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Indian Banks Turning Titanic- flash september 2011

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The Indian Banks were credited for the ' Sustain Potential during 2008 crisis. But, now the doubts are cast over the Credit Quality and likely NPA's in the wake, of Rising Interest rates, following …

The Indian Banks were credited for the ' Sustain Potential during 2008 crisis. But, now the doubts are cast over the Credit Quality and likely NPA's in the wake, of Rising Interest rates, following the sticky Inflation, retarding growth.

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  • 1. Banking Flash September 2011 Portfolio Management Group Aniruddha Kekatpure aniruddha.kekatpure@jmfinancial.in (91-22)-6704-3367Sept 2011 JM Financial Services Private Limited 1
  • 2. RBI Monetary Policy Review, September 2011 – Key ExtractsSince the Reserve Bank’s First Quarter Review of July 26, the global macroeconomic outlook has worsened. There is growingconsensus that sluggishness will persist longer than was earlier expected….…..Inflationary pressures are expected to ease towards the later part of 2011-12….However, in the current scenario, with thelikelihood of inflation remaining high for a few more months, rising inflationary expectations remain a key risk. This makes itimperative to persevere with the current anti-inflationary stance. ……..The HSBC Purchasing Managers Index for the manufacturing sector also suggested moderation. Corporate margins in Q1 of2011-12 moderated across several sectors compared to their levels in Q4 of 2010-11. However, barring a few sectors, significantpass-through of rising input costs is still visible….. In recent weeks, as a result of global risk aversion, the rupee has depreciated,which may have adverse implications for inflation.…. The central government’s fiscal imbalances widened during April-July of 2011 reflecting, primarily, the impact of decline inrevenue receipts coupled with pressures from non-plan revenue expenditures on account of higher petroleum and fertilizersubsidies. Fiscal deficit at 55.4 per cent of the budget estimates in the first four months of the current fiscal was significantlyhigher than that of 42.5 per cent during the corresponding period last year….…Although Indias exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the faceof weakening global demand. This, combined with the slowing down of domestic demand, to which the monetary policy stanceis also contributing, suggests that risks to the growth projection for 2011-12 made in the July Review are on the downside….Meanwhile, inflation remains high, generalised and much above the comfort zone of the Reserve Bank. …Moreover, there is stillan element of suppressed inflation. Though global oil prices have moderated, the pass-through to domestic prices remainsincomplete. Also, current administered electricity prices are yet to reflect increase in input prices, even as many states haveinitiated increases.As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in furthermoderation in demand and reversal of the inflation trajectory towards the later part of 2011-12. As such, a premature change inthe policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore,imperative to persist with the current anti-inflationary stance. Going forward, the stance will be influenced by signs ofdownward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and theimplications of global developments.Sept 2011 JM Financial Services Private Limited 2
  • 3. Q1FY12: Balance sheet growth slowing down with CD ratios moderating Q1FY12 Advances Growth Q1FY12 Deposit Growth Kotak Bank 36 Yes Bank 44 IndusInd Bank 31 Corporation Bank 29 Yes Bank 26 ING Vysya 29 ING Vysya 26 IndusInd Bank 29 Bank of Baroda 25 Punjab National 27 Canara Bank 24 Canara Bank 26 Punjab National 23 Axis Bank 24 Corporation Bank 22 Bank of Baroda 23 Bank of India 22 Federal Bank 23 Axis Bank 21 Kotak Bank 22 HDFC Bank 20 Bank of India 22 SYSTEMIC 20 SYSTEMIC 18 ICICI Bank 20 State Bank of India 17 State Bank of India 19 Union Bank 16 Federal Bank 18 HDFC Bank 15 Union Bank 17 ICICI Bank 15 0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40 45 50 CD Ratio - State Bank of India 83 Kotak Bank 83 HDFC Bank 75 Punjab National 75 SYSTEMIC 74 Bank of India 73 Union Bank 73 Canara Bank 72 Federal Bank 71 Bank of Baroda 69 IndusInd Bank 68 ING Vysya 67 Corporation Bank 67 Yes Bank 66 Axis Bank 64 ICICI Bank 64 60 65 70 75 80 85Sept 2011 JM Financial Services Private Limited 3
  • 4. Margins under pressure. Flow through to RoA depends on slippages Q1FY12 NIM - CASA Ratio - Kotak Bank 5.0 HDFC Bank 49 HDFC Bank 4.2 State Bank of India 48 Federal Bank 3.9 ICICI Bank 42 Punjab National 3.8 Axis Bank 41 State Bank of India 3.6 Punjab National 38 IndusInd Bank 3.4 Bank of Baroda 36 Bank of Baroda 3.4 Ing Vysya 34 Axis Bank 3.3 Union Bank 32 Union Bank 3.1 Bank of India 30 ING Vysya 3.0 IndusInd Bank 28 Yes Bank 2.8 Federal Bank 27 ICICI Bank 2.6 Kotak Bank 27 Canara Bank 2.4 Canara Bank 25 Bank of India 2.2 Corporation Bank 21 Corporation Bank 2.1 Yes Bank 11 0.0 1.0 2.0 3.0 4.0 5.0 6.0 0 10 20 30 40 50 60 Q1FY12 RoA - Kotak Bank 2.11 Axis Bank 1.63 HDFC Bank 1.47 Yes Bank 1.38 IndusInd Bank 1.34 ICICI Bank 1.31 Bank of Baroda 1.20 Punjab National 1.16 Federal Bank 1.14 Canara Bank 1.09 Corporation Bank 1.03 ING Vysya 0.84 Union Bank 0.83 Bank of India 0.66 State Bank of India 0.58 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25Sept 2011 JM Financial Services Private Limited 4
  • 5. Lower profit surprises for banks with stable asset quality & high CASANII Growth (Jun11) - Q1FY12 PPP Growth - Yes Bank 35 IndusInd Bank 35 State Bank of India 33 Yes Bank 31 IndusInd Bank 32 Axis Bank 21 Bank of Baroda 24 Bank of Baroda 20 Kotak Bank 22 Kotak Bank 19 ICICI Bank 21 State Bank of India 18 Punjab National 19 Punjab National 18 HDFC Bank 19 HDFC Bank 16 Union Bank 18 Union Bank 12 Axis Bank 14 Federal Bank 6 Federal Bank 11 ICICI Bank 2 ING Vysya 10 Bank of India (1) Bank of India 6 ING Vysya (1) Canara Bank 4 Corporation Bank (7) Corporation Bank 1 Canara Bank (14) 0 5 10 15 20 25 30 35 40 (15) (5) 5 15 25 35 PBT Growth Axis Bank 42 Yes Bank 37 ING Vysya 34 HDFC Bank 33 ICICI Bank 28 Kotak 28 Bank of Baroda 13 Federal Bank 9 Punjab National 1 Union Bank (13) Corporation Bank (17) Bank of India (19) Canara Bank (27) State Bank of India (33) (40) (30) (20) (10) 0 10 20 30 40 50Sept 2011 JM Financial Services Private Limited 5
  • 6. Asset Quality stable but pressures building upGross NPAs as % of Advances (Jun 2011) Net NPAs as % of Advances (Jun 2011) Federal Bank 4.49 State Bank of India 1.61 ICICI Bank 4.36 Canara Bank 1.34State Bank of India 3.52 Union Bank 1.32 Bank of India 2.69 Bank of India 1.27 Union Bank 2.57 ICICI Bank 1.04 Ing Vysya 2.15 Punjab National 0.86 Punjab National 2.00 Federal Bank 0.74 Canara Bank 1.67 Kotak Bank 0.54 Kotak Bank 1.59 Corporation Bank 0.52 Bank of Baroda 1.46 Bank of Baroda 0.44 IndusInd Bank 1.08 Ing Vysya 0.35 Corporation Bank 1.07 Axis Bank 0.31 Axis Bank 1.06 IndusInd Bank 0.30 HDFC Bank 1.04 HDFC Bank 0.20 Yes Bank 0.01 Yes Bank 0.17 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 Specific Coverage Ratio - PSU Banks ratios have slipped with pressure on asset quality Yes Bank 95 ING Vysya 84 HDFC Bank 83 Federal Bank 82 ICICI Bank 77 IndusInd Bank 73 Axis Bank 71 Bank of Baroda 70 Kotak Bank 66 Punjab National 57 State Bank of India 55 Bank of India 54 Corporation Bank 51 Union Bank 49 Canara Bank 20 10 20 30 40 50 60 70 80 90 100Sept 2011 JM Financial Services Private Limited 6
  • 7. Ju Ju n- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 n- 0 0.50 0.70 0.90 1.10 1.30 1.50 1.70 1.90 2.10 2.30 0 Se 6 Se 6 p- p- 0 D 06 D 6 ec Sept 2011 ec -0 -0 M 6 M 6 ar ar -0 -0 Ju 7 Ju 7 n- n- 0 Se 07 Se 7 p- p- 0 D 07 D 7 Gross NPA Ratio - HDFC Bank ec ec -0 -0 M 7 M 7 ar ar -0 -0 Ju 8 Ju 8 n- n- Gross NPA Ratio - Punjab National Bank Se 08 0 Se 8 p- p- 0 0 D 8 D 8 ec ec -0 -0 M 8 M 8 ar ar -0 -0 Ju 9 Ju 9 n- n- Se 09 0 Se 9 p- p- 0 0 D 9 D 9 ec ec -0 -0 M 9 M 9 ar ar -1 -1 Ju 0 Ju 0 n- 1 n- 1 Se 0 Se 0 p- p- D 10 1 ec D 0 -1 ec M 0 -1 ar M 0 -1 ar -1 Ju 1 Ju 1 n- n- 11 11 Ju Ju n- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 n- 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 1.30 Se 06 Se 06 p- p- D 06 D 06 ec ec - - M 06 M 06 ar ar -0 -0 Ju 7 Ju 7 n- n- Se 07 Se 07JM Financial Services Private Limited p- p- D 07 D 07 Gross NPA Ratio - Axis Bank ec ec - -0 M 07 M 7 Gross NPA Ratio - Bank of Baroda ar ar -0 -0 Ju 8 Ju 8 n- n- Se 08 Se 08 p- p- D 08 D 08 ec ec - - M 08 M 08 ar ar -0 -0 Ju 9 Ju 9 n- n- Se 09 Se 09 p- p- D 09 D 09 ec ec - - M 09 M 09 ar ar -1 -1 Ju 0 Ju 0 n- n- Se 10 Se 10 p- p- D 10 D 10 ec ec - -1 M 10 M 0 ar ar -1 -1 7 Ju 1 Ju 1 n- n- 11 11 NPAs at record lows. Should start to move up with increasing pressures.
  • 8. Overnight Index Swaps(OIS) indicate policy tightening cycle at its fag end Policy & OIS Rates - OIS rates pricing in last stages of near term policy rate hikes 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Repo Rate 1 Year OIS 5 Year OIS Source: Bloomberg, JM Financial PMS India OIS 2/5 Spread - Above the peak levels of 2008. 150 100 50 0 -50 -100 -150 -200 -250 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Source: Bloomberg, JM Financial PMSSept 2011 JM Financial Services Private Limited 8
  • 9. However, Oil prices though moderating are still at elevated levels. Average Prices - Prices impacting India basket marginally lower. Spread higher India Crude Basket - Though moderating but still well above $100/bbl 140 160 117 113 140 120 111 108 106 102 101 120 100 95 91 85 87 85 100 80 80 60 60 40 40 22 20 11 15 20 2 0 0 Q4CY10 Q1CY11 Q2CY11 Q3CY11 Se 7 8 08 9 Se 9 0 Se 0 1 Se 1 D 7 D 8 D 9 D 0 11 M 7 M 8 M 9 M 0 -0 -0 -1 -1 0 0 0 1 0 0 1 1 -0 -0 -0 -1 n- n- n- n- n- p- p- p- p- p- ar ar ar ar ec ec ec ec WTI Brent Dubai Oman Brent WTI Spread Ju Ju Ju Ju Ju Se Source: Bloomberg, JM Financial PMS Source: Bloomberg, JM Financial PMS Brent WTI Spread - Resumption of Libyan production should narrow the spread 30 25 20 15 10 5 0 -5 -10 Mar-08 Mar-09 Mar-10 Mar-11 Jun-07 Sep-07 Dec-07 Jun-08 Sep-08 Dec-08 Jun-09 Sep-09 Dec-09 Jun-10 Sep-10 Dec-10 Jun-11 Source: Bloomberg, JM Financial PMS Sep-11Sept 2011 JM Financial Services Private Limited 9
  • 10. Coupled with high oil prices, expansionary fiscal policy is keeping… Fiscal Deficit (% of GDP) - High deficits crowding out private investments 10 9 8 7 6 5 4 3 2 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Jun-05 Sep-05 Dec-05 Jun-06 Sep-06 Dec-06 Jun-07 Sep-07 Dec-07 Jun-08 Sep-08 Dec-08 Jun-09 Sep-09 Dec-09 Jun-10 Sep-10 Dec-10 Jun-11 Source: Bloomberg, JM Financial PMS Revenue Deficit (% of GDP) - Expansionary fiscal policy keeping inflation high 8 7 6 5 4 3 2 1 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Jun-05 Sep-05 Dec-05 Jun-06 Sep-06 Dec-06 Jun-07 Sep-07 Dec-07 Jun-08 Sep-08 Dec-08 Jun-09 Sep-09 Dec-09 Jun-10 Sep-10 Dec-10 Jun-11 Source: Bloomberg, JM Financial PMSSept 2011 JM Financial Services Private Limited 10
  • 11. …. headline inflation stubbornly high thereby… Infllation (WPI) - Moderation in headline but core component still high 12 10 8 6 (%) 4 2 0 -2 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 WPI Average Source: Bloomberg, JM Financial PMS Manufacturing Inflation - Continues to remain stubbornly high 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 -1.00 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Source: Bloomberg, JM Financial PMSSept 2011 JM Financial Services Private Limited 11
  • 12. …. forcing RBI to maintain a hawkish inflation fighting stance, but… RBI Policy Rates - Further tightening likely to be more data & oil price dependent Systemic Liquidity - RBI continues to maintain systemic liquidity in deficit mode 10.0 2000 16 15 9.0 1500 14 13 8.0 1000 12 11 500 10 7.0 9 8 6.0 0 7 6 5.0 -500 5 4 4.0 -1000 3 2 3.0 -1500 1 May-08 May-10 May-11 Mar-10 Nov-07 Nov-10 Jun-07 Aug-07 Feb-08 Jul-08 Oct-08 Feb-11 Jan-09 Apr-09 Jun-09 Sep-09 Dec-09 Aug-10 Jul-11 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Cash Reserve Ratio Repo Reverse Repo Reverse Repo Funds (Rs.Bn.) (LHS) 3m Commercial Paper Rate (%) (RHS) Source: Bloomberg, JM Financial PMS Source: Bloomberg, JM Financial PMS State Bank of India Rates (%) - Lending rates have surpassed 2008 highs 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 SBI Prime Lending rate SBI 1 Year Deposit Rate Source: Bloomberg, JM Financial PMSSept 2011 JM Financial Services Private Limited 12
  • 13. ….high interest rates are adversely affecting the investment cycle thereby… Capital Goods Growth - Capex cycle continues to remain weak. Reforms critical. HSBC Markit India Manufacturing PMI - Sharp deceleration since April 2011 70 65 60 50 60 40 30 55 20 10 50 0 -10 45 -20 -30 40 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 IIP Capital Goods Growth (%) 3 Month Moving Average Source: Bloomberg, JM Financial PMS Source: Bloomberg, JM Financial PMS Industrial Production Growth - Political uncertainty & high rates feeding through 25 20 15 10 5 0 -5 -10 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 India Industrial Production Growth (%) 3 Month Moving Average Source: Bloomberg, JM Financial PMSSept 2011 JM Financial Services Private Limited 13
  • 14. .…resulting in declining credit & economic growth. India Banking Credit Growth (%) - Reflecting slowdown in Investment cycle 35 30 25 20 15 10 5 Aug-97 Feb-98 Aug-98 Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Credit Growth Average Credit Growth Source: Bloomberg, JM Financial PMS India GDP Growth (QoQ) - RBI tightening slowing the trend growth 11.0 10.0 9.0 8.0 7.0 6.0 5.0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Annualised Rolling Four Quarters QoQ GDP Growth (%) Source: Bloomberg, JM Financial PMSSept 2011 JM Financial Services Private Limited 14
  • 15. Headwinds persist. Reforms to determine severity of NPA cycle.. IEarnings visibility getting cloudedOperating environment for financial sector should remain challenging as RBI continues to target near double digit inflationdespite decelerating economic growth momentum. These challenges are getting compounded due to 1. Overshoot in budgetedgovernment deficits since fiscal policy continues to remain expansionary & 2. Paralyzed legislative & administrative process inthe wake of ongoing corruption scandals. The slowing down in credit demand has been material even accounting for the slackseason and there is considerably lesser headroom within system to absorb rate hikes without affecting credit quality.Investment & infrastructure capex cycle has become subdued and loan sanctions in these segments have dropped materially.Spread stabilization to be dependent on monetary policy stanceMargin outlook dependent on 1. Composition of Deposits 2. Pass through of costs & 3. Pace of balance sheet growth.Composition of Deposits: Higher term deposit rates are resulting in cannibalization of CASA deposits in favor of term depositsthereby increasing cost of deposits. Since RBI has been in rate tightening mode for almost 18 months and effective tighteningof 500bps from the low (150bps in last 6 months) interest rates are nearer peak levels. However, deposit rates are expected toremain sticky on government deficits unless RBI lowers the statutory reserve requirements to infuse liquidity in to the systemthereby lowering the wholesale borrowing costs. Typically the banking system subscribes to ~40% of GOI bond issues & withthe slippage in budgeted deficit targets, large part of funds would get diverted towards statutory requirements. Hence depositrates would need to remain attractive to help banks mobilize deposits for credit growth.Pass through of costs: Slowdown in investment cycle is resulting in most banks targeting growing the Retail, SME & Agricultureportfolios to generate loan book growth. However, it is difficult to pass costs in agriculture, SME & mortgage segments withoutaffecting asset quality. As long as the economy doesn’t slow down sharply & asset quality remains stable, the need to beabsorb costs for the banks will be lower thereby helping margins.Pace of balance sheet growth: Assuming sustainable growth rate of 7-8%, in line with RBI comfort zone, & credit multiplier of2x, sustainable systemic credit growth can be 14-16%. Current systemic CD ratio at ~73% means credit growth to be functionof deposit growth since bulk of investment book close to statutory levels. Credit growth could be 17-18% if deposit growthstays healthy. Well capitalized banks with high CAR will be in a position to grow higher than the systemic average and gainmarket share from banks looking to conserve capital to protect against asset quality deterioration. Current credit demandmore for working capital loans v/s Investment demand as can be seen from the improved utilization of working capital limits.Sept 2011 JM Financial Services Private Limited 15
  • 16. Headwinds persist. Reforms to determine severity of NPA cycle.. II .NPA cycle at cyclical low and due for a turnNPA cycle is at a cyclical low and has likely turned with the rising stress levels on asset quality. The stress levels though arestill at manageable levels at an aggregate balance sheet levels of banks and certainly at the systemic level. Current assetquality pressures are largely coming from Airlines, Textiles, Gems & Jewelry, Agriculture & MFIs. Fears of large delinquenciesfrom infrastructure segment specifically power sector have been persistent and increasingly making the markets nervous. At asystemic level the banking sector has largest exposure to infrastructure segment since bulk of the credit growth over last fewyears has been on the back of lending to infrastructure segment specifically power & telecom. However, to what extent will thebanks remain insulated from the turn in NPA cycle and how sharply will the cycle turn will largely be a function of 1. DomesticPolicy actions & Policy Reforms & 2. Capital Flows.Power sector case study: Risks to the power sector exposure of banks & FIs are primarily arising from two levels –1. Off-taker Risk: On account of pricing issues of SEBs and 2. Fuel Risk: Shortages of Coal/ Gas to delay cash flow to projectsthereby increasing risks to creditors.The off-taker risk can be managed/ mitigated through policy actions improving the financial health of the SEBs. SEB losses areprimarily on account of static tariffs even in face of rising costs of power production/ procurement, non payment of subsidiesby the state governments to the SEBs, large capex on T&D without commensurate returns since 100% metering still not done,free power to agricultural sector and rising wages, salaries. In light of these, the power ministry recently held a conference ofstate power ministers on state distribution reforms of SEBs to focus on urgent steps & improve the health of SEBs and passedresolutions to effect the same. What will be critical though is the implementation of these resolutions. Upon implementation ofagreed resolution, the default risk of distribution companies (discoms) of SEBs should substantially reduce.Structurally, fuel risk is the more worrisome risk though even here a large part can be mitigated through policy initiatives. Midsize power companies without fuel linkages likely to get under stress. The probability of restructuring is higher of bad loanson account of the fuel supply risk.Conclusion: Key headwinds: 1. Pressure on Revenues: Lower credit growth coupled with margin pressure 2. Pressure onProfits: Rising credit costs & 3. Policy inaction & delayed reforms impacting business confidence and industrial activity. Aftereffectively tightening the monetary policy by 500bps since early 2010, RBI’s hawkish stance should moderate. Furthertightening will be primarily Oil price dependent since domestic demand has begun to moderate. Financial sector being aleveraged sector on the economy would be under pressure with global and domestic macro headwinds gathering momentum,sentiment would likely remain weak towards financial stocks. Valuations though are hovering near or below long termaverages, but not near trough levels as yet. Prefer private sector banks to public sector banks since they are better capitalized towithstand the challenging environment.Sept 2011 JM Financial Services Private Limited 16
  • 17. Consensus Earnings Estimates & ValuationsNEW PRIVATE BANKS CMP MCAP MCAP Consensus EPS Est Consensus BVPS Consensus RoE P/E Ratio P/B Ratio (Mn$) (Rs.Mn) 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013ICICI BANK LTD 884 21,549 1,018,562 55.4 67.2 508 552 12.0 13.5 16.0 13.1 1.74 1.60HDFC BANK LTD 484 23,915 1,130,424 21.6 27.4 125 147 18.5 20.1 22.4 17.6 3.87 3.30AXIS BANK LTD 1133 9,884 467,186 97.8 119.6 537 635 19.6 20.5 11.6 9.5 2.11 1.78KOTAK MAHINDRA BANK LTD 471 7,353 347,553 13.7 16.6 170 196 15.3 15.9 34.4 28.3 2.77 2.40INDUSIND BANK LTD 266 2,627 124,171 16.0 20.4 96 113 17.6 19.4 16.6 13.1 2.78 2.36YES BANK LTD 281 2,080 98,335 26.8 33.8 136 167 21.8 22.5 10.5 8.3 2.07 1.68Wt. Average 3,186,230 19.5 15.7 2.71 2.35OLD PRIVATE BANKS CMP MCAP MCAP Consensus EPS Est Consensus BVPS Consensus RoE P/E Ratio P/B Ratio (Mn$) (Rs.Mn) 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013FEDERAL BANK LTD 371 1,343 63,496 41.9 51.4 322 361 13.5 14.9 8.9 7.2 1.15 1.03KARUR VYSYA BANK LTD 361 823 38,900 48.8 59.2 250 295 21.4 22.0 7.4 6.1 1.45 1.23ING VYSYA BANK LTD 290 920 43,471 30.6 37.5 257 289 13.4 13.8 9.5 7.7 1.13 1.00JAMMU & KASHMIR BANK LTD 866 888 41,982 147.2 165.0 830 960 18.6 18.2 5.9 5.2 1.04 0.90SOUTH INDIAN BANK LTD 23 559 26,443 3.0 3.6 18 21 17.9 18.3 7.9 6.6 1.32 1.13CITY UNION BANK LTD 45 386 18,261 6.3 7.8 31 37 23.0 22.5 7.1 5.8 1.47 1.22KARNATAKA BANK LTD 92 367 17,353 16.2 16.2 136 146 10.3 12.1 5.7 5.7 0.68 0.63DEVELOPMENT CREDIT BANK LTD 48 204 9,621 1.9 3.2 33 36 6.4 9.3 25.7 15.1 1.47 1.33DHANLAXMI BANK LTD 80 143 6,781 7.1 10.7 109 119 6.7 8.7 11.3 7.5 0.73 0.67Wt. Average 266,309 8.5 6.9 1.18 1.03PUBLIC SECTOR BANKS CMP MCAP MCAP Consensus EPS Est Consensus BVPS Consensus RoE P/E Ratio P/B Ratio (Mn$) (Rs.Mn) 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013STATE BANK OF INDIA 1946 26,137 1,235,454 180.5 235.6 1494 1717 17.4 17.7 10.8 8.3 1.30 1.13PUNJAB NATIONAL BANK 981 6,573 310,666 160.6 194.3 754 911 22.3 22.5 6.1 5.0 1.30 1.08BANK OF BARODA 774 6,415 303,213 120.3 144.1 606 722 21.0 21.3 6.4 5.4 1.28 1.07CANARA BANK 434 4,064 192,085 93.3 111.1 481 574 20.1 20.2 4.6 3.9 0.90 0.76BANK OF INDIA 324 3,748 177,142 52.4 66.8 323 376 16.4 18.2 6.2 4.9 1.00 0.86UNION BANK OF INDIA 238 2,640 124,791 47.7 57.6 246 291 19.7 20.4 5.0 4.1 0.97 0.82IDBI BANK LTD 107 2,236 105,698 19.6 23.2 142 161 13.8 15.2 5.5 4.6 0.76 0.67ORIENTAL BANK OF COMMERCE 292 1,805 85,296 57.9 71.5 391 446 15.0 16.4 5.1 4.1 0.75 0.66ALLAHABAD BANK 164 1,655 78,218 36.6 45.3 186 222 19.9 21.1 4.5 3.6 0.88 0.74INDIAN BANK 208 1,892 89,435 43.9 53.1 226 267 20.4 21.2 4.7 3.9 0.92 0.78INDIAN OVERSEAS BANK 100 1,314 62,091 21.1 26.9 143 161 15.3 17.5 4.8 3.7 0.70 0.62CENTRAL BANK OF INDIA 105 1,435 67,829 28.1 29.6 152 182 16.7 16.4 3.7 3.5 0.69 0.58CORPORATION BANK 449 1,406 66,467 100.4 119.6 549 639 19.2 19.8 4.5 3.8 0.82 0.70Wt. Average 2,898,387 7.7 6.1 1.14 0.98Sept 2011 JM Financial Services Private Limited 17
  • 18. Disclaimer This report and information contained in this report is solely for information purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. The investment as mentioned and opinions expressed in this report may not be suitable for all investors. In rendering this information, we assumed and relied upon, without independent verification, the accuracy and completeness of all information that was publicly available to us. The information has been obtained from the sources we believe to be reliable as to the accuracy or completeness. While every effort is made to ensure the accuracy and completeness of information contained, the JM Financial Services and its affiliates takes no guarantee and assumes no liability for any errors or omissions of the information. This information is given in good faith and we make no representations or warranties, express or implied as to the accuracy or completeness of the information. No one can use the information as the basis for any claim, demand or cause of action. JM Financial Services and its affiliates shall not be liable for any direct or indirect losses or damage of any kind arising from the use thereof. Opinion expressed is our current opinion as of the date appearing in this report only and are subject to change without any notice. Recipients of this report must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. The recipient should independently evaluate the investment risks and should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document and should consult their own advisors to determine the merits and risks of such an investment. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of JM Financial Services and its affiliates. The report and information contained herein is strictly confidential and meant solely for the selected recipient and is not meant for public distribution. This document should not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced, duplicated or sold in any form. JM Financial Services Pvt. Ltd. Corp: 3rd Floor ,Apeejay House , 3 Dinshaw Vachha Road , Churchgate , Mumbai – 400020 Regd: 141, Maker Chambers III, Nariman Point Mumbai – 400021. NSE - Capital Market INB 231054835 | F&O Segment INF 231054835 | BSE - Cash Market INB 011054831 F&O Segment INF 011054831 | Depository Participant – NSDL DP: IN-DP-NSDL-241-2004 CDSL DP: IN-DP-CDSL-236-2004 | Portfolio Manager: INP 000000621Sept 2011 JM Financial Services Private Limited 18

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