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Fundamental Analysis and Valuation of Banking Sector

Faculty Guide

Dr. M. Manickaraj

By

Swapnil Shende
PGDM (Banking & Financial Services)
2014-16

Report submitted in Term-5 towards partial fulfillment of the requirements for the
award of
Post Graduate Diploma in Management (Banking & Financial Services)

National Institute of Bank Management, Pune

Contents
Sl.
No.
1.

Topic

Page
no.

Acknowledgement

2.

Executive Summary

3.

Chapter 1: Current Economic Picture of India

4.

Chapter 2: Overview of Banking Sector

14

5.

17

6.

Chapter 3: Comparison of HDFC, Yes Bank, SBI


and BOB.
Chapter 4: Valuation of the stocks

7.

Chapter 5: Conclusion

34

8.

Reference

35

Annexures

36

31

Acknowledgement
Firstly I would to like convey my sincere and heartiest thanks to my faculty guide Dr.
M.Manickaraj (Faculty Research Associate, NIBM) for constantly supporting and guiding me
for the successful completion of my Banking and Finance project. Without his rigorous support
and lucid explanation of some complex concepts to me, completion of this critical project would
not be possible.
Secondly I would to like convey my sincere gratitude to our director Dr. Achintan
Bhattacharya Dean-Education & Principal of Post Graduate Diploma in Management for
Banking and Financial Services [PGDM (B & Fs)] of National Institute of Bank Management
(NIBM), for giving me the opportunity to do this Banking and Finance project.

Executive Summary
Project Description:
In a bank-based economy like India, sound health of the banking system is an imperative for
efficient financial intermediation, the pillar on which overall development and financial stability
of the economy depends. In India, banks have dominant share of 63% of the financial assets,
compared to 19%, 8%, 6% and 4% share held by Insurance companies, non-banking financial
institutions, Mutual funds and provident fund respectively.
In banking system, public sector banks hold 72% of the banking asset compared to 22% and 6%
asset held by private and foreign banks respectively. However, current market capitalization of
the public sector banks is just 39% of the total market capitalization of the banking sector.

Scope of the project:


The project is based on brief study of the Indian banking sector. Top Down approach will be
followed to find out the credit requirement. Past Trends in Micro and Macro Economics will be
studied. Also Banking sector growth in past is studied and also different facets of the same.
Current analysis of the PSB and PVSB and their various aspects are studied. Dividend Discount
Model and Relative valuation methodology is adopted to compare with their CMP. Three
different scenarios i.e. like Optimistic, Pessimistic and Business View are studied for the four
stocks HDFC Bank, Yes Bank, SBI and BOB.

Literature review:
Mid-Year Economic Review of CEA (Chief Economic Advisor), Monetary Policy document for
the last 1 year was studied, CMIE Database was studied to obtain data of important factor like
M1, M0, M2, M3 and m (Money Multiplier). Research report of various broking companies
were studied and their views were taken into consideration while preparing the report.

Methodology: For Micro Economic Data and Macro Economic Data CMIE
database is used. For comparison of PSB vs PVSB, data from Indian Banking
Association was used. For obtaining Financial Statements, Adjusted Closing price
of the Stocks ACE Equity Database was used.
4

Chapter
I:
Current
Picture of India

Economic

Many factors like inflation, fiscal and current account deficit, crude oil price that were limiting
monetary and fiscal measures have fallen into place prompting surprise rate cut by RBI. Globally
also, India is the only major country that is projected to see a pickup in growth momentum. The
growth cycle has turned and moved from slowdown to a recovery mode - last seen in 2009. This
may start out gradually, but growth will pick up speed in the coming years with Indian economy
expected to grow at ~7.5% by FY17E.
Cyclicals, sector whose performance is linked with the business cycle, will benefit from the
revival in growth momentum, relatively lower interest rate and improvement in corporate
profitability.
Banks will be the key beneficiary of the expected uptrend in economic cycle as they account for
a major portion of financial intermediation and are the main channel of monetary policy
transmission, credit delivery and payment systems.
The Banking Credit History over the last decade.
Phase

GDP

NPA

Credit Growth

I - 2001-2006

Growth
Averaged

Sharp

High

6.3%

decline

in growth

regulatory and institutional changes

growth

of averaging 25%

like constitution of Debt Recovery

Gross NPA

Remarks

credit Decline in NPA was prompted by

Tribunal (DRT), Lok Adalats, Asset


Reconstruction

Companies

(ARC),

Corporate Debt Restructuring (CDR),


Settlement

Advisory

Committees,

enactment of SARFAESI Act, 2002


which

allowed

attachment

banks
notices

to

issue
without
5

II -2006-2009

Averaged

intervention of courts
Reversal in Credit growth Divergence between the growth in

8.8%

trend

with Registered

credit and NPA narrowing down

rise in NPA gradual

III

2013

2009- Averaged
7.7%

growth

slowdown

Sharp

averaging 19%
Slowdown in Sharp contrast in movement of credit

growth

in Credit growth growth and NPA, incremental NPA as

Gross NPA Continued

% of incremental gross advances,

averaging

which was as low as -0.3% at end of

averaging 17%

37%

FY07 increased significantly to over


6.6% by FY13

An analysis of growth in nominal GDP and gross NPAs reveals that slowdown in GDP growth is
accompanied by rise in NPAs growth. Over the last one decade, growth in NPAs decelerated
sharply, following acceleration in GDP growth in 11 quarters, whereas growth in NPAs rose
sharply following the deceleration in GDP
Some positive Development for Banks
1.
2.
3.
4.

Peaking of NPA cycle


Efforts to strengthen balance sheet
Extending 5/25 scheme to existing projects
Rally in bond prices to improve profitability

Another positive for public sector banks is the new approach of the new union government to
make public sector banks more efficient to meet government's social agenda. As the new
government finds its feet firmly grounded in next couple of years, we believe that main
recommendations of the PJ Kayak committee will be implemented to give banks more autonomy
and headroom to raise capital to meet Basel III requirement.
The recommendation of the Committee are

Strengthening the governance structure of PSBs by removing constraints such as dual


regulation (by the Ministry of Finance and the Reserve Bank), manner of appointment of

directors to boards
Fully empower boards in PSBs
Setting up of an autonomous Bank Investment Company (BIC) to hold equity stakes in

banks
Withdrawal of Reserve Bank's nominees on the boards of PSBs
Separation of CMDs' posts into executive MD and non- executive chairman (already

implemented)
Raising of the ceiling for promoter investors' stake to 25%
Permitting private equity funds including sovereign wealth funds to take a controlling
stake of up to 40% in distressed banks

GDP Forecast:
Different Global Banks like Banking organization like IMF , EIU , OECD , UN and
Goldman Sachs have predicted GDP Forecast For India.
GDP Growth Forecast
IMF Forecast
7.8% By 2020
UN Forecast
7.7% By 2017
EIU Forecast
7.9% By 2018
OECD Long Term Forecast
5.8 % By 2025

Year Wise forecast taken into consideration as given by OECD.

Year
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025

OECD
6.07%
5.96%
5.89%
5.87%
5.87%
5.88%
5.90%
5.90%
5.89%
5.88%

IMF

UN
7.70%

7.70%
7.80%

Gold Man
Sachs
8%
8%
8%
8%
8%

D&B
7.50%
7.50%
7.50%
7.50%
7.50%

Expected Credit Growth


In past the Credit Growth was most of the time a multiple of 3X of GDP.
Year
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025

GPD Growth Rate


7.50%
7.50%
7.50%
7.70%
7.80%
5.88%
5.90%
5.90%
5.89%
5.88%

2x - Credit Growth
15%
15%
15%
15%
16%
12%
12%
12%
12%
12%

3x - Credit Growth
23%
23%
23%
23%
23%
18%
18%
18%
18%
18%

Broad Money and Money Multiplier Concepts

The Money Multiplier Data:

Year
2000-01
2001-02
2002-03
2003-04
2004-05

Multiplier and Velocity of Money


2000-01 to 2014-15
Narrow money
Broad money
Income velocity of
multiplier
multiplier
money
(M1/M0)
(M3/M0)
(GDP/M3)
1.3
4.3
1.7
1.3
4.4
1.6
1.3
4.7
1.5
1.3
4.6
1.4
1.3
4.6
1.4
9

2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15

1.4
1.4
1.2
1.3
1.3
1.2
1.2
1.3
1.2
1.2

4.8
4.7
4.3
4.9
4.8
4.7
5.2
5.5
5.5
5.5

1.4
1.3
1.2
1.2
1.2
1.2
1.2
1.2
1.2

Analysis of banking data from 1964 to 2015 for last 41 years. Following are
the observation from the data observed in the table

The Credit to GDP Ratio was as low as 7.82 % and it increased to 52.26% by 2015.
Compared to Global Standard or of Developing Country Parameter were are way below.

Credit to Deposit Ratio and Credit to GDP Ratio


90
80
70
60
50
40
30
20
10
0

Credit to deposit ratio

Credit to GDP ratio

10

Expected Growth in Credit and Deposit according to CMIE


Database.
The YoY increase in Liability of SCBs and also % Change in YoY Data

The Composition of CASA Vs Term Deposit for last 25 years :

The composition of CASA and Term Deposit has remain constant over last 2
decades.

11

Expected Growth in Credit:

By 2019-20 Credit and Deposit Growth is expected to be around 13.3%.

12

Chapter II: Overview of Banking


Sector (PSB, PVSB and FB)
The following is the data collected and compiled for PSB , PVSB & FB.

Public Sector Banks


PSB
Deposits
Investments
Advances
Assets
Operating Profits
Provisions
Profits
Credit To Deposit Ratio
Investment To Deposit Ratio
Spread as a % Of Assets
Net NPA / Net Advances (%)

2013

2014

2015

5745697
1759056
4472845
6961988
121838
71256
50582
77.85
30.62
2.40
2.01

6589020
1974189
5101142
7968416
127653
90633
37020
77.42
29.96
2.30
2.56

7195480
2168852
5476250
8678770
138097
100277
37820
76.11
30.14
2.25
2.92

Private Sector Bank


PVSB
Deposits
Investments
Advances
Assets
Operating Profits
Provisions
Profits
Credit To Deposit Ratio
Investment To Deposit Ratio
Spread as a % Of Assets
Net NPA / Net Advances (%)

2013

2014

2015

1395836
625931
1143249
1989797
48656
19660
28995
81.90
44.84
2.98
0.52

1591694
648698
1342935
2258810
59257
25503
33754
84.37
40.76
3.11
0.66

1787761
727998
1543917
2534558
68402
30183
38219
86.36
40.72
3.15
0.89

13

Foreign Banks
Foreign Banks

2013
Deposits
Investments
Advances
Assets
Operating Profits
Provisions
Profits
Credit To Deposit Ratio
Investment To Deposit Ratio
Spread as a % Of Assets
Net NPA / Net Advances (%)

2014

288144
228063
263680
637894
20514
8846
11586
91.51
79.15
3.69
1.01

2015

352459
260456
291142
748809
22716
12597
10131
82.60
73.90
3.28
1.09

414441
254020
327615
754356
25244
12442
12802
79.05
61.29
3.53
0.54

Total Banking Sector In India From 2013 to 2015.


Total

2013
Deposits
Investments
Advances
Assets
Operating Profits
Provisions
Profits

7429677
2613051
5879773
9589679
191008
99763
91163

2014
8533173
2883344
6735219
10976035
209625
128732
80905

2015
9397682
3150871
7347781
11967684
231744
142902
88842

% Share Analysis of PSB and PVSB


PSB

2013
Deposits
Investments
Advances
Assets
Operating
Profits
Provisions

77.3
%
67.3
%
76.1
%
72.6
%
63.8
%
71.4

2014
77.2
%
68.5
%
75.7
%
72.6
%
60.9
%
70.4

PVSB

2015
76.6
%
68.8
%
74.5
%
72.5
%
59.6
%
70.2

2013
18.8
%
24.0
%
19.4
%
20.7
%
25.5
%
19.7

2014
18.7
%
22.5
%
19.9
%
20.6
%
28.3
%
19.8

FB

2015
19.0
%
23.1
%
21.0
%
21.2
%
29.5
%
21.1

2013

2014

2015

3.9%

4.1%

4.4%

8.7%

9.0%

8.1%

4.5%

4.3%

4.5%

6.7%
10.7
%
8.9%

6.8%
10.8
%
9.8%

6.3%
10.9
%
8.7%
14

%
55.5
%

Profits

%
45.8
%

%
42.6
%

%
31.8
%

%
41.7
%

%
43.0
%

12.7
%

12.5
%

14.4
%

Growth Figures For Last 3 Years in Banking Sector


PSB
2014

Deposits
Investments
Advances
Assets
Operating Profits
Provisions
Profits
Credit To Deposit Ratio
Investment To Deposit
Ratio
Spread as a % Of Assets
Net NPA / Net Advances
(%)

14.7
%
12.2
%
14.0
%
14.5
%

PVSB

FB

Total

2015

2014

2015

2014

2015

2014

2015

9.2%

14.0%

12.3%

22.3%

17.6%

14.9%

10.1%

9.9%

3.6%

12.2%

14.2%

-2.5%

10.3%

9.3%

7.4%

17.5%

15.0%

10.4%

12.5%

14.5%

9.1%

8.9%

13.5%

12.2%

17.4%

0.7%

14.5%

9.0%

4.8%
27.2
%
26.8
%

8.2%
10.6
%

21.8%

15.4%

10.7%

11.1%

9.7%

10.6%

29.7%

18.4%

42.4%

-1.2%

29.0%

11.0%

2.2%

16.4%

13.2%

-12.6%

26.4%

-11.3%

9.8%

-0.5%

-1.7%

3.0%

2.4%

-9.7%

-4.3%

-2.1%

0.6%

-9.1%

-0.1%

-6.6%

-17.1%

-4.2%

-2.1%

4.3%

1.3%

-10.9%

7.4%

27.1
%

14.3
%

25.8%

34.3%

7.5%

-50.5%

Interpretations that can be concluded form the above data is as follows:

PSB have share of around 76% in Deposit segment and it is losing ground to PVSB and
FB. FB are aggressive on this front in expansion of Deposits
PVSB have gained the market share in Advances from 19.4 % in 2013 to 21.0% in 2015.
Growth in operating profits has been 1.5X that of PSB for FB and 2X that of PSB for
PVSB.
Profit Share of PSB has drastically reduced from 52.0% to 42.5% while that has
increased for PVSB from 31.5 to 43%.
Spreads of PSB is under constant stress and has reduced by 4.2% and 2.1% sequentially
over the last 2 years.
For PVSB there has been a sharp increase in Net NPA over the last year.

15

Chapter III: Comparison of HDFC,


Yes Bank, SBI and BOB.
HDFC Bank
HDFC Bank amongst the ten private sector bank which were awarded license post liberalization
of 1990s. The bank was incorporated in August 1994 and is promoted by the biggest mortgage
lender in the country, HDFC Limited (21.6% stake). The bank is now the second largest private
sector bank in India with asset size of INR6t+ and market share of ~5% in deposit and loans
respectively. As on September 30, 2015, the bank had a network of 4,227 branches and 11,666
ATMs spread across the country

Strong Retail Loan Growth of around 30%.


NSL remains the lowest among peers
HDFC is best placed in industry due to following factors
o 40% CASA Ratio
o Growth Outlook of at least 1.5x of the industry
o Well capitalized bank
o Strong focus on building branches
o Significant Digitization initiative
o Best-in-class asset quality.
Major Focus of the bank is on branch expansion is driven by a) adding new location (half
of the new branches in new locations) b) focus on customer acquisition and then move
customers from physical to digital channels
Digitization in expected to bring Cost to Income ratio in moderate levels in future
NIMs are expected to remain at current level
o CASA Growth will pick up
o Benefit of falling rate cycle will occur
o High-yielding retail loans contribution will rise.
Over the last decade HDFC Market share has increased significantly in
o Retail Loans
o Low Cost Deposit
o Profitability
16

o Strong Fundamentals and almost near zero stress asset


o ROE Best in the banking sector of around 20%

Ratios
Return on Total Assets
Return on Equity
Operating Cost to Total
Income Ratio

Provisions to Operating
Income
Cost of Funds (Deposits and
Borrowings)
Return on Interest Earning
Assets

Interest Spread
Net Interest Margin
(NIM)

2015
1.98
%
20.29
%

HDFC Bank
2014 2013
1.97
1.87
%
%
22.00 20.87
%
%

2012
1.71
%
19.07
%

2011
1.61
%
17.13
%

2010 2009
1.50
% 1.42%
16.58 16.97
%
%

24.21
%
3.76
%

24.52
%
3.39
%

26.87
%
4.05
%

27.77
%
5.61
%

29.71
%
7.83
%

29.75 28.60
%
%
10.49
% 9.52%

6.05
%
9.82
%
3.78
%
4.78
%

6.37
%
10.11
%
3.74
%
4.76
%

6.57
%
10.36
%
3.79
%
4.88
%

6.12
%
9.82
%
3.69
%
4.90
%

4.67
%
8.44
%
3.77
%
4.89
%

4.69
% 6.92%
8.33 10.78
%
%
3.64
% 3.86%
4.68
% 5.36%

Composition of Deposits

CASA

16.27
%
27.71
%
55.91
%
43.98
%

16.69
%
28.08
%
55.17
%
44.76
%

17.63
%
29.78
%
52.54
%
47.41
%

18.36
%
29.99
%
51.57
%
48.36
%

22.19
%
30.42
%
47.25
%
52.61
%

22.19
%
29.79
%
47.96
%
51.98
%

19.87
%
24.45
%
55.56
%
44.32
%

Credit to Deposit Ratio

81.08
%

82.49
%

80.92
%

79.21
%

76.70
%

75.17
%

69.24
%

Composition of Assets
0.54
0.61
0.69
0.71
%
%
%
%

0.80
%

Demand Deposits
Savings Deposits
Term Deposits

Fixed Assets

0.97
% 0.96%
17

Cash balances
Advances
Investments

PAT/PBT
PBT/Operating Profit
Operating Profit/Total
Income
- Interest Cost / Total
Income
- Employee Cost /
Total Income
- Rent, Taxes, Lighting
Cost / Total Income
- Other Operating
Costs / Total Income
Total Income/Total
Assets
- Interest Income /
Total Assets
- Other Income / Total
Assets
Total Assets/Equity
ROE

6.15
%
61.90
%
28.19
%

8.05
%
61.64
%
24.60
%

6.81
%
59.88
%
27.88
%

DuPont Analysis
66.54 66.34 68.97
%
%
%
116.4 115.0 121.0
0%
3%
8%
22.94 22.59 19.22
%
%
%
45.32 46.10 45.81
%
%
%
8.57
8.84
9.77
%
%
%
1.81
1.86
2.00
%
%
%
13.83 13.82 15.09
%
%
%
10.20 10.34 10.74
%
%
%
9.36
9.54
9.72
%
%
%
1.76
1.86
1.93
%
%
%
10.26 11.19 11.16
18.59 19.95 19.24
%
%
%

Cost Structure (%
45.32 46.10
Interest cost
%
%
8.57
8.84
Employee cost
%
%
1.81
1.86
Rent, lighting, etc
%
%
13.83 13.82
Other costs
%
%
24.21 24.52
Total operating cost
%
%
22.94 22.59
Operating Profit Margin
%
%
3.76
3.39
Provisioning
%
%

to Total
45.81
%
9.77
%
2.00
%
15.09
%
26.87
%
19.22
%
4.05
%

6.20
%
57.83
%
28.85
%

10.70
%
57.68
%
25.57
%

13.46
% 9.55%
56.56 53.95
%
%
26.35 32.09
%
%

68.77
%
133.3
3%
16.82
%
44.19
%
10.45
%
2.15
%
15.17
%
10.12
%
9.16
%
1.95
%
11.13
17.36
%

67.44
%
147.8
2%
16.36
%
38.27
%
12.09
%
2.61
%
15.01
%
8.88
%
8.02
%
1.83
%
10.66
15.44
%

68.62 67.88
%
%
194.2 230.7
5%
1%
11.13
% 7.28%
38.14 45.08
%
%
11.69 11.65
%
%
2.82
% 2.62%
15.24 14.34
%
%
9.19 10.78
%
%
8.00 10.31
%
%
2.08
% 2.17%
11.09 11.92
15.12 14.65
%
%

Income)
44.19 38.27
%
%
10.45 12.09
%
%
2.15
2.61
%
%
15.17 15.01
%
%
27.77 29.71
%
%
16.82 16.36
%
%
5.61
7.83
%
%

38.14 45.08
%
%
11.69 11.65
%
%
2.82
% 2.62%
15.24 14.34
%
%
29.75 28.60
%
%
11.13
% 7.28%
10.49
% 9.52%
18

Other Income to Total


Income

15.85
%

16.32
%

16.59
%

17.53
%

18.62
%

20.59
%

17.40
%

Trends of Time Series Data of Ratios for last 6 years.

Return on Total Assets has been increasing over the years but the increase has been very
low. An increase of 1.42% in the year 2009 to 1.98% in the year 2015.
Return on equity has been increasing from 16.97% in 2009 to 20.29% in 2015. This is a
positive result for the bank.
Operating Cost to Total Income Ratio did not have much change over the years.
Cost of funds for deposits and borrowings have been constant throughout the years.
Interest spread has been around 3.7% throughout the years.
Credit to deposit ratio has increased from 69.24% in the year 2009 to 81.08% in the year
2015.
Deposits have grown around 22% in the last 5 years.
Advances have grown around 23.77% in the last 5 years.
The employee cost has grown around 16.67% in the last 5 years.
EPS has grown around 26% in the last 5 years.

YES Bank
Yes Bank, a private bank incorporated in 2003, is promoted and led by Mr. Rana
Kapoor, who is currently the MD & CEO of the bank. Yes Bank has steadily built a
full-service commercial bank with Corporate, Retail and SME Banking platforms,
with a comprehensive product suite. It was the first bank to offer differentiated
rates on savings account following RBI's deregulation of savings account rates in
October 2011. The number of branches and ATMs stood at 700 and 1,371
respectively
From the last fiscal year data following observations are made w.r.t financial
statements.

Strategy Adopted By Yes Bank


o YES has a well-laid strategy for growing small business loans (most of which
qualify as priority sector loans) and cross-selling to acquired customers which
would help granular retail fees growth.
o On balance-sheet front, initial focus of the bank will be on growing the liability
side first and as customer relationships age, focus would be on cross-selling its
retail assets.
19

NIMs stable; Customer asset growth moderates

Non-interest income growth moderated led by Financial markets

SA growth remains strong; CASA ratio improves.

The bank has a large corporate bond portfolio, which could be exposed to default risks in
a volatile economic environment. High exposure to iron & steel, EPC players and CRE
could lead to greater impairment.
Its credit cost is one of the lowest in the industry and would likely move up, given the
weak macro environment, coupled with greater exposure in stressed sectors
The RoE would continue under pressure, given the frequent dilution expected, coupled
with lower earnings
Valuations will reflect stress in large corporate loans even if they are not identified as
impaired
While there are multiple indicators of growing stress in the large over-leveraged
companies, these loans are classified as performing loans in the books of banks. Banks
have huge, concentrated exposure to these groups. Classifying one of them as stressed
would mean a sharp increase in impaired loans. These loans are still performing loans
because banks continue to provide additional funds to these groups to enable them to repay dues on time and run daily operations. While loans to large corporate group may not
figure as impaired loans, investors have already started building in a valuation discount
for the corporate banks (state-owned and private) that have exposure to these groups.
This explains why stock price performance of corporate private banks has been volatile
despite good results and low NPL formation.
Yes Bank has high exposure to the following sectors
o Metals
o Infrastructure
o Power
o Telecommunications
Valuation View
o YES has navigated well even during the toughest period of economic
environment.
Strong capitalization
Rapid branch expansion
Best in class asset quality

Ratios
Return on Total Assets
Return on Equity

2015
1.64%
21.33
%

Yes Bank
2014 2013
1.55% 1.51%
25.02 24.81
%
%

2012
1.47%
23.07
%

2011
1.52%
21.13
%

2010
1.61%
20.27
%

2009
1.52%
20.65%
20

16.78
%

14.95
%

13.97
%

13.02
%

14.57
%

16.98
%

17.17%

Provisions to Operating
Income

2.49%

3.09%

2.26%

1.26%

2.11%

4.65%

2.53%

Cost of Funds (Deposits and


Borrowings)

7.59%

7.92%
10.16
%
2.23%
2.88%

8.04%
10.15
%
2.12%
2.81%

8.09%
10.01
%
1.92%
2.68%

6.64%

6.15%

8.74%

8.81%
2.17%
2.88%

8.39%
2.23%
2.96%

10.65%
1.90%
2.88%

Operating Cost to Total Income


Ratio

Return on Interest Earning Assets

Interest Spread
Net Interest Margin (NIM)

9.97%
2.37%
3.14%

Composition of Deposits

Demand Deposits
Savings Deposits
Term Deposits
CASA
Credit to Deposit Ratio

Fixed Assets
Cash balances
Advances
Investments

PAT/PBT
PBT/Operating Profit
Operating Profit/Total
Income
- Interest Cost / Total
Income
- Employee Cost / Total
Income
- Rent, Taxes, Lighting Cost
/ Total Income
- Other Operating Costs /
Total Income

9.32%
13.80
%
76.88
%
23.12
%

9.46%
12.57
%
77.97
%
22.03
%

9.95%

9.95%

8.56%

9.06%

7.54%

8.99%
81.05
%
18.95
%

5.09%
84.96
%
15.04
%

1.78%
89.66
%
10.34
%

1.46%
89.48
%
10.52
%

1.19%

82.86
%

74.99
%

70.20
%

77.29
%

74.80
%

82.81
%

of Assets
0.22% 0.23%
4.10% 4.87%
47.42 51.60
%
%
43.36 37.70
%
%

0.22%
5.92%
58.24
%
31.91
%

0.31%
7.35%
61.00
%
28.06
%

67.38
%
106.6
3%
18.98
%
65.49
%

66.58
%
109.8
8%
21.31
%
59.91
%

65.76
%
123.2
1%
20.02
%
53.71
%

Composition
0.22% 0.25%
5.55% 5.40%
55.48 51.03
%
%
34.23 37.56
%
%

DuPont Analysis
68.91 69.54 67.54
%
%
%
113.2 118.4 112.6
1%
1%
3%
18.88 16.79 17.90
%
%
%
59.36 62.08 63.61
%
%
%

91.27%
8.73%
76.71%

0.57%
8.40%
54.16%
31.08%

65.21%
115.28
%
16.58%
61.19%

7.19%

6.70%

6.86%

6.63%

7.77%

8.72%

8.94%

1.96%

1.96%

1.90%

1.75%

1.86%

2.48%

2.31%

7.63%

6.29%

5.21%

4.63%

4.95%

5.78%

5.91%
21

Total Income/Total Assets


- Interest Income / Total
Assets
- Other Income / Total
Assets
Total Assets/Equity
ROE

Interest cost
Employee cost
Rent, lighting, etc
Other costs
Total operating cost
Operating Profit Margin
Provisioning
Other Income to Total
Income

10.00
%

10.74
%

9.64%

9.73%

7.91%

8.10%

10.65%

9.44%

9.59%

9.60%

9.51%

8.47%

7.99%

10.04%

1.67%
13.04
19.20
%

1.65%
16.10
23.89
%

1.46%
16.48
21.62
%

1.29%
15.66
20.78
%

1.31%
13.86
17.08
%

1.94%
12.58
16.51
%

2.19%
13.55

Income)
65.49 59.91
%
%
6.63% 7.77%
1.75% 1.86%
4.63% 4.95%
13.02 14.57
%
%
18.98 21.31
%
%
1.26% 2.11%

53.71
%
8.72%
2.48%
5.78%
16.98
%
20.02
%
4.65%

Cost Structure (% to Total


59.36 62.08 63.61
%
%
%
7.19% 6.70% 6.86%
1.96% 1.96% 1.90%
7.63% 6.29% 5.21%
16.78 14.95 13.97
%
%
%
18.88 16.79 17.90
%
%
%
2.49% 3.09% 2.26%
15.03
%

14.71
%

13.16
%

11.96
%

13.36
%

19.54
%

17.98%

61.19%
8.94%
2.31%
5.91%
17.17%
16.58%
2.53%

17.92%

Return on Total Assets has been same throughout. It has been around 1.6%

Return on equity has been increasing from 20.65% in 2009 to 25.02% in 2014. But In the
last year it has reduced to 21.33%. This is a negetive result for the bank.
Operating Cost to Total Income Ratio did not have much change over the years.
Cost of funds for deposits and borrowings have been constant throughout the years.
Interest spread has been around 2.3% throughout the years.
Credit to deposit ratio has increased from 76.71% in the year 2009 to 82.86% in the year
2015.
Deposits have grown around 27% in the last 5 years.
Advances have grown around 27.77% in the last 5 years.
The employee cost has grown around 30.7% in the last 5 years.
EPS has grown around 27.83% in the last 5 years

22

SBI State Bank Of India


SBI is the oldest and the largest bank in India. Government of India owns 60.2 per
cent of the banks equity capital. The SBI group offers a wide range of banking
products and services. Through its non-banking subsidiaries and joint venture
companies, it offers a wide range of financial services, such as merchant banking,
fund management, factoring, primary dealership, broking, investment banking,
credit cards, life insurance, and general insurance. The bank has ~16k branches
and ~56k ATM spread across the country
SBI has Following 5 subsidiaries.

1.
2.
3.
4.
5.

State Bank of Travancore


State Bank of Hyderabad
State Bank of Mysore
State Bank of Patiala
SBBJ
SBIN is highly levered to macro-economic conditions and improvement in investment
climate and interest rates would assuage asset quality fears. Our credit costs assumptions
remain very conservative
After growing below the system growth, pick up in loan growth during the FY16 is
expected.
Strong control over opex will keep core operating profit growth healthy
Huge push for taking GOI business on e-platform leading to moderate fees in GOI
commission fees
Following are the strengths of SBI
o Highest PCR of around 70% in Industry
o Healthy capitalization
o Strong Liability Franchise
o And focus on Core Profitability
o SBIN is beginning to see bottom in slippages however, has not yet seen bottom
2015
0.51%

SBI
2014
0.48%

8.49%

Operating Cost to Total Income


Ratio

Provisions to Operating
Income

Ratios
Return on Total Assets
Return on Equity

2012
0.67%
12.34
%

2011
0.53%

8.00%

2013
0.71%
12.20
%

22.10%

23.06%

21.58
%

11.20%

10.29%

8.20%

21.57
%
10.83
%

23.67
%
10.68
%

9.92%

2010
0.67%
11.79
%

2009
0.78%
13.65
%

23.64
%

20.46
%

5.11%

4.88%
23

Cost of Funds (Deposits and


Borrowings)
Return on Interest Earning
Assets

Interest Spread
Net Interest Margin (NIM)

4.47%

4.47%

4.43%

4.26%

3.71%

4.02%

4.38%

6.19%
1.73%
2.36%

6.22%
1.75%
2.36%

6.28%
1.86%
2.44%

6.39%
2.14%
2.76%

5.47%
1.77%
2.35%

5.37%
1.36%
1.90%

5.76%
1.38%
2.02%

8.41%
32.28
%
59.31
%
40.69
%

12.28
%
32.62
%
55.10
%
44.90
%

12.99
%
29.66
%
57.35
%
42.65
%

13.05
%
25.40
%
61.55
%
38.45
%

82.26
%

80.16
%

77.88
%

74.15
%

0.38%
6.97%
63.59
%
25.19
%

0.37%
9.43%
61.07
%
25.43
%

0.38%
7.71%
59.96
%
28.46
%

0.38%
9.60%
57.51
%
28.53
%

63.34
%
342.72
%

55.27
%
327.02
%

4.46%
52.31
%
14.04
%

4.70%
50.27
%
15.65
%

65.82
%
146.11
%
11.09
%
55.05
%
14.84
%

64.32
%
135.75
%
13.66
%
56.11
%
12.75
%

Composition of Deposits

Demand Deposits

7.46%

7.66%

Savings Deposits

31.98%

32.68%

Term Deposits

60.57%

59.66%

CASA

39.43%

40.34%

8.36%
32.39
%
59.25
%
40.75
%

Credit to Deposit Ratio

82.43%

85.83%

85.57
%

Fixed Assets
Cash balances
Advances
Investments

PAT/PBT
PBT/Operating Profit
Operating Profit/Total
Income
- Interest Cost / Total
Income
- Employee Cost / Total
Income
- Rent, Taxes, Lighting
Cost / Total Income
- Other Operating Costs /
Total Income
Total Income/Total Assets
- Interest Income / Total
Assets

Composition of Assets
0.44%
0.43% 0.41%
7.73%
6.98% 6.81%
65.29
62.67% 65.86%
%
24.35
25.77% 24.18%
%
DuPont Analysis
70.70
67.83% 67.34%
%
###### 6780.74 226.20
##
%
%
-0.16%

0.15%

55.66%

56.21%

13.45%

14.53%

6.50%
55.51
%
13.55
%

1.95%

1.91%

1.80%

1.71%

1.85%

1.85%

1.69%

6.71%
6.48%

6.63%
6.46%

6.24%
6.36%

5.82%
6.61%

6.18%
5.90%

6.95%
5.93%

6.02%
5.86%

5.98%

6.02%

6.04%

6.13%

5.25%

5.15%

5.47%
24

- Other Income / Total


Assets
Total Assets/Equity

0.89%
16.51

0.82%
16.63

ROE

8.01%

7.56%

Interest cost
Employee cost
Rent, lighting, etc
Other costs
Total operating cost

0.81%
17.14
11.33
%

Cost Structure (% to Total Income)


55.51
52.31
55.66% 56.21%
%
%
13.55
14.04
13.45% 14.53%
%
%
1.95%
1.91% 1.80% 1.71%
6.71%
6.63% 6.24% 5.82%
21.58
21.57
22.10% 23.06%
%
%

Operating Profit Margin

-0.16%

0.15%

6.50%

Provisioning

11.20%

10.29%

Other Income to Total


Income

12.90%

11.98%

0.83%
18.33
11.73
%

1.02%
18.59
9.33%

50.27
%
15.65
%
1.85%
6.18%
23.67
%

8.20%

4.46%
10.83
%

4.70%
10.68
%

11.82
%

11.87
%

16.28
%

1.09%
17.71
11.20
%

1.09%
17.45
12.20
%

55.05
%
14.84
%
1.85%
6.95%
23.64
%
11.09
%

56.11
%
12.75
%
1.69%
6.02%
20.46
%
13.66
%

5.11%

4.88%

17.41
%

16.59
%

Return on Total Assets has reduced over the years and also has been low.
Return on equity has decreased from 13.65% in 2009 to 8.49% in 2015. This is a negative
result for the bank.
Operating Cost to Total Income Ratio did not have much change over the years.
Cost of funds for deposits and borrowings have been constant throughout the years.
Interest spread has been around 1.7% throughout the years.
Credit to deposit ratio has increased from 74.15% in the year 2009 to 82.43% in the year
2015.
Deposits have grown around 12.96% in the last 5 years.
Advances have grown around 14.24% in the last 5 years.
The employee cost has grown around 13.04% in the last 5 years.
EPS has grown around 3.98% in the last 5 years.

25

Bank of Baroda
Bank of Baroda (BoB), established in 1908, is amongst the oldest commercial banks
in India with a substantial footprint in the domestic and international markets. BoB
has a wide presence overseas with almost one-third of the total business, coming
from its international business. As of Sep-15, BOB has a network of 5,242 domestic
branches, 105 overseas branches and 8,621 ATMs. The Government of India holds
59.2% stake in the bank.

BOB was the fastest growing PSB in last decade. However NII growth was much lower
due to low margins in international operations.
Second largest Indian bank in the overseas market (based on loans)
Some of the positive for the BOB are
o First PSB with private sector leadership
o lower exposure to sensitive sectors and low concentration risks
o Future capital infusions to be BV additive
o RoAs have bottomed at 0.5%we expect the number to improve
o During the last up cycle, ROA improved from 0.5% to 1.2% in three years
o Prolong economic slowdown leading to further asset quality pressures remains a
key risk to our estimates
The banks 26% loan CAGR over last 10 years was led by a strong growth in overseas
operations. The share of international book has been increasing and now accounts for a
third of loans. The growth in international book was historically driven by syndicated
loans for Indian corporates.
What management is currently pursuing.
o Management would be preparing a strategic roadmap for next
three years
NPA management a key priority
Diversification of portfolio and focus on revenue maximization
Digitalization
Revamping the human resource management
View :

o
o
o
o

o Near term asset quality trends are expected to be weak led by managements
aggressive stance on errant customers
o Appointment of Chairman and MD&CEO with private sector background and
healthy capitalization is likely to lead to much improved medium term prospects
and deserves premium to other state-owned banks.

26

Ratios
Return on Total Assets

2015
0.48%

Return on Equity

8.51%

Operating Cost to Total Income


Ratio

Provisions to Operating
Income
Cost of Funds (Deposits and
Borrowings)
Return on Interest Earning Assets

Interest Spread
Net Interest Margin (NIM)

BOB
2014
2013
0.74% 0.88%
12.77
14.50
%
%

16.20
%

16.44
%

9.49%
4.64%
6.24%
1.59%
1.98%

2012
1.22%
19.89
%

2011
1.30%
22.60
%

2010
1.19%
21.06
%

2009
1.07%
18.05%

15.59
%

18.75
%

19.54
%

20.03%

8.74%

15.32
%
10.73
%

7.72%

5.39%

3.57%

5.39%

4.79%
6.45%
1.66%
2.04%

5.16%
7.10%
1.94%
2.37%

5.16%
7.40%
2.24%
2.72%

4.41%
6.89%
2.48%
2.93%

4.59%
6.65%
2.06%
2.49%

5.41%
7.53%
2.12%
2.69%

7.76%

Composition of Deposits

Demand Deposits
Savings Deposits
Term Deposits
CASA

Credit to Deposit Ratio

Fixed Assets
Cash balances
Advances
Investments

PAT/PBT
PBT/Operating Profit

8.53%
17.91
%
73.57
%
26.43
%

8.79%
17.04
%
74.17
%
25.83
%

7.56%
17.90
%
74.54
%
25.46
%

7.52%
19.47
%
73.02
%
26.98
%

7.60%
21.21
%
71.18
%
28.82
%

7.87%
21.94
%
70.18
%
29.82
%

69.12
%

69.61
%

69.13
%

74.39
%

74.48
%

72.25
%

Composition of Assets
0.41% 0.42% 0.46% 0.53%
20.66
19.87
15.68
14.39
%
%
%
%
59.32
59.71
59.64
63.85
%
%
%
%
17.75
18.06
22.46
18.95
%
%
%
%

0.65%
14.04
%
63.37
%
20.25
%

0.83%
12.86
%
62.51
%
22.22
%

75.07
%
130.8
2%

72.16
%
119.6
9%

DuPont Analysis
62.69
82.61
92.74
%
%
%
585.3
322.6
728.3
1%
9%
6%

83.09
%
173.6
1%

22.22%
70.02%
29.98%

74.04%

1.11%
10.88%
62.86%
23.16%

66.62%
140.41%
27

Operating Profit/Total
Income
- Interest Cost / Total
Income
- Employee Cost / Total
Income
- Rent, Taxes, Lighting
Cost / Total Income
- Other Operating Costs /
Total Income
Total Income/Total Assets
- Interest Income / Total
Assets
- Other Income / Total
Assets
Total Assets/Equity
ROE

1.96%
62.86
%

3.93%
62.15
%

1.71%
61.51
%

10.49
%
58.49
%
9.02%

17.49
%
52.98
%
11.81
%

18.15
%
55.16
%
12.05
%

9.00%

9.54%

8.88%

1.47%

1.43%

1.35%

1.26%

1.45%

1.55%

1.46%

5.74%
6.45%

5.48%
6.42%

5.08%
6.94%

5.31%
7.24%

5.49%
6.74%

5.94%
6.86%

5.42%
7.71%

6.09%

6.30%

6.92%

7.21%

6.73%

6.47%

7.27%

0.62%
17.66

0.72%
17.37
11.67
%

0.71%
16.45
13.18
%

0.83%
16.36
17.91
%

0.86%
17.33
20.07
%

1.09%
17.76
19.11
%

1.33%
16.82

8.18%

Interest cost
Employee cost
Rent, lighting, etc
Other costs
Total operating cost
Operating Profit Margin
Provisioning
Other Income to Total
Income

Cost Structure (% to Total Income)


62.86
62.15
61.51
58.49
52.98
%
%
%
%
%
11.81
9.00% 9.54% 8.88% 9.02%
%
1.47% 1.43% 1.35% 1.26% 1.45%
5.74% 5.48% 5.08% 5.31% 5.49%
16.20
16.44
15.32
15.59
18.75
%
%
%
%
%
10.49
17.49
1.96% 3.93% 1.71%
%
%
10.73
9.49% 8.74%
% 7.72% 5.39%

9.29%

10.28
%

9.35%

10.34
%

11.38
%

55.16
%
12.05
%
1.55%
5.94%
19.54
%
18.15
%

13.34%
55.85%
13.16%

16.17%

55.85%
13.16%
1.46%
5.42%
20.03%
13.34%

3.57%

5.39%

14.39
%

15.45%

Return on Total Assets has reduced over the years and also has been low.
Return on equity has decreased from 18% in 2009 to 8.5% in 2015. This is a negative
result for the bank.
Operating Cost to Total Income Ratio has reduced over the years.
Cost of funds for deposits and borrowings have been constant throughout the years.
Interest spread has reduced over the years.
Credit to deposit ratio has reduced from 74.15% in the year 2009 to 69% in the year
2015.
28

Deposits have grown around 20% in the last 5 years.


Advances have grown around 19.63% in the last 5 years.
The employee cost has grown around 12.6% in the last 5 years.
EPS has been -1.76% in the last 5 years.

Comparison of all the four banks


1. Return on total asset: Private sector banks have higher return on total asset than public
sector banks. HDFC bank has the highest return on total assets.
2. Return on equity: Private sector banks have higher return on equity compared to public
sector banks. Around 2.5 times higher than public sector banks. Yes bank has the highest
among the 4 Banks.
3. Interest spread: HDFC bank has the highest interest spread among the 4 banks. Public
sector banks have lower interest spread of around 1-2% whereas private sector banks
have around 3%.
4. Credit to deposit ratio: Except BOB all the other banks have a credit to deposit ratio of
around 80%. BOB has a credit to deposit ratio of 69.12%.
5. Interest income/total asset for private sector banks are on the higher side with around 9%
whereas the public sector banks have interest income/total asset around 6%.
6. Deposits: For HDFC Bank and YES Bank deposits have grown 23% in the current year.
For SBI deposits have grown 11.6% in the current year. For BOB deposits have grown
8.6% in the current year.
7. Advances: Yes Bank has the highest growth in advances around 36%. HDFC Bank has
growth in advances of 20.6%. Public sector banks have growth in advances of 7%.
8. EPS: SBI has the highest EPS in the current year. HDFC Bank has 15.3%. If we see the
growth in last 5 years, YES bank has the highest with 27.83%.

29

Chapter IV: Valuation of the Stock


Sensex and Bankex performance From 2001 to 2008.

Sensex Vs Bankex
35000.00
30000.00
25000.00
20000.00
15000.00
10000.00
5000.00
0.00

Sensex

Bankex

Sensex and Bankex have high correlation and both of them have moved in Tandem for the last 7
Years.

30

Stock Performance from 1-Jan2008 to 30th September


2015.

Stock Performance Adjusted to Base of 100 for 1-Jan 2008.

P/BV range for all the 4 stocks for last 7 Years.


Some of the observation are as follows:

HDFC always enjoyed premier valuation compared to all the 4 stock in PVSB and
PSB.
HDFC enjoyed has premium in valuation during the bubble of 2007-2008 which was
almost 8.0X its Book value. Then it sharply contracted till 4x in Oct 2008 and from
then it is moving in the same range of around 3.5x to 4.5x of BV
31

Yes Bank despite growing at faster space is always below HDFC valuation. It did
cross the valuation once in Jan 2010.
SBI continues to enjoy premium valuation in comparison with all its peers in PSB
SUB Group.
But, SBI was never able to enjoy premium valuation of the HDFC due lower CAGR ,
ROE, ROA and lower efficiency ratio. Despite being the leader in the Banking
Domain.
BOB valuation are always below that of SBI. Both the SBI and BOB has higher
correlation with each other.

P/E Ratio For All the for Stock over the period of Last 7
Years.
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00

HDFC Bank

Yes Bank

SBI

BOB

Some of the observation are as follows:

HDFC always enjoyed premier valuation compared to all the 4 stock in PVSB and PSB.
HDFC enjoyed has premium in valuation during the bubble of 2007-2008 which was
almost 45X to its EPS. Then it continued to move in range of 25x to 30x
BOB continue to move in tight range of 6.0x to 10.00x of earnings, being lowest in the
group of 4.
Valuation Enjoyed by Yes Bank has reduced over the years.

32

Dividend Discount Model


A procedure for valuing the price of a stock by using predicted dividends and
discounting them back to present value. The idea is that if the value obtained from
the DDM is higher than what the shares are currently trading at, then the stock is
undervalued.This procedure has many variations, and it doesn't work for companies
that don't pay out dividends. For example one variation is the 3 Stage dividend
growth model which takes into account a period of high growth followed by a lower,
constant growth period. The principal behind the model is the net present value of
the cash flows. To get a growth number, one option is to take the return on equity
(ROE) and multiply it by the retention ratio (which is 1-the payout ratio).
Beta of the 4 Stock is as follows:
S.No
1
2
3
4

Stock Name
HDFC Bank
Yes Bank
SBI
BOB

Beta
0.28
0.08
-0.14
1.34

Three Stages of the DDM are

Abnormal Period
Transition Period
Stable Period

In Annexure the detailed working of DDM are attached.

33

MP : Market Price as on

Chapter V: Conclusion
Banks will be the key beneficiary of the expected uptrend in economic cycle as they
account for a major portion of financial intermediation and are the main channel of
monetary policy transmission, credit delivery and payment systems.
34

Among banks, public sector banks (PSB) would benefit as they are highly leveraged
to the corporate cycle recovery due to its large infrastructure exposure. PSBs would
also benefit from reduction in nonperforming assets.
In the past also we have witnessed strong outperformance by PSU bank index
during initial phase of turnaround in economy Secondly, while private sector banks
have always traded at premium to public sector banks, the valuation gap between
the two is at highest levels.
While the valuation gap is in line with sharp deterioration in asset quality of public
sector banks, it offers buying opportunity in well managed public sector banks as
they will benefit when the valuation spread retraces to its long term average led by
improvement in asset and earnings quality.
The private sector banks enjoy higher valuation as they are efficient with higher
return ratios and well capitalized to grow at a healthy pace compared to public
sector banks which follows lazy banking - poor asset quality, low profitability and
capital starved. While lazy banking, which is more systemic in nature, explains part
of the underperformance of public sector banks, current woes of public sector
banks, mainly poor asset quality and low return on asset, is due to pro-cyclical
nature of banking sector and also systemic organizational shortcomings.
For value investors and those willing to take higher risk leaders in PSB like SBI and
BOB offer good value to CMP. While the old generation PVSB and new generation
private sector bank are expected to give stellar earnings growth and also
appreciation to shareholders due to their robust structure of banking. For Growth
investors and Balance investors PVSB banking stocks like HDFC and YES Bank offer
safer bets and more assured returns.

References
35

Database : CMIE

Valuation of Banks based on Dividend discount model from


Investment Valuation by Aswath Damodaran

Qualitative data form Annual Report of respective banks.

Branch/ATM/POS Statistics from Reserve Bank of India

Financial data source : AceAnalyser

Additional Sources : moneycontrol.com, Indian Bankers Association

http://cci.gov.in/images/media/ResearchReports/mergers%20banking.pdf
http://www.scribd.com/doc/52893843/mergers-and-acquisitions-in-indian-bankingsector#scribd

Various Research Agency Reports.

Annexure
36

Valuation of Equity: Three-Stage Dividend Discount Model For


Stable Case.
State Bank of India

Bank of Baroda
37

YES Bank
38

HDFC Bank
39

Assumptions/Inputs
DPSo
EPSo
ROE
Payout Ratio
Abnormal Growth Period (No. of years)
Transition Period (No. of years)
Growth Rate
Stable Growth
Beta
Beta for stable growth
Risk-free rate (Rf)
Market return (Rm)

8
40.76
18.59%
19.63%
5
5
14.94%
14.00%
0.27
1
7.50%
15.00%

40