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


PAT per branch v/s Mcap per branch


Deposit per branch v/s Mcap per branch


Urban/Rural mix v/s Mcap per branch


Per branch Mcap in line with PSU banks


Mcap to advances also in line with PSU banks


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


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.


Overall CASA ratio – J&K scores the best


CASA/branch – SIB/FB significantly lower than peers


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.


CA ratio: ING best in class


CA/branch (Rsm): ING/J&K compare well v/s peers


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.


SA ratio: J&K bank best in the business


SA/branch also best in class for J&K Bank


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.


Low branch addition by regional private banks


B/S growth v/s Branch growth


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



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.


Deposit and CASA per branch


Growth in CASA/branch (5 yrs CAGR)


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


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)


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.


ING worst on Cost-to-Assets


ING also higher on Cost-to-Income


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.


Employee/assets highest for ING Vysya


Per employee cost don’t wary much b/w banks


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



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.


Reported Margins – FB in 1st quartile


Leverage adjusted Margins – FB moves to 2nd quartile


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



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.


Only ING compares well v/s private peers on fees (Fees as a % of assets)


For ING fees covers ~65% of Opex. For others it is lower than 40%


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…


Matrix (Non-Fund based exposure v/s fee/assets)


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.


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


SIB – Highest on secured lending


Gross slippages (FY09-12) high for FB…


…so are its credit costs (avg. FY09-12)


Gross NPAs low, expect for FB


Restructuring also low ,expect for FB


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.


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.


Tier 1 capital comfortable for all


RWA/Loans low especially for SIB/FB due to gold loans


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


Total PSL compliance (% of loans)


RIDF investments (% of loans)


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


October 03, 2012 34


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


October 03, 2012 35


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


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

COMPANIES

October 03, 2012 37

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


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


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


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


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


J&K: Per capita Income slowing catching up

Source: Tourism Ministry, PL Research

Tourism has picked up substantially


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


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.


J&K Bank has one of the highest CASA ratios in India


J&K CASA is among the highest, especially deposits within J&K


Giving J&K a big cost of funds advantage


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.



Outside J&K: Lending largely to “AAA” corporates

Slippages and credit costs


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



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


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


Marginal inch-up in cost expected in FY14


Factoring in some build-up in slippages


ROAs and ROEs remain best in class

October 03, 2012 49


Balance sheet growth picking up


NIMs: Marginal contraction linked to leverage


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



Liabilities within and outside J&K

Loan Mix

Source: NSE India

Shareholding Pattern


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)


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


Balance Sheet (Rs m)


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


Key Ratios


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%


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




Growth (%) 27.7 21.3 20.1 20.1 18.8


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




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



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.


ING more urban-centric than regional peers, in line with large private banks


65% branches in Metro+Urban centres (FY12)

October 03, 2012 53


~80% branch addition in Metro+Urban (FY08-12)


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


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


CA per branch also among the best

October 03, 2012 55


SA deposits : Still some way to go


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.


Fee/Assets comparable to large private banks


Fees is ~35% of total Income (ex-treasury)

October 03, 2012 56


Large proportion of fee corporate linked


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



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



Coverage has inched up considerably

Adjusted for coverage credit costs have remained low


SME Book: Largely trading linked


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.


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


Branch/employee growth not high for ING

October 03, 2012 60


Branch efficiency among the worst though


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


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.


Efficiency worst among Urban -centric banks

October 03, 2012 61


ING slowly closing on efficiency gap with peers (deposits/branch)


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)


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


Cost-to-income to improve from 59% to 52%


Have assumed a normalization in credit costs


ROA/ROEs on a upward trajectory

October 03, 2012 63


Expect loan growth at 20-22%


Margins have inched up; expect flat trajectory from here on


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


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


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


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


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)


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%


Beta 1.10





Sep-13 PT 480



-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

IIB Kotak HDFCB

LilladherPrabhudas Summary Profile


Shareholding Pattern (Jun-12)


Loan Mix


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


October 03, 2012 66




Int. Earned from Invt. 5,179 21 6 6 6

Others - - - - -



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


Total Income 28,531 33,490 45,266 55,533 65,316

Growth (%) 2.4 17.4 35.2 22.7 17.6



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) - -


PBT 3,715 4,836 6,539 8,188 10,370

Tax Provisions 1,293 1,650 1,976 2,702 3,422


PAT 2,422 3,186 4,563 5,486 6,948

Growth (%) 28.3 31.5 43.2 20.2 26.7




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



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


Key Ratios


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%


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




Growth (%) 7.3 23.8 11.8 12.9 17.2


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




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



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.


~55% branches in Kerala (FY12)


Branch Expansion (FY10-12) largely in Kerala and 5 states planned


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. Figures in Rs bn

Calibrated growth over the last two years

Loan growth has been largely driven by large corporates in last three yrs


Share of Retail and SME has come off as SME appraisal system has been overhauled and mortgage growth has been arrested


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.


CA franchise very weak SA remains relatively strong


NRI deposits: Largely savings, limited NRE TD (% of overall deposits)


Rates up ~5-6% on NRE Term deposits


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.


Margins to moderate despite flat spreads – Impact of higher leverage


Reported margins amongst the highest...


…but margins adjusted for leverage in the middle


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


Fees/Assets low but better than most South-based peers

Fees/Asset coming off largely due to lower recoveries


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


Opex/assets comparable to peers


Significant jump in branch expansion


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)


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.)


Slippages a function of high credit costs in FY05-08


Slippages coming off but still elevated


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


Reported credit costs and Adjusted credit costs

…but ~50-60bps recovered every year


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



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


Cost income to peak in FY13


Gross slippages lower than FY08-11 levels


ROEs to inch up to 16% by FY14-15

October 03, 2012 78


Some acceleration in loan growth now


Margins to moderate due to higher leverage


Fees growth to bounce back once base factors in lower recoveries

0%

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20

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E


1.00%

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-10.0%

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Fees growth

1.55%

1.60%

1.65%

1.70%

1.75%

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1.85%

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E


0.00%

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2011

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E


0.0%

5.0%

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2008

20

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2015

E

RoA RoE (RHS)


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


FB : PT of Rs525/share

FB v/s Other regional banks


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%


Beta 1.25





Sep-13 PT 525



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



Loan Mix


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


October 03, 2012 81





Others - - - - -



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


Total Income 42,041 45,688 60,907 71,398 82,251

Growth (%) 9.7 8.7 33.3 17.2 15.2



Growth (%) 0.4 12.8 5.6 6.1 19.7

NPA Provisions 4,133 5,032 2,582 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


PAT 4,645 5,871 7,768 8,253 9,980

Growth (%) (7.2) 26.4 32.3 6.2 20.9




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



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


Key Ratios


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%


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




Growth (%) 8.7 39.2 29.2 21.6 21.5


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




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



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


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


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.


Mid corporate and Retail lender


Share of secured lending highest among peers


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


... but even that is relatively safe


We factor in some inch-up in credit costs


The only risk is high Infra exposure…

October 03, 2012 85


Structural improvement in Asset Quality…


….in line with build-up in the secured book


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



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


SIB’s CASA coming off over the years


CASA worse off after the NRE deposit de-reg


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



Impact on margin is ~15bps

Spread to come off; margins to remain flat due to leverage impact of QIP


Increase in NRE TD rates after de-regulation


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.


Fees/Assets among the lowest


Fees/Assets have come off


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.


PSL lending has come off to 25% v/s 40% target


PSL book growth least for SIB


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


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%


Beta 1.25





Sep-13 PT 25



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



We expect cost-income to moderate


We factor in some inch-up in slippages


Return ratios to moderate

October 03, 2012 93


Loan/Deposit Growth


Expect some moderation in spreads


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


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


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


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


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



Loan book mix

Gold loans now 20% of SIB’s loan portfolio


Deposit mix

Source: NSE India


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 (%)


October 03, 2012 95





Others - - - - -



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


Total Income 21,442 26,427 38,305 48,928 58,410

Growth (%) 15.8 23.2 44.9 27.7 19.4



Growth (%) 14.5 27.9 24.0 24.9 20.8

NPA Provisions 436 496 601 1,600 1,888


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


PAT 2,338 2,926 4,017 4,586 5,572

Growth (%) 20.1 25.1 37.3 14.2 21.5




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



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


Key Ratios


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%


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.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India.

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

PL’s Recommendation Nomenclature

Rating Distribution of Research Coverage

22.3%

54.1%

23.0%

0.7%0%

10%

20%

30%

40%

50%

60%

BUY Accumulate Reduce Sell

% o

f To

tal C

ove

rage

VYSBANK_20121003

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