Financials | Public Sector Banks
22 May 2014
Sector Update
Financials
PSBs: Deep cyclicals at cusp of rebound
Play 4 R’s: Recovery | RoA acceleration| Reforms | Re-rating
Banks covered in the report
Public sector banks (PSBs) are deep cyclicals, with RoAs of 0.5-0.7% at the bottom of
the cycle and 0.9-1.4% at the peak of the cycle. Similarly, P/BV ranges between 0.3-
0.6x and 1.3-2.3x.
State Bank of India
Bank of Baroda
Bank of India
Punjab National Bank
Canara Bank
Union Bank of India
Oriental Bank of Commerce
Indian Bank
Our economist expects GDP growth to accelerate from 4.8% in FY14 to 5.5% in FY15
and 6.5%+ in FY16, with a positive bias. As India has voted a strong mandate for
development and governance, in favor of Mr Modi, we expect the reform process and
GDP growth to accelerate. This augurs well for Financials.
Growth improvement coupled with conducive liquidity and capital markets would lead
to acceleration in de-leveraging for corporate India and deceleration in incremental
stress addition. This would drive margin expansion and lower credit cost for PSBs, and
in turn support RoAs, which are currently at bottom of the cycle levels at ~0.6%.
We have upgraded PSBs’ earnings estimates for FY16 by 10-20% and our estimates
could see further upside, with growth cycle acceleration. Other things remaining
unchanged, every 10bp NIM expansion and 20bp reduction in credit cost has the
potential to upgrade FY16E earnings by ~20%, RoA by ~15bp and RoE by ~250bp.
Overall sector earnings growth could increase to 40%+.
While the PSB index has rallied 40%+ YTD and has outperformed the Nifty by 25%, it is
still ~40% below its peak levels. Valuations are still 20% below the long-period average
and at 50%+ discount to peak levels.
Improvement in operational performance is likely to drive the first leg of re-rating,
with structural reforms (Nayak Committee recommendations) goading the re-rating
process further. Our top picks are SBIN, PNB, CBK, OBC and INBK.
Beginning of upgrade cycle
PAT upgrade (%)
FY15
FY16
5.3
16.8
0.0
9.0
7.0
21.9
12.1
20.8
4.9
19.1
4.8
14.1
12.3
18.8
3.4
12.2
Entering upgrade cycle: Asset quality holds key
PSBs’ earnings are at FY10-11 levels, despite 2x increase in the loan size, as higher
asset quality stress impacted core operations. A strong government at the center
will lead to acceleration in growth cycle, infrastructure reforms and faster corporate
de-leveraging (led by conductive capital markets), in turn leading to better operating
environment, robust core earnings and stock re-rating. While we have upgraded
FY16 earnings estimates for PSBs by 10-20% to factor better growth and asset
quality, these remain conservative. We have not assumed major reduction in
interest rates, fee income acceleration and significant recoveries.
SBIN (Cons)
PNB
BOB
BOI
CBK
UNBK
OBC
INBK
Better operating environment to reduce fears of BV-dilutive capital raising
PSBs account for 75% of the banking system and would continue to play an
important role in the Indian economy. Considering structural challenges, GoI will
have to introduce a slew of reforms (reducing dividend payout, reducing GoI
shareholding to 51%, creation of stress asset funds, among others), which would
strengthen the PSBs. Higher economic growth and upgrades would lead to
continued re-rating, prodded further by reforms aimed at PSBs. This would, in turn,
reduce fears of BV-dilutive capital raising.
All exhibits pertain to the eight
banks covered in the report unless
otherwise mentioned
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Sohail Halai
(Sohail.Halai@MotilalOswal.com); +91 22 39825430
22 May 2014
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Financials | Public Sector Banks
Play the recovery; earnings at cyclical low
PSBs’ RoA and RoE have declined from 1.2% and 21%, respectively in FY08 (peak) to
0.6% and 11% in FY14 (bottom), driven by asset quality issues and fixed cost
structure (impacted by AS 15 related provision). PSBs’ valuations are below LPA and
return ratios are at cyclical lows. With acceleration in reforms, earnings upgrades
and re-rating would continue. Our top picks are
SBIN, PNB, BoB, CBK and OBC.
Financials: Valuation matrix
CMP Mcap Target
INR USD b P/BV x
SBIN (cons) Buy
2,512 31.3 1.3
PNB
Buy
986 5.9
1.1
BOB
Buy
925 6.6
1.2
BOI
Neutral 322 3.5
0.7
CBK
Buy
415 3.2
0.9
UNBK
Buy
215 2.3
0.8
OBC
Buy
326 1.6
0.8
INBK
Buy
170
1.3
0.8
Rating
TP Upside EPS (INR)
P/E (x)
BV (INR)
P/BV (x)
RoA (%)
RoE (%)
(INR) (%) FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16
3,150 25
231 307 10.4 7.8 2,075 2,326 1.16 1.03 0.7
0.8 11.5 13.7
1,320 34
121 158 8.1
6.2 1,060 1,200 0.93 0.82 0.7
0.8 12.1 14.0
1,200 30
121 154 7.6
6.0 881 1,000 1.05 0.93 0.8
0.8 14.5 16.4
350
9
55
72
5.9
4.5 438 501 0.74 0.64 0.6
0.7 13.2 15.2
560
35
59
77
7.1
5.4 564 623 0.74 0.67 0.5
0.6 10.8 12.9
260
21
32
39
6.8
5.4 294 327 0.73 0.66 0.5
0.6 11.2 12.7
400
23
46
55
7.1
5.9 461 504 0.71 0.65 0.6
0.6 10.3 11.4
235
38
30
37
5.7
4.5
271
300
0.63
0.57
0.7
0.7
11.5
13.1
At 25% premium to LPA, stocks would give 40-100% returns
CMP
2,512
986
925
322
415
215
326
170
LPA
1.2
1.2
1.0
1.1
1.0
1.1
0.9
0.9
LPA +25
1.5
1.5
1.3
1.3
1.2
1.3
1.1
1.1
Peak
2.3
1.8
1.8
1.8
1.7
1.7
2.1
1.7
LPA
2,850
1,429
1,000
527
608
348
455
271
LPA +25
3,562
1,786
1,249
658
760
435
569
339
Peak
5,291
2,199
1,799
893
1,036
568
1,034
503
LPA
13.4
45.0
8.0
63.4
46.6
62.1
39.6
59.7
Upside (%)
LPA +25%
41.8
81.3
35.0
104.2
83.2
102.7
74.5
99.7
Peak
110.6
123.1
94.4
176.9
149.7
164.2
217.3
196.5
SBIN
PNB
BOB
BOI
CBK
UNBK
OBC
INBK
Entering upcycle: Upgrade earnings estimate by 10-20% for FY16 (%)
Revised
estimates
SBIN (Std)
PNB
BOB
BOI
CBK
UNBK
OBC
INBK
Loan growth
FY15
FY16
16
20
15
20
15
20
14
18
16
20
12
15
15
20
16
20
NIMs
FY15
3.11
3.20
2.15
2.28
2.17
2.62
2.60
2.77
FY16
3.12
3.28
2.28
2.34
2.18
2.66
2.58
2.83
Credit Cost
FY15
FY16
1.10
1.00
1.25
1.05
0.80
0.70
1.05
0.95
0.85
0.80
0.95
0.80
1.05
0.95
0.85
0.75
ROA
FY15
0.69
0.75
0.75
0.58
0.51
0.53
0.58
0.69
FY16
0.77
0.84
0.84
0.65
0.57
0.59
0.60
0.74
FY15
11.46
12.07
14.50
13.23
10.81
11.23
10.34
11.91
ROE
FY16
13.75
14.02
16.42
15.23
12.89
12.71
11.42
13.52
PAT (INR m)
FY15
FY16
134,688
178,016
43,985
57,349
52,112
66,498
35,236
46,000
27,005
35,290
20,012
24,990
13,754
16,518
13,901
17,403
Earlier assumptions factored a tough macro, implying lower loan growth and persisting asset quality pressure (%)
Earlier
estimates
SBIN (Std)
PNB
BOB
BOI
CBK
UNBK
OBC
INBK
Loan growth
FY15
FY16
16
16
15
15
15
15
14
14
16
18
12
15
15
15
16
18
NIMs
FY15
3.06
3.20
2.15
2.26
2.17
2.62
2.57
2.77
FY16
3.02
3.26
2.21
2.27
2.11
2.63
2.53
2.78
Credit Cost
FY15
FY16
1.10
1.10
1.25
1.25
0.90
0.90
1.15
1.10
0.90
0.90
1.00
0.90
1.15
1.10
0.90
0.85
ROA
FY15
0.65
0.75
0.70
0.51
0.49
0.51
0.52
0.67
FY16
0.67
0.79
0.70
0.55
0.49
0.52
0.51
0.66
FY15
10.91
12.07
13.60
11.88
10.32
10.74
9.24
11.53
ROE
FY16
11.91
12.93
13.72
12.89
10.95
11.26
9.76
12.16
PAT (INR m)
FY15
FY16
127,915
152,462
43,985
52,607
48,698
54,562
31,434
38,072
25,736
29,633
19,101
21,911
12,245
13,904
13,439
15,517
Source: Company, MOSL
22 May 2014
2

Financials | Public Sector Banks
Earnings at cyclical low
Upgrading FY16 estimates by 10-20%; further upside possible
A strong government at the center will lead to acceleration in growth cycle,
infrastructure reforms and faster corporate de-leveraging (led by conductive capital
markets).
Better operating environment would push up core earnings and drive stock re-rating.
We have upgraded our FY16 earnings estimates for PSBs by 10-20% to factor better
growth and asset quality.
Our estimates remain conservative as we have not assumed major reduction in
interest rates, fee income acceleration and significant recoveries.
Operating environment improving; trough RoEs
Improving growth,
corporate deleveraging,
better capacity utilization
and reforms to reduce asset
quality stress and
accelerate earnings
PSBs are deep cyclicals, whose fortunes are closely linked to economic growth.
In the strong growth phase, their RoEs averaged at 20% (peak at 24% in FY04).
Challenges in the economic environment led to trough RoEs of 10/11%.
Consumption (4.4%) and investment (0.2%) growth are at decadal lows, with
plenty of low-hanging fruits that can be plucked with decisive policy action by
the new NDA government at the center.
While our underlying assumption for loan growth is 15% for FY15 and 18% for
FY16, better than expected foreign inflows and quicker resolution of stalled
infrastructure projects can surprise positively.
Higher economic growth (our economist estimates GDP growth to improve to
6.5% in FY16 against 4.8% in FY14), improving liquidity and supportive capital
markets (to accelerate balance sheet deleveraging) will reduce concerns on
asset quality. GNPAs are expected to have peaked out at 4.4% in FY14 and
should gradually decline to 3.4% by FY16. This would be aided by fall in gross
slippages, improving momentum in recoveries and better loan growth.
On the back of lower stress asset creation, earnings would get meaningful
upside, first on NIM expansion (lower interest income reversals) and then
reduction in credit cost (ageing of NPAs would keep credit cost elevated in FY15,
but if economic growth is better than anticipated, credit cost would decline).
Our sensitivity analysis suggests that 10bp higher NIM and 20bp lower than
estimated credit cost can lead to upgrade of ~20% in earnings, ~15bp in RoA and
~250bp in RoE.
Pace of upgrades and recoveries to accelerate
Upgrades & Recoveries (INR b)
% of Opening GNPA & Slippages
27.0
Moderation in economic growth led to high slippages
Gross Slippage (INR b)
Slippage Ratio (%)
3.4
2.7
2.1
Asset quality
deterioration at
its peak
2.0
2.0
2.3
2.8
3.1
Increasing pace of
upgrades/recoveries
21.1
21.5
19.0
18.5
266
17.6
337
158
192
451
20.3
473
20.9
203
273
362
544
708
891
834
772
122
117
Source: Company, MOSL
Source: Company, MOSL
22 May 2014
3

Financials | Public Sector Banks
Stress addition increased sharply…
7.9
5.8
3.7
… and led to high interest income reversals
GNPA including technical W/off, %
Negative Impact of 25bp
47
38
26
2.7
FY10
28
2.9
FY11
3.5
FY12
4.2
FY13
4.7
FY14
4.6
FY15E
4.3
FY16E
51
Impact on NIMs
49
45
GNPA up 3.7x
over FY10-14
2.7 2.4 2.1 2.3 2.4
4.4 4.1
3.8
3.4
3.1
Source: Company, MOSL
Source: Company, MOSL
Risk-adjusted NIMs at cyclical lows (%)
2.8
2.9
2.6
2.3 2.3
2.0
2.1
2.3 2.3
2.0
1.9 1.9
2.0
Core PPP and earnings growth to accelerate (%)
Earnings
50
30
10
-10
-30
Core PPP
Significant
slump in
earnings
54
36
18
0
-18
Source: Company, MOSL
Source: Company, MOSL
Return ratios at cyclical lows (%)
Strong GDP
growth
1.1 1.2
RoE
1.1
1.0 1.0
RoA
0.9
0.6 0.7
Significant upside if credit cost is lower than expected
9
13
37
52
30
1.2
1.0 0.9
0.9
0.7
10
12
12
6
-19
23
Source: Company, MOSL
Source: Company, MOSL
Return ratios near bottom; core PPP growth improving
NIMs stabilizing; core
operating profit growth
improving
The enablers of the economic boom phase became the disablers, as strong loan
growth in some sectors was followed by severe slowdown and increased
bottlenecks (policy logjam). This led to creation of impaired loans and PSBs’ net
stress loans increased to 8% as compared to 1-2% in FY08.
Average credit cost rose to 1% over FY11-14 as compared to a low of 0.5% over
FY05-09, even as PCR was compromised (43% v/s 52% in FY11).
The impact was visible in income growth, as focus shifted to restructuring of
assets. Fees, loan growth and CASA dwindled, and this was accompanied by
22 May 2014
4

Financials | Public Sector Banks
higher interest income reversals (NIM collapsed 50bp in three years). RoA
declined to a decadal low of 0.6% from an average of 1%+ over FY04-08.
Over the last few quarters, core operations have stabilized (NIM: 2.7/2.8%, core
PPP: 2.3/2.4%, RoA: 0.5/0.6%) and the recovery cycle will lead to improvement.
Gross impairment has stabilized (as a % of loans)
1.5
1.3
1.0
0.8
0.5
1.2
1.3
1.9
1.6
1.2
Credit cost stabilized though at elevated level (%)
3.5
3.3
3.0
2.8
2.5
NIMs (LHS)
Credit Cost (RHS)
Credit cost at ~1.1% levels
1.5
1.1
1.5
1.3
1.2
1.3
Source: Company, MOSL
Source: Company, MOSL
Core PPP growth improving; significant scope for further
improvement (%)
Core PPP growth
34
24
14
4
-6
-16
Core PPP
growth turns
positive
Core PPP to avg assets
4.0
3.5
3.0
2.5
2.0
Return ratios near bottom; lower tax rate and recoveries
helped in 4QFY14 (%)
1.2
0.8
0.9
1.0
1.0
0.9 0.9 0.8
0.8
0.6 0.5 0.6
*4Q SBIN estimates
Source: Company, MOSL
Source: Company, MOSL
Infrastructure reforms to accelerate PSBs’ earnings growth
Infrastructure segment
accounts for 1/3rd of stress
loans
According to the Financial Stability Report, gross stress loans for the system
have multiplied 4.5x since FY09. Notably, 54% of the incremental stress has
come from three segments: (1) 37% from Infrastructure, (2) 10% from Iron &
Steel, and (3) 7% from Textiles.
In the last couple of years, stress addition has receded in Textiles (led by
currency). Infrastructure remains the most vulnerable and policy reforms are
critical, with several projects likely to enter the operational phase.
A stable government could unclog bottlenecks and drive investment and
consumption demand. Stress in the Infrastructure segment should reduce.
Our Utilities team expects (a) massive pick-up in government capex and spend in
segments like Roads, Railways, Urban Infrastructure, Oil & Gas and Power, (b)
resolution of last-mile issues in terms of fast-tracking stalled projects, (c)
simplification of contentious issues like land acquisition and forest clearances,
(d) improvement in state DISCOMs’ financial health, (e) augmenting/enabling
fuel supply to power projects, and (e) reliable and wide grid connectivity.
22 May 2014
5

Financials | Public Sector Banks
Infrastructure loans contribute 1/3 of stress loans (% of
stressed assets)
40
30
20
10
0
Infrastructure
Iron and Steel
Textiles
rd
Incremental contribution of Infrastructure segment to
stressed loans is also high
Infrastructure
Iron and Steel
3
5
16
13
10
FY10
23
6
1
FY11
FY12
FY13
Sep-13
46
44
40
4
12
Textiles
7
13
Source: Company, MOSL
Source: Company, MOSL
Upgrading estimates; execution on reforms remains key
Increasing loan growth
estimate by 4% and NIM
estimate by 5-10bp, and
reducing credit cost
estimate by 10-15bp for
FY16
Given the strong mandate for the new NDA government, we firmly believe we
are at the bottom of the cycle and peak of stress addition. We expect significant
improvement in asset quality trends from 2HFY15.
The upgrade cycle has a rippling effect on profitability, as (1) credit costs fall,
(2) NIMs improve due to lower interest income reversals, and (3) loan growth
improves.
Accordingly, we have revised our estimates of net slippages and credit cost
downward, and have raised our NIM estimates (as interest reversals would
come down and CA growth would accelerate with an improving economy).
Improving growth could be a significant positive for PSBs – operating leverage
could increase faster, given that they operate on a fixed cost structure.
Despite the upgrades, we believe our estimates remain conservative. We have
not assumed major reduction in interest rates, fee income acceleration and
significant recoveries.
We upgrade FY16 earnings estimates by 10-20% across PSBs, led by lowering of
credit costs.
Other things remaining unchanged, every 20bp decline in credit cost and 10bp
expansion in margins (from base case) could lead to 20% upgrade in earnings
estimate for FY16.
Earlier assumptions factored a tough macro, implying lower loan growth and persisting asset quality pressure (%)
Earlier
SBIN (std)
PNB
BOB
BOI
CBK
UNBK
OBC
INBK
Loan growth
FY15
FY16
16
16
15
15
15
15
14
14
16
18
12
15
15
15
16
18
NIMs
FY15
3.06
3.20
2.15
2.26
2.17
2.62
2.57
2.77
FY16
3.02
3.26
2.21
2.27
2.11
2.63
2.53
2.78
Credit Cost
FY15
FY16
1.10
1.10
1.25
1.25
0.90
0.90
1.15
1.10
0.90
0.90
1.00
0.90
1.15
1.10
0.90
0.85
ROA
FY15
0.65
0.75
0.70
0.51
0.49
0.51
0.52
0.67
FY16
0.67
0.79
0.70
0.55
0.49
0.52
0.51
0.66
FY15
10.91
12.07
13.60
11.88
10.32
10.74
9.24
11.53
ROE
FY16
11.91
12.93
13.72
12.89
10.95
11.26
9.76
12.16
PAT (INR m)
FY15
FY16
127,915
152,462
43,985
52,607
48,698
54,562
31,434
38,072
25,736
29,633
19,101
21,911
12,245
13,904
13,439
15,517
Source: Company, MOSL
22 May 2014
6

Financials | Public Sector Banks
Entering upcycle: Upgrade earnings estimates by 10-20% for FY16 (%)
Revised
SBIN (Std)
PNB
BOB
BOI
CBK
UNBK
OBC
INBK
Loan growth
FY15
FY16
16
20
15
20
15
20
14
18
16
20
12
15
15
20
16
20
NIMs
FY15
3.11
3.20
2.15
2.28
2.17
2.62
2.60
2.77
FY16
3.12
3.28
2.28
2.34
2.18
2.66
2.58
2.83
Credit Cost
FY15
FY16
1.10
1.00
1.25
1.05
0.80
0.70
1.05
0.95
0.85
0.80
0.95
0.80
1.05
0.95
0.85
0.75
ROA
FY15
0.69
0.75
0.75
0.58
0.51
0.53
0.58
0.69
FY16
0.77
0.84
0.84
0.65
0.57
0.59
0.60
0.74
FY15
11.46
12.07
14.50
13.23
10.81
11.23
10.34
11.91
ROE
FY16
13.75
14.02
16.42
15.23
12.89
12.71
11.42
13.52
PAT (INR m)
FY15
FY16
134,688
178,016
43,985
57,349
52,112
66,498
35,236
46,000
27,005
35,290
20,012
24,990
13,754
16,518
13,901
17,403
Source: Company, MOSL
Earnings sensitivity: RoAs and RoEs could improve to 0.8-1% and 14-20% from estimates of 0.6-0.8% and 11-16%
Base Case
EPS
SBIN (Std)
PNB
BOB
BOI
CBK
UNBK
OBC
INBK
238
158
154
72
77
39
55
37
BV
1,825
1,200
1,000
501
623
327
504
291
RoA
0.8
0.8
0.8
0.7
0.6
0.6
0.6
0.7
RoE
13.7
14.0
16.4
15.2
12.9
12.7
11.4
13.5
10bp Margin expansion
EPS
BV
RoA
RoE
258 1,840
171 1,211
168 1,010
79
86
44
61
41
508
630
330
508
294
0.84 14.81
0.91 15.08
0.91 17.80
0.72 16.70
0.65 14.44
0.66 14.04
0.66 12.57
0.80 14.66
20bp decline in Credit Cost
EPS
BV
RoA
RoE
EPS
267 1,847
175 1,215
173 1,013
82
90
46
63
42
510
633
332
510
295
0.86 15.29
0.93 15.43
0.93 18.22
0.74 17.23
0.67 14.96
0.69 14.70
0.69 13.03
0.83 15.12
Both
BV
RoA
RoE
286 1,861
188 1,226
187 1,024
89
99
50
69
45
516
640
336
514
297
0.93 16.34
1.00 16.47
1.01 19.58
0.81 18.68
0.74 16.48
0.75 16.00
0.75 14.17
0.89 16.24
Source: Company, MOSL
22 May 2014
7

Financials | Public Sector Banks
Analyzing loss given default across cycles
Loss given default across
cycles is 40%; banks are
sitting with PCR of 40%+
We covered the cycle of FY01-09 to understand the impact of a recovery cycle
on the asset quality performance of banks.
Our analysis suggests that incremental net slippages decline sharply with
economic recovery. Further, write-offs help to contain GNPAs. GNPAs even
excluding write-offs during the period would have declined to 5.3% in FY09 from
14% in FY00.
Our study indicates that loss given default (LGD) is low at 40%. In FY01, the
opening GNPA balance was INR530b and cumulative slippages over FY01-12
were INR3.9t. Of the overall NPAs (opening of FY01 NPA + cumulative slippages)
of INR4.4t, banks could recover/upgrade INR2.4t (54% of gross stress loans) over
FY02-13, assuming one year lag in recovery.
Further, write-offs over the period amounted to INR1.4t. Assuming 20%
recovery from written-off loans, overall recoveries amounted to 59% of gross
stress loans. Thus, LGD could be ~40% for banks. Currently, banks have provision
coverage of 40%+, which we believe adequately covers the potential risk of
default.
Loss given default in the system at 40%: In line with coverage ratio
(INR m)
Opening Balance
Slippages
Reductions during the year
Upgradation and Recoveries
Write Off
Closing Balance
Net Slippages
Opening FY01 GNPA (A)
Aggregate Slippages FY01-12 (B)
Slippages FY13
Gross stress (c)
Upgrades / Recoveries in FY01
Aggregate upgrade/recovery FY02-13 (d)
Aggregate write offs FY04-12 (e)
Closing FY13 GNPA (F)
Upgrades ratio (G=d/c)
Recoveries from Written off account 20% (H)
Recoveries to gross stress (I=H/C)
Total Upgrades (K=G+I+J)
Loss (L= 100-K)
FY01
530
178
162
101
61
547
77
530
3,862
1,220
5,613
101
2,376
1,486
1,650
54.1
297
5.3
59.4
40.6
Source: Company, MOSL
FY02
547
181
163
94
69
565
87
FY03
565
183
207
106
101
541
77
FY04
541
202
228
109
119
515
93
FY05
515
166
196
141
55
485
25
FY06
485
177
249
151
97
414
26
FY07
414
204
228
138
90
390
66
FY08
390
249
233
148
85
406
101
FY09
406
328
284
202
82
450
126
FY10
450
457
307
185
121
599
271
FY11
599
601
454
277
177
746
324
FY12
746
936
504
341
163
595
FY13
1,178
1,220
748
484
265
737
1,178 1,650
22 May 2014
8

Financials | Public Sector Banks
Re-rating to reduce fear of dilutive capital raising
PSB reforms need of the hour
PSBs account for 3/4th of the banking system and would continue to play an
important role in the Indian economy, providing funding for the new capex cycle.
Considering structural challenges, GoI will have to introduce a slew of reforms
(reducing payout, reducing GoI shareholding to 51%, stress asset funds, among
others), which would strengthen the PSBs.
While higher economic growth and earnings upgrades will lead to continued re-rating,
reforms aimed at PSBs could further accelerate the re-rating, reducing fears of BV-
dilutive capital raising.
Operating environment improving; fears of BV-dilutive capital remain
One of the important factors for de-rating of PSBs in the down-cycle was
capitalization, as Basel III implementation significantly increased the core equity
tier-I capital requirement.
Increasing stress levels coupled with weak profitability led to a vicious cycle of
BV-dilutive capital raising and low RoE. As the cycle improves, asset quality
stress is likely to recede and earnings would accelerate, fueling re-rating and
lowering fears of BV-dilutive capital raising.
Decisive mandate gives the new government flexibility to revive growth,
introduce infrastructure reforms (PSBs to be major beneficiaries because of high
exposure to infrastructure) as well as reforms targeted at PSBs, which will
accelerate the re-rating.
Some of the expected reforms targeted at PSBs are GoI infusion of capital at
premium (to restore confidence), creation of stress asset resolution fund,
reducing dividend payout and allowing GoI shareholding to reduce to 51% or
below, and improving board governance.
Large-size PSBs are comfortably placed for the next two years
Common Equity Tier I
Reported Expected w/o dilution
FY14
8.28
8.55
8.95
6.80
7.38
7.18
8.50
10.31
FY15E
7.82
8.33
8.94
6.63
6.92
7.01
7.96
9.61
FY16E
7.51
7.98
8.46
6.43
6.38
6.66
7.21
8.82
Capital required
Regulatory required *
Based on prudence
6.50
7.13
8.00
9.00
FY15
FY16
Total
FY15
FY16
Total
0
0
0
34
291
325
0
0
0
0
52
52
0
0
0
0
26
26
0
33
33
55
67
122
0
33
33
39
75
115
0
14
14
26
46
72
0
0
0
1
36
37
0
0
0
0
3
3
Source: Company, MOSL
Regulatory requirement =
minimum CET I capital
requirement as per Basel III
and 1% additional capital
for systematically important
banks
SBIN
PNB
BOB
BOI
CBK
UNBK
OBC
INBK
22 May 2014
9

Financials | Public Sector Banks
Capital to meet regulatory requirement is very low; to maintain prudent capitalization, banks would have to raise capital.
Dilution could be 1-16%; valuation re-rating could lead to better pricing and low dilution.
Regulatory Requirement
Based on Prudence (FY15 - 8%; FY16 – 9%)
Equity
Equity dilution
BV
CMP
BV
dilution (%)
BV Dilution (%)
BV
by (%)
dilution (%)
FY15
FY16
FY15
FY16
FY15
FY16
FY15
FY16
FY15
FY16
FY15
FY16
SBIN
2,512
7,466
2,075
2,326
0
0
0.0
0.0
2,083
2,354
2
17
0.4
PNB
986
3,621
1,060
1,200
0
0
0.0
0.0
1,060
1,172
0
15
0.0
BOB
925
4,307
881
1,000
0
0
0.0
0.0
881
995
0
7
0.0
BOI
322
6,430
438
501
0
13
0.0
-2.7
414
435
26
59
-5.5
CBK
415
4,613
564
623
0
14
0.0
-2.5
539
545
21
60
-4.5
UNBK
215
6,303
294
327
0
9
0.0
-1.7
281
288
19
53
-4.4
OBC
326
2,999
461
504
0
0
0.0
0.0
461
455
1
38
-0.2
INBK
170
4,648
271
300
0
0
0.0
0.0
271
295
0
3
0.0
Assuming FY15 capital raising at CMP and FY16 at CMP +20%; SBIN consolidated
Source: Company, MOSL
Existing
Nayak Committee recommendations for PSBs
Reduce GoI shareholding | Improve governance | Increase top management tenure | Focus on profitability
On governance: RBI should be sole regulator
The government should distance itself from several
bank governance functions. Bank Nationalization
Act of 1970 and 1980, SBI Act and SBI (subsidiary
banks) Act should be repealed. All banks should be
incorporated under the Companies Act. Dual
regulation by the Finance Ministry and the RBI
should be done away with. The RBI should be the
sole regulator for PSBs.
The government should cease to issue instructions
to PSBs in pursuit of its development objectives.
Any such instructions should be issued by the RBI
and be applicable to all banks.
A Bank Investment Company (BIC) should be
constituted for governance of PSBs, to which the
government should transfer its shareholding in
PSBs. The Committee has suggested a three-phase
approach. Phase 1: Form a Bank Boards Bureau
(BBB) comprising of three senior bankers
(existing/retired) who will advise on appointments
of board members, CMDs and EDs. Phase 2: BIC
should actively strive to professionalize bank
boards. Phase 3: BIC should relegate several of its
powers to bank boards. The three-phased transition
should be completed in three years.
Measures suggested to address structural issues
Reduce the wide pay variation between PSBs and
private banks to attract talent.
Remove external vigilance by CBI and CVC, and limit
RTI applicability to PSBs. One of the measures
suggested for this is to reduce government stake to
51% or below.
PSB boards should focus on the following seven
themes: (1) business strategy, (2) risks, (3) financial
reports and their integrity, (4) human resources, (5)
compliance, (6) customer protection, and (7)
financial inclusion.
Ensure minimum five-year tenure for PSB Chairmen
and three-year tenure for Executive Directors.
Selection process should be initiated in phase 1-3 to
complete the appointments approval before the
expiry of tenures of the incumbents.
22 May 2014
10

Financials | Public Sector Banks
Outstanding CET1 FY14 (%)
10.3
6.8
7.2
7.4
8.3
8.5
8.6
9.0
GoI shareholding in banks (%)
81.5
56.3
58.6
58.9
59.1
60.1
66.7
69.0
BOB
SBIN
PNB
OBC
UNBK
BOI
CBK
INBK
Source: Company, MOSL
Source: Company, MOSL
Better capitalized banks with liability strength to still outperform
Capital and strong liability franchise would be key to participate in economic
recovery. Capital would provide the PSBs strength to grow their balance sheets,
with reduced risk of BV-diluting capital raising. Low cost deposits would give
them the ability to maintain low cost of funds and channelize these to low risk
segments without diluting margins.
While the PSB index has rallied 40%+ YTD and has outperformed the Nifty by
25%+, it is still 30-40% below peak. Valuations are still 20%+ below LPA and
50%+ discount to peak.
We prefer SBIN and PNB despite their valuations being at premium to other
PSBs. CBK will be a strong beta play, as it is likely to a big beneficiary of reforms
in the infrastructure space. Among midcaps, we like OBC and INBK.
TP Upside EPS (INR)
P/E (x)
BV (INR)
P/BV (x)
RoA (%)
RoE (%)
(INR) (%) FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16
3,150 25
231 307 10.4 7.8 2,075 2,326 1.16 1.03 0.7
0.8 11.5 13.7
1,320 34
121 158 8.1
6.2 1,060 1,200 0.93 0.82 0.7
0.8 12.1 14.0
1,200 30
121 154 7.6
6.0 881 1,000 1.05 0.93 0.8
0.8 14.5 16.4
350
9
55
72
5.9
4.5 438 501 0.74 0.64 0.6
0.7 13.2 15.2
560
35
59
77
7.1
5.4 564 623 0.74 0.67 0.5
0.6 10.8 12.9
260
21
32
39
6.8
5.4 294 327 0.73 0.66 0.5
0.6 11.2 12.7
400
23
46
55
7.1
5.9 461 504 0.71 0.65 0.6
0.6 10.3 11.4
235
38
30
37
5.7
4.5
271
300
0.63
0.57
0.7
0.7
11.5
13.1
Financials: Valuation matrix
CMP Mcap Target
INR USD b P/BV x
SBIN (cons) Buy
2,512 31.3 1.3
PNB
Buy
986 5.9
1.1
BOB
Buy
925 6.6
1.2
BOI
Neutral 322 3.5
0.7
CBK
Buy
415 3.2
0.9
UNBK
Buy
215 2.3
0.8
OBC
Buy
326 1.6
0.8
INBK
Buy
170
1.3
0.8
Rating
22 May 2014
11

Financials | Public Sector Banks
Valuations history
SBIN: Strong liability franchise, highest CET1 and least NSL
2.7
2.1
1.5
0.9
0.3
1.2
0.6
1.1
PB (x)
Peak(x)
Avg(x)
2.3
Min(x)
At Peak TP
INR5,291
At 25%+ LPA
TP INR3,562
At LPA TP
INR2,850
PNB: Best play on recovery and improving credit cycle
2.0
1.5
1.0
0.5
0.0
PB (x)
Peak(x)
Avg(x)
1.8
1.2
0.8
0.4
Min(x)
At Peak TP
INR2,199
At 25%+ LPA
TP INR1,786
At LPA TP
INR1,429
BOB: Asset quality performance driving premium valuations
2.1
1.7
1.3
0.9
0.5
0.6
1.0
PB (x)
Peak(x)
Avg(x)
1.8
Min(x)
At Peak TP
INR1,799
At 25%+ LPA
TP INR1,249
At LPA TP
INR1,000
BoI: Low capitalization: strong growth remains a worry
2.0
1.5
1.0
0.5
0.0
0.3
1.1
0.6
PB (x)
Peak(x)
Avg(x)
1.8
Min(x)
At Peak TP
INR893
At 25%+ LPA
TP INR658
At LPA TP
INR527
1.0
CBK: Upgrade and recoveries to surprise on up-cycle
2.2
1.7
1.2
0.7
0.2
1.0
0.4
0.6
PB (x)
Peak(x)
Avg(x)
1.7
Min(x)
At Peak TP
INR1,036
At 25%+ LPA
TP INR760
At LPA TP
INR608
OBC: Better capitalization; B/S consolidation to help
2.4
1.8
1.2
0.6
0.0
0.3
0.9
0.6
PB (x)
Peak(x)
Avg(x)
2.1
Min(x)
At Peak TP
INR1,034
At 25%+ LPA
TP INR569
At LPA TP
INR455
INBK: CET1 of 10.5%+; levered to growth
2.0
1.5
1.0
0.5
0.0
0.3
0.9
0.5
PB (x)
Peak(x)
Avg(x)
1.7
Min(x)
At Peak TP
INR489
At 25%+ LPA
TP INR329
At LPA TP
INR263
UNBK: Low capitalization; least NSL on balance sheet
PB (x)
2.2
1.7
1.2
0.7
0.2
0.4
1.7
1.1
0.6
Peak(x)
Avg(x)
Min(x)
At Peak TP
INR568
At 25%+ LPA
TP INR435
At LPA TP
INR348
Source: Company, MOSL
Source: Company, MOSL
22 May 2014
12

Financials | Public Sector Banks
STATE BANK OF INDIA
Best placed for economic recovery
Strong liability franchise |Healthy capitalization |Lowest net stress loans
Enviable liability franchise (SA ratio of ~35%), adequate capitalization (tier-I of ~10%
post recent equity infusion), and lowest net stress loans (6.7%) position SBIN as best
placed to benefit from an upturn in the economic cycle.
Core operating profitability and earnings are likely to have bottomed out in FY14. We
expect operating profit CAGR of 23%+ and earnings CAGR of 30%+ over FY15-16.
Initiatives by the new management would lead to higher fees and fall in overhead
expenses. The new Chairperson has outlined four key focus areas to improve core
profitability – NIM, operating leverage, NPA and HR.
With the economy bottoming out and greater likelihood of reforms, we expect a stock
re-rating. Maintain Buy with a revised target price of INR3,150 (25% upside).
RoEs to bottom out in FY14; gradual recovery expected (%)
Trades at LPA
2.7
2.1
1.5
0.9
0.3
1.2
0.6
1.1
PB (x)
Peak(x)
Avg(x)
2.3
Min(x)
At Peak TP
INR5,291
At 25%+ LPA
TP INR3,562
At LPA TP
INR2,850
RoE
0.9 1.0 0.9
1.0 1.1
0.9
0.9
RoA
0.9 1.0
0.7
0.6 0.7
0.8
NII CAGR of ~16% driven by loan CAGR of ~18%
NIM
NII growth
37.4
24.7
12.1
12.1
3.0
-3.7
3.0 3.4 3.5
2.8 2.7 2.6 3.2 3.8
13.0
22.6
13.4
2.4
3.3
3.1 3.1 3.1
11.5
33.1
15.4 17.3
Core PPP CAGR decline of 10% over FY12-14 (%)
80
50
20
-10
-40
Core PPP growth
PAT growth
PCR (Ex technical write offs) expected to be stable
2.5
PCR (%)
Credit Cost (%)
Net stress loans at INR766b (6.7% of loans)
SEB, 0.3
AI, 0.1
NNPA, 3.2
0.7
0.1
0.5 0.5
0.5
1.2
0.8
1.4
1.1
1.0 1.1 1.0
OSRL
(others), 3.
0
22 May 2014
13

Financials | Public Sector Banks
State Bank of India: Financials and valuations
22 May 2014
14

Financials | Public Sector Banks
BANK OF BARODA
Well positioned to enter next growth cycle
Superior asset quality performance | Healthy return ratios
Asset quality stress for BOB remained high in FY13 and in 1HFY14. However, in
2HFY14, asset quality trend has improved significantly and remains better than peers.
BOB is well placed to leverage the up-cycle, with healthy CET I of ~9.3%.
Core PPP and earnings CAGR would be healthy at 23%+ and 21%, respectively over
FY15-16. RoA would be 0.8%+ and RoE is expected to improve to 16%+ by FY16.
Maintain Buy with a revised target price of INR1,200 (28% upside).
Trades at 6% premium to LPA
2.1
1.7
1.3
0.9
0.5
0.6
1.0
PB (x)
Peak(x)
Avg(x)
1.8
Min(x)
At Peak TP
INR1,799
At 25%+ LPA
TP INR1,249
At LPA TP
INR1,000
Return ratios better than peers (%)
RoE
1.2
0.8 0.8 0.8 0.9
1.1
1.2
1.3
RoA
1.2
0.9
0.8
0.8 0.8
1.0
Domestic NIMs at ~2.9%; gradual improvement expected (%)
NIM
3.4
3.5
3.1
NII growth
48.2
Earnings growth to rebound with core PPP growth (%)
76
41
Core PPP growth
PAT growth
31.0
2.9 2.6
22.3
15.9
16.9
15.9
9.3
2.7
2.7
2.5 3.0
17.2
9.7
5.7
17.6
20.5
6
-29
-64
2.3
2.8 2.4
2.1 2.2
PCR (including write offs) best among peers at ~65%
2.7
PCR (%)
Credit Cost (%)
Net stress loans at INR285b (7.2% of loans)
AI, 0.4
SEB, 0.7
1.1
0.7
0.2 0.5
0.6
0.6 0.5
0.2
1.0 0.8 0.8
0.7
NNPA, 1.5
OSRL
(others), 4.
5
Source: MOSL, Company
Source: MOSL, Company
22 May 2014
15

Financials | Public Sector Banks
Bank of Baroda: Financials and valuations
22 May 2014
16

Financials | Public Sector Banks
BANK OF INDIA
Capital position weakest
Volatile asset quality | Focus on growth
Strategy of growing the loan portfolio aggressively (+28% YoY) with lower CET1 (6.8%)
and at the cost of profitability (RoA of 0.5%) is concerning.
While net slippage ratio has come off to 1.7% (v/s 2.2%) a large part of it is attributed
to sale of loans to ARCs (ex written-off loans of INR33.4b). Increased re-statement of
restructured loan portfolio makes it difficult to compare the same with peers.
We remain concerned over BOI’s strong growth aspirations even though capitalization
remains low. We believe this could result in significant dilution in the near term.
Maintain Neutral.
Trades at 40% discount to LPA
2.0
1.5
1.0
0.5
0.0
0.3
1.1
0.6
PB (x)
Peak(x)
1.8
Avg(x)
Min(x)
At Peak TP
INR893
At 25%+ LPA
TP INR658
At LPA TP
INR527
Return ratios to show gradual improvement (%)
RoE
1.5
1.2
0.7
0.4
0.9
1.3
0.7
0.8 0.7
0.7
0.7
0.5 0.6
RoA
Strong loan growth (+28% YoY) at cost of profitability (%)
NIM
30.7
17.7
8.1
1.6
22.9
30.0
4.7
NII growth
35.7
20.0 18.3 18.3
6.4 8.5
Core PPP growth of 20%; earnings to grow 30% over FY15/16
120
60
0
-60
-120
Core PPP growth
PAT growth
Credit cost at significantly higher levels v/s last growth phase Net stress loans at INR210b (5.7% of loans)
PCR (%)
1.4
1.1
0.7
0.9
0.7 0.7
0.9
0.5
0.6
Credit Cost (%)
1.4
1.2
Aviation, 0.
7
SEB, 0.7
NNPA, 2.0
1.1 1.0
OSRL
(others), 2.
3
Source: MOSL, Company
Source: MOSL, Company
22 May 2014
17

Financials | Public Sector Banks
Bank of India: Financials and valuations
22 May 2014
18

Financials | Public Sector Banks
PUNJAB NATIONAL BANK
Signficantly levered to up-cycle
Superior return ratios | Better capitalization
PNB remains highly levered to possible resolution of policy bottlenecks and expected
improvement in economic growth. NSL (ex-SEB and AI) at 11.2% is significantly higher
than industry and 60% of restructured loans belong to Infra and Iron & Steel sectors.
Balance sheet consolidation helped PNB to structurally improve liability profile and
maintain NIM in FY14, despite high asset quality strain. With focus shifting back to
growth, we expect FY15 NIM to moderate 15bp. However, NIM and credit cost could
surprise significantly, if the pace of recoveries and upgrades is faster than expected.
We expect core PPP CAGR of 16%; higher net investment gains and moderation in
credit cost would accelerate PAT CAGR to 30% over FY14-16.
Capitalization (CET1 of 8.6%) is relatively better than other PSBs. Maintain Buy with a
revised target price of INR1,320 (32% upside).
RoA and RoE halved from the peak (%)
Avg(x)
1.8
1.2
0.8
0.4
Min(x)
At Peak TP
INR2,199
At 25%+ LPA
TP INR1,786
At LPA TP
INR1,429
Trades at 21% discount to LPA
2.0
1.5
1.0
0.5
0.0
PB (x)
Peak(x)
RoE
1.2 1.2
1.1 1.0 1.1
RoA
1.2
1.4 1.4 1.3
1.0
0.6
0.7
0.8
Commendable NIM performance, despite higher stress (%)
NIM
NII growth
39.3
23.4 24.1
13.6
6.2
10.7 8.7 9.5
Core earnings growth at cyclical lows (%)
Core PPP growth
60
30
PAT growth
16.0
10.5 10.3
18.0
18.4
0
-30
-60
Credit cost at a cyclical high
2.7
PCR (%)
Credit Cost (%)
Net stress loans at INR454b (13% of loans)
Iron &
Steel, 1.7
SEB, 1.4
1.1
NNPA, 2.8
0.7
0.3
0.1
0.3
0.6 0.6
1.1
0.9 0.9
1.4 1.3
Power -
Pvt, 1.8
Aviation, 0.
5
OSRL, 4.7
22 May 2014
19

Financials | Public Sector Banks
Punjab National Bank: Financials and valuations
22 May 2014
20

Financials | Public Sector Banks
CANARA BANK
Levered to infrastructure reforms
RAM at cyclical low | Earnings sensitivity highest | Upgrade to Buy
Over FY11-14, CBK’s profitability has declined significantly (RoA of 0.5% in FY14 v/s
1.3% in FY11), led by 100bp compression in Risk-Adjusted Margins (RAM). With
improvement in growth and likelihood of reforms, pressure on asset quality and
earnings should ease. Further, CD ratio at 71% would help improve NIMs.
CBK’s upgrades/recoveries performance is better than peers. While gross slippage
ratio is similar to peers, its net slippage ratio is the lowest.
Sensitivity of earnings to risk-adjusted NIMs has increased significantly. With every (1)
10bp NIM expansion, earnings could see an upgrade of ~15%, and (2) 10bp decline in
credit cost, earnings could see an upside of ~10%.
CET1 at 7.4% is a concern. However, reforms in Infra space (Infra exposure at 19%),
and improvement in economic growth could ease fears of BV-dilutive capital raising.
Upgrade to Buy, with a revised target price of INR560 (37% upside).
Significant compression in return ratios (%)
Avg(x)
1.7
Min(x)
At Peak TP
INR1,036
At 25%+ LPA
TP INR760
Trades at 29% discount to LPA
2.2
1.7
1.2
0.7
0.2
1.0
0.4
PB (x)
Peak(x)
29.2
20.020.7
18.8 19.1
RoA
22.7
RoE
26.8 26.4
17.1
13.3
10.4 10.8
12.9
0.6
At LPA TP
INR608
Expect gradual improvement in NIM (%)
NIM
33.4
18.3 17.5
13.7
20.4
12.4
-0.1 2.5
-12.1
NII growth
35.5
17.5 17.5
13.5
Earnings highly sensitive to reforms in Infra segment (%)
60
40
20
0
-20
Core PPP growth
PAT growth
Credit cost estimates conservative
55.9 52.5
Credit Cost (%)
51.0
37.9
29.4 30.5 30.5
25.7
16.0 15.7 21.2
24.4
28.5
PCR (%)
Net stress loans at INR262b (8.7% of loans)
Iron and
Steel, 0.3
SEB, 2.2
Aviation, 0.
3
NNPA, 2.0
OSRL
(others), 3.
9
Source: MOSL, Company
Source: MOSL, Company
22 May 2014
21

Financials | Public Sector Banks
Canara Bank: Financials and valuations
22 May 2014
22

Financials | Public Sector Banks
UNION BANK OF INDIA
Balance sheet consolidation to improve core parameters
Earnings at cyclical low | Expect gradual recovery
UNBK’s key focus area under new leadership is to consolidate loan book (+10% YoY) in
an uncertain environment and conserve capital (CET1 of 7.2%).
Over FY11-14, UNBK has recognized a lot of stress, and with improvement in economic
growth, we expect the pressure to abate. Exposure to the infrastructure segment is
high at 16%+ and policy reforms in this space would be viewed positively.
Sensitivity of earnings to risk-adjusted NIMs has increased significantly. With every (1)
10bp NIM expansion, earnings could see an upgrade of ~12%, and (2) 10bp decline in
credit cost, earnings could see an upside of ~9%.
We expect earnings CAGR of 22% over FY14-16 as compared to flat earnings over
FY09-14. Upgrade to Buy, with a target price of INR260 (25% Upside).
Return ratios to show gradual improvement (%)
Trades at 40%+ discount to LPA
PB (x)
2.2
1.7
1.2
0.7
0.2
0.4
1.7
1.1
0.6
Peak(x)
Avg(x)
Min(x)
At Peak TP
INR568
At 25%+ LPA
TP INR435
At LPA TP
INR348
RoE
1.3
1.1
0.8 0.9
1.2 1.2 1.2
RoA
1.0
0.7 0.8
0.6
0.5 0.5
Expect gradual improvement in margins (%)
3.3 3.3
NIM
2.9 2.9 2.8
3.0
33.6
15.9 18.9
17.4
8.7
8.3
9.9
2.6
9.3 11.0
NII growth
3.2
48.3
3.0
2.8
2.5
2.6 2.7
15.8 15.8
4.5
Core PPP and earnings growth of 14% and 22% over FY15/16
90
60
30
0
-30
Core PPP growth
PAT growth
PCR stabilized over FY12-14; credit cost elevated
2.3
PCR (%)
Credit Cost (%)
Net stress loans at INR177b (7.7% of loans)
SEB, 1.5
0.9
0.9 0.9 0.8 1.0 1.0 0.8
NNPA, 2.3
0.6
0.3
0.6
0.6 0.6
OSRL, 3.9
22 May 2014
23

Financials | Public Sector Banks
Union Bank of India: Financials and valuations
Union Bank of India: Financials and valuations
22 May 2014
24

Financials | Public Sector Banks
ORIENTAL BANK OF COMMERCE
Focused on profitability rather than B/S expansion
Healthy capitalization|RAM at cyclical low
Focus on balance sheet management by (1) moderating loan growth (11% v/s CAGR of
24% over FY05-12), (2) reducing bulk deposits (18% v/s 28% in FY12), and (3)
maintaining CASA ratio at 24% (as against drop reported by peers) augurs well.
NIM and core PPP to average assets maintained at 2.8% and 1.5% over FY12-14 (peers
reported a drop of 20bp/40bp) despite higher interest income reversals. Improvement
in asset quality could drive up NIM and NII.
Net slippage ratio was high at 2.1% in FY14. However, the bank utilized higher share of
non-core income to maintain PCR (including technical w/off) of 60%. Sensitivity to
credit cost is high and for every 10bp decline, earnings are likely to rise by 8-10%.
Capitalization is healthy with CET1 at ~8.6%, among the best in mid-sized banks. Buy
with a TP of INR400 (27% upside).
Lower credit cost to drive RoEs higher (%)
Avg(x)
2.1
Min(x)
At Peak TP
INR1,034
At 25%+ LPA
TP INR569
At LPA TP
INR455
Trades at 30% discount to LPA
2.4
1.8
1.2
0.6
0.0
0.3
0.9
0.6
PB (x)
Peak(x)
RoA
28.7
25.3
18.9
15.4 14.8 14.8 16.5
RoE
17.1
10.7 11.5 9.2 10.3 11.4
NIMs to stabilize; loan CAGR of ~18% over FY15/16 (%)
NIM
45.6
20.8
4.7 5.3 5.4 -1.2
19.5
0.9
NII growth
43.7
Core PPP and earnings CAGR of 13% and 20%+ over FY15/16
70
40
Core PPP growth
PAT growth
11.5 9.1 11.4
16.0
10
-20
-50
Every 10bp decline in credit cost to help earnings by 8%
PCR (%)
Credit Cost (%)
1.0 1.0
0.5
0.7
0.3
-0.2
-0.5 -0.4
0.7
1.3 1.3
1.1 1.0
Net stress loans at INR146b (10.4% of loans)
AI, 0.8
SEB, 1.4
NNPA, 2.8
OSRL
(others), 5.
4
Source: MOSL, Company
Source: MOSL, Company
22 May 2014
25

Financials | Public Sector Banks
Oriental Bank of Commerce: Financials and valuations
22 May 2014
26

Financials | Public Sector Banks
INDIAN BANK
Best capitalized bank
Return ratios better than peers | Positive asset quality trends
Strong capitalization (CET1 of 10.2%) and RoA of ~0.7% (better than peers) are the key
positives for INBK.
Stress addition in FY14 was lower than earlier years as well as that of peers. Net
slippage ratio declined to 1.4% from 2.5% in FY13 and average of 2.1% for peers. With
improvement in economic growth, recoveries may surprise positively and aid earnings.
Outstanding standard restructured loan portfolio declined 7% YoY and stood at 7% as
a percentage of loans (4% ex-AI and SEB) as of FY14 – better than peers.
Core PPP and earnings CAGR expected at 21% and 23%, respectively over FY15-16 as
compared to 7% and 12% over FY11-14. Maintain Buy with a revised target price of
INR235 (38% upside).
Trades at 40%+ discount to LPA
2.0
1.5
1.0
0.5
0.0
0.3
0.9
0.5
PB (x)
Peak(x)
Avg(x)
1.7
Min(x)
At Peak TP
INR489
At 25%+ LPA
TP INR329
At LPA TP
INR263
Strong capitalization and return ratios better than peers (%)
50.4
30.6
29.9
RoA
RoE
26.0
26.0 24.8 25.6 23.5
20.4
16.1
10.5 11.5 13.1
NII growth to bounce back, led by NIM stabilization (%)
NIM
36.2
16.7
23.6
10.6
27.0
15.2
27.7
21.2
9.5
2.5
-3.7
18.0 19.9
NII growth
FY14-16 earnings CAGR of 21% v/s 7% decline over FY11/14
Core PPP growth
120
80
40
0
-40
PAT growth
Calculated PCR down sharply driven by higher write-offs
2.6
PCR (%)
Credit Cost (%)
Net stress loans at INR113b (9.2% of loans)
AI, 0.47
NNPA, 2.26
SEB, 2.50
1.2
0.5 0.4
1.0
0.1
1.0 0.9 1.0 1.0
0.9 0.8
0.7
OSRL
(others), 4.
02
Source: MOSL, Company
Source: MOSL, Company
22 May 2014
27

Financials | Public Sector Banks
Indian Bank: Financials and valuations
22 May 2014
28

Financials | Public Sector Banks
NOTES
22 May 2014
29

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Financials | Public Sector Banks
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22 May 2014
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30