Banking Sector - 29 Dec'09 (Initiating Coverage)

Institutional Research
Banking
Better momentum ahead
Analysts:
R.Sreesankar Sandeep Jain Abhijit Chakraborty

Email: r.sreesankar@tatacapital.com Email: sandeep.jain@tatacapital.com Email: abhijit.chakraborty@tatacapital.com
Tel: +91 22 6745 9154 Tel: +91 22 6745 9171 Tel: +91 22 6745 9160
TΛTΛ Securities
TΛTΛ Securities Banking
Banking
Overweight Better momentum ahead
Analysts:
Banking industry can be explained as the best proxy to the real economy. This
Initiating Coverage
R. Sreesankar co-relation was strongly reflected during the period of economic expansion of
Email: r.sreesankar@tatacapital.com FY04 to FY08 and a subsequent slowdown since then. During the economic
Tel: +91 22 6745 9154 slowdown, when the banking system world-over crumbled, the Indian banking
Sandeep Jain industry came out with a strong performance and continued to display the
Email: sandeep.jain@tatacapital.com underlying strength in the real economy.
Tel: +91 22 6745 9171
Abhijit Chakraborty The Indian banking industry’s strength comes from its huge deposit base,
Email: abhijit.chakraborty@tatacapital.com which is consistently growing, RBI’s proactive measures to steadily improve
Tel: +91 22 6745 9160 banks’ balance sheet strength, and a demand in the economy for physical asset
creation. These factors ensured that the Indian banking sector became stronger
in terms of capitalisation, lower NPAs and better spreads in the past one-and-a-
half decade.
Recommendation
Target M-cap Upside Stable asset quality: Over the past decade, Indian banks have significantly
Price (US$mn) (%)
brought down their Gross NPA levels and improved their provision coverage,
Yes Bank Buy 373 1,741 38 despite the NPA recognition norms getting stricter over a period of time. The
GNPA levels dropped from 17.1% in FY97 to around 2.4% in FY09.
HDFC Bank Buy 2,021 15,733 18
Economic downturn and incremental slippages, not a reason for worry:

Axis Bank Buy 1,199 8,534 21
Over the past four to five quarters, since the asset deterioration cycle started in
ICICI Bank Hold 889 20,655 3
India, the overall increase in stressed assets (restructured assets) is ~3.5% of
the total banking credit. Based on historical trends and economic assumptions,
we estimate that around 20% of the restructured assets will become NPAs,
translating to an addition of ~0.7% to the GNPA level. However, we believe that
the Indian banking industry has sufficient balance sheet strength to absorb this
incremental slippage.
Higher credit growth: After a period of hibernation, we believe that the

Indian economy is well poised to grow rapidly again. While we estimate a
8.5-9% GDP growth for FY11E with an 9-10% IIP growth, the interest rate is
expected to remain benign, with ample liquidity in the banking system. In our
view, these are factors conducive for a higher credit demand in the economy
and we initiate coverage with an Overweight rating on the sector.
We also believe that the private sector banks are better-placed to ride the next
wave of economic expansion, and are also less susceptible to the NPA
deterioration cycle, when compared to the public sector banks.
We initiate coverage on four private sector banks: (i) HDFC Bank, (ii) Axis Bank,
(iii) Yes Bank and (iv) ICICI Bank. We are most bullish on Yes Bank,
followed by HDFC Bank.
Valuation summary
NOI PAT EPS (Rs) ROE (%) Price/ABV
(Rs bn) FY09 FY10E FY11E FY09 FY10E FY11E FY09 FY10E FY11E FY09 FY10E FY11E FY09 FY10E FY11E
Yes Bank 9.5 14.2 20.6 3.0 4.6 6.4 10.2 15.5 21.6 20.6 24.5 25.9 4.7 3.5 2.7
HDFC Bank 107.1 138.1 179.4 22.4 28.2 35.4 52.8 62.4 78.4 17.2 15.9 16.0 5.2 3.8 3.4
Axis Bank 65.8 88.1 115.7 18.2 23.4 31.5 50.6 58.3 78.4 19.1 18.0 18.4 3.6 2.6 2.2
ICICI Bank 159.7 174.2 197.2 37.6 44.2 49.8 33.8 39.7 44.7 7.8 8.6 9.2 3.0 2.7 2.4
29 December 2009 1
Table of content
Banking sector
Credit growth, is it an issue? 3
Interest rates expected to be benign 7
NIMs may not expand much 8
Asset quality: Contained but concerns remain 9
Summary 12
Sections
Yes Bank 13
HDFC Bank 22
Axis Bank 29
ICICI Bank 38
29 December 2009 2
Mirroring the revival in the domestic economy, we expect the banking sector to
see better business momentum due to a higher credit growth. Similarly, we
believe that the banks withstood the current asset deterioration cycle remarkably
well and are well-poised to ride the next wave of economic expansion in the
country.
Credit growth, is it an issue?

All indications for a revival in the domestic economy are in place--better IIP
numbers, increase in freight rates, business confidence improving among
companies, equity infusion ability of corporates and the demand in the economy
remaining intact. The higher base of commodity prices in 1HFY09 compared to
W e estim ate ~12% 1HFY10 resulted in a lower requirement of funds for working capital, thereby
credit grow th in FY10E
impacting the credit off take from industry.
& 22% in FY11E.
Increase in domestic liquidity has had a cascading effect on the asset price
inflation, a disconnect to reality. The YTD growth in deposits is 9%, while the
credit growth is only 5.4% resulting in the banks looking for other investment
opportunities. The high liquidity with banks forced them to invest in liquid funds
of mutual funds, which in turn invested in CPs of corporates at a lower coupon--
corporates would have otherwise borrowed at a higher cost from the banks for
their working capital requirements. We view this as a combination of factors
leading to an unusually lower credit growth number.
Bank credit to GDP growth has a median multiplier of 2.7x. However, we believe
the multiplier tends to contract when the economy rebounds from a slowdown.
Corporates raising money through CPs also impacted the credit growth. Further,
based on our assumption of a busy second half, revival in GDP growth for FY11E
and incremental CD ratio of 100%, we estimate ~12% credit growth in FY10E
and 22% in FY11E.
Bank credit (Rs bn) & GDP growth
40,000 12.0%
35,000
10.0%
30,000
8.0%
25,000
20,000 6.0%
15,000
4.0%
10,000
2.0%
5,000
0 0.0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Bank Credit GDP (%)
Source: Tata Securities Research.
29 December 2009 3
Incremental credit (Rs bn)
1,200
1,000
800
600
400
200
0
-200
-400
-600
-800
Apr-08
Apr-09
Aug-08
Sep-08
Aug-09
Sep-09
May-08
Mar-09
Jun-08
Nov-08
Feb-09
May-09
Dec-08
Jan-09
Nov-09
Jul-08
Jun-09
Jul-09
Oct-08
Oct-09
The second half, which is the busy season for the economy, witnesses a higher
demand for bank credit. Among the three broad segments of bank credit: (a)
Capex & Infrastructure Credit, (b) Working Capital Loans and (c) Consumer
Loans, we expect growth to be most pronounced in case of infrastructure credit
and consumer loans. The demand for working capital loans is likely to be
sluggish as commodity prices (crude oil, metals) continue to be low and thus
companies will have lower working capital requirements on a YoY basis.
Half yearly bank credit growth
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E
1st Half 2nd Half
Our interactions with the banks’ management indicate that a large amount of
project-related sanctions are in place but disbursals are yet to happen. With
improving business confidence, a stable domestic demand and ability of the
corporate to raise equity, we expect the project-related disbursals to pick up
from 4QFY10.
Infrastructure to spur credit growth: As per the planned outlay on

infrastructure under the 11th Five Year Plan, the projected investment in
infrastructure should be around Rs4, 500bn per annum for the next three years.
Infrastructure as a percentage of total bank credit stands at 10.2% currently and
we estimate it to grow at more than 40% YoY for the next three years. Going
forward, we expect the demand for credit will be primarily driven by this sector.
29 December 2009 4
Infrastructure credit growth
100% 16%
14%
80%
12%
60% 10%
8%
40% 6%
4%
20%
2%
0% 0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Growth in infrastructure credit (YoY) Infrastructure as a % of non-food credit
The co-relation between IIP and bank credit corroborates our view. Historically,
we have seen that after a good IIP growth, credit demand picks up in three to
four months time. We expect the sharp improvement in IIP growth seen for Aug
and Sept to continue in the next fiscal and thereby the non-food credit will follow
suit.
Non-food credit growth and IIP growth
10% 15%
8% 10%
6% 5%
I nfrastructure/ project
related disbursals & 4% 0%
m ortgage loans to be
2% -5%
the m ain drivers of
credit grow th. 0% -10%
-2% -15%
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
Non-food credit growth (QoQ) IIP growth
Consumer loans to grow again: Rising purchasing power in smaller cities and
rural areas, coupled with job stability in large cities and Pay Commission benefits
have kept the consumer demand very resilient. We believe that asset-backed,
secured retail loans in the mortgage and vehicle financing segments are seeing
good demand and will drive the overall bank credit growth. In the absence of a
pick-up in corporate working capital loans, banks are eager to grow the secured
consumer loans portfolio. In our view, a price correction in the real estate market
and benign interest rates are factors conducive to grow these loan portfolios.
During the economic slowdown of the past two years, banks reduced their
exposure to unsecured consumer credit and we do not expect a revival in this
segment soon as the asset quality concerns are not yet over for the sector. Retail
loans have shown a CAGR of 22% during FY05-FY09. Within the retail segment,
29 December 2009 5
housing loans grew by 20% CAGR during the same period and consist ~10% of
the total bank credit.
Mortgage loans growth as a % of total bank credit
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
FY05 FY06 FY07 FY08 FY09
Direct housing lending
CD Ratio expected to expand
Deposits have shown a CAGR of 22.5% over the past three years and we
The increm ental CD estimate a similar growth in deposits for FY10E and FY11E as well. The slower
ratio is estim ated to be credit growth during the past three quarters led to the CD Ratio’s contraction by
over 100% in FY11E.
440bps YoY in 2QFY10 end. Given our credit growth projection and a buoyant
Equity capital raised by
banks w ould help deposit growth, we estimate that the CD Ratio will further contract by ~100bps
attain this. in 2HFY10E. Going forward, with a pick-up in credit growth in FY11E, we
estimate the CD Ratio to be ~70%.
Credit growth, deposit growth and CD Ratio
30% 75%
74%
25%
73%
20%
72%
15% 71%
70%
10%
69%
5%
68%
0% 67%
FY08
FY09
1QFY08
2QFY08
3QFY 08
1QFY09
2QFY09
3QFY09
1QFY10
2QFY10
FY10E
FY11E
Credit Growth Deposit Growth CD Ratio (RHS)
29 December 2009 6
Interest rates expected to be benign

Liquidity to be comfortable: Secular growth in deposits, low credit demand
and prudent borrowing schedule by the government has ensured abundant
liquidity in the banking system during FY10. Despite the huge borrowings
(Rs4,510bn) by the government in FY10, the money parked in the reverse repo
window by banks remained high. For FY11E, we expect GOI to have a better
fiscal situation, aided by higher revenue collection and hence a lower borrowing
need from the banking system. Also, we believe that a steady deposit growth will
ensure sufficient liquidity in the banking system for FY11 as well.
Ample liquidity in the system – shown by reverse repo auctions
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
-200
-400
11/03/08
12/03/08
01/03/09
02/03/09
03/03/09
04/03/09
05/03/09
06/03/09
07/03/09
08/03/09
09/03/09
10/03/09
11/03/09
Net reverse repo
W e ex pect a stable Inflation, not the sole determinant for policy rates: Though inflation is
interest rate regim e for expected to be in the range of 8-9% by Mar10, we don’t expect this to be the
the nex t four quarters,
w ith the possibility of sole criteria for RBI’s policy formulation. The Government is expected to
50-100bps increase gradually withdraw the stimulus benefits next year and we do not expect a sharp
betw een M ar-Sept10. rise in the lending rates.
29 December 2009 7
Measures taken by RBI to contain inflation
14
7th Jun'08: 2nd Aug'08: Increas e in 18th Oct'08: Decreas e in
Increas e in Repo Repo Rate by 50bps, Repo Rate by 100bps,
Rate by 25bps, Inflation: 12.9 Inflation: 10.8
12 Inflation: 11.6
6th Dec'08: Decreas e
19th Jul'08: in Revers e Repo &
Increas e in Repo Rate by 100bps,
10 26th Apr'08: CRR by Inflation: 6.6
Increas e in CRR by 25bps,
25bps, 1s t Nov'08: Decrease
Inflation: 12.5
Inflation: 8.27 in Repo Rate by Oct'09: SLR
8 50bps, res tored to 25%
Inflation: 8.7 Inflation: 1.3
6 25th Oct'08: 3rd Jan'09: Decrease

Decreas e in in Revers e Repo &
CRR by 50bps, Repo Rate by 100bps,
Inflation: 10.7 Inflation: 5.3
4 5th Jul'08:
10th May'08: Increas e in CRR 25th Apr'09:
Increas e in CRR by 25bps, 11th Oct'08: Decreas e in Revers e
17th Jan'09:
by 25bps, Inflation: 12.2 Decreas e in CRR Repo & Repo Rate by
Decreas e in
2 Inflation: 8.57 by 250bps, 25bps,
CRR by
Inflation: 11.3 50bps, Inflation: 1.8
Inflation: 5.0
0
24th May'08: Increas e 21s t Jun'08: 30th Aug'08: Increase 8th Nov'08: 28th Feb'09: Decrease
in CRR by 25bps , Increas e in Repo in CRR by 25bps , Decreas e in CRR in Revers e Repo &
-2 Inflation: 8.9 Rate by 50bps, Inflation: 12.4 by 50bps, Repo Rate by 50bps,
Inflation: 11.9 Inflation: 8.7 Inflation: 2.5
Inflation
-4
15/03/2008
19/04/2008
24/05/2008
28/06/2008
13/12/2008
17/01/2009
21/02/2009
28/03/2009
15/08/2009
19/09/2009
17/10/2009
4/10/2008
8/11/2008
11/7/2009
5/1/2008
9/2/2008
2/8/2008
6/9/2008
2/5/2009
6/6/2009
We expect a stable interest rate scenario with the possibility of 50-100bps

hardening in rates over Mar-Sept10. We believe that RBI will depend more on
CRR, SLR and risk weightages on loans as tools to regulate inflation, liquidity and
growth.
Bond yields to be range bound: Due to the comfortable liquidity position in

the system and lesser government borrowings in FY11, we believe that the bond
yields will remain range bound and don’t expect it to fall significantly. Lower-
than-expected government borrowings, reduced global risk premium and higher
credit growth should keep bond yields in a range. We estimate 10-year G-Sec
yield will be stable between 7.2-7.7% till 2QFY11E. This would mean a lower
treasury income for banks in FY11E but stable yield on investments.
NIMs may not expand much

The expected higher incremental CD ratio, improvement in spreads and stable
yield on investments are expected to improve NIMs for the sector in the coming
quarters. We estimate a 15-20bps improvement in NIMs in 2HFY10E. However,
we also believe that NIMs may not expand in FY11E as banks will be forced to
pay interest on outstanding deposits in the savings accounts, effecting roughly a
15bps margin contraction.
Higher CD Ratio: We estimate around 12% credit growth in FY10E and 22% in
FY11E, resulting in an incremental CD Ratio of more than 100% in FY11E.
Lower cost of funds: Due to a stable interest rate scenario and ample liquidity
in the system, we believe that banks will be able to maintain their cost of
deposits low.
29 December 2009 8
Spreads improvement: In our view, a large amount of high cost bulk deposits
from the previous year will get re-priced during 2HFY10. Most of these deposits
are expected to get re-priced lower by at least 200bps. Also, some amount of
lower re-pricing will happen on the asset side too. However, as was evident in
the 1H of FY10, banks seem to have got back the pricing power in the system to
improve their spreads. While deposits got re-priced at 200bps lower, advances
were re-priced around 150bps. Though, we expect a large part of the bulk
deposit re-pricing benefit to be passed on to the borrowers, it is expected to be
less than proportionate and thus improve the spreads.
Lower ID ratio: The Investment-Deposit ratio will gradually decline as credit

growth picks up. But the yield on investment is likely to be stable with an upward
bias, as we do not expect a significant weakness in G-Sec yields. This should
help in improving the overall yield on investment.
Asset quality: Contained but concerns remain

So far, so good: Since the beginning of the asset quality deterioration cycle
from 4QFY08, banks made increased provisioning to take care of the incremental
slippages, thereby NNPAs as a percentage of total advances has been contained
Slippages from the at the pre-crisis level. Banks ability to make higher provisioning was aided by
restructured portfolio & higher treasury income during the period. Though the Gross NPA level has
R BI guideline of 70%
provision coverage by increased marginally, the provision coverage ratio, after falling sharply,
2011 could im pact recovered to nearly the pre-crisis level.
profit grow th.
Incremental slippages: The muted increase in GNPA and the recovery in
provision coverage have been primarily due to the restructuring option provided
by RBI. However, there is a risk going forward. Overall, ~3.5% of the book has
been restructured by the banks so far. Past experience shows that 20-25% of
the restructured assets can become NPAs. So, the GNPA could increase by 0.7%
by the end of the cycle, which can take the overall banking industry’s GNPA
percentage to 3.2% from 2.5% as in 2QFY10. The industries which are major
contributors to the restructured portfolio (textiles, gems & jewellery),
predominantly have an export bias and have not yet seen a pick-up in their
fortunes. As the economic recovery is slower than anticipated in their markets,
we believe there is a strong possibility of incremental slippages happening on
these accounts. In most other cases, we have seen improvements in the quality
of accounts.
29 December 2009 9
Stress Test (Total stress assets = GNPA + Restructured assets) (Rs bn)
Total Total stress % of stress

Gross % GNPA to restructured assets (GNPA + asset as a % of
Name of the bank NPA loan book assets restructuring) loan book
ICICI Bank 92.0 4.8 48.0 140.0 7
HDFC Bank 20.2 1.8 2.8 23.0 2
Axis Bank 11.3 2.9 23.7 35.0 4
Yes Bank 0.5 0.3 1.6 2.1 1
We assume an overall 20% slippage in the restructured portfolio by the end of

FY10.
Stress Test after 20% slippages (Total stress assets = GNPA + 20% restructured assets) (Rs bn)
20% of % of stress
Gross % GNPA to restructured assets Total stress asset as a %
Name of the bank NPA loan book convert to GNPA assets of loan book
ICICI Bank 92.0 4.8 9.6 101.6 5.3
HDFC Bank 20.2 1.8 0.6 20.8 1.8
Axis Bank 11.3 2.9 2.3 26.0 3.2
Yes Bank 0.5 0.3 0.3 0.8 0.5
Concerns: We believe that when slippages take place in the restructured

portfolio, banks will face trouble on two counts: (i) The interest income booked
on these restructured assets will have to be written back, thus impacting the
revenue growth and (ii) A higher GNPA level will necessitate a higher
provisioning requirement, which will impact the profits negatively.
Provisions: In the Oct09 credit policy, RBI stipulated that banks will need to
achieve a 70% provision coverage ratio by Sept10. Recently, RBI allowed the
technically/prudentially written off assets to be included in the computation of
coverage ratio but maintained the deadline for increasing the coverage. We
believe that the recent RBI clarification will help some banks.
29 December 2009 10
GNPA, NNPA and provision coverage of all banks
18.0 70% 4.0 66

16.0 60% 3.5
64
14.0 3.0
50%
12.0 62
2.5
10.0 40%
2.0 60
8.0 30%
6.0 1.5
20% 58
4.0 1.0
2.0 10% 56
0.5
0.0 0% 0.0 54
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
4QFY09
1QFY10
2QFY10
3QFY 09
GNPA (%) NNPA (%) Provision Coverage (%) GNPA NNPA Provision Coverage (RHS)
The private sector banks in India have a lesser share of restructured asset
portfolio than the public sector banks. We believe this could be a significant
differentiator for their stock’s performance over the next few quarters.
Private sector (excluding technical written off) Public sector (excluding technical written off)
Top private GNPA NNPA Provision GNPA NNPA Provision

banks (%) (%) coverage (%) Top public banks (%) (%) coverage (%)
Axis Bank 1.21 0.45 63 St Bk of India 2.99 1.73 43
HDFC Bank 1.76 0.50 70 Punjab Natl.Bank 1.58 0.14 91
ICICI Bank 4.69 2.36 51 Bank of Baroda 1.30 0.27 79
Federal Bank 2.99 0.54 83 Bank of India 2.61 1.08 59
South Ind.Bank 1.61 0.43 73 Canara Bank 1.60 1.16 28
Yes Bank 0.31 0.08 75 Central Bank 2.64 0.69 74
Corporation Bank 1.18 0.29 75
Union Bank (I) 1.93 0.23 88
Fee income: Over the years, fee income has been the major source of revenue
for private sector banks. Private sector banks have leveraged on the existing
corporate relationships and have also started various activities like transaction
related services, third party products sales among others to increase this non-
fund based income, which public sector banks have not been able to leverage
fully. Fee income contributes 29% of the total net operating income for private
sector banks as in FY09 and 12% for the public sector banks as in FY09. Going
forward, we believe that the fee-based income would be a major source for the
private sector banks and will continue to contribute around 30% to the net
operating income in the future (we have taken the four largest private sector
banks and the seven largest public sector banks for the average).
29 December 2009 11
Fee income’s contribution to NOI
35%
30%
25%
20%
15%
10%
5%
0%
FY03 FY04 FY05 FY06 FY07 FY08 FY09
Avg. Private Sector Banks Avg. Public Sector Banks
Summary
Yes Bank: The bank is estimated to report EPS CAGR of 45% over FY09-FY11E.
ABV is estimated to grow at 32% CAGR during the same period. We estimate the
bank to maintain its NIMs at over 3% and RoE at 20% on a sustainable basis.
HDFC Bank: We estimate that the earnings growth will be at 26% CAGR during
FY09-11E on the back of an expected pick-up in credit growth. We estimate an
ABV of Rs447 for FY10E and Rs505 for FY11E after taking into account the
impact of warrant conversion due in Dec09.
Axis Bank: With the expected growth in credit off take, healthy margins and
high proportion of fee income, we estimate PAT CAGR of 32% over FY09-11E
and ABV of Rs384 for FY10E and Rs444 for FY11E.
ICICI Bank: The bank has seen an improvement in most of its operating
parameters--its CASA has improved, cost to income ratio has declined, credit
growth is likely to resume from 2HFY10 onwards. However, its asset quality still
remains a concern. The bank’s RoE will continue to be significantly lower than
the industry average at 9.2% in FY11E and its earnings growth is estimated to
be modest.
29 December 2009 12
TΛTΛ Securities
TΛTΛ Securities Yes Bank
Yes Bank
Buy
Say yes to growth
CMP: Rs 271
Initiating Coverage
Yes Bank has maintained an explosive growth in its core banking operations
Target Price: Rs 373 and fee income since FY06, while keeping its NPA levels at near zero level. The
Potential Upside: 38% bank’s performance can be credited to its differentiated and value-added
approach to traditional banking practices.
Key statistics Being a new and young bank, it faces predictable disadvantages in low CASA,
M cap (INR bn/USD mn) : 81.2/1,741 higher cost of funding and low consumer penetration. However, we believe it
Avg 3m daily vol. : 2,668,618 still maintains the industry lead in RoE, NIM, profit growth and asset quality.
Avg 3m daily value : US$13.9mn The bank provides knowledge-based banking in financial advisory,
Shares O/S (mn) : 300 transactional banking apart from core lending. This enables Yes Bank to
Reuters : YESB.BO
engage its customers at every stage of business process, enjoy the pricing
Bloomberg : YES IN
power and monitor risks effectively.
Sensex : 17,361
Nifty : 5,178 We estimate that the bank will report 45% CAGR in EPS over FY09-11E and
52-Wk High/Low : 278/41
32% CAGR in ABV growth over the same period. It is likely to maintain a RoE
of above 20% and near zero net NPA level. We are initiating coverage with a
Shareholding pattern (Sep’09) (%) target price of Rs373, valuing it at 4.0x its FY11E ABV, with a Buy rating.
Key highlights
Indian promoter 31.3
FIIs 29.2 Higher business growth: Yes Bank is projected to grow its loan book at a
MFs, Ins., FIs/Banks 8.7 CAGR of 48% over FY09-11E, twice that of the industry growth rate. Its fee
Others 30.8 income is estimated to grow at a CAGR of 60% during the same period.
Relative performance
Stable margins: Despite having the highest cost of funds among its peers,
the bank’s margin is above 3% and comparable to its peers. Further re-pricing
200
of deposits and capital infusion are also expected to result in an increase in
150
margins, going forward.
100
50 Highest ROE among peers: Despite the periodic equity dilution, the bank
0
has been able to achieve a consistent growth in RoE, which is a reflection of its
Apr-07
Feb-08
Sep-07
Aug-08
Jan-09
Jul-09
Dec-09
high growth and leveraged fee income.
SENSEX Yes Excellent asset quality: Though the bank has grown its loan book at twice
the industry growth rate, it has remained largely unscathed by the asset cycle
Analysts: deterioration. Yes Bank continues to maintain near-zero NNPA level.
Sandeep Jain Valuation Re-rating: The stock is currently trading at 2.9x its FY11E ABV.
Email: sandeep.jain@tatacapital.com
Given its strong earnings growth, high RoE and superior asset quality, we
Tel: +91 22 6745 9171
believe that the stock could trade at its historical median range of 4.0x to its 1-
Abhijit Chakraborty
year forward ABV.
Email: abhijit.chakraborty@tatacapital.com
Financial summary
Year-end NII PAT EPS P/E ABV P/ABV ROA ROE CAR GNPA NNPA
March (Rs mn) (Rs mn) (Rs) (x) (%) (%) (%) (%) (%)
FY08 3.4 2.0 6.8 40.1 44.3 6.1 1.2 19.0 13.6 0.1 0.1
FY09 5.1 3.0 10.2 26.5 53.3 5.1 1.3 20.6 16.6 0.7 0.3
FY10E 7.4 4.6 15.5 17.4 70.7 3.8 1.4 24.5 20.6 0.8 0.2
FY11E 11.5 6.4 21.6 12.6 93.3 2.9 1.3 25.9 15.6 0.8 0.2
29 December 2009 13
Business model
Strong growth in core banking, low NPAs and superior return on equity can be
attributed to Yes Bank’s differentiated business model. It has focused on big
ticket project-related lending to corporates, a key differentiator from peers. And
it approaches its clients from a stage prior to actual lending. The bank has an
established financial advisory division which does project evaluation and
feasibility studies, proposes the financing structure and then lends as per the
requirement. It also helps its corporate clients in tying up private equity, M&As
etc. Post the project-related lending, Yes Bank also leverages on the relationship
to carry out transactional banking for its clients by providing LCs, GCs or hedging
strategies, forex cover etc. Effectively an end-to-end business model helps it to
leverage and improve spreads, despite the higher costs (differentiating factor
with peer banks).
Business model of Yes Bank – The relationship banker
Provide end-to-end solutions to corporates
As an As a As a
Agent Banker Principal
 Project advisory & S yndication  Long Term Lending  Facility of letter of

 Structured & Project finance  Working Capital Loans credit, Bank Guarantee
etc
 Merger & Acquisition advisory
 Private Equity S yndication
Nurturing the relationship at each stage for better cross selling of products
We believe that this model has enabled the bank to maintain 73% CAGR in its
credit growth over FY06-09. Fee income (Financial advisory + transactional
banking + distribution) has grown at 75.3% during the same period and forms
24% of its net operating income.
Since Yes Bank is involved with its corporate client at every stage of the
business, in our view, it is in a better position to identify and manage risks.
Perhaps this is the reason why the bank’s GNPA as a percentage of the credit is
the lowest in the industry, despite having a high growth rate.
48% CAGR in credit Strong credit growth to continue: Yes Bank has a total loan book of
grow th over FY09-FY11E. Rs163bn. For FY10 YTD, it has already achieved a 31% credit growth compared
to the 4% growth for the banking industry. As per the management, sanctions
worth Rs90bn are likely to get disbursed in 2HFY10, which will take the FY10
credit growth to 48%. We estimate that the bank will achieve 50% credit growth
29 December 2009 14
83% of the total loan in FY11E. Yes Bank is focused on increasing its lending to sectors such as life
book is under non-
priority sector lending. sciences and infrastructure. Retail consumer exposure is only 4.5% of the total
W ithin that, m ore than loan book. This is mainly due to its few branches and initial phase of consumer
95% is to large and banking. However, the management is keen to grow the retail book in line with
m idsized corporates.
the expansion of its branch network.
Break-up of non-priority sector lending loans (2QFY10) Sectoral exposure (2QFY10)
Retail
Other
6% Agriculture
Mid Industries
21% 18%
Corporates
23%
Infrastructu
re and
All Logistics
Engineering 16%
18%
Large
Corporates Lifesciences TMT
72% and 18%
Chemicals
9%
Expansion in CD Ratio will result in core income growth: The bank’s CD

Ratio has increased to 84.1% in 2QFY10 due to a sharp increase in disbursals
during the last fortnight of 2QFY10. We estimate that the overall CD ratio will
decline to 77% by end FY10. However, going forward, we believe that Yes Bank
is likely to maintain a CD ratio of ~76% in FY11E.
Deposit growth, credit growth and CD Ratio
70% 78%
77%
60%
76%
50% 75%
74%
40% 73%
30% 72%
71%
20% 70%
69%
10%
68%
0% 67%
FY08 FY09 FY10E FY11E
Deposit Growth Credit Growth CD Ratio (RHS)
29 December 2009 15
Low CASA: Yes Bank’s CASA Ratio is currently at 9.5%, the lowest among its
peers. This is to be expected as it is a young bank with a limited number of
branches. We believe that it takes several years to develop a sticky base of
current and saving account holders. What is encouraging is that the CASA as a
percentage of total deposits has continued to increase despite the large number
of new branches being added every year. This means that the older branches are
able to attract a higher amount of CASA. Based on its growth rate in CASA and
number of new branches to be added, we estimate CASA to reach ~11% by
FY11E.
No. of branches and CASA Ratio
250 12%
10%
200
8%
150
6%
100
4%
50
2%
0 0%
FY 07 FY 08 FY 09 FY 10E FY 11E
No. of Branches CASA Ratio
Margins set to expand: Due to a low CASA and thus a higher dependence on
term deposits and borrowings, Yes Bank has the highest cost of fund among its
peers at 7%. Despite this, the bank has maintained NIMs at over 3%.This has
been possible due to two reasons: (a) Holistic banking approach to its clients
which provides pricing power and (b) Leverage benefit from a high CD ratio. Yes
Bank has seen an increase of 15bps in NIMs in 1HFY10 at 3.15%. Going ahead,
we believe that another 25% of its term deposit is going to get re-priced lower
by at least 200bps in 2HFY10. We estimate NIMs to expand by 10-15bps in
2HFY10E and would be maintained around this level in FY11E.
NIMs and cost of funds
5% 8%
4% 7%
4% 6%
3%
5%
3%
4%
2%
3%
2%
1% 2%
1% 1%
0% 0%
ICICI Bank HDFC Bank Axis Bank Yes Bank Federal Bank ING Vysya
NIMs Cost of funds
29 December 2009 16
Fee income – a positive catalyst: Fee income for the bank has grown at a
CAGR of 75% during the period of FY06-FY09 and contributed 33% to the net
operating income (NOI) as in 2QFY10. Yes Bank generates fee income from
three sources--financial advisory business, transactional banking and retail
segment.
In the financial advisory business, the bank has already earned Rs820mn in
1HFY10 as against Rs910mn for the entire FY09. About 72% of its non-priority
sector lending consists of large corporates. We believe that Yes Bank is focused
on leveraging its clientele to generate transactional and advisory-based fee
income.
Going ahead, we estimate that the fee income will show a CAGR of 61% during
FY09-FY11E period and its share of NOI will increase from 26% in FY10E to
27.2% in FY11E.
Fee income break-up
Retail Fees
10%
Transactional
Banking Financial
35% Advisory
Income
55%
Fee income break-up (Rs bn)
600
500
400
300
200
100
0
2QFY09 3QFY09 4QFY09 1QFY10 2QFY10
Financial Advisory Income Transactional Banking Retail Fees
29 December 2009 17
Strong asset quality: Despite maintaining a scorching pace of credit growth,

Yes Bank has maintained near zero NPA levels. We believe this has been possible
N ear zero N P As w ith because the bank is involved with its clients at all stages of business and hence
75% provision coverage. is able to monitor the risks better. In 2QFY10, Gross NPA stood at 0.31% and
NNPA at 0.08%, the lowest among its peers. Further, the bank has one of the
highest provision coverage in the industry at 75%.
Assets quality comparison
5.0 100%
4.0 80%
3.0 60%
2.0 40%
1.0 20%
0.0 0%
Axis
Federal
HDFC
Yes
South Ind.
ICICI
J&K
Kotak Mah.
IndusInd
Karnataka
ING Vysya
% GNPA % NNPA Provison Coverage (RHS)
The restructured loan portfolio is only 0.96% of the total loan book. We have
assumed a 10% slippage in FY10E and another 10% in FY11E in the restructured
loan book, which will increase the GNPA to 0.73% in FY10E and 0.83% in FY11E.
We believe this strong asset quality could be a significant valuation catalyst for
the bank.
Comfortable CAR to fuel growth: Yes Bank’s Capital Adequacy Ratio is

comfortable at 17.3% as in 2QFY10 with Tier I capital at 9.4%. The bank raised
Rs2.6bn as Tier II capital in 2QFY10 and is planning to raise another US$150mn
of equity, which would increase its Tier I capital by around 150bps.
Capital Adequacy Ratio and Tier I capital
20.0% 18.1%
16.6%
16.0% 14.0%
13.6% 13.6%
12.0%
9.5% 9.5%
8.2% 8.5% 7.9%
8.0%
4.0%
0.0%
FY07 FY08 FY09 FY10E FY11E
CAR Tier 1
29 December 2009 18
Sustainable high ROEs: We believe that Yes Bank is able to generate high
ROEs compared to its peers due to its high margin in core banking and a strong
franchise set-up for fee income. Typically, RoEs of banks move in a cycle along
with its equity dilution. They tend to dip post dilution and then recover a few
years later. In the case of Yes Bank, it has consistently improved its RoE over the
years, reflecting the core strength of its business model.
Consistent high return on equities
3.0 3.0 3.0 3.0 3.0 30%

3.0
25%
2.9
2.9 20%
2.8
2.8
15%
2.8
2.7
2.7 10%
2.7
5%
2.6
2.6 0%
FY06 FY07 FY08 FY09 FY10E FY11E
Share Capital (in bn) ROE
ROE (%) highest among the peer group
South Ind.bk
Karnataka bk
Yes bk
highest
IndusInd bk among
the peer
Kotak Mah. bk
group
ING Vysya bk
J & K bk
Federal bk
Axis bk
HDFC bk
ICICI bk
0.0 5.0 10.0 15.0 20.0 25.0
Valuation: We estimate that Yes Bank will report an EPS CAGR of 45% over
FY09-FY11E. ABV is estimated to grow at 32% CAGR during the same period. In
our view, the bank will maintain its NIMs at over 3% and RoE at over 20% on a
sustainable basis. Thus, we expect the bank to trade at a premium valuation
compared to its peers. In the past, Yes Bank has traded at a mean valuation of
4x its ABV. We value the stock at 4x its FY11E ABV of Rs93 to arrive at a target
price of Rs373 and recommend it as a strong Buy.
29 December 2009 19
Historical P/ABV chart
6.0
P/ABV
5.0
4.0
3.0
2.0
1.0
0.0
Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Sep-08 Apr-09 Dec-09
29 December 2009 20
Financials
(Rs bn)
P & L A/c FY08 FY09 FY10E FY11E Opt. Ratio (%) FY08 FY09 FY10E FY11E
Interest earned 13.1 20.0 24.5 38.0 Int Exp/Int Earned 74.3 74.5 69.8 69.8
Interest expended 9.7 14.9 17.1 26.5 Cost/NOI 49.3 44.2 42.0 42.8
NII 3.4 5.1 7.4 11.5 Cost/NOI(Ex.treasury inc.) 53.4 52.5 50.3 49.3
Other Income 3.5 4.4 6.8 9.1 Other Income/NOI 51.3 46.0 47.7 44.4
Fee Based 2.1 2.3 3.8 5.7 Ot.Inc.(ex.treasury)/NOI 42.8 30.3 31.3 31.2
Trading & Froex 0.2 0.3 0.3 0.4 NPM 28.9 32.1 32.6 31.1
Treasury Profit 0.6 1.5 2.3 2.7
Net Opt. Inc.(NOI) 6.9 9.5 14.2 20.6 Spreads (%) FY08 FY09 FY10E FY11E
Employee Cost 2.0 2.2 3.1 4.5 NII/Avg Total Assets 2.4 2.6 2.7 2.8
Opt. Expenses 1.4 2.0 2.8 4.4 NII/Average Interest earning 2.5 2.7 2.8 3.0
Opt. Profit 3.5 5.3 8.2 11.8 NIMs 1.9 2.2 2.5 2.6
Provisions 0.4 0.6 1.1 1.9 CASA 8.5 8.7 9.9 11.0
Profit before tax 3.1 4.7 7.1 9.9 Avg Int earnings assets 134.0 187.8 260.5 385.3
Net Profit 2.0 3.0 4.6 6.4 Avg Int bearing liabilities 123.5 176.8 247.6 363.2
Solvency (%) FY08 FY09 FY10E FY11E

Balance sheet FY08 FY09 FY10E FY11E Credit-Deposit Ratio 71.0 76.7 77.0 76.0
Capital 3.0 3.0 3.0 3.0 Incremental CD Ratio 62.2 102.6 77.6 74.1
Net Worth 13.2 16.2 21.4 28.2 Investment/Deposit Ratio 38.4 44.0 40.0 40.5
Deposit 132.7 161.7 238.4 362.3 GNPA Ratio 0.11 0.68 0.82 0.76
Total Liab. & Equity 169.8 229.0 325.3 488.4 Prov. Cover 20.0 51.5 75.2 77.9
Investments 50.9 71.2 95.4 146.7 NNPA Ratio 0.1 0.3 0.2 0.2
Advances 94.3 124.0 183.6 275.3 CAR 13.6 16.6 20.6 15.6
Total Assets 169.9 229.0 325.3 488.4 Tier 1 8.5 9.5 12.0 9.5
Tier 2 5.1 7.1 8.6 6.1
Growth (%) FY08 FY09 FY10E FY11E Return (%) FY08 FY09 FY10E FY11E
Deposits 61.5 21.8 47.4 52.0 ATA (Avg.Total Assets) 140.4 199.4 277.2 406.8
Advances 49.9 31.5 48.0 50.0 Total Busi. (Dep+Adv) 227.0 285.7 422.0 637.6
Total Assets 53.0 34.8 42.0 50.1 Interest Income / ATA 9.3 10.0 8.8 9.3
NII 96.5 51.8 44.7 54.9 PBT / ATA 2.2 2.3 2.6 2.4
Other Income 82.3 22.6 55.3 35.3 PAT / ATA 1.4 1.5 1.7 1.6
Net Profit 112.0 51.9 52.0 38.8 ROA % 1.2 1.3 1.4 1.3
ROE % 19.0 20.6 24.5 25.9
Assets / Equity 13.3 13.6 14.7 16.4
Productivity FY08 FY09 FY10E FY11E Valuation FY08 FY09 FY10E FY11E
Bus./Employee (mn) 72.1 107.0 151.8 221.4 P/E 40.1 26.5 17.4 12.6
Profit/Employee ('000) 635.0 1137.6 1661.1 2225.5 P/BV 6.1 5.0 3.8 2.9
Bus./Branch (mn) 3338.7 2421.4 2482.1 2772.4 P/ABV 6.1 5.1 3.8 2.9
NP/Branch (mn) 29.4 25.7 27.2 27.9 Adj Book Value 44.3 53.3 70.7 93.3
CASA Per Branch 166.0 119.6 138.4 173.8 EPS 6.8 10.2 15.5 21.6
29 December 2009 21
TΛTΛ Securities
TΛTΛ Securities HDFC Bank
HDFC Bank
Buy
Geared up
CMP: Rs 1,711
Initiating Coverage
HDFC bank is likely to regain its high growth phase, after consolidating its
Target Price: Rs 2,021 operations post the merger with Centurion Bank of Punjab. HDFC Bank faced
Potential Upside: 18% deterioration in most of its operating parameters. A slowdown in the economy
and high exposure to unsecured retail loan portfolio were the other concerns
that the bank had to deal with. During the past four quarters, HDFC Bank
Key statistics
managed to improve the operating metrics on most counts and is now ready to
M cap (INR bn/USD mn) : 733.9/15,733
regain its superior performance.
Avg 3m daily vol. : 724,990
Avg 3m daily value : US$26.4mn We believe that an improved outlook for the economy, stable asset quality,
Shares O/S (mn) : 429 access to low cost funds and improved operating strength should enable the
Reuters : HDBK.BO
bank to report earnings CAGR of 26% for FY09-11E. The bank had the
Bloomberg : HDFCB IN
distinction to always trade at a premium compared to its peers due to: 1)
Sensex : 17,361
Consistent earnings growth, 2) Superior NIMs and 3) Good asset quality. We
Nifty : 5,178
52-wk High/Low : 1,839/774
believe that HDFC Bank will continue to trade at the industry’s leading
valuation due to its improved performance. We initiate coverage on the bank
with a Buy rating and a target price of Rs2,021.
Shareholding pattern (Sep’09) (%)
Key highlights
Indian Promoter 19.3
Geared up after consolidation: Most operating parameters such as
FIIs 28.2
MFs, Ins, FIs/Banks 12.5
business per branch, CASA ratio, asset quality, NIMs and credit growth have
Others 40.0 started improving after retracing from their peaks in 1QFY09. We estimate a
credit growth of 29% in FY10E and 25% in FY11E.
Relative performance Leveraging on CBoP’s acquisition: After a business consolidation, we

250 believe that HDFC Bank will now reap the benefits of a higher growth in CASA
200 and business per branch from the merged entity.
150
100
Margins to remain firm: In our view, a higher growth in CASA, infusion of
50 Tier I capital and better credit growth shall enable the bank to improve its
margins over the next few quarters.
Apr-07
Feb-08
Sep-07
Aug-08
Jan-09
Jul-09
Dec-09
Lowest restructured assets among peers: Despite having the highest

SENSEX HDFC
exposure to the retail sector, we believe that HDFC Bank has maintained its
Analysts:
NNPA percentage and also has the lowest restructured assets (0.56% of total
advances) among its peers.
Sandeep Jain
Email: sandeep.jain@tatacapital.com Valuation: We estimate the bank’s earnings growth to be at 26% CAGR
Tel: +91 22 6745 9171 during FY09-11E due to an expected pick-up in credit growth. We also
Abhijit Chakraborty estimate an ABV of Rs447 for FY10E and Rs505 for FY11E. We are initiating
Email: abhijit.chakraborty@tatacapital.com coverage with a Buy rating and a target price of Rs2,021 (4x FY11E ABV), an
upside of 18% from the current levels.
Financial summary
Year-end NII PAT EPS P/E Div yield ABV P/ABV ROA ROE CAR GNPA NNPA
March (Rs bn) (Rs bn) (Rs) (x) (%) (Rs) (%) (%) (%) (%) (%)
FY08 52.3 15.9 44.9 38.1 0.5 314.8 5.4 1.2 17.7 13.6 1.4 0.5
FY09 74.2 22.4 52.8 32.4 0.6 329.0 5.2 1.2 17.2 15.7 2.0 0.6
FY10E 89.0 28.2 62.4 27.4 0.7 447.1 3.8 1.2 15.9 18.6 1.8 0.5
FY11E 114.7 35.4 78.4 21.8 0.9 505.2 3.4 1.2 15.9 16.4 1.9 0.5
29 December 2009 22
Investment rationale
Improvement post consolidation
Dip in operating metrics post CBoP merger: The famed operating strength
of HDFC Bank suffered post its merger with CBoP. Due to CBoP’s high exposure
HDFC Bank’s operating
to the retail segment and lax credit control, there was an addition of Rs6bn of
strength im proved after
four quarters of GNPA to HDFC Bank’s existing GNPA of Rs9bn. Business per branch declined to
consolidation. Rs1.85bn from Rs2.16bn. CASA as a percentage of total deposits dropped to
45% from 55% and the average cost of funds increased to 5.4% from 5.15%.
Comparison of some metrics post and pre-merger
Pre-merger Post merger

4QFY08 1QFY09 2QFY10
Average cost of fund (%) 5.2 5.4 5.1
CASA % of total deposits 55.0 45.0 50.0
Business/Branch (Rs cr) 216.0 185.0 175.0
GNPA % 1.3 2.1 1.8
Unsecured retail loan % 20.0 18.0 13.0
Much-needed consolidation: Post the merger, the retail loan book stood at
57% of the total book and unsecured loans (two-wheelers, personal loans and
credit cards) formed 18% of the total credit. Also, the threat of NPAs was higher
on CBoP’s portfolio. With a slowdown in the economy and asset quality becoming
a concern, HDFC Bank decided to de-focus on growing its unsecured loan
portfolio and the overall retail book, including mortgage loans. We believe that
growing the loan book aggressively with a higher cost of funds could have
contracted its NIMs sharply.
Consequently, the loan growth was muted for the four quarters from 2QFY09 to
1QFY10. As a result, the retail loan book has now come down to 55% and
unsecured book to 13%. The bank continued to make higher provisions to
contain the NPAs and has focused on growing its CASA to bring down its average
cost of fund.
Advances growth
12.0% 10.0%
10.0%
8.0%
5.6% 5.0%
6.0%
4.0%
2.0% 0.1%
0.0%
-2.0%
-4.0%
-3.4%
-6.0%
2QFY09 3QFY09 4QFY09 1QFY10 2QFY10
Advances Growth
29 December 2009 23
In our view, the composition of the loan book looks healthier now with wholesale
banking (corporate credit) rising and unsecured retail loans dropping sharply.
After four quarters of muted growth in advances, HDFC Bank posted a double
digit QoQ growth of 10% in 2QFY10. We believe that the bank is geared up after
consolidation and is waiting to tap the credit opportunity in the market. In
1HFY10, it disbursed ~Rs145bn, which is 15% YTD growth. Going ahead, we
believe that HDFC Bank can deploy the same amount of money in 2HFY10E and
post a growth of 29% YoY in FY10E and 25% in FY11E.
Break-up of total loan book (2QFY10) Break-up of total loan book (1QFY09)
Unsecured Unsecured
retail Retail
13% 18% Wholesale
Wholesale
45% 43%
Secured Secured
Retail Retail
42% 39%
CD Ratio to be stable: The bank already has a high CD Ratio of 76% as in

2QFY10 with a moderate outlook, going forward. We expect HDFC Bank to
maintain its CD Ratio as it will be utilising its Tier I capital to fund the credit
growth.
Advances, deposits & CD Ratio
80% 60%
70%
50%
60%
40%
50%
40% 30%
30%
20%
20%
10%
10%
0% 0%
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
CD Ratio Advances (%) Deposits (%)
Lower cost of funds: During the past four quarters, the bank has been able to
increase its CASA ratio to 50% from 45%. Together with the re-pricing of bulk
deposits in 1HFY10, the average cost of funds has come down to 5.06% in
2QFY10 from 5.40% in 1QFY09. We believe that the synergy benefits of CBoP
branches will start to flow in from next year onwards. HDFC Bank is planning to
increase its network by 250 branches in FY10 after a gap of almost a year. In our
29 December 2009 24
view, as the bank has come out of the consolidation phase and is focusing on
growing its business again, the improvement in CASA will continue.
Branch network and CASA
2000 70%
1800
60%
1600
1400 50%
Due to merger
1200 40%
with CBoP
1000
800 30%
600 20%
400
10%
200
0 0%
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
No. of Branches CASA/Branch CASA Ratio (RHS)
NIMs to remain firm: HDFC Bank’s NIMs have remained at above 4% even
during the period of slowdown. Going forward, we believe that the bank is going
to benefit from a lower cost of fund as Rs200bn in term deposits gets re-priced
in 2HFY10, the CASA Ratio improves and loan growth picks up. Thus, we
estimate that the bank will achieve 4.1% NIM in FY11E.
NII & NIM trend
140 4.5%
120
4.0%
100
80 3.5%
60 3.0%
40
2.5%
20
0 2.0%
Mar-05 Mar-06 FY07 FY08 FY09 FY10E FY11E
NII NIM % (RHS)
Going ahead, we expect the improved credit offtake and stable NIMs to result in
a 20% growth in NII in FY10E and 29% in FY11E.
29 December 2009 25
Comparison of CASA Ratio and NIMs
60% 5%
50% 4%
As HDFC Bank has the 40%
highest CASA and high 4%
N I M s, w e believe it trades 30%
at a prem ium com pared to 3%
peers. 20%
10% 3%
0% 2%
HDFC Bank Axis Bank ICICI Bank
CASA Ratio NIMs (RHS)
Maintaining the share of fee income in Net Operating Income (NOI):

The bank generates 75% of its fee income from retail and 25% from corporate
business. Fee income’s growth was moderate during the first two quarters of the
year due to a slow economic activity. HDFC Bank was able to maintain the fee
income/NOI above 22% levels. Going ahead, we estimate that as the economic
activity picks up and credit growth increases, the bank will post a fee income
growth in the range of 30-32% in FY10E-11E.
Assets quality
Despite having the largest exposure in the retail segment compared to its peers,
Assets quality is perhaps HDFC Bank has always managed its NPAs well. Its NNPA is one of the lowest in
the biggest strength of the the industry at 0.50%. It also maintains one of the highest provision coverage at
bank in these tim es.
70.3%. Post its merger with CBoP, its GNPA percentage had increased to 2.05%
which has subsequently come down to 1.76%. During the past four quarters, the
bank has brought down its exposure to the unsecured retail loan segment to
13% from 18% a year ago. The standard restructured assets form only 0.29% of
its total loan book, one of the lowest in the industry. Thus, we do not see any
risk on gross NPA slippages or its provision coverage.
Asset quality comparison (Rs bn)
Provision Provision
Restructured coverage % coverage %
Bank % GNPA % NNPA assets % (specific) (general)
ICICI Bank 4.7 2.4 2.5 51.1 68.0
HDFC Bank 1.8 0.5 0.3 70.3 125.0
Axis Bank 1.2 0.5 2.9 63.2 114.0
Yes Bank 0.7 0.2 1.0 74.7 144.0
Comfortable Capital Adequacy Ratio: We believe that the bank is in a

comfortable position to leverage its balance sheet and has a Tier I capital of
10.9% as in 2QFY10. The Rs36bn received on account of warrants conversion
has further increased its Tier I by 200bps.
29 December 2009 26
High Capital Adequacy Ratio
20% 19%
16%
16%
16%
13% 14% 14%
12%
12% 10% 11%
9%
8%
4%
0%
CAR Tier 1
Valuation: We estimate that the bank will register a 20% NII growth in FY10E
and 29% in FY11E. ABV is estimated to grow at 36% in FY10E and by 13% in
FY11E. In our view, the bank will maintain above 4% NIM and 16% RoE for
FY11E.
HDFC Bank has historically traded at a median price/ABV band of 4x – 4.5x. We

have valued the stock at 4x its FY11E ABV of Rs505 to arrive at our target price
of Rs2,021.
P/ABV
6.0
P/ABV
5.0
4.0
3.0
2.0
1.0
0.0
May-04 Dec-04 Jul-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Mar-09 Dec-09
29 December 2009 27
Financials
(Rs bn)
Opt. Expenses 24.4 32.9 40.2 54.3 NII/Avg Int Earning Assets 4.9 4.9 4.6 4.7
Opt. Profit 37.7 51.8 69.7 88.7 NIMs 4.4 4.2 4.0 4.1
Provisions 14.8 18.8 29.4 37.9 CASA 54.5 44.4 47.9 49.4

Advances 634.3 988.8 1263.4 1598.6 CAR 13.6 15.7 18.6 16.4
Tier 2 3.3 5.1 4.9 4.1
Total Assets 46.0 37.6 24.6 25.2 Interest Income / ATA 9.0 10.3 8.6 8.9
NII 50.7 42.0 19.9 29.0 PBT / ATA 2.0 2.1 2.0 2.0
Other Income 50.6 44.1 49.3 31.5 PAT / ATA 1.4 1.4 1.4 1.4
Net Profit 39.3 41.2 25.5 25.7 ROA % 1.2 1.2 1.2 1.2
ROE % 17.7 17.2 15.9 15.9
Assets / Equity 12.5 12.1 11.6 11.6
Bus./Branch (mn) 2157.6 1711.7 1844.1 2089.8 P/ABV 5.4 5.2 3.8 3.4
29 December 2009 28
TΛTΛ Securities
TΛTΛ Securities Axis Bank
Axis Bank
Buy
A diversified growth story
CMP: Rs 987
Initiating Coverage
Axis Bank has a stable and diversified income portfolio. Its loan book
Target Price: Rs 1,199 comprises a healthy mix of large corporates and retail. Fee income forms one
Potential Upside: 21% third of its net operating income. We believe that the bank has achieved
consistent growth in its core banking operations and has a superior margin and
RoE.
Key statistics
M cap (INR bn/USD mn) : 398.1/8,534 During the past three quarters, Axis has fallen back on growth, perhaps
Avg 3m daily vol. : 2,099,161 reflective of the slowdown in credit demand from large corporates. With the
Avg 3m daily value : US$44.0mn expected revival in economic activity and retail demand, we are confident of
Shares O/S (mn) : 403 the bank’s ability to embark on the growth path once again. The bank,
Reuters : AXBK.BO
however, has one of the largest proportions of restructured assets to the total
Bloomberg : AXSB IN
loan book and this could depress valuation in the medium term.
Sensex : 17,361
Nifty : 5,145 We estimate that the bank will achieve earnings CAGR of 32% over
52-Wk High/Low : 1,064/278
FY09-FY11E, sustainable RoE of 18% and FY11E ABV of Rs444. We have
valued the stock at 2.7x its FY11E ABV of Rs444 to arrive at a target price of
Shareholding pattern (Sep’09) (%) Rs1,199 and recommend a Buy.
Key highlights
Indian promoter 39.0
FIIs 29.7 Pick-up in loan growth after slowdown: Two-third of its loan book is
MFs, Ins., FIs/Banks 9.1 towards large corporates and retail. We are confident of a 20% credit growth
Others 22.2 in FY10E and 29% in FY11E.
Relative performance
High CASA: The bank has been able to maintain a high CASA of 40%. With
aggressive branch expansion planned, CASA is likely to grow at 25%, in our
300
250 view.
200
150 Maintained NIMs: Even during the period of slowdown, Axis Bank has been
100 able to improve its NIM. Going forward, we estimate NIMs will sustained at
50
3.3% levels due to growing CASA and continuous repricing of term deposits.
Apr-07
Feb-08
Sep-07
Aug-08
Jan-09
Jul-09
Dec-09
Diversified and rapid fee income growth: The bank’s fee income has
SENSEX Axis shown 64% CAGR during FY04-FY09 and contributes 33% to the net operating
income. We expect it to grow at 35% CAGR from FY09-FY11E.
Analysts:
Valuation: With the expected growth in credit offtake, healthy margins and
Sandeep Jain
high proportion of fee income, we estimate PAT CAGR of 32% over FY09-11E
and ABV of Rs384 for FY10E and Rs444 for FY11E. The stock currently trades
Tel: +91 22 6745 9171
at 2.2x FY11E ABV. We are initiating coverage with a Buy rating and a target
Abhijit Chakraborty
Email: abhijit.chakraborty@tatacapital.com price of Rs1,199 (2.7x FY11E ABV).
Financial summary
FY08 25.9 10.7 29.9 33.0 0.61 238.2 4.1 1.0 17.6 13.7 0.8 0.4
FY09 36.9 18.2 50.6 19.5 1.01 275.0 3.6 1.2 19.1 13.7 1.1 0.4
FY10E 47.4 23.4 58.3 16.9 1.18 383.9 2.6 1.3 18.0 16.3 1.5 0.4
FY11E 61.8 31.5 78.4 12.6 1.59 444.2 2.2 1.4 18.4 14.8 1.5 0.4
29 December 2009 29
Investment rationale
Credit growth: Axis Bank has a diversified loan book. Large and mid corporates
form 50% of the total book, retail at 22%, SME at 19% and agriculture at 9%.
Reflecting the systemic slowdown in credit growth, the bank has seen a lower
growth in the past three quarters. Going forward, as the credit outlook of the
system improves and the bank offers competitive rates compared to its peers for
home and auto loans, coupled with the focus on infrastructure sector, we
estimate the loan book to grow by 20% in FY10E and 29% in FY11E.
Growth in business
70%
60% 62%
60% 54% 54% 55%
50%
48%
50%
40% 37%
28% 29%
30%
18% 19%
20%
10%
45%
31%
35%
49%
46%
60%
54%
34%
24%
12%
17%
29%
0%
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
FY10E
FY11E
Advance (YoY%) Deposit (%)
Break-up of advance growth (%)
Growth rates FY09 1HFY10 2HFY10E FY10E FY11E

Large & mid corporate 42.0 - 2.7 20.0 17.0 33.0
Retail 18.0 12.0 20.0 32.0 30.0
SME 39.0 - 1.0 18.0 17.0 24.0
No major changes in loan book composition
60%
50%
40%
30%
51%
51%
50%
49%
47%
20%
24%
23%
22%
22%
20%
20%
19%
19%
18%
18%
10%
11%
10%
9%
9%
8%
0%
Large & mid corporate SME Agriculture Retail
29 December 2009 30
Though the loan book composition has largely remained stable, the bank has
reduced its exposure to unsecured and risky retail loans.
Retail break-up of loan book (%)
Retail composition FY09 2QFY10

Housing 65.0 67.0
Personal Loan 12.0 10.0
Credit Cards 4.0 3.0
Passenger Cars 11.0 13.0
CVs 3.0 1.0
Others 5.0 6.0
Two-wheelers 0.03 --
Deposits in line with credit: In line with the slower credit growth, deposits
too have shown a flat to negative growth in the past two quarters. We believe
that this has helped Axis Bank in maintaining its asset-liability profile and protect
its margins.
Composition of sources of funds (%)
Sources of funds FY09 2QFY10

CASA 40.0 40.0
Term Deposits 52.0 53.0
Borrowings 8.0 7.0
Growth rate (%)
Sources of funds FY09 2QFY10 YTD FY10E FY11E

CASA 27.0 - 2.3 20.0 30.0
Term Deposits 40.0 - 0.9 14.0 28.0
The bank has been able to grow its CASA and overall deposit base at 30-35% in
the past. With the expected pick-up in credit demand from 4QFY10E, we expect
the bank to simultaneously grow its deposit. We estimate the deposit growth
would be 16.7% in FY10E and 28.5% in FY11E. Axis Bank is aggressively
expanding its reach and has opened 164 branches last year and further opened
86 branches in 1HFY10. The savings and current account balance has grown at a
CAGR of ~46.5% during the period FY06-FY09. Going ahead, we believe that the
bank will be able to maintain its CASA ratio due to the expansion and focus on
retail liability.
29 December 2009 31
Branch network and CASA Ratio
1,200 50%
1,000
40%
800
30%
600
20%
400
200 10%
0 0%
FY05 FY06 FY07 FY08 FY09 FY10E FY11E
No. of Branches CASA/branch CASA (%) (RHS)
Growth in advances, deposits and CD Ratio
2,000 74%
1,800 72%
1,600
70%
1,400
1,200 68%
1,000 66%
800 64%
600
62%
400
200 60%
0 58%
Deposits Advances CD Ratio(RHS)
NIMs likely to be maintained, NII will improve: The average cost of funds
has come down to 5.41% in 2QFY10 from 6.12% in 4QFY09. This has been due
to a stable CASA, continuous re-pricing of deposits and infusion of Tier I capital.
Going forward, we expect the cost of funds to be stable due to a pick-up in CASA
and lower repricing of bulk deposits. We estimate that the bank will post a
margin of 3.2-3.3% in FY10E-FY11E. On the back of improved NIMs and higher
credit growth, we estimate a 29% growth in NII in FY10E and 30.4% in FY11E.
29 December 2009 32
NII & NIMs trend
70.0 5.0%
60.0
4.0%
50.0
40.0 3.0%
30.0 2.0%
20.0
1.0%
10.0
0.0 0.0%
NII NIM%
Diversified and rapid fee income growth: Fee income has grown at a CAGR
of 64% during FY04-09 and it is diversified among all the sectors of operations.
In 2QFY10, fee income showed a growth of 15% YoY and contributed 32% of
the Net Operating Income (NOI). We believe the expected pick-up in core
banking and revival in capital market is likely to drive fee income’s growth of
38.4% in FY10E and 40% in FY11E, contributing 34% and 36% in FY10E and
FY11E respectively, which is one of the highest in the peer group.
Fee income break-up (2QFY10)
Retail Banking Large & Mid

31% Corporate
vertical
22%
Treasury
16%
Capital Markets
11%
Business Agri & SME

Banking Banking
12% 8%
Fee income/NOI (%)
Name of the bank FY07 FY08 FY09 FY10E FY11E

Axis Bank 31.4 30.1 33.0 34.1 36.3
HDFC Bank 25.9 22.8 22.9 22.8 23.0
ICICI Bank 34.5 34.8 35.2 34.2 34.0
Yes Bank 30.5 29.7 23.9 26.0 27.2

29 December 2009 33
Comfortable CAR: The recent infusion of equity capital has augmented the Tier
I capital by ~150bps and increases the headroom for Tier II capital, in our view.
The Capital Adequacy Ratio of the bank is comfortable to back the targeted
credit growth.
Capital Adequacy Ratio
18% 16%
16% 15%
14% 14%
14%
11% 12% 11%
12% 10% 11%
10% 9%
8% 7%
6%
6%
4%
2%
0%
FY06 FY07 FY08 FY09 FY10 FY11
CAR Tier 1
High ROE: A consistent and high NII and fee income growth has enabled Axis
Bank to maintain a high ROE compared to its peers. Going forward, we believe
that due to the equity dilution, ROE will decrease by 100bps over FY09 level to
18% in FY10E and will increase to 18.5% in FY11E.
Sustainable high ROEs
25
20
15
10
0
HDFC bk
Axis bk
Federal bk
Yes bk
Ind.bk
J & K bk
ICICI bk
Kotak Mah.
IndusInd bk
Karnataka
ING Vysya
South
bk
bk
bk
29 December 2009 34
Dilution effect on ROE
4.5 22.0%
4.0 21.0%
3.5
20.0%
3.0
2.5 19.0%
2.0 18.0%
1.5
17.0%
1.0
0.5 16.0%
0.0 15.0%
FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Share Capital ROE
Asset quality
Concerns remain: Despite having 40% of the loan book exposed to SME and
retail sectors, the bank has maintained its GNPA levels at around 1% so far,
which is commendable. However, Axis Bank seems to be one of the worst
casualties of the asset cycle deterioration among the private sector banks as it
has one of the highest proportions of restructured assets to total advances.
High % of stress assets (GNPA + restructuring assets) (Rs bn)
%GNPA Total Total stress % of stress

Name of the Gross to loan restructured assets (GNPA+ asset as a %
bank NPA book assets restructuring) of loan book
ICICI Bank 92.0 4.8 48.0 140.0 7.3
HDFC Bank 20.2 1.8 2.8 23.0 2.0
Axis Bank 11.3 1.2 23.7 35.0 4.3
Yes Bank 0.5 0.3 1.6 2.1 1.0
Total restructured assets after 2QFY10 is Rs24bn (2.9% of total advances) and
total stressed assets of the bank comes at 4.32% of the total advances as in
2QFY10. We have assumed 20% slippage in the restructured assets in FY10E.
Segment-wise break-up of restructured assets
Paper Others
8% 5%
Oil & Gas

45%
Textiles
33%
29 December 2009 35
Comfortable provision coverage: Axis Bank had a specific provision coverage

of 63% in 2QFY10 and including the technical write-off, the provision coverage
stands at 87%. Recently, RBI clarified that banks can include the technical
written-off assets while computing the provision coverage ratio, which has
provided a cushion for Axis Bank. However, we assume that the incremental
slippages from high restructured assets and incremental lending will require the
bank to make more provisions to keep a low level of NPAs. We estimate that the
Net NPAs will remain ~0.4% in FY10E and FY11E.
Key risks: The key risk associated with the bank is that one third of its
restructured assets are in the SME category and its slippages in the coming
quarters can increase more than expected.
Valuation: We estimate that the bank can achieve an earnings CAGR of 32%
over FY09-FY11E, a sustainable RoE of 18% and FY11E ABV of Rs444.
Historically, the bank has traded at a median Price/ABV of 2.7x. Given the
current headwinds regarding the large restructured asset portfolio and the risk of
incremental slippages, we don’t expect the stock to trade at a superior valuation.
We have valued the stock at 2.7x its FY11E ABV of Rs444 to arrive at a target
price of Rs1,199.
Historical P/ABV chart
5.0
4.5
P/ABV
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Dec-04
Jun-05
Sep-05
Dec-05
Sep-06
Dec-06
Jun-06
Jun-07
Sep-07
Dec-07
Jun-08
Sep-08
Dec-08
Dec-09
Jun-09
Sep-09
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
29 December 2009 36
Financials
(Rs bn)
Opt. Expenses 14.8 18.6 24.2 31.7 NII/Avg Int Earning Assets 3.1 3.2 3.2 3.4
Opt. Profit 22.3 37.2 49.2 63.9 NIMs 3.2 3.2 3.2 3.3
Provisions 5.8 9.4 13.2 16.2 CASA 45.7 43.1 44.4 44.8

Balance Sheet FY08 FY09 FY10E FY11E Credit-Deposit Ratio 68.1 69.5 71.0 71.5
Advances 596.6 815.6 972.2 1259.0 CAR 13.7 13.7 16.3 14.8
Tier 2 3.6 4.4 5.0 4.1
Total Assets 49.6 34.8 19.2 25.9 Interest Income / ATA (%) 7.7 8.4 7.7 8.0
NII 76.1 42.6 28.5 30.4 PBT / ATA (%) 1.8 2.2 2.2 2.4
Other Income 77.8 61.3 40.7 32.5 PAT / ATA (%) 1.2 1.4 1.4 1.6
Net Profit 62.5 69.5 29.0 34.6 ROA (%) 1.0 1.2 1.3 1.4
ROE (%) 17.6 19.1 18.0 18.4
Assets / Equity 15.0 13.6 12.4 11.6
Bus./Branch (mn) 2195.0 2382.4 2377.1 2684.3 Price / Adj Bk Value 4.1 3.6 2.6 2.2
29 December 2009 37
TΛTΛ Securities
TΛTΛ Securities ICICI Bank
ICICI Bank
Hold
CMP: Rs 865 Strategy executed but valuation factored in
Initiating Coverage
Target Price: Rs 889 ICICI Bank was one of the worst affected banks during the credit crisis and
economic slowdown. High delinquencies coupled with a high cost to income
Potential Upside: 3%
ratio shrank its profit growth and RoE considerably. Since then, the bank had
embarked on a holistic consolidation programme to improve its Credit, Cost,
Key statistics CASA and CAR--the 4C strategy. In the last four quarters, the bank has
M cap (INR bn/USD mn) : 963.6/20,655 reduced its retail loan portfolio from 55% to 45% and reduced the cost to
Avg 3m daily vol. : 5,344,938 income ratio from 43% to 37% respectively, and is in a consolidation phase.
Avg 3m daily value : US$99.8mn
Shares O/S (mn) : 1,114 We estimate the bank to report 10% CAGR in EPS over FY09-11E, a 15%
Reuters : ICBK.BO CAGR in NII over the same period and ABV at Rs317 for FY10E and Rs357 for
Bloomberg : ICICIBC IN FY11E. With an improvement in cost efficiency and expected credit growth
Sensex : 17,361
from FY11E, we believe its RoE will improve to 8.6% in FY10E and 9.2% in
Nifty : 5,178
FY11E. However, we believe that the current valuation discounts most of the
52-Wk High/Low : 980/252
expected positives. We initiate coverage on the bank with a Hold rating.
Shareholding pattern (Sep’09) (%) Key highlights

Concern on assets quality: The total stress assets (GNPA plus restructured
FIIs 35.3
assets) of the bank are 7.3% of the total loan book in 2QFY10. Due to a higher
MFs, Ins., FIs/Banks 24.4
proportion of restructured assets, we estimate that the GNPA would increase to
Others 40.3
5.2% in FY10E.
Relative performance Enter the growth cycle: After a loan book contraction of 13% in 1HFY10,
200 we expect the bank to report a marginal credit growth in 2HFY10 at 3.3% and
150 a modest growth of 16.5% in FY11E.
100
Margins set to improve: Reduced dependence on bulk deposits and an
50
improvement in the CASA Ratio should continue to improve the spreads in the
0
coming quarters. Further, Rs300bn of term deposit is likely to get re-priced in
Apr-07
Feb-08
Sep-07
Aug-08
Jan-09
Jul-09
Dec-09
2HFY10, which will also help it to improve the margins by 10-15bps.
SENSEX ICICI Valuation: We value the core banking business at Rs624 (1.75x FY11E
P/ABV) and subsidiaries at Rs265 for FY11E. Our SOTP-based valuation
Analysts: estimate is Rs889, an upside of 3%. We initiate coverage with a Hold
recommendation.
Sandeep Jain
Tel: +91 22 6745 9171
Abhijit Chakraborty
Email: abhijit.chakraborty@tatacapital.com
Financial summary
FY08 73.0 41.6 37.4 23.1 0.7 314.2 2.8 1.0 11.6 14.0 3.3 1.5
FY09 83.7 37.6 33.8 25.6 1.3 288.5 3.0 1.0 7.8 15.5 4.3 2.1
FY10E 89.9 44.2 39.7 21.8 1.0 317.2 2.7 1.2 8.6 19.1 5.2 2.2
FY11E 101.9 49.8 44.7 19.3 1.2 356.7 2.4 1.1 9.2 17.8 4.6 1.3
29 December 2009 38
Consolidation & benefits

Faced with a contraction in margins, RoE and deterioration in asset quality, ICICI
Bank had decided to spend the better part of FY09 in consolidating and
improving its operating parameters. It sacrificed growth and focused on
strengthening the core banking fundamentals. The bank focused on the four
cornerstones of banking--Credit Quality, Cost to Income Ratio, CASA and CAR. It
has seen significant improvement on all parameters except NPAs, in line with the
industry.
We believe that the bank is executing the 4C strategy quite nicely, though high
stressed assets and the threat of incremental slippages remain.
Credit growth: Since 1QFY09, the bank’s loan book contracted by 14% from
Rs2,220bn to Rs1,908bn at the end of 2QFY10. This slowdown in credit offtake
was necessitated due to: (i) High exposure of the book to retail loans, which was
facing increased delinquencies, (ii) Greater dependence on term deposits/bulk
deposits, which put pressure on the spreads and (iii) Increased risk premia from
its overseas operations.
Loan 2QFY09 2QFY10

break-up (Rs bn) % of total (Rs bn) % of total
Retail 1,221 55 859 45
Corporate 910 41 935 49
Agriculture 89 4 115 6
Total 2,220 100 1,909 100
Over the last four quarters, the share of retail loan portfolio has come down from
55% to 45%. Within retail loans, the unsecured personal loan portfolio has
contracted by 45%, vehicle loan portfolio by 37% and outstanding credit cards
down by 32%.
While the overall loan book contracted, there has been an increase in the
corporate loan book, indicating a clear shift from unsecured retail loans to asset-
backed corporate loans, suggesting that the bank was consciously reducing the
vulnerable share of advances.
Retail loan 2QFY09 2QFY10

break-up (Rs bn) % of total (Rs bn) % of total
Home 622.7 51.0 492.0 57.3
STPL 8.5 0.7 1.7 0.2
Personal Loans 109.9 9.0 60.1 7.0
Vehicle Loans 354.1 29.0 223.3 26.0
Credit Cards 89.5 7.3 58.4 6.8
Other Secured 36.6 3.0 23.0 2.7
Total 1,221 100.0 859 100.0
29 December 2009 39
For 2HFY10, we believe that ICICI Bank is likely to continue de-growing its retail
and international loan book. We estimate a further contraction of 2% in the retail
portfolio and 10% in the international book. However, lending to domestic
corporates is estimated to grow at 16%. Overall, we estimate a 3.5% growth in
the loan book in 2HFY10E, which will bring the credit de-growth for FY10 at
13%.
The bank has been able to increase its CASA Ratio, CAR and re-balance the book
from unsecured retail portfolio towards large corporates and SMEs. In our view,
this shall enable the bank to grow its loan book in FY11E. We estimate a credit
growth ~17% for FY11E.
Projected growth in advances
2,500 45%
2,000
30%
1,500
15%
1,000
0%
500
0 -15%
Retail portfolio Total Advance Total Advance Growth (RHS)
CASA: Improving CASA and reducing the proportion of wholesale deposit was
one of the strategies of ICICI and this has shown a continuous improvement
during the past eight quarters. The CASA Ratio has improved to 37% in 2QFY10
from 22.5% in 1QFY08. The bank has added 120 new branches during the past
four quarters and has also benefited from the cash management due to a pick-
up in corporate fund raising activity, which led to an increase of 646bps in the
CASA Ratio.
Low cost deposit
1000 40%
800
30%
600
20%
400
10%
200
0 0%
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
FY10E
FY11E
CASA CASA Ratio
29 December 2009 40
Going forward, we believe that ICICI Bank will be able to maintain its CASA Ratio
at 36% in FY10E and 37% in FY11E as the management is focused on improving
its retail liability franchise and mobilising Rs12-13bn of CASA deposit every
month. The bank is further planning to open more than 450 branches in 2HFY10,
which is expected to attract low cost deposits.
Margins tend to move upwards: We expect the bank’s NIMs to improve on

the back of an improvement in CASA and reduced dependence on bulk deposit.
Also, Rs300bn of term deposit is likely to get re-priced in 2HFY10, which should
improve the margins by 10-15bps. Overall, we estimate the NIMs will improve by
15bps in FY11E over FY10E.
Due to the improvement in spreads and credit growth from 2HFY10 onwards, we
estimate the Net Interest Income (NII) will grow at 8% in FY10E and 13.5% in
FY11E.
Controlling cost: The bank’s cost-to-income ratio (excluding treasury income)

has reduced from 54% in 2QFY08 to 40% in 2QFY10. Its strategy of de-focusing
on retail loan portfolio has helped in a substantial reduction in direct market
access expenses. Apart from DMA expenses, ICICI Bank has also reduced its
other operating cost by 18% from Rs17.1bn in 3QFY08 to Rs14bn in 2QFY10.
Improving cost efficiency
4.5 60%
4.0
50%
3.5
3.0 40%
2.5
30%
2.0
1.5 20%
1.0
10%
0.5
0.0 0%
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
DMA Expenses Cost/NOI (ex. Treasury income) (RHS)
Going forward, as the bank is planning to expand its network aggressively with
450 branches planned for 2HFY10, the operating expenses are expected to
increase marginally. However, we believe that it is likely to be maintained at
40% in FY11E, down from 44% in FY09.
29 December 2009 41
Cost to income ratio
2,500 60%
50%
2,000
40%
1,500
30%
1,000
20%
500
10%
0 0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
No. of branches Cost to income ratio
Conserving capital: The reduction of retail portfolio has reduced the risk
weighted assets by 9% in 1HFY10, which has resulted in an increase in the
Capital Adequacy Ratio by 4.3%. CAR stood at 17.7% in 2QFY10 against 13.4%
in 1QFY09. Tier I capital was at 13.3% in 2QFY10, an increase by 201bps over
1QFY09. We believe the improvement in CAR has been due to the de-growth in
the loan book and a reduction in the exposure to higher risk weighted portfolio.
Capital Adequacy Ratio – Increasing gradually and one of the highest among peers
13.1 13.3
20 14 20.0
11.8 12.1 11.8
18 11.3 11.0 12 16.0
16
14 10 12.0
12 8 8.0
10
17.4 17.7 6
8 15.6 15.5 4.0
14.0 13.4 14.0
6 4
4 0.0
2
Axis Bank
HDFC Bank
City Union Bank
Dev.Credit Bank
Federal Bank
Karnataka Bank
Karur Vysya Bank
Lak. Vilas Bank
South Ind.Bank
Yes Bank
Bank of Rajasth.
ICICI Bank
ING Vysya Bank

J & K Bank
IndusInd Bank
Dhanalaksh.Bank
2
0 0
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
CAR Tier 1 Capital
In our view, ICICI Bank is well capitalized and has one of the highest capital
adequacy among its peers.
Concerns on assets quality: The deteriorating asset quality has been a

challenge for the bank, and the increased slippages on the stressed assets are
further cause for concern. GNPA of the bank stood at 4.7% in 2QFY10, one of
the highest in the industry. Another 2.5% of the book (Rs48bn) has been
restructured. Our worst case estimation of 20% slippage from the restructured
portfolio will increase the GNPA to 5.2% by end FY10. Further, ICICI Bank has
29 December 2009 42
an overall provision coverage of 51.1% as in 2QFY10, far lower than the RBI’s
threshold of 70%.
Stress Test (Rs bn)
% % of stress
GNPA Total Total stress assets asset as a
Name of Gross to loan restructured (GNPA + % of loan
the bank NPA book assets restructuring) book
ICICI Bank 92.0 4.8 48.0 140.0 7.3
HDFC Bank 20.2 1.8 2.8 23.0 2.0
Axis Bank 11.3 1.2 23.7 35.0 4.3
Yes Bank 0.5 0.3 1.6 2.1 1.3
Thus, we estimate an increase in the provisioning requirement for ICICI Bank in

the next three to four quarters, which would depress its net earnings.
Gross NPA levels
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10
GNPA (%) NNPA (%)
Valuation
The bank has seen an improvement in most of its operating parameters--CASA

has improved, Cost to Income Ratio has declined, Credit Growth is likely to
resume from 2HFY10 onwards. However, we believe while its asset quality still
remains a concern, its RoE will continue to be significantly lower than the
industry average at 9.2% in FY11E, and its earnings growth is estimated to be
modest.
Hence, in our view, even after an improvement in the operating parameters,

ICICI Bank will not be able to attract a superior valuation. We estimate the
banking business to trade at 1.75x its FY11E ABV of Rs357 and have valued the
subsidiaries at Rs265 per share. Thus, we have a target price of Rs889 and
recommend a Hold on the stock.
29 December 2009 43
International subsidiary: Management has indicated that the international

business remains a focus area of the bank’s strategy. However, the bank would
focus to do business with Indian companies who are doing business overseas.
ICICI Prudential Life Insurance: We estimate a CAGR of 16% in new

business achieved profit (NBAP) over FY09-FY11E. ICICI Prudential Life is
maintaining the margins of 19% over the past eight quarters. Going ahead, we
believe that as the business grows and due to increased competition, the high
margins will not be sustainable in the future. We have valued the insurance
business at 16x FY11E NBAP.
SOTP Valuation
Particulars Stake (%) Value (bn) Rs Per share Valuation methodology

ICICI Bank 694.9 624 1.75x of FY11E Adjusted book value
ICICI UK subsidiary 100% 14 12.9 1xFY11E book value
ICICI Canada Subsidiary 100% 46 40.9 1xFY11E book value
Value of Banking Business 755 678
ICICI Prudential Life Insurance 74% 217 144.0 16xFY11E NBAP
ICICI Lombard General Insurance 74% 18 12.3 10xFY11E Profits
ICICI Asset Management Company 51% 43 19.5 5% of Assets under management
ICICI Securities 100% 16 14.0 10xFY11E Profits
ICICI Ventures 100% 12 10.7 10% of Assets under management
ICICI Home Loan 100% 22 19.7 1.5x of FY11E BV
ICICI Securities Primary dealership ltd. 100% 23 20.5 10xFY11E Profits
Value of Non Banking Business 350.2 240.7
Holding Co. discount (10%) 41.0 29.5
Value of the bank 1064.0 889
29 December 2009 44
Financials
(Rs bn)
Opt. Expenses 60.8 50.7 48.2 53.0 NII/Average interest earning 2.2 2.5 2.6 2.8
Opt. Profit 79.6 89.3 103.6 118.2 NIMs 1.6 1.9 1.8 1.9
Provisions 29.0 38.1 40.5 47.1 CASA 26.1 28.7 35.6 36.9
Profit before tax 50.6 51.2 63.1 71.1 Avg Int earnings assets 3,256.4 3,397.7 3,417.6 3,635.3
Net Profit 41.6 37.6 44.2 49.8 Avg Int bearing liabilities 2,972.5 3,114.7 2,973.7 3,116.1

Capital 14.6 14.6 14.6 14.6 Incremental CD Ratio 213.7 -28.0 -204.0 88.6
Deposit 2,444 2,183 2,079 2,447 GNPA Ratio 3.3 4.3 5.2 4.6
Total Liab. & Equity 4,025 3,793 3,685 4,329 Prov. Cover 52.0 52.8 59.8 71.5
Investments 1,115 1,031 969 1,154 NNPA Ratio 1.5 2.1 2.2 1.3
Advances 2,256 2,183 1,971 2,297 CAR 14.0 15.5 19.1 17.8
Total Assets 4,025 3,793 3,685 4,330 Tier 1 11.8 11.8 14.6 13.8
Tier 2 2.2 3.7 4.5 4.0
Deposits 6.0 -10.7 -4.8 17.7 ATA (Avg.Total Assets) 3735.6 3908.8 3739.0 4007.6
Advances 15.2 -3.2 -9.7 16.5 Total Busi. (Dep+Adv) 4263.8 4700.5 4050.2 4744.0
Total Assets 16.8 -5.8 -2.8 17.5 Interest Income / ATA 8.2 8.0 7.3 7.5
NII 29.6 14.5 7.5 13.3 PBT / ATA 1.4 1.3 1.7 1.8
Other Income 27.2 -13.7 10.9 13.1 PAT / ATA 1.1 1.0 1.2 1.2
Net Profit 33.7 -9.6 17.5 12.7 ROA % 1.0 1.0 1.2 1.1
ROE % 11.6 7.8 8.6 9.2
Assets / Equity 10.5 8.1 7.3 7.4
Bus./Employee (mn) 104.8 135.9 115.7 131.8 P/E (Average) 23.1 25.6 21.8 19.3
Profit/Employee ('000) 1,021.9 1,086.3 1,262.2 1,382.6 P/BV 2.5 2.6 2.4 2.3
Bus./Branch (mn) 3,378.6 3,312.5 2,131.7 2,156.4 Price / Adj Bk Value 2.8 3.0 2.7 2.4
NP/Branch (mn) 32.9 26.5 23.3 22.6 Adj Book Value* 314.2 288.5 317.2 356.7
*After reducing equity investment in subsidiaries
29 December 2009 45
TΛTΛ Securities
Tata Securities Limited

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Tel: 91 22 6745 9000 Fax: 91 22 6610 6722
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Disclosure of Interest Statement in Banking Sector as on December 29, 2009

1. Name of the analysts: R.Sreesankar/Sandeep Jain/Abhijit Chakraborty
2. Qualifications of the analysts: BSc/CA/MBA
3. Analysts’ ownership of any stock related to the information contained: NIL
4. TSL ownership of any stock related to the information contained: NIL
5. Broking relationship with company covered: YES (HDFC Bank)
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29 December 2009 46
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Institutional Research

Better momentum ahead

R.Sreesankar Sandeep Jain Abhijit Chakraborty

Economic downturn and incremental slippages, not a reason for worry:

Higher credit growth: After a period of hibernation, we believe that the

Credit growth, is it an issue?

Bank credit (Rs bn) & GDP growth

Bank Credit GDP (%)

Source: Tata Securities Research.

Incremental credit (Rs bn)

Half yearly bank credit growth

1st Half 2nd Half

Source: Tata Securities Research.

Infrastructure to spur credit growth: As per the planned outlay on

Infrastructure credit growth

Source: Tata Securities Research.

Non-food credit growth and IIP growth

Non-food credit growth (QoQ) IIP growth

Source: Tata Securities Research.

Mortgage loans growth as a % of total bank credit

Direct housing lending

Source: Tata Securities Research.

CD Ratio expected to expand

Credit growth, deposit growth and CD Ratio

Credit Growth Deposit Growth CD Ratio (RHS)

Source: Tata Securities Research.

Interest rates expected to be benign

Ample liquidity in the system – shown by reverse repo auctions

Source: Tata Securities Research.

Measures taken by RBI to contain inflation

6 25th Oct'08: 3rd Jan'09: Decrease

We expect a stable interest rate scenario with the possibility of 50-100bps

Bond yields to be range bound: Due to the comfortable liquidity position in

NIMs may not expand much

Lower ID ratio: The Investment-Deposit ratio will gradually decline as credit

Asset quality: Contained but concerns remain

Total Total stress % of stress

We assume an overall 20% slippage in the restructured portfolio by the end of

Concerns: We believe that when slippages take place in the restructured

GNPA, NNPA and provision coverage of all banks

18.0 70% 4.0 66

Source: Tata Securities Research.

Top private GNPA NNPA Provision GNPA NNPA Provision

Source: Tata Securities Research.

Fee income’s contribution to NOI

Avg. Private Sector Banks Avg. Public Sector Banks

Source: Tata Securities Research.

high growth and leveraged fee income.

Business model of Yes Bank – The relationship banker

Provide end-to-end solutions to corporates

 Project advisory & S yndication  Long Term Lending  Facility of letter of

 Private Equity S yndication

Source: Tata Securities Research.

Break-up of non-priority sector lending loans (2QFY10) Sectoral exposure (2QFY10)

Source: Tata Securities Research.

Expansion in CD Ratio will result in core income growth: The bank’s CD

Deposit growth, credit growth and CD Ratio

Deposit Growth Credit Growth CD Ratio (RHS)

Source: Tata Securities Research.

No. of branches and CASA Ratio

No. of Branches CASA Ratio

Source: Tata Securities Research.