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ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

Sector U

pdate

December 31, 2019

Banking

Dominant PSBs, private banks remain structural picks

The continued slowdown seen by NBFCs is seen enabling banks to garner a

higher market share in advances, thereby growing at a relatively higher

pace. Anticipated recovery in a large NCLT account, focus on retail segment

and moderation in incremental stress assets will benefit PSU banks more

leading to improvement in asset quality and, subsequently, reduce capital

pressure. We retain our confidence in banks rather than NBFCs as balance

sheet management and lower growth concerns will take two to three

quarters to stabilise. Within private banks, we prefer Axis Bank and IDFC

First Bank. Peaking of NPA cycle and resolution of large stressed assets

make dominant PSU banks a good investment opportunity. We prefer SBI in

the PSU banking domain among our coverage.

The report highlights three segments;

Dominant PSU and large private banks as beneficiaries in current

environment and will continue to outperform peers

Evolving retail payment to provide impetus to credit card business

Broking twist – Intensifying competition and tighter regulations by

Sebi to lead to consolidation in broking industry. Large brokers to

remain beneficiaries surviving competition and regulations.

Dominant PSU, large private banks remain beneficiaries

Factors favouring revival of dominant PSU banks

Key beneficiaries of a decline in 10 year G-sec yields as interest rates

are anticipated to structurally remain lower

Improvement in IBC norms being a major reform, which is seen

reducing recovery timelines thereby improving the overall recovery

rate to ~50% vs. the earlier ~20-25% range

Focus on retail segment by PSU banks is likely to propel advance

growth and earnings trajectory. Top five PSU banks by advances

(SBI, BoI, Union, PNB) are focusing on the retail segment wherein

the proportion has increased from 17% in FY16 to 24% in FY19 &

26% in H1FY20 (partially contributed by buyout from NBFCs)

We expect below factors to pan out over the next couple of quarters.

Subdued private capex and higher stress in the corporate sector led

to sluggish credit growth in the last few years. While a gradual

recovery is seen in the industry sector, traction in the retail segment

has remained consistent. Going ahead, the economic slowdown and

high base is seen keeping credit growth in single digits in FY20E with

a gradual recovery expected from FY21E onwards

Resolution of large accounts like Essar Steel, Alok Industries and

Bhushan Power & Steel along are expected to pare down industry

GNPA to 7.1% though concerns on resolution of recently recognised

stressed companies remains a dragger. Recovery from resolution of

large NCLT cases is seen providing a cushion against provision in

lieu of recently cropped stressed asset

Evolving retail payment to lead to healthy growth in credit card

Focus on financial inclusion, improving granularity, digital reach by

promoting non-cash transactions, retail online payment methods have been

garnering strength; especially post demonetisation. With outstanding credit

cards at 5.25 crore, annualised spend of ~| 7 lakh crore (as of September

Sector View

Overweight

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

RATING RATIONALE

ICICI Securities | Retail Research 2

ICICI Direct Research

Sector Update | Banking

2019), credit cards have been playing a dominant role in engaging

substantial customers in digital payment arena that is seen growing further.

Broking twist – tighter Sebi guidelines to lead to consolidation

In the last six years, Indian markets have seen a spurt in volumes at ~34.4%

CAGR in FY13-19. Derivatives witnessed robust traction at 35.4% CAGR in

FY13-19 to | 959000 crore. Indian stock markets have undergone massive

development over several years in terms of yields, products and customer

services. In our view, Indian broking industry is set to see a gradual shift

from transaction based model to service or fee based model offering

services like wealth management & investment advisory. Focus on fund

based activities including margin funding and loan against shares, which the

brokers are currently engaged, is seen further increasing enabling brokers

as avenue of contribution to earnings. To enable investor safety, Sebi has

issued tighter guidelines that are seen leading to consolidation in the

industry and large brokers gaining market share.




Credit growth remains moderate; retail, NBFC in focus

Slower economic growth & sluggish private capex kept credit growth on a

moderate pace at 8.3% YoY in October 2019. Increased focus on retail

lending and portfolio buyout from NBFCs provided some respite to overall

growth. Though the second half of the fiscal remains the busy season for

the lending space, previous year base is seen keeping advances growth in

single digits in FY20E.

Industrial sector growth stayed in single digits at 3.4% in October 2019 but

saw some signs of improvement compared to the recent run rate. This is

largely driven by infrastructure, engineering & chemical sector that grew 7%,

6% & 4% YoY, respectively. Within infrastructure, telecommunication grew

3.3%YoY, roads grew 3.6% while power grew 4.9%. Within engineering,

other engineering grew at a healthy pace of 8.2% YoY.

The services segment growth continued to decline at 6.5% YoY in October

2019, led by the economic slowdown. However, among constituents,

growth in NBFC witnessed moderation at 26.8% in October 2019 vs. 29.2%

in FY19. It still supported overall growth with bank lending to NBFCs and

portfolio buyouts from NBFCs.

Retail loan segment recorded an improvement in growth to ~17% YoY in

October 2019 vs. 16% in FY19. Led by their cautious stance, moderation was

witnessed in pace of personal loans and credit cards. In addition, slowdown

in auto sales has kept portfolio growth in single digits. However, growth in

housing loan continue to remain healthy at 19.4% YoY in October 2019,

providing impetus to the overall pie.

Going ahead, the large industrial sector is poised to grow steadily compared

to the small & medium industry. The government’s focus on MSME is

expected to push up disbursements. However, moderate economic growth

and base effect is seen keeping overall credit growth in single digit in FY20E.

With an improving credit scenario and shifting of credit demand from NBFCs

to bank, we expect credit growth to improve from FY21E onwards.




Exhibit 1: Credit growth supported by steady pace in retail portfolio

| crores FY17 FY18 FY19 Aug-19 Sep-19 Oct-19

Non-Food Credit 70,94,490 76,88,423 86,33,418 85,32,367 86,20,329 86,63,557

Agriculture & Allied Activities 9,92,386 10,30,215 11,11,300 11,13,027 11,27,794 11,34,705

Industry 26,79,831 26,99,268 28,85,778 27,65,215 27,74,883 27,86,751

Large 22,05,296 22,22,589 24,03,878 23,01,894 23,08,566 23,22,175

Services 18,02,237 20,50,472 24,15,609 23,50,198 23,61,866 23,52,418

NBFCs 3,91,032 4,96,393 6,41,208 6,80,360 7,13,510 7,13,344

Personal Loans 16,20,034 19,08,469 22,20,732 23,03,930 23,55,785 23,89,684

Housing (Including Priority Sector Housing) 8,60,086 9,74,565 11,60,111 12,14,773 12,53,190 12,68,734

Credit Card Outstanding 52,132 68,628 88,262 97,650 99,372 1,05,026

Vehicle Loans 1,70,525 1,89,786 2,02,154 2,02,662 2,03,446 2,06,720

YOY growth (%)

Non-Food Credit 8.4% 8.4% 12.3% 9.8% 8.1% 8.3%

Agriculture & Allied Activities 12.4% 3.8% 7.9% 6.8% 7.0% 7.1%

Industry -1.9% 0.7% 6.9% 3.9% 2.7% 3.4%

Large -1.7% 0.8% 8.2% 5.1% 3.4% 4.2%

Services 16.9% 13.8% 17.8% 13.3% 7.3% 6.5%

NBFCs 10.9% 26.9% 29.2% 38.8% 30.5% 26.8%

Personal Loans 16.4% 17.8% 16.4% 15.6% 16.6% 17.2%

Housing (Including Priority Sector Housing) 15.2% 13.3% 19.0% 16.6% 19.3% 19.4%

Credit Card Outstanding 38.4% 31.6% 28.6% 24.4% 25.9% 25.9%

Vehicle Loans 11.5% 11.3% 6.5% 3.7% 4.1% 5.0%

Proportion (%)

Agriculture & Allied Activities 14.0% 13.4% 12.9% 13.0% 13.1% 13.1%

Industry 37.8% 35.1% 33.4% 32.4% 32.2% 32.2%

Large 31.1% 28.9% 27.8% 27.0% 26.8% 26.8%

Services 25.4% 26.7% 28.0% 27.5% 27.4% 27.2%

NBFCs 5.5% 6.5% 7.4% 8.0% 8.3% 8.2%

Personal Loans 22.8% 24.8% 25.7% 27.0% 27.3% 27.6%

Housing (Including Priority Sector Housing) 12.1% 12.7% 13.4% 14.2% 14.5% 14.6%

Credit Card Outstanding 0.7% 0.9% 1.0% 1.1% 1.2% 1.2%

Vehicle Loans 2.4% 2.5% 2.3% 2.4% 2.4% 2.4%

Source: RBI, ICICI Direct Research

Operation twist to provide treasury gains in quarter

After a fall in yields in the first half of the year, G-sec yield saw a surge, rising

~ 53 bps to 6.78% from the lows of 6.25% in July 2019. In Q3FY20, RBI

lowered its repo rate by 25 bps in October 2019 and maintained status quo

in December 2019. However, concerns on economic growth have kept the

G-sec yield curve in a narrow range with no major movement till recently.

RBI’s surprising stance on pausing a rate cut amid a slowdown in economy

and hardening of yields globally led to a sharp surge of 33 bps in 10 year G-

sec yield to 6.8% (6.47% as of December 1). Excess liquidity within short-

term bonds and hardening of 10 year G-sec yields led to an increase in

spread. To ease the borrowing situation within the money market, RBI

initiated India’s version of operation Twist where RBI will be simultaneously

buying long term government bonds and selling short term bonds. This will

lead to softening of long term yield. RBI has already planned | 20000 crore

worth of OMOs, post which yields have already fallen by 28 bps to 6.52%.

Going ahead, clarity on fiscal shortfall and resultant supply will be the

determining factor. Therefore, the Union Budget will remain a major event,

which will determine the directional move in yields ahead. In the near term,

easing of yields led by RBI intervention is seen providing treasury gains,

especially for PSU banks.




Exhibit 2: Sensitivity of G-sec yield on treasury income of banks

Q2FY20

| crore

H

T

M

30 bps 50 bps 30 bps 50 bps 30 bps 50 bps 30 bps 50 bps

Public sector banks

Bank of India* 1,46,834 42,747 1.2 147 246 8,91,673 1.7 1.9 4.2% 7.1% 48,440 0.3% 0.5%

Bank of Baroda 2,54,785 80,577 1.2 285 475 15,30,097 1.9 2.2 3.1% 5.1% 75,531 0.4% 0.6%

PNB* 2,36,258 76,476 3.4 782 1,304 11,36,278 6.9 8.0 17.9% 29.8% 44,201 1.8% 2.9%

SBI 9,41,406 4,06,687 2.1 2,587 4,311 35,81,787 7.2 8.4 7.0% 11.6% 2,26,075 1.1% 1.9%

Indian Bank 76,648 27,084 3.3 267 444 4,36,607 6.1 7.1 15.4% 25.7% 22,944 1.2% 1.9%

Private sector banks

Axis Bank 1,61,715 46,897 NA NA NA 8,05,145 NA NA NA NA 83,875 NA NA

City Union Bank 9,923 2,836 0.9 7 12 44,901 1.6 1.9 0.7% 1.1% 5,181 0.1% 0.2%

DCB 7,844 1,897 0.7 4 7 36,650 1.1 1.3 0.7% 1.1% 3,254 0.1% 0.2%

J&K Bank** 21,612 4,402 0.9 11 19 1,56,412 0.7 0.9 1.0% 1.6% 7,249 0.2% 0.3%

Impact on PAT

due to decline in

yield

Networth Impact on NW due

to decline in yield

Investment

book

AFS Duration

(yrs)

Absolute Impact

due to decline in

Yield

Average asset Impact on RoA due

to decline in yield

Source: Company, ICICI Direct Research

Essar Steel resolution to improve asset quality

In the absence of any large resolution or slippages, the GNPA ratio broadly

remained stable at 9.4% with absolute GNPA at | 921911 crore. In addition,

moderation was witnessed in fresh slippages during the quarter. Resolution

of large NCLT cases (Essar Power, Bhushan Power and Alok Industries)

during the quarter is seen reducing systemic GNPA ratio to 7.1% in FY20E

though concerns over resolution of recently recognised stressed companies

could remain a dragger. Recovery from resolution of large NCLT cases is

seen providing a cushion against provision in lieu of the recently cropped

up stressed assets. This is seen providing respite against burden on earnings

in the near term. Overall, we expect asset quality to broadly remain stable.

Exhibit 3: Asset quality remains steady in Q3FY20

FY16 FY17 FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20

GNPA 575313 776835 1024586 1002682 997247 961129 920300 924271 921911

NNPA 331340 430173 517775 485181 463082 417837 354507 353766 341896

GNPA ratio 7.6 9.6 11.6 11.3 10.8 10.2 9.2 9.4 9.4

NNPA ratio 5.1 5.3 5.8 5.5 5.0 4.4 3.6 3.6 3.5

GNPA of PSU banks 523398 684733 896601 874071 868812 829745 789016 788087 778310

GNPA of Private banks 51915 92102 127985 128611 128435 131384 131284 136184 143601

w/off 57585 108374 161328 197705


Exhibit 4: Expected improvement in asset quality on back of NCLT resolution

(| crore) FY20E

Expected resolution (Essar Steel + Bhushan Power + Alok Industries+ Ruchi Soya) 143146

New GNPA 777154

New GNPA ratio 7.1

Resolution of power exposure to extent of ~| 35,000 crore 742154

New GNPA ratio 6.8

NNPA 304878

New NNPA ratio 2.8


Yes Bank, SBI report higher NPA divergence

Given the completion of Asset Quality Review (AQR) by RBI for FY19, a large

number of banks reported a divergence in NPA. Ten banks (refer exhibit

below) reported a divergence in GNPA, NNPA & provisions to the tune of

| 21363 crore, | 16934 crore & | 22057 crore, respectively. Out of total

divergence reported by lender, ~71% of GNPA & ~59% of divergence in

provisions was reported by SBI & Yes Bank. The extent of divergence for

banks was low except for Yes Bank that reported 42% divergence to its FY19




GNPA. However, the management said that most of the stress has been

recognised in H1FY20 and remaining stress will be provided in Q3FY20.

In terms of divergence on provisioning, SBI and Indian overseas Bank

reported highest divergence in provisioning against bad loans at | 12036

crore and | 2262 crore, respectively. Majority of banks clarified that they

have classified most of the divergences as NPA and incremental provisions

will not have a substantial impact on earnings.

Exhibit 5: Divergences reported by banks

Source: Company, media articles, ICICI Direct Research

| crore/ FY19

GNPA as

per Bank

GNPA as

per RBIDivergence

NNPA as

per Bank

NNPA as

per RBIDivergence

Provisions

as per Bank

Provisions

as per RBIDivergence

Allahbad Bank 28705 28772 67 7419 7486 67 21261 21714 453

Bank of India 60661 61778 1117 19119 20236 1117 39392 40838 1446

Central Bank of India 32356 34921 2565 11333 13110 1777 19934 20722 788

Indian Bank 13353 13537 184 6793 5973 -820 6132 7136 1004

Indian Overseas Bank 33398 33756 358 1437 1630 193 18647 20909 2262

Lakshmi Vilas Bank 3359 3416 57 1506 1451 -55 1785 1897 112

PNB 78473 81090 2617 30038 32655 2617 48151 50242 2091

SBI 172750 184682 11932 65895 77827 11932 106856 118892 12036

UCO Bank 29888 31106 1218 9650 9485 -165 18994 20384 1390

Union Bank of India 48729 49318 589 20332 20921 589 28397 29984 1588

Yes Bank 7883 11159 3276 4485 6784 2299 3398 4376 978




Digital payment - offers huge opportunity ahead

India is an immense and extremely unique market with a nascent payments

industry that seems poised for dramatic growth. New dynamics on the

supply side including regulators and participants (universal & payment

banks, technology providers, aggregators, acquirers and fin-tech

companies) are bound to bring about a major change in the rules of the

game. Intense focus and strategic collaboration among market participants

will lower the costs of bringing underserved and unbanked consumers to

formal financial services. With collective and continuous emphasis by the

government, central banks and other stake holders, non-traditional payment

methodologies are being redefined to pave the way for higher digital modes

of payments. The new payments ecosystem will supplement as well as ride

the wave of smartphones, internet penetration and recent policy initiatives

like Jan Dhan, Aadhaar, Digital India and Digilocker to find creative ways to

deal with each other in the new marketplace to settle their positions on

where they will play and how they will win. Incentives and cash backs are

being offered to change the perception of digital payment, thereby

encouraging and engaging higher usage of non-cash medium of

transactions. According to Crisil Research, value of digital payments in India

is expected to more than double to | 4055 trillion in FY24E from | 1630

trillion in FY19, translating into a five-year CAGR of 20%. Increase in cashless

presents three primary advantage for banks and other financial

intermediaries: 1) provides opportunity to generate fee based income; 2)

reduction in cost in lieu of handling cash; 3) higher customer engagement.

Indian payment has been a cash economy for a long time but movement in

the direction of digital or cashless mode of transactions is rapid. Non cash

transactions have witnessed an increase at 14.1% CAGR to | 32.7 lakh crore.

Exhibit 6: Non cash payment on the rise

1,621,022 1,678,748 1,689,951

1,857,762

2,046,076

2,554,0862,855,818

3,269,487

0

5

10

15

20

25

30

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Payment in value (| billions) YoY growth (%)


Drilling down further among constituents of non-cash payments, non-cash

broadly comprises six methodologies including RTGS, NEFT, paper clearing

and cards. With focus on improving granularity and reach of digital

payments and promoting non-cash transactions, retail payment methods

(IMPS, NEFT) have witnessed a faster increase in volumes as well as value.

Value of transactions undertaken through retail non-cash means increased

at ~40% CAGR in FY14-19. This has led to an increase in the proportion of

retail non-cash in overall payment from ~1% in FY12 to ~8% in FY19. In

contrast, paper clearing has been trending downwards with proportion in

overall payment declining from 6.1% in FY12 to 2.5% in FY19. Proportion of

prepaid instruments (PPI), though very small in the overall pie, has been

growing at rapid pace of ~92% CAGR in FY12-19.




Exhibit 7: Retail non-cash proportion rises from 1% in FY12...

67%

25%

6%1%1%0% RTGS

CCIL Operated System

Paper Clearing

Retail Electronic

Clearing

Cards


Exhibit 8: …to ~8% in FY19

52%

36%

3%

8%1%0% RTGS

CCIL Operated System

Paper Clearing

Retail Electronic

Clearing

Cards


Exhibit 9: Rapid growth in non-cash retail payment

1.3% 1.9% 2.8% 3.5% 4.5% 5.2% 6.7% 7.9%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

RTGS CCIL Operated System Paper Clearing Retail Electronic Clearing Cards PPIs


Credit cards volumes to witness continued growth ahead

A slew of factors ranging from the government’s focus on digitisation, young

population with faster technology adaptability, higher mobile penetration,

rising e-commerce, etc, have led to a rise in digital payment and credit cards

as an avenue. Improving payment infrastructure (PoS machines) has further

supported the acceptance of card technology for payment.

The Indian card industry comprises ~92.4 crore debit cards (~95% of issued

cards at ~97.1 crore as of January 2019). Credit cards comprise the

remaining 5% of issued cards at ~4.7 crore (5.25 crore as of September

2019). Credit cards have witnessed faster growth at 32% CAGR in FY16-19,

primarily led by demonetisation, which has provided an impetus to non-cash

payments. Total spends using credit cards were at ~| 6 lakh crore in FY19

with per card spend at ~| 1.3 lakh per annum. As per Crisil Research, credit

card spend is expected to grow ~2.5x to ~| 15 lakh crore in FY24E.

Exhibit 10: Average ticket per transaction

| E-wallets UPI PPIs Debit card Credit cards

Avg transaction amount 450 1700 630 1300 3400

Source: RBI, DHRP, ICICI Direct Research

As per Crisil research, the e-commerce industry in India is estimated to be

~| 2.9 lakh crore in FY19. Out of this, ~30-35% of payments are been made

using credit cards, which is at ~| 101675 crore. Going ahead, the e-

commerce industry is expected to grow at 23-28% CAGR in FY19-24E to | 9

lakh crore, which will provide further impetus to usage of credit card.




Exhibit 11: Credit card issuance & spends on the rise post demonetisation

Sep'19Volume

(Million)

Value (|

Billion)

Cards

(Million)

Transaction

per card

Ticket size

per

transaction

(|)

Per card

annual spend

(|)

2011-2012 320 966 17.8 18.0 3020 54339

2012-2013 397 1230 17.8 22.3 3100 69209

2013-2014 509 1540 19.6 26.0 3025 78765

2014-2015 615 1899 21.0 29.3 3087 90437

2015-2016 786 2407 25.0 31.4 3063 96264

2016-2017 1087 3284 30.0 36.2 3021 109460

2017-2018 1405 4590 37.0 38.0 3266 124045

2018-2019 1763 6033 47.0 37.5 3423 128372

2019-2020* 1041 3546 52.5 19.8 3407 67542

FY12-16 CAGR 25.2% 25.6% 8.9% 15.0% 0.4% 15.4%

FY16-19 CAGR 30.9% 35.8% 23.4% 6.1% 3.8% 10.1%

Credit cards

Source: RBI, ICICI Direct Research * pertains to April – September 2019

In a bid to move towards a cashless society, the Reserve Bank of India, in its

payments vision document (May 2019), has set an objective to achieve

~44% share in point of sale (PoS)-based debit card transaction by FY21.

Likewise, banks (both public, private sector banks) have been aggressively

deploying swipe machines across the country making inroads in Tier II and

III cities. Currently, there are ~37.5 lakh active PoS terminals deployed

across India by banks as of FY19. Though banks were adding to the reach of

PoS machines, demonetisation in November 2016 provided a fillip to the

momentum. Of the overall active PoS, first 14 lakh machines were installed

in 30 years while post demonetisation in the next three years, ~24 lakh

machines were added. This is expected to grow to ~50 lakh ahead.

Exhibit 12: PoS strength at ~37.5 lakh; target to reach ~50 lakh

11.3

13.9

25.3

30.8

37.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

March, 2015 March, 2016 March, 2017 March, 2018 March, 2019

No. of POS Terminals in India (in lakhs)


Private banks lead in credit cards; foreign banks ahead in utility

In terms of cards, India has seen healthy growth in cards in the last decade,

pushed mainly by private banks. As of FY19, ~4.7 crore (5.25 crore as of

September 2019) credit card have been issued by the banking sector, as a

whole. In FY12-16, value of transaction undertaken through credit card

increased at 25.6% CAGR. However, this pace increased further at 35.8%

CAGR in FY16-19 to | 6 lakh crore. Value of transaction undertaken through

credit card is dependent on three factors – 1) number of cards issued, 2)

number of transaction per card per annum and 3) amount per transaction.

In FY12-16, higher usage of credit card i.e. transaction per card per annum

increased from 18 to 36.9. This led to an increase in value of credit card

transaction. However, post demonetisation, there was an increase in

number of credit cards issued. This is evident from the rise in outstanding




credit cards from 2.1 crore in FY16 to 3.78 crore in FY19. During the last

seven years, value per transaction broadly remained stable at ~| 3200-3500.

Of total credit card at ~4.7 crore (5.25 crore as of September 2019), private

banks have ~3.1 crore (3.44 crore as of September 2019) cards contributing

~65% (~65.5% as of September 2019) of total issued cards. In terms of

value, per annum transaction undertaken was at ~| 6 lakh crore in FY19

(| 3.54 lakh crore in April-September 2019). With average value per

transaction at | 3500 and ~37-40 transactions undertaken per annum, utility

per card was at | 128372 in FY19 (only PoS transaction).

Private banks contribute nearly two-third of total transactions at PoS

undertaken in terms of value at | 37099 crore (in Sep’19) of total transaction

at | 59845 crore (in Sep’19). Among constituents, the value per transaction

is broadly similar across various issuing banks. However, the number of

transactions per card per annum defines the difference in card utility among

the peers. For PSU banks, number of transactions per card per annum

ranges at ~35. Private banks have higher number of transactions per card

per annum at ~39 per card. Foreign banks have substantially higher number

of transaction per card per annum at ~66, led by an affluent customer base.

Exhibit 13: Foreign banks have highest utilisation of credit card (Sep’19)

Sep'19

Outstanding

cards (Sep

2019)

No. of

Transactions

Amount of

transactions

(| Millions)

Transacti

on per

card

Value of per

transaction (|)

Utility of

card (|)

PSB 11617996 35142310 121073 3.0 3445 10421

Private 34493345 110781428 370996 3.2 3349 10756

Foreign 6478378 34364451 106384 5.3 3096 16421

Total 52589719 180288189 598453 3.4 3319 11380


In terms of volume as well as value, HDFC Bank and SBI lead in terms of

credit cards market share, with ~43-45% market share. This is due to higher

number of card issued by financiers – HDFC Bank has 1.3 crore cards while

SBI has ~94 lakh cards. However, looking at card utilisation, volume of

transaction per card is the highest in cards issued by foreign banks - Citibank

(~7.8 in April 2019) followed by America Express (~4.6 in April 2019). Apart

from this, Union Bank of India has between four and five transactions per

month.

Exhibit 14: Higher number of card lead to substantial volume market share (Sep’19)

26.4

17.015.2

11.49.5

3.2 2.4 2.0

0

5

10

15

20

25

30

HD

FC

BA

NK

STA

TE B

AN

K O

F

IND

IA

ICICI B

AN

K

CIT

I B

AN

K

AX

IS B

AN

K

KO

TA

K

MA

HIN

DR

A

BA

NK

STA

ND

AR

D

CH

AR

TER

ED

BA

NK

IND

US

IND

BA

NK





Exhibit 15: HDFC Bank, SBI have highest market share in value (Sep’19)

28.1

18.6

11.6 10.77.8 7.3

4.02.6

0

5

10

15

20

25

30H

DFC

BA

NK

STA

TE B

AN

K O

F

IND

IA

ICICI B

AN

K

AX

IS B

AN

K

AM

ER

ICA

N

EX

PR

ESS

CIT

I B

AN

K

IND

US

IND

BA

NK

KO

TA

K

MA

HIN

DR

A

BA

NK


Debit cards – support to usher in cashless economy

India has a large number of debit cards. However, primary usage was

restricted to cash withdrawal. Therefore, in spite of such a huge outstanding

card base, the goal of a cashless economy remains far distant. In addition, it

does not enable intermediaries to generate fee based income. However,

there has been a structural shift, though gradual, in the usage of debit card.

On the one hand, usage of debit card at ATMs has been on a continuous

decline from | 60791 per card per annum to | 36528 in FY19, primarily led

by a reduction in the number of transaction per card per annum. However,

usage of debit cards at PoS is on the rise; boosted by demonetisation.

Number of transaction per card per annum has risen from 1.4 in FY12 to 2.1

in FY16, which more than doubled to 4.9 in FY19. This increase is attributable

to demonetisation wherein scarcity of cash pushed usage of cards.

Exhibit 16: Transaction per debit card has been on gradual decline

Sep'19Volume

(Million)

Value

(Rupees

Billion)

Cards

(Million)

Transaction

per card

Ticket size

per

transaction

(|)

Per card

annual spend

(|)

2011-2012 5082 13998 230 22.1 2754 60791

2012-2013 5308 16683 282 18.8 3143 59182

2013-2014 6088 19648 337 18.1 3227 58326

2014-2015 6996 22279 400 17.5 3184 55747

2015-2016 8073 25371 565 14.3 3143 44934

2016-2017 8563 23603 671 12.8 2756 35166

2017-2018 8602 28988 781 11.0 3370 37126

2018-2019 9860 33108 906 10.9 3358 36528

FY12-16 CAGR 12.3% 16.0% 25.1% -10.3% 3.4% -7.3%

FY16-19 CAGR 6.9% 9.3% 17.1% -8.7% 2.2% -6.7%

Debit Cards - ATM





Exhibit 17: Higher usage of debit cards; especially post demonetisation

Sep'19Volume

(Million)

Value (|

Billion)

Cards

(Million)

Transaction

per card

Ticket size

per

transaction

(|)

Per card

annual spend

(|)

2011-2012 328 534 230 1.4 1631 2321

2012-2013 467 743 282 1.7 1591 2636

2013-2014 619 955 337 1.8 1542 2834

2014-2015 808 1213 400 2.0 1502 3036

2015-2016 1174 1589 565 2.1 1354 2815

2016-2017 2399 3299 671 3.6 1375 4915

2017-2018 3343 4601 781 4.3 1376 5892

2018-2019 4414 5935 906 4.9 1344 6548

FY12-16 CAGR 37.6% 31.3% 25.1% 9.9% -4.5% 4.9%

FY16-19 CAGR 55.5% 55.1% 17.1% 32.8% -0.2% 32.5%

Debit Cards - POS


For the first time since demonetisation, payment through debit cards at

kirana & retail store has gained traction compared to ATM transactions. ATM

transaction, which usually forms more than two-third of total card volume,

saw a dip in market share led by higher PoS transaction. Accordingly, share

of PoS in total volume increased to 34% from 30% in January 2019. With

increasing penetration of e-commerce transaction & digitisation wave in in

Tier II & III cities, RBI is aiming at~44% share of PoS transaction by FY21.

Among constituents, foreign banks witness highest transaction value,

though it still remains lower than value of transaction through credit card.

Individually, HDFC Bank and SBI continue to command highest market share

led by high number of customers.

Exhibit 18: Foreign banks have highest utility in debit cards

Sep'19

Outstanding

cards (Sep

2019)

No. of

Transactions

Amount of

transactions

(| Millions)

Transacti

on per

card

Value of per

transaction (|)

Utility of

card (|)

PSB 609614786 870655393 2270843 1.4 2608 3725

Private 154622220 310675537 951852 2.0 3064 6156

Foreign 6213843 15197292 38416 2.4 2528 6182

Payment Bank 53289155 5408807 7869 0.1 1455 148

SFB 11853844 7018121 26067 0.6 3714 2199

Total 835593848 1208955150 3295047 1.4 2726 3943





Exhibit 19: SBI, HDFC Bank have highest market in debit card volume at PoS (Sep’19)

28.2

12.3

9.7

6.7

4.63.5

2.6 2.6 2.4

0

5

10

15

20

25

30S

TA

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AN

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F IN

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HD

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ICICI B

AN

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KO

TA

K M

AH

IND

RA

B

AN

K

BA

NK O

F IN

DIA

UN

ION

BA

NK O

F IN

DIA


Exhibit 20: Higher volume coincides with value of transaction (Sep’19)

29.8

13.2

10.3

7.6

4.1 3.52.4 1.9 1.6

0

5

10

15

20

25

30

35

STA

TE B

AN

K O

F IN

DIA

HD

FC

BA

NK

ICICI B

AN

K

AX

IS B

AN

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BA

NK O

F B

AR

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A

PU

NJA

B N

ATIO

NA

L B

AN

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KO

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AH

IND

RA

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BA

NK O

F IN

DIA

CIT

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AN

K





Indian brokerage industry – perspective and structure

The Indian broking industry is very fragmented with large number of

participants (~3755/3099 registered with Sebi in cash/derivative market).

Many of these may be propriety desk, still a large number of brokers offer

trading services to customers. In the last six years, Indian markets have

witnessed a spurt in volumes at ~34.4% CAGR from FY13 to FY19.

Following global trend of higher tilt towards options, derivatives witnessed

robust traction at 35.4% CAGR from | 155400 crore in FY13 to | 959000

crore in FY19, while equity (Cash) ADTO grew only by ~18.1% CAGR in

FY13-19 to | 35200 crore.

The Indian stock market has undergone developments over several years in

terms of yields, products and customer services. In the initial phase, Indian

brokerages were to be divided in two categories – bank led brokers and non-

bank led brokers. Majority of these brokerages were full service brokers with

services spanning from providing platform for trading, settlement services,

investment advisory (research), investment banking and wealth

management.

In order to counter the volatility of markets and thereby business,

brokerages started on the path of diversification – the first step being

distribution of financial products – insurance and mutual funds. Later,

brokerages entered next level of diversification through entry into new line

of business spanning from asset management to credit disbursement

through NBFC.

The Indian brokerage industry has now witnessed entry of new category of

brokers – discount brokers that offer basic transactional service at low fixed

brokerage irrespective of the size of trade quantum. Apart from transactional

service, these brokers provide various product used for analysis and

research services at additional cost.

Exchange volumes skewed towards derivatives in last 5 years

The Indian stock market has been witnessing a continuous rise in volumes

traded in FY15-Q2FY20. However, there has been a growing divergence

between cash and derivatives product segment. While the proportion of

cash segment has remained steady at ~3% of total volumes, option as a

product has been gaining prominence with share in total volume rising from

79% in FY15 to 88% in FY19 and 92% in Q2FY20.

Exhibit 21: Market volume tilting towards options

Source: NSE, ICICI Direct Research

ADTO in | crore FY17 FY18 FY19 Q1FY20 Q2FY20 Propn

Cash Intraday 16600 23300 26048

Cash Delivery 8100 9600 9152

Cash 24700 33000 35200 33629 34023 2.3%

Futures (NSE) 62361 82959 87564 79951 89734 6%

Stocks (NSE) 44877 63405 65109 55955 61020 4%

Index (NSE) 17484 19555 22455 23996 28714 2%

Options (NSE) 318164 587711 870503 1136812 1339202 92%

Stocks (NSE) 24627 39248 50735 45480 52299 4%

Index (NSE) 293537 548463 819768 1091332 1286903 88%

F&O total 382100 671000 959000 1216763 1428936 97.7%

Total ADTO 406800 704000 993000 1250392 1462959

Option segment witnessing higher share at 92%


0.5 0.5 0.6 0.8 0.9 0.8 0.92.6 2.3

3.2

5.7

8.7

11.413.4

0

2

4

6

8

10

12

14

16

AD

TO

in |

lakh crore

Cash Futures Options




Exhibit 22: Options forming ~92% of market volume


Exhibit 23: Internet based trading on the rise in last five years


Exhibit 24: Increase in market share of top five & 10 members


Snapshot of brokerages in India

The Indian broking industry has a large number of players. However, in

terms of number of active clients top 10 brokers contribute to ~63% of the

industry size. Among peers, Zerodha has the highest number of active

clients with ~13% market share, followed by ~51% market share

contributed by next nine players. In terms of active clients, Zerodha has

largest share of active clients, which were at 69%, compared to other players

wherein active clients as a percentage of total was in the range of 24-32%.

0.5 0.5 0.6 0.8 0.9 0.8 0.9

2.6 2.33.2

5.7

8.7

11.4

13.4

0

2

4

6

8

10

12

14

16

FY 15 FY 16 FY 17 FY18 FY19 Q1FY20 Q2FY20

AD

TO

in |

lakh crore

Cash Futures Options

0

5

10

15

20

25

30

35

FY14 FY15 FY16 FY17 FY18

(%

of total volu

me)

Cash F&O

0

5

10

15

20

25

30

35

40

Mar-16 Mar-17 Mar-18 Mar-19 Nov-19

(%

)

Top 5 Top 10

Top 10 brokers contribute ~63% of share

(Sep’19)


13%

50%

37%

Zerodha Next top 9 brokers Others




Exhibit 25: Financials of brokers (FY19)

Source: Company, Media articles, annual report, DRHP, ICICI Direct Research

Exhibit 26: Proportion of clients remain broadly in a range across brokers

Source: Company, NSE, media articles & websites, annual report, DRHP, ICICI Direct Research

Exhibit 27: ADTO and yield of traditional and discount brokers

* Angel DRHP, annual reports

Source: Company, NSE, media articles, ICICI Direct Research

Sub-brokers have been integral part of traditional broker

In terms of business model, traditional broker had sub-broker as integral part

of distribution franchise. Motilal Oswal and Angel have been strong players

in the industry with a large sub-broker franchise. This leads to fillip to

brokerage revenue enabling it as good business model for large traditional

brokers. Going ahead, we expect smaller brokers to become sub-broker of

larger franchise leading to consolidation in industry led by increased

competitive intensity.

Exhibit 28: Broker-wise share of franchise

*Operational franchise, # Angel numbers are as per prospectus

Source: Company, media articles, ICICI Direct Research

Scaling of margin funding book to contribute to revenue

Margin funding i.e. providing funding in lieu of securities held by client in his

account is one of the avenues to generate interest based income for Indian

brokers. Traditionally brokers have been providing this facility to their clients

and generating interest income. Brokers provide margin funding on a rolling

| crore Kotak Sec HDFC Sec Axis Sec Moti JM Geojit Angel Zerodha

Revenue from operation 1708 782 190 1120 343 288 731 880

Broking Income 868 526 160 668 121 223 501 490

Revenue ex interest income 1236 702 172 1045 298 288 542 712

Revenue ex interest inc/ Total Rev 72% 90% 91% 86% 87% 100% 74% 81%

Total expense 1093 287 142 750 315 230 640 320

PAT 403 330 73 173 23 35 79 400

Total opex/total revenue 64% 37% 75% 70% 92% 80% 88% 36%

Q2FY20 HDFC Sec Sharekhan Kotak Sec Motilal IIFL Sec Angel* JM Geogit Edelweiss 5 Paisa Zerodha

Total clients ( in Lakh) 21.0 19.0 13.6 12.6 8.3 11.0 NA 10.1 11.0 4.2 15.0

Active clients ( in Lakh) 6.4 4.8 4.6 3.3 2.0 4.3 2.0 1.6 1.2 3.0 10.4

Active % of total clients 31% 27% 32% 32% 24% 39% NA 16% 11% 70% 69%

Zerodha

Q1FY20 Q2FY20 Q1FY20 Q2FY20 Q1FY20 Q2FY20 FY18Q1FY19* Q1FY20 Q2FY20 Q1FY20Q2FY20* Q1FY20*

Total ADTO (| crore) 21207 23800 18900 20600 16934 19161 10890 13169 8205 10748 16805 18992 126900

Derivative (| crore) 17507 20536 17200 19000 15856 18021 9211 11318 7264 9861 16050 17923 123220

Cash (| crore) 3700 3264 1700 1600 1078 1140 1679 1851 941 887 755 1070 3680

Market share total 1.7% 1.6% 1.5% 1.4% 1.3% 1.3% 1.5% 1.3% 0.6% 0.7% 1.9% 2.0% 10.0%

Market share deriv 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.4% 1.5% 0.6% 0.7% 1.3% 1.3% 0.0%

Market share cash 10.0% 9.0% 4.6% 4.4% 2.9% 3.1% 8.8% 10.3% 2.6% 2.4% 2.1% 3.0% 10.0%

5 paisaJMKotak Sec Motilal Sec IIFL Sec Angel Broking

FY19 Kotak Sec Sharekhan MOSL Angel# IIFL Sec

No of franchise <1100 2600 2500 <11000 500*

Volume share of franchise (ADTO in %) ~10-15 30 70 50 ~20-25




basis for different tenures. Therefore, actual interest generating margin

funding book is seen at 1.5-2x of the closing balance as depicted in the

Exhibit below. This avenue remains attractive as yields generated from

margin funding book ranges between 12% and 18% on a rolling basis.

Exhibit 29: Margin funding book broker-wise as reported in balance sheet (FY19)

Source: Company, annual report, DRHP ICICI Direct Research

Exhibit 30: Interest as percentage of total income rising….

Source: Company, Annual reports, DRHP, ICICI Direct Research

Exhibit 31: Share of broking income moderating

Source: Company Annual reports, DRHP,, ICICI Direct Research

Business model to shift to advisory to sustain revenues

In the western stock market, entry of discount brokers have led to traditional

brokers mould their business model towards fee based income. Recently,

brokers including Charles Schwab, TD Ameritrade, E-Trade have dropped

trading fees and are offering nearly zero commission to clients. Accordingly,

the aim is to generate revenue from service offering including ETF and

advisory services rather than earlier regime of transaction based

commission.

In the wake of changes undertaken in domestic stock market and broking

industry, evolution in terms of business model is imminent. In our view, the

Indian broking industry is set to witness a gradual shift from transaction

based model to service or fee based model offering services like wealth

management and investment advisory. A shift towards fee based model is

already in foray with brokers focussing on building non transaction - wealth

AUM (refer exhibit below). Apart from advisory services, focus on fund

based activities including margin funding and loan against shares, which the

brokers are currently engaged, is seen further increasing, enabling brokers

as sustainable avenue of contribution to earnings.

581

227

450

103

660686

2452

78

0

100

200

300

400

500

600

700

800

Kotak Sec HDFC Sec Sharekhan Axis Sec Moti Angel 5Paisa Geojit IIFL

Securities

54

74

86

51

65

77

56

80

44

28

914 12

30

8

27

03

0

20

40

60

80

100

Brokergae Income/ Total Income Interest Income/ Total Income

51

67

84

55

69

80

56

76

44

28

1016 14

2620 19

36

0

20

40

60

80

100

Brokergae Income/ Total Income Interest Income/ Total Income

Funding book is in the range of 1.5-2x of what is

reported as closing balance

As of September 2019, majority of players have

witnessed decline in margin funding book due to lack

of funding options (e.g.: commercial papers)




Exhibit 32: Business model to focus on generation of AUM

*Includes retail demat AUM, # comprises fully of custodian & clearing assets


Bank led brokerages maintain top slot amid competition

Emergence of discount brokers offering low brokerage on per order basis

has led to a shift in market share in terms of active clientele. Market share of

top 10 brokers in terms of number of clients moderated to ~63% in

September 2019 vs. ~65% in July 2019. Gaining market share, RKSV and

5Paisa are new additions in top 12 list of brokers in terms of clientele. Both

have climbed three places in ranking to nine and 11, respectively.

Exhibit 33: Active clients of top brokers


Among discount players, Zerodha has been one of the prominent player

witnessing continuous increase in market share to ~12.3% in November

2019. Apart from Zerodha, RKSV and 5Paisa are next upcoming discount

brokers gaining market share. In addition, new players like Bajaj Financial

Securities (Bajaj Financial Services has launched subscription based

brokerage plans) and Paytm are also in row to formally launch fixed

brokerage plans. One of the peculiarity witnessed in terms of clientele is that

discount brokers have a large proportion to the extent of 60-70% of first time

investors in the age bracket of 25-40 years.

With focus on engaging with incremental or new investors entering stock

markets, traditional brokers have started to offer fixed brokerage products

mainly in the derivative segment. As depicted in the Exhibit below,

traditional brokers including Angel Broking, Edelweiss and Axis Securities

has launched fixed brokerage plans.

Revenue model of discount brokers is based on fixed brokerage per order

rather than percentage of trade value. Players like Zerodha cater to ~20-40

lakh order/trade per day, though ~50% of orders generate revenue (Zerodha

charges nil brokerage on cash delivery trades). Similarly 5Paisa caters to ~2-

3 lakh order per day and charges flat brokerage on per order basis. Increase

in clientele and orders provides with the top-line in terms of brokerage fees,

AUM (| crore) Motilal Edelweiss IIFL Wealth JM

AMC 38,500 35,900 23,420

Wealth 18,100 26,950 48,041

DP/Custodian assets 60,100 21500# 28,907

Distribution 9,900 80850* 72,730

Total 126,600 165,200 173,098 14,037

Active Clients (in '000) FY14 FY15 FY16 FY17 FY18 FY19 Jul-19 Sep-19 Nov-19 Mkt share

Zerodha 18 30 62 166 541 981 1008 1045 1113 12.3%

ICICI Securities 501 595 560 618 798 881 895 906 935 10.3%

HDFC Securities 279 348 408 483 602 651 647 635 648 7.1%

Sharekhan 275 343 336 366 535 505 501 481 486 5.4%

Kotak Securities 223 268 247 274 369 447 456 463 485 5.3%

Axis Securities 77 120 184 259 405 390 377 338 311 3.4%

Angel Broking 140 160 171 230 364 427 432 432 455 5.0%

Motilal Oswal 123 153 166 207 308 326 330 326 333 3.7%

RKSV Securities 188 277 376 4.1%

Karvy 126 172 167 181 245 267 268 265 283 3.1%

5 Paisa Capital Ltd 158 234 295 3.3%

SBI CAP Securities 68 114 126 169 214 212 213 213 220 2.4%

IIFL Securities 201 199 2.2%

Geojit Financial Services 157 157 1.7%

Edelweiss Broking 115 117 1.3%




however, sustainability of this growth is yet to be seen. While low cost

enables discount brokers to maintain business parity, sustainable rise in

volumes remains most key driver for discount brokers to make meaningful

profitability.

Exhibit 34: Broking plans - traditional players moving to fixed plans

Source: NSE, company websites, media articles, ICICI Direct Research

Traditional brokers had started with the business model encompassing

online & offline model. Hence, requirement of headcounts have been higher

compared to discount brokers. Therefore, as seen in the exhibit below,

number of employees for traditional brokers stands higher on relative basis.

Exhibit 35: Broker-wise headcounts

Source: Company, annual report, media articles, ICICI Direct Research

Sebi tightens rules on clients funds; large brokers could gain

In June 2019, Sebi released a circular tightening rules for usage of client’s

funds by brokers. As per the new rules, brokers need to transfer securities

to their client accounts within one day of receiving payment and not put to

any other use. In case, where the client defaults on payment, brokers have

been asked to hold the securities up to five days post which the broker can

liquidate securities in the market and recover their dues.

Further, Sebi has mandated that securities with brokers for non-receipt of

payment from clients is not be used as collateral for any of proprietary trades

or can be pledged with financial institutions. Post this circular, brokers will

not be able to use client stock as collateral thereby impacting revenue

stream of few brokers.

In a recent announcement, NSE has suspended Karvy Stock broking license

due to non-compliance of regulatory provisions of the exchange. As per

media sources, market regulator estimates that the broker has misused

client securities worth ~| 2800 crore, pledging the securities with financial

institutions. Currently, NSE has appointed EY India Ltd to conduct a forensic

Brokers Angel Edelweiss Axis Sec Zerodha Upstox 5 Paisa

Discount plans I Trade Prime Edelweiss Lite Trade @ 20*

Brokerage

Equity Delivery Nil ₹10 or 0.01% whichever lower |. 20 Nil Nil |. 10

Equity Intraday |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 20 |. 10

Equity Futures |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 20 |. 10

Equity Options |. 20 |. 10 |. 20 |. 20 |. 20 |. 10

Currency Futures |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 10

Currency Options |. 20 |. 10 |. 20 |. 20 |. 10

0

1000

2000

3000

4000

5000

6000

Sharekhan Kotak Sec Motilal* HDFC Sec Angel Zerodha 5 Paisa * Geojit

No of employees




audit and findings of the same is awaited. However, such events act as trust

deficit and can lead to large brokers gaining market share.

IBC amendment; final piece in jigsaw

In a move to remove the final hurdle for companies taking over stressed

companies, the Union Cabinet approved an amendment to the Insolvency

and Bankruptcy Code (IBC) that prohibits attaching assets of companies

resolved under the mechanism for offences/crime committed by the

previous management or promoters. This provides long-awaited relief to

acquirers as it establishes the principle of equity, that acquirers can take over

assets clear of all claims and, especially, past doings of the promoters and

directors. The moves set a precedence for resolution of other pending cases.

Early resolution of these account will bring systemic NPA down and aid

profitability in the current year.

Amendment to existing credit guarantee scheme

To provide liquidity to troubled NBFCs, the Government of India approved

changes to the partial credit guarantee scheme introduced in Budget 2019-

20. Lenders could now buy assets of NBFCs that are rated BBB+ & above

(earlier AA & above). The scheme has been extended till June 30, 2020 with

a guarantee by the government on the purchased asset capped at first loss

of 10% of bought asset or | 10000 crore, whichever is lower. This move is

expected to provide | 1 lakh crore of liquidity to NBFCs but the decision to

buy stressed asset from NBFCs is at the discretion of banks.

Indian Bank

Indian Bank’s stock price witnessed a knee jerk reaction on the

announcement of its amalgamation with Allahabad Bank. Given the bank’s

healthy capitalization and a favourable credit-deposit ratio, the bank is

poised to benefit in the current environment while post-amalgamation a

better liability franchise and healthy capital position is seen improving

market share of merged entity. Accordingly, we believe that fears on

integration process, asset quality of merged entity & future growth of bank

are overstated. The merged bank is currently trading ~0.5 FY21E ABV,

which is cheaper compared to its peers. Factoring in synergies of merger to

pan out ahead, strong capital position and better asset quality, we remain

positive on Indian Bank. Therefore, we remain positive on the stock &

upgrade to BUY from HOLD recommendation. However we lower our price

target to | 130 per share (earlier | 220) valuing it at ~0.6x FY21E ABV.

Exhibit 36: Key Financial and valuation (post-merger with Allahabad bank)

| crore FY18* FY19* FY20E** FY21E**

NII 5146 6263 12908 14198

PAT 1405 1259 525 2000

EPS 26.2 6.7 3.8 14.6

P/E 3.9 15.4 26.9 7.1

ABV 245 226 210 225

P/ABV 0.42 0.46 0.49 0.46

RoA 0.5 0.1 0.1 0.3

RoE 7.1 1.7 1.2 4.4

Source: Company, ICICI Direct Research * Indian Bank pre-merger, ** Proforma merged entity (Indian Bank and Allahabad

Bank)

Indian Bank Price Chart

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

50

100

150

200

250

300

350

400

450

Dec-19

Sep-1

9

May-19

Feb-19

Oct-18

Jul-18

Mar-18

Nov-17

Aug-17

May-17

Jan-17

Indian Bank (R.H.S) Nifty (L.H.S)




Annexure

Exhibit 37: Asset quality trend

Asset quality trend

Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20

PSU coverage

Bank of Baroda 55,121 53,184 48,233 78,681 66,714 21,059 19,131 15,610 35,886 24,530

SBI 2,05,864 1,87,765 1,72,750 1,68,494 1,68,894 94,810 80,944 65,895 65,624 66,344

Indian Bank 12,334 13,198 13,353 13,453 13,453 7,060 7,571 6,793 6,854 6,854

Private coverage

Axis Bank 30,938 30,855 29,789 29,405 27,053 12,716 12,233 11,276 11,037 10,706

City Union Bank 848 892 977 1,026 1,026 498 528 591 621 621

Development Credit Bank 410 445 439 470 491 155 163 154 163 200

IndusInd Bank 1,781 1,968 3,947 4,200 4,413 788 1,029 2,248 2,381 2,448

HDFC Bank 10,098 10,903 11,224 11,769 12,508 3,028 3,302 3,215 3,567 3,791

Jammu & Kashmir Bank 6,068 6,860 6,221 6,252 2,489 3,049 3,240 3,382 3,382

Yes Bank 3,866 5,159 7,883 12,092 17,134 2,020 2,876 4,485 6,883 9,757

NNPA (| crore)GNPA (| crore)


Exhibit 38: Quarterly margin trend

NIM (%) Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20

PSU coverage

Bank of Baroda 2.5 2.7 2.6 2.7 2.9 2.6 2.8

Indian Bank 2.9 3.1 3.0 2.9 3.0 2.9 2.9

SBI 2.5 2.8 2.7 2.8 2.8 2.8 2.9

Private coverage

Axis Bank 3.3 3.5 3.4 3.5 3.4 3.4 3.5

Bandhan Bank 9.3 10.3 10.3 10.5 10.7 10.5 8.2

City Union Bank 4.4 4.2 4.3 4.4 4.4 4.1 4.0

Development Credit Bank 4.1 3.9 3.8 3.8 3.8 3.7 3.7

HDFC Bank 4.3 4.2 4.3 4.3 4.4 4.3 4.2

IndusInd Bank 4.0 3.9 3.8 3.8 3.6 4.1 4.1

Jammu & Kashmir Bank 3.2 3.7 3.7 3.9 4.1 3.9 4.0

Kotak Mahindra Bank 4.4 4.3 4.2 4.3 4.5 4.5 4.6

Yes Bank 3.4 3.3 3.3 3.3 3.1 2.8 2.7


Exhibit 39: Key financial of industry as of Q2FY20

(| crore) Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20

NII 84835 94144 92132 99136 104651 102336 106102

Growth YoY 1.3 27.4 11.3 15.7 23.4 8.7 15.2

Other income 47391 37110 37019 41299 49070 42666 50354

Growth YoY 0.7 -11.4 -29.1 8.1 3.5 15.0 36.0

Total operating exp. 69366 64525 64068 71463 77857 71040 75068

Staff cost 34342 32053 32749 35995 36478 36200 37803

Operating profit 62860 66730 65084 68973 75864 73962 81388

Growth YoY -13.0 8.1 -13.8 9.9 20.7 10.8 25.1

Provision 148276 77236 70471 65837 107142 56111 60502

PBT -85460 -10552 -5437 3136 -31719 17773 20813

PAT -55648 -7130 -4404 -197 -21535 11209 6645

Growth YoY NM NM NM NM NM NM NM

GNPA 1024586 1002682 997247 961129 920300 924271 921911

Growth YoY 31.9 20.9 18.7 8.5 -10.2 -7.8 -7.6

NNPA 517775 485181 463082 417837 354507 353766 341896

Growth YoY 2.3 -11.0 -31.5 -27.1 -26.2

Source: Capitaline, Company, ICICI Direct Research




Exhibit 40: ICICI Direct Coverage Universe (BFSI)

CMP M Cap

(|) TP(|) Rating (| Bn) FY19FY20E FY21E FY19FY20E FY21E FY19 FY20E FY21E FY19FY20E FY21E FY19FY20E FY21E

BoB (BANBAR) 102 130 Buy 473 1.8 5.0 20.9 57.2 20.4 4.9 1.2 1.0 0.9 0.1 0.2 0.7 0.9 2.9 10.9

SBI (STABAN) 335 400 Buy 2988 1.0 18.4 31.1 345.2 18 10.8 2.4 1.8 1.6 0.0 0.5 0.7 0.5 8.5 12.5

Indian Bank (INDIBA) 102 130 Buy 62 6.7 21.7 40.6 15.1 4.7 2.5 0.4 0.4 0.4 0.1 0.3 0.6 1.7 5.3 9.4

Axis Bank (AXIBAN) 760 865 Buy 2141 18.1 21.3 49.0 42 35.6 15.5 3.5 2.8 2.4 0.6 0.7 1.4 0.6 0.7 1.4

City Union (CITUNI) 234 240 Buy 172 9.3 10.4 12.0 25.2 22.5 19.5 4.0 3.4 3.0 1.6 1.6 1.6 15.3 14.8 14.8

DCB Bank (DCB) 171 220 Buy 53 10.5 12.6 16.7 16.2 13.5 10.2 1.9 1.8 1.5 1.0 1.0 1.2 12.2 12.9 14.8

HDFC Bank (HDFBAN) 1,272 1,440 Buy 6964 38.7 47.7 56.8 32.9 26.7 22.4 4.8 4.2 3.6 1.8 1.9 1.9 16.5 16.3 17.0

IndusInd Bank (INDBA) 1,513 1,400 Buy 1048 60.9 83.4 110.7 24.8 18.1 13.7 3.6 2.9 2.5 1.6 1.9 2.1 14.5 16.8 18.4

J&K (JAMKAS) 30 48 Hold 17 8.3 9.4 14.5 3.6 3.2 2.1 0.5 0.5 0.4 0.5 0.5 0.6 7.3 7.7 11.0

Kotak Bank (KOTMAH) 1,685 1,700 Hold 3219 25.5 33.7 39.8 66.1 50.0 42.4 7.8 6.9 6.0 1.7 1.9 1.9 12.1 14.0 14.4

Yes Bank (YESBAN) 47 UR Reduce 120 6.4 -1.6 6.5 7.3 -30.0 7.3 0.5 0.7 0.8 0.4 -0.2 0.6 5.6 -1.9 6.7

Bandhan (BANBAN) 497 680 Buy 799 16.4 22.0 28.2 2.9 2.1 1.7 0.5 0.5 0.4 3.9 4.8 4.3 19.0 27.2 26.7

IDFC First (IDFBAN) 45 54 Buy 216 -3.4 -0.5 1.5 -13.3 -90.2 30.1 1.3 1.3 1.3 -1.1 -0.1 0.4 -9.8 -1.4 3.9

Sector / Company

RoE (%)RoA (%)EPS (|) P/E (x) P/ABV (x)

Source: Bloomberg, ICICI Direct Research




RATING RATIONALE

ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]




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