CMP* (Rs) 198 Upside/ (Downside) (%) 12. Market Cap. (Rs bn) 61 Free Float (%) 84 Shares O/S (mn) 308

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1 1QFY18 Result Update July 18, 217 Upside/ (Downside) 12 Market Cap. (Rs bn) 61 Free Float 84 Shares O/S (mn) 38 Healthy Core Operating Performance on Key Metrics; Maintain has posted a higher-than-estimated net earnings in 1QFY18 on the back of 19bps QoQ rise in NIMs to an all-time high of 4.23%, higher treasury gain of Rs287mn (vs. Rs41mn in 4QFY17) and 14.8% QoQ rise in core fee. On the other hand, fresh slippages increased sequentially to Rs887mn vs. Rs742mn in 4QFY17 led by higher slippages in LAP, AIB and gold loan portfolio. As a result, provisioning expenses rose by 72.9% YoY and 4.6% QoQ to Rs355mn. The Bank s net profit grew by 38.7% YoY and 23.4% QoQ to Rs652mn owing to strong growth in operating revenue, which oset higher provisioning and operating expenses. We reiterate our recommendation on the stock with a revised Target Price of Rs223 (from Rs27 earlier) based on 2.3x FY19E Adjusted book value. Management Commentary & Guidance The Bank opened 28 new branches during 1QFY18 and mulls opening another 1-2 branches by 2QFY18-end taking total branch count to Subsequently, the Bank will expand branch network in such a manner that it does not impact overall cost to income ratio and profitability. Higher slippage is attributable to several ongoing disparaging events (GST roll-out, farm loan waiver by various states and negative impact of demonetisation in MFI portfolio). Looking forward, the Bank expect s improvement on slippages front. Loan book grew by 3% QoQ and 22% YoY led by CV and mortgage segment. The Bank expects 22-25% growth in loan book in FY18 and looks forward to double its loan book over the next 3 years. Other income is likely to grow by 15-17% YoY in FY18 led by strong growth in income from sale of Priority Sector Lending Certificate (PSLC) and third party product distribution. Outlook & Valuation The Management focuses on increasing loan book in low-ticket retail, SME & AIB segments and augmenting its footprint both on physical and digital front. Though this aggressive strategy of expanding footprints will marginally impact its return ratios in the near-term, it would bring forth substantial positive benefits in the long-term. Further, the Management focuses on increasing eiciency of existing network to improve cost to income ratio in the long-term, which will lead to sustained earnings growth. The bank has raised Rs3.8bn of fresh equity during 1QFY18 via QIP at 2.6x Mar 17 book value. As a result book value of the bank increased by 11% on sequential basis. Further, incremental capital will help the bank grow by 25-3% over the next 2 years. Post this capital rising, we have revised upward our book value and profit estimates for FY19 by 5% and 2% respectively. Accordingly, we have revised our Price Target to Rs223 (from Rs27 earlier) based on 2.3x FY19E Adjusted book value. Share price 1 mth 3 mth 12 mth Absolute performance (5.8) Relative to Nifty (9.2) Shareholding Pattern Mar'16 Jun'17 Promoter Mutual Funds Insurance Companies Foreign Portfolio Investors Others Total Year Stock Price Performance Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Note: * CMP as on July 17, 217 Key Financials E FY19E NII 6,195 7,971 1,146 12,85 PPP 3,49 4,182 5,536 7,23 PAT 1,945 1,997 2,969 3,957 EPS (Rs) P/E (x) Adj. BV (Rs) P/Adj. BV (x) Gross NPA Net NPA Avg. ROA Avg. ROE Research Analyst : Asutosh Kumar Mishra Contact : (22) asutosh.mishra@relianceada.com 1

2 Upside/ (Downside) 12 Risks to the View Any major deterioration in macroeconomic environment may impact the Bank s growth plan as well as assets quality, which will in turn impact its financial performance. Any significant material change in new business strategy. Exhibit 1: Income Statement Analysis 1Q FY18 1Q FY17 % yoy / bps 4Q FY17 % qoq / bps FY17 FY16 % yoy / bps Interest on Advance 4,56 3, , ,48 13, YoA - Calculated (5) 11.4 (13) (11) Income on Investment 1, ,11 (4.3) 3,935 3, Interest on Balances Others Interests 6 62 (2.9) 6 (.3) (11.9) Interest Earned 5,66 4, , ,761 16, Interest Expended 3,329 2, , ,791 1, CoF - Calculated (64) 5.8 (5) (2) Net Interest Income 2,332 1, , ,971 6, NIM - Calculated NIM - Reported NII as % of Oper. Income (154) 77.6 (449) Core Fee Income ,657 1, Fee Inc. as % of OI (5) Non Core Fee Income Non core fee Inc. as % of OI (16) Total Other Income ,495 2, Other Inc. as % of OI (241) Operating Income (OI) 3,189 2, , ,465 8, Core Operating Income 2,851 2, , ,628 7, Employees Expenses ,8 2, Employees Expn. as % of OI (228) 28.7 (35) Other Operating Expenses ,23 2, Other Opert Exp. as % of OI (139) 3.6 (179) Total Operating Expenses 1,825 1, , ,283 4, Cost to income Ratio (367) 59.4 (214) Operating Profit (OP) 1, , ,182 3, Provisions and Conting , Pro Burden as % of OP (339) Profit Before Tax 1, ,67 2, Tax Expenses , Eective Tax Rate Net Profit ,997 1, EPS

3 Upside/ (Downside) 12 Exhibit 2: NIMs improved by 19bps YoY led by favourable change in loan-mix and improvement in CASA ratio Exhibit 3: Healthy growth in higher-yielding loan book and improvement in NIMs led to strong growth in NII ,5 2, 1,5 1, NII (LHS) NII as % of Avg. Assets Exhibit 4: Higher income from treasury operations and robust growth in core fee income aided the Bank s other income growth Exhibit 5: C/I ratio improved to 57.2% owing to healthy growth in operating income and rationalisation of branch opening expenses 1, , 1,8 1,6 1,4 1,2 1, Other Income OI as % of Operating Income Operating Expenses C/I Ratio Exhibit 6: Despite relatively higher slippages, overall provisioning increased as focus remained on improving PCR Exhibit 7: PAT growth remained robust led by strong growth in NII and other income, which was partially oset by higher opex and provisioning expenses (1.1) (3.1) (24.) (1.) (2.) (3.) PAT (LHS) Growth YoY (RHS) 3

4 Upside/ (Downside) 12 Exhibit 8: Balance Sheet Analysis (Rs bn) 4Q FY16 1Q FY17 2Q FY17 3Q FY17 4Q FY17 1Q FY18 QoQ% / bps YoY % / bps Net Worth Deposit (.7) 22.2 Savings Deposits Current Deposits CASA Deposit Term Deposit (4.) 16.2 Investments (4.) 27.4 Advances Total Business Avg Int. Earning Assets Risk Weighted Assets CAR Tier I Capital Exhibit 9: Loan book growth was led by commercial vehicle and mortgage segment Exhibit 1: Incremental growth in deposits slowed down as the Bank allowed maturity of high cost term deposits (Rs bn) (Rs bn) (2) (.4) (5) (.7) (2.) Incremental loan disbursement (LHS) Adv. Gr. qoq Incremental Deposit Mobilization (LHS) Deposit Gr. qoq (RHS) Exhibit 11: Loan Book Analysis 4Q FY16 1Q FY17 2Q FY17 3Q FY17 4Q FY17 1Q FY18 QoQ% YoY % Mortgages 55,562 57,349 63,519 64,171 68,16 71, Commercial Vehicle 5,169 5,335 5,774 5,834 6,327 8, SME + Micro SME 15,56 14,671 15,88 16,43 18,981 17,892 (5.7) 22. Agri & Inclusive Banking 21,966 22,673 24,542 24,793 28,472 27,652 (2.9) 22. Corporate Banking 19,382 2,5 23,98 23,335 25,38 24,399 (3.6) 22. Other 11,629 13,337 11,549 11,668 11,72 13, (2.4) 4

5 Upside/ (Downside) 12 Exhibit 12: Loan Book Analysis (% Break Up) 4Q FY16 1Q FY17 2Q FY17 3Q FY17 4Q FY17 1Q FY18 QoQ bps YoY bps Mortgages Commercial Vehicle SME + Micro SME (1) - Agri & Inclusive Banking (1) - Corporate Banking (1) - Other (2) Exhibit 13: CASA ratio improved by 27bps due to strong growth in saving deposits along with continued stickiness of deposits from demonetisation period Exhibit 14: Better ALM helped the bank to improve C/D ratio to 84%, which in turn led to better performance on NII front (Rs bn) C/D Ratio Exhibit 15: The Bank has raised Rs3.8bn in equities, which is expected to support its growth in coming 2 years Exhibit 16: RWA growth remained higher than loan growth, which led to relatively higher capital consumption (Rs bn) Total CAR Tier I Incremental RWA (LHS) RWA Gr. qoq 5

6 Upside/ (Downside) 12 Exhibit 17: Asset Quality Analysis 4Q FY16 1Q FY17 2Q FY17 3Q FY17 4Q FY17 1Q FY18 QoQ% / bps YoY % / bps Gross Non Performing Assets 1,974 2,313 2,554 2,279 2,542 2, Fresh Slippages Net Non Performing Assets 975 1,157 1,29 1,8 1,244 1, GNP Ratio NNP Ratio NPA Coverage Ratio (333) (224) Restructured Gross Loans (11.1) 1.3 Restructured Loan as % of Adv (3) (2) Exhibit 18: Slippages increased sequentially owing to higher slippages from mortgage and AIB segment Exhibit 19: Incremental gross NPA formation increased due to lower upgrades and recovery along with higher slippages (1) (2) (3) (4) (5) (16.) (1.8) (5.) (1.) (15.) (2.) Incremental Gross NPA (LHS) Gross NPA Gr. qoq (RHS) Exhibit 2: PCR remained in comfort zone with specific PCR at 47.7% and PCR (including technical write-o) came in at 71.8% Exhibit 21: Net NPA ratio remained well within the Management s comfort level 1,6 1,4 1,2 1, Net NPA (LHS).8.7 Net NPA Ratio (RHS)

7 Upside/ (Downside) 12 Profit & Loss Statement Y/E March E FY19E Interest Earned 16,985 2,761 25,618 31,732 Interest Expenditure 1,79 12,791 15,472 18,882 Net Interest Income 6,195 7,971 1,146 12,85 Fee Income 1,45 1,657 1,957 2,569 Non Fee Income ,133 1,264 Other Income 2,25 2,495 3,9 3,834 Net Operating Income 8,4 1,465 13,236 16,684 Core Operating Income 7,6 9,628 12,13 15,419 Employee Expenses 2,451 3,8 3,696 4,436 Other Expenses 2,458 3,23 4,4 5,45 Operating Expenses 4,99 6,283 7,7 9,48 Operating Profit 3,49 4,182 5,536 7,23 Provisions and Contingencies 879 1,115 1,3 1,163 Profit Before Tax 2,611 3,67 4,533 6,41 Taxes 666 1,7 1,564 2,84 Profit After Tax 1,945 1,997 2,969 3,957 Balance Sheet Y/E March E FY19E Capital & Liabilities Capital 2,844 2,854 3,75 3,75 Reserves Total 15,62 19,179 23,913 27,873 Net Worth 17,96 22,33 26,989 3,948 Deposits 149,26 192, ,186 31,375 Current deposits 11,771 15,347 19,972 25,617 Saving deposits 23,127 31,545 4,422 52,741 Term Deposits 114, , 178, ,17 Borrowings 11,479 12,758 13,78 15,358 Other Liabilities & Provisions 12,525 12,765 14,878 16,76 Total Liabilities 191,185 24, , ,43 Assets Cash & Cash Equivalents 8,916 11,925 13,17 15,139 Investments 43,333 58,179 7,741 85,923 Advances 129, , ,72 249,128 Fixed Assets 2,48 4,886 5,582 6,244 Other Assets 7,242 7,298 7,626 7,969 Total Assets 191,185 24, , ,43 7

8 Upside/ (Downside) 12 Per Share Data and Valuation Y/E March FY16 FY17E FY18E FY19E No. of Shares (Mn) Earnings Per Share (Rs.) Book Value / Share (Rs.) ABV/Share (Rs.) Dividend Per Share (Rs.) Price/ Earnings (X) Price/ BV (X) Price/Adjusted BV (X) Key Assumptions Y/E March E FY19E Loan Growth Deposit Growth RWA Growth Slippages Ratio Cost of Fund Yield on Fund NIM Other Income Growth Cost to Income Ratio Average Credit Cost Eective Tax Rate Growth Rate Y/E March E FY19E Net interest Income Other Income Operating Profit Provisions Expense (1.1) 16. PAT Risk Weighted Assets Yields / Margins Y/E March E FY19E Cost of Funds (CoF) Yield on Advance Yield on funds Net Interest Margin (NIM)

9 Upside/ (Downside) 12 Balance Sheet Ratio Y/E March E FY19E Credit / Deposit Ratio Incremental C/D Ratio Investment-Deposit Ratio CASA Ratio Asset Quality Y/E March E FY19E Gross NPA/Gross Advances Net NPA/Net Advances Provisioning Burden as % of PPP Provisioning Coverage Ratio Slippage ratio Provis. Exp. to Avg. Advance RoA Tree Analysis Y/E March E FY19E NII / Avg. Assets Core Fee / Avg. Assets Core Rev. / Avg. Assets Ope. Exp. / Avg. Assets Cost to Income Emp. cost / Avg. Assets Oprt. Exp. / Avg. Assets Core OP/ Avg. Assets Trading & Ot/ Avg. Assets OP/ Avg. Assets Provisions / Avg. Assets NPA prov. / Avg. Assets PBT / Avg. Assets Tax / Avg. Assets Eective Tax Rate RoA Leverage (x) RoE Capital Adequacy Ratio Y/E March E FY18E Total CAR Tier

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