Вы находитесь на странице: 1из 47

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

We,We,We,We,We, atatatatat Edelweiss,Edelweiss,Edelweiss,Edelweiss,Edelweiss, hostedhostedhostedhostedhosted aaaaa FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference ononononon FebruaryFebruaryFebruaryFebruaryFebruary 15,15,15,15,15, 20072007200720072007 ininininin MumbaiMumbaiMumbaiMumbaiMumbai tototototo givegivegivegivegive ourourourourour investorsinvestorsinvestorsinvestorsinvestors ananananan opportunityopportunityopportunityopportunityopportunity tototototo interactinteractinteractinteractinteract directlydirectlydirectlydirectlydirectly withwithwithwithwith fifteenfifteenfifteenfifteenfifteen financialfinancialfinancialfinancialfinancial servicesservicesservicesservicesservices companies.companies.companies.companies.companies. InInInInIn tandem,tandem,tandem,tandem,tandem, theretheretheretherethere werewerewerewerewere nineninenineninenine presentationspresentationspresentationspresentationspresentations bybybybyby industryindustryindustryindustryindustry expertsexpertsexpertsexpertsexperts ononononon diversediversediversediversediverse businessbusinessbusinessbusinessbusiness segmentssegmentssegmentssegmentssegments ininininin thethethethethe financialfinancialfinancialfinancialfinancial servicesservicesservicesservicesservices spacespacespacespacespace viz.,viz.,viz.,viz.,viz., Banking,Banking,Banking,Banking,Banking, MortgageMortgageMortgageMortgageMortgage Finance,Finance,Finance,Finance,Finance, InsuranceInsuranceInsuranceInsuranceInsurance (life(life(life(life(life andandandandand nonnonnonnonnon life),life),life),life),life), CVCVCVCVCV Financing,Financing,Financing,Financing,Financing, Agri/MicroAgri/MicroAgri/MicroAgri/MicroAgri/Micro Financing,Financing,Financing,Financing,Financing, InfrastructureInfrastructureInfrastructureInfrastructureInfrastructure Financing,Financing,Financing,Financing,Financing, RetailRetailRetailRetailRetail Financing,Financing,Financing,Financing,Financing, andandandandand industryindustryindustryindustryindustry outlook,outlook,outlook,outlook,outlook, whichwhichwhichwhichwhich gavegavegavegavegave ananananan insightinsightinsightinsightinsight intointointointointo thethethethethe intricaciesintricaciesintricaciesintricaciesintricacies ofofofofof thisthisthisthisthis space.space.space.space.space. ThisThisThisThisThis documentdocumentdocumentdocumentdocument triestriestriestriestries tototototo encapsulateencapsulateencapsulateencapsulateencapsulate thethethethethe keykeykeykeykey taketaketaketaketake alwaysalwaysalwaysalwaysalways fromfromfromfromfrom thethethethethe presentationspresentationspresentationspresentationspresentations andandandandand meeting.meeting.meeting.meeting.meeting.

KeyKeyKeyKeyKey TakeawaysTakeawaysTakeawaysTakeawaysTakeaways

Discussions at this event reaffirm our belief that the buoyant growth in the Indian economy in the next three-four years will provide strong tailwinds for banks, insurance, and other financial services companies. The financial services space will be one of the biggest beneficiaries of the current economic expansion. Bank managements were confident of continued credit growth emanating from strong underlying demand.

Credit demand is expected to be growth-supportive and resilient. We expect credit to attain 19% CAGR over FY07-09E, after growing at 26% in FY07 (factoring in some credit tightening post recent CRR hike). While direct impact of CRR hike on profitability (1-2%) and margins is lower, it is likely to slow down banks’ ability to expand credit. Loan demand from corporate and infrastructure sectors will remain strong in FY08E, while the retail sector is expected to report slower than historic growth.

In our view, pricing power is back with banks, which will enable stable margins going forward. Increasing competition on the deposit side will again benefit banks with a strong deposit franchise.

ValuationsValuationsValuationsValuationsValuations

We maintain our positive view on the sector. However, in the near term, due to negative news flow and uncertainty over inflation and interest rates, we expect valuations to remain subdued. In the current scenario, we advise investors to be selective in bank stocks. We also expect greater visibility on M&A to guide valuations as we approach the end of FY08.

OurOurOurOurOur toptoptoptoptop pickspickspickspickspicks

At current valuations, we prefer PNB, Union Bank, IOB, and Centurion Bank.

PNBPNBPNBPNBPNB at 1.3x FY08E book: Strong franchise, high CASA, and 19-21% expected RoE.

CenturionCenturionCenturionCenturionCenturion BankBankBankBankBank ofofofofof PunjabPunjabPunjabPunjabPunjab at 3.3x FY08E book and 28x FY08E EPS: Attractive valuations given strong growth outlook, high profitability, and M&A possibilities.

UnionUnionUnionUnionUnion BankBankBankBankBank at 1.0 FY08E book: Improved margins, high operating efficiency, and 20% plus expected RoE.

IOBIOBIOBIOBIOB at 1.4x FY08E book: Attractive valuations given 24-25% plus RoE over FY07-08E.

22

B I O B I O B I O B I O B at 1.4x FY08E

ContentsContentsContentsContentsContents

CONTENTSCONTENTSCONTENTSCONTENTSCONTENTS

Metrics — At a glance

5

MAINMAINMAINMAINMAIN TRACKTRACKTRACKTRACKTRACK PRESENTATIONSPRESENTATIONSPRESENTATIONSPRESENTATIONSPRESENTATIONS

Outlook on banks: Opportunities and challenges

7

Mortgage Finance

9

Rural banking and micro finance

10

Retail banking strategies at Centurion Bank

11

Infrastructure Financiang

12

Is life insurance a glorified asset management business?

13

General Insurance: A holistic view

14

Consumer and Commercial Vehicle Finance

15

Outlook on interest rates

16

COMPANIESCOMPANIESCOMPANIESCOMPANIESCOMPANIES

Allahabad Bank

17

Centurion Bank of Punjab

19

Federal Bank

21

HDFC

23

IDBI

25

Indian Overseas Bank

27

LIC Housing Finance

29

M&M Finance

31

Oriental Bank of Commerce

33

Punjab National Bank

35

SBI

37

Shriram Transport Finance

39

Union Bank

41

UTI Bank

43

Yes Bank

45

Bank 35 SBI 37 Shriram Transport Finance 39 Union Bank 41 UTI Bank 43 Yes Bank

3

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

 

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference mainmainmainmainmain tracktracktracktracktrack presentationspresentationspresentationspresentationspresentations

 

FromFromFromFromFrom

ToToToToTo

SpeakerSpeakerSpeakerSpeakerSpeaker

CompanyCompanyCompanyCompanyCompany

TopicTopicTopicTopicTopic

8:45

9:15

Registration

   

9:10

9:15

Welcome Address

9:00

9:45

S Maheshwari

L&T Finance

Infrastructure Finance

9:45

10:30

Harpreet Singh

Centurion Bank

Retail Finance

10:30

11:15

Amit Tandon

Fitch Ratings

Outlook on Banks

11:30

12:15

Keki Mistry

HDFC Ltd

Mortgages

12:15

13:00

Kamesh Goyal

Bajaj Allianz

Non Life Insurance

14:00

15:00

P. Nandgopal

Reliance Life Insurance

Life Insurance

15:00

15:45

Subhasri Shriram

Shriram Group

CV and Consumer Finance

16:00

17:00

Brahmanand Hegde

ICICI Bank

Agri and Micro Financing

17:00

18:00

Ajay Mahajan

Yes Bank

Financial Markets

4

4

AtAtAtAtAt AAAAA GlanceGlanceGlanceGlanceGlance

GLANCEMETRICS GLANCEMETRICS GLANCEMETRICS GLANCEMETRICS METRICS – – – – – AT AT AT AT AT
GLANCEMETRICS
GLANCEMETRICS
GLANCEMETRICS
GLANCEMETRICS
METRICS – – – – – AT
AT
AT
AT
AT A A A A A GLANCE
CompaniesCompanies
RecoCompaniesCompanies
RecoRecoCompanies
CapMkt. CapMkt.
Mkt.
Mkt.
Mkt. Cap
Cap
Cap
PricePrice
PricePrice
Price
P/BP/B
P/BP/B
P/B
P/BP/B
P/BP/B
P/B
RoERoE
RoERoE
RoE
P/EP/E
P/EP/E
P/E
P/EP/E
P/EP/E
P/E
PE/GPE/G
PE/GPE/G
PE/G
CAGREPS CAGREPS
EPS
EPS CAGR
EPS
CAGR
CAGR
yieldDiv. yieldDiv.
Div.
Div. yield
Div.
yield
yield
P/PPOPP/PPOP
P/PPOPP/PPOP
P/PPOP
RecoReco
FY07EFY07E
FY08EFY07EFY07E
FY08EFY08EFY07E
FY08EFY08E
FY08EFY08E
FY08E
FY08EFY08E
FY08EFY08E
FY08E
FY07EFY07E
FY07EFY07E
FY07E
FY08EFY08E
FY08EFY08E
FY08E
FY07-09FY07-09
FY07-09FY07-09
FY07-09
FY07-09FY07-09
FY07-09FY07-09
FY07-09
FY08EFY08E
FY08EFY08E
FY08E
FY08EFY08E
mn)(USD mn)(USD
(%)(%)(USD
(USD mn)
(x)(USD
mn)
mn)
(INR)(INR)
(INR)(INR)
(INR)
(x)(x)
(x)(x)
(x)
(x)(x)
(x)(x)
(x)
(%)(%)
(%)(%)
(%)
(x)(x)
(x)(x)
(x)
(x)(x)
(x)(x)
(x)
(x)(x)
(x)(x)
(x)
(%)(%)
(%)
(%)
BankState
BankState
BankssState
State Owned
BanksState
Owned
Owned
Owned
Owned Bankss
Allahabad Bank
Andhra Bank*
Bank of Baroda*
Bank of India*
Canara Bank*
Corporation Bank*
Dena Bank*
Indian Overseas Bank
865
87
1.1
1.0
20.2
5.1
5.0
0.6
9.0
5.7
3.0
BUY
907
84
1.3
1.1
17.2
7.8
6.7
5.2
Not rated
1,905
235
1.0
0.9
14.1
8.4
6.6
4.1
Not rated
1,936
179
1.6
1.4
18.5
9.4
7.7
3.1
Not rated
2,033
223
1.1
1.0
17.5
7.3
6.0
3.4
Not rated
938
294
1.1
1.0
15.0
8.0
6.9
3.4
Not rated
226
35
0.8
0.7
15.9
6.7
5.4
-
Not rated
1,368
113
1.6
1.4
23.9
6.8
6.2
0.5
13.4
2.7
3.1
BUY
Oriental Bank
Pun. Natl. Bank
SBI (standalone)
SBI (Consolidated)
Syndicate Bank
Union Bank (I)
Vijaya Bank*
1,310
235
1.1
1.0
14.5
6.3
7.4
5.1
1.5
3.0
4.8
ACCUMULATE
3,444
492
1.5
1.3
20.4
8.7
6.7
0.3
23.3
2.4
3.4
BUY
13,844
1,184
2.0
1.7
17.1
13.6
10.8
0.5
20.2
1.3
4.8
ACCUMULATE
13,844
1,184
1.6
1.3
10.4
8.7
0.5
17.9
ACCUMULATE
854
74
1.2
1.0
21.7
5.0
5.2
0.6
8.5
4.9
2.9
BUY
1,194
106
1.1
1.0
20.2
5.8
5.2
0.3
17.7
3.8
2.6
BUY
460
48
1.1
1.0
17.9
6.5
5.5
5.8
Not rated
BanksPrivate
BanksPrivate
BanksPrivate
BanksPrivate
Private Sector
Sector
Sector
Sector Banks
Sector
Centurion Bank
Federal Bank
HDFC Bank
ICICI Bank
ICICI Bank (adj)#
1,171
36
4.1
3.5
14.5
40.4
27.8
0.7
37.4
0.2
10.3
BUY
453
238
1.4
1.2
18.6
7.9
6.9
0.4
15.3
1.5
3.6
BUY
7,684
1,096
5.5
4.7
22.0
29.9
23.0
0.9
24.2
0.6
9.8
REDUCE
19,192
966
3.5
3.1
15.7
23.9
21.0
1.3
16.3
1.0
10.0
ACCUMULATE
19,192
792
2.9
2.6
15.7
19.6
17.2
1.1
16.3
1.3
8.2
ACCUMULATE
IDBI*
1,398
87
0.9
0.8
11.1
9.4
7.7
1.2
Not rated
IndusInd Bank*
336
52
1.7
1.5
21.8
9.0
6.8
2.1
Not rated
Karnataka Bank
486
181
1.7
1.6
14.7
11.6
11.2
1.0
11.3
1.8
6.2
ACCUMULATE
UTI Bank
3,461
554
4.6
3.9
21.9
24.7
19.3
1.0
19.1
0.8
9.3
BUY
Yes Bank
883
147
5.2
2.9
12.9
44.7
30.6
0.6
53.5
-
7.9
BUY
FinanceSpeciality FinanceSpeciality FinanceSpeciality FinanceSpeciality
Speciality Finance
HDFC Ltd
HDFC Ltd (adj)#
LIC HF
Mahindra Finance**
IDFC
Reliance Capital**
SREI
Shriram Transport**
9,776
1,759
7.4
5.1
24.1
30.1
25.4
1.6
15.9
1.6
ACCUMULATE
9,776
1,289
5.4
3.7
24.10
22.1
18.6
1.2
15.9
2.1
ACCUMULATE
316
168
0.9
0.8
15.8
5.6
6.0
217.7
0.0
3.3
BUY
254
412
4.6
35.8
Not rated
2,394
96
3.7
3.4
18.6
20.6
19.0
4.6
4.2
2.1
ACCUMULATE
3,673
674
5.3
31.2
Not rated
140
58
1.4
1.1
15.9
10.3
8.7
1.0
8.9
2.6
REDUCE
462
138
2.4
12.7
Not rated
* Balance sheet data as of FY06 and EPS, BV are Bloomberg consensus estimates ** Balance sheet data as of FY06 and EPS, BV are Edelweiss rough estimates# adjusted for value of subsidiaries
estimates ** Balance sheet data as of FY06 and EPS, BV are Edelweiss rough estimates# adjusted

5

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

(CONTD.)METRICS (CONTD.)METRICS (CONTD.)METRICS (CONTD.)METRICS METRICS – – – – – AT AT AT AT A
(CONTD.)METRICS
(CONTD.)METRICS
(CONTD.)METRICS
(CONTD.)METRICS
METRICS – – – – – AT
AT
AT
AT A A A A A GLANCE
AT
GLANCE
GLANCE
GLANCE
GLANCE (CONTD.)
PSBV PSBV
Mcap/branchMcap/branchBV
BV PS
Mcap/branchBV
PS
PS
PSBV PSBV
BV
BV PS
BV
PS
PS
EPSEPS
EPSEPS
EPS
EPSEPS
EPSEPS
EPS
NIMNIM
NIMNIM
NIM
ROAROA
ROAROA
ROA
ratioCASA ratioCASA
CASA
CASA
CASA ratio
ratio
ratio
NPANet NPANet
Net
Net NPA
Net
NPA
NPA
BranchesBranches
BranchesBranches
Branches
B/SB/S
B/SB/S
B/S
CAGRLoan CAGRLoan
Loan
Loan CAGR
Loan
CAGR
CAGR
Mcap/CASAMcap/CASA
Mcap/CASAMcap/CASA
Mcap/CASA
Mcap/branchMcap/branch
FY06FY06FY07EFY07E
FY06FY06FY07EFY07E
FY06FY07E
FY08EFY08E
FY08EFY08E
FY08E
FY07EFY07E
FY07EFY07E
FY07E
FY08EFY08E
FY08EFY08E
FY08E
FY07EFY07E
FY07EFY07E
FY07E
FY07EFY07E
FY07EFY07E
FY07E
FY07EFY07E
FY07EFY07E
FY07E
FY07EFY07E
FY07E
FY07E
FY07E
Mar-06Mar-06
Mar-06Mar-06
Mar-06
FY07EFY07E
FY07EFY07E
FY07E
FY07-09EFY07-09E
FY07-09EFY07-09E
FY07-09E
FY07EFY07E
FY07EFY07E
FY07E
mn)(INR)(INR)
(INR)(INR)
mn)(INR)
(INR)(INR)
(INR)(INR)
(INR)
(INR)(INR)
(INR)(INR)
(INR)
(INR)(INR)
(INR)(INR)
(INR)
(%)(%)
(%)(%)
(%)
(%)(%)
(%)(%)
(%)
(%)(%)
(%)(%)
(%)
(%)(%)
(%)(%)
(%)
# ## ##
bn(INR) bn(INR)
(INR)
(INR) bn
(INR)
bn
bn
(%)(%)
(%)(%)
(%)
(%)(%)
(%)(%)
(%)
mn)(INR mn)(INR
(INR
(INR
(INR mn)
State Owned Banks
Allahabad Bank
80
92
17.1
17.3
2.9
1.3
39
0.83
2,046
691
19.0
20.43
19.02
Andhra Bank*
67
75
10.8
12.6
3.3
1.4
36
0.24
1,222
407
33.13
33.40
Bank of Baroda*
234
260
28.2
35.7
3.3
0.7
38
0.86
2,743
1,134
24.12
31.25
Bank of India*
113
131
19.0
23.1
2.9
0.7
35
1.49
2,674
1,121
26.78
32.58
Canara Bank*
195
225
30.4
37.4
3.0
1.1
33
1.11
2,542
1,327
23.53
35.99
Corporation Bank*
263
296
36.6
42.7
3.5
1.2
34
0.64
882
405
37.39
47.85
Dena Bank*
44
51
5.3
6.6
3.2
0.7
44
2.26
1,122
263
9.86
9.06
Indian Overseas Bank
69
83
16.5
18.2
3.7
1.4
36
0.71
1,526
757
19.0
30.52
40.34
Oriental Bank
206
230
37.1
31.7
2.7
1.5
30
0.67
1,233
741
19.0
35.98
47.82
Pun. Natl. Bank
331
388
56.6
73.2
3.8
1.2
47
0.25
4,093
1,634
18.0
26.43
37.86
SBI (stand alone)
596
685
87.2
109.7
3.2
0.9
43
1.44
9,306
5,272
17.0
34.47
66.94
SBI (Consolidated)
798
907
114
136.8
14,000
7,429
26.51
44.50
2 1.03Syndicate
Bank
61
74
14.7
14.1
3.0
1.1
29
0.83
1,828
834
18.0
18.78
Union Bank (I)
95
110
18.2
20.6
3.0
1.0
35
1.01
2,082
998
18.0
22.41
25.80
Vijaya Bank*
44
50
7.3
8.7
3.4
0.8
33
0.84
923
332
18.39
22.45
BanksPrivate
BanksPrivate
BanksPrivate
Private Sector
BanksPrivate
Sector
Sector
Sector Banks
Sector
Centurion Bank
9
10
0.9
1.3
4.2
1.0
33
1.08
249
166
43.0
144.77
211.6
Federal Bank
171
202
30.1
34.7
3.3
1.2
27
0.63
430
226
19.0
45.53
47.4
HDFC Bank
198
235
36.6
47.7
4.5
1.4
55
0.36
585
916
29.0
111.77
591.1
ICICI Bank
278
308
40.3
46.0
2.4
1.3
24
0.98
667
3,301
27.5
230.24
1,294.8
ICICI Bank (adj)#
278
308
40.3
46.0
667
3,301
188.78
1,061.6
IDBI*
96
106
9.3
11.3
0.5
0.7
30
1.07
430
996
81.99
146.3
IndusInd Bank*
31
34
5.8
7.7
2.1
0.7
13
2.12
147
219
Karnataka Bank
104
116
15.6
16.2
2.7
1.2
22
1.42
395
166
18.5
79.17
55.4
UTI Bank
121
144
22.5
28.8
2.7
1.1
38
0.90
481
713
29.4
97.12
323.8
Yes Bank
28
50
3.3
4.8
2.7
1.4
8
-
29
91
64.7
1,274.21
1,369.6
FinanceSpeciality FinanceSpeciality FinanceSpeciality FinanceSpeciality
Speciality Finance
HDFC Ltd
238
344
58.3
69.2
2.6
2.5
-
219
644
24.8
HDFC Ltd (adj)#
238
344
58.3
69
2.6
2.5
-
219
644
LIC HF
180
201
30.2
28.0
2.3
1.6
1.30
120
174
13.9
Mahindra Finance**
91
11.5
9.0
2.6
2.40
400
49
IDFC
26
28
4.6
5.0
3.2
3.6
-
168
34.1
Reliance Capital**
127
21.6
-
45
SREI
42
51
5.6
6.7
4.3
1.9
0.29
36
42
78.2
Shriram Transport**
57
10.9
10.0
2.8
0.40
296
52
* Balance sheet data as of FY06 and EPS, BV are Bloomberg consensus estimates
** Balance sheet data as of FY06 and EPS, BV are Edelweiss rough estimates
# adjusted for value of subsidiaries

6

** Balance sheet data as of FY06 and EPS, BV are Edelweiss rough estimates # adjusted

(%)

OutlookOutlookOutlookOutlookOutlook ononononon banks:banks:banks:banks:banks: OpportunitiesOpportunitiesOpportunitiesOpportunitiesOpportunities andandandandand challengeschallengeschallengeschallengeschallenges

OutlookOutlookOutlookOutlookOutlook ononononon banks:banks:banks:banks:banks: OpportunitiesOpportunitiesOpportunitiesOpportunitiesOpportunities andandandandand challengeschallengeschallengeschallengeschallenges

By Fitch Ratings India

Mr. Amit Tandon, CEO of Fitch Ratings India, discussed the outlook on banks and opportunities and challenges linked with it. Key takeaways from his presentation are as follows:

ImprovedImprovedImprovedImprovedImproved performanceperformanceperformanceperformanceperformance ininininin 20062006200620062006 asasasasas comparedcomparedcomparedcomparedcompared tototototo 2005,2005,2005,2005,2005, ororororor hashashashashas ititititit beenbeenbeenbeenbeen missingmissingmissingmissingmissingwith it. Key takeaways from his presentation are as follows: Banks continued to show strong growth

Banks continued to show strong growth Y-o-Y. Growth in loans continued to be over 30% for two consecutive years. Asset quality has improved distinctly over the past few years. Investment in government securities has also reduced over the past few years, given the strong credit momentum. Banks have become leaner and efficiency has become a focal point in view of increased competition. Though banks have managed to grow their profitability (RoE), only half of the banks in the sample space have managed to improve their efficiency (RoA). Margins are under pressure due to sudden demand and scarce liquidity.

WillWillWillWillWill growthgrowthgrowthgrowthgrowth momentummomentummomentummomentummomentum sustain?sustain?sustain?sustain?sustain?under pressure due to sudden demand and scarce liquidity. GDP growth at above 8.5% translates into

GDP growth at above 8.5% translates into higher credit off take. Capital investments (particularly in infrastructure) are expected to maintain credit growth. The retail boom is expected to continue with increased geographic penetration and wider product suite with SME the second growth story. Retail is an under-penetrated market for organized players as the lion’s share is still with unorganized players. India has favorable demographics and a mass market (both urban and rural markets).

ChartChartChartChartChart 1:1:1:1:1: CosumerCosumerCosumerCosumerCosumer lendinglendinglendinglendinglending asasasasas aaaaa %%%%% ofofofofof GDPGDPGDPGDPGDP

Phillipines Indonesia India China Thailand Japan Singapore Hong kong Taiwan Korea Malaysia USA UK Australia
Phillipines
Indonesia
India
China
Thailand
Japan
Singapore
Hong kong
Taiwan
Korea
Malaysia
USA
UK
Australia

Source: Fitch ratings

100

80

60

40

20

0

There is a marked change in the outlook towards SME lending with improving financial health and changing mindsets of managements. With corporate business offering wafer thin margins, SME offer not only higher margins, but also higher returns per customer with more upside potential. It diversifies the loan book and also helps banks meet their priority sector commitments.

But NPAs continue to be on the high side and SME are the worst hit in case of a cyclical downturn.

Though there are concerns on bank credit growing too fast, structurally, there appears enormous scope for expansion. Bank credit and deposits as a percentage of GDP in India is lower than its peers.

appears enormous scope for expansion. Bank credit and deposits as a percentage of GDP in India

7

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

UpdateUpdateUpdateUpdateUpdate PredictingPredictingPredictingPredictingPredicting

PredictingPredictingPredictingPredictingPredicting keykeykeykeykey trendstrendstrendstrendstrends

The market dynamics are changing as the market share is moving from public sector banks to new generation private sector banks. Consolidation is the key to provide stiff competition to foreign banks. The cost of deposits is increasing and hence margins are declining. Banks have to focus on how to maintain margins and be profitable. Garnering low cost deposits is the key to success. The NPA ratio will improve due to the base effect, but loan loss provisions are in line with matured economies, which is not a healthy sign and should be higher due to ‘emerging market’ risks faced by them. Capital adequacy will be a growth constraint for all banks with little headroom available on the investment side. Raising equity will remain a priority as rapid credit growth and changing asset composition means total capital resources will have to be augmented further. Implementation of Basel II has been postponed, but operational risk charge is expected to trim at least 75bps from total capital adequacy ratio. AS-15 may decrease capital adequacy ratio further by 100bps; government banks with high ‘pension’ liabilities will be relatively higher affected.

There have been changes in the regulatory environment e.g., loss on MTM investments now will have to be reduced from the net worth instead of routing it through P&L. Also, now RBI has been provided the flexibility to reduce SLR.

In conclusion, retail and SME are expected to continue to grow further. The dispersed market is expected to consolidate with key big players emerging. Asset quality and margins remain key concerns.

8

market is expected to consolidate with key big players emerging. Asset quality and margins remain key

MortgageMortgageMortgageMortgageMortgage FinanceFinanceFinanceFinanceFinance

By HDFC Limited

MortgageMortgageMortgageMortgageMortgage FinanceFinanceFinanceFinanceFinance

Mr. Keki Mistry, managing director of HDFC Limited, enlightened the audience by making a crisp presen- tation on the mortgage market in India and on HDFC Limited. Key takeaways from his presentation are:

• Housing loans continue to be in demand due to tax incentives by government, rising income levels, and increasing penetration.

• He emphasized that with increasing interest rates, cost to the consumer does not necessarily increase to the same extent and thus demand continues to look strong.

• HDFC continues to grow at a strong pace and it expects to grow its disbursements by 25% per annum going forward.

• Asset quality is not a concern in view of peaking property prices as the loan disbursed is determined on the repayment capacity of the individual, qualification, number of dependents, where is he working and not on value of the property. HDFC expects to keep net NPA below 1%. Average loan size has increased by 10% due to sharp increase in real estate prices.

• HDFC is increasing lending rates actively to pass on the higher funding cost to customers in rising interest rate environment.

• From retail deposits, the company has now shifted to wholesale funds as major source of funding. Average loan to value continues to be at 63%, which the company expects to increase in the coming quarters.

• Competition from banks had peaked in 2001-2003 due to excessive liquidity in banks. Now the competition is gradually declining. With increased concerns on banks’ participation in real estate, housing finance companies are expected to increase their market share.

• There is substantial value to be unlocked in the subsidiaries. HDFC expects to list most of its subsidiaries in the coming three-four years.

most of its subsidiaries in the coming three-four years. OurOurOurOurOur ViewViewViewViewView HDFC is the strongest

OurOurOurOurOur ViewViewViewViewView

HDFC is the strongest and most venerable play on Indian mortgages over the long term. We expect the bank, with its strong brand recall, superior real estate knowledge, and revamped distribution strategy, to attain 22% CAGR in loan disbursement over FY07-09E. Consequently, we expect it to deliver 24% and 16% CAGR in loan book and earnings, respectively, over FY07-09E.

FY07-09E. Consequently, we expect it to deliver 24% and 16% CAGR in loan book and earnings,

9

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

RuralRuralRuralRuralRural bankingbankingbankingbankingbanking andandandandand micromicromicromicromicro financefinancefinancefinancefinance

By ICICI Bank

Mr. Brahmanand Hegde, head–rural and micro banking group at ICICI Bank, enlightened us on banking in the hinterland focusing on rural, micro financing, and agri banking. From his presentation it was clear that rural banking offers huge opportunities, though key issues need to be addressed by focusing on non- traditional approaches for both channels as well as products. Beyond doubt, technology is a key enabler for rapid scale up and risk management is key to sustainability of rural banking. ICICI Bank is aggressively adopting the ‘No White Spaces’ strategy and micro-financing to cater to the most underserved segments.

KeyKeyKeyKeyKey TakeawaysTakeawaysTakeawaysTakeawaysTakeaways

StructuralStructuralStructuralStructuralStructural factorsfactorsfactorsfactorsfactors provideprovideprovideprovideprovide hugehugehugehugehuge opportunityopportunityopportunityopportunityopportunity ininininin ruralruralruralruralrural bankingbankingbankingbankingbankingTakeawaysTakeawaysTakeawaysTakeawaysTakeaways Long term structural factors provide immense opportunities

Long term structural factors provide immense opportunities in rural banking—70-75% population is dependant on the rural economy, about 50% of GDP flows from rural India, and 780 mn people have limited access to basic banking services. Despite predominance of informal lenders, institutional credit to rural India has grown by 19% CAGR over FY00-05.

KeyKeyKeyKeyKey challengeschallengeschallengeschallengeschallengescredit to rural India has grown by 19% CAGR over FY00-05. Key challenges faced by banks

Key challenges faced by banks in rural areas are:

Inadequate banking infrastructure (7% of villages have a branch and the average distance is ~3.8 kms).

ATM penetration is low and other banking channels are non existent.

Regulatory constraints (license for opening branches/ATMs).

Low profitability due to low ticket size, high cost, and high default risk.

‘No‘No‘No‘No‘No WhiteWhiteWhiteWhiteWhite Space’Space’Space’Space’Space’ strategystrategystrategystrategystrategydue to low ticket size, high cost, and high default risk. To address the need of

To address the need of financial inclusion and bring a large proportion of population into the fold of basic banking services, ICICI Bank has initiated a holistic rural banking approach by launching ‘No White Spaces’ strategy. Through this, it will not leave any rural business opportunity (farmers, agri traders, processors, and non agri traders) untapped. An ICICI Bank touch point (combination of branch and non-branch channels customized to various segments) will be available 10 km away from any customer.

MicroMicroMicroMicroMicro financingfinancingfinancingfinancingfinancingsegments) will be available 10 km away from any customer. Micro finance (providing financial services to

Micro finance (providing financial services to poor and micro enterprises) is the need of the hour to cater to the most underserved segments. Small ticket size, high operating costs, and high default risk makes it inefficient for commercial banks to target this high volume/ low value transactions.

Traditional models viz., SHG-bank linkage and bank-MFI linkage lacked scalability, incentive alignment, and operated amidst inappropriate legal structures for on-lending activities.

Hence, ICICI Bank initiated structures partnering directly with MFIs, where the bank provided loan funds, mezzanine equity, and technology to lend directly to clients on a risk sharing basis with NGO/ MFI. NGOs/MFIs undertake risk origination, monitoring, and collection.

In collaboration with micro-finance partners, the bank offers asset building and risk mitigating products and flexible loans and financial services that respond to low income clients along with insurance to protect loan portfolio.

10

loans and financial services that respond to low income clients along with insurance to protect loan

RetailRetailRetailRetailRetail bankingbankingbankingbankingbanking strategiesstrategiesstrategiesstrategiesstrategies atatatatat CenturionCenturionCenturionCenturionCenturion BankBankBankBankBank

RetailRetailRetailRetailRetail bankingbankingbankingbankingbanking strategiesstrategiesstrategiesstrategiesstrategies atatatatat CenturionCenturionCenturionCenturionCenturion BankBankBankBankBank

By Centurion Bank of Punjab

Mr. Harpreet Singh, head-branch banking and wealth management at Centurion Bank of Punjab, pre- sented on emerging opportunities for retail banking in India and discussed clear strategies for retail credit growth at Centurion Bank.

clear strategies for retail credit growth at Centurion Bank. KeyKeyKeyKeyKey

KeyKeyKeyKeyKey TakeawaysTakeawaysTakeawaysTakeawaysTakeaways

Structural drivers viz., India’s buoyant phase of economic growth (9% plus GDP growth), improving demographics (64% population estimated to be in the 14-60 years age group), expanding consumerism (retail lending growing at 35% CAGR over FY03-07E), and low consumer finance penetration (consumer debt to GDP ratio at ~10%, significantly lower than US, UK, Singapore, and Taiwan) provides excellent opportunities for growth of retail banking in India.

Centurion Bank clearly follows retail focused strategy (69% of net advances) aided by extensive distribution franchise of 259 branches across 128 cities. It is a leading player in two-wheeler loans and ranks amongst the top 7 in CV, mortgage, and personal loan disbursals. It aims at sustaining its two wheeler leadership, continuing growth momentum in CV financing, and accelerating growth in personal and mortgage financing through the following strategies:

ExistingExistingExistingExistingExisting products-existingproducts-existingproducts-existingproducts-existingproducts-existing customers:customers:customers:customers:customers: Deepening and improving delivery of existing products.

NewNewNewNewNew products-existingproducts-existingproducts-existingproducts-existingproducts-existing customers:customers:customers:customers:customers: Cross sell and up sell new products using hooks (use two- wheeler business as a feeder channel for up selling).

ExistingExistingExistingExistingExisting products-newproducts-newproducts-newproducts-newproducts-new customers:customers:customers:customers:customers: Expanding network across geographies and across segments or resorting to acquisition strategy.

NewNewNewNewNew products-newproducts-newproducts-newproducts-newproducts-new customers:customers:customers:customers:customers: Through product innovation.

Besides adopting a growing, profitable, and sustainable business model, Centurion Bank follows a more customer focused model addressing diverse needs of individuals across all stages of their life cycle.

Distribution framework at Centurion Bank revolves around branches, ATM network, relationship and financial managers, direct distribution channels, product specific back up teams, tele-direct marketing, and presence at dealerships.

Innovative abilities of the bank are well reflected in its unique positioning of ‘Miracle’ credit card as ‘India’s first credit card with conscience’. It serves twin objectives of social responsibility and business. It is an initiative of sponsoring education and living expenses of 3,500 rural kids every year.

and business. It is an initiative of sponsoring education and living expenses of 3,500 rural kids

11

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

InfrastructureInfrastructureInfrastructureInfrastructureInfrastructure FinancingFinancingFinancingFinancingFinancing

By L&T Finance

Mr. S. Maheshwari from L&T Finance (NBFC for infrastructure financing floated by Larsen & Toubro) shared some interesting thoughts on infrastructure financing, emphasizing in particular on an urge to have proper institutional framework and innovative financing options for creating an enabling environment for infrastructure developments.

KeyKeyKeyKeyKey TakeawaysTakeawaysTakeawaysTakeawaysTakeaways

EffectiveEffectiveEffectiveEffectiveEffective institutionalinstitutionalinstitutionalinstitutionalinstitutional frameworkframeworkframeworkframeworkframeworkTakeawaysTakeawaysTakeawaysTakeawaysTakeaways India needs effective regulatory institutions, which are

India needs effective regulatory institutions, which are efficiently staffed, and legislations adequately revamped to create an enabling environment for infrastructure. New institutions with new frameworks and culture are the need of the hour (though this will increase invisible project costs). Multiplying good institutional structures is also very important.

InnovativeInnovativeInnovativeInnovativeInnovative financingfinancingfinancingfinancingfinancing optionsoptionsoptionsoptionsoptionsgood institutional structures is also very important. Project financing is no longer a game of plain

Project financing is no longer a game of plain vanilla equity and debt. Some out-of-the-box thinking is required to introduce innovative financing options. Besides equity capital with differential rights, mezzanine capital and debt refinancing, structured finance option is a new game today which can effectively reduce the level of equity needs.

FourthFourthFourthFourthFourth tiertiertiertiertier capital:capital:capital:capital:capital: NewNewNewNewNew trendtrendtrendtrendtrendwhich can effectively reduce the level of equity needs. Fourth tier capital, structured between promoters’ equity

Fourth tier capital, structured between promoters’ equity and lenders’ sub-debt, is being resorted to off late. It provides clear advantage to further enhance funding base through aggressive leveraging and provides enough potential to enable cash exit to the promoters.

ProjectProjectProjectProjectProject managementmanagementmanagementmanagementmanagement criticalcriticalcriticalcriticalcriticalenough potential to enable cash exit to the promoters. Creating a good project management organization is

Creating a good project management organization is critical to handle large and complex projects. It is necessary to break up projects into more manageable parts and the right developers need to be selected who can manage things better and stay through the project implementation.

AddressingAddressingAddressingAddressingAddressing endendendendend users’users’users’users’users’ needsneedsneedsneedsneedsthings better and stay through the project implementation. Project structuring needs to be made more sensitive

Project structuring needs to be made more sensitive to end users’ requirements. Thus the end user will feel a part of the process and it will make the process of project implementation much smoother.

CarefulCarefulCarefulCarefulCareful tarifftarifftarifftarifftariff settingsettingsettingsettingsettingmake the process of project implementation much smoother. Tariffs need to be set with utmost care

Tariffs need to be set with utmost care to build confidence of an end user. Initially, low tariff should be charged to build traffic. Then, tariff can be hiked using the RPI+X formula till it reaches desired levels. It is necessary to depoliticize the tariff setting process with a separate regulatory mechanism.

12

desired levels. It is necessary to depoliticize the tariff setting process with a separate regulatory mechanism.

IsIsIsIsIs lifelifelifelifelife insuranceinsuranceinsuranceinsuranceinsurance aaaaa glorifiedglorifiedglorifiedglorifiedglorified assetassetassetassetasset managementmanagementmanagementmanagementmanagement business?business?business?business?business?

IsIsIsIsIs lifelifelifelifelife insuranceinsuranceinsuranceinsuranceinsurance aaaaa glorifiedglorifiedglorifiedglorifiedglorified assetassetassetassetasset managementmanagementmanagementmanagementmanagement business?business?business?business?business?

By Reliance Life Insurance

Mr. P. Nandgopal, CEO of Reliance Life Insurance, presented on life insurance providing detailed insights into Unit Linked Insurance Plans and important parameters to be considered for valuing life insurance business. He also delved into the contentious topic of “whether India’s ULIP gathering life insurance companies are any different from mutual funds.”

KeyKeyKeyKeyKey TakeawaysTakeawaysTakeawaysTakeawaysTakeaways

ULIPULIPULIPULIPULIP vis-à-visvis-à-visvis-à-visvis-à-visvis-à-vis mutualmutualmutualmutualmutual fundsfundsfundsfundsfundsTakeawaysTakeawaysTakeawaysTakeawaysTakeaways Investors are quite confused over allocating their savings

Investors are quite confused over allocating their savings to life insurance and mutual funds. Not only do these products serve different purposes over different tenures, but even the gap in the benefits between these products has now seemingly narrowed with an increased popularity of Unit Linked Insurance Plans (ULIPs). ULIPs combine life investment protection with a variety of investment options similar to those of mutual fund plans.

• Why are ULIPs preferred to mutual funds?

• It is considered a long term savings instrument.

• Provides better control over money.

• Marketing efforts are greater in case of ULIPs due to higher commission rates.

However, ULIPs are more expensive than mutual funds and also carry the risk of asset-liability mismatch. Retail investors should weigh the benefits of each of these products and accordingly invest in them.

ULIPULIPULIPULIPULIP vis-à-visvis-à-visvis-à-visvis-à-visvis-à-vis traditionaltraditionaltraditionaltraditionaltraditional policiespoliciespoliciespoliciespoliciesof each of these products and accordingly invest in them. Globally, ULIPs are more popular than

Globally, ULIPs are more popular than traditional plans. Even in India there is a similar trend. However, traditional policies are now gaining traction and going forward, the contribution of ULIPs is expected to decline. Moreover, in ULIPs, risk is passed on to customers and returns (premium income less expenses) are relatively lower than in traditional policies where risk is retained with the company and higher premium is charged.

As per our analysis, profit margins on traditional life insurance policies are higher than on ULIPs as it leaves excess investment returns with the insurance company. However, RoE on ULIPs are superior to traditional products due to lower capital requirements in the former.

OutlookOutlookOutlookOutlookOutlook ononononon lifelifelifelifelife insuranceinsuranceinsuranceinsuranceinsurance sectorsectorsectorsectorsectorproducts due to lower capital requirements in the former. According to Mr. P. Nandgopal, the insurance

According to Mr. P. Nandgopal, the insurance sector is expected to grow very strongly, with GDP growth, rising savings rate, and demographic profile (64% population in 14-60 years age group) being the key drivers.

ValuationValuationValuationValuationValuation ofofofofof insuranceinsuranceinsuranceinsuranceinsurance businessbusinessbusinessbusinessbusinesspopulation in 14-60 years age group) being the key drivers. According to Mr. P. Nandgopal, besides

According to Mr. P. Nandgopal, besides assigning a multiple to new business achieved profits (NBAP) to value life insurance business, other valuation methodologies of primary importance will be the embedded value method (discounting future cash flows) or internal rate of return method (average IRR expected going forward is 15-18%). The ratios that hold significance for valuation are persistence ratio (average 70%), expense ratio, capital efficiency ratio, and tenure. We prefer the (embedded value + present value of NBAP) method to value life insurance businesses.

ratio, and tenure. We prefer the (embedded value + present value of NBAP) method to value

13

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

GeneralGeneralGeneralGeneralGeneral insurance:insurance:insurance:insurance:insurance: AAAAA holisticholisticholisticholisticholistic viewviewviewviewview

By Bajaj Allianz General Insurance

Mr. Kamesh Goyal, CEO of Bajaj Allianz General Insurance, gave a holistic perspective on the general insurance industry and its outlook. Key takeaways from his presentation were:

• Circa 2001 and prior, distribution channels were absent and commission on gross written premium was less than 2.5% for the industry; the product mix was skewed towards the corporate segment, with very little/no retail focus; the growth rate was also slow at 12%. Underwriting profitability was poor and competition was centered around pricing. In the past five years, growth has been around 15% with drop in premium rates for corporate business, especially marine/health and property. Motor business has posted strong growth in line with Asian peers and GDP growth. Also, health insurance is growing at a strong pace with increase in medical tourism. Penetration (as a percentage of GDP) has increased from 0.53% to 0.64% in the past five years.

• Future opportunity lies with retail and to encash this opportunity, Bajaj Allianz is increasing tie-ups with auto manufacturers, motor dealers, banks, and travel agents. It intends to increase cross selling of products and increase premium income. The industry is gearing up to develop and service the retail segment with policy issuance at point of sale, developing distribution channels like direct marketing, telemarketing, setting up call centers as a single point of contact for customers, and setting up web portals for transactions online.

• De-tariffing will impact the industry in the short term and will mature the industry faster. De-tariffing will force companies to be more efficient.

• Motor and health have loss ratios greater than 100%, so premiums should increase as the industry can no longer absorb the losses.

• Rates for some customers will increase and for others they are likely to decrease. Retail assets and infrastructure projects will provide a big boost.

14

and infrastructure projects will provide a big boost. 14 KeyKeyKeyKeyKey

KeyKeyKeyKeyKey challenges:challenges:challenges:challenges:challenges:

The expense ratio is increasing. It is rising for the public sector, while it is declining for the private sector. De-tariffing and rising salaries will push expense ratios beyond 33%. There is a huge scope to decrease expenses by 25-30%. Lack of skilled manpower is driving salaries upwards. However, a secular bull run in equity markets and drop in interest rates have helped insurance companies post profits. Going forward, if there is a bear phase and a catastrophe, it will be a huge dampener for the industry. De- tariffing offers a big opportunity for private players to tap segments like motor and commercial vehicles. The company expects the market share of private players to be around 45% in 2010.

like motor and commercial vehicles. The company expects the market share of private players to be

ConsumerConsumerConsumerConsumerConsumer andandandandand CommercialCommercialCommercialCommercialCommercial VehicleVehicleVehicleVehicleVehicle FinanceFinanceFinanceFinanceFinance

ConsumerConsumerConsumerConsumerConsumer andandandandand CommercialCommercialCommercialCommercialCommercial VehicleVehicleVehicleVehicleVehicle FinanceFinanceFinanceFinanceFinance

By Shriram City Union Finance

Ms. Subhashri Shriram, executive director of Shriram City Union Finance Ltd. (SCUFL) delivered a company presentation focusing on industry growth drivers, future plans, and marketing strategy at SCUFL.

KeyKeyKeyKeyKey TakeawaysTakeawaysTakeawaysTakeawaysTakeawaysdrivers, future plans, and marketing strategy at SCUFL. SCUFL is primarily focused on retail financing and

SCUFL is primarily focused on retail financing and manages INR 13 bn funds with assistance from the group’s chit fund entities in marketing and collections with operations from more than 600 outlets. It caters to 4.1 mn customers through 1.2 mn agents.

It has largely derisked its business model in the retail financing space by diversifying into various segments viz., consumer durable finance, auto finance (including new and pre-owned vehicles), personal finance, trade finance, and retail gold finance.

Revenues have grown by 26% CAGR over FY04-06 to INR 2.15 bn, in line with similar asset growth. PAT has grown by 35% CAGR to INR 504 mn during the same period.

SCUFL taps a small portion of chit subscriber base that currently contributes majority of its business (chit subscribers currently cater only to 0.63% of the total population of Tamil Nadu, Andhra Pradesh, and Karnataka). Therefore, immense potential exists for business from this segment.

Soaring demand in the INR 200 bn consumer durable industry is throwing up several opportunities in the segment. Low penetration levels across segments is an indication of the potential. The company is targeting 10% market share in this segment.

SCUFL currently offers personal loans to its existing customers and chit subscribers, particularly the salaried class.

There are more than 3.57 mn SMEs in India and number of owners among chit subscribers is about 800 per branch. Targeting 10% of owners in a year with average ticket size of INR 0.5 mn creates a business potential of INR 18.6 bn from chit customers alone.

The company has recently added retail gold financing to its product line (restricting this business to Chennai and AP). There is potential to enter bullion trading.

It plans to effectively leverage on its wide network, in-house credit verification, quick disbursements, expertise of chit outlets in collection and dealer tie-ups for all leading brands.

KeyKeyKeyKeyKey risksrisksrisksrisksrisksin collection and dealer tie-ups for all leading brands. Chit fund, its major business segment, is

Chit fund, its major business segment, is losing its current relevance.

Concentration in South exposes it to regional risks.

Competition from banks and institutions with access to cheaper funds.

in South exposes it to regional risks. Competition from banks and institutions with access to cheaper

15

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

OutlookOutlookOutlookOutlookOutlook ononononon interestinterestinterestinterestinterest ratesratesratesratesrates

By Yes Bank

Mr. Ajay Mahajan, group president–Financial Markets and Private Banking at Yes Bank, shared his well thought out view on interest rates outlook considering several broad economic factors. Key takeaways from his presentation were:

Global growth and inflationary pressures are anticipated to moderate in 2007. Monetary policies are ex- pected to be divergent in 2007. It is expected that the Federal Reserve will hold back interest rates (possibly may even lower rates) through 2007, while ECB, BoE, and BoJ are likely to hike rates further. India and China are set to tighten rates. Inflationary pressures are expected to remain high in India, while in China they are expected to rise.

ECB is expected to raise rates by 25bps in March, taking the rate to 3.75%. Two additional rate moves to 4.25% are expected by early 2008. The above rate yields to support Euro as European Zone yield spreads narrow versus the US.

BoE will raise rates further to 5.5%. Sustained GBP gains appear limited in the near term due to overvalued conditions. High yielding status of the GBP should underpin sentiment.

BoJ will gradually tighten with one rate hike expected in H107. Slow monetary tightening and persistent capital outflows is likely to slow down Japanese Yen (JPY) recovery and so limited gains can be expected in JPY.

On the domestic front, the pressures from the supply side are expected to remain; in addition demand pressures are expected to emerge. Manufactured prices’ inflation has remained subdued so far due to productivity gains and competition. Credit growth maintains a strong momentum for third consecutive year. Inter-bank rate now ruling at 10.25% which necessitates a PLR of around 11.5% in order to recover CRR and SLR cost. So, in the absence of global cues, domestic interest rates are expected to be firm.

16

order to recover CRR and SLR cost. So, in the absence of global cues, domestic interest

India Equity Research

|

Banking

 

AAAAALLAHABADLLAHABADLLAHABADLLAHABADLLAHABAD BBBBBANKANKANKANKANK

INRINRINRINRINR 8282828282

AAAAA LLAHABADLLAHABADLLAHABADLLAHABADLLAHABAD BBBBB ANKANKANKANKANK INRINRINRINRINR 8282828282
AAAAA LLAHABADLLAHABADLLAHABADLLAHABADLLAHABAD BBBBB ANKANKANKANKANK INRINRINRINRINR 8282828282

BUYBUYBUYBUYBUY

HighlightsHighlightsHighlightsHighlightsHighlights 

 

The bank is continuing on an accelerated growth path, steadily improving its market share driven by better deposit mobilization and higher than system credit expansion.

The new management has implemented a few initiatives—roll out of CBS, setting up of a general insurance venture with Sompo of Japan and plans to expand its reach in southern India, western Maharashtra and Gujarat—which may change the perception of the bank.

VishalVishalVishalVishalVishal Goyal,Goyal,Goyal,Goyal,Goyal, CFACFACFACFACFA +91-22-2286 4370 vishal.goyal@edelcap.com

KunalKunalKunalKunalKunal ShahShahShahShahShah +91-22-4009 4532 kunal.shah@edelcap.com

The bank is now increasingly focusing on retail, SME, and agri credit, alongwith increased thrust on mobilizing low cost deposits.

AjiteshAjiteshAjiteshAjiteshAjitesh NairNairNairNairNair +91-22-4009 4535 ajitesh.nair@edelcap.com

InvestmentInvestmentInvestmentInvestmentInvestment RationaleRationaleRationaleRationaleRationale 

 

The new management is increasingly focusing on expanding its reach in southern India, western Maharashtra and Gujarat, thereby lowering the concerns regarding its dominant presence in high risk, low returns eastern states.

Loan portfolio mix is likely to shift in favour of retail advances in eastern and central regions from public sector advances in western and northern regions. The bank has 236 retail boutiques dedicated to retail business. We expect loan growth to settle at 32% for FY07E.

Reuters

:

ALBK.BO

We believe that Allahabad Bank’s margin will improve in the coming quarters as its treasury is increasing proportion of high yielding non-SLR investments and loan mix shift in favour of retail and SME advances. We expect NIMs to improve to 2.8% in FY08E.

Bloomberg

:

ALBK IN

MarketMarketMarketMarketMarket DataDataDataDataData

We expect the operating expense (opex) to assets ratio to come down to 1.7% in FY07E and 1.6% in FY08E from 2.2% in FY06.

52-week range (INR)

:

99 / 53

Share in issue (mn)

:

446.7

M cap (INR bn/USD mn)

:

36.6 / 829.5

Avg. Daily Vol. BSE/NSE (‘000)

:

927.0

The stock has high dividend yields of ~5.0% and is underowned by foreigners (FIIs own 18% against the 20% limit).

Valuations:Valuations:Valuations:Valuations:Valuations: AttractiveAttractiveAttractiveAttractiveAttractive atatatatat 1.0x1.0x1.0x1.0x1.0x bookbookbookbookbookThe stock has high dividend yields of ~5.0% and is underowned by foreigners (FIIs own 18%

ShareShareShareShareShare HoldingHoldingHoldingHoldingHolding PatternPatternPatternPatternPattern (%)(%)(%)(%)(%)

Despite 20% plus RoE and 5% plus dividend yield, the bank trades at significant discount (40- 50%) to its peers, mainly due to technological backwardness and poor perception of its asset quality. In our view, with the change in management, technology initiatives (through CBS rollout), economic development in eastern states and inroads into other locations, the present discount is likely to narrow down in the future. The stock currently trades at 0.9x FY08E book and 2.8x FY08E PPOP. We recommend a BUYBUYBUY,BUYBUY expecting 25% plus return (excluding 5% dividend yield) in the next 12 months.

Promoters

:

55.2

MFs, FIs & Banks

:

7.6

FIIs

:

18.6

Others

:

18.6

EdelweissEdelweissEdelweissEdelweissEdelweiss ResearchResearchResearchResearchResearch isisisisis alsoalsoalsoalsoalso availableavailableavailableavailableavailable ononononon BloombergBloombergBloombergBloombergBloomberg EDELEDELEDELEDELEDEL <GO>,<GO>,<GO>,<GO>,<GO>, ThomsonThomsonThomsonThomsonThomson FirstFirstFirstFirstFirst Call,Call,Call,Call,Call, ReutersReutersReutersReutersReuters andandandandand Factset.Factset.Factset.Factset.Factset.

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

KeyKeyKeyKeyKey RisksRisksRisksRisksRisksUpdateUpdateUpdateUpdateUpdate A s s e t A s s e t A s s e t

AssetAssetAssetAssetAsset qualityqualityquality:qualityquality In the event of an economic slowdown, there is a greater risk of NPA accretion for Allahabad Bank than its peers, given its geographical spread and relatively weaker risk management systems. However, increased technological penetration can alleviate some risk of weak risk management system.

TechnologyTechnologyTechnology:TechnologyTechnology Delay in implementing CBS can restrict the improvement in CASA ratio and fee income.

CompanyCompanyCompanyCompanyCompany DescriptionDescriptionDescriptionDescriptionDescriptioncan restrict the improvement in CASA ratio and fee income. Allahabad Bank is India’s oldest public

Allahabad Bank is India’s oldest public sector bank with a pan-India presence and sixth largest network of over 2,040 branches across India. It has a strong presence in the eastern region with 70% of its branches are in Uttar Pradesh and Eastern India. It commands 7-10% share in the network in Uttar Pradesh and West Bengal.

Its credit book is well diversified with corporate advances forming 45%, retail 20.2%, agricultural loans 17.2%, and other priority loans 21.2%. SME lending (including SSI) forms 17% of the total loan book.

Its market share in advances was at 2.02% and market share in deposits was 2.29% as of March 2006.

Branches

2046

Mcap (INR bn)

37

Our recommendation

BUY

Balance sheet size (INR bn)

691

Ownership

State owned

 

FY06FY06FY06FY06FY06

FY07EFY07EFY07EFY07EFY07E

FY08EFY08EFY08EFY08EFY08E

FY09EFY09EFY09EFY09EFY09E

Net interest income (INR mn) PAT (INR mn) Advances (INR bn) Deposits (INR bn) (%)(%)(%)(%)(%) Fee to assets Opex to assets NIM Net NPA CAR CASA

15,774

17,053

20,360

24,599

7,061

7,622

7,717

9,051

291

396

476

561

485

623

718

861

1.0

0.7

0.6

0.6

2.2

1.7

1.7

1.5

3.3

2.9

2.8

2.9

0.8

0.8

0.8

0.9

13.4

11.7

11.8

11.2

39.3

39.0

39.8

40.0

RoE (%) RoA (%) EPS (INR) Book value (INR) PE (x) PB (x) P/PPOP (x)

29.6

23.0

20.2

20.6

1.5

1.3

1.1

1.1

15.8

17.1

17.3

20.3

68.3

79.8

91.6

105.2

5.2

4.8

4.8

4.1

1.2

1.0

0.9

0.8

3.7

3.4

2.8

2.2

PPOP per share (INR)

22.4

24.4

29.5

37.7

18

4.1 1.2 1.0 0.9 0.8 3.7 3.4 2.8 2.2 PPOP per share (INR) 22.4 24.4 29.5

India Equity Research

|

Banking

 

CCCCCENTURIONENTURIONENTURIONENTURIONENTURION BANKBANKBANKBANKBANK OFOFOFOFOF PPPPPUNJABUNJABUNJABUNJABUNJAB

INRINRINRINRINR 3636363636

BANKBANKBANKBANKBANK OFOFOFOFOF PPPPP UNJABUNJABUNJABUNJABUNJAB INRINRINRINRINR 3636363636
BANKBANKBANKBANKBANK OFOFOFOFOF PPPPP UNJABUNJABUNJABUNJABUNJAB INRINRINRINRINR 3636363636

BUYBUYBUYBUYBUY

InvestmentInvestmentInvestmentInvestmentInvestment RationaleRationaleRationaleRationaleRationale   

   

We expect Centurion Bank to post 48% CAGR in loan growth over the next two years, led by lending to retail and SME segments. We expect growth in retail credit (constituting 69% of the bank’s loan book) to be more broad-based in the future, to include mortgages, personal loans, and credit cards, instead of being concentrated on two wheelers and CVs.

VishalVishalVishalVishalVishal Goyal,Goyal,Goyal,Goyal,Goyal, CFACFACFACFACFA +91-22-2286 4370 vishal.goyal@edelcap.com

Centurion Bank has sustained its margins at the highest level in the industry at 4.7%, with exceptionally higher growth in personal and mortgage loans along with robust growth in SME segment. Going forward we expect margins to remain at 4% plus over FY07-09E.

KunalKunalKunalKunalKunal ShahShahShahShahShah +91-22-4009 4532 kunal.shah@edelcap.com

AjiteshAjiteshAjiteshAjiteshAjitesh NairNairNairNairNair +91-22-4009 4535 ajitesh.nair@edelcap.com

Opex/assets still remain high at Centurion Bank, but this will play out to its advantage as there

is

dramatic scope of improvement and will push up return ratios.

 

Inorganic growth is a part of Centurion Bank’s overall strategy, and we believe, the bank is in

a

good position to pursue the same.

 

The bank with a countrywide network, diversified product portfolio, and advanced technology in place, is the best fit as an acquisition target by a foreign bank.

Valuations:Valuations:Valuations:Valuations:Valuations: StillStillStillStillStill attractiveattractiveattractiveattractiveattractive 

 
 

Reuters

:

CENB.BO

The stock currently trades at 3.5x FY08E book and 27.8x FY08E earnings. We believe that its inorganic growth strategy will have a strong positive impact on its valuations, going forward. The bank deserves a premium valuation for its highly profitable business (reflected in its high RoA), tremendous growth potential (both organic and inorganic), and M&A possibilities. We expect the bank to generate 43% EPS CAGR over FY06-09E and deliver 20% RoE, once the capital ratio stabilizes. We have a BUYBUYBUYBUYBUY recommendation on the stock.

Bloomberg

:

CBOP IN

MarketMarketMarketMarketMarket DataDataDataDataData

52-week range (INR)

:

39 / 19

Share in issue (mn)

:

1,478.2

 

M cap (INR bn/USD mn)

: 53.2 / 1,205.1

KeyKeyKeyKeyKey RisksRisksRisksRisksRisks  Avg. Daily Vol. BSE/NSE (‘000) : 2,066.3

 

Avg. Daily Vol. BSE/NSE (‘000)

:

2,066.3

Deterioration in systemic retail asset quality

   

The bank has over 69% of its assets as retail loans. A system-wide deterioration in the quality of retail assets can impact its profitability due to its heavy dependence on the category.

ShareShareShareShareShare HoldingHoldingHoldingHoldingHolding PatternPatternPatternPatternPattern (%)(%)(%)(%)(%)

Promoters

:

0.0

MFs, FIs & Banks

:

2.4

Deterioration in margins

 

FIIs

:

25.0

 

Others

:

72.6

Higher than expected decline in margins is a risk to our estimate

   

EdelweissEdelweissEdelweissEdelweissEdelweiss ResearchResearchResearchResearchResearch isisisisis alsoalsoalsoalsoalso availableavailableavailableavailableavailable ononononon BloombergBloombergBloombergBloombergBloomberg EDELEDELEDELEDELEDEL <GO>,<GO>,<GO>,<GO>,<GO>, ThomsonThomsonThomsonThomsonThomson FirstFirstFirstFirstFirst Call,Call,Call,Call,Call, ReutersReutersReutersReutersReuters andandandandand Factset.Factset.Factset.Factset.Factset.

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

UpdateUpdateUpdateUpdateUpdate CompanyCompanyCompanyCompanyCompany

CompanyCompanyCompanyCompanyCompany DescriptionDescriptionDescriptionDescriptionDescription

Centurion Bank of Punjab (Centurion Bank) is a growing private sector bank with 249 branches and 402 ATMs across India.

It is one of the leading players in two-wheeler and commercial vehicle (CV) financing. Retail credit is the bank’s mainstay, constituting 69% of its advances.

The bank successfully merged the Bank of Punjab with itself and is producing synergies in the form of expanded reach, product diversification, and availability of low cost deposits. The merged bank has branch network in both northern and southern part of the country.

Recently, Centurion Bank has announced a merger with Kochi-based Lord Krishna Bank which, on approval from RBI, will add 112 branches in South India.

Branches

249

Mcap (INR bn)

53

Our recommendation

BUY

Balance sheet size (INR bn)

166

Ownership

Private

FY06FY06FY06FY06FY06

FY07EFY07EFY07EFY07EFY07E

FY08EFY08EFY08EFY08EFY08E

FY09EFY09EFY09EFY09EFY09E

Net interest income (INR mn) PAT (INR mn) Advances (INR bn) Deposits (INR bn) (%)(%)(%)(%)(%) Fee to assets Opex to assets NIM Net NPA CAR CASA

3,988

5,650

8,458

11,443

878

1,373

2,377

3,279

65

106

155

216

94

144

209

297

3.3

3.0

2.8

2.5

5.2

5.2

4.5

4.2

4.2

4.2

4.3

4.1

1.1

1.1

1.2

1.4

12.1

10.4

10.0

8.4

38.7

33.2

33.7

34.2

RoE (%) RoA (%) EPS (INR) Book value (INR) PE (x) PB (x) P/PPOP (x)

12.9

12.1

14.5

15.9

0.9

1.0

1.2

1.2

0.6

0.9

1.3

1.7

6.5

8.8

10.3

11.3

57.2

40.4

27.8

21.4

5.5

4.1

3.5

3.1

23.3

20.0

13.4

10.3

PPOP per share (INR)

1.5

1.8

2.7

3.5

20

21.4 5.5 4.1 3.5 3.1 23.3 20.0 13.4 10.3 PPOP per share (INR) 1.5 1.8 2.7

India Equity Research

|

Banking

 

FFFFFEDERALEDERALEDERALEDERALEDERAL BBBBBANKANKANKANKANK

INRINRINRINRINR 238238238238238

FFFFF EDERALEDERALEDERALEDERALEDERAL BBBBB ANKANKANKANKANK INRINRINRINRINR 238238238238238
FFFFF EDERALEDERALEDERALEDERALEDERAL BBBBB ANKANKANKANKANK INRINRINRINRINR 238238238238238

BUYBUYBUYBUYBUY

HighlightsHighlightsHighlightsHighlightsHighlights 

 

Breaking away from the image of an old generation private bank, Federal Bank admits it is not in the same league as ICICI Bank, HDFC Bank, and UTI Bank, but is aspiring to be in those ranks. It is looking at 2009 with a lot of confidence and sees itself playing the role of a consolidator.

VishalVishalVishalVishalVishal Goyal,Goyal,Goyal,Goyal,Goyal, CFACFACFACFACFA +91-22-2286 4370 vishal.goyal@edelcap.com

It is looking to expanding its branch network in the north western corridor. It currently has a network of 526 branches, which it plans to extend to 545 by March 2007.The bank is transforming its technology platform from in-house technology to Finacle from Infosys at a rapid pace. Margins are expected to be maintained above 3%. Asset quality is in control with 82% of its NPA book collateralized, which gives it a strong bargaining power for recovery. Hence, recoveries are expected to be strong.

The bank is coming out with a 1:1 rights issue; timing and pricing details of the same are under discussion. The bank is raising capital to meet the capital requirements for its insurance JV with IDBI and Belgo-Dutch bancassurance group Fortis. It is also reviving its subsidiary Fedbank Financial Services to sell its products through this arm.

KunalKunalKunalKunalKunal ShahShahShahShahShah +91-22-4009 4532 kunal.shah@edelcap.com

AjiteshAjiteshAjiteshAjiteshAjitesh NairNairNairNairNair +91-22-4009 4535 ajitesh.nair@edelcap.com

InvestmentInvestmentInvestmentInvestmentInvestment RationaleRationaleRationaleRationaleRationale 

 

SME and retail loans, which constitute a bulk of the bank’s loan book, are likely to continue to lead its growth in future. Loan book is expected to grow at 22% CAGR over next three years through network expansion.

With the implementation of core banking solutions (CBS) in FY07, we expect the bank’s fee income to grow at 11% CAGR over the next two years. Fee business will further receive boost due to its wide geographical presence in Kerala, which is amongst the largest recipients of NRI remittances.

Reuters

:

FED.BO

Bloomberg

:

FB IN

MarketMarketMarketMarketMarket DataDataDataDataData

52-week range (INR)

:

274 / 137

Share in issue (mn)

:

83.6

M cap (INR bn/USD mn)

:

19.9 / 450.6

 

Avg. Daily Vol. BSE/NSE (‘000)

:

409.0

Federal Bank is well-positioned with the NRI segment. NRI deposits account for ~30% of the total deposits which are cheaper than domestic term deposits.

ShareShareShareShareShare HoldingHoldingHoldingHoldingHolding PatternPatternPatternPatternPattern (%)(%)(%)(%)(%)

Valuations:Valuations:Valuations:Valuations:Valuations: AttractiveAttractiveAttractiveAttractiveAttractive  Promoters : 0.0

 

Promoters

:

0.0

 

MFs, FIs & Banks

:

8.8

The bank’s fundamentals are improving, which we believe will lead to a re-rating in valuations.

FIIs

:

37,3

During the past 24 months the stock has underperformed the banking index and broader market by 39% and 52%, respectively.

Others

:

54.0

We believe that the stock is attractively valued at 1.2x FY08E book relative to its 18% plus RoE and M&A possibilities (post 2009). We have a BUYBUYBUYBUYBUY recommendation.

 

EdelweissEdelweissEdelweissEdelweissEdelweiss ResearchResearchResearchResearchResearch isisisisis alsoalsoalsoalsoalso availableavailableavailableavailableavailable ononononon BloombergBloombergBloombergBloombergBloomberg EDELEDELEDELEDELEDEL <GO>,<GO>,<GO>,<GO>,<GO>, ThomsonThomsonThomsonThomsonThomson FirstFirstFirstFirstFirst Call,Call,Call,Call,Call, ReutersReutersReutersReutersReuters andandandandand Factset.Factset.Factset.Factset.Factset.

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

KeyKeyKeyKeyKey RisksRisksRisksRisksRisksUpdateUpdateUpdateUpdateUpdate The bank’s high dependence on the NRI segment (30% of its

The bank’s high dependence on the NRI segment (30% of its deposits come from NRI segment) exposes it to regulatory risks.

Geographical concentration in the South exposes it to the regional risk.

Execution risk of its transition to the CBS platform.

CompanyCompanyCompanyCompanyCompany DescriptionDescriptionDescriptionDescriptionDescriptionrisk. Execution risk of its transition to the CBS platform. Federal Bank is an old private

Federal Bank is an old private sector bank based in Kerala. It has an asset base of over INR 200 bn, network of over 524 branches (80% branches in Kerala), and 368 ATMs.

SME and retail lending are the bank’s focus areas and constitute 34% and 30%, respectively, of its loan book.

The bank’s recent merger with Ganesh Bank has added 32 branches to its existing network, increasing its foothold in western India.

IFC Washington has ~8% equity holding in Federal Bank.

Branches

534

Mcap (INR bn)

20

Our recommendation

BUY

Balance sheet size (INR bn)

226

Ownership

Private

FY06FY06FY06FY06FY06

FY07EFY07EFY07EFY07EFY07E

FY08EFY08EFY08EFY08EFY08E

FY09EFY09EFY09EFY09EFY09E

Net interest income (INR mn) PAT (INR mn) Advances (INR bn) Deposits (INR bn) (%)(%)(%)(%)(%) Fee to assets Opex to assets NIM Net NPA CAR CASA

5,998

6,909

7,955

9,085

2,225

2,575

2,972

3,423

117

150

180

213

179

199

235

277

1.1

0.9

0.8

0.8

1.8

1.9

1.7

1.7

3.3

3.3

3.3

3.2

1.0

0.6

0.4

0.4

13.8

12.0

11.1

10.9

25.0

27.0

27.3

27.6

RoE (%) RoA (%) EPS (INR) Book value (INR) PE (x) PB (x) P/PPOP (x)

22.6

19.0

18.6

18.2

1.2

1.2

1.2

1.2

26.0

30.1

34.7

40.0

145.2

171.4

201.7

236.8

9.2

7.9

6.9

6.0

1.6

1.4

1.2

1.0

4.4

4.2

3.6

3.1

PPOP per share (INR)

54.6

56.3

66.4

76.4

22

6.0 1.6 1.4 1.2 1.0 4.4 4.2 3.6 3.1 PPOP per share (INR) 54.6 56.3 66.4

India Equity Research

|

BFSI

 

HHHHHOUSINGOUSINGOUSINGOUSINGOUSING DDDDDEVELOPMENTEVELOPMENTEVELOPMENTEVELOPMENTEVELOPMENT FFFFFINANCEINANCEINANCEINANCEINANCE CCCCCORPORPORPORPORP

INRINRINRINRINR 1,7591,7591,7591,7591,759

FFFFF INANCEINANCEINANCEINANCEINANCE CCCCC ORPORPORPORPORP INRINRINRINRINR 1,7591,7591,7591,7591,759
FFFFF INANCEINANCEINANCEINANCEINANCE CCCCC ORPORPORPORPORP INRINRINRINRINR 1,7591,7591,7591,7591,759
 

ACCUMULATEACCUMULATEACCUMULATEACCUMULATEACCUMULATE

InvestmentInvestmentInvestmentInvestmentInvestment RationaleRationaleRationaleRationaleRationale   

   

HDFC is the strongest and most venerable play on Indian mortgages over the long term. We expect HDFC, with its strong brand recall, superior real estate knowledge, and revamped distribution strategy, to attain 22% CAGR in loan disbursement over FY06-09E. Consequently, we expect HDFC to deliver 24% and 19% CAGR in loan book and earnings, respectively.

VishalVishalVishalVishalVishal Goyal,Goyal,Goyal,Goyal,Goyal, CFACFACFACFACFA +91-22-2286 4370 vishal.goyal@edelcap.com

HDFC has differentiated itself from its peers with its diversified network and revamped distribution strategy. Of the total individual loans disbursed during FY06, 65% (38% in FY05) were routed through third party channels viz., HDFC Bank, DSAs, and distribution subsidiaries.

KunalKunalKunalKunalKunal ShahShahShahShahShah +91-22-4009 4532 kunal.shah@edelcap.com

AjiteshAjiteshAjiteshAjiteshAjitesh NairNairNairNairNair +91-22-4009 4535 ajitesh.nair@edelcap.com

HDFC has been highly proactive in passing on the cost and benefit to customers. With strong pricing power in the housing finance space, we believe HDFC will be able to pass on any increased funding cost to customers. Net effect, according to us, will be a very modest contraction in spreads of 7-10bps over FY06-08E.

Besides the core business, HDFC’s insurance, AMC, banking, BPO, and real estate private equity businesses are also growing at a rapid pace and the estimated value of its investments/ subsidiaries explains ~25% of HDFC’s market capitalisation. Value of stakes in HDFC Bank and HDFC Standard Life forms a significant portion of its unrealised gains. Unrealised gains on its investments amount to INR 470 per share of HDFC Ltd.

Reuters

:

HDFC.BO

Valuations:Valuations:Valuations:Valuations:Valuations: FairFairFairFairFair  Bloomberg : HDFC IN

 

Bloomberg

:

HDFC IN

Stripping off the value in investments, HDFC’s mortgage business is currently valued at 3.6x FY08E book and 18.1x FY08E earnings. We are impressed by its strong brand equity, talented management team, relentless commitment to a now proven “profitable growth” strategy, revenue diversification and related growth prospects, and unbeatable record of asset quality. We believe HDFC to be the best play available on Indian mortgage finance. However due to recent sharp appreciation we expect limited returns and have an ‘ACCUMULATE’‘ACCUMULATE’‘ACCUMULATE’‘ACCUMULATE’‘ACCUMULATE’ recom- mendation on the stock.

MarketMarketMarketMarketMarket DataDataDataDataData

52-week range (INR)

:

1,822 / 962

Share in issue (mn)

:

250.1

M cap (INR bn/USD mn)

: 439.8/9,946.6

Avg. Daily Vol. BSE/NSE (‘000)

:

652.2

ShareShareShareShareShare HoldingHoldingHoldingHoldingHolding PatternPatternPatternPatternPattern (%)(%)(%)(%)(%)

KeyKeyKeyKeyKey risksrisksrisksrisksrisksPromoters : 0.0

Promoters

:

0.0

Loss of market share to commercial banks and HFC’s

 

MFs, FIs & Banks

:

6.1

 

FIIs

:

79.8

Higher than expected increase in funding cost

 

Others

:

14.1

Risk of fraud and NPA accretion due to increase in interest rates and fall in property prices is inherent to the mortgage business

 

EdelweissEdelweissEdelweissEdelweissEdelweiss ResearchResearchResearchResearchResearch isisisisis alsoalsoalsoalsoalso availableavailableavailableavailableavailable ononononon BloombergBloombergBloombergBloombergBloomberg EDELEDELEDELEDELEDEL <GO>,<GO>,<GO>,<GO>,<GO>, ThomsonThomsonThomsonThomsonThomson FirstFirstFirstFirstFirst Call,Call,Call,Call,Call, ReutersReutersReutersReutersReuters andandandandand Factset.Factset.Factset.Factset.Factset.

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

UpdateUpdateUpdateUpdateUpdate CompanyCompanyCompanyCompanyCompany

CompanyCompanyCompanyCompanyCompany DescriptionDescriptionDescriptionDescriptionDescription

Housing Development Finance Corporation Ltd. (HDFC) is India’s largest provider of housing finance, primarily focusing on retail housing. Cumulative loan approvals and disbursements as at March 2006 were INR 1,124 bn and INR 931 bn, respectively. This is with respect to over 2.8 mn housing units.

HDFC has widened its distribution network to 219 offices in India. It also covers over 90 locations through its outreach programme, which has helped the corporation disburse housing loans in more than 2,400 towns and cities in India. It has also supplemented the distribution channel through the appointment of direct selling agents (DSA).

Currently, 79% of the shares are held by foreign institutional investors/foreign direct investments and 12% by individuals.

Besides the core business of mortgages, HDFC has evolved into a financial conglomerate diversifying into other businesses through its subsidiaries viz., HDFC Standard Life Insurance (78.38%), HDFC Asset Management Company (50.1%), HDFC Bank (21.94%), Intelenet Global (BPO) (50%), and HDFC Chubb General Insurance Company (74%).

Branches

219

Mcap (INR bn)

439

Our recommendation

ACCUMULATE

Balance sheet size (INR bn)

644

Ownership

Private

FY06FY06FY06FY06FY06

FY07EFY07EFY07EFY07EFY07E

FY08EFY08EFY08EFY08EFY08E

FY09EFY09EFY09EFY09EFY09E

Net interest income (INR mn) PAT (INR mn) Advances (INR bn) Deposits (INR bn) (%)(%)(%)(%)(%) Fee to assets Opex to assets NIM Net NPA CAR CASA

12,155

15,045

19,626

23,596

12,572

14,561

17,860

20,889

450

578

721

885

87

105

135

165

0.1

0.1

0.1

0.1

0.5

0.4

0.4

0.4

2.7

2.6

2.7

2.7

-

-

-

-

15.0

13.3

13.2

13.1

NA

NA

NA

NA

RoE (%) RoA (%) EPS (INR) Book value (INR) PE (x) PB (x)

30.1

28.0

24.1

19.9

2.8

2.5

2.5

2.4

50.4

58.3

69.2

78.4

179.0

238.1

344.2

455.2

34.9

30.1

25.4

22.4

9.8

7.4

5.1

3.9

24

58.3 69.2 78.4 179.0 238.1 344.2 455.2 34.9 30.1 25.4 22.4 9.8 7.4 5.1 3.9 24

India Equity Research

|

Banking

 

IDBIIDBIIDBIIDBIIDBI

INRINRINRINRINR 8787878787

I D B I I D B I I D B I I D B I
I D B I I D B I I D B I I D B I

NOTNOTNOTNOTNOT RATEDRATEDRATEDRATEDRATED

HighlightsHighlightsHighlightsHighlightsHighlights 

 

The bank emphasized that turnaround is in the offing due to recovery from written off ac- counts, unlocking of value from its investment book and disinvestment of non-productive assets. Unrealized gains on its equity book are ~INR 15 bn. The bank expects to reverse around INR 15 bn of SSF. It is aiming to grow its balance sheet size at 20% and low cost deposits (which remains a focus) at a similar rate. On a two-three year’s horizon, consolidation remains a good probability. The bank also expects huge recoveries from United Western Bank’s (UWB) written off accounts.

InvestmentInvestmentInvestmentInvestmentInvestment RationaleRationaleRationaleRationaleRationaleremains a good probability. The bank also expects huge recoveries from United Western Bank’s (UWB) written

VishalVishalVishalVishalVishal Goyal,Goyal,Goyal,Goyal,Goyal, CFACFACFACFACFA +91-22-2286 4370 vishal.goyal@edelcap.com

KunalKunalKunalKunalKunal ShahShahShahShahShah +91-22-4009 4532 kunal.shah@edelcap.com

AjiteshAjiteshAjiteshAjiteshAjitesh NairNairNairNairNair +91-22-4009 4535 ajitesh.nair@edelcap.com

Cleaning up relatively greater portion of its balance sheet, the bank is now thriving on quality balance sheet growth to drive profitability and return ratios. The bank has identified following key growth strategies going forward: stepping up credit to SME, agriculture, and retail segments; garnering higher low cost deposits; augmenting fee-based income; and aggressively improving asset quality through effective recoveries and restricting delinquencies.

UWB acquisition is expected to be positive for IDBI as it more than doubles its branch network and gives it much needed access to low cost deposits thus lowering its funding cost and increasing its margins.

Reuters

:

IDBI.BO

The bank has fairly large investment book where it has un-booked gains on the equity portfolio. Of these, stake in NSE, NSDL and Stock Holding Corporation are large and the bank is sitting on substantial un-booked gains. However uncertainty remains over the value unlocking.

Bloomberg

:

IDBI IN

MarketMarketMarketMarketMarket DataDataDataDataData

Going forward, with adequate capital in place, strong growth in fee income, increased reach tight credit monitoring measures, the return ratios are expected to improve from these levels. The bank is currently trading at 1.7x FY06 book.

52-week range (INR)

:

110 / 49

Share in issue (mn)

:

724.1

M cap (INR bn/USD mn)

: 62.8 / 1,419.7

 

Avg. Daily Vol. BSE/NSE (‘000)

:

4,485.3

KeyKeyKeyKeyKey RisksRisksRisksRisksRisks 

 

Increased delinquencies and non-recovery from written off accounts may impact its profitability.

ShareShareShareShareShare HoldingHoldingHoldingHoldingHolding PatternPatternPatternPatternPattern (%)(%)(%)(%)(%)

Promoters

:

52.7

 

MFs, FIs & Banks

:

17.1

Legacy borrowings may continue to weigh down on its margins and the profitability.

FIIs

:

12.9

CompanyCompanyCompanyCompanyCompany DescriptionDescriptionDescriptionDescriptionDescription

 

Others

:

17.3

IDBI was established in 1964 as a wholly owned subsidiary of RBI to catalyze the development of the nation. In 1976 the 100% of ownership was transferred from RBI to Government of India. Due to high NPA and cost of funds the government restructured the institution into a bank. In 2005 IDBI merged its banking subsidiary IDBI bank with itself.

 

EdelweissEdelweissEdelweissEdelweissEdelweiss ResearchResearchResearchResearchResearch isisisisis alsoalsoalsoalsoalso availableavailableavailableavailableavailable ononononon BloombergBloombergBloombergBloombergBloomberg EDELEDELEDELEDELEDEL <GO>,<GO>,<GO>,<GO>,<GO>, ThomsonThomsonThomsonThomsonThomson FirstFirstFirstFirstFirst Call,Call,Call,Call,Call, ReutersReutersReutersReutersReuters andandandandand Factset.Factset.Factset.Factset.Factset.

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

UpdateUpdateUpdateUpdateUpdate Since its transformation into commercial bank, it is

Since its transformation into commercial bank, it is diversifying beyond project finance and currently has 176 branches and 382 ATM’s spread across 101 cities. It has an asset size of INR 885 bn which makes it the fifth largest bank in the country. Government of India holds 52.5 % of the equity.

The bank has recently acquired United western bank which expands its branch network to 430 from

176.

SubsidiarySubsidiarySubsidiarySubsidiarySubsidiary

%%%%% HoldingHoldingHoldingHoldingHolding

IDBI Capital IDBI Housing finance Western India Arcil CARE CCIL IDFC IFCI NSDL NSE SHCL SIDBI STCI

 

100.0

100.0

82.0

20.0

26.0

6.5

3.2

6.0

13.0

7.0

17.0

19.2

7.2

Branches

430

Mcap (INR bn)

63

Our recommendation

NOT RATED

Balance sheet size (INR bn)

886

Ownership

State owned

FY03FY03FY03FY03FY03

FY04FY04FY04FY04FY04

FY05FY05FY05FY05FY05

FY06FY06FY06FY06FY06

Net interest income (INR mn) PAT (INR mn) Advances (INR bn) Deposits (INR bn) (%)(%)(%)(%)(%) Fee to assets Opex to assets NIM Net NPA CAR CASA

3,354

(2,373)

1,879

3,799

4,014

4,650

2,990

5,204

462

329

454

527

43

39

151

260

0.3

0.4

0.4

0.7

0.7

1.0

0.7

1.1

0.6

(0.4)

0.3

0.5

15.9

2.7

1.9

1.1

18.7

18.2

15.5

14.8

0.0

0.0

38.3

29.5

RoE (%) RoA (%) EPS (INR) Book value (INR) PE (x) PB (x) P/PPOP (x)

5.9

7.3

5.1

8.5

0.7

0.8

0.4

0.7

6.1

7.1

8.3

7.2

106.9

89.4

82.1

88.0

23.9

20.7

17.8

20.5

1.4

1.6

1.8

1.7

88.6

(16.8)

2,431.0

116.9

PPOP per share (INR)

1.7

(8.8)

0.1

1.3

26

1.4 1.6 1.8 1.7 88.6 (16.8) 2,431.0 116.9 PPOP per share (INR) 1.7 (8.8) 0.1 1.3

India Equity Research

|

Banking

 

IIIIINDIANNDIANNDIANNDIANNDIAN OOOOOVERSEASVERSEASVERSEASVERSEASVERSEAS BBBBBANKANKANKANKANK

INRINRINRINRINR 113113113113113

OOOOO VERSEASVERSEASVERSEASVERSEASVERSEAS BBBBB ANKANKANKANKANK INRINRINRINRINR 113113113113113
OOOOO VERSEASVERSEASVERSEASVERSEASVERSEAS BBBBB ANKANKANKANKANK INRINRINRINRINR 113113113113113

BUYBUYBUYBUYBUY

HighlightsHighlightsHighlightsHighlightsHighlights 

 

IOB has outperformed the system in credit growth. However, going forward, it will consciously slow down its loan growth in line with the system average.

The bank is expected to leverage on its 100% investment in Bharat Overseas Bank and 35% stake in each of the profitable three regional rural banks (RRBs) viz., Pandyan Grama Bank, Puri Gramya Bank, and Dhenkanal Gramya Bank. Pandyan Grama Bank has been adjudged the best performing RRB among 196 RRBs in India.

Despite robust credit growth, Tier-1 capital is still strong at almost 9% and there is enough headroom to raise further Upper Tier-2 capital as and when required.

VishalVishalVishalVishalVishal Goyal,Goyal,Goyal,Goyal,Goyal, CFACFACFACFACFA +91-22-2286 4370 vishal.goyal@edelcap.com

KunalKunalKunalKunalKunal ShahShahShahShahShah +91-22-4009 4532 kunal.shah@edelcap.com

AjiteshAjiteshAjiteshAjiteshAjitesh NairNairNairNairNair +91-22-4009 4535 ajitesh.nair@edelcap.com

IOB expects to maintain a low cost-income ration in the future as well. Earnings growth going forward will be driven by strong loan growth, strong fee income, and reduced provisioning levels.

The bank expects return on assets to reach 1.5% (from 1.38% in FY06) in FY07.

 

InvestmentInvestmentInvestmentInvestmentInvestment RationaleRationaleRationaleRationaleRationaleIOB has one of the highest interest margins on account of high yielding loan book

IOB has one of the highest interest margins on account of high yielding loan book (retail, SME, agri) and high CASA ratio of 36%. Considering the higher funding and aggressive asset growth in Q3FY07 we expect NIMs to contract 15-25bps over FY07-09E.

Reuters

:

IOBK.BO

Bloomberg

:

IOB IN

Loan book at IOB continued to grow at above system growth at 39% in Q3FY07.

 

MarketMarketMarketMarketMarket DataDataDataDataData

The bank has generated average 30% RoE during the past four years (FY03-06), enabled by its high interest margins and efficient capital management. Going forward, we expect RoE to remain robust at 23% plus over FY07-09E.

52-week range (INR)

:

129 / 66

Share in issue (mn)

:

544.8

M cap (INR bn/USD mn)

: 61.6 / 1,392.2

 

Avg. Daily Vol. BSE/NSE (‘000)

:

636.3

Acquisition of Bharat Overseas Bank (BhOB) will strengthen IOB’s trade finance and NRI remittance business. IOB has proposed to merge this bank with itself, which will add 102 branches to its network.

ShareShareShareShareShare HoldingHoldingHoldingHoldingHolding PatternPatternPatternPatternPattern (%)(%)(%)(%)(%)

Promoters

:

61.2

We like the bank for its high return on assets (of 1.3% plus) and high RoE (25%).

 

MFs, FIs & Banks

:

5.1

 

FIIs

:

18.2

Valuations:Valuations:Valuations:Valuations:Valuations: AttractiveAttractiveAttractiveAttractiveAttractive forforforforfor ~23%~23%~23%~23%~23% RoERoERoERoERoE  Others : 15.5

 

Others

:

15.5

The stock currently trades at 1.4x FY08E book, 3.1x FY08E PPOP, and 6.2x FY08E earnings. We like the bank for its high RoE on high capitalization (given its high RoA). We expect the bank to generate 23-26% RoE and 13.4% EPS CAGR over FY07-09E. IOB is our top pick and we have a ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’ recommendation.

 

EdelweissEdelweissEdelweissEdelweissEdelweiss ResearchResearchResearchResearchResearch isisisisis alsoalsoalsoalsoalso availableavailableavailableavailableavailable ononononon BloombergBloombergBloombergBloombergBloomberg EDELEDELEDELEDELEDEL <GO>,<GO>,<GO>,<GO>,<GO>, ThomsonThomsonThomsonThomsonThomson FirstFirstFirstFirstFirst Call,Call,Call,Call,Call, ReutersReutersReutersReutersReuters andandandandand Factset.Factset.Factset.Factset.Factset.

FinancialFinancialFinancialFinancialFinancial ServicesServicesServicesServicesServices ConferenceConferenceConferenceConferenceConference UpdateUpdateUpdateUpdateUpdate

KeyKeyKeyKeyKey RisksRisksRisksRisksRisksUpdateUpdateUpdateUpdateUpdate Aggressive credit growth may lead to higher than estimated

Aggressive credit growth may lead to higher than estimated NPA.

More than expected compression in net interest margin.

CompanyCompanyCompanyCompanyCompany DescriptionDescriptionDescriptionDescriptionDescriptionNPA. More than expected compression in net interest margin. IOB is a mid-sized PSU bank with

IOB is a mid-sized PSU bank with balance sheet size of INR 600 bn. It has 1,522 domestic branches and over 300 ATMs and currently, 389 branches are under core banking.

It is dominantly present in four southern states of Tamil Nadu, Kerala, Andhra Pradesh, and Karnataka. The bank has six overseas branches and aims to grow its share in trade finance and remittance market through Bharat Overseas Bank (its wholly owned subsidiary).

The bank’s focus traditionally has been on SME lending, which forms 14% of total credit, which explains its high margins.

Government holding is at 61% and foreign holding at maximum permissible 20%.

Branches

1526

Mcap (INR bn)

62

Our recommendation

BUY

Balance sheet size (INR bn)

757

Ownership

State owned

FY06FY06FY06FY06FY06

FY07EFY07EFY07EFY07EFY07E

FY08EFY08EFY08EFY08EFY08E

FY09EFY09EFY09EFY09EFY09E

Net interest income (INR mn) PAT (INR mn) Advances (INR bn) Deposits (INR bn) (%)(%)(%)(%)(%) Fee to assets Opex to assets NIM Net NPA CAR CASA

20,672

23,934

28,075

32,184

7,831

8,995

9,924

11,569

348

455

546

645

505

610

720

850

0.8

0.9

0.9

0.8

2.4

2.1

1.9

1.8

3.9

3.7

3.6

3.5

0.6

0.7

0.6

0.9

13.0

10.4

11.0

11.2

39.9

36.4

36.4

36.4

RoE (%) RoA (%) EPS (INR) Book value (INR) PE (x) PB (x) P/PPOP (x)

28.5

26.3

23.9

23.2

1.5

1.4

1.3

1.3

14.4

16.5

18.2

21.2

56.1

69.3

83.1

99.9

7.9

6.8

6.2

5.3

2.0

1.6

1.4

1.1

4.9

3.8

3.1

2.7

PPOP per share (INR)

23.1

29.9

36.0

42.5

28

5.3 2.0 1.6 1.4 1.1 4.9 3.8 3.1 2.7 PPOP per share (INR) 23.1 29.9 36.0

India Equity Research

|

BFSI

 

LICLICLICLICLIC HHHHHOUSINGOUSINGOUSINGOUSINGOUSING FFFFFINANCEINANCEINANCEINANCEINANCE

INRINRINRINRINR 160160160160160

LICLICLICLICLIC HHHHH OUSINGOUSINGOUSINGOUSINGOUSING FFFFF INANCEINANCEINANCEINANCEINANCE INRINRINRINRINR 160160160160160
LICLICLICLICLIC HHHHH OUSINGOUSINGOUSINGOUSINGOUSING FFFFF INANCEINANCEINANCEINANCEINANCE INRINRINRINRINR 160160160160160

BUYBUYBUYBUYBUY

InvestmentInvestmentInvestmentInvestmentInvestment RationaleRationaleRationaleRationaleRationale   

   

Due to