Banking Sector 2012 sector analysis

7/29/2019 Banking Sector 2012 sector analysis

1/84

Banking SectorValuation gap between private and public sector banks to narrow going ahead

December 10, 20

Kanika Thacker

[email protected]

Phone: +91-022-6631 8632

Amit Jain

[email protected]

Phone: +91-022-6113 1355


2/84

Banking Sect

Valuation gap between private and public sector banks to narrow goingah

PSU banks appear to have lost favor amongst investors due to concerns relating to asset quality, change in managem

and capital adequacy. As a result, the valuation gap between public and private banks has widened with public b

trading at ~62% discount to private banks as compared to historical averages of ~50%. We believe that markets seem

be over-reacting and asset quality concerns appear to be priced in. The high restructured books of public sector b

which have acted as a dampener, on investor sentiments do not seem nearly as threatening once we exclude, SEB

Air India restructuring which is unlikely to slip into non performing asset category. Based on our calculations, the ave

impact from slippages of 15% from restructured books adjusted for Air India and SEBs is ~9% on the FY14E adjusted

worth of banks. We expect these losses to be more than adequately compensated by gains from treasury books (~2

positive impact on adjusted networth of banks with a 100 bps decline in yields), recoveries and upgradations f

cumulative slippages of FY10-13E (The average impact from recoveries (50%) is ~14% on FY14E adjusted net wort

our PSU banking universe) and recoveries from written off accounts (The average impact from recoveries (15%) is ~3

on FY14E adjusted net worth of our PSU banking universe). As a result we do not expect the adjusted book value

banks to decline further from current levels. Despite the recent run up, several public sector banks are trading betheir long term one year forward P/ABV multiples and we expect valuations to move towards long term averages.

Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped a

likely to see some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market exp

the RBI to start the easing process which means yields dont have much upside risk (unless crude see a sharp up mo

However while the market would want to play on likely lower bond yields, it is skeptical about the rising risk of n

performing assets. However we believe though slippages will remain higher than historical averages, recoveries an

gradations will keep a check on net slippages in the coming quarters. Moreover with policy reforms and li

improvement in economic activity during FY14 vs. FY13, we believe the gap between private and PSU banks will nar

going ahead.

p

Recommendation summary for public sector banks

Bank

Target

Price

%

Upside Recommendation P/ABV ROAA ROAE

FY13E FY14E FY13E FY14E FY13E FY14

SBI 2590 13 Outperform 1.6 1.3 1.0% 1.0% 16.6% 18.2%

PNB 1001 22 Outperform 1.3 1.1 1.0% 1.1% 16.4% 18.7%

Union Bank 231 -9 Reduce 1.4 1.2 0.8% 0.8% 13.9% 15.3%

BOB 877 11 Neutral 1.2 1.0 1.1% 1.1% 17.4% 17.0%BOI 311 6 Hold 1.1 0.9 0.6% 0.7% 11.2% 14.3%

Corp. Bank 545 27 Buy 0.8 0.7 0.9% 0.9% 17.6% 18.3%

Canara Bank 549 13 Hold 1.2 1.1 0.8% 0.9% 14.0% 15.5%

Indian Bank 232 23 Buy 0.9 0.7 1.3% 1.4% 17.7% 18.6%

Allahabad Bank 190 19 Buy 0.9 0.8 0.9% 1.0% 15.7% 18.1%

OBC 371 6 Hold 0.9 0.8 0.8% 0.8% 11.6% 13.1%

IDBI Bank 113 3 Hold 0.9 0.9 0.7% 0.6% 10.3% 10.2%Source: Sunidhi Research, * CMP as of Dec 6


3/84

Banking Se

Sunidhi Research |

Executive summary

Recoveries likely to improve going ahead

Recoveries/Upgrades rate currently trending at 10 year low at 20% for select banks vs. 10 year average of 60%, whereas st

estimates are factoring in low recoveries in line with those seen in FY12 and H1FY13. Thus a pickup in recoveries could prove to b

re-rating factor for public sector banks in next two years. We have analyzed the upside to currently estimated net worth for se

public sector banks under three recovery scenario (Rate of recovery/Upgrade moving to 40%, 50% and 60% of cumulative slippa

of FY10-13E). The average impact from recoveries (50%) is ~14% on FY14E adjusted net worth of our PSU banks universe.

Written off book at 22% of networth can prove to be a hidden gem

The second biggest helping hand would most likely come from the written off books of banks. Based on our calculations, the av er

prudentially written off book for PSBs in our study stands at 22% of FY14 adjusted net-worth. We have analyzed the upside tonetworth on account of recovery from written off accounts. The average impact from recoveries (15%) is ~3.2% on FY14E adjus

net worth of our PSU banks universe.

Historical trend in recovery/upgrades to slippage vs. GDP

Source: Company, Sunidhi Research

Write off book as % of Adj. Networth


Restructured book largely seasoned or government guaranteed

The higher restructuring for public sector banks is partly due to restructuring in FY09-10 under the RBIs special dispensation sche

and partly due to Air India and SEBs restructuring which is unlikely to slip into NPA category. The restructured book excluding seasoned and government guaranteed portion would indicate much lower stress in the book as compared to stress visible pr

facie. We have analyzed the downside to the adjusted net-worth of banks on account of slippages from the restructured b

excluding Air India and SEB exposure. The average impact from slippage of 15% is ~9% on the FY14E adjusted net-worth of ba

(20% slippage would have an impact of 12%).

Restructured book vs. restructured excluding AI and SEB exposure


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0%

20%

40%

60%

80%

100%

120%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

PNB UBI GDP (RHS)

0%

5%

10%

15%20%

25%

30%

35%

40%

45%

Write off book as pe rce ntage to adjusted networth

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Allahabad

Indian

OBC

PNB

Corp

BOI

IDBI

BOB

Canara

UBI

SBI

Restructured (%) Restructured ex SEB / AI (%)


4/84

Banking Se

Sunidhi Research |

Select indicators suggest a revival in manufacturing

Select indicators (such as trend in new order book, raw material inventories and manufacturing PMI) along with recent governm

measures suggest that manufacturing activity could see a revival henceforth, which would have a positive bearing on GDP growt

revival in manufacturing and GDP growth would lead to lower non-performing assets for banks.

Trend in GFCF

Source:RBI

Trend in manufacturing PMI

Source:Markit economics

Trend in M1 growth

Source: RBI

Investment recovery likely with policy initiative

A majority of the companies with stalled project studied by our economy team reported that policy issues such as land acquisit

delay in environmental clearance, mining policy, fuel linkages and spectrum pricing were the main reason for the high incidence

stalled projects in the economy. These together accounts for about 68% of total stalled projects. Majority of these stalled proj

are in power, roads and mining sectors which remain the major stress points for banks.

Reasons for total stalled projects

Source:CMIE

Stalled project by Industry

Source: MIE

-5%

0%

5%

10%

15%

20%

25%

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Gross Fixed Capital Formation

30

35

40

45

50

55

60

65

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

0%

5%

10%

15%

20%

25%

30%

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

M1 Growth

Environmental ,

12.5%

Financial , 6.2%

Government,

11.8%

Land

Acquisition ,

27.7%

Raw

Material ,

15.9%

Management,

6.2%

Legal, 1.1%

Others,

18.6%

Cement , 1.37% Real Estate ,

8.98%

IT, 1.09%

Power, 36.38%

Transport,

11.23%

Metals &

Mininig ,

16.52%

Telecomunicati

on, 4.36%

Oil & Gas,

10.99%

Irrigation,

0.39%

Others, 8.70%


5/84

Banking Se

Sunidhi Research |

In the last couple of months, we have seen some concrete policy intentions towards solving these issues with FinMins fast t

reform initiatives. Clearance of the most conflicting issue of retail FDI in both the houses reflects would help the current governm

to fast track its most pending decisions. Some of the important measures which can change the investment climate of the coun

include new FSAs expected to be signed by Coal India with better pricing mechanism, proposal to set up a Committee

Infrastructure, the State Electricity Distribution Responsibility Bill and setting up a National Investment Board (NIB). These along w

step towards financial restructuring scheme of discoms are likely to bring financial turnaround of discoms. Hence, the recent po

initiatives such as permitting FDI in retail trade, civil aviation and power trading exchanges and rationalization of diesel prices

help improve the investment climate.

Decline in interest rates to improve investment climate

It is expected that RBI is likely to move toward easy monetary policy in coming few quarters which would be the biggest trigger

change in investment climate. This would make lot of project viable and along with policy initiatives would improve debt servi

capability of corporates.

SBI base rate is currently ~50bps higher than 1 year CP rates

indicating room for base rate to decline by 25-50bps in near

term

Source: Bloomberg, Sunidhi Research

Also, 1 year CP is at only 100 bps premium to 1 year risk free r

which is generally a base level reflecting that risk premium ha

declined


Price performance of PSBs are highly correlated to risky yields

Historically, we have observed that valuation of PSBs is highly correlated to high risk corporate bond yields (1 Year BBB corpor

bond yield). This is largely due to the fact that BBB bond yield is best barometer for asset quality stress as well as liquidity. In casfalling BBB bond yield, PSB stock price rallies due to a) expected improvement in liquidity scenario which would help banks

improve margins b) likely improvement in the economy to reduce asset quality stress and c) falling interest rate would result in g

in bond book. Considering SBI as proxy for PSBs, as we can see from chart below that SBI has rallied faster than the pace of fa

BBB bond yields and vice versa (we consider inverse BBB bond yield for simplicity).

Bond yields vs. SBI price performance


-300

-250

-200

-150-100

-50

0

50

100

Jul-10

Sep-1

0

Nov-1

0

Jan-1

1

Mar-

11

May-1

1

Jul-11

Sep-1

1

Nov-1

1

Jan-1

2

Mar-

12

May-1

2

Jul-12

Sep-1

2

Nov-1

2

Spread

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Sep-0

5

Feb-0

6

Jul-06

Dec-0

6

May-0

7

Oct-0

7

Mar-

08

Aug-0

8

Jan-0

9

Jun-0

9

Nov-0

9

Apr-

10

Sep-1

0

Feb-1

1

Jul-11

Dec-1

1

May-1

2

1 Year CP rat e premium to 1 Year Gsec yield

-15

-14

-13

-12

-11

-10

-9

-8

-7

-6

-100%

-50%

0%

50%

100%

150%

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Inverse 1 year BBB Corp Bond Yield - RHS SBI Price performance (YoY %)


6/84

Banking Se

Sunidhi Research |

Valuation gap between private and PSU banks to narrow going ahead

Historically public sector banks have traded at a ~50% discount to new private sector banks. Post the recent run up in private sec

banking stocks, the discount has widened significantly with public sector banks trading at ~62% discount to private banks. T

despite the challenging environment we harbor a positive bias towards public sector banks due to their reasonable valuations.

Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped and is likely to

some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market expects the RBI to start

easing process which means yields dont have much upside risk (unless crude see a sharp upmove). However while the mar

would want to play on likely lower bond yields, it is skeptical about the rising risk of non-performing assets. However we bel

though slippages will remain higher than historical averages, recoveries and up gradations will keep a check on net slippages in coming quarters. Moreover with policy reforms and likely improvement in economic activity during FY14 vs. FY13, we believe

gap between private and PSU banks will narrow going ahead.

Additionally, a long term theme supporting valuations of public sector banks is their lower weight in indices in comparison to t

market share.

Public banks account for around two-thirds of the market on different parameters yet they are severely under-represented

Market share Represented in ownership

Deposits Advances Total Assets NII PAT Bankex (BSE) Bank Nifty (NSE) Mc

Private Sector Banks 19% 19% 21% 23% 31% 77.2% 76.0% 57.

PSBs 81% 81% 79% 77% 69% 22.8% 24.1% 43.

PSB ex SBI 64% 62% 61% 56% 53% 10.3% 10.0% 25.

Source: Company, Exchanges, Sunidhi Research

Trend in ownership pattern for public sector banks

Ownership (PSBs)

Q2FY13 Q2FY12 Q2FY11

Non promoter 26.60% 26.10% 28.21%

FII 9.84% 10.08% 13.45%

Insurance + MF 14.59% 15.02% 13.98%

Ownership (PSB ex SBI)

Non promoter 26.76% 25.32% 27.21%

FII 10.33% 11.10% 13.05%

Insurance + MF 12.02% 12.68% 12.81%

Source: Capitaline, Sunidhi Research

Valuation Summary

ABV P/ABV Peak 5 yr

1 yr fwd

valuation

Trough 5

yr 1 yr

fwd val.

Average

5 yr 1 yr

fwd val.

ROAA ROAE

CMP FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14

Private sector

xis Bank 1365 632.2 736.7 2.2 1.9 3.4 0.9 2.2 1.7% 1.6% 20.6% 19.5

ICICI Bank* 1135 437.5 493.5 2.1 1.9 3.1 1.1 2.3 1.6% 1.6% 16.3% 17.1

es Bank 467 162.1 199.9 2.9 2.3 3.2 0.6 2.0 1.5% 1.5% 23.9% 23.4

HDFC Bank 694 146.2 171.6 4.7 4.0 4.5 2.0 3.3 1.8% 1.8% 20.0% 20.8

Federal Bank 481 358.7 409.4 1.3 1.2 1.6 0.5 1.0 1.3% 1.3% 14.1% 14.9

Ing Vysya Bk 494 287.5 327.3 1.7 1.5 2.3 0.8 1.4 1.1% 1.1% 13.8% 14.6

Public sector

SBI (conso) 2307 1471.9 1726.4 1.6 1.3 2.7 0.9 1.7 1.0% 1.0% 16.6% 18.2PNB 822 613.2 770.2 1.3 1.1 2.0 0.8 1.4 1.0% 1.1% 16.4% 18.7

Union Bank 253 182.8 209.6 1.4 1.2 2.2 0.9 1.4 0.8% 0.8% 13.9% 15.3

BOB 792 686.8 797.7 1.2 1.0 2.0 0.7 1.3 1.1% 1.1% 17.4% 17.0

BOI 294 261.4 310.6 1.1 0.9 2.1 0.9 1.5 0.6% 0.7% 11.2% 14.3

Corporation 429 539.7 605.5 0.8 0.7 2.2 0.5 1.0 0.9% 0.9% 17.6% 18.3

Canara 481 406.5 457.6 1.2 1.1 2.4 0.7 1.4 0.8% 0.9% 14.0% 15.5

Indian Bank 189 211.9 257.2 0.9 0.7 1.6 0.6 1.0 1.3% 1.4% 17.7% 18.6

llahabad Bk 159 170.4 210.7 0.9 0.8 1.6 0.5 0.9 0.9% 1.0% 15.7% 18.1

OBC 350 369.5 412.5 0.9 0.8 1.5 0.4 0.9 0.8% 0.8% 11.6% 13.1

IDBI Bank 110 116.1 126.1 0.9 0.9 1.5 0.5 1.0 0.7% 0.6% 10.3% 10.2

*Adjusted for subsidiary valuation **Prices as on 6th

Dec 2012 Source: Sunidhi Research


7/84

Banking Se

Sunidhi Research |

Impact on ABV based on key rationale

Rs bn

Allahabad

Bank BOB BOI

Canara

Bank

Corp.

Bank

IDBI

Bank

Indian

Bank OBC PNB UBI SBI

Networth with 100% buildup in

coverage (Ex Reval) (FY14) (A) 105 329 178 203 90 161 111 120 261 115 1,159

Stress Restructured Loans ex AI

and SEB (Q2FY13) 72 167 135 79 52 117 72 58 186 66 392

Default Rate (assumed 15%) (B) 11 25 20 12 8 18 11 9 28 10 59

Impact as % of Adj Networth 10% 8% 11% 6% 9% 11% 10% 7% 11% 9% 5%Upside on Recoveries/Upg. Rate

at 50% (C) 16 29 37 (7) 7 29 16 13 80 27 51

Impact as % of Adj Networth 15% 9% 21% -3% 8% 18% 14% 11% 31% 23% 4%

Upside on Recovery in Written

Off Accounts at 15% (D) 4 6 7 12 2 6 4 5 5 4 17

Impact as % of Adj Networth 4% 2% 4% 6% 2% 4% 3% 4% 2% 4% 1%

Upside from Gain in Tr. Book on

100bps Change in Yields (E) 3 6 9 10 2 1 1 3 9 2 15

Impact as % of Adj Networth 3% 2% 5% 5% 3% 1% 1% 2% 3% 2% 1%

Impact on Networth

(F=C+D+E+F-B) 12 17 33 3 4 18 9 12 66 23 24

Impact as % of Networth 11.2% 5.1% 18.5% 1.6% 4.6% 11.3% 8.5% 9.9% 25.1% 19.8% 2.1%

Adjusted Networth (A+F) 117 346 212 206 94 179 120 132 327 138 1,183

Market Capitalization 80 327 169 215 64 140 81 102 279 139 1,548

P/ABV 0.75 0.99 0.95 1.06 0.71 0.87 0.73 0.85 1.07 1.20 1.34

P/ABV (with above

adjustments) 0.68 0.94 0.80 1.04 0.68 0.78 0.68 0.77 0.85 1.01 1.31

Disc. to SBI (avg FY14 P/ABV)

- On P/ABV -44% -26% -29% -21% -47% -35% -45% -36% -20% -10%

- On P/ABV (With Adj) -48% -28% -39% -20% -48% -40% -48% -41% -35% -23%

Disc. to private banks (average

FY14 P/ABV)

- On P/ABV -64% -53% -55% -49% -66% -59% -65% -59% -49% -43% -36%

- On P/ABV (With Adj) -68% -55% -62% -50% -68% -63% -68% -63% -59% -52% -38%

Source: Sunidhi Research


8/84

Banking Se

Sunidhi Research |

Table of Contents

Particulars Page No

Valuation gap between public and private banks has increased 08

Is the market over-reacting? 10

Treasury gains to boost profitability & provide a buffer for provisioning 16

Recoveries likely to improve going ahead 18

Written off book at 22% of networth can prove to be a hidden gem 19

Restructured book largely seasoned or government guaranteed 19

Select indicators suggest a revival in manufacturing 21

Narrow Money (M1) is directly linked to corporate sales 22

Investment recovery likely with policy initiative 22

So can the tide turn? 23

Policy reform Hopes come alive after both houses cleared FDI retail 25

Cabinet Committee on Investment (CCI) One step forward 26Coal price pooling by Coal India Ltd may change the face of Indian power sector and could lead to

reduction of asset quality stress 26

Decline in interest rate to improve investment climate 29

Price performance of PSBs are highly correlated to risky yields 31

Valuation gap between private and PSU banks to narrow going ahead 31

Sunidhis banking performance indicator (SBPI) 32

Key risks 34

Company Section

Allahabad Bank 39

Bank Of Baroda 43

Bank Of India 47

Canara Bank 51

Corporation Bank 55

IDBI Bank 59

Indian Bank 63

Oriental Bank Of Commerce 67

Punjab National Bank 71State Bank Of India 75

Union Bank Of India 79


9/84

Banking Se

Sunidhi Research |

Valuation gap between public and private banks has increased

The Indian economy is going through challenging times consisting of volatility in liquidity, cru

inflation and growth. This has taken a toll on the prospects of the banking sector which is plag

with uncertainty relating to the monetary policy actions of the RBI and slower credit grow

Additionally, elevated interest rates are impacting the net interest margins and asset quality

banks.

We believe that the macro concerns are unlikely to reverse in the near term. Hence we exp

sharp volatility in the PSU banking space and cannot deny further downward risks to magrowth and stock prices. Due to the absence of any near term trigger, this segment may rem

volatile, however currently valuations are below long term averages for several public se

banks which has led to a widening in the discount between them and their private se

counterparts. Historically public sector banks have traded at a ~50% discount to new priv

sector banks. Post the recent run up in private sector banking stocks, the discount has wide

significantly with public sector banks trading at ~62% discount to private banks. Thus despite

challenging environment we harbor a positive bias towards public sector banks due to t

reasonable valuations.

Of the two important drivers of PSU banks stock performance, the first - bond rates already se

to have topped and is likely to see some easing going ahead, whereas concerns still remain in

second - NPA. Currently, the market expects the RBI to start the easing process which me

yields dont have much upside risk (unless crude see a sharp upmove). However while the mawould want to play on likely lower bond yields, it is skeptical about the rising risk of n

performing assets.

Valuation summary

ABV P/ABVPeak 5 yr

1 yr fwd

valuation

Trough 5

yr 1 yr

fwd

valuation

Average

5 yr 1 yr

fwd

valuation

ROAA ROAE

CMP FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY1

Private sector

Axis Bank 1365 632.2 736.7 2.2 1.9 3.4 0.9 2.2 1.7% 1.6% 20.6% 19.

ICICI Bank* 1135 437.5 493.5 2.1 1.9 3.1 1.1 2.3 1.6% 1.6% 16.3% 17.

Yes Bank 467 162.1 199.9 2.9 2.3 3.2 0.6 2.0 1.5% 1.5% 23.9% 23.

HDFC Bank 694 146.2 171.6 4.7 4.0 4.5 2.0 3.3 1.8% 1.8% 20.0% 20.

Federal Bank 481 358.7 409.4 1.3 1.2 1.6 0.5 1.0 1.3% 1.3% 14.1% 14.

Ing Vysya Bank 494 287.5 327.3 1.7 1.5 2.3 0.8 1.4 1.1% 1.1% 13.8% 14.

Public sector

SBI (Conso) 2307 1471.9 1726.4 1.6 1.3 2.7 0.9 1.7 1.0% 1.0% 16.6% 18.

PNB 822 613.2 770.2 1.3 1.1 2.0 0.8 1.4 1.0% 1.1% 16.4% 18.

Union Bank 253 182.8 209.6 1.4 1.2 2.2 0.9 1.4 0.8% 0.8% 13.9% 15.

BOB 792 686.8 797.7 1.2 1.0 2.0 0.7 1.3 1.1% 1.1% 17.4% 17.

BOI 294 261.4 310.6 1.1 0.9 2.1 0.9 1.5 0.6% 0.7% 11.2% 14.

Corporation 429 539.7 605.5 0.8 0.7 2.2 0.5 1.0 0.9% 0.9% 17.6% 18.

Canara 481 406.5 457.6 1.2 1.1 2.4 0.7 1.4 0.8% 0.9% 14.0% 15.

Indian Bank 189 211.9 257.2 0.9 0.7 1.6 0.6 1.0 1.3% 1.4% 17.7% 18.

Allahabad Bank 159 170.4 210.7 0.9 0.8 1.6 0.5 0.9 0.9% 1.0% 15.7% 18.

OBC 350 369.5 412.5 0.9 0.8 1.5 0.4 0.9 0.8% 0.8% 11.6% 13.

IDBI Bank 110 116.1 126.1 0.9 0.9 1.5 0.5 1.0 0.7% 0.6% 10.3% 10.*Adjusted for subsidiary valuation **Prices as on 6

thDec 2012



10/84

Banking Se

Sunidhi Research |

Long term average 1 year forward P/ABV Average FY13E P/ABV

2.5

1.2

0

0.5

1

1.5

2

2.5

3

New Pvt Banks Public Banks

2.9

1.1

0

1

2

3

4


Source: Capitaline, Sunidhi Research Source: Capitaline, Sunidhi Research

This time its different

Our quest for understanding the reason for the widening valuation gap leads us to que

whether every economical downturn has led to investors switching from public banks to pr

banks, thus leading to an increase in the valuation gap between the two. An evaluation of

valuations in FY08 reveals that the answer to this question is in the negative. In FY08, valuatioboth public and private banks came off to leave the gap in line with the average of ~50%.

Exhibit 1: Average FY08 P/ABV

2.0

1.0

0.0

0.5

1.0

1.5

2.0

2.5


Source: Capitaline, Sunidhi ResearchScams, asset quality issues and policy paralysis have led to negative sentiments towa

all PSUs

Scams, asset quality issues and policy paralysis have led to negative sentiments towards all pcompanies not only banks. This is depicted through the returns of the BSE PSU index which

considerably underperformed the sensex over the past year.


11/84

Banking Se

Sunidhi Research |

BSE PSU and Sensex returns BSE PSU and Sensex returns


Is the market over-reacting?The downtrend in PSU stocks over the past year leads us to question whether the market is oreacting to news flows relating to scams and policy deadlocks. According to behavioral econom

investors often fall prey to over-reaction and availability bias. This occurs when investors over-

to new information which is easily available thus creating a larger than justified impact on s

prices which is usually corrected in the future.

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

BSE PSU BSE Se nse x

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

1 day 1 Week 1 Month 3 Months 6 Months 1 Year

BSE PSU BSE Sensex

Winners & Losers

In 1985, behavioral finance academics Werner De Bondt and Richard Thaler released a stud

the Journal of Finance called "Does the Market Overreact?" In this study, the two exami

returns on the New York Stock Exchange for a three-year period. From these stocks, t

separated the best 35 performing stocks into a "winners portfolio" and the worst 35 perform

stocks were then added to a "losers portfolio". De Bondt and Thaler then tracked e

portfolio's performance against a representative market index for three years.

Surprisingly, it was found that the losers portfolio consistently beat the market index, while

winners portfolio consistently underperformed. In total, the cumulative difference between

two portfolios was almost 25% during the three-year time span. In other words, it appears

the original "winners" would became "losers", and vice versa.

So what happened? In both the winners and losers portfolios, investors essentially overreac

In the case of loser stocks, investors overreacted to bad news, driving the stocks' share p

down disproportionately. After some time, investors realized that their pessimism was

entirely justified, and these losers began rebounding as investors came to the conclusion

the stock was underpriced. The exact opposite is true with the winners portfolio: inves

eventually realized that their exuberance wasn't totally justified.

According to the availability bias, people tend to heavily weight their decisions toward m

recent information, making any new opinion biased toward that latest news


12/84

Banking Se

Sunidhi Research |

Bridging the gapWe believe that the widening valuation gap between private and public sector banks is like

close in and move towards the mean of ~50%. This is because problems associated with p

sector banks such as bureaucracy and corruption have always been known which is why p

banks trade at such a steep discount to private banks. The widening gap appears to be an o

reaction to policy paralysis and asset quality issues which is likely to correct. The correction c

take place in three ways:

Valuations of private sector banks could come offValuations of private sector banks could come off by ~12%. Probability of this happening is

because valuations are close to the mean. To safeguard against this we should stay with che

private sector banks like Axis Bank and ICICI Bank.

Adjusted book values of public sector banks could correct by 12%

Adjusted book values of public sector banks could correct by 12%. This could happen through

erosion of book value due to higher slippages. However the probability of this happening is low

to the reasons discussed in the following section.

Valuations of public sector banks could increase by 12%

Adjusted book values of public sector banks could increase by 12%. We believe that this is the likely scenario. As a result we are positive on the public sector banking space.

Downside to public sector bank valuations appear limited from current levels

We believe that the downside to public sector bank valuations appear limited from current lev

due to the following reasons:

Estimates are already factoring in accelerated slippages for public sector banks

Estimates are already factoring in accelerated slippages for public sector banks, significa

higher than the average slippages seen over the past five years.

Expected Slippage rate

Bank FY13E FY14E

5 Yr average slippage

ratio

Allahabad Bank 3.2% 2.5% 2.0%

Bank of Baroda 1.9% 1.5% 1.2%

Bank of India 3.3% 2.4% 2.0%

Canara Bank 2.8% 2.3% 2.1%

Corporation Bank 1.8% 1.6% 1.1%

IDBI Bank 1.8% 1.7% 1.4%

Indian Bank 2.3% 2.2% 1.4%

Punjab National Bank 4.2% 2.5% 2.1%

State Bank of India 4.0% 2.8% 2.7%

Union Bank of India 2.5% 2.2% 1.9%

OBC 2.6% 2.3% 2.0%

Source: Company, Sunidhi estimates

In order for adjusted book values of public sector banks to come off by 12% due to asset qua

deterioration the slippage rates for public banks will have to increase significantly in FY

trending towards their ten year peaks.


13/84

Banking Se

Sunidhi Research |

FY14E slippage rate assuming ABV deterioration of 12%

Bank

FY14E slippage

rate

FY14E slippage

rate for ABV to

come off by 12%

10 year peak

slippage rate

Allahabad Bank 2.5% 3.8% 3.9%

Bank of Baroda 1.5% 2.9% 3.0%

Bank of India 2.4% 3.3% 2.9%Canara Bank 2.3% 3.4% 4.6%

Corporation Bank 1.6% 2.7% 1.9%

IDBI Bank 1.7% 2.9% 4.2%

Indian Bank 2.2% 3.8% 2.5%

Punjab National Bank 2.5% 3.6% 4.5%

State Bank of India 2.8% 4.4% 3.6%

Union Bank of India 2.2% 3.0% 3.2%

OBC 2.3% 3.8% 9.5%

Source: Sunidhi estimates


14/84

Banking Se

Sunidhi Research |

Why is this situation unlikely?We believe that the above situation appears unlikely based on the following factors:

An improvement in growth could lead to asset quality improvement

Asset quality, as the chart below suggests, is inversely proportional to GDP growth, thus as

quality is likely to witness an improvement once GDP growth starts to look up. GDP growth wh

stood at ~8.5% in FY10 and FY11 came off to 6.5% in FY12 and H1FY13. The slowdown in G

growth was due to several reasons including a slowdown in agricultural growth, Inflation an

slowdown in investments due to policy paralysis. Addressing these factors could help bring

economy back on the growth path.

Trend in GDP growth and asset quality

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

GDP growth (LHS) % GNPA (RHS)

Source: RBI, Sunidhi Research

Delayed rainfall impacted Kharif but Rabi crop expected to be good

The south-west monsoon which was deficient and unevenly distributed in June and July h

adversely impacted sowing of the Kharif crop. However, higher than LPA rainfall in the monthAugust and September significantly brought down the cumulative rainfall deficit to 92% of

(upto September 30). The good rainfall towards the end of the season has improved soil moist

content and reservoir levels, thus raising prospects for a good Rabi crop.

However, the production weighted rainfall index (PRN) constructed by RBI indicated a deficie

of 13%. Deficient rainfall resulted in shortfall in area sown for several crops especially cereals

pulses. Despite higher food inflation, we do not expect higher NPAs on account of the same

lately banks have begun to secure agricultural loans against securities such as gold. This has n

turned into a significant part of current exposure. (E.g. 45% of SBIs agriculture exposur

secured with gold). Hence, default risk from this book is significantly mitigated. We can see th

the reducing proportion of priority sector NPAs in FY12 as compared to FY11.


15/84

Banking Se

Sunidhi Research |

Trend in monthly rainfall (% of LPA)

72%

87%

101%111%

0%

20%

40%

60%

80%

100%

120%

Jun-12 Jul-12 Aug-12 Sep-12

Source: IMD, Sunidhi Research

Trend in IMD rainfall assessment and RBI PRN


Rabi Crop Sowing (as on 30.11.2012)

Source: PIB, Sunidhi Research

Trend in composition of NPAs

47.2% 47.5% 49.1% 54.1%59.9% 63.9% 54.9% 53.8% 58.1% 50.0%

50.7% 51.2% 50.0% 43.7%38.8% 35.4% 44.0% 45.3% 41.5% 49.1%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Priority Non Priority Public


Unsecured loan books for all banks have come off in FY12

Banks have brought down their unsecured loan books in FY12 as compared to FY11.

proportion of unsecured loans has come off to 17.4% in FY12 as compared to 19.4% in FY11.

outstanding unsecured loan book for new private and public banks stands at par at ~17.

Meanwhile outstanding unsecured loan book for old private banks is significantly lower at 12%

reduction in unsecured loans could lead to lower slippages and higher recoveries going ahead.

Crops Area Sown (2012-13) Area Sown (2011-12) YoY% Cha nge

Wheat 157.89 162.5 -2.8%

Rice (Rabi) 0.85 1.05 -19.0%

Coarse Cereals 46.15 44.83 2.9%

Pulses 102.49 109.56 -6.5%

Oilseeds 66.84 66.76 0.1%

Total Rabi Area 374.22 384.70 -2.7%

(Area in la kh hectare)


16/84

Banking Se

Sunidhi Research |

Trend in unsecured loan book for all listed banks

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2008 2009 2010 2011 2012

All Banks Public New Pvt Old Pvt


Cautious lending by banks to risky segments could lead to lower slippages ahead

Loan book growth slowed to 16.9% for the fortnight ended Nov 16, 2012 down from +19.3%

growth seen in Mar12. A slowdown in demand coupled with banks being selective about lend

to risky segments has caused the slowing in loan book growth. The cautious stance adopted

banks towards lending is likely to result in lower slippages going ahead. The deposit growth for

period stood lower than credit growth at 13.4% yoy, however the gap between credit and dep

growth has started narrowing suggesting an improvement in liquidity.

Trend in loan book and deposit growth Trend in LAF borrowings

Source: RBI, Sunidhi Research Source: RBI, Sunidhi Research

Credit Deposit growth spread


10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Cre dit g row th (% yoy) De pos it g row th (% yoy)

-2,500.0

-2,000.0

-1,500.0

-1,000.0

-500.0

0.0

500.0

1,000.0

1,500.0

Jan-1

0

Mar-10

May-10

Jul-10

Sep-10

Nov-1

0

Jan-11

Mar-11

May-1

1

Jul-11

Sep-11

Nov-11

Jan-12

Mar-

12

May-12

Jul-12

Sep-1

2

Rs

billions

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

pr-10

Jun-10

-ct-

ec-

Fe

-r-

J

- -ct-

ec- - -

J

- -t-

Credit Deposit growth spread


17/84

Banking Se

Sunidhi Research |

Treasury gains to boost profitability & provide a buffer for provisioningThe ten year G-Sec yields have remained at elevated levels over the past year owing to the R

reluctance in cutting the repo rate. However the RBI has indicated that it is looking at reducing

repo rate in the last quarter of FY13. OIS spreads are factoring in around 100bps reduction in

repo rate within the next one year. A reduction in the yields could lead to writebacks on

investment depreciation provision undertaken by public sector banks. In the table below we h

calculated the impact of a 100 bps reduction in repo rate on the PAT and networth of se

banks. According to our analysis, a 100 bps reduction in the yields would positively impact

FY14 adjusted networth of PSBs by ~2-5% and FY14 PAT by 6-28% depending on banks AFS b

and duration. These writebacks would also provide some room for public sector banks to m

higher loan loss provisions.

Trend in 10 year G-Sec yields Trend in Spot OIS and 1yr Fwd OIS rates


Impact of a 100 bps reduction in yields on PAT and networth of public sector banks

Rs Bn

Impact on PAT Impact on

Networth

InvestmentsBook

HTM AFS SLRAFS

Other intsensitive AFS

AFS Modduration (yrs)

-1%yields

FY13E FY14E FY13E FY

Allahabad Bank 583.1 373.5 210 45 132 2.8 3.1 17.6% 13.3% 2.6%

Bank of Baroda 983.8 NA NA 149 61 3.5 6.3 12.3% 11.0% 2.0%

Bank of India 867.5 600.3 266 169 98 4.3 9.3 39.2% 27.9% 4.0%

Canara Bank 1207.2 758.0 437 145 234 3.8 9.9 29.6% 23.8% 3.9%

Corporation Bank 535.8 392.5 140 69 53 2.4 2.3 14.8% 12.5% 2.4%

IDBI Bank 694.8 581.8 113 27 61 1.5 0.8 4.0% 3.7% 0.4%

Indian Bank 423.9 281.0 141 42 79 1.2 1.0 4.9% 4.0% 0.8%

Oriental Bank of

Commerce 554.0 474.4 79 52 22 4.1 2.6 18.0% 14.4% 2.0%

Punjab National Bank 1291.8 938.6 353 160 154 3.7 8.7 17.8% 13.5% 2.7%

Union Bank of India 720.5 564.4 156 98 47 1.7 2.1 9.9% 8.1% 1.3%

State Bank of India 3715.3 2838.3 877 432 356 2.4 14.6 7.6% 5.8% 1.2%

Source: Company, Sunidhi research

In addition to MTM write backs, banks treasury gains too will help boost profits. Banks w

higher yield on investments are more likely to book higher treasury gains once interest rates s

trending down.

7.5

7.7

7.9

8.1

8.3

8.5

8.7

8.9

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

1 year Gsec Yield

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Spot OIS 1 Year Forward OIS


18/84

Banking Se

Sunidhi Research |

Yield on investment (Q2FY13)


Although, it has been on the agenda of the RBI to bring down its statutory liquidity ratio (S

over the past 15 years, it has only been reduced by 200 bps. In July 2012, the RBI brought down

SLR by 100 bps to 23%. A sudden and sharp fall in SLR holding of banks is unlikely considering

steep U-turn in the budget deficit trend resulting in a massive rise in government bond issuan

but the SLR cut is definitely a move in the right direction by the RBI. While banks have volunta

increased their SLR holdings especially PSU Banks (to fund government issues and as a

aversion measure), their bond holding is unlikely to remain in this range over the next few ye

once the fiscal situation improves or FII investment limit is hiked. A reduction in the SLR wo

help boost profitability of banks, which could in turn be used to shore up provision cover

ratios.

Current SLR vs. mandatory SLR requirement for public banks


8.1

7.9 7.97.8 7.8

7.7

7.57.4 7.4

7.2

7.0

6.6

6.8

7.0

7.2

7.4

7.6

7.8

8.0

8.2

8.4

Canara

BOI

PNB

Allahabad

BOB

Corp

OBC

Indian

UBI

SBI

IDBI

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

34.0%

SLR/DTL Required SLR


19/84

Banking Se

Sunidhi Research |

Recoveries likely to improve going ahead Historically trends show that recoveries and up-gradations move in line with GDP growth.

have analyzed past trends for recoveries from FY03-12 for PNB and UBI (reductions exclud

write-off and asset sale). Data for these banks reveals that these are trending at 10 year low

~20% as compared to long term average of ~62%. Going ahead we expect recoveries to impr

and move closer to long term averages which along with higher write-offs and asset sales wo

boost profits.

Historical trend in recovery / upgrades to slippage compared to GDP


Street estimates are factoring in low recoveries in line with those seen in FY12 and H1FY13. Th

pickup in recoveries could prove to be a re-rating factor for public sector banks in next two ye

We have analyzed the upside to currently estimated net worth for select public sector ba

under three recovery scenario (Rate of recovery/Upgrade moving to 40%, 50% and 60%

cumulative slippages during FY10-13E). The average impact from recoveries (50%) is ~14%

FY14E adjusted net worth. The results are highlighted in the table below.

Impact of recoveries on adjusted net-worth

Bank

Cumulative recovery/Up

gradation rate Upside (Rs bn) Upside to Adj. NW (FY14 )

FY10-13 @ 40% @ 50% @ 60% @ 40% @ 50% @ 60

Allahabad Bank 32% 6.8 15.6 24.4 6% 15% 23%

Bank of Baroda 27% 16.9 29.4 42.0 5% 9% 13%

Bank of India 32% 16.6 37.4 58.2 9% 21% 33%

Canara Bank 54% (24.9) (7.0) 10.9 -12% -3% 5%

Corporation Bank 33% 3.0 7.4 11.8 3% 8% 13%

IDBI Bank 19% 19.5 28.8 38.1 13% 19% 26%

Indian Bank 22% 10.1 15.6 21.2 9% 14% 19%

Punjab National Bank 20% 53.6 79.8 106.0 21% 31% 41%

Union Bank of India 30% 13.6 26.6 39.6 14% 26% 39%

State Bank of India 44% (38.5) 50.9 140.4 -3% 4% 12%

Oriental Bank of Commerce 36% 3.6 13.1 22.6 3% 11% 19%

Source: Sunidhi research

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0%

20%

40%

60%

80%

100%

120%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

PNB UBI GDP (RHS)


20/84

Banking Se

Sunidhi Research |

Written off book at 22% of networth can prove to be a hidden gem The second biggest helping hand would most likely come from the written off books of ba

Based on our calculations, the average prudentially written off book for PSBs in our study sta

at 22% of FY14 adjusted net-worth. Since the written off book in our calculation is only accou

which are written off from the head office and not from branches, the reason behind a majorit

the write offs are to report better asset quality number and for tax benefits. Hence, we bel

that ~15-20% recovery from this book is the most likely probability considering the large

between the demand from ARC and prices expected by the banks management. We h

analyzed the upside to the networth on account of recovery from written off accounts.

average impact from recoveries (15%) is ~3.2% on FY14E adjusted net worth.

Impact of recoveries from written off accounts on FY14E net-worth

Impact on FY14E NW

(Rs bn)

Write offs O/S

(Q2FY13)

Adj NW (FY14) % of Adj NW

(FY14)

Recovery at 15% Recovery at 20%

Allahabad Bank 26.3 105.4 25% 3.7% 5.0%

Bank of Baroda 39.3 328.9 12% 1.8% 2.4%

Bank of India 44.9 178.4 25% 3.8% 5.0%

Canara Bank 80.4 202.7 40% 6.0% 7.9%

Corporation Bank 14.6 89.7 16% 2.4% 3.3%

IDBI Bank 40.8 148.4 28% 4.1% 5.5%

Indian Bank 23.6 110.6 21% 3.2% 4.3%

Punjab National Bank 32.3 261.2 12% 1.9% 2.5%

Union Bank of India 27.5 100.6 27% 4.1% 5.5%

State Bank of India 115.6 1158.5 10% 1.5% 2.0%

Oriental Bank of Commerce 32.7 120.4 27% 4.1% 5.4%


Restructured book largely seasoned or government guaranteedThe higher restructuring for public sector banks is partly due to restructuring in FY09-10 under

RBIs special dispensation scheme and partly due to Air India and SEBs restructuring whic

unlikely to slip into NPA category. Most of the outstanding restructured book of FY09-1

performing and the weaker part has already slipped into NPA. Slippages from the performrestructured book of 2009-10 is likely to be very low as these assets are already servicing th

debt post the expiry of the moratorium period. Also, we dont see any slippage from Air Indi

SEB accounts in next two years due to moratorium.

Additionally, considering that the large proportion of SEB and Air India restructuring is alre

completed, we expect incremental restructuring to come off from H2FY13. However, stand

asset provisioning on restructured book is likely to remain high due to the RBIs intention

increasing the provisions on the same.

Public sector banks restructured book o/s (Q2FY13)

Rs bn Restructured

loans OS

% of

loan

book

SEB Air

India

OS Rest

ex

SEB/AI

Advances %

lo

bo

Allahabad Bank 127.5 11.5% 49.2 5.8 72.5 1108.5 6.

Bank Of Baroda 210.8 7.2% 20.0 24.0 166.8 2921.8 5.

Bank Of India 194.2 7.6% 29.0 30.0 135.2 2561.5 5.

Canara Bank 148.9 6.9% 55.0 15.0 78.9 2157.5 3.

Corporation Bank 88.7 9.0% 39.0 13.0 52.0 981.6 5.

IDBI Bank Ltd 125.3 7.5% 0.0 8.0 117.3 1663.7 7.

Indian Bank 103.5 10.9% 23.5 8.0 72.0 950.0 7.

OBC 114.8 9.7% 41.0 16.3 57.5 1178.2 4.

PNB 278.5 9.4% 70.0 23.0 185.5 2947.9 6.

Union Bank 100.1 5.8% 34.0 0.0 66.1 1729.0 3.

SBI 404.5 4.4% 0.0 13.0 391.5 9269.2 4.



21/84

Banking Se

Sunidhi Research |

Public sector banks restructured book o/s (Q2FY13)


The restructured book excluding the seasoned and government guaranteed portion wo

indicate much lower stress in the book as compared to stress visible prima facie. We h

analyzed the downside to the adjusted net-worth of banks on account of slippages from

restructured book excluding Air India and SEB exposure. The average impact from slippage of 1

is ~9% on the FY14E adjusted net-worth of banks (20% slippage would have an impact of 12%).

Impact of slippages from restructured book ex AI and SEBs on adjusted net-worth

Restructured

loans OS

OS Rest ex

SEB/AI

Slippages at

15% of

restructured

ex AI & SEB

Slippages at 20%

of restructured ex

AI & SEB

Adj Net

worth

(FY14)

Impact on Adj

NW assuming

15% slippages

Impact on Adj NW

assuming 20%

slippages

Allahabad Bank 127.5 72.5 10.9 14.5 105.4 10% 14%Bank Of Baroda 210.8 166.8 25.0 33.4 328.9 8% 10%

Bank Of India 194.2 135.2 20.3 27.0 178.4 11% 15%

Canara Bank 148.9 78.9 11.8 15.8 202.7 6% 8%

Corp Bank 88.7 52.0 7.8 10.4 89.7 9% 12%

IDBI Bank Ltd 125.3 117.3 17.6 23.5 148.4 12% 16%

Indian Bank 103.5 72.0 10.8 14.4 110.6 10% 13%

OBC 114.8 57.5 8.6 11.5 120.4 7% 10%

PNB 278.5 185.5 27.8 37.1 261.2 11% 14%

SBI 404.5 391.5 58.7 78.3 1158.5 5% 7%

Union Bank 100.1 66.1 9.9 13.2 100.6 10% 13%


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Allahabad

Indian

OBC

PNB

Corp

BOI

IDBI

BOB

Canara

UBI

SBI

Restructured (%) Restructured ex SEB / AI (%)


22/84

Banking Se

Sunidhi Research |

Select indicators suggest a revival in manufacturingSelect indicators (such as trend in new order book, raw material inventories, GFCF

manufacturing PMI) along with recent government measures suggest that manufacturing acti

could see a revival henceforth, which would have a positive bearing on GDP growth. A reviva

manufacturing and GDP growth would lead to lower non-performing assets for banks.

Average growth in new orders for Q1FY13 stood at 19.4% yoy and 3% qoq as compared to 3

yoy and 2.8% qoq in Q4FY12. Additionally raw material inventory to sales ratio has increased

faster pace as compared to finished goods inventory thus suggesting an increase in manufactu

going ahead. The HSBC manufacturing PMI has been largely stable at ~53 over the past f

months suggesting that it could have bottomed out. Capacity utilization too is close to recent l

at ~72%, leading us to believe that it could witness a revival from these levels.

Trend in manufacturing PMI Trend in Mfg IIP and capacity utilization

52.9

30

35

40

45

50

55

60

65

Oc

t-08

Jan-0

9

Apr-

09

Jul-09

Oc

t-09

Jan-1

0

Apr-

10

Jul-10

Oc

t-10

Jan-1

1

Apr-

11

Jul-11

Oc

t-11

Jan-1

2

Apr-

12

Jul-12

Oc

t-12

6

7

77

7

7

8

8

8

-15

-10

-5

0

5

10

15

20

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Detrended Qtl -IIP MFG LHS CU RHS

Source Markit economics, Sunidhi Research Source RBI, Sunidhi Research

Gross Fixed Capital Formation (GFCF) (a gauge of investment in the economy) grew at a rob

pace 8.7% in Q2FY13 which is showing a sign of pick up largely led by higher governmexpenditure. Government Fixed Capital Expenditure (GFCE) started showing good strength an

likely to support economic activity in FY14 considering historical trend of higher governm

expenditure before election year.

Trend in GFCF

Source RBI, Sunidhi Research

Trend in GFCE


-5%

0%

5%

10%

15%

20%

25%

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Gross Fixed Capita l Formation

0%

2%

4%

6%

8%

10%

12%

14%

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Government Final Consu mption Expenditure


23/84

Banking Se

Sunidhi Research |

Narrow Money (M1) is directly linked to corporate sales

Improvement in narrow money growth could be considered as a primary indicator of a reviva

economic activity. M1 represent demand deposit of corporate and currency with public. Si

both together reflect the core liquidity in the system, improvement in M1 growth generally re

in improvement in economic activity and sales of corporates. Higher currency with public wo

mean better spending capability and higher demand deposit with corporates is generall

precursor to either better production or higher capex.

Trend in M1 growth


Trend in new order book Trend in inventory / sales

-15

-10

-5

0

5

10

15

20

25

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

%

Avg New Order book (QoQ) Avg New Order book (YoY)

0

5

10

15

20

25

30

35

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

%

FG Inv/Sales RM Inv/Sales

Source: RBI, Sunidhi Research Source: RBI, Sunidhi Research

Investment recovery likely with policy initiativeIndex of Industrial Production (IIP) has seen a sharp deceleration during April-Sept 2012 whic

mostly led by capital goods, mining and power. Capital goods remained the biggest cul

indicating slowdown in investment activity and slowing external demand. Mining sector contin

to contract due to regulatory and environmental issues. Power generation moderated on acco

of shortages in coal supply and uneven monsoon conditions. Ex capital goods, growth rate of

declined but still positive.

0%

5%

10%

15%

20%

25%

30%

M1 Growth

M1 Growth


24/84

Banking Se

Sunidhi Research |

Trend in IIP growth

-10

-5

0

5

10

15

20

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12


Trend in IIP growth ex capital goods


The major reasons behind the slowdown in growth are high interest rates, fuel un-availability

government policy paralysis. Despite large new power capacity additions witnessed during

Eleventh Plan (about 55 GW of new capacity created), majority of it was in thermal power wh

was impacted by coal shortages resulting in lower utilization rates. In the absence of commitFuel Supply Agreements (FSAs), demand-supply gap is expected to elevate further during

Twelfth Plan and new powers project are expected to face further clearances problem. Thi

further exaggerated by stress in power distribution with large accumulated losses of discoms. T

demands fast decisions to improve investment in the sector, especially by easing po

constraints and removing major supply bottlenecks.

So can the tide turn?A majority of the companies with stalled project studied by our economy team reported t

policy issues such as land acquisition delay in environmental clearance, mining policy, fuel linka

and spectrum pricing were the main reason for the high incidence of stalled projects in

economy. These together accounts for about 68% of total stalled projects. Of the 191 proj

studied, about 93 projects entailing an investment close to Rs 6.7 tn in the infrastructure sp

were stalled for various reasons. The most prominent reason being the problem of l

acquisition with projects worth Rs. 3.1 tn. Next biggest issues being raw material unavailab

like fuel & bauxite and environmental clearance. Three biggest sectors largely impacted by pro

stalled are Power, Transport (mainly roads) and Metal & Mining accounting for 64% of t

stalled projects. These sectors remain the biggest stress sector for banks and are reflected in la

proportion into restructured book.

Trend in stalled projects

Reasons for total stalled projects

Source Capitaline, Sunidhi Research



-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Dec'07

Mar'08

Jun'08

Sep'08

Dec'08

Mar'09

Jun'09

Sep'09

Dec'09

Mar'10

Jun'10

Sep'10

Dec'10

Mar'11

Jun'11

Sep'11

Dec'11

Mar'12

Jun'12

Sept'12

IIP (excluding capital goods)

Environmental ,

12.5%

Financial , 6.2%

Government,

11.8%

Land

Acquisition ,

27.7%

Raw

Material ,

15.9%

Management,

6.2%

Legal, 1.1%

Others,

18.6%


8.98%

IT, 1.09%

Power, 36.38%

Transport,

11.23%

Metals &

Mininig ,

16.52%

Telecomunicati

on, 4.36%

Oil & Gas,

10.99%

Irrigation,

0.39%

Others, 8.70%


25/84

Banking Se

Sunidhi Research |

In last couple of months, we have seen some concrete policy intentions towards solving th

issues with FinMins fast track reform initiatives. Clearance of the most conflicting issue of re

FDI in both the houses reflects would help the current government to fast track its most pend

decisions. Some of the important measures which can change the investment climate of

country include new FSAs expected to be signed by Coal India with better pricing mechani

proposal to set up a Committee on Infrastructure, the State Electricity Distribution Responsib

Bill and setting up a Cabinet Committee on Investment (CCI) or NIB. These along with step towa

financial restructuring scheme of discoms are likely to bring financial turnaround of disco

Hence, the recent policy initiatives such as permitting FDI in retail trade, civil aviation & pow

trading exchanges and rationalization of diesel prices will help improve the investment climate

High incidence of stalled projects in the Power sector, Road and Mining sector which is bigg

stress point for banks

Out of the total stalled projects amounting to Rs 11.4 tn since 2008 (191 projects of more than

10 bn) Rs 6.9 tn which is about 60% are projects started implementation and are stalled. M

than 80% of these are in from sectors such as Power, Metals & Mining, Real Estate and Transp

sector (i.e. Rs 5.5 tn). Of the balance 45% (Rs 4.5 tn) of the projects (i.e. project that have not s

any investment) 50% contributed by Power and Metals & Mining sector. Hence, the high incide

of stalled projects in power and metals & mining sector indicates slow pace of growth in

investment activity and is the major reason for the stress in books of banks.




Implementation Stalled by Industry

Source CMIE, Sunidhi Research

Announced & Stalled by Industry



8.98%

IT, 1.09%

Power, 36.38%

Transport,

11.23%

Metals &

Mininig ,

16.52%

Telecomunicati

on, 4.36%

Oil & Gas,

10.99%

Irrigation,

0.39%

Others, 8.70%

Cement , 1.02% Real Estate

, 11.79%

IT, 1.81%

Power, 38.79%

Transport,

17.04%

Metals &

Mining, 13.92%

Telecomunicati

on, 7.02%

Irrigation ,

0.64%

Others, 7.97% Cement , 1.92% Real Estate ,4.72%

Power, 33.00%

Transport

Services , 2.33%

Metals & Mining

, 20.72%Telecomunicatio

n, 0.27%

Oil & Gas,

15.77%

Others, 21.27%


26/84

Banking Se

Sunidhi Research |

Further, bulk of the stalled projects (~84% including foreign private players) is a private sec

initiative as shown in chart below. Of which, 60 private companies have deferred infra proje

worth Rs 5.2 tn, accounting for 56.7% of the total private sector stalled projects.


Stalled project by ownership


Implementation Stalled by Ownership


Policy reform Hopes come alive after both houses cleared FDI retail

Fast tracking of the policy reform could result in clearance of some of the major project wh

would result improvement in investment climate in the economy and better asset quality amo

banks. Of the 191 stalled projects, the most prominent reason for them being stalled are

problem of land acquisition with projects worth Rs 3.1 tn stuck on account of unavailability

land. Among project implemented and stalled, almost 60% (about Rs 4tn) are stalled due to po

issues such as land acquisition, delay in environmental clearance, mining policy, fuel linkages

spectrum pricing. However, in case of project announced and stalled, policy issues accounts

about 40% of total stalled projects (Rs 1.8 tn). Raw material unavailability (like fuel & bau

shortage) is another major reason responsible for current slowdown in investments, with proje

worth Rs 1.8 tn stuck on account of the same.


Reasons for total Stalled


Central

Government,

10.14%Government

State, 5.90%Government

Local Bodies,

0.26%

Indian Private

Sector, 80.60%

Foreign

Private Sector,

3.10%

Central

Government,

11.2%

GovernmentState, 9.3%

Government

Local Bodies,

0.4%

Indian Private

Sector, 78.5%

Foreign

Private Sector,

0.5%

Environmental ,

12.5%

Financial , 6.2%

Government,

11.8%

Land

Acquisition ,

27.7%

Raw

Material ,

15.9%

Management,

6.2%

Legal, 1.1%

Others,

18.6%


27/84

Banking Se

Sunidhi Research |

Reasons for Announced & Stalled


Reasons for Implementation Stalled


Cabinet Committee on Investment (CCI) or NIB One step forwardTo speed up clearances of big infrastructure projects, Finance Minister P. Chidambaram in Sep

pitched for the setting up of a Cabinet Committee on Investment (CCI) or NIB headed by the Pr

Minister and has ministers from key ministry like Law, Finance and Justice as its members. As

the proposal once the final decision is taken by the NIB, no other ministry or governm

department will have the authority to challenge this clearance or delay in the proj

implementation. Considering most of the major ministries from centre and state would be pa

the board, CCI will supersede the various lines of clearance and would fast track the process.

study shows that of the 93 infrastructure projects stalled having an outlay of more than `10

projects worth Rs 1.3 tn have been held up for want of environment clearance. This amo

would move up to Rs 1.6 tn if we consider RBI definition of Infrastructure which includes Min

sector. The formation of the proposed NIB will help in fast tracking the clearances of th

investments and bring to the main stream.

Coal price pooling by Coal India Ltd may change the face of Indian pow

sector and could lead to reduction of asset quality stress

Availability of coal for thermal power stations is a matter of concern. According to working grfor 12th five year plan, coal requirement for power sector is expected to be around 682

tonnes (at 100% PLF) by FY17. Against the requirement of 682 mn tonnes, 54 mn tonne

expected to be imported by thermal power stations designed to use imported coal. SCCL

confirmed supply of 35 mn tonnes and c.100 mn tonnes are expected to be available from cap

coal blocks. Thus 493mn tonnes need to be made available by CIL to power stations. Conside

312mn tonnes supplied by CIL in FY12, CIL needs to supply at a CAGR of 10% over next five ye

to meet power sector demand in India. With new FSAs; where in CIL takes the onus of impor

coal on behalf of power utilities we can expect huge imports by CIL in near future.

Environmental ,

19.47%

Financial ,

2.25%

Government,

13.38%

Land

Acquisition ,

26.56%

Raw

Material ,21.46%

Management,

6.31%

Legal, 1.78%Others, 8.79%

Environmental ,

1.59%Financial ,

12.31%

Government,

9.30%

Land

Acquisition ,

29.59%

Raw Material ,

7.30%

Management,

6.02%

Others, 33.90%


28/84

Banking Se

Sunidhi Research |

Potential demand for coal in India to be met by CIL

Projected coal dema

(Mn tonne

Sector 2016-

Electricity (A)-Realistic assumption (against 842 mn tonnes) 6

Iron & Steel 1

Cement

Others 1

Non Electricity (B) 2Total (A+B) 11

Coal Availability from

SCCL

Captive Blocks for Power utilities 1

Imported coal for TPS's designed on imported coal

Total Coal availability, excl. CIL 1

Potential demand to be met by CIL for Power 4

Production by CIL in FY12 3

CAGR growth required for CIL 10

Source: Working Group, Sunidhi Research

CIL takes the onus of meeting the demand by bridging it with imported coal

Total requirement of coal from power plants is expected at c.682 mn tonnes by FY2016-17,

with FSA/LOA signed at 85%, total requirement is trimmed c.583mn tonnes by FY2016-17. CIL w

its new FSAs has committed to supply 80% of its FSA qty without attracting any penalty un

which 65% would be met by its indigenous production and remaining 15% through imported c

CIL supplied 312 mn tonnes to power sector in FY12. To meet 65% FSA qty it has to mainta

CAGR of 7%, failing which it would have to divert e-auction coal to power sector.

FSA commitment by CIL

ear of Commissioning

Capacity

(MW)

FSA/LOA

Quantity CIL Dispatch FY12

M

Tonn

(MT) Sector

Units commissioned by 31.3.2009 67,370 304.8 Power 312

2009-10 5,395 24.4 Steel 4

2010-11 6,205 24.9 Cement 62011-12 16,671 71.7 Fertilizer 2

2012-13 9,835 39.6 Others 107

2013-14 10,845 44.2 Total 433

2014-15 11,127 46.9 Total FSA's Qty 582

2015-16 5,502 23.9 At 80% commitment 466

2016-17 660 2.3 At 65% commitment 378

otal 133,610 583 Dispatch by CIL to power utilities in FY12 3

Source:Ministry of Coal, Sunidhi Research Implied CAGR for achieving 80% FSA target 14Implied CAGR for achieving 65% FSA target 7

If supply at 65% of FSA then total imports by CIL

during FY16-17

As per CIL guidance, it expects CAGR growth of 5% in production till FY2016-17. However s

supply growth is not enough to meet power sectors coal requirement which is expected

increase by CAGR of 10%. Thus by new FSA it has tried to bridge the gap with imports.


29/84

Banking Se

Sunidhi Research |

2016-17 road maps for coal demand and supply by CIL

Particulars (mn tonne) FY13 FY14 FY15 FY16 FY1

Existing +Completed Projects 227.39 222.56 202.35 197.26 192.4

Ongoing Projects 233.76 254.31 272.69 288.26 300.1

Future Projects 2.95 8.78 32.71 44.78 63.

TOTAL (A) 464 486 508 530 55

YoY Growth 5% 5% 4% 5%

Power demand (CEA) 466 545 631 663 68

FSA for power 396 463 536 564 58

At 80% (B) 317 371 429 451 46

At 65% (C) 257 301 349 366 37

Imports (D) (B-C) 59 69 80 85 8

Other user industry (A-C) 207 185 159 164 18

Source: Working Group Committee, Sunidhi Research

Coal pool pricing (CPP) could be a better option

We believe Coal price pooling could be a better option for the industry as coal availability is

major issue rather than coal price. Domestic coal is available at significant lower prices wh

compared to imported prices (40% discount). We believe coal pool pricing could lead to price h

of merely 8% in coal prices in contrast to nearly 60-70% price hike for power plants solely ba

on imported coal. Such higher power cost poses more problem rather than 8% hike in ovecosts (as per our Metal analyst calculation).

Price hike which SEBs need to approve

400-4300 Kcal

Imported coal 5300 Kcal CN

(equivalent basis

Domestic coal 810

Taxes (as per Annual report) 291

ROM cost 1101 200

Freight

cost at 300kms 1431 233

cost at 500kms 1651 255

weightage 0.8 0.

1321 46

Weighted avg price 178

price at 500 kms 165

Price difference 8%


Who gains? Private sector power plants tend to gain

Price pooling will fulfill the FSA requirements of nearly one third of the countrys thermal po

capacity, the bulk of which is in pvt sector. The cost of the coal is proposed to be subsidized

existing generation utilities, mostly in the public sector. Once the price pooling model is adop

power tariffs for plants located in the East are expected to increase more in comparison to

units that are in the coastal regions of the West ; as plants in the Eastern belt of India mostly

domestic coal.

Implementation of CPP would be significantly positive for the banking sector

Coal pool pricing thus if implemented can change the face of Indian power sector by assuring

supply of feed stock. This in turn would be hugely positive for Indian banking sector whic

reeling under the asset quality stress from power sector. Though the coal pooling p

mechanism would take time to get implemented but it assures the long term sustainability of

upcoming and already installed power plants.

Banks with highest exposure in Infra and Iron & Steel tend to benefit most if even a part of

above steps are taken as this would reduce stressed assets.


30/84

Banking Se

Sunidhi Research |

Banks exposure to infrastructure and Iron & Steel sectors

Infrastructure Iron & Steel Total

Stress sector

infra and met

UCO 27% 9% 37% 9

P&SB 26% 3% 29% 5

Andhra 21% 6% 27% 10

OBC 19% 7% 26% 9

United 17% 8% 25% 4

Central 21% 3% 25% 5

SBI 15% 9% 24% 10

Canara 19% 4% 23% 8

PNB 16% 6% 22% 4

BOM 17% 4% 21% 4

Union 16% 4% 20% 5

Indian 16% 3% 19% 5

Corp 16% 3% 18% 5

Syndicate 13% 3% 16% 3

BOI 11% 5% 16% 6BOB 10% 4% 14% 6


Decline in interest rate to improve investment climateIt is expected that the RBI is likely to move towards an easy monetary policy in the coming

quarters which would be the biggest trigger for a change in the investment climate. This wo

make a lot of projects viable and along with policy initiatives would improve the debt servic

capability of banks. As indicated by the charts below, we believe that there is room for inte

rates to go lower and harbor expectations of easing in the coming few quarter.

RBI should start softening soon

SBI base rate is currently ~50bps higher than 1 year CP rates

indicating room for base rate to decline by 25-50bps in near

term

Also, 1 year CP is at only 100 bps premium to 1 year risk free rat

which is generally a base level reflecting that risk premium has

declined

Source: Bloomberg, Sunidhi Research Source: Bloomberg, Sunidhi Research

-300

-250

-200

-150

-100

-50

0

50

100

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Spread

0.0

1.02.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Sep-0

5

Feb-0

6

Jul-06

Dec-

06

May-0

7

Oc

t-07

Mar-

08

Aug-0

8

Jan-0

9

Jun-0

9

Nov-0

9

Apr-

10

Sep-1

0

Feb-1

1

Jul-11

Dec-

11

May-1

2

1 Year CP rate p remium to 1 Year Gsec yield


31/84

Banking Se

Sunidhi Research |

Banks bulk deposit cost has fallen

Source:Bloomberg, Sunidhi Research

OIS yield curve still negative although Gsec yield curve turned

positive indicating rate cut hopes


Break in sticky upward trend of core inflation a major positive in Oct WPWPI inflation for Oct 12 eased to the lowest this fiscal to 7.45% against a reading of 7.81% in S

The ease was broad based with major groups of primary articles, fuel & power and manufactu

products marking a dip. One positive aspect of the Oct WPI number has been that the st

upward trend in core inflation (manufactured products ex food inflation) broke with the c

inflation falling below the 5.5% (at 5.2%) for the first time in last 3 months, with the MoM W

core inflation rising by a mere 0.1% in Oct. Going forward, we believe that the downward press

on the Primary Articles Inflation will continue on account of ease in food prices with bet

prospects of rabi food output. Food inflation has already eased to 6.6% in Oct from the annual

of 9.5%. The manufactured group of inflation could also continue with its downward trend

slowing demand in the economy adds to the easing pressure on the manufactured inflation.

Trend in Core Inflation

Source: CSO, Sunidhi Research

Trend in CPI

Source: CSO, Sunidhi Research

Signs of easing in the WPI inflation and bleak outlook on domestic industrial activity has rai

hopes for some interest rate action by financial year end.

-3.0

-2.0

-1.00.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09

Mar-10

Jul-10

Nov-10

Mar-11

Jul-11

Nov-11

Mar-12

Jul-12

1 Year Gsec premium to 1 Year CoD

-300

-200

-100

0

100

200

300

400

Jan-02

Aug-02

Mar-03

Oct-03

May-04

Dec-04

Jul-05

Feb-06

Sep-06

Apr-07

Nov-07

Jun-08

Jan-09

Aug-09

Mar-10

Oct-10

May-11

Dec-11

Jul-12

10 Yr - 1 Yr OIS Spread

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11

WPI Core Inflation WPI Core Inflation (6 months MA)

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

13.5

Overall CPI Food Fuel Excluding Food and Fuel


32/84

Banking Se

Sunidhi Research |

Price performance of PSBs are highly correlated to risky yieldsHistorically, we have observed that valuation of PSBs is highly correlated to high risk corpor

bond yields (1 Year BBB corporate bond yield). This is largely due to the fact that BBB bond yie

best barometer for asset quality stress as well as liquidity. In case of falling BBB bond yield,

stock price rallies due to a) expected improvement in liquidity scenario which would help bank

improve margins b) likely improvement in the economy to reduce asset quality stress and c) fal

interest rate would result in gain in bond book. Considering SBI as proxy for PSBs, as we can

from chart below that SBI has rallied faster than the pace of fall in BBB bond yields and vice ve(we consider inverse BBB bond yield for simplicity).


Valuation gap between private and PSU banks to narrow going aheadHistorically public sector banks have traded at a ~50% discount to new private sector banks. P

the recent run up in private sector banking stocks, the discount has widened significantly w

public sector banks trading at ~62% discount to private banks. Thus despite the challengenvironment we harbor a positive bias towards public sector banks due to their reasona

valuations.

Of the two important drivers of PSU banks stock performance, the first - bond rates already se

to have topped and is likely to see some easing going ahead, whereas concerns still remain in

second - NPA. Currently, the market expects the RBI to start the easing process which me

yields dont have much upside risk (unless crude see a sharp upmove). However while the ma

would want to play on likely lower bond yields, it is skeptical about the rising risk of n

performing assets. We believe that though slippages will remain high as compared to hist

averages recoveries and up gradations will keep a check on net slippages in the coming quart

Moreover with more policy reforms and likely improvement in economic activity during FY14

FY13, we believe the gap between private and PSU banks to narrow going ahead.

Banks represent 20% of the weight-age in the BSE Sensex and 19.4% in the BSE100 given

sectors involvement in every aspect of Indias growth. Howe ver, within the sector

composition is largely tilted towards private sector banks. Meanwhile public sector ba

dominate all major banking parameters including profits, business etc. This analysis is furt

heightened on comparing the weight-age of PSBs ex SBI. On comparison of market share in b

parameters such as credit, deposits etc, PSBs (ex SBI) represent 55-60% of the share in FY12 vs

index weight-age of just ~10% in the Bankex and the Bank nifty. In terms of the Sensex and

BSE100, banks represent 19-20% weight-age represented largely by private banks at 15-1

where as PSBs (ex SBI) weight-age is only 2% in BSE100 and zero in the Sensex.

The following chart depicts the difference in representation of PSBs and private banks in term

market share and representation in stock indices

-15

-14

-13

-12

-11

-10

-9

-8

-7

-6

-100%

-50%

0%

50%

100%

150%

May-0

5

Sep-0

5

Jan-0

6

May-0

6

Sep-0

6

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9

May-0

9

Sep-0

9

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Inverse 1 year BBB Corp Bond Yie ld - RHS SBI Price performance (YoY %)


33/84

Banking Se

Sunidhi Research |

Public banks account for around two-thirds of the market on different parameters yet they are severely under-represented

Market share Represented in ownership

Deposits Advances Total Assets NII PAT Bankex (BSE) Bank Nifty (NSE) Mc

Private Sector Banks 19% 19% 21% 23% 31% 77.2% 76.0% 57.

PSBs 81% 81% 79% 77% 69% 22.8% 24.1% 43.

PSB ex SBI 64% 62% 61% 56% 53% 10.3% 10.0% 25.

Source: Company, Exchanges, Sunidhi Research

The basic reason behind this is large government ownership and restrictions on the maximforeign investor holding resulting in lower free float. This has also led to under ownership

institutional investors.

Trend in ownership pattern for public sector banks

Ownership (PSBs)

Q2FY13 Q2FY12 Q2FY11

Non promoter 26.60% 26.10% 28.21%

FII 9.84% 10.08% 13.45%

Insurance + MF 14.59% 15.02% 13.98%

Ownership (PSB ex SBI)

Non promoter 26.76% 25.32% 27.21%

FII 10.33% 11.10% 13.05%Insurance + MF 12.02% 12.68% 12.81%


According to Sunidhis banking performance indicator for Q2FY13, the top five positions are

occupied by private sector banks. However while assigning a weight of 25% to valuations and 7

to the ranking in accordance to SBPI, select public sector banks such as Bank of Baroda a

Syndicate Bank also appear in the top five.

Sunidhis banking performance indicator (SBPI)

Bank

Total

Rank

(Q2FY13)

Total

Rank

(Q1FY13)

Asset

quality

Rank CAR Rank

Operational

efficiency

Rank

Profitability

score Rank

Quarterl

performan

rank

Yes Bank Ltd. 1 1 1 4 13 2 1

Axis Bank Ltd. 2 5 4 8 1 3 2

HDFC Bank Ltd. 3 2 2 2 4 12 5

IndusInd Bank Ltd. 4 3 3 10 12 1 6

Kotak Mahindra Bank Ltd. 5 7 5 3 17 18 3

Bank Of Baroda 6 8 8 7 7 5 10

Federal Bank Ltd. 7 9 6 1 8 17 12

ICICI Bank Ltd. 8 4 7 19 2 22 4

IDBI Bank Ltd 9 18 11 13 21 9 9

Syndicate Bank 10 10 9 20 19 4 7

Oriental Bank of Commerce 11 12 15 11 9 16 11

Canara Bank 12 15 13 5 16 11 14

Indian Bank 13 6 14 14 6 14 16

Union Bank Of India 14 22 12 21 14 13 13SBI 15 14 17 12 5 7 20

Bank Of India 16 21 16 22 11 21 8

Vijaya Bank Ltd 17 17 10 9 23 20 15

Punjab National Bank 18 11 21 18 3 10 19

Indian Overseas Bank 19 20 20 6 22 6 21

Allahabad Bank 20 13 19 15 10 19 22

Andhra Bank 21 16 18 16 15 8 23

UCO Bank 22 19 22 17 20 23 18

Central Bank Of India 23 23 23 23 18 15 17



34/84

Banking Se

Sunidhi Research |

SBPI ranking including valuation

Bank Total Rank

P/ABV

FY13E Valuation Rank

Total Rank plus

valuation rank

Total Rank

valuation

Yes Bank Ltd. 1 2.9 20 6 1

Axis Bank Ltd. 2 2.2 18 6 2

Bank Of Baroda 6 1.2 11 7 3

HDFC Bank Ltd. 3 4.7 23 8 4

Syndicate Bank 10 0.9 3 8 5

IndusInd Bank Ltd. 4 3.8 22 9 6

Federal Bank Ltd. 7 1.3 14 9 7

IDBI Bank Ltd 9 0.9 9 9 8

Kotak Mahindra Bank Ltd. 5 2.9 21 9 9

Oriental Bank of Commerce 11 0.9 8 10 10

ICICI Bank Ltd. 8 2.1 17 10 11

Indian Bank 13 0.9 4 11 12

Canara Bank 12 1.2 12 12 13

Union Bank Of India 14 1.4 15 14 14

Indian Overseas Bank 19 0.7 1 15 15

Bank Of India 16 1.1 10 15 16

SBI 15 1.6 16 15 17Allahabad Bank 20 0.9 7 17 18

Punjab National Bank 18 1.3 13 17 19

Andhra Bank 21 0.9 6 17 20

Vijaya Bank Ltd 17 2.2 19 18 21

Central Bank Of India 23 0.8 2 18 22

UCO Bank 22 0.9 5 18 23

Source: Company, Sunidhi Research *Prices as on 6th

Dec


35/84

Banking Se

Sunidhi Research |

Key risksThe government reforms initiated in September including FDI in retail, aviation, diesel price hik

SEB restructuring etc, have helped improve investors sentiment and portfolio flows. They h

also helped to reduce risks of downgrades and sharp rupee depreciation. However, some crit

economic issues still persist which remain the key downside risk to the banking sector wh

includes fiscal deficit, inflation, CAD issue, liquidity risk. Although some of the policy initiative

direct cash transfer would reduce the stress marginally but weak global financial conditions

higher pre budget spending could worsen the conditions. Hence, this would require

improvement in the external condition in addition to continued policy action by the governmand central bank.

Pre-election spending could lead to fiscal slippages

We expect the fiscal deficit (state + centre deficit) to be around 8.5% given only select measu

taken by the government to contain the fiscal deficit. Also, considering we are approaching

election year (2014), we could see a sharp rise in government expenditure whereas incom

largely inelastic. Historically, government expenditure rises at a faster pace during an election y

as per the chart below. Consistent high crude prices could result in risks of a higher sub

burden. Similarly, fertilizer and food subsidy bills are also likely to surprise on the upside. Wea

than expected tax revenues along with higher expenditure and more budget deficit for the st

are likely to result in poor fiscal deficit numbers.

Trend in central government expenditure

*Circles re

Banking Sector 2012 sector analysis

Documents

Transcript of Banking Sector 2012 sector analysis