Axis Bank (AXIBAN) 726 865 Buy 1901 3.3 2.4 0.0 0.8 1.0 0 ...content.icicidirect.com/mailimages/IDirect_Banking_SectorReport_Sep19.pdfpotential including HDFC Bank, Bajaj Finance,

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September 23, 2019

Banking

Tax cut steals the show – growth & earnings see light

Corporate banks had been the theme in the last two quarters while the

corporate tax cut by the GoI has further led to impetus. Corporate as well as

retail banks where a slowdown was being built-up got a renewed positive

outlook. From the perspective of banks and NBFCs, a reduction in tax rates

will have two positives – higher profitability and, thereby, return ratios for

profitable lenders with capex to revive growth cycle back into action. An

improvement in corporate earnings and increased manufacturing capex is

expected to further add to banking sector’s business potential.

A net profit rise would result in higher RoA, higher capital adequacy,

improve bank’s ability to pass on rate cuts. Similarly well managed stronger

NBFCS would enjoy better availability of capital, flow of liabilities that will be

enable to face competition, especially from repo rate based loans.

Therefore, we revise our rating on Bajaj Finance from HOLD to BUY and

revise upwards target for NBFCs/HFCs in our coverage. Corporate banks

Axis Bank and SBI remain top buys. We revise HDFC Bank from Hold to Buy.

Merger of PSU banks may keep them occupied addressing merger concerns

leading to further market share gains for private banks, large retail NBFCs.

Furthermore, an anticipated recovery in two large NCLT accounts will benefit

corporate and PSU banks leading to improvement in asset quality and,

subsequently, reduce capital pressure. Few large troubled HFCs may

continue to keep banks on toes, if resolutions do not happen or fresh round

of defaults are seen. Currently, GNPA ratio of banking sector was at 9.4%.

Resolution of large NCLT cases can be brought down by ~40 bps to 9%.

Implication on IBC companies by raising valuation led by a reduction in tax

rate raises IRR, which remains positive.

Credit growth has slowed down to 10.2% in recent months from 12% in

June-July 2019. We expect credit growth to normalise again at ~10-11% in

FY20E and then inch up in FY21E with a pick-up in manufacturing capex.

Led by fiscal stimulus of | 1.45 lakh crore, decline in G-sec yield for quarter

has disappeared now. For benefits of last quarter decline in yields, banks

need to sell treasury to book profits as erstwhile provisions write-back is

already done. PSU banks being more sensitive to change in yield vs. private

banks, will remain major beneficiaries of the decline if further rate cuts lead

to a decline in G-sec yields.

We prefer SBI, Axis Bank, HDFC Bank within the banking sector coverage

and M&M Finance, Bajaj Finserv and SBI Life Insurance within non-banks.

Exhibit 1: Coverage Universe

CMP M Cap

(|) TP(|) Rating (| Bn)FY18 FY19 FY20E FY18 FY19 FY20E FY18 FY19 FY20E

Bank of Baroda (BANBAR) 101 140 Buy 387 1.2 1.0 -0.3 0.4 0.6 -5.8 9.7

SBI (STABAN) 314 400 Buy 2800 2.2 1.7 -0.2 0.0 0.7 -3.0 0.5 12.1

Indian Bank (INDIBA) 152 220 Hold 75 0.7 0.7 0.5 0.1 0.3 7.1 1.7 5.3

Axis Bank (AXIBAN) 726 865 Buy 1901 3.3 2.4 0.0 0.8 1.0 0.0 0.8 1.0

City Union Bank (CITUNI) 216 240 Buy 159 3.7 3.2 1.6 1.6 1.6 15.5 15.3 14.8

DCB Bank (DCB) 214 260 Buy 66 2.4 2.1 0.9 1.0 1.1 10.9 12.1 14.4

Federal Bank (FEDBAN) 96 125 Buy 191 1.6 1.5 0.7 0.8 1.0 8.2 9.8 12.4

HDFC Bank (HDFBAN) 1,257 1,400 Buy 6878 4.7 4.1 1.8 1.8 2.2 17.9 16.5 18.1

IndusInd Bank (INDBA) 1,512 1,605 Hold 1047 3.7 3.0 1.8 1.3 2.0 16.2 13.1 21.2

J&K Bk(JAMKAS) 35 48 Hold 20 0.6 0.5 0.2 0.5 0.5 3.4 7.3 7.7

Kotak Mahindra (KOTMAH) 1,641 1,575 Hold 3133 7.6 6.7 1.7 1.7 1.9 12.5 12.1 14.2

Yes Bank (YESBAN) 55 75 Reduce 141 0.6 0.6 1.7 0.4 0.4 17.6 5.6 5.5

Bandhan Bank (BANBAN) 527 650 Buy 629 0.6 0.5 3.6 3.9 4.6 19.5 19.0 23.9

Sector / Company

RoE (%)RoA (%)P/ABV (x)

Source: Company, ICICI Direct Research

Sector View

Overweight

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

RATING RATIONALE

ICICI Securities | Retail Research 2

ICICI Direct Research

Sector Update | Banking

Tax reform acts as substantial relief, lifting RoAs

The government announcement on a substantial reduction in corporate tax

rate from ~34% to ~25.17% acts as a massive trigger for revving up growth

and, more importantly, resurrecting sentiments that were down in the

dumps. The immediate benefit remains increased cash flows to corporate

anticipated to be either channelised into debt reduction, incremental capex

investments and spurring beleaguered investment cycle. From the

perspective of banks and NBFCs, reduction in tax rates will have two

positives – higher profitability and thereby return ratios for profitable lenders

and corporate capex seen reviving credit growth cycle back into action.

Improvement in corporate earnings and increased manufacturing capex

would further add banking sectors’ business potential. Given accrual of twin

benefit, we upgrade lenders with strong business model and growth

potential including HDFC Bank, Bajaj Finance, Bajaj Finserv and M&M

Financial Services.

Bajaj Finance (CMP - | 3780)

Bajaj Finance has a strong business model with high focus on retail segment

entailing sustained AUM growth of ~40% for a long tenure (FY11-19). Asset

quality remained robust with GNPA ratio at 1.6%. Going ahead, moderation

is seen in AUM growth along with marginal deterioration in asset quality.

Higher growth in low yield home loan business is seen paring down

margins. Decline in tax rate is seen providing a boost to earnings ahead.

Also, recently announced capital raising at higher price would lead to book

value accretion. Hence, we revise our PAT estimate upwards by ~13-14%

in FY20-21E, increasing at 37.5% CAGR. Consequently, we upgrade our

target price from | 3535 to | 4350 per share, valuing the stock at ~6.5x

FY21E BV. Accordingly, we upgrade our rating to BUY.

Exhibit 1: Key financials & valuation

Financial Performance FY18 FY19 FY20E FY21E

NII (| crore) 8126 11862 14808 19143

PPP (| crore) 4878 7681 9330 12204

PAT (| crore) 2393 3996 5681 7553

ABV (|) 247 313 528 609

P/E 85 55 40 30

P/ABV 15.3 12.1 7.2 6.2

RoA 2.9 3.6 3.9 4.0

RoE 18.7 22.4 21.6 20.8


Bajaj Finserv (CMP - | 7800)

Bajaj Finserv continued to deliver a robust performance with an assertive

outlook. Strong parentage and focus on productivity enabled it to tide over

marketwide liquidity concerns. We remain positive on insurance business

led by strong growth in GI coupled with focus on productivity and continued

pick-up in premium accretion in life insurance with earlier investment

starting to yielding business. Given cut in corporate tax rate, we revise

upwards earnings estimates by ~13% in FY20-21E. Hence, we upgrade our

target to | 8800 (earlier | 8215) and subsequently rating from HOLD to BUY.


| crore FY17 FY18 FY19 FY20E FY21E

Revenue 24,508.5 32,457.4 42,608.2 50,830.4 61,713.3

PBT 4,924.5 6,057.3 8,069.5 10,035.6 12,917.1

PAT 2261.9 2608.8 3133.5 4554.3 5887.6

EPS (|) 142.2 164.0 196.9 286.2 370.0

BV (|) 994.0 1302.1 1497.3 1781.7 2150.0

P/E 54.9 47.6 39.6 27.3 21.1

P/BV 7.8 6.0 5.2 4.4 3.6

RoA 1.9 1.8 1.6 1.9 2.0

RoE 15.5 14.3 14.1 17.5 18.8


Bajaj Finance

Bajaj Finserv

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Sep-1

9

May-19

Jan-19

Sep-1

8

May-18

Jan-18

Sep-1

7

Jun-17

Feb-17

Oct-16

Bajaj Fin (R.H.S) Nifty (L.H.S)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Sep-1

9

May-19

Jan-19

Sep-1

8

May-18

Jan-18

Sep-1

7

Jun-17

Feb-17

Oct-16

Bajaj Finserv (R.H.S) Nifty (L.H.S)




LIC Housing Finance (CMP - | 420)

Being a superior franchise, LICHF is expected to report a healthy

performance but impact in terms of slower growth and marginal asset

quality pain cannot be ruled out. A strong parentage remains a positive

support, especially from a liabilities perspective. Moving towards external

benchmark rates is seen impacting margins and thereby profitability of HFCs

owing to passing of benefit to customers on asset side without

commensurate benefit on the liabilities side. However, a decline in corporate

tax rates is seen boosting profitability. Therefore, we revise our PAT

estimates by ~15% for FY20-21E. Accordingly, we upgrade our target price

to | 440 per share (earlier | 360) and rating from Reduce to HOLD.


| crore FY17 FY18 FY19 FY20E FY21E

NII 3645 3701 4463 4657 5512

PPP 3237 3301 3998 4288 5084

PAT 1931 2013 2431 2725 3213

ABV (|) 215.1 237.2 275.7 326.5 387.4

P/E 10.7 10.3 8.9 7.6 6.5

P/ABV 1.9 1.7 1.5 1.3 1.1

RoA 1.4 1.2 1.3 1.3 1.3

RoE 19.1 16.9 16.3 15.9 16.2


HDFC Bank (CMP - | 1200)

The recent announcement by the government to cut corporate tax to

25.17% from 34% earlier is seen as a key trigger to revive capex in economy

thereby leading to higher credit growth, going ahead. Factoring in the tax

cut, earning estimate is revised by ~12-13% in FY20-21E. Approaching the

festive season and bank’s proposed plan to organise 1000 Grameen loan

mela in the next six month is expected to speed up bank’s credit growth.

Hence, we upgrade our ratings from HOLD to BUY with a target price of

| 1400 (earlier | 1230) valuing core bank at ~3.7x FY21E ABV (earlier

3.2xFY21ABV) and | 75 per share for HDB Financial Services.

Exhibit 1: Key Financial & Valuation


M&M Financials (CMP - | 360)

In our previous update, we had cut our earnings estimates on the back of

subdued demand in the auto sector & asset quality pressure. However, on

the back of strong management, widespread presence in rural region and

adequate risk management, we maintain our BUY rating. Though revival in

auto volumes and thereby credit growth is seen remaining gradual, recent

tax sops by GoI are seen being earnings accretive by ~15% in FY20-21E.

Accordingly, we upgrade our target price to | 425 (earlier | 360), valuing

core auto business at 2.4x FY21E ABV (earlier 2.1x FY21ABV) and ~| 44 as

value for subsidiaries with 20% holding company discount. Consequently,

we maintain our BUY recommendation.

LIC Housing

HDFC Bank

M&M Finance

0

2000

4000

6000

8000

10000

12000

14000

0

100

200

300

400

500

600

700

800

900

Aug-16

Feb-17

Aug-17

Feb-18

Aug-18

Feb-19

Aug-19

LIC Housing NIFTY Index

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

200

400

600

800

1,000

1,200

1,400

Sep-1

9

May-19

Jan-19

Sep-1

8

May-18

Jan-18

Sep-1

7

Jun-17

Feb-17

Oct-16

HDFC Bank(R.H.S) Nifty (L.H.S)

0

2000

4000

6000

8000

10000

12000

14000

0

100

200

300

400

500

600

Aug-16

Feb-17

Aug-17

Feb-18

Aug-18

Feb-19

Aug-19

M&M Finance NIFTY Index




Exhibit 2: Key Financial & Valuation


External benchmarking: Lands faster than expected

In a move to improve interest rate transmission, RBI has mandated banks to

link their lending rates for retail, MSE, personal segment to external

benchmark from October 1, 2019. Other key highlights of the circular are:

External benchmark such as repo rate, three & six month treasury bills &

any other Financial Benchmarks India Pvt Ltd (FBIL) to be allowed

Banks free to offer external benchmark linked loan to other borrowers

Banks free to decide spread but risk premium to change only if credit

assessment deteriorates

Interest rates to be reset at least once in three months

Existing loans and credit limits linked to the MCLR/base rate/BPLR shall

continue till repayment or renewal

Existing floating rate loans eligible for pre-payment without charges

could migrate to external linked loan

Exhibit 3: Anticipated impact of shift to external benchmarking

FY19

Total Loans

(TL) (|

crore)

Retail

Loans

(RL) (|

crore)

RL as %

of TL

Home

Loans (HL)

(| crore)

HL as

% of TL

Existing

NIM

FY19

Impact of 30

bps cut in HL

on margins

(bps)

Kotak Mahindra Bk 205695 73,886 35.9% 40,722 19.8% 4.5% 6

Axis Bk 494798 245,812 49.7% 93,409 18.9% 3.6% 6

State Bk of India 2293454 647,844 28.2% 400,377 17.5% 3.0% 5

Federal Bk 110223 52,734 47.8% 15,394 14.0% 3.1% 4

HDFC Bk 819401 442,477 54.0% 51,359 6.3% 4.4% 2

Indusind Bk 186394 72,684 39.0% NA NA 3.8% NA

Bk of Baroda 396687 85,390 21.5% 54,612 13.8% 1.7% 4

Bk of Maharashtra 93467 18,805 20.1% 12,052 12.9% 2.6% 4

Andhra Bk 178690 40,985 22.9% 20,105 11.3% 3.5% 3

Punjab National Bk 490975 92,727 18.9% 51,980 10.6% 2.6% 3

Syndicate Bk 174822 37,642 21.5% 18,213 10.4% 3.2% 3

Allahabad Bk 163552 20,150 12.3% 14,757 9.0% 2.4% 3

Source: Company, ICICI Direct Research TL- Total Loans, RL – Retail Loans, HL- Home Loans




Our view

Banks with larger proportion of floating rate retail & MSE loans are likely to

be impacted. Housing loans segment is particularly the most impacted as

they are floating rate and have no prepayment charges. Largely, private

banks are to be most impacted as transmission by private lenders was

limited. Axis Bank, SBI, which have significant housing portfolio and existing

book conversion can impact margins (refer Exhibit above). This will lead to

overall pressure on margins for banks with high retail floating loans. Kotak

Mahindra Bank, IndusInd Bank and HDFC Bank have higher non-housing

retail portfolio, where floating proportion will be lower.

On the liabilities side, banks will likely link saving/bulk term deposit with

external benchmark (repo rate) to address pressure on margins thereby

matching interest rate risk on asset side.

HFCs will be more impacted as we expect HFCs to match the bank under

competitive pressure. Their costs will not be declining in line with loan rates

and thereby margins can be in pressure for both LIC Housing Finance (retail

loans-93%) and HDFC (71%).

PSBs consolidation - Reorganised in one shot

In a move towards consolidation in the Indian banking sector, Finance

Minister Nirmala Sitharaman announced a big bang move with second

course of amalgamation among PSU banks. According to the

announcement, PNB is to merge OBC, United Bank of India while Canara

Bank will consolidate Syndicate Bank. In another instance, Union Bank of

India is to merge Andhra Bank, Corporation Bank while Indian Bank,

Allahabad Bank are to amalgamate together. Capital adequacy, geography,

technology are factors at the core of the decision on selection of banks.

Post the three-way merger viz. Bank of Baroda, Vijaya Bank and Dena Bank,

GoI has gone ahead full steam with more amalgamations downsizing 10

PSU banks into four larger players. On an overall basis, the number of PSU

banks will reduce from 18 to 11. Other PSU banks comprising Uco Bank,

Bank of Maharashtra, IoB, Punjab & Sind Bank, Central Bank of India, Bank

of India will continue to operate as independent regional entities.

Overall, merger seems positive in long term. The respective boards of

banks will need to approve and then decide the contours of the swap ratio

along with the timeline for completion of merger, record date, etc.

Source: GoI, ICICI Direct Research

Our view

Broad calculations indicate dilution for anchor banks, which is to moderate

post fresh capital allocation. In case of 1) Indian Bank + Allahabad bank & 2)

Canara + Syndicate Bank, anchor banks are expected to witness 15-20%

impact on ABV. Therefore, Canara Bank (15% impact on ABV) and Indian

Bank (18% impact on ABV) are expected to witness negative pressure.

These are estimated after factoring fresh in capital infusion of | 2500 crore

and | 6500 crore, respectively, for merged entities. In case of amalgamation

with PNB and Union Bank, dilution due to merger has not impacted ABV.

Anchor Bank Amalgamating BanksBusiness Size

(| lakh crore)

PSB rank by size CBS NNPA (%) CRAR (%)

Punjab National Bank

Oriental Bank of Commerce

& United Bank of India17.94 2 Finacle 6.61 10.77

Canara Bank Syndicate Bank 15.2 4 Iflex 5.62 12.63

Union Bank of IndiaAndhra Bank & Corporation

Bank

14.59 5 Finacle 6.3 12.39

Indian Bank Allahabad Bank 8.08 7 BaNCS 4.39 12.89

Exhibit 1: Announced mergers of PSU banks




However, fresh capital infusion is seen leading to substantial positive

revision in ABV by ~20% for PNB and over ~40% for Union Bank. NPA

concerns in merged bank may rise in future and result in different estimates.

The banks getting acquired are expected to remain positive considering

amalgamation in large bank. The recent correction in PSU banks has largely

captured the pain though continuous dilution remains an overhang. Uco,

IOB, Central Bank of India and BoM, with high NPAs and left unmerged can

see a negative reaction.

Swap ratio based on current market price is expected as follows (broad

estimations- final ratios can differ basis market price changes ahead)

1. Allahabad Bank shareholders to get 176 shares of Indian Bank for

every 1000 shares of Allahabad Bank

2. Syndicate Bank shareholders to get 140 shares of Canara Bank for

every 1000 shares of Syndicate Bank

3. Oriental Bank (OBC) shareholders to get 1130 shares of PNB for

every 1000 shares of OBC and United Bank shareholders to get 160

shares of PNB for every 1000 shares of United Bank

4. Andhra Bank shareholders to get 330 shares of Union Bank for every

1000 shares of Andhra Bank and Corporation Bank shareholders to

get 320 shares of Union Bank for every 1000 shares of Corporation

Bank

On capital allocation, the FM has announced infusion of | 16,000 crore in

PNB, | 11,700 crore to Union Bank of India, | 7,000 crore in BoB, | 6,500

crore in Canara Bank and | 2,500 crore in Indian Bank. However, this

allocation is on a preliminary basis.

PNB has become a northern region leader, Canara a southern one while BoB

is already a western region leader. SBI remains a pan-India leader. Eastern

regional banks have been allowed to operate independently.

Source: GoI, ICICI Direct Research

Bank of Baroda Capital Allocated (| crore)

Punjab National Bank 16000

Union Bank of India 11700

Bank of Baroda 7000

Canara Bank 6500

Indian Bank 2500

IoB 3800

CBoI 3300

UCO Bank 2100

United Bank of India 1600

Punjab & Sind Bank 750

Total 55250

Exhibit 1: Announced capital allocation




Exhibit 4: PNB + OBC + United Bank

Source: GOI, ICICI Direct Research

Exhibit 5: Canara + Syndicate Bank


Exhibit 6: Union + Andhra + Corporation Bank





Exhibit 7: Indian + Allahabad Bank


Fiscal stimulus erases gain; rate cut may still benefit

Starting the quarter at ~6.88%, G-sec yields moved southwards to 6.25%

led by anticipation of further rate cut owing to slowing economy and low

inflation. However, recent announcement offering tax sops of ~| 1.45 lakh

crore is seen exerting pressure on fiscal maths and, thus, a reversal in yield

in opposite direction to 6.8% with resultant disappearance of treasury gains.

For benefits of last quarter’s decline in yields, banks need to sell treasury to

book profits as erstwhile provisions write-back is already done. PSU banks

being more sensitive to change in yield vs. private banks, will remain major

beneficiaries of the decline if further rate cuts lead to decline in G-sec yields.

Exhibit 8: No major treasury gains seen in Q2FY20E

Q1FY20

| crore

H

T

M

30 bps 50 bps 30 bps 50 bps 30 bps 50 bps 30 bps 50 bps

Public sector banks

Bank of India* 143,760 42,765 2.3 299 498 896,019 3.3 3.9 8.6% 14.3% 46000 0.6% 1.1%

Bank of Baroda 245,687 78,735 1.3 307 512 1,547,633 2.0 2.3 3.3% 5.5% 72634 0.4% 0.7%

PNB* 205,619 67,113 3.4 693 1,154 1,161,562 6.0 7.0 15.8% 26.4% 37390 1.9% 3.1%

SBI 902,337 376,275 2.6 2,912 4,854 4,962,550 5.9 6.8 7.8% 13.1% 232800 1.3% 2.1%

Indian Bank 68,693 21,418 2.8 179 299 427,883 4.2 4.9 10.4% 17.3% 20216 0.9% 1.5%

Private sector banks

Axis Bank 175,792 58,011 NA NA NA 1,040,612 NA NA NA NA 79168 NA NA

City Union Bank 8,626 2,099 0.9 5 9 71,214 0.8 0.9 0.5% 0.8% 5576 0.1% 0.2%

DCB 7,995 2,094 0.7 4 7 52,418 0.8 0.9 0.7% 1.2% 3531 0.1% 0.2%

J&K Bank 21,612 4,402 0.9 11 19 156,412 0.7 0.9 1.0% 1.6% 7249 0.2% 0.3%

Impact on PAT

due to decline in

yield

Networth

(FY20E)

Impact on NW due

to decline in yield

Investment

book

AFS Duration

(yrs)

Absolute Impact

due to decline in

Yield

Average asset Impact on RoA due

to decline in yield

Source: Company, ICICI Direct Research, *FY19E is from Bloomberg for non-coverage




Credit growth steady; revival in industry seen

A pick-up in infrastructure segment, which was reeling under pressure

in previous fiscals, led to growth in the industry segment. Infrastructure

formed ~88% in FY19 (| 164984 crore) of incremental credit in industry

segment (| 186510 crore).

Due to issues within power & telecom, overall infrastructure growth

remained muted in the past. Going ahead, with government focus on

infrastructure, credit growth is expected to improve gradually.

Moderation in incremental slippages would result in an improvement in

GNPA. Resolution of large stressed IBC cases would provide further

improvement.

Exhibit 9: Retail growth remains steady; revival in industry witnessed

| crores FY17 FY18 FY19 May-19 Jun-19 Jul-19

Non-Food Credit 7094490 7688423 8633418 8451239 8476377 8495759

Agriculture & Allied Activities 992386 1030215 1111300 1107883 1125788 1108988

Industry 2679831 2699268 2885778 2814039 2812034 2798360

Large 2205296 2222589 2403878 2343332 2340677 2331538

Services 1802237 2050472 2415609 2287877 2284715 2312871

NBFCs 391032 496393 641208 623527 635098 636733

Personal Loans 1620034 1908469 2220732 2241441 2253843 2275540

Housing (Including Priority Sector Housing) 860086 974565 1160111 1176926 1187027 1199806

Credit Card Outstanding 52132 68628 88262 93643 94890 93974

Vehicle Loans 170525 189786 202154 201894 200419 201318

YOY growth (%)

Non-Food Credit 8.4% 8.4% 12.3% 11.4% 11.1% 11.4%

Agriculture & Allied Activities 12.4% 3.8% 7.9% 7.8% 8.7% 6.8%

Industry -1.9% 0.7% 6.9% 6.4% 6.4% 6.1%

Large -1.7% 0.8% 8.2% 7.4% 7.6% 7.2%

Services 16.9% 13.8% 17.8% 14.8% 13.0% 15.2%

NBFCs 10.9% 26.9% 29.2% 40.5% 37.6% 34.5%

Personal Loans 16.4% 17.8% 16.4% 16.9% 16.6% 17.0%

Housing (Including Priority Sector Housing) 15.2% 13.3% 19.0% 18.7% 18.9% 19.2%

Credit Card Outstanding 38.4% 31.6% 28.6% 26.1% 27.5% 26.5%

Vehicle Loans 11.5% 11.3% 6.5% 5.7% 5.1% 4.9%

Proportion (%)

Agriculture & Allied Activities 14.0% 13.4% 12.9% 13.1% 13.3% 13.1%

Industry 37.8% 35.1% 33.4% 33.3% 33.2% 32.9%

Large 31.1% 28.9% 27.8% 27.7% 27.6% 27.4%

Services 25.4% 26.7% 28.0% 27.1% 27.0% 27.2%

NBFCs 5.5% 6.5% 7.4% 7.4% 7.5% 7.5%

Personal Loans 22.8% 24.8% 25.7% 26.5% 26.6% 26.8%

Housing (Including Priority Sector Housing) 12.1% 12.7% 13.4% 13.9% 14.0% 14.1%

Credit Card Outstanding 0.7% 0.9% 1.0% 1.1% 1.1% 1.1%

Vehicle Loans 2.4% 2.5% 2.3% 2.4% 2.4% 2.4%





Large resolution to keep NPA broadly steady

In the absence of any large resolution or slippages, GNPA ratio broadly

remained stable at 9.4% during the quarter. Resolution of large NCLT cases

(Bhushan Power & Alok Industries) during the quarter is expected to provide

some respite, though concerns over resolution of recently recognised

stressed companies could remain as a dragger. Overall we expect asset

quality to broadly remain stable.

Exhibit 10: Asset quality continues to improve

FY16 FY17 FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

GNPA 575313 776835 1024586 1002682 997247 961129 920300 924271

NNPA 331340 430173 517775 485181 463082 417837 354507 353766

GNPA ratio 7.6 9.6 11.6 11.3 10.8 10.2 9.2 9.4

NNPA ratio 5.1 5.3 5.8 5.5 5.0 4.4 3.6 3.6

GNPA of PSU banks 523398 684733 896601 874071 868812 829745 789016 788087

GNPA of Private banks 51915 92102 127985 128611 128435 131384 131284 136184





Annexure

Exhibit 11: Asset quality trend

Asset quality trend Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY19 Q3FY19 Q4FY19 Q1FY20

PSU coverage

Bank of Baroda 55,121 53,184 48,233 78,681 21,059 19,131 15,610 35,886

Indian Bank 12,334 13,198 13,353 13,453 7,060 7,571 6,793 6,854

SBI 2,05,864 1,87,765 1,72,750 1,68,494 94,810 80,944 65,895 65,624

Private coverage

Axis Bank 30,938 30,855 29,789 29,405 12,716 12,233 11,276 11,037

Bandhan Bank 413 831 820 861 220 237 228 240

City Union Bank 848 892 977 1,026 498 528 591 621

Development Credit Bank 410 445 439 470 155 163 154 163

Federal Bank 3,185 3,361 3,261 3,424 1,796 1,817 1,626 1,732

HDFC Bank 10,098 10,903 11,224 11,769 3,028 3,302 3,215 3,567

IndusInd Bank 1,781 1,968 3,947 4,200 788 1,029 2,248 2,381

Jammu & Kashmir Bank 6,068 6,860 6,221 6,252 2,489 3,049 3,240 3,382

Kotak Mahindra Bank 4,033 4,129 4,468 4,614 1,501 1,397 1,544 1,524

Yes Bank 3,866 5,159 7,883 12,092 2,020 2,876 4,485 6,883

GNPA (| crore) NNPA (| crore)


Exhibit 12: Quarterly margin trend

NIM (%) Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

PSU coverage

Bank of Baroda 2.7 2.5 2.7 2.6 2.7 2.9 2.6

Indian Bank 2.9 2.9 3.1 3.0 2.9 3.0 2.9

SBI 2.5 2.5 2.8 2.7 2.8 2.8 2.8

Private coverage

Axis Bank 3.4 3.3 3.5 3.4 3.5 3.4 3.4

Bandhan Bank 9.6 9.3 10.3 10.3 10.5 10.7 10.5

City Union Bank 4.4 4.4 4.2 4.3 4.4 4.4 4.1

Development Credit Bank 4.1 4.1 3.9 3.8 3.8 3.8 3.7

Federal Bank 3.3 3.1 3.1 3.2 3.2 3.2 3.2

HDFC Bank 4.3 4.3 4.2 4.3 4.3 4.4 4.3

IndusInd Bank 4.0 4.0 3.9 3.8 3.8 3.6 4.1

Jammu & Kashmir Bank 4.0 3.2 3.7 3.7 3.9 4.1 3.9

Kotak Mahindra Bank 4.2 4.4 4.3 4.2 4.3 4.5 4.5

Yes Bank 3.5 3.4 3.3 3.3 3.3 3.1 2.8


Exhibit 13: Key financial of industry as of Q1FY20

(| crore) Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

NII 85714 84835 94144 92132 99136 104651 102336

Growth YoY 14.8 1.3 27.4 11.3 15.7 23.4 8.7

Other income 38218 47391 37110 37019 41299 49070 42666

Growth YoY -16.7 0.7 -11.4 -29.1 8.1 3.5 15.0

Total operating exp. 61162 69366 64525 64068 71463 77857 71040

Staff cost 30128 34342 32053 32749 35995 36478 36200

Operating profit 62771 62860 66730 65084 68973 75864 73962

Growth YoY 1.6 -13.0 8.1 -13.8 9.9 20.7 10.8

Provision 76618 148276 77236 70471 65837 107142 56111

PBT -13888 -85460 -10552 -5437 3136 -31719 17773

PAT -6943 -55648 -7130 -4404 -197 -21535 11209

Growth YoY NM NM NM NM NM NM NM

GNPA 885788 1024586 1002682 997247 961129 920300 924271

Growth YoY 20.9 31.9 20.9 18.7 8.5 -10.2 -7.8

NNPA 469278 517775 485181 463082 417837 354507 353766

Growth YoY 12.4 20.4 3.9 2.3 -11.0 -31.5 -27.1

Source: Capitaline, Company, ICICI Direct Research




ICICI Direct Research coverage universe (BFSI)

CMP M Cap

(|) TP(|) Rating (| Cr) FY18 FY19FY20E FY18 FY19FY20E FY18 FY19FY20E FY18 FY19FY20E FY18 FY19FY20E

Bank of Baroda (BANBAR) 101 140 Buy 38,737 -9.2 7.7 18.5 -10.9 13.1 5.4 0.8 1.2 1.0 -0.3 0.4 0.6 -5.8 9.7

State Bank of India (STABAN) 314 400 Buy 2,80,010 -7.3 1.0 26.7 -43.0 323 11.7 2.6 2.2 1.7 -0.2 0.0 0.7 -3.0 0.5 12.1

Indian Bank (INDIBA) 152 220 Hold 7,471 26.2 6.7 21.7 5.8 22.7 7.0 0.6 0.7 0.7 0.5 0.1 0.3 7.1 1.7 5.3

Axis Bank (AXIBAN) 726 865 Buy 1,90,098 -1.0 22.2 31.7 -708.7 32.8 22.9 4.0 3.3 2.4 0.0 0.8 1.0 0.0 0.8 1.0

City Union Bank (CITUNI) 216 240 Buy 15,882 8.9 9.3 10.4 24.2 23.2 20.8 3.9 3.7 3.2 1.6 1.6 1.6 15.5 15.3 14.8

DCB Bank (DCB) 214 260 Buy 6,638 7.8 10.5 14.1 27.3 20.3 15.2 2.7 2.4 2.1 0.9 1.0 1.1 10.9 12.1 14.4

Federal Bank (FEDBAN) 96 125 Buy 19,059 4.5 6.3 8.7 21.5 15.3 11.0 1.8 1.6 1.5 0.7 0.8 1.0 8.2 9.8 12.4

HDFC Bank (HDFBAN) 1,257 1,400 Buy 6,87,812 33.7 38.7 53.3 37.3 32.5 23.6 6.3 4.7 4.1 1.8 1.8 2.2 17.9 16.5 18.1

IndusInd Bank (INDBA) 1,512 1,605 Hold 1,04,739 60.1 55.0 104.0 25.2 27.5 14.5 3.9 3.7 3.0 1.8 1.3 2.0 16.2 13.1 21.2

Jammu & Kashmir Bk(JAMKAS) 35 48 Hold 1,952 3.6 8.3 9.4 9.6 4.2 3.7 0.6 0.6 0.5 0.2 0.5 0.5 3.4 7.3 7.7

Kotak Mahindra Bank (KOTMAH)1,641 1,575 Hold 3,13,324 21.4 25.5 34.1 76.5 64.4 48.0 8.7 7.6 6.7 1.7 1.7 1.9 12.5 12.1 14.2

Yes Bank (YESBAN) 55 75 Reduce 14,141 18.3 6.4 5.8 3.0 8.7 9.6 0.5 0.6 0.6 1.7 0.4 0.4 17.6 5.6 5.5

Bandhan Bank (BANBAN) 527 650 Buy 62,907 11.3 16.4 25.2 4.9 3.4 2.2 0.7 0.6 0.5 3.6 3.9 4.6 19.5 19.0 23.9

Sector / Company

RoE (%)RoA (%)EPS (|) P/E (x) P/ABV (x)

Source: Bloomberg, ICICI Direct Research




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Documents

Axis Bank (AXIBAN) 726 865 Buy 1901 3.3 2.4 0.0 0.8 1.0 0 ...content.icicidirect.com/mailimages/IDirect_Banking_SectorReport_Sep19.pdfpotential including HDFC Bank, Bajaj Finance,