Fin 1

December 2, 2013
Financials
Patience is not an absence of action rather it is "timing"
SECTOR
UPDATE
Recent earnings season had been a mixed bag with few positive surprises for us as well as the street, especially on margin and adjustment for
investment depreciation front. However picture on asset quality continued remaining uncertain. The street expectations had been gloomy on
the back drop of liquidity tightening measures undertaken by RBI in mid of July 2013 creating uncertainties over pressure on margins and
quantum of treasury losses. However, most banks under our coverage universe managed to score better on these grounds, but sustainability
of the same seems difficult.
Political uncertainty still persists Prefer to stay cautious rather than getting overboard
In last few weeks, we had seen sharp rally in major indices as well as in the banking stocks with an undercurrent of change in guard during the
upcoming general elections in May 2014 and its likely positive impact on current policy bottle necks. We strongly feel relying on the probability for
such political outcome is slightly premature. We also believe that for an economy like India, economic turnaround and banks regaining lost
momentum on growth and asset quality front would need atleast couple of quarters.Till then lacklustre numbers are likely to circulate during earnings
season. On argument over attractive valuation, we believe that for upgrading valuation multiple, ground realities need to change. Hence, we continue
to remain cautious on banking sector as a whole and would wait for signs of real turnaround in the domestic economy.
Credit pick-up not visible; one offs of last quarter likely to reversed; slowing consumption demand another cause of concern
Although there had been continued efforts from the government authorities towards effective policy implementations, with cost of funds remaining
high along with uncertainty over project clearances, real credit growth is still invisible. Additionally upcoming general elections is adding further
uncertainty to corporate capex cycle, discouraging incremental credit opportunities. Interestingly during Q2FY14, due to sudden spike in short term
money market rates, group of borrowers (especially Mutual Funds and NBFCs) have withdrawn money for less than 90 days tenure from banks. This
pick up has inflated the credit growth for Q2FY14, however with stability in money market returning, spike in credit growth of last quarter is likely to
see reversal trend. Additionally slowing consumption demand is another indicator of sluggishness in demand for retail credit.
Although uncertainty over cost of funds has faded away; Pressure on margins yet to sustain
Now with some ease on liquidity already in place (especially for MSF rates) along with dollar exchange rate stabilizing in a defined range, sudden
spike in cost of funds seems unlikely. However with recent rate hike of 50bps along with shortage of liquidity due to consistent high government
borrowing, cost of funds are likely to remain at an elevated levels. This coupled with inability of banks to raise base rates on the back of slowing
growth and stiff competition, would put further pressure on margins.
Improvement in asset quality still seems slightly difficult; As old issues fades away new are likely to pop up
Although many banks has already indicated that signs of asset quality improvement is visible, we still believe worst might not be over for banks as
such. We remain cautious especially on two fronts: one has been increase in working capital cycles (no of days for payments) for mid corporate and
SME/MSME segment across industries,which is generally being funded by bank money. In case economy continues to witness lacklustre growth, this
trend is likely to worsen further resulting in fresh round of defaults. Secondly major part of restructured book for all banks has been generated during
past 12-18 months and is likely to complete its moratorium period in coming quarters. Performance of this book would be an important outcome as
we believe stress might reemerge from this portfolio. Hence we continue to remain cautious on loan loss defaults for entire banking sector and do not
expect credit cost to decline in near future.
Outlook
We continue to remain cautious on the banking sector, however, our preference towards private sector banks over public sector banks
remains intact. However, we would remain selective considering risk reward for individual banks. Turning positive towards PSU banks was
(and is) slightly difficult due to worsening asset quality, frequent management change as well as greater dilution risk. We continue to prefer
Axis Bank (ACCUMULATE with TP Rs1,224) and ICICI Bank (ACCUMULATE with TP Rs1,022) considering retail expansion, stability in margins
and healthy coverage ratio. Although we like HDFC Bank (HOLD with TP Rs644), considering its premium valuation, we see limited upside in
the stock. Among PSU Banks, BOI (HOLD with TP Rs210) surprised positively with Q2FY14 numbers. However, we would wait for sustainability
of performance. We avoid rest of PSU banks under our coverage like PNB (REDUCE with TP Rs503), BOB (SELL with TP Rs502), Union Bank of
India (SELL with TP Rs98) and Central Bank of India (CBoI) (SELL with TP Rs46) as we believe managing bottom line for these banks is
difficult. Among mid cap private sector banks, we like ING Vysya Bank, City Union Bank, J&K Bank and DCB as we believe these banks have
stronger liability franchise, focused advancing approach and limited risk on asset quality. We think in mid to longer term tenure, these mid-size
banks are likely to outperform large banks as well as major indices as a whole.

We advise the investors to avaoidrestAlthoughWe continue to avoid PSU banks. However, we believe PNB (HOLD with TP Rs480) is likely to
outperform BOB (HOLD with TP Rs450) mainly on the back of consolidation of advance book along with management stability and limited
international exposure.
Jignesh Shial +91-22-4322 1185 jignesh.shial@idbicapital.com

2
Sector Update Financials

What we prefer and Where we stand
We have valued the banks on Excess Return on Equity basis with Risk Free Rate at 8.5% and Market Risk Premium at 6.5%
We have considered 10 year of growth period and have assume terminal growth of 3% for all banks under our coverage
universe. In our Adjusted book value calculations we used to remove 100% of NPA to get clear picture on fair value of book.
However, considering the recent pile up in restructured book and consistent rise in slippages from that book, we believe that
adjusted book for NPAs doesnt accurately reflect the stress and are inflated. Hence we have adjusted book further for
restructured portfolio as well. Thus, We are adjusting reporting book value for100% NPA coverage as well as we are now
adjusting restructuring hit of 25% on the outstanding estimated (FY14-15E) restructured assets.

Table: Recommendation and Valuation (Under soft coverage)

Closing Price (Rs)
(as on Nov 30, 2013)
Outlook
CUB 49.3 POSITIVE
DCB 49.6 POSITIVE
Federal Bank 78.8 NEUTRAL
INDUSIND 422.5 NEUTRAL
ING Vysya 567.8 NEUTRAL
J&K 1,217.0 POSITIVE
KVB 335.9 NEUTRAL
SIB 20.6 NEGATIVE
YES Bank 368.7 POSITIVE

FY14E FY15E

Closing Price
(as on Nov 30, 2013)
Target
Price
Recommendation
Adj Book Value
(100% NPA + 25%
Rest Adv)
P/Adj Book
(x)
ROE (%)
Adj Book Value
(100% NPA + 25%
Rest Adv)
P/Adj Book
(x)
ROE (%)
Axis Bank 1,155 1,221 ACCUMULATE 758.3 1.6 15.9 868.7 1.4 16.5
ICICI Bank** 1,070 1,147 ACCUMULATE 598.4 1.9 14.0 663.6 1.7 14.9
HDFC Bank 661 658 HOLD 176.0 3.7 20.3 211.8 3.1 21.5
PNB 550 503 REDUCE 417.8 1.2 10.0 422.2 1.2 11.1
BOB 645 505 SELL 460.7 1.1 12.4 441.2 1.1 10.8
BOI 217 210 HOLD 183.0 1.1 10.5 170.7 1.2 11.6
Union Bank 120 98 SELL 122.2 0.8 8.8 110.1 0.9 9.8
Central Bank 52 46 SELL 50.6 0.9 (5.9) 39.6 1.2 4.7
** Standalone Numbers only
Table: How we differ from consensus
Table: Recommendation and Valuation (Covered companies) (Rs)
NII (Rsmn) PAT (Rsmn) Deviation
IDBI Capital Consensus IDBI Capital Consensus NII (%) PAT (%)
FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E
Axis Bank 1,19,164 1,36,462 113,800 134,000 56,171 66,912 58,471 68,680 4.7 1.8 (3.9) (2.6)
ICICI Bank 1,65,683 1,92,349 163,787 190,410 98,459 1,15,455 94,578 109,256 1.2 1.0 4.1 5.7
HDFC Bank 1,84,798 2,21,460 188,137 225,250 80,445 1,01,748 83,931 104,317 (1.8) (1.7) (4.2) (2.5)
PNB 1,61,902 1,81,241 160,746 181,047 33,658 41,796 41,147 51,253 0.7 0.1 (18.2) (18.5)
BOB 1,22,109 1,39,103 123,852 144,441 41,567 39,297 44,855 52,211 (1.4) (3.7) (7.3) (24.7)
BOI 1,01,701 1,14,464 104,301 122,108 26,096 31,492 29,745 34,956 (2.5) (6.3) (12.3) (9.9)
Union Bank 80,153 93,676 81,529 94,529 15,514 18,357 18,912 23,726 (1.7) (0.9) (18.0) (22.6)
Central Bank 61,210 71,127 61,087 70,876 (8,590) 6,529 (9,380) 8,986 0.2 0.4 (8.4) (27.3)
Source: Bloomberg; IDBI Capital Research

3

Index
Page No.
Overview on Banking Sector 4
Banks under Price to Book/ROE comparison 12
Recommendations Coverage Universe
Axis Bank Dont change horses in mid-stream ACCUMULATE Target Price Rs1,221 15
ICICI Bank A golden key can open any door ACCUMULATE Target Price Rs1,147 17
HDFC Bank A good man is hard to find HOLD Target Price Rs658 19
Punjab National Bank A miss is as good as mile REDUCE Target Price Rs503 21
Bank of Baroda All that glitters is not gold SELL Target Price Rs505 23
Bank of India Dont upset the apple cart HOLD Target Price Rs210 25
Union Bank of India Fine words butter no parsnips SELL Target Price Rs98 27
Central Bank of India A leopard cannot change its spots Target Price Rs46 29
Recommendations Soft Coverage
City Union Bank Best among Equals Outlook: Positive 32
Development Credit Bank Many a little makes a mickle - Outlook: Positive 33
Federal Bank Wait and watch is best strategy - Outlook: Neutral 34
Indusind Bank Patience is Virtue Outlook: Neutral 35
J&K Bank Strike when the iron is hot Outlook: Positive 36
KarurVysya Bank As you sow so shall you reap - Outlook: Neutral 37
South Indian Bank If anything can go wrong, it will - Outlook: Negative 38
ING Vysya Bank Make hay while the sun shine - Outlook: Neutral 39
Yes Bank Better to light a candle than to curse the darkness - Outlook: Positive 40
Notes and Disclaimer 41

4

Overview on Banking Sector
Political uncertainty still persists Prefer to stay cautious rather than getting overboard
As most of the market participants, we also completely agree that the outcome of general elections 2014 would be a
game changer activity for stock markets as a whole. Investors are eagerly waiting for Indias infrastructure story to start
playing its prominent role in shaping India growth story further and outcome of this general election would largely decide
the fate of this story. However forecasting an outcome and accordingly changing investment thesis seems little far
stretched atleast for now.
Market rallying on election expectation is bit premature Possibility of consolidation or correction
In last few weeks, we had seen sharp rally in major indices as well as in the banking stocks with an undercurrent of
change in guard during the upcoming general elections in May 2014 and its positive impact on current policy bottle
necks. We strongly feel relying on the probability for an outcome of a major political event which might occur after 8
months, is slightly premature as it could turn either ways. In case of election outcome going against market
expectations, the possible correction would be far steeper than expected. Thus, pre-election rally seems to have
already been arrived and market may start taking cues from current domestic/international environment and
earnings which still does not look much promising. Hence we expecta consolidation phase in the market or may
even see some correction from current levels.
Revival of economy or ease in inflation wont happen overnight
Banking sector had seen volatile earnings since past few quarters due to various reasons and factors. However the
key rationale had been slowing economy which ultimately resulted in lackluster growth in credit and rising levels of
delinquencies. Although the current government is actively stressing up on the revival measures to boost economic
growth as well tapering inflation levels, we do not expect the same to happen overnight. We believe that for an
economy to turn around and banks to regain its lost momentum especially on growth and asset quality front, it would
take atleast couple of quarters.
.weakness in earnings likely to stay for atleast few quarters
Although market may start pricing in the improvement at earlier stages of revival itself, still we believe that banks are
likely to report weak set of numbers atleast during upcoming 3 to 4 quarters and till than we expect the banking
stocks to remain range bound. We also do not expect banking sector to start commanding premium over current
valuation as we feel for doing so, ground realities in the economy needs to be changed and real investment cycle
needs to be initiated. Hence we continue to remain cautious on banking sector as a whole and would become
positive once we see signs of real turnaround in the domestic economy as well as the credit cycle.
Uncertainties causing slow down in credit; one offs during last quarter to be reversed; slowing
consumption demand another cause of concern
We have been highlighting our concerns over credit growth for quite some time. Although recently there had been
continued efforts from the government authorities towards effective policy implementations however with high rate of
interest and uncertainty over project clearances, real growth in credit is still invisible. Additionally upcoming general
elections is adding further uncertainty to corporate capex cycle, discouraging incremental credit opportunities.
Historic correlation between GDP growth to Credit growth indicates lackluster growth in credit to continue
We observed a trend of past 10 years whereby we tried to identify correlation between India Real GDP growths to
Indian credit growth for all scheduled commercial banks. Indian banking system credit had seen an average growth
multiple of 3x over India GDP growth. Thus, in case of Indian economy growing at RBIs expectation of 4.8% for
FY14, expected credit growth is unlikely to breach 15% levelsduring current fiscal. There could be an exception to
the average data but considering absence of credit demand from large corporate and recent slowdown visible in
consumer credit, credit growth for FY14 is expected to remain under RBIs guidance of 15%.

5

Figure: Chart on correlation between GDP growth to Credit growth (%)

Source: RBI; IDBI Capital Research
Spike in short term rates fueled in demand for short term credit from banks
Another interesting observation that we would like to highlight here would be spike in short term credit for banks.
During Q2FY14, many banks (especially from PSU segment) had seen better than expected credit uptick. However
while digging numbers in detail; we observe that there is a possibility of few one offs in such aggressive credit pick
up. We believe that due to spike in short term money market rates post July14, cost of funds for many companies
had become unviable and hence many borrowers (especially Mutual Funds and NBFCs) has started withdrawing
money for less than 90 days tenure from banks. This pick up has inflated the credit growth.
Figure: Pick up in Bank credit and decline in CP volumes post surge in CP rates (%)

Source: Bloomberg; RBI; IDBI Capital Research
could see reversal in upcoming quarter
However with stability in money market returning, spike in short tenure loans during last quarter is likely to see
reversal trends as such companies would re-start borrowing from short term money markets and may also start
repaying the existing loans which could result in negative trend for credit growth. We agree that this is more
hypothetical, still we believe it would be an interesting outcome to observe and should not be avoided in near term.
Hence we continue to remain skeptical over asset growth probabilities during the second half of FY14.
Shift in focus to retail credit may save private players
To counter slowdown in credit growth, we had been witnessing a shift in focus towards retail and SME/MSME
segment especially among private sector banks, the strategy which had been proved appropriate till now. However,
with macro-economic slowdown impacting the service industry as well, credit demand from these segments may
also dry out. Additionally, we remain slightly optimistic towards financial inclusion and potential growth from rural -
semi urban areas especially for large private sector banks like HDFC and ICICI. These banks generally adopts light
branch model whereby the operational cost for running this branches are relatively less and hence break even is
achieved in relatively lower period. This would also be source of augmenting law cost CASA and retail deposits as
well as would be useful for achieving priority sector lending targets.

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6

..but growing retail book for PSU banks seems difficult lower base is only advantage
Similarly to Private banks, PSU banks have also started focusing on gathering momentum on Retail and
SME/MSME front. However, most PSU Banks lack the necessary end to end banking facilities which are most
essential for growing retail customer base. For SME/MSME segment, historic data indicates weaker underwriting
abilities of these banks and hence likelihood of quality growth remains slightly dubious. We are seeing good growth
in retail front for many PSU banks on yearly basis however we attribute the same to low base effect of previous
year and would to be phased out gradually.

Good monsoon coupled with fresh disbursement to SEB could lead credit growth for PSU Banks
For PSU Banks, good monsoon could be face savior as that will lead to good credit demand for priority sector.
Apart from this, we expect fresh disbursement to SEBs (post first and second round of restructuring) would also
trigger further credit demand uptick in coming quarters. BOB and PNB are also witnessing relatively better business
in international market (especially due to rupee depreciation effect) which could be another positive trigger.
Figure: Credit Growth estimates (%)

Source: Company; IDBI Capital Research
Declining purchase liability resultant of sluggish growth Liquidity tightening would further
pressurize margins
Post government intervention last year, most of the banks were under pressure to reduce its dependence on high cost
bulk deposits. During the current quarter, most of the banks (private as well as public sector) has replaced major portion
of its purchase liabilities with low cost retail deposits. Retail deposits not only reduces cost of funds but is also
considered as relatively stable funding option. However we remain slightly skeptical on this movement as we believe that
reduction in wholesale deposit has more correlation to sluggish credit demand which allowed the banks to have liberty of
pricing its deposit base. Once credit demand likely to emerge, most of the banks would be forced to augment funds
through bulk deposits as they continue to remain quickest mode of fund augmentation.
Rise in CASA deposit base may be one off due to rupee depreciation
One positive aspect during previous quarter had been substantial jump in CASA deposit for the bank during
Q2FY14. Post deregulation of savings interest rates, many banks has hiked savings deposit rates and accordingly
witnessed multifold rise in saving deposit base. However during previous quarter, we believe there had been a one
off factor in the form of rupee depreciation which allowed significant rupee inflow from outside India through NRE
term/savings deposits. This money has been brought mainly in order generate asset base (mainly real estate) in
India and hence it should be considered as one offs and it might see a declining trend in coming quarters.
0.00
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0.35
Axis Bank ICICI Bank HDFC Bank PNB BOB BOI UBI CBOI
(
%
)
Q2FY14 FY14E FY15E
Table: Retail Segment exposure of banks (%)
Sector Axis Bank ICICI Bank HDFC Bank PNB BOB BOI UBI CBoI

Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12
Retail* 30 26 36 35 54 53 11 10 12 12 11 11 10 10 13 12
Others** 70 74 64 65 46 47 89 90 88 88 89 89 90 90 87 88
*Retail includes Housing loan, Auto loans, Personal loans, LAP, Credit Cards etc.; **Others includes corporate, SME/MSME etc.

7

Positive impact on margins due to recent capital infusion likely to be eroded soon especially for private
players
Many banks (including private sector banks) have raised capital during second half of FY13 or during Q1FY14
which has helped these banks to sustain their margins even during recent tight liquidity conditions. These banks
could see stability in margins or even sequential improvement in margins during Q2FY14 mainly due to such QIP
funds which were technically free of cost. However going forwards, impact of this zero cost funds is likely to be
eroded and gradually cost pressure building up, decline in margin is inevitable.
. However for PSU Banks, next round of fund raising already in place, margins likely to remain stable
For PSU Banks, raising capital on regular intervals has become more of a necessity rather than an opportunity to
expand. Post implementation of Basel III norms by RBI, maintaining higher capital base has been more severe than
Basel II regime. PSU banks with higher share of corporate exposure including stressed assets and sectors needs
capital infusion on regular intervals. Although it posts a major worry in the form of equity dilution, it also provides
margin sustainability. However with consistent pressure on cost of funds and inability to raise base rates, we expect
little scope for improvement in margins and we expect margins to remain stable.
Table: Capital raised by Banks
Sector AmtRs Period
Axis Bank 55.4 Feb'13
PNB 12.5 Mar'13
5.0 Dec'13
BOI 8.1 Mar'13
10.0 Dec'13
BOB 8.6 Mar'13
5.5 Dec'13
UBI 25.0 Mar'13
5.0 Dec'13
CBoI 24.1 Mar'13
18.0 Dec'13
Hike in deposit rates already done passing it to customers is difficult task
Post liquidity tightening measures under take by RBI in July13, almost all banks have increased its deposit rates by
50-100bps especially in deposits with mid-term maturity segment (1-3 years). Thus, overall cost of funds has
already increased. On the other hand, with sluggish demand environment and intense competition in the market,
banks are unable to increase its lending rate and hence are incurring hit on their margins which we expect to impact
return ratios for the bank negatively. Also with higher delinquencies continuing, risk of interest reversals also
emerges leading to further pressure on margins especially for PSU banks.

Table: Share of CASA, Retail Deposit and Bulk Deposit (%)
Sector Axis Bank ICICI Bank HDFC Bank PNB BOB BOI UBI CBoI

Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12 Sept'13 Sept'12
CASA 43 42 43.3 40 45 46 38.5 35.8 26.3 25.8 30.4 25.3 28.2 30.5 32.4 33.0
Bulk Deposit 27 34 29 34 17 19 9.0 24.9 NA NA 6.1 17.8 10.5 12.5 22.1 27.4
Other Term Depo 30 24 27.7 26 38 35 52.5 39.3 73.7 74.2 63.5 56.9 61.3 57.0 45.6 39.6

8

Figure: NIM estimates for Banks under Coverage


Asset quality issues is worst already behind? Not exactly
Asset quality issues for banks had been most volatile issue till date with rapid fluctuations varying from bank to bank
depending up on the base underline abilities of the bank.Q2FY14 had been a mixed quarter as many banks although
reported weak set of numbers still were better than street estimates and hence expectation of worst may be behind has
started popping up. On a positive note, recoveries from NPA had been improved in general for all banks including PSU
banks indicating seriousness of efforts from bankers to resolve NPA issues. On restructuring front, additions continued
to remain at elevated levels along with slippage from restructured book also inching upwards from previous year levels
which we believe is one of the worrying signs.
Through our discussions with various bank managements as well as through our channel checks (for agri, consumer and
auto segment), we believe that for asset quality worst may not be over yet. Slowing economic growth along with weaker
global demand has finally started impacting consumer sentiments in general which lead to slowing demand and
increasing risk of defaults. With consistently high inflation, real income for consumers in India has declined drastically
and as a result potential risk of defaults even for mortgage backed lending has consistently remained high. We are trying
to identify few of the areas of concern which we believe could resultant in to new wave of distressed asset quality cycle.
Funding extended working capital cycle may turn out to be fragile option
Due to prolonged weakness in domestic economy as well as with consistent higher rate of interest rates prevailing,
participants in major industries are witnessing absence of prompt trade payments resulting in extended working
capital cycle. Thus, there is a general trend of increase in payment day cycles (in case of receivables) for mid
corporate and SME/MSME segment across industries, which is generally funded by bank money. In case of further
slowdown in economy, this trend is likely to get worst and we may see new cases of defaults occurring.
Table: Advance book classification based on maturity profile
Loan Tenure on March'13 Axis Bank ICICI Bank HDFC Bank PNB BOB BOI UBI CBoI
Short Term* 31 18 45 54 57 60 50 38
Long Term 69 82 55 46 43 40 50 62
*Short Term indicates - less than 1 year including repayments from long term loans dues
Source: Company data; IDBI Capital Research
CDR and bilateral restructuring at historical high slippages from restructured book also at alarming levels
On restructuring front, previous year had witnessed the largest no of cases being referred to the CDR (Corporate
debt restructuring cell) since its inception. Even during Q1FY14 CDR references continued to remain alarmingly
high. Although most of the bank management considers CDR as an essence of revival especially during weak
economic environment, we remain cautious towards increase in quantum of cases referred as well as continued
high slippages from previous restructured accounts.

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Axis Bank ICICI Bank HDFC Bank PNB BOB BOI UBI CBOI
Q2FY14 FY14E FY15E

9

Figure: Quarter-wise breakup of the cases referred (%)

Source: CDR Cell; IDBI Capital Research
On an average trend, close to 10-12% of restructured accounts has slipped in to NPA during subsequent quarters
indicating restructuring is a measure for postponing current quarter losses to subsequent quarters. Also CDR
restructuring is just one form of restructuring undertaken by a common cell however the same is merely 30% of
total restructured pipeline of the banks whereas rest of the restructuring is bilateral restructuring which adds further
uncertainty to asset quality profile of the bank.

Restriction on write offs would bring more transparency NPA numbers likely to soar further
Interestingly during last year, although fresh slippage trend had been far worst, overall GNPA (%) remained stable
mainly as a resultant of higher write off undertaken by individual banks. However during the current fiscal, this trend
seems slightly difficult especially after finance ministry ensuring write off to remain equal to cash recoveries
obtained by the bank during same fiscal. This will ensure further transparency in the asset book of the bank
however NPA (%) is likely to soar harder.

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Amount Rs No referred
Table: Exposure in riskier sectors (%)
Sectoral Exposure as on
March 31, 2013 (Fund Based)
% of Total
CDR
(Q2FY14)
Axis Bank ICICI Bank HDFC Bank PNB BOB BOI UBI CBoI
Infrastructure
(incl Power &Telecome)
31.89 13.46 19.59 1.15 17.26 9.69 11.48 16.69 30.53
Iron & Steel 21.30 3.20 7.38 2.22 6.18 3.39 4.72 3.84 4.62
Textiles 9.96 2.30 1.27 1.30 2.38 3.52 1.47 2.82 3.32
Source: CDR Cell; Company data; IDBI Capital Research

Table: Delinquency data add restructuring detail (%)

Q2FY14 FY14E FY15E Q2FY14 FY14E FY15E Q2FY14 FY14E FY15E Q2FY14 FY14E FY15E Q2FY14 FY14E FY15E Q2FY14 FY14E FY15E Q2FY14 FY14E FY15E Q2FY14 FY14E FY15E
GNPA (%) 1.19% 1.27% 1.27% 3.08% 3.11% 2.97% 1.09% 1.11% 1.13% 5.14% 4.91% 5.07% 3.15% 3.31% 3.35% 2.93% 3.79% 3.93% 3.64% 3.68% 3.91% 6.47% 5.80% 6.09%
NNPA (%) 0.37% 0.37% 0.36% 0.85% 0.69% 0.65% 0.29% 0.25% 0.26% 3.07% 2.31% 2.38% 1.86% 1.88% 2.01% 1.85% 2.53% 2.69% 2.15% 2.37% 2.28% 3.77% 3.45% 3.54%
Fresh Slippage
(% of Adv)
1.10% 1.00% 1.20% 1.20% 1.00% 0.90% 3.00% 2.80% 2.50% 1.80% 3.00% 2.50% 2.50% 2.20% 3.00% 2.50%
Recovery
(% of O/s NPA)
8.00% 8.00% 0.30% 0.30% 5.00% 5.00% 12.00% 12.00% 6.00% 6.00% 6.00% 6.00% 8.00% 8.00% 8.00% 8.00%
Write off
(% of O/s NPA)
25.00% 25.00% 10.00% 10.00% 30.00% 30.00% 10.00% 12.00% 20.00% 20.00% 20.00% 20.00% 14.00% 14.00% 5.00% 5.00%
PCR (Reported) 80.00% 80.86% 81.92% 73.10% 77.76% 78.08% 78.00% 77.67% 76.80% 55.27% 52.92% 53.03% 61.68% 58.20% 55.11% 63.29% 53.10% 51.42% 60.43% 55.55% 56.57% 49.98% 45.50% 46.83%
Restrctured
Book (% of Adv)
2.10% 2.09% 2.19% 2.15% 2.00% 2.02% 0.20% 0.20% 0.19% 11.53 11.15% 11.60% 7.70% 7.84% 8.38% 5.19% 6.13% 6.55% 4.91% 6.25% 6.94% 14.33% 12.15% 12.54%

10

Dynamic/Un-hedged exposure provisioning yet to come Credit Cost to remain at an elevated levels
On the provisioning front, RBI has already increased provisioning requirements on restructured assets as well as
with dynamic provisioning and norms for provision for un-hedged corporate exposure implemented, provisioning
charge for the bank is likely to remain higher. Thus, with the probability of higher slippage trend continuing, we
expect credit cost for the banks to sustain at elevated levels for FY14 and FY15. Additionally, with restructured
accounts slipping in to NPA along with more of previous sub-standard category accounts moving to higher provision
categories of NPLs, risk of higher provisioning charges remains intact.

Investment depreciation and carry forward losses Clarity emerged but cushion left
Post liquidity tightening measures by RBI in July13, bond yields shot northwards and as a result most of the bankers,
who were expecting softening of interest rates, got trapped in losses of their investment book. To ease worries fr
bankers, the apex bank allowed other banks to transfer Available for Sale (AFS) holdings in Held To Maturity (HTM)
bonds category at a piece on the close of business of July 15, 2013. Additionally, the apex bank also allowed all banks to
spread the net depreciation on AFS securities over the rest of the financial year, saving them from a massive hit to their
treasury incomes this quarter.
Interestingly, few banks managed to write off entire investment depreciation during Q2FY14 itself whereas few of them
carried it forward for H2FY14. On a positive tone, uncertainty over losses from investment book has now been sorted out
and hence market would be little fair in valuing this banks. However this has removed a cushion generally created by
treasury gain in improving the bottom line inspite of higher credit cost. Thus, bottom line for the banks would be indirectly
impacted as treasury gains for the second half would be minimal for most of the banks.
Table: Situation on investment depreciation (Rs bn)
Sector
Investment
Book
Trf from AFS
to HTM in
Q2FY14
Loss recognised
on Transfer in
Q2FY14
Investment
Depreciation (MTM
Loss)
Provided in
Q2FY14
Balance to be
amortized over
H2FY14
Axis Bank 1,184.1 75.6 NA 1.1 1.1 -
ICICI Bank 1,688.3 23.1 0.1 2.8 2.8 -
HDFC
Bank
1,019.0 19.3 0.2 1.4 1.4 -
PNB 1,341.3 103.0 0.5 10.5 3.5 7.0
BOB 1,118.4 64.8 0.2 1.3 1.3 -
BOI 1,074.1 54.0 0.8 6.5 4.7 1.8
UBI 956.0 76.7 0.8 2.3 0.3 2.0
CBoI 748.7 93.2 0.9 2.8 0.9 1.9
Slowing growth impacting fee income PSU benefited due to low base effect
With credit pick up slowing down, especially for Private sector banks, growth in fee based income also seen declining
trend. This was more of resultant of slowing credit for corporate segment where debt syndication generates major source
of fee revenue. However traction on retail fee income continued to perform well. For PSU Banks, growth in fee income
had been substantially high, however we attribute the same to lower base effect as share of fee income to total operating
income (NII + Non Interest Income) continued to witness nominal growth.

Table: Credit cost data (%)
FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E
Loan Loss
Provision
0.75% 1.18% 1.08% 0.58% 0.65% 0.55% 0.56% 0.55% 0.50% 1.4% 1.7% 1.4% 1.17% 1.10% 1.00% 1.39% 1.30% 1.20% 0.85% 1.15% 1.00% 1.18% 1.92% 1.18%
Credit Cost 0.60% 1.00% 0.90% 0.48% 0.50% 0.40% 0.51% 0.50% 0.45% 1.1% 1.3% 1.2% 0.93% 0.90% 0.80% 1.29% 1.20% 1.10% 0.75% 1.00% 0.90% 0.79% 1.70% 1.00%

11

Table: Fee income Growth and Share in Operating Income (NII + Non Interest Income)
Fee Income as % Operating Income
Q2FY14 Growth (YoY) % Q2FY14 Q2FY13
Axis Bank 7.0 3.0 3.4
ICICI Bank 16.7 32.1 31.6
HDFC Bank 11.0 21.4 24.0
PNB 14.1 1.6 1.5
BOB 23.1 1.0 0.8
BOI 21.9 1.0 0.9
UBI 5.7 1.4 1.5
CBoI 3.6 1.1 1.1
Cost to Income stable for Private Banks as consolidation in operating expense visible pressure on
PSU banks mainly on the back of higher employee expense
Cost to income had been an important matrix mainly in order to understand operational efficiency of the bank. Most of the
private sector banks has witnessed drop in revenues however they managed to hold cost to income ratio at expected
levels as consolidation of operating expenses had been in the key focus area for most of the banks.However for PSU
Banks, cost to income ratio remained at an designated levels only due to current spoke in revenues which was resultant
of higher credit pick up. Most of the PSU banks are facing higher employee charges due to consistent branch expansion
as well as recent provision for employee wage hike. Most of the PSU banks has initiated providing for employee wage
hike and are likely to continue providing for the same in upcoming quarters as well. Hence in case of decline revenues in
the coming quarters, probability of spike in Cost to Income is most likely.
Table: Current Cost to Income Ratio along with Estimates
Cost to Income (%)
Q2FY14 FY14E FY15E
Axis Bank 41.5 41.3 39.8
ICICI Bank 37.4 39.5 39.5
HDFC Bank 46.4 47.7 46.6
PNB 48.4 45.7 46.3
BOB 47.6 44.1 46.4
BOI 42.0 41.4 41.6
UBI 52.3 49.6 52.7
CBoI 70.1 60.5 62.1

12

Banks under Price to Book/ROE comparison
To reiterate our view further, we have compared the banks on P/Adj Book to ROE basis. We have carried out a relative Price
to Book (P/B) to Return on Equity (RoE) analysis on FY13 P/B to FY14E RoE and FY14E P/B to FY15E RoE basis. We have
plotted all private sector banks and public sector banks on their Returns on Equity and Price/Book multiples to depict the
current market valuations on these parameters. These charts are indicating a very low R square due to the inclusion of
different kinds of banks in terms of their sizes and political environments.

Fig: Private Sector Banks with FY14 P/AB and FY15 ROE

Considering the possible growth opportunity (especially in retail
segment) coupled with stable margins and inline volatility in asset quality,
Axis and ICICI is likely to move upwards towards the line of best fit.
Fig: Public Sector Banks with FY14 P/AB and FY15 ROE

Post adjusting NPA from restructured book, we can see PNB is relatively
expensive whereas BOB seems in line with SBI levels and slightly
expensive compared to peers.
Fig: Private Sector Banks with FY15 P/AB and FY16 ROE

Axis is trading at 1.4x FY15 P/AB. With 18% CAGR growth in PAT from
FY13-15E (ROE of 16% - ROA of 1.7%), it would move further on the line of
best fit. At our TP of Rs1,221, it would trade at 1.4x Price to Adjusted FY15
book. ICICI is trading at 1.3x FY15 P/AB. With 13% CAGR growth in PAT
from FY13-15E (ROE of 15% - ROA of 1.7%), it would move further on the
line of best fit. At our TP of Rs1,147, it would trade at 1.7x Price to
Adjusted FY15 book.
Fig: Public Sector Banks with FY15 P/AB and FY16 ROE

Post adjusting NPA from restructured book, we can see SBI, PNB and
BOB are relatively expensive compared to peers however the same is
also due to liquidity of the stock and slightly better visibility compared to
other mid size public sector bank.
Axis
ICICI
HDFC
KMB
Indusind
Yes
y = -0.0328x + 3.0657
R = 0.0063
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
12.0 17.0 22.0
F
Y
1
4
P
/
B
FY15 RoE
PNB
BOB
SBI
BOI
Union
y = 0.0977x + 0.2018
R = 0.8315
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
8.00 9.00 10.00 11.00 12.00 13.00 14.00 15.00
F
Y
1
4
P
/
B
FY15 RoE
Axis
ICICI
HDFC
KMB
Indusind
Yes Bank
y = -0.0746x + 3.5136
R = 0.0509
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
12.0 17.0 22.0 27.0
F
Y
1
4
P
/
B
FY15 RoE
PNB
BOB
SBI
BOI
Union
y = 0.0836x + 0.1306
R = 0.0974
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
11.00 12.00 13.00 14.00 15.00
F
Y
1
4
P
/
B
FY15 RoE

13

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14

Covered Companies

COMPANY
REPORT

December 2, 2013
Axis Bank

Dont change horses in midstream
COMPANY
UPDATE
CMP Rs1,155
Target Price Rs1,221
Potential Upside/Downside +6%

Relative to Sensex
Source: Capitaline
ACCUMULATE
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters AXSB IN / AXBK.BO
Shares o/s (mn) 469
Market cap. (Rs mn) 5,41,695
Market cap. (US$ mn) 8,675
3-m daily average vol. 510,820
Key Stock Data
52-week high/low Rs1,549/764
-1m -3m -12m
Absolute (%) (8) 36 (12)
Rel to Sensex (%) (7) 23 (20)
Price Performance
Promoters 33.9
FIIs/NRIs/OCBs/GDR 48.1
MFs/Banks/FIs 4.9
Non Promoter Corporate 5.8
Public & Others 7.2
Shareholding Pattern (%)
Analyst
Jignesh Shial
+91-22-4322 1185
jignesh.shial@idbicapital.com

Summary
We have been cautious on Axis Bank since past few months mainly on the back of slowing growth
and rising concerns over asset quality however we also remain comfortable towards banks ability
to grow its retail franchise consistently.
Outlook
Credit growth slowing Retail franchise likely to strengthen further
As highlighted by the management, post adjusting for currency depreciation, the real growth in credit
during the quarter was close to 14% only. Thus, slowdown in credit pick up is across segments including
retail credit. The bank expects to grow its retail book by 20-25%. However, on corporate front, the bank
has been quite selective considering weak environment and greater risk to asset quality. Thus, we expect
credit book to grow at 18.2% for FY14. Going forward, considering normal improvement in economy and
positive impact of low base effect, we assume credit growth of 19.4% for FY15.
Cushion of capital raised likely to be faded away margin to stabilize at lower levels
The bank was able to deliver super normal margins during first half of FY14 mainly on the back of capital
infusion during Q4FY13. However, as highlighted earlier, the cushion on margins due to capital raised in
previous year is likely to be faded away during second half. Thus, we expect margins to stabilize at 350bps
during FY14 and gradually decline to 340bps for FY15.
Previous treasury losses already written off reversal unlikely growth in fee income
expected to remain muted
During Q2FY14, the bank has recognized Rs.2.8 bn as a repatriation of previous year accumulated
profits from a foreign branch which compensated for the entire treasury losses of Rs1.1bn occurred
due to monetary tightening by RBI in July13. Thus, treasuries losses have been sorted out however
with bond yield continue to remain at elevated levels, we do not expect reversals in coming quarters.
On fee income front, bank saw some traction over retail fee income growth however with lackluster
growth in credit on corporate front, fee income growth is likely to remain muted.
Stay cautious on asset quality especially towards slippage from restructured book
Considering the weak domestic environment along with banks exposure towards large corporate as well
as SME/MSME segment, we continue to remain cautious on the asset quality of the bank. We assume
fresh slippage ratio of 1.1% in FY14 which is slightly higher than the previous year. We also remain
skeptical towards banks ability to manage effective recoveries from its already existing restructured book
especially formed in past 18-24 months and is likely to come out of its moratorium period soon. The bank
has already revised its incremental impairment asset target by 20% from Rs50 bn previously. Hence, being
on conservative side, we increase our credit cost assumption to 100bps for FY14 against 90bps previously.
We assume 14% CAGR growth in PAT from FY13-15E driven by 19% CAGR in NII and margins in
the range of 340-350 bps for FY14-FY15. We value the bank on ERoE basis with cost of equity at
16% considering risk free rate at 8.5% and market risk premium at 6.5%. We maintain
ACCUMULATE rating on the stock with Target Price of Rs 1221. Currently, the bank is trading at
1.3x Price to Adj Book (100% NPA + 25% Restructured book) at our FY15 numbers. At our target
price, the stock would trade at 1.4x Price to Adjusted FY15 book and 8.2x Price to FY15 Earnings.

Table: Financial snapshot
Y/E: NII PAT EPS P/E Div. yield ABV P/ABV ROAE ROAA CAR GNPA NNPA
March (Rs mn) (Rs mn) (Rs) (x) (%) (Rs) (x) (%) (%) (%) (%) (%)
FY12 80,177 42,422 102.2 10.9 1.4 522.1 2.1 20.3 1.6 13.7 1.0 0.3
FY13 96,663 51,794 118.8 9.4 1.7 722.1 1.1 18.5 1.7 17.0 1.2 0.4
FY14E 1,19,164 56,171 119.8 9.2 1.9 758.3 - 15.9 1.5 16.7 1.3 0.4
FY15E 1,36,462 66,912 142.7 7.8 1.8 868.7 - 16.5 1.5 16.4 1.3 0.4
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AXSB Sensex

16
Company Update Axis Bank

Financial Summary

Profit & Loss Account (Rs mn)
Year-end: March FY12 FY13 FY14E FY15E
Net interest income 80,177 96,663 1,19,164 1,36,462
growth (%) 22.2 20.6 23.3 14.5
Operating expenses (60,071) (69,142) (79,192) (90,666)
Employee expenses (20,802) (23,770) (27,335) (31,982)
Operating profit 74,309 93,031 1,11,710 1,30,362
growth (%) 15.8 25.2 20.1 16.7
Provision (11,427) (17,501) (27,496) (30,045)
PBT 62,882 75,531 84,215 1,00,317
Taxes (20,460) (23,736) (28,043) (33,406)
Net profit 42,422 51,794 56,171 66,912
Adjusted net profit 42,422 51,794 56,171 66,912
Shares o/s (mn nos) 415.1 435.8 468.9 468.9

Balance Sheet (Rs mn)
Capital 4,132 4,680 4,680 4,680
Networth 2,28,085 3,31,079 3,76,371 4,32,405
Deposits 22,01,043 25,26,136 29,78,833 35,46,008
Borrowings 3,40,717 4,39,511 5,52,482 6,73,346
Total Liabilities & Equity 28,56,278 34,05,607 40,31,374 47,93,457
Cash & Bank with RBI 1,07,029 1,47,921 2,07,170 2,54,710
Investments 9,31,921 11,37,375 13,40,321 15,78,081
Govt. Securities 5,84,162 7,22,499 8,66,998 10,40,398
Advances 16,97,595 19,69,660 23,28,663 27,80,186
Other Assets 64,829 70,666 80,426 92,428
Total assets 28,56,277 34,05,606 40,31,373 47,93,456


RoE / RoA Tree (Rs mn)
Yield on Loans and Advances 9.9% 10.5% 10.3% 10.2%
Yield on Investments 7.7% 7.5% 7.3% 7.1%
Cost of Funds 5.5% 5.9% 5.5% 5.5%
Net Interest Margin 3.4% 3.4% 3.5% 3.4%
Advances (A) 16,97,595 19,69,660 23,28,663 27,80,186
Investments (B) 9,31,921 11,37,375 13,40,321 15,78,081
Total Interest Earning
Asset (C=A+B) 26,29,516 31,07,035 36,68,984 43,58,266
Average Interest
Earning Assets (D) 23,86,755 28,68,276 33,88,010 40,13,625
NII/Avg Int Earning Assets 3.4% 3.4% 3.5% 3.4%
Non Int Inc/Avg Int Earning
Assets 2.3% 2.3% 2.1% 2.1%
Total Income/Avg Int Earning
Assets 5.6% 5.7% 5.6% 5.5%
Op. Costs/Avg Int Earning
Assets 2.5% 2.4% 2.3% 2.3%
PPI/Avg Int Earning Assets 3.1% 3.2% 3.3% 3.2%
Provisions/Avg Int
Earning Assets 0.5% 0.6% 0.8% 0.7%
Taxes/Avg Int Earning Assets 0.9% 0.8% 0.8% 0.8%
Return on Avg Int
Earning Assets 1.8% 1.8% 1.7% 1.7%
Extraordinary item 0.0% 0.0% 0.0% 0.0%
Adj Return on Avg Int
Earning Assets 1.8% 1.8% 1.7% 1.7%
Productivity
(Avg Int Earning Assets/
Avg Total Assets) 90.3% 91.6% 91.1% 91.0%
Return on Average
Total Assets 1.6% 1.7% 1.5% 1.5%
Leverage
(Average Total Assets/
Average Equity) 12.6 11.2 10.5 10.9
Return on Average Equity 20.3% 18.5% 15.9% 16.5%

COMPANY
REPORT

December 2, 2013
ICICI Bank

A golden key can open any door
COMPANY
UPDATE
CMP Rs1,068
Target Price Rs1,147
Potential Upside/Downside +7%

Relative to Sensex
Summary
ICICI Bank continues to focus on increasing its retail franchise on asset as well as liability front mainly
in order to gain consistency in growth momentum as well as maintain stable margins. Although we
appreciate managements efforts in building a stronger brand for bank, considering the weak domestic
environment along with banks exposure towards large corporate as well as SME/MSME segment we
still remain cautious on asset quality profile of the bank.
Outlook
Strong retail franchise leads to improvement in margins
ICICI Bank continued to focus on increasing its retail advance book which grew by 20% (YoY) during
Q2FY14, thus increasing retail contribution to total advances to 36.2% against 35% during Q2FY13. CASA
base for the bank continues to remain robust at 43.3% in spite of stiff competition from other mid size
private sector banks indicating improvement in banks services and approach to customers. Thus, retail
deposits (including CASA) constitute 70% of total deposits. This gradual shift has allowed the bank to
improve margins to ~330bps which we expect would be sustainable in coming period.
Previous treasury losses already written off
On treasury front, the bank recognized an investment depreciation of Rs2788.4 mn during the quarter
which is fully amortized during the current quarter. Similarly the bank has transferred SLR securities worth
Rs23.3bn from AFS/HFT to HTM and as a result incurred a loss of Rs102.4mn which is also fully
recognized during the quarter.
Asset quality likely to remain volatile Continue to remain cautious
During Q2FY14, the bank had seen fresh slippages to the tune of Rs11.5 bn mainly comprising of
SME/MSME/Mid Corporate portfolio. The bank has consciously reduced its buy out portfolio which mainly
consists of commercial vehicle loans in order to avoid incremental default risk. We assume fresh slippage
ratio of 1.2% in FY14, in line with the previous year. Accordingly, we assume loan loss provisioning of
85bps for FY14-15. Also restructured book of the bank had seen addition of Rs10.8 bn with restructured
pipe line of Rs20bn which further increases volatility in the asset book. Hence we continue adjust 25% of
restructured book to arrive at our adjusted book value for the bank.
We assume 17.8% CAGR growth in PAT from FY13-15 which would be driven by 18% CAGR in NII, and
17.9% CAGR in loan book. We assume margins are likely to improve and would fall in the range of 330-
335bps for FY14-15. We assume cost to income for the bank is likely to improve further to 38% against
40% currently. Similarly, with continued pressure on asset quality, we assume provisioning charges
(other than tax) to increase by 12% for FY13-15.
We have valued the bank on sum of parts methodology. We value the stand alone business of the bank
on Excess Return on Equity (ERoE) methodology with cost of equity at 17% considering risk free rate at
8.5% and market risk premium at 6.5%. We remain positive on managements conservative approach and
ability to improve return matrices. We upgrade the stock to ACCUMULATE with target price of Rs1,147.
Currently, the bank is trading at 1.6x Price to Adjusted Book (100% NPA + 25% Restructured Book) at
our FY15 numbers. At our target price, the stock would trade at 1.7x Price to Adjusted FY15 book value
(100% NPA + 25% Restructured Book) and 11.0x Price to FY15 Earnings.
Source: Capitaline
ACCUMULATE
Sector Banking
Bloomberg / Reuters ICICIBC IN / ICBK.BO
Shares o/s (mn) 1,157
Key Stock Data
-1m -3m -12m
Absolute (%) (1) 32 (1)
Rel to Sensex (%) (0) 19 (10)
Price Performance
Promoters -
MFs/Banks/FIs 24.93
Govt. 0.03
Public & Others 5.45
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ICICIBC Sensex
Analyst
Jignesh Shial
+91-22-4322 1185

Nifty: 6,176; Sensex: 20,792

Y/E: NII PAT EPS P/E Div. yield ABV P/ABV ROE ROA CAR GNPA NNPA
FY12 1,07,342 64,653 55.9 18.6 1.6 496.7 2.1 11.2 1.4 18.5 3.7 0.7
FY13 1,38,664 83,255 71.9 14.5 1.9 545.8 1.9 13.1 1.6 18.7 3.3 0.8
FY14E 1,65,683 98,459 85.1 12.3 2.2 598.4 1.7 14.0 1.7 18.3 3.1 0.8
FY15E 1,92,349 1,15,454 99.7 10.4 2.4 663.6 1.6 14.9 1.8 18.2 2.9 0.7

18
Company Update ICICI Bank

Financial Summary

Net interest income 1,07,342 1,38,664 1,65,683 1,92,349
growth (%) 19.0 29.2 19.5 16.1
Operating expenses (78,504) (90,129) (1,00,806) (1,15,184)
Operating profit 1,03,865 1,31,992 1,58,111 1,81,600
growth (%) 14.8 27.1 19.8 14.9
Provision (17,338) (18,756) (23,235) (23,443)
PBT 86,527 1,13,237 1,34,876 1,58,157
Taxes (21,874) (29,982) (36,417) (42,702)
Net profit 64,653 83,255 98,459 1,15,454
Adjusted net profit 64,653 83,255 98,459 1,15,454
Shares o/s (mn nos) 1,155.6 1,157.5 1,157.5 1,157.5

Capital 11,552 11,581 11,581 11,581
Networth 6,04,052 6,67,060 7,35,309 8,17,198
Deposits 25,55,000 29,26,136 33,39,744 38,34,871
Borrowings 14,01,649 14,53,415 16,27,233 18,30,932
Investments 15,95,600 17,13,940 18,82,052 20,95,335
Govt. Securities 8,69,480 9,23,763 9,97,664 10,97,430
Advances 25,37,277 29,02,494 33,98,090 40,32,391
Other Assets 3,49,371 2,90,871 3,08,209 3,32,929
Total assets 48,90,688 53,67,947 60,48,296 68,52,531


Cost of Funds 5.8% 6.0% 5.6% 5.4%
Advances (A) 25,37,277 29,02,494 33,98,090 40,32,391
Investments (B) 15,95,600 17,13,940 18,82,052 20,95,335
Asset (C=A+B) 41,32,877 46,16,435 52,80,142 61,27,726
Average Interest
Earning Assets (D) 23,86,755 43,74,656 49,48,289 57,03,934
Assets 3.1% 1.9% 1.9% 1.8%
Assets 6.0% 5.1% 5.2% 5.2%
Assets 3.3% 2.1% 2.0% 2.0%
Provisions/Avg Int
Earning Assets 0.7% 0.4% 0.5% 0.4%
Return on Avg Int
Earning Assets 1.0% 1.9% 2.0% 2.0%
Earning Assets 1.0% 1.9% 2.0% 2.0%
Productivity
Avg Total Assets) 53.3% 85.3% 86.7% 88.4%
Return on Average
Total Assets 0.5% 1.6% 1.7% 1.8%
Leverage
Average Equity) 7.8 8.1 8.1 8.3

COMPANY
REPORT

December 2, 2013
HDFC Bank
A good man is hard to find Valuation Justified
COMPANY

UPDATE

CMP Rs661
Target Price Rs658
Potential Upside/Downside 0%

Relative to Sensex
Summary
HDFC Bank reported mixed numbers during Q2FY14 indicating volatility in the money market as well as
impacts of slowing economy. Although we continue to believe that the bank is well positioned to play India
consumption story with best in class underwriting abilities and superior management capabilities, its current
valuation premium is largely reflective of these strengths.
Outlook
Advances likely to pick up with upcoming festive season coupled with good monsoon
Although the bank saw slower growth during the current quarter, this was also a resultant of zero portfolio buy
out in housing finance segment. With upcoming festive season likely to contribute some incremental growth, we
expect credit uptick to pick up during the upcoming quarters. The bank has added 132 branches during the
quarter which were mainly in the semi-urban and rural areas. These too will start contributing to growth in the
coming period. Thus, we expect the bank to attain credit growth of 22.4% YoY during FY14 to Rs2.9 trn whereas
deposits are expected to grow by 20.3% YoY to Rs3.6 trn.
Margins likely to remain under stress Focus on FCNR deposits for low cost funds
With rise in cost of funds, the bank witnessed some stress on margins during the quarter. Going forward, with
liquidity tightening continuing along with tighter monetary policy measures, cost of funds are likely to remain at
elevated levels. Additionally, retail lending is consistently facing pricing pressure due to intensive competition
and slower growth. Interestingly the management is focusing on FCNR deposits, costing ~8.5%, for augmenting
further funds, tapping the opportunity of RBI swap window. This deposit does not have SLR/CRR limitations,
which provides further easing in cost and hence management considers it a better source of funding.
Considering this, we expect NIM to remain at 4.3% for FY14/15.
Previous treasury losses already written off Share of fee income declining
During Q2FY14, the bank has recognized the entire treasury losses of Rs1.7bn occurred due to monetary
tightening by RBI in July13. Thus, treasuries losses have been sorted out however with bond yield continue to
remain at elevated levels, we do not expect reversals in coming quarters. On fee income front, its contribution to
total income consistently witnessed declining trend (21% for Q2FY14 against 25% during Q2FY13) which is
attributable to slowing growth in corporate credit. We expect fee income for the bank to grow by 21% for FY14.
Asset quality likely to remain stable indicating manageable stress levels
Considering the weak domestic environment along with banks exposure towards CV/CE and other personal
loans, we remain cautious and expect fresh slippage ratio to remain at an elevated levels of 1% during FY14.
Accordingly, we assume credit cost of 50bps for FY14. The bank is well placed on restructured book front with
total restructured advances at 0.2% of total advance providing further comfort on asset quality front.
We maintain our earnings estimate of 23% CAGR in PAT during FY13-15E driven by 18.3% CAGR growth in
NII and 21.8% CAGR growth in loan book. We lower our margin estimates slightly to 4.3%/4.4% in FY14/FY15.
We value the bank on ERoE basis with cost of equity at 15% considering risk free rate at 8.5% and market
risk premium at 6.5%. We continue to believe that current valuation captures the superiority in numbers and
hence risk reward does not seem favorable. Hence, we maintain our HOLD rating on the stock with Target
Price of Rs 658. Currently, the bank is trading at 3.0x Price to Adjusted Book (100% NPA + 25% of
Restructured Book) at our FY15E numbers. At our target price, the stock would trade at 3.0x Price to
Adjusted FY15E book and 15.4x Price to FY15E Earnings.

Source: Capitaline
HOLD
Nifty: 6,176; Sensex: 20,792

Analyst
Jignesh Shial
+91-22-4322 1185

Sector Banking
Bloomberg / Reuters HDFCB IN / HDBK.BO
Key Stock Data
52-week high/low Rs727/528
-1m -3m -12m
Absolute (%) (4) 16 (5)
Rel to Sensex (%) (3) 3 (14)
Price Performance
Promoters 22.72
MFs/Banks/FIs 9.81
Govt Holding 0.02
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HDFCB Sensex
FY12 1,22,968 51,671 21.9 29.8 1.1 125.0 5.2 18.7 1.7 15.7 1.0 0.2
FY13 1,58,111 67,263 28.2 23.2 0.8 149.2 4.4 20.3 1.8 15.9 1.0 0.2
FY14E 1,84,798 80,445 33.7 19.4 0.8 176.0 3.7 20.3 1.9 17.0 1.1 0.2
FY15E 2,21,460 1,01,748 42.6 15.3 0.8 211.8 3.1 21.5 2.0 17.2 1.1 0.3

20
Company Update HDFC Bank
HDFC Bank
Financial Summary

growth (%) 16.6 28.6 16.9 19.8
Operating expenses (85,901) (1,12,361) (1,25,721) (1,44,527)
Operating profit 89,504 1,14,276 1,39,400 1,72,787
growth (%) 15.9 27.7 22.0 24.0
Provision (14,367) (16,764) (18,792) (20,241)
PBT 75,137 97,512 1,20,607 1,52,546
Taxes (23,466) (30,249) (40,162) (50,798)
Net profit 51,671 67,263 80,445 1,01,748
Adjusted net profit 51,671 67,263 80,445 1,01,748
Shares o/s (mn nos) 2,358.3 2,387.0 2,387.0 2,387.0

Capital 4,696 4,759 4,759 4,759
Networth 2,99,247 3,62,141 4,28,742 5,16,645
Deposits 24,67,064 29,62,470 35,51,204 42,84,761
Borrowings 2,38,465 3,30,066 3,93,355 4,69,520
Investments 9,74,829 11,16,136 12,73,855 14,76,574
Govt. Securities 7,62,178 8,49,023 9,50,906 10,84,033
Advances 19,54,200 23,97,206 29,12,947 35,59,060
Other Assets 2,17,216 1,90,144 2,05,101 2,26,102
Total assets 33,79,095 40,03,319 46,86,388 56,03,724


Cost of Funds 5.5% 5.8% 5.7% 5.6%
Advances (A) 19,54,200 23,97,206 29,12,947 35,59,060
Investments (B) 9,74,829 11,16,136 12,73,855 14,76,574
Asset (C=A+B) 29,29,029 35,13,342 41,86,801 50,35,633
Average Interest
Earning Assets (D) 26,18,090 32,21,186 38,50,072 46,11,217
Assets 2.0% 2.1% 2.1% 2.1%
Assets 6.7% 7.0% 6.9% 6.9%
Assets 3.3% 3.5% 3.3% 3.1%
Provisions/Avg Int
Earning Assets 0.5% 0.5% 0.5% 0.4%
Return on Avg Int
Earning Assets 2.0% 2.1% 2.1% 2.2%
Earning Assets 2.0% 2.1% 2.1% 2.2%
Productivity
Avg Total Assets) 85.1% 87.3% 88.6% 89.6%
Return on Average
Total Assets 1.7% 1.8% 1.9% 2.0%
Leverage
Average Equity) 11.1 11.2 11.0 10.9

COMPANY
REPORT

December 2, 2013
Punjab National Bank

A miss is as good as a mile
COMPANY
UPDATE
CMP Rs550
Target Price Rs503
Potential Upside/Downside (9)%

Relative to Sensex
Summary
Punjab National Bank (PNB) had been under consolidation stage for almost last 4 quarters whereby the
management has cautiously withdrawn itself from expanding advance book and focused on cleaning
the balance sheet. Although such steps had been appreciated by the markets, stress from previous
year advance book continued to reappear throughout past quarter results. This coupled with treasury
losses and pressure on margins has made the scenario unfavorable for the bank.
Outlook
Consolidation stage likely over Deposit franchise witnessing improvement
PNB management, as a planned strategy last year, had undergone a consolidation phase which was
adopted to avoid risk and to improve the underlying underwriting ability. Going forward, management
assumes that worst in asset quality seems to be over and scenario is likely to improve. Hence the
management may start pegging growth and credit book may grow in line to an industry average of 15%.
On the deposit franchise part, the bank has stressed on increasing core deposit base and has managed to
shed high cost deposit base which reduced to 6.3% of total deposits. Considering incremental base of low
cost deposit as well as probable capital infusion by GOI in December13, we assume margins to remain
stable at 345bps for FY14.
Previous treasury losses amortized over 3 quarters Uncertainty prevails
Due to spike in bond yield in July13, PNB had been one of the worst impacted banks among peers. The
bank has incurred total MTM losses of Rs01.5 bn in its treasury operations. The bank during the quarter
has recognized one third of the losses amounting to Rs3.5 bn and balance Rs 7bn would be recognized
over next 2 quarters. Although the management expects Bond Yields to stabilize during current quarter and
accordingly some reduction in losses expected, however we believe the same is more unlikely considering
yields continue t remain at elevated levels. The bank also recognized loss of Rs0.5 bn during Q2FY14
occurred due to one off transfer of securities worth Rs103 bn from AFS to HTM book
Higher slippage trend to continue Increasing Loan Loss Provisioning estimates
Considering the weak economic environment, we continue to remain cautious towards the asset quality for
the bank. With economic slowdown still persisting, we expect fresh slippages of Rs105.6 bn for FY14
indicating slippage ratio of 3%. Rise in NPA along with higher provisioning for restructured book will lead to
higher loan loss provision ratio which we assume at 170bps for FY14 against 130bps previously.
We assume decline in bottom line by 6% CAGR from FY13-15E driven by muted CAGR growth of 10.5%
in NII, 14.6% CAGR in advances & stable margins at 3.4% in FY14-FY15. Although we do not factor in
any dilution in our model for FY14, as discussed earlier, preferential allotment to Government is likely
to occur in December13 which may be further value decretive. We value the bank on ERoE basis with
cost of equity at 17% considering risk free rate at 8.5% and market risk premium at 6.5%. We continue
to remain conservative on growth prospects of the bank along with asset quality risk which is likely to
pop up further with economic slowdown continuing further. Hence we maintain our REDUCE rating on
the stock with Target Price of Rs 503. Currently, the bank is trading at 1.2x Price to Adjusted Book
(100% NPA + 25% of Restructured Book) at our FY15E numbers. At our target price, the stock would
trade at 1.2x Price to Adjusted FY15E book and 4.9x Price to FY15E Earnings.

Source: Capitaline
REDUCE
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters PNB IN / PNBK.BO
Shares o/s (mn) 353
Key Stock Data
-1m -3m -12m
Absolute (%) 9 29 (28)
Rel to Sensex (%) 10 16 (37)
Price Performance
Promoters 57.88
MFs/Banks/FIs 18.33
Govt. 0.03
Analyst
Jignesh Shial
+91-22-4322 1185

Y/E: NII PAT EPS BV P/E P/BV ROE ROA GNPA NNPA
March (Rs mn) (Rs mn) (Rs) (Rs) (x) (x) (%) (%) (%) (%)
FY12 1,33,551 49,272 155.4 877.6 3.4 0.6 20.0 1.2 3.0 1.5
FY13 1,48,565 47,186 138.7 994.2 3.8 0.5 15.6 1.0 4.2 2.3
FY14E 1,61,902 33,658 95.2 1,003.7 5.5 0.5 10.0 0.7 4.9 2.9
FY15E 1,81,241 41,796 103.6 1,061.5 5.1 0.5 11.1 0.7 5.0 2.8
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PNB Sensex

22
Company Update Punjab National Bank

Financial Summary

growth (%) 13.1 11.2 9.0 11.9
Operating expenses (70,028) (81,651) (94,935) (1,10,639)
Operating profit 1,05,549 1,09,074 1,10,034 1,21,089
growth (%) 16.6 3.3 0.9 10.0
Provision (34,749) (44,147) (61,744) (61,123)
PBT 70,800 64,926 48,290 59,965
Taxes (21,528) (17,741) (14,632) (18,169)
Net profit 49,272 47,186 33,658 41,796
Shares o/s (mn nos) 317.1 340.3 353.4 403.4

Capital 3,392 3,535 3,535 4,035
Networth 2,78,154 3,26,769 3,48,128 4,01,708
Deposits 37,95,885 39,15,601 45,10,222 52,27,647
Borrowings 3,72,643 3,96,209 4,25,778 4,62,654
Investments 12,27,030 12,98,962 14,68,439 16,86,340
Govt. Securities 9,97,594 10,75,986 12,05,104 13,73,819
Advances 29,37,748 30,87,252 35,18,559 40,57,094
Other Assets 97,177 97,626 1,01,471 1,09,558
Total assets 45,81,923 47,88,770 54,46,759 62,59,724


Cost of Funds 5.5% 6.3% 5.6% 5.4%
Advances (A) 29,37,748 30,87,252 35,18,559 40,57,094
Investments (B) 12,27,030 12,98,962 14,68,439 16,86,340
Asset (C=A+B) 41,64,778 43,86,214 49,86,998 57,43,435
Average Interest
Earning Assets (D) 26,18,090 42,75,496 46,86,606 53,65,216
Assets 1.6% 1.0% 0.9% 0.9%
Assets 6.7% 4.5% 4.4% 4.3%
Assets 2.7% 1.9% 2.0% 2.1%
Provisions/Avg Int
Earning Assets 1.3% 1.0% 1.3% 1.1%
Return on Avg Int
Earning Assets 1.9% 1.1% 0.7% 0.8%
Earning Assets 1.9% 1.1% 0.7% 0.8%
Productivity
Avg Total Assets) 62.6% 91.3% 91.6% 91.7%
Return on Average
Total Assets 1.2% 1.0% 0.7% 0.7%
Leverage
Average Equity) 17.0 15.5 15.2 15.6

COMPANY
REPORT

December 2, 2013
Bank of Baroda

All that glitters is not gold
COMPANY
UPDATE
CMP Rs645
Target Price Rs505

Relative to Sensex
Summary
Bank of Baroda (BOB) had been a favored pick of investors from PSU banking space mainly on
the back of its ability to deliver better set of numbers on growth as well as asset quality front
compared to its peers. Hence the bank has outperformed the broad market as well as banking
companies in past few quarters. However we have remained cautious on banks ability to deliver
better set of numbers considering weaker domestic environment as well as BOBs higher
exposure to riskier asset class.
Outlook
Shift towards Retail/SME segment not visible Margin likely to remain stable
The management had been consistently highlighting their preference towards Retail and SME/MSME
lending in order to diversify advance book. However on analyzing credit growth for Q2FY14, we can
observe that share of Retail and SME advances continue to remain flat sequentially indicating consistency
in credit growth is being maintained through wholesale lending only. Going forward, with higher share of
credit from large and mid size corporate segment along with persistent slowdown in manufacturing activity
across the country, we remain skeptical on the growth aspect of the bank. Hence, we maintain our credit
growth target of 15.8% for intact. The bank has been allocated capital infusion of Rs5.5 bn by GoI and the
management also plans to raise additional Rs10 bn through Tier II Bonds, which would provide some
comfort to margins. Hence, margins are expected to remain stable at 253bps for FY14.
Weakening asset quality - Higher slippage trend to continue
On the asset quality front, the bank witnessed additional slippages to the tune of Rs41.8 bn during H1FY14
indicating 2.2% of slippage ratio on an annualized basis. Although the management confirmed that trend of
slippage is likely to decline in coming quarters, considering weak demand, slowing growth and extended
working capital cycles, we continue to remain cautious and assume fresh slippage ratio of 2.5% for FY14.
Similarly, advances worth Rs14.8 bn slipped to restructured book during the quarter. Total restructured
portfolio for the bank amounts to Rs247.4 bn which is close to 7.7% of outstanding advances of the bank.
Slippage from restructured advances has increased to 18% against historical average of 14% which again
adds to our caution. We assume further restructuring to the tune of Rs30 bn for FY14.
We assume NII for the bank to grow by 11% CAGR from FY13-15 supported by 16.4% CAGR in
advances and stable margins at 2.5% in FY14-FY15. We have already reduced our provisioning charges
estimates mainly on account of reversal in investment depreciation. Although we do not factor in any
dilution in our model for FY14, as discussed earlier, preferential allotment to Government is likely to
occur in December13 which may be further value decretive.
We value the bank on ERoE basis with cost of equity at 17% considering risk free rate at 8.5% and
market risk premium at 6.5%.We continue to believe that the valuation premium obtained by BOB is not
justified and hence we maintain our SELL rating on the stock with Target Price of Rs505. Currently, the
bank is trading at 1.4x Price to Adjusted Book (100% NPA + 25% of Restructured Book) at our FY15E
numbers. At our target price, the stock would trade at 1.1x Price to Adjusted FY15E book and 5.4x Price
to FY15E Earnings.

Source: Capitaline
SELL
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters BOB IN / BOB.BO
Shares o/s (mn) 421
Key Stock Data
-1m -3m -12m
Absolute (%) 9 42 (13)
Rel to Sensex (%) 9 29 (21)
Price Performance
Promoters 55.4
MFs/Banks/FIs 19.6
Public & Others 5.3
Analyst
Jignesh Shial
+91-22-4322 1185

FY12 1,03,170 50,370 128.6 4.8 2.9 632.2 1.0 20.4 1.2 14.7 1.6 0.5
FY13 1,13,153 44,807 108.8 5.6 3.6 647.9 0.9 15.1 0.9 13.3 2.4 1.3
FY14E 1,22,108 41,567 98.7 6.2 3.7 637.5 1.0 12.4 0.7 12.6 3.3 1.9
FY15E 1,39,103 39,297 93.3 6.6 4.1 662.2 0.9 10.8 0.6 11.9 3.4 2.0
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BOB Sensex

24
Company Update Bank of Baroda

Financial Summary

growth (%) 17.2 9.7 7.9 13.9
Operating profit 86,106 89,992 90,654 98,405
growth (%) 23.3 4.5 0.7 8.6
Provision (25,548) (41,679) (43,419) (46,699)
PBT 60,558 48,312 47,235 51,706
Taxes (10,188) (3,505) (5,668) (12,409)
Net profit 50,370 44,807 41,567 39,297
Shares o/s (mn nos) 391.7 411.7 421.2 421.2

Capital 4,124 4,225 4,225 4,225
Networth 2,74,769 3,19,694 3,50,267 3,77,347
Deposits 38,48,711 47,38,833 55,63,213 65,63,863
Borrowings 2,35,731 2,65,793 2,86,898 3,13,600
Investments 8,32,094 12,13,937 13,74,196 15,82,587
Govt. Securities 6,91,882 10,20,445 11,63,308 13,49,437
Advances 28,73,773 32,81,858 37,99,991 44,44,418
Other Assets 1,02,247 97,039 1,00,014 1,07,869
Total assets 44,73,215 54,71,355 63,67,708 74,43,362


Cost of Funds 4.7% 4.8% 4.6% 4.4%
Advances (A) 28,73,773 32,81,858 37,99,991 44,44,418
Investments (B) 8,32,094 12,13,937 13,74,196 15,82,587
Asset (C=A+B) 37,05,867 44,95,795 51,74,187 60,27,005
Average Interest
Earning Assets (D) 26,18,090 41,00,831 48,34,991 56,00,596
Assets 1.3% 0.9% 0.8% 0.8%
Assets 5.2% 3.6% 3.4% 3.3%
Assets 2.0% 1.5% 1.5% 1.5%
Provisions/Avg Int
Earning Assets 1.0% 1.0% 0.9% 0.8%
Return on Avg Int
Earning Assets 1.9% 1.1% 0.9% 0.7%
Earning Assets 1.9% 1.1% 0.9% 0.7%
Productivity
Avg Total Assets) 64.4% 82.5% 81.7% 81.1%
Return on Average
Total Assets 1.2% 0.9% 0.7% 0.6%
Leverage
Average Equity) 16.5 16.7 17.7 19.0

COMPANY
REPORT

December 2, 2013
Bank of India

Dont upset the apple cart
COMPANY
UPDATE
CMP Rs217
Target Price Rs210

Relative to Sensex
Summary
Bank of India has delivered better set of numbers with improved performance visible on all
counts. The bank gained traction in fee income and could manage lower provisioning had been
the key highlight during the quarter apart from robust growth numbers. However we would remain
cautious towards sustainability of this performance in the coming quarters considering weaker
domestic economy and banks large exposure in various riskier asset class.
Outlook
Loan book to be driven by Retail & SME/MSME
The bank like most of its peers is geared on Retail and SME/MSME segment to drive the future advances
growth. Management expects to grow its retail book by 25% for FY14 whereas SME book is likely to grow
slightly ahead of industry average. On the corporate front, the bank focuses on mid corporate segment to
avail stable credit growth. We expect the bank to grow its advance book by 15.3% for FY14 which would
be in line with industry growth.
Deposit franchise strengthening Margin to remain stable
On the liability side, the bank targets to increase its traction in CASA deposits as well as NRE/FCNR
deposits through which it can sustain stable margins. The management has guided for 310bps margin for
domestic business whereas international business is likely to maintain margin of 115bps for FY14. With
some cushion from Rs10 bn capital infusion from GOI as well as FCNR deposit swap of Rs1.13 bn
undertaken during Q2FY14, we assume cost of funds to decline gradually for the bank. However, with little
scope of improvement in yields, we assume overall margin of 247bps for FY14.
Asset quality to remain under stress
On the asset quality front, although decline in NPA on % terms is largely driven by robust rise in advances
which provides higher base effect, still we believe the management is focused on containing fresh
slippages and is also committed to improve recoveries. The bank has now started lending for infra projects
only post considering complete government clearances, which is a welcome step. However, considering
weak economic environment, we remain slightly skeptical on managements abilities to maintain such
performance. On the restructuring front, the bank had seen fresh restructuring of Rs9.3 bn leading total
standard restructured book to Rs174.9 bn which is 5.2% of global advances. Going forward, the
management is already seeing restructuring pipeline of Rs10 bn underway which may further add to asset
quality stress. We assume further restructuring to the tune of Rs30 bn in second half of FY14.
We estimate flat growth of 7% CAGR in PAT from FY13-15E, driven by 12.6% CAGR in NII and 16%
CAGR growth in advances. We assume margin to remain stable at ~250bps for FY14/FY15. We expect
fresh slippages to the tune of Rs100 bn which would be ~3% of net advances and total loan loss
provision of 130bps for FY14. We expect bank to manage cost to income ratio in the range of ~40%
levels. Thus, ROE for the bank is likely to stabilize at 11.6% and ROA is assumed to remain at 0.6% by
FY15. We value the bank on ERoE basis with cost of equity at 17.6% considering risk free rate at 8.5%
and market risk premium at 6.5%. Although we appreciate Q2FY14 performance of the bank, we
continue to remain conservative and would wait for the bank to deliver similar set of numbers during
upcoming quarters as well. Hence we maintain our HOLD rating on the stock with Target Price of
Rs210. Currently, the bank is trading at 1.2x Price to Adjusted Book (100% NPA + 25% of Restructured
Book) at our FY15E numbers. At our target price, the stock would trade at 1.2x Price to Adjusted FY15E
book and 4.0x Price to FY15E Earnings.
Source: Capitaline
HOLD
Analyst
Jignesh Shial
+91-22-4322 1185

Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters BOI IN / BOI.BO
Shares o/s (mn) 596
Key Stock Data
-1m -3m -12m
Absolute (%) 20 63 (21)
Rel to Sensex (%) 21 50 (30)
Price Performance
Promoters 64.1
MFs/Banks/FIs 15.3
Public & Others 6.0
FY12 83,134 26,775 51.1 4.1 4.2 300.8 0.7 14.0 0.7 14.7 2.4 1.5
FY13 90,240 27,493 46.1 4.5 5.9 276.1 0.8 12.3 0.7 13.3 3.0 2.1
FY14E 1,01,701 26,096 43.7 4.8 4.8 268.7 0.8 10.5 0.5 11.8 3.8 2.5
FY15E 1,14,464 31,492 52.8 4.0 4.8 277.8 0.8 11.6 0.6 11.3 3.9 2.7
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BOI Sensex

26
Company Update Bank of India

Financial Summary

Net interest income 83,134 90,240 1,01,701 1,14,464
Growth (%) 6.4 8.5 12.7 12.5
Growth (%) 24.3 11.4 14.0 13.0
Provision (31,164) (44,508) 947,553) (50,900)
PBT 35,775 30,077 37,440 45,182
Taxes (9,000) (2,584) (11,344) (13,690)
Net profit 26,775 27,493 26,096 31,492
Shares o/s (mn nos) 524.3 596.8 596.6 596.6

Capital 5,745 5,966 5,966 5,966
Networth 2,09,618 2,39,182 2,58,356 2,82,927
Deposits 31,82,160 38,18,396 44,07,800 51,20,994
Borrowings 3,21,142 3,53,676 4,24,443 5,02,937
Investments 8,67,536 9,46,134 10,51,133 11,70,383
Govt. Securities 7,15,706 7,94,908 8,90,296 9,97,132
Advances 24,88,333 28,93,675 33,37,171 39,00,813
Other Assets 1,14,657 1,09,158 1,13,073 1,19,261
Total assets 38,45,355 45,26,027 52,08,197 60,28,342


Cost of Funds 5.8% 5.5% 5.4% 5.2%
Advances (A) 24,88,333 28,93,675 33,37,171 39,00,813
Investments (B) 8,67,536 9,46,134 10,51,133 11,70,383
Asset (C=A+B) 33,55,869 38,39,809 43,88,305 50,71,197
Average Interest
Earning Assets (D) 26,18,090 35,97,839 41,14,057 47,29,751
Assets 1.3% 1.0% 1.1% 1.1%
Assets 4.4% 3.6% 3.5% 3.5%
Assets 1.9% 1.5% 1.5% 1.4%
Provisions/Avg Int
Earning Assets 1.2% 1.2% 1.2% 1.1%
Return on Avg Int
Earning Assets 1.0% 0.8% 0.6% 0.7%
Earning Assets 1.0% 0.8% 0.6% 0.7%
Productivity
Avg Total Assets) 71.2% 86.0% 84.5% 84.2%
Return on Average
Total Assets 0.7% 0.7% 0.5% 0.6%
Leverage
Average Equity) 19.2 18.7 19.6 20.8

COMPANY
REPORT

December 2, 2013
Union Bank of India

COMPANY
UPDATE
CMP Rs120
Target Price Rs98

Relative to Sensex
Summary
Union Bank of India (UBOI) continued witnessing worsening asset quality and building of pressure
on margins. Adding that had been high treasury loss during Q2FY14 which needs to be amortized
over next 2 quarters. The bank already has lower than required Tier I Capital and hence risk of
higher dilution is also inevitable as of now. To sum up, we prefer to stay away from the bank at
current levels.
Outlook
Credit growth expected to remain in line Risk of dilution inevitable
The management plans to grow its advances book by 16%-18% for FY14-15 which would be in line with
industry average with focus on retail and SME/MSME segment. However, major issue faced by the bank is
lower capital adequacy. Total capital adequacy under Basel II norms as on September 30, 2013 was
9.72% of which Tier I stood at 7.11%, which is way lower than required limit of 8%. The GOI has allocated
Rs5 bn as fresh infusion of capital. However, the same would not suffice and the management is planning
to raise further Rs15 bn through QIP route. Considering the current market situation, we could see higher
dilution in book value than expected for the bank. The bank had annualized ROA of 48bps and ROE of
9.3% which does not provide any attractive entry point at current valuation.
Asset quality to remain under stress No sign of revival
On the asset quality front, Gross NPA for the bank stood at 3.64% against 3.50% in Q1FY14 whereas Net
NPA for the bank was at 2.15% against 1.96% in Q1FY14. In absolute terms, Gross NPA for the bank
grew by 13.6% QoQ and 24.6% YoY to Rs80.6 bn. Similarly, Net NPA for the bank grew by 20.3% QoQ
and 31.2% YoY, indicating continuation of weaker asset quality trend for the bank. Going forward as well,
the management expects stress on asset quality to continue considering slower economic environment
and delay in clearances especially for Infrastructure and construction segment. On the restructuring front,
the bank has seen fresh restructuring of Rs15.3 bn leading total standard restructured book to Rs109.4 bn
which is 4.9% of advances. Going forward, the management is already seeing restructuring pipeline of
Rs20 bn (including 2 SEBs) which may further add to asset quality stress. We assume further restructuring
to the tune of Rs40 bn in second half of FY14.
We estimate decline in PAT by 7.8% CAGR from FY13-15E, driven by 14.2% CAGR growth in
provisioning and slower NII growth of 11.4% CAGR. Margins are likely to remain in the near range of
~250bps for FY14/FY15. We assume fresh slippages to the tune of Rs60 bn (~2.5% of advances) and
loan loss provision of 120bps for FY14. We value the bank on ERoE basis with cost of equity at 17%
considering risk free rate at 8.5% and market risk premium at 6.5%. We believe that the bank has failed
to deliver on all parameters and we do not see any remedies for the bank in near future and hence
would advise the investors to stay from the bank at current levels. We maintain our SELL rating on the
stock with Target Price of Rs98. The bank is trading at 1.1x Price to Adjusted Book (100% NPA + 25% of
Restructured Book) at our FY15E numbers. At our target price, the stock would trade at 0.9x Price to
Adjusted FY15E book and 3.2x Price to FY15E Earnings.
Source: Capitaline
SELL
Nifty: 6,176; Sensex: 20,792

Analyst
Jignesh Shial
+91-22-4322 1185

Sector Banking
Bloomberg / Reuters UNBK IN / UNBK.BO
Shares o/s (mn) 597
Market cap. (Rs mn) 71,640
Key Stock Data
-1m -3m -12m
Absolute (%) 1 22 (49)
Price Performance
Promoters 57.9
MFs/Banks/FIs 17.8
Public & Others 9.2
Fine words butter no parsnips
FY12 67,931 17,871 34.1 3.4 7.2 192.1 0.6 13.0 0.7 14.7 3.1 1.7
FY13 75,428 21,579 36.2 3.2 7.3 208.6 0.6 13.5 0.8 13.3 3.0 1.6
FY14E 80,153 14,005 23.5 5.0 8.5 185.5 0.6 8.8 0.5 12.0 3.7 2.4
FY15E 93,676 16,848 28.2 4.1 10.3 192.4 0.6 9.8 0.5 11.1 3.9 2.3
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UNBK Sensex

28
Company Update Union Bank of India

Financial Summary

Net interest income 67,931 75,428 80,153 93,676
Growth (%) 9.3 11.0 6.3 16.9
Growth (%) 22.0 6.3 (6.1) 7.1
Provision (25,410) (25,185) (32,947) (32,835)
PBT 27,128 30,642 19,456 23,298
Taxes (9,256) (9,063) (5,451) (6,450)
Net profit 17,871 21,579 14,005 16,848
Shares o/s (mn nos) 524.3 596.8 596.8 596.8

Capital 6,615 7,078 7,078 7,078
Networth 1,46,331 1,72,962 1,81,553 1,91,603
Deposits 22,28,689 26,37,616 30,85,125 36,28,082
Borrowings 1,79,095 2,37,973 2,78,643 3,19,560
Cash & Bank with RBI 1,16,336 1,07,629 51,648 54,193
Investments 6,23,636 8,08,304 9,43,300 11,20,118
Govt. Securities 5,04,818 6,17,645 7,28,821 8,74,585
Advances 17,78,821 20,81,022 24,16,720 28,30,718
Other Assets 39,548 42,387 38,618 43,616
Total assets 26,22,114 31,18,608 36,31,257 42,38,555


Cost of Funds 5.9% 6.1% 6.4% 6.1%
Advances (A) 17,78,821 20,81,022 24,16,720 28,30,718
Investments (B) 6,23,636 8,08,304 9,43,300 11,20,118
Asset (C=A+B) 24,02,456 28,89,326 33,60,020 39,50,835
Average Interest
Earning Assets (D) 26,18,090 26,45,891 31,24,673 36,55,427
Assets 0.9% 1.0% 0.9% 0.8%
Assets 3.5% 3.8% 3.4% 3.3%
Assets 1.5% 1.7% 1.7% 1.8%
Provisions/Avg Int
Earning Assets 1.0% 1.0% 1.1% 0.9%
Return on Avg Int
Earning Assets 0.7% 0.8% 0.5% 0.5%
Earning Assets 0.7% 0.8% 0.5% 0.5%
Productivity
Avg Total Assets) 105.1% 92.2% 92.6% 92.9%
Return on Average
Total Assets 0.7% 0.8% 0.5% 0.5%
Leverage
Average Equity) 18.2 18.0 19.0 21.1

COMPANY
REPORT

Analyst
Jignesh Shial
+91-22-4322 1185

December 2, 2013
Central Bank of India

A leopard cannot change its spots
COMPANY
UPDATE
CMP Rs52
Target Price Rs46

Relative to Sensex
Source: Capitaline
SELL
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters CBOI IN / CBI.BO
Market cap. (US$ mn) 870
Key Stock Data
-1m -3m -12m
Absolute (%) (2) 2 (30)
Rel to Sensex (%) (1) (11) (39)
Price Performance
Promoters 85.3
MFs/Banks/FIs 7.7
Public & Others 4.7
FY12 51,686 5,330 7.2 7.2 5.0 80.9 0.6 4.6 0.2 12.4 4.9 3.1
FY13 57,376 10,148 11.2 4.6 6.2 93.7 0.6 7.3 0.4 11.5 4.9 2.9
FY14E 61,210 (8,590) (8.2) (6.3) 6.2 50.6 1.0 (5.9) (0.3) 11.7 5.8 3.5
FY15E 71,127 6,529 6.3 8.3 6.8 39.6 1.3 4.7 0.2 10.7 6.1 3.5
Summary
Central Bank of India (CBOI) witnessed another disappointing quarter with reported loss of
Rs15.1 bn during the quarter, mainly on back of incremental provisioning charges on account
of higher slippages as well as migration of accounts from sub-standard to doubtful during the
quarter. Although the bank has witnessed decline in yield on advances mainly on the back of
accelerating growth as well as inability of the bank to pass on higher rates to customers, the
management managed to shed away large chunk of bulk deposits during the quarter and
hence margin during the quarter remained flat at 268bps on sequential basis. On the treasury
front, the bank has transferred securities worth Rs93.2 bn from AFS portfolio to HTM portfolio
and hence, recognized loss of Rs917.8 mn during the quarter. Additionally, the bank has
incurred investment depreciation of Rs2.8 bn, of which the bank has provided for Rs930.2 mn
during the quarter and balance would be amortized during H2FY14.
Outlook
Concentration of corporate loan book to reduce growth
CBOI has 64% of total advances to corporate, which includes higher exposure to stress sectors like
power, infra and metals. Its exposure to retail loans remains very low at 12%. As we expect economic
environment to remain bleak, we expect the banks loan book to grow at 15.8% in FY14E. We expect
NIM to decline marginally in FY14 to 2.33% owing to decline in yield on advances. Consequently, we
expect NII growth to remain weak at 7% YoY to Rs 61.2 bn.
Asset quality to remain under stress
Considering the weak domestic environment, the banks exposure to corporate loans remains high at
64% which includes exposure to stressed sector like power and infra at 22.2% of total advances.
Therefore we continue to remain cautious on the asset quality as we expect the bank to report higher
NPAs in the near term. We assume fresh slippage ratio of 3% in FY14E. Consequently, we expect
gross NPA of 5.8% and net NPA of 3.5% % in FY14E. Accordingly, we assume loan loss provision to
remain high at 1.9% for FY14. During the quarter, the bank restructured loans amounting to Rs12.6
bn taking the outstanding restructured loan book to Rs229.12 bn, which is 11.5% of advances.
We estimate decline in PAT of 20% CAGR over FY13-15E, driven by 22.3% CAGR growth in provisioning
and slower NII growth of 11.3% CAGR. Margins are likely to remain in range of ~240bps for FY14/FY15.
We assume fresh slippages to the tune of Rs60 bn (~3% of advances) and loan loss provision of 190bps
for FY14. We value the bank on ERoE basis with cost of equity at 17.6% considering risk free rate at
8.5% and market risk premium at 6.5%. We maintain our SELL rating on the stock with Target Price of
Rs46. The bank is trading at 1.3x Price to Adjusted Book (only adjusted for 100% NPA) at our FY15E
numbers. At our target price, the stock would trade at 1.2x Price to Adjusted FY15E book and 7.4x Price
to FY15E Earnings.
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CBOI Sensex

30
Company Update Central Bank of India

Financial Summary

Net interest income 51,686 57,376 61,210 71,127
growth (%) (2.9) 11.0 6.7 16.2
growth (%) 8.6 12.7 (1.4) 10.5
Provision (21,687) (18,530) (39,871) (27,696)
PBT 6,463 13,196 (8,590) 6,873
Taxes (1,133) (3,048) 0 (344)
Net profit 5,330 10,148 (8,590) 6,529
Adjusted net profit 5,330 10,148 (8,590) 6,529
Shares o/s (mn nos) 736.1 902.8 1,044.6 1,044.6

Capital 23,531 26,616 26,616 26,616
Networth 1,24,515 1,53,129 1,39,398 1,40,182
Deposits 19,61,733 22,60,383 25,92,612 29,98,768
Borrowings 1,29,196 1,83,055 1,92,928 2,03,696
Cash & Bank with RBI 1,31,142 1,35,602 1,14,626 91,390
Investments 5,92,433 7,26,038 8,18,808 9,40,079
Govt. Securities 5,07,238 6,01,302 6,85,485 7,95,162
Advances 14,75,129 17,19,358 19,91,001 23,14,007
Other Assets 64,431 68,129 62,448 66,305
Total assets 22,97,997 26,81,295 30,19,849 34,45,189


Cost of Funds 6.7% 6.6% 6.4% 6.3%
Advances (A) 14,75,129 17,19,358 19,91,001 23,14,007
Investments (B) 5,92,433 7,26,038 8,18,808 9,40,079
Asset (C=A+B) 20,67,561 24,45,396 28,09,809 32,54,087
Average Interest
Earning Assets (D) 26,18,090 22,56,479 26,27,603 30,31,948
Assets 0.5% 0.7% 0.7% 0.7%
Assets 2.5% 3.3% 3.0% 3.0%
Assets 1.4% 1.9% 1.8% 1.9%
Provisions/Avg Int
Earning Assets 0.8% 0.8% 1.5% 0.9%
Return on Avg Int
Earning Assets 0.2% 0.4% -0.3% 0.2%
Earning Assets 0.2% 0.4% -0.3% 0.2%
Productivity
Avg Total Assets) 119.1% 90.6% 92.2% 93.8%
Return on Average
Total Assets 0.2% 0.4% -0.3% 0.2%
Leverage
Average Equity) 18.8 17.9 19.5 23.1
Return on Average Equity 4.6% 7.3% -5.9% 4.7%

Company Update Central Bank of India

31

Soft Coverage

COMPANY
REPORT

December 2, 2013
City Union Bank

Best among Equals
COMPANY
UPDATE
CMP Rs49

Relative to Sensex
Source: Capitaline
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters CUBK IN / CTBK.BO
Shares o/s (mn) 539
Key Stock Data
-1m -3m -12m
Absolute (%) 5 21 (6)
Price Performance
Promoters 0.0
MFs/Banks/FIs 7.5
Analyst
Jignesh Shial
+91-22-4322 1185

NOT RATED
Outlook: Positive
Summary
City Union Bank (CUB) is an old generation private sector bank, having major presence in the
state of Tamilnadu. The bank is well known for its focus on relationship banking approach, low
cost operating model, and conservative management principles. They have been bankers for
many SME/MSME/mid corporate business families for many generations and that loyalty business
is still the key driver for the business growth of the bank. Although the liability franchise of the
bank is not as good as some of its peers like Federal Bank or ING Vysya Bank, the bank
extensively relies up on retail deposits only. On asset side, the bank continues to have limited
exposure to riskier asset class and has diversified asset book spread across sectors. The bank
has existing 397 branches and 872 ATMs of which 262 branches are located in the state of Tamilnadu.
Going forward, the management is targeting 420 branches by end of FY14. The bank pegged superior
return ratios like 24% ROE and 1.5% ROA which makes it more favorable across investors and
hence it generally trades at a premium to most of its peers.
Outlook
Focus remains on SME/MSME/Retail where the lies the expertise
The bank has a conservative management who remains cautious especially towards quality of
disbursement rather than getting worried over credit growth. CUB had never been focused on large
industries as it has simple business model of focusing on SME/MSME and Retail segment. The bank also
specializes in short term/working capital loans which is already forming 68% of advances. As highlighted
earlier, being focused on quality of credit, the management has lowered its credit growth guidance to 18-
20% for FY14 against 20% previously.
Treasury Income (mark to market losses) is already provided for
The bank has incurred and provided for Rs24.7 mn during the quarter as investment depreciation.
Similarly, the bank has transferred securities worth Rs5.4 bn from AFS category to HTM category and has
recognized a loss of Rs2.6 mn. Henceforth, there will be no un-provided loss in the books of the bank.
NPA and Restructured advances in check No consortium lending and No CDR
During Q2FY14, the bank has witnessed sudden spike in NPA with fresh slippages to the tune of Rs1,879
mn. As discussed with the management, one large borrower account in steel sector with the balance of
Rs1,165 mn slipped to NPA during the quarter. The management is confident of recovering 70% of this
outstanding account as it has enough collateral to recover the same. Apart from this one account, rest of
slippage had been in normal course of business. There had been a nominal increase in restructured book
worth Rs4 mn and hence, cumulative outstanding restructured advance stands at Rs2,173 mn, which is
1.4% of Total Advances.
We remain confident of the business model of the bank considering their traditional relationship
based banking approach as well as the cautiousness of the management. The bank has delivered
best in class return ratios (24% ROE 1.5% ROA) and hence has always traded at a premium to its
peers. The bank is currently trading at 1.1x P/Adjusted book on FY15 estimates, which is quite
reasonable. We prefer the bank from mid to longer term investment horizon.

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CUBK Sensex

COMPANY
REPORT

December 2, 2013
Development Credit Bank

Many a little makes a mickle
COMPANY
UPDATE
Relative to Sensex
Source: Capitaline
NOT RATED
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters DEVB IN / DCBA.BO
Shares o/s (mn) 250
Key Stock Data
-1m -3m -12m
Absolute (%) (1) 26 10
Rel to Sensex (%) (1) 13 2
Price Performance
Promoters 18.5
MFs/Banks/FIs 14.0
Analyst
Jignesh Shial
+91-22-4322 1185

CMP Rs50

Outlook: Positive
Summary
Development Credit Bank (DCB) had been a turnaround story so far and we believe the same can
continue to do better in coming periods considering its clean balance sheet, no pressure of
restructuring, stable liability franchise and conservative but far experienced management. The
bank has already wiped off its legacy book of stresses assets and slippage from its newly built
advance book is consistently remained lower. The bank is increasing its network in a planned and
structural manner by being preferred private sector bank in particular geographies. The bank has
strong retail franchise with ~27% CASA and 79% retail deposit base which allows the bank to earn
stable margin. High cost to income ratio had been another cause of concern for the bank, however
the same is more attributable to lower revenues rather than rising cost and with growth
momentum picking up, we expect the same to normalize sooner than expected.
Outlook
Credit growth above industry average Focused on small ticket SME/ Mortgage loans
The management expects to grow its credit book by 5-6% ahead of industry average mainly lead by
mortgages and small ticket SME/MSME loans which forms close to ~60% of advance book currently. The
bank has also started venturing in to Gold Loan and CV business as well however on a very selective
basis. On a slightly mid to long term horizon, the management plans to achieve balance sheet size of Rs
300bn against Rs 150bn currently. The bank also relies on the current expansion plan which is already
underway especially in Tier II Tier VI cities across India. The bank has 101 branches as on June 30,
2013 with major dominance in the state of Maharashtra and Gujarat.
Pressure on margin inevitable Higher CASA and Base rate hike provides some breather
On funding part, management continues to rely on higher CASA base of the bank which was ~27% of total
deposits as on Q2FY14. The bank also relies on refinancing opportunities especially from NHB and SIDBI
for their priority sector portfolios. The bank has also increased its base rate by 35bps recently. However
although 90% of the loan portfolio of the bank is linked to base rate, considering the recent economic
slowdown and tiff competition, the management do not expect to pass on the entire cost hike to its
customers hence would face some pressure on margins in the coming quarters. The management expects
margins to remain stable at 320bps for the full year.
Asset quality concerns still in manageable levels
The bank had seen some surge in NPAs however the same is arising in normal course of business. The
bank is not part of CDR and has almost zero restructured book. However management remains cautious
and has already started consolidation their advance book especially on mid corporate and large
SME/MSME part. The bank has already reduced its SME/MSME ticket size and is also closely monitoring
movement in asset portfolio. For now, the risk of asset quality remains manageable for bank.
We remain confident on the growth aspects of the bank considering branch expansion and focus
on SME/MSME/Mortgages book. We also appreciate liability franchise of the bank providing
stability to margins. With conservative management approach we also assume asset quality
issues would remain under manageable levels. The bank is currently trading at 1.0x P/Adjusted
book on FY15 estimates. We prefer the bank from mid to longer term investment horizon.

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DEVB Sensex

COMPANY
REPORT

December 2, 2013
Federal Bank

Wait and Watch is best strategy
COMPANY
UPDATE
Relative to Sensex
Source: Capitaline
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters FB IN / FED.BO
Shares o/s (mn) 171
Key Stock Data
-1m -3m -12m
Absolute (%) (1) 46 (17)
Rel to Sensex (%) (1) 33 (25)
Price Performance
Promoters 0.0
MFs/Banks/FIs 20.6
Analyst
Jignesh Shial
+91-22-4322 1185

CMP Rs79

NOT RATED
Outlook: Neutral
Summary
Federal Bank is old generation private sector bank based of Kerala, however in recent times the
bank has expanded across India. The bank has best in class liability franchise with strong hold in
NRE deposits base, accordingly bank managed to earn stable margins. However asset quality
volatility had been the major concern among investors. Post management change although the
bank had undergone a consolidation stage whereby advance book had been growing below
industry average, delinquencies from its legacy book continued to weigh high and hence the bank
consistently performed weaker on return ratios. Although the bank has performed better during
last quarter, we continue to remain cautious and would wait for clarity on performance of asset
profile of the bank in the coming quarters.
Outlook
SME/retail loans likely to pull credit growth Gold business likely to pick up
The management intends to grow its SME/Retail book by 25% YoY for FY14 and it maintains its full year
credit growth target for FY14 of 13-15%. Of the total SME lending, close to 70% is working capital
financing whereas of the corporate book, close to 30% pertains to short term working capital loans. The
bank had seen some slowdown in Gold Loan book during the quarter. However, the same is more
attributable to decline in gold prices which led to lower Loan value; however with gold prices stabilizing, the
management is confident of witnessing higher traction in gold loan book in coming quarters.
Spike in NRE deposit coupled with higher CASA may lead to improving margins
With steep depreciation in rupee, the bank is seeing surge in NRE deposits. Hence the management is
cautiously replacing high cost bulk deposits with relatively lower cost NRE term deposits. The bank also
focused on CASA deposit on the back of surge in NRE savings deposits as well as increasing Pan India
presence. Considering this factors, margins are likely to improve in coming quarters.
Asset quality profile improving: however stressed asset pipeline still intact
The bank had seen some improvement in gross slippages during Q2FY14 which improved to 1.2% -
annualized against 2% during Q1FY14. The bank witnessed minimal slippage in its corporate loan book
profile which was surprising considering current weak environment and pressure faced by its peers. The
management continues to indicate stressed asset pipeline of Rs3-4 bn which is under scanner and could
see fresh slippage from this portfolio in the coming quarters. Hence, we remain cautious on the slippage
front. On the restructuring front, total standard restructured book is at Rs22.1 bn which is 5.2% of current
outstanding advances. Going forward, the management expects 15% growth in ex-PSU restructuring.
As highlighted earlier, we remain slightly sceptical on banks ability to maintain healthy asset
quality in current uncertain and slowing growth environment. On the mark to market side, out of
the net depreciation of Rs1.22 bn, the bank has recognized depreciation of Rs174.6 mn and the
balance would be recognized during H2FY14. Another key area to watch out for would be Cost to
Income ratio for the bank which is rising rapidly and it might impact bottom line of the bank
negatively. Capital adequacy for the bank remains healthy and we do not expect equity dilution in
near term. With RoA of 1% and RoE of 14%, the bank is currently trading at 1x P/Adjusted book
(100% NPA + 25% restructuring) on FY15 numbers, which we believe is justified.

We assume 17% CAGR growth in PAT from FY13-15E driven by 21% CAGR in NII, 19% CAGR in
advances and margins at 3.5% in FY14-FY15. We value the bank on ERoE basis with cost of equity
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FB Sensex

COMPANY
REPORT

December 2, 2013
IndusInd Bank

Patience is virtue
COMPANY
UPDATE
Relative to Sensex
Source: Capitaline
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters IIB IN / INBK.BO
Shares o/s (mn) 524
Key Stock Data
-1m -3m -12m
Absolute (%) (3) 20 2
Rel to Sensex (%) (2) 7 (7)
Price Performance
Promoters 15.2
MFs/Banks/FIs 7.4
Public & Others 8.2
Analyst
Jignesh Shial
+91-22-4322 1185

CMP Rs422

NOT RATED
Outlook: Neutral
Summary
Indusind Bank had been a robust growth story with improving return ratio and stable asset quality
profile. Although we like the bank considering its robust growth prospects and its professional
management approach, however for now we remain cautious on the bank considering its higher
CV exposure and pain from mid corporate segment.
Outlook
Growth slowing but still well ahead of industry Mortgage book doing fine
The bank like its peers is witnessing some slowdown in credit pick up during recent times mainly due to
slowing domestic environment rather than industry specific issues. Mortgage book remains the key growth
engine for the bank. For commercial Vehicle Loans (21% of advances), many players have exited CV loan
market due to headwinds faced by the industry. However, Indusind being an experienced player; has
consistently increased its market share in this segment. The bank has also cautiously and selectively
increased its presence in second hand CV financing and personal vehicle financing (especially in northern
India). Apart from this, LAP business for the bank is also performing well with average disbursements of
Rs1.5 bn every month. On the corporate front, the bank has witnessed some sluggishness. However the
management is confident of growing well ahead of industry in this segment as well. Overall the
management has slightly lowered its advance growth guidance to 22-25% for FY14E.
Cost of funds rising sharply pressure on margins visible
With recent liquidity tightening measures announced by RBI, the bank like many of its peers has witnessed sharp
rise in cost of funds for the bank which rose 200bps during last quarter. Accordingly, the bank is likely to witness
consolidation of 50-60bps in spreads. 40% of advance book is linked to variable rates, whereas 45% of deposits
are likely to be re-priced in coming quarter, which in turn puts some pressure on margins. During Q2FY14,
combined with improvement in CASA along with cautious replacement of deposit augmenting through
borrowings, the bank was able to manage margins at 3.65% against 3.72% during Q1FY14. However, we
believe higher margins were also an outcome of capital raised during Q4FY13 and hence gradually we expect
NIM for the bank to ease further at close 340bps by FY14.
Slippages at elevated levels Part of restructured book under moratorium is a risk
On asset quality front, the bank is witnessing rise in delinquencies in its CV portfolio. However, rest of
mortgage book is performing fine. The bank is also witnessing some pressure arising from its mid
corporate book. On large corporate front, there had been some referrals for restructuring as well as some
sectors are witnessing pressure. On sector specific front, the bank has identified some weakness in EPC
Construction business. The bank expects slippages to remain at an elevated levels but it maintains its
credit cost target of 60bps for FY14E which has upside risk up to 70-75bps.
Although we remain confident of asset quality profile for the bank (barring the bank would outperform
its peers on slippage and credit cost front), we still remain slightly skeptical about ability of the bank to
maintain margins (with incremental share of LAP) and expect margin for the bank to decline gradually.
We remain neutral towards treasury losses and expect no negative surprises on this count. The bank is
currently trading at 2.5x P/Adjusted book FY15 estimate which is a substantial premium to its peers. We
would avoid the bank at current levels and would accumulate the stock at slightly lower levels.

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IIB Sensex

COMPANY
REPORT

December 2, 2013
Jammu & Kashmir Bank

Strike while the iron is hot
COMPANY
UPDATE
Relative to Sensex
Source: Capitaline
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters JKBK IN / JKBK.BO
Shares o/s (mn) 49
Key Stock Data
-1m -3m -12m
Absolute (%) (1) 9 (12)
Rel to Sensex (%) (0) (4) (20)
Price Performance
Promoters 53.2
MFs/Banks/FIs 4.3
Analyst
Jignesh Shial
+91-22-4322 1185

CMP Rs1,217

NOT RATED
Outlook: Positive

Summary
Jammu & Kashmir bank is an old generation private sector bank having a strong presence in the
state of Jammu & Kashmir and is consistently gathering strong momentum on asset as well as
liability side. . The bank has existing 754 branches, of which 645 branches are situated within the
state of Jammu & Kashmir and going forward the management is targeting 800 branches by end of
FY14. With the state government of J&K holding controlling stake, the bank has been allocated
Quasi PSU status. However with professional management approach, better liability franchise and
tremendous growth opportunity with in state of J&K, the bank provides attractive risk rewards.
Outlook
J&K state remains key focus area amidst of competition from other private sector banks
The management continues to focus on growing its base in the state of J&K where it already enjoys near
monopoly status and expects to grow its book by 25% for FY14. The bank has 43% advances
concentrated in the state and the management is confident despite competition faced from large private
sector banks as well as few PSU Banks, as the core focus area for the bank remains unbanked or under
banked areas of the state. The bank has already opened 120 branches in such areas during previous year.
The management confirmed that maximum business opportunity still exists in such areas, whereas most of
the large private banks are focusing on urban areas in the state where credit market is already seeing
saturation. Outside the state of J&K, the bank focuses on better quality asset profile and hence the
management remains cautious. The bank has maintained its credit growth target at 20% for FY14.
Better managed liability franchise led to improvement in margin
The bank continued to manage well its deposit franchise with CASA deposit for the bank remaining at
38.5%, providing enough liquidity to the bank. Additionally, the management repaid large chunk of high
cost bulk deposits during the previous quarter which helped reduce cost of funds further. The key focus
area for the bank in the state of Jammu & Kashmir remains agriculture, horticulture, tourism industry,
personal and other retail loans where the bank manages higher yield on advances and hence manages
6% margins within the state. For rest of India, the bank managed margins at ~3% levels and hence the
management guides for margin at ~4% levels.
Asset quality pressure in line industry - Management continues to remain cautious
The management is confident of asset quality profile of the bank and does not see much fluctuation in its
book. For advances within the state of J&K, 60% of advances are pertaining to priority sector lending and
are mainly small ticket loans. Hence, probability of defaults generally remains lower. As highlighted earlier,
for credit outside state of J&K, the management remains extra cautious. We also remain comfortable
towards provision coverage ratio of the bank which stands at ~92%. Cumulative restructured book for the
bank stands at a comfortable level of 3.6% of advances.
The bank is currently trading at 0.9x P/Adjusted book on FY15 estimates, which is quite
reasonable considering its best in class return rations (~22% ROE and 1.6% ROA) and limited
dilution risk. We prefer the bank from longer term investment horizon. We get more positive on the
bank in the backdrop of recent extension of 3 years to the existing management which provides
better visibility and sustainability to earnings.

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JKBK Sensex

COMPANY
REPORT

December 2, 2013
Karur Vysya Bank

As you sow so shall you reap?
COMPANY
UPDATE
Relative to Sensex
Source: Capitaline
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters KVB IN / KARU.BO
Shares o/s (mn) 107
Key Stock Data
-1m -3m -12m
Absolute (%) (3) 7 (27)
Rel to Sensex (%) (2) (6) (36)
Price Performance
Promoters 3.1
MFs/Banks/FIs 13.3
Analyst
Jignesh Shial
+91-22-4322 1185

CMP Rs334

NOT RATED
Outlook: Neutral
Summary
Karur Vysya Bank (KVB) had been a favored pick of many investors earlier considering its
prominence in funding short term working capital loans, conservative management approach and
best in class return ratios. However since past few quarters, the bank had been expanding its
presence in PAN India and also been aggressive in growing its book size through consortium
lending. Accordingly the bank is trapped in vicious circle of asset quality deterioration, margin
shrinkage and rising operating expense. The bank witnessed subdued numbers during Q2FY14
followed by weak guidance from the management. Hence we remain skeptical on the bank in near
term and could turn positive once the numbers stabilizes.
Outlook
Sharp rise in cost of funds lead to decline in margins and flat growth in NII
The management was consistently pushing for removal of high cost bulk deposits and were trying to
replace the same through stable base of retail term deposits however during the process the bank had to
rely heavily on MSF and CD borrowings. With sudden tightening of policy rates in mid of July, the bank
witnessed sudden spike in cost of funds. However on the contrary due to pressure of competition as well
as with rising share of retail lending (especially housing loans), yield on advances remained at previous
levels. Hence the bank witnessed steep decline in margins to 251bps against 277bps during Q1FY14. The
management maintains full year margin guidance in the range of 280-300bps.
Lower income and higher expenses lead resulted in worsening cost to income ratio
Since past few quarters, rapid rise in expenditure base for the bank has also remained an area of concern.
We attribute such rise in opex to rapid growth in branch network for the bank which increased by
100branches during FY13. The management plans to open 75 branches during FY14 as well which is likely
to put further pressure on costs. As highlighted earlier, with decline in revenue followed increasing cost,
cost to income for the bank increased to 61% during Q2FY14 against 41% during Q1FY14 and 47% for
FY13. Going forward, with operating cost likely to remain high, in case margins remains at subdued levels,
pressure on cost to income is likely to remain higher which would impact the bottom line further.
NPA under check Restructuring trend likely to remain stable
During Q2FY14, the bank has witnessed stable rise in NPA with fresh slippages to the tune of 1.1bn
consisting of various accounts. The bank saw stable recovery process which is likely to continue during the
second half of the current fiscal as well. On the restructuring front, the bank witnesses fresh additions to
the tune of Rs7.5 bn which lead to total restructured book worth Rs 15.7 bn (~5% of advances). Going
forward, the bank expects a restructuring pipe line of Rs2.5bn however with some reversals on SEB
restructuring side, the net impact may remain neutral.
Recent result and commentary from the management were far below our and street estimates.
Going forward, although we may see some spike in margins, however with rise in operating
expense, impact on bottom line is likely to remain minimal. On NPA front, we expect weaker trend
is likely to continue and we do not expect any major improvement. The bank is currently trading at
1.1x P/Adj FY15 book which justifies weaker set of numbers and we expect the stock to trade at
similar levels till we see any improvement on margin and cost to income front.

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KVB Sensex

COMPANY
REPORT

December 2, 2013
South Indian Bank
If anything can go wrong, it will

COMPANY
UPDATE
Relative to Sensex
Source: Capitaline
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters SIB IN / SIBK.BO
Key Stock Data
-1m -3m -12m
Absolute (%) (3) 5 (13)
Rel to Sensex (%) (2) (8) (22)
Price Performance
Promoters 0.0
MFs/Banks/FIs 12.5
Analyst
Jignesh Shial
+91-22-4322 1185

CMP Rs21

NOT RATED
Outlook: Negative
Summary
South Indian Bank has been a gold loan story so far. However, with gold loan book peaking for the
bank, the management has failed to diversify advance book in other productive areas in an
effective manner. As a result, weakening asset quality trend along with higher credit cost has
become generalized trend since last few quarters now. Additionally, inability of the bank to
achieve priority sector lending targets along with regular dilution also keeps investor sentiment
negative in general. In current weak economic status, SIB remains most volatile towards asset
quality risk and margin pressure.
Outlook
Credit slowdown with slowing gold financing Priority Sector lending remains lower
More recently, the management has confirmed that due to rapid fluctuation in gold prices, the bank has
cautiously avoided aggressive venturing in gold loan portfolio. Hence bank had seen sequential decline in
Gold Loan book which de-grew by 7% having 20.5% share in overall advances against 22.4% share during
Q1FY14. With gold prices stabilizing at certain levels along with upcoming festive season, the bank
expects to witness further pick up in gold loan book. The management targets to achieve 20% growth in
credit for FY14. Another issue had been banks inability to achieve PSL targets on time. In recent times,
like previous years, the bank is facing hurdles in achieving its PSL targets. The bank has 20% PSL target
achieved with RIDF book maintained at Rs14.8 bn as on September 30, 2013. With steep depreciation in
rupee, the bank as per its historical trend, has seen surge in NRE deposits, which intentionally replaced
high cost bulk deposits through which the bank could see some improvement in margins.
Treasury Income and mark to market losses
On the mark to market side, the bank has transferred SLR securities with book value of Rs5.4 bn from
AFS/HFT to the HTM category at lower of book value or market value as of July 15, 2013 and recognized a
loss of Rs4 mn. Further, out of the net depreciation of Rs389 mn as at September 30, 2013, the bank has
recognized depreciation of Rs194.5 mn and balance would be recognized during H2FY14.
Fresh slippages and restructuring weakness persists
The bank had seen fresh slippages of close to 4% annualized during H1FY14 which is substantial number.
Although the management does not expect any major slippage trend in the upcoming quarter, the current
slowing economy provides further upside risk to this number. On the restructuring front, although the bank
has not seen any addition during Q2FY14, there is already a pipeline of Rs1.2 bn. Total outstanding
restructured book for the bank stands at Rs14.9 bn which is 4.7% of current outstanding advances. Credit
cost for the bank spiked to 80bps (annualized) during the first half of FY14 (30bps during first half of FY13)
clearly indicating pressure on bottom line due to weakening asset quality of the bank. Even provision
coverage for the bank continued to remain weaker at 53.5% against 58% during Q1FY14.
The bank is currently trading at 0.8x P/Adjusted book FY15 Bloomberg estimates, which though is
cheap and seemingly attractive; we would avoid the bank at current levels as in current weak
economic status, SIB remains most volatile towards asset quality risk and margin pressure.

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SIB Sensex

COMPANY
REPORT

December 2, 2013
ING Vysya Bank

Make hay while the sun shines
COMPANY
UPDATE
Relative to Sensex
Source: Capitaline
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters VYSB IN / VYSA.BO
Shares o/s (mn) 187
Key Stock Data
-1m -3m -12m
Absolute (%) (3) 32 19
Rel to Sensex (%) (2) 19 10
Price Performance
Promoters 43.4
MFs/Banks/FIs 13.6
Public & Others 8.4
Analyst
Jignesh Shial
+91-22-4322 1185

CMP Rs570

NOT RATED
Outlook: Neutral
Summary
ING Vysya bank is an old generation private sector bank based out of Karnataka having major
presence in the state of Andhra Pradesh. The bank post management change in FY09, the bank
has intensely cleared its legacy book and has focused on having its presence in secured niche
products and improving return ratios. As on Q2FY14, large Corporate accounted for 35.1%, SME
accounted for 35.9% whereas Agri and Retail portfolio accounted for balance 29% of advances.
The bank has virtually zero NPA with 90% provision coverage however bank has been
consolidating since past few years and hence grows in line at an industry average but slower than
its peers. ING AG group holds controlling stake in the bank.
Outlook
Credit expected to grow ahead of industryFocus on retail deposits continued
The management is consistently guiding for credit growth slightly ahead of industry average which
continues for current fiscal. With recent easing on branch expansion policy by RBI, the bank is likely to
expand in areas with higher agriculture advance possibilities. On the deposit front, the bank continued to
focus on increasing its retail and CASA deposit base and accordingly Current and Savings (CASA)
deposits grew by 9.7% to Rs130.1 bn and CASA ratio was at 32.5% of total deposits as at the end of
September 2013. The bank has recently raised equity capital to the tune of Rs18.4 bn through QIP route
which would have provided some cushion on the margins during H1FY14. Going forward, management
has guided for average margin of 3.5% for FY14.
Treasury Income (mark to market losses)
On mark to market losses side, the Bank had chosen conservative approach and has not transferred any
SLR security from Available for Sale (AFS) / Held for Trading (HFT) to HTM category and has considered
the entire depreciation worth Rs157 mn of the AFS / HFT portfolio in the current quarter.
No negative surprise on asset quality Sell down of portfolio remained the key
The bank had been conservative in asset growth since past many quarters and accordingly managed to
maintain stable asset quality. The bank was also able to maintain healthy coverage ratio of 89% which
provides us further comfort. Cumulative restructured book for the bank stands at a comfortable level of
1.3% of advances. As highlighted by the management, the bank continues to avoid bilateral restructuring
in order to strengthen processes further. Going forward, although the management does not see any
significant pressure on the asset quality, we slightly remain cautious over banks asset portfolio in the
state of Andhra Pradesh. Although the bank does not disclose the quantum, with highest branch network
in the state, we continue to remain slightly sceptical over state advances.
Going forward, the management is confident of growing its asset book slightly ahead of the
industry growth however it also remains conservative towards quality of asset book. On the
margin front, with ease in MSF rates, we are confident of banks ability to improve margins during
H2FY14. Although we remain positive towards banks current quarter performance as well as
abilities of the management, we also believe the valuation for the bank justifies the potential de-
risk in the asset portfolio of the bank. The bank is currently trading at premium to its peers at 1.4x
P/Adj book on FY15 estimates, hence we assume limited upside for the bank from current levels.

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VYSB Sensex

COMPANY
REPORT

December 2, 2013
Yes Bank

Better to light a candle than to curse the darkness
COMPANY
UPDATE
Relative to Sensex
Source: Capitaline
Nifty: 6,176; Sensex: 20,792

Sector Banking
Bloomberg / Reuters YES IN / YESB.BO
Shares o/s (mn) 360
3-m daily average vol. 22,07,955
Key Stock Data
-1m -3m -12m
Absolute (%) (1) 59 (17)
Rel to Sensex (%) (0) 46 (25)
Price Performance
Promoters 25.6
MFs/Banks/FIs 19.4
Analyst
Jignesh Shial
+91-22-4322 1185

CMP Rs369

NOT RATED
Outlook: Positive
Summary
Yes Bank had seen some volatility in past quarter mainly on the back of pressure on margins
arising due to spike in MSF rates by RBI along with confusion over banks treasury losses.
However during Q2FY14, the bank performed well on most of the parameters. Although we are
confident of banks ability to sustain in current weak environment, we remain slightly skeptical
over banks asset profile as well as probable higher than expected equity dilution.
Outlook
Credit growth slowing Gradual ease in capital cushion raises risk of margin pressure
As highlighted by the management, post adjusting for currency depreciation, the real growth in credit
during the quarter was close to 14% only. Thus, slowdown in credit pick up is across segments including
retail credit. The bank expects to grow its retail book by 20-25%. However, on corporate front, the bank
has been quite selective considering weak environment and greater risk to asset quality. The bank was
able to deliver super normal margins during current quarter mainly on the back of capital infusion during
Q4FY13. However, this effect is likely subdued over a period of time. Considering effect of high margins
during H1FY14, we revise our margin guidance upwards by 10bps to 355bps for FY14.
Treasury Income (mark to market losses) and Fee Income
The bank has been prominent in growing its fee based income due to its well placed merchant banking
services. With rise in retail customer base for the bank, it also witnessed strong momentum in retail fee
income. On treasury losses side, the bank has fully provided for a net depreciation on AFS/HFT bond
portfolio (Corporate & G-Sec) amounting to Rs1.1 bn. Also, during the quarter the Bank has transferred
eligible SLR securities worth face value of Rs0.9 bn from AFS category to HTM category at book value
with Rs3.3 mn losses on the Profit & Loss statement.
Asset quality stress managed - Sell down of portfolio remained the key
The bank during Q2FY14 witnessed fresh slippages to the tune of Rs1.4 bn (slippage of 0.8% annualized)
contributed by CV portfolio of the bank. However, the bank managed to sell down the portfolio to Asset
Reconstruction Company at Rs0.9 bn during the quarter. The bank received some part in cash, however,
the balance payments have been in the form of security receipts. For the amount lost on this sale, the bank
already had counter cyclical provisions of similar amount and hence impact on income statement had been
minimal during the quarter. Additionally, Total Restructured Advances (excluding NPAs) stand at Rs1.3 bn
as at September 30, 2013 which is 0.26% of the Gross Advances. There were no fresh restructurings
during the quarter. With lower slippages, the bank witnessed lower provisioning expense and hence, had
stable credit cost. Specific provisioning ratio for the bank stood at 85.3% which provides further comfort.
We are positive on Yes Bank numbers and we believe the bank has delivered effectively across
parameters. With MSF rates already normalized to Repo rates, pressure on margins would be
stable for the bank and in line with its peers. However we would remain cautious about possible
dilution probability with lower Tier I ratio of the bank. With RoA of 1.5% and RoE of 25%, the bank
is currently trading at 1.5x P/Adjusted book on FY15 estimates, which is at a discount to peers like
Indusind Bank. Hence, we would remain positive on bank for mid long term investment horizon.
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YES Sensex


41

Notes

Sonam H. Udasi Head Research (91-22) 4322 1375 sonam.udasi@idbicapital.com
Dealing (91-22) 6637 1150 dealing@idbicapital.com
Key to Ratings
Stocks:
BUY: Absolute return of 15% and above; ACCUMULATE: 5% to 15%; HOLD: Upto 5%; REDUCE: -5% to -15%; SELL: -15% and below.

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Equity Research Desk
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