Indian Private Banking Sector

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2 Indian Private Banking Sector Executive Summary. We believe that the Indian banking industry is on the threshold of significant expansion given that: India is the fastest developing economy in the world India s banking sector has grown at ~3x GDP; on latest methodology of GDP computation we project growth at 2.5x GDP domestic credit as a of GDP dismally low as compared to other emerging economies huge potential with 3 mn unbanked population. Accordingly, we expect the banking industry to grow at a 2 year CAGR of 19 to Rs 255 tn by 217. Within the Indian banking sector, we prefer private sector banks (PSBs) to the public sector banks (PSUs) given that: PSB advances have grown at faster pace of 3.8x GDP as compared to 3.3x for PSUs leading to market share cannibalization PSB share has increased from 11 of banking business pie in 1999 to 19 in 214. Going forward, we anticipate PSBs to gain incremental market share of.8 each year to constitute 22 of pie by 217. BANKING SECTOR REVIEW faster growth of branch network pan India make PSBs well poised to cater to the large business opportunity superior asset quality adequate capital reserves efficient operations coupled with superior asset quality leads to meaningful internal generation leading to healthy return ratios for shareholders and better valuations giving them the ability to raise capital at lower dilution. Within the private banking space, we like: - 1- Monday, 24 th August, 215

3 HDFC Bank Despite street skepticism on growth, we remain positive given well diversified portfolio, steady growth despite being the largest private sector bank, best in class asset quality, and aggressive digital initiatives which could propel future growth; BUY with a target price of Rs.1,327 implying an upside of ~3. Axis Bank On multiple parameters, Axis scores at par with HDFC yet trades at a discount of ~5 to HDFC s P/Bv multiple. While we agree with a size discount, a discount of 5 appears unwarranted and believe it should narrow to ~2, possible inclusion in MSCI is a trigger; BUY with a target price of Rs 813 implying a upside of 69. ICICI Bank, a late-cycle play -- Despite most of ICICI s operating matrices being on par with its peers -- Axis & HDFC Bank, poor asset quality continues to be a concern which is holding back re-rating of the stock. Asset quality is likely to show material improvement as and when the economy gathers pace, which is expected to happen only post FY17. However, value unlocking via listing of its businesses could provide re-rating opportunity over the medium term. BUY with a target price of Rs 349, implying an upside of 29. Yes Bank Over IndusInd Bank Yes Bank s current valuations are at a significant discount of 25 to that of Indusind despite superior operational efficiencies and asset quality, comparable return ratios, potential for NIM expansion with higher CASA focus and a more granular portfolio which de-risks business model. Further, the loan book size is set to outpace that of IndusInd in the coming years; BUY with a target price of Rs 1,317 implying an upside of 19. DCB over CUB While DCB is smaller compared to CUB, it has successfully improved its operational parameters since it started restructuring its business from FY11 onwards. With a larger CASA base, similar loan portfolio but higher growing loan book and earnings, similar NIMs and asset quality, we believe DCB offers better returns potential than CUB; we recommend a BUY with a target price of Rs 183, implying an upside of 46. Lakshmi Vilas Bank Among mid-sized banks, LVB emerges as a clear winner: i) loan book is set to grow at a healthy pace of 22 CAGR over FY15-17 leading to market share gains ii) on track to improve asset quality -- GNPA (2.2, -55bps), NNPA (1.4,-45 bps) to comparable levels with that of peers by FY17 iii) NIM expansion given its strong focus on CASA improvement and iv) steep improvement in RoA and RoE with high earnings growth; we recommend a BUY with a target price of Rs 11, implying an upside of Monday, 24 th August, 215

4 CONTENTS Private Banks to the Fore 4 Why we prefer Private banks over Public Sector bank Valuation Snapshot 21 Top Picks Why HDFC Bank remains our top pick? 23 Axis Bank Major re-rating on the cards 24 ICICI Bank Late Cycle Play 29 Kotak Mahindra Bank post merger with ING - what s in store? 34 Which is better, IndusInd Bank or Yes Bank? 35 Mid Sized Small banks: 41 Companies Why DCB over CUB? Why LVB over others? HDFC Bank 55 Axis Bank 64 ICICI Bank 74 Kotak Mahindra Bank 86 IndusInd Bank 96 Yes Bank 19 DCB Bank 122 City Union Bank 132 Lakshmi Vilas Bank 14 Federal Bank 153 South Indian Bank 161 Karnataka bank 169 Karur Vysya Bank Monday, 24 th August, 215

5 India China Korea Mexico Australia USA UK Spain Canada Germany France Italy Japan Brazil Russia Private Sector Banks to the fore We believe that the banking industry is on the threshold of significant expansion given that: India is the fastest growing economy After a sustained period of high inflation, policy logjam and slow growth, the Indian economy is all set to stage a recovery. According to IMF estimates, India s real GDP is set to accelerate by ~1 bps from an average of 6.4 during , to 7.5 from These estimates pip India as the fastest growing economy over the next two years. India Fastest growing economy in the world E Average GDP growth rate -1.3 Source: IMF Indian banks have grown at ~3x real GDP Over a period of 15 years, the banking industry, on an average, has grown at 3x India s real GDP. Advances have grown at a 15 year CAGR of 22, while deposits have grown 19 during the same period Monday, 24 th August, 215

6 Rs bn 18, 16, 14, 12, 1, 8, 6, 4, 2, India s banking industry size: From Rs 11 tn in 1999 to Rs 152 tn in Source: RBI, Ventura Research Overall, the banking Sector has grown at ~3x India s Real GDP 25. (x) Bank to Real GDP growth multiple (RHS) Deposits + Advances growth rate India Real GDP growth rate Average Bank to GDP growth multiple (RHS) Source: RBI, Ventura Research Monday, 24 th August, 215

7 Japan US Spain Italy UK China Australia Korea France Germany Brazil India Russia Mexico Banking assets as a of GDP is dismally low The potential of the banking industry can also be gauged by the fact that the size of India s banking assets projected for FY17 is likely to be similar to the China s banking assets size in 23 (~Rs tn). Also, India s banking assets as a of GDP at ~ 95 is far lower than that of China -- ~25. Given the favorable demographics, expected recovery in the economy and the huge unbanked population, we believe India s banking industry is poised for robust growth in the coming years. 3 Huge potential for India to catch-up in terms of banking assets China Banking Assets to GDP India Banking Assets to GDP Source: RBI, Ventura Research, World Bank Despite being one of the fastest growing economies, India ranks low in terms of domestic credit Source: RBI, Ventura Research, World Bank Domestic credit provided by financial sector ( of GDP) Monday, 24 th August, 215

8 Consequently, Indian banking industry has substantial room for growth As per the revised methodology of GDP calculation, banking sector growth has averaged at 2.6x in the past three years. Being the back-bone of economic recovery, we expect the banking sector to maintain its growth to GDP multiple at a conservative 2.5x. This translates to a total banking pie opportunity of Rs 255 tn by 217, a 3 year CAGR of 19. Rs bn 3, 25, 2, Banking Industry Growth Opportunity 2 year CAGR: : E: , 111, ,7 152,684 1, 5, P 216P 217P Source: RBI, Ventura Research Within the Indian banking sector, we prefer PSBs to PSUs given that: PSBs have grown at a faster rate PSBs have outpaced PSUs with a total business growth of 23 CAGR as compared to 18 CAGR for public sector banks over a period of 15 years Monday, 24 th August, 215

9 Banking Industry Growth Opportunity year CAGR: Total advances: 21 Private sector advances: 26 Public sector advances: 2 15 year Median: Total advances to GDP multiple: 3.2x Private sector advances to GDP multiple: 3.8x Public sector advances to GDP multiple: 3.3x Private Sector Advances Growth Pvt Bank Adv to GDP growth multiple (RHS) Public Sector Advances Growth Public Bank Adv to GDP growth multiple (RHS) Source: RBI, Ventura Research Deposits growth in PSBs significantly higher; median growth at 3.3x Real GDP year CAGR: Total deposits: 17 Pvt bank deposits: 21 Public bank deposits: year Median: Total dep growth to GDP growth: 2.5x Pvt Sector deposits growth to GDP growth: 3.3x Pub sector deposits growth to GDP growth: 2.3x Private sector deposits growth Pvt Bank Dep to GDP growth multiple (RHS) Public sector deposits growth Public Bank Dep to GDP growth multiple (RHS) Source: RBI, Ventura Research Monday, 24 th August, 215

10 leading to market share cannibalization With consistent out-performance, private banks have cannibalized the banking business from public sector banks. In 1999, public sector banks accounted for 82 of the total business pie, which has shrunk to 77 in 214. During the same period, the share of private sector banks has increased from 11 to 19. India Banking Business Pie India Banking Business Pie Indian Private Sector Banks, 11 Foreign Banks, 7 Indian Private Sector Banks, 19 Foreign Banks, 4 Public Sector Banks, 82 Public Sector Banks, 77 Source: RBI, Ventura Research Source: RBI, Ventura Research Incremental gain/loss of market share: Private and Public sector banks Avg market share gain of private banks:.5 each year in the past Avg market share loss of public sector banks:.4 each year in the past 15 years Incremental market share change of Private banks Incremental market share change of Public Banks Source: RBI, Ventura Research Monday, 24 th August, 215

11 Within the banking sector, we expect private sector banks to continue to eat into the market share of public sector banks. In the past 15 years, private sector banks gained.5 market share each year. We expect the gain to be higher at.8 each year going forward. This translates to the private sector pie growing to Rs 55 tn in 217 from Rs 29.3 tn in 214 at a three year CAGR of 23. Indian Private Sector Banks, 19 India Banking Pie- 214 Foreign Banks, 4 Indian Private Sector Banks, 22 India Banking Pie- 217E Foreign Banks, 4 The size of private sector banks business could grow to Rs 6 tn in 217 Public Sector Banks, 77 Public Sector Banks, 74 Source: RBI, Ventura Research Source: RBI, Ventura Research SBI has lost significant market share to HDFC, Axis and Kotak SBI BOB Bank Of India PNB Canara Bank HDFC ICICI Axis Kotak Amongst the largest banks, private sector banks will continue to eat into the share of public sector banks. HDFC is expected to be the biggest beneficiary FY5-FY15 Source: RBI, Ventura Research Monday, 24 th August, 215

12 Indian Bank Andhra Bank Bank Of Maharashtra Vijaya Bank Dena Bank United Bank Karnataka Bank CUB LVB DCB Dhanlaxmi Union Bank IDBI Bank Synd Bank Central Bank IOB UCO OBC Corp Bank Allahabad Bank Yes Bank IndusInd Federal J&K Bank SIB KVB Yes Bank top market share gainer amongst mid-sized private banks Amongst the mid-sized banks, majority of them are expected to lose market share barring Yes & IndusInd bank Source: RBI, Ventura Research FY5-FY15 FY17E Mid-sized PSBs has lost significant market share to their private counterparts Amongst the small-sized banks, public sector banks have lost market share significantly FY5-FY15 FY17E Source: RBI, Ventura Research Monday, 24 th August, 215

13 Union Bank IDBI Bank Syndicate Bank Central Bank Of India IOB UCO OBC Corporation Bank Allahabad Bank Yes Bank IndusInd Federal J&K Bank SIB KVB Faster growth of branch network make PSBs well poised to cater to the large business opportunity Public sector banks have a wide-spread presence with the largest public sector bank, SBI, having branch strength of 16,+ as of FY15. However, the pace of branch expansion in private banks is nearly 3x than that of public sector banks. In the past 6 years, the top 5 private sector banks have expanded their branches at an average CAGR of 27, as compared to 8 for the public sector banks Private sector bank v/s Public sector bank Branch expansion Top private sector banks expanding presence at a rapid pace SBI BOB BoI PNB CanBank HDFC ICICI Axis Kotak FY9 FY15 indicates 6 year CAGR Source: Ventura Research Yes Bank, Induslnd Bank and IDBI Bank most aggressive in branch expansion Yes Bank is the most aggressive mid-sized private sector bank in terms of branch expansion FY9 FY15 indicates 6 year CAGR Source: Ventura Research Monday, 24 th August, 215

14 SBI BOB BoI PNB Canara Bank HDFC ICICI Axis Kotak Union Bank IDBI Bank Syndicate Bank Central Bank IOB UCO OBC Corporation Bank Allahabad Bank Yes Bank IndusInd Federal J&K Bank SIB KVB Indian Bank Andhra Bank Bank Of Vijaya Bank Dena Bank United Bank Karnataka Bank CUB LVB DCB Dhanlaxmi Bank Indian Bank Andhra Bank Bank Of Maharashtra Vijaya Bank Dena Bank United Bank Karnataka Bank CUB LVB DCB Dhanlaxmi Bank CUB and Andhra most aggressive amongst smaller banks Source: Ventura Research FY9 FY15 indicates 6 year CAGR in Rs crs 3 25 Top private banks score above public banks in business per branch (FY15) as well Source: Ventura Research Monday, 24 th August, 215

15 Superior Asset Quality: The asset quality of private sector banks is relatively far superior to public sector banks. Strict control over asset quality through thorough screening procedures and robust loan recovery mechanisms has helped private sector banks maintain a healthy balance sheet and steady growth in profits. On the other hand, stressed balance sheets have made PSU s wary of lending. For instance, Gross NPAs in our banking system has increased at a 15 year CAGR of 11 from to Rs 2642 bn as of 214. PSU bank NPAs which constitute 89 of the total NPAs in the system, have grown at a 1 CAGR during the same period. Public sector banks gross NPA as a of total advances, stood at 4.5, while that of private sector banks stood at 1.8. Gross NPAs as a of advances lowest for private sector banks Public Sector Banks Indian Private Sector Banks Foreign Banks Source: RBI, Ventura Research Monday, 24 th August, 215

16 SBI BOB BoI PNB Canara Bank HDFC ICICI Axis Kotak Union Bank IDBI Bank Syndicate Bank Central Bank Of IOB UCO OBC Corporation Bank Allahabad Bank Yes Bank IndusInd Federal J&K Bank SIB KVB Indian Bank Andhra Bank Bank Of Maharashtra Vijaya Bank Dena Bank United Bank Karnataka Bank CUB LVB DCB Dhanlaxmi Bank Gross NPAs comparison (FY15) Private sector banks far superior 1 (x) Source: RBI, Ventura Research, * Post merger with ING Vysya Bank Adequate capital reserves: In 214, the Basel III Tier I capital adequacy ratio of private banks stood at 12.3, nearly 4 bps higher than public sector banks. This provides a cushion for private banks to withstand and absorb losses, thereby providing higher protection to lenders and borrowers. It also translates to lesser capital raising requirements in order to sustain growth. Private sector banks have consistently higher Tier I Capital Adequacy Ratio Private Banks Public Sector Banks Source: RBI, Ventura Research Monday, 24 th August, 215

17 SBI BOB BoI PNB Canara Bank HDFC ICICI Axis Kotak Union Bank IDBI Bank Syndicate Bank Central Bank Of India IOB UCO OBC Corporation Bank Allahabad Bank Yes Bank IndusInd Federal J&K Bank SIB KVB Indian Bank Andhra Bank Bank Of Maharashtra Vijaya Bank Dena Bank United Bank Karnataka Bank CUB LVB DCB Dhanlaxmi Bank According to industry estimates, mid-level PSU banks will require Rs 1.8 tn in capital over the next four-financial years to meet Basel III requirements. According to RBI s timeline for implementing Basel III norms, the minimum total capital adequacy requirement will increase to and subsequently to 1.25 in the next financial year. However, raising this capital will be a difficult task for public sector banks given that: Public sector banks are trading at discounted valuations many of them at.5-.8x historical price-to-book valuations compared to 2-3.5x range of private banks. Due to the higher multiple, private banks can raise more capital with lower equity dilution. Public sector banks trading at low valuations (FY15 P/Bv) (x) Large Banks -- Avg TTM P/Bv Public:.8x Private: 3.7x Source: RBI, Ventura Research, * Post merger with ING Vysya Bank (x) Across cycles, PSBs have traded at a premium compared to PSUs Pvt: 1.56x PSU:.91x Pvt: 2.17x PSU: 1.2x Pvt:.8x PSU:.48x Pvt: 1.89x PSU:.8x Private Banks All Banks Public Sector Banks Source: Ventura Research Monday, 24 th August, 215

18 PSBs P/Bv multiple trend PSUs P/Bv multiple trend Private Banks +1 standard deviation -1standard deviation Mean Source: Ventura Research Public Sector Banks +1 standard deviation -1standard deviation Mean Source: Ventura Research High NPAs and provisions have adversely impacted the profitability of public sector banks, leading to low internal capital generation. The government is burdened with the task of economic recovery and controlling deficit. With only Rs 25 bn (~14 of requirement) provided for bank recapitalization in this fiscal, government s support could be inadequate. This provides private sector banks an opportunity to capitalize on the credit growth potential which public sector banks may not be able to meet given capital constraints. PSBs operate far more efficiently than PSUs: Private sector banks have efficiently managed operations, branch network and employee strength as measured by RoA. RoA of private sector banks has consistently been ~1.5x higher than that of public sector banks. Further, while RoAs of private sector banks has been on an improving trend, the RoA of public sector banks has only deteriorated in the past couple of years. Return on Assets trend for Public sector and Private banks FY1 FY2 FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 Private Banks Public Sector Banks Source: RBI, Ventura Research Monday, 24 th August, 215

19 SBI BOB BoI PNB Canara Bank HDFC ICICI Axis Kotak Yes Bank Union Bank IDBI Bank Syndicate Bank Central Bank Of India IOB UCO OBC Corporation Bank Allahabad Bank IndusInd Federal J&K Bank SIB KVB Indian Bank Andhra Bank Bank Of Maharashtra Vijaya Bank Dena Bank United Bank Karnataka Bank CUB LVB DCB Dhanlaxmi Bank Return on Assets (FY15) significantly higher for Private Sector Banks Source: RBI, Ventura Research Digital initiatives: -1.8 Over the past decade, the Indian banking sector has witnessed major leaps in digitization of banking operations, primarily led by the initiatives of private sector banks. The thrust on digitization continues as 3 million Indians remain devoid of any sort of financial services. Further, challenges such as inefficiencies in payments/ transfer system and disbursal and monitoring of credit in rural areas limit the growth potential of the economy. Rightfully so, the government has increased its focus on achieving financial inclusion with the most notable initiative being the Pradhan Mantri Jan Dhan Yojna. According to a report by McKinsey Global Institute, an estimated 3 million Indians have no access to banking, which prevents them from accumulating savings or participating fully in the formal economy. Only 36 percent of rural Indians have bank accounts, and even those with bank accounts often do not have access to any other financial services, such as credit to buy farm equipment or fund a small business. Of some 17 million rural households in India, just 45 million to 5 million have access to formal credit, and one-third of them also borrow from non-formal sources, at punishingly high rates of interest. Run by dynamic and professional management, private sector banks have led the digitization of the banking sector in India. Most of the banking operations including account opening, loan disbursement, and transfers/bill payments are now carried out through mobile/net banking. Public sector banks have followed suit. Some example of the digital initiatives undertaken by leading private sector banks: HDFC Bank has launched a dedicated Go Digital Initiative. Under this initiative, among other things, o The bank is set to launch a digital wallet and an electronic marketplace for various online merchants. o Auto loans to be disbursed in less than 3 minutes using biometrics technology o Launched the Chillr App to transfer money to contacts and the PayZapp app which enables one click payments to vendors/service providers Monday, 24 th August, 215

20 ICICI Bank has launched its own digital village project by adopting a village in Gujarat to provide services ranging from cashless banking to digitized school teaching. It has also launched an end-to-end digitization system across the insurance platform to improve sales effectiveness. IndusInd Bank s personalized bank account number, online account opening and video branch are some digital initiatives to reduce costs and create customer value. A McKinsey Global Institute Report, December 214 has highlighted seven technology based applications that have the power to transform the financial services sector in the coming decade. Technological advancements that can re-shape the financial service sector in the coming decade Initiative Description Impact Universal Electronic Bank Account Zero Balance Accounts for all A digitally verifiable identity for all Indians will enable faster account opening citizens above the age of 18, enabled by a unique verifiable digital identity Mobile Money Use of mobile phon-based money transfer systems Mobile phones penetrating rural areas at a rapid pace, requires better co-ordination with banks and telecom carriers Advanced credit underwriting Use of unconventional channels Credit underwriting using unconventional data (mobile calling, texting and payments to provide credit to unbanked and improve underwriting and data) can enable lending of as much as $3 bn per year to unbanked Indians by 225 pricing for all customers Technology enabled business correspondents Digital government transfers and payments Enhanced customer experience Bank appointed agents to deliver basic financial services to non-tech users through mobile phones or micro-atms Government payments and transfers using verifiable digital identiy, mobile payments, and universal electronic bank accounts to cut leakage Simple, Easy to use applications on mobile and other channels Digitally enabled sales & fulfillment Data analytcis backed customer acquisition, virtual servicing and administration 3 mn transactions routed through this channel; $1 bm of government direct benefits and $3bn of domestic remmittances can be routed through this channel over the next 2-4 years Government makes payments of about $1 bn per year to citizens under various programs which suffers from leakage and high admin costs -- digital transfers could help save on these costs equivalent to 5-2 of total annual flow; these applications could have a potential economic impact of $4bn to $17bn per year in of all Indian bank customers use online banking; to expand base banks must adopt unconventional methods to enhance customer experience For eg: i) Kotak Mahindra Bank's mobile app offers easy peer-to-peer money transfers ii) ICICI Bank's Facebook app allows payments between Facewbook friends iii) HDFC Bank launched Smartbuy, an e commerce marketplace for customers Data backed customer segmentation can lead to higher conversions than cold calling Source: McKinsey Global Institute analysis Monday, 24 th August, 215

21 and could have an economic impact of $32 bn to $14 bn per year in 225 Source: McKinsey Global Institute analysis These initiatives not only spell growth prospects through penetration into the unbanked population, but also throw open additional opportunities for banks to capitalize on. Private sector banks, led by proactive managements, adequate capital reserves, healthy profitability and asset quality, are the best placed to bridge the gap between the banked and the unbanked through technological advances. Further, with PSU banks struggling with asset quality woes and bare minimum capital reserves, private sector banks have a huge opportunity for growth arising not only from digitization but also through cannibalization of market share which is expected to leap in their favour in the coming years Monday, 24 th August, 215

22 ` Valuation Snapshot: Banks Financial Snapshot CMP M. Cap Target Price EPS (Rs) P/E (x) Adj. BV P/Adj. BV (x) NIM () GNPA () NNPA () C/I () RoA () RoE () (Rs) (Rs. Cr) (Rs) () (x) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E HDFC , ICICI , Kotak , Axis , IndusInd , Yes 63 26, Federal 61 1, Karur Vysya 471 5, City Union 91 5, DCB 125 3, South Indian 19 2, Karnataka 122 2, Lakshmi Vilas 74 1, Source: Ventura Research -21- Mon day 24 th August, 215

23 2 yrs forward ROE ( ) 2 yrs forward C/I () 2 yrs EPS CAGR () 2 yrs Forword NNPA () ` 2 yrs forward EPS v/s P/ Adj. BV 2 yrs forward GNPA v/s NNPA LVB CUB KTK LVB ICICI KTK KVB SIB Federal Yes ICICI DCB CUB IIB Axis HDFC Kotak IIB Yes SIB KVB Kotak HDFC Axis DCB Federal yrs forward P/Adj BV Source: Ventura Research 2 yrs forward ROE v/s ROA yrs forward GNPA () Source: Ventura Research 2 yrs forward Cost to Income v/s NIM SIB KTK LVB DCB KVB Federal CUB Yes IIB Axis HDFC Kotak ICICI SIB KTK KVB LVB Yes CUB Federal Axis ICICI DCB IIB HDFC Kotak yrs forward ROA () Source: Ventura Research yrs forward NIM () Source: Ventura Research -22- Mon day 24 th August, 215

24 1) Why HDFC bank remains our top pick: Despite street skepticism on maintaining pace of growth, we remain strongly positive on the fortunes of HDFC Bank. In deference to street estimates we are quite confident that robust growth is on the cards given that: It is well placed to benefit from the impending economic upturn & growing consumerism. We forecast the loan book growth of 23.9 CAGR over the forecast period FY15-17 leading to an earnings growth of 23.5 CAGR. The bank has a successful track record of leadership initiatives which inspires confidence in the successful rollout of its new foray. It recent technology led initiatives are expected to help further consolidate its market position and foster market share gains,. Further the deeper embedding of technology across all operations is expected to improve its operational efficiencies significantly. Early initiatives in rural banking are expected to favor the Bank immensly. HDFC Bank has adequately demonstrated beyond doubt of maintaining best in class asset quality. Valuation Barring the economic meltdown of FY28-29, HDFC Bank has consistently traded in a tight band of 3.2X - 4.6X of its 1-Yr Forward Adj P/BV (mean of 3.9X Adj P/BV since 22) With the Bank taking the lead in the introduction of technology based product offerings, its exemplary asset quality, market penetration opportunities and resurgent expectations of the economy, we believe that HDFC Bank will continue to demand premium valuations. We initiate coverage on HDFC bank with a BUY for a target price of Rs. 1,327 implying an upside of ~3 over the CMP of Rs The target price is arrived at by assigning a multiple of a 4.1x on FY17E Adj. BV 1,4 1,2 1, ` Average P/Adj. BV- 4.x Overall average P/Adj. BV- 4.x HDFC Bank P/Adj. BV Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 HDFC Bank, Ventura Research Bull Phase average P/Adj. BV- 4.2x CMP 1X 2X 3X 4X 5X Monday 24 th August, 215

25 2) Axis Bank - major re-rating on the cards: Granular build up of the retail portfolio, increasing focus on higher rated corporate loans, continued thrust on CASA and stable asset quality augur well for Axis Bank (Axis). Further the aggressive branch roll out with the branches functioning more as advisory based centers over transaction networks should help drive business growth momentum. Given these superlative metrics, we believe that a valuation re-rating is on the cards. We recommend a Buy on the stock at its CMP of Rs. 462 (current FY17 P/Adj. BV of 2.x) with a price objective of Rs 813 (target P/BV 3.3x) implying an upside of 69 over the next 18 months. Inclusion in the MSCI should be an added positive Axis Bank 1-Yr Fwd P/Adj. BV Bands Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 Source :Axis Bank, Ventura Research ` CMP 1X 1.75X 2.5X 3.25X 4X Axis Bank relative valuation to HDFC Bank to narrow further Currently Axis Banks trades at a discount of.6x to HDFC Bank on an Adj P/BV basis. Undoubtedly HDFC Bank given its best in class performance metrics deserves the rich valuations it commands. However we believe that the significant valuation discount of Axis Bank is unjustified given that its performance on most parameters are near or equal to that of HDFC Bank s Monday 24 th August, 215

26 16-Apr-4 16-Oct-4 16-Apr-5 16-Oct-5 16-Apr-6 16-Oct-6 16-Apr-7 16-Oct-7 16-Apr-8 16-Oct-8 16-Apr-9 16-Oct-9 16-Apr-1 16-Oct-1 16-Apr Oct Apr Oct Apr Oct Apr Oct Apr-15 Relative P/Adj BV discount indicates significant scope for rerating Yr Forward Adj. P/BV relative valuation Bull phase average-.7x Bear phase average-.5x Entire period average-.6x Axis Bank HDFC Source : Ventura Research Historically during the previous bull run, the multiple averaged around.7x and during the fag end of the boom in 28 it peaked at.9x HDFC s 1 yr forward Adj P/BV. It was only when the economic slowdown and stress build up in the system got accentuated that the discount widened and Axis Bank consistently traded well below its long term average discount (.5x). In October 213 the gap widened to its maximum of.4x. Since then with the onset of the new government and sentiment stabilizing, this discount has started narrowing. In a fast growing economy BFS stocks tend to post strong growth and with India on the brink of a turnaround, BFS stocks are expected to be at the fulcrum of the India growth story. We expect the discount to narrow substantially as the growth cycle returns. Since the previous bull run there is substantial improvement in the metrics of Axis Bank not only in comparison to its own performance (of the previous bull run) but vis-avis HDFC Bank. Possible inclusion in the MSCI could trigger a further narrowing of this valuation disparity. This should fuel demand for the Axis Bank paper. We target an average discount to HDFC Bank of ~.8X implying a price target of Rs 813. The following set of comparative charts of Axis Banks and HDFC Bank operation metrics elucidates the compelling re-rating of the valuation of Axis Bank Monday 24 th August, 215

27 d Axis Bank s valuation to catch up with HDFC Axis Bank has superior CASA ratio ` crores HDFC Bank ` crores Axis Bank E 217E E 217E 38. Deposits CASA Deposits CASA Source: HDFC Bank, Ventura Research Source: Axis Bank, Ventura Research Higher share of the granular lending business augurs well with Axis 12 HDFC Bank 12 Axis Bank E 217E E 217E Corporate Consumer Corporate Consumer Source: HDFC Bank, Ventura Research Source: Axis Bank, Ventura Research HDFC will continue to outperform Axis Bank in terms of credit book 6 ` crores HDFC Bank 5 ` crores Axis Bank E 217E Source: HDFC Bank, Ventura Research E 217E Source: Axis Bank, Ventura Research Monday 24 th August, 215

28 Axis Bank s NII lags HDFC Bank 35 ` crores HDFC Bank 3 25 ` crores Axis Bank E 217E E 217E NII Growth NII Growth Source: HDFC Bank, Ventura Research Source: Axis Bank, Ventura Research HDFC s asset quality better than Axis GNPA.6.5 NNPA E 217E E 217E HDFC AXIS HDFC AXIS Source: HDFC Bank, Axis Bank, Ventura Research Scope for NIMs to expand for Axis Source: HDFC Bank, Axis Bank, Ventura Research Axis Bank has fairly lower Cost to Income NIM 6 5 Cost to Income E 217E E 217E HDFC AXIS HDFC AXIS Source: HDFC Bank, Axis Bank, Ventura Research Source: HDFC Bank, Axis Bank, Ventura Research Monday 24 th August, 215

29 Axis Bank s return ratios closely track HDFC 25. ROE 2.5 ROA E 217E E 217E HDFC AXIS HDFC AXIS Source: HDFC Bank, Axis Bank, Ventura Research Source: HDFC Bank, Axis Bank, Ventura Research Capital Adequacy is on par with HDFC Bank 18 HDFC Bank 18 Axis Bank Tier-1 Tier-2 Tier-1 Tier-2 Source: HDFC Bank, Ventura Research Source: Axis Bank, Ventura Research Monday 24 th August, 215

30 3) ICICI Bank Late cycle play: As known to all asset quality has been the biggest concern with respect to BFS stocks and the market has been ruthless in downgrading stocks with poor asset quality. ICICI Bank has been no exception. Despite most of ICICI Bank s operating matrices being on par with its peers -- Axis & HDFC Bank, the poor asset quality continues to be of concern which is holding back re-rating of the stock. The asset quality & restructured book remain sticky and continue to be key monitorable. Asset Quality remains the key monitorable Restructured Assets have risen considerably FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E ` Crores. Q1FY16 restructured loan book is Rs.1,962 crore Currently no pipeline for further restructuring. Restructuring lumpiness significantly down; maximum exposure of a single account to PCR (RHS) GNPA NNPA Restructured Assets Source :ICICl Bank, Ventura Research Source :ICICl Bank, Ventura Research Asset quality is likely to show material improvement as and when the economy gathers pace, which is expected to happen only post FY17. Having said this, the value unlocking via listing of its businesses can provide re-rating opportunity over the medium term. However there is scope for significant appreciation given the value unlocking which is expected to play out from the listing of its profitable financial subsidiaries. We initiate coverage on ICICI Bank with a ACCUMULATE recommendation and a target price of Rs We have valued ICICI Bank based on the sum-of-parts method; the core banking business is valued at Rs. 273 (1.9x FY17E Adj. P/BV) and Rs. 76 is the value assigned to its other businesses. We have arrived at the adjusted book value of standalone book by deducting investment in subsidiaries. Our SOTP target price implies an upside of 28 from the CMP. At the CMP of Rs. 273, it is trading at 1.6X FY17 Adj. P/BV Monday 24 th August, 215

31 SOTP Valuation of ICICI Bank Sum of the parts valuation Total Valus (` crores) ICICI Bank's stake Value attributable to ICICI Bank (` crores) `/share Valuation Methodology ICICI Prudential Life insurance Company (74 stake) Life insurance business is valued at 14x FY17 New Business Achieved Profit (NBAP) ICICI Lombard General Insurance (74 stake) Valued at 12x Normalized Earnings for FY15 ICICI Asset management (51 stake) of FY15 AUM ICICI Securities including PD x FY15 Earnings ICICI Venture Fund of FY15 AUM ICICI Home Finance x FY15 BV ICICI Bank UK x FY14 BV ICICI Bank Canada x FY14 BV Total Value of Subsdiaries 76 Value of the bank 273 2x FY17E adjusted book (adjusted for investment in subs and net NPLs) Target value for ICICI Bank 349 Source :ICICl Bank, Ventura Research The following set of comparative charts of ICICI Bank, Axis Bank and HDFC Bank operation metrics clearly elucidates that asset quality improvement is the key to rerating of the stock. Barring asset quality, ICICI Bank is comparable on all other operation metrics Monday 24 th August, 215

32 6 5 ICICI Bank CASA deposits in line with peers Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research ICICI Bank Net Interest Margin comparable to Axis Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research 6 ICICI Bank Cost to Income ratio lower than that of its peers Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research Monday 24 th August, 215

33 6 ` Crores Despite size, all three players expect strong credit growth Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research ICICI s asset quality remains a concern area Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research ICICI s Net NPLs are expected to remain sticky over the forecast period Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research Monday 24 th August, 215

34 es 25. ICICI s Return on Equity expected to pick up Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research 2.5 Return on Assets comparable to peers Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research 25 2 Capital adequacy is comfortable Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Tier I Tier II Source : Ventura Research Monday 24 th August, 215

35 4) Kotak Mahindra Bank Post merger with ING Bank - what s in store We initiate coverage on Kotak Mahindra Bank with a HOLD recommendation. Since the merger announcement with ING Vysya Bank, the Bank has seen a major rerating. We believe that the market has fully discounted its FY17 earnings leaving little room for appreciation. We have valued Kotak Mahindra Bank based on the sum-of-parts method; the core banking business is valued at 581 (4.1x FY17E Adj. P/BV) and 19 is the value assigned to its other businesses. We have arrived at the adjusted book value of standalone book by deducting investments in subsidiaries. At the CMP of 648, it is trading at 4.8X FY17 Adj. P/BV. SOTP valuation of Kotak Mahindra Bank Company Value Base Amt Value (` crores) Per Share (`) Valuation Methodology Kotak Mahindra AMC AUM AUM KMCC PAT x FY15 Earnings Kotak Securities PAT x FY15 Earnings Insurance NBP P/NBAP Others PAT x FY15 Earnings International Subsidiaries Book x FY15 Book Kotak Prime Book x FY15 Book Total Subsidiaries Value 19.9 Core Banking Business Value SOTP Value Source :Kotak Mahindra Bank, Ventura Research ` Adj P/Bv Major re-rating of KMB in line with the merger with ING Vysya Bank Mar-9 Mar-11 Mar-13 Mar-15 CMP 4X 4.65X 5.3X 5.95X 6.6X Source :Kotak Mahindra Bank, Ventura Research Monday 24 th August, 215

36 as FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E 5) Which is better IndusInd Bank or Yes Bank? IndusInd Bank valuations re-rating already factored in Since the change in management at the helm of IndusInd Bank, the stock has consistently been re-rated as the management delivered across all metrics stated in its planning cycles. During the first planning cycle FY28-11 the stock averaged a 2.4X 1 yr forward Adj P/BV. In the second cycle FY11-14 this got re-rated to an average of 2.9X. And as IIB outperforms its own performance benchmarks in the current Planning Cycle 3 FY14-FY17 we have seen the stock being re-rated to an average of 3.9x. 1, IndusInd Bank P/Adj. BV Band 1st Cycle- 2.4x 2nd Cycle- 2.9x 3rd Cycle - 3.9x Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP 1.2X 1.7X 2.2X 2.7X 3.2X Source : IndusInd Bank, Ventura Research IIB s valuation at a significant premium to HDFC Bank We believe that IIB has more or less peaked in valuations given that it trades at a premium relative to HDFC Banks on the Adj P/ BV basis. P/ Adj. BV comparison between IndusInd and HDFC Bank Yr Forward P/Adj. BV Yr Forward P/Adj. BV relative valuation Indusind bank Source: Ventura Research HDFC Source: Ventura Research HDFC vs. IndusInd Monday 24 th August, 215

37 ases FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E Given the size of HDFC Bank s business and compelling metrics, in our opinion, IIB should trade at a discount to HDFC Bank. Since 21 this discount has hovered in the range of.7x.9x HDFC Bank s I year forward multiple. We believe that this discount to the leader HDFC is expected to continue during the forecast period. Our target for HDFC Bank over the next 18 months is Rs 1327 (P/Adj BV of 4.1 on FY17). Based on our peer discount of.8x, we believe that IIB can rally another 7 to Rs. 922 (3.4X FY17 Adj P/ BV.) Yes Bank offers a better investment opportunity than its peer IIB The immediate peer for comparison with IIB is Yes Bank (given the size of business.) Yes Bank s current valuations are at a significant discount of.5x to that of IIB. P/ Adj. BV comparison between IndusInd and Yes Bank Yr Forward P/Adj. BV Yr Forward P/Adj. BV relative valuation Yes vs. IndusInd Base Indusind bank Source: Ventura Research Yes bank Source: Ventura Research This is despite the fact that: the loan book size is set to outpace that of IIB over the forecast period more granular and higher retail exposure ensures reduced business risk and volatility NIMs have room to catch up as substantial head room is available for CASA expansion Impeccable asset quality Superior operational efficiency Comparable return ratios We believe that the valuation discount is unjustified and hence Yes Bank offers a better investment opportunity. In our opinion the valuation multiple of Yes Bank should at least be on par with that of IIB, if not a premium Monday 24 th August, 215

38 Yes Bank is one of our top bets in the private banking space. Based on our financial model and valuations we believe that the stock has the potential to provide a 19 return from the CMP of Rs 629 (1.6X FY17 Adj P/BV of Rs 399 / share) and recommend buying the stock. Our optimism is based on the fact that Yes Bank has sustained its growth momentum while maintaining the lowest NPA levels (GNPA.4 / NNPA.1) among peers. Yes Bank has significantly de-risked its business model by enhancing the granularity of its deposit and asset base. Fee income growth has been sustained, NIMs have consistently expanded and the cost of operations has been kept surprisingly low despite a rapid pan-india branch roll out. Share holder return ratios continue to remain impressive inspite of frequent capital raising. Significant re-rating on the cards Barring the bear markets of FY28 and FY213, Yes Bank has consistently traded in the band of 2.3x to 3.6x its 1-Yr Fwd Adj. P/BV (with average multiple of 2.9x). Given the fact that the company has shown robust growth since its inception with performance on par with all its peers, we believe a re-rating for Yes Bank is on the cards. Yes Bank P/Adj. BV Band 1,6 ` 1,4 1,2 1, Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP 1X 1.95X 2.9X 3.85X 4.8X Source : Yes Bank, Ventura Research The following set of comparative charts of Yes Bank and IndusInd Bank operation metrics elucidates the compelling re-rating of the valuation of Yes Bank: Monday 24 th August, 215

39 FY FY FY FY FY FY FY FY FY16E FY17E d 19,37.4 FY FY FY FY FY FY FY FY FY16E FY17E IndusInd Bank s valuation expensive than that of Yes Bank Yes Bank has got enough headroom to expand CASA ` crores CASA , 12, 1, 8, 6, 4, 2, ` crores CASA Yes bank CASA (RHS) IndusInd bank CASA (RHS) Source: Yes Bank, Ventura Research Source: IndusInd Bank, Ventura Research Size of lending book almost similar with an equivalent split among consumer and corporate lending 12 of loan books Yes Bank 12 of loan books IndusInd Bank FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Consumer Corporate Banking Consumer* Yes Bank s NIM to catch up with that of IIB Yes Bank has higher operating efficiency 4. () 7 () FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 3 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes bank IndusInd bank Yes bank IndusInd bank Source: Yes Bank, IndusInd Bank, Ventura Research Source: Yes Bank, IndusInd Bank, Ventura Research Monday 24 th August, 215

40 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes Bank likely to enjoy faster profit growth ` crore PAT ` crores PAT Yes bank Yes yoy Growth () RHS IndusInd bank Indusind yoy Growth () RHS Source: Yes Bank, Ventura Research Source: IndusInd Bank, Ventura Research Yes Bank has better Asset quality profile 3.5 () GNPA 2.5 () NNPA FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes bank IndusInd bank Yes bank IndusInd bank Source: Yes Bank, IndusInd Bank, Ventura Research Source: Yes Bank, IndusInd Bank, Ventura Research Return ratios of both the banks are almost similar 3 () ROE 2.5 () ROA Dip in ROE due to capital infusion, earning normalized within 2-3 quarters. Similar trend is expected in Yes Bank 1..5 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes bank Indusind bank Yes bank Indusind bank Source: Yes Bank, IndusInd Bank Ventura Research Source: Yes Bank, IndusInd Bank Ventura Research Monday 24 th August, 215

41 as Both the banks are adequately funded for future growth () CAR () CAR FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E Yes bank Tier I Tier II IndusInd Bank Tier I Tier II Source: Yes Bank, Ventura Research Source: IndusInd Bank, Ventura Research Monday 24 th August, 215

42 9-Nov-6 9-Apr-7 9-Sep-7 9-Feb-8 9-Jul-8 9-Dec-8 9-May-9 9-Oct-9 9-Mar-1 9-Aug-1 9-Jan-11 9-Jun-11 9-Nov-11 9-Apr-12 9-Sep-12 9-Feb-13 9-Jul-13 9-Dec-13 9-May-14 9-Oct-14 9-Mar-15 6) Among the mid sized and small sized banks we have made an effort to categorize comparative peers considering valuations and size of operations. Accordingly we have grouped them into 2 sets: i) Compared CUB with DCB given their premium valuations, ii) Created another peer set of five banks a. Federal Bank, b. Karnataka Bank, c. South Indian Bank, d. Karur Vysya Bank and e. Lakshmi Vilas Bank. i) We prefer DCB over CUB We initiate coverage on DCB with a BUY and a price target of Rs We have valued DCB based on our target P/Adj BV of 2.7X (on FY17E s adjusted Book Value). Our target implies an upside of 47 from the CMP. At a CMP of Rs. 125 the stock is trading at 1.8x FY17E P/Adj. BV. DCB vs. CUB 4. 1 Yr Forward Adj. P/BV valuation DCB Bank 1-Yr Fwd. P/Adj. BV Band 2 ` Avg. P/Adj BV- 2.1 Avg. P/Adj BV Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 DCB CUB CMP.5X 1.3X 2X 2.8X 3.5X ource : Ventura Research ource : Ventura Research DCB is smaller in comparison to its immediate peer CUB. We believe that DCB offers a better investment proposition over CUB. Since the restructuring of the business took place in FY11, DCBs operating metrics have seen a decisive improvement. Asset quality which was its bane has been brought under control. On all parameters vis a-vis business growth, operating metrics, return ratios etc DCB is better placed than CUB. Currently DCB is trading at a premium of 1.2X to that of CUB on the Adj P/BV basis. We believe that this premium will continue to prevail over the forecast period. The following set of comparative charts of DCB and CUB s operating metrics clearly elucidate why the premium valuation of DCB is expected to sustain over the forecast period Monday 24 th August, 215

43 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E d FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E DCB to continue to trade at premium to CUB DCB has a larger CASA base compared to CUB ` crores CASA , 3, 25, 2, 15, 1, 5, - ` crores CASA DCB Bank CASA (RHS) CUB CASA (RHS) Source: DCB Bank, Ventura Research Source: CUB, Ventura Research Loan book composition of both the banks is similar 12 of loans book DCB 12 of loans book CUB FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Consumer Corporate Banking Consumer* Source: DCB Bank, Ventura Research Source: CUB, Ventura Research DCB s loan book to grow at a quicker pace ` crores DCB Bank ` crores City Union Bank FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E -3 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Advances Advances Growth Advances Advances Growth Source: DCB Bank, CUB, Ventura Research Source: DCB Bank, CUB, Ventura Research Monday 24 th August, 215

44 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Earnings growth of DCB to outstrip that of CUB Rs Crore Rs Crore DCB Bank DCB yoy Growth () RHS -15 CUB CUB yoy Growth () RHS Source: DCB Bank, Ventura Research Source: CUB, Ventura Research Asset quality of both the banks is similar () GNPA () NNPA FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E DCB Bank CUB DCB Bank CUB Source: DCB Bank, CUB, Ventura Research NIMs at par Source: DCB Bank, CUB, Ventura Research DCB s efficiency has improver remarkably 4. () 9 () FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 3 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E DCB Bank CUB DCB Bank CUB Source: Source: DCB Bank, CUB, Ventura Research Source: Source: DCB Bank, CUB, Ventura Research Monday 24 th August, 215

45 as Return ratios to catch up with CUB () ROA () ROE FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E DCB Bank CUB -2 DCB Bank CUB Source: DCB Bank, CUB, Ventura Research Source: DCB Bank, CUB, Ventura Research Both the banks are adequately funded for future growth DCB Bank CUB FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 F Tier I Tier II Tier I Tier II Source: DCB Bank, Ventura Research Source: CUB, Ventura Research Monday 24 th August, 215

46 ii) Among the other 5 mid-sized banks we clearly believe that Lakshmi Vilas Bank presents a compelling case for emerging a winner given: Fastest loan growth (22 CAGR FY15-17) among peers leading to market share gains. The worst with respect to asset quality is behind us and the Bank is on track to improve its asset quality - GNPA (2.2, -55bps), NNPA (1.4,-45 bps) to levels comparable with that of peers by FY17. While during Q1FY16, while all its peers have seen worsening of asset quality, LVB stands apart with its significant improvement. The restructured book is also expected to moderate by FY17. Moderate improvement in asset quality 3.5 Gross NPA 2.5 Net NPA Federal KVB SIB LVB KBL DCB Federal KVB SIB LVB KBL DCB Q4FY15 Q1FY16 Q4FY15 Q1FY16 Source : Ventura Research Restructured Assets kept under check 3 ` crores Federal KVB SIB LVB KBL DCB Q4FY15 Q1FY16 Source : Ventura Research Monday 24 th August, 215

47 2-Yr EPS CAGR NIM expansion on the cards given its strong focus to improve CASA & thereby reduced cost of funds (-15bps) and slight expansion of lending yields (+7 bps) Steep improvement in return ratios RoA and RoE. Faster earnings growth and compelling valuations. Fastest estimated earnings growth and cheaper valuations augur well for LVB LVB KVB KarBank DCB SIB CUB 15. FedBank FY17E P/Adj. BV Source : Ventura Research We initiate coverage on Lakshmi Vilas Bank with a BUY and a target price of Rs. 11 over a period of 18 months. We have valued Lakshmi Vilas Bank based on our target Price to Adjusted Book Value of 1.15X on FY17E book value. Our target price implies an upside of ~48 from the CMP. At the CMP of Rs. 74, the bank is trading at.8x FY16 and.7x FY17 of its Adj. P/BV. Adj. P/BV valuation bands for LVB 15 ` Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP.3X.6X.9X 1.2X 1.5X Source : LVB, Ventura Research Monday 24 th August, 215

48 16-Apr-7 16-Sep-7 16-Feb-8 16-Jul-8 16-Dec-8 16-May-9 16-Oct-9 16-Mar-1 16-Aug-1 16-Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Apr-7 16-Sep-7 16-Feb-8 16-Jul-8 16-Dec-8 16-May-9 16-Oct-9 16-Mar-1 16-Aug-1 16-Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Apr-7 16-Sep-7 16-Feb-8 16-Jul-8 16-Dec-8 16-May-9 16-Oct-9 16-Mar-1 16-Aug-1 16-Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Apr-7 16-Sep-7 16-Feb-8 16-Jul-8 16-Dec-8 16-May-9 16-Oct-9 16-Mar-1 16-Aug-1 16-Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar-15 LVB vs. KVB LVB vs. KBL Yr Forward P/Adj. BV relative valuation Yr Forward P/Adj. BV relative valuation ource : Ventura Research LVB KVB Source : Ventura Research LVB KBL LVB vs. SIB LVB vs. FEDB Yr Forward P/Adj. BV relative valuation Yr Forward P/Adj. BV relative valuation LVB SIB LVB FedBank ource : Ventura Research ource : Ventura Research Monday 24 th August, 215

49 LVB has demonstrated strong growth in advances and expected to outperform peers 8 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank ` Crores Source : Ventura Research LVB s NIMs expected to be in line with peers over the forecast period 4. Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Significant reduction in LVB s Cost to Income ratio on the cards 8 7 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Monday 24 th August, 215

50 While LVB s elevated GNPAs are expected to come down sharply 7. Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research NNPA though expected to come off sharply will still remain elevated 4. Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research LVB expected CASA growth highest among peers 4 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Monday 24 th August, 215

51 RoE expected to improve considerably compared to peers 3 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Sharp improvement of RoA on the anvil 1.8 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Monday 24 th August, 215

52 Valuation brief of other mid-sized and small-sized banks Federal Bank: Federal Bank has been proactive in the launch of new product and service offerings in the digital space. While we are optimistic about these forays we remain concerned about its asset quality which is expected to worsen over the forecast period. Further the loan growth of 14.6 CAGR is expected to be in line with that of the industry, leading to an earnings growth of 11 over the period FY We believe that much of the appreciation is already factored into the price. At the current price of Rs. 61, the stock is trading at 1.2X of its FY17E Adj. P/BV. We initiate our coverage on Federal Bank with a target price of Rs. 73 (1.2X FY17 Adj. P/BV) and recommend a HOLD on the stock ` Federal Bank Adj. P/BV Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 Source : Ventura Research CMP.3X.6X.9X 1.2X 1.5X South Indian Bank: South Indian Bank has seen significant deterioration in asset quality in FY15. While the asset quality is not expected to worsen from current levels, it is expected to remain elevated over the forecast period. The Bank is expected to see a significant churn in the composition of its loan book (from low yielding assets to higher yielding ones) however loan growth is expected to be in line with that of the sector. In line with the churn of the loan book NIMs are expected to expand marginally (but are expected to be significantly lower than those seen in FY13.) We do not expect a significant re-rating of the stock given the fact its return ratios are also expected to remain flat and significantly off its highs of 2 (RoE) and 1.1 (RoA) established in FY12. We value the Bank at.9x Adj. P/BV at Rs. 24, implying a potential upside of 26 over a period of 18 months. We recommend a HOLD on the stock Monday 24 th August, 215

53 South Indian Bank Adj. P/BV 4 ` Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP.3X.6X.9X 1.2X 1.5X Source : Ventura Research Karnataka Bank: Despite its RoE being the highest among its peers, on most other operational parameters the Bank continues to lag behind its peers. Key monitorables for the Bank for a re-rating are an improvement in asset quality and uptick in NIMs. The credit book is expected to grow at a slightly better pace than the industry leading to an earnings growth of 25. At current valuations the stock is quoting at.7x FY17E Adj /PBV. We initiate coverage with a target price of 152 (.85X FY17 Adj P/BV) indicating a potential appreciation of 25 over the next 18 months. Karnataka Bank Adj. P/BV 35 ` Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP.4X.7X.9X 1.2X 1.4X Source : Ventura Research Monday 24 th August, 215

54 Karur Vysya Bank: We initiate coverage on Karur Vysya Bank with a target price of 583 (1.5X FY17 Adj P/BV) indicating a potential appreciation of 24 over the next 18 months. Key monitorables would be faster than expected loan growth which could result in upward revision of earnings numbers and hence price targets. We recommend an ACCUMULATE on the stock. Karur Vysya Bank Adj. P/BV 8 ` Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP.4X.8X 1.2X 1.6X 2X Source : Ventura Research Monday 24 th August, 215

55 COMPANIES Monday 24 th August, 215

56 HDFC Bank Ltd. BUY Target Price `1,327 CMP `1,19 FY17E P/Adj. BV 3.1x Index Details Sensex 25,742 Nifty 7,89 Industry Banking Scrip Details MktCap(`cr) 2,56,176 O/s Shares (Cr) Av Vol (Lacs) Week H/L 1127/792 Div Yield ().8 FVPS (`) 2 Shareholding Pattern Shareholder Promoters 21.6 DIIs 1.5 FIIs 32.5 Public 35.4 Total 1 Contrary to the street we are upbeat about HDFC Bank s growth prospects. The recent product forays using technology, in our opinion, should raise the competitive bar for the industry and help HDFC Bank consolidate its position as the top private sector bank. The recent move to deepen penetration in rural India is a long term positive and would further strengthen its liability franchise. Its best in class asset quality, exemplary consistent performance and stickiness of high margins makes it a must have portfolio stock. In our view, current valuations are justified given the consistency in performance for the bank across economic cycles and high return ratios. We initiate with a BUY for a target price of Rs. 1,327 implying an upside of ~3 over the CMP of Rs The target price is arrived at by assigning multiple of 4.1x on FY17E Adj. BV. Despite its size, strong growth still on the cards Despite having grown at a scorching pace since its inception to become India s largest private sector bank, the outlook for growth has not dimmed. We expect HDFC Bank to continue to outperform the sector (4-5 better than system growth) given that the country is grossly under banked, economic revival is on the cards and the malaise affecting the government owned banks is expected to lead to market share gains. We expect HDFC Bank s loan portfolio to grow at a CAGR of 23.9 to Rs. 5,61,392 crores by FY17. Credit growth momentum to continue over coming years 6 ` crores HDFC Bank vs. Sensex Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug-215 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E HDFC Bank S&P Bse Sensex Corporate Retail Source : HDFC Bank, Ventura Research Key Financials (` in Cr) Net Non P/E P/Adj BV Y/E Mar Interest Interest PAT EPS Adj. BV ROE () ROA () (x) (x) Income Income , , , , , E 26, , , E 32, , , Monday 24 th August, 215

57 Deposit growth to mirror advance growth ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Deposits Deposit Growth Source : HDFC Bank, Ventura Research Well placed to benefit from the impending economic upturn & growing consumerism The credit portfolio is well balanced with near equal exposure to retail and wholesale segments (53:47) with no skewing to any particular sector of the economy. This has ensured stability in the loan book growth across business cycles. Further the rapid scale up of its rural footprint has also ensured that the Bank has a well balanced presence across the urban & rural diaspora. These key strategic decisions clearly ensure that HDFC Bank is well placed to benefit from the upturn in the economy and growing consumerism. Granular Retail loan portfolio Others Two Wheelers Gold Loans CV/CE Kisan Gold Credit Cards Business Banking NRI Home Loans Personal Loan Auto Loans Source : HDFC Bank, Ventura Research Monday 24 th August, 215

58 Successful track record of leadership initiatives inspires confidence in new forays The Bank has been an early entrant across business opportunities and this initiative has ensured that it continues to enjoy a leadership position. Today it is one of the largest settlements bank for capital and commodity markets, the preferred banking partner for e commerce and stands at number two in tax collections for the GOI. Technology led initiatives to help consolidate market position and foster market share gains The Banks digital platform and technological advancements has helped bolster customer acquisition. This leverage in technology has led customer initiated transactions through internet and mobile to increase from 13 in FY5 to 63 in FY15. We expect significant traction as more customers migrate to mobile banking. Currently the fledgling m-commerce industry of Rs 13, crores is significantly smaller than the Rs. 11, crores internet commerce. Global trends indicate that the increasing penetration of smart phones, convenience of mobile transacting and mobile only websites coupled with the governments Digital India initiative and 4G is expected to lead to m-commerce eventually taking over from internet commerce. Innovative digital product initiatives and thrust on data analytics to further raise the bar and consolidate its formidable leadership position It has up fronted investments in technology and its pioneering product initiatives like 4W / 2W auto loans in 3 / 15 minutes respectively and design your own loan against share products will raise the bar in terms of service delivery and customer turnaround times. It is also strengthening its in-house CRM and analytics team. These technological initiatives are expected to help the HDFC Bank achieve its priorities which include customer acquisition, product distribution and increasing customer penetration through cross-selling, besides enhancing credit efficiencies. All pervasive technology to improve operation efficiencies significantly. As the scale and size of its digital platform enhances, operating efficiencies are expected to kick in. It is pertinent to know that staffing costs have risen by only Monday 24 th August, 215

59 15.7 over the last 5 years while total income has grown at a much faster The cost effective digital initiative coupled with the improving profitability of its recently opened branches and reduced turnaround times of low cost rural branches should help in lowering the cost to income by 6 bps to 39 by FY17. Early rural initiative augurs well for HDFC Bank HDFC Bank has rapidly scaled up its geographical footprint nearly doubling its number of branches over the last three years. The thrust has been on opening semi urban and rural branches with these now accounting for 55 of its network. Aggressive and diversified branch expansion FY11 FY12 FY13 FY14 FY15 Metro Urban Semi-Urban Rural Source : HDFC Bank, Ventura Research The wide spread of its pan India footprint of low cost branches (with less than 5 personnel) have seen a considerable drop in turnaround time and are generating good business. These branches have helped improve deposit mobilizations through savings and large retail deposits besides helping the Bank achieve its priority sector lending (PSL) objectives. We expect deposits to grow at a CAGR of 24.5 with CASA share improving to 43 (CASA CAGR of 24.5 to Rs. 299,625 crores fueled by SA CAGR of 26.7 to Rs. 192,15 crore) Monday 24 th August, 215

60 Stable share of retail in Deposit mix FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E CASA TD Source : HDFC Bank, Ventura Research With an improving savings mix in CASA and large retail deposits, the already low cost of funds is expected to remain around these levels. Further, the Bank has focused on increasing working capital finance and trade services, which are high yielding compared to term loans. The low cost of funds and focus on high yielding assets has ensured higher margins than peers. Across business cycles margins have remained extremely stable (range of ) due to its strict policy of not compromising on margins and asset quality. Going forward we expect margins to remain sticky around these levels. Best in class asset quality Even in the current challenging times, the asset quality of HDFC Bank has remained healthy. Its GNPA has improved from 1.4 in FY1 to.9 in FY15. Its NNPA stood at.2 in FY15 which is lower than the 1 year average. We expect asset quality to remain benign as the Bank has an uncompromising stance towards asset quality vis-a-vis growth. We have modeled marginally higher GNPAs (+1 bps to 1) and NNPAs (+5 bps to.4) Monday 24 th August, 215

61 Asset quality to remain best amongst the industry FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E PCR (RHS) GNPA NNPA Source HDFC Bank, Ventura Research Operational performance to remain robust We expect HDFC s interest income to grow at a CAGR of 23.7 to Rs. 74,223 crores, which is slightly lower than its 5-year average of However, this is despite the higher base of HDFC. Further, with a majority of HDFC s fee income (85-9) coming from the retail segment, we expect an uptick in the fee income growth on the back of revival of the retail segment, and have projected a growth of 19.6 in fees income to Rs. 1,61 crores by FY17E. Moreover, as the benefits of the initiatives taken on the technological front unfurls, the Cost to Income ratio is expected to squeeze by 26 bps to 42 by FY17E. All these positives will translate to profitability growth of ~24 CAGR to Rs. 15,586 crores by FY17E and will drive the return ratios of the Bank going ahead. NII growth to sustain NIMs to stay at historical level 35 ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII NII rate (RHS) FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E CoF YoA NIM (RHS) Source HDFC Bank, Ventura Research Source : HDFC Bank, Ventura Research Monday 24 th August, 215

62 Lower cost to drive profitability Consistently strong return ratios FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Cost to Income RoE RoA (RHS) Source : HDFC Bank, Ventura Research Source :HDFC Bank, Ventura Research Adequately funded for future growth HDFC s CAR as of FY15 stood at 16.8 (of which 13.7 is Tier I), which was well above regulatory requirements of 9. In FY15, the bank issued equity shares worth Rs. 9,722 crores to ensure adequate capital to support its growth and expansion. Comfortable Capital Adequacy FY1 FY11 FY12 FY13 FY14 FY15 Tier-1 Tier-2 ource : HDFC Bank, Ventura Research Why HDFC bank remains our top pick: We remain strongly positive on the fortunes of HDFC Bank in deference to street estimates. We are confident that robust growth is on the cards given that: Monday 24 th August, 215

63 It is well placed to benefit from the impending economic upturn & growing consumerism. We forecast the loan book growth of 23.9 CAGR over the forecast period FY15-17 leading to an earnings growth of 23.5 CAGR. The bank has a successful track record of leadership initiatives, which inspires confidence in the successful rollout of its new foray. Its recent technology led initiatives are expected to help further consolidate its market position and foster market share gains,. Further the deeper embedding of technology across all operations is expected to improve its operational efficiencies significantly. Early initiatives in rural banking are expected to favor the Bank immensely. HDFC Bank has adequately demonstrated beyond doubt of maintaining best in class asset quality. HDFC Bank s premium valuation to sustain Barring for the economic meltdown of FY28-29, HDFC Bank has consistently traded in a tight band of 3.2X - 4.6X of its 1-Yr Forward Adj P/BV (with its mean since 22 of 3.9X Adj P/BV) With the Bank taking the lead in the introduction of technology based product offerings, its exemplary asset quality, market penetration opportunity and resurgent expectations of the economy, we believe that HDFC Bank will continue to demand premium valuations. We initiate coverage on HDFC bank with a BUY for a target price of Rs. 1,327 implying an upside of ~3 over the CMP of Rs The target price is arrived at by assigning a multiple of 4.1x on FY17E Adj. BV. 1,4 1,2 1, ` HDFC Bank 1-Yr Fwd P/Adj. BV bands Average P/Adj. BV- 4.x Overall average P/Adj. BV- 4.x Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP 1X 2X 3X 4X 5X Source : HDFC Bank, Ventura Research Bull Phase average P/Adj. BV- 4.2x Monday 24 th August, 215

64 Financials & Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 35, , , , ,223.2 Efficiency Ratio () Interest Expense 19, , , , ,916.7 Int Expended / Int Earned Net Interest Income 15, , , , ,36.5 Int Income / Total Funds YoY change () NII / Total Income Non Interest Income 6, , , , ,779.6 Other Inc. / Total Income Total Net Income 22, , , , ,86.1 Ope. Exp. / Total Income Total Operating Expenses 11, , , , ,356.2 Net Profit / Total Funds Pre Provision profit 11, , , , ,729.9 Credit / Deposit YoY change () Investment / Deposit Provisions for expenses 1, , ,75.8 2, ,256.1 NIM Profit Before Tax 9, , , , ,473.9 YoY change () Solvency Taxes 3,24.9 4, , , ,887.2 Gross NPA (Rs. Cr) 2, , , , ,613.9 Net profit 6, , , , ,586.7 Net NPA (Rs. Cr) , ,227.8 YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI 14, , , , ,357.6 Tier I Capital () Inter bank borrrowing 12, ,238. 8, ,85.1 2,958.6 Tier II Capital () Investments 111, , ,46 186, ,147.9 Loan and Advances 239, ,.3 365, , ,391.7 Per Share Data (`) Other Assets 21, , , , ,898. EPS Total Assets 4, , , , ,753.7 Dividend Per Share Deposits 296, , , , ,62.8 Book Value Demand 52, , , , ,475.1 Adjusted Book Value of Share Savings 88, , , , ,15.5 Term 155, , , , ,995.2 Valuation Ratio Borrowings 33,6.6 39, , , ,875.9 Price/Earnings (x) Other Liability 34, , , , ,93.5 Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves 35, , ,58.1 7, ,852.4 Total Liabilities 4, , , , ,753.7 Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) ,12.9 1, ,616.2 Advances Monday 24 th August, 215

65 Axis Bank Ltd. BUY Target Price `813 CMP `482 FY17E Adj. P/BV 2.x Index Details Sensex 25,742 Nifty 7,89 Industry Scrip Details Bank Mkt Cap(` cr) 1,14,561 BVPS (`) 197 O/s Shares (cr) Av Vol (Lacs) Week H/L 655/369 Div Yield ().8 FVPS (`) 2 Shareholding Pattern Shareholder Promoters 29.2 DIIs 13.4 FIIs 44.5 Public 12.9 Total Aug-214 Axis Bank vs. Sensex 1-Sep Oct Nov Dec Jan-215 Axis Bank Ltd. 1-Feb Mar Apr May Jun Jul-215 S&P Bse Sensex 1-Aug Granular build up of the retail portfolio, increasing focus on higher rated corporate loans, continued thrust on CASA and stable asset quality augur well for Axis Bank (Axis). Further, the aggressive branch roll out with the branches functioning more as advisory based centers over transaction networks should help drive business growth momentum. Given these superlative metrics, we believe that a valuation re-rating is on the cards. We recommend a Buy on the stock at its CMP of Rs. 482 (current FY17 P/Adj. BV of 2.1x) with a price objective of Rs 813 (target P/BV 3.3x) implying an upside of 69 over the next 18 months. Inclusion in the MSCI should be an added positive. Retail to propel credit growth Over the forecast period, we expect Axis Bank to maintain the growth momentum of its credit book. The loan book is expected to grow at a CAGR of 19.7 to Rs. 42,461 crores driven by its thrust on SME and retail lending ( CAGR of 22.2 to Rs. 231,23 crores over the same period). The Retail segment is expected to be propelled by SME lending and mortgage loans. Further the bank is not averse to taking calibrated risks as it intends to grow its unsecured lending (expected share of unsecured lending to go up to of total credit) by mining its existing +2 mns clientele. Extensive usage of data analytics is expected to keep risks under check Advances growth expected to remain above 2 ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Retail FY1 Growth rate (RHS) Key Financials (` in Cr) Net Y/E Mar Interest Income Non Interest Income PAT Source :Axis Bank, Ventura Research EPS (`) Adj.BV (`) P/E (x) P/Adj. BV (x) , ,45.2 6, , ,365. 7, E 16, , , E 2,28. 1,291. 1, Monday 24 th August, 215 ROA () ROE ()

66 .. Diversified retail lending book Housing Loans Auto Loans 8 Personal Loans LAP 12 Credit cards 63 Others Deposit growth to complement growth in advances 5 ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Deposits Deposit Growth Source :Axis Bank, Ventura Research Source :Axis Bank, Ventura Research NIMs to improve marginally The robust growth of the retail lending business is expected to improve its share visà-vis the corporate book to 57:43 from the present 55:45. Given the fact that there is general caution against a build-up of corporate NPAs, preference towards a higher rated corporate portfolio implies a slowdown in the corporate loan growth (CAGR of 16.5 to Rs. 171,257 crores by FY17) and elevating margin pressures. However the larger spreads of the faster growing retail book should help improve overall NIMs (calculated) to 3.6 by FY17E. Lower CoF to keep NIM intact Granular Deposit mix FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yield on Advances Cost of Funds NIM CASA TD Source :Axis Bank, Ventura Research Source :Axis Bank, Ventura Research Monday 24 th August, 215

67 Thrust on expanding rural footprint To promote retail growth the Bank has an aggressive branch expansion plan of adding another 1 branches by FY17 to its existing network of 2589 branches. A psyche change of treating branches more as advisory centers than simply transaction banking networks and the focus towards sourcing one retail product per branch (as a main product based on specific criteria) is expected to drive business growth. Over all deposit mobilization is expected to grow at a CAGR of 2.5 to Rs 467,977 crores. Thrust on increasing long term growing CASA (CAGR of 2.8 to Rs. 21,59 crores) is expected to contain the cost of funds. Adequately funded on the capital front On the capital front Axis is adequately funded to grow over the next 2-3 years. The internal threshold Tier 1 CAR of 9.5 is expected to trigger another round of fund raising, which in our opinion would be more back ended towards Q3FY17 (only if necessary). Adequately funded on the capital front FY1 FY11 FY12 FY13 FY14 FY15 Tier I Tier II Source : Axis Bank, Ventura Research Asset quality to be maintained The improving macro economic situation is expected to lower stressed asset formation in the system. While we have factored in marginal deterioration of asset quality (FY17 GNPA 1.52 (+15bps) / NNPA.55 (+1 bps), we are not particularly perturbed and believe that asset quality should be comfortable. The focus on higher rated corporate borrowers and granular structure of its retail book is expected to maintain asset quality over the next couple of years. On the provisioning front, Axis Bank has been very prudent and has a provisioning coverage ratio (PCR) of 78. The restructured asset book of Axis Bank stood at Rs. 8,17 crores (2.7 of gross advance), going ahead no significant restructuring is in the pipeline Monday 24 th August, 215

68 Asset Quality to remain stable FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E PCR (RHS) GNPA NNPA Source :Axis Bank, Ventura Research Operationally we expect NII to grow at a CAGR of 18.3 to Rs. 2,31 crores by FY17. Fee income is expected to grow at a CAGR of 12.2 to Rs 8,542 crores aided by retail fees which comprise 38 of overall fee income. Cost to income is expected to be maintained at 4.2 by FY17E, this is despite aggressive branch expansion plans. Earnings are expected to grow at a CAGR of 17.5 to Rs. 1,295 crores by FY17. Higher profitability will lead to greater return ratios. We expect RoE and RoA to be at 18.3 and 1.8 respectively, from the current 17.8 and 1.7. Superior return ratios NII growth to moderate to sustainable level of ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E RoE RoA (RHS) NII NiI growth Source :Axis Bank, Ventura Research Source :Axis Bank, Ventura Research Monday 24 th August, 215

69 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY16E FY17E Operational efficiency to improve further Re-rating on the cards Cost to Income Source :Axis Bank, Ventura Research Granular build up of the retail portfolio, increasing focus on higher rated corporate loans, continued thrust on CASA and stable asset quality augur well for Axis Bank (Axis). Further the aggressive branch roll out with the branches functioning more as advisory based centers over transaction networks should help drive business growth momentum. Given these superlative metrics, we believe that a valuation re-rating is on the cards. We recommend a Buy on the stock at its CMP of Rs. 482 (current FY17 P/Adj. BV of 2.x) with a price objective of Rs 813 (target P/BV 3.3x) implying an upside of 69 over the next 18 months. Inclusion in the MSCI should be an added positive. P/Adj. BV 8 ` Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP 1X 1.75X 2.5X 3.25X 4X Source :Axis Bank, Ventura Research Monday 24 th August, 215

70 16-Apr-4 16-Oct-4 16-Apr-5 16-Oct-5 16-Apr-6 16-Oct-6 16-Apr-7 16-Oct-7 16-Apr-8 16-Oct-8 16-Apr-9 16-Oct-9 16-Apr-1 16-Oct-1 16-Apr Oct Apr Oct Apr Oct Apr Oct Apr-15 Axis Bank relative valuation to HDFC Bank at cyclical lows Currently Axis Banks trades at a discount of.5x to that of HDFC Bank on the Adj P/BV basis. Undoubtedly HDFC Bank given its best in class performance metrics deserves the rich valuations it commands. However we believe that the significant valuation discount of Axis Bank is unjustified given that its performance on most parameters are near or equal to that of HDFC Bank s. Further scope for re-rating of the valuations Yr Forward Adj. P/BV relative valuation Bull phase average-.7x Bear phase average-.5x Entire period average-.6x Axis Bank HDFC Source : Ventura Research Historically during the previous bull run, the multiple averaged around.7x and during the fag end of the boom in 28 it peaked at.9x HDFC s 1 yr forward Adj P/BV. It was only when the economic slowdown and stress build up in the system got accentuated that the discount widened and Axis Bank consistently traded well below its long term average discount (.5x). In October 213 the gap widened to its maximum of.4x. Since then with the onset of the new government and sentiment stabilizing, this discount has started narrowing. In a fast growing economy BFS stocks tend to post strong growth and with India on the brink of a turnaround, BFS stocks are expected to be at the fulcrum of the India growth story. We expect the discount to narrow substantially as the growth cycle returns. Since the previous bull run there is substantial improvement in the metrics of Axis Bank not only in comparison to its own performance (of the previous bull run) but vis-avis HDFC Bank. Possible inclusion in the MSCI could trigger a further narrowing of this valuation disparity. This should fuel demand for the Axis Bank paper. We target an average discount to HDFC Bank of ~.8X implying a price target of Rs 813. The following set of comparative charts of Axis Banks and HDFC Bank operation metrics elucidates the compelling re-rating of the valuation of Axis Bank Monday 24 th August, 215

71 d Axis Bank s valuation to catch up with HDFC Axis Bank has superior CASA ratio ` crores HDFC Bank ` crores Axis Bank E 217E E 217E 38. Deposits CASA Deposits CASA Source: HDFC Bank, Ventura Research Source: Axis Bank, Ventura Research Higher share of the granular lending business augurs well with Axis 12 HDFC Bank 12 Axis Bank E 217E E 217E Corporate Consumer Corporate Consumer Source: HDFC Bank, Ventura Research Source: Axis Bank, Ventura Research HDFC will continue to outperform Axis Bank in terms of credit book 6 ` crores HDFC Bank 5 ` crores Axis Bank E 217E Source: HDFC Bank, Ventura Research E 217E Source: Axis Bank, Ventura Research Monday 24 th August, 215

72 Axis Bank s NII lags HDFC Bank 35 ` crores HDFC Bank 3 25 ` crores Axis Bank E 217E E 217E NII Growth NII Growth Source: HDFC Bank, Ventura Research Source: Axis Bank, Ventura Research HDFC s asset quality better than Axis GNPA.6.5 NNPA E 217E E 217E HDFC AXIS HDFC AXIS Source: HDFC Bank, Axis Bank Ventura Research Scope of NIM to expand for Axis NIM E 217E HDFC AXIS Source: HDFC Bank, Axis Bank Ventura Research Source: HDFC Bank, Axis Bank Ventura Research Axis Bank has fairly lower Cost to Income 6 Cost to Income E 217E HDFC AXIS Source: HDFC Bank, Axis Bank Ventura Research Monday 24 th August, 215

73 as Axis Bank s return ratios closely track HDFC 25. ROE 2.5 ROA E 217E E 217E HDFC AXIS HDFC AXIS Source: HDFC Bank, Axis Bank Ventura Research Source: HDFC Bank, Axis Bank Ventura Research CAR on par 18 HDFC Bank 18 Axis Bank Tier-1 Tier-2 Tier-1 Tier-2 Source: HDFC Bank, Ventura Research Source: Axis Bank Ventura Research Monday 24 th August, 215

74 Financials and Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 27, , , , ,554.1 Efficiency Ratio () Interest Expense 17, , , , ,526.2 Int Expended / Int Earned Net Interest Income 9, , , , ,28. Int Income / Total Funds YoY change () NII / Total Income Non Interest Income 6, ,45.2 8,365. 9, ,291. Other Inc. / Total Income Total Net Income 16, , , , ,319. Ope. Exp. / Total Income Total Operating Expenses 6, ,9.8 9,23.7 1, ,184.1 Net Profit / Total Funds Pre Provision profit 9, , , , ,134.9 Credit / Deposit YoY change () Investment / Deposit Provisions for expenses 1,75.1 2,17. 2, , ,772. NIM Profit Before Tax 7, , , , ,363. YoY change () Solvency Taxes 2, , ,699. 4,38.7 5,69.8 Gross NPA (Rs. Cr) 2, , ,11.4 4, ,617.8 Net profit 5, , , ,748. 1,293.2 Net NPA (Rs. Cr) ,24.6 1, , ,417.8 YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI 14, , , ,85. 26,872.1 Tier I Capital () Inter bank borrrowing 5, , , , ,811.3 Tier II Capital () Investments 113, , , , ,438.8 Loan and Advances 196, , , , ,46.2 Per Share Data (`) Other Assets 9, , , , ,75.9 EPS Total Assets 34, , , , ,288.2 Dividend Per Share Deposits 252, , , , ,977. Book Value Demand 48, , ,18. 66, ,918.2 Adjusted Book Value of Share Savings 63, , , , ,671.5 Term 14, , , , ,387.3 Valuation Ratio Borrowings 43, , , , ,52.2 Price/Earnings (x) Other Liability 1, , , ,27.7 2,93. Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves 32, , , , ,326.5 Total Liabilities 34, , , , ,372.8 Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) ,5.5 1,232.3 Advances Monday 24 th August, 215

75 ICICI Bank Ltd. ACCUMULATE Target Price `349 CMP `27 FY17E P/Adj. BV 1.6x Index Details Sensex 25,472 Nifty 7,89 Industry Bank Scrip Details MktCap(`cr) 1,56,748 O/s Shares (Cr) 58.5 Av Vol (Lacs) Week H/L 393/28 Div Yield () 1.6 FVPS (`) 2 ICICI Bank (ICICI), one of India s largest private sector banks, has witnessed a marked improvement in performance ever since it embarked on its 5C strategy -- concentrated focus on improving Credit Growth, Credit Quality, CASA, Customer Centricity, and Cost Efficiency. Over the years, the Bank has made substantial progress on all the parameters. While the bank s asset quality has improved, it continues to remain below industry standards owing to exposure to cash strapped sectors like infrastructure and power. We initiate coverage on ICICI Bank with a BUY recommendation and a target price of 349. We have valued ICICI Bank based on the sum-of-parts method; the core banking business is valued at 273 (1.9x FY17E Adj. P/BV) and 76 being value assigned to its other businesses. We have arrived at the adjusted book value of standalone book by deducting investment in subsidiaries. Our SOTP target price implies an upside of 28 from the CMP. At the CMP of 27, it is trading at 2.1x FY15, 1.9x FY16 and 1.6x FY17 of its Adj. P/BV Shareholding Pattern Shareholder Promoters - DIIs 22.3 FIIs 4.2 Public 37.4 Total Aug Sep-214 ICICI Bank vs. Sensex 1-Oct Nov Dec Jan-215 ICICI Bank 1-Feb Mar Apr May Jun-215 S&P Bse Sensex 1-Jul Aug Credit Growth : Thrust on Retail & SME Banking to spur the growth Over the past decade, ICICI s advances have grown at a steady pace except for FY9 and FY1, which were challenging years for the bank as well as the macro economy following the fallout of the financial crises globally. During these years, the bank s loan book de-grew at 3 and 17 respectively. Overall, advances have grown at a five year CAGR of 16 to Rs 3,87,522 crore in FY15 led by growth in the corporate lending book, the proportion of which has increased from 21 in FY1 to 29 in FY15. Retail & SME lending to drive future growth The management has indicated that it will focus on high yielding retail (43 of FY15 advances) and SME advances (4 of SME advances) for future growth. The Bank intends to leverage its technological expertise to provide a superior customer experience which is expected to drive growth in the retail segment. Further, given the weak global economy and sluggish corporate demand, the growth in corporate and overseas (24 of FY15 advances) advances is expected to lag retail loan book growth. Also, faster retail loan book growth will add diversity to the advances portfolio. Key Financials (` in Cr) Net Non P/E Y/E Mar Interest Interest APAT EPS Adj. BV ROE () ROA () (x) Income Income , , , Monday 24 th August, 215 P/Adj BV (x) , , , E 21, , , E 27, , ,

76 Granular retail loan break up Home Loans Vehicle Loans Business Banking Personal Loans Credit Cards Others Source :ICICI Bank, Ventura Research Overall, we expect advances to grow at a 2-year CAGR of 19 to Rs 5,48,731 crore by FY17 led by 23.5 CAGR in retail advances to Rs 2,51,163 crores (~46), 18 CAGR in overseas business to Rs 1,3,564 crore in FY17(~24) and 12 CAGR each in corporate ( 26) and SME loan book(4). Within retail advances, we expect Business Banking (26 CAGR), Credit Cards (23.5 CAGR) and Home loans (21 CAGR) segments to drive growth. Focus on retail to drive the credit growth 6 ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Retail Corporate Source :ICICI Bank, Ventura Research Low-cost retail deposits franchise to drive deposits growth ICICI s deposit base has grown at a 5-year CAGR of 12.3 to Rs 3,61,583 crore in FY15 led by 17 growth in SA to Rs 1,14,86 crore, 11.3 growth in term deposits to Rs 21,499 crore in FY15 and 7.8 growth in CA to Rs 45,195 crore. The bank has improved its CASA ratio from 29 in FY9 to 44 by FY15 driven Monday 24 th August, 215

77 by healthy growth in SA deposits. Strong traction in the savings account was fueled by the robust branch expansion, continuous technological advances and a customer differentiated approach. We expect the management to maintain the CASA levels at ~44. Overall, we expect the deposit base to grow at a 2-year CAGR of 2.2 to Rs 5,22,61 crore by FY17, led by 22.6 CAGR in SA deposits to Rs 1,72,59 crore and 24.7 CAGR in term deposits to Rs 3,13,44 crore by FY17. CASA ratio to remain stable over the forecast period Robust Deposit growth on the cards 12 () 6 ` crores () FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E -1 CASA TD Deposits Growth Rate Source : ICICI Bank, Ventura Research Source : ICICI Bank, Ventura Research Customer Centricity: Leveraging technology to cater its customer base ICICI Bank is one of the pioneers in adopting cutting-edge technology to provide convenience banking. The Bank continues to innovate and offer a range of new products and services with special focus on rural and inclusive banking. The strategy is to rapidly expand in the rural markets, leverage its strength in technology and deliver relevant products and services to the rural and unbanked population through a multi-channel network. Branch Banking: Shift in focus from service provider to revenue centre The shift in the working ideology of branches (service provider to revenue centre) and continuous leverage of technology forms the thrust of ICICI s strategy in providing superior customer experience. It has also launched mobile branch services to achieve deeper penetration of services in rural locations. Apart from digital branches, its physical network of branches is strong and well diversified -- as of FY15 it had 45 branches (steady 3 year CAGR of 14) with 25 located in metro cities, 23 in urban areas, 3.1 in semi-urban areas, and 21.9 in rural areas. The bank is planning to expand its branch network from 4,5 to ~4,9 by FY17E which will further strengthen its retail presence Monday 24 th August, 215

78 Focus on expanding rural presence Branches composition 2,752 3,1 3,753 4, FY12 FY13 FY14 FY15 Metro Urban Semi Urban Rural Source :ICICI Bank, Ventura Research Asset quality continues to remain sticky ICICI s woes on asset quality started from FY8 and peaked with a GNPA of 5.2 in FY1 (~73 of its GNPA was from unsecured retail portfolio). Subsequently, ICICI has commendably lowered the NPAs to 3. & 1.2 on gross and net levels respectively. A three pronged approach has helped the bank arrest its deteriorating asset quality; i) Collateral based lending, preferably to high rated clients ii) Focus on building a granular asset base, and iii) Sustained monitoring and proactive action whenever necessary. It has also decreased its exposure to unsecured personal loans and credit cards and increased exposure to secured corporate lending. Despite these measures, the environment continues to be fraught with risks for ICICI bank due to its exposure to Power (6.2 of FY15 advances), Infra (6.1) and Iron & Steel (5.6). The bank s current restructuring pipeline stood at Rs 15 bn as of FY15. The management has indicated that aggregate additions to restructured loans and NPAs will be lower in FY16, than in FY15. Going forward, we anticipate GNPAs to marginally increase from 3.1 in FY15 to 3.44 by FY17 and net NPAs to increase from 1.2 to 1.5 in FY17. The Provision Coverage Ratio which stood at ~6 in FY15; is expected to remain steady in the range of Asset quality sustenance is a key monitorable which investors must closely watch out for Monday 24 th August, 215

79 Asset Quality remains the key moniterable FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E PCR (RHS) GNPA NNPA Source :ICICI Bank, Ventura Research Adequate Capital Reserves to sustain the 5C strategy ICICI Bank s CAR (Basel III) stood at 17.2, with Tier I capital of We believe ICICI Bank is adequately capitalized to undertake the envisaged growth plans under its 5C strategy. Cost Optimization: Cost to income ratio to marginally decrease over the period Cost consciousnesses, slower pace of physical branch expansion, digital initiatives and optimizing employee strength have enabled the bank bring down its cost to income ratio from 42.2 in FY11 to in FY15. We believe the bank has achieved a sustainable cost-to-income ratio and expect it remain at around same levels going forward. Capital Adequacy Ratio C/I ratio to sustain at same levels FY1 FY11 FY12 FY13 FY14 FY FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Tier I Tier II Cost to Income Source : ICICI Bank, Ventura Research Source : ICICI Bank, Ventura Research Monday 24 th August, 215

80 Operationally we expect NII to grow at a CAGR of 19 to Rs. 27,16 crore by FY17, similar to the growth rate witnessed in the past five years. Cost to income is expected to remain stable at 37. We expect NIMs to increase gradually as the asset base shifts towards higher yielding retail loans- expect NIMs to expand 1 bps to 3.6 by FY17. Earnings are expected to grow at a CAGR of 22 to Rs. 16,663 crores by FY17E. We expect RoE to expand 32 bps to 17.7 in FY17 and RoA to expand 2 bps to 2. in FY17 from FY15 levels, fairly tracking the levels of Axis & HDFC Bank. Uptick expected in NII growth Lower cost of funds to aid NIM expansion 3 ` crores FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII NII growth Yields on Advances Cost of Funds NIM Source : ICICI Bank, Ventura Research Source : ICICI Bank, Ventura Research Higher profitability to sustain return ratios FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E RoE RoA Source :ICICI Bank, Ventura Research Monday 24 th August, 215

81 Valuation: ICICI Bank- Late cycle play As known to all asset quality has been the biggest concern with respect to BFS stocks and the market has been ruthless in downgrading stocks with poor asset quality. ICICI Bank has been no exception. Despite most of ICICI Bank s operating matrices being on par with its peers -- Axis & HDFC Bank, the poor asset quality continues to be of concern which is holding back re-rating of the stock. The asset quality & restructured book remain sticky and continue to be key monitorables. Asset Quality remains the key moniterable Restructured assets have risen considerably FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E ` Crores. Q1FY16 restructured loan book is Rs.1,962 crore Currently no pipeline for further restructuring. Restructuring lumpiness significantly down; maximum exposure of a single account to PCR (RHS) GNPA NNPA Restructured Assets Source :ICICI Bank, Ventura Research Source :ICICI Bank, Ventura Research Asset quality is likely to show material improvement as and when the economy gathers pace, which is expected to happen only post FY17. Having said this, the value unlocking via listing of its businesses can provide a re-rating opportunity over the medium term. However there is scope for significant appreciation given the value unlocking which is expected to play out from the listing of its profitable financial subsidiaries. We initiate coverage on ICICI Bank with a BUY recommendation and a target price of Rs We have valued ICICI Bank based on the sum-of-parts method; the core banking business is valued at Rs. 273 (1.9x FY17E Adj. P/BV) and 76 is the value assigned to its other businesses. We have arrived at the adjusted book value of standalone book by deducting investment in subsidiaries. Our SOTP target price implies an upside of 28 from the CMP. At the CMP of Rs. 27, it is trading at 2.1x FY15, 1.9x FY16E and 1.6x FY17E of its Adj. P/BV Monday 24 th August, 215

82 SOTP valuation of ICICI Bank Sum of the parts valuation Total Valus (` crores) ICICI Bank's stake Value attributable to ICICI Bank (` crores) `/share Valuation Methodology ICICI Prudential Life insurance Company (74 stake) Life insurance business is valued at 14x FY17 New Business Achieved Profit (NBAP) ICICI Lombard General Insurance (74 stake) Valued at 12x Normalized Earnings for FY15 ICICI Asset management (51 stake) of FY15 AUM ICICI Securities including PD x FY15 Earnings ICICI Venture Fund of FY15 AUM ICICI Home Finance x FY15 BV ICICI Bank UK x FY14 BV ICICI Bank Canada x FY14 BV Total Value of Subsdiaries 76 Value of the bank 273 2x FY17E adjusted book (adjusted for investment in subs and net NPLs) Target value for ICICI Bank 349 Source :ICICI Bank, Ventura Research The following set of comparative charts of ICICI Bank, Axis Bank and HDFC Bank operation metrics clearly elucidates that asset quality improvement is the key to rerating of the stock. Barring asset quality, ICICI Bank is comparable on all other operation metrics Monday 24 th August, 215

83 6 ` Crores Despite size, all three players expect strong credit growth Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research ICICI Bank Net Interest Margin comparable to Axis Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research ICICI Bank Cost to Income ratio lower than that of its peers 6 Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research Monday 24 th August, 215

84 6 5 ICICI Bank CASA deposits in line with peers Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research ICICI s asset quality remains a concern area Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research ICICI s Net NPLs are expected to remain sticky over the forecast period 25. Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research Monday 24 th August, 215

85 25. ICICI s Return on Equity expected to pick up Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research 2.5 Return on Assets comparable to peers Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : Ventura Research Capital adequacy is comfortable 25 2 Axis Bank ICICI Bank HDFC Bank FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Tier I Tier II Source : Ventura Research Monday 24 th August, 215

86 Financials and Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 4, , , , ,883.4 Efficiency Ratio () Interest Expense 26, ,72.6 3, , ,867.8 Int Expended / Int Earned Net Interest Income 13, , , , ,15.7 Int Income / Total Funds YoY change () NII / Total Income Non Interest Income 8,346. 1, , , ,738.3 Other Inc. / Total Income Total Net Income 22, , , ,1. 43,754. Ope. Exp. / Total Income Total Operating Expenses 9,12.9 1, , , ,29.1 Net Profit / Total Funds Pre Provision profit 13, , , , ,544.9 Credit / Deposit YoY change () Investment / Deposit Provisions for expenses 1,82.2 2, ,899. 3, ,561.9 NIM Profit Before Tax 11, , , , ,983. YoY change () Solvency Taxes 3,71.2 4, , , ,32.3 Gross NPA (Rs. Cr) 9,67.8 1, , , ,875.4 Net profit 8, , , , ,662.7 Net NPA (Rs. Cr) 2,23.6 3,298. 4,46.5 7, ,397.4 YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI 19, , , , ,54.3 Tier I Capital () Inter bank borrrowing 22, , , , ,33.3 Tier II Capital () Investments 171, , ,58 229, ,549.6 Loan and Advances 29, , , , ,731.2 Per Share Data (`) Other Assets 33, , , , ,986.1 EPS Total Assets 536, , , , ,84.5 Dividend Per Share Deposits 292, , , , ,61.1 Book Value Demand 36, , , , ,486.1 Adjusted Book Value of Share Savings 85, , ,86 143, ,59.3 Term 17, , , , ,43.9 Valuation Ratio Borrowings 2, , ,69.9 5, ,137.7 Price/Earnings (x) Other Liability 175, , , , ,122.5 Price/Book Value (x) Equity 1, ,155. 1,167. 1,155. 1,155. Price/Adj.Book Value (x) Reserves 65, , , , ,788. Total Liabilities 536, , , , ,84.3 Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit ,883.3 Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Monday 24 th August, 215

87 Kotak Mahindra Bank Ltd. HOLD Target Price `69 CMP `648 FY17E P/Adj. BV 4.8x Index Details Sensex 25,742 Nifty 7,89 Industry Bank Scrip Details MktCap(`cr) 1,18,323 O/s Shares (Cr) Av Vol (Lacs) Week H/L 745/459 Div Yield ().13 FVPS (`) 5 Shareholding Pattern Shareholder Promoters 33.8 DIIs 3.7 FIIs 35.3 Public 27.2 Total 1 KMB vs. Sensex Kotak Mahindra Finance Ltd. was the first NBFC in India to receive a banking license in February 23 and convert to a bank Kotak Mahindra Bank (KMB). In a span of a decade, KMB catapulted to being the fourth largest private sector bank in India. In November 214, it announced a merger with the 8 th largest private sector bank ING Vysya resulting in a merged entity with Rs 2 tn worth of banking assets (advances + deposits). During the process of integration, i.e. in FY16, return ratios and profitability are expected to be subdued with the synergies likely to fully kick - in from FY17 onwards. The management has chalked out a step-wise integration plan to ensure a smooth transition post the merger. An enhanced pan India network, greater loan portfolio diversity and multiple additions to product offerings achieved through reasonable valuations - deal valued at ~2.1x erstwhile ING s (eing) trailing book value - speak volumes about the management s foresight. While we are optimistic on the prospects of the merged entity, we believe the valuations of KMB fully factor in the synergy benefits and the resultant growth and profitability potential. We initiate coverage on KMB with a target price of Rs 69 and recommend a HOLD. Kotak-ING Merger: An ideal match Merger details: Effective April 1st 215, KMB merged with ING, resulting in an institution with banking assets (deposits + advances) of over Rs 2tn. The Rs 15, crore merger was done through an all stock deal at share swap ratio of 725:1 For every 1 shares of ING of face value Rs 1 each, shareholders got 725 shares of KMB of face value of Rs 5 each Aug Sep Oct Nov Dec Jan-215 Kotak Bank 1-Feb Mar Apr May Jun Jul-215 S&P Bse Sensex 1-Aug Merger Status: KMB has indicated merger costs of Rs 2 crore which includes employee pensions and costs on NPAs of eing s corporate book. Of this amount, the management has incurred Rs 54 crore in Q4FY15, Rs 63 crores in Q1FY16, with remaining Rs 83 crores to be provided in the remaining quarters of FY16. Wholesale and Treasury business has been integrated Support functions to be integrated in Q2, retail assets business in H2 and branch banking business around April 216. Key Financials (` in Cr) Y/E Mar Net Non P/E P/Adj BV Interest Interest APAT EPS Adj. BV ROE () ROA () (x) (x) Income Income 214 3,72 1, ,224 2, E 6,943 2, E 8,972 3, Hence, the full impact of the synergies of the merger will be visible from FY17 onwards. At the time of the merger, KMB ranked fourth amongst the private sector Monday, 24 th August, 215

88 Hence, the full impact of the synergies of the merger will be visible from FY17 onwards. At the time of the merger, KMB ranked fourth amongst the private sector banks, and ING, the 8 th. Post merger, Kotak has consolidated its position with a combined branch network of 1,26 branches, ~195 ATMs across 641 locations. Synergies of merger: The merger is expected to yield significant synergies for KMB through: Enhanced presence: KMB has a strong foothold in the form of a branch network in West and North India, while eing s branch network is predominantly South based. This translates to a near pan-india presence post merger. Further, KMB s branch network will strengthen to 125 branches from 64 pre-merger thereby enhancing the reach significantly. This is likely to result in savings in infrastructure and customer acquisition costs. Branches Branch network of the merged entity ING Vysya Kotak Kotak West North South East 4 5 Total Branches , Wide product offerings: KMB and eing boast of a diverse set of product offerings. However, KMB is likely to benefit from eing s strong mobilization of CA deposits and forex and trade finance product offerings, which has scaled up owing to its foreign parentage. The merged entity s better CASA mix and higher fee income from overseas business will help boost profitability in the long run. Corporate & Banking Business Significant Product Complementarities Commercial Banking (CV,CE etc) Consumer Finance Agriculture/Tractor Deposits -- CA Deposits -- SA Fees (Forex, Trade) Private Banking/Broking/IB Asset Management/Insurance Source : KMB, Ventura Research ING Vysya Kotak Kotak (Merged) Monday, 24 th August, 215

89 Diversify asset base: The merger will help KMB granulize its lending portfolio leading to a relatively de-risked business model. SME lending constitutes ~8 of KMB s loan book, while it constituted ~38 of eing s loan book. Significant Product Complementarities Large Corporates Mid Corporates SMEs ( including Traders) HNI Mass Affluent Mass Market NRIs MNCs ING Vysya Kotak Kotak (Merged) Source : KMB, Ventura Research Adequate Capital Reserves: With ING s CAR at and Kotak s CAR at 17.59, the CAR for the merged entity stands at a healthy Thus, the merger was carried out without significant dilution of KMB s equity base and KMB (merged) has adequate capital reserves for smooth integration and aggressive growth plans. Adequate Capital Reserves FY11 FY12 FY13 FY14 FY15 Q1FY16 (merged) Tier-1 Tier-2 Source : KMB, Ventura Research Headroom for enhancing foreign shareholding: The merged entity provides scope for enhancing the foreign shareholding limit, the share of which stands at 48. FIPB has approved KMB s application for increasing the shareholding limit to 55. Given that the foreign shareholding in private banks is limited to 74, KMB has a lot of headroom for enhancing foreign shareholding even post the merger Monday, 24 th August, 215

90 Given the above synergies, we forecast key parameters of KMB (merged) with the following rationale: Loan book: Addition of SME portfolio will bring in granularity; growth to pick-up in FY17 KMB s advances have grown at a healthy 5 year CAGR of 26 to Rs 66,16 crore by FY15. Over these years, KMB s loan portfolio has witnessed a structural shift the high yielding retail loan portfolio has declined from 6 in FY11 to Rs 44 in FY15, which has resulted in NIMs declining from 5.2 to 4.93 during the same period. In terms of the lending mix, corporate banking portfolio has remained steady at around 3, while the share of commercial vehicles and construction equipment (CV/CE) has declined from 21 in FY1 to 8 in FY15. Corporate banking along with home loans & LAP (22), and agriculture (18) constituted ~71 of KMB s loan portfolio as of FY15. ING, on the other hand, has a loan book composition in favour of high yielding corporate book i) Business banking (36), primarily to traders/sme and ii) Wholesale banking (35) primarily to the NBFCs, telecom, manufacturing and construction sectors. Accordingly, the loan composition of the merged entity is relatively diversified with the high yielding corporate composition of ING. Diversified Loan Portfolio post merger Corporate banking CV/CE Agriculture Division Business Banking Home Loans Small Business, PL, CC Others Source : KMB, Ventura Research The management has guided a 15-2 growth rate in the loan book of the merged entity. The growth is likely to be slower in FY16 as KMB is rationalizing the loan book, specifically on loan limits and cleaning up the stressed assets. Once the rationalization process is completed, the management expects crossselling to drive loan book growth. For instance, ~2 branches of eing have started selling auto loans, tractor loans, and personal credit cards which were absent in their portfolio and like-wise; KMB has started leveraging ING s Kissan Credit Card agri product to drive lending opportunity to small and medium farmers Monday, 24 th August, 215

91 ,116 15,184 Q1FY16 advances of the merged entity stood at Rs 1,3,614 crore. We expect Kotak s FY16 advances to touch Rs 1,21,115 crore and grow at 24 YoY in FY17 to Rs 1,5,183 crore. Loan Book growth of KMB (merged) ` Crores Growth rate for FY16 is over estimated merged no for KMB and ING for FY15 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Advances Advances growth (RHS) Source : KMB, Ventura Research CASA to improve post merger KMB s deposits have grown at a 5-year CAGR of 26 to Rs 74,86 crore in FY15, led by 21 CAGR in CA to Rs crore (17.6), 42 CAGR in SA to Rs 14,36 crore (18.6) and 24 CAGR in Term Deposits to Rs 47,642 crore in FY15. CASA ratio increased from 31.2 in FY1 to 36.4 in FY15 led by robust growth in SA deposits, specifically after KMB started offering interest rates of ~5.5-6 after the de-regulation of SA interest rates in October 211. ING s CASA ratio, too, stood at a healthy 31.8, with a equitable mix of CA and SA as on December 214. However, ING s CA float is healthy due to higher concentration of SME deposits. For Q1FY16, the CASA of the merged entity stood at The management has guided an optimistic outlook on CASA growth given that: ING s SA customer base can earn upto 6 interest Customers get access to a higher number of ATMs KMB has been efficient in mobilization of low cost deposits SA mobilization per branch of KMB is ~ 5 higher than that of eing, while CA mobilization per branch is 25 higher. Hence, there is headroom to improve deposit mobilization in eing s branch network. Going forward, we expect KMB (merged) to clock deposits worth Rs 1,39,213 crore in FY16 and grow at 22.6 in FY17 to Rs 1,7,663 crore. CASA is expected to improve to 38.3 in FY17 from 34.2 in Q1FY16 led by 35 YoY growth in SA and 25 YoY growth in CA Monday, 24 th August, 215

92 Healthy deposit growth of KMB (merged) CASA ratio to improve ` Crores Growth rate for FY16 is over estimated merged no for KMB and ING for FY15 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E Deposits Deposit Growth (RHS) CASA TD Source :KMB, Ventura Research Asset Quality: Clean-up in progress Source : KMB, Ventura Research KMB has successfully bought down its Gross NPA levels from 2.4 in FY1 to 1.85 in FY15 and Net NPA from 1.73 to.92 during the same period. ING s Gross NPA stood at 1.86, while Net NPA stood at.66 as of December 214. The Gross NPA of the merged entity stood at 2.3 (+4 bps QoQ) in Q1FY16 and Net NPA stood at 1. The deterioration in asset quality is primarily due to the stress on eing s asset portfolio, which the management is addressing in the following manner: While the NPA levels of ING are reasonable, KMB has identified Rs ~3 crore of eing s fund and non-fund based portfolio (6 of ING s loan portfolio and 2.5 of the combined entity s book) as stressed assets, but not necessarily NPAs. As a part of the clean-up exercise, KMB has transferred these loans to its Asset Reconstruction division with a specialized team for monitoring/recovery of these accounts. Also, the stressed assets are primarily related to the corporate loan book; ING s SME asset quality, according to the management, is good. The management has adopted a cautious policy on asset quality management No CDR participation, transfer to ARC, conversion to offbalance sheet items or 5/25 loans disbursement in Q1FY16. Restructured but standard loans stood at Rs 418 crore in Q1FY16, of which Rs 271 crore arose from the eing portfolio. Further, NPA provisioning for the quarter stood at Rs 35 crore (primarily on eing s stressed assets) compared to Rs 66 crore for standalone KMB in the previous quarter. The management has guided additional provisions of about.4-.5 (Rs crore) of combined book for 9MFY Monday, 24 th August, 215

93 Accordingly, we expect Gross NPAs and Net NPAs to remain elevated at 2 and 1 respectively in FY16 and gradually reduce to 1.95 and.9 by FY17. NPAs to remain elevated in the short term FY11 FY12 FY13 FY14 FY15 FY16E FY17E PCR (RHS) GNPA NNPA Source : KMB, Ventura Research Operationally, we expect NII of Rs crore in FY16 and Rs 8972 crore in FY17 (YoY growth of 29). Fee income is expected to grow 35 YoY to Rs 197 crore by FY17 led by higher cross selling opportunities and eing s forex and trade finance vertical. KMB s cost to income ratio is likely to reduce to 5.5 in FY17 from elevated levels of ~54 in FY15-16 through: Elimination of over-lapping branches, ATMs and high cost premises Consolidation of data centres Pricing rationalization with vendors given the larger scale of business Digital initiatives such as i) Kotak Bharat first multi-lingual/no data connectivity App ii) Kaypay: World s largest bank agnostic, real time payment platform and iii) using the digital medium for client acquisition KMB has one of the highest mobile banking penetration Monday, 24 th August, 215

94 NII and NII growth rate Cost to Income to reduce by FY ` Crores Growth rate for FY16 is over estimated merged no for KMB and ING for FY FY11 FY12 FY13 FY14 FY15 FY16E FY17E 47. FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII Source : KMB, Ventura Research NII rate (RHS) Source : KMB, Ventura Research Cost to Income KMB s Q1FY16 NIM stood at 4.2, down from 5.1 in Q1FY15 and 4.9 in FY15 on account of higher SA interest rates offered to eing customer base and reduction of base rate. We expect NIMs to remain range bound at this level over the FY Earnings are expected to grow 48 YoY to Rs. 547 crores by FY17E. We expect RoE to decline to 12.7 in FY16 from 14.1 in FY15 and gradually improve to 13.9 by FY17 as the synergies start reaping benefits. RoA is expected to remain range bound at 1.6 in FY CoF, YoA and NIM trend RoE and RoA trend FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E CoF YoA NIM (RHS) RoE RoA (RHS) Source : KMB, Ventura Research Source : KMB, Ventura Research Monday, 24 th August, 215

95 Valuation: We initiate coverage on Kotak Mahindra Bank with a HOLD recommendation. Since the merger announcement with ING Vysya Bank, the Bank has seen a major re-rating. We believe that the market has fully discounted its FY17 earnings leaving little room for appreciation. We have valued Kotak Mahindra Bank based on the sum-of-parts method; the core banking business is valued at Rs. 581 (4.1x FY17E Adj. P/BV) and Rs. 19 is value assigned to its other businesses. We have arrived at the adjusted book value of standalone book by deducting investments in subsidiaries. At the CMP of 648, it is trading at 4.8X FY17 Adj. P/BV. SOTP valuation of Kotak Mahindra Bank Company Value Base Amt Value (` crores) Per Share (`) Valuation Methodology Kotak Mahindra AMC AUM AUM KMCC PAT x FY15 Earnings Kotak Securities PAT x FY15 Earnings Insurance NBP P/NBAP Others PAT x FY15 Earnings International Subsidiaries Book x FY15 Book Kotak Prime Book x FY15 Book Total Subsidiaries Value 19.9 Core Banking Business Value SOTP Value Source :Kotak Mahindra Bank, Ventura Research ` Adj P/Bv Major re-rating of KMB in line with the merger with ING Vysya Bank Mar-9 Mar-11 Mar-13 Mar-15 CMP 4X 4.65X 5.3X 5.95X 6.6X Source :Kotak Mahindra Bank, Ventura Research Monday, 24 th August, 215

96 Financials & Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 8,42.5 8, , , ,647.7 Efficiency Ratio () Interest Expense 4, ,47.1 5, , ,675.2 Int Expended / Int Earned Net Interest Income 3,25.7 3,72 4, , ,972.5 Int Income / Total Funds YoY change () NII / Total Income Non Interest Income 1,16.7 1, ,28.5 2, ,288.6 Other Inc. / Total Income Total Net Income 4, , , ,44 12,261.1 Ope. Exp. / Total Income Total Operating Expenses 2,29.7 2, , ,5.4 6,253.2 Net Profit / Total Funds Pre Provision profit 2, , , , ,7.9 Credit / Deposit YoY change () Investment / Deposit Provisions for expenses NIM Profit Before Tax 1, , ,833. 3, ,47.2 YoY change () Solvency Taxes , ,838.5 Gross NPA (Rs. Cr) ,59.4 1, , ,928.6 Net profit 1,36.7 1,52.5 1,866. 2, ,568.8 Net NPA (Rs. Cr) ,24.5 1,345.4 YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI 2,27.9 2, , , ,972.8 Tier I Capital () Inter bank borrrowing 1, ,31.7 2, , ,973.2 Tier II Capital () Investments 28, , , , ,591.5 Loan and Advances 48, , , , ,183.6 Per Share Data (`) Other Assets 2, ,93.3 3, , ,664.6 EPS Total Assets 83, , , , ,385.8 Dividend Per Share Deposits 51, , , , ,663.2 Book Value Demand 7,65.2 8, , , ,36.7 Adjusted Book Value of Share Savings 7, ,87. 14, , ,369.7 Term 36,11.5 4, , , ,256.8 Valuation Ratio Borrowings 2, , , , ,132.6 Price/Earnings (x) Other Liability 2, , ,858. 8, ,239.8 Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves 9, , , , ,434.2 Total Liabilities 83, , , , ,385.8 Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Note: FY16 and FY17 financials are of the merged entity Monday, 24 th August, 215

97 IndusInd Bank Ltd. HOLD Target Price `922 CMP `866 FY17E Adj. P/BV 3.2x Index Details Sensex 25,742 Nifty 7,89 Industry Bank Scrip Details Mkt Cap (Rs cr) 51,246 BVPS (Rs) 197 O/s Shares (cr) 58.3 Av Vol (Lacs).9 52 Week H/L 988/534 Div Yield ().4 FVPS (Rs) 1 Shareholding Pattern Shareholders Promoters 15. DIIs 9.4 FIIs 38.6 Public 37. Total 1 IndusInd vs. Sensex IndusInd Bank (IIB) over its past two planning cycle has adequately demonstrated its abilities of executing its plan and delivering on aspirational goals. So far during the third planning cycle too IIB is well on track to achieve its stated benchmarks. Given its proven execution capabilities we expect the loan book to grow at a CAGR of 25.2 to Rs crores by FY17 while earnings are expected to grow at a CAGR of 26.8 to Rs crores over the same period. Over the same period, we expect the bank to maintain its exemplary asset quality. Although we are upbeat about the business prospect of IIB, we believe that at the CMP of 866 (3.2X FY17 P/Adj BV) the stock is not cheap and much of the expectation is already built into price. We recommend a Hold on the stock with a target price of Rs. 922 (7 appreciation over 18 months). We believe at the CMP of Yes Bank s current valuations (1.6X FY17 P/Adj BV) are at a significant discount of.25x to that of IIB despite the fact that: the loan book size is set to outpace that of IIB over the forecast period more granular and higher retail exposure ensures reduced business risk and volatility NIMs have room to catch up as substantial head room is available for CASA expansion Impeccable asset quality Superior operational efficiency Comparable return ratios We believe that the valuation discount is unjustified and hence Yes Bank offers a better investment opportunity. In our opinion the valuation multiple of Yes Bank should at least be on par with that of IIB, if not a premium. Key Financials (Rs. Cr.) Y/E Mar Net Interest Income Non Interest Income Past performance suggests high probability of IIB achieving its planning cycle objectives 28 marked a significant change in the fortunes of IndusInd Bank, when a professional management team took over the reins. A 3 year planning cycle was instituted to script a success story. PAT EPS (Rs) Adj.BV (Rs) P/E (x) P/Adj. BV (x) 214 2,89.7 1,89.5 1, ,42.3 2,43.9 1, E 4,276. 2, , E 5, , , Monday, 24 th August, 215 ROA () ROE ()

98 .. In order to make a mark in the industry and build its brand further, IIB is looking at increasing its suite of products to provide a comprehensive range of offerings. To achieve a swift presence across product categories the bank has partnered with other players 1. AVIVA for Life Insurance 2. Chola Mitsui for General Insurance 3. Kotak Securities tie up for Broking Business 4. Health products from Religare 5. Home loan products from HDFC 6. Credit Card Business (acquired from Deutsche Bank) It further plans to introduce one unique product / services offering every 6-8 months. A number of service offerings have been introduced in the recent past viz: 1. Choose your Bank Account Number 2. Video Calling branch managers for NRI customers 3. Option to choose currency denominations during cash withdrawals from ATMs. These offering have helped the Bank build bank recall and deepen customer relationships. Towards executing this plan the India geography has been categorized into four segments I. Developed markets which include large metros where there already exists deep penetration. Here the strategy is to improve penetration among the business owner segment with a comprehensive suite of offerings that span facility management, working capital, investment advisory products and other advisory services. In the large metros the focus is on the liability products than the assets side. II. Home markets cover the Tier I cities and here the focus is to improve branch build up and enhance CASA share. Concentration is on 18 cities and these have been identified based on parameters spanning wealth creation potential, existing competition, deposit growth, local GDP etc. The roll out plan is to invest heavily on advertisement and brand promotions, highlight product led advantages and undertake mass penetration drives. The strategy has already been rolled out in 12 cities and another six will be included in the current year. III. For Rural Markets the strategy is mainly asset led with a thrust on PSL compliance through CV financing and agri business products. The footprint expansion here is primarily through the cluster approach Monday, 24 th August, 215

99 IV. Rest of Indian markets finding newer opportunities to grow business further. In our opinion the strategy is working for the Bank and given the unquestionable execution capability as played out in the earlier planning cycles we have confidence that the stretch targets set by the Bank are achievable. In its guidance, IIB had indicated a loan book growth of 25-3 by FY17. In the first year of the third planning cycle the Bank has grown ~25 to 68,788 crores. By FY17 we expect the loan book to scale to Rs. 17,91 crores (2 yr CAGR of 21.5). Consumer Finance (41 of total lending) is expected to grow at a 2 year CAGR of 24.4 to Rs.43,969 crores (with non vehicle finance driving the growth as its share of business improves to 29.5 from the current 24.3). Corporate and Commercial Banking Business is expected to grow at a CAGR of 25.8 to Rs. 63,932 crores by FY17E. Growth momentum of advance book to continue 12 ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Consumer Finance Corp. & Commercial ource :IndusInd Bank, Ventura Research Consumer finance book well balanced Comm. Vehicle Loans Utility Vehicle Loans Small CV Two Wheeler Loans Car Loans Equipment Financing Credit Card Loan Against Property BL,PL,GL,etc ource : IndusInd Bank, Ventura Research Monday, 24 th August, 215

100 Deposits are expected to grow at a 24.4 CAGR to Rs.114,788 crores by FY17E aided by the doubling of branch network and consequent doubling of the customer based. IIB plans to scale branch network to 12 from the current 81 branches. We expect CASA to grow at a CAGR of 29.8 to Rs. 42,618 crores by FY17E. The unique customer friendly services stated above are expected to aid the faster than industry growth rates. Overall CASA share is expected to grow by 3 bps to 37.1 by FY17E. Extensive focus on expanding CASA FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E CASA TD ource :IndusInd Bank, Ventura Research IIB s NIMs are already at an enviable 3.6 which is on par with its larger peers. Given the rebalancing of the loan book, the growth in low cost CASA deposits and fixed rate CV book in a declining interest rate scenario, we expect NIMs to expand by 2 bps to 3.8 by FY17E. NIM expansion on the cards FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yields on Advances Cost of Funds NIM (RHS) - ource : IndusInd Bank, Ventura Research Monday, 24 th August, 215

101 During FY15, IIB sold gross loans amounting to ~Rs. 42 crores to ARCs which led to a lower GNPA at.8. In the same fiscal IIB also proactively classified 3 standard accounts (which showed some signs of stress) as NPA. Despite this the NPA stood at a reasonable level of.3. With the size of the restructured and stressed asset book at a lower level, a pick-up in CV segment and economy revival on cards, we expect asset the quality to remain stable. Asset quality to remain stable FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E PCR (RHS) Gross NPA Net NPA ource: IndusInd Bank, Ventura Research Faster loan growth in FY15 led to further utilization of Tier I capital, which further eroded by 15 bps to 11.2 (13.8 in FY13). With the acquisition of the Gems & Jewellery portfolio from ABN Amro, capital consumption is expected to remain higher. The management has guided capital issuance in the current fiscal. Capital Adequacy Ratio FY1 FY11 FY12 FY13 FY14 FY15 Tier I Tier II ource : Yes Bank, Ventura Research Monday, 24 th August, 215

102 On the operational front, we expect the profits to grow at 26.8 CAGR to Rs. 2,886 crores by FY17E led by growth in revenues, better NIMs and higher operational efficiency. We expect the interest income to grow to Rs. 14,371 crores by FY17E, implying a CAGR of ~22. The Bank s fee based income is expected to grow at 22.8 CAGR to Rs. 3,144 crores by FY17E. Cost to Income is also expected to be lowered by 3 bps to 44.8 by FY17 as we expect faster business growth and a rapid turnaround of new branches. Cost to Income is comparable to peers. In Q1FY16, IIB grew its credit book by 23 at Rs. 72,243 crores. Asset quality of bank remained under control with its Gross NPA at.8 (+2 bps QoQ) and Net NPA remained unchanged at.31. IIB managed to sustain its NIM at 3.7 during the quarter. NII during the quarter grew by 22.5 YoY to Rs. 981 crores while profits grew by ~25 to Rs crores over the same period. NII growth to moderate to a sustainable level Return ratios to continue to improve ` crores FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII NII growth RoE RoA (RHS) ource : IndusInd Bank, Ventura Research ource : IndusInd Bank, Ventura Research Operational efficiency to improve further FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E ource : IndusInd Bank, Ventura Research Monday, 24 th August, 215

103 4/9/27 9/9/27 2/9/28 7/9/28 12/9/28 5/9/29 1/9/29 3/9/21 8/9/21 1/9/211 6/9/211 11/9/211 4/9/212 9/9/212 2/9/213 7/9/213 12/9/213 5/9/214 1/9/214 3/9/215 as FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E Valuation Since the change in management at the helm of IndusInd Bank, the stock has consistently been re-rated as the management delivered across all metrics stated in its planning cycles. During the first planning cycle- FY the stock averaged a 2.4X 1 yr forward Adj P/BV. In the second cycle FY11-14 this got re-rated to an average of 2.9X. And as IIB outperforms its own performance benchmarks in the current Planning Cycle 3 (FY14-FY17), we have seen the stock being re-rated to an average of 3.9x. IndusInd Bank P/Adj. BV Bands 1, 1st Cycle- 2.4x 2nd Cycle- 2.9x 3rd Cycle - 3.9x Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP 1.2X 1.7X 2.2X 2.7X 3.2X ource : IndusInd Bank, Ventura Research IIB s valuation at a significant premium to HDFC Bank We believe that IIB has more or less peaked in valuations given that it trades at a premium relative to HDFC Banks on the Adj P/ BV basis. P/ Adj. BV comparison between IndusInd and HDFC Bank Yr Forward P/Adj. BV Yr Forward P/Adj. BV relative valuation Indusind bank Source: Ventura Research HDFC Source: Ventura Research HDFC vs. IndusInd Monday, 24 th August, 215

104 4/9/27 9/9/27 2/9/28 7/9/28 12/9/28 5/9/29 1/9/29 3/9/21 8/9/21 1/9/211 6/9/211 11/9/211 4/9/212 9/9/212 2/9/213 7/9/213 12/9/213 5/9/214 1/9/214 3/9/215 8/9/215 ashes Given the size of HDFC Bank s business and compelling metrics, in our opinion, IIB should trade at a discount to HDFC Bank. Since 21 this discount has hovered in the range of.7x.9x HDFC Bank s I year forward multiple. We believe that this discount to the leader HDFC is expected to continue during the forecast period. Our target for HDFC Bank over the next 18 months is Rs 1,327 (P/Adj BV of 4.1X on FY17). Based on our peer discount of.8x, we believe that IIB can rally another 7 to Rs. 922 (3.4X FY17 Adj P/ BV.) Yes Bank offers better investment opportunity than its peer IIB The immediate peer for comparison with IIB is Yes Bank (given the size of business.) Yes Bank s current valuations are at a significant discount of.25x to that of IIB. P/ Adj. BV comparison between IndusInd and Yes Bank 1 Yr Forward P/Adj. BV Yr Forward P/Adj. BV relative valuation Indusind bank Yes bank.4 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E Yes vs. IndusInd Base Source: Ventura Research Source: Ventura Research This is despite the fact that: the loan book size is set to outpace that of IIB over the forecast period more granular and higher retail exposure ensures reduced business risk and volatility NIMs have room to catch up as substantial head room is available for CASA expansion Impeccable asset quality Superior operational efficiency Comparable return ratios We believe that the valuation discount is unjustified and hence Yes Bank offers a better investment opportunity. In our opinion the valuation multiple of Yes Bank should at least be on par with that of IIB, if not a premium Monday, 24 th August, 215

105 Yes Bank is one of our top bets in the private banking space. Based on our financial model and valuations we believe that the stock has the potential to provide a 19 return from the CMP of Rs 629 (1.6X FY17E Adj P/BV of Rs 399 / share) and recommend buying the stock. Our optimism is based on the fact that Yes Bank has sustained its growth momentum while maintaining the lowest NPA levels (GNPA.4 / NNPA.1) among peers. Yes Bank has significantly de-risked its business model by enhancing the granularity of its deposit and asset base. Fee income growth has been sustained, NIMs have consistently expanded and the cost of operations has been kept surprisingly low despite a rapid pan-india branch roll out. Share holder return ratios continue to remain impressive inspite of frequent capital raising. Significant re-rating on the cards Barring the bear markets of FY28 and FY213, Yes Bank has consistently traded in the band of 2.3x to 3.6x its 1-Yr Fwd Adj. P/BV (with average multiple of 2.9x). Given the fact that the company has shown robust growth since its inception, with performance on par with all its peers, we believe a re-rating for Yes Bank is on the cards. 1,6 1,4 1,2 1, ` Yes Bank P/Adj. BV Band Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP 1X 1.95X 2.9X 3.85X 4.8X Source : Yes Bank, Ventura Research The following set of comparative charts of Yes Bank and IndusInd Bank operation metrics elucidates the compelling re-rating of the valuations of Yes Bank: Monday, 24 th August, 215

106 FY FY FY FY FY FY FY FY FY16E FY17E d 19,37.4 FY FY FY FY FY FY FY FY FY16E FY17E IndusInd Bank s valuation more expensive than that of Yes Bank Yes Bank has got enough headroom to expand CASA ` crores CASA , 12, 1, 8, 6, 4, 2, - ` crores CASA Yes bank CASA (RHS) IndusInd bank CASA (RHS) Source: Yes Bank, Ventura Research Source: IndusInd Bank, Ventura Research Size of lending book almost similar with an equivalent split among consumer and corporate lending FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Consumer Corporate Banking Consumer* Source: Yes Bank, Ventura Research Yes Bank s NIM to catch up with that of IIB Source: IndusInd Bank, Ventura Research Yes Bank has higher operating efficiency 4. () 7 () FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 3 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes bank IndusInd bank Yes bank IndusInd bank Source: Yes Bank, Ventura Research Source: Yes Bank, Ventura Research Monday, 24 th August, 215

107 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes Bank likely to enjoy faster profit growth ` crore PAT ` crores PAT Yes bank Yes yoy Growth () RHS IndusInd bank Indusind yoy Growth () RHS Source: Yes Bank, Ventura Research Source: IndusInd Bank, Ventura Research Yes Bank has better Asset quality profile 3.5 () GNPA 2.5 () NNPA FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes bank IndusInd bank Yes bank IndusInd bank Source: Yes Bank,IndusInd Bank, Ventura Research Source: Yes Bank, IndusInd Bank, Ventura Research Return ratios of both the banks are almost similar 3 () ROE 2.5 () ROA Dip in ROE due to capital infusion, earning normalized within 2-3 quarters. Similar trend is expected in Yes Bank 1..5 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes bank Indusind bank Yes bank Indusind bank Source: Yes Bank, IndusInd Bank, Ventura Research Source: Yes Bank, IndusInd Ban, Ventura Research Monday, 24 th August, 215

108 as Both the banks are adequately funded for future growth Yes bank IndusInd Bank FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E Tier I Tier II Tier I Tier II Source: Yes Bank, Ventura Research Source: IndusInd Bank, Ventura Research Monday, 24 th August, 215

109 Financials and Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 6, , , , ,371.9 Efficiency Ratio () Interest Expense 4,75.4 5, , , ,59.8 Int Expended / Int Earned Net Interest Income 2, ,89.7 3,42.3 4,276. 5,312.1 Int Income / Total Funds YoY change () NII / Total Income Non Interest Income 1,363. 1,89.5 2,43.9 2, ,571.4 Other Inc. / Total Income Total Net Income 3, , , , ,883.6 Ope. Exp. / Total Income Total Operating Expenses 1, , , , ,977. Net Profit / Total Funds Pre Provision profit 1, ,596. 3,98.2 3, ,96.6 Credit / Deposit YoY change () Investment / Deposit Provisions for expenses NIM Profit Before Tax 1, , ,79.2 3, ,274.8 YoY change () Solvency Taxes , ,389.3 Gross NPA (Rs. Cr) Net profit 1,61.2 1,48. 1, , ,885.5 Net NPA (Rs. Cr) YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI 3, , ,35.1 5, ,98.9 Tier I Capital () Inter bank borrrowing 3, , ,744. 4, ,624.4 Tier II Capital () Investments 19, , , ,63 36,31.6 Loan and Advances 44, , , , ,9.9 Per Share Data (`) Other Assets 2,483. 3, , , ,859.5 EPS Total Assets 73, , , , ,676.5 Dividend Per Share Deposits 54, , , , ,788.5 Book Value Demand 8, , , , ,178. Adjusted Book Value of Share Savings 7,32.8 9, , , ,439.8 Term 38, , , , ,17.7 Valuation Ratio Borrowings 9, ,762. 2, , ,114.4 Price/Earnings (x) Other Liability 2,1 2, ,719. 4, ,875.6 Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves 7,96.7 8,56.3 1,11. 11, ,354.6 Total Liabilities 73, , , , ,676.5 Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Monday, 24 th August, 215

110 YES Bank Ltd BUY Target Price `1,317 CMP `63 FY17E P/Adj. BV 1.6x Index Details Sensex 25,742 Nifty 7,89 Industry Bank Scrip Details MktCap(`cr) 26,343 O/s Shares (Cr) 41.8 Av Vol (Lacs) Week H/L 91/516 Div Yield () 1. FVPS (`) 1 Shareholding Pattern Shareholder Promoters 22. DIIs 21.3 FIIs 44.4 Public 12.3 Total 1 Under its Version 3. we believe that Yes Bank is well on track to achieve its aspirational targets. Yes Bank has significantly derisked its business model by enhancing granularity of its deposit and asset base. High loan growth & fee income growth have been sustained. NIMs have consistently expanded and cost of operations has been surprisingly kept low despite a rapid pan India branch roll out. Share holder return ratios continue to remain impressive inspite of frequent capital raising. Based on our financial model and valuations we believe that the stock has the potential to achieve our price target of Rs. 1,317 providing a 19 return from the CMP of Rs 63 (3.3X FY17E Adj P/BV of Rs 399/ share). We initiate with a BUY We believe the valuation discount of 5 to its peer IndusInd Bank is unwarranted and we expect the valuation re-rating story to pan out over the forecast period given that : the loan book size is set to outpace that of IIB over the forecast period more granular and higher retail exposure ensures reduced business risk and volatility NIMs have room to catch up as substantial head room is available for CASA expansion Impeccable asset quality Superior operational efficiency Comparable return ratios Aug-214 Yes Bank vs. Sensex 1-Sep Oct Nov Dec Jan-215 Yes Bank 1-Feb Mar Apr May Jun-215 S&P Bse Sensex 1-Jul Aug Version 1.- Establishing a strong foundation for a growth Yes Bank, which commenced operations in 24, took a little more than a decade to emerge as the fourth largest private sector bank in India. A 3-phased approach viz. growth versions, was adopted to sustain the aggressive expansion without compromising on asset quality. Focus on fee income generation with lower tenure of assets has been the key foundation of its strategy. Further, the focus has always been on lending to sun-rise sectors. In Version 1., the period from 24-21, the management expanded its credit base from Rs 76 crores in FY5 to Rs 22,193 crores in FY1, at a CAGR of nearly 1. Key Financials (` in Cr) Net Non P/E Y/E Mar Interest Interest APAT EPS Adj. BV ROE () ROA () (x) Income Income Monday 24 th August, 215 P/Adj BV (x) E E

111 The asset portfolio was strategically build to focus on high growth sectors Food & Agri, Engineering, Infra, Logistics, Technology, Media, Telecom and Healthcare constituted 78 of the total advances as at March 21. The expansion in deposits and advances, however, was primarily led by corporate and institutional segments. While retail loans constituted only 3 of the advances, retail deposits formed ~2 of the deposits. CASA remained low at 1.5 of total deposits. Fee income increased from Rs 7.8 crore in FY5 to Rs 379 crore by FY1 at a CAGR of 12+. This growth was achieved despite the financial crises that emerged from the default of sub-prime loans and the bankruptcy of Lehman Brothers. The focus, during the period, was to rapidly expand and keep costs low, which the bank achieved successfully Cost to Income declined from over 1 in FY5 to 36 in FY1, while NIMs expanded from 1.5 in FY5 to 2.25 in FY1. RoE expanded from to 2.27 during the same period, while RoA increased from.29 to Net NPAs remained low at 6. The number of branches expanded five times -- from ~3 in FY6 to 15 by FY1. At the end of Version 1., the bank had 2 ATMs and 3+ employees, a significant increase from ~2 employees in FY5. Version 2.- Vertical take off The bank continued its aggressive and competitive stance as it entered Version 2. the Vertical Take Off phase from FY11 to FY15. Advances grew at a CAGR of 22 to Rs 75,55 crore and deposits grew at 19 to ~Rs 92, crore by FY15. In this phase, the bank launched innovative offerings such as savings rate of 7, complete suite of retail loan offerings and digitalization of processes to speed up customer acquisitions. The bank also invested heavily in building the YES brand to attract retail business. Version 3.- Establishing a Pan India presence Consequently, the proportion of high yielding retail loan book increased to 35 by FY15 and low-cost retail deposits now constitute ~45 of the total liabilities; CASA ratio has improved to 23 in FY15 from 1 in FY1. The Bank s NIMs further expanded to 2.7 in FY15 from 2.2 as focus on cost control continued to be a priority. RoE remained high in the range of 21-24, while RoA expanded from 1.52 to 1.64 in FY15, in line with the top private sector banks. This phase also saw Yes Bank catapulting to the fourth largest private sector banks in terms of size with superior asset quality Net NPAs remained low at less than.1. The bank expanded its branch network around 2.5 times to 63 through the hub & spoke model which helped keep costs low. The bank had 1,+ employees at the end of this phase Monday 24 th August, 215

112 As Yes Bank now enters Version 3., the period from FY16-FY2, the management has envisaged its retail portfolio, which currently is ~35 of its loan book, to grow to ~4 of the loan book, including the SME segment. On the deposit base, the management expects retail deposits to be in the range of 6-65 from ~45 currently. Clearly, the focus of the bank is on increasing the retail business by continued investments in brand building and the launch of new offerings the launch of credit cards is on the anvil. Given the management s track record, innovative approach, adequate capital reserves and superior asset quality, we believe the bank is well on course to achieve its vision of being a $1-billion bank by the end of Version 3.. Aggressive retail focus to drive credit growth Yes Bank s advances have grown at a rapid pace 5-year CAGR of ~28 to Rs 75,55 crore in FY15 driven by a 31 CAGR in retail the loan book and a 26 CAGR in the corporate loan book. With a sub-5 exposure to any particular sector, the bank has been able to sustain an above average industry growth rate despite subdued macro-economic conditions in recent times. Advances Growth 14 ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Retail Source : Yes Bank, Ventura Research Within the loan book, Yes Bank has focused on increasing the share of high yielding retail and MSME loans from 3.9 in FY1 to 35.3 in FY15, specifically to sun-rise sectors. Given the aggressive branch expansion plans and the launch of new products specifically targeting the retail segment viz. Loan Against Property, Gold & Home Loan products, we expect advances to grow at a CAGR of 26 to Rs 1,19,935 crore by FY17, led by retail loan book CAGR of 3.7 (increase to 38 of total advances from 35.3 in FY15) and corporate loan book CAGR of Monday 24 th August, 215

113 SA deposits, even at lower cost, to drive CASA Yes Bank adopted an aggressive strategy of offering significantly higher interest rates to mobilize SA deposits. This strategy has paid off and in the past five years, SA deposits increased at a CAGR of 1 to Rs 12,58 crore in FY15. Given that the bank has increased its minimum account balance requirements for its 7 interest rate offering, the cost of SA deposits are likely to come down. Nevertheless, the bank s offering of 6-8 interest rate on savings bank deposits is still relatively higher than majority of other banks. Yes Bank is likely to continue this aggressive stance until the critical mass on CASA deposits (~3-32) is achieved. We expect CA to grow at 26.5 CAGR (28.5 CAGR from FY1-FY15) to Rs 13,65 crore by FY17, SA to grow at a faster pace of 35 CAGR to Rs 22,927 by FY17 (1 CAGR from FY15-FY17) and total CASA to grow at a 32 CAGR to Rs 36,532 crore. We expect CASA ratio to increase to 26.5 by FY17 from 23.1 currently. Term deposits are expected to grow at a CAGR of 2.2 to Rs 1,1,325 crore by FY17 and the overall deposit mobilization is expected to grow at a CAGR of 23 to Rs 137,857 crore by FY17. Deposit mix FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E CA TD Source : Yes Bank, Ventura Research Aggressive branch expansion Yes Bank has an aggressive branch expansion strategy in place it increased the number of branches from 214 in FY11 to 63 branches as of FY15 and further plans to increase it to 8 by FY16. The branch expansion program will not only help in raising the CASA ratio but also help in tapping the previously untapped market, increase its presence in retail banking and enhance customer acquisition Monday 24 th August, 215

114 Superior Asset quality maintained despite high growth With a granular asset base, Yes Bank has been successful in maintaining its asset quality despite high growth under challenging macro-economic conditions. Gross NPAs have been below.4 and Net NPAs below.1 for the past 4 years supported by a healthy Provision Coverage Ratio over 75. On a conservative basis, we expect Gross NPAs to increase to.55 and Net NPA to increase to.18 by FY17. Restructured assets stood at Rs 382 crore in FY15 (.5 of Gross Advances). Slippages stood at ~1.2 of gross advances in FY15, and are expected to remain at those levels going forward. Asset quality FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E PCR GNPA (RHS) NNPA Source Yes Bank, Ventura Research Q1 results tame street concerns on asset quality Recently, the street was abound with rumours of non-disclosure of NPAs, large proportion of stressed assets and potential default of a large account. However, the management has denied the same. In our opinion, the granular and diversified nature of Yes Bank s asset base provides a cushion to asset quality concerns. Having said this, the Q1FY16 results clearly demonstrated that the management was in full control and asset quality continues to remain exemplary Monday 24 th August, 215

115 Asset quality was well under control during Q1FY Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 GNPA NNPA Source : Yes Bank, Ventura Research Higher Capital Reserves validates growth potential With the latest infusion of capital (Rs 2,952 crore via QIP), Yes Bank was able to bolster its Capital Adequacy Ratio to 15.6 in FY15 (Tier I stood at 11.5, while Tier II stood at 4.1) from 8.93 in FY14. Being adequately capitalized, Yes Bank is well poised maintain its aggressive growth momentum from FY15-FY17. Further, we believe that the trigger point for raising the additional capital will be at (CAR). However, the bank is not averse to raising additional capital if a suitable opportunity presents itself. Infact, Yes Bank has plans for a $ 1 billion ADR or QIP issue offering in the next fiscal. Capital Adequacy Ratio FY1 FY11 FY12 FY13 FY14 FY15 Tier I Tier II Source : Yes Bank, Ventura Research Monday 24 th August, 215

116 Robust operational performance expected Operationally we expect NII to grow at a CAGR of 29.1 to Rs. 589 crore by FY17, lower than 35 CAGR from FY1-FY15 as the bank has achieved a sizeable scale. Other income, which constitutes income from transaction banking, financial markets and advisory and third party distribution, is expected to grow at a CAGR of 18 to Rs 246 crore, (CAGR 29 in the past five years). Continuous expansion of product & service offerings in fee based income areas, supported by rapid branch expansion and a change in management strategy towards Retail Banking (earlier largely focus on corporate lending) will continue to drive other income. Cost to income is expected to decline to by FY17 (~6 bps decline from FY15) on the back of cost efficiencies. We expect NIMs to increase gradually as the asset base shifts towards higher yielding retail and MSME loans expect NIMs to expand 3 bps to 3.5 by FY17. Earnings are expected to grow at a CAGR of 32 to Rs. 351 crores by FY17E, similar to the growth witnessed in the past. We expect RoE and RoA to remain stable at 21.5 and 1.7 in the coming two years. Yields, Cost and NIM RoE vs. RoA FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 1.4 YoA CoF NIM Source : Yes Bank, Ventura Research RoE Source : Yes Bank, Ventura Research RoA (RHS) Monday 24 th August, 215

117 4/9/27 9/9/27 2/9/28 7/9/28 12/9/28 5/9/29 1/9/29 3/9/21 8/9/21 1/9/211 6/9/211 11/9/211 4/9/212 9/9/212 2/9/213 7/9/213 12/9/213 5/9/214 1/9/214 3/9/215 as FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E Net Income growth at ~29 CAGR ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII NII growth Source : Yes Bank, Ventura Research Valuation re-rating on the cards The immediate peer for comparison is IndusInd Bank given the size of business. Yes Bank s current valuations are at a significant discount of.5x to that of IIB. P/ Adj. BV comparison between IndusInd and Yes Bank Yr Forward P/Adj. BV Yr Forward P/Adj. BV relative valuation Indusind bank Yes bank Yes vs. IndusInd Base Source: Ventura Research Source: Ventura Research This is despite the fact that the loan book size is set to outpace that of IIB over the forecast period more granular and higher retail exposure ensures reduced business risk and volatility NIMs have room to catch up as substantial head room is available for CASA expansion Monday 24 th August, 215

118 Impeccable asset quality Superior operational efficiency Comparable return ratios Yes Bank is one of our tops in the private banking space. Based on our financial model and valuations we believe that the stock has the potential to provide 19 return from the CMP of Rs 63 (1.6X FY17E Adj P/BV of Rs 399/ share) and recommend buying the stock. Our optimism is based on the fact that Yes Bank has sustained its growth momentum while maintaining the lowest NPA levels (GNPA.4 / NNPA.1) among peers. Yes Bank has significantly de-risked its business model by enhancing granularity of its deposit and asset base. Fee income growth has been sustained, NIMs have consistently expanded and cost of operations have been surprisingly kept low despite a rapid pan India branch roll out. Share holder return ratios continue to remain impressive inspite of frequent capital raising. Significant re-rating on the cards Barring the bear markets of FY28 and FY213, Yes Bank has consistently traded in the band of 2.3x to 3.6x its 1-Yr Fwd Adj. P/BV (with average multiple of 2.9x). Given the fact that the company has shown robust growth since inception with performance on par with all its peers, we believe a re-rating for Yes Bank is on the cards. 1,6 1,4 1,2 1, ` Yes Bank P/Adj. BV Band Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP 1X 1.95X 2.9X 3.85X 4.8X Source : Yes Bank, Ventura Research The following set of comparative charts of Yes Bank and IndusInd Bank operation metrics elucidates the compelling re-rating of valuation of Yes Bank Monday 24 th August, 215

119 FY FY FY FY FY FY FY FY FY16E FY17E d 19,37.4 FY FY FY FY FY FY FY FY FY16E FY17E IndusInd Bank s valuation more expensive than that of Yes Bank Yes Bank has got enough headroom to expand CASA ` crores CASA , 12, 1, 8, 6, 4, 2, - ` crores CASA Yes bank CASA (RHS) IndusInd bank CASA (RHS) Source: Yes Bank, Ventura Research Source: Indusind Bank, Ventura Research Size of lending book almost similar with an equivalent split among consumer and corporate lending 12 of loan books Yes Bank 12 of loan books IndusInd Bank FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Consumer Corporate Banking Consumer* Source: Yes Bank, Ventura Research Yes Bank s NIM to catch up with that of IIB Source: Indusind Bank, Ventura Research Yes Bank has higher operating efficiency 4. () 7 () FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 3 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes bank IndusInd bank Yes bank IndusInd bank Source: Yes Bank, Ventura Research Source: Yes Bank, Ventura Research Monday 24 th August, 215

120 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes Bank likely to enjoy faster profit growth ` crore PAT ` crores PAT Yes bank Yes yoy Growth () RHS IndusInd bank Indusind yoy Growth () RHS Source: Yes Bank, Ventura Research Source: Indusind Bank, Ventura Research Yes Bank has better Asset quality profile 3.5 () GNPA 2.5 () NNPA FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes bank IndusInd bank Yes bank IndusInd bank Source: Yes Bank, Ventura Research Source: Yes Bank, Ventura Research Return ratios of both the banks are almost similar 3 () ROE 2.5 () ROA Dip in ROE due to capital infusion, earning normalized within 2-3 quarters. Similar trend is expected in Yes Bank 1..5 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yes bank Indusind bank Yes bank Indusind bank Source: Yes Bank, Ventura Research Source: Yes Bank, Ventura Research Monday 24 th August, 215

121 as Both the banks are adequately funded for future growth () CAR () CAR FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E Yes bank Tier I Tier II IndusInd Bank Tier I Tier II Source: Yes Bank, Ventura Research Source: Indusind Bank, Ventura Research Monday 24 th August, 215

122 Financials & Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 8,294. 9, , , ,481.7 Efficiency Ratio () Interest Expense 6,75.2 7, ,84.2 9, ,672.6 Int Expended / Int Earned Net Interest Income 2, , , , ,89.1 Int Income / Total Funds YoY change () NII / Total Income Non Interest Income 1, , ,46.5 2, ,867.2 Other Inc. / Total Income Total Net Income 3, , , ,35.1 8,676.2 Ope. Exp. / Total Income Total Operating Expenses 1, , , ,65.3 3,74.3 Net Profit / Total Funds Pre Provision profit 2, ,688. 3, , ,61.9 Credit / Deposit YoY change () Investment / Deposit Provisions for expenses NIM Profit Before Tax 1, , ,91.2 3, ,11.9 YoY change () Solvency Taxes , ,591.8 Gross NPA (Rs. Cr) Net profit 1,3.7 1, ,5.5 2, ,51.1 Net NPA (Rs. Cr) YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI 3, , ,24.7 6, ,522.1 Tier I Capital () Inter bank borrrowing ,35.1 2, ,4.6 2,57.4 Tier II Capital () Investments 42,976. 4, , , ,823.1 Loan and Advances 46, , , , ,935.3 Per Share Data (`) Other Assets 5,51.7 6,52.6 6, , ,72.9 EPS Total Assets 99, , , ,1.8 24,58.8 Dividend Per Share Deposits 66, , , , ,856.7 Book Value Demand 6, ,17.2 8, , ,65. Adjusted Book Value of Share Savings 6,22.7 9, ,58 16, ,927.1 Term 54, , , , ,324.7 Valuation Ratio Borrowings 2, , , , ,864.2 Price/Earnings (x) Other Liability 5, , , ,77.7 9,299.5 Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves 5,449. 6, , , ,649.2 Total Liabilities 99, , , , ,117.4 Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Monday 24 th August, 215

123 DCB Bank Ltd. BUY Target Price `183 CMP `125 FY17E Adj. P/BV 1.8x Index Details Sensex 25,742 Nifty 7,89 Industry Bank Scrip Details Mkt Cap (` cr) 3535 BVPS (`) 54.2 O/s Shares (cr) 28.3 Av Vol (Lacs) Week H/L 15/78 Div Yield () FVPS (`) 1 Shareholding Pattern Shareholders Promoters 16.3 DIIs 24.4 FIIs 14.8 Public 44.5 Total 1 DCB vs. Sensex Since the economic debacle, DCB Bank has undertaken significant business restructuring to derisk its balance sheet and ensure sustainability of earnings. Asset quality, which was its bane, has been brought under control. Its granular and diversified asset book has ensured that growth has not come at the cost of asset quality. We initiate coverage on DCB with a BUY and a price target of Rs We have valued DCB based on our target P/Adj BV of 2.7X (on FY17E s adjusted Book Value). Our target implies an upside of 47 from the CMP. At a CMP of Rs. 125 the stock is trading at 1.8x FY17E P/Adj. BV. DCB is the smallest among the private banks and in comparison to its immediate peer CUB, we believe that DCB offers a better investment proposition. Since the restructuring of the business took place in FY11 the Bank s operating metrics has seen a decisive improvement. On all parameters vis a-vis business growth, operating metrics, return ratios etc DCB is better placed than CUB (as shown in the following charts) Currently DCB is trading at a premium of 1.2x to CUB on an Adj P/BV basis. We believe that this premium will continue to prevail over the forecast period. Prudent approach to credit growth augurs well A granular and diversified credit portfolio has enabled DCB Bank to derisk its balance sheet and ensure sustainability in earnings. Over the past five years, DCB s loan book grew at ~26 CAGR and crossed the Rs 1, crore mark in FY15. Management s prudent and cautious approach viz. a higher focus on secured lending has ensured that this healthy growth in loan book has not come at the cost of asset quality. Over the forecast period, we expect DCB Bank to maintain this momentum in loan book growth and clock a CAGR of ~2 to reach Rs 15,17 crores by FY17. The focus of the Bank will continue to be on enhancing mortgage credit, which we expect will grow at a CAGR of 25 to Rs 7,3 crores by FY17. In terms of the credit mix, given the management s aversion to risk, we expect the proportion of mortgage loans to increase to 47 of the loan book from 43 in FY15. Key Financials (` in Cr) Net Non ROE ROA Y/E Mar Interest Interest APAT EPS Adj. BV P/E P/Adj BV () () Income Income E E Monday 24 th August, 215

124 Advances Growth ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Retail Source : DCB Bank, Ventura Research Higher term deposits = better ALM In the past five years, DCB Bank s deposits have grown at a CAGR of 21 to Rs 12,69 crore in FY15, led by a 26 CAGR in term deposits which constitutes 77 of the total deposits. The management s strategy of focusing on term deposits has enabled them to better time their assets and liabilities, thereby resulting in a stable balance sheet. Given the longer tenure of its asset book, focus of DCB is more towards garnering ALM-favorable term deposits than towards CASA. The Bank s CASA ratio currently stands relatively low at 23.4, which we expect will marginally increase to 25 by FY17. Deposits to grow at a 2 year CAGR of 22 Deposit mix ` Crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Deposits Deposits Growth CA SA TD Source : DCB Bank, Ventura Research Source : DCB Bank, Ventura Research Monday 24 th August, 215

125 The overall deposit mobilization is expected to grow at a CAGR of 22 to Rs 18,771 crore by FY17. Term deposits are expected to grow at a CAGR of 23 to Rs 14,558 crore in FY17. In FY15, as the Bank raised capital and went slow on deposit growth, the C/D ratio increased to 83 from ~78 earlier. We expect the Credit to Deposit ratio to taper to 8 over the next two years Doubling of branches on the cards DCB bank has the lowest branch network of 154 branches spread primarily in the Western part of India. It is now looking to double its branch count and have an equitable presence pan India, primarily in Tier 2-Tier 6 cities through a cluster based approach. This strategy is in line with its focus on MSME leading and achieving a faster breakeven for its branches. Superior Asset quality to be maintained The management s persistent focus on maintenance of asset quality gives us great comfort. We factor in a marginal 2 bps increase in GNPA to 1.98 by FY17, while NNPAs are expected to remain stable at 1.1. The management has set an internal pre-defined limit of Rs 3 crores on exposure to large and unsecured loans. Similarly, enhancement of existing accounts will be capped at Rs 3 crore. A higher proportion of mortgage loans provide a great cushion in maintaining asset quality. Further, DCB Bank has a provisioning coverage ratio (PCR) of 43. The restructured asset book of DCB Bank stood at Rs. 5 crores, with no significant restructuring expected in the near future. Slippages stood between.5-.6 of gross advances in FY15. Also, DCB is planning to increase the floating provision base by 15 each year. Asset quality FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E PCR (RHS) GNPA NNPA Source DCB Bank, Ventura Research Monday 24 th August, 215

126 Adequate Capital Reserves In FY15, DCB Bank s Capital Adequacy Ratio (CAR) strengthened to 15.1 (+ 13 bps YoY) as it raised Rs. 25 crores through the issue of 3.4 crores shares to QIPs. Tier I capital stood at way above the RBI s mandated guidelines of 9, while Tier II capital stood at.7. The bank, thus, has adequate capital reserves to support its conservative- growth oriented approach. Capital Adequacy Ratio FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Tier I Tier II Source : DCB Bank, Ventura Research Operational growth to continue Operationally we expect NII to grow at a CAGR of 26.7 to Rs. 816 crore by FY17, similar to the CAGR from FY1-FY15. Other income is expected to grow at a CAGR of 2.5 to Rs 241 crores, much higher than the 9 CAGR witnessed in the past five years. For other income, we have assumed a conservative growth compared to the management s guidance of DCB is focusing on increasing its other income through increased cross selling of products, both in-house and third party by entering into partnerships. Cost to income is expected to decline to 55.2 by FY17 (~35 bps decline from FY15) on the back of relatively higher growth in other income and cost efficiencies. We expect NIMs to remain stable in the range of Earnings are expected to grow at a CAGR of 18 to Rs. 265 crores by FY17E. We expect RoE to moderate from 14 in FY15 to 13.8 in FY17, while RoA is expected to remain stable at Monday 24 th August, 215

127 Yields, Cost and NIM RoE vs. RoA FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Yield on Advances Cost of Funds NIM (RHS) FY11 FY12 FY13 FY14 FY15 FY16E FY17E RoE RoA (RHS) Source : DCB Bank, Ventura Research Source : DCB Bank, Ventura Research NII to grow at robust pace on a higher base ` crores FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII NII Growth Source : DCB Bank, Ventura Research Monday 24 th August, 215

128 9-Nov-6 9-Apr-7 9-Sep-7 9-Feb-8 9-Jul-8 9-Dec-8 9-May-9 9-Oct-9 9-Mar-1 9-Aug-1 9-Jan-11 9-Jun-11 9-Nov-11 9-Apr-12 9-Sep-12 9-Feb-13 9-Jul-13 9-Dec-13 9-May-14 9-Oct-14 9-Mar-15 Valuation DCB vs. CUB 4. 1 Yr Forward Adj. P/BV valuation DCB Bank 1-Yr Fwd. P/Adj. BV Band 2 ` Avg. P/Adj BV- 2.1 Avg. P/Adj BV Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 DCB CUB CMP.5X 1.3X 2X 2.8X 3.5X Source : Ventura Research Source : Ventura Research We initiate coverage on DCB with a BUY and a price target of Rs We have valued DCB based on our target P/Adj BV of 2.7X (on FY17E s adjusted Book Value). Our target implies an upside of 47 from the CMP. At a CMP of Rs. 125 the stock is trading at 1.8x FY17E P/Adj. BV. DCB is the smallest among the private banks and in comparison to its immediate peer CUB. We believe that DCB offers a better investment proposition. Since the restructuring of the business took place in FY11 the Bank s operating metrics have seen a decisive improvement. Asset quality which was its bane has been brought under control. On all parameters vis a-vis business growth, operating metrics, return ratios etc DCB is better placed than CUB (as shown in the following charts) Currently DCB is trading at a premium of 1.2x to CUB on an Adj P/BV basis. We believe that this premium will continue to prevail over the forecast period Monday 24 th August, 215

129 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E d FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E DCB to continue to trade at premium to CUB DCB has a larger CASA base compared to CUB ` crores CASA , 3, 25, 2, 15, 1, 5, - ` Crore City Union Bank DCB Bank CASA (RHS) CUB CASA (RHS) Source: DCB Bank, Ventura Research Source: CUB, Ventura Research Loan book composition of both the banks is similar FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Consumer FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Banking Consumer* Source: DCB Bank, Ventura Research Source: CUB, Ventura Research DCB s loan book to grow at a quicker pace ` crores DCB Bank ` crores City Union Bank FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E -3 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Advances Advances Growth Advances Advances Growth Source: DCB Bank, CUB, Ventura Research Source: DCB Bank, CUB, Ventura Research Monday 24 th August, 215

130 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Earnings growth of both the banks to mirror each other ` crores ` crores DCB Bank DCB yoy Growth () RHS -15 CUB CUB yoy Growth () RHS Source: DCB Bank, Ventura Research Source: CUB, Ventura Research Asset quality of both the banks is similar () NNPA () GNPA.5 1. FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E DCB Bank CUB DCB Bank CUB Source: DCB Bank, CUB, Ventura Research NIMs at par Source: DCB Bank, CUB, Ventura Research DCB s efficiency has improver remarkably 4. () 9 () FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 3 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E DCB Bank CUB DCB Bank CUB Source: DCB Bank, CUB, Ventura Research Source; DCB Bank, CUB, Ventura Research Monday 24 th August, 215

131 as Return ratios to catch up with CUB () ROA () ROE FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E DCB Bank CUB -2 DCB Bank CUB Source: DCB Bank, CUB, Ventura Research Source: DCB Bank, CUB, Ventura Research Both the banks are adequately funded for future growth DCB Bank CUB FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E Tier I Tier II Tier I Tier II Source: DCB Bank, Ventura Research Source: CUB, Ventura Research Monday 24 th August, 215

132 Financials and Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income , , , ,132. Efficiency Ratio () Interest Expense ,13. 1,316.1 Int Expended / Int Earned Net Interest Income Int Income / Total Funds YoY change () NII / Total Income Non Interest Income Other Inc. / Total Income Total Net Income ,56.7 Ope. Exp. / Total Income Total Operating Expenses Net Profit / Total Funds Pre Provision profit Credit / Deposit YoY change () Investment / Deposit Provisions for expenses NIM Profit Before Tax YoY change () Solvency Taxes Gross NPA (Rs. Cr) Net profit Net NPA (Rs. Cr) YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI Tier I Capital () Inter bank borrrowing Tier II Capital () Investments 3, , ,47.6 5, ,879.8 Loan and Advances 6, ,14.2 1, , ,17.1 Per Share Data (`) Other Assets EPS Total Assets 11, , , , ,373.1 Dividend Per Share Deposits 8, , , , ,771.4 Book Value Demand ,32.5 1, ,649.9 Adjusted Book Value of Share Savings 1, , , , ,42.9 Term 6,92.2 7, , , ,558.3 Valuation Ratio Borrowings 1, ,167. 1,25.2 1,51.7 Price/Earnings (x) Other Liability ,32. Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves ,33.4 1,52.9 1,786. Total Liabilities 11, , , , ,373.1 Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Monday 24 th August, 215

133 City Union Bank Ltd. ACCUMULATE Target Price `115 CMP `91 FY17E P/Adj. BV 1.7x Index Details Sensex 25,742 Nifty 7,89 Industry Bank Scrip Details With over 1+ years of existence, City Union Bank s (CUB) consistency in maintaining profitability, dividend payouts and asset quality gives us great comfort. Primarily a southern based bank, it is now looking to expand its presence in West India. At the helm of their strategy is conservative approach to lending particularly to SME/MSME and deposit mobilization which has helped the bank grow steadily, without too many hiccups, during various economic cycles. MktCap(`cr) 5,417 O/s Shares (Cr) Av Vol (Lacs) Week H/L 15.9/74.3 Div Yield () 1.1 FVPS (`) 2 Shareholding Pattern Shareholder Promoters - DIIs 1 FIIs 37 Public 53 Total Aug Sep Oct-214 CUB vs. Sensex 1-Nov Dec Jan Feb-215 City Union Bank 1-Mar Apr May Jun Jul-215 S&P Bse Sensex 1-Aug We initiate coverage on CUB with an Accumulate and a price target of Rs 115. We have valued CUB based on our target P/Adj BV of 2.2X (on FY17E s adjusted Book Value). Our target implies an upside of 26 from the CMP. At a CMP of Rs. 91, the stock is trading at 1.7x FY17E P/Adj. BV. CUB is a fledgling bank and is comparable to DCB. We believe that compared to CUB, DCB offers a better investment proposition. While CUB has performed commendably across economic cycles we believe that its performance is already built into the valuations. DCB since the restructuring of its business in FY11 has seen a sharp improvement in its operating metrics. Asset quality which was its bane has been brought under control. On all parameters viz., business growth, operating metrics, return ratios etc DCB is better placed than CUB (as shown in the following charts) Currently CUB is trading at a discount of.8x to that of DCB on the Adj P/BV basis. We believe that this discount will continue to prevail over the forecast period. Prudent strategy ensures steady credit growth CUB s advances have grown at a steady pace -- 5 year CAGR of ~14 to Rs 17,965 crore in FY15. Product-wise, working capital loans continue to account for 65 of the total loan book, while the proportion of MSME lending has increased from ~27 to ~35 in the past five years. The strategy is to build a loan portfolio of collateral-backed, high yielding and short duration advances, primarily based on floating interest rates (~85 of total loan book) which helps protect profitability. Key Financials (` in Cr) Y/E Mar Net Non P/E P/Adj BV Interest Interest APAT EPS Adj. BV ROE () ROA () (x) (x) Income Income E E 1, Monday 24 th August, 215

134 Tamil Nadu is one of the preferred destinations for SME/MSMEs and CUB has indepth expertise of lending to this sector. We believe the bank will continue to grow its loan book at a steady pace of 16 to Rs 24,6 crores by FY17, with proportions of MSME and working capital loans largely remaining the same. Retail and SME to fuel future credit growth 3 ` crores FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Retail & SME Source : CUB, Ventura Research Focus on term deposits to aid ALM CUB s deposits have grown at a 5 year CAGR of 19 to Rs 24,75 crore, led by term deposits (~8 of the total deposits) which have grown at a similar pace. The management is not very aggressive in increasing its CASA ratio, since it has been able to maintain NIMs upwards of 3 consistently for the past many years given the composition of its loan book. Further, term deposits constitute relatively higher maturity retail deposits, with no reliance on low yielding bulk corporate deposits. This helps maintain profitability and aid ALM with majority of the advances and deposits have a similar maturity profile. CASA share is expected to remain stable FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E CASA TD Source : CUB, Ventura Research Monday 24 th August, 215

135 We expect deposits to grow at a steady 2-year CAGR of 14.6 to Rs 31,659 crore led by a similar growth in term deposits to Rs 23,128 crore by FY17. We expect the CASA ratio to marginally increase from 19.2 in FY15 to 2.1 by FY17. Within the CASA mix, we expect SA deposits to increase at a 2-year CAGR of 2 to Rs 4,266 crore and CA to increase at a 2 year CAGR of 12.2 to Rs 1,965 crore by FY17. Deposit book to grow at ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Deposits Growth Source CUB, Ventura Research Geographical branch expansion As of March 215, CUB has 475 branches, of which 421 branches are located in the South and 324 in Tamil Nadu (~68) alone. Further, the branches are strategically located to tap and service the SME/MSME sectors -- ~6 of the branches are located in the semi urban and rural areas. We understand that the management is focused on further expanding its branch network in Maharashtra and Gujarat as well, which currently stands at 17 and 9 respectively. We expect the bank to add ~5-6 branches each year and reach a total branch network of ~575 branches by FY17. Healthy asset quality despite loan book skewed towards SME/MSME CUB s gross NPAs have remained in the range of , while Net NPAs have ranged around.5 to 1.3 in the past five years despite a loan book skewed towards SME/MSME and traders. CUB s loan book is granular in nature textiles, the largest sector that it lends to, constitutes only 5 of the total loan book. Further, the bank lends to the SME/MSME segment only after securing additional collateral in the form of residential property or personal guarantees. Further, these loans are based on one-to-one relationships unlike lending consortiums. This helps CUB closely monitor the asset quality regularly and ensure timely Monday 24 th August, 215

136 collections. On a conservative basis, we expect Gross NPAs to marginally increase from 1.86 in FY15 to 1.95 by FY17 and Net NPAs to increase from 1.3 to 1.4 during the same period. As of FY15, CUB s restructured standard assets stood at 1.44 of Gross Advances (FY14 1.7). During FY15, the bank restructured loans worth Rs 1.3 crore, and the balance o/s in respect of restructuring stood at Rs 26 crore (1.4 of total Gross advances) Slight increase in NPAs factored in FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E GNPA NNPA Source : CUB, Ventura Research Adequate Capital Reserves With a high CAR of (Basel II norms) and a core CAR of 16.3, we do not foresee any requirement for the bank to go in for capital infusion. It is well capitalized to realize the steady business growth that we anticipate in the coming years. Capital Adequacy Ratio FY11 FY12 FY13 FY14 FY15 FY16E FY17E Tier I Tier II Source : CUB, Ventura Research Monday 24 th August, 215

137 Operationally we expect NII to grow at a CAGR of 19.6 to Rs crores by FY17. Other income, which constitutes fee and treasury income would continue to form ~12 of the total income. The bank has been able to maintain NIMs at 3+, in line with top private banks, despite a low CASA. The bank s strategy of floating based interest rate loans and increasing proportion of high yielding SME/MSME will continue to help maintain profitability. We expect NIMs to expand from 3.16 in FY15 to 3.49 in FY17. Cost to income is expected to remain in the range of going forward. Earnings are expected to grow at a CAGR of 16 to Rs. 531 crores by FY17. We expect the RoE and RoA to remain stable at 16.4 and 1.5 in the coming two years. NII growth to pick up aided by NIM expansion Stable cost and yields to keep NIMs steady ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII Source : CUB, Ventura Research NII growth Source : CUB, Ventura Research YoA CoF NIM Uptick in return ratios expected C/I ratio expected to remain flat FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E RoE Source : CUB, Ventura Research RoA Source : CUB, Ventura Research Cost to Income Monday 24 th August, 215

138 Retail & SME loan book composition Traders MSME Agricluture Retail Traders Personal Loans Others Source : CUB, Ventura Research Valuation We initiate coverage on CUB with an ACCUMULATE and a price target of Rs 115. We have valued CUB based on our target P/Adj BV of 2.2X (on FY17E s adjusted Book Value). Our target implies an upside of 26 from the CMP. At a CMP of Rs. 91, the stock is trading at 1.7x FY17E P/Adj. BV. CUB is a fledgling bank and is comparable to DCB. We believe that compared to CUB, DCB offers a better investment proposition. While CUB has performed commendably across economic cycles we believe that its performance is already built into the valuations. DCB since the restructuring of its business in FY11 has seen a sharp improvement in its operating metrics. Asset quality which was its bane has been brought under control. On all parameters viz., business growth, operating metrics, return ratios etc DCB is better placed than CUB (as shown in the following charts) Currently CUB is trading at a discount of.8x to DCB on the Adj P/BV basis. We believe that this discount will continue to prevail over the forecast period Monday 24 th August, 215

139 9-Nov-6 9-Apr-7 9-Sep-7 9-Feb-8 9-Jul-8 9-Dec-8 9-May-9 9-Oct-9 9-Mar-1 9-Aug-1 9-Jan-11 9-Jun-11 9-Nov-11 9-Apr-12 9-Sep-12 9-Feb-13 9-Jul-13 9-Dec-13 9-May-14 9-Oct-14 9-Mar CUB vs. DCB 1 yr fwd P/Adj. BV relative valuation CUB 1-Yr Fwd. P/Adj. BV Band Avg. P/Adj. BV-.7x Avg. P/Adj. BV- 1.4x Avg. P/Adj. BV- 1.7x Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 Source : CUB, Ventura Research CUB DCB CMP 1X 1.5X 2X 2.5X 3X Source : CUB, Ventura Research Monday 24 th August, 215

140 Financials & Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 2, , , ,8.4 3,595.8 Efficiency Ratio () Interest Expense 1, , , , ,44.8 Int Expended / Int Earned Net Interest Income ,155. Int Income / Total Funds YoY change () NII / Total Income Non Interest Income Other Inc. / Total Income Total Net Income ,6.6 1, , ,668.3 Ope. Exp. / Total Income Total Operating Expenses Net Profit / Total Funds Pre Provision profit Credit / Deposit YoY change () Investment / Deposit Provisions for expenses NIM Profit Before Tax YoY change () Solvency Taxes Gross NPA (Rs. Cr) Net profit Net NPA (Rs. Cr) YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI 1,16.3 1,4.1 1, , ,449.7 Tier I Capital () Inter bank borrrowing , ,33.3 1, ,741.2 Tier II Capital () Investments 5, , , , ,175.7 Loan and Advances 15, , , , ,6 Per Share Data (`) Other Assets ,3.6 1,17.7 1,287.2 EPS Total Assets 22, , , , ,713.8 Dividend Per Share Deposits 2, , ,75. 27,66. 31,657.9 Book Value Demand 1, ,442. 1, , ,99.7 Adjusted Book Value of Share Savings 2,69.3 2, , , ,266.1 Term 16,9.1 18, , , ,292.1 Valuation Ratio Borrowings Price/Earnings (x) Other Liability ,14.2 1,361.3 Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves 1, ,97.7 2, , ,397.5 Total Liabilities 22, , , , ,713.8 Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Monday 24 th August, 215

141 Lakshmi Vilas Bank Ltd. BUY Target Price ` 11 CMP `74 FY17E P/Adj. BV.7x Index Details Sensex 25,742 Nifty 7,89 Industry Bank Scrip Details MktCap ( Cr) 1334 O/s Shares (Cr) 17.9 Av Vol (Lacs).7 52 Week H/L 111/69 Div Yield () 2.2 FVPS (`) 1 Shareholding Pattern Shareholder Promoters 9.5 DIIs 7.2 FIIs 1.7 Public 72.5 Total 1 Lakshmi Vilas Bank vs. Sensex Lakshmi Vilas Bank (LVB), one of the oldest private sector banks in the country, has a dominant presence in the South. LVB is on the path of revival from the aftermath of the economic turmoil that adversely impacted the bank from FY11-FY14. During this period, the bank s asset quality deteriorated substantially net NPAs increased from.9 in FY11 to 3.44 in FY14. However, with the change in focus towards high yielding Retail and MSME lending along with significant recovery and up-gradation of NPAs to standard asset category, we expect a revival in the bank s business over the forecasted period. We clearly believe that Lakshmi Vilas Bank presents a compelling case for emerging a winner given: Fastest loan growth (22 CAGR FY15-17) among peers leading to market share gains. The worst is behind us with respect to asset quality and the Bank is on track to improve asset quality - GNPA (2.2, -55bps), NNPA (1.4,-45 bps) to comparable levels with that of peers by FY17. While during the Q1FY16 all its peers have seen worsening of asset quality, LVB stands apart with its significant improvement. The restructured book is also expected to moderate by FY17 NIM expansion is on the cards given its strong focus to improve CASA & thereby reduce cost of funds (-15bps) along with a slight expansion of lending yields (+7 bps) Steep improvement in return ratios RoA and RoE. Faster earnings growth and compelling valuations Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug We initiate coverage on Lakshmi Vilas Bank with a BUY and a target price of Rs. 11 over a period of 18 months. We have valued Lakshmi Vilas Bank based on our target Price to Adjusted Book Value of 1.15X on FY17E book value. Our target price implies an upside of ~48 from the CMP. At the CMP of Rs. 74, the bank is trading at.7x FY16 and.7x FY17 of its Adj. P/BV. Lakshmi Vilas Bank S&P Bse Sensex Key Financials (` in Cr) Y/E Mar Net Non P/E P/Adj BV Interest Interest APAT EPS Adj. BV ROE () ROA () (x) (x) Income Income E E Monday, 24 th August, 215

142 Retail & MSMEs to fund next leg of credit growth LVB is embarking on its next leg of growth with a thrust on the Retail and MSMEs segment. LVB is looking to leverage its rural and sub-rural reach & market expertise to provide MSMEs with term and working capital loans for shorter durations (1 to 3 years) to enhance credit growth. Retail Lending to bolster loan growth 3 ` Crores FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Retail & SMR Source : LVB, Ventura Research Further, i) launch of new products such as LAP viz. Lakshmi Business Credit ii) Tie-ups with HDFC and Ashok Leyland for home loan and CV financing respectively, and iii) huge potential in the under-penetrated MSME lending market will drive growth in the coming years. We expect the loan book to grow at 14 CAGR to Rs 24,338 crore by FY17E. In the past, LVB grew its loan book by focusing on wholesale lending, which helped the bank achieve a CAGR of 21 over FY1-15. However, the economic slowdown resulted in delinquencies leading to a deterioration of its asset quality. The bank s recent shift in focus onto MSME and Retail contribution of Retail and MSME has increased from ~45 in FY12 to 53 in FY15 -- should help it diversify its risk portfolio. We expect the retail and MSME proportion in the loan book to increase to 36 (FY15: 34) and 21 (FY 15: 19) respectively by FY Monday, 24 th August, 215

143 Granular Retail portfolio Housing Education Loans Gold loans Other Personal Loans Personal Loans Loans collateralised by Deposits Source : LVB, Ventura Research Focus on CASA growth; 2 targeted by FY17E LVB s CASA ratio at 17 in FY15 is relatively lower than other private sector banks, largely owing to slower branch expansion (8 CAGR FY1-FY15, 4 branches as of FY15) and an erstwhile focus on term deposits. However, LVB has re-worked its strategy. It is now focusing on driving the low cost CASA deposits through branch expansion (added 19 branches in the past two years) and hired a dedicated sales force of 5 employees with an incentivized pay structure to mobilize CASA. CASA to grow at over 3 CAGR FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E CASA TD Source : LVB, Ventura Research Monday, 24 th August, 215

144 Further, the increased focus towards the MSME segment should augur well for CA mobilization and help improve the CASA ratio steadily to ~2 by FY17E (Rs crore, CAGR of 32 from FY15-17). We expect the overall deposit base to grow at a CAGR 2.3 to Rs 31,815 crore by FY17, driven by 56 CAGR in CA to Rs 3491 crore and 25 CAGR in SA to Rs 3459 crore by FY17. We expect term deposits to grow at a slow pace of ~16.5 CAGR to Rs 24,864 crore over the forecasted period. Higher share of retail term deposits aids Asset-Liability Management (ALM) LVB has managed ALM relatively better than peers, with ~83 of deposits and ~89 of advances maturing below three-years as of FY14. The banks advances mix is tilted more towards working-capital loans (~7), which is majorly financed by retail term deposits which form ~86 of the deposits. The better asset-liability match should also help LVB maintain stable margins across interest rate cycles as a similar maturity pattern helps to pass on deposit rate hikes to borrowers. Asset quality expected to improve The LVB management has successfully managed to arrest the asset quality deterioration -- Net NPAs improved from 3.44 in FY14 to 1.85 in FY15. Considerable amount of secured lending with LTV in the range of 6 to 8, restructuring and up- gradation of bad loans into standard category, recalibration in disbursement towards corporates and risky sectors should help control slippages and improve asset quality. We expect Gross NPAs to improve from 2.75 in FY15 to 2.2 in FY17 and Net NPAs to improve from 1.85 in FY15 to 1.4 in FY17. We expect restructured assets, which stood at Rs 1315 crore in FY15 to constitute 8 of total advances from 9 currently. Asset Quality to improve further FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E GNPA NNPA Source : LVB, Ventura Research Monday, 24 th August, 215

145 Adequate Capital Reserves to sustain restructuring LVB recently infused capital via a rights issue which increased the Capital Adequacy Ratio (CAR) to 13.7 in FY15 from 1.9 in FY14. LVB is adequately capitalized to undertake the envisaged restructuring exercises. Capital raising to assist in maintaining CAR FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Tier I Tier II Source : LVB, Ventura Research Operationally we expect NII to grow at a CAGR of 4.3 to Rs.137 crore by FY17, higher than 16 CAGR from FY1-FY15, which was a slow growth period for the bank. Cost to income is expected to improve from 55 in FY15 to 5.5 by FY17. LVB s operating model has largely remained cost-heavy due to lower operating efficiency and low CASA per branch as compared to its peers. However, the management is confident of bringing in operating efficiencies with growth in CASA and effective branch expansion strategy. We expect NIMs to increase gradually as the asset base shifts towards higher yielding retail and MSME loans; we expect NIMs to expand by 1 bps to 3.1 by FY17. Earnings are expected to grow at a CAGR of 7 to Rs. 49 crores by FY17 on a low base. With improving asset quality and profitability, we expect RoE to expand 54 bps to 14.7 in FY17 and RoA to expand 7 bps to 1.2 in FY17 from FY15 levels Monday, 24 th August, 215

146 Lower cost of funds to help sustain NIMs NII growth to remain above ` Crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E -1 Source : LVB, Ventura Research YoA CoF NIM NII Source : LVB, Ventura Research NII Growth Higher income base to improve C/I ratio Higher profitability to propel return ratios FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source : LVB, Ventura Research Cost to Income RoE Source : LVB, Ventura Research RoA Monday, 24 th August, 215

147 Valuation Among the other 5 mid-sized banks we clearly believe that Lakshmi Vilas Bank presents a compelling case for emerging a winner given: Fastest loan growth (22 CAGR FY15-17) among peers leading to market share gains. The worst with respect to asset quality is behind us and the Bank is on track to improve its asset quality - GNPA (2.2, -55bps), NNPA (1.4,-45 bps) to levels comparable with that of peers by FY17. While during the Q1FY16 all its peers have seen a worsening of asset quality, LVB stands out with its significant improvement. The restructured book is also expected to moderate by FY17 Moderate improvement in asset quality 3.5 Gross NPA 2.5 Net NPA Federal KVB SIB LVB KBL DCB Federal KVB SIB LVB KBL DCB Q4FY15 Q1FY16 Q4FY15 Q1FY16 Source : Ventura Research Restructured Assets kept under check 3 ` crores Federal KVB SIB LVB KBL DCB Q4FY15 Q1FY16 Source : Ventura Research Monday, 24 th August, 215

148 2-Yr EPS CAGR NIM expansion on the cards given its strong focus to improve CASA & thereby reduced cost of funds (-15bps) and slight expansion of lending yields (+7 bps) Steep improvement in return ratios RoA and RoE. Faster earnings growth and compelling valuations. Fastest estimated earnings growth and cheaper valuations augur well for LVB LVB KarBank KVB DCB SIB 15. FedBank 1 CUB FY17E P/Adj. BV Source : Ventura Research We initiate coverage on Lakshmi Vilas Bank with a BUY and a target price of Rs. 11 over a period of 18 months. We have valued Lakshmi Vilas Bank based on our target Price to Adjusted Book Value of 1.15X on FY17E book value. Our target price implies an upside of ~48 from the CMP. At the CMP of Rs. 74, the bank is trading at.8x FY16 and.7x FY17 of its Adj. P/BV. Adj. P/BV valuation bands for LVB 15 ` Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP.3X.6X.9X 1.2X 1.5X Source : LVB, Ventura Research Monday, 24 th August, 215

149 16-Apr-7 16-Aug-7 16-Dec-7 16-Apr-8 16-Aug-8 16-Dec-8 16-Apr-9 16-Aug-9 16-Dec-9 16-Apr-1 16-Aug-1 16-Dec-1 16-Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Apr-7 16-Sep-7 16-Feb-8 16-Jul-8 16-Dec-8 16-May-9 16-Oct-9 16-Mar-1 16-Aug-1 16-Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Apr-7 16-Sep-7 16-Feb-8 16-Jul-8 16-Dec-8 16-May-9 16-Oct-9 16-Mar-1 16-Aug-1 16-Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Apr-7 16-Sep-7 16-Feb-8 16-Jul-8 16-Dec-8 16-May-9 16-Oct-9 16-Mar-1 16-Aug-1 16-Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar-15 LVB vs. KVB LVB vs. KBL Yr Forward P/Adj. BV relative valuation Yr Forward P/Adj. BV relative valuation Source : Ventura Research LVB KVB Source : Ventura Research LVB KBL LVB vs. SIB Yr Forward P/Adj. BV relative valuation LVB vs. FEDB 3. 1 Yr Forward P/Adj. BV relative valuation LVB SIB LVB FedBank Source : Ventura Research Source : Ventura Research Monday, 24 th August, 215

150 LVB has demonstrated strong growth in advances and expected to outperform peers 8 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank ` Crores Source : Ventura Research LVB s NIMs expected to be in line with peers over the forecast period 4. Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Significant reduction in LVB s Cost to Income ratio on the cards 8 7 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Monday, 24 th August, 215

151 While LVB s elevated GNPAs are expected to come down sharply 7. Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research NNPA though expected to come off sharply will still remain elevated 4. Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research LVB expected CASA growth highest among peers 4 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Monday, 24 th August, 215

152 RoE expected to improve considerably compared to peers 3 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Sharp improvement of RoA on the anvil 1.8 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank Source : Ventura Research Monday, 24 th August, 215

153 Financials and Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 1,76.5 1,984. 2, , ,41. Efficiency Ratio () Interest Expense 1, , , ,28.3 2,364.3 Int Expended / Int Earned Net Interest Income ,36.7 Int Income / Total Funds YoY change () NII / Total Income Non Interest Income Other Inc. / Total Income Total Net Income ,75.9 1,386.1 Ope. Exp. / Total Income Total Operating Expenses Net Profit / Total Funds Pre Provision profit Credit / Deposit YoY change () Investment / Deposit Provisions for expenses NIM Profit Before Tax YoY change () Solvency Taxes Gross NPA (Rs. Cr) Net profit Net NPA (Rs. Cr) YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI , , , ,525. Tier I Capital () Inter bank borrrowing Tier II Capital () Investments 4, , ,13.8 7, ,816.1 Loan and Advances 11, , , , ,338.3 Per Share Data (`) Other Assets ,27.2 EPS Total Assets 17, , , , ,925. Dividend Per Share Deposits 15, , , , ,814.8 Book Value Demand , ,44.1 3,491.1 Adjusted Book Value of Share Savings 1, , , , ,459.5 Term 13, , , , ,864.2 Valuation Ratio Borrowings Price/Earnings (x) Other Liabilities Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves ,377. 1,86.4 2,469.1 Total Liabilities 17, , , , ,925. Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Monday, 24 th August, 215

154 Federal Bank Ltd. HOLD Target Price `73 CMP `61 FY17E P/Adj. BV 1.2x Index Details Sensex 25,742 Nifty 7,89 Industry Bank Scrip Details MktCap(`cr) 1,462 O/s Shares (Cr) Av Vol (Lacs) Week H/L 79/58 Div Yield () 1.6 FVPS (`) 2 Shareholding Pattern Shareholder Promoters - DIIs 33.9 FIIs 34.4 Public 31.6 Total 1 Federal Bank vs. Sensex Federal Bank (FEDBANK) is one of the largest old generation private sector banks, with a dominant presence in the South -- ~47 of the branch network is located in Kerala alone. After a muted business growth in FY14, FEDBANK made a strong comeback in FY15 backed by an improving macroeconomic scenario in South India and strategy modifications reducing exposure to riskier sectors, diversifying asset base and undertaking digital initiatives to control costs. Federal Bank has been proactive in the launch of new product and service offerings in the digital space. While we are optimistic about these forays, we remain concerned about its asset quality which is expected to worsen over the forecast period. Further the loan growth of 14.6 CAGR is expected to be in line with that of the industry, leading to an earnings growth of 11 over the period FY At the current price of Rs. 61, the stock is trading at 1.2X of its FY17E Adj. P/BV. We believe that much of the appreciation is already factored into price. We initiate our coverage on Federal Bank with a target price of Rs. 73 (1.2X FY17 Adj. P/BV) and recommend a HOLD on the stock. Credit growth to revive during FY16-17 FEDBANK s advances have grown at a 5-year CAGR of 15 to Rs 51,285 crore in FY15. While the bank maintained a sustained growth of ~18-2 from FY1 to FY13, advances de-grew by 1.5 in FY14 on account of the slowdown in the key markets of South India and the management s stance of being selective in credit disbursals. However, it also bought down the ballooning NPA levels significantly from Gross NPAs of ~3.5 to 2.5 in FY14. As the economic conditions improved, FEDBANK s advances grew at 18.1 in FY15. The management s prudent credit management gives us great comfort. Key Financials (` in Cr) Y/E Mar Net Non P/E P/Adj BV Interest Interest APAT EPS Adj. BV ROE () ROA () (x) (x) Income Income 214 2, , E 2, E 3,169 1, Monday 24 th August, 215

155 Retail credit expected to be robust, Corporate muted 8 ` Crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Corporate Retail & SME Source :Federal Bank, Ventura Research The proportion of high yielding retail and SME & Agri loans has consistently been on the rise from ~55 in FY12 to 68 in FY15. This has helped improve profitability and add granularity to the asset base which could provide a cushion in adverse economic situations. Going forward, we believe FEDBANK will be able to sustain the growth momentum given its strong brand power in the South and anticipated economic revival. We expect advances to grow at a 2 year CAGR of 15 to Rs 67,348 crores in FY17 led by a 16 CAGR in SME & Agri loans to Rs 26,362 crore, 18 CAGR in Retail loans to Rs 21,376 crore and 9 CAGR in Corporate loans to Rs 19,69 crore in FY17. Diverse retail mix Housing Gold Mortgage Others Source : Federal Bank, Ventura Research Monday 24 th August, 215

156 Focus on improving CASA ratio FEDBANK s deposits have grown at a 5 year CAGR of 14 to Rs 7,825 crore, led by growth in CASA to Rs 21,784 crore (CA: 6, SA: 25 of total FY15 deposits) and 13 growth in term deposits to Rs 49,41 crore in FY15. The management has focused on improving the CASA ratio and reducing the dependence on high cost bulk term deposits (from 25.3 of deposits in FY11 to 1.1 in FY15). Deposits to grow at 14.1 CAGR CASA share expected to grow steadily ` Crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Deposit Deposit growth CASA TD Source : Federal Bank, Ventura Research Source : Federal Bank, Ventura Research For instance, CASA ratio has improved from ~26 in FY1 to ~3.7 in FY15, primarily led by increase in the contribution of SA deposits from 21.1 to 25 during the same period. Aggressive branch expansion and focus on garnering low cost NRI SA deposits through foreign exchange remittances from expats based in the Middle East has been the key to SA growth. The contribution of NRI deposits to total SA deposits has increased from 4.4 in FY11 to 45.5 in FY15. Also, within term deposits, the proportion of NRI term deposits has increased from 37.5 in FY11 to 43.2 by FY15. We understand that the management is looking to sustain the CASA ratio in the range of and enhance growth in its deposits through sustained focus on NRI, HNI and salaried class deposits, Priority Banking initiatives, and branch expansions. We expect CASA to grow at a 2 year CAGR of 19 to Rs 3,664 crore by FY17 led by 18 growth in SA deposits to Rs 24,783 crore. CASA ratio is expected to improve from 3.7 in FY15 to 33.3 by FY17. Term deposits are expected to grow at CAGR of 16 to Rs 66,44 crore by FY17E. Overall deposits mobilization is expected to grow at a CAGR of 14.1 to Rs 92,131 crore by FY Monday 24 th August, 215

157 Geographic diversification of branch network on the cards As of Q1FY16, FEDBANK s branch strength stands at 1247, with presence primarily in South and West India, and some parts of North India. Of the total branch network, ~47 is located in Kerala, ~11 in Tamil Nadu and 8 in Maharashtra and Karnataka each. The management is consciously working to reduce its dependence on Kerala, which constituted 55 of the total branch strength in FY12. FEDBANK has steadily expanded its branch strength, primarily on a cluster bases, at a 5-year CAGR of 13 to 1247 as of date. We expect the steady pace of expansion to continue given its focus on garnering retail deposits. Asset quality has substantially improved; though concerns remain FEDBANK has successfully improved its asset quality Gross NPAs have come down from 3.49 in FY11 to 2.4 in FY15. However, Net NPAs have increased from.6 in FY11 to.73 in FY15, which effectively means that the bank has lowered its provisions Provision coverage ratio has reduced from 84 in FY11 to 64 in FY15. With a relatively more diversified asset book, higher focus on Retail & SME lending, and single account exposure restricted to Rs 1 crore (except for very large accounts), the bank hopes to maintain GNPAs at between in the coming two years. However, there are few accounts worth Rs 3-4 crore which are currently under stress and key monitrables for asset quality concerns. We expect the GNPA to increase to 2.27 in FY17 and Net NPA to increase to 1.4 by FY17. Upside risk on asset quality limited FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E PCR GNPA NNPA Source : Federal Bank, Ventura Research Monday 24 th August, 215

158 Adequate Capital Reserves With a high CAR of 15.7 and core CAR of 14.4, we do not foresee any requirement for the bank to go in for capital infusion. It is well capitalized to realize the steady business growth that we anticipate in the coming years. The bank is adequately funded With 14.8 Tier I capital FY1 FY11 FY12 FY13 FY14 FY15 Tier I Tier II Source : Federal Bank, Ventura Research Operationally we expect NII to grow at a CAGR of 19 to Rs. 3,168 crore by FY17, higher than 11 CAGR from FY1-FY15. We don t anticipate that the bank will witness a FY14-like year in terms of a business slowdown. Fee income is expected to grow at a 17 CAGR to Rs crore by FY17 (CAGR 2 in the past five years). Continuous expansion of product & service offerings in fee based income areas, supported by rapid branch expansion and a number of digital initiatives such as online account opening and mobile based transactions will drive other income. The digital initiatives will also help control costs. We expect the bank to arrest the increase in cost to income ratio which was 37 in FY11 and has reached 5 in FY15; we expect the ratio to decline marginally to ~49.2 by FY17. The bank has been able to maintain NIMs at 3+ consistently on the back of strong retail-based liability franchisee and an increasing proportion of retail and SME/MSME loans. We expect NIMs to improve from 3.1 in FY15 to 3.2 by FY17. Earnings are expected to grow at a CAGR of 11 to Rs. 1,235 crores by FY17E, similar to the growth witnessed in the past. We expect RoE and RoA to remain stable at and in the coming two years Monday 24 th August, 215

159 Steady Cost and yield will help NIMs to sustain Return ratios to remain stable FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 1. YoA CoF NIM RoE RoA Source : Federal Bank, Ventura Research Source : Federal Bank, Ventura Research C/I ratio has topped out, to improve marginally NII growth to bounce back ` Crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Cost to Income NII NII growth Source : Federal Bank, Ventura Research Source : Federal Bank, Ventura Research Monday 24 th August, 215

160 Valuation Federal Bank has been proactive in the launch of new product and service offerings in the digital space. While we are optimistic about these forays we remain concerned about its asset quality which is expected to worsen over the forecast period. Further the loan growth of 14.6 CAGR is expected to be in line with that of the industry, leading to an earnings growth of 11 over the period FY We believe that much of the appreciation is already factored into the price. At the current price of Rs. 61, the stock is trading at 1.2X of its FY17E Adj. P/BV. We initiate our coverage on Federal Bank with a target price of Rs. 73 (1.2X FY17 Adj. P/BV) and recommend a HOLD on the stock. Federal Bank 1-Yr Fwd. P/Adj. BV 9 ` Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP.3X.6X.9X 1.2X 1.5X Source : Ventura Research Monday 24 th August, 215

161 Financials & Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 6, , , , ,326.3 Efficiency Ratio () Interest Expense 4, , ,39.1 5, ,157.4 Int Expended / Int Earned Net Interest Income 1, , ,38.4 2,74 3,168.9 Int Income / Total Funds YoY change () NII / Total Income Non Interest Income ,84.6 Other Inc. / Total Income Total Net Income 2, , , , ,253.5 Ope. Exp. / Total Income Total Operating Expenses 1, , ,63.9 1, ,91.5 Net Profit / Total Funds Pre Provision profit 1, ,48.4 1, , ,161.9 Credit / Deposit YoY change () Investment / Deposit Provisions for expenses NIM Profit Before Tax 1, ,212. 1,521. 1, ,816.6 YoY change () Solvency Taxes Gross NPA (Rs. Cr) 1,554. 1,87.4 1,57.7 1,33. 1,425.1 Net profit ,5.7 1,8 1,235.3 Net NPA (Rs. Cr) YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI 2, ,14.3 3, , ,62.6 Tier I Capital () Inter bank borrrowing , ,4.5 1, ,764.5 Tier II Capital () Investments 21, , , , ,35.6 Loan and Advances 44, , , , ,347.6 Per Share Data (`) Other Assets 2,61.7 2,51.8 2, ,312. 2,641.7 EPS Total Assets 71, , , , ,7,122. Dividend Per Share Deposits 57, , ,825. 8, ,13.8 Book Value Demand 2,98.9 3, ,56.6 4, ,88.4 Adjusted Book Value of Share Savings 12, , , , ,783.4 Term 41, , , , ,467. Valuation Ratio Borrowings 5,187. 5,688. 2,38.2 2, ,523.7 Price/Earnings (x) Other Liability 1, , , , ,874.8 Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves 6, , , , ,25 Total Liabilities 71, , , , ,7,122. Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Monday 24 th August, 215

162 South Indian Bank Ltd. HOLD Target Price `24 CMP `19 FY17E P/Adj. BV.7x Index Details Sensex 25,742 Nifty 7,89 Industry Bank Incorporated in 1929, South Indian Bank (SIB) is a leading mid-sized private sector bank with a dominant presence in Kerala. SIB is adopting a fourpronged strategy for future growth: i) Enhancing exposure to high yielding Retail and SME segments ii) Improving asset quality, which has deteriorated in the past few quarters iii) Continuing efforts to improve CASA mix and iv) Undertaking digital initiatives for client acquisition and retention. Scrip Details MktCap (`cr) 2,626 O/s Shares (Cr) 135. Av Vol (Lacs) Week H/L 32/19 Div Yield () 2.6 FVPS (`) 1 Shareholding Pattern Shareholder Promoters - DIIs 12.9 FIIs 28.1 Public 59. Total 1 South Indian Bank vs. Sensex South Indian Bank has seen significant deterioration in asset quality in FY15. While the asset quality is not expected to worsen from current levels, it is expected to remain elevated over the forecast period. The Bank is expected to see a significant churn in the composition of its loan book (from low yielding assets to higher yielding ones) however loan growth is expected to be in line with that of the sector. NIMs are expected to expand marginally (but are expected to be significantly lower than those seen in FY13.) We do not expect a significant re-rating of the stock given the fact its return ratios are also expected to remain flat and significantly off its highs of 2 (RoE) and 1.1 (RoA) established in FY12. We value the Bank at.9x Adj. P/BV at Rs. 27, implying a potential upside of 26 over a period of 18 months. We recommend a HOLD on the stock. Reduced exposure to corporate; increased to SME SIB s advances have grown at a 5 year CAGR of 19 to Rs 37,392 crore in FY15. In line with the bank s strategy of growing its exposure to high yielding sectors, the SME portion in SIB s loan book has increased from 9 in FY12 to 21, while the corporate loan book has reduced from 46 in FY12 to 42 in Q1FY16. However, the proportion of retail exposure, which primarily constitutes Housing loan (24), Gold Loan (21), loan to Service & Traders (18) and Manufacturing sector (16), has reduced from 37 to 24 during the same period. The management is focusing on enhancing the retail and SME portion through the following initiatives: i) Dedicated retail hub in Cochin for focusing on home loans; two more hubs planned one in South India and one in North India; Green Channel branches to drive SME loan Key Financials (` in Cr) Y/E Mar Net Non P/E P/Adj BV Interest Interest APAT EPS Adj. BV ROE () ROA () (x) (x) Income Income 214 1, , E 1, E 1, Monday 24 th August, 215

163 ii) Centralized processing of loans with focus on faster approvals iii) Requisite staff training to push mortgage loans; iv) Television tapped for marketing retail loan products ( has roped in Mamootty, an actor, as brand ambassador) v) New product introductions in various segments The gold loan portfolio, which finds strong demand in the South, has reduced from Rs 595 crore in June 214 (22 of advances) to Rs 4268 crore in June 215 (11 of advances), a de-growth of 28 YoY. The primary reason for the fall being the crash in gold prices and the low Loan-to-Value ratio on gold loans. However, the management has indicated that it is taking steps to revive the gold loan segment by rationalization of LTV allowed within lending norms and leveraging rural branches to focus on gold loans. It plans to increase the total gold loan composition to 15 of its lending book in the coming years. Also, the management envisages reducing its corporate loan book exposure to 3 in future. Retail lending to propel loan book for SIB 6 5 ` crores FY11 FY12 FY13 FY14 FY15 FY16E FY17E Retail Corporate Source : South Indian Bank, Ventura Research We expect SIB s advances to grow at a 2 year CAGR of 14 to Rs 48,627 crore by FY17, with the proportion of corporate loan book expected to decline to 31 by FY17 from 41 in FY15 and retail portion expected to increase from 25.4 in FY15 to 3 by FY17. Efforts to improve CASA mix SIB s deposits have grown at a 5-year CAGR of 18 to Rs 51,912 crore, led by an 18 CAGR in term deposits to Rs 41,229 crore and 15 CAGR in CASA (CA: 3.5, SA: 17.8 of total FY15 deposits) Monday 24 th August, 215

164 The bank s CASA ratio has remained stagnant in the range of in the past five years; CASA stood at 22.3 in Q1FY16. The management is now taking concentrated efforts to increase its CASA ratio including, i) setting specific CASA related targets, ii) enhancing digital banking initiatives, iii) setting up a central processing unit to ease load on branches, and iv) reducing the proportion of retail bulk deposits. Deposit growth to pick up to compliment credit book ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Deposit Deposits grwth Source :South Indian Bank, Ventura Research It aims to improve the CASA mix by ~2 each year. We estimate the CASA ratio to improve to by FY17 from 2.59 in FY15, with CASA growing at a 2- year CAGR of 16 to Rs crore. We expect term deposits to grow at a slower rate 11 CAGR to Rs 51,81 crore by FY17 (78 of total deposit base) as compared to 18 CAGR from FY1-FY15. Overall deposits mobilization is expected to grow at a CAGR of 12 to Rs 65,446 crore by FY17. Share of CASA to increase marginally FY1 FY11 FY12 FY13 FY14 FY15 CASA TD Source :South Indian Bank, Ventura Research Monday 24 th August, 215

165 Improving branch productivity As of Q1FY16, SBL s branch strength stood at 828, with 447 branches in Kerala and 239 branches in South India, excluding Kerala. SBL s pace of branch expansion has been moderate at 5-year CAGR of 8 to 828 as of date. It has commenced a phase-wise productivity improvement in branches; 15 branches have been taken up in Phase I. The management aims to re-distribute resources efficiently to bring in cost efficiencies in these branches. Taking steps to improve deteriorating asset quality SIB s asset quality worsened in Q1FY16; Gross NPAs increased to 1.85 (+14 bps QoQ, +35bps YoY), while Net NPAs increased to 1.21 (+25 bps QoQ, +3 bps YoY). Fresh slippages in Q1FY16 stood at Rs 175 crore with majority arising from a single Rs 6 crore account in the steel sector. The management has indicated that this account could be upgraded in the coming quarter. Also, two accounts totaling Rs 23 crore are under watch. During Q1FY16, total restructured assets stood at Rs 217 crore (5.5 of total advances). The management is taking steps to arrest the deteriorating asset quality -- during FY11-FY15, GNPAs increased from 1.11 to 1.71, while net NPAs increased from.29 to.96. Apart from cleaning its books through the sale of stressed assets to Asset Reconstruction companies, the bank is also setting up a recovery cell to monitor bad loans and restructured assets. It has adopted a cautious approach on large account exposures and is taking steps to enhance the retail and SME loan book which will granulize the asset base. Accordingly, we expect the asset quality to remain stable GNPA expected at 1.68, Net NPA at.95 by FY17. Asset Quality to remain stable FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E PCR (RHS) GNPA NNPA Source : South Indian Bank, Ventura Research Monday 24 th August, 215

166 Adequate Capital Reserves With a CAR of 11.4 (Basel III) and core CAR of 1, the bank may require additional funding to support future growth. However, with increasing proportion of retail loan book with the lower risk weights, the requirement for additional capital may be limited. Capital infusion may take place over the forecast period FY1 FY11 FY12 FY13 FY14 FY15 Tier I Tier II Source : South Indian Bank, Ventura Research Operationally we expect NII to grow at a CAGR of 14.5 to Rs crore by FY17 (19 CAGR in the past five years). Fee income is expected to grow at a 15 CAGR to Rs 4 crore by FY17 (CAGR 22 in the past five years). SIB is focusing on growing its other income, primarily by i) strengthening its retail presence ii) focusing on NRI remittances and currency conversion iii) integrating domestic and forex treasury operations to enhance treasury income and iv) expanding the POS/ATM network SIB s Cost to income ratio has increased from ~47 in FY11 to 52.7 in FY15. The bank is taking a number of steps to bring in operational efficiencies such as i) revamping branch operations to enhance productivity, and ii) undertaking several digital initiatives such as mobile and internet based applications. The bank s internet transaction value has increased to Rs 5936 crore in FY15, from Rs 3127 crore in FY14, while mobile transaction value has increased to Rs 13 crore in FY15 from Rs 2 crore in FY14. We expect the cost-to-income ratio to remain stable at 52.7 in FY Monday 24 th August, 215

167 Higher advances to help in NII uptick C/I ratio to moderate over the forecast period ` crores FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII NII growth Cost to Income Source :South Indian Bank, Ventura Research Source : South Indian Bank, Ventura Research The bank s NIM contracted from 3.1 in FY11 to 2.7 in FY15 as the loan book largely comprises of low yielding corporate loans. NIMs further deteriorated in Q1FY16 to 2.54 due to a decline in lending yields on account of a base rate cut and higher interest income reversal. We expect NIMs to improve marginally to 2.6 by FY17 with increasing focus on retail and SME loans. Earnings are expected to grow at a CAGR of 14 to Rs. 4 crores by FY17E. We expect RoE to improve from 8.8 in FY15 to 1.1 by FY17, while RoA is expected to improve from.5 to.6 in the coming two years. NIMs to remain in the range of Return ratios to recoup after steep fall over the years FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E YoA CoF NIM RoE RoA Source :South Indian Bank, Ventura Research Source :South Indian Bank, Ventura Research Monday 24 th August, 215

168 Valuation South Indian Bank has seen significant deterioration in asset quality in FY15. While the asset quality is not expected to worsen from current levels, it is expected to remain elevated over the forecast period. The Bank is expected to see a significant churn in the composition of its loan book (from low yielding assets to higher yielding ones) however loan growth is expected to be in line with that of the sector. In line with the churn of the loan book NIMs are expected to expand marginally (but are expected to be significantly lower than those seen in FY13.) We do not expect a significant re-rating of the stock given the fact its return ratios are also expected to remain flat and significantly off its highs of 2 (RoE) and 1.1 (RoA) established in FY12. We value the Bank at.9x Adj. P/BV at Rs. 24, implying a potential upside of 26 over a period of 18 months. At the CMP of Rs. 19 the stock is trading at.7x FY17E Adj. P/BV. We recommend a HOLD on the stock. South Indian Bank Adj. P/BV 4 ` Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 CMP.3X.6X.9X 1.2X 1.5X Source : Ventura Research Monday 24 th August, 215

169 Financials & Projections Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Income Statement Ratio Analysis Interest Income 4, ,15.1 5, , ,627.8 Efficiency Ratio () Interest Expense 3, , ,92 4, ,838.2 Int Expended / Int Earned Net Interest Income 1,28.8 1, , , ,789.6 Int Income / Total Funds YoY change () NII / Total Income Non Interest Income Other Inc. / Total Income Total Net Income 1, , , ,82.2 2,414.8 Ope. Exp. / Total Income Total Operating Expenses ,14. 1,271.4 Net Profit / Total Funds Pre Provision profit ,143.3 Credit / Deposit YoY change () Investment / Deposit Provisions for expenses NIM Profit Before Tax YoY change () Solvency Taxes Gross NPA (Rs. Cr) Net profit Net NPA (Rs. Cr) YoY change () Gross NPA () Net NPA () Balance Sheet Capital Adequacy Ratio () Cash & Balances with RBI 1, ,2.8 2, , ,984.4 Tier I Capital () Inter bank borrrowing 2, ,17.1 1, , ,443.4 Tier II Capital () Investments 12, , , , ,833.2 Loan and Advances 31, , , ,32. 48,626.7 Per Share Data (`) Other Assets 1,12.1 1, , , ,474.9 EPS Total Assets 49, , , , ,362.6 Dividend Per Share Deposits 44, , , , ,446.4 Book Value Demand 1, , , ,44.3 2,37.3 Adjusted Book Value of Share Savings 6, , , , ,995.2 Term 36, , , , ,8.9 Valuation Ratio Borrowings 1, ,73.8 2, , ,95.6 Price/Earnings (x) Other Liability 1,242. 1, , ,53. 1,719.8 Price/Book Value (x) Equity Price/Adj.Book Value (x) Reserves 2, , , , ,955.5 Total Liabilities 49, , , , ,354.7 Return Ratio RoAA () Dupont Analysis RoAE () of Average Assets Net Interest Income Growth Ratio () Non Interest Income Interest Income Net Income Interest Expenses Operating Expenses Other Income Operating Profit Total Income Provisions & Contingencies Net profit Taxes Deposits Avg.Assets / Avg.Equity (x) Advances Monday 24 th August, 215

170 Karnataka Bank Ltd. HOLD Target Price `152 CMP `122 FY17E P/Adj. BV.7x Index Details Sensex 25,742 Nifty 7,89 Industry Bank Scrip Details M/Cap(`cr) 231 O/s Shares (Cr) 18.8 Av Vol (Lacs) Week H/L 158/18 Div Yield () 3.4 FVPS (`) 1 Shareholding Pattern Shareholder Promoters - DIIs 9.2 FIIs 22.3 Public 68.5 Total 1 Karnataka Bank vs. Sensex Karnataka Bank Ltd (KBL), incorporated in 1924, is one of the oldest private sector banks in India, with a dominant presence in the South -- ~62 of the branch network is located in Karnataka alone. Adopting technological changes to curtail costs, putting up efficient risk management system in place to keep the asset quality in check and enhancing the proportion of advances towards high yielding sectors form the crux of KBL s strategy for future growth. Further, the Bank is implementing prioritized initiatives under Project Tejas, -- a Business Process Re-engineering project aimed at high growth with superior quality. Despite its RoE being the highest among its peers on most operational parameters the Bank continues to lag behind its peers. The credit book is expected to grow at a slightly better pace than the industry leading to an earnings growth of 25. At current valuations the stock is quoting at.7x FY17E Adj /PBV. We initiate coverage with a target price of 152 (.85X FY17 Adj P/BV) indicating a potential appreciation of 25 over the next 18 months. Key monitorables for the Bank for a re-rating are improvement in asset quality and an uptick in NIMs. Focus on enhancing SME/MSME lending Over FY1-FY15, KBL s advances have grown at a 5-year CAGR of 17 to Rs 31,68 crore in FY15. Since FY12, KBL has undertaken major revamping exercise in its asset portfolio. In line with its strategy of focusing on high yielding retail and SME/MSME sectors, it has successfully reduced dependence on low yielding corporate lending from 55.7 in FY12 to 49.3 as of Q1FY16. This has also enabled KBL add granularity to its asset portfolio the exposure to top 2 accounts has reduced from of total advances in FY1 to 9.92 by FY15. Also, the exposure to infrastructure advances, the single largest sector in the bank s asset portfolio, has reduced from in FY1 to 7.1 in FY15. The management has indicated that it will continue to pursue growth in SME/MSME lending (currently ~25 of total advances) through: Key Financials (` in Cr) Net Non P/E P/Adj BV Y/E Mar Interest Interest APAT EPS Adj. BV ROE () ROA () (x) (x) Income Income 214 1, , E 1, E 1, Monday 24 th August, 215