Bank of Maharashtra NEUTRAL. Performance Highlights CMP. `47 Target Price - 1QFY2013 Result Update Banking. Investment Period - Key financials

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1 1QFY2013 Result Update Banking July 23, 2012 Bank of Maharashtra Performance Highlights Particulars (` cr) 1QFY13 4QFY12 % chg (qoq) 1QFY12 % chg (yoy) NII Preprov. profit PAT During 1QFY2013, Bank of Maharashtra reported 15.1% growth in net profit to `140cr, which was mainly aided by tax writeback of `16cr compared to tax expense of `69cr in 1QFY2012. At the PBT level, the bank witnessed a decline of 34.8% yoy to `125cr, on back of 41.1% yoy increase in provisioning expenses to `316cr. NIMs decline 26bp qoq, Slippages continue at elevated levels: The bank reported healthy growth in its business, with advances witnessing a growth of 22.7% yoy and deposits registering a growth of 17.4% yoy. CASA deposits remained flat on a sequential basis, as 3.6% qoq growth witnessed in saving deposits was fully offset by 10.1% sequential decline registered in cyclical current deposits. Consequently CASA ratio for the bank declined on a sequential basis by 175bp to 39.6%. The reported NIMs for the bank declined by 26bp qoq to 2.9% due to 19bp sequential decline in the yield on funds and 7bp qoq increase in costs of funds. Noninterest income (excluding treasury) declined by 6.0% yoy. Treasury income for the bank came in at `24cr during the quarter as against `9cr in 1QFY2012, while recoveries from written off accounts came in at `22cr compared to `16cr in 1QFY2012. On the asset quality front, Gross NPA ratio came sequentially lower at 2.2% compared to 2.3% in 4QFY2012. However, Net NPA climbed to 1.0% from 0.8% in 4QFY2012. The slippage ratio for the quarter remained elevated, much above the comfortable 11.5% levels at 3.1% (average slippages of `452cr for the last two quarters compared to average of `198cr since 1QFY2011). PCR for the bank dipped by 103bp, but still remains comfortable at 79.3%. NEUTRAL CMP `47 Target Price Investment Period Stock Info Sector Banking Market Cap (` cr) 2,789 Beta Week High / Low 59/38 Avg. Daily Volume 69,191 Face Value (`) 10 BSE Sensex 16,877 Nifty 5,118 Reuters Code BMBK.BO Bloomberg Code BOMH@IN Shareholding Pattern (%) Promoters 79.0 MF / Banks / Indian Fls 11.1 FII / NRIs / OCBs 0.9 Indian Public / Others 9.0 Abs. (%) 3m 1yr 3yr Sensex (1.3) (9.9) 10.8 BOM (8.6) (13.9) 11.4 Outlook and valuation: At the CMP, the stock is trading at valuations of 0.6x FY2014E ABV, which we believe factors in expected 30.4% CAGR in earnings over FY201214E. Owing to the asset quality concerns arising due to weak macroeconomic outlook, we recommend Neutral rating on the stock. Key financials Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E NII 1,968 2,517 2,779 3,181 % chg Net profit % chg (24.8) NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%) Vaibhav Agrawal Ext: 6808 vaibhav.agrawal@angelbroking.com Varun Varma Ext: 6847 varun.varma@angelbroking.com Sourabh Taparia Ext: 6872 sourabh.taparia@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 1QFY2013 performance Particulars (` cr) 1QFY13 4QFY12 % chg (qoq) 1QFY12 % chg (yoy) FY2012 FY2011 % chg (qoq) Interest earned 2,039 1, , ,214 5, on Advances / Bills 1,553 1, , ,491 4, on investments ,709 1, on balance with RBI & others (25.8) 2 25 (94.0) on others Interest Expended 1,387 1, , ,697 3, Net Interest Income ,517 1, Other income Other income excl. treasury (12.8) 164 (6.0) Fee Income (17.9) 136 (29.0) Treasury Income 24 (4) (660.5) (80.6) Recoveries from written off accounts (36.2) Others Operating income ,158 2, Operating expenses (31.7) ,643 1,644 (0.1) Employee expenses (38.6) ,113 1,157 (3.8) Other Opex (11.8) Preprovision Profit , Provisions & Contingencies PBT (34.8) Provision for Tax (16) 33 (148.3) 69 (123.0) PAT Effective Tax Rate (%) (12.8) bp Exhibit 2: 1QFY2013 Actual vs. Angel estimates Particulars (` cr) Actual Estimates Var. (%) Net interest income (1.9) Other income Operating income Operating expenses (9.3) Preprov. profit Provisions & cont PBT (39.7) Prov. for taxes (16) 67 (123.7) PAT July 23,

3 Exhibit 3: 1QFY2013 performance analysis Particulars 1QFY13 4QFY12 % chg (qoq) 1QFY12 % chg (yoy) Advances (` cr) 56,872 56, , Deposits (` cr) 79,880 76, , CredittoDeposit Ratio (%) (206)bp bp Current deposits (` cr) 7,596 8,452 (10.1) 6, Saving deposits (` cr) 24,023 23, , CASA deposits (` cr) 31,619 31,632 (0.0) 27, CASA ratio (%) (175)bp 40.6 (102)bp CAR (%) bp 12.6 (13)bp Profitability Ratios (%) Cost of deposits bp bp Yield on advances (34)bp bp Yield on investments (19)bp 7.1 3bp Yield on funds (19)bp bp Cost of funds bp bp Calculated NIM (26)bp 3.2 (27)bp Costtoincome ratio (2256)bp bp Asset quality Gross NPAs (` cr) 1,294 1,297 (0.2) 1, Gross NPAs (%) (4)bp 2.4 (20)bp Net NPAs (` cr) Net NPAs (%) bp 1.2 (18)bp Provision Coverage Ratio (%) (103)bp bp Slippage ratio (%) (79)bp bp Business growth healthy in 1QFY2013, NIMs decline 26bp qoq During 1QFY2013, the bank reported healthy growth in its business, with advances witnessing a growth of 22.7% yoy and deposits registering a growth of 17.4% yoy. CASA deposits were higher by 14.4% on a yoy basis, aided by 16.4% growth in current deposits and 13.8% growth in savings. However on a sequential basis, CASA deposits remained flat sequentially, as 3.6% qoq growth witnessed in saving deposits was fully offset by 10.1% sequential decline registered in cyclical current deposits. Consequently, CASA ratio for the bank declined on a sequential basis by 175bp to 39.6%. The reported NIMs for the bank declined by 26bp qoq to 2.9% due to 19bp sequential decline in the yield on funds and 7bp qoq increase in costs of funds. Yield on advances for the bank declined by 34bp qoq to 11.2%, while sequential fall in yield on investments was 19bp to 7.2%. July 23,

4 Exhibit 4: Business growth remained healthy Exhibit 5: CASA ratio decline sequentially by 175bp Adv. yoy chg (%) Dep. yoy chg (%) CDR (%, RHS) CASA ratio (%) CASA yoy growth (%, RHS) Exhibit 6: NIMs decline sequentially by 26bp mainly on... Exhibit 7:..19bp qoq decline in yield on funds (%) (%) Noninterest income (excluding treasury) declines During 1QFY2013, the bank s noninterest income excluding treasury declined by 6.0% yoy, mainly on account of 29.0% yoy decline in income from Commission, Exchange and Brokerage stream to `96cr. Treasury income for the bank came in at `24cr during the quarter as against `9cr in 1QFY2012, while recoveries from written off accounts came in at `22cr compared to `16cr in 1QFY2012. Higher writeoffs increases net NPA ratio; slippages remain elevated On the asset quality front, Gross NPA ratio decreased from 2.3% to 2.2% during the quarter, while the net NPA ratio increased from 0.8% to 1.0%, mainly on account of higher writeoffs during the quarter (`288cr in 1QFY2013 compared to `140cr in 4QFY2012 and average of `93cr since 1QFY2011). The slippage ratio for the quarter remained elevated, much above the comfortable 11.5% levels at 3.1% (average slippages of `452cr for the last two quarters compared to average of `198cr since 1QFY2011). PCR for the bank dipped by 103bp, but still remains comfortable at 79.3%. July 23,

5 Exhibit 8: Slippages remained at elevated levels Exhibit 9: Asset quality deteriorated sequentially (%) (0.5) Gross NPAs (%) Net NPAs (%) PCR (%, RHS) ; Note: PCR including tech. writeoffs Staff expenses increase sequentially Staff expenses increased by 13.4% yoy to `259cr (though were lower sequentially by 38.6%), while other expenses increased by 7.5% yoy to `130cr. Structurally, the bank s operating efficiency has been relatively lower than peers, as evident from opex to average assets ratio of 2.0% for FY2012 highest amongst the PSU banks. For 1QFY2013E, the bank s opex to average asset ratio came in at 1.7%. Exhibit 10: Operating expenses trend for BOM (` cr) Staff expenses Other opex Exhibit 11: Cost ratios structurally higher for BOM Opex to average assets (%) Costtoincome ratio (%, RHS) Capital infused by Govt. and LIC, still tier1 CAR at low 8.3% (as of 4QFY2012) The bank had approached the government for an infusion of ~`860cr in 1QFY2012. The bank in FY2012 has received `605cr via equity capital infusion from the government and LIC. As of 4QFY2012, the bank s total CAR stood at 12.43%, with tier1 ratio at 8.3%, which is still on the lower side. As of 1QFY2013, the bank reported total CAR of 12.46%, but has not yet disclosed its tier1 ratio. July 23,

6 Investment arguments Healthy CASA franchise ensures lowcost funding Bank of Maharashtra has enjoyed a healthy CASA ratio in the vicinity of 40% over the past several years on the back of strong rural and semiurban presence (accounting for 53.3% of the entire branch network). Branch expansion seems to be gradually picking up, with the addition of 53 branches in FY2012 and target of adding 200 branches in FY2013 (although 1QFY2013 branch addition was muted at 4). We expect steady branch expansion and moderate balance sheet growth strategy to aid the bank in maintaining its CASA share at ~40% levels over FY E. Also, management has been constantly focusing on reduction of dependence on bulk deposits. The benefit of healthy CASA ratio and a relatively lower dependence on bulk deposits is reflected in the bank s relatively lower cost of deposits than peers (at 6.7% for 1QFY2013). Outlook and Valuation At the CMP, the stock is trading at valuations of 0.6x FY2014E ABV, which we believe factors in expected 30.4% CAGR in earnings over FY201214E. Owing to the asset quality concerns arising due to weak macroeconomic outlook, we recommend Neutral rating on the stock. Exhibit 12: Key assumptions Particulars (%) Earlier estimates Revised estimates FY2013 FY2014 FY2013 FY2014 Credit growth Deposit growth CASA ratio NIMs Other income growth Growth in staff expenses Growth in other expenses Slippages Coverage Source: Angel Research July 23,

7 Exhibit 13: Change in estimates FY2013 Particulars (` cr) Earlier Revised Earlier Var. (%) estimates estimates estimates FY2014 Revised estimates Var. (%) NII 2,830 2,779 (1.8) 3,221 3,181 (1.2) Noninterest income Operating income 3,506 3,471 (1.0) 3,925 3,889 (0.9) Operating expenses 1,829 1,818 (0.6) 2,037 2,024 (0.6) Preprov. profit 1,677 1,653 (1.4) 1,888 1,865 (1.2) Provisions & cont PBT (18.7) 1,122 1,086 (3.2) Prov. for taxes (36.1) (3.2) PAT (10.3) (3.2) Source: Angel Research Exhibit 14: P/ABV band 140 Price(`) 0.4x 0.7x 1x 1.3x 1.6x Apr04 Sep04 Feb05 Jul05 Dec05 May06 Oct06 Mar07 Aug07 Jan08 Jun08 Nov08 Apr09 Sep09 Feb10 Jul10 Dec10 May11 Oct11 Mar12 Aug12 Jan13 July 23,

8 Exhibit 15: Recommendation summary Company Reco. CMP (`) Tgt. price (`) Upside (%) FY2014E P/ABV (x) FY2014E Tgt. P/ABV (x) FY2014E P/E (x) FY201214E EPS CAGR (%) FY2014E RoA (%) FY2014E RoE (%) AxisBk Buy 1,027 1, FedBk Neutral HDFCBk Neutral ICICIBk* Buy 912 1, SIB Neutral YesBk Buy AllBk Accumulate AndhBk Neutral BOB Buy BOI Accumulate BOM Neutral CanBk Buy CentBk Reduce (6.3) CorpBk Accumulate DenaBk Accumulate IDBI# Buy IndBk Neutral IOB Accumulate J&KBk Accumulate OBC Accumulate PNB Buy 805 1, SBI* Buy 2,093 2, SynBk Buy UcoBk Neutral UnionBk Buy UtdBk Buy VijBk Reduce (5.7) ; Note:*Target multiples=sotp Target Price/ABV (including subsidiaries), # Without adjusting for SASF Company Background Bank of Maharashtra is a midsize Punebased public sector bank, with operations mostly concentrated in the parent state of Maharashtra (~65% branches as of FY2011). The bank has the highest number of branches in Maharashtra (1,021 as of FY2011) after State Bank of India, which has allowed the bank to grow inline with the state's progress over the past decade. July 23,

9 Income statement Y/E March (` cr) FY09 FY10 FY11 FY12 FY13E FY14E Net Interest Income 1,257 1,296 1,968 2,517 2,779 3,181 YoY Growth (%) Other Income YoY Growth (%) (10.2) Operating Income 1,757 1,887 2,499 3,158 3,471 3,889 YoY Growth (%) Operating Expenses 963 1,073 1,644 1,643 1,818 2,024 YoY Growth (%) (0.1) Pre Provision Profit ,515 1,653 1,865 YoY Growth (%) Prov. & Cont YoY Growth (%) 88.2 (13.0) (9.5) Profit Before Tax ,086 YoY Growth (%) (2.2) 11.3 (31.8) Prov. for Taxation as a % of PBT PAT YoY Growth (%) (24.8) Preference Dividend PAT avl. to Eq. shareholders YoY Growth (%) (32.5) Balance sheet Y/E March (` cr) FY09 FY10 FY11 FY12 FY13E FY14E Share Capital ,070 1,178 1,178 1,178 Equity Preference Reserve & Surplus 2,087 2,428 2,901 3,545 3,941 4,444 Deposits 52,255 63,304 66,845 76,529 86,477 98,584 Growth (%) Borrowings ,325 1,494 1,701 Tier 2 Capital 2,068 2,668 2,500 2,500 2,875 3,278 Other Liab. & Prov. 2,001 2,096 2,550 2,941 3,323 3,810 Total Liabilities 59,030 71,056 76,442 88,017 99, ,994 Cash Balances 3,881 5,315 3,846 4,535 3,459 3,943 Bank Balances 224 1, ,209 1,364 1,552 Investments 18,382 21,324 22,491 22,911 26,292 29,811 Advances 34,291 40,315 46,881 56,060 64,469 73,494 Growth (%) Fixed Assets Other Assets 1,597 2,063 2,354 2,701 3,047 3,468 Total Assets 59,030 71,056 76,442 88,017 99, ,994 Growth (%) July 23,

10 Ratio analysis Y/E March FY09 FY10 FY11 FY12 FY13E FY14E Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR Tier I Asset Quality (%) Gross NPAs Net NPAs Slippages Loan Loss Prov. /Avg. Assets Provision Coverage Per Share Data (`) EPS ABVPS (75% cover.) DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis NII () Prov. Exp Adj. NII Treasury Int. Sens. Inc Other Inc Op. Inc Opex PBT Taxes RoA Pref. Div RoA after Pref. Div Leverage RoE July 23,

11 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies 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. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Bank of Maharashtra 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (5 to 5%) Reduce (5% to 15%) Sell (< 15%) July 23,