Evaluate 38 Banking Stocks thru a Quant. Scan to highlight 9 stand outs - Size , Structure , Complexity , Quality & Pedigree.

1. India Banking ‘2011 “ Data the new S(OIL) for information & info-graphics “ 1 Varun Goenka +09004670600 varun.goenka@jmfinancial.in

3. Indian Banks ~ The EVA Leaders ( 14 co.s of 38 )

4. Indian Banks : A Relative Perspective on Size , Value , Structure , Solvency , Quality & Complexity.

5. Indian Financial Sector Reforms I ~ The Past ( Dr. Rakesh Mohan’s research )

6. Indian Financial Sector Reforms II ~ The Present & Future ( Core Banking Solution )Select Slides :: Indian Banking Sector vs BSE 500. Select 14 Banking Stocks ~ Economic Value Adders. Experience of a Fundamentally Weighted Quant. Portfolio portfolio vs comparables. 2

7. INDIA vs World Evidence of Services Sector Contribution , Urbanization & GDP Growth ( 1980 -2008 ) Distinct evidence of ; Increasing Service Sector contribution to GDP in all economies. Increasing Urban ization of Population ; explosion in India & China which leads to financial deepening. While Industrialization is more linear – inline with GDP , Services provide the alpha. 3

8. The Big Picture While the path will not be as linear ; what is certain is the trajectory and the force of transformation inclusive both positive & negative surprises. As would be more evident going further down the ppt . , Service economy is the alpha for economic growth … and BANKING the enabler. 4

9. How big can the Big picture get !! Banking Groups PSU , Pvt. & Foreign Key Questions What’ll be the distribution of business opportunity amongst business Groups !! What’ll be the key enabler(s) - People , Technology , Reforms !! Amongst the individual business groups , there would be distinct winners & losers. 5

12. Operating PAT ~13.1%

13. PAT ~16.7%

14. Networth ~17.4%

15. Invested Capital ~9.8%.( Operating performance market -share ahead of Market Cap. Share !! ) Source :: Capitaline 6

16. Indian Banking vs World - I :: Market Value & Valuations !! It is implicit and evident that India will benefit from both ; GDP Growth & Sector Growth . India’s Sector MCap. is comparable to most economies , however has enormous scope to grow coz of sheer economic size , non- agri. growth at an inflexion point & accelerating financial depth. India commands a valuation premium. Source :: Citi Group Global Research 7

17. Indian Banking vs World - II :: Margins & Return Ratio !! Indian Banking Sector Margins are inline with comparables. BRAZIL is a highlight , standing out in previous slides too. Source :: Citi Group Global Research 8

18. Indian Banking vs World - III :: Credit / GDP Ratio & recent growth !! India has a well Developed Banking Infrastructure , and is Growing extremely well in scale and Sophistication. There seem enormous scope for credit expansion and overall financial deepening. Large part of it perhaps due to Housing related & low quality. Brazil !!! 9

19. The Enterprise of Indian Banking :: The Economic Value – Adders ( Select 14 of 38 cos. ) 10

20. ECONOMIC VALUE – ADDED :: Is the enterprise EVA positive !! Distinct Winners ( as on 2010 ) SIB , KVB , J&K , CUB , Indian Bank , Dena Bank , Canara Bank , BoB , Andhra Bank , Allahabad Bank Source : Capitaline 11

21. The EVA Contention :: Growth or Profit is not necessarily value – additive & pro-shareholders. # Bubble Size :: Abs. EVA ( in crs. ) / Market Cap. Even though growing , are the banks EVA positive – i.e are they adding value over and above their Cost – of – Capital ! The select banks shown in the graph are EVA positive . Source : Capitaline 12

22. Select 14 ( of 38 ) - I::{ Price vs Value , Pay back vs Recent Track Record } vs Sector Aggregates The select 14 stocks ( EVA positive as on 2010 ) stand out all the 3 basic measures of Valuations , , Return ratios & Last 3years performance ( which has been apparently the most difficult business period ) vs comparables aggregates. While J&K is deep value ( for obvious reasons ) & KVB deserves a premium due to its pedigree – Dena , OBC & Indian Bank stand out on other fronts. Source : Capitaline 13

23. Select 14 ( of 38 ) - II:: { Legacy , Franchisee & Financial Strength & Quality } vs Sector Aggregates The select 14 Stocks have a strong pedigree and financial strength. However , given the current environment of Realty concerns , high interest rates & challenging credit growth – Banks with higher CASA , lower Cost of Deposits , lower leverage & lower Realty exposure are preferred. J&K Bank , BoB , KVB , ALBH stand out. Source : Capitaline 14

24. 15 Evidence of significant out-performance both on Price & Operating fundamentals……A Natural flair & ability to grow organically

25. Fundamentally ( Value-received ) Weighted – vs - FF Market Cap. ( Price paid) Weighted !! Fundamentally W’td :: The diff !! Shift from > Free-Float Market Cap. Weight ( which gives higher weight to size ) -to- Weight age based on Fundamental Performance of Co.s measured by several financial metrics. Small Cap. W’td is Smaller the Market Cap. , higher the weight age ‘. It is theoretical & very illiquid. Symbolic : Fundamentals are of higher significance vs mere size Because NBFC’ s are included in the simulation , the really true comparables are “ Large & Small Cap. W’td “ only vs Fundamentally W’td. 16

26. The Indian Banking Enterprise ‘s :: Relative Perspective ……….Size , Value , Structure , Solvency , Quality & Complexity 17

27. Over ~80% of the Indian Financial Asset base is controlled by Public – Sector Enterprises. Banking comprises of ~70% of the total Asset base. Public – Sector banks essentially control ~80% of Indian Banking. 18

28. India Banking : Regional Banking Franchisee …….The distinct importance of West , North , South 19

29. SIZE Relation I – Deposit Base vs Market Value…..are banks empowered by large deposit bases ! # Bubble Size : Market Cap. Central Bank & Union Bank have significant Asset – bases , thou hardly speaks of quality. KMB is clearly is not a pure banking franchisee in addition to the above Top 4. BoI , UCO , Syndicate & Canara stand out . Source : Capitaline 20

30. SIZE Relation II – CASA ~ The holy grail of a bank franchise…..How does higher CASA insulate banks during higher rate regimes! # Bubble Size : CASA( in crs. ) Central / Union / Canara Bank , BoB , UBI , HDFC & PNB stand out distinctly. ICICI & KMB are Non-CASA franchisees. Source : Capitaline 21

31. SIZE Relation III – Creditvs External Borrowing…..How does external borrowing help fuel credit ; augment capital structure !! # Bubble Size : Total Assets BoB , Canara, Central, Indian ,OBC,PNB,UCO ,Union & UBI stand out distinctly. Source : Capitaline 22

32. VALUE Relation I – Profitability on ( Market Value of Equity vs Book Value of Equity ) # Bubble Size : Total Networth Banks in the marked circle stand out distinctly. Source : Capitaline 23

33. VALUE Relation II – Profitability on ( Market Value of Enterprise vs Book Value of Enterprise ) # Bubble Size : Enterprise Value Indian Bank , J&K Bank PNB, , Federal , CUB , Albh Bank , , Andhra , OBC stand out distinctly. Source : Capitaline 24

34. STRUCTURE Relation I – Solvency VS Total Financial Leverage Pvt. Banks are clearly well capitalized & of substantially lower leverage than PSU’s. [ Distinct Leaders :: Banks with Higher Capitalization & Lower Leverage = Yes Bank , KMB, J&K , ING V Bank , ICICI Bank , HDFC , Federal , Axis Bank ] [ Distinct Laggards :: Banks with Lower Capitalization & Higher Leverage = Dhanlaksmi Bank , UCO , Syndicate , IDBI , Central , Bank of Maha , Dena Bank , OBC ] Source : Capitaline 25

35. STRUCTURE Relation II – Liabilities Composition Distinct Leaders ( Higher CASA , Lower Borrowings , High Networth , Low Other Liabilities ) = SIB , KVB , J&K , Karnataka , CUB , Indian Bank Source : Capitaline 26

36. STRUCTURE Relation III – Asset Composition Distinct Leaders ( Higher Liquidity , Advances , Lower Investments & Assets ) = Bank of Baroda , Andhra Bank , Syndicate Bank Source : Capitaline 27

37. STRUCTURE Relation IV – P / L Composition Distinct Leaders ( Higher Core Banking Earnings , Net Earnings , ) = Andhra Bank , BoB , CUB , Corp. Bank, Indian Bank , J&K , KVB, PNB , Union Bank. Source : Capitaline 28

38. QUALITY Relation I – NPA & Impact Pvt. Banks are clearly much better placed with respect to Asset Quality and balance sheet impact. [ Distinct Leaders :: Banks with Low NPA’s & impact = Yes Bank ,SIB , KMB , KVB , J&K , Indus Ind. , HDFC , CUB , Axis Bank , Indian Bank , Corp. Bank ] [ Distinct Laggards :: Banks with High NPA’s & impact = Karnataka Bank , ING V Bank, DCB, Vijaya, UBI , Union , UCO , Syndicate , SBI , IDBI , IOB , Dena , Central & Bank of Mah.] Source : Capitaline 29

39. QUALITY Relation II – Competitive bargaining power …….Distinct Leaders - marked Source : Capitaline 30

40. COMPLEXITY Relation I – Contingent / Off-Balance Sheet ~ Liabilities …….Private Sector banks distinctly complex vs Public Sector peers Composition of CL of Select Banks Select 14 ( EVA Leaders ,Yellow ) vs 5 Complex Pvt Banks Source : Capitaline 31

41. COMPLEXITY Relation II – PSu Bank’s ; Negligible participation in Complex derivatives …….Foreign Banks & PSu Banks have extreme polarity of complexity. ( Choice or Incompetency !! ) 32

43. India FINANCIAL SECTOR Reforms I ~ The Past …. Study of Experience & Impact from Dr. Rakesh Mohan‘s Research 34

44. Capitalization of Banks :: Extent & Inclusion ! Distinct evidence of not only increased Capitalization , but all adoption by all banks OBC , IDBI , Dena & Central Bank nearest to ~10% ; thus the need for fresh capital infusion. Yes Bank , KMB , ICICI , Federal , HDFC , Axis & Corp. near or above 15%. 35

45. Banking Risk :: NPA ! Distinct evidence of substantial improvement in Asset Quality metrics. Pvt. Banks up here are far ahead vs PSU peers. Leaders :: Yes Bank ,SIB , KMB , KVB , J&K , Indus Ind. , HDFC , CUB , Axis Bank , Indian Bank , Corp. Bank . 36

46. Banking Franchisee :: Market Share vs Efficiency Quite clearly Pvt. Banks have been successful in making in-roads into the PSU Banking market Share ; however size is still keeping them distinctly apart. Efficiency has been the key driver for PSU Banks coming around. ( Technology & Employee Cost are 2 key factors ) 37

47. Progress of Private Sector Banks ! An aggressive in road by Pvt. Sector Banks on market share of PSU Banks & New Business acquisition. PSU Banks thriving on improved efficiency or cost – reduction. 38

48. Economics of 3 Distinct Business Groups in the Sector ! PSU & Foreign Banks have had significant cost reduction . Significant improvement in NIM’s of Pvt. Sector Banks , while fall in NIMs of PSU’s ( coupled with deceleration in business growth ) Return on Assets is starkly different for the 3 business groups. , requiring further In-depth research on income drivers and sources. 39

49. Indian Banks ~ Well Capitalized , unless increase in NPA’s ! 40

50. India FINANCIAL SECTOR Reforms II ~ The Present & Future….Technology, the key enabler 41

51. CORE BANKING SOLUTION :: The Key Technology Enabler ! The New Age Banking Architecture 42

52. CASE STUDY CBS Transformation Completed - I :: How Big is STATE BANK of INDIA !! 43

53. CASE STUDY - II ::Is SBI Big Enough ; Is there scope to grow !! 44

54. CASE STUDY - III :: ICICI Bank ; Pre & Post Technology Adoption 45

55. CASE STUDY - IV:: State of Technology Absorption at Public Sector Banks !! 46

56. INDIAN BANKING :: Enormous scope to improve Efficiency , Asset-quality and their Impact !! 47

59. References :: Third Party Reports – ENAM , Edelweiss , Anand Rathi , CLSA , Kotak , HDFC , PUG , MS & KRC. Theory White Papers – RBI , IIM Research , A. Damodaran , Mckinsey Global Institute. Company presentations. 48