25 Banks CIMB Mar 2014

March 25, 2014

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

INDIA BANKS

In twilight zone We think that wholesale borrowing costs will decline in FY15 as loan growth decelerates while deposit growth remains steady. Incrementally, the stress in asset quality is also expected to alleviate. We upgrade the sector from Neutral to Overweight and expect HFCs to benefit the most from the falling cost of wholesale borrowings. Our top picks are HDFC Ltd, ICICI Bank and Bank of Baroda.

Figure 1: Key forecasts

Company Reco. Price TP Upside

(Rs) (Rs) =/- P/E (x) P/BV (x) ROE (%) Div. Yld. (%)

Axis Bank HOLD 1,394 1,451 4.1% 10.7 1.6 15.8% 1.5%

Bajaj Finance Ltd ADD 1,673 1,860 11.2% 9.7 1.8 20.6% 1.3%

Bank of Baroda ADD 656 722 10.0% 5.8 0.7 13.8% 3.3%

HDFC Bank HOLD 734 788 7.4% 18.0 3.6 21.9% 1.0%

Housing Development Fin. ADD 843 982 16.5% 22.3 4.3 20.5% 1.7%

ICICI Bank ADD 1,200 1,445 20.5% 13.6 1.7 13.6% 1.8%

ING Vysya Bank ADD 556 677 21.8% 13.1 1.4 11.4% 1.0%

State Bank of India HOLD 1,702 1,762 3.5% 8.6 1.0 12.5% 2.4%

CY14

NOTE: Prices as on 21

st March 2014 SOURCES: CIMB, COMPANY REPORTS

Wholesale borrowing rates likely to fall in FY15 In our view, there is a high probability of wholesale borrowings rates falling in FY15. The loan growth tailwinds (corporate capex and retail asset sales growth) are weakening and real deposit rates have turned positive for the first time in almost two years. This is likely to lead to a drop in the loan-deposit ratio (LDR) and thus, improve the liquidity situation for the banking sector as a whole.

Incremental loan impairments to slow down India’s GDP growth appears to be bottoming out and leading indicators such as the number of additional stalled projects are moderating. Both factors suggest that the incremental asset quality deterioration is likely to slow. That said, gross NPLs and restructured loans remain at high levels and pose challenges in terms of elevated loan loss charges in FY15-16, especially for the public sector banks (PSBs). Loan loss charges will also be higher, partly due to NPL formation from the erstwhile-restructured loans.

Buy HFCs and private banks, avoid PSBs We expect housing finance companies (HFCs) to benefit most from the expected drop in wholesale borrowing costs, which will lead to an expansion in spreads. We upgrade HDFC Ltd from Hold to Add and downgrade HDFC Bank from Add to Hold. The asset financing auto financiers (NBFCs) will also benefit from the falling cost of funds but the headwinds for asset quality and loan growth keep us cautious. In this space, we like Bajaj Finance and maintain our Reduce ratings on Shriram Transport Finance and Mahindra Finance. Among the large private banks, our top pick is ICICI Bank. Among the mid-sized private banks, we upgrade Federal Bank from Hold to Add and Indusind Bank from Reduce to Hold. We maintain our Add ratings on ING Vysya Bank and J&K Bank. In general, we advise investors to avoid PSBs but prefer well-capitalised banks with relatively superior ROAs. We maintain an Add on BOB and upgrade SBI, BOI and Union Bank from Reduce to Hold. In the life insurance space, we like Max India.

Sources: CIMB. COMPANY REPORTS

Notes from the Field

—————————————————————————————————————————

Jatinder AGARWAL T (91) 22 6602 5158 E [email protected]

Vivek VERMA T (91) 22 6602 5162 E [email protected]

Umang SHAH T (91) 22 6602 5163 E [email protected]

‘‘‘‘ RBI believes its fight against inflation will have traction, despite food being an important component of the CPI.

– Dr. Raghuram Rajan, Governor, Reserve Bank of India

Highlighted Companies

HDFC Ltd. HDFC is poised to benefit from an expected fall in wholesale borrowing costs, which should boost its spreads in FY15-16. It is trading below its long-term P/BV valuation, which looks attractive to us. HDFC is now our top pick among NBFCs.

ICICI Bank Near-term concerns over asset quality continue to cloud the overall improvement in the interest-bearing liability mix. ICICI Bank remains well capitalised and valuations appear attractive in relation to the consolidated ROEs. ICICI Bank is our top pick among private banks.

Bank of Baroda Net interest margins appear to have bottomed out and asset quality is unlikely to worsen further. While the improvement in asset quality is likely to be gradual, RoAs are unlikely to fall further. BOB is our preferred pick among PSBs.

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BANKS

March 25, 2014

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In twilight zone 1. BACKGROUND

1.1 Economic growth remains weak

The continued weakness in India’s 9MFY14 GDP growth was led largely by the slowdown in the industrial sector as the output in both mining as well as manufacturing segments contracted (Fig 2 & 3). The strong momentum in the services sector could largely be explained by the robust growth registered by the financial sector and the higher government expenditure (Fig 4). However, the signs of a pick-up in capital formation are still absent. Furthermore, private consumption showed signs of fatigue. That said, GDP growth appears to have troughed and we expect it to improve gradually moving forward.

Figure 2: GDP growth (% yoy)

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Please fill in the values above to have them entered in your report

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3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14

GDP Agriculture Industry Services

SOURCES: CIMB, MOSPI

Figure 3: Industrial GDP growth (% yoy) Figure 4: Services GDP growth (% yoy)

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Source:


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Industry Mining & quarrying Manufacturing

Electricity Construction

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Services Trade, hotel, transport & comm.

Finance, insurance, real estate Social & personal services

SOURCES: CIMB, MOSPI SOURCES: CIMB, MOSPI

Table of Contents

1. BACKGROUND p.2

2. OUTLOOK p.8

3. VALUATION AND RECOMMENDATION p.27

Companies

1. AXIS Bank p.30

2. Bajaj Finance Ltd p.32

3. Bank of Baroda p.34

4. Bank of India p.36

5. Canara Bank p.38

6. Federal Bank p.40

7. HDFC Bank p.42

8. Housing Development Fin. p.44

9. ICICI Bank p.46

10. IDFC Limited p.48

11. Indusind Bank p.50

12. ING Vysya Bank p.52

13. J&K Bank p.54

14. Mahindra & Mahindra Finance p.56

15. Oriental Bank of Commerce p.58

16. Punjab National Bank p.60

17. Shriram Transport Finance p.62

18. State Bank of India p.64

19. Union Bank of India p.66

20. Yes Bank p.68

GDP growth is showing signs of stabilisation.

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March 25, 2014

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Figure 5: GDP growth, by demand (% yoy)

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Source:


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14%

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14

Consumption Govt expenditure Gross fixed capital formation


Figure 6: Index of industrial production (% yoy)

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IIP Cap goods (3m avg) Intermediate goods Core sector Consumer goods

SOURCES: CIMB, BLOOMBERG

Figure 7: GDP composition (rolling four quarters upto 3QFY14)

Title:

Source:


Agri, Forestry & Fishing18%

Mining & quarrying2%

Manufacturing13%

Electricity, gas & w ater supply

2%

Construction8%

Trade, hotels, transpt & communication

24%

Fin / Ins/ Real estate / Busi services

18%

Community / social & per services

15%


The index of industrial production (IIP) has been close to zero for a long time…

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March 25, 2014

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1.2 Twin deficits have subsided

The recent government measures to limit gold imports have resulted in a sharp dip in the current account deficit (Fig 8). The moderation in economic growth has also started weighing on import demand. Furthermore, there are signs of a pick-up in exports following the recent rupee depreciation (Fig 9). The one-time foreign currency non-resident [FCNR (B)] deposit swap window eased the pressure on India’s balance of payments.

The fiscal deficit in FY14 is expected to be better than the government’s earlier estimates. However, the interim budget mathematics (to be eventually replaced by the final budget presented by the new government after the general election) are debatable as the fiscal deficit of 4.1% of GDP in FY15 hinges on aggressive growth in tax revenue (18% yoy growth in FY15 vs. 13% in FY14) and lower expenditure. Net market borrowings are estimated to be Rs4.57tr in FY15, close to the projected Rs4.69tr in FY14. We note that the combined fiscal deficit is trending down and is now close to the FY05 levels.

Figure 8: Balance of payments ($ bn)

FY10 FY11 FY12 FY13 FY14e

Exports 182 250 310 300 310

Imports 301 381 500 496 460

of which, Oil imports 87 106 154 165 165

of which, Gold imports 29 39 63 55 35

Merchandise (118) (131) (190) (196) (150)

Net invisibles 80 85 112 108 113

of which, software exports 48 53 61 64 66

of which, private transfers 64 64 67

Current account (38) (46) (78) (88) (37)

Capital accout 52 62 68 89 53

of which, FDI 18 9 22 20 27

of which, Portfolio investments 32 30 17 27 6

of which, ECBs 2 13 19 31 9

of which, NRI deposits 3 3 12 15 38

Overall BOP 13 13 (13) 4 15 SOURCES: CIMB, RBI

Figure 9: Export-import growth (% yoy)

Title:

Source:


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Exports Imports Imports (ex-gold)

SOURCES: CIMB, CMIE

The measures to limit gold imports and allowing FCNR (B) inflows under the swap scheme have caused the balance of payments to improve in 9MFY14.

The rupee depreciation seems to have boosted export growth, while the domestic slowdown has negatively affected imports, especially the non-oil, non-gold imports.

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March 25, 2014

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Figure 10: Combined state and central government fiscal deficit (% of GDP)

Figure 11: Government debt-to-GDP ratio (%)

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Gross Fiscal Deficit - Centre Gross Fiscal Deficit - State

50.0%

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90.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Govt debt to GDP

SOURCES: CIMB, CMIE SOURCES: CIMB, RBI

Figure 12: Fiscal deficit as % of incremental M3 (%)

Title:

Source:


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Fiscal Deficit as a % of incremental M3

SOURCES: CIMB, RBI

Figure 13: Key highlights of India’s fiscal accounts

Rs bn FY13 FY14e % yoy FY15e % yoy

Fiscal Deficit to GDP 4.9% 4.6% 4.1%

Tax to GDP 7.4% 7.3% 7.7%

Oil and Gas - subsidies 969 855 -12% 632 -26%

Food - subsidy 850 920 8% 1,150 25%

Fertilizer - subsidy 656 680 4% 680 0%

Total - subsidy 2,475 2,455 -1% 2,462 0%

% of fiscal deficit 50% 47% 47%

% of GDP 2.5% 2.2% 1.9%

Divestment receipts 259 258 0% 569 121%

% of fiscal deficit 5.3% 4.9% 10.8%

% of GDP 0.3% 0.2% 0.4%

Interest payments 3,132 3,801 21% 4,270 12%

% of fiscal deficit 64% 72% 81%

% of GDP 3.1% 3.3% 3.3% SOURCES: CIMB, MINISTRY OF FINANCE

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March 25, 2014

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1.3 Inflation on downward trajectory but still above comfort level

Inflation, as reflected by the wholesale price index (WPI) and consumer price index (CPI), is trending downwards. However, core WPI and core CPI remain stable and above the comfort levels (Fig 14 & 15). In general, the inflationary pressures are expected to ease due to the persistent negative output gap, moderation in the increase of minimum support prices (MSP) last year and stabilising rupee.

According to the report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework dated Jan 2014, “the nominal anchor or target should be set at 4% with a band of +/- 2% around it: (a) in view of the vulnerability of the Indian economy to supply/ external shocks and the relatively large weight of food in the CPI; and (b) the need to avoid a deflation bias in the conduct of monetary policy.” The committee also suggested that “the elevated level of current CPI inflation and hardened inflation expectations, supply constraints and weak output performance, the transition path to the target zone should be graduated to bring down inflation from the current level of 10% to 8% over a period not exceeding the next 12 months and 6% over a period not exceeding the next 24-month period before formally adopting the recommended target of 4% inflation with a band of +/- 2%.”

Figure 14: Wholesale price index (% yoy) Figure 15: Consumer price index (% yoy)

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WPI Core-WPI

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CPI Core-CPI

SOURCES: CIMB, CMIE SOURCES: CIMB, CMIE

Figure 16: GDP – difference between nominal and real GDP (%)

Title:

Source:


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Agri, Forestry & Fishing Mining & quarrying

Manufacturing Electricity, gas & water supply

Construction Trade, hotels, transport & comm

Fin / Ins/ Real estate/ busi ser Community/ social & per serv

GDP at factor cost


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March 25, 2014

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Figure 17: Contribution to CPI (%)

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Source:


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Food, beverages & tobacco Fuel & light Clothing, bedding & footwear Housing Miscellaneous


Figure 18: MSPs (ex-bonus) of key agricultural commodities

Title:

Source:


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2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Wheat Paddy (Common) Jowar / Bajra / Maize / Ragi Barley

SOURCES: CIMB, Department of Food & Public Distribution

Figure 19: CRB index

Title:

Source:


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March 25, 2014

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2. OUTLOOK

2.1 Wholesale borrowing rates likely to fall in FY15

Over the last 3-4 years, project investments have been declining (Fig 20). The deleveraging cycle has just begun and is expected to continue in FY15, as the banks put pressure on borrowers to improve their debt profiles (Fig 21 & 22). This should keep FY15 industry loan growth in check. The lead indicators also suggest that retail asset sales are slowing. Home sales across most major markets have been muted (Fig 23) while auto sales have been falling (Fig 24 & 25). This should keep FY15 retail loan growth in check. In short, we expect moderate loan growth in FY15-16.

After almost two years, real deposit rates have turned positive (Fig 28). In our view, this will partially improve deposit growth. That said, a key risk to our falling interest rate argument is the persistence of high inflation.

A combination of the above will lead to better liquidity in FY15-16 compared to FY14 as far as the banks’ balance sheets are concerned. In our view, there is a high probability of the wholesale borrowing rates falling in FY15.

Figure 20: Project investments – new orders announced (Rs bn)

Title:

Source:


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Private sector (Rs bn) Government sector (Rs bn) yoy growth (%, RHS)

SOURCES: CIMB, CMIE

Figure 21: Divestment of road assets by infrastructure companies

Date Seller Buyer Project SPV Name Project Mode Stake Sale (%)

Feb-14Madhucon Projects

LtdIDFC Alternatives Ltd Agra-Jaipur Expressways

Madhucon Agra–Jaipur

Expressways LtdBOT 74%

Jan-14GVK Power and

Infrastructure*SBI-Macquarie Jaipur-Kishangarh project Jaipur Expressway Pvt. Ltd. BOT NA

Jan-14GVK Power and

Infrastructure*SBI-Macquarie Bagodara- Vasad project

GVK Bagodara- Vasad

Expressway LimitedBOT NA

Dec-13 SEW InfrastructureUniquest Infra

Ventures Private Ltd

National Highway 3 in the

borders of Madhya Pradesh and

Maharashtra

SEW Navayuga Barwani Tollways BOT Majority

Sep-13 GMR Infrastructure Ltd

India Infrastructure

Fund (IIF) for INR 222

crore

Ulundurpet ExpresswaysGMR Ulundurpet Expressways

Pvt. Ltd.BOT (Toll) 74%

Jun-13MVR Infrastructure &

TollwaysIRB Infrastructure Omallur-Salem-Namakkal project MVR Infrastructure & Tollways BOT (Toll)

Acquisition 26% stake of MVR

Infra is in process (74% in Oct-

12)

Jun-13

Shapoorji-Pallonji’ and

Malaysia-based IJM

Corporation

SBI Macquarie Ulundurpet-Padalur stretch Trichy Tollway Pvt Ltd BOT (Toll)74% (remaining 26% in process

of acquisition)

May-13 IVRCL Ltd TRIL Roads Pvt LtdThree road projects- (154.83 km-

long roads)

Salem Tollway, Kumarpalayam

Tollway and IVRCL Chengapally

Tollway

BOT 74%

May-13 Deutsche BankIRB Infrastructure

Developers LtdSurat Dahisar Tollway IRB Surat Dahisar Tollway Pvt Ltd BOT (Toll) 10%

SOURCES: CIMB, INFRALINE

Project investments have slowed significantly and are now close to the levels last seen 10 year ago…

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March 25, 2014

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Figure 22: Indian companies selling assets to repay debt (Rs bn)

Company Asset / stake sold in 2013-2014 Rs bn

Adani Ports & SEZ Divests 100% in Abbott Point to promoters 123.0

Bharti Airtel Stake sale to Qatar Foundation 68.0

DLF Sale of Aman Resorts 22.8

DLF Divestitures of land parcels 17.7

DLF Sale of Wind Energy projects 6.3

DLF Divestitures of Pramerica, IDFC, Star, Noida 4.8

Elder Pharmaceuticals Sale of Formulations business 20.0

Fortis Healthcare Business in Australia (Acquisition cost + Debt on its books) 23.0

Future Group Stake sale in Insurance company + Stake sale in fashion brand 7.0

GMR Stake sale in Istanbul Airport (Expected) 18.6

GMR Stake sale in Singapore Energy Unit 29.3

GMR Stake sale in Jadcherla Expressways 2.1

IVRCLStake sale in 3 Road Assets (Salem Tollways, Kumarapalayam Tollways

and Chengapally Tollways) 3.5-4.0

Jaypee Sale of Gujarat cement plant 38.0

Jaypee Sale of Hydro Power assets 105.0

Jet Airways Stake sale to Etihad Airwyas (Expected) 20.7

Lanco Sale of hydro power assets to Greenko 6.5

Gayatri Projects + NCC 45% stake sale by Gayatri Projects to Sembcorp 8.5

Shree Renuka Sugars Preferential allotment of fresh equity to Wilmar International 5.2

Tata Power Stake sale in PT Arutmin Indonesia 31.0

Videocon Stake sale in Mozambique’s Rovuma-1 gas field 148.5 SOURCES: CIMB, COMPANY REPORTS, MEDIA REPORTS

Figure 23: Home sales data

Sales (in units) yoy chg Price (Rs/ sq ft) yoy chg Absorption (%)

Mumbai

2009 17,242 -6% 9,111 1% 6%

2010 24,435 42% 10,525 16% 7%

2011 22,312 -9% 11,346 8% 5%

2012 15,500 -31% 13,196 16% 4%

2013 11,870 -23% 15,307 16% 2%

Gurgaon

2009 23,846 61% 2,919 -7% 8%

2010 24,800 4% 3,585 23% 11%

2011 28,146 13% 4,337 21% 10%

2012 25,543 -9% 5,518 27% 8%

2013 13,526 -47% 7,044 28% 4%

Bangalore

2009 20,645 -25% 2,882 -9% 5%

2010 28,950 40% 2,977 3% 7%

2011 41,591 44% 3,191 7% 7%

2012 48,826 17% 3,684 15% 6%

2013 52,043 7% 3,974 8% 5%

Chennai

2009 14,361 17% 3,917 6% 5%

2010 21,983 30% 3,904 10% 6%

2011 30,962 -7% 4,003 7% 4%

2012 31,034 -19% 4,087 6% 4%

2013 24,050 -6% 3,944 7% 4% SOURCES: CIMB, PropEquity

…and Indian companies are selling assets to deleverage

New home sales across major cities showing signs of slowdown…

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March 25, 2014

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Figure 24: Auto sales growth (% yoy)

Title:

Source:


-23%

18%

50%

-6%

3%

-26%

-19%

-5% -6%

6%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

M&HCVs LCVs UVs CARS 2Ws

FY13 YTD FY14 (Feb'14)

SOURCES: CIMB, SIAM

Figure 25: Auto sales volumes (units)

FY09 FY10 FY11 FY12 FY13YTD FY14

(Feb'14)

M&HCVs 183,815 244,596 322,749 348,701 268,259 177,192

LCVs 229,348 335,725 413,888 551,358 651,657 474,602

UVs 225,495 272,569 324,185 367,984 553,660 473,396

CARs 1,221,181 1,526,651 1,982,990 2,015,458 1,894,383 1,613,920

2Ws 7,437,220 9,371,271 11,790,305 13,433,846 13,797,095 13,471,267 SOURCES: CIMB, SIAM

Figure 26: Loan growth (% yoy)

Title:

Source:


-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

FY

80

FY

81

FY

82

FY

83

FY

84

FY

85

FY

86

FY

87

FY

88

FY

89

FY

90

FY

91

FY

92

FY

93

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

Agriculture Other PSL Industry Trade Others

SOURCES: CIMB, RBI

…as are automobile sales

Thus, a moderation in loan growth seems likely in FY15-16

BANKS

March 25, 2014

11

Figure 27: Industry - loan mix (Rs bn)

Sector FY13 Dec-13 YTD

Non-Food Gross Bank Credit (1 to 4) 48,994 53,086 8.4%

1. Agriculture & Allied Activities 5,922 6,351 7.2%

2. Industry (Small, Medium and Large) 22,448 24,117 7.4%

Micro and small 2,857 3,252 13.8%

Medium 1,242 1,259 1.4%

Large 18,349 19,607 6.9%

3. Services 11,579 12,628 9.1%

3.1. Transport Operators 798 860 7.8%

3.2. Professional and Other Services 563 681 21.0%

3.3. Trade 2,786 3,042 9.2%

3.4. Real Estate Loans 1,261 1,428 13.2%

3.5. Non-Banking Financial Companies 2,617 2,904 11.0%

Misc - services (balancing figure) 3,554 3,714 4.5%

4. Personal Loans 9,045 9,990 10.4%

4.1. Consumer Durables 84 103 22.5%

4.2. Housing (including priority sector housing) 4,622 5,185 12.2%

4.3. Advances Against Fixed Deposits 613 586 -4.4%

4.4. Credit Card Outstandings 253 244 -3.6%

4.5. Education 551 592 7.6%

4.5. Vehicle Loans 1,115 1,261 13.2%

Misc - personal loans (balancing figure) 1,808 2,018 11.6%

Sector FY13 Dec-13 YTD

Industry (Small, Medium and Large Scale) 22,448 24,117 7.4%

Mining 326 354 8.7%

Food Processing 943 1,370 45.3%

Beverage and Tobacco 169 168 -0.5%

Textiles 1,857 1,946 4.8%

Leather and Leather products 88 100 14.0%

Wood and wwod products 77 90 16.4%

Paper and Paper Products 286 320 11.7%

Petroleum, Coal Products and Nuclear Fuels 611 575 -5.9%

Chemicals and Chemical Products 1,608 1,656 3.0%

Rubber, Plastic and their Products 312 354 13.5%

Glass and glassware 74 86 16.0%

Cement and cement products 463 527 13.9%

Iron and Steel 2,395 2,593 8.3%

Other metal and metal products 773 855 10.7%

All Engineering 1,279 1,388 8.5%

Vehicles, Vehicle Parts and Transport Equipments 598 659 10.2%

Gems and Jewellery 609 637 4.6%

Construction 525 588 12.0%

Infrastructure - Power 4,188 4,685 11.9%

Infrastructure - Telecom 890 859 -3.4%

Infrastructure - Roads and Ports 1,320 1,511 14.5%

Infrastructure - others 953 991 4.0%

Other Industries (balancing figure) 2,105 1,803 -14.3% SOURCES: CIMB, RBI

Infrastructure and real estate-related loans – home loans and CRE have been the key loan drivers in 9MFY14

BANKS

March 25, 2014

12

Figure 28: Real deposit rates (%)

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Jan

-12

Feb-1

2

Mar-

12

Ap

r-12

Ma

y-1

2

Jun

-12

Jul-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan

-13

Feb-1

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Mar-

13

Ap

r-13

Ma

y-1

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Jun

-13

Jul-1

3

Au

g-1

3

Se

p-1

3

Oct-

13

Nov-1

3

De

c-1

3

Jan

-14

Feb-1

4

CPI Inflation (%, monthly)

SBI (1 year deposit rates, %)

Real rates (SBI 1 year term deposit rate less CPI, %)


Figure 29: Loans, deposits and LDR (%)

Title:

Source:


72.0

73.0

74.0

75.0

76.0

77.0

78.0

79.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

Jan-1

1

Feb

-11

Mar-

11

Apr-

11

May-

11

Jun-1

1

Jul-11

Aug-1

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Sep-1

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Oct-11

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Feb

-12

Mar-

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Apr-

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May-

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Jun-1

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Jul-12

Aug-1

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Sep-1

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Oct-12

Nov-

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12

Jan-1

3

Feb

-13

Mar-

13

Apr-

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May-

13

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct-13

Nov-

13

Dec-

13

Jan-1

4

Feb

-14

Loans (% yoy, LHS) Deposits (% yoy, LHS) LDR (%; RHS)


Figure 30: SBI – 1-year deposit rate (%)

Title:

Source:


0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan-0

0

Jun-0

0

Nov-

00

Apr-

01

Sep-0

1

Feb

-02

Jul-02

Dec-

02

May-

03

Oct-03

Mar-

04

Aug-0

4

Jan-0

5

Jun-0

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Nov-

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Apr-

06

Sep-0

6

Feb

-07

Jul-07

Dec-

07

May-

08

Oct-08

Mar-

09

Aug-0

9

Jan-1

0

Jun-1

0

Nov-

10

Apr-

11

Sep-1

1

Feb

-12

Jul-12

Dec-

12

May-

13

Oct-13

Mar-

14


Real deposit rates have turned positive after almost two years

Will banks cut deposit rates aggressively in FY15-16 ?

The expected slowdown in loan growth and steady deposit growth should lead to better liquidity as far as banks are concerned

BANKS

March 25, 2014

13

Figure 31: Repo balance - Liquidity situation (Rs bn)

-2500

-2000

-1500

-1000

-500

0

500

1000

1500

Jan

-10

Feb-1

0M

ar-

10

Ap

r-10

May-1

0Jun

-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-

10

Nov-1

0D

ec-1

0Jan

-11

Feb-1

1M

ar-

11

May-1

1Jun

-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-

11

Nov-1

1D

ec-1

1Jan

-12

Mar-

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Ap

r-12

May-1

2Jun

-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-

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ec-1

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-13

Ma

r-1

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pr-

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3Jun

-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-

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Nov-1

3D

ec-1

3Jan

-14

Feb-1

4

28 day repo (Rs bn) 14 day repo (Rs bn) MSF (Rs bn) REPO (Rs bn): (+) represents net absorption of liquidity by RBI


Figure 32: Certificate of Deposits (CD) and Commercial Paper (CP) rates (%)

Title:

Source:


7

8

9

10

11

12

13

Jan-1

1

Apr-

11

Jul-11

Oct-11

Jan-1

2

Apr-

12

Jul-12

Oct-12

Jan-1

3

Apr-

13

Jul-13

Oct-13

Jan-1

4

3m CD rates (%) 12m CD rates (%) 3m CP rates (%) 12m CP rates (%)


Figure 33: Repo rate and 10-yr G-sec yields (%)

Title:

Source:


4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Apr-

01

Aug-0

1

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12

Apr-

13

Aug-1

3

Dec-

13

Repo rate (%) 10 year bond yield (%)


BANKS

March 25, 2014

14

Figure 34: Policy rates and Cash reserve ratio (%)

Title:

Source:


2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

Jan-0

5

Apr-

05

Jul-05

Oct-05

Jan-0

6

Apr-

06

Jul-06

Oct-06

Jan-0

7

Apr-

07

Jul-07

Oct-07

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8

Apr-

08

Jul-08

Oct-08

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9

Apr-

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Jul-09

Oct-09

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0

Apr-

10

Jul-10

Oct-10

Jan-1

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Apr-

11

Jul-11

Oct-11

Jan-1

2

Apr-

12

Jul-12

Oct-12

Jan-1

3

Apr-

13

Jul-13

Oct-13

Jan-1

4

Reverse repo rate (%) Repo rate (%) MSF rate (%) Cash reserve ratio (%)


2.2 Near-term asset quality pain likely to remain elevated but incremental stress should subside

Given the slowdown in corporate earnings growth, we think that the asset quality stress is likely to continue in the medium term. Although the large corporates appear stretched debt-wise (Fig 43), the recent instances of deleveraging are comforting.

A sharp improvement in asset quality is unlikely unless GDP growth rebounds sharply and the government’s recent measures to improve infrastructure bottlenecks change the reality on the ground. That said, GDP growth appears to have troughed and thus, the fresh additions to gross NPLs are likely to peak in the next few quarters. We note that the pace of stalled projects has slowed in the past year (Fig 37).

Our analysis shows that in FY01-13, the banks successfully recovered/upgraded around 40% of their gross delinquencies and wrote off around 31%. The remaining 29% represented the closing stock of gross delinquencies at end-FY13. After considering the recoveries from the bad loans that had been written-off, actual loan losses fell from 31% to around 25% (Fig 45). Thus, actual loan losses (write-offs) were much lower than loan loss provisions made in the P&L accounts in FY01-13. In our view, the actual loan losses (write-offs) were low because: 1) the loans given were generally backed by collateral (land and/or buildings), 2) the rising collateral prices (especially land) and strong economic growth in the past decade facilitated the resolution of bad loans, and 3) the well-diversified loan books cushioned the impact of sharp slowdowns in selected sectors. However, our above analysis ignores the time value of money and restructured loans.

According to Asset Reconstruction Co. (India) Ltd (Arcil), around Rs420bn in bad loans are available for sale to asset reconstruction companies (ARCs) in FY14 compared to Rs120bn in FY13.

The game changer for asset quality in the long term will be the significant changes in the regulatory environment. In our view, the recent steps taken by the Reserve Bank of India (RBI) will lead to better credit risk monitoring, which will help banks in the long term, especially public sector banks (Fig 44).

BANKS

March 25, 2014

15

Figure 35: Project investments – stalled projects (Rs bn)

Title:

Source:


-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Private sector Government sector yoy growth (%, RHS)

SOURCES: CIMB, CIME

Figure 36: Project investments – completed projects (Rs bn)

Title:

Source:


-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Private projects completed Government projects completed

SOURCES: CIMB, CIME

Figure 37: Project investments – stalled projects as % of projects under implementation (%)

Title:

Source:


0%

2%

4%

6%

8%

10%

12%

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

9M

FY

14

Stalled projects as % of under implementation projects

SOURCES: CIMB, CIME

The growth in stalled projects appears to be moderating

There appear to be a large number of stalled projects but the proportion of stalled projects is reasonable relative to the number of projects under implementation…

BANKS

March 25, 2014

16

Figure 38: CCI – projects under consideration and approved (Rs bn, %)

4%

71%

20%

27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

1,000

2,000

3,000

4,000

5,000

6,000

Gas Power Steel Others

Under consideration (Rs bn) Approved (Rs bn) Approved (%)

SOURCES: CIMB, Cabinet Committee on Investments (Dec 2013)

Figure 39: Outstanding restructured loans (% of loans)

FY12 FY13 9MFY14

BOB 4.4% 5.5% 6.0%

BOI 3.1% 4.9% 4.7%

Can 2.1% 6.3% 6.4%

Corp 2.8% 5.7% 5.4%

Fed 3.2% 4.7% 5.5%

Indian 7.4% 7.7% 7.5%

OBC 7.2% 9.2% 7.2%

PNB 7.3% 9.4% 9.6%

SBI 1.9% 2.8% 3.4%

Union 2.8% 4.4% 4.9%

PSB (avg) 3.4% 5.1% 5.3%

Axis 1.0% 2.1% 2.3%

HDFCB 0.1% 0.0% 0.2%

ICICI 1.5% 1.8% 2.6%

IIB 0.2% 0.3% 0.3%

J&K 3.2% 3.0% 3.0%

Yes 0.3% 0.3% 0.2%

Pvt (avg) 0.9% 1.2% 1.6% SOURCES: CIMB, COMPANY REPORTS

Figure 40: Increase in net restructured loans (% of loans)

Title:

Source:


-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

BO

B

BO

I

Can

Corp

Fed

India

n

OB

C

PN

B

SB

I

Unio

n

PS

B (

avg

)

Axi

s

HD

FC

B

ICIC

I

IIB

J&K

Yes

Pvt

(avg

)

FY12 FY13 9MFY14

SOURCES: CIMB, COMPANY REPORTS

About 70% of the projects cleared by the CCI are in the power sector.

Based on the outstanding restructured loans, it appears that the pace of incremental restructuring is slowing.

BANKS

March 25, 2014

17

Figure 41: EBITDA growth (% yoy)

Title:

Source:


-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1Q

FY

11

2Q

FY

11

3Q

FY

11

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

3Q

FY

14

Construction - Real Estate Engineering / Construction Metals - Iron & Steel Textiles

SOURCES: CIMB, ACEEQUITY

NOTE: Based on data for 370 listed companies on the NSE

Figure 42: PAT margin (%)

Title:

Source:


-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1Q

FY

11

2Q

FY

11

3Q

FY

11

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

3Q

FY

14

Construction - Real Estate Engineering / Construction Metals - Iron & Steel Textiles

SOURCES: CIMB, ACEEQUITY

NOTE: Based on data for 370 listed companies on the NSE

However, there are still no significant signs of improvement in earnings growth of the key stressed sectors…

… net margins seem to be stabilising though.

BANKS

March 25, 2014

18

Figure 43: Indian corporates - debt position

Net

Debt/Eq.

FY11 FY12 FY13 FY11 FY12 FY13 FY11 FY12 FY13 (x; FY13)

Adani Enterprises Ltd.* 303 627 613 45 55 69 6.7 11.3 8.9 3.1

Adani Ports and SEZ Ltd.* 34 165 108 14 18 26 2.4 9.2 4.1 1.7

Adani Power Ltd. 232 393 440 12 13 10 18.7 29.7 45.8 10.2

Bharti Airtel Ltd. 601 652 645 199 237 249 3.0 2.7 2.6 1.2

Bhushan Steel Ltd. * 165 194 267 21 30 33 7.9 6.4 8.0 2.9

CESC Ltd.* 29 44 82 10 12 15 2.8 3.8 5.5 2.0

DLF Ltd. 226 236 230 38 39 26 6.0 6.0 8.7 0.9

GMR Infrastructure Ltd. 185 268 297 14 20 25 12.8 13.4 12.0 4.1

GVK Power & Infrastructure Ltd. 52 122 171 5 7 8 10.3 17.3 21.9 5.4

Hindalco Industries Ltd. 196 327 457 79 82 78 2.5 4.0 5.8 1.3

Idea Cellular Ltd. 106 131 129 37 50 60 2.8 2.6 2.2 0.9

Jaiprakash Associates Ltd.* 378 507 608 52 58 70 7.2 8.8 8.7 4.9

Jaiprakash Power Ventures Ltd 111 165 221 7 15 20 16.9 11.1 11.3 3.4

Jindal Steel & Power Ltd. 132 165 226 63 68 60 2.1 2.4 3.8 1.0

JSW Steel Ltd. 144 169 197 47 61 65 3.1 2.8 3.0 1.2

KSK Energy Ventures Ltd.* 57 79 115 6 8 9 9.9 10.2 12.5 3.7

Lanco Infratech Ltd.* 154 270 309 22 18 27 7.1 14.6 11.7 8.4

Larsen & Toubro Ltd. 215 364 509 78 87 99 2.8 4.2 5.2 1.5

Mahindra & Mahindra Ltd. 148 155 240 61 74 91 2.4 2.1 2.6 1.2

Reliance Communications Ltd. 337 372 403 65 65 66 5.2 5.7 6.1 1.2

Reliance Infrastructure Ltd* 110 169 215 25 35 40 4.4 4.8 5.3 0.9

Reliance Power Ltd * 57 137 227 11 14 21 5.2 10.0 11.0 1.4

Steel Authority Of India Ltd. 27 97 177 69 54 40 0.4 1.8 4.4 0.4

Suzlon Energy Ltd.* 96 83 117 12 19 -11 8.3 4.3 36.6

Tata Communications Ltd 77 108 109 12 18 21 6.2 5.8 5.2 8.9

Tata Motors Ltd. 218 205 341 178 237 266 1.2 0.9 1.3 0.9

Tata Power Company Ltd. 226 301 359 46 49 64 4.9 6.1 5.6 3.3

Tata Steel Ltd. 481 500 577 170 124 123 2.8 4.0 4.7 1.7

Videocon Industries Ltd.* 111 128 230 20 21 14 5.6 6.1 16.8 2.3

Total 5,208 7,132 8,617 1,417 1,590 1,683 3.7 4.5 5.1 1.7

Consolidated Net Debt (Rs bn) Consolidated EBITDA (Rs bn) Net Debt / EBITDA (x)Company Name


* Indicates companies that are not under coverage universe. Data collated is from Ace Equity

BANKS

March 25, 2014

19

Figure 44: Regulatory changes effective on 1 Apr 2014

Early recognition of stress

Before a loan account turns into an NPA, banks are required to identify

incipient stress in the account by creating a sub-asset category viz. ‘Special

Mention Accounts’ (SMA). Banks would henceforth be required to have three

sub-categories under the SMA category depending on principal or interest

overdue for more than 30-90 days.

SMA Sub-categories Basis of classification

SMA-0Principal or interest payment not overdue for more than 30 days but account

showing signs of incipient stress

SMA-1 Principal or interest payment overdue between 31-60 days

SMA-2 Principal or interest payment overdue between 61-90 days

Centralised reporting and

dissemination of

information on large credit

(CRILC)

Banks will have to furnish credit information to CRILC on all their borrowers

having aggregate fund-based and non-fund based exposure of Rs50m and above

with them. Notified systemically important non-banking financial companies

(NBFC-SI) and NBFC-Factors would also be required to furnish such

information. In addition, banks will have to furnish details of all current accounts

of their customers with outstanding balance (debit or credit) of Rs10m and

above. Lenders in India covered under this Framework must also report the

External Commercial Borrowing (ECB) extended by their overseas

branches/offices to the Indian borrowers.

Formation of Joint Lenders’

Forum (JLF)

Early formation of a lenders’ committee with timelines to agree to a plan for

resolution. As soon as an account is reported to CRILC as SMA-2, the lenders,

should form a lenders’ committee to be called Joint Lenders’ Forum (JLF) under

a convener and formulate a joint Corrective Action Plan (CAP) for early

resolution of the stress in the account.

Some other key recommendations

1) More expensive future borrowing for borrowers who do not co-operate with lenders in resolution

2) Incentives for lenders to agree collectively and quickly to a plan – better regulatory treatment of stressed

assets if a resolution plan is under way, or accelerated provisioning if no agreement can be reached SOURCES: CIMB, RBI

In our view, the recent changes in the regulatory environment will be game changer for asset quality. Although the changes come too late to affect the current cycle, they will have a positive impact during the next downturn.

BANKS

March 25, 2014

20

Figure 45: Loan loss analysis (FY01-13, Rs bn)

BOB BOI Can Bank PNB SBI Union Axis HDFCB ICICI IndusInd Yes Total

Opening GNPLs (as of March, 2000) 39.0 34.6 23.3 31.3 152.5 18.8 1.9 1.2 0.9 2.7 0.0 306

Additions to GNPLs (FY01-FY13) 218.0 304.2 295.4 345.0 1,381.7 189.9 95.8 140.6 377.7 33.7 5.7 3,388

Proforma GNPLs (as on FY13) 257.0 338.9 318.8 376.2 1,534.2 208.7 97.7 141.9 378.6 36.4 5.7 3,694

Closing GNPLs - actual reported (FY13) 79.8 87.6 62.6 134.7 511.9 63.1 23.9 23.4 96.1 4.6 0.9 1,089

Implied - Recovery / Upgrade / Write-off 177 251 256 242 1,022 146 74 119 283 32 5 2,605

-

Net NPLs (as of FY13) 41.9 59.5 52.8 72.4 219.6 33.5 7.0 4.7 22.3 1.4 0.1 515

-

Provisions (as on March 31, 2000) 22.1 12.6 7.7 12.1 89.6 7.2 0.3 0.8 0.4 0.5 0.0 153

Total specific provision for NPLs (FY01-FY13) 116.9 153.8 124.4 147.3 538.2 99.9 65.7 100.6 196.9 16.0 3.9 1,564

Proforma Provisions (as on FY13) 139.0 166.4 132.2 159.4 627.9 107.0 66.0 101.4 197.3 16.5 3.9 1,717

Closing provisions - actual reported (as of FY13) 37.9 28.2 9.8 62.3 292.3 29.6 16.9 18.7 73.8 3.2 0.9 574

Implied w/offs (balancing figure) 101 138 122 97 336 77 49 83 123 13 3 1,143

Write-off as % of bad loans (opening GNPLs+ slippages) 39% 41% 38% 26% 22% 37% 50% 58% 33% 36% 54% 31%

Closing GNPLs as % of bad loans (opening GNPLs + slippages) 31% 26% 20% 36% 33% 30% 24% 16% 25% 13% 16% 29%

Implied - Recovery/upgrades as % of bad loans 30% 33% 42% 38% 45% 33% 25% 25% 42% 51% 30% 40%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Opening Loans (as of March, 2000) 244 252 235 226 981 150 35 34 37 37 24 2,255

Loans (as on FY13) 3,282 2,894 2,422 3,087 10,456 2,081 1,970 2,397 2,902 443 470 32,404

Recovery from w/off bad loans (credited to P&L) 25.1 28.8 27.7 21.8 83.8 15.7 11.9 10.0 0.0 0.0 0.0 225

Adjusted write-offs (after recovery from w/off accounts) 76 109 95 75 252 62 37 73 123 13 3 919

Adjusted write-offs (as % of delinquency / slippage) 30% 32% 30% 20% 16% 30% 38% 51% 33% 36% 54% 25%

Delinquency rate (% of avg loans, FY01-FY13) 1.9% 2.2% 2.3% 2.4% 2.8% 2.1% 1.5% 1.6% 3.5% 2.3% 0.3% 2.1%

Provisions - bad loans (% of avg loans, FY01-13) 1.0% 1.1% 1.1% 1.1% 1.1% 1.1% 1.2% 1.3% 1.1% 1.2% 0.3% 1.1%

RoA (average over FY01-FY13) 1.0% 0.9% 1.1% 1.1% 0.8% 1.0% 1.3% 1.5% 1.1% 1.0% 1.5% 1.1% SOURCES: CIMB, COMPANY REPORTS

Figure 46: Loss given default estimates (%)

Average LGD (%) Downturn LGD (%)

Corporate loans 36.1 79.0

Retail loans 33.4 73.1

Housing Loans 8.0 20.0

Other Loans 79.1 90.2

Total Loans 45.5 71.9 SOURCES: CIMB, RBI – Discussion Paper on Introduction of Dynamic Loan Loss Provisioning Framework for Banks in India

Based on sample of 15 banks from 2001-2010.

2.3 But bond gains not likely to be as large as those during the 2001-04 cycle

The softer interest rate environment will also aid bond gains, which are close to their lowest levels in almost a decade (Fig 47). That said, the likely gains during this cycle may not be as large as those during the FY01-04 cycle.

RBI’s long cycle analysis indicates that the loss given defaults are reasonable compared to gross delinquencies.

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March 25, 2014

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Figure 47: Estimated bond gains to loans

Rs bn FY01 Feb-14

Deposits 10,554 76,052

Loans 5,262 58,617

Investments - G sec 3,532 22,441

Duration - estimated 5 5

% fall in interest rates from peak to trough 6.5 1

Implied gains 1,148 1,122

% of loans 22% 2%

Actual gains booked (FY01-04) 232 na

% of loans 4% na SOURCES: CIMB, RBI

Figure 48: Loan-deposit and Investment-deposit ratios (%)

Title:

Source:


40.0

45.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

25

30

35

40

45

50

Jan-9

9

Jun-9

9

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99

Apr-

00

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-01

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-11

Jul-11

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11

May-

12

Oct-12

Mar-

13

Aug-1

3

Jan-1

4

IDR (%, LHS) LDR (%, RHS)


Figure 49: Maturity pattern of GOI rupee loans (Rs bn, %)

Mix

under 5 years 5-10 years over 10 years Total under 5 years 5-10 years over 10 years

2001 1,642 1,908 1,814 5,363 31% 36% 34%

2002 1,779 2,337 2,626 6,742 26% 35% 39%

2003 1,848 2,552 3,846 8,246 22% 31% 47%

2004 2,212 2,838 4,245 9,296 24% 31% 46%

2005 2,455 3,073 4,795 10,323 24% 30% 46%

2006 2,752 3,469 5,253 11,474 24% 30% 46%

2007 4,170 4,135 5,533 13,838 30% 30% 40%

2008 4,032 5,372 6,165 15,569 26% 35% 40%

2009 4,592 7,466 7,251 19,309 24% 39% 38%

2010 6,245 7,354 7,971 21,569 29% 34% 37%

2011 5,388 8,536 8,764 22,689 24% 38% 39%

2012 5,569 6,433 13,932 25,933 21% 25% 54%

2013 9,482 10,698 10,427 30,607 31% 35% 34% SOURCES: CIMB, RBI

Bond gains may come to the rescue in FY15, although they may not be as large as during the FY01-14 cycle.

However, the maturity profile of government borrowings in FY13 is similar to that of FY01.

Unlike during the FY01-04 cycle, bonds now constitute a lower proportion of overall assets.

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March 25, 2014

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Figure 50: 10-year government bond yield (%)

Title:

Source:


0

2

4

6

8

10

12

14

Jan-9

9

Jun-9

9

Nov-

99

Apr-

00

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-11

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11

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13

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Jan-1

4


Figure 51: Public sector banks – treasury gains and provisions (%)

Title:

Source:


-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F

Portfolio gains (% of assets) Provision for bad loans (% of assets)

Provision for investments (% of assets)


Figure 52: Private sector banks – treasury gains and provisions (%)

Title:

Source:


-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F

Portfolio gains (% of assets) Provision for bad loans (% of assets)

Provision for investments (% of assets)


The ROAs of the PSBs were the most negatively affected in 9MFY14 due to the loan loss charges and provisions for the mark-to-market losses on investments.

The private sector banks’ higher treasury gains in 9MFY14 were used to make greater provisions for bad loans.

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March 25, 2014

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2.4 HFCs expected to be prime beneficiaries of the likely drop in wholesale borrowing rates

In general, the drop in wholesale borrowing costs will have a more positive impact on non-banks than banks. Among the NBFCs, we think that the housing finance companies (HFCs) will benefit the most.

We think a decline in the wholesale borrowing costs will lead to only a moderate cut in the base rate for lending by banks, as the base rate is now a function of the cost of funds, negative carry-on CRR/SLR, unallocated overhead costs and the average return on capital. Furthermore, banks may not aggressively cut their base rates due to the asset quality headwinds they are facing.

The recent history, since the introduction of a base rate, suggests that there is a low correlation between the base rate and the wholesale cost of borrowing (Fig 53). In our view, the base rate will provide a floor for the mortgage lending rate. Thus, as cost of funds fall, HFCs will benefit in terms of expanding spreads.

Figure 53: Base rate for lending vs. 1-year wholesale borrowing cost (%)

Title:

Source:


7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13

Public sector - average base rate Private banks - average base rate

12m certificate of deposit rates (average)

SOURCES: CIMB, RBI, BLOOMBERG

Figure 54: SBI’s home loan rate vs. AAA 3-year bond yield (%)

Title:

Source:


7.00

7.50

8.00

8.50

9.00

9.50

10.00

10.50

11.00

11.50

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-12

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SBI - Base rate SBI - home loan rate AAA 3 year bond yield


Low correlation between base rate for lending and cost of wholesale borrowings.

In the past, the HFCs faced stiff lending rate competition from banks despite the rising cost of marginal wholesale borrowings.

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March 25, 2014

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2.5 PSBs face multiple challenges

In general, the public sector banks (PSBs) continue to face multiple challenges including the loss of market share in low-cost deposits (Fig 55), elevated loan loss charges, provisions for staff retirement benefits and the risk of capital infusion by the government at valuations below book value.

Most PSBs, other than SBI, have lost market share in savings deposits to private sector banks. In our view, the reason for this is that a large proportion of the employees at PSB branches are focused on transaction banking/operational activities, rather than marketing (Fig 57 & 58). Furthermore, anecdotal evidence suggests that PSBs have been very passive in the pursuit of corporate salary accounts. The private sector banks are also becoming more aggressive and capturing more government business market share from the PSBs.

The recent capital infusion by the GOI was negative for minority investors, in our view (Fig 59). Furthermore, the net NPLs combined with one-third of the restructured loans comprise almost half of the PSB’s reported net worth. We think that the increased capital requirements under the Basel III norms are likely to lead to frequent equity dilutions. If these dilutions happen at valuations below the book value, the minority investors will be negatively affected.

While the flow of impairments is likely to slow in FY15, loan loss charges are likely to remain elevated in the medium term. Note that, loan loss provision cover for bad loans at PSBs has been falling (Fig 60). Further, based on the restructured loans that are close to completing their 2-year moratorium, if a third of these become NPLs, the resulting higher loan loss charges translate to 7bp of ROAs (Fig 62).

In comparison to the private sector banks, the PSBs will benefit more from the likely fall in interest rates in terms of bond portfolios due to the longer duration of their portfolios. However, a drop in interest rates will also cause the pension liability to increase (Fig 63, 64 & 65). In short, if interest rates fall, the bond portfolio gains may be partly offset by the higher provision for pension liabilities.

Figure 55: PSBs – CASA market share (%) Figure 56: Private sector banks – CASA market share (%)

Title:

Source:


0%

5%

10%

15%

20%

25%

30%

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

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07

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08

FY

09

FY

10

FY

11

FY

12

FY

13

BOB BOI CBK CRPBK FB

INBK OBC PNB SBIN UNBK

Title:

Source:


0%

1%

2%

3%

4%

5%

6%

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

AXSB HDFCB ICICIBC IIB J&KBK YES

SOURCES: CIMB, RBI, COMPANY REPORTS SOURCES: CIMB, RBI, COMPANY REPORTS

BANKS

March 25, 2014

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Figure 57: PSBs - employees per branch and business per employee trends

Figure 58: Private sector banks - employees per branch and business per employee trends

Title:

Source:


73

86

102

115

127

0

2

4

6

8

10

12

14

0

20

40

60

80

100

120

140

FY09 FY10 FY11 FY12 FY13

Business per employee (Rs m) Employees per branch (Nos.) - RHS

Title:

Source:

Please fill in the values above to have them entered in your report68

77

8386

94

0

5

10

15

20

25

0

20

40

60

80

100

FY09 FY10 FY11 FY12 FY13

Business per employee (Rs m) Employees per branch (Nos.) - RHS

SOURCES: CIMB, RBI SOURCES: CIMB, RBI

Figure 59: Capital infusion in PSBs (3QFY14 and 4QFY14)

Rs bn Capital infusionEquity

CapitalReserves Networth

Cap infusion as %

of NetworthBook Value Dilution

Equity

dilution

(Mar'13) (Mar'13) (Mar'13) (Mar'13) Price (Rs)

Allahabad Bank 4.0 5.0 99.8 105 3.8% 210 90 8.9%

Andhra Bank 2.0 5.6 78.8 84 2.4% 151 67 5.4%

Bank of Baroda 5.5 4.2 304.4 309 1.8% 731 674 1.9%

Bank of India 10.0 6.0 210.2 216 4.6% 362 216 7.8%

Canara Bank 5.0 4.4 224.0 228 2.2% 516 274 4.1%

Corporation Bank 4.5 1.5 94.1 96 4.7% 626 308 9.6%

Oriental Bank of Commerce 1.5 2.9 118.1 121 1.2% 415 185 2.8%

Punjab National bank 5.0 3.5 308.9 312 1.6% 884 582 2.4%

State Bank of India 20.0 6.8 1,243.5 1,250 1.6% 1,828 1,783 1.6%

Union Bank of India 5.0 6.0 150.9 157 3.2% 263 149 5.6%

TOTAL 62.5 2,878.9 2.2% 5.0% SOURCES: CIMB, COMPANY REPORTS

Figure 60: Loan loss provision coverage ratio (%)

Title:

Source:


30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

1Q

FY

10

2Q

FY

10

3Q

FY

10

4Q

FY

10

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FY

11

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FY

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14

Public sector banks (Avg.; %) Private sector banks (Avg.; %)


BANKS

March 25, 2014

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Figure 61: Unprovisioned stress to capital (Rs bn, at end-Dec 2013)

Rs bn Capital Reserves Net NPLs

Restructured

loans

Unprovided

stress (net

NPLs + 35%

restructured

loans)

% of

networth

Bank of Baroda 4.2 338.3 66.2 211.7 140.3 41%

Bank of India 6.4 241.4 61.5 163.9 118.8 48%

Canara Bank 4.6 247.1 68.7 184.5 133.3 53%

Corporation Bank 1.7 103.7 26.5 66.1 49.7 47%

Indian Bank 4.3 109.0 24.8 84.0 54.2 48%

Oriental Bank of Commerce 3.0 127.8 38.3 96.9 72.2 55%

Punjab National Bank 3.6 339.2 90.8 312.9 200.3 58%

State Bank of India 6.8 1,060.5 371.7 394.0 509.6 48%

Union Bank of India 6.3 166.7 50.5 110.3 89.1 51%

Total 41.0 2,733.7 799.1 1,624.3 1,367.6 49%

Axis Bank 4.7 370.2 10.0 49.0 27.2 7%

HDFC Bank 4.8 422.4 8.0 5.9 10.1 2%

ICICI Bank 11.5 744.8 31.2 86.0 61.3 8%

Federal Bank 1.7 67.6 3.6 22.7 11.5 17%

Indus Ind Bank 5.2 79.1 1.6 1.6 2.2 3%

ING 1.9 69.2 0.7 5.6 2.7 4%

JnK Bank 0.5 57.5 1.0 13.1 5.6 10%

Yes Bank 3.6 66.5 0.4 1.1 0.8 1%

Total 34.0 1,877.1 56.5 185.1 121.3 6% SOURCES: CIMB, COMPANY REPORTS

Figure 62: PSBs - likely impact on ROAs from loans restructured up to FY12

Rs bn 3QFY14

Total assets 48,465

Outstanding loan book - Dec 2013 31,004

Restructured loans - FY12 1,064

% of loans 3.4%

% of assets 2.2%

Assuming, one-third of restructured become NPLs 351

Loan loss charge less reversal of standard asset provision 35

Loan losss charge - as % of total assets 0.07% SOURCES: CIMB, COMPANY REPORTS

Figure 63: Pension assumptions (%)- FY13

BOB BOI Canara J&K OBC PNB SBI Union

Discount Rate 8.25% 8.0% 8.11% 8.0% 8.5% 8.45% 8.5% 8.5%

Return on plan assets 8.0% 8.0% 8.0% 8.0% 9.13% 8.61% 8.6% 8.7%

Salary escalation 6.0% 5.0%Salary - 4%

Pension -2.5%3.5% 5.5% 5.0% 5.0% 4.0%

Attrition rate 2.0% 1.0% n/a 1.0% n/a 1.0% n/a 2.0%

Mortality table 1994-96 n/a n/a 2006-08 n/a n/a n/a n/a SOURCES: CIMB, COMPANY REPORTS

Figure 64: Gap between PVPO and FVA- FY13


Present value of pension obligations 75 74 86 6 33 136 396 60

yoy growth 7% 4% 11% 14% 16% 16% 8% 14%

Fair value of assets 67 65 81 5 27 124 350 48

yoy growth 16% 28% 8% 26% 28% 22% 29% 19%

Gap between PVPO and FVA 8 9 5 1 6 11 45 12

% 11% 12% 6% 18% 18% 8% 11% 20%

Of which, amortised portion of SPO 7.3 8.8 7.4 0.0 3.4 13.3 0 6.8 SOURCES: CIMB, COMPANY REPORTS

A large percentage of a PSB’s capital is impaired even though a reasonable proportion of the restructured loans are considered NPLs.

Note that the banks have used different discount rates to value pension liabilities. In a falling rate environment, the present value of pension obligation (PVPO) may be revised up as the discount rate falls.

Note the gap between the PVPO and fair value of assets (FVA).

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March 25, 2014

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Figure 65: Employee cost analysis - FY13


Employee expenses 34 31 33 7 17 57 184 28

yoy growth 16% 3% 9% 25% 24% 20% 8% 11%

% of average AUM 0.7% 0.8% 0.8% 1.0% 0.9% 1.2% 1.3% 1.0%

Key retirement costs

Current service cost 13.0 10.1 2.28 0.68 2.1 5.2 12.3 2.3

% of average AUM 0.26% 0.24% 0.06% 0.10% 0.11% 0.11% 0.08% 0.08%

Amortised pension liabilities 3.7 5.3 5.1 1.0 1.7 6.6 1 3.2

% of average AUM 0.07% 0.13% 0.13% 0.15% 0.09% 0.14% 0.01% 0.11%

Change in actuarial assumption -6.5 -8.5 2.0 -0.7 2.4 10.3 10.7 5.1

% of average AUM -0.06% -0.08% 0.05% -0.11% 0.22% 0.36% 0.07% 0.29% SOURCES: CIMB, COMPANY REPORTS

3. VALUATION AND RECOMMENDATION

The PSBs’ valuations are at their lowest in a decade. However, in our view, they face multiple challenges including the loss of market share in low-cost deposits, elevated loan loss charges, provisions for staff retirement benefits and the risk of capital infusion by the government at valuations below book value. Among the PSBs, we prefer the well-capitalised banks with relatively superior ROAs.

We expect housing finance companies (HFCs) to benefit the most from the expected drop in wholesale borrowing costs, which will lead to an expansion in spreads. We upgrade HDFC Ltd to an Add rating from Hold and downgrade HDFC Bank to Hold from Add. The asset financing auto financiers (NBFCs) will also benefit from the falling cost of funds but the headwinds affecting asset quality and loan growth keeps us cautious. In this space we like Bajaj Finance and maintain our Reduce ratings on Shriram Transport Finance and Mahindra Finance.

Among the large private banks, our top pick is ICICI Bank. Among the mid-sized private banks, we upgrade Federal Bank to Add from Hold and Indusind Bank to Hold from Reduce. We maintain our Add ratings on ING Vysya Bank and Jammu & Kashmir Bank.

BANKS

March 25, 2014

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Figure 66: PSBs: 1-yr forward rolling PBV (x) chart

Title:

Source:


-

0.50

1.00

1.50

2.00

2.50

3.00

Mar-

06

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Jun-1

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13

SBIN PNB BOB BOI CBK UNBK

SOURCES: CIMB, BLOOMBERG, COMPANY REPORTS

Figure 67: Private Banks: 1-yr forward rolling PBV (x) chart

Title:

Source:


-

1.00

2.00

3.00

4.00

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HDFCB AXSB ICICIBC IIB YES


Figure 68: NBFCs: 1-yr forward rolling PBV (x) chart

Title:

Source:


-

1.00

2.00

3.00

4.00

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6.00

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HDFC IDFC MMFS SHTF BAF


BANKS

March 25, 2014

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Figure 69: Sector Comparison

PriceTarget

Price

(Rs) (Rs) CY13 CY14 CY13 CY14 CY13 CY14 CY15 CY13 CY14

PUBLIC BANKS

Bank of Baroda BOB IN ADD 656 722 4,625 6.2 5.8 1.7% 0.83 0.74 14.8% 13.8% 13.9% 3.3% 3.3%

Bank of India BOI IN HOLD 202 212 2,129 4.4 4.4 1.5% 0.53 0.49 13.0% 11.8% 11.8% 5.0% 5.0%

Canara Bank CBK IN HOLD 240 262 1,816 4.2 3.7 -0.2% 0.45 0.41 11.4% 11.6% 12.0% 5.4% 5.7%

Oriental Bank of Commerce OBC IN HOLD 192 202 944 5.1 4.5 1.5% 0.45 0.42 9.5% 9.7% 10.7% 4.3% 5.0%

Punjab National Bank PNB IN HOLD 642 657 3,816 5.9 4.7 1.5% 0.69 0.62 12.6% 14.0% 14.5% 4.2% 4.3%

State Bank of India SBIN IN HOLD 1,702 1,762 20,858 10.1 8.6 3.7% 1.11 1.00 11.9% 12.5% 13.0% 2.4% 2.4%

State Bank of India 8.9 6.3 0.82 0.74

Union Bank of India UNBK IN HOLD 116 119 1,205 4.0 3.6 -1.1% 0.43 0.40 11.5% 11.7% 11.9% 6.9% 7.5%

PRIVATE BANKS

Axis Bank AXSB IN HOLD 1,394 1,451 10,745 11.4 10.7 6.4% 1.78 1.57 17.5% 15.8% 15.4% 1.4% 1.5%

Federal Bank FB IN ADD 86 105 1,206 9.4 8.4 2.6% 1.08 0.98 12.5% 12.4% 12.8% 1.8% 2.0%

HDFC Bank HDFCB IN HOLD 734 788 28,876 21.8 18.0 17.3% 4.25 3.59 22.0% 21.9% 21.4% 0.9% 1.0%

ICICI Bank ICICIBC IN ADD 1,200 1,445 22,735 14.8 13.6 7.6% 1.92 1.74 14.2% 13.6% 13.5% 1.7% 1.8%

Indusind Bank IIB IN HOLD 471 506 4,066 18.8 15.4 19.4% 2.99 2.58 18.1% 18.2% 18.6% 0.7% 0.8%

J&K Bank JKBK IN ADD 1,510 1,770 1,202 6.3 6.2 4.0% 1.31 1.12 23.8% 19.7% 18.4% 3.3% 3.3%

ING Vysya Bank VYSB IN ADD 556 677 1,721 13.9 13.1 11.7% 1.58 1.41 13.0% 11.4% 11.7% 0.9% 1.0%

Yes Bank YES IN HOLD 360 387 2,133 8.7 7.6 12.5% 1.92 1.60 25.2% 23.4% 22.0% 1.8% 2.0%

NBFCs

Bajaj Finance Ltd BAF IN ADD 1,673 1,860 1,377 11.7 9.7 19.2% 2.17 1.82 21.2% 20.6% 21.1% 1.0% 1.3%

Housing Development Fin. HDFC IN ADD 843 982 21,598 26.8 22.3 12.7% 4.81 4.27 20.0% 20.5% 21.1% 1.5% 1.7%

IDFC Limited IDFC IN HOLD 109 117 2,718 8.4 7.7 6.2% 1.19 1.07 15.5% 14.8% 14.6% 2.7% 2.9%

Mahindra & Mahindra Finance MMFS IN REDUCE 254 236 2,374 16.2 13.9 10.1% 2.90 2.52 20.2% 19.6% 20.5% 1.4% 1.7%

Shriram Transport Finance SHTF IN REDUCE 667 632 2,484 11.5 10.4 4.1% 1.88 1.63 18.4% 17.1% 17.4% 1.0% 1.2%

INSURANCE

Bajaj Finserv BJFIN IN HOLD 715 738 1,868 142.5 132.4 1.1% 4.61 4.46 3.6% 3.5% 3.7% 0.0% 0.0%

Max India MAX IN ADD 201 230 876 19.5 22.8 -14.0% 1.70 1.66 9.3% 7.5% 9.4% 3.5% 3.2%

P/BV (x) Recurring ROE (%)Dividend Yield

(%)CompanyBloomberg

TickerReco.

Market

Cap

(US$ m)

Core P/E (x)3-year

EPS

CAGR (%)

NOTE: Prices as on 21

st March 2014 SOURCES: CIMB, COMPANY REPORTS

Banks│India

March 25, 2014


Challenges ahead Axis Bank’s earnings growth is likely to be muted in the near term due to large one-off gains in 9MFY14. Also, the continued slowdown in industrial segment is the key risk to asset quality as it hurts loans in the mid-corporate and SME segments. That said, the overall improvement in asset and liability mix are key positives.

In 9MFY14, Axis Bank booked Rs4.8bn in treasury gains and Rs4bn of currency gain on repatriated profit from overseas branches. These will likely lead to muted earnings growth in FY15. We largely maintain our FY15-16 EPS estimates but lower our cost of equity assumptions from 15% to 13% which leads to a higher discounted economic profit based target of Rs1,451. We maintain our Hold rating.

Asset quality and corporate loan growth, a weak point In general, given the overall slowdown in the economy and stress in capital-intensive sectors, we expect Axis Bank’s asset quality to remain under pressure. In 3Q, the fresh delinquencies remained largely stable qoq (guidance of Rs60bn in gross impairments in FY14, Rs43bn impaired in 9MFY14). We believe there is upside risk to the bank's impaired assets if growth in the manufacturing sector remains muted. As at end-Dec 13, gross NPLs were 1.4% and standard restructured loans

stood at 2.3% of loans. Furthermore, corporate loan growth is slowing (+8% yoy, +61% of total loans as at Dec 13), which impacts fee income as Axis Bank is a large player in the debt syndication business.

Improvements in loan mix Over the past couple of years, Axis Bank has focussed on increasing the proportion of its retail loans. As at end-Dec 13, retail loans accounted for 30% of its total loans vs. 22% in Dec 11. This partly eases concerns over the overall loan loss provisions given that retail loans have been experiencing low NPL formation.

…and in liability mix Axis Bank is consistently focussing on reducing its reliance on wholesale deposits. As at end-Dec 13, wholesale deposits (over Rs50m) accounted for 26% of total deposits vs. 37% in Dec 11. CASA was at 43% as of Dec 13. As at end-Dec 13, its Tier-I capital stood at 11.5% (excluding 9MFY14 earnings), which makes it comfortably placed based on its medium-term business growth prospects.

CIMB Analyst(s)




Share price info

Share price perf. (%) 1M 3M 12M

Relative 11.7 5.9 -9.5

Absolute 16.8 9.1 6.3

Major shareholders % held

SUUTI 20.7

LIC of India 9.3

GIC of India 1.6

Axis Bank AXSB IN / AXBK.BO Current Rs1,394

Market Cap Avg Daily Turnover Free Float Target Rs1,451

US$10,745m US$69.36m 66.1% Prev. Target Rs1,227

Rs654,619m Rs4,267m 468.0 m shares Up/Downside 4.1% Conviction| |


56.0

69.3

82.7

96.0

109.3

700

900

1,100

1,300

1,500

Price Close Relative to SENSEX (RHS)

Source: Bloomberg

20

40

60

80

Mar-13 Jun-13 Sep-13 Dec-13

Vo

l m

Financial Summary

Mar-12A Mar-13A Mar-14F Mar-15F Mar-16F

Net Interest Income (Rsm) 80,177 96,663 119,054 133,729 154,929

Total Non-Interest Income (Rsm) 54,202 65,511 68,875 73,877 81,481

Operating Revenue (Rsm) 134,380 162,174 187,929 207,606 236,410

Total Provision Charges (Rsm) (11,625) (17,509) (22,906) (26,138) (30,320)

Net Profit (Rsm) 42,422 51,786 57,930 62,199 71,079

Core EPS (Rs) 103.0 117.5 123.5 131.9 150.0

Core EPS Growth 24.0% 14.1% 5.1% 6.8% 13.7%

FD Core P/E (x) 13.54 11.86 11.29 10.57 9.29

DPS (Rs) 16.00 18.00 20.00 22.00 24.00

Dividend Yield 1.15% 1.29% 1.43% 1.58% 1.72%

BVPS (Rs) 552 708 807 913 1,034

P/BV (x) 2.53 1.97 1.73 1.53 1.35

ROE 20.3% 18.5% 16.3% 15.3% 15.4%

% Change In Core EPS Estimates 0.000% (0.009%) (0.007%)

CIMB/consensus EPS (x) 0.98 0.91 0.88

1,394

1,451

782.9 1,535

Target

52-week share price range

Current

SOURCE: CIMB, COMPANY REPORTS


Axis Bank

March 25, 2014

31

Profit & Loss

(Rsm) Mar-13A Mar-14F Mar-15F Mar-16F

Net Interest Income 96,663 119,054 133,729 154,929

Total Non-Interest Income 65,511 68,875 73,877 81,481

Operating Revenue 162,174 187,929 207,606 236,410

Total Non-Interest Expenses (69,142) (78,561) (88,633) (100,001)

Pre-provision Operating Profit 93,031 109,368 118,973 136,409

Total Provision Charges (17,509) (22,906) (26,138) (30,320)

Operating Profit After Provisions 75,522 86,462 92,835 106,088

Total Pretax Income/(Loss) from Assoc. 0 0 0 0

Operating EBIT (incl Associates) 75,522 86,462 92,835 106,088

Total Non-Operating Income/(Expense) 0 0 0 0

Profit Before Tax (pre-EI) 75,522 86,462 92,835 106,088

Exceptional Items

Pre-tax Profit 75,522 86,462 92,835 106,088

Taxation (23,736) (28,533) (30,636) (35,009)

Consolidation Adjustments & Others

Exceptional Income - post-tax

Profit After Tax 51,786 57,930 62,199 71,079

Minority Interests

Pref. & Special Div 0 0 0 0

FX And Other Adj. 0 0 0 0

Net Profit 51,786 57,930 62,199 71,079

Recurring Net Profit 51,786 57,930 62,199 71,079

Balance Sheet


Total Gross Loans 1,986,220 2,308,010 2,678,255 3,108,439

Liquid Assets & Invst. (Current) 1,133,161 1,244,135 1,389,149 1,551,295

Other Int. Earning Assets

Total Gross Int. Earning Assets 3,119,381 3,552,146 4,067,404 4,659,734

Total Provisions/Loan Loss Reserve (16,560) (23,205) (27,881) (34,005)

Total Net Interest Earning Assets 3,102,821 3,528,940 4,039,523 4,625,729

Intangible Assets 0 0 0 0

Other Non-Interest Earning Assets 98,436 106,674 115,661 125,472

Total Non-Interest Earning Assets 98,436 106,674 115,661 125,472

Cash And Marketable Securities 204,350 224,785 247,263 271,989

Long-term Investments 0 0 0 0

Total Assets 3,405,607 3,860,399 4,402,448 5,023,190

Customer Interest-Bearing Liabilities 2,526,136 2,868,461 3,288,266 3,771,636

Bank Deposits

Interest Bearing Liabilities: Others 439,511 487,998 540,834 598,454

Total Interest-Bearing Liabilities 2,965,647 3,356,459 3,829,101 4,370,091

Bank's Liabilities Under Acceptances

Total Non-Interest Bearing Liabilities 108,881 124,315 141,897 161,946

Total Liabilities 3,074,528 3,480,774 3,970,997 4,532,037

Shareholders' Equity 331,079 379,626 431,451 491,153

Minority Interests

Total Equity 331,079 379,626 431,451 491,153

Balance Sheet Employment

Mar-13A Mar-14F Mar-15F Mar-16F

Gross Loans/Cust Deposits 78.6% 80.5% 81.4% 82.4%

Avg Loans/Avg Deposits 78.2% 79.6% 81.0% 82.0%

Avg Liquid Assets/Avg Assets 38.4% 38.6% 37.6% 36.7%

Avg Liquid Assets/Avg IEAs 41.8% 42.1% 40.8% 39.6%

Net Cust Loans/Assets 57.8% 59.2% 60.2% 61.2%

Net Cust Loans/Broad Deposits 78.0% 79.7% 80.6% 81.5%

Equity & Provns/Gross Cust Loans 18.0% 17.9% 17.6% 17.4%

Asset Risk Weighting 75.9% 78.7% 81.2% 83.9%

Provision Charge/Avg Cust Loans 0.69% 0.89% 0.99% 0.99%

Provision Charge/Avg Assets 0.41% 0.53% 0.60% 0.61%

Total Write Offs/Average Assets 0.47% 0.56% 0.63% 0.64%

Key Ratios


Total Income Growth 20.7% 15.9% 10.5% 13.9%

Operating Profit Growth 24.9% 17.6% 8.8% 14.7%

Pretax Profit Growth 20.1% 14.5% 7.4% 14.3%

Net Interest To Total Income 59.6% 63.4% 64.4% 65.5%

Cost Of Funds 6.36% 6.04% 6.00% 5.85%

Return On Interest Earning Assets 9.44% 9.29% 9.17% 9.05%

Net Interest Spread 3.08% 3.25% 3.17% 3.20%

Net Interest Margin (Avg Deposits) 4.09% 4.41% 4.34% 4.39%

Net Interest Margin (Avg RWA) 3.94% 4.24% 4.04% 3.98%

Provisions to Pre Prov. Operating Profit 18.8% 20.9% 22.0% 22.2%

Interest Return On Average Assets 3.09% 3.28% 3.24% 3.29%

Effective Tax Rate 31.4% 33.0% 33.0% 33.0%

Net Dividend Payout Ratio 16.3% 16.2% 16.7% 16.0%

Key Drivers


Loan Growth (%) 16.1% 16.2% 16.0% 16.1%

Net Interest Margin (%) 3.4% 3.6% 3.5% 3.6%

Non Interest Income Growth (%) 20.9% 5.1% 7.3% 10.3%

Cost-income Ratio (%) 42.6% 41.8% 42.7% 42.3%

Net NPL Ratio (%) 0.4% 0.5% 0.6% 0.7%

Loan Loss Reserve (%) 110.0% 96.6% 91.1% 87.0%

GP Ratio (%) 0.5% 0.5% 0.5% 0.5%

Tier 1 Ratio (%) 12.2% 11.9% 11.5% 11.2%

Total CAR (%) 12.2% 11.9% 11.5% 11.2%

Deposit Growth (%) 14.8% 13.6% 14.6% 14.7%

Loan-deposit Ratio (%) 78.0% 79.7% 80.6% 81.5%

Gross NPL Ratio (%) 1.2% 1.5% 1.7% 1.8%

Fee Income Growth (%) 15.7% 5.0% 10.0% 10.0%


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Rolling FD P/E (x)

Axis Bank HDFC Bank ICICI Bank

Finance Companies│India

March 25, 2014


On a steady growth path Bajaj Finance (BAF) continues to deliver healthy performance on loan growth as well as on asset quality. Note that it has maintained margins through efficient asset-liability management amid a volatile interest rate environment. An expected fall in wholesale borrowing costs could further augment margins.

Despite the challenging macros and volatile rates, BAF's 3Q loan growth surprised positively. We raise our FY15-16 EPS estimates by 2-5% as we lower the cost of funds and lower our cost of equity assumption from 15% to 13%. Our Add rating is maintained, with a revised discounted economic profit-based target price of Rs1,860.

Fall in wholesale rates bodes well for margins We expect the wholesale cost of funds to fall in FY15-16, which augurs well for wholesale-funded entities like BAF. This would also partially mitigate the negative impact on margins due to the shift in portfolio mix in favour of the low-yielding mortgages segment. Note, that when wholesale borrowing costs spiked in mid-FY14, BAF opted to keep the excess liquidity on its balance-sheet which negatively impacted spreads.

Benefitting from ban on 0% finance schemes by banks The RBI notification banning the 0% financing schemes offered by banks had fuelled fears over BAF’s loan growth. However, BAF has actually

benefitted from this move, to an extent, as the ban reduces the competition from banks. Though the guidelines are not applicable to NBFCs, management has taken proactive measures and redesigned the bank's products, providing comfort over the future growth visibility of such products.

Valuation and outlook BAF's growth trajectory is likely to moderate from its historical trends, but should remain healthy. Though the two-wheeler and (16% of loans, +10% yoy as at Dec 13) commercial loan (8% of loans, -15% yoy as at Dec 13) segment is witnessing growth pressures, other segments such as loan against property (41% of loans as at Dec 13, +56% yoy), consumer durables (13% of loans as at Dec 2013, +44% yoy) and personal loans (11% of loans as at Dec 2013, +52% yoy) are likely to grow at a healthy pace. In our view, BAF’s proactive measures to rebalance its loan book has helped it maintain its asset quality. This gives us comfort in terms of overall business growth and loan loss charges.

CIMB Analyst(s)




Share price info


Relative 4.3 8.4 19.6

Absolute 9.4 11.6 35.4


Bajaj Finserv 62.1

Maharashtra Scooters 3.8

HDFC Std Life 1.8

Bajaj Finance Ltd BAF IN / BJFN.NS Current Rs1,673



Rs83,903m Rs44.56m 49.78 m shares Up/Downside 11.2% Conviction| |


80.0

91.1

102.2

113.3

124.4

910

1,110

1,310

1,510

1,710


Source: Bloomberg

200

400

600


Vo

l th

Financial Summary






Net Profit (Rsm) 4,064 5,913 7,354 8,970 11,207

Core EPS (Rs) 104.3 129.8 147.7 180.2 225.1

Core EPS Growth 54.6% 24.5% 13.8% 22.0% 24.9%

FD Core P/E (x) 16.05 12.89 11.33 9.29 7.43

DPS (Rs) 12.00 15.00 18.00 22.00 26.00

Dividend Yield 0.72% 0.90% 1.08% 1.31% 1.55%

BVPS (Rs) 487 676 803 958 1,152

P/BV (x) 3.44 2.47 2.08 1.75 1.45

ROE 24.1% 22.0% 20.0% 20.5% 21.3%

% Change In Core EPS Estimates 0.00% 2.29% 5.20%


1,673

1,860

984.3 1,695

Target


Current



Bajaj Finance Ltd

March 25, 2014

33

Profit & Loss













Exceptional Items

Pre-tax Profit 8,716 11,142 13,591 16,981

Taxation (2,803) (3,788) (4,621) (5,774)



Profit After Tax 5,913 7,354 8,970 11,207

Minority Interests



Net Profit 5,913 7,354 8,970 11,207


Balance Sheet


Total Gross Loans 167,436 228,089 269,145 323,648

Liquid Assets & Invst. (Current) 53 1,870 2,180 2,589


Total Gross Int. Earning Assets 167,489 229,960 271,325 326,237

Total Provisions/Loan Loss Reserve 0 0 0 0

Total Net Interest Earning Assets 167,489 229,960 271,325 326,237






Total Assets 178,212 242,885 284,782 339,228

Customer Interest-Bearing Liabilities 0 0 0 0

Bank Deposits 69,433 98,880 115,255 136,884


Total Interest-Bearing Liabilities 131,334 187,033 218,008 258,919



Total Liabilities 144,541 202,909 237,117 281,871


Minority Interests

Total Equity 33,670 39,976 47,665 57,358



Gross Loans/Cust Deposits

Avg Loans/Avg Deposits




Net Cust Loans/Broad Deposits 241% 231% 234% 236%






Key Ratios






Cost Of Funds 10.3% 9.7% 8.8% 8.3%



Net Interest Margin (Avg Deposits) N/A N/A N/A N/A






Key Drivers


Loan Growth (%) 36.3% 36.2% 18.0% 20.3%


Non Interest Income Growth (%) -2.9% 28.0% 14.8% 15.4%


Net NPL Ratio (%) 0.2% 0.3% 0.3% 0.3%


GP Ratio (%) 0.3% 0.3% 0.3% 0.3%

Tier 1 Ratio (%) 19.2% 16.7% 16.9% 17.0%

Total CAR (%) 22.0% 18.8% 18.7% 18.5%

Deposit Growth (%) N/A N/A N/A N/A

Loan-deposit Ratio (%) N/A N/A N/A N/A

Gross NPL Ratio (%) 1.1% 1.3% 1.6% 1.8%

Fee Income Growth (%) -2.9% 28.0% 14.8% 15.4%


0.0

5.0

10.0

15.0

20.0

25.0


Rolling FD P/E (x)

Bajaj Finance Ltd Mahindra & Mahindra Finance

Shriram Transport Finance

Banks│India

March 25, 2014


Light at the end of the tunnel The sharp deterioration in asset quality in the past two years has taken away the sheen at BOB. That said, it is still better than its peers in terms of overall stressed loans. For now, NIMs appear to have bottomed and gross delinquencies are expected to trend lower.

Meanwhile, we do not expect asset quality to worsen further. We largely maintain our FY14-16 EPS estimates. However, we lower our cost of equity assumption from 15% to 13%. Hence we maintain our Add rating on the stock, with a revised GGM-based target price of Rs722. BOB remains our preferred pick among public sector banks.

Asset quality unlikely to worsen further Over the past two years, BOB has seen a rapid deterioration in its asset quality. Its gross NPL ratio more than doubled from 1.5% in Dec 2011 to 3.3% in Dec 2013 and standard restructured loans also rose almost twofold from 3.3% of total loans to 6%. Note that the increase in NPLs and restructured loans was on a relatively faster expanding loan base (average loan growth of about 20-22% in the past three years). Furthermore, BOB has a large overseas business, with 33% of its total loans in Dec 2013 coming from its foreign operations (largely linked to India-related businesses). Gross NPLs in this book have risen to 1.75%

in Dec 2013 from 1.37% in Mar 2013. Going forward, management expects gross delinquencies to trend lower. For the past two quarters, the pace of fresh impairments has slowed down. The loan restructuring pipeline as at end-Dec 2013 stands at Rs15bn-20bn (about 40-60bp of loans).

NIMs have bottomed out BOB’s NIMs seem to have bottomed out, after steadily declining for the past eight quarters, partly due to stress in its asset quality. In 3QFY14, domestic NIMs improved 10bp qoq to 2.95% while overseas NIMs were stable qoq at 1.18%. Overall, NIMs are likely to trend higher partly due to the improvement in the CASA ratio and rebalancing of the overseas loan book.

Better placed among peers After adjusting for the post-tax net NPLs and 35% of the restructured loans, BOB trades at 1x FY15 P/BV. In the past three years, BOB’s ROAs have fallen, from about 1.30% in FY11 to 0.8% in 9MFY14. We think that its ROAs are unlikely to fall further. Moreover, as at end-Dec 2013, BOB's Tier-1 capital (including profits) was standing comfortably at 9.7%.

CIMB Analyst(s)




Share price info


Relative 21.6 -2.5 -15.1

Absolute 26.7 0.7 0.7


Government of India 55.4

LIC of India 11.4

HDFC MF 3.7

Bank of Baroda BOB IN / BOB.BO Current Rs656.2

Market Cap Avg Daily Turnover Free Float Target Rs722.0

US$4,625m US$17.62m 44.6% Prev. Target Rs603.0



62.0

68.4

74.9

81.3

87.7

94.1

100.6

107.0

410

460

510

560

610

660

710

760


Source: Bloomberg

2

4

6

8

10


Vo

l m

Financial Summary






Net Profit (Rsm) 50,070 44,807 45,269 50,262 58,238

Core EPS (Rs) 124.4 107.3 106.1 116.7 135.2

Core EPS Growth 11.2% (13.7%) (1.1%) 10.0% 15.9%

FD Core P/E (x) 5.28 6.11 6.18 5.62 4.85

DPS (Rs) 18.00 21.50 21.50 22.00 24.00

Dividend Yield 2.74% 3.28% 3.28% 3.35% 3.66%

BVPS (Rs) 638 731 813 908 1,019

P/BV (x) 1.03 0.90 0.81 0.72 0.64

ROE 21.7% 15.7% 13.7% 13.6% 14.0%



656.2

722.0

445.8 740.5

Target


Current



Bank of Baroda

March 25, 2014

35

Profit & Loss













Exceptional Items

Pre-tax Profit 48,312 56,586 69,327 80,329

Taxation (3,505) (11,317) (19,065) (22,090)



Profit After Tax 44,807 45,269 50,262 58,238

Minority Interests



Net Profit 44,807 45,269 50,262 58,238


Balance Sheet











Cash And Marketable Securities 853,989 1,004,609 1,105,070 1,215,577


Total Assets 5,460,312 6,208,951 6,993,639 7,879,926


Bank Deposits







Minority Interests

Total Equity 308,652 350,122 390,910 438,814














Key Ratios




Pretax Profit Growth (19.8%) 17.1% 22.5% 15.9%


Cost Of Funds 5.25% 4.98% 4.80% 4.62%









Key Drivers


Loan Growth (%) 14.4% 16.3% 14.3% 14.2%




Net NPL Ratio (%) 1.3% 1.8% 1.7% 1.5%


GP Ratio (%) 0.6% 0.6% 0.6% 0.6%

Tier 1 Ratio (%) 10.1% 9.7% 9.4% 9.3%

Total CAR (%) 10.1% 9.7% 9.4% 9.3%

Deposit Growth (%) 23.1% 13.8% 12.8% 12.8%


Gross NPL Ratio (%) 2.4% 3.2% 3.3% 3.4%



0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0


Rolling FD P/E (x)

Bank of Baroda Bank of India Canara Bank Punjab National Bank

Banks│India

March 25, 2014


Driving in the fast lane We think that a combination of low core Tier-1 capital and muted ROAs will keep BOI’s valuations under pressure. Strong loan growth in the current uncertain environment and a likely increase in staff costs may act as near-term drags.

BOI is currently cheap, but we think that it will remain so in the medium to long term. Low core Tier-1 capital will necessitate capital dilution and could suppress ROEs. Moreover, likely provisions for employee benefits can pressurise earnings. We largely maintain our EPS, but we cut cost of equity from 15% to 13%, which lifts our GGM-based target price. Given the stock price correction, we upgrade the stock to Hold from Reduce on the back of reasonable valuations.

Constrained by capital As at end-Dec 13, BOI’s Tier-1 capital adequacy ratio was 8.1%, with a core equity Tier-1 ratio of 7.85% (including profits). Over FY11-14, the Indian government had infused capital into BOI every year, diluting the holdings of minority shareholders. In our view, a mix of low ROAs (0.56% annualised in 9MFY14) and low Tier-1 capital is likely to invite further capital injections in the foreseeable future – to meet Basel III norms. We forecast internal capital generation (profits less dividends) of 9-10% for FY14-16

while its loan book continues to grow rapidly (+27% yoy at end-Dec 13; +22% YTD).

Loan write-offs higher than peers’ FY12-13 bad-loan write-offs were higher than peers’. BOI wrote off 1.1% of its loans in FY12 (vs. a 0.5% average for public-sector banks) and 0.9% in FY13 (vs. a 0.7% average). Its accelerated write-offs have lowered its headline gross NPLs. Furthermore, the bank sold about Rs20bn (60bp of loans) to asset reconstruction companies in 9MFY14. As at end-Dec 13, its gross NPL ratio was 2.8% and restructured loans, 4.7% of loans.

LLP to decline gradually In 3QFY14 incremental delinquencies and loan restructuring increased qoq. In 9MFY14 loan loss charges came in at 1.2% (annualised); though this was lower than the 1.5% in FY13, it remained higher than peers’. The aggressive loan growth in 9MFY14 in the current environment can lead to asset-quality stress on a later date, in our view.

CIMB Analyst(s)




Share price info


Relative 15.4 -9.5 -44.9

Absolute 20.5 -6.3 -29.1



LIC 11.8

Lazard Asset Mgmt 3.5

Bank of India BOI IN / BOI.BO Current Rs202.0





38

53

68

83

98

113

128

100

150

200

250

300

350

400


Source: Bloomberg

10

20

30


Vo

l m

Financial Summary






Net Profit (Rsm) 26,775 27,493 28,084 29,922 34,125

Core EPS (Rs) 47.74 46.95 45.31 46.54 53.08

Core EPS Growth 2.9% (1.7%) (3.5%) 2.7% 14.0%

FD Core P/E (x) 4.23 4.30 4.46 4.34 3.81

DPS (Rs) 7.00 10.00 10.00 10.00 10.00

Dividend Yield 3.47% 4.95% 4.95% 4.95% 4.95%

BVPS (Rs) 326.5 362.4 385.5 422.0 465.1

P/BV (x) 0.62 0.56 0.52 0.48 0.43

ROE 15.6% 13.6% 12.1% 11.5% 12.0%



202.0

212.0

131.1 342.2

Target


Current



Bank of India

March 25, 2014

37

Profit & Loss













Exceptional Items

Pre-tax Profit 30,077 39,555 42,746 48,749

Taxation (2,584) (11,471) (12,824) (14,625)



Profit After Tax 27,493 28,084 29,922 34,125

Minority Interests



Net Profit 27,493 28,084 29,922 34,125


Balance Sheet



Liquid Assets & Invst. (Current) 941,990 1,054,981 1,204,196 1,375,157










Total Assets 4,503,052 5,265,179 6,017,716 6,889,944


Bank Deposits







Minority Interests

Total Equity 216,207 247,848 271,341 299,036














Key Ratios




Pretax Profit Growth (15.9%) 31.5% 8.1% 14.0%


Cost Of Funds 5.96% 5.99% 5.72% 5.53%









Key Drivers


Loan Growth (%) 16.4% 26.5% 15.0% 15.1%


Non Interest Income Growth (%) 13.4% 19.0% -1.2% 6.2%


Net NPL Ratio (%) 2.3% 1.7% 1.7% 1.6%


GP Ratio (%) 0.5% 0.5% 0.5% 0.5%

Tier 1 Ratio (%) 8.3% 6.9% 6.5% 6.3%

Total CAR (%) 8.3% 6.9% 6.5% 6.3%

Deposit Growth (%) 20.0% 17.5% 14.7% 14.9%


Gross NPL Ratio (%) 3.0% 2.8% 2.8% 2.8%



0.0

5.0

10.0

15.0

20.0

25.0


Rolling FD P/E (x)

Bank of Baroda Bank of India Canara Bank

Punjab National Bank State Bank of India

Banks│India

March 25, 2014


Bumpy ride ahead Can Bank's strong loan growth in the current environment (+32% yoy and +19% YTD as at Dec-13) due to its aggressive loan pricing, low core Tier-I capital and deteriorating asset quality are key concerns. Despite its cheap valuations, its strong loan growth gives us discomfort, as it can lead to asset quality stress at a later date.

We largely maintain our EPS estimates for FY15-16. However, we lower our cost of equity assumption from 15% to 13%. Consequently, we maintain our Hold rating on the stock, with a revised GGM-based target price of Rs262.

NIMs to remain under pressure As at end-Dec 13, Can Bank’s cost of interest-bearing liabilities (IBL) was 7.4% vs. the 6.7% average for public-sector banks, largely due to its inferior IBL mix. It has the lowest proportion of low-cost deposits (domestic CASA of 24% as at Dec-13) and the highest proportion of term deposits among peers. The wholesale cost of funds as reflected by the 12-month certificate of deposit rates have moved further north in 4QFY14 to average 9.5% vs. 9.2% in 3QFY14, which will likely put pressure on its NIMs. In 2QFY14, the bank cut its base lending rate by 30bp to 9.95% to aggressively grow its loan book (+30.3% yoy in Sep 13, +31.8% yoy in Dec 13). In Jan 2014, the bank increased its base rate to 10.20%. Its LDR rose from 65% as at end-Jun 13

to 70% as at end-Dec 13. We think NIMs can rise in FY15-16, led largely by lower cost of wholesale borrowing, but this will be largely offset by the higher provision for bad loans.

Asset quality under stress Can Bank's asset quality is largely in line with its peers, with gross NPLs at 2.7% of loans and restructured loans at 6.4% as at Dec 13. The bank has a restructuring pipeline of Rs33bn (1.1% of loans) as at Dec 13. In our view, the aggressive loan growth in 9MFY14, in the current environment, can lead to asset quality stress on a later date.

Low profitability can lead to capital issues As at end-Dec 13, Can Bank's Tier-1 capital stood at 7.5% (without profits) vs. 9.77% in Mar 13 (Basel II), with a CET 1 of 7.1%, partly due to the aggressive loan growth in 9MFY14. We expect its internal rate of capital generation (profits less dividends) to be 9-10% over FY14-15. Also, ROAs are likely to be below its peers (0.6% in FY14-15).

CIMB Analyst(s)




Share price info


Relative 6.9 -12.7 -51.2

Absolute 12 -9.5 -35.4



LIC of India 5.4

HSBC Global Invst Funds 1.4

Canara Bank CBK IN / CNBK.BO Current Rs239.9





37

50

63

76

88

101

114

127

160

210

260

310

360

410

460

510


Source: Bloomberg

5

10

15


Vo

l m

Financial Summary






Net Profit (Rsm) 32,829 28,721 24,527 31,208 35,313

Core EPS (Rs) 74.11 64.83 54.25 67.66 76.56

Core EPS Growth (21.5%) (12.5%) (16.3%) 24.7% 13.2%

FD Core P/E (x) 3.24 3.70 4.42 3.55 3.13

DPS (Rs) 11.00 13.00 13.00 14.00 15.00

Dividend Yield 4.59% 5.42% 5.42% 5.84% 6.25%

BVPS (Rs) 465.6 515.7 546.2 599.9 661.5

P/BV (x) 0.52 0.47 0.44 0.40 0.36

ROE 17.0% 13.2% 10.2% 11.8% 12.1%



239.9

262.0

194.4 445.9

Target


Current



Canara Bank

March 25, 2014

39

Profit & Loss













Exceptional Items

Pre-tax Profit 36,721 33,144 43,046 48,708

Taxation (8,000) (8,618) (11,838) (13,395)



Profit After Tax 28,721 24,527 31,208 35,313

Minority Interests



Net Profit 28,721 24,527 31,208 35,313


Balance Sheet













Total Assets 4,103,094 4,837,188 5,436,991 6,113,476


Bank Deposits







Minority Interests

Total Equity 228,446 251,961 276,712 305,106














Key Ratios



Operating Profit Growth (0.9%) 13.4% 15.2% 13.5%

Pretax Profit Growth (10.1%) (9.7%) 29.9% 13.2%


Cost Of Funds 7.29% 7.41% 7.17% 7.00%









Key Drivers


Loan Growth (%) 4.3% 25.0% 14.5% 14.5%




Net NPL Ratio (%) 2.2% 2.3% 2.0% 1.6%


GP Ratio (%) 0.5% 0.6% 0.6% 0.6%

Tier 1 Ratio (%) 9.8% 8.2% 7.9% 7.6%

Total CAR (%) 9.8% 8.2% 7.9% 7.6%

Deposit Growth (%) 8.8% 19.0% 12.7% 12.7%


Gross NPL Ratio (%) 2.6% 2.7% 2.8% 3.0%



0.0

5.0

10.0

15.0

20.0

25.0


Rolling FD P/E (x)



Banks│India

March 25, 2014


Set to roll, if growth accelerates An improving risk-return profile is reflected in better risk-adjusted NIMs. It has built up a branch network of 1,000+, partly reducing its dependence on wholesale funds and de-risking its asset portfolio. All this, along with its comfortable Tier-I capital, positions it well for a turn in the interest-rate cycle.

We raise our EPS by 2% for FY15-16 as we raise our NIMs. We raise our GGM based target price to Rs105 on the back of our EPS upgrade and cut in cost of equity from 15% to 13%. We upgrade the stock to Add from Hold with catalysts expected from its improving ROAs.

Risk-adjusted NIM improves

Management’s focus on lowering risks to its asset portfolio resulted in a decline in NIM from 3.82% in FY10 to 3.37% in FY13. However, the impact of declining margins was more than offset by lower loan-loss provisions. Loan-loss provisions fell from 1.7% of average loans in FY09-11 to 0.62% in FY13 (gross delinquencies down from c.3% of average loans in FY09-11 to 2% in FY13). As a result, risk-adjusted NIMs improved from 2.7% in FY10 to 3.05% in FY13. Furthermore, large SME exposure (35% of total loans) will benefit its NIM in a falling interest rate environment. That said, its cost of funds is still higher than peers’ – partly due to the higher deposit rates on term deposits vs peers.

Asset quality better than PSBs At end-3QFY14, gross NPL ratio stood at 2.8% (average of PSBs: 4.6%), net NPL ratio at 0.9% (average of PSBs: 2.7%) and provision coverage at 70% (83% ex-technical write-offs, average of PSBs: 42%). Loans under close watch accounted for c.Rs4bn (1% of loans). Restructured loans were 5.5% of loans (2.7% ex-SEBs and state-owned aviation company vs. 4% for coverage PSBs).

Building blocks in place Back-ended loan growth was evident in each year of FY11-13. In our view, steady loan and fee-income growth will be critical for sustainable improvements in ROAs. That said, FB de-risked its asset portfolio and had aggressively built a branch network of 1,142 by end-3QFY14 (FY10: 672), which has partly reduced its dependence on wholesale borrowings. All this, along with its comfortable Tier-I capital (14.8% at end-3QFY14), places it well for a turn in the interest-rate cycle, in our view.

CIMB Analyst(s)




Share price info


Relative 11.9 4.8 -24.5

Absolute 17 8 -8.7


IFC 4.8

Warhol Ltd. 4.6

Franklin Templeton Investments 4.1

Federal Bank FB IN / FED.BO Current Rs85.95





44.0

52.6

61.1

69.7

78.3

86.9

95.4

104.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0


Source: Bloomberg

5

10

15

20


Vo

l m

Financial Summary






Net Profit (Rsm) 7,768 8,382 7,623 9,202 10,640

Core EPS (Rs) 9.08 9.80 8.89 10.68 12.29

Core EPS Growth 32.3% 7.9% (9.3%) 20.1% 15.0%

FD Core P/E (x) 9.46 8.77 9.67 8.05 7.00

DPS (Rs) 1.80 1.80 1.50 1.80 2.20

Dividend Yield 2.09% 2.09% 1.75% 2.09% 2.56%

BVPS (Rs) 66.66 74.35 81.36 89.82 99.44

P/BV (x) 1.29 1.16 1.06 0.96 0.86

ROE 14.4% 13.9% 11.4% 12.5% 13.0%



85.95

105.0

46.02 97.64

Target


Current



Federal Bank

March 25, 2014

41

Profit & Loss













Exceptional Items

Pre-tax Profit 11,938 11,463 13,532 15,646

Taxation (3,556) (3,840) (4,330) (5,007)



Profit After Tax 8,382 7,623 9,202 10,640

Minority Interests



Net Profit 8,382 7,623 9,202 10,640


Balance Sheet



Liquid Assets & Invst. (Current) 207,566 238,701 274,506 315,682










Total Assets 710,444 792,764 905,216 1,040,756

Customer Interest-Bearing Liabilities 576,149 631,431 722,831 832,852

Bank Deposits







Minority Interests

Total Equity 63,595 69,937 77,592 86,330














Key Ratios



Operating Profit Growth (3.1%) 3.5% 14.0% 14.0%

Pretax Profit Growth 2.1% (4.0%) 18.0% 15.6%


Cost Of Funds 7.23% 7.20% 7.13% 7.11%









Key Drivers


Loan Growth (%) 16.4% 8.4% 15.0% 15.0%




Net NPL Ratio (%) 2.0% 1.7% 1.9% 1.8%


GP Ratio (%) 0.6% 0.5% 0.5% 0.5%

Tier 1 Ratio (%) 14.1% 14.1% 13.7% 13.2%

Total CAR (%) 14.6% 15.5% 15.0% 14.7%

Deposit Growth (%) 17.7% 9.6% 14.5% 15.2%


Gross NPL Ratio (%) 3.4% 2.7% 3.1% 3.1%



0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00


Rolling FD P/E (x)

Federal Bank ING Vysya Bank J&K Bank

Banks│India

March 25, 2014


Close to fair valuation HDFC Bank delivered strong operating performance in 9MFY14 despite the challenging environment. Its margin and fee income are under pressure but this will be offset by the company’s tight control of operating expenses and its stable asset quality.

Given its tier 1 capital ratio of 11.5% at end-Dec 2013 (including profit), HDFC Bank can achieve ROEs of ~21-22% over FY15-16. We broadly maintain our FY14-16 EPS but reduce our cost of equity assumptions. We believe that its current valuations are fair and thus, downgrade our rating to Hold from Add, with a higher discounted economic profit-based target price of Rs788.

Best cost of funds in sector HDFC Bank’s cost of funds is the best in the sector due to its low reliance on wholesale borrowings. At end-Dec 2013, its CASA ratio was at 41% (vs. 45% at end-Sep 2013) partly due to the higher deposits garnered under the RBI’s FCNR window. That said, HDFC Bank’s lending spread fell in 9MFY14 (5.3% in 9MFY14 vs. 5.48% in FY13) but this was largely offset by the rising investment spread (2.22% in 9MFY14 vs. 1.78% in FY13).

Few asset quality concerns HDFC Bank’s asset quality remains impeccable due to its superior underwriting standards. Though, there was some stress in its CV-CE segment. At end-Dec 2013, its gross

NPLs were a mere 1% of loans, while net NPLs were 0.3% and net restructured loans were 0.2%. The bank also has floating provisions of Rs18.65bn (equivalent to ~0.7% of loans). Furthermore, its retail loans (best-performing asset class) constituted c.50% of total loans at end-Dec 2013.

Investments in network to boost earnings In the past two years, HDFC Bank has aggressively expanded its branch network. At end-Dec 2013, it had 3,336 branches (vs. 2,201 at end-Dec 2011). On average, a new branch breaks even in 18-24 months. Thus, most of these branches should start contributing positively to earnings in FY15-16, in our view. The bank has brought down its cost-to-income ratio from 49% in FY13 to 45.6% in 9MFY14, which will boost its ROAs.

Capital raising: An upside risk If RBI proposes a D-SIB capital surcharge, we think that HDFC Bank may raise capital at end-FY15, which would be a key risk to our argument.

CIMB Analyst(s)




Share price info


Relative 5.4 7.2 5.1

Absolute 10.5 10.4 20.9


HDFC Limited 22.7

LIC of India 4.7

Europacific Growth Fund 2.8

HDFC Bank HDFCB IN / HDFCBK.BO Current Rs733.9



Rs1,759,279m Rs1,359m 2,379 m shares Up/Downside 7.4% Conviction| |


91.0

96.0

101.0

106.0

111.0

116.0

540

590

640

690

740

790


Source: Bloomberg

5

10

15

20


Vo

l m

Financial Summary






Net Profit (Rsm) 51,665 65,933 85,057 102,422 121,133

Core EPS (Rs) 22.11 27.90 35.57 42.41 49.66

Core EPS Growth 29.9% 26.2% 27.5% 19.2% 17.1%

FD Core P/E (x) 33.19 26.30 20.63 17.30 14.78

DPS (Rs) 4.30 5.50 6.50 7.50 9.00

Dividend Yield 0.59% 0.75% 0.89% 1.02% 1.23%

BVPS (Rs) 127.5 152.2 179.6 212.5 250.9

P/BV (x) 5.75 4.82 4.09 3.45 2.93

ROE 18.7% 19.9% 21.4% 21.6% 21.4%

% Change In Core EPS Estimates 0.000% (0.005%) 0.001%

CIMB/consensus EPS (x)

733.9

788.0

561.9 742.4

Target


Current



HDFC Bank

March 25, 2014

43

Profit & Loss













Exceptional Items

Pre-tax Profit 96,183 126,950 152,869 180,796

Taxation (30,249) (41,894) (50,447) (59,663)



Profit After Tax 65,933 85,057 102,422 121,133

Minority Interests



Net Profit 65,933 85,057 102,422 121,133


Balance Sheet













Total Assets 4,003,329 4,711,229 5,491,792 6,405,254


Bank Deposits







Minority Interests

Total Equity 362,141 431,625 515,891 615,009














Key Ratios






Cost Of Funds 6.42% 6.30% 6.19% 6.03%









Key Drivers


Loan Growth (%) 22.6% 20.1% 18.1% 18.1%




Net NPL Ratio (%) 0.2% 0.3% 0.2% 0.3%


GP Ratio (%) 0.4% 0.4% 0.4% 0.4%

Tier 1 Ratio (%) 11.1% 10.9% 10.9% 10.7%

Total CAR (%) 16.5% 15.8% 15.3% 14.8%

Deposit Growth (%) 20.1% 18.1% 16.5% 16.6%


Gross NPL Ratio (%) 1.0% 1.1% 1.2% 1.3%



0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


Rolling FD P/E (x)



March 25, 2014


To regain lost glory HDFC is poised to benefit from an expected fall in wholesale borrowing costs, which should boost its spreads in FY15-16. It is trading at the lower end of its long-term P/BV valuations, which looks attractive. HDFC is now our top pick among NBFCs.

In past two years, HDFC continued to increase the portion of its retail loans, despite rising cost of funds, for two reasons, in our view: benefits of the upward re-pricing of teaser-rate loans and the availability of free-float benefits following warrant conversion. We increase our EPS for FY15-16 as we factor in a 10bp margin expansion for FY15. We also lower cost of equity from 15% to 13% and upgrade the stock to Add from Hold, with a higher SOP-based target price. Catalysts are expected from rising spreads or increasing proportion of retail loans.

Borrowing costs to trend down; spreads to improve We think that a fall in the wholesale cost of borrowing will only lead to a moderate cut in the base lending rate by banks (a benchmark for mortgage loans), as the base rate is now a function of cost of funds, negative carry on CRR/SLR, overhead costs which cannot be allocated and average return on capital. Furthermore, banks may not aggressively cut their base rates due to headwinds from asset quality. Since the introduction of base rates, the correlation between these rates

and wholesale cost of borrowing has been low. This should put a floor on lending rates for mortgages, in our view, benefitting HDFC’s net interest margins as cost of wholesale funds heads lower in FY15-16.

Growth to stay steady, asset quality good Incrementally new home sales in Tier-1 and metropolitan cities are slowing. But on the other hand, demand in Tier-2 and -3 centres is spurring the demand for housing loans. For the industry, we believe that while the growth momentum may moderate from historical levels, it should remain healthy. At HDFC in the last two years, retail loans had increased from 65% of total loans in Dec 11 to 69% in Dec 13. Further, asset quality remains good with gross NPLs at 0.77% of loans as of Dec 13.

Upgrade to Add HDFC continues to provide the best long-term exposure to the Indian mortgage market, in our view. It now trades below its long term P/BV valuation. We upgrade to Add, as we expect tailwinds for margins to gather strength in FY15-16.

CIMB Analyst(s)




Share price info


Relative 0.2 2 -10.1

Absolute 5.3 5.2 5.7


Oppenheimer 4.0


Housing Development Fin. HDFC IN / HDFC.BO Current Rs843.3





83.0

87.3

91.6

95.9

100.1

104.4

108.7

113.0

620

670

720

770

820

870

920

970


Source: Bloomberg

5

10

15

20

25


Vo

l m

Financial Summary





Total Provision Charges (Rsm) (800) (1,450) (1,000) (1,300) (1,600)

Net Profit (Rsm) 36,376 44,103 50,053 61,735 72,702

Core EPS (Rs) 24.71 29.18 32.25 39.53 46.32

Core EPS Growth 15.8% 18.1% 10.5% 22.6% 17.2%

FD Core P/E (x) 34.12 28.90 26.15 21.33 18.21

DPS (Rs) 11.00 12.50 13.00 15.00 17.00

Dividend Yield 1.30% 1.48% 1.54% 1.78% 2.02%

BVPS (Rs) 128.8 161.7 179.6 203.2 231.4

P/BV (x) 6.55 5.22 4.69 4.15 3.64

ROE 20.0% 20.0% 18.9% 20.7% 21.3%



843.3

982.0

652.8 929.5

Target


Current



Housing Development Fin.

March 25, 2014

45

Profit & Loss













Exceptional Items

Pre-tax Profit 61,348 69,519 85,744 100,975

Taxation (17,245) (19,465) (24,008) (28,273)



Profit After Tax 44,103 50,053 61,735 72,702

Minority Interests



Net Profit 44,103 50,053 61,735 72,702


Balance Sheet













Total Assets 1,955,307 2,315,844 2,712,511 3,180,592


Bank Deposits 0 0 0 0

Interest Bearing Liabilities: Others 1,068,953 1,270,690 1,510,957 1,797,179






Minority Interests

Total Equity 250,000 279,823 318,088 364,055



Gross Loans/Cust Deposits 327% 318% 323% 327%

Avg Loans/Avg Deposits 351% 322% 321% 325%










Key Ratios






Cost Of Funds 9.62% 9.33% 9.08% 9.05%









Key Drivers


Loan Growth (%) 20.8% 19.6% 18.0% 18.0%




Net NPL Ratio (%) 0.4% 0.5% 0.5% 0.5%


GP Ratio (%) 0.0% 0.0% 0.0% 0.0%

Tier 1 Ratio (%) 14.2% 13.7% 13.4% 13.1%

Total CAR (%) 14.2% 13.7% 13.4% 13.1%

Deposit Growth (%) 43.1% 22.7% 16.3% 16.3%


Gross NPL Ratio (%) 0.7% 0.7% 0.7% 0.7%



0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


Rolling FD P/E (x)

Housing Development Fin. IDFC Limited

Mahindra & Mahindra Finance Shriram Transport Finance

Banks│India

March 25, 2014


Some gain, some pain The near-term concerns about ICICI Bank’s asset quality continue to overshadow the overall improvement in its interest-bearing liabilities mix. A marginal improvement in NIMs and growth in core fees should boost its operating profit. ICICI Bank remains well capitalised and its valuations appear attractive in comparison to its consolidated ROEs.

In our universe, ICICI Bank appears to be the most comfortable on the capital front despite the likely surcharge for D-SIBs. We expect its ROAs to remain strong and its consolidated ROEs to rise in the next 1-2 years. We maintain our FY14-16 EPS estimates. However, we cut our cost of equity assumption from 15% to 13%. Consequently, we maintain our Add rating, with a higher SOP-based target price of Rs1,445.

Asset quality concerns to persist In 9MFY14, ICICI Bank’s gross impairments were Rs35bn or c.126bp of loans on a one-year lag basis. In addition, the bank’s restructured loans were Rs39bn (1.2% of total loans). Its restructuring pipeline stood at Rs30bn (0.9% of loans) at end-Dec 2013. According to management, the impairments (gross delinquencies plus restructured loans) are likely to remain elevated in the near term due to the overall economic slowdown and stress in capital-intensive sectors. The key risk stems from the mid-sized corporate and SME segments. That said, retail

loans that comprise 35% of total loans at end-Dec 2013 should provide some cushion to overall asset quality.

Steady improvement in liability mix ICICI Bank has improved on its interest-bearing liabilities (IBL) mix in the past few years. The CASA proportion was 43% of the overall deposit mix at end-Dec 2013 and the proportion of retail term deposits was around 60%. This has lowered ICICI Bank’s reliance on wholesale deposits. We think that its NIMs will trend marginally higher in FY15-16 and its core fee income trajectory will be sustained.

Adequately capitalised At end-Dec 2013, ICICI Bank’s tier 1 ratio was 12.7% (including 9MFY14 profit), which is adequate (including the likely surcharge for D-SIBs). We expect ICICI Bank to achieve consolidated ROEs of around 15-16% in FY15-16, which will drive valuations. Excluding the value of its stakes in various non-banking businesses, the stock trades at 1.5x FY15 P/BV.

CIMB Analyst(s)




Share price info


Relative 11.9 7.1 0.1

Absolute 17 10.3 15.9


LIC of India 9.7

Dodge & Cox 2.7


ICICI Bank ICICIBC IN / ICBK.BO Current Rs1,200





76.0

82.7

89.3

96.0

102.7

109.3

116.0

730

830

930

1,030

1,130

1,230

1,330


Source: Bloomberg

5

10

15

20


Vo

l m

Financial Summary






Net Profit (Rsm) 64,653 83,255 96,955 103,583 116,937

Core EPS (Rs) 56.1 72.2 83.9 89.5 100.7

Core EPS Growth 23.4% 28.7% 16.3% 6.6% 12.6%

FD Core P/E (x) 21.38 16.62 14.29 13.41 11.91

DPS (Rs) 16.50 20.00 21.00 22.00 23.00

Dividend Yield 1.38% 1.67% 1.75% 1.83% 1.92%

BVPS (Rs) 524.0 578.2 639.6 705.4 781.2

P/BV (x) 2.29 2.07 1.88 1.70 1.54

ROE 11.2% 13.1% 13.8% 13.3% 13.6%



1,200

1,445

783.6 1,232

Target


Current



ICICI Bank

March 25, 2014

47

Profit & Loss













Exceptional Items

Pre-tax Profit 113,967 137,179 147,975 167,052

Taxation (30,712) (40,224) (44,393) (50,116)



Profit After Tax 83,255 96,955 103,583 116,937

Minority Interests



Net Profit 83,255 96,955 103,583 116,937


Balance Sheet













Total Assets 5,367,947 6,006,808 6,818,330 7,746,331


Bank Deposits







Minority Interests

Total Equity 667,015 739,711 817,816 908,048



Gross Loans/Cust Deposits 102% 103% 103% 103%

Avg Loans/Avg Deposits 102% 102% 103% 103%










Key Ratios






Cost Of Funds 6.29% 6.02% 5.80% 5.62%









Key Drivers


Loan Growth (%) 13.9% 15.6% 15.9% 16.0%




Net NPL Ratio (%) 0.7% 1.0% 0.9% 0.7%


GP Ratio (%) 0.6% 0.6% 0.5% 0.5%

Tier 1 Ratio (%) 12.8% 12.7% 12.2% 11.8%

Total CAR (%) 13.6% 13.6% 13.2% 12.9%

Deposit Growth (%) 14.5% 14.1% 16.2% 16.1%


Gross NPL Ratio (%) 3.2% 3.2% 3.0% 2.8%



0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


Rolling FD P/E (x)



March 25, 2014


At the crossroads IDFC has showcased its strong execution capabilities by delivering stable spreads and relatively superior asset quality. Nonetheless, the moderation in its loan growth remains a concern. IDFC is a frontrunner for a banking license and that will come with its own set of challenges.

We revise our FY15-16 EPS estimates by 2% to factor in lower cost of funds over FY15-16. We believe IDFC's current valuations are fair – considering that it is a front runner for banking licence which will put pressure on medium term return ratios. We downgrade our rating to Hold from Add, with a revised discounted economic profit based target price of Rs117.

Margins may see an uptick, but growth constrained We expect the wholesale borrowing costs to decline in FY15-16. In general, a fall in wholesale rates augurs well for wholesale-funded entities like IDFC, and should boost NIMs and open up refinancing opportunities for IDFC in the sector. However, given the slowdown in project investments, the growth opportunities are limited. Furthermore, there are challenges on the asset quality front. But IDFC's loan loss reserve of around 2% of total loans as at end-Dec 2013 provides a buffer to absorb asset quality shocks.

Key contender for banking licence

IDFC is a frontrunner for a banking licence. We think that the statutory requirements and execution costs related to the conversion into a bank would have a negative impact on IDFC’s return ratios in the medium term. In the event IDFC converts into a bank, we expect its medium-term ROA to contract to 1.1-1.2% from around 2.8% currently. This would be caused by complying with the requirements for cash reserve ratio (~30bp of ROA), statutory liquidity ratio (~30bp of ROA) and priority sector loans (~80-100bp of ROA). Furthermore, the upfront cost of investments in the branch network will also put pressure on ROAs. In our view, following a conversion into a bank, the key challenge will be scaling up the low-cost retail deposit/asset franchise.

Valuation and outlook We like IDFC for its superior execution capability but see its current valuation as fair, given the medium-term trend of ROAs post conversion into a bank.

CIMB Analyst(s)




Share price info


Relative 9.7 0.9 -35.8

Absolute 14.8 4.1 -20


President of India 17.2

Sipadan Investments (Mauritius) 10.0

First State Investments 5.5

IDFC Limited IDFC IN / IDFC.BO Current Rs109.2



Rs165,571m Rs821.2m 1,515 m shares Up/Downside 7.1% Conviction| |


48.0

62.0

76.0

90.0

104.0

118.0

70

90

110

130

150

170


Source: Bloomberg

20

40

60

80


Vo

l m

Financial Summary






Net Profit (Rsm) 14,595 18,362 19,908 21,910 24,895

Core EPS (Rs) 10.57 12.35 13.15 14.46 16.41

Core EPS Growth 25.8% 16.8% 6.5% 9.9% 13.5%

FD Core P/E (x) 10.33 8.84 8.30 7.55 6.65

DPS (Rs) 2.38 2.75 3.00 3.25 3.50

Dividend Yield 2.18% 2.52% 2.75% 2.98% 3.21%

BVPS (Rs) 77.5 84.1 94.2 105.3 118.1

P/BV (x) 1.41 1.30 1.16 1.04 0.92

ROE 14.2% 15.3% 14.8% 14.5% 14.7%



109.2

117.0

79.10 163.9

Target


Current



IDFC Limited

March 25, 2014

49

Profit & Loss













Exceptional Items

Pre-tax Profit 25,954 28,440 31,301 35,565

Taxation (7,511) (8,532) (9,390) (10,669)



Profit After Tax 18,443 19,908 21,910 24,895

Minority Interests (81) 0 0 0



Net Profit 18,362 19,908 21,910 24,895


Balance Sheet













Total Assets 701,022 726,210 804,797 923,089


Bank Deposits 121,057 98,404 101,107 109,834







Minority Interests 254 254 254 254

Total Equity 127,509 142,884 159,877 179,470














Key Ratios






Cost Of Funds 9.29% 9.30% 9.54% 9.67%









Key Drivers


Loan Growth (%) 15.8% 1.4% 10.3% 15.2%


Non Interest Income Growth (%) 3.6% -8.5% 10.4% 10.9%


Net NPL Ratio (%) -0.2% 0.6% 1.0% 1.4%


GP Ratio (%) 0.3% 0.3% 0.3% 0.3%

Tier 1 Ratio (%) 18.7% 20.5% 20.8% 20.4%

Total CAR (%) 18.7% 20.5% 20.8% 20.4%



Gross NPL Ratio (%) 0.2% 1.0% 1.5% 1.9%



0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


Rolling FD P/E (x)

Housing Development Fin. IDFC Limited


Banks│India

March 25, 2014


Well placed with fair valuations We believe IIB will be a beneficiary of falling wholesale borrowing rates, given its sizable fixed-rate book and wholesale funding. However, in the backdrop of macro slowdown, we expect IIB’s loan growth to remain muted. Also, its balance sheet concentration risks remain a concern.

We raise our FY15-16 EPS estimates by 2-4% as we up our NIM forecasts. Our discounted economic profit based target price goes up to Rs528 following the increase in our EPS forecasts and as we lower our cost of equity assumption from 15% to 13%. We upgrade the stock to Hold from Reduce.

Margin tailwinds; but growth to remain slow IIB has a high dependence on wholesale deposits (about 50% of its term deposits) and a large fixed-rate loan book (about 50% of loans). As at end-Mar 13, 65% of its interest-bearing liability mix had a maturity of less than one year compared to just 45% of the interest-bearing assets. Such asset-liability composition in our view is positive, given our expectation of a fall in wholesale borrowing rates in FY15. We increase our NIM estimate from 3.6% to 3.65% for FY15-16. However, given the macro slowdown, we anticipate the bank’s loan growth to slow to sub-20% levels in FY15-16 (vs. average growth of ~30% over FY10-13). Note that automobile sales

have weakened this year despite the low base in FY13. IIB’s auto finance book is about 42% of its total loans and increased by 9% yoy as at end-Dec 13.

A well-capitalised entity IIB had a tier-1 capital adequacy ratio of 13.3% as at end-3QFY14 which, in our view, is comfortable for strong organic business growth over the next two to three years. With a very comfortable capital adequacy ratio, the internal rate of capital generation (ROEs less dividend) of about 16-17% should enable it to increase its loan book faster than the industry, in our view.

Balance sheet concentration risks remain IIB’s exposure to the top-20 depositors/borrowers remains higher than its peers. Incrementally, the bank’s risk profile is changing with rising exposure to LAP (4% of loans as at end-Dec 13, +96% yoy) and second-hand vehicle financing (5% of total loans).

CIMB Analyst(s)




Share price info


Relative 15.2 7.8 0.2

Absolute 20.3 11 16


Indusind Intl. Holdings 11.5

Indusind Ltd. 3.7

Ga Global Investments Ltd 4.9

Indusind Bank IIB IN / INBK.BO Current Rs471.5





79.0

89.0

99.0

109.0

119.0

129.0

310

360

410

460

510

560


Source: Bloomberg

5

10

15


Vo

l m

Financial Summary






Net Profit (Rsm) 8,026 10,614 13,791 16,954 20,634

Core EPS (Rs) 17.19 21.43 26.24 31.94 38.49

Core EPS Growth 30.5% 24.6% 22.5% 21.7% 20.5%

FD Core P/E (x) 27.42 22.00 17.96 14.76 12.25

DPS (Rs) 2.20 3.00 3.50 4.00 4.50

Dividend Yield 0.47% 0.64% 0.74% 0.85% 0.95%

BVPS (Rs) 96.7 141.9 163.2 189.4 221.5

P/BV (x) 4.88 3.32 2.89 2.49 2.13

ROE 19.2% 17.8% 17.2% 18.1% 18.7%



471.5

506.0

337.3 529.4

Target


Current



Indusind Bank

March 25, 2014

51

Profit & Loss













Exceptional Items

Pre-tax Profit 15,764 20,583 25,305 30,797

Taxation (5,150) (6,792) (8,351) (10,163)



Profit After Tax 10,614 13,791 16,954 20,634

Minority Interests



Net Profit 10,614 13,791 16,954 20,634


Balance Sheet





Total Gross Int. Earning Assets 642,953 768,867 929,251 1,129,248


Total Net Interest Earning Assets 639,743 763,556 921,500 1,118,858






Total Assets 730,943 869,083 1,046,475 1,266,898


Bank Deposits


Total Interest-Bearing Liabilities 635,767 749,681 903,404 1,104,689



Total Liabilities 656,767 782,913 945,431 1,147,591


Minority Interests

Total Equity 74,176 86,170 101,044 119,306














Key Ratios






Cost Of Funds 8.29% 7.87% 7.72% 7.68%









Key Drivers


Loan Growth (%) 26.4% 22.3% 20.3% 20.2%




Net NPL Ratio (%) -0.1% -0.5% -0.9% -1.3%


GP Ratio (%) 0.4% 0.4% 0.4% 0.4%

Tier 1 Ratio (%) 13.8% 13.3% 13.0% 12.8%

Total CAR (%) 15.9% 15.0% 15.4% 15.2%

Deposit Growth (%) 27.7% 10.3% 27.8% 28.5%


Gross NPL Ratio (%) 1.0% 1.3% 1.6% 1.7%



0.0

5.0

10.0

15.0

20.0

25.0

30.0


Rolling FD P/E (x)

Indusind Bank ING Vysya Bank Yes Bank

Banks│India

March 25, 2014


Better slow than sorry Although its slow savings-deposit traction and improvements in operating leverage are concerns, healthy capital ratios, stable asset quality, high loan-loss provision coverage and well-managed ALM are key positives for the bank.

We raise our FY15-16 EPS by 7%/6% as we build in NIM expansion. We raise our discounted economic profit based target price on the back of our EPS upgrades and cut in cost of equity from 15% to 13%. We maintain our Add rating.

Sound operating metrics The bank’s turnaround has played out well, as reflected in its improved NIMs (from 2.84% in FY09 to 3.5% in FY13; 3.44% in 9MFY14), CASA (from 27% in FY09 to 32.5% in FY13), cost- income ratio (from 65% in FY09 to 56.2% in FY13) and ROAs (from 0.7% in FY09 to 1.26% in FY13). ING follows a policy of conservative loan restructuring, upfront recognition of stress and higher provisioning, which we view positively. As at end-9MFY14, GNPLs stood at 1.7% of loans (FY10: 2.9%), net NPLs at 0.2% (FY10: 1.2%) and restructured loans at 1.6% (FY10: 1.5%) – all lower than peer averages. High provision coverage (c.87%) provides a buffer against a deterioration in asset quality. Its larger share of SME loans (37% of total loans as at Dec 13, of which c.75% were working-capital loans) should ensure better control of

pricing and asset quality. ING raised equity of about Rs18.4bn in 2QFY14, which lifted its Tier-1 ratio to about 14.5% as at Dec 13. We think that this will be enough to support its loan growth in the next 2-3 years.

Expect NIM improvements ING Vysya has a modest liability mix, with wholesale deposits at about 35% of total deposits and core CASA at about 32.7% (industry: 33% in FY13). Consequently, its NIMs are strongly leveraged to the interest-rate cycle. We expect margin expansion going forward, led partly by free-float benefits on its recent capital-raising and partly by lower wholesale funding costs.

…though ROEs to remain under pressure We believe that ING’s FY14-15 loan growth will remain in line with industry levels (vs. above-average growth in FY12-13). We expect ROAs to gradually rise from 1.2% in FY14. However, post its capital-raising, the leverage should fall to 9-10x, capping its near-term ROEs in the range of 11-12%.

CIMB Analyst(s)




Share price info


Relative -2.2 -3.8 -13.2

Absolute 2.9 -0.6 2.6


ING Mauritius Holding 33.6

ING Mauritius Investments 9.6

Aberdeen Global Indian Equity Mauritius Ltd 3.9

ING Vysya Bank VYSB IN / VYSA.BO Current Rs556.0





74.0

82.3

90.7

99.0

107.3

115.7

124.0

380

430

480

530

580

630

680


Source: Bloomberg

1

1

2

2


Vo

l m

Financial Summary





Total Provision Charges (Rsm) (1,140) (912) (1,600) (2,215) (2,598)

Net Profit (Rsm) 4,563 6,128 6,868 8,128 9,591

Core EPS (Rs) 33.66 40.18 40.07 43.03 50.27

Core EPS Growth 27.3% 19.4% (0.3%) 7.4% 16.8%

FD Core P/E (x) 16.52 13.84 13.87 12.92 11.06

DPS (Rs) 4.00 5.50 5.00 6.00 7.00

Dividend Yield 0.72% 0.99% 0.90% 1.08% 1.26%

BVPS (Rs) 258.1 292.1 370.0 403.3 442.4

P/BV (x) 2.15 1.90 1.50 1.38 1.26

ROE 14.3% 14.6% 12.0% 11.1% 11.9%



556.0

677.0

410.3 660.3

Target


Current



ING Vysya Bank

March 25, 2014

53

Profit & Loss







Total Provision Charges (912) (1,600) (2,215) (2,598)






Exceptional Items

Pre-tax Profit 9,014 10,100 11,953 14,105

Taxation (2,887) (3,232) (3,825) (4,514)



Profit After Tax 6,128 6,868 8,128 9,591

Minority Interests



Net Profit 6,128 6,868 8,128 9,591


Balance Sheet






Total Provisions/Loan Loss Reserve (525) (746) (811) (1,061)







Total Assets 547,337 620,431 709,873 813,095


Bank Deposits







Minority Interests

Total Equity 45,231 69,551 76,558 84,826














Key Ratios






Cost Of Funds 7.49% 7.01% 6.95% 6.93%









Key Drivers


Loan Growth (%) 10.6% 13.0% 15.0% 15.0%




Net NPL Ratio (%) 0.2% 0.0% -0.1% -0.3%


GP Ratio (%) 0.5% 0.5% 0.5% 0.4%

Tier 1 Ratio (%) 10.5% 14.2% 13.5% 12.8%

Total CAR (%) 13.8% 17.7% 17.3% 17.1%

Deposit Growth (%) 17.4% 9.3% 16.1% 16.3%


Gross NPL Ratio (%) 0.4% 0.4% 0.4% 0.4%



0.0

5.0

10.0

15.0

20.0

25.0

30.0


Rolling FD P/E (x)


Banks│India

March 25, 2014


High-quality franchise with reasonable valuations We like J&K Bank for its well-funded and well-capitalised balance sheet, stable asset quality and high profitability. Given its dominant presence in Jammu and Kashmir (J&K), the bank is set to benefit from the improving economic conditions in the state.

J&K Bank has delivered a healthy 9MFY14 performance for most of its operating metrics but its asset quality outside the state of J&K remains a concern. We maintain our FY14-16 EPS estimates. However, we raise our GGM based target price to Rs1,770, implying 1.3x P/BV, as we cut our cost of equity assumption from 15% to 13% .

More opportunities in J&K J&K Bank earns a high NIM of (c.6.5% at end-3QFY14, blended NIM of c.3.97%), thanks to its low-ticket loans in the state of J&K. Almost 80% of its loans in the state comprised high-yield segments such as SME loans, personal loans (largely to government employees) and trade finance. Furthermore, its strong liability franchise in the state supports a high CASA ratio (39% at end-3QFY14). Of late, GDP growth in the state of J&K has inched closer to the national average, led by the improving tourist arrivals and rising infrastructure investments. In our view, a sustained GDP growth trend presents opportunities for J&K Bank

to engage in more-profitable lending within the state of J&K in the long term.

Operating metrics best in sector Building on its strength in the state of J&K, the bank’s ROAs have consistently improved from 1.1% in FY08 to 1.6% in FY13, mainly led by an 87bp NIM expansion. At end-3QFY14, its tier 1 ratio stood at a comfortable 11.4%. Its headline asset quality numbers were better than its public sector peers, with gross NPL ratio of 1.6%, net NPL ratio of 0.2% and 87% provision cover (90% including technical write-offs). However, the increasing loan restructuring outside the state of J&K remains a concern (standard restructured loans comprised 3% of loans at end-3QFY14).

Undemanding valuations The stock trades at 1.1x FY15 P/BV, with 1.5% ROA and 20% average ROE over FY14-15. We maintain our Add rating.

CIMB Analyst(s)




Share price info


Relative 8.1 2.8 6.1

Absolute 13.2 6 21.9


Govt. of J&K 53.2

Aberdeen Investment Services 3.5

Wellington 2.8

J&K Bank JKBK IN / JKBK.BO Current Rs1,510





78.0

83.0

88.0

93.0

98.0

103.0

108.0

113.0

960

1,060

1,160

1,260

1,360

1,460

1,560

1,660


Source: Bloomberg

100

200

300

400

500


Vo

l th

Financial Summary






Net Profit (Rsm) 8,034 10,551 12,085 11,672 13,371

Core EPS (Rs) 165.7 217.6 249.2 240.7 275.7

Core EPS Growth 30.5% 31.3% 14.5% (3.4%) 14.6%

FD Core P/E (x) 9.11 6.94 6.06 6.27 5.48

DPS (Rs) 33.50 50.00 50.00 50.00 55.00

Dividend Yield 2.22% 3.31% 3.31% 3.31% 3.64%

BVPS (Rs) 844 1,003 1,202 1,393 1,614

P/BV (x) 1.79 1.51 1.26 1.08 0.94

ROE 21.2% 23.6% 22.6% 18.5% 18.3%

% Change In Core EPS Estimates 0.000% (0.029%) 0.012%


1,510

1,770

1,014 1,543

Target


Current



J&K Bank

March 25, 2014

55

Profit & Loss













Exceptional Items

Pre-tax Profit 15,266 17,265 17,421 19,957

Taxation (4,715) (5,179) (5,749) (6,586)



Profit After Tax 10,551 12,085 11,672 13,371

Minority Interests



Net Profit 10,551 12,085 11,672 13,371


Balance Sheet













Total Assets 717,433 780,363 900,873 1,040,519


Bank Deposits







Minority Interests

Total Equity 48,647 58,307 67,555 78,259














Key Ratios






Cost Of Funds 6.37% 6.12% 6.23% 6.10%









Key Drivers


Loan Growth (%) 18.6% 10.2% 16.0% 16.1%




Net NPL Ratio (%) 0.8% 0.8% 0.8% 0.7%


GP Ratio (%) 0.5% 0.5% 0.5% 0.5%

Tier 1 Ratio (%) 10.9% 11.9% 11.9% 11.9%

Total CAR (%) 10.9% 11.9% 11.9% 11.9%

Deposit Growth (%) 20.4% 7.3% 15.8% 15.7%


Gross NPL Ratio (%) 1.6% 1.8% 1.9% 2.0%

Fee Income Growth (%) 11.8% -15.0% 12.5% 12.5%


0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00


Rolling FD P/E (x)

Federal Bank ING Vysya Bank J&K Bank


March 25, 2014


Hold your horses Weakening auto sales and increasing delinquencies can blunt MMFS' strong earnings growth. As at Dec 13, its absolute gross NPLs have almost doubled from Mar 13's figure while loan losses have increased to 1.9% vs. 1.4% in FY13. Despite the expected fall in wholesale borrowing costs, we remain cautious due to its valuations.

In 9MFY14, MMFS witnessed a sharp moderation in its asset growth and a steep spike in gross NPLs. In our view, moderating auto sales will result in weaker asset growth in the medium term. We increase our FY15-16 EPS estimates by an average 2% to factor in the lower borrowing costs and lower our cost of equity assumption from 15% to 13%. Maintain Reduce, with a revised discounted economic profit based target price of Rs236.

Moderating auto sales to put pressure on growth MMFS has been riding high on the buoyancy of the rural markets. While the favourable monsoon conditions have led to strong tractor sales, they were partly offset by weak domestic auto sales. So far in FY14 (Apr-Feb), the growth in tractor sales has been in excess of 20% yoy, cars sales have fallen 6% yoy, UV sales dipped 5% yoy while M&HCV and LCV sales slipped 26% and 19% yoy, respectively. Consequently, 9MFY14 growth in value of assets financed fell to 14% vs. a 39% CAGR during the FY10-13 period. As per anecdotal

evidence, auto sales failed to pick up despite the cut in excise duty. We believe the asset growth is likely to further moderate as the demand is likely to remain weak in the near term. As at end Dec 13, cars constituted 34% of total AUMs, followed by UVs 27% , tractors c.20%, commercial vehicles and construction equipment 11% and used vehicles of ~9%.

Asset quality stress likely to persist During 9MFY14, MMFS witnessed a sharp 99% increase in gross NPLs, much higher than its seasonal trend. Loan loss provisions increased to 1.9% (annualised) vs. 1.4% in FY13. In our view, its asset quality is likely to remain under pressure as economic activities have slowed down markedly.

Valuations above long-period averages MMFS trades at +1 SD on a long term PBV basis. We believe that the stock is priced to perfection, leaving limited room for any disappointment.

CIMB Analyst(s)




Share price info


Relative -6.2 -22.4 20.7

Absolute -1.1 -19.2 36.5


Mahindra & Mahindra 52.2

Cartica Capital 5.1

Wasatch - EM Small Cap Fund 1.6

Mahindra & Mahindra Finance MMFS IN / MMFS.NS Current Rs254.4



Rs144,665m Rs486.0m 563.0 m shares Up/Downside -7.2% Conviction| |


93

115

137

160

170

220

270

320


Source: Bloomberg

5

10

15

20


Vo

l m

Financial Summary






Net Profit (Rsm) 6,201 8,827 8,694 10,786 13,192

Core EPS (Rs) 12.09 16.40 15.44 19.16 23.43

Core EPS Growth 29.5% 35.6% (5.8%) 24.1% 22.3%

FD Core P/E (x) 21.03 15.51 16.47 13.28 10.86

DPS (Rs) 2.80 3.60 3.60 4.40 5.50

Dividend Yield 1.10% 1.42% 1.42% 1.73% 2.16%

BVPS (Rs) 57.5 79.1 90.3 104.4 121.4

P/BV (x) 4.43 3.21 2.82 2.44 2.10

ROE 22.8% 23.8% 18.2% 19.7% 20.8%



254.4

236.0

194.8 326.9

Target


Current



Mahindra & Mahindra Finance

March 25, 2014

57

Profit & Loss













Exceptional Items

Pre-tax Profit 12,792 13,173 16,342 19,988

Taxation (3,965) (4,479) (5,556) (6,796)



Profit After Tax 8,827 8,694 10,786 13,192

Minority Interests



Net Profit 8,827 8,694 10,786 13,192


Balance Sheet













Total Assets 254,924 314,307 370,412 439,968


Bank Deposits 106,204 133,779 157,928 188,061







Minority Interests

Total Equity 44,546 50,868 58,756 68,324














Key Ratios






Cost Of Funds 9.86% 9.91% 9.31% 8.91%









Key Drivers


Loan Growth (%) 37.4% 24.3% 18.1% 19.1%




Net NPL Ratio (%) 1.3% 2.2% 2.3% 2.3%


GP Ratio (%) 0.2% 0.3% 0.3% 0.3%

Tier 1 Ratio (%) 17.0% 15.7% 15.5% 15.3%

Total CAR (%) 19.5% 17.5% 17.0% 16.5%



Gross NPL Ratio (%) 3.2% 4.4% 4.6% 4.7%

Fee Income Growth (%) 21.8% -2.1% 10.1% 13.0%


0.0

5.0

10.0

15.0

20.0

25.0


Rolling FD P/E (x)


Banks│India

March 25, 2014


Not good enough We believe that OBC will be a beneficiary of the falling wholesale borrowing rates, given its weak liabilities profile. However, its modest operating profit and weak asset quality are likely to keep its earnings under pressure in the medium term.

We raise our FY15 EPS forecast by 8% as we raise our net interest income estimate. Our GGM based target price is revised up to Rs202, implying 0.7x FY15 book value (adjusted for NPL and restructured loans), on back of our EPS upgrade and cut in cost of equity from 15% to 13%. However, we maintain our Hold rating due to OBC’s weak profitability.

Rate cycle play, comfortable tier I ratio At end-3QFY14, OBC’s CASA ratio stood low at 24.2% compared with the 33% industry average at end-FY13. Given its low CASA ratio, we believe that the bank’s NIM will benefit from the falling wholesale borrowing rates. We note that since the bank has reduced its dependence on the differential rate of interest deposits from 34% at end-FY11 to 16% at end-3QFY14, the benefit from the falling rates will not be as significant as that in the previous cycle. Unlike the other small public sector banks (PSBs), OBC is not capital constrained, which is a positive. Its tier I ratio (Basel III) stood at 8.6% at end-Dec 2013.

Weak asset quality is a concern OBC’s stressed loans (gross NPLs + restructured loans) comprised around 11% of total loans at end-3QFY14. Excluding the loans to the state electricity board and state-owned aviation, its stressed loans comprised 8.6% of total loans at end-3QFY14. At end-Dec 2013, OBC had a restructuring pipeline of Rs11bn (0.8% of loans). OBC’s provision cover fell by 4% yoy to 26% at end-Dec 2013 (60% including technical write off). Furthermore, its recent NPL formation rate (c.3% of lagged loans in 9MFY14) was alarming, given its modest operating profit (PPOP-to- asset ratio of c1.9% in FY13) that leaves limited room for absorption of higher loan losses.

Outlook We expect OBC’s margins to improve slightly due to the falling wholesale borrowing rates but its profitability is likely to remain subdued, given its weak operating profit and high loan loss charges. We estimate ROA of 0.56% and ROE of ~10% in FY14-16.

CIMB Analyst(s)




Share price info


Relative 12.5 -16 -35.3

Absolute 17.6 -12.8 -19.5


GOI 59.1

LIC 8.2

HDFC Std 1.3

Oriental Bank of Commerce OBC IN / ORBC.BO Current Rs191.9


US$944.5m US$5.03m 40.9% Prev. Target Rs176.0



44

64

84

104

124

100

150

200

250

300


Source: Bloomberg

5

10

15


Vo

l m

Financial Summary






Net Profit (Rsm) 11,416 13,280 10,476 13,492 16,182

Core EPS (Rs) 39.13 45.52 35.42 45.00 53.97

Core EPS Growth (29.4%) 16.3% (22.2%) 27.0% 19.9%

FD Core P/E (x) 4.90 4.22 5.42 4.26 3.56

DPS (Rs) 7.90 9.20 8.00 10.00 12.00

Dividend Yield 4.12% 4.79% 4.17% 5.21% 6.25%

BVPS (Rs) 379.9 414.7 435.4 470.4 512.4

P/BV (x) 0.51 0.46 0.44 0.41 0.37

ROE 10.7% 11.5% 8.3% 9.9% 11.0%



191.9

202.0

124.7 284.6

Target


Current



Oriental Bank of Commerce

March 25, 2014

59

Profit & Loss













Exceptional Items

Pre-tax Profit 15,361 14,351 19,274 23,117

Taxation (2,081) (3,875) (5,782) (6,935)



Profit After Tax 13,280 10,476 13,492 16,182

Minority Interests



Net Profit 13,280 10,476 13,492 16,182


Balance Sheet













Total Assets 2,000,206 2,206,862 2,504,535 2,842,689


Bank Deposits







Minority Interests

Total Equity 120,989 130,567 141,060 153,644














Key Ratios



Operating Profit Growth 14.3% (3.1%) 8.1% 13.2%



Cost Of Funds 7.54% 7.25% 7.22% 7.15%









Key Drivers


Loan Growth (%) 15.2% 10.0% 14.2% 14.1%




Net NPL Ratio (%) 2.8% 3.4% 3.4% 3.1%


GP Ratio (%) 0.5% 0.5% 0.5% 0.5%

Tier 1 Ratio (%) 9.2% 9.1% 8.6% 8.2%

Total CAR (%) 12.2% 11.8% 11.0% 10.3%

Deposit Growth (%) 12.8% 10.5% 14.5% 14.4%


Gross NPL Ratio (%) 3.2% 3.9% 4.1% 4.0%



0.0

2.0

4.0

6.0

8.0

10.0

12.0


Rolling FD P/E (x)

Canara Bank Indian Bank

Oriental Bank of Commerce Union Bank of India

Banks│India

March 25, 2014


Doing well, but not good enough PNB's 3QFY14 results were a positive surprise in terms of asset quality deterioration and NIMs. Relatively moderate loan growth and increasing proportion of low-cost deposits were the key positives. That said, its stock of gross NPLs and restructured loans is still the highest among peer banks.

We largely maintain our FY15-16 EPS estimates. However, we raise our GGM based target price to Rs657, as we cut our cost of equity from 15% to 13%. We maintain our Hold rating on the stock.

Business consolidation led to liability improvements In the past year, PNB had focused on business consolidation. This resulted in two key benefits: 1) slow loan growth (+9.7% yoy, +5.6% YTD in Dec 13), which in the current environment means that underlying asset quality trends will likely improve over the long term, and 2) a sharp improvement in its low-cost deposit ratio (CASA at 38.3% at end-Dec 2013 from 35.3% at end-Mar 2012). Furthermore, its proportion of wholesale deposits was a mere 5.1% at end-Dec 2013 (15% at end-Dec 2012). In our view, the above factors should enable PNB to report better- than-peers NIMs.

Moderation in incremental gross impairments

On a stock basis, PNB’s asset quality continues to be inferior to its peers. That said, the percentage comparison is partially distorted as PNB’s loan book expanded at a slower rate than its peers (+6% yoy in Mar 13, +10% yoy in Dec 13). At end-Dec 2013, PNB’s gross NPLs were 4.8% of total loans and net NPLs were 2.8%. Its standard restructured loans stood at 9.6% of total loans (7.4% of loans ex-SEB and state owned aviation exposure) at end-Dec 2013, which is the highest among peers. However, incrementally, the pace of fresh gross impairments appears to be moderating, which is a silver lining.

Well capitalised to fund growth At end-Dec 2013, PNB’s Tier-I capital was 9.2% (Basel III; including 9MFY14 profits) and its internal capital generation rate is expected to be around 12-13% in FY14-15. Thus, a loan growth target of c.15-16% in FY14 appears reasonable, given the estimated ROAs of more than 90bp over FY15-16.

CIMB Analyst(s)




Share price info


Relative 14.9 4.8 -26.4

Absolute 20 8 -10.6



LIC of India 12.9

Lazard Asset 4.1

Punjab National Bank PNB IN / PNBK.BO Current Rs642.1





48.0

62.0

76.0

90.0

104.0

118.0

360

460

560

660

760

860


Source: Bloomberg

2

4

6

8


Vo

l m

Financial Summary






Net Profit (Rsm) 48,842 47,477 35,459 53,612 59,482

Core EPS (Rs) 148.9 137.2 99.2 148.2 164.5

Core EPS Growth 6.2% (7.9%) (27.7%) 49.4% 10.9%

FD Core P/E (x) 4.31 4.68 6.47 4.33 3.90

DPS (Rs) 22.00 27.00 27.00 28.00 29.00

Dividend Yield 3.43% 4.21% 4.21% 4.36% 4.52%

BVPS (Rs) 777 885 949 1,069 1,205

P/BV (x) 0.83 0.73 0.68 0.60 0.53

ROE 21.1% 16.5% 10.8% 14.7% 14.5%



642.1

657.0

409.5 835.5

Target


Current



Punjab National Bank

March 25, 2014

61

Profit & Loss













Exceptional Items

Pre-tax Profit 65,218 50,656 76,589 84,975

Taxation (17,741) (15,197) (22,977) (25,492)



Profit After Tax 47,477 35,459 53,612 59,482

Minority Interests



Net Profit 47,477 35,459 53,612 59,482


Balance Sheet













Total Assets 4,774,472 5,379,906 6,051,936 6,810,617


Bank Deposits







Minority Interests

Total Equity 312,476 343,188 386,674 435,668














Key Ratios




Pretax Profit Growth (7.3%) (22.3%) 51.2% 10.9%


Cost Of Funds 6.38% 5.88% 5.89% 5.97%









Key Drivers


Loan Growth (%) 5.7% 14.4% 14.2% 14.0%




Net NPL Ratio (%) 2.3% 2.5% 2.3% 2.1%


GP Ratio (%) 0.6% 0.9% 0.9% 0.9%

Tier 1 Ratio (%) 9.8% 8.9% 8.7% 8.6%

Total CAR (%) 9.8% 8.9% 8.7% 8.6%

Deposit Growth (%) 3.2% 12.9% 12.7% 12.8%


Gross NPL Ratio (%) 4.3% 4.8% 4.7% 4.6%



0.0

5.0

10.0

15.0

20.0

25.0


Rolling FD P/E (x)




March 25, 2014


Wait for the tide to turn Shriram’s (STF) net interest margins appear to have troughed. The likely drop in wholesale borrowing costs augurs well for its margins. However, a pick-up in loan growth and improvement in asset quality are more crucial for improvement in STF’s return ratios and thereby re-rating of the stock.

We increase our FY15-16 EPS by 1%-6% to factor in the expected uptick in net interest margins and revise our discounted economic profit-based target price to Rs632 as we lower our cost of equity assumptions from 15% to 13%. During FY11-14, there has been sharp valuation de-rating for STF as its return ratios eroded significantly due to regulatory changes, slower growth and higher loan losses. We maintain our Reduce rating as uncertainty towards growth and asset quality could prolong the valuation re-rating.

Growth/margin trade-off India’s auto sales growth continues to moderate in FY14. Despite a low base of FY13, the commercial vehicle (CV) sales continues to trend down in 9MFY14. YTD, the domestic medium and heavy commercial vehicle (M&HCV) sales and light commercial vehicle (LCV) sales fell 23% and 18% yoy respectively. After a positive surprise in 1HFY3/14, STF’s assets under management contracted qoq in 3QFY14. As at Dec-13, CVs’ constituted 70% of STF’s AUM and passenger vehicles 22%. As recovery

in the CV cycle still appears distant, management expects higher incremental growth from the passenger vehicles segment, which earns lower yields. In our view, STF’s NIMs are unlikely to improve substantially as this will offset the benefits of lower cost of funds.

Asset quality risks persist STF’s asset quality risk remains high, given the continued economic slowdown. Its annualised loan loss charge stood at 2.1% at end-9MFY14 (vs. 1.8% at end-FY13). We expect STF’s loan losses (including write-offs) to remain elevated in the medium term. That said, STF’s provision coverage was 80% at end-Dec 2013, which is better than peers.

Valuation and outlook We think that STF’s margins may have troughed but muted economic growth will put pressure on its loan growth and asset quality. We would wait for positive catalysts (a rebound in GDP growth, CV demand), which are critical for improvement in return ratios and thereby re-rating of the stock.

CIMB Analyst(s)




Share price info


Relative 8.3 -2.1 -20

Absolute 13.4 1.1 -4.2


Shriram Capital 25.9

Piramal Enterprises 10.0

Genesis Indian Inv. Co. 6.1

Shriram Transport Finance SHTF IN / SRTR.NS Current Rs667.2



Rs151,365m Rs250.1m 226.9 m shares Up/Downside -5.3% Conviction| |


65.0

80.0

95.0

110.0

125.0

460

560

660

760

860


Source: Bloomberg

10

20

30


Vo

l m

Financial Summary






Net Profit (Rsm) 12,575 13,606 12,994 15,098 18,211

Core EPS (Rs) 55.58 60.04 57.27 66.54 80.26

Core EPS Growth 4.4% 8.0% (4.6%) 16.2% 20.6%

FD Core P/E (x) 12.00 11.11 11.65 10.03 8.31

DPS (Rs) 6.50 7.00 7.00 8.00 10.00

Dividend Yield 0.97% 1.05% 1.05% 1.20% 1.50%

BVPS (Rs) 264.8 317.1 366.2 423.4 491.9

P/BV (x) 2.52 2.10 1.82 1.58 1.36

ROE 23.1% 20.6% 16.8% 16.9% 17.5%



667.2

632.0

499.6 835.4

Target


Current



Shriram Transport Finance

March 25, 2014

63

Profit & Loss













Exceptional Items

Pre-tax Profit 20,162 18,563 21,569 26,016

Taxation (6,556) (5,569) (6,471) (7,805)



Profit After Tax 13,606 12,994 15,098 18,211

Minority Interests



Net Profit 13,606 12,994 15,098 18,211


Balance Sheet













Total Assets 448,332 518,024 591,307 701,175


Bank Deposits 109,169 124,916 140,594 167,307







Minority Interests

Total Equity 71,947 83,083 96,058 111,614














Key Ratios






Cost Of Funds 10.6% 11.6% 11.1% 10.8%









Key Drivers


Loan Growth (%) 31.7% 14.7% 12.6% 19.0%


Non Interest Income Growth (%) -9.0% -27.4% 3.5% 17.4%


Net NPL Ratio (%) 0.8% 1.0% 0.7% 0.4%


GP Ratio (%) 0.2% 0.2% 0.2% 0.2%

Tier 1 Ratio (%) 15.4% 15.4% 15.7% 15.4%

Total CAR (%) 20.3% 20.8% 20.2% 19.1%



Gross NPL Ratio (%) 3.0% 3.7% 3.7% 3.5%



0.0

5.0

10.0

15.0

20.0

25.0


Rolling FD P/E (x)


Banks│India

March 25, 2014


Cheap valuation a mirage SBI reported 9MFY14 consolidated profit of Rs102bn and a Rs197bn increase in consolidated net NPLs. That said, ROAs appear to have bottomed out despite lingering concerns on asset quality. Further, SBI will likely be adversely impacted if capital surcharge for D-SIBs (domestic systemically-important banks) is introduced.

A 20bp base rate hike during 3QFY14 and its recent equity capital raising should act as tailwinds to SBI’s net interest margins in FY15-16. However, near term asset quality issues would persist. We maintain our FY14-16 EPS estimates. However, we cut our cost of equity assumptions from 15% to 13%. Consequently, we upgrade our rating to Hold, with a revised SOP-based target price of Rs1,762.

NIMs set to improve SBI is the only public sector bank which has gained market share in low cost savings deposits over FY01-13 which is reflected in its relatively lower cost of funds (CASA of 41% as at end-Dec 2013). SBI raised its base rate by ~20bp in 3QFY14 and also deposit rates for various tenures by ~25bp. It also raised its equity capital to the tune of Rs100bn, which should boost its margins in FY15.

But, no respite on asset quality SBI’s incremental addition to stressed assets (fresh delinquencies + fresh restructuring of loans) remained high at Rs505bn during 9MFY14 (4.8% of

loans as at Mar 13). In 9MFY14, net NPLs rose Rs152bn (consolidated: Rs197bn) compared to net profit of Rs78.5bn (consolidated: Rs102bn). This led to a fall in its adjusted book value YTD in 9MFY14. As at end-Dec 2013, SBI’s gross NPLs stood at 5.6% of total loans while standard restructured loans comprised 3.4%. Nonetheless, SBI’s proportion of restructured loans is lower than its peers, which suggests that it recognises NPLs upfront, which is a key positive.

ROAs appear to have bottomed We think SBI's ROAs will improve in FY15, led largely by lower staff costs and improving NIMs. At 0.7x FY15 consolidated book value, the stock appears cheap. However, after adjusting for post-tax net NPLs and 35% of the restructured loans, it trades at 1.2x on FY15 price to adjusted book value basis. In our view, a combination of low ROEs (about 13% over FY14-16) and likely introduction of D-SIB surcharge, will keep valuations under pressure.

CIMB Analyst(s)




Share price info


Relative 8.2 -6 -35.5

Absolute 13.3 -2.8 -19.7



LIC of India 15.0

HDFC MF 1.5

State Bank of India SBIN IN / SBI.BO Current Rs1,702



Rs1,270,779m Rs3,001m 684.0 m shares Up/Downside 3.5% Conviction| |


56.0

66.0

76.0

86.0

96.0

106.0

116.0

1,300

1,500

1,700

1,900

2,100

2,300

2,500


Source: Bloomberg

2

4

6

8


Vo

l m

Financial Summary






Net Profit (Rsm) 117,073 141,050 110,732 159,007 179,488

Core EPS (Rs) 179.3 208.2 154.8 213.1 240.5

Core EPS Growth 37.7% 16.1% (25.6%) 37.6% 12.9%

FD Core P/E (x) 9.49 8.18 10.99 7.99 7.08

DPS (Rs) 35.00 41.50 41.50 41.50 44.00

Dividend Yield 2.06% 2.44% 2.44% 2.44% 2.58%

BVPS (Rs) 1,251 1,446 1,566 1,738 1,934

P/BV (x) 1.36 1.18 1.09 0.98 0.88

ROE 15.7% 15.4% 10.3% 12.9% 13.1%



1,702

1,762

1,474 2,425

Target


Current



State Bank of India

March 25, 2014

65

Profit & Loss













Exceptional Items

Pre-tax Profit 199,509 164,047 235,565 265,909

Taxation (58,459) (53,315) (76,559) (86,420)



Profit After Tax 141,050 110,732 159,007 179,488

Minority Interests



Net Profit 141,050 110,732 159,007 179,488


Balance Sheet











Cash And Marketable Securities 1,148,202 1,263,022 1,389,324 1,528,256


Total Assets 15,662,610 17,893,518 20,412,985 23,301,499


Bank Deposits




Total Non-Interest Bearing Liabilities 954,299 1,053,597 1,159,248 1,277,908


Shareholders' Equity 988,837 1,168,790 1,296,824 1,443,474

Minority Interests

Total Equity 988,837 1,168,790 1,296,824 1,443,474














Key Ratios



Operating Profit Growth (1.6%) (2.4%) 23.6% 14.0%



Cost Of Funds 5.93% 5.97% 5.74% 5.58%









Key Drivers


Loan Growth (%) 20.6% 14.9% 16.1% 16.0%




Net NPL Ratio (%) 2.0% 2.9% 2.6% 2.4%


GP Ratio (%) 0.5% 0.5% 0.5% 0.5%

Tier 1 Ratio (%) 9.5% 9.8% 9.4% 9.0%

Total CAR (%) 9.5% 9.8% 9.4% 9.0%

Deposit Growth (%) 15.2% 13.4% 13.8% 13.8%


Gross NPL Ratio (%) 4.8% 5.6% 5.4% 5.2%



0.0

5.0

10.0

15.0

20.0

25.0


Rolling FD P/E (x)



Banks│India

March 25, 2014


On a road to nowhere The combination of low core tier 1 capital and muted return ratios will continue to suppress Union Bank’s valuation, in our view. Furthermore, its net interest margin (NIM) is still under pressure and its rising NPLs will keep loan loss charges elevated.

Union Bank’s current valuation is cheap but we think that it will remain so in the long term. Its low core tier I capital will result in frequent capital dilutions and thus, suppress ROEs. We broadly maintain our FY14-16 EPS estimates. However, we lower our cost of equity assumption from 15% to 13%. Thus, we upgrade our rating from Reduce to Hold, with a higher GGM-based target price of Rs119.

Capital constraint At end-Dec 2013, Union Bank’s CET1 stood at 6.3%, as per Basel III norms. Its ROA has steadily contracted from 1.2% in FY10 (ROE of 26%) to 0.76% in FY13 (ROE of 15%) and 0.46% in 9MFY14. Its loan book expanded by ~20% CAGR (+20% yoy in 9MFY14) in FY10-13. This necessitated annual capital injections by the government of India (GOI) in FY11-14. Although Union Bank’s business growth trajectory is expected to moderate in the near term, equity dilutions are inevitable as its internal rate of capital generation is likely to trail risk-weighted asset growth. We expect Union Bank to register a ~10%

internal rate of capital generation (profit less dividends) in FY14-15, which will be insufficient to fund c.15-16% loans growth, given its already-low core tier 1 capital.

Falling NIMs… Union Bank’s NIM contracted from over 3.0% at end-3QFY13 to 2.5% at end-3QFY14. Yields have been under pressure as: 1) the bank has not increased its base rate despite rising cost of funds in 9MFY14 2) the proportion of CASA is declining (28.8% in 3QFY14 vs. 31% in FY13), and 3) rising NPLs have had a negative impact on loan yields. Thus, its NIMs are likely to remain under pressure in the near term.

…and deteriorating asset quality Union Bank’s gross NPLs have increased 39% YTD to 3.8% of total loans at end-9MFY14. Furthermore, its net restructured loans stood at 4.9% of total loans at end-Dec 2013. In our view, the combination of falling NIMs and rising bad loans bodes ill for Union Bank’s ROAs and ROEs.

CIMB Analyst(s)




Share price info


Relative 7.9 -8.7 -61.8

Absolute 13 -5.5 -46



LIC of India 10.3

HDFC Std. Life 2.4

Union Bank of India UNBK IN / UNBK.BO Current Rs116.5





27

52

77

102

83

133

183

233


Source: Bloomberg

10

20

30


Vo

l m

Financial Summary






Net Profit (Rsm) 17,871 21,579 16,143 22,169 23,476

Core EPS (Rs) 33.25 37.62 26.15 34.76 36.81

Core EPS Growth (17.8%) 13.1% (30.5%) 32.9% 5.9%

FD Core P/E (x) 3.50 3.10 4.45 3.35 3.16

DPS (Rs) 8.00 8.00 8.00 9.00 10.00

Dividend Yield 6.87% 6.87% 6.87% 7.73% 8.59%

BVPS (Rs) 235.9 262.9 273.0 298.7 325.5

P/BV (x) 0.49 0.44 0.43 0.39 0.36

ROE 14.9% 15.0% 9.8% 12.2% 11.8%



116.5

119.0

98.65 247.1

Target


Current



Union Bank of India

March 25, 2014

67

Profit & Loss













Exceptional Items

Pre-tax Profit 30,642 23,915 31,671 33,537

Taxation (9,063) (7,772) (9,501) (10,061)



Profit After Tax 21,579 16,143 22,169 23,476

Minority Interests



Net Profit 21,579 16,143 22,169 23,476


Balance Sheet



Liquid Assets & Invst. (Current) 807,010 896,393 996,881 1,109,046










Total Assets 3,102,534 3,505,211 3,962,074 4,479,656


Bank Deposits







Minority Interests

Total Equity 156,894 174,074 190,504 207,603














Key Ratios



Operating Profit Growth 6.3% (4.5%) 9.5% 9.6%



Cost Of Funds 6.65% 7.02% 6.97% 6.92%









Key Drivers


Loan Growth (%) 17.0% 14.3% 14.2% 14.2%




Net NPL Ratio (%) 1.7% 2.2% 2.0% 1.9%


GP Ratio (%) 0.5% 0.6% 0.6% 0.6%

Tier 1 Ratio (%) 8.2% 7.8% 7.4% 6.9%

Total CAR (%) 8.3% 7.8% 7.4% 6.9%

Deposit Growth (%) 18.3% 14.1% 13.6% 13.6%


Gross NPL Ratio (%) 3.0% 3.8% 3.8% 3.8%



0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0


Rolling FD P/E (x)

Bank of Baroda Bank of India Canara Bank Union Bank of India

Banks│India

March 25, 2014


Not out of the woods yet Yes Bank’s business model is strongly leveraged to a conducive macro- economic environment. A largely wholesale-funded liability mix should benefit from a likely fall in wholesale funding rates. However, its low Tier-1 ratio and mid-market exposure will remain overhangs, in our view.

We raise our EPS for FY15-16 by 2% on average as we increase our net interest income estimates. We raise our discounted economic profit based target price to Rs387 as we cut our cost of equity to 13% and upgrade EPS, even as we maintain our Hold rating given lack of near-term catalysts.

NIMs leveraged to falling rates Yes Bank’s business model is strongly leveraged to benign liquidity conditions. It has a low CASA (current and savings accounts) ratio of 20.9% and a high dependence on corporate and wholesale deposits (c.60% of total deposits). According to its FY13 annual report, about 76% of its interest-bearing liabilities will mature in less than one year vs. 28% of interest-bearing assets. If wholesale funding rates fall, as we anticipate, its NIMs will likely expand.

Asset quality: so far so good

Yes Bank has shown limited cross-cycle asset-quality stress so far,

which is perhaps a reflection of its small scale and segment expertise. At end-3QFY14, its gross NPL ratio stood at 0.4%, with provision coverage of 78% while its restructured loans were a mere 0.2% of loans − all well below industry averages. However, its mid-market exposure (about one-third of loans) will remain an overhang in a stressed macro-economic environment, in our view. Some pain was evident in 2Q-3Q, when delinquencies came in at about Rs2.8bn (quarterly run rate of 0.3% of loans), well above its trend rate. Its outstanding NPLs with the asset reconstruction companies (ARC) stood at Rs1.8bn (0.4% of loans).

Low Tier-I is a concern Yes Bank’s Tier-I capital adequacy (Basel III, including 9M earnings) was 9.9% at end-3QFY14 with a CET-1 of 9.3%, which will likely cap its long term business growth prospects unless it raises equity capital in the near term. We expect loan growth of 15% in FY14-16 vs. a CAGR of 38% over FY08-13.

CIMB Analyst(s)




Share price info


Relative 12.6 -5.9 -32.4

Absolute 17.7 -2.7 -16.6


Madhu Kapur & Family 9.8

Rana Kapoor 5.6

Yes Capital (India) Pvt. Ltd. 4.2

Yes Bank YES IN / YESB.BO Current Rs360.4





48

68

88

108

128

190

290

390

490

590


Source: Bloomberg

10

20

30

40

50


Vo

l m

Financial Summary





Total Provision Charges (Rsm) (902) (2,160) (3,692) (3,803) (4,093)

Net Profit (Rsm) 9,770 13,007 15,483 18,004 20,827

Core EPS (Rs) 27.91 36.56 42.87 49.17 56.09

Core EPS Growth 31.7% 31.0% 17.3% 14.7% 14.1%

FD Core P/E (x) 12.91 9.86 8.41 7.33 6.42

DPS (Rs) 4.00 6.00 6.50 7.50 7.50

Dividend Yield 1.11% 1.67% 1.80% 2.08% 2.08%

BVPS (Rs) 132.5 161.9 195.9 234.7 279.8

P/BV (x) 2.72 2.23 1.84 1.54 1.29

ROE 23.1% 24.8% 23.9% 22.8% 21.8%



360.4

387.0

225.9 542.8

Target


Current



Yes Bank

March 25, 2014

69

Profit & Loss













Exceptional Items

Pre-tax Profit 19,257 22,439 26,872 31,084

Taxation (6,251) (6,956) (8,868) (10,258)



Profit After Tax 13,007 15,483 18,004 20,827

Minority Interests



Net Profit 13,007 15,483 18,004 20,827


Balance Sheet





Total Gross Int. Earning Assets 900,629 1,008,732 1,150,679 1,314,049

Total Provisions/Loan Loss Reserve (873) (1,243) (2,343) (4,243)

Total Net Interest Earning Assets 899,756 1,007,489 1,148,336 1,309,805






Total Assets 991,041 1,092,784 1,245,200 1,419,978


Bank Deposits


Total Interest-Bearing Liabilities 878,777 944,568 1,072,988 1,229,281



Total Liabilities 932,965 1,021,538 1,158,664 1,315,368


Minority Interests

Total Equity 58,077 71,246 86,536 104,610














Key Ratios






Cost Of Funds 8.04% 8.06% 8.25% 8.20%









Key Drivers


Loan Growth (%) 23.7% 15.1% 15.2% 15.2%




Net NPL Ratio (%) 0.0% 0.1% 0.1% 0.2%


GP Ratio (%) 0.6% 0.5% 0.5% 0.5%

Tier 1 Ratio (%) 9.5% 10.0% 9.9% 9.8%

Total CAR (%) 9.5% 10.0% 9.9% 9.8%

Deposit Growth (%) 36.2% 9.2% 13.5% 14.5%


Gross NPL Ratio (%) 0.2% 0.3% 0.5% 0.7%



0.0

5.0

10.0

15.0

20.0

25.0

30.0


Rolling FD P/E (x)


BANKS

March 25, 2014

70

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Whilst every effort is made to ensure that statements of facts made in this report are accurate, all estimates, projections, forecasts, expressions of opinion and other subjective judgments contained in this report are based on assumptions considered to be reasonable as of the date of the document in which they are contained and must not be construed as a representation that the matters referred to therein will occur. Past performance is not a reliable indicator of future performance. The value of investments may go down as well as up and those investing may, depending on the investments in question, lose more than the initial investment. No report shall constitute an offer or an invitation by or on behalf of CIMB or its affiliates to any person to buy or sell any investments.

CIMB, its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CIMB, its affiliates and its related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report.

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The analyst responsible for the production of this report hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions about any and all of the issuers or securities analysed in this report and were prepared independently and autonomously. No part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations(s) or view(s) in this report. CIMB prohibits the analyst(s) who prepared this research report from receiving any compensation, incentive or bonus based on specific investment banking transactions or for providing a specific recommendation for, or view of, a particular company. Information barriers and other arrangements may be established where necessary to prevent conflicts of interests arising. However, the analyst(s) may receive compensation that is based on his/their coverage of company(ies) in the performance of his/their duties or the performance of his/their recommendations and the research personnel involved in the preparation of this report may also participate in the solicitation of the businesses as described above. In reviewing this research report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request.

Reports relating to a specific geographical area are produced by the corresponding CIMB entity as listed in the table below. The term “CIMB” shall denote, where appropriate, the relevant entity distributing or disseminating the report in the particular jurisdiction referenced below, or, in every other case, CIMB Group Holdings Berhad ("CIMBGH") and its affiliates, subsidiaries and related companies.

Country CIMB Entity Regulated by

Australia CIMB Securities (Australia) Limited Australian Securities & Investments Commission

Hong Kong CIMB Securities Limited Securities and Futures Commission Hong Kong

Indonesia PT CIMB Securities Indonesia Financial Services Authority of Indonesia

India CIMB Securities (India) Private Limited Securities and Exchange Board of India (SEBI)

Malaysia CIMB Investment Bank Berhad Securities Commission Malaysia

Singapore CIMB Research Pte. Ltd. Monetary Authority of Singapore

South Korea CIMB Securities Limited, Korea Branch Financial Services Commission and Financial Supervisory Service

Taiwan CIMB Securities Limited, Taiwan Branch Financial Supervisory Commission

Thailand CIMB Securities (Thailand) Co. Ltd. Securities and Exchange Commission Thailand

(i) As of March 24, 2014, CIMB has a proprietary position in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) -

(ii) As of March 25, 2014, the analyst(s) who prepared this report, has / have an interest in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) -

The information contained in this research report is prepared from data believed to be correct and reliable at the time of issue of this report. CIMB may or may not issue regular reports on the subject matter of this report at any frequency and may cease to do so or change the periodicity of reports at any time. CIMB is under no obligation to update this report in the event of a material change to the information contained in this report. This report does not purport to contain all the information that a prospective investor may require. CIMB or any of its affiliates does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information and opinion contained in this report. Neither CIMB nor any of its affiliates nor its related persons shall be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

This report is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CIMB and its affiliates’ clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. The information and opinions in this report are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or other financial instruments thereof.

Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this research report. The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors.

Australia: Despite anything in this report to the contrary, this research is provided in Australia by CIMB Securities (Australia) Limited (“CSAL”) (ABN 84 002 768 701, AFS Licence number 240 530). CSAL is a Market Participant of ASX Ltd, a Clearing Participant of ASX Clear Pty Ltd, a Settlement Participant of ASX Settlement Pty Ltd, and, a participant of Chi X Australia Pty Ltd. This research is only available in Australia to persons who are “wholesale clients” (within the meaning of the Corporations Act 2001 (Cth)) and is supplied solely for the use of such wholesale clients and shall not be distributed or passed on to any other person. This research has been prepared without taking into account the objectives, financial situation or needs of the individual recipient.

France: Only qualified investors within the meaning of French law shall have access to this report. This report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial instruments and it is not intended as a solicitation for the purchase of any financial instrument.

Hong Kong: This report is issued and distributed in Hong Kong by CIMB Securities Limited (“CHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) activities. Any investors wishing to purchase or otherwise deal in the securities

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covered in this report should contact the Head of Sales at CIMB Securities Limited. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CHK has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CHK. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CHK. Unless permitted to do so by the securities laws of Hong Kong, no person may issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the securities covered in this report, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong).

India: This report is issued and distributed in India by CIMB Securities (India) Private Limited (“CIMB India”) which is registered with SEBI as a stock-broker under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 and in accordance with the provisions of Regulation 4 (g) of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013, CIMB India is not required to seek registration with SEBI as an Investment Adviser.

The research analysts, strategists or economists principally responsible for the preparation of this research report are segregated from the other activities of CIMB India and they have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues, client feedback and competitive factors. Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed or proposed to be performed by CIMB India or its affiliates.

Indonesia: This report is issued and distributed by PT CIMB Securities Indonesia (“CIMBI”). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBI has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CIMBI. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBI. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesia residents except in compliance with applicable Indonesian capital market laws and regulations.

Malaysia: This report is issued and distributed by CIMB Investment Bank Berhad (“CIMB”). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CIMB. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB.

New Zealand: In New Zealand, this report is for distribution only to persons whose principal business is the investment of money or who, in the course of, and for the purposes of their business, habitually invest money pursuant to Section 3(2)(a)(ii) of the Securities Act 1978.

Singapore: This report is issued and distributed by CIMB Research Pte Ltd (“CIMBR”). Recipients of this report are to contact CIMBR in Singapore in respect of any matters arising from, or in connection with, this report. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBR has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only. If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBR..

As of March 24, 2014, CIMBR does not have a proprietary position in the recommended securities in this report.

South Korea: This report is issued and distributed in South Korea by CIMB Securities Limited, Korea Branch ("CIMB Korea") which is licensed as a cash equity broker, and regulated by the Financial Services Commission and Financial Supervisory Service of Korea.

The views and opinions in this research report are our own as of the date hereof and are subject to change, and this report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial investment instruments and it is not intended as a solicitation for the purchase of any financial investment instrument.

This publication is strictly confidential and is for private circulation only, and no part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB Korea.

Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden.

Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report have not been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer or a placement within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of the Financial Supervisory Commission of the Republic of China.

Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (CIMBS). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBS has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CIMBS. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBS.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 – 100 80 – 89 70 – 79 Below 70 or No Survey Result Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.

United Kingdom and Europe: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (“CIMB UK”). CIMB UK is authorised and regulated by the Financial Services Authority and its registered office is at 27 Knightsbridge, London, SW1X 7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are persons that are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in

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matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”); (c) are persons falling within Article 49 (2) (a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom; or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

Only where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent "investment research" under the applicable rules of the Financial Services Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research.

United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S.-registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (Australia) Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as "U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Rating Distribution (%) Investment Banking clients (%)

Outperform/Buy/Trading Buy/Add 51.1% 6.9%

Neutral/Hold 32.7% 6.0%

Underperform/Sell/Trading Sell/Reduce 16.2% 5.5%

Distribution of stock ratings and investment banking clients for quarter ended on 31 January 2014

1336 companies under coverage for quarter ended on 31 January 2014

As at the time of publishing this report CIMB is phasing in an absolute recommendation structure for stocks (Framework #1). Please refer to all frameworks for a definition of any recommendations stated in this report.

CIMB Recommendation Framework #1 Stock Ratings Definition Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months. Sector Ratings Definition Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation. Country Ratings Definition Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

CIMB Stock Recommendation Framework #2 * Outperform The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 12 months. Neutral The stock's total return is expected to be within +/-5% of a relevant benchmark's total return. Underperform The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 12 months. Trading Buy The stock's total return is expected to exceed a relevant benchmark's total return by 3% or more over the next 3 months. Trading Sell The stock's total return is expected to be below a relevant benchmark's total return by 3% or more over the next 3 months. * This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. CIMB Research Pte Ltd (Co. Reg. No. 198701620M)

CIMB Stock Recommendation Framework #3 ** Outperform Expected positive total returns of 10% or more over the next 12 months. Neutral Expected total returns of between -10% and +10% over the next 12 months. Underperform Expected negative total returns of 10% or more over the next 12 months. Trading Buy Expected positive total returns of 10% or more over the next 3 months. Trading Sell Expected negative total returns of 10% or more over the next 3 months. ** This framework only applies to stocks listed on the Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

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Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2013. AAV – Good, ADVANC - Excellent, AMATA - Very Good, ANAN – Good, AOT - Excellent, AP - Very Good, BANPU - Excellent , BAY - Excellent , BBL - Excellent, BCH – Good, BCP - Excellent, BEC - Very Good, BGH - not available, BJC – Very Good, BH - Very Good, BIGC - Very Good, BTS - Excellent, CCET – Very Good, CENTEL – Very Good, CK - Excellent, CPALL - Very Good, CPF – Excellent, CPN - Excellent, DELTA - Very Good, DTAC - Excellent, EGCO – Excellent, GLOBAL - Good, GLOW - Very Good, GRAMMY – Excellent, HANA - Excellent, HEMRAJ - Excellent, HMPRO - Very Good, INTUCH – Excellent, ITD – Very Good, IVL - Excellent, JAS – Very Good, KAMART – not available, KBANK - Excellent, KKP – Excellent, KTB - Excellent, LH - Very Good, LPN - Excellent, MAJOR – Very Good, MAKRO – Very Good, MCOT - Excellent, MINT - Excellent, PS - Excellent, PSL - Excellent, PTT - Excellent, PTTGC - Excellent, PTTEP - Excellent, QH - Excellent, RATCH - Excellent, ROBINS - Excellent, RS – Excellent, SAMART – Excellent, SC – Excellent, SCB - Excellent, SCC - Excellent, SCCC - Very Good, SIRI – Very Good, SPALI - Excellent, STA - Good, STEC - Very Good, TCAP - Excellent, THAI - Excellent, THCOM – Excellent, TICON – Very Good, TISCO - Excellent, TMB - Excellent, TOP - Excellent, TRUE - Excellent, TTW – Excellent, TUF - Very Good, VGI – Excellent, WORK – Good.

25 Banks CIMB Mar 2014

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