New Private Banks

8/8/2019 New Private Banks

http://slidepdf.com/reader/full/new-private-banks 1/20Please refer to the disclaimer towards the end of the document.

India Equity Researc

Financial

August 10, 2010

New private banks

Promises underlying new equity yet unfulfilled

Sector Report The RoE on new equity of most new private banks has stayed below

that on their core equity. The success of the prolific equity offers by

new banks

was

partly

based

on

implicit

assumptions

that

new

equity

would earn a high RoE. The low incremental profitability could furthe

erode the valuation premium over public sector banks. The latter have

stopped losing ground in the urban market and have arrested the long

decline in their share of low‐cost deposits. Another challenge to the

premium valuation of new banks could build up if more foreign bank

choose to list in the IDR market, as done by Standard Chartered. We

assume the long‐term loan growth of new banks would widen its lead

over public sector banks. This is contrary to the trend of convergence

seen in recent years. Yet, we estimate a low upside in two of the three

largest banks. We initiate coverage on Axis Bank (Add), HDFC Bank

(Hold) and

ICICIC

Bank

(Hold).

Low RoE on new equity could erode valuation premium even more

During the past decade, many new banks raised up to five tranches of equity

this now comprises close to two‐thirds of their book. The success of these

offers reflected implicit assumptions that the book multiples and RoEs would

be preserved. While the first assumption has been largely true, the second i

not. We find that the RoE on new equity stays below that on core equity fo

most new banks. In contrast, the RoE of public sector banks has expanded and

now exceeds that of new banks with a better record in lifting the RoE on new

equity close to the level of core equity.

Strength in urban centres and savings deposits may be waning

The dominance of new banks in urban branches began to decline in 2006, afte

public sector banks began the huge expansion in their urban presence. Still, the

branch networks of new private banks are heavily tilted towards urban India

which drove the rebound in their savings deposits in FY10. Public sector bank

appear to have arrested the long trend of decline in their share of low‐cos

deposits and could pose a challenge to new banks in the medium term.

Is the IDR listing by foreign banks an inflection point for new banks?

The IDR listing by Standard Chartered Bank may inspire other foreign bank

with a significant presence in India to follow suit. Potential crowding in the

investor’s portfolio could impact new private banks more due to their simila

profile. Standard Chartered Bank’s IDR is just 1.21% of the market cap of the

five

largest

new

private

banks.

Thus,

the

risk

of

their

P/E

de‐

rating

is

low.

Low upside in new banks, even as they regain lead in loan growth

The narrowing premium in the P/B of new banks is justified by their shrinking

lead over the loan growth of public sector banks and the decline in their RoEs

Even with the assumption for the 10‐year, long‐term loan growth tilted in favo

of new banks, we foresee the potential upside to be restricted to 14.6%. We

initiate coverage on Axis Bank (AXSB IN, Add), HDFC Bank (HDFCB IN, Hold) and

ICICI Bank (ICICIBC IN, Hold).

Axis Bank

Rating

Current Market Price

Target Price

Bloomberg Code

Reuters code

Avg. Vol. (3m)

Avg. Val.(3m)(INRmn)

52‐wk H/L (INR)

MCAP (INRbn/USDbn)

HDFC Bank

Rating


Target Price

Bloomberg Code

Reuters code

Avg. Vol. (3m)


52‐wk H/L (INR)

MCAP (INRbn/USDbn)

ICICI Bank

Rating


Target Price

Bloomberg Code

Reuters code

Avg. Vol. (3m)(mn)


52‐wk H/L (INR)

MCAP (INRtn/USDbn)

Valuations

AXSB

HDFCB

ICICIBC

958.00 / 20.77

3.78

1,093 / 23.71

980.1

1061

AXSB IN

1,501

1,399 / 797

Hold

2,154

ICICIBC IN

ICBK.BO

4.41

1,010 / 690

P/E (x) P/B (x)

03/12f 03/11f

Add

1,310

Hold

2,082

AXBK.BO

1.76

2.21

534.34 / 11.58

HDFCB IN

HDBK.BO

741,304

2,145 / 1,353

1.46

2.9 2.5

24.5 19.9 1.9 1.8

3.8 3.3

03/12f 03/11f

24.7 19.5

17.5 13.8

Chandana Jha, +91 022 66842854

[email protected]


http://slidepdf.com/reader/full/new-private-banks 2/20

India Equity Research New private banks

Financials 2

Investment Summary

During the past decade, many new banks raised up to five tranches of equity that now comprises close to two‐thirds of

their book. The positive response from investors reflected implicit assumptions that the book multiples are likely to

sustain and so would the RoEs. While the first assumption has been largely true, the second is not. The RoE on new

equity stays below that on the core equity for most new private banks. In contrast, the RoE of public sector banks has

expanded, with a better record in lifting the RoE on new equity. Also, the dominance of new banks in urban India has

been declining since 2006. Public sector banks appear to have arrested the long trend of decline in their share of

low‐cost deposits and could pose a challenge to new banks in the medium term. The IDR listing by Standard Chartered

Bank may be an inflection point for a listing in India by other foreign banks. Potential crowding in the investor’s

portfolio is likely to put new banks at a higher risk due to their similar profile. Even with the assumption of long‐term

loan growth tilted in favor of new banks, we foresee the potential upside to be restricted to 14.6%. We initiate coverage

on Axis Bank (AXSB IN, Add), HDFC Bank (HDFCB IN, Hold) and ICICI Bank (ICICIBC IN, Hold).

Low RoE on new equity could erode valuation premium even more

Indian new private banks have been prolific issuers of new equity capital. During the past decade,

many new private banks raised up to five tranches of equity that now comprises close to two‐thirds of

the book. The positive response by investors to these issues reflects the implicit assumptions that the

book multiples are likely to sustain and so would the RoEs. While the first assumption has been largely

true, the second is not. We find that the RoE on new equity stays below that on the core equity for

most new banks. In particular, the two latest tranches of equity have a significantly lower RoE. In

contrast, the RoE of public sector banks (PSBs) has expanded and now exceeds that of private banks.

Many PSBs also have a better record in lifting the RoE on new equity close to the level of core equity.

The premium in the P/B of new banks has been declining for the past 15 months. Our analysis suggests

this trend may extend.


The dominance of new banks in urban branches began to decline in 2006 after PSBs began the huge

expansion in their urban presence. Still, the branch networks of new private banks are heavily tilted

towards urban India. This helped drive their savings deposits growth, which rebounded strongly in

FY10. However, the market share of new banks in savings deposits may have peaked in FY08 and could

even be in decline. PSBs appear to have arrested the long trend of decline in their share of low‐cost

deposits and could pose a stiffer challenge to new banks in the medium term. Also, PSBs have

outpaced new banks in the growth in savings deposits per branch during the past three years.


The IDR listing by Standard Chartered Bank may be an inflection point for other foreign banks with a

significant presence in India to follow in its footsteps. Wider access to capital markets and potential

leverage to growth of the Indian business are likely to continue being key drivers for reasons to list in

India. Potential crowding in the investor’s portfolio is likely to put new private banks at a higher risk

due to their similar profile with foreign banks. Standard Chartered Bank’s IDR is just 1.21% of the

market cap of the five largest new banks. Thus, the risk of their P/E de‐rating is small. However, as

other foreign banks begin to list in India, the percentage of market cap of IDR to that of new banks may

begin to rise.


Even if the long‐term loan growth of new banks were to regain its lead over PSBs there would be little

justification for preservation of the current premium in their valuation. The lead of new banks shrank

from 7.8% (difference between mean loan growth of three largest new banks and five large PSBs) in

FY07 to ‐15.7% in FY10. Loan growth is a critical input in our estimation of the fair value of bank stocks

by discounting the excess return over a period of 25 years. Our forecasts for the three years ending

RoE on new equity stays

below that on the core

equity for

most

new

banks, while PSBs have a

better record in lifting the

RoE on new equity.

The market share in

savings deposits may have

peaked in

FY08.

PSBs

have

ceased to lose ground and

may pose a stiff challenge

in future.

Potential crowding in the

investor’s portfolio is

likely to put new private

banks at a higher risk due

to their similar profile

with foreign

banks.

Even with assumptions for

loan growth tilted in favor

of new banks, we foresee

the potential upside to be

restricted to 14.6%.




Financials 3

Mar13fassume the lead to expand further in favor of new banks, relative to PSBs. We also assume loan

growth in the 10‐year semi‐explicit period after Mar13 to be between 22% and 29% for new banks

compared to 16% for PSBs. Even with assumptions tilted in favor of new banks, we foresee the

potential upside to be restricted to 14.6%.

Initiate coverage on three large new private banks

We initiate coverage on Axis Bank, HDFC Bank and ICICI Bank.

Axis Bank

AXSB’s RoE has been superior to peers with the core RoE staying near 30% and that on the initial

tranches of new equity rising to 27% by FY10. Our forecast loan CAGR of 27% till Mar13f is below that

for the preceding three years as well as the growth at the end of Jun10. In contrast to peers, asset

quality may be the major stress factor during FY11f and FY12f. We forecast a rise in incremental and

year‐end NPL ratios. Despite a likely deceleration, fee income may stay a significant driver of earnings

growth during FY11f ‐FY13f. We forecast a three‐year CAGR of 26% in net profit and initiate coverage

with an Add rating and a Jun11 target of INR 1,501.

HDFC Bank

The RoE on new equity raised before 2005 had risen rapidly for two years. However, incremental RoEs

stay below the core RoE, which itself has been in a gentle decline. Gearing of the aggregate equity is

likely to rise after a near‐term fall in FY11f, based on our forecast three‐year loan CAGR of 29%. We

forecast the proportion of retail loans to stabilize near 50% by end FY12 and a three‐year CAGR of

28.1% in net profits. Threats to HDFCB’s profitability arise from a potential decline in fee intensity and

rise in cost ratios. FY10 had seen the cost/assets fall by 0.73% after rising for seven years. The asset

quality cycle is poised to stabilize and we forecast a 1.42% gross NPL ratio by Mar12. A key challenge

for HDFCB would be to sustain the growth in savings deposits. Our Jun11 target of INR2,154 values the

stock at a P/E of 19.1x and P/B of 3.4x. We initiate coverage on the stock with a Hold rating.

ICICI Bank

ICICIBC has raised new equity more frequently and to a larger extent than peers. Compared with peers,

the RoE on new equity raised after FY07 is the lowest. The phase of balance sheet contraction is likely

to have ended and we assume loan growth to rebound to 15% y‐o‐y in FY11f, driven by segments such

as home loans, car loans and project finance. While savings deposits growth is likely to slow, the rise in

the proportion of savings deposits may sustain. We estimate a rise in the cost/asset ratio during FY10‐

FY13f. Loan‐loss provisions are likely to have peaked in FY10. However, we assume incremental NPL to

rise in the next three years as loan growth revives. We assume a CAGR of 20% in net profit during FY10‐

FY13f compared to 9% in the preceding three years. NII growth and low NPL provisions are likely to

stay key drivers of profitability. We initiate coverage with an Hold rating and Jun11 target of INR1,061.

Exhibit 1: Relative valuation (as on August 9, 2010)

CMP Rating Target ‐‐‐ Price change ‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐ P/E ‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐ P/B ‐‐‐‐‐‐‐‐‐‐‐‐

(INR) price (INR) 1‐m 3‐m 6‐m Mar11f Mar12f Mar13f Mar11f Mar12f Mar13f

AXSB 1,310 Add 1,501 2.9 10.1 26.1 17.5 13.8 10.6 2.9 2.5 2.1

HDFCB 2,082 Hold 2,154 3.9 12.7 30.7 25.1 19.9 15.4 3.9 3.4 2.9

ICICIBC 980 Hold 1,061 11.9 11.9 22.5 24.5 19.9 16.2 1.9 1.8 1.8

Source: Company, Bloomberg, Avendus Research

AXSB’s RoE has been

superior to peers with the

core RoE staying near

30%.

Threats to

HDFCB’s

profitability arise from a

potential decline in fee

intensity and rise in cost

ratios.

Compared with peers, the

RoE on new equity raised

by ICICIBC after FY07 is

the lowest.




Financials 4

Table of Contents

Investment Summary ........................................................................................................................ 2 Low RoE on new equity could erode valuation premium even more ...................................................2 Strength in urban centres and savings deposits may be waning...........................................................2 Is the IDR listing by foreign banks an inflection point for new banks?..................................................2 Low upside in new banks, even as they regain lead in loan growth......................................................2 Initiate coverage on three large new private banks..............................................................................3

Fall in incremental RoE could erode premium in P/B of new banks.................................................. 5 Historical premium in valuation of new private banks over PSBs… ......................................................5 …partly attributed to the frequent capital raising by them ..................................................................5 Incremental RoE is lower than core RoE, but has been rising ...............................................................6 Flood of new equity has depressed RoE of new banks .........................................................................7 RoE on new equity has been rising steadily for public sector banks.....................................................8

Strength in urban centres and savings deposits may be waning....................................................... 9 Share of new banks in incremental urban branches is declining ..........................................................9 Savings deposits growth rebounds, but lead over PSBs has reduced .................................................10 Trend reversal in the share of savings deposits for new banks...........................................................11 Despite revival, growth in SB deposits per branch stays below PSBs..................................................12

Is the IDR listing by foreign banks an inflection point for new banks?............................................ 13 IDR listing by Standard Chartered Bank may set off a trend ...............................................................13 Reasons to list in India… ......................................................................................................................13 …may lead to other foreign banks following in its footsteps ..............................................................13 Potential crowding in the investor’s portfolio.....................................................................................14 Unlikely to impact P/E of new banks, in the near term.......................................................................14

Low upside in new banks, even as they regain lead in loan growth................................................ 15 We assume new banks to regain the lead in loan growth ..................................................................15 RoEs of new banks may not exceed 20%.............................................................................................15 Fair value derived from discounting excess returns............................................................................16 Target price derived from P/E, P/B and DCF‐based values .................................................................16 Low upside, despite higher CAGR in semi‐explicit period loan growth...............................................17 Initiate coverage on large new private banks .....................................................................................18 Key risks to our estimates ...................................................................................................................18




Financials 5

Fall in incremental RoE could erode premium in P/B of new banks

Indian new private banks have been prolific issuers of new equity capital. During the past decade, many new private

banks raised up to five tranches of equity that now comprises close to two‐thirds of the book. The positive response by

investors to these issues reflects the implicit assumptions that the book multiples are likely to sustain and so would the

RoEs. While the first assumption has been largely true, the second is not. We find that the RoE on new equity stays

below that on the core equity for most new banks. In particular, the two latest tranches of equity have a significantly

lower RoE. In contrast, the RoE of public sector banks (PSBs) has expanded and now exceeds that of private banks.

Many PSBs also have a better record in lifting the RoE on new equity close to the level of core equity. The premium in

the P/B of new banks has been declining for the past 15 months. Our analysis suggests this trend may extend.

Historical premium in valuation of new private banks over PSBs…

Historically, new private banks have traded at a large valuation premium to PSBs. The average

premium of new private banks during the past six years was 100.7%. The average valuation premium of

new banks increased from 80.5% during Mar04‐Jun05 to 122.2% during Jun05‐Sep08. However,

between Sep08 and Aug10, the average valuation premium of new banks declined to 74.7%.

Exhibit 2: Valuation premium in P/B of new banks to PSBs (%)

50

76

102

128

154

Mar04 Apr05 May06 Jun07 Jun08 Jul09 Aug10

Premium of new banks to PSBs in P/B Average premium

Average 80.5%

Average 122.2%

Average 74.7%

Source: Bloomberg, Avendus Research

…partly attributed to the frequent capital raising by them

Exhibit 3: Financial year in which equity was raised for new banks and large PSBs

Mar01 Mar02 Mar03 Mar04

Mar05 Contribution of share

premium to networth

Mar06 Mar07 Mar08 Mar09 Mar10 Contribution of share

premium to networth

ICICI Bank √ √ 31.8% √ √ 60.7%

HDFC Bank √ √ 50.3% √ √ 51.5%

Axis Bank √ √ √ 52.4% √ √ 60.9%

Kotak Mahindra Bank √ 33.8% √ √ 38.6%

Yes Bank 7.8% √ √ √ √ 41.7%

State Bank of India 10.8% √ 25.1%

Punjab National Bank √ √ 25.6% 12.3%

Bank of Baroda 13.7% √ 14.9%

Bank of India 12.2% √ 14.1%

Canara Bank √ 4.5% 2.7%

Corporation Bank √ 23.0% 12.1%

Source: Company, Avendus Research

Valuation premium of

new banks has been partly

due to the success of their

frequent capital issuances.

However, the premium in

the P/B of new banks has

been declining for the past

15 months.




Financials 6

The historical valuation premium of new banks to PSBs was partly due to stock prices being driven by a

decline in the valuation multiple after equity dilution.

New private banks have raised equity once every two to three years and three to five times during the

past decade. In contrast, large PSBs have raised equity just one to two times during the past decade.

Another reason that may have resulted in the large valuation premium of new banks is the high loan

growth during the initial 10 years of operations compared to PSBs.

Incremental RoE is lower than core RoE, but has been rising

Incremental RoE is rising on all tranches of new equity raised by AXSB

The RoE on new equity revives within every one to two years, but stays lower than that on core equity.

The RoE on new equity for new private banks, except ICICIBC, has been rising, though it remains lower

than that on core equity. AXSB’s average RoE for the first, second, third and fourth tranche of equity

raised in FY02, FY03, FY05 and FY08 was 20.9%, 19.2%, 18% and 11.2%, respectively. The RoE on new

equity was lower than the core RoE by 11.2% to 14%. While the RoE for each tranche of equity declines

with the decline in leverage ratio, it has a rising trend.

Exhibit 4: Core RoE and RoE on new equity for AXSB (%)

0

10

20

30

40

Mar02 Mar03 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10

Core RoE RoE

(FY02) RoE

(FY03) RoE

(FY05) RoE

(FY08)


Initial rise in incremental RoE seen in HDFCB, followed by a flattening

Exhibit 5: Core RoE and RoE on new equity for HDFCB (%)

0

10

20

30

40


Core RoE RoE (FY02) RoE (FY05) RoE (FY08)


Though, the RoE on new

equity was

lower

than

the

core RoE by 11.2% to 14%,

it has a rising trend for all

tranches.

The RoE for most tranches

of equity for HDFCB

revived within one to two

years and stabilized at the

lower level, in contrast to

the rising trend for AXSB.




Financials 7

HDFCB’s average RoE for the first, second and third tranche of equity raised in FY02, FY05 and FY08

was 19.5%, 15.7%, 10.9%, respectively. Therefore, the RoE on new equity was lower than the core RoE

by 2.7% to 11.3%. Thus, the RoE for most tranches of equity for HDFCB revives within one to two years

and stabilizes at the lower level, in contrast to the rising trend for AXSB.

Low and declining incremental RoE in later tranches of equity raised by ICICIBC

ICICIBC’s average RoE for the first, second, third and fourth tranche of equity raised in FY03, FY05, FY06 and FY08 was 20.3%, 11.8%, 9.3%, 11.2% and 1.6%, respectively. Therefore, the RoE on new equity was

lower than the core RoE by up to 18.3%. The RoE of ICICIBC has been adjusted for the investment in

subsidiaries. Unlike AXSB and HDFCB where the RoE on new equity was either rising or had stabilized,

the RoE for ICICIBC on equity raised in later years shows a sharp decline after rising in the initial years.

We treat capital gains on sale of treasury stock in FY03 as new equity. Since ICICIBC’s net profit for

FY03 was inflated due to capital gains, the RoE on new equity has been very close to the core equity.

Exhibit 6: Core RoE and RoE on new equity for ICICIBC (%)

0

10

20

30

40


Core RoE RoE (FY03) RoE (FY05) RoE (FY06) RoE (FY08)


Flood of

new

equity

has

depressed

RoE

of

new

banks

Due to frequent equity issuance, the total RoE of new private banks has been declining. Equity dilution

virtually every alternate year has resulted in a decline in the RoE after every rebound. The impact has

been more pronounced for ICICIBC with the RoE declining by 12% in the preceding four years to 13.1%

(adjusted for investment in subsidiaries) after equity dilution in FY08.

Exhibit 7: RoE for large new private banks (%)

5

10

15

20

25

30

Mar02 Mar04 Mar06 Mar08 Mar10

ICICIBC AXSB HDFCB


Exhibit 8: RoE for a few PSBs (%)

5

10

15

20

25

30

Mar02 Ma r04 Mar06 Ma r08 Mar10

PNB BOB SBIN CRPBK


The RoE for ICICIBC on

equity raised after FY04

shows a sharp decline

after rising in the initial

years.

Equity dilution virtually

every alternate year by

new banks has resulted in

a decline in the RoE after

every rebound. It has

been rising steadily for

PSBs during

the

past

three

years.




Financials 8

Between Mar04 and Mar08, the RoE of HDFCB and AXSB declined by 2.9% and 11.1% to 17.7% and

16%, respectively. Therefore, HDFCB had the most stable trend in RoE. The profitability of new capital

has been more consistent for HDFCB, resulting in the lower erosion in RoE.

RoE on new equity has been rising steadily for public sector banks

PSBs have raised new equity fewer times than their private counterparts. For Bank of Baroda (BOB IN,

Buy) and Punjab National Bank (PNB IN, Add), there has been a steady rise in the RoE on new equity.

For BOB, the RoE on equity raised in FY06 revived from 12% in FY07 to 16% in FY10.

Exhibit 9: Core RoE, RoE on new equity for BOB (%)

0

10

20

30

40


Core RoE RoE (FY06)


Exhibit 10: Core RoE, RoE on new equity for PNB (%)

0

10

20

30

40


Core RoE RoE (FY02) RoE (FY05)


For PNB, the RoE on the equity raised in FY02 revived in three years from 1.2% in FY03 to 14.4% in

FY05. After a steady rise for five years, the RoE on new equity increased to 21% in FY10. The RoE on the

second tranche of equity raised in FY05 increased from 2.5% in FY06 to 19.3% in FY10, closer to the RoE

on the first tranche of equity. Thus, the RoE on new equity has been rising, though it remains lower

than that on core equity.

For BOB and PNB, there

has been a steady rise in

the RoE on new equity;

thus, lifting the RoE on

aggregate equity.




Financials 9


The dominance of new banks in urban branches began to decline in 2006 after PSBs began their huge expansion in

urban centres. Still, the branch networks of new private banks are heavily tilted towards urban India. This helped drive

their savings deposits growth, which rebounded strongly in FY10. However, the market share of new banks in savings

deposits may have peaked in FY08 and could even be in decline. PSBs appear to have arrested the long trend of decline

in their share of low‐cost deposits and could pose a stiffer challenge to new banks in the medium term. Also, PSBs have

outpaced new banks in the growth in savings deposits per branch during the past three years.

Share of new banks in incremental urban branches is declining

Urban region has been largest contributor to savings deposits

Since the urban region has the largest contribution to savings deposits, a decline in the urban presence

is likely to slow down the incremental growth in savings deposits of new private banks.

Exhibit 11: Region‐wise share in savings deposits (%)

Mar01 Mar02 Mar03 Mar04 Mar05 Mar06 Mar07 Mar08

Rural 19 19 20 19 19 17 17 17

Semi‐urban 24 24 24 24 24 21 22 21

Urban 57 57 56 57 57 61 61 62

Source: RBI, Avendus Research

Between end Mar01 and Mar05, 40.7% of urban branches were added by new private banks, while

PSBs added 49.9%. New urban branches during this period were 69.6% of total urban branches and

51.5% of total branches of new private banks at end Mar05.

Exhibit 12: Urban branch additions between Mar01 and Mar05

Urban branches

added (a)

Share

(%)

Total urban branches

at end Mar05(b)

(a/b) Total branches

at end Mar05 (c)

(a/c)

Public sector 1,033 49.9 18,307 5.6 48,851 2.1

Private (new) 842 40.7 1,210 69.6 1,635 51.5

Private (old) 150 7.2 2,246 6.7 4,806 3.1

Foreign banks 45 2.2 245 18.4 245 18.4

Total 2,070 100.0 22,008 9.4 55,537 3.7


The pace of addition of urban branches by PSBs between end Mar05 and Mar09 outpaced that of new

banks. While the share of new private banks in urban branches added during this period declined to

18.9%, it increased significantly to 76.9% for PSBs. New branches during this period were 57.5% of total

urban branches and 39.1% of total branches of PSBs at end Mar09.

Exhibit 13: Urban branch additions between Mar05 and Mar09

Urban branches

added (a)

Share

(%)

Total urban branches

at end Mar09(b)

(a/b) Total branches

at end Mar09 (c)

(a/c)

Public sector 6,679 76.9 24,986 26.7 57,497 11.6

Private (new) 1,639 18.9 2,849 57.5 4,195 39.1

Private (old) 329 3.8 2,575 12.8 4,991 6.6

Foreign banks 33 0.4 278 11.9 286 11.5

Total 8,680 100.0 30,688 28.3 66,969 13.0


Proportion of urban branches continues to decline for new private banks

The proportion of urban branches of new private banks declined from 74.2% at end Mar01 to 67.9% at

end Mar09. On the other hand, due to the significant addition of urban branches, the proportion of

urban branches for PSBs increased from 36.3% at end Mar01 to 43.5% at end Mar09. Therefore, new

private banks are losing their edge in urban presence to PSBs.

Urban region is the largest

contributor to the stock of

savings deposits.

In the four years ended

Mar05, 40.7% of urban

branches were added by

new banks, constituting

69.6% of total urban

branches.

While share of new banks

in urban branches added

during the four years

ended

Mar09

declined

to

18.9%, it increased to

76.9% for PSBs.




Financials 10

Exhibit 14: Proportion of bank branches located in urban centres (%)

30

40

50

60

70

80


Public sector Private (new) Private (old)


Savings deposits growth rebounds, but lead over PSBs has reduced

After a sharp decline in the y‐o‐y growth in savings deposits to 15% for FY09, it rebounded in FY10 to

32.6%. Thus, despite a decline in the urban presence, new banks are likely to continue holding the edge

in savings deposits growth, partly due to the higher proportion of urban branches. However, the wide

gap in savings deposits growth compared to PSBs has reduced significantly. Savings deposits growth for

PSBs (arrived at by adding savings deposits for the six‐largest PSBs) increased from 15.2% in FY01 to

26.7% in FY10. For new private banks, savings deposits growth declined from 100% to 32.6%. The

increase in urban presence and a strong revival in savings deposits growth during the past two years

may continue to narrow the gap in savings deposits growth between the two bank segments.

Exhibit 15: Growth in savings deposits for the bank segments (%)

0

28

56

84

112

Mar01 Mar02 Mar03 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10

Public sector Private (new)


SB deposits growth continues to outpace the growth in total deposits

The four‐year CAGR in savings deposits for new private banks during end Mar01‐Mar05 and

end Mar05‐Mar09 outpaced the CAGR in total deposits. While the CAGR in savings deposits has

declined for new private banks during end Mar05‐Mar09 compared to the preceding four years, it

remained stable, close to 17%, for PSBs.

The proportion of urban

branches of new banks

declined from 74.2% at

end Mar01 to 67.9% at

end Mar09, while it has

been increasing steadily

for PSBs.

The gap in savings

deposits growth of new

banks compared

to

PSBs

has reduced significantly.




Financials 11

Exhibit 16: Four‐year CAGR in savings deposits and total deposits

(%) ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ CAGR in savings deposits ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ CAGR in total deposits ‐‐‐‐‐‐‐‐‐‐‐‐‐‐

Mar01‐Mar05 Mar05‐Mar09 Mar01‐Mar05 Mar05‐Mar09

Public sector banks 17.7 17.1 14.9 24.5

Private banks (new) 55.7 35.9 39.1 26.6

Private banks (old) 16.3 15.0 14.3 17.7


New private banks continue to gain a share in incremental savings deposits

Between end Mar01 and Mar05, 11.5% of incremental savings deposits were added by new private

banks, while the contribution by PSBs was 80.7%. Incremental savings deposits during this period were

83.0% of total savings deposits and 12.3% of total deposits for new private banks.

Exhibit 17: Incremental savings deposits between end‐Mar01 and Mar05

(INRbn) Incremental

SB deposits (a)

Share

(%)

Total SB deposits

at end Mar05 (b)

(a/b) Total deposits

at end Mar05 (c)

(a/c)

Public sector 1,799 80.7 3,753 47.9 12,960 13.9

Private (new) 257 11.5 310 83.0 2,081 12.3

Private (old) 90 4.0 198 45.4 1,047 8.6

Foreign banks 83 3.7 143 58.1 765 10.8

Total 2,228 100.0 4,403 50.6 16,854 13.2


Incremental savings deposits of new private banks between end‐Mar05 and Mar09 banks increased

from that during the preceding four years. While the share of new banks in incremental savings

deposits increased to 17.2%, it declined to 76% for PSBs. Incremental savings deposits by new private

banks during this period was 70.7% of their total savings deposits and 14% of their total deposits.

Exhibit 18: Incremental savings deposits between end Mar05 and Mar09

(INRbn) Incremental SB

deposits (a)

Share

(%)

Total SB deposits

at end Mar09 (b)

(a/b) Total deposits

at end Mar09 (c)

(a/c)

Public sector 3,301 76.0 7,055 46.8 31,127 10.6

Private (new) 748 17.2 1,057 70.7 5,353 14.0Private (old) 148 3.4 345 42.7 2,011 7.3

Foreign banks 145 3.3 288 50.5 2,141 6.8

Total 4,342 100.0 8,745 49.6 40,632 10.7


Trend reversal in the share of savings deposits for new banks

After rising steadily for the seven years till end Mar08 to 12.4%, the share of new private banks in the

stock of savings deposits declined marginally at end Mar09 to 12.1%. Due to higher growth in savings

deposits, PSBs have been able to arrest the decline in their share of savings deposits. Their share in

savings deposits declined from 89.9% at end Mar01 to 80.1% at end Mar08. However, it increased

marginally at end Mar09.

Exhibit 19: Share of bank segments in the stock of savings deposits

(%) Mar01 Mar02 Mar03 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09

Public sector banks 89.9 89.0 88.2 85.8 85.2 83.5 82.7 80.1 80.7

New private banks 2.4 3.0 3.9 5.8 7.0 9.0 10.4 12.4 12.1

Old private banks 5.0 5.0 4.8 5.1 4.5 4.4 3.6 4.1 3.9

Foreign banks 2.7 3.0 3.0 3.3 3.2 3.1 3.4 3.5 3.3


While the CAGR in savings

deposits declined for new

banks between

end‐Mar05‐Mar09 and

Mar01‐Mar05, it remained

close to 17%, for PSBs.

While the share of new

banks in incremental

savings deposits increased

to

17.2%

during

the

four

years ended Mar09, it

declined to 76% for PSBs.

Due to higher growth in

savings deposits, PSBs

have been able to arrest

the decline in their share

of savings deposits.




Financials 12

Despite revival, growth in SB deposits per branch stays below PSBs

Growth in savings deposits per branch of new private banks has been declining significantly since FY06.

After contraction of 10.5% in FY09, it rebounded to 9.4% in FY10. However, despite the revival, the

growth in savings deposits per branch of new private banks stays below that of PSBs (six largest PSBs).

The savings deposits per branch of PSBs have increased consistently during the past three years, from

11.6% in FY08 to 16.8% in FY10.

Exhibit 20: Growth in savings deposits per branch (%)

‐15

10

35

60

Mar03 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09 Mar10

Public sector banks New private banks


Despite the revival, the

growth in savings deposits

per branch of new banks

stays below the mean for

the six largest PSBs.




Financials 13


The IDR listing by Standard Chartered Bank may be an inflection point for other foreign banks with a significant

presence in India to follow in its footsteps. Wider access to capital markets and potential leverage to growth of the

Indian business are likely to continue being key drivers for reasons to list in India. Potential crowding in the investor’s

portfolio is likely to put new private banks at a higher risk due to their similar profile. Standard Chartered Bank’s IDR is

just 1.21% of the market cap of the five largest new banks. Thus, the risk of their P/E de‐rating is small. However, as

other foreign banks begin to list in India, the percentage of market cap of IDR to that of new banks may begin to rise.

IDR listing by Standard Chartered Bank may set off a trend

In May10 Standard Chartered Bank (STAN IN, NR) became the first foreign bank to list in India. It raised

INR25bn through issue of Indian depository receipts (IDR) by selling 240mn IDRs at an issue price of

INR104. Ten IDRs equal one share of Standard Chartered Plc (STAN LN, NR). Depending on its success,

this IDR may set off a trend of other foreign banks raising capital and listing on the Indian bourses.

Reasons to list in India…

Wider access to capital market: This was Standard Chartered Bank’s third listing after floating

public issues in London and Hong Kong. One of the key reasons to list in India is likely to be the

wider access to the capital market. Standard Chartered Bank focuses on Asia, Africa and the Middle

East with a mix of wholesale and retail banking products. About 90% of its profit before tax comes

from these markets. The presence across geographies provides an opportunity to global banks to

have wider access to the capital market.

Emphasize the link with India: Standard Chartered Bank’s IDR issue can also be viewed as a

message to emphasize the link with India, which provides 12% of its global revenues.

Potential leverage to growth of Indian business: Standard Chartered Bank has 94 branches in India

across 37 cities, with over 2mn customers. The issue is likely to increase the bank’s market visibility

and brand profile, apart from giving Indian investors an opportunity to participate in the bank’s

growth. India is the bank’s most profitable geography after Hong Kong.

…may lead to other foreign banks following in its footsteps

Exhibit 21: Share of loans and deposits of bank segments (%)

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Mar05 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Mar09 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

Share in loans Share in deposits Share in loans Share in deposits

Public sector banks 74.2 78.2 75.3 76.6

Private banks (Old) 5.9 6.4 4.3 4.9

Private banks (New) 13.3 10.8 14.9 13.2

Foreign banks 6.5 4.7 5.5 5.3


Exhibit 22: Loans and deposits of foreign banks in India (Mar09)

(INRmn)

Loans

% of

total

loans

of

foreign

banks Deposits

%

of

total

deposits

of

foreign

banks

Citibank 399,199 24.1 516,775 24.1

Standard Chartered Bank 375,160 22.7 418,018 19.5

HSBC 275,887 16.7 499,703 23.3

ABN Amro Bank 166,597 10.1 159,603 7.5

Deutsche Bank 87,976 5.3 141,474 6.6

Barclays Bank 105,505 6.4 124,855 5.8

DBS Bank 27,229 1.6% 60,229 2.8%

Total deposits of foreign banks 2,140,767 91.2 1,654,146 93.2


Standard Chartered

Bank’s listing

in

India

was

driven by potential

leverage to growth of

Indian business and wider

access to capital market.

The IDR listing by

Standard Chartered Bank

may inspire other foreign

banks with a significant

presence in India to

follow suit.




Financials 14

There are 31 operational foreign banks in India. However, the share of foreign banks in the business is

small. While the share of foreign banks in total deposits during the four years ended Mar09 declined to

4.7%, the share in total loans has increased. The listing by Standard Chartered Bank is likely to lead to

other foreign banks following in its footsteps, driven by the above‐mentioned rationale to list in India.

Potential crowding in the investor’s portfolio

The listing of Standard Chartered Bank and the possibility of other foreign banks following suit could

lead to potential crowding in the investor’s portfolio, such as:

Expanding the choice of banking stocks: There are 22 listed PSBs and 15 listed private banks (old

and new) in India. The potential listing by foreign banks is likely to create a new category and

investment opportunity for investors.

Reducing the allocation of institutional funds to Indian stocks: Investment in a new category is

likely to reduce the allocation of investments to Indian stocks.

New private banks likely to be more at risk due to similar profile: Due to the profile of foreign

banks being similar to that of new private banks, these banks are likely to be at a higher risk of a

reduction in investor allocation.

Unlikely to impact P/E of new banks, in the near term

IDR is just 1.21% of the market cap of the five largest new private banks

The size of the IDR is just 1.09% of the market cap of Standard Chartered Bank. Also, the market cap of

the IDR is just 1.21% of the sum of the free‐float adjusted market cap of the five largest new private

banks. Thus, the risk of a P/E de‐rating of new private banks due to lower investor allocation is

currently immaterial.

The percentage could rise if more foreign banks list in India

If other foreign banks list in India, the proportion of the market cap of foreign banks to that of new

banks is likely to increase. Thus, it is likely to increase the risk of a P/E derating.

Exhibit 23: Free‐float adjusted market cap as on 09 Aug 10 (INRbn)

0

235

470

705

940

Stan IDR AXSB HDFCB ICICIBC KMB IN YES IN

1.21% of the free‐float adjusted

market cap of five largest new banks


Would regulators be comfortable with capital flowing into foreign banks?

There is an increasing trend of Indian banks raising capital overseas though issue of perpetual bonds.

The Regulator and the Government of India may not be comfortable with Indian capital flowing

overseas. Contrary to IDR issues, the reverse flow of capital is unlikely to sit well with the regulators.

Potential crowding in the

investor’s portfolio is

likely to put new private

banks at a higher risk due

to their similar profile.

Risk of P/E de‐rating of

new banks, due to lower

investor allocation, is

currently immaterial.

If other

foreign

banks

list

in India, the proportion of

their market cap to that of

new banks is likely to

increase, thereby,

increasing the risk of P/E




Financials 15


Loan growth of HDFCB and AXSB is likely to decrease from a CAGR of 40% during the three years ended Mar10 to 28%

for the three years ending Mar13f. While the same for ICICI is likely to rise to 18.3%, it is likely to stay below its

historical peak of 46.7% between Mar04 and Mar07. This implies that the trend of a shrinking gap in loan growth

between the five PSBs under our coverage and the three largest new private banks is likely to continue. This trend is

consistent with the narrowing premium in the P/B of new banks over PSBs. The forecast CAGR in loan growth is a critical

input in our valuation model for banking stocks where we determine the fair value by discounting the excess return

over a period of 25 years. However, our assumptions for loan growth during the 10‐year semi‐explicit period currently

assume the loan growth to expand in favor of new banks after Mar13f. We assume semi‐explicit period growth of 22%

to 29% for new private banks and 16% for PSBs. Even with assumptions tilted in favor of new banks, we foresee the

potential upside to be restricted to 14.6%.

We assume new banks to regain the lead in loan growth

The three years ended Mar10 saw a sharp fall in loan growth for AXSB and ICICIBC compared to the

preceding three years. The deceleration in loan growth has been much less for PSBs. During

Mar10‐Mar13f, we assume new banks to regain the lead in loan growth over PSBs. However, while

new banks may grow ahead of PSBs, the gap in loan growth is likely to shrink.

Exhibit 24: Three‐year CAGR in loans (%)

AXSB HDFCB ICICIBC SBIN PNB BOB BOI CRPBK

Mar04‐Mar07 57.9 38.3 46.7 28.8 26.9 32.9 22.9 29.2

Mar07‐Mar10 41.4 38.9 ‐2.6 23.3 24.5 27.9 26.3 28.3

Mar10‐Mar13f 26.6 29.4 18.3 21.8 24.3 24.3 20.8 21.7

Semi‐explicit period growth 26.0 28.0 23.0 16.0 16.0 16.0 16.0 16.0


Semi‐explicit period growth for new banks assumed between 22% and 29%

We assume semi‐explicit period (10 years ending Mar23) growth of 21% to 29% for new private banks

and 16% for PSBs. We raised the growth assumption for PSBs by 3% to 16% in Nov09, assuming the gap

in loan growth between the banks segments may continue to shrink.

RoEs of new banks may not exceed 20%

Due to lower equity dilution, most PSBs have either sustained or increased their RoE during the past

decade. This is in contrast to the decline in RoE for new banks, which was partly driven by frequent

capital raising. Despite the lead in loan growth over PSBs, the RoEs of new banks may not diverge and

may stay below that of a few PSBs during Mar11f ‐Mar13f.

Exhibit 25: Average RoE for large new banks and PSBs

Mar02‐Mar04 Mar05‐Mar07 Mar08‐Mar10 Mar11f ‐Mar13f

ICICI Bank 15.7 15.8 9.2 10.0

Axis Bank 27.1 20.4 18.6 19.7

HDFC Bank 20.0 18.6 17.0 18.3

Punjab National Bank 24.1 20.5 24.0 24.1

Bank of Baroda 19.3 12.9 19.1 21.3

State Bank of India 18.6 17.3 16.3 14.6

Bank of India 25.4 14.2 23.7 15.4

Corporation Bank 18.9 14.2 19.9 20.4


Downward bias to valuation premium may persist

The valuation gap between new private banks and PSBs has narrowed during the past 15 months. This

decline in the valuation gap may sustain as the gap in the RoE narrows. Also, the premium enjoyed by

new private banks in valuations may be absent as the growth slows during the next three years.

While new banks may

regain the lead in loan

growth over PSBs during

Mar10‐Mar13f, the gap in

loan growth is likely to

shrink.

Despite the lead in loan

growth over PSBs, the

RoEs of new banks may

not diverge and may stay

below that of a few PSBs

during Mar11f ‐Mar13f.




Financials 16

Exhibit 26: Month‐end P/B (x) of bank segments

0.5

1.5

2.5

3.5

4.5

Mar04 Apr05 May06 Jun07 Jun08 Jul09 Aug10

Public sector banksNew private banks


Fair value derived from discounting excess returns

Our three‐stage DCF uses explicit forecasts until FY13, followed by 10 years of semi‐explicit forecasts,

where we assume a CAGR of 22% to 29% in loan growth and dividend payout of 22%. We also assume

the RoA at the end of the semi‐explicit period to converge to 1.21%—the difference between the

average RoA for new private banks and PSBs (we assume a RoA of 1% for PSBs at the end of the

semi‐explicit period). The final stage of 12 years assumes convergence of the RoE and cost of equity

(assumed to be 14%). The fair value is derived from discounting the excess returns over cost of equity.

Exhibit 27: RoA of new private banks and PSBs (%)

Mar05 Mar06 Mar07 Mar08 Mar09 Mar10 Average

New private banks 1.34 1.23 1.13 1.18 1.16 1.28 1.22

Public sector banks 0.94 0.94 0.91 1.04 1.17 1.04 1.01


Exhibit 28: Key assumptions for DCF

(%)

RoA at the end of the semi‐explicit period (FY23f) 1.2

Semi‐explicit period growth 22.0‐29.0

Fade period growth 3.0

Dividend payout 22.0

Cost of equity 14.0

Source: Avendus Research

Target price derived from P/E, P/B and DCF‐based values

We

estimate

the

mean

P/E

and

P/B

for

the

12‐

month

period

ended

20

Jul10.

Exhibit 29: Average P/E (till 20 Jul10)

1 month 3 months 6 months 12 months

Axis Bank 15.8 15.8 15.4 14.6

HDFC Bank 22.5 22.2 21.9 21.7

ICICI Bank 21.8 23.2 22.6 22.0


The decline in the

valuation gap between

new banks and PSBs may

sustain as the gap in the

RoE and loan growth

narrows.

Our three‐stage DCF uses

explicit forecasts until

FY13, followed by 10 years

of semi‐explicit forecasts,

where we assume loan

CAGR of 22% to 29%.




Financials 17

Exhibit 30: Average P/B (till 20 Jul10)

1 month 3 months 6 months 12 months

Axis Bank 2.7 2.7 2.6 2.4

HDFC Bank 3.6 3.5 3.4 3.3

ICICI Bank 1.8 1.9 1.8 1.8


We apply these to our forecast one‐year forward EPS and book value for Jun10 to arrive at P/E and

P/B‐based target prices. Our target price is a weighted average, where we assign a weight of 50% to

our DCF/SOTP value and 25% each to our P/E and P/B values.

Sensitivity of sustainable growth assumption to DCF values

Exhibit 31: Sensitivity of semi‐explicit period growth assumption to AXSB’s DCF values

Weight Semi‐explicit period growth 24% 25% 26% 27% 28%

50% DCF value 1,416 1.501 1,590 1,685 1,785

25% P/E‐based value 1,495 1,495 1,495 1,495 1,495

25% P/B‐based value 1,330 1,330 1,330 1,330 1,330

Price target 1,414 1,457 1,501 1,549 1,599


Exhibit 32: Sensitivity of semi‐explicit period growth assumption to HDFCB’s DCF values


50% DCF value 1,777 1,892 2,015 2,146 2,285

25% P/E‐based value 2,454 2,454 2,454 2,454 2,454

25% P/B‐based value 2,131 2,131 2,131 2,131 2,131

Price target 2,035 2,093 2,154 2,219 2,289

Source: Company, Avendus Research.

Exhibit 33: Sensitivity of semi‐explicit period growth assumption to DCF/SOP values of ICICIBC


50% DCF value 963 1,005 1,050 1,098 1,149

25% P/E‐based value

1,171 1,171

1,171

1,171 1,17125% P/B‐based value 973 973 973 973 973

Price target 1,017 1,039 1,061 1,085 1,111


Low upside, despite higher CAGR in semi‐explicit period loan growth

Despite assuming higher semi‐explicit growth, there is a low upside for new banks compared to PSBs.

This implies that the estimated higher loan growth during the next three years may be priced in.

Exhibit 34: Target price and potential upside for banks in our coverage list as on 09 Aug 10

Target price 25% 25% 50% CMP

(Jun11) P/E P/B DCF/SOTP (INR) Potential upside

Bank of India 471 466 439 489 439 7%

Bank of Baroda 875 736 714 1,025 770 14%

Corporation Bank 761 568 564 957 580 31%

Punjab National Bank 1,246 1,190 1,176 1,309 1,111 12%

State Bank of India* 2,444 2,516 2,497 2,382 2,651 ‐6%

Axis Bank 1,501 1,495 1,330 1,590 1,310 14%

HDFC Bank 2,154 2,454 2,131 1,777 2,082 3%

ICICI Bank 1,061 1,139 941 1,015 980 8%

Source: Company, Avendus Research * Target price of State Bank of India is for Mar11

Our target price is a

weighted average, where

we assign a weight of 50%

to our DCF/SOTP value

and 25% each to our P/E

and P/B values.

Low upside in new banks,

despite higher loan

growth in semi‐explicit

period,

indicates

that

high

loan growth in next three

years may be priced in.




Financials 18

Initiate coverage on large new private banks

Axis Bank

AXSB’s RoE has been superior to peers with the core RoE staying near 30% and that on the initial

tranches of new equity rising to 27% by FY10. Our forecast loan CAGR of 27% till Mar13f is below that

for the preceding three years as well as the growth at the end of Jun10. In contrast to peers asset

quality may be the major stress factor during FY11 and FY12. We forecast a rise in incremental and

year‐end NPL ratios. Despite a likely deceleration, fee income may stay a significant driver of earnings

growth during FY11f ‐FY13f. We forecast a three‐year CAGR of 26% in net profit and initiate coverage

with an Add Rating and a Jun11 target of INR 1,501.

HDFC Bank

RoE on new equity raised before 2005 had risen rapidly for two years. However, incremental RoEs stay

below the core RoE which itself has been in gentle decline. The gearing of the aggregate equity is likely

to rise after a near‐term fall in FY11f based on our forecast three‐year loan CAGR of 29%. We forecast

the proportion of retail loans to stabilize near 50% by end of FY12 and net profits to grow at a three‐

year CAGR of 28.1%. Threats to HDFCB’s profitability arise from a potential decline in fee intensity and

rise in cost ratios. FY10 had seen cost/assets fall by 0.73% after rising for seven years. The asset quality

cycle is poised to stabilize and we forecast a 1.42% gross NPL ratio by Mar12. A key challenge for

HDFCB would be to sustain the growth in savings deposits. Our Jun11 target of INR2,154 values the

stock at a P/E of 19.1x and P/B of 3.4x. We initiate coverage on the stock with a Hold rating.

ICICI Bank

ICICIBC has raised new equity more frequently and to a larger extent than peers. Compared with peers,

the RoE on new equity raised after FY07 is the lowest. The phase of balance sheet contraction is likely

to have ended and we assume loan growth to rebound to 15% y‐o‐y in FY11f, driven by segments such

as home loans, car loans and project finance. While savings deposits growth is likely to slow, the rise in

the proportion of savings deposits may sustain. We estimate a rise in the cost/asset ratio during FY10‐

FY13f. Loan‐loss provisions are likely to have peaked in FY10. However, we assume incremental NPL to

rise in the next three years as loan growth revives. We assume a CAGR of 20% in net profit during FY10‐

FY13f compared to 9% in the preceding three years. NII growth and low NPL provisions are likely to

stay key drivers of profitability. We initiate coverage with an Add rating and Jun11 target of INR1,061.

Key risks to our estimates

We have not assumed equity dilution in the forecast. Further equity dilution by new banks may

bring down the RoE on aggregate equity of new banks even more.

Higher than assumed loan CAGR in the next three years may lead to the upside risk in earnings.

Higher than estimated loan‐loss provisions for public sector banks may result in the decline in RoE.




Financials 19

Analyst Certification

I, Chandana Jha, MBA, research analyst and author of this report, hereby certify that all of the views expressed in this document accurately reflect our personal views about the

subject company/companies and its or their securities. We further certify that no part of our compensation was, is or will be, directly or indirectly related to specific

recommendations or views expressed in this document.

Disclaimer

This document has been prepared by Avendus Securities Private Limited (Avendus). This document is meant for the use of the intended recipient only. Though dissemination to all

intended recipients is simultaneous, not all intended recipients may receive this document at the same time. This document is neither an offer nor solicitation for an offer to buy

and/or sell any securities mentioned herein and/or official confirmation of any transaction. This document is provided for assistance only and is not intended to be, and must not

be taken as, the sole basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such

investigation as he deems necessary to arrive at an independent evaluation, including the merits and risks involved, for investment in the securities referred to in this document

and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. This

document has been prepared on the basis of information obtained from publicly available, accessible resources. Avendus has not independently verified all the information given

in this document. Accordingly, no representation or warranty, express or implied, is made as to accuracy, completeness or fairness of the information and opinion contained in this

document. The information given in this document is as of the date of this document and there can be no assurance that future results or events will be consistent with this

information. Though Avendus endeavours to update the information contained herein on reasonable basis, Avendus, its associate companies, their directors, employees, agents or

representatives (“Avendus and its affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that

may prevent us from doing so. Avendus and its affiliates expressly disclaim any and all liabilities that may arise from information, error or omission in this connection. Avendus and

its affiliates shall not be liable for any damages whether direct, indirect, special or consequential, including lost revenue or lost profits, which may arise from or in connection with

the use of this document. This document is strictly confidential and is being furnished to you solely for your information. This document and/or any portion thereof may not be

duplicated in any form and/or reproduced or redistributed without the prior written consent of Avendus. This document is not directed or intended for distribution to, or use by,

any person or entity who is a citizen or resident of the United States or Canada or is located in any other locality, state, country or other jurisdiction, where such distribution,

publication, availability or use would be contrary to law or regulation or which would subject Avendus and its affiliates to any registration or licensing requirements within such

jurisdiction. Persons in whose possession this document comes should inform themselves about and observe any such restrictions. Avendus and its associate companies may be

performing or seeking to perform investment banking and other services for any company referred to in this document. Affiliates of Avendus may have issued other reports that

are inconsistent with and reach a different conclusion from the information presented in this document.

Avendus generally prohibits its analysts and persons reporting to analysts from maintaining a financial interest in the securities or derivatives of any company that the analysts

cover. Avendus and its affiliates may have interest/positions, financial or otherwise, in the companies mentioned in this document. In order to provide complete transparency to

our clients, we have incorporated a ‘Disclosure of Interest Statement’ in this document. This should, however, not be treated as an endorsement of the view expressed in the

document.

Avendus

is

committed

to

providing

high‐

quality,

objective

and

unbiased

research

to

our

investors.

To

this

end,

we

have

policies

in

place

to

identify,

consider

and

manage potential conflicts of interest and protect the integrity of our relationships with investing and corporate clients. Employee compliance with these policies is mandatory.

Any comment or statement made herein are solely those of the analyst and do not necessarily reflect those of Avendus.




Disclosure of Interest Statement (as of August 9, 2010)

Analyst ownership

of the stock

Avendus or its associate

company’s ownership of the

stock

Broking relationship with

Avendus Securities

Investment Banking

mandate with associate

companies of Avendus

ABN Amro Bank No No No No

Axis Bank No No No No

Bank of Baroda No No No No

Bank of India No No No No

Barclays Bank No No No No

Canara Bank No No No No

Citibank No No No No

Corporation Bank No No No No

DBS Bank No No No No

Deutsche Bank No No No No

HDFC Bank No No No No

HSBC No No No No

ICICI Bank No No No No

Kotak Mahindra Bank No No No No

Punjab National Bank No No No No

Standard Chartered Bank No No No No

State Bank of India No No No No

Yes Bank No No No No

OFFICES

Corporate office Institutional Broking Bangalore North America

IL&FS Financial Centre, IL&FS Financial Centre, The Millenia , Tower A, 100 Park Avenue

B Quadrant, 5th Floor, B Quadrant, 6th Floor, # 1&2, 10th Floor, Murphy Road, 16th Floor,

Bandra‐Kurla Complex Bandra‐Kurla Complex Ulsoor, Bangalore‐8. India. New York, NY 10017

Bandra (E), Mumbai 400051 Bandra (E), Mumbai 400051 T : +91 80 66483600 T : +1 212 3515066

T : +91 22 66480050 T : +91 22 66480090 F : +91 80 66483636 F : +1 484 2312343

F : +91 22 66480040

Documents

New Private Banks