change FY10 FY11 FY12E FY13E CAGR FY09-11 CAGR FY11-13E

ALBK 41.4 41.1 4.3 15.5 41.2 9.8

ANDB 50.5 33.2 5.6 17.5 41.6 11.4

AXSB 48.1 26.0 17.9 20.1 36.6 19.0

BOB 33.3 45.4 3.8 17.0 39.2 10.2

BOI -44.5 92.6 11.6 17.6 3.4 14.6CBK 41.1 57.1 -0.1 10.7 48.9 5.2

CRPBK 27.2 31.6 0.8 16.5 29.4 8.4

HDFCB 31.4 33.3 30.7 31.5 32.3 31.1

ICICIB 4.6 30.7 17.7 18.1 16.9 17.9

PNB 9.0 39.2 8.6 21.6 23.1 14.9

SBI -9.1 20.9 26.2 7.7 4.8 16.6

SIB 20.4 25.1 33.6 21.5 22.7 27.4

UBI 9.1 26.5 26.3 11.4 17.5 18.6

UNTDB 74.6 118.3 7.8 45.1 95.2 25.1

YES 57.2 52.2 33.2 18.5 54.7 25.6

Total PSU 3.9 38.7 12.9 13.9 20.0 13.4

PSU ex SBI 12.1 47.8 7.3 17.0 28.7 12.1

Total Private 23.6 31.1 22.7 22.9 27.3 22.8

Total 8.6 36.6 15.5 16.4 21.8 16.0


We expect the RoAs of the PSU banks under our coverage, excluding SBI to drop by 10bps

over FY11-12E. Though the drop may optically look low, if adjusted for hefty pension

liabilities in FY11, the RoAs would fall by ~17bps in FY12E over FY11. We expect the RoAs

of private sector banks to remain largely stable.


21/25



Return on assets, excluding pension costs

% Chg in bps

RoA FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E

ALBK 1.1 1.2 1.1 1.0 15 15 -19 -4

ANDB 1.3 1.4 1.2 1.2 20 8 -18 -2

AXSB 1.6 1.6 1.5 1.4 23 -4 -14 -5

BOB 1.4 1.6 1.3 1.3 9 21 -26 -3BOI 0.7 1.1 1.0 1.0 -86 38 -9 -1

CBK 1.2 1.6 1.3 1.2 18 33 -28 -8

CRPBK 1.2 1.2 1.0 0.9 -2 3 -24 -3

HDFCB 1.5 1.6 1.7 1.8 3 12 8 12

ICICIB 1.1 1.3 1.4 1.4 9 28 4 2

PNB 1.4 1.6 1.4 1.4 -17 17 -19 1

SBI 0.9 1.0 1.1 1.0 -29 6 8 -8

SIB 1.0 1.0 1.1 1.1 -2 -2 8 3

UBI 1.2 1.2 1.3 1.2 -17 5 7 -8

UNTDB 0.5 0.9 0.8 1.0 15 40 -4 19

YES 1.6 1.5 1.4 1.3 9 -9 -10 -12

Total PSU 1.1 1.2 1.1 1.1 -18 17 -7 -4

PSU ex SBI 1.1 1.4 1.2 1.2 -12 22 -17 -2

Total Private 1.3 1.5 1.5 1.5 14 16 0 2

Total 1.1 1.3 1.2 1.2 -11 16 -5 -3


We also expect the RoEs of PSU banks (adjusted for pension costs) to dwindle from a high

of 25% in FY11 to 21% in FY13. For private banks, we expect the RoEs to improve from

13.5% in FY11 to 15.7% in FY13E, largely driven by improvement in RoEs of ICICI Bank.

RoEs to dwindle for PSU banks

% FY10 FY11 FY12E FY13E

ALBK 19.2 22.3 19.4 19.4

ANDB 26.0 25.6 20.7 20.5

AXSB 20.5 19.3 19.4 19.8

BOB 24.6 27.7 22.6 22.2

BOI 12.6 21.3 20.0 20.2

CBK 22.5 27.3 21.6 20.3

CRPBK 22.0 23.9 20.2 20.2

HDFCB 16.3 16.7 18.4 20.0

ICICIB 7.8 9.6 10.5 11.4

PNB 23.6 27.1 24.4 24.4

SBI 14.8 16.9 20.0 18.8

SIB 16.8 17.6 15.7 14.3UBI 21.7 22.7 23.8 22.2

UNTDB 10.4 19.1 17.7 22.3

YES 20.3 21.1 23.0 18.5

Total PSU 18.3 21.9 21.2 20.6

PSU ex SBI 20.8 25.0 21.9 21.6

Total Private 12.0 13.5 14.7 15.6

Total 16.0 18.8 18.9 18.8


Rise in provisions could create further downside

As highlighted earlier, we have kept our provision costs for FY12E/13E lower than that in

FY11. If rising exposure to SME and infrastructure loans translates into NPA problems, our

numbers could see further downside.


22/25



Valuations

Weak ALM and high growth banks battered in last cycle

In the last NIM compression cycle, the banks with weak ALMs or banks which chased high

growth were badly battered in terms of valuations.

ALMs, growth and stock performance in last NIM contraction cycleALM mismatch upto 1 yr FY06-08 CAGR Derating in P/ABV#

FY06 FY07 FY08 in advances (%) b/w Oct-05 and Mar-07

ALBK -10.3 -0.5 -18.1 30.6 -40.8

ANDB -16.4 -17.7 -23.6 24.5 -31.8

AXSB -17.6 -20.9 -15.7 63.5 -20.0

BOB -20.0 -23.0 -21.7 33.5 -36.6

BOI -21.3 -24.9 -7.1 32.0 -21.4

CBK -17.6 -9.7 -8.1 16.2 -24.3

CRPBK -5.2 -7.4 1.4 27.9 -43.2

HDFCB 5.2 7.3 12.1 34.5 -20.8

ICICIB -23.2 -26.1 -15.7 24.2 -10.8

PNB 2.8 7.7 -8.9 26.5 -4.1

SIB 1.3 2.2 -0.8 28.1 -10.5

SBI -8.1 -8.2 -9.2 26.2 -18.5

UBI -21.3 -19.7 -6.9 18.0 -48.1

YES -22.7 -38.0 -38.4 97.9 NA

Source: Companies, Emkay Research # one-year forward

The last margins compression cycle happened between FY05-08 and during that period,

the valuations of the PSU banks were between 1-1.4x one year forward ABV. For private

banks, the valuations were around 2.3-3.8x one-year forward ABV. If one looks at

valuations over the last five year period, the mean valuations have been around similarrange.

We believe that in the current margins compression cycle, the valuations would reflect the

same range as was in FY05-08. However, we would also like to highlight that during the

same period, the valuations of the banks under our coverage also touched 0.4-1.0x one

year forward P/ABV for PSU banks and 1.5-2.9x for private banks which are 20-40% lower

than the average valuations.

Prefer banks with low risk to margins and asset quality



impact on NIMs, viz.,

Low maturity duration mismatch

Control over cost of funds

Low NPLs/net worth and high tier I adjusted for NPLs

Low exposure to infrastructure and SME sector (except for PNB)


23/25



Targets and recommendations

Banks 1-yr forward P/ABV between FY05-08 Target TP Upside Recommendation

Average Min Max Multiple (x) (Rs) (%)

ALBK 1.1 0.7 1.6 1.0 215 12.0 Accumulate

ANDB 1.4 0.9 1.9 1.0 150 16.2 Accumulate

AXSB 2.5 1.7 4.7 2.3 1,380 10.9 Hold

BOB 1.0 0.7 1.5 1.3 950 7.5 Hold

BOI 1.2 0.7 2.2 1.2 450 10.6 Hold

CBK 1.1 0.7 2.0 1.1 560 9.9 Hold

CRPNK 1.4 0.7 2.1 1.0 590 15.9 Accumulate

HDFCB 3.6 2.9 5.5 3.5 2,540 8.9 Hold

ICICIB 2.2 1.5 3.6 1.5 1,200 16.4 Accumulate

PNB 1.5 1.0 1.8 1.4 1,270 22.0 Accumulate

SIB 0.6 0.4 1.9 1.3 30 27.4 Accumulate

SBI 1.4 1.0 2.8 1.2 2,300 6.5 Hold

UBI 1.4 0.8 2.0 1.2 330 13.1 Accumulate

UNTDB NA NA NA 0.9 110 16.6 Accumulate

YES 3.5 2.1 5.2 1.7 320 11.4 Accumulate


Target multiple derivation

Bank Reason for the multiple Comments

ALBK 10% discount to average multiple of FY05-08 cycle Significant high risk to earnings due to duration mismatch and high growth in

infra and SME loans

ANDB Valued similar to ALBK Significant high risk to earnings due to duration mismatch and high growth in

infra and SME loans

AXSB 32% discount to HDFC Bank's multiple which was averagebetween FY05-08

Significant high risk to earnings due to duration mismatch and high growth ininfra and SME loans

BOB 10% discount to PNB Significant high risk to earnings due to duration mismatch

BOI At par with FY05-08 multiple Good maturity duration but very high NPLs/net worth and low tier I adjusted

for NPLs

CBK At par with FY05-08 multiple Good maturity duration but very high NPLs/net worth ratio

CRPBK Valued similar to ALBK Very high CDR, low CASA and high cost of funds, high growth in infra and

SME loans are key risks

HDFCB At par with FY05-08 multiple Best maturity duration, NIMs driven by low cost of funds, least exposure to

infra and SME loans

ICICIB At par with FY05-08 multiple plus Rs345 for the subsidiaries Best maturity duration, NIMs driven by low cost of funds, least exposure to

infra and SME loans

PNB At par with FY05-08 multiple Best maturity duration but marginally high NPLs/net worth and low tier I

adjusted for NPLs

SIB Valued at 40% discount to AXSB Best maturity duration, NIMs driven by low cost of funds, least exposure to

infra and SME loans

SBI At par with FY05-08 multiple plus Rs300 for the subsidiaries Good maturity duration but very high NPLs/net worth and low tier I adjusted

for NPLs

UBI Valued at part with BOI Good maturity duration but very high NPLs/net worth and low tier I adjusted

for NPLs

UNTDB Valued at 10% discount to ALBK Best maturity duration but very high NPLs/net worth and low tier I adjusted

for NPLs

YES Valued at 25% discount to AXSB Significant high risk to earnings due to duration mismatch



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Financials TableBanks EPS (Rs) ABV (Rs) RoE (%) RoA (%)

FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

ALBK 29.9 35.1 40.9 145.0 173.8 207.9 18.7 18.2 18.4 1.0 1.0 1.0

ANDB 22.6 24.7 29.3 111.1 130.0 153.0 23.2 19.5 19.4 1.3 1.1 1.1

AXSB 82.5 96.4 114.9 440.8 512.4 599.4 19.3 19.4 19.8 1.6 1.5 1.4

BOB 110.9 125.5 148.0 514.3 605.5 720.3 24.1 21.5 21.2 1.4 1.2 1.2

BOI 45.5 61.6 73.7 254.3 309.6 372.6 17.4 19.5 19.8 0.8 0.9 0.9

CBK 90.9 99.0 110.5 353.1 428.7 509.5 26.4 22.1 20.5 1.3 1.2 1.1

CRPNK 95.4 99.8 117.1 457.0 518.0 593.7 21.9 19.2 19.3 1.1 0.9 0.9

HDFCB 84.4 108.8 141.3 462.6 601.8 730.8 16.7 18.4 20.0 1.6 1.7 1.8

ICICIB 44.6 52.5 62.0 457.4 499.2 548.1 9.6 10.5 11.4 1.3 1.4 1.4

PNB 139.9 167.7 207.1 568.1 732.2 910.0 22.6 22.4 22.8 1.3 1.3 1.3

SIB 2.6 2.7 3.2 14.5 20.3 23.0 17.6 15.7 14.3 1.0 1.1 1.1

SBI 195.0 263.7 294.7 1,009.3 1,247.4 1,532.9 16.1 19.6 18.7 0.7 0.9 0.9

UBI 39.7 53.3 60.3 176.9 225.4 276.1 18.0 20.2 19.4 1.0 1.1 1.0

UNTDB 15.4 19.9 29.9 85.7 105.1 127.4 14.3 16.0 20.8 0.7 0.7 0.9

YES 20.9 27.6 27.1 109.0 130.9 183.1 21.1 23.0 18.5 1.5 1.4 1.3


Valuations table

Banks CMP PER (x) P/ABV (x) P/PPP (x) Historical 1-yr forward P/ABV

(Rs) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E Max MinAvg last

5 yrs

Avg

FY05-08

ALBK 192 6.4 5.5 4.7 1.3 1.1 0.9 3.0 2.5 2.3 1.6 0.3 1.0 1.1

ANDB 129 5.7 5.2 4.4 1.2 1.0 0.8 3.0 2.7 2.3 2.1 0.4 1.1 1.4

AXSB 1,244 15.1 12.9 10.8 2.8 2.4 2.1 8.0 6.9 5.9 4.7 0.7 2.4 2.5

BOB 847 7.6 6.7 5.7 1.6 1.4 1.2 4.7 3.9 3.4 1.8 0.3 1.1 1.0

BOI 407 8.9 6.6 5.5 1.6 1.3 1.1 4.1 3.3 2.8 2.4 0.5 1.2 1.2

CBK 510 5.6 5.1 4.6 1.4 1.2 1.0 3.7 3.3 3.0 2.1 0.5 1.2 1.4

CRPNK 509 5.3 5.1 4.3 1.1 1.0 0.9 2.9 2.5 2.2 2.1 0.4 1.0 1.4

HDFCB 2,332 27.6 21.4 16.5 5.0 3.9 3.2 14.0 11.9 9.4 5.5 1.8 3.4 3.6

ICICIB 1,031 23.1 19.6 16.6 2.3 2.1 1.9 13.1 10.9 9.3 3.6 0.6 2.0 2.2

PNB 1,041 7.4 6.2 5.0 1.8 1.4 1.1 3.6 2.9 2.4 2.1 0.3 1.5 1.5

SIB 24 9.1 8.8 7.3 1.6 1.2 1.0 5.1 4.9 4.1 1.9 0.4 0.9 0.6

SBI 2,160 11.1 8.2 7.3 2.1 1.7 1.4 4.2 3.7 3.3 3.1 0.6 1.9 1.4

UBI292 7.4 5.5 4.8 1.6 1.3 1.1 3.6 2.9 2.6 2.1 0.5 1.3 1.4

UNTDB 94 6.1 4.7 3.2 1.1 0.9 0.7 2.1 1.8 1.5 NA NA NA NA

YES 287 13.7 10.4 10.6 2.6 2.2 1.6 8.4 6.3 6.4 2.1 0.5 1.3 3.5


.


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