Financials | Sector Update
31 December 2014
Sector Update
Financials
State-owned banks’ reforms gather pace
Please refer to our sector
report dated 25 Dec 2014
An indication of concrete reforms blueprint to be seen in Jan 2 conclave?
In a landmark decision, government took a vital reform step for state-owned banks to
split the position of Chairman and Managing Director. Further, a chairman will be a
part time board member (not an executive chairman), who would preside over the
board meeting. So far, SBI was the lone bank among state-owned banks to have a
separate chairman and managing director position (as per the SBI Act of 1980).
To widen the candidates search procedure (to be announced shortly), government has
decided to go for a fresh selection method for three large state-owned banks (PNB,
BOB and CBK), thus indicating its seriousness to appoint the best-in-class at the helm
of affairs.
In our view, splitting top management positions is a step in the right direction and will
widen the top management’s bandwidth. This should result in greater independence
and objectivity to take board/credit decisions. However, the bigger task for the
government would be to make significant changes in the appointment procedure of
the board of directors.
Key factors to watch out: a) new criteria/candidates for the post of MD and CEO of
large state-owned banks, b) procedure for selection of chairman and c) any change in
the appointment of board of directors.
MD & CEO appointments
Mr Animesh Chauhan
New role:
MD &CEO, OBC
Previous role:
ED, CBoI
Superannuation date:
June 30, 2017
Mr Kishore Kumar Sansi
New role:
MD &CEO,
Vijaya Bank
Previous role:
ED, P&S Bk
Superannuation date:
Aug
31, 2017
Mr R Koteeswaran
New role:
MD &CEO,
Indian Overseas Bank
Previous role:
ED, BoI
Superannuation date:
June 30, 2016
Mr P Srinivas
New role:
MD &CEO, UBoI
Previous role:
ED, BoB
Superannuation date:
June 30, 2016
Strong indication of reforms prior to Jan 2 conclave?
The government finally took the decision to split the position of Chairman and
Managing Director, thus indicating a strong intent of expected reforms for state-
owned banks.
Pertinently, it has sent a strong signal that it is not ready to compromise on the
selection of top management candidates, and has called for a fresh selection
procedure for BOB, PNB and CBK.
Media is already speculating on the appointment for top management positions
from the industry, including from private sector banks (link). If this materializes,
in our view, it will be one of the most crucial reforms for state-owned banks.
We believe the bold step of splitting the top management position is a huge
positive, though the lower remaining tenure (18-30 months considering
superannuation age of 60 years) for new appointees is slightly disappointing.
What bold reforms are expected to improve state-owned banks
functioning?
In our note dated Dec 25, 2014 (link), we highlighted in detail the important
reforms needed to improve state-owned banks’ functioning.
In our view, immediate attention is required for the selection/composition of
board of directors, revamp of HR policies, strengthening and providing a
conducive environment for the recovery mechanism.
Further, government needs to ensure that profitability of state-owned banks
precedes growth, considering the capital requirements under Basel III.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Vallabh Kulkarni
(Vallabh.Kulkarni@MotilalOswal.com); +91 22 3982 5430
31 December 2014
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Financials | Sector Update
Conclave - hopes build for state-owned banks’ reforms
In a maiden event, the government has called for a two-day long conclave (Jan
2-3, 2015 (PIB
press release)
to prepare the blueprint for banking sector
reforms, especially related to state-owned banks.
The Modi government’s resolve for banking sector reforms can be noted by the
level of participation in the event by India’s Prime Minister, Finance Minister,
DFS, RBI governor, all CMDs of state-owned banks and FIs, and prominent
industry experts.
Banks’ multiple below/near LPA; reforms - a key catalyst
State-owned banks 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 cycle. Similarly, P/BV ranges between 0.4-
0.6x and 1.3-2.3x. Valuations are near (for large state-owned) or below the long
period average (20-40% discount for mid-sized state-owned banks).
Growth improvement coupled with conducive liquidity and improving 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 credits cost for state-owned banks, and in turn support RoAs, which
are currently at bottom of the cycle levels at ~0.6%.
Strained by higher capital requirement under Basel III, state-owned banks have
been prudent in this cycle, with higher focus on core profitability. Unlike the
2003-08 cycle, this cycle is likely to see a gradual reduction in interest rates
(rates were rising over FY04-08 led by higher inflation), thus providing healthy
capital gains to banks (in turn supporting earnings).
An improvement in operational performance is likely to drive the first leg of re-
rating, with structural reforms taking the re-rating process further.
Our top picks are
SBIN, PNB
and
UNBK.
Exhibit 2: State-owned banks – one-year forward PB
2.3
PSU Banks Sector PB (x)
1.7
1.1
0.8
1.1
LPA (x)
Exhibit 1: State-owned banks – one-year forward PE
12
9
7
4
2
3.9
PSU Banks Sector PE (x)
10.6
7.1
LPA (x)
8.5
1.8
1.3
0.8
0.3
Source: MOSL, Company
Source: MOSL, Company
31 December 2014
2

Financials | Sector Update
Key details on MD & CEO appointments
Mr Animesh Chauhan
New role:
MD & CEO, Oriental Bank of Commerce
Previous role:
ED, Central Bank of India
Superannuation date:
June 30, 2017
He took over as the ED on Aug 5, 2013. Prior to becoming ED he was General Manager, Rajasthan Zone, Bank of Baroda.
He would be retiring on June 30, 2017.
He joined Bank of Baroda in 1979. He has more than 36 years of experience in banking, having worked as General
Manager & Zonal Head Rajasthan Zone, Jaipur. He was the Head of London Main Office & Chief Compliance Officer UK
operations and Chairman of The Nainital Bank Ltd.
Mr Kishore Kumar Sansi
New role:
MD & CEO, Vijaya Bank
Previous role:
ED, Punjab and Sind Bank
Superannuation date:
Aug 31, 2017
He took over as the ED on Aug 6, 2013. Prior to becoming ED, he was Field General Manager, Chandigarh, OBC. He
would be retiring on Aug 31, 2017.
He joined the Oriental Bank of Commerce as a probationary officer in 1980 and has worked in the Foreign Exchange,
General Banking, Risk Management & IT departments.
Mr R Koteeswaran
New role:
MD & CEO, Indian Overseas Bank
Previous role:
ED, Bank of India
Superannuation date:
June 30, 2016
He took over as the ED on Aug 5, 2013. Prior to becoming ED, he was General Manager (from Dec 1, 2010) Bank of
Baroda. He would be retiring on June 30, 2016.
He joined Bank of Baroda in 1976 and has worked in various branches in different centers, mostly in credit. He was also
heading the Kisumu Branch in Kenya for four years.
Mr P Srinivas
New role:
MD & CEO, United Bank of India
Previous role:
ED, Bank of Baroda
Superannuation date:
June 30, 2016
He took over as the ED on June 18, 2012 and would be retiring on June 30, 2016.
He started the banking career with Andhra Bank in Nov 1978. Has worked in various departments such as IT, Operations,
Accounts, Credit Card. He was instrumental in the migration of all branches of Andhra Bank to the Core Banking Solution
(CBS).
31 December 2014
3

Financials | Sector Update
Exhibit 3: Financials – Valuation Matrix
63.27
Rating
CMP
(INR)
Mcap
EPS (INR)
FY16
22.8
52.5
36.5
49.2
59.9
42.9
43.8
13.1
19.5
4.3
FY17
27.0
63.8
42.8
60.4
75.6
53.3
55.5
15.5
23.5
5.3
P/E (x)
FY16
12.8
18.1
13.8
25.7
12.9
18.7
19.9
11.6
7.7
6.7
16.9
32.5
42.1
9.2
7.0
4.9
7.4
6.6
7.2
5.4
7.4
5.1
4.5
8.1
38
32
62
64
13
67
57
90
20
208
46
39
76
77
14
78
69
105
24
245
19.4
13.4
6.4
7.1
12.2
5.0
5.2
12.3
16.2
16.7
13.2
FY17
10.5
14.9
11.7
20.9
10.2
15.1
15.7
9.8
6.4
5.3
14.1
7.1
5.4
3.9
6.5
5.0
6.6
4.5
7.1
3.7
3.7
6.4
14.5
11.1
5.2
6.0
10.9
4.3
4.3
10.5
13.7
14.2
11.1
166
192
198
229
359
416
157
173
110
120
301
361
292
344
514
604
117
134
1,123 1,328
235
239
481
974
323
291
687
165
157
137
269
275
549
1,103
362
317
745
174
173
150
BV (INR)
FY16
133
254
219
371
329
228
434
100
144
30
FY17
152
303
256
427
389
272
478
112
162
34
P/BV (x)
FY16
2.20
3.74
2.29
3.41
2.35
3.51
2.00
1.51
1.04
0.94
2.78
1.28
0.92
0.63
1.11
0.74
0.75
0.49
0.57
0.47
0.45
0.93
4.50
2.20
1.10
2.92
1.18
1.11
1.03
2.16
2.81
3.10
2.48
FY17
1.86
3.14
1.96
2.96
1.98
2.95
1.82
1.35
0.92
0.83
2.41
1.11
0.80
0.55
0.98
0.66
0.69
0.45
0.54
0.42
0.41
0.83
3.47
1.90
0.95
2.65
1.06
0.93
0.87
1.84
2.45
2.62
2.15
2.49
1.41
1.35
4.23
2.33
3.50
3.09
2.64
2.86
2.94
2.50
1.43
1.33
4.15
2.30
3.36
3.08
2.78
2.87
2.79
23.8
17.6
18.4
31.4
11.7
24.5
21.2
18.5
18.5
20.1
24.8
18.4
19.7
32.5
12.0
23.4
21.7
19.5
19.1
20.0
1.4
1.1
2.5
6.2
1.6
3.5
3.4
0.7
1.2
1.0
0.88
0.84
0.55
0.79
0.56
0.64
0.38
0.36
0.58
0.48
0.97
0.94
0.58
0.75
0.65
0.61
0.39
0.32
0.69
0.51
14.6
13.9
13.5
15.9
11.8
10.8
9.3
8.0
9.5
10.3
16.6
15.9
14.9
16.1
14.0
10.9
10.4
7.9
11.9
11.7
1.2
1.1
2.1
2.3
2.0
2.4
2.4
2.9
2.1
3.4
RoA (%)
FY16
1.83
1.97
1.76
1.86
1.68
1.95
1.09
1.17
1.09
0.85
FY17
1.81
1.96
1.71
1.86
1.69
1.95
1.14
1.16
1.16
0.91
RoE (%)
FY16
15.6
22.4
17.8
14.3
19.6
20.4
10.5
13.7
14.3
15.0
FY17
16.2
22.9
18.0
15.0
21.0
21.3
12.2
14.7
15.4
16.5
D.
Yield
(%) #
1.5
0.9
0.9
0.1
1.1
0.6
0.8
1.5
2.0
2.5
ICICIBC*
HDFCB
AXSB
KMB*
YES
IIB
VYSB
FB
JKBK
SIB
Private
Aggregate
SBIN
(cons)*
PNB
BOI
BOB
UNBK
INBK
CRPBK
ANDB
IDBI
DBNK
Public
Aggregate
HDFC*
LICHF
DEWH
IHFL
IDFC
RECL
POWF
SHTF
MMFS
BAF
NBFC
Aggregate
Buy
Buy
Buy
Neutral
Buy
Buy
Neutral
Buy
Buy
Buy
(USDb)
353
32.2
952
36.1
502
18.6
1,263 15.4
773
5.1
803
6.7
869
2.6
152
2.0
150
1.1
28
0.6
120.5
Buy
Buy
Neutral
Neutral
Buy
Buy
Neutral
Neutral
Neutral
Neutral
312
219
302
1,085
239
218
337
95
73
62
36.8
1.3
3.1
7.4
2.4
1.6
0.9
0.9
1.9
0.5
62.7
31.3 40.8
61.2 76.8
146.3 167.6
36.3 48.0
30.2 33.1
61.9 74.2
12.8 13.4
14.4 19.7
13.6 16.8
Buy
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Neutral
Buy
1,135
436
395
459
158
335
300
1,110
329
3,481
28.0
3.5
0.8
2.6
4.0
5.2
6.3
4.0
2.9
2.7
60.0
*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries
# Div Yield based on FY14 declared dividend; UR: Under Review
31 December 2014
4

Financials | Sector Update
NOTES
31 December 2014
5

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