Banking & Nbfc Q411 Earnings & Policy Impacts (23rd May11)

Banking & NBFCs Q4’11 Earnings & Policy impactsHigh InflationHigh Inflation

Probable credit demand slowdown

Higher credit cost & cost of deposits

Analyst: Abhisek SasmalMail: [email protected]: 91 033 3051 2175

23rd May’2011

Phone: 91-033-3051-2175

ContentsMacro Economic Trend During Q4’11 3-6

Deployment of Bank Credit by Major Sectors 7

Impact of Savings Bank Rate hike 8-9

Impact of increase in the provision requirements 10-11

Impact of Other RBI notifications 12

Impact of Asset Liability Mismatch 13-14

I di h P i b k (l hik & i fl i l ) 15Impact on credit growth - Private banks (last rate hike & inflationary cycle) 15

Impact on credit growth – Public Banks ( last rate hike & inflationary cycle) 16

Impact of increasing rates on credit growth - Now & Then (comparative situation) 17

Impact on forward earnings of companies under our coverage 18Impact on forward earnings of companies under our coverage 18

Target Price Revisions 19-20

Banking Quarterly Performance Analysis (Q4’11) 21

NBFCs Performance Analysis (Q4’11) 22NBFCs Performance Analysis (Q4 11) 22

Banking Sector – Outlook – near term pain 23

Quarterly Performance Analysis (Appendix 1) 24

Quarterly Performance Analysis (Appendix 2) 25Q y y ( pp )

Key Financial Snapshot (Appendix 3) 26

Key Financial Snapshot (Appendix 4) 27

Return Summery 28

23rd May’2011

y

Macro-Economic Trend during Q4’11

The Indian Banking sector which has been a proxy to the Indian economy, is growing strong in fourth quarter too. During Q4-2011, RBIincreased the repo rate by 50 basis points from 6.25% to 6.75%, with a similar increase in the reverse repo rate from 5.25% to 5.75%. This takesthe overall increase during fiscal year 2011 to 150 basis points in the repo rate and 200 basis points in the reverse repo rate. Inflation remains thekey concern for the economy especially since December 2010 when food prices increased steeply Food prices have now started abating butkey concern for the economy, especially since December 2010 when food prices increased steeply. Food prices have now started abating buthave been replaced by rise in fuel and non-food manufactured products inflation. Core inflation (i.e. manufactured products excluding food)increased to 7.2% in March 2011. With domestic fuel prices yet to fully adjust to international oil price increases and also pressures rising innon-food manufactured products, we believe risks to inflation are clearly on the upside. Headline inflation as measured by the Wholesale PriceIndex, or WPI, was at 9.0% in March.

Policy rates & Reserve ratio trend

12%

Inflation Trend (y-o-y %)

8.00%

9.00%

10.00%

4%

6%

8%

10%

3.00%

4.00%

5.00%

6.00%

7.00%

-2%

0%

2%

0.00%

1.00%

2.00%

Source: RBI, Microsec Research

CRR Repo Rate Reverse Repo

23rd May’20113

Macro-Economic Trend during Q4’11…..

High global crude oil and othercommodity prices pose the biggest risk toIndia’s growth and inflation. Persistentlyhigh inflation has kept inflationg pexpectations elevated. Inflation duringFY12 is likely to moderate slowly but mayremain above the comfort level as thepass-through of international commodityprices is likely to continue.


23rd May’20114

Macro-Economic Trend during Q4’11…..The statutory liquidity ratio was maintained at 24.0% in response to the deficit in systemic liquidity during the quarter. However, liquidityconditions eased through the quarter on the back of increased government spending with government cash balances with RBI falling to a low levelof INR 1 billion by mid-March 2011. Interest rates on most of the short-term money market instruments including T-bill yields, inter-bank callmoney rates, rates on Commercial Papers and rates on Certificate of deposits have showed a mild decline. In the mid-quarter monetary policyreview announced in March 2011, RBI has indicated a comfort level for overall liquidity to move in the range of +/-1% of net demand and timeq y gliabilities (NDTL). Also, the special liquidity measures in terms of additional liquidity support and second LAF facility, which was to end in April2011, were extended up to May 2011. Going forward, we expect liquidity to come under pressure again around June 2011 due to advance taxpayments.

d ld21

IIP trend (YoY%)

5 00

6.00

7.00

8.00

9.00

(%)

Government Bond Yield Curve

369

121518

3.00

4.00

5.00(

4/1/2010 3/31/2011

-303

605

102030405060

1

2

3

4

5

468

1012141618

Source: RBI Microsec Research

00FY06 FY07 FY08 FY09 FY10 FY11 FY12E

Central Govt Net Market Borrowing (INR Tn)

Bank's share in Govt O/S Bonds(%) RHS

02

CD 3month CD 6month CD 12month

23rd May’2011


5

CD 3month CD 6month CD 12month

Macro-Economic Trend during Q4’11…..Th di h i d d i h i h f d di h 21 2% M h 25 2011 dThe credit growth remained strong during the quarter with a year-on-year non-food credit growth at 21.2% at March 25, 2011, compared to17.1% growth at March 26, 2010. Based on sector-wise data published by RBI, as of end February 2011, the growth was largely driven byindustry and services sectors; however, the deposit growth in the system continued to lag recording a growth of just 15.8% on year-on-year basisat March 25, 2011 as against 17.2% at March 26, 2010. This moderation was due to a decline in demand deposits by 1% at March25, 2011, compared to a growth of 23.4% at March 26, 2010. Time deposits grew by 18.7% in FY2011 compared to a growth of 16.2% in theprevious year Fiscal 2011 ended with the banking system reporting a credit to deposit ratio of 75 68% compared to 72 22% at the end ofprevious year. Fiscal 2011 ended with the banking system reporting a credit-to deposit ratio of 75.68% compared to 72.22% at the end offinancial year 2010.During the quarter, we saw most banks increase their deposit rates in the range of 25-150 basis points for various maturities. Lending rates werealso increased by most banks with 65 to 100 basis points increase in base rates during the quarter.

30 1000 Liquidity condition improved during Q4’11

10

15

20

25 Credit Growth% Deposit Growth%

0

500

Liquidity condition improved during Q4 11

0

5

-1500

-1000

-500

I t l C/D tiIncremental C/D ratio

23rd May’2011


6

Deployment of Bank Credit by Major SectorsSr.No Sector Outstanding as on (INR Bn)Sr.No Sector Outstanding as on ( )

Mar.27, 2009 Mar.26, 2010 Mar.25, 2011 % Total Credit YoY%

Non-food Credit (1 to 4) 26,018 30,400 36,674 74.5% 20.6%1 Agriculture & Allied Activities 3,387 4,161 4,603 9.3% 10.6%2 Industry (Micro & Small, Medium and Large ) 10,544 13,115 16,208 32.9% 23.6%2.1 Micro & Small 1,690 2,064 2,291 4.7% 11.0%2.2 Medium 1,222 1,326 1,846 3.7% 39.2%2.3 Large 7,632 9,724 12,071 24.5% 24.1%3 Services 6,463 7,268 9,008 18.3% 23.9%3.1 Transport Operators 393 525 655 1.3% 24.7%3.2 Computer Software 97 125 151 0.3% 20.3%3.3 Tourism, Hotels & Restaurants 136 194 277 0.6% 42.9%3.4 Shipping 94 92 92 0.2% -0.2%3.5 Professional Services 443 434 603 1.2% 38.9%3.6 Trade 1,444 1,645 1,863 3.8% 13.2%3.6.1 Wholesale Trade (other than food procurement) 674 864 1,036 2.1% 19.9%3.6.2 Retail Trade 770 781 827 1.7% 5.8%3.7 Commercial Real Estate 924 921 1,118 2.3% 21.4%3.8 Non-Banking Financial Companies (NBFCs) 989 1,134 1,756 3.6% 54.8%3.9 Other services 1,944 2,197 2,494 5.1% 13.5%4 Personal Loans 5,625 5,856 6 854 13 9% 17 0%4 Personal Loans 5,625 5,856 6,854 13.9% 17.0%4.1 Consumer Durables 82 83 102 0.2% 22.4%4.2 Housing (Including Priority Sector Housing) 2,794 3,009 3,461 7.0% 15.0%4.3 Advances against Fixed Deposits (Including FCNR (B), NRNR Deposits etc.) 487 487 605 1.2% 24.4%4.4 Advances to Individuals against share, bonds, etc. 23 29 36 0.1% 26.2%4.5 Credit Card Outstanding 280 201 181 0.4% -10.2%4.6 Education 286 369 437 0.9% 18.6%4 7 Vehicle Loans 620 638 793 1 6% 24 3%4.7 Vehicle Loans 620 638 793 1.6% 24.3%4.8 Other Personal Loans 1,054 1,041 1,238 2.5% 19.0%

5 Priority Sector 9324.59 10921.79 12583.86 25.5% 15.2%5.1 Agriculture & Allied Activities 3386.56 4161.33 4603.33 9.3% 10.6%5.2 Micro & Small Enterprises 3091.95 3735.3 4549.95 9.2% 21.8%5.2(a) Manufacturing 1689.97 2064.01 2291.01 4.7% 11.0%5 2(b) Services 1401 98 1671 3 2258 94 4 6% 35 2%5.2(b) Services 1401.98 1671.3 2258.94 4.6% 35.2%5.3 Housing 1971.1 2178.77 2306.86 4.7% 5.9%5.4 Micro-Credit 165.29 217.99 268.95 0.5% 23.4%5.5 Education Loans 278.61 362.47 430.26 0.9% 18.7%5.6 State-Sponsored Orgs. for SC/ST 24.51 27.49 20.48 0.0% -25.5%5.7 Weaker Sections 1394.22 1769.57 2043.32 4.1% 15.5%5.8 Export Credit 259.61 288.66 318.21 0.6% 10.2%

23rd May’2011


7

Impact of Savings Bank Rate hike…RBI hiked the savings bank deposit interest rate to 4% from the current 3.5% with immediate effect, even as the final decision to deregulateRBI hiked the savings bank deposit interest rate to 4% from the current 3.5% with immediate effect, even as the final decision to deregulatesavings rate remains pending. But, it was expected as term deposit rates have gone up significantly over the years. A core part of savings accountbehaves as fixed deposit so it should earn better rates. The increase in the savings bank deposit rates likely to impact margins of banks, especiallybanks with higher savings share in the overall deposit mix – impact more likely for PSU banks. However the net impact on margins is difficult topredict because the banks may pass on this increase to end customers in the form of 1) higher fees on transactions 2) higher lending rates etc.This will also vary bank to bank according to their priorities.y g p

Assuming, the banks don’t pass on the 50 bps hike in Savings bank rate, the impact on their FY12 expected earnings is as under -

Public Sector Banks TD% SA% CA%

Increase due to SA Rate hike

Impact on NIMs FY12E

Impact on NII% (FY12E) Impact on PBT % FY12 E

Andhra Bank 70.94 21.3 7.76 10.7 7.7 2.68 4.28BOB 65 6 27 7 4 13 5 10 5 3 68 5 88BOB 65.6 27 7.4 13.5 10.5 3.68 5.88BOI 75.5 19.6 4.8 9.8 6.8 2.38 3.81Canara Bank 71 22.2 6.8 11.1 8.1 2.84 4.54CBI 65.1 28.3 6.6 14.2 11.2 3.90 6.24Corporation Bank 75 15.3 9.7 7.7 4.7 1.63 2.60IDBI 79.1 7.7 13.2 3.9 0.9 0.30 0.48Indian Bank 67.5 25.7 6.8 12.9 9.9 3.45 5.52IOB 69 8 24 3 6 12 2 9 2 3 20 5 12IOB 69.8 24.3 6 12.2 9.2 3.20 5.12OBC 75.4 18.9 5.7 9.5 6.5 2.26 3.61PNB 61.5 30.4 8.1 15.2 12.2 4.27 6.83SBI* 53.1 35.5 11.4 17.8 14.8 5.16 8.26Union Bank 68.2 22.1 9.7 11.1 8.1 2.82 4.51Vijaya Bank 74.8 18.2 7 9.1 6.1 2.14 3.42

Private Sector Banks TD% SA% CA%Increase due to SA

Rate hikeImpact on NIMs

FY12EImpact on NII%

(FY12E) Impact on PBT % FY12 EAxis Bank 58.9 21.6 19.5 10.8 7.8 2.73 3.69Dhanlaxmi Bank 77.1 10.7 12.2 5.4 2.4 0.82 1.11Federal Bank* 70.4 24 5.7 12.0 9.0 3.15 4.25HDFC Bank 47.3 30.4 22.3 15.2 12.2 4.27 5.76ICICI Bank 54.9 29.6 15.4 14.8 11.8 4.13 5.58

C l h “D R d” i d “D G ” l i d * 3Q’11 S d l S C Bl b Mi R h

IndusInd Bank 72.8 8.9 18.3 4.5 1.5 0.51 0.69ING Vysya Bank 65.4 17.7 16.9 8.9 5.9 2.05 2.76J&K Bank* 60.4 28.8 10.8 14.4 11.4 3.99 5.39Karnataka* 75.1 18.1 6.8 9.1 6.1 2.12 2.86Karur Vysya Bank* 75 14 11 7.0 4.0 1.40 1.89DCB 64.8 19.41 15.79 9.7 6.7 2.35 3.17

23rd May’20118

Color scheme – “Deep Red” – worst impacted , “Deep Green” – least impacted * 3Q’11 Standalone Source: Company, Bloomberg, Microsec Research

Savings Bank Rate Deregulation - Case StudyI di ’ b h i h d l i f d i i d b k h 1980 h b k i d ff 8 d i fIndia’s brush with deregulation of deposit interest rates date back to the 1980s when banks were permitted to offer up to 8 per cent on deposits for atenure between 15 days and up to a year. It triggered a flight of capital from current accounts and partially from savings bank accounts to the shortertenure deposits. The deregulation plan proved to be disastrous as it triggered a rate war among banks. The freedom to set interest rates waswithdrawn in May 1985. The process of interest rate deregulation resumed in 1992 after the liberalization. Bank won back the freedom to set interestrates in phases, leaving the savings bank rate as the only administered rate at 3.5%.

Global experience

Interest rates on savings account in developed countries such asCanada, Japan, Australia, New Zealand, UK, and USA are all deregulatedand determined by the commercial banks themselves on the basis ofand determined by the commercial banks themselves on the basis ofmarket interest rates. Most savings bank accounts may carry customercharges if the number of transactions exceeds the permissible level.

In response to the recent deregulation of SB rates in Hong Kong, anumber of banks launched new products such as combined savings and

Source: RBI, Telegraph, Google

number of banks launched new products such as combined savings andchecking accounts and Hong Kong inter-bank offered rate (HIBOR)linked savings products. Some also revised fees and charges and minimumbalance requirements, and introduced tiered structures of interest rates.

However, we need to understand that unlike many other countries in Asia as well as other parts of the world, the Indian situation is different. Alarge number of people in India are from the rural background with less saving. Deregulation of savings bank rate would work against financialinclusion as public sector banks saddle with all un-remunerative accounts. Finally, if banks had the freedom to set the savings bank rate, they couldlower the rate in times of surplus liquidity to levels that are lower than at present. This would hurt senior citizens and pensioners who depend oninterest as a source of regular income

Access our earlier report on SB rate Deregulation http://www.microsec.in/Static/Pdf/634196444626714000_Event%20Note%20-%20Proposal%20on%20freeing%20Savings%20Bank%20rate.pdf

interest as a source of regular income.

23rd May’20119

Impact of increase in the provision requirements New Provision requirements for NPAs

Category Earlier (%) Now (%) Sub-standard (Secured) 10% 15%Sub-standard (Un-secured) 20% 25%Secured -Doubtful -upto 1 year 20% 25%Secured -Doubtful -From 1-3 year 30% 40%

New Provision requirements for NPAs

yRestructured -Standard 0.25-1% 2% in 1st 2 years from date of restructuring

Restructured -Standard -Where moratorium of interest / principal 0.25-1% 2% in period of moratorium + 2 years thereafter Restructured -NPA -When upgraded to standard 0.25-1% 2% in the 1st year from the date of up-gradation

We expect limited impact of revised guidelines on NPA provisioning However guidelines on provision on restructured assets (RA) may effectSource: RBI, Microsec Research

We expect limited impact of revised guidelines on NPA provisioning. However guidelines on provision on restructured assets (RA) may effectbank’s profitability in FY12, specially for PSU banks where the proportion of RAs to the overall advances are higher than their private peers.

Advances (INR Mn)

% of advances

NPA coverage (%)

Additional Prov FY11 PBTFY12E PBT

Additioan Prov/ PBT Average Impact%

on FY12E PBTPublic Sector Banks Restructured book (INR Mn) 1.25% 1.75% INR Bn INR Bn 1.25% 1.75%M ) adva ces (%)boo ( N M ) . 5% .75% N N . 5% .75%

Andhra Bank 27,145 714,353 3.8 78 3.39 4.75 17.67 20.85 1.6% 2.3% 2.0%

BOB 67,114 2,286,764 2.9 85 8.39 11.74 56.50 66.67 1.3% 1.8% 1.5%

BOI 106,446 2,130,962 5 72.2 13.31 18.63 34.95 41.25 3.2% 4.5% 3.9%

Canara Bank 87,440 1,898,820 4.6 75.9 10.93 15.30 50.26 59.31 1.8% 2.6% 2.2%

CBI 47,710 1,163,090 4.1 70.3 5.96 8.35 16.59 19.58 3.0% 4.3% 3.7%

Corporation Bank 31,344 868,504 3.6 74.7 3.92 5.49 19.34 22.82 1.7% 2.4% 2.1%

IDBI 105,470 1,570,981 6.7 74.7 13.18 18.46 22.81 29.09 4.5% 6.3% 5.4%

Indian Bank 52,750 757,260 7 84.3 6.59 9.23 26.34 31.09 2.1% 3.0% 2.5%

Indian Overseas Bank 69,065 1,118,330 6.2 70 8.63 12.09 15.92 17.78 4.9% 6.8% 5.8%

OBC 52,500 959,082 5.5 76.8 6.56 9.19 20.39 24.06 2.7% 3.8% 3.3%

PNB 140,900 2,212,520 6.4 77.2 17.61 24.66 65.64 77.45 2.3% 3.2% 2.7%

SBI* 183,950 7,266,490 2.5 64.1 22.99 32.19 139.26 164.33 1.4% 2.0% 1.7%

Union Bank 50,649 1,337,870 3.8 70.2 6.33 8.86 29.55 34.87 1.8% 2.5% 2.2%

Vijaya Bank 12,630 435,700 3.8 67.6 1.58 2.21 6.84 8.07 2.0% 2.7% 2.3%

C l h “D R d” i d “D G ” l i d * 3Q’11 S d l S C Bl b Mi R h

23rd May’201110


Impact of increase in the provision requirements

Restructured book (INR Mn)

Advances (INR Mn)

% of advances

NPA coverage (%)

Additional ProvAdditioan Prov/

PBTAverage Impact%

on FY12E PBTPrivate Sector Banks 1.25% 1.75% FY11 PBTFY12E PBT 1.25% 1.75%

INR Bn INR BnAxis Bank 19,300 1,424,078 1.4 80.9 2.41 3.38 51.36 56.94 0.4% 0.6% 0.5%Dhanlaxmi Bank 50 90,652 0.1 59.1 0.01 0.01 0.40 0.47 0.1% 0.2% 0.2%Federal Bank* 13,510 282,400 4.8 80.3 1.69 2.36 9.02 10.73 1.6% 2.2% 1.9%ICICI Bank 25,620 2,163,659 1.2 76 3.20 4.48 67.61 80.45 0.4% 0.6% 0.5%IndusInd Bank 733 261,657 0.3 72.6 0.09 0.13 8.80 10.47 0.1% 0.1% 0.1%ING Vysya Bank 3,200 236,021 0.3 83.4 0.40 0.56 4.84 5.76 0.7% 1.0% 0.8%J&K Bank* 3 906 253 627 1 5 99 8 0 49 0 68 7 92 9 42 0 5% 0 7% 0 6%J&K Bank 3,906 253,627 1.5 99.8 0.49 0.68 7.92 9.42 0.5% 0.7% 0.6%Karnataka Bank * 15,770 162,819 9.7 70 1.97 2.76 1.90 2.26 8.7% 12.2% 10.5%Karur Vysya Bank* 5,080 165,140 3.1 87.4 0.64 0.89 4.26 5.07 1.3% 1.8% 1.5%Yes Bank 829 343,636 0.2 88.6 0.10 0.15 10.92 13.00 0.1% 0.1% 0.1%DCB 428 42,714 1.0 82 0.05 0.07 0.29 0.35 1.5% 2.2% 1.8%HDFC Bank 5,000 1,599,826 0.3 83 0.63 0.88 58.19 69.08 0.1% 0.13% 0.1%

If we calculate the combo impact of 50 bps hike in SB rates and increase in the provisions on FY12 expected PBT, then we can see the worstimpact will be on IOB, SBI & Central bank of India in PSU Space and Karnataka bank, Federal bank & ICICI bank in private space. The average


impact for PSU banks would be 7.6% to their FY12 expected PBT. For private banks, the impact would be much lesser to the tune of 4.9%.

However the important thing to remember here is that Banks can pass on these cost to its end customers. Infact, after RBI’s annual meet on 3rd

May’11, a slew of banks like IDBI Bank, Indian Bank, YES bank, OBC , PNB & Bank of Maharashtra (BoM) has increased its base rate by 50bps. With the increase, the base rate for PNB, OBC, IDBI and BoM stand at 10% while the private sector lender YES Bank will be at 9.50%.BPLR f PNB d 13 50% OBC 14 25% IDBI b k 14 50% B M 14 25% d Y B k 19% H h i i hi hBPLR of PNB stands at 13.50%, OBC at 14.25%, IDBI bank 14.50%, BoM 14.25% and Yes Bank 19% . However the interesting things to watchin coming months is that how much it would effect the domestic credit demand. We have tried to predict the impact on credit growth in pages15-17 where we have re-looked the previous rate hike cycle.

23rd May’201111

Impact of Other RBI notifications RBI notification on Priority sector status

The Reserve Bank of India (RBI), in its notification dated 3rd May 11, has indicated that bank loans to NBFCs excluding micro finance institutions(MFIs) will not be classified as priority sector lending. Loss of priority sector status on bank borrowings would increase the cost of funds forNBFCs. RBI is likely to issue separate guidelines for assignment/securitization. Any substantial changes due to the new regulation couldy p g g y g gconsiderably impact the profitability of asset financing NBFCs . On an average 10-15% of the total borrowings for these NBFCs are for prioritySector lending . Removal of PSL status means in 4-5 bps increase in cost of funds simple arithmetic term.

However, as per managements, priority sector borrowings are either at normal bank rates or at negligible differential (between priority and non-priority borrowing rates), which is likely to be passed on, hence protecting NIMs.

RBI has accepted the Malegam committee recommendations for microfinance companies

RBI's final Malegam Committee

For MFIs proposals recommendationsRBI has decided to broadly accept the recommendations of the Malegam Committeereport for micro-finance institutions and is likely to issue detailed guidelines onFor MFIs proposals recommendations

Margin cap 12% 10%

Interest rate cap 26% 24%

Share of income generating loans (%) 75% 75%


report for micro-finance institutions and is likely to issue detailed guidelines onthis. Borrowers would also have a choice of repayment in weekly, monthly orfortnightly installments. It can be a near term negative for the whole MFI sectorand also for banks (IndusInd Bank, YES Bank) which has substantial exposure tothis sector.

Investments in mutual funds restricted at 10% of last year’s net-worth

RBI has proposed that banks’ investments in liquid schemes of debt-oriented mutual funds will be subject to a prudential cap of 10% of theirnetworth, as of 31 March of the previous year. Banks which have over 10% of net-worth would be given about six months’ time to reduce toregulatory limits As of 25 Mar ’11 banks investment in instruments issued by mutual funds stood at INR 476bn (13 9% of FY10 networth)regulatory limits. As of 25 Mar 11, banks investment in instruments issued by mutual funds stood at INR 476bn (13.9% of FY10 networth).So within six month’s time we may see debt oriented MF liquidation to the tune of INR 19 Bn which is negative for those mutual funds thatare largely debt-oriented. For banks we feel it wouldn’t have that much of an effect.

23rd May’201112

Impact of Asset Liability Mismatch Unfortunately, the disproportionate dependence of Indian infrastructure projects on bank funding has forced banks to take higher-than-normalexposure towards long gestation projects, resulting in potential ALM mismatches. Infrastructure accounts for 14% of bank loans as onQ3’11compared to 9% on March 2008. We expect this ratio to go up to around 18% by March 2012. The liability profile of banks, on the otherhand, continues to be characterized by short to medium term deposits with tenures of one to three years. This has led to an average mismatch of30 % in the 'up to three years' bucket, as on March 31, 2011, a gap that is expected to widen further. Now the potential impact could lead top y g p p p pmargin erosions for banks whose residual maturity of assets is higher than that of its liabilities.

Interest rate outlook and Asset-Liability Mismatches BANKS’ ASSETS AND LIABILITIES (in %)Liabilities FY09 FY10 Assets FY09 FY10Deposits Loans and Advances Interest rate outlook / mismatches +ve mismatch* -ve mismatch**

Increasing interest rates Favorable Unfavorable

Decreasing interest rates Unfavorable Favorable

Deposits Loans and Advances

Up to 1 year 48.6 49.4 Up to 1 year 38.9 38.9Over 1 year and up to 3 years 28.5 29.4 Over 1 year and up to 3 years 33.3 33.3

Over 3 years 22.9 21.2 Over 3 years 27.8 27.8Borrowings Investments

* Positive mismatch refers to a liquidity surplus (assets maturing faster than liabilities)

** Negative mismatch refers to a liquidity deficit (liabilities maturing faster than assets)

Borrowings Investments

Up to 1 year 46.3 43.7 Up to 1 year 31.2 27.7

Over 1 year and up to 3 years 19.2 15.3 Over 1 year and up to 3 years 16.1 14.5

Over 3 years 34.5 41 Over 3 years 52.6 57.8


23rd May’201113

Impact of Asset Liability Mismatch….

Bank (FY10) 3YR+ Dep. as % of 3YR + adv

3YR+ Borr. as % of 3YR+ adv

3YR+ Adv. as a %of total adv

Term loans As % Of Advances

Less than 3 yrs Dep As % of TL

Impact in Increasing rate scenario & SB rate

deregulation *

United Bank of India 204.70% 0.60% 34.60% 73.90% 61.84% -42.8

HDFC Bank 173.80% 30.90% 16.20% 75.90% 52.24% 3.1

State Bank Of India 163.80% 24.70% 24.40% 49.70% 82.00% -37.0

Punjab National Bank 124.50% 23.90% 23.60% 53.60% 78.18% -23.3

Jammu & Kashmir Bank 115.20% 11.20% 23.30% 65.90% 70.00% -9.7

Karur Vysya Bank 109.70% 5.30% 21.40% 32.30% 56.96% -10.7

IndusInd Bank 96.80% 211.50% 5.20% 57.80% 16.12% 32.4

Bank of Baroda 94.30% 22.70% 29.70% 59.40% 69.01% -16.3

Axis Bank 61.50% 12.90% 62.00% 71.80% 39.30% -2.5

South Indian Bank 59.10% 8.70% 19.20% 37.70% 71.68% -2.3

UCO Bank 58.70% 8.90% 61.10% 66.80% 38.57% -0.3

I di O B k 32 20% 23 00% 26 60% 50 50% 66 27% 2 4Indian Overseas Bank 32.20% 23.00% 26.60% 50.50% 66.27% 2.4

IDBI Bank 27.40% 47.20% 35.40% 83.10% 11.48% 47.1

Allahabad Bank 25.90% 15.30% 35.50% 55.30% 71.36% 1.2

Development Credit Bank 12.20% 17.10% 14.10% 55.20% 43.05% 27.3

Andhra Bank 11.90% 23.20% 24.40% 44.60% 64.33% 7.3

Yes Bank 8.90% 75.80% 13.70% 78.50% 2.24% 65.1

Dena Bank 8.30% 11.80% 36.20% 52.00% 74.91% 5.8

Dhanalakshmi Bank 6.80% 1.50% 36.30% 62.30% 31.67% 39.6

Kotak Mahindra Bank 4.30% 20.60% 24.30% 79.30% 14.99% 61.4

ICICI Bank 3 80% 74 00% 28 60% 77 50% 37 90% 25 9


* Calculation has been done by assuming advances to be 100. The color scheme represents : ‘Deep green’ – least impact & ‘Deep Red’ – highest impact. The figures in the box should be read as an indicator rather than on absolute basis. The actual numbers may be different.

ICICI Bank 3.80% 74.00% 28.60% 77.50% 37.90% 25.9

23rd May’201114

Impact on credit growth - Private banks – Will history repeat itself? Private banks in last rate hike cycle had shown quick adaptability to the situation. Their Net Interest Income growth had come down to 2.23%Private banks in last rate hike cycle had shown quick adaptability to the situation. Their Net Interest Income growth had come down to 2.23%(Average quarterly growth) from a high of 12.57% during the FY08 period. The private banks ward off some its impact by reducing operationalexpenses, however with a lag of 3 months. Average Opex/NII at that time came down to 68.78% from a high of 92.75% during FY08. On assetquality front, there was a seasonal blip on GNPA as on June quarter’ 2008. However, GNPA & NPPA remain at the elevated level for the next 3quarters with rising incremental slippages. On a PAT level, the average quarterly growth rate came down to 11.11% from a high of 16.6% in FY08.We expect some seasonal moderation in Q1’12 along with increase in bad loans. However the real impact to be felt on subsequent quarters.

20.00%

25.00%

30.00%NII Growth% (Sequential)

p Q g p q q

80.00%

100.00%

120.00%Opex/NII

0.00%

5.00%

10.00%

15.00%

0 00%

20.00%

40.00%

60.00%

-20.00%

-15.00%

-10.00%

-5.00% 0.00%

A t Q lit t dPAT Growth (Sequential) %

1.50

2.00

2.50

3.00

3.50

GNPA% NNPA%

Asset Quality trend

10.00%

20.00%

30.00%

40.00%

0.00

0.50

1.00

-30.00%

-20.00%

-10.00%

0.00%

23rd May’201115

Source: Company, ACE Equity, Microsec Research

Impact on credit growth – Public Banks

P bli b k i l hik l (M 08 N ’08) h d h i d b l Th i N I I h h d d 3 92%Public banks in last rate hike cycle (May08-Nov’08) had shown mixed bag results. Their Net Interest Income growth had come down to 3.92%(Average quarterly growth) from 5% during the FY08 period. In addition public banks’ average quarterly operational expenses to NII (%) increasedto 72.3% from 70% during FY08. On asset quality front, there was a seasonal blip on GNPA as on June quarter’ 2008. However, GNPA & NPPAremain at the elevated level for the next 3 quarters with rising incremental slippages. On a PAT level, the average quarterly growth rate staysreasonable at 8.16%. We expect some seasonal moderation in Q1’12 along with increase in bad loans. However the real impact to be felt onsubsequent quarters when incremental restructured assets will dent profitabilitysubsequent quarters when incremental restructured assets will dent profitability.

10 00%

15.00%

20.00%NII Growth (Sequential)%

%70.00%80.00%90.00%

Opex/NII

-5.00%

0.00%

5.00%

10.00%

10 00%20.00%30.00%40.00%50.00%60.00%

Asset Quality trend

-15.00%

-10.00% 0.00%10.00%

3.0060.00%PAT Growth (Sequential)%

0 50

1.00

1.50

2.00

2.50

20.00%

40.00%

60.00%

0.00

0.50

GNPA% NNPA% -40.00%

-20.00%

0.00%

23rd May’201116

Q4’11 include SBI associates also Source: Company, ACE Equity, Microsec ResearchGNPA% NNPA%

Impact of increasing rates on credit growth…Now & Then Then (July'2008) Now (May'2011) Comparative standy y Comparative stand

Inflation Concern The headline inflation rate (WPI) had accelerated to a 13-year high of 11.89% during the week ended July 12, 2008, from a low of 3.1% during the week ended November 24, 2007. RBI was worried about the risk of second-round effects from high global commodity prices and thus inflation expectations.

India's headline inflation (WPI) rose faster than expected inMarch on higher fuel and manufacturing prices. WPI rose8.98% YoY. The March reading was above the central bank'sinflation projection of 8% for the final month of the fiscalyear, suggesting its eight interest rate hikes since March 2010have been insufficient to contain stubbornly high inflation.

Current account deficit Even though oil prices had moderated from a peak of US$145/bbl, they were at higher than comfort levels at US$ 128/bbl. The rise in oil prices since April'08 implied that the trade deficit would widen further. The RBI was also concerned about high non-oil import growth causing further widening of the current account deficit at a time when global capital inflows were slowing. Non-oil imports grew at an average of 24 9% during April May 2008

India's CAD, which stood at 3.7 per cent of GDP in the first half of last fiscal (2010-11), moderated to 2.1 per cent in Q3'11 on the back of a pick up in exports. However the rising prices of commodities, especially crude oil, are likely to swell India’s import bill in the coming months. India imports almost 75% of the oil it uses. Recent decline in NYMEX crude from US$ 113/bbl to US$ 98/bbl gave some short term relief to Indiangrew at an average of 24.9% during April-May 2008. 113/bbl to US$ 98/bbl gave some short term relief to Indian govt.

Monetary Aggregates Non-food credit growth stood at 25.9%Y during the fortnight ended July'08, from a low of 21.9% as of end-2007. While some of the uptick had been on account of greater credit off-take by the oil companies underpinned by higher oil prices. The RBI was

Non-food credit growth stood at 20.6%Y during the fortnight ended March 25 2011. It was down from a high of 23.14% as of end-2010. CD ratio which was very high at the end of 2010, has come down to a reasonable levels. Deposits growth was p p y g p

particularly concerned about the level of credit growth, considering that deposit growth had already slowed to 21.7% as of the fortnight ended July 4, 2008.

p galso picking up due to almost ~300 bps hike in deposit rates of different maturities.

Rate hike In its first quarter review of monetary policy, the Reserve Bank of India (RBI) decided to hike the repo rate (the rate at which the RBI infuses liquidity) by 50bps to 9% and the cash reserve ratio (CRR)

RBI Hiked Repo Rate 50 bps to 7.25% with immediate effect in its annual policy review. Cash Reserve Ratio was unchanged at 6 0% Savings bank rate increased to 4 0% frominfuses liquidity) by 50bps to 9% and the cash reserve ratio (CRR)

by 25bps to 9%. It was above market expectation of 25 bps.unchanged at 6.0%. Savings bank rate increased to 4.0% from 3.5%. RBI started marginal standing facility for banks at 8.25%.

Policy Action rationale The policy statement highlighted the RBI’s concerns about aggregate demand pressures in the economy as reflected in higher domestic inflation, the rising non-food credit off-take, the widening trade deficit and loose fiscal policy

The Central Bank enunciated the view that containing inflation is imperative. However, no control over supply side constraints make the situation much more trickier this time. We also believe RBI was definitely behind the curve this time.

Impact on growth GDP growth projection moderated from a high of 9%+ to 7-7.5%. Credit growth in next 9 months come down to 15% YoY and deposits grow was at 13% YoY.

GDP growth projection moderated from a high of 8.5-8.75%+ to 7.5-8%. Credit growth in next 10 months is expected to come down to 18% YoY and deposits grow was at 16% YoY. The deposit growth will have a lag effect of the SB rate hike.

23rd May’201117

Thumbs up - Now is comparatively better Source: RBI, Microsec Research

Impact on forward earnings of companies under our coverage 2012E 2013E 2012E 2013E

HDFC Bank

2012E 2013E

Old New % Change Old New % Change

NII 121234.80 123354.30 1.75% 148876.30 149875.50 0.67%

PAT 48658.00 47144.74 -3.11% 63248.00 62457.40 -1.25%

EPS 106.70 103.38 -3.11% 139.20 136.96 -1.61%

LICHFL

2012E 2013EOld New % Change Old New % Change

NII 15876.20 16428.50 3.48% 20639.06 19993.60 -3.13%PAT 10576.30 10761.39 1.75% 13495.36 13356.36 -1.03%EPS 24.90 25.34 1.75% 31.77 31.45 -1.03%


Axis Bank

2012E 2013E


NII 79124.00 78426.60 -0.88% 98324.00 96633.80 -1.72%

PAT 40093.00 39190.91 -2.25% 49899.00 49337.64 -1.13%

EPS 99.00 96.77 -2.25% 123.21 121.82 -1.12%

Dewan Housing

Old New % Change Old New % ChangeNII 4650.90 4578.81 -1.55% 6092.68 5943.30 -2.45%PAT 3035.70 3005.34 -1.00% 3855.34 3786.73 -1.78%EPS 29.19 28.90 -1.00% 37.07 36.41 -1.78%

GRUH


NII 1490 30 1531 03 2 73% 1654 20 1768 30 6 90%

IDBI Bank

2012E 2013E


NII 52118.00 51190.40 -1.78% 62263.20 60660.20 -2.57%

PAT 23267.50 22592.74 -2.90% 27301.50 26905.63 -1.45%

EPS 23 60 22 92 -2 90% 27 70 27 29 -1 48%

GRUH Finance NII 1490.30 1531.03 2.73% 1654.20 1768.30 6.90%

PAT 980.60 993.99 1.36% 1108.10 1146.33 3.45%EPS 28.06 28.44 1.36% 31.71 32.80 3.44%

Bajaj Finance


NII 12398.70 12262.31 -1.10% 14479.95 14335.15 -1.00%EPS 23.60 22.92 2.90% 27.70 27.29 1.48%

IOB

2012E 2013E


NII 51273.79 50180.40 -2.13% 58663.42 58961.50 0.51%

PAT 12405.72 11741.27 -5.36% 15640.68 15210.57 -2.75%

FinancePAT 2920.72 2847.70 -2.50% 4065.54 3994.39 -1.75%EPS 79.80 77.81 -2.50% 111.10 109.13 -1.77%

REC


NII 37884.70 36653.45 -3.25% 45840.40 44923.59 -2.00%PAT 29486.80 28307.33 -4.00% 35973.90 35182.47 -2.20%

Source: Microsec Research

EPS 19.90 18.83 -5.36% 25.00 24.40 -2.40%

Key assumptions

• Credit demand slow down to the tune of 300 bps to 18% in FY12.• Factored in 50 bps hike in SB rate & 50 bps hike in FD rate for FY12 Also 75 bps hike in base rates

EPS 29.80 28.61 -4.00% 36.36 35.56 -2.21%

• Factored in 50 bps hike in SB rate & 50 bps hike in FD rate for FY12. Also 75 bps hike in base rates.• Increase in Provisioning expenditure by 1.4%, keeping slippages at the same levels of H1’FY 11.• For NBFCs, we have factored in 150 bps hike in cost of funds.

We also adjusted our estimates on the basis of their recent financial performance in FY11.

23rd May’201118

Target Price Revisions - Banks

Target Price Target P/ABV Multiple**

Annualized return%

Recommendation^ Risk Return Banks Prev Current CMP* Upside%# Comments

PSU

ProfileProfile

IOB 195 190 1.15 148 28.38% 16% BUY

Hike in base rates (Up by 50 bps) may support the margin, higherproportion of Restructured assets (6.2% of advances) may posesome upside risk to provisioning cost which may dent thebottomline.

High Risk/High

Gain

Loan growth to moderate as management emphasis on quality

IDBI Bank 183 175 1.00 132 32.58% 18% BUY

over quantity, hike in base rates (Up by 50 bps) may support themargin, higher proportion of Restructured assets (6.7% ofadvances) may pose some upside risk to provisioning cost whichmay dent the bottomline. However we feel the asset qualityimprovement will continue.

High Risk/High

Gain

Private

HDFC Bank 2451 2451 3.40 2265 8.21% 4% HOLD

It has the pricing power in this kind of scenario. Base rate hike of55 bps and FD rate hike to the tune of 75-125 bps (differentmaturities)may have some marginal impact on NIMs goingforward. Strong operational & asset quality may support earningsd it d ti

Low Risk/Low

Gaindespite some moderation.

Axis Bank 1529 1529 2.40 1216 25.74% 14% BUY

Low capital adequacy 12.7% may compel the bank for capitalraising during FY12 to support growth. This may see some equitydilution. There can be some near term assert quality pressure dueto execution delays in power & Infra segment along with trouble-some Microfinance portfolio.

Low Risk/High

Gain

*Closing price as on 18th May’11, ** based on FY13 expected earnings, # absolute, ^ according to our rating scale

p

23rd May’201119

Target Price Revisions – NBFCs T P i R d iTarget Price

Target P/ABV Multiple**

Annualized return%

Recommendation ^ Risk Return Prev Current CMP* Upside%# Comments

NBFCs

ProfileHigher proportion of variable rates on the asset side and fixedrates on the liability side may give the company to maintain its

LICHFL 238 238 2.00 208 14.4% 8% HOLD

rates on the liability side may give the company to maintain itsmargin. However, increasing interest rates may slowdown thecredit demand in the Tier-1 cities. Lower proportion of highyielding assets may hamper profitability. Asset quality to remainstrong.

Low Risk/Low

Gain

Higher proportion of bank borrowings (~40%) may have an

GRUH Finance 478 470 3.25 396 18.7% 10% HOLD

g p p g ( ) yimpact on margins going forward as most of the banks hadincreased their base rates by almost 225-300 bps during H2'11.Strong asset quality and strong parentage will support earnings.Higher proportion of some risky segment in the asset side maypose some risk.

Low Risk/Low

Gain

Dewan Housing 356 346 1.75 238 45.4% 25% Strong BUY

Higher proportion of bank borrowings (~40%) may have animpact on margins going forward as most of the banks hadincreased their base rates by almost 225-300 bps during H2'11.Acquisition of Deautsche Post Bank Home finance will segmentthe loan book and diversify the loan portfolio.

High Risk/High

Gain

Business restructuring will support the earnings However

Bajaj Finance 1080 950 1.75 635 49.6% 27% Strong BUY

Business restructuring will support the earnings. However,slowdown in consumer & capital goods segment may pose topline earnings risk going forward. Beside that the benefit of lowerbase will not be there in FY12. However, strong brand,improving RoE profile makes it a investment case for long term.

High Risk/High

Gain

Higher exposure to financially weak SEBs & T&D segment may

REC 286 286 1.75 213 34.3% 19% BUY

g p y g ypose some asset quality risk. Even slow down in projectexecution may threaten the top line growth. Higher proportionof bulk borrowing may erase margins going forward as higherbulk borrowing cost.

High Risk / Low Gain

*Closing price as on 18th May’11, ** based on FY13 expected earnings, # absolute, ^ according to our rating scale

23rd May’201120

B ki t fit f th f th t di M h 2011 t d 3 5% Q Q i d 48 78% Y Y th th t di

Banking Quarterly Performance Analysis (Q4’11) – Operational Efficiency saves the day

Banking sector profit for the fourth quarter ending March 2011 reported a 3.5% QoQ increase and a 48.78% YoY growth over the quarter endingMarch 2011. Private sector banks have again relatively performed better than PSU banks in terms of gaining market share and reporting strongbottom-line numbers. The PSU bottomline numbers were relatively subdued due to higher provisioning for 2nd option of pension liability &higher provisioning for bad loans. The standalone net profit growth of Private sector banks for the quarter was 14.44% QoQ as against a declineof 7.2% for PSU banks. Also, the standalone net profit growth of Private sector banks for the quarter was 71.74% YoY as against a of 25.8% forPSU banksPSU banks.

Among the consortium, the highest YoY % increase in net profit for March 2011 quarter was reported by Laxmi Vilas Bank & DevelopmentCredit Bank (DCB) among the private sector banks. Among PSU Banks, the highest increase in net profit in YoY % term for Q4’11 was observedin the case of IOB & United Bank of India.

On the asset quality front, Private sector saw a decline in Net NPA by 11.33% QoQ and 19.62% on a YoY basis. In case of PSBs, asset qualityworsened in Q4’11 by 6.3% QoQ and 46.1% YoY. Among the PSBs, Indian Overseas Bank (IOB) has shown the best performance in terms ofasset quality. The bank’s NNPA declined by 10.7% QoQ and 33.4% on a YoY basis. Among the private sector banks, DCB has shown the bestimprovement on asset quality front , closely followed by ING Vysya Bank and Laxmi Vilas bank.

80 00%

39.61%46.10%

19 56%

71.74%

30.5% 29.4% 25.8%

46.1%

40.00%

60.00%

80.00% Private Sector Bank (YoY%) Public Sector Banks (YoY%)3.67%

3.44%

3.32%3.40%

3.60%

3.80% Q4'11 Q3'11

19.56%

19 62%

13.8%16.8%

-20.00%

0.00%

20.00%

Interest Earned Interest expenses Other Income Provisions PAT NNPA

3.10%

3.29%3.23%

3.00%

3.20%

-51.72%

-19.62%

-60.00%

-40.00%2.80%

Private Bank Average NIM%

PSU Average NIMs%

Combined NIMs%

23rd May’2011

* Excluding associates of SBI Source: Bloomberg, Microsec Research

21

NBFCs Performance Analysis (Q4’11) - Strong Operating Performance

We believe NBFCs have peaked in Q4’11. There was some fatigue visible in the top line which shows some moderation sequentially . Howeverbetter cost efficiency and lower provisioning on bad loans augmented the PAT growth. We expect some moderation from Q4’11 levels for mostNBFCs. The seasonal trend will also kick in from Q1’12. We may say credit demand slow down due to higher interest rates. The fund-raisingplans of non-banking finance companies may also be impacted after RBIs’ recent regulation on Priority sector lending. We believe companieswhose loan books were largely made up of auto and gold loans would be affected adversely Since regular loans are costlier than priority sectorwhose loan books were largely made up of auto and gold loans would be affected adversely. Since regular loans are costlier than priority sectorones, the regulation is set to affect the borrowing cost of these NBFCs.

15.00%

20.00%Sequential growth% shows first sign of fatigue in the top line

5.00%

10.00%

-5.00%

0.00%

Q4'11Q3'11Q2'11Q1'11

-10.00%

Net sales growth% Operating Profit growth% PAT growth%

23rd May’2011

Average for top 14 companies Source: ACE Equity, Microsec Research

22

BFSI Sector –Short term pain on the anvil

The outlook for the banking sector in coming quarters appears neutral to marginal negative on the back of probable credit growth slowdownand expected margin pressure. High global crude oil and other commodity prices pose the biggest risk to India’s growth and inflation.However, substantial cooling down in the prices of global commodities may give some comfort, however with a lag.

On the positive side, we are still bullish on the future prospect of the banking sector in the long run. We believe, banks would benefit in ap p p g grising GDP growth scenario. We are anticipating a credit growth of 18% for FY2012 with more focus on non-infra loans. Deposit growthwhich had been a laggard till now, may see some revival going forward due to recent SB & FD rate hikes which makes the real interest ratesturning positive. The overhang of 2nd pension option liability is behind the banks. Most of them had done requisite provisions in Q4’11 itself.

On the negative side, Net interest margin is likely to be under pressure in near term. We expect net interest margins across the board to belower by 25-30 bps due to rise in cost of funds & margin pressure due to ALM mismatch in an increasing rate scenario. CASA growth formost banks would slowdown a bit as banks will go slow on this front before the much debated savings rate deregulation pass through andterm deposits becomes more attractive after the hikes. If savings bank rate deregulation comes through the impact on margin in currentscenario would be more (we haven't build that into our valuation model yet). On the asset quality front, implementation of CBS forcomputation of NPA may throw few more negative surprises for PSU banks. Private banks with strong reporting structure are a better bet inthat case. Finally after RBIs recent guidelines on provisioning requirements, we may see some pressure on the bottomline.

In a nutshell , we expect some pressure on earnings in a seasonally weak quarter ahead (Q1’12). This pressure may continue for the 1st half ofFY12. However, by then the banks will realign its operating strategy in accordance to the changing market scenario. However, given thecurrent environment of macro headwinds, we remain selective and prefer banks with a) robust deposit franchise, b) diversified loan book &

h i ibili ) h l h i l d d d) f bl l i W f P i b k i hi ki d f i fl i d hikgrowth visibility, c) healthy capital adequacy and d) comfortable valuation. We prefer Private banks in this kind of inflationary and rate hikescenario. Our top picks include 1) HDFC Bank 2) Axis Bank 3) LICHFL.

Bankex has corrected by almost 5.5% after the RBI policy announcements on 3rd May’2011. During last 6 months, it has corrected by almost20%. We believe this correction gives good opportunity for long term investors to start accumulating good stocks. Bankex may correctfurther 5 6% from the current le el in coming months but that correction should be looked at as an in estment opportunitfurther 5-6% from the current level in coming months, but that correction should be looked at as an investment opportunity.

23rd May’201123

Quarterly Performance Analysis (Appendix 1)

Private Sector Banks Interest Earned Interest expenses Other Income Provisions & Contingencies PAT CAR (BPS) GNPA NNPA

Q4'11 QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY%

Axis Bank Ltd 13 77% 46 12% 26 62% 74 41% 26 37% 55 37% -18 95% 26 02% 14 44% 33 37% 19 -315 7 86% 21 35% 6 44% -2 06%Axis Bank Ltd. 13.77% 46.12% 26.62% 74.41% 26.37% 55.37% 18.95% 26.02% 14.44% 33.37% 19 315 7.86% 21.35% 6.44% 2.06%

Centurion Bank Of Punjab Ltd. 6.19% 71.67% 3.75% 104.74% 1.88% 57.21% 69.05% 236.22% 21.13% 44.05% -55 98 12.15% NA 14.62% 20.00%

City Union Bank Ltd. 7.13% 29.02% 10.67% 24.47% -17.35% 0.86% -32.27% 7.90% -6.31% 41.94% -35 -160 7.92% -10.16% 4.87% -31.59%

Development Credit Bank Ltd. 5.71% 29.65% 7.84% 36.69% 12.46% 18.95% -14.27% -66.55% 38.89% 237.50% -14 -160 -11.33% -17.42% -19.94% -61.69%

Dhanalakshmi Bank Ltd. 18.53% 96.86% 16.71% 93.00% 38.17% 44.32% 20.10% 139.90% 53.58% 99.11% -159 -119 -18.20% -13.43% -32.04% -34.50%

Federal Bank Ltd. 7.65% 15.41% 13.53% 20.04% 16.02% 8.12% -44.22% -18.88% 20.00% 46.96% 37 -157 -0.39% 39.87% -16.03% 48.06%

HDFC Bank Ltd. 4.56% 34.92% 7.17% 54.49% 11.34% 32.08% -7.41% -1.95% 2.47% 33.24% -10 -120 -4.91% -6.74% -10.36% -24.39%

ICICI Bank Ltd. 6.88% 22.82% 5.99% 22.54% -6.18% -13.23% -17.37% -61.24% 1.05% 44.41% -44 13 -1.50% 5.84% -16.20% -37.33%

IndusInd Bank Ltd. 14.64% 45.63% 19.72% 47.68% -7.31% 37.22% -28.37% -24.26% 11.63% 75.34% 28 56 -13.13% 4.07% -19.97% -28.49%

ING Vysya Bank Ltd. 12.48% 36.80% 14.34% 58.54% 2.23% 15.29% -87.31% -95.98% 9.99% 34.44% 25 -197 -8.36% -4.30% -33.13% -58.63%

Jammu & Kashmir Bank Ltd 8.47% 29.15% 9.72% 28.70% 53.46% 32.08% 146.82% 93.80% -17.46% 15.43% -177 -217 2.98% 12.23% 401.79% -17.24%Ltd.

Karnataka Bank Ltd. 5.47% 14.31% 2.07% 4.07% 2.69% 5.02% -6.73% -16.16% 34.37% 5.41% -34 -130 8.61% 4.10% 10.70% -17.98%

Karur Vysya Bank Ltd. 11.02% 27.54% 5.99% 21.59% -9.92% 15.59% -24.06% -50.55% 10.35% 49.23% -125 -144 6.21% 18.05% 29.49% 31.04%

Kotak Mahindra Bank Ltd. 8.56% 39.95% 8.36% 72.27% 15.70% -23.94% -116.82% -105.62% 32.38% 22.81% 126 157 -18.91% -21.35% -10.25% -41.38%

Lakshmi Vilas Bank Ltd. 4.08% 12.52% 5.26% 1.73% -46.82% -6.97% -20.93% 13.86% 4.12% 279.42% -101 -347 -21.74% -41.37% -22.95% -45.30%

South Indian Bank Ltd. 13.02% 36.96% 15.37% 10.84% 21.69% 37.92% -11.46% -957.47% 8.51% 111.73% -88 -138 -9.16% 9.17% -19.25% -2.52%

Yes Bank Ltd. 8.57% 83.96% 8.86% 107.91% 15.52% 16.62% 73.39% 1.64% 6.41% 45.24% -172 -411 10.56% 33.75% -47.35% -29.56%

23rd May’2011

Source: Bloomberg, Microsec Research

24

Quarterly Performance Analysis (Appendix 2)

Public Sector Banks Interest Earned Interest expenses Other Income Provisions & Contingencies PAT CAR (bps) GNPA NNPA

Q4'11 QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY% QoQ% YoY%

Allahabad Bank 9.2% 41.4% 9.1% 34.4% 82.2% 16.8% 97.4% 56.7% -38.0% 14.7% 18 -66 7.0% 34.9% 45.3% 56.6%

Andhra Bank 11.4% 38.4% 17.2% 42.8% 50.5% 11.1% 76.3% 35.8% -5.5% 30.2% 238 45 14.1% 104.1% -11.2% 185.9%

Bank Of Baroda 11.8% 45.5% 10.3% 42.6% 23.4% 8.8% 94.2% 56.5% 21.1% 42.8% 207 16 13.8% 31.3% 6.3% 31.3%

Bank Of India 15.4% 39.4% 14.9% 34.5% 27.0% 13.8% -4.1% -41.0% -24.4% 15.4% -24 -77 5.9% -1.5% 17.1% -11.9%

Bank Of Maharashtra 8.1% 24.0% 6.9% 14.6% 27.2% -4.7% -86.5% -80.7% -23.1% -50.1% 11 57 -14.8% -3.0% -22.5% -6.6%

Canara Bank 8.6% 33.8% 17.3% 38.9% 73.8% 31.4% 247.1% -24.9% -18.7% 78.7% 236 195 12.2% 19.3% 17.9% 30.4%

Central Bank Of India 7.6% 34.1% 12.1% 12.5% 109.6% -8.1% 61.1% 5.0% -67.1% -22.4% -8 -55 -12.1% -2.6% 4.7% 16.5%

Corporation Bank 3.4% 36.5% 10.1% 39.9% 85.4% 51.8% 7.8% 63.2% -9.7% 10.6% -16 -126 -13.5% 21.4% -3.8% 101.6%

Dena Bank 9.1% 32.4% 13.7% 27.0% 42.3% 3.4% 44.5% 50.2% 1.2% 14.5% 233 64 4.8% 31.2% 5.4% 27.9%

IDBI Bank Ltd 6.6% 23.1% 11.6% 17.9% 51.1% 24.0% -56.8% -48.0% 13.7% 62.1% -46 233 -7.8% 30.8% 4.2% 19.3%

Indian Bank 8.5% 29.5% 9.5% 36.0% 9.2% -13.8% 136.8% -40.6% -10.7% 7.0% 121 85 -1.6% 45.1% -4.8% 174.0%

Indian Overseas Bank 13.9% 38.6% 17.5% 34.1% 9.5% 36.4% 24.5% -3.0% 87.5% 240.8% 110 -23 -5.4% -14.4% -10.7% -33.4%

Oriental Bank Of Commerce 6.6% 20.4% 10.8% 30.8% 29.6% 13.0% 192.3% 34.3% -18.3% 5.2% 185 169 8.9% 30.8% 15.0% 29.6%

Punjab National Bank 4.5% 33.2% 12.7% 41.9% 33.6% 30.7% 2.0% 17.1% 10.2% 5.8% 52 -174 -3.6% 36.2% 29.4% 107.7%

State Bank Of Bikaner & Jaipur 8.5% 28.7% 7.2% 20.8% 89.9% 14.0% 18.0% 119.8% 41.7% 12.8% 27 -162 -8.6% 36.5% -12.9% 26.3%J p

State Bank Of India 1.4% 20.9% 10.5% 21.5% 45.3% 6.8% 102.6% 76.9% -99.3% -98.9% -118 -141 8.1% 29.6% 5.6% 13.6%

State Bank Of Mysore 0.3% 15.5% 6.8% 20.2% 62.1% 17.7% -27.0% -4.3% 24.1% 32.5% 58 134 -16.9% 45.1% -0.5% 56.1%

State Bank Of Travancore 3.4% 26.5% 9.7% 34.7% 42.8% 29.6% 2.2% 86.8% 35.4% 9.7% -11 -120 5.5% 30.1% 6.2% 28.7%

Syndicate Bank 7.4% 25.8% 11.6% 21.0% 19.1% 11.2% -17.4% 34.1% 12.9% 72.0% 130 34 10.7% 29.5% 8.6% 7.0%

UCO Bank 6.0% 26.0% 21.4% 31.5% 36.4% 14.9% -25.2% 92.7% -25.0% -40.5% 78 59 37.0% 89.0% 83.8% 88.8%

Union Bank Of India 9.9% 29.6% 12.2% 33.9% 21.7% 21.9% -61.7% -54.9% 3.1% 0.7% 107 44 1.2% 35.6% 12.9% 86.8%

United Bank of India 8.4% 26.2% 11.3% 21.9% 50.4% 37.4% 70.4% 0.8% -12.2% 208.8% 54 25 -8.7% -1.2% -0.7% -2.7%

Vijaya Bank Ltd 8.5% 32.1% 19.5% 21.7% 40.2% -51.4% -25.3% -46.4% -64.3% -58.6% 21 138 17.4% 26.6% 23.8% 27.4%

23rd May’2011

Source: Bloomberg, Microsec Research

25

Key Financial Snapshot (Appendix 3)

Private Banks CMP 52Wk High 52Wk Low Loan to Deposit (Mar'10)*

Interest Earned to Expended P/B TTM P/E TTM P/BV 3Yr

Avg Dvd Yld(%) CAR (%) (Mar'11)

NNPA (Mar’11) (%)* ROA (%)

Axis Bank 1217.75 1608.00 1146.60 75.25 1.64 2.63 14.77 2.53 1.15 12.65 0.26 0.45

Bank of Rajasth. 212.10 213.50 82.50 55.30 1.45 3.65 0.00 0.98 0.00 7.74 1.60 -0.05

City Union Bank 42.25 54.05 31.40 66.44 1.50 1.73 8.62 1.18 1.78 13.06 0.53 0.43

Dev.Credit Bank 58.85 76.70 38.60 76.14 1.51 2.09 54.97 1.40 0.00 13.25 0.97 0.16

Dhanalaksh.Bank 123.65 212.50 94.00 70.53 1.44 1.27 40.40 1.29 0.40 11.80 0.30 0.09

Federal Bank 435.75 501.00 288.00 74.74 1.69 1.46 12.69 0.82 1.95 16.79 0.60 0.37

HDFC Bank 2254.10 2518.00 1785.00 75.17 2.08 4.14 26.74 3.66 0.73 16.20 0.20 0.40

ICICI Bank 1039.50 1277.00 803.30 89.70 1.54 2.17 23.25 1.55 1.35 19.54 1.11 0.37

IndusInd Bank 240.90 309.30 177.00 76.94 1.59 2.93 19.44 2.10 0.83 15.89 0.28 0.39

ING Vysya Bank 321.00 443.90 283.00 71.55 1.53 1.54 12.19 1.60 0.93 12.94 0.39 0.25

J & K Bank 803.50 938.00 694.80 61.92 1.70 1.12 6.33 1.04 2.74 13.72 0.20 0.28

Karnataka Bank 105.45 192.97 96.83 60.83 1.37 0.99 10.56 1.05 3.50 11.37 1.18 0.54

KVB Bank 419.00 508.13 268.15 70.04 1.58 2.29 11.20 1.29 1.63 12.13 0.19 0.46

Kotak Mah. Bank 410.50 529.50 333.25 86.97 2.02 4.45 36.99 4.84 0.12 19.92 0.72 0.50

Source: Accord *Bloomberg

Lak. Vilas Bank 104.00 142.80 76.00 69.17 1.52 1.25 19.14 0.95 0.58 12.51 2.04 0.23

South Ind.Bank 23.25 29.70 13.75 68.76 1.46 1.55 8.98 0.98 2.15 14.01 0.29 0.27

Yes Bank 288.45 388.00 233.55 82.81 1.40 2.64 13.80 2.50 0.87 16.50 0.03 0.37

23rd May’201126

Source: Accord Bloomberg

Key Financial Snapshot (Appendix 4)

Public Banks CMP 52Wk High 52Wk Low Loan to Deposit (Mar'10)

Interest Earned to Expended P/B TTM P/E TTM P/BV 3Yr

Avg Dvd Yld(%) CAR (%) (Mar'11)

NNPA (Mar’11) (%)* ROA (%)

Allahabad Bank 191.65 270.90 150.00 67.52 1.59 1.19 6.41 0.74 3.13 12.96 0.79 0.74

Andhra Bank 138.05 190.15 123.50 72.23 1.57 1.19 6.10 0.96 3.98 14.38 0.38 0.31

Bank of Baroda 861.15 1050.00 670.00 72.62 1.70 1.71 7.95 1.05 1.92 14.52 0.35 0.38

Bank of India 401.50 588.00 310.15 73.33 1.58 1.41 8.82 1.29 1.74 12.17 0.91 0.15

Bank of Maha 57.25 84.95 51.60 63.68 1.59 0.94 8.35 0.85 3.49 13.35 1.32 0.10

Canara Bank 542.25 844.00 345.00 72.16 1.44 1.34 5.97 1.04 2.03 15.38 1.11 0.32

Central Bank 123.05 211.86 116.67 65.01 1.51 1.73 6.35 0.96 1.73 11.68 0.65 0.28

Corporation Bank 548.75 814.85 484.00 68.15 1.42 1.14 5.75 0.89 3.64 14.11 0.46 1.12

Dena Bank 92.95 151.00 80.50 69.07 1.50 0.90 5.07 0.78 2.37 13.41 1.22 0.24

IDBI bank 132.50 202.25 105.85 87.04 1.28 1.03 7.90 0.80 2.64 13.64 1.06 0.22

Indian Bank 226.05 316.50 197.00 70.44 1.75 1.23 5.67 1.10 3.32 13.56 0.53 0.37

IOB 151.60 176.35 87.35 71.31 1.52 1.15 8.75 0.98 3.30 14.55 1.19 0.18

Oriental Bank 323.50 545.00 303.60 69.43 1.46 0.92 6.28 0.76 2.81 14.23 0.98 0.23

Punjab & Sind Bank 99.00 149.70 95.00 66.40 1.40 0.77 4.20 0.00 2.02 12.94 0.56 0.21

Punjab Natl.Bank 1058.15 1395.00 933.00 74.84 1.69 1.67 7.56 1.48 2.08 12.42 0.85 0.34

St Bk of India 2413.60 3515.00 2138.00 78.58 1.59 2.04 18.54 1.74 1.24 11.98 1.63 0.01

Syndicate Bank 112.15 164.20 84.15 77.25 1.58 0.97 6.14 0.81 3.30 13.04 0.97 0.84

UCO Bank 95.30 152.35 68.10 67.40 1.38 1.15 6.60 0.84 2.10 13.80 0.02 0.16

Union Bank (I) 318.65 426.80 275.15 70.17 1.59 1.51 8.03 1.33 2.51 12.95 1.19 0.26

United Bank of India 99.85 152.20 72.10 62.09 1.48 0.97 6.56 0.25 2.20 13.05 1.42 0.17

Vijaya Bank 71.40 115.35 52.75 67.04 1.42 1.02 6.44 0.74 3.50 13.88 1.52 0.07

23rd May’201127

Source: Accord *Bloomberg

Return SummeryPrivate Banks (as on April end'2011) 1M Return% 3M Return% 6M Return% 12M Return%Private Banks (as on April end 2011) 1M Return% 3M Return% 6M Return% 12M Return%Axis Bank Ltd. -8.38% 3.15% -12.32% 4.69%City Union Bank Ltd. -2.46% 3.80% -13.47% 28.34%Development Credit Bank Ltd. 29.23% 24.47% -14.56% 33.00%Dhanalakshmi Bank Ltd. 10.63% 32.00% -32.44% -17.69%Federal Bank Ltd. 0.54% 15.53% -10.62% 21.58%HDFC Bank Ltd -2 15% 12 22% 0 63% 21 59%HDFC Bank Ltd. 2.15% 12.22% 0.63% 21.59%ICICI Bank Ltd. 0.13% 9.24% -4.08% 28.51%IndusInd Bank Ltd. -1.38% 16.30% -1.57% 32.31%ING Vysya Bank Ltd. 7.64% 14.30% -14.16% 13.81%Jammu & Kashmir Bank Ltd. -7.43% 9.72% -11.04% 7.71%Karnataka Bank Ltd. 5.40% -7.87% -33.34% -27.99%Karur Vysya Bank Ltd 2 79% 1 69% -3 62% 42 87%Karur Vysya Bank Ltd. 2.79% 1.69% -3.62% 42.87%Kotak Mahindra Bank Ltd. -5.83% 11.89% -7.45% 13.70%Lakshmi Vilas Bank Ltd. 11.36% 7.24% -15.88% 31.14%South Indian Bank Ltd. -0.44% 13.75% -17.42% 33.08%Yes Bank Ltd. -1.55% 16.03% -15.08% 5.99%

Public Banks (as on April end'2011) 1M Return% 3M Return% 6M Return% 12M Return%Andhra Bank -11.18% 1.09% -17.09% 24.18%Bank Of Baroda -7.92% -0.18% -21.93% 2.02%Bank Of India -5.30% 4.95% -9.78% 28.40%Bank Of Maharashtra -4.42% 4.04% -6.00% 38.60%Canara Bank 1.52% 2.12% -22.64% 6.82%Central Bank Of India 0.79% 4.82% -12.32% 54.61%Corporation Bank -4.40% -7.81% -30.06% 8.23%Dena Bank -8.58% 1.62% -22.11% 7.83%IDBI Bank Ltd -0.05% -0.57% -23.64% 16.29%Indian Bank 0.77% 1.52% -20.54% 26.25%Indian Overseas Bank 3.68% 14.65% -17.58% 4.94%Oriental Bank Of Commerce 6.30% 17.02% -4.38% 67.66%Punjab National Bank -10.67% 4.46% -30.72% 2.90%State Bank Of India 5.97% 13.02% -14.46% 36.44%Syndicate Bank 4.41% 11.15% -12.27% 21.94%UCO Bank -4.14% 9.71% -15.96% 27.20%Union Bank Of India -2.47% -3.42% -17.00% 32.47%United Bank of India -8.03% -3.37% -15.50% 8.93%Vij B k Ltd 3 48% 16 28% 13 28% 39 77%

23rd May’201128

Vijaya Bank Ltd 3.48% 16.28% -13.28% 39.77%

Notes

23rd May’201129

Recent BFSI reports

IDBI Bank – ICR – 07/12 /2010 BFSI Performance Analysis & Top Picks – Update – 28/02/2011 IOB – ICR – 19/11/2010

Housing Finance Industry – ICR – 22/09/2010 BFSI Q4’11 Preview – Update – 04/04/2011 Bajaj Finance – ICR – 29/10/ 2010

23rd May’201130

Housing Finance Industry ICR 22/09/2010 BFSI Q4 11 Preview Update 04/04/2011 Bajaj Finance ICR 29/10/ 2010

MICROSEC RESEARCH IS ALSO ACCESSIBLE ON BLOOMBERG AT <MCLI>MICROSEC RESEARCH IS ALSO ACCESSIBLE ON BLOOMBERG AT <MCLI>

Recommendation Expected absolute returns (%) over 12 monthsStrong BUY More than 20%

Rating Scale

BUY Between 10% and 20%Hold Between 0% and 10%Underperform Negative return up to -10%Sell Less than -10%

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Banking & Nbfc Q411 Earnings & Policy Impacts (23rd May11)

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