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15 August 2015 1

Financials | Sector Update

Alpesh Mehta ([email protected]); +91 22 3982 5415 Vallabh Kulkarni ([email protected]); +91 22 3982 5430

AGENDA

Indradhanush – Towards the golden age Re-iterate Play 4R’s: Recovery|ROA acceleration | Reforms | Re-rating

n The g overnment h as u nveiled “ Indradhanush” ( Hindi w ord f or “ Rainbow”), a framework t ouching s even c ontours o f t he b anking s ystem (A to G a pproach), continuing with its commitment of reforming State Owned Banking space. We believe this f ramework f or transforming the S tate Owned B anks re presents t he mo st comprehensive re form e ffort u ndertaken b y a ny g overnment s ince b anking nationalization in 1970.

n Key highlights: Appointments (appointed MD&CEO and Chairman for 5 banks), Bank

Board B ureau ( to o versee a ll P SU B anks i ncluding appointments; t o be operational

from 1st April 2016); Capitalization (INR700b committed by FY19; bank wise allocation

for first INR200b announced); De-stressing (various measures to reduce asset quality

stress); Empowerment (no interference from Government greater, flexibility in hiring

manpower); Framework f or Accountability ( Comprehensive KPI b ased f ramework t o

assess performance; E SOPs f or s enior ma nagement); Governance re forms

(governance reforms started with Gyan Sangam) n PSB re forms c an u sher i n s tructural c hanges, t hough m ay not n ecessarily re flect in

earnings in the near term, and will help improving governance (in turn multiples) and outreach o f PSBs. Reforms further s upported by i mproved p rospects o f a n i nterest rate cut by RBI, cyclical recovery and opex optimization efforts undertaken by banks can result in significant re-rating.

n Public sector banks (PSBs) are deep cyclicals, with RoAs of 0.4-0.7% at the bottom of the cycle and 0 .9-1.4% at the peak of cycle. S imilarly, P/BV r anges between 0.4-0.6x and 1 .3-2.3x. Valuations a re n ear ( for l arge P SBs) o r b elow t he l ong p eriod a verage (20-40% discount for mid-sized PSBs).

n With a ppointment o f C hairman a nd M D&CEO from Private Sector b ackground and healthy capitalization, we upgrade BOB to BUY from Neutral earlier. We maintain our positive stance on SBI and UNBK.

Seven point agenda – Most comprehensive action plan since 1970s n Appointments: MDs & CEOs and non-executive chairman of 5 banks were

announced. A few high profile appointments include Mr. PS Jayakumar (MD&CEO, BOB – earlier with Citigroup), Mr. Rakesh Sharma (MD&CEO, Canara Bank – earlier with SBI and LVB), Mr. Ravi Venkatesan (Chairman, BOB – earlier with Microsoft/Infosys), Mr. G Padmanabhan (Chairman, BOI – earlier ED of RBI).

n Bank Board Bureau: Structure of BBB has been laid out (chairman plus 6 personnel) with the aim to replace existing appointment board; and will act as an advisory services/body for banks’ strategy. BBB to start functioning from April ’16. BBB search committee would comprise of RBI Governor, Financial Services Secretary and Secretary, DoPT.

n Capitalization: Commitment of INR700b by FY19; Announced bank wise allocation for first two tranches of FY16 (INR200b of the INR250 proposed for the year); SBIN, UNBK, BOB to be the key beneficiaries. IDBI/IOB amongst mid-sized banks.

15 August 2015

Sector Update

Financials

· Appointments (appointed MD&CEO and chairmen for 5 banks),

· Bank Board Bureau (to oversee all PSU Banks including appointments; to be operational from 1st April 2016);

· Capitalization (INR700b committed by FY19; bank wise allocation for first INR200b announced);

Please refer to our sector

report dated 5th Jan 2015

Investors are advised to refer through disclosures made at the end of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

http://institution.motilaloswal.com/emailer/Research/BANK-GYAN-20150105-MOSL-SU-PG008.pdf�

http://www.motilaloswal.com/Institutional-Equities�

15 August 2015 2


AGENDA

n De-stressing: Focus on resolutions by involving stakeholders (Project Monitoring

Group, clearing pending policy decisions, long term availability of fuel, Discom reforms, Flexible restructuring, strengthening ARCs, etc).

n Empowerment: Focus on banks’ autonomy with no government interference; Banks are encouraged to take their decision independently keeping the commercial interest in mind; greater flexibility in hiring manpower to Banks

n Framework of Accountability: A new framework of key performance indicators (KPIs) to be measured for incentives was announced; Variable pay and ESOPs for top management are also announced

n Governance Reforms: Continuous engagement with banks, regular review meetings with banks with no interference. Next Gyan Sangam scheduled on 14-16th January 2016

Multiple below/near LPA| Economic Recovery a key catalyst n PSBs reforms can usher in structural changes, though may not necessarily reflect

in earnings in the near term, and will help improving governance (in turn multiples) and outreach of these banks.

n Reforms further supported by improved prospects of an interest rate cut by RBI, cyclical recovery and opex optimization efforts undertaken by banks can result in significant re-rating for PSBs.

n Public sector banks (PSBs) are deep cyclicals, with RoAs of 0.4-0.7% at the bottom of the cycle and 0.9-1.4% at the peak of cycle. Similarly, P/BV ranges between 0.4-0.6x and 1.3-2.3x. Valuations are near (for large PSBs) or below the long period average (20-40% discount for mid-sized PSBs).

n With appointment of Chairman and MD&CEO with Private Sector background and healthy capitalization, we upgrade BOB to BUY from Neutral earlier. We maintain our positive stance on SBI and UNBK.

Exhibit 1: PSU Banks - One year forward PE

Source: MOSL, Company

Exhibit 2: PSU Banks - One year forward PB


3.9

10.6

7.8

7.4

2

4

7

9

12

Aug

-05

Nov

-06

Feb-

08

May

-09

Aug

-10

Nov

-11

Feb-

13

May

-14

Aug-

15

PSU Banks Sector PE (x) LPA (x)

1.9

0.6

0.91.1

0.3

0.8

1.3

1.8

2.3

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15PSU Banks Sector PB (x) LPA (x)

· De-stressing (various measures to reduce asset quality stress);

· Empowerment (no interference from Government greater, flexibility in hiring manpower);

· Framework for Accountability (Comprehensive KPI based framework to assess performance; ESOPs for senior management);

· Governance reforms (governance reforms started with Gyan Sangam)

15 August 2015 3


Increased transperency in Appointments Bank Board Bureau empowered to appoint Bank Chairman, MD & CEO n MDs & CEOs and non-executive chairman of 5 banks were announced –after a position

lying vacant for almost a year n A f ew h igh profile appointments include Mr. P S Jaykumar (MD&CEO, B OB – earlier

with C itigroup), Mr. R akesh S harma ( MD&CEO, C anara Bank – earlier w ith S BI a nd LVB), Mr. Ravi Venkatesan ( Chairman, BOB – earlier with Microsoft/Infosys), Mr. G Padmanabhan (Chairman, BOI – earlier ED of RBI).

n Untill the Bank Investment Company is estabhilised appointment of key managment person will b e d one by Bank Board B earu ( BBB). The members for the BBB will b e selected in the next six months and the BBB will start functioning from the 1st April, 2016.

Key details on MD & CEO appointments

Mr. P S Jayakumar New role: MD & CEO, Bank of Baroda Previous role: MD & CEO of Value and Budget Housing Corporation Pvt Ltd. Associated with Citi bank more than 2.5 decades Age: 53 years

n Prior to Value and Budget Housing Corporation Pvt. Ltd, Mr. Jayakumar served as Head of Balance Sheet Optimisation - Treasury in Asia-Pacific at Citigroup Inc. since May 2008.

n Mr. Jayakumar started his career with Citibank in 1986 and has held several senior management positions, including being Country Head for Consumer Business in India and Asia Pacific. He also served as Region Head of Asia-Pacific (Consumer Finance) at Citigroup Inc.

n Mr. Jayakumar is a Gurukul Chevening Scholar from the London School of Economics and Political Science on Globalization. He holds a Master's Degree in Management from XLRI, Jamshedpur and a Bachelor Degree in Commerce from the University of Madras.

Mr. M.O. Rego New role: MD &CEO, Bank of India Previous role: DMD, IDBI Bank Age: 56 years

n Mr. Rego joined IDBI in 1984 and has extensive exposure in all areas of Core Banking and his forte lies in International Banking and Treasury.

n Mr. Rego was also MD & CEO of IDBI Home finance Ltd. which under his leadership grew from a fledgling company to become the fourth largest housing finance company.

n He holds B.Com from University of Pune and M.B.A (Finance) from Symbiosis Institute of Business Management, Pune

15 August 2015 4


Mr. Rakesh Sharma New role: MD &CEO, Canara Bank Previous role: MD & CEO, The Laxmi Vilas Bank Ltd Age: 57 years

n Mr. Sharma was earlier with SBI where his last assignment was that of Chief General Manager. Mr. Sharma served SBI for over 33 years, heading different departments – both domestic as well as internationally. His expertise lies in retail and wholesale banking, asset liability management, loan syndication, trade finance and personnel development.

n During his stint in SBI, Mr. Sharma also administered banking operations for International Banking Group (IBG) encompassing consolidation of balance sheets for all the foreign offices of the bank. While posted at Tokyo, he was in charge of overall functioning of SBI branches in Japan.

n Mr. Sharma holds a B.Com degree and Masters in Economics.

Mr. Kishore Kharat Piraji New role: MD &CEO, IDBI Bank Previous role: ED, Union Bank of India Age: 56 years

n In the banking career, spanning over more than three decades in Bank of Baroda, Mr. K.P. Kharat has got varied exposure which includes Credit Administration, Foreign Business, Information Technology and general administration in India as well as overseas.

n Mr. K.P. Kharat has established and headed a foreign subsidiary of Bank of Baroda in Trinidad & Tobago; other foreign assignment was at Sharjah. In his last posting he was heading Financial Inclusion Vertical as General Manager of BOB

n Mr. K.P. Kharat is a graduate in Commerce, CAIIB and Law. He also holds an Executive Diploma in Management.

Ms. Usha Ananthasubramanian New role: MD &CEO, Punjab National Bank Previous role: CMD, Bhartiya Mahila Bank Age: 56 years

n Prior to taking over as CMD of the Bhartiya Mahila Bank, Ms. Usha Ananthasubramanian was the Executive Director of Punjab National Bank for over two years.

n In a career spanning over three decades, Ms. Ananthasubramanian has worked in various positions in the banking and allied areas. Key assignments held include General Manager South Zone, Bank of Baroda and Life Insurance Joint Venture Formation. She was closely associated with the transformation project of Bank of Baroda including rebranding and innovative HR initiatives.

n She holds a Master’s degree in Statistics from the University of Madras and a Master’s degree in Ancient Indian Culture from the University of Mumbai.

15 August 2015 5


Key details on Non-Executive Chairman Appointments

Mr. Ravi Venkatesan New role: Non-Executive Chairman, Bank of Baroda Previous role: Independent Director, Infosys Age: 51 years

n Mr. Venkatesan is a Director on the Board of Infosys, and a Fellow of the Center for Higher Ambition Leadership, Boston. n Between 2004 and 2011, he was the Chairman of Microsoft India, which, under his leadership, became Microsoft's

second largest and one of its fastest growing geographies. n Prior to Microsoft, he spent sixteen years with Cummins Inc. as Chairman of Cummins India Limited; he oversaw the

company’s transformation into a leading provider of power solutions and automotive engines in India. n He holds a bachelor’s degree in mechanical engineering from the Indian Institute of Technology, Bombay; a master’s in

engineering from Purdue University; and a Master of Business Administration from Harvard Business School.

Mr. G Padmananbhan New role: Non-Executive Chairman, Bank of India Previous role: Retired ED of Reserve Bank of India Age: 60 years

n Mr. Padmanabhan served as Executive Director of the Reserve Bank of India, looking after Department of Information and Technology, Department of Payment and Settlement Systems and Foreign Exchange Department.

n Prior to his appointment as Executive Director, Mr. Padmanabhan was heading the Department of Payment & Settlement Systems in the bank since March 2005.

n He is a post graduate in Economics from the University of Kerala and an MBA (International Banking and Finance) from the Birmingham University, UK.

Mr. T N Manoharan New role: Non-Executive Chairman, Canara Bank Previous role: Director, Tech Mahindra, Public Health Foundation Age: 59 years

n Mr. Manoharan served as the President of ICAI during 2006-07 and was instrumental in charting the road map for several accounting reforms in the Indian System and pioneered proactive amendments to the Chartered Accountants Act, 1949.

n Mr. Manoharan was the Chairman of ICAI of Accounting Research Foundation. He was on the Board of IRDA and on the committees constituted by RBI, SEBI, CAG and CBDT during 2006-07.

n Mr. Manoharan was nominated by the Government of India to the Board of Satyam Computer Services Ltd. He made significant contribution towards the revival of the erstwhile Mahindra Satyam within a short span of time. The Government of India conferred him the "Padma Shri" award in 2010.

15 August 2015 6


Mr. G Narayanan New role: Non-Executive Chairman, Vijaya Bank Previous role: Retired ED, Indian Overseas Bank Age: 66 years

n During the period spanning over 38 years in the Indian Banking Sector, Mr. Narayanan was ED of Indian Overseas Bank; General Manager of Bank of India heading treasury operations;. Managing Director of Centrum Capital Ltd. and Managing Director of Securities Trading Corporation of India Ltd.

n Mr. Narayanan was also Director of Clearing Corporation Of India Ltd, IL&FS Investment Managers Ltd and Securities Trading Corporation of India Ltd.

n Mr. Narayanan holds a Diploma in Corporate Law. He also completed Management Accountant (MAC-1). He has B.Com form Madras University.

Mr. T C V Subramainian New role: Non-Executive Chairman, Indian Bank Previous role: Retired CMD, Exim Bank Age: 66 years

n Mr. Subramanian served has diverse experience in industrial and export financing. He joined EXIM Bank in 1982 when it was set up and served as its CEO till 2009. He actively participated in the setting up of EXIM Bank as a model public sector organization with a professional work culture.

n Prior to EXIM bank, he worked at the Bank of India and IDBI. n He holds a BE, CAIIB and ICWAI (Inter).

15 August 2015 7


Bank Board Bureau – a reality now One step closer towards Bank Investment Company The decision to set up a Bank Board Bureau, one of the recommendations of Gyan Sangam, was a nnounced in the Budget. The F inance Minister has a lready indicated t hat o nce t he new structure is stablised, the Bank Board Bureau (BBB) will be eventually over period of time b ecome a B ank Investment Company (BIC) – In l ine w ith the Nayak C ommittee recommendation. The members for the BBB will be selected in the next six months and the BBB will start functioning from the 1st April, 2016.

Structure and Functions of the Bank Board Bureau (BBB) n BBB c omposition will comprise of a Chairman and six more members – three

will be officials and three experts (of which two would necessarily be from the banking sector).

n Key f unctions of t he BBB are: (a) Link between the PSBs and government, (b) constantly engage with the Board of Directors of all the PSBs to formulate appropriate strategies for their growth and development, and (c) Replace the Appointments Board for appointment of Whole-time Directors as well as non-Executive Chairman of PSBs.

n The BBB would broadly follow the selection methodology as approved in relevant Appointments Committee of the Cabinet (ACC) guidelines.

n Search C ommittee for m embers o f t he B BB would comprise of the RBI Governor, Department of Financial Services (DFS) Secretary and Department of Personnel and Training (DoPT) Secretary as members.

n The members for BBB will be selected in the next six months and the BBB will start functioning from the 1st April, 2016.

n As per Nayak committee recommendation, members of BBB be given a tenure of three years or until powers are passed on to BIC, whichever is shorter.

Suggestions of Nayak Committee on Bank Investment Company (BIC) n BIC will be Core Investment Company under the RBI registration and regulations

and character of the same will resemble to that of sovereign wealth fund n CEO (to be selected through search process) should be professional banker or

private equity professional having substantial experience in banking n Non executive chairman of BIC would be nominated by GOI n All other directors should be independent and bring in requisite banking or

investment skills n BIC employees would be incentivized based on financial returns of the bank n If required GOI shareholding in BIC should come below 50% n All banks employees will be obliged to CEO, CEO to board, board to BIC and BIC

to GOI (in terms of shareholders agreement)

BBB will comprise of a Chairman and six more

members – three will be officials and three experts

Search Committee for members of the BBB would comprise of RBI Governor,

DFS Secretary and DoPT Secretary as members.

15 August 2015 8


As per Nayak Committee recommendations, how the transition to BIC from direct government ownership shall happen? A) Phase 1: Constitution of BIC and fixing up of responsibility n Important legislative change required: PSU banks stake will be transferred to BIC

thus, it will be required all PSU banks shall come under companies act vs nationalized banking act or SBI act currently

n GOI shall initially hold entire equity of BIC and constitute professional board for BIC

n All existing ownership function shall be transferred to BIC and non ownership function such as regulatory and development related shall be transferred to RBI

B) Phase 2: Actual implementation of reforms start n Reconstitution of board takes place – an important step in our view to improve

governance standards and fixing up of responsibility n New board members shall be decided by identifying the skill gap, bringing in the

requisite professional with talent and experience in the financial services n BIC will continue to exercise bank ownership function C) Phase 3: Empowering board; BIC function as investor in banks n All the ownership functions will be transferred to respective boards n Appointment of independent directors, CEOs and other whole time directors

will be banks responsibilities. BIC will have maximum two nominee director on the board

n As the non-executive Chairman is not an independent director, a lead independent director would play a helpful role in each bank board, and would be chosen by the board's independent directors.

GOI is committed to BIC but silent on the structure and

time lines as yet

15 August 2015 9


Capitalization – a major boost CET1 for most banks above 7.5% vs minimum requirement of 6.125%

n GOI has committed to infuse INR700b capital over t he next four years (INR250b in FY16). Th e capital i nfusion in first a nd s econd t ranche t otaling I NR200b w ould t ake place within a month.

n As per our estimates, CET1 of all PSU Banks (ex-IOB) would remain above 7.5% (GOI stated target level) by March 2016.

n In the proposed capital infusion, we estimate minimum BV dilution in SBIN, BOB, PNB and UNBK. While, we estimate 10% dilution in trailing BV of BOI

Exhibit 3: Minimum dilution in case of SBIN, BOB and UNBK; Among mid sized banks IDBI/IOB are the key beneficiaries

(INRb) CMP INR

Capital Infusion (INRm)

Pre Issue shares (m)

Post Issue Shares (m)

% dilution Pre Issue BV

FY15 Post Issue

BV FY15 % dilution

SBIN 268 55,310 7,466 7,672 2.8 216 218 0.6 BOI 170 24,550 665 809 21.7 394 354 -10.1 IDBI 66 22,290 1,604 1,941 21.0 145 132 -9.4 IOB 39 20,090 1,235 1,754 42.0 260 194 -25.2 BOB 184 17,860 2,211 2,308 4.4 167 168 0.4 PNB 166 17,320 1,855 1,959 5.6 203 201 -1.0 UNBK 208 10,800 636 688 8.2 288 282 -2.1 CBK 306 9,470 515 546 6.0 509 498 -2.3 CRPBK 51 8,570 838 1,005 19.9 125 113 -9.8 DBNK 44 4,070 561 653 16.4 129 117 -9.3 BOM 35 3,940 1,063 1,174 10.5 66 63 -4.4 ANDB 76 3,780 603 653 8.3 167 160 -4.2 ALBK 91 2,830 571 602 5.4 202 196 -2.8

Source: MOSL, Company Exhibit 4: Post capital infusion, CET1 of all PSU Banks (except IOB) is now above 7.5% (as indicated by GOI earlier)

(INRb) CET1 % (FY15)

CET1 (FY15) FY15 RWA

(FY15)

Capital infusion

(proposed) FY16 Accruals FY16 CET1 FY16 CET1 (%)

SBIN 9.1 1,482 16,226 55.3 121 1,658 9.3 BOI 7.2 279 3,846 24.6 12 315 7.4 IDBI 7.4 210 2,861 22.3 11 243 7.7 IOB 6.6 127 1,944 20.1 2 150 7.0 BOB 9.8 388 3,961 17.9 37 443 10.2 PNB 9.1 385 4,214 17.3 29 431 9.3 UNBK 7.2 184 2,542 10.8 18 213 7.6 CBK 7.4 256 3,434 9.5 21 286 7.6 CRPBK 7.4 103 1,394 8.6 7 118 7.7 DBNK 7.3 62 847 4.1 3 70 7.5 BOM 7.5 70 934 3.9 5 79 7.7 ANDB 7.5 94 1,241 3.8 9 106 7.8 ALBK 7.6 116 1,528 2.8 7 126 7.5 INBK 10.8 127 1,176 0.0 9 136 10.5 OBC 8.1 129 1,589 0.0 6 135 7.7 CBOI 8.0 156 1,957 0.0 8 164 7.6 UNTDB 7.5 50 668 0.0 3 53 7.3 VJYBK 7.6 59 778 0.0 5 64 7.5 UCO 8.9 113 1,264 0.0 12 125 9.0 SNDB 7.5 121 1,602 0.0 16 136 7.7 PJSB 8.5 48 565 0.0 2 50 8.0

* Assumption: RWA growth of 10%; 20% dividend payout Source: MOSL, Company

15 August 2015 10


Exhibit 5: Dilution in EPS / Book value estimates (INR) Pre Issue BV Post Issue BV Pre Issue EPS Post Issue EPS FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 SBIN 229 255 287 230 255 287 25.5 31.6 39.8 25.2 31.0 39.0 PNB 220 244 273 218 240 268 19.5 26.8 33.3 18.8 25.6 31.7 BOB 182 201 223 183 201 222 20.7 24.6 29.1 20.2 23.7 28.1 BOI 412 444 488 370 396 432 22.5 39.4 55.8 19.7 33.2 46.7 UNBK 317 355 402 309 344 388 35.4 46.2 57.0 33.4 43.1 53.1 ANDB 180 196 216 172 187 205 17.8 22.8 27.9 16.6 21.2 26.0


Exhibit 6: Despite book value dilutive capital infusion for a few banks, PBV ratios remain significantly below LPA (INR) Pre Issue RoE Post Issue RoE New Price to Book (x) LPA 1yr fwd

PBV (x) FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 SBIN 11.8 13.1 14.7 11.8 12.8 14.4 1.16 1.05 1.26 PNB 9.2 11.6 12.9 9.2 11.2 12.5 0.76 0.69 1.18 BOB 11.9 12.8 13.7 11.8 12.4 13.3 1.01 0.92 1.04 BOI 5.6 9.2 12.0 5.7 8.7 11.3 0.46 0.43 1.06 UNBK 11.7 13.7 15.1 11.6 13.2 14.5 0.67 0.60 1.05 ANDB 10.3 12.2 13.6 10.2 11.8 13.3 0.44 0.41 0.88


Exhibit 7: Transition to BASEL III capital requirements

CET1 Capital conservation

buffer Total D-SIB req.

Total CET I required

FY15 5.50 0.00 5.50 0.80 6.30 FY16 5.50 0.63 6.13 0.80 6.93 FY17 5.50 1.25 6.75 0.80 7.55 FY18 5.50 1.88 7.38 0.80 8.18 FY19 5.50 2.50 8.00 0.80 8.80

Source: MOSL, RBI

Exhibit 8: PSU Banks can raise ~INR1t from market by diluting GOI stake to 51%

Post Issue GOI

Shareholding (%) Market

Cap (INRb) Capital raise by diluting

GoI to 51% INRb) SBIN 60.2 2,032 368 BOB 59.3 408 66 PNB 62.0 308 66 CBOI 81.5 172 103 CBK 66.5 157 48 UNBK 63.5 132 32 BOI 70.8 113 44 IDBI 80.6 106 62 INBK 82.1 71 44 SNDB 69.2 68 24 UCO 72.8 57 24 ALBK 62.9 52 12 OBC 59.1 51 8 IOB 81.6 48 29 ANDB 64.0 46 12 CRPBK 69.4 43 16 BOM 81.7 38 23 VJYBK 74.1 33 15 DBNK 65.4 25 7 UNTDB 82.0 19 12 PJSB 79.6 18 10 Total 1,024


Capital requirements are expected to be back-ended

towards FY17-19

15 August 2015 11


Exhibit 9: Equity capital infusion by GoI in PSU Banks (INR b)


0 13 8 0 0 5 0

100

19 12

201

120 125 140

70

250 250

100 100

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

FY19

E

Equity capital infusion by GoI in PSU Banks (INRb)

15 August 2015 12


De-stressing PSBs Taking measures to reduce stress in select sectors The Government has issued a circular that there will be no interference from Government. Banks have been encouraged to take their decision independently keeping the commercial interest in mind. A c leaner d istinction b etween i nterference a nd intervention h as b een made. Government intends to provide greater flexibility in hiring manpower to banks. We think all these meausres will help improve the corporate governance perception at PSBs.

Exhibit 10: Taking several measures to reduce stress

Focu

s on

De-

Stre

ssin

g PS

B Ba

lanc

e Sh

eets

Various ministries to monitor stressed / delayed projects to resolve issues

SEBs will be given handholding towards enabling early reforms

Bank will explore options like change of promoter if he/she is not been able to bring in additional capital

Strengthening the capital position of ARCs

Requested RBI to consider proposal for granting further flexibility in restructuring of existing loans wherever the banks find viability

Source: MOSL

Exhibit 11: PSBs stressed assets ratio stood at 13.5% in FY15

Source: MOSL, RBI

Exhibit 12: Five sub-sectors, which together constituted 29% of total advances had 53% share in total stressed advances

Source: MOSL, RBI

17.313.6

10.57.5

2.7 1.4

Power Other infra (ex. power)

Iron and Steel

Textiles Aviation Mining

Share in stressed advances of PSBs

15 August 2015 13


Empowerment – No political interference Governance reform – Moving in the right direction n The G overnment i ssued a c ircular i n Jan-15 about n o p olitical i nterference i n t he

functioning o f P SBs. Since then o ur i ntereaction w ith b ankers s uggest t hat it i s followed in true sprit

n Government i ntends t o p rovide g reater f lexibility i n h iring ma npower t o banks. W e think all t hese m eausres w ill help i mprove t he corporate governance perception a t PSBs.

n GOI Issued a circular that there will be no interference from Government and

banks are encouraged to take their decision independently keeping the commercial interest in mind.

n Government intends to provide greater flexibility in hiring manpower to banks. Government is committed to provide required professionals as BoDs to the board so that well-informed and well-discussed decisions are taken.

n With autonomy comes accountability, accordingly Banks have been asked to build robust grievances redressal mechanism for customers as well as staff so that concerns of the affected are addressed effectively in time bound manner.

n Recommendations from the 2015 Gyan Sangam on no interference from

government, strengthening the risk management practices have been put into action.

n Finance Ministry has been constantly engaging with the PSBs through review meeting and other sessions to focus on improving HR management practices and removing barriers so that the PSBs can share and work together on common resources.

n In addition, Further, scheme of ESOPs for top management (under formulation), is a step in the right direction to attract outside talent for PSBs. Government has also indicated that other strategic initiatives such as consolidation etc. need to be discussed.

n Next Gyan Sangam, will be held on Jan 14-16th, 2016

Steps taken to empower banks and provide greater

flexibility

Governance Reforms: Gyan Sangam recommendations

taken into action

15 August 2015 14


Framework for Accountability Now, PSBs performance system based on profitability from growth n Present s ystem o f P SBs p erformance me asurement c alled SoI – Statement o f I ntent

has b een c ompletely re vamped. A n ew f ramework o f Key P erformance I ndicators (KPIs) has been introdued – Focus has shifted from growth to profitability

n Operating p erformance e valuated t hrough K PI f ramework w ill b e linked t o t he performance bonus t o b e p aid t o t he M D&CEO o f PSBs. Also, p erformance l inked bonus to be increased (currently maximum incentive to CMD INR0.8m)

n Government is also considering ESOPs for top management n PSBs need to follow strict timelines for filling fraud cases with CBI n Quarterly review by Finance minister

Exhibit 13: Operating performance evaluated through the KPI framework – DFS secretary to chair the review committee

*Total income = Net Interest Income + Total other Income, **Total income = Interest earned + Total other Income, The improvement achieved below maximum level will be evaluated on proportionate basis of achievement. Marks obtained in fraction will be rounded off to nearest unit. For Financial Inclusion, score below maximum will be evaluated as per specified matrix.

Source: MOSL

15 August 2015 15


Multiple re-rating on the cards Valuation multiples near LPA| Recovery cycle ahead | Reforms key catalyst n In o ur v iew, s tate-owned b anks’ R oEs a re b ottoming o ut a nd w e e xpect g radual

improvement hereon led by improving economic cycle. n Significant steps taken by RBI and GoI to provide conducive environment for recovery

cycle will help improve profitability going forward. n Improvement i n o perational performance i s likely t o d rive the f irst l eg o f re-rating,

with structural reforms goading the re -rating process further. Valuations are near or below t he l ong p eriod av erage. We u pgrade B OB t o B uy. Top P icks: SBIN, BOB and UNBK

RoEs at the cyclical low so does the multiple; Recovery, reforms key catalyst Public sector banks (PSBs) are deep cyclicals, with RoAs of 0.4-0.7% at the bottom of the cycle and 0.9-1.4% at the peak of the cycle. Similarly, P/BV ranges between 0.4-0.6x and 1.3-2.3x. Valuations are near (for large PSBs) or below the long period average (20-40% discount for mid size PSBs). Improvement in operational performance is likely to drive the first leg of re-rating, with structural reforms goading the re-rating process further. We upgrade BOB to Buy. Top Picks: SBIN, BOB and UNBK

Exhibit 14: PSU Banks - One year forward PE


Exhibit 15: PSU Banks - One year forward PB


Exhibit 16: Price to book ratio (1yr forward) for Indian Banks


3.9

10.6

7.8

7.4

2

4

7

9

12

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15

PSU Banks Sector PE (x) LPA (x)

1.9

0.6

0.91.1

0.3

0.8

1.3

1.8

2.3

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15

PSU Banks Sector PB (x) LPA (x)

Valuation differential between PSU and Private

Banks near peak levels; Trading at 67% discount

15 August 2015 16


Exhibit 17: Financials: Valuation metrics

63.7 Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%)

(INR) (USDb) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17

ICICIBC* Buy 302 27.5 21.8 25.7 10.9 8.9 132 150 1.81 1.52 1.56 1.58 15.0 15.6

HDFCB Buy 1,102 43.4 49.1 59.2 22.5 18.6 285 330 3.87 3.34 1.89 1.86 18.4 19.2

AXSB Buy 571 21.2 36.7 43.6 15.5 13.1 218 254 2.62 2.25 1.77 1.80 18.0 18.4

KMB* Neutral 718 20.6 20.3 27.4 35.4 26.2 184 211 3.90 3.40 1.18 1.49 13.9 14.5

YES Buy 797 5.2 60.6 76.4 13.2 10.4 328 389 2.43 2.05 1.69 1.75 19.9 21.3

IIB Buy 959 8.7 41.8 52.1 22.9 18.4 287 332 3.34 2.89 2.03 2.09 18.0 16.8

DCBB Buy 137 0.6 6.9 9.4 19.9 14.6 62 71 2.22 1.92 1.07 1.15 11.8 14.1

FB Buy 67 1.8 5.7 7.1 11.8 9.5 50 55 1.35 1.22 1.07 1.12 12.0 13.6

JKBK Neutral 104 0.8 14.1 17.3 7.4 6.0 136 150 0.76 0.70 0.85 0.92 10.7 12.1

SIB Buy 23 0.5 2.2 3.1 10.6 7.5 28 31 0.82 0.76 0.47 0.59 8.2 10.5

Private Aggregate 130.4 18.9 15.8 2.88 2.52

SBIN (cons)* Buy 268 31.9 25.5 31.6 10.1 8.1 229 255 1.12 1.00 0.70 0.76 11.7 13.0

PNB Buy 166 4.8 19.5 26.8 8.5 6.2 220 244 0.76 0.68 0.57 0.70 9.2 11.6

BOI Neutral 170 1.8 22.5 39.4 7.6 4.3 412 444 0.41 0.38 0.23 0.36 5.6 9.2

BOB Buy 184 1.3 20.7 24.6 8.9 7.5 182 201 1.01 0.92 0.62 0.67 11.9 12.8

UNBK Buy 208 2.1 35.4 46.2 5.9 4.5 317 355 0.66 0.59 0.56 0.64 11.7 13.7

INBK Buy 148 1.1 23.6 31.7 6.3 4.7 280 304 0.53 0.49 0.56 0.67 8.7 10.9

CRPBK Neutral 51 0.1 16.5 21.9 3.1 2.3 141 158 0.37 0.33 0.54 0.64 12.3 14.7

ANDB Buy 76 0.7 17.8 22.8 4.3 3.3 180 196 0.42 0.39 0.55 0.62 10.3 12.2

IDBI Neutral 66 1.7 14.4 19.7 4.6 3.4 157 173 0.42 0.38 0.58 0.69 9.5 11.9

DBNK Neutral 44 0.4 9.7 13.6 4.5 3.2 130 141 0.34 0.31 0.36 0.44 7.7 10.0

Public Aggregate 45.9 8.7 6.7 0.82 0.75

HDFC* Buy 1,300 32.1 38 44 22.5 17.7 167 192 5.13 4.04 2.60 2.60 23.6 24.4 LICHF Buy 504 4.0 34 43 14.8 11.8 182 217 2.76 2.33 1.50 1.56 20.3 21.4 DEWH Buy 510 1.2 53 66 9.7 7.7 358 408 1.43 1.25 1.27 1.29 15.6 17.3

IHFL Buy 792 4.6 63 75 12.7 10.6 208 239 3.81 3.31 3.91 3.79 32.3 33.5

IDFC Buy 145 3.6 10 12 14.9 12.5 107 116 1.09 0.99 1.75 1.83 8.8 9.8

RECL Buy 259 4.0 63 76 4.1 3.4 302 360 0.86 0.72 3.22 3.23 22.9 22.9

REPCO Buy 733 0.7 25 29 29.6 25.1 152 180 4.82 4.07 2.16 2.12 17.5 19.2

POWF Buy 243 5.0 54 62 4.5 3.9 285 330 0.86 0.74 3.06 3.12 20.3 20.2

SHTF Buy 865 3.1 65 81 13.2 10.7 460 524 1.88 1.65 2.18 2.48 14.7 16.5

MMFS Buy 261 2.3 15 18 17.4 14.2 111 125 2.35 2.10 2.32 2.47 14.2 15.6

BAF Buy 5,422 4.5 214 267 25.4 20.3 1,342 1,566 4.04 3.46 3.01 2.91 19.1 18.3

NBFC Aggregate 65.2 15.9 13.5 2.84 2.49

*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries

15 August 2015 17


Exhibit 18: SBIN - One year forward PE

Source: MOSL, Bloomberg

Exhibit 19: SBIN - One year forward PB


Exhibit 20: BOB - One year forward PE


Exhibit 21: BOB - One year forward PB


Exhibit 22: PNB - One year forward PE


Exhibit 23: PNB - One year forward PB


Exhibit 24: BOI - One year forward PE


Exhibit 25: BOI - One year forward PB


9.8

16.3

9.6

5.4

3

8

13

18

Aug

-05

Nov

-06

Feb-

08

May

-09

Aug

-10

Nov

-11

Feb-

13

May

-14

Aug

-15

PE (x) Peak(x) Avg(x) Min(x)

1.2

2.3

1.3

0.70.3

1.1

1.9

2.7

Aug

-05

Nov

-06

Feb-

08

May

-09

Aug

-10

Nov

-11

Feb-

13

May

-14

Aug

-15

PB (x) Peak(x) Avg(x) Min(x)

8.311.5

5.5

1.10

3

6

9

12

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15PE (x) Peak(x) Avg(x) Min(x)

1.0

1.8

0.8

0.20.0

0.5

1.0

1.5

2.0

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15


6.9

11.7

7.3

2.82

5

7

10

12

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15


0.7

1.8

1.1

0.40.0

0.5

1.0

1.5

2.0

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15


5.7

12.9

7.4

3.83

6

9

12

15

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15


0.4

1.8

1.0

0.40.0

0.5

1.0

1.5

2.0

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15


15 August 2015 18


Exhibit 26: CBK - One year forward PE


Exhibit 27: CBK - One year forward PB


Exhibit 28: UNBK - One year forward PE


Exhibit 29: UNBK - One year forward PB


Exhibit 30: INBK - One year forward PE


Exhibit 31: INBK - One year forward PB


Exhibit 32: OBC - One year forward PE


Exhibit 33: OBC - One year forward PB


5.0

9.3

5.9

2.3

1

4

6

9

11

Aug

-05

Nov

-06

Feb-

08

May

-09

Aug

-10

Nov

-11

Feb-

13

May

-14

Aug

-15


0.5

1.7

0.90.4

0.2

0.7

1.2

1.7

2.2

Aug

-05

Nov

-06

Feb-

08

May

-09

Aug

-10

Nov

-11

Feb-

13

May

-14

Aug

-15


4.7

10.8

6.2

3.0

2

5

8

11

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15PE (x) Peak(x) Avg(x) Min(x)

0.6

1.7

1.0

0.4

0.2

0.8

1.4

2.0

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15


5.4

9.5

5.42.3

2

4

7

9

12

Feb-

07

May

-08

Jul-0

9

Oct

-10

Dec

-11

Mar

-13

May

-14

Aug-

15


0.5

1.7

0.90.2

0.0

0.5

1.0

1.5

2.0

Feb-

07

May

-08

Jul-0

9

Oct

-10

Dec

-11

Mar

-13

May

-14

Aug-

15


3.1

15.2

6.6

2.41

6

11

16

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15


0.3

1.4

0.8

0.30.0

0.5

1.0

1.5

2.0

Aug-

05

Nov

-06

Feb-

08

May

-09

Aug-

10

Nov

-11

Feb-

13

May

-14

Aug-

15


15 August 2015 19


Exhibit 34: ANDB - One year forward PE


Exhibit 35: ANDB - One year forward PB


3.8

12.8

6.1

2.11

5

9

13

Aug

-05

Nov

-06

Feb-

08

May

-09

Aug

-10

Nov

-11

Feb-

13

May

-14

Aug

-15


0.4

1.7

0.9

0.3

0.0

0.5

1.0

1.5

2.0

Aug

-05

Nov

-06

Feb-

08

May

-09

Aug

-10

Nov

-11

Feb-

13

May

-14

Aug

-15


15 August 2015 20


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