Financial Services Initiations 2jul10

Financial services
Table of contents
Headed for next cycle of growth ......................................................................................... 4

Looking ahead: Further scope for RoA improvement .................................................... 15
DuPont convergence a key trend ...................................................................................... 15
Previous decade: Inefficiency to efficiency........................................................................ 15
Next decade: Further scope for RoA improvement ........................................................... 16
How to play the next cycle: Learning from our across-the-cycle analysis ................... 21
How to play the next cycle ................................................................................................. 21
Our sector call: Outperform ............................................................................................... 26
Companies
ICICI Bank ............................................................................................................................ 39

Axis Bank ............................................................................................................................. 51
Punjab National Bank ......................................................................................................... 61
Union Bank of India ............................................................................................................ 71
HDFC Bank........................................................................................................................... 81
Bank of Baroda .................................................................................................................... 91
Bank of India ...................................................................................................................... 101
State Bank of India ............................................................................................................ 111
2 July 2010 Indiabulls Research 2

Institutional
Initiating coverage
Banking sector
Eq
2 July 2010 Next cycle of growth
India The banking sector is headed for its next cycle with balance sheet pick-
Financial services up imminent in 2HFY11 after an adjustment phase of two years. Earning
drivers look quite healthy with higher earnings growth driven by uptick
in credit, stable margins, improving asset quality, and lower MTM losses.
Recommendation summary Our benchmarking analysis suggests there is further scope for RoA
Company Reco TP Upside (%) improvement within the sector, which would drive valuations ahead. We
initiate coverage of the sector with Outperform rating.
ICICI Bk OP 1,052 25
Axis Bk OP 1,529 24
Headed for next cycle of growth
Balance sheet pick-up is imminent after the adjustment phase of the last two years.
PNB OP 1,276 25
We expect a healthy loan growth of 22%, loan restructuring worries to fade off after
Union Bk OP 381 21 1HFY11 as a year passes by since the major restructuring done under RBI’s special
HDFC Bk OP 2,297 20 dispensation scheme, lower MTM losses with banks having derisked their treasury
BOB Neutral 803 12
portfolios and stable margins as pricing power comes back to banks with increasing
credit growth and decreasing liquidity in the system.
BOI Neutral 343 (4)
SBI Neutral 2,520 11 Looking ahead: Further scope for RoA improvement
Source: Indiabulls research. Benchmarking the efficient banks in core lending and fee income operations leaves
further scope for RoA improvement for the banks going ahead. We believe Dupont
Performance (%) convergence between RoA leaders and RoA laggards, wherein RoA laggards to show
significant improvement in operational parameters, is a key trend to watch out for. Our
1m 3m 1yr
across-the-cycle analysis suggests that such structural improvements in RoA
ICICI Bk 0.4 (11.7) 15.3 composition will drive the valuations.
Axis Bk 4.4 5.1 41.9
PNB 2.3 0.4 49.2

How to play the next cycle: Learning from our across-the-cycle analysis
RoA leaders (who consistently delivered above Industry RoA) are likely to emerge as
Union Bk 11.1 3.5 26.3 multi-year alpha bets. RoA laggards (who consistently delivered below Industry RoA)
HDFC Bk 2.8 (1.6) 26.9 can be significant outperformers if and when they are able to improve their
BOB 1.5 10.8 59.5 performance. Also, RoA cyclical behaviour generally lasts 3-4 years on an average
and our analysis suggests RoA direction is the key for stock performance.
BOI 10.9 3.1 (0.0)
SBI 2.4 7.6 27.1 Our sector call: Outperform

Nifty 5.7 (0.7) 21.0 As the sector heads for a new cycle of growth, we expect stocks to trade at a premium
Source: Bloomberg.
to the past five years’ valuations driven by higher profitability and RoE. We initiate
ICICI Bank, Axis, PNB, Union, HDFC Bank with Outperform, and BoB, BoI, and SBI
with Neutral rating.
Figure 1: Valuation summary

Units as shown
P/ABV (x) P/E (x) RoE (%)

FY11E FY12E FY11E FY12E FY11E FY12E
ICICI 1.7 1.6 19 14 9 11
Axis 2.8 2.4 17 13 17 19
PNB 1.7 1.4 7 6 24 24
Union 1.6 1.2 7 5 21 22
Saikiran Pulavarthi HDFC Bk 3.7 3.2 24 18 16 18
saikiran.pulavarthi@indiabulls.com BoB 1.6 1.3 7 6 21 22
+91 22 3980 5203
BoI 1.4 1.2 8 6 16 18
Deepak Agrawal SBI 2.2 1.9 13 10 16 18
deepak.agrawal@indiabulls.com Source: Company, Indiabulls research.
+91 22 3980 5496
Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.
Financial services
Headed for next cycle of growth

Balance sheet pick-up is imminent after the adjustment phase of the last two years. We
expect a healthy loan growth after the credit drought of FY10, fading-away of loan
restructuring worries after 1HFY11 as a year passes by since the major restructuring done
under RBI’s special dispensation scheme. In terms of earnings, we see FY11E PAT growth
rates at 17% if no big downside occurs as NIMs have peaked and trading gains lowered.
We expect earnings growth to pick up to 27% in FY12E.
Loan growth at CAGR 22% during FY10-12E

We build in system loan growth at CAGR 22% during FY10-12E after a credit drought in
FY10 assuming a 1.5x consensus nominal GDP multiplier, in line with long term historical
average (refer Figure 2). We do not foresee credit growth to nominal GDP growth ratio
above 1.5x (against 2x in the last decade) as last decade’s high credit growth was
supported by very low bank credit penetration which is not the case at present (refer Figures
7 & 8).
Figure 2: Credit growth to nominal GDP growth ratio

x
2.5
2.0
2.0 1.8
1.5
1.5 1.4
1.0
0.5
0.0
Avg since 1951 Avg since 1981 Avg since 1991 Avg since 2001
Source: RBI, Indiabulls research.
What will drive credit growth in FY11-FY12?

We believe infrastructure and retail segments to be the growth drivers in FY11-FY12E in
addition to corporate capex which continues to remain subdued post the recent crisis.
Infrastructure to contribute 25% of incremental credit

· Infrastructure is expected to contribute 25% of incremental credit in FY11 backed by
strong demand from segments like power, roads and telecom.
· Planning Commission estimates have put demand from infrastructure projects at

Rs1080bn in FY11 backed by very strong growth from power and road projects.
· Private participation has increased in the infrastructure space.
· Healthy capital markets have also enabled projects to attract equity capital, which
helps in boosting demand for credit.
· Considering that real interest rates continue to remain negative, we believe demand
from infrastructure projects should continue to remain buoyant until FY12.

Financial services
Figure 3: Infrastructure to witness significant investments in the current plan

Rs bn
FY07–08* FY08–09* FY09–10* FY10–11* FY11–12* Total Eleventh Plan

Centre 1,126 1,283 1,485 1,721 2,040 7,656
Central Budget 294 335 388 450 533 2,000
Internal Generation (IEBR) 250 284 329 381 452 1,697
Borrowings (IEBR) 582 664 768 890 1,055 3,959
States 795 990 1,250 1,602 2,072 6,709
States Budgets 527 656 828 1,062 1,373 4,447
Internal Generation (IEBR) 80 100 126 162 210 679
Borrowings (IEBR) 188 234 295 378 489 1,584
Private 782 943 1,157 1,468 1,847 6,196
Internal Accruals/Equity 235 287 347 440 554 1,859
Borrowings 547 660 810 1,027 1,293 4,337
Total Projected Investment 2,703 3,216 3,893 4,791 5,959 20,562
Non-Debt 1,386 1,659 2,019 2,495 3,122 10,681
Debt 1,317 1,557 1,883 2,296 2,837 9,880
O/w Bank credit 498 632 801 1,016 1,289 4,237
Source: Planning Commission.
Note: *At FY07-08 price.
Figure 4: Domestic banks to play dominant role in infrastructure funding

Rs bn
FY07–08* FY08–09* FY09–10* FY10–11* FY11–12* Total Eleventh Plan

Domestic Bank Credit 498 632 801 1,016 1,289 4,237
Non-Bank Finance Companies 239 315 416 549 724 2,242
Pension/Insurance Companies 91 100 110 121 133 554
External Commercial Borrowing (ECB) 196 218 242 269 299 1,223
Likely Total Debt Resources 1,024 1,264 1,569 1,954 2,444 8,255
Estimated Requirement of Debt 1,317 1,557 1,873 2,296 2,837 9,880
Gap between Estimated Requirement and likely debt resources 293 293 305 341 393 1,625
Source: Planning Commission.
Note: *At FY07-08 price.
Secured Retail to aid credit growth further

Structural shift in the retail · Retail is likely to maintain a steady pick-up in credit volumes.
business model with focus on
secured products is likely to · We expect the strong momentum in secured retail lending to continue as
drive growth ahead consumption trends are showing significant uptick.
· Auto loans are showing a high growth and housing loans too registered a significant
growth in the last two years.
· Significant beneficiaries during the period were: HDFC Bank, ICICI Bank and SBI –
all predominant players in this segment.
· However we don’t expect unsecured lending to see any major pick-up in the next
few years as a hangover of the high delinquencies in the last cycle.

Financial services
Figure 5: Housing loan portfolio

Rs mn
Axis BoB BoI PNB HDFC Bk ICICI SBI Union

FY09 104,338 82,650 63,152 93,070 50,690 577,651 545,674 66,210
% YoY 35 14 15 14 N.A.* -13 21 28
FY10 147,427 103,130 71,500 106,120 87,000 468,000 711,930 81,150
% YoY 41 25 13 14 72 -19 30 23
Source: Company, Indiabulls research.
Note: *HDFC Bk started doing housing loans in FY09.
Figure 6: Increasing annual car sales in India – positive for retail lenders
Nos.
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
FY06 FY07 FY08 FY09 FY10
Passenger Vehicles
Source: SIAM, Indiabulls research.
Why we think 30% credit growth achieved in last cycle is unlikely in

FY11-12
· We think it is too early to expect credit growth to reach 30% like in the last cycle (2x
nominal GDP multiplier).
· IMF analysis suggests that, internationally, significant improvement in credit to GDP

ratio would lead to a credit crisis (See Figure 8). The same assessment is also
evident from the tone of the RBI deputy governor.
· The study reflects the fact that if Credit/GDP ratio breaches 50% with a faster
average annual increase in Credit/GDP ratio, countries are at risk of creating credit
bubbles.
· Countries highlighted in black have had problems as most of them had seen a very
sharp increase in Credit/GDP ratio over short span of time which lead to problems
in the past.
· India is closer to 50% in terms of Credit/GDP ratio and 4% avg increase in

Credit / GDP ratio in last 4 years (Refer Figure 7). Considering the above
mentioned statistical evidence, we are factoring Credit to GDP ratio at 1.5x
below the average of 2x since FY01.

Financial services
“In the context of the macro- Figure 7: Scope for further financial deepening highly contingent on real economy
economic trend of high %
services sector growth which
includes the banking sector 40.0 59.8
growth, I feel that the services
growth needs to be well 30.0 49.8
supported by growth from the
real sectors of the economy. 20.0 39.8
Financial leverage cannot
10.0 29.8
bring perpetual prosperity.
Banks need to keep this in 0.0 19.8
mind, and I am telling this as a
1-Jan-51
1-Jan-54
1-Jan-57
1-Jan-60
1-Jan-63
1-Jan-66
1-Jan-69
1-Jan-72
1-Jan-75
1-Jan-78
1-Jan-81
1-Jan-84
1-Jan-87
1-Jan-90
1-Jan-93
1-Jan-96
1-Jan-99
1-Jan-02
1-Jan-05
1-Jan-08
banker, as well as a central (10.0) 9.8
banker,” Dr. K. C.
Chakrabarty, Dy. Governor, (20.0) (0.2)
st
RBI, 31 August 2009, at New
Delhi Growth in credit (LHS) Credit / GDP (RHS) Linear (Credit / GDP (RHS))
Source: RBI, Indiabulls research.
Figure 8: Significant increase in credit to GDP ratio above 50% can result in credit
crisis
%
India
Source: IMF.
Note: Crisis countries are depicted in Italics
Biggest average annual three-year increase before crisis for crisis countries.
2002-04 for other countries.

Financial services
Loan growth assumptions for companies under coverage

We expect HDFC Bank and Axis Bank to exceed the industry’s loan growth rate. Among
PSU banks, we expect BoB to be in line with industry growth rate; SBI, PNB, and Union to
marginally exceed it, and BoI to lag.
Figure 9: Our loan growth assumptions

%
Loan growth Axis BoB BoI HDFC Bk ICICI PNB SBI Union
FY08 61.8 27.6 33.3 35.1 15.2 23.7 23.5 19.2
FY09 36.7 34.9 25.9 55.9 -3.2 29.5 30.2 30.0
FY10 27.9 21.6 19.9 30.0 -17.0 20.6 16.5 23.4
FY11E 25.0 22.0 20.0 30.0 15.0 23.0 23.0 23.0
FY12E 25.0 22.0 22.0 30.0 19.6 23.0 23.0 23.0
· ICICI: We expect ICICI Bank to build domestic loan growth of 20% and 25% for
FY11E and FY12E respectively while its international loan book is likely to be
flattish in absolute terms.
· Axis Bank: This bank’s loan growth rate is likely to moderate to 25% during FY11-
FY12E vs. CAGR of 46% during FY06-10 considering its size. However, we build in
further market share gain considering its strength in infrastructure lending.
· PNB: A 23% growth rate, marginally higher than the industry rate, can be expected
from PNB primarily on account of its superior capital position and balance sheet
strength to fund bigger infrastructure projects.
· Union Bank: Focus on retail and SME to drive UBI’s loan growth rate to 23%.
Higher growth rates are constrained by relatively weak capital position (Tier 1 at
7.9%).
· HDFC Bank: Higher than industry growth rates of 30% can be expected to be
sustained with increased buoyancy in secured retail lending. We also expect HDFC
Bank’s base rate to be lower than its peer group, which could give HDFC Bank a
competitive advantage for gaining market share.
· BoB: We expect BoB’s steady performance to continue through the next two years
in line with industry growth rates.
· BoI: Asset quality pressures are likely to keep BoI’s growth momentum below the
industry in FY11E. We expect growth to come by in FY12E.
· SBI: We expect SBI to register marginally higher than industry growth rates due to
its strengths in underwriting large infrastructure projects, continued aggression in
retail lending, and increased economic activity in rural areas.

Financial services
Margins to be flattish on a high base
· We expect sector-wide margins to be to be flattish as further benefits of liability re-

pricing are unlikely. Given that liquidity in the system is drying out, we believe
pricing power would be back with banks.
· Improvement in yields on assets will cover up pressures on the liability side, viz.,
interest calculation on daily savings balances.
· We expect SBI and Union Bank, whose margins were under pressure last year
primarily on account of excess liquidity in the balance sheet, to show NIM
improvements. PNB and Axis Bank can be expected to show marginal moderation
in NIMs due to excessive dependence on wholesale funds.
Figure 10: Our margin assumptions

%
NIM Axis BoB BoI HDFC Bk ICICI PNB SBI Union

FY08 3.1 2.5 2.7 4.9 2.1 3.3 2.8 2.8
FY09 3.0 2.6 2.8 4.6 2.4 3.3 2.6 2.9
FY10 3.4 2.4 2.4 4.3 2.3 3.3 2.4 2.4
FY11E 3.3 2.5 2.4 4.3 2.4 3.3 2.6 2.8
FY12E 3.3 2.5 2.6 4.3 2.5 3.3 2.8 2.9
Peak loan deposit spread to sustain with credit growth in the system
We believe current peak loan deposit spreads will sustain this time around. We expect
pricing power, which was missing in the last eight quarters, to be back with the banks as
liquidity tightens in the market. Currently, OIS spreads and CD rates have both increased by
150 bps indicating that overnight liquidity conditions are also tightening, which would bring
pricing power back to the banks.
Figure 11: Peak spreads to sustain as pricing power likely to be back with banks due
to liquidity drying out
%
15.0 6.0
14.0 5.5
13.0 5.0
12.0 4.5
11.0 4.0
10.0 3.5
9.0 3.0
8.0 2.5
7.0 2.0
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Dec-02
Aug-03
Dec-03
Aug-04
Dec-04
Aug-05
Dec-05
Aug-06
Dec-06
Aug-07
Dec-07
Aug-08
Dec-08
Aug-09
Dec-09
Average lending rates Lending spread

Financial services
Figure 12: 5-year OIS spreads peaking... Figure 13: .... implying upward move of CD rates,
% bringing pricing power back to banks
%
6
8
5 7
4 7
6
3 6
5
2 5
1 4
4
0 3
11/3/2009 1/3/2010 3/3/2010 5/3/2010 11/23/2009 1/23/2010 3/23/2010 5/23/2010
Source: Bloomberg, Indiabulls research. Source: Bloomberg, Indiabulls research.
Deposit rates expected move higher in few months as CD ratio is

closer to 72% vs. 48% in last cycle
· We expect this time around deposit rates would move higher in a few months unlike
in the last cycle when deposit rates moved up with a two-year lag.
· The current banking system CD ratio at 72% leaves no further room for funding
credit without deposit raising, unlike in the last cycle when the CD ratio was at 48%
and the banking system was able to fund a 25% credit growth without raising
deposits for two years.
Figure 14: Deposit rates are driven by the CD ratio

%
90.0 10.0
80.0
70.0 8.0
60.0
50.0 6.0
40.0 4.0
30.0
20.0 2.0
10.0
0.0 0.0
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
CD Ratio (%) SBI 1 yr Deposit rates
Source: Company, Bloomberg.

Financial services
Figure 15: Deposit rates to inch upwards as CD ratios peaked

%
85.0
75.0
65.0
55.0
45.0
35.0
25.0
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
CD Ratio (%) ID Ratio (%)
Source: Bloomberg.
10-15bps impact on NIMs from daily interest calculation on SB deposits

We believe the impact of daily interest calculation on SB deposits would be minimal as
higher interest rates would make such deposits attractive for investors to keep more money.
However, we have factored in 10-15 bps margin contraction assuming there is no
incremental flows into SB deposits after the change in interest rate calculation.
Figure 16: Savings bank deposits as % of total deposits high in private sector banks
%
60
We build in 10 to 20 bps
impact on margins on account 50
of daily calculation of interest
40
rates on SB deposits with 23 30
effect from 1 April 2010 30 26 32 31
20 23
22 21
10 24 22
15 11 10 10 8 7
0
Axis HDFC Bk ICICI SBI PNB Union BoB BoI
CA SA

Financial services
Fee Income
· Building in fee income growth in sync with credit growth, but believe there is no
further scope for its improvement as percentage of assets in FY11-12E
· Building in lower growth for Banks with higher reliance on sale of third party
products like HDFC Bk due to expected changes in regulation
HDFC Bank’s high Figure 17: Building in fee income in line with credit growth...
dependence on third party %
distribution is likely to result in
low fee income growth going Fee income growth Axis BoB BoI HDFC Bk ICICI PNB SBI Union
ahead FY08 88 14 31 35 26 14 23 85
FY09 64 38 39 34 5 24 29 34
FY10 20 20 0 15 -13 21 27 33
FY11E 25 23 20 20 15 25 24 25
FY12E 25 23 20 25 20 25 20 25
Figure 18: ... unlikely to improve further as % of assets

%
FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Axis Bank 1.0 1.1 1.4 1.7 1.6 1.6 1.6
Bank of Baroda 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Bank of India 0.5 0.4 0.4 0.5 0.4 0.4 0.4
HDFC Bank 1.5 1.5 1.4 1.3 1.3 1.2 1.2
ICICI Bank 1.3 1.4 1.5 1.7 1.6 1.6 1.5
Punjab National Bank 0.5 0.6 0.6 0.6 0.6 0.6 0.6
State Bank of India 0.8 0.8 0.8 0.8 0.9 1.0 1.0
Union Bank 0.2 0.3 0.4 0.4 0.5 0.5 0.5
We believe regulation of third party distribution would put fee income under
pressure.
Figure 19: Highest dependence for HDFC Bank on insurance payouts

%
FY09 FY10
HDFC Bank * 22.9 19.3
ICICI Bank 3.6 3.9
State Bank of India 0.8 2.2
Axis Bank 5.5 4.0
Note:* includes expenses reimbursement.

Financial services
Treasury income to moderate in FY11-FY12E
· We believe opportunities for treasury gains in the past year were pretty high with
equity market returns at 80% and volatility in G-Sec yields.
· We expect opportunities in equity and debt markets would be limited going forward
and not building in huge treasury gains.
· PSU banks are now more conservative in building their AFS portfolios unlike earlier
periods, which explains low treasury numbers for FY11-FY12E.
Figure 20: Building in lower treasury income

%
Trading income as % of PBT Axis BoB BoI HDFC Bk ICICI PNB SBI Union
FY06 16 28 12 (4) 29 15 9 7
FY07 18 (4) 13 (4) 31 21 (1) 5
FY08 14 24 14 10 26 13 9 20
FY09 13 27 18 12 8 14 18 17
FY10 21 15 24 8 22 13 15 20
FY11E 9 5 6 7 9 7 10 7
FY12E 6 4 5 2 7 6 5 6
Asset quality: Worst seems over

We may see some slippages from restructured advances into NPAs as a year of seasoning
(Q1FY11) would get completed after the restructuring under RBI’s special dispensation.
With the overall economy improving, slippages are expected to be much less then initial
estimates of 25-30%.
· HDFC Bank emerges a clear leader with 0.3% advances restructured and almost
negligible slippages.
· ICICI Bank restructured 2.3% of advances. Even though the slippages number is
not available, we are factoring minimal slippages considering that the asset quality
problems in retail advances have faded off.
· PNB and BoB continue to have reasonable asset quality with slippages at less than
10%. BoB had additional restructuring in its International operations of Rs18bn
adjusted for which 4% of the advances have been restructured vs. 3% earlier.
· BoI continues to remain under pressure with 15% of restructured advances slipping
into NPAs. We expect further slippages in next two quarters.
Figure 21: Restructured book behaved well until FY10

Mn
Total Advances Cumulative Restructured Advances Restructured / Total Slipped into NPAs % Slipped
HDFC Bk 1,258,306 3,774 0.30 NA* 0.00
Axis 1,043,431 22,861 2.19 2,830 12.38
ICICI 1,812,060 41,960 2.32 NA* 0.00
SBI 6,319,140 167,960 2.66 16,160 9.62
Union 1,193,153 47038.5 3.94 4,813 10.23
BOB 1,750,353 70,618 4.03 4,179 5.92
PNB 1,866,010 120,965 6.48 7,750 6.41
BOI 1,684,907 110,574 6.56 16,150 14.61
Note: * not available.

Financial services
Figure 22: Restructuring as % of total advances

%
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
HDFC Bk Axis ICICI SBI Union BOB PNB BOI
Restructured / Total advances
· Factoring in ~10% additional slippages from Restructured accounts in FY11 and

expect provision charges to moderate primarily on account of an improving
economic scenario.
· Slippages from restructuring advances stood at 10-15% at end-FY10 for the banks
under coverage.
· The asset quality improvement at ICICI Bank is expected to be quite high on

account of successful management of problems in the retail loans portfolio.
Figure 23: Provision charges as % of loans

%
FY10 FY11E FY12E

HDFC Bk 1.6 1.2 1.2
Axis 1.3 1.3 1.3
ICICI 2.4 1.7 1.5
SBI 0.8 0.6 0.5
Union 0.6 0.6 0.6
BoB 0.5 0.5 0.4
PNB 0.6 0.5 0.5
BoI 1.0 1.0 1.0

Financial services
Looking ahead: Further scope for RoA

improvement
After a decade of balance sheet restructuring, we expect further RoA improvement to be
driven by fundamental improvements in lending operations, profile of deposits, and fee
income. To identify the scope for improvement further ahead, we have benchmarked all the
banks with the best bank under lending operations (HDFC Bank) and-non lending
operations (Axis Bank). We believe while DuPont convergence is a key trend to watch for,
we understand that convergence would be limited by business models and competitive
advantages. RoA improvement is the key for valuation rerating.
DuPont convergence a key trend

We have seen DuPont convergence trends in PNB and HDFC Bank. While HDFC Bank has
shown sustenance, PNB registered a dramatic improvement to converge its DuPont with
HDFC Bank.
Figure 24: DuPont convergence

%
HDFC Bk PNB
FY00 FY10 FY00 FY10
NII/avg. total assets 3.8 4.1 2.7 3.2
Provisions/Avg. total assets (0.8) (1.1) (0.4) (0.5)
Risk Adj Margins 3.0 3.1 2.3 2.8
Non-Interest Income/avg total assets 1.6 1.9 1.2 1.2
Net Income/avg. total assets 4.6 5.0 3.5 4.0
Operating Expenses/avg. total assets (2.1) (2.9) (2.6) (1.8)
PBT/Avg assets 2.5 2.1 0.9 2.2
(1-Tax rate) 38.4 31.2 23.3 32.5
Return on Assets 1.5 1.5 0.7 1.5
Avg. total assets/average equity (x) 14.5 11.1 28 16.7
Return on Equity 21.8 16.2 19.6 25.1
Previous decade: Inefficiency to efficiency

In the last decade (FY00-10), the sector’s RoA improved from 0.5% to 1.1% as the private
sector showed higher growth while PSUs improved their cost-efficiencies. The excellent
performance of the past decade was enabled by:
· In private sector: High growth albeit on a low base, consistent dilutions at premium
valuations; technology; new business segments; great fee income performance.
· Among PSUs: Weeding out of cost inefficiencies; clean-up of asset quality with aid
from regulatory support, and technology.
· Macro economy: Significant improvement in Credit / GDP ratio led to 30% CAGR
loan growth in the last decade.
· Regulatory support: Banks were given the option to put in a higher % of G-Secs in
their HTM portfolio, which reduced volatility in the P&L accounts and easy monetary
policy.

Financial services
Figure 25: RoA improvement in the last decade was phenomenal

%
1.2
0.9
0.6
0.3
0.0
(0.3)
FY79
FY81
FY83
FY85
FY87
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
(0.6)
(0.9)
(1.2)
(1.5)
RoA
Source: RBI, Company, Indiabulls research.
Next decade: Further scope for RoA improvement

Benchmarking the efficient banks in core lending and fee income operations leaves further
scope for RoA improvement for the banks going ahead.
· Our across-the-cycle analysis suggests that HDFC Bank and PNB demonstrate
better performance in core lending operations, while Axis Bank and ICICI Bank
emerge as clear winners in fee income performance.
· HDFC Bank and Axis Bank are the clear leaders and are in the top quartile with
high scores both in fee based income and core lending operations.
· ICICI Bank continues to be very strong on fee income generation but has been a
laggard on core lending which is expected to improve significantly going ahead with
improving margins and asset quality.
· SBI has shown a margin of improvement both on core lending and fee income
while, in the near term, asset quality pressures are likely to keep lending operations
under pressure.
· PNB and Union Bank have good scope for improvement in fee-based income while
BoI appears in the bottom quartile and is expected to improve its lending operations
primarily on its experience of asset quality stress in FY10.

Financial services
Figure 26: Competitive position of banks under coverage
High
HDFC
PNB Bk
Quadrant 3
Lending ops Quadrant 4 Axis
Union
SBI
BoB
ICICI
Quadrant 1 BoI
Quadrant 2
High
Fee income
Identifying RoA leaders and laggards

· Strength of core lending operations by computing Net Interest Income less
Provisions as % of average assets
· Efficiency in generating fee based for which we have used Fee income less
employee costs as % of average assets as fee income is driven by investment in
people.
Strength of core lending operations

In order to better appreciate the strengths in the core lending business, we have
computed NII less provisions as % of average assets. Our findings are:
· PNB and HDFC Bank emerged as winners in core lending operations across the
cycle.
· Axis Bank is also quite strong but lower than HDFC Bank and PNB. The relative
weak performance gets compensated by its pretty strong fee income performance
· Union Bank and BoB’s domestic lending spreads are marginally lower than Axis
Bank’s, even though their headline numbers appear relatively weak due to their
international operations.
· BoI has exhibited structurally weak performance. Improvements during FY06-09

aided by higher-than-system credit growth faded off primarily due to asset quality
problems. We expect this poor performance to continue in the next few quarters
· ICICI Bank headed for structural improvement in its lending operations, aided by
changes in loan mix and improving liability franchise, which is the key driver for re-
rating

Financial services
Figure 27: (NII - provisions) as % of average assets

%
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
ICICI 1.0 2.1 0.5 (0.3) 1.2 1.7 1.3 1.2 1.2 1.2 1.0 1.3 1.5
Axis 0.8 0.6 0.0 1.1 1.3 2.2 1.9 1.9 2.2 2.1 2.4 2.3 2.4
PNB 2.1 3.3 2.7 2.7 3.1 3.0 2.9 3.0 2.7 2.7 2.8 2.8 2.8
Union 2.6 2.8 2.3 2.5 2.4 2.4 2.3 2.4 1.8 2.1 1.9 2.2 2.3
BoB 2.1 2.5 2.1 2.1 1.9 1.5 2.1 2.1 2.0 2.0 2.0 2.1 2.1
HDFC Bk 2.1 3.3 2.7 2.7 3.1 3.0 2.9 3.0 3.1 3.2 3.1 3.1 3.3
BoI 1.5 2.1 1.5 1.6 1.6 1.4 1.8 2.0 2.0 2.1 1.4 1.6 1.7
Source: Capitaline, Indiabulls research.
Efficiency in generating fee based income as measured by (Fee income

less employee costs) as % of average assets
We have used Fee income less employee costs to determine the efficiency in generating
fee based income as we believe investment in people drive the growth for this segment. In
the last three years, the improvement has been marginal and we expect the same trend to
continue.
Key findings:-
· Private banks have significantly high fee income spreads than PSU banks
although improvement in PSU banks in the past decade was phenomenal.
· Axis Bank and ICICI Bank emerge as clear winners in fee income performance
· SBI emerges as a leader among PSU banks under coverage; however it falls far
below its private sector peers.
· PSU managements recognise the importance of HR in generating fee income and

have therefore started investing in people. However, structural improvement in the
next two years seems unlikely as the investment in HR would take longer to bear
fruit.
Figure 28: Improvement at PSUs was phenomenal

%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
HDFC Bank’s performance in Axis Bank 0.7 0.4 0.3 0.3 0.5 0.6 0.6 0.7 0.9 0.8
the past few years was poor
Bank of Baroda (1.4) (1.1) (1.1) (1.1) (1.2) (1.1) (0.9) (0.8) (0.8) (0.6)
due to the CBoP merger and
highly skewed retail business Bank of India (1.8) (1.2) (1.0) (1.0) (0.9) (0.8) (0.8) (0.5) (0.4) (0.5)
model HDFC Bank 0.4 0.3 0.3 0.3 0.7 0.9 0.6 0.4 0.1 0.3
ICICI Bank 0.6 0.1 0.4 0.4 0.8 0.9 0.9 0.9 0.9 0.8
Axis Bank outperformed all its Punjab Natl.Bank (1.8) (1.3) (1.3) (1.2) (1.3) (1.0) (0.9) (0.7) (0.7) (0.5)
peers in the past two years St Bk of India (1.2) (0.7) (0.7) (0.8) (0.8) (0.9) (0.6) (0.3) (0.3) (0.3)
Union Bank (1.7) (1.3) (1.1) (1.1) (1.0) (0.8) (0.6) (0.5) (0.6) (0.5)
PSU average (1.2) (0.9) (0.9) (0.9) (0.9) (0.8) (0.6) (0.5) (0.4) (0.4)
Pvt average 0.2 0.0 0.2 0.2 0.5 0.7 0.6 0.6 0.6 0.5
Total average (1.1) (0.8) (0.7) (0.7) (0.6) (0.5) (0.3) (0.2) (0.2) (0.2)

Financial services
Analysing the trend in growth of fee income as % of average assets

· Fee income at private banks has shown a remarkable improvement over PSU
banks from FY02 to FY10.
· This has been aided by core banking solutions, aggressive selling of third party
products and debt syndication capabilities offered by private banks.
· However FY07 onwards fee income as % of average assets has been stagnant at
around 1.3%
· We expect fee income growth to mirror credit growth, but is unlikely to improve as %
of average assets as there are pressures on fee based income due to reduction in
margins on sale of third party products and increased competition from PSU players
aided by investment in technology led initiatives.
Figure 29: Fee income growth at private banks has been phenomenal
%
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Pvt Fee income / Avg assets PSU Fee income / Avg assets
Analysing the trend in Staff cost as % of average assets

· Staff costs have declined from 1.9% in FY01 to 1% in FY10 for PSU banks clearly
demonstrating the fact that PSU banks have worked hard to weed out the
efficiencies.
· Private staff costs have increased from 0.6% in FY01 to 0.8% in FY10 as they have
invested in employees in enhancing their product offerings as can be seen from the
growth in fee based income
· Employee training and recruitment would be a focus for the next few years as the
PSU banking sector heads for a series of retirements. Also, new employees come
at much lower costs but to sustain the productivity-levels of retired employees, PSU
banks would need to hire more people.
· PSU banks will find it difficult to reduce staff costs as % of average assets and
instead would focus on increasing fee based income by adding new employees
which would lead to an increase in staff costs. Private banks will be able to maintain
staff costs as % of average assets at current levels.

Financial services
Figure 30: PSU staff costs vs. private staff costs as % of average assets
%
2.0
1.5
1.0
0.5
0.0
PSU Staff costs / avg assets Pvt Staff costs / avg assets

Financial services
How to play the next cycle: Learning

from our across-the-cycle analysis
How to play the next cycle
RoA leaders (who consistently delivered above-industry RoA) have turned out to be multi-
year alpha bets. RoA laggards (who consistently delivered below-industry RoA) can be
significant outperformers as they improve their performance. Also, RoA cyclical behaviour
generally lasts for 3-4 years on an average and our analysis suggests RoA direction is the
key for stock performance.
Our across the cycle analysis

We analyzed deviation in systemic RoA and company-specific RoA over a 15-year period
and bucketed out-performance/underperformance.
Key findings from the across the cycle analysis:
· RoA leaders – HDFC Bk, ICICI, Axis, PNB, Union
· RoA laggards – BoB, SBI, BoI
· HDFC Bank tops the chart and leads the private banks
· PNB and Union Bank are leaders within the PSU space
· ICICI Bank appears strong, notwithstanding its lukewarm performance over the last
five years
Figure 31: Number of years of RoA outperformance/underperformance

Nos.
HDFC Bk ICICI Axis PNB Union BoB SBI BoI

High 15 11 11 10 9 7 5 6
Inline 0 3 4 5 2 4 4 2
Low (1) (2) (1) (1) (5) (5) (7) (8)
RoA leaders
We have seen that RoA leaders generated relatively higher returns than RoA laggards in
the long run. We expect this trend to continue.
Figure 32: Structurally strong franchises provide significant alpha performance in

the long term
%
10-year CAGR returns 5-year CAGR returns

(incl dividend) (excl dividend) (incl dividend) (excl dividend)
ICICI 31 29 21 19
HDFC Bk 28 27 28 27
PNB 45 43 20 17
SBI 29 27 32 30
BoI 41 35 35 33
BoB 29 23 19 16
Union 46 41 23 19
Axis 49 45 41 40

Financial services
RoA laggards
RoA laggards during their journey from RoA underperformance to RoA outperformance turn
out to be alpha bets in the medium term.
Figure 33: For short-term outperformance, one needs to keep an eye on turnaround
candidates. Classic case was BoI during FY06-08
Yearly stock price returns (%)
SBI BoB BoI Union* PNB* Winner Loser Winner (excl SBI) Loser (excl SBI)
FY00 96 99 73 BoB BoI BoB BoI
FY01 109 141 80 BoB BoI BoB BoI
FY02 110 79 222 BoI BoB BoI BoB
FY03 118 176 149 BoB SBI BoB BoI
FY04 209 245 131 179 307 PNB BoI PNB BoI
FY05 107 83 150 187 120 Union BoB Union BoB
FY06 147 101 128 107 117 SBI BoB BoI BoB
FY07 106 96 130 86 102 BoI Union BoI Union
FY08 179 141 163 141 112 SBI PNB BoI PNB
FY09 70 92 84 111 89 Union SBI Union BoI
FY10 181 262 142 186 234 BoB BoI BoB BoI
Note: * Listed since FY04.
Timing the RoA laggards

Company’s peak RoA outperformance over industry to lowest RoA underperformance and
vice-versa generally lasts between 3-4 years. ICICI Bank (FY02-05: improvement, FY05-09:
deceleration), Axis Bank (FY01-05: deceleration, FY07-10: improvement), PNB (FY01-04
and FY05-08: deceleration). We expect this pattern to continue.
Figure 34: ICICI Bank: Worst seems to be over Figure 35: Axis Bank: Becoming stronger by the day
ICICI Bank RoA – Industry RoA (%) Axis Bank RoA – Industry RoA (%)
Cycle 1: FY02-05, increase in RoA
2.0 Cycle 2: FY06-09, decrease in RoA 1.0 Cycle 1: FY01-04, decrease in RoA
1.5 0.8
0.6
1.0
0.4
0.5
0.2
0.0
0.0
FY11E
FY12E
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
(0.5)
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
(0.2)
(1.0) (0.4)
Source: Company, Indiabulls research. Source: Company, Indiabulls research.

Financial services
Figure 36: PNB: A clear winner in the PSU space Figure 37: Union Bank: Another clear PSU winner
PNB Bank RoA – Industry RoA (%) Union Bank RoA – Industry RoA (%)
Cycle 1: FY01-04, decrease in RoA
0.6 Cycle 2: FY06-09, increase in RoA
0.5
0.4 0.4
0.3
0.2 0.2
0.1
0.0 0.0
(0.1)
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY11E
FY12E
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
(0.2)
(0.2)
(0.3) (0.4)
(0.4)
(0.5) (0.6)
Figure 38: HDFC Bank: Steady, as always Figure 39: BoB: Of late, improvement is causing
HDFC Bank RoA less Industry RoA (%) excitement
BoB RoA less Industry RoA (%)
3.0 Cycle 1: FY01-04, decrease in RoA
Cycle 2: FY07-09, decrease in RoA 0.6
2.5 Cycle 2: FY08-10, increase in RoA
0.5
2.0 0.4
1.5 0.3
1.0 0.2
0.1
0.5 0.0
0.0 (0.1)
FY11E
FY12E
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
(0.5) (0.2)
FY11E
FY12E
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
(0.3)
(0.4)
Figure 40: BoI: Falling off the cliff Figure 41: SBI: Growth at the cost of profitability
BoI RoA less Industry RoA (%) SBI RoA less Industry RoA (%)
Cycle 1: FY01-03, increase in RoA Cycle 1: FY00-04, decrease in RoA
1.0 Cycle 2:FY05-09, increase in RoA 0.6 Cycle 2: FY05-08, decrease in RoA
0.8 0.5
0.6 0.4
0.3
0.4
0.2
0.2
0.1
0.0
0.0
(0.2)
FY11E
FY12E
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
(0.1)
FY11E
FY12E
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
(0.4) (0.2)
(0.6) (0.3)

Financial services
Stocks with cyclical improvement in RoA performance from below to above industry rates
give significant outperformance both on account of higher earnings growth and valuation re-
rating.
Figure 42: BOI’s stupendous earnings growth and RoA Figure 43: ...led to significant outperformance
improvement... %
% 500
120 2.0
400
100
1.5
80 300
60 1.0 200
40
0.5 100
20
0 - 0
FY06 FY07 FY08 FY09 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
PAT growth (LHS) RoA (RHS) BoI Sensex Bankex
Consistent RoA improvement over the years aid the stocks to trade at a premium to the
peer group.
Figure 44: Axis has shown consistent RoA Figure 45: … leading to outperformance…
improvement… %
% 250
80 2.0 200
60 1.5 150
100
40 1.0
50
20 0.5
0
0 0.0
FY08 FY09 FY10 FY11E
PAT growth (LHS) RoA (RHS)
Axis Sensex Bankex

Financial services
Figure 46: … driven by valuation re-rating for Axis

x
2,000
4x
1,500
3x
1,000
2x
500 1x
0
Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10
Price 1x 2x 3x 4x

Financial services
Our sector call: Outperform

As we head for a new cycle of growth in the banking sector, we expect stocks to trade at a
premium on the last five years’ valuations as a result of higher profitability. Initiate ICICI
Bank, Axis Bank, PNB, Union Bank, HDFC Bank with Outperform, and BoB, BoI and SBI
with Neutral. We expect FY10-12E PAT CAGR of the banks under our coverage to be at
23% aided by the return of pricing power to banks, improvement in asset quality, and higher
balance sheet growth.

Units as shown
P/Adj BV (x) P/E (x) RoE (%) RoA (%)

Company M.cap (Rs bn) FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E
ICICI 936 1.9 1.7 1.6 23.3 18.5 14.5 8.0 9.5 11.3 1.1 1.3 1.4
Axis 496 3.2 2.8 2.4 19.7 16.8 13.4 18.5 17.2 18.7 1.7 1.4 1.5
PNB 322 2.1 1.7 1.4 7.8 6.9 5.6 25.5 23.5 23.8 1.5 1.4 1.4
Union 158 1.9 1.6 1.2 7.6 6.6 5.2 21.9 21.0 21.9 1.2 1.1 1.2
BoB 263 2.0 1.6 1.3 8.6 7.5 6.0 21.9 21.2 22.0 1.2 1.1 1.1
HDFC Bk 873 4.1 3.7 3.2 29.6 24.1 18.1 16.1 15.8 18.3 1.5 1.4 1.5
BoI 188 1.7 1.4 1.2 10.8 7.9 6.1 12.6 15.6 17.7 0.7 0.8 0.9
SBI 1,435 2.5 2.2 1.9 15.7 12.5 9.9 14.8 16.4 18.2 0.9 1.0 1.1
Current valuations are at discount to historical peaks

Stocks are currently trading at discount from peak valuations and we believe further scope
for re-rating would be driven by higher RoE than 5yr average and profitability. PNB and
Union Bank are expected to trade at a premium to their historical average considering a
significant improvement in their RoEs of the early cycles. We expect PAT CAGR of the
banks under our coverage to be at 21% for FY11-FY12E driven by asset quality
improvement, growth in advances, and high economic activity.
Figure 48: Valuations vs history

x (unless otherwise stated)
1 year Average % Diff % Diff RoE RoE
Peak Rating
fwd PB FY05-10 from peak from avg FY05-10 (%) FY11-12 (%)
Axis 2.78 2.40 4.40 -37 16 18.8 18.0 Outperform
BoI 1.43 1.30 2.00 -28 10 17.6 16.7 Neutral
BoB 1.63 1.00 1.60 2 63 15.4 21.6 Neutral
HDFC Bk 3.65 3.40 5.40 -32 7 17.8 17.0 Outperform
ICICI 1.75 2.00 3.60 -51 -13 12.0 10.4 Outperform
PNB 1.68 1.40 1.80 -7 20 18.3 23.7 Outperform
SBI 2.23 1.90 3.10 -28 18 16.7 15.4 Neutral
Union 1.56 1.30 1.90 -18 20 20.1 21.9 Outperform
Source: Bloomberg, Indiabulls research.

Financial services
Figure 49: Summary
RoA Sustenance Near term Valuation Comments

ICICI Bank ++ +++ ++++++ Last 5 years lost their steam in RoA sustenance
Balance sheet adjustment is over, BoR might put under pressure but structurally in the
right direction
Valuations are not expensive
Axis Bank +++++ +++++ +++ Proven consistently right
Balance sheet manoeuvrability is pretty strong
Valuations are below their historical peaks
PNB +++++ ++++ ++++ Clearly a winner in sustenance
Expect earnings growth to be relatively higher on the high base of FY10.
Market is concerned about asset quality pressures
Relatively undervalued
Union Bank +++++ ++++ +++++ Clearly a winner in sustenance
Core performance is further expected to improve yoy as bank's 1HFY10 was under
pressure
Valuations does not price in the inherent profitability
HDFC Bank +++++ +++++ +++ A clear winner in sustenance
Expect CBOP merger productivity to drive growth going ahead
Valuations are reasonable
BoB +++++ +++++ +++ Loser in sustenance but significant improvement seen in the recent past
Expect next two years' earnings growth to be pretty strong at 19%
Valuations are at the higher end of the trading band
BoI +++ +++ ++++ Loser in sustenance
Balance sheet restructuring mode, expected to continue in the medium term
Valuations are in line with historical average. Any improvement in asset quality will be the
key trigger
SBI + ++ +++ Last four years growth has come at the cost of profitability
Asset quality, incremental provision charges to meet 70% cover to put earnings under
pressure. But improving NIM with credit growth to act as a saviour
ICICI Bank
Outperform. One of the largest retail franchises with extensive branch network has been
this bank’s strength. We believe its recent balance sheet adjustment phase is nearing
completion. We expect the bank’s profitability growth strategy to result in a higher earnings
growth, which we have factored in. The factors are: 1) high earnings growth due to NIM
improvement aided by structural improvement in liability franchise, 2) lower provision
charges as asset quality pressures are at near-end, and 3) growth in domestic loan book to
kick at a higher rate after a degrowth phase during FY08-10. We believe the market is not
factoring in the structural growth and multiple earning upgrades. Key risk to the call is that
the BoR merger might pull the bank again in the adjustment phase; however we believe the
recent correction of 6-7% prices in the risk.

Financial services
Figure 50: Significant ROA improvement

%
Return on equity decomposition FY09 FY10 FY11E FY12E

Employee exp -0.51 -0.52 -0.56 -0.60
Non- Employee exp -1.32 -1.06 -1.16 -1.25
Operating Profit /avg. total assets 2.45 2.62 2.74 2.79
Provisions/Avg. total assets -0.99 -1.18 -0.95 -0.84
(1-tax rate) 24.07 24.70 28.00 28.00
Return on Assets 1.11 1.08 1.29 1.40
Avg. total assets/average equity (x) 7.9 7.3 7.3 8.0
Return on Equity 8.8 8.0 9.5 11.3
Figure 51: FY10 saw the worst in terms of NPAs. Expect Figure 52: Factoring marginal increase in margins for
significant improvement on the back of focus FY11 & FY12 as the bank starts growing its
on secured lending advances after stagnation in FY10
Units as shown %
6.0 4.2 80 2.6 10.0

5.1 4.7
3.5 4.2 60
4.0 2.4
2.0 2.4 40
2.0 1.9 2.2 5.0
2.0 1.0 1.5 1.4 1.2
0.7 20 2.0
0.0 -
1.8 0.0
Provision coverage % - RHS NIMs - LHS
Gross NPL % - LHS Average cost of funds - RHS
Net NPL % - LHS Average yield on assets - RHS
Figure 53: ICICI Bank: Scope of further RoE improvement to drive valuations ahead
x
45.0 4.0
40.0 3.5
35.0 3.0
30.0 2.5
25.0
2.0
20.0
15.0 1.5
10.0 1.0
5.0 0.5
0.0 0.0
Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
ICICI PE ICICI PBV (RHS)

Financial services
We value the core banking business of ICICI Bank using Gordon growth model at 2xFY12E
ABV which works out to Rs 822 and valuation of subsidiaries at Rs 230 which gives us a TP
of Rs 1052 an upside of 24% from current levels.
Axis Bank
Outperform. Axis is one of the fastest-growing, highly profitable, and competitive private
sector banks in India. After a high-growth period, we expect this bank’s business to
consolidate in the medium term and substantially ease out its growth rates vis-a-vis its
historically high levels. Axis Bank’s asset quality remained stable during last year’s
challenging times despite concerns about the potential follow-through of its recent high
growth. We believe the general economic stability should limit significant asset quality
pressure and that Axis Bank stands to gain disproportionately from opportunities in the
banking sector.
Figure 54: RoE to improve as capital gets deployed

%
FY08 FY09 FY10 FY11E FY12E

RoAE 16.3 19.8 18.5 17.2 18.7
Tier 1 CAR 10.2 9.4 11.2 10.3 9.6
Figure 55: Axis Bank: Higher than industry growth to drive stock returns
x
30.0 5.0
25.0 4.0
20.0
3.0
15.0
2.0
10.0
5.0 1.0
0.0 0.0
Axis PE Axis PBV (RHS)
We value the core banking business of Axis Bank using Gordon growth model at 2.9xFY12E
ABV which works out to a TP of Rs 1524, an upside of 26% from current levels.
Punjab National Bank

Outperform. PNB has good profitability (23% RoE) and relatively high net interest margins.
We believe PNB has been able to maintain its growth along with its higher-than-industry
NIMs. While we expect NIMs to drift downwards, they are still likely to remain significantly
above industry. PNB has shown significant growth in fee income, led by its strong
technology platform and greater management focus. Asset quality has held up reasonably
well despite its greater SME and agricultural focus and higher restructured book. Key risks
to the call are sustainability of NIMs going ahead in a rising interest rate environment and
asset quality.

Financial services
Figure 56: RoA & RoE among the best in the Industry with steady improvement
%
FY09 FY10 FY11E FY12E

Operating Expenses/avg. total assets -1.9 -1.8 -1.7 -1.7
Employee exp / avg assets -1.3 -1.2 -1.2 -1.2
Non- Employee exp / avg assets -0.6 -0.6 -0.6 -0.5
(1-tax rate) 35 33 33 33
Return on Assets 1.42 1.50 1.40 1.39
Avg. total assets/average equity (x) 16 17 17 17
Return on Equity 22.9 24.9 23.5 23.8
Figure 57: PNB: Historical premium valuations to stay due to higher RoA vs PSU
peers
x
14.0 2.0
12.0
10.0 1.5
8.0
1.0
6.0
4.0 0.5
2.0
0.0 0.0
PNB PE PNB PBV (RHS)
PNB stock should trade at a premium to historical average multiples, due to significant
improvement in RoE from 18% (average during FY05-10) to 23% in the next two years. We
value the core banking business of PNB using Gordon growth model at 1.7xFY12E ABV
which gives us a TP of Rs 1276, an upside of 23% from current levels.
Union Bank of India

Outperform. Union Bank’s key strengths are its cost efficient large distribution network as
operating costs (as a proportion of assets) below industry average, good technology ahead
of its peer group in implementation, and a clean balance sheet with low gross and net NPLs
(improving above industry levels). NII growth should be higher on a low base as NIMs in the
last year have been impacted by dependence on bulk deposits. Key risks lie in its low
balance sheet liquidity, and the need to grow term deposits rapidly to fund loan growth;
relatively lower capital cushion, which is likely to moderate asset growth.

Financial services
Figure 58: FY10 margins were lower due to excess liquidity. Margins are expected to
come back to reasonable levels FY11 onwards
%
4.0 12.0
3.5 10.4 10.0
9.1 8.9
3.0 7.7 8.4
8.6 8.0
2.5 7.4
6.8
2.0 6.7 5.9 6.0
5.9 6.0
1.5 4.9 5.7
4.0
1.0
0.5 2.0
0.0 0.0
NIMs - LHS Average cost of funds - RHS Average yield on assets - RHS
Figure 59: ROEs continue to remain healthy

%

(1-tax rate) 26 27 28 28
Return on Equity 21.5 21.9 18.0 19.5

Financial services
Figure 60: Union Bank: High growth to drive stock returns

x
12.0 2.5
10.0 2.0
8.0
1.5
6.0
1.0
4.0
2.0 0.5
0.0 0.0
Union PE Union PBV (RHS)
We value the core banking business of Union Bank using Gordon growth model at
1.5xFY12E ABV which gives us TP of Rs 379, an upside of 19% from current levels.
HDFC Bank
Outperform. Consistent and steady operating performance has been the hallmark of HDFC
Bank. The underlying strength of its business model backed by high CASA deposits, higher
proportion of advances in the retail segment coupled with lower NPAs make HDFC Bank
business model unique and difficult to replicate. The bank offers the best play on the India
consumption story. With high visibility in core earnings growth as provision charges trend
downwards with the CBoP adjustment phase getting done and cost leverage expected to
kick-in with CBoP branches becoming more productive, balance sheet adjustment is already
done during Q4FY10 by the bank to factor in daily calculation of interest on savings
balances. In the event of volatility in the market, HDFC Bank would be seen as safe haven
in a flight to safety.
Figure 61: Consistent performance of RoA over the years

%

NII/avg. assets 4.4 4.1 4.1 4.3
Non-Int Inc/avg assets 1.9 1.9 1.8 1.7
Net Income/avg. assets 6.3 6.0 5.9 6.0
Op Profit /avg. assets 3.0 3.2 3.1 3.3
Provisions/Avg. assets -1.1 -1.1 -1.0 -1.0
(1-tax rate) 32 31 31 32
Avg. assets/avg equity (x) 13 11 11 12
Return on Equity 16.9 16.1 15.8 18.3

Financial services
Figure 62: Underwriting standards continue to remain best in the Industry

%
2.5 71
2.0 2.0 70
1.6
1.4 1.4 69
1.5 1.4
1.4
1.3 68
1.0
67
0.4 0.5 0.6 0.5 0.4
0.5 0.4
0.4 66
0.0 65
Provision coverage % - RHS Gross NPL % - LHS Net NPL % - LHS
Figure 63: HDFC Bank: Higher than industry growth, and superior RoE to drive
valuations ahead
x
40.0 6.0
35.0 5.0
30.0
25.0 4.0
20.0 3.0
15.0 2.0
10.0
5.0 1.0
0.0 0.0
HDFC Bk PE HDFC Bk PBV (RHS)
We value the core banking business of HDFC Bank using Gordon growth model at
3.9xFY12E ABV which gives us a TP of Rs 2357, an upside of 18% from current levels.
Bank of Baroda
Neutral. BoB’s traditional banking model of strong retail franchise backed by strong credit
appraisal standards has ensured strong performance of domestic business. International
business with its focus on Indian corporates remains highly profitable. Management stability
with clear focus on profitable growth makes BoB the best pick in the Indian banking space.
Significant outperformance in the last one year and FII ownership already hitting the
threshold limits leave little margin of error in valuations. Our target multiple continues to be
in line with those for SBI and PNB and we believe its valuation discount will fade off as a
result of its recent performance being pretty strong for a bank of its size and its superior
management quality.

Financial services
Figure 64: RoAs unlikely to improve from current levels

%

Emp -1.2 -0.9 -0.8 -0.8
NonEmp -0.6 -0.6 -0.5 -0.5
PBT/ Avg Assets 1.6 1.6 1.6 1.6
(1-tax rate) 33 28 30 30
Return on Equity 18.7 21.9 21.2 22.0
Figure 65: BoB: Historical high valuation driven by improvement in inherent

profitability
x
14.0 1.8
12.0 1.6
1.4
10.0
1.2
8.0 1.0
6.0 0.8
0.6
4.0
0.4
2.0 0.2
0.0 0.0
BoB PE BoB PBV (RHS)
Structural improvement in RoE from 16% (average FY05-10) to 22% (FY11-FY12) has
resulted in a 70% premium on historical average multiples. We value the core banking
business of BoB using Gordon growth model at 1.5xFY12E ABV which gives us a TP of Rs
803, an upside of 14% from current levels.
Bank of India
Neutral. BoI’s key strengths are in its large balance sheet, distribution, and low operating
costs below industry average. After an explosive growth during FY06-08, this bank has
witnessed significant asset quality concerns with its restructuring book higher than the
industry average putting earnings under significant pressure. We expect further asset quality
pressures, but NIMs should improve as high-cost deposits are expected to be re-priced and
provision charges are expected to be back at the average cycle level. BoI’s CMP does not
carry any downside risk, in our view, as the stock is trading at historical low multiples;

Financial services
however, rerating is highly dependent on an improvement in its asset quality – an aspect in

which the bank has continuously disappointed for three successive quarters.
Figure 66: Asset quality concerns persist though we believe that the worse is over
for the Bank
%
4.0 80
3.7
3.5 3.0 70
3.0 3.0 60
2.5 2.9 50
2.4
2.0 1.7 40
1.5 1.7 1.3
1.5 1.0 30
1.0 0.9 1.1 20
0.5
0.5 0.4 10
0.0 0
Provision coverage ratio - RHS Gross NPL ratio - LHS Net NPL ratio - LHS
Figure 67: BoI’s valuation at historical average unlikely to rerate as asset quality
pressures to sustain
x
12.0 2.5
10.0 2.0
8.0
1.5
6.0
1.0
4.0
2.0 0.5
0.0 0.0
BoI PE BoI PBV (RHS)
We value the core banking business of BoI using Gordon growth model at 1.2xFY12E ABV
which gives us a TP of Rs 343, an upside of 2% from current levels.
State Bank of India

Neutral. SBI has aggressively restructured in terms of manpower, technology and business
focus during the last four years. It should be a significant beneficiary of the expected
increase in loan demand in India, spread across the consumer and the industrial segments.
SBI has also invested aggressively in its technology platform and its five subsidiary banks,
and has restructured itself to lead and participate in the strong economic and business
environment. We expect SBI to generate a RoE in the 15-17% level, and be more
aggressive in leveraging capital that it is in the process of raising. However, weak asset
quality due to higher-than-industry growth in the last few years and low provision coverage
can act as a dampener.

Financial services
Figure 68: RoA improving still lower then most of the Larger Banks & below industry
average
%
Axis BoB BoI HDFC Bk ICICI PNB SBI Union Average

FY08 1.2 0.9 1.2 1.3 1.1 1.1 1.0 1.2 1.1
FY09 1.4 1.1 1.5 1.3 1.1 1.4 1.1 1.2 1.3
FY10 1.7 1.2 0.7 1.5 1.1 1.5 0.9 1.2 1.2
FY11E 1.4 1.1 0.8 1.4 1.3 1.4 1.0 0.9 1.2
FY12E 1.5 1.1 0.9 1.5 1.4 1.4 1.1 1.0 1.2
Figure 69: PAT to be under pressure due to higher provisions inspite of improvement
in NII
Rs bn
400 35
350 30
300 25
250
20
200
15
150
100 10
50 5
- 0
FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
NII - LHS PAT - LHS Provisions as % of NII - RHS
Figure 70: SBI: Valuation at higher end of historical average

x
20.0 3.5
3.0
15.0 2.5
2.0
10.0
1.5
5.0 1.0
0.5
0.0 0.0
SBI PE SBI PBV (RHS)
We value the core banking business of SBI using Gordon growth model at 1.7xFY12E ABV
at Rs 2004 and valuation of subsidiaries at Rs 657 which gives us a TP of Rs 2661, an
upside of 11% from current levels.

Financial services
Companies

Financial services
This page has been left blank intentionally.

Institutional
Initiating coverage
ICICI Bank Outperform

2 July 2010
Eq In the right direction
India ICICI Bank offers the best play in the private banking space considering
Financial services that margins will improve on a growing balance sheet, NPA accretion
will continue to come down as bank moves towards secured lending,
Price: Rs 841
credit underwriting standards improve, and higher CAR provides the
Target price: Rs 1,052 fuel for growing the balance sheet size. Outperform.
Stock details
Will they get it right this time?
Bloomberg code ICICIBC IN We believe the answer is Yes as the bank has transformed from an aggressive
MCap Rs/US$ mn 938,603/20,174 growth-centric bank to a profitability-centric bank. We believe branches opened by
Outstanding shares (mn) 1,115
ICICI Bank in FY10 will help it have better access to low cost deposits, further
improving margins which are currently below industry average. Asset quality which, in
52-wk H/L (Rs) 1010/606
our view, has been the biggest concern for ICICI Bank will show consistent
3m avg trd vol (US$ mn) 93.9 improvement over the course of the year, with slippages remaining low
Nifty / Sensex 5251/17509
Improving asset quality
The reasons are: lower restructured book, stabilisation of retail NPLs, increased
Shareholding pattern (%)
focus on secured retail products (housing and auto loans) along with a domestic
100% 10 corporate loan book to keep further slippages under check. We are building in higher
25 provision charges for FY11E at 1.4% of loans considering 70% provision coverage
50% ratio to be achieved by Sep’10.
65
0% 0
Banking business RoE set to improve
Mar-07 Mar-08 Mar-09 Mar-10 Core RoE of standalone banking business is expected to improve to 14% by FY12E
Promoters FIIs DIIs Public & Others
vs. 10% for FY10, with a strategy shift driven by high CASA, higher proportion of
secured advances and lower provision charges. We believe the balance sheet is
Stock performance (%) poised to ride the next leg of growth and can expect further positive upside risks on
balance sheet growth going ahead, which could further propel RoE.
1m 3m 1yr
Absolute 0.4 (11.7) 15.3 Valuation

Nifty 5.7 (0.7) 21.0
We value the core bank at 2x ABV using single-stage Gordon growth model and
subsidiaries at Rs. 252 per share (insurance at 13x NBAP multiple) to arrive at a
140 target price of Rs. 1,052. ICICI Bank now trades at the lower end of the historical
120 P/ABV multiple. Improving RoEs, stabilising asset quality and international business
100 to act as catalysts for re-rating. Outperform.
80
Jul-09 Nov-09 Mar-10 Jul-10
Nifty Index ICICI
Figure 71: Key financials
Source: Bloomberg, Prowess. Rs million, year-end March

Net interest income 73,041 83,667 81,140 89,490 109,971
Non interest income 88,108 76,042 74,777 77,444 90,154
Pre provision profits 79,606 94,542 97,319 107,146 128,881
PAT 41,577 42,871 40,247 50,497 64,792
EPS (Rs.) 38.7 33.8 36.2 45.4 58.2
EPS (consensus) (28) 36.6 43.7 55.8
Saikiran Pulavarthi EPS growth 11.2 (12.8) 7.1 25.5 28.3
saikiran.pulavarthi@indiabulls.com ROE (%) 11.0 8.8 8.0 9.5 11.3
+91 22 3980 5203 PE (x) 17.9 15.7 22.6 18.5 18.5
ROA (%) 1.1 1.1 1.1 1.3 1.4
Deepak Agrawal
deepak.agrawal@indiabulls.com P/ABV (x) 1.8 1.3 1.9 1.7 1.6
+91 22 3980 5496 Source: Company , Indiabulls research.
ICICI Bank
Figure 72: FY10 saw the worst in terms of NPAs. We expect significant improvement
on the back of the focus on secured lending
Units as shown
6.0 80
5.1 4.7 4.2 70
5.0
4.2 60
4.0 3.5 50
3.0 2.4 40
2.0 2.0 1.9
2.0 1.5 30
1.4 1.2
1.0 20
1.0 0.7
10
0.0 -
Figure 73: ICICI is back on the growth path after 17% decline in advances in FY10.
Factoring 15% growth in FY11 & 20% growth in FY12 for overall advances
Units as shown
3000 70
60 60
2500 50
2000 40
34 30
1500 15 20 20
15
10
1000 -
(3)
500 (10)
(17) (20)
0 (30)
Net loans & advances (Rs bn) - LHS YoY growth % - RHS

ICICI Bank
Figure 74: Massive branch roll out in FY10 and stagnant Balance Sheet has led to
sharp spike in CASA %. Expect CASA to move down once the Balance
Sheet starts growing
Units as shown
3,000 45
42 40
38 40
2,500
35
2,000 29 30
23
26 25
1,500
22 20
1,000 15
10
500
5
0 0
Number of branches - LHS CASA % - RHS
Figure 75: Factoring marginal increase in margins for FY11-FY12E as the bank starts
growing its advances after stagnation in FY10
Units as shown
2.6 10.0
2.5
8.0
2.4
2.3 6.0
2.2 4.0
2.1
2.0
2.0
1.9 0.0

ICICI Bank
Figure 76: Arriving at our loan growth and margin assumptions

%
FY10 FY11E FY12E

Domestic 75.0 90.0 112.5
International 25.0 25.0 25.0
100.0 115.0 137.5
Domestic growth 20.0 25.0

International growth 0 0
Overall loan growth 15.0 19.6
Domestic NIMs 3.1 3.0 3.1

International NIM 0.7 0.7 0.7
Overall NIMs 2.5 2.5 2.7
Figure 77: Fee income growth to be in line with advances growth

Units as shown
90 70
80 57 60
70 49 50
60 40
50 26 30
40 20 20
30 5 15 10
20 0
10 (13) (10)
0 (20)
Fee income (Rs bn) - LHS YoY growth % - RHS

ICICI Bank
Figure 78: Strong capabilities both on retail and corporate products will help sustain
current levels
Units as shown
42 2.0
41 1.7
1.5 1.6 1.6
40 1.4 1.5 1.5
1.3
39
38
1.0
37
36
35 0.5
34
33 0.0
Fee income/total income (%) - LHS Fee income/total assets (%) - RHS
Figure 79: Contribution of Trading Profits going down. Performance driven by core
operations
Units as shown
100 35
29 31 30
80
26 25
60 22
20
40 15
9 10
20 8 7
5
0 0
Trading profits (Rs bn) - LHS PBT (Rs bn) - LHS Trading profits / PBT (%) - RHS

ICICI Bank
Figure 80: Massive cost-cutting measures implemented in FY10 as ICICI Bank moves
away from DSA to a branch-driven model. we expect marginal uptick in
cost ratios going forward due to branch expansion
Units as shown
60 2.3 2.3 2.5

2.2
50 2.0
1.7 1.7 1.9
40 1.6
1.5
30
1.0
20
10 0.5
0 0.0
Cost income ratio (%) - LHS Opex/average assets (%) - RHS
Figure 81: Significant improvement in ROE

%
20.0
17.3
15.3
15.0 14.3
15.5 12.1 12.3
11.2 10.3
13.2
10.0 11.0 11.3
9.5
8.8
7.9
5.0
0.0
Standalone ROE adjusted for investments in all subsidiaries Reported ROE

ICICI Bank
Figure 82: P/E band Figure 83: PBV band

Rs Rs
2,000 40x 2,000

4x
1,500 30x 1,500 3x
1,000 20x 1,000 2x
500 10x 500 1x
0 0
Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10
Price 10x 20x 30x 40x Price 1x 2x 3x 4x
Figure 84: ICICI Bank's Dupont analysis

%
Return on Equity Decomposition FY07 FY08 FY09 FY10 FY11E FY12E

NII/avg. total assets 2.0 2.0 2.2 2.2 2.3 2.4
Non-Interest Income/avg total assets 2.4 2.4 2.0 2.0 2.2 2.3
Employee exp (0.6) (0.6) (0.5) (0.5) (0.6) (0.6)
Non- Employee exp (1.8) (1.7) (1.3) (1.1) (1.2) (1.3)
Operating Profit /avg. total assets 2.1 2.2 2.5 2.6 2.7 2.8
Provisions/Avg. total assets (0.8) (0.8) (1.0) (1.2) (0.9) (0.8)
(1-tax rate) 14.7 17.8 24.1 24.7 28.0 28.0
Return on Assets 1.1 1.1 1.1 1.1 1.3 1.4
Avg. total assets/average equity (x) 12 10 8 7 7 8
Return on Equity 13.2 11.0 8.8 8.0 9.5 11.3

ICICI Bank
Figure 85: SOTP

Units as shown
Value (Rs. Rs. per

Particulars % stake Valuation methodology
bn) share
ICICI bank 915 822 2x core Adj BV on single stage gordon growth model
ICICI Securities Limited 100% 27 24 15x FY12E Profits
ICICI Prudential Life Insurance Co. Ltd. 74% 130 117 13x FY11E NBAP
ICICI Lombard General Insurance Co. Ltd. 74% 6 10
ICICI Prudential Asset Management Co. Ltd. 50% 21 19 4% of AUM
ICICI Bank UK PLC 100% 28 25 Valued at 1x BV
ICICI Bank Canada 100% 42 38 Valued at 1x BV
Others (incl Home finance and Ventures, PD) 25 23 Ventures valued as 4% of AUM, PD and Home Finance at
10x FY10 PAT
Subsidiaries - Total 280 256
Holding co discount (10%) 28 26
Value of the BANK 1,167 1,052


ICICI Bank

ICICI Bank
Figure 86: Summary financials

Rs million, year-end March
Profit and loss FY08 FY09 FY10 FY11E FY12E

Interest income 307,883 310,926 257,066 274,800 329,994
Interest expense 234,842 227,259 175,926 185,310 220,023
YoY growth (%) 30 15 (3) 10 23
YoY growth (%) 27 (14) (2) 4 16
Fee & other income 75,210 71,610 62,970 71,444 84,154
Gains / (losses) on securities 12,898 4,432 11,807 6,000 6,000
Total net income 161,148 159,709 155,917 166,933 200,125
Total operating expenses 81,542 70,451 58,598 67,359 85,563
YoY growth (%) 22 (14) (17) 15 27
Employee expenses 20,789 19,717 19,258 21,988 27,663
Other operating expenses 60,753 50,734 39,340 45,371 57,900
Pre-provision profit (pre-excep) 79,606 94,542 97,319 107,146 128,881
Exceptionals 0 0 0 0 0
Pre-provision profit 79,606 94,542 97,319 107,146 128,881
NPA provisions 25,420 37,500 43,621 35,063 36,604
Provisions for depn on invest 623 977 (27) 0 0
Other provisions 3,003 (395) 274 1,948 2,288
Provisions 29,046 38,083 43,868 37,011 38,891
Profit before tax 50,561 56,460 53,451 70,135 89,989
Taxes 8,984 13,588 13,203 19,638 25,197
Net profit 41,577 42,871 40,247 50,497 64,792
Exceptionals (Post tax) 0 0 0 0 0
Adj net profit 41,577 42,871 40,247 50,497 64,792
Balance sheet
Cash and balance with RBI 293,774 175,364 238,740 275,298 367,772
Inter-bank borrowings 86,636 124,302 150,000 175,000 190,000
Loans & advances 2,256,160 2,183,110 1,812,060 2,083,869 2,491,583
Investments 1,114,540 1,030,580 1,208,930 1,400,367 1,734,597
Interest earning assets 3,751,110 3,513,356 3,409,730 3,934,534 4,783,951
Fixed assets 41,094 38,016 40,000 42,000 44,000
Other assets 205,746 241,636 224,270 204,697 227,367
Total assets 3,997,950 3,793,008 3,634,000 4,181,231 5,055,318
Customer deposits 2,444,310 2,183,478 2,020,170 2,340,069 2,898,580
O/w CASA 637,806 626,678 842,411 926,652 1,111,982
Borrowings 863,990 928,050 911,500 1,103,913 1,371,386
Interest bearing liabilities 3,308,300 3,111,528 2,931,670 3,443,981 4,269,967
Other liabilities 224,950 186,150 186,150 186,150 186,150
Equity capital 11,130 11,133 11,150 11,150 11,150
Reserves 453,570 484,200 505,030 539,949 588,051
Total liabilities 3,997,950 3,793,008 3,634,000 4,181,231 5,055,318

ICICI Bank
Summary financials (cont’d)

Balance sheet structure ratios (%) FY08 FY09 FY10 FY11E FY12E
Loans/deposits 92 100 90 89 86
Investments /deposits 46 47 60 60 60
CASA ratio 26 29 42 40 38
Loan growth 15 -3 -17 15 20
Deposit growth 6 -11 -7 16 24
Operating ratios (%)

NIM 2.1 2.4 2.3 2.4 2.5
Non-interest income/Net income 55 48 48 46 45
Employee costs as % of total op costs 25 28 33 33 32
Cost/income 51 41 38 39 40
Operating cost growth 21.9 -13.6 -16.8 15.0 27.0
Total prov as % of avg. loans 1.4 1.7 2.2 1.9 1.7
Tax rate 18 24 25 28 28
Credit quality ratios (%)

Gross NPA (Rs mn) 75,795 99,290 94,807 97,662 105,583
Net NPA (Rs mn) 34,906 45,539 36,432 22,912 16,499
Gross NPA 3.5 4.2 5.1 4.7 4.2
Net NPA 1.5 2.0 1.9 1.1 0.7
NPA provisions/avg loans 1.4 1.7 2.2 1.9 1.7
NPA coverage ratio 57 53 63 77 84
Capital adequacy ratios (%)

Total CAR 14.9 15.5 19.4 17.9 16.0
Tier 1 CAR 11.3 11.8 14.0 13.2 12.1
Profitability ratios (%)

RoAE 11.0 8.8 8.0 9.5 11.3
RoAA 1.1 1.1 1.1 1.3 1.4
Valuation ratios
BVPS (Rs) 418 445 464 495 539
Price/BV (x) 2.3 1.2 1.8 1.7 1.6
Adjusted BVPS (Rs) 395 416 439 481 528
Price/Adj. BV (x) 1.8 1.3 1.9 1.7 1.6
EPS (Rs) 38.7 33.8 36.2 45.4 58.2
P/E (x) 18 16 23 19 19
Dividend yield 1.6 2.1 1.5 1.7 1.8

ICICI Bank

Institutional
Initiating coverage
Axis Bank Outperform

Eq
2 July 2010 Growth to stability
India Axis bank is one of the fast growing, highly profitable and competitive
Financial services private sector banks in India has entered a new phase of stable growth.
We expect loan growth at 25% CAGR over FY10-12 vs. a very high
Price: Rs 1,234 CAGR of 46% during FY04-08. The bank has successfully manoeuvred a
Target price: Rs 1,529 stable growth strategy during FY10 under its new management. A large
retail franchise, and focus on corporate advances backed by a strong
Stock details fee income from corporates and retail segments enable Axis to play a
direct role in the Indian CAPEX story. Outperform.
Bloomberg code AXSB IN
MCap Rs/US$ mn 502,023/10,785 Advances: Shifting gears

Outstanding shares (mn) 407 After an high growth period (46% CAGR during FY05-10), we expect bank’s business
to consolidate in the medium term (25% CAGR) across FY10-12E and stands to gain
52-wk H/L (Rs) 1,320/705
disproportionately from opportunities in the banking sector with a strong liability
3m avg trd vol (US$ mn) 51.9
franchise and underwriting capabilities in infrastructure segment.
Asset quality: All is well
Shareholding pattern (%)
The bank’s advances book performed well under the testing times of FY08-10. Its
restructured book at 2.2% is relatively lower than PSU banks and slippages from the
100% 13 restructured book are expected to be at 20%, in line with the industry. However, we
7
42
are building in higher provision charges than the peer group at 1.4% primarily on
50%
account of slippages from restructured advances.
39
0%
Fee income: The key differentiator
Mar-07 Mar-08 Mar-09 Mar-10
Relatively high fee income as percentage of average assets is the key differentiator
for Axis bank. Its diversified fee income streams have shown consistent performance
on a growing balance sheet. We believe the bank’s strengths in loan syndication,
Stock performance (%) leveraging strong liability franchise, and SME relationships to drive fee income growth
1m 3m 1yr
are hard to be replicated.
Absolute 4.4 5.1 41.9 Valuations

Nifty 5.7 (0.7) 21.0 Axis trades at 2.4xFY12E ABV and 13xFY12E earnings. Steady growth in advances,
170 asset quality issued fading out and improving RoEs make Axis an attractive play on
the Indian CAPEX story. We initiate coverage on Axis Bank with an Outperform rating
140
and value the bank using two stage Gordon growth model with a target price of
110 Rs1524.
80
Nifty Index Axis
Source: Bloomberg, Prowess.
PAT 10,592 18,133 25,148 29,513 36,899
EPS (Rs.) 31.8 50.6 62.6 73.4 91.8
EPS (consensus) (37) 60.7 74.6 94.3
EPS growth 36.3 59.2 23.6 17.4 25.0
Saikiran Pulavarthi
+91 22 3980 5203 PE (x) 38.8 24.4 19.7 16.8 13.4
ROA (%) 1.2 1.4 1.7 1.4 1.5
Deepak Agrawal P/ABV (x) 5.1 4.4 3.2 2.8 2.4
deepak.agrawal@indiabulls.com
Axis Bank
Figure 88: Asset growth has been moderating after very high growth in FY06-08
Units as shown
1,800 70
1,600 62 60
1,400 65
50
1,200
43 40
1,000 37
800 28 25 30
600 25
20
400
200 10
0 0
Figure 89: Comfortable provision coverage ratio will rule out spike in provisions
%
2.5 2.0 80
70
2.0
60
1.7 50
1.5 1.7
1.1 1.0 1.2 40
1.0 0.8
1.0 30
0.7 20
0.5 0.4 0.4 0.6
0.4 0.5 10
0.0 0
Provision coverage ratio - RHS Gross NPL % - LHS Net NPL % - LHS

Axis Bank
Figure 90: Factoring lower CASA % in FY11 on the back of revival in demand for
credit, which will lead to faster growth in demand deposits
Units as shown
1,200 48
47
1,000 46 45 46
800 45 44
43
600 42
40
400 40 40
200 38
0 36
CASA (Rs bn) - LHS CASA % - RHS
Figure 91: NIMs will continue to be strong on the back of strong CASA growth
Units as shown
4.0 10
3.5
8
3.0
2.5 6
2.0
1.5 4
1.0
2
0.5
0.0 0

Axis Bank
Figure 92: Fee income growth to be in line with growth in advances

Units as shown
50 100
88
40 80
30 64 60
63
20 48 40
25
20
10 25 20
0 0
Figure 93: High proportion of fee income has differentiated Axis Bank
Units as shown
40 1.7 1.6 1.6 1.6 1.8

1.4 1.6
35
30 1.4
1.1 1.2
25 1.0
1.0
20
0.8
15 0.6
10 0.4
5 0.2
0 0.0

Axis Bank
Figure 94: Contribution of trading profits going down, performance driven by core
operations
Units as shown
60 24
21 21
50
18 18
40 16
14 15
13
30 12
9
20 9
6 6
10 3
0 0
Figure 95: Operating costs lower compared to other private sector banks due to
wholesale banking business model
%
52 3.0
50 2.4 2.4 2.5
2.2 2.2 2.1
48 1.9
46 2.0 2.0
44 1.5
42 1.0
40
38 0.5
36 0.0

Axis Bank
Figure 96: PE band Figure 97: PVB band

Rs Rs
1,800 2,000
23x 4x
1,500
1,200 17x 3x
11x 1,000 2x
600
5x 500 1x
0 0
Figure 98: Axis’s DuPont analysis

%

Employee exp / avg assets (0.6) (0.8) (0.8) (0.8) (0.8) (0.8)
Non- Employee exp / avg assets (1.3) (1.6) (1.4) (1.6) (1.4) (1.4)
(1-tax rate) 34.0 35.2 34.8 34.7 34.5 34.5
Return on Assets 1.0 1.2 1.4 1.7 1.4 1.5
Return on Equity 20.9 16.3 19.8 18.5 17.2 18.7

%
Axis
CoE 14.0
Rf 7.7
G - growth phase 30.0
Beta 1.0
Market Return 14.0
Growth (Gn) 5.0
Normalised RoE 19.0
Initial Payout ratio (P) 20
Perpetual Payout ratio (Pn) 30
Target P/Adj BV - Two Stage 2.3
Premium / (Discount) 30.0
Assigned Multiple 3.0

Axis Bank

Axis Bank


Interest income 70,051 108,353 116,380 164,017 209,415
YoY growth (%) 76 43 36 30 26
YoY growth (%) 78 61 36 7 21
Fee & other income 15,908 29,260 30,852 35,847 41,637
Gains / (losses) on securities 2,051 2,802 7,330 3,100 3,100
Total net income 43,811 65,808 89,497 107,167 132,528
YoY growth (%) 78 32 30 21 22
Loan loss provisions 3,440 7,322 13,570 16,434 20,543
Provisions for depn on invest 65 1,078 (220) 0 0
Other provisions 2,291 997 545 785 981
Provisions 5,796 9,397 13,892 17,219 21,524
Taxes 5,757 9,698 13,368 15,545 19,436
Net profit 10,592 18,133 25,148 29,513 36,899
Adj net profit 10,592 18,133 25,148 29,513 36,899
Balance sheet
Loans & advances 596,611 815,568 1,043,431 1,304,289 1,630,361
Investments 337,051 463,303 559,748 715,047 893,809
Fixed assets 9,228 10,729 12,224 13,447 14,791
Other assets 27,845 37,451 39,011 39,011 39,011
Total assets 1,095,776 1,477,220 1,806,479 2,266,745 2,821,661
Customer deposits 876,193 1,173,741 1,413,000 1,811,513 2,264,391
O/w CASA 400,253 506,437 660,300 815,181 1,018,976
Borrowings 56,240 101,855 171,696 206,035 247,242
Interest bearing liabilities 932,434 1,275,595 1,584,696 2,017,547 2,511,632
Other liabilities 1,008,123 1,375,072 1,646,030 2,083,874 2,610,357
Equity capital 3,577 3,590 4,020 4,020 4,020
Reserves 83,941 98,546 156,393 178,851 207,285

Axis Bank
Summary financials (cont'd)

Investments/deposits 38 39 39 39 39
CASA ratio 46 43 47 45 45
Loan growth 62 37 28 25 25
Deposit growth 49 34 20 28 25

NIM 3.1 3.0 3.4 3.3 3.3
Non-interest income/net income 41.0 44.0 44.1 39.3 38.4
Employee costs as % of total op costs 34.7 34.9 33.8 34.4 35.4
Cost/income 49.5 43.4 41.4 41.9 41.3
Operating cost growth 77.7 31.9 29.8 21.0 21.8
Tax rate 35.2 34.8 34.7 34.5 34.5

Gross NPA (Rs mn) 4,946 8,978 13,195 23,074 33,119
Net NPA (Rs mn) 2,483 3,270 4,442 6,702 9,125
Gross NPA 0.8 1.0 1.2 1.7 2.0
Net NPA 0.4 0.4 0.4 0.5 0.6
Slippage 0.8 1.3 2.1 1.9 1.9

Total CAR 13.7 13.9 15.8 13.9 12.7
Tier 1 CAR 10.2 9.4 11.2 10.3 9.6

RoAE 16.3 19.8 18.5 17.2 18.7
RoAA 1.2 1.4 1.7 1.4 1.5
Valuation ratios
BVPS (Rs) 245 285 399 455 526
Price/BV (x) 5.0 4.3 3.1 2.7 2.3
Adjusted BVPS (Rs) 240 278 391 443 510
Price/Adj. BV (x) 5.1 4.4 3.2 2.8 2.4
EPS (Rs) 31.8 50.6 62.6 73.4 91.8
P/E (x) 39 24 20 17 13
Dividend yield 0.5 0.8 1.0 1.2 1.5

Axis Bank

Institutional
Initiating coverage
Punjab National Bank Outperform

Eq
2 July 2010 Structurally strong retail franchise
India We believe PNB will be to maintain its growth along with its higher-than-
Financial services industry NIMs (3.3%) and RoEs (above 23%). Asset quality has held up
reasonably well despite its greater SME and agricultural focus and
Price: Rs 1,020 higher restructured book. Earnings growth is expected to be healthy at
Target price: Rs 1,276 25% over FY11-12 on the back of strong demand for credit and healthy
growth in fee-based income with controlled rise in NPAs. We initiate
Stock details with an Outperform and a target price of Rs 1,276 an upside of 25% from
current levels.
Bloomberg code PNB IN
MCap Rs/US$ mn 321,719/6,914

Superior core performance
Outstanding shares (mn) 315
Ability to sustain superior NIMs in a volatile interest rate scenario demonstrates
52-wk H/L (Rs) 1,145/598 structurally strong liability franchise with superior RoAs at 1.5% for FY10. Fee-based
3m avg trd vol (US$ mn) 7.5 income has been a key focus area which can be seen from its 23% CAGR growth
over FY08-10 and we expect further improvement as PNB leverages technology
more efficiently and increases cross-selling of products.
Shareholding pattern (%) Asset quality continues to remain healthy

100%
PNB restructured Rs120bn worth of advances up to March 2010 constituting 6.4% of
5
18 advances of which Rs7.7bn (6.4% of restructured advances) slipped into NPAs. We
19
50% expect less than 20% slippages from restructured accounts in FY11 on the back of an
58
improving economy and expect the bank to maintain gross NPAs at less than 2%
0% from 1.7% in FY10. We believe the seasoning of restructured advances would bring
Mar-07 Mar-08 Mar-09 Mar-10 comfort to investors after 1QFY11.
Valuation
The stock trades at 1.4xFY12E ABV and 5.6xFY12E earnings. The stock now trades
Stock performance (%)
at a higher end of its historical range. Of late, the valuation gap between BoB and
1m 3m 1yr PNB has faded off primarily on account of asset quality concerns. We recommend
Absolute 2.3 0.4 49.2 switch to PNB from BoB as its strong retail franchise, superior operating
performance, and strong asset quality will sustain premium valuations assigned to
Nifty 5.7 (0.7) 21.0
PNB with asset quality concerns fading off after 1HFY11. Initiate coverage on PNB
170 with an Outperform rating and value the bank using the Gordon growth model with a
140 target price of Rs1,276. Superior management quality, stable and long tenure should
110 ensure strategic continuity and investor comfort.
80
Nifty Index PNB
PAT 20,541 31,203 41,507 46,353 57,007
EPS (Rs.) 65.1 99.0 131.6 147.0 180.8
EPS (consensus) (14) 115.4 136.9 169.2
Saikiran Pulavarthi EPS growth 78.1 51.9 33.0 11.7 23.0
+91 22 3980 5203 PE (x) 15.7 10.3 7.8 6.9 5.6
ROA (%) 1.1 1.4 1.5 1.4 1.4
Deepak Agrawal
P/ABV (x) 3.1 2.5 2.1 1.7 1.4
Figure 102: Asset quality steadily improving

Units as shown
4.5 100
4.0 4.1 90
3.5 3.4 80
3.0 70
2.7 60
2.5
2.0 2.1 2.2 50
2.0 1.8
40
1.5 30
1.0 0.7 0.6 0.6 20
0.5 0.6 0.6 10
0.3 0.2
0.0 -
Figure 103: Consistent growth in advances has made PNB one of the steady
performers
Units as shown
3,000 35
29
2,500 29 30
23 25
2,000 24 21 23
24 20
1,500
15
1,000
10
500 5
- 0

Figure 104: CASA levels much higher than Industry average of 34%
Units as shown
1,600 60
1,400 49
46 50
1,200 43 41 40
38
1,000 40 40
800 30
600 20
400
200 10
0 0
Figure 105: High CASA % coupled with reasonable growth in advances ensures that
margins remain strong
Units as shown
3.7 10
3.6 9
8
3.5 7
3.4 6
5
3.3 4
3.2 3
2
3.1 1
3.0 0

Figure 106: Reaping the benefits of increased cross-selling and corporate

relationships
Units as shown
30 35.0
25 28.9 30.0
25.0
24.4 21.4 25.0
20
25.0 20.0
15
14.0 15.0
10
8.9 10.0
5 5.0
0 0.0
Figure 107: Improving fee income as % of total income seems a tough task
Units as shown
15.5 0.62
15.0 0.6 0.60
14.5 0.6 0.58
0.6
14.0 0.6
0.6 0.56
13.5
0.6 0.54
13.0
12.5 0.5 0.52
12.0 0.50
11.5 0.48
11.0 0.46

Figure 108: Contribution of trading profits going down as core operations drive
performance
Units as shown
90 25
80
21 20
70
60
15 13 14 15
50 13
40 10
30 7
20 6 5
10
0 0
Trading profits (Rs bn) - LHS PBT (Rs bn) - LHS Trading profits/PBT (%) - RHS
Figure 109: Further cost leverage from current levels will be a challenge as banks
need to invest for future growth
Units as shown
60 2.2 2.5
2.2
50 2.0 1.9 2.0
1.8 1.7
40 1.7
1.5
30
1.0
20
10 0.5
0 0.0

Figure 110: PE band Figure 111: PBV band

Rs Rs
1,800 12x 1,250

2.0x
1,500 1,000
9x 1.5x
1,200 750
900 6x 1.0x
500
600 0.5x
3x 250
300
0 0
Jun-04 Jun-06 Jun-08 Jun-10 Jun-04 Jun-06 Jun-08 Jun-10
Price 3x 6x 9x 12x Price 0.5x 1.0x 1.5x 2.0x
Figure 112: PNB's Dupont analysis

%

(1-tax rate) 35.3 37.8 34.9 32.5 33.0 33.0
Return on Assets 0.9 1.1 1.4 1.5 1.4 1.4
Return on Equity 14.2 18.1 22.9 24.9 23.5 23.8

%
PNB
CoE 13.4
Rf 7.7
Beta 0.9
Market Return 14.0
Growth (Gn) 5.0
Normalised RoE 18.0
Target P/Adj BV - Single Stage 1.5




Interest income 142,650 193,262 217,278 276,494 349,188
YoY growth (%) 6.2 27.0 24.9 22.9 23.5
YoY growth (%) 15.7 47.2 9.3 4.4 18.9
Fee & other income 15,545 22,529 24,199 28,639 34,997
Gains / (Losses) on securities 4,431 6,647 8,030 5,000 5,000
Total net income 75,317 99,484 120,067 141,581 173,289
YoY growth (%) 6.0 19.3 13.2 21.6 21.7
Exceptionals - - 1,528 - -
Loan loss provision 2,771 8,206 10,350 12,484 15,355
Provisions for depn on invest 1,042 2,163 1,740 - -
Other provisions 3,291 3,726 2,125 2,030 2,382
Provisions 7,103 9,769 12,475 14,514 17,737
Taxes 12,472 16,760 19,994 22,831 28,078
Net profit 20,541 31,203 41,507 46,353 57,007
Exceptionals (Post tax) 4,978 - (1,528) - -
Adj net profit 25,519 31,203 39,979 46,353 57,007
Balance sheet
Loans & advances 1,195,016 1,547,030 1,866,010 2,295,192 2,823,087
Investments 539,917 633,851 747,990 1,042,698 1,282,519
Fixed assets 23,155 23,971 23,971 23,971 23,971
Other assets 43,808 50,202 50,202 50,202 50,202
Total assets 1,990,203 2,469,190 2,944,983 3,691,138 4,523,040
O/w CASA 715,609 814,599 1,018,500 1,226,704 1,508,845
Borrowings 54,465 43,743 91,983 227,253 306,614
Equity capital 3,153 3,153 3,153 3,153 3,153
Reserves 120,030 143,383 175,246 212,673 259,860


Rs million, yea-end March
Loans/deposits 71.8 73.8 74.8 74.8 74.8
Investments / deposits 32.4 32.1 30.0 34.0 34.0
CASA ratio 43.0 38.8 40.8 40.0 40.0
Loan growth 23.7 29.5 20.6 23.0 23.0
Deposit growth 19.0 26.0 18.9 23.0 23.0

NIM 3.3 3.3 3.3 3.3 3.3
Non-interest income/Net income 26.5 29.3 26.8 23.8 23.1
Cost/income 46.8 42.3 39.7 40.9 40.7
Operating cost growth 6.0 19.3 (13.2) 21.6 21.7
Tax rate 37.8 34.9 32.5 33.0 33.0

Gross NPA (Rs mn) 33,193 27,673 37,320 48,199 62,108
Net NPA (Rs mn) 7,538 2,639 11,196 13,496 16,148
Gross NPA 2.7 1.8 2.0 2.1 2.2
Net NPA 0.6 0.2 0.6 0.6 0.6
Slippage 1.8 1.3 4.0 5.0 5.0

Total CAR 13.5 14.0 14.2 13.4 12.8
Tier 1 CAR 9.0 9.0 9.1 9.4 9.5

RoAE 18.1 22.9 25.5 23.5 23.8
RoAA 1.1 1.4 1.5 1.4 1.4
Valuation ratios
BVPS (Rs) 342 417 518 636 786
Price/BV (x) 3.0 2.4 2.0 1.6 1.3
Adjusted BVPS (Rs) 325 411 493 607 750
Price/Adj. BV (x) 3.1 2.5 2.1 1.7 1.4
EPS (Rs) 65 99 132 147 181
P/E (x) 16 10 8 7 6
Dividend yield 1.3 2.0 2.2 2.4 2.6


Institutional
Initiating coverage
Union Bank of India Outperform

Eq
2 July 2010 Transitioning from Midcap to Largecap
India Union Bank (UBI) continues its aggressive growth phase with 23%
Financial services CAGR growth expected in advances over FY10-12 in line with growth
rates of FY07-10. The bank has leveraged technology to offer
Price: Rs 314 differentiated offerings to customers. Strong growth in business with
Target price: Rs 381 increased focus on Infrastructure, retail and MSME advances, growing
traction from fee-based income, and expected improvement in asset
Stock details quality make UBI attractive. We initiate with an Outperform and a target
price of Rs.381
Bloomberg code UNBK IN
MCap Rs/US$ mn 158,355/3,403

Advances: In top gear
Advances are expected to grow at over 23% over FY11-12 in line with growth rates of
52-wk H/L (Rs) 349/200 FY07-10. UBI has been building capability in the infrastructure segment and we
3m avg trd vol (US$ mn) 4.6 expect this segment to contribute 20% of advances in next few years. Retail
advances (up 34% yoy) and the MSME segment (up 40%) yoy in FY10 will continue
to show strong growth going ahead.
Shareholding pattern (%) Fee-based income: Building new products to sustain growth
100%
Fee-based income has grown at 47% CAGR over FY07-10 on the back of strong
14
13 technology to offer differentiated offerings to retail and corporate customers. Fee
17
50% income as % of total income has gone up from 8% in FY07 to 15% in FY09. UBI has
55
been building capabilities in the infrastructure finance space and entering new
0% products like debt syndication and transaction banking, which will help sustain growth
Mar-07 Mar-08 Mar-09 Mar-10 in this segment.
Asset quality: Expected to improve from current levels

UBI restructured 4% of advances (Rs49.5bn) under the RBI scheme up to FY10 of
which Rs4.8bn (~10%) slipped into NPAs. Gross NPAs increased from 1.96% in
1m 3m 1yr FY09 to 2.2% in FY10. Asset quality continues to remain healthy and management
Absolute 11.1 3.5 26.3 has guided Gross NPAs at ~2.1% for FY11, which we believe should be attainable as
we do not expect any major slippages from restructured advances.
Nifty 5.7 (0.7) 21.0
130
120
Valuation
110
UBI trades at 1.2xFY12E ABV and 5.2xFY12E earnings with an RoE of 21.9% in
100 FY12E. Transition from midcap to large cap will improve the multiple the bank
90 commands. Strong growth in earnings and improvement in asset quality make UBI an
80 attractive proposition. Outperform.
Nifty Index Union
PAT 13,871 17,280 20,745 24,095 30,424
EPS (Rs.) 27.5 34.2 41.1 47.7 60.2
EPS (consensus) (1) 38.7 46.0 55.5
EPS growth 64.1 24.6 20.1 16.1 26.3
Saikiran Pulavarthi
+91 22 3980 5203 PE (x) 11.4 9.2 7.6 6.6 5.2
ROA (%) 1.2 1.2 1.2 1.1 1.2
Union Bank of India
Figure 116: Advances growth continues in top gear

Units as shown
2,000 35
33
30 30
1,500 23 25
23
17 19 23 20
1,000
15
500 10
5
0 0
Figure 117: Healthy growth in CASA over the years

Units as shown
900 36
800 34 35
35
700 33 34 34
600 33
500 32 32
32
400 31
300 30 30
200 29
100 28
0 27

Union Bank of India
Figure 118: FY10 margins were lower due to excess liquidity. Margins are expected
to come back to reasonable levels FY11 onwards
Units as shown
4.0 12.0
3.5 10.4 10.0
9.1 8.9
3.0 7.7 8.2 8.5 8.0
2.5 7.4
6.8
2.0 6.7 6.1 6.0
5.9 5.9
1.5 4.9 5.7
4.0
1.0
0.5 2.0
0.0 0.0
Figure 119: New income streams like loan syndication and transaction banking are
driving growth
Units as shown
16 85 90
14 80
12 70
10 60
50
8
26 34 40
6 23 33 25 30
4 25
20
2 10
0 0

Union Bank of India
Figure 120: Improving fee income as % of total income seems a tough task
Units as shown
18 0.6
0.5 0.5
16 0.5
0.4 0.5
14 0.4
12 0.4
10 0.3
0.2 0.3
8
6 0.2
4
0.1
2
0 0.0
Figure 121: Contribution of trading profits declining as core operations drive

performance
Units as shown
60 25
50 20 20 20
40
17 15
30
10
20 7 7
5 6 5
10
0 0

Union Bank of India
Figure 122: Further improvement from the current levels will be a challenge as UBI
needs to invest for future growth
Units as shown
60 2.0
1.7
50 1.5 1.5
1.4 1.4 1.4 1.5
40 1.4
30 1.0
20
0.5
10
0 0.0
Figure 123: Concerns on asset quality fading

Units as shown
4.5 100
4.0 3.8
3.5 80
3.0 2.9
2.5 2.2 2.3 60
2.2 2.0 2.3
2.0 40
1.5 1.6
1.0 1.0 0.8 0.8 20
0.5 0.2 0.7
0.3
0.0 0

Union Bank of India
Figure 124: PE band Figure 125: PE band

Rs Rs
500
10x 400 2.0x
375 8x 1.5x
300
6x
250 200 1.0x
4x
125 100 0.5x
0 0
Jun-04 Jun-06 Jun-08 Jun-10 Jun-04 Jun-06 Jun-08 Jun-10
Figure 126: Union Bank's DuPont analysis

%

(1-tax rate) 38.8 25.1 26.3 26.8 28.0 28.0
Return on Assets 0.9 1.2 1.2 1.2 1.1 1.2
Return on Equity 17.3 22.1 21.5 21.9 21.0 21.9

%
Union
CoE 13.8
Rf 7.7
Beta 1.0
Market Return 14.0
Growth (Gn) 5.0
Normalised RoE 18.0
Premium / (Discount)

Union Bank of India

Union Bank of India


Interest income 92,146 118,894 133,027 175,160 212,906
YoY growth (%) 8 34 10 40 25
YoY growth (%) 57 12 33 (12) 18
Fee & other income 6,330 8,180 10,620 13,192 16,390
Gains / (Losses) on securities 5097 5170 7300 3000 3000
Total net income 41,734 52,971 61,674 75,878 93,942
YoY growth (%) 8 39 13 21 21
Provisions for depn on invest 300 (390) (1,170) 0 0
Provisions 7,289 7,370 8,260 12,063 15,029
Taxes 4,644 6,180 7,580 9,370 11,831
Net profit 13,871 17,280 20,745 24,095 30,424
Exceptionals (Post tax) (2) 0 0 0 0
Adj net profit 13,869 17,280 20,745 24,095 30,424
Balance sheet
Loans & advances 743,483 965,342 1,193,153 1,467,578 1,805,121
Investments 338,224 429,967 544,035 622,346 746,816
Fixed assets 22,004 23,352 23,054 24,207 25,417
Other assets 36,041 31,242 33,609 35,289 37,054
Total assets 1,240,730 1,609,752 1,951,618 2,314,562 2,787,640
O/w CASA 362,040 417,112 539,572 684,581 846,391
Borrowings 47,605 38,849 92,153 53,881 78,594
Equity capital 5,051 5,051 5,051 5,051 5,051
Reserves 68,426 82,352 99,187 120,311 147,780

Union Bank of India

Investments / Deposits 33 31 31 30 30
CASA ratio 35 30 32 33 34
Loan growth 19 30 23 23 23

NIM 2.8 2.9 2.4 2.8 2.9
Non-interest income/net income 32 28 32 23 22
Cost/Income 38 42 41 40 39
Operating cost growth 8 39 13 21 21
Tax rate 25 26 27 28 28

Gross NPA (Rs mn) 16,566 19,234 26,714 34,068 42,202
Net NPA (Rs mn) 1,276 3,259 9,650 11,420 12,128
Gross NPA 2.2 2.0 2.2 2.3 2.3
Net NPA 0.2 0.3 0.8 0.8 0.7
Slippage 1.1 1.4 1.7 1.5 1.5

Total CAR 12.5 12.0 12.5 12.5 12.2
Tier 1 CAR 7.5 7.4 7.9 8.3 8.4

RoAE 22.1 21.5 21.9 21.0 21.9
RoAA 1.2 1.2 1.2 1.1 1.2
Valuation ratios
BVPS (Rs) 111 140 173 215 269
Price/BV (x) 2.8 2.2 1.8 1.5 1.2
Adjusted BVPS (Rs) 110 135 161 200 254
Price/Adj. BV (x) 2.9 2.3 1.9 1.6 1.2
EPS (Rs) 27.5 34.2 41.1 47.7 60.2
P/E (x) 11 9 8 7 5
Dividend yield 1.3 1.6 1.8 1.6 1.6

Union Bank of India

Institutional
Initiating coverage
HDFC Bank Outperform

Eq
2 July 2010 Steady as always
India Consistent and steady operating performance has been the hallmark of
Financial services HDFC Bank. The underlying strength of its business model backed by
high CASA deposits, higher proportion of advances in the retail
Price: Rs 1,907 segment coupled with lower NPAs make HDFC Bank’s business model
Target price: Rs 2,297 unique and difficult to replicate. The bank offers the best play on the
India consumption story. We initiate with an Outperform and a target
Stock details price of Rs 2,297.
Bloomberg code HDFCB IN
Inherent strength of business model
MCap Rs/US$ mn 876,814/18,842 HDFC operates differently from the traditional business model followed by most
Outstanding shares (mn) 460 banks in India. It has 55% retail advances with minimal housing loans vs. 20-25% for
52-wk H/L (Rs) 2010/1333 most other banks. NIMs at 4.3% are a result of high yields on retail advances and
52% CASA deposits. Its fee income forms 23% of total income, which is a healthy
sign considering the fact that HDFC Bank does not operate in the debt syndication
space like ICICI Bank and Axis Bank.
Shareholding pattern (%) Asset quality: Better times ahead

100%
HDFC Bank’s gross NPAs have declined from 2% in FY09 to 1.6% in FY10 as
20 advances of Centurion bank of Punjab (CBoP) were run down. Only 0.3% of the
12
advances were restructured, which speaks of superior credit underwriting standards.
50% 44
Time to bear fruits from CBoP merger
24
0% Based on our calculations, CBoP was an expensive merger for HDFC Bank.
Mar-07 Mar-08 Mar-09 Mar-10 However, HDFC Bank took up the challenge of cleaning up CBoP’s portfolio of
Promoters FIIs DIIs Public & Others advances and bringing the acquired bank to HDFC Bank standards in terms of
operating parameters. CASA levels which had declined to 44% have increased to
52% in FY10. Similarly NPAs declined from 2% in FY09 to 1.6% in FY10. Cost
income ratio has been brought down from 52% in FY09 to 47% in FY10.
1m 3m 1yr
Valuation
Absolute 2.8 (1.6) 26.9
The stock trades at 3.2xFY12E ABV and 16xFY12E earnings. The stock now trades
Nifty 5.7 (0.7) 21.0 at a slight premium to its historical average and a significant premium to peer banks.
A unique business model which is hard to replicate for peer banks, strong core
140
operating performance, and very strong asset quality make HDFC Bank the best play
120
on the India consumption story. We initiate coverage on HDFC Bank with an
100 outperform rating and value the bank using the Gordon growth model with a target
80 price of Rs2,297.
Nifty Index HDFC Bk
PAT 15,927 22,448 29,502 36,174 48,155
EPS (Rs.) 46 53 64 79 105
EPS (consensus) (1) 65 85 110
EPS growth 26.3 15.4 22.3 22.6 33.1
Saikiran Pulavarthi
+91 22 3980 5203 PE (x) 28 20 25 21 16
ROA (%) 1.3 1.3 1.5 1.4 1.5
HDFC Bank
Figure 130: HDFC Bank’s underwriting standards remain best in the industry
Units as shown
2.5 71
2.0 2.0 70
1.6
1.4 1.4 69
1.5 1.4
1.4
1.3 68
1.0
67
0.4 0.5 0.6 0.5 0.4
0.5 0.4
0.4 66
0.0 65
Figure 131: Factoring 30% growth in advances backed by strong demand from retail
segment
Units as shown
2,500 60
56
2,000 50
37 40
1,500 34 35 30 30
30 30
1,000
20
500 10
0 0

HDFC Bank
Figure 132: CASA % expected to come down marginally due to uptick in credit,
which will skew the proportion towards term deposits
Units as shown
1,600 70
1,400 55 58 60
54 52 50
1,200 50 50
1,000 44
40
800
30
600
400 20
200 10
0 0
Figure 133: Do not expect any drop in margins as retail advances continue to see
healthy growth
Units as shown
5.0 12.0
4.8 10.0
4.6 8.0
4.4 6.0
4.2 4.0
4.0 2.0
3.8 0.0

HDFC Bank
Figure 134: Fee income growth to be in line with growth in advances

Units as shown
45 90
40 78 80
35 70
30 60
25 50
20 35 40
15 26 34 30
20 25
10 15 20
5 10
0 0
Figure 135: Fee income growth may be strained as insurance payouts to come
under pressure due to expected regulatory tussle
Rs million
FY08 FY09 FY10 FY11E

Insurance commission 1,294 2,050 3,310 3,968
Marketing & sales promotion 262 3,569 2,158 1,500
Total payouts from HDFC Std Life 1,557 5,619 5,468 5,468
% of Total fee income - 23 19 16
% of PBT 7 17 13 10
Figure 136: Highly skewed retail business model explains high NIM and low fee
income...
Units as shown
35 1.5 1.5 1.4 1.6

30 1.3 1.3 1.4
1.2
1.2 1.2
25
1.0
20
0.8
15
0.6
10 0.4
5 0.2
0 0.0

HDFC Bank
Figure 137: Contribution of trading profits going down. Performance driven by core
operations
Units as shown
500 15
12
10
400 10
8
7
300
5
200 2
0
100 (4)
(4)
0 (5)
(100) (10)
Figure 138: Operating costs higher compared to other private sector banks due to
retail banking business model
Units as shown
55 2.7 2.8 3.0

2.7 2.5 2.7
2.5
2.3 2.3
50 2.0
1.5
45 1.0
0.5
40 -

HDFC Bank

Rs Rs
3,000
3,000 35x 5x
27x 2,500
2,500 4x
2,000
2,000 3x
19x
1,500 1,500
11x 1,000 2x
1,000
500 500
0 0
Figure 141: HDFC Bank's DuPont analysis

%
Dupont FY07 FY08 FY09 FY10 FY11E FY12E

NII/avg. assets 4.1 4.4 4.4 4.1 4.1 4.3
Non-Int Inc/avg assets 1.9 2.0 1.9 1.9 1.8 1.7
Op Profit /avg. assets 3.0 3.2 3.0 3.2 3.1 3.3
Provisions/Avg. assets (1.1) (1.2) (1.1) (1.1) (1.0) (1.0)
(1-tax rate) 30.5 30.6 32.0 31.2 31.0 32.0
Return on Assets 1.3 1.3 1.3 1.5 1.4 1.5
Avg. assets/avg equity (x) 14 13 13 11 11 12
Return on Equity 19.5 17.8 16.9 16.1 15.8 18.3

Units as shown
HDFC Bk
CoE 12.9
Rf 7.7
Beta 0.8
Market Return 14.0
Growth (Gn) 5.0
Normalised RoE 19.0

HDFC Bank

HDFC Bank


Interest income 101,170 163,321 161,728 206,387 272,114
YoY growth (%) 51 42 13 24 30
YoY growth (%) 51 39 16 18 18
Fee income 18,299 24,573 28,307 33,968 42,461
Others 3,156 4,466 6,318 7,565 9,060
Total net income 76,054 107,116 121,954 148,904 188,363
YoY growth (%) 55 45 4 23 21
Employee costs 13,384 22,382 22,891 28,217 33,217
Provisions for depn on invest
Provisions 14,844 18,791 21,405 25,829 31,726
Taxes 7,020 10,549 13,404 16,252 22,661
Net profit 15,927 22,448 29,502 36,174 48,155
Adj net profit 15,927 22,448 29,502 36,174 48,155
Balance sheet
Loans & advances 634,269 988,831 1,258,306 1,671,124 2,172,461
Investments 493,935 588,175 586,076 790,396 1,027,515
Fixed assets 11,751 17,067 21,228 22,926 24,531
Other assets 44,027 63,568 59,551 53,879 -28,490
Total assets 1,331,766 1,832,707 2,224,586 2,809,318 3,577,665
O/w CASA 549,139 633,597 871,540 1,129,138 1,467,879
Borrowings 44,789 26,858 129,157 90,410 99,451
Other liabilities 164,319 227,261 206,189 216,498 259,798
Equity capital 3,544 4,254 4,577 4,577 4,577
Reserves 111,428 146,219 210,619 239,558 278,082

HDFC Bank

Loans / deposits 63 69 75 74 74
CASA ratio 54 44 52 50 50
Loan growth 35 56 30 30 30
Operational ratios (%)

Net interest margin 4.9 4.6 4.3 4.3 4.3
Non-int inc as % of total inc 31 31 31 30 28
Core fee income growth 35 34 15 20 25
Emp costs as % of total op costs 35 40 40 40 39
Cost to income ratio 50 52 47 47 46
Operating cost growth 55 45 4 23 21
Total prov as % avg loans 3 2 2 2 2
Tax rate 31 32 31 31 32

Gross NPA (Rs mn) 9,070 19,881 19,881 23,572 28,437
Net NPA (Rs mn) 2,985 6,276 6,276 7,072 8,531
Gross NPA 1.4 2.0 1.6 1.4 1.3
Net NPA 0.5 0.6 0.5 0.4 0.4

Total CAR 13.6 15.7 18.3 15.9 14.6
Tier 1 CAR 10.3 10.6 14.0 12.6 11.8

RoAE 17.8 16.9 16.1 15.8 18.3
RoAA 1.3 1.3 1.5 1.4 1.5
Valuation ratios
BVPS (Rs) 334 354 470 533 618
Price/BV (x) 5.7 5.4 4.1 3.6 3.1
Adj BV per share (Rs) 328 344 461 523 604
P/ Adj BV (x) 5.8 5.5 4.1 3.7 3.2
EPS (Rs) 46 53 64 79 105
P/E (x) 28 20 25 21 16
Dividend yield (%) 0.4 0.5 0.6 0.8 1.1

HDFC Bank

Institutional
Initiating coverage
Bank of Baroda Neutral

Eq
2 July 2010 Improvement unlikely from current levels
India Bank of Baroda (BoB) has outperformed its peers with high earnings
Financial services growth driven by cost efficiencies, enviable fee income performance,
and better asset quality. We believe further RoA improvement is unlikely
Price: Rs 720 from current levels. BoB currently trades at a 60% premium to its
Target price: Rs 803 historical average and in line with PNB and SBI. We recommend Neutral
rating on the stock with target price of Rs803.
Stock details
Bloomberg code BOB IN

RoA improvement unlikely
We believe that further RoA improvement (0.8% in FY05 to 1.2% in FY10 ) is unlikely
MCap Rs/US$ mn 262,127/5,632
from current levels as fee income growth is set to moderate after a 28% CAGR fee
Outstanding shares (mn) 364 income and on account of consistent improvement in asset quality and controlled rise
52-wk H/L (Rs) 755/360 in operating expenses. Also, earnings growth should moderate to 20% CAGR during
FY10-12E after a 44% CAGR in FY07-10
Nifty / Sensex 5251/17509 International business: Difficult to sustain growth momentum

In its international ops, the bank registered a 1.42% RoA and 24% RoE in FY10,
Shareholding pattern (%) which are superior to the corresponding domestic figures. The superior international
100% performance was primarily aided by high fee income (36% of total fee income),
12
18 superior cost leverage (CI ratio at 22%) and better asset quality (GNPAs at 0.47%).
17
50% Restructured advances at Rs17.9bn (4.1% of international advances) are at a higher
54 end, which will mean higher provisions in FY11 and pressure on profits. BoB may find
0% it extremely difficult to sustain its current growth momentum in international business
Mar-07 Mar-08 Mar-09 Mar-10 as players like ICICI have started becoming aggressive after having vacated the
space for most part of FY10.
Valuations
Stock performance (%) BoB now trades at 60% premium to its historical average both on P/E and P/ABV
1m 3m 1yr parameters. Positive triggers are absent since RoA improvement is unlikely,
International business is likely to see pressure on margins and current valuations at
Absolute 1.5 10.8 59.5
an all-time high for the stock leave limited room for upside. We initiate coverage on
Nifty 5.7 (0.7) 21.0
BoB with a neutral rating and value the bank using the Gordon growth model with a
170 target price of Rs803.
140
110
80
Nifty Index BOB
PAT 14,355 22,277 30,607 35,073 43,553
EPS (Rs.) 39.3 61.1 83.7 96.0 119.2
EPS (consensus) (11) 76.1 89.9 108.1
EPS growth 39.9 55.6 37.0 14.6 24.2
Saikiran Pulavarthi
+91 22 3980 5203 PE (x) 18.3 11.8 8.6 7.5 6.0
ROA (%) 0.9 1.1 1.2 1.1 1.1
Bank of Baroda
Figure 145: Remarkable improvement in asset quality on sustainable basis

%
4.5 80
4.0 3.9 70
3.5 60
3.0 50
2.5 2.5
40
2.0 1.8 1.5 1.5
1.3 1.4 30
1.5
1.0 0.8 0.6 20
0.5 0.3 0.3 0.4 0.4 10
0.5
0.0 -
Figure 146: Restructured advances have peaked out, do not expect any major
slippages into NPAs with overall macro environment improving
Rs mn
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Opening - 26,590 45,532 45,532 48,015
Restructured 26,590 18,942 2,483 4,633
Upgradation
Closing 26,590 45,532 45,532 48,015 52,648
Cumulative slipped into NPAs 1,874 4,179

Figure 147: Asset growth has been moderating after very high growth achieved in
FY06 to FY09 in line with overall demand for credit
Units as shown
3,000 45
40 40
2,500
38 35 35
2,000 30
28 22 22 22 25
1,500
20
1,000 15
10
500
5
0 0

Bank of Baroda
Figure 148: Will be difficult for BoB to improve CASA from current levels
Units as shown
1,200 40
1,000 38 35
31
31 30
33 31 31
800 30 25
600 20
400 15
10
200 5
0 0
Figure 149: Margins to be maintained on the back of improving demand for credit
%
3.5 9.0
3.0 8.0
7.0
2.5
6.0
2.0 5.0
1.5 4.0
3.0
1.0
2.0
0.5 1.0
0.0 0.0

Bank of Baroda
Figure 150: Growth in fee-based income driven by new streams like loan
syndication and transaction banking
Units as shown
16 40
38
14
12 31 30
10 20 23 23
8 20
6 14
4 5 10
2
0 0
Figure 151: Growth to remain healthy, backed by new product offerings

Units as shown
12 0.3
0.3
10 0.3 0.3 0.3
0.3 0.3
8 0.3 0.3
6 0.3
0.3
4 0.3
2 0.3
0 0.3
Fee income /total income (%) - LHS Fee income /total assets (%) - RHS

Bank of Baroda
Figure 152: Contribution of trading profits declining. Performance driven by core

operations
Units as shown
70 30
28 27
60 25
50 24 15 20
40 15
30 10
5 4
20 5
10 0
0 (5)
(4)
(10) FY06 FY07 FY08 FY09 FY10 FY11E FY12E (10)
Figure 153: Further improvement from the current levels will be a challenge as BoB
needs to invest for future growth
%
60 3.0
50 2.4 2.5
2.0
40 1.9 2.0
1.8
1.5 1.3
30 1.3 1.5
20 1.0
10 0.5
0 0.0

Bank of Baroda
Figure 154: P/E band Figure 155: PBV band

Rs Rs
1,200 750
12x 1.6x
900 500
9x 1.2x
600 6x 0.8x
250
300
3x 0.4x
0 0
Figure 156: BoB’s DuPont analysis

%
FY07 FY08 FY09 FY10 FY11E FY12E

Emp (1.3) (1.2) (1.2) (0.9) (0.8) (0.8)
NonEmp (0.7) (0.7) (0.6) (0.6) (0.5) (0.5)
(1-tax rate) 38.0 35.0 33.4 27.8 30.0 30.0
Return on Assets 0.8 0.9 1.1 1.2 1.1 1.1
Return on Equity 12.4 14.6 18.7 21.9 21.2 22.0

%
BOB
CoE 13.7
Rf 7.7
Beta 1.0
Market Return 14.0
Growth (Gn) 5.0
Normalised RoE 18.0

Bank of Baroda

Bank of Baroda

Income statement FY08 FY09 FY10 FY11E FY12E

Interest Income 118,135 150,916 166,983 216,272 270,257
Interest Expense 79,017 99,682 107,589 140,550 176,866
Net Interest Income 39,118 51,234 59,395 75,722 93,391
YoY Growth (%) 9.3 31.0 15.9 27.5 23.3
Non-Interest Income 20,510 27,580 27,249 26,028 30,385
YoY Growth (%) 43.0 34.5 (1.2) (4.5) 16.7
Fee & Other Income 15,190 18,580 20,843 23,466 28,078
Gains / (Losses) on Securities 5,320 9,000 6,406 2,563 2,306
Total Net Income 59,628 78,814 86,644 101,751 123,776
Total Operating Expenses 30,343 35,760 38,106 41,209 50,129
YoY Growth (%) 17 18 7 8 22
Employee Expenses 19,038 23,481 23,509 25,438 30,944
Other Operating Expenses 11,305 12,279 14,597 15,771 19,185
Pre-provision Profit 29,285 43,054 48,538 60,542 73,647
Loan Loss provisions 4,360 3,370 9,555 9,714 10,666
Provisions for Depn on Invest 418 5,370 (3,807) 0 0
Other Provisions 2,436 880 1,225 723 761
Provisions 7,214 9,620 6,134 10,438 11,428
Profit Before Tax 22,072 33,434 42,404 50,104 62,219
Taxes 7,716 11,157 11,797 15,031 18,666
Net Profit 14,355 22,277 30,607 35,073 43,553
Exceptionals (Post Tax) 0 0 0 0 0
Adj Net Profit 14,355 22,277 30,607 35,073 43,553
Balance sheet
Loans & Advances 1,067,013 1,439,860 1,750,353 2,135,430 2,605,225
Investments 438,701 524,459 611,824 801,622 977,979
Interest Earning Assets 1,728,707 2,205,190 2,716,847 3,369,751 4,111,096
Fixed Assets 24,270 23,097 22,848 25,132 27,646
Other Assets 43,018 45,781 43,472 45,646 47,928
Total Assets 1,795,995 2,274,068 2,783,167 3,440,529 4,186,670
Customer Deposits 1,520,341 1,923,970 2,410,443 2,940,740 3,587,703
o/w CASA 474,724 569,384 714,680 911,629 1,112,188
Borrowings 39,270 56,361 133,500 231,706 294,276
Interest Bearing Liabilities 1,559,612 1,980,331 2,543,943 3,172,446 3,881,979
Other Liabilities 125,944 165,381 88,160 88,160 88,160
Equity Capital 3,655 3,655 3,655 3,655 3,655
Reserves 106,784 124,700 147,409 176,267 212,876
Total Liabilities 1,795,995 2,274,068 2,783,167 3,440,529 4,186,670

Bank of Baroda

Balance Sheet Structure Ratios (%) FY08 FY09 FY10 FY11E FY12E
Loans/Deposits 70 75 73 73 73
CASA Ratio 31 30 31 31 31
Loan Growth 28 35 22 22 22
Deposit Growth 22 27 25 22 22
Operating Ratios (%)

NIM 2.5 2.6 2.4 2.5 2.5
Non-interest income/Net income 34 35 31 26 25
Employee Costs as % of Total Op Costs 63 66 62 62 62
Cost/Income 51 45 44 41 41
Tax Rate 35 33 28 30 30
Credit Quality Ratios (%)

Gross NPA 19,814 18,429 24,007 32,445 41,793
Net NPA 4,936 4,512 6,023 8,393 12,243
Slippage 1.8 1.3 1.4 1.5 1.6
NPA coverage ratio 0.5 0.3 0.3 0.4 0.5
Capital Adequacy Ratios (%)

Total CAR 12.9 14.1 14.3 13.5 13.4
Tier 1 CAR 7.6 8.5 9.7 9.1 9.0
Profitability Ratios (%)

RoAE 14.6 18.7 21.9 21.2 22.0
RoAA 0.9 1.1 1.2 1.1 1.1
Valuation Ratios
BVPS (Rs) 265 316 380 459 559
Price/BV (x) 2.7 2.3 1.9 1.6 1.3
Adjusted BVPS (Rs) 257 309 368 442 535
Price/Adj. BV (x) 2.8 2.3 2.0 1.6 1.3
EPS (Rs) 39 61 84 96 119
P/E (x) 18 12 9 7 6.0
Dividend Yield 1.1 1.3 2.1 2.4 2.6

Bank of Baroda

Institutional
Initiating coverage
Bank of India Neutral

Eq
2 July 2010 Pain before gain
India We expect Bank of India’s (BoI) earnings growth to be healthy at 32%
Financial services CAGR for FY11-12E albeit on a lower base of FY10. The bank’s core
operational performance seems poised to improve with better NIMs, fee
Price: Rs 357 income growth to mirror loan growth, and MTM losses to be contained,
Target price: Rs 343 but we believe more pain is in store on the asset quality front. With
current valuations near to average cycle, we recommend Neutral rating
Stock details on the stock with a target price of Rs. 343.
Bloomberg code BOI IN
MCap Rs/US$ mn 187,488/4,029 Earnings growth at 32% CAGR for FY11-12E

Earnings growth to be healthy at 32% CAGR for FY11-12E albeit on a lower base of
FY10. After its dismal performance during FY10, the bank can be expected to register
52-wk H/L (Rs) 475/295 RoA at 0.9% in FY12E and show a 10 bps improvement each in the next two years.
Core performance to improve
We expect BoI’s core operational performance to improve with gradual improvement
in NIMs as re-pricing of deposits will aid margins in FY11 and asset quality will
Shareholding pattern (%) stabilise in FY12, Fee income growth should mirror credit growth and MTM losses on
100% 8
12
investment portfolio should be minimal as the bank has reduced the duration of its
15 AFS book during the 1QFY11.
50%
64
Asset quality: More pain left
0% The bank’s asset quality has been consistently disappointing for the past four
Mar-07 Mar-08 Mar-09 Mar-10 quarters. An18% slippage on its restructured assets portfolio at such a nascent stage
Promoters FIIs DIIs Public & Others of the restructuring raises further concerns on the asset quality. Therefore, in our
view, more slippage from the restructured assets portfolio cannot be ruled out.
Stock performance (%) Valuations artificially cheap: Recommend Neutral

1m 3m 1yr Current valuations at 1.2x FY12E ABV appear cheap; however one should wait and
watch the asset quality, restructured book behaviour in the next two quarters before
Absolute 10.9 3.1 (0.0)
entering the stock. We recommend neutral on the stock with a target price of Rs 343.
Nifty 5.7 (0.7) 21.0
140
120
100
80
Nifty Index BOI
PAT 20,094 30,078 17,422 23,652 30,571
EPS (Rs.) 38.2 57.2 33.1 45.0 58.1
EPS (consensus) (15) 38.5 46.0 58.5
EPS growth 66.1 49.7 (42.1) 35.8 29.3
Saikiran Pulavarthi
+91 22 3980 5203 PE (x) 9.3 6.2 10.8 7.9 6.1
ROA (%) 1.2 1.5 0.7 0.8 0.9
Bank of India
Figure 160: Asset quality concerns led to moderate growth in FY10. Expect modest
growth in FY11E
Units as shown
3,000 35
33
2,500 30
31 26 25
2,000 20 20 22
20
1,500 17
15
1,000
10
500 5
0 0
Figure 161: We are factoring marginal improvement in CASA from FY10 levels
Units as shown
1,200 40
31 35
1,000
35 30
800 32 31 29 30 25
26
600 20
400 15
10
200 5
0 0

Bank of India
Figure 162: Repricing of high cost deposits will be over in FY11E, which will lead to
improvement in margins from FY12E
Units as shown
2.9 9.0
2.8 8.0
2.7 7.0
2.6 6.0
5.0
2.5
4.0
2.4 3.0
2.3 2.0
2.2 1.0
2.1 0.0
Figure 163: Fee-based income was strong over the last credit cycle from FY06-FY09
in line with growth in advances
Units as shown
18 45
16 39 40
14 31 35
12 30
10 25
20
8 15 20 20
6 15 15
4 10
2 5
0 0 0

Bank of India
Figure 164: Improving fee income % from current levels seems a tough task
Units as shown
14 0.6
0.5 0.5
0.4 0.4 0.5
0.4 0.4 0.4
13 0.4
0.3
12 0.2
0.1
11 0.0
Figure 165: Factoring much lower treasury income on the back of rising interest
rates
Units as shown
50 25
24
45
40 20
35 18
30 12 13 15
25 14
20 10
15 6
10 5 5
5
0 0

Bank of India
Figure 166: Further improvement in cost-income ratio from current levels will be a
challenge as the bank need to invest for future growth
Units as shown
60 2.5
2.0 2.1
50 2.0
1.6
40 1.5 1.5
1.4 1.5
30 1.3
1.0
20
10 0.5
0 0.0
Figure 167: Gradual improvement in RoAs and RoEs building

Units as shown
30 1.6
25 1.4
1.2
20 1.0
15 0.8
10 0.6
0.4
5 0.2
0 0.0
RoE RoA

Bank of India
Figure 168: Asset quality concerns to persist for the next few quarters
Units as shown
4.0 80
3.7
3.5 3.0 70
3.0 3.0 60
2.5 2.9 50
2.4
2.0 1.7 40
1.5 1.7 1.3
1.5 1.0 30
1.0 0.9 1.1 20
0.5
0.5 0.4 10
0.0 0

Rs Rs
700 700
600 12x 600 12x
500 500
9x 9x
400 400
300 6x 300 6x
200 200
3x 3x
100 100
0 0

Bank of India
Figure 171: BoI’s DuPont analysis

%

(1-tax rate) 26.7 25.2 27.8 30.2 30.0 30.0
Return on Assets 0.9 1.2 1.5 0.7 0.8 0.9
Return on Equity 20.6 24.4 25.0 12.6 15.6 17.7

%
BoI
CoE 15.9
Rf 7.7
Beta 1.3
Market Return 14.0
Growth (Gn) 5.0
Normalised RoE 18.0

Bank of India


Interest income 123,552 163,474 178,780 216,780 263,014
YoY growth (%) 22.9 30.0 4.7 21.3 22.9
YoY growth (%) 35.4 44.2 (14.2) (1.2) 16.8
Fee & other income 17,507 23,060 20,240 23,862 28,206
Total net income 63,462 85,514 83,740 95,684 116,028
YoY growth (%) 1 17 19 9 14
Provisions for depn on invest 834 4,740 2,435 0 0
Provisions 10,165 12,924 22,109 21,757 26,458
Taxes 6,753 11,571 7,528 10,137 13,102
Net profit 20,094 30,078 17,422 23,652 30,571
Adj net profit 20,094 30,078 17,422 23,652 30,571
Balance sheet
Loans & advances 1,134,763 1,429,094 1,684,907 2,055,803 2,508,079
Investments 418,029 526,072 670,802 780,946 952,754
Fixed assets 24,261 25,319 25,319 31,476 31,476
Other assets 34,073 56,920 58,136 102,013 102,013
Total assets 1,788,300 2,255,018 2,749,665 3,173,488 3,797,573
O/w CASA 459,116 507,752 636,273 789,090 1,011,641
Borrowings 71,724 94,869 223,999 246,399 258,719
Other liab / Pref capital 110,562 128,114 85,746 91,513 91,069
Equity capital 5,259 5,259 5,259 5,259 5,259
Reserves 100,635 129,690 137,041 155,434 179,168

Bank of India

Loans/deposits 75.6 75.3 73.3 76.9 76.9
Investments / Deposits 27.9 27.7 29.2 29.2 29.2
CASA ratio 30.6 26.8 27.7 29.5 31.0
Loan growth 33.3 25.9 19.9 20 22
Deposit growth 25.1 26.5 17.5 20.0 22.0

NIM 2.7 2.8 2.4 2.4 2.6
Non-interest income/net income 33.4 35.7 31.3 27.0 26.0
Cost/income 41.7 36.2 43.8 41.9 39.6
Tax rate 25.2 27.8 30.2 30.0 30.0

Gross NPA (Rs mn) 1,931 2,471 4,884 6,321 7,939
Net NPA (Rs mn) 592 628 2,208 2,169 2,807
Gross NPA 1.7 1.7 2.9 3.0 3.0
Net NPA 0.5 0.4 1.3 1.0 1.1
Slippage 1.4 1.6 2.5 2.2 2.2

Total CAR 13.0 13.2 12.9 12.6 12.0
Tier 1 CAR 8.2 8.7 8.5 8.5 8.3

RoAE 24.4 25.0 12.6 15.6 17.7
RoAA 1.2 1.5 0.7 0.8 0.9
Valuation ratios
BVPS (Rs) 168 224 243 278 324
Price/BV (x) 2.1 1.6 1.5 1.3 1.1
Adjusted BVPS (Rs) 160 216 214 250 286
Price/Adj. BV (x) 2.2 1.7 1.7 1.4 1.2
EPS (Rs) 38 57 33 45 58
P/E (x) 9 6 11 8 6
Dividend yield (%) 1.1 2.2 2.0 2.8 3.6

Bank of India

Institutional
Initiating coverage
State Bank of India Neutral

Eq
2 July 2010 A mixed bag
India SBI’s headline PAT numbers will show a healthy growth albeit on a
Financial services lower base aided by NIM expansion, but it will be constrained by higher
provision charges, asset quality pressures, and imminent management
Price: Rs 2,262 transition. We recommend Neutral rating on SBI and believe capital
Target price: Rs 2,520 raising is a key trigger for the stock to be back in the reckoning.
Stock details Shifting gears from growth to profitability...

RoE declined from 15.5% in FY07 to 14.8% in FY10 (adjusted for treasury gains,
Bloomberg code SBIN IN
RoE has declined from 15.4% in FY07 to 12.5% in FY10) due to aggressive growth
MCap Rs/US$ mn 1,436,265/30,868
strategy, operating expenses having grown at 20% CAGR on the back of massive
Outstanding shares (mn) 635 ATM and branch expansion, and increased headcount. Market share gain strategy in
52-wk H/L (Rs) 2,630/1,511 most segments has resulted in sub-optimal margins which we believe will change
3m avg trd vol (US$ mn) 98.4 going forward.
Nifty / Sensex 5251/17509 ... but asset quality pressures and provision will be a overhang in FY11E
FY11 will see pressure in terms of headline numbers as we expect further slippages
Shareholding pattern (%) of ~10% from restructured accounts and additional provisions to meet 70% provision
100% 9 coverage ratio which if provided completely will have an impact of Rs50bn in FY11E.
17
We are factoring further 10% slippages in FY11. Corporate advances continue to be
14
50% under pressure with Rs 10bn of slippages in 4QFY10 and we expect further
59
slippages.
0%
Mar-07 Mar-08 Mar-09 Mar-10
... NIM improvement a saviour
Promoters FIIs DIIs Public & Others NIMs are expected to improve from 2.4% in FY10 to 2.6% in FY11 and further to
2.8% in FY12 on the back of repricing of deposits and reduction in surplus liquidity for
the Bank. Yield on advances are expected to remain strong as demand for
Stock performance (%) infrastructure segment continues to remain strong and demand from corporates is
1m 3m 1yr expected to pick up in FY11.
Absolute 2.4 7.6 27.1
Valuation
Nifty 5.7 (0.7) 21.0 SBI trades at 1.6xFY12E ABV (adjusted for value of subsidiaries) and 10xFY12E
140 earnings with an RoE of 18.2% in FY12. Management has given guidance for 25%
growth in profit for FY11 which appears a tall task considering the bad debt
110 provisions to be made in FY11. Also, a planned equity dilution will lead to decline in
profitability ratios. Our SOTP target price for the stock at Rs.2,520 leaves limited
80 room upside from current levels. Neutral
Nifty Index SBI Figure 174: Key financials
Source: Bloomberg, Prowess. Rs million, year-end March

PAT 67,292 91,213 91,451 114,605 144,699
EPS (Rs.) 106 144 144 181 228
EPS (consensus) (27) 156 171 212
Saikiran Pulavarthi EPS growth 22.9 35.5 0.3 25.3 26.3
saikiran.pulavarthi@indiabulls.com
+91 22 3980 5203 ROE (%) 16.8 17.1 14.8 16.4 18.2
PE (x) 21.3 15.7 15.7 12.5 9.9
Deepak Agrawal ROA (%) 1.0 1.1 0.9 1.0 1.1
deepak.agrawal@indiabulls.com P/ABV (x) 3.3 2.8 2.5 2.2 1.9
+91 22 3980 5496
State Bank of India
Figure 175: SBI’s provision coverage needs to be taken to 70% by FY11, which will
put pressure on profits
Units as shown
7.0 70
6.0
6.0 60
5.0 50
4.0 3.9 40
2.9 3.0 2.9 3.0 3.1
3.0 2.6 2.9 30
2.0 1.8 1.6 1.8 1.8 1.7 20
1.2
1.0 1.1 10
0.0 0
Figure 176: Factoring 200bps higher growth in advances than industry for FY11-
FY12
Units as shown
10,000 35
29
29 30 30
8,000
23 25
24 22
6,000 20
16 15
4,000
10
2,000
5
0 0
Net Loans & Advances (Rs bn) - LHS YoY growth % - RHS

State Bank of India
Figure 177: Highest CASA % among PSU banks

Units as shown
5,000 50
48
48
4,000 47
48 45 46
3,000 45
44
43
2,000 42
41 42
40
1,000
38
0 36
Figure 178: Margins are expected to improve as surplus liquidity drains

Units as shown
4.0 9.0
3.5 8.0
3.0 7.0
2.5 6.0
5.0
2.0
4.0
1.5 3.0
1.0 2.0
0.5 1.0
0.0 0.0

State Bank of India
Figure 179: PAT to be under pressure due to higher provisions inspite of

improvement in NII
Rs bn
400 35
350 30
300 25
250
20
200
15
150
100 10
50 5
- 0
NII - LHS PAT - LHS Provisions as % of NII - RHS
Figure 180: SBI leveraging on technology and syndication capabilities

Units as shown
160 35
140 29 30
27
120 25
20 23 24
100
20 20
80 14
15
60 13
40 10
20 5
0 0

State Bank of India
Figure 181: Expect SBI to sustain fee income at current levels

Units as shown
30 1.2
0.9 1.0 1.0
25 0.8 0.8 1.0
0.8 0.8
20 0.8 0.8
15 0.6
10 0.4
5 0.2
- -
Figure 182: Factoring much lower growth on the back of rising interest rate scenario
Units as shown
250 20
18
200 15 15
150
9 10 10
100 9
5 5
50
0 0
(1)
(50) -5

State Bank of India

Rs Rs
3,000 16x 2,500
2,500 2.0x
12x 2,000
2,000
1,500 1.5x
1,500 8x
1,000 1,000 1.0x

4x
500 500 0.5x
0
0
Figure 185: SBI's DuPont analysis

%

(1-tax rate) 40.4 35.5 35.7 34.2 34.2 34.2
Return on Assets 0.9 1.0 1.1 0.9 1.0 1.1
Return on Equity 15.4 16.8 17.1 14.8 16.4 18.2

%
SBI
CoE 14.6
Rf 7.7
Beta 1.1
Market Return 14.0
Growth (Gn) 5.0
Normalised RoE 17.0

State Bank of India
Figure 187: SOTP

Units as shown
Particulars Value (Rs. Bn) Value per share (Rs.) Valuation Methodology
SBI - Standalone 1,197 1,887 1.6x FY12E Adj BV
Banking Subs 261 412

State Bank of Hyderabad 124 1.5 x FY12E Adj BV
State Bank of Patiala 86 1.3 x FY12E Adj BV
State Bank of Travancore 59 1.5 x FY12E Adj BV
State Bank of Bikaner 51 1.5 x FY12E Adj BV
State Bank of Mysore 48 1.3 x FY12E Adj BV
State Bank of Indore 43 1.3 x FY12E Adj BV
SBI Life 162 15x FY12E NBAP NBAP Margin 17%
Others 53 83
Holding Co disc 10%
Non Bkg Subs Value after discount 283 221
Value (Rs.) 1,480 2,519

CMP 2,262
Upside (%) 11.4

State Bank of India


Interest income 489,503 647,384 709,939 871,245 1,077,499
YoY growth (%) 13.0 22.6 13.4 22.0 25.6
YoY growth (%) 28.5 46.0 17.8 17.5 0.0
Fee & other income 77,375 101,270 128,407 158,844 188,958
Total income 257,161 335,639 386,187 464,493 561,790
YoY growth (%) 6.6% 24.1% 29.8% 16.2% 0.0%
Exceptionals
Provisions for depn on invest (887) 7,072 (9,686) 0 0
Provisions 26,687 37,346 43,948 54,174 60,695
Taxes 37,098 50,594 47,600 59,652 75,316
Net profit 67,292 91,213 91,451 114,605 144,699
Adj net profit 67,292 91,213 91,451 114,605 144,699
Balance sheet
Loans & advances 4,167,682 5,425,032 6,319,140 7,772,542 9,482,501
Investments 1,895,012 2,759,540 2,857,900 3,254,257 3,709,853
Fixed assets 33,735 38,380 44,130 48,543 53,397
Other assets 444,170 377,330 351,130 386,243 424,867
Total assets 7,215,262 9,644,319 10,534,140 12,477,947 14,777,297
O/w CASA 2,523,628 3,089,778 3,465,630 4,125,115 4,702,631
Borrowings 517,274 537,140 1,031,020 1,671,109 2,469,112
Other liabilities 833,623 1,106,971 803,370 903,370 1,003,370
Equity capital 6,315 6,350 6,350 6,350 6,350
Reserves 484,012 573,128 653,140 730,196 848,173

State Bank of India

Loans/deposits 77.6 73.1 78.6 84.8 90.7
Investments / Deposits 35.3 37.2 35.5 35.5 35.5
CASA ratio 47.0 41.6 43.1 45.0 45.0
Loan growth 23.5 30.2 16.5 23.0 22.0
Deposit growth 23.4 38.1 10.0 14.0 14.0

NIM 2.8 2.6 2.4 2.6 2.8
Non-interest income/net income 34 38 39 38 35
Cost/income 49 47 53 51 50
Operating cost growth 7 24 -30 16 19
Tax Rate 36 36 34 34 34

Gross NPA (Rs mn) 99,982 128,373 157,133 195,343 241,468
Net NPA (Rs mn) 52,577 74,243 96,773 108,703 94,211
Gross NPA 3.0 2.9 3.0 3.1 2.9
Net NPA 1.8 1.8 1.7 1.2 1.1
Slippage 2.1 2.3 2.0 2.5 2.3

Total CAR 12.5 14.3 13.4 12.1 11.8
Tier 1 CAR 8.5 9.4 9.5 6.7 6.5

RoAE 16.8 17.1 14.8 16.4 18.2
RoAA 1.0 1.1 0.9 1.0 1.1
Valuation ratios
BVPS (Rs) 773 913 1,039 1,161 1,347
Price/BV (x) 2.9 2.5 2.2 1.9 1.7
Adjusted BVPS (Rs) 691 807 920 1012 1179
Price/Adj. BV (x) 3.3 2.8 2.5 2.2 1.9
EPS (Rs) 106 144 144 181 228
P/E (x) 21 16 16 13 10
Dividend yield 0.9 1.3 1.3 1.6 1.6

State Bank of India
Key to Indiabulls Institutional Equities recommendations:

Outperform= Expected total return is more than 15%
Neutral= Expected total return is less than 15% but more than zero.
Underperform= Expected total return is negative
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Financial services

Headed for next cycle of growth ......................................................................................... 4

ICICI Bank ............................................................................................................................ 39

2 July 2010 Indiabulls Research 2

PNB 2.3 0.4 49.2

SBI 2.4 7.6 27.1 Our sector call: Outperform

Figure 1: Valuation summary

P/ABV (x) P/E (x) RoE (%)

Headed for next cycle of growth

Loan growth at CAGR 22% during FY10-12E

Figure 2: Credit growth to nominal GDP growth ratio

Source: RBI, Indiabulls research.

What will drive credit growth in FY11-FY12?

Infrastructure to contribute 25% of incremental credit

· Planning Commission estimates have put demand from infrastructure projects at

· Private participation has increased in the infrastructure space.

2 July 2010 Indiabulls Research 4

Figure 3: Infrastructure to witness significant investments in the current plan

FY07–08* FY08–09* FY09–10* FY10–11* FY11–12* Total Eleventh Plan

Figure 4: Domestic banks to play dominant role in infrastructure funding

FY07–08* FY08–09* FY09–10* FY10–11* FY11–12* Total Eleventh Plan

Secured Retail to aid credit growth further

2 July 2010 Indiabulls Research 5

Figure 5: Housing loan portfolio

Axis BoB BoI PNB HDFC Bk ICICI SBI Union

Source: SIAM, Indiabulls research.

Why we think 30% credit growth achieved in last cycle is unlikely in

· IMF analysis suggests that, internationally, significant improvement in credit to GDP

· India is closer to 50% in terms of Credit/GDP ratio and 4% avg increase in

2 July 2010 Indiabulls Research 6

Source: RBI, Indiabulls research.

2 July 2010 Indiabulls Research 7

Loan growth assumptions for companies under coverage

Figure 9: Our loan growth assumptions

2 July 2010 Indiabulls Research 8

Margins to be flattish on a high base

· We expect sector-wide margins to be to be flattish as further benefits of liability re-

Figure 10: Our margin assumptions

NIM Axis BoB BoI HDFC Bk ICICI PNB SBI Union

Average lending rates Lending spread

Source: Company, Indiabulls research.

2 July 2010 Indiabulls Research 9

Source: Bloomberg, Indiabulls research. Source: Bloomberg, Indiabulls research.

Deposit rates expected move higher in few months as CD ratio is

Figure 14: Deposit rates are driven by the CD ratio

CD Ratio (%) SBI 1 yr Deposit rates

Source: Company, Bloomberg.

2 July 2010 Indiabulls Research 10

Figure 15: Deposit rates to inch upwards as CD ratios peaked

10-15bps impact on NIMs from daily interest calculation on SB deposits

2 July 2010 Indiabulls Research 11

Figure 18: ... unlikely to improve further as % of assets

FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Figure 19: Highest dependence for HDFC Bank on insurance payouts

2 July 2010 Indiabulls Research 12

Treasury income to moderate in FY11-FY12E

Figure 20: Building in lower treasury income

Asset quality: Worst seems over

Figure 21: Restructured book behaved well until FY10

2 July 2010 Indiabulls Research 13

Figure 22: Restructuring as % of total advances

Restructured / Total advances

Source: Company, Indiabulls research.