2014-09-04_1409808826
TRANSCRIPT
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TableofContents
PotentialriseinGDPandcutinratesapleasantmixforbanks ........................................................ 3
UpgradestotheFY09,FY10GDPforecastbyuptoc3% ....................................................................3
wascoupledwiththec2.4xexpansionintheP/BofCNXPSBK .........................................................3
Currentforecast
builds
1.6%
rise
in
GDP
over
FY15
FY16 .....................................................................4
Lessscopeforriseinthereporateasgapwith1yrGsecyieldfalls ...................................................4
WhileCPItargetforJan15issettobeachieved................................................................................5
foodinflationmaykeeptheinterestrateshighinCY14 ...................................................................5
RatescutmaybebackendedinFY15...................................................................................................6
StressonassetqualityintensebutincrementalNPLtrendingdown................................................ 7
IncrementalNPLofPSUbanksareondownwardtrajectory.............................................................7
andstressedassetsvirtuallystableforthelastsevenquarters ........................................................7
WeassumemoderationintheincrementalNPLinFY16fFY17f .......................................................8
butsubduedloangrowthlikelytodelaytherecoveryinNPLratios .................................................8
NIMexpansionmayrevivecorerevenuesoverFY15fFY17f .......................................................... 10
OurFY15fPATforecastforPSUbanksismarginallybelowconsensus ...............................................10
PSUbanks
PAT
growth
forecast
to
exceed
new
banks
for
FY15
FY16 ...............................................10
Fallinrates,moderationinslippagetosupportNIMexpansion ........................................................11
EdgeinSBdepositshasslippedfornewprivatebanks.......................................................................12
Retailpartlyoffsetthelargeslowdowninthecorporateloans ..........................................................13
PSUbanksseerevivalinretailloangrowthaheadoffewnewbanks.................................................14
NII/assets,fallinprovisionstodriveRoAexpansionofPSUbanks.....................................................14
FallinthevaluationgapbetweenPSBsandnewbankscouldsustain............................................ 16
RallyinCY14ontheheelsoflargestunderperformancein10years..................................................16
Evenaftertherally,P/BofCNXPSBKc15%belowthe5yearmean ...................................................17
Reforms,reboundinassetqualitycouldfurthershrinkvaluationgap ...............................................17
LargerpotentialupsideinPSUbanksoverthe12months ............................................................. 19
DCFassumereturntonormalRoAoversemiexplicitperiodforPSBs ...............................................19
Potentialupside
of
up
to
21%
for
PSU
banks
over
12
months............................................................19
Riskfactors ..........................................................................................................................................20
Annexure:StockselectionwithinPSUbanksbasedonthefilters ......................................................21
Companies
BankofBaroda.24
HDFCBank 31
ICICIBank39
PunjabNationalBank47
StateBank
of
India..53
AxisBank......60
IndusIndBank.67
BankofIndia75
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PotentialriseinGDPandcutinratesapleasantmixforbanks
Large upgrade to GDP, by upto 3% during FY09FY10 was accompanied by c2.4x expansion in the P/B of PSU banks.
CurrentconsensusforecastfactorsrevivalinGDPby1.6%to6.3%inFY16,with20bpupgradetotheFY16GDPforecast
in the last3 months. PSU banks couldbe a larger beneficiary of GDP revival due to larger exposure to the corporate
sectorcomparedtothenewprivatebanks.There is lessscopeforfurtherrise inthereporateasgapwith1yrGsec
yield has contracted. In recent monetary policy, RBI indicated the peaking of interest rates. CPI and WPI have
moderated and stay close to the comfort zone of RBI. While high food inflation is likely to keep the interest rates
elevatedinCY14,potentialcutinFY16coupledwiththeuptrendinGDPislikelytosustaintherecentexpansioninP/B.
UpgradestotheFY09,FY10GDPforecastbyuptoc3%
The reported GDP (revised estimate) for FY09FY10 was significantly higher than the consensus
forecast.WeassumealagofthirteenmonthsfortheGDPtobereportedasfinalrevisedestimatefrom
thefiscalend.ThemonthlytimeseriesforecastfortherealGDPgrowthforFY09wasupgradedfrom
4% in Mar09 to 7% in Jul09. The reported revised GDP was closer, at 6.7%. Similarly, FY10 GDP was
upgradedfrom6.3%inOct09to8.2%inMar10.
wascoupledwiththec2.4xexpansionintheP/BofCNXPSBK
ThedurationoflargeGDPupgradeswascoupledwithlargeexpansionintheP/BofPSUbanks.TheP/B
ofCNXPSBKincreasedfrom0.69xattheendofMar09andpeakedat1.65xinOct10.
Uptoc3.5%fallintheFY11FY13GDPforecastcoupledwiththefallinP/BForFY11,fromthepeakof9.0%inJan11,GDPforecastdeclinedto7.75%inMar11.ThereportedGDP
was1.4%higherat8.91%.TherewaslargedowngradetotheGDPforecastforFY12from8.7%inJun11
to5.2%inMar13.However,thereportedGDPwashigherat6.69%.FY13GDPat4.7%wasabout2.2%
lower than the forecast in Jul12. The P/B of CNXPSBK declined from 1.33x in Jan11 to 0.56x at end
Feb14.
Exhibit1:GDPgrowthforecastand1yearforwardP/BofCNXPSBK
2
4
6
8
10
Oct07 Oct08 Oct09 Sep10 Sep11 Sep12 Aug13 Aug14
0.0
0.5
1.0
1.5
2.0
P/B(CNXPSBK,RHS) FY08 FY09FY10 FY11 FY12FY13
Source:Bloomberg,IL&FSInstitutionalEquities
RBIindicatespositivebiastowardsFY15centralestimateof5.5%
ThecurrentforecastforrealGDPgrowthforFY14,FY15andFY16isbetween4.7%and6.3%,withina
narrowrangeof1.6%.FY16GDPhasbeenupgradedby20bpsinceMay14.RBI,initsAnnualMonetary
policyApril2014had statedthatcontingentupon thedesired inflationoutcome,realGDPgrowth is
projected topick upfroma little below 5% in201314 to a rangeof5 to 6% in201415albeit with
downside risks to the central estimate of 5.5% However, in its latest Bimonthly monetary policy
there was a positive bias towards the GDP guidance prospectsfor reinvigoration of growth have
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improvedmodestly.Thefirmingupofexportgrowthshouldsupportmanufacturingandservicesector
activity.Iftherecentpickupinindustrialactivityissustainedinanenvironmentconducivetotherevival
ofinvestmentandunlockingofstalledprojects,withongoingfiscalconsolidationreleasingresourcesfor
private enterprise, external demandpicking up and international crudeprices stabilising, the central
estimate of real GDP growth of 5.5% within a likely range of 5 to 6% that was set out in theApril
projectionfor201415canbesustained.
Currentforecastbuilds1.6%riseinGDPoverFY15FY16
FY16GDPhasbeenupgradedby20bpsinceMay14Exhibit2:GDPgrowthforecastand1yearforwardP/BofCNXPSBK
2
4
6
8
10
Jul12 Nov12 Feb13 May13 Aug13 Nov13 Feb14 May14 Aug14
0.0
0.5
1.0
1.5
2.0
P/B(CNXPSBK,RHS) FY14 FY15 FY16
Source:Bloomberg,IL&FSInstitutionalEquities
PSUbankscouldbelargerbeneficiaryoftherevivalinGDPWe believe the impending uptrend in GDP is likely to sustain the gradual expansion in valuation of
banks. PSU banks could be a larger beneficiary of GDP revival due to their larger exposure to the
corporatesector
compared
to
the
new
private
banks.
The
P/B
of
CNXPSBK,
despite
sharp
rise
in
CY14,
at0.85xon02Sep14staysbelowthe5yearmean.
Lessscopeforriseinthereporateasgapwith1yrGsecyieldfalls
OneyearGsecyieldcloselytrackstherepo innormaltimeswithformerbeingthe lead indicatorfor
thereporate.ThedeclineinthegapbetweenoneyearGsecyieldandreporatewithfallinthespread
closeto5yearmeanof39bpleaveslessscopeforanysignificantriseinthereporate.
Exhibit3:1yrGsecandReporate
3.5
5.0
6.5
8.0
9.5
11.0
Mar06 Dec07 Aug09 Apr11 Dec12 Aug14
1yrGsec (%) Reporate(%)
Source:IIL&FSInstitutionalEquities
Exhibit4: Spreadbetween1yrGsecandRepo
2.8
1.4
0.0
1.4
2.8
4.2
Mar06 Dec07 Aug09 Apr11 Dec12 Aug14
Spread(1yrGse cand Repo)5yrs mean
Source:IL&FSInstitutionalEquities
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Exhibit5:CPI(%)
15%
5%
5%
15%
25%
J an1 2 J un12 Nov12 Apr1 3 Se p13 Fe b14 J ul14
5%
7%
9%
11%
13%
CPI (yoy,RHS) CPI(mom,annualised)
Source:IIL&FSInstitutionalEquities
Exhibit6:FoodsegmentinCPI(%)
30%
14%
2%
18%
34%
J an1 2 J un1 2 Nov1 2 Apr 13 Se p1 3 Fe b1 4 J ul 14
5%
8%
11%
14%
17%
Food(33.8,yoy,RHS) Food(mom,annualised)
Source:IL&FSInstitutionalEquities
WhileCPItargetforJan15issettobeachieved
According to theUrijitPatel Committeeto revise andstrengthenthe monetary policyframeworkin
view of the elevated level of current CPI inflation and hardened inflation expectations, supply
constraintsandweakoutputperformance,thetransitionpathtothetargetzoneshouldbegraduated
tobringingdowninflationfromthecurrentlevelof10%to8%overaperiodnotexceedingthenext12
monthsand 6% over aperiodnot exceeding thenext 24 monthperiod beforeformallyadopting the
recommendedtargetof4percentinflationwithabandof+/ 2%..CPI(combined)hasdeclinedfrom
9.87%inDec13to7.42%inJul14.
foodinflationmaykeeptheinterestrateshighinCY14
While we may see rise in retail inflation driven largely by food, in the nearterm due to inadequate
rainfall, CPI may moderate towards the end of FY15. In the latest Annual Monetary Policy, RBI has
statedthe
risks
to
achieving
the
inflation
of
8%
by
Jan15
such
as
less
than
normal
monsoon
due
to
possibleelninoeffects,uncertaintyonthesettingofMSPforagricommoditiesandthesettingofother
administered prices, especially of fuel, fertilizer and electricity; the outlook for fiscal policy; geo
politicaldevelopmentsandtheir impacton internationalcommodityprices.However,therewillalso
beadownwardpullonCPIinflationexertedbybaseeffectsofhighinflationduringJunNov13.
Exhibit7:YoychangeinWPIanditssegments
0.5%
3.5%
7.5%
11.5%
15.5%
Apr12 Jul12 Oct12Jan13Apr13 Jul13 Oct13Jan14Apr14 Jul14
WPI Food(24.3)Fuel(inc.crude,15.8) Manufactured(exc.food,55)
Source:IIL&FSInstitutionalEquities
Exhibit8:Mom(annualized)changeinWPIsegments
60%
30%
0%
30%
60%
Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 Apr14 Jul14
Food(24.3) Fuel(inc.crude,15.8)
Manufactured(exc.food,55)
Source:IIL&FSInstitutionalEquities
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RatescutmaybebackendedinFY15
Nearterm rise in food Inflation may lead to the upward pressure on inflation. Hence, despite the
moderation in WPI and CPI, the interest rate cut may be backended in FY15 after the impact from
factorssuchasmonsoonsandbaseeffectplaysout.
FallinWPIfortwoconsecutivemonthsinJun14Jul14
WPI
surged
to
6.01%
in
May14
after
the
decline
in
Apr14
to
5.2%
and
staying
below
5.7%
in
the
precedingfourconsecutivemonths.However,therehasbeenadeclineinthetwoconsecutivemonths
of Jun14Jul14. The Food segment24.3% weight in the Wholesale Price Index (WPI) has remained
closerto7%forfivemonths.Themomchange(annualised),revealsthesteeprise infoodprices in
May14andJul14andmaykeeptheWPIhighinthenearterm.
Exhibit9:Reporate,1yearGsecyield,CPI(%)andWPIinflation(%)
4
6
8
10
12
Jan12 Mar12May12 Jul12 Sep12 Nov12 Jan13 Mar13May13 Jul13 Sep13 Nov13 Jan14 Mar14May14 Jul14
4
6
8
10
12
Reporate 1yrGsec yield
CPI(yoy,RHS) WPI(yoy,RHS)
Source:Company,AvendusResearch
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StressonassetqualityintensebutincrementalNPLtrendingdown
The intense stress on the asset quality of PSU banks is visible in nearly the decade high stressed assets and low
provisioncoverage.However,thepaceofnetadditiontostressedassetismoderating.Thefourquartermovingaverage
forincrementalNPLratiodeclinedduringthelastfourquartersby0.56bp.Thisisinsharpcontrasttothoseinthenew
privatebanks,whichhadanincreaseof10bpduringJun13Jun14.WhilethestressislikelytostayinFY15f,weassume
an improvement in incrementalNPLduringFY15fFY17f,byupto0.72%.However,therecovery inNPLratiosandNPL
provisionsmaybedelayedduetosubduedloangrowthandburdenduetosharpfallinthePCR;thePCRofthefifteen
largestPSUbanksdeclinedfrom61.7%attheendofSep08to42.4%attheendofJun14.
IncrementalNPLofPSUbanksareondownwardtrajectory
The incremental NPL (change in outstanding gross NPL over four quarters as percentage of starting
loans)of15PSUbanksdeclinedforthethirdconsecutivequarterinMar14,thisbeingthefirstdecline
forthreeconsecutivequarters innineteenquarters.Mar14beingcyclicallybetterquarter,therewas
riseinJun14quarterbutstayedwellbelowthepeak. TheincrementalNPLmayhavepeakedat0.72%
inJun13quarterbeforedecliningthereafter.ThedeclinewaslargelydrivenbySBI,BOB,CanaraBank,
AndhraBank, Central Bankand IDBIBank.Large writeoffandsale to ARCs partlycontributed to the
declinein
net
additions
in
the
last
few
quarters.
Newprivatebankshadthereverse,risingtrendfor5consecutivequartersThetrendinincrementalNPLfornewprivatebankshasbeenmovinginthedirectionoppositetothat
ofthePSUbanks.Therehasbeenaconsistentrise intheratio inthe lastfivequartersfrom0.12% in
theDec12quarterto0.34%intheMar14quarterbeforemoderatingintheJun14quarter.Theincrease
hasbeendrivenbyICICIBank,KotakMahindraBankandYesBank.HDFCBankandIndusIndBankhad
thereversetrendwithinnewbankswithdeclineintheirincrementalNPLratiooverpastfivequarters.
Exhibit10:IncrementalNPL(4qtrsmovingaverage)
0.0%
0.2%
0.4%
0.6%
0.8%
Dec09 Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec13 Jun14
Newprivatebanks PSUbanks
Source:Company,IL&FSInstitutionalEquities
andstressedassetsvirtuallystableforthelastsevenquarters
The stressed asset (Gross NPL and restructured loans) of the group of fifteen largest PSU Banks has
remainedclosetoc11% inthe last eightquarters.Restructured loanofagroupofthefifteen largest
PSUbankshasremainedwithinarangeof6.5%to7.5%inthelasttenquarters.Afterneardoublingin
FY13to6.5%of loans,therestructured loansaspercentageof loanshas largelystabilized.Thegross
NPLratiohasalsoremainedwithinaverynarrowrangeof4.3% 4.5% inthelastfourquarters.After
sharpriseby80bpand67bpinFY12andFY13,respectively,thepaceofrisehassloweddowninFY14.
Thetotalstressedassetshavedeclinedinthepastthreequartersfrom11.7%attheendofJun13to
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Exhibit11:Stressedassets(%)
0.0
4.0
8.0
12.0
Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec13 Jun14
0%
150%
300%
450%
RatioofPSU/New(RHS)
PSU
New
Source:Company,IL&FSInstitutionalEquities
Exhibit12:PCR(%,excludingwriteoff)
30
50
70
90
Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec13 Jun14
Newprivatebanks PSUBanks
Source:Company,IL&FSInstitutionalEquities
11.2% at the end of Jun14. While the has been partly driven by sale of asset by banks to ARCs, the
stressedassts
as
remained
virtually
stable
and
within
a
very
narrow
range
of
10.6%
11.5%
in
the
last
eightquarters.
WeassumemoderationintheincrementalNPLinFY16fFY17f
We assume the incremental NPL in FY15f to stay close to the average during FY13FY14 for the PSU
banksunderourcoverage.ThesignificantimprovementintheassetqualityislikelyinFY16fFY17f.For
thePSUbanksunderourcoverage(SBIN,BOB,BOI,PNB),weassumedeclineinincrementalNPLover
FY15fFY16fbyupto0.72bp.However,despitethe improvement in assetquality,wedonotexpect
theincrementalNPLratiotofalltothepreFY12level.Forthenewbanks,weassumetheincremental
NPLtoremainlargelystablewithupto5bpriseassumedforICICIBCandIIBduetolargeincremental
restructuringintherecentquartersanddelayedrecoveryintheCVcycle.
Exhibit13:IncrementalNPL(%)
0.0%
0.4%
0.8%
1.2%
1.6%
2.0%
SBI(s) PNB BOB BOI
FY10FY12 FY13FY1 4 FY1 5f FY1 6FFY17f
Source:IL&FSInstitutionalEquities
Exhibit14:IncrementalNPL(%)
0.0%
0.3%
0.6%
0.9%
1.2%
1.5%
1.8%
ICICIBC AXSB HDFCB IIB
FY10FY12 FY13FY1 4 FY1 5f FY1 6FFY17f
Source:IL&FSInstitutionalEquities
butsubduedloangrowthlikelytodelaytherecoveryinNPLratios
Whiletheremaybefall inthepaceofnetadditiontogrossNPLs,therebound intheNPLratiosand
NPL provisions may be delayed. Moderation in loan growth may partly keep the gross NPL ratio at
higher level. For the PSU banks under our coverage, we estimate the rise in gross NPL ratios. Loan
growthoverFY15FY17isassumedtogrowthintherangeof15%18%,constrainedduetolargecapital
requirementsevenifthereisarecoveryintheinvestmentcycle.
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Exhibit15:GrossNPLratio
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
SBI(s) PNB BOB BOI
FY10FY1 2 FY1 3FY14 FY15f FY16FFY17f
Source:IL&FSInstitutionalEquities
Exhibit16:GrossNPLratio
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
ICICIBC AXSB HDFCB IIB
FY10FY1 2 FY1 3FY1 4 FY15f FY16FFY17f
Source:IL&FSInstitutionalEquities
LowPCRiskeeptheprovisioningburdenhighThePCR(excludingwriteoff)ofthefifteenlargestPSUbanks(referexhibit19)declinedfrom61.7%at
theendofSep08to42.4attheendofJun14.SBI,BOBandIDBIbankarebestplacedamongPSUbanks
withtheir
PCR
being
close
to
50%.
Exhibit17:PCR(%)
0
20
40
60
80
SBI(s) PNB BOB BOI
FY10FY1 2 FY1 3FY14 FY15f FY16FFY17f
Source:IL&FSInstitutionalEquities
Exhibit18: PCR(%)
0
20
40
60
80
ICICIBC AXSB HDFCB IIB
FY10FY1 2 FY1 3FY1 4 FY15f FY16FFY17f
Source:IL&FSInstitutionalEquities
Except SBI, we do not forecast the NPL provisions/ loans to decline to preFY13 level. Even with an
improvementtheprovisioningburdenislikelytostayhighduetopossibleincreaseintheprovisionson
restructuredloansandverylowcoverageratio.
Exhibit19:NPLprovisions/loans(%)
0.0
0.3
0.6
0.9
1.2
1.5
SBI(s) PNB BOB BOI
FY10FY1 2 FY1 3FY14 FY15f FY16FFY17f
Source:IL&FSInstitutionalEquities
Exhibit20:NPLprovisions/loans(%)
0.0
0.3
0.6
0.9
1.2
1.5
ICICIBC AXSB HDFCB IIB
FY10FY1 2 FY1 3FY1 4 FY15f FY16FFY17f
Source:IL&FSInstitutionalEquities
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NIMexpansionmayrevivecorerevenuesoverFY15fFY17f
Current earnings expectation for PSU banks for FY15FY16 is above that for the new banks with FY16f PAT growth
forecastbeingupgradedbyc6%inthelast12months.WiththegradualmoderationintheadditiontoNPLs,thesharp
dropinyieldonloansislikelytogetarrested,benefittingthemargins.ThesignificantleadinSBdepositsproportionof
thenewprivatebanksoverPSUbankshasdeclinedoverthelasttwoyears.TheyoySBdepositsgrowthofPSUbanks
declinedfrom20%28%inFY11to13%18%inFY14PSUbanksundercoverage.Theslowdownhasbeenlargerforthe
newprivatebanksfrom21%60%to17%41.WeforecastanexpansionintheRoAofupto25bpoverFY15fFY17ffor
thefourlargePSUbanksunderourcoverage.EasingofpressureoncorerevenuesanddeclineinNPLprovisionsasnet
additiontogrossNPLrecedes,islikelytodrivetheRoAexpansion.
OurFY15fPATforecastforPSUbanksismarginallybelowconsensus
Exhibit21:ConsensusandourforecastforthePSUbanksinourcoverage
(INRmn) Ourforecast Consensus Variationwithconsensus
FY15f FY16f FY17f FY15f FY16f FY17f FY15f FY16f FY17f
SBI 184,586 239,780 306,884 179,017 220,181 267,885 3% 9% 15%
PNB 41,708 55,299 70,475 48,187 59,623 74,838 13% 7% 6%
BOB
52,863 62,397 75,354 53,799 64,907 76,731
2%
4%
2%
BOI 32,439 41,996 48,804 32,870 41,335 53,601 1% 2% 9%
Total 311,596 399,471 501,517 313,872 386,045 473,055 1% 3% 6%
Source:Company,IL&FSInstitutionalEquities
Exhibit22:Consensusandourforecastforthenewbanksinourcoverage
(INRmn) Ourforecast Consensus Variationwithconsensus
FY15f FY16f FY17f FY15f FY16f FY17f FY15f FY16f FY17f
AXSB 70,821 84,574 100,323 71,874 85,548 103,537 1% 1% 3%
HDFCB 108,103 134,265 162,107 104,166 128,848 160,184 4% 4% 1%
ICICIBC 114,874 133,235 153,153 112,047 132,073 157,042 3% 1% 2%
IIB 17,409 21,611 26,880 17,692 22,196 27,901 2% 3% 4%
Total
311,207 373,685 442,463 305,779 368,666 448,665
2%
1%
1%Source:Company,IL&FSInstitutionalEquities
PSUbanksPATgrowthforecasttoexceednewbanksforFY15FY16
Exhibit23:YoyPATgrowth(CNXPSBK)
20
10
0
10
20
30
May13 Aug13 Oct13 Dec13 Feb14 Apr14 Jun14 Aug14
FY14 FY15f FY16f
Source:Bloomberg,IL&FSInstitutionalEquities
Exhibit24:YoyPATgrowth(Newprivatebanks)
20
10
0
10
20
30
May13 Aug13 Oct13 Dec13 Fe b14 Apr14 Jun14 Aug14
FY14 FY15f FY16f
Source:Bloomberg,IL&FSInstitutionalEquities
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PATgrowthforecastbytheconsensusforFY15FY16forPSUbanks isabovethatforthenewprivate
banks.FY15fPATgrowthforecasthasbeenupgradedfortheCNXPSBK,withanincreasefrom19.4%in
Sep13 to 25.1% in Sep14. The consistent upgrade has been on the lowbase and downgrade inFY14
PATgrowth.FY16fPATgrowthforecasthasalsoseenanupwardtrajectory.Newbankshaveastable
PATgrowthforecastforFY15FFY16f, inthenarrowrangeof18%20%.Whilethereexistarisktothe
earningsofPSUbanksposedbyhigherNPLprovisions,itisforecasttostaywellabovethatinFY14.
Fallinrates,moderationinslippagetosupportNIMexpansion
Withthegradualpickup in loansandmoderation intheadditiontoNPLs,thesharpdrop inyieldon
loansforthePSUbanksislikelytogetarrested. WeforecastgradualrecoveryinNIMofthePSUbanks.
SBINislikelytoseelargestexpansioninNIMduetotheirstrongliabilityfranchise.
New banks had large NIM expansion over the last two years and we estimate it to have peaked for
mostofthem.HighCASA,strongtilttowardshighyieldingretailloanspartlycontributedtotherising
NIMofthenewbanks.
Exhibit25:NIM(calculatedfortheyear,%)
1.8
2.3
2.8
3.3
3.8
Mar10 Mar12 Mar14 Mar16f
SBI(s) PNB BOB BOI
Source:IL&FSInstitutionalEquities
Exhibit26: NIM(calculatedfortheyear,%)
1.8
2.3
2.8
3.3
3.8
4.3
4.8
Mar10 Mar12 Mar14 Mar16f
ICICIBC AXSB HDFCB IIB
Source:IL&FSInstitutionalEquities
Exhibit27:Yieldonloans(%)
7
8
9
10
11
Mar10 Mar12 Mar14 Mar16f
SBI(S) PNB BOB BOI
Source:IL&FSInstitutionalEquities
Exhibit28: Costofdeposits
4
5
6
7
8
Mar10 Mar12 Mar14 Mar16f
SBI(S) PNB BOB BOI
Source:IL&FSInstitutionalEquities
NIMdeclineofPSUbanksinlasteightquartersweredrivenbyhostoffactorsTherewaslargedeclineinNIMofthePSUbanksduringFY13FY14withthecontractioninfourlargest
PSU banks byupto 60bp over last two years, largest being for SBI and BOB. High cost of funds, low
yieldsduetothe inabilitytopassonratehikefollowing lackofloandemandand interestreversalon
accountofhighslippageledtothesharpcontractionintheNIMofPSUbanks.
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Exhibit29:Loan/depositsratioofallbanks
240%
20%
200%
420%
640%
860%
1080%
J un0 8 J ul 09 J ul 10 J ul 11 Aug1 2 Aug1 3 Aug1 4
70.0%
71.5%
73.0%
74.5%
76.0%
77.5%
79.0%
Incr.loans /deposits Loans/deposits(RHS)
Source:IL&FSInstitutionalEquities
Exhibit30: Loangrpwthanddepositsgrowth
6%
11%
16%
21%
26%
31%
36%
Jun08 Jul09 Jul10 Jul11 Aug12 Aug13 Aug14
Loangrowth Depositgrowth
Source:IL&FSInstitutionalEquities
Normalizationofloan/depositratiomayhavelimitedimpactonPSUbanks
Theloan/deposit
ratio
of
banks
saw
significant
rise
from
70%
at
the
end
of
CY09
to
c78%
at
the
end
of
Mar14.However,ithasdeclinedsinceMar14to76.1%.TheimpactonNIMduetofallinloandeposit
ratio may be limited for PSU banks. However, several new private banks replaced deposit with
borrowingsinFY14tomanagetheircostoffunds.Thetrendmayreverseandputneartermpressure
ontheirNIM.
EdgeinSBdepositsgrowthhasslippedfornewprivatebanks
The significant lead in SB deposits proportion of the new private banks over PSU banks has declined
over the last two years. Also, there has been rise in the SB deposits proportion of PSU banks in the
recent years, partly driven by low accretion of term deposits following sharp slowdown in corporate
loans.
Exhibit31:
SBdeposits
proportion
at
the
end
of
Mar14
0%
8%
16%
24%
32%
40%
SBI(s) PNB BOB BOI ICICIBC AXSB HDFCB IIB
Source:Company,IL&FSInstitutionalEquities
Declineininflation,interestratesmayarrestthedeclineinSBdepositsgrowthTheyoySBdepositsgrowthdeclinedfrom15%30%inFY10toc15%inFY14formostPSUbanks.The
slowdownhasbeen largerforthenewprivatebankswiththeirSBdepositsgrowthalignedtothatof
thePSUbanksfrom30%45% inFY10toc15%,exceptforIIB. Wedonotexpectsignificantrevival in
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growthandproportion inFY15f.Fall in inflation,decline in interestratesmaybebackended inFY15
andthisislikelytoleadtothereboundinSBdepositsinFY16.
Exhibit32:SBdepositsgrowth
0%
10%
20%
30%
40%
50%
60%
Mar10 Mar12 Mar14 Mar16f
SBI(s) PNB BOB BOI
Source:IL&FSInstitutionalEquities
Exhibit33:SBdepositsgrowth
0%
10%
20%
30%
40%
50%
60%
Mar10 Mar12 Mar14 Mar16f
ICICIBC AXSB HDFCB IIB
Source:IL&FSInstitutionalEquities
Retailpartly
offset
the
large
slowdown
in
the
corporate
loans
LargecorporateloanshadsteadydeclineintheircontributiontoloangrowthExhibit34: Contributiontononfoodcreditgrowth
0%
15%
30%
45%
60%
Micro&s ma ll Me di um Large
FY12 FY13 FY14
Source:IL&FSInstitutionalEquities
Exhibit35:Contributiontononfoodcreditgrowth
5%
0%
5%
10%
15%
20%
Power Tele com Roa ds Othe rInfra
FY12 FY13 FY14
Source:IL&FSInstitutionalEquities
CREandhousingloanscontributiontoloangrowthroseoverFY12FY14
Exhibit36:Contributiontononfoodcredit
0.0%
2.5%
5.0%
7.5%
10.0%
CRE Trade
FY12 FY13 FY14
Source:IL&FSInstitutionalEquities
Exhibit37:Contributiontononfoodcredit
1%
3%
7%
11%
15%
Consumer Housing Vehicle
FY12 FY13 FY14
Source:IL&FSInstitutionalEquities
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Thesharp slowdown in the corporate segment ledto the fall in thecontribution of large industry to
incremental nonfood loan growth, from 50.8% in FY12 to 42.1% in FY14. The small and midsize
industryresumedtheirgrowthaftertheperiodofconsolidationduringFY12FY13.Industrywas45.3%
of nonfood loans at the end of Mar14, large industry being 36.7% of total nonfood loans. The
decelerationincorporatesegmentwaspartlyoffsetbyfewsegmentswithinretail.Housingloanshada
steady rise in their contribution to nonfood loan growth from 8.2% in FY12 to 12.1% in FY14.
Commercialrealestate(CRE)hashadincreaseintheirmomentuminthelastthreeyears.
PSUbanksseerevivalinretailloangrowthaheadoffewnewbanks
TheretailloangrowthofPSUbankshadareboundinFY14,largelydrivenbyhousingloans.PNB,BOB
andBOIreportedretailloangrowthinFY14higherthanthatforHDFCBank,IndusIndBankandsimilar
to ICICI Bank. The sharp slowdown in retail loans of new private banks was largely driven by the
slowdowninthevehicle loansegmentandis likelytoreviveforward.However,PSUbankshavebeen
morecompetitiveintheretailsegmentandcouldsustaintheuptrend.
Exhibit38:Retailloangrowth
0%
10%
20%
30%
40%
50%
Mar11 Mar12 Mar13 Mar14
SBI(s) PNB BOB BOI
Source:IL&FSInstitutionalEquities
Exhibit39:Retailloangrowth
0%
10%
20%
30%
40%
50%
Mar11 Mar12 Mar13 Mar14
ICICIBC AXSB HDFCB IIB
Source:IL&FSInstitutionalEquities
NII/assets,fallinprovisionstodriveRoAexpansionofPSUbanks
Weforecast
an
expansion
in
the
RoA
of
up
to
24
bp
over
FY15fFY17f
for
the
four
large
PSU
banks
under our coverage universe. While the pressure on core revenues may ease for most PSU banks,
declineinNPLprovisionsasthenetadditiontogrossNPLrecedes,islikelytodrivetheRoAexpansion.
WhileourforecastassumesafallinincrementalNPLsandNPLprovisionsafterFY14,theprovisionsare
estimatedhigherthanthepreFY13leveltorecoverthePCRratio.
Exhibit40:DupontofPSUbanksundercoverage
SBIN PNB BOB BOI
Change Change Change Change
FY14 FY12FY14 FY15fFY17f FY14 FY12FY14 FY15fFY17f FY14 FY12FY14 FY15fFY17f FY14 FY12FY14 FY15fFY17f
Netinterestincome 2.93 0.08 0.24 3.14 0.36 0.14 1.98 0.78 0.13 2.11 0.44 0.19
Feebasedincome 0.86 0.28 0.01 0.61 0.11 0.05 0.41 0.07 0.00 0.42 0.13 0.01
Otherincome
0.24
0.00
0.02
0.28
0.07
0.07
0.33
0.07
0.00
0.42
0.11
0.10
Operatingrevenue 4.04 0.21 0.22 4.03 0.54 0.12 2.72 0.92 0.14 2.95 0.46 0.10
Operatingexpenses 2.13 0.11 0.04 1.81 0.07 0.12 1.18 0.27 0.06 1.31 0.35 0.06
Operatingprofit 1.91 0.31 0.18 2.21 0.47 0.00 1.54 0.65 0.08 1.64 0.11 0.05
Loanlossprovisions 0.85 0.11 0.13 0.88 0.28 0.13 0.49 0.15 0.03 0.77 0.43 0.03
Provisionforinvest. 0.03 0.02 0.00 0.15 0.11 0.12 0.03 0.03 0.01 0.01 0.03 0.00
Otherprovisions 0.07 0.05 0.01 0.27 0.17 0.11 0.11 0.03 0.02 0.16 0.06 0.07
Tax 0.31 0.27 0.10 0.26 0.37 0.11 0.16 0.28 0.09 0.16 0.17 0.08
Netprofit 0.65 0.08 0.20 0.65 0.66 0.25 0.75 0.58 0.04 0.53 0.28 0.07
Source:Company,IL&FSInstitutionalEquities
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WeforecastpeakingoftheRoAformostnewprivatebanksContrary to the trend in PSU banks, we believe the RoA of new private banks could have peaked in
FY14 and is likely to see marginal moderation. The peaking of NII/assets, largely stable NPL
provision/assetsislikelytoresultinthemarginalcontractionintheirRoA.Declineinthehighyielding
retailloanproportion,fallintheyieldonloansintheneartermwithfallininterestratesislikelytoput
pressureontheyields.NPLprovisionhasalowbaseandevenwiththedeclineinincrementalNPL,we
donotseesignificantdeclineinNPLprovisions/assetsoverFY15fFY17f.
Exhibit41:DuPontofnewprivatebanks
AXSB ICICIBC HDFCB IIB
Change Change Change Change
FY14 FY12FY14 FY15fFY17f FY14 FY12FY14 FY15fFY17f FY14 FY12FY14 FY15fFY17f FY14 FY12FY14 FY15fFY17f
Netinterestincome 3.30 0.20 0.02 2.91 0.58 0.01 4.14 0.07 0.14 3.61 0.21 0.08
Feebasedincome 1.65 0.20 0.07 1.44 0.23 0.14 1.60 0.21 0.08 2.23 1.21 0.15
Otherincome 0.39 0.06 0.05 0.41 0.35 0.07 0.18 0.25 0.05 0.13 0.62 0.01
Operatingrevenue 5.35 0.06 0.04 4.75 0.70 0.08 5.92 0.03 0.16 5.96 0.80 0.24
Operatingexpenses 2.18 0.07 0.01 1.82 0.12 0.04 2.70 0.16 0.03 2.73 0.24 0.20
Operatingprofit 3.17 0.14 0.05 2.93 0.58 0.04 3.22 0.13 0.19 3.24 0.57 0.05
Loanlossprovisions 0.36 0.09 0.01 0.35 0.17 0.00 0.37 0.06 0.07 0.39 0.01 0.01
Provisionfor
invest.
0.03
0.07
0.04
0.01
0.04
0.01
0.07
0.07
0.07
0.11
0.09
0.11
Otherprovisions 0.25 0.15 0.00 0.10 0.08 0.02 0.06 0.40 0.01 0.08 0.00 0.01
Tax 0.87 0.04 0.01 0.73 0.32 0.02 0.96 0.21 0.02 0.90 0.15 0.00
Netprofit 1.72 0.12 0.01 1.73 0.40 0.05 1.90 0.33 0.19 1.76 0.33 0.06
Source:Company,IL&FSInstitutionalEquities
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Evenaftertherally,P/BofCNXPSBKc15%belowthe5yearmean
TherallyinPSUbankshasliftedtheP/BofCNXPSBKto0.85xon02Sep14,closetotheirfiveyearmean
of1.0x.TheP/BofPSUbanksmayhavebottomedoutatthedecadelowvaluationof0.49xon3Sep13
andhasbeenseeinggradualrecoverythereafter.TherapidbouncesinceFeb14haslifteditsP/Bclose
to15%belowthefiveyearmean.DespitelargeoutperformancetoNiftyof12%inCY14(ytd),theP/B
isstillbelowthe5yearmeanandwellbelowthepeakinFeb08andNov10.
Newprivatebanksc11%abovetheir5yearmeanof2.28xHowever,newprivatebankssawtheirvaluationrise11%abovetheir5yearmean(2.28x)to2.54xon
02Sep14butbelowthepeakof2.99xinNov10.
Exhibit44:OneyearforwardP/BofCNXPSBKandnewprivatebanks
0
1
2
3
4
Apr04 May05 Jul06 Sep07 Nov08 Jan10 Mar11 May12 Jun13 Aug14
CNXPSBK NPVT
Avg(Sep09Sep14)
Avg(Sep09Sep14)
Source:Bloomberg,IL&FSInstitutionalEquities
Reforms,reboundinassetqualitymayfurthershrinkvaluationgap
ThereportbyDrP.J.Nayaktoreviewthegovernanceofboardsofbanks inIndiaentailsmeasuresto
improve
the
structural
framework
of
the
PSU
banks.
The
committee
has
recommended
the
new
governance structure including reduction of the government shareholding in banks to avoid capital
support from government. Other key recommendations include: elimination of constrains which are
applicableonlytothePSUbankssuchasdualregulation,shorttenorsofCMDsandEDs,compensation
constrains,externalvigilanceenforcement and applicabilitytoRTIAct. Whilereformscouldbealong
drawnprocess,the introductionofsomeoftheseproposalsandgradualturnaround intheNPLcycle
maysustainthecontractioninthevaluationgapwithnewbanksclosertothelongtermmeanoverthe
next12years.
DiscountofPSUtonewbanksbottomedmuchearlierthantherallyin2014Theimprovedoutlookfortheeconomyfollowingthestableelectionoutcomeanddepressedvaluation
ledtothelargeoutperformanceofPSUbankstothenewprivatebanksinMay14Jun14.Drivenbythe
sharp
rise
in
NPLs
and
concern
over
the
capital
constrain,
the
discount
of
PSU
to
new
banks
hadincreasedtoadecadehighof 78%.Ithascontractedthereafterto 71%on02Sep14butstayshigher
thanthe5yearaverageof 63%.TheoutperformanceofthePSUbanksmayextendfurtherovernext
12months.
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Exhibit45: DiscountofCNXPSBKtonewprivatebanksinP/B
80%
70%
60%
50%
40%
30%
20%
Apr04 May05 Jul06 Sep07 Nov08 Dec09 Feb11 Apr12 Jun13 Aug14
DiscountofPSUbanksoverNPVT
Avg(Aug09Aug14)
28Oct13,78%
Avg(Apr04Aug14)
Source:Bloomberg,IL&FSInstitutionalEquities
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LargerpotentialupsideinPSUbanksoverthe12months
WehavevaluedbanksusingacombinationofDCF,P/EandP/B.OurthreestageDCFusesexplicitforecastsuntilFY17,
followedby10yearsofsemiexplicitforecasts.Wehavecappedleverageratioforthesemiexplicitperiodat18xforthe
PSUbanksandlinkedtheloangrowthtothetargetasset/equity.Hence,thesemiexplicitgrowthforthePSUbanksis
assumedtobeintherangeof6%14%.WereinitiatecoverageonBankofIndia,BankofBaroda,PunjabNationalBank
StateBankofIndia,AxisBank,HDFCBank,ICICIBankandIndusIndBank.TheestimatedpotentialupsideinPSUbanks
exceedsthereturninnewbanksoverthe12monthsperiod.ThepotentialupsideinPSUbanksisupto21%.Weprefer
banksthatarebettercapitalizedandaresuperiorinassetquality.OurmostpreferredpickamongPSUbanksisBankof
BarodaandICICIBankamongnewprivatebanks.
DCFassumereturntonormalRoAoversemiexplicitperiodforPSBs
We have valued banks using a combination of DCF, P/E and P/B. Our threestage DCF uses explicit
forecastsuntilFY17,followedby10yearsofsemiexplicitforecasts,wherewelinkloangrowthtothe
leverageratioandassumedividendpayoutof20%.Thefinalstageof12yearsassumesconvergenceof
RoEandCoE(assumedtobe14%).TheRoAisassumedtoconvergetothe10yearaverageforthePSU
banksand1.2%forthenewprivatebanksattheendofthesemiexplicitperiod.
WehaveestimatedthemeanP/EandP/Bforthefiveyearperiodended02Sep14.Weapplytheseto
ourone
year
forward
EPS
and
adjusted
book
value
forecast
to
arrive
at
our
P/E
and
P/B
based
fair
value.Ourtargetpriceisaweightedaverage,whereweassignaweightof30%toourDCFvalueand
35%eachtoourP/EandP/Bvalues.
CaponleverageratioduringsemiexplicitperiodimplieslowergrowthWehavecappedleverageratioforthesemiexplicitperiodat18xforthePSUbanksandlinkedtheloan
growthtothetargetasset/equity.Hence,thesemiexplicitgrowthforthePSUbanksisassumedtobe
in the range of 6%14%. New private banks, being well capitalized are assumed to keep growing at
fasterpacethantheirPSUcounterparts.
Potentialupsideofupto21%forPSUbanksover12months
We reinitiate coverage on Bank of India, Bank of Baroda, Punjab National Bank State Bank of India,
AxisBank,HDFCBank,ICICIBankandIndusIndBank.OurmostpreferredpickamongPSUbanksisBank
of
Baroda
and
among
private
banks
is
HDFC
Bank
and
ICICIBC
with
largest
potential
upside.
We
apply
25% discount to the 5year mean P/E and P/B for BOI given large volatility in its NPLs and low
capitalizationratios.Also,weapply25%premiumtothe5yearmeanP/EandP/BforICICIBCgivenits
significantlreboundinRoEoverlast3years.
Exhibit46:AssumptionsfortheDCFbasedfairvalues
RoA(%) Growth(%,CAGR) Asset/Equity (Mean)
Actual Explicitperiod Semiexplicit Semiexplicit A ctual Explicitperiod Semiexplicit Actual
Explicit
period Semiexplicit
(FY13FY14) (FY15fFY17f (FY18fFY27f) (FY27f) (FY13FY14) (FY13fFY15f (FY16fFY25f) (FY13FY14) (FY15fFY17f (FY18fFY27f)
BOI
0.59
0.58
0.71
0.80 22.1% 15.9% 5.9%
20.3
21.5 18.0BOB 0.83 0.77 0.90 0.98 17.5% 17.0% 11.3% 17.9 19.3 18.0
PNB 0.83 0.81 0.96 1.00 9.0% 16.3% 16.2% 16.0 16.3 18.4
SBIN 0.76 0.76 0.92 0.95 16.5% 18.5% 13.5% 16.9 17.2 17.9
AXSB 1.69 1.72 1.44 1.21 16.4% 18.6% 22.7% 10.7 10.4 14.3
HDFCB 1.86 2.05 1.71 1.21 25.1% 20.2% 20.9% 11.2 9.7 11.8
ICICIBC 1.69 1.80 1.47 1.21 15.1% 17.6% 22.8% 8.0 8.8 14.1
IIB 1.69 1.82 1.22 1.21 26.5% 25.2% 22.9% 10.5 10.9 14.6
Source:Company,IL&FSInstitutionalEquities
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20
Exhibit47:AverageP/EandadjustedP/B(02Sep14)
P/E P/B
3M 6M 1year 2years 3years 5years 3M 6M 1year 2years 3years 5years
BOI 4.94 5.23 4.84 4.26 4.62 4.99 0.75 0.81 0.80 0.72 0.84 0.94
BOB 6.58 6.58 6.48 5.75 5.48 5.44 1.03 1.02 0.99 0.86 0.89 0.97
PNB 6.50 6.83 6.33 5.12 4.90 4.94 0.85 0.87 0.80 0.66 0.71 0.82
SBI
9.33
9.86
9.22
8.07 7.52 7.44 1.25 1.33 1.25
1.08
1.14 1.19
AXSB 11.94 12.07 11.14 9.68 9.73 9.52 1.98 1.99 1.82 1.56 1.68 1.68
HDFCB 17.51 17.76 17.28 16.66 17.68 18.03 3.03 3.16 3.30 3.27 3.49 3.48
ICICIBC 14.54 14.37 13.84 12.60 12.90 13.05 2.05 2.02 1.91 1.70 1.69 1.63
IIB 15.25 15.52 15.28 14.55 15.26 14.92 2.72 2.75 2.69 2.50 2.84 2.78
Source:Company,IL&FSInstitutionalEquities
Exhibit48:PE,P/BandDCFbasedfairvaluesandthetargetprice
PE PB DCF/SOP TP CMP(03Sep14) Upside Rating Target valuation Currentvaluation
Weights 35% 35% 30% PE P/B PE P/B
BOI 269 355 314 312 292 7% Add 5.11 0.79 5.83 0.81
BOB 953 1,179 1,101 1,076 886 21% Buy 6.95 1.10 6.84 1.02
PNBK
964
1,217
1,396
1,182
961
23%
Buy
7.09
1.15
7.47
1.05
SBI 2,970 3,119 2,644 2,925 2,501 17% Buy 8.62 1.34 9.31 1.29
AXSB 453 484 423 455 414 10% Add 11.56 1.98 12.51 2.08
HDFCB 1,198 1,179 575 1,004 860 17% Buy 16.34 3.07 17.11 3.09
ICICIBC 2,124 1,550 1,647 1,780 1,579 13% Add 14.36 2.28 14.70 2.22
IndusInd 705 753 514 665 616 8% Add 14.41 2.65 16.59 2.88
Source:Company,IL&FSInstitutionalEquities
Riskfactors
Delay
in
the
roadmap
for
the
capitalization
of
PSU
banks
may
stay
an
overhang.
Basel
III
requirementswouldpressureontheloangrowtheveniftheinvestmentcyclepicksup.
Delay in the recovery in NPL cycle and elevated slippage extending into FY16 may pull down the
profitability.
RegulatorychangessuchasmandatinghigherPCRrequirementsmayimpacttheprofitability.
Elevatedinterestratesin2016mayextendtheNPLcycle,mainlyintheSMEsegmentanddelaythe
revivalintreasuryincome.
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Annexure:StockselectionwithinPSUbanksbasedonthefilters
Exhibit49:NetNPL/NetworthVschangeinnetNPL/NetworthbetweenMar12Mar14
0
10
20
30
40
15 20 25 30 35 40 45 50
ALBK
ANDB
CRPBK
CBOI
IOB
UCO
BOMH DBKPNB
OBC
Net
NPL
/
Networth
(%,
Mar14)ChangeinNetNPL/Networth(Ma
r12
Mar14)
UNBKSBIBOI
SNDB
BOB
INBK
IDBI
CBKVJYK
Source:Company,IL&FSInstitutionalEquities
Exhibit50:GrossNPLratio(Mar14)VschangeingrossNPLratiobasedon2yearagoloans(Mar12)
0.5
1.0
1.5
2.0
2.5
2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5
GrossNPLratio(Mar14)RiseinGro
ssNPLratiobasedon2
yearagoloan
CBOI
ALBKANDB
SBI
PNBIOB
IDBI
UCOUNBK
OBC
INBK
BOMH
BOI
CRPBKDBK
BOB
CBK
VJYK
SNDB
Source:Company,IL&FSInstitutionalEquities
Exhibit51:RoE(FY15f)VsP/B(FY15f)basedonconsensus(02Sep14)
0.5
0.7
0.9
1.1
1.3
1.5
1.7
3 5 7 9 11 13 15 17
RoEbasedonconsensus(FY15f)
P/B(FY15)
SBIN
SNDB
BOB
UCO
PNBCBOI
IOBIDBI
ANDB
UNBKCBK
OBCDBNK
CRPBK
BOI
ALBKINBK
Source:Company,IL&FSInstitutionalEquities
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22
Exhibit52:P/B(FY15f)Vschangeinpricebetween14Feb14and02Sep14
30
43
56
69
82
95
108
121
0.5 0.7 0.9 1.1 1.3 1.5
P/B
(FY15)
ChangeinPricebetween14
Feb14
2Sep14
SBIN
UNBK
UCO
BOB
CBOI
PNB
VJYK
CBK
SNDB
IDBI
OBC
ANDB
INBK
ALBK BOI
CRPBKDBNK
Source:Company,AvendusResearch
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IndiaEquityResearc
Financial
September04,2014
B U Y BankofBarodaTargetPrice(INR) 1076 Superiorassetquality,RoEtodriveoutperformance
CompanyReport Moderationintheaccretionofstressedassetsinthelastfewquarter
is likely to sustain. We assume a 37bp reduction in the incrementa
NPL,translating
into
8bp
fall
in
NPL
provision/loans
over
FY15f
FY17f
RiseinPCRduringthelastfewquartershaslifteditabovepeersandi
likelytoreducetheincrementalprovisioningburden.Acontraction in
the NIM over the past two years is likely to get arrested, as interes
rates and slippage moderate. Large cut in bulk deposits is likely to
sustain the cost at lower level, supporting NIM. Despite buildingin
elevatedprovisions,weforecasta206bpRoEexpansionoverFY15f
FY17f. BOB is our most preferred stock among PSBs due to superio
asset quality, Tier I ratio and RoE. Reinitiate coverage with a TP o
1,076andaBuyrating.TheTPimplies1yrfwdadjustedP/Bof1.1x.
Recentrise
in
the
PCR
and
moderating
NPLs
to
ease
provision
burden
RiseinthePCRcoupledwithmoderatingadditiontostressedassetsislikelyto
lowertheprovisioningburdenoverFY15fFY17f.Overthe last3quarters,PCR
has increased by 8.2% to 50.2% at endJun14, highest among the PSBs
IncrementalgrossNPLdeclined4bpyoyto1.17%inFY14afterrisingsharply
by79bpintheprecedingtwoyears.Wefactora37bpfallintheincrementa
NPLoverFY15fFY17f to0.80% inFY17translating intoa8bp fall intheNP
provisions/loans. However, improvement in asset quality is builtin during
FY16fFY17fasweassumethestresstocontinueinthecurrentfiscal.
CoreprofitabilitytorevivewithgradualNIMexpansion
NIMexpansionand likelypickup incorefees isestimatedtoexpandRoAand
RoE to c0.80% and c16%, respectively in FY17f. With softening interest rate
andslippage,
the
large
NIM
contraction
over
the
last
two
years
is
likely
to
ge
arrested,ascostofdepositsmoderatesandyieldimproves.Weforecast13bp
NIM expansion over the next three years. The share of CDs to term deposit
declined3.5%qoqto4.0%atendJune14,partlycontributingto10bpqoq
expansioninNIM.WeforecastthePATtoriseata3yearCAGRof18.4%.
DilutionrequiredlikelytostaylowerthanthepeersoverFY15fFY17f
BOBiscapitalisedbetterthanpeersandisunlikelytorequirelowerdilutionin
thenearterm.Weassume3%dilutioninFY15f,likelytobethroughbudgetary
allocation. CET 1 was 8.95% and CAR was 12.28% at the end of Mar14. The
pickup in retainedearningsgrowth is likely tosustainCET1above8.4%ove
thenext3years.Also,moderation inRWAgrowth isassumed tosustainata
lowerlevel3yearCAGRof16%preservingthecorecapital.
MostpreferredamongPSBs;TPvaluesBOBatAdj.P/Bof1.1xBOBisourmostpreferredstockamongPSBsduetosuperiorassetquality,Tie
I ratio and RoE. We value P/E, P/B and DCF to arrive at the blended TP o
INR1,075. Our DCF assumes a cost of equity of 14% and semiexplicit, fade
periodgrowthof11.4%and3%,respectively.Thesemiexplicitperiodcapsthe
asset/equityat18x.OurSep15TPofINR1,076valuesBOBat1yrfwdadjusted
P/B of 1.1x. Reinitiate coverage with a Buy. Lowerthanestimated NIM and
slowrecover inNPLsare ke risk factors.
LastPrice(INR)Bloomberg code
Reuters code
Avg.Vol.(3m)(mn)
Avg.Val.(3m)(INRbn)
52 wk H/L (INR)
Sensex
MCAP(INRbn/USDbn)
Shareholding (%) 03/14 06/14
Promoters
MFs,FIs,Banks
FIIs
Public
Others
StockChart(Relative toSensex)
StockPerfm.(%) 1m 3m 1yr
Absolute
Rel.to Sensex
Financials(INRbn) 03 /14 03/15 f 03/16 f
NII
YoY (%)
Operatingprofit
A.PAT
Sh o/s (diluted)
A.EPS(INR)
YoY (%)
Equity/Assets (%)
P/E(x)
P/B (Adj)(x)
Ro A(%)
Ro E(%)
QuarterlyTrends 09/13 12/13 03 /14 06/14
Op. income (INRbn)
PA T (INRbn)
886.0
119.7
18.6
92.1
15.6
4. 7
4. 9
167.7143.6
17.7
56.3 56.3
27,140
380.46 /6.29
17.0
4. 7
4. 4
140.3
18.0
6. 3
43.2
13.6
444.7
120.8
11.6
43.5
444.7
0. 9
7. 4
1. 9
7. 3
14.7
44.5
1. 01. 1
0. 7
14.1
5. 3
12.7
5. 5
0. 8
7. 5
16.8
111.7
52.9
20.0
129.1
62.4
5. 7
92.9
45.4
5. 5
430.7
106.4
0. 6
BOB IN
BOB.BO
1.57
1, 010/45 0
1.37
11.7
38.7
8. 4
1. 2
0. 8
13.8
10.5
39.9
00
70
40
710
80
50
20
S e p13 J a n14 M a y14 S e p14
Bank of Baroda Sensex Rebased
ChandanaJha,+9102266842854
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BankofBaroda
Financials
25
SustainedriseinthePCRlikelytoeasetheincrementalprovisions
Afterasharpcontractionof23%inthePCRbetweenMar12 Sep13,PCRhasrecoveredinthelastthree
quartersby8.2%to50.2%attheendofJun14,partlybenefitingfromthemoderationinslippageand
marginalrecovery inthecorerevenues.BOBsPCRstayswellabovemostpeerssuchasBOI(37.5%),
PNB(47%),CBK(21.2%)andUNBK(44.2%),andisinlinewithSBIN.
Exhibit
1:Slippage
and
NPL
ratios
0.0%
0.7%
1.4%
2.1%
2.8%
3.5%
Jun12 Dec12 Jun13 Dec13 Jun14
GrossNPLratio NetNPLratioSlippage ratio
Source:Company,IL&FSInstitutionalEquities
Exhibit
2:Provision
coverage
ratio
20%
30%
40%
50%
60%
70%
Jun12 Dec12 Jun13 Dec13 Jun14
Provisioncoverageratio(exc.writeoff)
Source:Company,IL&FSInstitutionalEquities
Slippageratio,despitesomevolatility,stayswellbelowthepeakAdditionstothegrossNPLdecreasedinthethreeconsecutivequartersto1.23%intheMar14quarter
(annualised)beforerisingto2.3%intheJun14quarter,drivenbyslippageintheSMEandagri.While
slippage is likely to stay elevated in FY15f as most restructured loans are nearing their moratorium
period,weassume ittostaybelowthepeak.However,NPLratiosare likelytostayhighduetoslow
pickpickintheloangrowth.
PaceofrestructuringhasbeenmoderatinginthepastfourquartersThe addition to the stock of restructured loans has been trending down in the last few quarters.
However,thepercentageofrestructured loansaspercentageof loans increased intheJun14quarter
largelydue
to
4%
sequential
contraction
in
the
outstanding
loans.
Exhibit3:Restructuredloans
Jun12 Sep12 Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14
Loansrestructured(INRbn) 7.71 9.33 15.87 35.25 19.97 14.84 12.13 17.03 9.86
Domestic 8.03% 8.40% 9.08% 8.31% 9.72% 9.60% 9.39% 8.29% 8.81%
Overseas 4.17% 4.70% 4.82% 3.83% 3.98% 4.08% 3.57% 3.19% 3.20%
Totalrestructuredloans 6.82% 7.21% 7.68% 6.89% 7.83% 7.83% 7.49% 6.68% 7.01%
Source:Company,IL&FSInstitutionalEquities
Exposuretotheriskysectorslowerthantheindustryaverage
Exhibit4:ExposureofBOBandIndustrytotheriskysectors(Mar14)
(INRmn)
Bankof
Baroda
All
banks
Fundbased %ofdomesticloans Outstanding %oftotalloans
Miningandquarrying 25,580 0.92% 353,260 0.59%
BasicMetalandmetalproducts 161,811 5.82% 3,619,690 6.02%
Energy 187,543 6.75% 4,883,460 8.12%
Total 374,933 13.49% 8,856,410 14.73%
Source:Company,IL&FSInstitutionalEquities
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26
Weestimate20bpfallinprovisionsfollowingslowingNPLaddition
IncrementalgrossNPL(rise ino/sgrossNPLasapercentageofstarting loans)declined4bpyoy in
FY14 to1.17%. It increased79bp in thepreceding twoyears.Weassumestable incrementalNPL in
FY15f as the stress may sustain due to large restructured loans nearing their moratorium period.
However,wefactora37bpfallintheincrementalNPLoverFY16fFY17fto0.80%inFY17f.However,
moderationintheloangrowthmayleadtothe86bpriseinthegrossNPLratioto3.80%.
However,fallinNPLprovision/loansisestimatedtobelower,at8bpWebuild inhigherNPLprovisions inourestimate tobring thePCRratiocloser to itshistorical level.
Historically,BOBsPCRhasremainedabovepeers.NPLprovisions/loansdeclined19bpyoyto0.80%
in FY14. We estimate a decline of 8bp to 0.72% FY15fFY17f and estimate 7.5% rise in the PCR to
56.7%. The threeyear average NPL provisions/loan is estimated at 0.76%,just 4bp lower than the
precedingthreeyearsaverage.
Exhibit5:NPLratioandincrementalNPL
0.0%
0.8%
1.6%
2.4%
3.2%
4.0%
Mar11 Mar13 Mar15f Mar17f
IncrementalNPL GNPLratio
NNPLratio
Source:Company,IL&FSInstitutionalEquities
Exhibit6:NPLprovision/loan,PCR
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
Ma r11 Ma r13 Ma r15f Ma r17f
30%
40%
50%
60%
70%
80%
NPLprovision/loans PCR(RHS)
Source:IL&FSInstitutionalEquities
FallinNIMlikelytobearrestedasfundingcost,slippagesmoderate
Withthe
sharp
reduction
in
the
high
cost
bulk
deposits
(CDs/term
deposits
at
4%
at
the
end
of
Jun14)
andstableCASA,weestimate11bpfallinthecostofdeposits.Also,yieldsarelikelytobenefit,asthe
slippagetrendsdownward.ThelargeNIMcontraction,by60bp,seenoverthepasttwoyearsreversed
intheJun14quarterandislikelytosustain.Weestimate5bpexpansioninFY15f.
Exhibit7:NIM,depositcost,yield(quarterly)
5
6
7
8
9
10
Jun12 Dec12 Jun13 Dec13 Jun14
2.0
2.2
2.4
2.6
2.8
3.0
Costofdeposits YieldonloansNIM(RHS)
Source:Company,IL&FSInstitutionalEquities
Exhibit8:CalculatedNIMfortheyear(%)
0.5
1.0
1.5
2.0
2.5
3.0
Mar11 Mar13 Mar15f Mar17f
NIM
Source:Company,IL&FSInstitutionalEquities
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EstimatedretainedearningscouldsustainCET1above8%tillFY17f
BOB is capitalised better than peers and is unlikely to require dilution in the near term. CET 1 was
8.95%andCARat12.28%attheendofMar14.TierIwas9.06%andCARat11.91%attheendofJun14
(withoutaddingbackquarterlynetprofit).3%dilutioninFY15fandpickupinretainedearninggrowth
islikelytosustainCET1above8.4%overthenextthreeyears.Also,amoderationintheRWAgrowthis
assumedtosustain,preservingthecorecapital.WeassumeRWAtoriseatathreeyearCAGRof16%.
Exhibit9:CapitalratiosattheendofJun14
0
3
6
9
12
15
CAR TierI CET1 TierII
Source:Company,IL&FSInstitutionalEquities
Exhibit10:GrowthinRWA,retainedearnings,TierI
5%
6%
7%
8%
9%
10%
Ma r1 4 Ma r1 5f Ma r1 6f Ma r1 7f 0%
5%
10%
15%
20%
TierI(RHS)Retainedearnings(yoy)RWA(yoy)
Source:Company,IL&FSInstitutionalEquities
Despiteelevatedprovisions,scopeforRoEandRoAexpansion
Exhibit11:RoA,RoE
0.4
0.6
0.8
1.0
1.2
1.4
Mar11 Mar12 Mar13 Mar14 Mar15f Mar16f Mar17f
0
6
12
18
24
30
RoA RoE(RHS)
Source:Company,IL&FSInstitutionalEquities
We forecast an expansion in the return ratios over FY15fFY17f, driven by the peaking of NPLs and
gradual NIM expansion. RoA and RoE is estimated to expand 4bp and 206bp, to 0.8% and 15.9%,
respectively.TheimprovementinprofitabilityisestimateddespitefactoringelevatedNPLprovisions.
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MostpreferredamongPSBsonundemandingcurrentvaluation...
Exhibit12:Discount/premiumofBOBtoPNBandSBIN,adjustedP/BofBOB
40%
20%
0%
20%
40%
60%
Jun09 Dec09 Aug10 Mar11 Oct11 May12 Nov12 Jul13 Jan14 Aug14
0.0
0.5
1.0
1.5
2.0
2.5
AdjustedP/B(RHS) PremiumtoPNB DiscounttoSBI
Source:Company,IL&FSInstitutionalEquities
andhigherprofitability
Higher RoE could drive the relative outperformance of BOB. With superior asset quality and
profitabilitycompared to peers, asharp recent fall in itspremium to PNB and rise in itsdiscount to
SBINcouldreverse.BOBisourmostpreferredstockamongPSBs.
Exhibit13:RoEofBOBandpeers
FY13 FY14 FY15f FY16f FY17f
BOB 15.68 13.80 14.09 14.70 15.87
BOI 12.95 11.16 11.22 12.65 13.33
PNB 16.48 10.17 11.30 13.31 15.12
SBIN 15.43 10.03 11.37 12.74 14.03
Source:Company,IL&FSInstitutionalEquities
OurTPvaluesBOBat1yearforwardadjustedP/Bof1.1xOur target price is based on the DCF, P/E and P/B methods. Our DCFbased fair value stands at
INR1,076,whereinweassumeacostofequityof14%aswellassemiexplicitandfadeperiodgrowth
of11%and3%,respectively.Thesemiexplicitperiodcaps theasset/equityat18xand links itto the
growth. Our Sep15 target price of INR1,076 values BOB at 1.1x the oneyear forward adjusted book
value.WereinitiatecoveragewithaBuyrating.
Exhibit14:AverageP/EandP/B(till2Sep13)
1month 3month 6month 12month 2year 3year 5year
P/E 6.58 6.58 6.48 5.75 5.48 5.44 6.15
P/B 1.03 1.02 0.99 0.86 0.89 0.97 1.20
Source:Company,IL&FSInstitutionalEquities
Exhibit15:P/E,P/B andDCFbasedTP,andweightedaverageTP
P/E P/B DCF/SOP TP
Weights 35% 35% 30%
952 1,179 1,101 1,076
Source:Company,IL&FSInstitutionalEquities
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Exhibit16:OneyearforwardP/BandtargetP/B
0.4
0.8
1.2
1.6
2.0
2.4
Ja n10 Dec10 Nov11 Nov12 Oct13 Sep14 Sep15
1yearforwardP/ABV(X) 5yearaverage
12monthsmovingaverage
Source:Company,IL&FSInstitutionalEquities
Exhibit17:OneyearforwardP/EandtargetP/E
2
4
6
8
10
Ja n10 Dec10 Nov11 Nov12 Oct13 Sep14 Sep15
1yearforwardP/E(X) 5yearaverage12monthsmovingaverage
Source:Company,IL&FSInstitutionalEquities
Riskfactors:
Some of the large exposures become delinquent, leading to higherthanestimated slippage and
NPLprovisions.
SustainedmonetarytightnessoverFY15FY16islikelytohurtmarginsduetohighercostoffunds,
giventhelowCASAofthebank.
Growthpicksupsignificantlyanddilutionbecomes imminent inthenearterm leadingtoa lower
thanestimatedRoE.
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30
Financialsandvaluations
Incomestatement(INRbn) DecompositionofRo A (% )Fiscalyear ending 03/14 03/15f 03/16f 03/17f Fiscalyearending 03/14 03/15f 03/16f 03/17f
Ne tinterest incom e 119.7 143.6 167.7 200.0 Netinteresti ncome 1.98 2.03 2.07 2.12
Feei ncome 24.8 2 7.7 3 2.8 39.2 Feei ncome 0.41 0.39 0.40 0.42
Tradingprofi t 7.4 8.1 9.9 11.1 Otheri ncome 0.33 0.32 0.33 0.33
Otheri ncome 12.4 14.8 17.2 20.0 Opera ti ng
i ncome 2.72
2.75
2.80
2.86
Totaloperatingincome 164.3 194.1 227.6 270.4 Operatingexpens es 1.18 1.17 1.21 1.24
Total operatingexpens e 71.4 82.4 98.4 117.6 Operatingprofit 1.54 1.58 1.59 1.62
Operatingprofit 92.9 111.7 129.1 152.8 Loanloss provi s i ons 0.49 0.51 0.47 0.46
Provisionfor ba ddebt 29.4 35.7 38.2 43.3 Pr ovi si onfor i nves tments 0.03 0.01 0.02 0.02
Other provi s i on 8.6 6.5 8.8 10.4 Otherprovi s i ons 0.11 0.08 0.09 0.09
PBT (reported) 55.0 69.6 82.1 99.2 Ta x 0.16 0.24 0.24 0.25
Total taxes 9.6 16.7 19.7 23.8 Netprofi t 0.75 0.75 0.77 0.80
PAT (reported) 45.4 52.9 62.4 75.4
(+)Sharein asso c .ea rni ngs 0.0 0.0 0.0 0.0
Less:Minority i nteres t 0.0 0.0 0.0 0.0 RoA 0.75 0.75 0.77 0.80
Priorperiodi tems 0.0 0.0 0.0 0.0 As s ets /Equi ty 18.34 18.80 19.13 19.90
Netincome(reported) 45.4 52.9 62.4 75.4 RoE 13.80 14.09 14.70 15.87
Adjustednet incom e 45.4 52.9 62.4 75.4
Shares outstanding(mn) 430.7 430.7 430.7 430.7
Dil.shares (mn) 430.7 444.7 444.7 444.7
DilEPS (INR) 105.4 118.9 140.3 169.5
Growthratios(% ) KeyRatiosLoa ns 21.0 15.6 17.7 17.8 Fiscalyearending 03/14 03/15f 03/16f 03/17f
Netinteresti ncome 5.7 20.0 16.8 19.3 Valuationratios(x)
Feei ncome 20.2 1 1.7 1 8.6 19.6 P/E(on dil.EPS) 8.40 7.45 6 .31 5.23
Provisionfor ba ddebt 4.3 2 1.5 7.1 13.3 P/BV 1.06 0 .96 0 .86 0 .77
Adjusted neti nc ome 1.3 16.4 18.0 20.8 P/Adj us tedBV 1.21 1.09 0.96 0.85
Dil.EPS 0.6 12.7 18.0 20.8 Di vi dendyield(%) 2.84 3.39 4.06 5.30
Operating ratios(% ) Pe rshare ratios(INR)NII/operatingi ncome 72.8 74.0 73.7 74.0 Bas i c ReportedEPS (INR) 106.4 122.7 144.9 175.0
Feeincome/operatingi ncome 15.1 14.3 14.4 14.5 Di l utedReportedEPS (I NR) 106.4 120.8 140.3 169.5
Operatingprofitma rgi n 56.6 57.5 56.7 56.5 ReportedBookValue(BV) 8 35 .6 9 26 .1 1 ,0 30 .4 1 ,1 52 .9
Netprofitmargi n 27.6 27.2 27.4 27.9 Adj us tedBookValue(ABV) 731.4 810.0 919.6 1,043.8
EffectiveTa xrate 17.4 24.0 24.0 24.0 Di vi dendper sh ar e(INR) 25.2 30.0 36.0 47.0Ba ance s e e t I N R n Return/Profitability Ratios(%)
Yieldon
advances 7.69
7.81
7.86
7.97
Fiscalyear ending 03/14 03/15f 03/16f 0 3/17f Yieldon i nves tments 7.32 7.39 7.40 7.41
Equitycapi tal 4.3 4.4 4.4 4.4 Cos tofdepos i ts 4.84 4.73 4.74 4.76
Preferencec api ta l 0.0 0.0 0.0 0.0 Netinterestmargi n 2.03 2.08 2.11 2.16
Reserves a nd s urpl us 355.5 407.4 453.8 508.2 Feeincome/Op revenue 15.07 14.25 14.41 14.50
Ne tworth 359.9 411.8 458.2 512.7 Tradingprofit/Oprevenue 4.53 4.16 4.33 4.12
Depos i ts 5,688.9 6,599.2 7,712.2 9,069.9 Opexpense/Op revenue 43.44 42.47 43.26 43.50
Total borrowi ngs 191.2 168.2 178.2 187.5 CapitalizationRatios(%)
Other l iabil ities an dprovi s ion 355.0 340.0 371.3 408.4 Equi ty/As s ets 5.46 5.48 5.25 5.04
Totalliabilities 6,595.0 7,519.2 8,719.9 10,178.5 Loans /As s ets 60.20 61.04 61.97 62.55
Casha nd bankb al a nc es 1 ,3 08 .8 1 ,4 27 .7 1 ,6 32 .3 1 ,9 04 .0 I nves tmen ts /As s ets 17.61 17.64 17.08 16.63
Inves tments 1,161.1 1,326.1 1,489.5 1,692.6 Di vi dendpa yout 23.86 25.24 25.66 27.74
Loa ns 3,970.1 4,589.7 5,404.1 6,366.5 Interna l capital growth 10.81 10.98 11.26 11.88
Fixeda s s ets 27.3 2 9.9 3 1.7 33.0 Capi tal a dequa cy 12.28 10.67 10.26 9.74
Other a s s ets 127.7 145.8 162.2 182.4 AssetQuality
Totalassets 6,595.0 7,519.2 8,719.9 10,178.5 Gross NPL ra ti o 2.94 3.55 3.69 3.80
BusinessRatios(%) NetNPL ra ti o 1.52 1.80 1.73 1.68
Loan/Depos i t 69.8 69.5 70.1 70.2 NetNPL /networth 17.5 20.6 20.7 21.0
Investment/Depos i t 20.4 20.1 19.3 18.7 Loanl o ss reserve /Gross NPL 49.2 50.2 54.1 56.7
SLRInvestment/Depos i t 17.0 17.0 16.6 16.2 Loanprovisions/NII 24.5 24.9 22.8 21.6
SLRInvestment/NDTL 16.5 16.6 16.2 15.9 Loanprovisions/Total l oa ns 0.74 0.78 0.71 0.68
Debenture/Inves tment 3.4 2.9 2.6 2.3 Productivity/Efficiencyratios
Businessper branch( IN Rm n) 1 ,9 8 1.7 2,121.5 2,353.1 2,627.9
Netprofitper employee(I NRmn 0 .9 9 1.11 1.28 1.51
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IndiaEquityResearc
Financial
September04,2014
B U Y HDFCBankTargetPrice(INR) 1004 Sharpfallinvaluationpremiumunlikelytosustain
CompanyReport A sustained cost advantage and fall in provisions is likely to suppor
RoAexpansionoverFY15fFY17f.DuringFY14,alargedeclineof32bp
inthe
cost/asset
ratio
over
FY13
FY14
offset
the
weakness
in
fees
and
NIM.Retailloangrowthislikelytoreboundwiththebottomingofthe
vehicle loans in the 2HFY15. The retail loan proportion is likely to
stabilise near 49%. The asset quality cycle is poised to stabilise; we
forecast a 0.15% incremental NPL by Mar16f, 12bp fall over FY14. A
sharpdrop inthevaluationpremiumoverpeers is inconflictwith its
superiorreturnratios.OurSep15TPofINR1,004valuesthestockata
P/Eof16.3xandP/Bof3.07x,15%discounttoits5yearmean.Were
initiatecoveragewithaBuyrating.
Sharpfallinvaluationpremiumtopeersunlikelytosustain
The
valuation
premium
of
HDFCB
to
AXSB
and
ICICIBC
in
P/B
(adjusted)
hafallenby c60% in thepastsixmonths, wellbelow the fiveyearmean.Highe
NIM and low credit cost has sustained superior RoA and RoE of HDFCB
compared to peers. The average (FY13FY14) RoA and RoE of HDFCB were
higherthanpeersbyupto0.17%and7.25%,respectively.Thesuperiorasse
quality and NIM isunlikely to fade away. Hence,asharp fall in thevaluation
premium of HDFCB to peers is unlikely to sustain and the current valuation
couldprovidereasonablereturnwithrelativeoutperformanceover12months
Assetqualitypoisedtostabilisewithgradualreboundinretailsegment
The asset quality in the CV/CE portfolio has likely peaked, but should stay
stable rather than improve until there is a material change in the underlying
industryconditions.WeforecastanincrementalNPLof0.15%adeclineof12
bpover
FY14
by
FY16f.
With
low
NPLs
and
astrong
capital
position,
HDFCB
i
wellplacedtorebound ingrowth,asdemandpicksup.Weexpecttotal loan
andretailloanstoincreaseata3yearCAGRof21%and20%,respectively.
Significantleverspresenttosustaincostratioimprovement
Despite assuming normalised employee addition and a rise in the average
pay/employee, a 32bp fall in the costasset ratio in the past two years may
sustainduringFY15fFY17f.Thereisscopeforcost/incomeratioimprovement
ledbytheoperatingleverage,derivingbenefitsfromsignificantinvestmentsin
distribution (including branches) that is yet to reach full productivity. Some
structural techbased improvements in process, led by digitisation, could
translateintostructuralcostbenefits.Weforecastthecostincomeratiotostay
closeto44%,lowerthanthelastthreeyearaverageof48%.
CAGRof
24%
in
PAT
likely
to
drive
19
bp
RoA
expansion
We forecasta CAGR of 24% in PAT over FY15fFY17f, driven by a14bpNIM
expansion, sustainable cost advantage and declining provisioning burden. A
decrease in provisions is likely to support RoA expansion. An uptrend in the
RoAisbelievedtosustain;weforecasta19bpexpansionto2.09%.OurSep15
TPofINR1,004valuesthestockat16.45xand3.07xtheoneyearforwardP/E
andP/B,respectively.WereinitiatecoverageonthestockwithaBuyrating.
LastPrice(INR)Bloomberg code
Reuters code
Avg.Vol.(3m)(mn)
Avg.Val.(3m)(INRbn)
52 wk H/L (INR)
Sensex
MCAP(INRbn/USDbn)
Shareholding (%) 03/14 06/14
Promoters
MFs,FIs,Banks
FIIs
Public
Others
StockChart(Relative toSensex)
StockPerfm.(%) 1m 3m 1yr
Absolute
Rel.to Sensex
Financials(INRbn) 03 /14 03/15 f 03/16 f
NII
YoY (%)
Operatingprofit
A.PAT
Sh o/s (diluted)
A.EPS(INR)
YoY (%)
Equity/Assets (%)
P/E(x)
P/B (Adj)(x)
Ro A(%)
Ro E(%)
QuarterlyTrends 09/13 12/13 03 /14 06/14
Op. income (INRbn)
PA T (INRbn)
856.7
184.8
9. 9
52.3
34.1
8. 0
25.4
276.0227.9
10.1
22.6 22.6
27,140
2,067 /34.18
33.9
8. 1
25.4
55.7
24.2
15.4
3. 4
23.2
2,411.1
44.9
23.3
69.5
2,411.1
5. 1
1. 5
3. 9
5. 3
19.9
67.8
2. 83. 3
2. 0
20.5
10.3
26.9
10.5
2. 1
19.1
21.1
179.9
108.1
23.3
219.4
134.3
16.9
143.6
84.8
8. 8
2,399.1
35.5
25.0
HDFCBIN
HDBK.BO
1.99
86 5/55 7
1.64
18.4
63.4
24.2
4. 7
1. 9
21.3
19.8
63.2
20
00
80
60
40
20
S e p13 J a n14 M a y14 S e p14
HDFC Bank Sensex Rebased
ChandanaJha,+9102266842854
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HDFCBank
Financials
32
Pickupinretailloanslikelyasvehicleloansbottomout
Retail loans reported a sharp slowdown in FY14 due to the slump in the vehicle loan segment. As a
percentageofnet loans,retail loanswere49%attheendofMar14,decliningfromapeakof57%at
the end of Mar12. Retail loans increased at a CAGR of 18% over FY13FY14, largely driven by
unsecured loanspersonal loansandcreditcards; theytogethercomprise22%ofretail loans.While
creditcardsroseataCAGRof33%,personalloansandbusinessbankingwentupatCAGRsof21%and
16%,respectively.
HDFCB
has
the
option
of
retaining
c70%
of
mortgages
that
the
bank
originates
for
theparentHDFC(HDFCIN,NR).ThemortgagebooksizewasINR193bnattheendofMar14;HDFCB
originatescINR5bnmortgagespermonthandwebelieve,itislikelytoaidloangrowth.
Exhibit1:Breakupofretailloans
24.6% 22.1%
12.2%9.6%
13.0%13.6%
17.4%16.7%
13.3%12.9%
6.5%8.2%
13.0% 16.8%
0%
25%
50%
75%
100%
Mar12 Mar14
Auto CV PL BB Home Creditcard Others
Source:Company,IL&FSInstitutionalEquities
Vehicle loanhasseenasignificantslowdown inthepasttwoyearswiththeCAGR inCV/CEandauto
loansat5%and12%,respectively.Commercialvehicleloans,asapercentageofretailandtotalloans,
havebeendecliningconsistentlyoverthepasttwoyears.Theshareinretailloansdeclinedfrom12.2%
atthe
end
of
Mar12
to
8.9%
at
the
end
of
Jun14.
Exhibit2:Growthinretailloansandretailasapercentageofnetloans
0%
8%
16%
24%
32%
40%
Mar12 Jun12 Sep12 Dec12 Mar13 Jun13 Sep13 Dec13 Mar14
45%
48%
51%
54%
57%
Retail/net loans(RHS) Totalloangrowth Retailloangrowth
Source:Company,IL&FSInstitutionalEquities
CAGRof20%assumedinretailloansduringFY15fFY17fWithlowNPLsandstrongcapitalposition,HDFCBiswellplacedtoreboundingrowth,asdemandpicks
up; the competitions ability to absorb elevated demand may be limited. During FY15fFY17f, we
expecttotalloanstoriseataCAGRof21%andretailloansat20%.
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HDFCBank
Financials
33
Exhibit3:CAGRinloans
Mar11Mar12 Mar13Mar14 Mar15Mar17f
Totalloans 23.7% 23.9% 20.7%
Retailloans 39.8% 18.2% 19.8%
Source:Company,IL&FSInstitutionalEquities
SBdeposits
to
gain
traction
as
newly
opened
branches
yield
benefits
The pace of branch additions has increased in thepast three years ended Mar14 with1,417 branch
additions, much higher than the 574 branches added in the preceding two years (Mar09Mar11).
DuringFY14,74%of the banksbranches opened in the semiurban andrural regions; this lifted the
shareofsemiurbanandruralbranchesfrom53%attheendofMar13to55%attheendofMar14.The
SB deposits grew at a CAGR of 18% during FY12FY14, moderating from 35% in the preceding two
years, partly due to high inflation. The CAGR in SB deposits may begin to pick up, as inflation
moderates and large branch expansion undertaken in the last three years yield benefits. While we
assume branch addition to moderate in the forthcoming years, we forecast a CAGR of 20% in SB
depositsduringFY15fFY17f.WeexpecttheCASAratiotoremainwithin45%47%overFY15fFY17f.
Exhibit4:Savingsdeposits
0%
5%
10%
15%
20%
25%
J un1 2 De c1 2 J un1 3 De c1 3 J un1 4
25%
26%
27%
28%
29%
30%
SBdeposits
growth
SBdepositsproportion(RHS)
Source:Company,IL&FSInstitutionalEquities
Exhibit5:CAGRinsavingsdeposits
0%
7%
14%
21%
28%
35%
Mar09Mar11Mar11Mar14Mar14Mar17f
500
700
900
1100
1300
1500
CAGRinSBdeposits Bra nchesadded
Source:Company,IL&FSInstitutionalEquities
Significantleverspresenttosustainimprovementincostratios
DeclineincostratioexceededfallinfeeintensityoverFY12FY14Exhibit6:Cost/asset,fee/assetandNII/assetratios(%)
1.0
1.7
2.4
3.1
3.8
Mar10 Mar11 Mar12 Mar13 Mar14 Mar15f Mar16f Mar17f
3.4
3.7
4.0
4.3
4.6
Fee /assets Cost/assets NII/asset(RHS)
Source:Company,IL&FSInstitutionalEquities
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HDFCBank
Financials
34
During the two years ended Mar14, HDFCBs cost/asset ratio decreased 32bp, while the fee/asset
ratiofell21bpandtheNII/assetratiodeclinedmarginallyby6bp.Thus,therelativeadvantageoffees
andNIIovercosthasincreasedby5bp.
Exhibit7:Costratios(%)
Mar10 Mar11 Mar12 Mar13 Mar14 Mar15f Mar16f Mar17f
Employee
cost/asset
1.13 1.13 1.11 1.07
0.94
0.94 0.96 0.98Nonemployeecost/asset 1.80 1.73 1.91 1.97 1.76 1.68 1.71 1.70
Totalcost/asset 2.93 2.86 3.02 3.04 2.70 2.62 2.66 2.68
Costincome 48.0 48.1 49.7 49.6 45.6 44.5 44.1 43.8
Source:Company,IL&FSInstitutionalEquities
Despitenormalisedemployeeaddition,riseinaveragepay/employeeDuringFY14,HDFCBsoperatingexpenseincreasedjust7%;employeecostwentupevenlower,justby
5%yoy,partlydrivenbythedeclineinnumberofemployeesby900to68,165attheendofMar14.
This follows a largenet additionof 13,200 employees in the past twoyears.We assumeaddition of
employeestobenormalisedwith11,338netadditionsduringFY15fFY17f.Ourforecastassumesthe
average pay per employee to grow at an accelerated pace of 17% (compared tojust 5% in the
precedingthreeyearsoverthenextthreeyears,astheeconomyrebounds).
improvementincostratiosforecasttosustainduringFY15fFY17fWithanincreaseinthepaceofrevenueandassetgrowth,theimprovementincostratiosisforecastto
sustain. The biggest driver in sustaining cost ratios would be the operating leverage. The bank has
madesignificantinvestmentsoverthelastfewyearsindistribution(includingbranches)andthatisyet
to reach full productivity.Thisoperating leverage impactshould last another 12years at least.The
strongcostcuttingexerciseoverthepastyearorsohasalsoyieldedresults.Someofthisisvulnerable
tobeingunwoundwhengrowthreturns,butthemanagementbelievesthatsomeofthiscostcontrol
willremain.Therearesomestructuraltechbasedimprovementsinprocess,largelyledbydigitisation.
Theprimarybenefithasbeen inbettercustomerserviceand fasterturnaroundtimes,but thiscould
translateintosignificantstructuralcostbenefitsoverthelongterm.
DecliningprovisionstosupportRoAexpansionoverFY15fFY17f
IncrementalNPLforecastat0.17%,4bplowerthanpast3yearaverageTheassetqualityintheCV/CEportfoliohas likelypeaked,butshouldstaystableratherthan improve
untilthereisamaterialchangeinunderlyingindustryconditions.
Exhibit8:NPLratiosandincrementalNPL(%)
0.0%
0.3%
0.6%
0.9%
1.2%
Ma r1 1 Ma r1 3 Ma r1 5f Ma r1 7f
0.13%
0.03%
0.07%
0.17%
0.27%
GNPLratioNNPLratioIncrementalNPL(RHS)
Source:Company,IL&FSInstitutionalEquities
Exhibit9:Provisions/assetsandPCR
0.00%
0.12%
0.24%
0.36%
0.48%
Ma r11 Ma r13 Ma r15 f Ma r17f
65%
70%
75%
80%
85%
NPLprovisions/assets
Otherprovisions(exc.taxand invest.)/assets
NPLprovisions/grossNPL
Source:Company,IL&FSInstitutionalEquities
Theassetqualityinotherretailloansisstillstrong,creditcostsanddelinquencieshavebeenrisingover
thepastyearorso,butthemanagementseesthataspartofthenormalisationprocess.Therecouldbe
somemoreuptickiftheeconomystaysweak,butthemanagementdoesnotexpectanalarmingspike,
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HDFCBank
Financials
35
given the overall standards of credit control. The overall corporate loan portfolio is likely to remain
stable;apartfromsomeaccountspecificrisks,theoverallportfolio isstable.Weassume incremental
NPL to decline 12bp to 0.15% over FY15fFY16f. The average incremental NPL for FY15fFY17f is
assumed at 0.17%, 4bp lower than the preceding three years. The gross NPL ratio is estimated to
decline7bpto0.98%bytheendofFY17f.Theprovisioncoverageratioisforecasttoremainatc70%
duringFY15fFY17f.TheNPLprovision/assetsincreased6bpto0.37%;weforecasta7bpdeclineover
thenext
three
years,
following
the
softening
in
the
incremental
NPL.
A
large
rise
in
other
provisions
during FY11FY12 was driven by a floating provision of INR13.7bn. We assume the decline in other
provisionswiththenormalisationofNPLsinthepasttwoyearstosustainandremaincloseto5bp.
CAGRof24%inPATlikelytodrive19bpRoAexpansionWe forecast aCAGR of 24% in PAT over FY15fFY17f, driven bya 14bp NIM expansion, sustainable
costadvantageandthedecliningburdenofprovisions.Adecreaseinprovisionsisbelievedtosupport
earningsgrowthandRoAexpansion.Arise inRoA inthepastfouryears isbelievedtosustainduring
thefollowingthreeyearswithaforecastedexpansionof19bpto2.09%.TheRoEislikelytostayclose
tothe21%level.
Exhibit10:TrendinRoEandRoA
0
5
10
15
20
25
Mar10 Mar11 Mar12 Mar13 Mar14 Mar15f Mar16f Mar17f
1.20
1.40
1.60
1.80
2.00
2.20Asset
/
Equity RoE RoA
Source:Company,IL&FSInstitutionalEquities
ValuationpremiumofHDFCBtopeerswellbelow3yearmean
Exhibit11:ValuationpremiumofHDFCBoverAXSBandICICIBCinadjustedP/B
0%
70%
140%
210%
280%
Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14 Sep14
AXSB ICICIBC
Source:Company,IL&FSInstitutionalEquities
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HDFCBank
Financials
36
ThevaluationpremiumofHDFCBtopeers, intheadjustedP/Bhascontractedsignificantly inthe last
sixmonths.ThepremiumofHDFCBtoICICIBCcontractedbyc74%andtoAXSBbyc79%toc42%and
c50%,respectively,inthepastsixmonths;thiswaswellbelowthethreeyearmean.
SustainedhigherRoA,RoEtoreversethefallinvaluationpremium
HighermarginsandlowcreditcosthaveledtoasustainedsuperiorRoAforHDFCBcomparedtopeers.
Thecompetitiveedge inassetqualityandlowcostfunds isunlikelytofadeawayoverthenextthree
years.Hence,asharpfallinthevaluationpremiumofHDFCBtopeersisunlikelytosustain.
Exhibit12:AverageRoE(%)
0
7
14
21
FY13FY14 FY15f FY17f
AXSB HDFCB ICICIBC
Source:Company,IL&FSInstitutionalEquities
Exhibit13:AverageRoA(%)
0.0
0.7
1.4
2.1
FY13FY14 FY15f FY17f
AXSB HDFCB ICICIBC
Source:Company,IL&FSInstitutionalEquities
Targetpricevaluesstockat3.07x,1yearforwardadj.P/B
WevalueHDFCBcombiningtheDCF,P/EandP/Bmethods.OurthreestageDCFusesexplicitforecasts
untilFY17,followedby10yearsofsemiexplicitforecasts,whereweassumeaCAGRof21% in loans
and a dividend payout of 20%. We also assume the RoA at the end of the semiexplicit period to
converge to 1.2% (fiveyearaverage for new privatebanks).The finalstageof 12 yearsassumes the
convergenceofRoEandCoE(expectedtobe14%).ThismethodresultsinafairvalueofINR575.
WeestimatethemeanoneyearforwardP/EandP/Bforthefiveyearperiodended02Sep14at19.5x
and3.6x,respectively.WeapplythesetoourforecastedEPSandP/BforSep15toarriveatfairvalues
of INR1,198 and INR1,179, respectively. Our Sep15 TP of INR1,004 is a weightedaverage, where we
assignaweightof30%toourDCFvalueand35%eachtoourP/EandP/Bvalues.
Exhibit14:OneyearforwardP/E(x)andtargetP/E
10
15
20
25
30
Ja n10 Dec10 Nov11 Nov12 Oct13 Sep14 Sep15
1yearforwardP/E(X) 5yearaverage12monthsmovingaverage
Source:Bloomberg,IL&FSInstitutionalEquities
Exhibit15:OneyearforwardP/BandtargetP/B
2.2
2.9
3.6
4.3
5.0
Ja n10 Dec10 Nov11 Nov12 Oct13 Sep14 Sep15
1yearforwardP/ABV(X) 5yearaverage
12monthsmovingaverage
Source:Bloomberg,IL&FSInstitutionalEquities
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HDFCBank
Financials
37
Exhibit16:AverageP/EandP/B(till02Sep14)
1month 3month 6month 12month 2year 3year 5year
P/E 17.51 17.76 17.28 16.66 17.68 18.03 19.49
P/B 3.03 3.16 3.30 3.27 3.49 3.48 3.60
Source:Company,IL&FSInstitutionalEquities
Exhibit17:P/E,P/B andDCFbasedTP,andweightedaverageTP
P/E P/B DCF/SOP TP
Weights 35% 35% 30%
1,198 1,179 575 1,004
Source:Company,IL&FSInstitutionalEquities
Keyriskstoourestimates
Lowerthanestimatedsavingsdepositsgrowth inFY15fandFY16fmaydecreasetheproportionof
savingsdeposits,leadingtolowerNIMexpansion.
NPLratiosmayrise in linewithhigherthanestimated incrementalNPLs.Loanlossprovisionsmay
behigherunderthisscenario,resultinginadownwardrisktoearnings.
A
rebound
in
fee
intensity
may
be
higher
than
our
estimates,
resulting
in
an
upward
risk
to
earnings.
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39/81Pleaserefertothedisclaimertowardstheendofthedocument.
IndiaEquityResearc
Financial
September04,2014
A D D ICICIBankTargetPrice(INR) 1780 Uptrendinprofitabilitytodrivethevaluation
CompanyReport ICICIBChasderisked its loanbook inrecentyears;thequalityof the
retail book has been resilient, as the bank has focused on secured
retail
loans
in
the
past
34
years
and
cut
down
on
risky
retail
loansignificantly. Given the strong liability mix (CASA ratio of 43% at the
end of FY14) and increase in yields, partly driven by rising working
capital lending, we forecast NIM expansion to sustain in FY15f
althoughbya lesserextentof9bpto3.24%.The incrementalNPLo
ICICIBChasremainedwellbelowthepeakduringFY07FY08(average
of1.25%).APATCAGRof16%wouldlifttheRoEby2.62%to16.7%by
FY17f.OurSep15TPofINR1,780valuesthestockat2.23xtheoneyea
forwardadjustedP/B.WereinitiatecoveragewithanAdd.
LargereboundinNIMduringFY11FY14islikelytosustain
DuringFY11FY14,
the
NIM
expanded
54
bp,
driven
by
a172
bp
improvemen
intheyieldon loans,whilecostofdepositsrose lowerby101bp.Addressing
structural issuessuchas,reductionofthedragfromsecuritisationlosses,loan
pricingandreductionofexcess liquidity intheoverseasbranchescontributed
tothe improvement intheyieldon loans.Giventhestrong liabilitymix(CASA
ratio of 43% at the end of Jun14) and increase in yields, partly led by rising
working capital lending, we forecast NIM expansion to sustain in FY15f
although by a lesser extent of 9bp to 3.24%. The NII/assets is estimated a
2.99%forFY15f,an8bpimprovementyoy.
Despiterise,incrementalNPLwellbelowpeakduringFY07FY09
ICICIBCsincrementalNPLduringFY13FY14hasremainedwellbelowthepea
during FY07FY08 (average of 1.25%). While the management has guided fo
an
improvement
in
FY15f,
we
assume
the
incremental
addition
at
0.25%similartothatinFY14.NPLprovision/loanisunlikelytodeclinemateriallyfrom
the current level and is estimated at 0.42% of the loans over FY15fFY17f
similartothemeanoftheprecedingthreeyears.
ExpansioninRoEaheadofsomepeers;gapnarrowssignificantly
ICICIBC reported large expansion in its return ratios in the preceding three
yearswith itsRoEandRoAexpandingby40bpand437bp,respectively.The
large gap in RoE with some peers such as AXSB and HDFCB has contracted
significantly.APATCAGRof16%wouldlifttheRoEby2.62%to16.7%byFY17f
Mostpreferredamongnewbanks