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Transcript of VYSBANK_20121003
India Financials
Adarsh Parasrampuria [email protected]
+91-22-6632 2236
Parul Gulati [email protected]
+91-22-6632 2242
Click to edit Master title style LilladherPrabhudas Sector: Financials
October 2012
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report.
Benchmarking mid-sized private banks; Finding the next winner
LilladherPrabhudas Contents
October 03, 2012 2
(Prices as on October 3, 2012)
Page No.
Bench marking and finding the next winner 3
Investment summary 4
Bench marking scorecard 7
Benchmarking SWOT 9
Valuations and PT 10
Benchmarking old generation private banks (+75 parameters)
Liability Franchise – J&K best, FB/SIB weak 14
Network expansion – All slow expect for Federal 17
Loan growth – Slowdown lower than larger peers 18
Branch efficiency – Significant catch up needed especially ING 19
Cost Efficiency - Highest potential for improvement in ING 21
Margins and Spreads – Mixed bag 24
Fee income – Weak expect for ING 26
Asset quality – Safe haven especially SIB, Federal the only exception 28
Exposure to stressed sectors – Infra lowest for ING 30
Capital and Leverage - All well placed on capital, Federal under-leveraged 31
Priority sector – New worry for SIB 32
Benchmarking snapshot 33
Companies
J&K Bank – Good bank at great valuations - BUY 38
ING Vysya - Set for significant efficiency improvement - BUY 52
Federal Bank - Improving asset quality franchise - BUY 67
South Indian Bank - Too dependent on stable asset quality - ACCUMULATE 82
LilladherPrabhudas Mid Cap private banks – Finding the next Winner
Large number of private banks have succeeded in creating value /setting benchmarks. Competition is only increasing but some mid-cap banks have had management changes and others have reoriented their business models. We benchmark four mid-cap banks, ING Vysya (ING), Federal (FB), South Indian (SIB) and J&K (J&K) v/s larger private/PSU peers on +75 metrics to ascertain relative strengths/weakness and arrive at the next winner. We initiate coverage with a ‘BUY’ on J&K (+24% upside), ING (+17% upside) and FB (+17% upside) and ‘ACCUMULATE’ on SIB (~5% upside).
Benchmarking: Scoring on many metrics: Surprisingly, Mid-cap banks compare well v/s peers on capital (Tier-1 levels), overall return ratios and more importantly asset quality comfort, especially from Infra risks. Liability franchise is a mixed bag with J&K/ING faring well but SIB lagging behind. Fee income is a common worry (excl. ING) and so is branch efficiency, though efficiency metrics is on a improving trajectory , but still is significantly sub-optimal v/s larger private peers.
J&K best pick; SIB least preferred: J&K (BUY, ~24% upside) enjoys an inherent state CASA advantage and though competition is picking up in J&K, our feedback suggests that it will not be disruptive. J&K Bank is most detached from the current economic slowdown and best positioned to benefit from a booming and under-penetrated J&K state. Valuations is extremely appealing at 0.85x FY14 book, with +20% ROEs and limited asset quality risk. SIB (ACCUMLATE, ~5% upside) also enjoys strong asset quality + robust ROEs. However, with the weakest operating metrics, including liability/NIM/Core fees/branch efficiency, we believe re-rating in case of SIB will be limited.
Positive on ING and FB: ING (BUY, ~17% upside) and FB (BUY, ~17% upside) both lag on ROEs. However, we believe, issues constraining ROEs will get addressed over the next two years. ING’s ~59% cost/income has been a ROA constraint and we believe, management strategy of calibrated branch expansion will aid in bringing C/I lower without impacting growth as ING is the most urban-centric bank with characteristic similar to large banks and hence, branch efficiency catch-up will be significant. FB’s legacy asset quality issues have been addressed by the new management and as the legacy book rolls down, credit costs will settle at ~50% lower levels v/s FY09-11 and gradual leveraging up will drive ROE improvement.
Valuation gap v/s larger private banks will never get bridged but provides significant comfort: Current valuations at 0.8-1.2x for old generation private banks is extremely reasonable, considering limited asset quality issues, especially Infra and improving profitability, though gap in many metrics will never let valuations converge with larger peers. With the ~15-20% move in Financials over last two months, we believe a basket of small private banks provide potential for strong upside +20-25% and also offer downside protection as growth slowdown will be lower + Infra risks is limited.
October 03, 2012 3
LilladherPrabhudas Investment Summary
J&K Bank - Good bank at great valuations (PT of Rs1,250/share, ~24% upside)
Strong liability franchise, with improved focus on growth: J&K enjoys a very strong liability franchise due to its state advantage and management’s intended growth acceleration (after five years of consolidation) coincides with a phase of strong economic growth and activity in J&K. With +60% market share in advances and deposits, we believe J&K Bank is best positioned to benefit from strong growth in J&K state.
Competition will not be disruptive: High CASA + Low operating costs make J&K an attractive expansion opportunity for private banks. However, our feedback from large private banks suggest that competition will not be disruptive.
More private than PSU bank; Mid-cap PSU valuations unwarranted: Low fees and CA ratio are the only commons (PSUs) , apart from which J&K Bank is more of a private bank on most parameters like high CASA and margins, sound underwriting and high ROAs/RORWAs. Management continuity, which is a big issue with PSUs, is also absent in J&K Bank, with ~5-6 years of average tenure for the Chairman.
Valuations extremely undemanding: J&K valuations at 0.85x FY14 book is extremely reasonable relative to ROEs of +20% and with limited commonality with PSUs and low Infra risk, we believe market should not peg J&K’s valuations with mid-cap PSUs. We base our Sep-13 PT of Rs1250/share on a modest 1.05x FY14 book with possible upsides.
ING Vysya - Set for significant branch efficiency improvement (PT of Rs480/share, ~17% upside)
Regional bank with most urban characteristics: ~65% of ING's branches are in Urban/Metro centers and ING also benchmarks favorably on parameters like CA ratio, fee-to-assets v/s private peers, where regional private banks have struggled. We, thus, believe that right branch efficiency benchmarks for ING is larger private peers rather than regional banks, indicating significant catch-up potential.
Robust asset quality with negligible Infra risks: ING's expertise in SME lending, low-risk retail book, low exposure to sensitive sectors and most importantly negligible Infra exposure will keep credit costs under check though we conservatively factor in credit costs to inch up.
Addressing cost concerns: ING's high Urban-Metro branch mix still has significant scope for efficiency improvement and this, coupled with a calibrated branch expansion strategy, will aid in bringing down cost to income without compromising on growth.
Valuation reasonable, ‘BUY’ with a PT of Rs480/share: Profitability improvement will continue as management drives growth from better branch efficiency. Valuations at 1.2x FY14 book is reasonable, considering improving ROEs + no Infra risks.
October 03, 2012 4
LilladherPrabhudas Investment Summary
Federal Bank - Improving asset quality franchise (PT of Rs525/share, ~17% upside)
Credit system overhaul done; positives to follow: The new management over the last two years has (1) centralized credit appraisal (2) consolidated FB's high delinquency mortgage book and (3) improved quality of underwriting in large/mid corporate and these initiatives will bring down slippages to <2% as the legacy corporate book runs off.
Aggressive network expansion; some near-term cost implications: After overhauling their credit systems, FB is on a branch network expansion drive, especially in credit heavy states. Hence, there will be some inch-up in cost ratio, which, we believe, will be manageable.
Lower credit costs to drive return ratios: With the asset quality initiatives, credit costs will come off to ~90bps from ~170bps in FY08-11. With margins to remain flat and cost expected to inch up in the near term, lower credit costs will help in maintaining ROAs at 1.3-1.4% range. Also, with the leveraging up process, ROEs will touch ~16% by FY14-15 after being stuck in a narrow band of 12-14% over the last 4-5 years.
Valuations reasonable; BUY with a PT of Rs525/share: Lower normalized credit costs will drive re-rating for FB in the medium term as it is the only constraint for FB to deliver on return ratios. Improving asset quality will likely be the stock catalysts.
South Indian Bank - Too dependent on stable asset quality (PT of Rs25/share, ~5% upside)
Best-in-class asset quality drives return ratios: Highest share of secured loans, high proportion of gold loans and conservative underwriting has led to best in class asset quality. Conservative corporate underwriting and low risk Infra exposure will keep asset quality under check.
Gold loans - Large book - Risks Limited: Proportion of gold loans is highest for SIB and our feedback suggest that RBI is relatively comfortable with gold lending by banks limiting regulatory risks. Risk weight calculation for gold loans could be increased but impact will be low for SIB, given high Tier-1.
All other metrics deteriorating; risks to profitability remain: The good story ends with asset quality with (1) one of the lowest fee/assets and (2) lowest CASA ratio which is also steadily coming off, making ROA delivery always contingent on low credit costs. Large miss on PSL lending in FY12 exposes another structural negative which could impact profitability.
Initiate with an ‘ACCUMULATE’ with a PT of Rs25/share: SIB enjoys one of the best asset quality franchise. However, with deterioration in all other metrics and increasing risk from higher RIDF call, we rate SIB an ‘Accumulate’, with Sep-13 PT of Rs25/share implying 1x FY14 book.
October 03, 2012 5
LilladherPrabhudas Valuations reasonable with high/improving ROEs
October 03, 2012 6
Rating PT Upside FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14
New generation private banks
Axis BUY 1,350 21% 1.76 1.50 9.8 8.3 19.5% 19.4% 10.6% 17.5%
HDFCB Accumulate 610 -2% 4.19 3.56 22.0 18.5 20.3% 20.6% 27.6% 19.0%
ICICI BUY 1,100 4% 1.94 1.73 13.1 11.3 12.4% 13.2% 21.5% 15.9%
Kotak Reduce 530 -17% 3.10 2.73 23.5 19.1 13.9% 15.1% 15.1% 23.2%
IndusInd BUY 400 8% 3.24 2.72 17.3 14.0 20.3% 21.2% 24.7% 23.6%
Yes BUY 450 12% 2.48 2.02 12.0 9.6 22.7% 23.1% 20.8% 24.3%
Old generation private banks
Federal BUY 525 17% 1.20 1.07 9.3 7.7 13.7% 14.9% 6.2% 20.9%
ING BUY 480 17% 1.41 1.24 11.3 8.9 13.4% 15.0% 20.2% 26.7%
J&K BUY 1,250 24% 1.02 0.87 5.2 4.7 21.0% 20.0% 16.7% 10.9%
SIB Accumulate 25 6% 1.10 0.95 6.8 5.6 18.9% 18.3% -2.9% 21.5%
PSU banks
PNB Accumulate 850 3% 0.99 0.85 5.4 4.7 18.2% 18.1% 6.0% 15.8%
BOI Accumulate 335 10% 0.88 0.77 5.2 4.4 16.0% 16.5% 26.4% 18.0%
BOB BUY 850 9% 1.07 0.92 6.4 5.5 17.7% 17.8% 0.3% 17.1%
SBI Accumulate 2,100 -9% 1.32 1.15 7.8 6.9 16.6% 16.3% 22.7% 12.1%
NBFCs
HDFC BUY 800 3% 4.13 3.56 17.2 14.7 22.4% 21.5% 15.7% 17.2%
IDFC BUY 145 -10% 1.79 1.60 13.1 11.3 14.3% 14.9% 20.0% 16.5%
LIC housing BUY 300 9% 2.15 1.83 11.8 9.2 19.2% 20.9% 29.2% 27.7%
Shriram Accumulate 575 -9% 2.00 1.70 10.5 9.4 20.7% 19.5% 8.5% 11.5%
MMFS BUY 860 -4% 2.57 2.17 12.4 10.3 22.7% 22.9% 19.9% 21.0%
P/B P/E ROE EPS Growth
LilladherPrabhudas Benchmarking Scorecard: Scoring on many metrics
October 03, 2012 7
Category Metrics 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile
Liability Franchise
CA and SA Ratios (%)
CA and SA per branch
CA and SA Growth
Bulk Dep/Borrowing dependence
HDFCB
SBI
J&K Bank
Axis
ICICI
PNB
ING Vysya
Kotak
IIB
BOB
BOI
Federal bank
Yes Bank
South Indian
Network Expansion
and Spread
Branch Growth (%)
Branch v/s B/S growth
Urban-Rural Mix
ATM/Branch
Axis
Kotak
HDFCB
Yes Bank
IIB
ICICI
Federal Bank
South Indian
SBI
PNB
BOI
BOB
ING Vysya
J&K Bank
Branch Efficiency
Business and Deposits per branch
CASA per branch
Branch efficiency v/s Urban-Rural Mix
Employees/branch v/s Asset Mix
Axis Bank
HDFCB
ICICI
Kotak
IIB
Yes Bank
J&K Bank
SBI
PNB
BOB
BOI
Federal
South Indian
ING Vysya
Yields and Margins
Risk/Leverage adjusted margins
Cost of funds advantage
Yields on assets advantage
HDFCB
Kotak
IndusInd
J&K Bank
SBI
Axis
ICICI
ING
Federal
PNB
Yes Bank
BOB
BOI
South Indian
Fee income franchise
Fees to Assets
Core fee growth
Fee to expenses
Non-fund based book
IIB
HDFCB
Axis
ICICI
ING Vysya
Kotak
Yes Bank
SBI
Federal Bank
PNB
BOI
BOB
South Indian
J&K Bank
LilladherPrabhudas Benchmarking Scorecard: Scoring on many metrics
October 03, 2012 8
Category Metrics 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile
Cost Efficiency
Cost to income/Cost to assets
Per emp. cost/ Per branch emp.
Overheads to Assets/ per branch
Opex growth v/s Network expansion
Cost to assets v/s Urban-Rural mix
Cost to Assets v/s Branch efficiency
J&K Bank
ICICI
BOB
BOI
Axis
Federal Bank
PNB
Yes
HDFCB
IIB
Kotak
SBI
South Indian
ING Vysya
Asset Mix and
Quality
Gross slippages and credit costs
Gross NPA and coverage
Restructuring and slippages
Infra +stressed sectors exposure
Mitigants: Working capital + Retail
HDFCB
Kotak
IIB
South Indian
J&K Bank
Yes Bank
ING Vysya
ICICI
Axis
BOB
Federal Bank
SBI
PNB
BOI
Capital and Leverage
Core Tier-1
Optimum leverage
RWA/Loans
Non Fund based exposure
IIB
HDFCB
South Indian
J&K Bank
ICICI
Axis
BOB
PNB
ING Vysya
Federal Bank
Kotak
SBI
BOI
PNB
Profitability/Return
Ratios
Return on Asset and Equity
RORWA
PPOP/employee and branch
Net Profit per employee and branch
HDFCB
Yes Bank
IIB
Axis
J&K Bank
South Indian
ICICI
Kotak
PNB
BOB
Federal
ING Vysya
SBI
BOI
LilladherPrabhudas Benchmarking SWOT
October 03, 2012 9
Strengths Weaknesses Opportunities Threats
Federal Bank
1. Margins among the highest though
partly due to leverage
2. Most cost efficient South-based
bank - Cost income <42%
3. Niche gold loan portfolio
contributing ~8-9% of loans
1. Legacy asset quality issues - High
delinquency portfolio in SME and
also in mortgages
2. More than adequately
capitalised - Will take 3-4 years to
self-correct
1. New management streamlining
SME credit systems - Biggest area
of improvement
2. Expanding aggresively in
developed states beyond Kerala -
Should aid strong growth
1. Legacy issues continue to
impact asset quality over the
near term
2. Competition getting
aggressive on NRI business
ING Vysya
1. Most urbanised old generation bank
- 65% branches Metro/Urban
2. Strong CA franchise at 18% of dep.
3. Best in class fees/ assets of ~1.5%
4. Very strong SME franchise and
negligible thermal power exposure
1. Branch efficiency lowest,
considering Urban/Rural mix and
hence, worst on cost efficiency
2. Large RIDF book at 11% of loans -
Drag on margins
3. No Niche retail lending expertise
Features of Urban bank like high
CA ratio, fee income franchise
present -- Ramp up on branch
efficiency could be the highest
and hence, we expect signifcant
cost/income improvement
Low branch additions could
improve efficiency but also
risk CASA growth after 1-2 yrs -
We believe branch efficiency
catch-up will be the highest
for ING
J&K Bank
1. Best in class SA franchise - 30%
overall SA with ~43% SA in J&K.
2. Cost income is low as branch
overheads are lowest in J&K
3. Consistent and stable asset quality --
Limited impact from current industrial
slowdown
1. Fee income remain among the
lowest
2. Corporate underwriting
capability limited- Lends largely to
"AAA" corporates to avoid risks
1. Benefit from higher business
activity in J&K and also under
penetration of credit especially
Horticulture
2. Improvement in corporate
underwriting skills to aid margins,
given liability franchise
1. Competition inching up in
J&K, with HDFCB opening ~25
branches in FY12
2. Rise in terrorism always
remains a risk in J&K Bank
South Indian Bank
1. Secured lending and low credit
costs remain significant strengths
2. Largest gold loan books among
banks - ~22% of loans
3. Most signifcant transformation in
HR among old generation banks
1. Weak CASA franchise (<20%)
further impacted by NRI rate de-reg
2. Fee income franchise very weak
at just ~0.5% of assets
3. Branch efficiency also among the
lowest
4. Incremental shortfall on PSL
significant (at 25% v/s 40%
required)
1. Build on CASA and fee income
which will not be easy
2. Build on the niche gold lending
book
1. RIDF book currently small
but ~15% PSL shortfall can
drive signifcant RIDF calls with
negative impact on already
low NIMs
2. Competition getting
aggressive on NRI business
LilladherPrabhudas Summary of Valuations and PT
Source: PL Research
Source: Company, PL Research
We have valued banks on the two-stage Gordon growth model, with risk free rate of 8% and risk premium of 6%.
J&K Bank PT implies a modest 1x FY14 valuation which is very reasonable for high ROEs generated and we believe, pegging valuations with mid-cap PSU banks is not justified. Hence, we see highest potential for upside in J&K Bank (~24% upside)
ING Vysya Bank PT implies ~1.45x valuation, highest in the midcap private banks pack as ING displays most characteristics of an Urban bank with negligible Infra risks and efficiency improvement over the next three years will drive strongest ROE improvement.
Federal Bank PT implies 1.3x valuation. ROEs will improve as leverage inched up but lower credit costs should aid in maintaining ROAs at ~1.3% levels.
South Indian Bank PT also implies a modest 1x FY14 valuation as well. However, weak outcomes on most fundamental metrics and too much dependence on low credit costs to generate ROAs/ROEs is a risk
Valuations reasonable relative to their return ratios: Current valuations at 0.8-1.2x 1-yr fwd book is extremely reasonable, considering return ratios generated, especially for J&K and also SIB and potential improvement in ROEs over the next 2-3 years for FB and ING will drive valuations higher.
Valuation summary:
Compares well on P/B v/s ROAs
October 03, 2012 10
Federal ING SIB J&K
Risk free rate 8.0% 8.0% 8.0% 8.0%
Equity Risk Premium 6.0% 6.0% 6.0% 6.0%
Beta 1.25 1.10 1.25 1.20
Cost of Equity 15.5% 14.6% 15.5% 15.2%
Terminal growth 5.0% 5.0% 5.0% 5.0%
Normalised ROE 16.9% 17.1% 15.6% 17.1%
Stage 2 growth 14.0% 18.0% 14.0% 11.0%
Sep-13 PT 525 480 25 1250
Implied Mar-14 P/B 1.27 1.46 1.02 1.08
Implied Mar-14 P/E 9.0 10.4 6.0 5.8
Subsidiaries/Investments (Rs/Share) 0
ICICI
Axis
Kotak
IIBYes
Federal
INGSIB
J&K
SBI
PNBBOB
BOI
0.5%
0.7%
0.9%
1.1%
1.3%
1.5%
1.7%
1.9%
2.1%
0.50 1.00 1.50 2.00 2.50 3.00 3.50
RoA
FY13 P/BV
LilladherPrabhudas Undemanding on most valuation metrics
Source: Company, PL Research
PAT per branch v/s Mcap per branch
Source: Company, PL Research
Deposit per branch v/s Mcap per branch
Source: Company, PL Research
Urban/Rural mix v/s Mcap per branch
Source: Company, PL Research
Per branch Mcap in line with PSU banks
Source: Company, PL Research
Mcap to advances also in line with PSU banks
Source: Company, PL Research
J&K’s Mcap/CASA worse off than PSU banks
October 03, 2012 11
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
Ko
tak
HD
FCB IIB
ICIC
I
Yes
Axi
s
ING
Fed
eral
J&K
SBI
BO
B
PN
B
SIB
BO
I
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
350.0%
Ko
tak
Yes
IIB
HD
FCB
ICIC
I
Fed
eral
Axi
s
ING
SIB
BO
B
SBI
PN
B
BO
I
J&K
ICICI
Axis
HDFCBIIB
Yes
FederalING
SIB
J&K
SBIPNBBOB
BOI
0.0
5.0
10.0
15.0
20.0
25.0
30.0
- 100 200 300 400 500 600
PAT
/ B
ranc
h
Mcap / Branch (Rs m)
ICICI
Axis
IIBYes
FederalING
SIB
J&KSBI
PNBBOB
BOI-
100
200
300
400
500
400 600 800 1,000 1,200 1,400
Dep
osit
/ B
ranc
h
Mcap / Branch (Rs m)
ICICI
Axis
IIBYes
Federal INGSIB
J&K
SBI
PNB
BOB
BOI
0
50
100
150
200
250
300
350
400
450
30% 40% 50% 60% 70%
Mca
p /
Bra
nch
(Rs
m)
Urban / Rural Mix
-
100
200
300
400
500
600
700
HD
FCB IIB
ICIC
I
Yes
Axi
s
ING
SBI
BO
B
Fed
eral
J&K
PN
B
BO
I
SIB
(Rs
m)
LilladherPrabhudas Trading at average valuations
Source: Company, PL Research
P/B - % variation from average currently
October 03, 2012 12
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
Axis PNB Yes BOI J&K SBI ICICI BOB ING SIB Federal Kotak HDFCB IIB
LilladherPrabhudas
BENCHMARKING EXERCISE
COMPARING BANKS ON 75+ METRICS
October 03, 2012 13
Liability Franchise Network Expansion and Spread Branch Efficiency Yields and Margins Fee income franchise
CA and SA Ratios (%)
CA and SA per branch
CA and SA Growth
Bulk Dep/Borrowing dependence
Branch Growth (%)
Branch v/s B/S growth
Urban-Rural Mix
ATM/Branch
Business and Deposits per branch
CASA per branch
Branch efficiency v/s Urban-Rural
Mix
Employees/branch v/s Asset Mix
Risk/Leverage adjusted
margins
Cost of funds advantage
Yields on assets advantage
Fees to Assets
Core fee growth
Fee to expenses
Non-fund based book
Cost Efficiency Asset Mix and Quality Capital and Leverage Profitability/Return Ratios Priority Sector
Cost to income/Cost to assets
Per emp. cost/ Per branch emp.
Overheads to Assets/ per branch
Opex growth v/s Network expansion
Cost to assets v/s Urban-Rural mix
Cost to Assets v/s Branch efficiency
Gross slippages and credit costs
Gross NPA and coverage
Restructuring and slippages
Infra +stressed sectors exposure
Mitigants: Working capital + Retail
Core Tier-1
Optimum leverage
RWA/Loans
Non-Fund based exposure
Return on Asset and Equity
RORWA
PPOP/employee and branch
Net Profit per employee and
branch
Compliance with RBI
requirement
Growth in PSL advances - 3 yrs
PSL growth v/s Loan growth
RIDF deposits (% of Loans)
LilladherPrabhudas Liability Franchise: ING great on CA; J&K enjoys state SA
advantage; SIB getting weaker
Analysis: Compare CASA franchise of all coverage banks and study underlying branch network and efficiency to understand inherent strengths/weakness in liability franchise of these banks.
Key Conclusions:
J&K’s CASA franchise is among the best, with CASA at ~40% largely due to the SA advantage J&K state – Overall, SA ratio of ~30%, with CASA of 56% within J&K and SA of ~43% within J&K. Also, CA/branch is better than peers though lower than large private peers
ING Vysya scores well on CA at ~18% comparable to most large private banks, with large corporate presence + higher share of Urban branches (65%), aiding CA franchise. SA ratio at ~16% is below peers
Kerala-based bank’s like FB and SIB’s CASA franchise has been aided by low cost NRI deposits which have been re-regulated after which CASA looks relatively weaker for both banks, but notably for SIB, with just 3% CA ratio and <20% CASA.
Source: Company, PL Research
Overall CASA ratio – J&K scores the best
Source: Company, PL Research
CASA/branch – SIB/FB significantly lower than peers
Source: Company, PL Research
CASA growth v/s B/S growth (last 3 yrs)
October 03, 2012 14
5%
15%
25%
35%
45%
55%
65%
J&K
(in
J&K
)
HD
FCB
SBI
ICIC
I
Axi
s
J&K
PN
B
Kota
k
ING
Vys
ya IIB
BO
B
Fed
eral
BO
I
Yes
SIB -
100
200
300
400
500
600
Axi
s
HD
FCB
ICIC
I
J&K
Kota
k
SBI
IIB
BO
B
PNB
ING
BO
I
Yes
Fede
ral
SIB
(Rs
m)
ICICI AxisHDFCB
KotakIIB
Federal
ING Vysya
SIBJ&K
SBIPNB
BOB
BOI
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
5.0% 15.0% 25.0% 35.0%
CASA
CA
GR
FY0
9-1
2
B/S Growth - FY09-12
LilladherPrabhudas CA not easy to build: Only ING Vysya scores
CA franchise is generally difficult to build and gap between private and PSUs have been wide with private banks at ~15-20% CA ratio and PSUs at <10%. Even the smaller private sector banks have not been able to achieve significant success, with the only exception being ING Vysya, with ~18% CA ratio. Kerala-based FB and SIB have <5% CA ratio and that also have been contracting.
CA/branch for ING at Rs125m/branch and J&K~Rs100m/branch is lower than private banks at Rs200m/branch but significantly better than PSU banks at Rs60m/branch. SIB and FB lag significantly, with CA/branch of just Rs20/30m/branch which is 50% lower than even PSU banks.
Co-related to spread in Metro+Urban centers: Higher CA ratio is linked to higher presence in Metro+Urban centers. ING’s stronger CA franchise is explained by its better Urban+Metro mix as ~67% of its branches are in Urban/Metro centers which is again comparable to larger private peers. Part of FB and SIB’s low CA/branch is explained by the low Urban/Metro mix but still CA/branch is significantly lower.
Source: Company, PL Research
CA ratio: ING best in class
Source: Company, PL Research
CA/branch (Rsm): ING/J&K compare well v/s peers
Source: Company, PL Research
Ca/branch v/s Urban+Metro (%)
October 03, 2012 15
0%
5%
10%
15%
20%
Ko
tak
HD
FCB
ING
Vys
ya
Axi
s
IIB
ICIC
I
J&K
Yes
SBI
BO
B
PNB
BO
I
Fed
eral
SIB
0
50
100
150
200
250
Axi
s
Ko
tak
HD
FCB IIB Yes
ICIC
I
ING
J&K
BO
B
SBI
PN
B
BO
I
Fed
eral
SIB
Inudusind
INGYes
HDFCB
Axis
ICICI
SIB
BOB
Federal
BOI
J&K
PNB
SBI
0
50
100
150
200
250
30% 40% 50% 60% 70%
CA /
Bra
nch
(Rs
m)
Urban / Metro Branches
LilladherPrabhudas SA franchise: J&K strongest; FB at median
Large private banks + SBI have a SA/branch of ~Rs300m and PSU banks here are not far behind with Rs200m SA/branch as they have closed the gap with private banks significantly over the last five years. Both the old and new generation smaller private sector banks are at similar levels of Rs100-150m of SA/branch but post savings rate de-regulation, growth in SA has been stronger for the new generation private banks, given higher SA rates offered.
SA franchise - only J&K scores: The old generation private sector banks are still way behind their larger private peers, with the exception of J&K, which has almost shown a 3x jump in its SA/branch and is now comparable to the likes of HDFCB/Axis. SIB’s SA/branch remains the weakest at <100m/branch.
In terms of growth of SA/branch, large private banks seems to have hit a plateau as they have expanded into relatively smaller towns. PSU banks have shown an improvement as they added limited branches in the last five years. SA/branch overall has improved for old generation private banks, but pace of improvement has been commendable for J&K bank but not so much for the others like ING/FB and SIB. Going forward, we expect significant improvement on SA/branch for ING Vysya.
Source: Company, PL Research
SA ratio: J&K bank best in the business
Source: Company, PL Research
SA/branch also best in class for J&K Bank
Source: Company, PL Research
Growth in SA/branch (FY07-12) – Expect better growth from ING vysya, going forward
October 03, 2012 16
0%5%
10%15%20%25%30%35%40%
SBI
HD
FCB
J&K
ICIC
I
PN
B
Axi
s
Fed
eral
BO
I
BO
B
SIB
ING
Vys
ya
Kota
k
IIB
Yes
-
50.0
100.0
150.0
200.0
250.0
300.0
350.0
Axi
s
HD
FCB
ICIC
I
J&K
SBI
BO
B
PNB
BO
I
Ko
tak
IIB
Fed
eral
ING
SIB
Yes
-10%
0%
10%
20%
30%
40%
Ye
s
J&K
IIB
SB
I
PN
B
SIB
Ko
tak
BO
B
ING
Vys
ya
BO
I
Fe
de
ral
Axi
s
HD
FC
B
ICIC
I
LilladherPrabhudas Slow on the network expansion…
The last two success stories of HDFCB and Axis is based on strong growth + improving operating metrics and profitability which is not easy to replicate.
Most old generation private sector banks have been slower on network expansion drive v/s their larger peers, with ~20-30% CAGR increase in branch network for most of the larger private sector banks. However, the old generation private sector banks have just grown their branch network by ~5-10%, with the only exception of FB as expansion in FY12 aided stronger branch expansion.
We agree that branch efficiency for old generation banks significantly lag that of private sector banks and some part of the growth can be driven by efficiency improvement but less than 5-7% growth in branches does risk future growth (ING/J&K).
Branch efficiency study co-related with location of branches gives more understanding of potential of branch efficiency improvement.
Source: Company, PL Research
Low branch addition by regional private banks
Source: Company, PL Research
B/S growth v/s Branch growth
Source: Company, PL Research
ATMs/Branches comparison (FY12)
October 03, 2012 17
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
IIB
Axi
s
ICIC
I
HD
FCB
Kota
k
Fed
eral
SIB
BO
B
BO
I
PNB
SBI
ING
J&K
CAGR FY09-12 CAGR FY07-12 HDFCBKotak
IIB
Federal
ING Vysya
SIB
J&K
SBI
PNB
BOBBOI
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
15.0% 20.0% 25.0% 30.0%
Bra
nch
CA
GR
(07
-12
)
Balance Sheet CAGR (07-12)
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Axi
s
HD
FCB
ICIC
I
Ko
tak
IIB
Yes
SBI
PN
B
Fed
eral
SIB
J&K
ING
Vys
ya
BO
B
BO
I
LilladherPrabhudas …. and also on loan growth, except for SIB
Source: Company, PL Research
Source: Company, PL Research
Loan growth for most large private banks have been +25-30% over the last 3/5 years, with Infra contributing to the rapid growth only for Axis/ICICI. Large PSUs, excl. SBI, have also reported ~25% loan growth over 3/5 years; however, contribution of Infra has been significant.
Only SIB’s growth is comparable to private peers: Only SIB has been able to report ~30% growth over the last 3/5 years, with ING reporting ~18% growth and FB calibrating growth over the last two years. J&K has lagged on loan growth due to the consolidation phase between FY05-10 where loan growth was just 11.5%.
Slower growth but less risky as well: Though growth has been slower for the old generation banks, reliance on Infra/other bulky lending has been limited. For SIB, ~9% of the ~30% CAGR growth reported has come for “0” slippages Gold loans. Infra loans have contributed +20% of the system loan growth over the last three years and pose a risk to medium term asset quality for banks. However, for the old generation private banks, Infra exposure is either limited or is less riskier than their PSU and private peers.
Loan growth slowdown to be lower than peers: With limited dependence on Infra lending and relatively slower growth in the recent past, we believe growth slowdown will be lower for old generation private banks. J&K will see accelerated growth relative to its past with some slowdown for SIB. However, we expect FB and ING to maintain their calibrated growth pace.
Growth slower than peers expect for SIB (Loan growth CAGR)
Growth slowdown lower for old generation private banks
October 03, 2012 18
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Yes
Axi
s
HD
FC
B
Kota
k
SIB
BO
B IIB
PNB
BO
I
SBI
Fe
de
ral
ING
J&K
ICIC
I
CAGR (FY07-FY12) CAGR (FY09-FY12)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
IIB
SIB
HD
FCB
ING
J&K
Ko
tak
Yes
Fede
ral
Axi
s
BO
B
ICIC
I
BO
I
SBI
PNB
CAGR (FY09-FY12) CAGR (FY12-15E)
LilladherPrabhudas Branch efficiency: A very wide gap
Efficiency comparisons aid in better understanding of need for network expansion and more importantly cost structure of a bank
Deposit per branch is Rs1-1.5bn/branch for most new generation private sector banks, ~Rs0.8-1.0bn/branch for large PSU banks. For old generation private banks deposit/branch is ~Rs0.5-0.6bn/branch, which is ~40-50% lower than private peers and ~30% lower than PSU banks, with J&K being the only exception at Rs1bn of deposit per branch.
The difference is even higher comparing CASA/branch, with large private banks having CASA/branch at Rs400-600m, PSUs at Rs250-300m/branch. However, old private generation private sector banks are at <Rs200m/branch. Again, J&K is the only exception with robust deposit/CASA per branch and SIB continues to have significantly lower CASA/branch of ~Rs100m/branch.
Though branch efficiency for small generation private banks is going up, analysis of lagged deposit/branch (2 yrs) show that the difference in branch efficiency has only increased v/s private banks.
Source: Company, PL Research
Deposit and CASA per branch
Source: Company, PL Research
Growth in CASA/branch (5 yrs CAGR)
Source: Company, PL Research
Difference v/s HDFCB/Axis (Both current CASA/branch and lagged CASA/branch)
October 03, 2012 19
-
500
1,000
1,500
Yes
Axi
s
Kota
k
IIB
BO
B
HD
FCB
ICIC
I
J&K
BO
I
SBI
PN
B
ING
SIB
Fed
e…
(Rs
m)
Deposits/Branch CASA/Branch
-10%
-5%
0%
5%
10%
15%
ING
J&K
IIB
BO
B
Yes
SIB
PN
B
SBI
BO
I
Fed
eral
Kota
k
Axi
s
HD
FCB
ICIC
I
-100%
-80%
-60%
-40%
-20%
0%
ICIC
I
J&K
Kota
k
SBI
IIB
BO
B
PN
B
ING
Vys
ya
BO
I
Yes
Fed
eral
SIB
Current Two Year Lag
LilladherPrabhudas Branch efficiency: Understanding finer details
We link branch efficiency with branch presence in Urban/Metro centers to understand possibility of efficiency improvement.
Urban v/s Rural Spread: Most private sector banks have ~60-65% of their branch network in Urban/Metro centers, whereas PSU banks and most old generation private sector banks have only 35-40% of their branches in Rural/Semi Urban centers. The only exception is ING Vysya with ~65% branches in Urban/Metro centers.
75-85% difference in efficiency: Average branch efficiency of Semi Urban/Rural area is 75-85% lower than average branch efficiency of Metro/Urban centre explaining part of the efficiency gap between private banks and old generation banks.
Scope for efficiency improvement: High for banks with low deposit/branch currently and high share of Metro/Urban mix. Among the old generation banks, ING Vysya falls in this category, where branch efficiency can potentially be the driver for B/S growth.
Source: Company, PL Research, RBI
Metro/Urban branch mix best for ING
Source: Company, PL Research
Branch efficiency lags private/PSU peers
Source: Company, PL Research, RBI
Co-relation b/w branch mix and efficiency high – ING has significant scope for improvement
October 03, 2012 20
0%
10%
20%
30%
40%
50%
60%
70%
80%
IIB ING
Yes
HD
FCB
Axi
s
ICIC
I
SIB
BO
B
Fed
eral
BO
I
J&K
PN
B
SBI
% o
f bra
nch
es
in
Me
tro
/Urb
an c
entr
es
-200 400 600 800
1,000 1,200 1,400 1,600 1,800
Yes
Axi
s
IIB
ICIC
I
HD
FCB
Kota
k
BO
B
J&K
BO
I
SBI
ING
PN
B
Fed
eral
SIB
Dep
osit
/ B
ranc
h (R
s m
)
Inudusind
ING
Yes
HDFCB
Axis
ICICI
SIB
BOB
Federal
BOI
J&K
PNB
SBI
400
600
800
1,000
1,200
1,400
1,600
30% 40% 50% 60% 70%
Dep
osit
s /
Bra
nch
(Rs
m)
Urban / Metro Branches
LilladherPrabhudas Cost efficiency: J&K best placed, ING worst
Cost efficiency is linked to many factors and we believe cost/assets and cost/income both should be compared together as Cost/income is sometimes impacted by volatility in income \and cost/assets is impacted by asset mix (higher for retail banks).
Cost income comparisons indicate that ING (~59%) and SIB (~50%) are high on cost income and J&K (38%) and FB (~41%) are low on C/I ratios. However, analyzing together with cost-to-assets, we see that FB’s low-cost income advantage is related to higher income (higher leverage) as cost-to-assets is in line with other banks at 1.7% and SIB’s high cost issue is more linked to lower income with cost to assets at 1.7% also in line with industry trends.
Putting together C/I and Cost-to-assets, we see that FB and SIB have relatively stable cost structures. ING screens out higher on both parameters and J&K screens better on both parameters.
Source: Company, PL Research
ING worst on Cost-to-Assets
Source: Company, PL Research
ING also higher on Cost-to-Income
Source: Company, PL Research
B/S growth/ v/s branch growth (last 3 yrs)
October 03, 2012 21
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
BO
B
J&K
BO
I
SIB
Fed
eral
PN
B
SBI
ICIC
I
Yes
ING
Vys
ya
Axi
s
IIB
HD
FCB
Kota
k 20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
J&K
ICIC
I
BO
B
Fed
eral
BO
I
SBI
PN
B
Axi
s
HD
FCB
SIB
IIB
ING
Yes
Kota
k
-
1.00
2.00
3.00
4.00
5.00
6.00
PN
B
J&K
BO
B
SIB
BO
I
ING
IIB
SB
I
Fed
eral
Ko
tak
Axi
s
Yes
HD
FCB
ICIC
I
LilladherPrabhudas Employee Expenses – ING has a long way to go
Employee costs/assets is same across banks at 0.8-1.0% of assets. Even for most South-based banks, employee costs/assets is ~0.9-1.0%, with ING Vysya being the only exception with employee/assets at ~1.4%.
Per employee costs is similar across private/PSU banks at ~0.70.8m/employee/yr and per employee cost is the same even for old generation private banks at Rs0.7m/employee.
Employee per branch varies significantly: Private banks having ~20 employee/branch v/s 10-11 employee/branch for PSUs/old generation banks. The key difference, we believe, is in the spread of Urban-Rural centers and also share of retail business as ex-mortgage sourcing/collections and liabilities require higher number of employees.
Most old generation private banks have 10-12 employees/branch but ING Vysya has 19 employee/branch partly explained by higher proportion of Urban+Metro branches but without commensurate business impacting Cost-income/cost to assets for ING. Thus, we believe, management strategy of improving branch efficiency rather than just adding branches could work in the medium term.
Source: Company, PL Research
Employee/assets highest for ING Vysya
Source: Company, PL Research
Per employee cost don’t wary much b/w banks
Source: Company, PL Research
The key differentiator is employees/branch
October 03, 2012 22
0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%
Yes
BO
B
Axi
s
ICIC
I
BO
I
J&K
IIB
Fed
eral
SIB
HD
FCB
PN
B
SBI
ING
Vys
ya
Ko
tak 0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Fed
e…
J&K
IIB
HD
FCB
ICIC
I
ING
SIB
BO
B
Axi
s
BO
I
SBI
PN
B
(Rs
m)
IIB
ING
Yes
HDFCB
Axis
ICICI
SIB
BOB
Federal
BOIJ&K
PNBSBI
400
600
800
1,000
1,200
1,400
1,600
5 10 15 20 25 30
Dep
osit
/ B
ranc
h (R
s m
)
Employee / Branch
LilladherPrabhudas Overheads varies significantly between banks
Source: Company, PL Research
Source: Company, PL Research
Overheads vary significantly across banks: Though employee costs/assets is similar across banks, overheads vary significantly across banks, given (1) The mix of Urban+Metro branches and (2) Type of Assets (Retail entailing more costs than wholesale business).
For Private banks, Overheads/assets is >1.5% of assets v/s PSUs and old generation private banks at between 0.5-0.7% of assets. Again, the only exception here is ING Vysya in terms of absolute numbers, Overheads/branch for private banks is Rs20m/branch/yr v/s just Rs5m/branch/yr for PSUs/old generation private banks.
High co-relation with branch mix: This explains ING’s high overheads/assets as higher share of Urban/Metro branches lead to higher overheads/branch added with lower branch efficiency which leads to higher overheads to assets.
Highest change in overheads/branch has been for ICICI where overheads have come off by ~30% from the peak and that has led to ~75% fall in overheads/branch for ICICI. ICICI bank now is the most efficient among larger private sector banks in terms of overheads.
Overheads/Assets highest for ING among old generation banks
Overheads/branch v/s Urban-Metro mix
October 03, 2012 23
ICICI
Axis
HDFCB IIB
Yes
FederalING Vysya
SIBJ&KSBI
PNBBOBBOI
0
5
10
15
20
25
30
30% 35% 40% 45% 50% 55% 60% 65% 70%
Ove
rhe
ads
/ B
ranc
h (
Rs
m)
% of Urban / Metro Branches
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
J&K
BO
I
BO
B
PNB
SIB
Yes
SBI
Fede
ral
ICIC
I
ING
Vys
ya
Axi
s
Ko
tak
IIB
HD
FCB
LilladherPrabhudas NIMs: Comparing the right metrics
Right metrics: Margins contribute ~60-90% of revenues for banks and it is important to compare right NIM bench marks as margins are not only impacted due to inherent strength of liability/asset model but also by leverage. Hence, we use “Leverage adjusted Margins” – Material impact of leverage on margins is only for ICICI/Kotak/FB, given high Tier-1 capital levels.
Leverage adjusted margins indicate that larger private bank + SBI’s margins at ~3.5% is higher than PSU banks. Leverage adjusted margins is robust for FB and J&K at +3.2% v/s weak outcomes for ING and SIB at ~2.7-2.8%.
Risk + Leverage adjusted margins: Higher margins can also be a function of asset mix which has its implications on credit costs and hence, risk+leverage adjusted margins adjusts for higher risk taken for higher yields – Adjusting for credit costs, only J&K bank compares favorably with larger private banks as FB’s margins are diluted due to higher slippages/credit costs.
Among old generation private sector banks, J&K compares the best on risk adjusted margins due to lower credit costs + higher CASA. However, SIB misses due to low CASA and FB misses due to high credit costs.
Source: Company, PL Research
Reported Margins – FB in 1st quartile
Source: Company, PL Research
Leverage adjusted Margins – FB moves to 2nd quartile
Source: Company, PL Research
Leverage + risk adjusted margins – J&K screens out the best
October 03, 2012 24
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
HD
FCB
Fed
eral
SBI
Ko
tak
IIB
J&K
PNB
Axi
s
ING
Vys
ya SIB
Yes
BO
B
ICIC
I
BO
I
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
HD
FCB
Ko
tak
SBI
IIB
PN
B
Axi
s
J&K
Fed
eral
ING
Vys
ya SIB
Yes
ICIC
I
BO
B
BO
I
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Ko
tak
HD
FCB
J&K
IIB
Axi
s
Yes
SIB
Fed
eral
ING
Vys
ya
ICIC
I
PN
B
SBI
BO
B
BO
I
LilladherPrabhudas Understanding the margin levers
Source: Company, PL Research
Source: Company, PL Research
Three key margin levers: (1) Liability franchise – CASA ratio + Mismatches + Bulk deposit funding (2) Asset Mix - but this has a bearing on asset quality/credit costs (3) Leverage - as lower leverage will aid margins and vice versa.
We segregate margin drivers for banks between liabilities and assets and scatter chart show how various banks are placed on liability/asset advantage/disadvantage.
Among the old generation private banks, only J&K has a liability cost advantage but with only “AAA” rated lending in large corporate portfolio (outside J&K) leads to a asset mix disadvantage despite high yields in its J&K advances book.
FB and SIB both have a liability disadvantage as expected, but large proportion of gold lending provides a margin cushion – With liability franchise getting further eroded by NRI de-reg, we expect some inch down in margins for FB/SIB.
ING does not have a cost disadvantage v/s peers but with retail book being largely mortgages, ING also does not have any asset mix advantage.
Only J&K bank has a liability advantage among old generation banks, FB and SIB have a liability disadvantage
J&K compares well on Cost of funds
October 03, 2012 25
1.5%
2.5%
3.5%
4.5%
5.5%
6.5%
7.5%
8.5%
BO
B
SBI
HD
FC
B
Axi
s
BO
I
J&K
PNB
ICIC
I
ING
Vys
ya
Fed
eral
Kota
k
SIB
Ye
s
IIB
Axis
HDFCB
KotakIIB
Yes
PNB
Federal
ING
SIB
J&K
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
Cost
Dis
adva
ntag
e /
Adv
anta
ge
Asset Disadvantage / Advantage
LilladherPrabhudas Fee income: ING stands out of the pack
Fee income high contributor for Private banks: Fee income at ~1.6-2.0% of assets contributes ~35% of income for larger private banks and covers ~70-100% of Opex. For PSUs, Fee income contributes ~20-25% of their total revenues and covers only ~55-60% of Opex.
ING Vysya - the only comparable: ING’s fee/assets have remained >1.5%. It is the only old generation private sector bank comparable to larger peers. FB’s fee income in the past has been +1.0% of assets but core fee contribution is lower at 0.7-0.8% as recovery from written-off accounts accounted for 20-30% of fees prior to FY12.
SIB and J&K have an extremely week fee income franchise with fees/assets of 0.5-0.6% covering <40% of Opex. SIB has been growing fee income at 17-18% p.a for last 3-5 years but faster growth in assets has brought down fees/assets for SIB.
Non-fund based exposure contributes significantly to fee income: Apart from the more obvious fee income streams like FX, business banking, retail distribution, etc, non-fund based limits have also contributed significantly to fee income and there is a strong co-relation of higher fees with non-fund based limits. Some part of ING’s higher fees/assets can be associated to higher non-fund based exposure.
Source: Company, PL Research
Only ING compares well v/s private peers on fees (Fees as a % of assets)
Source: Company, PL Research
For ING fees covers ~65% of Opex. For others it is lower than 40%
Source: Company, PL Research
Change in fee/assets (avg 08-09 and 11-12)
October 03, 2012 26
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
IIB
Axi
s
HD
FCB
ICIC
I
ING
Kota
k
SBI
PN
B
BO
I
Fed
eral
BO
B
Yes
J&K
SIB
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
ICIC
I
Axi
s
IIB
ING
Vys
ya
HD
FCB
SBI
BO
B
BO
I
PN
B
Kota
k
Fed
eral
J&K
SIB
Yes -0.60%
-0.40%
-0.20%
0.00%
0.20%
0.40%
0.60%
IIB
Axi
s
SBI
J&K
PN
B
ICIC
I
Ko
tak
HD
FCB
SIB
BO
B
ING
Vys
ya
Fed
eral
BO
I
Yes
LilladherPrabhudas Contd…
Source: Company, PL Research
Matrix (Non-Fund based exposure v/s fee/assets)
Source: Company, PL Research
Fee income growth compared to b/s growth (5 yrs)
October 03, 2012 27
AxisHDFCB
IIB
Yes
ING Vysya
SIBJ&K
SBIPNB
BOB BOI
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
10% 13% 15% 18% 20% 23% 25% 28% 30%
Fee
/ A
sse
t
Non Fund Exposure
ICICI
Federal
J&K
BOI BOB
SIB
SBI
ING
HDFCB
Kotak PNB
IIB
Yes
Axis
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Fees
(CA
GR
5ye
ar)
Balance Sheet (CAGR 5year)
LilladherPrabhudas Asset Quality: Understanding the Asset Mix
ING Vysya - SME+Mid market focused with ~32% of loans to MSME largely traders with sole banking relationships. Large proportion of large/mid corporate portfolio is either linked to services and some are ING’s global relationship. Infra contributes just 2% of loans. Retail contributes ~20% of book largely mortgages/LAP (~80%).
J&K Bank – Largely AAA corporate book: J&K have ~66% market share in J&K’s overall advances spread across all segments but outside J&K (~60% of advances), lending franchise is weak and J&K largely does “AAA” corporate lending.
Federal Bank – Diversified but risky loan book: FB has a diversified asset mix in Large Corp/MSME/Retail at 40:30:30. Retail and SME share has come off in the last 2-3 years as management has been calibrating growth to streamline credit systems and hence, large corporate book has grown at a quick pace. Retail is largely Mortgages and Gold but peculiarly slippages in FB’s mortgage portfolio is the highest.
South Indian Bank - Secured loan book: SIB also has a diversified loan book but the focus is on secured lending with highest share of secured assets among banks. Retail portfolio is largely gold which has negligible credit costs.
Source: Company, PL Research
Advances mix- High share of Retail and SME advances for old generation banks
October 03, 2012 28
Mix (%) Axis ICICI HDFCB SBI PNB BOI BOB Union Kotak IIB YesING
Vysya
South
IndiaJ&K Bank
Federal
Bank
Corporate 38.7% 25.0% 45.2% 31.8% 50.0% 41.1% 35.8% 69.6% 14.9% 27.1% 71.0% 41.0% 53.3% 57.0% 42.6%
SME 14.0% 5.3% 9.5% 18.0% 16.8% 12.9% 12.0% 16.3% 14.9% 22.9% 19.9% 28.0% 6.6% 17.0% 17.7%
Agri 10.2% 7.7% 8.0% 13.5% 15.6% 9.4% 10.1% 10.8% 9.0% 0.0% 0.0% 8.0% 5.9% 9.0% 11.0%
Retail 22.1% 34.0% 37.3% 21.0% 9.9% 7.6% 12.4% 10.8% 61.2% 49.2% 9.1% 23.0% 34.1% 16.0% 28.7%
Home 16.6% 22.4% 7.3% 11.9% 4.7% 3.3% 4.9% 7.0% 15.7% 1.6% 0.0% 19.6% 5.7% 9.6% 12.9%
Auto 2.9% 9.7% 21.5% 2.9% 0.9% 0.7% 0.0% 0.9% 34.6% 46.9% 0.0% 0.9% 0.0% 0.0% 1.1%
Unsecured 0.4% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% 1.6% 3.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Others 2.2% 0.9% 8.5% 6.3% 4.4% 3.6% 0.0% 1.3% 7.4% 0.7% 9.1% 2.5% 28.4% 6.4% 14.6%
International 14.9% 28.0% 0.0% 15.7% 7.4% 29.1% 29.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
LilladherPrabhudas Low slippages and restructuring, except for FB
Source: Company, PL Research
SIB – Highest on secured lending
Source: Company, PL Research
Gross slippages (FY09-12) high for FB…
Source: Company, PL Research
…so are its credit costs (avg. FY09-12)
Source: Company, PL Research
Gross NPAs low, expect for FB
Source: Company, PL Research
Restructuring also low ,expect for FB
Source: Company, PL Research
And all of them well covered on NPAs
October 03, 2012 29
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Yes
IIB
HD
FCB
Ko
tak
Axi
s
J&K
SIB
ING
Vys
ya
BO
B
BO
I
Fed
eral
ICIC
I
PNB
SBI
20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%
100.0%
ING
Vys
ya
J&K
HD
FCB
Fed
eral
ICIC
I
Yes
Axi
s
IIB
SIB
BO
B
SB
I
Ko
tak
PN
B
BO
I
60.0%65.0%
70.0%75.0%
80.0%85.0%
90.0%95.0%
100.0%
SIB
IIB
PN
B
ING
Vys
ya
Axi
s
ICIC
I
BO
B
J&K
Ko
tak
SBI
BO
I
Fed
eral
HD
FCB
Yes
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Yes
SIB
BO
B
IIB J&K
Axi
s
ICIC
I
ING
Vys
ya
PN
B
BO
I
Kota
k
HD
FCB
SBI
Fed
eral
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
SIB
Yes
J&K
BO
B
IIB
BO
I
ING
Vys
ya
PNB
SBI
Axi
s
Kota
k
ICIC
I
HD
FCB
Fed
eral
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
ING
ICIC
I
J&K
Axi
s
SBI
SIB
BO
B
Fed
eral
BO
I
PNB
LilladherPrabhudas Exposure to Stressed sectors; Least Infra for ING
Infra+ Power: Axis/ICICI and PSU banks have ~10-15% of their total exposure in Infra, with power exposure being ~60-70%. Among the old generation banks, ING’s exposure to Infra/Power is negligible and SIB has the highest Infra exposure. J&K’s Infra exposure is also large at ~9%. However, large part of J&K’s portfolio is non-conventional power which reduces its portfolio risk.
SEB exposure: Within Infra/Power, SEB exposure is highest for SIB at ~4% in line with PSU banks. FB also has ~3% of their exposure to SEBs and again ING does not have any SEB exposure.
Other stressed sectors: SIB’s exposure to stressed sectors is among the lowest. Ironically, FB has low exposure to stressed sectors but slippages seem to be the highest, reflecting legacy issues in underwriting within specific segments. ING has high exposure to segments like Gems +Textiles but 100% secured lending aids lower credit costs.
Overall SIB and J&K have had the lowest credit costs though relatively large Infra book is a concern for SIB. ING has navigated well on SME asset quality over the last 18 months which inspires confidence on asset quality. FB is on an improving trajectory but legacy loans still is keeping credit costs elevated and Infra risks also remain.
Source: Company, PL Research
Stressed exposures – Least Infra exposure for ING (<2%); SIB /FB and J&K high on Infra but nature of lending is inherently less risky
October 03, 2012 30
Sensitive sectors (Ex Infra) ICICI Axis Yes Federal ING SIB J&K SBI PNB BOB BOIIron and steel 5.1% 3.3% 2.7% 3.1% 0.8% 1.1% 3.2% 6.3% 7.4% 5.5% 5.3%Engineering 8.4% 4.2% 2.8% 1.0% 0.0% 0.2% 1.4% 4.7% 2.3% 4.2% 1.2%Textiles 0.7% 1.6% 0.4% 1.9% 3.3% 2.8% 1.4% 3.8% 1.4% 4.7% 3.8%Gems 0.8% 0.6% 0.8% 0.0% 4.6% 0.5% 0.0% 1.2% 0.3% 0.5% 2.7%Construction 4.2% 0.7% 6.0% 0.3% 3.3% 0.1% 1.1% 1.1% 1.1% 2.3% 1.1%Airlines 0.3% 0.3% 0.3% 1.0% 0.0% 2.0% 0.0% 1.3% 1.3% 1.7% 2.1%Commercial RE 3.2% 3.4% 2.8% 1.1% 2.5% 0.3% 4.7% 0.8% 4.3% 1.7% 1.9%Total 22.6% 14.0% 15.8% 8.5% 14.5% 6.9% 11.8% 19.3% 18.1% 20.6% 18.2%
Infra Exposure 10.1% 14.6% 6.0% 9.3% 1.9% 11.7% 8.5% 9.9% 13.6% 11.5% 14.0%SEB 0.0% 0.0% 0.0% 3.2% 0.0% 3.7% 1.5% 2.1% 3.9% 3.3% 2.6%Private power 6.4% 8.1% 4.8% 1.0% 0.3% 2.9% 4.2% 3.5% 5.6% 3.8% 6.5%Other Infra 3.7% 6.5% 1.2% 5.0% 1.6% 5.1% 2.7% 4.3% 4.1% 4.4% 4.9%
LilladherPrabhudas Capital and Leverage: SIB best placed
No issues for old generation banks under Basel III: There is a stark difference in core Tier-I capital levels between private and PSU banks, with private banks well capitalized to meet Basel III and PSUs requiring high capital raising. Most old generation private banks have adequate core Tier-1 capital and we do not see any issues for them under BASEL III.
RWA/Loans at the median level, except for SIB: Risk weighted assets to Loans for old generation private banks are in the median range with lower RWA/Loans compared to private banks (lower non-fund based exposure + higher retail loans). However, RWA/loans are marginally higher than PSU banks. Only SIB’s RWA/Loans is significantly lower than peers due to high proportion of gold loans (`19.8%) and a very small non-fund based book.
Co-relation b/w non-fund based book and RWA/Loans: Guarantees/LCs carry high risk weights and high proportion of non-fund based exposure increased RWA/Loan’s restructuring leverage possibilities. ING and J&K’s relatively higher RWA/Loans can be ascribed to higher share of non-fund based exposure.
Source: Company, PL Research
Tier 1 capital comfortable for all
Source: Company, PL Research
RWA/Loans low especially for SIB/FB due to gold loans
Source: Company, PL Research
RWA/Loans v/s Non fund based exposure
October 03, 2012 31
0.0%
5.0%
10.0%
15.0%
20.0%
Ko
tak
Fed
eral
ICIC
I
SIB
IIB
ING
Vys
ya
J&K
HD
FCB
BO
B
Yes
SBI
Axi
s
PNB
BO
I 20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
SIB
BO
B
Fed
eral
BO
I
PN
B
SBI
J&K
IIB
ING
Vys
ya
Ko
tak
HD
FCB
Axi
s
Yes
ICIC
I
ICICI
Axis
HDFCBKotak
IIB Yes
Federal
ING
SIBJ&K
SBIPNB
BOB
BOI
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50.0% 100.0% 150.0% 200.0%
Non
Fun
d B
ased
Exp
osur
e
RWA / Loan
LilladherPrabhudas PSL: ING not well placed but SIB could get worse
Source: Company, PL Research
Total PSL compliance (% of loans)
Source: Company, PL Research
RIDF investments (% of loans)
Source: Company, PL Research
PSL book growth over last 3 years
October 03, 2012 32
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
ING
ICIC
I
HD
FCB
J&K
IIB
Axi
s
SIB
SBI -10%
0%
10%
20%
30%
40%
50%
Yes
IIB
HD
FCB
Axi
s
Kota
k
PN
B
SBI
BO
B
ING
Vys
ya
BO
I
Fed
eral
J&K
SIB
ICIC
I
Overall PSL compliance for all banks is >35% v/s 40% required by RBI but for SIB, overall PSL compliance has dipped to ~25% in FY12 – RBI disallowed part of the gold loan portfolio to be classified as PSL and hence SIB now faces a structural challenge of low PSL compliance increasing risk of higher RIDF calls
RIDF investments is the highest for ING Vysya and is one of the key reasons for ING’s low margins. Though SIB currently has a low PSL book, overall PSL shortfall of 15% could increase RIDF investments substantially impacting margins in the future.
Growth in priority sector advances has been slow for most of the old generation private banks. Among them, ING has done relatively better with the worst outcome for SIB with <10% growth in priority sector advances in the last 3 yrs.
5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%
IIB
Ko
tak
HD
FCB
ING
Vys
ya
PN
B
Axi
s
SBI
BO
B
Fed
eral
J&K
ICIC
I
BO
I
SIB
LilladherPrabhudas Benchmarking Matrix
October 03, 2012 33
ICICI Axis HDFCB Kotak IIB Yes SBI PNB BOB BOI Federal ING SIB J&K
Liability Franchise (FY12)
CASA ratio (%) 43% 42% 48% 32% 27% 15% 45% 35% 27% 27% 28% 34% 20% 41%
CA ratio (%) 14% 18% 18% 19% 16% 10% 9% 8% 8% 6% 5% 18% 3% 11%
SA Ratio (%) 30% 23% 30% 13% 11% 5% 35% 28% 19% 21% 22% 16% 16% 30%
CASA/branch (Rs mn) 403.4 563.6 469.4 349.4 289.1 207.6 331.7 236.4 265.2 212.0 141.9 228.6 102.6 360.1
SA/branch (Rs mn) 276.3 318.5 290.9 142.3 117.4 70.3 261.9 186.2 191.0 167.1 115.1 107.1 84.5 265.0
CASA Growth (%) - 3 yrs 21.0% 21.8% 23.5% 34.3% 39.5% 73.6% 14.8% 18.1% 22.1% 18.6% 19.5% 21.5% 18.6% 20.0%
CASA div. B/S growth - 3 yrs 21% 22% 24% 34% 40% 74% 15% 18% 22% 19% 20% 22% 19% 20%
Borrowing (% of B/S) 23% 9% 4% 24% 13% 13% 7% 6% 3% 6% 7% 10% 1% 2%
Network (FY12)
Branch growth - 3 yrs 25% 25% 22% 18% 30% 45% 7% 7% 10% 9% 14% 5% 10% 4%
B/S div. Branch growth - 3 yrs 31% 99% 104% 178% 92% 106% 160% 316% 265% 219% 114% 277% 262% 403%
ATMs/Branch 3.3 6.1 3.5 2.4 1.7 1.7 1.4 1.1 0.5 0.4 1.1 0.8 0.9 0.8
Yields/Margins (FY12)
Cost of funds 6.0% 5.7% 5.4% 7.2% 7.7% 7.6% 5.2% 5.8% 5.1% 5.8% 7.1% 6.7% 7.4% 5.8%
Margins 2.6% 3.3% 4.3% 4.5% 3.4% 2.7% 3.5% 3.3% 2.6% 2.4% 3.6% 3.0% 2.9% 3.4%
Risk adjusted margins 2.1% 2.6% 3.8% 4.3% 2.9% 2.5% 2.0% 2.1% 1.7% 1.4% 2.8% 2.5% 2.6% 2.9%
Margins - capital adjusted 2.6% 3.3% 4.2% 4.0% 3.3% 2.6% 3.5% 3.3% 2.5% 2.5% 3.2% 2.8% 2.7% 3.3%
Fee income (FY12)
Fee/assets 1.72% 2.02% 1.77% 1.54% 1.86% 1.24% 1.20% 0.93% 0.70% 0.79% 0.80% 1.53% 0.56% 0.54%
Fee/expenses 97% 89% 63% 49% 71% 88% 59% 55% 55% 59% 46% 59% 33% 37%
Fee growth - 3 yrs 6.4% 26.5% 23.3% 26.4% 37.7% 41.7% 14.8% 19.6% 14.9% 8.1% 1.3% 9.2% 17.1% 17.8%
Fee growth - 5 yrs 5.7% 41.1% 28.0% 28.2% 30.4% 34.0% 19.9% 29.6% 18.0% 16.8% 12.2% 20.8% 18.0% 14.9%
Guarantees/LCs (% of loans) 55.8% 45.0% 17.5% 24.3% 33.8% 43.2% 29.4% 25.4% 14.4% 21.2% 12.2% 28.4% 7.8% 15.5%
PSU banks Old generation private banksNew Generation private banks
LilladherPrabhudas Benchmarking Matrix
October 03, 2012 34
ICICI Axis HDFCB Kotak IIB Yes SBI PNB BOB BOI Federal ING SIB J&K
Cost + Branch Effeciency (FY12)
Cost to Assets 1.8% 2.3% 2.8% 3.1% 2.6% 1.4% 2.0% 1.7% 1.3% 1.3% 1.7% 2.6% 1.7% 1.4%
Cost to income 42.9% 45.0% 48.4% 53.8% 50.5% 38.3% 44.5% 40.5% 39.3% 44.0% 40.7% 59.5% 50.3% 37.5%
Opex growth - FY09-12 CAGR 3.7% 27.9% 15.8% 15.3% 34.9% 30.6% 18.5% 18.5% 13.0% 16.9% 19.7% 12.9% 23.4% 19.4%
Opex growth/branch growth - 3 yrs 0.15 1.12 0.73 0.86 1.14 0.68 2.58 2.54 1.35 1.88 1.40 2.56 2.41 4.63
Business/branch 928 1,357 970 1,086 1,059 1,381 740 669 986 796 515 668 521 885
CASA/branch 403 564 469 349 289 208 332 236 265 212 142 229 103 360
SA/branch 276 319 291 142 117 70 262 186 191 167 115 107 85 265
Employee cost/Assets 0.8% 0.8% 1.1% 1.5% 0.9% 0.7% 1.3% 1.1% 0.7% 0.8% 1.0% 1.4% 1.0% 0.9%
Employees/branch 21.2 19.6 26.0 31.0 23.4 15.8 15.3 10.9 10.6 10.3 10.2 19.0 8.4 14.8
Cost/Employee 0.70 0.83 0.67 0.96 0.66 1.17 0.90 0.91 0.79 0.86 0.66 0.72 0.76 0.66
Overheads/Assets 0.99% 1.49% 1.69% 1.65% 1.67% 0.69% 0.71% 0.55% 0.54% 0.51% 0.78% 1.18% 0.67% 0.51%
Overheads/branch 15.75 24.21 20.40 27.11 21.44 12.85 6.45 4.02 5.57 4.72 4.58 9.57 3.47 4.66
Metro+Urban branches (%) 58% 61% 62% 76% 67% 63% 33% 37% 40% 37% 39% 67% 42% 37%
Leverage (FY12)
Tier-1 Equity 12.7% 9.5% 11.0% 17.6% 11.4% 9.9% 9.8% 9.3% 10.8% 8.6% 15.9% 11.2% 11.5% 11.1%
Assets/Equity (x) 7.8 12.5 11.3 8.3 12.7 15.8 15.9 17.3 17.0 19.4 10.6 12.1 19.9 14.7
RWA/Loans 157% 136% 124% 122% 112% 137% 110% 99% 88% 95% 94% 119% 62% 110%
Non Fund (% of Loans) 111% 47% 17% 24% 50% 48% 45% 25% 18% 25% 12% 45% 22% 37%
Total exposure (% of loans) 268% 172% 127% 156% 203% 193% 181% 124% 118% 125% 124% 198% 137% 163%
Return Ratios (FY12)
ROAs 1.5% 1.7% 1.8% 1.9% 1.6% 1.6% 1.0% 1.2% 1.3% 0.8% 1.4% 1.1% 1.1% 1.5%
RORWAs 1.7% 2.0% 2.4% 2.6% 2.3% 2.1% 1.3% 1.8% 2.2% 1.2% 2.3% 1.5% 2.5% 2.4%
ROEs 11.2% 20.3% 18.7% 14.7% 19.3% 23.1% 15.7% 21.1% 21.7% 15.0% 14.4% 14.3% 21.6% 21.2%
New Generation private banks PSU banks Old generation private banks
LilladherPrabhudas Benchmarking Matrix
October 03, 2012 35
ICICI Axis HDFCB Kotak IIB Yes SBI PNB BOB BOI Federal ING SIB J&K
Asset Quality (FY12)
Gross NPAs 3.6% 1.1% 1.0% 1.6% 1.0% 0.2% 4.5% 2.9% 1.5% 2.3% 3.4% 1.9% 1.0% 1.5%
Coverage 79.8% 73.6% 82.2% 59.2% 72.5% 79.1% 60.1% 48.9% 65.1% 38.0% 80.6% 90.5% 66.0% 90.3%
Gross Delinquency (FY09-12) 1.6% 1.6% 2.5% 2.3% 1.3% 0.6% 2.7% 2.1% 1.2% 2.2% 2.9% 1.7% 1.1% 1.4%
Credit costs (FY09-12) 1.3% 1.1% 1.3% 1.2% 0.8% 0.5% 1.1% 0.9% 0.6% 0.8% 1.5% 0.9% 0.3% 0.5%
% of Restructured book 1.7% 1.8% NM NM NM NM 4.3% 8.5% 5.4% 7.0% 6.4% 0.8% 3.7% 4.1%
Loan Book break up (%)
Corporate 25.0% 38.7% 45.2% 14.9% 27.1% 71.0% 31.8% 50.0% 35.8% 41.1% 42.6% 41.0% 53.3% 57.0%
SME 5.3% 14.0% 9.5% 14.9% 22.9% 19.9% 18.0% 16.8% 12.0% 12.9% 17.7% 28.0% 6.6% 17.0%
Agri 7.7% 10.2% 8.0% 9.0% 0.0% 0.0% 13.5% 15.6% 10.1% 9.4% 11.0% 8.0% 5.9% 9.0%
Retail 34.0% 22.1% 37.3% 61.2% 49.2% 9.1% 21.0% 9.9% 12.4% 7.6% 28.7% 23.0% 34.1% 16.0%
Home 22.4% 16.6% 7.3% 15.7% 1.6% 0.0% 11.9% 4.7% 4.9% 3.3% 12.9% 19.6% 5.7% 9.6%
Auto 9.7% 2.9% 21.5% 34.6% 46.9% 0.0% 2.9% 0.9% 0.0% 0.7% 1.1% 0.9% 0.0% 0.0%
Unsecured 1.3% 0.4% 0.0% 3.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Others 0.9% 2.2% 8.5% 7.4% 0.7% 9.1% 6.3% 4.4% 0.0% 3.6% 14.6% 2.5% 28.4% 6.4%
International 28.0% 14.9% 0.0% 0.0% 0.0% 0.0% 15.7% 7.4% 29.7% 29.1% 0.0% 0.0% 0.0% 0.0%
Corporate+International 53.0% 53.6% 45.2% 14.9% 27.1% 71.0% 47.5% 57.4% 65.5% 70.2% 42.6% 41.0% 53.3% 57.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
PSL Status
PSL book Growth (%)- 3 yrs -1.5% 28.3% 29.0% 25.1% 31.0% 42.8% 20.3% 23.2% 19.3% 14.4% 12.9% 15.5% 8.3% 10.7%
Valuations
Mcap/Branch (Rs mn) 369.9 287.6 581.9 1,173.9 401.4 377.7 102.2 49.8 82.2 43.8 79.3 113.9 36.6 74.2
Mcap/Advances 40% 27% 76% 107% 46% 35% 12% 10% 11% 7% 20% 21% 9% 14%
Mcap/Deposits 40% 21% 60% 108% 38% 27% 10% 7% 8% 6% 15% 17% 7% 8%
Mcap/CASA 92% 51% 124% 336% 139% 182% 25% 21% 31% 21% 56% 50% 36% 21%
New Generation private banks PSU banks Old generation private banks
LilladherPrabhudas Benchmarking Matrix
October 03, 2012 36
ICICI Axis Yes SBI PNB BOB BOI Federal ING SIB J&K
Sensitive sectors (Ex Infra)
Iron and steel 5.1% 3.3% 2.7% 6.3% 7.4% 5.5% 5.3% 3.1% 0.8% 1.1% 3.2%
Engineering 8.4% 4.2% 2.8% 4.7% 2.3% 4.2% 1.2% 1.0% 0.5% 0.2% 1.4%
Textiles 0.7% 1.6% 0.4% 3.8% 1.4% 4.7% 3.8% 1.9% 3.3% 2.8% 1.4%
Gems 0.8% 0.6% 0.8% 1.2% 0.3% 0.5% 2.7% 0.0% 4.6% 0.5% 0.0%
Construction 4.2% 0.7% 6.0% 1.1% 1.1% 2.3% 1.1% 0.3% 3.3% 0.1% 1.1%
Airlines 0.3% 0.3% 0.3% 1.3% 1.3% 1.7% 2.1% 1.0% 0.0% 2.0% 0.0%
Commercial RE 3.2% 3.4% 2.8% 0.8% 4.3% 1.7% 1.9% 1.1% 2.5% 0.3% 4.7%
Total 22.6% 14.0% 15.8% 19.3% 18.1% 20.6% 18.2% 8.5% 14.5% 6.9% 11.8%
Infra Exposure 10.1% 14.6% 6.0% 9.9% 13.6% 11.5% 14.0% 9.3% 1.9% 11.7% 8.5%
SEB 0.0% 0.0% 0.0% 2.1% 3.9% 3.3% 2.6% 3.2% 0.0% 3.7% 1.5%
Private power 6.4% 8.1% 4.8% 3.5% 5.6% 3.8% 6.5% 1.2% 0.3% 2.9% 4.2%
Other Infra 3.7% 6.5% 1.2% 4.3% 4.1% 4.4% 4.9% 5.0% 1.6% 5.1% 2.7%
New Generation private
banks PSU banks Old generation private banks
LilladherPrabhudas Jammu & Kashmir Bank
CMP: Rs1,010 TP: Rs1,250 Rating: BUY MCap: Rs49.0bn
State liability advantage: J&K Bank enjoys a very strong liability franchise due to its state advantage, with CASA within J&K at ~55%. Despite just ~15% CASA outside J&K, J&K Bank’s total CASA at ~41% is the best in the industry, providing the bank with a significant cost advantage.
Growth picking up in J&K; Bank best positioned: Management’s intended growth acceleration after five years of consolidation coincides with a phase of strong economic growth and activity in J&K. With ~60% market share in advances and deposits, we believe J&K Bank is best positioned to benefit from the J&K story. Also, outside J&K, the bank is concentrating on expanding lending expertise to mid corporates (predominantly AAA till now) and that will aid in improving lending yields.
Competition will not be disruptive: High CASA + low operating costs make J&K an attractive expansion opportunity for private banks. However, our feedback from large private banks suggest that competition will not be disruptive. Also, expertise in specific segments like horticulture lending and state business (30% of J&K Bank’s loans) will be less impacted by competition.
More private than PSU bank: Low fees income and CA ratio are the only commonalities with PSU banks, apart from which J&K Bank is more of a private bank on most fundamental parameters like high CASA and margins, sound underwriting and high ROAs/RORWAs. Management continuity, which is a big issue with PSUs, is also absent in J&K Bank with ~5-6 years of average tenure for the Chairman; thus, valuation benchmarking to mid-cap PSU banks is unwarranted.
Valuations extremely undemanding: J&K Bank’s valuations at 0.85x FY14 book is extremely reasonable relative to ROEs of +20% and with limited commonality with PSUs + low Infra risk, we believe market should not peg J&K’s valuations with mid-cap PSUs. We base our Sep-13 PT of Rs1250/share on a modest 1.05x FY14 book, with possible upsides from MetLife stake transfer.
October 03, 2012 38
Key Financials (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Net interest income 11,193 15,437 18,384 21,313 24,589
Growth (%) 13.8 37.9 19.1 15.9 15.4
Operating profit 9,582 11,495 13,703 16,276 18,333
PAT 5,120 6,152 8,032 9,372 10,398
EPS (Rs) 105.6 126.9 165.6 193.3 214.4
Growth (%) 24.9 20.2 30.6 16.7 10.9
Net DPS (Rs) 22.0 26.0 33.5 38.5 44.3
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY10 FY11 FY12 FY13E FY14E
NIM (%) 2.8 3.3 3.3 3.3 3.3
RoAE (%) 18.2 19.0 21.2 21.0 20.0
RoAA (%) 1.3 1.3 1.5 1.5 1.4
P / BV (x) 1.6 1.4 1.2 1.0 0.9
P / ABV (x) 1.6 1.4 1.2 1.0 0.9
PE (x) 9.6 8.0 6.1 5.2 4.7
Net dividend yield (%) 2.2 2.6 3.3 3.8 4.4
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute 12.7 10.8 32.2
Relative to Sensex 4.5 2.8 17.5
LilladherPrabhudas Consolidation done; Growth to pick up
October 03, 2012 39
YrDep.
Growth (%)
Adv.
Growth
(%)
CASA C/D Ratio NIMs ROAsGross
NPAsPhases and Key focus area
Mar-99 32.0% 36.7% 36.6% 45.8% 4.5% 1.6%
Mar-01 18.5% 35.4% 30.8% 42.6% 3.5% 1.9% 5.10%
Mar-02 15.6% 34.9% 34.0% 49.8% 3.6% 2.3% 4.70%
Mar-04 27.2% 15.9% 30.3% 49.8% 3.0% 2.0% 3.03%
Mar-05 16.0% 24.0% 32.0% 53.2% 2.7% 0.5% 2.72%
Mar-06 8.5% 25.8% 34.2% 61.7% 2.7% 0.7% 2.51%
Mar-07 7.3% 17.9% 37.0% 67.8% 2.9% 1.0% 2.89%
Mar-08 13.5% 10.6% 39.2% 66.0% 2.7% 1.2% 2.53%
Mar-09 15.4% 10.8% 38.1% 63.4% 2.9% 1.2% 2.64%
Mar-10 12.8% 10.2% 40.7% 61.9% 2.8% 1.3% 1.97%
Mar-11 20.0% 13.6% 40.5% 58.6% 3.4% 1.4% 1.95%
Mar-12 19.4% 26.3% 40.7% 62.0% 3.4% 1.5% 1.54%
Mar-13 14.8% 20.0% 39.5% 68.4% 3.4% 1.5% 1.66%
Mar-14 17.3% 20.0% 38.5% 69.7% 3.4% 1.4% 1.75%
Mar-15 18.4% 20.0% 38.5% 70.3% 3.3% 1.4% 1.84%
Leadership: Dr. Haseeb Drabu (Joined in 2005)
1. 2005: Large losses in investment book and fall in NIMs due to ALM
mismatches
2. New management focus was to consolidate the liability franchise and
improve LDRs from low of ~50%. Credit growth was just 15% between FY06-10
but management significantly improved liability franchise
3. Profitability improved with asset quality checks and improvement in
CASA/NIMs - ROAs moved up from 70bps to 135bps and ROEs from 10% to 19%
Leadership: MY Khan - Corporate growth main focus
1. Building corporate franchise - CD ratios low at 40%
2. Bank recorded 27% CAGR growth v/s 17% in the State
3. Liability franchise impacted, with CASA dipping to 32% from 36%
Leadership: Mr. Mushtaq Ahmed
1. With liabilities and profitability in place, new management now wants to
push the paddle on growth
2. Focus on (1)some improvement in share of J&K Bank in total advances and
(2) improve lending to smaller corporates outside J&K (bank historically
concentrated on only AAA corp. outside J&K)
3. We factor in 20% loan growth over FY12-15, with share of J&K Bank
remaining constant
LilladherPrabhudas J&K state now the focus area for Advances growth
Source: Company, PL Research
Loan break-up – Opportunities in and outside J&K (Mar-12) Share of J&K Bank has come off in Advances: In order to improve LDR, J&K Bank has largely lent to AAA corporates outside J&K due to limited credit appetite within J&K state.
Focusing back on J&K: With growth focus coming back, management wants to improve share of J&K Bank’s advances and sees opportunity in Horticulture (Apples), State Infra building and personal loans – With low credit penetration and state growth trajectory at a high, we believe the bank will be able to arrest the decline in share of J&K book.
Focus outside J&K is now to take exposure beyond AAA corporates to improve yield. Management concentrated on AAA corporate lending to avoid risks and increase LDRs. The initiative now is to ramp-up on mid-corporate portfolio outside J&K as well.
October 03, 2012 40
Source: Company, PL Research
Loan growth in J&K to pick up - This will arrest fall in J&K state share
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2009 2010 2011 2012 2013 2014 2015
Advances share - Within J&K Growth- Within J&K
Sector % of FY12 book
Agriculture 9%
J&k 5%
Rest of India 4%
Trade 9%
J&k 6%
Rest of India 2%
Personal 16%
J&k 14%
Rest of India 2%
Retail Break up (Largely J&K)
Housing 44%
Consumer Finance 3%
LAP 10%
Education/Others 43%
Corporate 57%
J&k 6%
Rest of India 51%
SME 8%
J&k 6%
Rest of India 2%
Others 1%
Rest of India 1%
J&K 0%
LilladherPrabhudas State prospects looking up + Unpenetrated
Source: Company, PL Research
J&K: Per capita Income slowing catching up
Source: Tourism Ministry, PL Research
Tourism has picked up substantially
Source: Company, PL Research
Horticulture potential still not fully explored
October 03, 2012 41
Source: RBI
J&K ‘s GDP growth on a upward trajectory
Source: RBI, PL Research
Credit penetration still low in the state
Source: Company, PL Research
J&K well positioned to benefit from the same
10%
20%
30%
40%
50%
60%
19
97
-98
1998
-99
19
99
-00
20
00
-01
2001
-02
20
02
-03
20
03
-04
2004
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
India (Bank Credit/GDP)
J&K (Bank Credit/Net GDP)
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
2009 2010 2011 2012
% Share in J&K Advances % Share in J&K Deposits
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2007 2008 2009 2010 2011
Tourist (m)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
19
82
1985
19
88
1991
19
94
19
97
20
00
20
03
20
06
20
09
20
12
0
20,000
40,000
60,000
80,000
100,000
Har
yan
aM
ahar
ash
tra
Gu
jara
tTa
mil
Nad
uK
era
laP
un
jab
Utt
arak
han
dH
PA
PK
arn
atak
aW
est
Be
nga
lR
ajas
than
Ch
hat
tisg
arh
Ori
ssa
J&K
MP
Ass
amJh
arkh
and
Utt
ar P
rad
esh
Bih
ar
Potential in Agri Sector
Potential in Apple Farming;
Total Apple Growers 283,000
Apple growers funded by J&K Bank 7,200
Penetration in apple growing 2.5%
Total areas under apple cultivation (m
acres)0.33
WC for one acre of apple farming(Rs
m/acre)0.30
Total funding in Apple farming (Rs m) 99,000
J&K's Agri Portfolio 16,240
Gap in formal funding (%) 84%
LilladherPrabhudas Liabilities – A big state advantage
J&K state has one of the highest CASA ratios at ~54% and with ~64% market share in J&K state deposits, J&K Bank’s liability franchise is among the best in the industry.
Despite having just 15% CASA ratio in non-J&K states, overall J&K banks has CASA of ~40% currently, with ~55% CASA ratio in J&K state growing at ~20% CAGR.
Cost of funds is among the lowest in the industry - J&K Bank has concentrated on AAA lending outside J&K (~63% of advances) and that has pulled down NIMs.
J&K Bank is now concentrating within J&K for advances and more importantly to smaller corporates outside J&K to inch-up margins.
Source: Company, PL Research
J&K Bank has one of the highest CASA ratios in India
Source: Company, PL Research
J&K CASA is among the highest, especially deposits within J&K
Source: Company, PL Research
Giving J&K a big cost of funds advantage
Source: Company, PL Research
Leading to NIMs in the top quartile
October 03, 2012 42
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Bih
ar
Ass
am UP
J&K
Har
y.
Raj
as.
Punj
ab
Guj
arat AP
WB
All-
Indi
a
HP
Ka
rna
t.
Del
hi
Mah
ar.
Current Savings
5%
15%
25%
35%
45%
55%
65%
J&K
(in
J&K
)
HD
FCB
SBI
ICIC
I
Axi
s
J&K
PN
B
Kota
k
ING
Vys
ya IIB
BO
B
Fed
eral
BO
I
Yes
SIB 1.5%
2.5%
3.5%
4.5%
5.5%
6.5%
7.5%
8.5%
BO
B
SBI
HD
FCB
Axi
s
BO
I
J&K
PN
B
ICIC
I
ING
Vys
ya
Fed
eral
Ko
tak
SIB
Yes
IIB
Cost of funds
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
HD
FCB
Fed
eral
SBI
Ko
tak
IIB J&K
PN
B
Axi
s
ING
Vys
ya SIB
Yes
BO
B
ICIC
I
BO
I
Margin
LilladherPrabhudas Low risk Infra Lending; Credit costs under check
Stable asset quality: Asset quality has largely remained under control, primarily due to J&K Bank’s large exposure to AAA corporates in non-J&K portfolio.
Within J&K – Economic drivers are largely tourism and trade and the impact from current slowdown in the economy will be limited on J&K bank’s exposure in J&K state.
Restructuring is limited at ~4% of loans and slippage rates have also largely been under control.
Low risk Infra book: Infra exposure is Rs35bn currently with power exposure of Rs15bn. Of the total, thermal power exposure is at <Rs7bn with larger proportion linked to hydro and unconventional power projects and hence, risks from Infra portfolio is limited.
Source: Company, PL Research
Source: Company, PL Research
Outside J&K: Lending largely to “AAA” corporates
Slippages and credit costs
Source: Company, PL Research
Infra book: Low exposure to thermal power facing coal issues currently
October 03, 2012 43
(Rs m) % of advances
Infrastructure 35,175 10.6%
Power 15,414 4.7%
Hydro 5,116 1.5%
Non-Conventional 956 0.3%
Other Power Projects & Services 2,576 0.8%
Thermal 6,767 2.0%
Roads+Ports 9,597 2.9%
Other Infra 10,165 3.1%0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2008 2009 2010 2011 2012
Gross Incremental Slippage LLP/average loans
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
2009 2010 2011 2012
Advances Share Outside J&K Overall Growth Outside J&K (RHS)
LilladherPrabhudas Concern #1: Competition in J&K
Source: Company, PL Research
Source: Company, PL Research
Unpenetrated by private banks:
J&K Bank, with strong CASA deposit base and high-yielding loan book, has been a under-penetrated market, with % share of private sector banks at just 3-4%. Apart from J&K Bank, SBI and PNB have been active banks in J&K in the past and competitive impact has been limited.
HDFCB, which had limited presence in J&K till FY11, has ramped-up its branch network from 11 to 35 branches in FY12 and market concern for J&K Bank is the potential competition building up.
HDFCB acknowledges J&K to be a good market and service offering of HDFCB will be better than their PSU peers. However, we do not believe that its increasing presence will be a game changer for J&K Bank due to :
J&K contributes just <0.5% of total system advances and <1% of total system deposits and hence, strategic focus for HDFCB in J&K will be limited due to the size of the market.
Strong relationships with SME clients and also State Govt. agencies/employees for J&K bank built over the years will ensure some stickiness - ~25% of J&K bank’s advances are to State Govt. or their employees.
Agri-related lending is largely horticulture where the opportunity is large - just <10% penetration of formal lending in Apples.
Overall, given the slow growth in traditional geographies, private sector banks, including HDFCB, may increase J&K penetration. However, due to the above mentioned reasons, we believe it will not be a game changer for J&K.
SBI & PNB been historically large, HDFCB has started to build up in FY12
Share in incremental branch addition (FY09-12)
October 03, 2012 44
J&K38%
Co-op banks
26%
SBI
15%
PNB
8%
HDFCB3%
Others10%
J&K Bank
36.1%
SBI
15.9%PNB
9.0%
HDFCB13.7%
Others
25.4%
LilladherPrabhudas Concern #1: Competition in J&K
Source: PL Research
Feedback/ highlights from individual banks
Source: PL Research
% of individual bank’s loan book assuming 10% market share in J&K
Source: PL Research
How important is J&K: <1% in total deposits/advances
October 03, 2012 45
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
% Share in CASA % Share in Credit % Share In Deposit % Share in GDP
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
HDFCB BOI ICICI BOB PNB SBI
10% share in J&K over the overall book
HDFC Bank: Largest competitive threat
from HDFCB as they have added ~24
branches in FY12.
HDFCB sees J&K as a lucrative market but the ~24 branches in FY12 should
be looked in context with ~560 branches opened across India in just one year by HDFCB and not seen as a
rush into J&K. We note that even 10% market share in J&K will not add more than 1% to HDFCB’s loan book.
SBI and PNB have always been present in J&K, with both SBI + PNB
contributing ~25% of the state branches and hence, we do not see
competition from even larger PSUs as a material threat to J&K Bank.
ICICI Bank still has just <10 branches in J&K and our interactions with them
does not suggest of significant ramp-up in branches in the state.
Apart from SBI and PNB, two co-operative banks constitute ~26% of total of the state’s total branch
network which effectively does not compete with J&K Bank. Also, of the two co-operatives, J&K owns 100%
of J&K Grameen bank (17% of total branches).
LilladherPrabhudas Concern #2: How PSU is J&K Bank
October 03, 2012 46
PSU Bank J&K Bank
Ownership Central Govt. owned, with ~20% cap on FII holdingState govt. owned (~53%) but with no cap on FII holding (current
FII holding at ~25%)
Management Change Every 1-3 years, with frequent change in strategy and most
importantly, transition-related asset quality issues
Much higher stability, with ~5-6 years average tenure for the last
two Chairmen
Pension Issues Unamortised pension + Weak assumptions J&K also has unamortised pension and assumptions on pension
are similar to that used by PSU banks
Operating metrics
1. Liability FranchiseMost PSU banks have seen a significant deterioration in CASA
franchise
J&K, due to consolidation between FY05-10, improved on its
liability franchise
2. Pace of Growth Growth of most PSU banks between FY04-08 and 09-11 was
higher than comfort levels, leading to high NPAs + Restructuring
Calibrated growth during last 6-7 years has helped J&K to
improve on asset quality with stable credit costs
3. Fee income franchise Weak with fee/assets <0.6-0.7%Largely liability-driven bank and hence, fee income has remained
a weakness
4. Niche lending franchiseExcept Agri, which has moral hazard issues, PSU banks have not
developed any niche on the lending side
J&K has an advantage of an under-penetrated state; however,
has not been able to build on a niche in non-J&K portfolio (~60%
of advances)
5. Credit underwriting High growth led to compromise on credit standards reflected in
current asset quality + restructuring
Relatively better than PSU banks - Though compromised on
yields, J&K Bank has not lent aggresively and funded AAA
corporates and has seen lower restructuring
6. Risky Infra exposureMost PSU banks have built a concentrated Infra book which could
imply credit issues in FY13-15
J&K also has an Infra book, including power, but >50% of their
exposure is either Hydro/uncoventional
7. Capitalisation Mostly under-capitalised - signifcant dilution to meet Basel IIINo dilution in last 7-8 years. Well capitalised, with Tier-1 capital
at 11%
6. ROAs and RORWAsROAs and RORWAs also remain sub-optimal v/s Private sector
banks
ROAs and RORWAs at 1.4% and 2.3% is comparable with most
private banks
LilladherPrabhudas ROE Tree: High ROAs and RORWAs
October 03, 2012 47
2008 2009 2010 2011 2012 2013E 2014E 2015E Comments
NIM/Assets 2.69% 2.85% 2.85% 3.39% 3.39% 3.36% 3.35% 3.30%
Marginal NIM contraction largely leverage linked - We
have not factored in potential benefit of higher share of
non-AAA rated corporates in our numbers
Fees/Assets 0.58% 0.53% 0.62% 0.60% 0.55% 0.54% 0.54% 0.54%Weak fee income franchise. Expect stable growth.
Don't see signifcant levers of improvement
Inv. Profits/Assets 0.24% 0.23% 0.44% 0.20% 0.07% 0.11% 0.11% 0.09%
Net revenues/Assets 3.51% 3.61% 3.91% 4.19% 4.00% 4.02% 4.00% 3.93%
Opex/Assets -1.34% -1.36% -1.47% -1.67% -1.48% -1.45% -1.50% -1.50%In Opex, we factor in marginal increase in FY14 related
to wage settlement
Provisions/Assets -0.26% -0.41% -0.43% -0.47% -0.31% -0.40% -0.42% -0.36%Factored in increase in credit costs from ~50bps to
70bps and flat prov. coverage at ~90%
Taxes/Assets -0.71% -0.64% -0.71% -0.70% -0.73% -0.72% -0.69% -0.68%
Costs/Assets -2.32% -2.42% -2.61% -2.84% -2.52% -2.56% -2.61% -2.55%
ROA 1.19% 1.19% 1.30% 1.35% 1.48% 1.45% 1.39% 1.38%
ROAs to remain in the 1.3-1.4% range. Risk from higher
slippage from non-AAA book build up but could be
compensated by higher NIMs
Equity/Assets 7.1% 7.1% 7.2% 7.1% 7.0% 7.0% 7.1% 7.0%
ROE 16.7% 16.7% 18.2% 19.0% 21.2% 20.9% 20.0% 19.8% ROEs remain best in class at +20%
RORWA 2.07% 2.19% 2.43% 2.29% 2.40% 2.29% 2.12% 2.06% RORWA in line with private peers
LilladherPrabhudas Valuations: PT of Rs1250/share; BUY
PT of Rs1250/share; +24% upside: We value J&K Bank conservatively at 1.05x FY14 book and excluding the surplus on the MetLife stake, we have a Sep-13 PT of Rs1250/share, implying ~25% upside from current levels.
Deserves better valuations than PSU peers, valuation conservative: Given significantly better operating metrics, no limit on FII holding and stable management, we believe J&K deserves better multiples than PSU banks. Also, we value insurance business at ~40% lower than the recent PNB deal.
Our PT implies <1.1x fwd book which is in-line with historic multiples but with much better return ratios and state growth prospects. Current stock price implies just 0.85x FY14 book.
Continuation of better asset quality will be the key trigger for the stock. Terrorism and J&K competition remain the key risks. Source: PL Research
Source: Company, PL Research
J&K Bank : PT of Rs1250/share
Similar valuations to PSU banks is unwarranted
Source: PL Research
1-yr fwd P/B chart
October 03, 2012 48
-0.10
0.10
0.30
0.50
0.70
0.90
1.10
1.30
1.50
Jan
-05
Jun-
05
No
v-0
5
Apr
-06
Se
p-0
6
Feb
-07
Jul-
07
Dec
-07
May
-08
Oct
-08
Mar
-09
Au
g-0
9
Jan
-10
Jun-
10
Nov
-10
Apr
-11
Sep
-11
Feb
-12
Jul-
12
J&K Average
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Vijaya
Bank
Indian BOI Andhra J&K PNB BOB SBI
F13 P/B
Risk free rate 8.0%
Equity Risk Premium 6.0%
Beta 1.20
Cost of Equity 15.2%
Terminal growth 5.0%
Normalised ROE 17.1%
Stage 2 growth 11.0%
Sep-13 PT 1250
Implied Mar-14 P/B 1.08
Implied Mar-14 P/E 5.8
LilladherPrabhudas Financials – ROEs remain best in class
Source: Company, PL Research
Marginal inch-up in cost expected in FY14
Source: Company, PL Research
Factoring in some build-up in slippages
Source: Company, PL Research
ROAs and ROEs remain best in class
October 03, 2012 49
Source: Company, PL Research
Balance sheet growth picking up
Source: Company, PL Research
NIMs: Marginal contraction linked to leverage
Source: Company, PL Research
We factor in just 16-17% fee income growth
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
20
08
20
09
20
10
20
11
20
12
20
13
E
20
14
E
20
15
E
Deposit Growth Loan Growth
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
2008
2009
2010
2011
2012
2013
E
2014
E
2015
E
NIM NIM Capital Adjusted
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
20
08
2009
2010
20
11
20
12
20
13
E
20
14
E
20
15
E
Fees growth
0.00%
0.50%
1.00%
1.50%
2.00%
34.0%
36.0%
38.0%
40.0%
42.0%
44.0%
20
08
2009
20
10
20
11
20
12
20
13
E
2014
E
20
15
E
Cost-Income Cost-Asset (RHS)
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
20
08
20
09
20
10
2011
20
12
20
13
E
20
14
E
20
15
E
Gross NPA Gross Slippage
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
5.0%
10.0%
15.0%
20.0%
25.0%
20
08
2009
20
10
20
11
20
12
20
13
E
2014
E
20
15
E
RoE (RHS) ROA
LilladherPrabhudas Summary Profile
Source: Company, PL Research
Source: Company, PL Research
Liabilities within and outside J&K
Loan Mix
Source: NSE India
Shareholding Pattern
Source: Company, PL Research
Advances within & outside J&K (Rs m)
October 03, 2012 50
Within J&K125,740
38%
Outside J&K
205,560
62%
CA-Rest of India2.5%
CA-J&K9.4%
SA-Rest of India
1.7%
SA-J&K31.0%
TD-Rest of India
23.8%
TD-J&K31.7%
Promoter
53.17%
FII's
26.53%
MF's2.51%
Insurance0.44%
Individuals10.75%
Others
6.60%
Corporate57.0%
SME
17.0%
Agri
9.0%
Retail
16.0%
LilladherPrabhudas Financials
October 03, 2012 51
Income Statement (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Int. Earned from Adv. 23,417 26,296 33,937 42,999 50,195
Int. Earned from Invt. 7,046 10,661 14,033 17,005 18,943
Others - - - - -
Total Interest Income 30,569 37,131 48,356 60,391 69,524
Interest expense 19,375 21,695 29,972 38,930 44,599
NII 11,193 15,437 18,384 21,461 24,925
Growth (%) 13.8 37.9 19.1 16.7 16.1
Treasury Income 1,734 924 359 700 800
NTNII 2,428 2,724 2,983 3,448 3,986
Non Interest Income 4,162 3,648 3,341 4,148 4,786
Total Income 34,731 40,779 51,697 64,538 74,310
Growth (%) 7.4 17.4 26.8 24.8 15.1
Operating Expense 5,774 7,589 8,022 9,185 11,045
Operating Profit 9,582 11,495 13,703 16,424 18,666
Growth (%) 23.7 20.0 19.2 19.9 13.7
NPA Provisions 1,500 1,461 1,400 2,525 3,093
Investment Provisions (388) 410 123 - -
Total Provisions 1,670 2,151 1,692 2,525 3,093
PBT 7,912 9,344 12,011 13,899 15,574
Tax Provisions 2,792 3,192 3,979 4,604 5,159
Effective Tax Rate (%) 35.3 34.2 33.1 33.1 33.1
PAT 5,120 6,152 8,032 9,295 10,415
Growth (%) 24.9 20.2 30.6 15.7 12.1
Source: Company Data, PL Research
Balance Sheet (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Equity 485 485 485 485 485
Networth 30,105 34,787 40,932 48,118 56,003
Adj. Networth 29,461 34,254 40,438 47,481 55,192
Deposits 372,372 446,759 533,469 612,452 718,533
Low Cost deposits 151,532 180,867 217,152 241,919 276,635
Total Liabilities 425,468 505,082 602,692 686,244 803,339
Net Advances 230,572 261,936 330,774 396,929 476,315
Growth (%) 10.2 13.6 26.3 20.0 20.0
Investments 139,562 196,958 216,243 235,766 264,798
Total Assets 425,468 505,082 602,692 686,244 803,339
Source: Company Data, PL Research
Key Ratios
Y/e March FY10 FY11 FY12 FY13E FY14E
Gross NPA (%) 2.01 1.98 1.56 1.68 1.78
Net NPA (%) 0.28 0.20 0.15 0.16 0.17
NPA Coverage (%) 86.1 89.7 90.4 90.4 90.4
Gross Slippages (%) 0.9% 1.2% 1.2% 1.6% 1.6%
Credit Cost (%) 0.7% 0.6% 0.5% 0.6% 0.6%
Total CAR 15.9% 13.7% 13.4% 12.8% 12.1%
Tier I Capital 12.8% 11.3% 11.1% 10.9% 10.6%
Tier II Capital 3.1% 2.4% 2.2% 1.9% 1.6%
Source: Company Data, PL Research
LilladherPrabhudas ING Vysya Bank
CMP: Rs411 TP: Rs480 Rating: BUY MCap: Rs61.8bn
Regional bank with most urban characteristics: ~65% of ING's branches are in Urban/Metro centres, which is almost 1.6x of urban branch mix of regional/PSU banks and in line with private banks. ING also benchmarks very favorably with peers on parameters like CA ratio and fee-to-assets, where regional banks have struggled. We, thus, believe that right branch efficiency benchmarks for ING is large private peers rather than regional banks, indicating significant catch-up potential in ING’s branch efficiency.
Robust asset quality with negligible Infra risks: ING's expertise in SME lending, low-risk retail book (80% mortgages+ LAP) and low exposure to sensitive sectors have kept credit costs at <50bps. ING has completely refrained from Infra lending, with Infra book at <2% of exposure, negligible thermal power and also has restructured the least. We conservatively factor in credit costs to inch up to 65bps from 35bps. However, with negligible Infra exposure, lumpy slippages are unlikely in FY14/15.
Addressing cost concerns: ING's Achilles' heel has been its cost ratios which has restricted ROA improvement. Management is following a calibrated branch expansion strategy, with significant efficiency gains expected from existing branches, which we believe, will play out over the next 2-3 years as ING's high Urban-Metro branch mix still has significant scope for efficiency improvement. We factor in cost income to come off from 59% to 52.5% by FY15, improving ROAs to 1.2% despite assuming high credit costs.
Valuation undemanding, ‘BUY’ with a PT of Rs480/share: We believe ING’s profitability improvement will continue as management drives more growth from better branch efficiency. We believe valuations are undemanding at 1.2x FY14 book, considering higher ROEs (~16% in FY14-15), coupled with no Infra risks. Stable asset quality and improving cost ratios over the next 6-12 months would be the key stock catalysts.
October 03, 2012 52
Key Financials (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Net interest income 8,298 10,065 12,084 14,515 17,241
Growth (%) 27.7 21.3 20.1 20.1 18.8
Operating profit 6,420 6,355 7,679 10,077 12,819
PAT 2,422 3,186 4,563 5,486 6,948
EPS (Rs) 20.2 26.3 30.4 36.5 46.3
Growth (%) 9.7 30.4 15.4 20.2 26.7
Net DPS (Rs) 2.5 3.0 4.0 5.0 6.0
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY10 FY11 FY12 FY13E FY14E
NIM (%) 2.5 2.8 2.8 2.8 2.8
RoAE (%) 12.7 13.5 14.3 13.4 15.0
RoAA (%) 0.7 0.9 1.1 1.1 1.1
P / BV (x) 2.2 2.0 1.6 1.4 1.3
P / ABV (x) 2.4 2.0 1.6 1.4 1.2
PE (x) 20.4 15.6 13.5 11.3 8.9
Net dividend yield (%) 0.6 0.7 1.0 1.2 1.5
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute 12.3 12.8 41.0
Relative to Sensex 4.0 4.8 26.3
LilladherPrabhudas Much more urban than South-based peers
ING Vysya bank started as “Vysya bank”, a community bank. However, ING’s acquisition in 2002 started the transformation.
ING Vysya has, over the last decade, been more urban-centric than most peers, with +50% of branches in Metro+Urban centres. ~80% of branch addition over the last four years have been at Metro/Urban centers, taking % of branches in Metro/Urban centers to ~65%.
Branch network of ING is, thus, more urban-centric than all regional banks and is comparable to larger private peers, thus, making both costs and efficiency comparisons with South-based banks less relevant.
Source: Company, PL Research
ING more urban-centric than regional peers, in line with large private banks
Source: Company, PL Research
65% branches in Metro+Urban centres (FY12)
October 03, 2012 53
Source: Company, PL Research
~80% branch addition in Metro+Urban (FY08-12)
Source: Company, PL Research
ING has been expanding beyond South India
10%
20%
30%
40%
50%
60%
70%
80%
Kota
k
Indu
sind
ING
Yes
HD
FCB
Axi
s
ICIC
I
SIB
Fe
de
ral
J&K
Metro
30%
Urban 34%
Semi Urban 19%
Rural 17%
0
100
200
300
400
500
600
FY08 FY09 FY10 FY11 FY12
AP Rest Of South North & East West
LilladherPrabhudas Building on its strength in SME lending
Source: Company, PL Research
ING’s Loan book: SME continues to remain focus area
October 03, 2012 54
SME/Business banking: (32% of book)
Inherent strength of the bank.
SME share in advances has increased from 22% in 2008 to ~32%.
Sole banker relationships + lending against hard collaterals - key to success on which ING remains focused on.
ING aims to be among the Top 3 players in this space, with ~Rs2bn of monthly disbursements.
Large and Emerging corporates: (42% of book)
Very well diversified, but more importantly, limited Infra exposure -- 4.6% of this book, just ~2% of total loans.
ING’s MNC connections globally aid in sourcing and bank is increasingly leveraging on ING’s global platform.
ING intends to increase the share of emerging/mid corporates in their loan book.
Retail – (19% of book)
Largely mortgages + LAP – 80% of retail loans.
Proportion of retail has come off as ING has rolled down unsecured book started in 2008-09 due to high delinquencies.
Concentrating on Mortgages with increasing share of LAP disbursements (~40% of total mortgages).
Selectively looking at CVs/Gold, not keen on building Car book.
% of
FY12
loans
Share
(FY12
over
FY08)
Gr.
CAGR
(FY08-
12)
Focus Risk Profile
Large + Mid
corporates42.0% -4.2% 15.6%
Growth picking up
over the last two
years. Focus on Mid
corporates more +
ING global
relationships
Well diversified
portfolio with
negligible Infra risks
SME/Business
Banking 32.1% 9.2% 28.8%
Biggest focus area
where ING has built
a niche. ~35% of
portfolio is small
traders
Totally secured with
hard collaterals and
mostly sole banker
relationships with
clients
Consumer
Finance19.2% -2.2% 15.2%
Share of retail down
as ING has run down
its unsecured book
~80% book
mortgages+LAP and
hence, slippages
risk l imited
Mortgages 15.6% 2.5% 23.6%
Focusing more on
LAP, with ~40%
incremental
disbursements being
LAP
High LTV ensures
low loss, given
default
Ex-
mortgages3.7% -4.7% -3.7%
Unsecured book now
<1% of loans after
roll down. Some
focus on gold and
CV lending
Write-off in
unsecured book
done with
Others 6.7% -2.8% 8.4%
LilladherPrabhudas SA not weak but CA ratio ‘Best-in-Class’
ING’s CASA composition is unique, with robust SA ratio (16%); however, more importantly best in class CA ratio of +18%. High CA takes ING’s overall CASA to 33-34% which is better than most regional banks.
Current Accounts – Best in Class: ~18% CA ratio indicates strong liability product offering to corporates and is comparable to the likes of HDFCB/Axis.
Per branch CA is ~5x of south-based peers, >2x of large PSUs and comparable to private peers - Much higher urban branch presence.
Savings accounts - Not weak but still way to go: SA ratio at 16% is in the third quartile among banks - Per branch SA significantly lags peers with urban presence.
ING is adding ~60K new salary accounts/quarter and focus is on increasing corporate empanelment further. Source: Company, PL Research
Highest CA among banks
Source: Company, PL Research
CA per branch also among the best
October 03, 2012 55
Source: Company, PL Research
SA deposits : Still some way to go
Source: Company, PL Research
Build up in the SA salary accounts
0
50
100
150
200
250
300
Axi
s
Kota
k
HD
FCB IIB Yes
ICIC
I
ING
J&K
BO
B
SBI
PNB
BO
I
Fede
ral
SIB
CA/branch (Rs m)
0%
10%
20%
30%
40%
SBI
HD
FCB
J&K
ICIC
I
PN
B
Axi
s
Fed
eral
BO
I
BO
B
SIB
ING
Vys
ya
Kota
k
IIB
Yes
SA ratio (%)
0
10
20
30
40
50
60
70
1Q11
2Q
11
3Q11
4Q
11
1Q
12
2Q
12
3Q
12
4Q12
1Q
13
New to Bank Salary Accounts (000) for the Quarter
0%
5%
10%
15%
20%
25%
Kota
k
HD
FCB
ING
Vys
ya
Axi
s
IIB
ICIC
I
J&K
Yes
SBI
BO
B
PNB
BO
I
Fede
ral
SIB
LilladherPrabhudas
0.0%
20.0%
40.0%
60.0%
80.0%
ICIC
I
Axi
s
Yes
SBI
IIB
ING
J&K
PN
B
BO
I
SIB
Ko
tak
BO
B
HD
FCB
Fed
eral
Non fund dependence (% of fund based book)
Fee income also Best in Class
ING’s fee/assets at ~1.5-1.6% is higher than PSU banks and South-based banks at <0.8% of assets and in line with Private sector banks.
Most South-based banks have strong liabilities franchise only with some niche lending capabilities and lack a robust fee income business – ING’s high fee-to-assets further distinguishes ING from the rest of the pack.
ING has a strong corporate fee income franchise and is focusing on building of retail fee income streams like wealth management/advisory, retail/SME Fx and trade and increase cross-selling to bank’s existing liability customers.
We factor in fee income growth of ~17% and expect fee/assets to remain in the range of 1.5-16% over FY12-15E.
Source: Company, PL Research
Fee/Assets comparable to large private banks
Source: Company, PL Research
Fees is ~35% of total Income (ex-treasury)
October 03, 2012 56
Source: Company, PL Research
Large proportion of fee corporate linked
Source: Company, PL Research
Non-fund based exposure highest among peers
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
IIB
Axi
s
HD
FCB
ICIC
I
ING
Ko
tak
SB
I
PNB
BO
I
Fede
ral
BO
B
Ye
s
J&K
SIB
Fees/Asset
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
ICIC
I
Axi
s
IIB
ING
HD
FCB
Ko
tak
SBI
BO
B
BO
I
PN
B
Fed
er…
Yes
SIB
J&K
Fees/Income
Liability Related
18%
Asset Related
17%
Trade Finance &
CMS17%
Wealth mng. & Advis.17%
FX & Derivatives
22%
Investment Related
2%
Recoveries4%
Others3%
LilladherPrabhudas
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
ING
ICIC
I
J&K
Axi
s
SIB
SBI
BO
B
Fe
de
ral
BO
I
PNB
Restr. book % of advances (4QFY12)
Asset quality – Stable in an uncertain environment
Source: Company, PL Research
Source: Company, PL Research
ING’s asset quality has surprised even the management, with low levels of delinquencies, especially in their SME portfolio. Gross NPAs have come off from 3.0% in FY10 to ~2.0% in two years, with ~60% of the ~60bps provisioning over last two years used to just inch-up provisioning cover.
SME/Mid corporate – Strong trends
Emphasis on Hard collateral: Not only reduces loss given default but also reduces risk of default as promoter’s house is used as collateral in most cases.
Sole banker relationship in most cases: Complete understanding of client indebtedness.
Management expects some credit cost normalization over FY12-14.
Large corporates: Well spread; Limited power risk
ING has limited exposure to sensitive sectors, with total Infra exposure at <2% of loans and most importantly negligible thermal power exposure – Big re-rating catalyst for many retail banks over last 18-24 months.
Lumpy Telecom 2G exposure, mainly on parent MNC relationships, backed by MNC guarantees (evident in Uninor’s case).
Retail – Low risk portfolio currently – 80% Mortgages+LAP
After run-down of its unsecured book from FY08-09 levels, ING’s current retail portfolio is ~80% mortgages.
Expect retail book to remain low risk with just some inch up expected in CVs and low risk gold funding.
Gross NPA has come in a difficult economic environment …
…and ING has not resorted to restructuring
October 03, 2012 57
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
2006 2007 2008 2009 2010 2011 2012
Gross NPA ratio
LilladherPrabhudas
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
ING
Ye
s
J&K
Fed
eral
SBI
ICIC
I
BO
B
SIB
Un
ion
PNB
BO
I
Axi
s
Negligible credit costs adjusted for coverage
Source: Company, PL Research
Source: Company, PL Research
Coverage has inched up considerably
Adjusted for coverage credit costs have remained low
Source: Company, PL Research
SME Book: Largely trading linked
Source: Company, PL Research
Infra exposure the least among peers
October 03, 2012 58
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
2006 2007 2008 2009 2010 2011 2012
Provision coverage
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2006 2007 2008 2009 2010 2011 2012
LLP/average loans LLP (Adjusted for coverage)
Traders35%
Manufacturing11%Gems
9%
Rent discounting8%
Food Processing8%
Automobile
6%
Textiles5%
Contractors
3%
Others15%
LilladherPrabhudas Cost Concern #1: Why is cost income high ?
October 03, 2012 59
High Costs - ING’s Achilles Heel: ING’s cost income of ~60% and cost/assets of ~2.7% is the highest in the industry and impacts return ratios for ING despite high fees and low credit costs. Historically, large expansion in Urban/Metro centers have not been accompanied by similar expansion in business.
Cost Analysis - Employee Costs: Employee costs/assets at 1.4-1.5% is among the highest v/s ~1.0% avg. employee costs/assets for large and regional private banks- Cost per employee at ~Rs0.7m is similar to other banks but the key difference is that ING generates similar business/ branch to regional banks and has 1.8x the employees/branch v/s south-based banks and generates ~40% lower business/branch and has similar number of employees/branch as large private banks.
Cost Analysis – Overheads: Even overheads for ING at ~1.0% of assets is higher than South-based banks and similar to larger private peers. Overheads/branch for ING is Rs10m/branch v/s Rs5m/branch for South-based banks.
Source: Company, PL Research
ING screens out to have high cost income due to branch inefficiency
ICICI Axis HDFCB Kotak IIB Yes ING Federal SIB J&K
Cost income and Cost to Assets highest in the industry
Cost to Assets 1.8% 2.3% 2.8% 3.1% 2.6% 1.4% 2.6% 1.7% 1.7% 1.4%
Cost to income 42.9% 45.0% 48.4% 53.8% 50.5% 38.3% 59.5% 40.7% 50.3% 37.5%
Employee costs higher as employee/branch higher but peers
Employee cost/Assets 0.8% 0.8% 1.1% 1.5% 0.9% 0.7% 1.4% 1.0% 1.0% 0.9%
Employees/branch 21.2 19.6 26.0 31.0 23.4 15.8 19.0 10.2 8.4 14.8
Cost/Employee 0.70 0.83 0.67 0.96 0.66 1.17 0.72 0.66 0.76 0.66
Overheads/Assets 0.99% 1.49% 1.69% 1.65% 1.67% 0.69% 1.18% 0.78% 0.67% 0.51%
Overheads/branch 15.75 24.21 20.40 27.11 21.44 12.85 9.57 4.58 3.47 4.66
Efficiency ratios compare poorly with banks with similar Urban-Metro mix
Business/branch 928 1,357 970 1,086 1,059 1,381 668 515 521 885
CASA/branch 403 564 469 349 289 208 229 142 103 360
SA/branch 276 319 291 142 117 70 107 115 85 265
Metro+Urban branches (%) 58% 61% 62% 76% 67% 63% 67% 39% 42% 37%
LilladherPrabhudas Cost concern #2: Cost optimization v/s Growth
Management target on costs: Cost income has improved over the last 3-4 years. However, management expects C/I to improve to 51-52% levels over the next three years.
Strategy – calibrated branch addition: ING has calibrated branch opening, adding just 30-35 branches a year and similar numbers planned, going forward and focusing on driving better efficiencies of existing network.
The big question: Is ING compromising on future growth to bring costs under control?
We believe the answer lies in understanding/mapping the potential of the current branch network of banks:
ING’s branch efficiency is similar to South-based banks on most parameters, including Business/Deposits/CASA per branch but is ~40% lower on Business/Deposits per branch and ~50% lower on CASA per branch v/s larger peers.
We believe the right efficiency comparison is v/s private sector banks as branch network is more urban and thus, business model is also similar to larger private peers with high fees, high CA and high urban/metro branches
Source: Company, PL Research
Branch/employee growth not high for ING
October 03, 2012 60
Source: Company, PL Research
Branch efficiency among the worst though
Source: Company, PL Research
Emp./branch high due to high Urban branch mix
-
500
1,000
1,500
Yes
Axi
s
Kota
k
IIB
BO
B
HD
FCB
ICIC
I
J&K
BO
I
SBI
PN
B
ING
SIB
Fed
eral
(Rs
m)
Deposits/Branch CASA/Branch
0%
10%
20%
30%
40%
50%
60%
Fed
eral
Ko
tak
HD
FCB
Yes
Axi
s
IIB
ING
J&K
SIB
Branch CAGR (FY08-FY12)
Employees (FY08-FY12)Inudusind
ING
Yes
HDFCB
Axis
ICICI
SIBBOB
Federal
BOI
J&K
PNB
SBI
5
10
15
20
25
30
30% 40% 50% 60% 70%
Empl
oyee
/ B
ranc
h
Urban / Metro Branches
LilladherPrabhudas Cost Concern #3: How cost efficient can ING be?
ING’s branch efficiency has been improving, with deposits/branch increasing to Rs700m/branch v/a Rs1.1-1.2m of deposits/branch for large private banks which is still ~40% lower. The efficiency gap was higher at ~60% in FY08-09 and with robust growth over last 3-4 years, efficiency gap has closed in from 60% to 40%.
Management strategy:
Management believes 80:20 principle works for branch network - Of ING’s ~530 branches, 90 branches give ~80% of their business and management’s focus is to concentrate on just targeting high impact branches.
With ~200 branches planned in five years, ING intends to more than double business, targeting 80-90 high impact branches and this is evident in their branch additions even over FY08-12.
We do not expect growth to get impacted:
Branch efficiency still has a long way to go – 40% lower than peers, South-based banks not the right comparison considering their branch network.
We factor in ~100 branch additions by FY12-15 and expect the efficiency gap to close down further to ~20-25% and, thus, cost income to move to 52% by FY15E. The key risk for ING is that it already runs large deficit on RIDF funding and limited expansion in rural/semi-urban centers which will further increase RIDF commitments.
Source: Company, PL Research
Efficiency worst among Urban -centric banks
October 03, 2012 61
Source: Company, PL Research
ING slowly closing on efficiency gap with peers (deposits/branch)
Source: Company, PL Research
Expect cost ratios to come off over FY12-15E
100
300
500
700
900
1,100
1,300
1,500
2006 2007 2008 2009 2010 2011 2012
Average (HDFCB,Axis) ING Vysya
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
20
05
20
06
20
07
20
08
20
09
2010
20
11
20
12
20
13
E
2014
E
20
15
E
Cost to income
Cost to Assets (RHS)
Inudusind
ING
Yes
HDFCB
Axis
ICICI
SIB
BOB
Federal
BOI
J&K
PNB
SBI
400
600
800
1,000
1,200
1,400
1,600
30% 40% 50% 60% 70%
Dep
osit
s /
Bra
nch
(Rs
m)
Urban / Metro Branches
LilladherPrabhudas ROE Analysis: Cost improvement to drive up return ratios
October 03, 2012 62
2009 2010 2011 2012 2013E 2014E 2015E Comments
NIM/Assets 2.42% 2.70% 2.91% 2.95% 2.96% 2.94% 2.94%
We expect flat margins over the next 2-3 years. Yield
improvement in retail book will offset some margin pressures
due to leverage
Fees/Assets 1.88% 1.76% 1.61% 1.60% 1.57% 1.56% 1.54%Fee income franchise is strong - building further on private
wealth and Fx/trade business
Inv. Profits/Assets 0.16% 0.26% 0.28% 0.03% 0.10% 0.13% 0.13%
Net revenues/Assets 4.46% 4.71% 4.80% 4.59% 4.64% 4.62% 4.61%
Opex/Assets -2.88% -2.63% -2.97% -2.71% -2.58% -2.44% -2.34%Cost/Assets to continue to show improving trend. Largest
contributor to ROA improvement for ING
Provisions/Assets -0.48% -0.88% -0.44% -0.28% -0.39% -0.42% -0.44%
Headline provision assumprtions seem flat YoY. However,
adjusted for coverage, we assume credit costs to inch up from
~30bps to 60-65bps
Taxes/Assets -0.39% -0.42% -0.48% -0.48% -0.55% -0.58% -0.60%
Costs/Assets -3.76% -3.93% -3.88% -3.47% -3.52% -3.44% -3.38%
ROA 0.70% 0.79% 0.92% 1.11% 1.12% 1.18% 1.22%Despite 2x credit costs, we expect ROAs to inch upto ~1.2-1.25% -
credit costs may throw a positive surprise
Equity/Assets 5.6% 6.2% 6.8% 7.8% 8.4% 7.9% 7.5%
ROE 12.5% 12.7% 13.5% 14.3% 13.4% 15.0% 16.3%Expect ROEs to inch upto ~15-16% by FY14/15 after being stuck in
a narrow band of 12.5-14% b/w FY08-12
RORWA 0.92% 1.14% 1.36% 1.51% 1.46% 1.52% 1.56%
LilladherPrabhudas Financials – Expect ~24% PAT growth over FY12-15E
Source: Company, PL Research
Cost-to-income to improve from 59% to 52%
Source: Company, PL Research
Have assumed a normalization in credit costs
Source: Company, PL Research
ROA/ROEs on a upward trajectory
October 03, 2012 63
Source: Company, PL Research
Expect loan growth at 20-22%
Source: Company, PL Research
Margins have inched up; expect flat trajectory from here on
Source: Company, PL Research
Expect fee income growth of 17-19%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
20
08
2009
2010
20
11
20
12
2013
E
2014
E
2015
E
Deposit Growth Loan Growth
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
20
08
2009
2010
20
11
20
12
20
13
E
20
14
E
20
15
E
NIM NIM Capital Adjusted
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
20
08
20
09
20
10
2011
20
12
20
13
E
20
14
E
20
15
E
Fees growth
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
20
08
20
09
20
10
20
11
20
12
20
13
E
20
14
E
20
15
E
Cost-Income Cost-Asset (RHS)
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
20
08
2009
2010
20
11
20
12
20
13
E
20
14
E
20
15
E
Gross NPA Gross Slippage
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
20
08
2009
20
10
20
11
20
12
20
13
E
2014
E
20
15
E
ROA RoE (RHS)
LilladherPrabhudas Valuations: PT of Rs480/share
PT of Rs480/share; ~19% upside: We value ING Vysya Bank at 1.45x FY14 book and we have a Sep-13 PT of Rs480/share implying ~20% upside from current levels.
Cost improvement - biggest lever: ING has a stronger corporate banking franchise on most parameters like fee income, CA deposits and also asset quality. Calibrated branch expansion will lead to improvement in cost income over the next 2-3 years and drive stock performance.
Our PT implies 1.5x fwd book which is higher than historic valuations of ~10% as we expect return ratios to improve + asset quality risks seem limited with negligible thermal power exposure (strong positive in this environment).
Source: : PL Research
Source: : PL Research, Bloomberg
ING Vysya Bank : PT of Rs480/share
ING trading at significant discount with low Infra exposure banks (FY13)
Source: : PL Research, Bloomberg
Current valuations below historic levels
October 03, 2012 64
0.50
0.75
1.00
1.25
1.50
1.75
2.00
Jan
-05
Jun-
05
Nov
-05
Ap
r-0
6
Sep
-06
Feb
-07
Jul-
07
Dec
-07
May
-08
Oct
-08
Mar
-09
Au
g-0
9
Jan
-10
Jun-
10
Nov
-10
Apr
-11
Sep
-11
Feb
-12
Jul-
12
ING Average
Risk free rate 8.0%
Equity Risk Premium 6.0%
Beta 1.10
Cost of Equity 14.6%
Terminal growth 5.0%
Normalised ROE 17.1%
Stage 2 growth 18.0%
Sep-13 PT 480
Implied Mar-14 P/B 1.46
Implied Mar-14 P/E 10.4
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
IIB Kotak HDFCB
LilladherPrabhudas Summary Profile
Source: Company, PL Research
Shareholding Pattern (Jun-12)
Source: Company, PL Research
Loan Mix
Source: Company, PL Research
Dilution History
October 03, 2012 65
Key Personnel
Designation Name Profile
MD & CEO Mr. Shailendra Bhandari
Mr.Bhandari joined ING in 2009 from Tata Capital where he was head of their private equity. Prior to Tata capital, he
was the CEO and MD of of Centurion Bank of Punjab. Over 2000- 2004, he was the MD & CEO of ICIC Pru AMC. Prior
to that, he was part of the core team that set up HDFC Bank in 1994 as Treasurer and Executive Director.
Chief Financial Officer Mr. Jayant MehrotraMr.Mehrotra has been with ING for over 6-7 years. He has over two decades of experience across various industries
and geographies. He was the core team member at IDBI, responsible for various strategic initiatives.
Country Head - Retail Banking Mr. Uday SareenMr.Sareen has been with ING for five years, prior to which he had 13 years of experience in Retail Banking at
Citibank, where he worked across geographies, markets and products.
Country Head - Private Banking Mr. Samir Bimal Mr.Bimal has been with ING for six years. He has worked for BNP Paribas (India) and Lazard India and has a total
experience of 15 years, both in India and the Middle East.
Country Head - Wholesale Banking Mr. Janak DesaiMr.Desai has been with ING for seven years. He has also worked at ABN AMRO, Standard Chartered and was also the
core team member at IDBI responsible for bank’s strategy & repositioning.
Chief Risk Officer Mr. Jan Van WellenMr.Wellen has been with ING India for four years. He has more than two decades of experience in Banking across
BBL and ING and has worked across geographies in Credit and Risk functions.
Promoter43.73%
FII's25.20%
MF's13.66%
FI's0.25%
Individuals8.93%
Others8.23%
Corporate
41.0%
SME
28.0%
Agri8.0%
Retail23.0%
Date DilutionNo of
shares
Price
Rs/Share
Amount
(Rs m)
Jun-11 10.0% 15.0 342 5,131
Sep-09 8.3% 9.3 248 2,301
Nov-07 6.1% 6.2 310 1,924
LilladherPrabhudas Financials
October 03, 2012 66
Income Statement (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Int. Earned from Adv. 17,094 20,326 28,678 36,063 42,521
Int. Earned from Invt. 5,179 21 6 6 6
Others - - - - -
Total Interest Income 22,329 26,941 38,568 47,350 55,423
Interest expense 14,030 16,875 26,485 32,834 38,183
NII 8,298 10,065 12,084 14,515 17,241
Growth (%) 27.7 21.3 20.1 20.1 18.8
Treasury Income 798 970 131 500 750
NTNII 5,404 5,579 6,567 7,683 9,143
Non Interest Income 6,202 6,550 6,698 8,183 9,893
Total Income 28,531 33,490 45,266 55,533 65,316
Growth (%) 2.4 17.4 35.2 22.7 17.6
Operating Expense 8,081 10,260 11,102 12,621 14,315
Operating Profit 6,420 6,355 7,679 10,077 12,819
Growth (%) 51.1 (1.0) 20.8 31.2 27.2
NPA Provisions 2,715 1,501 1,078 1,889 2,449
Investment Provisions (18) 55 (4) - -
Total Provisions 2,704 1,518 1,140 1,889 2,449
PBT 3,715 4,836 6,539 8,188 10,370
Tax Provisions 1,293 1,650 1,976 2,702 3,422
Effective Tax Rate (%) 34.8 34.1 30.2 33.0 33.0
PAT 2,422 3,186 4,563 5,486 6,948
Growth (%) 28.3 31.5 43.2 20.2 26.7
Source: Company Data, PL Research
Balance Sheet (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Equity 1,200 1,210 1,501 1,501 1,501
Networth 22,199 25,182 38,748 43,355 49,249
Adj. Networth 19,982 24,264 38,223 42,694 48,407
Deposits 258,653 301,942 351,954 421,608 510,493
Low Cost deposits 84,270 104,586 120,473 141,239 171,015
Total Liabilities 337,692 389,078 468,955 559,281 673,623
Net Advances 185,072 236,021 287,367 344,840 420,705
Growth (%) 10.4 27.5 21.8 20.0 22.0
Investments 104,729 110,583 127,155 147,193 171,499
Total Assets 337,692 389,078 468,955 559,281 673,623
Source: Company Data, PL Research
Key Ratios
Y/e March FY10 FY11 FY12 FY13E FY14E
Gross NPA (%) 3.01 2.34 1.96 2.05 2.14
Net NPA (%) 1.20 0.39 0.18 0.19 0.20
NPA Coverage (%) 60.2 83.4 90.7 90.7 90.7
Gross Slippages (%) 2.4% 1.3% 0.7% 1.0% 1.1%
Credit Cost (%) 1.5% 0.7% 0.4% 0.6% 0.6%
Total CAR 14.9% 12.9% 14.0% 13.5% 12.9%
Tier I Capital 10.1% 9.4% 11.2% 10.5% 9.8%
Tier II Capital 4.8% 3.6% 2.8% 3.0% 3.1%
Source: Company Data, PL Research
LilladherPrabhudas Federal Bank
CMP: Rs450 TP: Rs525 Rating: BUY MCap: Rs76.9bn
Credit systems overhaul done; positives to follow: Aggressive growth over FY06-08 led to significant inch-up in slippages for FB in FY08-11. The new management over the last two years has (1) centralised the credit appraisal process, especially in SME/retail (2) consolidated FB's high delinquency mortgage book and increased share of gold loans in the retail portfolio and (3) improved quality of underwriting in large/mid corporate. Management initiatives are being reflected in lower slippages in SME/Retail and with the legacy corporate book running off, we expect slippages to come off from +3% to ~2% in FY13/14.
Aggressive network expansion; some near-term cost implications: After overhauling their credit systems, FB is on an branch network expansion drive, especially in credit heavy states like Maha/TN/Gujarat /Karnataka/Punjab, with ~1030 branches now v/s 750 branches in FY11. FB plans to reach to ~1150 branches by FY13 before consolidating and hence, there will be some inch-up in cost ratios, which, we believe, will be manageable.
Lower credit costs to drive return ratios: Given the asset quality initiatives, we expect credit costs to come off to ~90bps from ~170bps in FY08-11, aided not only by lower slippages but also significantly lower write-offs. With margins to remain flat and cost expected to inch up in the near term, lower credit costs will help in maintaining ROAs at 1.3-1.4% range. With the leveraging up process, we expect ROEs to touch ~16% by FY14-15 as against being stuck in a narrow band of 12-14% over the last 4-5 years.
Valuations reasonable; ‘BUY’ with a PT of Rs525/share: We initiate coverage with a Sep-13 PT of Rs525/share (~17% upside). Management focus on asset quality will bring down normalized credit costs and this would drive re-rating for FB in the medium term. Also, the leveraging up process will likely continue and aid in delivering ROEs of ~16% by FY14-15. Asset quality volatility remains the key risk to our ‘BUY’ recommendation.
October 03, 2012 67
Key Financials (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Net interest income 14,108 17,466 19,534 22,048 25,845
Growth (%) 7.3 23.8 11.8 12.9 17.2
Operating profit 12,648 14,273 15,065 15,982 19,136
PAT 4,645 5,871 7,768 8,253 9,980
EPS (Rs) 27.2 34.3 45.4 48.3 58.3
Growth (%) -7.2 26.4 32.3 6.2 20.9
Net DPS (Rs) 5.0 8.5 9.0 10.5 12.0
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY10 FY11 FY12 FY13E FY14E
NIM (%) 3.4 3.7 3.5 3.3 3.3
RoAE (%) 10.3 12.0 14.4 13.7 14.9
RoAA (%) 1.1 1.2 1.4 1.3 1.3
P / BV (x) 1.6 1.5 1.3 1.2 1.1
P / ABV (x) 1.6 1.5 1.3 1.2 1.1
PE (x) 16.5 13.1 9.9 9.3 7.7
Net dividend yield (%) 1.1 1.9 2.0 2.3 2.7
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute 10.7 1.4 25.1
Relative to Sensex 2.4 (6.6) 10.4
LilladherPrabhudas Rapid network expansion; Focusing on developed states
Expanding pan-India, with focus on developed states: FB is a Kerala-based bank, with ~55% branches in Kerala and is now expanding pan-India with a focus on developed and credit heavy states like TN, Karnataka, Maharashtra, Gujarat and Punjab. ~85% of incremental network (~300 branches) have been opened in Kerala and these five states with an aim of focusing on SME/Agri and NRI banking. FB has moved aggressively on expanding network to +1000 branches (~250 added in four quarters) and expects to reach ~1150 branches by FY13 before calibrating growth.
Calibrated advances growth over the last two years
FB’s advances grew aggressively between FY05-08 at ~27% CAGR, especially in large/mid corporates and retail segment, leading to high slippages (~3.2% over FY09-11), including mortgages.
Under the leadership of Mr. Shyam Srinivasan, FB has calibrated its growth rate with consolidation in its mortgage and SME business along with changes in credit systems/underwriting; growth is largely being driven by large/mid corporates over the last six quarters.
With the re-organization in credit underwriting largely done (Jun-11), FB wants to re-focus on SME/Agri as the growth engine, going forward, and the network expansion is also aimed accordingly.
Source: Company, PL Research
~55% branches in Kerala (FY12)
Source: Company, PL Research
Branch Expansion (FY10-12) largely in Kerala and 5 states planned
Source: Company, PL Research
The 5 focus states outside Kerala constitute ~50% of GDP and system credit/deposit
October 03, 2012 68
Kerala525
55%
TN
82
9%
Maha.
81
8%
Karnataka68 7%
Gujarat
28
3%
Punjab
15
2%
Rest151
16%
Kerala
13450%
TN
3513%
Maha.18
7%
Karnataka208%
Gujarat207%
Punjab9
3%
Rest
32
12%
0%
10%
20%
30%
40%
50%
60%
CASA GDP Deposit Credit
LilladherPrabhudas Calibrating loan growth
Source: Company, PL Research
Source: Company, PL Research. Figures in Rs bn
Calibrated growth over the last two years
Loan growth has been largely driven by large corporates in last three yrs
Source: Company, PL Research
Share of Retail and SME has come off as SME appraisal system has been overhauled and mortgage growth has been arrested
Source: Company, PL Research
High growth in FY05-09 leading to high delinquencies in FY09-11
October 03, 2012 69
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2005 2006 2007 2008 2009 2010 2011 2012
Credit growth Slippage (RHS)
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
E
20
14
E
20
15
E
Credit growth
50%
52%
54%
56%
58%
60%
62%
64%
66%
68%
4QFY
09
1QFY
10
2QFY
10
3Q
FY
10
4QFY
10
1Q
FY
11
2QFY
11
3QFY
11
4QFY
11
1QFY
12
2Q
FY
12
3QFY
12
4Q
FY
12
1QFY
13FY09 FY10 FY11 FY12
Advances 223.9 269.5 319.5 377.6
YoY % 20.4% 18.6% 18.2%
Corporate 78.7 98.4 129.5 173.8
YoY % 25.0% 31.7% 34.1%
Retail 71.7 86.1 94.4 101.9
YoY % 20.2% 9.5% 8.0%
SME 73.6 85.0 95.6 101.9
YoY % 15.5% 12.6% 6.5%
LilladherPrabhudas Liability franchise – No big impact from NRI de-reg
FB’s low cost liability franchise is largely SA-linked and was earlier aided by NRI TD deposits like all Kerala-based banks which has been de-regulated by RBI in Nov-11.
FB has a strong SA deposit base at ~22% of deposits and will continue to build on SA base with its geographic expansion.
CA franchise has been weak at ~5% and though corporate book has expanded significantly, CA deposits continue to remain a challenge.
The recent NRI deposit de-reg has made NRE TDs high cost. However, in Sep-11 the total o/s NRE TD was ~Rs10.5bn (2% of FY12) deposits and hence, impact is limited. We estimate impact of ~15bps on NIMs only.
Source: Company, PL Research
CA franchise very weak SA remains relatively strong
Source: Company, PL Research
NRI deposits: Largely savings, limited NRE TD (% of overall deposits)
Source: Company, PL Research
Rates up ~5-6% on NRE Term deposits
Source: Company, PL Research
Comparable impact on NIMs lower
October 03, 2012 70
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
NRI (savings) -Already de-
regulated)
NRO TD (Already de-
regulated)
FCNR (Rate increased in
May-12)
NRE TD (De-regulated in
Nov-11)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Current NRE TD
(Pre De-reg)
Dom.
Saving
Dom. TD NRE TD
(Post De-reg)
0%
5%
10%
15%
20%
25%
Kota
kH
DFC
BIN
G V
ysya
Axi
sIIB
ICIC
I J&
KYe
sSB
IB
OB
PNB
BO
IFe
dera
lSI
B
0%
5%
10%
15%
20%
25%
30%
35%
40%
SBI
HD
FCB
J&K
ICIC
I PN
BA
xis
Fede
ral
BO
IB
OB
SIB
ING
Vys
yaKo
tak
IIB Yes
SA ratio (%)
(% of deposits) Federal SIB
NRI (savings) - Already de-regulated)
8.5% 5.5%
NRO TD (Already de-regulated) 5.9% 3.8%
NRE TD (De-regulated in Nov-11) 2.3% 2.5%
FCNR (Rate increased in May-12) 3.2% 1.3%
Total 19.9% 13.2%
Margin impact (NRE TD Up 500bps + FCNR up 200bps)
0.13% 0.13%
LilladherPrabhudas Margins high, aided by leverage
FB’s margins at ~3.6% is among the highest and we believe, apart from gold loans/SME lending, the margin advantage is also linked to leverage.
Adjusted for leverage, FB’s margins is 35bps lower (~3.25%) and is at the middle of our coverage universe and not highest as implied by reported margins.
Also on a risk adjusted basis, FB’s margins stack up in the median range and not at the higher end.
We believe margins for FB has peaked in FY11-12 at ~3.8-3.9% and due to lower share of low cost NRI deposits and higher leverage, we expect NIMs to come by ~15-20bps over FY12-14.
Source: Company, PL Research
Margins to moderate despite flat spreads – Impact of higher leverage
Source: Company, PL Research
Reported margins amongst the highest...
Source: Company, PL Research
…but margins adjusted for leverage in the middle
Source: Company, PL Research
Risk adjusted margins also in the middle of the pack
October 03, 2012 71
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
HD
FCB
Fed
eral
SBI
Ko
tak
IIB J&K
PN
B
Axi
s
ING
Vys
ya SIB
Yes
BO
B
ICIC
I
BO
I
Margin
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
HD
FCB
Ko
tak
SBI
IIB
PN
B
Axi
s
J&K
Fed
eral
ING
Vys
ya SIB
Yes
ICIC
I
BO
B
BO
I
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Ko
tak
HD
FCB
J&K
IIB
Fed
eral
SIB
Axi
s
ING
Vys
ya Yes
ICIC
I
PN
B
SBI
BO
B
BO
I
2.00%
2.50%
3.00%
3.50%
4.00%
2008 2009 2010 2011 2012 2013E 2014E 2015E
Spread NIM
LilladherPrabhudas Fees better than south peers but way to go otherwise
FB’s fee/assets at ~0.8% is better than most South-based (~0.5-0.6%) banks, especially considering a relatively small non-fund based book.
FB’s fees/assets is coming off over the last two years but a large part of the drop is related to lower write-offs over the last two years and hence, lower recoveries from written-off accounts.
FB expects fee income momentum to remain robust (+20%) over next 1-2 years as they have added senior members in corporate/treasury. Also, geographical expansion will also aid fee income momentum.
Focus Areas: Centralization of trade, increase in non-fund based business, overseas business correspondent business and treasury are key areas with limited syndication/DCM opportunities.
We factor in ~18% growth in core fees but do not expect any material improvement in Fees/Assets for FB. Source: Company, PL Research
Source: Company, PL Research
Fees/Assets low but better than most South-based peers
Fees/Asset coming off largely due to lower recoveries
Source: Company, PL Research
Expect robust fee income growth but higher than b/s growth unlikely
October 03, 2012 72
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
IIB
Axi
s
HD
FCB
ICIC
I
ING
Ko
tak
SB
I
PNB
BO
I
Fede
ral
BO
B
Ye
s
J&K
SIB
Fees/Asset
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
2008 2009 2010 2011 2012
Fees/Assets (LHS) Recoveries/Assets (RHS)
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2008 2009 2010 2011 2012 2013E 2014E 2015E
Credit growth Fees growth
LilladherPrabhudas
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
BO
B
J&K
BO
I
SIB
Fed
eral
PN
B
SBI
ICIC
I
Yes
ING
Vys
ya
Axi
s
IIB
HD
FCB
Ko
tak
Low opex allows for aggressive network expansion
Well paced on Opex v/s peers:
FB’s opex/assets is in line with peers at ~1.7% of assets but cost-income is lower due to higher margins.
Branch efficiency lags larger private peers by ~50%. However, this is directly linked to lower share of Urban branches at just ~40% v/s 60-70% branches in Urban/Metro centers for larger peers.
Some consolidation after swift network expansion:
FB has expanded branch network by ~30% in the last three quarters to ~1000 branches from ~750 in H1FY13 in order to achieve FY13 target of 1000 and plans to expand branches to 1150 by FY13.
With significant expansion in branches over FY11-13, we expect some consolidation. We have, thus, factored in a cost income to inch up to 43% in FY13 and then moderate. Source: Company, PL Research
Branch efficiency v/s Rural urban spread
Source: Company, PL Research
Opex/assets comparable to peers
Source: Company, PL Research
Significant jump in branch expansion
Source: Company, PL Research
Cost income to inch up in FY13; progressively to come off from there
October 03, 2012 73
0
200
400
600
800
1,000
2005 2006 2007 2008 2009 2010 2011 2012
No. Of Branches
30.0%
32.0%
34.0%
36.0%
38.0%
40.0%
42.0%
44.0%
46.0%
20
08
2009
2010
20
11
20
12
20
13
E
20
14
E
20
15
E
Kotak
Inudusind
ING
Yes
HDFCB
Axis
ICICI
SIB
BOB
Federal
BOI
J&K
PNB
SBI
400
600
800
1,000
1,200
1,400
1,600
30% 40% 50% 60% 70% 80%
Dep
osit
s /
Bra
nch
(Rs
m)
Urban / Metro Branches
LilladherPrabhudas Asset quality: The Historical issue
Asset quality has remained volatile: FB’s asset quality has been volatile over the last three years, with increasing delinquencies and also highest restructuring among private banks largely due to aggressive growth between FY05-08. Delinquencies have been high from not only SME space but more peculiarly retail.
FB’s retail book is largely Mortgages and Gold which are generally considered as low delinquency products. But FB has been facing high slippages even in its mortgages. The FY08-09 crisis impacted NRI population and also FB’s mortgage book; however, current delinquency levels are surprising.
SME slippages continue to remain high but slippages have shown a steady improvement from 5-6% in FY11 to ~3% currently and management expects to further improve on the current trend. Source: Company, PL Research
Gross slippages have been the highest (FY09-12 avg.)
Source: Company, PL Research
Slippages a function of high credit costs in FY05-08
Source: Company, PL Research
Slippages coming off but still elevated
Source: Company, PL Research
Restructured loan book also high
October 03, 2012 74
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
SIB
Yes
J&K
BO
B IIB
BO
I
ING
PNB
SBI
Axi
s
Ko
tak
ICIC
I
HD
FCB
Fede
ral
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13
Retail (%) SME (%) Corporate (%)
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
ING
ICIC
I
J&K
Axi
s
SBI
SIB
BO
B
Fed
eral
BO
I
PN
B0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Credit growth Slippage (RHS)
LilladherPrabhudas Understanding the magnitude of the asset quality issue
Aggressive write-off policy exaggerates asset quality issue: FB’s slippages and delinquencies are higher than most peer banks and so are the credit costs. However, FB’s aggressive write-off policy in the past exaggerates the asset quality issue.
Analysis of credit costs (excl. recoveries from written-off accounts) indicate that though FB has higher delinquencies than peers, magnitude is lower than indicated by reported numbers.
FB’s credit costs have averaged ~1.7% between FY09-11. However, FB had ~55-60bps of recoveries from written-off accounts each year and hence, net credit costs even in peak slippage years was ~120bps v/s 170bps suggested by reported numbers. Recovery from written-off accounts is limited to <10-20bps for banks under our coverage, especially private banks. Source: Company, PL Research
Source: Company, PL Research
Reported credit costs and Adjusted credit costs
…but ~50-60bps recovered every year
Source: Company, PL Research
Credit costs for FB significantly higher (avg FY09-12)…
October 03, 2012 75
0.00%
0.50%
1.00%
1.50%
2.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Reported Adj for coverage + recoveries
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
SIB
Yes
J&K
BO
B IIB
BO
I
ING
PNB
SBI
Axi
s
Ko
tak
ICIC
I
HD
FCB
Fede
ral
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
Fe
de
ral
Axi
s
PN
B
ING
BO
I
BO
B
SB
I
IIB
Recoveries (Avg. FY10-12)
LilladherPrabhudas Better asset mix + Mgt. initiatives to drive asset quality
Source: Company, PL Research
Source: Company, PL Research
Asset quality improvement and lower credit costs will be primary drivers of stock performance and will aid in maintaining ROAs at +1.3%. We believe credit costs will inch down from 1.7% to ~0.9% for FB, driven partly by better asset mix and initiatives taken by the management on credit systems/procedures and partly explained by lower write-offs.
SME sourcing improving significantly: The new management at FB has centralized sourcing of credit and with limited branch intervention, SME sourcing has improved significantly which is also reflected in the moderating SME slippages over the last 3-4 quarters.
More gold loans in Retail: Low ticket size in mortgage and high growth in the past has led to high slippages in retail. Mortgage book has remained stagnant and FB has concentrated on increasing share of gold loans which remains a “0” delinquency product. Focus remains on increasing share of gold loans to +15% from <10% and better asset mix will drive lower credit costs in retail.
Large corporate – Sourcing of higher rated corporates: Large corporates have driven 55% of the growth over the last two years and FB has added large number of AAA corporates in their portfolio under the leadership of Mr. Chacko who is the new ED. Most large account slippages have been from legacy book, with just 1-2 large accounts slippages from new relationships.
Infra book - SME exposure high, private power limited: FB has a large Infra book of ~10% but share of high risk IPP exposure is just 1%. FB has lent ~3% of loans to Rajasthan, TN, AP SEBs where we see some risks of NPV hits. Apart from SEBs, other Infra exposure is largely private power distribution and low risk road operators.
Gross and Net NPAs (%)
Infra book : Exposure to IPP limited
October 03, 2012 76
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2008 2009 2010 2011 2012 2013E 2014E 2015E
Gross NPA ratio Net NPA ratio
Private power 13%
State SEBs
23%
Private distributors
15%
Roads15%
Ports9%
Others25%
LilladherPrabhudas ROE Analysis: Improvement to be driven by credit costs
October 03, 2012 77
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E Comments
NIM/Assets 3.25% 3.10% 3.78% 3.50% 3.76% 3.59% 3.46% 3.44% 3.43%Expect margins to inch down as leverage increases and we are
factoring in full year impact of NRI TD de-regulation.
Fees/Assets 1.14% 1.14% 1.24% 1.05% 1.01% 0.83% 0.73% 0.73% 0.73%
Fee/Assets coming off as recoveries from written-off accounts
drying due to lower write-offs (20bps impact)- Expect core fee
growth of 19%.
Inv. Profits/Assets 0.23% 0.27% 0.24% 0.27% 0.10% 0.15% 0.13% 0.15% 0.13%
Net revenues/Assets 4.62% 4.52% 5.26% 4.81% 4.87% 4.56% 4.33% 4.32% 4.29%
Opex/Assets -1.84% -1.68% -1.64% -1.68% -1.80% -1.80% -1.82% -1.77% -1.72%Opex to peak in FY13 due to large branch addition over the last 3-
4 quarters. Expect slower pace of branch addition from here on.
Provisions/Assets -0.97% -1.05% -1.34% -1.00% -1.13% -0.62% -0.57% -0.57% -0.55%Expect credit costs to stabilise at ~80-90bps/ Lower write-offs
also aiding lower credit costs.
Taxes/Assets -0.48% -0.47% -0.84% -0.98% -0.68% -0.72% -0.65% -0.67% -0.68%
Costs/Assets -3.29% -3.20% -3.82% -3.66% -3.61% -3.14% -3.04% -3.00% -2.95%
ROA 1.33% 1.32% 1.44% 1.15% 1.26% 1.43% 1.29% 1.32% 1.34%Expect ROAs at ~1.3% which is higher than most peer banks
though asset quality volatil ity will continue.
Equity/Assets 6.2% 9.7% 11.8% 11.2% 10.5% 9.9% 9.4% 8.9% 8.4%
ROE 21.4% 13.6% 12.1% 10.3% 12.0% 14.4% 13.6% 14.8% 15.9%ROEs stil l long way to go as leverage stil l low with Tier-1 at 14%
in FY14.
RORWA 1.90% 1.93% 2.27% 1.82% 1.95% 2.29% 2.13% 2.15% 2.17%
LilladherPrabhudas Financials - Lower credit costs hold the key
Source: Company, PL Research
Cost income to peak in FY13
Source: Company, PL Research
Gross slippages lower than FY08-11 levels
Source: Company, PL Research
ROEs to inch up to 16% by FY14-15
October 03, 2012 78
Source: Company, PL Research
Some acceleration in loan growth now
Source: Company, PL Research
Margins to moderate due to higher leverage
Source: Company, PL Research
Fees growth to bounce back once base factors in lower recoveries
0%
5%
10%
15%
20%
25%
30%
20
08
20
09
20
10
20
11
20
12
20
13
E
20
14
E
20
15
E
Deposit Growth Loan Growth
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
20
08
2009
20
10
20
11
20
12
20
13
E
20
14
E
20
15
E
NIM NIM Capital Adjusted
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
20
08
2009
2010
2011
20
12
20
13
E
20
14
E
20
15
E
Fees growth
1.55%
1.60%
1.65%
1.70%
1.75%
1.80%
1.85%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
20
08
2009
20
10
20
11
20
12
20
13
E
2014
E
20
15
E
Cost-Income Cost-Asset (RHS)
0.00%
1.00%
2.00%
3.00%
4.00%
20
08
20
09
20
10
2011
20
12
20
13
E
20
14
E
20
15
E
Gross NPA Gross Slippage
0.0%
5.0%
10.0%
15.0%
20.0%
0.00%
0.50%
1.00%
1.50%
2.00%
2008
20
09
20
10
20
11
20
12
20
13
E
20
14
E
2015
E
RoA RoE (RHS)
LilladherPrabhudas Valuations: PT of Rs525/share
PT of Rs525/share; ~17% upside: We value FB at 1.4x FY14 book and we have a Sep-13 PT of Rs524/share, implying ~17% upside from the current levels.
Calibrated growth + Improvement in asset quality: With various management initiatives taken over the last two years, we believe slippages will come and so will credit costs. ROEs, which have remained within the 10-14% range, will creep up to ~16% as leverage increases and that should drive valuations up. Continued volatility in asset quality remains the key risk to our ‘BUY’ recommendation.
Our PT implies 1.3x fwd book, which is ~15% higher than historical levels as quality of asset book, is seeing a structural improvement and higher ROEs justify a higher multiple. Source: PL Research
Source: : PL Research, Bloomberg
FB : PT of Rs525/share
FB v/s Other regional banks
Source: : PL Research, Bloomberg
1-yr fwd P/B chart
October 03, 2012 79
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Jan
-05
Jun
-05
No
v-0
5
Apr
-06
Sep
-06
Feb
-07
Jul-
07
Dec
-07
May
-08
Oct
-08
Ma
r-0
9
Aug
-09
Jan
-10
Jun
-10
No
v-1
0
Apr
-11
Sep
-11
Feb
-12
Jul-
12
Federal Average
Risk free rate 8.0%
Equity Risk Premium 6.0%
Beta 1.25
Cost of Equity 15.5%
Terminal growth 5.0%
Normalised ROE 16.9%
Stage 2 growth 14.0%
Sep-13 PT 525
Implied Mar-14 P/B 1.27
Implied Mar-14 P/E 9.1
Federal
ING
SIB
J&K
SBI
PNB
BOB
BOI
0.80
0.90
1.00
1.10
1.20
1.30
1.40
0.7% 0.9% 1.1% 1.3% 1.5% 1.7%
FY
13
P/B
V
RoA
LilladherPrabhudas Key Personnel & Shareholding
Source: NSE India
Shareholding Pattern
Source: Company, PL Research
Loan Mix
Source: Company, PL Research
Dilution history
October 03, 2012 80
Key Personnel
Designation Name Profile
MD & CEO Mr Shyam Srinivasan
Mr.Shrinivas joined the bank in Sep-10. Prior to this, he has worked with Standard Chartered Bank in India and overseas
in the Middle East and South East Asia, where he has experience in Retail lending, Wealth management and SME banking.
Executive Director P C JohnMr.John joined FB as Executive Trainee in 1973. He was appointed as Executive Director of the bank in May 2010. He has
exposure in different areas of banking, including Branches, Regional offices and Corporate office.
Executive Director Abraham Chacko
Mr.Chacko joined the Bank as Executive Director in charge of Wholesale Banking in May-11. Prior to FB, he had a ~15
year stint with HSBC in Mumbai, Kolkata and New Delhi. After moving on to ABN AMRO in Dubai, he became the Deputy
Country Manager overseeing Wholesale Banking, Transaction Banking and the Financial Institutions divisions, covering
UAE, Qatar and Oman.
FII's43.8
MF's13.2
FI's
7.1
Individuals
16.0
Others20.0
Corporate42.6%
SME17.7%
Agri
11.0%
Retail
28.7%
Date DilutionNo of
shares
Price
Rs/Share
Amount
(Rs m)
Nov-08100%
Rights85.7 240 20,558
Jan-06 23.4% 20.0 175 3,500
LilladherPrabhudas Financials
October 03, 2012 81
Income Statement (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Int. Earned from Adv. 28,497 31,688 41,898 50,051 57,780
Int. Earned from Invt. 7,834 8,680 13,157 15,251 17,255
Others - - - - -
Total Interest Income 36,732 40,520 55,584 65,867 75,643
Interest expense 22,624 23,054 36,050 43,819 49,798
NII 14,108 17,466 19,534 22,048 25,845
Growth (%) 7.3 23.8 11.8 12.9 17.2
Treasury Income 1,081 461 824 850 1,100
NTNII 4,228 4,707 4,499 4,681 5,508
Non Interest Income 5,309 5,168 5,323 5,531 6,608
Total Income 42,041 45,688 60,907 71,398 82,251
Growth (%) 9.7 8.7 33.3 17.2 15.2
Operating Expense 6,769 8,361 9,793 11,596 13,318
Operating Profit 12,648 14,273 15,065 15,982 19,136
Growth (%) 0.4 12.8 5.6 6.1 19.7
NPA Provisions 4,133 5,032 2,582 3,557 4,111
Investment Provisions (977) 111 349 - -
Total Provisions 4,053 5,254 3,370 3,557 4,111
PBT 8,595 9,018 11,695 12,425 15,025
Tax Provisions 3,950 3,147 3,927 4,172 5,045
Effective Tax Rate (%) 46.0 34.9 33.6 33.6 33.6
PAT 4,645 5,871 7,768 8,253 9,980
Growth (%) (7.2) 26.4 32.3 6.2 20.9
Source: Company Data, PL Research
Balance Sheet (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Equity 1,710 1,710 1,710 1,710 1,710
Networth 46,846 51,030 57,009 63,161 70,739
Adj. Networth 45,480 48,970 54,554 60,120 67,006
Deposits 360,580 430,148 489,371 570,904 677,024
Low Cost deposits 94,424 115,541 134,759 156,999 186,859
Total Liabilities 436,697 514,507 606,214 710,612 843,262
Net Advances 269,501 319,532 377,560 445,521 534,625
Growth (%) 20.4 18.6 18.2 18.0 20.0
Investments 130,546 145,377 174,025 199,472 230,508
Total Assets 436,697 514,507 606,214 710,612 843,262
Source: Company Data, PL Research
Key Ratios
Y/e March FY10 FY11 FY12 FY13E FY14E
Gross NPA (%) 3.05 3.59 3.45 3.62 3.70
Net NPA (%) 0.51 0.64 0.65 0.68 0.70
NPA Coverage (%) 83.4 82.1 81.1 81.1 81.1
Gross Slippages (%) 3.3% 3.2% 2.1% 2.0% 2.0%
Credit Cost (%) 1.7% 1.7% 0.7% 0.9% 0.8%
Total CAR 18.4% 16.8% 16.6% 15.6% 14.5%
Tier I Capital 16.9% 15.6% 15.9% 14.9% 13.9%
Tier II Capital 1.4% 1.2% 0.8% 0.7% 0.6%
Source: Company Data, PL Research
LilladherPrabhudas South Indian Bank
CMP: Rs24 TP: Rs25 Rating: Accumulate MCap: Rs2.7bn
Best-in-class asset quality drives return ratios: Highest share of secured loans, high proportion of gold loans and conservative underwriting has led to best-in-class asset quality for SIB, with <1% Gross NPA and <40bps of credit costs over the last 4-5 years and is the key reason for management’s consistency to surprise on profitability guidance. High Infra exposure (12% of loans) seems a risk but exposure is to relatively safer names in roads/private power. SEB exposure is high at 4% with some risks of NPV hit due to the new SEB restructuring package announced.
Gold loans - Large book - Risks limited: Proportion of gold loans is highest for SIB among banks at ~20% which provides high yields without higher credit costs. Our feedback suggest that tightening of gold lending regulations will not be replicated for banks as done for NBFCs as RBI seems relatively comfortable with gold-lending by banks. The only risk which is the risk weight calculation for gold loans (effective "0" risk weight now) could be changed by RBI. However, the impact will be low for SIB, given high Tier-1.
All other metrics deteriorating; risks to profitability remain: The good story ends with asset quality with (1) one of the lowest fee/assets among old generation private banks and the ratio deteriorating further and (2) CASA ratio has been coming off steadily with the recent NRI deposit de-reg impacting liability franchise further. Management efforts, we believe, at best will arrest further decline in these metrics, thus, making ROA delivery always contingent upon low credit costs. In FY12, PSL book shrunk by ~17% due to de-recognition of large part of the Gold portfolio as PSL, leading to total PSL compliance of just 25%. Hence, RIDF calls can increase manifold, going forward, risking future margins.
Initiate with an ‘Accumulate’ with a PT of Rs25/share: SIB enjoys one of the best asset quality franchise that aids in delivering superior return ratios. However, with deterioration in all other metrics and increasing risk from RIDF call, we rate SIB an ‘Accumulate’, with Sep-13 PT of Rs25/share implying 1x FY14 book.
October 03, 2012 82
Key Financials (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Net interest income 5,683 7,911 10,217 12,426 15,099
Growth (%) 8.7 39.2 29.2 21.6 21.5
Operating profit 4,106 5,253 6,515 8,136 9,828
PAT 2,338 2,926 4,017 4,586 5,572
EPS (Rs) 2.1 2.6 3.5 3.4 4.2
Growth (%) 20.1 25.1 36.9 -2.9 21.5
Net DPS (Rs) 0.4 0.5 0.6 0.7 0.8
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY10 FY11 FY12 FY13E FY14E
NIM (%) 2.5 2.7 2.8 2.8 2.8
RoAE (%) 17.0 18.5 21.6 18.9 18.3
RoAA (%) 1.0 1.0 1.1 1.0 1.0
P / BV (x) 1.8 1.6 1.3 1.1 1.0
P / ABV (x) 1.8 1.6 1.3 1.1 1.0
PE (x) 11.4 9.1 6.6 6.8 5.6
Net dividend yield (%) 1.7 2.1 2.6 2.9 3.3
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute 8.3 (5.2) 9.3
Relative to Sensex 0.0 (13.2) (5.4)
LilladherPrabhudas Regional bank with commendable HR transformation
Source: Company, PL Research
SIB: Large presence in South, especially Kerala SIB is a Kerala-based bank, with ~55% branches in Kerala and 85% of branches across the four Southern states. The bank has also expanded its footprint pan-India, especially Maharashtra and Delhi.
Mr. VA Joseph, the current MD and CEO (joined in 2005), was instrumental in driving various initiatives, including path-breaking HR initiatives (VRS scheme) which led to significant efficiency improvement and profitability. Average age of employees has come down to ~36 years from >42 years (4-5 years back).
SIB's B/S has grown by ~27% CAGR over FY06-12, with +30% growth over the last three years as SIB has expanded into newer geographies. Also, contribution from high-yielding gold loan business has ramped up significantly, now contributing ~20% of loan book.
October 03, 2012 83
Source: Company, PL Research
Largely concentrated in South, expanding in Mumbai and Delhi as well
Kerala
387
55%
Tamil Nadu
124
18%
Karnataka466%
Andhra Pradesh40
6%
Maharashtra253%
Delhi23
3%
Others
61
9%
LilladherPrabhudas Best in terms of asset quality
SIB’s credit costs has been amongst the lowest at <30bps for the last five years, with Gross NPAs coming off from 2% in FY08 to 1% in FY12 due to:
High share of secured lending - ~90% of total loans: SIB has concentrated largely on secured lending compromising ~90% of total loans. Share of secured lending has inched up from <80% to ~90% currently and is highest among peers. This, we believe, leads to lower delinquencies and more importantly, lower loss, given default.
Large proportion of “0” delinquency Gold loans: SIB has built a Rs55bn gold loan portfolio growing at ~60% CAGR over the last three years and share of gold lending has increased from ~11% in FY09 to ~20% currently. Gold lending adds to the secured book and has largely remained a “0” loss portfolio as is the case for most of the industry. SIB also has ~4% of its book in low margin loans against fixed deposits which also cushions credit costs.
Infra lending high but seems less risky: SIB has ~12% exposure to Infra but exposure to IPPs is <2% of exposures with high proportion of Infra loans to private distributors and safer road operators. SEB exposure is high at ~4% of exposure and that could have some NPV hits from the proposed restructuring package.
Overall, we factor in ~50bps of credit costs for SIB. This translates to ~60bps of credit costs for the loan book, excl. Gold loans.
Source: Company, PL Research
Mid corporate and Retail lender
Source: Company, PL Research
Share of secured lending highest among peers
Source: Company, PL Research
Gold loans highest for SIB (% of loans)
October 03, 2012 84
Agri
5.9%SME
6.6%
Corporate
53.3%
Housing5.5%
Gold Loan 19.8%
FSLD3.6%
Others
5.2%
60.0%
70.0%
80.0%
90.0%
100.0%
SIB IIB
PN
B
ING
Vys
ya
Axi
s
ICIC
I
BO
B
J&K
Ko
tak
SBI
BO
I
Fed
eral
HD
FCB
Yes
% of Secured Advances
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
SIB Federal HDFCB
LilladherPrabhudas
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
ING
Yes
J&K
Fed
eral
SBI
ICIC
I
BO
B
SIB
Un
ion
PN
B
BO
I
Axi
s
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
ING
ICIC
I
Axi
s
Cana
ra
SIB
J&K
SBI
BO
B
All
ahab
ad
Fed
eral
UB
I
BO
I
OB
C
PN
B
IOB
Cen
tral
Best in terms of asset quality
Source: Company, PL Research
... but even that is relatively safe
Source: Company, PL Research
We factor in some inch-up in credit costs
Source: Company, PL Research
The only risk is high Infra exposure…
October 03, 2012 85
Source: Company, PL Research
Structural improvement in Asset Quality…
Source: Company, PL Research
….in line with build-up in the secured book
Source: Company, PL Research
Restructuring has been relatively under check
0.00%
0.50%
1.00%
1.50%
20
06
20
07
20
08
20
09
20
10
2011
2012
20
13
E
20
14
E
LLP/average loans
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
2005 2006 2007 2008 2009 2010 2011 2012
Gross NPA ratio
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
82.0%
84.0%
86.0%
88.0%
90.0%
92.0%
94.0%
2006 2007 2008 2009 2010 2011 2012
% of Secured Advances NPA (RHS)
SEB29%
Private distributors
18%IPPs10%
Road+Ports34%
Others9%
LilladherPrabhudas Niche gold loan book – Relative advantage
Source: Company, PL Research
Source: Company, PL Research
Largest gold portfolio among banks: SIB, through it's vast branch network of ~475 branches in Kerala and Tamil Nadu, has built a gold portfolio of Rs55bn (~20% of book) and is amongst the largest gold loan book among banks.
Large gold book not only aids in preserving asset quality but also leads to yield improvement, given ~13-13.5% yields. Management intends to increase share of gold loans to ~25% from 20% currently.
Regulatory risks limited:
RBI has tightened gold lending by NBFCs over the last 12 months. However, our feedback suggests that regulatory intervention will be limited for banks as RBI is less concerned regarding auction/pricing practices followed by banks.
Regulatory gap between banks and NBFCs is expected to persist and though competition is increasing overall, banks could benefit v/s NBFCs in gaining share in the near term.
“0” risk weight for gold loans right?
Gold loans adjusted for LTVs effectively carry “0” risk weight and with high growth in SIB’s gold portfolio, RWA/Loans have come off from 90% in FY08 to ~62% which is the lowest in the industry.
Though gold loans have low credit risks and costs, we believe RBI may introduce higher risk weight on gold lending. However, impact on SIB will be limited, given high Tier-1 capital – Assuming ~50% risk weight FY13 Tier-1 will come off from 13.4% to 11.6%.
Gold loans now 20% of SIB’s loan portfolio
SIB has the largest gold portfolio among banks (% of loans)
October 03, 2012 86
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
FY09 FY10 FY11 FY12
RWA/Loans (LHS) Share of gold loans (%)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
SIB Federal HDFCB
LilladherPrabhudas
0%
10%
20%
30%
40%
50%
60%
Yes
SIB
SIB
(Inc
l. N
RE)
BO
I
BO
B
IIB
Fed
eral
Kota
k
ING
Vys
ya
PNB
J&K
Axi
s
ICIC
I
SBI
HD
FCB
NRE de-reg further weakens a weak liability franchise
Weakening CASA franchise: SIB’s CASA has historically been low v/s peers, given low share of CA deposits at just 4-5% and lower than B/S growth in CASA has led to CASA ratio coming off from 24% to 19.5% currently. The negative news is that levers to aid a significant improvement in CA deposit seem limited at the disposal of the management.
NRI deposits – No more low cost: High share of low cost NRE deposits was always the saving grace and added ~7-8% to SIB’s low CASA of ~20-21%, taking share of low cost deposits to a respectable +25%. But after the de-reg of NRE deposits by RBI, NRE business-linked low cost deposits are just <1.5% of deposits and de-reg of NRI deposits have, thus, impacted an already weakening liability franchise.
Impact on margins material for SIB: SIB has already seen ~95% of the NRI TD reprise over the last nine months and hence, incremental margin impact is limited. However, NRI deposit de-reg has structurally brought down margins by ~15bps in our view – Margins remained relatively stable over the last three quarters as negative impact of de-reg was netted off by re-pricing of Rs30bn of high cost deposit.
We factor in spreads to come off by ~15bps over FY11-13E; however, margins remain stable due to the recent Rs5bn of QIP which would reduce leverage
Source: Company, PL Research
SIB’s CASA coming off over the years
Source: Company, PL Research
CASA worse off after the NRE deposit de-reg
Source: Company, PL Research
Mainly due to dismal CA ratio
October 03, 2012 87
10.0%
15.0%
20.0%
25.0%
30.0%
2006 2007 2008 2009 2010 2011 2012
CASA%
0%
5%
10%
15%
20%
25%
Ko
tak
HD
FCB
ING
…
Axi
s
IIB
ICIC
I
J&K
Yes
SBI
BO
B
PNB
BO
I
Fed
eral
SIB
LilladherPrabhudas NRE de-reg further weakens a weak liability franchise
Source: Company, PL Research
Source: Company, PL Research
Impact on margin is ~15bps
Spread to come off; margins to remain flat due to leverage impact of QIP
Source: Company, PL Research
Increase in NRE TD rates after de-regulation
Source: Company, PL Research
De-reg has turned ~20% of SIB’s low cost NRI deposits to high cost
October 03, 2012 88
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Current NRE TD (Pre De-
reg)
Dom. Saving Dom. TD NRE TD (Post
De-reg)
2.00%
2.20%
2.40%
2.60%
2.80%
3.00%
3.20%
3.40%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
E
20
14
E
Spread NIM
NRI Savings (Low cost)
18,599 42%
NRO TD (High cost)
12,990 29%
NRE TD (High
cost from Dec-
11)8,610 19%
FCNR4,400 10%
(% of deposits) Federal SIB
NRI (savings) - Already de-regulated) 8.5% 5.5%
NRO TD (Already de-regulated) 5.9% 3.8%
NRE TD (De-regulated in Nov-11) 2.3% 2.5%
FCNR (Rate increased in May-12) 3.2% 1.3%
Total 19.9% 13.2%
Margin impact (NRE TD Up 500bps + FCNR up 200bps) 0.13% 0.13%
LilladherPrabhudas
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
IIB
Axi
s
HD
FCB
ICIC
I
ING
Kota
k
SBI
PN
B
BO
I
Fed
eral
BO
B
Yes
J&K
SIB
Fees/Asset
Weak fee income base
Weak fee income franchise: SIB’s fee income at <0.6% of assets is among the lowest in private banks and is characteristic of an only liability franchise bank like most regional private banks in India. Fee/assets have come off from 0.7-0.8% to <0.6% assets as fee growth has not been able to keep pace with balance sheet growth – 24% CAGR balance sheet growth v/s 18% fee income growth over FY07-12.
Some corrective measures: Management acknowledges the weak link and expects to ramp up on fee income at least in the near term. They have moved their treasury to Mumbai and expect to generate higher FX income, going forward. On the retail side, they are targeting strong growth from retail FX and gold coin sales. SIB is also focusing on non-fund based business now but this would come with some credit risks.
Don’t expect significant jump in Fees/Assets: Overall, fee income could grow by ~% in FY13. However, we do not expect fees/assets to jump materially over the medium term as SIB lacks a full suite of corporate product offerings and wealth management on the retail side.
Source: Company, PL Research
Fees/Assets among the lowest
Source: Company, PL Research
Fees/Assets have come off
Source: Company, PL Research
Fee income growth v/s b/s growth in last 5yrs
October 03, 2012 89
Federal
J&K
BOI
BOB
SIB
SBI
ING
HDFCB
Kotak PNB
IIB
Yes
Axis
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
10.0% 20.0% 30.0% 40.0% 50.0%
Fees
(C
AG
R 5
ye
ar)
Balance Sheet (CAGR 5 year)
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
2005 2006 2007 2008 2009 2010 2011 2012
LilladherPrabhudas RIDF investments could see a significant jump
Big miss on PSL from FY12: Till FY11, SIB attained almost 40% on its PSL targets over FY05-11. However, RBI’s diktat on de-reg of gold loans as Agri and PSL, if not backed by land papers, led to ~17% contraction in SIB’s PSL book, leaving overall PSL compliance of SIB at just ~25% v/s ~40% in FY12.
Could see significant rise in RIDF calls: With a 15% gap on overall PSL and ~9% gap on Agri PSL targets, we believe RIDF calls on SIB could significantly increase over the next 2-3 years and with negative spreads on RIDF investments, we believe this could impact margins. Current RIDF book for SIB is just 3% of loans which is better than most peers. However, the current shortfalls could significantly add to the PSL burden.
Some corrective steps being taken, but gap too large to be filled: Management has initiated some steps to improve on PSL targets, including taking land papers in as many possible cases in gold lending business as well. However, filling the PSL gap, according to us, will only be a gradual process and thus, in the interim, we expect RIDF calls to inch up for SIB.
Source: Company, PL Research
PSL lending has come off to 25% v/s 40% target
Source: Company, PL Research
PSL book growth least for SIB
Source: Company, PL Research
RIDF burden small but can catch up quickly
October 03, 2012 90
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2005 2006 2007 2008 2009 2010 2011 2012
-10%
0%
10%
20%
30%
40%
50%
Yes
IIB
HD
FCB
Axi
s
Kota
k
PN
B
SBI
BO
B
ING
Vys
ya
BO
I
Fed
eral
J&K
SIB
ICIC
I
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
SBI
SIB
Axi
s
IIB J&K
HD
FCB
ICIC
I
ING
LilladherPrabhudas ROE Tree: Return ratios contingent on low credit costs
October 03, 2012 91
2008 2009 2010 2011 2012 2013E 2014E 2015E Comments
NIM/Assets 2.51% 2.85% 2.53% 2.78% 2.87% 2.85% 2.83% 2.80%
We expect spreads to come off but margins to remain flat
over FY13-14 due to the equity issue. We have not fully
factored in risk from high RIDF investments
Fees/Assets 0.74% 0.70% 0.58% 0.56% 0.58% 0.56% 0.54% 0.52%
Fee/asset have been coming off and though we expect ~18-
19% fee income growth, we do not expect fee/asset to
show any material improvement
Inv. Profits/Assets 0.21% 0.20% 0.35% 0.14% 0.12% 0.14% 0.14% 0.11%
Net revenues/Assets 3.46% 3.75% 3.46% 3.48% 3.56% 3.55% 3.50% 3.44%
Opex/Assets -1.65% -1.79% -1.63% -1.63% -1.73% -1.68% -1.66% -1.59%Opex/assets are in line with peers but due to low
revenues/assets, cost income at ~50% is among the highest
v/s peersProvisions/Assets -0.26% -0.31% -0.19% -0.28% -0.22% -0.37% -0.35% -0.37%
Credit costs remains the primary driver of return ratios. We
expect some marginal inch-up in provisions
Taxes/Assets -0.53% -0.58% -0.59% -0.54% -0.48% -0.45% -0.44% -0.44%
Costs/Assets -2.45% -2.68% -2.42% -2.45% -2.44% -2.49% -2.46% -2.40%
ROA 1.01% 1.06% 1.04% 1.03% 1.13% 1.05% 1.04% 1.04%
Expect ROAs to remain in the 1.0-1.1% range over the next
2-3 years - Risks from RIDF not yet fully captured in our
numbers
Equity/Assets 6.22% 6.62% 6.13% 5.56% 5.22% 5.57% 5.71% 5.36%
ROE 16.3% 16.0% 17.0% 18.5% 21.6% 18.9% 18.3% 19.4%
RORWA 1.72% 2.05% 2.24% 2.25% 2.54% 2.43% 2.40% 2.38%
High leverage with RWA/Loans at ~63% leads to ~19-10%
ROEs and ~2.3-2.4% RORWas despite low ROAs
LilladherPrabhudas Valuations: PT of Rs25/share
PT of Rs25/share; ~7% upside: We value SIB at 1.0x FY14 book and we have a Sep-13 PT of Rs25/share implying ~7% upside from the current levels.
Excluding asset quality, all other metrics deteriorating: SIB’s asset quality and underwriting remains a key advantage and we do not expect a significant deterioration in asset quality. However, most other metrics are deteriorating and hence, we expect ROAs to remain capped at ~1.0-1.1%, with increasing dependence on low credit costs to maintain ROAs at current level.
Valuations modest but re-rating very unlikely: Our implied valuation is modest at 1x FY14 for a bank generating ~19-20% ROEs and growing at ~23-25%; however, stagnating ROAs will cap valuations . Source: PL Research
Source: Company Data, Bloomberg
South Indian Bank : PT of Rs25/share
Market Cap/ CASA – In line with peers
Source: PL Research, Bloomberg
1-yr fwd P/B chart
October 03, 2012 92
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Jan
-05
Jun
-05
Nov
-05
Apr
-06
Sep
-06
Fe
b-0
7
Jul-
07
Dec
-07
Ma
y-0
8
Oct
-08
Mar
-09
Aug
-09
Jan
-10
Jun
-10
Nov
-10
Ap
r-1
1
Se
p-1
1
Fe
b-1
2
Jul-
12
SIB Average
Risk free rate 8.0%
Equity Risk Premium 6.0%
Beta 1.25
Cost of Equity 15.5%
Terminal growth 5.0%
Normalised ROE 15.6%
Stage 2 growth 14.0%
Sep-13 PT 25
Implied Mar-14 P/B 1.01
Implied Mar-14 P/E 5.9
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
200.0%
Yes
IIB
HD
FCB
ICIC
I
Fede
ral
Axi
s
ING
SIB
BO
B
SBI
PN
B
BO
I
J&K
LilladherPrabhudas Financials
Source: Company, PL Research
We expect cost-income to moderate
Source: Company, PL Research
We factor in some inch-up in slippages
Source: Company, PL Research
Return ratios to moderate
October 03, 2012 93
Source: Company, PL Research
Loan/Deposit Growth
Source: Company, PL Research
Expect some moderation in spreads
Source: Company, PL Research
We factor in 18-19% fee income growth
0.0%
10.0%
20.0%
30.0%
40.0%
20
08
20
09
20
10
20
11
20
12
2013
E
2014
E
20
15
E
Deposit Growth Loan Growth
1.50%
2.00%
2.50%
3.00%
20
08
20
09
20
10
20
11
2012
2013
E
20
14
E
20
15
E
NIM NIM Capital Adjusted
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
20
08
2009
20
10
20
11
20
12
2013
E
2014
E
2015
E
Fees growth
1.5%1.6%1.6%1.7%1.7%1.8%1.8%1.9%
46%47%48%49%50%51%52%53%
20
08
20
09
2010
20
11
20
12
2013
E
20
14
E
Cost-Income Cost-Asset (RHS)
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
2008
20
09
20
10
20
11
20
12
20
13
E
20
14
E
20
15
E
Gross NPA Gross Slippage
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
1.10%
1.20%
2008
20
09
20
10
20
11
20
12
20
13
E
20
14
E
2015
E
RoA RoE (RHS)
LilladherPrabhudas Company Profile
Source: Company, PL Research
Source: Company, PL Research
Loan book mix
Gold loans now 20% of SIB’s loan portfolio
Source: Company, PL Research
Deposit mix
Source: NSE India
Shareholding Pattern
October 03, 2012 94
Corporate
53.3%
SME
6.6%
Agri5.9%
Retail (Excl. Gold
Loan)14.4%
Gold Loan
19.8%
FIIs
46.09%
MF's
1.22%Insurance
3.76%
FIs
2.66%
Individuals
34.02%
Others12.25%
Savings deposits
16%
Current deposts
4%
Term deposits
80%0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
FY09 FY10 FY11 FY12
RWA/Loans (LHS) Share of gold loans (%)
LilladherPrabhudas Financials
October 03, 2012 95
Income Statement (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Int. Earned from Adv. 15,186 19,300 28,681 37,271 44,389
Int. Earned from Invt. 3,781 4,815 6,211 7,596 9,373
Others - - - - -
Total Interest Income 19,357 24,460 35,834 45,904 54,799
Interest expense 13,674 16,549 25,617 33,478 39,700
NII 5,683 7,911 10,217 12,426 15,099
Growth (%) 8.7 39.2 29.2 21.6 21.5
Treasury Income 780 384 416 600 750
NTNII 1,305 1,583 2,055 2,424 2,861
Non Interest Income 2,085 1,967 2,471 3,024 3,611
Total Income 21,442 26,427 38,305 48,928 58,410
Growth (%) 15.8 23.2 44.9 27.7 19.4
Operating Expense 3,662 4,625 6,173 7,315 8,882
Operating Profit 4,106 5,253 6,515 8,136 9,828
Growth (%) 14.5 27.9 24.0 24.9 20.8
NPA Provisions 436 496 601 1,600 1,888
Investment Provisions (409) 94 151 - -
Total Provisions 433 798 792 1,600 1,888
PBT 3,673 4,455 5,723 6,535 7,940
Tax Provisions 1,336 1,529 1,707 1,949 2,368
Effective Tax Rate (%) 36.4 34.3 29.8 29.8 29.8
PAT 2,338 2,926 4,017 4,586 5,572
Growth (%) 20.1 25.1 37.3 14.2 21.5
Source: Company Data, PL Research
Balance Sheet (Rs m)
Y/e March FY10 FY11 FY12 FY13E FY14E
Equity 1,131 1,131 1,134 1,333 1,333
Networth 14,667 16,936 20,229 28,346 32,694
Adj. Networth 13,911 16,217 19,325 27,215 31,263
Deposits 230,115 297,211 365,005 441,639 549,652
Low Cost deposits 53,233 64,041 71,793 84,795 105,533
Total Liabilities 255,155 326,666 402,226 488,088 601,672
Net Advances 158,228 204,887 272,807 332,825 412,703
Growth (%) 33.5 29.5 33.2 22.0 24.0
Investments 71,555 89,238 93,999 113,436 138,423
Total Assets 255,155 326,666 402,226 488,088 601,672
Source: Company Data, PL Research
Key Ratios
Y/e March FY10 FY11 FY12 FY13E FY14E
Gross NPA (%) 1.33 1.12 0.98 1.13 1.24
Net NPA (%) 0.48 0.35 0.33 0.34 0.35
NPA Coverage (%) 64.2 68.8 66.2 70.0 72.0
Gross Slippages (%) 1.5% 0.7% 0.8% 1.0% 1.0%
Credit Cost (%) 0.3% 0.3% 0.3% 0.5% 0.5%
Total CAR 15.4% 14.0% 14.0% 15.4% 14.2%
Tier I Capital 12.4% 11.3% 11.5% 13.4% 12.6%
Tier II Capital 3.0% 2.7% 2.5% 2.0% 1.6%
Source: Company Data, PL Research
LilladherPrabhudas Disclaimer
October 03, 2012 96
BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months
Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months
Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month
Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly
This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.
The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.
Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.
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PL’s Recommendation Nomenclature
Rating Distribution of Research Coverage
22.3%
54.1%
23.0%
0.7%0%
10%
20%
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40%
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