Fiancial Services Conference

8/14/2019 Fiancial Services Conference

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Financial Services Conference UpdateFinancial Services Conference UpdateFinancial Services Conference UpdateFinancial Services Conference UpdateFinancial Services Conference Update

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We, at Edelweiss, hosted a Financial Serv ices Conference on February 15, 2007 in Mumbai to give ourWe, at Edelweiss, hosted a Financial Serv ices Conference on February 15, 2007 in Mumbai to give ourWe, at Edelweiss, hosted a Financial Serv ices Conference on February 15, 2007 in Mumbai to give ourWe, at Edelweiss, hosted a Financial Serv ices Conference on February 15, 2007 in Mumbai to give ourWe, at Edelweiss, hosted a Financial Serv ices Conference on February 15, 2007 in Mumbai to give our

investors an opportuni ty to interact directly with fifteen financial services companies. In tandem, thereinvestors an opportuni ty to interact directly with fifteen financial services companies. In tandem, thereinvestors an opportuni ty to interact directly with fifteen financial services companies. In tandem, thereinvestors an opportuni ty to interact directly with fifteen financial services companies. In tandem, thereinvestors an opportuni ty to interact directly with fifteen financial services companies. In tandem, there

were nine presentations by industry experts on diverse business segments in the financial serviceswere nine presentations by industry experts on diverse business segments in the financial serviceswere nine presentations by industry experts on diverse business segments in the financial serviceswere nine presentations by industry experts on diverse business segments in the financial serviceswere nine presentations by industry experts on diverse business segments in the financial services

space viz., Banking, Mortgage Finance, Insurance (life and non life), CV Financing, Agri/Micro Financing,space viz., Banking, Mortgage Finance, Insurance (life and non life), CV Financing, Agri/Micro Financing,space viz., Banking, Mortgage Finance, Insurance (life and non life), CV Financing, Agri/Micro Financing,space viz., Banking, Mortgage Finance, Insurance (life and non life), CV Financing, Agri/Micro Financing,space viz., Banking, Mortgage Finance, Insurance (life and non life), CV Financing, Agri/Micro Financing,

Infrastructure Financing, Retail Financing, and industry outlook, which gave an insight into the intricaciesInfrastructure Financing, Retail Financing, and industry outlook, which gave an insight into the intricaciesInfrastructure Financing, Retail Financing, and industry outlook, which gave an insight into the intricaciesInfrastructure Financing, Retail Financing, and industry outlook, which gave an insight into the intricaciesInfrastructure Financing, Retail Financing, and industry outlook, which gave an insight into the intricacies

of this space. This document tries to encapsulate the key take always from the presentations andof this space. This document tries to encapsulate the key take always from the presentations andof this space. This document tries to encapsulate the key take always from the presentations andof this space. This document tries to encapsulate the key take always from the presentations andof this space. This document tries to encapsulate the key take always from the presentations and

meeting.meeting.meeting.meeting.meeting.

Key TakeawaysKey TakeawaysKey TakeawaysKey TakeawaysKey Takeaways

Discussions at this event reaffirm our belief that the buoyant growth in the Indian economy in the next

three-four years will provide strong tailwinds for banks, insurance, and other financial services companies.

The financial services space will be one of the biggest beneficiaries of the current economic expansion.

Bank managements were confident of continued credit growth emanating from strong underlying

demand.

Credit demand is expected to be growth-supportive and resilient. We expect credit to attain 19% CAGR

over FY07-09E, after growing at 26% in FY07 (factoring in some credit tightening post recent CRR

hike). While direct impact of CRR hike on profitability (1-2%) and margins is lower, it is likely to slow

down banks’ ability to expand credit. Loan demand from corporate and infrastructure sectors will

remain strong in FY08E, while the retail sector is expected to report slower than historic growth.

In our view, pricing power is back with banks, which will enable stable margins going forward. Increasing

competition on the deposit side will again benefit banks with a strong deposit franchise.

Valuations Valuations Valuations Valuations Valuations

We maintain our positive view on the sector. However, in the near term, due to negative news flow and

uncertainty over inflation and interest rates, we expect valuations to remain subdued. In the current

scenario, we advise investors to be selective in bank stocks. We also expect greater visibil ity on M&A

to guide valuations as we approach the end of FY08.

Our top picksOur top picksOur top picksOur top picksOur top picks

At current valuations, we prefer PNB, Union Bank, IOB, and Centurion Bank.

PNBPNBPNBPNBPNB at 1.3x FY08E book: Strong franchise, high CASA, and 19-21% expected RoE.

Centurion Bank of PunjabCenturion Bank of PunjabCenturion Bank of PunjabCenturion Bank of PunjabCenturion Bank of Punjab at 3.3x FY08E book and 28x FY08E EPS: Attractive valuations given strong

growth outlook, high profitability, and M&A possibilities.

Union BankUnion BankUnion BankUnion BankUnion Bank at 1.0 FY08E book: Improved margins, high operating efficiency, and 20% plus expected

RoE.

IOBIOBIOBIOBIOB at 1.4x FY08E book: Attractive valuations given 24-25% plus RoE over FY07-08E.



CONTENTSCONTENTSCONTENTSCONTENTSCONTENTS

Metrics — At a glance ................................................................................................................................................. 5

MAIN TRACK PRESENTATIONSMAIN TRACK PRESENTATIONSMAIN TRACK PRESENTATIONSMAIN TRACK PRESENTATIONSMAIN TRACK PRESENTATIONS

Outlook on banks: Opportunities and challenges ......................................................................................................... 7

Mortgage Finance ....................................................................................................................................................... 9

Rural banking and micro finance ................................................................................................................................ 10

Retail banking strategies at Centurion Bank............................................................................................................... 11

Infrastructure Financiang ........................................................................................................................................... 12

Is life insurance a glorified asset management business? ............................................................................................ 13

General Insurance: A holistic view.............................................................................................................................. 14

Consumer and Commercial Vehicle Finance .............................................................................................................. 15

Outlook on interest rates ........................................................................................................................................... 16

COMPANIESCOMPANIESCOMPANIESCOMPANIESCOMPANIES

Allahabad Bank ......................................................................................................................................................... 17

Centurion Bank of Punjab .......................................................................................................................................... 19

Federal Bank ............................................................................................................................................................. 21

HDFC ........................................................................................................................................................................ 23

IDBI ........................................................................................................................................................................... 25

Indian Overseas Bank ............................................................................................................................................... 27

LIC Housing Finance ................................................................................................................................................. 29

M&M Finance ............................................................................................................................................................ 31

Oriental Bank of Commerce ...................................................................................................................................... 33

Punjab National Bank ................................................................................................................................................ 35

SBI ............................................................................................................................................................................ 37

Shriram Transport Finance ......................................................................................................................................... 39

Union Bank ............................................................................................................................................................... 41

UTI Bank ................................................................................................................................................................... 43

Yes Bank .................................................................................................................................................................. 45

ContentsContentsContentsContentsContents

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Financial Services Conference main track presentationsFinancial Services Conference main track presentationsFinancial Services Conference main track presentationsFinancial Services Conference main track presentationsFinancial Services Conference main track presentations

FromFromFromFromFrom To To To To To SpeakerSpeakerSpeakerSpeakerSpeaker CompanyCompanyCompanyCompanyCompany Topic Topic Topic Topic Topic

8:45 9:15 Registration

9:10 9:15 Welcome Address

9:00 9:45 S Maheshwari L&T Finance Infrastructure Finance

9:45 10:30 Harpreet Singh Centurion Bank Retail Finance

10:30 11:15 Amit Tandon Fitch Ratings Outlook on Banks

11:30 12:15 Keki Mistry HDFC Ltd Mortgages

12:15 13:00 Kamesh Goyal Bajaj Allianz Non Life Insurance

14:00 15:00 P. Nandgopal Reliance Life Insurance Life Insurance

15:00 15:45 Subhasri Shriram Shriram Group CV and Consumer Finance

16:00 17:00 Brahmanand Hegde ICICI Bank Agri and Micro Financing

17:00 18:00 Ajay Mahajan Yes Bank Financial Markets







Outlook on banks: Opportunities and challengesOutlook on banks: Opportunities and challengesOutlook on banks: Opportunities and challengesOutlook on banks: Opportunities and challengesOutlook on banks: Opportunities and challengesBy Fitch Ratings India

Mr. Amit Tandon, CEO of Fitch Ratings India, discussed the outlook on banks and opportunities and

challenges linked with it. Key takeaways from his presentation are as follows:

Improved performance in 2006 as compared to 2005, or has it been missingImproved performance in 2006 as compared to 2005, or has it been missingImproved performance in 2006 as compared to 2005, or has it been missingImproved performance in 2006 as compared to 2005, or has it been missingImproved performance in 2006 as compared to 2005, or has it been missing

Banks continued to show strong growth Y-o-Y. Growth in loans continued to be over 30% for two

consecutive years. Asset quality has improved distinctly over the past few years. Investment in government

securities has also reduced over the past few years, given the strong credit momentum. Banks have

become leaner and efficiency has become a focal point in view of increased competition. Though

banks have managed to grow their profitability (RoE), only half of the banks in the sample space have

managed to improve their efficiency (RoA). Margins are under pressure due to sudden demand and

scarce liquidity.

Will growth momentum sustain?Will growth momentum sustain?Will growth momentum sustain?Will growth momentum sustain?Will growth momentum sustain?

GDP growth at above 8.5% translates into higher credit off take. Capital investments (particularly in

infrastructure) are expected to maintain credit growth. The retail boom is expected to continue with

increased geographic penetration and wider product suite with SME the second growth story. Retail is

an under-penetrated market for organized players as the lion’s share is still with unorganized players.

India has favorable demographics and a mass market (both urban and rural markets).

Chart 1: Cosumer lending as a % of GDPChart 1: Cosumer lending as a % of GDPChart 1: Cosumer lending as a % of GDPChart 1: Cosumer lending as a % of GDPChart 1: Cosumer lending as a % of GDP

Source: Fitch ratings

There is a marked change in the outlook towards SME lending with improving financial health and

changing mindsets of managements. With corporate business offering wafer thin margins, SME offernot only higher margins, but also higher returns per customer with more upside potential. It diversifies

the loan book and also helps banks meet their priority sector commitments.

But NPAs continue to be on the high side and SME are the worst hit in case of a cyclical downturn.

Though there are concerns on bank credit growing too fast, structurally, there appears enormous

scope for expansion. Bank credit and deposits as a percentage of GDP in India is lower than its peers.

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Outlook on banks: Opportunities and challengesOutlook on banks: Opportunities and challengesOutlook on banks: Opportunities and challengesOutlook on banks: Opportunities and challengesOutlook on banks: Opportunities and challenges

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Predicting key trendsPredicting key trendsPredicting key trendsPredicting key trendsPredicting key trends

The market dynamics are changing as the market share is moving from public sector banks to new

generation private sector banks. Consolidation is the key to provide stiff competition to foreign banks.

The cost of deposits is increasing and hence margins are declining. Banks have to focus on how to

maintain margins and be profitable. Garnering low cost deposits is the key to success. The NPA ratio

will improve due to the base effect, but loan loss provisions are in line with matured economies, whichis not a healthy sign and should be higher due to ‘emerging market’ risks faced by them. Capital

adequacy will be a growth constraint for all banks with little headroom available on the investment side.

Raising equity will remain a priority as rapid credit growth and changing asset composition means total

capital resources will have to be augmented further. Implementation of Basel II has been postponed,

but operational risk charge is expected to trim at least 75bps from total capital adequacy ratio. AS-15

may decrease capital adequacy ratio further by 100bps; government banks with high ‘pension’ liabilities

will be relatively higher affected.

There have been changes in the regulatory environment e.g., loss on MTM investments now will have

to be reduced from the net worth instead of routing it through P&L. Also, now RBI has been provided the

flexibility to reduce SLR.

In conclusion, retail and SME are expected to continue to grow further. The dispersed market is

expected to consolidate with key big players emerging. Asset quality and margins remain key concerns.



Mortgage FinanceMortgage FinanceMortgage FinanceMortgage FinanceMortgage FinanceBy HDFC Limited

Mr. Keki Mistry, managing director of HDFC Limited, enlightened the audience by making a crisp presen-

tation on the mortgage market in India and on HDFC Limited. Key takeaways from his presentation are:

• Housing loans continue to be in demand due to tax incentives by government, rising income

levels, and increasing penetration.

• He emphasized that with increasing interest rates, cost to the consumer does not necessarily

increase to the same extent and thus demand continues to look strong.

• HDFC continues to grow at a strong pace and it expects to grow its disbursements by 25% per

annum going forward.

• Asset quality is not a concern in view of peaking property prices as the loan disbursed is determined

on the repayment capacity of the individual, qualification, number of dependents, where is he

working and not on value of the property. HDFC expects to keep net NPA below 1%. Average

loan size has increased by 10% due to sharp increase in real estate prices.

• HDFC is increasing lending rates actively to pass on the higher funding cost to customers in rising

interest rate environment.

• From retail deposits, the company has now shifted to wholesale funds as major source of funding.

Average loan to value continues to be at 63%, which the company expects to increase in the

coming quarters.

• Competition from banks had peaked in 2001-2003 due to excessive liquidity in banks. Now the

competition is gradually declining. With increased concerns on banks’ participation in real estate,

housing finance companies are expected to increase their market share.

• There is substantial value to be unlocked in the subsidiaries. HDFC expects to list most of its

subsidiaries in the coming three-four years.

Our ViewOur ViewOur ViewOur ViewOur View

HDFC is the strongest and most venerable play on Indian mortgages over the long term. We expect the

bank, with its strong brand recall, superior real estate knowledge, and revamped distribution strategy,

to attain 22% CAGR in loan disbursement over FY07-09E. Consequently, we expect it to deliver 24%

and 16% CAGR in loan book and earnings, respectively, over FY07-09E.

Mortgage FinanceMortgage FinanceMortgage FinanceMortgage FinanceMortgage Finance

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Retail banking strategies at Centurion BankRetail banking strategies at Centurion BankRetail banking strategies at Centurion BankRetail banking strategies at Centurion BankRetail banking strategies at Centurion BankBy Centurion Bank of Punjab

Mr. Harpreet Singh, head-branch banking and wealth management at Centurion Bank of Punjab, pre-

sented on emerging opportunities for retail banking in India and discussed clear strategies for retail credit

growth at Centurion Bank.


Structural drivers viz., India’s buoyant phase of economic growth (9% plus GDP growth), improving

demographics (64% population estimated to be in the 14-60 years age group), expanding consumerism

(retail lending growing at 35% CAGR over FY03-07E), and low consumer finance penetration (consumer

debt to GDP ratio at ~10%, significantly lower than US, UK, Singapore, and Taiwan) provides excellent

opportunities for growth of retail banking in India.

Centurion Bank clearly follows retail focused strategy (69% of net advances) aided by extensive

distribution franchise of 259 branches across 128 cities. It is a leading player in two-wheeler loans and

ranks amongst the top 7 in CV, mortgage, and personal loan disbursals. It aims at sustaining its two

wheeler leadership, continuing growth momentum in CV financing, and accelerating growth in personal

and mortgage financing through the following strategies:

Existing products-existing customers:Existing products-existing customers:Existing products-existing customers:Existing products-existing customers:Existing products-exist ing customers: Deepening and improving delivery of existing products.

New products-existing customers:New products-existing customers:New products-existing customers:New products-existing customers:New products-existing customers: Cross sell and up sell new products using hooks (use two-

wheeler business as a feeder channel for up selling).

Existing products-new customers:Existing products-new customers:Existing products-new customers:Existing products-new customers:Existing products-new customers: Expanding network across geographies and across segments or

resorting to acquisition strategy.

New products-new customers:New products-new customers:New products-new customers:New products-new customers:New products-new customers: Through product innovation.

Besides adopting a growing, profitable, and sustainable business model, Centurion Bank follows a

more customer focused model addressing diverse needs of individuals across all stages of their life

cycle.

Distribution framework at Centurion Bank revolves around branches, ATM network, relationship and

financial managers, direct distribution channels, product specific back up teams, tele-direct marketing,

and presence at dealerships.

Innovative abilities of the bank are well reflected in its unique positioning of ‘Miracle’ credit card as

‘India’s first credit card with conscience’. It serves twin objectives of social responsibility and business.

It is an initiative of sponsoring education and living expenses of 3,500 rural kids every year.

Retail banking strategies at Centurion BankRetail banking strategies at Centurion BankRetail banking strategies at Centurion BankRetail banking strategies at Centurion BankRetail banking strategies at Centurion Bank

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Infrastructure FinancingInfrastructure FinancingInfrastructure FinancingInfrastructure FinancingInfrastructure FinancingBy L&T Finance

Mr. S. Maheshwari from L&T Finance (NBFC for infrastructure financing floated by Larsen & Toubro)

shared some interesting thoughts on infrastructure financing, emphasizing in particular on an urge to have

proper institutional framework and innovative financing options for creating an enabling environment for

infrastructure developments.


Effective institutional frameworkEffective institutional frameworkEffective institutional frameworkEffective institutional frameworkEffective institutional framework

India needs effective regulatory institutions, which are efficiently staffed, and legislations adequately

revamped to create an enabling environment for infrastructure. New institutions with new frameworks

and culture are the need of the hour (though this will increase invisible project costs). Multiplying good

institutional structures is also very important.

Innovative financing optionsInnovative financing optionsInnovative financing optionsInnovative financing optionsInnovative financing options

Project financing is no longer a game of plain vanilla equity and debt. Some out-of-the-box thinking is

required to introduce innovative financing options. Besides equity capital with differential rights, mezzanine

capital and debt refinancing, structured finance option is a new game today which can effectively

reduce the level of equity needs.

Fourth tier capital: New trendFourth tier capital: New trendFourth tier capital: New trendFourth tier capital: New trendFourth tier capital: New trend

Fourth tier capital, structured between promoters’ equity and lenders’ sub-debt, is being resorted to off

late. It provides clear advantage to further enhance funding base through aggressive leveraging and

provides enough potential to enable cash exit to the promoters.

Project management criticalProject management criticalProject management criticalProject management criticalProject management critical

Creating a good project management organization is critical to handle large and complex projects. It is

necessary to break up projects into more manageable parts and the right developers need to beselected who can manage things better and stay through the project implementation.

Addressing end users’ needs Addressing end users’ needs Addressing end users’ needs Addressing end users’ needs Addressing end users’ needs

Project structuring needs to be made more sensitive to end users’ requirements. Thus the end user will

feel a part of the process and it will make the process of project implementation much smoother.

Careful tariff settingCareful tariff settingCareful tariff settingCareful tariff settingCareful tariff setting

Tariffs need to be set with utmost care to build confidence of an end user. Initially, low tariff should be

charged to build traffic. Then, tariff can be hiked using the RPI+X formula till it reaches desired levels.

It is necessary to depoliticize the tariff setting process with a separate regulatory mechanism.



Is life insurance a glorified asset management business?Is life insurance a glorified asset management business?Is life insurance a glorified asset management business?Is life insurance a glorified asset management business?Is life insurance a glorified asset management business?By Reliance Life Insurance

Mr. P. Nandgopal, CEO of Reliance Life Insurance, presented on life insurance providing detailed insights

into Unit Linked Insurance Plans and important parameters to be considered for valuing life insurance

business. He also delved into the contentious topic of “whether India’s ULIP gathering life insurance

companies are any different from mutual funds.”


ULIP vis-à-vis mutual fundsULIP vis-à-vis mutual fundsULIP vis-à-vis mutual fundsULIP vis-à-vis mutual fundsULIP vis-à-vis mutual funds

Investors are quite confused over allocating their savings to life insurance and mutual funds. Not only

do these products serve different purposes over different tenures, but even the gap in the benefits

between these products has now seemingly narrowed with an increased popularity of Unit Linked

Insurance Plans (ULIPs). ULIPs combine life investment protection with a variety of investment options

similar to those of mutual fund plans.

• Why are ULIPs preferred to mutual funds?

• It is considered a long term savings instrument.

• Provides better control over money.

• Marketing efforts are greater in case of ULIPs due to higher commission rates.

However, ULIPs are more expensive than mutual funds and also carry the risk of asset-liability mismatch.

Retail investors should weigh the benefits of each of these products and accordingly invest in them.

ULIP vis-à-vis traditional policiesULIP vis-à-vis traditional policiesULIP vis-à-vis traditional policiesULIP vis-à-vis traditional policiesULIP vis-à-vis traditional policies

Globally, ULIPs are more popular than traditional plans. Even in India there is a similar trend. However,

traditional policies are now gaining traction and going forward, the contribution of ULIPs is expected to

decline. Moreover, in ULIPs, risk is passed on to customers and returns (premium income less expenses)

are relatively lower than in traditional policies where risk is retained with the company and higher

premium is charged.

As per our analysis, profit margins on traditional life insurance policies are higher than on ULIPs as it

leaves excess investment returns with the insurance company. However, RoE on ULIPs are superior to

traditional products due to lower capital requirements in the former.

Outlook on life insurance sectorOutlook on life insurance sectorOutlook on life insurance sectorOutlook on life insurance sectorOutlook on life insurance sector

According to Mr. P. Nandgopal, the insurance sector is expected to grow very strongly, with GDP

growth, rising savings rate, and demographic profile (64% population in 14-60 years age group) being

the key drivers.

Valuation of insurance business Valuation of insurance business Valuation of insurance business Valuation of insurance business Valuation of insurance business

According to Mr. P. Nandgopal, besides assigning a multiple to new business achieved profits (NBAP)

to value life insurance business, other valuation methodologies of primary importance will be the

embedded value method (discounting future cash flows) or internal rate of return method (average IRR

expected going forward is 15-18%). The ratios that hold significance for valuation are persistence ratio

(average 70%), expense ratio, capital efficiency ratio, and tenure. We prefer the (embedded value +

present value of NBAP) method to value life insurance businesses.

Is life insurance a glorified asset management business?Is life insurance a glorified asset management business?Is life insurance a glorified asset management business?Is life insurance a glorified asset management business?Is life insurance a glorified asset management business?

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General insurance: A holistic viewGeneral insurance: A holistic viewGeneral insurance: A holistic viewGeneral insurance: A holistic viewGeneral insurance: A holistic viewBy Bajaj Allianz General Insurance

Mr. Kamesh Goyal, CEO of Bajaj Allianz General Insurance, gave a holistic perspective on the general

insurance industry and its outlook. Key takeaways from his presentation were:

• Circa 2001 and prior, distribution channels were absent and commission on gross written premium

was less than 2.5% for the industry; the product mix was skewed towards the corporate segment,

with very little/no retail focus; the growth rate was also slow at 12%. Underwriting profitability was

poor and competition was centered around pricing. In the past five years, growth has been around

15% with drop in premium rates for corporate business, especially marine/health and property.

Motor business has posted strong growth in line with Asian peers and GDP growth. Also, health

insurance is growing at a strong pace with increase in medical tourism. Penetration (as a percentage

of GDP) has increased from 0.53% to 0.64% in the past five years.

• Future opportunity lies with retail and to encash this opportunity, Bajaj Allianz is increasing tie-ups

with auto manufacturers, motor dealers, banks, and travel agents. It intends to increase cross

selling of products and increase premium income. The industry is gearing up to develop andservice the retail segment with policy issuance at point of sale, developing distribution channels

like direct marketing, telemarketing, setting up call centers as a single point of contact for customers,

and setting up web portals for transactions online.

• De-tariffing will impact the industry in the short term and will mature the industry faster. De-tariffing

will force companies to be more efficient.

• Motor and health have loss ratios greater than 100%, so premiums should increase as the industry

can no longer absorb the losses.

• Rates for some customers will increase and for others they are likely to decrease. Retail assets and

infrastructure projects will provide a big boost.

Key challenges:Key challenges:Key challenges:Key challenges:Key challenges:

The expense ratio is increasing. It is rising for the public sector, while it is declining for the private sector.

De-tariffing and rising salaries will push expense ratios beyond 33%. There is a huge scope to decrease

expenses by 25-30%. Lack of skilled manpower is driving salaries upwards. However, a secular bull run

in equity markets and drop in interest rates have helped insurance companies post profits. Going

forward, if there is a bear phase and a catastrophe, it will be a huge dampener for the industry. De-

tariffing offers a big opportunity for private players to tap segments like motor and commercial vehicles.

The company expects the market share of private players to be around 45% in 2010.



Consumer and Commercial Vehicle FinanceConsumer and Commercial Vehicle FinanceConsumer and Commercial Vehicle FinanceConsumer and Commercial Vehicle FinanceConsumer and Commercial Vehicle FinanceBy Shriram City Union Finance

Ms. Subhashri Shriram, executive director of Shriram City Union Finance Ltd. (SCUFL) delivered a company

presentation focusing on industry growth drivers, future plans, and marketing strategy at SCUFL.


SCUFL is primarily focused on retail financing and manages INR 13 bn funds with assistance from the

group’s chit fund entities in marketing and collections with operations from more than 600 outlets. It

caters to 4.1 mn customers through 1.2 mn agents.

It has largely derisked its business model in the retail financing space by diversifying into various

segments viz., consumer durable finance, auto finance (including new and pre-owned vehicles),

personal finance, trade finance, and retail gold finance.

Revenues have grown by 26% CAGR over FY04-06 to INR 2.15 bn, in line with similar asset growth.

PAT has grown by 35% CAGR to INR 504 mn during the same period.

SCUFL taps a small portion of chit subscriber base that currently contributes majority of its business

(chit subscribers currently cater only to 0.63% of the total population of Tamil Nadu, Andhra Pradesh,

and Karnataka). Therefore, immense potential exists for business from this segment.

Soaring demand in the INR 200 bn consumer durable industry is throwing up several opportunities in the

segment. Low penetration levels across segments is an indication of the potential. The company is

targeting 10% market share in this segment.

SCUFL currently offers personal loans to its existing customers and chit subscribers, particularly the

salaried class.

There are more than 3.57 mn SMEs in India and number of owners among chit subscribers is about 800

per branch. Targeting 10% of owners in a year with average ticket size of INR 0.5 mn creates a

business potential of INR 18.6 bn from chit customers alone.

The company has recently added retail gold financing to its product line (restricting this business to

Chennai and AP). There is potential to enter bullion trading.

It plans to effectively leverage on its wide network, in-house credit verification, quick disbursements,

expertise of chit outlets in collection and dealer tie-ups for all leading brands.

Key risksKey risksKey risksKey risksKey risks

Chit fund, its major business segment, is losing its current relevance.

Concentration in South exposes it to regional risks.

Competition from banks and institutions with access to cheaper funds.

Consumer and Commercial Vehicle FinanceConsumer and Commercial Vehicle FinanceConsumer and Commercial Vehicle FinanceConsumer and Commercial Vehicle FinanceConsumer and Commercial Vehicle Finance

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Outlook on interest ratesOutlook on interest ratesOutlook on interest ratesOutlook on interest ratesOutlook on interest ratesBy Yes Bank

Mr. Ajay Mahajan, group president–Financial Markets and Private Banking at Yes Bank, shared his well

thought out view on interest rates outlook considering several broad economic factors. Key takeaways from

his presentation were:

Global growth and inflationary pressures are anticipated to moderate in 2007. Monetary policies are ex-

pected to be divergent in 2007. It is expected that the Federal Reserve will hold back interest rates (possibly

may even lower rates) through 2007, while ECB, BoE, and BoJ are likely to hike rates further. India and

China are set to tighten rates. Inflationary pressures are expected to remain high in India, while in China they

are expected to rise.

ECB is expected to raise rates by 25bps in March, taking the rate to 3.75%. Two additional rate moves to

4.25% are expected by early 2008. The above rate yields to support Euro as European Zone yield spreads

narrow versus the US.

BoE will raise rates further to 5.5%. Sustained GBP gains appear limited in the near term due to overvalued

conditions. High yielding status of the GBP should underpin sentiment.

BoJ will gradually tighten with one rate hike expected in H107. Slow monetary tightening and persistent

capital outflows is likely to slow down Japanese Yen (JPY) recovery and so limited gains can be expected

in JPY.

On the domestic front, the pressures from the supply side are expected to remain; in addition demand

pressures are expected to emerge. Manufactured prices’ inflation has remained subdued so far due to

productivity gains and competition. Credit growth maintains a strong momentum for third consecutive year.

Inter-bank rate now ruling at 10.25% which necessitates a PLR of around 11.5% in order to recover CRR

and SLR cost. So, in the absence of global cues, domestic interest rates are expected to be firm.



HighlightsHighlightsHighlightsHighlightsHighlights

The bank is continuing on an accelerated growth path, steadily improving its market share

driven by better deposit mobilization and higher than system credit expansion.

The new management has implemented a few initiatives—roll out of CBS, setting up of a

general insurance venture with Sompo of Japan and plans to expand its reach in southern

India, western Maharashtra and Gujarat—which may change the perception of the bank.

The bank is now increasingly focusing on retail, SME, and agri credit, alongwith increased

thrust on mobilizing low cost deposits.

Investment RationaleInvestment RationaleInvestment RationaleInvestment RationaleInvestment Rationale

The new management is increasingly focusing on expanding its reach in southern India,

western Maharashtra and Gujarat, thereby lowering the concerns regarding its dominant

presence in high risk, low returns eastern states.

Loan portfolio mix is likely to shift in favour of retail advances in eastern and central regions

from public sector advances in western and northern regions. The bank has 236 retail boutiques

dedicated to retail business. We expect loan growth to settle at 32% for FY07E.

We believe that Allahabad Bank’s margin will improve in the coming quarters as its treasury is

increasing proportion of high yielding non-SLR investments and loan mix shift in favour of retail

and SME advances. We expect NIMs to improve to 2.8% in FY08E.

We expect the operating expense (opex) to assets ratio to come down to 1.7% in FY07E and

1.6% in FY08E from 2.2% in FY06.

The stock has high dividend yields of ~5.0% and is underowned by foreigners (FIIs own 18%

against the 20% limit).

Valuations: Attractive at 1.0x book Valuations: Attractive at 1.0x book Valuations: Attractive at 1.0x book Valuations: Attractive at 1.0x book Valuations: Attractive at 1.0x book

Despite 20% plus RoE and 5% plus dividend yield, the bank trades at significant discount (40-

50%) to its peers, mainly due to technological backwardness and poor perception of its asset

quality. In our view, with the change in management, technology initiatives (through CBS

rollout), economic development in eastern states and inroads into other locations, the present

discount is likely to narrow down in the future. The stock currently trades at 0.9x FY08E book

and 2.8x FY08E PPOP. We recommend a ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’, expecting 25% plus return (excluding 5%

dividend yield) in the next 12 months.

A A A A ALLAHABADLLAHABADLLAHABADLLAHABADLLAHABAD BBBBB ANK ANK ANK ANK ANK INR 82INR 82INR 82INR 82INR 82

BUYBUYBUYBUYBUY

Vishal Goyal, CFA Vishal Goyal, CFA Vishal Goyal, CFA Vishal Goyal, CFA Vishal Goyal, CFA

+91-22-2286 4370

[email protected]

Kunal ShahKunal ShahKunal ShahKunal ShahKunal Shah

+91-22-4009 4532

[email protected]

Ajitesh Nair Ajitesh Nair Ajitesh Nair Ajitesh Nair Ajitesh Nair

+91-22-4009 4535

[email protected]

Reuters : ALBK.BO

Bloomberg : ALBK IN

Market DataMarket DataMarket DataMarket DataMarket Data

52-week range (INR) : 99 / 53

Share in issue (mn) : 446.7

M cap (INR bn/USD mn) : 36.6 / 829.5

Avg. Daily Vol. BSE/NSE (‘000) : 927.0

Share Holding Pattern (%)Share Holding Pattern (%)Share Holding Pattern (%)Share Holding Pattern (%)Share Holding Pattern (%)

Promoters : 55.2

MFs, FIs & Banks : 7.6

FIIs : 18.6

Others : 18.6

India Equity Research | Banking

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.




18

Key RisksKey RisksKey RisksKey RisksKey Risks

Asset quality Asset quality Asset quality Asset quality Asset quality: In the event of an economic slowdown, there is a greater risk of NPA accretion for

Allahabad Bank than its peers, given its geographical spread and relatively weaker risk management

systems. However, increased technological penetration can alleviate some risk of weak risk management

system.

Technology Technology Technology Technology Technology: Delay in implementing CBS can restrict the improvement in CASA ratio and fee income.

Company DescriptionCompany DescriptionCompany DescriptionCompany DescriptionCompany Description

Allahabad Bank is India’s oldest public sector bank with a pan-India presence and sixth largest network

of over 2,040 branches across India. It has a strong presence in the eastern region with 70% of its

branches are in Uttar Pradesh and Eastern India. It commands 7-10% share in the network in Uttar

Pradesh and West Bengal.

Its credit book is well diversified with corporate advances forming 45%, retail 20.2%, agricultural loans

17.2%, and other priority loans 21.2%. SME lending (including SSI) forms 17% of the total loan book.

Its market share in advances was at 2.02% and market share in deposits was 2.29% as of March 2006.

Branches 2046

Mcap (INR bn) 37

Our recommendation BUY

Balance sheet size (INR bn) 691

Ownership State owned

FY06FY06FY06FY06FY06 FY07EFY07EFY07EFY07EFY07E FY08EFY08EFY08EFY08EFY08E FY09EFY09EFY09EFY09EFY09E

Net interest income (INR mn) 15,774 17,053 20,360 24,599

PAT (INR mn) 7,061 7,622 7,717 9,051

Advances (INR bn) 291 396 476 561Deposits (INR bn) 485 623 718 861

(%)(% )(%)(% )(% )

Fee to assets 1.0 0.7 0.6 0.6

Opex to assets 2.2 1.7 1.7 1.5

NIM 3.3 2.9 2.8 2.9

Net NPA 0.8 0.8 0.8 0.9

CAR 13.4 11.7 11.8 11.2

CASA 39.3 39.0 39.8 40.0

RoE (%) 29.6 23.0 20.2 20.6

RoA (%) 1.5 1.3 1.1 1.1

EPS (INR) 15.8 17.1 17.3 20.3

Book value (INR) 68.3 79.8 91.6 105.2PE (x) 5.2 4.8 4.8 4.1

PB (x) 1.2 1.0 0.9 0.8

P/PPOP (x) 3.7 3.4 2.8 2.2

PPOP per share (INR) 22.4 24.4 29.5 37.7




We expect Centurion Bank to post 48% CAGR in loan growth over the next two years, led by

lending to retail and SME segments. We expect growth in retail credit (constituting 69% of the

bank’s loan book) to be more broad-based in the future, to include mortgages, personal loans,

and credit cards, instead of being concentrated on two wheelers and CVs.

Centurion Bank has sustained its margins at the highest level in the industry at 4.7%, with

exceptionally higher growth in personal and mortgage loans along with robust growth in SME

segment. Going forward we expect margins to remain at 4% plus over FY07-09E.

Opex/assets still remain high at Centurion Bank, but this will play out to its advantage as there

is dramatic scope of improvement and will push up return ratios.

Inorganic growth is a part of Centurion Bank’s overall strategy, and we believe, the bank is in

a good position to pursue the same.

The bank with a countrywide network, diversified product portfolio, and advanced technology

in place, is the best fit as an acquisition target by a foreign bank.

Valuations: Still attractive Valuations: Still attractive Valuations: Still attractive Valuations: Still attractive Valuations: Still attractive

The stock currently trades at 3.5x FY08E book and 27.8x FY08E earnings. We believe that its

inorganic growth strategy will have a strong positive impact on its valuations, going forward.

The bank deserves a premium valuation for its highly profitable business (reflected in its high

RoA), tremendous growth potential (both organic and inorganic), and M&A possibilities. Weexpect the bank to generate 43% EPS CAGR over FY06-09E and deliver 20% RoE, once the

capital ratio stabilizes. We have a ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’ recommendation on the stock.


Deterioration in systemic retail asset quality

The bank has over 69% of its assets as retail loans. A system-wide deterioration in the quality

of retail assets can impact its profitability due to its heavy dependence on the category.

Deterioration in margins

Higher than expected decline in margins is a risk to our estimate.....

CCCCCENTURIONENTURIONENTURIONENTURIONENTURION BANKBANKBANKBANKBANK OFOFOFOFOF PPPPPUNJABUNJABUNJABUNJABUNJAB INR 36INR 36INR 36INR 36INR 36

BUYBUYBUYBUYBUY


+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : CENB.BO

Bloomberg : CBOP IN



Share in issue (mn) : 1,478.2

M cap (INR bn/USD mn) : 53.2 / 1,205.1

Avg. Daily Vol. BSE/NSE (‘000) : 2,066.3


Promoters : 0.0


FIIs : 25.0

Others : 72.6






20


Centurion Bank of Punjab (Centurion Bank) is a growing private sector bank with 249 branches and

402 ATMs across India.

It is one of the leading players in two-wheeler and commercial vehicle (CV) financing. Retail credit is the

bank’s mainstay, constituting 69% of its advances.

The bank successfully merged the Bank of Punjab with itself and is producing synergies in the form of

expanded reach, product diversification, and availability of low cost deposits. The merged bank has

branch network in both northern and southern part of the country.

Recently, Centurion Bank has announced a merger with Kochi-based Lord Krishna Bank which, on

approval from RBI, will add 112 branches in South India.

Branches 249

Mcap (INR bn) 53



Ownership Private



PAT (INR mn) 878 1,373 2,377 3,279

Advances (INR bn) 65 106 155 216

Deposits (INR bn) 94 144 209 297

(%)(% )(%)(% )(% )

Fee to assets 3.3 3.0 2.8 2.5


NIM 4.2 4.2 4.3 4.1

Net NPA 1.1 1.1 1.2 1.4

CAR 12.1 10.4 10.0 8.4

CASA 38.7 33.2 33.7 34.2

RoE (%) 12.9 12.1 14.5 15.9

RoA (%) 0.9 1.0 1.2 1.2

EPS (INR) 0.6 0.9 1.3 1.7

Book value (INR) 6.5 8.8 10.3 11.3

PE (x) 57.2 40.4 27.8 21.4

PB (x) 5.5 4.1 3.5 3.1

P/PPOP (x) 23.3 20.0 13.4 10.3





Breaking away from the image of an old generation private bank, Federal Bank admits it is not

in the same league as ICICI Bank, HDFC Bank, and UTI Bank, but is aspiring to be in those

ranks. It is looking at 2009 with a lot of confidence and sees itself playing the role of a

consolidator.

It is looking to expanding its branch network in the north western corridor. It currently has a

network of 526 branches, which it plans to extend to 545 by March 2007.The bank is transforming

its technology platform from in-house technology to Finacle from Infosys at a rapid pace.

Margins are expected to be maintained above 3%. Asset quality is in control with 82% of its

NPA book collateralized, which gives it a strong bargaining power for recovery. Hence, recoveries

are expected to be strong.

The bank is coming out with a 1:1 rights issue; timing and pricing details of the same are under

discussion. The bank is raising capital to meet the capital requirements for its insurance JV

with IDBI and Belgo-Dutch bancassurance group Fortis. It is also reviving its subsidiary Fedbank

Financial Services to sell its products through this arm.


SME and retail loans, which constitute a bulk of the bank’s loan book, are likely to continue to

lead its growth in future. Loan book is expected to grow at 22% CAGR over next three years

through network expansion.

With the implementation of core banking solutions (CBS) in FY07, we expect the bank’s fee

income to grow at 11% CAGR over the next two years. Fee business will further receive boost

due to its wide geographical presence in Kerala, which is amongst the largest recipients of NRI

remittances.

Federal Bank is well-positioned with the NRI segment. NRI deposits account for ~30% of the

total deposits which are cheaper than domestic term deposits.

Valuations: Attractive Valuations: Attractive Valuations: Attractive Valuations: Attractive Valuations: Attractive

The bank’s fundamentals are improving, which we believe will lead to a re-rating in valuations.

During the past 24 months the stock has underperformed the banking index and broader

market by 39% and 52%, respectively.

We believe that the stock is attractively valued at 1.2x FY08E book relative to its 18% plus RoE

and M&A possibilities (post 2009). We have a ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’ recommendation.

FFFFFEDERALEDERALEDERALEDERALEDERAL BBBBB ANK ANK ANK ANK ANK INR 238INR 238INR 238INR 238INR 238

BUYBUYBUYBUYBUY


+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : FED.BO

Bloomberg : FB IN


52-week range (INR) : 274 / 137


M cap (INR bn/USD mn) : 19.9 / 450.6



Promoters : 0.0


FIIs : 37,3

Others : 54.0






22

Branches 534

Mcap (INR bn) 20



Ownership Private



PAT (INR mn) 2,225 2,575 2,972 3,423

Advances (INR bn) 117 150 180 213Deposits (INR bn) 179 199 235 277

(%)(% )(%)(% )(% )

Fee to assets 1.1 0.9 0.8 0.8


NIM 3.3 3.3 3.3 3.2

Net NPA 1.0 0.6 0.4 0.4

CAR 13.8 12.0 11.1 10.9

CASA 25.0 27.0 27.3 27.6

RoE (%) 22.6 19.0 18.6 18.2

RoA (%) 1.2 1.2 1.2 1.2

EPS (INR) 26.0 30.1 34.7 40.0

Book value (INR) 145.2 171.4 201.7 236.8

PE (x) 9.2 7.9 6.9 6.0

PB (x) 1.6 1.4 1.2 1.0

P/PPOP (x) 4.4 4.2 3.6 3.1



The bank’s high dependence on the NRI segment (30% of its deposits come from NRI segment)

exposes it to regulatory risks.

Geographical concentration in the South exposes it to the regional risk.

Execution risk of its transition to the CBS platform.


Federal Bank is an old private sector bank based in Kerala. It has an asset base of over INR 200 bn,

network of over 524 branches (80% branches in Kerala), and 368 ATMs.

SME and retail lending are the bank’s focus areas and constitute 34% and 30%, respectively, of its

loan book.

The bank’s recent merger with Ganesh Bank has added 32 branches to its existing network, increasing

its foothold in western India.

IFC Washington has ~8% equity holding in Federal Bank.




HDFC is the strongest and most venerable play on Indian mortgages over the long term. We

expect HDFC, with its strong brand recall, superior real estate knowledge, and revamped

distribution strategy, to attain 22% CAGR in loan disbursement over FY06-09E. Consequently,

we expect HDFC to deliver 24% and 19% CAGR in loan book and earnings, respectively.

HDFC has differentiated itself from its peers with its diversified network and revamped distribution

strategy. Of the total individual loans disbursed during FY06, 65% (38% in FY05) were routed

through third party channels viz., HDFC Bank, DSAs, and distribution subsidiaries.

HDFC has been highly proactive in passing on the cost and benefit to customers. With strong

pricing power in the housing finance space, we believe HDFC will be able to pass on anyincreased funding cost to customers. Net effect, according to us, will be a very modest

contraction in spreads of 7-10bps over FY06-08E.

Besides the core business, HDFC’s insurance, AMC, banking, BPO, and real estate private

equity businesses are also growing at a rapid pace and the estimated value of its investments/

subsidiaries explains ~25% of HDFC’s market capitalisation. Value of stakes in HDFC Bank

and HDFC Standard Life forms a significant portion of its unrealised gains. Unrealised gains on

its investments amount to INR 470 per share of HDFC Ltd.

Valuations: Fair Valuations: Fair Valuations: Fair Valuations: Fair Valuations: Fair

Stripping off the value in investments, HDFC’s mortgage business is currently valued at 3.6x

FY08E book and 18.1x FY08E earnings. We are impressed by its strong brand equity, talented

management team, relentless commitment to a now proven “profitable growth” strategy,

revenue diversification and related growth prospects, and unbeatable record of asset quality.

We believe HDFC to be the best play available on Indian mortgage finance. However due to

recent sharp appreciation we expect limited returns and have an ‘ACCUMULATE’‘ACCUMULATE’‘ACCUMULATE’‘ACCUMULATE’‘ACCUMULATE’ recom-

mendation on the stock.


Loss of market share to commercial banks and HFC’s

Higher than expected increase in funding cost

Risk of fraud and NPA accretion due to increase in interest rates and fall in property prices is

inherent to the mortgage business

HHHHHOUSINGOUSINGOUSINGOUSINGOUSING DDDDDEVELOPMENTEVELOPMENTEVELOPMENTEVELOPMENTEVELOPMENT FFFFFINANCEINANCEINANCEINANCEINANCE CCCCCORPORPORPORPORP..... INR 1,759INR 1,759INR 1,759INR 1,759INR 1,759

ACCUMULATE ACCUMULATE ACCUMULATE ACCUMULATE ACCUMULATE


+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : HDFC.BO

Bloomberg : HDFC IN


52-week range (INR) : 1,822 / 962


M cap (INR bn/USD mn) : 439.8/9,946.6



Promoters : 0.0


FIIs : 79.8

Others : 14.1

India Equity Research | BFSI





24


Housing Development Finance Corporation Ltd. (HDFC) is India’s largest provider of housing finance,

primarily focusing on retail housing. Cumulative loan approvals and disbursements as at March 2006

were INR 1,124 bn and INR 931 bn, respectively. This is with respect to over 2.8 mn housing units.

HDFC has widened its distribution network to 219 offices in India. It also covers over 90 locations

through its outreach programme, which has helped the corporation disburse housing loans in more

than 2,400 towns and cities in India. It has also supplemented the distribution channel through the

appointment of direct selling agents (DSA).

Currently, 79% of the shares are held by foreign institutional investors/foreign direct investments and

12% by individuals.

Besides the core business of mortgages, HDFC has evolved into a financial conglomerate diversifying

into other businesses through its subsidiaries viz., HDFC Standard Life Insurance (78.38%), HDFC

Asset Management Company (50.1%), HDFC Bank (21.94%), Intelenet Global (BPO) (50%), and

HDFC Chubb General Insurance Company (74%).

Branches 219

Mcap (INR bn) 439

Our recommendation ACCUMULATE


Ownership Private



PAT (INR mn) 12,572 14,561 17,860 20,889

Advances (INR bn) 450 578 721 885

Deposits (INR bn) 87 105 135 165

(%)(% )(%)(% )(% )

Fee to assets 0.1 0.1 0.1 0.1


NIM 2.7 2.6 2.7 2.7

Net NPA - - - -

CAR 15.0 13.3 13.2 13.1

CASA NA NA NA NA

RoE (%) 30.1 28.0 24.1 19.9

RoA (%) 2.8 2.5 2.5 2.4

EPS (INR) 50.4 58.3 69.2 78.4

Book value (INR) 179.0 238.1 344.2 455.2

PE (x) 34.9 30.1 25.4 22.4

PB (x) 9.8 7.4 5.1 3.9




The bank emphasized that turnaround is in the offing due to recovery from written off ac-

counts, unlocking of value from its investment book and disinvestment of non-productive

assets. Unrealized gains on its equity book are ~INR 15 bn. The bank expects to reverse

around INR 15 bn of SSF. It is aiming to grow its balance sheet size at 20% and low cost

deposits (which remains a focus) at a similar rate. On a two-three year’s horizon, consolidation

remains a good probability. The bank also expects huge recoveries from United Western

Bank’s (UWB) written off accounts.


Cleaning up relatively greater portion of its balance sheet, the bank is now thriving on quality

balance sheet growth to drive profitability and return ratios. The bank has identified following

key growth strategies going forward: stepping up credit to SME, agriculture, and retail segments;

garnering higher low cost deposits; augmenting fee-based income; and aggressively improving

asset quality through effective recoveries and restricting delinquencies.

UWB acquisition is expected to be positive for IDBI as it more than doubles its branch network

and gives it much needed access to low cost deposits thus lowering its funding cost and

increasing its margins.

The bank has fairly large investment book where it has un-booked gains on the equity

portfolio. Of these, stake in NSE, NSDL and Stock Holding Corporation are large and the bank

is sitting on substantial un-booked gains. However uncertainty remains over the value unlocking.

Going forward, with adequate capital in place, strong growth in fee income, increased reach

tight credit monitoring measures, the return ratios are expected to improve from these levels.

The bank is currently trading at 1.7x FY06 book.


Increased delinquencies and non-recovery from written off accounts may impact its

profitability.

Legacy borrowings may continue to weigh down on its margins and the profitability.


IDBI was established in 1964 as a wholly owned subsidiary of RBI to catalyze the development

of the nation. In 1976 the 100% of ownership was transferred from RBI to Government of India.

Due to high NPA and cost of funds the government restructured the institution into a bank. In

2005 IDBI merged its banking subsidiary IDBI bank with itself.

IDBIIDBIIDBIIDBIIDBI INR 87INR 87INR 87INR 87INR 87

NOT RATEDNOT RATEDNOT RATEDNOT RATEDNOT RATED


+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : IDBI.BO

Bloomberg : IDBI IN




M cap (INR bn/USD mn) : 62.8 / 1,419.7



Promoters : 52.7


FIIs : 12.9

Others : 17.3








IOB has outperformed the system in credit growth. However, going forward, it will consciously

slow down its loan growth in line with the system average.

The bank is expected to leverage on its 100% investment in Bharat Overseas Bank and 35%

stake in each of the profitable three regional rural banks (RRBs) viz., Pandyan Grama Bank,

Puri Gramya Bank, and Dhenkanal Gramya Bank. Pandyan Grama Bank has been adjudged

the best performing RRB among 196 RRBs in India.

Despite robust credit growth, Tier-1 capital is still strong at almost 9% and there is enough

headroom to raise further Upper Tier-2 capital as and when required.

IOB expects to maintain a low cost-income ration in the future as well. Earnings growth going

forward will be driven by strong loan growth, strong fee income, and reduced provisioning

levels.

The bank expects return on assets to reach 1.5% (from 1.38% in FY06) in FY07.


IOB has one of the highest interest margins on account of high yielding loan book (retail, SME,

agri) and high CASA ratio of 36%. Considering the higher funding and aggressive asset growth

in Q3FY07 we expect NIMs to contract 15-25bps over FY07-09E.

Loan book at IOB continued to grow at above system growth at 39% in Q3FY07.

The bank has generated average 30% RoE during the past four years (FY03-06), enabled by

its high interest margins and efficient capital management. Going forward, we expect RoE to

remain robust at 23% plus over FY07-09E.

Acquisition of Bharat Overseas Bank (BhOB) will strengthen IOB’s trade finance and NRI

remittance business. IOB has proposed to merge this bank with itself, which will add 102

branches to its network.

We like the bank for its high return on assets (of 1.3% plus) and high RoE (25%).

Valuations: Attractive for ~23% RoE Valuations: Attractive for ~23% RoE Valuations: Attractive for ~23% RoE Valuations: Attractive for ~23% RoE Valuations: Attractive for ~23% RoE

The stock currently trades at 1.4x FY08E book, 3.1x FY08E PPOP, and 6.2x FY08E earnings.

We like the bank for its high RoE on high capitalization (given its high RoA). We expect the

bank to generate 23-26% RoE and 13.4% EPS CAGR over FY07-09E. IOB is our top pick and

we have a ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’ recommendation.

IIIIINDIANNDIANNDIANNDIANNDIAN OOOOO VERSEAS VERSEAS VERSEAS VERSEAS VERSEAS BBBBB ANK ANK ANK ANK ANK INR 113INR 113INR 113INR 113INR 113

BUYBUYBUYBUYBUY


+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : IOBK.BO

Bloomberg : IOB IN




M cap (INR bn/USD mn) : 61.6 / 1,392.2



Promoters : 61.2


FIIs : 18.2

Others : 15.5






28

Branches 1526

Mcap (INR bn) 62






PAT (INR mn) 7,831 8,995 9,924 11,569

Advances (INR bn) 348 455 546 645

Deposits (INR bn) 505 610 720 850

(%)(% )(%)(% )(% )

Fee to assets 0.8 0.9 0.9 0.8


NIM 3.9 3.7 3.6 3.5

Net NPA 0.6 0.7 0.6 0.9

CAR 13.0 10.4 11.0 11.2

CASA 39.9 36.4 36.4 36.4

RoE (%) 28.5 26.3 23.9 23.2

RoA (%) 1.5 1.4 1.3 1.3

EPS (INR) 14.4 16.5 18.2 21.2

Book value (INR) 56.1 69.3 83.1 99.9

PE (x) 7.9 6.8 6.2 5.3PB (x) 2.0 1.6 1.4 1.1

P/PPOP (x) 4.9 3.8 3.1 2.7



Aggressive credit growth may lead to higher than estimated NPA.

More than expected compression in net interest margin.


IOB is a mid-sized PSU bank with balance sheet size of INR 600 bn. It has 1,522 domestic branches

and over 300 ATMs and currently, 389 branches are under core banking.

It is dominantly present in four southern states of Tamil Nadu, Kerala, Andhra Pradesh, and Karnataka.

The bank has six overseas branches and aims to grow its share in trade finance and remittance market

through Bharat Overseas Bank (its wholly owned subsidiary).

The bank’s focus traditionally has been on SME lending, which forms 14% of total credit, which

explains its high margins.

Government holding is at 61% and foreign holding at maximum permissible 20%.




Due to internal restructuring and intense pricing war disbursals for the company grew at a

paltry 9% (below industry average of 36%) over FY04-06. Post internal restructuring, we

expect LICHFL to grow at a higher than historical growth rates, though slower than industry

growth. We expect LICHFL to grow its disbursals at 14% CAGR during FY06-09E considering

the strong tailwinds in mortgage finance in India. Resultantly, loan outstanding would grow to

INR 230 bn at 16% CAGR during the same period.

The loan spreads have been under pressure for quite some time due to increasing cost of

funds and the limited pricing power due to stiff competition. In our view, pressure on spreads

should ease in FY08, as we see industry mortgage rates rising and the company acquiring

greater pricing power amid strong demand. 85% of loans are on floating rate basis and hence,

any further increase in cost of funds can be passed on. We expect the spreads to remain at

1.6% in H2FY07 before improving to ~1.7% in FY08.

Historically, asset quality for LICHFL has not been highly impressive. However, with adoption

of better and strict risk management process and concerted efforts on NPA recoveries, we

expect the company to improve its net NPA from 1.8% in March 2006 to around 1.2% by

March 2008.

In order to sustain the loan growth, we believe the company will need to replenish its tier I

capital in FY08. The company has capital adequacy of 14.3% (tier I capital at 10.3%) as on

September 2006. We expect the company to raise equity in FY08 through 17.5% dilution.

Valuations: Inexpensive at 0.8x book Valuations: Inexpensive at 0.8x book Valuations: Inexpensive at 0.8x book Valuations: Inexpensive at 0.8x book Valuations: Inexpensive at 0.8x book

The stock currently trades at 0.8x FY08E book and 5.7 FY08E earnings. The low business

growth, narrowing margins, competitive environment, and asset quality issues are fully factored

in its current price, which reflects in significant discount to its peers. Moreover, the stock

should be supported by its 3.7% dividend yield and its inexpensive valuations at 0.8x FY08E

book. Considering the strong tailwinds in mortgage finance, the company’s RoE potential of

~15%, and its current valuations, we recommend ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’ with 25% return in the next 12

months.


Limited pricing power and higher than expected funding cost may pressurize loan spreads

NPA provisions could be higher than estimates if our belief of new risk management would not

lead to better than historical asset quality

LIC HLIC HLIC HLIC HLIC HOUSINGOUSINGOUSINGOUSINGOUSING FFFFFINANCEINANCEINANCEINANCEINANCE INR 160INR 160INR 160INR 160INR 160

BUYBUYBUYBUYBUY


+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : LICH.BO

Bloomberg : LICHF IN


52-week range (INR) : 234 / 136


M cap (INR bn/USD mn) : 13.6 / 307.5



Promoters : 39.1


FIIs : 29.6

Others : 23.2






30


LICHFL is the second-largest housing finance company and fourth-largest player in home loan market.

It provides loans for homes, construction activities, and corporate housing schemes.

Almost 95% of new loans are to retail customers and balance 5% to large ticket commercial sector. It

is fourth in terms of market share (including banks) with 6% market share in home loan disbursements.

The company has loan outstanding of INR 149 bn as on March 31, 2006. It has 115 offices and 100

camps across the country. The company has a marketing network of 5,500 direct sales agents, home

loan agents, and associates.

LIC India is the majority shareholder with 39% of the shareholding and FII holding is presently at 34%.

Branches 120

Mcap (INR bn) 14



Ownership Private



PAT (INR mn) 2,086 2,566 2,801 3,021

Advances (INR bn) 147 168 190 215

(%)(% )(%)(% )(% )

Fee to assets 0.6 0.7 0.7 0.8


NIM 2.5 2.3 2.4 2.3

Net NPA 1.8 1.7 1.4 1.3

CAR 14.1 13.3 15.3 15.1

CASA NA NA NA NA

RoE (%) 16.4 17.8 15.8 14.2

RoA (%) 1.5 1.6 1.5 1.5

EPS (INR) 24.5 30.2 28.0 30.2

Book value (INR) 158.3 180.1 200.9 224.2

PE (x) 6.5 5.3 5.7 5.3

PB (x) 1.0 0.9 0.8 0.7




The company is taking several initiatives and is still investing for further growth, expanding

distribution network and asset base. Presently, ~70% of its loan book comprises of Mahindra

products.

The company has added 52,000 plus new customer contracts (net) during Q3FY07 (as

against 37,000 plus in Q3FY06 and 41,000 plus in Q2FY07) taking cumulative number of

customer contracts to 595,000 plus by December 2006. Consequently, its loan book grew

35% Y-o-Y and 9% Q-o-Q to INR 57 bn.

Income from operations (net of interest expenses) grew 55% Y-o-Y during Q3FY07. Preprovision

profit grew 86% Y-o-Y (6% Q-o-Q) to INR 802 mn due to better operating efficiency as benefitsof investments in branch expansion have started yielding results. However, PAT growth was

weighed down to 59% Y-o-Y due to higher provisioning. PAT was lower 15% Q-o-Q.

NIMs expanded by ~100bps to 9% as hike in lending rates fully offset 80bps rise in cost of

funds. However, NIMs were almost flat Q-o-Q. Provisions more than doubled during the

quarter to INR 415 mn due to higher NPA accretion. Additions to gross NPA (in absolute terms)

were of INR 700 mn and gross NPA ratio rose to 6.9% in Q3FY07 from 6.2% in Q2FY07.

MMFSL is in a position to take advantage of growth in the CV financing segment with its rural

domain knowledge, extensive branch network, close association with M&M and auto dealers,

strong parent brand, and large customer base.


The organized auto and auto finance market is expected to grow at a CAGR of 15% and 20%,

respectively, over FY06-10E, buoyed by 34% growth in used vehicle finance segment and 15-

18% growth in new car and utility vehicle segment (Source: CRIS INFAC ).

Currently, ~30% of its loan book comprises of non-Mahindra products. To insulate itself from

too much dependence on the parent’s products, it has recently entered into a tie up with

Maruti Udyog. It has even commenced financing commercial vehicles and two wheelers (on

pilot basis).

To leverage on its large client base and wide distribution network, MMFS entered into the

insurance broking business in 2005 and has recently commenced distribution of mutual funds

as well. It even plans to enter housing and personal loan business.


The company is currently trading at 2.6x book (mrq) and 16.4x earnings (ttm).

M&M FM&M FM&M FM&M FM&M FINANCEINANCEINANCEINANCEINANCE INR 240INR 240INR 240INR 240INR 240



+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : MMFS.BO

Bloomberg : MMFS IN


52-week range (INR) : 299 / 159


M cap (INR bn/USD mn) : 20.6 / 466.8



Promoters : 70.9


FIIs : 23.1

Others : 5.5






32


Rising competition may restrict its growth and margins may contract.

The company needs to maintain credit rating to avail funds at competitive rates.

The company is highly dependant on parent’s portfolio and to insulate this risk it needs to add more

non-M&M products.


M&M Financial Services (MMFS) finances purchase of utility vehicles, tractors and cars, particularly in the

rural and semi-urban areas. 78% of its branches are situated in rural areas and 21% in semi-urban areas.

The company is taking several initiatives and is still investing for further growth. In the first nine months

of FY07, the company has added 95 branches taking its total branch network to 400 and added 279

employees, raising its employee strength to 2,575.

On the back robust demand in UV, tractors, and cars segments, MMFS has delivered strong growth in

customer contracts, asset size, and profitability. Asset book grew by 41% CAGR in the past years,

aiding 44% CAGR in revenues and 19% CAGR in profitability.

The company is leveraging well on its close association with M&M and 1,000 plus auto dealer relationships,

retaining leadership in financing Mahindra products.

Promoters (M&M) hold 68% and FIIs, at present, hold 23%.

Branches 400

Mcap (INR bn) 20

Our recommendation Not rated


Ownership Private

FY04FY04FY04FY04FY04 FY05FY05FY05FY05FY05 FY06FY06FY06FY06FY06

Operating income (INR mn) 2,051 2,731 3,600

PAT (INR mn) 676 823 1,083

Loan book (INR bn) 17 26 42

Total assets (INR bn) 15 20 31

(%)(% )(%)(% )(% )

Fee to assets 0.2 0.2 0.2

Opex to assets 3.7 3.4 3.1

NIM 11.8 10.6 9.0

Net NPA 3.7 3.2 2.4

CAR 16.2 17.8 18.2

CASA NA NA NA

RoE (%) 28.5 26.9 24.7

RoA (%) 3.7 3.3 2.6

EPS (INR) 11.2 13.2 14.4

Book value (INR) 41.5 50.7 81.9

PE (x) 21.6 18.2 16.7

PB (x) 5.8 4.7 2.9




The bank sounded positive on recoveries being a key driver for profit growth and cleaning up

the balance sheet, retrieving capital and liquidity. The bank has recovered INR 7 bn during

9mFY07, substantial amount coming in from Global Trust Bank’s (GTB) accounts. NPAs in

GTB’s accounts that stood at INR 13.4 bn at the time of merger have been significantly

brought down to INR 8.6 bn.

During FY07, the bank has opened 27 new branches and expects to roll out another 20 to 25

branches in February and March 2007. This addition to the branch network will help it in

mobilizing more low cost deposits.

The bank has resorted to fund raising thrice in FY07. CAR, currently, stands at comfortablelevels of 13%. It has got a lot of headroom to further mobilize Tier-2 bonds. The bank can take

on another INR 20–30 bn of advances comfortably in Q4FY07 without sourcing the additional

deposits from its existing capital base.

The bank has insulated its bond portfolio from interest rate risk up to 8.1% 10-year Gsec yield.

Thereafter, the bank will be required to provide for investment depreciation in respect to its AFS

investments. Presently, 36% of its investments are in the AFS category and the duration of this

portfolio is 3.7 years.

CASA ratio at OBC stands at relatively lower levels (when compared to its peers) of 30%. The

bank expects to improve it further by 1 or 2 percentage points with the launch of CASA

campaign throughout the country.


OBC’s loan growth (led by SME loans) at 24% YTD growth is in line with system growth. Retail

loans grew, albeit at a slower pace of 9% Y-o-Y, and constituted 17.4% of the loan book.

Deposit growth at 23% Y-o-Y was higher than system growth. Currently, CASA deposits stand

at 30.2%. We expect loan book growth to moderate to 27% in FY07E.

Net interest margins have remained largely flat 2.5-2.6% and we expect the margin to remain

at similar levels in FY08E.

Historically, high operating efficiency had enabled strong RoAs for OBC. It is amongst the most

efficient Indian banks, with expense to assets ratio at 1.64%

Asset quality has shown remarkable improvement as recoveries remain strong during FY06.

Considering the strength in economy and OBC’s strength in NPA management skills, recoveries

may surprise us on the upside.

Valuations: To follow weak core operations; appear fair Valuations: To follow weak core operations; appear fair Valuations: To follow weak core operations; appear fair Valuations: To follow weak core operations; appear fair Valuations: To follow weak core operations; appear fair

The stock currently trades at 1.0x FY08E book and 4.77x FY08E earnings. We believe weak

earnings outlook would limit the upside potentials and advise buying on price declines. We

have a ‘ACCUMULATE’‘ACCUMULATE’‘ACCUMULATE’‘ACCUMULATE’‘ACCUMULATE’ recommendation.....

OOOOORIENTALRIENTALRIENTALRIENTALRIENTAL BBBBB ANK ANK ANK ANK ANK OFOFOFOFOF CCCCCOMMERCEOMMERCEOMMERCEOMMERCEOMMERCE INR 235INR 235INR 235INR 235INR 235



+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : ORBC.BO

Bloomberg : OBC IN


52-week range (INR) : 280 / 139


M cap (INR bn/USD mn) : 58.9 / 1,330.3



Promoters : 51.1


FIIs : 19.0

Others : 7.9






34

Branches 1233

Mcap (INR bn) 59






PAT (INR mn) 8,040 9,293 7,944 9,567

Advances (INR bn) 336 428 514 606

Deposits (INR bn) 502 632 731 863

(%)(% )(%)(% )(% )

Fee to assets 0.6 0.7 0.6 0.5


NIM 3.0 2.7 2.6 2.6

Net NPA 0.5 0.7 0.9 1.3

CAR 12.5 10.6 10.6 10.2

CASA 32.6 30.4 31.4 31.6

RoE (%) 23.7 19.3 14.5 15.6

RoA (%) 1.5 1.5 1.1 1.1

EPS (INR) 32.1 37.1 31.7 38.2

Book value (INR) 177.1 206.4 230.4 259.8

PE (x) 7.3 6.3 7.4 6.2

PB (x) 1.3 1.1 1.0 0.9

P/PPOP (x) 6.0 5.2 4.8 3.8



Exposed bond book makes it vulnerable to rising yields.


Oriental Bank of Commerce is a mid sized PSU bank, with the eleventh-largest branch network and

tenth-largest asset book among Indian banks. Historically, the bank had a strong presence in Northand West India and merger of Global Trust Bank (then roughly 15% of the size of OBC) provided it a

foothold in the South.

The bank has over 1,200 branches across India, 1,017 of which are under core banking solution.

It has one of the best efficiency ratios in the industry (cost to income ratio of 40%).

Government ownership in the bank is at minimum 51%, leaving no room for further equity dilution. FII

holding in the bank is at maximum allowed 20%.




The bank has guided for 16% deposit growth rate. During 9MFY07, deposit growth rate was

merely 12%, but relatively higher growth expected in Q4FY07 will aid in achieving the target

growth rate of 16%.

Bulk deposits of the bank, presently account for 6-7% of total deposits. Of 4,500 branches,

two-third in the Northern belt and two-third in semi-urban and rural areas will maintain CASA

at 50% going forward.

The bank expects advances to grow at 23% in FY07E and 20% in FY08E. It has guided future

growth rate of 20-22%. The bank is targeting business of INR 2,400 bn for FY07E. Approximately

70% of its loans are granted on a floating rate basis.

The bank’s net interest margins will be protected at 4% plus level, with assets being repriced

upwards. There is potential for improvement in CD ratio as SLR ratio is still at 26.5%. The NIM

looks sustainable.

With roll out of CBS, there has been reduction in space requirement for branches. Hence, 0.2

mn sq ft of area has been surrendered by the bank, thereby reducing its rental expense.

Of the total investment book, 69% currently is in the HTM category. The average duration of

its investment book is 3.5 years. The bank has insulated its investment portfolio till 10- year

yield of 7.61%. Thereafter it will have to provide for investment depreciation.


PNB has been performing well on key operating parameters. Its 1.2% plus return on assets,

enabled by high margins, improving cost ratios, and declining provisions can potentially generate

higher than presently reported RoE (19%).

PNB has grown its loan book robustly fueled by strong growth in retail credit. We believe PNB

has enough liquidity in its balance sheet to grow credit at 18% plus for the next two years.

PNB’s net interest margins at 4.16% are one of the highest amongst Indian banks, supported

by its strong low cost deposit franchise (47% second highest after HDFC Bank). We expect

NIMs (post investment premium amortisation) to stay high at 3.6-3.8% (reported NIMs ~4.20%)

during FY07-09E.

Going forward, we do not expect any significant rise in NPA vis-à-vis asset growth and forecastnet NPA ratio to remain at current levels during FY07-09E.

Valuations: Attractive at 1.3x book Valuations: Attractive at 1.3x book Valuations: Attractive at 1.3x book Valuations: Attractive at 1.3x book Valuations: Attractive at 1.3x book

The stock is available at 1.3x FY08E book, 3.4x FY08E PPOP and 6.7x FY08E earnings. We

like the bank for its strong core operating performance—high margin business, and high

sustainable RoA. We believe that the bank is best positioned to grow balance sheet even in a

tight liquidity environment given its excess SLR and high CASA ratio. We expect 18-20% RoE

and 26% EPS CAGR over FY07-08E. PNB is our top pick among Indian banks and we have

a ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’ recommendation.

PPPPPUNJABUNJABUNJABUNJABUNJAB NNNNN ATIONAL ATIONAL ATIONAL ATIONAL ATIONAL BBBBB ANK ANK ANK ANK ANK INR 492INR 492INR 492INR 492INR 492

BUYBUYBUYBUYBUY


+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : PNBK.BO

Bloomberg : PNB IN


52-week range (INR) : 585 / 300


M cap (INR bn/USD mn) :155.1 / 3,516.8



Promoters : 57.8


FIIs : 20.1

Others : 8.1








Being an unrivalled industry leader, State Bank of India remains a macro economic proxy for

Indian economy with customer base of ~146 mn, distribution network of 14,156 branches,

and leveraging on strong relationships with over 80% of large corporates and 50% of mid

corporates in India.

The bank has recently raised INR 10 bn through upper Tier-2 bonds with a maturity of 15 years

and carrying a coupon of 9.4%.

The management expects retail banking, business process reengineering, and technology

upgradation to fuel growth in future.

The bank expects to sustain margins at the current levels by improving loan yields andcontrolling deposit cost driven by its strategy of scaling up low cost deposit and de-focusing on

bulk deposits.

SBI’s international banking business is developing scale with 28% share in foreign trade, 24%

share in NRI deposits, and 23% share in inward remittances. The increased thrust on fee

income is reflected in revision of service charges and new NRI initiatives targeting deeper

penetration in inward remittances (through speed remittances, online automated clearing

house, increasing tie-ups, and instant transfers).

The bank is addressing the problem of large and ageing workforce by restricting fresh

recruitments to about 15% of natural attrition and has launched an early exit scheme for all

cadres of employees (wherein 4,000 officers are about to leave).


We expect the bank to attain 19% CAGR in loan book over the next two years. Medium sized

corporate, retail and international business will be the key growth drivers for the bank.

The step up in technology infrastructure coupled with reduced workforce (higher retirees) in

the next few years will aid in containing opex vis-à-vis asset growth.

Retail fee income can potentially be a growth area if serious cross selling is done at SBI’s

extensive network.

Of SBI’s seven associate banks, State Bank of Travancore, State Bank of Mysore, and State

Bank of Bikaner and Jaipur are already listed. Management has expressed its intention tounlock values of its investment in associate banks through a public issue.

Valuations: Little upside from 1.4x book Valuations: Little upside from 1.4x book Valuations: Little upside from 1.4x book Valuations: Little upside from 1.4x book Valuations: Little upside from 1.4x book

We expect the bank to post 14% EPS CAGR and average RoE of 17% over FY06-09E. On a

consolidated book, the stock trades at 1.4x FY08E book and 8.6x FY08E earnings. The stock

trades at 1.7x FY08E standalone book and 10.8x FY08E standalone earnings. While we are

positive on the structural story of SBI, we believe current valuations factor in the near term

upsides. We advise ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’ only on price declines and our recommendation is ‘ACCUMULATE’.‘ACCUMULATE’.‘ACCUMULATE’.‘ACCUMULATE’.‘ACCUMULATE’.

SSSSS TATE TATE TATE TATE TATE BBBBB ANK ANK ANK ANK ANK OFOFOFOFOF IIIIINDIANDIANDIANDIANDIA INR 1,184INR 1,184INR 1,184INR 1,184INR 1,184



+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : SBI.BO

Bloomberg : SBIN IN


52-week range (INR) : 1,379 / 684


M cap (INR bn/USD mn) :623.1/14,091.8



Promoters : 59.7


FIIs : 11.9

Others : 15.5






38


Risk of losing market share to new private sector banks.

Investment risk on MTM as 36% of investments in AFS category.

Increased government intervention in the operation of PSU banks.

Enforcement of AS-15 relating to provision of retirement benefits that is likely to erode the reserves of

SBI by a year’s profit.


The State Bank of India is India’s largest commercial bank with an asset size of INR 4,600 bn. It has over

9,000 branches on standalone basis, 14,000 branches including associates, the largest ATM network

of 5,826 ATMs, and largest card base of 23.49 mn cards. It has a market share of around 23-24% in

advances and deposits.

Over the past two years, the bank has increased focus on retail credit, both to provide itself the necessary

growth momentum and also to improve spreads. Retail credit now forms 23% of its total loan book.

For better management of operations, SBI has integrated its treasury operations and has a common

technology platform across all its seven subsidiary banks. It has 4,573 branches under CBS.

Branches 9186

Mcap (INR bn) 623


Balance sheet size (INR bn) 5,272




PAT (INR mn) 44,076 45,895 57,710 66,323

Advances (INR bn) 2,616 3,271 3,859 4,477

Deposits (INR bn) 3,800 4,162 4,818 5,561

(%)(% )(%)(% )(% )

Fee to assets 1.5 1.4 1.3 1.2


NIM 3.4 3.2 3.3 3.3

Net NPA 1.9 1.4 1.2 1.3

CAR 11.9 13.6 12.2 12.7

CASA 47.6 43.1 43.1 43.2

RoE (%) 17.0 15.6 17.1 17.1

RoA (%) 1.0 0.9 1.1 1.0

EPS (INR) 83.7 87.2 109.7 126.0

Book value (INR) 525.3 595.9 684.6 786.4

PE (x) 14.1 13.6 10.8 9.4

PB (x) 2.3 2.0 1.7 1.5

P/PPOP (x) 4.3 4.1 3.5 3.1





Shriram Transport has huge opportunity to grow its asset base considering target market

potential of INR 225 bn each in new CVs and in pre owned trucks. To tap this opportunity

Shriram will leverage on its strong customer base (of 0.5 mn plus), wide distribution network

and strong competencies developed over the years in the areas of loan origination, valuation

of pre-owned trucks, effective customer evaluation and collection.

It expects to grow its AUMs to INR 150 bn by 2010E, targeting a CAGR of 15% plus over FY07-

10E. This will be aided by creating a network of 200 private financiers on franchisee basis and

increasing its national coverage to 100% by FY07 (from 91% currently). The company is

building a vertically integrated business model by scaling up new truck financing business and

providing value-added services such as loan for reconditioned truck, accidental repair loans,

tyre finance, working capital loans, engine replacement finance, and truck exchange

programmes.

The company has business specific competitive edge in terms of valuation expertise and

efficient collection. It develops the resale price grid, regionwise, for all the popular models in the

past 5-12 years. To ensure efficient collection, it maintains direct contact with customers by

avoiding intermediaries and links significant proportion (~60%) of the salary of field officers to

origination and collection effectiveness. To reduce the chances of defaults, it lends at relatively

lower loan to value ratio of 60%.

Strong private equity investors like New Bridge, Chrys Capital, FMO, Citicorp, Quantum, and

UTI Bank are providing it growth support.


The stock is currently trading 2.7x FY06 book and 14.3x FY06 EPS.


In the event of an economic slowdown, there is greater risk of NPA accretion as it serves highly

vulnerable segment of pre-owned truck owners.

Yields may come under pressure with increased competition in this segment.

Rising interest rate scenario may have an adverse impact on its funding cost.

SSSSSHRIRAMHRIRAMHRIRAMHRIRAMHRIRAM T T T T TRANSPORTRANSPORTRANSPORTRANSPORTRANSPORT FFFFFINANCEINANCEINANCEINANCEINANCE INR 134INR 134INR 134INR 134INR 134



+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : SRTR.BO

Bloomberg : SHTF IN




M cap (INR bn/USD mn) : 20.9 / 473.7



Promoters : 37.4


FIIs : 16.4

Others : 44.0






40


Shriram Transport Finance is the largest asset financing NBFC with AUMs of INR 100 bn plus. The

company is a leader in organized high yield financing of pre-owned CVs with strategic presence in 5-

12 years old trucks and a market share of 20-25%. In new CV financing, it enjoys a market share of 7-

8%.

It has a low cost pan-India presence covering 91.3% of truck owners with a network of four regional

offices, 50 divisional offices, and 327 branches and employs more than 1,500 field officers.

The company has grown its assets by 32% CAGR over FY02-06 and earnings have grown at a 62%

CAGR during the same period. In 9MFY07Disbursements have grown by 86% Y-o-Y and preowned

CV constituted 66% of the total disbursements in FY06.

Branches 296

Mcap (INR bn) 20

Our recommendation Not rated


Ownership Private

FY04FY04FY04FY04FY04 FY05FY05FY05FY05FY05 FY06FY06FY06FY06FY06

Operating income (INR mn) 2,609 3,467 9,087

PAT (INR mn) 368 493 1,416

Retail book (INR bn) 777 1,006 2,169

AUM (INR bn) 47 58 75

(%)(% )(%)(% )(% )

Fee to assets 2.2 2.3 2.0

Opex to assets 4.5 3.8 3.6

NIM 12.7 11.4 10.1

Net NPA 0.8 0.7 0.4

CAR 14.1 17.6 19.6CASA NA NA NA

RoE (%) 39.0 31.8 22.4

RoA (%) 3.5 3.2 2.8

EPS (INR) 8.2 9.1 9.4

Book value (INR) 21.9 30.1 49.6

PE (x) 16.3 14.7 14.3

PB (x) 6.1 4.5 2.7

P/PPOP (x)




The bank expects deposits to grow at 20% in FY07, substantial growth (50% of the target or

INR 70 bn) has flowed in from the Union Double Plus Scheme. Management expects 22%

growth in deposits in FY08E.

Union Bank has reduced the proportion of bulk deposits from 25% in March 2006 to 18% in

December 2006 and expects to maintain it at the similar levels in Q4FY07. The management

expects the bulk deposit proportion to marginally increase to 19% in FY08E.

CASA remains the key focus area for the bank and it aims to maintain it at 35% in FY07E and

aggressively improve it to 40% in FY08E. The bank expects to maintain cost of deposit in the

range of 5.5-5.6% in FY08E.

Advances are expected to grow at 20-22% for FY07E and at 25% for FY08E. More than half

of the advances portfolio consists of the retail, SME, and agriculture, having an average yield

of 11% and the management expects 25% growth in FY08E from these areas. The bank has

been increasing its focus on advances to small traders which has a higher yield of 14%. It is

increasing its thrust on SME by dedicating 150 specialised SME branches from this quarter.

The bank expects to increase yield on advances to 9.5% in FY08E.

~40% of the loans are granted on a fixed rate basis and this may put some pressure on the

yields in a rising interest rate scenario.

Net interest margins for 9MFY07 stood at 2.89%.The banks expects to increase it to 3% in Q4FY07

and report NIMs of 2.95% for FY07. It plans to further increase the NIMs to 3.05% in FY08E.

The bank expects fee income from distribution of the third party products to grow from INR 210

mn in FY06 to INR 520-530 mn in FY07E. The insurance venture is expected to start in six

months and the bank is also in discussions with some players to start an Asset Reconstruction

Company. The bank has also launched various derivatives products in this year and this

segment could see high growth in the coming years.

The management expects recoveries of INR 850-900 mn by end of this year. The bank has a

total written off account book of INR 12 bn. With property prices on an upswing, the bank has

witnessed good growth in recoveries as lenders are paying off debt to capitalise on this opportunity.


We like Union Bank due to its high operating efficiency. It has one of the lowest operatingexpenses-to-asset-ratio (50-60bps lower than PSU banking aggregate), which can be credited

to its high CBS coverage.

The bank is also protected, to a great extent, by the rising interest rates with its low duration

and 95% of SLR investments in the HTM category.

With higher upgrades/recoveries, limited slippages, and insulated bond portfolio, we expect

provision to subside going forward.

We remain upbeat on fee income growth and expect it grow by 13% over FY07-09E with third

party distribution being a major trigger.

UUUUUNIONNIONNIONNIONNION BBBBB ANK ANK ANK ANK ANK INR 106INR 106INR 106INR 106INR 106

BUYBUYBUYBUYBUY


+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : UNBK.BO

Bloomberg : UNBK IN




M cap (INR bn/USD mn) : 53.5 / 1,210.8



Promoters : 55.4


FIIs : 19.7

Others : 15.8






42

Branches 2,082

Mcap (INR bn) 54






PAT (INR mn) 6,751 9,183 10,423 12,727

Advances (INR bn) 534 641 769 892

Deposits (INR bn) 741 830 994 1,161

(%)(% )(%)(% )(% )

Fee to assets 0.7 0.8 0.7 0.7


NIM 3.2 3.0 3.0 2.9

Net NPA 1.6 1.0 0.9 0.9

CAR 11.4 12.3 12.5 12.2

CASA 32.4 35.0 35.4 35.7

RoE (%) 18.7 20.7 20.2 21.1

RoA (%) 0.9 1.0 1.0 1.0

EPS (INR) 13.4 18.2 20.6 25.2

Book value (INR) 81.0 94.8 109.9 128.5

PE (x) 8.0 5.8 5.2 4.2

PB (x) 1.3 1.1 1.0 0.8

P/PPOP (x) 3.6 3.0 2.6 2.2



We like the management’s renewed focus on profitable business and asset quality, which reflects in its

improved NIMs and low NPA levels. We expect Union Bank to deliver high RoE of 20% plus in the next

three years. In the past two years, the stock has underperformed the broader market by 126% and has

delivered 3% absolute return. The stock is arguably the cheapest among Indian banks at 1.0x FY08E

book, relative to its RoE and earnings outlook. The stock trades at 5.2x FY08E earnings and 2.56xFY08E PPOP. We have a ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’ recommendation.


Liability management will be a key factor to grow loan book at a faster-than-expected rate.

Margins may come under pressure as the bank has low SLR cushion.


Incorporated in 1919, Union Bank of India (Union Bank) is one of the oldest banks in India. Its network

of 2,082 branches and balance sheet size of INR 886 bn as on March 2006 are sixth largest and fifth

largest, respectively, in the country.

The bank has the most widespread branch network in India (after SBI), with branches distributed evenly

across all regions. Around 979 of the bank’s branches are networked under core banking solution

(CBS).




UTI Bank is uniquely positioned to harness the high growth opportunity in India. The bank has

relatively better scope for aggressively expanding across segments where it has a low presence

(retail credit) and spreading across geographies. It is targeting a presence in more than 75% of

India’s districts in the next five years.

The bank is making efforts to improve margins by improving CD ratio, mobilizing higher low

cost deposits, and developing high yield assets.

Rapidly growing franchise and new product offerings (viz., credit cards) will further drive growth

in retail fee income. The bank is also intensifying efforts to penetrate the remittance business

by aggressively spreading its international operations Other key contributors to fee income willbe project advisory, debt syndication, and third party distribution of insurance.


UTI Bank has registered buoyant loan growth on a balanced portfolio skewed towards corporate

advances than retail.

Loan book is expected to grow at a brisk pace of 30% plus in FY07E with SME, agri, housing,

and personal loan segments likely to be the key growth engines.

The margins at UTI Bank are relatively low when compared with peers. It is making efforts to

narrow down the gap by improving CD ratio to 79% in FY08E (from 72%) and developing high

yield asset book. We expect substantial expansion in margins to 3.1% by FY09E (from 2.6%).

Going forward, we expect overall fee income to grow at ~35% in the next two years.

Asset quality at UTI Bank remains under check with a low gross NPA ratio of 1.2% and net

NPA ratio of 0.68% in December 2006. Overall quality of loan portfolio remained healthy with

82% of corporate advances with a rating of ‘A’ and above.

It will be a strong contender for acquisition by a foreign bank after 2009E, considering its low

promoter holding, increasing geographical spread, and phenomenal growth momentum.


UTI Bank’s Q3 results have reinforced our belief that it can deliver CAGR of 25% in earnings

over FY06-09E with average RoE of 20% plus. The stock currently trades at 3.9x FY08E book

and 19.3x FY08E earnings and 9.25x PPOP. We like the bank for its ability to deliver high

growth without diluting its 20% RoE. We have a ‘BUY’‘BUY’‘BUY’‘BUY’‘BUY’ recommendation.

UTI BUTI BUTI BUTI BUTI B ANK ANK ANK ANK ANK INR 554INR 554INR 554INR 554INR 554

BUYBUYBUYBUYBUY


+91-22-2286 4370

[email protected]


+91-22-4009 4532

[email protected]


+91-22-4009 4535

[email protected]

Reuters : UTBK.BO

Bloomberg : UTIB IN


52-week range (INR) : 530 / 222


M cap (INR bn/USD mn) :154.4 / 3,488.3



Promoters : 43.2


FIIs : 36.4

Others : 12.0






44


Change in key management personnel may impact the pace of growth and profitability.


UTI Bank is the third-largest private sector bank in terms of asset size, with a balance sheet size of INR

713 bn. It has a network of 481 branches and extension counters across India.

As compared to other leading private banks, UTI Bank’s loan portfolio is skewed more towards

corporate advances than retail. Retail advances contribute merely 28% to the total loan portfolio.

The bank earns substantial fee income from transaction and merchant banking activities.

The key promoter UTI Ltd. holds 27.5%, LIC holds 10.4%, and the rest is widely held by FIIs and the

public.

Branches 481

Mcap (INR bn) 154



Ownership Private



PAT (INR mn) 8,708 11,470 14,941 19,477

Advances (INR bn) 223 348 466 583

Deposits (INR bn) 401 581 758 917

(%)(% )(%)(% )(% )

Fee to assets 1.5 1.4 1.4 1.4


NIM 2.6 2.7 2.8 3.1

Net NPA 1.0 0.9 1.0 1.0

CAR 11.1 10.1 10.7 13.3

CASA 40.0 37.5 37.5 37.5

RoE (%) 18.3 20.2 21.9 18.7

RoA (%) 1.2 1.1 1.1 1.1

EPS (INR) 17.4 22.5 28.8 31.9

Book value (INR) 103.1 120.7 143.7 221.2

PE (x) 31.8 24.7 19.3 17.4

PB (x) 5.4 4.6 3.9 2.5

P/PPOP (x) 17.8 13.4 9.3 8.0








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