Download - Banking Sector Update_230611
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1/25Emkay Global Financial Services Ltd 1
.
June 23, 2011
Allahabad Bank - ALBK Accumulate
CMP: Rs192 TP: Rs215
Andhra Bank - ANDB Accumulate
CMP: Rs129 TP: Rs150
Axis Bank - AXSB Hold
CMP: Rs1,244 TP: Rs1,380
Bank of Baroda - BOB Hold
CMP: Rs847 TP: Rs950
Bank of India - BOI HoldCMP: Rs407 TP: Rs450
Canara Bank - CBK Hold
CMP: Rs510 TP: Rs560
Corp. Bank - CRPBK Accumulate
CMP: Rs509 TP: Rs590
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
CMP: Rs292 TP: Rs330
United Bk of India -UNTDB Accumulate
CMP: Rs94 TP: Rs110
Yes Bank - YES Accumulate
CMP: Rs287 TP: Rs320
Kashyap Jhaveri
[email protected]+91 22 6612 1249
Pradeep Agrawal
+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).
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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
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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
Source: Companies, Emkay Research
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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
Source: Companies, Emkay Research
Prefer banks with low risk to margins and asset quality
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.,
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)
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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.
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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
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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.
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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 (%)
Source: Companies. Emkay Research
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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
Source: Companies. Emkay Research
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
`
Source: Companies. Emkay Research
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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.
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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`
Source: Companies. Emkay Research
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.
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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
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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)
Source: CSO, RBI, Emkay Research
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.
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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
Source: CSO, RBI, Emkay Research
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
Source: Companies, Emkay Research
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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
Source: Companies, Emkay Research
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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
Source: Companies. Emkay Research
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
Source: Companies. Emkay Research
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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
Source: Companies. Emkay Research
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%.
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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
Source: Company, Emkay Research
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
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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
Source: Companies. Emkay Research
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
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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
Source: Companies, Emkay Research
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.
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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
Source: Companies, Emkay Research
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
Source: Companies, Emkay Research
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.
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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
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.,
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)
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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
Source: Companies, Emkay Research
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
Source: Company, Emkay Research
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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
Source: Companies, Emkay Research
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
Source: Companies, Emkay Research
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