Vysbank 20121003

Prabhudas Lilladher
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Sector: Financials
October 2012
India Financials
Benchmarking mid-sized private banks; Finding the next winner
Adarsh Parasrampuria adarshparasrampuria@plindia.com +91-22-6632 2236 Parul Gulati parulgulati@plindia.com +91-22-6632 2242
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report.
Prabhudas Lilladher Contents

Bench marking and finding the next winner Investment summary Bench marking scorecard Benchmarking SWOT Valuations and PT Page No. 3 4 7 9 10
Benchmarking old generation private banks (+75 parameters) Liability Franchise J&K best, FB/SIB weak Network expansion All slow expect for Federal Loan growth Slowdown lower than larger peers Branch efficiency Significant catch up needed especially ING Cost Efficiency - Highest potential for improvement in ING Margins and Spreads Mixed bag Fee income Weak expect for ING Asset quality Safe haven especially SIB, Federal the only exception Exposure to stressed sectors Infra lowest for ING Capital and Leverage - All well placed on capital, Federal under-leveraged Priority sector New worry for SIB Benchmarking snapshot
Companies J&K Bank Good bank at great valuations - BUY ING Vysya - Set for significant efficiency improvement - BUY Federal Bank - Improving asset quality franchise - BUY South Indian Bank - Too dependent on stable asset quality - ACCUMULATE
(Prices as on October 3, 2012)
14 17 18 19 21 24 26 28 30 31 32 33
38 52 67 82
October 03, 2012
Prabhudas Lilladher Mid Cap private banks Finding the next Winner
Large number of private banks have succeeded in creating value /setting benchmarks. Competition is only increasing but some mid-cap banks have had management changes and others have reoriented their business models. We benchmark four mid-cap banks, ING Vysya (ING), Federal (FB), South Indian (SIB) and J&K (J&K) v/s larger private/PSU peers on +75 metrics to ascertain relative strengths/weakness and arrive at the next winner. We initiate coverage with a BUY on J&K (+24% upside), ING (+17% upside) and FB (+17% upside) and ACCUMULATE on SIB (~5% upside).
Benchmarking: Scoring on many metrics: Surprisingly, Mid-cap banks compare well v/s peers on capital (Tier-1 levels), overall return ratios and more importantly asset quality comfort, especially from Infra risks. Liability franchise is a mixed bag with J&K/ING faring well but SIB lagging behind. Fee income is a common worry (excl. ING) and so is branch efficiency, though efficiency metrics is on a improving trajectory , but still is significantly sub-optimal v/s larger private peers.
J&K best pick; SIB least preferred: J&K (BUY, ~24% upside) enjoys an inherent state CASA advantage and though competition is picking up in J&K, our feedback suggests that it will not be disruptive. J&K Bank is most detached from the current economic slowdown and best positioned to benefit from a booming and under-penetrated J&K state. Valuations is extremely appealing at 0.85x FY14 book, with +20% ROEs and limited asset quality risk. SIB (ACCUMLATE, ~5% upside) also enjoys strong asset quality + robust ROEs. However, with the weakest operating metrics, including liability/NIM/Core fees/branch efficiency, we believe re-rating in case of SIB will be limited.
Positive on ING and FB: ING (BUY, ~17% upside) and FB (BUY, ~17% upside) both lag on ROEs. However, we believe, issues constraining ROEs will get addressed over the next two years. INGs ~59% cost/income has been a ROA constraint and we believe, management strategy of calibrated branch expansion will aid in bringing C/I lower without impacting growth as ING is the most urban-centric bank with characteristic similar to large banks and hence, branch efficiency catch-up will be significant. FBs legacy asset quality issues have been addressed by the new management and as the legacy book rolls down, credit costs will settle at ~50% lower levels v/s FY09-11 and gradual leveraging up will drive ROE improvement.
Valuation gap v/s larger private banks will never get bridged but provides significant comfort: Current valuations at 0.8-1.2x for old generation private banks is extremely reasonable, considering limited asset quality issues, especially Infra and improving profitability, though gap in many metrics will never let valuations converge with larger peers. With the ~15-20% move in Financials over last two months, we believe a basket of small private banks provide potential for strong upside +20-25% and also offer downside protection as growth slowdown will be lower + Infra risks is limited.
October 03, 2012
Prabhudas Lilladher Investment Summary

J&K Bank - Good bank at great valuations (PT of Rs1,250/share, ~24% upside)
Strong liability franchise, with improved focus on growth: J&K enjoys a very strong liability franchise due to its state advantage and managements intended growth acceleration (after five years of consolidation) coincides with a phase of strong economic growth and activity in J&K. With +60% market share in advances and deposits, we believe J&K Bank is best positioned to benefit from strong growth in J&K state.
Competition will not be disruptive: High CASA + Low operating costs make J&K an attractive expansion opportunity for private banks. However, our feedback from large private banks suggest that competition will not be disruptive.
More private than PSU bank; Mid-cap PSU valuations unwarranted: Low fees and CA ratio are the only commons (PSUs) , apart from which J&K Bank is more of a private bank on most parameters like high CASA and margins, sound underwriting and high ROAs/RORWAs. Management continuity, which is a big issue with PSUs, is also absent in J&K Bank, with ~5-6 years of average tenure for the Chairman. Valuations extremely undemanding: J&K valuations at 0.85x FY14 book is extremely reasonable relative to ROEs of +20% and with limited commonality with PSUs and low Infra risk, we believe market should not peg J&Ks valuations with mid-cap PSUs. We base our Sep-13 PT of Rs1250/share on a modest 1.05x FY14 book with possible upsides.
ING Vysya - Set for significant branch efficiency improvement (PT of Rs480/share, ~17% upside)
Regional bank with most urban characteristics: ~65% of ING's branches are in Urban/Metro centers and ING also benchmarks favorably on parameters like CA ratio, fee-to-assets v/s private peers, where regional private banks have struggled. We, thus, believe that right branch efficiency benchmarks for ING is larger private peers rather than regional banks, indicating significant catch-up potential. Robust asset quality with negligible Infra risks: ING's expertise in SME lending, low-risk retail book, low exposure to sensitive sectors and most importantly negligible Infra exposure will keep credit costs under check though we conservatively factor in credit costs to inch up. Addressing cost concerns: ING's high Urban-Metro branch mix still has significant scope for efficiency improvement and this, coupled with a calibrated branch expansion strategy, will aid in bringing down cost to income without compromising on growth. Valuation reasonable, BUY with a PT of Rs480/share: Profitability improvement will continue as management drives growth from better branch efficiency. Valuations at 1.2x FY14 book is reasonable, considering improving ROEs + no Infra risks.
October 03, 2012 4
Prabhudas Lilladher Investment Summary

Federal Bank - Improving asset quality franchise (PT of Rs525/share, ~17% upside)
Credit system overhaul done; positives to follow: The new management over the last two years has (1) centralized credit appraisal (2) consolidated FB's high delinquency mortgage book and (3) improved quality of underwriting in large/mid corporate and these initiatives will bring down slippages to <2% as the legacy corporate book runs off.
Aggressive network expansion; some near-term cost implications: After overhauling their credit systems, FB is on a branch network expansion drive, especially in credit heavy states. Hence, there will be some inch-up in cost ratio, which, we believe, will be manageable.
Lower credit costs to drive return ratios: With the asset quality initiatives, credit costs will come off to ~90bps from ~170bps in FY08-11. With margins to remain flat and cost expected to inch up in the near term, lower credit costs will help in maintaining ROAs at 1.3-1.4% range. Also, with the leveraging up process, ROEs will touch ~16% by FY14-15 after being stuck in a narrow band of 12-14% over the last 4-5 years. Valuations reasonable; BUY with a PT of Rs525/share: Lower normalized credit costs will drive re-rating for FB in the medium term as it is the only constraint for FB to deliver on return ratios. Improving asset quality will likely be the stock catalysts.
South Indian Bank - Too dependent on stable asset quality (PT of Rs25/share, ~5% upside)
Best-in-class asset quality drives return ratios: Highest share of secured loans, high proportion of gold loans and conservative underwriting has led to best in class asset quality. Conservative corporate underwriting and low risk Infra exposure will keep asset quality under check. Gold loans - Large book - Risks Limited: Proportion of gold loans is highest for SIB and our feedback suggest that RBI is relatively comfortable with gold lending by banks limiting regulatory risks. Risk weight calculation for gold loans could be increased but impact will be low for SIB, given high Tier-1. All other metrics deteriorating; risks to profitability remain: The good story ends with asset quality with (1) one of the lowest fee/assets and (2) lowest CASA ratio which is also steadily coming off, making ROA delivery always contingent on low credit costs. Large miss on PSL lending in FY12 exposes another structural negative which could impact profitability. Initiate with an ACCUMULATE with a PT of Rs25/share: SIB enjoys one of the best asset quality franchise. However, with deterioration in all other metrics and increasing risk from higher RIDF call, we rate SIB an Accumulate, with Sep-13 PT of Rs25/share implying 1x FY14 book.
October 03, 2012 5
Prabhudas Lilladher Valuations reasonable with high/improving ROEs

P/B Rating New generation private banks Axis HDFCB ICICI Kotak IndusInd Yes Old generation private banks Federal ING J&K SIB PSU banks PNB BOI BOB SBI NBFCs HDFC IDFC LIC housing Shriram MMFS BUY Accumulate BUY Reduce BUY BUY BUY BUY BUY Accumulate Accumulate Accumulate BUY Accumulate BUY BUY BUY Accumulate BUY PT 1,350 610 1,100 530 400 450 525 480 1,250 25 850 335 850 2,100 800 145 300 575 860 Upside 21% -2% 4% -17% 8% 12% 17% 17% 24% 6% 3% 10% 9% -9% 3% -10% 9% -9% -4% FY13 1.76 4.19 1.94 3.10 3.24 2.48 1.20 1.41 1.02 1.10 0.99 0.88 1.07 1.32 4.13 1.79 2.15 2.00 2.57 FY14 1.50 3.56 1.73 2.73 2.72 2.02 1.07 1.24 0.87 0.95 0.85 0.77 0.92 1.15 3.56 1.60 1.83 1.70 2.17 FY13 9.8 22.0 13.1 23.5 17.3 12.0 9.3 11.3 5.2 6.8 5.4 5.2 6.4 7.8 17.2 13.1 11.8 10.5 12.4 P/E FY14 8.3 18.5 11.3 19.1 14.0 9.6 7.7 8.9 4.7 5.6 4.7 4.4 5.5 6.9 14.7 11.3 9.2 9.4 10.3 FY13 19.5% 20.3% 12.4% 13.9% 20.3% 22.7% 13.7% 13.4% 21.0% 18.9% 18.2% 16.0% 17.7% 16.6% 22.4% 14.3% 19.2% 20.7% 22.7% ROE FY14 19.4% 20.6% 13.2% 15.1% 21.2% 23.1% 14.9% 15.0% 20.0% 18.3% 18.1% 16.5% 17.8% 16.3% 21.5% 14.9% 20.9% 19.5% 22.9% EPS Growth FY13 FY14 10.6% 27.6% 21.5% 15.1% 24.7% 20.8% 6.2% 20.2% 16.7% -2.9% 6.0% 26.4% 0.3% 22.7% 15.7% 20.0% 29.2% 8.5% 19.9% 17.5% 19.0% 15.9% 23.2% 23.6% 24.3% 20.9% 26.7% 10.9% 21.5% 15.8% 18.0% 17.1% 12.1% 17.2% 16.5% 27.7% 11.5% 21.0%
October 03, 2012
Prabhudas Lilladher Benchmarking Scorecard: Scoring on many metrics

Category Metrics CA and SA Ratios (%) CA and SA per branch CA and SA Growth Bulk Dep/Borrowing dependence 1st Quartile HDFCB SBI J&K Bank Axis Axis Kotak HDFCB Yes Bank Axis Bank HDFCB ICICI HDFCB Kotak IndusInd J&K Bank IIB HDFCB Axis ICICI 2nd Quartile ICICI PNB ING Vysya Kotak 3rd Quartile IIB BOB BOI Federal bank 4th Quartile
Liability Franchise
Yes Bank South Indian
Network Expansion and Spread
Branch Growth (%) Branch v/s B/S growth Urban-Rural Mix ATM/Branch Business and Deposits per branch CASA per branch Branch efficiency v/s Urban-Rural Mix Employees/branch v/s Asset Mix
IIB ICICI Federal Bank
South Indian SBI PNB J&K Bank SBI PNB BOB BOI ING Federal PNB
BOI BOB ING Vysya J&K Bank Federal South Indian ING Vysya Yes Bank BOB BOI South Indian BOI BOB South Indian J&K Bank
Branch Efficiency
Kotak IIB Yes Bank
Yields and Margins
Risk/Leverage adjusted margins Cost of funds advantage Yields on assets advantage Fees to Assets Core fee growth Fee to expenses Non-fund based book
SBI Axis ICICI
Fee income franchise
ING Vysya Kotak Yes Bank
SBI Federal Bank PNB
October 03, 2012
Prabhudas Lilladher Benchmarking Scorecard: Scoring on many metrics

Category Metrics Cost to income/Cost to assets Per emp. cost/ Per branch emp. Overheads to Assets/ per branch Opex growth v/s Network expansion Cost to assets v/s Urban-Rural mix Cost to Assets v/s Branch efficiency Gross slippages and credit costs Gross NPA and coverage Restructuring and slippages Infra +stressed sectors exposure Mitigants: Working capital + Retail Core Tier-1 Optimum leverage RWA/Loans Non Fund based exposure Return on Asset and Equity RORWA PPOP/employee and branch Net Profit per employee and branch 1st Quartile J&K Bank ICICI BOB BOI 2nd Quartile Axis Federal Bank PNB Yes 3rd Quartile 4th Quartile SBI South Indian ING Vysya
Cost Efficiency
HDFCB IIB Kotak
Asset Mix and Quality
HDFCB Kotak IIB South Indian
J&K Bank Yes Bank ING Vysya
ICICI Axis BOB Federal Bank PNB ING Vysya Federal Bank Kotak SBI PNB BOB Federal
SBI PNB BOI
Capital and Leverage
IIB HDFCB South Indian J&K Bank HDFCB Yes Bank IIB Axis
ICICI Axis BOB
BOI PNB
Profitability/Return Ratios
J&K Bank South Indian ICICI Kotak
ING Vysya SBI BOI
October 03, 2012
Prabhudas Lilladher Benchmarking SWOT

Strengths Weaknesses Opportunities Threats 1. Margins among the highest though 1. Legacy asset quality issues - High 1. New management streamlining 1. Legacy issues continue to partly due to leverage delinquency portfolio in SME and SME credit systems - Biggest area impact asset quality over the 2. Most cost efficient South-based also in mortgages of improvement near term bank - Cost income <42% 2. More than adequately 2. Expanding aggresively in 2. Competition getting 3. Niche gold loan portfolio capitalised - Will take 3-4 years to developed states beyond Kerala aggressive on NRI business contributing ~8-9% of loans self-correct Should aid strong growth
Federal Bank
ING Vysya
1. Most urbanised old generation bank 1. Branch efficiency lowest, Features of Urban bank like high Low branch additions could - 65% branches Metro/Urban considering Urban/Rural mix and CA ratio, fee income franchise improve efficiency but also 2. Strong CA franchise at 18% of dep. hence, worst on cost efficiency present -- Ramp up on branch risk CASA growth after 1-2 yrs 3. Best in class fees/ assets of ~1.5% 2. Large RIDF book at 11% of loans - efficiency could be the highest We believe branch efficiency 4. Very strong SME franchise and Drag on margins and hence, we expect signifcant catch-up will be the highest negligible thermal power exposure 3. No Niche retail lending expertise cost/income improvement for ING 1. Best in class SA franchise - 30% 1. Benefit from higher business overall SA with ~43% SA in J&K. 1. Fee income remain among the activity in J&K and also under 1. Competition inching up in 2. Cost income is low as branch lowest penetration of credit especially J&K, with HDFCB opening ~25 overheads are lowest in J&K 2. Corporate underwriting Horticulture branches in FY12 3. Consistent and stable asset quality -- capability limited- Lends largely to 2. Improvement in corporate 2. Rise in terrorism always Limited impact from current industrial "AAA" corporates to avoid risks underwriting skills to aid margins, remains a risk in J&K Bank slowdown given liability franchise 1. Weak CASA franchise (<20%) further impacted by NRI rate de-reg 1. RIDF book currently small 1. Secured lending and low credit 2. Fee income franchise very weak but ~15% PSL shortfall can costs remain significant strengths 1. Build on CASA and fee income at just ~0.5% of assets drive signifcant RIDF calls with 2. Largest gold loan books among which will not be easy 3. Branch efficiency also among the negative impact on already banks - ~22% of loans 2. Build on the niche gold lending lowest low NIMs 3. Most signifcant transformation in book 4. Incremental shortfall on PSL 2. Competition getting HR among old generation banks significant (at 25% v/s 40% aggressive on NRI business required)
J&K Bank
South Indian Bank
October 03, 2012
Prabhudas Lilladher Summary of Valuations and PT

We have valued banks on the two-stage Gordon growth model, with risk free rate of 8% and risk premium of 6%. J&K Bank PT implies a modest 1x FY14 valuation which is very reasonable for high ROEs generated and we believe, pegging valuations with mid-cap PSU banks is not justified. Hence, we see highest potential for upside in J&K Bank (~24% upside) ING Vysya Bank PT implies ~1.45x valuation, highest in the midcap private banks pack as ING displays most characteristics of an Urban bank with negligible Infra risks and efficiency improvement over the next three years will drive strongest ROE improvement. Federal Bank PT implies 1.3x valuation. ROEs will improve as leverage inched up but lower credit costs should aid in maintaining ROAs at ~1.3% levels. South Indian Bank PT also implies a modest 1x FY14 valuation as well. However, weak outcomes on most fundamental metrics and too much dependence on low credit costs to generate ROAs/ROEs is a risk Valuations reasonable relative to their return ratios: Current valuations at 0.8-1.2x 1-yr fwd book is extremely reasonable, considering return ratios generated, especially for J&K and also SIB and potential improvement in ROEs over the next 2-3 years for FB and ING will drive valuations higher.
Valuation summary:
Risk free rate Equity Risk Premium Beta Cost of Equity Terminal growth Normalised ROE Stage 2 growth Sep-13 PT Implied Mar-14 P/B Implied Mar-14 P/E Subsidiaries/Investments (Rs/Share) Federal 8.0% 6.0% 1.25 15.5% 5.0% 16.9% 14.0% 525 1.27 9.0 ING 8.0% 6.0% 1.10 14.6% 5.0% 17.1% 18.0% 480 1.46 10.4 SIB 8.0% 6.0% 1.25 15.5% 5.0% 15.6% 14.0% 25 1.02 6.0 J&K 8.0% 6.0% 1.20 15.2% 5.0% 17.1% 11.0% 1250 1.08 5.8 0
Source: PL Research
Compares well on P/B v/s ROAs

2.1%
1.9% 1.7% Kotak
Axis J&K Federal BOB PNB ING SIB SBI

BOI
1.5%
RoA
ICICI
Yes
IIB
1.3%
1.1% 0.9% 0.7%
0.5% 0.50 1.00 1.50 2.00 FY13 P/BV 2.50 3.00 3.50
Source: Company, PL Research
October 03, 2012
10
Prabhudas Lilladher Undemanding on most valuation metrics

Per branch Mcap in line with PSU banks
700
Mcap to advances also in line with PSU banks

120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0%
Kotak HDFCB IIB ICICI Yes Axis ING Federal J&K SBI BOB PNB SIB BOI
J&Ks Mcap/CASA worse off than PSU banks

350.0%
600 500
300.0% 250.0% 200.0%

150.0% 100.0%
(Rs m)
400
300 200
100 Federal Yes SBI PNB
50.0% 0.0%
Kotak Yes IIB HDFCB ICICI Federal Axis ING SIB BOB SBI PNB BOI J&K
BOB
J&K
BOI
IIB
HDFCB
Axis
ICICI
ING
SIB
PAT per branch v/s Mcap per branch

30.0 25.0 Axis Yes
Deposit per branch v/s Mcap per branch

500
Urban/Rural mix v/s Mcap per branch

450 400 350 300 250 200 150 100 50 0 30% ICICI Yes
Deposit / Branch
ICICI J&K
BOB PNB SBI ING BOI Federal SIB
ICICI
IIB
Yes Axis
20.0 15.0 10.0

5.0 0.0
IIB
HDFCB
300
200
Mcap / Branch (Rs m)
400
IIB
PAT / Branch
Axis
SBI BOB SIB Federal BOI J&K PNB
100 -
Federal
ING
SBI J&K
SIB PNB BOI
BOB
ING
100
200 300 400 500 Mcap / Branch (Rs m)
600
400
600
800
1,000
1,200
1,400
Mcap / Branch (Rs m)
40% 50% 60% Urban / Rural Mix
70%
October 03, 2012
11
Prabhudas Lilladher Trading at average valuations

P/B - % variation from average currently
1.00 0.80
0.60 0.40
0.20 0.00
-0.20 -0.40
-0.60
-0.80
Axis
PNB
Yes
BOI
J&K
SBI
ICICI
BOB
ING
SIB
Federal
Kotak
HDFCB
IIB
October 03, 2012
12
Prabhudas Lilladher
BENCHMARKING EXERCISE
COMPARING BANKS ON 75+ METRICS
Liability Franchise CA and SA Ratios (%) CA and SA per branch CA and SA Growth Bulk Dep/Borrowing dependence Cost Efficiency Network Expansion and Spread Branch Growth (%) Branch v/s B/S growth Urban-Rural Mix ATM/Branch Asset Mix and Quality Branch Efficiency Business and Deposits per branch CASA per branch Branch efficiency v/s Urban-Rural Mix Employees/branch v/s Asset Mix Capital and Leverage Core Tier-1 Optimum leverage RWA/Loans Non-Fund based exposure Yields and Margins Risk/Leverage adjusted margins Cost of funds advantage Yields on assets advantage Profitability/Return Ratios Fee income franchise Fees to Assets Core fee growth Fee to expenses Non-fund based book Priority Sector
Cost to income/Cost to assets Gross slippages and credit costs Per emp. cost/ Per branch emp. Gross NPA and coverage Overheads to Assets/ per branch Restructuring and slippages Opex growth v/s Network expansion Infra +stressed sectors exposure Cost to assets v/s Urban-Rural mix Mitigants: Working capital + Retail Cost to Assets v/s Branch efficiency
Return on Asset and Equity Compliance with RBI RORWA requirement PPOP/employee and branch Growth in PSL advances - 3 yrs Net Profit per employee and PSL growth v/s Loan growth branch RIDF deposits (% of Loans)
October 03, 2012
13
Prabhudas Liability Franchise: ING great on CA; J&K enjoys state SA Lilladher advantage; SIB getting weaker
Analysis: Compare CASA franchise of all coverage banks and study underlying branch network and efficiency to understand inherent strengths/weakness in liability franchise of these banks. Key Conclusions: J&Ks CASA franchise is among the best, with CASA at ~40% largely due to the SA advantage J&K state Overall, SA ratio of ~30%, with CASA of 56% within J&K and SA of ~43% within J&K. Also, CA/branch is better than peers though lower than large private peers ING Vysya scores well on CA at ~18% comparable to most large private banks, with large corporate presence + higher share of Urban branches (65%), aiding CA franchise. SA ratio at ~16% is below peers Kerala-based banks like FB and SIBs CASA franchise has been aided by low cost NRI deposits which have been re-regulated after which CASA looks relatively weaker for both banks, but notably for SIB, with just 3% CA ratio and <20% CASA.
Overall CASA ratio J&K scores the best

65%
CASA/branch SIB/FB significantly lower than peers

600 400 300 200
100 -
CASA growth v/s B/S growth (last 3 yrs)

40.0%
IIB Kotak
35%
(Rs m)
45% 25% 15%

5%
CASA CAGR FY09-12
55%
500
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 15.0% 25.0% B/S Growth - FY09-12 35.0% HDFCB ICICI ING Vysya Axis BOB J&K SIB Federal BOI PNB SBI
J&K (in J&K) HDFCB SBI ICICI Axis J&K PNB Kotak ING Vysya IIB BOB Federal BOI Yes SIB
Axis HDFCB ICICI J&K Kotak SBI IIB BOB PNB ING BOI Yes Federal SIB
October 03, 2012
14
Prabhudas Lilladher CA not easy to build: Only ING Vysya scores

CA franchise is generally difficult to build and gap between private and PSUs have been wide with private banks at ~15-20% CA ratio and PSUs at <10%. Even the smaller private sector banks have not been able to achieve significant success, with the only exception being ING Vysya, with ~18% CA ratio. Kerala-based FB and SIB have <5% CA ratio and that also have been contracting. CA/branch for ING at Rs125m/branch and J&K~Rs100m/branch is lower than private banks at Rs200m/branch but significantly better than PSU banks at Rs60m/branch. SIB and FB lag significantly, with CA/branch of just Rs20/30m/branch which is 50% lower than even PSU banks. Co-related to spread in Metro+Urban centers: Higher CA ratio is linked to higher presence in Metro+Urban centers. INGs stronger CA franchise is explained by its better Urban+Metro mix as ~67% of its branches are in Urban/Metro centers which is again comparable to larger private peers. Part of FB and SIBs low CA/branch is explained by the low Urban/Metro mix but still CA/branch is significantly lower.
CA ratio: ING best in class

20% 15%
10% 5%
CA/branch (Rsm): ING/J&K compare well v/s peers

250
Ca/branch v/s Urban+Metro (%)

250
200 150
100
Axis
CA / Branch (Rs m)
200 150
100
HDFCB
ICICI SBI J&K BOB SIB
Inudusind Yes ING
50 0
Kotak HDFCB ING Vysya Axis IIB ICICI J&K Yes SBI BOB PNB BOI Federal SIB Axis Kotak HDFCB IIB Yes ICICI ING J&K BOB SBI PNB BOI Federal SIB
0%
50 0
30%
PNB BOI
Federal
40% 50% 60% Urban / Metro Branches
70%
October 03, 2012
15
Prabhudas Lilladher SA franchise: J&K strongest; FB at median

Large private banks + SBI have a SA/branch of ~Rs300m and PSU banks here are not far behind with Rs200m SA/branch as they have closed the gap with private banks significantly over the last five years. Both the old and new generation smaller private sector banks are at similar levels of Rs100-150m of SA/branch but post savings rate de-regulation, growth in SA has been stronger for the new generation private banks, given higher SA rates offered. SA franchise - only J&K scores: The old generation private sector banks are still way behind their larger private peers, with the exception of J&K, which has almost shown a 3x jump in its SA/branch and is now comparable to the likes of HDFCB/Axis. SIBs SA/branch remains the weakest at <100m/branch.
In terms of growth of SA/branch, large private banks seems to have hit a plateau as they have expanded into relatively smaller towns. PSU banks have shown an improvement as they added limited branches in the last five years. SA/branch overall has improved for old generation private banks, but pace of improvement has been commendable for J&K bank but not so much for the others like ING/FB and SIB. Going forward, we expect significant improvement on SA/branch for ING Vysya.
SA ratio: J&K bank best in the business

40% 35% 30% 25% 20% 15% 10% 5% 0%
SA/branch also best in class for J&K Bank

350.0 300.0 250.0 200.0 150.0 100.0 50.0
Growth in SA/branch (FY07-12) Expect better growth from ING vysya, going forward
40%
30% 20% 10% 0%

-10%
Yes J&K IIB SBI PNB SIB Kotak BOB ING Vysya BOI Federal Axis HDFCB ICICI Axis HDFCB ICICI J&K SBI BOB PNB BOI Kotak IIB Federal ING SIB Yes
SBI
J&K
BOI
BOB
HDFCB
Axis
SIB
Federal
Kotak
PNB
ING Vysya
Yes
IIB
ICICI
October 03, 2012
16
Prabhudas Lilladher Slow on the network expansion

The last two success stories of HDFCB and Axis is based on strong growth + improving operating metrics and profitability which is not easy to replicate. Most old generation private sector banks have been slower on network expansion drive v/s their larger peers, with ~20-30% CAGR increase in branch network for most of the larger private sector banks. However, the old generation private sector banks have just grown their branch network by ~5-10%, with the only exception of FB as expansion in FY12 aided stronger branch expansion. We agree that branch efficiency for old generation banks significantly lag that of private sector banks and some part of the growth can be driven by efficiency improvement but less than 5-7% growth in branches does risk future growth (ING/J&K). Branch efficiency study co-related with location of branches gives more understanding of potential of branch efficiency improvement.
Low branch addition by regional private banks

35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
B/S growth v/s Branch growth

35.0%
Branch CAGR (07-12)
ATMs/Branches comparison (FY12)

HDFCB 7.0 6.0 5.0 4.0 3.0 2.0 1.0 Kotak Federal Yes
CAGR FY09-12
CAGR FY07-12
30.0% 25.0%
20.0%
Kotak IIB Federal SBI ING Vysya BOI PNB 20.0% 25.0% Balance Sheet CAGR (07-12) SIB
BOB
15.0% 10.0% 5.0% J&K 0.0%
SBI
PNB
IIB
ING Vysya
J&K
HDFCB
BOI
SBI
HDFCB
Kotak
Federal
BOB
Axis
PNB
ICICI
ING
J&K
SIB
IIB
15.0%
30.0%
October 03, 2012
ICICI
BOB
Axis
17
BOI
SIB
Prabhudas Lilladher . and also on loan growth, except for SIB

Loan growth for most large private banks have been +25-30% over the last 3/5 years, with Infra contributing to the rapid growth only for Axis/ICICI. Large PSUs, excl. SBI, have also reported ~25% loan growth over 3/5 years; however, contribution of Infra has been significant. Only SIBs growth is comparable to private peers: Only SIB has been able to report ~30% growth over the last 3/5 years, with ING reporting ~18% growth and FB calibrating growth over the last two years. J&K has lagged on loan growth due to the consolidation phase between FY05-10 where loan growth was just 11.5%. Slower growth but less risky as well: Though growth has been slower for the old generation banks, reliance on Infra/other bulky lending has been limited. For SIB, ~9% of the ~30% CAGR growth reported has come for 0 slippages Gold loans. Infra loans have contributed +20% of the system loan growth over the last three years and pose a risk to medium term asset quality for banks. However, for the old generation private banks, Infra exposure is either limited or is less riskier than their PSU and private peers. Loan growth slowdown to be lower than peers: With limited dependence on Infra lending and relatively slower growth in the recent past, we believe growth slowdown will be lower for old generation private banks. J&K will see accelerated growth relative to its past with some slowdown for SIB. However, we expect FB and ING to maintain their calibrated growth pace.
Growth slower than peers expect for SIB (Loan growth CAGR)
50.0%
40.0% CAGR (FY07-FY12) CAGR (FY09-FY12)
30.0% 20.0%
10.0% 0.0%
Federal
Kotak
Yes
PNB
BOI
SBI
IIB
HDFCB
BOB
Axis
ING
J&K SBI
SIB
Growth slowdown lower for old generation private banks

50.0% 40.0%
30.0% 20.0% 10.0% CAGR (FY09-FY12) CAGR (FY12-15E)
0.0%
Kotak
Federal
Yes
IIB
HDFCB
BOB
ING
October 03, 2012
ICICI
18
PNB
J&K
Axis
BOI
SIB
ICICI
Prabhudas Lilladher Branch efficiency: A very wide gap

Efficiency comparisons aid in better understanding of need for network expansion and more importantly cost structure of a bank
Deposit per branch is Rs1-1.5bn/branch for most new generation private sector banks, ~Rs0.8-1.0bn/branch for large PSU banks. For old generation private banks deposit/branch is ~Rs0.5-0.6bn/branch, which is ~40-50% lower than private peers and ~30% lower than PSU banks, with J&K being the only exception at Rs1bn of deposit per branch.
The difference is even higher comparing CASA/branch, with large private banks having CASA/branch at Rs400-600m, PSUs at Rs250300m/branch. However, old private generation private sector banks are at <Rs200m/branch. Again, J&K is the only exception with robust deposit/CASA per branch and SIB continues to have significantly lower CASA/branch of ~Rs100m/branch. Though branch efficiency for small generation private banks is going up, analysis of lagged deposit/branch (2 yrs) show that the difference in branch efficiency has only increased v/s private banks.
Deposit and CASA per branch

1,500
Growth in CASA/branch (5 yrs CAGR)

CASA/Branch
15%
Difference v/s HDFCB/Axis (Both current CASA/branch and lagged CASA/branch)

Current 0% -20%
-40%
Deposits/Branch
Two Year Lag
10%
(Rs m)
1,000 500 -
5%
0%
-60% -80% -100%

SBI J&K BOB BOI
-5% -10%
Yes Axis Kotak IIB BOB HDFCB ICICI J&K BOI SBI PNB ING SIB Fede ING J&K IIB BOB Yes SIB PNB SBI BOI Federal Kotak Axis HDFCB ICICI
Kotak
October 03, 2012
ING Vysya
Federal
ICICI
PNB
Yes
19
SIB
IIB
Prabhudas Lilladher Branch efficiency: Understanding finer details

We link branch efficiency with branch presence in Urban/Metro centers to understand possibility of efficiency improvement.
Urban v/s Rural Spread: Most private sector banks have ~60-65% of their branch network in Urban/Metro centers, whereas PSU banks and most old generation private sector banks have only 35-40% of their branches in Rural/Semi Urban centers. The only exception is ING Vysya with ~65% branches in Urban/Metro centers.
75-85% difference in efficiency: Average branch efficiency of Semi Urban/Rural area is 75-85% lower than average branch efficiency of Metro/Urban centre explaining part of the efficiency gap between private banks and old generation banks. Scope for efficiency improvement: High for banks with low deposit/branch currently and high share of Metro/Urban mix. Among the old generation banks, ING Vysya falls in this category, where branch efficiency can potentially be the driver for B/S growth.
Metro/Urban branch mix best for ING

80% 70% 60% 50% 40% 30% 20% 10% 0%
Branch efficiency lags private/PSU peers

1,800 1,600 1,400 1,200 1,000 800 600 400 200 Yes Axis IIB ICICI HDFCB Kotak BOB J&K BOI SBI ING PNB Federal SIB
Co-relation b/w branch mix and efficiency high ING has significant scope for improvement
1,600
Deposit / Branch (Rs m)
Deposits / Branch (Rs m)
% of branches in Metro/Urban centres
Axis
1,400 Yes BOB J&K
1,200 1,000 800 600 400 SBI
ICICI Inudusind HDFCB ING SIB
BOI PNB
Federal
30%
IIB ING Yes HDFCB Axis ICICI SIB BOB Federal BOI J&K PNB SBI
70%
Source: Company, PL Research, RBI
Source: Company, PL Research, RBI
October 03, 2012
20
Prabhudas Lilladher Cost efficiency: J&K best placed, ING worst

Cost efficiency is linked to many factors and we believe cost/assets and cost/income both should be compared together as Cost/income is sometimes impacted by volatility in income \and cost/assets is impacted by asset mix (higher for retail banks). Cost income comparisons indicate that ING (~59%) and SIB (~50%) are high on cost income and J&K (38%) and FB (~41%) are low on C/I ratios. However, analyzing together with cost-to-assets, we see that FBs low-cost income advantage is related to higher income (higher leverage) as cost-to-assets is in line with other banks at 1.7% and SIBs high cost issue is more linked to lower income with cost to assets at 1.7% also in line with industry trends. Putting together C/I and Cost-to-assets, we see that FB and SIB have relatively stable cost structures. ING screens out higher on both parameters and J&K screens better on both parameters.
ING worst on Cost-to-Assets

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
ING also higher on Cost-to-Income

65% 60% 55% 50% 45% 40% 35% 30% 25% 20%
B/S growth/ v/s branch growth (last 3 yrs)

6.00
5.00 4.00 3.00 2.00

1.00
BOB J&K BOI SIB Federal PNB SBI ICICI Yes ING Vysya Axis IIB HDFCB Kotak
J&K ICICI BOB Federal BOI SBI PNB Axis HDFCB SIB IIB ING Yes Kotak
PNB J&K BOB SIB BOI ING IIB SBI Federal Kotak Axis Yes HDFCB ICICI
October 03, 2012
21
Prabhudas Lilladher Employee Expenses ING has a long way to go

Employee costs/assets is same across banks at 0.8-1.0% of assets. Even for most South-based banks, employee costs/assets is ~0.9-1.0%, with ING Vysya being the only exception with employee/assets at ~1.4%. Per employee costs is similar across private/PSU banks at ~0.70.8m/employee/yr and per employee cost is the same even for old generation private banks at Rs0.7m/employee. Employee per branch varies significantly: Private banks having ~20 employee/branch v/s 10-11 employee/branch for PSUs/old generation banks. The key difference, we believe, is in the spread of Urban-Rural centers and also share of retail business as ex-mortgage sourcing/collections and liabilities require higher number of employees. Most old generation private banks have 10-12 employees/branch but ING Vysya has 19 employee/branch partly explained by higher proportion of Urban+Metro branches but without commensurate business impacting Cost-income/cost to assets for ING. Thus, we believe, management strategy of improving branch efficiency rather than just adding branches could work in the medium term.
Employee/assets highest for ING Vysya

1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%
Per employee cost dont wary much b/w banks

1.00
0.90 0.80
The key differentiator is employees/branch

1,600
Deposit / Branch (Rs m)
1,400 1,200 1,000 800

600 SIB
Yes
Axis IIB HDFCB ICICI ING
(Rs m)
0.70 0.60 0.50 0.40
BOB
BOI PNB Federal
J&K SBI
Yes BOB Axis ICICI BOI J&K IIB Federal SIB HDFCB PNB SBI ING Vysya Kotak
Fede
0.30
J&K
HDFCB
BOB
Axis
ING
BOI
SBI
SIB
ICICI
PNB
IIB
400 5 10 15 20 25 30
Employee / Branch
October 03, 2012
22
Prabhudas Lilladher Overheads varies significantly between banks

Overheads vary significantly across banks: Though employee costs/assets is similar across banks, overheads vary significantly across banks, given (1) The mix of Urban+Metro branches and (2) Type of Assets (Retail entailing more costs than wholesale business). For Private banks, Overheads/assets is >1.5% of assets v/s PSUs and old generation private banks at between 0.5-0.7% of assets. Again, the only exception here is ING Vysya in terms of absolute numbers, Overheads/branch for private banks is Rs20m/branch/yr v/s just Rs5m/branch/yr for PSUs/old generation private banks. High co-relation with branch mix: This explains INGs high overheads/assets as higher share of Urban/Metro branches lead to higher overheads/branch added with lower branch efficiency which leads to higher overheads to assets. Highest change in overheads/branch has been for ICICI where overheads have come off by ~30% from the peak and that has led to ~75% fall in overheads/branch for ICICI. ICICI bank now is the most efficient among larger private sector banks in terms of overheads.
Overheads/Assets highest for ING among old generation banks
1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%
Federal
Kotak
Yes
SBI
BOI
PNB
ING Vysya
J&K
BOB
SIB
IIB
Overheads/branch v/s Urban-Metro mix

30
Overheads / Branch (Rs m)
25 20 15
Axis
HDFCB IIB
ICICI Yes
ING Vysya
10 5 0 30% Federal SBI J&K SIB BOB PNB BOI 35% 40% 45% 50% 55% 60% 65%
70%
% of Urban / Metro Branches
October 03, 2012
23
HDFCB
ICICI
Axis
Prabhudas Lilladher NIMs: Comparing the right metrics

Right metrics: Margins contribute ~60-90% of revenues for banks and it is important to compare right NIM bench marks as margins are not only impacted due to inherent strength of liability/asset model but also by leverage. Hence, we use Leverage adjusted Margins Material impact of leverage on margins is only for ICICI/Kotak/FB, given high Tier-1 capital levels. Leverage adjusted margins indicate that larger private bank + SBIs margins at ~3.5% is higher than PSU banks. Leverage adjusted margins is robust for FB and J&K at +3.2% v/s weak outcomes for ING and SIB at ~2.7-2.8%. Risk + Leverage adjusted margins: Higher margins can also be a function of asset mix which has its implications on credit costs and hence, risk+leverage adjusted margins adjusts for higher risk taken for higher yields Adjusting for credit costs, only J&K bank compares favorably with larger private banks as FBs margins are diluted due to higher slippages/credit costs. Among old generation private sector banks, J&K compares the best on risk adjusted margins due to lower credit costs + higher CASA. However, SIB misses due to low CASA and FB misses due to high credit costs.
Reported Margins FB in 1st quartile

4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0%
HDFCB Federal SBI Kotak IIB J&K PNB Axis ING Vysya SIB Yes BOB ICICI BOI
Leverage adjusted Margins FB moves to 2nd quartile

4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0%
HDFCB Kotak SBI IIB PNB Axis J&K Federal ING Vysya SIB Yes ICICI BOB BOI
Leverage + risk adjusted margins J&K screens out the best

4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0%
October 03, 2012
Kotak HDFCB J&K IIB Axis Yes SIB Federal ING Vysya ICICI PNB SBI BOB BOI
24
Prabhudas Lilladher Understanding the margin levers

Three key margin levers: (1) Liability franchise CASA ratio + Mismatches + Bulk deposit funding (2) Asset Mix - but this has a bearing on asset quality/credit costs (3) Leverage - as lower leverage will aid margins and vice versa. We segregate margin drivers for banks between liabilities and assets and scatter chart show how various banks are placed on liability/asset advantage/disadvantage.
Only J&K bank has a liability advantage among old generation banks, FB and SIB have a liability disadvantage
2.0%
Cost Disadvantage / Advantage
IIB
Kotak 1.5% Federal 1.0%
Yes
SIB
0.5% ING 0.0% PNB

-0.5%
HDFCB
Among the old generation private banks, only J&K has a liability cost advantage but with only AAA rated lending in large corporate portfolio (outside J&K) leads to a asset mix disadvantage despite high yields in its J&K advances book.
FB and SIB both have a liability disadvantage as expected, but large proportion of gold lending provides a margin cushion With liability franchise getting further eroded by NRI de-reg, we expect some inch down in margins for FB/SIB. ING does not have a cost disadvantage v/s peers but with retail book being largely mortgages, ING also does not have any asset mix advantage.
J&K Axis
-2.0%
-1.5%
-1.0%
-1.0% -0.5% 0.0% 0.5% Asset Disadvantage / Advantage
1.0%
1.5%
J&K compares well on Cost of funds

8.5%
7.5%
6.5%
5.5%
4.5%
3.5% 2.5%
1.5%
Kotak
SBI
Federal
PNB
Yes
BOI
ING Vysya
BOB
J&K
HDFCB
Axis
October 03, 2012
ICICI
SIB
25
IIB
Prabhudas Lilladher Fee income: ING stands out of the pack

Fee income high contributor for Private banks: Fee income at ~1.6-2.0% of assets contributes ~35% of income for larger private banks and covers ~70-100% of Opex. For PSUs, Fee income contributes ~20-25% of their total revenues and covers only ~55-60% of Opex. ING Vysya - the only comparable: INGs fee/assets have remained >1.5%. It is the only old generation private sector bank comparable to larger peers. FBs fee income in the past has been +1.0% of assets but core fee contribution is lower at 0.7-0.8% as recovery from written-off accounts accounted for 20-30% of fees prior to FY12. SIB and J&K have an extremely week fee income franchise with fees/assets of 0.5-0.6% covering <40% of Opex. SIB has been growing fee income at 17-18% p.a for last 3-5 years but faster growth in assets has brought down fees/assets for SIB. Non-fund based exposure contributes significantly to fee income: Apart from the more obvious fee income streams like FX, business banking, retail distribution, etc, non-fund based limits have also contributed significantly to fee income and there is a strong co-relation of higher fees with non-fund based limits. Some part of INGs higher fees/assets can be associated to higher non-fund based exposure.
Only ING compares well v/s private peers on fees (Fees as a % of assets)
2.5%
For ING fees covers ~65% of Opex. For others it is lower than 40%
100.0%
Change in fee/assets (avg 08-09 and 11-12)

0.60%
0.40%
2.0% 1.5% 1.0% 0.5%

0.0%
80.0% 60.0% 40.0% 20.0%

0.0%
0.20% 0.00% -0.20% -0.40%

ICICI Axis IIB ING Vysya HDFCB SBI BOB BOI PNB Kotak Federal J&K SIB Yes
-0.60%
October 03, 2012
IIB Axis SBI J&K PNB ICICI Kotak HDFCB SIB BOB ING Vysya Federal BOI Yes
IIB Axis HDFCB ICICI ING Kotak SBI PNB BOI Federal BOB Yes J&K SIB
26
Prabhudas Lilladher Contd

Fee income growth compared to b/s growth (5 yrs)
50.0% Yes 45.0% 40.0% 35.0% HDFCB Axis SIB 30.0% Kotak PNB 25.0% BOB BOI IIB 20.0% Federal ING 15.0% SBI ICICI J&K 10.0% 5.0% 0.0% 0.0% 10.0% 20.0% 30.0% 40.0% Balance Sheet (CAGR 5year)
Matrix (Non-Fund based exposure v/s fee/assets)

2.5% IIB
2.0% HDFCB
Fees (CAGR 5year)
Axis ING Vysya PNB Yes SBI
Fee / Asset
1.5%
1.0%
BOB 0.5%
SIB 0.0%
BOI
J&K 18% 20% 23% Non Fund Exposure 25% 28% 30%
50.0%
10%
13%
15%
October 03, 2012
27
Prabhudas Lilladher Asset Quality: Understanding the Asset Mix

ING Vysya - SME+Mid market focused with ~32% of loans to MSME largely traders with sole banking relationships. Large proportion of large/mid corporate portfolio is either linked to services and some are INGs global relationship. Infra contributes just 2% of loans. Retail contributes ~20% of book largely mortgages/LAP (~80%). J&K Bank Largely AAA corporate book: J&K have ~66% market share in J&Ks overall advances spread across all segments but outside J&K (~60% of advances), lending franchise is weak and J&K largely does AAA corporate lending. Federal Bank Diversified but risky loan book: FB has a diversified asset mix in Large Corp/MSME/Retail at 40:30:30. Retail and SME share has come off in the last 2-3 years as management has been calibrating growth to streamline credit systems and hence, large corporate book has grown at a quick pace. Retail is largely Mortgages and Gold but peculiarly slippages in FBs mortgage portfolio is the highest. South Indian Bank - Secured loan book: SIB also has a diversified loan book but the focus is on secured lending with highest share of secured assets among banks. Retail portfolio is largely gold which has negligible credit costs.
Advances mix- High share of Retail and SME advances for old generation banks
Mix (%) Corporate SME Agri Retail Home Auto Unsecured Others International Total Axis 38.7% 14.0% 10.2% 22.1% 16.6% 2.9% 0.4% 2.2% 14.9% 100.0% ICICI 25.0% 5.3% 7.7% 34.0% 22.4% 9.7% 1.3% 0.9% 28.0% 100.0% HDFCB 45.2% 9.5% 8.0% 37.3% 7.3% 21.5% 0.0% 8.5% 0.0% 100.0% SBI 31.8% 18.0% 13.5% 21.0% 11.9% 2.9% 0.0% 6.3% 15.7% 100.0% PNB 50.0% 16.8% 15.6% 9.9% 4.7% 0.9% 0.0% 4.4% 7.4% 100.0% BOI 41.1% 12.9% 9.4% 7.6% 3.3% 0.7% 0.0% 3.6% 29.1% 100.0% BOB 35.8% 12.0% 10.1% 12.4% 4.9% 0.0% 0.0% 0.0% 29.7% 100.0% Union 69.6% 16.3% 10.8% 10.8% 7.0% 0.9% 1.6% 1.3% 0.0% 100.0% Kotak 14.9% 14.9% 9.0% 61.2% 15.7% 34.6% 3.5% 7.4% 0.0% 100.0% IIB 27.1% 22.9% 0.0% 49.2% 1.6% 46.9% 0.0% 0.7% 0.0% 100.0% Yes 71.0% 19.9% 0.0% 9.1% 0.0% 0.0% 0.0% 9.1% 0.0% 100.0% ING Vysya 41.0% 28.0% 8.0% 23.0% 19.6% 0.9% 0.0% 2.5% 0.0% 100.0% South J&K Bank India 53.3% 57.0% 6.6% 17.0% 5.9% 9.0% 34.1% 16.0% 5.7% 9.6% 0.0% 0.0% 0.0% 0.0% 28.4% 6.4% 0.0% 0.0% 100.0% 100.0% Federal Bank 42.6% 17.7% 11.0% 28.7% 12.9% 1.1% 0.0% 14.6% 0.0% 100.0%
October 03, 2012
28
Prabhudas Lilladher Low slippages and restructuring, except for FB

Gross NPAs low, expect for FB
7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
Yes IIB HDFCB Kotak Axis J&K SIB ING Vysya BOB BOI Federal ICICI PNB SBI
Restructuring also low ,expect for FB

9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
And all of them well covered on NPAs

100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0%
ING Vysya J&K HDFCB Federal ICICI Yes Axis IIB SIB BOB SBI Kotak PNB BOI
Federal
ING
SBI
ICICI
BOB
PNB
J&K
Axis
BOI
SIB
SIB Highest on secured lending

100.0% 95.0% 90.0% 85.0% 80.0% 75.0% 70.0% 65.0% 60.0%
SIB IIB PNB ING Vysya Axis ICICI BOB J&K Kotak SBI BOI Federal HDFCB Yes
Gross slippages (FY09-12) high for FB

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
Yes SIB BOB IIB J&K Axis ICICI ING Vysya PNB BOI Kotak HDFCB SBI Federal
so are its credit costs (avg. FY09-12)

1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%
SIB Yes J&K BOB IIB BOI ING Vysya PNB SBI Axis Kotak ICICI HDFCB Federal
October 03, 2012
29
Prabhudas Lilladher Exposure to Stressed sectors; Least Infra for ING

Infra+ Power: Axis/ICICI and PSU banks have ~10-15% of their total exposure in Infra, with power exposure being ~60-70%. Among the old generation banks, INGs exposure to Infra/Power is negligible and SIB has the highest Infra exposure. J&Ks Infra exposure is also large at ~9%. However, large part of J&Ks portfolio is non-conventional power which reduces its portfolio risk. SEB exposure: Within Infra/Power, SEB exposure is highest for SIB at ~4% in line with PSU banks. FB also has ~3% of their exposure to SEBs and again ING does not have any SEB exposure. Other stressed sectors: SIBs exposure to stressed sectors is among the lowest. Ironically, FB has low exposure to stressed sectors but slippages seem to be the highest, reflecting legacy issues in underwriting within specific segments. ING has high exposure to segments like Gems +Textiles but 100% secured lending aids lower credit costs. Overall SIB and J&K have had the lowest credit costs though relatively large Infra book is a concern for SIB. ING has navigated well on SME asset quality over the last 18 months which inspires confidence on asset quality. FB is on an improving trajectory but legacy loans still is keeping credit costs elevated and Infra risks also remain.
Stressed exposures Least Infra exposure for ING (<2%); SIB /FB and J&K high on Infra but nature of lending is inherently less risky
Sensitive sectors (Ex Infra) Iron and steel Engineering Textiles Gems Construction Airlines Commercial RE Total Infra Exposure SEB Private power Other Infra ICICI 5.1% 8.4% 0.7% 0.8% 4.2% 0.3% 3.2% 22.6% 10.1% 0.0% 6.4% 3.7% Axis 3.3% 4.2% 1.6% 0.6% 0.7% 0.3% 3.4% 14.0% 14.6% 0.0% 8.1% 6.5% Yes 2.7% 2.8% 0.4% 0.8% 6.0% 0.3% 2.8% 15.8% 6.0% 0.0% 4.8% 1.2% Federal 3.1% 1.0% 1.9% 0.0% 0.3% 1.0% 1.1% 8.5% 9.3% 3.2% 1.0% 5.0% ING 0.8% 0.0% 3.3% 4.6% 3.3% 0.0% 2.5% 14.5% 1.9% 0.0% 0.3% 1.6% SIB 1.1% 0.2% 2.8% 0.5% 0.1% 2.0% 0.3% 6.9% 11.7% 3.7% 2.9% 5.1% J&K 3.2% 1.4% 1.4% 0.0% 1.1% 0.0% 4.7% 11.8% 8.5% 1.5% 4.2% 2.7% SBI 6.3% 4.7% 3.8% 1.2% 1.1% 1.3% 0.8% 19.3% 9.9% 2.1% 3.5% 4.3% PNB 7.4% 2.3% 1.4% 0.3% 1.1% 1.3% 4.3% 18.1% 13.6% 3.9% 5.6% 4.1% BOB 5.5% 4.2% 4.7% 0.5% 2.3% 1.7% 1.7% 20.6% 11.5% 3.3% 3.8% 4.4% BOI 5.3% 1.2% 3.8% 2.7% 1.1% 2.1% 1.9% 18.2% 14.0% 2.6% 6.5% 4.9%
October 03, 2012
30
Prabhudas Lilladher Capital and Leverage: SIB best placed

No issues for old generation banks under Basel III: There is a stark difference in core Tier-I capital levels between private and PSU banks, with private banks well capitalized to meet Basel III and PSUs requiring high capital raising. Most old generation private banks have adequate core Tier-1 capital and we do not see any issues for them under BASEL III. RWA/Loans at the median level, except for SIB: Risk weighted assets to Loans for old generation private banks are in the median range with lower RWA/Loans compared to private banks (lower non-fund based exposure + higher retail loans). However, RWA/loans are marginally higher than PSU banks. Only SIBs RWA/Loans is significantly lower than peers due to high proportion of gold loans (`19.8%) and a very small non-fund based book.
Co-relation b/w non-fund based book and RWA/Loans: Guarantees/LCs carry high risk weights and high proportion of non-fund based exposure increased RWA/Loans restructuring leverage possibilities. ING and J&Ks relatively higher RWA/Loans can be ascribed to higher share of non-fund based exposure.
Tier 1 capital comfortable for all

20.0% 15.0%
10.0% 5.0% 0.0%
RWA/Loans low especially for SIB/FB due to gold loans

180.0% 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0%
SIB BOB Federal BOI PNB SBI J&K IIB ING Vysya Kotak HDFCB Axis Yes ICICI
RWA/Loans v/s Non fund based exposure

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 50.0%
Non Fund Based Exposure
ICICI
SBI ING PNB IIB

BOI SIB
Axis Yes
J&K Kotak BOB HDFCB Federal
Kotak Federal ICICI SIB IIB ING Vysya J&K HDFCB BOB Yes SBI Axis PNB BOI
100.0%
150.0%
200.0%
RWA / Loan
October 03, 2012
31
Prabhudas Lilladher PSL: ING not well placed but SIB could get worse
Overall PSL compliance for all banks is >35% v/s 40% required by RBI but for SIB, overall PSL compliance has dipped to ~25% in FY12 RBI disallowed part of the gold loan portfolio to be classified as PSL and hence SIB now faces a structural challenge of low PSL compliance increasing risk of higher RIDF calls RIDF investments is the highest for ING Vysya and is one of the key reasons for INGs low margins. Though SIB currently has a low PSL book, overall PSL shortfall of 15% could increase RIDF investments substantially impacting margins in the future. Growth in priority sector advances has been slow for most of the old generation private banks. Among them, ING has done relatively better with the worst outcome for SIB with <10% growth in priority sector advances in the last 3 yrs.
Total PSL compliance (% of loans)

50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0%
SBI
RIDF investments (% of loans)

12.0%
PSL book growth over last 3 years

50%
40%
10.0% 8.0% 6.0% 4.0%

2.0%
30% 20% 10% 0%

SBI BOI
J&K
HDFCB
Kotak
BOB
Axis
ING Vysya
ING Vysya
Federal
Federal
Yes
BOB
HDFCB
Kotak
PNB
Axis
PNB
J&K
BOI
SIB
SIB
IIB
IIB
ICICI
0.0%
ING
J&K
HDFCB
ICICI
Axis
SBI
IIB
SIB
-10%
October 03, 2012
32
ICICI
Prabhudas Lilladher Benchmarking Matrix

ICICI Liability Franchise (FY12) CASA ratio (%) CA ratio (%) SA Ratio (%) CASA/branch (Rs mn) SA/branch (Rs mn) CASA Growth (%) - 3 yrs CASA div. B/S growth - 3 yrs Borrowing (% of B/S) Network (FY12) Branch growth - 3 yrs B/S div. Branch growth - 3 yrs ATMs/Branch Yields/Margins (FY12) Cost of funds Margins Risk adjusted margins Margins - capital adjusted Fee income (FY12) Fee/assets Fee/expenses Fee growth - 3 yrs Fee growth - 5 yrs Guarantees/LCs (% of loans) 43% 14% 30% 403.4 276.3 21.0% 21% 23% New Generation private banks Axis HDFCB Kotak IIB 42% 18% 23% 563.6 318.5 21.8% 22% 9% 48% 18% 30% 469.4 290.9 23.5% 24% 4% 32% 19% 13% 349.4 142.3 34.3% 34% 24% 27% 16% 11% 289.1 117.4 39.5% 40% 13% Yes 15% 10% 5% 207.6 70.3 73.6% 74% 13% SBI 45% 9% 35% PSU banks PNB BOB 35% 8% 28% 27% 8% 19% BOI 27% 6% 21% Old generation private banks Federal ING SIB J&K 28% 5% 22% 141.9 115.1 19.5% 20% 7% 34% 18% 16% 228.6 107.1 21.5% 22% 10% 20% 3% 16% 102.6 84.5 18.6% 19% 1% 41% 11% 30% 360.1 265.0 20.0% 20% 2%
331.7 236.4 265.2 212.0 261.9 186.2 191.0 167.1 14.8% 18.1% 22.1% 18.6% 15% 18% 22% 19% 7% 6% 3% 6%
25% 31% 3.3
25% 99% 6.1
22% 104% 3.5
18% 178% 2.4
30% 92% 1.7
45% 106% 1.7
7% 160% 1.4
7% 316% 1.1
10% 265% 0.5
9% 219% 0.4
14% 114% 1.1
5% 277% 0.8
10% 262% 0.9
4% 403% 0.8
6.0% 2.6% 2.1% 2.6%
5.7% 3.3% 2.6% 3.3%
5.4% 4.3% 3.8% 4.2%
7.2% 4.5% 4.3% 4.0%
7.7% 3.4% 2.9% 3.3%
7.6% 2.7% 2.5% 2.6%
5.2% 3.5% 2.0% 3.5%
5.8% 3.3% 2.1% 3.3%
5.1% 2.6% 1.7% 2.5%
5.8% 2.4% 1.4% 2.5%
7.1% 3.6% 2.8% 3.2%
6.7% 3.0% 2.5% 2.8%
7.4% 2.9% 2.6% 2.7%
5.8% 3.4% 2.9% 3.3%
1.72% 97% 6.4% 5.7% 55.8%
2.02% 89% 26.5% 41.1% 45.0%
1.77% 63% 23.3% 28.0% 17.5%
1.54% 49% 26.4% 28.2% 24.3%
1.86% 71% 37.7% 30.4% 33.8%
1.24% 88% 41.7% 34.0% 43.2%
1.20% 59% 14.8% 19.9% 29.4%
0.93% 55% 19.6% 29.6% 25.4%
0.70% 0.79% 55% 59% 14.9% 8.1% 18.0% 16.8% 14.4% 21.2%
0.80% 46% 1.3% 12.2% 12.2%
1.53% 59% 9.2% 20.8% 28.4%
0.56% 33% 17.1% 18.0% 7.8%
0.54% 37% 17.8% 14.9% 15.5%
October 03, 2012
33

ICICI Cost + Branch Effeciency (FY12) Cost to Assets Cost to income Opex growth - FY09-12 CAGR Opex growth/branch growth - 3 yrs Business/branch CASA/branch SA/branch Employee cost/Assets Employees/branch Cost/Employee Overheads/Assets Overheads/branch Metro+Urban branches (%) Leverage (FY12) Tier-1 Equity Assets/Equity (x) RWA/Loans Non Fund (% of Loans) Total exposure (% of loans) Return Ratios (FY12) ROAs RORWAs ROEs 1.8% 42.9% 3.7% 0.15 928 403 276 0.8% 21.2 0.70 0.99% 15.75 58% New Generation private banks Axis HDFCB Kotak IIB 2.3% 45.0% 27.9% 1.12 1,357 564 319 0.8% 19.6 0.83 1.49% 24.21 61% 2.8% 48.4% 15.8% 0.73 970 469 291 1.1% 26.0 0.67 1.69% 20.40 62% 3.1% 53.8% 15.3% 0.86 1,086 349 142 1.5% 31.0 0.96 1.65% 27.11 76% 2.6% 50.5% 34.9% 1.14 1,059 289 117 0.9% 23.4 0.66 1.67% 21.44 67% Yes 1.4% 38.3% 30.6% 0.68 1,381 208 70 0.7% 15.8 1.17 0.69% 12.85 63% SBI PSU banks PNB BOB BOI Old generation private banks Federal ING SIB J&K 1.7% 40.7% 19.7% 1.40 515 142 115 1.0% 10.2 0.66 0.78% 4.58 39% 2.6% 59.5% 12.9% 2.56 668 229 107 1.4% 19.0 0.72 1.18% 9.57 67% 1.7% 50.3% 23.4% 2.41 521 103 85 1.0% 8.4 0.76 0.67% 3.47 42% 1.4% 37.5% 19.4% 4.63 885 360 265 0.9% 14.8 0.66 0.51% 4.66 37%
2.0% 1.7% 1.3% 1.3% 44.5% 40.5% 39.3% 44.0% 18.5% 18.5% 13.0% 16.9% 2.58 2.54 1.35 1.88 740 669 986 796 332 236 265 212 262 186 191 167 1.3% 15.3 0.90 1.1% 10.9 0.91 0.7% 10.6 0.79 0.8% 10.3 0.86
0.71% 0.55% 0.54% 0.51% 6.45 4.02 5.57 4.72 33% 37% 40% 37%
12.7% 7.8 157% 111% 268%
9.5% 12.5 136% 47% 172%
11.0% 11.3 124% 17% 127%
17.6% 8.3 122% 24% 156%
11.4% 12.7 112% 50% 203%
9.9% 15.8 137% 48% 193%
9.8% 15.9 110% 45% 181%
9.3% 10.8% 17.3 17.0 99% 88% 25% 18% 124% 118%
8.6% 19.4 95% 25% 125%
15.9% 10.6 94% 12% 124%
11.2% 12.1 119% 45% 198%
11.5% 19.9 62% 22% 137%
11.1% 14.7 110% 37% 163%
1.5% 1.7% 11.2%
1.7% 2.0% 20.3%
1.8% 2.4% 18.7%
1.9% 2.6% 14.7%
1.6% 2.3% 19.3%
1.6% 2.1% 23.1%
1.0% 1.2% 1.3% 0.8% 1.3% 1.8% 2.2% 1.2% 15.7% 21.1% 21.7% 15.0%
1.4% 2.3% 14.4%
1.1% 1.5% 14.3%
1.1% 2.5% 21.6%
1.5% 2.4% 21.2%
October 03, 2012
34

ICICI Asset Quality (FY12) Gross NPAs Coverage Gross Delinquency (FY09-12) Credit costs (FY09-12) % of Restructured book Loan Book break up (%) Corporate SME Agri Retail Home Auto Unsecured Others International Corporate+International Total PSL Status PSL book Growth (%)- 3 yrs Valuations Mcap/Branch (Rs mn) Mcap/Advances Mcap/Deposits Mcap/CASA 3.6% 79.8% 1.6% 1.3% 1.7% New Generation private banks Axis HDFCB Kotak IIB Yes SBI PSU banks PNB BOB BOI Old generation private banks Federal ING SIB J&K 3.4% 80.6% 2.9% 1.5% 6.4% 1.9% 90.5% 1.7% 0.9% 0.8% 1.0% 66.0% 1.1% 0.3% 3.7% 1.5% 90.3% 1.4% 0.5% 4.1%
1.1% 1.0% 1.6% 1.0% 0.2% 73.6% 82.2% 59.2% 72.5% 79.1% 1.6% 2.5% 2.3% 1.3% 0.6% 1.1% 1.3% 1.2% 0.8% 0.5% 1.8% NM NM NM NM
4.5% 2.9% 1.5% 2.3% 60.1% 48.9% 65.1% 38.0% 2.7% 2.1% 1.2% 2.2% 1.1% 0.9% 0.6% 0.8% 4.3% 8.5% 5.4% 7.0%
25.0% 38.7% 45.2% 14.9% 27.1% 71.0% 5.3% 14.0% 9.5% 14.9% 22.9% 19.9% 7.7% 10.2% 8.0% 9.0% 0.0% 0.0% 34.0% 22.1% 37.3% 61.2% 49.2% 9.1% 22.4% 16.6% 7.3% 15.7% 1.6% 0.0% 9.7% 2.9% 21.5% 34.6% 46.9% 0.0% 1.3% 0.4% 0.0% 3.5% 0.0% 0.0% 0.9% 2.2% 8.5% 7.4% 0.7% 9.1% 28.0% 14.9% 0.0% 0.0% 0.0% 0.0% 53.0% 53.6% 45.2% 14.9% 27.1% 71.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
31.8% 18.0% 13.5% 21.0% 11.9% 2.9% 0.0% 6.3% 15.7% 47.5% 100.0%
50.0% 16.8% 15.6% 9.9% 4.7% 0.9% 0.0% 4.4% 7.4% 57.4% 100.0%
35.8% 12.0% 10.1% 12.4% 4.9% 0.0% 0.0% 0.0% 29.7% 65.5% 100.0%
41.1% 12.9% 9.4% 7.6% 3.3% 0.7% 0.0% 3.6% 29.1% 70.2% 100.0%
42.6% 41.0% 53.3% 57.0% 17.7% 28.0% 6.6% 17.0% 11.0% 8.0% 5.9% 9.0% 28.7% 23.0% 34.1% 16.0% 12.9% 19.6% 5.7% 9.6% 1.1% 0.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 14.6% 2.5% 28.4% 6.4% 0.0% 0.0% 0.0% 0.0% 42.6% 41.0% 53.3% 57.0% 100.0% 100.0% 100.0% 100.0%
-1.5%
28.3%
29.0%
25.1%
31.0%
42.8%
20.3% 23.2% 19.3% 14.4%
12.9%
15.5%
8.3%
10.7%
369.9 40% 40% 92%
287.6 27% 21% 51%
581.9 1,173.9 76% 107% 60% 108% 124% 336%
401.4 46% 38% 139%
377.7 35% 27% 182%
102.2 12% 10% 25%
49.8 10% 7% 21%
82.2 11% 8% 31%
43.8 7% 6% 21%
79.3 20% 15% 56%
113.9 21% 17% 50%
36.6 9% 7% 36%
74.2 14% 8% 21%
October 03, 2012
35

New Generation private banks ICICI Axis Yes Sensitive sectors (Ex Infra) Iron and steel Engineering Textiles Gems Construction Airlines Commercial RE Total Infra Exposure SEB Private power Other Infra 5.1% 8.4% 0.7% 0.8% 4.2% 0.3% 3.2% 22.6% 10.1% 0.0% 6.4% 3.7% 3.3% 4.2% 1.6% 0.6% 0.7% 0.3% 3.4% 14.0% 14.6% 0.0% 8.1% 6.5% 2.7% 2.8% 0.4% 0.8% 6.0% 0.3% 2.8% 15.8% 6.0% 0.0% 4.8% 1.2% PSU banks PNB BOB Old generation private banks Federal ING SIB J&K 3.1% 1.0% 1.9% 0.0% 0.3% 1.0% 1.1% 8.5% 9.3% 3.2% 1.2% 5.0% 0.8% 0.5% 3.3% 4.6% 3.3% 0.0% 2.5% 14.5% 1.9% 0.0% 0.3% 1.6% 1.1% 0.2% 2.8% 0.5% 0.1% 2.0% 0.3% 6.9% 11.7% 3.7% 2.9% 5.1% 3.2% 1.4% 1.4% 0.0% 1.1% 0.0% 4.7% 11.8% 8.5% 1.5% 4.2% 2.7%
SBI
BOI
6.3% 7.4% 5.5% 5.3% 4.7% 2.3% 4.2% 1.2% 3.8% 1.4% 4.7% 3.8% 1.2% 0.3% 0.5% 2.7% 1.1% 1.1% 2.3% 1.1% 1.3% 1.3% 1.7% 2.1% 0.8% 4.3% 1.7% 1.9% 19.3% 18.1% 20.6% 18.2% 9.9% 13.6% 11.5% 14.0% 2.1% 3.9% 3.3% 2.6% 3.5% 5.6% 3.8% 6.5% 4.3% 4.1% 4.4% 4.9%
October 03, 2012
36
Prabhudas Lilladher
COMPANIES
October 03, 2012
37
Prabhudas Jammu & Kashmir Bank Lilladher CMP: Rs1,010 TP: Rs1,250 Rating: BUY
State liability advantage: J&K Bank enjoys a very strong liability franchise due to its state advantage, with CASA within J&K at ~55%. Despite just ~15% CASA outside J&K, J&K Banks total CASA at ~41% is the best in the industry, providing the bank with a significant cost advantage.
Key Financials (Rs m) Y/e March Net interest income Growth (%) Operating profit PAT EPS (Rs) Growth (%) Net DPS (Rs) FY10 11,193 13.8 9,582 5,120 105.6 24.9 22.0 FY11 15,437 37.9 11,495 6,152 126.9 20.2 26.0
MCap: Rs49.0bn
FY12 18,384 19.1 13,703 8,032 165.6 30.6 33.5 FY13E 21,313 15.9 16,276 9,372 193.3 16.7 38.5 FY14E 24,589 15.4 18,333 10,398 214.4 10.9 44.3
Growth picking up in J&K; Bank best positioned: Managements intended growth acceleration after five years of consolidation coincides with a phase of strong economic growth and activity in J&K. With ~60% market share in advances and deposits, we believe J&K Bank is best positioned to benefit from the J&K story. Also, outside J&K, the bank is concentrating on expanding lending expertise to mid corporates (predominantly AAA till now) and that will aid in improving lending yields.
Source: Company Data, PL Research Profitability & valuation Y/e March NIM (%) RoAE (%) RoAA (%) P / BV (x) P / ABV (x) PE (x) Net dividend yield (%) FY10 2.8 18.2 1.3 1.6 1.6 9.6 2.2 FY11 3.3 19.0 1.3 1.4 1.4 8.0 2.6 FY12 3.3 21.2 1.5 1.2 1.2 6.1 3.3 FY13E 3.3 21.0 1.5 1.0 1.0 5.2 3.8 FY14E 3.3 20.0 1.4 0.9 0.9 4.7 4.4
Competition will not be disruptive: High CASA + low operating costs make J&K an attractive expansion opportunity for private banks. However, our feedback from large private banks suggest that competition will not be disruptive. Also, expertise in specific segments like horticulture lending and state business (30% of J&K Banks loans) will be less impacted by competition.
More private than PSU bank: Low fees income and CA ratio are the only commonalities with PSU banks, apart from which J&K Bank is more of a private bank on most fundamental parameters like high CASA and margins, sound underwriting and high ROAs/RORWAs. Management continuity, which is a big issue with PSUs, is also absent in J&K Bank with ~5-6 years of average tenure for the Chairman; thus, valuation benchmarking to mid-cap PSU banks is unwarranted.
Source: Company Data, PL Research Stock Performance (%) Absolute Relative to Sensex 1M 12.7 4.5 6M 10.8 2.8 12M 32.2 17.5
Valuations extremely undemanding: J&K Banks valuations at 0.85x FY14 book is extremely reasonable relative to ROEs of +20% and with limited commonality with PSUs + low Infra risk, we believe market should not peg J&Ks valuations with mid-cap PSUs. We base our Sep-13 PT of Rs1250/share on a modest 1.05x FY14 book, with possible upsides from MetLife stake transfer. October 03, 2012
38
Prabhudas Lilladher Consolidation done; Growth to pick up

Yr Mar-99 Mar-01 Mar-02 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Dep. Growth (%) 32.0% 18.5% 15.6% 27.2% 16.0% 8.5% 7.3% 13.5% 15.4% 12.8% 20.0% 19.4% 14.8% 17.3% 18.4% Adv. Growth (%) 36.7% 35.4% 34.9% 15.9% 24.0% 25.8% 17.9% 10.6% 10.8% 10.2% 13.6% 26.3% 20.0% 20.0% 20.0% CASA 36.6% 30.8% 34.0% 30.3% 32.0% 34.2% 37.0% 39.2% 38.1% 40.7% 40.5% 40.7% 39.5% 38.5% 38.5% C/D Ratio 45.8% 42.6% 49.8% 49.8% 53.2% 61.7% 67.8% 66.0% 63.4% 61.9% 58.6% 62.0% 68.4% 69.7% 70.3% NIMs 4.5% 3.5% 3.6% 3.0% 2.7% 2.7% 2.9% 2.7% 2.9% 2.8% 3.4% 3.4% 3.4% 3.4% 3.3% ROAs 1.6% 1.9% 2.3% 2.0% 0.5% 0.7% 1.0% 1.2% 1.2% 1.3% 1.4% 1.5% 1.5% 1.4% 1.4% 5.10% Leadership: MY Khan - Corporate growth main focus 1. Building corporate franchise - CD ratios low at 40% 4.70% 2. Bank recorded 27% CAGR growth v/s 17% in the State 3.03% 3. Liability franchise impacted, with CASA dipping to 32% from 36% 2.72% 2.51% Leadership: Dr. Haseeb Drabu (Joined in 2005) 1. 2005: Large losses in investment book and fall in NIMs due to ALM 2.89% mismatches 2. New management focus was to consolidate the liability franchise and 2.53% improve LDRs from low of ~50%. Credit growth was just 15% between FY06-10 but management significantly improved liability franchise 2.64% 3. Profitability improved with asset quality checks and improvement in 1.97% CASA/NIMs - ROAs moved up from 70bps to 135bps and ROEs from 10% to 19% 1.95% Leadership: Mr. Mushtaq Ahmed 1. With liabilities and profitability in place, new management now wants to 1.54% push the paddle on growth 2. Focus on (1)some improvement in share of J&K Bank in total advances and 1.66% (2) improve lending to smaller corporates outside J&K (bank historically 1.75% concentrated on only AAA corp. outside J&K) 3. We factor in 20% loan growth over FY12-15, with share of J&K Bank 1.84% remaining constant Gross NPAs Phases and Key focus area
October 03, 2012
39
Prabhudas Lilladher J&K state now the focus area for Advances growth
Share of J&K Bank has come off in Advances: In order to improve LDR, J&K Bank has largely lent to AAA corporates outside J&K due to limited credit appetite within J&K state. Focusing back on J&K: With growth focus coming back, management wants to improve share of J&K Banks advances and sees opportunity in Horticulture (Apples), State Infra building and personal loans With low credit penetration and state growth trajectory at a high, we believe the bank will be able to arrest the decline in share of J&K book. Focus outside J&K is now to take exposure beyond AAA corporates to improve yield. Management concentrated on AAA corporate lending to avoid risks and increase LDRs. The initiative now is to ramp-up on mid-corporate portfolio outside J&K as well.
Loan growth in J&K to pick up - This will arrest fall in J&K state share
Advances share - Within J&K Growth- Within J&K
Loan break-up Opportunities in and outside J&K (Mar-12)
60.0% 50.0% 40.0%

30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 2009 2010 2011 2012 2013 2014 2015
Sector Agriculture J&k Rest of India Trade J&k Rest of India Personal J&k Rest of India Retail Break up (Largely J&K) Housing Consumer Finance LAP Education/Others Corporate J&k Rest of India SME J&k Rest of India Others Rest of India J&K
% of FY12 book 9% 5% 4% 9% 6% 2% 16% 14% 2% 44% 3% 10% 43% 57% 6% 51% 8% 6% 2% 1% 1% 0%
October 03, 2012
40
Prabhudas Lilladher State prospects looking up + Unpenetrated

J&K s GDP growth on a upward trajectory
10.0%
8.0% 60%
Credit penetration still low in the state

India (Bank Credit/GDP) J&K (Bank Credit/Net GDP)
J&K well positioned to benefit from the same

% Share in J&K Advances 80.0%
70.0%
% Share in J&K Deposits
6.0% 4.0% 2.0% 0.0%
50%
40%
60.0% 50.0%
40.0%
30%
20%
10%
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
30.0% 20.0%
2009 2010 2011 2012
1985
1991
1982
1988
1994
1997
2000
2003
2006
2009
2012
Source: RBI
Source: RBI, PL Research
J&K: Per capita Income slowing catching up

100,000
Tourism has picked up substantially

Tourist (m)
Horticulture potential still not fully explored

Potential in Agri Sector Potential in Apple Farming; Total Apple Growers Apple growers funded by J&K Bank Penetration in apple growing Total areas under apple cultivation (m acres) WC for one acre of apple farming(Rs m/acre) Total funding in Apple farming (Rs m) 283,000 7,200 2.5% 0.33 0.30 99,000 16,240 84%
80,000 60,000
40,000
14.0 12.0 10.0 8.0 6.0

Haryana Maharashtra Gujarat Tamil Nadu Kerala Punjab Uttarakhand HP AP Karnataka West Bengal Rajasthan Chhattisgarh Orissa J&K MP Assam Jharkhand Uttar Pradesh Bihar
20,000 0
4.0
2.0 0.0
2007
2008
2009
2010
2011
J&K's Agri Portfolio Gap in formal funding (%)
Source: Tourism Ministry, PL Research
October 03, 2012
41
Prabhudas Lilladher Liabilities A big state advantage

J&K state has one of the highest CASA ratios at ~54% and with ~64% market share in J&K state deposits, J&K Banks liability franchise is among the best in the industry. Despite having just 15% CASA ratio in non-J&K states, overall J&K banks has CASA of ~40% currently, with ~55% CASA ratio in J&K state growing at ~20% CAGR. Cost of funds is among the lowest in the industry - J&K Bank has concentrated on AAA lending outside J&K (~63% of advances) and that has pulled down NIMs. J&K Bank is now concentrating within J&K for advances and more importantly to smaller corporates outside J&K to inch-up margins.
J&K Bank has one of the highest CASA ratios in India
80.0%
70.0% Current Savings
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Assam Rajas. All-India
Gujarat
Punjab
Bihar
AP
J&K CASA is among the highest, especially deposits within J&K

65%
Giving J&K a big cost of funds advantage

8.5% 7.5% 6.5% 5.5% 4.5% 3.5% 2.5% 1.5%
SBI BOB
Leading to NIMs in the top quartile

4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Margin
Cost of funds
55% 45%
35%
25% 15%
5%
J&K (in J&K) HDFCB SBI ICICI Axis J&K PNB Kotak ING Vysya IIB BOB Federal BOI Yes SIB
ING Vysya
October 03, 2012
Federal
Kotak
PNB
BOI
Yes
J&K
HDFCB
Axis
ICICI
SIB
IIB
42
Mahar.
Karnat.
UP
HP
Hary.
Delhi
J&K
WB
Prabhudas Lilladher Low risk Infra Lending; Credit costs under check
Stable asset quality: Asset quality has largely remained under control, primarily due to J&K Banks large exposure to AAA corporates in non-J&K portfolio. Within J&K Economic drivers are largely tourism and trade and the impact from current slowdown in the economy will be limited on J&K banks exposure in J&K state. Restructuring is limited at ~4% of loans and slippage rates have also largely been under control. Low risk Infra book: Infra exposure is Rs35bn currently with power exposure of Rs15bn. Of the total, thermal power exposure is at <Rs7bn with larger proportion linked to hydro and unconventional power projects and hence, risks from Infra portfolio is limited.
Outside J&K: Lending largely to AAA corporates
Advances Share Outside J&K Overall Growth Outside J&K (RHS)
70.0%
60.0%
50.0% 40.0%
30.0%
20.0%
10.0% 0.0% 2009 2010 2011 2012
45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
Infra book: Low exposure to thermal power facing coal issues currently
(Rs m) Infrastructure Power Hydro Non-Conventional Other Power Projects & Services Thermal Roads+Ports Other Infra
Slippages and credit costs

2.5% 2.0% 1.5%
1.0% 0.5% 0.0% 2008 2009 2010 2011 2012 Gross Incremental Slippage LLP/average loans
% of advances 10.6% 4.7% 1.5% 0.3% 0.8% 2.0% 2.9% 3.1%
35,175 15,414 5,116 956 2,576 6,767 9,597 10,165
October 03, 2012
43
Prabhudas Lilladher Concern #1: Competition in J&K

Unpenetrated by private banks:
SBI & PNB been historically large, HDFCB has started to build up in FY12
PNB 8%
J&K Bank, with strong CASA deposit base and high-yielding loan book, has been a under-penetrated market, with % share of private sector banks at just 3-4%. Apart from J&K Bank, SBI and PNB have been active banks in J&K in the past and competitive impact has been limited.
HDFCB, which had limited presence in J&K till FY11, has rampedup its branch network from 11 to 35 branches in FY12 and market concern for J&K Bank is the potential competition building up.
HDFCB Others 3% 10%
J&K 38%
SBI 15%
HDFCB acknowledges J&K to be a good market and service offering of HDFCB will be better than their PSU peers. However, we do not believe that its increasing presence will be a game changer for J&K Bank due to : J&K contributes just <0.5% of total system advances and <1% of total system deposits and hence, strategic focus for HDFCB in J&K will be limited due to the size of the market. Strong relationships with SME clients and also State Govt. agencies/employees for J&K bank built over the years will ensure some stickiness - ~25% of J&K banks advances are to State Govt. or their employees. Agri-related lending is largely horticulture where the opportunity is large - just <10% penetration of formal lending in Apples.
Co-op banks 26%
Share in incremental branch addition (FY09-12)

Others 25.4%
J&K Bank 36.1%
HDFCB 13.7%
Overall, given the slow growth in traditional geographies, private sector banks, including HDFCB, may increase J&K penetration. However, due to the above mentioned reasons, we believe it will not be a game changer for J&K.
October 03, 2012
PNB 9.0%
SBI 15.9%
44
Prabhudas Lilladher Concern #1: Competition in J&K

How important is J&K: <1% in total deposits/advances
1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4%
0.2% 0.0% % Share in CASA % Share in Credit % Share In Deposit % Share in GDP
Feedback/ highlights from individual banks

HDFC Bank: Largest competitive threat from HDFCB as they have added ~24 branches in FY12.
HDFCB sees J&K as a lucrative market but the ~24 branches in FY12 should be looked in context with ~560 branches opened across India in just one year by HDFCB and not seen as a rush into J&K. We note that even 10% market share in J&K will not add more than 1% to HDFCBs loan book.
Source: PL Research
% of individual banks loan book assuming 10% market share in J&K

1.20% 1.00% 10% share in J&K over the overall book
SBI and PNB have always been present in J&K, with both SBI + PNB contributing ~25% of the state branches and hence, we do not see competition from even larger PSUs as a material threat to J&K Bank.
ICICI Bank still has just <10 branches in J&K and our interactions with them does not suggest of significant ramp-up in branches in the state. Apart from SBI and PNB, two co-operative banks constitute ~26% of total of the states total branch network which effectively does not compete with J&K Bank. Also, of the two co-operatives, J&K owns 100% of J&K Grameen bank (17% of total branches).
0.80%
0.60%
0.40%
0.20%
0.00% HDFCB BOI ICICI BOB PNB SBI
Source: PL Research
Source: PL Research
October 03, 2012
45
Prabhudas Lilladher Concern #2: How PSU is J&K Bank

PSU Bank Ownership Management Change Pension Issues Operating metrics 1. Liability Franchise 2. Pace of Growth 3. Fee income franchise 4. Niche lending franchise Most PSU banks have seen a significant deterioration in CASA franchise Growth of most PSU banks between FY04-08 and 09-11 was higher than comfort levels, leading to high NPAs + Restructuring Weak with fee/assets <0.6-0.7% Except Agri, which has moral hazard issues, PSU banks have not developed any niche on the lending side High growth led to compromise on credit standards reflected in current asset quality + restructuring Most PSU banks have built a concentrated Infra book which could imply credit issues in FY13-15 Mostly under-capitalised - signifcant dilution to meet Basel III ROAs and RORWAs also remain sub-optimal v/s Private sector banks J&K, due to consolidation between FY05-10, improved on its liability franchise Calibrated growth during last 6-7 years has helped J&K to improve on asset quality with stable credit costs Largely liability-driven bank and hence, fee income has remained a weakness J&K has an advantage of an under-penetrated state; however, has not been able to build on a niche in non-J&K portfolio (~60% of advances) Relatively better than PSU banks - Though compromised on yields, J&K Bank has not lent aggresively and funded AAA corporates and has seen lower restructuring J&K also has an Infra book, including power, but >50% of their exposure is either Hydro/uncoventional No dilution in last 7-8 years. Well capitalised, with Tier-1 capital at 11% ROAs and RORWAs at 1.4% and 2.3% is comparable with most private banks Central Govt. owned, with ~20% cap on FII holding Every 1-3 years, with frequent change in strategy and most importantly, transition-related asset quality issues Unamortised pension + Weak assumptions J&K Bank State govt. owned (~53%) but with no cap on FII holding (current FII holding at ~25%) Much higher stability, with ~5-6 years average tenure for the last two Chairmen J&K also has unamortised pension and assumptions on pension are similar to that used by PSU banks
5. Credit underwriting 6. Risky Infra exposure 7. Capitalisation 6. ROAs and RORWAs
October 03, 2012
46
Prabhudas Lilladher ROE Tree: High ROAs and RORWAs

2008 NIM/Assets 2.69% 2009 2.85% 2010 2.85% 2011 3.39% 2012 3.39% 2013E 3.36% 2014E 3.35% 2015E Comments Marginal NIM contraction largely leverage linked - We 3.30% have not factored in potential benefit of higher share of non-AAA rated corporates in our numbers 0.54% 0.09% 3.93% In Opex, we factor in marginal increase in FY14 related to wage settlement Factored in increase in credit costs from ~50bps to -0.36% 70bps and flat prov. coverage at ~90% -0.68% -1.50% -2.55% ROAs to remain in the 1.3-1.4% range. Risk from higher 1.38% slippage from non-AAA book build up but could be compensated by higher NIMs 7.0% 19.8% ROEs remain best in class at +20% 2.06% RORWA in line with private peers Weak fee income franchise. Expect stable growth. Don't see signifcant levers of improvement
Fees/Assets Inv. Profits/Assets Net revenues/Assets Opex/Assets Provisions/Assets Taxes/Assets Costs/Assets ROA Equity/Assets ROE RORWA
0.58% 0.24% 3.51% -1.34% -0.26% -0.71% -2.32% 1.19% 7.1% 16.7% 2.07%
0.53% 0.23% 3.61% -1.36% -0.41% -0.64% -2.42% 1.19% 7.1% 16.7% 2.19%
0.62% 0.44% 3.91% -1.47% -0.43% -0.71% -2.61% 1.30% 7.2% 18.2% 2.43%
0.60% 0.20% 4.19% -1.67% -0.47% -0.70% -2.84% 1.35% 7.1% 19.0% 2.29%
0.55% 0.07% 4.00% -1.48% -0.31% -0.73% -2.52% 1.48% 7.0% 21.2% 2.40%
0.54% 0.11% 4.02% -1.45% -0.40% -0.72% -2.56% 1.45% 7.0% 20.9% 2.29%
0.54% 0.11% 4.00% -1.50% -0.42% -0.69% -2.61% 1.39% 7.1% 20.0% 2.12%
October 03, 2012
47
Prabhudas Lilladher Valuations: PT of Rs1250/share; BUY

PT of Rs1250/share; +24% upside: We value J&K Bank conservatively at 1.05x FY14 book and excluding the surplus on the MetLife stake, we have a Sep-13 PT of Rs1250/share, implying ~25% upside from current levels. Deserves better valuations than PSU peers, valuation conservative: Given significantly better operating metrics, no limit on FII holding and stable management, we believe J&K deserves better multiples than PSU banks. Also, we value insurance business at ~40% lower than the recent PNB deal. Our PT implies <1.1x fwd book which is in-line with historic multiples but with much better return ratios and state growth prospects. Current stock price implies just 0.85x FY14 book. Continuation of better asset quality will be the key trigger for the stock. Terrorism and J&K competition remain the key risks.
1-yr fwd P/B chart
1.50 J&K Average
J&K Bank : PT of Rs1250/share

Risk free rate Equity Risk Premium Beta Cost of Equity Terminal growth Normalised ROE Stage 2 growth Sep-13 PT Implied Mar-14 P/B Implied Mar-14 P/E 8.0% 6.0% 1.20 15.2% 5.0% 17.1% 11.0% 1250 1.08 5.8
Source: PL Research
Similar valuations to PSU banks is unwarranted

1.40 1.20 1.00 0.80 0.60 0.40 0.20
F13 P/B
1.30
1.10
0.90
0.70 0.50
0.30
0.10
Feb-07
Sep-11
Mar-09
Dec-07
Aug-09
Feb-12
Sep-06
Jan-05
Jun-05
Jan-10
Jun-10
Jul-07
Apr-06
May-08
Oct-08
Nov-10
Nov-05
Apr-11
Jul-12
-0.10
0.00 Vijaya Bank Indian BOI Andhra J&K PNB BOB SBI
Source: PL Research
October 03, 2012
48
Prabhudas Lilladher Financials ROEs remain best in class

Balance sheet growth picking up
Deposit Growth 30.0% 25.0% 20.0%
15.0%
NIMs: Marginal contraction linked to leverage

NIM 4.00% 3.50% 3.00%
2.50%
We factor in just 16-17% fee income growth

Fees growth 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
Loan Growth
NIM Capital Adjusted
10.0% 5.0% 0.0%

2011
2008 2009 2010 2012 2013E 2014E 2015E
2.00% 1.50% 1.00%
2009
2010
2008
2011
2012
2013E
2014E 2015E
2013E
2014E
2015E
Marginal inch-up in cost expected in FY14

Cost-Income 44.0% 42.0% 40.0% 38.0% 36.0% 34.0% Cost-Asset (RHS) 2.00% 1.50%
1.00%
Factoring in some build-up in slippages

Gross NPA 3.00% 2.50% 2.00%
1.50%
ROAs and ROEs remain best in class

RoE (RHS) 25.0% 20.0% 15.0%
10.0%
Gross Slippage
ROA 1.60% 1.40%

1.20%
1.00% 0.80% 0.60% 0.40%
0.50% 0.00%
1.00% 0.50% 0.00%
5.0%
2009
2011
2008
2010
2011
2012
2008
2009
2010
2014E
2013E
2015E
2012
2013E
2014E
2015E
2009
2008
2010
2011
2012
October 03, 2012
2014E
2013E
49
2015E
2009
2010
2008
2011
2012
Prabhudas Lilladher Summary Profile

Advances within & outside J&K (Rs m) Liabilities within and outside J&K
CA-Rest of India 2.5% Within J&K 125,740 38% TD-J&K 31.7% CA-J&K 9.4%
SA-Rest of India 1.7%
Outside J&K 205,560 62% TD-Rest of India 23.8%
SA-J&K 31.0%
Shareholding Pattern
Individuals 10.75%
Others 6.60%
Loan Mix
Retail 16.0%
Insurance 0.44% MF's 2.51%
Agri 9.0% Promoter 53.17% SME 17.0%
Corporate 57.0%
FII's 26.53%
Source: NSE India
October 03, 2012
50
Prabhudas Lilladher Financials

Income Statement (Rs m) Y/e March Int. Earned from Adv. Int. Earned from Invt. Others Total Interest Income Interest expense NII Growth (%) Treasury Income NTNII Non Interest Income Total Income Growth (%) Operating Expense Operating Profit Growth (%) NPA Provisions Investment Provisions Total Provisions PBT Tax Provisions Effective Tax Rate (%) PAT Growth (%) FY10 23,417 7,046 30,569 19,375 11,193 13.8 1,734 2,428 4,162 34,731 7.4 5,774 9,582 23.7 1,500 (388) 1,670 7,912 2,792 35.3 5,120 24.9 FY11 26,296 10,661 37,131 21,695 15,437 37.9 924 2,724 3,648 40,779 17.4 7,589 11,495 20.0 1,461 410 2,151 9,344 3,192 34.2 6,152 20.2 FY12 33,937 14,033 48,356 29,972 18,384 19.1 359 2,983 3,341 51,697 26.8 8,022 13,703 19.2 1,400 123 1,692 12,011 3,979 33.1 8,032 30.6 FY13E 42,999 17,005 60,391 38,930 21,461 16.7 700 3,448 4,148 64,538 24.8 9,185 16,424 19.9 2,525 2,525 13,899 4,604 33.1 9,295 15.7 FY14E 50,195 18,943 69,524 44,599 24,925 16.1 800 3,986 4,786 74,310 15.1 11,045 18,666 13.7 3,093 3,093 15,574 5,159 33.1 10,415 12.1 Total CAR Tier I Capital Tier II Capital 15.9% 12.8% 3.1% 13.7% 11.3% 2.4% 13.4% 11.1% 2.2% 12.8% 10.9% 1.9% 12.1% 10.6% 1.6% Key Ratios Y/e March Gross NPA (%) Net NPA (%) NPA Coverage (%) Gross Slippages (%) Credit Cost (%) FY10 2.01 0.28 86.1 0.9% 0.7% FY11 1.98 0.20 89.7 1.2% 0.6% FY12 1.56 0.15 90.4 1.2% 0.5% FY13E 1.68 0.16 90.4 1.6% 0.6% FY14E 1.78 0.17 90.4 1.6% 0.6% Balance Sheet (Rs m) Y/e March Equity Networth Adj. Networth Deposits Low Cost deposits Total Liabilities Net Advances Growth (%) Investments Total Assets FY10 485 30,105 29,461 372,372 151,532 425,468 230,572 10.2 139,562 425,468 FY11 485 34,787 34,254 446,759 180,867 505,082 261,936 13.6 196,958 505,082 FY12 485 40,932 40,438 533,469 217,152 602,692 330,774 26.3 216,243 602,692 FY13E 485 48,118 47,481 612,452 241,919 686,244 396,929 20.0 235,766 686,244 FY14E 485 56,003 55,192 718,533 276,635 803,339 476,315 20.0 264,798 803,339
Source: Company Data, PL Research
October 03, 2012
51
Prabhudas ING Vysya Bank Lilladher CMP: Rs411 TP: Rs480
Regional bank with most urban characteristics: ~65% of ING's branches are in Urban/Metro centres, which is almost 1.6x of urban branch mix of regional/PSU banks and in line with private banks. ING also benchmarks very favorably with peers on parameters like CA ratio and fee-to-assets, where regional banks have struggled. We, thus, believe that right branch efficiency benchmarks for ING is large private peers rather than regional banks, indicating significant catch-up potential in INGs branch efficiency.
Rating: BUY
MCap: Rs61.8bn
FY12 12,084 20.1 7,679 4,563 30.4 15.4 4.0 FY13E 14,515 20.1 10,077 5,486 36.5 20.2 5.0 FY14E 17,241 18.8 12,819 6,948 46.3 26.7 6.0
Robust asset quality with negligible Infra risks: ING's expertise in SME lending, low-risk retail book (80% mortgages+ LAP) and low exposure to sensitive sectors have kept credit costs at <50bps. ING has completely refrained from Infra lending, with Infra book at <2% of exposure, negligible thermal power and also has restructured the least. We conservatively factor in credit costs to inch up to 65bps from 35bps. However, with negligible Infra exposure, lumpy slippages are unlikely in FY14/15.
Addressing cost concerns: ING's Achilles' heel has been its cost ratios which has restricted ROA improvement. Management is following a calibrated branch expansion strategy, with significant efficiency gains expected from existing branches, which we believe, will play out over the next 2-3 years as ING's high Urban-Metro branch mix still has significant scope for efficiency improvement. We factor in cost income to come off from 59% to 52.5% by FY15, improving ROAs to 1.2% despite assuming high credit costs.
Source: Company Data, PL Research Stock Performance (%) Absolute Relative to Sensex 1M 12.3 4.0 6M 12.8 4.8 12M 41.0 26.3
Valuation undemanding, BUY with a PT of Rs480/share: We believe INGs profitability improvement will continue as management drives more growth from better branch efficiency. We believe valuations are undemanding at 1.2x FY14 book, considering higher ROEs (~16% in FY1415), coupled with no Infra risks. Stable asset quality and improving cost ratios over the next 6-12 months would be the key stock catalysts. October 03, 2012
52
Prabhudas Lilladher Much more urban than South-based peers

ING Vysya bank started as Vysya bank, a community bank. However, INGs acquisition in 2002 started the transformation. ING Vysya has, over the last decade, been more urban-centric than most peers, with +50% of branches in Metro+Urban centres. ~80% of branch addition over the last four years have been at Metro/Urban centers, taking % of branches in Metro/Urban centers to ~65%.
ING more urban-centric than regional peers, in line with large private banks
80% 70% 60% 50%
40% 30% 20% 10%
Indusind
Federal
HDFCB
Branch network of ING is, thus, more urban-centric than all regional banks and is comparable to larger private peers, thus, making both costs and efficiency comparisons with South-based banks less relevant.
Kotak
ING
Yes
ICICI
65% branches in Metro+Urban centres (FY12)

Rural 17%
~80% branch addition in Metro+Urban (FY08-12)
ING has been expanding beyond South India

AP Rest Of South North & East West
Metro 30%
600 500
400
Semi Urban 19%
300 200 100 Urban 34% 0 FY08 FY09 FY10 FY11 FY12
October 03, 2012
Axis
J&K
SIB
53
Prabhudas Lilladher Building on its strength in SME lending

SME/Business banking: (32% of book)
INGs Loan book: SME continues to remain focus area
% of FY12 loans Share Gr. (FY12 CAGR over (FY08FY08) 12) Focus Risk Profile
Inherent strength of the bank.

SME share in advances has increased from 22% in 2008 to ~32%. Sole banker relationships + lending against hard collaterals - key to success on which ING remains focused on. ING aims to be among the Top 3 players in this space, with ~Rs2bn of monthly disbursements. Very well diversified, but more importantly, limited Infra exposure -- 4.6% of this book, just ~2% of total loans. INGs MNC connections globally aid in sourcing and bank is increasingly leveraging on INGs global platform. ING intends to increase the share of emerging/mid corporates in their loan book. Largely mortgages + LAP 80% of retail loans. Proportion of retail has come off as ING has rolled down unsecured book started in 2008-09 due to high delinquencies. Concentrating on Mortgages with increasing share of LAP disbursements (~40% of total mortgages). Selectively looking at CVs/Gold, not keen on building Car book.
Mortgages Large + Mid corporates
Large and Emerging corporates: (42% of book)

SME/Business Banking
Growth picking up over the last two Well diversified years. Focus on Mid 42.0% -4.2% 15.6% portfolio with corporates more + negligible Infra risks ING global relationships Biggest focus area Totally secured with where ING has built hard collaterals and 9.2% 28.8% a niche. ~35% of mostly sole banker portfolio is small relationships with traders clients ~80% book Share of retail down mortgages+LAP and 15.2% as ING has run down hence, slippages its unsecured book risk limited Focusing more on LAP, with ~40% High LTV ensures 23.6% incremental low loss, given disbursements being default LAP Unsecured book now <1% of loans after Write-off in -3.7% roll down. Some unsecured book focus on gold and done with CV lending 8.4%
32.1%
Retail (19% of book)
Consumer Finance
19.2% -2.2%
15.6%
2.5%
Exmortgages Others
3.7% -4.7%
6.7% -2.8%
October 03, 2012
54
Prabhudas Lilladher SA not weak but CA ratio Best-in-Class

INGs CASA composition is unique, with robust SA ratio (16%); however, more importantly best in class CA ratio of +18%. High CA takes INGs overall CASA to 33-34% which is better than most regional banks. Current Accounts Best in Class: ~18% CA ratio indicates strong liability product offering to corporates and is comparable to the likes of HDFCB/Axis. Per branch CA is ~5x of south-based peers, >2x of large PSUs and comparable to private peers - Much higher urban branch presence. Savings accounts - Not weak but still way to go: SA ratio at 16% is in the third quartile among banks - Per branch SA significantly lags peers with urban presence. ING is adding ~60K new salary accounts/quarter and focus is on increasing corporate empanelment further.
CA per branch also among the best
300 250
Highest CA among banks

25%
20% 15%
10%
5%
0%
SBI
J&K
BOI
HDFCB
Kotak
BOB
Axis
ING Vysya
SA deposits : Still some way to go

40%
Build up in the SA salary accounts

New to Bank Salary Accounts (000) for the Quarter 70 60 50 40 30 20 10 0
CA/branch (Rs m)
SA ratio (%)
200 150 100 50 0
30%
20%
10%
0%
SBI
J&K
BOI
BOB
HDFCB
Axis
SIB
Federal
Kotak
PNB
ING Vysya
Axis Kotak HDFCB IIB Yes ICICI ING J&K BOB SBI PNB BOI Federal SIB
ICICI
Yes
IIB
1Q11
3Q11
4Q12
2Q11
4Q11
1Q12
2Q12
3Q12
October 03, 2012
1Q13
Federal
Yes
ICICI
PNB
55
SIB
IIB
Prabhudas Lilladher Fee income also Best in Class

INGs fee/assets at ~1.5-1.6% is higher than PSU banks and South-based banks at <0.8% of assets and in line with Private sector banks. Most South-based banks have strong liabilities franchise only with some niche lending capabilities and lack a robust fee income business INGs high fee-to-assets further distinguishes ING from the rest of the pack. ING has a strong corporate fee income franchise and is focusing on building of retail fee income streams like wealth management/advisory, retail/SME Fx and trade and increase crossselling to banks existing liability customers. We factor in fee income growth of ~17% and expect fee/assets to remain in the range of 1.5-16% over FY12-15E.
Fees is ~35% of total Income (ex-treasury)
50.0% 40.0%
30.0%
Fee/Assets comparable to large private banks

2.5%
2.0% 1.5% 1.0% 0.5% 0.0%
SBI
Fees/Asset
BOI
BOB
J&K
HDFCB
Axis
Kotak
Large proportion of fee corporate linked

Recoveries Investment 4% Related 2% FX & Derivatives 22% Others 3%
Liability Related 18% Asset Related 17%
Non-fund based exposure highest among peers

80.0%
Fees/Income
Non fund dependence (% of fund based book)
60.0% 40.0% 20.0% 0.0%
20.0%
10.0%
ICICI Axis IIB ING HDFCB Kotak SBI BOB BOI PNB Feder Yes SIB J&K
0.0%
Wealth mng. & Advis. 17%
Trade Finance & CMS 17%
October 03, 2012
ICICI Axis Yes SBI IIB ING J&K PNB BOI SIB Kotak BOB HDFCB Federal
Federal
ICICI
ING
PNB
Yes
56
SIB
IIB
Prabhudas Lilladher Asset quality Stable in an uncertain environment

INGs asset quality has surprised even the management, with low levels of delinquencies, especially in their SME portfolio. Gross NPAs have come off from 3.0% in FY10 to ~2.0% in two years, with ~60% of the ~60bps provisioning over last two years used to just inch-up provisioning cover. SME/Mid corporate Strong trends Emphasis on Hard collateral: Not only reduces loss given default but also reduces risk of default as promoters house is used as collateral in most cases. Sole banker relationship in most cases: Complete understanding of client indebtedness. Management expects some credit cost normalization over FY1214. Large corporates: Well spread; Limited power risk ING has limited exposure to sensitive sectors, with total Infra exposure at <2% of loans and most importantly negligible thermal power exposure Big re-rating catalyst for many retail banks over last 18-24 months. Lumpy Telecom 2G exposure, mainly on parent MNC relationships, backed by MNC guarantees (evident in Uninors case). Retail Low risk portfolio currently 80% Mortgages+LAP After run-down of its unsecured book from FY08-09 levels, INGs current retail portfolio is ~80% mortgages. Expect retail book to remain low risk with just some inch up expected in CVs and low risk gold funding.
and ING has not resorted to restructuring
9.0%
8.0% Restr. book % of advances (4QFY12)
Gross NPA has come in a difficult economic environment

3.50% Gross NPA ratio
3.00% 2.50%
2.00%
1.50%
1.00% 0.50%
0.00% 2006 2007 2008 2009 2010 2011 2012
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Federal ING
SBI
ICICI
October 03, 2012
BOB
57
PNB
J&K
Axis
BOI
SIB
Prabhudas Lilladher Negligible credit costs adjusted for coverage

Infra exposure the least among peers
16.0% 14.0%
12.0% 80.0%
Coverage has inched up considerably

100.0% Provision coverage
10.0%
8.0%
60.0%
40.0% 20.0%
Union
6.0%
4.0% 2.0%
0.0%
ING
Yes
SBI
PNB
J&K
ICICI
BOB
BOI
SIB
Federal
Axis
0.0% 2006 2007 2008 2009 2010 2011 2012
SME Book: Largely trading linked

Contractors 3%
Adjusted for coverage credit costs have remained low

1.80% Traders 35% 1.60%
1.40% 1.20% 1.00% 0.80% 0.60% LLP/average loans LLP (Adjusted for coverage)
Others 15%
Textiles 5%
Automobile 6%
Food Processing 8% Rent discounting 8%

Gems 9%
0.40%
Manufacturing 11%
0.20% 0.00% 2006 2007 2008 2009 2010 2011 2012
October 03, 2012
58
Prabhudas Lilladher Cost Concern #1: Why is cost income high ?

High Costs - INGs Achilles Heel: INGs cost income of ~60% and cost/assets of ~2.7% is the highest in the industry and impacts return ratios for ING despite high fees and low credit costs. Historically, large expansion in Urban/Metro centers have not been accompanied by similar expansion in business. Cost Analysis - Employee Costs: Employee costs/assets at 1.4-1.5% is among the highest v/s ~1.0% avg. employee costs/assets for large and regional private banks- Cost per employee at ~Rs0.7m is similar to other banks but the key difference is that ING generates similar business/ branch to regional banks and has 1.8x the employees/branch v/s south-based banks and generates ~40% lower business/branch and has similar number of employees/branch as large private banks. Cost Analysis Overheads: Even overheads for ING at ~1.0% of assets is higher than South-based banks and similar to larger private peers. Overheads/branch for ING is Rs10m/branch v/s Rs5m/branch for South-based banks.
ING screens out to have high cost income due to branch inefficiency
ICICI Axis Cost income and Cost to Assets highest in the industry Cost to Assets 1.8% 2.3% Cost to income 42.9% 45.0% Employee costs higher as employee/branch higher but peers Employee cost/Assets 0.8% 0.8% Employees/branch 21.2 19.6 Cost/Employee 0.70 0.83 HDFCB 2.8% 48.4% 1.1% 26.0 0.67 Kotak 3.1% 53.8% 1.5% 31.0 0.96 1.65% 27.11 1,086 349 142 76% IIB 2.6% 50.5% 0.9% 23.4 0.66 1.67% 21.44 1,059 289 117 67% Yes 1.4% 38.3% 0.7% 15.8 1.17 0.69% 12.85 1,381 208 70 63% ING 2.6% 59.5% 1.4% 19.0 0.72 1.18% 9.57 668 229 107 67% Federal 1.7% 40.7% 1.0% 10.2 0.66 0.78% 4.58 515 142 115 39% SIB 1.7% 50.3% 1.0% 8.4 0.76 0.67% 3.47 521 103 85 42% J&K 1.4% 37.5% 0.9% 14.8 0.66 0.51% 4.66 885 360 265 37%
Overheads/Assets 0.99% 1.49% 1.69% Overheads/branch 15.75 24.21 20.40 Efficiency ratios compare poorly with banks with similar Urban-Metro mix Business/branch 928 1,357 970 CASA/branch 403 564 469 SA/branch 276 319 291 Metro+Urban branches (%) 58% 61% 62%
October 03, 2012
59
Prabhudas Lilladher Cost concern #2: Cost optimization v/s Growth

Management target on costs: Cost income has improved over the last 3-4 years. However, management expects C/I to improve to 51-52% levels over the next three years. Strategy calibrated branch addition: ING has calibrated branch opening, adding just 30-35 branches a year and similar numbers planned, going forward and focusing on driving better efficiencies of existing network. The big question: Is ING compromising on future growth to bring costs under control? We believe the answer lies in understanding/mapping the potential of the current branch network of banks:
INGs branch efficiency is similar to South-based banks on most parameters, including Business/Deposits/CASA per branch but is ~40% lower on Business/Deposits per branch and ~50% lower on CASA per branch v/s larger peers.
We believe the right efficiency comparison is v/s private sector banks as branch network is more urban and thus, business model is also similar to larger private peers with high fees, high CA and high urban/metro branches
Branch/employee growth not high for ING

60% 50% 40% 30% 20%
10% Branch CAGR (FY08-FY12) Employees (FY08-FY12)
Branch efficiency among the worst though

1,500
Emp./branch high due to high Urban branch mix

30
Deposits/Branch
CASA/Branch
HDFCB ICICI SBI J&K PNB BOI BOB Federal SIB 30% 40% 50% 60% Urban / Metro Branches Axis
Yes
(Rs m)
1,000 500 Yes Axis Kotak IIB BOB HDFCB ICICI J&K BOI SBI PNB ING SIB Federal
Employee / Branch
25 20 15 10 5
Inudusind ING
0%
Federal Kotak Yes IIB
J&K
HDFCB
Axis
ING
SIB
70%
October 03, 2012
60
Prabhudas Lilladher Cost Concern #3: How cost efficient can ING be?
INGs branch efficiency has been improving, with deposits/branch increasing to Rs700m/branch v/a Rs1.1-1.2m of deposits/branch for large private banks which is still ~40% lower. The efficiency gap was higher at ~60% in FY08-09 and with robust growth over last 3-4 years, efficiency gap has closed in from 60% to 40%. Management strategy: Management believes 80:20 principle works for branch network - Of INGs ~530 branches, 90 branches give ~80% of their business and managements focus is to concentrate on just targeting high impact branches. With ~200 branches planned in five years, ING intends to more than double business, targeting 80-90 high impact branches and this is evident in their branch additions even over FY08-12. We do not expect growth to get impacted: Branch efficiency still has a long way to go 40% lower than peers, South-based banks not the right comparison considering their branch network. We factor in ~100 branch additions by FY12-15 and expect the efficiency gap to close down further to ~20-25% and, thus, cost income to move to 52% by FY15E. The key risk for ING is that it already runs large deficit on RIDF funding and limited expansion in rural/semi-urban centers which will further increase RIDF commitments.
Efficiency worst among Urban -centric banks
1,600
ING slowly closing on efficiency gap with peers (deposits/branch)

1,500
Expect cost ratios to come off over FY12-15E

90.0%
80.0% Cost to income Cost to Assets (RHS)
Axis
1,400 Yes BOB J&K
Average (HDFCB,Axis)
ING Vysya
6.0% 5.0% 4.0% 3.0%

2.0%
1,300
1,100
1,200 1,000 800 600 400 SBI
70.0% 60.0%
50.0%
ICICI Inudusind HDFCB ING

SIB
900 700 500 300 70% 100 2006 2007 2008 2009 2010 2011 2012
BOI PNB
40.0% 30.0% 20.0%
1.0% 0.0%
Federal 30%
2010
2005
2006
2007
2008
2009
2011
2012
2014E
2013E
October 03, 2012
2015E
61
Prabhudas Lilladher ROE Analysis: Cost improvement to drive up return ratios

2009 NIM/Assets Fees/Assets Inv. Profits/Assets Net revenues/Assets Opex/Assets 2.42% 1.88% 0.16% 4.46% -2.88% 2010 2.70% 1.76% 0.26% 4.71% -2.63% 2011 2.91% 1.61% 0.28% 4.80% -2.97% 2012 2.95% 1.60% 0.03% 4.59% -2.71% 2013E 2.96% 1.57% 0.10% 4.64% -2.58% 2014E 2.94% 1.56% 0.13% 4.62% -2.44% 2015E Comments We expect flat margins over the next 2-3 years. Yield 2.94% improvement in retail book will offset some margin pressures due to leverage Fee income franchise is strong - building further on private 1.54% wealth and Fx/trade business 0.13% 4.61% -2.34% Cost/Assets to continue to show improving trend. Largest contributor to ROA improvement for ING
Provisions/Assets Taxes/Assets Costs/Assets ROA Equity/Assets ROE RORWA
-0.48% -0.39% -3.76% 0.70% 5.6% 12.5% 0.92%
-0.88% -0.42% -3.93% 0.79% 6.2% 12.7% 1.14%
-0.44% -0.48% -3.88% 0.92% 6.8% 13.5% 1.36%
-0.28% -0.48% -3.47% 1.11% 7.8% 14.3% 1.51%
-0.39% -0.55% -3.52% 1.12% 8.4% 13.4% 1.46%
-0.42% -0.58% -3.44% 1.18% 7.9% 15.0% 1.52%
Headline provision assumprtions seem flat YoY. However, -0.44% adjusted for coverage, we assume credit costs to inch up from ~30bps to 60-65bps -0.60% -3.38% 1.22% 7.5% 16.3% 1.56% Expect ROEs to inch upto ~15-16% by FY14/15 after being stuck in a narrow band of 12.5-14% b/w FY08-12 Despite 2x credit costs, we expect ROAs to inch upto ~1.2-1.25% credit costs may throw a positive surprise
October 03, 2012
62
Prabhudas Lilladher Financials Expect ~24% PAT growth over FY12-15E

Expect loan growth at 20-22%
Deposit Growth 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Loan Growth 3.50% 3.00% 2.50% 2.00% 1.50% 1.00%
Margins have inched up; expect flat trajectory from here on

NIM NIM Capital Adjusted
Expect fee income growth of 17-19%

70.0%
Fees growth
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2009
2010
2011
2008
2011
2012
2008
2009
2010
2013E
2014E
2015E
2012
2013E
2014E 2015E
2013E
2014E
2015E
Cost-to-income to improve from 59% to 52%

Cost-Income 70.0%
60.0%
Have assumed a normalization in credit costs

Gross NPA 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Gross Slippage
ROA/ROEs on a upward trajectory

ROA 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% RoE (RHS) 17.0% 15.0% 13.0%
11.0%
Cost-Asset (RHS) 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50%
50.0% 40.0% 30.0% 20.0%

2008 2009 2010 2011 2012 2013E 2014E 2015E
9.0% 7.0% 5.0%
2009
2008
2010
2011
2012
2013E
2014E
2015E
October 03, 2012
2014E
2013E
2009
2010
2008
2011
2012
2015E
2009
2010
2008
2011
2012
63
Prabhudas Lilladher Valuations: PT of Rs480/share

PT of Rs480/share; ~19% upside: We value ING Vysya Bank at 1.45x FY14 book and we have a Sep-13 PT of Rs480/share implying ~20% upside from current levels. Cost improvement - biggest lever: ING has a stronger corporate banking franchise on most parameters like fee income, CA deposits and also asset quality. Calibrated branch expansion will lead to improvement in cost income over the next 2-3 years and drive stock performance. Our PT implies 1.5x fwd book which is higher than historic valuations of ~10% as we expect return ratios to improve + asset quality risks seem limited with negligible thermal power exposure (strong positive in this environment).
ING Vysya Bank : PT of Rs480/share
Risk free rate Equity Risk Premium Beta Cost of Equity Terminal growth Normalised ROE Stage 2 growth Sep-13 PT Implied Mar-14 P/B Implied Mar-14 P/E
Source: : PL Research
8.0% 6.0% 1.10 14.6% 5.0% 17.1% 18.0% 480 1.46 10.4
Current valuations below historic levels

ING 2.00 Average
ING trading at significant discount with low Infra exposure banks (FY13)
0% -10%
-20%
1.75 1.50 1.25 1.00 0.75 0.50

Sep-06 Feb-07 Sep-11
Mar-09
-30%
-40%
-50%
-60%
-70%
Dec-07
Aug-09
Feb-12
Jan-05
Jun-05
Jan-10
Jun-10
Jul-07
May-08
Oct-08
Nov-05
Nov-10
Apr-11
Apr-06
Jul-12
-80%
IIB
Kotak
HDFCB
Source: : PL Research, Bloomberg
October 03, 2012
64
Prabhudas Lilladher Summary Profile

Key Personnel Designation MD & CEO Name Mr. Shailendra Bhandari Profile Mr.Bhandari joined ING in 2009 from Tata Capital where he was head of their private equity. Prior to Tata capital, he was the CEO and MD of of Centurion Bank of Punjab. Over 2000- 2004, he was the MD & CEO of ICIC Pru AMC. Prior to that, he was part of the core team that set up HDFC Bank in 1994 as Treasurer and Executive Director. Mr.Mehrotra has been with ING for over 6-7 years. He has over two decades of experience across various industries and geographies. He was the core team member at IDBI, responsible for various strategic initiatives. Mr.Sareen has been with ING for five years, prior to which he had 13 years of experience in Retail Banking at Citibank, where he worked across geographies, markets and products. Mr.Bimal has been with ING for six years. He has worked for BNP Paribas (India) and Lazard India and has a total experience of 15 years, both in India and the Middle East. Mr.Desai has been with ING for seven years. He has also worked at ABN AMRO, Standard Chartered and was also the core team member at IDBI responsible for banks strategy & repositioning. Mr.Wellen has been with ING India for four years. He has more than two decades of experience in Banking across BBL and ING and has worked across geographies in Credit and Risk functions.
Chief Financial Officer Country Head - Retail Banking Country Head - Private Banking Country Head - Wholesale Banking Chief Risk Officer
Mr. Jayant Mehrotra Mr. Uday Sareen Mr. Samir Bimal Mr. Janak Desai Mr. Jan Van Wellen
Shareholding Pattern (Jun-12)

Others 8.23%
Loan Mix
Retail 23.0%
Dilution History
Date
Corporate 41.0%
Individuals 8.93% FI's 0.25%
Dilution
No of Price shares Rs/Share 15.0 9.3 6.2 342 248 310
Amount (Rs m) 5,131 2,301 1,924
MF's 13.66%
Promoter 43.73%
Jun-11
Agri 8.0%
10.0% 8.3% 6.1%
Sep-09 Nov-07
FII's 25.20%
SME 28.0%
October 03, 2012
65

Income Statement (Rs m) Y/e March Int. Earned from Adv. Int. Earned from Invt. Others Total Interest Income Interest expense NII Growth (%) Treasury Income NTNII Non Interest Income Total Income Growth (%) Operating Expense Operating Profit Growth (%) NPA Provisions Investment Provisions Total Provisions PBT Tax Provisions Effective Tax Rate (%) PAT Growth (%) FY10 17,094 5,179 22,329 14,030 8,298 27.7 798 5,404 6,202 28,531 2.4 8,081 6,420 51.1 2,715 (18) 2,704 3,715 1,293 34.8 2,422 28.3 26,941 16,875 10,065 21.3 970 5,579 6,550 33,490 17.4 10,260 6,355 (1.0) 1,501 55 1,518 4,836 1,650 34.1 3,186 31.5 FY11 20,326 21 38,568 26,485 12,084 20.1 131 6,567 6,698 45,266 35.2 11,102 7,679 20.8 1,078 (4) 1,140 6,539 1,976 30.2 4,563 43.2 FY12 28,678 6 47,350 32,834 14,515 20.1 500 7,683 8,183 55,533 22.7 12,621 10,077 31.2 1,889 1,889 8,188 2,702 33.0 5,486 20.2 FY13E 36,063 6 55,423 38,183 17,241 18.8 750 9,143 9,893 65,316 17.6 14,315 12,819 27.2 2,449 2,449 10,370 3,422 33.0 6,948 26.7 Total CAR Tier I Capital Tier II Capital 14.9% 10.1% 4.8% 12.9% 9.4% 3.6% 14.0% 11.2% 2.8% 13.5% 10.5% 3.0% 12.9% 9.8% 3.1% Key Ratios Y/e March Gross NPA (%) Net NPA (%) NPA Coverage (%) Gross Slippages (%) Credit Cost (%) FY10 3.01 1.20 60.2 2.4% 1.5% FY11 2.34 0.39 83.4 1.3% 0.7% FY12 1.96 0.18 90.7 0.7% 0.4% FY13E 2.05 0.19 90.7 1.0% 0.6% FY14E 2.14 0.20 90.7 1.1% 0.6% FY14E 42,521 6 Balance Sheet (Rs m) Y/e March Equity Networth Adj. Networth Deposits Low Cost deposits Total Liabilities Net Advances Growth (%) Investments Total Assets FY10 1,200 22,199 19,982 258,653 84,270 337,692 185,072 10.4 104,729 337,692 FY11 1,210 25,182 24,264 301,942 104,586 389,078 236,021 27.5 110,583 389,078 FY12 1,501 38,748 38,223 351,954 120,473 468,955 287,367 21.8 127,155 468,955 FY13E 1,501 43,355 42,694 421,608 141,239 559,281 344,840 20.0 147,193 559,281 FY14E 1,501 49,249 48,407 510,493 171,015 673,623 420,705 22.0 171,499 673,623
October 03, 2012
66
Prabhudas Federal Lilladher CMP: Rs450
Bank
TP: Rs525 Rating: BUY
Key Financials (Rs m) Y/e March Net interest income Growth (%) Operating profit PAT EPS (Rs) Growth (%) Net DPS (Rs) FY10 14,108 7.3 12,648 4,645 27.2 -7.2 5.0 FY11 17,466 23.8 14,273 5,871 34.3 26.4 8.5 FY12 19,534 11.8 15,065 7,768 45.4 32.3 9.0 FY13E 22,048 12.9 15,982 8,253 48.3 6.2 10.5 FY14E 25,845 17.2 19,136 9,980 58.3 20.9 12.0
MCap: Rs76.9bn
Credit systems overhaul done; positives to follow: Aggressive growth over FY06-08 led to significant inch-up in slippages for FB in FY08-11. The new management over the last two years has (1) centralised the credit appraisal process, especially in SME/retail (2) consolidated FB's high delinquency mortgage book and increased share of gold loans in the retail portfolio and (3) improved quality of underwriting in large/mid corporate. Management initiatives are being reflected in lower slippages in SME/Retail and with the legacy corporate book running off, we expect slippages to come off from +3% to ~2% in FY13/14.
Aggressive network expansion; some near-term cost implications: After overhauling their credit systems, FB is on an branch network expansion drive, especially in credit heavy states like Maha/TN/Gujarat /Karnataka/Punjab, with ~1030 branches now v/s 750 branches in FY11. FB plans to reach to ~1150 branches by FY13 before consolidating and hence, there will be some inch-up in cost ratios, which, we believe, will be manageable.
Lower credit costs to drive return ratios: Given the asset quality initiatives, we expect credit costs to come off to ~90bps from ~170bps in FY08-11, aided not only by lower slippages but also significantly lower write-offs. With margins to remain flat and cost expected to inch up in the near term, lower credit costs will help in maintaining ROAs at 1.3-1.4% range. With the leveraging up process, we expect ROEs to touch ~16% by FY14-15 as against being stuck in a narrow band of 12-14% over the last 4-5 years.
Source: Company Data, PL Research Stock Performance (%) Absolute Relative to Sensex 1M 10.7 2.4 6M 1.4 (6.6) 12M 25.1 10.4
Valuations reasonable; BUY with a PT of Rs525/share: We initiate coverage with a Sep-13 PT of Rs525/share (~17% upside). Management focus on asset quality will bring down normalized credit costs and this would drive re-rating for FB in the medium term. Also, the leveraging up process will likely continue and aid in delivering ROEs of ~16% by FY14-15. Asset quality volatility remains the key risk to our BUY recommendation. October 03, 2012
67
Prabhudas Lilladher Rapid network expansion; Focusing on developed states

Expanding pan-India, with focus on developed states: FB is a Kerala-based bank, with ~55% branches in Kerala and is now expanding panIndia with a focus on developed and credit heavy states like TN, Karnataka, Maharashtra, Gujarat and Punjab. ~85% of incremental network (~300 branches) have been opened in Kerala and these five states with an aim of focusing on SME/Agri and NRI banking. FB has moved aggressively on expanding network to +1000 branches (~250 added in four quarters) and expects to reach ~1150 branches by FY13 before calibrating growth. Calibrated advances growth over the last two years FBs advances grew aggressively between FY05-08 at ~27% CAGR, especially in large/mid corporates and retail segment, leading to high slippages (~3.2% over FY09-11), including mortgages. Under the leadership of Mr. Shyam Srinivasan, FB has calibrated its growth rate with consolidation in its mortgage and SME business along with changes in credit systems/underwriting; growth is largely being driven by large/mid corporates over the last six quarters. With the re-organization in credit underwriting largely done (Jun-11), FB wants to re-focus on SME/Agri as the growth engine, going forward, and the network expansion is also aimed accordingly.
Branch Expansion (FY10-12) largely in Kerala and 5 states planned
Punjab 9 3% Gujarat 20 7% Karnataka 20 8% Maha. 18 7%
Rest 32 12%
~55% branches in Kerala (FY12)

Punjab 15 2%
The 5 focus states outside Kerala constitute ~50% of GDP and system credit/deposit
60% 50% 40%
Gujarat 28 3%
Rest 151 16%
Karnataka 68 7% Maha. 81 8%
Kerala 525 55%
Kerala 134 50% TN 35 13%
30%
20%
10% 0%
CASA GDP Deposit Credit
TN 82 9%
October 03, 2012
68
Prabhudas Lilladher Calibrating loan growth

High growth in FY05-09 leading to high delinquencies in FY09-11
35.0% Credit growth Slippage (RHS) 3.5%
Calibrated growth over the last two years

35.0% 30.0% 25.0% 20.0% Credit growth
30.0%
25.0% 20.0%
3.0%
2.5% 2.0%
15.0% 10.0%
5.0% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012
1.5% 1.0%
0.5% 0.0%
15.0% 10.0%
2006 2008 2009 2011 2012
2007 2010
2014E
Share of Retail and SME has come off as SME appraisal system has been overhauled and mortgage growth has been arrested
68% 66% 64% 62% 60% 58% 56% 54% 52% 50%
3QFY10 1QFY11 2QFY12 4QFY12
Loan growth has been largely driven by large corporates in last three yrs
FY09 Advances YoY % Corporate YoY % Retail YoY % 71.7 78.7 223.9 FY10 269.5 20.4% 98.4 25.0% 86.1 20.2% 73.6 85.0 15.5% FY11 319.5 18.6% 129.5 31.7% 94.4 9.5% 95.6 12.6% FY12 377.6 18.2% 173.8 34.1% 101.9 8.0% 101.9 6.5%
4QFY09
1QFY10
2QFY10
4QFY10
2QFY11
3QFY11
4QFY11
1QFY12
3QFY12
1QFY13
SME YoY %
Source: Company, PL Research. Figures in Rs bn
October 03, 2012
2015E
2013E
69
Prabhudas Lilladher Liability franchise No big impact from NRI de-reg

FBs low cost liability franchise is largely SA-linked and was earlier aided by NRI TD deposits like all Kerala-based banks which has been de-regulated by RBI in Nov-11. FB has a strong SA deposit base at ~22% of deposits and will continue to build on SA base with its geographic expansion. CA franchise has been weak at ~5% and though corporate book has expanded significantly, CA deposits continue to remain a challenge. The recent NRI deposit de-reg has made NRE TDs high cost. However, in Sep-11 the total o/s NRE TD was ~Rs10.5bn (2% of FY12) deposits and hence, impact is limited. We estimate impact of ~15bps on NIMs only.
CA franchise very weak
25%
20% 15%
SA remains relatively strong

40% 35% 30% 25% 20% 15% 10% 5% 0%
SA ratio (%)
10%
5%
NRI deposits: Largely savings, limited NRE TD (% of overall deposits)

9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
NRI (savings) Already deregulated) NRO TD (Already deregulated) FCNR (Rate increased in May-12) NRE TD (Deregulated in Nov-11)
Rates up ~5-6% on NRE Term deposits

10.0% 8.0% 6.0%
Kotak HDFCB ING Vysya Axis IIB ICICI J&K Yes SBI BOB PNB BOI Federal SIB
Comparable impact on NIMs lower

(% of deposits) NRI (savings) - Already deregulated) NRO TD (Already de-regulated) NRE TD (De-regulated in Nov-11) FCNR (Rate increased in May-12) Federal 8.5% 5.9% 2.3% 3.2% 19.9% 0.13% SIB 5.5% 3.8% 2.5% 1.3% 13.2% 0.13%
4.0% 2.0% 0.0%

Current NRE TD Dom. (Pre De- Saving reg) Dom. TD NRE TD (Post Dereg)
Total Margin impact (NRE TD Up 500bps + FCNR up 200bps) Source: Company, PL Research
October 03, 2012
SBI HDFCB J&K ICICI PNB Axis Federal BOI BOB SIB ING Vysya Kotak IIB Yes
0%
70
Prabhudas Lilladher Margins high, aided by leverage

FBs margins at ~3.6% is among the highest and we believe, apart from gold loans/SME lending, the margin advantage is also linked to leverage. Adjusted for leverage, FBs margins is 35bps lower (~3.25%) and is at the middle of our coverage universe and not highest as implied by reported margins. Also on a risk adjusted basis, FBs margins stack up in the median range and not at the higher end. We believe margins for FB has peaked in FY11-12 at ~3.8-3.9% and due to lower share of low cost NRI deposits and higher leverage, we expect NIMs to come by ~15-20bps over FY12-14.
Margins to moderate despite flat spreads Impact of higher leverage
Spread NIM
4.00%
3.50%
3.00%
2.50% 2.00% 2008 2009 2010 2011 2012 2013E 2014E 2015E
Reported margins amongst the highest...

4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Margin
but margins adjusted for leverage in the middle

4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0%
Risk adjusted margins also in the middle of the pack

5.0%
4.0% 3.0% 2.0% 1.0%

0.0%
HDFCB Kotak SBI IIB PNB Axis J&K Federal ING Vysya SIB Yes ICICI BOB BOI
October 03, 2012
Kotak HDFCB J&K IIB Federal SIB Axis ING Vysya Yes ICICI PNB SBI BOB BOI
71
Prabhudas Lilladher Fees better than south peers but way to go otherwise
FBs fee/assets at ~0.8% is better than most South-based (~0.5-0.6%) Fees/Assets low but better than most South-based peers banks, especially considering a relatively small non-fund based book. FBs fees/assets is coming off over the last two years but a large part of the drop is related to lower write-offs over the last two years and hence, lower recoveries from written-off accounts. FB expects fee income momentum to remain robust (+20%) over next 1-2 years as they have added senior members in corporate/treasury. Also, geographical expansion will also aid fee income momentum. Focus Areas: Centralization of trade, increase in non-fund based business, overseas business correspondent business and treasury are key areas with limited syndication/DCM opportunities.
2.5%
2.0% 1.5% 1.0% 0.5% 0.0%
SBI
Fees/Asset
BOI
BOB
J&K
HDFCB
Axis
Kotak
We factor in ~18% growth in core fees but do not expect any material Source: Company, PL Research improvement in Fees/Assets for FB.
Fees/Asset coming off largely due to lower recoveries
Fees/Assets (LHS) 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2008 2009 2010 2011 2012 Recoveries/Assets (RHS) 0.40%
Expect robust fee income growth but higher than b/s growth unlikely
40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0%
2008 2009 Credit growth Fees growth
0.35% 0.30%
0.25% 0.20%
0.15%
0.10%
2010
2011
2012
2013E
Federal
ICICI
ING
PNB
2014E
Yes
2015E
October 03, 2012
72
SIB
IIB
Prabhudas Lilladher Low opex allows for aggressive network expansion

Well paced on Opex v/s peers:
Branch efficiency v/s Rural urban spread
1,600 Axis Yes Kotak
FBs opex/assets is in line with peers at ~1.7% of assets but costincome is lower due to higher margins.
Branch efficiency lags larger private peers by ~50%. However, this is directly linked to lower share of Urban branches at just ~40% v/s 6070% branches in Urban/Metro centers for larger peers. Some consolidation after swift network expansion:
1,400
1,200 BOB
1,000 800 SBI J&K BOI PNB ICICI Inudusind
HDFCB
FB has expanded branch network by ~30% in the last three quarters to ~1000 branches from ~750 in H1FY13 in order to achieve FY13 target of 1000 and plans to expand branches to 1150 by FY13.
600 400
ING
SIB 50% 60% 70% 80%
Federal
30% 40% With significant expansion in branches over FY11-13, we expect some consolidation. We have, thus, factored in a cost income to inch up to 43% in FY13 and then moderate. Source: Company, PL Research
Urban / Metro Branches
Opex/assets comparable to peers

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
Significant jump in branch expansion

1,000 800
600
Cost income to inch up in FY13; progressively to come off from there

46.0% 44.0% 42.0% 40.0% 38.0% 36.0% 34.0% 32.0% 30.0%
No. Of Branches
400 200
BOB J&K BOI SIB Federal PNB SBI ICICI Yes ING Vysya Axis IIB HDFCB Kotak
2009
2010
2008
2011
2012
2013E
2014E
2005 2006 2007 2008 2009 2010 2011 2012
October 03, 2012
73
2015E
Prabhudas Lilladher Asset quality: The Historical issue

Asset quality has remained volatile: FBs asset quality has been volatile over the last three years, with increasing delinquencies and also highest restructuring among private banks largely due to aggressive growth between FY05-08. Delinquencies have been high from not only SME space but more peculiarly retail. FBs retail book is largely Mortgages and Gold which are generally considered as low delinquency products. But FB has been facing high slippages even in its mortgages. The FY08-09 crisis impacted NRI population and also FBs mortgage book; however, current delinquency levels are surprising. SME slippages continue to remain high but slippages have shown a steady improvement from 5-6% in FY11 to ~3% currently and management expects to further improve on the current trend.
Slippages a function of high credit costs in FY05-08
Credit growth 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
2005 2006 2007 2008 2009 2010 2011 2012
Gross slippages have been the highest (FY09-12 avg.)

1.6% 1.4% 1.2%
1.0% 0.8%
0.6% 0.4% 0.2%

0.0%
Kotak
Yes
SBI
Slippages coming off but still elevated

Retail (%) SME (%) Corporate (%)
Restructured loan book also high

9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
Slippage (RHS) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
Federal
ING
SBI
ICICI
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13
October 03, 2012
BOB
PNB
J&K
Axis
BOI
SIB
74
Federal
IIB
BOB
PNB
J&K
BOI
SIB
HDFCB
ING
Axis
ICICI
Prabhudas Lilladher Understanding the magnitude of the asset quality issue

Aggressive write-off policy exaggerates asset quality issue: FBs slippages and delinquencies are higher than most peer banks and so are the credit costs. However, FBs aggressive write-off policy in the past exaggerates the asset quality issue. Analysis of credit costs (excl. recoveries from written-off accounts) indicate that though FB has higher delinquencies than peers, magnitude is lower than indicated by reported numbers.
Reported credit costs and Adjusted credit costs
Reported Adj for coverage + recoveries
2.00% 1.50%
1.00% 0.50% 0.00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
FBs credit costs have averaged ~1.7% between FY09-11. However, FB had ~55-60bps of recoveries from written-off accounts each year and hence, net credit costs even in peak slippage years was ~120bps v/s 170bps suggested by reported numbers. Recovery from written-off accounts is limited to <10-20bps for banks under our coverage, especially private banks.
Credit costs for FB significantly higher (avg FY09-12)
1.6% 1.4% 1.2%
1.0% 0.8%
but ~50-60bps recovered every year

0.45% 0.40% 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00%
Federal Axis
Recoveries (Avg. FY10-12)
0.6% 0.4% 0.2%

0.0%
Kotak
BOI
BOB
PNB
ING
SBI
Yes
SBI
Federal
IIB
BOB
PNB
J&K
BOI
SIB
HDFCB
ING
Axis
ICICI
October 03, 2012
IIB
75
Prabhudas Lilladher Better asset mix + Mgt. initiatives to drive asset quality
Asset quality improvement and lower credit costs will be primary drivers of stock performance and will aid in maintaining ROAs at +1.3%. We believe credit costs will inch down from 1.7% to ~0.9% for FB, driven partly by better asset mix and initiatives taken by the management on credit systems/procedures and partly explained by lower write-offs. SME sourcing improving significantly: The new management at FB has centralized sourcing of credit and with limited branch intervention, SME sourcing has improved significantly which is also reflected in the moderating SME slippages over the last 3-4 quarters. More gold loans in Retail: Low ticket size in mortgage and high growth in the past has led to high slippages in retail. Mortgage book has remained stagnant and FB has concentrated on increasing share of gold loans which remains a 0 delinquency product. Focus remains on increasing share of gold loans to +15% from <10% and better asset mix will drive lower credit costs in retail. Large corporate Sourcing of higher rated corporates: Large corporates have driven 55% of the growth over the last two years and FB has added large number of AAA corporates in their portfolio under the leadership of Mr. Chacko who is the new ED. Most large account slippages have been from legacy book, with just 1-2 large accounts slippages from new relationships. Infra book - SME exposure high, private power limited: FB has a large Infra book of ~10% but share of high risk IPP exposure is just 1%. FB has lent ~3% of loans to Rajasthan, TN, AP SEBs where we see some risks of NPV hits. Apart from SEBs, other Infra exposure is largely private power distribution and low risk road operators.
October 03, 2012 Gross and Net NPAs (%)
4.0%
3.5% 3.0% 2.5% Gross NPA ratio Net NPA ratio
2.0% 1.5% 1.0%

0.5% 0.0%
2008
2009
2010
2011
2012
2013E
2014E
2015E
Infra book : Exposure to IPP limited

Others 25% Private power 13%
State SEBs 23%
Ports 9%
Roads 15%
Private distributors 15%
76
Prabhudas Lilladher ROE Analysis: Improvement to be driven by credit costs

2007 NIM/Assets Fees/Assets Inv. Profits/Assets Net revenues/Assets Opex/Assets Provisions/Assets Taxes/Assets Costs/Assets ROA Equity/Assets ROE RORWA 3.25% 1.14% 0.23% 4.62% 2008 3.10% 1.14% 0.27% 4.52% 2009 3.78% 1.24% 0.24% 5.26% 2010 3.50% 1.05% 0.27% 4.81% 2011 3.76% 1.01% 0.10% 4.87% 2012 3.59% 0.83% 0.15% 4.56% 2013E 2014E 2015E 3.46% 0.73% 0.13% 4.33% 3.44% 0.73% 0.15% 4.32% Comments Expect margins to inch down as leverage increases and we are 3.43% factoring in full year impact of NRI TD de-regulation. Fee/Assets coming off as recoveries from written-off accounts 0.73% drying due to lower write-offs (20bps impact)- Expect core fee growth of 19%. 0.13% 4.29% Opex to peak in FY13 due to large branch addition over the last 34 quarters. Expect slower pace of branch addition from here on. Expect credit costs to stabilise at ~80-90bps/ Lower write-offs also aiding lower credit costs.
-1.84% -1.68% -1.64% -1.68% -1.80% -1.80% -1.82% -1.77% -1.72% -0.97% -1.05% -1.34% -1.00% -1.13% -0.62% -0.57% -0.57% -0.55% -0.48% -0.47% -0.84% -0.98% -0.68% -0.72% -0.65% -0.67% -0.68% -3.29% -3.20% -3.82% -3.66% -3.61% -3.14% -3.04% -3.00% -2.95% 1.33% 6.2% 21.4% 1.90% 1.32% 9.7% 13.6% 1.93% 1.44% 11.8% 12.1% 2.27% 1.15% 11.2% 10.3% 1.82% 1.26% 10.5% 12.0% 1.95% 1.43% 9.9% 14.4% 2.29% 1.29% 9.4% 13.6% 2.13% 1.32% 8.9% 14.8% 2.15% 1.34% 8.4% 15.9% 2.17%
Expect ROAs at ~1.3% which is higher than most peer banks though asset quality volatility will continue. ROEs still long way to go as leverage still low with Tier-1 at 14% in FY14.
October 03, 2012
77
Prabhudas Lilladher Financials - Lower credit costs hold the key

Some acceleration in loan growth now
Deposit Growth 30% 25% 20% 15% 10% 5% 0%
2008 2009 2010 2011 2012 2013E 2014E 2015E
Margins to moderate due to higher leverage

NIM 4.00% 3.50% 3.00%
2.50%
Fees growth to bounce back once base factors in lower recoveries

Fees growth 40.0%
30.0%
Loan Growth
20.0% 10.0% 0.0% -10.0%
2.00% 1.50% 1.00%
2009
2008
2010
2011
2012
2009
2010
2011
2008
2013E
2014E
2015E
2012
2013E
2014E
Cost income to peak in FY13

Cost-Income 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Cost-Asset (RHS) 1.85% 1.80% 1.75%
1.70%
Gross slippages lower than FY08-11 levels

Gross NPA 4.00% 3.00%
2.00%
ROEs to inch up to 16% by FY14-15

RoA
2.00%
Gross Slippage
RoE (RHS)
20.0%
1.50% 1.00%
0.50%
15.0% 10.0%
5.0%
1.65% 1.60% 1.55%
1.00% 0.00%
0.00%
0.0%
2009
2011
2008
2010
2011
2012
2008
2009
2010
2014E
2013E
2015E
2012
2013E
2014E
2015E
2008
2009
2010
2011
2012
October 03, 2012
2015E
2013E
2014E
2015E
78

PT of Rs525/share; ~17% upside: We value FB at 1.4x FY14 book and we have a Sep-13 PT of Rs524/share, implying ~17% upside from the current levels. Calibrated growth + Improvement in asset quality: With various management initiatives taken over the last two years, we believe slippages will come and so will credit costs. ROEs, which have remained within the 10-14% range, will creep up to ~16% as leverage increases and that should drive valuations up. Continued volatility in asset quality remains the key risk to our BUY recommendation. Our PT implies 1.3x fwd book, which is ~15% higher than historical levels as quality of asset book, is seeing a structural improvement and higher ROEs justify a higher multiple.
1-yr fwd P/B chart
Federal 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Average
FB : PT of Rs525/share
Source: PL Research
8.0% 6.0% 1.25 15.5% 5.0% 16.9% 14.0% 525 1.27 9.1
FB v/s Other regional banks

1.40 1.30
FY13 P/BV
ING
SBI
1.20 1.10 1.00 0.90 BOI 0.9%
Federal SIB PNB J&K

BOB
Sep-06
Feb-07
Sep-11
Mar-09
Dec-07
Aug-09
Feb-12
Jan-05
Jun-05
Jan-10
Jun-10
Apr-06
Oct-08
May-08
Nov-05
Nov-10
Apr-11
Jul-12
Jul-07
0.80 0.7%
1.1%
RoA
1.3%
1.5%
1.7%
October 03, 2012
79
Prabhudas Lilladher Key Personnel & Shareholding

Key Personnel Designation MD & CEO Name Mr Shyam Srinivasan Profile Mr.Shrinivas joined the bank in Sep-10. Prior to this, he has worked with Standard Chartered Bank in India and overseas in the Middle East and South East Asia, where he has experience in Retail lending, Wealth management and SME banking. Mr.John joined FB as Executive Trainee in 1973. He was appointed as Executive Director of the bank in May 2010. He has exposure in different areas of banking, including Branches, Regional offices and Corporate office. Mr.Chacko joined the Bank as Executive Director in charge of Wholesale Banking in May-11. Prior to FB, he had a ~15 year stint with HSBC in Mumbai, Kolkata and New Delhi. After moving on to ABN AMRO in Dubai, he became the Deputy Country Manager overseeing Wholesale Banking, Transaction Banking and the Financial Institutions divisions, covering UAE, Qatar and Oman.
Executive Director
P C John
Executive Director
Abraham Chacko
Others 20.0
Loan Mix
Retail 28.7% Corporate 42.6% FII's 43.8 Agri 11.0%
Dilution history
Date Nov-08 Dilution 100% Rights 23.4% No of shares 85.7 20.0 Price Rs/Share 240 175 Amount (Rs m) 20,558 3,500
Individual s 16.0
Jan-06
FI's 7.1
MF's 13.2
SME 17.7%
Source: NSE India
October 03, 2012
80

Income Statement (Rs m) Y/e March Int. Earned from Adv. Int. Earned from Invt. Others Total Interest Income Interest expense NII Growth (%) Treasury Income NTNII Non Interest Income Total Income Growth (%) Operating Expense Operating Profit Growth (%) NPA Provisions Investment Provisions Total Provisions PBT Tax Provisions Effective Tax Rate (%) PAT Growth (%) FY10 28,497 7,834 36,732 22,624 14,108 7.3 1,081 4,228 5,309 42,041 9.7 6,769 12,648 0.4 4,133 (977) 4,053 8,595 3,950 46.0 4,645 (7.2) FY11 31,688 8,680 40,520 23,054 17,466 23.8 461 4,707 5,168 45,688 8.7 8,361 14,273 12.8 5,032 111 5,254 9,018 3,147 34.9 5,871 26.4 FY12 41,898 13,157 55,584 36,050 19,534 11.8 824 4,499 5,323 60,907 33.3 9,793 15,065 5.6 2,582 349 3,370 11,695 3,927 33.6 7,768 32.3 FY13E 50,051 15,251 65,867 43,819 22,048 12.9 850 4,681 5,531 71,398 17.2 11,596 15,982 6.1 3,557 3,557 12,425 4,172 33.6 8,253 6.2 FY14E 57,780 17,255 75,643 49,798 25,845 17.2 1,100 5,508 6,608 82,251 15.2 13,318 19,136 19.7 4,111 4,111 15,025 5,045 33.6 9,980 20.9 Total CAR Tier I Capital Tier II Capital 18.4% 16.9% 1.4% 16.8% 15.6% 1.2% 16.6% 15.9% 0.8% 15.6% 14.9% 0.7% 14.5% 13.9% 0.6% Key Ratios Y/e March Gross NPA (%) Net NPA (%) NPA Coverage (%) Gross Slippages (%) Credit Cost (%) FY10 3.05 0.51 83.4 3.3% 1.7% FY11 3.59 0.64 82.1 3.2% 1.7% FY12 3.45 0.65 81.1 2.1% 0.7% FY13E 3.62 0.68 81.1 2.0% 0.9% FY14E 3.70 0.70 81.1 2.0% 0.8% Balance Sheet (Rs m) Y/e March Equity Networth Adj. Networth Deposits Low Cost deposits Total Liabilities Net Advances Growth (%) Investments Total Assets FY10 1,710 46,846 45,480 360,580 94,424 436,697 269,501 20.4 130,546 436,697 FY11 1,710 51,030 48,970 430,148 115,541 514,507 319,532 18.6 145,377 514,507 FY12 1,710 57,009 54,554 489,371 134,759 606,214 377,560 18.2 174,025 606,214 FY13E 1,710 63,161 60,120 570,904 156,999 710,612 445,521 18.0 199,472 710,612 FY14E 1,710 70,739 67,006 677,024 186,859 843,262 534,625 20.0 230,508 843,262
October 03, 2012
81
Prabhudas South Indian Bank Lilladher CMP: Rs24 TP: Rs25
Best-in-class asset quality drives return ratios: Highest share of secured loans, high proportion of gold loans and conservative underwriting has led to best-in-class asset quality for SIB, with <1% Gross NPA and <40bps of credit costs over the last 4-5 years and is the key reason for managements consistency to surprise on profitability guidance. High Infra exposure (12% of loans) seems a risk but exposure is to relatively safer names in roads/private power. SEB exposure is high at 4% with some risks of NPV hit due to the new SEB restructuring package announced.
Rating: Accumulate
MCap: Rs2.7bn
FY12 10,217 29.2 6,515 4,017 3.5 36.9 0.6 FY13E 12,426 21.6 8,136 4,586 3.4 -2.9 0.7 FY14E 15,099 21.5 9,828 5,572 4.2 21.5 0.8
Gold loans - Large book - Risks limited: Proportion of gold loans is highest for SIB among banks at ~20% which provides high yields without higher credit costs. Our feedback suggest that tightening of gold lending regulations will not be replicated for banks as done for NBFCs as RBI seems relatively comfortable with gold-lending by banks. The only risk which is the risk weight calculation for gold loans (effective "0" risk weight now) could be changed by RBI. However, the impact will be low for SIB, given high Tier-1.
All other metrics deteriorating; risks to profitability remain: The good story ends with asset quality with (1) one of the lowest fee/assets among old generation private banks and the ratio deteriorating further and (2) CASA ratio has been coming off steadily with the recent NRI deposit de-reg impacting liability franchise further. Management efforts, we believe, at best will arrest further decline in these metrics, thus, making ROA delivery always contingent upon low credit costs. In FY12, PSL book shrunk by ~17% due to de-recognition of large part of the Gold portfolio as PSL, leading to total PSL compliance of just 25%. Hence, RIDF calls can increase manifold, going forward, risking future margins.
Source: Company Data, PL Research Stock Performance (%) Absolute Relative to Sensex 1M 8.3 0.0 6M (5.2) (13.2) 12M 9.3 (5.4)
Initiate with an Accumulate with a PT of Rs25/share: SIB enjoys one of the best asset quality franchise that aids in delivering superior return ratios. However, with deterioration in all other metrics and increasing risk from RIDF call, we rate SIB an Accumulate, with Sep-13 PT of Rs25/share implying 1x FY14 book. October 03, 2012
82
Prabhudas Lilladher Regional bank with commendable HR transformation

SIB is a Kerala-based bank, with ~55% branches in Kerala and 85% of branches across the four Southern states. The bank has also expanded its footprint pan-India, especially Maharashtra and Delhi. Mr. VA Joseph, the current MD and CEO (joined in 2005), was instrumental in driving various initiatives, including path-breaking HR initiatives (VRS scheme) which led to significant efficiency improvement and profitability. Average age of employees has come down to ~36 years from >42 years (4-5 years back). SIB's B/S has grown by ~27% CAGR over FY06-12, with +30% growth over the last three years as SIB has expanded into newer geographies. Also, contribution from high-yielding gold loan business has ramped up significantly, now contributing ~20% of loan book.
SIB: Large presence in South, especially Kerala
Largely concentrated in South, expanding in Mumbai and Delhi as well

Maharashtra 25 3% Andhra Pradesh 40 6% Karnataka 46 6%
Tamil Nadu 124 18%
Delhi 23 3%
Others 61 9%
Kerala 387 55%
October 03, 2012
83
Prabhudas Lilladher Best in terms of asset quality

SIBs credit costs has been amongst the lowest at <30bps for the last five years, with Gross NPAs coming off from 2% in FY08 to 1% in FY12 due to: High share of secured lending - ~90% of total loans: SIB has concentrated largely on secured lending compromising ~90% of total loans. Share of secured lending has inched up from <80% to ~90% currently and is highest among peers. This, we believe, leads to lower delinquencies and more importantly, lower loss, given default. Large proportion of 0 delinquency Gold loans: SIB has built a Rs55bn gold loan portfolio growing at ~60% CAGR over the last three years and share of gold lending has increased from ~11% in FY09 to ~20% currently. Gold lending adds to the secured book and has largely remained a 0 loss portfolio as is the case for most of the industry. SIB also has ~4% of its book in low margin loans against fixed deposits which also cushions credit costs. Infra lending high but seems less risky: SIB has ~12% exposure to Infra but exposure to IPPs is <2% of exposures with high proportion of Infra loans to private distributors and safer road operators. SEB exposure is high at ~4% of exposure and that could have some NPV hits from the proposed restructuring package. Overall, we factor in ~50bps of credit costs for SIB. This translates to ~60bps of credit costs for the loan book, excl. Gold loans.
Mid corporate and Retail lender
FSLD 3.6% Gold Loan 19.8%
Others 5.2% Agri 5.9% SME 6.6%
Share of secured lending highest among peers

100.0% 90.0% 80.0% 70.0% % of Secured Advances
Gold loans highest for SIB (% of loans)

25.0%
20.0% 15.0% 10.0%
SIB IIB PNB ING Vysya Axis ICICI BOB J&K Kotak SBI BOI Federal HDFCB Yes
Housing 5.5% Corporate 53.3%
60.0%
5.0% 0.0% SIB Federal HDFCB
October 03, 2012
84
Prabhudas Lilladher Best in terms of asset quality

Structural improvement in Asset Quality
7.00%
.in line with build-up in the secured book

% of Secured Advances 94.0% 92.0%
90.0%
Restructuring has been relatively under check

14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
ING ICICI Axis Canara SIB J&K SBI BOB Allahabad Federal UBI BOI OBC PNB IOB Central
Gross NPA ratio
NPA (RHS) 6.00% 5.00%

4.00%
6.00%
5.00%
4.00% 3.00% 2.00% 1.00%

0.00%
88.0% 86.0% 84.0% 2005 2006 2007 2008 2009 2010 2011 2012 82.0% 2006 2007 2008 2009 2010 2011 2012
3.00% 2.00% 1.00% 0.00%
The only risk is high Infra exposure

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
SBI J&K BOB BOI
... but even that is relatively safe

Others 9% Road+Ports 34% SEB 29%
We factor in some inch-up in credit costs

1.50% LLP/average loans
1.00%
0.50%
Federal
2011
2012
2006
2007
2008
2009
2010
2013E
IPPs 10%
October 03, 2012
2014E
Private distributors 18%
SIB
Union
ICICI
PNB
Axis
ING
Yes
0.00%
85
Prabhudas Lilladher Niche gold loan book Relative advantage

Largest gold portfolio among banks: SIB, through it's vast branch network of ~475 branches in Kerala and Tamil Nadu, has built a gold portfolio of Rs55bn (~20% of book) and is amongst the largest gold loan book among banks. Large gold book not only aids in preserving asset quality but also leads to yield improvement, given ~13-13.5% yields. Management intends to increase share of gold loans to ~25% from 20% currently.
Gold loans now 20% of SIBs loan portfolio
RWA/Loans (LHS) Share of gold loans (%)
Regulatory risks limited:

RBI has tightened gold lending by NBFCs over the last 12 months. However, our feedback suggests that regulatory intervention will be limited for banks as RBI is less concerned regarding auction/pricing practices followed by banks. Regulatory gap between banks and NBFCs is expected to persist and though competition is increasing overall, banks could benefit v/s NBFCs in gaining share in the near term. 0 risk weight for gold loans right? Gold loans adjusted for LTVs effectively carry 0 risk weight and with high growth in SIBs gold portfolio, RWA/Loans have come off from 90% in FY08 to ~62% which is the lowest in the industry. Though gold loans have low credit risks and costs, we believe RBI may introduce higher risk weight on gold lending. However, impact on SIB will be limited, given high Tier-1 capital Assuming ~50% risk weight FY13 Tier-1 will come off from 13.4% to 11.6%.
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

FY09 FY10 FY11 FY12
25.0% 20.0% 15.0% 10.0%

5.0% 0.0%
SIB has the largest gold portfolio among banks (% of loans)

25.0% 20.0%
15.0% 10.0%
5.0%
0.0% SIB Federal HDFCB
October 03, 2012
86
Prabhudas Lilladher NRE de-reg further weakens a weak liability franchise

Weakening CASA franchise: SIBs CASA has historically been low v/s peers, given low share of CA deposits at just 4-5% and lower than B/S growth in CASA has led to CASA ratio coming off from 24% to 19.5% currently. The negative news is that levers to aid a significant improvement in CA deposit seem limited at the disposal of the management. NRI deposits No more low cost: High share of low cost NRE deposits was always the saving grace and added ~7-8% to SIBs low CASA of ~20-21%, taking share of low cost deposits to a respectable +25%. But after the de-reg of NRE deposits by RBI, NRE business-linked low cost deposits are just <1.5% of deposits and de-reg of NRI deposits have, thus, impacted an already weakening liability franchise. Impact on margins material for SIB: SIB has already seen ~95% of the NRI TD reprise over the last nine months and hence, incremental margin impact is limited. However, NRI deposit de-reg has structurally brought down margins by ~15bps in our view Margins remained relatively stable over the last three quarters as negative impact of de-reg was netted off by re-pricing of Rs30bn of high cost deposit. We factor in spreads to come off by ~15bps over FY11-13E; however, margins remain stable due to the recent Rs5bn of QIP which would reduce leverage
SIBs CASA coming off over the years

30.0% 25.0% 20.0% 15.0% 10.0% 2006 2007 2008 2009 2010 2011 2012 CASA%
CASA worse off after the NRE deposit de-reg

60% 50% 40% 30% 20% 10% 0%
Yes SIB SIB (Incl. NRE) BOI BOB IIB Federal Kotak ING Vysya PNB J&K Axis ICICI SBI HDFCB
Mainly due to dismal CA ratio

25% 20% 15%
10%
5%
Kotak ING
0%
Federal
Yes
SBI
PNB
J&K
BOB
BOI
IIB
HDFCB
Axis
October 03, 2012
ICICI
87
SIB
Prabhudas Lilladher NRE de-reg further weakens a weak liability franchise

De-reg has turned ~20% of SIBs low cost NRI deposits to high cost
FCNR 4,400 10%
NRE TD (High cost from Dec11) 8,610 19%
Impact on margin is ~15bps

(% of deposits) NRI (savings) - Already de-regulated) Federal 8.5% 5.9% 2.3% 3.2% 19.9% 0.13% SIB 5.5% 3.8% 2.5% 1.3% 13.2% 0.13%
NRI Savings (Low cost) 18,599 42%
NRO TD (Already de-regulated) NRE TD (De-regulated in Nov-11) FCNR (Rate increased in May-12)
NRO TD (High cost) 12,990 29%
Total Margin impact (NRE TD Up 500bps + FCNR up 200bps)
Increase in NRE TD rates after de-regulation

10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
Current NRE TD (Pre De- Dom. Saving reg) Dom. TD NRE TD (Post De-reg)
Spread to come off; margins to remain flat due to leverage impact of QIP
3.40% 3.20% 3.00% 2.80%
2.60% 2.40% 2.20% 2.00% Spread NIM
2007
2009
2011
2006
2008
2010
2012
2013E
October 03, 2012
88
2014E
Prabhudas Lilladher Weak fee income base

Weak fee income franchise: SIBs fee income at <0.6% of assets is among the lowest in private banks and is characteristic of an only liability franchise bank like most regional private banks in India. Fee/assets have come off from 0.7-0.8% to <0.6% assets as fee growth has not been able to keep pace with balance sheet growth 24% CAGR balance sheet growth v/s 18% fee income growth over FY07-12. Some corrective measures: Management acknowledges the weak link and expects to ramp up on fee income at least in the near term. They have moved their treasury to Mumbai and expect to generate higher FX income, going forward. On the retail side, they are targeting strong growth from retail FX and gold coin sales. SIB is also focusing on non-fund based business now but this would come with some credit risks.
Dont expect significant jump in Fees/Assets: Overall, fee income could grow by ~% in FY13. However, we do not expect fees/assets to jump materially over the medium term as SIB lacks a full suite of corporate product offerings and wealth management on the retail side.
Fees/Assets among the lowest

2.5%
Fees/Assets have come off

0.8%
Fee income growth v/s b/s growth in last 5yrs

Yes 50.0% 45.0% 40.0% Axis 35.0% HDFCB 30.0% BOB 25.0% Federal SIB Kotak PNB BOI 20.0% ING IIB 15.0% SBI J&K 10.0% 10.0% 20.0% 30.0% 40.0%
Balance Sheet (CAGR 5 year)
Fees/Asset
1.5% 1.0% 0.5%

0.0%
0.6%
0.5% 0.4% 0.3%

IIB Axis HDFCB ICICI ING Kotak SBI PNB BOI Federal BOB Yes J&K SIB
0.2%
2005 2006 2007 2008 2009 2010 2011 2012
Fees (CAGR 5 year)
2.0%
0.7%
50.0%
October 03, 2012
89
Prabhudas Lilladher RIDF investments could see a significant jump

Big miss on PSL from FY12: Till FY11, SIB attained almost 40% on its PSL targets over FY05-11. However, RBIs diktat on de-reg of gold loans as Agri and PSL, if not backed by land papers, led to ~17% contraction in SIBs PSL book, leaving overall PSL compliance of SIB at just ~25% v/s ~40% in FY12. Could see significant rise in RIDF calls: With a 15% gap on overall PSL and ~9% gap on Agri PSL targets, we believe RIDF calls on SIB could significantly increase over the next 2-3 years and with negative spreads on RIDF investments, we believe this could impact margins. Current RIDF book for SIB is just 3% of loans which is better than most peers. However, the current shortfalls could significantly add to the PSL burden.
Some corrective steps being taken, but gap too large to be filled: Management has initiated some steps to improve on PSL targets, including taking land papers in as many possible cases in gold lending business as well. However, filling the PSL gap, according to us, will only be a gradual process and thus, in the interim, we expect RIDF calls to inch up for SIB.
PSL lending has come off to 25% v/s 40% target

50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0%
PSL book growth least for SIB

50%
40%
RIDF burden small but can catch up quickly

12.0%
10.0% 8.0% 6.0% 4.0%

2.0%
30% 20% 10% 0%

SBI BOI
J&K
HDFCB
Kotak
BOB
Axis
ING Vysya
Federal
Yes
PNB
SIB
IIB
ICICI
SBI
Axis
J&K
SIB
HDFCB
2005 2006 2007 2008 2009 2010 2011 2012
October 03, 2012
ICICI
ING
IIB
-10%
0.0%
90
Prabhudas Lilladher ROE Tree: Return ratios contingent on low credit costs
2008 NIM/Assets 2.51% 2009 2.85% 2010 2.53% 2011 2.78% 2012 2.87% 2013E 2.85% 2014E 2.83% 2015E Comments We expect spreads to come off but margins to remain flat 2.80% over FY13-14 due to the equity issue. We have not fully factored in risk from high RIDF investments Fee/asset have been coming off and though we expect ~180.52% 19% fee income growth, we do not expect fee/asset to show any material improvement 0.11% 3.44%
Fees/Assets Inv. Profits/Assets Net revenues/Assets Opex/Assets Provisions/Assets Taxes/Assets Costs/Assets ROA Equity/Assets ROE RORWA
0.74% 0.21% 3.46%
0.70% 0.20% 3.75%
0.58% 0.35% 3.46%
0.56% 0.14% 3.48%
0.58% 0.12% 3.56%
0.56% 0.14% 3.55%
0.54% 0.14% 3.50%
Opex/assets are in line with peers but due to low revenues/assets, cost income at ~50% is among the highest v/s peers Credit costs remains the primary driver of return ratios. We -0.26% -0.31% -0.19% -0.28% -0.22% -0.37% -0.35% -0.37% expect some marginal inch-up in provisions -0.53% -0.58% -0.59% -0.54% -0.48% -0.45% -0.44% -0.44% -1.65% -1.79% -1.63% -1.63% -1.73% -1.68% -1.66% -1.59% -2.45% -2.68% -2.42% -2.45% -2.44% -2.49% -2.46% -2.40% 1.01% 6.22% 16.3% 1.72% 1.06% 6.62% 16.0% 2.05% 1.04% 6.13% 17.0% 2.24% 1.03% 5.56% 18.5% 2.25% 1.13% 5.22% 21.6% 2.54% 1.05% 5.57% 18.9% 2.43% 1.04% 5.71% 18.3% 2.40% Expect ROAs to remain in the 1.0-1.1% range over the next 1.04% 2-3 years - Risks from RIDF not yet fully captured in our numbers 5.36% 19.4% High leverage with RWA/Loans at ~63% leads to ~19-10% 2.38% ROEs and ~2.3-2.4% RORWas despite low ROAs
October 03, 2012
91

PT of Rs25/share; ~7% upside: We value SIB at 1.0x FY14 book and we have a Sep-13 PT of Rs25/share implying ~7% upside from the current levels. Excluding asset quality, all other metrics deteriorating: SIBs asset quality and underwriting remains a key advantage and we do not expect a significant deterioration in asset quality. However, most other metrics are deteriorating and hence, we expect ROAs to remain capped at ~1.0-1.1%, with increasing dependence on low credit costs to maintain ROAs at current level. Valuations modest but re-rating very unlikely: Our implied valuation is modest at 1x FY14 for a bank generating ~19-20% ROEs and growing at ~23-25%; however, stagnating ROAs will cap valuations .
1-yr fwd P/B chart
1.60
South Indian Bank : PT of Rs25/share

Source: PL Research
8.0% 6.0% 1.25 15.5% 5.0% 15.6% 14.0% 25 1.01 5.9
Market Cap/ CASA In line with peers

Average
200.0% 180.0% 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0%
Federal ING Yes SBI IIB PNB
BOI
SIB
1.40 1.20
1.00
0.80 0.60
0.40
0.20 0.00
Jul-07
May-08
HDFCB
Aug-09
Apr-06
Oct-08
Nov-05
Nov-10
Sep-06
Feb-07
Apr-11
Sep-11
Mar-09
Dec-07
Feb-12
Jan-05
Jun-05
Jan-10
Jun-10
Jul-12
Source: PL Research, Bloomberg
Source: Company Data, Bloomberg
October 03, 2012
ICICI
BOB
Axis
J&K
SIB
92

Loan/Deposit Growth
Deposit Growth 40.0% 30.0%
20.0%
Expect some moderation in spreads

Loan Growth
3.00%
We factor in 18-19% fee income growth

Fees growth
NIM
2.50% 2.00%
10.0%
2012
2008
2009
2010
2011
0.0%
2008 2009 2010 2011 2012
1.50%
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
2013E
2014E
2015E
2009
2008
2010
2011
2012
2013E
2014E
2015E
We expect cost-income to moderate

Cost-Income 53% 52% 51% 50% 49% 48% 47% 46% Cost-Asset (RHS) 1.9% 1.8% 1.8% 1.7% 1.7% 1.6% 1.6% 1.5%
We factor in some inch-up in slippages

Gross NPA 2.50% 2.00% 1.50% 1.00% 0.50%
0.00%
Return ratios to moderate

RoA RoE (RHS)
Gross Slippage
1.20% 1.10% 1.00% 0.90% 0.80% 0.70% 0.60% 0.50%
25.0% 20.0% 15.0% 10.0% 5.0%

0.0%
2010
2008
2009
2011
2012
2013E
2014E
2008
2009
2010
2011
2012
2013E
2014E
2015E
October 03, 2012
2015E
2013E
2014E
2008
2009
2010
2011
2012
2015E
2013E
2014E
93
Prabhudas Lilladher Company Profile

Others 12.25%
Loan book mix

Gold Loan 19.8%
Individuals 34.02%
FIIs 46.09%
Retail (Excl. Gold Loan) 14.4% Corporate 53.3%
FIs 2.66%
Agri 5.9%
Insurance 3.76% MF's 1.22% SME 6.6%
Source: NSE India
Deposit mix
Savings deposits 16% Current deposts 4%
Gold loans now 20% of SIBs loan portfolio

RWA/Loans (LHS) Share of gold loans (%)
Term deposits 80%
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

FY09 FY10 FY11 FY12
25.0% 20.0% 15.0% 10.0%

5.0% 0.0%
October 03, 2012
94

Income Statement (Rs m) Y/e March Int. Earned from Adv. Int. Earned from Invt. Others Total Interest Income Interest expense NII Growth (%) Treasury Income NTNII Non Interest Income Total Income Growth (%) Operating Expense Operating Profit Growth (%) NPA Provisions Investment Provisions Total Provisions PBT Tax Provisions Effective Tax Rate (%) PAT Growth (%) FY10 15,186 3,781 19,357 13,674 5,683 8.7 780 1,305 2,085 21,442 15.8 3,662 4,106 14.5 436 (409) 433 3,673 1,336 36.4 2,338 20.1 FY11 19,300 4,815 24,460 16,549 7,911 39.2 384 1,583 1,967 26,427 23.2 4,625 5,253 27.9 496 94 798 4,455 1,529 34.3 2,926 25.1 FY12 28,681 6,211 35,834 25,617 10,217 29.2 416 2,055 2,471 38,305 44.9 6,173 6,515 24.0 601 151 792 5,723 1,707 29.8 4,017 37.3 FY13E 37,271 7,596 45,904 33,478 12,426 21.6 600 2,424 3,024 48,928 27.7 7,315 8,136 24.9 1,600 1,600 6,535 1,949 29.8 4,586 14.2 FY14E 44,389 9,373 54,799 39,700 15,099 21.5 750 2,861 3,611 58,410 19.4 8,882 9,828 20.8 1,888 1,888 7,940 2,368 29.8 5,572 21.5 Total CAR Tier I Capital Tier II Capital 15.4% 12.4% 3.0% 14.0% 11.3% 2.7% 14.0% 11.5% 2.5% 15.4% 13.4% 2.0% 14.2% 12.6% 1.6% Key Ratios Y/e March Gross NPA (%) Net NPA (%) NPA Coverage (%) Gross Slippages (%) Credit Cost (%) FY10 1.33 0.48 64.2 1.5% 0.3% FY11 1.12 0.35 68.8 0.7% 0.3% FY12 0.98 0.33 66.2 0.8% 0.3% FY13E 1.13 0.34 70.0 1.0% 0.5% FY14E 1.24 0.35 72.0 1.0% 0.5% Balance Sheet (Rs m) Y/e March Equity Networth Adj. Networth Deposits Low Cost deposits Total Liabilities Net Advances Growth (%) Investments Total Assets FY10 1,131 14,667 13,911 230,115 53,233 255,155 158,228 33.5 71,555 255,155 FY11 1,131 16,936 16,217 297,211 64,041 326,666 204,887 29.5 89,238 326,666 FY12 1,134 20,229 19,325 365,005 71,793 402,226 272,807 33.2 93,999 402,226 FY13E 1,333 28,346 27,215 441,639 84,795 488,088 332,825 22.0 113,436 488,088 FY14E 1,333 32,694 31,263 549,652 105,533 601,672 412,703 24.0 138,423 601,672
October 03, 2012
95
Prabhudas Lilladher Disclaimer
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India. Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage
60%
% of Total Coverage
54.1%
50% 40%
30% 20%
22.3%
23.0%
10% 0%
BUY Accumulate Reduce
0.7%
Sell
PLs Recommendation Nomenclature BUY Reduce Trading Buy Not Rated (NR) : Over 15% Outperformance to Sensex over 12-months : Underperformance to Sensex over 12-months : Over 10% absolute upside in 1-month : No specific call on the stock Accumulate Sell Trading Sell Under Review (UR) : : : : Outperformance to Sensex over 12-months Over 15% underperformance to Sensex over 12-months Over 10% absolute decline in 1-month Rating likely to change shortly
This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.
October 03, 2012
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Prabhudas Lilladher Contents

October 03, 2012

October 03, 2012

Prabhudas Lilladher Investment Summary

Prabhudas Lilladher Investment Summary

Prabhudas Lilladher Valuations reasonable with high/improving ROEs

October 03, 2012

Prabhudas Lilladher Benchmarking Scorecard: Scoring on many metrics

Yes Bank South Indian

Network Expansion and Spread

IIB ICICI Federal Bank

Kotak IIB Yes Bank

Yields and Margins

SBI Axis ICICI

Fee income franchise

ING Vysya Kotak Yes Bank

SBI Federal Bank PNB

October 03, 2012

Prabhudas Lilladher Benchmarking Scorecard: Scoring on many metrics

HDFCB IIB Kotak

Asset Mix and Quality

HDFCB Kotak IIB South Indian

J&K Bank Yes Bank ING Vysya

SBI PNB BOI

Capital and Leverage

ICICI Axis BOB

J&K Bank South Indian ICICI Kotak

ING Vysya SBI BOI

October 03, 2012

Prabhudas Lilladher Benchmarking SWOT

South Indian Bank

October 03, 2012

Prabhudas Lilladher Summary of Valuations and PT

Compares well on P/B v/s ROAs

Axis J&K Federal BOB PNB ING SIB SBI

Source: Company, PL Research

October 03, 2012

Prabhudas Lilladher Undemanding on most valuation metrics

Mcap to advances also in line with PSU banks

J&Ks Mcap/CASA worse off than PSU banks

300.0% 250.0% 200.0%

100 Federal Yes SBI PNB

Source: Company, PL Research

Source: Company, PL Research

Source: Company, PL Research

PAT per branch v/s Mcap per branch

Deposit per branch v/s Mcap per branch

Urban/Rural mix v/s Mcap per branch

20.0 15.0 10.0

Mcap / Branch (Rs m)

SIB PNB BOI

200 300 400 500 Mcap / Branch (Rs m)

Mcap / Branch (Rs m)

40% 50% 60% Urban / Rural Mix

Source: Company, PL Research

Source: Company, PL Research

Source: Company, PL Research

October 03, 2012

Prabhudas Lilladher Trading at average valuations

Source: Company, PL Research

October 03, 2012