Banking Sector 2012 Sector Analysis

December 10, 2012
Banking Sector
Valuation gap between private and public sector banks to narrow going ahead
Amit Jain
amit.j@sunidhi.com Phone: +91-022-6113 1355
Kanika Thacker
kanika.t@sunidhi.com Phone: +91-022-6631 8632
Banking Sector
Valuation gap between private and public sector banks to narrow going ahead
PSU banks appear to have lost favor amongst investors due to concerns relating to asset quality, change in management and capital adequacy. As a result, the valuation gap between public and private banks has widened with public banks trading at ~62% discount to private banks as compared to historical averages of ~50%. We believe that markets seem to be over-reacting and asset quality concerns appear to be priced in. The high restructured books of public sector banks which have acted as a dampener, on investor sentiments do not seem nearly as threatening once we exclude, SEB and Air India restructuring which is unlikely to slip into non performing asset category. Based on our calculations, the average impact from slippages of 15% from restructured books adjusted for Air India and SEBs is ~9% on the FY14E adjusted networth of banks. We expect these losses to be more than adequately compensated by gains from treasury books (~2-5% positive impact on adjusted networth of banks with a 100 bps decline in yields), recoveries and upgradations from cumulative slippages of FY10-13E (The average impact from recoveries (50%) is ~14% on FY14E adjusted net worth of our PSU banking universe) and recoveries from written off accounts (The average impact from recoveries (15%) is ~3.2% on FY14E adjusted net worth of our PSU banking universe). As a result we do not expect the adjusted book values of banks to decline further from current levels. Despite the recent run up, several public sector banks are trading below their long term one year forward P/ABV multiples and we expect valuations to move towards long term averages. Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped and is likely to see some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market expects the RBI to start the easing process which means yields dont have much upside risk (unless crude see a sharp up move). However while the market would want to play on likely lower bond yields, it is skeptical about the rising risk of nonperforming assets. However we believe though slippages will remain higher than historical averages, recoveries and up gradations will keep a check on net slippages in the coming quarters. Moreover with policy reforms and likely improvement in economic activity during FY14 vs. FY13, we believe the gap between private and PSU banks will narrow going ahead. Recommendation summary for public sector banks
Target Price 2590 1001 231 877 311 545 549 232 190 371 % Upside
13 22 -9 11 6 27 13 23 19 6
Sector Report
Bank SBI PNB Union Bank BOB BOI Corp. Bank Canara Bank Indian Bank Allahabad Bank OBC
Recommendation Outperform Outperform Reduce Neutral Hold Buy Hold Buy Buy Hold Hold 1.6 1.3 1.4 1.2 1.1 0.8 1.2 0.9 0.9 0.9 0.9
P/ABV FY13E FY14E 1.3 1.1 1.2 1.0 0.9 0.7 1.1 0.7 0.8 0.8 0.9 1.0% 1.0% 0.8% 1.1% 0.6% 0.9% 0.8% 1.3% 0.9% 0.8% 0.7%
ROAA FY13E FY14E 1.0% 1.1% 0.8% 1.1% 0.7% 0.9% 0.9% 1.4% 1.0% 0.8% 0.6%
ROAE FY13E 16.6% 16.4% 13.9% 17.4% 11.2% 17.6% 14.0% 17.7% 15.7% 11.6% 10.3% FY14E 18.2% 18.7% 15.3% 17.0% 14.3% 18.3% 15.5% 18.6% 18.1% 13.1% 10.2%
IDBI Bank 113 3 Source: Sunidhi Research, * CMP as of Dec 6
Banking Sector
Executive summary
Recoveries likely to improve going ahead Recoveries/Upgrades rate currently trending at 10 year low at 20% for select banks vs. 10 year average of 60%, whereas street estimates are factoring in low recoveries in line with those seen in FY12 and H1FY13. Thus a pickup in recoveries could prove to be a re-rating factor for public sector banks in next two years. We have analyzed the upside to currently estimated net worth for select public sector banks under three recovery scenario (Rate of recovery/Upgrade moving to 40%, 50% and 60% of cumulative slippages of FY10-13E). The average impact from recoveries (50%) is ~14% on FY14E adjusted net worth of our PSU banks universe. Written off book at 22% of networth can prove to be a hidden gem The second biggest helping hand would most likely come from the written off books of banks. Based on our calculations, the average prudentially written off book for PSBs in our study stands at 22% of FY14 adjusted net-worth. We have analyzed the upside to the networth on account of recovery from written off accounts. The average impact from recoveries (15%) is ~3.2% on FY14E adjusted net worth of our PSU banks universe. Historical trend in recovery/upgrades to slippage vs. GDP
120% 100% 80% 60% 40% 20% 0% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 PNB UBI GDP (RHS)
Write off book as percentage to adjusted networth
Write off book as % of Adj. Networth

12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
45% 40% 35% 30%
25% 20% 15% 10% 5% 0%
Source: Company, Sunidhi Research
Restructured book largely seasoned or government guaranteed The higher restructuring for public sector banks is partly due to restructuring in FY09-10 under the RBIs special dispensation scheme and partly due to Air India and SEBs restructuring which is unlikely to slip into NPA category. The restructured book excluding the seasoned and government guaranteed portion would indicate much lower stress in the book as compared to stress visible prima facie. We have analyzed the downside to the adjusted net-worth of banks on account of slippages from the restructured book excluding Air India and SEB exposure. The average impact from slippage of 15% is ~9% on the FY14E adjusted net-worth of banks (20% slippage would have an impact of 12%). Restructured book vs. restructured excluding AI and SEB exposure
14.0% 12.0%
10.0%
8.0% 6.0% 4.0%
2.0%
0.0%
BOI
BOB
OBC
Indian
Allahabad
Corp
PNB
Restructured (%)
Restructured ex SEB / AI (%)
Sunidhi Research |
Canara
IDBI
UBI
SBI
Banking Sector Select indicators suggest a revival in manufacturing Select indicators (such as trend in new order book, raw material inventories and manufacturing PMI) along with recent government measures suggest that manufacturing activity could see a revival henceforth, which would have a positive bearing on GDP growth. A revival in manufacturing and GDP growth would lead to lower non-performing assets for banks. Trend in GFCF Trend in manufacturing PMI
25% 20%
65 60
55 50
15%
10% 5% 0%
52.9
45 40 35
-5%
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q1FY13
Q2FY13
Q3FY11
Q4FY12
30
Jul-09
Jul-10
Jul-11
Oct-08
Oct-09
Oct-10
Oct-11
Jul-12
Apr-09
Apr-10
Apr-11
Gross Fixed Capital Formation
Source:RBI
Source:Markit economics
Trend in M1 growth 30% 25% 20% 15% 10% 5% 0%
Jun-08
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Jun-11
Jun-06
Jun-07
Jun-09
Jun-10
Dec-11
M1 Growth
Source: RBI
Investment recovery likely with policy initiative A majority of the companies with stalled project studied by our economy team reported that policy issues such as land acquisition delay in environmental clearance, mining policy, fuel linkages and spectrum pricing were the main reason for the high incidence of stalled projects in the economy. These together accounts for about 68% of total stalled projects. Majority of these stalled projects are in power, roads and mining sectors which remain the major stress points for banks. Reasons for total stalled projects
Environmental , 12.5%
Stalled project by Industry

Irrigation, 0.39% Others, 8.70% Oil & Gas, 10.99% Cement , 1.37% Real Estate , 8.98% IT, 1.09%
Others, 18.6%
Legal, 1.1%
Financial , 6.2%
Management, 6.2%
Raw Material , 15.9%
Government, 11.8%
Telecomunicati on, 4.36% Metals & Mininig , 16.52%
Jun-12
Power, 36.38%
Land Acquisition , 27.7%
Transport, 11.23%
Source:CMIE
Source: MIE
Sunidhi Research |
Apr-12
Oct-12
Jan-09
Jan-10
Jan-11
Jan-12
Banking Sector In the last couple of months, we have seen some concrete policy intentions towards solving these issues with FinMins fast track reform initiatives. Clearance of the most conflicting issue of retail FDI in both the houses reflects would help the current government to fast track its most pending decisions. Some of the important measures which can change the investment climate of the country include new FSAs expected to be signed by Coal India with better pricing mechanism, proposal to set up a Committee on Infrastructure, the State Electricity Distribution Responsibility Bill and setting up a National Investment Board (NIB). These along with step towards financial restructuring scheme of discoms are likely to bring financial turnaround of discoms. Hence, the recent policy initiatives such as permitting FDI in retail trade, civil aviation and power trading exchanges and rationalization of diesel prices will help improve the investment climate. Decline in interest rates to improve investment climate It is expected that RBI is likely to move toward easy monetary policy in coming few quarters which would be the biggest trigger for change in investment climate. This would make lot of project viable and along with policy initiatives would improve debt servicing capability of corporates. SBI base rate is currently ~50bps higher than 1 year CP rates indicating room for base rate to decline by 25-50bps in near term
100 50 0 -50 -100 -150 -200 -250 -300
Also, 1 year CP is at only 100 bps premium to 1 year risk free rate which is generally a base level reflecting that risk premium has declined
9.0
8.0
7.0
6.0
5.0
4.0 3.0 2.0 1.0 0.0
Jun-09
Jul-06
Mar-08
Dec-06
Jul-11
May-07
Dec-11
Oct-07
Jan-11
Sep-10
Sep-11
Jan-12
Nov-10
Nov-11
Sep-12
May-11
Spread
May-12
Nov-12
Mar-11
Mar-12
1 Year CP rate premium to 1 Year Gsec yield
Source: Bloomberg, Sunidhi Research
Price performance of PSBs are highly correlated to risky yields Historically, we have observed that valuation of PSBs is highly correlated to high risk corporate bond yields (1 Year BBB corporate bond yield). This is largely due to the fact that BBB bond yield is best barometer for asset quality stress as well as liquidity. In case of falling BBB bond yield, PSB stock price rallies due to a) expected improvement in liquidity scenario which would help banks to improve margins b) likely improvement in the economy to reduce asset quality stress and c) falling interest rate would result in gain in bond book. Considering SBI as proxy for PSBs, as we can see from chart below that SBI has rallied faster than the pace of fall in BBB bond yields and vice versa (we consider inverse BBB bond yield for simplicity).
Bond yields vs. SBI price performance

150% 100% 50% 0% -50% -6 -7 -8 -9 -10 -11 -12 -13 -14 -15
-100%
Jan-06
Jan-07
Jan-09
Jan-10
Jan-11
Jan-08
Sep-05
Sep-08
Sep-09
Jan-12
May-05
May-06
May-07
May-08
May-09
May-10
May-11
Inverse 1 year BBB Corp Bond Yield - RHS
SBI Price performance (YoY %)
Sunidhi Research |
May-12
Sep-12
Sep-06
Sep-07
Sep-10
Sep-11
May-12
Feb-06
Sep-05
Aug-08
Nov-09
Jul-10
Jul-11
Jul-12
Apr-10
Sep-10
Feb-11
Oct-12
Jan-09
Banking Sector Valuation gap between private and PSU banks to narrow going ahead Historically public sector banks have traded at a ~50% discount to new private sector banks. Post the recent run up in private sector banking stocks, the discount has widened significantly with public sector banks trading at ~62% discount to private banks. Thus despite the challenging environment we harbor a positive bias towards public sector banks due to their reasonable valuations. Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped and is likely to see some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market expects the RBI to start the easing process which means yields dont have much upside risk (unless crude see a sharp upmove). However while the market would want to play on likely lower bond yields, it is skeptical about the rising risk of non-performing assets. However we believe though slippages will remain higher than historical averages, recoveries and up gradations will keep a check on net slippages in the coming quarters. Moreover with policy reforms and likely improvement in economic activity during FY14 vs. FY13, we believe the gap between private and PSU banks will narrow going ahead. Additionally, a long term theme supporting valuations of public sector banks is their lower weight in indices in comparison to their market share. Public banks account for around two-thirds of the market on different parameters yet they are severely under-represented Market share Represented in ownership Deposits Advances Total Assets NII PAT Bankex (BSE) Bank Nifty (NSE) Mcap Private Sector Banks 19% 19% 21% 23% 31% 77.2% 76.0% 57.0% PSBs 81% 81% 79% 77% 69% 22.8% 24.1% 43.0% PSB ex SBI 64% 62% 61% 56% 53% 10.3% 10.0% 25.1%
Source: Company, Exchanges, Sunidhi Research
Trend in ownership pattern for public sector banks Q2FY13 26.60% 9.84% 14.59% 26.76% 10.33% 12.02% Ownership (PSBs) Q2FY12 26.10% 10.08% 15.02% Ownership (PSB ex SBI) 25.32% 11.10% 12.68% Q2FY11 28.21% 13.45% 13.98% 27.21% 13.05% 12.81%
Non promoter FII Insurance + MF Non promoter FII Insurance + MF

Source: Capitaline, Sunidhi Research
Valuation Summary ABV CMP Private sector Axis Bank ICICI Bank* Yes Bank HDFC Bank Federal Bank Ing Vysya Bk Public sector SBI (conso) PNB Union Bank BOB BOI Corporation Canara Indian Bank Allahabad Bk OBC IDBI Bank 1365 1135 467 694 481 494 2307 822 253 792 294 429 481 189 159 350 110 FY13E 632.2 437.5 162.1 146.2 358.7 287.5 1471.9 613.2 182.8 686.8 261.4 539.7 406.5 211.9 170.4 369.5 116.1 FY14E 736.7 493.5 199.9 171.6 409.4 327.3 1726.4 770.2 209.6 797.7 310.6 605.5 457.6 257.2 210.7 412.5 126.1 P/ABV FY13E 2.2 2.1 2.9 4.7 1.3 1.7 1.6 1.3 1.4 1.2 1.1 0.8 1.2 0.9 0.9 0.9 0.9 FY14E 1.9 1.9 2.3 4.0 1.2 1.5 1.3 1.1 1.2 1.0 0.9 0.7 1.1 0.7 0.8 0.8 0.9 Peak 5 yr 1 yr fwd valuation 3.4 3.1 3.2 4.5 1.6 2.3 2.7 2.0 2.2 2.0 2.1 2.2 2.4 1.6 1.6 1.5 1.5 Trough 5 yr 1 yr fwd val. 0.9 1.1 0.6 2.0 0.5 0.8 0.9 0.8 0.9 0.7 0.9 0.5 0.7 0.6 0.5 0.4 0.5 Average 5 yr 1 yr fwd val. 2.2 2.3 2.0 3.3 1.0 1.4 1.7 1.4 1.4 1.3 1.5 1.0 1.4 1.0 0.9 0.9 1.0 ROAA FY13E 1.7% 1.6% 1.5% 1.8% 1.3% 1.1% 1.0% 1.0% 0.8% 1.1% 0.6% 0.9% 0.8% 1.3% 0.9% 0.8% 0.7% FY14E 1.6% 1.6% 1.5% 1.8% 1.3% 1.1% 1.0% 1.1% 0.8% 1.1% 0.7% 0.9% 0.9% 1.4% 1.0% 0.8% 0.6% ROAE FY13E 20.6% 16.3% 23.9% 20.0% 14.1% 13.8% 16.6% 16.4% 13.9% 17.4% 11.2% 17.6% 14.0% 17.7% 15.7% 11.6% 10.3% FY14E 19.5% 17.1% 23.4% 20.8% 14.9% 14.6% 18.2% 18.7% 15.3% 17.0% 14.3% 18.3% 15.5% 18.6% 18.1% 13.1% 10.2% 5
*Adjusted for subsidiary valuation **Prices as on 6th Dec 2012
Source: Sunidhi Research
Sunidhi Research |
Banking Sector Impact on ABV based on key rationale

Rs bn Networth with 100% buildup in coverage (Ex Reval) (FY14) (A) Stress Restructured Loans ex AI and SEB (Q2FY13) Default Rate (assumed 15%) (B) Impact as % of Adj Networth Upside on Recoveries/Upg. Rate at 50% (C) Impact as % of Adj Networth Upside on Recovery in Written Off Accounts at 15% (D) Impact as % of Adj Networth Upside from Gain in Tr. Book on 100bps Change in Yields (E) Impact as % of Adj Networth Impact on Networth (F=C+D+E+F-B) Impact as % of Networth Adjusted Networth (A+F) Market Capitalization P/ABV P/ABV (with above adjustments) Disc. to SBI (avg FY14 P/ABV) - On P/ABV - On P/ABV (With Adj) Disc. to private banks (average FY14 P/ABV) - On P/ABV - On P/ABV (With Adj) Source: Sunidhi Research -44% -48% -26% -28% -29% -39% -21% -20% -47% -48% -35% -40% -45% -48% -36% -41% -20% -35% -10% -23% Allahabad Bank 105 72 11 10% 16 15% 4 4% 3 3% 12 11.2% 117 80 0.75 0.68 BOB 329 167 25 8% 29 9% 6 2% 6 2% 17 5.1% 346 327 0.99 0.94 BOI 178 135 20 11% 37 21% 7 4% 9 5% 33 18.5% 212 169 0.95 0.80 Canara Bank 203 79 12 6% (7) -3% 12 6% 10 5% 3 1.6% 206 215 1.06 1.04 Corp. Bank 90 52 8 9% 7 8% 2 2% 2 3% 4 4.6% 94 64 0.71 0.68 IDBI Bank 161 117 18 11% 29 18% 6 4% 1 1% 18 11.3% 179 140 0.87 0.78 Indian Bank 111 72 11 10% 16 14% 4 3% 1 1% 9 8.5% 120 81 0.73 0.68 OBC 120 58 9 7% 13 11% 5 4% 3 2% 12 9.9% 132 102 0.85 0.77 PNB 261 186 28 11% 80 31% 5 2% 9 3% 66 25.1% 327 279 1.07 0.85 UBI 115 66 10 9% 27 23% 4 4% 2 2% 23 19.8% 138 139 1.20 1.01 SBI 1,159 392 59 5% 51 4% 17 1% 15 1% 24 2.1% 1,183 1,548 1.34 1.31
-64% -68%
-53% -55%
-55% -62%
-49% -50%
-66% -68%
-59% -63%
-65% -68%
-59% -63%
-49% -59%
-43% -52%
-36% -38%
Sunidhi Research |
Banking Sector
Table of Contents
Particulars Valuation gap between public and private banks has increased Is the market over-reacting? Treasury gains to boost profitability & provide a buffer for provisioning Recoveries likely to improve going ahead Written off book at 22% of networth can prove to be a hidden gem Restructured book largely seasoned or government guaranteed Select indicators suggest a revival in manufacturing Narrow Money (M1) is directly linked to corporate sales Investment recovery likely with policy initiative So can the tide turn? Policy reform Hopes come alive after both houses cleared FDI retail Cabinet Committee on Investment (CCI) One step forward Coal price pooling by Coal India Ltd may change the face of Indian power sector and could lead to reduction of asset quality stress Decline in interest rate to improve investment climate Price performance of PSBs are highly correlated to risky yields Valuation gap between private and PSU banks to narrow going ahead Sunidhis banking performance indicator (SBPI) Key risks Company Section Allahabad Bank Bank Of Baroda Bank Of India Canara Bank Corporation Bank IDBI Bank Indian Bank Oriental Bank Of Commerce Punjab National Bank State Bank Of India Union Bank Of India 39 43 47 51 55 59 63 67 71 75 79 Page No 08 10 16 18 19 19 21 22 22 23 25 26 26 29 31 31 32 34
Sunidhi Research |
Banking Sector Valuation gap between public and private banks has increased The Indian economy is going through challenging times consisting of volatility in liquidity, crude, inflation and growth. This has taken a toll on the prospects of the banking sector which is plagued with uncertainty relating to the monetary policy actions of the RBI and slower credit growth. Additionally, elevated interest rates are impacting the net interest margins and asset quality of banks. We believe that the macro concerns are unlikely to reverse in the near term. Hence we expect sharp volatility in the PSU banking space and cannot deny further downward risks to macro growth and stock prices. Due to the absence of any near term trigger, this segment may remain volatile, however currently valuations are below long term averages for several public sector banks which has led to a widening in the discount between them and their private sector counterparts. Historically public sector banks have traded at a ~50% discount to new private sector banks. Post the recent run up in private sector banking stocks, the discount has widened significantly with public sector banks trading at ~62% discount to private banks. Thus despite the challenging environment we harbor a positive bias towards public sector banks due to their reasonable valuations. Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped and is likely to see some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market expects the RBI to start the easing process which means yields dont have much upside risk (unless crude see a sharp upmove). However while the market would want to play on likely lower bond yields, it is skeptical about the rising risk of nonperforming assets. Valuation summary
ABV CMP Private sector Axis Bank ICICI Bank* Yes Bank HDFC Bank Federal Bank Ing Vysya Bank Public sector SBI (Conso) PNB Union Bank BOB BOI Corporation Canara Indian Bank Allahabad Bank OBC IDBI Bank 2307 822 253 792 294 429 481 189 159 350 110 1471.9 613.2 182.8 686.8 261.4 539.7 406.5 211.9 170.4 369.5 116.1 1726.4 770.2 209.6 797.7 310.6 605.5 457.6 257.2 210.7 412.5 126.1 1.6 1.3 1.4 1.2 1.1 0.8 1.2 0.9 0.9 0.9 0.9 1.3 1.1 1.2 1.0 0.9 0.7 1.1 0.7 0.8 0.8 0.9 2.7 2.0 2.2 2.0 2.1 2.2 2.4 1.6 1.6 1.5 1.5 0.9 0.8 0.9 0.7 0.9 0.5 0.7 0.6 0.5 0.4 0.5 1.7 1.4 1.4 1.3 1.5 1.0 1.4 1.0 0.9 0.9 1.0 1.0% 1.0% 0.8% 1.1% 0.6% 0.9% 0.8% 1.3% 0.9% 0.8% 0.7% 1.0% 1.1% 0.8% 1.1% 0.7% 0.9% 0.9% 1.4% 1.0% 0.8% 0.6% 16.6% 16.4% 13.9% 17.4% 11.2% 17.6% 14.0% 17.7% 15.7% 11.6% 10.3% 18.2% 18.7% 15.3% 17.0% 14.3% 18.3% 15.5% 18.6% 18.1% 13.1% 10.2% 1365 1135 467 694 481 494 632.2 437.5 162.1 146.2 358.7 287.5 736.7 493.5 199.9 171.6 409.4 327.3 2.2 2.1 2.9 4.7 1.3 1.7 1.9 1.9 2.3 4.0 1.2 1.5 3.4 3.1 3.2 4.5 1.6 2.3 0.9 1.1 0.6 2.0 0.5 0.8 2.2 2.3 2.0 3.3 1.0 1.4 1.7% 1.6% 1.5% 1.8% 1.3% 1.1% 1.6% 1.6% 1.5% 1.8% 1.3% 1.1% 20.6% 16.3% 23.9% 20.0% 14.1% 13.8% 19.5% 17.1% 23.4% 20.8% 14.9% 14.6% FY13E FY14E P/ABV FY13E FY14E Peak 5 yr 1 yr fwd valuation Trough 5 yr 1 yr fwd valuation Average 5 yr 1 yr fwd valuation ROAA FY13E FY14E ROAE FY13E FY14E
*Adjusted for subsidiary valuation **Prices as on 6th Dec 2012
Sunidhi Research |
Banking Sector
Long term average 1 year forward P/ABV Average FY13E P/ABV
3 2.5
2 1.5
2.5
4 3
1.2
2.9
1 0.5 0
New Pvt Banks
1.1
1 0
Public Banks
New Pvt Banks

Public Banks
This time its different

Our quest for understanding the reason for the widening valuation gap leads us to question whether every economical downturn has led to investors switching from public banks to private banks, thus leading to an increase in the valuation gap between the two. An evaluation of bank valuations in FY08 reveals that the answer to this question is in the negative. In FY08, valuations of both public and private banks came off to leave the gap in line with the average of ~50%.
Exhibit 1: Average FY08 P/ABV
2.5 2.0 2.0 1.5 1.0 0.5 0.0 New Pvt Banks
1.0
Public Banks
Scams, asset quality issues and policy paralysis have led to negative sentiments towards all PSUs
Scams, asset quality issues and policy paralysis have led to negative sentiments towards all public companies not only banks. This is depicted through the returns of the BSE PSU index which has considerably underperformed the sensex over the past year.
Sunidhi Research |
Banking Sector
BSE PSU and Sensex returns BSE PSU and Sensex returns
20.0 18.0 16.0
20.0% 15.0%
10.0%
5.0% 0.0%
14.0 12.0
10.0 8.0 6.0
-5.0% -10.0%
-15.0%
Dec-11 Aug-12 Apr-12 Oct-12 Jan-12 May-12 Mar-12 Nov-12 Feb-12 Sep-12 Jun-12 Jul-12
4.0 2.0
0.0
1 day
1 Week
1 Month 3 Months 6 Months

BSE Sensex
1 Year
BSE PSU
BSE Sensex
BSE PSU
Is the market over-reacting?

The downtrend in PSU stocks over the past year leads us to question whether the market is overreacting to news flows relating to scams and policy deadlocks. According to behavioral economists, investors often fall prey to over-reaction and availability bias. This occurs when investors over-react to new information which is easily available thus creating a larger than justified impact on share prices which is usually corrected in the future.
Winners & Losers

In 1985, behavioral finance academics Werner De Bondt and Richard Thaler released a study in the Journal of Finance called "Does the Market Overreact?" In this study, the two examined returns on the New York Stock Exchange for a three-year period. From these stocks, they separated the best 35 performing stocks into a "winners portfolio" and the worst 35 performing stocks were then added to a "losers portfolio". De Bondt and Thaler then tracked each portfolio's performance against a representative market index for three years. Surprisingly, it was found that the losers portfolio consistently beat the market index, while the winners portfolio consistently underperformed. In total, the cumulative difference between the two portfolios was almost 25% during the three-year time span. In other words, it appears that the original "winners" would became "losers", and vice versa. So what happened? In both the winners and losers portfolios, investors essentially overreacted. In the case of loser stocks, investors overreacted to bad news, driving the stocks' share prices down disproportionately. After some time, investors realized that their pessimism was not entirely justified, and these losers began rebounding as investors came to the conclusion that the stock was underpriced. The exact opposite is true with the winners portfolio: investors eventually realized that their exuberance wasn't totally justified. According to the availability bias, people tend to heavily weight their decisions toward more recent information, making any new opinion biased toward that latest news
Read more: http://www.investopedia.com/university/behavioral_finance/behavioral10.asp#ixzz28z18kyY 2
Sunidhi Research |
10
Banking Sector
Bridging the gap

We believe that the widening valuation gap between private and public sector banks is likely to close in and move towards the mean of ~50%. This is because problems associated with public sector banks such as bureaucracy and corruption have always been known which is why public banks trade at such a steep discount to private banks. The widening gap appears to be an overreaction to policy paralysis and asset quality issues which is likely to correct. The correction could take place in three ways: Valuations of private sector banks could come off Valuations of private sector banks could come off by ~12%. Probability of this happening is low because valuations are close to the mean. To safeguard against this we should stay with cheaper private sector banks like Axis Bank and ICICI Bank. Adjusted book values of public sector banks could correct by 12% Adjusted book values of public sector banks could correct by 12%. This could happen through the erosion of book value due to higher slippages. However the probability of this happening is low due to the reasons discussed in the following section. Valuations of public sector banks could increase by 12% Adjusted book values of public sector banks could increase by 12%. We believe that this is the most likely scenario. As a result we are positive on the public sector banking space. Downside to public sector bank valuations appear limited from current levels We believe that the downside to public sector bank valuations appear limited from current levels due to the following reasons: Estimates are already factoring in accelerated slippages for public sector banks Estimates are already factoring in accelerated slippages for public sector banks, significantly higher than the average slippages seen over the past five years. Expected Slippage rate Bank Allahabad Bank Bank of Baroda Bank of India Canara Bank Corporation Bank IDBI Bank Indian Bank Punjab National Bank State Bank of India Union Bank of India OBC
Source: Company, Sunidhi estimates
FY13E 3.2% 1.9% 3.3% 2.8% 1.8% 1.8% 2.3% 4.2% 4.0% 2.5% 2.6%
FY14E 2.5% 1.5% 2.4% 2.3% 1.6% 1.7% 2.2% 2.5% 2.8% 2.2% 2.3%
5 Yr average slippage ratio 2.0% 1.2% 2.0% 2.1% 1.1% 1.4% 1.4% 2.1% 2.7% 1.9% 2.0%
In order for adjusted book values of public sector banks to come off by 12% due to asset quality deterioration the slippage rates for public banks will have to increase significantly in FY14, trending towards their ten year peaks.
Sunidhi Research |
11
Banking Sector FY14E slippage rate assuming ABV deterioration of 12% FY14E slippage rate 2.5% 1.5% 2.4% 2.3% 1.6% 1.7% 2.2% 2.5% 2.8% 2.2% 2.3% FY14E slippage rate for ABV to come off by 12% 3.8% 2.9% 3.3% 3.4% 2.7% 2.9% 3.8% 3.6% 4.4% 3.0% 3.8% 10 year peak slippage rate 3.9% 3.0% 2.9% 4.6% 1.9% 4.2% 2.5% 4.5% 3.6% 3.2% 9.5%
Bank Allahabad Bank Bank of Baroda Bank of India Canara Bank Corporation Bank IDBI Bank Indian Bank Punjab National Bank State Bank of India Union Bank of India OBC
Source: Sunidhi estimates
Sunidhi Research |
12
Banking Sector
Why is this situation unlikely?

We believe that the above situation appears unlikely based on the following factors: An improvement in growth could lead to asset quality improvement Asset quality, as the chart below suggests, is inversely proportional to GDP growth, thus asset quality is likely to witness an improvement once GDP growth starts to look up. GDP growth which stood at ~8.5% in FY10 and FY11 came off to 6.5% in FY12 and H1FY13. The slowdown in GDP growth was due to several reasons including a slowdown in agricultural growth, Inflation and a slowdown in investments due to policy paralysis. Addressing these factors could help bring the economy back on the growth path. Trend in GDP growth and asset quality
10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 5.5% 5.0%
4.5%
4.0% 3.5% 3.0% 2.5%

2.0%
GDP growth (LHS)

Source: RBI, Sunidhi Research
% GNPA (RHS)
Delayed rainfall impacted Kharif but Rabi crop expected to be good The south-west monsoon which was deficient and unevenly distributed in June and July had adversely impacted sowing of the Kharif crop. However, higher than LPA rainfall in the months of August and September significantly brought down the cumulative rainfall deficit to 92% of LPA (upto September 30). The good rainfall towards the end of the season has improved soil moisture content and reservoir levels, thus raising prospects for a good Rabi crop. However, the production weighted rainfall index (PRN) constructed by RBI indicated a deficiency of 13%. Deficient rainfall resulted in shortfall in area sown for several crops especially cereals and pulses. Despite higher food inflation, we do not expect higher NPAs on account of the same as lately banks have begun to secure agricultural loans against securities such as gold. This has now turned into a significant part of current exposure. (E.g. 45% of SBIs agriculture exposure is secured with gold). Hence, default risk from this book is significantly mitigated. We can see this in the reducing proportion of priority sector NPAs in FY12 as compared to FY11.
Sunidhi Research |
13
Banking Sector Trend in monthly rainfall (% of LPA)

120% 101% 111%
Trend in IMD rainfall assessment and RBI PRN
100%
80% 72%
87%
60% 40%
20%
0% Jun-12 Jul-12 Aug-12 Sep-12
Source: IMD, Sunidhi Research
Rabi Crop Sowing (as on 30.11.2012)

(Area in lakh hectare) Crops Wheat Rice (Rabi) Coarse Cereals Pulses Oilseeds Total Rabi Area Source: PIB, Sunidhi Research Area Sown (2012-13) 157.89 0.85 46.15 102.49 66.84 374.22 Area Sown (2011-12) 162.5 1.05 44.83 109.56 66.76 384.70 YoY% Change -2.8% -19.0% 2.9% -6.5% 0.1% -2.7%
Trend in composition of NPAs

120.0%
100.0% 80.0%
60.0%
50.7%
51.2%
50.0%
43.7%
38.8%
35.4%
44.0%
45.3%
41.5%
49.1%
40.0%
20.0%
47.2%
47.5%
49.1%
54.1%
59.9%
63.9%
54.9%
53.8%
58.1%
50.0%
0.0%
Priority
Non Priority
Public
Unsecured loan books for all banks have come off in FY12 Banks have brought down their unsecured loan books in FY12 as compared to FY11. The proportion of unsecured loans has come off to 17.4% in FY12 as compared to 19.4% in FY11. The outstanding unsecured loan book for new private and public banks stands at par at ~17.6%. Meanwhile outstanding unsecured loan book for old private banks is significantly lower at 12%. A reduction in unsecured loans could lead to lower slippages and higher recoveries going ahead. Sunidhi Research | 14
2012
2003
2004
2005
2006
2007
2008
2009
2010
2011
Banking Sector
Trend in unsecured loan book for all listed banks
30.0%
25.0%
20.0% 15.0% 10.0% 5.0%

0.0%
2008
2009 All Banks Public
2010 New Pvt
2011 Old Pvt
2012
Cautious lending by banks to risky segments could lead to lower slippages ahead Loan book growth slowed to 16.9% for the fortnight ended Nov 16, 2012 down from +19.3% yoy growth seen in Mar12. A slowdown in demand coupled with banks being selective about lending to risky segments has caused the slowing in loan book growth. The cautious stance adopted by banks towards lending is likely to result in lower slippages going ahead. The deposit growth for the period stood lower than credit growth at 13.4% yoy, however the gap between credit and deposit growth has started narrowing suggesting an improvement in liquidity. Trend in loan book and deposit growth
24.0% 22.0% 20.0% 18.0% 16.0% 14.0% 12.0%
Rs billions
Trend in LAF borrowings

1,500.0
1,000.0 500.0
0.0 -500.0
-1,000.0 -1,500.0
-2,000.0
10.0%
Feb-11 Dec-10 Dec-11 Feb-12 Jun-10 Jun-11 Aug-10 Aug-11
Jun-12 Aug-12
Oct-10
Oct-11
Apr-10
Apr-11
Apr-12
Oct-12
-2,500.0
Sep-10 Sep-11 Mar-10 Mar-11
Mar-12
May-10
May-12
May-11
Nov-11
Sep-12
Jan-11
Jan-12
Jan-10
Jul-11
Jul-12
Jul-10
Credit growth (% yoy)
Deposit growth (% yoy)
Source: RBI, Sunidhi Research Credit Deposit growth spread

10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
Feb-11
Dec-10
Dec-11
Feb-12
Jun-10
Jun-11
Aug-10
Aug-11
Jun-12
Aug-12
Oct-10
Oct-11
Apr-10
Apr-11
-2.0%
Credit Deposit growth spread
Sunidhi Research |
Apr-12
Oct-12
Nov-12
Nov-10
15
Banking Sector
Treasury gains to boost profitability & provide a buffer for provisioning

The ten year G-Sec yields have remained at elevated levels over the past year owing to the RBIs reluctance in cutting the repo rate. However the RBI has indicated that it is looking at reducing the repo rate in the last quarter of FY13. OIS spreads are factoring in around 100bps reduction in the repo rate within the next one year. A reduction in the yields could lead to writebacks on the investment depreciation provision undertaken by public sector banks. In the table below we have calculated the impact of a 100 bps reduction in repo rate on the PAT and networth of select banks. According to our analysis, a 100 bps reduction in the yields would positively impact the FY14 adjusted networth of PSBs by ~2-5% and FY14 PAT by 6-28% depending on banks AFS book and duration. These writebacks would also provide some room for public sector banks to make higher loan loss provisions. Trend in 10 year G-Sec yields
8.9 8.7
Trend in Spot OIS and 1yr Fwd OIS rates

10.0 9.0 8.0
8.5
8.3 8.1
7.0
6.0 5.0 4.0
7.9
7.7 7.5
Apr-10
Apr-11
Feb-10
Feb-11
Feb-12
Apr-12
Jun-10
Jun-11
Dec-10
Dec-11
Dec-09
Oct-10
Oct-11
Jun-12
Aug-10
Aug-11
Feb-12
Apr-12
Dec-11
Mar-12
Sep-12
Sep-11
Jun-11
Jun-12
Oct-11
Aug-11
Nov-11
May-12
Aug-12
Oct-12
1 year Gsec Yield
Spot OIS
1 Year Forward OIS
Impact of a 100 bps reduction in yields on PAT and networth of public sector banks
Impact on PAT Rs Bn Investments Book Allahabad Bank Bank of Baroda Bank of India Canara Bank Corporation Bank IDBI Bank Indian Bank Oriental Bank of Commerce Punjab National Bank Union Bank of India 583.1 983.8 867.5 1207.2 535.8 694.8 423.9 554.0 1291.8 720.5 HTM 373.5 NA 600.3 758.0 392.5 581.8 281.0 474.4 938.6 564.4 2838.3 AFS 210 NA 266 437 140 113 141 79 353 156 877 SLR AFS 45 149 169 145 69 27 42 52 160 98 432 Other int sensitive AFS 132 61 98 234 53 61 79 22 154 47 356 AFS Mod duration (yrs) 2.8 3.5 4.3 3.8 2.4 1.5 1.2 4.1 3.7 1.7 2.4 -1% yields 3.1 6.3 9.3 9.9 2.3 0.8 1.0 2.6 8.7 2.1 14.6 FY13E 17.6% 12.3% 39.2% 29.6% 14.8% 4.0% 4.9% 18.0% 17.8% 9.9% 7.6% FY14E 13.3% 11.0% 27.9% 23.8% 12.5% 3.7% 4.0% 14.4% 13.5% 8.1% 5.8% Impact on Networth FY13E FY14E 2.6% 2.0% 4.0% 3.9% 2.4% 0.4% 0.8% 2.0% 2.7% 1.3% 1.2% 2.2% 1.8% 3.6% 3.5% 2.1% 0.4% 0.7% 1.8% 2.3% 1.2% 1.0%
State Bank of India 3715.3 Source: Company, Sunidhi research
In addition to MTM write backs, banks treasury gains too will help boost profits. Banks with higher yield on investments are more likely to book higher treasury gains once interest rates start trending down.
Sunidhi Research |
Aug-12
Jan-12
Oct-12
Jul-11
Jul-12
16
Banking Sector
Yield on investment (Q2FY13)
8.4 8.2 8.0 7.8 7.6 8.1 7.9 7.9 7.8
7.8
7.7 7.5
7.4
7.4
7.2
7.4 7.2 7.0
7.0 6.8 6.6
OBC
PNB
BOI
BOB
Allahabad
Corp
Indian
UBI
SBI
Source: Company, Sunidhi research
Although, it has been on the agenda of the RBI to bring down its statutory liquidity ratio (SLR), over the past 15 years, it has only been reduced by 200 bps. In July 2012, the RBI brought down its SLR by 100 bps to 23%. A sudden and sharp fall in SLR holding of banks is unlikely considering the steep U-turn in the budget deficit trend resulting in a massive rise in government bond issuances but the SLR cut is definitely a move in the right direction by the RBI. While banks have voluntarily increased their SLR holdings especially PSU Banks (to fund government issues and as a risk aversion measure), their bond holding is unlikely to remain in this range over the next few years once the fiscal situation improves or FII investment limit is hiked. A reduction in the SLR would help boost profitability of banks, which could in turn be used to shore up provision coverage ratios. Current SLR vs. mandatory SLR requirement for public banks
34.0% 32.0% 30.0% 28.0% 26.0%
24.0%
22.0% 20.0%
Canara
SLR/DTL
Required SLR
Sunidhi Research |
IDBI
17
Banking Sector
Recoveries likely to improve going ahead

Historically trends show that recoveries and up-gradations move in line with GDP growth. We have analyzed past trends for recoveries from FY03-12 for PNB and UBI (reductions excluding write-off and asset sale). Data for these banks reveals that these are trending at 10 year lows of ~20% as compared to long term average of ~62%. Going ahead we expect recoveries to improve and move closer to long term averages which along with higher write-offs and asset sales would boost profits. Historical trend in recovery / upgrades to slippage compared to GDP
120% 100% 80% 60% 40% 20% 0% FY03 FY04 FY05 FY06 PNB FY07 FY08 FY09 FY10 FY11 FY12 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
UBI
GDP (RHS)
Street estimates are factoring in low recoveries in line with those seen in FY12 and H1FY13. Thus a pickup in recoveries could prove to be a re-rating factor for public sector banks in next two years. We have analyzed the upside to currently estimated net worth for select public sector banks under three recovery scenario (Rate of recovery/Upgrade moving to 40%, 50% and 60% of cumulative slippages during FY10-13E). The average impact from recoveries (50%) is ~14% on FY14E adjusted net worth. The results are highlighted in the table below. Impact of recoveries on adjusted net-worth
Bank Allahabad Bank Bank of Baroda Bank of India Canara Bank Corporation Bank IDBI Bank Indian Bank Punjab National Bank Union Bank of India State Bank of India Oriental Bank of Commerce Source: Sunidhi research Cumulative recovery/Up gradation rate FY10-13 32% 27% 32% 54% 33% 19% 22% 20% 30% 44% 36% @ 40% 6.8 16.9 16.6 (24.9) 3.0 19.5 10.1 53.6 13.6 (38.5) 3.6 Upside (Rs bn) @ 50% 15.6 29.4 37.4 (7.0) 7.4 28.8 15.6 79.8 26.6 50.9 13.1 @ 60% 24.4 42.0 58.2 10.9 11.8 38.1 21.2 106.0 39.6 140.4 22.6 Upside to Adj. NW (FY14 ) @ 40% 6% 5% 9% -12% 3% 13% 9% 21% 14% -3% 3% @ 50% 15% 9% 21% -3% 8% 19% 14% 31% 26% 4% 11% @ 60% 23% 13% 33% 5% 13% 26% 19% 41% 39% 12% 19%
Sunidhi Research |
18
Banking Sector
Written off book at 22% of networth can prove to be a hidden gem

The second biggest helping hand would most likely come from the written off books of banks. Based on our calculations, the average prudentially written off book for PSBs in our study stands at 22% of FY14 adjusted net-worth. Since the written off book in our calculation is only accounts which are written off from the head office and not from branches, the reason behind a majority of the write offs are to report better asset quality number and for tax benefits. Hence, we believe that ~15-20% recovery from this book is the most likely probability considering the large gap between the demand from ARC and prices expected by the banks management. We have analyzed the upside to the networth on account of recovery from written off accounts. The average impact from recoveries (15%) is ~3.2% on FY14E adjusted net worth. Impact of recoveries from written off accounts on FY14E net-worth
Write offs O/S (Q2FY13) 26.3 39.3 44.9 80.4 14.6 40.8 23.6 32.3 27.5 115.6 32.7 Adj NW (FY14) 105.4 328.9 178.4 202.7 89.7 148.4 110.6 261.2 100.6 1158.5 120.4 % of Adj NW (FY14) 25% 12% 25% 40% 16% 28% 21% 12% 27% 10% 27% Impact on FY14E NW Recovery at 15% Recovery at 20% 3.7% 1.8% 3.8% 6.0% 2.4% 4.1% 3.2% 1.9% 4.1% 1.5% 4.1% 5.0% 2.4% 5.0% 7.9% 3.3% 5.5% 4.3% 2.5% 5.5% 2.0% 5.4%
(Rs bn) Allahabad Bank Bank of Baroda Bank of India Canara Bank Corporation Bank IDBI Bank Indian Bank Punjab National Bank Union Bank of India State Bank of India Oriental Bank of Commerce Source: Company, Sunidhi research
Restructured book largely seasoned or government guaranteed

The higher restructuring for public sector banks is partly due to restructuring in FY09-10 under the RBIs special dispensation scheme and partly due to Air India and SEBs restructuring which is unlikely to slip into NPA category. Most of the outstanding restructured book of FY09-10 is performing and the weaker part has already slipped into NPA. Slippages from the performing restructured book of 2009-10 is likely to be very low as these assets are already servicing their debt post the expiry of the moratorium period. Also, we dont see any slippage from Air India or SEB accounts in next two years due to moratorium. Additionally, considering that the large proportion of SEB and Air India restructuring is already completed, we expect incremental restructuring to come off from H2FY13. However, standard asset provisioning on restructured book is likely to remain high due to the RBIs intention of increasing the provisions on the same. Public sector banks restructured book o/s (Q2FY13)
Rs bn Restructured loans OS 127.5 210.8 194.2 148.9 88.7 125.3 103.5 114.8 278.5 100.1 404.5 % of loan book 11.5% 7.2% 7.6% 6.9% 9.0% 7.5% 10.9% 9.7% 9.4% 5.8% 4.4% SEB Air India 5.8 24.0 30.0 15.0 13.0 8.0 8.0 16.3 23.0 0.0 13.0 OS Rest ex SEB/AI 72.5 166.8 135.2 78.9 52.0 117.3 72.0 57.5 185.5 66.1 391.5 Advances % of loan book 6.5% 5.7% 5.3% 3.7% 5.3% 7.1% 7.6% 4.9% 6.3% 3.8% 4.2%
Allahabad Bank Bank Of Baroda Bank Of India Canara Bank Corporation Bank IDBI Bank Ltd Indian Bank OBC PNB Union Bank SBI Source: Company, Sunidhi research
49.2 20.0 29.0 55.0 39.0 0.0 23.5 41.0 70.0 34.0 0.0
1108.5 2921.8 2561.5 2157.5 981.6 1663.7 950.0 1178.2 2947.9 1729.0 9269.2
Sunidhi Research |
19
Banking Sector Public sector banks restructured book o/s (Q2FY13)

14.0% 12.0%
10.0%
8.0% 6.0% 4.0%
2.0%
0.0%
BOI
BOB
OBC
Indian
Allahabad
Corp
PNB
Restructured (%)
Restructured ex SEB / AI (%)
The restructured book excluding the seasoned and government guaranteed portion would indicate much lower stress in the book as compared to stress visible prima facie. We have analyzed the downside to the adjusted net-worth of banks on account of slippages from the restructured book excluding Air India and SEB exposure. The average impact from slippage of 15% is ~9% on the FY14E adjusted net-worth of banks (20% slippage would have an impact of 12%). Impact of slippages from restructured book ex AI and SEBs on adjusted net-worth
Slippages at 15% of restructured ex AI & SEB 10.9 25.0 20.3 11.8 7.8 17.6 10.8 8.6 27.8 58.7 9.9 Slippages at 20% of restructured ex AI & SEB 14.5 33.4 27.0 15.8 10.4 23.5 14.4 11.5 37.1 78.3 13.2 Adj Net worth (FY14) 105.4 328.9 178.4 202.7 89.7 148.4 110.6 120.4 261.2 1158.5 100.6 Impact on Adj NW assuming 15% slippages 10% 8% 11% 6% 9% 12% 10% 7% 11% 5% 10% Impact on Adj NW assuming 20% slippages 14% 10% 15% 8% 12% 16% 13% 10% 14% 7% 13%
Restructured loans OS Allahabad Bank Bank Of Baroda Bank Of India Canara Bank Corp Bank IDBI Bank Ltd Indian Bank OBC PNB SBI 127.5 210.8 194.2 148.9 88.7 125.3 103.5 114.8 278.5 404.5
OS Rest ex SEB/AI 72.5 166.8 135.2 78.9 52.0 117.3 72.0 57.5 185.5 391.5 66.1
Union Bank 100.1 Source: Company, Sunidhi research
Sunidhi Research |
Canara
IDBI
UBI
SBI
20
Banking Sector
Select indicators suggest a revival in manufacturing

Select indicators (such as trend in new order book, raw material inventories, GFCF and manufacturing PMI) along with recent government measures suggest that manufacturing activity could see a revival henceforth, which would have a positive bearing on GDP growth. A revival in manufacturing and GDP growth would lead to lower non-performing assets for banks. Average growth in new orders for Q1FY13 stood at 19.4% yoy and 3% qoq as compared to 3.5% yoy and 2.8% qoq in Q4FY12. Additionally raw material inventory to sales ratio has increased at a faster pace as compared to finished goods inventory thus suggesting an increase in manufacturing going ahead. The HSBC manufacturing PMI has been largely stable at ~53 over the past four months suggesting that it could have bottomed out. Capacity utilization too is close to recent lows at ~72%, leading us to believe that it could witness a revival from these levels. Trend in manufacturing PMI
65 60
55 50
Trend in Mfg IIP and capacity utilization

20 15
52.9
84 82 80 78 76 74 72 70 68
Q3FY11 Q2FY12 Q1FY13
Q1FY13 Q2FY13
10 5 0 -5 -10 -15
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q4FY11 Q1FY12 Q3FY12
Q3FY12
45 40 35 30
Jul-09 Jul-10 Jul-11 Oct-08 Oct-09 Oct-10 Oct-11 Jul-12 Apr-09 Apr-10 Apr-11 Apr-12 Oct-12 Jan-09 Jan-10 Jan-11 Jan-12
Detrended Qtly-IIP MFG (LHS)
CU (RHS)
Source Markit economics, Sunidhi Research
Source RBI, Sunidhi Research
Gross Fixed Capital Formation (GFCF) (a gauge of investment in the economy) grew at a robust pace 8.7% in Q2FY13 which is showing a sign of pick up largely led by higher government expenditure. Government Fixed Capital Expenditure (GFCE) started showing good strength and is likely to support economic activity in FY14 considering historical trend of higher government expenditure before election year. Trend in GFCF
25% 20%
Trend in GFCE
14%
12%
10% 8%
15%
10% 5% 0%
6%
4% 2%
Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q1FY13 Q2FY13
Q3FY11 Q4FY12
-5%
0%
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY11
Gross Fixed Capital Formation
Government Final Consumption Expenditure
Sunidhi Research |
Q4FY12
Q4FY12
21
Banking Sector
Narrow Money (M1) is directly linked to corporate sales

Improvement in narrow money growth could be considered as a primary indicator of a revival in economic activity. M1 represent demand deposit of corporate and currency with public. Since both together reflect the core liquidity in the system, improvement in M1 growth generally result in improvement in economic activity and sales of corporates. Higher currency with public would mean better spending capability and higher demand deposit with corporates is generally a precursor to either better production or higher capex.
Trend in M1 growth
M1 Growth
30% 25% 20% 15% 10% 5% 0%
M1 Growth
Trend in new order book

25 20
15
Trend in inventory / sales

35
30
25
20
%
10 5
0
%
15
10
-5 -10
-15
Q4FY10 Q1FY11 Q1FY12 Q2FY12 Q1FY13
Q1FY10 Q2FY10 Q3FY10 Q2FY11 Q3FY11 Q4FY11 Q3FY12 Q4FY12
5
0
Q4FY10 Q1FY11 Q1FY12 Q2FY12 Q1FY13
Q1FY10 Q2FY10 Q3FY10 Q2FY11 Q3FY11 Q4FY11 Q3FY12 Q4FY12
Avg New Order book (QoQ)
Avg New Order book (YoY)
FG Inv/Sales
RM Inv/Sales
Investment recovery likely with policy initiative

Index of Industrial Production (IIP) has seen a sharp deceleration during April-Sept 2012 which is mostly led by capital goods, mining and power. Capital goods remained the biggest culprit indicating slowdown in investment activity and slowing external demand. Mining sector continued to contract due to regulatory and environmental issues. Power generation moderated on account of shortages in coal supply and uneven monsoon conditions. Ex capital goods, growth rate of IIP declined but still positive.
Sunidhi Research |
22
Banking Sector Trend in IIP growth

20 15
10 5 0
Sep-08 Sep-09 Sep-10 Sep-11
Trend in IIP growth ex capital goods

15.00% 10.00%
5.00%
0.00%
Sep'08
Sep'09
Sep'10
Sep'11
Mar-09
Mar-10
Mar-11
Mar-12
Dec-08
Dec-09
Dec-10
-5 -10
Dec-11
Sep-12
Jun-12
Jun-09
Jun-10
Jun-11
-5.00%
-10.00%
IIP (excluding capital goods)
The major reasons behind the slowdown in growth are high interest rates, fuel un-availability and government policy paralysis. Despite large new power capacity additions witnessed during the Eleventh Plan (about 55 GW of new capacity created), majority of it was in thermal power which was impacted by coal shortages resulting in lower utilization rates. In the absence of committed Fuel Supply Agreements (FSAs), demand-supply gap is expected to elevate further during the Twelfth Plan and new powers project are expected to face further clearances problem. This is further exaggerated by stress in power distribution with large accumulated losses of discoms. This demands fast decisions to improve investment in the sector, especially by easing policy constraints and removing major supply bottlenecks.
So can the tide turn?

A majority of the companies with stalled project studied by our economy team reported that policy issues such as land acquisition delay in environmental clearance, mining policy, fuel linkages and spectrum pricing were the main reason for the high incidence of stalled projects in the economy. These together accounts for about 68% of total stalled projects. Of the 191 projects studied, about 93 projects entailing an investment close to Rs 6.7 tn in the infrastructure space were stalled for various reasons. The most prominent reason being the problem of land acquisition with projects worth Rs. 3.1 tn. Next biggest issues being raw material unavailability like fuel & bauxite and environmental clearance. Three biggest sectors largely impacted by project stalled are Power, Transport (mainly roads) and Metal & Mining accounting for 64% of total stalled projects. These sectors remain the biggest stress sector for banks and are reflected in large proportion into restructured book.
Trend in stalled projects

Reasons for total stalled projects

Others, 18.6%
Legal, 1.1%
Financial , 6.2%
Management, 6.2%
Government, 11.8%
Power, 36.38%
Transport, 11.23%
Source Capitaline, Sunidhi Research
Sunidhi Research |
Sept'12
Jun'09
Jun'10
Mar'08
Mar'09
Mar'11
Mar'12
Mar'10
Dec'07
Dec'09
Dec'10
Dec'11
Dec'08
Jun'12
Jun'08
Jun'11
23
Banking Sector In last couple of months, we have seen some concrete policy intentions towards solving these issues with FinMins fast track reform initiatives. Clearance of the most conflicting issue of retail FDI in both the houses reflects would help the current government to fast track its most pending decisions. Some of the important measures which can change the investment climate of the country include new FSAs expected to be signed by Coal India with better pricing mechanism, proposal to set up a Committee on Infrastructure, the State Electricity Distribution Responsibility Bill and setting up a Cabinet Committee on Investment (CCI) or NIB. These along with step towards financial restructuring scheme of discoms are likely to bring financial turnaround of discoms. Hence, the recent policy initiatives such as permitting FDI in retail trade, civil aviation & power trading exchanges and rationalization of diesel prices will help improve the investment climate. High incidence of stalled projects in the Power sector, Road and Mining sector which is biggest stress point for banks Out of the total stalled projects amounting to Rs 11.4 tn since 2008 (191 projects of more than Rs 10 bn) Rs 6.9 tn which is about 60% are projects started implementation and are stalled. More than 80% of these are in from sectors such as Power, Metals & Mining, Real Estate and Transport sector (i.e. Rs 5.5 tn). Of the balance 45% (Rs 4.5 tn) of the projects (i.e. project that have not seen any investment) 50% contributed by Power and Metals & Mining sector. Hence, the high incidence of stalled projects in power and metals & mining sector indicates slow pace of growth in the investment activity and is the major reason for the stress in books of banks.

Power, 36.38%
Transport, 11.23%
Implementation Stalled by Industry

Others, 7.97% Cement , 1.02%
Announced & Stalled by Industry

Real Estate , 11.79% IT, 1.81%
Others, 21.27% Cement , 1.92% Real Estate , 4.72%
Irrigation , 0.64%
Telecomunicati on, 7.02%
Metals & Mining, 13.92%

Oil & Gas, 15.77%
Power, 33.00%
Power, 38.79% Transport, 17.04%
Telecomunicatio n, 0.27%
Metals & Mining , 20.72%
Transport Services , 2.33%
Source CMIE, Sunidhi Research
Sunidhi Research |
24
Banking Sector Further, bulk of the stalled projects (~84% including foreign private players) is a private sector initiative as shown in chart below. Of which, 60 private companies have deferred infra projects worth Rs 5.2 tn, accounting for 56.7% of the total private sector stalled projects.

Stalled project by ownership
Foreign Private Sector, 3.10% Central Government, 10.14%Government State, 5.90% Government Local Bodies, 0.26%
Implementation Stalled by Ownership

Foreign Private Sector, 0.5% Central Government, 11.2% Government State, 9.3% Government Local Bodies, 0.4%
Indian Private Sector, 80.60%
Indian Private Sector, 78.5%
Policy reform Hopes come alive after both houses cleared FDI retail Fast tracking of the policy reform could result in clearance of some of the major project which would result improvement in investment climate in the economy and better asset quality among banks. Of the 191 stalled projects, the most prominent reason for them being stalled are the problem of land acquisition with projects worth Rs 3.1 tn stuck on account of unavailability of land. Among project implemented and stalled, almost 60% (about Rs 4tn) are stalled due to policy issues such as land acquisition, delay in environmental clearance, mining policy, fuel linkages and spectrum pricing. However, in case of project announced and stalled, policy issues accounts for about 40% of total stalled projects (Rs 1.8 tn). Raw material unavailability (like fuel & bauxite shortage) is another major reason responsible for current slowdown in investments, with projects worth Rs 1.8 tn stuck on account of the same.

Reasons for total Stalled
Others, 18.6%
Legal, 1.1%
Financial , 6.2%
Management, 6.2%
Government, 11.8%
Sunidhi Research |
25
Banking Sector Reasons for Announced & Stalled

Legal, 1.78% Management, 6.31% Others, 8.79% Environmental , 19.47%
Reasons for Implementation Stalled

Environmental , 1.59% Financial , 12.31%
Financial , 2.25%
Raw Material , 21.46% Land Acquisition , 26.56%
Government, 9.30% Others, 33.90%
Government, 13.38%
Land Acquisition , 29.59% Management, 6.02% Raw Material , 7.30%
Cabinet Committee on Investment (CCI) or NIB One step forward

To speed up clearances of big infrastructure projects, Finance Minister P. Chidambaram in Sept12 pitched for the setting up of a Cabinet Committee on Investment (CCI) or NIB headed by the Prime Minister and has ministers from key ministry like Law, Finance and Justice as its members. As per the proposal once the final decision is taken by the NIB, no other ministry or government department will have the authority to challenge this clearance or delay in the projects implementation. Considering most of the major ministries from centre and state would be part of the board, CCI will supersede the various lines of clearance and would fast track the process. Our study shows that of the 93 infrastructure projects stalled having an outlay of more than `10 bn, projects worth Rs 1.3 tn have been held up for want of environment clearance. This amount would move up to Rs 1.6 tn if we consider RBI definition of Infrastructure which includes Mining sector. The formation of the proposed NIB will help in fast tracking the clearances of these investments and bring to the main stream.
Coal price pooling by Coal India Ltd may change the face of Indian power sector and could lead to reduction of asset quality stress
Availability of coal for thermal power stations is a matter of concern. According to working group for 12th five year plan, coal requirement for power sector is expected to be around 682 mn tonnes (at 100% PLF) by FY17. Against the requirement of 682 mn tonnes, 54 mn tonnes is expected to be imported by thermal power stations designed to use imported coal. SCCL has confirmed supply of 35 mn tonnes and c.100 mn tonnes are expected to be available from captive coal blocks. Thus 493mn tonnes need to be made available by CIL to power stations. Considering 312mn tonnes supplied by CIL in FY12, CIL needs to supply at a CAGR of 10% over next five years to meet power sector demand in India. With new FSAs; where in CIL takes the onus of importing coal on behalf of power utilities we can expect huge imports by CIL in near future.
Sunidhi Research |
26
Banking Sector Potential demand for coal in India to be met by CIL

Projected coal demand (Mn tonnes) 2016-17 682 104 50 135 289 1131 35 100 54 189 493 312 10%
i) ii) iii)
Sector Electricity (A)-Realistic assumption (against 842 mn tonnes) Iron & Steel Cement Others Non Electricity (B) Total (A+B) Coal Availability from SCCL Captive Blocks for Power utilities Imported coal for TPS's designed on imported coal Total Coal availability, excl. CIL Potential demand to be met by CIL for Power Production by CIL in FY12 CAGR growth required for CIL
Source: Working Group, Sunidhi Research
CIL takes the onus of meeting the demand by bridging it with imported coal
Total requirement of coal from power plants is expected at c.682 mn tonnes by FY2016-17, but with FSA/LOA signed at 85%, total requirement is trimmed c.583mn tonnes by FY2016-17. CIL with its new FSAs has committed to supply 80% of its FSA qty without attracting any penalty under which 65% would be met by its indigenous production and remaining 15% through imported coal. CIL supplied 312 mn tonnes to power sector in FY12. To meet 65% FSA qty it has to maintain a CAGR of 7%, failing which it would have to divert e-auction coal to power sector. FSA commitment by CIL Year of Commissioning Units commissioned by 31.3.2009 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Total
Source:Ministry of Coal, Sunidhi Research
Capacity (MW) 67,370 5,395 6,205 16,671 9,835 10,845 11,127 5,502 660 133,610
FSA/LOA Quantity (MT) 304.8 24.4 24.9 71.7 39.6 44.2 46.9 23.9 2.3 583
CIL Dispatch FY12 Sector Power Steel Cement Fertilizer Others Total Total FSA's Qty At 80% commitment At 65% commitment Dispatch by CIL to power utilities in FY12 Implied CAGR for achieving 80% FSA target Implied CAGR for achieving 65% FSA target If supply at 65% of FSA then total imports by CIL during FY16-17
Mn Tonnes 312.1 4.1 6.7 2.8 107.3 433.0 582.8 466.2 378.8 312 14% 7% 87
As per CIL guidance, it expects CAGR growth of 5% in production till FY2016-17. However such supply growth is not enough to meet power sectors coal requirement which is expected to increase by CAGR of 10%. Thus by new FSA it has tried to bridge the gap with imports.
Sunidhi Research |
27
Banking Sector 2016-17 road maps for coal demand and supply by CIL Particulars (mn tonne) FY13 FY14 Existing +Completed Projects 227.39 222.56 Ongoing Projects 233.76 254.31 Future Projects 2.95 8.78 TOTAL (A) 464 486 YoY Growth 5% Power demand (CEA) 466 545 FSA for power 396 463 At 80% (B) 317 371 At 65% (C) 257 301 Imports (D) (B-C) 59 69 Other user industry (A-C) 207 185
Source: Working Group Committee, Sunidhi Research Coal pool pricing (CPP) could be a better option
FY15 202.35 272.69 32.71 508 5% 631 536 429 349 80 159
FY16 197.26 288.26 44.78 530 4% 663 564 451 366 85 164
FY17 192.42 300.18 63.8 556 5% 682 580 464 377 87 180
We believe Coal price pooling could be a better option for the industry as coal availability is the major issue rather than coal price. Domestic coal is available at significant lower prices when compared to imported prices (40% discount). We believe coal pool pricing could lead to price hike of merely 8% in coal prices in contrast to nearly 60-70% price hike for power plants solely based on imported coal. Such higher power cost poses more problem rather than 8% hike in overall costs (as per our Metal analyst calculation). Price hike which SEBs need to approve 400-4300 Kcal ` 810 291 1101 1431 1651 0.8 1321 Imported coal 5300 Kcal CNF (equivalent basis)
Domestic coal Taxes (as per Annual report) ROM cost Freight cost at 300kms cost at 500kms weightage Weighted avg price price at 500 kms Price difference
2005 2335 2555 0.2 467 1788 1651 8%
Who gains? Private sector power plants tend to gain Price pooling will fulfill the FSA requirements of nearly one third of the countrys thermal power capacity, the bulk of which is in pvt sector. The cost of the coal is proposed to be subsidized by existing generation utilities, mostly in the public sector. Once the price pooling model is adopted, power tariffs for plants located in the East are expected to increase more in comparison to the units that are in the coastal regions of the West ; as plants in the Eastern belt of India mostly use domestic coal. Implementation of CPP would be significantly positive for the banking sector Coal pool pricing thus if implemented can change the face of Indian power sector by assuring the supply of feed stock. This in turn would be hugely positive for Indian banking sector which is reeling under the asset quality stress from power sector. Though the coal pooling price mechanism would take time to get implemented but it assures the long term sustainability of the upcoming and already installed power plants. Banks with highest exposure in Infra and Iron & Steel tend to benefit most if even a part of the above steps are taken as this would reduce stressed assets. Sunidhi Research | 28
Banking Sector Banks exposure to infrastructure and Iron & Steel sectors Infrastructure UCO P&SB Andhra OBC United Central SBI Canara PNB BOM Union Indian Corp Syndicate BOI BOB 27% 26% 21% 19% 17% 21% 15% 19% 16% 17% 16% 16% 16% 13% 11% 10% Iron & Steel 9% 3% 6% 7% 8% 3% 9% 4% 6% 4% 4% 3% 3% 3% 5% 4% Total 37% 29% 27% 26% 25% 25% 24% 23% 22% 21% 20% 19% 18% 16% 16% 14% Stress sector ex infra and metals 9% 5% 10% 9% 4% 5% 10% 8% 4% 4% 5% 5% 5% 3% 6% 6%
Decline in interest rate to improve investment climate

It is expected that the RBI is likely to move towards an easy monetary policy in the coming few quarters which would be the biggest trigger for a change in the investment climate. This would make a lot of projects viable and along with policy initiatives would improve the debt servicing capability of banks. As indicated by the charts below, we believe that there is room for interest rates to go lower and harbor expectations of easing in the coming few quarter.
RBI should start softening soon

SBI base rate is currently ~50bps higher than 1 year CP rates indicating room for base rate to decline by 25-50bps in near term
100 50 0 -50 -100 -150 -200 -250 -300
Jan-11 Sep-10 Sep-11 Jan-12 Nov-10 Nov-11 Sep-12 May-11 May-12 Nov-12 Jul-10 Jul-11 Mar-11 Mar-12 Jul-12
Also, 1 year CP is at only 100 bps premium to 1 year risk free rate which is generally a base level reflecting that risk premium has declined
9.0
8.0
7.0
6.0
5.0
4.0 3.0 2.0 1.0 0.0
Jun-09 Jul-06 Mar-08 Dec-06 Jul-11 May-07 Dec-11 Oct-07
May-12
Feb-06
Sep-05
Aug-08
Spread
1 Year CP rate premium to 1 Year Gsec yield
Sunidhi Research |
Nov-09
Apr-10
Sep-10
Feb-11
Oct-12
Jan-09
29
Banking Sector Banks bulk deposit cost has fallen

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Mar-08 Mar-09 Mar-11 Nov-08 Nov-11
Nov-07 Nov-09 Nov-10
OIS yield curve still negative although Gsec yield curve turned positive indicating rate cut hopes
400 300
200
100
0
-100 -200
Mar-12
Mar-10
Jul-12
-300
Jan-02 Sep-06 Aug-02 Apr-07
Jan-09
Nov-07
Aug-09
Jun-08
Jul-05
Mar-03
Mar-10
Dec-04
May-04
1 Year Gsec premium to 1 Year CoD
Source:Bloomberg, Sunidhi Research
10 Yr - 1 Yr OIS Spread
Source:Bloomberg, Sunidhi Research
Break in sticky upward trend of core inflation a major positive in Oct WPI
WPI inflation for Oct 12 eased to the lowest this fiscal to 7.45% against a reading of 7.81% in Sept The ease was broad based with major groups of primary articles, fuel & power and manufactured products marking a dip. One positive aspect of the Oct WPI number has been that the sticky upward trend in core inflation (manufactured products ex food inflation) broke with the core inflation falling below the 5.5% (at 5.2%) for the first time in last 3 months, with the MoM WPI core inflation rising by a mere 0.1% in Oct. Going forward, we believe that the downward pressure on the Primary Articles Inflation will continue on account of ease in food prices with better prospects of rabi food output. Food inflation has already eased to 6.6% in Oct from the annual Avg of 9.5%. The manufactured group of inflation could also continue with its downward trend as slowing demand in the economy adds to the easing pressure on the manufactured inflation. Trend in Core Inflation
10.0%
8.0% 6.0% 4.0% 2.0%
Trend in CPI
13.5 12.5 11.5 10.5 9.5 8.5 7.5 6.5 5.5 4.5 3.5
0.0% Oct-05
-2.0% -4.0%
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
WPI Core Inflation
WPI Core Inflation (6 months MA)
Overall CPI
Food
Fuel
Excluding Food and Fuel
Source: CSO, Sunidhi Research
Source: CSO, Sunidhi Research
Signs of easing in the WPI inflation and bleak outlook on domestic industrial activity has raised hopes for some interest rate action by financial year end.
Sunidhi Research |
May-11
Dec-11
Feb-06
Oct-10
Oct-03
Jul-12
30
Banking Sector
Price performance of PSBs are highly correlated to risky yields

Historically, we have observed that valuation of PSBs is highly correlated to high risk corporate bond yields (1 Year BBB corporate bond yield). This is largely due to the fact that BBB bond yield is best barometer for asset quality stress as well as liquidity. In case of falling BBB bond yield, PSB stock price rallies due to a) expected improvement in liquidity scenario which would help banks to improve margins b) likely improvement in the economy to reduce asset quality stress and c) falling interest rate would result in gain in bond book. Considering SBI as proxy for PSBs, as we can see from chart below that SBI has rallied faster than the pace of fall in BBB bond yields and vice versa (we consider inverse BBB bond yield for simplicity).
150% 100% 50% 0% -50%
-6 -7 -8 -9 -10 -11 -12 -13 -14 -15
-100%
Jan-06 Jan-07 Jan-09 Jan-10 Jan-11
Jan-08
Sep-05
Sep-08
Sep-09
Jan-12
May-05
May-06
May-07
May-08
May-09
May-10
May-11
Inverse 1 year BBB Corp Bond Yield - RHS
SBI Price performance (YoY %)
Valuation gap between private and PSU banks to narrow going ahead
Historically public sector banks have traded at a ~50% discount to new private sector banks. Post the recent run up in private sector banking stocks, the discount has widened significantly with public sector banks trading at ~62% discount to private banks. Thus despite the challenging environment we harbor a positive bias towards public sector banks due to their reasonable valuations. Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped and is likely to see some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market expects the RBI to start the easing process which means yields dont have much upside risk (unless crude see a sharp upmove). However while the market would want to play on likely lower bond yields, it is skeptical about the rising risk of nonperforming assets. We believe that though slippages will remain high as compared to historic averages recoveries and up gradations will keep a check on net slippages in the coming quarters. Moreover with more policy reforms and likely improvement in economic activity during FY14 vs. FY13, we believe the gap between private and PSU banks to narrow going ahead. Banks represent 20% of the weight-age in the BSE Sensex and 19.4% in the BSE100 given the sectors involvement in every aspect of Indias growth. However, within the sector the composition is largely tilted towards private sector banks. Meanwhile public sector banks dominate all major banking parameters including profits, business etc. This analysis is further heightened on comparing the weight-age of PSBs ex SBI. On comparison of market share in basic parameters such as credit, deposits etc, PSBs (ex SBI) represent 55-60% of the share in FY12 vs. an index weight-age of just ~10% in the Bankex and the Bank nifty. In terms of the Sensex and the BSE100, banks represent 19-20% weight-age represented largely by private banks at 15-16% where as PSBs (ex SBI) weight-age is only 2% in BSE100 and zero in the Sensex. The following chart depicts the difference in representation of PSBs and private banks in terms of market share and representation in stock indices Sunidhi Research | 31
May-12
Sep-12
Sep-06
Sep-07
Sep-10
Sep-11
Banking Sector Public banks account for around two-thirds of the market on different parameters yet they are severely under-represented Market share Represented in ownership Deposits Advances Total Assets NII PAT Bankex (BSE) Bank Nifty (NSE) Private Sector Banks 19% 19% 21% 23% 31% 77.2% 76.0% PSBs 81% 81% 79% 77% 69% 22.8% 24.1% PSB ex SBI 64% 62% 61% 56% 53% 10.3% 10.0%
Source: Company, Exchanges, Sunidhi Research
Mcap 57.0% 43.0% 25.1%
The basic reason behind this is large government ownership and restrictions on the maximum foreign investor holding resulting in lower free float. This has also led to under ownership by institutional investors. Trend in ownership pattern for public sector banks Q2FY13 26.60% 9.84% 14.59% 26.76% 10.33% 12.02% Ownership (PSBs) Q2FY12 26.10% 10.08% 15.02% Ownership (PSB ex SBI) 25.32% 11.10% 12.68% Q2FY11 28.21% 13.45% 13.98% 27.21% 13.05% 12.81%
Non promoter FII Insurance + MF Non promoter FII Insurance + MF

According to Sunidhis banking performance indicator for Q2FY13, the top five positions are still occupied by private sector banks. However while assigning a weight of 25% to valuations and 75% to the ranking in accordance to SBPI, select public sector banks such as Bank of Baroda and Syndicate Bank also appear in the top five. Sunidhis banking performance indicator (SBPI) Total Total Asset Operational Quarterly Rank Rank quality efficiency Profitability performance Bank (Q2FY13) (Q1FY13) Rank CAR Rank Rank score Rank rank Yes Bank Ltd. 1 1 1 4 13 2 1 Axis Bank Ltd. 2 5 4 8 1 3 2 HDFC Bank Ltd. 3 2 2 2 4 12 5 IndusInd Bank Ltd. 4 3 3 10 12 1 6 Kotak Mahindra Bank Ltd. 5 7 5 3 17 18 3 Bank Of Baroda 6 8 8 7 7 5 10 Federal Bank Ltd. 7 9 6 1 8 17 12 ICICI Bank Ltd. 8 4 7 19 2 22 4 IDBI Bank Ltd 9 18 11 13 21 9 9 Syndicate Bank 10 10 9 20 19 4 7 Oriental Bank of Commerce 11 12 15 11 9 16 11 Canara Bank 12 15 13 5 16 11 14 Indian Bank 13 6 14 14 6 14 16 Union Bank Of India 14 22 12 21 14 13 13 SBI 15 14 17 12 5 7 20 Bank Of India 16 21 16 22 11 21 8 Vijaya Bank Ltd 17 17 10 9 23 20 15 Punjab National Bank 18 11 21 18 3 10 19 Indian Overseas Bank 19 20 20 6 22 6 21 Allahabad Bank 20 13 19 15 10 19 22 Andhra Bank 21 16 18 16 15 8 23 UCO Bank 22 19 22 17 20 23 18 Central Bank Of India 23 23 23 23 18 15 17
Sunidhi Research |
32
Banking Sector SBPI ranking including valuation Bank Yes Bank Ltd. Axis Bank Ltd. Bank Of Baroda HDFC Bank Ltd. Syndicate Bank IndusInd Bank Ltd. Federal Bank Ltd. IDBI Bank Ltd Kotak Mahindra Bank Ltd. Oriental Bank of Commerce ICICI Bank Ltd. Indian Bank Canara Bank Union Bank Of India Indian Overseas Bank Bank Of India SBI Allahabad Bank Punjab National Bank Andhra Bank Vijaya Bank Ltd Central Bank Of India UCO Bank Total Rank 1 2 6 3 10 4 7 9 5 11 8 13 12 14 19 16 15 20 18 21 17 23 22
th
P/ABV FY13E 2.9 2.2 1.2 4.7 0.9 3.8 1.3 0.9 2.9 0.9 2.1 0.9 1.2 1.4 0.7 1.1 1.6 0.9 1.3 0.9 2.2 0.8 0.9
Valuation Rank 20 18 11 23 3 22 14 9 21 8 17 4 12 15 1 10 16 7 13 6 19 2 5
Total Rank plus valuation rank 6 6 7 8 8 9 9 9 9 10 10 11 12 14 15 15 15 17 17 17 18 18 18
Total Rank inc valuations 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Source: Company, Sunidhi Research *Prices as on 6 Dec
Sunidhi Research |
33
Banking Sector
Key risks
The government reforms initiated in September including FDI in retail, aviation, diesel price hikes, SEB restructuring etc, have helped improve investors sentiment and portfolio flows. They have also helped to reduce risks of downgrades and sharp rupee depreciation. However, some critical economic issues still persist which remain the key downside risk to the banking sector which includes fiscal deficit, inflation, CAD issue, liquidity risk. Although some of the policy initiative like direct cash transfer would reduce the stress marginally but weak global financial conditions and higher pre budget spending could worsen the conditions. Hence, this would require an improvement in the external condition in addition to continued policy action by the government and central bank. Pre-election spending could lead to fiscal slippages We expect the fiscal deficit (state + centre deficit) to be around 8.5% given only select measures taken by the government to contain the fiscal deficit. Also, considering we are approaching an election year (2014), we could see a sharp rise in government expenditure whereas income is largely inelastic. Historically, government expenditure rises at a faster pace during an election year as per the chart below. Consistent high crude prices could result in risks of a higher subsidy burden. Similarly, fertilizer and food subsidy bills are also likely to surprise on the upside. Weaker than expected tax revenues along with higher expenditure and more budget deficit for the state are likely to result in poor fiscal deficit numbers. Trend in central government expenditure
16000 14000 12000 30 25
Trend in fiscal deficit of centre (% of GDP)

7.0%
6.5%
6.0% 5.8%
6.0% 5.0% 4.0% 3.0%
10000
20
15 10
4.9%
8000 6000 4000
% yoy
Rs bn
3.3% 2.5%
2000
0
5
0
2.0%
1.0% 0.0% 2006-07
Year
1971-72
1975-76
1979-80
1981-82
1985-86
1987-88
1989-90
1991-92
1995-96
1997-98
2001-02
2003-04
2005-06
2007-08
2011-12
1973-74
1977-78
1983-84
1993-94
1999-00
2009-10
Central Govt Expenditure
Central Govt Expenditure (yoy)
2007-08
2008-09
2009-10
2010-11
2011-12
*Circles represent election years Source: RBI, Sunidhi Research
Source: Budget, Sunidhi Research
Inflation pressures still persist As inflation in the near term has remained above the RBI comfort zone, rate cuts have been pushed further with the RBI stating that rate cuts could only take place during the last quarter of FY13. Going ahead inflation could surprise and remain at higher levels on the back of the recent diesel price hike, electricity tariff hikes in several states and a 40% increase in the minimum support price. However, we believe the base effect would come in favor during Q4FY13. Trend in WPI and core inflation
15.00% 10.00%
WPI (%)
Trend in composition of inflation

10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0%
25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00%
Core inflation (%)
5.00% 0.00%
Dec-09 Oct-10 Aug-11 Apr-08 Sep-08 Feb-09 May-10 Jan-12 Jul-09
-5.00%
Mar-11
Jun-12
WPI
Core Inflation
Sunidhi Research |
Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12
Primary articles Fuel, power & Light
Manufactured goods
34
Banking Sector
Recent state tariff hikes

State Tamil Nadu Delhi Madhya Pradesh Kerala Rajasthan Haryana Chattisgarh Jharkhand Himachal Pradesh Andhra Pradesh Punjab Orissa Bihar West Bengal Uttarakhand Karnataka Gujarat
Source: Media reports, Sunidhi Research
Tariff hike 37% 26% 24% 23% 19% 19% 18% 16% 13% 12% 12% 12% 12% 9% 7% 3% 2%
Date of tariff hike Apr-12 Jul-12 Apr-12 Jul-12 Aug-12 Apr-12 Apr-12 Aug-12 Apr-12 Apr-12 Jul-12 Apr-12 Apr-12 Feb-12 Apr-12 Apr-12 Jun-12
Current account deficit risk high CAD which widened to an all time high of 4.2% of GDP during FY12 narrowed to 3.9% for Q1FY13 but still remains distant from the governments target of 3.5%. This is largely led by higher international energy price, rising gold import and rupee weakness. The Oct12 Trade Deficit widened to a record $20.96 billion leaving the challenge open that slower growth has not resulted in lower imports. However, in case of global slowdown, funding of fiscal deficit would remain the biggest risk due to lack of capital flows. Trend in current account deficit
4 3.5 3 2.5 2 1.5 1 1.3 2.3
3.6
2.8
2.7
1 0.5 0
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Source: Budget document, Sunidhi Research
Tight liquidity could result in higher short term rates Net borrowings under the LAF window continued to remain in deficit mode of approximately Rs 800 bn currently. This is post liquidity infusion by RBI via CRR cuts of 175bps in FY12-FY13 combined with a +Rs 1tn of infusion YoY via OMO. Considering seasonality in loan book growth in Q4, likely overshooting of fiscal deficit and higher working capital requirements, we could see liquidity tighten further by the fiscal year end. Loan Deposit growth gap continues to remain high which could provide limited room for credit growth unless deposit picks up. This could result in higher short term wholesale rates by fiscal end.
Sunidhi Research |
35
Banking Sector Trend in LAF borrowings

1,500.0 1,000.0
500.0
Rs billions
Trend in CD rates
12
11 10
0.0 -500.0
9
8 7
-1,000.0 -1,500.0
6
5 4
Dec-10
Dec-11
Oct-10
Oct-11
Aug-10
Aug-11
-2,500.0
Jan-10 Nov-10 Nov-11 Jan-12
Jan-11
May-10
May-11
May-12
Mar-11
Mar-12
Mar-10
Nov-12
Sep-10
Sep-11
Sep-12
Jul-10
Jul-12
Jul-11
12M
3M
6M
Slippages from stressed sectors According to our Z score analysis applied to the FY12 financials of all listed companies, 246 companies with a total debt of Rs 7846 bn or 16% of the outstanding loans in the system are stressed. The sectors which face the most stress include Aviation, Telecom, shipping, Construction, Infrastructure etc. Additionally we have compiled public sector bank exposure to these troubled sectors. Banks which have higher exposure to troubled sectors bear higher risks of defaults. Z Score Analysis: List of troubled sectors Sector Air Transport Telecomm Equipment & Infra Services Telecomm-Service Shipping Construction Infrastructure developers & operators Power Generation & Distribution Paper Healthcare Glass Realty Sugar Steel Textiles Dry Cells
Net Debt (Rs bn) 209 182 1370 364 973 1452 2811 78 75 52 498 240 1786 882 3
Net Debt/EBIDTA -7.4 20.2 11.3 7.1 8.4 6.6 5.9 8.0 6.7 7.6 9.4 8.3 4.9 5.1 -8.2
Z-Score -0.3 0.3 0.9 1.2 1.2 1.2 1.3 1.5 1.6 1.6 1.7 1.7 1.7 1.8 1.8
Sunidhi Research |
Aug-12
Apr-10
Apr-11
Feb-11
Feb-12
Apr-12
Oct-12
Jun-10
Jun-11
Jun-12
-2,000.0
36
Banking Sector Public sector banks fund based exposure to troubled sectors (% of loan book) (FY12) Iron & Total Construction Textiles Steel Infrastructure Power Allahabad SBI OBC Corp BOB Canara UCO United UBI Central BOM Syndicate BOI P&SB Andhra Indian PNB NA 1.7% 2.0% 0.3% 1.7% 1.7% 2.4% 1.2% 1.2% 1.4% 0.6% 1.1% 0.6% 1.7% 3.2% NA 1.3% 2.9% 6.3% 4.7% 3.7% 3.4% 4.8% 5.6% 2.1% 2.7% 2.9% 3.1% 1.5% 3.4% 2.7% 5.6% 4.0% 1.5% 5.7% 8.8% 6.6% 2.8% 3.5% 4.1% 9.3% 8.3% 4.3% 3.4% 4.1% 3.4% 4.6% 2.9% 6.2% 3.1% 6.1% 18.2% 15.4% 19.1% 15.5% 10.2% 18.9% 27.3% 16.9% 16.0% 21.1% 17.1% 12.6% 11.3% 26.2% 20.5% 16.0% 15.7% 12.0% 7.2% NA 9.3% 5.0% 11.2% 15.4% 11.5% NA NA 12.9% NA 7.5% 14.3% 20.5% 10.7% 10.0%
Telecom 0.6% 2.8% NA 2.6% 2.0% 3.1% 3.0% 1.4% NA NA 0.9% NA 0.6% NA NA 0.8% 0.7%
Paper NA 0.8% 1.0% 0.2% 0.5% 0.8% 0.5% 0.2% 0.2% 0.3% 0.6% NA 0.4% 0.2% NA 0.5% 0.4%
Sugar NA 1.0% 1.3% 0.7% 0.3% 0.7% 0.4% NA 0.8% 0.8% 0.0% NA 1.5% 0.5% 1.5% 0.8% 0.7%
Public sector banks non fund based exposure to troubled sectors (% of loan book) (FY12) Iron & Total Construction Textiles Steel Infrastructure Power SBI OBC Corp BOB Canara UCO United Union Central BOM Syndicate BOI P&SB Andhra Indian PNB 0.3% 0.9% 0.2% 0.3% 0.9% 2.1% 0.5% 0.8% 0.6% 1.4% 1.4% 0.5% 0.7% 6.5% NA 0.1% 0.8% 0.6% 0.7% 0.6% 0.4% 0.4% NA 0.3% 0.1% 0.4% 0.1% 0.2% 0.1% 0.6% 0.3% 0.2% 2.7% 2.3% 0.8% 1.2% 0.7% 1.9% 0.6% 1.1% 0.3% 0.7% 0.3% 0.5% 0.1% 2.8% 0.9% 3.4% 6.2% 1.5% 3.1% 2.0% 3.1% 3.1% 1.8% 1.5% 0.4% 6.2% 1.1% 2.5% 2.7% 3.4% 2.3% 2.5% 3.1% NA 0.6% 1.1% 2.6% 1.9% 0.8% NA NA 3.6% NA 1.1% 0.1% 3.4% 1.2% 2.0%
Telecom 0.5% NA 0.6% 0.2% 0.3% 0.3% 0.1% NA NA NA NA NA NA NA 0.1% NA
Paper 0.1% 0.3% NA 0.1% NA NA NA NA NA 0.1% NA NA NA NA 0.1% 0.1%
Sugar 0.1% 0.2% NA NA NA NA NA NA 0.1% NA NA NA NA 0.3% 0.1% NA
Sunidhi Research |
37
Banking Sector
Company Section
Sunidhi Research |
38
Allahabad Bank
Asset quality improvement in sight, Maintain Buy Allahabad bank was founded in 1865 by a group of Europeans, making it one of Indias oldest public sector banks. It is a midsized bank with a branch network of over 2500 branches, located predominantly in the eastern region. The bank had in the past traded at a discount to its peers on account of asset quality concerns and its geographical concentration in the eastern region. However, in the past few years the bank has managed to improve its asset quality and is focusing on expanding its branch network in Casa rich southern and western states. NIM likely to stabilize During Q2FY13, the bank reported a sharp decline in the NIM to 2.8% from 3.2% in Q1FY13. The decline in the NIM was due to interest reversals on non performing assets. Cost of deposit declined in Q2FY13 due to shedding of high cost bulk deposit. Going ahead NIM is likely to stabilize and we have factored a recovery of NIM to 3% by Q4FY13. Recoveries can be a big trigger Allahabad Bank reported a surge in slippages during Q2FY13 with its slippage rate accelerating to 6.2% from 2.1% in Q1FY13. The deterioration in asset quality was on account of the difference in opinion with RBI on treatment of restructured assets. Going ahead, we expect asset quality to improve on the back of lower slippages and higher recoveries. Assuming recoveries of 50% and 60% on additions during FY1013E, the impact on the adjusted networth of Allahabad Bank would be ~15% and ~23% for FY14E respectively. Restructured book excluding Air India and SEBs at 6.5% of loan book While the restructured book for Allahabad Bank is one of the highest amongst public sector banks at 11.5% of the loan book, a large part of it consists of loans to Air India and SEBs. Loans to Air India and SEBs are unlikely to slip into non performing asset category. Excluding Air India and SEB exposure, the banks restructured book stands lower at 6.5%. Revival in fee income and treasury gains to boost non-interest income Allahabad Banks non-interest income has been muted in FY12 and YTD FY13. Going ahead we expect a revival in non-interest income on the back of higher fee income and treasury gains. We expect the fee income to revive in FY14 and expect it to improve to ~0.8% of average advances. Additionally the bank has interest sensitive AFS book of ~23% of its total investment book with a modified duration of 2.8 for SLR AFS book. A 100 bps change in yields would have 13% imapct on the banks FY14E PAT and 2.9% on FY14E Adj NW. Tax provisions surge to 30% Contrary to management guidance for FY13, the tax rate for Q2FY13 came in at 30% due to lower writeoffs and availing of concession. We have assumed tax rate of 28% for FY13. Maintain Buy with a target price of `190: At the CMP of `159, the bank trades at 0.9x its FY13E ABV and 0.8x its FY14E ABV. At these levels the bank trades at a discount to its long term average one year forward P/ABV ratio. We maintain our Buy recommendation and target price of `190 (0.9x FY14E ABV) on the stock.
Financials NII `mn PAT `mn ABV ` P/E x P/ABV X ROAA % ROAE %
Banking Sector Outlook - Neutral

Company Update
Allahabad Bank Growth CAGR (FY12-14E) Allahabad Bank Growth CAGR (FY12-14E)
15% 15% 10% 10% 5% 5% 0% 0%
10% 10%
11% 11%
12% 12%
12% 12%
NII NII
Net Total PPP PAT Net Total Income PPP growth PAT growth Income growth growth
Recommendation Recommendation CMP (`) CMP (`) Price Target (`) Price Target (`) Upside (%) Upside (%) 52 Week H / L ` 52 Week H / L ` BSE 30 BSE 30 Key Data Key Data No.of Shares, Mn. No.of Shares, Mn. Mcap, ` Bn Mcap, ` Bn Mcap,USD bn @ `54 Mcap,USD bn @ `53 2 W Avg Qty, (BSE+NSE) Mn 2 W Avg Qty, (BSE+NSE) Mn Share holding, Sept'12 Share holding, Sept'12 Promoters Promoters FII FII DII DII Public & Others Public & Others Performance Performance Stock Return % Stock Return % Relative Return % Relative Return %
40.0% 30.0% 30.0% 20.0% 20.0%
10.0% 10.0% 0.0% 0.0% -10.0% -10.0% -20.0%
BUY BUY 159 137 190 182 19% 33 211/103 19487
500.0 79.5 1.5 2.4
55.2 11.5 20.3 13.0
1M 1M 16.9 13.3
3M 3M 33.7 20.5
6M 6M 17.7 5.3
12 M 12 M -2.7 -20.4
-20.0% -30.0%
-30.0% -40.0%
Dec-11 Aug-12 Aug-12
Nov-11
PFC NIFTY Allahabad Bank
NIFTY
40,225 14,232 FY11 51,627 18,668 FY12 54,910 17,650 FY13E 62,050 23,313 FY14E 67,154 26,235 FY15E Source: Company, Sunidhi Research
145.0 171.1 170.4 210.7 252.8
5.3 4.3 4.5 3.4 3.0
1.1 0.9 0.9 0.8 0.6
1.0 1.1 0.9 1.0 1.0
18.7 19.6 15.7 18.1 17.5
Dec-11
Apr-12
Oct-12
Jan-12
May-12
Mar-12 Mar-12
Nov-12
Nov-12
Feb-12 Feb-12
Apr-12
Apr-12
Sep-12
Jun-12
Jan-12
Jul-12 Jul-12
Nov-12
Feb-12
Sep-12
Sep-12
Jun-12
Jul-12
Allahabad Bank
Trend in advances growth
2000.0 1800.0 1600.0 30.8% 25.0% 20.0% 18.7% 16.0% 17.0% 17.0% 35.0% 30.0%
Trend in deposits growth

3000.0 2500.0 2000.0 24.4% 21.0% 18.7% 15.4% 1000.0 500.0 0.0 17.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
1400.0
Rs bn
Rs bn
1200.0
1000.0 800.0 600.0
1500.0
15.0% 10.0% 5.0%

0.0%
400.0 200.0
0.0
2011
2012
2013E
2014E
% yoy
2015E
2011
2012
2013E
2014E
% yoy
2015E
Advances
Deposits
Trend in NII and NIM

80.0 70.0 3.3% 3.2% 3.4%
Trend in other income growth

25.0 20.0 35.0% 30.0%
3.3%
3.2%
60.0
50.0
28.9%
25.0%
20.0%
Rs bn
Rs bn
3.1%
15.0 15.3%
10.0 6.5%
15.0%
10.0% 5.0% 0.0%
40.0
30.0
20.0 10.0
3.0% 3.0%
3.0% 2.9%
2.9%
2.8%
5.0 -5.2%
0.0
-5.0% -10.0%
-15.0%
0.0
2011 2012 NII 2013E NIM 2014E 2015E
2.7%
-9.6% 2011 2012 2013E 2014E

% yoy
2015E
Other Income
Trend in %GNPA and %NNPA

3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 1.0% 2.8% 2.4%
Trend in slippages and credit costs

3.5% 3.0%
2.1% 1.6%
1.5%
3.2% 2.4% 2.5%
1.7%
1.8%
2.0%
2.5% 2.0%
2.4%
2.2%
1.5% 1.0% 0.5%

0.0%
0.8%
1.0%
1.2%
1.2%
1.0%
0.9%
0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
2011
2012
2013E
2014E
2015E
Slippage (%)
Credit Cost (%)
Impact of various scenarios on adjusted Networth (` Bn) Networth with 100% build up for coverage (Ex Revaluation) (FY14) (A) Default Rate (assumed 15%) (B) Upside on Recoveries/Upgradation Rate at 50% (C) Upside on Recovery in Written Off Accounts at 15% (D) Upside from Gain in Treasury Book on 100bps Change in Yields (E) Impact on Networth (F=C+D+E+F-B) Impact as % of Networth Adjusted Networth (A+F) P/ABV (with above adjustments) (x) Sunidhi Research |
On Adj NW (FY14) 105.4 10.9 15.6 4.0 3.1 11.8 11.2% 117.2 0.7 40
Allahabad Bank
Financials (Standalone)
Profit & Loss Account (` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet (` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balances with Banks & money at Call Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) Sunidhi Research | 2011 110146.9 69922.2 40224.7 13705.1 53929.8 23383.0 30546.8 11238.7 19308.1 5076.0 14232.1 2011 4,762.2 80,311.7 85,073.9 1,318,871.6 69,181.8 39,736.3 1,512,863.6 79,009.3 31,264.5 432,470.6 936,248.9 11,482.3 22,388.0 1,512,863.6 2011 31.6% 22.3% 51.8% -9.6% 29.4% 44.5% 19.9% 44.7% 9.0% -10.2% 18.0% 2011 1.7% 0.8% 2.4% 108.1% 55.3% 1.0% 0.8% 2012 155232.8 103606.3 51626.5 12986.8 64613.3 26913.9 37699.4 16069.6 21629.8 2961.9 18667.9 2012 5,000.3 100,065.9 105,066.2 1,595,930.8 90,944.8 37,403.9 1,829,345.7 87,124.5 53,127.6 542,834.4 1,111,451.0 11,977.3 22,832.9 1,829,347.7 2012 40.9% 48.2% 28.3% -5.2% 19.8% 15.1% 23.4% 43.0% 12.0% -41.6% 31.2% 2012 1.8% 1.0% 2.4% 110.5% 47.0% 1.2% 1.0% 2013E 187804.9 132894.6 54910.4 13833.6 68743.9 28295.3 40448.7 15934.4 24514.3 6864.0 17650.3 2013E 5,000.3 114,229.0 119,229.3 1,841,833.1 103,142.7 53,576.5 2,117,781.5 108,816.3 46,405.8 607,455.7 1,289,283.2 19,060.0 46,760.6 2,117,781.5 2013E 21.0% 28.3% 6.4% 6.5% 6.4% 5.1% 7.3% -0.8% 13.3% 131.7% -5.5% 2013E 2.8% 2.0% 3.2% 100.0% 29.2% 1.2% 0.8% 2014E 209103.0 147053.1 62049.9 17836.2 79886.1 32331.8 47554.3 15175.0 32379.3 9066.2 23313.1 2014E 5,000.3 133,764.3 138,764.6 2,186,175.8 120,676.9 43,911.7 2,489,529.0 101,507.6 60,247.2 607,455.7 1,508,461.3 22,405.8 189,451.5 2,489,529.0 2014E 11.3% 10.7% 13.0% 28.9% 16.2% 14.3% 17.6% -4.8% 32.1% 32.1% 32.1% 2014E 2.4% 1.6% 2.5% 90.0% 31.3% 1.0% 0.7% 2015E 230784.5 163630.1 67154.4 20557.7 87712.2 34541.3 53170.8 16733.7 36437.1 10202.4 26234.7 2015E 5,000.3 155,640.1 160,640.4 2,557,825.7 141,192.0 71,802.5 2,931,460.6 146,302.3 66,345.2 607,455.7 1,764,899.7 26,383.1 320,074.5 2,931,460.6 2015E 10.4% 11.3% 8.2% 15.3% 9.8% 6.8% 11.8% 10.3% 12.5% 12.5% 12.5% 2015E 2.1% 1.5% 2.2% 90.0% 30.9% 0.9% 0.7% 41
Allahabad Bank Other operating indicators NIM (%) Cost to income (%) Business per branch (` mn) Business per employee (` mn) Profit per branch (` mn) Profit per employee (` mn) CASA per branch (` mn) CASA ratio (%) Other income / Total income CEB / Other income CEB / average advances Capital Adequacy ratios CAR (%) Tier 1 (%) Tier 2 (%) Leverage (x) Risk weighted assets / Total Assets (%) Valuation Table Net profit (` mn) Shares in issue (mn) EPS (`) EPS growth (%) PE (x) P/PPP (x) Book value (`/share) P/BV (x) Adj book value (`/share) P/ABV (x) ROAA (%) ROAE (%) ROAE (adj for reval reserve) (%) Dividend Yield (%) Du pont Decomposition Yield on Assets Less: Cost of Assets Net Interest Income Other Income Less: Operating Exp Less: Provisions Less: Tax RoAA Leverage RoAE
2011 3.2% 43.4% 933.8 106.3 5.9 0.7 182.8 33.5% 25.4% 60.3% 0.9% 2011 13.0% 8.6% 4.4% 17.8 60.7% 2011 14232.1 476.2 29.9 10.7% 5.3 2.5 178.6 0.9 145.0 1.1 1.0% 18.7% 21.0% 3.8% 2011 8.1% 5.1% 2.9% 1.0% 1.7% 0.8% 0.4% 1.0% 17.9 18.7%
2012 3.3% 41.7% 1076.1 121.2 7.4 0.8 193.4 30.5% 20.1% 60.6% 0.8% 2012 12.8% 9.1% 3.7% 17.4 59.5% 2012 18667.9 500.0 37.3 24.9% 4.3 2.1 210.1 0.8 171.1 0.9 1.1% 19.6% 21.6% 3.8% 2012 9.3% 6.2% 3.1% 0.8% 1.6% 1.0% 0.2% 1.1% 17.6 19.6%
2013E 3.0% 41.2% 1174.5 130.5 6.6 0.7 214.2 31.0% 20.1% 47.1% 0.7% 2013E 12.3% 9.0% 3.3% 17.8 59.5% 2013E 17650.3 500.0 35.3 -5.5% 4.5 2.0 238.4 0.7 170.4 0.9 0.9% 15.7% 17.0% 3.8% 2013E 9.5% 6.7% 2.8% 0.7% 1.4% 0.8% 0.3% 0.9% 17.6 15.7%
2014E 3.0% 40.5% 1312.0 145.8 8.3 0.9 240.7 31.0% 22.3% 58.8% 0.8% 2014E 11.9% 9.0% 2.9% 17.9 59.5% 2014E 23313.1 500.0 46.6 32.1% 3.4 1.7 277.5 0.6 210.7 0.8 1.0% 18.1% 19.4% 4.1% 2014E 9.1% 6.4% 2.7% 0.8% 1.4% 0.7% 0.4% 1.0% 17.9 18.1%
2015E 2.9% 39.4% 1457.4 161.9 8.8 1.0 267.3 31.0% 23.4% 63.7% 0.8% 2015E 11.5% 8.9% 2.6% 18.2 59.5% 2015E 26234.7 500.0 52.5 12.5% 3.0 1.5 321.3 0.5 252.8 0.6 1.0% 17.5% 18.6% 4.7% 2015E 8.5% 6.0% 2.5% 0.8% 1.3% 0.6% 0.4% 1.0% 18.1 17.5%
Sunidhi Research |
42
Bank of Baroda
Change of guard to remain a hangover in the near term Banking Sector Outlook - Neutral
Initiating Coverage
Bank of Baroda CAGR (FY12-14E)
Bank of Baroda (BOB) is one of the largest public sector utility banks in India. As of Q2FY13, it had a loan book of `2921 bn. Overseas loans comprise 32% of the loan book. The bank has 4021 domestic branches as on Q2FY13, over half of which are in semi urban and rural areas. In H2FY13, the Bank plans to open 475 new branches with 241 branches in Tier-I & Tier-II centres & 234 branches in Tier-III to Tier-VI centres. Recoveries from slippages and written off accounts to boost profitability As the asset quality for Bank of Baroda has been better than its peers with lower slippages as compared to other public sector banks, recoveries are likely to be lower as well. However assuming a 50% recovery rate from assets slipped into non performing category from FY10-13E, upside to adjusted networth would be ~9% in FY14E and this number increases to ~13% assuming a 60% recovery rate. Additionally recoveries from written off accounts, assuming a 15% recovery rate would lead to a 1.8% upside to networth in FY14E. Restructured book lower as compared to peers Total restructured book outstanding for Bank of Baroda as on Q2FY13 stands at 7.2% lower as compared to its peers. Adjusting for restructured loans to SEBs and Air india which are unlikely to slip into NPA category, the restructured book stands at 5.7%. High modified duration of AFS book to lead to higher treasury gains The modified duration of BOBs AFS book stands high at 3.5, as a result a 1% reduction in yield could lead to MTM writebacks of `6.3 bn which would have an impact of 11.0% on the banks FY14E PAT and 1.9% on the banks FY14E adjusted networth. Lower exposure to troubled sectors as compared to peers BOBs exposure to sensitive sectors is lower as compared to several peers such as BOI, SBI, PNB, Canara Bank. BOBs total infrastructure exposure stands at 12.2% of advances (FY12) as compared to 13.8% for BOI, 21.6% for SBI, 18.2% for PNB and 22% for Canara Bank. Initiate coverage with a NEUTRAL rating and a target price of `877: At the CMP of `792, the bank trades at 1.2x its FY13E ABV and 1.0x its FY14E ABV. At these levels the bank trades below its average one year forward P/ABV multiple. Bank of Baroda with its lower exposure to troubled sectors, smaller restructured book and sound return ratios is a sound pick amongst public sector banking stocks. However the likely change of management may remain a hangover for the stock performance in the near term. We initiate coverage on BOB with a neutral rating and a target price of `877 (1.1x FY14E ABV)
16%
14%
14%
7%
NII
Net Total Income
PPP
PAT
Recommendation CMP (`) Price Target (`) Upside (%) 52 Week H / L ` BSE 30 Key Data No.of Shares, Mn. Mcap, ` Bn Mcap,USD bn @ `54 2 W Avg Qty, (BSE+NSE) Mn Share holding, Sept'12 Promotors FII DII Public & Others Performance Stock Return % Relative Return %
20.0% 15.0%
Neutral 792 877 11 881/606 19487
411.1 325.6 6.0 0.6
54.3 14.9 19.1 11.8 1M 4.9 1.3 3M 29.8 16.6 6M 9.9 -2.5 12 M 7.0 -10.7
10.0% 5.0%
0.0% -5.0% -10.0% -15.0% -20.0%
Financials FY11 FY12 FY13E FY14E FY15E
NII `mn 88022.6 103170.1 120763.4 138545.7 163542.6
PAT `mn 42416.9 50069.5 51284.5 57315.2 67527.5
ABV ` 515.6 628.9 686.8 797.7 936.3
P/E x 7.3 6.5 6.4 5.7 4.8
P/ABV X 1.5 1.3 1.2 1.0 0.8
ROAA % 1.4 1.4 1.1 1.1 1.1
ROAE % 23.5 20.6 17.4 17.0 17.5
Dec-11
Dec-11
Aug-12
Apr-12
Apr-12
Oct-12
Jan-12
Nov-12
May-12
Mar-12
BOB
NIFTY
Nov-12
Feb-12
Sep-12
Sep-12
Feb-12
Jun-12
Jul-12
Jul-12
Bank of Baroda
5000.0 4500.0 4000.0 30.8% 25.0% 5000.0 24.4% 21.0% 18.7% 15.4% 17.0% 20.0% 18.7% 16.0% 17.0% 17.0% 4000.0 35.0% 30.0%

7000.0 6000.0 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
3500.0
Rs bn
2500.0 2000.0 1500.0
15.0% 10.0% 5.0%

0.0%
Rs bn
3000.0
3000.0 2000.0 1000.0

0.0
1000.0 500.0
0.0
2011
2012
2013E
2014E
% yoy
2015E
2011
2012
2013E
2014E
% yoy
2015E
Advances
Deposits

180.0 3.4% 3.3% 3.2% 3.3% 3.2%

50.0 45.0 40.0 35.0% 30.0%
160.0
140.0 120.0
28.9%
25.0%
35.0
20.0% 15.0% 15.3%

6.5% 10.0% 5.0% 0.0%
Rs bn
Rs bn
100.0
80.0 60.0
3.1% 3.0%
30.0
25.0 20.0 15.0
3.0%
3.0%
2.9% 2.9% 2.8% 2.7%
40.0
20.0 0.0
10.0 5.0
0.0
-5.0% -5.2% -9.6% 2011 2012 2013E 2014E

% yoy
-10.0%
-15.0%
2011
2012
NII
2013E
NIM
2014E
2015E
2015E
Other Income

2.5% 2.3% 2.3%

2.2%
2.5% 2.0%
2.0%
1.5% 1.5%
1.9%
1.5%
1.5%
1.3%
1.4% 1.0%
0.8% 0.5%
1.5%
1.1% 1.0%
0.6%
1.0%
0.5% 0.3%
0.6%
0.8%
0.8%
0.8%
0.5%
0.0%
0.5%
0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
2011
2012
2013E
2014E
2015E
Slippage (%)
Credit Cost (%)
On Adj NW (FY14) 328.9 25.0 29.4 5.9 6.3 16.6 5.1% 345.6 0.9 44
Bank of Baroda
Profit & Loss Account (` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet (` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash Balances Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) Provisioning / NPA additions (%) Reductions in provisions / NPA reductions (%) Sunidhi Research | 2011 218859.2 130836.6 88022.6 28091.9 116114.4 46298.3 69816.1 13312.8 56503.3 14086.4 42416.9 2011 3,928.1 206507.3 210,435.3 3054394.8 129061.5 190,080.1 3,583,971.8 499340.7 713965.9 2286763.6 22997.2 60904.4 3,583,971.8 2011 31% 22% 48% 0% 33% 21% 41% 91% 33% 19% 39% 2011 1.4% 0.3% 1.1% 47.7% 74.9% 0.5% 0.4% 1.4% 0.3% 2012 296737.2 193567.1 103170.1 34223.3 137393.4 51587.2 85806.2 25548.3 60257.9 10188.4 50069.5 2012 4,123.8 270644.7 274,768.5 3848711.1 141713.5 208,021.6 4,473,214.7 641685.4 832094.0 2873772.9 23415.0 102247.3 4,473,214.7 2012 36% 48% 17% 22% 18% 11% 23% 92% 7% -28% 18% 2012 1.5% 0.5% 1.5% 67.6% 65.4% 0.6% 0.6% 1.5% 0.5% 2013E 349768.1 229004.7 120763.4 32722.9 153486.2 57481.5 96004.7 31899.1 64105.7 12821.1 51284.5 2013E 4,123.8 311420.2 315,544.0 4445441.1 162970.5 231,103.8 5,155,059.5 656074.8 1027155.9 3333600.3 25756.5 112472.0 5,155,059.5 2013E 18% 18% 17% -4% 12% 11% 12% 25% 6% 26% 2% 2013E 2.3% 1.0% 1.9% 52.0% 57.8% 0.8% 0.7% 2.3% 1.0% 2014E 398507.5 259961.8 138545.7 39227.2 177772.9 65382.4 112390.5 36975.8 75414.7 18099.5 57315.2 2014E 4,123.8 356124.6 360,248.4 5255464.6 187416.1 261,938.9 6,065,068.0 717942.8 1269039.1 3926034.6 28332.2 123719.2 6,065,068.0 2014E 14% 14% 15% 20% 16% 14% 17% 16% 18% 41% 12% 2014E 2.3% 0.8% 1.5% 44.1% 66.5% 0.8% 0.7% 2.3% 0.8% 2015E 461819.7 298277.1 163542.6 43591.6 207134.2 73228.3 133905.9 41402.4 92503.5 24975.9 67527.5 2015E 4,123.8 408519.2 412,643.0 6213854.8 215528.5 296,939.5 7,138,965.8 778389.0 1569157.2 4624163.0 31165.4 136091.2 7,138,965.8 2015E 16% 15% 18% 11% 17% 12% 19% 12% 23% 38% 18% 2015E 2.2% 0.6% 1.3% 42.7% 74.8% 0.8% 0.6% 2.2% 0.6% 45
Bank of Baroda
Other operating indicators NIM (%) Cost to income (%) Business per branch (` mn) Business per employee (` mn) Profit per branch (` mn) Profit per employee (` mn) CASA per branch (` mn) CASA ratio (%) Other income / Total income CEB / Other income CEB / average advances Capital Adequacy ratios CAR (%) Tier 1 (%) Tier 2 (%) Leverage (x) Risk weighted assets / Total Assets (%) Valuation Table Net profit (` mn) Shares in issue (mn) EPS (`) EPS growth (%) PE (x) P/PPP (x) Book value (`/share) P/BV (x) Adj book value (`/share) P/ABV (x) ROAA (%) ROAE (%) Dividend Yield (%) Du pont Decomposition Yield on Assets Less: Cost of Assets Net Interest Income Other Income Less: Operating Exp Less: Provisions Less: Tax RoAA Leverage RoAE
2011 2.8% 39.9% 1587.7 133.4 12.6 1.1 260.4 28.7% 24.2% 36.3% 0.5% 2011 14.5% 10.0% 4.5% 17.0 58.5% 2011 42416.9 392.8 108.0 29.1% 7.3 4.5 535.7 1.5 515.6 1.5 1.4% 23.5% 2.1% 2011 6.9% 4.1% 2.8% 0.9% 1.5% 0.3% 0.4% 1.4% 17.6 24.7%
2012 2.6% 37.5% 1721.9 159.4 12.8 1.2 265.2 26.9% 24.9% 35.8% 0.5% 2012 14.7% 10.8% 3.8% 16.3 56.7% 2012 50069.5 412.4 121.4 12.4% 6.5 3.8 666.3 1.2 628.9 1.3 1.4% 20.6% 2.5% 2012 7.4% 4.8% 2.6% 0.8% 1.3% 0.5% 0.3% 1.4% 16.6 22.5%
2013E 2.6% 37.5% 1918.9 177.6 12.7 1.2 284.6 26.0% 21.3% 41.6% 0.4% 2013E 14.0% 10.5% 3.5% 16.3 58.1% 2013E 51284.5 412.4 124.4 2.4% 6.4 3.4 765.2 1.0 686.8 1.2 1.1% 17.4% 2.9% 2013E 7.3% 4.8% 2.5% 0.7% 1.2% 0.6% 0.3% 1.1% 16.3 18.3%
2014E 2.5% 36.8% 2184.0 202.2 13.6 1.3 318.3 25.5% 22.1% 39.6% 0.4% 2014E 13.4% 10.1% 3.3% 16.8 58.8% 2014E 57315.2 412.4 139.0 11.8% 5.7 2.9 873.6 0.9 797.7 1.0 1.1% 17.0% 3.4% 2014E 7.1% 4.6% 2.5% 0.7% 1.2% 0.6% 0.3% 1.1% 16.6 17.8%
2015E 2.5% 35.4% 2489.2 230.4 15.5 1.4 356.5 25.0% 21.0% 40.6% 0.4% 2015E 13.0% 9.7% 3.2% 17.3 59.4% 2015E 67527.5 412.4 163.7 17.8% 4.8 2.4 1000.6 0.8 936.3 0.8 1.1% 17.5% 4.1% 2015E 7.0% 4.5% 2.5% 0.7% 1.1% 0.6% 0.4% 1.1% 17.1 18.4%
Sunidhi Research |
46
Bank of India
Asset quality concerns remain, Initiate with Hold Banking Sector Outlook - Neutral
Initiating Coverage
Bank of India CAGR (FY12-14E)
Bank of India (BoI) is one of Indias largest PSBs with a total asset size of `3957 bn. BoIs lending book stood at `2604 bn, while its deposits amounted to `3327 bn in Q2FY13. The bank is primarily focused on lending to large corporates which made up 49% of non food credit in Q2FY13 followed by services at 27% , agriculture at 13% and retail at 11%. Asset quality concerns persist Asset quality remained volatile in Q2FY13 trends with %GNPA rising by ~85bps QoQ to 3.4%, the slippage rate jumped to 7% and restructured assets were up qoq. Restructured assets are likely to rise further in quarters ahead, though at a lesser pace. Overall, risks to asset quality remain and are likely to reverse only with an improvement in the economic environment. However higher recoveries in FY14 and FY15 could lead to an improvement in asset quality. Assuming recoveries of around 50% from slippages during FY10-13E, the upside to the banks adjusted networth in FY14 would be around 21%. NIM likely to remain stable at current levels During Q2FY13, the banks NIM improved by 10 bps sequentially due to lower interest reversals as compared to Q1FY13 and a 20 bps qoq improvement in the yield on advances. For FY13 we expect the NIM to stand at 2.4% and remain stable at that level in FY14. High modified duration and large AFS book likely to lead to treasury gains Bank of India has one of the largest AFS books as compared to peers, with around 31% of its investment book in the AFS category. Additionally the modified duration of the book at 4.3 is relatively high. Thus a 100 bps reduction in yields could lead to treasury gains of around `9.3 bn. This would lead to a 27.9% impact of FY14E PAT and 5.2% on FY14E networth. Improving productivity to keep cost to income ratio in check going ahead During Q2FY13, the productivity of the bank improved, with the core cost-income ratio coming off by 470bps yoy to 41.4 % on account of negligible new employee recruitment which kept employee costs in check. We expect the cost to income ratio of the bank to come off to 41% in FY14 from ~43% in FY13. Initiate coverage with a HOLD rating and a target price of `311: At the CMP of `294, the bank trades at 1.1x its FY13E ABV and 0.9x its FY14E ABV. At these levels the bank trades below its average one year forward P/ABV multiple. However as asset quality concerns are likely to persist in the future putting pressure on return ratios, upside in the near term is likely to be limited. We initiate coverage on BOI with a Hold rating and a target price of `311 (1x its FY14E ABV).
13% 11% 12%
11%
NII
Net Total Income
PPP
PAT
Recommendation CMP (`) Price Target (`) Upside (%) 52 Week H / L ` BSE 30 Key Data No.of Shares, Mn. Mcap, ` Bn Mcap,USD bn @ `54 2 W Avg Qty, (BSE+NSE) Mn Share holding, Sept'12 Promoters FII DII Public & Others Performance Stock Return % Relative Return %
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0%
Dec-11
Dec-11
HOLD 294 311 6 408/254 19487
573.8 168.7 3.1 0.9
62.7 14.4 16.2 6.7

1M 5.3 1.7 3M 15.1 1.9 6M -14.4 -26.8 12 M -15.3 -33.0
NII `mn 78775.0 83946.5 90192.4 104156.3 123408.2
PAT `mn 24887.2 26746.2 23694.4 33284.8 43616.5
ABV ` 262.6 287.4 261.4 310.6 385.0
P/E x 6.3 6.2 7.2 5.1 3.9
P/ABV X 1.1 1.0 1.1 0.9 0.8
ROAA % 0.8 0.7 0.6 0.7 0.8
ROAE % 17.0 14.7 11.2 14.3 16.6
Aug-12
Apr-12
Apr-12
Oct-12
Jan-12
Nov-12
May-12
Mar-12
BOI
NIFTY
Nov-12
Feb-12
Sep-12
Sep-12
Feb-12
Jun-12
Jul-12
Jul-12
Bank of India
4500.0 4000.0 3500.0 30.0% 25.0%

6000.0 5000.0 30.0% 4000.0 35.0% 30.0% 25.0% 20.0% 3000.0 2000.0 1000.0 6.6% 0.0 16.3%
26.4%
3000.0
20.0% 16.9% 12.8%

16.8%
Rs bn
2000.0 1500.0 1000.0

500.0 0.0 2011
16.8%
15.0% 10.0%
5.0% 0.0%
Rs bn
2500.0
17.7%
15.0% 10.0% 5.0%

0.0%
13.0%
2012
2013E
2014E % yoy
2015E
2011
2012
2013E
2014E
% yoy
2015E
Advances
Deposits

140.0 120.0 100.0 2.8% 2.8% 2.7% 2.6%

50.0 45.0 40.0 25.6% 20.7% 15.0% 10.0% 7.4% 1.6% 2011 1.4% 2013E 5.0% 0.0% 25.0% 20.0% 30.0%
35.0
Rs bn
Rs bn
80.0 60.0 40.0 20.0 0.0
2.5%
30.0
25.0 20.0 15.0
2.5%
2.4%
2.4%
2.4%
2.4%
2.3% 2.2% 2.1%
10.0 5.0
0.0
2011
2012
NII
2013E
NIM
2014E
2015E
2012
2014E
% yoy
2015E
Other Income

4.0% 3.5% 3.4% 3.4% 3.1% 2.3%

3.5% 3.0% 3.3%
3.0%
2.5% 2.0%
2.5%
2.5% 2.0%
2.4% 2.0%
2.5%
2.0%
2.2%
1.7% 1.0%
1.5%
1.0% 0.5% 0.9%
1.5%
1.5%
1.5% 1.0%
0.5% 0.8% 0.9% 0.8%
0.5%
0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
0.0%
2011
2012
2013E
2014E
2015E
Slippage (%)
Credit Cost (%)
Impact of various scenarios on adjusted Networth (` Bn) Networth with 100% build up for coverage (Ex Revaluation) (FY14) (A) Default Rate (assumed 15%) (B) Upside on Recoveries/Upgradation Rate at 50% (C) Upside on Recovery in Written Off Accounts at 15% (D) Upside from Gain in Treasury Book on 100bps Change in Yields (E) Impact on Networth (F=C+D+E+F-B) Impact as % of Networth Adjusted Networth (A+F) P/ABV (with above adjustments) (x)
On Adj NW (FY14) 178.4 20.3 37.4 6.7 9.3 33.1 18.5% 211.5 0.8
Sunidhi Research |
48
Bank of India
Profit & Loss Account (` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet (` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash Balances Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) 2011 218584.3 139809.3 78775.0 26418.3 105193.3 51213.5 53979.8 18932.9 35046.9 10159.7 24887.2 2011 5,472.2 170888.6 176,360.8 2995594.0 128616.0 229,235.3 3,529,806.1 376963.6 866765.9 2137083.6 24994.3 124511.1 3,529,806.1 2011 21% 15% 35% 2% 25% 38% 14% -14% 40% 33% 43% 2011 2.2% 1.5% 1.7% 39.6% 59.6% 0.5% 0.6% 2012 286109.5 202163.0 83946.5 33192.4 117138.9 50103.6 67035.3 31177.8 35857.5 9111.3 26746.2 2012 5,745.2 208394.8 214,140.0 3194125.3 227534.0 239,464.2 3,875,263.5 354643.4 880568.7 2497334.4 28000.2 115345.7 3,875,263.5 2012 31% 45% 7% 26% 11% -2% 24% 65% 2% -10% 7% 2012 2.3% 2.5% 2.5% 35.2% 37.8% 0.8% 0.8% 2013E 311651.8 221459.3 90192.4 33664.1 123856.5 52998.2 70858.3 37009.2 33849.1 10154.7 23694.4 2013E 5,745.2 226381.3 232,126.5 3610636.7 250287.4 275,692.3 4,368,742.9 374033.1 1020809.0 2816849.3 30800.3 126880.2 4,368,742.9 2013E 9% 10% 7% 1% 6% 6% 6% 19% -6% 11% -11% 2013E 3.4% 2.0% 3.3% 37.4% 29.0% 1.0% 0.9% 2014E 347739.8 243583.6 104156.3 40616.9 144773.2 58679.1 86094.0 39865.1 46228.9 12944.1 33284.8 2014E 5,745.2 252268.4 258,013.6 4197952.8 287830.5 330,830.8 5,074,627.7 452669.6 1159180.1 3289958.5 33880.3 139568.3 5,074,627.7 2014E 12% 10% 15% 21% 17% 11% 22% 8% 37% 27% 40% 2014E 3.4% 1.5% 2.4% 35.9% 40.1% 0.9% 0.8% 2015E 396072.5 272664.3 123408.2 43615.9 167024.0 64985.2 102038.8 41460.4 60578.5 16962.0 43616.5 2015E 5,745.2 286290.3 292,035.5 4942335.7 331005.1 396,996.9 5,962,373.2 612064.0 1317569.4 3842575.3 37268.3 153525.1 5,962,373.2 2015E 14% 12% 18% 7% 15% 11% 19% 4% 31% 31% 31% 2015E 3.1% 0.0% 2.0% 32.8% 51.5% 0.8% 0.8%
Sunidhi Research |
49
Bank of India
2011 2.8% 48.7% 1458.6 128.4 7.1 0.6 216.2 25.4% 25.1% 44.9% 0.6% 2011 12.2% 8.4% 3.8% 21.5 57.3% 2011 24887.2 547.2 45.5 37.6% 6.3 3.0 322.3 1.1 262.6 1.1 0.8% 17.0% 2.3 2011 6.9% 4.4% 2.5% 0.8% 1.6% 0.6% 0.3% 0.8% 21.5 17.0%
2012 2.5% 42.8% 1412.6 136.0 6.6 0.6 210.9 26.6% 28.3% 38.5% 0.6% 2012 12.0% 8.7% 3.3% 20.3 61.1% 2012 26746.2 574.5 46.6 2.4% 6.2 2.5 372.7 1.0 287.4 1.0 0.7% 14.7% 2.3 2012 7.7% 5.5% 2.3% 0.9% 1.4% 0.8% 0.2% 0.7% 20.3 14.7%
2013E 2.4% 42.8% 1519.9 155.1 5.6 0.6 227.3 26.6% 27.2% 42.5% 0.5% 2013E 11.5% 8.0% 3.4% 19.6 63.5% 2013E 23694.4 574.5 41.2 -11.4% 7.2 2.4 404.0 1.1 261.4 1.1 0.6% 11.2% 2.9 2013E 7.6% 5.4% 2.2% 0.8% 1.3% 0.9% 0.2% 0.6% 19.6 11.2%
2014E 2.4% 40.5% 1690.7 182.6 7.5 0.8 254.0 26.8% 28.1% 38.7% 0.5% 2014E 11.1% 7.6% 3.5% 20.3 64.5% 2014E 33284.8 574.5 57.9 40.5% 5.1 2.0 449.1 0.9 310.6 0.9 0.7% 14.3% 3.7 2014E 7.4% 5.2% 2.2% 0.9% 1.2% 0.8% 0.3% 0.7% 20.3 14.3%
2015E 2.4% 38.9% 1897.8 216.3 9.4 1.1 284.3 26.6% 26.1% 39.7% 0.5% 2015E 10.8% 7.3% 3.6% 21.0 64.7% 2015E 43616.5 574.5 75.9 31.0% 3.9 1.7 508.3 0.8 385.0 0.8 0.8% 16.6% 4.8 2015E 7.2% 4.9% 2.2% 0.8% 1.2% 0.8% 0.3% 0.8% 21.0 16.6%
Sunidhi Research |
50
Canara Bank
High recovery in previous years leaves little scope for asset quality surprise
Banking Sector Outlook - Neutral

Initiating Coverage
Canara Bank CAGR (FY12-14E)
29% 28% 27% 26% 25% 24% 23% 22%
Canara Bank is a public sector commercial bank with its headquarter in Bangalore. Canara Bank was incorporated on July 1, 1906 and nationalized in 1969 making it one of the oldest public sector banks in the country. As at the end of Sep-12, the bank has a network of 3655 branches and 3184 ATMs. Recoveries likely to be limited due to higher recoveries in previous years As recoveries and up-gradations for Canara Bank have been relatively high during FY10-12, it can be inferred that a large portion of slippages seen during FY09-11 have already been recovered. Hence upside to profitability on account of recoveries is likely to be limited going ahead. Assuming recoveries at 60% for additions during FY10-13E, the upside to adjusted networth in FY14E is likely to be around 5%. Restructured book excluding Air India and SEBs at 3.7% Total restructured book outstanding for Canara Bank as on Q2FY13 stands at 6.9% lower as compared to its peers. Adjusting for restructured loans to SEBs and Air india which are unlikely to slip into NPA category, the restructured book stands at 3.7%. Highest SLR and treasury yields as compared to peers Canara Bank has one of the highest SLR book amongst public banks. Its SLR at 34% is significantly higher than mandatory requirement. Once the economic situation improves, the bank can reduce SLR holdings and improve its NIM and return ratios. Additionally, the banks investment yield at 8.1% is the highest amongst its peer groups suggesting that the bank could make strong treasury gains once yields begin to come off. NIM can improve with an improvement in the CD ratio The bank has one of the lowest CD ratios compared to its peers. Its CD ratio stood at 64% as at the end of Q2FY13. The lower CD ratio is due to the bank going slow on credit growth due to its focus on maintaining asset quality. The bank has scope to increase its CD ratio and improve its NIM going ahead. Adequately Capitalized The bank is adequately capitalized with a CAR of 13.1% and tier 1 capital of 10.1%. Initiate coverage with a HOLD rating and a target price of `549: At the CMP of `485, the bank trades at 1.2x its FY13E ABV and 1.1x its FY14E ABV. At these levels the bank trades below its long term average one year forward P/ABV multiple. However as asset quality concerns are likely to weigh down valuations in the near term, we initiate coverage on Canara Bank with a Hold rating and a target price of `549 (1.2x its FY14E ABV).
28% 25% 24%

PPP 24% PAT
NII
Net Total Income
30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0%
Dec-11
Dec-11
HOLD 485 549 13 566/306 19487
443.0 214.9 4.0 0.8
67.7 13.2 12.4 6.6 1M 14.5 10.9 3M 54.5 41.3 6M 15.8 3.4 12 M 7.0 -10.7

Aug-12 Apr-12
Apr-12 Oct-12
NII `mn 76993.3 76893.1 79648.0 91287.9 109902.5
PAT `mn 40259.0 32827.1 33631.3 41845.4 49949.4
ABV ` 352.4 389.1 406.5 457.6 526.9
P/E x 5.3 6.5 6.4 5.1 4.3
P/ABV X 1.4 1.2 1.2 1.1 0.9
ROAA % 1.3 0.9 0.8 0.9 0.9
ROAE % 23.2 15.4 14.0 15.5 16.3
Jan-12
Nov-12
May-12
Mar-12
Canara bank
NIFTY
Nov-12
Feb-12
Sep-12
Sep-12
Feb-12
Jun-12
Jul-12
Jul-12
Canara Bank
Trend in loan book growth
4000.0 3500.0 30.0% 25.0% 24.8% 18.0% 20.0% 16.3%

6000.0 5000.0 25.1% 4000.0 20.0% 15.0% 13.5% 15.2% 15.7% 10.0% 5.0% 0.0% 30.0% 25.0%
3000.0 2500.0
Rs bn
2000.0
1500.0 1000.0 500.0
15.0% 10.0%
Rs bn
3000.0 2000.0 1000.0 0.0
10.0%
10.8% 5.0% 0.0%
11.5%
0.0 2011 2012 2013E 2014E

% yoy
2015E
2011
2012
2013E
2014E
% yoy
2015E
Advances
Deposits

120.0 100.0 80.0 2.8% 2.4% 2.2% 2.2% 3.0% 2.5%

40.0 35.0 30.0
2.1%
2.0%
20.0% 15.0%
14.7%
10.0%
25.0
Rs bn
Rs bn
10.1%
5.0% 4.1% 2.6% 0.0% -5.0% -7.0% 2011 -10.0%
60.0 40.0 20.0 0.0
1.5% 1.0% 0.5% 0.0%
20.0 15.0 10.0 5.0 0.0
2011
2012
NII
2013E
NIM
2014E
2015E
2012
2013E
2014E
% yoy
2015E
Other Income

3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 1.5% 1.1% 1.7% 1.5% 2.5% 2.1% 2.5% 2.1% 2.5% 2.1%

3.0% 2.5% 2.2% 2.8% 2.3%
2.1%
2.0% 1.5% 1.0% 0.5% 0.0% 0.5%
2.0%
0.6%
0.6%
0.6%
0.5%
0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
2011
2012
2013E
2014E
2015E
Slippage (%)
Credit Cost (%)
On Adj NW (FY14) 202.7 11.8 (7.0) 12.1 9.9 3.1 1.6% 205.9 1.0 52
Canara Bank
Profit & Loss Account (` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet (` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balances with Banks & money at Call Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) Sunidhi Research | 2011 229400.7 152407.4 76993.3 28114.6 105108.0 44193.2 60914.8 10655.8 50259.0 10000.0 40259.0 2011 4,430.0 195968.2 200,398.2 2934366.4 51984.0 82,067.5 3,359,448.6 220147.9 86933.2 836360.2 2112682.9 28444.0 74880.2 3,359,448.6 2011 22% 17% 36% -7% 21% 27% 17% -14% 26% 25% 26% 2011 1.5% 1.1% 2.1% 114.3% 25.7% 0.5% 0.4% 2012 308506.2 231613.1 76893.1 29276.0 106169.1 46737.4 59431.6 18604.5 40827.1 8000.0 32827.1 2012 4,430.0 222469.6 226,899.6 3270537.3 65582.7 88,911.2 3,741,601.9 177951.4 103842.7 1020574.3 2324898.2 28575.4 85760.1 3,741,601.9 2012 34% 52% 0% 4% 1% 6% -2% 75% -19% -20% -18% 2012 1.7% 1.5% 2.2% 117.8% 16.0% 0.6% 0.5% 2013E 338514.5 258866.5 79648.0 30028.7 109676.7 49883.3 59793.4 17754.3 42039.1 8407.8 33631.3 2013E 4,430.0 249259.4 253,689.4 3712490.3 81978.4 102,247.9 4,244,560.8 260208.7 106872.0 1175890.1 2575821.0 31432.9 94336.1 4,244,560.8 2013E 10% 12% 4% 3% 3% 7% 1% -5% 3% 5% 2% 2013E 2.5% 2.1% 2.8% 103.8% 16.7% 0.6% 0.4% 2014E 375808.5 284520.6 91287.9 34432.6 125720.5 54788.4 70932.1 17963.2 52968.9 11123.5 41845.4 2014E 4,430.0 282895.2 287,325.2 4278280.3 98374.1 117,585.0 4,885,134.8 293214.0 109998.8 1347947.3 2995628.8 34576.2 103769.7 4,885,134.8 2014E 11% 10% 15% 15% 15% 10% 19% 1% 26% 32% 24% 2014E 2.5% 2.1% 2.3% 72.9% 16.3% 0.6% 0.4% 2015E 429001.9 319099.4 109902.5 37916.2 147818.7 61240.8 86577.9 22540.2 64037.7 14088.3 49949.4 2015E 4,430.0 322993.0 327,423.0 4951051.4 118048.9 135,222.8 5,645,673.3 298694.9 113226.5 1546729.4 3534842.0 38033.8 114146.7 5,645,673.3 2015E 14% 12% 20% 10% 18% 12% 22% 25% 21% 27% 19% 2015E 2.5% 2.1% 2.0% 62.7% 17.0% 0.5% 0.4% 53
Canara Bank
2011 2.8% 43.0% 1549.6 116.3 12.4 0.9 255.2 28.3% 26.7% 26.9% 0.4% 2011 15.4% 10.9% 4.5% 16.8 52.4% 2011 40259.0 443.0 90.9 16.9% 5.3 3.5 405.0 1.2 352.4 1.4 1.3% 23.2% 2.3% 2011 7.6% 5.1% 2.6% 0.9% 1.5% 0.4% 0.3% 1.3% 17.3 23.2%
2012 2.4% 45.4% 1554.3 132.4 9.1 0.8 221.1 24.3% 27.6% 27.2% 0.4% 2012 13.8% 10.4% 3.4% 16.5 56.4% 2012 32827.1 443.0 74.1 -18.5% 6.5 3.6 465.6 1.0 389.1 1.2 0.9% 15.4% 2.3% 2012 8.7% 6.5% 2.2% 0.8% 1.3% 0.5% 0.2% 0.9% 16.6 15.4%
2013E 2.2% 47.0% 1654.8 140.9 8.9 0.8 234.6 24.0% 27.4% 27.6% 0.3% 2013E 13.1% 9.9% 3.2% 16.7 58.1% 2013E 33631.3 443.0 75.9 2.4% 6.4 3.6 526.0 0.9 406.5 1.2 0.8% 14.0% 2.7% 2013E 8.5% 6.5% 2.0% 0.8% 1.2% 0.4% 0.2% 0.8% 16.6 14.0%
2014E 2.1% 45.0% 1818.5 154.9 10.5 0.9 258.6 24.2% 27.4% 26.7% 0.3% 2014E 12.6% 9.6% 3.0% 17.0 59.1% 2014E 41845.4 443.0 94.5 24.4% 5.1 3.0 602.0 0.8 457.6 1.1 0.9% 15.5% 3.3% 2014E 8.2% 6.2% 2.0% 0.8% 1.2% 0.4% 0.2% 0.9% 16.9 15.5%
2015E 2.2% 42.3% 2020.5 172.1 11.9 1.0 290.6 24.7% 25.7% 26.7% 0.3% 2015E 12.2% 9.3% 2.9% 17.2 59.8% 2015E 49949.4 443.0 112.8 19.4% 4.3 2.5 692.5 0.7 526.9 0.9 0.9% 16.3% 3.9% 2015E 8.1% 6.1% 2.1% 0.7% 1.2% 0.4% 0.3% 0.9% 17.1 16.3%
Sunidhi Research |
54
Corporation Bank
On strong footing all across, Initiate with Buy Banking Sector Outlook - Neutral
Initiating Coverage
Corporation Bank CAGR (FY12-14E)
Corporation Bank is a mid-sized PSU bank, with a branch network of around 1,600 branches. Around half of the banks branches are situated in the southern region with majority (~26%) located in Karnataka. The bank has a total loan book size of `982 bn with around 48% comprising of large industries. Corporation Bank was the first public sector banks to adopt CBS and is a leader in technology adoption and financial inclusion.
11%
10% 8% 6%
NII
Net Total Income
PPP
PAT
Slippages remain under check The bank has managed to keep its slippage rate under check. During Q2FY13, the banks slippage rate stood at 1.8% in Q2FY13 down from 2.9% in Q1FY13. Despite controlled slippages the banks GNPAs increased by 15.4% qoq due to lower recoveries and up-gradations during the quarter. Going ahead we expect recoveries and up gradations to improve which would lead to an improvement in the asset quality. Rapid branch expansion to aid CASA growth The bank has been rapidly growing its branch network and it now stands at 1600 branches as compared to 981 branches in FY08. The bank added 100 branches in H1FY13 and is looking at adding 200 new branches in H2FY13. The rapid branch expansion is likely to aid CASA growth going ahead. Amongst the most cost efficient public sector banks Corporation bank is one of the most cost efficient public sector banks in the country. The bank has a cost to income ratio of around 40%, significantly lower as compared to the average for public sector banks which stood at around 45% in Q2FY13. The lower cost to income ratio of the bank is owing to its high proportion of large corporate advances coupled with large number of branches (~52%) being located in rural and semi urban areas. NIM to improve in FY14 The reported NIM of Corporation bank has come off to 2.2% in Q2FY13 from 2.4% in Q2FY12 due to a fall in the CASA ratio and higher term deposit rates. Going ahead, we expect the cost of funds to come off on account of a reduction in deposit rates as well as cost of borrowings. As a result we expect the calculated NIM to improve to 2% in FY14 from 1.9% in FY13. Initiate coverage with a Buy rating and a target price of `545: At the CMP of `429, the bank trades at 0.8x its FY13E ABV and 0.7x its FY14E ABV. At current levels we believe that asset quality concerns have been priced in. As a result, we initiate coverage on Corporation Bank with a Buy rating and a target price of `545 (0.9x its FY14E ABV).
50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0%
Dec-11
Dec-11
BUY 429 545 27 528/335 19487
148.1 63.5 1.2 0.1
58.5 3.5 30.3 7.6 1M 7.7 4.1 3M 16.6 3.4 6M 3.7 -8.7 12 M 21.4 3.7
NII `mn 29401.8 31472.1 33283.5 38351.4 45066.1
PAT `mn 14200.6 15181.1 15675.0 18606.8 20536.2
ABV ` 459.3 504.7 539.7 605.5 693.2
P/E x 4.5 4.2 4.1 3.4 3.1
P/ABV X 0.9 0.9 0.8 0.7 0.6
ROAA % 1.1 1.0 0.9 0.9 0.9
ROAE % 21.8 19.5 17.6 18.3 17.7
Aug-12
Apr-12
Apr-12
Oct-12
Jan-12
Nov-12
May-12
Mar-12
Nov-12
Feb-12
Sep-12
Sep-12
Feb-12
Jun-12
Jul-12
Jul-12
Corporation Bank
NIFTY
Corporation Bank
1800.0 1600.0 40.0%

2500.0 2000.0 30.0% 25.0% 20.0%
1400.0
1200.0
37.4%
35.0% 30.0% 25.0%

25.9%
Rs bn
800.0 600.0
400.0 200.0 15.7% 14.6% 17.1%
20.0% 17.6% 15.0% 10.0% 5.0% 0.0% 2011 2012 2013E 2014E
% yoy
Rs bn
1000.0
1500.0 16.6%
1000.0 14.2%
16.0%
17.3%
15.0% 10.0% 5.0% 0.0%
500.0
0.0
0.0 2015E
Advances
2011
2012
2013E
2014E
% yoy
2015E
Deposits

50.0 45.0 40.0 2.4% 2.1% 2.5% 2.0%

20.0 18.0 16.0 19.0% 20.0% 13.1%
1.9% 2.0% 2.0%
25.0%
20.0%
15.0% 10.0%
35.0
14.0
Rs bn
Rs bn
30.0
25.0 20.0 15.0
1.5%
1.0%
12.0
10.0 8.0 6.0
5.0%
0.0% -5.0%
10.0 5.0
0.0
0.5%
0.0%
4.0 2.0
0.0 -10.3% -15.7% 2011
-10.0%
-15.0% -20.0%
2011
2012
NII
2013E
NIM
2014E
2015E
2012
2013E
2014E
% yoy
2015E
Other Income

2.5% 1.9% 1.4%

2.0% 1.8%
1.9% 1.9%
1.8%
1.6% 1.4% 1.4%
2.0%
1.5%
1.6%
1.4%
1.3% 0.9% 0.5% 0.9% 1.3% 1.3%
1.3%
1.2%
1.0% 0.8% 0.6%
1.0%
0.5%
0.6%
0.6%
0.6%
0.5%
0.5%
0.4% 0.2%
0.0%
0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
2011
2012
2013E
2014E
2015E
Slippage (%)
Credit Cost (%)
On Adj NW (FY14) 89.7 7.8 7.4 2.2 2.3 4.2 4.6% 93.8 0.7 56
Corporation Bank
Profit & Loss Account (` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet (` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) 2011 91350.4 61948.6 29401.8 12654.9 42056.7 16420.1 25636.5 6232.2 19404.3 5203.7 14200.6 2011 1,481.3 70533.8 72,015.1 1167391.1 106278.8 89,975.1 1,435,660.2 103925.1 434970.1 868504.0 3290.3 24954.9 1,435,660.2 2011 31% 22% 54% -16% 23% 30% 19% 32% 16% 6% 20% 2011 0.9% 0.5% 1.3% 103.5% 49.7% 0.6% 0.5% 2012 130177.8 98705.7 31472.1 15065.0 46537.1 17839.3 28697.8 9522.0 19175.8 3994.7 15181.1 2012 1,481.3 81970.0 83,451.3 1361348.1 89106.0 102,335.1 1,636,240.5 116979.9 475294.3 1004690.2 3560.1 35700.1 1,636,240.5 2012 43% 59% 7% 19% 11% 9% 12% 53% -1% -23% 7% 2012 1.3% 0.9% 1.4% 91.0% 31.8% 0.6% 0.6% 2013E 146154.9 112871.4 33283.5 13515.6 46799.1 19400.6 27398.5 8737.8 18660.7 2985.7 15675.0 2013E 1,481.3 93483.5 94,964.8 1554948.2 102471.9 112,568.6 1,864,953.4 118000.7 554619.4 1151216.8 3631.3 37485.2 1,864,953.4 2013E 12% 14% 6% -10% 1% 9% -5% -8% -3% -25% 3% 2013E 1.9% 1.3% 1.8% 71.0% 31.0% 0.6% 0.5% 2014E 165474.6 127123.2 38351.4 16218.4 54569.8 22532.6 32037.2 8182.4 23854.8 5248.1 18606.8 2014E 1,481.3 107304.5 108,785.8 1803739.9 117842.6 123,825.5 2,154,193.8 112717.5 649022.9 1347515.9 3703.9 41233.7 2,154,193.8 2014E 13% 13% 15% 20% 17% 16% 17% -6% 28% 76% 19% 2014E 1.9% 1.4% 1.6% 63.4% 27.7% 0.5% 0.4% 2015E 189913.0 144846.9 45066.1 18350.4 63416.5 26175.6 37240.9 10219.6 27021.3 6485.1 20536.2 2015E 1,481.3 122337.1 123,818.4 2115126.9 135519.0 136,208.0 2,510,672.3 115291.4 761481.0 1584764.9 3778.0 45357.0 2,510,672.3 2015E 15% 14% 18% 13% 16% 16% 16% 25% 13% 24% 10% 2015E 1.9% 1.3% 1.4% 56.2% 30.5% 0.5% 0.4%
Sunidhi Research |
57
Corporation Bank
2011 2.4% 39.0% 1495.9 146.9 10.4 1.0 222.6 26.0% 30.1% 27.9% 0.5% 2011 14.1% 8.7% 5.4% 19.9 62.7% 2011 14200.6 148.1 95.9 16.4% 4.5 2.5 486.2 0.9 459.3 0.9 1.1% 21.8% 4.9% 2011 7.2% 4.9% 2.3% 1.0% 1.3% 0.5% 0.4% 1.1% 17.2 19.1%
2012 2.1% 38.3% 1577.4 159.8 10.1 1.0 200.8 22.1% 32.4% 26.2% 0.4% 2012 13.0% 8.3% 4.7% 19.6 64.7% 2012 15181.1 148.1 102.5 6.9% 4.2 2.2 563.4 0.8 504.7 0.9 1.0% 19.5% 5.2% 2012 8.5% 6.4% 2.0% 1.0% 1.2% 0.6% 0.3% 1.0% 17.0 16.8%
2013E 1.9% 41.5% 1712.8 182.2 9.9 1.1 219.2 22.3% 28.9% 32.1% 0.4% 2013E 13.1% 8.3% 4.9% 19.6 64.7% 2013E 15675.0 148.1 105.8 3.3% 4.1 2.3 641.1 0.7 539.7 0.8 0.9% 17.6% 5.9% 2013E 8.3% 6.4% 1.9% 0.8% 1.1% 0.5% 0.2% 0.9% 16.6 14.8%
2014E 2.0% 41.3% 1898.3 211.5 11.2 1.2 242.0 22.3% 29.7% 30.8% 0.4% 2014E 12.8% 8.1% 4.6% 19.8 64.7% 2014E 18606.8 148.1 125.6 18.7% 3.4 2.0 734.4 0.6 605.5 0.7 0.9% 18.3% 6.8% 2014E 8.2% 6.3% 1.9% 0.8% 1.1% 0.4% 0.3% 0.9% 16.5 15.3%
2015E 2.0% 41.3% 2126.4 247.4 11.8 1.4 272.8 22.4% 28.9% 31.3% 0.4% 2015E 12.3% 7.9% 4.4% 20.3 64.7% 2015E 20536.2 148.1 138.6 10.4% 3.1 1.7 835.9 0.5 693.2 0.6 0.9% 17.7% 7.8% 2015E 8.1% 6.2% 1.9% 0.8% 1.1% 0.4% 0.3% 0.9% 16.4 14.4%
Sunidhi Research |
58
IDBI Bank
Not very impressive, Maintain Hold Banking Sector Outlook - Neutral
Company Update
25.0%
20.0% 15.0%
IDBI CAGR (FY12-14E)
10.0% 5.0%
21.1%
19.7%
18.8%
IDBI was founded in 1964 as a development financial institution (DFI) by the RBI with the aim of financing industrial development in India. Within a decade, IDBI was a flourishing DFI, financing not only large industrial projects but also working capital loans of companies. In 1976, IDBI was de-linked from the RBI and declared an autonomous institution. In 2004, IDBI converted itself into a commercial bank. As a DFI, IDBI played an important role in creating the infrastructural base of the country and has helped finance some of the key organization that have shaped the countrys financial architecture. Asset quality likely to remain under pressure Slippages for Q2FY13 stood at `6.2 bn (slippage rate of 1.5%) which was lower as compared to the previous quarter. However restructuring activity maintained pace with the bank restructuring loans worth `15 bn during the quarter. The outstanding restructured book increased by 15% qoq to `125.3 bn or 7.5% of advances. We believe that the banks asset quality is likely to remain under pressure as it accelerates lending to the agri and SME segment in order to meet priority sector lending targets. NIM likely to improve and stand at 2% in FY15 As the bank expands its branch network and focuses on garnering CASA deposits and reducing bulk deposits we expect the NIM to improve to 1.9% in FY13 and reach 2% in FY15. Strong investment book IDBI bank has a strong investment book with a book value of `832 bn of which `33.8 bn consists of equity shares. The bank has significant stake in certain strategic investments such as CARE, SIDBI, NSE, ARCIL etc. These investments act as a cushion against decline in valuations and going forward we could see some value unlocking from these investments through listing or stake sale. High operational efficiencies IDBI bank has been a leader in adopting progressive HR customs such as performance linked pay and e-learning initiatives. Additionally, unlike other public sector banks whose average age of employees is ~50 years, the average age of IDBI bank employees is only around ~31 years which adds to its productivity. As a result, the banks efficiency ratios business per employee, business per branch, cost to income are significantly higher as compared to other public sector banks. Maintain HOLD with a target price of `113: At the CMP of `110, the bank trades at 1x its FY13E ABV and 0.9x its FY14E ABV. At these levels the bank trades largely in line with its long term average one year forward P/ABV multiple of 1.0x. As a result we maintain our Hold recommendation on the stock with a target price of `113 (0.9x FY14E ABV). Financials FY11 NII `mn 43,289 45,449 55,913 66,672 76865.9 PAT `mn 16,503 20,316 20,906 22,425 25098.2 ABV ` 111.7 114.4 116.1 126.1 135.7 P/E x 6.6 6.9 6.7 6.3 5.6 P/ABV X 1.0 1.0 0.9 0.9 0.8 ROAA % 0.7 0.7 0.7 0.6 0.6 ROAE % 13.3 12.0 10.3 10.2 10.6
5.1%
0.0% NII growthNet total income PPP growth PAT growth
25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0%
Dec-11
Dec-11
HOLD 110 113 3 121/77 19487
1278.4 140.6 2.6 2.2
70.5 2.8 14.7 12.0 1M 11.6 8.0 3M 26.1 12.9 6M 23.3 10.9 12 M 12.0 -5.7
Aug-12
Apr-12
Apr-12
Oct-12
Jan-12
Nov-12
May-12
Mar-12
Nov-12
Feb-12
Sep-12
Sep-12
Feb-12
Jun-12
Jul-12
Jul-12
FY12 FY13E FY14E FY15E
IDBI Bank
NIFTY
IDBI Trend in loan book growth

3000.0 2500.0 2000.0 15.3% 15.0% 15.0% 14.5% 14.0% 14.0% 1000.0 500.0 0.0 2011 2012 2013E 2014E 2015E 13.7% 13.5% 13.0% 12.5% 15.5% 15.0%

3500.0 3000.0 2500.0 16.6% 14.1% 16.4% 15.0% 18.0%
16.0%
14.0% 12.0%
Rs bn
1500.0
Rs bn
2000.0
10.0%
8.0%
1500.0 1000.0 500.0

0.0
7.6%
6.0%
4.0%
2.0% 0.0%
2011
2012
2013E
2014E
% yoy
2015E
Advances
% yoy
Deposits

90.0 2.0% 2.0% 2.0% 2.0% 1.9%

35.0 30.0 25.0 14.2% 19.0% 25.0% 20.0% 15.0%
80.0
70.0 60.0
1.9%
Rs bn
Rs bn
50.0
40.0 30.0
1.9%
14.8%
1.9% 1.8%
20.0
10.0% 5.0%
15.0 10.0 5.0

0.0 1.7% -9.5%
0.0% -5.0% -10.0% -15.0%
20.0
10.0 0.0
1.8%
1.8% 1.7% 1.7%
2011
2012
NII
2013E
NIM
2014E
2015E
2011
2012
2013E
2014E
% yoy
2015E
Other Income

4.0% 3.5%

3.3%
3.4%
3.6%
2.0% 1.8% 1.6% 1.4%
1.8% 1.6%
1.7%
1.7%
3.0%
2.5% 2.0%
2.5%
2.1% 2.0% 2.0%
1.4% 1.2%
1.0% 0.8% 0.7% 0.4% 0.3% 0.6% 0.9%
1.8%
1.1%
1.0%
1.6%
1.5%
1.0% 0.5%
0.4% 0.2%
0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
0.0%
2011
2012
2013E
2014E
2015E
Slippage (%)
Credit Cost (%)
On Adj NW (FY14) 161.2 17.6 28.8 6.1 0.8 18.2 11.3% 179.3 0.8 60
IDBI
Profit & Loss Account (` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet (` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balances with Banks & money at Call Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) Provisioning / NPA additions (%) Reductions in provisions / NPA reductions (%) Sunidhi Research | 2011 186008.2 142719.3 43288.9 20836.5 64125.4 22546.9 41578.5 18768.7 22809.8 6306.6 16503.2 2011 9,845.7 135,820.2 145,675.7 1,804,857.9 515,696.5 67,537.7 2,533,767.8 195,590.5 12,070.3 682,691.7 1,570,980.7 30,373.4 42,061.3 2,533,767.9 2011 21.9% 9.7% 91.9% -9.5% 40.7% 23.1% 52.5% 39.1% 65.7% 82.1% 60.1% 2011 1.8% 1.1% 1.4% 62.6% 39.8% 0.3% 0.8% 69.9% 75.5% 2012 233699.3 188250.8 45448.5 21187.8 66636.3 26074.6 40561.7 14264.7 26297.0 5980.9 20316.1 2012 12,780.0 181,486.8 194,275.4 2,104,925.6 534,776.4 74,391.2 2,908,368.6 150,902.1 29,674.4 831,753.7 1,811,584.3 30,188.1 54,269.8 2,908,372.4 2012 25.6% 31.9% 5.0% 1.7% 3.9% 15.6% -2.4% -24.0% 15.3% -5.2% 23.1% 2012 2.5% 1.6% 1.6% 28.5% 36.1% 0.4% 0.5% 46.4% 82.3% 2013E 282409.9 226496.8 55913.1 24192.0 80105.1 31241.0 48864.1 19418.6 29445.5 8539.2 20906.3 2013E 12,780.0 197,752.5 210,541.1 2,401,402.4 516,096.0 180,253.1 3,308,292.6 180,973.4 23,538.7 943,119.5 2,065,206.1 33,690.0 61,765.0 3,308,292.6 2013E 20.8% 20.3% 23.0% 14.2% 20.2% 19.8% 20.5% 36.1% 12.0% 42.8% 2.9% 2013E 3.3% 2.1% 1.8% 20.0% 37.1% 0.7% 0.6% 57.6% 106.3% 2014E 319677.0 253004.8 66672.2 28787.8 95460.1 38184.0 57276.0 25691.1 31584.9 9159.6 22425.3 2014E 12,780.0 215,200.1 227,988.7 2,794,102.4 653,755.2 129,887.6 3,805,733.9 207,338.8 37,812.6 1,077,390.5 2,374,987.0 38,190.0 70,015.0 3,805,733.9 2014E 13.2% 11.7% 19.2% 19.0% 19.2% 22.2% 17.2% 32.3% 7.3% 7.3% 7.3% 2014E 3.4% 2.0% 1.7% 30.0% 42.6% 0.9% 0.7% 71.0% 72.8% 2015E 363195.0 286329.1 76865.9 33051.4 109917.2 43966.9 65950.3 30600.8 35349.5 10251.4 25098.2 2015E 12,780.0 234,727.2 247,515.8 3,213,217.7 748,349.4 150,183.0 4,359,265.9 238,395.9 33,125.0 1,235,554.9 2,731,235.1 42,690.0 78,265.0 4,359,265.9 2015E 13.6% 13.2% 15.3% 14.8% 15.1% 15.1% 15.1% 19.1% 11.9% 11.9% 11.9% 2015E 3.6% 2.0% 1.7% 30.0% 44.6% 1.0% 0.7% 72.5% 83.6% 61
IDBI Other operating indicators NIM (%) Cost to income (%) Business per branch (` mn) Business per employee (` mn) Profit per branch (` mn) Profit per employee (` mn) CASA per branch (` mn) CASA ratio (%) Other income / Total income CEB / Other income CEB / average advances Capital Adequacy ratios CAR (%) Tier 1 (%) Tier 2 (%) Leverage (x) Risk weighted assets / Total Assets (%) Valuation Table Net profit (` mn) Shares in issue (mn) EPS (`) EPS growth (%) PE (x) P/PPP (x) Book value (`/share) P/BV (x) Adj book value (`/share) P/ABV (x) ROAA (%) ROAE (%) ROAE (adj for reval reserve) (%) Dividend Yield (%) Du pont Decomposition Yield on Assets Less: Cost of Assets Net Interest Income Other Income Less: Operating Exp Less: Provisions Less: Tax RoAA Leverage RoAE
2011 1.9% 35.2% 4137.1 244.6 20.2 1.2 46.2 20.9% 32% 71% 1.0% 2011 13.6% 8.0% 5.6% 17.4 77% 2011 16503.2 984.6 16.8 18% 6.6 2.6 148.0 0.7 111.7 1.0 0.7% 13.3% 15.8% 3.2% 2011 7.6% 5.9% 1.8% 0.9% 0.9% 0.8% 0.3% 0.7% 19.7 13.3%
2012 1.8% 39.1% 4025.2 244.8 20.9 1.3 52.1 24.1% 32% 72% 0.9% 2012 14.6% 8.4% 6.2% 15.0 74% 2012 20316.1 1278.0 15.9 -5% 6.9 3.5 152.0 0.7 114.7 1.0 0.7% 12.0% 13.4% 2.8% 2012 8.6% 6.9% 1.7% 0.8% 1.0% 0.5% 0.2% 0.7% 16.0 12.0%
2013E 1.9% 39.0% 3977.4 241.9 18.6 1.1 47.0 22.0% 30% 80% 1.0% 2013E 13.4% 7.9% 5.5% 15.7 75% 2013E 20906.3 1278.0 16.4 3% 6.7 2.9 164.7 0.7 116.1 0.95 0.7% 10.3% 11.4% 2.8% 2013E 9.1% 7.3% 1.8% 0.8% 1.0% 0.6% 0.3% 0.7% 15.4 10.3%
2014E 2.0% 40.0% 4060.6 246.9 17.6 1.1 50.5 23.0% 30% 81% 1.1% 2014E 12.5% 7.5% 5.0% 16.7 75% 2014E 22425.3 1278.0 17.5 7% 6.3 2.5 178.4 0.6 126.1 0.87 0.6% 10.2% 11.2% 3.1% 2014E 9.0% 7.1% 1.9% 0.8% 1.1% 0.7% 0.3% 0.6% 16.2 10.2%
2015E 2.0% 40.0% 4177.4 254.0 17.6 1.1 51.9 23.0% 30% 81% 1.1% 2015E 13.4% 8.2% 5.2% 17.6 75% 2015E 25098.2 1278.0 19.6 12% 5.6 2.1 193.7 0.6 135.7 0.81 0.6% 10.6% 11.4% 3.4% 2015E 8.9% 7.0% 1.9% 0.8% 1.1% 0.7% 0.3% 0.6% 17.2 10.6%
Sunidhi Research |
62
Indian Bank
H2FY13 may surprise negatively on the asset quality front Banking Sector Outlook - Neutral
Company Update
Indian Bank Growth CAGR (FY12-14E)
25% 20% 15% 10% 5%

0%
Indian Bank, established on 15th August 1907, is a south based mid-sized public sector bank with a global branch network of 2002 branches and 1295 ATMs. The banks focus on financial inclusion is reflected through its loan book 43% of which is focused on the agricultural, retail and MSME segments. Strong NIMs coupled with comfortable asset quality led to superior ROAs Indian Banks loan book is skewed towards high yielding segments such as SME, retail and agriculture, which form about 43% of the banks advances. As a result, despite having a moderate CASA ratio of 29%, the banks NIMs are relatively high at ~3.1% for Q2FY13. This coupled with comfortable asset quality has led to superior ROAs (1.3% for Q2FY13) which are amongst the highest in the banks peer group. Restructured book high however a large part of it is seasoned While the restructured book for Indian bank appears high at 10.9% of the loan book, the restructured book outstanding excluding SEB and Air India exposure stands at 7.6%. Moreover a large portion of this book consists of seasoned textile exposure. Greater concentration in semi urban and rural areas has led to cost efficiencies As a result of the banks thrust on financial inclusion and its focus on advances to MSME and agricultural segments, around 55% of its branches are located in semiurban and rural areas. Operating expenses for branches located in semi-urban and rural areas are lower than those for urban and metro branches. Thus the bank enjoys one of the lowest cost to income ratios amongst its peer group. The cost to income ratio for the bank stood at 39% in FY12 lower as compared to peers. Adequately capitalized The bank appears adequately capitalized with a CAR of 13% and a tier 1 CAR of 11.8%. The bank has headroom to raise tier II capital worth `76 bn. Hence the bank is in no urgent need of raising new equity capital, although it has government permission to dilute 10% government holding to raise 0.6 bn. Maintain Buy with a target price of `232: At the CMP of `189, the bank trades at 0.9x its FY13E ABV and 0.7x its FY14E ABV. At these levels the bank below its long term average one year forward P/ABV multiple. We maintain our Buy rating on the stock with a target price of `232 (based on 0.9x FY14E ABV).
20% 13%
14%
14%
NII
Net total income
PPP
Net Profit
Recommendation CMP (`) Price Target (`) Upside (%) 52 Week H / L ` BSE 30
BUY 189 232 23 265/152 19487
Key Data No.of Shares, Mn. Mcap, ` Bn Mcap,USD bn @ `54 2 W Avg Qty, (BSE+NSE) Mn 429.8 81.2 1.5 0.3
Share holding, Sept'12 Promoters FII DII Public & Others Performance Stock Return % Relative Return %
25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0%
Dec-11
Dec-11
80.0 8.6 5.4 6.0 1M 14.6 11.0 3M 23.5 10.3 6M 15.0 2.6 12 M -4.5 -22.2
NII `mn 40,361 44,180 48,288 56,014 63,411
PAT `mn 17,141 17,470 20,536 25,122 28,122
ABV ` 175.2 187.1 211.9 257.2 313.9
P/E x 4.7 4.6 4.0 3.2 2.9
P/ABV X 1.1 1.0 0.9 0.7 0.6
ROAA % 1.5 1.3 1.3 1.4 1.4
ROAE % 19.3 17.2 17.7 18.6 17.9

Aug-12 Apr-12
Apr-12 Oct-12
Jan-12
Nov-12
May-12
Mar-12
IDBI Bank
NIFTY
Nov-12
Feb-12
Sep-12
Sep-12
Feb-12
Jun-12
Jul-12
Jul-12
Indian Bank Trend in loan book growth

1600.0 25.0% 20.0% 20.0% 17.0% 17.0% 17.0%

2000.0 1800.0 1600.0 25.0% 20.0% 19.9% 16.6%
1400.0
1200.0 1000.0 21.1%
1400.0
Rs bn
15.0%
Rs bn
1200.0
1000.0 800.0 600.0
15.0%
15.6% 14.6% 10.0%
800.0
600.0 10.0% 5.0%
14.2%
400.0
200.0
400.0 200.0
0.0
5.0%
0.0%
0.0 2011 2012 2013E 2014E

% yoy
0.0% 2015E
Advances
2011
2012
2013E
2014E
% yoy
2015E
Deposits

70.0 60.0 50.0 3.8%

20.0 18.0 16.0 30.0%
3.7%
25.0% 25.5%
20.0% 15.0%
3.7%
3.6% 3.5%
14.0
Rs bn
Rs bn
40.0 30.0 20.0 10.0 0.0 3.5% 3.4%
12.0
10.0 8.0 6.0 10.3%
3.4%
10.0% 10.5%
5.0% 0.0% -0.2%
3.3%
3.3%
3.3%
3.2% 3.1% 3.0%
4.0 2.0
0.0
-5.0%
-10.0%
-10.2% 2011 2012 2013E 2014E

% yoy
-15.0%
2011
2012
NII
2013E
NIM
2014E
2015E
2015E
Other Income
Trend in NPA
2.5% 2.3%

3.0%
2.1% 1.8% 1.5% 1.3%
2.0% 2.0% 1.7%

1.5%
2.5% 2.0% 1.5% 1.5% 1.0% 0.8%
2.5%
2.3%
2.2%
1.8%
1.3%
1.0% 0.5%
1.0%
0.5%
0.9%
1.0%
0.9%
0.8%
0.5% 0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
0.0%
2011
2012
2013E
2014E
2015E
Slippage (%)
Credit Cost (%)
On Adj NW (FY14) 110.6 10.8 15.6 3.5 1.0 9.4 8.5% 119.9 0.7 64
Indian Bank
Profit & Loss Account (` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet(` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balances with Banks & money at Call Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) Provisioning / NPA additions (%) Reductions in provisions / NPA reductions (%) Sunidhi Research | 2011 93610.3 53249.2 40361.1 11818.9 52180.0 19263.2 32916.8 6572.2 26344.6 9203.9 17140.7 2011 4,297.7 86,913.3 95,211.0 1,058,041.8 21,003.7 42,926.5 1,217,183.1 68,779.4 16,843.7 347,837.6 752,499.1 16,060.4 15,162.9 1,217,183.1 2011 21.3% 16.9% 27.7% -10.2% 16.5% 11.3% 19.8% 66.1% 12.0% 15.5% 10.2% 2011 1.0% 0.5% 1.5% 141.9% 46.4% 0.8% 0.6% 73.9% 1.0% 2012 122313.2 78133.2 44180.0 11798.3 55978.3 21870.0 34108.4 11952.7 22155.6 5209.3 17469.7 2012 4,297.7 99,716.7 108,014.4 1,208,038.0 48,728.6 49,411.0 1,414,192.0 63,188.7 24,944.9 379,760.3 903,236.0 16,306.9 26,755.2 1,414,192.0 2012 30.7% 46.7% 9.5% -0.2% 7.3% 13.5% 3.6% 81.9% -15.9% -43.4% 1.9% 2012 2.0% 1.3% 2.5% 103.8% 35.3% 0.9% 0.9% 51.8% 2.0% 2013E 141750.4 93462.2 48288.2 13009.8 61298.0 23701.5 37596.5 9464.9 28131.6 7595.5 20536.1 2013E 4,297.7 116,041.5 124,339.2 1,409,048.2 52,839.3 65,108.1 1,647,334.7 70,799.8 26,192.2 443,080.2 1,056,786.1 21,330.0 29,146.5 1,647,334.7 2013E 15.9% 19.6% 9.3% 10.3% 9.5% 8.4% 10.2% -20.8% 27.0% 45.8% 17.6% 2013E 2.3% 1.7% 2.3% 80.0% 28.4% 1.0% 0.6% 47.1% 2.3% 2014E 158493.4 102478.9 56014.5 16327.8 72342.3 27730.6 44611.7 10198.1 34413.6 9291.7 25122.0 2014E 4,297.7 136,952.1 145,249.8 1,629,414.7 61,822.0 65,672.5 1,898,159.0 80,312.0 27,501.8 494,476.8 1,236,439.8 25,113.0 34,315.7 1,898,159.0 2014E 11.8% 9.6% 16.0% 25.5% 18.0% 17.0% 18.7% 7.7% 22.3% 22.3% 22.3% 2014E 2.1% 1.5% 2.2% 85.0% 29.7% 0.9% 0.6% 46.3% 2.1% 2015E 179042.2 115631.1 63411.1 18034.7 81445.7 31706.3 49739.5 11215.6 38523.8 10401.4 28122.4 2015E 4,297.7 160,863.3 169,161.0 1,867,951.1 79,564.9 84,352.4 2,197,029.3 94,275.3 28,876.8 557,575.9 1,446,634.5 29,439.3 40,227.4 2,197,029.3 2015E 13.0% 12.8% 13.2% 10.5% 12.6% 14.3% 11.5% 10.0% 11.9% 11.9% 11.9% 2015E 1.8% 1.3% 1.8% 85.0% 31.1% 0.8% 0.5% 47.1% 1.8% 65
Indian Bank Other operating indicators NIM (%) Cost to income (%) Business per branch (` mn) Business per employee (` mn) Profit per branch (` mn) Profit per employee (` mn) CASA per branch (` mn) CASA ratio (%) Other income / Total income CEB / Other income CEB / average advances Capital Adequacy ratios CAR (%) Tier 1 (%) Tier 2 (%) Leverage (x) Risk weighted assets / Total Assets (%) Valuation Table Net profit (` mn) Shares in issue (mn) EPS (`) EPS growth (%) PE (x) P/PPP (x) Book value (`/share) P/BV (x) Adj book value (`/share) P/ABV (x) ROAA (%) ROAE (%) ROAE (adj for reval reserve) (%) Dividend Yield (%) Du pont Decomposition Yield on Assets Less: Cost of Assets Net Interest Income Other Income Less: Operating Exp Less: Provisions Less: Tax RoAA Leverage RoAE
2011 3.72% 36.9% 971.8 93.8 9.2 0.9 175.6 30.9% 22.7% 28.4% 0.5% 2011 13.6% 11.0% 2.6% 12.8 61.2% 2011 17140.7 429.77 39.9 10.2% 4.7 2.5 212.2 0.9 175.2 1.1 1.5% 19.3% 22.3% 4.0% 2011 8.4% 4.8% 3.6% 1.1% 1.7% 0.6% 0.8% 1.5% 12.5 19.3%
2012 3.46% 39.1% 1078.3 112.4 8.9 0.9 188.3 30.5% 21.1% 34.4% 0.5% 2012 13.5% 11.1% 2.4% 13.1 60.6% 2012 17469.7 429.77 40.6 1.9% 4.6 2.4 242.0 0.8 187.1 1.0 1.3% 17.2% 19.4% 4.0% 2012 9.3% 5.9% 3.4% 0.9% 1.7% 0.9% 0.4% 1.3% 12.9 16.7%
2013E 3.25% 38.7% 1156.0 120.5 9.6 1.0 191.6 29.0% 21.2% 33.9% 0.5% 2013E 13.3% 11.2% 2.1% 13.2 60.6% 2013E 20536.1 429.77 47.8 17.6% 4.0 2.2 280.0 0.7 211.9 0.9 1.3% 17.7% 19.6% 4.0% 2013E 9.3% 6.1% 3.2% 0.8% 1.5% 0.6% 0.5% 1.3% 13.2 17.7%
2014E 3.41% 38.3% 1255.3 130.8 11.0 1.1 214.1 30.0% 22.6% 35.1% 0.5% 2014E 13.6% 11.6% 2.0% 13.1 60.6% 2014E 25122.0 429.8 58.5 22.3% 3.2 1.8 328.7 0.6 257.2 0.7 1.4% 18.6% 20.4% 4.0% 2014E 8.9% 5.8% 3.2% 0.9% 1.6% 0.6% 0.5% 1.4% 13.2 18.6%
2015E 3.34% 38.9% 1362.3 142.0 11.6 1.2 238.0 31.0% 22.1% 37.2% 0.5% 2015E 13.7% 11.8% 1.9% 13.0 60.6% 2015E 28122.4 429.8 65.4 11.9% 2.9 1.6 384.3 0.5 313.9 0.6 1.4% 17.9% 19.3% 4.0% 2015E 8.7% 5.6% 3.1% 0.9% 1.5% 0.5% 0.5% 1.4% 13.0 17.9%
Sunidhi Research |
66
Oriental Bank of Commerce

Valuation captures optimism, Initiate with Hold Banking Sector Outlook - Neutral
Initiating Coverage
OBC CAGR (FY12-14E)
26.0%
14.2% 16.2%
Oriental Bank of Commerce (OBC) is a mid sized public sector bank with 1850 branches, 1304 ATMs and an asset size of `1870 bn. Branches are primarily located in the northern region. The bank has been plagued by asset quality issues in the past post its merger with Global Trust Bank, however management has worked towards stabilizing asset quality and asset quality appears relatively stable. We initiate coverage on OBC with a Hold recommendation and target price of `359 (0.9x FY14E ABV). Asset quality likely to improve on the back of stronger recoveries OBC reported an improvement in slippages in H1FY13 as compared to FY12. The slippage rate for H1FY13 stood at 2.4% as compared to 4.1% for FY12. Going ahead we expect asset quality for OBC to improve on the back of stronger recoveries and up-gradations. Based on our recovery analysis, assuming recoveries of 50% from additions in FY10-13E, the upside to OBCs networth is 9.4% (11% of adjusted networth) and assuming recoveries at 60%, the upside increases to 16.3% of FY14E networth and 19% of FY14E adjusted networth. Restructured book excluding Air India and SEBs at 4.9% of loan book While the restructured book for OBC appears high at 9.7% of the loan book, a large part of it consists of loans to Air India and SEBs. Loans to Air India and SEBs are unlikely to slip into non performing asset category. Additionally management has stated that with the bond issuance of Air India, OBC expects to receive ~ `5 bn which could lead to some provision writebacks. Excluding Air India and SEB exposure, the banks restructured book stands limited at 4.9%. High modified duration of AFS book to lead to higher treasury gains The modified duration of OBCs AFS book stands high at 4.1, as a result a 1% reduction in yield could lead to MTM writebacks of `2.6 bn which would have an impact of ~2.2% on the banks FY14E networth and 14.4% on its FY14E PAT. NIM improvement through increasing core deposits OBC reported a NIM of 2.8% in Q2FY13, stable sequentially. Despite several cuts in the banks base rate, management expects to maintain its full year NIM at ~2.9% due to its focus on reducing bulk deposits. The bulk deposits of the bank came off to 22.1% from 27.6% as on Mar-12. Initiate coverage with a HOLD rating and a target price of `371: At the CMP of `351, the bank trades at 0.9x its FY13E ABV and 0.9x its FY14E ABV. At these levels the bank trades in line with its long term average one year forward P/ABV multiple of 0.9x. As a result we initiate coverage on OBC with a Hold recommendation and target price of `371 (0.9x FY14E ABV). Financials FY11 FY12 FY13E FY14E FY15E NII `mn 41,776 42,158 46,985 55,018 62,223 PAT `mn 15,029 11,416 14,473 18,134 20,221 ABV ` 348.2 325.0 369.5 412.5 465.1 P/E x 6.8 9.0 7.1 5.6 5.1 P/ABV X 1.0 1.1 0.9 0.9 0.8 ROAA % 1.0 0.7 0.8 0.8 0.8 ROAE % 15.5 9.9 11.6 13.1 13.2
13.6%
NII
Net Total Income
PPP growth
PAT growth
30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0%
Dec-11
Dec-11
HOLD 351 371 6 355/190 19487
291.8 102.4 1.9 0.6
58.0 9.5 25.4 7.1 1M 7.8 4.2 3M 60.0 46.8 6M 47.4 35.0 12 M 26.9 9.2
Aug-12
Apr-12
Apr-12
Oct-12
Jan-12
Nov-12
May-12
Mar-12
Nov-12
Feb-12
Sep-12
Sep-12
Feb-12
Jun-12
Jul-12
Jul-12
OBC
NIFTY

1800.0 17.0%

3000.0 2500.0 2000.0 16.3% 15.0% 12.2% 1500.0 1000.0 500.0 0.0 15.0% 18.0% 16.5% 16.0%
1600.0
1400.0 1200.0
16.8%
16.0%
15.6% 14.0% 12.0%
Rs bn
800.0 600.0 14.9%
Rs bn
1000.0 15.0% 15.0% 15.0%
15.5%
10.0%
8.0% 6.0%
15.0% 14.5% 14.0%

13.5%
400.0
200.0 0.0
4.0%
2.0% 0.0%
2011
2012
2013E
2014E
% yoy
2015E
2011
2012
2013E
2014E
% yoy
2015E
Advances
Deposits

70.0
60.0 50.0 3.1%

3.1%
3.0% 2.9%
25.0
40.0% 30.0% 29.2% 30.1% 16.0% 4.3%
20.0
15.0 10.0 5.0 0.0 -20.0% 2011
20.0% 10.0%
0.0% -10.0% -20.0% -30.0%
40.0
30.0 20.0 2.7% 2.7%
2.8%
2.7%
2.7%
2.7%
2.6%
10.0
0.0 2011 2012 2013E NII NIM 2014E 2015E
2.5%
2.4%
2012
2013E
2014E
2015E
Other Income
% yoy
Trend in NPA
3.5%

3.2%
2.9% 2.9% 2.7%
4.5%
4.1%
3.0%
2.5% 2.0%
4.0% 3.5% 3.0%

2.6% 2.3% 1.9% 1.0% 1.0% 1.1% 2.1%
2.0%
2.2%
1.8% 1.7%
1.6%
2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
1.5%
1.0% 0.5% 1.0%
0.9%
0.8%
0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
2011
2012 Slippage (%)
2013E
2014E
2015E
Credit Cost (%)
On Adj NW (FY14) 120.4 8.6 13.1 4.9 2.6 11.9 9.9% 132.3 0.8 68
Profit & Loss Account(` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet(` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balances with Banks & money at Call Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) Provisioning / NPA additions (%) Reductions in provisions / NPA reductions (%) Sunidhi Research | 2011 120878.1 79102.6 41775.5 9600.7 51376.2 16262.8 35113.4 14745.3 20368.1 5339.4 15028.7 2011 2,917.6 108,053.8 110,971.4 1,390,542.6 56,392.1 59,717.6 1,617,623.7 95,151.3 21,029.5 495,454.1 959,082.2 13,978.0 32,928.6 1,617,623.7 2011 17.8% 7.6% 43.7% -20.0% 25.1% 10.4% 33.3% 43.0% 27.0% 13.8% 32.4% 2011 2.0% 1.0% 1.9% 75.2% 51.2% 1.0% 1.0% 60.5% 63.0% 2012 158148.8 115990.9 42157.9 12402.5 54560.4 19897.1 34663.3 20461.0 14202.3 2786.7 11415.6 2012 2,917.6 116,507.4 119,425.0 1,559,649.2 52,590.5 54,277.0 1,785,941.7 84,617.0 2,652.5 521,013.3 1,119,776.9 14,206.5 43,675.5 1,785,941.7 2012 30.8% 46.6% 0.9% 29.2% 6.2% 22.3% -1.3% 38.8% -30.3% -47.8% -24.0% 2012 3.2% 2.2% 4.1% 116.5% 31.3% 1.0% 1.2% 27.5% 41.7% 2013E 180616.3 133631.2 46985.1 16135.5 63120.6 24426.0 38694.6 18593.7 20101.0 5628.3 14472.7 2013E 2,917.6 127,623.1 130,540.7 1,813,723.1 66,825.7 28,109.5 2,039,199.0 89,163.7 3,033.0 593,988.7 1,287,743.4 16,950.0 48,320.1 2,039,199.0 2013E 14.2% 15.2% 11.5% 30.1% 15.7% 22.8% 11.6% -9.1% 41.5% 102.0% 26.8% 2013E 2.9% 1.8% 2.6% 75.0% 40.3% 1.1% 1.0% 45.0% 80.0% 2014E 199139.9 144121.4 55018.4 18709.8 73728.2 28965.5 44762.7 19576.7 25186.0 7052.1 18133.9 2014E 2,917.6 142,400.0 145,317.6 2,085,781.6 83,196.1 33,545.5 2,347,840.9 103,070.3 3,506.0 685,563.8 1,480,905.0 20,100.1 54,695.7 2,347,840.9 2014E 10.3% 7.9% 17.1% 16.0% 16.8% 18.6% 15.7% 5.3% 25.3% 25.3% 25.3% 2014E 2.9% 1.7% 2.3% 65.0% 41.9% 0.9% 0.9% 40.0% 60.0% 2015E 221203.3 158980.2 62223.1 19519.0 81742.0 33233.2 48508.9 20424.1 28084.8 7863.7 20221.0 2015E 2,917.6 159,264.1 162,181.7 2,398,648.9 102,022.1 35,421.7 2,698,274.3 118,530.8 4,031.9 787,372.0 1,703,040.7 23,710.8 61,588.1 2,698,274.3 2015E 11.1% 10.3% 13.1% 4.3% 10.9% 14.7% 8.4% 4.3% 11.5% 11.5% 11.5% 2015E 2.7% 1.6% 2.1% 65.0% 42.6% 0.8% 0.8% 40.0% 60.0% 69
Other operating indicators NIM (%) Cost to income (%) Business per branch (` mn) Business per employee (` mn) Profit per branch (` mn) Profit per employee (` mn) CASA per branch (` mn) CASA ratio (%) Other income / Total income CEB / Other income CEB / average advances Capital Adequacy ratios CAR (%) Tier 1 (%) Tier 2 (%) Leverage (x) Risk weighted assets / Total Assets (%) Valuation Table Net profit (` mn) Shares in issue (mn) EPS (`) EPS growth (%) PE (x) P/PPP (x) Book value (`/share) P/BV (x) Adj book value (`/share) P/ABV (x) ROAA (%) ROAE (%) ROAE (adj for reval reserve) (%) Dividend Yield (%) Du pont Decomposition Yield on Assets Less: Cost of Assets Net Interest Income Other Income Less: Operating Exp Less: Provisions Less: Tax RoAA Leverage RoAE
2011 3.1% 31.7% 1450.4 141.4 9.3 0.9 210.8 24.6% 18.7% 66.1% 0.7% 2011 14.2% 11.2% 3.0% 14.6 60.8% 2011 15028.7 291.8 51.5 13.7% 6.8 2.9 380.4 0.9 348.2 1.0 1.0% 15.5% 15.5% 3.0% 2011 8.1% 5.3% 2.8% 0.6% 1.1% 1.0% 0.4% 1.0% 15.5 15.5%
2012 2.7% 36.5% 1512.1 145.9 6.4 0.6 212.4 24.1% 22.7% 58.5% 0.7% 2012 12.7% 10.1% 2.6% 15.0 65.8% 2012 11415.6 291.8 39.1 -24.0% 9.0 3.0 409.3 0.9 325.0 1.1 0.7% 9.9% 9.9% 2.3% 2012 9.3% 6.8% 2.5% 0.7% 1.2% 1.2% 0.2% 0.7% 14.8 9.9%
2013E 2.7% 38.7% 1613.7 155.6 7.5 0.7 227.7 24.1% 25.6% 48.5% 0.7% 2013E 12.0% 9.7% 2.3% 15.6 65.8% 2013E 14472.7 291.8 49.6 26.8% 7.1 2.6 447.4 0.8 369.5 0.9 0.8% 11.6% 11.6% 2.8% 2013E 9.4% 7.0% 2.5% 0.8% 1.3% 1.0% 0.3% 0.8% 15.3 11.6%
2014E 2.7% 39.3% 1721.4 166.0 8.8 0.8 242.9 24.1% 25.4% 51.8% 0.7% 2014E 11.4% 9.4% 2.0% 16.2 65.8% 2014E 18133.9 291.8 62.2 25.3% 5.6 2.3 498.1 0.7 412.5 0.9 0.8% 13.1% 13.1% 2.8% 2014E 9.1% 6.6% 2.5% 0.9% 1.3% 0.9% 0.3% 0.8% 15.9 13.1%
2015E 2.7% 40.7% 1845.9 178.1 9.1 0.9 260.4 24.1% 23.9% 57.1% 0.7% 2015E 10.9% 9.1% 1.8% 16.6 65.8% 2015E 20221.0 291.8 69.3 11.5% 5.1 2.1 555.9 0.6 465.1 0.8 0.8% 13.2% 13.2% 2.8% 2015E 8.8% 6.3% 2.5% 0.8% 1.3% 0.8% 0.3% 0.8% 16.4 13.2%
Sunidhi Research |
70
Punjab National Bank

Asset quality concerns priced in, Initiate with Outperform Banking Sector Outlook - Neutral
Initiating Coverage
PNB is the second largest PSB in India by asset size. As on Q2FY13, the bank has a total asset size of `4720 bn and a loan book of `2948 bn. PNBs loan book is primarily focused on corporate loans followed by SME and retail loans. PNBs domestic branch network stood at 5748 at the end of Sep-12, out of which, 39% of branches are located in rural India. Higher recoveries to offset stress in incremental slippages In Q2FY13, PNB reported a significant deterioration in asset quality with gross slippages accelerating to 6.5%. Slippages were broad based across segments such as Industry, Agri, SME and retail. Asset quality is likely to remain under pressure for the bank in the near term as slippages from the banks agri and SME portfolio are likely to remain high. However higher recoveries in subsequent quarters could lead to an improvement in asset quality going ahead. Assuming recoveries of 50%, the upside to networth for PNB would be 22% of FY14E networth and 31% of FY14E adjusted Networth. Restructured book excluding Air India and SEBs at 6.3% Outstanding restructured book for PNB as on Q2FY13 stands at 9.4%. However, adjusting for restructured loans to SEBs and Air India which are unlikely to slip into NPA, the restructured book stands at 6.3% which also includes seasoned restructered book of FY09-11. The restructured book of the bank is unlikely to increase substantially from current levels as majority of SEB restructuring has already been completed. High treasury yields could lead to higher treasury profits going ahead Around 26% of PNBs investment book is in the AFS category. Additionally the modified duration of the banks AFS book is high at 3.7. Hence a 100 bps decline in yields would lead to a 13.5% increase in the banks FY14E PAT. Moreover the banks yield on investments at 7.9% is one of the highest amongst peer banks indicating towards higher treasury gains once interest rates start coming off. NIM likely to come off to 3.2% in FY13E The reported NIM of the bank came off by 10 bps qoq to 3.5% in Q2FY13. The deterioration in the NIM was primarily due to interest reversals on slippages. For FY13E we expect the calculated NIM to stand at 3.2% down 15 bps yoy. In FY14 and FY15 we expect the NIM to remain stable at ~3.2%. Initiate coverage with an Outperform rating and a target price of `1001: At the CMP of `822, the bank trades at 1.3x its FY13E ABV and 1.1x its FY14E ABV. PNB had corrected significantly over past few months due to its weak quarterly performance. We believe that asset quality concerns are largely factored into its price. We initiate coverage on PNB with an Outperform rating and a target price of `1001 (1.3x its FY14E ABV) considering strong liability franchise, well capitalisation and good operating efficiency. Financials FY11 FY12 FY13E FY14E FY15E
Dec-11 Aug-12
May-12
PNB CAGR (FY12-14E)
15%
14%
14%
12%
NII
Net Total Income
PPP
PAT
20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0%
Mar-12
Outperform 822 1001 22 1091/659 19487
339.2 278.8 5.2 0.5
56.1 17.4 20.6 5.9 1M 8.6 5.0 3M 23.5 10.3 6M 7.0 -5.4 12 M -11.3 -29.0
NII `mn 118073.4 134144.4 151063.9 175932.8 206318.8
PAT `mn 46926.9 53938.7 50801.4 67067.8 82493.0
ABV ` 568.1 646.1 613.2 770.2 987.8
P/E x 5.5 5.2 5.5 4.2 3.4
P/ABV X 1.4 1.3 1.3 1.1 0.8
ROAA % 1.4 1.3 1.0 1.2 1.3
ROAE % 23.9 21.9 17.1 19.5 20.5
PNB
NIFTY
Nov-12
Dec-12
Feb-12
Apr-12
Sep-12
Oct-12
Jan-12
Jun-12
Jul-12
Punjab National Bank Trend in loan book growth

5000.0 4500.0 4000.0 3500.0 3000.0 2500.0 2000.0 1500.0 1000.0 500.0 0.0 35.0%

7000.0 6000.0 5000.0 30.0% 25.0%
30.0%
29.7% 25.0%
25.5%
21.3% 15.3% 17.0% 20.0% 15.0% 10.0% 5.0% 0.0%
Rs bn
21.3% 16.0%
17.5%
18.1%
15.0%
10.0% 5.0%
Rs bn
20.0%
4000.0
3000.0 2000.0 1000.0

0.0
15.1%
0.0% 2011 2012 2013E 2014E

% yoy
2015E
2011
2012
2013E
2014E
% yoy
2015E
Advances
Deposits

250.0 200.0 3.6% 3.7%

60.0 50.0 40.0 23.6% 25.0% 20.0%
3.6%
3.5% 3.4%
Rs bn
Rs bn
150.0
100.0 3.3%
3.3%
30.0 20.0 10.0 0.0
16.3%
15.0%
10.0%
3.2% 3.2% 3.2%

3.2% 3.1% 3.0%
50.0
0.0
5.0% 0.1% 2011 2012

2.1% 2013E 5.6% 0.0%
2.9%
2011
2012
NII
2013E
NIM
2014E
2015E
2014E
% yoy
2015E
Other Income
Trend in NPA
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 1.8% 2.9% 2.8% 2.3% 1.5% 1.8%

4.5%
4.8%
4.6% 4.2%
4.2%
4.0%
3.5% 3.0% 2.8%
2.5%
2.0% 1.5%
2.3%
2.5% 2.0%
0.8%
1.0%
0.5% 0.0%
0.8%
0.8%
1.1%
1.0%
0.8%
0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
2011
2012
2013E
2014E
2015E
Slippage (%)
Credit Cost (%)
On Adj NW (FY14) 261.2 27.8 79.8 4.8 8.7 65.5 25.1% 326.7 0.9 72
Profit & Loss Account(` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet(` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) 2011 269864.8 151791.4 118073.4 36125.8 154199.2 63642.2 90556.9 22327.7 68229.2 21302.3 46926.9 2011 3,168.1 211917.5 215,085.6 3128987.3 203993.9 235,185.7 3,783,252.4 296912.1 951623.5 2421066.7 31056.0 82594.2 3,783,252.4 2011 26% 17% 39% 0% 28% 34% 24% 57% 16% 7% 20% 2011 1.8% 0.8% 2.3% 98.7% 53.4% 0.8% 0.7% 2012 364280.3 230135.9 134144.4 42026.0 176170.4 70027.5 106142.9 30675.8 75467.1 21528.4 53938.7 2012 3,391.8 274778.9 278,170.7 3795884.8 260739.7 247,144.8 4,581,940.0 288280.3 1226294.7 2937747.6 31688.6 97928.8 4,581,940.0 2012 35% 52% 14% 16% 14% 10% 17% 37% 11% 1% 15% 2012 2.9% 1.5% 2.8% 53.2% 48.9% 0.8% 0.7% 2013E 423055.5 271991.6 151063.9 42914.4 193978.2 79985.7 113992.6 40175.1 73817.5 23016.0 50801.4 2013E 3,391.8 313782.3 317,174.1 4376400.5 299850.7 284,216.5 5,277,641.7 336140.2 1387592.1 3407787.2 36441.9 109680.3 5,277,641.7 2013E 16% 18% 13% 2% 10% 14% 7% 31% -2% 7% -6% 2013E 4.8% 2.8% 4.2% 50.5% 43.1% 1.1% 0.8% 2014E 476770.4 300837.6 175932.8 53040.5 228973.2 90286.9 138686.3 41458.3 97228.0 30160.1 67067.8 2014E 3,391.8 366183.8 369,575.6 5036106.4 344828.3 326,849.0 6,077,359.3 338200.8 1571951.9 4002456.6 41908.2 122841.9 6,077,359.3 2014E 13% 11% 16% 24% 18% 13% 22% 3% 32% 31% 32% 2014E 4.6% 2.3% 2.5% 36.8% 50.7% 1.0% 0.7% 2015E 540233.4 333914.5 206318.8 56018.1 262337.0 101928.3 160408.6 40820.6 119588.0 37095.0 82493.0 2015E 3,391.8 431218.1 434,609.9 5893489.2 396552.5 375,876.3 7,100,527.9 405112.7 1782776.6 4726861.2 48194.4 137582.9 7,100,527.9 2015E 13% 11% 17% 6% 15% 13% 16% -2% 23% 23% 23% 2015E 4.2% 1.8% 2.0% 35.7% 58.0% 0.8% 0.6%
Sunidhi Research |
73
2011 3.6% 41.3% 1209.4 99.1 10.2 0.8 155.9 43.0% 23.4% 55.4% 0.5% 2011 13.0% 8.8% 4.2% 17.6 62.9% 2011 46926.9 316.8 148.1 19.6% 5.5 2.9 632.5 1.3 568.1 1.4 1.4% 23.9% 2.7% 2011 8.0% 4.5% 3.5% 1.1% 1.9% 0.7% 0.6% 1.4% 17.2 23.9%
2012 3.3% 39.7% 1442.5 122.9 11.6 1.0 174.5 38.8% 23.9% 44.9% 0.5% 2012 13.1% 9.6% 3.6% 16.5 61.8% 2012 53938.7 339.2 159.0 7.4% 5.2 2.6 777.4 1.1 646.1 1.3 1.3% 21.9% 2.7% 2012 8.7% 5.5% 3.2% 1.0% 1.7% 0.7% 0.5% 1.3% 17.0 21.9%
2013E 3.2% 41.2% 1556.2 145.7 10.2 1.0 203.6 40.8% 22.1% 46.6% 0.5% 2013E 12.6% 9.3% 3.4% 16.6 64.9% 2013E 50801.4 339.2 149.8 -5.8% 5.5 2.4 892.4 0.9 613.2 1.3 1.0% 17.1% 3.2% 2013E 8.6% 5.5% 3.1% 0.9% 1.6% 0.8% 0.5% 1.0% 16.6 17.1%
2014E 3.2% 39.4% 1740.2 170.3 12.9 1.3 231.7 38.5% 23.2% 56.6% 0.6% 2014E 12.2% 9.0% 3.2% 16.4 67.7% 2014E 67067.8 339.2 197.7 32.0% 4.2 2.0 1046.9 0.8 770.2 1.1 1.2% 19.5% 3.7% 2014E 8.4% 5.3% 3.1% 0.9% 1.6% 0.7% 0.5% 1.2% 16.5 19.5%
2015E 3.2% 38.9% 1871.4 183.1 14.5 1.4 236.4 35.3% 21.4% 56.5% 0.5% 2015E 11.9% 8.8% 3.1% 16.3 69.5% 2015E 82493.0 339.2 243.2 23.0% 3.4 1.7 1238.6 0.7 987.8 0.8 1.3% 20.5% 4.4% 2015E 8.2% 5.1% 3.1% 0.9% 1.5% 0.6% 0.6% 1.3% 16.4 20.5%
Sunidhi Research |
74
State Bank of India

Valuation attractive from historic averages, Initiate with Outperform Banking Sector Outlook - Neutral
Initiating Coverage
SBI CAGR (FY12-14E)
SBI is Indias largest bank with a distribution network of 14230 branches, 22767 ATMs and an asset size of `14401 bn. Branches are loacted through out the country with a focus on rural and semi urban areas. Over 66% of the banks branches are loacted in rural and semi urban areas. Due to its vast distribution network, it has a large CASA base and is the market leader in retail advances with a market share of over 25% in home and education loans. NIM to remain stable SBI has excess liquidity of around `70 bn which it can deploy to increase its credit deposit ratio. Additionally its stable CASA ratio coupled with the re-pricing of bulk deposits at lower rates would keep NIMs stable at current levels. We have factored in a NIM of 3.2% for FY13. Asset quality pressure to come off going ahead SBI has reported higher slippages in H1FY13 with annualized slippages at 5.0% in Q1FY13 and 3.0% in Q2FY13. Going ahead we expect slippages to come off in H2FY13 and FY14 on the back of measures taken by the management such as cautious credit growth on risky segments, use of CIBIL scores for retail loans and focus on secured loans. We have factored a slippage rate of 4% in FY13 and 2.8% in FY14. Additionally, recoveries / upgradation from slippages are likely to to aid asset quality improvement. Restructured book low as compared to peers The restructured book for SBI is lower than several of its peers and has largely been restricted to CDR cases. Restructured book outstanding stood at 4.4% of advances as on Q2FY13. The bank has limited exposure to SEBs and Air India, as a result of which its restructured book excluding AI and SEBs stands almost at the same level at ~4.2% of advances. Capital manangement improved; Infusion likely in the near future Over last 4-5 quarters, capital management for the bank has improved resulting in stable RWA and improvement in Tier 1. SBI has a tier 1 ratio of 8.9% and a total CAR of 12.6%. The government has undertaken to keep SBI well capitalized and is likely to infuse capital whenever required. For FY13, management expects some capital infusion of ~`40 bn. Initiate coverage with an Outperform rating and a target price of `2590: At the CMP of `2300, the bank trades at 1.6x its FY13E cons. ABV and 1.3x its FY14E cons. ABV. At these levels, we believe that asset quality concerns are largely priced in. We initiate coverage with an Outperform rating and a target price of `2590 (1.5x its FY14E cons. ABV). Financials FY11 FY12 FY13E FY14E FY15E NII `bn 455.5 578.8 603.9 685.5 775.3 PAT `bn 111.8 159.8 189.2 238.7 274.6 ABV ` 1120.1 1347.3 1471.9 1726.4 1995.2 P/E x 13.1 9.7 8.2 6.5 5.6 P/ABV X 2.1 1.7 1.6 1.3 1.2 ROAA % 0.7 0.9 1.0 1.0 1.0 ROAE % 13.4 16.8 16.6 18.2 18.1
22%
9% 11% 13%
NII
Net Total Income
PPP
PAT
40.0% 30.0%
Outperform 2300 2590 13 2475/1576 19487
671.0 1515.2 28.1 2.3
61.6 9.1 17.2 12.1 1M 6.2 2.6 3M 24.5 11.3 6M 6.8 -5.6 12 M 20.9 3.2
20.0%
10.0% 0.0% -10.0% -20.0%
Dec-11
Dec-11
Aug-12
Apr-12
Apr-12
Oct-12
Jan-12
Nov-12
May-12
Mar-12
Nov-12
Feb-12
Sep-12
Sep-12
Feb-12
Jun-12
Jul-12
Jul-12
SBI
NIFTY
State Bank of India Trend in loan book growth

20000.0 18000.0 16000.0 14000.0 12000.0 10000.0 8000.0 6000.0 4000.0 2000.0 0.0 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

25000.0 20000.0 14.9% 17.0% 17.0% 18.0%
16.0%
14.0% 12.0%
15.7%
15.6% 14.3%
16.6%
17.3%
Rs bn
Rs bn
15000.0
10000.0
12.5%
12.7%
10.0%
8.0% 6.0%
5000.0
0.0
4.0%
2.0% 0.0%
2011
2012
2013E
2014E % yoy
2015E
2011
2012
2013E
2014E
% yoy
2015E
Advances
Deposits

900.0 3.6%

500.0 450.0 400.0 18.4% 13.4% 20.0% 15.0% 10.0%
3.5% 3.5%
3.4% 3.3%
800.0
700.0 600.0
350.0
Rs bn
Rs bn
500.0
400.0 300.0 3.2%
300.0
250.0 200.0 150.0
10.8% 1.3%
5.0%
3.2%
3.1% 3.1%
3.0% 3.0% 2.9% 2.8%
0.0% -5.0% -10.0% -12.8% 2012

-15.0%
200.0
100.0 0.0
3.1%
100.0 50.0
0.0
2011
2012
NII
2013E
NIM
2014E
2015E
2011
2013E
2014E
% yoy
2015E
Other Income
Trend in NPA
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 4.4% 3.3% 2.3% 2.2% 2.2%

5.6% 5.5%
5.5%
4.5%
4.0% 3.2% 2.8% 2.8% 2.5% 1.6% 1.3% 1.4% 1.2%
4.0%
3.5% 3.0%
2.5%
2.0% 1.5%
1.8%
1.5%
1.6%
1.0%
0.5% 0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
0.0%
2011
2012
Slippage (%)
2013E
2014E
2015E
Credit Cost (%)
On Adj NW (FY14) 1,158.5 58.7 50.9 17.3 14.6 24.2 2.1% 1,182.7 1.3 76
State Bank of India
Profit & Loss Account(` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet(` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash Balances Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) Sunidhi Research | 2011 1136.4 680.9 455.5 342.1 797.6 465.2 332.4 133.2 199.2 87.4 111.8 2011 6.3 828.4 834.7 12555.6 1424.7 1,663.9 16,479.0 1553.3 4190.7 10064.0 64.9 606.2 16,479.0 2011 14% 2% 36% 1% 19% 10% 34% 118% 7% 31% -7% 2011 3.3% 1.6% 2.8% 63.2% 51.2% 1.5% 0.9% 2012 1472.0 893.2 578.8 298.4 877.1 468.6 408.6 162.4 246.1 86.4 159.8 2012 6.7 1055.6 1,062.3 14146.9 1579.9 1,510.5 18,299.6 1275.9 4609.5 11636.7 74.1 703.4 18,299.6 2012 30% 31% 27% -13% 10% 1% 23% 22% 24% -1% 43% 2012 4.4% 1.8% 3.2% 40.9% 60.1% 1.6% 0.9% 2013E 1676.8 1072.8 603.9 338.5 942.4 508.9 433.5 137.8 295.6 106.4 189.2 2013E 6.7 1206.3 1,213.0 16255.1 1843.8 1,878.8 21,190.6 1887.8 5152.7 13294.9 81.5 773.7 21,190.6 2013E 14% 20% 4% 13% 7% 9% 6% -15% 20% 23% 18% 2013E 5.6% 2.3% 4.0% 43.8% 60.5% 1.3% 0.7% 2014E 1869.1 1183.6 685.5 400.8 1086.3 564.0 522.3 160.6 361.7 123.0 238.7 2014E 6.7 1401.0 1,407.7 19018.5 2120.4 2,062.9 24,609.4 2297.7 5834.6 15497.8 89.6 889.8 24,609.4 2014E 11% 10% 14% 18% 15% 11% 21% 17% 22% 16% 26% 2014E 5.5% 2.2% 2.8% 33.1% 62.2% 1.4% 0.7% 2015E 2097.4 1322.1 775.3 444.2 1219.5 630.2 589.3 179.5 409.8 135.2 274.6 2015E 6.7 1625.4 1,632.1 22251.6 2438.4 2,265.5 28,587.6 2674.1 6607.9 18183.7 98.6 1023.2 28,587.6 2015E 12% 12% 13% 11% 12% 12% 13% 12% 13% 10% 15% 2015E 5.5% 2.2% 2.5% 26.3% 62.2% 1.2% 0.7% 77
State Bank of India
Other operating indicators NIM (%) Cost to income (%) Business per branch (` mn) Business per employee (` mn) Profit per branch (` mn) Profit per employee (` mn) CASA per branch (` mn) CASA ratio (%) Other income / Total income CEB / Other income CEB / average advances Capital Adequacy ratios CAR (%) Tier 1 (%) Tier 2 (%) Leverage (x) Risk weighted assets / Total Assets (%) Valuation Table Net profit (` bn) Shares in issue (bn) EPS (`) EPS growth (%) PE (x) P/PPP (x) Book value (`/share) P/BV (x) Adj book value (`/share) P/ABV (x) ROAA (%) ROE (%) Dividend Yield (%) Du pont Decomposition Yield on Assets Less: Cost of Assets Net Interest Income Other Income Less: Operating Exp Less: Provisions Less: Tax RoAA Leverage RoAE
2011 3.1% 58.3% 1681.5 101.5 8.3 0.5 419.1 44.9% 42.9% 79.0% 2.9% 2011 12.0% 7.8% 4.2% 18.6 66.3% 2011 111.8 0.6 176.1 -6.9% 13.1 4.4 1314.5 1.8 1120.1 2.1 0.7% 13.4% 1.3% 2011 7.3% 4.4% 2.9% 2.2% 3.0% 0.9% 0.6% 0.7% 18.6 13.4%
2012 3.5% 53.4% 1829.0 119.7 11.3 0.7 408.3 40.7% 34.0% 93.1% 2.6% 2012 13.7% 9.7% 4.0% 18.3 60.8% 2012 159.8 0.7 238.1 35.2% 9.7 3.8 1583.1 1.5 1347.3 1.7 0.9% 16.8% 1.5% 2012 8.5% 5.1% 3.3% 1.7% 2.7% 0.9% 0.5% 0.9% 18.3 16.8%
2013E 3.2% 54.0% 2010.6 134.0 12.9 0.9 449.4 40.6% 35.9% 86.2% 2.3% 2013E 13.4% 9.6% 3.8% 17.4 60.4% 2013E 189.2 0.7 281.9 18.4% 8.2 3.6 1807.6 1.3 1471.9 1.6 1.0% 16.6% 1.7% 2013E 8.5% 5.4% 3.1% 1.7% 2.6% 0.7% 0.5% 1.0% 17.4 16.6%
2014E 3.1% 51.9% 2256.4 150.4 15.6 1.0 505.2 40.6% 36.9% 83.0% 2.3% 2014E 12.9% 9.2% 3.6% 17.5 62.4% 2014E 238.7 0.7 355.7 26.2% 6.5 3.0 2097.8 1.1 1726.4 1.3 1.0% 18.2% 2.0% 2014E 8.2% 5.2% 3.0% 1.8% 2.5% 0.7% 0.5% 1.0% 17.5 18.2%
2015E 3.0% 51.7% 2543.6 169.6 17.3 1.2 568.8 40.6% 36.4% 86.1% 2.3% 2015E 12.4% 8.9% 3.5% 17.5 64.5% 2015E 274.6 0.7 409.1 15.0% 5.6 2.6 2432.2 0.9 1995.2 1.2 1.0% 18.1% 2.3% 2015E 7.9% 5.0% 2.9% 1.7% 2.4% 0.7% 0.5% 1.0% 17.5 18.1%
Sunidhi Research |
78
Union Bank of India

Valuation running ahead of fundamentals, Initiate with Reduce Banking Sector Outlook - Neutral
Initiating Coverage
UBI CAGR (FY12-14E)
Union Bank is the sixth-largest government bank, with a large balance sheet size and diversified distribution network. It has around 3200 branches and 4100 ATMs spread across the country. Its business is distributed across the country with a focus on the Western region. Union Bank listed in 2002. Positive surprise on asset quality could continue As a contrast to other PSU banks, UBI reported an improvement in its asset quality during Q2FY13 with GNPA improving by 10bps QoQ to 3.7%. The improvement in GNPAs was on account of lower slippages (1.8% vs 3.6% in Q1FY13) as well as higher recoveries. However recoveries were chunky in nature and sustainability of the same remains questionable. We expect asset quality for UBI to remain volatile going ahead and have factored a slippage rate of 2.5% for FY13. NIM likely to remain stable at 3% During Q2FY13, UBIs reported NIM was largely stable at 3.0% qoq as the 18bps QoQ contraction in yields on assets was offset by a decrease in the cost of funds. The H1FY13 NIM stood at 3.0% largely in line with that of FY12. Going ahead we expect the NIM to remain stable at 3% for FY13 and FY14. Loan growth to moderate to 15% in FY13 UBI has grown its loan book at a CAGR of 24% from FY08-12. However due to asset quality concerns, several banks are going slow on lending especially to the large corporate segment. As a result, we expect UBIs loan book growth to come off to 15% in FY13 from 18% in FY12. Higher treasury gains could lead to an improvement in other income growth Other income for the bank has remained muted in H1FY13 owing to lower treasury and fee based income. As a result we have factored in an 8% yoy decline in other income for FY13. However we expect other income to register a robust increase of 19% yoy in FY14 on the back of higher treasury income. For UBI, a 100 bps decline in yields would lead to 8% impact on the banks FY14E PAT. Initiate coverage with a REDUCE rating and a target price of `231: At the CMP of `253, the bank trades at 1.4x its FY13E ABV and 1.2x its FY14E ABV. The bank has recently run up owing to its strong quarterly performance and now trades at a premium to its peers. However we believe that asset quality concerns remain for the bank which could lead to downgrades going ahead. We initiate coverage on UBI with a Reduce rating and a target price of `231 (1.1x its FY14E ABV).
20% 12%
10%
9%
NII
Net Total Income
PPP
PAT
30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0%
Dec-11
Dec-11
REDUCE 253 231 -9 274/150 19487
550.5 139.3 2.6 2.0
54.4 10.2 20.0 15.5 1M 16.1 12.5 3M 61.8 48.6 6M 26.1 13.7 12 M 12.2 -5.5

Aug-12 Apr-12
Apr-12 Oct-12
NII `mn 62162.0 69088.9 77658.0 86841.2 97830.3
PAT `mn 20819.4 17871.3 21236.8 25925.0 27666.7
ABV ` 176.9 181.0 182.8 209.6 239.9
P/E x 6.4 7.8 6.6 5.4 5.0
P/ABV X 1.4 1.4 1.4 1.2 1.1
ROAA % 1.0 0.7 0.8 0.8 0.8
ROAE % 18.0 13.2 13.9 15.3 14.7
Jan-12
Nov-12
May-12
Mar-12
Union Bank
NIFTY
Nov-12
Feb-12
Sep-12
Sep-12
Feb-12
Jun-12
Jul-12
Jul-12
Union Bank of India Trend in loan book growth

3000.0 2500.0 2000.0 26.5% 30.0% 25.0% 20.0%

4000.0 3500.0 3000.0 2500.0 20.0% 25.0%
19.1%
15.2% 13.7% 10.1%
Rs bn
1500.0 1000.0 500.0 0.0
17.8% 14.7%
16.2%
18.0%
Rs bn
16.7%
15.0%
10.0%
15.0% 10.0% 5.0% 0.0%
2000.0 1500.0 1000.0 500.0 0.0
5.0%
0.0%
2011
2012
2013E
2014E
% yoy
2015E
2011
2012
2013E
2014E
% yoy
2015E
Advances
Deposits

120.0 100.0 80.0 3.2% 3.1% 3.0% 3.0% 40.0 20.0 0.0 2.9% 3.1% 60.0 3.3% 3.2%

30.0 25.0 18.7% 20.0 14.4% 3.2% 25.0% 20.0% 15.0% 10.0%
Rs bn
Rs bn
3.0% 2.9% 2.8% 2.7% 2.6%
15.0 10.0 5.0 0.0
7.7%
5.0% 0.0% -5.0%
2011
2012
NII
2013E
NIM
2014E
2015E
2011
2012
-7.7% 2013E
-10.0%
2014E
% yoy
2015E
Other Income
Trend in NPA
4.0% 3.5% 3.0% 2.4% 1.7% 1.2% 2.2% 3.5% 3.4% 3.3%

3.0% 2.5% 2.0%
2.0% 1.8%
2.5%
2.5%
2.5% 2.2%
2.0%
3.0%
2.5% 2.0%
1.5% 1.0% 0.5% 0.0% 0.8%
1.5%
1.0% 0.5%
0.8%
0.9%
0.8%
0.8%
0.0%
2011 2012 %GNPA 2013E %NNPA 2014E 2015E
2011
2012
2013E
2014E
2015E
Slippage (%)
Credit Cost (%)
On Adj NW (FY14) 115.4 9.9 26.6 4.1 2.1 22.9 19.8% 138.3 1.0 80
Union Bank of India
Profit & Loss Account (` Mn) Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Balance Sheet(` Mn) Liabilities Equity Capital Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Assets Cash Balances Investments Advances Fixed Assets Other Assets Total Assets Growth matrix P&L Interest Earned Interest expended Net interest income Non-interest income Net total income Operating expenses Pre- provisioning profit (PPP) Provision & Contingency PBT Tax PAT Asset quality GNPA (%) NNPA (%) Slippage Ratio (%) NPA reduction rate (%) PCR (ex tech write offs) (%) Credit Costs (%) Provisioning / avg assets (%) Sunidhi Research | 2011 164526.2 102364.2 62162.0 20387.8 82549.8 39500.0 43049.8 13495.9 29553.9 8734.5 20819.4 2011 5,243.3 121291.9 126,535.2 2024612.9 71259.7 136,326.7 2,358,734.5 200984.4 583991.4 1509860.8 22927.8 42080.0 2,358,734.5 2011 24% 12% 50% 3% 35% 58% 19% 63% 6% 15% 2% 2011 2.4% 1.2% 2.5% 73.8% 50.2% 0.8% 0.6% 2012 211442.8 142353.9 69088.9 23323.8 92412.7 39875.2 52537.5 25410.0 27127.5 9256.2 17871.3 2012 5,505.5 139715.1 145,220.6 2228689.5 117194.9 129,899.5 2,621,004.4 156751.4 623635.6 1778820.8 23358.0 39548.6 2,621,004.4 2012 29% 39% 11% 14% 12% 1% 22% 88% -8% 6% -14% 2012 3.0% 1.7% 2.5% 53.4% 44.5% 0.8% 1.0% 2013E 235424.1 157766.2 77658.0 21528.9 99186.9 45418.8 53768.1 22071.5 31696.7 10459.9 21236.8 2013E 5,505.5 154939.5 160,445.0 2532995.5 134774.1 139,794.4 2,968,009.0 133480.6 724600.1 2039863.7 25693.8 45480.9 2,968,009.0 2013E 11% 11% 12% -8% 7% 14% 2% -13% 17% 13% 19% 2013E 3.5% 2.2% 2.5% 49.6% 38.7% 0.9% 0.8% 2014E 260425.7 173584.4 86841.2 25557.8 112399.0 49897.6 62501.5 23807.5 38694.0 12769.0 25925.0 2014E 5,505.5 173371.2 178,876.7 2918693.7 154990.2 157,513.8 3,410,074.4 144204.3 815468.1 2370945.9 28263.2 52303.0 3,410,074.4 2014E 11% 10% 12% 19% 13% 10% 16% 8% 22% 22% 22% 2014E 3.4% 2.0% 2.2% 48.5% 41.9% 0.8% 0.7% 2015E 291003.7 193173.4 97830.3 27521.0 125351.2 55545.5 69805.7 28512.2 41293.5 13626.9 27666.7 2015E 5,505.5 191693.4 197,198.9 3405764.5 178238.8 177,566.2 3,958,768.4 151220.2 919966.3 2797453.9 31089.5 60148.5 3,958,768.4 2015E 12% 11% 13% 8% 12% 11% 12% 20% 7% 7% 7% 2015E 3.3% 1.8% 2.0% 44.7% 47.0% 0.8% 0.8% 81
Union Bank of India
2011 3.2% 47.8% 1583.5 142.6 9.3 0.8 288.1 31.8% 24.7% 17.9% 0.3% 2011 13.0% 8.7% 4.3% 18.7 59.4% 2011 20819.4 524.3 39.7 -1.4% 6.4 3.1 211.3 1.2 176.9 1.4 1.0% 18.0% 3.2% 2011 7.6% 4.7% 2.9% 0.9% 1.8% 0.6% 0.4% 1.0% 18.7 18.0%
2012 3.1% 43.1% 1771.7 162.5 7.9 0.7 308.2 31.3% 25.2% 15.7% 0.2% 2012 11.9% 8.4% 3.5% 18.3 64.2% 2012 17871.3 550.5 32.5 -18.2% 7.8 2.7 235.9 1.1 181.0 1.4 0.7% 13.2% 3.2% 2012 8.5% 5.7% 2.8% 0.9% 1.6% 1.0% 0.4% 0.7% 18.3 13.2%
2013E 3.0% 45.8% 1995.1 186.3 9.3 0.9 343.3 31.1% 21.7% 18.7% 0.2% 2013E 11.4% 8.0% 3.5% 18.3 65.7% 2013E 21236.8 550.5 38.6 18.8% 6.6 2.6 263.6 1.0 182.8 1.4 0.8% 13.9% 3.6% 2013E 8.4% 5.6% 2.8% 0.8% 1.6% 0.8% 0.4% 0.8% 18.3 13.9%
2014E 3.0% 44.4% 2278.1 216.6 11.2 1.1 392.2 31.2% 22.7% 17.6% 0.2% 2014E 10.7% 7.6% 3.1% 18.8 67.5% 2014E 25925.0 550.5 47.1 22.1% 5.4 2.2 297.0 0.9 209.6 1.2 0.8% 15.3% 4.5% 2014E 8.2% 5.4% 2.7% 0.8% 1.6% 0.7% 0.4% 0.8% 18.8 15.3%
2015E 2.9% 44.3% 2637.4 255.3 11.8 1.1 449.2 31.0% 22.0% 18.3% 0.2% 2015E 10.0% 7.1% 2.9% 19.6 68.6% 2015E 27666.7 550.5 50.3 6.7% 5.0 2.0 330.3 0.8 239.9 1.1 0.8% 14.7% 5.7% 2015E 7.9% 5.2% 2.7% 0.7% 1.5% 0.8% 0.4% 0.8% 19.6 14.7%
Sunidhi Research |
82
Union Bank of India
Sunidhis Rating Rationale

The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral. (For Mid & Small cap stocks from 12 months perspective) BUY ACCUMULATE HOLD REDUCE SELL Absolute Return >20% Absolute Return Between 10-20% Absolute Return Between 0-10% Absolute Return 0 To Negative 10% Absolute Return > Negative 10%
Apart from Absolute returns our rating for a stock would also include subjective factors like macro environment, outlook of the industry in which the company is operating, growth expectations from the company vis a vis its peers, scope for P/E re-rating/de-rating for the broader market and the company in specific.
SUNIDHI SECURITIES & FINANCE LTD

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Disclaimer: "This Report is published by Sunidhi Securities & Finance Ltd.("Sunidhi") for private circulation. This report is meant for informational purposes and is not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. While utmost care has been taken in preparing this report, we claim no responsibility for its accuracy. Recipients should not regard the report as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without any notice and this report is not under any obligation to update or keep current the information contained herein. Past performance is not necessarily indicative of future results. This Report accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. Sunidhi and its associated companies, directors, officers and employees may from time to time have a long or short position in the securities mentioned and may sell or buy such securities, or act upon information contained herein prior to the publication thereof. Sunidhi may also provide other financial services to the companies mentioned in this report."
Sunidhi Research |
83

Banking Sector 2012 Sector Analysis

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Banking Sector 2012 Sector Analysis

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December 10, 2012

IDBI Bank 113 3 Source: Sunidhi Research, * CMP as of Dec 6

Write off book as % of Adj. Networth

Source: Company, Sunidhi Research

Source: Company, Sunidhi Research

Restructured ex SEB / AI (%)

Source: Company, Sunidhi Research

Gross Fixed Capital Formation

Trend in M1 growth 30% 25% 20% 15% 10% 5% 0%

Stalled project by Industry

Telecomunicati on, 4.36% Metals & Mininig , 16.52%

Land Acquisition , 27.7%

1 Year CP rate premium to 1 Year Gsec yield

Source: Bloomberg, Sunidhi Research

Source: Bloomberg, Sunidhi Research

Bond yields vs. SBI price performance

Inverse 1 year BBB Corp Bond Yield - RHS

SBI Price performance (YoY %)

Source: Bloomberg, Sunidhi Research

Non promoter FII Insurance + MF Non promoter FII Insurance + MF

*Adjusted for subsidiary valuation **Prices as on 6th Dec 2012

Source: Sunidhi Research

Banking Sector Impact on ABV based on key rationale

*Adjusted for subsidiary valuation **Prices as on 6th Dec 2012

Source: Sunidhi Research

New Pvt Banks

This time its different

1 Month 3 Months 6 Months

Is the market over-reacting?

Winners & Losers

Read more: http://www.investopedia.com/university/behavioral_finance/behavioral10.asp#ixzz28z18kyY 2

Bridging the gap

Why is this situation unlikely?

4.0% 3.5% 3.0% 2.5%

GDP growth (LHS)

Banking Sector Trend in monthly rainfall (% of LPA)

Trend in IMD rainfall assessment and RBI PRN

0% Jun-12 Jul-12 Aug-12 Sep-12

Source: IMD, Sunidhi Research

Source: RBI, Sunidhi Research

Rabi Crop Sowing (as on 30.11.2012)

Trend in composition of NPAs

Source: RBI, Sunidhi Research

20.0% 15.0% 10.0% 5.0%

2009 All Banks Public

2010 New Pvt

2011 Old Pvt

Source: RBI, Sunidhi Research

Trend in LAF borrowings

Credit growth (% yoy)

Deposit growth (% yoy)

Source: RBI, Sunidhi Research

Source: RBI, Sunidhi Research Credit Deposit growth spread

Credit Deposit growth spread

Source: RBI, Sunidhi Research

Treasury gains to boost profitability & provide a buffer for provisioning

Trend in Spot OIS and 1yr Fwd OIS rates

1 year Gsec Yield

1 Year Forward OIS

Source: RBI, Sunidhi Research

State Bank of India 3715.3 Source: Company, Sunidhi research

7.4 7.2 7.0

7.0 6.8 6.6