Edelweiss Investment Research Stock view: Axis Bank Ltd. Axis Bank Ltd.

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1 Edelweiss Investment Research Stock view: Axis Bank Ltd Edelweiss Trading Team Axis Bank Ltd. Fundamental Observations: Retail loan book to drive the growth Axis bank reported 2.0x loan growth of average industry s loan growth in FY17 aided by retail loans. In FY17, retail loans grew by 21% y-o-y to INR 1,680bn, constituting 45% of total loan book. SME registered 10% y-o-y growth in loans & advances to INR 492bn, which contributes 13% of total loan book while corporate advances remained flat y-o-y to INR 1,559bn, constituting 42% of total advances. We believe bank has potential to grow 5-6% higher than Industry growth rate on back of 20%+ growth in retail loans. Asset quality remained stable In Q4FY17, asset quality marginally improved because of ARC sale. Bank sold gross stressed assets of INR 23.54bn, hence gross non-performing assets improved to 5.04% from 5.22% in Q3FY17 and nonperforming assets improved to 2.11% as against 2.18% in previous quarter. The slippage was INR 48.11bn as against INR 45.6bn in Q3FY17, marginally higher because an account with loan outstanding of INR 16.6bn in cement sector downgraded. The slippage from non-watch-list declined substantially and the watch-list portfolio shrunk to INR 94.36bn as against INR 111bn in Q3FY17 and INR 226.3bn in Q4FY16. Credit cost is expected to remain lower for FY18. We believe the slippage should be lower in FY18 and hence asset quality to improve. Profitability to imporve We expect the profitability to improve on account of a)credit cost is expected to come down, b) loans & advances to grow 5-6% higher than the industry s average growth rate and c) slippage is likely come down significantly, hence NII to improve. In light of these factors, we have projected RoA and RoE to 1.5% & 16% in next two years. Valuation We believe that bank has potential to deliver normalized returns RoE potential of 16% next two years. At CMP, stock is trading at 2.3x FY18E ABV and 2.0xFY19E ABV. Based on 2.3x FY19 ABV, we arrive at target price of INR 588 per share, entailing 14% upside. Technical observations: The short term trend and medium term trends are up. Medium term momentum oscillators are also trading in bullish territory. Major resistance is placed at 575 levels while crucial support area is at levels. View: The stock is near short term resistance of 530 levels while it has been trading sideways in the zone of since last 3 months. Going forward, we believe that stock may continue to trade with upward bias. Move above 530 levels may take the stock higher towards levels Date: 10 th May, 2017 Resistance levels: 530 / Support Levels : 500 / GWM/ Edelweiss Investment Research

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3 Edelweiss Investment Research Stock view: HDFC Bank Ltd. Edelweiss Trading Team HDFC Bank Ltd. Loans & advances to growth higher than the industry growth HDFC bank has been growing at higher pace than the industry s average growth. In FY17, bank has reported 19% y-o-y growth in advances to INR 5,546bn as compared to 5.5% industry s average growth. Domestic loan grew by 23.7% y-o-y to INR 5,386bn aided by domestic retail loans. Domestic retail loans grew by 26.6% y-o-y, constituting 53% of domestic advances. We believe, that bank has potential to grow 18% in next few years on back equally distributed in wholesale and retails. We expect retail loans to grow at higher pace. Robust asset quality to continue HDFC bank has one of the finest asset qualities in Indian banking system. The gross non-performing assets of the bank stood at 1.05% and net non-performing assets were 0.3%. The outstanding restructured book of the bank was 0.1% which is one of lowest in banking industry. We believe that bank to report healthy asset quality going forward. Margin and return ratio to improve We expect return ratio to improve on back of a) significant jump in low cost of funds, CASA which constitute 48% of total deposits, b) increasing share of high yield disbursement, c) improving cost-toincome ratio on back of digitization and d) slippage is under control. Consequently bank has reported 10bps expansion in net interest margin to 4.3% while RoA and RoAE remained stable to 2% and 17.9% respectively. In light of above factors, we believe margin and return to improve in medium to long term. Valuation At CMP of INR 1,535, stock is trading at 3.9x FY18E adjusted book value (ABV) and 3.3x FY19E ABV. Based on 3.5x FY19E ABV, we arrive at a target price of INR 1,735, implying 13% upside from current price. Technical observations: The short and medium term trends are up. Stock is trading at its all time high levels. Momentum oscillators are trading at bullish territory. View: The stock has been one of the strongest outperformer in the Nifty and Private Banking stock index post December It is currently in a strong bullish momentum and is trading near to its all time high level. Going forward, we believe that the stock may continue its upward momentum. Price pattern implication suggests further rally towards levels in the medium term. Crucial support is placed at 1500 level which are good level to accumulate the stock. Date: 10 th May, 2017 Resistance levels: 1650 / 1700 Support Levels : 1450 / GWM/Edelweiss Investment Research

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5 Edelweiss Investment Research Stock view: HDFC Ltd Edelweiss Trading Team HDFC Ltd. Fundamental Observations: Best-in-class NIM of 4.1% maintained over FY17 is expected to sustain HDFC Limited has delivered a Net Interest Margin of 4.1%, which is one of the highest in the Housing Finance segment. Only Repco Home Finance has a superior NIM at 4.3%. HDFC Limited s own affordable housing subsidiary has a comparable NIM at 4.1% whereas Indiabulls Housing has a NIM of c.4%. The rest of the segment players have lower NIM ranging between %. We expect this NIM to sustain going forward. Overall loan growth of 21% in FY17 and this run rate would be maintained going forward The overall loan growth for HDFC Limited in FY17 was 21% yoy after adding back loan sold down. The growth in loan book was driven by the lower risk individual loans, which grew 23% yoy and now form 73% of overall AUM. We expect this loan growth to maintained going forward on the back of HDFC Limited strong sourcing abilities backed by HDFC Sales as well as HDFC Bank. Super asset quality maintained and we do not see any concerns emerging on this front Overall GNPA Ratio at the end of FY17 was controlled at a low level of 0.79%. Further as a matter of prudence, HDFC Limited maintains provisions in excess of bad loan quantum resulting in a NNPA Ratio of 0%. On a more granular level, the GNPA Ratio for Individual loans was 0.61% and that of Non- Individual loans was 1.16%. We expect sound asset quality to be maintained in the future on the back of HDFC Limited s best-in-class underwriting standards. Investment Theme HDFC Limited has a structurally low Cost to Income Ratio, which was 7.4% in FY17 (7.6% in FY16), which the best in the housing finance segment, barring LICHF. Furthermore, low dependence on Bank Funding at 12% of Borrowings aids margin delivery. INR 81,514 cr of unrealized gains on listed investments provides further comfort to investors. Valuations At CMP of INR 1,535, the stock trades at 4.9x FY19E book for FY18E-20E RoE of 20-23%. It should be noted that the value of unrealized gains on listed investments alone amounts to INR 513 per share. Including this, HDFC Limited trades at 1.9x FY19E book. Considering, the RoE profile, we believe the stock is attractively valued at these levels and we recommend a HOLD. Technical observations: The short, medium and long term trends are up. Stock continues to show strong momentum post entering into new life high territory. View: The stock continues to make higher high and higher lows. The uptrend will continue as long as this sequence of higher lows last. The crucial support of 100 DMA is placed at 1426 levels. Hence, look to enter the stock on a dip near levels. We expect the stock to move higher towards 1750 levels in the medium term. Date: 10 th May, 2017 Resistance levels: 1600 / 1700 Support Levels 1520 / GWM/Edelweiss Investment Research

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7 Edelweiss Investment Research Stock view: ICICI Bank Ltd. Edelweiss Trading Team ICICI Bank Ltd. Fundamental Observations: Traction on building retail-oriented model continued ICICI Bank has successfully created a strong retail advances and deposits. Bank s retail franchise continues to grow at healthy pace, supporting advances and deposits growth. Retail loans grew by 19% y-o-y, constitution 52% of domestic advances in FY17. We believe retail loans to grow 18-20% for next couple of years. Further, the bank has strengthened liability franchise in last few years. In FY17, CASA increased by 28% y-o-y to INR 2,468bn, constituting 50.4% of total deposits. We believe bank has potential to maintain the current CASA and retails advances. Growth is expected to remain robust Bank reported 14% y-o-y growth in domestic advances, driven by retail & SME while corporate growth remained muted. Retail loans grew 19% y-o-y which contributes 52% of total advances as against 49% in Q3FY17 & SME reported 18% y-o-y growth while corporate growth remained subdued to 6% y-o-y. We expect credit growth to be higher than the industry s average on back of 18-20% growth in retail advances. Asset quality to improve Asset quality is expected to improve on back of a) slippage from watch-list is reducing, b) watch-list portfolio is shrinking significantly, c) slippage from non-watch-list is decreasing and d) overall macroeconomic scenario is improving substantially. In Q4FY17, asset quality of bank deteriorated due to a large cement account slipped into GNPA category. which was INR 53.78bn. the slippage during the quarter was INR 113bn (including the slippage from cement account was INR 53.78bn), consequently gross GNPA increased to 7.89% as compared to 7.20% while net NPA stood at 4.89%. The restructured book of bank stood at INR 42.65bn, implying 0.81% of total advances. In light of above factors, we believe asset quality to improve. Valuation At CMP of INR 300 per share, stock is trading at 1.4x FY19E ABV, including valuation of subsidiary companies which contribute ~30% of total valuation. Based on 1.8x FY19E ABV, we arrive at a target price of INR 372 per share, implying 24% upside. Technical observations: The medium term trend is up. The stock has made a new 52 week high after 6 months of consolidation. View: The stock has shown strong momentum and witnessed a breakout from the narrow range of levels after its recent quarterly result. It has spent almost 6 months in the mentioned range. Breakout post consolidation suggests a rally towards 340 levels in the medium term. Price is currently at its new 52 week high levels. Look to accumulate the stock near 290 levels. Crucial long term supports are placed near 270 levels. Date: 10 th May, 2017 Resistance levels: 310/340 Support Levels : 270/265 7 GWM/Edelweiss Investment Research

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9 Edelweiss Investment Research Stock view: Indusind Bank Ltd. Edelweiss Trading Team Indusind Bank Ltd. Fundamental Observations: Loan growth to be strong on the back of MCLR regime, infra spending and Microfinance The new MCLR regime has made Indusind Bank more competitive on the working capital portion of corporate lending (52% of FY17 loan book, of which 28% is large corporate). The upcoming infra spending in FY18 and beyond will drive the CV portion of retail lending (48% of loan book including business banking, of which 24% is CV). Microfinance is also an attractive growth area for Indusind Bank from a long term perspective. Overall loan growth was 28% for FY17 which we expect will sustain going forward. High Net Interest Margin to be sustained on the back balance sheet retailisation Indusind Bank delivered a Net Interest Margin of 3.99% in FY17, which is one of the highest in the Indian Banking industry. CASA has been steadily inching up and has moved up from 35% in FY16 to 37% in FY17. We expect CASA to be on an improving trend in the future. In addition, the loan mix is also expected to move in favour of retail with latter forming c.50% of loan book by FY20. Furthermore, Non-Vehicle Loans would rise from 18% to 25%, further augmenting yield and NIM. Operating costs to fall on the back of technology initiatives Indusind Bank is executing a best-in-class technology strategy which enable to reduce personnel requirement in Metro branches by almost half from 23 to 12. Improvement in other branch types would be similar in nature. Cost to Income has fallen from 47% in Q4FY16 to 45% Q4FY17 and is expected to improve by a further 200 bps by FY20. Indusind Bank has developed a suite of zero or low gestation non-banking businesses Indusind Bank has migrated successfully from a mid-market Investment Banking player to higher value deal making and IB now contributes 13% to Fee Income. They are expected to achieve their aspiration of becoming a top 3 player in debt deals. They have also acquired IL&FS Securities in an opportunistic deal to fill gaps in clearing, custody and depository businesses. We expect non-banking businesses to be increasingly RoA accretive going forward. Valuation At CMP of INR 1428, the stock trades at a P/B of 3.1x FY19E book for an RoE of 17-19% over FY18E- 20E. Hence, we believe the stock is attractively valued at these levels and we recommend a HOLD.. Technical observations: Short and medium term trends are up. The stock is showing strong momentum. View: Indusind Bank was one of the first mover in the banking space who made a new all time high in Since then the stock has rallied by more than 14%. The stock is currently in its new life high territory which is a zone of no resistance. Price pattern implication suggests further upside towards 1630 levels. Near term support is at 1340 levels. Date: 10 th May, 2017 Resistance levels: 1485/1630 Support Levels : 1340/ GWM/Edelweiss Investment Research

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11 Edelweiss Investment Research Stock view: Kotak Mahindra Bank Limited. Edelweiss Trading Team Kotak Mahindra Bank Ltd. Fundamental Observations: Kotak Mahindra continues to have among the best underwriting standards in the Banking industry Kotak Mahindra Bank has among the best underwriting standards in the Indian Banking industry reflected in its low headline gross stressed assets ratio (GNPA ratio of 2.6% + Standard Restructured Assets Ratio of 0.1%) of 2.7% at the end of FY17. The bank also has nil exposure to quasi-recognized stressed assets in the form of Security Receipts, 5/25 Refinancing, SDR and S4A. We expect sound asset quality to be maintained going forward. Kotak Mahindra Bank possesses one of the best retail franchises in the Indian Banking sector Kotak Mahindra Bank possesses one of the best retail franchises in the Indian Banking sector reflected in a high share of small ticket loans (including Business Banking) of 66% of FY17 consolidsted loan book. Retail and small-ticket SME loans are typically higher yielding loans which resulted in KMB delivering a NIM of 4.6% in Q4FY17, which is one of the highest in the industry. We believe that KMB s margin profile is structural and will remain in place in the future. Kotak Mahindra Bank possesses best-in-class financial businesses outside of lending Kotak Mahindra Bank possesses best-in-class non-lending businesses in life insurance, broking, asset management, investment banking, private equity and distressed investing which augment consolidated RoE. Kotak Securities, which also houses its market-leading institutional broking business, contributed 9% to consolidated PAT in Q4FY17. Kotak Mahindra Old Mutual Life Insurance is a fast-growing business with New Business Premium (NBP) growing 27% yoy in Q4FY17 driven by Individual NBP (61% of Total NBP), which grew 53%, with the business contributing 7% to consolidated PAT. Valuation At CMP of INR 925, the stock trades at a P/B of 3.3x FY19E book for an RoE of 15-16% over FY18E-20E. Given exceptional management pedigree, which will ensure continued synergies from ING Vysya acquisition, we expect RoE to trend higher from this range beyond FY20. Hence, we believe the stock is attractively valued at these levels and we recommend a HOLD. Technical observations: The short and medium term trends are up. Stock continues to trend upward with low volatility Momentum oscillator is in bullish territory. View: The momentum oscillator and the trend signal confirmed an uptrend in Feb 17 and since then the stock has been moving upward with low volatility which is a strong sign of bullish trend. Price pattern implication post entering into new life high territory suggests a target of 1000 in the medium term. Resistance levels: 1000 Support Levels : 850 / 830 Date: 10 th May, GWM/Edelweiss Investment Research

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13 Edelweiss Broking Limited, 1 st Floor,Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W) Board:(91-22) Vinay Khattar Head Research vinay.khattar@edelweissfin.com 13 GWM/Edelweiss Investment Research

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