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634673235874066131

  1. 1. 13 March 2012 Update Financials Superior and stable RACI leading to lower earnings volatility and higher RoA HDFCB, IIB, PNB and INBK leading the pack; SBIN and ICICIBC report sharp improvement     We have analyzed banks' performance on two parameters: (1) risk-adjusted margin (RAM) and (2) risk adjusted core income (RACI). We define RAM as (NII-NPA provisions)/average assets, and RACI as RAM + fee income (as a percentage of average assets). Significant improvement in RAM is noticed for private banks from FY11 onwards led by the sharp fall in credit cost due to benign retail asset quality. Private banks are historically twice efficient than PSU banks on generating fees. The gap of RACI has increased further during the last two years leading to sustained premium multiples despite moderation in growth. Banks delivering higher-than-system average RACI are HDFCB (~5.4%), AXSB (~4.1%), INBK (~3.8%) and PNB (~3.6%). ICICIBC and IIB's sharp improvement in core income over the last 2-3 years has led to historical high RACIs. Despite being a bulk borrower YES's consistent on performance of RAM is commendable (range of 2.2-2.5%). We re-iterate SBIN, ICICIBC, PNB, INBK and YES as our top picks in the sector due to their consistently superior/improving core operating performance. PSU banks' RAMs down sharply by 60bp over FY07-10; higher NIMs resulted in improvement thereafter: Sharp contraction in PSU banks' RAM during FY07-10 was led by the drop in NII-to-average assets (defined as net interest margin or NIM) of over 40bp and higher NPA provisions-to-average assets (defined as credit cost) of over 20bp. However, banks recovered some lost ground in FY11 as NIMs increased by ~42bp leading to over 32bp improvement in RAM. In FY11, for PSU banks like Bank of Baroda (BOB), Bank of India (BOI), Canara Bank (CBK), Union Bank (UNBK) and Andhra Bank (ANDB), RAM expanded by over 35bp. Punjab National Bank (PNB) and Indian Bank (INBK) have consistently maintained average RAMs that are ~50bp higher vis-à-vis peers. Superior retail asset quality, NIM expansion helped private banks' to boost RAM: During FY07-10, private banks' average RAM remained largely stable at 1.9%, while performance varied sharply among players. While ICICI Bank's (ICICIBC) RAM compressed sharply by 40bp to 1% (half of private bank's average of 1.9%) in FY10, IndusInd Bank's (IIB) reported sharp improvement in RAM during the same period. Led by ICICIBC' strong bounce back (up 82bp, out of which 65bp was from credit cost) and the superior retail asset quality performance of HDFC Bank (HDFCB) and other smaller banks, private banks' RAM improved sharply (up 70bp) in FY11. While an improvement in RAM was seen across all private banks (FY12 v/s FY07), a sharp improvement was noticed for IIB (3% v/s 1.1%), ICICIBC (2.1% v/s 1.4%) and Federal Bank (FB) - 2.8% v/s 2.2%. Yes Bank's (YES) RAM remained in the narrow band of 2.2-2.5%. Strong contribution from fee-based income leading to higher RACI for SBIN; private banks doing a better job: With the exception of State Bank of India (SBIN), the contribution of fee-based income to average assets is less than 90bp for PSU banks. Whereas private banks are nearly 1.8x more efficient than their PSU counterparts in fees. Over FY07-11, PSU banks' average fee-based contribution was ~90bp v/s private banks' 160bp. In a moderating economic scenario, the RACI gap between PSU and private banks has widened sharply due to continued buoyancy in fee-based income for private banks, and improving RAM led by lower credit cost (due to benign retail asset quality and lower restructured loans). In case of SBIN, while RAM was ~10bp lower than PSU banks' average (over FY07-11), RACI was ~10bp higher because of the high component of fee-based income for the bank. For FY12, SBIN's RACI is likely to be ~40bp higher than PSU banks' average in FY12. Superior RACI leads to higher RoA; SBIN is an exception: We believe banks that have consistently delivered higher RACI are better placed. PSU banks with higher RACI like PNB, INBK enjoy much superior ROAs compared to peers. While SBIN's RACI is higher than its peers, higher opex and highly volatile treasury income has lead to lower RoA. Among private banks, consistent improvement in RACI was witnessed for ICICIBC, IIB, VYSB and FB over the last 2-3 years leading to an improvement in RoAs. HDFCB enjoys best of the RACI's, followed by IIB. We reiterate SBIN, ICICIBC, PNB, INBK and YES as our top picks in the sector due to their consistently superior core operating performance. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415 Sohail Halai (Sohail.Halai@MotilalOswal.com) / Umang Shah (Umang.Shah@MotilalOswal.com)
  2. 2. Financials | Update Margins competitive but asset quality-a key differentiator Sharp improvement in RAM for ICICIBC and IIB; HDFCBs RAM remain superior     Led by a sharp drop in NIM (down over 40bp) and higher credit cost (up 20bp) over FY07-10, PSU banks' RAM compressed sharply. However, NIMs recovered in FY11 (up 42bp) leading to ~32bp improvement in RAM. During FY07-10, while the average RAM for private banks was 1.9-2%, performance varied sharply among players. While ICICIBC's RAM compressed sharply by 40bp to 1% (nearly half of private bank's average of 1.9%), that of IIB improved sharply during the same period. Over the last 2-3 years, private banks' strong retail asset quality performance and structural improvement in balance sheet profile have translated into higher RAM. After restructuring of its balance sheet, ICICIBC registered the strongest improvement in RAM (up 105bp over the past two years). HDFCB, PNB and INBK have consistently delivered superior RAM over the years leading to superior ROA. YES's stable RAM, despite a bulk borrower, is commendable. PSU Bank RAM bounce back in FY11 led by improvement in margins Led by a sharp drop in NIM (down over 40bp) and higher credit cost (up 20bp) over FY07-10, PSU banks' RAM compressed sharply. However, NIMs recovered in FY11 (up 42bp) leading to ~32bp improvement in RAM.  Compression in NIM (down 50bp, led by high liquidity build-up) and asset quality pressure (+20bp) led to a sharp compression in SBIN's RAM by ~70bp during FY0710. However, corrective actions taken by the management with increased focus on NIM led to 23bp improvement in FY11 which is expected to improve further by 40bp in FY12. SBIN's RAM has again bounced back to near the FY07 level now.  Except PNB, UNBK and INBK, none of the PSU banks have shown consistency in RAM performance. PNB and INBK have consistently maintained RAMs of 40-75bp and 40-100bp above PSU banks' average leading to superior ROA.  Among PSU banks, major swings were witnessed for BOI in FY10 (down 80bp due to asset quality-related issues) and CBK in FY08 (down 70bp, largely driven by NIM compression).  Private banks flare better in terms of RAM during FY11-12 (RAM, %) PSU banks' RAM improved in FY11 led by an up-tick in margins. However, credit costs remained at an elevated level. In case of private banks, improvement in asset quality (led by ICICIBC) and higher margins led to sharp improvement in RAM PSU Avera ge Pvt Avera ge 2.7 2.6 2.6 1.9 FY07 1.9 FY08 2.3 2.3 2.3 2.3 2.0 FY09 2.0 1.9 FY10 FY11 FY12E Source: Company/MOSL 13 March 2012 2
  3. 3. Financials | Update 3.6 3.6 3.0 3.0 HDFCB INBK IIB PNB 1.8 3.0 3.0 3.0 2.9 2.9 2.8 2.8 2.8 2.6 ANDB 2.6 2.8 2.4 SIB 2.6 2.7 2.3 FB 2.7 2.0 2.3 FY12 VYSB 2.6 2.6 AXSB 2.4 2.1 2.5 2.2 SBIN 2.3 2.3 YES 2.2 2.3 BoB FY11 2.5 2.4 2.3 2.1 UNBK 2.2 1.8 2.1 1.3 ICICIBC 2.2 2.0 2.2 OBC 2.2 1.7 1.9 CBK 1.7 BoI 2.1 2.2 FY07--11 3.9 Private banks’ RAM has remained stable or improved; PSU banks has been a mixed bag (%) Source: Company/MOSL Private Banks: Sharp improvement in RAM over past two years; ICICIBC & IIB posting strong turnaround SBIN's higher focus on yield led to sharp bounce back in RAM despite challenges in asset quality. IIB's and ICICIBC's strong improvement in RAM was led by restructuring of balance sheet and focus on profitability. HDFCB, INBK and PNB has consistently delivered superior RAM      13 March 2012 Most private banks have registered stable-to-improving RAMs during FY05-10, led by improving CASA ratio, better pricing on retail loans and superior risk management practices. After a dismal performance during FY07-10 (due to lower margins and pressure on asset quality), ICICIBC registered a sharp improvement in RAM. Addressing ALM issues, improvement in liability profile, increased focus on profitable growth, better loan sourcing and diversifying its loan book are some of the key reasons for the healthy improvement. HDFCB has consistently maintained its RAM level above private banks' average leading to consistent and healthy earnings growth. Post the management change in IIB its RAM, which used to be half of the private banks' average in FY08, has improved to more than the average in FY11. AXSB's RAM, which was 2.2-2.5% (average of 2.3%) during FY07-10, has improved to 2.6% due to improvement in margins (led by the impact of capital-raising and lower growth rates than historical averages). YES has managed to keep its RAM in the range of 2.2-2.5% during FY07-12, which has reduced earnings volatility. VYSB and FB has registered sharp improvement in RAM during the same period. 3
  4. 4. Financials | Update INBK and PNB have consistently delivered higher RAM; SBIN's RAM has bounced back sharply (%) SBIN: Margins off-sets higher credit cost NII/Avg As s ets 2.6 LLP/Avg As s ets 2.5 PNB: Consistently delivering higher RAM NII/Avg As s ets 3.0 LLP/Avg As s ets 2.2 2.8 2.6 -0.3 -0.3 1.9 2.3 2.9 3.3 -0.3 -0.5 -0.7 3.4 3.1 3.1 3.1 -0.2 -0.4 -0.4 -0.8 FY07 FY08 FY09 FY10 FY11 FY12E 2.6 3.5 3.3 -0.6 -0.4 2.8 2.1 2.5 2.7 LLP/Avg As s ets 2.4 2.2 2.4 2.8 2.4 2.5 2.4 -0.1 -0.3 -0.1 -0.4 2.2 2.8 2.6 -0.3 -0.4 2.0 FY10 FY11 FY12E FY07 FY08 FY09 FY10 FY11 FY12E BoI: Volatile asset quality impacting RAM CBK: Weak core operating performance UNBK: Stable RAM despite higher NPAs NII/Avg As s ets 2.3 2.2 2.4 2.7 -0.4 2.6 -0.4 2.7 -0.3 LLP/Avg As s ets 1.6 2.2 2.3 2.5 -0.7 -0.3 1.7 2.1 -0.4 FY07 FY08 FY09 FY10 FY11 FY12E OBC: Volatile RAM performance NII/Avg As s ets 1.8 1.9 2.0 2.3 -0.2 0.3 2.3 -0.4 2.2 NII/Avg As s ets 2.3 1.9 LLP/Avg As s ets 1.7 2.2 1.5 2.7 -0.4 2.0 2.4 2.3 2.6 -0.5 -0.4 -0.6 -0.4 1.7 2.0 3.3 2.3 2.0 2.1 2.7 2.5 2.7 2.4 -0.4 -0.3 -0.5 -0.4 -0.4 2.3 2.1 2.9 2.7 -0.6 -0.6 FY07 FY08 FY09 FY10 FY11 FY12E ANDB: Strong margin performance LLP/Avg As s ets 3.0 LLP/Avg As s ets 2.0 FY07 FY08 FY09 FY10 FY11 FY12E NII/Avg As s ets NII/Avg As s ets 2.4 INBK: RAM best amongst peers LLP/Avg As s ets 2.8 FY07 FY08 FY09 NII/Avg As s ets 2.9 2.9 2.9 -0.4 2.3 BoB: Largely stable RAM performance 3.0 2.7 3.3 3.0 3.4 3.4 3.6 3.4 0.0 -0.4 -0.6 -0.4 NII/Avg As s ets LLP/Avg As s ets 2.8 3.0 2.8 3.2 3.3 -0.5 -0.5 2.4 2.4 2.3 3.0 2.6 2.6 2.8 -0.1 -0.2 -0.3 -0.4 0.2 2.5 2.0 2.8 2.5 3.4 3.2 -0.6 -0.4 -0.2 -0.6 FY07 FY08 FY09 FY10 FY11 FY12E FY07 FY08 FY09 FY10 FY11 FY12E FY07 FY08 FY09 FY10 FY11 FY12E Source: Company/MOSL 13 March 2012 4
  5. 5. Financials | Update Across-the-board RAM improvement; ICICIBC and IIB register strong turnaround (%) ICICIBC: Sharpest improvement in RAM since FY10 NII/Avg As s ets LLP/Avg As s ets 1.8 1.2 2.0 2.1 2.2 -0.7 -1.0 -1.2 1.3 1.9 -0.5 NII/Avg As s ets 3.4 2.4 -0.5 3.7 3.7 4.2 2.1 2.3 1.0 1.4 AXSB: Improving RAM performance over FY11-12 HDFCB: RAM best amongst peers 4.7 4.7 LLP/Avg As s ets 3.9 3.6 4.1 4.2 3.9 -1.0 -0.3 -0.8 -0.9 -1.0 FY07 FY08 FY09 FY10 FY11 FY12E NII/Avg As s ets LLP/Avg As s ets 2.1 2.1 1.9 1.8 2.3 2.7 1.1 3.4 3.3 2.5 2.2 2.3 2.5 2.8 1.4 -0.3 -0.5 -0.4 -0.4 -0.3 -0.4 -0.2 -0.4 -0.7 -0.4 FY07 FY08 FY09 FY10 FY11 FY12E FB: Superior NIM leading to higher RAM NII/Avg As s ets 2.4 3.0 -0.9 -1.0 FY07 FY08 2.8 2.9 3.0 3.1 3.0 -0.4 -0.6 -0.9 -0.5 -0.4 FY07 FY08 FY09 FY10 FY11 FY12E NII/Avg As s ets 2.2 3.7 2.4 LLP/Avg As s ets 2.4 2.5 2.6 2.7 2.6 2.4 -0.3 -0.3 -0.1 -0.1 2.3 2.3 2.4 0.0 2.3 FY07 FY08 FY09 FY10 FY11 FY12E SIB: Consistently delivering on asset quality LLP/Avg As s ets 2.0 3.1 2.4 -0.2 FY07 FY08 FY09 FY10 FY11 FY12E 2.2 2.6 2.2 1.8 -0.3 2.6 2.9 2.8 1.4 2.2 0.0 1.3 1.1 2.2 YES: RAM in a narrow band of 2.2-2.5% LLP/Avg As s ets 3.0 2.4 2.5 2.3 -0.3 IIB: Sharp turnaround in core operations VYSB: Improving core income 3.0 LLP/Avg As s ets -0.1 3.2 -0.3 FY07 FY08 FY09 FY10 FY11 FY12E NII/Avg As s ets NII/Avg As s ets 2.6 NII/Avg As s ets 2.7 3.4 3.7 -1.3 -1.0 -1.1 FY09 FY10 FY11 FY12E 2.4 -0.8 3.5 2.7 2.2 2.9 -0.7 FY07 LLP/Avg As s ets 2.3 2.6 2.8 2.4 2.8 2.5 2.7 2.8 -0.1 -0.1 -0.2 -0.1 -0.1 FY08 FY09 FY10 FY11 FY12E Source: Company/MOSL 13 March 2012 5
  6. 6. Financials | Update Private banks: Reaping benefit of benign asset quality PSU banks' Higher NIMs aids profitability; credit cost remain elevated    The increased discipline in pricing and improvement in CD ratio propelled margins in FY11. However, the sharp increase in PSU banks' slippages led by system-based recognition of NPAs and continued tight liquidity in the system led to stable to marginal decline in NIMs in FY12. SBIN is an exception with margins improving ~50bp in FY11 and expected to further improve by 50bp in FY12 - best amongst the sector. Change in NPA provisions requirement and higher asset quality stress led to sharp increase in PSU banks' NPA provisions. On the other hand, NPA provisions for private banks declined due to their well-diversified portfolio, superior risk management practices and betterthan-trend line retail asset quality performance. A higher share of a retail portfolio and strong liability franchise enabled HDFCB to maintain superior NIMs. ICICIBC and IIB reported consistent improvement in NIM led by structural improvement in balance sheet profile. ICICIBC's NPA provisions also fell sharply due to the sharp decline in unsecured retail loans and improvement in risk management practices. 2.9 2.5 2.9 2.8 2.6 2.6 2.4 2.6 3.1 Pvt Avera ge 2.9 PSU Avera ge 2.9 Performance on margins is expected to be a mixed bag for PSU bank. However, on an aggregate basis margins are expected to remain stable. Private banks exhibited strong margin performance across the board 3.0 Consistent improvement in NIM of private banks bridges the gap as against PSU banks (NIM, %) FY07 FY08 FY09 FY10 FY11 FY12E Source: Company/MOSL Divergent trend in NPA provision-to-average assets for PSU and private bank (credit cost, %) While NPA provisions of PSU banks has been rising over past three years, private banks have been able to show consistent improvement led by sharp decline in NPA provision PSU Pri va te 1.0 0.8 0.6 0.3 FY07 0.5 0.3 FY08 0.6 0.6 0.5 0.4 0.3 0.3 FY09 FY10 FY11 FY12E Source: Company/MOSL 13 March 2012 6
  7. 7. Financials | Update PSU Banks: Performance on margin a mixed bag; SBIN's performance remains superior Margins bounced back sharply for PSU banks in FY11 led by (1) asset reallocation, leading to improvement in CD ratio, (2) buoyancy in CASA growth, and (3) increased pricing discipline. Despite pressure on CASA deposits, higher slippages and tight liquidity conditions, we believe NIMs are unlikely to drop sharply in FY12 due to significant pricing discipline in the industry and banks' focus on core profitability. Change of management's focus to garner higher share of customer wallet share via yields than fees, sharp repricing of some of the assets and high share of CASA mix benefitted SBIN in FY12. The bank is likely to report 70bp+ improvement in margins v/s the average seen during FY07-11. While SBIN's NPA provisions were either in-line or marginally above PSU banks' average during FY07-10, it increased sharply in FY11-12 impacting earnings growth CBK's and BOI's margins compressed sharply led by higher slippages and higher proportion of bulk deposits (annualized slippage ratio in FY12 is expected to be 2.2% and 3.1%, respectively). UNBK's performance on margins surprised us positively as despite higher slippages, its NIM is expected to decline by only ~20bp as compared to over 30-50bp for BOI and CBK. Other PSU banks are expected to report 20-30bp NIM decline in FY12. Apart from SBIN, the only other PSU bank that is expected to report improvement in margin is ANDB (up 10bp).      Mixed performance on margins (%) FY12E 2.9 3.2 3.5 PSU avg ANDB PNB 3.6 2.9 UNBK INBK 2.8 BOB 2.9 2.6 2.7 2.8 OBC SBIN 2.6 2.6 2.5 BOI 2.4 2.1 2.6 2.1 2.3 2.5 2.6 2.7 2.9 2.8 3.3 3.2 3.3 2.6 3.3 3.4 3.4 FY11 CBK Avg. FY07-11 SBIN - Strong improvement in NIMs (%) E Credit cost increases for most PSU banks (%) 0.8 0.6 0.7 SBIN UNBK 0.6 0.4 0.4 0.6 0.6 PSU average 0.3 0.5 ANDB 0.3 BOI 0.4 0.5 FY12E 0.4 0.4 0.4 0.6 0.4 FY11 PNB 0.4 CBK 0.5 0.4 OBC 0.4 0.1 0.6 0.4 0.4 0.6 INBK 0.4 0.3 BOB 0.2 Avg. FY07-11 BOB and INBK, NPA provision remain under control led by strong asset quality performance. Those of SBIN, UNBK and OBC have risen significantly Source: Company/MOSL 13 March 2012 7
  8. 8. Financials | Update Private banks' NIMs sharp improvement in FY11-12      The performance of private banks has remained strong across-the-board. A higher share of retail portfolio and strong liability franchise enabled HDFCB to maintain superior NIM of ~4%. ICICIBC and IIB reported consistent improvement in NIMs led by a structural improvement in their balance sheet profile. Improvement in liability mix (CASA ratio improved to 40%+ in FY11 from 22% in FY07) and an uptick in its international business' margins led to ICICIBC registering a strong performance. Its NPA provision declined to 50bp in FY11 as against peak of 120bp in FY10. Better risk management, change in loan mix more towards secured products and running-off of unsecured loan portfolio has led to stellar performance on asset quality, driving ROAA. IIB's increased focus on high-yielding commercial vehicle (CV) loans and improving liability franchise has resulted in its NIMs improving. Despite its higher exposure to the CV segment, the bank has been able to maintain its asset quality in a moderating economic growth environment, which is commendable. AXSB's performance has been strong with the bank maintaining MINs at 3%+ over the past three years. While strong growth in past and higher exposure towards the SME segment remains a risk for the bank, so far its performance has been strong with NPA provisions declining from ~90bp in FY10 to ~45bp in FY11 and expected to further decline to ~40bp in FY12. 2.4 2.9 2.8 3.0 2.8 3.0 2.8 3.1 3.1 3.4 3.7 VYSB AXSB Pvt Avg IIB FB 4.7 4.7 4.2 4.1 4.2 FY10 FY11 3.9 4.2 2.7 2.8 2.7 SIB NII to a vera ge a s s ets HDFCB 2.5 2.4 2.6 YES 2.2 2.1 2.4 2.3 3.4 3.5 FY12E 3.3 FY11 ICICIBC Avg. FY07-11 HDFB: Superior perfomance on NIMs continues (%) 4.4 3.9 Healthy NIM performance across board (NIM, %) FY07 FY08 FY09 FY12E 0.8 1.1 0.4 FB 0.3 0.5 AXSB HDFCB 0.4 Pvt Average 0.3 0.4 0.5 0.7 0.3 0.4 0.4 IIB 0.5 ICICIBC 0.3 0.4 0.4 0.2 VYSB YES 0.1 0.1 0.1 0.2 0.1 0.1 SIB FY12E 0.8 FY11 0.8 Avg. FY07-11 Balance sheet restructuring and focus on profitability led to sharp decline in ICICIBC NPA provisions, resulting in higher RAM and RoAA 1.1 Lower credit cost led by strong asset quality (credit cost, %) Source: Company/MOSL 13 March 2012 8
  9. 9. Financials | Update Higher RACI translating into higher RoAs Fees a key differentiator of return ratios     In case of most PSU banks (excluding SBIN), the contribution of fee-based income contribution to average assets is less than 90bp. Private banks are nearly 1.8x efficient in garnering feebased income. In FY11, fee income accounted for 90bp of PSU banks' average vis-à-vis 160bp for private banks. In a moderating economic scenario, the RACI gap between PSU and private banks has widened sharply due to continued buoyancy in fees for private banks, lower credit cost (due to buoyancy in retail loans) and improving NIMs led by ICICIBC (ALM changes and liability profile). While SBIN's RACI is higher than its peers, higher opex and highly volatile treasury income has translated into lower ROA. Among private banks, players, the consistent improvement in RACI over the last 2-3 years for ICICIBC, IIB, VYSB and FB has lead to an improvement in ROA. HDFCB enjoys the best RACI followed by IIB. Whereas in PSU banks PNB and INBK has consistently delivered higher RACI translating into higher RoAA's. Private banks have consistently delivered higher fee income than PSU banks Private banks have emerged as clear winners in terms of fee income generation led by superior technology, introduction of structured products and diversified sources of fee income PSU Fee income to average asset (%) 1.7 1.6 FY07 1.7 FY08 0.9 FY09 1.6 1.6 1.6 0.9 0.9 0.9 Pvt 0.9 FY10 0.8 FY11 FY12E Source: Company/MOSL Fee income to average asset (%) PSU banks: Fee income moderates across-the-board 1.8 FY12E IIB AXSB ICICIBC HDFCB VYSB YES 0.5 0.5 0.7 0.7 ANDB INBK UNBK OBC 0.6 0.8 1.2 1.3 1.4 1.8 1.7 1.6 1.8 1.3 1.4 1.7 1.8 1.7 1.7 1.8 FY11 0.5 0.6 BOI 0.8 BOB 0.7 0.7 0.9 CBK 0.7 0.8 PNB 0.6 0.6 0.5 0.6 0.7 0.8 0.6 0.6 0.8 0.8 0.6 0.7 0.7 0.8 0.8 0.9 1.1 1.0 1.1 SBIN Avg FY07‐11 1.4 FY12E 1.8 FY11 1.7 Avg FY07‐11 Private banks: Fee income remains as a key contributor to RoA FB SIB Source: Company/MOSL 13 March 2012 9
  10. 10. Financials | Update Improving core income performance from private banks During FY07-11, PSU banks' margin performance (NIMs of 2.7%) was competitive to those of private banks (NIMs of 2.8%). However, the higher contribution of feebased income led to higher RACI (average of 3.7% v/s 3.2% for PSU banks) for private banks.  RACI gap between PSU and private banks widened sharply in FY11-12 due to the latter's strong performance on fee-based income, lower credit cost (due to buoyancy in retail loans) and improving NIMs. Fee income to average assets for private banks over FY07-11 averaged ~160bp as against 90bp for PSU banks.  One of the key differentiator in fees for private banks is forex income, contributing 30-40bp for private banks v/s 10-20bp for PSU banks  PSU banks: Moderation in RAM and fee income is expected to result in lower RACI in FY12; except for SBIN and PNB SBIN's RAM was ~10bp lower than the PSU bank average (over FY07-11). However, due to its high fee-based income, its RACI is ~10bp higher than the average for PSU banks. RACI is likely to be 50bp higher than average for PSU banks in FY12 due to a change in revenue mix from fees to margins.  While fee income growth for most of the other PSU banks has moderated, PNB has been able to maintain its fee income to average assets at ~80bp over FY07-12E despite strong growth in balance sheet (22%+ over FY07-12E).  Higher than peers RACI is leading to superior ROAA performance for PNB and INBK. While SBIN's RACI is higher than peers, higher opex and highly volatile treasury income leads to lower ROA.  BoI and ANDB fee income to average assets has reported the sharpest decline of 25bp over FY07-11 to 70bp each. Falling fee income contribution and weaker RAM due to higher asset quality issues is resulting in BoI's RACI declining to 2.3% in FY12 as against average of ~3% over FY07-11.  Private Banks: Strong fee income boost RACI & RoAA's Private Banks has been able to deliver stable fee income to average assets of ~160bp throughout FY07-11 and is expected to be similar in FY12. However fee income growth for old generation private banks viz. FB and SIB remains at a low of 50-60bp.  Strong RAM performance and sharp improvement in fee income to average from 1.2% in FY07 to ~1.8% in FY12E (highest in the sector), has translated in to superior RACI for IIB, next only to HDFCB.  YES fee income to average assets is expected to decline to 1.2% from 2.4% in FY07 despite strong growth in fee income (CAGR of 34% over FY07-12) as fee income was unable to keep pace with balance sheet growth. As a result RACI has moderated to 3.8% in FY11 as against average of 4.1% over FY07-11.  Among private banks, consistent improvement in RACI over the last 3-4 years for ICICIBC, IIB, VYSB and FB, leading to an improvement in ROAs. HDFCB enjoys the best RACI with average at over FY07-11 at 5.4% i.e.170bp higher than overall average of private banks. Superior RAM and strong fee income contribution of 1.7%+ has led to higher RACI and thereby RoAA.  13 March 2012 10
  11. 11. Financials | Update PSU banks Risk-adjusted core income (RACI, %) Return on average assets (ROAA, %) SBIN: RACI to improve led by sharp improvement in margins SBIN: Despite higher RACI, higher opex leading to lower ROA RAM 3.5 1.0 Fee Income 3.4 3.2 1.0 1.0 3.0 1.1 3.5 1.0 1.1 3.3 1.1 1.0 0.9 0.9 0.9 0.7 2.6 2.3 2.2 1.9 2.1 FY07 FY08 FY09 FY10 FY11 2.5 FY12E PNB: Consistently higher RAM leading to strong RACI RAM 3.8 3.6 0.8 0.8 FY07 FY08 0.8 3.6 0.8 FY10 FY11 FY12E PNB:Consistently delivering higher ROAs Fee Income 3.5 FY09 3.7 0.8 1.4 3.7 0.8 1.4 1.3 1.2 1.1 1.0 3.0 2.9 2.7 2.8 2.9 2.9 FY07 FY08 FY09 FY10 FY11 FY12E BOB: Lower margins compared to peers leading to lower RACI RAM 0.8 0.7 2.7 FY07 FY08 FY09 FY10 0.7 0.7 2.2 2.4 FY08 FY09 2.0 FY10 1.2 2.9 2.7 0.8 FY12E 1.3 3.1 3.2 FY11 BoB: Consistent improvement though led by operating leverage Fee Income 3.4 2.9 FY07 1.2 1.1 0.6 0.9 0.8 2.4 2.2 FY11 FY12E FY07 FY08 FY09 FY10 FY11 FY12E Source: Company/MOSL 13 March 2012 11
  12. 12. Financials | Update Risk-adjusted core income (RACI, %) Return on average assets (ROAA, %) BOI: Sharp drop in RACI as higher slippages impacted NIM as well as credit cost BOI: Earnings impacted due to higher slippages RAM 3.2 0.9 3.1 Fee Income 3.4 1.0 0.9 2.8 2.3 2.2 2.4 FY07 FY08 FY09 1.3 2.3 0.7 0.6 0.7 2.3 1.5 1.6 FY10 2.2 FY11 0.9 2.8 FY12E 0.9 1.1 2.3 FY07 0.9 0.9 1.9 1.5 FY08 1.7 FY09 FY10 RAM 2.7 0.7 0.7 2.4 FY07 FY08 FY09 1.2 2.4 0.7 2.2 FY11 0.7 2.0 2.3 FY08 FY09 2.7 3.0 FY10 FY12E 1.3 0.9 0.9 1.7 FY12E FY07 FY08 FY09 FY10 FY11 FY12E UNBK: ROA declines led by higher opex and credit cost 1.2 1.2 1.2 2.7 1.0 0.9 0.6 0.6 0.7 2.0 FY11 1.0 1.0 Fee Income 3.0 FY10 CBK: Drop in RACI and trading gains translating into lower RoA UNBK: Higher credit cost and moderation in fee income impacting RACI despite healthy margin performance 3.1 FY07 3.1 2.6 0.7 1.7 Fee Income 3.2 2.6 0.8 0.7 CBK: Higher volatility in core operating parameters RAM 0.9 0.6 2.3 2.1 FY11 FY12E FY07 FY08 FY09 FY10 FY11 FY12E Source: Company/MOSL 13 March 2012 12
  13. 13. Financials | Update Risk-adjusted core income (RACI, %) Return on average assets (ROAA, %) OBC: RACI remains in a narrow range of 2.4-2.6% OBC: RoA declines led by higher opex and lower trading gains RAM 1.2 Fee Income 3.4 1.0 2.8 2.7 2.6 0.5 0.5 2.4 2.4 0.6 0.5 1.8 0.6 1.9 2.2 2.0 FY09 FY10 FY11 FY12E 0.6 2.8 2.3 FY07 FY08 INBK: Superior RACI across years RAM 3.7 3.8 0.8 0.8 FY07 3.0 3.0 FY08 FY10 FY11 FY12E ANDB: Consistent improvement in NIM offset higher credit cost RAM 3.9 3.0 FY07 3.2 FY10 FY11 FY12E 1.6 1.7 1.5 1.5 1.4 3.1 3.1 0.8 2.3 2.4 FY08 FY09 FY10 FY08 FY09 FY10 FY11 FY12E 1.3 1.2 3.5 1.1 1.3 1.1 0.8 2.4 3.5 FY07 ANDB: Higher provisions towards restructured loan impairs ROA for FY12 Fee Income 0.8 0.9 FY09 3.0 FY09 2.7 FY08 0.6 0.8 3.3 FY07 1.6 3.7 0.8 0.8 0.7 INBK: RoA best amongst peers 3.3 3.5 0.9 Fee Income 4.2 4.0 1.0 0.9 0.7 0.6 2.8 2.8 FY11 FY12E 1.0 FY07 FY08 FY09 FY10 FY11 FY12E Source: Company/MOSL 13 March 2012 13
  14. 14. Financials | Update Private banks Risk-adjusted core income (RACI, %) Return on average assets (ROAA, %) ICICIBC: Consistent improvement across profitability parameters ICICIBC: Structural improvement in ROA RAM Fee Income 3.5 3.1 3.1 2.9 2.5 1.7 1.7 1.8 1.7 1.5 3.8 1.7 1.2 FY08 FY09 FY10 2.1 FY11 FY12E 1.0 FY07 1.1 1.0 1.8 1.3 1.1 1.0 1.5 1.4 1.3 HDFCB: Despite some moderation RACI remain best amongst peers RAM 5.3 1.9 5.6 5.5 1.8 1.8 Fee Income 5.7 5.0 1.8 1.8 FY07 FY08 FY09 FY10 FY11 FY12E HDFCB: RoA remains as best in the industry 1.7 5.3 1.6 1.7 1.5 1.4 1.4 FY08 FY09 1.4 3.4 3.7 3.7 3.2 FY07 FY08 FY09 FY10 3.9 3.6 FY11 FY12E FY07 FY10 FY11 FY12E AXSB: Fee-based income to average assets best amongst peers AXSB: Strong margin performance and continuous traction in fee income leading to higher RoA RAM Fee Income 4.4 1.5 4.4 4.1 4.1 4.0 1.4 1.6 1.9 1.8 2.3 2.5 2.2 2.2 2.6 FY08 FY09 FY10 FY11 FY12E 1.5 1.4 2.6 FY07 1.6 3.7 1.8 1.8 1.2 1.1 FY07 FY08 FY09 FY10 FY11 FY12E Source: Company/MOSL 13 March 2012 14
  15. 15. Financials | Update Risk-adjusted core income (RACI, %) Return on average assets (ROAA, %) IIB: Structural improvement across parameters - strong turnaround IIB: Consistent improvement in return ratios; now second best in the Industry after HDFCB RAM Fee Income 4.6 1.4 4.8 1.1 3.8 1.6 2.3 2.6 2.3 1.2 1.2 1.1 1.1 FY08 FY09 0.6 0.4 0.3 FY07 FY08 1.3 FY07 1.8 1.4 1.3 1.6 2.4 FY10 3.0 3.0 FY11 FY12E VYSB: Improvement in NIM & lower credit cost driving RACI RAM 3.4 1.3 3.7 FY10 FY11 1.5 3.7 FY12E VYSB: Fee income & operating leverage to be the key drivers going forward 1.0 Fee Income 3.4 1.6 FY09 4.1 0.9 3.2 1.4 0.6 1.4 0.7 0.7 FY08 FY09 FY10 1.4 0.4 2.1 2.1 1.9 1.8 FY07 FY08 FY09 FY10 2.3 2.7 FY11 FY12E YES: Fee income continues to moderate; Asset Quality remains impeccable RAM 4.7 4.5 2.1 4.0 1.4 1.6 1.3 FY12E 1.6 1.5 1.5 3.8 FY11 YES: RoA to be at 1.4%+ despite moderation in RACI Fee Income 3.7 2.4 FY07 1.4 3.5 1.2 2.2 2.3 2.3 2.4 2.5 FY08 FY09 FY10 FY11 FY12E 1.2 2.3 FY07 1.5 FY07 FY08 FY09 FY10 FY11 FY12E Source: Company/MOSL 13 March 2012 15
  16. 16. Financials | Update Risk-adjusted core income (RACI, %) Return on average assets (ROAA, %) FB:: Strong margin performance overshadows higher credit cost FB: Improvement in fee income could drive RoAs higher RAM 3.0 0.8 Fee Income 1.4 3.4 3.2 3.3 0.8 0.7 0.7 1.3 1.3 1.2 0.6 3.2 2.8 1.3 1.1 0.8 2.2 2.0 2.4 2.4 2.6 2.7 FY07 FY08 FY09 FY10 FY11 FY12E FY07 FY08 FY09 FY10 FY11 FY12E SIB: Impeccable asset quality leading to consistently higher RACI SIB: RoA remains at 1%+ over past 5 years RAM 2.9 0.7 3.1 0.7 Fee Income 3.2 3.4 0.5 1.1 1.0 3.3 1.0 1.0 FY09 FY10 FY11 0.5 1.0 2.9 0.7 0.6 2.2 2.4 2.7 2.3 2.6 2.8 FY07 FY08 FY09 FY10 FY11 FY12E 0.7 FY07 FY08 FY12E Source: Company/MOSL 13 March 2012 16
  17. 17. Financials | Update Valuation matrix 13 March 2012 17
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