25 Banks CIMB Mar 2014

March 25, 2014
INDIA
BANKS
Notes from the Field
In twilight zone
We think that wholesale borrowing costs will decline in FY15 as loan growth decelerates while deposit growth remains steady. Incrementally, the stress in asset quality is also expected to alleviate. We upgrade the sector from Neutral to Overweight and expect HFCs to benefit the most from the falling cost of wholesale borrowings. Our top picks are HDFC Ltd, ICICI Bank and Bank of Baroda.
Figure 1: Key forecasts
Company Axis Bank Bajaj Finance Ltd Bank of Baroda HDFC Bank Housing Development Fin. ICICI Bank ING Vysya Bank State Bank of India Reco. HOLD ADD ADD HOLD ADD ADD ADD HOLD Price (Rs) 1,394 1,673 656 734 843 1,200 556 1,702 TP (Rs) 1,451 1,860 722 788 982 1,445 677 1,762 Upside =/4.1% 11.2% 10.0% 7.4% 16.5% 20.5% 21.8% 3.5% P/E (x) 10.7 9.7 5.8 18.0 22.3 13.6 13.1 8.6 CY14 P/BV (x) ROE (%) 1.6 15.8% 1.8 20.6% 0.7 13.8% 3.6 21.9% 4.3 20.5% 1.7 13.6% 1.4 11.4% 1.0 12.5% Div. Yld. (%) 1.5% 1.3% 3.3% 1.0% 1.7% 1.8% 1.0% 2.4%
Jatinder AGARWAL
T (91) 22 6602 5158 E jatinder.agarwal@cimb.com
Vivek VERMA
T (91) 22 6602 5162 E vivek.verma@cimb.com
Umang SHAH
T (91) 22 6602 5163 E umang.shah@cimb.com
NOTE: Prices as on 21st March 2014
SOURCES: CIMB, COMPANY REPORTS
RBI believes its fight against inflation will have traction, despite food being an important component of the CPI.
Dr. Raghuram Rajan, Governor, Reserve Bank of India
Wholesale borrowing rates likely to fall in FY15

In our view, there is a high probability of wholesale borrowings rates falling in FY15. The loan growth tailwinds (corporate capex and retail asset sales growth) are weakening and real deposit rates have turned positive for the first time in almost two years. This is likely to lead to a drop in the loan-deposit ratio (LDR) and thus, improve the liquidity situation for the banking sector as a whole.
Buy HFCs and private banks, avoid PSBs

We expect housing finance companies (HFCs) to benefit most from the expected drop in wholesale borrowing costs, which will lead to an expansion in spreads. We upgrade HDFC Ltd from Hold to Add and downgrade HDFC Bank from Add to Hold. The asset financing auto financiers (NBFCs) will also benefit from the falling cost of funds but the headwinds for asset quality and loan growth keep us cautious. In this space, we like Bajaj Finance and maintain our Reduce ratings on Shriram Transport Finance and Mahindra Finance. Among the large private banks, our top pick is ICICI Bank. Among the mid-sized private banks, we upgrade Federal Bank from Hold to Add and Indusind Bank from Reduce to Hold. We maintain our Add ratings on ING Vysya Bank and J&K Bank. In general, we advise investors to avoid PSBs but prefer well-capitalised banks with relatively superior ROAs. We maintain an Add on BOB and upgrade SBI, BOI and Union Bank from Reduce to Hold. In the life insurance space, we like Max India.
Highlighted Companies HDFC Ltd.

HDFC is poised to benefit from an expected fall in wholesale borrowing costs, which should boost its spreads in FY15-16. It is trading below its long-term P/BV valuation, which looks attractive to us. HDFC is now our top pick among NBFCs.
ICICI Bank
Near-term concerns over asset quality continue to cloud the overall improvement in the interest-bearing liability mix. ICICI Bank remains well capitalised and valuations appear attractive in relation to the consolidated ROEs. ICICI Bank is our top pick among private banks.
Incremental loan impairments to slow down

Indias GDP growth appears to be bottoming out and leading indicators such as the number of additional stalled projects are moderating. Both factors suggest that the incremental asset quality deterioration is likely to slow. That said, gross NPLs and restructured loans remain at high levels and pose challenges in terms of elevated loan loss charges in FY15-16, especially for the public sector banks (PSBs). Loan loss charges will also be higher, partly due to NPL formation from the erstwhile-restructured loans.
Bank of Baroda
Net interest margins appear to have bottomed out and asset quality is unlikely to worsen further. While the improvement in asset quality is likely to be gradual, RoAs are unlikely to fall further. BOB is our preferred pick among PSBs.
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA
BANKS March 25, 2014
Table of Contents
1. BACKGROUND 2. OUTLOOK 3. VALUATION AND RECOMMENDATION p.2 p.8 p.27
In twilight zone
1. BACKGROUND 1.1 Economic growth remains weak
The continued weakness in Indias 9MFY14 GDP growth was led largely by the slowdown in the industrial sector as the output in both mining as well as manufacturing segments contracted (Fig 2 & 3). The strong momentum in the services sector could largely be explained by the robust growth registered by the financial sector and the higher government expenditure (Fig 4). However, the signs of a pick-up in capital formation are still absent. Furthermore, private consumption showed signs of fatigue. That said, GDP growth appears to have troughed and we expect it to improve gradually moving forward.
Figure 2: GDP growth (% yoy)
8% 7% 6% 5%
Companies
1. AXIS Bank 2. Bajaj Finance Ltd 3. Bank of Baroda 4. Bank of India 5. Canara Bank 6. Federal Bank 7. HDFC Bank 8. Housing Development Fin. 9. ICICI Bank 10. IDFC Limited 11. Indusind Bank 12. ING Vysya Bank 13. J&K Bank 14. Mahindra & Mahindra Finance 15. Oriental Bank of Commerce 16. Punjab National Bank 17. Shriram Transport Finance 18. State Bank of India 19. Union Bank of India 20. Yes Bank p.30 p.32 p.34 p.36 p.38 p.40 p.42 p.44 p.46 p.48 p.50 p.52 p.54 p.56 p.58 p.60 p.62 p.64 p.66 p.68
4% 3% 2% 1% 0% 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
GDP growth is showing signs of stabilisation.
-1% -2% GDP Agriculture Industry Services
SOURCES: CIMB, MOSPI
Figure 3: Industrial GDP growth (% yoy)

12% 10% 8%
6%
Figure 4: Services GDP growth (% yoy)

14% 12% 10% 8% 6% 4% 2%
Title: Source:
Please fill in the values above to have them entered in your rep
4% 2% 0% -2% -4%
3QFY12
1QFY13
2QFY13
4QFY13
1QFY14
3QFY14
3QFY12
1QFY13
2QFY13
4QFY13
1QFY14
Industry Electricity
Mining & quarrying Construction
Manufacturing
Services Finance, insurance, real estate
Trade, hotel, transport & comm. Social & personal services
3QFY14
4QFY12
3QFY13
2QFY14
4QFY12
3QFY13
2QFY14
Figure 5: GDP growth, by demand (% yoy)

14% 12% 10% 8% 6% 4% 2% 0% 3QFY12 -2% -4% -6% Consumption Govt expenditure Gross fixed capital formation 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
The index of industrial production (IIP) has been close to zero for a long time
Figure 6: Index of industrial production (% yoy)

70 60 50 40
30
20 10
0
-10 -20
May-11
May-12
May-13
May-06
May-07
May-08
May-09
May-10
-30
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Feb-13
Aug-13
Aug-06
Aug-07
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
IIP
Cap goods (3m avg)
Intermediate goods
Core sector
Consumer goods
SOURCES: CIMB, BLOOMBERG
Figure 7: GDP composition (rolling four quarters upto 3QFY14)

Community / social & per services 15%
Agri, Forestry & Fishing 18%
Mining & quarrying 2% Fin / Ins/ Real estate / Busi services 18% Manufacturing 13%
Electricity, gas & w ater supply 2% Trade, hotels, transpt & communication 24% Construction 8%
Nov-13
1.2 Twin deficits have subsided

The recent government measures to limit gold imports have resulted in a sharp dip in the current account deficit (Fig 8). The moderation in economic growth has also started weighing on import demand. Furthermore, there are signs of a pick-up in exports following the recent rupee depreciation (Fig 9). The one-time foreign currency non-resident [FCNR (B)] deposit swap window eased the pressure on Indias balance of payments. The fiscal deficit in FY14 is expected to be better than the governments earlier estimates. However, the interim budget mathematics (to be eventually replaced by the final budget presented by the new government after the general election) are debatable as the fiscal deficit of 4.1% of GDP in FY15 hinges on aggressive growth in tax revenue (18% yoy growth in FY15 vs. 13% in FY14) and lower expenditure. Net market borrowings are estimated to be Rs4.57tr in FY15, close to the projected Rs4.69tr in FY14. We note that the combined fiscal deficit is trending down and is now close to the FY05 levels.
The measures to limit gold imports and allowing FCNR (B) inflows under the swap scheme have caused the balance of payments to improve in 9MFY14.
Figure 8: Balance of payments ($ bn)
FY10 Exports Imports of which, Oil imports of which, Gold imports Merchandise Net invisibles of which, software exports of which, private transfers Current account Capital accout of which, FDI of which, Portfolio investments of which, ECBs of which, NRI deposits Overall BOP (38) 52 18 32 2 3 13 (46) 62 9 30 13 3 13 182 301 87 29 (118) 80 48 FY11 250 381 106 39 (131) 85 53 FY12 310 500 154 63 (190) 112 61 64 (78) 68 22 17 19 12 (13) FY13 300 496 165 55 (196) 108 64 64 (88) 89 20 27 31 15 4 FY14e 310 460 165 35 (150) 113 66 67 (37) 53 27 6 9 38 15
SOURCES: CIMB, RBI
The rupee depreciation seems to have boosted export growth, while the domestic slowdown has negatively affected imports, especially the non-oil, non-gold imports.
Figure 9: Export-import growth (% yoy)

30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0%
Dec-12
May-13
Jan-13
Jun-13
Mar-13
Feb-13
Nov-13
Exports
Imports
Imports (ex-gold)
SOURCES: CIMB, CMIE
Dec-13
Sep-13
Aug-13
Jan-14
Apr-13
Oct-13
Jul-13
Figure 10: Combined state and central government fiscal deficit (% of GDP)
12.0%
Figure 11: Government debt-to-GDP ratio (%)
90.0%
10.0% 80.0% 8.0%
6.0%
70.0%
4.0% 60.0%
2.0%
0.0%
FY10
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY11
FY12
FY13
FY14e
FY15e
50.0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Gross Fiscal Deficit - Centre
Gross Fiscal Deficit - State
Govt debt to GDP
SOURCES: CIMB, CMIE
SOURCES: CIMB, RBI
Figure 12: Fiscal deficit as % of incremental M3 (%)

80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
1992-93
1993-94
1994-95
1995-96
2000-01
2001-02
2002-03
2007-08
2008-09
2009-10
2010-11
1996-97
1997-98
1998-99
1999-00
2003-04
2004-05
2005-06
2006-07
2011-12
2012-13
Fiscal Deficit as a % of incremental M3
SOURCES: CIMB, RBI
Figure 13: Key highlights of Indias fiscal accounts

Rs bn Fiscal Deficit to GDP Tax to GDP Oil and Gas - subsidies Food - subsidy Fertilizer - subsidy Total - subsidy % of fiscal deficit % of GDP Divestment receipts % of fiscal deficit % of GDP Interest payments % of fiscal deficit % of GDP FY13 4.9% 7.4% 969 850 656 2,475 50% 2.5% 259 5.3% 0.3% 3,132 64% 3.1% FY14e 4.6% 7.3% 855 920 680 2,455 47% 2.2% 258 4.9% 0.2% 3,801 72% 3.3% 21% 0% -12% 8% 4% -1% % yoy FY15e 4.1% 7.7% 632 1,150 680 2,462 47% 1.9% 569 10.8% 0.4% 4,270 81% 3.3%
SOURCES: CIMB, MINISTRY OF FINANCE
% yoy
2013-14
-26% 25% 0% 0%
121%
12%
1.3 Inflation on downward trajectory but still above comfort level

Inflation, as reflected by the wholesale price index (WPI) and consumer price index (CPI), is trending downwards. However, core WPI and core CPI remain stable and above the comfort levels (Fig 14 & 15). In general, the inflationary pressures are expected to ease due to the persistent negative output gap, moderation in the increase of minimum support prices (MSP) last year and stabilising rupee. According to the report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework dated Jan 2014, the nominal anchor or target should be set at 4% with a band of +/- 2% around it: (a) in view of the vulnerability of the Indian economy to supply/ external shocks and the relatively large weight of food in the CPI; and (b) the need to avoid a deflation bias in the conduct of monetary policy. The committee also suggested that the elevated level of current CPI inflation and hardened inflation expectations, supply constraints and weak output performance, the transition path to the target zone should be graduated to bring down inflation from the current level of 10% to 8% over a period not exceeding the next 12 months and 6% over a period not exceeding the next 24-month period before formally adopting the recommended target of 4% inflation with a band of +/- 2%.
Figure 14: Wholesale price index (% yoy)
9.0% 8.0%
Figure 15: Consumer price index (% yoy)

12.0%
7.0%
6.0%
10.5%
9.0% 5.0% 4.0% 3.0%
7.5%
2.0%
Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14
6.0%
Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14
CPI Core-CPI
WPI
Core-WPI
SOURCES: CIMB, CMIE
SOURCES: CIMB, CMIE
Figure 16: GDP difference between nominal and real GDP (%)
30.0%
25.0%
20.0% 15.0% 10.0% 5.0%
2QFY11
3QFY11
4QFY11
1QFY12
1QFY13
2QFY13
3QFY13
-5.0% -10.0%
Agri, Forestry & Fishing Manufacturing Construction Fin / Ins/ Real estate/ busi ser GDP at factor cost
Mining & quarrying Electricity, gas & water supply Trade, hotels, transport & comm Community/ social & per serv
3QFY14
0.0%
1QFY11
2QFY12
3QFY12
4QFY12
4QFY13
1QFY14
2QFY14
Figure 17: Contribution to CPI (%)

100% 90% 80% 70%
60%
50% 40%
30%
20% 10%
May-12
May-13
0%
Mar-12
Jan-13
Jun-12
Jun-13
Feb-12
Mar-13
Feb-13
Jan-14 Jul-13 Oct-13
Sep-12
Aug-13
Sep-13
Aug-12
Nov-12
Dec-12
Nov-13
Food, beverages & tobacco
Fuel & light
Clothing, bedding & footwear
Housing
Miscellaneous
Figure 18: MSPs (ex-bonus) of key agricultural commodities

1700
1500
1300
1100
900
700
500 2007-08 Wheat 2008-09 2009-10 Paddy (Common) 2010-11 2011-12 2012-13 2013-14 Barley
Jowar / Bajra / Maize / Ragi
SOURCES: CIMB, Department of Food & Public Distribution
Figure 19: CRB index

500 450 400 350 300 250 200 150
Jan-06
Jan-07
Jan-12
Jan-13
Dec-13
CRB Index
Jan-14
Jan-08
Jan-09
Jan-10
Jan-11
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-06
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Jul-12
Oct-12
Apr-10
Apr-11
Apr-12
Apr-13
Apr-06
Apr-07
Apr-08
Apr-09
Feb-14
Jan 12
Apr-12
Oct-12
Jul-13
Jul-12
Oct-13
Apr-13
2. OUTLOOK 2.1 Wholesale borrowing rates likely to fall in FY15

Over the last 3-4 years, project investments have been declining (Fig 20). The deleveraging cycle has just begun and is expected to continue in FY15, as the banks put pressure on borrowers to improve their debt profiles (Fig 21 & 22). This should keep FY15 industry loan growth in check. The lead indicators also suggest that retail asset sales are slowing. Home sales across most major markets have been muted (Fig 23) while auto sales have been falling (Fig 24 & 25). This should keep FY15 retail loan growth in check. In short, we expect moderate loan growth in FY15-16. After almost two years, real deposit rates have turned positive (Fig 28). In our view, this will partially improve deposit growth. That said, a key risk to our falling interest rate argument is the persistence of high inflation. A combination of the above will lead to better liquidity in FY15-16 compared to FY14 as far as the banks balance sheets are concerned. In our view, there is a high probability of the wholesale borrowing rates falling in FY15.
Figure 20: Project investments new orders announced (Rs bn)
25,000 140% 120% 20,000 100% 80% 15,000 60% 40% 10,000 20% 0% 5,000 -20%
-40%
Project investments have slowed significantly and are now close to the levels last seen 10 year ago
FY96
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
-60%
Private sector (Rs bn)
Government sector (Rs bn)
yoy growth (%, RHS)
SOURCES: CIMB, CMIE
Figure 21: Divestment of road assets by infrastructure companies

Date Seller Madhucon Projects Ltd GVK Power and Jan-14 Infrastructure GVK Power and Jan-14 Infrastructure Feb-14 Buyer Project SPV Name Madhucon AgraJaipur Expressways Ltd Jaipur Expressway Pvt. Ltd. GVK Bagodara- Vasad Expressway Limited Project Mode Stake Sale (%) BOT BOT BOT 74% NA NA Majority
IDFC Alternatives Ltd Agra-Jaipur Expressways *SBI-Macquarie *SBI-Macquarie Jaipur-Kishangarh project Bagodara- Vasad project
National Highway 3 in the Uniquest Infra Dec-13 SEW Infrastructure borders of Madhya Pradesh and Ventures Private Ltd Maharashtra India Infrastructure Sep-13 GMR Infrastructure Ltd Fund (IIF) for INR 222 Ulundurpet Expressways crore Jun-13 MVR Infrastructure & Tollways IRB Infrastructure
SEW Navayuga Barwani Tollways BOT GMR Ulundurpet Expressways Pvt. Ltd.
BOT (Toll)
74% Acquisition 26% stake of MVR Infra is in process (74% in Oct12) 74% (remaining 26% in process of acquisition) 74% 10%
SOURCES: CIMB, INFRALINE
Omallur-Salem-Namakkal project MVR Infrastructure & Tollways
BOT (Toll)
Shapoorji-Pallonji and Jun-13 Malaysia-based IJM SBI Macquarie Corporation May-13 IVRCL Ltd May-13 Deutsche Bank TRIL Roads Pvt Ltd IRB Infrastructure Developers Ltd
Ulundurpet-Padalur stretch
Trichy Tollway Pvt Ltd
BOT (Toll)
Salem Tollway, Kumarpalayam Three road projects- (154.83 kmTollway and IVRCL Chengapally long roads) Tollway Surat Dahisar Tollway
BOT
IRB Surat Dahisar Tollway Pvt Ltd BOT (Toll)
9MFY14
and Indian companies are selling assets to deleverage
Figure 22: Indian companies selling assets to repay debt (Rs bn)
Company Adani Ports & SEZ Bharti Airtel DLF DLF DLF DLF Elder Pharmaceuticals Fortis Healthcare Future Group GMR GMR GMR IVRCL Jaypee Jaypee Jet Airways Lanco Shree Renuka Sugars Tata Power Videocon Asset / stake sold in 2013-2014 Divests 100% in Abbott Point to promoters Stake sale to Qatar Foundation Sale of Aman Resorts Divestitures of land parcels Sale of Wind Energy projects Divestitures of Pramerica, IDFC, Star, Noida Sale of Formulations business Business in Australia (Acquisition cost + Debt on its books) Stake sale in Insurance company + Stake sale in fashion brand Stake sale in Istanbul Airport (Expected) Stake sale in Singapore Energy Unit Stake sale in Jadcherla Expressways Stake sale in 3 Road Assets (Salem Tollways, Kumarapalayam Tollways and Chengapally Tollways) Sale of Gujarat cement plant Sale of Hydro Power assets Stake sale to Etihad Airwyas (Expected) Sale of hydro power assets to Greenko Preferential allotment of fresh equity to Wilmar International Stake sale in PT Arutmin Indonesia Stake sale in Mozambiques Rovuma-1 gas field Rs bn 123.0 68.0 22.8 17.7 6.3 4.8 20.0 23.0 7.0 18.6 29.3 2.1 3.5-4.0 38.0 105.0 20.7 6.5 8.5 5.2 31.0 148.5
Gayatri Projects + NCC 45% stake sale by Gayatri Projects to Sembcorp
SOURCES: CIMB, COMPANY REPORTS, MEDIA REPORTS
New home sales across major cities showing signs of slowdown
Figure 23: Home sales data

Sales (in units) Mumbai 2009 2010 2011 2012 2013 Gurgaon 2009 2010 2011 2012 2013 Bangalore 2009 2010 2011 2012 2013 Chennai 2009 2010 2011 2012 2013 17,242 24,435 22,312 15,500 11,870 23,846 24,800 28,146 25,543 13,526 20,645 28,950 41,591 48,826 52,043 14,361 21,983 30,962 31,034 24,050 yoy chg -6% 42% -9% -31% -23% 61% 4% 13% -9% -47% -25% 40% 44% 17% 7% 17% 30% -7% -19% -6% Price (Rs/ sq ft) 9,111 10,525 11,346 13,196 15,307 2,919 3,585 4,337 5,518 7,044 2,882 2,977 3,191 3,684 3,974 3,917 3,904 4,003 4,087 3,944 yoy chg 1% 16% 8% 16% 16% -7% 23% 21% 27% 28% -9% 3% 7% 15% 8% 6% 10% 7% 6% 7% Absorption (%) 6% 7% 5% 4% 2% 8% 11% 10% 8% 4% 5% 7% 7% 6% 5% 5% 6% 4% 4% 4%
SOURCES: CIMB, PropEquity
Figure 24: Auto sales growth (% yoy)
as are automobile sales

60.0% 50% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -23% -26% M&HCVs -19% LCVs FY13 UVs YTD FY14 (Feb'14) CARS 2Ws -5% -6% -6% 18% 6%
3%
SOURCES: CIMB, SIAM
Figure 25: Auto sales volumes (units)

FY09 M&HCVs LCVs UVs CARs 2Ws 183,815 229,348 225,495 1,221,181 7,437,220 FY10 244,596 335,725 272,569 1,526,651 9,371,271 FY11 322,749 413,888 324,185 1,982,990 11,790,305 FY12 348,701 551,358 367,984 2,015,458 13,433,846 FY13 268,259 651,657 553,660 1,894,383 13,797,095 YTD FY14 (Feb'14) 177,192 474,602 473,396 1,613,920 13,471,267
SOURCES: CIMB, SIAM
Thus, a moderation in loan growth seems likely in FY15-16
Figure 26: Loan growth (% yoy)

80% 70% 60% 50% 40% 30%
20%
10% 0%
FY80
FY81
FY85
FY86
FY90
FY91
FY92
FY96
FY97
FY01
FY02
FY03
FY07
FY08
FY09
FY12
Agriculture
Other PSL
Industry
Trade
Others
SOURCES: CIMB, RBI
10
FY13
FY82
FY83
FY84
FY87
FY88
FY89
FY93
FY94
FY95
FY98
FY99
FY00
FY04
FY05
FY06
FY10
FY11
-10%
Figure 27: Industry - loan mix (Rs bn)
Infrastructure and real estate-related loans home loans and CRE have been the key loan drivers in 9MFY14
Sector Non-Food Gross Bank Credit (1 to 4) 1. Agriculture & Allied Activities 2. Industry (Small, Medium and Large) Micro and small Medium Large 3. Services 3.1. Transport Operators 3.2. Professional and Other Services 3.3. Trade 3.4. Real Estate Loans 3.5. Non-Banking Financial Companies Misc - services (balancing figure) 4. Personal Loans 4.1. Consumer Durables 4.2. Housing (including priority sector housing) 4.3. Advances Against Fixed Deposits 4.4. Credit Card Outstandings 4.5. Education 4.5. Vehicle Loans Misc - personal loans (balancing figure) Sector Industry (Small, Medium and Large Scale) Mining Food Processing Beverage and Tobacco Textiles Leather and Leather products Wood and wwod products Paper and Paper Products Petroleum, Coal Products and Nuclear Fuels Chemicals and Chemical Products Rubber, Plastic and their Products Glass and glassware Cement and cement products Iron and Steel Other metal and metal products All Engineering Vehicles, Vehicle Parts and Transport Equipments Gems and Jewellery Construction Infrastructure - Power Infrastructure - Telecom Infrastructure - Roads and Ports Infrastructure - others Other Industries (balancing figure)
FY13 48,994 5,922 22,448 2,857 1,242 18,349 11,579 798 563 2,786 1,261 2,617 3,554 9,045 84 4,622 613 253 551 1,115 1,808 FY13 22,448 326 943 169 1,857 88 77 286 611 1,608 312 74 463 2,395 773 1,279 598 609 525 4,188 890 1,320 953 2,105
Dec-13 53,086 6,351 24,117 3,252 1,259 19,607 12,628 860 681 3,042 1,428 2,904 3,714 9,990 103 5,185 586 244 592 1,261 2,018 Dec-13 24,117 354 1,370 168 1,946 100 90 320 575 1,656 354 86 527 2,593 855 1,388 659 637 588 4,685 859 1,511 991 1,803
YTD 8.4% 7.2% 7.4% 13.8% 1.4% 6.9% 9.1% 7.8% 21.0% 9.2% 13.2% 11.0% 4.5% 10.4% 22.5% 12.2% -4.4% -3.6% 7.6% 13.2% 11.6% YTD 7.4% 8.7% 45.3% -0.5% 4.8% 14.0% 16.4% 11.7% -5.9% 3.0% 13.5% 16.0% 13.9% 8.3% 10.7% 8.5% 10.2% 4.6% 12.0% 11.9% -3.4% 14.5% 4.0% -14.3%
SOURCES: CIMB, RBI
11
Real deposit rates have turned positive after almost two years
Figure 28: Real deposit rates (%)

12.00 2.0 1.5
10.00
8.00 6.00 4.00 2.00 0.00
1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0
Dec-13
Nov-12
Dec-12
Nov-13
Oct-12
Jan-12
Jun-12
Jan-13
Jun-13
Oct-13
Apr-12
Apr-13
Jul-12
Jul-13
Aug-12
Sep-12
Mar-13
Aug-13
Sep-13
Feb-12
Mar-12
Feb-13
Jan-14
May-12
CPI Inflation (%, monthly) SBI (1 year deposit rates, %) Real rates (SBI 1 year term deposit rate less CPI, %)
May-13
Figure 29: Loans, deposits and LDR (%)
The expected slowdown in loan growth and steady deposit growth should lead to better liquidity as far as banks are concerned
25.0 23.0 21.0
Feb-14
79.0 78.0 77.0
19.0 17.0 15.0 13.0 74.0 11.0 9.0

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14
76.0 75.0
73.0 72.0
7.0
Loans (% yoy, LHS)
Deposits (% yoy, LHS)
LDR (%; RHS)
Will banks cut deposit rates aggressively in FY15-16 ?
Figure 30: SBI 1-year deposit rate (%)

12.0
10.0
8.0
6.0
4.0
2.0
May-03
May-08
May-13
0.0
Jan-00
Jun-00
Jan-05
Jan-10
Jun-05
Feb-02
Feb-07
Jun-10
Feb-12
Mar-04
Mar-09
Sep-11
Sep-01
Aug-04
Sep-06
Aug-09
Dec-02
Nov-05
Nov-10
Nov-00
Dec-07
12
Dec-12
Mar-14
Jul-07
Apr-01
Oct-03
Apr-06
Oct-08
Jul-12
Jul-02
Oct-13
Apr-11
10
11
12
13
-2500
-1500
-1000
-500
-2000
1000
1500
500
10.0
11.0
Jan-11
4.0
28 day repo (Rs bn)
5.0
Apr-11 Jul-11
6.0
7.0
8.0
9.0
3m CD rates (%)
Figure 33: Repo rate and 10-yr G-sec yields (%)
Figure 31: Repo balance - Liquidity situation (Rs bn)
Figure 32: Certificate of Deposits (CD) and Commercial Paper (CP) rates (%)
13
Oct-11 Jan-12
14 day repo (Rs bn)
Repo rate (%) 12m CD rates (%)

Apr-12 Jul-12 Oct-12 Jan-13
MSF (Rs bn)
REPO (Rs bn): (+) represents net absorption of liquidity by RBI
10 year bond yield (%) 3m CP rates (%)

Apr-13
Jul-13
Oct-13
12m CP rates (%)
Apr-01 Aug-01 Dec-01 Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13

Jan-14
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14
Figure 34: Policy rates and Cash reserve ratio (%)

11.00 10.00 9.00 8.00 7.00 6.00
5.00
4.00 3.00 2.00

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14
Reverse repo rate (%)
Repo rate (%)
MSF rate (%)
Cash reserve ratio (%)
2.2 Near-term asset quality pain likely to remain elevated but incremental stress should subside
Given the slowdown in corporate earnings growth, we think that the asset quality stress is likely to continue in the medium term. Although the large corporates appear stretched debt-wise (Fig 43), the recent instances of deleveraging are comforting. A sharp improvement in asset quality is unlikely unless GDP growth rebounds sharply and the governments recent measures to improve infrastructure bottlenecks change the reality on the ground. That said, GDP growth appears to have troughed and thus, the fresh additions to gross NPLs are likely to peak in the next few quarters. We note that the pace of stalled projects has slowed in the past year (Fig 37). Our analysis shows that in FY01-13, the banks successfully recovered/upgraded around 40% of their gross delinquencies and wrote off around 31%. The remaining 29% represented the closing stock of gross delinquencies at end-FY13. After considering the recoveries from the bad loans that had been written-off, actual loan losses fell from 31% to around 25% (Fig 45). Thus, actual loan losses (write-offs) were much lower than loan loss provisions made in the P&L accounts in FY01-13. In our view, the actual loan losses (write-offs) were low because: 1) the loans given were generally backed by collateral (land and/or buildings), 2) the rising collateral prices (especially land) and strong economic growth in the past decade facilitated the resolution of bad loans, and 3) the well-diversified loan books cushioned the impact of sharp slowdowns in selected sectors. However, our above analysis ignores the time value of money and restructured loans. According to Asset Reconstruction Co. (India) Ltd (Arcil), around Rs420bn in bad loans are available for sale to asset reconstruction companies (ARCs) in FY14 compared to Rs120bn in FY13. The game changer for asset quality in the long term will be the significant changes in the regulatory environment. In our view, the recent steps taken by the Reserve Bank of India (RBI) will lead to better credit risk monitoring, which will help banks in the long term, especially public sector banks (Fig 44).
14
The growth in stalled projects appears to be moderating
Figure 35: Project investments stalled projects (Rs bn)

10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 40% 20% 0% -20% -40% 140% 120% 100% 80% 60%
Private sector
Government sector
yoy growth (%, RHS)
SOURCES: CIMB, CIME
Figure 36: Project investments completed projects (Rs bn)

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Private projects completed Government projects completed
SOURCES: CIMB, CIME
There appear to be a large number of stalled projects but the proportion of stalled projects is reasonable relative to the number of projects under implementation
Figure 37: Project investments stalled projects as % of projects under implementation (%)
12% 10%
8%
6% 4% 2% 0%
FY96
FY97
FY99
FY01
FY02
FY04
FY06
FY07
FY09
FY12
FY98
FY00
FY03
FY05
FY08
FY10
FY11
FY13
Stalled projects as % of under implementation projects
SOURCES: CIMB, CIME
15
9MFY14
About 70% of the projects cleared by the CCI are in the power sector.
Figure 38: CCI projects under consideration and approved (Rs bn, %)
6,000 80%
71%
70% 5,000 60% 4,000 50% 3,000 27% 2,000 4% 1,000 10% 0% 20% 40%
30%
20%
Gas
Power
Steel
Others
Under consideration (Rs bn)
Approved (Rs bn)
Approved (%)
SOURCES: CIMB, Cabinet Committee on Investments (Dec 2013)
Figure 39: Outstanding restructured loans (% of loans)

FY12 BOB BOI Can Corp Fed Indian OBC PNB SBI Union PSB (avg) Axis HDFCB ICICI IIB J&K Yes Pvt (avg) 4.4% 3.1% 2.1% 2.8% 3.2% 7.4% 7.2% 7.3% 1.9% 2.8% 3.4% 1.0% 0.1% 1.5% 0.2% 3.2% 0.3% 0.9% FY13 5.5% 4.9% 6.3% 5.7% 4.7% 7.7% 9.2% 9.4% 2.8% 4.4% 5.1% 2.1% 0.0% 1.8% 0.3% 3.0% 0.3% 1.2% 9MFY14 6.0% 4.7% 6.4% 5.4% 5.5% 7.5% 7.2% 9.6% 3.4% 4.9% 5.3% 2.3% 0.2% 2.6% 0.3% 3.0% 0.2% 1.6%
Based on the outstanding restructured loans, it appears that the pace of incremental restructuring is slowing.
Figure 40: Increase in net restructured loans (% of loans)

12.0% 10.0% 8.0% 6.0% 4.0% 2.0%
0.0%
HDFCB
PNB
Axis
Union
IIB
Indian
PSB (avg)
Yes
-2.0%
-4.0% FY12 FY13 9MFY14
16
Pvt (avg)
BOB
OBC
SBI
Corp
ICICI
Can
Fed
J&K
BOI
However, there are still no significant signs of improvement in earnings growth of the key stressed sectors
Figure 41: EBITDA growth (% yoy)

100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0%
2QFY11
4QFY11
3QFY12
1QFY13
4QFY13
2QFY14
Construction - Real Estate
Engineering / Construction
Metals - Iron & Steel
Textiles
SOURCES: CIMB, ACEEQUITY NOTE: Based on data for 370 listed companies on the NSE
Figure 42: PAT margin (%)
net margins seem to be stabilising though.
25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0%
3QFY11
4QFY11
2QFY12
3QFY12
2QFY13
3QFY13
2QFY14
1QFY11
2QFY11
1QFY12
4QFY12
1QFY13
4QFY13
1QFY14
Construction - Real Estate
Engineering / Construction
Metals - Iron & Steel
Textiles
SOURCES: CIMB, ACEEQUITY NOTE: Based on data for 370 listed companies on the NSE
17
3QFY14
3QFY14
1QFY11
3QFY11
1QFY12
2QFY12
4QFY12
2QFY13
3QFY13
1QFY14
Figure 43: Indian corporates - debt position

Company Name Adani Enterprises Ltd.* Adani Ports and SEZ Ltd.* Adani Power Ltd. Bharti Airtel Ltd. Bhushan Steel Ltd. * CESC Ltd.* DLF Ltd. GMR Infrastructure Ltd. GVK Power & Infrastructure Ltd. Hindalco Industries Ltd. Idea Cellular Ltd. Jaiprakash Associates Ltd.* Jaiprakash Power Ventures Ltd Jindal Steel & Power Ltd. JSW Steel Ltd. KSK Energy Ventures Ltd.* Lanco Infratech Ltd.* Larsen & Toubro Ltd. Mahindra & Mahindra Ltd. Reliance Communications Ltd. Reliance Infrastructure Ltd* Reliance Power Ltd * Steel Authority Of India Ltd. Suzlon Energy Ltd.* Tata Communications Ltd Tata Motors Ltd. Tata Power Company Ltd. Tata Steel Ltd. Videocon Industries Ltd.* Total Consolidated Net Debt (Rs bn) FY11 303 34 232 601 165 29 226 185 52 196 106 378 111 132 144 57 154 215 148 337 110 57 27 96 77 218 226 481 111 5,208 FY12 627 165 393 652 194 44 236 268 122 327 131 507 165 165 169 79 270 364 155 372 169 137 97 83 108 205 301 500 128 7,132 FY13 613 108 440 645 267 82 230 297 171 457 129 608 221 226 197 115 309 509 240 403 215 227 177 117 109 341 359 577 230 8,617 Consolidated EBITDA (Rs bn) FY11 45 14 12 199 21 10 38 14 5 79 37 52 7 63 47 6 22 78 61 65 25 11 69 12 12 178 46 170 20 1,417 FY12 55 18 13 237 30 12 39 20 7 82 50 58 15 68 61 8 18 87 74 65 35 14 54 19 18 237 49 124 21 1,590 FY13 69 26 10 249 33 15 26 25 8 78 60 70 20 60 65 9 27 99 91 66 40 21 40 -11 21 266 64 123 14 1,683 Net Debt / EBITDA (x) FY11 6.7 2.4 18.7 3.0 7.9 2.8 6.0 12.8 10.3 2.5 2.8 7.2 16.9 2.1 3.1 9.9 7.1 2.8 2.4 5.2 4.4 5.2 0.4 8.3 6.2 1.2 4.9 2.8 5.6 3.7 FY12 11.3 9.2 29.7 2.7 6.4 3.8 6.0 13.4 17.3 4.0 2.6 8.8 11.1 2.4 2.8 10.2 14.6 4.2 2.1 5.7 4.8 10.0 1.8 4.3 5.8 0.9 6.1 4.0 6.1 4.5 5.2 1.3 5.6 4.7 16.8 5.1 FY13 8.9 4.1 45.8 2.6 8.0 5.5 8.7 12.0 21.9 5.8 2.2 8.7 11.3 3.8 3.0 12.5 11.7 5.2 2.6 6.1 5.3 11.0 4.4 Net Debt/Eq. (x; FY13) 3.1 1.7 10.2 1.2 2.9 2.0 0.9 4.1 5.4 1.3 0.9 4.9 3.4 1.0 1.2 3.7 8.4 1.5 1.2 1.2 0.9 1.4 0.4 36.6 8.9 0.9 3.3 1.7 2.3 1.7
SOURCES: CIMB, COMPANY REPORTS * Indicates companies that are not under coverage universe. Data collated is from Ace Equity
18
Figure 44: Regulatory changes effective on 1 Apr 2014
In our view, the recent changes in the regulatory environment will be game changer for asset quality. Although the changes come too late to affect the current cycle, they will have a positive impact during the next downturn.
Early recognition of stress
SMA Sub-categories SMA-0 SMA-1 SMA-2
Before a loan account turns into an NPA, banks are required to identify incipient stress in the account by creating a sub-asset category viz. Special Mention Accounts (SMA). Banks would henceforth be required to have three sub-categories under the SMA category depending on principal or interest overdue for more than 30-90 days. Basis of classification Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress Principal or interest payment overdue between 31-60 days Principal or interest payment overdue between 61-90 days
Banks will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs50m and above with them. Notified systemically important non-banking financial companies Centralised reporting and (NBFC-SI) and NBFC-Factors would also be required to furnish such dissemination of information. In addition, banks will have to furnish details of all current accounts information on large credit of their customers with outstanding balance (debit or credit) of Rs10m and (CRILC) above. Lenders in India covered under this Framework must also report the External Commercial Borrowing (ECB) extended by their overseas branches/offices to the Indian borrowers. Early formation of a lenders committee with timelines to agree to a plan for resolution. As soon as an account is reported to CRILC as SMA-2, the lenders, Formation of Joint Lenders should form a lenders committee to be called Joint Lenders Forum (JLF) under Forum (JLF) a convener and formulate a joint Corrective Action Plan (CAP) for early resolution of the stress in the account. Some other key recommendations 1) More expensive future borrowing for borrowers who do not co-operate with lenders in resolution 2) Incentives for lenders to agree collectively and quickly to a plan better regulatory treatment of stressed assets if a resolution plan is under way, or accelerated provisioning if no agreement can be reached
SOURCES: CIMB, RBI
19
Figure 45: Loan loss analysis (FY01-13, Rs bn)

BOB Opening GNPLs (as of March, 2000) Additions to GNPLs (FY01-FY13) Proforma GNPLs (as on FY13) Closing GNPLs - actual reported (FY13) Implied - Recovery / Upgrade / Write-off Net NPLs (as of FY13) Provisions (as on March 31, 2000) Total specific provision for NPLs (FY01-FY13) Proforma Provisions (as on FY13) Closing provisions - actual reported (as of FY13) Implied w/offs (balancing figure) Write-off as % of bad loans (opening GNPLs+ slippages) Closing GNPLs as % of bad loans (opening GNPLs + slippages) Implied - Recovery/upgrades as % of bad loans Total Opening Loans (as of March, 2000) Loans (as on FY13) Recovery from w/off bad loans (credited to P&L) Adjusted write-offs (after recovery from w/off accounts) Adjusted write-offs (as % of delinquency / slippage) Delinquency rate (% of avg loans, FY01-FY13) Provisions - bad loans (% of avg loans, FY01-13) RoA (average over FY01-FY13) 39.0 BOI 34.6 Can Bank 23.3 PNB 31.3 SBI 152.5 Union 18.8 189.9 208.7 63.1 146 33.5 7.2 99.9 107.0 29.6 77 37% 30% 33% Axis HDFCB ICICI IndusInd 1.9 95.8 97.7 23.9 74 7.0 0.3 65.7 66.0 16.9 49 50% 24% 25% 1.2 0.9 2.7 33.7 36.4 4.6 32 1.4 0.5 16.0 16.5 3.2 13 36% 13% 51% Yes 0.0 5.7 5.7 0.9 5 0.1 0.0 3.9 3.9 0.9 3 54% 16% 30% Total 306 3,388 3,694 1,089 2,605 41.9 22.1 59.5 12.6 52.8 7.7 72.4 12.1 219.6 89.6 538.2 627.9 292.3 336 22% 33% 45% 100% 981 10,456 83.8 252 16% 2.8% 1.1% 0.8% 4.7 0.8 22.3 0.4 515 153 1,564 1,717 574 1,143 31% 29% 40% 100% 2,255 116.9 153.8 139.0 166.4 37.9 101 39% 31% 30% 28.2 138 41% 26% 33% 124.4 147.3 132.2 159.4 9.8 122 38% 20% 42% 62.3 97 26% 36% 38% 100.6 196.9 101.4 197.3 18.7 83 58% 16% 25% 73.8 123 33% 25% 42%
218.0 304.2 257.0 338.9 79.8 177 87.6 251
295.4 345.0 1,381.7 318.8 376.2 1,534.2 62.6 134.7 256 242 511.9 1,022
140.6 377.7 141.9 378.6 23.4 119 96.1 283
100% 100% 244 252
100% 100% 235 226
100% 100% 150 35
100% 100% 34 37
100% 100% 37 443 0.0 13 36% 2.3% 1.2% 1.0% 24
3,282 2,894 25.1 76 30% 1.9% 1.0% 1.0% 28.8 109 32% 2.2% 1.1% 0.9%
2,422 3,087 27.7 95 30% 2.3% 1.1% 1.1% 21.8 75 20% 2.4% 1.1% 1.1%
2,081 1,970 15.7 62 30% 2.1% 1.1% 1.0% 11.9 37 38% 1.5% 1.2% 1.3%
2,397 2,902 10.0 73 51% 1.6% 1.3% 1.5% 0.0 123 33% 3.5% 1.1% 1.1%
470 32,404 0.0 3 54% 0.3% 0.3% 1.5% 225 919 25% 2.1% 1.1% 1.1%
RBIs long cycle analysis indicates that the loss given defaults are reasonable compared to gross delinquencies.
Figure 46: Loss given default estimates (%)

Average LGD (%) Corporate loans Retail loans Housing Loans Other Loans Total Loans 36.1 33.4 8.0 79.1 45.5 Downturn LGD (%) 79.0 73.1 20.0 90.2 71.9
Based on sample of 15 banks from 2001-2010.
SOURCES: CIMB, RBI Discussion Paper on Introduction of Dynamic Loan Loss Provisioning Framework for Banks in India
2.3 But bond gains not likely to be as large as those during the 2001-04 cycle
The softer interest rate environment will also aid bond gains, which are close to their lowest levels in almost a decade (Fig 47). That said, the likely gains during this cycle may not be as large as those during the FY01-04 cycle.
20
Bond gains may come to the rescue in FY15, although they may not be as large as during the FY01-14 cycle.
Figure 47: Estimated bond gains to loans

Rs bn Deposits Loans Investments - G sec Duration - estimated % fall in interest rates from peak to trough Implied gains % of loans Actual gains booked (FY01-04) % of loans FY01 10,554 5,262 3,532 5 6.5 1,148 22% 232 4% Feb-14 76,052 58,617 22,441 5 1 1,122 2% na na
SOURCES: CIMB, RBI
Unlike during the FY01-04 cycle, bonds now constitute a lower proportion of overall assets.
Figure 48: Loan-deposit and Investment-deposit ratios (%)

50 85.0 80.0 45 75.0 70.0
40
65.0 60.0 55.0
35
30
50.0 45.0
Jan-99 Jun-99 Nov-99 Apr-00 Sep-00 Feb-01 Jul-01 Dec-01 May-02 Oct-02 Mar-03 Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14
25
40.0
IDR (%, LHS)
LDR (%, RHS)
However, the maturity profile of government borrowings in FY13 is similar to that of FY01.
Figure 49: Maturity pattern of GOI rupee loans (Rs bn, %)

Mix under 5 years 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1,642 1,779 1,848 2,212 2,455 2,752 4,170 4,032 4,592 6,245 5,388 5,569 9,482 5-10 years over 10 years 1,908 2,337 2,552 2,838 3,073 3,469 4,135 5,372 7,466 7,354 8,536 6,433 10,698 1,814 2,626 3,846 4,245 4,795 5,253 5,533 6,165 7,251 7,971 8,764 13,932 10,427 Total 5,363 6,742 8,246 9,296 10,323 11,474 13,838 15,569 19,309 21,569 22,689 25,933 30,607 under 5 years 31% 26% 22% 24% 24% 24% 30% 26% 24% 29% 24% 21% 31% 5-10 years over 10 years 36% 35% 31% 31% 30% 30% 30% 35% 39% 34% 38% 25% 35% 34% 39% 47% 46% 46% 46% 40% 40% 38% 37% 39% 54% 34%
SOURCES: CIMB, RBI
21
Figure 50: 10-year government bond yield (%)

14 12
10
8 6 4 2 0
Jan-99 Jun-99 Nov-99 Apr-00 Sep-00 Feb-01 Jul-01 Dec-01 May-02 Oct-02 Mar-03 Aug-03
Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07
The ROAs of the PSBs were the most negatively affected in 9MFY14 due to the loan loss charges and provisions for the mark-to-market losses on investments.
Figure 51: Public sector banks treasury gains and provisions (%)
1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% FY01 -0.2% Portfolio gains (% of assets) Provision for investments (% of assets) Provision for bad loans (% of assets) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F
Figure 52: Private sector banks treasury gains and provisions (%)
The private sector banks higher treasury gains in 9MFY14 were used to make greater provisions for bad loans.
1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% FY01 -0.2% Portfolio gains (% of assets) Provision for investments (% of assets) Provision for bad loans (% of assets) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F
22
Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14
Jan-04 Jun-04
2.4 HFCs expected to be prime beneficiaries of the likely drop in wholesale borrowing rates
In general, the drop in wholesale borrowing costs will have a more positive impact on non-banks than banks. Among the NBFCs, we think that the housing finance companies (HFCs) will benefit the most. We think a decline in the wholesale borrowing costs will lead to only a moderate cut in the base rate for lending by banks, as the base rate is now a function of the cost of funds, negative carry-on CRR/SLR, unallocated overhead costs and the average return on capital. Furthermore, banks may not aggressively cut their base rates due to the asset quality headwinds they are facing. The recent history, since the introduction of a base rate, suggests that there is a low correlation between the base rate and the wholesale cost of borrowing (Fig 53). In our view, the base rate will provide a floor for the mortgage lending rate. Thus, as cost of funds fall, HFCs will benefit in terms of expanding spreads.
Figure 53: Base rate for lending vs. 1-year wholesale borrowing cost (%)
Low correlation between base rate for lending and cost of wholesale borrowings.
11.0 10.5 10.0

9.5
9.0 8.5 8.0 7.5 7.0 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Public sector - average base rate 12m certificate of deposit rates (average) Private banks - average base rate
SOURCES: CIMB, RBI, BLOOMBERG
Figure 54: SBIs home loan rate vs. AAA 3-year bond yield (%)
In the past, the HFCs faced stiff lending rate competition from banks despite the rising cost of marginal wholesale borrowings.
11.50 11.00 10.50 10.00 9.50 9.00 8.50 8.00 7.50
May-12
May-13
7.00
Jan-12 Mar-12 Feb-12 Apr-12
Jun-12
Jan-13
Mar-13
Jun-13
Feb-13
Jan-14
Aug-12
Sep-12
Aug-13
Sep-13
Nov-12
Nov-13
Dec-12
SBI - Base rate
SBI - home loan rate
AAA 3 year bond yield
23
Dec-13
Mar-14
Feb-14
Oct-12
Apr-13
Jul-13
Jul-12
Oct-13
2.5 PSBs face multiple challenges

In general, the public sector banks (PSBs) continue to face multiple challenges including the loss of market share in low-cost deposits (Fig 55), elevated loan loss charges, provisions for staff retirement benefits and the risk of capital infusion by the government at valuations below book value. Most PSBs, other than SBI, have lost market share in savings deposits to private sector banks. In our view, the reason for this is that a large proportion of the employees at PSB branches are focused on transaction banking/operational activities, rather than marketing (Fig 57 & 58). Furthermore, anecdotal evidence suggests that PSBs have been very passive in the pursuit of corporate salary accounts. The private sector banks are also becoming more aggressive and capturing more government business market share from the PSBs. The recent capital infusion by the GOI was negative for minority investors, in our view (Fig 59). Furthermore, the net NPLs combined with one-third of the restructured loans comprise almost half of the PSBs reported net worth. We think that the increased capital requirements under the Basel III norms are likely to lead to frequent equity dilutions. If these dilutions happen at valuations below the book value, the minority investors will be negatively affected. While the flow of impairments is likely to slow in FY15, loan loss charges are likely to remain elevated in the medium term. Note that, loan loss provision cover for bad loans at PSBs has been falling (Fig 60). Further, based on the restructured loans that are close to completing their 2-year moratorium, if a third of these become NPLs, the resulting higher loan loss charges translate to 7bp of ROAs (Fig 62). In comparison to the private sector banks, the PSBs will benefit more from the likely fall in interest rates in terms of bond portfolios due to the longer duration of their portfolios. However, a drop in interest rates will also cause the pension liability to increase (Fig 63, 64 & 65). In short, if interest rates fall, the bond portfolio gains may be partly offset by the higher provision for pension liabilities.
Figure 55: PSBs CASA market share (%)
30% 25% 20% 15% 10%
2%
Figure 56: Private sector banks CASA market share (%)

6%
Title: Source:
5%
4%
3%
5% 1% 0%
FY02
FY03
FY05
FY07
FY08
FY10
FY11
FY13
FY01
FY04
FY06
FY09
FY12
FY01
FY03
FY04
FY06
FY07
FY09
FY12
FY02
FY05
FY08
FY10
FY11
BOB INBK
BOI OBC
CBK PNB
CRPBK SBIN
FB UNBK AXSB HDFCB ICICIBC IIB J&KBK YES
SOURCES: CIMB, RBI, COMPANY REPORTS
SOURCES: CIMB, RBI, COMPANY REPORTS
24
FY13
0%
Figure 57: PSBs - employees per branch and business per employee trends
140 120 102 100 86 80 60 40 20 0 FY09 FY10 FY11 FY12 FY13 73 8 6 4 10 115 14 12
Figure 58: Private sector banks - employees per branch and business per employee trends
100
127
Title: Source:
77 68
94 83 86
25
80
15
20
60
40
10
20 2 0 0 FY09 FY10 FY11 FY12 FY13
Business per employee (Rs m)
Employees per branch (Nos.) - RHS
Business per employee (Rs m)
Employees per branch (Nos.) - RHS
SOURCES: CIMB, RBI
SOURCES: CIMB, RBI
Figure 59: Capital infusion in PSBs (3QFY14 and 4QFY14)

Rs bn Capital infusion Equity Capital (Mar'13) Allahabad Bank Andhra Bank Bank of Baroda Bank of India Canara Bank Corporation Bank Oriental Bank of Commerce Punjab National bank State Bank of India Union Bank of India TOTAL 4.0 2.0 5.5 10.0 5.0 4.5 1.5 5.0 20.0 5.0 62.5 5.0 5.6 4.2 6.0 4.4 1.5 2.9 3.5 6.8 6.0 Reserves (Mar'13) 99.8 78.8 304.4 210.2 224.0 94.1 118.1 308.9 1,243.5 150.9 Networth (Mar'13) 105 84 309 216 228 96 121 312 1,250 157 2,878.9 3.8% 2.4% 1.8% 4.6% 2.2% 4.7% 1.2% 1.6% 1.6% 3.2% 2.2% Cap infusion as % Book Value of Networth (Mar'13) 210 151 731 362 516 626 415 884 1,828 263 Dilution Price (Rs) 90 67 674 216 274 308 185 582 1,783 149 8.9% 5.4% 1.9% 7.8% 4.1% 9.6% 2.8% 2.4% 1.6% 5.6% 5.0%
Equity dilution
Figure 60: Loan loss provision coverage ratio (%)

90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0%
2QFY10
4QFY10
2QFY11
1QFY12
3QFY12
1QFY13
3QFY13
1QFY14
Public sector banks (Avg.; %)
Private sector banks (Avg.; %)
25
3QFY14
1QFY10
3QFY10
1QFY11
3QFY11
4QFY11
2QFY12
4QFY12
2QFY13
4QFY13
2QFY14
A large percentage of a PSBs capital is impaired even though a reasonable proportion of the restructured loans are considered NPLs.
Figure 61: Unprovisioned stress to capital (Rs bn, at end-Dec 2013)

Unprovided stress (net NPLs + 35% Restructured restructured loans loans) 211.7 163.9 184.5 66.1 84.0 96.9 312.9 394.0 110.3 1,624.3 49.0 5.9 86.0 22.7 1.6 5.6 13.1 1.1 185.1 140.3 118.8 133.3 49.7 54.2 72.2 200.3 509.6 89.1 1,367.6 27.2 10.1 61.3 11.5 2.2 2.7 5.6 0.8 121.3
Rs bn Bank of Baroda Bank of India Canara Bank Corporation Bank Indian Bank Oriental Bank of Commerce Punjab National Bank State Bank of India Union Bank of India Total Axis Bank HDFC Bank ICICI Bank Federal Bank Indus Ind Bank ING JnK Bank Yes Bank Total
Capital 4.2 6.4 4.6 1.7 4.3 3.0 3.6 6.8 6.3 41.0 4.7 4.8 11.5 1.7 5.2 1.9 0.5 3.6 34.0
Reserves 338.3 241.4 247.1 103.7 109.0 127.8 339.2 1,060.5 166.7 2,733.7 370.2 422.4 744.8 67.6 79.1 69.2 57.5 66.5 1,877.1
Net NPLs 66.2 61.5 68.7 26.5 24.8 38.3 90.8 371.7 50.5 799.1 10.0 8.0 31.2 3.6 1.6 0.7 1.0 0.4 56.5
% of networth 41% 48% 53% 47% 48% 55% 58% 48% 51% 49% 7% 2% 8% 17% 3% 4% 10% 1% 6%
Figure 62: PSBs - likely impact on ROAs from loans restructured up to FY12
Rs bn Total assets Outstanding loan book - Dec 2013 Restructured loans - FY12 % of loans % of assets Assuming, one-third of restructured become NPLs Loan loss charge less reversal of standard asset provision Loan losss charge - as % of total assets 3QFY14 48,465 31,004 1,064 3.4% 2.2% 351 35 0.07%
Note that the banks have used different discount rates to value pension liabilities. In a falling rate environment, the present value of pension obligation (PVPO) may be revised up as the discount rate falls.
Figure 63: Pension assumptions (%)- FY13

BOB Discount Rate Return on plan assets Salary escalation Attrition rate Mortality table 8.25% 8.0% 6.0% 2.0% 1994-96 BOI 8.0% 8.0% Canara 8.11% J&K 8.0% 8.0% 3.5% 1.0% OBC 8.5% 9.13% 5.5% n/a n/a PNB 8.45% 8.61% 5.0% 1.0% n/a SBI 8.5% 8.6% 5.0% n/a n/a Union 8.5% 8.7% 4.0% 2.0% n/a
8.0% Salary - 4% 5.0% Pension -2.5% 1.0% n/a n/a
n/a 2006-08
Note the gap between the PVPO and fair value of assets (FVA).
Figure 64: Gap between PVPO and FVA- FY13

BOB Present value of pension obligations yoy growth Fair value of assets yoy growth Gap between PVPO and FVA % Of which, amortised portion of SPO 75 7% 67 16% 8 11% 7.3 BOI 74 4% 65 28% 9 12% 8.8 Canara 86 11% 81 8% 5 6% 7.4 J&K 6 14% 5 26% 1 18% 0.0 OBC 33 16% 27 28% 6 18% 3.4 PNB 136 16% 124 22% 11 8% 13.3 SBI 396 8% 350 29% 45 11% 0 Union 60 14% 48 19% 12 20% 6.8
26
Figure 65: Employee cost analysis - FY13

BOB Employee expenses yoy growth % of average AUM Key retirement costs Current service cost % of average AUM Amortised pension liabilities % of average AUM Change in actuarial assumption % of average AUM 13.0 0.26% 3.7 0.07% -6.5 -0.06% 10.1 0.24% 5.3 0.13% -8.5 -0.08% 2.28 0.06% 5.1 0.13% 2.0 0.05% 0.68 0.10% 1.0 0.15% -0.7 -0.11% 2.1 0.11% 1.7 0.09% 2.4 0.22% 5.2 0.11% 6.6 0.14% 10.3 0.36% 12.3 0.08% 1 0.01% 10.7 0.07% 2.3 0.08% 3.2 0.11% 5.1 0.29% 34 16% 0.7% BOI Canara 31 3% 0.8% 33 9% 0.8% J&K 7 25% 1.0% OBC 17 24% 0.9% PNB 57 20% 1.2% SBI 184 8% 1.3% Union 28 11% 1.0%
3.
VALUATION AND RECOMMENDATION
The PSBs valuations are at their lowest in a decade. However, in our view, they face multiple challenges including the loss of market share in low-cost deposits, elevated loan loss charges, provisions for staff retirement benefits and the risk of capital infusion by the government at valuations below book value. Among the PSBs, we prefer the well-capitalised banks with relatively superior ROAs. We expect housing finance companies (HFCs) to benefit the most from the expected drop in wholesale borrowing costs, which will lead to an expansion in spreads. We upgrade HDFC Ltd to an Add rating from Hold and downgrade HDFC Bank to Hold from Add. The asset financing auto financiers (NBFCs) will also benefit from the falling cost of funds but the headwinds affecting asset quality and loan growth keeps us cautious. In this space we like Bajaj Finance and maintain our Reduce ratings on Shriram Transport Finance and Mahindra Finance. Among the large private banks, our top pick is ICICI Bank. Among the mid-sized private banks, we upgrade Federal Bank to Add from Hold and Indusind Bank to Hold from Reduce. We maintain our Add ratings on ING Vysya Bank and Jammu & Kashmir Bank.
27
1.00 -
2.00
3.00
4.00
5.00
6.00
7.00
8.00
1.00
2.00
3.00
4.00
5.00
6.00
0.50
1.00
1.50
2.00
2.50
3.00
Mar-06 Mar-06
Mar-06
Jun-06
Sep-06 Dec-06
Jun-06
Jun-06
Sep-06 Dec-06
Sep-06
Dec-06
Mar-07
Jun-07 Sep-07
Mar-07
Mar-07
Jun-07
Figure 66: PSBs: 1-yr forward rolling PBV (x) chart
Figure 68: NBFCs: 1-yr forward rolling PBV (x) chart
Figure 67: Private Banks: 1-yr forward rolling PBV (x) chart
28
Dec-07
Mar-08 Jun-08
Jun-07
SBIN
Sep-07
Sep-07
HDFCB
HDFC
Dec-07
Dec-07
Mar-08 Jun-08
Mar-08
Jun-08
PNB
Sep-08
Dec-08
Sep-08
AXSB
Sep-08
Dec-08
Dec-08
IDFC
Mar-09 Jun-09
Sep-09
Mar-09
Mar-09 Jun-09
BOB
Sep-09
Jun-09 Dec-09 Mar-10

Jun-10
Sep-09
Dec-09
ICICIBC
Dec-09 Mar-10
Jun-10
MMFS
Mar-10 Sep-10
Dec-10 Mar-11
Jun-10
BOI
Sep-10
Sep-10
Dec-10 Mar-11
Dec-10
Mar-11
SHTF
Jun-11
IIB
Sep-11
Jun-11 Dec-11 Mar-12
Jun-11
CBK
Sep-11
Sep-11
Dec-11
YES
Jun-12
Dec-11 Mar-12
Jun-12
Mar-12 Sep-12 Dec-12

Mar-13
BAF
Jun-12
Sep-12
Sep-12 Dec-12
Mar-13
UNBK
Dec-12
Mar-13
Jun-13
Jun-13
Sep-13 Dec-13
Jun-13
Sep-13 Dec-13
Sep-13
SOURCES: CIMB, BLOOMBERG, COMPANY REPORTS
Dec-13
Figure 69: Sector Comparison

Company PUBLIC BANKS Bank of Baroda Bank of India Canara Bank Oriental Bank of Commerce Punjab National Bank State Bank of India State Bank of India Union Bank of India PRIVATE BANKS Axis Bank Federal Bank HDFC Bank ICICI Bank Indusind Bank J&K Bank ING Vysya Bank Yes Bank NBFCs Bajaj Finance Ltd Housing Development Fin. IDFC Limited Mahindra & Mahindra Finance Shriram Transport Finance INSURANCE Bajaj Finserv Max India Bloomberg Ticker Reco. Price (Rs) ADD HOLD HOLD HOLD HOLD HOLD HOLD 656 202 240 192 642 1,702 116 Target Price (Rs) 722 212 262 202 657 1,762 119 Market Cap (US$ m) 4,625 2,129 1,816 944 3,816 20,858 1,205 Core P/E (x) CY13 6.2 4.4 4.2 5.1 5.9 10.1 8.9 4.0 CY14 5.8 4.4 3.7 4.5 4.7 8.6 6.3 3.6 3-year EPS CAGR (%) 1.7% 1.5% -0.2% 1.5% 1.5% 3.7% -1.1% P/BV (x) CY13 0.83 0.53 0.45 0.45 0.69 1.11 0.82 0.43 CY14 0.74 0.49 0.41 0.42 0.62 1.00 0.74 0.40 Recurring ROE (%) CY13 14.8% 13.0% 11.4% 9.5% 12.6% 11.9% 11.5% CY14 13.8% 11.8% 11.6% 9.7% 14.0% 12.5% 11.7% CY15 13.9% 11.8% 12.0% 10.7% 14.5% 13.0% 11.9% Dividend Yield (%) CY13 CY14 3.3% 5.0% 5.4% 4.3% 4.2% 2.4% 6.9% 3.3% 5.0% 5.7% 5.0% 4.3% 2.4% 7.5%
BOB IN BOI IN CBK IN OBC IN PNB IN SBIN IN UNBK IN
AXSB IN FB IN HDFCB IN ICICIBC IN IIB IN JKBK IN VYSB IN YES IN
HOLD ADD HOLD ADD HOLD ADD ADD HOLD
1,394 86 734 1,200 471 1,510 556 360
1,451 105 788 1,445 506 1,770 677 387
10,745 1,206 28,876 22,735 4,066 1,202 1,721 2,133
11.4 9.4 21.8 14.8 18.8 6.3 13.9 8.7
10.7 8.4 18.0 13.6 15.4 6.2 13.1 7.6
6.4% 2.6% 17.3% 7.6% 19.4% 4.0% 11.7% 12.5%
1.78 1.08 4.25 1.92 2.99 1.31 1.58 1.92
1.57 0.98 3.59 1.74 2.58 1.12 1.41 1.60
17.5% 12.5% 22.0% 14.2% 18.1% 23.8% 13.0% 25.2%
15.8% 12.4% 21.9% 13.6% 18.2% 19.7% 11.4% 23.4%
15.4% 12.8% 21.4% 13.5% 18.6% 18.4% 11.7% 22.0%
1.4% 1.8% 0.9% 1.7% 0.7% 3.3% 0.9% 1.8%
1.5% 2.0% 1.0% 1.8% 0.8% 3.3% 1.0% 2.0%
BAF IN HDFC IN IDFC IN MMFS IN SHTF IN
ADD ADD HOLD REDUCE REDUCE
1,673 843 109 254 667
1,860 982 117 236 632
1,377 21,598 2,718 2,374 2,484
11.7 26.8 8.4 16.2 11.5
9.7 22.3 7.7 13.9 10.4
19.2% 12.7% 6.2% 10.1% 4.1%
2.17 4.81 1.19 2.90 1.88
1.82 4.27 1.07 2.52 1.63
21.2% 20.0% 15.5% 20.2% 18.4%
20.6% 20.5% 14.8% 19.6% 17.1%
21.1% 21.1% 14.6% 20.5% 17.4%
1.0% 1.5% 2.7% 1.4% 1.0%
1.3% 1.7% 2.9% 1.7% 1.2%
BJFIN IN MAX IN
HOLD ADD
715 201
738 230
1,868 876
142.5 19.5
132.4 22.8
1.1% -14.0%
4.61 1.70
4.46 1.66
3.6% 9.3%
3.5% 7.5%
3.7% 9.4%
0.0% 3.5%
0.0% 3.2%
NOTE: Prices as on 21st March 2014
29
BanksIndia March 25, 2014
Axis Bank
AXSB IN / AXBK.BO Current Rs1,394 Rs1,451 Rs1,227 4.1%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
Target Prev. Target Up/Downside
US$10,745m
Rs654,619m
US$69.36m
Rs4,267m
66.1%
468.0 m shares
CIMB Analyst(s)
Challenges ahead
Axis Banks earnings growth is likely to be muted in the near term due to large one-off gains in 9MFY14. Also, the continued slowdown in industrial segment is the key risk to asset quality as it hurts loans in the mid-corporate and SME segments. That said, the overall improvement in asset and liability mix are key positives.
In 9MFY14, Axis Bank booked Rs4.8bn in treasury gains and Rs4bn of currency gain on repatriated profit from overseas branches. These will likely lead to muted earnings growth in FY15. We largely maintain our FY15-16 EPS estimates but lower our cost of equity assumptions from 15% to 13% which leads to a higher discounted economic profit based target of Rs1,451. We maintain our Hold rating. stood at 2.3% of loans. Furthermore, corporate loan growth is slowing (+8% yoy, +61% of total loans as at Dec 13), which impacts fee income as Axis Bank is a large player in the debt syndication business.
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders SUUTI LIC of India GIC of India 1M 11.7 16.8 3M 5.9 9.1 12M -9.5 6.3 % held 20.7 9.3 1.6
Improvements in loan mix

Over the past couple of years, Axis Bank has focussed on increasing the proportion of its retail loans. As at end-Dec 13, retail loans accounted for 30% of its total loans vs. 22% in Dec 11. This partly eases concerns over the overall loan loss provisions given that retail loans have been experiencing low NPL formation.
Asset quality and corporate loan growth, a weak point

In general, given the overall slowdown in the economy and stress in capital-intensive sectors, we expect Axis Banks asset quality to remain under pressure. In 3Q, the fresh delinquencies remained largely stable qoq (guidance of Rs60bn in gross impairments in FY14, Rs43bn impaired in 9MFY14). We believe there is upside risk to the bank's impaired assets if growth in the manufacturing sector remains muted. As at end-Dec 13, gross NPLs were 1.4% and standard restructured loans
and in liability mix

Axis Bank is consistently focussing on reducing its reliance on wholesale deposits. As at end-Dec 13, wholesale deposits (over Rs50m) accounted for 26% of total deposits vs. 37% in Dec 11. CASA was at 43% as of Dec 13. As at end-Dec 13, its Tier-I capital stood at 11.5% (excluding 9MFY14 earnings), which makes it comfortably placed based on its medium-term business growth prospects.
Price Close 1,500
Relative to SENSEX (RHS) 109.3
Financial Summary
96.0
82.7 69.3
1,300
1,100 900
700 80
60 40
56.0
20
Mar-13 Jun-13 Sep-13 Dec-13
Source: Bloomberg
52-week share price range

1,394 782.9
1,535
1,451
Current Target
Net Interest Income (Rsm) Total Non-Interest Income (Rsm) Operating Revenue (Rsm) Total Provision Charges (Rsm) Net Profit (Rsm) Core EPS (Rs) Core EPS Growth FD Core P/E (x) DPS (Rs) Dividend Yield BVPS (Rs) P/BV (x) ROE % Change In Core EPS Estimates CIMB/consensus EPS (x)
Mar-12A 80,177 54,202 134,380 (11,625) 42,422 103.0 24.0% 13.54 16.00 1.15% 552 2.53 20.3%
Mar-13A 96,663 65,511 162,174 (17,509) 51,786 117.5 14.1% 11.86 18.00 1.29% 708 1.97 18.5%
Mar-14F 119,054 68,875 187,929 (22,906) 57,930 123.5 5.1% 11.29 20.00 1.43% 807 1.73 16.3% 0.000% 0.98
Mar-15F 133,729 73,877 207,606 (26,138) 62,199 131.9 6.8% 10.57 22.00 1.58% 913 1.53 15.3% (0.009%) 0.91
Mar-16F 154,929 81,481 236,410 (30,320) 71,079 150.0 13.7% 9.29 24.00 1.72% 1,034 1.35 15.4% (0.007%) 0.88
Vol m
SOURCE: CIMB, COMPANY REPORTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA
Axis Bank March 25, 2014
Profit & Loss

(Rsm) Net Interest Income Total Non-Interest Income Operating Revenue Total Non-Interest Expenses Pre-provision Operating Profit Total Provision Charges Operating Profit After Provisions Total Pretax Income/(Loss) from Assoc. Operating EBIT (incl Associates) Total Non-Operating Income/(Expense) Profit Before Tax (pre-EI) Exceptional Items Pre-tax Profit Taxation Consolidation Adjustments & Others Exceptional Income - post-tax Profit After Tax Minority Interests Pref. & Special Div FX And Other Adj. Net Profit Recurring Net Profit Mar-13A 96,663 65,511 162,174 (69,142) 93,031 (17,509) 75,522 0 75,522 0 75,522 75,522 (23,736) Mar-14F 119,054 68,875 187,929 (78,561) 109,368 (22,906) 86,462 0 86,462 0 86,462 86,462 (28,533) Mar-15F 133,729 73,877 207,606 (88,633) 118,973 (26,138) 92,835 0 92,835 0 92,835 92,835 (30,636) Mar-16F 154,929 81,481 236,410 (100,001) 136,409 (30,320) 106,088 0 106,088 0 106,088 106,088 (35,009)
Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A Mar-14F 1,986,220 2,308,010 1,133,161 1,244,135 3,119,381 (16,560) 3,102,821 0 98,436 98,436 204,350 0 3,405,607 2,526,136 439,511 2,965,647 108,881 3,074,528 331,079 331,079 3,552,146 (23,205) 3,528,940 0 106,674 106,674 224,785 0 3,860,399 2,868,461 487,998 3,356,459 124,315 3,480,774 379,626 379,626 Mar-15F 2,678,255 1,389,149 4,067,404 (27,881) 4,039,523 0 115,661 115,661 247,263 0 4,402,448 3,288,266 540,834 3,829,101 141,897 3,970,997 431,451 431,451 Mar-16F 3,108,439 1,551,295 4,659,734 (34,005) 4,625,729 0 125,472 125,472 271,989 0 5,023,190 3,771,636 598,454 4,370,091 161,946 4,532,037 491,153 491,153
51,786 0 0 51,786 51,786
57,930 0 0 57,930 57,930
62,199 0 0 62,199 62,199
71,079 0 0 71,079 71,079
Balance Sheet Employment

Gross Loans/Cust Deposits Avg Loans/Avg Deposits Avg Liquid Assets/Avg Assets Avg Liquid Assets/Avg IEAs Net Cust Loans/Assets Net Cust Loans/Broad Deposits Equity & Provns/Gross Cust Loans Asset Risk Weighting Provision Charge/Avg Cust Loans Provision Charge/Avg Assets Total Write Offs/Average Assets Mar-13A 78.6% 78.2% 38.4% 41.8% 57.8% 78.0% 18.0% 75.9% 0.69% 0.41% 0.47% Mar-14F 80.5% 79.6% 38.6% 42.1% 59.2% 79.7% 17.9% 78.7% 0.89% 0.53% 0.56% Mar-15F 81.4% 81.0% 37.6% 40.8% 60.2% 80.6% 17.6% 81.2% 0.99% 0.60% 0.63% Mar-16F 82.4% 82.0% 36.7% 39.6% 61.2% 81.5% 17.4% 83.9% 0.99% 0.61% 0.64%
Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 20.7% 24.9% 20.1% 59.6% 6.36% 9.44% 3.08% 4.09% 3.94% 18.8% 3.09% 31.4% 16.3% Mar-14F 15.9% 17.6% 14.5% 63.4% 6.04% 9.29% 3.25% 4.41% 4.24% 20.9% 3.28% 33.0% 16.2% Mar-15F 10.5% 8.8% 7.4% 64.4% 6.00% 9.17% 3.17% 4.34% 4.04% 22.0% 3.24% 33.0% 16.7% Mar-16F 13.9% 14.7% 14.3% 65.5% 5.85% 9.05% 3.20% 4.39% 3.98% 22.2% 3.29% 33.0% 16.0%
Rolling FD P/E (x)

35.0 30.0
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 16.1% 3.4% 20.9% 42.6% 0.4% 110.0% 0.5% 12.2% 12.2% 14.8% 78.0% 1.2% 15.7% Mar-14F 16.2% 3.6% 5.1% 41.8% 0.5% 96.6% 0.5% 11.9% 11.9% 13.6% 79.7% 1.5% 5.0% Mar-15F 16.0% 3.5% 7.3% 42.7% 0.6% 91.1% 0.5% 11.5% 11.5% 14.6% 80.6% 1.7% 10.0% Mar-16F 16.1% 3.6% 10.3% 42.3% 0.7% 87.0% 0.5% 11.2% 11.2% 14.7% 81.5% 1.8% 10.0%
25.0
20.0 15.0 10.0 5.0 0.0 Jan-10
Jan-11
Axis Bank
Jan-12
Jan-13
HDFC Bank
Jan-14
ICICI Bank
SOURCE: CIMB, COMPANY REPORTS
31
Finance CompaniesIndia March 25, 2014
Bajaj Finance Ltd

BAF IN / BJFN.NS Current Rs1,673 Rs1,860 Rs1,800 11.2%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$1,377m
Rs83,903m
US$0.72m
Rs44.56m
37.9%
49.78 m shares
CIMB Analyst(s)
On a steady growth path

Bajaj Finance (BAF) continues to deliver healthy performance on loan growth as well as on asset quality. Note that it has maintained margins through efficient asset-liability management amid a volatile interest rate environment. An expected fall in wholesale borrowing costs could further augment margins.
Despite the challenging macros and volatile rates, BAF's 3Q loan growth surprised positively. We raise our FY15-16 EPS estimates by 2-5% as we lower the cost of funds and lower our cost of equity assumption from 15% to 13%. Our Add rating is maintained, with a revised discounted economic profit-based target price of Rs1,860. benefitted from this move, to an extent, as the ban reduces the competition from banks. Though the guidelines are not applicable to NBFCs, management has taken proactive measures and redesigned the bank's products, providing comfort over the future growth visibility of such products.
Umang SHAH
Jatinder AGARWAL
Vivek VERMA
Share price info

Share price perf. (%) Relative Absolute Major shareholders Bajaj Finserv Maharashtra Scooters HDFC Std Life 1M 4.3 9.4 3M 8.4 11.6 12M 19.6 35.4 % held 62.1 3.8 1.8
Fall in wholesale rates bodes well for margins

We expect the wholesale cost of funds to fall in FY15-16, which augurs well for wholesale-funded entities like BAF. This would also partially mitigate the negative impact on margins due to the shift in portfolio mix in favour of the low-yielding mortgages segment. Note, that when wholesale borrowing costs spiked in mid-FY14, BAF opted to keep the excess liquidity on its balance-sheet which negatively impacted spreads.
Valuation and outlook

BAF's growth trajectory is likely to moderate from its historical trends, but should remain healthy. Though the two-wheeler and (16% of loans, +10% yoy as at Dec 13) commercial loan (8% of loans, -15% yoy as at Dec 13) segment is witnessing growth pressures, other segments such as loan against property (41% of loans as at Dec 13, +56% yoy), consumer durables (13% of loans as at Dec 2013, +44% yoy) and personal loans (11% of loans as at Dec 2013, +52% yoy) are likely to grow at a healthy pace. In our view, BAFs proactive measures to rebalance its loan book has helped it maintain its asset quality. This gives us comfort in terms of overall business growth and loan loss charges.
Benefitting from ban on 0% finance schemes by banks

The RBI notification banning the 0% financing schemes offered by banks had fuelled fears over BAFs loan growth. However, BAF has actually
Price Close 1,710 Relative to SENSEX (RHS) 124.4
Financial Summary
113.3
102.2 91.1
1,510
1,310 1,110
910 600
400
80.0
200
Source: Bloomberg

984.3 1,673 1,695
1,860
Current Target
Mar-12A 12,303 1,954 14,257 (1,544) 4,064 104.3 54.6% 16.05 12.00 0.72% 487 3.44 24.1%
Mar-13A 17,158 1,899 19,057 (1,818) 5,913 129.8 24.5% 12.89 15.00 0.90% 676 2.47 22.0%
Mar-14F 22,754 2,430 25,184 (2,564) 7,354 147.7 13.8% 11.33 18.00 1.08% 803 2.08 20.0% 0.00% 0.99
Mar-15F 28,109 2,790 30,899 (3,329) 8,970 180.2 22.0% 9.29 22.00 1.31% 958 1.75 20.5% 2.29% 1.01
Mar-16F 34,033 3,219 37,252 (3,497) 11,207 225.1 24.9% 7.43 26.00 1.55% 1,152 1.45 21.3% 5.20% 1.01
Vol th
Bajaj Finance Ltd March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A 167,436 53 167,489 0 167,489 0 6,559 6,559 4,164 0 178,212 0 69,433 61,901 131,334 13,207 144,541 33,670 33,670 Mar-14F 228,089 1,870 229,960 0 229,960 0 7,778 7,778 5,148 0 242,885 0 98,880 88,153 187,033 15,876 202,909 39,976 39,976 Mar-15F 269,145 2,180 271,325 0 271,325 0 9,186 9,186 4,271 0 284,782 0 115,255 102,752 218,008 19,109 237,117 47,665 47,665 Mar-16F 323,648 2,589 326,237 0 326,237 0 10,991 10,991 2,000 0 339,228 0 136,884 122,035 258,919 22,952 281,871 57,358 57,358
5,913 0 0 5,913 5,913
7,354 0 0 7,354 7,354
8,970 0 0 8,970 8,970
11,207 0 0 11,207 11,207

Mar-13A Gross Loans/Cust Deposits Avg Loans/Avg Deposits Avg Liquid Assets/Avg Assets Avg Liquid Assets/Avg IEAs Net Cust Loans/Assets Net Cust Loans/Broad Deposits Equity & Provns/Gross Cust Loans Asset Risk Weighting Provision Charge/Avg Cust Loans Provision Charge/Avg Assets Total Write Offs/Average Assets Mar-14F Mar-15F Mar-16F
Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 33.7% 39.2% 44.7% 90.0% 10.3% 20.1% 9.8% N/A 11.6% 17.3% 11.2% 32.2% 12.6% Mar-14F 32.2% 30.1% 27.8% 90.4% 9.7% 19.2% 9.5% N/A 11.2% 18.7% 10.8% 34.0% 12.2% Mar-15F 22.7% 23.4% 22.0% 91.0% 8.8% 18.3% 9.5% N/A 11.0% 19.7% 10.7% 34.0% 12.2% Mar-16F 20.6% 21.0% 24.9% 91.4% 8.3% 18.0% 9.7% N/A 11.2% 17.1% 10.9% 34.0% 11.5%
1.58% 1.68% 94.0% 241% 21.4% 95.9% 1.25% 1.18% 1.18%
2.67% 2.83% 93.9% 231% 18.9% 96.3% 1.30% 1.22% 1.22%
2.55% 2.69% 94.5% 234% 19.3% 96.9% 1.34% 1.26% 1.26%
1.77% 1.85% 95.4% 236% 19.5% 97.8% 1.18% 1.12% 1.12%
Rolling FD P/E (x)

25.0 20.0
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 36.3% 11.8% -2.9% 44.7% 0.2% 110.8% 0.3% 19.2% 22.0% N/A N/A 1.1% -2.9% Mar-14F 36.2% 11.5% 28.0% 45.6% 0.3% 100.4% 0.3% 16.7% 18.8% N/A N/A 1.3% 28.0% Mar-15F 18.0% 11.2% 14.8% 45.2% 0.3% 99.7% 0.3% 16.9% 18.7% N/A N/A 1.6% 14.8% Mar-16F 20.3% 11.4% 15.4% 45.0% 0.3% 101.1% 0.3% 17.0% 18.5% N/A N/A 1.8% 15.4%
15.0
10.0 5.0 0.0 Jan-10
Jan-11
Bajaj Finance Ltd
Jan-12
Jan-13
Jan-14
Mahindra & Mahindra Finance
Shriram Transport Finance
33
Bank of Baroda
BOB IN / BOB.BO Current Rs656.2 Rs722.0 Rs603.0 10.0%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$4,625m
Rs281,761m
US$17.62m
Rs1,090m
44.6%
422.5 m shares
CIMB Analyst(s)
Light at the end of the tunnel

The sharp deterioration in asset quality in the past two years has taken away the sheen at BOB. That said, it is still better than its peers in terms of overall stressed loans. For now, NIMs appear to have bottomed and gross delinquencies are expected to trend lower.
Meanwhile, we do not expect asset quality to worsen further. We largely maintain our FY14-16 EPS estimates. However, we lower our cost of equity assumption from 15% to 13%. Hence we maintain our Add rating on the stock, with a revised GGM-based target price of Rs722. BOB remains our preferred pick among public sector banks. in Dec 2013 from 1.37% in Mar 2013. Going forward, management expects gross delinquencies to trend lower. For the past two quarters, the pace of fresh impairments has slowed down. The loan restructuring pipeline as at end-Dec 2013 stands at Rs15bn-20bn (about 40-60bp of loans).
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders Government of India LIC of India HDFC MF 1M 21.6 26.7 3M -2.5 0.7 12M -15.1 0.7 % held 55.4 11.4 3.7
NIMs have bottomed out

BOBs NIMs seem to have bottomed out, after steadily declining for the past eight quarters, partly due to stress in its asset quality. In 3QFY14, domestic NIMs improved 10bp qoq to 2.95% while overseas NIMs were stable qoq at 1.18%. Overall, NIMs are likely to trend higher partly due to the improvement in the CASA ratio and rebalancing of the overseas loan book.
Asset quality unlikely to worsen further

Over the past two years, BOB has seen a rapid deterioration in its asset quality. Its gross NPL ratio more than doubled from 1.5% in Dec 2011 to 3.3% in Dec 2013 and standard restructured loans also rose almost twofold from 3.3% of total loans to 6%. Note that the increase in NPLs and restructured loans was on a relatively faster expanding loan base (average loan growth of about 20-22% in the past three years). Furthermore, BOB has a large overseas business, with 33% of its total loans in Dec 2013 coming from its foreign operations (largely linked to India-related businesses). Gross NPLs in this book have risen to 1.75%
Financial Summary
Better placed among peers

After adjusting for the post-tax net NPLs and 35% of the restructured loans, BOB trades at 1x FY15 P/BV. In the past three years, BOBs ROAs have fallen, from about 1.30% in FY11 to 0.8% in 9MFY14. We think that its ROAs are unlikely to fall further. Moreover, as at end-Dec 2013, BOB's Tier-1 capital (including profits) was standing comfortably at 9.7%.
Price Close 760 710 660 610 560 510 460 410 10 8 6 4 2
Mar-13 Jun-13 Sep-13
Relative to SENSEX (RHS) 107.0 100.6 94.1 87.7 81.3 74.9 68.4 62.0
Dec-13
Source: Bloomberg

656.2 445.8
740.5
722.0
Current Target
Mar-12A 103,170 34,223 137,393 (25,548) 50,070 124.4 11.2% 5.28 18.00 2.74% 638 1.03 21.7%
Mar-13A 113,153 36,306 149,459 (41,679) 44,807 107.3 (13.7%) 6.11 21.50 3.28% 731 0.90 15.7%
Mar-14F 120,039 41,615 161,654 (34,334) 45,269 106.1 (1.1%) 6.18 21.50 3.28% 813 0.81 13.7% 0.000% 1.01
Mar-15F 139,030 43,836 182,866 (32,683) 50,262 116.7 10.0% 5.62 22.00 3.35% 908 0.72 13.6% (0.118%) 0.99
Mar-16F 161,011 49,025 210,036 (37,258) 58,238 135.2 15.9% 4.85 24.00 3.66% 1,019 0.64 14.0% (0.272%) 0.99
Vol m
Bank of Baroda March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A Mar-14F 3,319,763 3,860,193 1,205,671 1,265,955 4,525,435 (37,906) 4,487,529 0 118,794 118,794 853,989 0 5,460,312 4,738,833 265,793 5,004,626 138,530 5,143,157 308,652 308,652 5,126,148 (53,239) 5,072,910 0 131,432 131,432 1,004,609 0 6,208,951 5,391,184 300,460 5,691,645 158,685 5,850,329 350,122 350,122 Mar-15F 4,412,468 1,402,205 5,814,673 (72,539) 5,742,134 0 146,436 146,436 1,105,070 0 6,993,639 6,079,228 337,595 6,416,823 177,405 6,594,229 390,910 390,910 Mar-16F 5,038,636 1,553,528 6,592,164 (91,117) 6,501,047 0 163,303 163,303 1,215,577 0 7,879,926 6,856,269 377,443 7,233,712 198,901 7,432,613 438,814 438,814
44,807 0 0 44,807 44,807
45,269 0 0 45,269 45,269
50,262 0 0 50,262 50,262
58,238 0 0 58,238 58,238

Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 8.8% 4.9% (19.8%) 75.7% 5.25% 8.53% 3.27% 2.64% 4.05% 46.3% 2.28% 7.3% 20.3% Mar-14F 8.2% 1.0% 17.1% 74.3% 4.98% 8.00% 3.03% 2.37% 3.65% 37.8% 2.06% 20.0% 20.5% Mar-15F 13.1% 12.2% 22.5% 76.0% 4.80% 7.86% 3.05% 2.42% 3.67% 32.0% 2.11% 27.5% 18.8% Mar-16F 14.9% 15.3% 15.9% 76.7% 4.62% 7.68% 3.06% 2.49% 3.72% 31.7% 2.17% 27.5% 17.7%
Rolling FD P/E (x)

14.0 12.0
Key Drivers
10.0
8.0 6.0 4.0 2.0 0.0 Jan-10
Jan-11
Jan-12
Bank of India
Jan-13
Canara Bank
Jan-14
Punjab National Bank
Bank of Baroda
35
Bank of India
BOI IN / BOI.BO Current Rs202.0 Rs212.0 Rs177.0 5.0%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$2,129m
Rs129,737m
US$14.45m
Rs894.8m
33.3%
642.9 m shares
CIMB Analyst(s)
Driving in the fast lane

We think that a combination of low core Tier-1 capital and muted ROAs will keep BOIs valuations under pressure. Strong loan growth in the current uncertain environment and a likely increase in staff costs may act as near-term drags.
BOI is currently cheap, but we think that it will remain so in the medium to long term. Low core Tier-1 capital will necessitate capital dilution and could suppress ROEs. Moreover, likely provisions for employee benefits can pressurise earnings. We largely maintain our EPS, but we cut cost of equity from 15% to 13%, which lifts our GGM-based target price. Given the stock price correction, we upgrade the stock to Hold from Reduce on the back of reasonable valuations. while its loan book continues to grow rapidly (+27% yoy at end-Dec 13; +22% YTD).
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders Government of India LIC Lazard Asset Mgmt 1M 15.4 20.5 3M -9.5 -6.3 12M -44.9 -29.1 % held 66.7 11.8 3.5
Loan write-offs higher than peers

FY12-13 bad-loan write-offs were higher than peers. BOI wrote off 1.1% of its loans in FY12 (vs. a 0.5% average for public-sector banks) and 0.9% in FY13 (vs. a 0.7% average). Its accelerated write-offs have lowered its headline gross NPLs. Furthermore, the bank sold about Rs20bn (60bp of loans) to asset reconstruction companies in 9MFY14. As at end-Dec 13, its gross NPL ratio was 2.8% and restructured loans, 4.7% of loans.
Constrained by capital
As at end-Dec 13, BOIs Tier-1 capital adequacy ratio was 8.1%, with a core equity Tier-1 ratio of 7.85% (including profits). Over FY11-14, the Indian government had infused capital into BOI every year, diluting the holdings of minority shareholders. In our view, a mix of low ROAs (0.56% annualised in 9MFY14) and low Tier-1 capital is likely to invite further capital injections in the foreseeable future to meet Basel III norms. We forecast internal capital generation (profits less dividends) of 9-10% for FY14-16
LLP to decline gradually

In 3QFY14 incremental delinquencies and loan restructuring increased qoq. In 9MFY14 loan loss charges came in at 1.2% (annualised); though this was lower than the 1.5% in FY13, it remained higher than peers. The aggressive loan growth in 9MFY14 in the current environment can lead to asset-quality stress on a later date, in our view.
Price Close 400 350
Relative to SENSEX (RHS) 128 113
Financial Summary
98
83 68 53
300
250 200 150
100 30
20
38
10
Source: Bloomberg

202.0 131.1
342.2
212.0
Current Target
Mar-12A 83,135 33,212 116,346 (31,165) 26,775 47.74 2.9% 4.23 7.00 3.47% 326.5 0.62 15.6%
Mar-13A 90,240 37,660 127,900 (44,508) 27,493 46.95 (1.7%) 4.30 10.00 4.95% 362.4 0.56 13.6%
Mar-14F 105,950 44,799 150,748 (46,310) 28,084 45.31 (3.5%) 4.46 10.00 4.95% 385.5 0.52 12.1% 0.000% 0.94
Mar-15F 119,976 44,252 164,227 (47,262) 29,922 46.54 2.7% 4.34 10.00 4.95% 422.0 0.48 11.5% (0.187%) 0.84
Mar-16F 136,497 47,014 183,511 (49,844) 34,125 53.08 14.0% 3.81 10.00 4.95% 465.1 0.43 12.0% (0.019%) 0.87
Vol m
Bank of India March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A Mar-14F 2,913,257 3,684,613 941,990 1,054,981 3,855,247 (19,582) 3,835,665 0 119,029 119,029 548,359 0 4,503,052 3,818,396 353,676 4,172,072 109,335 4,281,406 216,207 216,207 4,739,594 (38,582) 4,701,011 0 130,932 130,932 433,236 0 5,265,179 4,488,405 405,399 4,893,804 123,527 5,017,331 247,848 247,848 Mar-15F 4,239,091 1,204,196 5,443,288 (46,156) 5,397,131 0 144,025 144,025 476,560 0 6,017,716 5,148,216 462,723 5,610,939 135,437 5,746,375 271,341 271,341 Mar-16F 4,877,859 1,375,157 6,253,016 (55,984) 6,197,032 0 158,427 158,427 534,485 0 6,889,944 5,915,969 526,293 6,442,262 148,647 6,590,909 299,036 299,036
27,493 0 0 27,493 27,493
28,084 0 0 28,084 28,084
29,922 0 0 29,922 29,922
34,125 0 0 34,125 34,125

Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 9.9% 11.4% (15.9%) 70.6% 5.96% 8.84% 2.87% 2.58% 3.48% 59.7% 2.17% 8.6% 21.7% Mar-14F 17.9% 15.1% 31.5% 70.3% 5.99% 8.78% 2.79% 2.55% 3.34% 53.9% 2.17% 29.0% 22.9% Mar-15F 8.9% 4.8% 8.1% 73.1% 5.72% 8.26% 2.54% 2.49% 3.16% 52.5% 2.13% 30.0% 21.5% Mar-16F 11.7% 9.5% 14.0% 74.4% 5.53% 8.03% 2.50% 2.47% 3.12% 50.6% 2.11% 30.0% 18.8%
Rolling FD P/E (x)

25.0 20.0
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 16.4% 2.5% 13.4% 41.7% 2.3% 39.4% 0.5% 8.3% 8.3% 20.0% 75.8% 3.0% -0.7% Mar-14F 26.5% 2.5% 19.0% 43.0% 1.7% 57.5% 0.5% 6.9% 6.9% 17.5% 81.2% 2.8% 10.0% Mar-15F 15.0% 2.4% -1.2% 45.2% 1.7% 58.4% 0.5% 6.5% 6.5% 14.7% 81.4% 2.8% 10.0% Mar-16F 15.1% 2.3% 6.2% 46.3% 1.6% 59.9% 0.5% 6.3% 6.3% 14.9% 81.5% 2.8% 10.0%
15.0
10.0 5.0 0.0 Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Canara Bank
Bank of Baroda Punjab National Bank
Bank of India State Bank of India
37
Canara Bank
CBK IN / CNBK.BO Current Rs239.9 Rs262.0 Rs227.0 9.2%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$1,816m
Rs110,656m
US$10.02m
Rs620.3m
32.3%
461.3 m shares
CIMB Analyst(s)
Bumpy ride ahead

Can Bank's strong loan growth in the current environment (+32% yoy and +19% YTD as at Dec-13) due to its aggressive loan pricing, low core Tier-I capital and deteriorating asset quality are key concerns. Despite its cheap valuations, its strong loan growth gives us discomfort, as it can lead to asset quality stress at a later date.
We largely maintain our EPS estimates for FY15-16. However, we lower our cost of equity assumption from 15% to 13%. Consequently, we maintain our Hold rating on the stock, with a revised GGM-based target price of Rs262. to 70% as at end-Dec 13. We think NIMs can rise in FY15-16, led largely by lower cost of wholesale borrowing, but this will be largely offset by the higher provision for bad loans.
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders Government of India LIC of India HSBC Global Invst Funds 1M 6.9 12 3M -12.7 -9.5 12M -51.2 -35.4 % held 69.0 5.4 1.4
Asset quality under stress

Can Bank's asset quality is largely in line with its peers, with gross NPLs at 2.7% of loans and restructured loans at 6.4% as at Dec 13. The bank has a restructuring pipeline of Rs33bn (1.1% of loans) as at Dec 13. In our view, the aggressive loan growth in 9MFY14, in the current environment, can lead to asset quality stress on a later date.
NIMs to remain under pressure

As at end-Dec 13, Can Banks cost of interest-bearing liabilities (IBL) was 7.4% vs. the 6.7% average for public-sector banks, largely due to its inferior IBL mix. It has the lowest proportion of low-cost deposits (domestic CASA of 24% as at Dec-13) and the highest proportion of term deposits among peers. The wholesale cost of funds as reflected by the 12-month certificate of deposit rates have moved further north in 4QFY14 to average 9.5% vs. 9.2% in 3QFY14, which will likely put pressure on its NIMs. In 2QFY14, the bank cut its base lending rate by 30bp to 9.95% to aggressively grow its loan book (+30.3% yoy in Sep 13, +31.8% yoy in Dec 13). In Jan 2014, the bank increased its base rate to 10.20%. Its LDR rose from 65% as at end-Jun 13
Financial Summary
Mar-12A 76,895 29,276 106,171 (18,605) 32,829 74.11 (21.5%) 3.24 11.00 4.59% 465.6 0.52 17.0%
Low profitability can lead to capital issues

As at end-Dec 13, Can Bank's Tier-1 capital stood at 7.5% (without profits) vs. 9.77% in Mar 13 (Basel II), with a CET 1 of 7.1%, partly due to the aggressive loan growth in 9MFY14. We expect its internal rate of capital generation (profits less dividends) to be 9-10% over FY14-15. Also, ROAs are likely to be below its peers (0.6% in FY14-15).
Price Close 510 460 410 360 310 260 210 160 15 10
Relative to SENSEX (RHS) 127 114 101 88 76 63 50 37
5
Source: Bloomberg

239.9 194.4
445.9
262.0
Current Target
Mar-13A 78,790 31,530 110,320 (22,179) 28,721 64.83 (12.5%) 3.70 13.00 5.42% 515.7 0.47 13.2%
Mar-14F 87,620 38,585 126,206 (33,673) 24,527 54.25 (16.3%) 4.42 13.00 5.42% 546.2 0.44 10.2% 0.00% 0.98
Mar-15F 104,950 39,244 144,193 (33,950) 31,208 67.66 24.7% 3.55 14.00 5.84% 599.9 0.40 11.8% 0.63% 1.02
Mar-16F 121,311 42,168 163,479 (38,703) 35,313 76.56 13.2% 3.13 15.00 6.25% 661.5 0.36 12.1% 0.47% 1.00
Vol m
Canara Bank March 25, 2014
Profit & Loss

Balance Sheet
28,721 0 0 28,721 28,721
24,527 0 0 24,527 24,527
31,208 0 0 31,208 31,208
35,313 0 0 35,313 35,313

Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 3.9% (0.9%) (10.1%) 71.4% 7.29% 9.76% 2.47% 2.31% 3.47% 37.7% 2.01% 21.8% 20.1% Mar-14F 14.4% 13.4% (9.7%) 69.4% 7.41% 9.81% 2.40% 2.25% 3.21% 50.4% 1.96% 26.0% 24.4% Mar-15F 14.3% 15.2% 29.9% 72.8% 7.17% 9.58% 2.41% 2.33% 3.24% 44.1% 2.04% 27.5% 20.7% Mar-16F 13.4% 13.5% 13.2% 74.2% 7.00% 9.44% 2.44% 2.39% 3.26% 44.3% 2.10% 27.5% 19.6%
Rolling FD P/E (x)

25.0 20.0
Key Drivers
15.0
10.0 5.0 0.0 Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Canara Bank
39
Federal Bank
FB IN / FED.BO Current Rs85.95 Rs105.0 Rs81.00 22.2%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$1,206m
Rs73,480m
US$3.26m
Rs201.5m
100.0%
855.3 m shares
CIMB Analyst(s)
Set to roll, if growth accelerates
Vivek VERMA
Jatinder AGARWAL
An improving risk-return profile is reflected in better risk-adjusted NIMs. It has built up a branch network of 1,000+, partly reducing its dependence on wholesale funds and de-risking its asset portfolio. All this, along with its comfortable Tier-I capital, positions it well for a turn in the interest-rate cycle.
We raise our EPS by 2% for FY15-16 as we raise our NIMs. We raise our GGM based target price to Rs105 on the back of our EPS upgrade and cut in cost of equity from 15% to 13%. We upgrade the stock to Add from Hold with catalysts expected from its improving ROAs.
Umang SHAH
Asset quality better than PSBs

At end-3QFY14, gross NPL ratio stood at 2.8% (average of PSBs: 4.6%), net NPL ratio at 0.9% (average of PSBs: 2.7%) and provision coverage at 70% (83% ex-technical write-offs, average of PSBs: 42%). Loans under close watch accounted for c.Rs4bn (1% of loans). Restructured loans were 5.5% of loans (2.7% ex-SEBs and state-owned aviation company vs. 4% for coverage PSBs).
Share price info

Share price perf. (%) Relative Absolute Major shareholders IFC Warhol Ltd. Franklin Templeton Investments 1M 11.9 17 3M 4.8 8 12M -24.5 -8.7 % held 4.8 4.6 4.1
Risk-adjusted NIM improves

Managements focus on lowering risks to its asset portfolio resulted in a decline in NIM from 3.82% in FY10 to 3.37% in FY13. However, the impact of declining margins was more than offset by lower loan-loss provisions. Loan-loss provisions fell from 1.7% of average loans in FY09-11 to 0.62% in FY13 (gross delinquencies down from c.3% of average loans in FY09-11 to 2% in FY13). As a result, risk-adjusted NIMs improved from 2.7% in FY10 to 3.05% in FY13. Furthermore, large SME exposure (35% of total loans) will benefit its NIM in a falling interest rate environment. That said, its cost of funds is still higher than peers partly due to the higher deposit rates on term deposits vs peers.
Financial Summary
Building blocks in place

Back-ended loan growth was evident in each year of FY11-13. In our view, steady loan and fee-income growth will be critical for sustainable improvements in ROAs. That said, FB de-risked its asset portfolio and had aggressively built a branch network of 1,142 by end-3QFY14 (FY10: 672), which has partly reduced its dependence on wholesale borrowings. All this, along with its comfortable Tier-I capital (14.8% at end-3QFY14), places it well for a turn in the interest-rate cycle, in our view.
Price Close 110.0 100.0 90.0 80.0 70.0 60.0 50.0 40.0 20 15 10
5
Source: Bloomberg

85.95 46.02
97.64
105.0
Current Target
Mar-12A 19,534 5,323 24,858 (3,370) 7,768 9.08 32.3% 9.46 1.80 2.09% 66.66 1.29 14.4%
Mar-13A 19,747 6,644 26,391 (2,658) 8,382 9.80 7.9% 8.77 1.80 2.09% 74.35 1.16 13.9%
Mar-14F 21,778 6,975 28,753 (3,640) 7,623 8.89 (9.3%) 9.67 1.50 1.75% 81.36 1.06 11.4% 0.00% 0.96
Mar-15F 25,271 7,652 32,922 (3,688) 9,202 10.68 20.1% 8.05 1.80 2.09% 89.82 0.96 12.5% 1.77% 0.94
Mar-16F 28,904 8,797 37,701 (3,992) 10,640 12.29 15.0% 7.00 2.20 2.56% 99.44 0.86 13.0% 1.75% 0.90
Vol m
Federal Bank March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A 451,946 207,566 659,512 (10,979) 648,533 0 24,711 24,711 37,200 0 710,444 576,149 51,870 628,019 18,831 646,849 63,595 63,595 Mar-14F 490,073 238,701 728,774 (9,419) 719,355 0 30,336 30,336 43,073 0 792,764 631,431 66,162 697,593 25,234 722,827 69,937 69,937 Mar-15F 563,821 274,506 838,327 (11,069) 827,258 0 28,424 28,424 49,534 0 905,216 722,831 75,805 798,636 28,988 827,624 77,592 77,592 Mar-16F 648,644 315,682 964,325 (12,979) 951,347 0 32,445 32,445 56,964 0 1,040,756 832,852 88,220 921,072 33,354 954,426 86,330 86,330
8,382 0 0 8,382 8,382
7,623 0 0 7,623 7,623
9,202 0 0 9,202 9,202
10,640 0 0 10,640 10,640

Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 6.2% (3.1%) 2.1% 74.8% 7.23% 10.1% 2.90% 3.71% 5.00% 18.2% 3.00% 29.8% 4.09% Mar-14F 9.0% 3.5% (4.0%) 75.7% 7.20% 10.0% 2.81% 3.61% 4.76% 24.1% 2.90% 33.5% 8.97% Mar-15F 14.5% 14.0% 18.0% 76.8% 7.13% 10.0% 2.90% 3.73% 4.92% 21.4% 2.98% 32.0% 9.29% Mar-16F 14.5% 14.0% 15.6% 76.7% 7.11% 10.0% 2.88% 3.72% 4.91% 20.3% 2.97% 32.0% 8.04%
Rolling FD P/E (x)

18.00 16.00 14.00 12.00
Key Drivers
10.00
8.00 6.00
4.00
2.00 0.00 Jan-10
Jan-11
Federal Bank
Jan-12
Jan-13
ING Vysya Bank
Jan-14
J&K Bank
41
HDFC Bank
HDFCB IN / HDFCBK.BO Current Rs733.9 Rs788.0 Rs748.0 7.4%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$28,876m
Rs1,759,279m
US$21.99m
Rs1,359m
77.3%
2,379 m shares
CIMB Analyst(s)
Close to fair valuation

HDFC Bank delivered strong operating performance in 9MFY14 despite the challenging environment. Its margin and fee income are under pressure but this will be offset by the companys tight control of operating expenses and its stable asset quality.
Given its tier 1 capital ratio of 11.5% at end-Dec 2013 (including profit), HDFC Bank can achieve ROEs of ~21-22% over FY15-16. We broadly maintain our FY14-16 EPS but reduce our cost of equity assumptions. We believe that its current valuations are fair and thus, downgrade our rating to Hold from Add, with a higher discounted economic profit-based target price of Rs788. NPLs were a mere 1% of loans, while net NPLs were 0.3% and net restructured loans were 0.2%. The bank also has floating provisions of Rs18.65bn (equivalent to ~0.7% of loans). Furthermore, its retail loans (best-performing asset class) constituted c.50% of total loans at end-Dec 2013.
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders HDFC Limited LIC of India Europacific Growth Fund 1M 5.4 10.5 3M 7.2 10.4 12M 5.1 20.9 % held 22.7 4.7 2.8
Best cost of funds in sector

HDFC Banks cost of funds is the best in the sector due to its low reliance on wholesale borrowings. At end-Dec 2013, its CASA ratio was at 41% (vs. 45% at end-Sep 2013) partly due to the higher deposits garnered under the RBIs FCNR window. That said, HDFC Banks lending spread fell in 9MFY14 (5.3% in 9MFY14 vs. 5.48% in FY13) but this was largely offset by the rising investment spread (2.22% in 9MFY14 vs. 1.78% in FY13).
Investments in network to boost earnings

In the past two years, HDFC Bank has aggressively expanded its branch network. At end-Dec 2013, it had 3,336 branches (vs. 2,201 at end-Dec 2011). On average, a new branch breaks even in 18-24 months. Thus, most of these branches should start contributing positively to earnings in FY15-16, in our view. The bank has brought down its cost-to-income ratio from 49% in FY13 to 45.6% in 9MFY14, which will boost its ROAs.
Few asset quality concerns

HDFC Banks asset quality remains impeccable due to its superior underwriting standards. Though, there was some stress in its CV-CE segment. At end-Dec 2013, its gross
Price Close 790 740 Relative to SENSEX (RHS) 116.0 111.0
Capital raising: An upside risk

If RBI proposes a D-SIB capital surcharge, we think that HDFC Bank may raise capital at end-FY15, which would be a key risk to our argument.
Financial Summary
106.0
101.0 96.0
690
640 590
540 20
15 10
91.0
5
Source: Bloomberg

561.9 733.9 742.4
788.0
Current Target
Mar-12A 128,846 57,836 186,682 (18,774) 51,665 22.11 29.9% 33.19 4.30 0.59% 127.5 5.75 18.7%
Mar-13A 158,111 68,534 226,645 (18,101) 65,933 27.90 26.2% 26.30 5.50 0.75% 152.2 4.82 19.9%
Mar-14F 183,634 82,015 265,648 (18,719) 85,057 35.57 27.5% 20.63 6.50 0.89% 179.6 4.09 21.4% 0.000%
Mar-15F 216,618 93,680 310,298 (22,452) 102,422 42.41 19.2% 17.30 7.50 1.02% 212.5 3.45 21.6% (0.005%)
Mar-16F 255,525 107,313 362,838 (30,194) 121,133 49.66 17.1% 14.78 9.00 1.23% 250.9 2.93 21.4% 0.001%
Vol m
HDFC Bank March 25, 2014
Profit & Loss

Balance Sheet
65,933 0 0 65,933 65,933
85,057 0 0 85,057 85,057
102,422 0 0 102,422 102,422
121,133 0 0 121,133 121,133

Key Ratios
Rolling FD P/E (x)

35.0 30.0
Key Drivers
25.0
20.0 15.0 10.0 5.0 0.0 Jan-10
Jan-11
Axis Bank
Jan-12
Jan-13
HDFC Bank
Jan-14
ICICI Bank
43
Housing Development Fin.

HDFC IN / HDFC.BO Current Rs843.3 Rs982.0 Rs844.0 16.5%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$21,598m
Rs1,315,831m
US$36.41m
Rs2,252m
100.0%
1,546 m shares
CIMB Analyst(s)
To regain lost glory

HDFC is poised to benefit from an expected fall in wholesale borrowing costs, which should boost its spreads in FY15-16. It is trading at the lower end of its long-term P/BV valuations, which looks attractive. HDFC is now our top pick among NBFCs.
In past two years, HDFC continued to increase the portion of its retail loans, despite rising cost of funds, for two reasons, in our view: benefits of the upward re-pricing of teaser-rate loans and the availability of free-float benefits following warrant conversion. We increase our EPS for FY15-16 as we factor in a 10bp margin expansion for FY15. We also lower cost of equity from 15% to 13% and upgrade the stock to Add from Hold, with a higher SOP-based target price. Catalysts are expected from rising spreads or increasing proportion of retail loans. and wholesale cost of borrowing has been low. This should put a floor on lending rates for mortgages, in our view, benefitting HDFCs net interest margins as cost of wholesale funds heads lower in FY15-16.
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders Oppenheimer Europacific Growth Fund 1M 0.2 5.3 3M 2 5.2 12M -10.1 5.7 % held 4.0 3.2
Growth to stay steady, asset quality good

Incrementally new home sales in Tier-1 and metropolitan cities are slowing. But on the other hand, demand in Tier-2 and -3 centres is spurring the demand for housing loans. For the industry, we believe that while the growth momentum may moderate from historical levels, it should remain healthy. At HDFC in the last two years, retail loans had increased from 65% of total loans in Dec 11 to 69% in Dec 13. Further, asset quality remains good with gross NPLs at 0.77% of loans as of Dec 13.
Borrowing costs to trend down; spreads to improve

We think that a fall in the wholesale cost of borrowing will only lead to a moderate cut in the base lending rate by banks (a benchmark for mortgage loans), as the base rate is now a function of cost of funds, negative carry on CRR/SLR, overhead costs which cannot be allocated and average return on capital. Furthermore, banks may not aggressively cut their base rates due to headwinds from asset quality. Since the introduction of base rates, the correlation between these rates
Price Close 970 920 870 820 770 720 670 620 25 20 15 10 5
Upgrade to Add
HDFC continues to provide the best long-term exposure to the Indian mortgage market, in our view. It now trades below its long term P/BV valuation. We upgrade to Add, as we expect tailwinds for margins to gather strength in FY15-16.
Financial Summary
Net Interest Income (Rsm) Total Non-Interest Income (Rsm) Operating Revenue (Rsm) Total Provision Charges (Rsm) Net Profit (Rsm) Core EPS (Rs) Core EPS Growth FD Core P/E (x) DPS (Rs) Dividend Yield BVPS (Rs) P/BV (x) ROE % Change In Core EPS Estimates CIMB/consensus EPS (x) Mar-12A 47,269 9,856 57,124 (800) 36,376 24.71 15.8% 34.12 11.00 1.30% 128.8 6.55 20.0% Mar-13A 57,406 10,781 68,187 (1,450) 44,103 29.18 18.1% 28.90 12.50 1.48% 161.7 5.22 20.0% Mar-14F 65,821 11,030 76,851 (1,000) 50,053 32.25 10.5% 26.15 13.00 1.54% 179.6 4.69 18.9% 0.00% Mar-15F 80,489 13,836 94,325 (1,300) 61,735 39.53 22.6% 21.33 15.00 1.78% 203.2 4.15 20.7% 3.00% Mar-16F 94,945 16,003 110,949 (1,600) 72,702 46.32 17.2% 18.21 17.00 2.02% 231.4 3.64 21.3% 2.85%
Vol m
Source: Bloomberg

843.3 652.8
929.5
982.0
Current Target
Housing Development Fin. March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A Mar-14F 1,695,708 2,027,418 53,958 63,495 1,749,666 0 1,749,666 0 148,130 148,130 57,511 0 1,955,307 519,328 0 1,068,953 1,588,281 117,027 1,705,308 250,000 250,000 2,090,913 0 2,090,913 0 155,917 155,917 69,014 0 2,315,844 637,391 0 1,270,690 1,908,081 127,940 2,036,021 279,823 279,823 Mar-15F 2,391,943 75,025 2,466,968 0 2,466,968 0 162,727 162,727 82,816 0 2,712,511 741,306 0 1,510,957 2,252,263 142,161 2,394,423 318,088 318,088 Mar-16F 2,822,017 89,002 2,911,019 0 2,911,019 0 170,194 170,194 99,380 0 3,180,592 861,846 0 1,797,179 2,659,025 157,512 2,816,537 364,055 364,055
44,103 0 0 44,103 44,103
50,053 0 0 50,053 50,053
61,735 0 0 61,735 61,735
72,702 0 0 72,702 72,702

Gross Loans/Cust Deposits Avg Loans/Avg Deposits Avg Liquid Assets/Avg Assets Avg Liquid Assets/Avg IEAs Net Cust Loans/Assets Net Cust Loans/Broad Deposits Equity & Provns/Gross Cust Loans Asset Risk Weighting Provision Charge/Avg Cust Loans Provision Charge/Avg Assets Total Write Offs/Average Assets Mar-13A 327% 351% 5.69% 6.46% 86.7% 327% 14.7% 87.1% 0.025% 0.022% 0.051% Mar-14F 318% 322% 5.71% 6.35% 87.5% 318% 13.8% 86.0% 0.054% 0.047% 0.047% Mar-15F 323% 321% 5.77% 6.37% 88.2% 323% 13.3% 85.9% 0.059% 0.052% 0.052% Mar-16F 327% 325% 5.88% 6.44% 88.7% 327% 12.9% 85.9% 0.061% 0.054% 0.054%
Key Ratios
Rolling FD P/E (x)

40.0 35.0 30.0 25.0 20.0 15.0
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 20.8% 3.6% 9.4% 7.9% 0.4% 0.0% 0.0% 14.2% 14.2% 43.1% 326.5% 0.7% -10.1% Mar-14F 19.6% 3.4% 2.3% 8.2% 0.5% 0.0% 0.0% 13.7% 13.7% 22.7% 318.1% 0.7% 15.0% Mar-15F 18.0% 3.5% 25.4% 7.7% 0.5% 0.0% 0.0% 13.4% 13.4% 16.3% 322.7% 0.7% 20.0% Mar-16F 18.0% 3.5% 15.7% 7.5% 0.5% 0.0% 0.0% 13.1% 13.1% 16.3% 327.4% 0.7% 20.0%
10.0
5.0 0.0 Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
IDFC Limited Shriram Transport Finance
Housing Development Fin. Mahindra & Mahindra Finance
45
ICICI Bank
ICICIBC IN / ICBK.BO Current Rs1,200 Rs1,445 Rs1,302 20.5%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$22,735m
Rs1,385,137m
US$56.51m
Rs3,493m
100.0%
1,154 m shares
CIMB Analyst(s)
Some gain, some pain

The near-term concerns about ICICI Banks asset quality continue to overshadow the overall improvement in its interest-bearing liabilities mix. A marginal improvement in NIMs and growth in core fees should boost its operating profit. ICICI Bank remains well capitalised and its valuations appear attractive in comparison to its consolidated ROEs.
In our universe, ICICI Bank appears to be the most comfortable on the capital front despite the likely surcharge for D-SIBs. We expect its ROAs to remain strong and its consolidated ROEs to rise in the next 1-2 years. We maintain our FY14-16 EPS estimates. However, we cut our cost of equity assumption from 15% to 13%. Consequently, we maintain our Add rating, with a higher SOP-based target price of Rs1,445. loans that comprise 35% of total loans at end-Dec 2013 should provide some cushion to overall asset quality.
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders LIC of India Dodge & Cox Europacific Growth Fund 1M 11.9 17 3M 7.1 10.3 12M 0.1 15.9 % held 9.7 2.7 1.8
Steady improvement liability mix
in
Asset quality concerns to persist

In 9MFY14, ICICI Banks gross impairments were Rs35bn or c.126bp of loans on a one-year lag basis. In addition, the banks restructured loans were Rs39bn (1.2% of total loans). Its restructuring pipeline stood at Rs30bn (0.9% of loans) at end-Dec 2013. According to management, the impairments (gross delinquencies plus restructured loans) are likely to remain elevated in the near term due to the overall economic slowdown and stress in capital-intensive sectors. The key risk stems from the mid-sized corporate and SME segments. That said, retail
Price Close 1,330 1,230 Relative to SENSEX (RHS) 116.0 109.3
ICICI Bank has improved on its interest-bearing liabilities (IBL) mix in the past few years. The CASA proportion was 43% of the overall deposit mix at end-Dec 2013 and the proportion of retail term deposits was around 60%. This has lowered ICICI Banks reliance on wholesale deposits. We think that its NIMs will trend marginally higher in FY15-16 and its core fee income trajectory will be sustained.
Adequately capitalised
At end-Dec 2013, ICICI Banks tier 1 ratio was 12.7% (including 9MFY14 profit), which is adequate (including the likely surcharge for D-SIBs). We expect ICICI Bank to achieve consolidated ROEs of around 15-16% in FY15-16, which will drive valuations. Excluding the value of its stakes in various non-banking businesses, the stock trades at 1.5x FY15 P/BV.
Financial Summary
102.7
96.0 89.3 82.7
1,130
1,030 930 830
730 20
15 10
76.0
5
Source: Bloomberg

1,200 783.6
1,232
1,445
Current Target
Mar-12A 107,342 75,028 182,369 (15,830) 64,653 56.1 23.4% 21.38 16.50 1.38% 524.0 2.29 11.2%
Mar-13A 138,664 83,457 222,121 (18,025) 83,255 72.2 28.7% 16.62 20.00 1.67% 578.2 2.07 13.1%
Mar-14F 165,577 99,426 265,002 (25,832) 96,955 83.9 16.3% 14.29 21.00 1.75% 639.6 1.88 13.8% 0.000%
Mar-15F 192,396 104,557 296,953 (34,881) 103,583 89.5 6.6% 13.41 22.00 1.83% 705.4 1.70 13.3% (0.005%)
Mar-16F 222,721 114,620 337,340 (42,571) 116,937 100.7 12.6% 11.91 23.00 1.92% 781.2 1.54 13.6% (0.005%)
Vol m
ICICI Bank March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A Mar-14F 2,976,269 3,441,679 1,648,453 1,828,364 4,624,723 (73,775) 4,550,948 0 402,824 402,824 414,175 0 5,367,947 2,926,136 1,453,415 4,379,551 321,381 4,700,932 667,015 667,015 5,270,043 (74,785) 5,195,258 0 434,235 434,235 377,316 0 6,006,808 3,338,024 1,572,302 4,910,326 356,772 5,267,097 739,711 739,711 Mar-15F 3,988,108 2,029,015 6,017,123 (82,511) 5,934,612 0 468,670 468,670 415,048 0 6,818,330 3,877,956 1,726,550 5,604,506 396,007 6,000,514 817,816 817,816 Mar-16F 4,628,075 2,252,860 6,880,934 (97,583) 6,783,351 0 506,427 506,427 456,552 0 7,746,331 4,503,124 1,894,973 6,398,098 440,185 6,838,283 908,048 908,048
83,255 0 0 83,255 83,255
96,955 0 0 96,955 96,955
103,583 0 0 103,583 103,583
116,937 0 0 116,937 116,937

Gross Loans/Cust Deposits Avg Loans/Avg Deposits Avg Liquid Assets/Avg Assets Avg Liquid Assets/Avg IEAs Net Cust Loans/Assets Net Cust Loans/Broad Deposits Equity & Provns/Gross Cust Loans Asset Risk Weighting Provision Charge/Avg Cust Loans Provision Charge/Avg Assets Total Write Offs/Average Assets Mar-13A 102% 102% 38.6% 45.1% 54.1% 99% 25.4% 82.3% 0.50% 0.27% 0.30% Mar-14F 103% 102% 37.5% 43.1% 56.1% 101% 24.2% 85.1% 0.73% 0.41% 0.45% Mar-15F 103% 103% 36.3% 41.2% 57.3% 101% 23.1% 86.7% 0.88% 0.51% 0.54% Mar-16F 103% 103% 35.4% 40.0% 58.5% 101% 22.2% 88.2% 0.93% 0.55% 0.58%
Key Ratios
Rolling FD P/E (x)

35.0 30.0
Key Drivers
25.0
20.0 15.0 10.0 5.0 0.0 Jan-10
Jan-11
Axis Bank
Jan-12
Jan-13
HDFC Bank
Jan-14
ICICI Bank
47
IDFC Limited
IDFC IN / IDFC.BO Current Rs109.2 Rs117.0 Rs114.0 7.1%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$2,718m
Rs165,571m
US$13.29m
Rs821.2m
82.8%
1,515 m shares
CIMB Analyst(s)
At the crossroads
IDFC has showcased its strong execution capabilities by delivering stable spreads and relatively superior asset quality. Nonetheless, the moderation in its loan growth remains a concern. IDFC is a frontrunner for a banking license and that will come with its own set of challenges.
We revise our FY15-16 EPS estimates by 2% to factor in lower cost of funds over FY15-16. We believe IDFC's current valuations are fair considering that it is a front runner for banking licence which will put pressure on medium term return ratios. We downgrade our rating to Hold from Add, with a revised discounted economic profit based target price of Rs117. IDFC is a frontrunner for a banking licence. We think that the statutory requirements and execution costs related to the conversion into a bank would have a negative impact on IDFCs return ratios in the medium term. In the event IDFC converts into a bank, we expect its medium-term ROA to contract to 1.1-1.2% from around 2.8% currently. This would be caused by complying with the requirements for cash reserve ratio (~30bp of ROA), statutory liquidity ratio (~30bp of ROA) and priority sector loans (~80-100bp of ROA). Furthermore, the upfront cost of investments in the branch network will also put pressure on ROAs. In our view, following a conversion into a bank, the key challenge will be scaling up the low-cost retail deposit/asset franchise.
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders President of India Sipadan Investments (Mauritius) First State Investments 1M 9.7 14.8 3M 0.9 4.1 12M -35.8 -20 % held 17.2 10.0 5.5
Margins may see an uptick, but growth constrained

We expect the wholesale borrowing costs to decline in FY15-16. In general, a fall in wholesale rates augurs well for wholesale-funded entities like IDFC, and should boost NIMs and open up refinancing opportunities for IDFC in the sector. However, given the slowdown in project investments, the growth opportunities are limited. Furthermore, there are challenges on the asset quality front. But IDFC's loan loss reserve of around 2% of total loans as at end-Dec 2013 provides a buffer to absorb asset quality shocks.

We like IDFC for its superior execution capability but see its current valuation as fair, given the medium-term trend of ROAs post conversion into a bank.
Key contender for banking licence

Price Close 170 150 Relative to SENSEX (RHS) 118.0 104.0
Financial Summary
90.0
76.0 62.0
130
110 90
70 80
60 40
48.0
20
Source: Bloomberg

109.2 79.10
163.9
117.0
Current Target
Mar-12A 18,841 10,006 28,846 (2,846) 14,595 10.57 25.8% 10.33 2.38 2.18% 77.5 1.41 14.2%
Mar-13A 24,365 10,361 34,726 (3,496) 18,362 12.35 16.8% 8.84 2.75 2.52% 84.1 1.30 15.3%
Mar-14F 27,097 9,477 36,574 (2,625) 19,908 13.15 6.5% 8.30 3.00 2.75% 94.2 1.16 14.8% 0.00% 1.01
Mar-15F 30,705 10,462 41,168 (3,563) 21,910 14.46 9.9% 7.55 3.25 2.98% 105.3 1.04 14.5% 1.65% 1.00
Mar-16F 35,311 11,604 46,915 (4,122) 24,895 16.41 13.5% 6.65 3.50 3.21% 118.1 0.92 14.7% 1.67% 1.00
Vol m
IDFC Limited March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A 565,946 112,903 678,849 (11,443) 667,406 0 30,989 30,989 2,627 0 701,022 26,505 121,057 394,712 542,273 31,494 573,767 127,255 254 127,509 Mar-14F 574,120 129,571 703,690 (14,589) 689,101 0 34,088 34,088 3,021 0 726,210 31,488 98,404 420,160 550,052 33,527 583,580 142,630 254 142,884 Mar-15F 633,120 148,711 781,831 (18,005) 763,826 0 37,496 37,496 3,474 0 804,797 35,748 101,107 472,881 609,735 35,794 645,529 159,623 254 159,877 Mar-16F 729,041 170,693 899,734 (21,887) 877,847 0 41,246 41,246 3,996 0 923,089 41,558 109,834 554,880 706,272 38,365 744,637 179,216 254 179,470
18,443 (81) 0 0 18,362 18,362
19,908 0 0 0 19,908 19,908
21,910 0 0 0 21,910 21,910
24,895 0 0 0 24,895 24,895

Key Ratios
15.4% 16.1% 79.1% 376% 23.0% 90.5% 0.226% 0.183% 0.212%
17.4% 17.9% 77.0% 431% 25.4% 89.6% 0.105% 0.084% 0.086%
18.6% 19.2% 76.4% 449% 25.9% 89.5% 0.119% 0.094% 0.113%
18.9% 19.4% 76.6% 467% 25.3% 89.7% 0.131% 0.104% 0.131%
Rolling FD P/E (x)

40.0 35.0 30.0 25.0 20.0 15.0
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 15.8% 3.9% 3.6% 15.2% -0.2% 310.6% 0.3% 18.7% 18.7% N/A N/A 0.2% 32.7% Mar-14F 1.4% 3.9% -8.5% 15.1% 0.6% 55.7% 0.3% 20.5% 20.5% N/A N/A 1.0% 0.0% Mar-15F 10.3% 4.1% 10.4% 15.3% 1.0% 44.1% 0.3% 20.8% 20.8% N/A N/A 1.5% 15.0% Mar-16F 15.2% 4.2% 10.9% 15.4% 1.4% 37.5% 0.3% 20.4% 20.4% N/A N/A 1.9% 15.0%
10.0
5.0 0.0 Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
IDFC Limited Shriram Transport Finance
Housing Development Fin. Mahindra & Mahindra Finance
49
Indusind Bank
IIB IN / INBK.BO Current Rs471.5 Rs506.0 Rs386.0 7.3%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$4,066m
Rs247,711m
US$13.24m
Rs818.3m
84.8%
522.9 m shares
CIMB Analyst(s)
Well placed with fair valuations
Vivek VERMA
Jatinder AGARWAL
We believe IIB will be a beneficiary of falling wholesale borrowing rates, given its sizable fixed-rate book and wholesale funding. However, in the backdrop of macro slowdown, we expect IIBs loan growth to remain muted. Also, its balance sheet concentration risks remain a concern.
We raise our FY15-16 EPS estimates by 2-4% as we up our NIM forecasts. Our discounted economic profit based target price goes up to Rs528 following the increase in our EPS forecasts and as we lower our cost of equity assumption from 15% to 13%. We upgrade the stock to Hold from Reduce. have weakened this year despite the low base in FY13. IIBs auto finance book is about 42% of its total loans and increased by 9% yoy as at end-Dec 13.
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders Indusind Intl. Holdings Indusind Ltd. Ga Global Investments Ltd 1M 15.2 20.3 3M 7.8 11 12M 0.2 16 % held 11.5 3.7 4.9
A well-capitalised entity
IIB had a tier-1 capital adequacy ratio of 13.3% as at end-3QFY14 which, in our view, is comfortable for strong organic business growth over the next two to three years. With a very comfortable capital adequacy ratio, the internal rate of capital generation (ROEs less dividend) of about 16-17% should enable it to increase its loan book faster than the industry, in our view.
Margin tailwinds; but growth to remain slow

IIB has a high dependence on wholesale deposits (about 50% of its term deposits) and a large fixed-rate loan book (about 50% of loans). As at end-Mar 13, 65% of its interest-bearing liability mix had a maturity of less than one year compared to just 45% of the interest-bearing assets. Such asset-liability composition in our view is positive, given our expectation of a fall in wholesale borrowing rates in FY15. We increase our NIM estimate from 3.6% to 3.65% for FY15-16. However, given the macro slowdown, we anticipate the banks loan growth to slow to sub-20% levels in FY15-16 (vs. average growth of ~30% over FY10-13). Note that automobile sales
Balance sheet concentration risks remain

IIBs exposure to the top-20 depositors/borrowers remains higher than its peers. Incrementally, the banks risk profile is changing with rising exposure to LAP (4% of loans as at end-Dec 13, +96% yoy) and second-hand vehicle financing (5% of total loans).
Price Close 560 510
Relative to SENSEX (RHS) 129.0 119.0
Financial Summary
109.0
99.0 89.0
460
410 360
310 15
10
79.0
5
Source: Bloomberg

471.5 337.3
529.4
506.0
Current Target
Mar-12A 17,042 10,118 27,160 (1,773) 8,026 17.19 30.5% 27.42 2.20 0.47% 96.7 4.88 19.2%
Mar-13A 22,329 13,630 35,958 (2,631) 10,614 21.43 24.6% 22.00 3.00 0.64% 141.9 3.32 17.8%
Mar-14F 28,687 18,582 47,269 (4,530) 13,791 26.24 22.5% 17.96 3.50 0.74% 163.2 2.89 17.2% 0.00%
Mar-15F 34,941 21,478 56,419 (4,527) 16,954 31.94 21.7% 14.76 4.00 0.85% 189.4 2.49 18.1% 1.72%
Mar-16F 42,185 26,141 68,326 (5,624) 20,634 38.49 20.5% 12.25 4.50 0.95% 221.5 2.13 18.7% 4.01%
Vol m
Indusind Bank March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A 446,417 196,537 642,953 (3,210) 639,743 0 22,712 22,712 68,487 0 730,943 541,167 94,600 635,767 21,000 656,767 74,176 74,176 Mar-14F 546,022 222,845 768,867 (5,310) 763,556 0 27,492 27,492 78,035 0 869,083 596,695 152,986 749,681 33,232 782,913 86,170 86,170 Mar-15F 656,604 272,647 929,251 (7,750) 921,500 0 33,283 33,283 91,691 0 1,046,475 762,768 140,635 903,404 42,028 945,431 101,044 101,044 Mar-16F 789,015 340,233 1,129,248 (10,390) 1,118,858 0 40,303 40,303 107,737 0 1,266,898 980,038 124,651 1,104,689 42,902 1,147,591 119,306 119,306
10,614 0 0 10,614 10,614
13,791 0 0 13,791 13,791
16,954 0 0 16,954 16,954
20,634 0 0 20,634 20,634

Key Ratios
Rolling FD P/E (x)

30.0 25.0 20.0 15.0 10.0 5.0 0.0 Jan-10
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 26.4% 3.9% 34.7% 48.8% -0.1% 108.2% 0.4% 13.8% 15.9% 27.7% 81.9% 1.0% 34.7% Mar-14F 22.3% 4.1% 36.3% 46.9% -0.5% 106.0% 0.4% 13.3% 15.0% 10.3% 90.6% 1.3% 27.0% Mar-15F 20.3% 4.1% 15.6% 47.1% -0.9% 100.9% 0.4% 13.0% 15.4% 27.8% 85.1% 1.6% 24.0% Mar-16F 20.2% 4.1% 21.7% 46.7% -1.3% 98.6% 0.4% 12.8% 15.2% 28.5% 79.4% 1.7% 22.0%
Jan-11
Indusind Bank
Jan-12
Jan-13
ING Vysya Bank
Jan-14
Yes Bank
51
ING Vysya Bank

VYSB IN / VYSA.BO Current Rs556.0 Rs677.0 Rs598.0 21.8%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$1,721m
Rs104,850m
US$0.76m
Rs46.75m
56.8%
188.3 m shares
CIMB Analyst(s)
Better slow than sorry

Although its slow savings-deposit traction and improvements in operating leverage are concerns, healthy capital ratios, stable asset quality, high loan-loss provision coverage and well-managed ALM are key positives for the bank.
We raise our FY15-16 EPS by 7%/6% as we build in NIM expansion. We raise our discounted economic profit based target price on the back of our EPS upgrades and cut in cost of equity from 15% to 13%. We maintain our Add rating. pricing and asset quality. ING raised equity of about Rs18.4bn in 2QFY14, which lifted its Tier-1 ratio to about 14.5% as at Dec 13. We think that this will be enough to support its loan growth in the next 2-3 years.
Vivek VERMA
Jatinder AGARWAL
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders ING Mauritius Holding ING Mauritius Investments Aberdeen Global Indian Equity Mauritius Ltd 1M -2.2 2.9 3M -3.8 -0.6 12M -13.2 2.6 % held 33.6 9.6 3.9
Expect NIM improvements

ING Vysya has a modest liability mix, with wholesale deposits at about 35% of total deposits and core CASA at about 32.7% (industry: 33% in FY13). Consequently, its NIMs are strongly leveraged to the interest-rate cycle. We expect margin expansion going forward, led partly by free-float benefits on its recent capital-raising and partly by lower wholesale funding costs.
Sound operating metrics

The banks turnaround has played out well, as reflected in its improved NIMs (from 2.84% in FY09 to 3.5% in FY13; 3.44% in 9MFY14), CASA (from 27% in FY09 to 32.5% in FY13), costincome ratio (from 65% in FY09 to 56.2% in FY13) and ROAs (from 0.7% in FY09 to 1.26% in FY13). ING follows a policy of conservative loan restructuring, upfront recognition of stress and higher provisioning, which we view positively. As at end-9MFY14, GNPLs stood at 1.7% of loans (FY10: 2.9%), net NPLs at 0.2% (FY10: 1.2%) and restructured loans at 1.6% (FY10: 1.5%) all lower than peer averages. High provision coverage (c.87%) provides a buffer against a deterioration in asset quality. Its larger share of SME loans (37% of total loans as at Dec 13, of which c.75% were working-capital loans) should ensure better control of
Financial Summary
though ROEs to remain under pressure

We believe that INGs FY14-15 loan growth will remain in line with industry levels (vs. above-average growth in FY12-13). We expect ROAs to gradually rise from 1.2% in FY14. However, post its capital-raising, the leverage should fall to 9-10x, capping its near-term ROEs in the range of 11-12%.
Price Close 680 630
580
530 480 430
107.3
99.0 90.7 82.3
380 2
2 1
74.0
1
Source: Bloomberg

556.0 410.3
660.3
677.0
Current Target
Mar-12A 12,084 6,698 18,781 (1,140) 4,563 33.66 27.3% 16.52 4.00 0.72% 258.1 2.15 14.3%
Mar-13A 15,386 7,269 22,655 (912) 6,128 40.18 19.4% 13.84 5.50 0.99% 292.1 1.90 14.6%
Mar-14F 17,217 8,585 25,801 (1,600) 6,868 40.07 (0.3%) 13.87 5.00 0.90% 370.0 1.50 12.0% 0.00% 1.00
Mar-15F 20,416 9,631 30,047 (2,215) 8,128 43.03 7.4% 12.92 6.00 1.08% 403.3 1.38 11.1% 7.42% 0.90
Mar-16F 23,317 11,267 34,584 (2,598) 9,591 50.27 16.8% 11.06 7.00 1.26% 442.4 1.26 11.9% 5.63% 0.89
Vol m
ING Vysya Bank March 25, 2014
Profit & Loss

(Rsm) Net Interest Income Total Non-Interest Income Operating Revenue Total Non-Interest Expenses Pre-provision Operating Profit Total Provision Charges Operating Profit After Provisions Total Pretax Income/(Loss) from Assoc. Operating EBIT (incl Associates) Total Non-Operating Income/(Expense) Profit Before Tax (pre-EI) Exceptional Items Pre-tax Profit Taxation Consolidation Adjustments & Others Exceptional Income - post-tax Profit After Tax Minority Interests Pref. & Special Div FX And Other Adj. Net Profit Recurring Net Profit Mar-13A 15,386 7,269 22,655 (12,728) 9,927 (912) 9,014 0 9,014 0 9,014 9,014 (2,887) Mar-14F 17,217 8,585 25,801 (14,101) 11,700 (1,600) 10,100 0 10,100 0 10,100 10,100 (3,232) Mar-15F 20,416 9,631 30,047 (15,879) 14,168 (2,215) 11,953 0 11,953 0 11,953 11,953 (3,825) Mar-16F 23,317 11,267 34,584 (17,881) 16,703 (2,598) 14,105 0 14,105 0 14,105 14,105 (4,514)
Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A 318,245 182,761 501,006 (525) 500,482 0 18,521 18,521 28,335 0 547,337 413,340 65,122 478,462 23,644 502,106 45,231 45,231 Mar-14F 359,770 207,900 567,670 (746) 566,924 0 22,338 22,338 31,168 0 620,431 451,884 73,139 525,023 25,858 550,880 69,551 69,551 Mar-15F 413,689 237,058 650,747 (811) 649,936 0 25,652 25,652 34,285 0 709,873 524,839 77,529 602,368 30,947 633,315 76,558 76,558 Mar-16F 475,870 270,966 746,836 (1,061) 745,775 0 29,607 29,607 37,714 0 813,095 610,381 80,740 691,121 37,148 728,269 84,826 84,826
6,128 0 0 6,128 6,128
6,868 0 0 6,868 6,868
8,128 0 0 8,128 8,128
9,591 0 0 9,591 9,591

Key Ratios
Rolling FD P/E (x)

30.0 25.0 20.0 15.0 10.0 5.0 0.0 Jan-10
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 10.6% 3.4% 8.5% 56.2% 0.2% 166.1% 0.5% 10.5% 13.8% 17.4% 76.9% 0.4% 2.2% Mar-14F 13.0% 3.2% 18.1% 54.7% 0.0% 155.1% 0.5% 14.2% 17.7% 9.3% 79.5% 0.4% 8.5% Mar-15F 15.0% 3.4% 12.2% 52.8% -0.1% 144.9% 0.5% 13.5% 17.3% 16.1% 78.7% 0.4% 17.0% Mar-16F 15.0% 3.3% 17.0% 51.7% -0.3% 157.8% 0.4% 12.8% 17.1% 16.3% 77.8% 0.4% 17.0%
Jan-11
Indusind Bank
Jan-12
Jan-13
ING Vysya Bank
Jan-14
Yes Bank
53
J&K Bank
JKBK IN / JKBK.BO Current Rs1,510 Rs1,770 Rs1,509 17.2%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$1,202m
Rs73,211m
US$1.00m
Rs61.63m
46.8%
48.49 m shares
CIMB Analyst(s)
Vivek VERMA
High-quality franchise reasonable valuations
with
Jatinder AGARWAL
Umang SHAH
We like J&K Bank for its well-funded and well-capitalised balance sheet, stable asset quality and high profitability. Given its dominant presence in Jammu and Kashmir (J&K), the bank is set to benefit from the improving economic conditions in the state.
J&K Bank has delivered a healthy 9MFY14 performance for most of its operating metrics but its asset quality outside the state of J&K remains a concern. We maintain our FY14-16 EPS estimates. However, we raise our GGM based target price to Rs1,770, implying 1.3x P/BV, as we cut our cost of equity assumption from 15% to 13% . to engage in more-profitable lending within the state of J&K in the long term.
Share price info

Share price perf. (%) Relative Absolute Major shareholders Govt. of J&K Aberdeen Investment Services Wellington 1M 8.1 13.2 3M 2.8 6 12M 6.1 21.9 % held 53.2 3.5 2.8
Operating metrics best in sector

Building on its strength in the state of J&K, the banks ROAs have consistently improved from 1.1% in FY08 to 1.6% in FY13, mainly led by an 87bp NIM expansion. At end-3QFY14, its tier 1 ratio stood at a comfortable 11.4%. Its headline asset quality numbers were better than its public sector peers, with gross NPL ratio of 1.6%, net NPL ratio of 0.2% and 87% provision cover (90% including technical write-offs). However, the increasing loan restructuring outside the state of J&K remains a concern (standard restructured loans comprised 3% of loans at end-3QFY14).
More opportunities in J&K

J&K Bank earns a high NIM of (c.6.5% at end-3QFY14, blended NIM of c.3.97%), thanks to its low-ticket loans in the state of J&K. Almost 80% of its loans in the state comprised high-yield segments such as SME loans, personal loans (largely to government employees) and trade finance. Furthermore, its strong liability franchise in the state supports a high CASA ratio (39% at end-3QFY14). Of late, GDP growth in the state of J&K has inched closer to the national average, led by the improving tourist arrivals and rising infrastructure investments. In our view, a sustained GDP growth trend presents opportunities for J&K Bank
Price Close 1,660 1,560 1,460 1,360 1,260 1,160 1,060 960 500 400 300 200 100
Undemanding valuations
The stock trades at 1.1x FY15 P/BV, with 1.5% ROA and 20% average ROE over FY14-15. We maintain our Add rating.
Financial Summary
Net Interest Income (Rsm) Total Non-Interest Income (Rsm) Operating Revenue (Rsm) Total Provision Charges (Rsm) Net Profit (Rsm) Core EPS (Rs) Core EPS Growth FD Core P/E (x) DPS (Rs) Dividend Yield BVPS (Rs) P/BV (x) ROE % Change In Core EPS Estimates CIMB/consensus EPS (x) Mar-12A 18,384 3,341 21,725 (1,692) 8,034 165.7 30.5% 9.11 33.50 2.22% 844 1.79 21.2% Mar-13A 23,160 4,837 27,997 (2,842) 10,551 217.6 31.3% 6.94 50.00 3.31% 1,003 1.51 23.6% Mar-14F 26,799 3,805 30,605 (1,400) 12,085 249.2 14.5% 6.06 50.00 3.31% 1,202 1.26 22.6% 0.000% 1.02 Mar-15F 29,583 4,106 33,689 (2,776) 11,672 240.7 (3.4%) 6.27 50.00 3.31% 1,393 1.08 18.5% (0.029%) 0.90 Mar-16F 34,067 4,557 38,624 (3,420) 13,371 275.7 14.6% 5.48 55.00 3.64% 1,614 0.94 18.3% 0.012% 0.90
Vol th
Source: Bloomberg

1,510 1,014
1,543
1,770
Current Target
J&K Bank March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A 397,624 257,351 654,975 (5,620) 649,355 0 14,035 14,035 54,043 0 717,433 642,206 10,750 652,956 15,830 668,786 48,647 48,647 Mar-14F 438,175 283,086 721,260 (6,970) 714,290 0 16,923 16,923 49,150 0 780,363 689,091 15,750 704,841 17,214 722,055 58,307 58,307 Mar-15F 508,167 328,379 836,547 (7,970) 828,577 0 18,619 18,619 53,678 0 900,873 798,103 16,355 814,459 18,856 833,315 67,555 67,555 Mar-16F 589,949 380,920 970,869 (9,720) 961,149 0 20,485 20,485 58,885 0 1,040,519 923,631 17,688 941,319 20,939 962,258 78,259 78,259
10,551 0 0 10,551 10,551
12,085 0 0 12,085 12,085
11,672 0 0 11,672 11,672
13,371 0 0 13,371 13,371

Key Ratios
Rolling FD P/E (x)

18.00 16.00 14.00 12.00
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 18.6% 3.8% 44.8% 35.3% 0.8% 118.2% 0.5% 10.9% 10.9% 20.4% 61.0% 1.6% 11.8% Mar-14F 10.2% 3.9% -21.3% 39.0% 0.8% 114.8% 0.5% 11.9% 11.9% 7.3% 62.6% 1.8% -15.0% Mar-15F 16.0% 3.8% 7.9% 40.0% 0.8% 108.9% 0.5% 11.9% 11.9% 15.8% 62.7% 1.9% 12.5% Mar-16F 16.1% 3.8% 11.0% 39.5% 0.7% 107.1% 0.5% 11.9% 11.9% 15.7% 62.8% 2.0% 12.5%
10.00
8.00 6.00
4.00
2.00 0.00 Jan-10
Jan-11
Federal Bank
Jan-12
Jan-13
ING Vysya Bank
Jan-14
J&K Bank
55

MMFS IN / MMFS.NS Current Rs254.4 Rs236.0 Rs208.0 -7.2%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$2,374m
Rs144,665m
US$7.87m
Rs486.0m
47.8%
563.0 m shares
CIMB Analyst(s)
Hold your horses

Weakening auto sales and increasing delinquencies can blunt MMFS' strong earnings growth. As at Dec 13, its absolute gross NPLs have almost doubled from Mar 13's figure while loan losses have increased to 1.9% vs. 1.4% in FY13. Despite the expected fall in wholesale borrowing costs, we remain cautious due to its valuations.
In 9MFY14, MMFS witnessed a sharp moderation in its asset growth and a steep spike in gross NPLs. In our view, moderating auto sales will result in weaker asset growth in the medium term. We increase our FY15-16 EPS estimates by an average 2% to factor in the lower borrowing costs and lower our cost of equity assumption from 15% to 13%. Maintain Reduce, with a revised discounted economic profit based target price of Rs236. evidence, auto sales failed to pick up despite the cut in excise duty. We believe the asset growth is likely to further moderate as the demand is likely to remain weak in the near term. As at end Dec 13, cars constituted 34% of total AUMs, followed by UVs 27% , tractors c.20%, commercial vehicles and construction equipment 11% and used vehicles of ~9%.
Umang SHAH
Jatinder AGARWAL
Vivek VERMA
Share price info

Share price perf. (%) Relative Absolute Major shareholders Mahindra & Mahindra Cartica Capital Wasatch - EM Small Cap Fund 1M -6.2 -1.1 3M -22.4 -19.2 12M 20.7 36.5 % held 52.2 5.1 1.6
Moderating auto sales to put pressure on growth

MMFS has been riding high on the buoyancy of the rural markets. While the favourable monsoon conditions have led to strong tractor sales, they were partly offset by weak domestic auto sales. So far in FY14 (Apr-Feb), the growth in tractor sales has been in excess of 20% yoy, cars sales have fallen 6% yoy, UV sales dipped 5% yoy while M&HCV and LCV sales slipped 26% and 19% yoy, respectively. Consequently, 9MFY14 growth in value of assets financed fell to 14% vs. a 39% CAGR during the FY10-13 period. As per anecdotal
Price Close 320 270 220 Relative to SENSEX (RHS) 160 137 115
Asset quality stress likely to persist

During 9MFY14, MMFS witnessed a sharp 99% increase in gross NPLs, much higher than its seasonal trend. Loan loss provisions increased to 1.9% (annualised) vs. 1.4% in FY13. In our view, its asset quality is likely to remain under pressure as economic activities have slowed down markedly.
Valuations above long-period averages

MMFS trades at +1 SD on a long term PBV basis. We believe that the stock is priced to perfection, leaving limited room for any disappointment.
Financial Summary
Net Interest Income (Rsm) Total Non-Interest Income (Rsm) Operating Revenue (Rsm) Total Provision Charges (Rsm) Net Profit (Rsm) Core EPS (Rs) Core EPS Growth FD Core P/E (x) DPS (Rs) Dividend Yield BVPS (Rs) P/BV (x) ROE % Change In Core EPS Estimates CIMB/consensus EPS (x) Mar-12A 13,499 3,244 16,743 (1,570) 6,201 12.09 29.5% 21.03 2.80 1.10% 57.5 4.43 22.8% Mar-13A 18,075 4,970 23,045 (2,833) 8,827 16.40 35.6% 15.51 3.60 1.42% 79.1 3.21 23.8% Mar-14F 22,222 5,389 27,611 (5,220) 8,694 15.44 (5.8%) 16.47 3.60 1.42% 90.3 2.82 18.2% 0.00% Mar-15F 27,279 5,950 33,230 (5,753) 10,786 19.16 24.1% 13.28 4.40 1.73% 104.4 2.44 19.7% 1.61% Mar-16F 32,431 6,855 39,286 (6,064) 13,192 23.43 22.3% 10.86 5.50 2.16% 121.4 2.10 20.8% 2.52%
170 20
15 10
93
Vol m
5
Source: Bloomberg

254.4 194.8
326.9
236.0
Current Target
Mahindra & Mahindra Finance March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A 239,025 4,575 243,600 0 243,600 0 7,870 7,870 3,454 0 254,924 0 106,204 82,520 188,723 21,655 210,378 44,546 44,546 Mar-14F 297,155 6,097 303,252 0 303,252 0 8,444 8,444 2,611 0 314,307 0 133,779 103,945 237,724 25,715 263,438 50,868 50,868 Mar-15F 350,796 7,385 358,181 0 358,181 0 9,039 9,039 3,192 0 370,412 0 157,928 122,709 280,637 31,019 311,656 58,756 58,756 Mar-16F 417,730 8,991 426,721 0 426,721 0 9,765 9,765 3,482 0 439,968 0 188,061 146,122 334,184 37,460 371,644 68,324 68,324
8,827 0 0 8,827 8,827
8,694 0 0 8,694 8,694
10,786 0 0 10,786 10,786
13,192 0 0 13,192 13,192

Key Ratios
3.34% 3.48% 93.8% 225% 21.0% 97.5% 1.37% 1.29% 1.29%
2.94% 3.06% 94.5% 222% 19.7% 98.0% 1.95% 1.83% 1.83%
2.82% 2.92% 94.7% 222% 19.4% 97.9% 1.78% 1.68% 1.68%
2.84% 2.94% 94.9% 222% 19.1% 98.0% 1.58% 1.50% 1.50%
Rolling FD P/E (x)

25.0 20.0
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 37.4% 8.6% 53.2% 32.2% 1.3% 73.7% 0.2% 17.0% 19.5% N/A N/A 3.2% 21.8% Mar-14F 24.3% 8.1% 8.4% 33.4% 2.2% 58.5% 0.3% 15.7% 17.5% N/A N/A 4.4% -2.1% Mar-15F 18.1% 8.2% 10.4% 33.5% 2.3% 59.2% 0.3% 15.5% 17.0% N/A N/A 4.6% 10.1% Mar-16F 19.1% 8.3% 15.2% 33.7% 2.3% 59.8% 0.3% 15.3% 16.5% N/A N/A 4.7% 13.0%
15.0
10.0 5.0 0.0 Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
57
Oriental Bank of Commerce

OBC IN / ORBC.BO Current Rs191.9 Rs202.0 Rs176.0 5.3%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$944.5m
Rs57,541m
US$5.03m
Rs311.2m
40.9%
299.8 m shares
CIMB Analyst(s)
Not good enough

We believe that OBC will be a beneficiary of the falling wholesale borrowing rates, given its weak liabilities profile. However, its modest operating profit and weak asset quality are likely to keep its earnings under pressure in the medium term.
We raise our FY15 EPS forecast by 8% as we raise our net interest income estimate. Our GGM based target price is revised up to Rs202, implying 0.7x FY15 book value (adjusted for NPL and restructured loans), on back of our EPS upgrade and cut in cost of equity from 15% to 13%. However, we maintain our Hold rating due to OBCs weak profitability.
Vivek VERMA
Jatinder AGARWAL
Umang SHAH
Weak asset concern
quality
is
Share price info

Share price perf. (%) Relative Absolute Major shareholders GOI LIC HDFC Std 1M 12.5 17.6 3M -16 -12.8 12M -35.3 -19.5 % held 59.1 8.2 1.3
Rate cycle play, comfortable tier I ratio

At end-3QFY14, OBCs CASA ratio stood low at 24.2% compared with the 33% industry average at end-FY13. Given its low CASA ratio, we believe that the banks NIM will benefit from the falling wholesale borrowing rates. We note that since the bank has reduced its dependence on the differential rate of interest deposits from 34% at end-FY11 to 16% at end-3QFY14, the benefit from the falling rates will not be as significant as that in the previous cycle. Unlike the other small public sector banks (PSBs), OBC is not capital constrained, which is a positive. Its tier I ratio (Basel III) stood at 8.6% at end-Dec 2013.
Financial Summary
OBCs stressed loans (gross NPLs + restructured loans) comprised around 11% of total loans at end-3QFY14. Excluding the loans to the state electricity board and state-owned aviation, its stressed loans comprised 8.6% of total loans at end-3QFY14. At end-Dec 2013, OBC had a restructuring pipeline of Rs11bn (0.8% of loans). OBCs provision cover fell by 4% yoy to 26% at end-Dec 2013 (60% including technical write off). Furthermore, its recent NPL formation rate (c.3% of lagged loans in 9MFY14) was alarming, given its modest operating profit (PPOP-to- asset ratio of c1.9% in FY13) that leaves limited room for absorption of higher loan losses.
Outlook
We expect OBCs margins to improve slightly due to the falling wholesale borrowing rates but its profitability is likely to remain subdued, given its weak operating profit and high loan loss charges. We estimate ROA of 0.56% and ROE of ~10% in FY14-16.
Price Close 300 250 200 150
Relative to SENSEX (RHS) 124 104 84 64
100 15
10
44
5
Source: Bloomberg

191.9 124.7
284.6
202.0
Current Target
Mar-12A 42,158 12,402 54,560 (17,148) 11,416 39.13 (29.4%) 4.90 7.90 4.12% 379.9 0.51 10.7%
Mar-13A 47,012 16,547 63,559 (20,546) 13,280 45.52 16.3% 4.22 9.20 4.79% 414.7 0.46 11.5%
Mar-14F 50,833 16,181 67,014 (20,430) 10,476 35.42 (22.2%) 5.42 8.00 4.17% 435.4 0.44 8.3% 0.00% 0.93
Mar-15F 56,881 17,476 74,357 (18,327) 13,492 45.00 27.0% 4.26 10.00 5.21% 470.4 0.41 9.9% 7.62% 0.98
Mar-16F 65,959 18,508 84,467 (19,439) 16,182 53.97 19.9% 3.56 12.00 6.25% 512.4 0.37 11.0% 0.37% 0.98
Vol m
Oriental Bank of Commerce March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A Mar-14F 1,302,336 1,432,916 583,362 647,525 1,885,697 (12,785) 1,872,912 0 41,397 41,397 85,896 0 2,000,206 1,758,975 76,793 1,835,769 43,448 1,879,217 120,989 120,989 2,080,441 (14,410) 2,066,031 0 45,486 45,486 95,345 0 2,206,862 1,944,500 80,951 2,025,451 50,844 2,076,295 130,567 130,567 Mar-15F 1,635,890 731,672 2,367,561 (18,793) 2,348,768 0 49,934 49,934 105,833 0 2,504,535 2,226,379 84,655 2,311,033 52,441 2,363,475 141,060 141,060 Mar-16F 1,866,917 826,948 2,693,864 (23,427) 2,670,438 0 54,777 54,777 117,474 0 2,842,689 2,546,264 88,606 2,634,870 54,175 2,689,045 153,644 153,644
13,280 0 0 13,280 13,280
10,476 0 0 10,476 10,476
13,492 0 0 13,492 13,492
16,182 0 0 16,182 16,182

Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 16.5% 14.3% 7.7% 74.0% 7.54% 10.0% 2.47% 2.83% 3.69% 57.2% 2.49% 13.5% 20.2% Mar-14F 5.4% (3.1%) (6.6%) 75.9% 7.25% 9.6% 2.37% 2.75% 3.52% 58.7% 2.42% 27.0% 22.9% Mar-15F 11.0% 8.1% 34.3% 76.5% 7.22% 9.6% 2.38% 2.73% 3.51% 48.7% 2.41% 30.0% 22.2% Mar-16F 13.6% 13.2% 19.9% 78.1% 7.15% 9.6% 2.44% 2.76% 3.58% 45.7% 2.47% 30.0% 22.2%
Rolling FD P/E (x)

12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jan-10
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 15.2% 2.7% 33.4% 43.5% 2.8% 47.1% 0.5% 9.2% 12.2% 12.8% 73.3% 3.2% 5.5% Mar-14F 10.0% 2.6% -2.2% 48.1% 3.4% 39.4% 0.5% 9.1% 11.8% 10.5% 72.9% 3.9% 1.0% Mar-15F 14.2% 2.6% 8.0% 49.4% 3.4% 40.1% 0.5% 8.6% 11.0% 14.5% 72.6% 4.1% 8.0% Mar-16F 14.1% 2.6% 5.9% 49.6% 3.1% 43.7% 0.5% 8.2% 10.3% 14.4% 72.4% 4.0% 11.0%
Jan-11
Canara Bank
Jan-12
Jan-13
Jan-14
Indian Bank Union Bank of India
Oriental Bank of Commerce
59
Punjab National Bank

PNB IN / PNBK.BO Current Rs642.1 Rs657.0 Rs550.0 2.3%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$3,816m
Rs232,467m
US$13.89m
Rs860.0m
41.1%
361.7 m shares
CIMB Analyst(s)
Doing well, but not good enough

PNB's 3QFY14 results were a positive surprise in terms of asset quality deterioration and NIMs. Relatively moderate loan growth and increasing proportion of low-cost deposits were the key positives. That said, its stock of gross NPLs and restructured loans is still the highest among peer banks.
We largely maintain our FY15-16 EPS estimates. However, we raise our GGM based target price to Rs657, as we cut our cost of equity from 15% to 13%. We maintain our Hold rating on the stock. On a stock basis, PNBs asset quality continues to be inferior to its peers. That said, the percentage comparison is partially distorted as PNBs loan book expanded at a slower rate than its peers (+6% yoy in Mar 13, +10% yoy in Dec 13). At end-Dec 2013, PNBs gross NPLs were 4.8% of total loans and net NPLs were 2.8%. Its standard restructured loans stood at 9.6% of total loans (7.4% of loans ex-SEB and state owned aviation exposure) at end-Dec 2013, which is the highest among peers. However, incrementally, the pace of fresh gross impairments appears to be moderating, which is a silver lining.
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders Government of India LIC of India Lazard Asset 1M 14.9 20 3M 4.8 8 12M -26.4 -10.6 % held 58.9 12.9 4.1
Business consolidation led to liability improvements

In the past year, PNB had focused on business consolidation. This resulted in two key benefits: 1) slow loan growth (+9.7% yoy, +5.6% YTD in Dec 13), which in the current environment means that underlying asset quality trends will likely improve over the long term, and 2) a sharp improvement in its low-cost deposit ratio (CASA at 38.3% at end-Dec 2013 from 35.3% at end-Mar 2012). Furthermore, its proportion of wholesale deposits was a mere 5.1% at end-Dec 2013 (15% at end-Dec 2012). In our view, the above factors should enable PNB to report betterthan-peers NIMs.
Well capitalised to fund growth

At end-Dec 2013, PNBs Tier-I capital was 9.2% (Basel III; including 9MFY14 profits) and its internal capital generation rate is expected to be around 12-13% in FY14-15. Thus, a loan growth target of c.15-16% in FY14 appears reasonable, given the estimated ROAs of more than 90bp over FY15-16.
Moderation in incremental gross impairments
Price Close 860 760
Financial Summary
90.0
76.0 62.0
660
560 460
360 8
6 4
48.0
2
Source: Bloomberg

642.1 409.5
835.5
657.0
Current Target
Mar-12A 134,144 42,026 176,170 (35,773) 48,842 148.9 6.2% 4.31 22.00 3.43% 777 0.83 21.1%
Mar-13A 148,565 42,159 190,724 (43,856) 47,477 137.2 (7.9%) 4.68 27.00 4.21% 885 0.73 16.5%
Mar-14F 164,211 42,921 207,132 (60,129) 35,459 99.2 (27.7%) 6.47 27.00 4.21% 949 0.68 10.8% 0.000% 0.93
Mar-15F 185,855 47,413 233,268 (47,293) 53,612 148.2 49.4% 4.33 28.00 4.36% 1,069 0.60 14.7% (0.299%) 1.10
Mar-16F 211,875 51,255 263,129 (53,914) 59,482 164.5 10.9% 3.90 29.00 4.52% 1,205 0.53 14.5% (0.308%) 1.03
Vol m
Punjab National Bank March 25, 2014
Profit & Loss

Balance Sheet
47,477 0 0 47,477 47,477
35,459 0 0 35,459 35,459
53,612 0 0 53,612 53,612
59,482 0 0 59,482 59,482

Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 8.3% 2.8% (7.3%) 77.9% 6.38% 9.69% 3.31% 3.85% 4.82% 40.2% 3.18% 27.2% 20.1% Mar-14F 8.6% 1.6% (22.3%) 79.3% 5.88% 9.15% 3.28% 3.94% 4.72% 54.3% 3.23% 30.0% 27.5% Mar-15F 12.6% 11.8% 51.2% 79.7% 5.89% 9.15% 3.26% 3.95% 4.66% 38.2% 3.25% 30.0% 18.9% Mar-16F 12.8% 12.1% 10.9% 80.5% 5.97% 9.25% 3.28% 3.99% 4.64% 38.8% 3.29% 30.0% 17.6%
Rolling FD P/E (x)

25.0 20.0
Key Drivers
15.0
10.0 5.0 0.0 Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Canara Bank
61

SHTF IN / SRTR.NS Current Rs667.2 Rs632.0 Rs557.0 -5.3%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$2,484m
Rs151,365m
US$4.05m
Rs250.1m
74.1%
226.9 m shares
CIMB Analyst(s)
Wait for the tide to turn

Shrirams (STF) net interest margins appear to have troughed. The likely drop in wholesale borrowing costs augurs well for its margins. However, a pick-up in loan growth and improvement in asset quality are more crucial for improvement in STFs return ratios and thereby re-rating of the stock.
We increase our FY15-16 EPS by 1%-6% to factor in the expected uptick in net interest margins and revise our discounted economic profit-based target price to Rs632 as we lower our cost of equity assumptions from 15% to 13%. During FY11-14, there has been sharp valuation de-rating for STF as its return ratios eroded significantly due to regulatory changes, slower growth and higher loan losses. We maintain our Reduce rating as uncertainty towards growth and asset quality could prolong the valuation re-rating. in the CV cycle still appears distant, management expects higher incremental growth from the passenger vehicles segment, which earns lower yields. In our view, STFs NIMs are unlikely to improve substantially as this will offset the benefits of lower cost of funds.
Umang SHAH
Jatinder AGARWAL
Vivek VERMA
Share price info

Share price perf. (%) Relative Absolute Major shareholders Shriram Capital Piramal Enterprises Genesis Indian Inv. Co. 1M 8.3 13.4 3M -2.1 1.1 12M -20 -4.2 % held 25.9 10.0 6.1
Asset quality risks persist

STFs asset quality risk remains high, given the continued economic slowdown. Its annualised loan loss charge stood at 2.1% at end-9MFY14 (vs. 1.8% at end-FY13). We expect STFs loan losses (including write-offs) to remain elevated in the medium term. That said, STFs provision coverage was 80% at end-Dec 2013, which is better than peers.
Growth/margin trade-off
Indias auto sales growth continues to moderate in FY14. Despite a low base of FY13, the commercial vehicle (CV) sales continues to trend down in 9MFY14. YTD, the domestic medium and heavy commercial vehicle (M&HCV) sales and light commercial vehicle (LCV) sales fell 23% and 18% yoy respectively. After a positive surprise in 1HFY3/14, STFs assets under management contracted qoq in 3QFY14. As at Dec-13, CVs constituted 70% of STFs AUM and passenger vehicles 22%. As recovery
Price Close 860 760 660 560 Relative to SENSEX (RHS) 125.0 110.0 95.0 80.0

We think that STFs margins may have troughed but muted economic growth will put pressure on its loan growth and asset quality. We would wait for positive catalysts (a rebound in GDP growth, CV demand), which are critical for improvement in return ratios and thereby re-rating of the stock.
Financial Summary
Net Interest Income (Rsm) Total Non-Interest Income (Rsm) Operating Revenue (Rsm) Total Provision Charges (Rsm) Net Profit (Rsm) Core EPS (Rs) Core EPS Growth FD Core P/E (x) DPS (Rs) Dividend Yield BVPS (Rs) P/BV (x) ROE % Change In Core EPS Estimates CIMB/consensus EPS (x) Mar-12A 9,751 24,576 34,327 (7,683) 12,575 55.58 4.4% 12.00 6.50 0.97% 264.8 2.52 23.1% Mar-13A 14,569 22,363 36,933 (8,508) 13,606 60.04 8.0% 11.11 7.00 1.05% 317.1 2.10 20.6% Mar-14F 23,023 16,241 39,264 (11,171) 12,994 57.27 (4.6%) 11.65 7.00 1.05% 366.2 1.82 16.8% 0.00% 0.94 Mar-15F 27,040 16,807 43,847 (11,319) 15,098 66.54 16.2% 10.03 8.00 1.20% 423.4 1.58 16.9% 0.77% 0.93 Mar-16F 31,673 19,730 51,403 (12,479) 18,211 80.26 20.6% 8.31 10.00 1.50% 491.9 1.36 17.5% 6.05% 0.95
460 30
20
65.0
Vol m
10
Source: Bloomberg

667.2 499.6
835.4
632.0
Current Target
Shriram Transport Finance March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A 343,538 32,751 376,289 0 376,289 0 8,850 8,850 63,193 0 448,332 0 109,169 200,855 310,024 66,361 376,385 71,947 71,947 Mar-14F 394,157 50,273 444,430 0 444,430 0 9,749 9,749 63,845 0 518,024 0 124,916 229,826 354,742 80,199 434,940 83,083 83,083 Mar-15F 443,629 56,952 500,581 0 500,581 0 10,798 10,798 79,927 0 591,307 0 140,594 258,672 399,266 95,983 495,249 96,058 96,058 Mar-16F 527,917 68,331 596,248 0 596,248 0 12,028 12,028 92,899 0 701,175 0 167,307 307,819 475,126 114,436 589,561 111,614 111,614
13,606 0 0 13,606 13,606
12,994 0 0 12,994 12,994
15,098 0 0 15,098 15,098
18,211 0 0 18,211 18,211

Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 7.6% 8.2% 7.2% 39.4% 10.6% 12.8% 2.24% N/A 3.61% 29.7% 3.61% 32.5% 13.6% Mar-14F 6.3% 3.7% (7.9%) 58.6% 11.6% 15.0% 3.41% N/A 4.76% 37.6% 4.76% 30.0% 14.3% Mar-15F 11.7% 10.6% 16.2% 61.7% 11.1% 14.6% 3.48% N/A 4.88% 34.4% 4.88% 30.0% 14.1% Mar-16F 17.2% 17.0% 20.6% 61.6% 10.8% 14.3% 3.59% N/A 4.90% 32.4% 4.90% 30.0% 14.6%
23.0% 27.6% 76.6% 315% 23.5% 100.0% 2.82% 2.11% 2.11%
21.7% 25.6% 76.1% 316% 24.1% 100.0% 3.03% 2.31% 2.31%
22.6% 26.6% 75.0% 316% 25.0% 100.0% 2.70% 2.04% 2.04%
23.1% 27.2% 75.3% 316% 24.5% 100.0% 2.57% 1.93% 1.93%
Rolling FD P/E (x)

25.0 20.0
Key Drivers
Loan Growth (%) Net Interest Margin (%) Non Interest Income Growth (%) Cost-income Ratio (%) Net NPL Ratio (%) Loan Loss Reserve (%) GP Ratio (%) Tier 1 Ratio (%) Total CAR (%) Deposit Growth (%) Loan-deposit Ratio (%) Gross NPL Ratio (%) Fee Income Growth (%) Mar-13A 31.7% 4.3% -9.0% 22.4% 0.8% 84.0% 0.2% 15.4% 20.3% N/A N/A 3.0% -2.7% Mar-14F 14.7% 5.6% -27.4% 24.3% 1.0% 81.2% 0.2% 15.4% 20.8% N/A N/A 3.7% 11.2% Mar-15F 12.6% 5.7% 3.5% 25.0% 0.7% 90.1% 0.2% 15.7% 20.2% N/A N/A 3.7% 14.2% Mar-16F 19.0% 5.8% 17.4% 25.1% 0.4% 96.1% 0.2% 15.4% 19.1% N/A N/A 3.5% 17.1%
15.0
10.0 5.0 0.0 Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
63
State Bank of India

SBIN IN / SBI.BO Current Rs1,702 Rs1,762 Rs1,440 3.5%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$20,858m
Rs1,270,779m
US$48.54m
Rs3,001m
41.4%
684.0 m shares
CIMB Analyst(s)
Cheap valuation a mirage

SBI reported 9MFY14 consolidated profit of Rs102bn and a Rs197bn increase in consolidated net NPLs. That said, ROAs appear to have bottomed out despite lingering concerns on asset quality. Further, SBI will likely be adversely impacted if capital surcharge for D-SIBs (domestic systemically-important banks) is introduced.
A 20bp base rate hike during 3QFY14 and its recent equity capital raising should act as tailwinds to SBIs net interest margins in FY15-16. However, near term asset quality issues would persist. We maintain our FY14-16 EPS estimates. However, we cut our cost of equity assumptions from 15% to 13%. Consequently, we upgrade our rating to Hold, with a revised SOP-based target price of Rs1,762. loans as at Mar 13). In 9MFY14, net NPLs rose Rs152bn (consolidated: Rs197bn) compared to net profit of Rs78.5bn (consolidated: Rs102bn). This led to a fall in its adjusted book value YTD in 9MFY14. As at end-Dec 2013, SBIs gross NPLs stood at 5.6% of total loans while standard restructured loans comprised 3.4%. Nonetheless, SBIs proportion of restructured loans is lower than its peers, which suggests that it recognises NPLs upfront, which is a key positive.
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders Government of India LIC of India HDFC MF 1M 8.2 13.3 3M -6 -2.8 12M -35.5 -19.7 % held 58.6 15.0 1.5
NIMs set to improve

SBI is the only public sector bank which has gained market share in low cost savings deposits over FY01-13 which is reflected in its relatively lower cost of funds (CASA of 41% as at end-Dec 2013). SBI raised its base rate by ~20bp in 3QFY14 and also deposit rates for various tenures by ~25bp. It also raised its equity capital to the tune of Rs100bn, which should boost its margins in FY15.
ROAs appear to have bottomed

We think SBI's ROAs will improve in FY15, led largely by lower staff costs and improving NIMs. At 0.7x FY15 consolidated book value, the stock appears cheap. However, after adjusting for post-tax net NPLs and 35% of the restructured loans, it trades at 1.2x on FY15 price to adjusted book value basis. In our view, a combination of low ROEs (about 13% over FY14-16) and likely introduction of D-SIB surcharge, will keep valuations under pressure.
But, no respite on asset quality

SBIs incremental addition to stressed assets (fresh delinquencies + fresh restructuring of loans) remained high at Rs505bn during 9MFY14 (4.8% of
Price Close 2,500 2,300 Relative to SENSEX (RHS) 116.0 106.0
Financial Summary
96.0
86.0 76.0 66.0
2,100
1,900 1,700 1,500
1,300 8
6 4
56.0
2
Source: Bloomberg

1,702 1,474
2,425
1,762
Current Target
Mar-12A 432,911 143,514 576,425 (130,902) 117,073 179.3 37.7% 9.49 35.00 2.06% 1,251 1.36 15.7%
Mar-13A 443,313 160,348 603,661 (111,308) 141,050 208.2 16.1% 8.18 41.50 2.44% 1,446 1.18 15.4%
Mar-14F 495,447 175,298 670,745 (139,314) 110,732 154.8 (25.6%) 10.99 41.50 2.44% 1,566 1.09 10.3% 0.000%
Mar-15F 581,879 179,813 761,692 (139,485) 159,007 213.1 37.6% 7.99 41.50 2.44% 1,738 0.98 12.9% 0.000%
Mar-16F 672,214 192,748 864,962 (161,803) 179,488 240.5 12.9% 7.08 44.00 2.58% 1,934 0.88 13.1% 0.002%
Vol m
State Bank of India March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A Mar-14F Mar-15F Mar-16F 10,748,486 12,354,314 14,348,114 16,650,522 3,454,621 3,936,647 4,332,534 4,768,344 14,203,107 (292,320) 13,910,787 0 603,622 603,622 1,148,202 0 15,662,610 12,027,396 16,290,961 (329,724) 15,961,237 0 669,259 669,259 1,263,022 0 17,893,518 13,635,439 18,680,648 (399,589) 18,281,059 0 742,602 742,602 1,389,324 0 20,412,985 15,513,688 21,418,866 (470,233) 20,948,633 0 824,610 824,610 1,528,256 0 23,301,499 17,653,715
1,691,827 2,035,692 2,443,226 2,926,406 13,719,223 15,671,131 17,956,913 20,580,121 954,299 1,053,597 1,159,248 1,277,908 14,673,522 16,724,728 19,116,162 21,858,029 988,837 1,168,790 1,296,824 1,443,474 988,837 1,168,790 1,296,824 1,443,474
141,050 0 0 141,050 141,050
110,732 0 0 110,732 110,732
159,007 0 0 159,007 159,007
179,488 0 0 179,488 179,488

Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 4.7% (1.6%) 7.9% 73.4% 5.93% 9.14% 3.21% 3.95% 4.82% 35.8% 3.06% 29.3% 20.1% Mar-14F 11.1% (2.4%) (17.8%) 73.9% 5.97% 9.00% 3.03% 3.86% 4.61% 45.9% 2.95% 32.5% 28.0% Mar-15F 13.6% 23.6% 43.6% 76.4% 5.74% 8.85% 3.11% 3.99% 4.70% 37.2% 3.04% 32.5% 19.5% Mar-16F 13.6% 14.0% 12.9% 77.7% 5.58% 8.71% 3.14% 4.05% 4.69% 37.8% 3.08% 32.5% 18.3%
Rolling FD P/E (x)

25.0 20.0
Key Drivers
15.0
10.0 5.0 0.0 Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Canara Bank
65
Union Bank of India

UNBK IN / UNBK.BO Current Rs116.5 Rs119.0 Rs100.00 2.2%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$1,205m
Rs73,399m
US$6.49m
Rs401.9m
39.9%
630.3 m shares
CIMB Analyst(s)
On a road to nowhere
The combination of low core tier 1 capital and muted return ratios will continue to suppress Union Banks valuation, in our view. Furthermore, its net interest margin (NIM) is still under pressure and its rising NPLs will keep loan loss charges elevated.
Union Banks current valuation is cheap but we think that it will remain so in the long term. Its low core tier I capital will result in frequent capital dilutions and thus, suppress ROEs. We broadly maintain our FY14-16 EPS estimates. However, we lower our cost of equity assumption from 15% to 13%. Thus, we upgrade our rating from Reduce to Hold, with a higher GGM-based target price of Rs119. internal rate of capital generation (profit less dividends) in FY14-15, which will be insufficient to fund c.15-16% loans growth, given its already-low core tier 1 capital.
Jatinder AGARWAL
Vivek VERMA
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders Government of India LIC of India HDFC Std. Life 1M 7.9 13 3M -8.7 -5.5 12M -61.8 -46 % held 60.1 10.3 2.4
Falling NIMs
Union Banks NIM contracted from over 3.0% at end-3QFY13 to 2.5% at end-3QFY14. Yields have been under pressure as: 1) the bank has not increased its base rate despite rising cost of funds in 9MFY14 2) the proportion of CASA is declining (28.8% in 3QFY14 vs. 31% in FY13), and 3) rising NPLs have had a negative impact on loan yields. Thus, its NIMs are likely to remain under pressure in the near term.
Capital constraint
At end-Dec 2013, Union Banks CET1 stood at 6.3%, as per Basel III norms. Its ROA has steadily contracted from 1.2% in FY10 (ROE of 26%) to 0.76% in FY13 (ROE of 15%) and 0.46% in 9MFY14. Its loan book expanded by ~20% CAGR (+20% yoy in 9MFY14) in FY10-13. This necessitated annual capital injections by the government of India (GOI) in FY11-14. Although Union Banks business growth trajectory is expected to moderate in the near term, equity dilutions are inevitable as its internal rate of capital generation is likely to trail risk-weighted asset growth. We expect Union Bank to register a ~10%
and deteriorating asset quality

Union Banks gross NPLs have increased 39% YTD to 3.8% of total loans at end-9MFY14. Furthermore, its net restructured loans stood at 4.9% of total loans at end-Dec 2013. In our view, the combination of falling NIMs and rising bad loans bodes ill for Union Banks ROAs and ROEs.
Price Close 233 183 133
Relative to SENSEX (RHS) 102 77 52
Financial Summary
Net Interest Income (Rsm) Total Non-Interest Income (Rsm) Operating Revenue (Rsm) Total Provision Charges (Rsm) Net Profit (Rsm) Core EPS (Rs) Core EPS Growth FD Core P/E (x) DPS (Rs) Dividend Yield BVPS (Rs) P/BV (x) ROE % Change In Core EPS Estimates CIMB/consensus EPS (x) Mar-12A 69,089 23,324 92,413 (25,410) 17,871 33.25 (17.8%) 3.50 8.00 6.87% 235.9 0.49 14.9% Mar-13A 75,428 25,520 100,949 (25,185) 21,579 37.62 13.1% 3.10 8.00 6.87% 262.9 0.44 15.0% Mar-14F 80,238 27,836 108,074 (29,407) 16,143 26.15 (30.5%) 4.45 8.00 6.87% 273.0 0.43 9.8% 0.00% 0.96 Mar-15F 90,969 30,052 121,021 (26,713) 22,169 34.76 32.9% 3.35 9.00 7.73% 298.7 0.39 12.2% (0.42%) 1.01 Mar-16F 103,143 32,519 135,662 (30,453) 23,476 36.81 5.9% 3.16 10.00 8.59% 325.5 0.36 11.8% (0.79%) 0.90
83 30
20
27
Vol m
10
Source: Bloomberg

116.5 98.65
247.1
119.0
Current Target
Union Bank of India March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A Mar-14F 2,109,198 2,410,035 807,010 896,393 2,916,208 (28,176) 2,888,032 0 52,399 52,399 162,104 0 3,102,534 2,637,610 239,083 2,876,692 61,318 2,938,010 156,894 156,894 3,306,427 (37,670) 3,268,758 0 58,139 58,139 178,314 0 3,505,211 3,008,462 253,587 3,262,049 69,088 3,331,137 174,074 174,074 Mar-15F 2,752,550 996,881 3,749,431 (48,054) 3,701,377 0 64,551 64,551 196,146 0 3,962,074 3,417,135 278,399 3,695,534 76,036 3,771,570 190,504 190,504 Mar-16F 3,142,618 1,109,046 4,251,664 (59,492) 4,192,171 0 71,724 71,724 215,760 0 4,479,656 3,882,816 305,569 4,188,385 83,668 4,272,053 207,603 207,603
21,579 0 0 21,579 21,579
16,143 0 0 16,143 16,143
22,169 0 0 22,169 22,169
23,476 0 0 23,476 23,476

Key Ratios
Total Income Growth Operating Profit Growth Pretax Profit Growth Net Interest To Total Income Cost Of Funds Return On Interest Earning Assets Net Interest Spread Net Interest Margin (Avg Deposits) Net Interest Margin (Avg RWA) Provisions to Pre Prov. Operating Profit Interest Return On Average Assets Effective Tax Rate Net Dividend Payout Ratio Mar-13A 9.2% 6.3% 13.0% 74.7% 6.65% 9.41% 2.76% 3.10% 4.05% 45.1% 2.64% 29.6% 22.1% Mar-14F 7.1% (4.5%) (22.0%) 74.2% 7.02% 9.51% 2.48% 2.84% 3.65% 55.2% 2.43% 32.5% 31.6% Mar-15F 12.0% 9.5% 32.4% 75.2% 6.97% 9.45% 2.48% 2.83% 3.59% 45.8% 2.44% 30.0% 25.9% Mar-16F 12.1% 9.6% 5.9% 76.0% 6.92% 9.39% 2.48% 2.83% 3.52% 47.6% 2.44% 30.0% 27.2%
Rolling FD P/E (x)

14.0 12.0
Key Drivers
10.0
8.0 6.0 4.0 2.0 0.0 Jan-10
Jan-11
Jan-12
Bank of India
Jan-13
Canara Bank
Jan-14
Union Bank of India
Bank of Baroda
67
Yes Bank
YES IN / YESB.BO Current Rs360.4 Rs387.0 Rs359.0 7.4%
Conviction| |
Market Cap
Avg Daily Turnover
Free Float
US$2,133m
Rs129,952m
US$31.53m
Rs1,948m
74.4%
358.6 m shares
CIMB Analyst(s)
Not out of the woods yet

Yes Banks business model is strongly leveraged to a conducive macroeconomic environment. A largely wholesale-funded liability mix should benefit from a likely fall in wholesale funding rates. However, its low Tier-1 ratio and mid-market exposure will remain overhangs, in our view.
We raise our EPS for FY15-16 by 2% on average as we increase our net interest income estimates. We raise our discounted economic profit based target price to Rs387 as we cut our cost of equity to 13% and upgrade EPS, even as we maintain our Hold rating given lack of near-term catalysts. which is perhaps a reflection of its small scale and segment expertise. At end-3QFY14, its gross NPL ratio stood at 0.4%, with provision coverage of 78% while its restructured loans were a mere 0.2% of loans all well below industry averages. However, its mid-market exposure (about one-third of loans) will remain an overhang in a stressed macro-economic environment, in our view. Some pain was evident in 2Q-3Q, when delinquencies came in at about Rs2.8bn (quarterly run rate of 0.3% of loans), well above its trend rate. Its outstanding NPLs with the asset reconstruction companies (ARC) stood at Rs1.8bn (0.4% of loans).
Vivek VERMA
Jatinder AGARWAL
Umang SHAH
Share price info

Share price perf. (%) Relative Absolute Major shareholders Madhu Kapur & Family Rana Kapoor Yes Capital (India) Pvt. Ltd. 1M 12.6 17.7 3M -5.9 -2.7 12M -32.4 -16.6 % held 9.8 5.6 4.2
NIMs rates
leveraged
to
falling
Yes Banks business model is strongly leveraged to benign liquidity conditions. It has a low CASA (current and savings accounts) ratio of 20.9% and a high dependence on corporate and wholesale deposits (c.60% of total deposits). According to its FY13 annual report, about 76% of its interest-bearing liabilities will mature in less than one year vs. 28% of interest-bearing assets. If wholesale funding rates fall, as we anticipate, its NIMs will likely expand.
Low Tier-I is a concern

Yes Banks Tier-I capital adequacy (Basel III, including 9M earnings) was 9.9% at end-3QFY14 with a CET-1 of 9.3%, which will likely cap its long term business growth prospects unless it raises equity capital in the near term. We expect loan growth of 15% in FY14-16 vs. a CAGR of 38% over FY08-13.
Asset quality: so far so good

Yes Bank has shown limited cross-cycle asset-quality stress so far,
Price Close 590 490 390 290 Relative to SENSEX (RHS) 128 108 88 68
Financial Summary
Net Interest Income (Rsm) Total Non-Interest Income (Rsm) Operating Revenue (Rsm) Total Provision Charges (Rsm) Net Profit (Rsm) Core EPS (Rs) Core EPS Growth FD Core P/E (x) DPS (Rs) Dividend Yield BVPS (Rs) P/BV (x) ROE % Change In Core EPS Estimates CIMB/consensus EPS (x) Mar-12A 16,156 8,571 24,728 (902) 9,770 27.91 31.7% 12.91 4.00 1.11% 132.5 2.72 23.1% Mar-13A 22,188 12,574 34,762 (2,160) 13,007 36.56 31.0% 9.86 6.00 1.67% 161.9 2.23 24.8% Mar-14F 26,769 16,662 43,431 (3,692) 15,483 42.87 17.3% 8.41 6.50 1.80% 195.9 1.84 23.9% 0.00% 0.99 Mar-15F 31,212 19,717 50,929 (3,803) 18,004 49.17 14.7% 7.33 7.50 2.08% 234.7 1.54 22.8% 2.10% 0.96 Mar-16F 35,558 23,347 58,904 (4,093) 20,827 56.09 14.1% 6.42 7.50 2.08% 279.8 1.29 21.8% 1.01% 0.93
Vol m
190 50 40 30 20 10
48
Source: Bloomberg

360.4 225.9
542.8
387.0
Current Target
Yes Bank March 25, 2014
Profit & Loss

Balance Sheet
(Rsm) Total Gross Loans Liquid Assets & Invst. (Current) Other Int. Earning Assets Total Gross Int. Earning Assets Total Provisions/Loan Loss Reserve Total Net Interest Earning Assets Intangible Assets Other Non-Interest Earning Assets Total Non-Interest Earning Assets Cash And Marketable Securities Long-term Investments Total Assets Customer Interest-Bearing Liabilities Bank Deposits Interest Bearing Liabilities: Others Total Interest-Bearing Liabilities Bank's Liabilities Under Acceptances Total Non-Interest Bearing Liabilities Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-13A 470,869 429,760 900,629 (873) 899,756 0 50,628 50,628 40,658 0 991,041 669,556 209,221 878,777 54,187 932,965 58,077 58,077 Mar-14F 541,738 466,994 1,008,732 (1,243) 1,007,489 0 38,538 38,538 46,756 0 1,092,784 730,873 213,695 944,568 76,970 1,021,538 71,246 71,246 Mar-15F 623,913 526,766 1,150,679 (2,343) 1,148,336 0 43,095 43,095 53,770 0 1,245,200 829,772 243,217 1,072,988 85,675 1,158,664 86,536 86,536 Mar-16F 719,048 595,001 1,314,049 (4,243) 1,309,805 0 48,338 48,338 61,835 0 1,419,978 949,987 279,295 1,229,281 86,087 1,315,368 104,610 104,610
13,007 0 0 13,007 13,007
15,483 0 0 15,483 15,483
18,004 0 0 18,004 18,004
20,827 0 0 20,827 20,827

Key Ratios
Rolling FD P/E (x)

30.0 25.0 20.0 15.0 10.0 5.0 0.0 Jan-10
Key Drivers
Jan-11
Indusind Bank
Jan-12
Jan-13
ING Vysya Bank
Jan-14
Yes Bank
69
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CIMBI has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of CIMBI. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBI. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesia residents except in compliance with applicable Indonesian capital market laws and regulations. Malaysia: This report is issued and distributed by CIMB Investment Bank Berhad (CIMB). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of CIMB. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB. New Zealand: In New Zealand, this report is for distribution only to persons whose principal business is the investment of money or who, in the course of, and for the purposes of their business, habitually invest money pursuant to Section 3(2)(a)(ii) of the Securities Act 1978. Singapore: This report is issued and distributed by CIMB Research Pte Ltd (CIMBR). Recipients of this report are to contact CIMBR in Singapore in respect of any matters arising from, or in connection with, this report. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBR has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only. If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBR.. As of March 24, 2014, CIMBR does not have a proprietary position in the recommended securities in this report. South Korea: This report is issued and distributed in South Korea by CIMB Securities Limited, Korea Branch ("CIMB Korea") which is licensed as a cash equity broker, and regulated by the Financial Services Commission and Financial Supervisory Service of Korea. The views and opinions in this research report are our own as of the date hereof and are subject to change, and this report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial investment instruments and it is not intended as a solicitation for the purchase of any financial investment instrument. This publication is strictly confidential and is for private circulation only, and no part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB Korea. Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden. Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report have not been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer or a placement within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of the Financial Supervisory Commission of the Republic of China. Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (CIMBS). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBS has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of CIMBS. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBS. Corporate Governance Report: The disclosure of the survey result of the Thai Institute of Directors Association (IOD) re garding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result. Score Range: 90 100 80 89 70 79 Below 70 or No Survey Result Description: Excellent Very Good Good N/A United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates. United Kingdom and Europe: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (CIMB UK). CIMB UK is authorised and regulated by the Financial Services Authority and its registered office is at 27 Knightsbridge, London, SW1X 7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are persons that are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in
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matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the Order); (c) are persons falling within Article 49 (2) (a) to (d) (high net worth companies, unincorporated associations etc) of the Order; (d) are outside the United Kingdom; or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as relevant persons). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. Only where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent "investment research" under the applicable rules of the Financial Services Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S.-registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (Australia) Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as "U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
Distribution of stock ratings and investment banking clients for quarter ended on 31 January 2014 1336 companies under coverage for quarter ended on 31 January 2014 Rating Distribution (%) Outperform/Buy/Trading Buy/Add Neutral/Hold Underperform/Sell/Trading Sell/Reduce 51.1% 32.7% 16.2% Investment Banking clients (%) 6.9% 6.0% 5.5%
As at the time of publishing this report CIMB is phasing in an absolute recommendation structure for stocks (Framework #1). Please refer to all frameworks for a definition of any recommendations stated in this report.
CIMB Recommendation Framework #1

Stock Ratings Add Hold Reduce
Definition The stocks total return is expected to exceed 10% over the next 12 months. The stocks total return is expected to be between 0% and positive 10% over the next 12 months. The stocks total return is expected to fall below 0% or more over the next 12 months.
The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months. Sector Ratings Overweight Neutral Underweight Country Ratings Overweight Neutral Underweight Outperform Neutral Underperform Trading Buy Trading Sell Definition An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation. Definition An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark. The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 12 months. The stock's total return is expected to be within +/-5% of a relevant benchmark's total return. The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 12 months. The stock's total return is expected to exceed a relevant benchmark's total return by 3% or more over the next 3 months. The stock's total return is expected to be below a relevant benchmark's total return by 3% or more over the next 3 months.
CIMB Stock Recommendation Framework #2 *
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. CIMB Research Pte Ltd (Co. Reg. No. 198701620M)
CIMB Stock Recommendation Framework #3 **

Outperform Neutral Underperform Trading Buy Trading Sell
Expected positive total returns of 10% or more over the next 12 months. Expected total returns of between -10% and +10% over the next 12 months. Expected negative total returns of 10% or more over the next 12 months. Expected positive total returns of 10% or more over the next 3 months. Expected negative total returns of 10% or more over the next 3 months.
** This framework only applies to stocks listed on the Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
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Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2013.
AAV Good, ADVANC - Excellent, AMATA - Very Good, ANAN Good, AOT - Excellent, AP - Very Good, BANPU - Excellent , BAY - Excellent , BBL - Excellent, BCH Good, BCP - Excellent, BEC - Very Good, BGH - not available, BJC Very Good, BH - Very Good, BIGC - Very Good, BTS - Excellent, CCET Very Good, CENTEL Very Good, CK Excellent, CPALL - Very Good, CPF Excellent, CPN - Excellent, DELTA - Very Good, DTAC - Excellent, EGCO Excellent, GLOBAL - Good, GLOW - Very Good, GRAMMY Excellent, HANA - Excellent, HEMRAJ - Excellent, HMPRO - Very Good, INTUCH Excellent, ITD Very Good, IVL - Excellent, JAS Very Good, KAMART not available, KBANK - Excellent, KKP Excellent, KTB - Excellent, LH - Very Good, LPN - Excellent, MAJOR Very Good, MAKRO Very Good, MCOT - Excellent, MINT - Excellent, PS Excellent, PSL - Excellent, PTT - Excellent, PTTGC - Excellent, PTTEP - Excellent, QH - Excellent, RATCH - Excellent, ROBINS - Excellent, RS Excellent, SAMART Excellent, SC Excellent, SCB - Excellent, SCC - Excellent, SCCC - Very Good, SIRI Very Good, SPALI - Excellent, STA - Good, STEC - Very Good, TCAP - Excellent, THAI - Excellent, THCOM Excellent, TICON Very Good, TISCO - Excellent, TMB - Excellent, TOP - Excellent, TRUE - Excellent, TTW Excellent, TUF - Very Good, VGI Excellent, WORK Good.
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25 Banks CIMB Mar 2014

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March 25, 2014

Notes from the Field

NOTE: Prices as on 21st March 2014

SOURCES: CIMB, COMPANY REPORTS

Wholesale borrowing rates likely to fall in FY15

Buy HFCs and private banks, avoid PSBs

Highlighted Companies HDFC Ltd.

Incremental loan impairments to slow down

BANKS March 25, 2014

4% 3% 2% 1% 0% 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14

GDP growth is showing signs of stabilisation.

-1% -2% GDP Agriculture Industry Services

SOURCES: CIMB, MOSPI

Figure 3: Industrial GDP growth (% yoy)

Figure 4: Services GDP growth (% yoy)

Mining & quarrying Construction

Services Finance, insurance, real estate

Trade, hotel, transport & comm. Social & personal services

SOURCES: CIMB, MOSPI

SOURCES: CIMB, MOSPI

BANKS March 25, 2014

Figure 5: GDP growth, by demand (% yoy)

SOURCES: CIMB, MOSPI

Figure 6: Index of industrial production (% yoy)

Cap goods (3m avg)

SOURCES: CIMB, BLOOMBERG

Figure 7: GDP composition (rolling four quarters upto 3QFY14)

SOURCES: CIMB, MOSPI

BANKS March 25, 2014

1.2 Twin deficits have subsided

SOURCES: CIMB, RBI

Figure 9: Export-import growth (% yoy)

SOURCES: CIMB, CMIE

BANKS March 25, 2014

Figure 11: Government debt-to-GDP ratio (%)

10.0% 80.0% 8.0%

Gross Fiscal Deficit - Centre

Gross Fiscal Deficit - State

Govt debt to GDP

SOURCES: CIMB, CMIE

SOURCES: CIMB, RBI

Figure 12: Fiscal deficit as % of incremental M3 (%)

Fiscal Deficit as a % of incremental M3

SOURCES: CIMB, RBI

Figure 13: Key highlights of Indias fiscal accounts

BANKS March 25, 2014

1.3 Inflation on downward trajectory but still above comfort level

Figure 15: Consumer price index (% yoy)

9.0% 5.0% 4.0% 3.0%

SOURCES: CIMB, CMIE

SOURCES: CIMB, CMIE

20.0% 15.0% 10.0% 5.0%

SOURCES: CIMB, MOSPI

BANKS March 25, 2014

Figure 17: Contribution to CPI (%)

Jan-14 Jul-13 Oct-13

Food, beverages & tobacco

Fuel & light

Clothing, bedding & footwear

SOURCES: CIMB, MOSPI

Figure 18: MSPs (ex-bonus) of key agricultural commodities

Jowar / Bajra / Maize / Ragi

SOURCES: CIMB, Department of Food & Public Distribution