private banking in india-overview

8/8/2019 Private Banking in India-Overview

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Sector summary

Source: ENAM Research , Note : Prices as on 9 October 2007. P/E and P/B of ICICI Bank are calculated after deducting the value of investments

Source: ENAM Research, Bloomberg

Bankex Vs Pvt Sector Banks

Private Sector BanksIndia Research

October 10, 2007

Bankex Vs BSE Sensex


Still attractive, despite higher valuations

Punit [email protected] (+91 22 6754 7609)

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100

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220

Sep-06 Mar-07 Sep-07

Bankex Sensex

60100

140

180

220

260


Bankex Pvt Sector Banks

CMP Mkt. Cap ROE (%) Tgt Price Upside Relative to

(Rs) (USD mn) FY08E FY09E FY08E FY09E FY09E (Rs) (%) sector

ICICI Bank 1,046 28,985 19 13 1.7 1.4 11.1 1,284 23 Outperformer

HDFC Bank 1,420 12,701 34 26 4.3 3.8 15.4 1,502 6 Underperformer

Axis Bank 728 6,567 28 20 3.0 2.7 14.2 937 29 Outperformer

CBoP 45 2,075 53 37 3.8 3.5 9.9 46 2 Underperformer

Yes Bank 193 1,371 32 20 4.0 2.8 16.8 - - -

Federal Bank 367 794 8 7 1.7 1.4 22.3 428 17 Outperformer

P/E P/BV


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Table of Contents

Slide No.

Sector Review 3

ICICI Bank 8

HDFC Bank 17

Axis Bank 23

CBoP Bank 29

Yes Bank

Federal Bank 41

Annexure 47

Historical Performance: New Private Banks 49

Historical Performance: Old Private Banks 53

Current Performance 55


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3

Key Events expected in FY08

RBI unlikely to ease in the near term, interest rates still seen peaking out Tight monetary policy likely to continue for next six months with real test of inflation starting from November onwards

Appreciating rupee, due to huge dollar inflows, may continue to force RBI to follow a tight monetary policy

However, the recent increase in MSS limit to Rs 2 trillion may allay the fear of an imminent CRR hike

Despite the tight monetary policy, interest rates likely to be stable with a downward bias

A cut in SLR expected towards the end of this fiscal

Total demand for SLR estimated at USD 40bn in FY08

Against this demand, total supply is in the range of USD 25-30bn only

The demand supply gap is likely to worsen next fiscal

Implementation of BaselII norms by end FY08 Credit Portfolio to gain as risk weight to range from 20%-100% against 100% earlier

Extra capital requirement due to market and operational risk

Banks in general are likely to lose 1-1.5% CAR

Banks that will raise fresh capital this fiscal include Yes, ING Vysya, Federal & Dhanalakshmi

Centurion Bank of Punjab & South Indian Bank have already raised capital in Sep 2007

Among Larger Banks, ICICI, HDFC and Axis have already raised capital in June/July 2007

Credit growth expected to slow down to ~22% after growing by 26-30% in last three years

Slowdown largely due to moderated growth in retail segment

No major signs of slowdown in corporate, rural and overseas loans


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3

4

5

6

7

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

(%)Headline Inflation

Source : CSO, RBI

Assuming0.1% weekly rise

YoY growth in credit vs. deposits

15

20

25

30

35

Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07

(%)

YoY gwth in deposits YoY gwth in cred

Outlook for FY08

Expect inflation to remain low till Nov 2007 Inflation for the week ended 22nd Sept-07 was 3.42%

RBI has set a medium term target of 4-4.5%.

Expected to inch up from Oct- 07 though unlikely to go above 5% till Mar 2008

Moderation in credit to restrict interest rates from rising further

Banks are reducing deposit rates but credit rates largely untouched

However, some banks have decided to cut mortgage rates

Corporate lending rates largely untouched

Cut in deposit rates to help support NIMs

NIM of most banks were under pressure in Q1FY07 NIM may continue to be under pressure in Q2FY07 due to deposit re-pricing

However, recent cuts in deposit rates to support NIM after 2-3 quarters

General Provisioning likely to come down in FY08

GP requirements to be lower this fiscal, after higher requirements in FY07

Higher Gross NPAs in some segments could increase loan specific provisions

Asset quality unlikely to witness any major deterioration

Deterioration largely from the retail segment

CIBIL checks are helping to curtail higher NPAs despite higher interest rates


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Private Banks: From growth to profitability

With loan growth slowing, more focus on NIMs ICICI Bank to focus more on NIMs with slowing retail loan growth

HDFC Bank focusing more on SMEs & corporates, Axis Bank likely to sustain growth momentum on lower base

Smaller banks like Centurion, Yes & Kotak likely to sustain growth momentum

ING Vysya to start seeing a pick up with renewed top management vigor

Regional private banks also likely to grow 20-25% this fiscal

Superior quality growth in assets and earnings to mask low ROE on account of equity dilution Almost all private banks have raised or will be raising equity capital this fiscal

ROE likely to remain low for next two years, though likely to pick up from FY10 onwards

P/BV looking attractive as most dilutions are substantially book accretive

Valuations higher on P/E terms due to substantial equity dilution

Valuations unlikely to be affected due to lower ROE especially for HDFC Bank & Axis Bank

Our top picks include ICICI Bank & Axis Bank Despite the expected slowdown, NIMs to be stable for ICICI Bank

Asset quality unlikely to deteriorate significantly

Corporates, Rural, Overseas and unsecured loans likely to see higher growth

Value of non-banking businesses to increase substantially in next two years for ICICI Bank Valuations are the most attractive for ICICI Bank. Axis Bank may see some further re-rating

Federal Bank is our other preferred pick Federal Bank expected to witness some further re-rating due to consistently superior performance

YES Bank expected to see strong growth momentum and better ROE for next two years

ING Vysya also to see much stronger growth in assets and earning for next two years


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Comparative P/E vs ROE (FY09E)

Yes Bk

HDFC Bk

Federal

CBoP

Axis Bk

ICICI

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

5 10 15 20 25RoE (%)

P/BV(

x)

ICICI

Axis Bk

CBoP

Federal

HDFC Bk

Yes Bk

0

5

10

15

20

25

30

35

40

5 10 15 20 25RoE (%)

P/E(

x)

Source: ENAM Research

Source: ENAM Research , Note : prices as on 9 October 2007

CMP Mkt. Cap ROE (%) Tgt Price Upside Relative to

(Rs) (USD mn) FY08E FY09E FY08E FY09E FY09E (Rs) (%) sector

ICICI Bank 1,046 28,985 19 13 1.7 1.4 11.1 1,284 23 Outperformer

HDFC Bank 1,420 12,701 34 26 4.3 3.8 15.4 1,502 6 Underperformer

Axis Bank 728 6,567 28 20 3.0 2.7 14.2 937 29 Outperformer

CBoP 45 2,075 53 37 3.8 3.5 9.9 46 2 Underperformer

Yes Bank 193 1,371 32 20 4.0 2.8 16.8 - - -Federal Bank 367 794 8 7 1.7 1.4 22.3 428 17 Outperformer

P/E P/BV

Comparative P/BV vs RoE(FY09E)

Valuations summary

Comparative Valuations


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Private Banks


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Opportunity, among short term fears

ICICI BankRs 1,046

Target Price: Rs.1,284

Potential Upside: 23%


Relative to Sector: Outperformer

Financial summaryPAT EPS BV P/BV Leverage P/Banking P/E P/E NPAs RoE RoE on

(Rs mn) (Rs.) (Rs.) (x) BV BV (x) banking (%) (%) Banking BV(%)

2006 25,400 28.5 250 4.2 205 3.1 36.6 22.3 0.7 16.2 16.0

2007 31,102 34.6 270 3.9 222 2.9 30.2 18.4 1.0 13.4 15.9

2008E 42,457 38.2 424 2.5 384 1.9 27.4 18.8 1.5 11.9 13.4

2009E 54,264 48.8 456 2.3 417 1.4 21.4 12.2 1.5 11.1 12.8

Y/E Mar


India Research

Relative Performance

Shareholding (%) Jun-07 QoQ chg

FIIs & NRIs : 45.9 0.9

ADRs : 24.9 (1.6)Banks / FIs : 11.6 (0.4)MFs/UTI : 5.0 0.6Others : 12.6 0.5

Stock Data

No. of shares : 1,111.7mnMarket cap :Rs 1,163bn52 week high/low :Rs1,125/ Rs673

Avg. daily vol. (6mth) : 2.5mn sharesBloomberg code : ICICIBC INReuters code : ICBK.BO

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100140

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BANKEX ICICI


October 10, 2007


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ICICI Bank: Investment Summary

Well positioned to capitalize on rising corporate & overseas demand after the retail boom Credit book still expected to grow at ~25% driven by rural credit and overseas lending

NIM expected to improve on the back of USD 5bn equity dilution

Fee-based income projected to grow at a CAGR of ~35% for next two years

Asset quality issues overdone

Higher additions in NPAs due to higher proportion of unsecured loans, which forms ~14% of retail loans Gross NPAs at 2.9% appears high on account of additions of write-offs in gross NPAs

Net NPAs at 1.3% still under control

Best placed in the current interest rate scenario Around 50% of the retail loans are of fixed rate being non-mortgage loans

The re-pricing of such loans is yet to happen Hence the upside potential on asset yields is among the highest

A play on fast growing financial services like Insurance, asset management, securities etc. ICICI Prudential, the leading private life insurer, 74% being held by ICICI Bank valued at USD 9.4bn Rs 249 p/s

ICICI Lombard, leader in private non-life space, 74% being held by ICICI Bank valued at USD 1.1bn Rs 31 p/s

Asset Management business, second largest Mutual Fund valued at USD 500m Rs 19/s Overseas Subsidiaries, held 100% by ICICI, valued at USD 2bn Rs 77 p/s

Others including I-Sec, ICICI Ventures, First Source etc. valued at Rs 48 p/s

Total value of investments at Rs 451 p/s, SOTP gives a price target of Rs 1284 Value of all investments estimated at Rs 530 per share, if we take USD 11bn transaction of the holding company

Value of investments likely to grow multi-fold in next 3-5 years

Stock quoting at of 1.4x FY09E Banking BV, after adjusting for the value of investments


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CurrentAccount

77%

Term

Deposits

9%

Savings

Account

14%

ICICI Bank: Background

Largest Private Bank with total asset size of USD 88bn 950 branches (including 48 ECs)

3,470 ATMs

36,000 employees

Incorporated in 1994 as a subsidiary of ICICI (75%)

The bank came out with its IPO in Sep-1997 at Rs 35 per share. First Indian Company listed on NYSE in Sep 1999

Acquired Bank of Madura in Feb 2001 and Sangli Bank in Dec 2006

Leadership position in most retail segments Enjoys 25-30% market share in Mortgages, Auto and Personal

loans

Largest overseas presence amongst Indian Banks Total overseas asset size of USD 22bn in Jun-07

25% market share in overseas remittances

Presence in 17 countries

Three wholly owned international subsidiaries in UK, Canada &Russia

Key subsidiaries include ICICI Prudential (74%) & ICICI Lombard (74%)

ICICI Ventures (100%)

ICICI Sec (Group) (99.9%) ICICI-Prudential AMC (51%)

ICICI Bank: Loan breakup (Q1FY08)

PL

6%

Others

8%

CC

3% TW

1%

CV

9% Auto

10%

Mortgages

27%

SMEs

3%

Corporates &

Others

10%

Overseas

Loans

16%

Rural

7%

Source: Company

ICICI Bank: Break of Deposits(Q1FY08)


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ICICI Bank: Performance Highlights

Credit to witness 25-30% CAGR for next 2 years Largely driven by corporate lending, rural credit and overseas lending

CAGR in credit at 47% over the past 3 years

Retail loans have grown at a 57% CAGR over past 3 years

Retail loans likely to grow by 15-20% for next 2 years, despite the

slowdown

Re-pricing of fixed rate retail loans to help improve NIM Around Rs 75bn of such fixed rate retail loans are maturing per quarter

Hence the upside potential on asset yields is among the highest

We expect the NIM to start expanding from Q3 onwards

Fee based income on track Likely to grow at a CAGR of ~35% for next two years

Rising cross selling of wealth management products - Insurance & MFs

25% market share in growing overseas remittances

Higher focus on Corporates and SMEs

Core NIM expected to improve from Q3 onwards Downward re-pricing of bulk deposits and upward re-pricing of fixed rate

retail loans will help in improvement of NIM from Q3 onwards

USD 5bn issue will help in higher reported NIM from Q2 onwards

Further rise in NPAs largely on account of

Rising proportion of unsecured loans Slowdown in overall retail loans, which will result in a base effect

0

20

40

60

FY03 FY04 FY05 FY06 FY07 FY08E

(%)

ICICI Bank: Balance Sheet growth

34

5

6

7

FY03 FY04 FY05 FY06 FY07 FY08E

(%)

ICICI Bank: Credit Spread

0

5

10

15

FY02

FY03

FY04

FY05

FY06

FY07

FY08E

FY09E

(%)

Net NPAs

Gross NPAsSlippages as % of prev yr adv

ICICI Bank: NPAs and Slippages

Source: Company, ENAM Research


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Performance & Value of Non-Banking Businesses

Life Insurance: Strong pick up in Q2 after a subdued Q1 After a subdued growth of 22% in Q1FY07;

FYP grew 58% in July-07 and 91% in Aug-07

YTD growth till Aug-07 stands at 42%

FYP likely to end this fiscal with a growth of 55-60%

Valuing ICICI-Pru Life at USD 8.3bn Rs 249 p/s for ICICI Bank

Non Life Business: Focus on profitability

Gross Premium Underwritten grew 20%+ in July 2007 and Aug 2007

Earlier in Q1FY07, GP growth was at single digit at 9%

Focus to maintain its Combined Ratio had led to such a fall in GP

Higher competition in some segments led to price war, which is expectedto cool down going ahead

Normalised profit grew 59% in FY07 to Rs 1.38bn

Normalised profit projected to reach Rs 2.3bn by FY09

Valuing ICICI-Lombard at USD 1.1bn Rs 31 p/s for ICICI Bank

Overseas banking subsidiaries showing high growth Total assets grew 125% in FY07 to USD 7bn

UK subsidiary made a profit of USD 40m in FY07, likely to make USD 110m

net profit by FY09

Overseas subsidiaries UK, Canada & Russia valued at USD 1.6bn Rs 77

p/s for ICICI Bank

37

1322

43

62

87

0

10

2030

40

50

60

70

80

90

100

FY03

FY04

FY05

FY06

FY07

FY08E

FY09E

4 yr CAGR

of 103%

ICICI-Pru Life

Insurance - APE

2.14.9

8.915.9

30

39

50.7

0

10

20

30

40

50

60

FY03

FY04

FY05

FY06

FY07

FY08E

FY09E

4 yr CAGR

of 94%

ICICI Lombard Gross

written premium

General Insurance (Rs mn)

PAT - FY07 684Combined Ratio - FY07 97.5%Total Net Surplus - FY07 (normalised profit) 1,379Total net surplus-FY09 (normalised profit) 2,331

Value of the Non Life Business 46,610ICICI share 74%

Value of Non Life to ICICI 34,492Value per share (FY09) 31

Value of Life Insurance Business Rs.bn

Estimated value of new policies likely tobe sold (on APE basis) in FY09 98Estimated NBAP margin on APE by FY09 19%Estimated NBAP 18.7Multiple (x) 20.0

Value of Life Insurance Business 374Value assigned to ICICI Bank 277

Value per share for Life Insurance Business 249


(Rs bn) (Rs bn)


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Implied P/BV Based on Holding Company Valuations


-1,046Current price of the stock

CommentsRs./shrValuations

After deducting the cost of investments at ~Rs 40 per share417Banking BV FY09

-516Implied Price of ICICI Bank

1.2 x FY09E Banking BVImplied P/Banking BV

-

Other investments include I-Sec, ICICI Venture and other investments

0.8% ROA at 12x on $18bn of assets by FY09E

Based on USD 11bn valuation of ICICI Financial Services

530

75

77

378

Total Value of Investments

Value of other investments

Value of overseas subsidiaries

Value of ICICI Financial Services

ICICI Bank: Implied P/BV based on USD 11bn valuations of holding company


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SOTP Without Considering Holding Company Structure

1,284

48

77

27

31

249

19

833

FY09

Value of Banking Business at 2x FY09 Banking BVICICI Bank

NoteFY09 (Rs/shr)

Valuations of ICICI Group

7% of AUM by FY09Mutual Fund Business

Include value of investments in ICICI Sec/3i/ ICICI Venture/ NCDEX/

NSE/ICICI First Source

Value of other investments at 20%

discount

15x FY09E PAT for ICICI UK and ICICI Canada

12x FY09 PAT of Rs 2.5bn (FY07 net profit of Rs 1.67bn)

20x FY09 projected Net Surplus

20x FY09 NBAP of Rs 18.7bn

Value of overseas subsidiaries

I-Sec (Group)

General Insurance

Life Insurance



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ICICI Bank: Financials

Income Statement Balance Sheet


(Rs mn) FY06 FY07 FY08E FY09E

Liabilities

Equity Capital 8,898 8,990 11,117 11,117

Net worth 222,060 243,130 470,864 507,221

Preference Share 3,500 3,500 3,500 3,500

Deposits 1,650,832 2,305,100 2,881,375 3,659,346

ICICI Borrowings etc. 486,670 706,610 826,170 983,120

Others incl. ST borrowings 354,770 598,240 747,800 934,750

Other Liabilities 150,830 188,240 353,432 495,032

Total Liabilities 2,513,892 3,446,580 4,535,341 5,648,219

Assets

Cash with RBI and at Call 170,400 371,210 489,613 625,775

SLR Investments 510,740 673,680 889,258 1,156,035

Advances 1,461,631 1,958,660 2,546,258 3,259,210

Other Investments 204,730 238,900 342,422 339,955

Fixed Assets 39,500 39,234 40,734 42,234

Other Assets 126,890 164,896 227,056 225,009

Total Assets 2,513,892 3,446,580 4,535,341 5,648,219


Interest Income 143,061 229,942 348,435 448,242

Interest Expenses 95,974 163,585 260,659 331,100

Net Interest Income 47,087 66,357 87,776 117,142

Non-Interest Income 41,810 59,290 77,041 100,906

- Fee-based income 32,590 50,120 70,168 94,727

- Profit from sale of sec. 9,280 10,140 8,500 7,500

- Lease income 7,960 9,020 10,373 11,929

- Amortization (8,021) (9,990) (12,000) (13,250)

Net Income 88,896 125,647 164,817 218,048

Operating Expenses 35,470 49,787 67,212 90,736

Operating Profit 38,886 58,742 79,526 106,275

Provisions 7,920 22,260 22,916 31,940

PBT 30,966 36,482 56,610 74,335

Tax 5,565 5,380 14,152 20,070

Deferred Tax (1,347) 0 0 0

PAT 25,400 31,102 42,457 54,264


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ICICI Bank: Financials


(%) FY06 FY07 FY08E FY09E

Growth (%)

Growth in NII 66 41 32 33

Growth in Net profit 27 22 37 28

Growth in deposits 65 40 25 27

Growth in advances 60 34 30 28

Growth in SLR 48 32 32 30

Decline in ICICI Borrowings (32) (18) (28) (38)

Valuations

EPS (Rs.) 29 35 38 49

ROA (%) 1.2 1.0 1.1 1.1

ROE (%) 14.6 13.4 11.9 11.1

BV (Rs.) 250 270 424 456

Adj. BV (Rs.) 240 254 395 416

Banking BV (Rs.) 216 222 384 417

Yields & Margins (%)

Avg.Yield on Advances 8.7 10.4 11.3 11.3

Avg.Cost of Deposits 5.2 6.7 7.5 7.6

Avg.Cost of funds 5.4 6.4 7.8 7.9

NIM 2.6 2.6 2.5 2.6


Asset Quality (%)

Gross NPAs 1.9 2.3 3.1 3.2

Net NPAs 0.7 1.0 1.5 1.5

Capital (%)

Tier-I CAR 9.2 7.4 13.3 11.8

Tier-II CAR 4.2 4.3 4.1 3.8

CAR 13.4 11.7 17.4 15.6

Others

Op. Cost as % of Net Inc. 56 53 52 51

Op cost as % of avg. assets 2.4 2.2 2.1 2.2

NII as % of total income 53.0 52.8 53.3 53.7

Fee-inc. as % of net inc. 36.7 40 42.6 43.4

% of current deposits 10.0 9.3 10.0 10.5

% of savings deposits 12.7 12.5 13.0 13.5

% of Low Cost Deposits 22.7 21.8 23.0 24.0

Dividend Per Share (Rs) 8.5 10 11 12.5

Growth Rates & Key Ratios Key Ratios


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A quality play, but upside potential limited

Relative to Sector: Neutral

HDFC BankRs.1,420

Target Price: Rs.1,502



Financial summaryPAT EPS Change P/E BV P/BV NPAs P/Adj.BV RoE RoA

Y/E Mar (Rs m) (Rs.) YoY (%) (x) (Rs.) (x) (%) (x) (%) (%)

2006 8,708 28 29 51 169 8.4 0.4 8.6 17.7 1.4

2007 11,415 36 29 40 201 7.0 0.4 7.3 19.5 1.4

2008E 14,987 42 17 34 331 4.3 0.4 4.4 16.4 1.4

2009E 19,493 55 30 26 375 3.8 0.4 3.9 15.4 1.5


India Research



Promoters : 24.7 3.2

FIIs : 26.5 (5.8)MFs / UTI : 5.5 2.4Banks / FIs : 3.2 (0.1)Others : 40.1 0.4

Stock Data

No. of shares :353.2mnMarket cap :Rs.501.4bn52 week high/low :Rs.1,459 / Rs.875

Avg. daily vol. (6mth) :695,068 sharesBloomberg code :HDFCB INReuters code :HDBK.BO

50

100

150

200


BANKEX HDFC Bank

Source: ENAM Research , Note : Prices as on 9 October 2007

October 10, 2007


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HDFC Bank: Investment Summary

A quality play with consistent performance Balance sheet growth of 31% in the past five years, likely to grow at ~30% for next two years

Net profit growth of 31% during the same period, expected to grow at 30% for next two years

Credit growth 5 year CAGR at 48%, likely to grow at 30% for next two years

Net Interest Margin of ~ 4% for last 4 years, expected to be maintained

High quality funding franchise CASA ratio of 51% as of Jun-07 - the highest in the industry

Current account component of ~26% in the same period.

Strong fee income source 5 year CAGR of 48% in fee-income growth

Distribution of third party insurance and MFs contributed to 18% of retail commissions.

Slippages higher on account higher proportion of unsecured loans Unsecured loans comprised ~24% of the retail loan book in FY07

Slippages were almost 1.8% of total opening gross advances in the same period.

Cost to asset ratio of 2.9% among the highest Cost to asset ratio of 2.9% in FY07 against ~2% for ICICI and Axis Bank

Net profit expected to grow by ~30% for next two years ROA of ~1.5% for next two years, among the highest in the industry

ROE likely to average around 16% for next two years

The stock quotes at 26x FY09E earnings and 3.8x FY09E BV One year price target raised by 14% to Rs 1502 an upside of 7% from current levels


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HDFC Bank: Background

Second largest private bank with USD 26bn ofassets 750 outlets in 320 cities

>1600 ATMs

>15000 employees

Raised ~ USD 1bn in July-07 through equitydilution

High focus on retail, especially in auto and personal

loans

Higher focus on SME against top rated corporateloans earlier

Telephone

banking10%

Branches

22%

Internet &

mobile

19%ATMs

49%

HDFC: Delivery channels for retail clients HDFC Bank

(No) FY05 FY06 FY07

Cities 211 228 316

Branches 467 535 684

ATMs 1147 1323 1605

Source: Company

SME

27%Agr.

5%

Corporate

11%

Others

including

Mortgage

backed

securities

6%

Other retail

loans

2%

Loan against

securities

2%

Credit Cards

3%

TWL

4%Personal Loans

9%

Auto Loans

14%

Retail Business

Banking

9%

CVs & CE

8%

HDFC Bank: Break-up of Credit Portfolio (FY07)


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Retail loans as % of total loans

0%

20%

40%

60%

80%

100%

FY04 FY05 FY06 FY07

Auto CVs & CEPersonal Against securitiesTW Business BankingCredit cards Others

Break-up of retail loans

HDFC Bank: Performance Highlights

High retail component, both in assets and liabilities CASA at 51% (Q1FY08), the highest.

Wholesale deposits comprised 36% of deposits in FY07

Retail component continues to remain high

Personal loans account for 24% of retail loans The second largest component in retail after Auto Loans

One of the highest NIMs due to lowt funding cost Yields have been supported by the high proportion of retail and

unsecured loans.

CASA at above 50% in Q1FY07, almost evenly divided

NIM expected to be stable at 4%

Slippages higher due to higher % of unsecured loans Slippages at 1.8% in FY07 on account of

Substantial increase in interest rates

Higher proportion of unsecured loans which increased from 18% of retail loans

in FY04 to an average of 26% in last two years

Healthy fee income growth 7.1 mn debit and credit cards issued in FY07

Increased cross selling through branches, while targeting various

customer segments

Improving transaction cost

~50% of retail transactions through ATMs

2612 19 19 9

27

3430

21

13

0

20

40

60

HDFC

Bank

PNB

SBI

Axis

Bank

ICICI

Bank

(%)

0

2

4

6

8(%)

Current a/c (LHS) Savings a/c (LHS)Cost of Deposits

18 2127

4146 55 57 57

0102030405060

FY01

FY02

FY03

FY04

FY05

FY06

FY07

Q1

FY08

(%)

Comparative CASA (FY07)

Source: Company


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HDFC Bank: Financials

Income statement Balance sheet


(Rs. mn) FY06 FY07 FY08E FY09E

Interest Earned 44,753 68,890 89,160 114,844

Interest Expended 19,295 31,795 39,988 50,313


Non-Interest Income 11,240 15,162 17,741 23,352

- Sale of Investments (521) (684) (160) (500)

- Fee & other income 11,761 15,727 20,501 26,652

-Bond Amortisation - - (2,600) (2,800)

Net Income 36,698 52,258 66,913 87,882


- Staff Costs 4,868 7,769 11,264 15,207


Provisions 7,252 11,663 10,747 12,292

PBT 12,535 16,388 22,708 29,534

Tax 3,134 3,827 4,973 7,721

PAT 8,708 11,415 14,987 19,493


Liabilities

Capital 3,131 3,194 3,573 3,573

Reserves and Surplus 49,864 61,138 114,818 130,412

ESOP 0.7 - - -

Networth 52,996 64,332 118,390 133,985

Deposits 557,968 682,979 860,554 1,084,298

Borrowings 28,585 28,154 29,562 35,474

Sub-ordinated Debt 17,020 32,826 32,826 34,467

Other Liabilities & Prov. 78,495 104,065 124,878 156,098

Total Liabilities 735,064 912,356 1,166,210 1,444,322

Assets


Investments 283,940 305,648 382,060 469,934

Advances 350,613 469,448 614,977 799,470

Fixed Assets 8,551 9,667 10,667 11,667

Other Assets 22,771 36,055 48,661 51,839

Total Assets 735,064 912,356 1,166,210 1,444,322


22/64

22

HDFC Bank: Financials



Growth (%)





Growth in investment 47 8 25 23

Valuations

EPS (Rs.) 28 36 42 55

ROA 1.4 1.4 1.4 1.5

ROE 18 19 16 15

BV (Rs.) 169 201 331 375

Adj. BV (Rs.) 164 196 324 366


Avg.Yield on Investment 6.8 7.8 7.7 7.7



NIM 4.0 4.3 4.5 4.4


Asset Quality (%)

Gross NPAs 1.2 1.1 1.3 1.3

Net NPAs 0.4 0.4 0.4 0.4

Provisioning Coverage 69.5 71.4 77.4 79.0

Capital (%)

Tier-I CAR 8.6 8.6 12.7 11.5

Tier-II CAR 2.9 4.5 4.0 3.5

CAR 11.4 13.1 16.7 15.0

Others

Op.Cost as % of Net Inc. 46 46 50 52

Credit deposit ratio 63 69 71 74

Fee-income to total assets 1.9 1.9 1.7 1.8

Fee-income to net income 32 30 31 30

% of current deposits 26 29 28 25

% of savings deposits 29 29 29 26

% of Low cost deposits 55 58 57 51

% of retail assets 61 59 57 55

Dividend Per Share (Rs.) 5.5 7.0 8.0 10.0



23/64

23

Racing Ahead



Axis BankRs 728

Target Price: Rs 937


Financial summaryPAT EPS Change P/E BV P/BV NPAs P/Adj. BV RoE RoA

(Rs. m) (Rs.) YoY (%) (x) (Rs.) (x) (%) (x) (%) (%)

2006 4,851 17.6 25 41.4 103 7.1 0.8 7.5 18.4 1.1

2007 6,590 23.4 33 31.1 120 6.0 0.7 6.4 21.0 1.1

2008E 9,203 25.9 10 28.1 240 3.0 0.6 3.1 15.4 1.0

2009E 12,830 36.0 39 20.2 268 2.7 0.6 2.8 14.2 1.1

Y/E Mar




Indian Promoters : 42.9 (0.2)

MFs & UTI : 8.5 1.7Banks & FIs : 0.1 (0.0)FIIs : 36.2 (5.5)Indian Public : 8.7 3.1Others : 3.6 0.9

Stock Data

No. of shares :356mnMarket cap :Rs 259bn52 week high/low :Rs 775/ Rs 382

Avg. daily vol. (6mth) :686,600 sharesBloomberg code : AXSB INReuters code :AXSB.BO

India Research

50

100150

200

250


BANKEX Axis Bk.


October 10, 2007


24/64

24

Axis Bank: Investment Summary

Among the fastest growing Private Banks 5 year Balance sheet CAGR of 40%, likely to grow by 35-40% for next two years

5 year CAGR in net profit at 38%, in line with asset growth, expected to grow at a CAGR of 40% for next two years

5 year CAGR in credit at 48%, expected to grow at a CAGR of 47% for next two years

Among the most improved banks in the private space

NIM expanded from 1.68% in FY02 to 2.9% in FY07

Net NPAs fell to 0.67% in FY07 from 2.7% in FY02

CASA improved from 15% in FY02 to 41% in FY07

Average ROE of 22% in past five years

Asset growth still expected to grow at 35-40% for next two years

Credit growth driven by corporates, SMEs, rural, retail and overseas assets

NIM likely to remain stable with CASA component of ~40%

Asset quality unlikely to see any noticeable deterioration

Average ROE likely to drop to 15% for next two years, however projected to deliver ~17% in FY10

High earnings growth to keep the valuations attractive, despite lower ROE The stock quotes at 20.2x FY09E earnings and 2.7x FY09E BV

Equity dilution of USD 1.05bn to lead to lower ROE in FY08 & FY09, though it will pick up in FY10

Raising our price target by 16% on account of expected sustained momentum in credit growth and net profit

Sector Outperformer rating with a price target of Rs 937


25/64

25

Axis Bank: Background

Third largest private bank in the country Total asset size of ~USD 20bn

Established in 1994 with a capital of USD 28mn Promoters : SUUTI, LIC & GIC and other insurance companies

Currently, the third largest ATM network of 2,341 next only

to SBI & ICICI 522 branches with PAN India presence

9980 employees in FY07

Recently raised USD 1bn through equity dilution Raised capital simultaneously through GDR, QIP and

preferential allotments

Mr P J Nayak likely to continue for next two years

as Chairman & CEO The bank will have to find a suitable suitor for him and split the

post between Non Executive Chairman & CMD in future

Some of the large investors (besides promoters)

include (pre-dilution) HSBC (4.9%)

Barclays (4.9%)

Citigroup (4.4%)

UBS (4%)

Axis Bank: Break-up of Loan Portfolio(Q1FY08)

Large

coporates

47%

Retail

23%

Mid

Corporate

13%

Agriculture

10%

SME

7%

West Bengal

31%

Uttaranchal

4% UP

12%

Tripura

1%

TN

20%

Sikkim1%

Pondicherry

1%Orrisa

5%

Punjab

17%Rajasthan

8%

State Wise Distribution of Branches

Source: RBI, ENAM Research


26/64

26

Axis Bank: Performance Highlights

Expect 47% CAGR in credit over the period 2007-09 Retail and corporate advances increased by 38% and 76% in

FY07

Expect retail lending to moderate to 30-32% with some slowdown

in the home loan and Auto Loan segments

Fee based income to provide greater upside to incomegrowth Projected 2 year CAGR of ~40% in fee based income

Driven by capital market services and retail banking segments.

Growth in international operations likely to increase commission

based income

NIM expected to improve marginally in FY08 Expanding retail network and high CASA to help sustain NIM

Margins likely sustain as the bank expands its branch network by a

further 150 branches in FY08

USD 1.05bn issue will also help in higher reported NIM

Healthy asset quality Despite strong asset growth, Axis Banks asset quality remained

healthy.

During Q1FY08 , gross and net NPAs were comfortable at 1.01%

and 0.59%

As on Mar 2007, provisioning coverage (including write-offs) stoodat 76%

0%

20%

40%

60%

80%

100%

2004 2005 2006 2007 2008E

Auto. loans Home LoansPersonal Loans OthersEdu. Loans Cons. durable loans

Break-up of Retail Loans

Fee Income growth for Axis

0

4,000

8,000

12,000

16,000

FY04 FY05 FY06 FY07 FY08E

(mn)

Corporate Banking Business Banking

Capital Markets Retail Banking


CAGR of 58%


27/64

27

Axis Bank: Financials


Interest Earned 28,888 45,604 68,780 95756

Interest Expended 18,106 29,933 46,132 64079

Net Interest Income 10,782 15,671 22,648 31677

Non-Interest Income 7,296 10,101 11,815 15985

- Sale of Investments 1,298 1,857 1,100 900

- Fee inc (ex. Treasury) 5,998 8,433 11,815 16235

- Bond Amortisation - - (1,100) (1,150)

Net Income 18,079 25,772 34,463 47662

Operating Expenses 8,141 12,146 17,126 24490

- Staff Costs 2,402 3,814 5,415 7744

Operating Profit 9,938 13,626 17,337 23173

Prov & Contingencies 2,625 3,664 3,393 4024

PBT 7,313 9,962 13,944 19149

Tax 2,462 3,372 4,741 6319

PAT 4,851 6,590 9,203 12,830




Liabilities

Capital 2,787 2,816 3,559 3,559


Networth 28,856 34,022 85,453 95,461

Deposits 401,135 587,856 822,998 1,111,048

Borrowings 26,809 51,956 59,749 83,649


Subordinated Debt 17,886 35,014 35,014 38,515

Total Liabilities 497,311 732,572 1,029,312 1,362,598

AssetsCash with RBI and at Call 36,418 69,183 83,020 87,171

Investments 215,274 268,972 352,353 440,441

Advances 223,142 368,765 560,522 795,942

Fixed Assets 5,677 6,732 7,136 7,992

Other Assets 16,800 18,921 26,281 31,053

Total Assets 497,311 732,572 1,029,312 1,362,598


28/64

28

Axis Bank: Financials


Asset Quality (%)

Gross NPAs 1.3 1.0 0.8 0.8

Net NPAs 1.5 0.6 0.6 0.5

Prov.Coverage (ex. w/o) 42 36 44 46

Capital (%)

Tier-I CAR 7.3 6.4 10.8 8.9

Tier-II CAR 3.8 5.2 5.0 4.8

CAR 11.1 11.6 15.8 13.7

Others


Fee income to net income 33 33 34 34

Credit Deposit Ratio 56 63 68 72




% of retail assets 29 24 22 20

Dividend Per Share (Rs.) 3.5 4.5 5.0 7.0



Growth (%)






Valuations

EPS (Rs.) 18 23 26 36

ROA 1.1 1.1 1.0 1.1

ROE 18 21 15 14

BV (Rs.) 103 120 240 268

Adj. BV (Rs.) 97 113 233 259




Avg.Cost of Funds 4.9 5.9 6.2 6.4

NIM 2.9 2.9 3.0 3.0



29/64

29

High growth story, but fairly valued

Centurion Bank of PunjabRs 45

Target Price: Rs.46



Financial summary

Relative to Sector: Underperformer




Promoters : 0.0 0.0

FIIs : 19.7 1.5MFs / UTI : 3.1 (0.1)Banks / FIs : 0.1 0.0Others : 77.2 (1.4)

Stock Data

No. of shares : 1,820 mnMarket cap : Rs 81.9bn52 week high/low : Rs 47/ Rs 24

Avg. daily vol. (6mth) : 2.5 mn sharesBloomberg code : CBOP INReuters code : CENB.BO

India Research

60100140

180220260


BANKEX CBoP

PAT EPS Change P/E BV P/BV NPAs P/Adj. BV RoE RoA

(Rs.m) (Rs.) YoY (%) (x) (Rs.) (x) (%) (x) (%) (%)

2006 879 0.6 152 72.0 7 6.9 1.1 7.5 11.7 1.1

2007 1,217 0.8 24 57.9 9 5.1 1.3 5.7 10.6 0.8

2008E 1,627 0.8 9 52.9 12 3.8 1.5 4.3 8.9 0.7

2009E 2,352 1.2 45 36.6 13 3.5 1.0 3.9 9.9 0.7

Y/E Mar


October 10, 2007

CBOP I S


30/64

30

CBOP: Investment Summary New private sector bank with substantial focus on Retail and SME

Retail loans comprise 68% of credit book, one of the highest among private banks Increasing focus on SMEs, comprising 14% of the credit book

Adequately capitalized to leverage future growth Rs. 5 bn QIP placement at Rs.40.75 in Sept-07 Post QIP, CAR to reach 14%. Warrants conversion and higher Bank of Muscat stake can lead to further dilution

One of the largest branch networks among private banks in North India 56 branches in Delhi (NCR), 77 branches in Punjab and 23 branches in Haryana (23)

Merger has added 121 branches and ECs along with access to LKBs clients in Kerela Post merger the bank will have over 37% of its branches in Kerela The bank plans to add another 200 branches by June-08 Proportion of Retail deposits will increase but CASA may moderate to ~ 26% in FY08 from 28% in Jun-07

Margin contraction due to higher cost of funds and pressure on yields NIM contracted to 3.6% in Q1FY07 from a high of 4.6% in FY07 Cost to income ratio has also come down to 68% from 76% in Q1FY07

Though C/I likely to remain high due to focus on retail especially in TW & CV/CE

ROA & ROE projected to remain low for next two years ROA projected to remain ~0.7% and ROE


31/64

31

CBOP: Background

Large branch network in Northern India and Kerala Post mergers with BOP & LKB, the bank enjoys dominant presence in

Punjab, Delhi, Haryana & Kerala

393 Branches and ECs along with 450 ATMs (post-merger).

Over 6400 employees as of March 2007

Established in July-94 as Centurion Bank Restructuring and equity infusion in 2004 by some of the existing

investors and Sabre capital

North based Bank of Punjab merged with the bank in Oct,2005

Merger with Lord Krishna Bank CBOP took over unlisted Lord Krishna Bank in Sep 2007 at a swap

ratio of 5:7

The merger added 121 branches and ECs

Post merger balance sheet size of ~Rs 206bn

Highly qualified team of top management Mr Rana Talwar took over as Chairman post restructuring in 2004

He is also the Chairman of Sabre Capital with over 32 years of

experience with Citibank and Standard Chartered Bank

Bank Muscat, ICICI Venture ,Citigroup etc. other key investors

0

30,000

60,000

90,000

120,000

150,000

180,000

2003 2004 2005 2006 2007

(Rs mn)

Deposits Advances


Balance sheet growth

Haryana7%

Tamil-

Nadu

7%

Others

14%

Punjab22%

Kerela

24%

Delhi

16%

Maharash

tra

10%

Branch distribution Sept-07(post LKB merger)

4 yr CAGR of92% in credit

CBOP P f Hi hli ht


32/64

32

CBOP: Performance Highlights

Retail and SME likely to remain key areas of focus Post restructuring CBOP has focused on retail and SME as core

segments

Amongst top 3-4 players in Two-Wheeler segment

Retail expected to grow at a CAGR of 40% and contribute to ~62 %

of total advances over the period 2007-09

NIMs to remain below 4% due to lower pricing power Cost of funds also rising on account of lower CASA base post BoP

merger

Yield on loans to remain stable with higher focus on SMEs

Asset quality may deteriorate a bit, post LKB merger Net NPAs at 1.26% in Q1FY08 as compared to 4.30% in FY04

Post-Merger likely to see a deterioration in asset quality by up to 30

bps

Strong fee income source: Fee income proportion has risen from ~ 12% in FY04 to 26% in

FY07

Exposure to LKBs NRI clients to provide impetus to fee-income

growth

Increased focus on HNI clients and wealth management products

Centurion Elite

Car

3%Others

3%Agricultural

6%

Loan against

sec.

6%

Personal

20%

Mortgages

28%

CV/CE

17%

Personal

17%

SME

14%Coporates

9%

Retail68%

Large

Corporates

9%

Mortgages are the biggestcontributor in FY07

Advances Break-up (FY07)

Break-up of Retail advances (FY07)

Source: ENAM ResearchMarch,05 numbers are for Centurion Bank alone.

0

5

10

1520

FY03 FY04 FY05 FY06 FY07

(%)

Gross NPAs (%) Net NPAs (%)

Improvement in asset quality

C t i B k f P j b Fi i l


33/64

33

Centurion Bank of Punjab: Financials

Income Statement Balance Sheet



Interest Earned 8,032 12,685 23,317 34,390



Non-Interest Income 2,142 4,054 5,558 7,016- Sale of Investments 33 72 70 40

- Other inc.(ex. Treasury) 2,109 3,983 5,488 6,976

Net Income 6,130 9,750 14,484 21,125


- Staff Costs 1,424 2,213 3,541 5,666


Prov & Contingencies 855 855 1,988 3,039

PBT 871 1,837 2,575 3,692

Tax -8 621 948 1,339

PAT 879 1,217 1,627 2,352


Liabilities

Capital 1,408 1,567 1,915 1,915


Networth 9,178 13,716 22,815 24,932Employee Stocks 134 245 245 245

Deposits 93,996 148,637 230,092 333,634

Borrowings 516 9,309 13,963 20,945


Total Liabilities 2,150 2,150 2,150 2,150


Assets


Investments 29,228 46,150 79,609 121,453

Advances 65,334 112,214 180,076 262,911

Fixed Assets 3,113 3,373 3,710 4,081

Other Assets 5,166 8,198 3,157 6,854

Total Assets 113,302 184,828 282,191 403,421

C t i B k f P j b Fi i l


34/64

34

Centurion Bank of Punjab: Financials



Growth (%)






Valuations

EPS (Rs.) 0.6 0.8 0.8 1.2

ROA 1.1 0.8 0.7 0.7

ROE 11.7 10.6 8.9 9.9

BV (Rs.) 6.5 8.8 11.9 13.0

Adj. BV (Rs.) 6.0 7.8 10.5 11.6

Yields & Margins




NIM 4.6 4.6 4.0 4.2


Asset Quality

Gross NPAs (%) 4.6 2.8 3.1 2.9

Net NPAs (%) 1.1 1.3 1.5 1.0

Prov.Coverage (%) 76.5 55.5 49.6 64.1

Capital

Tier-I CAR 10.8 9.9 12.6 9.8

Tier-II CAR 1.7 1.1 2.0 2.0

CAR 12.5 11.1 14.6 11.8

Others


Op.Cost as % of Net Inc.

(excl treasury profits)




Dividend Per Share (Rs.)

2 22 2



35/64

35

A Premium Play

Yes Bank Rs193


Financial summary

PAT EPS Change P/E BV P/BV NPAs ROE ROA

(Rs mn) (Rs) YoY (%) (x) (Rs) (x) (%) (%) (%)

2006 553 2.0 - 94.3 21 9.1 0.0 14.0 2.0

2007 944 3.4 64 57.3 28 6.9 0.0 13.9 1.2

2008E 1,818 6.1 80 31.9 48 4.0 0.1 16.3 1.3

2009E 3,008 9.6 58 20.2 68 2.8 0.1 16.8 1.3

Y/E Mar


India Research



Promoters : 35.9 0.0FIIs : 30.6 5.7MFs / UTI : 1.0 (0.1)Banks / FIs : 0.1 0.0Others : 32.4 (5.6)

Stock Data

No. of shares :280mnMarket cap :Rs.54.1bn52 week high/low :Rs.215 / Rs.99

Avg. daily vol. (3mth) : 1.2mn sharesBloomberg code : YES INReuters code :YESB.BO

60

100140

180220

260


BANKEX Yes Bank


October 10, 2007

Yes Bank Investment Summary


36/64

36

Yes Bank: Investment Summary

New age private sector bank with excellent track record of promoters

Unhindered growth momentum

Bank size grown at 195% CAGR between FY05 & FY07 to Rs 111bn

Branch network expanded from 8 in FY06 to 54 in Jun-07

Balance sheet mix to improve Strategically CASA is clear focus area

CASA targeted to reach 25% by FY10. We however estimate CASA at 20% by FY10

Incremental asset growth from higher yielding assets SME and retail loans expected to constitute 35% of loan book by FY10 vs 6% in FY07

Better asset-liability profile expected to aid NIM expansion

NIM expected to be 3.10% by FY10 from 2.79% in FY07 Fee income at 2% of assets (FY10) to aid ROA

Equity dilution imminent

Tier-I at 7.6% in June-07 but projected CAGR of 58% in assets between FY07 & FY10 will require capital infusion.

Bank employing a strategy of smaller dilutions at a premium to current market price

Key concerns & challenges

Asset quality deterioration post retail-rollout, lower than expected CASA base and capital market based fee income

volatility are the key concerns to our estimates

Yes Bank: Background


37/64

37

Retail2%

EC

21%

C&IB

73%

SME4%

0

100

200

300

400

500

FY05

FY06

FY07

FY08E

FY09E

FY10E

(Rs bn)

2yr CAGRof 195%

Growth in assets

Yes Bank: Background

The only bank to receive a green-field license from theRBI since 1995

Commenced operations in Aug 2004 after receiving license in May

2004

IPO in 2005 at Rs 45 per share

Network of 54 branches as of June 2007, a majority concentrated in

Northern and the Western India

Employee strength of 2,792 as of Jun 2007

Excellent promoter track record & strong investor base

Mr. Rana Kapoor (CEO & MD) and Mr. Ashok Kapur - well known

professional bankers Institutions like Rabobank (current holding 19.29%), Chrys Capital

(current holding 2.28%) are the initial investors

Growth momentum largely driven by wholesale banking.

Corporate advances grew at a CAGR of over 200% since inception.

Continues to have NIL NPAs till Jun 2007 Balance sheet size has grown at CAGR of 195% in the past 2 years

High treasury and advisory business income

Non-Int Income/Total Income at 59.2% as of Jun 2007


Break-up of loan book (FY07)

Break-up of branches as of Jun 2007

South

7%

North

50%

East

2% West

41%

Yes Bank: Performance Highlights


38/64

38

Yes Bank: Performance Highlights Current deposit franchise mainly funded by wholesale

CASA at 6.6% as of Jun 2007

As the bank improves its retail presence, CASA expected improve to

~20% by 2010

Retail and SME segment to drive incremental growth Expect 25% of loan book to comprise Retail & SME by FY10

Bank targets to open 250 branches by 2010 with an initial focus on

affluent retail customers

NIM to stabilize going forward We expect NIM to steadily improve to ~3.1% by FY10 on the back of

a better asset liability mix

In the short term, NIM expected to remain under pressure due to

dependence on bulk deposits

Commendable Fee-income/assets ratio of 2.4% (FY07) Non-Interest Income/ total income ratio at 53.2%

Fee-income likely to grow at a CAGR of 58% between FY07 and FY10

Untapped potential of financial services Business Targeting to raise USD 1.5bn for PE investments by 2010

Investment in real estate, infrastructure, food and agri-business,

distressed assets etc. through PE fund

FY07 Break-up of deposits

Other

Retail

5%

Other

Whole-

sale

69%

CDs

20%

CASA

6%

Margin Movement


0

3

6

9

12

FY06 FY07 FY08E FY09E FY10E

(Rs.bn)

2.4

2.6

2.8

3.0

3.2(%)

NII (LHS) NIM (RHS)

Yes Bank: Financials


39/64

39





Interest Earned 1,902 5,876 12,375 21,141


Net Interest Income 855 1,713 3,085 5,383

Non-Interest Income 997 1,946 3,697 6,285- Financial Markets 549 809 1,391 1,867

- Financial Advisory 309 642 739 943

- Third Party Distribution 40 195 813 1,885

-Transaction Banking 60 214 739 1,571

Net Income 1,852 3,659 6,782 11,667

Operating Expenses 861 1,935 3,483 5,958

- Staff Costs 501 1,175 2,114 3,700Operating Profit 991 1,724 3,299 5,709

Prov & Contingencies 146 288 545 1,151

PBT 844 1,437 2,754 4,558

Tax 291 493 937 1,550

PAT 553 944 1,818 3,008


Liabilities

Capital 2,700 2,800 3,000 3,150


Networth 5,727 7,870 14,415 21,472Deposits 29,104 82,204 135,637 223,800

Borrowings 4,648 8,673 13,877 22,203

Other Liabilities & Provisio 1,147 7,501 8,251 11,552

Subordinated Debt 1,000 4,786 4,800 4,800



Investments 13,501 30,731 52,243 83,588

Advances 24,071 62,897 106,925 176,427

Fixed Assets 347 709 825 1,000

Other Assets 1,550 3,768 5,275 7,385

Total Assets 41,626 111,034 176,980 283,827



40/64

40




Growth (%)


Growth in Net profit 1,573 71 93 65

Growth in deposits 339 182 65 65Growth in advances 216 161 70 65


Valuations

EPS (Rs.) 2 3 6 10

ROA (%) 2.0 1.2 1.3 1.3

ROE (%) 14 14 16 17BV (Rs.) 21 28 48 68

Adj. BV (Rs.) 21 28 48 68




NIM 3.0 2.8 2.7 2.9


Asset Quality (%)

Gross NPAs 0.0 0.0 0.2 0.3

Net NPAs 0.0 0.0 0.1 0.1

Prov.Coverage 0.0 0.0 51.4 70.6

Capital (%)

Tier-I CAR 13.8 8.2 9.5 8.8

Tier-II CAR 2.6 5.4 4.7 4.0

CAR 16.4 13.6 14.2 12.8

OthersOp.Cost as % of Net Inc. 47 53 51 51

Fee income to net income 52 51 54 54

Credit deposit ratio 83 77 79 79

% of current deposits 10.3 5.1 7.0 10

% of savings deposits 0.4 0.7 2.0 4


% of retail assets 0 2 4 8Dividend Per Share (Rs.) 0.0 0.0 0.5 1.0


India Research


41/64

41

Consistency pays


Federal BankRs 367

Target Price: Rs.428Potential Upside: 17%


Financial summary

PAT EPS Change P/E BV P/BV NPAs P/Adj. BV ROE ROA

(Rs. m) (Rs.) YoY (%) (x) (Rs.) (x) (%) (%) (%)

FY06 2,252 26 150.0 13.9 145 2.5 1.0 2.7 23.0 1.2

FY07 2,927 34 30.0 10.7 175 2.1 0.4 2.2 21.3 1.3

FY08E 3,702 43 26.5 8.5 212 1.7 0.4 1.8 22.3 1.3

FY09E 4,476 52 20.9 7.0 257 1.4 0.4 1.5 22.3 1.4

Y/E Mar


India Research



FIIs : 35.5 1.9MFs / UTI : 14.0 3.4Banks / FIs : 4.2 0.0Others : 46.3 (5.3)

Stock Data

No. of shares :85.5mnMarket cap :Rs.31.3bn52 week high/low :Rs.396 / Rs.188

Avg. daily vol. (3mth) :262,273 sharesBloomberg code : FB INReuters code : FED.BO

60

110

160

210


BANKEX Federal


October 10, 2007

Federal Bank: Investment Summary


42/64

42

Federal Bank: Investment Summary An old private sector bank with consistence track record in growth and profitability

Strong regional player with ~72% of the branches in the southern state of Kerala (FY06)

Assets grew at CAGR of 20% between FY02 and FY07 indicating steady growth

Growth driven by Retail and SME, which currently constitutes 70% of the loan book on a combined basis

NIM maintained despite low CASA

Higher asset yield due to strong foothold in its region has helped sustain higher NIMs

Amongst the few banks to experience NIM expansion despite a relatively low CASA base of 25%

Consistently delivering on its ROA and ROE over the past few years

ROE has been in the region of 20% - 23% during FY02 - FY07 Only exception in FY05 when it was 13% due one time wage expenses and higher depreciation in bond portfolio

Beginning to pursue alternate growth strategies

In 2006, acquired Ganesh Bank of Kurunwad, a regional player with a concentrated presence in Maharashtra

Entered into a life insurance joint venture with IDBI and Fortis. IRDA approval expected shortly

Management open to acquiring other private sector banks that provide a reasonable fit

Maintain sector Outperformer

The stock quotes at 7.0x FY09E earnings and 1.4x FY09E BV

Federal Bank: Background


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Federal Bank: Background An old generation private sector bank

Incorporated as Travancore Federal Bank Ltd, Nedumpram in1931

No promoters but strong backing of Institutionalinvestors ICICI Bank held ~20.4% shares in Sep 2004

Reduction in holdings post notification of RBI guidelines restrictingcross-bank ownership to 5% in 2004-05.

HDFC MF held 5.5% in Mar 2004. Stake reduced to ~1.7% ason Jun 2007

In Mar 2007, IFC was looking to acquire close to 7.76% in FedBank However the RBI restricted the investment to 5%

Strategy of consistent asset growth Asset growth clocked ~20% CAGR over FY02-FY07 Retail and SME segments to drive Incremental growth going

forward

Consistently delivered a reasonable ROA and ROE Barring FY05 when there was a GDR issue, one time wage

expenses and depreciation in investment portfolio which led toa fall in returns for the bank;

ROA and ROE has been in the range of 1-1.3% and 20-23%respectively

Geographical distribution of branches

Tamil

Nadu

7%

West

Bengal

3%

Others

15%

Maharas

htra

4%

Kerala71%

0

5

10

15

20

25

FY02

FY03

FY04

FY05

FY06

FY07

(%)

0.0

0.3

0.6

0.9

1.2

1.5(%)

RoE (LHS) RoA (RHS)

RoA & RoE

Corporate

30%

SME

40%

Retail

30%

Breakup of advances (FY07)

Source: Company

Federal Bank: Performance Highlights


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Federal Bank: Performance Highlights NIM expansion despite a low CASA base

Q1FY08 NIM at 3.21% vs. 3.17% in Q1FY07 and 3.06% in FY07

Relatively stable CASA over the past few years at 25%

Asset quality consistently improving Despite higher exposure to the Retail and SME segments

NPAs at its lowest in Q1FY08, Net NPA ratio at 0.37%

Target is to recover NPAs of ~Rs 1.5bn in FY08, of which ~Rs 470mn arealready recovered in Q1FY08

Assets likely to grow at a CAGR of 19% in FY07-09

Advances likely to grow at a CAGR of ~21.5% between FY07 and FY09

Bank is expected to maintain the current mix of loans and advances

Life insurance foray - tie-up with IDBI and Fortis

Expected to pump in ~Rs 2bn over the next 5 years for 26% stake in the

venture

Decided to undertake a rights issue in the ratio of 1:1

The leverage in FY07 was comfortable at 16.7x with Q1FY08 Tier-I at

9.22%

However, the size and time frame for the issue is yet to be decided

CASA & NIM

0%

10%

20%

30%

40%

FedBk

SIB

C

anBk

C

orpBk

Syn

dicate

Bk

VijayaBk

(100)

0

100

200

300(bps)

CASA YoY Chng NIM (RHS)

Assets Quality

0

2

4

6

8

FY04 FY05 FY06 FY07 Q1FY08

(%)

0.0

1.0

2.0

3.0

4.0(%)

Net NPAs (RHS) Gross NPAs

CASA & COD

18

20

2224

26

28

FY02

FY03

FY04

FY05

FY06

FY07

Q1FY08

(%)

0

3

6

9

12(%)

CASA COD (RHS)

Source: Company

Federal Bank: Financials


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45





Interest Earned 14,365 18,174 25,094 29,604



Non-Interest Income 2,169 2,867 3,068 3,657- Sale of Investments 331 493 200 200

-Bond Amortisation (162) (159) (170) (185)

Net Income 8,167 10,191 11,955 14,141


- Employees expenses 2,284 2,605 2,995 3,444

- Other Op.expenses 1,362 1,456 1,602 1,842

Operating Profit 4,522 6,130 7,357 8,854Provisions 1,714 2,148 2,216 2,460

PBT 2,808 3,982 5,141 6,394

Tax 556 1,055 1,440 1,918

PAT 2,252 2,927 3,702 4,476


Liabilities

Capital 856 856 856 856


Networth 12,429 15,022 18,169 21,973Deposits 178,787 215,844 259,013 308,226

Borrowings 6,105 7,702 8,472 9,320


Subordinate Bonds 2,700 4,700 4,700 4,700



Investments 62,724 70,327 77,359 85,095

Advances 117,365 148,991 183,259 219,911

Fixed Assets 1,668 1,861 2,047 2,432

Other Assets 5,877 6,589 9,100 18,621

Total Assets 206,358 250,899 298,366 356,650



46/64

46




Growth (%)



Growth in deposits 18 21 20 19Growth in advances 33 27 23 20


Valuations

EPS (Rs.) 26 34 43 52

ROA 1.2 1.3 1.3 1.4

ROE 23 21 22 22BV (Rs.) 145 175 212 257

Adj. BV (Rs.) 135 170 206 249




NIM 3.1 3.3 3.2 3.2


Asset Quality (%)

Gross NPAs 4.6 3.0 2.7 2.5

Net NPAs 1.0 0.4 0.4 0.4

Prov. Coverage 80.2 85.6 85.3 84.1

Capital (%)

Tier-I CAR 9.7 8.9 8.7 8.4

Tier-II CAR 4.0 4.5 3.0 2.5

CAR 13.8 13.4 11.7 10.9

OthersOp.Cost as % of Net Inc. 45 40 38 37

Op.Cost as % of Net Inc.

(excl treasury profits)




Dividend Per Share (Rs.) 3.5 4.0 5.5 5.5Leverage (x) 19 17 17 16

383947 42



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47

Annexure

Origin of Private Banks


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48

O g Post nationalization of banks in 1969 and

1980, RBI permitted the entry of new

generation private banks in July 1993

Prior to this, there were 21 old private banks,

which were already operating in 1993

Most of these old private banks have a long history of60-70 years

Many of them have been doing quite well and hence

have not yet been merged

In 1993 RBI gave licenses to 9 new private

sector banks in the country. Of these, Times Bank merged with HDFC Bank in Feb 2000

Global Trust Bank merged with OBC

Bank of Punjab merged with Centurion Bank

Two new banking licenses were given post

1993 Yes Bank in 2004

Kotak was allowed to convert to a bank in 2003-04

Currently there are 8 new generation private

banks and 18 old generation private banks LKB recently merged with Centurion Bank Source : RBI, ENAM Research, Company

Catholic Syrian Bank(Chawlas 36%, Syrian Community, Kerala)

Bank of Rajasthan (Tayal group, 44%)

The South Indian Bank(Nil, Kerala)

Tamilnad Mercantile Bank(Nadar,80%, Tamilnadu)

Dhanalakshmi Bank(Raja Mohan Rao, 9.68, kerala)

The Ratnakar Bank(Promoters of Centrum Fin,5%, Maharashtra)

The Lakshmi Vilas Bank

(Nil, Tamilnadu)

The Karur Vysya Bank(Nil, Tamilnadu)

The Jammu & KashmirBank(J&K Govt, 53%,J&K)

Federal Bank(Nil, Kerala)

SBI Commercial & International (100,SBI)

Nainital Bank, (Bank of Baroda, 98

Uttarkhand)

Karnataka Bank (Nil)

Ing Vysya Bank (ING, 44.2, Karnataka )

City Union Bank (Nil, Tamilnadu)

Old Generation Private Sector Banks

1.22Centurion Bank of Punjab

26.5Development Credit Bank22HDFC Bank Ltd

0ICICI Bank

28IndusInd Bank

36

34

55

Promoters holding/Controlling Stake (%)

YES Bank

Axis Bank

Kotak Mahindra Bank

New Generation Private Banks

Note: Information in brackets includes majority shareholder,% owned & majorpresence in the state


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49

Historical Performance: New Private Banks

New Private Banks: Credit Growth


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50

Credit Growth

0

20

40

60

80

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

ICICI HDFC Bk Axis

Credit Growth

(40)0

4080

120160

200240

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

CBoP KMB Yes Bank

Credit Growth

(40)

0

40

80

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

DCB IndusInd


New Private Banks: NIM movement


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51

NIM

01

2

3

4

5

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

ICICI HDFC Bk Axis

NIM

2

3

4

5

6

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

CBoP KMB Yes Bank

NIM

0.0

1.0

2.0

3.0

4.0

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

DCB IndusInd


New Private Banks: Net NPAs


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52

Net NPAs

0

12

3

4

5

6

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

ICICI HDFC Bk Axis

0

2

4

6

8

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

CBoP KMB

0.0

2.0

4.0

6.0

8.0

10.0

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

DCB IndusInd


Net NPAsNet NPAs


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53

Historical Performance: Old Private Banks

Performance of Old Private Banks: Credit Growth


54/64

54

Credit Growth

0

10

20

30

40

FY00

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

Fed Bk KTK Bank KVB

Credit Growth

0

10

20

30

40

FY00

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

J&K ING Vysya SIB


NIM

2.0

2.5

3.0

3.5

4.0

FY00

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

J&K BK SIB ING Vysya

NIM

1

2

3

4

5

FY00

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

Fed Bk KBV Karnataka Bk

Asset Quality

0

2

4

6

8

10

FY00

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

J&K Bank SIB ING Vysya

Asset Quality

0

2

4

6

8

10

12

FY00

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY08E

(%)

Fedbank KVB KTK BK


55/64

55

Current Performance

Credit Growth Moderating, but Still Healthy


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56

Credit growth seen moderating in most large

private banks Mortgages and auto loans are worst affected

Corporates, rural and overseas loans likely to continue

grow at higher rate

Banks like HDFC Bank & ICICI Bank have seen

moderation in credit growth

On a systemic basis Both credit and deposits grew 23.4% till mid Sep 2007

Increase in credit till Apri-Sep-07 at Rs 0.5 trillion

Increase in investments in the same period at Rs 1.17

trillion

NII growth was lower than credit growth as

NIMs came under pressure

YoY Credit growth YoY Deposit growth

Q1FY08 YoY Credit and Deposit Growth

(%)

13

13

26

23

25

20

35

26

33

121

45

55

168

6

23

23

26

29

32

33

35

50

56

60

60

118

-150 -100 -50 0 50 100 150 200

Indus Bk

Federal Bk

INGV Bk

KVB

SIB

J&K Bk

HDFC Bk

ICICI Bk

DCB

Kotak Bk

Axis Bk

CBoP

Yes Bk

Source: Company

NIMs Under Pressure


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57

NIM under pressure both on a sequential and

YoY basis, largely on account of Fall in LDR over the last quarter

Fall in Bond spreads resulting from increase in cost of

deposits and more or less flat yields on investments

Moderation in credit is helping banks to

reduce cost of deposits. Therefore incremental

cost of deposits will be lower

However, pressure on NIM may still sustain as

deposits come up for re-pricing in the next

few quarters

(bps)

20 20 1110

4 3

2 4 410

50

100

40

(120)

(100)

(80)

(60)

(40)(20)

0

20

40

60

CBOP

YesBk

IC

ICIBk

KMB

DenaBk

IndusBk

IN

GVBk

J&KBk

SIB

F

ed.

Bk

A

xisBk

HD

FCBk

KtkBk

YoY change in NIM in Q1FY08(bps)

101

49

36 30

2520

16 1610 7

15

(120)

(100)

(80)

(60)(40)

(20)

0

20

40

CBOP

YesBk

ICICIBk

H

DFCBk

I

ndusBk

AxisBk

INGVBk

SIB

KMB

J&KBk

Fed.

Bk

Sequential change in NIM in Q1FY08*

Source: Company, ENAM Research, * in comparison with FY07 credit spreads

QoQ Movement in CASA (Q1FY08)

(bps)

(720)

(640)

(560)

(480)

(400)

(320)

(240)

(160)

(80)

0

80

160

HDFCBk

AxisBk

INGVBk

J&KBk

DCB

KtkBk

KMB

Fed.

Bk

IndusBk

ICICIBk

YesBk

even as credit spreads have improved


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58

Despite hike in term deposit rates in

Q4FY07, credit spreads^ improved for

banks Largely on account of their ability to hike PLR

almost 3 times in FY07

Banks saw improvement in credit spread

both on YoY and QoQ basis

Banks are also slowly moving away from

housing loans to industrial loans where discount to PLR is reduced to some extent

Pressure on credit spreads expected to

be lower with banks cutting down on

deposit rates(bps)

20 19

4

8

22 24

(40)

(20)

0

20

40

IC

ICIBk

Y

esBk

Fed.

Bk

IN

GV

Bk

J

&K

Bk

SIB

QoQ change in credit spreads in Q1FY08*

(bps)

29

6068

128

24209

000

20

40

60

80

100

120

140

ICICIBk

YesBk

J&KBk

Federal

Bk

INGVBk

SIB

OBC

BoI

DCB

YoY change in credit spread in Q1FY08

Source: Company, ENAM Research, * In comparison with FY07 credit spreads

^ Credit Spread : Yield on Advances Cost of deposits

Some Deterioration in Asset Quality, but Not Alarming


59/64

59

2

11

3

15

15

8

(52)

(21)

(7)

(6)

3

5

13

24

25

(32)

(13)

(4)

ICICI Bk

Ktk Bk

Indus Bk

Axis Bk

INGV Bk

Fed. Bk

J&K Bk

SIB

DCB(bps)

Fall in Gross NPA Fall in Net NPA

Q1 QoQ Decline in Gross and Net NPA

Source: Company, Note: Negative numbers indicate rise in NPAs

(bps)

14

18

39

94

124

287

(74)

(61)

(18)

24

141

154

157

172

962

(50)

(67)

(26)

ICICI Bk

Indus Bk

J&K Bk

Axis Bk

Ktk Bk

Fed. Bk

INGV Bk

SIB

DCB

Q1 YoY Decline in Gross and Net NPA

Fall in Gross NPA Fall in Net NPA

Net Profit Growth has been Robust


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60

(%) PAT GrowthGrowth provision

Yes Bk 113.3 45.0

SIB 101.8 (60.5)

INGV Bk 71.2 109.1

Federal Bk 66.6 19.8

IndusInd Bank 65.0 (19.5)

Axis Bank 45.1 0.1

Karnataka Bank 40.8 (25.7)

KMB 39.7 54.3

HDFC Bk 34.2 50.5

J&K Bk 33.4 (34.7)

DCB 32.3 0.9

ICICI Bk 25.1 155.4

Karur Vysya Bank 24.9 (99.0)

CBOP 14.9 98.9

Q1FY08 YoY PAT and provisioning growth

High profit growth in Q1FY08

despite margin pressure largely

on account of:

Lower provisioning requirements for

most banks in Q1FY08

Lower standard asset provisioning in

Q1FY08 vis--vis Q1FY07 when somebanks had higher standard asset

provisioning due to change in RBI

norms

Source: Company

Capital is Comfortable for Most Banks


61/64

61

(%)

12

11

12

11

13

10

13

13

11

13

13

6.3

7.1

7.2

7.5

7.6

8.0

9.2

9.2

9.3

11.0

12.4

Axis Bk

ICICI Bk

Indus Bk

INGV Bk

Yes Bk

DCB

HDFC Bk

Fed. Bk

CBoP

Ktk Bk

J&K Bk

Q1FY08: Tier-I & CAR

Tier-I CAR

Source: Company

Most large Private Banks have

already completed their capital

raising exercise

ICICI Bank, HDFC Bank and Axis Bank havealready raised capital in July 2007

CBOP and SIB both raised capital by way of

QIP in Sept 2007

Post capital raising, Tier-I will go up

ICICI Bank - 11% HDFC Bank 13.5%

Axis Bank 12%

Others who are likely to raise capital

Yes Bank & ING Vysya planning for

preferential/QIP

Federal bank has already announced rights

issue

Roadmap for Presence of Foreign Banks in India


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62

Phase I (March 2005 to March 2009) (Source: RBI)

Foreign banks wishing to establish a setup in India can either operate through a branch network or set

up a 100% wholly owned subsidiary, following the one-mode presence criteria

For existing foreign banks the RBI will go beyond the existing commitment of 12 branches in a year.Also, a more liberal policy in under-banked areas will be followed

Foreign banks already operating in India will be allowed to convert their existing branches to wholly

owned subsidiaries which would be treated on par with the existing branches in terms of market

access and national treatment limitation

Initially, entry of foreign banks will be permitted only in those private banks that are identified by the

RBI for re-structuring RBI may ask the foreign bank for a minimum stake of 15% to start with though the overall limit of 74% will still

be applicable

If such a foreign bank is already having a setup in India then the bank will have to submit a proposal to conform

to the one mode of presence concept, which should be completed within 6 months

Roadmap for Presence of Foreign Banks in India


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63

Phase II : April 2009

Wholly Owned subsidiaries of foreign banks will be be treated at par with domestic banks

Dilution of stake in a wholly owned subsidiary

On completion of a minimum prescribed period of operations, wholly owned subsidiaries of foreign

banks will be allowed to dilute their stake so that at least 26% of equity is held by Indian Residents atall times

Mergers & Acquisition of Private Banks in India

Foreign Banks may be permitted to enter into mergers and acquisitions with any private sector bank in

India, subject to overall limit of 74%


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private banking in india-overview

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