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Note on Demonetization

Paradise Lost and Paradise Regained

December 2016

ABHINESH VIJAYARAJ [email protected] +91 44 4344 0006

NISHANT RUNGTA [email protected] +91 44 4344 0033

NAVIN BABU E S [email protected] +91 44 4344 0065

Paradise Lost and Paradise Regained

Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

Post demonetisation, India’s financial landscape promises much – a structural uptick in low cost deposits,

surplus liquidity & easing inflation leading to a fall in interest rates, a steepening yield curve with the potential

for significant treasury gains and an improving, albeit still high slippage trajectory. Credit growth, already at a

decadal low, is likely to recede further led by large repayments/pre-payments of short term working capital and

overdraft/cash credit loans. While this presents an opportunity to ‘regain’ lost ground for most banks, NBFCs

seem ‘lost’ – structural challenges on reinventing business models hitherto centred around cash, onerous

transitions to 90 day NPA recognition, a weakening real estate cycle leading to higher delinquencies, heightened

competition from banks and a slowdown in growth loom ahead. Effectively while most of our coverage banks are

likely to maintain/improve RoAs, NBFCs are poised for a structural downshift.

In view of the above, we downgrade our ratings on CIFC, REPCO and SCUF to ‘reduce’, besides maintaining our

high conviction ‘sell’ calls on SHTF, MMFS, LICHF and HDFC. While we are directionally positive on BHAFIN, we

would await a better risk-reward ratio, preferring the SFBs Equitas and Ujjivan. Indeed, we believe both Equitas

and Ujjivan should gain disproportionately on the liability front besides being better positioned to move away

from a cash centric model. Amongst the banks, while we make no stock call changes, we increase the weights on

SBI and the old gen pack besides replacing SIB with FB in the model portfolio.

Key thoughts:

• Deposits set to clock 13% yoy increase. Current trends in inflows suggest a 60% SA, 20% CA, 5% TD and 15%

CC/OD repayment split. We estimate 25% of demonetisation led flows to stay back.

• Credit growth likely to be a modest 5% yoy. Almost 40% of systemic loans are CC/OD/loans repayable on demand

-all witnessing pre-payments. In light of a likely ~Rs.1300bn of inflows into CC/OD accounts and challenges at the

branch level in processing retail/SME loans, effective credit growth has to be ~Rs.7000bn from Nov ‘11 to Mar 31 to

deliver 5% FY17 loan growth

• Higher real interest rate vs RBI’s target rate of 1.25% to provide room for a 50 - 75bps repo rate cut over the next

year.

• As deposit rates come off 50-75bps, MCLR likely to decline ~30bps. Wholesale funded, retail focussed banks with

large ALM mismatches viz IIB, AXSB, KMB, HDFCB, ICICIBC, YES and SBIN are well positioned for a falling rate

environment on the NIM front.

• Treasury gains likely to offset ~30% of NPA provisions in 2HFY17.

• NPAs – fall in SMA accounts and heightened recovery momentum in the near term. However, structural challenges

with ageing of NPAs and a real estate cycle linked recovery environment persist.

Abhinesh Vijayaraj | [email protected] | +91 44 4344 0006

Nishant Rungta | [email protected] | +91 44 4344 0033

Navin Babu E S | [email protected] | +91 44 4344 0065

INDIA FINANCIALS

Performance (%)

1m 3m 12m

Bankex -4% -8% 12%

Sensex -2% -7% 7%

Date 12 Dec, 2016

Market Data

Sensex Index 26,747

BANKEX Index 21,411

NIFTY Index 8,262

-30%

-20%

-10%

0%

10%

20%

30%

40%

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

Bankex Sensex

NBFCex

mailto:[email protected]



Section I: Ears on the Ground Summarised Takeaways

Spark’s Ears on the Ground – Pan India coverage

Guntur

Vijayawada

Amaravati

Vapi Surat

Rajpipla

Vadodara

Ahmedabad

Secunderabad

Hyderabad

Dharwad Hubli

Davangere

Shimoga

Udupi Mangalore

Thrissur Valapad

Irinjalakuda

Kochi Edapally

Trivandrum

Bhopal Jabalpur

Chindwara

Anand

Indore

Aurangabad

Jalgaon Amravati

Nagpur

Delhi Ghaziabad

Noida

Faridabad

Sardarshahar Churu

Mukundgarh Nawalgarh Gurgaon

Jaipur

Shahpura Bhiwandi

Bengaluru Chennai

Salem Namakkal

Chalakudi Angamaly

Erode Coimbatore

Ooty

Pollachi

Lucknow

Kanpur

Gwalior Allahabad

Varanasi

20 analysts from our research desk, in teams of two, traversed

more than 15,000 kms for 10 days across the length and

breadth of the country doing hundreds of varied channel

checks each day to judge the Demonetisation impact on

everyday business.

Andhra Pradesh

Telangana

Gujarat

Karnataka

Kerala

Madhya Pradesh

12 key states covered

Visited more than 100

majorcities and towns

across the nation

Spark Ears on the Ground Juggernaut

20 analysts + 15,000 kms + 2000 plus channel checks in 100 cities & towns and more villages across India

1. How long and how painful is the generally perceived ‘short-

term pain’ likely to be?

2. How much of the demand destruction could be structural?

3. The power of the Indians’ mind to accept and adapt to change

in unraveling the impact.

Trip Objectives – To find answers for:

Maharashtra

National Capital Region

Rajasthan

Tamil Nadu

Uttar Pradesh

Punjab

SMEs,Bank & NBFC branches, 2W/ 4W/ truck dealers, truck

operators, toll plazas, luxury stores, restaurants, consumer

durables outlets, jewelers, apparels shops, cement dealers, tiles

& building materials, electricals, pharmacy,construction sites,

real estate developers,farmers etc.

2000+ touch points across urban and rural pockets

• Mood, perception on demonetisation and business impact?

• What was the share of cash and non-cash transactions in

your revenue mix earlier?

• What is the impact on demand since 8th November 2016?

• When and how do you see demand recovering?

• What changes you intend to make to your way of doing

business?

• Any signs of pick up in demand during this week?

Key questions asked to understand the pulse:

Chandigarh Barnala

Key takeaways from our channel checks

Takeaways across sectors for banks/NBFCs

PSU Banks:

• ~Branch led retail and SME business

impacted, significant inflow into CC/OD

accounts; working capital loans being pre-

paid. Credit growth to be low to mid single

digits for FY17.

• Heightened momentum in recoveries led by

ability to accept old notes.

• Demand for POS terminals up 10x, waiting

period of a fortnight.

• ~30% movement in Jan Dhan accounts

across branches.

Private Banks:

~No meaningful impact in large and mid

corporate segments thus far

Core non-deposit business at branch level hurt

the first fortnight, but slowly returning to normal

now.

CASA up 300-400bps; no material change in

business outlook for the year.

No deviation in collections from CV, cars, 2/3

wheeler and autos although disbursements are

down 10-15% mom

Micro Finance:

• Steady improvement in collection

efficiencies which has improved to ~90%

from 60% in the week beginning Nov 8.

• Growth to be at the back-burner for FY17.

• Weekly collection models lesser impacted

than the monthly collection models.

• Collection in North India, specifically states

like UP, Rajasthan a concern as 60 day

extension has been politically

misinterpreted

Regional Banks:

~15% increase in inflows since Nov 8, with 65%

flowing into SA, 20% CA and 15% CC/OD

accounts.

Inflows into CC/OD accounts has hurt overall

loan growth

Old NPAs being repaid in cash, but largely

restricted to small ticket size NPAs.

Overdue accounts (SMA 0, 1, 2) down

meaningfully.

Asset Financing NBFCs:

~50% collection in CV, 70% in MSME and gold

cash based. Inability to accept old notes hurting

collections although the 60 day payment period

extension will help.

Incremental focus on collections, disbursements

not a focus at present. Loan growth to be sharply

lower.

Operating leverage to defer led by increase in

collection turnaround times per customer and

lower growth.

Repo activity to slowdown with crash in second

hand CV prices

Cash flows moving to banks could result in a

structural change in the extant lending model

Housing Finance:

• Imminent price correction in the realty

segment will likely impact new home buyer

sentiment in the near term.

• Lower wealth effect combined with price

correction likely to push LTVs higher

resulting in increased credit costs.

• Business activity slowdown for SMEs to

accentuate already high LAP NPAs.

• Intensifying pricing pressures from banks to

impact margins.

• Real Estate activity in TN has been more

impacted due to the Madras High Court

Order on DTCP approval.

Ears on the Ground

Takeaways

Sub Categories % Cash proportion in revenue % fall in Demand

Auto & Auto ancillary

2 W Dealer 53% 39%

4 W dealer 40% 43%

Auto ancs dealer 77% 58%

Tyre/battery dealer 79% 63%

Logistics company 67% 24%

Cement and Building

Materials

Cement & Building materials 88% 62%

Tiles/Sanitaryware dealer / Paint 73% 68%

Real Estate Developer 69% 93%

Paint dealer Paint dealer 79% 77%

Gold Jeweller GOLD JEWELLER 77% 77%

Consumer Durables Consumer Durables 67% 54%

FMCG and Consumer

Discretionary

Apparel 54% 43%

Consumer Discretionary 71% 59%

FMCG 85% 30%

Key Highlight:

Cement and building materials, paint dealers and tyre dealers are majorly dependent on cash transaction and they were seriously affected by

the policy.

FMCG sector, though majorly dependent on cash was the least impacted due to quick adaptability of the shop keepers and customers. Apart

from FMCG items, the least fall in demand was seen in 2 wheelers and 4 wheelers.

Barring FMCG, sectors with high cash dependency are hit hard

FMCG, 2W and 4W Auto - least impacted. Real estate, cement, building materials – Max impacted

Sub Categories Recovered 1 month 2 months 3 months 6 months to 1

year

Auto & Auto ancillary

2 W Dealer 0% 20% 55% 20% 5%

4 W dealer 0% 20% 35% 25% 20%

Auto ancs dealer 0% 0% 0% 50% 50%

Tyre/battery dealer 0% 17% 42% 25% 17%

Logistics company 0% 50% 0% 25% 25%

Cement and Building

Materials

Cement & Building materials 0% 7% 10% 24% 59%

Tiles/Sanitaryware dealer / Paint 0% 0% 17% 17% 67%

Real Estate Developer 0% 0% 14% 0% 86%

Gold Jeweller Gold Jeweller 6% 6% 31% 19% 38%

Paints Paint dealer 0% 0% 29% 43% 29%

Consumer Durables Consumer Durables 6% 31% 13% 31% 19%

FMCG and Consumer

Discretionary

Apparel 0% 36% 36% 28% 0%

Consumer Discretionary 0% 40% 27% 20% 13%

FMCG 25% 75% 0% 0% 0%

Key Highlight:

Real estate dependent sector: This is the one sector where we have found the sentiment and activity levels deteriorate across the country on our road trip

over the past 10 days. FMCG, Consumer discretionary and Apparels are expected to recover the earliest. Inventory glut, labour scarcity, delay in projects

are additional reasons that will dampen the real estate dependent sectors.

Sector-wise expectation of recovery

FMCG, Auto & Apparels to recover faster while Cement, Building Materials & Jewellers to be the last

South and Central India expectsquicker recovery compared to the Western region

North South West Central

Normal 0% 0% 0% 0%

Recovered 0% 9% 5% 3%

It is recovering fast and will

be normal in a few days 0% 0% 0% 0%

2 months 33% 43% 10% 45%

3 months 33% 23% 20% 24%

6 months to 1 year 33% 25% 65% 28%

Across nation, the proportion of cash in

transaction has been the same

Region % cash % fall in

demand

North India 71% 68%

South India 72% 67%

West India 76% 75%

Central India 73% 63%

Rural India is expected to recover faster than Urban India

Urban Rural

Normal 0% 0%

Recovered 6% 8%

It is recovering fast and will be normal in a few days 0% 0%

2 months 29% 50%

3 months 30% 19%

6 months to 1 year 36% 23%

Key Highlight:

Our assessment is that, recovery is

materially dependent on the place’s

resistance to change its cash usage

behaviour.

We observed that the mind set to

remain under radar, extreme aversion

to card transactions even for big ticket

bills are certain features that

procrastinate recovery.

South & Central India expect a quicker recovery vs. Western part

Rural India is expected to recover faster than Urban India

Section II : Macro Outlook after Demonetisation

#1: Growth Outlook: Demonetisation to reduce GDP growth by 210bps

GDP growth to fall to 5.6% in 3Q and further to 4.5% in 4Q (2HFY17: 5.1% vs. 1HFY17: 7.2% = - 210bps)

Consumption: Expect durable

consumption (Wt: 12%) to see the

maximum impact, while services

consumption (Wt: 49%) to see a

moderate impact and non-durable

consumption (Wt: 39%) to be largely

unaffected.

Govt exp would not be impacted by

Demonetisation in FY17. In FY18, it’s

impact can be positive on Govt

expenditure.

We estimate that GDP growth is likely

to inch up to 6% in FY18 from 5.1% in

2H FY17 as system gets used to

cashless transactions.

Share

in GDP Absolute values (Rs.trn) Growth (%, yoy)

(%) FY16 1H FY17 2H FY17 FY17E FY18E FY16 1H FY17 2H FY17 FY17E FY18E

C 55.5 63.0 32.3 34.7 67.1 71.3 7.4 7.1 5.7 6.4 6.3

G 9.9 11.3 7.3 5.5 12.9 14.5 2.2 16.9 10.9 14.2 12.5

I 34.5 39.2 18.7 19.2 37.9 39.3 3.4 -5.7 -0.8 -3.3 3.8

X 20.9 23.8 12.1 12.2 24.3 24.8 -5.2 1.7 2.4 2.1 2.1

M 22.8 25.9 12.2 12.3 24.5 25.1 -2.8 -7.5 -3.2 -5.4 2.4

(X-M) -1.9 -2.1 -0.2 -0.1 -0.2 -0.3 ... ... ... ... ...

E&O 1.9 2.1 0.6 2.2 2.8 2.8 ... ... ... ... ...

GDP 100.0 113.5 58.8 61.6 120.4 127.6 7.4 7.2 5.1 6.1 6.0

Demonetisation to hurt Mar’17 GDP growth more than the GDP growth in Dec’16. We estimate India’s GDP growth to decelerate from 7.3% in Sep’16 quarter to

5.6% in Dec’16 quarter and further to 4.5% in Mar’17 quarter. (GDP growth: 5.1% in 2HFY17 vs. 7.2 in 1HFY17 = 210bps impact)

Source: Spark Capital Research

Let’s do the math: Here is the GDP calculation (using demand side method)

GDP=C + I + G + (X-M)

C: Pvt. consumption, I: Investment, G: Govt. consumption, X: exports, M: Imports

Due to a marginal pick up in X and contraction in M (weak domestic dd), (X-M) in FY16 =- Rs.

2.1tnand(X-M) in FY17=- Rs. 0.2tn

The delta on (X-M) in FY17 over FY16 would be positive at Rs 1.9tn,

Also incremental GDP in FY17 = Rs. 6.9tn

Net exports’ contribution in FY17 = (1.9/6.9)*6.1 = 1.7ppt

Thus, positive delta from (X-M) in FY17 to add 1.7ppt to GDP vs. a drag of 0.5ppt in FY16

Therefore, a sharp fall in GDP growth would be partially offset by a positive

contribution by (X-M) led by a mild exports recovery and decline in imports.

4.1

0.2

1.2

-0.5

2.4

7.4

3.6

1.4

-1.1

1.7

0.6

6.1

3.5

1.3

1.2

-0.1

0.0

6.0

C G I (X-M) E&Y GDP

Contribution to growth, percentage points

FY16 FY17 FY18

#2: Inflation Outlook: CPI inflation adjusting to lower orbit

Demonetisation to reduce CPI inflation by 50pbs; Expect CPI inflation to fall below 4% in Nov-Dec FY17

We estimate CPI inflation to ease to sub-4% by Dec’16 and to end

the year FY18E at 4.2% by Mar’18

Source: GoI, Spark Capital Research

We estimate WPI inflation to surpass CPI inflation in coming months

due to compression in middlemen’s margins


6.1

4.2

3.7

4.9

3.2

4.2

2

3

4

5

6

7

8

9

10

Jan

-14

Mar-

14

May-1

4

Jul-

14

Se

p-1

4

No

v-1

4

Jan

-15

Mar-

15

May-1

5

Jul-

15

Se

p-1

5

No

v-1

5

Jan

-16

Mar-

16

May-1

6

Jul-

16

Se

p-1

6

No

v-1

6

Jan

-17

Mar-

17

May-1

7

Jul-

17

Se

p-1

7

No

v-1

7

Jan

-18

Mar-

18

CPI inflation (%) Estimates (%, yoy)

Estimates 9%

6%

4%

Demonetisation to reduce CPI inflation by 50bps led by lower

inflation for food, housing and discretionary items


20

10

10

5

5

50

Food Housing Durablegoods

Consumergoods &

staples

Others Total

Segment-wise impact of Demonetisation on CPI inflation (bps)

6.2

-5.1

3.9

2.7

5.3

3.3

4.6

-6

-4

-2

0

2

4

6

8

Jan

-14

Mar-

14

May-1

4

Jul-

14

Se

p-1

4

No

v-1

4

Jan

-15

Mar-

15

May-1

5

Jul-

15

Se

p-1

5

No

v-1

5

Jan

-16

Mar-

16

May-1

6

Jul-

16

Se

p-1

6

No

v-1

6

Jan

-17

Mar-

17

May-1

7

Jul-

17

Se

p-1

7

No

v-1

7

Jan

-18

Mar-

18

WPI inflation (%) Estimates (%, yoy)

Estimates

Farmers

Traders

Commissioning Agent

Wholesaler

Consumer Retailer

20%

25%

30%

30%

A farmer sells

onions at Rs. 10 /Kg

Final consumer

pays Rs 25/Kg,

~150% jump

Removal of APMC act on fruits & vegetables in Maharashtra is one

recent example

Final consumer

pays Rs 25/Kg,

~150% jump

Liquidity condition to ease further when Govt spending would increase as it maintained Rs 1.4tn cash balance with RBI in Nov’16


We see a faster monetary policy transmission which would drive

market lending rates lower by 50-75bps

Source: CEIC, Spark Capital Research

Higher real interest rate vs. RBI’s target rate of 1.25% to provide

room for a 50-75bps rate cut by RBI in one year


#3: Interest rate Outlook: More easing ahead

New developments create room for another 50-75bps cut in the repo rate

2.32

3.03

2.17

1.25

0

1

2

3

4

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct-

15

De

c-1

5

Fe

b-1

6

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct-

16

De

c-1

6

Fe

b-1

7

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct-

17

De

c-1

7

Real interest rate (%) RBI's target for real rate (%)

Room for

50-75bps

cut in repo

Estimates

6.25

5.50

9.48

7.75

6.06.57.07.58.08.59.09.510.010.511.0

5

6

7

8

9

Se

p-1

0

De

c-1

0

Mar-

11

Jun

-11

Se

p-1

1

De

c-1

1

Mar-

12

Jun

-12

Se

p-1

2

De

c-1

2

Mar-

13

Jun

-13

Se

p-1

3

De

c-1

3

Mar-

14

Jun

-14

Se

p-1

4

De

c-1

4

Mar-

15

Jun

-15

Se

p-1

5

De

c-1

5

Mar-

16

Jun

-16

Se

p-1

6

De

c-1

6

Mar-

17

Jun

-17

Se

p-1

7

De

c-1

7

Repo rate Base Rate: Five Major Banks (%) MCLR (%)

The spread between repo rate and banks’

MCLR is at historic high of over 300bps

799 749

539

32 132

427 496

685

1287 1312

952

1514

138

353

147 0 52

262 159

1398

Ap

r/1

5

May/1

5

Jun

/15

Jul/15

Au

g/1

5

Se

p/1

5

Oct/1

5

No

v/1

5

De

c/1

5

Jan

/16

Fe

b/1

6

Mar/

16

Ap

r/1

6

May/1

6

Jun

/16

Jul/16

Au

g/1

6

Se

p/1

6

Oct/1

6

No

v/1

6

Govt surplus cash balance with RBI (Rs. bn)

Post Demonetisation announcement, currency in circulation (CIC)

has declined by Rs 6tn as on 25 Nov’16


#4: ‘Govt initiative to make India a cashless economy’ to provide big benefits

Lower cost of borrowing and higher money multiplier to push GDP growth up after initial re-adjustment

Currency in circulation, which grows in line with nominal GDP

growth, had decoupled with nominal GDP growth rate


14.9

8.7

5

7

9

11

13

15

17

19

21

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

Currency in circulation growth (%) Nominal GDP growth (%)

5.9

13.4

14.9 14.8

17.2 18.0

11.9

56789

101112131415161718

Ap

r'0

8

Ap

r'1

4

Ap

r'1

5

Au

g'1

5

Ap

r'1

6

04-N

ov'1

6

25-N

ov'1

6

Currency in Circulation (Rs tn)

* Keeping other things unchanged

Lower currency in circulation (CIC) would have multiple benefits

I. Banks CASA would go up. Banks’ cost of deposit can fall sharply. As a result, banks’

MCLR would fall sharply, leading to fall in cost of borrowings

II. It would enhance structural liquidity in the system, which means banks can park

excess liquidity with the RBI. Hence, reverse repo would become the operative rate

III. Money multiplier would increase from 5.5 to 6.2 leading to higher GDP growth

Current trends in inflows since November 8:

60% Savings Account

20% Current Account

5% Term Deposit

15% CC/OD

repayment

Total inflows

#5: Deposits set to clock ~13% yoy increase…

Deposits set to spike ~7% qoq before normalising in 4QFY17


* Assumptions

Demonetisation in the past:

The current move to demonetise high value notes is the third

such instance since 1946.

1946: In January 1946 India demonetised Rs.1000 and

Rs.10,000 notes towards curbing ‘black markets’. By 1954

however, higher denomination notes of Rs.1000, Rs.5000 and

Rs.10000 were reintroduced.

1978: In January 1978, Rs.1000, Rs.5000 and Rs.10000 were

demonetised – these high value notes amounted to Rs.1.45bn

forming 1.8% of currency in circulation. In view of the

miniscule proportion involved, the government maintained that

the demonetisation was aimed not at curbing black money

instead focusing solely on preventing illegal transactions.

HNIs submitted notes worth Rs.0.6bn while Rs.0.7bn was

found to be with banks. Rs.0.16bn (11% of the targeted value

of Rs.1.45bn) weren’t tendered. The Rs.1000 note was

reintroduced more than two decades later in November 2000.

Total Deposits post demonetisation Rs.bn

A Currency in Circulation (as of Sep'16) 17,279

B Currency with banks 627

C=[A-B] Currency with public sources 16,651

D Currency of denomination (<500) 2,350

E=[C-D] Currency with public (in 500/1000 denomination) 14,302

F* Currency in 500/1000 not expected to come back into the system 1,000

G=[E-F] Currency in 500/1000 inflows into banking system 13,302

H* Repayments/prepayments in CC/OD accounts 1,330

I=[G-H] Total Deposit inflows to banks (up to Dec '16) 11,971

J* Cash withdrawals from banks (up to Dec '16) 4,500

K=[I-J] Net deposit inflows to banking system (up to Dec '16) 7,471

L Deposits (as of Sep 30 '16) 1,01,431

M=[K+L] Expected Deposits (as of Dec'16) 1,08,902

N* Deposit inflow in 4QFY17 5,000

O* Cash withdrawals from banks in 4QFY17 4,000

P=[L+N-O] Expected Deposits (as of Mar 31 '17) 1,09,902

Q Deposits as of March '16 97,208

R=P/Q-1 FY17 Deposit Growth (YoY %) 13%

Inflation and capex which used to contribute >2/3rds of incremental credit

growth are now down to ~43%

21% 32%

23% 25% 34% 29% 29% 25%

59%

62%

50% 47% 41%

26% 27% 18%

20% 5%

27% 29% 25%

45% 44% 57%

18% 17%

21%

17%

14% 14%

9% 9%

5%

10%

15%

20%

25%

0%

20%

40%

60%

80%

100%

F Y0 9 F Y1 0 F Y1 1 F Y1 2 F Y1 3 F Y1 4 F Y1 5 F Y1 6

Inflation led credit growth Capex led credit growth

Non-inflation non-capex System Credit Growth % (RHS)

#6: … however credit growth likely to be only ~5% yoy

Lower inflation, inflows into CC/OD accounts and lower branch productivity likely to impair loan growth


For system credit to grow at 8% [X], Industry credit needs to grow at 6% [D], which translates to incremental lending to industry of Rs. 1649bn (2x that of FY16) -

even as the capex pipeline for FY16 is at a 10 year low of Rs. 535bn.

Rs. Bn FY10 FY11 FY12 FY13 FY14 FY15 FY16 Oct '16 FY17 (Non food credit growth scenarios)

FY18E 4% 6% 8% 10% 12% 14%

Non-food Credit [X] 30,396 36,674 42,897 48,696 55,296 60,030 65,469 66,239 68,088 69,397 70,707 72,016 73,325 74,635 79,218

YoY growth % 17% 21% 17% 14% 14% 9% 9% 7% 4% 6% 8% 10% 12% 14% 10%

Agriculture & Allied Activities [A] 4,157 4,806 5,466 5,899 6,660 7,659 8,829 9,302 9,977 9,977 9,977 9,977 9,977 9,977 11,274

YoY growth % 23% 16% 14% 8% 13% 15% 15% 13% 13% 13% 13% 13% 13% 13% 13%

Services [B] 7,268 8,942 10,230 11,519 13,375 14,131 15,411 15,849 16,181 16,181 16,181 16,181 16,181 16,181 17,799

YoY growth % 12% 23% 14% 13% 16% 6% 9% 9% 5% 5% 5% 5% 5% 5% 10%

Personal Loans [C] 5,856 6,879 7,828 8,976 10,097 11,663 13,922 15,041 15,593 15,593 15,593 15,593 15,593 15,593 18,244

YoY growth % 4% 17% 14% 15% 12% 16% 19% 17% 12% 12% 12% 12% 12% 12% 17%

Industry [D] 13,115 16,046 19,373 22,302 25,165 26,576 27,307 26,047 26,337 27,646 28,955 30,265 31,574 32,883 31,900

YoY growth % 24% 22% 21% 15% 13% 6% 3% -2% -4% 1% 6% 11% 16% 20% 5%

Incremental growth 2,571 2,931 3,327 2,929 2,863 1,411 731 -459 -970 339 1,649 2,958 4,267 5,577 1,636


• YTD growth (as of 11th Nov) stands at -2%. To even clock a 5%

credit growth number for FY17, credit growth between Nov ‘11

to Mar 31 has to be to the tune of Rs. 5340bn (7.3% growth over

Nov 11).In light of a likely ~Rs.1300bn of inflows into CC/OD

accounts and challenges at the branch level in processing

retail/SME loans, effective credit growth has to be ~Rs.7000bn

from Nov ‘11 to deliver 5% FY17 loan growth.

Back ended nature of credit growth visible in the ~10% growth clocked in

the 5 month period between November - March the last couple of years.

Oct 31

2014

(Rs.

Bn)

Mar 31

2015

Loan

growth

between

Oct ‘14 –

Mar -15

Incremental

growth Oct-15 Mar-16

Loan

growth

between

Oct ‘15 –

Mar -16

Incremental

growth

61,352 67,333 10% 5,981 66,922 74,288 11% 7,366

Close to 40% of loans are payable on demand

Incremental credit growth has been retail and services led. NBFC lending likely to moderate.


Sectoral Credit Breakup (Rs. Bn) Oct-15 Oct-16

Incremental

contribution

to growth

Incremental

growth

YoY

growth

1 Agriculture & Allied Activities 8,232 9,302 26% 1,071 13%

2 Industry (Micro & Small,

Medium and Large ) 26,506 26,047 -11% -459 -2%

2.1 Micro & Small 3,702 3,543 -4% -159 -4%

2.2 Medium 1,127 1,087 -1% -40 -4%

2.3 Large 21,677 21,417 -6% -260 -1%

3 Services 14,503 15,849 33% 1,346 9%

3.1 Transport Operators 962 1,020 1% 58 6%

3.2 Computer Software 192 181 0% -11 -6%

3.3 Tourism, Hotels & Restaurants 375 383 0% 8 2%

3.4 Shipping 103 105 0% 2 2%

3.5 Professional Services 930 1,218 7% 288 31%

3.6 Trade 3,586 3,925 8% 339 9%

3.6.1 Wholesale Trade 1,623 1,741 3% 118 7%

3.6.2 Retail Trade 1,964 2,184 5% 221 11%

3.7 Commercial Real Estate 1,708 1,787 2% 79 5%

3.8 NBFCs 3,183 3,345 4% 162 5%

3.90 Other Services 3,465 3,885 10% 420 12%

4 Personal Loans 12,857 15,041 53% 2,185 17%

4.1 Consumer Durables 163 196 1% 33 20%

4.2 Housing 6,959 8,113 28% 1,154 17%

4.3 Advances against Fixed Deposits 608 613 0% 6 1%

4.4 Advances against shares 58 46 0% -12 -21%

4.5 Credit Card Outstanding 360 463 2% 103 29%

4.6 Education 674 710 1% 36 5%

4.7 Vehicle Loans 1,360 1,680 8% 319 23%

4.8 Other Personal Loans 2,674 3,220 13% 546 20%

Total 62,097 66,239 100%

Close to 40% of loans are CC/OD and working capital loans. Our

interactions with banks suggest that 10-20% of inflows since Nov 8

are into CC/OD accounts, posing a challenge for credit growth. In

addition, branch led core lending business has taken a back seat.

Rs. Bn

Bills

purchased and

discounted

CC, OD, loans

repayable on

demand

Term loans Total

CC/OD,

Demand

loans %

ICICIBC 126 845 3382 4353 19%

DCBB 2 27 100 129 21%

YES 14 234 735 982 24%

IIB 9 231 644 884 26%

HDFCB 185 1243 3218 4646 27%

AXSB 47 966 2375 3388 29%

JKBK 6 158 339 502 31%

KMB 38 404 744 1187 34%

BOI 507 1442 1643 3592 40%

SBIN 944 5894 7799 14637 40%

CBK 102 1316 1829 3247 41%

BOB 500 1680 1658 3838 44%

SIB 18 191 202 411 46%

FB 14 324 243 581 56%

PNB 301 2338 1484 4123 57%

CUBK 3 137 71 211 65%

KVB 13 294 83 391 75%

Total 2828 17724 26549 47101 38%

Expect the yield curve to steepen further with the shorter end correcting more than the longer end.


Wedge between deposit and credit growth set to widen to ~800bps, the highest in the last decade.


6.38% 6.42% 6.57% 6.57% 6.59%

6.71% 6.79% 6.87% 6.93% 6.99% 6.82%

7.13% 7.19% 7.04% 7.03%

5.95% 6.00%

6.07% 6.24% 6.23%

6.40% 6.39% 6.51% 6.58% 6.63%

6.41% 6.60%

6.82% 6.69% 6.67%

5.50%

6.50%

7.50%

8.50%

3M 6M 1Y 2Y 3Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y

01-Nov-16 15-Jul-13 30-Nov-16 07-Dec-16

31.8%

28.5%

23.0%

17.8% 17.1%

21.3% 19.0%

14.8% 12.9% 12.7%

10.3%

5.0% 8.0%

18.1%

23.8% 22.4%

19.9% 17.2%

15.9% 17.1%

13.1% 14.6%

12.1% 9.7%

13.0%

10.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Non-Food Credit Growth YoY Deposit Growth YoY

#7: Widening credit deposit wedge…

Expect the yield curve to steepen further

Demonetisation led deposit spurt has led to net liquidity turning sharply positive and 6% call money rates…


… however deposit rates (SBI) in the <1 year bucket are largely unchanged


5.50%

6.50% 6.75% 7.00% 7.05% 7.10% 7.00% 6.50% 6.50%

5.50%

6.50% 6.75% 7.00% 6.90% 6.95% 6.85% 6.50% 6.50%

7 days to 45 days 46 days to 179 days 180 days to 210days

211 days to lessthan 1 year

1 year to 455 days 456 days to lessthan 2 years

2 years to less than3 years

3 years to less than5 years

5 years and up to 10years

24-Oct-16 17-Nov-16

-1985

-286

360

7.3

6.7

6.1

5.4

5.6

5.8

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

-2500

-2000

-1500

-1000

-500

0

500

Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16

Net liquidity (Rs bn) Call money rate (%) - RHS

… to result in surplus liquidity driving rates lower…

Deposit rates set to fall 50 - 100bps across tenures

8.90% 8.90% 8.90% 8.85% 8.85% 8.65% 8.65% 8.65%

9.00% 9.00% 9.00% 8.95% 8.95% 8.75% 8.75% 8.75%

9.05% 9.05% 9.05% 9.00% 9.00% 8.80% 8.80% 8.80%

9.10% 9.10% 9.10% 9.05% 9.05% 8.85% 8.85% 8.85%

9.15% 9.15% 9.15% 9.10% 9.10% 8.90% 8.90% 8.90%

9.25% 9.25% 9.25% 9.20% 9.20% 9.00% 9.00% 9.00%

9.30% 9.30% 9.30% 9.25% 9.25% 9.05% 9.05% 9.05%

01-May-16 01-Jun-16 01-Jul-16 01-Aug-16 01-Sep-16 01-Oct-16 01-Nov-16 01-Dec-16

Overnight MCLR 1 Month MCLR 3 Month MCLR 6 Month MCLR 1 Year MCLR 2 Year MCLR 3 Year MCLR

SBI’s 1 year MCLR currently works out to 8.9%...

Source of funds (excluding equity) Deposit Rates on the

date of review (%)

Balance O/s as %

of total funds Marginal Cost

CA 0.00 7% 0.00

SA 4.00 30% 1.19

TD

- Upto 1 month 5.50 5% 0.30

- 1 to 6 months 6.50 4% 0.28

- 6 months to 1 year 6.75 16% 1.11

- More than 1 year 7.05 23% 1.65

Borrowings

RBI 6.25 0% 0.00

Other banks 6.00 2% 0.15

Bonds and debentures 8.35 11% 0.93

Marginal Cost of Borrowings 5.61

SBIN Current MCLR computation

Marginal Cost of Borrowing [A] 5.61%

Cost of Equity CAPM [B] 16.18%

Marginal CoF [C]= 92% * [A] + 8%* [B] 6.46%

Negative carry on CRR [D] = 4% * [C] / (1-4%) 0.27%

Operating costs [E] 1.80%

Tenor Premium (1 Yr) [F] 0.40%

MCLR [G] = [C] + [D] + [E] + [F] 8.93%

… SBI’s MCLR rates are flat since 1 Oct ‘16.

#8: MCLR likely to fall 30-40bps

Revisiting the MCLR methodology

Marginal CoF

Negative carry on

CRR

Operating costs

Tenor Premium

Marginal CoF based

Lending Rate

(MCLR)

Changes in deposit rates

result in immediate impact

on marginal cost of

borrowings, which has a

92% in calculation of

Marginal cost of funds. The

other 8% weightage is

towards the cost of equity,

which is computed under the

CAPM model.

Indian banks currently run a

negative carry on CRR/SLR of

~20-60bps, adding to the overall

base rate. Under the MCLR

methodology there is no

negative carry on SLR since the

marginal cost of funds ranges

between 5.6% to 7.0%. The

marginal CoF results in ~25bps

of negative carry for most

banks.

Operating costs are costs

associated with providing the

loans and includes the cost of

raising the funds, effectively

meaning entire operating

expenses of the bank, and could

range between 1.1% to 2.9%.

Any service charges recovered

would not be part of this

component. In the current

environment opex/assets to rise

by 10bps for PSU/old gen banks

led by pension obligations

RBI has introduced a tenor

premium to the mix, to

adjust for the costs arising

out of asset liability

mismatches, and this

would not be specific to

borrower or asset class.

Tenor premium could be

~0.4% for 1-year tenor,

and much higher for longer

residual tenors.

Sensitivity Analysis – Impact on 1 YR MCLR forSBI

MCLR (bps) Cost of Deposits (Benchmark 6 months) (%)

9.04% 5.75 5.95 6.15 6.35 6.55 6.75 6.95 7.15 7.35 7.55 7.75

Borrowings (as % of

liabilities)

7% 8.32% 8.42% 8.51% 8.61% 8.70% 8.80% 8.89% 8.99% 9.08% 9.18% 9.27%

8% 8.35% 8.44% 8.54% 8.63% 8.73% 8.82% 8.92% 9.01% 9.11% 9.20% 9.30%

9% 8.37% 8.46% 8.56% 8.65% 8.75% 8.84% 8.94% 9.03% 9.13% 9.22% 9.32%

10% 8.39% 8.49% 8.58% 8.68% 8.77% 8.87% 8.96% 9.06% 9.15% 9.25% 9.34%

11% 8.41% 8.51% 8.60% 8.70% 8.79% 8.89% 8.98% 9.08% 9.17% 9.27% 9.36%

12% 8.44% 8.53% 8.63% 8.72% 8.82% 8.91% 9.01% 9.10% 9.20% 9.29% 9.39%

13% 8.46% 8.55% 8.65% 8.74% 8.84% 8.93% 9.03% 9.12% 9.22% 9.31% 9.41%

14% 8.48% 8.58% 8.67% 8.77% 8.86% 8.96% 9.05% 9.15% 9.24% 9.34% 9.43%

15% 8.50% 8.60% 8.69% 8.79% 8.88% 8.98% 9.07% 9.17% 9.26% 9.36% 9.45%

16% 8.53% 8.62% 8.72% 8.81% 8.91% 9.00% 9.10% 9.19% 9.29% 9.38% 9.48%

MCLR sensitivity analysis

A 100bps fall in cost of deposits is likely to result in a 30-40bps fall in MCLR

IIB, AXSB, KMB, HDFCB, ICICIBC, YES and SBIN are better positioned for the falling interest rate scenario; CBK, PNB, DCBB, KVB and BOI are

poorly positioned (Scores - higher the better; Ranks -1 being the best and 17 being the worst)

CASA % Deposits

<1yr %

Retail book

(ex. Mortgage)

Large

Corporate book

ALM mismatch

(Liab-Assets)

<1 year

CASA

Score

Deposits <1yr

Score

Retail book

Score

Large Corporate

Score

ALM

mismatchScore

Cumulative

Score Rank

IIB 35% 53% 36% 30% 14% 10 12 17 15 9 13 1

AXSB 47% 45% 22% 46% 17% 17 9 14 7 10 12 2

KMB 38% 63% 14% 30% 20% 12 15 10 13 11 11 3

HDFCB 43% 39% 31% 51% -3% 13 7 15 4 4 10 4

ICICIBC 46% 33% 19% 53% 2% 16 4 13 3 5 10 5

YES 28% 63% 32% 68% 23% 8 15 16 1 16 10 6

SBIN 43% 39% 12% 44% 22% 13 7 8 8 12 9 7

FB 33% 38% 13% 31% 7% 9 6 9 12 8 8 8

SIB 22% 64% 19% 43% 22% 2 17 12 9 15 8 9

JKBK 44% 26% 12% 51% -7% 15 1 7 5 1 8 10

BOB 26% 59% 10% 36% 22% 7 14 6 10 14 7 11

CUBK 20% 27% 15% 6% -5% 1 2 11 17 2 7 12

CBK 26% 50% 8% 30% 22% 5 10 4 14 13 6 13

PNB 37% 31% 8% 50% 6% 11 3 3 6 6 6 14

DCBB 23% 54% 3% 21% 29% 4 13 1 16 17 5 15

KVB 23% 36% 9% 36% -3% 3 5 5 11 3 5 16

BOI 26% 51% 6% 56% 6% 5 11 2 2 7 4 17

#9: How are NIMs likely to fare?

Wholesale funded, retail focussed banks with large ALM mismatches are well positioned

As bond yields ease, we estimate potential treasury gains in 2HFY17 to average ~25% of NPA provisions for the system. Amongst private sector banks, KMB, YES,

HDFCB & SIB stand to benefit the most, while CBK would benefit in the PSU pack.

AFS Investments

(Rs.bn)

Modified

Duration

NPA Provisions

2H FY17E

40bps change 60bps change 80bps change

Potential gains

(Rs.bn)

Gains as % of

Provisions

Potential gains

(Rs.bn)

Gains as % of

Provisions

Potential gains

(Rs.bn)

Gains as % of

Provisions

KMB 195 3.0 3 2.3 69% 3.5 104% 4.7 138%

YES 149 3.0 3 1.8 58% 2.7 87% 3.6 116%

HDFCB 847 1.8 16 6.1 38% 9.2 57% 12.2 76%

SIB 32 4.4 2 0.6 29% 0.8 44% 1.1 58%

CBK 396 5.1 28 8.1 29% 12.1 43% 16.2 57%

DCBB 19 1.6 0 0.1 26% 0.2 39% 0.2 53%

KVB 29 2.5 1 0.3 21% 0.4 31% 0.6 42%

IIB 104 2.0 4 0.8 20% 1.2 31% 1.7 41%

PNB 583 4.0 50 9.3 19% 14.0 28% 18.7 37%

BOB 449 3.2 32 5.8 18% 8.7 27% 11.6 36%

FB 48 2.5 3 0.5 18% 0.7 27% 1.0 36%

BOI 349 4.3 36 6.0 17% 9.0 25% 12.0 33%

ICICIBC 610 3.0 50 7.3 15% 11.0 22% 14.6 29%

AXSB 548 3.0 58 6.6 11% 9.9 17% 13.2 23%

SBIN 1,945 1.6 134 12.5 9% 18.8 14% 25.0 19%

JKBK 89 1.5 7 0.5 8% 0.8 12% 1.1 16%

CUBK 15 1.6 1 0.1 7% 0.1 10% 0.2 14%

Total 6,406 2.7 429 68.8 16% 103.2 24% 137.5 32%

#10: Treasury gains in 2HFY17 to be a meaningful offset

~25 - 40% of NPA provisions in 2HFY17 likely to be met through treasury gains

Debit cards currently account for ~42% of POS transactions by value. The recent move to withdraw MDR (Merchant Discount Rate) charges on debit card linked

POS transactions until Dec 31 is largely modest for most banks, given the lower value and transaction charge mix relative to credit cards. Most banks lose money

on POS transactions (net of payment to card infrastructure providers, VISA/Mastercard, opex etc…). POS transactions are primarily an enabler for float income

and CASA

Rs.Bn

Value of POS

Credit Card

transactions

(FY17E)

Value of POS

Debit Card

transactions

(FY17E)

Total value of

POS

transactions

(FY17E)

Debit card %

in POS

transactions

by value

MDR on credit

card swipes

@1%

MDR on debit

card swipes

@0.75%

Other income

FY17E

Debit card

MDR income

as a % of

other income

HDFC BANK LTD 905 317 1222 26% 9.0 2.4 128.8 2%

STATE BANK OF INDIA 392 463 855 54% 3.9 3.5 341.9 1%

ICICI BANK LTD 345 322 667 48% 3.4 2.4 205.0 1%

AXIS BANK LTD 270 175 445 39% 2.7 1.3 116.8 1%

INDUSIND BANK LTD 95 14 108 13% 0.9 0.1 42.3 0%

KOTAK MAHINDRA BANK LTD 62 42 104 40% 0.6 0.3 34.2 1%

PUNJAB NATIONAL BANK 6 60 65 91% 0.1 0.4 99.1 0%

CANARA BANK 9 52 62 85% 0.1 0.4 70.4 1%

BANK OF BARODA 7 44 51 86% 0.1 0.3 64.9 1%

BANK OF INDIA 5 42 47 90% 0.0 0.3 62.7 1%

FEDERAL BANK LTD 0 22 22 100% 0.0 0.2 10.6 2%

YES BANK LTD 1 14 15 95% 0.0 0.1 36.6 0%

KARUR VYSYA BANK LTD 0 12 12 100% 0.0 0.1 8.3 1%

SOUTH INDIAN BANK 0 9 9 100% 0.0 0.1 6.1 1%

CITY UNION BANK 0 6 6 99% 0.0 0.0 4.4 1%

JAMMU AND KASHMIR BANK 2 2 4 49% 0.0 0.0 4.8 0%

DEVELOPMENT CREDIT BANK 0 3 3 93% 0.0 0.0 2.7 1%

Total 3,090 2,204 5,294 42% 30.9 16.5

#11: Analyzing POS transactions

Modest impact of withdrawal of POS transaction charges

38%

37%

43%

57%

39%

59%

42%

38%

41%

39%

56%

49%

47%

66%

59%

47%

26%

28%

52%

49%

34%

26%

27%

20%

25%

21%

14%

19%

19%

29%

59%

19%

34%

20%

31%

13%

20%

35%

28%

27%

27%

24%

26%

26%

25%

12%

23%

7%

30%

32%

23%

0%

22%

14%

23%

0%

12%

31%

21%

32%

21%

19%

30%

5%

4%

9%

4%

16%

16%

5%

3%

3%

2%

1%

1%

8%

3%

15%

1%

11%

6%

0%

3%

4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Co

ve

rag

e U

ni.

PS

U

Pri

va

te

Old

-gen

AX

SB

HD

FC

B

ICIC

IBC

IIB

KM

B

YE

S

CU

BK

DC

BB

FB

JK

BK

KV

B

SIB

BO

B

BO

I

CB

K

PN

B

SB

IN

Substandard Doubtful 1 Doubtful 2 Doubtful 3 Loss

KVB, AXSB, ICICIBC, SIB andKMB witnessed the largest shifts in NPA buckets in 2QFY17 while …


… PSU banks witnessed marginal shifts as compared to 1QFY17.


38%

38%

35%

57%

27%

60%

30%

44%

50%

37%

53%

48%

44%

66%

38%

56%

30%

28%

54%

48%

36%

29%

30%

20%

27%

16%

12%

21%

14%

22%

60%

22%

44%

29%

31%

10%

18%

32%

28%

27%

30%

30%

23%

22%

33%

10%

40%

7%

38%

30%

20%

0%

22%

6%

17%

0%

12%

25%

20%

32%

19%

15%

23%

5%

4%

9%

6%

17%

16%

6%

4%

3%

2%

1%

1%

7%

3%

40%

1%

11%

6%

0%

3%

3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Co

ve

rag

e U

ni.

PS

U

Pri

va

te

Old

-gen

AX

SB

HD

FC

B

ICIC

IBC

IIB

KM

B

YE

S

CU

BK

DC

BB

FB

JK

BK

KV

B

SIB

BO

B

BO

I

CB

K

PN

B

SB

IN

Substandard Doubtful 1 Doubtful 2 Doubtful 3 Loss

#12: >50% of NPAs continue in the D1+ buckets

Temporal surge in recoveries likely but structural issues with ageing remain

Govt spending thrust continues to be on roads & highways, railways and rural development

Government’s clear focus is to push capex

Absolute (Rs. tn) Growth (%, yoy)

(%, yoy) FY17BE Apr-Oct FY17 FY17BE Apr-Oct FY17

Total Expenditure 19.8 11.5 10.8 12.6

- Non-plan 14.3 8.1 9.2 7.8

-- Non-plan revenue 13.3 7.7 9.5 10.0

-- Non-plan capital 1.0 0.4 5.4 -20.8

- Plan 5.5 3.4 15.3 26.1

-- Plan revenue 4.0 2.6 20.5 43.1

-- Plan capital 1.5 0.8 2.9 -8.1

#13: Fiscal Outlook: Govt to meet FY17 fiscal target without cutting expenditure

Absolute (Rs tn) Growth (%)

FY17BE FY17 YTD FY17BE FY17 YTD

Total tax revenue 10.5 5.3 11.2 23.6

Direct tax 8.4 3.8 12.8 10.7

- Personal income tax 3.5 1.7 18.6 19.3

- Corporate tax 4.9 2.1 9.0 4.5

Indirect tax 7.8 4.3 10.8 25.4

- Custom duties 2.3 1.3 9.8 4.9

- Excise duties 3.2 1.8 12.2 46.4

- Service tax 2.3 1.2 10.0 24.5

Non-tax revenue 3.2 1.7 24.9 3.7

Trend in Expenditure during Apr-Oct FY17 Trend in Revenue during Apr-Oct FY17

Absolute value (Rs bn) Growth (%, yoy)

FY16 FY17BE FY17E FY18E FY16 FY17BE FY17E FY18E

Direct taxes 7,446 8,397 8,473 9,605 8.3 12.8 13.8 13.4

Indirect taxes 7,150 7,912 8,284 9,579 28.2 10.7 15.9 15.6

Net tax revenue (i) 9,475 10,587 10,878 12,453 4.9 11.7 14.8 14.5

Non-tax revenue (ii) 2,586 3,229 2,870 3,100 30.7 24.9 11.0 8.0

Disinvestment of PSUs 253 565 350 400 -32.9 123.2 38.3 14.3

TOTAL REVENUES (i+ii+iii) = A 12,503 14,487 14,292 16,155 8.4 15.9 14.3 13.0

Non plan expenditure (a) 13,082 14,281 14,138 15,499 8.9 9.2 8.1 9.6

Subsidies 2,419 2,318 2,317 2,204 -2.9 -4.2 -4.2 -4.9

Food 1,394 1,348 1,377 1,387 18.5 -3.3 -1.2 0.7

Fertilizer 724 700 670 680 1.9 -3.4 -7.5 1.5

Oil 300 269 269 137 -50.2 -10.2 -10.2 -49.3

Plan expenditure (b) 4,772 5,500 5,488 5,866 3.1 15.3 15.0 6.9

TOTAL EXPENDITURE (a+b) = B 17,854 19,781 19,626 21,366 7.3 10.8 9.9 8.9

Fiscal deficit (B-A) 5,351 5,293 5,334 5,211 4.8 -1.1 -0.3 -2.3

Fiscal deficit (% of GDP) 3.9 3.5 3.5 3.1 ... ... ... ...

FY17E: Likely shortfall in revenue = Rs 574bn

(Non-tax revenue = - Rs 359bn & Disinvestment: -

Rs 215bn).

Likely surplus revenue = Rs 501bn (Excise duty =

Rs. 165bn & Service tax = Rs 336bn).

Thus, Govt would be able to meet the fiscal

deficit target of 3.5% of GDP in FY17E.

.

BoP to be in surplus in FY17E and FY18E, providing fundamental

support to the INR (US$ bn) FY15 FY16 FY17YTD FY17E FY18E

Total imports (a) 448.0 379.6 208.7 366.7 392.7

- Oil imports 138.3 82.7 46.6 86.8 99.8

- Gold imports 34.4 31.8 11.4 20.1 24.1

- Non-oil non-gold imports 275.3 265.1 150.6 259.8 268.9

Total Exports (b) 310.3 261.1 155.4 272.4 290.7

- Oil exports 56.8 29.2 16.8 30.0 35.0

- Non-oil exports 253.5 232.0 138.6 242.4 255.7

Trade balance (b-a) = i -137.7 -118.5 -53.3 -94.3 -102.0

Invisibles (ii) 118.1 107.9 23.5 96.0 100.0

CAD (i+ii+iii) = a -26.8 -22.2 -0.3 -8.3 -12.0

CAD(% of GDP) -1.3 -1.1 -0.1 -0.4 -0.5

Foreign Direct Investment 31.3 36.0 4.1 15.5 16.0

Portfolio Investment 42.2 -4.1 2.1 4.0 6.0

Commercial Borrowings 1.6 -4.5 -2.1 0.0 1.5

NRI Deposits 14.1 16.1 1.4 5.0 12.0

Others 0.2 -2.3 1.6 -1.7 -1.1

Capital account (b) 89.3 41.1 7.1 22.8 34.4

Errors and Omissions (c) -1.1 -1.1 0.2 0.0 0.0

Balance of Payment (a+b+c) 61 18 7 15 22

#14: Rupee Outlook: Short-term headwinds due to shrinking bond yield diff.

Depreciating bias @70 /USD; Yet strong fundamentals would make it one of the most stable currencies


Rupee has been the most stable BRICS currencyon account of a

sharp improvement in macro fundamentals


i. FII flows (equity) : $3.7bn in FY17YTD (Apr-Nov) (1HFY17: $7bn) . FII flows

(debt) : - $2.5bn in FY17YTD (1HFY17: +$1.5bn) . FII flows (equity + debt) :

$1.2bn in FY17YTD (1HFY17: $8.5bn)

ii. $24bn out of $32bn of FCNR deposits have matured in Nov’16. The RBI had

already purchased ~$34bn in the forward market to avoid INR volatility

iii. Rupee Outlook: In next 2-3 months, INR may face downward pressure

towards 70 per USD on account of a sharp fall in bond yield differentials

and expectations of rate hike in US. However, the fundamentals of INR

remain strong which would keep the INR stable at that level.

10 year Gsec spread between India and US has come off sharply to

394bps from 595bps, making India a less attractive bond market.

However, it is still attractive if seen in light with inflation differentials


Currency performance vs. USD (%)

1 year 2 year Since Sep'13

Indian Rupee -2.5 -9.6 -0.2

Chinese Renminbi -7.7 -11.2 -11.5

Brazilian Real 13.4 -24.6 -30.8

Russian Rubble 1.1 -24.1 -49.0

South African Rand 2.8 -21.1 -25.7

Source: GoI, Spark Capital ResearchNote: Till trade bal ytd means Apr-Oct and after that Q1

5.95

3.94 5.3

2.6

40

45

50

55

60

65

70

0

2

4

6

8

10

12

Jan

-12

Ap

r-1

2

Jul-

12

Oct-

12

Jan

-13

Ap

r-1

3

Jul-

13

Oct-

13

Jan

-14

Ap

r-1

4

Jul-

14

Oct-

14

Jan

-15

Ap

r-1

5

Jul-

15

Oct-

15

Jan

-16

Ap

r-1

6

Jul-

16

Oct-

16

US

D I

NR

Rate

Dif

fere

nti

als

(p

pt)

Bond Yield Differentials Inflation Differentials USD INR - RHS

We estimate ~12.5% yoy increase in farmers’ income in FY17 led by 10% income growth in Kharif season (Volume growth:4.2% & price rise:5.8%) and 15%

income growth in upcoming Rabi season (Volume growth:3.2% & price rise:11.8%)

Source: GoI, Spark Capital Research, Note: Rabi sowing data is as on 25th Nov’16, Decline in rice and coarse cereals sowing is due to poor NE monsoon in Southern part of India

#15: Rural vs. urban: Rural India to recover faster than urban India

Our anti-consensus call is based on the following facts

Nominal wage growth in rural India inches up to a

23-month high of 5.9% in Sep’16


17.6

5.9

1.9

-5

0

5

10

15

20

25

Jan

-06

Se

p-0

6

May-0

7

Jan

-08

Se

p-0

8

May-0

9

Jan

-10

Se

p-1

0

May-1

1

Jan

-12

Se

p-1

2

May-1

3

Jan

-14

Se

p-1

4

May-1

5

Jan

-16

Se

p-1

6

Rural wage growth: Nominal ( % yoy)

6.5

2.5

i. We have 300mn poor people accounts.

Assuming 10% of these accounts get

49K each (Rs. 30*49 = Rs 1.47tn) and

let’s assume these accounts would get

10% commission (Rs 147bn). Thus,

~30mn poor people would have Rs

147bn i.e. ~5K each for themselves.

ii. Rural economy also functions on

barter and credit system, which

would dramatically reduce the

negative impact of Demonetisation

on rural economy.

Sown area under ongoing Rabi crop has

increased by 8.5%

Sowing (Million

Hectare) FY16 FY17

Change (%,

yoy)

Wheat 15.3 17.4 14.0

Rice 1.5 1.3 -9.9

Pulses 10.0 11.3 13.1

Coarse Cereals 5.1 4.5 -13.2

Oilseeds 6.4 7.1 10.1

Total Rabi 38.3 41.6 8.5

Mar’16 E

128.1

124.0

129.2

124.0

128.2

132.3

-0.5

-3.2

4.2

-9.1

3.4 3.2

-10

-8

-6

-4

-2

0

2

4

6

118

120

122

124

126

128

130

132

134

FY15 FY16 FY17E

Kharif (ton mn) Rabi (ton mn)

Growth (Kharif) - RHS Growth (Rabi) - RHS

1.5 1.9

5.8

2.0

8.4

11.8

0

2

4

6

8

10

12

FY15 FY16 FY17

Average hike in MSP of kharif crop (%, yoy)

Average hike in MSP of rabi crop (%, yoy)

Govt plan exp on rural development has

increased 30% yoy in Apr-Oct FY17

Source: CGA, Spark Capital Research

650.6

500.4 467.2 468.7

419.4 394.8

467.3

359.5

309.1

FY17FY16FY15FY14FY13FY12FY11FY10FY09

Ministry of Rural Development (Apr-Oct, Rs bn)

30%

Section III: Portfolio Strategy and Key Ideas

Spark Coverage sectors earnings revision post Demonetisation

Revenue revision post

demonetisation

FY16-18E Revenue

CAGR

EBITDA revision

post

demonetisation

FY16-18E EBITDA

CAGR

PAT revision post

demonetisation

FY16-18E PAT

CAGR

FY17E FY18E Pre Post FY17E FY18E Pre Post FY17E FY18E Pre Post

Spark Coverage

including Financials -1% -1% 9% 8% -1% -3% 14% 12% -1% -3% 20% 18%

Spark Coverage

excluding Financials -1% -1% 9% 8% -2% -2% 13% 12% -2% -3% 12% 11%

Cement -6% -11% 14% 8% -10% -23% 29% 13% -14% -31% 50% 25%

Building Materials -6% -11% 13% 7% -6% -10% 15% 9% -11% -9% 20% 14%

Automobiles -5% -6% 13% 10% -6% -7% 15% 11% -6% -7% 19% 15%

Consumption -4% -5% 12% 9% -4% -6% 14% 11% -4% -5% 16% 13%

Media -3% -3% 13% 11% -2% -3% 18% 16% 0% 0% 24% 24%

Pharma -1% -1% 14% 13% -3% -2% 15% 14% -2% -3% 17% 16%

Capital Goods &

Engineering -1% -1% 12% 11% -2% -2% 54% 52% -3% -3% 63% 60%

IT Services 0% 0% 11% 11% 0% 0% 7% 7% 0% 0% 6% 6%

Agri & Logistics 0% 0% 10% 10% 0% 0% 20% 20% 0% 0% 21% 21%

Infra & Power 0% 0% 11% 11% 0% 0% 15% 15% 0% 0% 8% 8%

Oil & Gas 0% 0% 5% 5% 0% 0% 11% 11% 0% 0% 7% 7%

Operating Profit revision post

demonetisation FY16-18E Operating Profit CAGR

PAT revision post

demonetisation FY16-18E PAT CAGR

FY17E FY18E Pre Post FY17E FY18E Pre Post

Pvt. Banks 0% -1% 13% 13% 1% -1% 18% 18%

PSU Banks -1% -5% 15% 12% 8% -4% NA NA

NBFC 0% -8% 12% 8% -5% -11% 17% 10%

Key Sells

Investment Thesis

PNB Asset quality concerns

BOB Slow turnaround

MMFS Elevated credit costs, growth challenges

SHTF Growth, asset quality and NIM challenges

Buy on 20% correction

Investment Thesis

CIFC CV financing bellwether

LICHF Relatively insulated salaried portfolio

AXSB Growth play

CBK Asset quality bottoming out, liability

beneficiary of demonetization

HDFC Value unlocking play in subs

Portfolio Changes

What's in Change in weights

FB SBIN▲

What's out KVB▲

CIFC, REPCO, SIB CUBK▲

Source: Spark Capital research

Model Portfolio - Financials

Model Portfolio – Financials

Company Recommended

Weights (%) CMP (Rs.) Market Cap (Rs. Bn) Remarks

HDFCB 20 1,198 3,050 Growth play; RoE driven returns

SBIN 15 267 2,070 Relative outperformance

IIB 15 1,113 664 Growth play; improving NIM

KMB 10 745 1,369 Valuation comfort; RoA improvement play

ICICIBC 10 268 1,562 Valuation comfort

YES 10 1,220 514 Growth play, NIM improvement; impending capital raise

FB 5 71 122 Valuation comfort; business turnaround

KVB 5 83 51 Improving RoA trajectory

CUBK 5 135 81 Best pick in the regional pack

UJJIVAN 2.5 354 42 Growth, MFI play

EQUITAS 2.5 160 54 Growth, MFI play

Company Section – NBFCs / SFBs

NBFCs - Valuation Matrix

Pre-Demonetization and Post Demonetization Changes

Source: Spark Capital Research; Company data

NBFC Net Interest Income, Rs. bn Operating Profits, Rs. bn PAT, Rs. bn Gross NPA FY16-18E CAGR NIM

FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E NII PAT ABV FY16 FY17E FY18E

BHAFIN 6.8 10.7 15.2 4.3 6.9 9.7 3.0 7.3 6.3 0.1% 0.1% 0.2% 49% 44% 53% 11.5% 11.3% 11.2%

CIFC 21.4 24.5 30.4 13.0 14.3 18.3 5.7 7.3 9.2 3.5% 4.4% 4.0% 19% 27% 16% 7.5% 6.9% 7.0%

EQUITAS 5.8 8.5 12.0 3.2 4.1 5.6 1.7 2.1 3.0 1.3% 2.5% 2.7% 44% 34% 24% 13.2% 12.4% 11.6%

HDFC 86.9 95.6 109.4 108.2 114.1 126.3 70.9 76.1 86.1 0.7% 0.8% 0.8% 12% 10% 11% 3.1% 3.0% 2.9%

LICHF 29.4 35.1 40.3 27.1 31.8 36.2 16.6 19.2 22.0 0.5% 0.5% 0.6% 17% 15% 17% 2.5% 2.6% 2.6%

MMFS 32.1 32.2 37.8 20.9 19.0 22.4 6.7 7.4 10.6 8.0% 10.8% 9.7% 8% 26% 3% 9.2% 8.1% 8.2%

REPCO 3.0 3.7 4.5 2.7 3.5 4.0 1.5 1.9 2.2 1.3% 1.7% 2.1% 22% 21% 17% 4.4% 4.3% 4.3%

SCUF 24.4 28.6 32.9 14.2 16.8 19.4 5.3 6.8 8.2 5.2% 6.5% 8.3% 16% 24% 8% 13.5% 13.4% 12.9%

SHTF 51.8 56.4 65.0 38.4 43.7 49.5 11.8 16.1 21.7 6.2% 7.9% 9.4% 12% 36% 7% 7.9% 7.2% 7.2%

SUF 10.9 11.8 13.5 7.6 8.0 9.5 4.8 5.1 5.8 2.1% 2.0% 1.9% 11% 10% 11% 5.9% 5.8% 5.9%

UJJIVAN 5.1 7.5 10.3 3.0 4.4 5.0 1.8 2.6 2.6 0.2% 0.3% 0.5% 42% 22% 21% 12.3% 11.3% 10.8%

NBFC Net Interest Income, Rs. bn Operating Profits, Rs. bn PAT, Rs. bn Gross NPA FY16-18E CAGR NIM


BHAFIN 6.8 10.1 12.9 4.3 6.1 7.3 3.0 6.6 5.0 0.1% 0.3% 0.2% 37% 29% 48% 11.5% 11.2% 10.4%

CIFC 21.4 23.6 26.6 13.0 13.5 15.2 5.7 6.9 7.4 3.5% 3.9% 4.8% 11% 14% 13% 7.5% 6.9% 7.0%

EQUITAS 5.8 8.4 11.5 3.2 4.1 5.1 1.7 2.1 2.7 1.3% 2.8% 3.0% 41% 27% 22% 13.2% 12.5% 11.4%

HDFC 86.9 95.0 105.1 108.2 112.3 120.2 70.9 74.6 79.3 0.7% 0.8% 1.0% 10% 6% 10% 3.1% 3.0% 2.9%

LICHF 29.4 34.4 37.3 27.1 31.0 32.9 16.6 18.1 18.8 0.5% 0.7% 0.9% 13% 6% 14% 2.5% 2.6% 2.5%

MMFS 32.1 31.8 35.3 20.9 18.6 20.5 6.7 7.3 8.9 8.0% 11.2% 11.3% 5% 15% -2% 9.2% 8.1% 7.9%

REPCO 3.0 3.6 4.0 2.7 3.3 3.6 1.5 1.8 2.0 1.3% 2.0% 2.4% 15% 14% 15% 4.4% 4.3% 4.1%

SCUF 24.4 27.9 30.3 14.2 16.2 17.5 5.3 6.1 6.2 5.2% 7.1% 10.4% 11% 8% 4% 13.5% 13.4% 12.7%

SHTF 51.8 54.7 59.3 38.4 42.0 44.1 11.8 14.6 17.3 6.2% 8.3% 10.4% 7% 21% 3% 7.9% 7.1% 6.8%

SUF 10.9 11.7 13.5 7.6 8.0 9.4 4.8 4.9 5.5 2.1% 2.4% 2.4% 11% 7% 10% 5.9% 5.8% 5.9%

UJJIVAN 5.1 7.2 10.0 3.0 3.9 4.1 1.8 2.4 2.2 0.2% 0.3% 0.5% 40% 11% 19% 12.3% 11.2% 10.8%

PRE-DEMONETISATION

POST-DEMONETISATION

NBFCs - Valuation Matrix



NBFC

RoE RoA ABV/share Rs. P/ABV (x) CMP Shares M.Cap Target

Rating FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY17E FY18E (Rs.) (mn) Rs. bn P/ABV(x)

Price

(Rs.)

BHAFIN 24.9% 31.5% 16.5% 3.8% 5.7% 3.2% 109 203 239 3.5 3.0 714 127 91 3.2 765 ADD

CIFC 18.0% 17.4% 16.0% 1.9% 2.0% 1.9% 208 240 264 3.7 3.4 886 156 138 3.0 801 REDUCE

EQUITAS 13.3% 11.4% 11.2% 3.0% 2.4% 2.1% 49 66 73 2.4 2.2 160 337 54 2.6 189 BUY

HDFC 21.8% 21.0% 20.2% 2.4% 2.2% 2.1% 211 226 254 4.2 3.6 1268 1580 2004 2.7 1083 SELL

LICHF 19.6% 18.3% 16.6% 1.4% 1.3% 1.2% 178 204 231 2.8 2.5 570 505 288 2.0 462 SELL

MMFS 11.4% 11.5% 13.0% 1.7% 1.7% 1.9% 93 85 89 3.4 3.2 288 565 162 2.5 222 SELL

REPCO 17.0% 17.2% 16.3% 2.2% 2.1% 2.0% 149 172 198 3.3 2.8 561 63 35 2.6 514 REDUCE

SCUF 12.3% 12.7% 11.7% 2.6% 2.7% 2.4% 654 705 711 2.6 2.6 1866 66 123 2.4 1708 REDUCE

SHTF 12.2% 13.6% 14.5% 1.6% 1.7% 1.8% 414 431 439 2.1 2.0 890 227 202 1.7 746 SELL

SUF 15.2% 14.0% 14.3% 2.4% 2.2% 2.2% 290 317 353 3.8 3.1 1211 111 135 3.4 1281 ADD

UJJIVAN 18.3% 15.8% 11.6% 3.7% 3.2% 2.1% 118 150 167 2.4 2.1 354 118 42 2.5 419 BUY

NBFC

RoE RoA ABV/share Rs. P/ABV (x) CMP Shares M.Cap Target

Rating FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY17E FY18E (Rs.) (mn) Rs. bn P/ABV(x)

Price

(Rs.)

BHAFIN 24.9% 34.5% 19.7% 3.8% 6.2% 3.9% 109 208 254 3.4 2.8 714 127 91 3.9 992 BUY

CIFC 18.0% 18.3% 19.4% 1.9% 2.1% 2.2% 208 232 282 3.8 3.1 886 156 138 4.6 1307 BUY

EQUITAS 13.3% 11.5% 12.4% 3.0% 2.4% 2.3% 49 66 75 2.4 2.1 160 337 54 2.7 203 BUY

HDFC 21.8% 21.4% 21.7% 2.4% 2.2% 2.1% 211 227 259 4.1 3.5 1268 1580 2004 2.8 1140 SELL

LICHF 19.6% 19.3% 19.0% 1.4% 1.4% 1.4% 178 208 242 2.7 2.4 570 505 288 2.0 484 SELL

MMFS 11.4% 11.8% 15.3% 1.7% 1.7% 2.2% 93 87 99 3.3 2.9 288 565 162 2.8 273 SELL

REPCO 17.0% 18.5% 17.9% 2.2% 2.2% 2.1% 149 175 205 3.2 2.7 561 63 35 3.6 742 BUY

SCUF 12.3% 14.1% 15.0% 2.6% 2.9% 3.0% 654 719 769 2.6 2.4 1866 66 123 3.9 2995 BUY

SHTF 12.2% 15.0% 17.6% 1.6% 1.9% 2.2% 414 439 472 2.0 1.9 890 227 202 2.0 967 SELL

SUF 15.2% 14.5% 15.0% 2.4% 2.2% 2.3% 290 321 358 3.6 3.0 1211 111 135 4.2 1510 ADD

UJJIVAN 18.3% 17.6% 13.6% 3.7% 3.6% 2.5% 118 153 174 2.3 2.0 354 118 42 2.9 509 BUY

PRE-DEMONETISATION

POST-DEMONETISATION

Cholamandalam Investment and Finance

CIFC FY17 FY18

ROA Tree Pre Post Pre Post

Net Interest Income 7.0% 6.9% 7.1% 6.8%

Total Income 7.0% 6.9% 7.1% 6.8%

Opex 2.9% 2.9% 2.8% 2.9%

PPOP 4.1% 3.9% 4.3% 3.9%

Provisions 0.9% 0.8% 1.0% 1.0%

PAT 2.1% 2.0% 2.2% 1.9%

ABV (Rs.) 232 240 282 264

Particulars FY17 FY18

Pre Post Pre Post

Loan Growth 20% 13% 23% 13%

Yields 14.6% 14.6% 14.5% 14.0%

Cost of Funds 9.5% 9.4% 9.0% 8.7%

NIM 7.5% 7.5% 7.7% 7.4%


Pre Post Pre Post

Overall GNPA 4.4% 3.9% 4.0% 4.8%

• Loan growth and asset quality remain the key concerns for

CIFC.

• Growth to suffer in the medium term owing to the adverse

impact on fleet operators who have traditionally worked in

an unorganized environment and the impact on real estate

having a bearing on the sustainability of SME players in the

country

• Asset quality to remain under stress due to weakening in

the credit risk profile of customers across all segments.

• However, GNPA% will be guided by the transition to 90

day recognition as we now believe the company may

postpone transition to 90 days to FY18 as against FY17

end.

• ABV for FY17 in our estimates has increased post

demonetization as we factor in transition to 90DPD in

FY18 as against FY17 previously.

• With the company transitioning to 90 DPD in FY18 and

increased pain from LAP and VF segments, the ABV hit is

expected at around 6% in FY18 vs previous estimates.

Target

Rs. 801

Rating

REDUCE

CMP

Rs. 886 Rating: ▼ Target price: ▼ ABV: ▼


Cholamandalam Investment and Finance

PRE-DEMONETISATION DRIVERS

POST-DEMONETISATION IMPACT

AUM growth at 23-25% in the medium term

Margins improving due to growth kicking in

Return to growth providing operating leverage

GNPAs to improve with improvement in macro

Loss of wealth for SMEs to result in growth downside

Increased competition from banks to drive margins

downwards albeit partially offset by declining COFs

Operating leverage to slow down as new branches will

take time to optimise on profitability

Weakening credit risk profile of customers to deepen

pain in asset quality particularly in LAP

Key vector is the movement in GNPAs over FY18


CIFC continues to remain costly post demonetisation with little

impact on valuation multiples


2.00

2.50

3.00

3.50

4.00

4.50

5.00

Ap

r-1

5

May-1

5

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

Jan

-16

Fe

b-1

6

Mar-

16

Ap

r-1

6

May-1

6

Jun

-16

Jul-

16

Au

g-1

6

Se

p-1

6

Oct-

16

No

v-1

6

De

c-1

6

CIFC - PB Bands

Pre Demonetisation Post Demonetisation

Particulars Revised Estimates Worst Case

FY17 FY18 FY18

CV GNPA 3.76% 4.56% 4.86%

LAP GNPA 4.90% 6.20% 7.00%

Overall GNPA 3.90% 4.80% 5.20%

Recognition days 120 90 90

VF Loan Growth 13.4% 15.8% 12.2%

LAP Book Growth 10.3% 4.1% 0.0%

Overall AUM Growth 13.3% 13.4% 9.8%

ABV 240 264 258

Target

Rs. 801

Rating

REDUCE

CMP

Rs. 886 Key Drivers


Cholamandalam Investment and Finance Target

Rs. 801

Rating

REDUCE

CMP

Rs. 886


Financial Summary

Abridged Financial Statements Key Metrics

Rs.mn FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E

Profit & Loss Growth ratios

Net Interest Income 21,417 23,563 26,580 31,583 37,739 ABV per share 15% 15% 10% 22% 24%

Other Income 12 17 29 34 43 AUM 16% 13% 13% 18% 20%

Total Income 21,429 23,580 26,609 31,617 37,782 Borrowings 16% 13% 13% 18% 20%

Operating Expenses 8,449 10,092 11,404 12,993 15,404 NII 24% 10% 13% 19% 19%

Pre-Provisioning Operating Profit 12,980 13,488 15,204 18,624 22,378 PAT 31% 21% 7% 32% 20%

Provisions 4,272 2,867 3,829 3,575 4,249 EPS 21% 21% 7% 32% 20%

PBT 8,708 10,621 11,376 15,049 18,128 Asset-Liability Profile

PAT 5,685 6,904 7,384 9,768 11,766 Leverage (x) 8.2 7.5 7.3 7.3 7.4

Balance Sheet Leverage (x) (Incl Off B/S) 9.4 8.7 8.4 8.3 8.3

Net worth 36,574 42,840 49,472 58,489 69,504 Core Tier 1- CAR 13.3% 13.7% 14.0% 13.9% 13.6%

Paid Up Capital 1,562 1,563 1,563 1,563 1,563 Profitability and Efficiency

Reserves 35,012 41,277 47,909 56,926 67,941 Net Interest Margin 7.8% 7.5% 7.4% 7.6% 7.6%

Others Capital Instruments ROA 2.2% 2.3% 2.2% 2.5% 2.5%

Borrowings 225,762 256,041 288,933 342,281 412,069 RoA (On +Off) 1.9% 2.0% 1.9% 2.2% 2.2%

Total Liabilities & Net worth 278,883 316,787 357,777 425,456 516,420 ROE 18.0% 17.4% 16.0% 18.1% 18.4%

Advances 296,504 335,951 380,964 451,304 543,321 Dupont Analysis

Fixed Assets 1,113 1,446 1,531 1,628 1,738 NII/Total Assets (On+ Off BS) 7.2% 6.9% 6.8% 7.1% 7.1%

Investments 647 1,061 1,148 1,243 1,346 TI/Total Assets (On+ Off BS) 7.2% 6.9% 6.8% 7.1% 7.1%

Total AUM 320,528 367,073 410,991 481,725 578,729 Opex/Total Assets (On+ Off BS) 2.8% 2.9% 2.9% 2.9% 2.9%

Off Balance Sheet Assets 41,645 50,286 53,214 56,270 62,309 PPOP/Total Assets (On+ Off BS) 4.4% 3.9% 3.9% 4.2% 4.2%

Total Assets (On B/S) 278,883 316,787 357,777 425,456 516,420 Prov/Total Assets (On+ Off BS) 1.4% 0.8% 1.0% 0.8% 0.8%

PAT/Total Assets (On+ Off BS) 1.9% 2.0% 1.9% 2.2% 2.2%

Shares outstanding (mn) 156 156 156 156 156 Valuation

Current market price (Rs.) 886 886 886 886 886 Book Value per share (Rs.) 234 274 316 374 445

Market capitalization (Rs. mn) 138,473 138,570 138,570 138,570 138,570 Adj Book Value per share (Rs.) 208 240 264 322 400

Earnings per share (Rs.) 36 44 47 62 75 P/ABV (x) 4.3 3.7 3.4 2.8 2.2

Dividend per share (Rs.) 4.5 3.5 4.0 4.0 4.0 P/E (x) 24.4 20.1 18.8 14.2 11.8

Shriram Transport Finance

SHTF FY17 FY18



Total Income 6.7% 6.6% 6.8% 6.4%

Opex 1.6% 1.6% 1.7% 1.7%

PPOP 5.2% 5.0% 5.1% 4.7%

Provisions 2.2% 2.4% 1.8% 1.9%

PAT 1.9% 1.7% 2.2% 1.8%

ABV (Rs.) 439 430 472 439


Pre Post Pre Post

Loan Growth 15% 12% 15% 13%

Yields 14.2% 14.1% 14.0% 13.6%

Cost of Funds 10.3% 10.2% 10.0% 9.8%

NIM 7.2% 7.1% 7.2% 6.8%


Pre Post Pre Post

Overall GNPA 7.9% 8.3% 9.4% 10.4%

• Loan growth and asset quality remain the key concerns.

• Growth to suffer in the medium term owing to the adverse

impact on fleet operators who have traditionally worked in

an unorganized environment.

• Government spend on infra and rural will remain the key

drivers of growth in FY18 and FY19.

• Asset quality to deteriorate with weakening in the credit

risk profile of customers.

• Lower availability of freight, fall in freight rates and

depressed pricing in used CV market to hurt asset quality

of SHTF.

• Higher PCR to help tide through the transition to 90DPD.

• With ROAs structurally challenged for SHTF in the medium

term, the impact on ABV vs our previous estimates is

expected to be at around 6% for FY18.

• Long term impact – Banks will now have access to cash flow

data of customers with many being financially included.

Focus on financing newer vintage vehicles and entry of

banks in used CV financing may hurt SHTF structurally.

Target

Rs. 746

Rating

SELL

CMP

Rs. 890 Rating: ◄► Target price: ▼ ABV: ▼





Infra, mining and rural revival in FY18 to create

broad-based positive impact on SHTF

Margins holding up steady with declining cost of

funds

GNPAs to improve with improvement in macro

Growth challenged due to expected decline in freight

availability, price impact in used CV market

Expect infra and govt. spend to pick up after a lag

Decline in lending rates and income reversals due to

higher NPAs may not keep pace with declining COFs

Weakening credit risk profile of customers and declining

freight rates to deepen pain in asset quality

Key monitorable is transition to 90 DPD in FY18


SHTF continues to remain costly post demonetisation with little



Shriram Transport Finance

Key Drivers


FY17 FY18 FY18

Overall GNPAs 8.3% 10.4% 11.0%

Recognition days 120 90 90

New CV Loan Growth 7.3% 12.5% 4.1%

Used CV Loan Growth 12.4% 12.9% 9.8%

Overall AUM Growth 11.8% 12.8% 9.2%

ROA 1.7% 1.8% 1.7%

ABV 431 439 429

1.00

1.50

2.00

2.50

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3.50

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May-1

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SHTF - PB Bands



Target

Rs. 746

Rating

SELL

CMP

Rs. 890

Shriram Transport Finance Target

Rs. 746

Rating

SELL

CMP

Rs. 890 Financial Summary






Other Income 37 690 770 889 1,023 AUM 23% 12% 13% 15% 16%



PPOP 38,400 41,970 44,080 51,716 60,621 PAT -5% 24% 19% 29% 19%

Provisions 20,586 19,704 18,234 18,401 21,142 EPS -5% 24% 19% 29% 19%


PAT 11,782 14,583 17,317 22,322 26,451 Leverage (x) 6.6 6.7 6.7 6.7 6.7


Networth 101,541 112,847 126,340 144,839 167,467 Core Tier 1- CAR 14.7% 14.9% 14.5% 14.2% 13.9%




Borrowings 497,907 557,898 630,700 734,191 850,462 RoA (On+Off BS) 1.6% 1.7% 1.8% 2.1% 2.2%

Total Liabilities & Networth 679,633 756,079 852,625 976,471 1,128,203 ROE 12.2% 13.6% 14.5% 16.5% 16.9%

Advances 618,784 688,129 776,451 889,766 1,028,618 Dupont Analysis (On+Off BS)

Fixed Assets 1,011 1,005 1,040 1,062 1,068 NII/Total Assets 7.0% 6.5% 6.3% 6.5% 6.6%

Net Current Assets 19,561 683 771 884 1,021 TI/Total Assets 7.0% 6.6% 6.4% 6.6% 6.7%

Total Assets 679,633 756,079 852,625 976,471 1,128,203 Opex/Total Assets 1.8% 1.6% 1.7% 1.8% 1.8%

Off Balance Sheet Assets 108,822 125,698 141,832 162,531 187,894 PPOP/Total Assets 5.2% 5.0% 4.7% 4.8% 4.9%

Total AUM 788,455 881,777 994,457 1,139,001 1,316,098 Prov/Total Assets 2.8% 2.4% 1.9% 1.7% 1.7%

PAT/Total Assets 1.6% 1.7% 1.8% 2.1% 2.2%




Earnings per share (Rs.) 51.9 64.3 76.3 98.4 116.6 P/ABV (x) 2.2 2.1 2.0 1.7 1.4


Mahindra Finance

MMFS FY17 FY18



Total Income 7.6% 7.6% 7.8% 7.5%

Opex 3.2% 3.2% 3.3% 3.2%

PPOP 4.4% 4.3% 4.6% 4.3%

Provisions 1.7% 1.7% 1.2% 1.4%

PAT 1.7% 1.7% 2.2% 1.9%

ABV (Rs.) 87 85 99 89


Pre Post Pre Post

Loan Growth 16% 14% 16% 15%

Yields 15.5% 15.5% 15.3% 15.1%

Cost of Funds 9.3% 9.2% 9.1% 9.0%

NIM 8.1% 8.1% 8.2% 7.9%


Pre Post Pre Post

Overall GNPA 10.8% 11.2% 9.7% 11.3%

• Impact of demonetisation on rural economy to remain the

key variable in terms of guiding the loan growth and asset

quality for the company.

• A 12.5% expected increase in farmers’ incomes in FY17 on

the back of a strong Khariff and Rabi output, highest MSP

increase in 3 years and strong govt. rural spend may mean

loan growth not being impacted adversely.

• However, the next 4-6 quarters look challenging for rural

India due to loss of wealth in the hands of rural customers

translating into lower spend in CVs.

• Asset quality to deteriorate with weakening in the credit

risk profile of customers.

• Lower cash flows in the hands of customers may

translate into GNPA spike and procrastinating CV

purchases.

• Expect heightened pricing pressure from banks in the

medium term, thereby structurally impacting margins for

MMFS and most rural dependent players.

• Declining used CV prices and increased discounts from

OEMs may restrain any serious repossessions by most

financiers and MMFS particularly.

• Credit costs therefore have a strong upside bias with limited

room to dispose off existing repo stock at viable prices.

Target

Rs. 222

Rating

SELL

CMP






Rural, infra and mining revival in FY18 to create

broad-based positive impact on MMFS

Strong upside in margins with growth kicking in

Sharp improvement in GNPAs with rural pick-up

Growth challenged due to lower cash flows in hands of

rural customers and weak onset of North East monsoon

Expect infra and govt. spend to pick up after a lag

High delinquencies and consequent income reversals

may hurt NIMs meaningfully

Weakening credit risk profile of customers and declining

used CV prices to deepen pain in asset quality

Key vectors in the medium term


Recent price decline has had little impact on MMFS’s multiples and

the stock continues to trade at elevated levels


Mahindra Finance

Key Drivers

1.50

2.00

2.50

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3.50

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MMFS - PB Bands


• We believe the pace of transition to 90DPD ahead of RBI

requirements may now slow down and expect the company to

transition to 90 DPD only by March 2018 as against our earlier

expectations of transitioning by 2QFY18.

• Tweaking of NPA norms (similar to one undertaken in 1QFY17) to

further accommodate impact of repo stock, their valuation and the

provisioning thereof.

• Improvement in second hand CV and tractor prices.

• Developments in North-East monsoon in subsequent months.


Target

Rs. 222

Rating

SELL

CMP

Rs. 288

Mahindra Finance Target

Rs. 222

Rating

SELL

CMP






Net Interest Income 32,139 31,795 35,289 42,566 51,277 ABV per share 3% -8% 4% 20% 19%

Other Income 519 573 571 669 796 AUM 9% 14% 15% 18% 19%


Operating Expenses 11,781 13,803 15,346 18,019 21,466 NII 6% -1% 11% 21% 20%

PPOP 20,877 18,565 20,513 25,216 30,607 PAT -19% 8% 22% 36% 25%

Provisions 10,495 7,356 6,853 6,614 7,385 EPS -19% 8% 22% 36% 25%


PAT 6,726 7,268 8,858 12,062 15,058 Leverage (x) 6.3 6.6 6.8 7.1 7.4


Net worth 60,881 65,134 71,008 79,951 91,754 Core Tier 1- CAR 14.9% 14.6% 14.0% 13.4% 13.0%



Others Capital Instruments - - - - - ROA 1.8% 1.8% 1.9% 2.2% 2.4%


Total Liabilities & Networth 395,795 433,394 494,052 581,724 688,080 ROE 11.4% 11.5% 13.0% 16.0% 17.5%


Fixed Assets 1,135 816 541 422 558 NII/Total Assets (On+ Off BS) 8.3% 7.4% 7.4% 7.7% 7.8%

Net Current Assets 15,099 1,227 1,277 1,329 1,383 TI/Total Assets (On+ Off BS) 8.4% 7.6% 7.5% 7.8% 8.0%

Total Assets 395,795 433,394 494,052 581,724 688,080 Opex/Total Assets (On+ Off BS) 3.0% 3.2% 3.2% 3.3% 3.3%


Total Assets (On+Off) 409,333 445,935 508,421 598,743 708,301 Prov/Total Assets (On+ Off BS) 2.7% 1.7% 1.4% 1.2% 1.1%






Dividend per share (Rs.) 4.0 4.2 4.4 4.6 4.8 P/E (x) 24 22 18 13 11

Sundaram Finance

SUF FY17 FY18



Total Income 5.8% 5.9% 6.0% 6.1%

Opex 2.3% 2.3% 2.2% 2.3%

PPOP 3.6% 3.6% 3.8% 3.8%

Provisions 0.3% 0.4% 0.4% 0.5%

PAT 2.2% 2.2% 2.3% 2.2%

ABV (Rs.) 321 317 358 353


Pre Post Pre Post

Loan Growth 13% 10% 14% 12%

Yields 12.5% 12.5% 12.4% 12.3%

Cost of Funds 9.0% 8.9% 8.8% 8.4%

NIM 6.2% 6.2% 6.3% 6.4%


Pre Post Pre Post

Overall GNPA 2.0% 2.4% 1.9% 2.4%

• Growth is likely to remain subdued even relatively amongst

peers for SUF.

• However, in an environment of uncertainty SUF is expected

to perform relatively better as its customers rank higher in

the overall pyramid of the CV financing customer segment.

• With ~80% of collections already happening through

cheques in the VF ecosystem, we foresee limited impact of

demonetisation for SUF.

• With COFs slated to decline even further, we believe SUF

would be able to sustain its margins at current levels.

• We bake in marginally higher GNPAs for SUF driven by

weakening of cash flows in the hands of VF customers as

they operate in an unorganized environment.

• Believe GNPAs in the housing business to aggravate in

the medium term with expected decline in real estate

prices and weakening of cash flows for SMEs.

• In our coverage universe, SUF is likely to witness the

lowest erosion on ABV compared to our previous

estimates.

• With interest rates being fairly competitive and in line with

the bank rates, we believe SUF will have limited pressure to

lower its yields in the VF segment in the medium term.

Target

Rs. 1,281

Rating

ADD

CMP

Rs. 1,211 Rating: ◄► Target price: ▼ ABV: ▼




VF business growth revival

Consolidation in the housing business

Margins to remain healthy with an upside bias

NPAs to remain best in class with further

improvement

Growth to be challenged in the medium term

Real estate slowdown to have an adverse impact on

growth and asset quality

Improvement in yields may be difficult but COFs decline

may assuage margin compression

Expect asset quality to deteriorate marginally – albeit

remain better than peers

SOTP valuation – scenario analysis


Recent price decline has had little impact on SUF’s multiples and the

stock continues to trade at elevated levels


Sundaram Finance

Key Drivers

Particulars Pre-Demo Post-Demo Worst Case

Multiple Rs. Multiple Rs. Multiple Rs.

SUF value @ Sep’18E ABV 3.8 969 3.2 856 2.9 715

Housing @ Sep’18E ABV 2.3 108 2 94 1.8 80

AMC @ Sep’18E AUM 5% 129 5% 129 3% 77

Insurance @ Sep’18E GWP 1.1 148 1.1 148 1.1 148

Other Investments @ 4x BV 4 54 4 54 4 54

Total Value per share 1,409 1,281 1,075

Loan Growth in FY18E 14% 12% 9%

3.00

3.50

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4.50

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5.50

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Ap

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SUF - PB Bands



Target

Rs. 1,281

Rating

ADD

CMP

Rs. 1,211

Sundaram Finance Target

Rs. 1,281

Rating

ADD

CMP

Rs. 1,211 Financial Summary






Other Income 1,626 1,355 1,552 1,734 1,681 AUM growth 10% 10% 12% 12% 12%



PPOP 7,643 7,988 9,388 10,568 11,608 PAT 5% 2% 13% 19% 12%

Provisions 811 840 1,301 938 821 EPS 5% 2% 13% 19% 12%


PAT 4,773 4,886 5,502 6,552 7,340 Leverage (x) 5.4 5.2 5.1 5.1 5.0





Others Capital Instruments ROA (incl Off B/S) 2.4% 2.2% 2.2% 2.4% 2.4%

Borrowings 125,867 138,126 154,111 172,704 193,982 ROE 15.2% 14.0% 14.3% 15.3% 15.2%

Total Liabilities & Networth 173,926 187,694 206,242 227,683 252,103 Cost/Income 39.2% 38.9% 37.5% 37.0% 37.4%


Fixed Assets 2,784 2,472 2,135 1,769 1,374 NII/Total Assets (On+Off) 5.4% 5.3% 5.5% 5.6% 5.6%

Net Current Assets 8,882 12,959 13,485 14,032 14,602 TI/Total Assets (On+Off) 6.2% 5.9% 6.1% 6.2% 6.2%

Total Assets 173,926 187,694 206,242 227,683 252,103 Opex/Total Assets (On+Off) 2.4% 2.3% 2.3% 2.3% 2.3%

Off Balance Sheet Assets 36,574 45,384 50,637 56,746 63,737 PPOP/Total Assets (On+Off) 3.8% 3.6% 3.8% 3.9% 3.9%

Total Assets (incl. Off B/S) 210,500 233,078 256,878 284,429 315,840 Provisions/Total Assets (On+Off) 0.4% 0.4% 0.5% 0.3% 0.3%

PAT/Total Assets (On+Off) 2.4% 2.2% 2.2% 2.4% 2.4%


Current market price (Rs.) 1,211 1,211 1,211 1,211 1,211 Book Value per share (Rs.) 298 328 363 408 460




Shriram City Union Finance

SCUF FY17 FY18



Total Income 12.4% 12.3% 12.0% 11.7%

Opex 5.2% 5.2% 5.0% 5.0%

PPOP 7.2% 7.1% 7.0% 6.7%

Provisions 2.7% 3.0% 2.5% 3.1%

PAT 2.9% 2.7% 3.0% 2.4%

ABV (Rs.) 719 705 769 711


Pre Post Pre Post

Loan Growth 18% 13% 22% 15%

Yields 20.7% 20.7% 20.0% 19.8%

Cost of Funds 10.0% 9.9% 9.7% 9.5%

NIM 13.4% 13.4% 12.9% 12.7%


Pre Post Pre Post

Overall GNPA 6.5% 7.1% 8.3% 10.4%

• SCUF may be one of the worst hit in our coverage universe

given the SME concentration that the company has.

• Wealth loss in the hands of SMEs is likely to hit the loan

growth as well as asset quality for SCUF in FY18.

• With impending transition to 90DPD, SCUF is likely to post

depressed NIMs in the medium term and elevated credit

costs.

• SMEs are projected to be hit the hardest due to

demonetisation and consequently suffer wealth loss.

• As a result, we believe most customers to prioritise

commercial obligations over financial obligations to SCUF

and other SME financiers. Believe, SCUF to be structurally

impacted due to this and post elevated GNPAs.

• ABV hit to be the strongest for SCUF in our coverage

universe at 7.5% vs our previous estimates.

• Believe margins and credit costs to both be a drag on the

numbers in the medium term.

• Revival of SMEs post wealth erosion may take time and

impact the loan off-take over the next 4-6 quarters.

Target

Rs. 1,708

Rating

REDUCE

CMP

Rs. 1,866 Rating: ▼ Target price: ▼ ABV: ▼


Shriram City Union Finance




Margins at healthy levels albeit constrained by

income reversals upon NPA transition


Improving trajectory of GNPAs with improvement in

macro

Loss of wealth for SMEs to result in growth downside

Yields expected to decline with increased competitive

pressures on pricing. Margins to suffer with high NPAs.

Lower growth may entail CIR remaining elevated

GNPA pain to be the strongest for SCUF due to

weakening cash flows for SMEs

Key vector is growth across segments for SCUF in the medium term


CIFC continues to remain costly post demonetisation with little



Key Drivers

1.50

2.00

2.50

3.00

3.50

4.00

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SCUF - PB Bands


• SME portfolio – this segment is expected to be hit the most for the

company given that proportion of such customers operating in an

unorganized environment is the highest. The ‘cash flow’ based

assessment of lending to such customers may well be under

threat for most SME financiers.

• Gold loans – with gold prices expected to remain under pressure,

this segment may witness a further decline in growth rates.

• 2W and Personal loans – with discretionary spending expected to

come down in the medium term, growth can remain elusive in both

these segments for the company.


Target

Rs. 1,708

Rating

REDUCE

CMP

Rs. 1,866

Shriram City Union Finance Target

Rs. 1,708

Rating

REDUCE

CMP







Other Income 212 200 220 242 266 AUM 17% 13% 15% 18% 19%



PPOP 14,232 16,247 17,480 20,709 24,905 PAT -5% 15% 2% 43% 31%

Provisions 6,163 6,935 8,023 7,162 7,178 EPS -5% 15% 2% 43% 31%


PAT 5,298 6,074 6,169 8,837 11,563 Leverage (x) 4.5 4.7 4.8 5.0 5.1



Paid Up Capital 659 659 659 659 659 Profitability and Efficiency


Others Capital Instruments - - - - - ROA 2.7% 2.7% 2.4% 3.0% 3.4%




Fixed Assets 849 837 906 980 1,061 NII/Total Assets (On+ Off BS) 12.1% 12.2% 11.7% 11.7% 11.8%

Other Assets 17,460 20,446 21,395 22,189 23,065 TI/Total Assets (On+ Off BS) 12.2% 12.3% 11.7% 11.8% 11.9%

Total Assets (On + Off) 214,067 243,098 277,345 323,512 382,016 Opex/Total Assets (On+ Off BS) 5.2% 5.2% 5.0% 4.9% 4.8%





Current market price (Rs.) 1,866 1,866 1,866 1,866 1,866 Book Value per share (Rs.) 684 765 841 954 1,106

Market capitalization (Rs. mn) 122,996 122,996 122,996 122,996 122,996 Adj Book Value per share (Rs.) 654 705 711 868 1,045


Dividend per share (Rs.) 15.0 15.0 15.0 18.0 20.0 P/E (x) 23 20 20 14 11

Repco Home Finance

REPCO FY17 FY18



Total Income 4.8% 4.7% 4.6% 4.4%

Opex 0.8% 0.8% 0.9% 0.9%

PPOP 4.0% 3.9% 3.8% 3.6%

Provisions 0.6% 0.7% 0.6% 0.6%

PAT 2.2% 2.1% 2.1% 2.0%

ABV (Rs.) 175 172 205 198


Pre Post Pre Post

Loan Growth 24% 18% 22% 17%

Yields 12.1% 12.1% 11.9% 11.6%

Cost of Funds 9.1% 9.0% 9.0% 8.8%

NIM 4.3% 4.3% 4.3% 4.1%


Pre Post Pre Post

Overall GNPA 1.7% 2.0% 2.1% 2.4%

• Demonetisation is likely to have an adverse impact on

realty sales and consequently loan growth for most HFCs.

• Believe REPCO to be impacted on both the housing loan

and LAP portfolio growth over the next 4-6 quarters. Recent

high court ruling in TN permitting registration only if DTCP

approval comes through a further drag on growth.

• Declining interest rate environment may mean yields

coming down meaningfully and intensifying pricing

pressures- margins to be impacted for REPCO.

• LAP GNPAs to aggravate in the medium term for REPCO

with impact likely in individual book as well.

• A likely decline in real estate prices may translate into

limited avenues to repossess delinquent assets and

recover credit costs.

• Limited scope to improve margins from hereon due to

intense pricing pressures from PSU banks; internal caps

on growing in high margin segments may leave little

scope for NIM improvement.

• ESOP costs may add to opex burden in FY18 and

elevated credit costs may mean ROA compression in

medium term.

Target

Rs. 514

Rating

REDUCE

CMP



Repco Home Finance



AUM growth at healthy 23-25% in the medium term

COFs reduction assuaging margin pressures in the

medium term

Healthy growth shrouding opex burden in the

medium term

Increasing PCR cushioning GNPA pressure

With realty likely to be hit hard by demonetisation, loan

growth may suffer in the medium term

Increasing pricing pressure to impact margins for most

HFCs

Lower growth and ESOP costs may push CIRs higher

With lower profitability, PCR may remain at current

levels while GNPAs increase in the medium term

Key vector is asset quality movement for REPCO in LAP segment


Multiples have contracted sharply for REPCO since demonetisation,

however valuations continue to remain steep


Key Drivers

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

Ap

r-1

5

May-1

5

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

Jan

-16

Fe

b-1

6

Mar-

16

Ap

r-1

6

May-1

6

Jun

-16

Jul-

16

Au

g-1

6

Se

p-1

6

Oct-

16

No

v-1

6

De

c-1

6

REPCO - PB Bands


FY18 ROA Tree Analysis Revised Estimates Worst Case

Housing LAP Housing LAP


Total Income 3.6% 8.0% 3.7% 7.9%

Opex 0.9% 0.6% 0.9% 0.6%

PPOP 2.7% 7.4% 2.8% 7.2%

Provisions 0.4% 1.2% 0.5% 2.2%

PAT 1.5% 4.1% 1.5% 3.3%

Loan Growth 17.1% 15.0% 13.1% 11.0%

GNPA % 1.9% 4.5% 2.1% 6.0%


Target

Rs. 514

Rating

REDUCE

CMP

Rs. 561

Repco Home Finance Target

Rs. 514

Rating

REDUCE

CMP







Other Income 297 381 420 473 528 Loan Assets 28% 18% 17% 20% 20%


Operating Expenses 643 681 851 1,011 1,135 NII 28% 20% 10% 16% 20%


Provisions 392 604 553 385 653 EPS 22% 19% 10% 23% 16%


PAT 1,501 1,784 1,967 2,417 2,792 Leverage (x) 7.8 8.2 8.3 8.4 8.6



Paid Up Capital 625 626 626 626 626 Profitability and Efficiency



Borrowings 65,379 76,901 90,454 108,128 129,256 ROE 17.0% 17.2% 16.3% 17.1% 16.9%

Total Liabilities & Networth 77,632 91,787 108,305 129,685 155,138 Cost/Income 19.3% 17.0% 19.2% 19.8% 18.7%


Fixed Assets 93 109 127 152 182 NII/Total Assets 4.4% 4.3% 4.0% 3.9% 3.9%

Net Current Assets 504 1,112 2,483 3,186 3,922 TI/Total Assets 4.8% 4.7% 4.4% 4.3% 4.3%

Total Assets 77,632 91,787 108,305 129,685 155,138 Opex/Total Assets 0.9% 0.8% 0.9% 0.8% 0.8%

Off Balance Sheet Assets PPOP/Total Assets 3.9% 3.9% 3.6% 3.4% 3.5%

Total AUM 77,632 91,787 108,305 129,685 155,138 Provisions/Total Assets 0.6% 0.7% 0.6% 0.3% 0.5%

PAT/Total Assets 2.2% 2.1% 2.0% 2.0% 2.0%






LIC Housing Finance

LICHF FY17 FY18



Total Income 2.7% 2.7% 2.7% 2.6%

Opex 0.4% 0.4% 0.4% 0.5%

PPOP 2.3% 2.3% 2.3% 2.2%

Provisions 0.2% 0.2% 0.1% 0.3%

PAT 1.4% 1.3% 1.4% 1.2%

ABV (Rs.) 208 204 242 231


Pre Post Pre Post

Loan Growth 15% 12% 15% 11%

Yields 10.4% 10.4% 10.2% 10.0%

Cost of Funds 8.7% 8.7% 8.6% 8.3%

NIM 2.6% 2.6% 2.6% 2.5%


Pre Post Pre Post

Overall GNPA 0.5% 0.7% 0.6% 1.0%

• Realty price corrections in the medium term to have a strong

impact on loan growth and asset quality.

• Model lower growth rates in the medium term for LICHF

• Intense pricing pressures from PSU banks to drive yields

downwards. However, sharp expected decline in COFs may

partially offset margin contraction.

• High quality LAP and strong individual housing portfolio

may translate into relatively lower impact on ABV amongst

peers.

• Bake in higher GNPAs in the medium term – believe

incremental stress to build up in the developer portfolio for

LICHF.

• Developer portfolio currently constitutes 3% of the

portfolio and current GNPAs in this book are estimated at

~9.3%.

• Expect LICHF to pass on the entire COF decline benefit to

customers in order to stay competitive. Also expect

significant re-pricing to kick in for LICHF as customers

wish to migrate to cheaper products.

• Margin upside to remain elusive in the medium term while

asset quality pain may erode ABV for LICHF.

Target

Rs. 462

Rating

SELL

CMP



LIC Housing Finance



Return to growth in the individual housing portfolio

Pace of portfolio re-pricing and prepayment to

remain muted

Margins remaining stable with declining COFs

No particular pressure in asset quality

Growth to be impacted due to real estate price

corrections

Portfolio re-pricing and prepayments to go up due to

overall pricing coming down

Competitive pressure on pricing may bring down

margins

Developer book GNPAs to go up due to demonetization

Key vector ismovement of NPAs in developer book for LICHF


LICHF continues to remain costly post demonetisation with little



Key Drivers

1.501.701.902.102.302.502.702.903.10

Ap

r-1

5

May-1

5

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

Jan

-16

Fe

b-1

6

Mar-

16

Ap

r-1

6

May-1

6

Jun

-16

Jul-

16

Au

g-1

6

Se

p-1

6

Oct-

16

No

v-1

6

De

c-1

6

LICHF - PB Bands



FY17 FY18 FY17 FY18

Individual Book GNPAs 0.40% 0.64% 0.40% 0.75%

Developer Book GNPAs 10.00% 12.50% 10.50% 15.00%

Overall GNPAs 0.66% 0.95% 0.67% 1.13%

NIM 2.6% 2.5% 2.6% 2.5%

Provisioning Costs 0.23% 0.26% 0.24% 0.36%

ROA 1.3% 1.2% 1.3% 1.2%

ABV 204 231 204 227


Target

Rs. 462

Rating

SELL

CMP

Rs. 570

LIC Housing Finance Target

Rs. 462

Rating

SELL

CMP







Other Income 2,346 2,371 2,476 2,827 3,225 Loan Assets 16% 12% 11% 14% 14%



PPOP 27,100 30,965 32,883 38,382 42,541 PAT 20% 9% 4% 25% 14%

Provisions 1,465 3,190 4,001 2,244 1,293 EPS 20% 9% 4% 25% 14%


PAT 16,608 18,089 18,786 23,506 26,830 Leverage (x) 14.3 13.9 13.5 13.2 13.0


Networth 91,460 105,915 120,766 140,033 162,322 Tier 1- CAR 13.9% 13.8% 13.6% 13.2% 12.8%




Borrowings 1,109,312 1,249,459 1,398,923 1,589,490 1,806,017 ROE 19.6% 18.3% 16.6% 18.0% 17.7%

Total Liabilities & Networth 1,304,978 1,445,273 1,609,778 1,834,392 2,086,487 Cost/Income 14.7% 15.9% 17.4% 17.3% 17.8%

Advances 1,251,732 1,402,703 1,562,033 1,779,713 2,023,946 Dupont Analysis

Fixed Assets 920 1,037 1,152 1,281 1,427 NII/Total Assets 2.4% 2.5% 2.4% 2.5% 2.5%

Net Current Assets 49,557 38,168 42,503 48,426 55,072 TI/Total Assets 2.6% 2.7% 2.6% 2.7% 2.6%

Total Assets 1,304,978 1,445,273 1,609,778 1,834,392 2,086,487 Opex/Total Assets 0.4% 0.4% 0.5% 0.5% 0.5%

Off Balance Sheet Assets - - - - - PPOP/Total Assets 2.2% 2.3% 2.2% 2.2% 2.2%

Total AUM 1,304,978 1,445,273 1,609,778 1,834,392 2,086,487 Provisions/Total Assets 0.1% 0.2% 0.3% 0.1% 0.1%

PAT/Total Assets 1.4% 1.3% 1.2% 1.4% 1.4%






HDFC

LICHF FY17 FY18



Total Income 3.5% 3.5% 3.4% 3.4%

Opex 0.2% 0.2% 0.2% 0.2%

PPOP 3.3% 3.2% 3.1% 3.1%

Provisions 0.2% 0.2% 0.1% 0.2%

PAT 2.2% 2.2% 2.1% 2.1%

ABV (Rs.) 227 226 259 254


Pre Post Pre Post

Loan Growth 16% 13% 15% 12%

Yields 10.6% 10.6% 10.5% 10.4%

Cost of Funds 8.3% 8.3% 8.2% 8.1%

NIM 3.0% 3.0% 2.9% 2.9%


Pre Post Pre Post

Overall GNPA 0.8% 0.8% 0.8% 1.0%

• Expect loan growth to moderate given the impending price

corrections in realty segment.

• Pressure on margins likely to be limited since HDFC offers

one of the most competitive pricing in the industry and

COFs benefits to flow through meaningfully. However, do

not expect spreads to expand from here on.

• Significant exposure to corporate segment, construction

finance and LRD may translate in serious asset quality

challenges for HDFC in the medium term.

• Believe that excess contingency provisions may not be

sufficient to make good the pain in the medium term.

• High probability of our thesis on value-volume growth to

pan out in the medium term upon realty price corrections.

• Over the past 10 years, 70% of HDFC’s growth in individual

housing book has been led by value inflation and only 30%

by increase in volumes (on FY07 base year).

• Any price correction is likely to impact LTVs materially,

translating into challenges in recovery.

Target

Rs. 1,083

Rating

SELL

CMP

Rs. 1,268 Rating: ◄► Target price: ▼ ABV: ▼


HDFC



AUM growth at 15% in the medium term

Margins remaining healthy in the medium term

Other income monetization to be a key variable

GNPAs remaining healthy with high provisioning

coverage to dip into

Growth to moderate to around 12-13%

Limited upside on margins though COF benefit to help.

Spread expansion to remain elusive

Value unlocking in subs becomes more important than

ever – HDFC Life listing to be critical

Pain in non-individual housing segment may erode ABV

Key vector is the pain in non-individual housing

portfolio


HDFC continues to trade at elevated multiples post

demonetisation


Key Drivers

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct-

15

De

c-1

5

Fe

b-1

6

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct-

16

De

c-1

6

HDFC - PB Bands



FY17 FY18 FY17 FY18

Individual Book

GNPAs 0.67% 0.81% 0.70% 1.01%

Corporate Book

GNPAs 1.17% 1.31% 1.20% 2.60%

Overall GNPAs 0.82% 0.96% 0.85% 1.48%

NIM 3.0% 2.9% 3.0% 2.9%

Provisioning 0.18% 0.18% 0.19% 0.41%

ROA 2.2% 2.1% 2.2% 1.9%

ABV 226 254 226 247


Target

Rs. 1,083

Rating

SELL

CMP

Rs. 1,268

SOTP Valuation on FY18

Value per Share

Core Lending Book at 2.7x

FY18 ABV Rs.534

Stake in HDFC Bank at 3.7x

FY18 ABV Rs.371

Other Investments Rs.178

Target Price Rs.1,083

HDFC Target

Rs. 1,083

Rating

SELL

CMP







Other Income 28,875 25,710 24,540 27,739 31,253 Loan Assets 15% 13% 12% 13% 13%




Provisions 7,150 6,333 6,832 4,073 4,453 EPS 18% 5% 6% 13% 10%


PAT 70,931 74,577 79,328 89,902 98,761 Leverage (x) 8.3 8.7 8.8 8.7 8.6


Net worth 341,211 369,341 414,412 468,155 528,854 CAR 16.6% 15.3% 15.4% 15.5% 15.7%




Borrowings 2,376,392 2,676,930 2,998,215 3,374,517 3,798,049 ROA (Off + On B/S) 2.4% 2.2% 2.1% 2.1% 2.1%

Total Liabilities & Net worth 2,887,528 3,261,993 3,625,508 4,058,458 4,546,232 ROE 21.8% 21.0% 20.2% 20.4% 19.8%

Advances 2,586,582 2,903,196 3,248,585 3,659,948 4,123,400 Dupont Analysis

Fixed Assets 6,645 6,531 6,531 6,531 6,531 NII/Total Assets 2.9% 2.8% 2.7% 2.7% 2.6%

Net Current Assets 140,846 152,356 170,482 192,070 216,391 TI/Total Assets 3.9% 3.5% 3.4% 3.3% 3.3%

Total Assets 2,887,528 3,261,993 3,625,508 4,058,458 4,546,232 Opex/Total Assets 0.3% 0.2% 0.2% 0.2% 0.2%

Off Balance Sheet Assets 323,070 377,998 422,967 476,527 536,869 PPOP/Total Assets 3.6% 3.3% 3.1% 3.1% 3.0%

Total Assets (On+Off) 3,210,598 3,639,991 4,048,475 4,534,985 5,083,101 Provisions/Total Assets 0.2% 0.2% 0.2% 0.1% 0.1%

PAT/Total Assets 2.4% 2.2% 2.1% 2.1% 2.1%

Shares outstanding (mn) 1,580 1,584 1,584 1,584 1,584 Valuation


Market capitalization (Rs. mn) 2,003,645 2,008,845 2,008,845 2,008,845 2,008,845 Adj Book Value per share (Rs.) 211 226 254 287 324



Bharat Financial Inclusion

CIFC FY17 FY18



Total Income 10.6% 10.1% 10.8% 9.3%

Opex 4.8% 4.9% 4.7% 4.6%

PPOP 5.8% 5.3% 6.0% 4.7%

Provisions 0.4% 0.4% 0.4% 0.4%

PAT 6.2% 5.7% 3.9% 3.2%

ABV (Rs.) 208 203 254 239


Pre Post Pre Post

Loan Growth 46% 33% 41% 41%

Yields 16.8% 16.8% 15.9% 15.6%

Cost of Funds 10.7% 10.7% 10.5% 10.0%

NIM 11.3% 11.2% 11.2% 10.4%


Pre Post Pre Post

Overall GNPA 0.11% 0.25% 0.15% 0.19%

• Believe loan growth to be hit in FY17 for BHAFIN unlike

AFCs where loan growth hit is likely to be more palpable in

FY18.

• Relaxation of withdrawal limits and availability of cash

remain key triggers for most MFI companies.

• Believe lower growth may translate into lower margins in

FY18; expect yields and COFs to drop in the medium term.

• Asset quality remains largely hinged on withdrawal limits;

prolonged withdrawal restrictions may impact collections

adversely.

• Do not rule out a mass default scenario if cash crunch

continues for long – lower disbursements will mean lower

collections. Remain wary of North India exposure.

• Believe MFI companies to make significant changes to their

extant lending model – progressing towards cashless

business transactions a top priority.

• Trust MFI companies to shelve the branch expansion

strategy for a few quarters until cash availability is sorted.

• Given the challenges, we cut our FY18 earnings estimates

by 20% for BHAFIN over our previous estimates.

Target

Rs. 765

Rating

ADD

CMP



Bharat Financial Inclusion



AUM growth at elevated levels in the medium term

Other income profile to aid ROA expansion

Opex to normalize with scale kicking in

Asset quality remaining healthy due to rural focus

Disbursements to stay impacted in H1FY17 – growth to

taper off in the medium term.

Focus on cross sell and other income to take a back-

seat due to cut in discretionary spending by customers

Low growth may translate into slower pace of operating

leverage

Rural to be most impacted on account of demonetization

as it takes time for cash to reach the hinterlands.

Key vector is any geographic blowout impacting collections – sensitivity to growth

remains acute


BHAFIN continues to remain costly post

demonetisation with little impact on valuation multiples


Key Drivers

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Ap

r-1

5

May-1

5

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

Jan

-16

Fe

b-1

6

Mar-

16

Ap

r-1

6

May-1

6

Jun

-16

Jul-

16

Au

g-1

6

Se

p-1

6

Oct-

16

No

v-1

6

De

c-1

6

BHAFIN - PB Bands


North India GNPA Sensitivity –

Worst Case Scenario

State Exposure % of

AUM

GNPA % in

1QFY18

Rajasthan 4.8% 20.0%

Haryana 2.0% 5.0%

Delhi 0.1% 5.0%

Uttar Pradesh 8.8% 25.0%

Uttarakhand 0.9% 15.0%

Punjab 1.7% 10.0%

Total North India 18.3% 3.6%

FY18 ROA Tree Revised

Estimates

Worst

Case

Net Interest Income 8.2% 7.9%

Total Income 9.3% 8.9%

Opex 4.6% 4.8%

PPOP 4.7% 4.1%

Provisions 0.4% 1.7%

PAT 3.2% 2.2%

Loan Growth 41.4% 26.4%

GNPA % 0.2% 3.3%


Target

Rs. 765

Rating

ADD

CMP

Rs. 714

Bharat Financial Inclusion Target

Rs. 765

Rating

ADD

CMP







Other Income 1,515 1,612 1,655 2,467 3,145 AUM 84% 33% 41% 36% 29%



Pre-Provisioning Operating Profit 4,325 6,071 7,315 12,614 16,692 PAT 61% 117% -24% 56% 33%

Provisions 386 460 619 944 1,215 EPS 60% 101% -24% 56% 33%


PAT 3,030 6,580 5,027 7,819 10,370 Leverage (x) 4.9 4.2 4.0 4.3 4.4





Others Capital Instruments 0 230 230 230 230 ROA 5.1% 7.5% 4.2% 4.9% 5.1%




Fixed Assets 165 180 508 626 508 NII/Total Assets (On+ Off BS) 8.7% 8.7% 8.2% 9.2% 9.4%

Cash and Bank Balances 17,663 23,204 27,191 28,693 34,706 TI/Total Assets (On+ Off BS) 10.6% 10.1% 9.3% 10.4% 10.6%

Total Assets (On + Off) 98,652 131,937 180,873 237,867 303,781 Opex/Total Assets (On+ Off BS) 5.1% 4.9% 4.6% 4.4% 4.4%








Dividend per share (Rs.) - - - - - P/E (x) 30 15 20 13 9

Equitas is now our preferred pick in the SFB/NBFC space as the impact of

demonetization translates into inexpensivebuild up of deposit base

ROA Tree

FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)

Net Interest Income 9.8% 9.7% -5 9.3% 8.9% -37

Other Income 1.6% 1.6% 0 1.4% 1.4% 0

Treasury Income 0.0% 0.0% 0 0.0% 0.0% 0

Total Income 11.3% 11.3% -5 10.6% 10.3% -37

Operational expenses 6.6% 6.6% 0 6.3% 6.4% 1

Operating Profit 4.8% 4.7% -5 4.3% 3.9% -38

Provisions 0.9% 0.9% -1 0.8% 0.8% -2

PBT 3.8% 3.8% -4 3.5% 3.1% -35

Return on Assets 2.4% 2.4% -2 2.3% 2.1% -24

Leverage 4.8 4.8 0.0 5.4 5.4 0.0

Return on Equity 11.5% 11.4% -11 12.4% 11.2% -120

Source: Spark Capital Research, Company data

Impact on margins to be limited since COF benefit to flow through in the

medium term. However, change in product mix will drive down overall yields.


Pre Post ▲ Pre Post ▲

Advances growth 39% 35% -3.5% 35% 33% -1.4%

Credit-Deposit Ratio 148% 144% -3.8% 100% 96% -3.6%

Yield on Investments 8% 7% -24 8% 8% 0

Cash Reserve Ratio 3% 3% 0.0% 3% 3% 0.0%

Net Interest Margin 12.4% 12.5% 10 11.6% 11.4% -19

Do not see any significant change in FY17 deposit accretions post

demonetization as bank branches still get established



CA % 1.3% 1.3% 0.0% 3.2% 3.2% 0.0%

SA % 7.5% 7.5% 0.0% 11.4% 11.4% 0.0%

TD % 91.3% 91.3% 0.0% 85.4% 85.4% 0.0%

Do not build in serious erosion in growth rates in the medium term as

conversion to SFB accentuates financial inclusion and widens lending ambit



Advances growth (%) 39% 35% -4% 35% 33% -1%

Assets growth (%) 66% 66% 0% 40% 40% 0%

RWA growth (%) 57% 57% 0% 32% 32% 0%

T1 CAR 24.7% 24.7% 0.0% 21.2% 21.0% -0.2%

BV 68 67 0% 76 75 -1%

ABV 66 66 -1% 75 73 -3%

Equitas Holdings

Rating: ◄► Target price: ▼ ABV: ▼


• Asset quality issues in the used CV financing and unsecured loans

segment could impact the effective margins (due to income reversals) in

the medium term.

• ROA sensitivity to growth remains strong. Believe UCV and individual

lending model to undergo structural changes.

Target

Rs. 189

Rating

BUY

CMP

Rs. 160



Advances growth CAGR of 32% in the medium term

Margins to be guided by pace COFs decline with

limited pressure on yields

GNPAs to be a no-worry in the medium term

Bake in marginally lower growth rates in the medium

term driven by measured lending to new customers

Though COF benefit may impact margins positively,

asset quality issues in used CV financing may bring

down effective yields.

Used CV and individual unsecured book could witness

asset quality challenges over the medium term.

Key variable in the medium term would be the asset quality movement in

various segments


Valuation multiples have contracted for Equitas post demonetization.

However, the impact pre and post the Govt. move remains negligible.


Key Drivers

Equitas Holdings


1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

3.10

Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16

Equitas – PB Bands


Segmental GNPAs

Previous

Estimates Revised Estimates

FY17E FY18E FY17E FY18E

MFI GNPAs 0.25% 0.25% 0.29% 0.30%

CV GNPAs 6.50% 6.90% 7.80% 7.95%

SME GNPAs 1.40% 1.80% 2.05% 2.25%

Housing GNPAs 4.70% 4.80% 5.50% 5.70%

Overall GNPAs 2.47% 2.69% 2.77% 3.05%

Target

Rs. 189

Rating

BUY

CMP

Rs. 160

Equitas Holdings

Financial Summary


Target

Rs. 189

Rating

BUY

CMP

Rs. 160





Other Income 1,012 1,346 1,799 2,326 3,033 Advances 46% 35% 33% 30% 28%

Fee Income 735 1,290 1,591 2,037 2,524 Deposits - - 98% 41% 33%

Treasury Income 0 16 49 88 109 NII 47% 46% 37% 30% 24%

Total Income 6,789 9,777 13,334 17,318 21,636 PAT 56% 24% 30% 37% 31%

Operating Expenses 3,597 5,706 8,250 10,247 12,612 EPS 56% -1% 30% 37% 31%

Pre-Provision Profit 3,192 4,071 5,083 7,071 9,024 Asset Quality

Provisions 591 795 1,061 1,579 1,806 Gross NPA (Rs.mn) 681 1,900 2,782 3,785 5,150

PBT 2,601 3,276 4,022 5,492 7,217 Gross NPA 1.3% 2.8% 3.0% 3.2% 3.4%

PAT 1,671 2,066 2,695 3,680 4,836 Net NPA 0.9% 1.6% 1.8% 1.8% 1.8%

Balance Sheet Slippage 2.6% 2.5% 2.4% 2.8% 2.4%

Networth 13,414 22,740 25,435 29,115 33,950 Coverage 29.8% 42.3% 41.0% 43.5% 47.0%

Deposits - 47,680 94,640 133,284 177,192 Growth in Gross NPA 82.1% 178.9% 46.4% 36.0% 36.0%

CASA - 4,172 13,858 20,682 24,995 Asset-Liability Profile

Borrowings & Current Liabilities 51,652 37,779 31,258 35,287 34,378 Leverage (x) 3.7 3.6 4.8 5.7 6.1

Total Liabilities & Networth 65,065 108,199 151,333 197,686 245,521 CD ratio - 143.8% 96.4% 89.1% 85.5%

Cash with RBI & other banks 9,470 17,428 24,255 35,199 41,900 CASA - 8.8% 14.6% 15.5% 14.1%

Advances 50,702 68,540 91,260 118,730 151,512 Tier I CAR 22.9% 24.7% 21.0% 18.9% 17.7%

Investments 121 14,267 24,666 31,911 38,231 Profitability and Efficiency

Fixed & Current Assets 4,773 7,964 11,152 11,846 13,878 Net Interest Margin 13.2% 12.5% 11.4% 11.1% 10.8%

Total Assets 65,065 108,199 151,333 197,686 245,521 ROA 3.0% 2.4% 2.1% 2.1% 2.2%

Other Information ROE 13.3% 11.4% 11.2% 13.5% 15.3%



Market capitalisation (Rs. mn) 53,997 53,997 53,997 53,997 53,997 Adj Book Value per share (Rs.) 49 66 73 83 96


Dividend per share (Rs.) - - - - - P/E (x) 25.9 26.1 20.0 14.7 11.2

Ujjivan is one of our preferred picks in the SFB/NBFC space as the impact

of demonetization is less structural and more transient in nature for the

company.

ROA Tree

FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)

Net Interest Income 10.1% 9.8% -31 9.9% 9.6% -25

Other Income 2.4% 2.1% -27 2.6% 2.1% -52

Treasury Income 0.0% 0.0% 0 0.1% 0.1% 0

Total Income 12.6% 12.0% -58 12.5% 11.7% -78

Operational expenses 6.6% 6.6% 1 7.7% 7.8% 4

Operating Profit 6.0% 5.4% -59 4.8% 4.0% -81

Provisions 0.4% 0.4% -1 0.9% 0.7% -18

PBT 5.5% 4.9% -59 3.9% 3.3% -64

Return on Assets 3.6% 3.2% -38 2.5% 2.1% -41

Leverage 5 5 0 5 6 0

Return on Equity 17.6% 15.8% -175 13.6% 11.6% -197


Impact on margins to be limited since COF benefit to flow through in the

medium term. However, change in product mix will drive down overall yields.



Advances growth 33% 26% -6.7% 31% 32% 1.1%


Yield on Investments 1% 1% 0 8% 8% 0


Net Interest Margin 11.3% 11.2% -8 10.8% 10.8% 9

Do not see any significant change in FY17 deposit accretions post

demonetization as Ujjivan is still to convert into an SFB



CA % 2.5% 2.5% 0.0% 4.2% 4.2% 0.0%

SA % 5.0% 5.0% 0.0% 12.1% 12.1% 0.0%

TD % 92.5% 92.5% 0.0% 83.8% 83.8% 0.0%

Cut our growth estimates for FY17 as non-availability of cash will impact

Ujjivan



Advances growth (%) 33% 26% -7% 31% 32% 1%

Assets growth (%) 58% 57% 0% 31% 31% 0%

RWA growth (%) 56% 56% 0% 27% 26% 0%

T1 CAR 22.3% 22.0% -0.3% 20.0% 19.5% -0.6%

BV 153 150 -2% 174 168 -4%

ABV 153 150 -2% 174 167 -4%

Ujjivan Financial Services

Rating: ◄► Target price: ▼ ABV: ▼


• Asset quality issues in individual unsecured loan segment could impact

the effective margins (due to income reversals) in the medium term.

• ROA sensitivity togrowth remains strong. Believe individual lending

model to undergo structural changes.

Target

Rs. 419

Rating

BUY

CMP

Rs. 354



Advances growth CAGR of 30% in the medium term

Margins to be guided by pace COFs decline with

limited pressure on yields

GNPAs to be a no-worry in the medium term

Bake in marginally lower growth rates in the medium

term driven by moderation in cash disbursements

Though COF benefit may impact margins positively,

moving away from MFI segment may bring down

effective yields

GNPAs to inch up higher with moderation in the cash

flows of customers in individual loan segment

Key variable for Ujjivan will be the change in portfolio composition and

GNPA. We however do not see any major change being effected in AUM mix.


Valuation multiples have contracted for Ujjivan post demonetization.

However, the impact pre and post the Govt. move remains negligible.


Key Drivers



0.85

1.35

1.85

2.35

2.85

3.35

3.85

May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16

Ujjivan - PB Bands


Portfolio Break-up Current Estimates

FY17E FY18E

MFI 83.3% 76.9%

MSE 6.9% 10.9%

Housing 5.6% 6.8%

Agri and Animal Husbandry Loan 4.0% 4.8%

Others 0.2% 0.6%

Total 100.0% 100.0%

Segmental GNPAs

Previous Estimates Revised Estimates

FY17E FY18E FY17E FY18E

Overall GNPAs 0.26% 0.48% 0.27% 0.50%

Target

Rs. 419

Rating

BUY

CMP

Rs. 354


Financial Summary


Target

Rs. 419

Rating

BUY

CMP

Rs. 354





Other Income 966 1,583 2,189 3,154 4,371 Advances 57% 26% 32% 30% 30%

Fee Income 708 792 1,137 1,786 2,644 Deposits - - 239% 60% 34%


Total Income 6,041 8,827 12,170 16,266 21,152 PAT 134% 33% -7% 51% 43%

Operating Expenses 3,068 4,882 8,051 10,336 12,882 EPS 99% 14% -7% 51% 43%


Provisions 253 324 732 827 978 Gross NPA (Rs.mn) 78 172 422 1,064 2,134

PBT 2,720 3,621 3,387 5,103 7,292 Gross NPA 0.2% 0.3% 0.5% 1.0% 1.5%

PAT 1,772 2,360 2,195 3,308 4,727 Net NPA 0.0% 0.1% 0.1% 0.2% 0.3%



Deposits - 19,360 65,691 105,194 141,253 Growth in Gross NPA 231.9% 120.3% 146.1% 152.0% 100.5%

CASA - 1,452 10,646 16,433 21,505 Asset-Liability Profile


Total Liabilities & Networth 57,273 89,975 117,596 154,890 198,606 CD ratio - 329.8% 128.8% 104.3% 101.0%

Cash with RBI & other banks 4,913 8,778 9,432 14,588 16,290 CASA - 7.5% 16.2% 15.6% 15.2%


Investments 1 13,837 18,877 24,812 32,594 Profitability and Efficiency


Total Assets 57,273 89,975 117,596 154,890 198,606 ROA 3.7% 3.2% 2.1% 2.4% 2.7%







Company Section - Banks

Bank Net Interest Income, Rs. bn Operating Profits, Rs. bn PAT, Rs. bn Gross NPA FY16-18E CAGR NIM


AXSB 168.3 187.1 220.5 161.0 185.6 215.8 82.2 46.9 99.9 1.8% 5.0% 5.4% 14% 10% 6% 3.7% 3.7% 3.8%

BOB 127.4 141.1 156.1 88.2 109.9 120.2 -54.0 25.6 39.0 10.0% 10.9% 10.7% 11% NM 15% 2.0% 2.2% 2.3%

BOI 117.2 116.2 133.3 60.4 81.6 87.0 -60.9 -3.4 20.0 13.1% 13.8% 13.8% 7% NM 7% 2.1% 2.1% 2.3%

CBK 97.6 103.3 122.8 71.5 88.5 102.6 -28.1 20.3 36.9 9.4% 9.9% 10.1% 12% NM 16% 1.9% 2.0% 2.2%

CUBK 9.8 12.0 13.6 8.3 9.7 10.8 4.4 5.0 6.1 2.4% 2.6% 2.5% 18% 17% 15% 3.6% 3.9% 4.0%

DCBB 6.2 8.0 9.6 3.5 4.4 4.9 1.9 2.3 2.7 1.5% 1.7% 1.8% 25% 19% 14% 3.8% 4.0% 3.9%

FB 25.0 30.1 34.2 14.2 19.8 23.0 4.8 9.0 12.6 2.9% 2.7% 2.6% 17% 63% 12% 3.1% 3.4% 3.3%

HDFCB 275.9 327.2 389.8 213.6 255.6 301.2 123.0 146.9 177.0 0.9% 1.0% 1.1% 19% 20% 17% 4.7% 4.8% 4.8%

ICICIBC 212.2 219.9 266.7 238.6 278.0 256.5 97.3 108.8 128.8 6.0% 7.2% 7.0% 12% 15% 12% 3.5% 3.2% 3.4%

IIB 45.2 60.9 78.0 41.4 54.9 68.7 22.9 30.6 39.5 0.9% 0.9% 0.9% 31% 31% 17% 4.0% 4.3% 4.5%

JKBK 27.1 28.1 34.2 16.7 15.3 19.0 4.1 7.4 8.7 8.7% 8.4% 8.1% 12% 45% 5% 3.8% 3.6% 3.8%

KMB 69.0 82.6 99.0 39.8 58.9 69.7 20.3 34.0 41.7 2.4% 2.4% 2.3% 20% 43% 14% 5.1% 4.5% 4.6%

KVB 17.8 20.0 21.9 12.4 12.6 13.3 5.7 5.9 7.4 1.3% 2.2% 2.2% 11% 14% 8% 3.5% 3.6% 3.6%

PNB 153.1 161.4 188.1 122.2 145.0 157.9 -39.7 28.1 48.3 12.9% 13.1% 12.9% 11% NM 29% 2.6% 2.5% 2.7%

SBIN 568.8 628.3 750.1 432.6 502.3 595.6 99.5 147.9 236.4 6.5% 6.7% 6.7% 15% 54% 14% 3.0% 2.9% 3.1%

SIB 15.1 17.5 19.8 8.8 11.7 13.4 3.3 4.6 7.0 3.8% 4.0% 3.9% 15% 45% 17% 2.7% 2.9% 2.9%

YES 45.7 59.9 77.1 43.0 57.9 72.3 25.4 34.3 44.4 0.8% 0.8% 0.9% 30% 32% 22% 3.3% 3.6% 3.7%

Banks - Valuation Matrix



PRE-DEMONETISATION

POST-DEMONETISATION

Bank Net Interest Income, Rs. bn Operating Profits, Rs. bn PAT, Rs. bn Gross NPA FY16-18E CAGR NIM


AXSB 168.3 186.5 210.8 161.0 184.0 208.5 82.2 45.4 95.0 1.8% 4.8% 5.0% 12% 8% 5% 3.7% 3.7% 3.6%

BOB 127.4 141.4 157.8 88.2 110.6 115.9 -54.0 23.9 35.4 10.0% 10.6% 10.3% 11% NM 12% 2.0% 2.2% 2.2%

BOI 117.2 116.4 134.0 60.4 79.7 79.3 -60.9 -5.4 18.6 13.1% 13.3% 13.0% 7% NM -4% 2.1% 2.1% 2.2%

CBK 97.6 102.3 120.4 71.5 86.5 97.5 -28.1 18.2 33.4 9.4% 9.4% 9.2% 11% NM 10% 1.9% 2.0% 2.1%

CUBK 9.8 12.2 14.1 8.3 9.9 10.8 4.4 5.2 6.1 2.4% 2.5% 2.4% 20% 17% 15% 3.6% 4.0% 3.9%

DCBB 6.2 7.8 9.4 3.5 4.2 4.8 1.9 2.2 2.6 1.5% 1.8% 1.8% 23% 16% 13% 3.8% 4.0% 3.9%

FB 25.0 29.5 34.2 14.2 19.0 22.7 4.8 8.2 12.3 2.9% 2.7% 2.5% 17% 61% 11% 3.1% 3.3% 3.3%

HDFCB 275.9 326.6 386.2 213.6 254.6 296.1 123.0 146.2 173.3 0.9% 1.0% 1.1% 18% 19% 16% 4.7% 4.7% 4.7%

ICICIBC 212.2 214.8 252.9 238.6 269.8 241.7 97.3 105.6 122.0 6.0% 7.2% 6.9% 9% 12% 11% 3.5% 3.2% 3.3%

IIB 45.2 59.6 74.1 41.4 53.5 65.5 22.9 29.8 37.2 0.9% 0.8% 0.8% 28% 28% 16% 4.0% 4.2% 4.2%

JKBK 27.1 27.0 32.4 16.7 14.3 17.3 4.1 6.6 7.6 8.7% 8.4% 8.1% 9% 35% 3% 3.8% 3.5% 3.6%

KMB 69.0 82.0 100.0 39.8 56.8 68.7 20.3 32.9 41.0 2.4% 2.3% 2.2% 20% 42% 14% 5.1% 4.4% 4.6%

KVB 17.8 19.7 21.2 12.4 12.0 12.6 5.7 5.4 6.9 1.3% 2.2% 2.3% 9% 10% 7% 3.5% 3.6% 3.5%

PNB 153.1 158.1 181.1 122.2 142.5 147.7 -39.7 26.5 41.5 12.9% 12.5% 11.8% 9% NM 21% 2.6% 2.5% 2.6%

SBIN 568.8 617.9 735.4 432.6 487.0 579.6 99.5 134.6 217.9 6.5% 6.6% 6.4% 14% 48% 12% 3.0% 2.8% 2.9%

SIB 15.1 16.9 19.1 8.8 11.1 12.3 3.3 4.5 6.4 3.8% 3.7% 3.6% 12% 39% 15% 2.7% 2.8% 2.8%

YES 45.7 58.5 73.3 43.0 55.6 68.4 25.4 32.7 41.6 0.8% 0.8% 0.9% 27% 28% 21% 3.3% 3.5% 3.6%

Banks - Valuation Matrix



PRE-DEMONETISATION

POST-DEMONETISATION

Bank RoE RoA ABV/share Rs. P/ABV (x) CMP Shares M.Cap Target

Rating FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY17E FY18E (Rs.) (mn) Rs. bn P/ABV(x) Price (Rs.)

AXSB 16.8% 8.7% 16.9% 1.7% 0.8% 1.5% 216 209 243 2.2 1.9 456 2390 1091 1.6 388 SELL

BOB -14.4% 6.9% 9.7% -0.8% 0.4% 0.5% 100 114 131 1.4 1.2 162 2310 374 0.9 118 SELL

BOI -22.5% -1.3% 7.2% -1.0% -0.1% 0.3% 92 84 106 1.4 1.1 117 1055 124 0.8 85 SELL

CBK -10.7% 7.5% 12.4% -0.5% 0.4% 0.6% 225 246 301 1.1 0.9 316 543 171 0.8 300 Reduce

CUBK 15.5% 15.4% 16.3% 1.5% 1.5% 1.6% 47 54 63 2.5 2.2 135 598 81 2.5 157 BUY

DCBB 11.9% 12.3% 13.0% 1.1% 1.0% 1.0% 59 67 76 1.6 1.4 107 285 31 1.2 91 SELL

FB 6.0% 10.6% 13.4% 0.5% 0.9% 1.1% 43 47 54 1.5 1.3 71 1721 122 1.5 81 BUY

HDFCB 18.3% 18.6% 19.1% 1.9% 1.9% 2.0% 284 332 387 3.6 3.1 1198 2546 3050 3.7 1431 BUY

ICICIBC 11.6% 11.8% 12.5% 1.4% 1.4% 1.5% 135 147 167 1.4 1.1 268 5820 1562 1.4 320 BUY

IIB 16.6% 16.4% 18.1% 1.8% 1.9% 2.0% 287 333 392 3.3 2.8 1113 597 664 3.3 1294 BUY

JKBK 6.6% 10.9% 11.8% 0.5% 0.8% 0.9% 102 97 113 0.6 0.5 62 485 30 Under Review

KMB 10.6% 13.3% 14.2% 1.4% 1.7% 1.8% 126 143 165 3.7 2.9 745 1837 1369 3.5 846 BUY

KVB 12.9% 12.3% 14.1% 1.0% 1.0% 1.1% 73 76 85 1.1 1.0 83 609 51 1.2 102 BUY

PNB -10.9% 7.3% 11.1% -0.6% 0.4% 0.6% 60 78 99 1.4 1.0 135 2187 296 0.8 114 SELL

SBIN 7.3% 9.8% 14.2% 0.5% 0.6% 0.9% 138 152 179 1.4 1.1 267 7763 2070 1.4 322 BUY

SIB 9.3% 11.7% 15.5% 0.5% 0.7% 0.9% 22 26 30 0.8 0.7 22 1351 29 0.9 27 BUY

YES 19.9% 22.5% 23.8% 1.7% 1.9% 1.9% 323 392 482 3.1 2.5 1220 422 514 3.0 1445 BUY

Bank RoE RoA ABV/share Rs. P/ABV (x) CMP Shares M.Cap Target

Rating FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY17E FY18E (Rs.) (mn) Rs. bn P/ABV(x) Price (Rs.)

AXSB 16.8% 8.4% 16.2% 1.7% 0.8% 1.4% 216 208 239 2.2 1.9 456 2390 1091 1.8 421 SELL

BOB -14.4% 6.4% 8.9% -0.8% 0.3% 0.5% 100 110 126 1.5 1.3 162 2310 374 1.0 124 SELL

BOI -22.5% -2.0% 6.8% -1.0% -0.1% 0.3% 92 70 86 1.7 1.4 117 1055 124 0.8 69 SELL

CBK -10.7% 6.7% 11.4% -0.5% 0.3% 0.5% 225 222 273 1.2 0.9 316 543 171 0.8 275 SELL

CUBK 15.5% 15.8% 16.4% 1.5% 1.5% 1.6% 47 54 63 2.5 2.2 135 598 81 2.8 173 BUY

DCBB 11.9% 11.6% 12.6% 1.1% 1.0% 1.0% 59 66 75 1.6 1.4 107 285 31 1.3 96 SELL

FB 6.0% 9.7% 13.2% 0.5% 0.8% 1.0% 43 47 53 1.5 1.3 71 1721 122 1.8 93 BUY

HDFCB 18.3% 18.5% 18.8% 1.9% 1.9% 1.9% 284 332 385 3.6 3.1 1198 2546 3050 3.8 1477 BUY

ICICIBC 11.6% 11.5% 11.9% 1.4% 1.4% 1.4% 135 146 165 1.4 1.1 268 5820 1562 1.5 320 BUY

IIB 16.6% 16.0% 17.2% 1.8% 1.9% 1.9% 287 331 387 3.4 2.9 1113 597 664 3.6 1408 BUY

JKBK 6.6% 9.9% 10.4% 0.5% 0.8% 0.8% 102 96 109 0.6 0.6 62 485 30 0.8 88 BUY

KMB 10.6% 12.9% 14.0% 1.4% 1.6% 1.7% 126 142 163 3.8 2.9 745 1837 1369 3.8 894 BUY

KVB 12.9% 11.4% 13.3% 1.0% 0.9% 1.0% 73 75 83 1.1 1.0 83 609 51 6.6 551 BUY

PNB -10.9% 6.9% 9.6% -0.6% 0.4% 0.6% 60 73 88 1.5 1.2 135 2187 296 0.9 113 SELL

SBIN 7.3% 9.0% 13.2% 0.5% 0.5% 0.8% 138 148 172 1.4 1.1 267 7763 2070 1.4 315 BUY

SIB 9.3% 11.4% 14.5% 0.5% 0.7% 0.8% 22 25 28 0.9 0.8 22 1351 29 1.0 28 BUY

YES 19.9% 21.5% 22.7% 1.7% 1.8% 1.8% 323 388 471 3.1 2.6 1220 422 514 3.3 1538 BUY

* CBK, ICICIBC, KMB, PNB & SBIN - P/ABV adjusted for subsidiaries

* CBK, ICICIBC, KMB, PNB & SBIN - P/ABV adjusted for subsidiaries

CUBK remains our top pick amongst regional banks, despite the negative

effect of demonetization on growth in the near term, higher CASA accretion &

lower CoF are structural positives; the long term story remains intact.

RoA and RoE decomposition

FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)

Net Interest Income to

Average Assets 3.6% 3.6% -1 3.6% 3.7% 8

Other Income to Average

Assets 1.3% 1.3% 2 1.2% 1.3% 5

Treasury Income to

Average Assets 0.2% 0.2% 1 0.2% 0.2% 3

Total Income to Average Assets 4.9% 4.9% 1 4.8% 4.9% 14

Operational expenses to

Average Assets 2.0% 2.0% 4 2.0% 2.0% 0

Operating Profit to Average

Assets 2.9% 2.9% -3 2.8% 2.9% 13

Provisions to Average Assets 0.8% 0.8% 0 0.6% 0.6% 3

PBT to Average Assets 2.1% 2.1% -3 2.2% 2.3% 10

Return on Assets 1.5% 1.5% -2 1.6% 1.6% 7

Leverage (Average Equity to

Average Assets) 10 10 0 10 10 -1

Return on Equity 15.8% 15.4% -42 16.4% 16.3% -8


Impact on margins are multipronged viz. lower advances growth, fall in

C/D ratio, higher CRR requirements on incremental NDTL

FY17 FY18


Advances growth 18% 10% -8.3% 19% 14% -5.0%


Yield on Investments 8% 8% -32 9% 8% -18


Net Interest Margin 3.95% 3.94% -1 3.92% 4.01% 9

Sep'16 Dec'16 ▲

Bond yields 6.8 6.2 62bps

Investment-Deposit Ratio 25%

AFS 22%

Mod. Duration 1.6

Do not expect high treasury

gains for CUBK, owing to

low modified duration of an

already low proportion of

AFS investment book

Increase in CASA ratio is expected to be marginal, as incremental

deposits will get moved to term deposits in line with customer behavior

FY17 FY18


CA % 7.4% 7.3% -0.1% 7.0% 8.0% 1.0%

SA % 14.0% 14.8% 0.8% 14.1% 14.1% 0.0%

TD % 78.6% 78.0% -0.6% 78.9% 77.9% -1.0%

Fall in advances growth and higher growth in investments (lower risk

weighted) to result in lesser capital consumption & higher tier-I ratios

FY17 FY18


Advances growth (%) 18% 10% -8% 19% 14% -5%

Assets growth (%) 15% 12% -3% 18% 12% -6%

RWA growth (%) 20% 15% -5% 18% 14% -4%

T1 CAR 14.3% 14.9% 0.5% 13.9% 15.0% 1.1%

BV 58 58 0% 67 66 -1%

ABV 54 54 1% 63 63 0%

City Union Bank

Rating: ◄► Target price: ▼ ABV: ◄►

CMP

Rs. 135

Target

Rs. 157

Rating

BUY


POST-DEMONETISATION IMPACT Advances growth of 18%, among the highest within the

regional pack

Margin improvement on fall in Cost of deposits


Lower slippage trajectory

Negative wealth effect for SMEs & repayments in CC/OD to

result in lower advances growth

Lower advances growth led fall in C/D ratios to be completely

offset by declining COFs on higher CASA accretion

Operating leverage to be delayed as new branches will take time

to break even in a low growth environment

Weakening credit risk profile of SME customers to impact asset

quality; however current inflows have reduced SMA proportion

Impact on advances growth is expected to be severe for CUBK, owing to the

high proportion of working capital loans (66%)


CUBK 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 66%

Term

loans, 34%

0.50

1.00

1.50

2.00

2.50

3.00

FY11 FY12 FY13 FY14 FY15 FY16 FY17

Key Drivers

CMP

Rs. 135

Target

Rs. 157

Rating

BUY

City Union Bank

Financial Summary

CMP

Rs. 135

Target

Rs. 157

Rating

BUY






Fee Income 446 2,600 3,177 3,916 4,901 Deposits 13% 12% 11% 16% 20%


Total Income 13,910 16,389 18,316 20,305 23,824 PAT 13% 13% 21% 15% 20%

Operating Expenses 5,577 6,719 7,548 8,645 10,083 EPS 12% 13% 21% 15% 20%


Provisions 2,306 2,745 2,222 1,842 1,919 Gross NPA (Rs.mn) 5,120 6,041 6,766 7,578 8,715

PBT 6,027 6,925 8,546 9,818 11,822 Gross NPA 2.4% 2.6% 2.5% 2.4% 2.3%

PAT 4,447 5,013 6,068 6,971 8,394 Net NPA 1.5% 1.4% 1.3% 1.2% 1.1%



Deposits 271,581 305,225 338,995 391,581 469,897 Growth in Gross NPA 52.5% 18.0% 12.0% 12.0% 15.0%

CASA 55,326 67,235 74,918 86,148 101,498 Asset-Liability Profile


Total Liabilities & Networth 312,520 350,022 392,025 450,828 540,994 CD ratio 77.5% 75.7% 77.7% 78.7% 78.7%

Cash with RBI & other banks 26,001 29,060 32,431 37,362 44,832 CASA 20.4% 22.0% 22.1% 22.0% 21.6%


Investments 63,245 75,811 80,406 87,135 104,565 Profitability and Efficiency


Total Assets 312,520 350,022 392,025 450,828 540,994 ROA 1.5% 1.5% 1.6% 1.7% 1.7%







City Union Bank

The negative effect of demonetization on DCBB’s growth & margins is

somewhat offset by higher treasury income (fall in bond yields) and marginally

lower opex/assets; capital consumption continues to remain high


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 3.7% 3.7% 0 3.6% 3.6% -2


Assets 1.2% 1.2% -1 1.2% 1.2% 2

Treasury Income to

Average Assets 0.2% 0.2% 3 0.2% 0.2% 5

Total Income to Average Assets 4.9% 4.9% -1 4.7% 4.7% 0


Average Assets 2.9% 2.8% -6 2.9% 2.9% 0


Assets 2.0% 2.0% 5 1.8% 1.8% 0

Provisions to Average Assets 0.4% 0.4% 0 0.3% 0.3% -3

PBT to Average Assets 1.5% 1.6% 5 1.5% 1.5% 3

Return on Assets 1.0% 1.0% 3 1.0% 1.0% 2


Average Assets) 12 12 0 13 13 0

Return on Equity 11.6% 12.3% 71 12.6% 13.0% 39


Impact on margins led by fall in C/D ratios, higher CRR requirements

partially offset by higher investment yields

FY17 FY18


Advances growth 25% 22% -3.0% 25% 20% -5.0%




Net Interest Margin 4.0% 4.0% -1 3.9% 3.9% -4

Sep'16 Dec'16 ▲



AFS 35%

Mod. Duration 1.6

Expect moderate treasury

gains for DCBB, owing to

high proportion of AFS in

the investment book (35%)

DCBB is expected to see its CASA increasing to ~25% from the 23%

levels, despite the high growth rates in overall deposits

FY17 FY18


CA % 7.8% 7.4% -0.4% 7.4% 7.4% 0.0%

SA % 15.0% 18.4% 3.4% 14.5% 18.4% 3.9%

TD % 77.2% 74.2% -3.0% 78.1% 74.2% -3.9%

Higher balance sheet growth (despite lower weights for investments) to

result in higher capital consumption & lower tier-I ratios

FY17 FY18


Advances growth (%) 25% 22% -3% 25% 20% -5%

Assets growth (%) 23% 30% 7% 24% 17% -7%

RWA growth (%) 28% 33% 5% 24% 19% -5%

T1 CAR 11.4% 11.0% -0.4% 10.4% 10.6% 0.1%

BV 69 69 1% 78 79 1%

ABV 66 67 1% 75 76 2%

DCB Bank

Rating: ◄► Target price: ▼ ABV: ▲

CMP

Rs. 107

Target

Rs. 91

Rating

SELL



Advances growth of 25%, highest amongst regional peers


High proportion of higher yielding LAP book (43% of

advances)

Low stressed assets (GNPA: 1.8%, restructured assets: 0.2%)


result in lower advances growth. LAP behaviour key monitorable

Lower advances growth led rate cuts & fall in yields to result in

lower NIMs despite partial offset by declining COFs

Operating leverage to be delayed as the bank already operates

on a high cost structure


quality; however current inflows have reduced SMA proportion.

Impact on advances growth is expected to marginal for DCBB, as working

capital loans (22%) form only a small proportion


DCBB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 22%

Term

loans, 78%

0.50

1.00

1.50

2.00

2.50


Key Drivers

DCB Bank CMP

Rs. 107

Target

Rs. 91

Rating

SELL

Financial Summary






Fee Income 1,405 1,714 2,017 2,380 2,809 Deposits 18% 35% 18% 19% 20%


Total Income 8,400 10,692 12,801 15,070 18,029 PAT 2% 18% 19% 15% 26%



Provisions 879 939 807 883 1,010 Gross NPA (Rs.mn) 1,974 2,724 3,459 4,082 4,817

PBT 2,611 3,489 4,142 4,779 6,012 Gross NPA 1.5% 1.7% 1.8% 1.7% 1.7%

PAT 1,945 2,291 2,734 3,154 3,968 Net NPA 0.8% 0.7% 0.6% 0.5% 0.5%











Total Assets 191,185 248,541 290,793 346,043 411,792 ROA 1.1% 1.0% 1.0% 1.0% 1.0%






Dividend per share (Rs.) - - - - - P/E (x)

15.7

13.3

11.2

9.7

7.7

DCB Bank CMP

Rs. 107

Target

Rs. 91

Rating

SELL

FB’s margins are unlikely to be impacted in the near term despite the fall in

advances growth owing to the high CASA proportion & resultant low Cost of

Funds. FB is also likely to consume lesser capital, resulting in higher T1 CAR


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 3.0% 3.0% 7 2.9% 3.0% 6


Assets 1.1% 1.1% 2 1.0% 1.1% 4

Treasury Income to

Average Assets 0.3% 0.3% 2 0.2% 0.3% 3



Average Assets 2.1% 2.1% 0 2.0% 2.0% 4


Assets 1.9% 2.0% 9 1.9% 2.0% 6

Provisions to Average Assets 0.7% 0.6% -4 0.4% 0.3% -2


Return on Assets 0.8% 0.9% 9 1.0% 1.1% 5



Return on Equity 9.7% 10.6% 95 13.2% 13.4% 24


Impact on margins are not significant as the fall in C/D ratios & higher

CRR gets completely offset by fall in CoFs & yield on investments

FY17 FY18


Advances growth 22% 17% -5.0% 20% 17% -3.0%


Yield on Investments 8% 8% 10 7% 7% -1


Net Interest Margin 3.30% 3.38% 8 3.26% 3.32% 6

Sep'16 Dec'16 ▲



AFS 20%

Mod. Duration 2.5

Do not expect significant

treasury gains for FB,

owing to low modified

duration of the AFS

investment book

FB’s CASA ratio is expected to move upwards of 32% despite the high

growth rate of overall deposits aided by higher CASA accretion

FY17 FY18


CA % 5.0% 5.4% 0.4% 5.0% 5.0% 0.0%

SA % 26.0% 26.7% 0.7% 25.5% 27.0% 1.5%

TD % 69.0% 67.9% -1.1% 69.5% 68.0% -1.5%



FY17 FY18


Advances growth (%) 22% 17% -5% 20% 17% -3%

Assets growth (%) 18% 17% -1% 18% 15% -3%

RWA growth (%) 18% 16% -2% 18% 15% -3%

T1 CAR 12.8% 13.1% 0.4% 12.1% 12.9% 0.7%

BV 51 51 1% 57 58 1%

ABV 47 47 2% 53 54 2%

Federal Bank


CMP

Rs. 71

Target

Rs. 81

Rating

BUY



Advances growth of 22%, higher end of the regional peers

Margin improvement on higher CASA & fall in Cost of deposits

Pick up in corporate loan growth aiding operating leverage

Lower slippage trajectory





Operating leverage to play out for FB as corporate loan book (key

growth driver) continues to do well



Loan growth decline is not expected to be severe for FB despite high

proportion of working capital loans, as corporate growth engine chugs along


FB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 58%

Term

loans, 42%

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00


Key Drivers

Federal Bank CMP

Rs. 71

Target

Rs. 81

Rating

BUY

Financial Summary




Net Interest Income 25,042 30,111 34,249 39,574 46,121 ABV per share -1% 10% 14% 15% 17%



Treasury Income 1,275 3,216 2,964 2,755 2,973 NII 5% 20% 14% 16% 17%

Total Income 32,906 40,737 46,479 53,663 62,399 PAT -53% 89% 40% 23% 24%

Operating Expenses 18,668 20,968 23,466 26,196 29,836 EPS -53% 89% 40% 23% 24%



PBT 7,197 13,708 19,155 23,474 28,996 Gross NPA 2.9% 2.7% 2.6% 2.4% 2.2%

PAT 4,757 9,011 12,642 15,493 19,137 Net NPA 1.6% 1.5% 1.3% 1.1% 0.9%



Deposits 791,717 927,721 1,060,267 1,218,618 1,425,321 Growth in Gross NPA 57.7% 12.0% 13.0% 10.0% 10.0%



Total Liabilities & Networth 914,300 1,069,731 1,230,191 1,414,720 1,655,222 CD ratio 73.4% 73.3% 75.0% 77.0% 79.0%


Advances 580,904 679,658 795,200 938,336 1,126,003 Tier I CAR 13.6% 13.1% 12.9% 12.6% 12.4%



Total Assets 914,297 1,069,731 1,230,191 1,414,720 1,655,222 ROA 0.5% 0.9% 1.1% 1.2% 1.2%







Federal Bank CMP

Rs. 71

Target

Rs. 81

Rating

BUY

JKBK’s advances growth is expected to bear the brunt of the demonetization,

impact of higher incidences of unrest in J&K state (significant reduction in

economic activity) and the corporate loan book clean-up impact


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 3.0% 3.1% 1 3.0% 3.0% 1


Assets 0.6% 0.6% 6 0.5% 0.6% 11

Treasury Income to

Average Assets 0.1% 0.2% 5 0.1% 0.2% 9



Average Assets 2.0% 2.0% -2 2.1% 2.1% 0


Assets 1.6% 1.7% 9 1.4% 1.6% 13


PBT to Average Assets -0.1% 0.0% 10 0.3% 0.4% 14

Return on Assets -0.1% 0.0% 7 0.2% 0.3% 10



Return on Equity -1.2% -0.2% 94 2.9% 4.0% 107


Impact on margins are multipronged viz. lower advances growth, fall in

C/D ratio, higher CRR requirements partially offset by lower CoF

FY17 FY18


Advances growth 12% 0% -12.0% 11% 8% -3.0%





Sep'16 Dec'16 ▲



AFS 38%

Mod. Duration 0.9


gains for JKBK, owing to a

sizable AFS investment

book despite a low

modified duration

JKBK is expected to garner material CASA flows increasing its CASA ratio

to ~45%, also aided by lower deposits growth

FY17 FY18


CA % 10.0% 10.1% 0.1% 10.0% 10.0% 0.0%

SA % 33.5% 34.5% 1.0% 33.0% 35.0% 2.0%

TD % 56.5% 55.4% -1.1% 57.0% 55.0% -2.0%



FY17 FY18


Advances growth (%) 12% 0% -12% 11% 8% -3%

Assets growth (%) 14% 10% -4% 9% 6% -3%

RWA growth (%) 11% 7% -4% 9% 6% -3%

T1 CAR 9.3% 9.9% 0.6% 8.7% 9.8% 1.1%

BV 129 132 3% 130 138 6%

ABV 84 92 10% 90 100 11%

Jammu & Kashmir Bank

Rating: N/A Target price: N/A ABV: N/A

CMP

Rs. 62

Target

Under Review

Rating

Under Review


POST-DEMONETISATION IMPACT Advances growth of 12%, marginally higher than the systemic

credit growth

Higher CASA ratio resulting from lower deposit accretion in

J&K state

Moderate treasury income flows as 38% of investments lie in

the AFS book

Adequate capital to sustain growth

Higher incidences of unrest in J&K state and reduced economic

activity to result in lower advances growth in the state

Corporate loan book clean up under the new management to

also result in negligible growth in non-J&K book

Margin impact to be insignificant as fall in CoF is expected to

offset effect of fall in C/D ratios & higher CRR

Weakening credit risk profile of customers in J&K state to

adversely impact asset quality

Loan growth decline is expected to be severe despite low proportion of

working capital loans, as JKBK is in the midst of a corporate book clean-up


JKBK 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 33%

Term

loans, 67%

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80


Key Drivers

Jammu & Kashmir Bank CMP

Rs. 62

Target

Under Review

Rating

Under Review

Financial Summary




Net Interest Income 27,100 25,715 27,632 29,660 33,098 ABV per share -6% -10% 9% 15% 9%



Treasury Income 1,460 1,487 1,688 1,138 1,163 NII 2% -5% 7% 7% 12%

Total Income 32,128 30,982 33,352 35,008 38,290 PAT -18% N/A N/A 127% 5%

Operating Expenses 15,462 17,065 19,061 21,658 25,201 EPS -18% N/A N/A 127% 5%



PBT 6,904 -205 3,924 8,915 9,328 Gross NPA 8.7% 11.1% 11.5% 10.8% 10.0%

PAT 4,148 (147) 2,629 5,973 6,250 Net NPA 4.4% 5.8% 5.0% 4.0% 3.7%






Total Liabilities & Networth 802,681 882,949 935,926 1,010,800 1,121,988 CD ratio 72.3% 64.8% 66.0% 68.0% 70.0%





Total Assets 802,681 882,949 935,926 1,010,800 1,121,988 ROA 0.5% 0.0% 0.3% 0.6% 0.6%

Other Information ROE 6.6% -0.2% 4.0% 8.6% 8.3%




Earnings per share (Rs.) 8.6 (0.3) 5.4 12.3 12.9 P/ABV (x) 0.6 0.7 0.6 0.5 0.5

Dividend per share (Rs.) 1.8 - - 1.0 1.0 P/E (x) 7.2 N/A 11.4 5.0 4.8

Jammu & Kashmir Bank CMP

Rs. 62

Target

Under Review

Rating

Under Review

KVB remains one of our top picks amongst regional banks; despite the

negative effect of demonetization on growth, as lower CoF aided by higher

CASA flows keeps the long term SME story remains intact


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 3.3% 3.3% 1 3.2% 3.3% 7


Assets 1.3% 1.4% 7 1.2% 1.3% 10

Treasury Income to

Average Assets 0.3% 0.4% 9 0.1% 0.2% 11



Average Assets 2.6% 2.6% 0 2.5% 2.6% 8


Assets 2.0% 2.1% 8 1.9% 2.0% 10

Provisions to Average Assets 0.6% 0.6% -1 0.5% 0.5% 0


Return on Assets 0.9% 1.0% 6 1.0% 1.1% 7



Return on Equity 11.4% 12.3% 88 13.3% 14.1% 75


Impact on margins viz. lower advances growth, fall in C/D ratio, higher

CRR requirements, largely offset by fall in CoF

FY17 FY18


Advances growth 10% 4% -6.3% 12% 8% -4.0%





Sep'16 Dec'16 ▲



AFS 20%

Mod. Duration 2.5

Do not expect high treasury

gains for KVB, owing to low

modified duration of an

already low proportion of

AFS investment book

KVB’s CASA ratio is expected to increase to ~26%, aided by more CASA

flows than term deposits

FY17 FY18


CA % 8.0% 9.0% 1.0% 8.0% 8.0% 0.0%

SA % 15.8% 17.2% 1.4% 15.3% 16.0% 0.7%

TD % 76.2% 73.9% -2.3% 76.7% 76.0% -0.7%



FY17 FY18


Advances growth (%) 10% 4% -6% 12% 8% -4%

Assets growth (%) 10% 13% 3% 11% 6% -4%

RWA growth (%) 11% 11% 0% 11% 9% -2%

T1 CAR 11.8% 11.9% 0.1% 11.9% 12.3% 0.4%

BV 81 82 1% 89 91 2%

ABV 75 76 1% 83 85 3%

Karur Vysya Bank


CMP

Rs. 83

Target

Rs. 102

Rating

BUY


POST-DEMONETISATION IMPACT Advances growth marginally higher than systemic credit

growth, considering challenging credit scenario


Gradual return to growth providing operating leverage &

improving capital efficiency

Healthy return ratios despite high cost structure due to

amortization of losses on sale of assets





Operating leverage to be delayed as new branches will take time

to break even in a low growth environment



Impact on advances growth is expected to severe for KVB, owing to the high

proportion of working capital loans (79%)


KVB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 79%

Term

loans, 21%

0.70

0.90

1.10

1.30

1.50

1.70

1.90

2.10


Key Drivers

Karur Vysya Bank CMP

Rs. 83

Target

Rs. 102

Rating

BUY

Financial Summary







Treasury Income 944 2,183 1,596 1,026 744 NII 22% 13% 9% 5% 7%

Total Income 24,881 28,345 30,530 32,082 34,664 PAT 22% 4% 26% 12% 10%




PBT 9,116 8,939 10,305 11,562 12,591 Gross NPA 1.3% 2.2% 2.2% 2.1% 2.0%

PAT 5,676 5,878 7,419 8,325 9,192 Net NPA 0.6% 1.3% 1.2% 1.1% 0.9%



Deposits 500,787 559,027 599,438 639,111 703,678 Growth in Gross NPA -24.6% 80.0% 8.0% 5.0% 7.0%








Total Assets 576,627 651,587 690,682 739,030 812,933 ROA 1.0% 1.0% 1.1% 1.2% 1.2%






Dividend per share (Rs.) 3 3 3 3 3 P/E (x) 8.9 8.6 6.8 6.1 5.5

Karur Vysya Bank CMP

Rs. 83

Target

Rs. 102

Rating

BUY

SIB’s margins are unlikely to be impacted in the near term despite the fall in

advances growth owing to the high CASA accretion & resultant low CoFs. SIB’s

low RWA/assets to ensure minimal capital consumption


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 2.5% 2.6% 5 2.5% 2.6% 10


Assets 0.9% 0.9% 1 0.7% 0.8% 8

Treasury Income to

Average Assets 0.3% 0.3% 1 0.1% 0.2% 8



Average Assets 1.8% 1.8% 0 1.6% 1.7% 4


Assets 1.7% 1.7% 5 1.6% 1.7% 14



Return on Assets 0.7% 0.7% 1 0.8% 0.9% 7



Return on Equity 11.4% 11.7% 35 14.5% 15.5% 107


Fall in CoF to largely offset impact on margins from lower advances

growth, fall in C/D ratio & higher CRR requirements

FY17 FY18


Advances growth 16% 9% -7.0% 16% 12% -4.0%





Sep'16 Dec'16 ▲



AFS 20%

Mod. Duration 4.4


gains for SIB, owing to high

modified duration despite

low proportion of AFS

investment book

Increase in CASA ratio is expected to marginal, as incremental deposits

will get moved to term deposits in line with customer behavior

FY17 FY18


CA % 4.0% 4.4% 0.4% 4.0% 4.0% 0.0%

SA % 19.0% 19.6% 0.6% 19.0% 20.0% 1.0%

TD % 77.0% 76.0% -1.0% 77.0% 76.0% -1.0%

Higher growth in investments (lower risk weighted) to not result in lesser

capital consumption, as RWA/assets is already the lowest at ~58%

FY17 FY18


Advances growth (%) 16% 9% -7% 16% 12% -4%

Assets growth (%) 13% 16% 3% 16% 10% -5%

RWA growth (%) 11% 12% 1% 17% 12% -6%

T1 CAR 9.1% 9.1% 0.0% 8.9% 9.4% 0.5%

BV 31 31 0% 35 35 1%

ABV 25 26 3% 28 30 5%

South Indian Bank


CMP

Rs. 22

Target

Rs. 27

Rating

BUY


POST-DEMONETISATION IMPACT Advances growth of 16%, significantly higher than systemic

credit growth

Margin improvement led by incremental growth from higher

yielding Retail & SME books

Return to growth on the gold loan book providing operating

leverage for the bank

Low credit costs led by absence of chunky slippages & high

recoveries amongst regional peers





Low growth augurs well for SIB, as it slows the pace of capital

consumption



Impact on advances growth is expected to be moderate for SIB, owing to the

equal split between working capital & term loans


SIB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 51%

Term

loans, 49%

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00


Key Drivers

South Indian Bank CMP

Rs. 22

Target

Rs. 27

Rating

BUY

Financial Summary






Fee Income 519 2,258 2,984 3,758 4,577 Deposits 7% 16% 9% 11% 13%


Total Income 20,271 23,670 26,099 28,753 32,791 PAT 8% 40% 50% 11% 14%




PBT 5,092 7,008 10,417 11,582 13,222 Gross NPA 3.8% 4.0% 3.9% 3.8% 3.5%

PAT 3,328 4,645 6,980 7,760 8,859 Net NPA 2.9% 2.5% 2.3% 2.0% 1.7%






Total Liabilities & Networth 631,749 732,829 806,111 894,784 1,020,053 CD ratio 73.7% 69.2% 71.0% 73.0% 74.0%





Total Assets 631,749 732,829 806,111 894,784 1,020,053 ROA 0.5% 0.7% 0.9% 0.9% 0.9%



Current market price (Rs.) 22 22 22 22 22 Book Value per share (Rs.) 27.5 31.1 35.4 40.2 45.7

Market capitalisation (Rs. mn) 29,096 29,096 29,096 29,096 29,096 Adj Book Value per share (Rs.) 21.6 25.6 29.7 34.6 40.2



South Indian Bank CMP

Rs. 22

Target

Rs. 27

Rating

BUY

AXSB is unlikely to be impacted on the margin front, though the growth is

expected to slack off, owing to the high CASA accretion & incremental growth

coming from the retail & SME books


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 3.3% 3.3% 1 3.2% 3.4% 18


Assets 2.1% 2.1% 2 2.0% 2.0% -2

Treasury Income to

Average Assets 0.4% 0.4% 2 0.3% 0.3% 4



Average Assets 2.1% 2.1% 0 2.1% 2.1% 2


Assets 3.3% 3.3% 3 3.2% 3.3% 14



Return on Assets 0.8% 0.8% 3 1.4% 1.5% 9



Return on Equity 8.4% 8.7% 27 16.2% 16.9% 71


Impact on margins viz. lower advances growth, fall in C/D ratio, higher

CRR requirements, fully offset by fall in CoF

FY17 FY18


Advances growth 17% 14% -3.0% 18% 16% -2.0%





Sep'16 Dec'16 ▲



AFS 44%

Mod. Duration 3.0

Expect significant treasury

as the bank has positioned

itself for falling yields with

AFS+HFT together

constituting 44% of

investment book

Increase in CASA ratio is expected to be marginal, as CASA accretion is

expected to be in line with overall deposit growth

FY17 FY18


CA % 17.0% 16.5% -0.5% 17.0% 17.0% 0.0%

SA % 28.0% 29.2% 1.2% 28.0% 29.0% 1.0%

TD % 55.0% 54.3% -0.7% 55.0% 54.0% -1.0%



FY17 FY18


Advances growth (%) 17% 14% -3% 18% 16% -2%

Assets growth (%) 15% 15% 0% 18% 16% -2%

RWA growth (%) 18% 17% -1% 19% 17% -2%

T1 CAR 11.3% 11.4% 0.1% 10.8% 11.2% 0.4%

BV 230 230 0% 263 265 1%

ABV 208 209 1% 239 243 2%

Axis Bank


CMP

Rs. 456

Target

Rs. 388

Rating

SELL


POST-DEMONETISATION IMPACT Advances growth of 17%, led by ~25% growth in retail

advances

Margins on a decline, with fall in yields (slippage related

interest income reversals) outpacing fall in CoF

High provisioning costs as slippages from watch list remains

high coupled with falling PCR (60%)

Depressed return ratios & increasing pace of capital

consumption

Higher reliance on corporate term loans to have lesser impact on

advances growth due to repayments in CC/OD accounts

Fall in C/D ratio & higher CRR to be completely offset by

declining COFs, resulting in flat NIMs

Slippage & aging related provisioning costs to remain high

despite inflows reducing the SMA proportion

Slowdown in corp. business & weakening credit risk profile to

keep return ratios suboptimal, though capital remains adequate

Impact on advances growth is expected to be marginal for AXSB, as the

proportion of working capital is only 30%


AXSB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 30%

Term

loans, 70%

0.50

1.00

1.50

2.00

2.50

3.00

3.50


Key Drivers

Axis Bank CMP

Rs. 456

Target

Rs. 388

Rating

SELL

Financial Summary




Net Interest Income 168,330 187,079 220,451 241,399 288,576 ABV per share 17% -3% 16% 16% 16%




Total Income 262,044 303,872 351,642 383,217 447,869 PAT 12% -43% 113% 13% 18%

Operating Expenses 101,008 118,291 135,853 159,813 188,579 EPS 11% -43% 113% 13% 18%



PBT 123,938 70,324 151,330 171,746 202,084 Gross NPA 1.8% 5.0% 5.4% 5.3% 5.2%

PAT 82,237 46,905 99,878 113,352 133,375 Net NPA 0.7% 2.0% 1.8% 1.6% 1.5%



Deposits 3,579,676 4,153,801 4,765,898 5,564,562 6,566,183 Growth in Gross NPA 48.1% 230.0% 25.0% 16.0% 15.0%

CASA 1,694,450 1,899,418 2,192,313 2,559,698 3,020,444 Asset-Liability Profile

Borrowings & Current Liabilities 1,143,352 1,338,341 1,610,002 1,907,534 2,349,813 Leverage (x) 8.9 10.0 10.1 10.2 10.5

Total Liabilities & Networth 5,254,676 6,042,878 7,009,738 8,201,393 9,759,658 CD ratio 94.6% 93.0% 94.0% 95.0% 95.0%


Advances 3,387,737 3,862,020 4,479,944 5,286,334 6,237,874 Tier I CAR 12.5% 11.4% 11.2% 10.9% 10.6%

Investments 1,220,062 1,363,751 1,583,094 1,807,738 2,206,054 Profitability and Efficiency


Total Assets 5,254,676 6,042,878 7,009,738 8,201,393 9,759,658 ROA 1.7% 0.8% 1.5% 1.5% 1.5%




Market capitalisation (Rs. mn) 1,090,682 1,090,682 1,090,682 1,090,682 1,090,682 Adj Book Value per share (Rs.) 216 209 243 281 327



Axis Bank CMP

Rs. 456

Target

Rs. 388

Rating

SELL

HDFCB remains our top pick amongst private banks, with demonetization

marginally impacting growth negatively in the near term, the long term impact

remains structurally positive on growth & margins


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 4.2% 4.3% 5 4.2% 4.3% 11


Assets 1.7% 1.7% 2 1.6% 1.7% 4

Treasury Income to

Average Assets 0.1% 0.1% 1 0.1% 0.1% 2



Average Assets 2.6% 2.6% 2 2.6% 2.7% 4


Assets 3.3% 3.3% 4 3.2% 3.3% 11



Return on Assets 1.9% 1.9% 3 1.9% 2.0% 7



Return on Equity 18.5% 18.6% 8 18.8% 19.1% 35


Fall in CoF to completely offset impact on margins from lower advances

growth, fall in C/D ratio & higher CRR requirements

FY17 FY18


Advances growth 19% 17% -2.0% 20% 20% 0.0%

Credit-Deposit Ratio 86% 85% -0.5% 87% 87% 0.0%




Sep'16 Dec'16 ▲



AFS 41%

Mod. Duration 1.8


gains for HDFCB, despite a

sizable AFS proportion of

investments book due to

the low modified duration

HDFCB’s CASA ratio is expected to receive a leg up, and this increase is

expected to be structural in nature and sustain

FY17 FY18


CA % 16.0% 16.0% 0.0% 16.0% 16.0% 0.0%

SA % 27.0% 29.1% 2.1% 27.5% 29.0% 1.5%

TD % 57.0% 54.9% -2.1% 56.5% 55.0% -1.5%



FY17 FY18


Advances growth (%) 19% 17% -2% 20% 20% 0%

Assets growth (%) 18% 16% -2% 19% 19% 0%

RWA growth (%) 18% 13% -5% 19% 20% 1%

T1 CAR 13.2% 13.8% 0.6% 13.0% 13.5% 0.6%

BV 335 336 0% 389 391 0%

ABV 332 332 0% 385 387 0%

HDFC Bank


CMP

Rs. 1198

Target

Rs. 1431

Rating

BUY


POST-DEMONETISATION IMPACT Advances growth of 19%, nearly 2.0x of the systemic credit

growth

Margin improvement on higher CASA accretion & fall in Cost

of deposits

Lower corporate advances growth to accelerate loan book shift

towards retail advances

Low stressed assets (GNPA: 1.0%, Restructured: 0.1%)

Higher reliance on retail loans to result in less impact on


Declining CoF to offset fall in loan growth, lower C/D ratio &

higher CRR, resulting in marginal improvement in NIMs

The digital spends made by HDFCB to play out as significant

operating leverage

Higher proportion of digital transactions at a system level to result

in significant market share increase

Impact on advances growth is expected to be marginal for HDFCB, as the



HDFCB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 31%

Term

loans, 69%

2.50

2.70

2.90

3.10

3.30

3.50

3.70

3.90

4.10

4.30

4.50


Key Drivers

HDFC Bank CMP

Rs. 1198

Target

Rs. 1431

Rating

BUY

Financial Summary








Total Income 383,432 456,023 539,899 639,345 758,084 PAT 20% 19% 20% 18% 18%



Provisions 27,256 32,143 31,375 38,521 47,192 Gross NPA (Rs.mn)

43,928

54,471

70,812

87,807

108,881

PBT 186,379 223,424 269,830 315,918 371,854 Gross NPA 0.9% 1.0% 1.1% 1.1% 1.1%

PAT 122,962 146,897 177,008 208,506 245,424 Net NPA 0.3% 0.3% 0.3% 0.2% 0.2%


Networth 726,777 854,258 995,528 1,162,340 1,360,113 Coverage 69.9% 74.1% 77.0% 78.6% 81.0%



Borrowings & Current Liabilities 897,436 1,007,204 1,291,790 1,586,833 1,822,454 Leverage (x)

8.5

8.4

8.5

8.6

8.8






Total Assets 7,088,454 8,222,608 9,784,903 11,644,035 13,856,401 ROA 1.9% 1.9% 2.0% 1.9% 1.9%







HDFC Bank CMP

Rs. 1198

Target

Rs. 1431

Rating

BUY

ICICIBC being a corporate biased term lending institution to see only a

marginal impact on growth, while margins can move up structurally owing to

higher CASA flows & resultant fall in borrowings


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 2.8% 2.9% 4 2.9% 3.0% 13


Assets 2.6% 2.7% 3 1.7% 1.8% 3

Treasury Income to

Average Assets 1.1% 1.1% 4 0.2% 0.2% 4



Average Assets 1.9% 1.9% 0 1.9% 1.9% 2


Assets 3.5% 3.6% 7 2.8% 2.9% 15



Return on Assets 1.4% 1.4% 3 1.4% 1.5% 7



Return on Equity 11.5% 11.8% 33 11.9% 12.5% 58


Higher CASA led fall in CoF to result in uptick in margins despite fall in

C/D ratios and higher CRR

FY17 FY18


Advances growth 13% 12% -1.0% 15% 13% -2.0%





Sep'16 Dec'16 ▲



AFS 35%

Mod. Duration 3.0


gains for ICICIBC, as a

result of sizable SLR book

with a moderate duration

CASA ratio is expected to reach ~46% by FY17, as CASA accretion

continues to outpace the overall deposit growth

FY17 FY18


CA % 14.0% 13.0% -1.0% 14.0% 14.0% 0.0%

SA % 33.0% 32.9% -0.1% 33.0% 34.0% 1.0%

TD % 53.0% 54.1% 1.1% 53.0% 52.0% -1.0%



FY17 FY18


Advances growth (%) 13% 12% -1% 15% 13% -2%

Assets growth (%) 12% 14% 2% 15% 13% -2%

RWA growth (%) 14% 14% -1% 15% 14% -1%

T1 CAR 12.8% 13.0% 0.1% 12.6% 12.9% 0.3%

BV 166 167 0% 186 188 1%

ABV 146 147 1% 165 167 1%

ICICI Bank

Rating: ◄► Target price: ◄► ABV: ▲

CMP

Rs. 268

Target

Rs. 320

Rating

BUY



Impact on advances growth is expected to be marginal for ICICIBC, as the



ICICIBC 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 22%

Term

loans, 78%

Advances growth of 13%, led by ~21% growth in retail

advances



High provisioning costs as slippages from watch list remains

high coupled with falling PCR (60%)

Return ratios maintained through divestment in non-core

assets despite elevated credit costs





Slippage & aging related provisioning costs to remain high but

additional provisions of Rs. 32bn provides comfort

Fall in RWA/assets to slow down pace of capital consumption

and result in higher capital adequacy

0.50

1.00

1.50

2.00

2.50

3.00


Key Drivers

ICICI Bank CMP

Rs. 268

Target

Rs. 320

Rating

BUY

Financial Summary








Total Income 365,471 424,983 421,327 472,736 547,186 PAT -13% 12% 18% 22% 23%




PBT 121,959 131,886 184,007 233,653 287,081 Gross NPA 6.0% 7.2% 7.0% 6.8% 6.4%

PAT 97,265 108,826 128,805 156,547 192,345 Net NPA 3.0% 3.5% 3.2% 2.8% 2.4%


Networth 869,181 970,653 1,092,648 1,242,115 1,427,106 Coverage 50.6% 53.5% 56.3% 60.4% 63.9%




Total Liabilities & Networth 7,206,951 8,244,099 9,312,169 10,611,928 12,199,491 CD ratio 103% 99% 100% 101% 101%





Total Assets 7,206,951 8,215,924 9,283,994 10,583,754 12,171,317 ROA 1.4% 1.4% 1.5% 1.6% 1.7%







ICICI Bank CMP

Rs. 268

Target

Rs. 320

Rating

BUY

SOTP Valuation

ICICI Bank CMP

Rs. 268

Target

Rs. 320

Rating

BUY

SOTP Valuation FY18E

Subsidiary Basis Multiple Market Cap. (Rs. Mn) Value per share

ICICI Prudential Life Insurance P-BV 5.0 245,064 42.1

ICICI Bank Canada P-BV 1.0 43,974 7.6

ICICI Bank UK P-BV 1.0 36,235 6.2

ICICI Lombard General Insurance P-GWP 2.0 123,674 21.2

ICICI Home Finance P-ABV 2.5 49,208 8.5

ICICI Securities Primary Dealership P-E 15.0 36,691 6.3

ICICI Prudential AMC % of AUM 4.0 42,792 7.4

ICICI Securities P-E 18.0 52,054 8.9

ICICI Venture Funds Management % of AUM 2.0 4,550 0.8

Other Subsidiaries P-BV 1.0 216 0.0

ICICI Bank P-ABV 1.4 1,227,249 210.9

Total 1,861,708 319.9

IIB remains amongst our top picks in private banks space, with demonetization

marginally impacting growth negatively in the near term, the long term impact

remains structurally positive on both growth & margins


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 3.8% 3.8% 7 3.8% 4.0% 23


Assets 2.7% 2.7% 0 2.7% 2.7% -2

Treasury Income to

Average Assets 0.4% 0.5% 1 0.3% 0.4% 3



Average Assets 3.1% 3.0% -1 3.1% 3.1% 2


Assets 3.4% 3.5% 8 3.3% 3.5% 19



Return on Assets 1.9% 1.9% 4 1.9% 2.0% 13



Return on Equity 16.0% 16.4% 41 17.2% 18.1% 90




FY17 FY18


Advances growth 27% 24% -3.0% 27% 24% -3.0%





Sep'16 Dec'16 ▲



AFS 32%

Mod. Duration 2.0


gains for IIB, despite a

sizable AFS proportion of

investments book due to

the low modified duration

IIB’s CASA ratio is expected to reach 40% by FY18, from sustainably high

CASA flows; expect reduction in SA rates as well

FY17 FY18


CA % 16.5% 17.7% 1.2% 17.0% 18.0% 1.0%

SA % 19.5% 22.0% 2.5% 20.0% 22.0% 2.0%

TD % 64.0% 60.3% -3.7% 63.0% 60.0% -3.0%



FY17 FY18


Advances growth (%) 27% 24% -3% 27% 24% -3%

Assets growth (%) 25% 26% 1% 26% 22% -3%

RWA growth (%) 25% 24% -1% 26% 22% -3%

T1 CAR 13.8% 13.9% 0.1% 12.8% 13.4% 0.6%

BV 335 336 0% 391 397 1%

ABV 331 333 0% 387 392 1%

IndusInd Bank


CMP

Rs. 1113

Target

Rs. 1294

Rating

BUY



Impact on advances growth is expected to be marginal for IIB, as the



IIB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Advances growth of 27%, amongst the highest in our coverage

universe


of deposits

Lower small & mid corporate advances growth to accelerate

loan book shift towards retail






Investments on digital initiatives to create significant operating

leverage for IIB & & higher market share in digital banking space

Could see higher delinquencies in the CV book, which is more of

a transitory effect

Working

Capital loans, 27%

Term

loans, 73%

1.50

2.00

2.50

3.00

3.50

4.00


Key Drivers

IndusInd Bank CMP

Rs. 1113

Target

Rs. 1294

Rating

BUY

Financial Summary








Total Income 78,131 103,145 130,368 158,087 191,626 PAT 27% 34% 29% 17% 17%




PBT 34,688 46,398 59,892 70,295 82,073 Gross NPA 0.9% 0.9% 0.9% 0.9% 0.8%

PAT 22,860 30,610 39,529 46,395 54,168 Net NPA 0.4% 0.3% 0.3% 0.3% 0.3%



Deposits 930,001 1,257,376 1,544,925 1,909,457 2,360,301 Growth in Gross NPA 38.0% 26.0% 22.0% 22.0% 22.0%





Advances 884,192 1,096,398 1,359,534 1,699,417 2,124,271 Tier I CAR 14.9% 13.9% 13.4% 12.8% 12.3%



Total Assets 1,400,564 1,764,699 2,152,933 2,626,578 3,230,691 ROA 1.8% 1.9% 2.0% 1.9% 1.8%







IndusInd Bank CMP

Rs. 1113

Target

Rs. 1294

Rating

BUY

KMB could structurally see higher margins post demonetization owing to

higher CASA accretion led CoF decline, though the growth could decline in the

near term; could see some delinquencies in the real estate exposure


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 4.0% 4.0% 7 4.1% 4.2% 7


Assets 1.6% 1.7% 8 1.6% 1.7% 13

Treasury Income to

Average Assets 0.3% 0.4% 7 0.3% 0.3% 4



Average Assets 2.8% 2.8% 3 2.9% 3.0% 8


Assets 2.7% 2.9% 13 2.8% 3.0% 12



Return on Assets 1.6% 1.7% 7 1.7% 1.8% 8



Return on Equity 12.9% 13.3% 40 14.0% 14.2% 18




FY17 FY18


Advances growth 19% 17% -2.0% 20% 18% -2.0%





Sep'16 Dec'16 ▲



AFS 40%

Mod. Duration 3.0




high AFS proportion &

mod. duration

KMB’s CASA ratio is expected to reach 44% by FY18, from sustainably

high CASA flows; expect reduction in SA rates as well

FY17 FY18


CA % 18.0% 17.8% -0.2% 18.0% 18.0% 0.0%

SA % 23.0% 26.0% 3.0% 24.0% 26.0% 2.0%

TD % 59.0% 56.3% -2.7% 58.0% 56.0% -2.0%



FY17 FY18


Advances growth (%) 19% 17% -2% 20% 18% -2%

Assets growth (%) 15% 13% -2% 19% 17% -2%

RWA growth (%) 16% 14% -2% 19% 17% -2%

T1 CAR 14.8% 15.2% 0.3% 14.3% 14.9% 0.6%

BV 148 149 0% 170 171 1%

ABV 142 143 0% 163 165 1%

Kotak Mahindra Bank


CMP

Rs. 745

Target

Rs. 846

Rating

BUY



Impact on advances growth is expected to be marginal for KMB, as the



KMB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Advances growth of 19%, nearly 2.0x of the systemic credit

growth


of deposits

CV book was a key driver to growth (up ~40 yoy) and margins






Investments on digital initiatives to create significant operating

leverage for KMB & higher market share in digital banking space

Could see higher delinquencies in the CV book & real estate

exposures

Working

Capital loans, 37%

Term

loans, 63%

1.50

2.00

2.50

3.00

3.50

4.00

4.50


Key Drivers

Kotak Mahindra Bank CMP

Rs. 745

Target

Rs. 846

Rating

BUY

Financial Summary








Total Income 95,126 116,815 139,798 163,382 195,071 PAT 9% 68% 23% 17% 24%




PBT 30,617 51,725 63,253 73,703 91,378 Gross NPA 2.4% 2.4% 2.3% 2.2% 2.1%

PAT 20,277 33,999 41,747 48,644 60,309 Net NPA 1.1% 1.1% 1.0% 0.9% 0.8%




CASA 527,764 685,070 800,943 961,132 1,153,358 Asset-Liability Profile







Total Assets 1,922,598 2,172,536 2,541,867 3,024,821 3,599,537 ROA 1.4% 1.7% 1.8% 1.7% 1.8%





Earnings per share (Rs.) 11.1 18.5 22.7 26.5 32.8 P/ABV (x)

4.5

3.7

2.9

2.3

1.7



Rs. 745

Target

Rs. 846

Rating

BUY

SOTP Valuation


Rs. 745

Target

Rs. 846

Rating

BUY

SOTP Valuation FY18E basis

Basis Multiple Market Cap. (Rs.mn) Value per share

Kotak Prime P-ABV 3.5 193,457 105

Kotak Securities P-E 25 100,850 55

KMCC P-E 25 15,876 9

Kotak Insurance P-BV 6.0 103,526 56

Kotak General insurance P-BV 3.0 5,040 3

Kotak Investment Advisors % of AUM 6% 5,494 3

Kotak AMC % of AUM 6% 37,674 21

Kotak International % of AUM 6% 20,407 11

Kotak Investments P-BV 3.0 36,646 20

Other Subsidiaries P-BV 1.0 4,738 3

Kotak Mahindra Bank P-ABV 3.5 1,031,572 561

Total 1,555,278 846

YES remains amongst our top picks in private banks space, with

demonetization marginally impacting growth negatively in the near term, the

long term impact remains structurally positive on both growth & margins


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 3.2% 3.3% 7 3.2% 3.3% 16


Assets 1.9% 2.0% 5 1.8% 1.9% 1

Treasury Income to

Average Assets 0.3% 0.3% 5 0.2% 0.2% 1



Average Assets 2.1% 2.1% 0 2.1% 2.1% 0


Assets 3.0% 3.1% 12 3.0% 3.1% 17



Return on Assets 1.8% 1.9% 9 1.8% 1.9% 12



Return on Equity 21.5% 22.5% 93 22.7% 23.8% 117




FY17 FY18


Advances growth 30% 27% -3.0% 28% 28% 0.0%





Sep'16 Dec'16 ▲



AFS 30%

Mod. Duration 3.0




high AFS proportion &

mod. duration

YES’s CASA ratio is expected to reach 36% by FY18, from sustainably

high SA flows; expect reduction in SA rates as well

FY17 FY18


CA % 9.6% 10.1% 0.5% 10.0% 10.0% 0.0%

SA % 21.5% 23.7% 2.2% 24.2% 26.0% 1.8%

TD % 68.9% 66.2% -2.7% 65.8% 64.0% -1.8%



FY17 FY18


Advances growth (%) 30% 27% -3% 28% 28% 0%

Assets growth (%) 23% 23% 0% 28% 28% 0%

RWA growth (%) 27% 25% -2% 28% 28% 0%

T1 CAR 10.1% 10.3% 0.2% 9.5% 9.8% 0.3%

BV 393 397 1% 477 489 2%

ABV 388 392 1% 471 483 2%

YES Bank


CMP

Rs. 1220

Target

Rs. 1445

Rating

BUY



Advances growth of 30%, highest amongst coverage banks


High income growth to keep CIR flat despite high investments

in branch banking business


Impact on advances growth is expected to be marginal for KMB, as the



YES 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 25%

Term

loans, 75%





Investments in branch banking & digital initiatives to increase

market share in retail lending business



0.50

1.00

1.50

2.00

2.50

3.00

3.50


Key Drivers

YES Bank CMP

Rs. 1220

Target

Rs. 1445

Rating

BUY

Financial Summary








Total Income 72,789 96,480 120,069 150,925 190,983 PAT 27% 35% 30% 25% 27%




PBT 37,662 51,113 65,362 81,938 104,469 Gross NPA 0.8% 0.8% 0.9% 1.0% 1.0%

PAT 25,394 34,284 44,446 55,718 71,039 Net NPA 0.3% 0.3% 0.3% 0.3% 0.3%


Networth 137,866 167,226 205,753 255,058 319,191 Coverage 62% 71% 73% 74% 75%

Deposits 1,117,195 1,426,265 1,814,205 2,285,899 2,857,373 Growth in Gross NPA 139% 42% 40% 30% 30%

CASA 313,428 481,944 653,114 868,641 1,142,949 Asset-Liability Profile


Total Liabilities & Networth 1,652,634 2,030,047 2,598,460 3,274,060 4,092,575 CD ratio 88% 87% 88% 88% 88%

Cash with RBI & other banks 82,184 112,555 142,367 178,235 221,690 CASA 28% 34% 36% 38% 40%

Advances 982,099 1,247,266 1,596,501 2,011,591 2,514,488 Tier I CAR 10.7% 10.3% 9.8% 9.5% 9.5%

Investments 488,385 532,027 682,698 861,347 1,077,787 Profitability and Efficiency


Total Assets 1,652,634 2,030,047 2,598,460 3,274,060 4,092,575 ROA 1.7% 1.9% 1.9% 1.9% 1.9%







YES Bank CMP

Rs. 1220

Target

Rs. 1445

Rating

BUY

BOB is expected to suffer a decline in credit growth, while profiting from lower

CoF led by higher CASA accretion; the effect of fall in yields is two fold: higher

treasury income & higher opex (pension liabilities); capital remains adequate


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 2.0% 2.1% 6 2.0% 2.1% 13


Assets 0.9% 0.9% 4 0.8% 0.9% 13

Treasury Income to

Average Assets 0.3% 0.3% 3 0.2% 0.3% 9



Average Assets 1.3% 1.4% 6 1.3% 1.4% 9


Assets 1.6% 1.6% 4 1.5% 1.7% 17



Return on Assets 0.3% 0.4% 4 0.5% 0.5% 8


Average Assets) 19 18 -1 20 18 -2

Return on Equity 6.4% 6.9% 45 8.9% 9.7% 80




FY17 FY18


Advances growth 0% -4% -4.0% 8% 6% -2.0%

Credit-Deposit Ratio 59% 60% 1.4% 58% 60% 2.0%




Sep'16 Dec'16 ▲



AFS 33%

Mod. Duration 3.2


gains for BOB, as a result

of sizable SLR book with a

ample mod. duration

CASA ratio is expected to hover at ~30%, as CASA accretion continues to

outpace the overall deposit growth

FY17 FY18


CA % 6.5% 6.8% 0.3% 6.5% 6.5% 0.0%

SA % 23.5% 24.3% 0.8% 23.0% 24.0% 1.0%

TD % 70.0% 68.9% -1.1% 70.5% 69.5% -1.0%



FY17 FY18


Advances growth (%) 0% -4% -4% 8% 6% -2%

Assets growth (%) 11% 5% -6% 10% 7% -3%

RWA growth (%) 11% 3% -8% 10% 9% -1%

T1 CAR 10.2% 11.0% 0.8% 10.0% 11.0% 1.0%

BV 165 166 0% 180 182 1%

ABV 110 114 4% 126 131 4%

Bank of Baroda


CMP

Rs. 162

Target

Rs. 118

Rating

SELL



Impact on advances growth is expected to be severe for BOB, owing to the

high proportion of working capital loans (57%)


BOB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Flat advances book, led by decline in unbeneficial overseas

business

Margins uptick led by lower CoF & fall in lower yielding buyer’s

credit in overseas book

High provisioning costs led by high slippages & aging related

provisions

Sub-optimal return ratios & low capital adequacy restricting

growth in balance sheet





Fall in yields to result in higher treasury income and higher opex

(pension related provisions)



Working

Capital loans, 57%

Term

loans, 43%

0.00

0.50

1.00

1.50

2.00

2.50


Key Drivers

Bank of Baroda CMP

Rs. 162

Target

Rs. 118

Rating

SELL

Financial Summary




Net Interest Income 127,399 141,093 156,098 164,833 181,124 ABV per share -33.8% 14% 15% 15% 15%

Other Income 49,989 64,922 68,060 65,568 72,538 Advances -10.3% -4% 6% 8% 10%

Fee Income 15,015 32,998 40,505 43,389 47,108 Deposits -7.0% 6% 7% 8% 10%

Treasury Income 11,789 22,986 21,555 14,179 15,431 NII -3.4% 11% 11% 6% 10%

Total Income 177,387 206,014 224,158 230,401 253,663 PAT N/A N/A 52% 18% 21%

Operating Expenses 89,231 96,113 104,006 111,411 124,561 EPS N/A N/A 52% 18% 21%



PBT -66,981 39,947 58,165 68,497 82,706 Gross NPA 10.0% 10.9% 10.7% 10.4% 9.9%

PAT (53,955) 25,584 38,971 45,893 55,413 Net NPA 5.1% 4.8% 4.5% 4.1% 3.7%







Cash with RBI & other banks 1,339,003 1,474,145 1,578,855 1,707,564 1,881,320 CASA 26.4% 31.1% 30.5% 30.0% 29.5%




Total Assets 6,713,765 7,020,472 7,511,905 8,112,857 8,924,143 ROA -0.8% 0.4% 0.5% 0.6% 0.7%

Other Information ROE -14.4% 6.9% 9.7% 10.4% 11.3%




Earnings per share (Rs.) (23.4) 11.1 16.9 19.9 24.0 P/ABV (x) 1.6 1.4 1.2 1.1 0.9

Dividend per share (Rs.) - - - 1.0 1.0 P/E (x) N/A 14.6 9.6 8.2 6.8

Bank of Baroda CMP

Rs. 162

Target

Rs. 118

Rating

SELL

BOI is expected to suffer a decline in credit growth, while profiting from lower


treasury income & an opex spike (pension liabilities); capital remains a concern


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 1.9% 1.9% 1 2.0% 2.0% 3


Assets 1.0% 1.0% 4 0.8% 0.9% 13

Treasury Income to

Average Assets 0.4% 0.4% 3 0.2% 0.2% 9



Average Assets 1.6% 1.6% 1 1.6% 1.6% 1


Assets 1.3% 1.3% 4 1.2% 1.3% 14


PBT to Average Assets -0.1% -0.1% 5 0.4% 0.4% 4

Return on Assets -0.1% -0.1% 3 0.3% 0.3% 3



Return on Equity -2.0% -1.3% 77 6.8% 7.2% 44




FY17 FY18


Advances growth 6% -1% -7.0% 8% 5% -3.0%





Sep'16 Dec'16 ▲



AFS 29%

Mod. Duration 4.3


gains for BOI, as a result of

sizable SLR book with a

high mod. duration

CASA ratio is expected to hover at ~30%, as CASA accretion continues to

outpace the overall deposit growth

FY17 FY18


CA % 5.0% 4.6% -0.4% 6.0% 5.0% -1.0%

SA % 22.0% 24.5% 2.5% 23.0% 25.0% 2.0%

TD % 73.0% 70.9% -2.1% 71.0% 70.0% -1.0%

Fall in advances growth and higher growth in lower risk weighted inv. to

slow down capital consumption & marginally higher tier-I ratios

FY17 FY18


Advances growth (%) 6% -1% -7% 8% 5% -3%

Assets growth (%) 4% 3% -1% 8% 7% -1%

RWA growth (%) 6% 4% -2% 8% 7% -1%

T1 CAR 9.1% 9.3% 0.2% 8.9% 9.3% 0.3%

BV 251 253 1% 269 272 1%

ABV 70 84 20% 86 106 23%

Bank of India

Rating: ◄► Target price: ▲ ABV: ▲

CMP

Rs. 117

Target

Rs. 85

Rating

SELL



Impact on advances growth is expected to be significant for BOI, owing to

the high proportion of working capital loans (54%)


BOI 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Working

Capital loans, 54% Term

loans, 46%

Advances growth of 6%, led by double digit growth in retail

credit while corporate continues to decline




provisions









Insufficient capital position despite fall in RWA/assets slowing

down pace of capital consumption

0.00

0.50

1.00

1.50

2.00

2.50

3.00


Key Drivers

Bank of India CMP

Rs. 117

Target

Rs. 85

Rating

SELL

Financial Summary




Net Interest Income 117,247 116,239 133,259 138,166 150,228 ABV per share -67% -10% 27% 19% 18%

Other Income 36,524 62,659 57,782 59,193 64,730 Advances -11% -1% 5% 8% 10%

Fee Income 14,035 21,684 33,650 36,877 41,692 Deposits -4% 6% 7% 8% 8%

Treasury Income 7,495 25,574 15,633 12,316 13,038 NII 3% -1% 15% 4% 9%

Total Income 153,770 178,898 191,041 197,358 214,958 PAT N/A N/A N/A 15% -1%

Operating Expenses 93,415 97,330 104,013 116,307 133,235 EPS N/A N/A N/A 15% -1%



PBT -77,909 -5,053 28,629 32,844 32,371 Gross NPA 13.1% 13.8% 13.8% 13.4% 12.7%

PAT (60,894) (3,367) 20,040 22,991 22,660 Net NPA 7.8% 7.5% 7.0% 6.5% 5.8%







Cash with RBI & other banks 991,410 935,277 998,724 1,079,939 1,167,102 CASA 25.9% 29.1% 30.0% 30.0% 30.0%




Total Assets 6,099,133 6,282,112 6,721,859 7,259,608 7,840,377 ROA -1.0% -0.1% 0.3% 0.3% 0.3%

Other Information ROE -22.5% -1.3% 7.2% 7.7% 7.1%

Shares outstanding (mn) 817 1,055 1,055 1,055 1,055 Valuation



Earnings per share (Rs.) N/A N/A 19.0 21.8 21.5 P/ABV (x) 1.3 1.4 1.1 0.9 0.8

Dividend per share (Rs.) - - - 1.0 2.0 P/E (x) N/A N/A 6.2 5.4 5.5

Bank of India CMP

Rs. 117

Target

Rs. 85

Rating

SELL

CBK despite being a term lending biased institution is expected to see some

impact on growth in line with systemic credit growth, while margins can move

up structurally owing to higher CASA flows & resultant fall in borrowings


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 1.8% 1.8% 1 1.9% 2.0% 5


Assets 1.2% 1.2% 4 1.1% 1.2% 6

Treasury Income to

Average Assets 0.3% 0.4% 4 0.2% 0.3% 6



Average Assets 1.5% 1.5% 2 1.5% 1.5% 1


Assets 1.5% 1.5% 3 1.6% 1.7% 9



Return on Assets 0.3% 0.4% 4 0.5% 0.6% 6



Return on Equity 6.7% 7.5% 76 11.4% 12.4% 102


Higher CASA led fall in CoF to result in marginal uptick in margins despite

fall in C/D ratios and higher CRR

FY17 FY18


Advances growth 10% 4% -6.0% 12% 8% -4.0%





Sep'16 Dec'16 ▲



AFS 28%

Mod. Duration 5.1


gains for CBK, as a result

of high moderate duration

with a moderate SLR book



FY17 FY18


CA % 4.1% 4.7% 0.6% 4.1% 4.1% 0.0%

SA % 22.0% 24.8% 2.8% 22.0% 24.0% 2.0%

TD % 73.9% 70.5% -3.4% 73.9% 71.9% -2.0%



FY17 FY18


Advances growth (%) 10% 4% -6% 12% 8% -4%

Assets growth (%) 7% 8% 1% 10% 7% -3%

RWA growth (%) 6% 4% -3% 10% 9% -1%

T1 CAR 8.7% 9.0% 0.3% 8.7% 9.2% 0.5%

BV 513 517 1% 570 580 2%

ABV 222 246 11% 273 301 10%

Canara Bank

Rating: ▲ Target price: ▲ ABV: ▲

CMP

Rs. 316

Target

Rs. 300

Rating

REDUCE



Impact on advances growth is expected to be substantial for CBK, as the

proportion of working capital is 44%


CBK 1Yr fwd. P/ABV multiples (open-high-low-close chart)



advances

Margins uptick led by lower CoF & fall in lower yielding

overseas advances


provisions



Working

Capital loans, 44%

Term

loans, 56%








and result in higher T1 ratios; Capital continues to be a concern

0.00

0.50

1.00

1.50

2.00

2.50


Key Drivers

Canara Bank CMP

Rs. 316

Target

Rs. 300

Rating

REDUCE

Financial Summary




Net Interest Income 97,630 103,283 122,750 132,237 149,288 ABV per share -48.2% 9.4% 22.4% 17.5% 18.5%

Other Income 48,751 70,389 74,002 80,371 89,988 Advances -1.6% 4.0% 8.0% 12.0% 14.0%

Fee Income 9,174 23,470 36,470 41,673 48,188 Deposits 1.3% 8.5% 7.8% 10.3% 10.6%

Treasury Income 9,897 20,314 15,532 14,699 15,800 NII 1.0% 5.8% 18.8% 7.7% 12.9%

Total Income 146,381 173,672 196,752 212,608 239,276 PAT N/A N/A 82.0% 13.2% 18.2%

Operating Expenses 74,919 85,211 94,112 106,484 122,456 EPS N/A N/A 82.0% 13.2% 18.2%



PBT -31,913 29,421 52,736 59,713 70,583 Gross NPA 9.4% 9.9% 10.1% 9.9% 9.5%

PAT (28,128) 20,286 36,915 41,799 49,408 Net NPA 6.4% 6.5% 6.2% 5.9% 5.5%











Total Assets 5,529,607 5,971,976 6,390,015 7,029,016 7,872,498 ROA -0.5% 0.4% 0.6% 0.6% 0.7%





Earnings per share (Rs.) N/A 37.4 68.0 77.0 91.0 P/ABV (x) 1.4 1.3 1.1 0.9 0.7

Dividend per share (Rs.) - 1.0 4.0 5.0 6.0 P/E (x) N/A 8.4 4.6 4.1 3.5

Canara Bank CMP

Rs. 316

Target

Rs. 300

Rating

REDUCE

SOTP Valuation

Canara Bank CMP

Rs. 316

Target

Rs. 300

Rating

REDUCE



Canara HSBC Life P-BV 4.0 21,930 40.4

CanFin Homes P-ABV 3.5 20,496 37.7

Can Bank Factors P-BV 1.0 2,200 4.1

Canara Robeco Asset Management % of AUM 3.0 1,523 2.8

Can Bank Securities Ltd. P-E 10.0 749 1.4

Can Bank Venture Capital Fund P-E 10.0 590 1.1

Can Bank Computer services P-E 8.0 401 0.7

Commercial Indo Bank LLC, Moscow P-ABV 0.7 581 1.1

Canara Bank P-ABV 0.7 124,340 229.0

SOTP (20% hold. co discount assumed on

subsidiaries) 172,811 300.4

PNB is expected to suffer a decline in credit growth, while profiting from lower


treasury income & an opex spike (pension liabilities); capital remains a concern


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 2.3% 2.3% 2 2.4% 2.5% 7


Assets 1.4% 1.4% 2 1.2% 1.3% 8

Treasury Income to

Average Assets 0.3% 0.4% 2 0.2% 0.3% 8



Average Assets 1.6% 1.7% 3 1.6% 1.7% 3


Assets 2.1% 2.1% 2 2.0% 2.1% 12



Return on Assets 0.4% 0.4% 2 0.6% 0.6% 9



Return on Equity 6.9% 7.3% 39 9.6% 11.1% 145


Higher CASA led fall in CoF to result in marginal uptick in margins despite

fall in C/D ratios and higher CRR

FY17 FY18


Advances growth 8% 0% -8.0% 10% 6% -4.0%





Sep'16 Dec'16 ▲



AFS 34%

Mod. Duration 4.0


gains for PNB, as a result of

sizable SLR book with a

moderate duration



FY17 FY18


CA % 6.5% 7.1% 0.6% 7.0% 7.0% 0.0%

SA % 31.0% 31.9% 0.9% 31.0% 32.0% 1.0%

TD % 62.5% 61.0% -1.5% 62.0% 61.0% -1.0%



FY17 FY18


Advances growth (%) 8% 0% -8% 10% 6% -4%

Assets growth (%) 6% 8% 2% 10% 8% -2%

RWA growth (%) 9% 8% -1% 10% 10% 0%

T1 CAR 8.9% 9.0% 0.1% 8.9% 9.2% 0.3%

BV 187 188 0% 206 210 2%

ABV 73 78 7% 88 99 13%

Punjab National Bank


CMP

Rs. 135

Target

Rs. 114

Rating

SELL



Impact on advances growth is expected to be significant for PNB, owing to

the high proportion of working capital loans (64%)


PNB 1Yr fwd. P/ABV multiples (open-high-low-close chart)


Advances growth of 8%, led by 22% growth in retail credit

while corporate & overseas books continues to decline

Margins on an uptick, led by higher yields as interest income

reversals trend lower


provisions








(pension related provisions); adequately provided for pension


and result in higher T1 ratios; Capital continues to be a concern

Working

Capital loans, 64%

Term

loans, 36%

0.00

0.50

1.00

1.50

2.00

2.50

3.00


Key Drivers

Punjab National Bank CMP

Rs. 135

Target

Rs. 114

Rating

SELL

Financial Summary




Net Interest Income 153,118 161,366 188,084 202,709 220,008 ABV per share -59.5% 30.8% 26.7% 22.1% 19.0%

Other Income 68,770 99,073 93,879 97,704 105,400 Advances 8.4% 0.0% 6.0% 10.0% 12.0%

Fee Income 27,874 37,966 40,824 44,422 50,575 Deposits 10.3% 11.7% 8.8% 8.3% 8.7%

Treasury Income 7,261 25,447 21,554 21,281 22,325 NII -7.5% 5.4% 16.6% 7.8% 8.5%

Total Income 221,888 260,438 281,962 300,413 325,408 PAT N/A N/A 72.0% 29.5% 7.6%

Operating Expenses 99,725 115,455 124,080 139,755 158,809 EPS N/A N/A 72.0% 29.5% 7.6%



PBT -57,379 42,281 72,090 93,392 100,536 Gross NPA 12.9% 13.1% 12.9% 12.1% 11.1%

PAT (39,744) 28,078 48,301 62,573 67,359 Net NPA 8.6% 8.7% 8.3% 8.0% 7.5%







Cash with RBI & other banks 736,231 801,748 866,164 941,874 1,025,673 CASA 37.2% 39.0% 39.0% 39.0% 39.0%




Total Assets 6,673,904 7,207,817 7,784,442 8,485,042 9,248,695 ROA -0.6% 0.4% 0.6% 0.8% 0.8%





Earnings per share (Rs.) N/A 12.8 22.1 28.6 30.8 P/ABV (x) 2.3 1.8 1.4 1.1 0.9

Dividend per share (Rs.) - - - - 1.6 P/E (x) N/A 10.5 6.1 4.7 4.4


Rs. 135

Target

Rs. 114

Rating

SELL

SOTP Valuation


Rs. 135

Target

Rs. 114

Rating

SELL



PNB Gilts P-E 15.0 5,021 2.3

PNB Metlife India Insurance Company P-BV 4.0 27,425 12.5

PNB Housing Finance P-ABV 2.7 63,430 29.0

Principal PNB Asset Management % of AUM 3.0 295 0.1

PNB International Limited P-ABV 0.8 7,078 3.2

Punjab National Bank P-ABV 0.8 167,216 76.5

Total (assuming 20% hold co. discount) 270,467 114.2

SBIN is expected to suffer a decline in credit growth in line with the system,

while benefitting from lower CoF led by higher CASA accretion; the fall in

yields is expected to increase treasury income & opex (pension liabilities)


FY17 FY18

Pre Post ▲ (in

bps) Pre Post

▲ (in

bps)


Average Assets 2.5% 2.6% 7 2.6% 2.7% 14


Assets 1.4% 1.4% 3 1.3% 1.3% 5

Treasury Income to

Average Assets 0.4% 0.4% 2 0.3% 0.3% 1



Average Assets 1.9% 1.9% 2 1.8% 1.9% 6


Assets 2.0% 2.1% 8 2.1% 2.2% 12



Return on Assets 0.5% 0.6% 6 0.8% 0.9% 9



Return on Equity 9.0% 9.8% 84 13.2% 14.2% 93




FY17 FY18


Advances growth 12% 6% -6.0% 14% 11% -3.0%





Sep'16 Dec'16 ▲



AFS 30%

Mod. Duration 1.6


gains for SBIN, as a result

of sizable SLR book with a

moderate duration

CASA ratio is expected to reach ~45% in FY17, as CASA accretion


FY17 FY18


CA % 7.5% 7.5% 0.0% 7.0% 7.0% 0.0%

SA % 35.0% 37.2% 2.2% 35.0% 36.5% 1.5%

TD % 57.5% 55.3% -2.2% 58.0% 56.5% -1.5%



FY17 FY18


Advances growth (%) 10% 6% -4% 14% 11% -3%

Assets growth (%) 18% 16% -2% 12% 9% -3%

RWA growth (%) 19% 15% -4% 12% 11% -1%

T1 CAR 10.1% 10.6% 0.5% 9.7% 10.4% 0.7%

BV 200 203 2% 224 230 3%

ABV 148 153 4% 172 181 5%

State Bank of India


CMP

Rs. 267

Target

Rs. 322

Rating

BUY



Impact on advances growth is expected to be material for SBIN, as the

proportion of working capital is 47%


SBIN 1Yr fwd. P/ABV multiples (open-high-low-close chart)



advances, while mid-corporate & overseas books slow down

Margins on an uptick, led by higher yields as interest income

reversals trend lower

High Investments on digital initiatives to stay abreast with

competition

PCR of 62% despite high provisioning costs led by high

slippages & aging related provisions

Working

Capital loans, 47%

Term

loans, 53%






(pension related provisions); adequately provided for pension


and result in higher T1 ratios; capital remains adequate

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00


Key Drivers

State Bank of India CMP

Rs. 267

Target

Rs. 322

Rating

BUY

Financial Summary








Total Income 850,402 970,235 1,117,386 1,229,445 1,371,044 PAT -24% 49% 60% 14% 8%



Provisions 294,838 287,386 242,775 234,932 250,122 Gross NPA (Rs.mn) 981,728 1,079,901 1,187,891 1,306,680 1,437,348

PBT 137,741 214,900 352,831 400,469 431,353 Gross NPA 6.5% 6.7% 6.7% 6.4% 6.1%

PAT 99,507 147,888 236,397 268,314 289,006 Net NPA 3.8% 3.7% 3.3% 3.0% 2.7%


Networth 1,442,744 1,562,810 1,771,962 2,011,214 2,268,435 Coverage 43.2% 46.8% 52.2% 54.9% 57.6%





Cash with RBI & other banks 1,674,677 1,548,863 1,677,978 1,870,446 2,074,957 CASA 42.6% 44.7% 43.5% 43.0% 43.0%



Fixed & Current Assets 1,507,977 1,608,845 1,783,407 2,030,457 2,329,141 Net Interest Margin 3.0% 2.9% 3.1% 3.1% 3.1%

Total Assets 22,590,630 26,205,131 28,563,593 31,991,224 35,510,259 ROA 0.5% 0.6% 0.9% 0.9% 0.9%








Rs. 267

Target

Rs. 322

Rating

BUY

SOTP Valuation


Rs. 267

Target

Rs. 322

Rating

BUY

SOTP Valuation FY18

Subsidiary Basis Multiple Market Cap. (Rs. Mn) Value per share

SBBJ P-ABV 0.7 38,939 5.0

SBH P-ABV 0.7 70,312 9.1

SBM P-ABV 0.7 25,106 3.2

SBP P-ABV 0.7 36,786 4.7

SBT P-ABV 0.8 32,595 4.2

SBI Capital Markets P-E 20.0 67,489 8.7

SBI Life Insurance Company P-BV 6.0 305,886 39.4

SBI General Insurance Company P-GWP 1.5 24,489 3.2

SBI DFHI P-E 15.0 8,357 1.1

SBI Global Factors P-BV 1.0 2,799 0.4

SBI Funds Management % of AUM 4.0 24,166 3.1

SBI Cards & Payment Services P-E 20.0 39,745 5.1

State Bank of India (California) P-BV 1.0 9,200 1.2

State Bank of India (Canada) P-BV 1.0 7,940 1.0

Commercial Indo Bank LLC, Moscow P-BV 1.0 947 0.1

SBI (Mauritius) Ltd. P-BV 1.0 14,686 1.9

Bank SBI Indonesia P-BV 1.0 3,436 0.4

Nepal SBI Bank Ltd. P-BV 1.0 2,332 0.3

State Bank of India P-ABV 1.4 1,788,397 230.4

Total 2,503,606 322

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Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year

horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year

horizon SELL Stock expected to fall >10% over a 1-year horizon

Disclaimer

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