Syndicate Bank SYNOPSIS. Target Price: Rs Date: November 11, Share Holding Pattern:

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1 Syndicate Bank BUY CMP: Rs Date: November 11, 2009 Key Ratios: Particulars FY09 FY10E FY11E OPM(%) PAT Margin(%) ROE(%) ROCE(%) P/BV(x) P/E(x) Debt-Equity(x) Key Data: Sector Banking Face Value Rs wk. High/Low Rs /Rs Volume (2 wk. Avg.) BSE Code V.S.R. Sastry Vice President Equity Research Desk Target Price: Rs Market Cap.: Rs mn. SYNOPSIS Syndicate Bank, one of India`s leading nationalized banks, provides contemporary banking services in accordance with the innovative banking techniques of new-age banking. Syndicate Bank has mobilized Rs 1.94 billion via its issue of unsecured, IPDI, non-convertible taxable tier I bonds of face value of Rs 1 million. PayMate, India`s leading mobile commerce company, has partnered with Syndicate Bank, to provide mobile banking solutions to their customers across over 2000 branches. The Global Business of the bank grew by 17.09% and stood at Rs.19,34,880 million as against Rs.16,52,430 million as on 30 th September The Networth of the Bank increased by 19% to Rs million as on 30 th September 2009 from Rs million as on 30 th September The CAR as per Basel II stood at 13.26% as on 30th September 2009 as against 12.54% as on September NII and PAT of the bank are expected to grow at a CAGR of 14% & 12% over FY08 to FY11E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1

2 Table of Content Content Page No. 1. Investment Highlights Company Profile Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 13 2

3 Investment Highlights Q2 FY10 Results Update Syndicate bank has posted a net profit of Rs 1, million for the quarter ended Sep. 30, 2009 as compared to Rs 2, million for the quarter ended Sep.30, 2008, registering fall of 32.11%. Total income has increased 11.62% from Rs 25, million for the quarter ended Sep. 30, 2008 to Rs 28, million for the quarter ended Sep. 30, It reported earnings of Rs 3.41 a share, fall of 32.07% as compared to prior year period. The revenue for the September 2009 quarter is pegged at Rs million, about 8.06% up against Rs million recorded during the year-ago period. A decline of 17.31% was observed in the OPM in the quarter ended September 2009 from 19.32% as compared to prior year period. Standalone result (Rs. in Million) Particulars Sep Sep % Change Net Sales PAT (32.11) operating profit margin(%) (10.38) Segment wise Revenue for the Q2 FY10 Particulars (Rs.mn.) Q2 FY10 Treasury Corporate / Wholesale Banking Retail Banking Other Banking Operations Total

4 Business Growth The Global Business of the bank grew by 17.09% and stood at Rs.19,34,880 million as against Rs.16,52,430 million as on 30 th September Bank s global deposits reached Rs.11,11,290 million with a y-o-y growth of 16.05% as on 30 th September Global gross advances increased to Rs.8,23,590 million from Rs.6,94,870 million as on 30 th September 2008, achieving a growth rate of 18.52%. Domestic business as on 30 th September 2009 increased to Rs.18,11,410 million from Rs.15,47,980 million as on 30 th September 2008, registering an annual growth of 17.02%. The domestic deposits reached a level of Rs.10,54,800 million registering a y-o-y growth of 15.75%. Domestic advances grew by 18.82% to Rs.7,56,610 million as on 30 th September 2009 from Rs.6,36,740 million as on 30 th September The CD ratio increased to 74.11% from 72.57% as on 30 th September Improving Asset Quality The gross NPA ratio decreased to 2.25% as compared to 2.55% as on 30 th September The Net NPA ratio also decreased marginally to 0.91% as against 0.92% as on 30 th September

5 Cost to Income ratio Cost to Income ratio reduced to 45.75% from 51.66% as on 30 th September

6 Cuts deposit rates by 75 bps Syndicate Bank has cut deposit rates by up to 75 basis points across various maturities effective from October 7. The days fixed deposits would earn an interest rate of 2.75% against earlier level of 3.5%, a decline of 75 basis points. At the same time, interest rate on days term deposits has also been revised downward by 75 basis points to 3.75%. However, fixed deposits of days would now earn 5% against 5.5%, while deposit rates of 181 days to a year`s term have been slashed by 75 basis points to 5.75%. For term deposits between 2-3 years rates have been reduced by 50 basis points to 6.75%. The rate for 3-5 years term deposit has also been reduced by 50 basis points to 7%. The prime lending rate (PLR) of the bank stands at 12%. Self-certified syndicate bankers to get fee for IPO applications The Securities and Exchange Board of India (Sebi) has directed companies, which are planning initial public offerings (IPOs) and their merchant bankers to pay commission to selfcertified syndicate bankers (SCSBs) who process IPO applications for subscribers. Revises interest rates; introduces new schemes Syndicate bank has introduced special scheme on housing loans and Synd Vahan (for 4 wheelers) with reduction in interest rates. The bank slashed interest rates on housing and vehicle loans for a limited period up to March The revised interest rates on both housing loans for an amount up to Rs 3 million interest charged for the first two years is 8.25%, from third to fifth year its is 8.75% and from sixth year onwards public lending rate (PLR) would be 2.50% subject to maximum of 11%. The interest rate charged for an loan above Rs 3 million interest charged for the first two years is 9.25%, from third to fifth year its is 9.75% and from sixth year onwards public lending rate (PLR) would be 2.00% subject to maximum of %. The special housing loan scheme as per IBA guidelines till Dec.31, 2009 the interest rate charged would be 8.50% for the first five years for loan up to Rs 500,000and for loans above Rs 500,000 and up to 2 million the interest rate charged would be 9.25% for the first five years. Under the Synd Vahan Special Scheme (4 wheelers) interest for first year would be 9%, second and third year 9.5% and above three years public lending rate (PLR) would be 1% subject to maximum of %. PayMate partners Syndicate Bank to provide mobile banking solutions PayMate, India`s leading mobile commerce company, has partnered with Syndicate Bank, one of India`s leading nationalized banks, to provide mobile banking solutions to their customers across over 2000 branches. This is PayMate`s first foray into the lucrative Mobile Banking solution space. While PayMate has till date tied up with 22 leading banks and 6

7 provided them with its mobile payment services & applications, PayMate will now also be offering holistic mobile banking applications which will include non-financial transactions as well. Delists from Bangalore Stock Exchange Syndicate Bank has been delisted from Bangalore Stock Exchange with effect from (w.e.f.) Sep. 07, The move is based on the request made by the Bank to Bangalore Stock Exchange. Mobilizes Rs 1.94 billion via bond issue Syndicate Bank has mobilized Rs 1.94 billion via its issue of unsecured, IPDI, non-convertible taxable tier I bonds of face value of Rs 1 million. The issue had an unlimited green shoe option and a coupon rate of 8.90% p.a. payable annually, has been fully subscribed. The bank had originally planned to mobilize Rs 1.50 billion via the issue. Company Profile Syndicate Bank was established in 1925 in Udupi, Karnataka. Government of India nationalized Syndicate Bank in 1969 along with 13 other major commercial banks. In 1946, the bank created history by opening 29 branches in a single day in rural areas of India. And in 2006, Syndicate Bank witnessed its 2006th branch in Gangtok, Sikkim. Today Syndicate Bank spans India with 2227 branches. Syndicate Bank provides contemporary banking services in accordance with the innovative banking techniques of new-age banking. These include e-banking, AAA banking (Anytime, Anywhere, Anyhow Banking), toll free voice mail system, e-pay services, Core Banking Solutions (CBS), EFT (Electronic Funds Transfer), RGTS (Real Time Gross Settlement) and specialized Forex services. 7

8 Peer Group Comparison Name of the company CMP(Rs.) (As on Nov. 11, 2009) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) SYNDICATE BANK , SBI ,510, PNB , BANK OF INDIA , Key Concerns The Banking industry is very competitive and the ability of banks to grow depends on their ability to compete effectively. Banking in India is a heavily regulated industry and material changes in the regulations could adversely affect Banks business. Exchange rate fluctuations may have an impact on banks financial performance. A slowdown in economic growth in India could cause banks business to suffer. The introduction of technology in banking operations has also imposed greater responsibility to protect against various information security threats and to ensure wider assurance of safeguard of the interest of customers. Regulatory amendments. Implementation of Basel II requires higher capital. 8

9 Financials 12 Months Ended Profit & Loss Account (Standalone) Value(Rs. in million) FY08 FY09 FY10E FY11E Description 12m 12m 12m 12m Net Income Other Income Total Income Interest Expended Net Interest Income Operating Expenses Operating Profit Provisions & Contingencies Profit before Tax Tax Profit after Tax Equity Capital Reserves Face Value (Rs) Total No. of Shares EPS (Rs)

10 Quarterly Ended Profit & Loss Account (Standalone) Value(Rs. in million) 31-Mar Jun Sep Dec-09E Description 3m 3m 3m 3m Net Income Other Income Total Income Interest Expended Net Interest Income Operating Expenses Operating Profit Provisions & Contingencies Profit before Tax Tax Profit after Tax Equity Capital Face Value (Rs) Total No. of Shares EPS (Rs) E=Estimated 10

11 Charts A) Net Income & PAT Chart C) P/E Chart B) Debt-Equity Chart D) P/BV Chart 11

1 Year Comparative Graph SYNDICATE BANK BSE SENSEX Outlook and Conclusion At the market price of Rs.90.00, the stock trades at 4.66x and 3.93x for the earnings of FY10E and FY11E respectively.

12 1 Year Comparative Graph SYNDICATE BANK BSE SENSEX Outlook and Conclusion At the market price of Rs.90.00, the stock trades at 4.66x and 3.93x for the earnings of FY10E and FY11E respectively. Price to Book Value of the stock is expected to be at 0.84x and 0.69x respectively for FY10E and FY11E. Earning per share (EPS) of the bank for the earnings of FY10E and FY11E is seen at Rs and Rs respectively for equity share of Rs each. Net Income and PAT of the bank are expected to grow at a CAGR of 14% & 12% over FY08 to FY11E. The Global Business of the bank grew by 17.09% and stood at Rs.19,34,880 million as against Rs.16,52,430 million as on 30 th September The Networth of the Bank increased by 19% to Rs million as on 30 th September 2009 from Rs million as on 30 th September Syndicate Bank has mobilized Rs 1.94 billion via its issue of unsecured, IPDI, non-convertible taxable tier I bonds of face value of Rs 1 million. PayMate, India`s leading mobile commerce company, has partnered with Syndicate Bank, one of India`s leading nationalized banks, to provide mobile banking solutions to their customers across over 2000 branches. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. 12

13 Industry Overview The Banking sector is gearing itself to support growth. Competition, consolidation and convergence will transform banking. Technology will be the key and drive the change. Banks strengthening capital base, risk management and skills. Banks outsourcing norms introduced by Reserve bank of India. With the economic growth picking up pace and the investment cycle on the way to recovery, the banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds. The revived credit off take (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself. Besides gearing up for the compliance with Basel II accord, the sector is also looking forward to consolidation and investments on the FDI front. Public sector banks have been very proactive in their restructuring initiatives be it in technology implementation or pruning their loss assets. Windfall treasury gains made in the falling interest rate regime were used for writing off the doubtful and loss assets. Incremental provisioning made for asset slippages have safeguarded the banks from witnessing a sudden impact on their bottom lines. Retail lending (especially mortgage financing) formed a significant portion of the portfolio for most banks and the entities customized their products to cater to the diverse demands. With better penetration in the semi urban and rural areas the banks garnered a higher proportion of low cost deposits thereby economizing on the cost of funds. Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. Global Outlook The global economic environment continues to be uncertain. The world economy, which was passing through unprecedented financial turmoil since August 2007, experienced a jolt in September 2008 when the failure of Lehman Brothers led to widespread panic across global 13

14 financial markets. The liquidity crisis that ensued not only engulfed developed markets but also quickly transmitted to emerging markets, including India. The US Federal Reserve responded by infusing dollar liquidity into large financial centres through currency swap arrangements with major foreign central banks in addition to massive injection of liquidity in the domestic market through several innovative schemes. Domestic Outlook Like other EMEs, India too has been affected by the global financial crisis. Real GDP growth moderated to 7.8 per cent in the first half of as against 9.3 per cent in the first half of The third quarter of witnessed signs of further moderation in growth, especially in the industrial sector and some segments of the services sector. Over the last five years, India clocked 8.8 per cent average annual growth, driven largely by domestic consumption and investment even as the share of net exports rose. While the benign global environment, easy liquidity and low interest rates helped, at the heart of India s growth have been its growing entrepreneurial spirit and rise in productivity. These fundamental strengths continue to be in place. Nevertheless, the global crisis will dent India s growth trajectory as investments and exports slow. Clearly, there is a period of painful adjustment ahead of us. However, once the global economy begins to recover, India s turnaround will be sharper and swifter, backed by our strong fundamentals and the untapped growth potential. Meanwhile, the challenge for the Government and the Reserve Bank is to manage the adjustment with as little pain as possible. Liquidity Impact The cumulative reduction in the CRR by 400 basis points since mid-september 2008 released additional Rs.1,60,000 crore of primary liquidity. Unwinding of MSS has released primary liquidity of a little over Rs.63,000 crore. Further, potential liquidity has been made available through various refinance facilities for banks and financial institutions to the tune of Rs.80,000 crore. The term repo facility gives an additional potential liquidity of Rs.60,000 crore. The SPV for NBFC will augment potential liquidity by another Rs.25,000 crore. In sum, the actions of the Reserve Bank since mid-september 2008 have resulted in augmentation of actual/potential liquidity of over Rs.3,88,000 crore. In addition, the permanent reduction in SLR by 1.0 per cent of NDTL has made available liquid funds of the order of Rs.40,000 crore for the purpose of credit expansion. 14

15 Monetary Measures The Bank Rate has been kept unchanged at 6.0 per cent. The repo rate under the LAF has been kept unchanged at 4.75 per cent. The reverse repo rate under the LAF has been kept unchanged at 3.25 per cent. The Reserve Bank has the flexibility to conduct repo/reverse repo auctions at a fixed rate or at variable rates as circumstances warrant. The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. The Reserve Bank will continue to use this flexibly including the right to accept or reject tender(s) under the LAF, wholly or partially, if deemed fit, so as to make efficient use of the LAF in daily liquidity management. The cash reserve ratio (CRR) of scheduled banks has been kept unchanged at 5.0 per cent of NDTL. Liquidity Facilities The Reserve Bank has allowed banks to avail liquidity support under the LAF for the purpose of meeting the funding requirements of mutual funds (MFs), nonbanking financial companies (NBFCs) and housing finance companies (HFCs) through relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL. Second, a special refinance facility for scheduled commercial banks (excluding RRBs) was provided by the Reserve Bank on November 1, 2008 under Section 17(3B) of the RBI Act, 1934 up to 1.0 per cent of each bank s NDTL as on October 24, Both these facilities are currently available up to June 30, In order to ensure that banks continue to have flexibility in their liquidity management operations in the current market conditions, it has been decided to extend both the refinance facilities up to September 30, Key points Supply- Liquidity is controlled by the Reserve Bank of India (RBI). Demand- India is a growing economy and demand for credit is high though it could be cyclical. Barriers of Entry- Licensing requirement, investment in technology and branch network. Bargaining power of customers- High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms. Depositors may invest elsewhere if interest rates fall. 15

16 Bargaining power of borrowers- For good creditworthy borrowers bargaining power is high due to the availability of large number of banks Competition- High. There are public sector banks, private sector and foreign banks along with non banking finance companies competing in similar business segments. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 16

17 Firstcall India Equity Research: B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Auto Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s,takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai Tel. : / / Telefax : info@firstcallindiaequity.com 17

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