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Financials
• We expect our coverage universe to post 14% yoy and 6.4% qoq earnings growth led by healthy volumes, gains from
higher lending rates and lower base in Q3FY10.We also expect that growth in earnings would be driven by net interest
income growth, fee income and lower credit costs. We remain cautious on key headwinds including lower treasury
income contribution, provisions for pension fund liabilities and investment depreciation losses
• Amongst the PSU banks, we expect PNB and Syndicate Bank to outperform sector on growth and earnings performance
• Our estimates suggest average margin contraction of 5‐10 bps sequentially for Q4 margins due to the hike in deposit
rates; though some banks like OBC & Andhra Bank shall witness 30‐40 bps decline in incremental margins. For Q3FY11,
we are not building in material impact as most of the hikes have been made in the later part of the quarter and would
therefore impact Q4FY11 margin. Our estimates for Q1FY12 builds in further contraction as credit growth tends to taper
off sequentially
• We are also not building in substantial losses on long dated securities as the absolute change in ten year bond yield has
been immaterial for the quarter till date. However, the short term yields have moved up much more sharply, banks
trading investment portfolio with lesser duration could be more impacted
• Deposit growth has been subdued due to negative real yields ‐‐ demand deposit growth also sluggish. System aggregate
deposits grew by 15% yoy, slower than 18.2% last year for same period. For the fiscal year so far, total deposit growth
has been 7.8% veRs.es 9.7% for the corresponding period last year. We expect the SCBs’ CASA share to drift down from
end‐March’10 and end‐September’10 mainly due to lower growth in demand deposits compared to time deposits
• Strong credit demand from mid and large corporate particularly from infrastructure sector across verticals propels
overall credit growth. In Q3FY11, credit growth drivers would be SME, large corporate and retail. SCBs’ credit book
expanded by 23.1% YoY against 10.5% YoY a year back. For a period year till date, credit book expanded by 10.9%
against 5.4% in a corresponding period previous year
• During YTD, SCBs’ investment in commercial papers and debentures increased by 43% and 24% respectively to Rs.354
bn and Rs.756 bn. There has been huge jump in investments in PSU’s CPs and private corporate sector debentures
Financials – Top Picks
ICICI Bank
• Best play on volume growth due to financial leverage. Tier I capital of 13.8% and leverage of 7.2x compared to industry
average of 18‐20x. Expected expansion in asset size would improve return ratio
• Potential to improve operating efficiency of acquired BoR assets. BoR business per branch and profit per branch were
Rs.496 mn and Rs.2.5 mn against ICICI Bank’s Rs.3.1 bn and Rs.26 mn respectively. Also, BoR’s operating expenses to
average assets ratio was 2.9% compared to ICICI Bank’s 1.6%
• Robust deposit profile would protect margin. CASA deposit franchise of 44% would protect the margin
• Relatively better placed on asset quality cycle. Sequential decline in restructured loan book and better NPA recovery
would reflect in decline in NPAs
• At CMP, the stock trades at 2.5x FY12 adjusted book value, based on our target price of Rs.1,229 the stock would quote
at 2.7x
• Proactive top management and longer tenure of CMD. The present CMD has been most proactive in taking decisions to
improve bank’s profitability and he would stay with bank till October’ 14
• Strong CASA franchise a key advantage in the current environment and differentiator. Consistently maintaining more
than 40% CASA deposit share with 22% business growth would succor margin and profitability
• Robust and consistent margin. Maintaining one of highest margins in the industry, reported 4.0% in H1FY11
• Asset quality comfortable; PCR at 78%. High PCR acts as a buffer to provisioning in case of increase in bad debts
• At CMP, the bank trades at 1.7x adjusted book value FY12 and based on our target price the stock would quote at 2.2x ABV FY12
Bank of India
• Worst days of asset quality behind us. Majority of slippages (from restructured loan book) of Rs.10.5 bn and Rs.5.6 bn
were reported in FY09 and FY10, we expect slippages from vulnerable restructured loan book to recede in FY12
• Robust low‐cost deposit profile: Maintaining more than 33% domestic CASA share and small CD & bulk deposits share
• Improvement in operating leverage: With faster balance sheet expansion, operating overheads leverage would add 3
bps to the bank’s profitability in FY12
• Attractive valuation at 1.5x adjusted book value FY12, the bank’s mean and median of past five years high P/ABV ( x)
were 1.8x and 1.77x respectively. At our target price of Rs.539, the stock would quote at 1.8x AB
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