Flashnote

abc
Global Research

Banks
Commercial Banks
Equity – India
Indian Financials
Roadshow wrap: Waiting for the April spring
 The future: Basel III and IFRS are key variables for 2013

 The present: Mediocre loan growth, flat margins and more

slippages was the story for the remainder of this year; but
expectations of easier liquidity, quicker loan growth and
improving asset quality are likely beginning FY12

 The recent past: Bribery case, telecom and microfinance

exposures do not appear to worry most banks; our top picks
remain smaller private banks – YES, IndusInd – while PSUs
have some way to go before we get convinced
7 December 2010
Sachin Sheth*
Analyst We met CEOs, CFOs of 14 financial companies across a three-day roadshow with the mood
HSBC Securities & Capital Markets
(India) Private Limited
being guarded to optimistic. The troika of recent concerns dominated discussions as did the
+91 22 2268 1224 twin issues of new capital and accounting norms, and a view on operational outlook.
sachinsheth@hsbc.co.in
Three recent concerns? Not really: While most banks relegated the bribery news to the
Tejas Mehta *
Analyst past, classifying them as individual cases of corruption, the impact was likely to be a
HSBC Securities & Capital Markets short-term delay in loan processing and approvals, particularly for the commercial real
(India) Private Limited
+91 22 2268 1243
estate sector where the consequence might be lower prices. Similarly, in the opinion of
tejasmehta@hsbc.co.in several participants the telecom scam repercussions were unlikely to be more than some
Todd Dunivant* sorts of penalties being charged. In addition, banks’ exposure to new 2G players is
Head of Banks Research, Asia Pacific relatively low. The microfinance issue was the only issue for which participants
The Hongkong and Shanghai Banking
anticipated tangible losses in the near term, but that too was underplayed as exposure
Corporation Limited
+852 2996 6599 proportion was generally about 1% of loan book and about 30% was Andhra Pradesh
tdunivant@hsbc.com.hk related exposure. Also with more clarity expected on regulation by January, the potential
View HSBC Global Research at: spread of default to other states looks limited.
http://www.research.hsbc.com
*Employed by a non-US affiliate of Near-term outlook – guardedly positive: System loan growth seen at 18-20% this year
HSBC Securities (USA) Inc, and is not
registered/qualified pursuant to FINRA and a little higher next year driven by infra and secured retail loans, working capital
regulations showing some signs of pick-up given tight liquidity, but manufacturing capex not yet
Issuer of report: HSBC Securities and evident. Most expected their margins to remain flat barring specific cases like IDBI Bank
Capital Markets
(India) Private Limited and IndusInd, who expect a structural uptick. Slippages likely to continue for the next
quarter or two, but at a reducing pace. Easier liquidity starting April 2011 and pick-up in
Disclaimer &
loan growth likely to drive earnings beyond the next 4-5 months.
Disclosures
This report must be read 2013 changes: With higher capital requirements almost being a certainty under Basel III
with the disclosures and and IFRS accounting likely to result in generally a neutral to positive impact, we prefer
the analyst certifications in smaller, higher growth, higher visibility, better capitalised private banks over PSUs.
the Disclosure appendix,
and with the Disclaimer,
which forms part of it
2

India Financials - Reverse Roadshow, 29 Nov-1 Dec, 2010

7 December 2010
Commercial Banks
Indian Financials
Bribery case Microfinance update Telecom investigation Growth Rates & Margins Asset Quality Capital, Basel 3 Others

Axis Bank - Shishir PSU banks likely to go slow System exposure Rs300bn 2G licenses of concerned Expect system loan growth Seeing pricing pressure on Axis' real-estate exposure is Min tier 1 is 9% and the Not yet looking to
Mankad, VP Finance on commercial real estate = 0.75% of loan book and 1- companies unlikely to be of 19-20% in FY11 helped mortgages (8% not 4% and 2/3rd is rental Bank is on track to run manufacture insurance
lending in near term as risk- 1.5% including direct cancelled - too many issues by post harvest agri + retail feasible). Axis' CASA discounting, and bulk of the down existing Tier 1 by products
reward is skewed exposure to SHGs. AP to be dealt with. Rollout (secured) + infrastructure hovering at 40-41% on a balance is project finance early calendar 2012
exposure = 30-35%. Axis times likely to be extended disbursements. WC loans daily avg basis. Non-retail related lending. Credit costs
exposure Rs13bn (no direct and monetary penalties are disintermediated part of term deposits is are 120bps currently and
SHG exposure). CF gap likely to be enforced because of 1) higher higher to match asset target is 100-120bps in near
likely at MFI level as efficiency at corporates (as maturities of 6-9 mths. term. Longer term
payment cycle elongates a result of a tighter cycle), Margins likely to dip in the normalised costs are 80-
and hence may come up for 2) manufacturing capex not initial part of the upcycle. 100bps. No noticeable
rescheduling. Will wait for yet gaining visibility Exit margins at 3.5% in improvement in slippages
Malegam committee FY11. In FY12 margins will as yet (Rs4.5bn in 1Q and
recommendations next lose support of equity raised 2Q) - mainly SME related.
month. ROAs of MFIs could last year Not yet fully comfortable on
halve from current 5-6% textile and gems & jewellery
levels exposure
BOI - BA Prabhakar, ED These are individual-related No significant MFI exposure Credit demand strong but Wholesale deposits have Continued stress with the Tier 1 of 8.4% is ROA target of 1.1% is
cases, the Bank's internal or lending liquidity remains tight repriced over the last 2-3 level of 2Q slippages likely comfortable for a year achievable. Government
processes haven't been months, now it is retail to continue for 2 more spending has been slow -
compromised. No individual deposits. CASA growth at quarters, mainly on smaller probably they are trying to
in BOI has sanctioning 28%. Expect the 10yr to be loans including agri. No conserve cash for next year
powers, but only in a range of 7.95-8.05% shocks expected from
recommendation powers. international loan book
The 3 corporates mentioned
are not brokered by Money
Matters, which was also
mentioned in the CBI
investigation. Impact is
likely to be somewhat on
morale and time spent on
responding to the Govt,
media, etc. Short-term delay
expected in processing new
cases; have now separated
marketing and underwriting
functions - this is likely to
speed up turnaround time
as some proposals will
come directly to the Head
Office
Source: Company management, HSBC

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 India Financials - Reverse Roadshow, 29 Nov-1 Dec 2010

7 December 2010
Commercial Banks
Indian Financials
Bribery case Microfinance update Telecom investigation Growth Rates & Margins Asset Quality Capital, Basel 3 Others
CRISIL - Suman Choudhury PSU banks' incentive System growth seen at 18- Some slippages expected Focus is on liquidity and
(Head - Financial sector structure is very different 20% on the back of 9% for the next 1-2 qtrs likely to stability. Most Indian banks
ratings) from private banks, hence industrial production growth add 40bps to Gross NPL well positioned given large
more vulnerable to such for FY11 ratios. 20% slippage retail deposit base. CRE
cases. Also PSUs typically expected on restructured risk weights may increase
don’t meet customers, loans. Moratorium on about
rather expect branch walk- 60% of restructured loans is
ins, hence need through, about 40%
intermediaries more than remaining which is likely to
private banks. Illegal be done by 1Q FY12.
gratification is Modified credit ratio
predominantly to move files (upgrades/downgrades)
faster and not so much to currently at 1.07 (vs. peak
dilute quality of of 1.2 in 2005 and 0.85 in
underwriting. Impact is that FY10)
individual sanctioning power
may be curtailed or
reviewed at PSU banks.
HDFC Bank - Paresh Near-term pause expected Some pain expected given HDBK generally has not Corporate and retail CASA deposits likely to
Sukthankar (ED), Pralay in loan growth but political mileage extraction. taken exposure to new growing at same pace for grow given higher flows in
Mondal (Country Hd, retail normalisation thereafter. Equity likely to bridge the players in the sector HDBK. Corporate capex is economy but HDBK's core
assets & credit cards) gap of bank financing given lagging, infra has dominated CASA likely to decline a few
less demanding valuations. and WC has seen some percentage pts and 'fluff'
Once the loss scenario decent growth given higher CASA likely to disappear.
abates, banks likely to step corporate revenue growth. Savings rate deregulation is
in to boost liquidity. Corporate access to money uncertain and likely to be
Possibility of spreading to market has come off given discussed by committees in
other states is lower given tightness. Corporate capex the medium term
that timeline for the has been mainly funded by
committee report is near. cash surpluses and forex
HDBK's exposure is less loans. System growth in
than 1% of loan book to FY12 seen at 20-22%
MFIs and 0.07% directly to
SHGs

Source: Company management, HSBC

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4

India Financials – Reverse Roadshow, 29 Nov-1 Dec 2010

7 December 2010
Commercial Banks
Indian Financials
Bribery case Microfinance update Telecom investigation Growth Rates & Margins Asset Quality Capital, Basel 3 Others
ICICI Bank - Chanda No loan quality issue. Not Other than AP where ICBK has no direct Domestic corporate loan Domestic NIMs unlikely to Avg credit cost is 100bps Weightage for systemic ROA targeted at 1.6% with
Kochhar (MD & CEO), Rajiv much clarity when news collections are low, they are exposure to 3G companies, growth at an annualised improve substantially, with near term trends likely buffer and large complex ROE at 15% by FY12. UID
Sabharwal (ED), Puneet flow is likely to abate on normal elsewhere. So far exposure to 2G was mainly rate of 30% in 2Q. System international NIMs may to dip below that level. SME corporates likely to increase expenses are a cost centre
Nanda (ED), Satyan this. Some changes Oct & Nov obligations have working capital (non fund loan growth likely at 18% in improve to 100bps. credit quality is fine for pvt T1 requirements. Currently right now with 3 years
Jambunathan (SVP & Head expected in PSU banks been met. Near-term growth based). FY11 with ICBK at 15% ex- However, higher domestic sector. There is a difference T1 is 14% and T2 = 6% for gestation. 4 focus areas -
Finance) methods – disintermediation likely to be impacted so also BOR. Structural change in loan mix likely to pull up between SME credit quality ICBK Mortgages, CV & car loans,
likely to reduce, but growth cash flows over the next deposit mix seen with overall NIMs as current mix for pvt and PSU banks. project finance and working
may not really slow down. couple of months. Industry corporate surpluses going of international book at 25% capital
needs more equity either towards investments. Car likely to reduce to 15% over
from existing or new and CV loan market 3 years
investors or conversion of growing at 30% p.a. and
existing debt to equity. What likely to grow at 15% for
is required is a single-point CVs and 20% for cars going
regulator without an ahead. Mortgages growth
interference from state level steady in rest of country ex
bodies. Credit bureaus need Mumbai and NCR - some
to examine family's total price correction expected in
indebtedness rather than South and mid-Mumbai.
single-person exposures. SME growth seen in auto,
For ICBK MFI exposure is suppliers to power
1% of loan book. companies, pharma. Rural
aim is to do secured loans
(e.g. jewellery loans, tractor
loans, etc). Real estate -
may see swing towards
residential projects as cash
flows come in relatively
quicker vs CRE.
IDBI Bank - P Sitaram No exposure to 3G. Low Continue to expand 300 Focus now on CASA System can absorb another T1 at 8.88% and 7.4% Have completed all
(CFO) exposure to 2G players branches by FY11 end, (recently waived all savings 50bps rate hikes before under Basel 3 regulatory requirements
currently at 762. Term acct charges). CASA target credit quality starts getting except PSL for which
deposit growth likely to be at 18% in FY11 and 25% by impacted. Avg credit costs deadline is Mar11
challenging as incremental FY13. At least 1.75% NIMs at 100bps
money going into savings expected for FY11, 2.2% in
and other instruments. FY12 and 2.5% in FY13 -
Savings rate deregulation ROA target at 1.2%. Would
may happen next year. Old like to bring down bulk
committed infra loans and deposits from 65% to 50%
priority sector likely to drive of term deposits.
loan growth of 12-13%
Source: Company management, HSBC

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 India Financials - Reverse Roadshow, 29 Nov-1 Dec 2010

7 December 2010
Commercial Banks
Indian Financials
Bribery case Microfinance update Telecom investigation Growth Rates & Margins Asset Quality Capital, Basel 3 Others
IndusInd Bank – Romesh Consumer loans are the Vehicle finance gross yields Vehicle financing is a 25 yr RBI hinting at 15% CAR ROA target is 1.6% and with
Sobti (MD & CEO), Paul 'new wind in the sails' andat 16% help achieve old business at 42% of total implying Tier-1 of 10% and 14-15x leverage ROE is
Abraham (COO), KS are viewed by IIB as yield blended yields of 12.1% loan book. Have seen 5-6 Tier-2 of 5% 20%plus. ESOP pool is 7%
Sridhar (Chief Risk Officer) enhancers. Will launch which is highest in the downturns in 25 cycles. of capital base but only
credit cards, but only for industry. Bulk deposits now High entry barriers. issued 4.5% of that so far.
brand visibility. IIB also down to 50% of term Rebranding initiatives are
likely to originate home deposits. 100bps increase on the backburner. IFRS
loans for HDFC with all in in CASA mix implies 6-7 impact is that NPL
fees of 1.5%. Need branch increase in NIMs. Target is recognition could change as
density in 20 cities in the N
35% CASA. Believe that could derivatives accounting
& W (i.e. 3-4% market CASA retention is mainly
share). About half of branch
involuntary by customers. 3-
openings in Tier 1 & 2 cities
year target for CASA is
and remaining in Tier 3-6 Rs240bn in line with CV
loan book.
SBI - SS Ranjan (DMD & No slowdown seen as a MFI exposure for SBI at New 2G players exposure Deposit growth will be 3% SBI does not rely on money Attempt to keep Gross 9.5% Tier 1 expected by Intended cap on non-staff
CFO) consequence of this case. Rs8bn with AP exposure at Rs5-10bn lower than loan growth. FY markets for funding. NPLs flat at Jun 10 levels 2013. Min T1 requirements expenses growth of 5%
Branch managers in SBI less than Rs3bn. SHG 12 loan growth seen at 22% Margins likely to increase by by Mar11. 14% slippage in likely to be hiked to 10% by likely to increase to 10-12%.
have only sourcing powers, exposure is Rs15-16bn and FY11 at 18-19%. 500- about 5bps. Volatility in core restructured book - majority 2015 but in near term min. Staff expenses likely to
no individual sanctioning (12.5% interest rate on 600 branch expansion savings accts is low at 5- is done. Last moratorium by could be hiked to 8%. grow 8-9%. Cost/Income
power. reducing balance basis envisaged each year. Fee 6%. Incremental cost of Sep10. 20% is the slippage Rights issue is targeting T1 ratio target at 38-40% over
growth of 20-30% over next funds is 5.27%. By 2Q12, expected for industry and of 10% by year 3 2 yrs vs 45% currently as
3-4 years as GDP growth Rs400bn of 1,000 day hi- hence balance 4-5% income increases quicker.
accelerates. Working capital cost deposits will have expected to be spread over QE2 could be a problem to
lending improving as repriced and also equity next 4-5 quarters. Credit manage inflation volatility. If
inventory unwinding is issuance in Mar11 is likely costs target is 80bps with inflation held at 8%, it is an
coming off. to help move margins to retail costs expected to achievement
3.5% levels decline. 70% coverage by
Sep12 but trying to achieve
by Mar or Jun11. Rs10bn
recoveries seen from written
off assets annually
YES Bank - Rajat Monga Appears to be mainly speed Some talk and expectations Issue only with new 2G High rates and tightness
(CFO), Aparajit Bhandarkar money. Some pushbacks of loan waivers (on the line operators. Even with those, expected until March
(VP) and delays in disbursement of farm loan waiver). The many of them have little or
expected in absence of real problem is the non- no debt, or have started
facilitation fees. banking finance company operations or have parent
(NBFC) MFIs guarantees. YES's
(moneylenders in the garb exposure is mainly to old
of MFIs). YES exposure to 2G and wireless broadband
MFIs is 1% of loan book – players. 3G loans have
with no direct self-help been paid down
group (SHG) exposure.
Andhra exposure is USD15-
20m which is about 25-30%
of 1% exposure and if these

abc
AP companies were to go
down, about half could
potentially be recovered.
However, a likely scenario
is a restructuring.
Source: Company management, HSBC
5
6

India Financials - Reverse Roadshow, 29 Nov-1 Dec 2010

7 December 2010
Commercial Banks
Indian Financials
Bribery case Microfinance update Telecom investigation Growth Rates & Margins Asset Quality Capital, Basel 3 Others
Non Banks
HDFC Ltd - Keki Mistry (VC Unlikely to step in to fill any 20-25% growth comfortable Jan-Mar yield curve may CRE funding likely to see Life sub listing could result
No plans to enter education
& CEO) potential 'void' from in medium term, led by steepen as govt spending short term hesitation from in some release of capital.
sector currently. IFRS
competitors who have been urban population proportion resumes (short rates down) PSU banks and hence implementation in 2013
caught in the cross currents increasing from 28% to and credit offtake some downward impact likely to result in lower PB
of this case. 40%. Not very reliant on accelerates (long yields up). likely on property prices. multiple from market value
South Mumbai where Real estate risk weights accounting of gains in listed
demand has slowed - could be increased and and unlisted subs and at the
mainly Northern Mumbai. residential mortgages could same time not likely to
be reduced. result in a collapse of ROE
given share of profit from
subs, also NPL accounting
could help HDFC as well as
upfront accounting on
selldown of loans.
IDFC - LK Narayan (ED & IDFC uses no 19% of assets mainly 2G US$8bn pipeline likely to Duration of assets is 2.5 Risk-reward framework has Recent capital raising of Non-interest income is 45%
Group CFO), Bimal Giri (Sr intermediaries. exposure (tower business). play out over 18-2 months years – same as that of slipped for some Rs35bn is to increase ticket of operating income. In talks
Director) Telco risks have changed and thus despite new PSU banks. IFC status aggressively bid road size of financing. Credit with strategic partner for MF
and margins are negatively projects being on the likely to help in 1) higher projects. IRR sensitivity to agencies are comfortable business for tapping
impacted. Too many players periphery no slowdown is exposure limits by banks, 2) interest rates has to be with leverage of 6.5-7x. international pools of
- see consolidation. 2G expected. Target is to treble access to automatic ECB seen in perspective of Target to increase Tier 2 money. Equity book is
tainted players may end up balance sheet in 3-4 years approval, 3) access to financing costs being only capital from 2.5% to 5%. Rs28bn of which Rs13bn is
paying higher fees. from Rs330bn currently. domestic funding under 12-15% of project costs. in subs.
sec.80CCF and 4) potential
access to pension funds.
Infra business NIMs stable
at 3.4% incrementally and
on stock basis, with gross
spread at 2.5%.
Insurance
HDFC Std Life - Vibha FY11 target 20-25% and Next 12-15 months will go HDFC Bank does 60% of
Padalkar (CFO) FY12 10-15%. back to 15-20% margins Life company's origination.
from higher levels currently. If bancassurance is
If no cost cutting were liberalised, fees paid may
undertaken, margins would decrease. DTC - EV impact
fall to single digits. Hence could be 20-25%. IFRS both
efforts to cut fixed cost base costs and revenues would
& increase productivity. be amortised (only direct
Persistency has improved costs)
from 65% to 80%. Product
mix incrementally is 10%
traditional, 90% Unit linked
insurance policies (ULIPs).
Source: Company management, HSBC

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 India Financials - Reverse Roadshow, 29 Nov-1 Dec 2010

7 December 2010
Commercial Banks
Indian Financials
Bribery case Microfinance update Telecom investigation Growth Rates & Margins Asset Quality Capital, Basel 3 Others
ICICI Pru Life - Puneet NBAP margins have
Nanda (ED), Satyan dropped given expenses
Jambunathan (SVP & Head and persistency. Hence,
Finance) expense cut required to
maintain margins. New
products far more
favourable to customers
hence persistency likely to
increase despite drop in
commission rates. Greater
focus on protection
products. Current quarter is
one of adjustment to new
norms. 15% growth seen in
FY11 and higher after that.
Reliance Life - Sam Ghosh DTC implementation may NB margins intact. Business USD1b required this year In talks with partners for an
(CEO Reliance Capital) slow sales somewhat, mix is now 50% ULIPs and and USD2.5b next year and alliance. IPO - waiting for
savvier large-ticket holders 50% traditional non par. then self sufficient after that. regulations to be finalised.
may opt out but smaller Cost strategy is to cut IFRS will be positive as
holders will not. branches. Waiting for DAC will be permitted.
regulatory changes on However, cannot book ULIP
bancassurance as fees are premium in topline, only fee
too high. income.
Source: Company management, HSBC

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7
 Indian Financials
Commercial Banks abc
7 December 2010

Valuations and risks

We value Indian banks using a weighted average combination of PE, PB, and economic profit model (EPM)
methodologies. We assign a 75%, 15% and 10% weight each to the PE, PB and EPM components,
respectively. The three-stage EPM uses explicit forecasts until FY13e (other than HDFC, for which we have
estimates till FY12e), followed by 10 years of semi-explicit forecasts. The final stage of 12 years (fade period)
assumes convergence of ROE and COE. EPM is based on the assumptions in the following table.

Coverage Stocks: Economic Profit Model (EPM) assumptions

BOB CNBK PNBK SBI BoI UNBK AXSB HDBK ICBK HDFC Yes IIB
Semi-explicit forecasts for 10 yrs
Loan CAGR 8% 8% 11% 8% 13% 8% 13% 20% 14% 14% 13% 13%
Dividend payout 20% 20% 20% 20% 13% 20% 23% 25% 30% 45% 13% 13%
Fade period of 12 yrs
Risk free rate 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8%
Beta 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.7 1.0 1.0 1.0 1.0
Equity risk premium 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%
Cost of Equity 14% 14% 14% 14% 14% 14% 14% 12.2% 14% 14% 14% 14%
EPM value 882 745 1,407 1,816 677 432 849 2,190 685 547 301 174
Source: HSBC estimates

Coverage stocks: Valuations & risk factors

PE multiple PE-based PB multiple PB-based DCF value Weighted Upside risks Downside risks
TP TP TP (INR)
Weight 75% 15% 10%
Public sector banks
BOB 7.7 1,146 1.3 817 882 1,070 Better than expected loan growth Worse asset quality, unascertained pension
and asset quality liability, chairman retiring in FY13
CNBK 7.0 859 1.2 635 745 814 --- Higher slippages, lower margins,
management change in 2HFY13
PNBK 6.8 1,396 1.4 1,252 1,407 1,375 Improved pricing power, lower- Worse asset quality
than-estimated pension liability
SBI 11.7 2,901 1.8 2,979 1,816 2,800 Higher margins, lower credit and ---
opex costs
BOI 6.7 526 1.4 559 677 546 Faster asset quality recovery, Worse asset quality, higher credit costs
higher margins
UNBK 6.8 444 1.2 345 432 428 Better asset quality, lower-than- Chairman retiring in FY13
estimated pension liability
Private sector banks
AXSB 18.9 2,115 2.6 1,534 849 1,900 --- Slower than expected loan growth and
margins
HDBK 24.3 3,001 3.6 2,512 2,190 2,850 --- Slower than expected loan growth,
worsening asset quality
ICBK 23.4 1,457 2.2 1,209 685 1,350 --- Slowing loan growth momentum, spike in
NPLs
YES 18.0 595 2.5 381 301 534 --- Liquidity crisis leading to slower growth,
significantly worse asset quality, slower
branch expansion
IIB 24.0 446 3.0 311 174 400 --- Attrition of top management, branch rollout
execution risk, worse than expected
slippage in asset quality
HDFC 24.0 609 5.0 607 547 602 Quicker recovery of mortgage Higher commercial loan defaults, irrational
markets pricing environment
Source: HSBC estimates

8
 Indian Financials
Commercial Banks abc
7 December 2010

India Banks coverage universe (closing price as on 3 December 2010)

RIC Code Stock Market Target Potential Rating Market ________HSBC P/E _________ ________HSBC P/B_________ EPS
price price cap CAGR
INR/sh INR/sh return (USDm) FY11e FY12e FY13e FY11e FY12e Fy13e Fy10-13e
Public Sector banks
BOB.BO Bank of Baroda 959 1,070 13.8% N 7,746 8.9 7.3 6.0 2.1 1.7 1.4 24.0%
CNBK.BO Canara Bank 729 814 13.0% OW 6,628 7.8 6.6 5.6 1.9 1.5 1.2 21.2%
PNBK.BO Punjab National 1,274 1,375 10.5% N 8,906 9.1 7.1 5.6 2.0 1.7 1.3 22.3%
BOI.BO Bank of India 482 546 15.5% N 5,608 8.7 7.0 5.6 1.7 1.4 1.2 37.5%
SBI.BO SBI 3,071 2,800 -7.4% UW 43,231 17.1 14.0 11.4 2.6 2.0 1.8 23.0%
UNBK.BO Union Bank 367 428 18.0% N 4,110 8.8 6.2 5.2 1.7 1.4 1.1 19.7%
Private Sector banks
AXBK.BO Axis Bank 1,406 1,900 36.0% OW 12,772 18.3 14.5 11.5 3.1 2.7 2.2 23.9%
HDBK.BO HDFC Bank 2,396 2,850 19.6% OW 24,632 27.9 22.1 17.8 4.4 3.8 3.2 26.2%
ICBK.BO ICICI Bank 1,181 1,350 15.5% OW 30,079 25.9 21.3 17.6 2.4 2.2 2.0 23.0%
HDFC.BO HDFC 695 602 -12.1% N* 22,539 29.3 24.3 na 6.0 5.3 na na
YESB.BO Yes Bank 330 534 62.2% OW* 2,530 16.7 12.0 8.9 3.1 2.5 2.1 38.2%
INBK.BO IndusInd Bank 291 400 38.0% OW 3,001 25.8 18.5 13.6 3.5 3.1 2.6 35.9%
Note: Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points above and below the hurdle rate for Indian stocks of 10.5% and for stocks without a volatility indicator, the Neutral band is 5
percentage points above and below the hurdle rate for Indian stocks of 10.5%. Our target prices provided upside potential that was above, below, or within the Neutral band of our model at the time we set our target; therefore, we rate
the stock OW(V), OW, UW, N(V) or N(V), as indicated in the “Rating” column above.
* We have removed the volatility flag from ratings of Yes Bank and HDFC as, under HSBC’s ratings system, these stocks are no longer considered volatile (see Disclosures for fuller explanation).
Source: Company data, Bloomberg, HSBC estimates

9
 Indian Financials
Commercial Banks abc
7 December 2010

Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Sachin Sheth, Todd Dunivant and Tejas Mehta

Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,

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 Indian Financials
Commercial Banks abc
7 December 2010

stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 06 December 2010, the distribution of all ratings published is as follows:
Overweight (Buy) 47% (22% of these provided with Investment Banking Services)
Neutral (Hold) 38% (18% of these provided with Investment Banking Services)
Underweight (Sell) 15% (21% of these provided with Investment Banking Services)

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price Date Disclosure
AXIS BANK LTD AXBK.BO 1406.15 06-Dec-2010 1, 2, 4, 5, 7, 11
BANK OF BARODA BOB.NS 959.20 06-Dec-2010 1, 5, 6, 7, 11
BANK OF INDIA BOI.NS 481.65 06-Dec-2010 1, 4, 5, 6, 7, 11
CANARA BANK CNBK.BO 729.15 06-Dec-2010 2, 6, 7, 11
HDFC HDFC.NS 695.30 06-Dec-2010 6, 7
HDFC BANK HDBK.NS 2395.65 06-Dec-2010 6, 7
ICICI BANK ICBK.NS 1181.45 06-Dec-2010 1, 2, 4, 5, 6, 7, 11
INDUSIND BANK INBK.BO 291.30 06-Dec-2010 4, 7
PUNJAB NATIONAL BANK PNBK.BO 1274.05 06-Dec-2010 6, 7
STATE BANK OF INDIA SBI.NS 3070.75 06-Dec-2010 1, 2, 4, 5, 6, 7, 11
UNION BANK OF INDIA UNBK.BO 367.00 06-Dec-2010 7, 11
YES BANK YESB.BO 329.95 06-Dec-2010 4, 7
Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 31 October 2010 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 October 2010, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 October 2010, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7 As of 31 October 2010, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.

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 Indian Financials
Commercial Banks abc
7 December 2010

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 This report is dated as at 07 December 2010.
2 All market data included in this report are dated as at close 03 December 2010, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
4 As of 31 October 2010, HSBC beneficially owned 5% or more of a class of common equity securities of the following
company(ies) : AXIS BANK LTD
5 As of 31 October 2010, HSBC beneficially owned 2% or more of a class of common equity securities of the following
company(ies) : STATE BANK OF INDIA
6 As of 31 October 2010, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities
managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of,
1% or more of the total capital of the subject companies securities in the market for the following Company(ies) : STATE
BANK OF INDIA , YES BANK , ICICI BANK , INDUSIND BANK , AXIS BANK LTD

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 Indian Financials
Commercial Banks abc
7 December 2010

Disclaimer
* Legal entities as at 31 January 2010 Issuer of report
'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation
HSBC Securities and Capital Markets
Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada)
(India) Private Limited
Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf;
000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; Registered Office
'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC 52/60 Mahatma Gandhi Road
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Fort, Mumbai 400 001, India
Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Telephone: +91 22 2267 4921
Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC
Fax: +91 22 2263 1983
Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC
Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Website: www.research.hsbc.com
Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo
Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank
Argentina S.A., HSBC Saudi Arabia Limited., The Hongkong and Shanghai Banking Corporation Limited,
New Zealand Branch.
This document has been issued by HSBC Securities and Capital Markets (India) Private Limited ("HSBC") for the information of its customers only. HSBC
Securities and Capital Markets (India) Private Limited is regulated by the Securities and Exchange Board of India. If it is received by a customer of an affiliate
of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not
be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information
obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts
no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to
change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document
(or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market
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buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those
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changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no
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HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving
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In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial
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information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited
investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in
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These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are
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written permission of HSBC Securities and Capital Markets (India) Private Limited. MICA (P) 142/06/2010 and MICA (P) 193/04/2010

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