31 ESS Private Banks

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THEMATIC

India | Banks | 26-March-2014
Private Sector Banks

SME is the new "Retail"

Private banks have rallied over the past one month anticipating a
recovery. However, with strong competition eroding profitability in
the retail segment and corporate recovery still some time away
where will growth come from for private banks? We think the MSME
(Micro, Small and Medium Enterprise) segment could plug this gap
for private banks in the next leg of growth as they grab market
share from PSU banks (76% of MSME market share vs 20% for pvt
banks). The MSME segment offers high growth potential and is
performing well on the asset quality front despite the macro
headwinds. It is already one of the most profitable divisions for the
likes of HDFC Bank and Axis while ICICI seems to be struggling to
get its strategy in place. We reiterate our BUY recommendation on
HDFC Bank and Axis Bank but downgrade ICICI to SELL as post the
recent rally we are not comfortable with its valuation. We upgrade
Yes Bank to Neutral (from SELL) with a revised fair value of Rs360
as we believe most of the risks are priced at the current valuation.

With retail slowing, MSME will drive the next leg of growth
Growth in retail credit, especially in the high profit segments like credit cards
and auto loans, has tapered down. Also, increased competition in the home
loans segment has forced private banks to guide for lower growth from retail
going forward. With previously lucrative segments slowing down, wheres
growth going to come from? We believe MSME or business banking will spur
the next leg of growth for private banks as capital constraints weigh down
PSU banks.
MSME segment remains highly underpenetrated and underserved
With nearly 45mn MSMEs the segment accounts for nearly 15% of Indias GDP.
However, only 1.6mn or c.5% of the total MSMEs are registered with various
industry bodies or forums and a majority of them are unregistered. As per the
Nachiket Mor Committee Report only c.4% of these MSMEs have access to
institutional sources of credit like banks and NFBCs with the remaining 96%
relying on self-financing or non-institutional sources of credit. PSU banks
control majority of the market share (c.76%) while private banks have c.20%
market share; this presents a huge growth opportunity for private banks in an
underpenetrated segment.
Huge growth and fee income opportunity for private banks
In addition to the growth opportunity the MSME segment also offers strong
fee income and cross-sell opportunity for private banks. For example, the
strong retail FX fee income growth for a number of private banks including
HDFC Bank and IndusInd is a result of these banks offering FX services to their
MSME customers via the banks branches.
Recommendations
HDFC Bank (HDFCB IN, BUY, FV:Rs 850): Ahead of the curve
Axis Bank (AXSB IN, BUY, FV:Rs 1,590): SME always been a core segment
ICICI Bank (ICICIBC IN, SELL, FV:Rs 1,080): No more valuation comfort
Yes Bank (YES IN, Neutral, FV:Rs 360): Capital is key; risks look priced in.

ICICI Bank

SELL
14% downside
Fair Value Rs1,080.00

Bloomberg ticker ICICIBC IN
Share Price Rs1,253.00
Market Capitalisation Rs1,450,109.00m
Free Float 100%

HDFC Bank

BUY
13% upside
Fair Value Rs850.00

Bloomberg ticker HDFCB IN
Share Price Rs750.00
Free Float 77%

Axis Bank

BUY
13% upside

Bloomberg ticker AXSB IN
Market Capitalisation Rs657,335.00m
Free Float 76%

Yes Bank

NEUTRAL
5% downside
Fair Value Rs360.00

Bloomberg ticker YES IN
Free Float 74%

Source: Espirito Santo Investment Bank Research, Company
Data, Bloomberg

Analysts

Saikiran Pulavarthi
+91 22 4315 6824
saikiran.pulavarthi@espiritosantoib.co.in
Espirito Santo Securities India Private Limited

Sri Karthik Velamakanni
+91 22 4315 6826
sri.karthik@espiritosantoib.co.in

Page 2 of 22
Table 2 Our EPS growth estimates for
Private banks
FY14E FY15E FY16E
ICICIBC 16% 13% 14%
HDFCB 25% 26% 26%
AXSB 23% 16% 16%
IIB 31% 29% 24%
YES 24% 16% 15%

Source: Espirito Santo Investment Bank Research estimates

Table 4 Our RoE estimates for Private banks
RoE% FY15E FY15E FY16E
ICICIBC 13.5% 14.0% 14.3%
HDFCB 21.2% 22.5% 23.6%
AXSB
17.8% 17.8% 17.8%
IIB
17.2% 19.1% na
YES 24.4% 23.6% 22.4%


Private Banks have rallied in anticipation of a recovery
Over the past one month private banks like ICICI, HDFC and IIB have rallied
20% on average and are now trading close to their average historical
multiples. However, Axis and Yes still continue to trade at c.25% and c.37%
discount respectively to their historical average multiples.

In the table below, we adjust our Two Stage Gordon Growth model to get a
sense about what the market is currently factoring in to arrive at the current
multiples for private banks.

A few things to note on the current market expectations on private sector
banks:
Steep rate cut expectation: In order to justify the current multiples we
had to cut our risk free rate assumption to 7.0%, which implies a 100bps
rate cut for the rest of the year.
Improvement in short-term earnings growth: The current valuations
factor in an improvement in earnings growth momentum for almost all
private sector banks.
Improvement in RoEs: Along with higher earnings growth, private bank
valuations also factor in improvement in steady state RoEs (driven by
improvement in economic environment and higher growth potential).
The big question then is: will the economic recovery be strong enough to
carry banks over current market expectations and help deliver higher earnings
growth and RoE improvement.
Table 1 Most Private banks are now trading close to their average historical multiples

1 month
Perf
3 month
Perf
FY15E P/B
Historical
average P/B
FY15E P/E
ICICI Bank 21% 15% 1.8x 1.8x 13.4x
HDFC Bank 12% 14% 3.5x 3.3x 17.0x
Axis Bank 13% 9% 1.5x 2.0x 8.9x
IndusInd 22% 15% 2.6x 1.9x 14.2x
Yes Bank 25% 1% 1.6x 2.4x 7.3x
Bankex 18% 10%
Table 3 Valuation factoring in improvement in growth and RoEs - (FY15E)
Two Stage Gordon
Growth
HDFC ICICI Axis IndusInd YES Comments
CoE 11.8% 12.4% 13.0% 13.0% 14.2%

Risk free rate 7.00% 7.00% 7.00% 7.00% 7.00%
Market pricing in steep rate cuts
Our Beta Assumption 0.80 0.90 1.00 1.00 1.20

Risk premium 6.0% 6.0% 6.0% 6.0% 6.0%

G - Growth phase 25.0% 19.0% 18.0% 25.0% 21.0%
Current prices are factoring in a recovery with
earnings momentum picking up
g - final 6.0% 6.0% 6.0% 6.0% 6.0%
Sustainable RoE 18.5% 16.0% 18.0% 18.0% 20.0%
Implied steady state RoE assumptions have also
been increased to factor current prices
Initial Payout ratio (P) 20.0% 20.0% 17.0% 15.0% 10.0%
Perpetual Payout ratio
(Pn)
35.0% 35.0% 35.0% 35.0% 35.0%

Implied P/B 3.50 1.60 1.50 2.60 1.60

FY15E BVPS 213 578 933 190 239
Investment in Subs 0 324 0 0 0
Current Price 750 1,253 1,401 486 379

Source: Espirito Santo Investment Bank Research, Company Data
Page 2 of 32

Page 3 of 22
From our Economist Deepali Bhargava
Our house view for GDP growth, FD,
CAD for FY15E is 5.4%, 4.7% and 2.5%
respectively
How strong is the current economic recovery?
While macro indicators point to economy bottoming out
Most economists, as per Bloomberg consensus estimates, are predicting an
improvement in GDP growth (5.4% for FY15E vs 4.7% for FY14E), Fiscal Deficit
(4.1% for FY15E vs 4.6% for FY14E) and Current Account Deficit (2.3% as of
FY15E vs 4.8% as of FY14E).
Figure 1 GDP YoY growth rate Figure 2 Fiscal Deficit as a % of GDP

Figure 3 CAD as a % of GDP

Source: Bloomberg Source: Bloomberg Source: Bloomberg
Industry is yet to show signs of revival
While the overall GDP numbers are showing signs of revival this is primarily
driven by a recovery in the Services and Agri GDP numbers as can be seen
from the figures 4 and 5 below. However, the Industrial GDP numbers have
continued to slump, with sell-side analysts not factoring in any recovery for
industrial and manufacturing growth.
Figure 4 Services GDP YoY growth rate Figure 5 Agri GDP YoY growth rate

Figure 6 Industries GDP YoY growth rate

Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Sharp recovery unlikely this time on the economy front
India has seen the biggest drop in potential growth amongst BRICS, from 7.4%
in 2011 to 5.7% in 2013, and the output gap is also large, with c.1% between
actual and potential growth. The most noteworthy feature of the current
investment cycle is that the downturn is strikingly long with capital
inefficiency at its peak, suggesting that a return to the peak will take longer.
We still see no signs of a capex recovery or increase in private corporate
investment in India and expect capex cycle to revive only next year.
A cyclical recovery led by global growth recovery is in the offing but we think
a return back to 8%+ growth is unlikely in the near term. Limited fiscal space
for a significant increase in government investment, high interest rates and
uncertainty on the election outcome will in our view likely postpone a sharp
recovery. We expect GDP growth of 5.4% YoY in FY15 vs. 4.7% in FY14, in line
with consensus.
For an increase in potential growth, India needs an increase in productivity led
by a structural shift from agriculture to the manufacturing sector; reduction in
fiscal deficit and a perceived stable and administratively competent
government all of which can happen only over time.
9.3%
6.2%
5.0%
4.7%
5.4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
GDP Growth
4.9%
5.8%
4.9%
4.6%
4.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Fiscal Deficit
-2.6%
-4.2%
-4.8% -4.8%
-2.3%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
Current Account Deficit
10.5%
9.8%
8.2%
5.3%
6.9%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Services GDP growth
0.8%
7.9%
3.6%
3.4%
4.6%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Agri GDP growth
9.2%
9.2%
3.5%
3.6%
0.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Industries GDP Growth
Page 3 of 32

Page 4 of 22
If this is the base case scenario
where will additional growth for
private banks come from?

Base case GDP of 6% & 2.5x credit multiplier Credit growth of 14-16%
for FY15E
We looked at the historical relationship between credit growth and GDP
growth and observed that when the credit multiplier is around 2.6-2.7x (as in
during 2006-2013 period) then the CD ratio is above 70%. Now given that we
are at the higher end of CD ratio (76%) for the banking system we expect
credit multiplier to remain around the 2.5-3.0x, implying a credit growth range
of 14-16% for FY15E using our FY15E GDP growth estimate of 5.4%.
Table 5 Average GDP Growth, Credit Growth & Multiplier (x)
Avg GDP
Avg Credit
Growth
Multiplier (x)
Avg
CD Ratio
1981 - 1985 5.5% 19% 3.8x 64%
1986 - 1990 5.7% 16% 3.0x 59%
1991 - 1995 4.8% 15% 3.7x 58%
1996 - 2000 6.9% 17% 2.6x 57%
2001 - 2005 5.7% 20% 3.7x 60%
2006 - 2010 8.7% 24% 2.7x 74%
2011 - 2013 6.2% 16% 2.6x 76%
2014E 4.9% 16 - 17% 3.3 3.5x 78%
2015E 5.4% 14 - 16% 2.5 3.0x

Growth in retail credit has slowed and competition is now more
intense
Over the past two decades from 1994-2014 retail credit has been the mainstay
for private banks, helping them grow at a faster rate than the system and
increase their market share significantly. More importantly the higher growth
came along with higher RoEs with the introduction of highly profitable
products such as credit cards, personal loans, consumer durables loans & auto
loans in addition to the traditional home loan segment. For the system as a
whole the retail segment continues to grow at a brisk pace of 16% YoY driven
by relatively higher growth from the housing loans segment. However, the
higher RoE businesses have slowed down dramatically with the credit card
segment showing no growth while the auto segment grew only at 15% YoY.
Figure 7 Retail credit growth for the banking sytem remained around
the 15-16%...
Figure 8 ...however, growth in several highly profitable segments like
credit cards and auto loans has tapered

Source: Espirito Santo Investment Bank Research, RBI Source: Espirito Santo Investment Bank Research, RBI
While retail growth has slowed down, the number of players vying for the
retail pie has increased with PSU banks trying hard to grow their retail
portfolios by offering highly competitive pricing in the secured segments of
housing and auto loans. This is clearly visible from the marked slowdown in
the retail growth for private banks while PSU banks experienced a sharp pick-
up in retail growth.
16%
18%
0%
5%
10%
15%
20%
25%
Retail Loans Retail excl Housing Housing
0%
10%
15%
25%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Credit Card Education Auto Personal (Unsecured)
Page 4 of 32

Page 5 of 22
Figure 9 Private banks have seen a dip in their retail credit growth... Figure 10 ...while PSU banks have seen a sharp pickup in retail growth

Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data
Another key trend which is visible is the higher growth in retail advances for
Axis and ICICI during the last few quarters. When we dig deeper into the
reasons for this higher growth for Axis, ICICI and PSU banks the clear driver
seems to be the higher growth from the housing loans segments.
Figure 11 The higher growth for the likes of Axis, ICICI is driven by the
housing loan segments...
Figure 12 ...which is also the case for PSU banks which have seen higher
growth driven by housing loans

Source: Espirito Santo Investment Bank Research, Company Data, Kotak Mahindra (Not Rated) Source: Espirito Santo Investment Bank Research, Company Data, CNBK is Canara Bank
While the home loans segment has helped the some of the private banks
deliver higher retail growth, several large private mortgage players have
hinted at a slowdown in the housing segment as well as increased competition
from PSU banks as this segment is their mainstay.
Table 6 Management commentary on retail credit growth
Bank Comment
HDFC Bank Q3
FY14 analyst call
There has been some deceleration in auto loan growth again linked to what's happening to the underlying sales of
cars. And virtually a negligible growth in the CV portfolio.
From a pricing perspective, I think, the only regret is that perhaps in the last few months, as the competition has in
some ways intensified on the retail front Mr Paresh Sukthankar, DMD HDFC Bank
ICICI Bank Q3
FY14 analyst call
Growth in the retail portfolio continued to be strong and improved to 22.3% on a yearonyear basis at Q314
compared to 19.6% at Q214. Growth in the retail portfolio continues to be driven by secured products.
We continue to see strong growth, strong core operating trends, continued momentum in retail lending
Mr Kannan, ED ICICI Bank
Axis Bank Q3
FY14 analyst call
The credit quality of retail loans remains steady. Going forward, we expect some moderation in the growth of this
segment. And the growth of home loans is expected to be marginally slightly lower due to sluggishness in the
residential real estate sector. Mr Somnath Sengupta, ED Axis Bank
Kotak Bank
"For the past two years, our home loan book has been growing at 30-40 per cent, but this year it has grown by
only 10-15 per cent," Mr Sumit Bali, EVP and head of retail assets Kotak Bank
IndusInd Bank
Q3 FY14 analyst
call
The Corporate Loan book grew much faster than the Consumer Loan book. That is essentially because of the
slowdown which we have seen in the CV segment which accounted for about 20% of our total book.
We do expect to see some uptick in Q4 and I think in Q1 of next year onwards
Mr Romesh Sobti, CEO IndusInd Bank


0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
ICICIBC HDFCB AXSB IIB KMB ING
16%
23%
55%
-10%
0%
10%
20%
30%
40%
50%
60%
SBI PNB BOB BOI UNBK CNBK
-11%
17%
20% 20%
21%
49%
38%
36%
34%
32%
21%
24%
26%
22%
16%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
ICICI Axis Kotak
19%
23%
71%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
SBI PNB BOB BOI UNBK CNBK
Page 5 of 32

Page 6 of 22
To conclude
a) Growth in higher RoE retail segments has declined.
b) Banks driving retail growth through higher growth from housing loan
segment.
c) HDFC Bank has acknowledged the increased competition in the retail
segment.
d) Private banks like Axis, Kotak and HDFC Bank have hinted at lower
growth from retail.
So with previously lucrative segments slowing down, wheres growth going to
come from? The answer we believe is newer product segments. As growth in
retail credit slows private banks will foray into hitherto PSU strongholds to
drive growth and PSU banks constrained by capital requirements could falter.

Page 6 of 32

Page 7 of 22
MSME still remains largely untapped
Newer product segments will drive the next leg of growth
In addition to the slower growth and increased competition in the retail
segment banks also need to deal with the additional challenge of subdued
growth from the corporate segment which is already reeling from asset quality
stress and over-leverage.
In the following sections, we look at which product segments are going to
drive market share gains for Private Banks in the next 3-4 years. This is
especially important since the growth in retail credit has slowed down for
private banks in the last 3 quarters. In order to deliver higher growth we see
private banks foraying into MSME or business banking.
MSME / Business Banking / LAP whats in the name?
The Micro, Small and Medium Enterprise (MSME) is one of the main sectors
contributing to nearly 15% of Indian GDP and plays a crucial role in providing
large employment opportunities. As of FY12 there were nearly 45million MSME
units in India providing employment to nearly 101mn people. However, only
1.6mn or 4% of the total MSME are registered with various industry bodies or
forums with a majority of them still remaining unregistered.
Figure 13 Number of MSMEs
Figure 14 MSME provides large scale
employment...

Figure 15 ...however, most MSME still remain
unregistered (Mn)

Source: Ministry of MSMEs - FY13 Annual report Source: Ministry of MSMEs - FY13 Annual report Source: Ministry of MSMEs - FY13 Annual report
As a vast majority of MSME remains unregistered most of them do not have
access to institutional sources of financing. As can be seen from the figure
below, nearly 93% of MSME rely on self-financing, which is in line with the
proportion of MSME unregistered. This is also evident in the low Credit to GDP
ratio of the MSME sector relative to the Indian banking system.
Figure 16 Since most MSMEs remain unregistered, their access to
institution financing is olny 5%...
Figure 17 because of which their Credit to GDP for MSMEs is lower
than banking system average

Source: Ministry of MSMEs Source: Ministry of MSMEs

36
38
39
41
43
45
0
5
10
15
20
25
30
35
40
45
50
No of Working MSMEs (Mn)
81
84
88
92
97
101
0
20
40
60
80
100
120
No of people employed (Mn)
1.6, 4%
34.6,
96%
Registered vs unregistered
MSME
Registered Un-registered
93%
5%
2%
Self Finance /
no Finance
Institutional
Sources
Non-
Institutional
Sources
25%
43%
36%
52%
56%
101%
0%
20%
40%
60%
80%
100%
120%
MSME -
Services
Large -
Services
Agri Total MSME -
Industry
Large -
Industry
Credit to GDP
Page 7 of 32

Page 8 of 22
Nearly 56% of MSMEs are in the rural
and semi-urban regions and nearly 70%
of them are in the services sector
where the Credit to GDP ratio is only
25%.
Industry MSMEs appear to have 56% financial depth (Credit to GDP ratio),
while Service MSMEs have a much lower at 25%. The Nachiket Mor Committee
revealed that even though 70% of MSMEs have a bank account, only 5% have
access to term loans and a mere 1% has access to working capital loans from
banks. A large number of MSMEs are present in states such as UP and WB
where credit penetration is one of the lowest in the country. Refer to state
figure 32 for state wise portfolio split of top 3 private banks.
Figure 18 MSMEs present in near equal
proportion in both urban & rural regions
Figure 19 A majority of MSMEs are in the
services sector

Figure 20 However, credit to Services-MSMEs
is lower than Mfg-MSMEs (Rs Bn)

Source: Ministry of MSMEs Source: Ministry of MSMEs Source: Ministry of MSMEs
Figure 21 MSMEs are present through out
India without any regional bias
Figure 22 Even in terms of employement
generation the distribution seems very even

Figure 23 Retail trade and repairs is the
lergest industry segment following by textiles

Source: Ministry of MSMEs Source: Ministry of MSMEs Source: Ministry of MSMEs
Figure 24 States like UP, WB which have large proportion of MSMEs
have low credit penetration as per CRISIL Inclusix...
Figure 25 ...which is also visible from the low CD ratio of the respective
states as of FY13

Source: CRISIL Source: Espirito Santo Investment Bank Research, RBI
44%
56%
Area wise share of MSMEs
Urban Rural
30%
70%
Activity wise share of MSMEs
Manufacturing Services
5,105
10,979
2,843 2,779
0
2,000
4,000
6,000
8,000
10,000
12,000
MSME - Mfg MSME - Services
GDP Credit
UP, 4.4
WB,
3.7
TN, 3.3
MH, 6.1
AP,
2.6
KL,
2.2
GJ, 2.2
KTKT,
2.0
MP, 1.9
RAJ,
1.7
Others,
6.1
State wise distribution of
MSME (Mn)
UP, 9.2
WB,
8.6
TN, 8.1
AP, 7.1
MH,
7.0
KL,
5.0
GJ,
4.8
KTKT,
4.7
MP, 3.4
OR, 3.3
Others,
19.4
State wise employement in
MSMEs (Mn)
Retail
Trade &
Repairs,
40%
Textile,
11%
Food &
Bev, 7%
Hotels,
4%
Auto &
Fuel, 4%
Furnitur
e, 3%
Metal &
Machine
ry, 2%
Other
Servies,
29%
Leading industries in MSME
30%
42%
45%
55%
58%
68%
70% 70%
0%
10%
20%
30%
40%
50%
60%
70%
80%
BH UP OR MP WB KTK KL GJ
State CD ratio
Page 8 of 32

Page 9 of 22
PSU banks still control majority of MSME market share
Relative to retail credit where Private and Foreign banks now control majority
of the banking system market share, in the MSME segment its PSU banks that
still control majority of the market with private banks having only c.20% of
market share compared to c.45% in retail credit. We believe private sector
banks are nicely placed to increase their market share in this segment.
Figure 26 Private banks hold majority market share in retail credit Figure 27 ...while PSU banks continue to dominate the MSME segment

Source: Espirito Santo Investment Bank Research, RBI Source: Ministry of MSMEs
In our previous note on PSU Bank Climbing the FY16Ecliff we have
discussed in detail as to why the past trend of PSU banks losing market share
to private sector banks will only accelerate in the next few years with private
bank gaining significant foothold in the rural and semi-urban regions. We have
presented three key reasons: (a) Reason 1: Capital constraints; (b) Reason 2:
Liabilities difficult road ahead & (c) Reason 3: Asset quality and elevated
provisioning requirements.
With the exception of a few top PSU banks most PSU banks have low Basel III
Tier 1 ratios which are significantly lower than the Tier 1 ratios of private banks.
Figure 28 Current Reported Tier 1, Tier 1 Including PAT and CET 1 of major Indian bank

Figure 29 Reported Tier 1 as of Q3 FY14 of mid Tier PSU banks

Source: Espirito Santo Investment Bank Research, Company Data, Tier 1 ratio excluding profits
43%
45%
12%
PSU Banks
Private Banks
Foreign Banks
76%
20%
4%
PSU Banks
Private Banks
Foreign Banks
1
0
.
1
%
9
.
1
%
8
.
8
%
8
.
4
%
7
.
9
%
7
.
2
%
12.7%
12.3%
11.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
SBI BOB PNB OBC BOI UNBK ICICIBC AXSB HDFCB
Tier 1 - Reported Tier 1 - Including 9 Months PAT CET1
5.6%
6.7%
7.0% 7.1%
7.5%
7.6% 7.7%
7.9% 7.9% 8.0%
8.1% 8.1% 8.2%
10.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Tier 1 Ratios

Min Tier 1 requirement of
8.45% as of FY16E
Page 9 of 32

Page 10 of 22
LAP is only one of the various business
banking products that we end up doing
which is a small part. - Mr Paresh
Suktankar, ED HDFC Bank

For LAP and Business banking the
customer segment could be similar but
these are two separate products. So
some of it may be secured by property,
but the primary focus in this is to get
the transactional accounts of
customers. - Mr KVS Manian, President
Consumer Banking Kotak Bank

Most private banks are showing robust MSME growth numbers
Private Banks have latched on to this opportunity and are growing the MSME
segment at a brisk pace as can be seen in the figure below.
Figure 30 MSME credit growth for the system has picked up Figure 31 ...with Private banks showing robust growth numbers

Source: Espirito Santo Investment Bank Research, RBI Source: Espirito Santo Investment Bank Research, Company Data
Management commentary from most private bank managements reiterates
this trend with most continuing to guide for higher growth in the SME
segment.
Table 7 Management commentary on SME credit growth remains bullish except for ICICI Bank
Bank Comment
Axis Bank Q3
FY14 analyst call
Net advances increased 18%, largely driven by strong growth in retail and SME loans.
Our SME business continues to perform well and the portfolio behaviour remains healthy. The loan book is well
diversified and carries lower concentration risk Mr Somnath Sengupta, ED Axis Bank
ICICI Bank Q3
FY14 analyst call
The SME portfolio declined by 5.5% on a yearonyear basis.
The bank continues to adopt a calibrated approach to growth in the corporate and SME segments in view of the
weak operating environment Mr Kannan, ED ICICI Bank
ING Bank Q3
FY14 analyst call
"SME, retail - all those segments, they are actually growing at upwards of 25%.
SME has been one of the flagship businesses for us over the last few years and the portfolio quality there has been
rock solid. And that continues to do Mr Jayant Mehrotra, CFO ING Vysya Bank
Federal Bank Q3
FY14 analyst call
SME has been consistently growing at about 7%, 8% every quarter sequentially, that trend will continue.
Encouragingly the SME growth has been both in our home market of Kerala and equally encouragingly in markets
outside Kerala Mr Shyam Srinivasan, CEO Federal Bank

LAP is only a small part of the Business banking pie for banks
In addition to the high growth in the SME / Business banking, private banks
are also growing their LAP portfolios at a brisk pace. While the bank level
disclosures are quite confusing because of the non-standard classifications of
this segment, the LAP portfolio could be classified either as retail or SME
portfolios of banks. A bigger confusion is the fact that both business banking
and LAP seem to be taking property as collateral. Also, banks claim that both
these products are underwritten based on cash flows. So how are these two
products different? The biggest difference seems to be in the type of loan
Business banking loans are mostly working capital loans while LAP is mostly a
term loan product where the tenure of the loan is higher.
Huge growth and fee income opportunity for private banks
Private banks currently control about 20% market share in the MSME segment
with clear bias towards some of the more highly banked states such as
Maharashtra, Delhi, Gujarat, Tamil Nadu and Andhra Pradesh. However, as we
have seen previously some of the poorly banked states such as Uttar Pradesh,
West Bengal and Orissa have significant number of MSMEs where private
banks have lower presence.
24%
23%
21%
22%
14%
14%
8%
12%
9%
17%
19%
22%
0%
5%
10%
15%
20%
25%
MSME
5%
15%
25%
19%
38%
40%
-20%
-10%
0%
10%
20%
30%
40%
50%
ICICI HDFCB Axis ING Federal IIB
Page 10 of 32

Page 11 of 22
Figure 32 MSME portfolios of top three private banks in ten largest states (Rs Bn)

Private banks have invested heavily in their distribution network and
expanded their branch network in these poorly banked states at a rapid pace.
The branch network in the four states has nearly doubled for all the private
banks since Mar08. The lower ticket size MSME loans which continue to grow
at a fast pace and are relatively better in terms of asset quality are mostly
sourced through branches. The higher geographic reach should allow private
banks to target the MSME segment which is branch sourced from these poorly
banked states with high potential.
Figure 33 Branch network of the top 3 private banks in select states

MSME segment should also provide strong fee income growth
In addition to the advances growth opportunity MSME also offers strong fee
income opportunities for private banks as they offer new products and
services to these customers. Most of the customers are not new to banking
but are definitely new to certain banking services which were never available
to them from PSU banks. For example, the strong retail FX fee income growth
for a number of private banks including HDFC Bank and IndusInd Bank is the
result of private banks offering FX services to the MSME customers through
their branches. In fact business banking is one of the most profitable products
for HDFC Bank after personal loans.
Table 8 MSME offers strong fee income and cross sell opportunities for private banks
Bank Comment
HDFC Bank
analyst call
On profitability, right now, the most profitable products would be probably personal loans, followed by maybe
business banking and auto.- Mr Paresh Suktankar, ED HDFC Bank
Axis Bank
analyst call
The main business contributing to fee income during the quarter was agriculture and SME, which grew 22%,
followed by treasury which grew 20% and business banking which grew 9%. Mr Somnath Sengupta, ED Axis Bank
IndusInd Bank
analyst call
We opened a new segment in consistent with our increase in our retail network to offer retail FX services to our
clients across all branches in India. Strong FX fees is attributed to the fact that we have much wider and deeper
coverage of the client base Mr Romesh Sobti,CEO IndusInd Bank

57
42
45
38
23
17
24
9
13
3
38
21
24
21
12
9
8
6 6
2
18
9
17
13
12
8
10
6 7 6
0
10
20
30
40
50
60
70
MH DEL GUJ TN AP UP PUNJ KL WB OR
HDFCB ICICIBC AXSB
184
244
124
170
132
153
73 72
102
53
61
54
117
123
70
93
80
83
42
24
37
29
16 15
72
44
30
49
45
72
27
12
20
4 4 2
0
50
100
150
200
250
300
ICICIBC HDFCB AXSB ICICIBC HDFCB AXSB ICICIBC HDFCB AXSB ICICIBC HDFCB AXSB
Uttar Pradesh West Bengal Orissa Bihar
Sept'13 Mar'10 Mar'08

Page 11 of 32

Page 12 of 22
Understanding SME & Business Banking
In the figure below we classify SME / Business Banking segments based on
four main classifications (a) Size; (b) Sector; (c) Product type & (c) Sourcing.
Obviously all these four categories overlap with each other and hence it is
difficult to estimate the size of each of these categories. However, based on
our interaction with bank managements we can clearly see a few clear trends:
1. Private Banks are primarily into working capital type loans.
2. Private Banks have a higher proportion of services MSME where the
leverage / penetration is still lower.
3. The smaller ticket size loans are sourced from branches and the credit
behaviour is similar to retail lending.
4. Large ticket size MSMEs are serviced through relationships; this segment
is relatively under higher strain.
Figure 34 Classification of SME / business banking based on various parameters


Small & Micro Enterprses
(12% of banking system credit)
1. Lower leverage
2. Single business lines
3. Cashflows strained in some cases
4. High hard collateral, mostly property

Classification
based on size
< Rs1.0bn
turnover
1. Strong growth
2. Good asset
quality
performance
Rs1.0bn to
Rs2.5bn
turnover
1. Low growth
2. Stable asset
quality
> Rs2.5bn
turnover
1. Low growth
2. High asset
quality stress
Classification
based on sector
Manufacturing
MSMEs
1. PSU dominated
2. Higher asset
quality stress
Services
MSMEs
1. Private banks
have higher
presence
2. Lower asset
quality stress
Classification
based on type of
loan
Term lending
1. Relatively
higher leverage
2. Mostly
collateralized
3.Cash flows could
be strained
4. Part of the
portfolio can be
LAP

Working
Capital
1. Mostly
transactional type
2. Strong asset
quality
performance
3. Cashflowbased
lending but still
collateralized

Classification
based on sourcing
Branch
Sourcing
1. Smaller ticket
size loans
2. Parametrized
lending
3. Asset quality
performance
similar to retail
credit
Relationship
based sourcing
1. Larger ticket
size loans
2.Asset quality
performance
similar to mid-
corporate
Page 12 of 32

Page 13 of 22
Figure 35 Segments which contribute to HDFC
Banks MSME portfolio


Understanding the underlying Business banking / SME portfolio of
private banks
The challenge in understanding the Business banking / SME portfolio of
private banks is that different banks define / classify them differently either as
retail or SME or even Corporate based on their own portfolio classifications.
Hence, it is very difficult to do a like for like comparison between banks to
understand the relative positioning of each other. Also, the sub-segments
where each of them operates are very different in terms of their ticket sizes,
sector and sourcing models. In the following sections we provided some color
on the business banking / SME portfolios of each of the private banks based
on anecdotal evidence, channel checks and our interactions with management.
HDFC Bank Ahead of the curve
HDFC Bank is one of the major players in the business banking segment and
classifies the segment partly in retail and the rest in wholesale based on the
size of exposures. Management remains upbeat on the lower ticket size
segment of business banking and has clearly indicated that they are yet to see
anything which causes meaningful or serious concern in delinquency trends in
business banking book. It is one of the most profitable portfolios for HDFC
Bank.
Classification based on size: Ticket sizes below Rs50mn are classified in
retail segment while ticket sizes above Rs50mn are classified in the
wholesale segment.
Classification based on sector: Difficult to get a clear sense of the sector
breakup of business banking for HDFC Bank. However, given the lower
ticket sizes and the type of working capital loans we believe services
MSME would form a higher proportion of HDFC Banks portfolio.
Classification based on type of loan: Most of the lending is to small
customers and the lending is cash flow based with some form of property
as collateral for most of the loans. Business banking piece includes
working capital type lending or some term lending to customers of a
certain size and then also, LAP, rental discounting, and a whole range of
products.
Classification based on sourcing: A large part of business banking over
the last few years is own-sourcing done through bank branches. As the
branch network has grown, HDFC Bank is adding business banking
customers who have account or bank relationships with us. Not really a
feet-on-street or a DSA (Direct Selling Agent) originated retail-type
portfolio.
Figure 36 Business banking within retail segment (Less than Rs50mn
ticket size)
Figure 37 Business banking within wholesale segment (above Rs50mn
ticket size)

110 150 186 245 266
8.7%
9.4%
9.5%
10.2% 9.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0
50
100
150
200
250
300
FY10 FY11 FY12 FY13 Q3FY14
Retail Busines Banking (Rs Bn) % of total advances

Page 13 of 32

Page 14 of 22
Figure 38 Segments which contribute to ICICI


ICICI Bank Struggling to get the strategy right
ICICI recently reclassified its entire advances portfolio and separated the
business banking and SME segments in terms of its disclosures. ICICI Bank is
the only major private bank which is indicating a cautious approach towards
SME and business banking. While the business banking segment in the retail
division has started to grow at a faster pace in the last couple of quarters this
part only contributes to c.2.5% of its total advances. The SME portion which is
a much larger portfolio contributing to 4.3% of ICICIs portfolio is currently
struggling in terms of growth and asset quality pressures.
SME, we have been talking about that for the last five quarters or six quarters,
that the stress has continued on that portfolio and we have seen additions to
NPLs and restructured coming in from that portfolio. Incrementally of course,
we have been extremely cautious. Mr Kannan, ED ICICI Bank
Classification based on size: Given that the SME portfolio (Rs143bn) is
nearly twice the size of the business banking portfolio (Rs72bn) we
believe ICICIs portfolio is more skewed towards the larger ticket size
segment.
Classification based on sector: Again understanding the portfolio from a
sector perspective is proving to be difficult given the sparse disclosures.
However, because of the larger proportion of higher ticket size advances
we would expect ICICI Bank to be present in the manufacturing sector
MSME. This is also evident from the higher levels of stress for ICICI Bank in
the SME segment.
Classification based on type of loan: The business banking portfolio
classified in the retail segment would mostly be working capital type
loans. However, given the bigger higher asset quality stress from the SME
portfolio we would expect the SME piece to have higher proportion of
term loans within this portfolio.
Classification based on sourcing: Because of the higher ticket sizes of the
SME loans they would be mostly relationship based sourcing while the
business banking piece would be sourced from the branches.

Figure 39 Business banking within retail segment (Less than Rs50mn
ticket size) Figure 40 SME segment (above Rs50mn ticket size)


69 63 63 70 72
2.7%
2.2%
2.1%
2.2%
2.2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
58
60
62
64
66
68
70
72
74
FY12 FY13 Q1FY14 Q2FY14 Q3FY14
Retail Busines Banking (Rs Bn) % of total advances
152 151 139 146 143
6.0%
5.2%
4.6% 4.6%
4.3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
100
110
120
130
140
150
160
FY12 FY13 Q1FY14 Q2FY14 Q3FY14
SME (Rs Bn) % of total advances

Page 14 of 32

Page 15 of 22
Figure 41 Segments which contribute to Axis


Axis Bank SME always been a core portfolio
Compared to both HDFC Bank and ICICI, Axis has a higher the proportion of
SME loans in its portfolio. The bank has always focused on SME loans due to
legacy reasons: he bank has a large number of mid-level managers from the
PSU background who have a strong understanding of the SME business.
SME is an area which we believe offers attractive returns. And it will continue
to be a focus area. As we keep saying, SME provides good returns to
shareholders and this is something which we would grow at a reasonable
pace. Mr Somnath Sengupta, ED Axis Bank
Classification based on size: We believe Axis bank would be operating
more in the larger ticket size segments compared to HDFC Bank and
ICICI.
Classification based on sector: Difficult to get a clear sense of the sector
breakup of SME for Axis Bank as few disclosures are available.
Classification based on type of loan: Axis Bank extends working capital,
project finance as well as trade finance facilities to SMEs as disclosed in
their Annual report.
Classification based on sourcing: Axis relies on relationship to source its
SME business. The relationship-based approach enables Axis Bank to
deliver value through the entire life cycle of SMEs, creating enormous
goodwill and stickiness.
Figure 42 SME segment for Axis Bank (Rs Bn) Figure 43 SME, Agri and Business Banking fees for Axis Bank (Rs Mn)

Figure 44 SME ratings profile of Axis Bank's SME portfolio

195 214 238 299 316
19%
15%
14%
15%
15%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
50
100
150
200
250
300
350
SME (Rs Bn) % of total advances
6
,
0
1
0
6
,
3
1
0
7
,
2
3
0
8
,
0
1
1
6
,
4
6
0
21%
17%
15%
15%
15%
0%
5%
10%
15%
20%
25%
50
1,050
2,050
3,050
4,050
5,050
6,050
7,050
8,050
9,050
FY10 FY11 FY12 FY13 9MFY14
SME + Agri & Business banking fees (Rs Mn)
% of total fees
2%
5% 5% 6%
7%
13%
18% 18% 16% 16%
62%
59% 57% 58% 58%
13%
11%
12% 12% 12%
10%
7% 9% 8% 7%
0%
20%
40%
60%
80%
100%
120%
SME1 SME2 SME3 SME4 SME 5-8

Page 15 of 32

Page 16 of 22
Figure 45 Segments which contribute to Yes


Yes Bank A long way to go
Yes defines Business banking as loans to companies with turnover less than
Rs1.0bn and Commercial banking as loans to companies with turnover
between Rs1.0bn to Rs10bn. The business banking portfolio is around Rs87bn
or 17% of the portfolio as of Q3FY14 while the consumer banking portfolio is
Rs74bn or 15% of portfolio. The Business banking division is growing at a fast
pace and the management remains confident of growth in this segment.
However, like for all banks the commercial banking business is under stress
and the portfolio is declining for the last few quarters.
Classification based on size: The business banking portfolio comprises of
lower ticket size loans while the consumer banking portfolio would be
higher ticket size loans.
Classification based on sector: Since the bank does not disclose the
portfolio composition of the business banking segment it is difficult to
estimate the sector bias of the portfolio.
Classification based on type of loan: The business banking segment
would mostly constitute of working capital loans while the consumer
banking segment would have a mix of working capital and term loans.
Classification based on sourcing: A key difference between Yes Banks
business banking portfolio and other banks we have analysed so far is that
in addition to the self-originated loans, around c.40% of the business
banking loans are from buyout portfolios to meet the priority sector
requirements.
Figure 46 Business banking segment (Less than Rs1bn turnover) Figure 47 Commercial banking for Yes Bank (Rs1 - 10bn turnover)

Figure 48 Business banking segment (Less than Rs1bn turnover) Figure 49 Break up of Business banking as per origination (FY13)

12 42 69 86 87
5%
12%
18%
18% 17%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
10
20
30
40
50
60
70
80
90
100
SME / Business banking (Rs Bn) % of total advances
57 79 82 80 74
26%
23%
22%
17%
15%
0%
5%
10%
15%
20%
25%
30%
0
10
20
30
40
50
60
70
80
90
SME / Business banking (Rs Bn) % of total advances
55
69 61 62 59 86 82 82 87
5%
11%
10%
12%
12%
15%
15%
18%
16%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
10
20
30
40
50
60
70
80
90
100
Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14Q3'14
SME / Business banking (Rs Bn)
% of total advances
44%
56%
Buyout Portfolio Self Originated (Organic)

Page 16 of 32

Page 17 of 22
We reduced our estimates for Yes
Bank due to the following reasons: (a)
Lower margins, (b) lower balance
sheet and (c) we have not factored in
capital raising into our estimates now.
Changes to estimates

Espirito Santo vs Consensus
Table 13 ICICI Bank of India - ESIB vs Consensus
Rs mn
ESS Consensus % Change
FY15E FY16E FY15E FY16E FY15E FY16E
Total Income 302,605 349,923 302,605 349,923 0% 0%
PAT 108,065 125,467 108,590 123,488 0% -2%
Adj BVPS 685 764 685 764 0% 0%

Source: Espirito Santo Investment Bank Research, Bloomberg for consensus
Table 14 HDFC Bank - ESIB vs Consensus
Rs mn
Total Income 318,347 380,441 318,563 384,003 0% -1%
PAT 106,271 134,396 104,904 129,888 1% 3%
Adj BVPS 213 259 213 255 0% 1%

Table 15 Axis Bank - ESIB vs Consensus
Rs mn
Total Income 219,630 254,360 216,467 252,340 1% 1%
PAT 73,844 85,933 67,813 79,156 9% 9%
Adj BVPS 933 1,085 910 1,044 3% 4%

Table 16 Yes Bank - ESIB vs Consensus
Rs mn
Total Income 52,583 61,820 52,532 64,329 0% -4%
PAT 18,697 21,443 18,415 21,773 2% -2%
Adj BVPS 239 290 242 290 -1% 0%

Table 9 ICICI Bank - Changes to estimates
Rs mn
Old New % Change
Op. Profit 165,484 189,270 165,293 187,643 0% -1%
PAT 95,782 109,121 96,233 108,590 0% 0%
Adj BVPS 618 686 616 685 0% 0%

Source: Espirito Santo Investment Bank Research for estimates
Table 10 HDFC Bank - Changes to estimates
Rs mn
Old New % Change
Op. Profit 136,800 170,805 145,023 182,033 6% 7%
PAT 83,332 104,365 84,069 106,271 1% 2%
Adj BVPS 176 212 178 213 1% 1%

Table 11 Axis Bank - Changes to estimates
Rs mn
Old New % Change
Op. Profit 112,270 127,477 116,001 129,215 3% 1%
PAT 61,217 72,662 63,717 73,844 4% 2%
Adj BVPS 800 926 805 933 1% 1%

Table 12 Yes Bank - Changes to estimates
Rs mn
Old New % Change
Op. Profit 27,832 34,300 26,635 30,912 -4% -10%
PAT 16,252 19,953 16,065 18,697 -1% -6%
Adj BVPS 228 269 197 239 -14% -11%

Page 17 of 32

Page 18 of 22
Valuation methodology
In table below, we summarize our assumptions for the Two Stage Gordon
growth model. The key assumptions include: (a) risk free rate of 7.25% which
assumes a 75bps rate cut during FY15E; (b) risk premium of 5%; (c) G - Growth
during the growth phase; (d) long term growth rate of 3%; (e) P - Initial
payout ratio and (f) Pn Perpetual payout ratio. Note that the growth rate
assumption for the growth phase is the most important variable in a Two
Stage Gordon growth model.
Table 17 Two stage Gordon growth model
Two Stage Gordon Growth HDFC ICICI Axis YES
CoE 11.3% 12.3% 12.3% 13.3%
Risk free rate 7.25% 7.25% 7.25% 7.25%
Our Beta Assumption 0.80 1.00 1.00 1.20
Risk premium 5.0% 5.0% 5.0% 5.0%
G - Growth phase 25.0% 16.0% 18.0% 18.0%
g - final 6.0% 6.0% 6.0% 6.0%
Sustainable RoE 18.0% 15.0% 18.0% 20.0%
Initial Payout ratio (P) 20.0% 20.0% 17.0% 10.0%
Perpetual Payout ratio (Pn) 35.0% 35.0% 35.0% 35.0%
Implied P/B 4.00 1.30 1.70 1.50
FY15E BVPS 213 578 933 239
Investment in Subs 0 324 0 0
Target price 850 1,080 1,590 360
Current Price 750 1,253 1,401 379
Upside / Downside 13% -14% 13% -5%
Our Stance BUY SELL BUY Neutral

Relative Valuation
Table 18 Relative valuation of private sector bank based on Espirito Santo estimates

Source: Espirito Santo Investment Bank Research, Company Data; priced as of 25 March

CMP
Fair
Value
(Rs) Rs FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14A FY15E FY16E
ICICI Bank ICICIBC IN SELL 1,253 1,080 1.69% 1.60% 1.57% 13.5% 14.0% 14.3% 15.1 13.3 11.7 2.03 1.83 1.64 1.8% 1.9% 2.1%
HDFC Bank HDFCB IN BUY 750 850 1.90% 1.94% 2.04% 21.2% 22.5% 23.6% 21.4 17.0 13.4 4.22 3.51 2.89 0.9% 1.1% 1.3%
Axis AXSB IN BUY 1,401 1,590 1.81% 1.77% 1.79% 17.8% 17.8% 17.8% 10.3 8.9 7.6 1.74 1.50 1.29 1.3% 1.5% 1.6%
Indusind IIB IN BUY 486 532 1.76% 1.84% 17.2% 19.1% 18.3 14.2 3.01 2.56 0.8% 1.0%
Yes YES IN NEUTRAL 379 360 1.57% 1.55% 1.52% 24.4% 23.6% 22.4% 8.5 7.3 6.3 1.93 1.58 1.31 2.0% 2.4% 2.8%
DCB DEVB IN BUY 59 63 1.19% 1.31% 13.7% 16.0% 9.8 7.3 1.41 1.18 0.0% 0.0%
ING Vysya VYSB IN BUY 574 711 1.35% 1.34% 13.0% 12.5% 14.2 11.4 1.52 1.36 1.0% 1.1%
Federal Bank FB IN BUY 91 113 1.11% 1.29% 1.30% 12.3% 14.1% 14.4% 9.5 7.4 6.4 1.16 1.02 0.90 2.0% 2.3% 2.3%
South Indian
Bank
SIB IN BUY 22.5 28.0 1.01% 1.00% 0.98% 16.6% 16.2% 16.0% 5.7 4.9 4.3 0.97 0.81 0.68 3.3% 3.6% 3.6%
Ratings Ticker
RoA (%) P/B ROE (%) P/E Div Yield (%)
Page 18 of 32

FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF
MARKET UPDATE

ICICI Bank

No more valuation comfort; SELL

Despite our concerns on the rerating potential for the core banking
franchise of ICICI Bank we had remained Neutral on the stock due to
the valuation comfort provided by its undervalued insurance
subsidiaries. However, post the c.30% rally in the past 6 months
ICICI is currently trading at 1.8x FY15E P/B, which is close to its
historical average multiple. It is the only major private bank with a
cautious approach towards MSME due to stress in its large-ticket
MSME portfolio. While Business banking has started to grow in the
last couple of quarters, it is a small part of its advances (c.2.5% of
advances) and is unlikely to have a major impact on the overall
growth of the bank. With limited growth opportunity in the
corporate segment, intense competition in the low profitable home
loans segment, and given its struggle to drive growth in the highly
profitable segments like MSME we believe Core RoE improvement
is still sometime away. We downgrade our stance on ICICI Bank to
SELL due to lack of comfort on valuation. We marginally increase
our FV to Rs 1,080 as we tweak our FY15E BVPS estimate.

ICICI Bank struggling with its MSME strategy
ICICI Bank recently reclassified its entire advances portfolio and separated the
business banking and MSME segments in terms of its disclosures. ICICI Bank is
the only major private bank which is indicating a cautious approach towards
MSME and business banking. While the business banking segment in the retail
division has started to grow at a faster pace in the last couple of quarters, this
part accounts for only c.2.5% of its total advances. The MSME portion which is
a much larger portfolio contributing to 4.3% of ICICIs advances portfolio is
currently struggling on account of growth and asset quality pressures.
More dependent on large-ticket MSME segment which is under stress
The large-ticket size segment (above Rs50mn) within the MSME is under
stress for the entire banking system and given that this segment accounts for
a much larger portion of ICICI Banks portfolio (4.3% of advances) the bank is
facing higher asset quality stress relative to other peer private banks. This
together with the fact that the smaller ticket business banking segment for
ICICI Bank has decelerated till Q114 with the bank resuming its growth only
during Q214 (and Q314) shows that this is not a focus segment for ICICI Bank.
Core RoE improvement still sometime away
With limited growth opportunity in the corporate segment and intense
competition in the home loans segment, we believe ICICI will find growth
difficult to come by as it is struggling with its MSME strategy. Together with
this the bank will face near-term asset quality challenges due to stress from its
Corporate and big-ticket MSME portfolio.
No comfort on valuation Downgrade to Sell
Hence, we believe that at 1.8x FY15E P/B (which is the average historical
multiple) the stock is pricing in a blue sky scenario in terms of asset quality
improvement and growth, leaving no room for disappointment. We marginally
increase our FV to Rs 1,080 as we tweak our FY15E BVPS estimate. We
downgrade the stock to SELL due to lack of comfort on valuation.

Accounting & corporate governance GREEN
Franchise Strength GREEN
Amber AMBER

SELL
14% downside

Bloomberg ticker ICICIBC IN
Free Float 100%

INR m Y/E 31-Mar 2013A 2014E 2015E 2016E
Total Income 222,121 267,899 314,310 358,632
Pre provision profit 131,992 165,293 187,643 214,103
Provisions 18,025 26,829 31,623 36,677
PBT 113,967 138,465 156,020 177,426
PAT 83,254 96,233 108,590 123,488
EPS (Rs) 72 83 94 107
DPS (Rs) 20.0 23.0 24.0 26.0
ABVPS (Rs) 563 616 685 764

Y/E 31-Mar 2013A 2014E 2015E 2016E
P/E (x) 17.4 15.1 13.4 11.7
P/ABV (x) 2.2 2.0 1.8 1.6
ROE (%) 12.9% 13.5% 14.0% 14.3%
ROA (%) 1.64% 1.69% 1.60% 1.57%
Dividend Yield (%) 1.6% 1.8% 1.9% 2.1%

Data, Bloomberg

70
80
90
100
110
120
130
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Jan
2014
Feb
2014
Mar
2014
ICICIBC IN vs BSE500 Index
Share Price Performance
Analysts

Saikiran Pulavarthi
+91 22 4315 6824

+91 22 4315 6826
Page 19 of 32

Page 2 of 5
Source: Company Filings, Espirito Santo Investment Bank Research, Factset
Recommendation: SELL P/E (x) 22.3 17.4 15.1 13.4 11.7
Fair Value: Rs 1080 P/ABV (x) 2.4 2.2 2.0 1.8 1.6
ROE (%) 11.1% 12.9% 13.5% 14.0% 14.3%
Share Price: Rs 1253 ROA (%) 1.47% 1.64% 1.69% 1.60% 1.57%
Upside / Downside -14% Dividend Yield (%) 1.3% 1.6% 1.8% 1.9% 2.1%
3 Month ADV ($m) $57.6mn BVPS (Rs) 524 576 637 706 787
Free Float 100% ABVPS (Rs) 513 563 616 685 764
52 Week High / Low Rs.1,249 / Rs.757 BVPS (Excl Subs) (Rs) 416 470 530 600 681
ABVPS (Excl Subs) (Rs) 405 456 509 578 657
Bloomberg: ICICIBC IN Equity EPS (Rs) 56 72 83 94 107
Model Published On: 26 March 2014 DPS (Rs) 16.5 20.0 23.0 24.0 26.0
Dividend Payout Ratio 29% 28% 28% 26% 24%
Shares In Issue (mn) 1,157 P&L Summary FY12A FY13A FY14E FY15E FY16E
Market Cap ($ Bn) 23.7 Net Interest Income 107,342 138,664 166,689 199,027 227,134
Market Cap (Rs bn) 1,450 Non Interest Income 75,029 83,457 101,210 115,283 131,498
GoI Holding 0% Total Income 182,371 222,121 267,899 314,310 358,632
% change 16.4% 21.8% 20.6% 17.3% 14.1%
Wage costs 35,153 38,933 40,185 53,433 60,967
Forthcoming Catalysts Other costs 43,352 51,196 62,420 73,234 83,561
Operating Expenses 78,504 90,129 102,605 126,667 144,529
Q4 FY14 Results Apr 2014 % change 19% 15% 14% 23% 14%
General Election results Jun 2014 Pre provision profit 103,866 131,992 165,293 187,643 214,103
Q1 FY15 Results Jul 2014 % change 15% 27% 25% 14% 14%
% margin 57.0% 59.4% 61.7% 59.7% 59.7%
Provisions 15,831 18,025 26,829 31,623 36,677
% change -31% 14% 49% 18% 16%
Espirito Santo Securities Analysts PBT 88,036 113,967 138,465 156,020 177,426
Saikiran Pulavarthi % change 30% 29% 21% 13% 14%
saikiran.pulavarthi@espiritosantoib.co.in Income Tax Expense 23,382 30,713 42,232 47,430 53,937
Net Income 64,654 83,254 96,233 108,590 123,488
Sri Karthik Velamakanni % change 26% 29% 16% 13% 14%
Balance Sheet Summary FY12A FY13A FY14E FY15E FY16E
Equity 11,552 11,581 11,581 11,581 11,581
Shareholding Pattern (As of Dec'13) Networth 604,053 667,060 736,674 817,489 910,887
Deposits 2,555,000 2,926,136 3,401,444 3,996,602 4,697,177
Borrowings 1,398,149 1,449,915 1,814,891 2,153,374 2,544,901
Other Liabilities & Provisions 333,487 324,836 324,836 324,836 324,836
Total Sources of funds 4,890,688 5,367,947 6,277,845 7,292,300 8,477,801
Application of funds
Cash with RBI ,Call Money and Interbank Borrowings 362,293 414,175 481,452 565,692 664,854
Investments 1,595,600 1,713,936 1,992,340 2,340,943 2,751,294
Advances 2,537,277 2,902,490 3,432,978 3,977,481 4,612,651
Fixed Assets 168,150 109,975 143,709 180,816 221,635
Other Assets 195,154 279,837 293,829 308,521 323,947
Total Application of funds 4,858,474 5,420,413 6,344,308 7,373,454 8,574,381
Key ratios FY12A FY13A FY14E FY15E FY16E
Advances Yield 9.5% 9.9% 9.9% 9.9% 9.9%
Cost of Funds 5.9% 6.1% 6.0% 6.1% 6.2%
Loan Book (Q3 FY14) NIM 2.66% 2.99% 3.21% 3.17% 3.10%
CASA 43.5% 41.9% 43.2% 43.1% 42.9%
Credit / Deposit 99.3% 99.2% 100.9% 99.5% 98.2%
Investment / Deposit 62.5% 58.6% 58.6% 58.6% 58.6%
Gorss NPAs (%) 3.6% 3.2% 3.1% 2.9% 2.8%
Net NPAs (%) 0.7% 0.8% 1.0% 0.9% 0.8%
Provision Coverage Ratio 80% 76% 68% 70% 70%
Efficiency Ratios FY12A FY13A FY14E FY15E FY16E
Operating Cost / Income 43.0% 40.6% 38.3% 40.3% 40.3%
Wage costs / Total operating costs 19.3% 17.5% 15.0% 17.0% 17.0%
Capital Ratios FY12A FY13A FY14E FY15E FY16E
Tier-1 capital 12.7% 12.8% 12.3% 11.9% 11.6%
Tier-2 capital 5.8% 5.9% 5.1% 4.4% 3.8%
RoA and RoE Trends Chart Capital adequacy ratio 18.5% 18.7% 17.4% 16.3% 15.4%
Dupont (as % of Avg assets) FY12A FY13A FY14E FY15E FY16E
NII 2.44% 2.73% 2.92% 2.93% 2.88%
Other Income 1.70% 1.64% 1.78% 1.70% 1.67%
o/w Treasury 0.00% 0.10% 0.18% 0.17% 0.17%
Employee exp -0.80% -0.77% -0.70% -0.79% -0.77%
Non- Employee exp -0.98% -1.01% -1.09% -1.08% -1.06%
Operating Profit 2.36% 2.59% 2.90% 2.77% 2.72%
Provisions -0.36% -0.35% -0.47% -0.47% -0.47%
PBT 2.00% 2.24% 2.43% 2.30% 2.25%
(1-tax rate) 26.56% 26.95% 30.50% 30.40% 30.40%
Return on Assets 1.47% 1.64% 1.69% 1.60% 1.57%
#REF! RoA excl Treasury 1.47% 1.61% 1.63% 1.55% 1.52%
Avg. total assets/average equity (x) 7.5 7.9 8.0 8.7 9.1
Return on Equity 11.1% 12.9% 13.5% 14.0% 14.3%
FY16E FY15E FY14E
ICICI Bank (Standalone)
Valuation Metrics FY12A FY13A
FII
67%
DII
25%
Others
8%
Retail
37%
SME
4%
Dom Corp
32%
Intl
28%
1.47% 1.64% 1.69% 1.60% 1.57%
11.1%
12.9%
13.5%
14.0%
14.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
FY12A FY13A FY14E FY15E FY16E
RoA RoE
Page 20 of 32

MARKET UPDATE

HDFC Bank

Ahead of the curve; reiterate BUY

HDFC Bank is the market leader in the small-ticket business banking
segment, and is ahead of its peers in terms of market share and
geographic diversity of its portfolio. The bank has invested in
expanding its distribution reach to help drive growth from
underpenetrated states such as UP and WB. Given this we expect
HDFC Bank to maintain its valuation premium by capturing the
opportunity in the MSME segment which offers high growth
potential and high return ratios. We upgrade our FV by 18% to
Rs850 (from Rs721) as we roll over to FY15E BVPS giving us a 13%
upside. Reiterate BUY on HDFC Bank as our top pick among private
banks.

HDFC Bank is the market leader in small-ticket business banking
As of Q314 HDFC Banks business banking portfolio constitutes nearly 9% of
its total advances portfolio and 18% of its retail portfolio. This portfolio has
grown at a brisk pace of nearly c.25% CAGR over the past four years to nearly
Rs266bn as of Q314. Most of this portfolio as per management commentary is
branch originated with ticket sizes of loan below Rs50mn. As most of these
loans are originated from the banks branches the underwriting is strictly
defined by parameterised models and so we expect the credit behaviour to be
similar to the good credit behaviour exhibited by retail customers.
Highly profitable segment with huge potential
In our view, the business banking segment is one of the most profitable
segments for the bank as the segment offers relatively higher yields (due to
lower availability of formal credit), lower credit costs (as the credit behaviour
is similar to retail customers) and higher cross-sell opportunities. This
customer segment offers high cross-sell opportunity helping the bank
generate fee income as well. For example, HDFC Bank offers plain vanilla FX
offerings to retail and business banking segments which contributes to c.6% of
its FX fee income. Despite the large portfolio we see huge growth opportunity
for HDFC Bank, driven by the underlying fundamentals of the segment like (a)
low penetration and (b) low market share for private banks & (c) significant
branch expansion by HDFC Bank in underpenetrated markets like UP, WB.
Asset quality trends in line with retail asset quality
Similar to retail asset quality trends the MSME asset quality for HDFC Bank has
held up well in relation to the expected credit costs. The smaller ticket size,
working capital nature of the loans and the availability of hard collateral in the
form of property has helped in the better asset quality performance of the
segment.
Follow the leader - Reiterate Buy
We factor in higher advances growth for FY15E driven by pickup in the
advances growth of system. This has led to marginal upgrades to our FY15E
PAT and BVPS. Currently HDFC Bank is trading at 3.5x FY15E P/B which is
close to its average historical multiple of 3.3x. We expect HDFC Bank to
sustain its valuation premium by capturing the opportunity in the MSME
segment which offers high growth potential and high return ratios. We
upgrade our FV by 18% to Rs850, giving us 13% upside from the current levels.
Reiterate BUY on HDFC Bank as our top pick among private banks.

Earnings Momentum GREEN

BUY
13% upside
Fair Value Rs850.00

Bloomberg ticker HDFCB IN
Free Float 77%

INR m Y/E 31-Mar 2013A 2014E 2015E 2016E
Total Income 223,755 264,511 318,347 380,441
Provisions 15,827 18,602 22,227 22,812
PBT 97,506 126,420 159,806 202,100
PAT 67,263 84,069 106,271 134,396
EPS (Rs) 28.1 35.0 44.1 55.8
DPS (Rs) 5.5 7.0 8.5 10.0
ABVPS (Rs) 150.8 177.8 213.4 259.1

Y/E 31-Mar 2013A 2014E 2015E 2016E
P/E (x) 26.7 21.4 17.0 13.4
P/ABV (x) 5.0 4.2 3.5 2.9
ROE (%) 20.2% 21.2% 22.5% 23.6%
ROA (%) 1.81% 1.90% 1.94% 2.04%
Dividend Yield (%) 0.73% 0.93% 1.13% 1.33%

Data, Bloomberg

90
95
100
105
110
115
120
125
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Jan
2014
Feb
2014
Mar
2014
HDFCB IN vs BSE500 Index
Analysts

Saikiran Pulavarthi
+91 22 4315 6824

+91 22 4315 6826
Page 21 of 32

Page 2 of 5

Recommendation: BUY P/E (x) 33.8 26.7 21.4 17.0 13.4
ROE (%) 18.5% 20.2% 21.2% 22.5% 23.6%
Upside / Downside 13% Dividend Yield (%) 0.6% 0.7% 0.9% 1.1% 1.3%
52 Week High / Low Rs753 / Rs528 EPS (Rs) 22.2 28.1 35.0 44.1 55.8
DPS (Rs) 4.3 5.5 7.0 8.5 10.0
Bloomberg: HDFCB IN Equity Dividend Payout Ratio 19% 20% 20% 19% 18%
Model Published On: 26 March 2014
P&L Summary FY12A FY13A FY14E FY15E FY16E
Net Interest Income 122,968 156,428 183,790 222,865 269,055
Shares In Issue (mn) 2,395 Non Interest Income 52,437 67,327 80,720 95,482 111,385
Market Cap ($bn) 29.3 Total Income 175,405 223,755 264,511 318,347 380,441
Market Cap (Rs bn) 1,796 % change 18% 28% 18% 20% 20%
Promoter Holding 23% Wage costs 33,999 39,654 40,936 45,979 51,644
Other costs 51,902 70,768 78,552 90,335 103,885
Forthcoming Catalysts % change 21% 29% 8% 14% 14%
Pre provision profit 89,504 113,334 145,023 182,033 224,912
Q1 FY15 Results Jul 2014 Provisions 14,373 15,827 18,602 22,227 22,812
PBT 75,132 97,506 126,420 159,806 202,100
% change 29% 30% 30% 26% 26%
Espirito Santo Securities Analysts Income Tax Expense 23,461 30,243 42,351 53,535 67,703
Saikiran Pulavarthi Net Income 51,671 67,263 84,069 106,271 134,396
saikiran.pulavarthi@espiritosantoib.co.in % change 32% 30% 25% 26% 26%
sri.karthik@espiritosantoib.co.in Balance Sheet Summary FY12A FY13A FY14E FY15E FY16E
Equity 4,693 4,759 4,759 4,759 4,759
Networth 299,244 362,141 429,493 515,409 625,860
Shareholding Pattern (Dec'13) Deposits 2,467,065 2,962,470 3,523,605 4,279,890 5,199,274
Borrowings 238,465 330,066 590,502 682,651 780,525
Total Sources of funds 3,379,092 4,003,319 4,961,969 5,979,995 7,208,112
Application of funds
Investments 974,829 1,116,136 1,233,262 1,497,962 1,819,746
Advances 1,954,200 2,397,206 2,924,592 3,509,510 4,211,412
Fixed Assets 23,472 27,031 28,923 30,948 33,114
Other Assets 217,216 190,144 317,124 385,190 467,935
Total Application of funds 3,379,095 4,003,319 4,961,969 5,979,995 7,208,112
Advances Yield 11.2% 11.8% 11.7% 11.7% 11.7%
Cost of deposits (%) 5.0% 5.5% 5.9% 5.9% 5.9%
NIM 4.3% 4.5% 4.4% 4.4% 4.4%
Loan Book (Q3 FY14) CASA 48.4% 47.4% 42.0% 41.5% 41.5%
Credit / Deposit 79.2% 80.9% 83.0% 82.0% 81.0%
Gorss NPAs (%) 1.0% 1.0% 0.9% 0.9% 0.9%
Net NPAs (%) 0.2% 0.2% 0.2% 0.2% 0.2%
Tier-1 capital 11.9% 11.1% 10.7% 10.8% 10.9%
Tier-2 capital 5.1% 5.7% 4.6% 3.8% 3.2%
Capital adequacy ratio 16.9% 16.8% 15.3% 14.6% 14.1%
RoA and RoE Trends Chart
NII 4.0% 4.2% 4.2% 4.1% 4.1%
Other Income 1.7% 1.8% 1.8% 1.7% 1.7%
o/w Treasury -0.1% 0.0% 0.0% 0.0% 0.0%
Employee exp -1.1% -1.1% -0.9% -0.8% -0.8%
Non- Employee exp -1.7% -1.9% -1.8% -1.7% -1.6%
Provisions -0.5% -0.4% -0.4% -0.4% -0.3%
PBT 2.4% 2.6% 2.9% 2.9% 3.1%
(1-tax rate) 31.2% 31.0% 33.5% 33.5% 33.5%
Return on Assets 1.66% 1.81% 1.90% 1.94% 2.04%
RoA excl Treasury 1.68% 1.79% 1.89% 1.93% 2.03%
#REF! Avg. total assets/average equity (x) 11.1 11.2 11.2 11.6 11.6
Return on Equity 18.5% 20.2% 21.2% 22.5% 23.6%
FY14E FY15E FY16E
HDFC Bank
Promoter
23%
FII
52%
DII
9%
Others
16%
Corporate,
42%
SME /
Business
Banking,
9%
Retail
Credit, 41%
Internation
al, 8%
1.66% 1.81% 1.90% 1.94% 2.04%
18.5%
20.2%
21.2%
22.5%
23.6%
0%
5%
10%
15%
20%
25%
RoA RoE
Page 22 of 32

MARKET UPDATE

Axis Bank

SME always been a core segment

MSME or Business banking has always been a core segment for Axis
Bank, which is evident from the higher proportion of SME loans in its
portfolio relative to ICICI Bank and HDFC Bank. The bank has always
focused on SME loans due to legacy reasons: the bank has a large
number of mid-level managers from the PSU background who have
a strong understanding of the SME business. Given this we continue
to prefer Axis over ICICI as our recovery play as Axis has enough
avenues to deliver growth despite the slowdown in corporate and
retail segment. At 1.5x FY15E P/B, Axis trades at a 25% discount to
its historical average multiple of 2.0x which gives us comfort on
valuation. We value Axis Bank at 1.7x FY15E P/B, which gives us a
fair value of Rs1,590, implying an upside of 13.5%. Reiterate BUY.

SME always been a core segment
Compared to both HDFC Bank and ICICI Bank, Axis has a higher the
proportion of SME loans in its portfolio. The bank has clocked an average
growth of c.25% for the last 5 quarters and the management remains
confident about delivering growth from this segment.
Operates in the higher ticket size segment
Axis relies on relationship banking to source its SME business where the ticket
sizes are relatively higher compared to the branch sourced business banking
loans. While this segment is under stress for the banking system Axis
continues to do well in terms of asset quality due to its better understanding
of the segment and the fact that majority of the portfolio (more than 80%) is
highly rated (SME 3 or above). Hence, management is confident of
maintaining the SME asset quality which is also visible from the stable ratings
profile of the SME portfolio. We do not factor higher asset quality pressures
from the SME portfolio in our estimates.
Table 1 SME ratings profile of Axis Bank's SME portfolio
SME1 2% 5% 5% 6% 7%
SME2 13% 18% 18% 16% 16%
SME3 62% 59% 57% 58% 58%
SME4 13% 11% 12% 12% 12%
SME 5-8 10% 7% 9% 8% 7%

Top pick to play the recovery theme
We reiterate our preference for Axis Bank over ICICI Bank to play the recovery
theme as we believe Axis has enough growth levers to pull in an environment
where retail and corporate growth is difficult to come by. We expect SME and
business banking business to drive growth for private banks in the next 2-3
years and Axis in our view is well positioned to capture this opportunity. At
1.5x FY15E P/B Axis trades at a 25% discount to its historical average multiple
of 2.0x which gives us comfort on valuation. We value Axis at 1.7x FY15E P/B
giving us a fair value of Rs1,590; 13.5% upside. The change in fair value is due
to an increase in our target multiple from 1.4x to 1.7x due to (a) lower beta
from 1.1 to 1.0 & higher sustainable RoE from 17% to 18%. Reiterate BUY.

Earnings Momentum GREEN

BUY
13% upside

Bloomberg ticker AXSB IN
Free Float 76%

INR m Y/E 31-Mar 2013A 2014E 2015E 2016E
Total Income 162,174 194,269 219,630 254,360
Provisions 17,504 20,902 20,621 23,505
PBT 75,527 95,099 108,594 126,372
PAT 51,794 63,717 73,844 85,933
EPS (Rs) 121 136 158 184
DPS (Rs) 18.0 18.5 21.0 23.0
ABVPS (Rs) 697 805 933 1,085

Y/E 31-Mar 2013A 2014E 2015E 2016E
P/E (x) 11.6 10.3 8.9 7.6
P/ABV (x) 2.0 1.7 1.5 1.3
ROE (%) 19.8% 17.8% 17.8% 17.8%
ROA (%) 1.69% 1.81% 1.77% 1.79%
Dividend Yield (%) 1.3% 1.3% 1.5% 1.6%

Data, Bloomberg

40
60
80
100
120
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Jan
2014
Feb
2014
Mar
2014
AXSB IN vs BSE500 Index
Analysts

Saikiran Pulavarthi
+91 22 4315 6824

+91 22 4315 6826
Page 23 of 32

Page 2 of 5
Recommendation: BUY P/E (x) 13.6 11.6 10.3 8.9 7.6
ROE (%) 20.2% 19.8% 17.8% 17.8% 17.8%
Upside / Downside 13.5% Dividend Yield (%) 1.1% 1.3% 1.3% 1.5% 1.6%
3 Month ADV ($m) $43.3mn BVPS (Rs) 555 708 820 953 1,109
Free Float 76% ABVPS (Rs) 547 697 805 933 1,085
52 Week High / Low Rs.1,550 / Rs.763 EPS (Rs) 103 121 136 158 184
DPS (Rs) 16.0 18.0 18.5 21.0 23.0
Bloomberg: AXSB IN Equity Dividend Payout Ratio 16% 15% 14% 13% 13%
Shares In Issue (mn) 469 Non Interest Income 54,202 65,511 71,467 83,152 97,083
Market Cap (Rs bn) 657 Total Income 134,380 162,174 194,269 219,630 254,360
Market Cap ($ bn) 10.6 % change 20% 21% 20% 13% 16%
Promoter Holding 25% Wage costs 20,802 23,770 26,090 30,932 36,673
Other costs 39,269 45,373 52,178 59,483 67,811
% change 26% 15% 13% 16% 16%
Forthcoming Catalysts Pre provision profit 74,309 93,031 116,001 129,215 149,876
55.3% 57.4% 59.7% 58.8% 58.9%
Q1 FY15 Results Jul 2014 Provisions 11,430 17,504 20,902 20,621 23,505
PBT 62,878 75,527 95,099 108,594 126,372
% change 22% 20% 26% 14% 16%
Income Tax Expense 20,456 23,733 31,383 34,750 40,439
Espirito Santo Securities Analysts Net Income 42,422 51,794 63,717 73,844 85,933
Saikiran Pulavarthi % change 25% 22% 23% 16% 16%
Equity 4,106 4,680 4,692 4,692 4,692
Networth 228,059 331,079 384,652 446,969 520,276
Shareholding Pattern (As of Mar'14) - ESS Estimate Deposits 2,201,043 2,526,136 2,918,153 3,383,825 3,925,237
Borrowings 340,717 439,511 462,941 457,722 516,053
Total Liabilities 2,856,251 3,405,607 3,896,404 4,445,305 5,149,713
Investments 931,921 1,137,375 1,254,806 1,387,368 1,609,347
Advances 1,697,595 1,969,660 2,304,502 2,673,222 3,100,938
Fixed Assets 22,593 23,556 25,912 28,503 31,354
Other Assets 64,829 70,666 77,732 85,505 94,056
Total Assets 2,856,278 3,405,607 3,896,404 4,445,305 5,149,713
Advances Yield 9.5% 9.7% 9.9% 9.5% 9.5%
Cost of Funds 6.2% 6.5% 6.2% 6.4% 6.5%
NIM 3.5% 3.5% 3.8% 3.5% 3.5%
Loan Book - Domestic (Q3 FY14) CASA 41.5% 44.4% 42.6% 42.6% 42.6%
Credit / Deposit 77.1% 78.0% 79.0% 79.0% 79.0%
Gorss NPAs (%) 0.9% 1.1% 1.3% 1.4% 1.5%
Net NPAs (%) 0.3% 0.3% 0.4% 0.5% 0.5%
Tier-1 capital 9.5% 12.2% 13.0% 13.3% 13.3%
Tier-2 capital 4.2% 4.8% 4.2% 3.7% 3.2%
RoA and RoE Trends Chart
NII 3.2% 3.2% 3.5% 3.3% 3.3%
Other Income 2.1% 2.1% 2.0% 2.0% 2.0%
o/w Treasury 0.1% 0.2% 0.2% 0.1% 0.1%
Employee exp -0.82% -0.78% -0.74% -0.74% -0.76%
Non- Employee exp -1.54% -1.48% -1.48% -1.43% -1.41%
Provisions -0.4% -0.6% -0.6% -0.5% -0.5%
PBT 2.5% 2.5% 2.7% 2.6% 2.6%
(1-tax rate) 32.5% 31.4% 33.0% 32.0% 32.0%
Return on Assets 1.67% 1.69% 1.81% 1.77% 1.79%
Return on Equity 20.2% 19.8% 17.8% 17.8% 17.8%
FY16E FY15E FY14E
Axis Bank
Promoter,
24.5%
FII, 50.8%
DII, 14.0%
Others,
10.7%
Corporate,
34%
SME, 15%
Agri,
6%
Retail,
30%
Intl, 15%
1.67% 1.69% 1.81% 1.77% 1.79%
20.2% 19.8%
17.8% 17.8% 17.8%
0%
5%
10%
15%
20%
25%
RoA RoE
Page 24 of 32

MARKET UPDATE

Yes Bank

Capital is the key; risks look priced in

We have been sellers on Yes Bank due to concerns on: a) high
dependence on wholesale liabilities; b) higher asset quality
challenges due to macro-economic conditions. We continue to
believe that re-rating for Yes bank is highly contingent on the
successful execution of its retail strategy together with a sustained
macro-economic recovery. During the past 6 months both these
concerns played out with the stock de-rating to 1.5x (1 year forward
P/B) 37% below its average P/B multiple of 2.4x. Based on two state
Gordon growth model we arrive at a target multiple of 1.5x (12%
discount to our target multiple for Axis) which implies a fair value of
Rs360, down from Rs386. Owing to the limited downside to our
revised FV, we upgrade our stance from Sell to NEUTRAL.

Capital: Remains key in a challenging economic environment
At 9.9% Tier 1 (CET1 of 9.3%; including 9M PAT) as of Q314 Yes Bank has the
lowest capital ratios among the New Generation Private Sector banks we
cover. The bank has slowed down its advances growth to 17% as of Q314 and
hence internal accruals (RoEs at 24% for FY14E) should be sufficient to fund
growth. However, in a challenging macro-economic environment and with
increasing Basel III requirements we believe Yes Bank needs to bring down its
leverage ratios through dilution. We believe capital raising would be a key
positive catalyst for the bank.
SME: A long way to go
The Business banking division is growing at a fast pace and management says
it remains confident of growth in this segment. However, like for all banks the
commercial banking business is under stress and the portfolio has been
declining for the last few quarters. However, around ~40% of Yes Banks
business banking portfolio is from buyout portfolios to meet priority sector
requirements and hence cannot be considered as organic growth.
Granularity of liabilities: Improving but can this be profitable?
We believe Yes Banks strategy of targeting HNIs (High Network Individuals)
as its target liabilities customers bodes well in the longer term and offers a
cross-selling opportunity to make the liabilities franchise profitable on a
standalone basis. However, executing this strategy is a drawn-out process and
the bank is yet to prove the scalability of this segment.
Re-rating unlikely but valuations comfortable Upgrade to Neutral
Yes Bank is trying to do all the right things to re-adjust its balance sheet (a)
building a retail liabilities franchise; (b) diversifying the loan book by reducing
dependence on the Corporate loan book. However, in our view this re-
adjustment will take time (refer to our retail liabilities note) and higher capital
is key in a challenging macro environment.
We believe that a re-rating for Yes Bank is highly contingent on the successful
execution of its retail strategy together with a sustained macro-economic
recovery. However, the stock has de-rated in the past 6 months and is
currently trading at 1.5x FY15E P/B (1 year forward P/B), which is a sharp 37%
discount to its average multiple which in our view will be the new normal. We
assign at a target multiple of 1.5x (20% discount to our target multiple for Axis
Bank) which implies a fair value of Rs360, 5% downside. We upgrade our
stance from Sell to Neutral. We reduce our FY15E PAT estimate by 6% due to:
(a) Lower margins, (b) lower growth and (c) we have not factored in capital
raising; leading to change in earnings momentum to AMBER.

Franchise Strength AMBER
Earnings Momentum AMBER

NEUTRAL
5% downside
Fair Value Rs360.00

Bloomberg ticker YES IN
Free Float 74%

INR m Y/E 31-Mar 2013A 2014E 2015E 2016E
Total Income 34,762 43,668 52,583 61,820
Provisions 2,160 3,352 3,815 3,157
PBT 19,257 23,282 27,097 31,076
PAT 13,006 16,065 18,697 21,443
EPS (Rs) 36.5 44.8 52.1 59.8
DPS (Rs) 6.0 7.5 9.0 10.5
ABVPS (Rs) 161.8 196.5 239.4 289.9

Y/E 31-Mar 2013A 2014E 2015E 2016E
P/E (x) 10.4 8.5 7.3 6.3
P/ABV (x) 2.3 1.9 1.6 1.3
ROE (%) 24.5% 24.4% 23.6% 22.4%
ROA (%) 1.56% 1.57% 1.55% 1.52%
Dividend Yield (%) 1.58% 1.98% 2.37% 2.77%

Data, Bloomberg

40
60
80
100
120
140
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Jan
2014
Feb
2014
Mar
2014
YES IN vs BSE500 Index
Analysts

Saikiran Pulavarthi
+91 22 4315 6824

+91 22 4315 6826
Page 25 of 32

Page 2 of 7
Yes Banks capital raising plans:
Yes bank already has in place the
necessary board and RBI approvals for
capital raising.
It also has the necessary approvals
from FIPB and CCEA to increase the FII
shareholding limit to 62%.
Figure 3 Evolution of minimum capital
requirements for Banks operating in India


6.0%
6.5%
7.6%
8.3%
8.9%
9.5% 9.5%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Basel 3 Tier 1 requirement
Capital remains the key in a challenging economic environment
At 9.9% Tier 1 (CET1 of 9.3%; including 9M PAT) as of Q314 Yes Bank has the
lowest capital ratios among the New Generation Private Sector banks we
cover. Most of the peer group banks have already accessed capital markets
and raised capital in the last 12-18 months. The most notable ones include Axis
Bank (Rs55.4bn); IndusInd Bank (Rs20bn) and ING Vysya (Rs18.4bn), all of
which now have high Tier 1 ratios.
Figure 1 Yes Bank has the lower Tier 1 (Basel 3) among peer group Figure 2 Its leverage ratio is also the highest (Q3FY14)

Source: Espirito Santo Investment Bank Research, Company Data, As of Q3 FY14 Source: Espirito Santo Investment Bank Research, Company Data, As of Q3 FY14
Given the lower Tier 1 and the current economic conditions, Yes Bank has
slowed down balance sheet growth to below its internal accrual rates of c.20%
(RoE of c.24% for FY14E and 17% dividend pay-out ratio) so that internal
accruals will sufficient to fund its growth. However, we believe higher capital
ratios are necessary for a bank like Yes Bank to successfully navigate through
the current challenging environment:
1. Basel 3 requirements and high leverage ratios: While Yes banks CET1
ratio of 9.3% as of Q314 looks well above the regulatory requirements, the
higher asset equity leverage of 14.4x as of Q314 is a cause for concern.
2. Asset quality risks: Given the higher exposure to large and mid-corporate
segments, which are struggling with asset quality challenges, Yes Bank
faces the possibility of a rise in asset quality stress. We believe having
higher Tier 1 equity capital would provide some comfort for investors
given the current economic conditions.
3. Growth capital: Yes Bank has historically enjoyed a growth premium
because of the high balance sheet growth the bank has delivered.
Because of the low Tier 1 capital the bank has restricted growth to below
c.20% so that the Tier 1 ratio remains around the 9.0% level. We believe
the re-rating of Yes Bank is highly contingent on its ability to grow at a
high rate and hence its capital raising plans become even more important
for the stock performance.
Figure 4 Yes Bank has brought down its growth... Figure 5 ...Which is one of the reasons for its de-rating

Source: Espirito Santo Investment Bank Research, Company Data, As of Q3 FY14 Source: Espirito Santo Investment Bank Research, Bloomberg
17.9%
14.3%
13.3%
12.7%
12.3%
11.5%
9.9%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Tier 1 (%) - Incl 9M PAT
14.4
10.9
9.8
9.5
7.6
5.9
4.6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Asset Equity Leverage (X)
53%
35%
59%
62%
25%
35%
17%
0%
10%
20%
30%
40%
50%
60%
70%
Balance Sheet Growth - YoY
0.0
1.0
2.0
3.0
4.0
5.0
6.0
PBV Std Dev(-2) Std Dev(-1)
Mean Std Dev(+1) Std Dev(+2)
Page 26 of 32

Page 3 of 7
According to Yes Banks management,
the bank can afford to offer higher SA
rates until the proportion of SA
deposits reaches around 25-30% of
deposits post which management
would think about reducing savings
deposits rates.
Granularity of liabilities: Improving but can this be profitable?
Since the deregulation of saving deposit rate during Oct11 (Q312) Yes Bank
has managed to more than triple its savings deposits, increasing the SA ratio
(% of SA in total deposits) from a mere 5% to nearly 11% as of Q314. During
this period, Yes Banks outstanding debit cards (which we use as a proxy for
the number of accounts) have increased nearly 3x, taking the number of debit
cards outstanding to more than 0.5m. There was a sharp jump in the average
SA balance per debit card from Rs51,000 as of Q212 to Rs142,000 as of Q314.
Figure 6 Yes has seen a significant improvement in the SA ratio Figure 7 Yes has seen consistent additions to no. of debit cards

Source: Espirito Santo Investment Bank Research, Company Data, As of Q3 FY14 Source: Espirito Santo Investment Bank Research, Company Data
However, a distinct feature of Yess SA story has been the higher average
balances; significantly higher than the other peer group banks IndusInd (IIB)
and Kotak Mahindra (KMB). This is clearly visible from the higher average SA
balance per debit card for Yes compared to IIB and KMB.
Figure 8 Yes has the highest avg SA balance,
As of Nov'13
Figure 9 Still behind peer banks in no. of
debit cards, as of Nov'13

Figure 10 In absolute terms, SA deposit match
peers, As of Q3'14

Source: Espirito Santo Investment Bank Research, Bloomberg Source: Espirito Santo Investment Bank Research, Bloomberg Source: Espirito Santo Investment Bank Research, Bloomberg
Our interactions with management suggest that this is in line with Yess overall
liabilities strategy of targeting High Net Worth Individuals (HNIs) as their
target liabilities customer base. This decision was taken keeping in mind the
future profitability and cross-selling potential of the target customer base.
Can Yes bank extract value from the customer base?
However, Yes Bank does not look to be able to continue to offer higher SA
rates even in an environment when term deposit rates come down (some time
in the future). We believe it is necessary for Yes Bank to make the liabilities
customer franchise profitable on a standalone basis and we believe making
this franchise profitable is highly contingent on the banks ability to cross-sell
other products to customers. This is where we agree with managements
strategy to acquire HNI customers where the cross sell potential is relatively
higher. Yes Bank has made all the necessary investments in terms of people,
processes, products and technology in order to improve the cross sell to its
liabilities customers which is visible in the uptick in the number of debit
transactions by its customers. The improvement in cross sell is also seen from
the pickup in 3
rd
party distribution fees (proxy for cross sell) which is growing.
8
25 30 39 49 60 65 70 76
2%
5%
6%
7%
9%
9%
10%
10%
11%
0%
2%
4%
6%
8%
10%
12%
0
10
20
30
40
50
60
70
80
90
Savings Deposits SA Ratio
174
147
163
186
253
296
349
392
417
458
505
537
0
100
200
300
400
500
600
No of Debit Cards ('000)
142
63
85
0
20
40
60
80
100
120
140
160
Yes IIB Kotak
Avg SA balance (Rs '000)
537
1,463
1,069
0
200
400
600
800
1,000
1,200
1,400
1,600
Yes IIB Kotak
Number of Debit Cards ('000)
76
93
91
0
10
20
30
40
50
60
70
80
90
100
Yes IIB Kotak
SA Deposits (Rs Mn)
Page 27 of 32

Page 4 of 7
Source: Espirito Santo Investment Bank Research, Reuters, Bloomberg, Company Data
Recommendation: NEUTRAL P/E (x) 13.6 10.4 8.5 7.3 6.3
ROE (%) 22.8% 24.5% 24.4% 23.6% 22.4%
Upside / Downside -5% Dividend Yield (%) 1.1% 1.6% 2.0% 2.4% 2.8%
52 Week High / Low Rs 548 / Rs 216 EPS (Rs) 27.9 36.5 44.8 52.1 59.8
DPS (Rs) 4.0 6.0 7.5 9.0 10.5
Bloomberg: YES IN Equity Dividend Payout Ratio 14% 16% 17% 17% 18%
Shares In Issue (mm) 359 Non Interest Income 8,571 12,574 16,856 19,794 23,245
Market Cap ($mn) 2,228 Total Income 24,727 34,762 43,668 52,583 61,820
Market Cap (Rs bn) 135.9 % change 38% 47% 34% 17% 17%
Wage costs (4,752) (6,555) (7,866) (9,754) (12,095)
Other costs (4,574) (6,790) (9,167) (11,916) (15,491)
Forthcoming Catalysts Operating Expenses (9,325) (13,345) (17,033) (21,671) (27,587)
% change 37% 43% 28% 27% 27%
Q4 FY14 Results Apr 2014 Pre provision profit 15,402 21,417 26,635 30,912 34,234
Q1 FY15 Results Jul 2014 % change 29% 39% 24% 16% 11%
Provisions (902) (2,160) (3,352) (3,815) (3,157)
PBT 14,500 19,257 23,282 27,097 31,076
Espirito Santo Securities Analysts % change 33% 33% 21% 16% 15%
Income Tax Expense (4,730) (6,251) (7,218) (8,400) (9,634)
Saikiran Pulavarthi Net Income 9,771 13,006 16,065 18,697 21,443
saikiran.pulavarthi@espiritosantoib.co.in % change 34% 33% 24% 16% 15%
Equity 3,530 3,586 3,586 3,586 3,586
Networth 46,766 58,077 71,452 86,921 104,598
Shareholding Pattern (Dec'13) Deposits 491,517 669,556 724,047 839,895 991,076
Borrowings 141,565 209,221 262,086 299,175 348,764
Total Liabilities 736,621 991,041 1,115,509 1,293,182 1,523,724
Cash with RBI ,Call Money and others 35,855 40,658 43,967 51,002 60,182
Investments 277,573 429,760 477,871 554,331 654,110
Advances 379,886 469,996 535,795 621,522 733,396
Fixed Assets 1,691 2,185 2,294 2,408 2,529
Other Assets 41,535 48,332 55,582 63,919 73,507
Total Assets 736,621 991,042 1,115,509 1,293,182 1,523,724
Advances Yield 10.5% 10.5% 10.8% 10.5% 10.5%
Cost of Funds 8.4% 8.3% 8.5% 8.3% 8.3%
NIM 2.7% 2.8% 2.9% 2.9% 2.9%
Loan Book Q3 FY14 CASA 15.0% 18.9% 21.0% 23.0% 24.5%
Credit / Deposit 77% 70% 74% 74% 74%
Investment / Deposit 56% 64% 66% 66% 66%
Gorss NPAs 0.2% 0.2% 0.7% 0.9% 0.7%
Net NPAs 0.05% 0.01% 0.26% 0.24% 0.12%
Efficiency Ratios
Operating Cost/Income 37.7% 38.4% 39.0% 41.2% 44.6%
Wage costs/Total operating costs 51.0% 49.1% 46.2% 45.0% 43.8%
Capital Ratios
Tier-1 capital 9.9% 9.5% 9.4% 9.9% 10.1%
Tier-2 capital 8.0% 8.8% 7.9% 6.9% 5.9%
RoA and RoE Trends Chart Dupont (as % of Avg assets) FY12A FY13A FY14E FY15E FY16E
NII 2.5% 2.7% 2.6% 2.7% 2.7%
Other Income 1.3% 1.5% 1.6% 1.6% 1.7%
o/w Treasury 0.1% 0.3% 0.2% 0.1% 0.1%
Employee exp -0.7% -0.8% -0.8% -0.8% -0.9%
Non- Employee exp -0.7% -0.8% -0.9% -1.0% -1.1%
Provisions -0.1% -0.3% -0.3% -0.3% -0.2%
PBT 2.3% 2.3% 2.3% 2.2% 2.2%
(1-tax rate) 32.6% 32.5% 31.0% 31.0% 31.0%
Return on Assets 1.52% 1.56% 1.57% 1.55% 1.52%
#REF! Return on Equity 22.8% 24.5% 24.4% 23.6% 22.4%
FY16E FY15E FY14E
Yes Bank
Promoter
25%
FII
40%
DII
19%
Others
16%
Corporate
Banking
68%
Commerci
al Banking
15%
Business
Banking -
SME &
Retail
17%
1.52% 1.56% 1.57% 1.55% 1.52%
23%
25% 24%
24%
22%
0%
5%
10%
15%
20%
25%
30%
RoA RoE
Page 28 of 32

Page 19 of 22
Valuation Methodology

Refer page 18

Risks to Fair Value

HDFC Bank
1. Capital raising: There is upside risk to the fair value if HDFC Bank decides
to raise equity capital as it trades at a significant premium to its last
reported book value.
2. Asset quality challenges: HDFC Bank might face asset quality problems
because of its lending in the non-metro regions where the credit
infrastructure is not yet fully established. With the data not as exhaustive
as for the metro or urban regions, HDFC Bank stands an increased risk of
asset quality impairment.
3. Lower growth: We currently factor in advances growth of 300bps higher
than system credit growth for HDFC Bank driven by market share gains in
semi-urban and rural regions and market share gains in SME / Business
banking segment. If HDFC Bank sees lower credit growth we will have to
reduce our fair value.
ICICI Bank
1. Faster Core RoE improvement: We will have to increase our fair value if
ICICI Bank manages to improve its core RoA and core RoE faster than
our expectations spurred by higher growth of its retail assets.
2. Pick up in corporate credit growth: Any improvement in conditions for
project finance deals will help the bank deliver a higher RoE as credit
growth with improve and credit costs will be contained.
3. Asset quality improvement: Improved economic conditions will also aid in
reduced stress on the corporate and SME loan book which should prove
positive for ICICI.
4. Unlocking of value from subsidiaries: We value the ICICI Pru Life
Subsidiary at Rs240bn and ICICI Lombard General Insurance at Rs10bn.If
ICICI manages to get higher values from the listing of its insurance
subsidiaries we will have to upgrade our fair value.
Axis Bank
1. Corporate asset quality pressures: Any significant deterioration in the
asset quality of the corporate loan book could lead to downgrades to our
adjusted book value per share leading to downgrades to our fair value.
2. SME asset quality pressures: Any significant deterioration in the asset
quality of the SME loan book, given that Axis is into higher ticket size
segment, could lead to downgrades to our adjusted book value per share
leading to downgrades to our fair value.
3. Lower growth: There is downside risk to our fair value if credit growth
falters due to high competition in secured retail segments and lower
growth from SME due to increased asset quality stress in SME portfolio.
Yes Bank
1. In ability to raise capital: We believe higher capital ratios are paramount
for a bank like Yes to successfully navigate through the current
challenging environment. Failure to do so in a conducive market
conditions will lead to further downside risks to our fair value
2. Key man risk: One of the key risks for Yes Bank is the retirement of
current CEO and co-founder Mr. Rana Kapoor (current age 55 years). We
believe that he is one of the key drivers behind the superior performance
of the bank in terms of its growth and asset quality. Any management
change after Mr Rana Kapoor retires is going to be a risk for the bank.
Page 29 of 32

Page 20 of 22
3. Concentration of top management: Most of the top management of Yes
Bank came from the erstwhile Rabo Bank and other top foreign banks.
There is downward risk to our fair value if there is high attrition.
4. Asset quality risks: Currently, Yes Bank has NNAP% of only 0.21% which is
the best in class in the Indian banking system. However, any increase to
asset quality stress is likely to lead to downgrades to our fair value.
5. SA attrition due to reduction in SA rate: Yes Bank currently has the
highest SA rate in the industry and has benefitted significantly due to this.
As the interest rates cool off and short term funding costs come down,
there will be increased pressure on Yes Bank to reduce the 7% interest
rate offered to its SA customers. This could lead to higher SA attrition
leading to downwards risks to our fair value.
6. Upside risk to fair value if corporate asset quality for the system recovers
and if Yes bank manage to improve the granularity of its liabilities base.

Please visit our website at www.EspiritoSantoIB.co.uk for up to date recommendation charts.

ICICI Bank ICICIBC IN
Report date Recommendation Fair value Share price
2013 December 3 Neutral Rs1069.00 Rs1068.00
October 7 Neutral Rs952.30 Rs933.00
October 1 Neutral Rs952.00 Rs885.00
March 25 Buy Rs1175.00 Rs1022.00
2012 June 25 Buy Rs1020.00 Rs850.00
2011 November 17 Buy Rs1007.00 Rs788.85
Source: Bloomberg, Espirito Santo Investment Bank Research
N
N
N
B
B
B
650
750
850
950
1050
1150
1250
Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage
HDFC Bank HDFCB IN
2013 March 25 Buy Rs721.00 Rs608.00
March 13 Buy Rs607.00 Rs644.00
February 13 Buy Rs607.20 Rs656.95
2012 June 25 Buy Rs610.00 Rs543.00
2011 November 17 Neutral Rs455.00 Rs465.70
B
B
B
B
N
0
500
1000
1500
2000
2500
3000
Axis Bank AXSB IN
2013 December 3 Buy Rs1297.00 Rs1155.00
October 1 Buy Rs1190.00 Rs1007.30
March 25 Neutral Rs1388.00 Rs1305.00
2012 June 25 Neutral Rs1126.00 Rs1025.00
2011 November 17 Neutral Rs1156.00 Rs1006.15
B
B
N
N
N
750
850
950
1050
1150
1250
1350
1450
1550
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Yes Bank YES IN
2013 June 27 Sell Rs386.00 Rs448.10
2011 April 8 Buy Rs386.00 Rs330.00
S
B
200
250
300
350
400
450
500
550
Page 30 of 32

Page 21 of 22
IMPORTANT DISCLOSURES
220314
This report was prepared by Esprito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Esprito Santo de Investimento, S.A., with
headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A Corretora de Cmbio e Valores Mobilirios, in Brazil, Execution
Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation.
All of these entities are included within the perimeter of the Financial Group controlled by Esprito Santo Financial Group S.A. (Banco Esprito Santo Group).
Analyst Certification
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this
report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the
recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the
specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Esprito Santo de
Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or
financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter.
Ratings Distribution
Espirito Santo Investment Bank Research hereby provides the distribution of the equity research ratings in relation to the total Issuers covered and to the investment banking
clients as of end of December 2013.
Explanation of Rating System Ratings Distribution
12-MONTH RATING DEFINITION
BUY Analyst expects at least 10% upside potential to fair
value, which should be realized in the next 12 months
NEUTRAL Analyst expects upside/downside potential of between
+10% and -10% to fair value, which should be realized in
the next 12 months
SELL Analyst expects at least 10% downside potential to fair
value, which should be realized in the next 12 months

As at end December 2013 Total ESIB Research
Total Investment Banking Clients
(IBC)
Recommendation Count % of Total Count % of IBC % of Total
12 Month Rating:

Buy

204 47.9% 26 72.2% 6.1%
Neutral

127 29.8% 7 19.4% 1.6%
Sell

92 21.6% 1 2.8% 0.2%
Restricted

2 0.5% 2 5.6% 0.5%
Under Review

1 0.2% 0 0.0% 0.0%

TRADING RATING DEFINITION
TRADING BUY Analyst expects a positive short-term movement in the
share price (max duration 2 months from the time Trading
Buy is announced) and may move out of line with the fair
value estimate during that period
TRADING SELL Analyst expects a negative short-term movement in the
share price (max duration 2 months from time Trading
Sell is announced) and may move out of line with the fair
value estimate during that period

Trading Rating:
Trading Buy 0 0.0% 0 0.0% 0.0%
Trading Sell 0 0.0% 0 0.0% 0.0%

Total recommendations 426 100% 36 100% 8.5%

For further information on Rating System please see Definitions and distribution of ratings on: http://www.espiritosantoib-research.com.
Share Prices
Share prices are as at the close of business on the day preceding publication, unless otherwise specified.
Coverage Policy
Esprito Santo Investment Bank Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they
trade 2) market capitalisation 3) liquidity, 4) sector suitability. Esprito Santo Investment Bank Research has no specific policy regarding the frequency in which opinions and investment
recommendations are released.
Representation to Investors
Esprito Santo Investment Bank Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial
Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material.
Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. This report is not, and should not be
construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for
investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the
risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does not
purport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report must
make its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words or
phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than the
investors currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to
future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the
interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the
securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication
may not be eligible for sale in some states or countries.
All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Esprito Santo Investment
Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are Esprito Santo Investment Bank Research
present opinions only, and are subject to change without prior notice. Esprito Santo Investment Bank Research is not under any obligation to update or keep current the information and
the opinions expressed herein nor to provide the recipient with access to any additional information.
Esprito Santo Investment Bank Research has not entered into any agreement with the issuer relating to production of this report. Esprito Santo Investment Bank Research does not
accept any form of liability for losses or damages which may arise from the use of this report or its contents.
Ownership and Material Conflicts of Interest
Banco Esprito Santo de Investimento, S.A. and/or its Affiliates (including all entities within Esprito Santo Investment Bank Research) and/or their directors, officers and employees, may
have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Esprito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business
relationships with the companies mentioned in this report. However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject to
their opinion.
Banco Esprito Santo Group has a qualified shareholding (1% or more) in Providncia. Bradesco has an indirect qualified shareholding (4.8%) in Banco Esprito Santo, S.A. and a direct
qualified shareholding (20%) in BES Investimento do Brasil, S.A., the parent company of BES Securities do Brasil S.A. CCVM.
Pursuant to Polish Ministry of Finance regulations, we inform that Banco Esprito Santo Group companies and/or Banco Esprito Santo de Investimento, S.A. Branch in Poland do not have
a qualified shareholding in the Polish Securities Issuers mentioned in this report higher than 5% of its total share capital.
The Chief Executive Officer of Banco Esprito Santo de Investimento, S.A., Mr. Jos Maria Ricciardi, is a member of EDPs General and Supervisory Board. Mr. Rafael Valverde, a member of
the board of Banco Esprito Santo de Investimento, S.A., is a non-executive board member of EDP Renovveis. Mr. Ricardo Abecassis Esprito Santo Silva, a member of the board of
Banco Esprito Santo de Investimento, S.A., is a board member of Brazil Hospitality Group.
Banco Esprito Santo de Investimento, S.A and/or its subsidiaries are liquidity providers or market makers for Altri, Usiminas and Vale.
Banco Esprito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated as a syndicate member in share offerings of Brazil Hospitality Group, Capital Park, CTT,
Iguatemi, Just Retirement, Klabin, Mota-Engil, Sports Direct and Zon Optimus in the last 12 months.
Banco Esprito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated as a syndicate member in the bond issues of the following companies: Abengoa, Altri,
EDP, Galp Energia, Globe Trade Centre, Kredyt Inkaso, Mota-Engil and Sonae in the last 12 months.
Banco Esprito Santo de Investimento, S.A. and/or its subsidiaries provided investment banking services to the following companies: 4imprint, Abengoa, Altri, Brazil Hospitality Group,
Burford Capital, Capital Park, Casino Guichard, EDP, EDP Renovaveis, Ence, Galp Energia, Globe Trade Centre, Godrej Consumer Products, Iguatemi, IQE, Just Retirement, Kcom Group,
Klabin, Kredyt Inkaso, Kruk, Laird, Mota-Engil, Novae Group Plc, REN, Rovi, Semapa, Sonae, Sports Direct, SVG Capital, Ted Baker, Xchanging and Zon Optimus in the last 12 months.
Page 31 of 32

Page 22 of 22
Banco Esprito Santo Group has been a partner to Mota-Engil in the infrastructure business in Portugal and other countries. Mota-Engil and Banco Esprito Santo Group, through ES
Concesses, S.G.P.S., S.A., have created a joint holding company Ascendi for all stakes in transportation infrastructure concessions, in Portugal and abroad. Banco Esprito Santo de
Investimento, S.A. provided, or continues to provide, investment banking services to Ascendi.
Banco Esprito Santo de Investimento, S.A. and/or its subsidiaries do and seek to provide investment banking or other services to the companies referred to in this research report. As a
result, investors should be aware that a conflict of interest may exist.
Market Making UK
Execution Noble Limited is a Market Maker in companies covered and may sell to or buy from customers as principal in certain financial instruments listed or admitted to listing on the
London Stock Exchange. For information on Companies to which Execution Noble Limited is a Market Maker please see Execution Noble Limited UK Market Making on
http://www.espiritosantoib-research.com.
Confidentiality
This report cannot be reproduced, in whole or in part, in any form or by any means, without Esprito Santo Investment Bank Researchs specific written authorization. This report is
confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt
and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this
report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Esprito Santo de
Investimento, S.A.
Regulatory Authorities
For information on the identity of the Regulatory Authorities that supervise the entities included within Esprito Santo Investment Bank Research please see http://www.espiritosantoib-
research.com.
IMPORTANT DISCLOSURES FOR U.S. PERSONS
This report was prepared by Esprito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Esprito Santo de Investimento, S.A., with
headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A Corretora de Cmbio e Valores Mobilirios, in Brazil, Execution
Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation.
Neither Banco Esprito Santo de Investimento, S.A. nor these affiliates are registered as a broker-dealer in the United States and therefore, is not subject to U.S. rules regarding the
preparation of research reports and the independence of research analysts. This report is provided for distribution to U.S. institutional investors in reliance upon the exemption from
registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended.
This report is confidential and not intended for distribution to, or use by, persons other than the addressee and its employees, agents and advisors.
E.S. Financial Services, Inc. is the U.S. distributor of this report. E.S. Financial Services, Inc. accepts responsibility for the contents of this report, subject to the terms set out below, to the
extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Any U.S. person receiving this report and wishing to effect securities transactions in any security
discussed in the report should do so only through E.S. Financial Services, Inc.
Contact Information
Garreth Hodgson Senior Managing Director / Head of Sales (212) 351-6054 ghodgson@espiritosantoib.com
Eva Gendell Vice President (212) 351-6058 egendell@espiritosantoib.com
Hande Cuhruk Vice President (212) 351-6070 hcuhruk@espiritosantoib.com
James Kaloudis Executive Director (212) 351-6065 jkaloudis@espiritosantoib.com
Mike Williams Vice President (212) 351-6052 mwilliams@espiritosantoib.com
Pedro Marques Vice President (212) 351-6051 pmarques@espiritosantoib.com
Tatiana Sarandinaki Vice President (212) 351-6055 tsarandinaki@espiritosantoib.com

E.S. Financial Services, Inc.
New York Branch
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Each analyst whose name appears in this report certifies the following, with respect to each security or issuer that the analyst covers in this report: (1) that all of the views expressed in
this report accurately reflect the personal views of the analyst about those securities and issuers; and (2) that no part of the compensation of the analyst was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed by the analyst in this report.
The analysts whose names appear in this report are not registered or qualified as research analysts with the Financial Industry Regulatory Authority ("FINRA") and may not be associated
persons of E.S. Financial Services, Inc. and therefore may not be subject to the applicable restrictions under FINRA Rules on communications with a subject company, public appearances
and trading securities held by a research analyst account.
Ownership and Material Conflicts of Interest
Banco Esprito Santo de Investimento, S.A. and/or its Affiliates and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned
in this report. Banco Esprito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report.
For a complete list of the covered Issuers in which Banco Esprito Santo de Investimento, S.A. or its Affiliates hold stakes in excess of 1% and for information on possible material conflicts
of interest arising from investment banking activities please see Important disclosures for US persons on http://www.espiritosantoib-research.com.
Receipt of Compensation
For information on Receipt of Compensation from subject Issuers please see Important disclosures for US persons on http://www.espiritosantoib-research.com.
Representation to Investors
Esprito Santo Investment Bank Research has issued this report for information purposes only. All the information contained therein is based upon information available to the public and
has been obtained from sources believed to be reliable. However, Esprito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information
contained in this report. The opinions expressed herein are our present opinions only, and are subject to change without prior notice. Esprito Santo Investment Bank Research is not
under any obligation to update or keep current the information and the opinions expressed herein. This report is not, and should not be construed as an offer or a solicitation to buy or sell
any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives
and financial position. Where an investment is denominated in a currency other than the investors currency, changes in rates of exchange may have an adverse effect on the value, price
of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the
investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may
become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts,
assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. Esprito Santo Investment Bank
Research does not accept any form of liability for losses or damages which may arise from the use of this report. Please note that investing in any non-U.S. securities or related financial
instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission or
subject to regulation in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and
reporting standards and regulatory requirements comparable to those in the United States.

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