ambit bfsi sectorupdate iciciandaxis 05mar2014

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

ICICI and Axis - Separated at birth Our bottom-up analysis of ICICI Bank and Axis Bank shows that Axis Bank is poised to grow its earnings faster than ICICI Bank, due to its faster balance sheet growth, a better cushion on margins, and relatively greater control over its credit quality in FY15-16. We turn BUYers on Axis Bank with a target price of `1,450/share (12% upside) and remain BUYers on ICICI Bank with a target price of `1,175/share (10% upside). We expect Axis Banks current valuation premium over ICICI Bank to sustain and we expect Axiss superior EPS growth relative to ICICI to give it the lead in generating shareholder returns.

Axis Bank scores over ICICI on operating performance

Momentum in retail loans (growing at ~30% YoY) and a healthy SME book provides Axis Bank, relative to ICICI Bank, levers to protect its balance sheet growth at a time when corporate credit growth has collapsed. Muted growth in corporate and SME loans means that ICICI Banks NIMs are at relative risk than Axis. Given their focus on retail lending, the fee income trends and cost ratio trends for both banks are likely to be under pressure. We expect Axis to deliver 15% operating profit CAGR (FY14-16E) vs 13% for ICICI.

Asset quality a concern; near-term headwinds for ICICI Bank

After aggressive growth in domestic corporate credit in FY08-11, Axis Bank took its foot off the pedal in FY11. Hence, Axis Banks asset quality has deteriorated in a controlled manner (stable addition, ~2.5% of loans, to stressed loans in last 10 quarters). ICICI Bank accelerated growth in the stressed segment in FY12 and FY13 and seems to be paying the price in the form of sharp asset quality deterioration of late (Addition to stressed loans jumped to ~4% and is likely to further rise.) The environment is fraught with risks for both banks due to their exposure to Power, other Infra and Iron & Steel and, we expect, addition to stressed assets to remain elevated (3.5-3.9% of loans for both banks) in FY15. However, even in a stressed scenario, the buffers in provision coverage, operating performance and capital allow both banks to keep their RoAs above 1.3-1.4%.

Valuation premium for Axis Bank

The relative valuation multiples of these banking heavyweights have followed their EPS growth trajectory and their RoAs have been a relatively minor determinant of their share price return. We expect Axis Bank to deliver an EPS CAGR of 14% (FY14-16E) vs 10% for ICICI Bank. We turn BUYers on Axis Bank with a target price of `1,450/share (12% upside). The 29% increase in our target price for Axis is largely driven by a 24% increase in its valuation multiple (12-months forward P/B), as we expect Axis Bank to protect its long-term earnings growth better than our earlier expectation. We grant Axis this re-rating due to improved performance vis a vis balance sheet growth and credit quality.

ICICI Bank RoA improvement is capped from hereon

ICICI Bank closed its profitability and valuation gap with Axis Bank, over FY08-11, supported by improving margins and moderated credit costs. However, asset quality risks have re-emerged after aggressive growth in FY12-13. The re-orientation in the business towards retail and away from corporate and SME seems likely to now impact balance sheet growth and profitability. However, valuations at ~1.1x standalone FY15E BV capture these headwinds. We are BUYers with a target price of `1,175/share (10% upside).

BFSI NEGATIVE

SECTOR UPDATE March 05, 2014

Key Recommendations

ICICI Bank BUY

Target Price: 1,175 Upside : 10%

Axis Bank BUY

Target Price: 1,450 Upside : 12%

Analyst Details

Pankaj Agarwal +91 22 3043 3206 [email protected]

Ravi Singh +91 22 3043 3181 [email protected]

Aadesh Mehta +91 22 3043 3239 [email protected]

BFSI

March 05, 2014 Ambit Capital Pvt. Ltd. Page 2

CONTENTS

Axis Bank and ICICI Bank: At the bottom of the pack 3

Historical performance. 5

Loan growth: Converging towards the sector average.. 7

NIMs: Likely to remain stable.. 9

Fee income would remain weak.. 14

Cost efficiency: Retail is the swing factor 17

ICICI Bank. 32

Axis Bank 34

BFSI


Axis Bank and ICICI Bank: At the bottom of the pack ICICI Bank and Axis Bank have significantly de-rated over the last three years and have underperformed other new private sector banks during this period (see the exhibits below), owing to challenges around asset quality and its relatively higher presence in the riskier corporate lending segment (vs other retail-focussed private sector banks).

Exhibit 1: Share price performance of three years of ICICI Bank and Axis Bank vs peers

Source: Company, Bloomberg, Ambit Capital research.

Exhibit 2: Valuation (12-month forward P/B) discount of Axis Bank and ICICI Bank composite on their peers


However, in terms of RoAs and operating profit growth, both ICICI Bank and Axis Bank have fared just as well over the last two years, if not better, as compared to HDFC Bank (HDFCB), IndusInd Bank (IIB) and Kotak Mahindra Bank (KMB).

Exhibit 3: No material difference between RoAs of Axis Bank and ICICI Bank and other private sector banks


Exhibit 4: Operating profit growth of Axis Bank and ICICI have matched other private sector banks


Hence, the significant share price underperformance of ICICI Bank and Axis Bank vs other new private sector banks is primarily due to a more pronounced increase in stressed asserts (NPAs+ restructured assets) for these two banks vs their peers. This has resulted in higher credit costs for these two banks vs their peers.

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Exhibit 5: Gross NPL + restructured loans


Exhibit 6: Net NPL + restructured loans


Moreover, with ICICI Bank and Axis Bank having relatively higher exposure to stressed sectors (e.g. power, infra and iron & steel), the perceived asset quality risk is higher for these two lenders vs the rest of the new private sector banks. Hence, if the asset quality concerns subside for these two lenders, ICICI Bank and Axis Bank could face a material re-rating, given the valuation difference to their peers.

In the following sections, we have tried to forecast the earnings growth and RoA and RoE trajectory of Axis Bank and ICICI Bank based on their ability to generate operating profits and asset quality risk on their balance sheets.

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Historical performance How ICICI Bank caught up with Axis Bank?

Whilst ICICI and Axis had similar profitability (standalone bank) in FY07, Axis Bank raised its RoA profile by 40bps over FY07-10 due to an improvement in its net interest margins and fee income generation during this period (see the exhibits on the next page). On the other hand, ICICI Bank struggled with asset quality challenges in its personal loan book segment until FY10 (due to aggressive expansion until FY07), resulting in RoA increasing by only 10bps in FY07-10.

ICICI Bank consolidated its loan book by end-FY10 and began to normalise its growth and profitability in the following years. It has now raised its RoA profile at a similar level to that of Axis Bank by containing its credit cost and improving its NIMs by increasing the share of low CASA deposits (from 29% at end-FY13 to 43% at end-3QFY14FY13) in its liability mix during this period. On the assets side, ICICI Bank increased the share of domestic corporate loans in its loan book. On the other hand, Axis Banks RoAs appear to have plateaued and have increased by only 20bps in FY10-13.

Exhibit 7: Converging RoAs and growth after years of divergence As a % of assets FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14 FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

ICICI bank (standalone bank*) Axis Bank

NII 1.9% 2.0% 2.2% 2.3% 2.4% 2.5% 2.8% 3.0% 2.4% 2.8% 2.9% 3.0% 3.1% 3.0% 3.1% 3.4%

Core non-interest inc.

1.8% 1.6% 1.6% 1.8% 1.7% 1.6% 1.4% 1.4% 1.5% 1.7% 2.0% 1.8% 1.9% 1.9% 1.8% NA

Other non-interest income 0.4% 0.5% 0.3% 0.1% -0.1% 0.0% 0.1% 0.2% 0.1% 0.3% 0.3% 0.6% 0.3% 0.1% 0.3% NA

Non-interest income 2.2% 2.1% 1.9% 1.9% 1.7% 1.6% 1.5% 1.6% 1.6% 2.0% 2.3% 2.4% 2.2% 2.1% 2.1% 2.0%

Total net revenues 4.1% 4.1% 4.1% 4.2% 4.1% 4.0% 4.3% 4.6% 4.0% 4.8% 5.1% 5.5% 5.3% 5.1% 5.2% 5.4%

Employee cost 0.5% 0.6% 0.5% 0.5% 0.8% 0.8% 0.8% 0.7% 0.6% 0.7% 0.8% 0.8% 0.8% 0.8% 0.8% 0.7%

Other operating cost 1.7% 1.7% 1.3% 1.1% 1.0% 1.0% 1.0% 1.1% 1.4% 1.6% 1.4% 1.5% 1.5% 1.5% 1.4% 1.5%

Total operating cost 2.3% 2.2% 1.9% 1.6% 1.8% 1.8% 1.8% 1.8% 2.0% 2.4% 2.2% 2.3% 2.3% 2.3% 2.2% 2.2%

PPOP 1.8% 1.9% 2.3% 2.5% 2.3% 2.2% 2.5% 2.7% 2.1% 2.4% 2.9% 3.2% 3.0% 2.8% 3.0% 3.2%

Provisions 0.8% 0.8% 1.0% 1.2% 0.6% 0.4% 0.4% 0.5% 0.4% 0.6% 0.7% 0.8% 0.6% 0.4% 0.6% 0.6%

PBT 1.1% 1.1% 1.3% 1.3% 1.7% 1.9% 2.1% 2.3% 1.6% 1.8% 2.2% 2.3% 2.4% 2.4% 2.4% 2.5%

Tax rate 17% 23% 28% 22% 25% 29% 29% 33.0% 34.0% 35.0% 35.0% 35.0% 34.0% 33.0% 31.0% 34.0%

RoA 0.9% 0.8% 0.9% 1.0% 1.3% 1.3% 1.5% 1.5% 1.1% 1.2% 1.4% 1.5% 1.6% 1.6% 1.7% 1.7%

leverage 14.9 12.5 10 9.3 9.1 9.6 9.8 9.4 19.6 15 13.6 12.5 12.1 12.6 11.2 9.8

RoE 13.4% 10.3% 9.0% 9.5% 11.6% 12.6% 14.5% 14.3% 21.0% 17.6% 19.1% 19.2% 19.3% 20.3% 18.5% 16.4%

Loan growth 34% 15% -3% -17% 19% 17% 14% 16% 65% 62% 37% 28% 36% 19% 16% 18%

Domestic loan growth 28% 4% -8% -17% 19% 14% 18% 13% 54% 58% 32% 29% 33% 18% 15% NA

EPS growth 10% 0% 3% 7% 27% 19% 29% 14% 34% 42% 51% 30% 26% 24% 14% 21%

ource: Company, Ambit Capital research; *Note: ICICI Banks standalone numbers here are adjusted for dividend income from subsidiaries and equity investment in subsidiaries.

Valuations reflect the catch-up game

The relative performance on profitability also reflects in the trajectory of the relative valuation between Axis Bank and ICICI Bank. With the profitability gap closing between Axis Bank and ICICI Bank, the valuation premium of Axis Bank over ICICI Bank has also diminished in FY10-14.

BFSI


Exhibit 8: The RoA trend for ICICI Bank and Axis Bank

Source: Company, Ambit Capital research

Exhibit 9: Valuation premium of Axis Bank over ICICI Bank and difference in 12-month forward RoA

Source: Company, Bloomberg, Ambit Capital research

However, muted loan growth capped ICICIs share price performance

Whilst ICICI Bank closed its valuation (P/B) gap with Axis Bank over FY10-14 (see Exhibit 9), ICICI Banks earnings growth was slower during this period due to slower balance sheet growth. As a result, ICICI Banks performance, in terms of share price returns, was in line with Axis Bank during this period (see Exhibit 11) despite significant improvement in profitability and re-rating of the valuation multiple.

Exhibit 10: Asset growth trends for ICICI Bank and Axis Bank (FY07-14E)


Exhibit 11: Relative share price of ICICI Bank and Axis Bank


Hence, to take a call on the share price performance of these two banks from hereon, we look in detail at: (1) what underlying factors have driven the profitability trends for these two banks; and (2) what is the outlook of these banks performance on these factors.

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Loan growth: Converging towards the sector average The loan growth of Indian banks have significantly slowed down over the last three years (from 22% YoY at end-FY11 to 15% YoY at end-3QFY14), owing to lower demand from the corporate sector and stretched credit-deposit ratios for Indian banks (due to weak deposit growth).

Historically, Axis Bank has grown at a faster pace at 35% vs 10% delivered by ICICI Bank in FY07-9MFY14 (vs overall system loan growth at 21% CAGR). However, this was more due to ICICI Bank consolidating its balance sheet in FY08-10. With ICICI Bank starting to grow its balance sheet again and with Axis Bank putting a break on its corporate loan, the loan growth trends for Axis Bank and ICICI Bank, in fact, have converged in recent years and are now closer to the overall banking systems credit growth.

Exhibit 12: Domestic credit growth has converged for both the banks

Source: Company, Ambit Capital research.

Exhibit 13: Axis Bank has put a brake on its corporate loan growth over the last two years


Growth drivers ICICI Bank: retail loans; Axis Bank: retail and SME loans

Whilst ICICI Bank and Axis Bank grew their domestic corporate credit at a similar pace in FY09-11, Axis Bank has meaningfully slowed down in the last two years (see Exhibit 15).

Whilst ICICI Bank had a bigger presence in retail loans historically, Axis Bank has steadily scaled up its retail assets franchise (see Exhibit 14) and is growing its retail book faster than ICICI Bank (see Exhibit 15).

Exhibit 14: Loan book mix ICICI Bank and Axis Bank ICICI Bank* Axis Bank

Loan book mix

FY08 FY09 FY10 FY11 FY12* FY13 9MFY14 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

Domestic corporate

8% 12% 18% 21% 29% 32% 32% 40% 38% 39% 40% 39% 35% 32%

SME 3% 4% 4% 5% 6% 5% 4% 19% 20% 18% 15% 14% 15% 15%

Agri 9% 10% 10% 10% NA NA NA 9% 10% 12% 12% 10% 8% 6%

Retail - mortgage

29% 26% 26% 25% 19% 20% 20% 13% 13% 14% 13% 17% 20% 22%

Retail - auto/CV loans

18% 14% 12% 10% 10% 9% 8% 4% 3% 3% 2% 3% 4% 3%

Retail - others 12% 8% 6% 3% 8% 8% 9% 6% 4% 3% 4% 3% 4% 5%

Overseas 21% 25% 25% 26% 27% 25% 28% 9% 12% 12% 14% 15% 15% 16%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Source: Company, Ambit Capital research; *Note: From FY12 onwards, ICICI Bank changed its segmental reporting of loan book (agri loans allocated into retail, corporate and SME segments; builder finance, dealer funding and loans to small businesses were reclassified across segments).

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BFSI


Exhibit 15: Loan book growth (YoY) ICICI Bank and Axis Bank

ICICI Bank* Axis Bank

Loan book growth (YoY) FY08 FY09 FY10 FY11 FY12* FY13 9MFY14 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

Domestic corporate 7% 42% 25% 41% 27% 30% 7% 61% 31% 29% 40% 17% 4% -5%

SME 7% 28% -17% 43% 29% -1% -4% 74% 39% 14% 17% 11% 26% 25%

Agri 4% 4% -17% 16% 6% NA NA 35% 49% 55% 36% 0% -14% 15%

Retail - mortgage NA -12% -18% 15% 7% 18% 23% NA 35% 41% 28% 49% 38% 42%

Retail - auto/CV loans NA -23% -32% 7% 18% -2% 3% NA 3% 23% 10% 60% 55% 32%

Retail others NA -33% -44% -28% -20% 13% 43% NA -8% -2% 76% -23% 68% 64%

Overseas 96% 14% -17% 22% 26% 6% 24% 109% 89% 21% 59% 29% 19% 22%

Total 15% -3% -17% 19% 17% 14% 16% 62% 37% 28% 36% 19% 16% 18%

Source: Company, Ambit Capital research; *Note: From FY12 onwards, ICICI Bank changed its segmental reporting of loan book (agri loans allocated into retail, corporate and SME segments; builder finance, dealer funding and loans to small businesses were reclassified across segments). However, FY12 numbers are adjusted on a like-for-like basis.

As we expect large corporate credit growth to remain weak over the next one year, we believe that retail and SME would drive credit growth for the banking system in the near term. Within retail, we expect home loan growth to remain robust in the near term.

For ICICI Bank, retail home loans are the chief growth drivers, as asset quality concerns are leading the bank to go slow on not only corporate loans but also SME loans. We expect ICICI Bank to expand its loan book at a CAGR of 17% (FY14-16E) driven primarily by retail loans.

For Axis Bank, growth in the retail segment has been strong across home loans, auto loans and other retail products. Also, in contrast to ICICI Bank, asset quality for the SME segment has held up better for Axis Bank and this segment continues to grow well (up 25% YoY at end-3QFY14). Healthy growth rates in these segments have allowed Axis Bank to sharply lower its corporate credit growth since end-FY11. We expect this trend to continue and expect Axis Bank to deliver a loan CAGR of ~18% (FY14-16E) supported by retail and SME loans.

BFSI


NIMs: Likely to remain stable Over the last seven years (FY08-14E), Axis Bank has maintained its margins at healthy levels of ~3.5%. During this period, ICICI Bank has traversed a journey of margin improvement from 2.2% in FY08 to 3.3% in 9MFY14.

Exhibit 16: Net interest margins


Further analysis of the components of NIMs shows that the improvement in ICICI Banks margins was driven by the improvement in spreads. Axis Bank held its spread stable over FY08-13. The change in leverage has not been a key driver of NIM, except for Axis Banks capital-raising of `64bn in 4QFY13, which provided a ~20bps benefit to margins in FY14E.

Exhibit 17: Narrowing difference between net interest spreads (calculated) of these banks


Exhibit 18: Higher contribution of equity enhances ICICIs NIMs more than that of Axis Banks


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Exhibit 19: ICICI Bank - attribution of net interest margins (calculated)


Exhibit 20: Axis Bank - attribution of net interest margins (calculated)


Given that ~25% of ICICIs loan book comprises the international loan book (which has lower margins, currently at ~1.7% vs domestic margins of ~3.7%), ICICIs margins look lower than that of Axis. However, if we remove the impact of the international loan book, ICICIs margins are at 3.67% (reported for 9MFY14) vs Axis Banks reported margins of 3.78% (reported for 9MFY14).

ICICI Bank the upward journey for margins

The dynamics on both sides of the balance sheet has led to an improvement in ICICI Banks spreads and margins over FY09-13. After the crisis in FY08-09, the bank focussed on building its low-cost retail deposits franchise and improved its CASA ratio from 29% in FY09 to 43% as at end-3QFY14 primarily driven by growth in savings deposits.

Exhibit 21: ICICI Bank cost of funds and liabilities mix

As % of total liabilities FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

Cost of funds 6.35% 7.43% 7.08% 5.79% 5.37% 6.24% 6.29% 6.04%

NIM 1.98% 2.06% 2.21% 2.34% 2.48% 2.57% 2.91% 3.10%

Liabilities mix:

Capital 7.1% 11.6% 13.1% 14.2% 13.6% 12.4% 12.4% 12.9%

Deposits 66.9% 61.1% 57.6% 55.6% 55.5% 52.2% 54.5% 55.2%

Current accounts 6.2% 6.2% 5.7% 8.5% 8.6% 7.2% 6.9% 7.2%

Savings accounts 8.4% 9.8% 10.8% 14.6% 16.5% 15.5% 16.0% 16.7%

Term deposits 52.3% 45.2% 41.0% 32.4% 30.5% 29.5% 31.7% 31.3%

Borrowings 20.5% 21.6% 24.6% 25.9% 27.0% 28.7% 27.1% 26.3%

Other liabilities 5.6% 5.6% 4.8% 4.3% 3.9% 6.7% 6.0% 5.6%


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Impact of B/Smgmt.

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On the assets side, whilst the overall mix of the balance sheet has remained stable (see Exhibit 22), the loan mix has undergone significant changes (see Exhibit 23). The share of domestic corporate loans in total loans increased from 8% in FY08 to 32% in FY13. This was largely at the expense of a reduction in the share of retail loans in total loans from 58% in FY08 to 37% in FY13.

Exhibit 22: ICICI Bank - yield on assets and assets mix

As % of total assets FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

Yield on advances 9.4% 10.7% 10.1% 8.7% 8.3% 9.4% 10.1% 9.9%

Yield on interest earning assets 7.8% 8.8% 8.5% 7.4% 7.2% 8.0% 8.4% 8.4%

NIM 2.0% 2.1% 2.2% 2.3% 2.5% 2.6% 2.9% 3.1%

Asset mix:

Cash & equivalents 10.8% 9.5% 7.9% 10.7% 8.4% 7.4% 7.7% 5.7%

Investments 26.5% 27.9% 27.2% 33.3% 33.2% 32.6% 31.9% 30.0%

Net advances 56.8% 56.4% 57.6% 49.9% 53.3% 51.9% 54.1% 57.9%

Domestic 49.7% 44.5% 43.2% 37.4% 39.7% 37.7% 40.4% 42.0%

Foreign 7.1% 11.9% 14.3% 12.4% 13.6% 14.2% 13.7% 15.9%

Fixed & other assets 5.9% 6.2% 7.4% 6.2% 5.2% 8.1% 6.3% 6.4%


Exhibit 23: Loan mix trends for ICICI Bank

Source: Company, Ambit Capital research. *Note: From FY12 onwards, ICICI Bank changed its segmental reporting of loan book (agri loans allocated into retail, corporate and SME segments; builder finance, dealer funding and loans to small businesses were reclassified across segments).

9% 8% 12%18% 21%

29% 32% 33%12% 21%25%

25% 26%27% 25% 27%

65% 58%49% 43% 39%

38% 37% 36%3% 3% 4% 4% 5%

6% 5% 5%10% 9% 10% 10% 10%

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Domesticcorporate

BFSI


As shown in the exhibits below, the rising share of domestic corporate loans has supported margin improvement for ICICI. However, the increase in asset quality stress in the segment in the last year has made the bank go slow on loan growth in the segment. Consequently, as corporate loan growth slows down and lower-yielding retail loans (primarily home loans) drive loan growth, we expect margins to remain stable, at best, at the current levels from hereon.

Exhibit 24: ICICI Bank share of corporate loans and margins


Exhibit 25: ICICI Bank share of domestic corporate loans and margins


Axis Bank Stable margins

Axis Banks stable net interest margins and spreads are underlined by the stability in the mix of its assets and liabilities mix over the last seven years. Its CASA ratio has been stable in a narrow range of 43-46% since FY08.

Exhibit 26: Axis Bank cost of funds and liabilities mix

As % of total liabilities FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

Cost of funds 5.3% 5.4% 6.2% 4.6% 4.6% 6.0% 6.4% 6.1%

NIM 2.5% 2.9% 3.0% 3.1% 3.2% 3.1% 3.2% 3.4%

Liabilities mix:

Capital 4.6% 8.0% 6.9% 8.9% 7.8% 8.0% 9.7% 10.5%

Deposits 80.2% 80.0% 79.5% 78.2% 78.0% 77.1% 74.2% 73.0%

Current accounts 15.4% 18.3% 16.8% 17.8% 15.2% 13.9% 14.2% 11.7%

Savings accounts 16.6% 18.2% 17.5% 18.7% 16.8% 18.1% 18.7% 19.4%

Retail term deposits 14.0% 14.7% 16.2% 14.9% 13.8% 16.8% 17.5% 25.8%

Wholesale term deposits 34.3% 28.7% 29.0% 26.8% 32.1% 28.3% 23.8% 16.1%

Borrowings 11.9% 8.3% 10.5% 9.5% 10.8% 11.9% 12.9% 13.5%

Other liabilities 3.3% 3.8% 3.1% 3.4% 3.4% 3.0% 3.2% 3.1%


On the asset side, Axis Bank has managed its balance sheet better, as the share of loans in total assets increased from 50% in FY07 to 59% in FY12. During this period, the share of lower-interest-earning cash & equivalents declined from 11% in FY08 to 5% in FY12 (see Exhibit 27).

The share of loans in total assets, however, appears to be now plateauing at 58-59%. Within loans, as shown in Exhibit 28, the segmental break-up was remarkably stable over FY07-12. The asset quality stress for corporate loans has, however, led to the bank slowing down the growth and focussing more on retail and SME loans now.

Whilst the decline in the share of corporate loans is incrementally negative for margins, we believe high yields in SME loans would more than offset any margin pressure. We expect Axis Banks margins to remain stable hereon, with the

2.0%

2.2%

2.4%

2.6%

2.8%

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3.4%

20%25%30%35%40%45%50%55%60%65%

Mar

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-09

Mar

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-12

Mar

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Share of corporate loans NIM

2.0%2.2%2.4%2.6%2.8%3.0%3.2%3.4%

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-09

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Mar

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Share of domestic corporate loans NIM

BFSI


performance of SME loans being a key determinant of margins in the near term, as margins in retail, consisting mainly of home loans, continue to be under pressure.

Exhibit 27: Axis Bank - yield on assets and assets mix

As % of total assets FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

Yield on advances 9.1% 9.8% 10.6% 8.6% 8.4% 9.9% 10.5% 10.7%

Yield on interest earning assets 7.55% 7.94% 8.71% 7.31% 7.37% 8.58% 8.94% 8.89%

NIM 2.49% 2.93% 2.96% 3.14% 3.19% 3.13% 3.18% 3.44%

Assets mix:

Cash & equivalents 9.4% 11.4% 10.2% 8.4% 8.8% 4.9% 6.0% 6.6%

Investments 36.7% 30.8% 31.4% 31.0% 29.7% 32.6% 33.4% 31.2%

Net advances 50.3% 54.4% 55.2% 57.8% 58.7% 59.4% 57.8% 58.8%

Domestic 46.8% 49.5% 48.3% 50.9% 50.6% 50.6% 49.0% NA

Foreign 3.5% 4.9% 6.9% 6.8% 8.1% 8.9% 8.8% NA

Fixed & other assets 3.5% 3.4% 3.3% 2.8% 2.8% 3.1% 2.8% 3.3%


Exhibit 28: Loan mix trend for Axis Bank


40% 40% 38% 39% 40% 39% 35% 32%

7% 9% 12% 12% 14% 15% 15% 16%

24% 23% 20% 20% 19%22% 27% 30%

18% 19% 20% 18% 15% 14%15% 15%

11% 9% 10% 12% 12% 10% 8% 6%

0%10%20%30%40%50%60%70%80%90%

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Agri

SME

Retail

Overseas

Domesticcorporate

BFSI


Fee income would remain weak As highlighted in our note on fee income (click here) and our note on Indian regional banks (click here), fee income is the major differentiator between the RoAs of new private sector banks and old private sector banks. Currently, fee income constitutes ~40% of net revenues of both ICICI Bank and Axis Bank.

In FY10-13, ICICIs core fee income (excluding income from subsidiaries, treasury income and recoveries from written-off loans) has recorded a CAGR of just 3%. Fee income, as a percentage of assets, has declined to 1.36% in FY13 (vs 1.72% in FY10) for ICICI Bank.

On the other hand, for Axis Bank, core fee income growth has been robust, with 23% CAGR in FY10-13. However, of late, Axis Banks fee income has faced pressure, with just 8% YoY growth in 9MFY14 and with the fee income/asset ratio falling to 1.62% of average assets in 9MFY14 vs 1.79% in FY12.

Exhibit 29: Axis Bank has been generating more fee income on its assets vs ICICI Bank


Exhibit 30: ..which is visible in higher growth in fee income for Axis Bank


Axis Banks has shown superior fee income but its coming under pressure

Fee income generation has been a key strength for Axis Bank and it has remained stable at ~1.8% of average assets in FY10-13 (see Exhibit 29). However, Axis Banks fee income has been under pressure in YTD FY14, with just 8% YoY growth in 9MFY14 and with the fee income to asset ratio falling to 1.6% of average loans in YTD FY14 (vs average of 1.8% over the last four years). A closer look at the breakup of fee income of Axis Bank shows that lower fee income in the retail segment and large corporate segments has been the main reasons behind the moderation in the fee income growth of Axis Bank.

1.2%1.3%1.4%1.5%1.6%1.7%1.8%1.9%2.0%

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BFSI


Exhibit 31: Declining fee income on retail and large corporate loans have led to a decline in fee income


The fall in Axis Banks retail fee income can be explained by three facts: (i) share of home loans (where fee income is lower) has been increasing in Axiss Bank retail portfolio (from 57% in FY08 to 72% at YTD FY14); (ii) as explained earlier, processing fee on home loans have come down from ~1% of the loan amount 3-4 years back to ~0.1-0.2% right now (visible in falling fee income for specialised mortgage lenders, such as LICHF); and (iii) the share of high fee-income-generating personal loans and credit card loans have significantly fallen from ~20% of the retail loan book in FY08 to ~10% of the retail loan book at 9MFY14.

Exhibit 32: Axis Bank - changing portfolio mix in retail loan book


Exhibit 33: Falling fee income on home loan trends for specialised mortgage lender, LIC Housing Finance


Another major driver behind the recent weakness in fee income of Axis Bank is the falling fee income on corporate loans (which have fallen from ~2.05% of loan in FY12 to 1.71% of loans in YTD FY14). We believe this decline in fee income in corporate loans is driven by two factors: (i) falling sanctions in large infrastructure loans where fee income is chunky and is booked upfront and; (ii) falling proportion of non- funded exposure (where the banks earn fee income) in the overall exposure of the bank.

1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%5.5%

FY0

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Corporate fee as % ofcorporate loans

Retail fee as % of retailloans

(Agri+SME+BB) fee as% of (SME+agri) loans

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Home loansPersonal loans+ credit cards -RHS

0.4%

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0.8%

0.9%

1.0%

1.1%

1.2%

FY10 FY11 FY12 FY13 9MFY14

Fee income as a % of Disbursals- LIC Housing

BFSI


Exhibit 34: Lower non-fund-based exposure is leading to lower fee income from the corporate segment


Exhibit 35: Falling sanctions in infrastructure loans by Indian lenders

Source: Company, RBI, Ambit Capital research

We expect Axis Banks fee income to average assets ratio to fall further from hereon and fee income to grow at a slower pace as compared to balance sheet growth, as: (i) home loans grow faster than the overall balance sheet growth, (ii) corporate asset growth remains weak (up 3% YoY in 9MFY14), and (iii) sanctions for new infrastructure loans are unlikely to pick up over the next year. We expect Axis Banks core fee income/asset ratio to average ~1.6% of assets in FY15-16 (vs 1.7% in 9MFY14).

ICICI struggled on fee income generation but now seems to be stabilising

As compared to Axis Bank, the detailed breakup of the fee income is not disclosed by ICICI Bank. However, based on the movement in the banks loan book and taking cue from the fee income growth of other banks and NBFCs, these are the three reasons behind the weak fee income trends for ICICI Bank:

Falling share of personal loans and credit card loans and other small ticket-sized loans (where fee income is higher) in the overall loan book of ICICI (from 7.7% in FY08 to 2.1% in FY11 and now back to 5.5%).

A sharp decline in the processing fee on home loans (from ~1% of the loan amount 3-4 years back to ~0.1-0.2% right now) which has historically contributed ~20-25% of the loan book of ICICI Bank.

A slowdown in new infra projects over the last 2-3 years where ICICI used to earn fee income on both its loan funds as well as on an advisory basis.

Now, with the share of personal loans and credit card loans inching up again (5.8% of the loan book at December 2013 vs 5.1% at March 2013), the share of home loans in the loan book stabilising at around 20% and processing fee on home loans stabilising at 0.1-0.2%, we expect ICICIs fee income to stabilise at ~1.35-1.40% of the average loan book and grow in line with the loan book growth (in line with the managements guidance).

With fee income from selling life insurance policies, comprising just ~5% of the total fee income for the banks, both the banks are unlikely to face a meaningful pressure on their fee income due to regulators pushing for lower commissions for insurance distributors.

1.0%

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1.4%

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20%22%24%26%28%30%32%34%36%38%40%

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Non-fund based exposure aa % of total exposure

Corporate fee as % of corporate loans

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Total Sanctions for project loans by Indian lenders(Rsbn)-RHS

BFSI


Cost efficiency: Retail is the swing factor Over the last six years, whilst ICICI Banks operating cost to asset ratio has fallen from around 2.2% to ~1.8%, this ratio has remain elevated for Axis Bank at 2.2-2.3% (see Exhibits 36 and 37). However, the cost-to-income ratios of both the banks have improved over the last five years, with the difference between their cost-to-income ratios not being as stark as the cost-to-asset ratios (see Exhibits 38 and 39). This is because Axis Bank generates a significantly higher income on its assets (~4.9% of assets) vs ICICI Bank (~4.2% of assets).

Exhibit 36: Cost to assets - ICICI Bank


Exhibit 37: Cost to assets - Axis Bank


Exhibit 38: Cost to income - ICICI Bank


Exhibit 39: Cost to income Axis Bank


Similar employee cost base

From the perspective of employee expenses, both the banks have almost similar cost structures, with identical employee cost to asset ratios, which is also visible in the number of employees per branch and the identical employee cost per employee.

0.5

%

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%

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%

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%2.2% 2.2%

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FY0

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Employee costs to assets Other costs to assets

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%

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%

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%

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%

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% 1.6

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%

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Employee costs to assets Other costs to assets

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%

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%

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%

18

%

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%

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%

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%

45

%

43

%

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%

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%

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%

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%

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%

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%

59% 57%49%

39% 42% 43% 41% 40%

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Other opex to income Employee cost to income

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%

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%

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%

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%

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%

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%

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%

36

%

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%

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Employee cost to income Other opex to income

BFSI


Exhibit 40: Employees per branch


Exhibit 41: Employee cost per employee (` mn)


However, the real swing factor on cost efficiencies has been non-salary expenses, with a wide variation between the banks (see Exhibits 36 and 37 on the previous page). Also, in this segment, ICICI Bank has improved considerably over the years over Axis Bank.

On average, higher the proportion of retail assets in the balance sheet of a bank, higher the other operating expenses, as more resources are required to originate and collect these small ticket-sized loans (see the exhibit below).

Exhibit 42: Relationship between the share of retail loans and non-salary expenses


10

15

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25

30

35

40

45

50


Axis Bank ICICI Bank

0.3

0.4

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0.5

0.6

0.6

0.7

0.7



ICICI Bank

Axis Bank

HDFC Bank

IndusInd Bank

Yes Bank

Kotak Mahindra Bank

R = 73%

0.5%

0.7%

0.9%

1.1%

1.3%

1.5%

1.7%

1.9%

0% 10% 20% 30% 40% 50% 60%Non

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ary

expe

nses

to a

sset

s,

FY1

3

Share of retail loans in total, end-FY13

BFSI


Exhibit 43: Falling share of retail assets appears to have helped ICICI Bank on cost efficiencies


Exhibit 44: A rising share of retail assets have kept the cost ratios sticky for Axis Bank


As ICICI Bank starts focusing back on retail assets, we see some inch up in the cost-to-asset ratios for ICICI bank and we build in average cost to assets of ~1.9% over the next two years. On the other hand, as retail assets continue to grow at a faster rate than corporate assets for Axis Bank, we expect the cost to asset ratios to remain sticky at ~2.2% for Axis Bank.

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Share of retail loans in total loansCost to assets

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Share of retail loans in total loansCost to assets

BFSI


Asset quality a black box As shown in the previous sections, on pre-provisioning profit, both the banks are performing as well as other private sector banks, if not better. However, both the banks have higher exposure to: (i) corporate loans, where delinquencies are trending higher (vs retail loans); (ii) stressed sectors, such as infrastructure, power and iron & steel; and (iii) project loans vs the working capital nature of loans originated by other private sector banks.

Hence, the asset quality risk is higher for these two banks vs their peers.

Before getting into the future trajectory of asset quality, we have analysed the current buffers that these two banks enjoy to maintain their asset quality.

Exhibit 45: ICICI Bank cost of funds and liabilities mix FY12 FY13 9MFY14 FY12 FY13 9MFY14

ICICI Bank* Axis Bank

Gross NPAs (%) 3.63% 3.23% 3.06% 1.06% 1.20% 1.41%

Restructured assets (%) 1.79% 1.83% 2.59% 1.80% 2.22% 2.32%

Total stressed assets (%) 5.42% 5.06% 5.65% 2.86% 3.42% 3.73%

Total Gross NPAs (` mn) 94,753 96,078 103,991 18,063 23,934 30,082

Total Restructured assets (` mn) 45,540 53,150 86,020 30,600 43,680 49,000

Total Stressed assets (` mn) 140,293 149,228 190,011 48,663 67,614 79,082

Total provisions costs (` mn) 9,932 15,388 NA 10,107 13,759 12,820

Credit cost (%)* 0.42% 0.57% NA 0.65% 0.75% 0.87%

Provisions for NPAs (` mn) 76,145 73,772 72,807 13,337 16,893 20,048

Provisions for standard assets (` mn)) 14,796 16,235 18,606 7,800 9,766 10,485

Total provisions outstanding (` mn) 90,941 90,007 91,413 21,136 26,659 30,533

Provisioning coverage on NPAs 80.4% 76.8% 70.0% 73.8% 70.6% 66.6%

Total provisions as a % of total stressed assets 64.8% 60.3% 48.1% 43.4% 39.4% 38.6%

Net NPA + std. restructured as a % of equity 10.6% 11.3% 15.8% 15.5% 15.3% 15.7%

Net NPA + std. restructured as a % of net advances 2.5% 2.6% 3.5% 2.1% 2.6% 2.8%

Source: Company, Ambit Capital research; * Note: Credit costs for ICICI Bank also include recoveries on written-off assets. Other banks report this as part of their other income.

Whilst ICICI Bank demonstrated better asset quality ratios (such as total net stressed assets as a percentage of book value and provision coverage ratio for total stressed assets) than Axis Bank until end-FY13, a rapid rise in restructuring during 3QFY14 has led to a closing of the gap between ICICI Bank and Axis Bank on these ratios (see Exhibits 45 and 46). The moot question, hence, is whether this diverging performance on asset quality is likely to persist in the coming quarters? To answer this question, we look at the sectoral mix of these two banks incremental exposures for any signs of a stress build-up.

BFSI


Exhibit 46: The rate (annualised) of addition to NPAs and restructured loans as a percentage of loans ICICI Bank vs Axis Bank


Differing strategies for domestic corporate credit

Exhibit 47 shows the growth trends for domestic corporate credit for ICICI Bank and Axis Bank over the last five years. Whilst the exhibit shows that both ICICI Bank and Axis Bank grew their domestic corporate loan book aggressively at ~35% per annum over FY09-11, we believe the comparison is distorted by the fact that ICICI Bank was consolidating its loan book prior to FY09.

Hence, if we compare the activity of these two banks in terms of market share (see Exhibit 48), we note that: (1) ICICI Banks higher growth rate during FY09-11 followed a sharp market share loss during FY06-08 and Axis Bank was a larger and more aggressive player in domestic corporate & SME credit during the FY09-11; and (2) Whilst Axis Bank took its foot of the pedal in FY11, ICICI Bank continued to aggressively grow its domestic corporate & SME book in FY12 and FY13.

Hence, we believe the answers of the near-term credit quality trends for ICICI Bank and Axis Bank lie in the responses to the following two queries: (1) Level of stress in Axis Banks corporate & SME loan book originated during FY09 and FY11; (2) Quality of ICICI Banks corporate and SME loans originated during the acceleration of growth in FY12-13.

Exhibit 47: ICICI Bank and Axis Bank domestic corporate credit growth (YoY)


Exhibit 48: ICICI Bank and Axis Bank market shares in domestic corporate + SME credit

Source: Company, RBI, Ambit Capital research

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Axis Banks asset quality a controlled deterioration

Axis Banks rapid market share gain in FY07-11 was accompanied by a deterioration of the rating profile of its corporate loan book (see Exhibit 49). The share of loans rated BBB and below increased from 16% at end-FY07 to 25% at end-FY11. Even as Axis Bank slowed down the growth of its corporate loan book, the rating profile continued to deteriorate. The share of loans rated BBB and below currently stands at 38%.

Exhibit 49: Axis Banks corporate & SME credit market share and ratings profile of the corporate loan book

Source: RBI, Company, Ambit Capital research

Exhibit 50 shows that the key sectors, which contributed to high growth during FY08-11, were power, mining, iron & steel, chemicals and other infra. The CAGR in funded exposure to these sectors expanded at a much faster pace than the overall banking systems exposures to the same sectors.

Exhibit 50: Axis Bank fastest-growing sectoral exposures during FY08-11 (CAGR compared with system)


Most of these sectors (e.g. power, iron & steel and other infrastructure) are the same industries which are among the worst affected at the system level in the current downturn.

15%

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Market share (Corp. & SME) Ratings (BBB & below) - RHS

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Pow

er

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teel

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AXSB All banks

BFSI


Exhibit 51: Mix of CDR live case (worth `2,076bn) as at end-December 2013

Source: CDR, Ambit Capital research

The bank however began moderating its growth in these segments since end-FY11 and, except for, non-ferrous metals and engineering & electronics, growth in funded exposures to most of these sectors have significantly slowed down, both, as compared to earlier period growth rates and relative to the growth rates of the banking systems exposures (see Exhibit 52).

Exhibit 52: Axis Bank Growth of sectoral exposures during FY11-13 (CAGR compared to the system)


Non-ferrous metals and engineering & electronics accounted for ~8.3% of Axis Banks funded exposure as at end-December 2013. Loan growth continues to be strong in these sectors along with the stressed environment for these industries. (RBI data reports worsening of interest coverage ratio for these industries until end-2QFY14.) We believe, these sectors, apart from infra, iron & steel and chemicals, remain critical for any asset quality risks.

Axis Banks non-fund-based exposure (letters of credit and bank guarantees) also shows a similar trend of rapid growth during FY09-11, driven by sectors such as power, engineering, iron & steel and other infra (see Exhibit 54). Whilst, the growth since end-FY11 has slowed down for both fund-based and non-fund-based exposures, certain segments (such as power, engineering and chemicals) still continue to grow at 20-25% YoY.

Infrastructure, 20%

Iron & steel, 18%

Power, 13%Textiles, 9%Telecom, 5%

NBFC, 3%

Shipping, 3%

Construction, 3%

Pharmaceuticals, 3%

Others, 22%

-10%

0%

10%

20%

30%

40%

50%

60%

Met

al (

non-

ferr

ous)

Elec

tron

ics

Food

& b

ever

ages

Pow

er

Min

ing

Petr

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Oth

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Che

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Cem

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Iron

& s

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AXSB All banks

BFSI


Exhibit 53: Axis Bank growth in fund-based and non-fund-based exposures YoY growth FY09 FY10 FY11 FY12 FY13

Funded exposure 37.7% 22.0% 37.5% 12.3% 18.8%

Non-funded exposure 78.2% 50.2% 49.5% 12.2% -4.3%

Total exposure 44.9% 28.2% 40.6% 12.3% 12.5%


Exhibit 54: Key sectoral trend for Axis Banks non-fund-based exposures

Non-fund based Fund based & non-fund based combined

as % of total, at end-FY13

CAGR (FY08-11)

CAGR (FY11-13)

as % of total, at end-FY13

CAGR (FY08-11)

CAGR (FY11-13)

Power 18% 169% 20% 7% 125% 22%

Electronics & engineering 11% 122% 22% 4% 82% 25%

Iron & steel 6% 87% 4% 3% 75% 0%

Other infrastructure 32% 95% 8% 14% 74% 11%

Chemical & fertilisers 4% 68% 26% 3% 63% 15%

Other infra 14% 69% -3% 8% 57% 4%

Petroleum 4% 35% 38% 2% 48% 23%

Food & beverages 4% 47% 19% 3% 35% 24%

Total exposure 100% 59% 4% 100% 38% 12%


However, given that Axis Bank has been able to manage risk, so far, despite a strong growth over FY07-11 and moderated its loan growth early in some stressed sectors in recent years, we believe any deterioration would be in a controlled manner and we are unlikely to see a blow-up of stressed assets. We expect fresh additions to stressed assets (NPA + restructured loans) for Axis Bank to be at ~3.5% in FY15 vs 3.0% in FY14E and 2.4% in FY13. The restructuring pipeline might rise in FY15 (our estimate is ~`41bn vs ~`31bn in FY14E), as regulatory forbearance on restructuring is taken away after end-FY15. We expect credit costs to rise to ~100bps over FY15-16 vs 80bps over FY13-14E.

ICICI Banks asset quality Did it succumb to its cowboy instincts?

As shown earlier in Exhibit 46, ICICI Banks asset quality has deteriorated sharply in the last two quarters, with its 4QFY14 guidance indicating a further 50% rise in restructuring. A key difference in ICICI Banks and Axis Banks recent strategies has been that whilst Axis Bank began moderating its domestic corporate credit growth after FY11 (at ~10% CAGR in FY11-13), ICICI Bank was growing its domestic corporate credit growth by 30% YoY until end-FY13. By end-9MFY14, however, ICICI Banks domestic corporate loan growth has slowed down to 7% YoY vs -5% YoY for Axis Bank.

The key stressed sectors that have driven domestic corporate credit higher in FY11-13 for ICICI Bank are cement, non-ferrous metals, construction, power and iron & steel. Exhibit 56 shows that ICICI Banks corporate borrowers have seen some deterioration in the rating profile. The management has highlighted an increase in stress in the last two quarters from SME and mid-corporate loans. We believe the acceleration in domestic corporate credit in FY12 and FY13 despite the visible stress in the economy could have led to asset quality concerns. Even though the growth has slightly slowed down in 9MFY14, we believe the pace of fresh NPAs and restructuring would remain high.

BFSI


Exhibit 55: ICICI Bank CAGR of funded exposure growth in key sectors during FY11-13


Exhibit 56: ICICI Bank rating profile of corporate credit

Source: Company, Ambit Capital research; Note: IG1=AAA, AA+, AA, AA-, S1-S4, 1, 2 A-C; IG2=A+, A, A-, S5-S7, 3 A-C; IG3=BBB+, BBB and BBB-, S8, 4 A-C; Non-IG=Below investment grade.

We expect fresh additions to stressed assets (NPA + restructured loans) for ICICI Bank to be at ~3.9% in FY15 vs 4.2% in FY14E and 2.1% in FY13. The restructuring pipeline would remain elevated in FY15 (our estimate of `66bn vs `69bn in FY14), as regulatory forbearance on restructuring is taken away after end-FY15. We expect credit costs to rise to ~90bps over FY15-16 vs 96bps in FY14E and 57bps in FY13. ICICI Banks credit costs also include recoveries on written-off loans, which most other banks report as other income.

Exhibit 57: Exposure to stressed assets/sector at December 2013


Funded

Exposure Non-Funded

Exposure Total

Funded Exposure

Non-Funded Exposure

Total

Infrastructure (excluding power) 5.6% 14.2% 7.5% 5.4% 4.8% 5.2%

Power 3.7% 14.6% 6.1% 4.6% 6.2% 5.1%

Textiles 1.5% 0.6% 1.3% 0.5% 0.8% 0.6%

Construction 0.5% 3.0% 1.0% 1.6% 8.5% 3.8%

Iron & Steel 2.2% 5.3% 2.8% 3.6% 6.0% 4.4%

Mining 0.7% 0.5% 0.7% 1.7% 1.3% 1.5%

Total 14.2% 38.2% 19.4% 17.4% 27.6% 20.6%


0%20%40%60%80%

100%120%

Cem

ent

Met

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pro

duct

s(n

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Ship

ping

Min

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Con

stru

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Iron

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-Oth

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Elec

tron

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gine

erin

g

Che

mic

al &

fert

ilise

rs

ICICIBC All banks

5% 2% 2%9% 10% 11%

29% 34% 37%

28% 29%24%

29% 25% 25%

0%

20%

40%

60%

80%

100%

FY11 FY12 FY13

IG1

IG2

IG3

Non-IG

Unrated

BFSI


Capital Not a big issue Exhibit 58: Both ICICI Bank and Axis Bank are adequately capitalised for the next two years of growth

Jun13 Dec13 FY15E FY16E Jun13 Dec13 FY15 FY16

Basel III Disclosures ICICI Bank Axis Bank

Tier 1 Capital 11.72% 11.53% 12.05% 11.69% 11.73% 11.49% 11.59% 11.09%

Total Capital 17.04% 16.81% 16.99% 16.05% 15.83% 15.50% 15.71% 14.88%

Phase in of all deductions from capital funds

20% 20% 60% 80% 20% 20% 60% 80%

Basel II Disclosures

Tier 1 12.48% 11.85%

Total Capital 18.35%

Basel III Requirements

Common Tier-1 Capital 4.5% 5.0% 6.125% 6.75% 4.5% 5.0% 6.125% 6.75%

Tier 1 Capital 6.0% 6.5% 7.62% 8.25% 6.0% 6.5% 7.62% 8.25%

Total Capital 9.0% 9.0% 9.62% 10.25% 9.0% 9.0% 9.62% 10.25%


With the phased implementation of Basel-III capital norms for banks from FY14 and with the falling profitability of banks, the capital requirements for Indian banks are set to increase over the next 2-3 years. However, ICICI and Axis Bank are much better capitalised as compared to PSU banks and some private sector banks (HDFC Bank and Yes Bank).

Whilst, at present, both ICICI and Axis Bank has similar tier-1 capital ratios, the higher impact from Basel-III guidelines means that the capital position is marginally weaker for ICICI Bank vs Axis Bank as both the banks migrate towards a fuller implementation of the Basel III norms. However, based on our base-case loan growth and RoE trends, both banks are comfortably positioned on capital adequacy for the next two years.

However, if the asset quality stress is higher than our expectations, both the banks might need to raise capital. To put in numbers, an RoE of lower than ~12% over the next two years would not support loan book growth of 15% over the next two years.

Overall profitability Axis Bank is better placed Hence, based on our analysis, in our base-case scenario, we expect ICICI Bank to deliver an EPS CAGR of ~10% in FY14-16 (v 25% CAGR in FY11-13) and average core (adjusted for investment in subsidiaries) RoAs and RoEs of ~1.4% and ~14%, respectively.

On the other hand, we expect Axis Bank to deliver an earnings growth of 14% in FY14-16E (vs 22% CAGR in FY11-13) and average RoAs and RoEs of 1.6% and 16%, respectively.

BFSI


Exhibit 59: ICICI Bank and Axis Bank - forecast RoE tree; loans and EPS growth

ICICI Bank* (standalone) Axis Bank

FY12 FY13 FY14E FY15E FY16E FY12 FY13 FY14E FY15E FY16E

NII 2.5% 2.8% 3.0% 2.9% 2.8% 3.0% 3.1% 3.3% 3.2% 3.1%

Core non-interest income 1.6% 1.4% 1.4% 1.4% 1.4% 1.9% 1.8% 1.8% 1.7% 1.7%

Other non-interest income

0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.3% 0.3% 0.2% 0.2%

Non-interest income 1.6% 1.5% 1.5% 1.5% 1.5% 2.1% 2.1% 2.1% 2.0% 1.9%

Total net revenues 4.0% 4.3% 4.5% 4.3% 4.3% 5.1% 5.2% 5.3% 5.1% 5.1%

Employee cost 0.8% 0.8% 0.7% 0.7% 0.7% 0.8% 0.8% 0.7% 0.7% 0.7%

Other operating cost 1.0% 1.0% 1.1% 1.1% 1.2% 1.5% 1.4% 1.5% 1.5% 1.5%

Total operating cost 1.8% 1.8% 1.8% 1.8% 1.9% 2.3% 2.2% 2.2% 2.2% 2.2%

PPOP 2.2% 2.5% 2.7% 2.5% 2.4% 2.8% 3.0% 3.1% 2.9% 2.9%

Provisions 0.4% 0.4% 0.6% 0.5% 0.4% 0.4% 0.6% 0.6% 0.7% 0.6%

PBT 1.9% 2.1% 2.1% 1.9% 2.0% 2.4% 2.4% 2.5% 2.3% 2.3%

Tax rate 29% 29% 33% 32% 32% 32.5% 31.4% 33.0% 32.5% 32.5%

RoA 1.32% 1.48% 1.42% 1.32% 1.36% 1.61% 1.65% 1.69% 1.53% 1.53%

leverage 9.6 9.8 9.7 10.0 10.3 12.6 11.2 10.2 10.3 10.7

RoE 12.6% 14.5% 13.7% 13.1% 14.0% 20.3% 18.5% 17.2% 15.8% 16.3%

Loan growth 17% 14% 15% 16% 17% 19% 16% 17% 17% 18%

EPS growth 23% 29% 9% 6% 17% 24% 14% 12% 4% 18%

Source: Company, Ambit Capital research; *Note: ICICI Banks standalone numbers here are adjusted for dividend income from subsidiaries and equity investment in subsidiaries.

Key assumptions and change in estimates Exhibit 60: ICICI Bank key assumptions and change in estimates New Estimates Old Estimates Change Comments

FY14E FY15E FY14E FY15E FY14E FY15E

Recommendation BUY

BUY

Target price (`) 1,175

1,200

Assumptions

YoY assets growth 15.5% 16.0% 15.5% 16.9% 0 -82

NIMs (calculated) 3.11% 3.04% 3.09% 3.10% 1 -6 Whilst we have kept our margins and fee income expectation unchanged due to limited room for improvement, we have built in a slightly higher cost-to-income ratio.

Cost to income 38.9% 40.7% 39.1% 39.6% -18 116

Credit cost 0.96% 0.91% 0.98% 0.88% -2 3

Outputs (` mn)

NII 164,724 181,318 163,983 184,875 0% -2%

Operating profit 160,811 170,423 159,490 178,912 1% -5%

Net Profit 90,904 96,568 89,525 103,277 2% -6%

EPS (`) 78.8 83.7 77.6 89.5 2% -6%

ROA (%) 1.59% 1.50% 1.57% 1.60% 2 -10

ROE (%) 13.0% 12.7% 12.8% 13.6% 19 -85


BFSI


Exhibit 61: Axis Bank key assumptions and change in estimates New Estimates Old Estimates Change Comments

FY14E FY15E FY14E FY15E FY14E FY15E

Recommendation BUY

SELL

Target price (`) 1,450

1,120

Assumptions

YoY assets growth 17.1% 17.1% 15.0% 17.8% 204 -68 Our earnings estimates are largely unchanged, as slight upgrades in operating profit estimates are offset by higher credit costs.

NIMs (calculated) 3.35% 3.23% 3.29% 3.26% 6 -2

Cost to income 41.3% 42.9% 42.0% 43.6% -71 -63

Credit cost 0.84% 1.02% 0.76% 0.92% 8 11

Outputs (` mn)

NII 118,783 132,508 116,376 132,851 2% 0%

Operating profit 113,614 122,591 109,477 121,647 4% 1%

Net Profit 61,345 64,104 60,463 65,512 1% -2%

EPS (`) 131.1 137.0 129.2 140.0 1% -2%

ROA (%) 1.69% 1.53% 1.66% 1.56% 2 -3

ROE (%) 17.2% 15.8% 17.0% 16.1% 23 -35


Exhibit 62: ICICI Bank Ambit vs consensus (` mn) Consensus Ambit % difference

NII

FY15E 191,462 181,318 -5% FY16E 224,803 204,092 -9% EPS (`)

FY15E 94.2 83.7 -11% FY16E 109.2 97.9 -10% Source: Bloomberg, Ambit Capital research

Exhibit 63: Axis Bank Ambit vs consensus

(` mn) Consensus Ambit % difference

NII

FY15E 136,889 132,508 -3% FY16E 161,681 153,593 -5% EPS (`)

FY15E 145.0 137.0 -6% FY16E 169.4 161.2 -5% Source: Bloomberg, Ambit Capital research

BFSI


Valuations - EPS growth drives valuation Contrary to popular perception, RoA has not been a big driver of the valuation multiples that these banks have enjoyed. The valuation charts below show that whilst RoA expectations have significantly improved for both banks over the last two years, both the stocks have been significantly de-rated over the last two years.

Exhibit 64: Axis Bank P/B vs RoA (one-year forward estimate)


Exhibit 65: ICICI Bank P/B vs RoA (one-year forward estimate)


However, on the other hand, two-year forward EPS CAGR expectations have been a better driver of valuation multiples for both the banks.

Exhibit 66: Axis Bank P/E vs two-year forward EPS CAGR estimate


Exhibit 67: ICICI Bank P/E vs two-year forward EPS CAGR estimate


This is the reason that despite ICICI bridging the RoA gap to Axis Bank by ~30bps in FY09-11, it delivered a neutral share price performance, relative to Axis Bank, as its loan growth and earnings growth were muted. However, a combination of further RoA improvement and loan growth resumption in FY11-FY14YTD led to ICICI outperforming Axis Bank (by ~15%) during this period.

However, now with our expectation of loan growth converging for the two banks over the next two years, the RoA trajectory of these two banks would determine both the absolute as well as relative share price performance of these two banks.

As explained in the earlier section, we expect EPS growth CAGR of 10% and 14% for ICICI Bank and Axis Bank, respectively over FY14-16E. Our EPS estimates for ICICI

0.91.41.92.42.93.43.94.4

1.01.11.21.31.41.51.61.7

Jan-

06

Aug

-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-

09

Feb-

10

Sep-

10

Apr

-11

Nov

-11

Jun-

12

Jan-

13

Aug

-13

ROA - 1yr fwd PB - 1yr fwd (RHS)

0.6

1.1

1.6

2.1

2.6

3.1

3.6

1.01.11.21.31.41.51.61.71.8

Jan-

06

Aug

-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-

09

Feb-

10

Sep-

10

Apr

-11

Nov

-11

Jun-

12

Jan-

13

Aug

-13

ROA - 1yr fwd PB - 1yr fwd (RHS)

05101520253035

13%

18%

23%

28%

33%

38%

Jan-

06

Aug

-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-

09

Feb-

10

Sep-

10

Apr

-11

Nov

-11

Jun-

12

Jan-

13

Aug

-13

EPS 2yr CAGR PE - 1yr fwd (RHS)

5

10

15

20

25

30

8%

13%

18%

23%

28%

Jan-

06

Aug

-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-

09

Feb-

10

Sep-

10

Apr

-11

Nov

-11

Jun-

12

Jan-

13

Aug

-13

EPS 2yr CAGR PE - 1yr fwd (RHS)

BFSI


Bank are ~10% lower than consensus expectations. Our EPS estimates for Axis Bank are ~5-6% lower than consensus expectations.

Hence in our base-case scenario, we expect Axis Bank to outperform ICICI Bank in the medium term.

Absolute valuation ICICI Bank

We have valued standalone ICICI Bank using a two-stage (20 years) excess return to equity model which is net profit (cost of equity x average net worth) for all the future years discounted back to the present using cost of equity.

We have explicitly forecast net profit for FY14-16E based on the assumptions in Exhibit 60.

We have valued the standalone bank by deducting equity investment in subsidiaries from book value and assets and income from subsidiaries from net profits.

We have assumed 16% CAGR in asset growth for FY17-24 (phase I) and 14% CAGR in asset growth for FY25-34 (phase II).

We have assumed sustainable RoAs of 1.4% from FY17 onwards.

We have assumed cost of equity of 14% and terminal growth of 5%.

Based on these assumptions, our excess return model values standalone ICICI Bank at Rs1,175/share (implied FY15E P/B of 1.4x and one-year forward P/E of 10.8x).

Using SOTP method to value the consolidated entity, we arrive at a valuation of `1,175/share, which is 2% lower than our earlier target price of `1,200/share.

Exhibit 68: ICICI Bank SOTP valuation Holding Valuation Methodology Value Contribution

(%) per share

(`) to TP (%)

ICICI Bank - Parent 100% 1.4x Mar'15E BPS 842 72% ICICI Prudential Life 74% Appraisal Value 168 14% ICICI Prudential MF 51% 5% of AUM 21 2% ICICI Bank UK 100% 1x Current book 29 2% ICICI Bank Canada 100% 1x Current book 49 4% ICICI Bank HF 100% 1x Current book 13 1% ICICI Lombard 74% 2.5x FY12 book 29 3% ICICI Securities 100% 12x FY13 EPS 7 1% ICICI Ventures 100% 10% of AUM 11 1% ICICI Sect. Primary Dealership 100% 1.0x FY13 book 6 1% Total (`.) 1,175 100%


Axis Bank

We have valued standalone ICICI Bank using a two-stage (20 years) excess return to equity model which is net profit (cost of equity x average net worth) for all the future years discounted back to the present using cost of equity.

We have explicitly forecast net profit for FY14-16E based on the assumptions in Exhibit 61.

We have assumed 18% CAGR in asset growth for FY17-24 (phase I) and 15% CAGR in assets growth for FY25-34 (phase II).

We have faded RoAs from 1.6% in FY16E to 1.4% by FY34.

BFSI


We have assumed cost of equity of 14% and terminal growth of 5%.

Based on these assumptions, our excess return model values Axis Bank at Rs1,450/share (implied FY15E P/B of 1.55x and one-year forward P/E of 9.7x).

This is 29% higher than our earlier target price of `1,120/share for Axis. The increase is largely driven by a 24% increase in the valuation multiple, as we expect Axis Bank to protect its long-term earnings growth better than our earlier expectation due to a better-than-expected performance on balance sheet growth and credit quality.

Relative valuation ICICI Bank and Axis Bank are trading at a ~50% discount to their retail lending focussed private sector bank peers. However, both the banks are now curtailing their corporate credit exposure with an incremental focus on retail loans. Whilst the diversification continues, we believe the banks have sufficient profitability buffers to face a rise in credit costs due to their exposure to stressed corporate loans. Thus, over the coming years, whilst the corporate loan book would continue to be a material part of the loan book, we expect the earnings profile to diversify and the valuation discount to narrow. Between the two banks, we believe Axis Bank would deliver better returns due to better EPS growth.

Exhibit 69: Our BFSI coverage universe

Mcap Price Reco. TP Up/ down

P/B P/E EPS CAGR ROA ROE

US$bn Rs Rs FY14E FY15E FY14E FY15E FY13-15E FY14E FY15E FY14E FY15E

New Private

HDFC Bank 26.0 672 SELL 600 -11% 3.7 3.1 19.0 15.7 23% 1.9% 1.9% 21.2% 21.8%

ICICI Bank* 20.0 1,069 BUY 1,175 10% 1.2 1.1 9.8 9.2 8% 1.6% 1.5% 13.0% 12.7%

Kotak Mahindra Bank 8.4 677 SELL 630 -7% 2.7 2.3 20.0 16.9 17% 2.1% 2.2% 15.1% 14.9%

Axis Bank 9.8 1,294 BUY 1,450 12% 1.6 1.4 9.9 9.4 11% 1.7% 1.5% 17.2% 15.8%

IndusInd Bank 3.5 411 NA NA NA 2.5 2.1 15.7 12.7 25% 1.7% 1.8% 16.8% 17.9%

Yes Bank 1.9 320 NA NA NA 1.6 1.3 7.4 6.3 19% 1.5% 1.5% 24.2% 23.1%

Average 2.3 2.0 14.7 12.6 16% 1.8% 1.8% 16.5% 16.6%

Large PSUs

State Bank of India* 18.7 1,550 SELL 1,380 -11% 0.7 0.6 7.6 5.9 -6% 0.6% 0.7% 9.8% 11.2%

Bank of Baroda 4.0 577 SELL 550 -5% 0.7 0.6 5.9 5.4 0% 0.7% 0.6% 12.8% 12.5%

Punjab National Bank 3.3 566 SELL 450 -20% 0.6 0.6 5.7 4.9 -7% 0.7% 0.7% 11.0% 11.7%

Bank of India 1.8 176 SELL 185 5% 0.4 0.4 3.9 3.4 5% 0.5% 0.5% 11.0% 11.4%

Union Bank of India 1.1 106 SELL 100 -5% 0.4 0.3 4.0 3.2 6% 0.5% 0.5% 9.7% 11.2%

Average 0.6 0.5 5.4 4.6 0% 0.6% 0.6% 10.9% 11.6%

Old Private

ING Vysya 1.6 539 BUY 630 17% 1.4 1.3 14.2 11.1 11% 1.2% 1.3% 11.4% 12.4%

Federal Bank 1.1 80 BUY 90 13% 1.0 0.9 8.6 7.1 7% 1.0% 1.1% 11.9% 13.2%

Karur Vysya bank 0.5 315 SELL 320 2% 1.0 0.9 10.5 6.0 1% 0.6% 0.9% 10.2% 16.5%

South Indian Bank 0.5 21 SELL 20 -4% 0.9 0.8 5.4 5.2 3% 1.0% 0.9% 16.9% 15.4%

City Union Bank 0.4 48 BUY 64 35% 1.2 1.1 7.1 5.9 9% 1.5% 1.5% 19.6% 19.5%

Average 1.1 1.0 9.1 7.0 6% 1.1% 1.1% 14.0% 15.4%

NBFCs

HDFC 20.7 822 SELL 710 -14% 4.6 4.2 25.2 23.6 5% 2.2% 1.9% 25.1% 23.0%

M&M Finance 2.3 245 SELL 240 -2% 2.7 2.3 16.0 13.4 3% 2.8% 2.8% 17.2% 17.9%

IDFC 2.4 100 BUY 130 31% 1.1 1.0 8.0 8.2 0% 2.8% 2.8% 13.2% 11.7%

Shriram Transport 2.1 579 SELL 575 -1% 1.6 1.4 10.4 9.4 1% 2.1% 2.0% 16.3% 15.8%

LIC Housing Finance 1.7 208 BUY 268 29% 1.4 1.2 8.5 7.7 16% 1.5% 1.4% 16.3% 16.7%

Magma Fincorp 0.2 67 BUY 87 31% 0.8 0.7 8.8 5.8 32% 0.7% 1.0% 9.6% 13.0%

Motilal Oswal Financial 0.2 86 BUY 108 25% 1.0 0.9 35.9 9.5 9% 2.7% 9.7% 2.7% 9.9%

Manappuram General Fin 0.3 23 BUY 29 28% 0.8 0.7 7.3 6.4 20% 2.2% 2.4% 10.5% 11.5%

Source: Company, Bloomberg, Ambit Capital research; * Note: valuation multiples for SBI and ICICI Bank have been adjusted for the standalone bank.

BFSI


ICICI Bank Balance sheet (standalone)

Year to March (` mn) FY12 FY13 FY14E FY15E FY16E

Networth 604,029 667,015 728,224 791,049 866,202

Deposits 2,555,000 2,926,136 3,365,057 3,903,466 4,567,055

Borrowings 1,401,649 1,453,415 1,569,094 1,753,465 1,963,992

Other Liabilities 330,011 321,381 372,817 428,750 493,067

Total Liabilities 4,890,688 5,367,947 6,035,192 6,876,729 7,890,315

Cash & Balances with RBI & Banks 362,293 414,175 386,861 427,944 476,184

Investments 1,595,600 1,713,936 1,832,132 2,052,298 2,314,864

Advances 2,537,277 2,902,494 3,350,965 3,888,301 4,544,080

Other Assets 395,518 337,341 465,234 508,186 555,187

Total Assets 4,890,688 5,367,947 6,035,192 6,876,729 7,890,315


Income statement (standalone)


Interest Income 335,427 400,756 450,941 501,189 563,847

Interest Expense 228,085 262,092 286,217 319,872 359,754

Net Interest Income 107,342 138,664 164,724 181,318 204,092

Total Non-Interest Income 75,028 83,457 98,339 106,181 120,225

Total Income 182,369 222,121 263,063 287,498 324,318

Total Operating Expenses 78,504 90,129 102,252 117,076 135,296

Employees expenses 35,153 38,933 40,817 44,582 49,754

Other Operating Expenses 43,352 51,196 61,435 72,494 85,542

Pre Provisioning Profits 103,865 131,992 160,811 170,423 189,022

Provisions 15,830 18,025 31,318 34,411 29,942

PBT 88,034 113,967 129,493 136,012 159,079

Tax 23,382 30,712 38,589 39,443 46,133

PAT 64,653 83,255 90,904 96,568 112,946


Ratio analysis (standalone)


Credit-Deposit (%) 99.3% 99.2% 99.6% 99.6% 99.5%

Investment / Deposit (%) 62.5% 58.6% 54.4% 52.6% 50.7%

CASA ratio (%) 45.8% 44.6% 43.7% 43.3% 42.9%

Cost/Income ratio (%) 43.0% 40.6% 38.9% 40.7% 41.7%

Gross NPA (` mn) 94,753 96,078 110,930 138,468 180,421

Gross NPA (%) 3.63% 3.23% 3.24% 3.48% 3.88%

Net NPA (` mn) 18,608 22,306 33,279 44,310 75,777

Net NPA (%) 0.73% 0.77% 0.99% 1.14% 1.67%

Provision coverage (%) 80.4% 76.8% 70.0% 68.0% 58.0%

NIMs (%) 2.57% 2.91% 3.11% 3.04% 2.98%

Tier I (%) 12.67% 12.80% 12.51% 12.05% 11.61%

CAR (%) 18.52% 18.74% 17.96% 16.99% 16.05%


BFSI


Du-pont analysis (standalone)


NII / Assets (%) 2.4% 2.7% 2.9% 2.8% 2.8%

Other income / Assets (%) 1.7% 1.6% 1.7% 1.6% 1.6%

Total Income / Assets (%) 4.1% 4.3% 4.6% 4.5% 4.4%

Cost to Assets (%) 1.8% 1.8% 1.8% 1.8% 1.8%

PPP / Assets (%) 2.3% 2.6% 2.8% 2.6% 2.6%

Provisions / Assets (%) 0.7% 0.7% 1.0% 1.0% 0.7%

PBT / Assets (%) 2.0% 2.2% 2.3% 2.1% 2.2%

Tax Rate (%) 26.6% 26.9% 29.8% 29.0% 29.0%

ROA (%) 1.4% 1.6% 1.6% 1.5% 1.5%

RoRWAs (%) 1.7% 2.0% 1.9% 1.8% 1.8%

Leverage (%) 7.8 8.1 8.2 8.5 8.9

ROE (%) 11.2% 13.1% 13.0% 12.7% 13.6%


Valuation parameters (standalone)

Year to March FY12 FY13 FY14E FY15E FY16E

EPS (`) 56 72 79 84 98

EPS growth (%) 25% 29% 9% 6% 17%

Adjusted BVPS (`) 522 574 624 686 751

P/E (x) 19.1 14.8 13.6 12.8 10.9

P/BV (x) 2.04 1.85 1.69 1.56 1.42


BFSI


Axis Bank Balance sheet


Networth 228,085 331,079 380,926 431,890 492,536

Deposits 2,201,043 2,526,136 2,804,011 3,280,693 3,871,217

Borrowings 340,717 439,511 544,416 641,668 780,045

Other Liabilities 86,433 108,881 141,545 169,855 203,825

Total Liabilities 2,856,278 3,405,607 3,870,899 4,524,105 5,347,623

Cash & Balances with RBI & Banks 139,339 204,350 222,410 268,252 316,723

Investments 931,921 1,137,375 1,247,202 1,449,465 1,709,525

Advances 1,697,595 1,969,660 2,305,609 2,699,381 3,197,745

Other Assets 87,423 94,222 95,679 107,008 123,630

Total Assets 2,856,278 3,405,607 3,870,899 4,524,105 5,347,623


Income statement


Interest Income 219,946 271,826 308,483 354,343 407,254

Interest Expense 139,769 175,163 189,700 221,836 253,660

Net Interest Income 80,177 96,663 118,783 132,508 153,593

Total Non-Interest Income 54,202 65,511 74,605 82,293 95,981

Total Income 134,380 162,174 193,388 214,800 249,575

Total Operating Expenses 60,071 69,142 79,774 92,209 107,508

Employees expenses 20,802 23,770 26,688 30,629 35,460

Other Operating Expenses 39,269 45,373 53,086 61,580 72,048

Pre Provisioning Profits 74,309 93,031 113,614 122,591 142,067

Provisions 11,427 17,501 22,054 27,622 30,321

PBT 62,882 75,531 91,560 94,969 111,746

Tax 20,460 23,736 30,215 30,865 36,317

PAT 42,422 51,794 61,345 64,104 75,428


Ratio analysis


Credit-Deposit (%) 77.1% 78.0% 82.2% 82.3% 82.6%

Investment / Deposit (%) 42.3% 45.0% 44.5% 44.2% 44.2%

CASA ratio (%) 43.6% 47.0% 46.3% 45.8% 45.2%

Cost/Income ratio (%) 44.7% 42.6% 41.3% 42.9% 43.1%

Gross NPA (` mn) 18,063 23,934 33,484 44,688 60,378

Gross NPA (%) 1.06% 1.20% 1.44% 1.64% 1.87%

Net NPA (` mn) 4,726 7,041 11,719 15,641 25,963

Net NPA (%) 0.28% 0.36% 0.51% 0.58% 0.81%

Provision coverage (%) 73.8% 70.6% 65.0% 65.0% 57.0%

NIMs (%) 3.13% 3.18% 3.35% 3.23% 3.19%

Tier I (%) 9.45% 12.23% 12.04% 11.59% 11.09%

CAR (%) 13.66% 17.00% 16.42% 15.71% 14.88%


BFSI


Du-pont analysis


NII / Assets (%) 3.0% 3.1% 3.3% 3.2% 3.1%

Other income / Assets (%) 2.1% 2.1% 2.1% 2.0% 1.9%

Total Income / Assets (%) 5.1% 5.2% 5.3% 5.1% 5.1%

Cost to Assets (%) 2.3% 2.2% 2.2% 2.2% 2.2%

PPP / Assets (%) 2.8% 3.0% 3.1% 2.9% 2.9%

Provisions / Assets (%) 0.4% 0.6% 0.6% 0.7% 0.6%

PBT / Assets (%) 2.4% 2.4% 2.5% 2.3% 2.3%

Tax Rate (%) 32.5% 31.4% 33.0% 32.5% 32.5%

ROA (%) 1.6% 1.7% 1.7% 1.5% 1.5%

RoRWAs (%) 2.0% 2.1% 2.2% 1.9% 1.9%

Leverage (%) 12.6 11.2 10.2 10.3 10.7

ROE (%) 20.3% 18.5% 17.2% 15.8% 16.3%


Valuation parameters

Year to March FY12 FY13 FY14E FY15E FY16E

EPS (`) 103 111 131 137 161

EPS growth (%) 24% 8% 18% 4% 18%

Adjusted BVPS (`) 552 708 814 923 1,053

P/E (x) 12.6 11.7 9.9 9.4 8.0

P/BV (x) 2.34 1.83 1.59 1.40 1.23


BFSI


Institutional Equities Team

SaurabhMukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking & Financial Services (022) 30433239 [email protected]

Achint Bhagat Cement / Infrastructure (022) 30433178 [email protected]

Aditya Khemka Healthcare (022) 30433272 [email protected]

Akshay Wadhwa Banking & Financial Services (022) 30433005 [email protected] Ankur Rudra, CFA Technology / Telecom / Media (022) 30433211 [email protected]

Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power / Capital Goods (022) 30433252 [email protected]

Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 [email protected]

Deepesh Agarwal Power / Capital Goods (022) 30433275 [email protected] Dipti Abhyankar Economy (022) 30433229 [email protected] Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 [email protected]

Karan Khanna Strategy (022) 30433251 [email protected]

Krishnan ASV Banking & Financial Services (022) 30433205 [email protected]

Nitin Bhasin E&C / Infrastructure / Cement (022) 30433241 [email protected]

Nitin Jain Technology (022) 30433291 [email protected]

Pankaj Agarwal, CFA Banking & Financial Services (022) 30433206 [email protected]

Pratik Singhania Real Estate / Retail (022) 30433264 [email protected]

Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 [email protected]

Rakshit Ranjan, CFA Consumer / Real Estate / Retail (022) 30433201 [email protected]

Ravi Singh Banking & Financial Services (022) 30433181 [email protected]

Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Tanuj Mukhija, CFA E&C / Infrastructure (022) 30433203 [email protected]

Sales

Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Sarojini Ramachandran UK +44 (0) 20 7614 8374 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

ambit bfsi sectorupdate iciciandaxis 05mar2014

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