1. Banking & NBFCs Q4’11 Earnings & Policy impacts
High Inflation
Probable credit demand slowdown
Higher credit cost & cost of deposits
Analyst: Abhisek Sasmal
Mail: asasmal@microsec.in
Phone: 91 033 3051 2175
91-033-3051-2175
23rd May’2011

2. Contents
Macro Economic Trend During Q4’11 3-6
Deployment of Bank Credit by Major Sectors 7
Impact of Savings Bank Rate hike 8-9
Impact of increase in the provision requirements 10-11
Impact of Other RBI notifications 12
Impact of Asset Liability Mismatch 13-14
Impact on credit growth - P i
I di h Private banks (last rate hik & inflationary cycle)
b k (l hike i fl i l ) 15
Impact on credit growth – Public Banks ( last rate hike & inflationary cycle) 16
Impact of increasing rates on credit growth - Now & Then (comparative situation) 17
Impact on forward earnings of companies under our coverage 18
Target Price Revisions 19-20
Banking Quarterly Performance Analysis (Q4’11) 21
NBFCs Performance Analysis (Q4’11)
(Q4 11) 22
Banking Sector – Outlook – near term pain 23
Quarterly Performance Analysis (Appendix 1) 24
Q
Quarterly Performance Analysis (Appendix 2)
y y ( pp ) 25
Key Financial Snapshot (Appendix 3) 26
Key Financial Snapshot (Appendix 4) 27
y
Return Summery 28
23rd May’2011

3. Macro-Economic Trend during Q4’11
The Indian Banking sector which has been a proxy to the Indian economy, is growing strong in fourth quarter too. During Q4-2011, RBI
increased the repo rate by 50 basis points from 6.25% to 6.75%, with a similar increase in the reverse repo rate from 5.25% to 5.75%. This takes
the overall increase during fiscal year 2011 to 150 basis points in the repo rate and 200 basis points in the reverse repo rate. Inflation remains the
key concern for the economy especially since December 2010 when food prices increased steeply Food prices have now started abating but
economy, steeply.
have been replaced by rise in fuel and non-food manufactured products inflation. Core inflation (i.e. manufactured products excluding food)
increased to 7.2% in March 2011. With domestic fuel prices yet to fully adjust to international oil price increases and also pressures rising in
non-food manufactured products, we believe risks to inflation are clearly on the upside. Headline inflation as measured by the Wholesale Price
Index, or WPI, was at 9.0% in March.
Policy rates & Reserve ratio trend Inflation Trend (y-o-y %)
10.00%
9.00% 12%
8.00%
10%
7.00%
6.00% 8%
5.00%
6%
4.00%
4%
3.00%
2.00% 2%
1.00%
0%
0.00%
-2%
CRR Repo Rate Reverse Repo
Source: RBI, Microsec Research
3 23rd May’2011

4. Macro-Economic Trend during Q4’11…..
High global crude oil and other
commodity prices pose the biggest risk to
India’s growth and inflation. Persistently
high inflation has kept inflation
g p
expectations elevated. Inflation during
FY12 is likely to moderate slowly but may
remain above the comfort level as the
pass-through of international commodity
prices is likely to continue.
Source: RBI, Microsec Research
4 23rd May’2011

5. Macro-Economic Trend during Q4’11…..
The statutory liquidity ratio was maintained at 24.0% in response to the deficit in systemic liquidity during the quarter. However, liquidity
conditions eased through the quarter on the back of increased government spending with government cash balances with RBI falling to a low level
of INR 1 billion by mid-March 2011. Interest rates on most of the short-term money market instruments including T-bill yields, inter-bank call
money rates, rates on Commercial Papers and rates on Certificate of deposits have showed a mild decline. In the mid-quarter monetary policy
review announced in March 2011, RBI has indicated a comfort level for overall liquidity to move in the range of +/-1% of net demand and time
q y g
liabilities (NDTL). Also, the special liquidity measures in terms of additional liquidity support and second LAF facility, which was to end in April
2011, were extended up to May 2011. Going forward, we expect liquidity to come under pressure again around June 2011 due to advance tax
payments.
21
9.00 Government Bond Yield Curve
d ld 18 IIP trend (YoY%)
8.00 15
12
7.00
9
6.00 6
(%)
5.00
5 00 3
(
0
4.00
-3
3.00
4/1/2010 3/31/2011 5 60
18
16 4 50
14 40
12 3
10 30
8 2
20
6
1 10
4
2 0 0
0
FY06 FY07 FY08 FY09 FY10 FY11 FY12E
Central Govt Net Market Borrowing (INR Tn)
Bank's share in Govt O/S Bonds(%) RHS
CD 3month CD 6month CD 12month Source: RBI, Microsec Research
RBI
5 23rd May’2011

6. Macro-Economic Trend during Q4’11…..
The
Th credit growth remained strong d i the quarter with a year-on-year non-food credit growth at 21 2% at M h 25 2011 compared to
di h i d during h ih f d di h 21.2% March 25, 2011, d
17.1% growth at March 26, 2010. Based on sector-wise data published by RBI, as of end February 2011, the growth was largely driven by
industry and services sectors; however, the deposit growth in the system continued to lag recording a growth of just 15.8% on year-on-year basis
at March 25, 2011 as against 17.2% at March 26, 2010. This moderation was due to a decline in demand deposits by 1% at March
25, 2011, compared to a growth of 23.4% at March 26, 2010. Time deposits grew by 18.7% in FY2011 compared to a growth of 16.2% in the
previous year Fiscal 2011 ended with the banking system reporting a credit to deposit ratio of 75 68% compared to 72 22% at the end of
year. credit-to 75.68% 72.22%
financial year 2010.
During the quarter, we saw most banks increase their deposit rates in the range of 25-150 basis points for various maturities. Lending rates were
also increased by most banks with 65 to 100 basis points increase in base rates during the quarter.
30 1000
Liquidity condition improved during Q4 11
Q4’11
25 Credit Growth% Deposit Growth%
500
20
15 0
10
-500
5
0
-1000
-1500
Incremental C/D ratio
I t l ti
Source: RBI, Microsec Research
6 23rd May’2011

7. Deployment of Bank Credit by Major Sectors
Sr.No Sector Outstanding as on (
(INR Bn)
)
Mar.27, 2009 Mar.26, 2010 Mar.25, 2011 % Total
Credit YoY%
Non-food Credit (1 to 4) 26,018 30,400 36,674 74.5% 20.6%
1 Agriculture & Allied Activities 3,387 4,161 4,603 9.3% 10.6%
2 Industry (Micro & Small, Medium and Large ) 10,544 13,115 16,208 32.9% 23.6%
2.1 Micro & Small 1,690 2,064 2,291 4.7% 11.0%
2.2 Medium 1,222 1,326 1,846 3.7% 39.2%
2.3 Large 7,632 9,724 12,071 24.5% 24.1%
3 Services 6,463 7,268 9,008 18.3% 23.9%
3.1 Transport Operators 393 525 655 1.3% 24.7%
3.2 Computer Software 97 125 151 0.3% 20.3%
3.3 Tourism, Hotels & Restaurants 136 194 277 0.6% 42.9%
3.4 Shipping 94 92 92 0.2% -0.2%
3.5 Professional Services 443 434 603 1.2% 38.9%
3.6 Trade 1,444 1,645 1,863 3.8% 13.2%
3.6.1 Wholesale Trade (other than food procurement) 674 864 1,036 2.1% 19.9%
3.6.2 Retail Trade 770 781 827 1.7% 5.8%
3.7 Commercial Real Estate 924 921 1,118 2.3% 21.4%
3.8 Non-Banking Financial Companies (NBFCs) 989 1,134 1,756 3.6% 54.8%
3.9 Other services 1,944 2,197 2,494 5.1% 13.5%
4 Personal Loans 5,625 5,856 6,854
6 854 13.9%
13 9% 17.0%
17 0%
4.1 Consumer Durables 82 83 102 0.2% 22.4%
4.2 Housing (Including Priority Sector Housing) 2,794 3,009 3,461 7.0% 15.0%
4.3 Advances against Fixed Deposits (Including FCNR (B), NRNR Deposits etc.) 487 487 605 1.2% 24.4%
4.4 Advances to Individuals against share, bonds, etc. 23 29 36 0.1% 26.2%
4.5 Credit Card Outstanding 280 201 181 0.4% -10.2%
4.6 Education 286 369 437 0.9% 18.6%
4.7
47 Vehicle Loans 620 638 793 1.6%
1 6% 24.3%
24 3%
4.8 Other Personal Loans 1,054 1,041 1,238 2.5% 19.0%
5 Priority Sector 9324.59 10921.79 12583.86 25.5% 15.2%
5.1 Agriculture & Allied Activities 3386.56 4161.33 4603.33 9.3% 10.6%
5.2 Micro & Small Enterprises 3091.95 3735.3 4549.95 9.2% 21.8%
5.2(a) Manufacturing 1689.97 2064.01 2291.01 4.7% 11.0%
5.2(b)
5 2(b) Services 1401.98
1401 98 1671.3
1671 3 2258.94
2258 94 4.6%
4 6% 35.2%
35 2%
5.3 Housing 1971.1 2178.77 2306.86 4.7% 5.9%
5.4 Micro-Credit 165.29 217.99 268.95 0.5% 23.4%
5.5 Education Loans 278.61 362.47 430.26 0.9% 18.7%
5.6 State-Sponsored Orgs. for SC/ST 24.51 27.49 20.48 0.0% -25.5%
5.7 Weaker Sections 1394.22 1769.57 2043.32 4.1% 15.5%
5.8 Export Credit 259.61 288.66 318.21 0.6% 10.2%
Source: RBI, Microsec Research
7 23rd May’2011

8. Impact of Savings Bank Rate hike…
RBI hiked the savings bank deposit interest rate to 4% from the current 3.5% with immediate effect, even as the final decision to deregulate
savings rate remains pending. But, it was expected as term deposit rates have gone up significantly over the years. A core part of savings account
behaves as fixed deposit so it should earn better rates. The increase in the savings bank deposit rates likely to impact margins of banks, especially
banks with higher savings share in the overall deposit mix – impact more likely for PSU banks. However the net impact on margins is difficult to
predict because the banks may pass on this increase to end customers in the form of 1) higher fees on transactions 2) higher lending rates etc.
This will also vary bank to bank according to their priorities.
y g p
Assuming, the banks don’t pass on the 50 bps hike in Savings bank rate, the impact on their FY12 expected earnings is as under -
Public Sector Banks Increase due to SA Impact on NIMs Impact on NII%
TD% SA% CA% Rate hike FY12E (FY12E) Impact on PBT % FY12 E
Andhra Bank 70.94 21.3 7.76 10.7 7.7 2.68 4.28
BOB 65.6
65 6 27 7.4
74 13.5
13 5 10.5
10 5 3.68
3 68 5.88
5 88
BOI 75.5 19.6 4.8 9.8 6.8 2.38 3.81
Canara Bank 71 22.2 6.8 11.1 8.1 2.84 4.54
CBI 65.1 28.3 6.6 14.2 11.2 3.90 6.24
Corporation Bank 75 15.3 9.7 7.7 4.7 1.63 2.60
IDBI 79.1 7.7 13.2 3.9 0.9 0.30 0.48
Indian Bank 67.5 25.7 6.8 12.9 9.9 3.45 5.52
IOB 69.8
69 8 24.3
24 3 6 12.2
12 2 9.2
92 3.20
3 20 5.12
5 12
OBC 75.4 18.9 5.7 9.5 6.5 2.26 3.61
PNB 61.5 30.4 8.1 15.2 12.2 4.27 6.83
SBI* 53.1 35.5 11.4 17.8 14.8 5.16 8.26
Union Bank 68.2 22.1 9.7 11.1 8.1 2.82 4.51
Vijaya Bank 74.8 18.2 7 9.1 6.1 2.14 3.42
Increase due to SA Impact on NIMs Impact on NII%
Private Sector Banks
TD% SA% CA% Rate hike FY12E (FY12E) Impact on PBT % FY12 E
Axis Bank 58.9 21.6 19.5 10.8 7.8 2.73 3.69
Dhanlaxmi Bank 77.1 10.7 12.2 5.4 2.4 0.82 1.11
Federal Bank* 70.4 24 5.7 12.0 9.0 3.15 4.25
HDFC Bank 47.3 30.4 22.3 15.2 12.2 4.27 5.76
ICICI Bank 54.9 29.6 15.4 14.8 11.8 4.13 5.58
IndusInd Bank 72.8 8.9 18.3 4.5 1.5 0.51 0.69
ING Vysya Bank 65.4 17.7 16.9 8.9 5.9 2.05 2.76
J&K Bank* 60.4 28.8 10.8 14.4 11.4 3.99 5.39
Karnataka* 75.1 18.1 6.8 9.1 6.1 2.12 2.86
Karur Vysya Bank* 75 14 11 7.0 4.0 1.40 1.89
DCB 64.8 19.41 15.79 9.7 6.7 2.35 3.17
Color h
C l scheme – “D
“Deep R d” – worst i
Red” impacted , “Deep G
d “D Green” – l
” least i
impacted * 3Q’11 S d l
d Standalone Source: Company, Bloomberg, Microsec Research
S C Bl b Mi R h
8 23rd May’2011

9. Savings Bank Rate Deregulation - Case Study
India’s brush i h deregulation of d
I di ’ b h with d l i f deposit i
i interest rates d b k to the 1980 when b k were permitted to offer up to 8 per cent on d
date back h 1980s h banks i d ff deposits f a
i for
tenure between 15 days and up to a year. It triggered a flight of capital from current accounts and partially from savings bank accounts to the shorter
tenure deposits. The deregulation plan proved to be disastrous as it triggered a rate war among banks. The freedom to set interest rates was
withdrawn in May 1985. The process of interest rate deregulation resumed in 1992 after the liberalization. Bank won back the freedom to set interest
rates in phases, leaving the savings bank rate as the only administered rate at 3.5%.
Global experience
 Interest rates on savings account in developed countries such as
Canada, Japan, Australia, New Zealand, UK, and USA are all deregulated
and determined by the commercial banks themselves on the basis of
market interest rates. Most savings bank accounts may carry customer
charges if the number of transactions exceeds the permissible level.
 In response to the recent deregulation of SB rates in Hong Kong, a
number of banks launched new products such as combined savings and
checking accounts and Hong Kong inter-bank offered rate (HIBOR)
linked savings products. Some also revised fees and charges and minimum
balance requirements, and introduced tiered structures of interest rates.
Source: RBI, Telegraph, Google
However, we need to understand that unlike many other countries in Asia as well as other parts of the world, the Indian situation is different. A
large number of people in India are from the rural background with less saving. Deregulation of savings bank rate would work against financial
inclusion as public sector banks saddle with all un-remunerative accounts. Finally, if banks had the freedom to set the savings bank rate, they could
lower the rate in times of surplus liquidity to levels that are lower than at present. This would hurt senior citizens and pensioners who depend on
interest as a source of regular income
income.
Access our earlier report on SB rate Deregulation
http://www.microsec.in/Static/Pdf/634196444626714000_Event%20Note%20-%20Proposal%20on%20freeing%20Savings%20Bank%20rate.pdf
9 23rd May’2011

10. Impact of increase in the provision requirements
New Provision requirements for NPAs
Category Earlier (%) Now (%)
Sub-standard (Secured) 10% 15%
Sub-standard (Un-secured) 20% 25%
Secured -Doubtful -upto 1 year 20% 25%
Secured -Doubtful -From 1-3 year
y 30% 40%
Restructured -Standard 0.25-1% 2% in 1st 2 years from date of restructuring
Restructured -Standard -Where moratorium of interest / principal 0.25-1% 2% in period of moratorium + 2 years thereafter
Restructured -NPA -When upgraded to standard 0.25-1% 2% in the 1st year from the date of up-gradation
Source: RBI, Microsec Research
We expect limited impact of revised guidelines on NPA provisioning However guidelines on provision on restructured assets (RA) may effect
provisioning.
bank’s profitability in FY12, specially for PSU banks where the proportion of RAs to the overall advances are higher than their private peers.
FY12E Additioan Prov/
Additional Prov FY11 PBT PBT PBT Average Impact%
Restructured Advances (INR % of NPA coverage on FY12E PBT
Public Sector Banks
boo ( N M )
book (INR Mn) M )
Mn) adva ces
advances (%) 1.25%
. 5% 1.75%
.75% INR Bn
N INR Bn
N 1.25%
. 5% 1.75%
.75%
Andhra Bank 27,145 714,353 3.8 78 3.39 4.75 17.67 20.85 1.6% 2.3% 2.0%
BOB 67,114 2,286,764 2.9 85 8.39 11.74 56.50 66.67 1.3% 1.8% 1.5%
BOI 106,446 2,130,962 5 72.2 13.31 18.63 34.95 41.25 3.2% 4.5% 3.9%
Canara Bank 87,440 1,898,820 4.6 75.9 10.93 15.30 50.26 59.31 1.8% 2.6% 2.2%
CBI 47,710 1,163,090 4.1 70.3 5.96 8.35 16.59 19.58 3.0% 4.3% 3.7%
Corporation Bank 31,344 868,504 3.6 74.7 3.92 5.49 19.34 22.82 1.7% 2.4% 2.1%
IDBI 105,470 1,570,981 6.7 74.7 13.18 18.46 22.81 29.09 4.5% 6.3% 5.4%
Indian Bank 52,750 757,260 7 84.3 6.59 9.23 26.34 31.09 2.1% 3.0% 2.5%
Indian Overseas Bank 69,065 1,118,330 6.2 70 8.63 12.09 15.92 17.78 4.9% 6.8% 5.8%
OBC 52,500 959,082 5.5 76.8 6.56 9.19 20.39 24.06 2.7% 3.8% 3.3%
PNB 140,900 2,212,520 6.4 77.2 17.61 24.66 65.64 77.45 2.3% 3.2% 2.7%
SBI* 183,950 7,266,490 2.5 64.1 22.99 32.19 139.26 164.33 1.4% 2.0% 1.7%
Union Bank 50,649 1,337,870 3.8 70.2 6.33 8.86 29.55 34.87 1.8% 2.5% 2.2%
Vijaya Bank 12,630 435,700 3.8 67.6 1.58 2.21 6.84 8.07 2.0% 2.7% 2.3%
Color h
C l scheme – “D
“Deep R d” – worst i
Red” impacted , “Deep G
d “D Green” – l
” least i
impacted * 3Q’11 S d l
d Standalone Source: Company, Bloomberg, Microsec Research
S C Bl b Mi R h
10 23rd May’2011

11. Impact of increase in the provision requirements
Additioan Prov/
Additional Prov PBT
Restructured Advances (INR % of NPA coverage FY12E Average Impact%
Private Sector Banks on FY12E PBT
book (INR Mn) Mn) advances (%) 1.25% 1.75% FY11 PBT PBT 1.25% 1.75%
INR Bn INR Bn
Axis Bank 19,300 1,424,078 1.4 80.9 2.41 3.38 51.36 56.94 0.4% 0.6% 0.5%
Dhanlaxmi Bank 50 90,652 0.1 59.1 0.01 0.01 0.40 0.47 0.1% 0.2% 0.2%
Federal Bank* 13,510 282,400 4.8 80.3 1.69 2.36 9.02 10.73 1.6% 2.2% 1.9%
ICICI Bank 25,620 2,163,659 1.2 76 3.20 4.48 67.61 80.45 0.4% 0.6% 0.5%
IndusInd Bank 733 261,657 0.3 72.6 0.09 0.13 8.80 10.47 0.1% 0.1% 0.1%
ING Vysya Bank 3,200 236,021 0.3 83.4 0.40 0.56 4.84 5.76 0.7% 1.0% 0.8%
J&K Bank*
Bank 3,906
3 906 253,627
253 627 1.5
15 99.8
99 8 0.49
0 49 0.68
0 68 7.92
7 92 9.42
9 42 0.5%
0 5% 0.7%
0 7% 0.6%
0 6%
Karnataka Bank * 15,770 162,819 9.7 70 1.97 2.76 1.90 2.26 8.7% 12.2% 10.5%
Karur Vysya Bank* 5,080 165,140 3.1 87.4 0.64 0.89 4.26 5.07 1.3% 1.8% 1.5%
Yes Bank 829 343,636 0.2 88.6 0.10 0.15 10.92 13.00 0.1% 0.1% 0.1%
DCB 428 42,714 1.0 82 0.05 0.07 0.29 0.35 1.5% 2.2% 1.8%
HDFC Bank 5,000 1,599,826 0.3 83 0.63 0.88 58.19 69.08 0.1% 0.13% 0.1%
Color scheme – “Deep Red” – worst impacted , “Deep Green” – least impacted * 3Q’11 Standalone Source: Company, Bloomberg, Microsec Research
If we calculate the combo impact of 50 bps hike in SB rates and increase in the provisions on FY12 expected PBT, then we can see the worst
impact will be on IOB, SBI & Central bank of India in PSU Space and Karnataka bank, Federal bank & ICICI bank in private space. The average
impact for PSU banks would be 7.6% to their FY12 expected PBT. For private banks, the impact would be much lesser to the tune of 4.9%.
However the important thing to remember here is that Banks can pass on these cost to its end customers. Infact, after RBI’s annual meet on 3rd
May’11, a slew of banks like IDBI Bank, Indian Bank, YES bank, OBC , PNB & Bank of Maharashtra (BoM) has increased its base rate by 50
bps. With the increase, the base rate for PNB, OBC, IDBI and BoM stand at 10% while the private sector lender YES Bank will be at 9.50%.
BPLR of PNB stands at 13 50% OBC at 14 25% IDBI b k 14 50% B M 14 25% and Y B k 19% . H
f d 13.50%, 14.25%, bank 14.50%, BoM 14.25% d Yes Bank However the ih interesting things to watch
i hi h
in coming months is that how much it would effect the domestic credit demand. We have tried to predict the impact on credit growth in pages
15-17 where we have re-looked the previous rate hike cycle.
11 23rd May’2011

12. Impact of Other RBI notifications
RBI notification on Priority sector status
The Reserve Bank of India (RBI), in its notification dated 3rd May 11, has indicated that bank loans to NBFCs excluding micro finance institutions
(MFIs) will not be classified as priority sector lending. Loss of priority sector status on bank borrowings would increase the cost of funds for
NBFCs. RBI is likely to issue separate guidelines for assignment/securitization. Any substantial changes due to the new regulation could
y p g g y g g
considerably impact the profitability of asset financing NBFCs . On an average 10-15% of the total borrowings for these NBFCs are for priority
Sector lending . Removal of PSL status means in 4-5 bps increase in cost of funds simple arithmetic term.
However, as per managements, priority sector borrowings are either at normal bank rates or at negligible differential (between priority and non-
priority borrowing rates), which is likely to be passed on, hence protecting NIMs.
RBI has accepted the Malegam committee recommendations for microfinance companies
RBI's final Malegam Committee RBI has decided to broadly accept the recommendations of the Malegam Committee
For MFIs proposals recommendations report for micro-finance institutions and is likely to issue detailed guidelines on
Margin cap 12% 10% this. Borrowers would also have a choice of repayment in weekly, monthly or
Interest rate cap 26% 24% fortnightly installments. It can be a near term negative for the whole MFI sector
Share of income generating loans (%) 75% 75% and also for banks (IndusInd Bank, YES Bank) which has substantial exposure to
Source: RBI, Microsec Research this sector.
Investments in mutual funds restricted at 10% of last year’s net-worth
RBI has proposed that banks’ investments in liquid schemes of debt-oriented mutual funds will be subject to a prudential cap of 10% of their
networth, as of 31 March of the previous year. Banks which have over 10% of net-worth would be given about six months’ time to reduce to
regulatory limits As of 25 Mar ’11 banks investment in instruments issued by mutual funds stood at INR 476bn (13 9% of FY10 networth)
limits. 11, (13.9% networth).
So within six month’s time we may see debt oriented MF liquidation to the tune of INR 19 Bn which is negative for those mutual funds that
are largely debt-oriented. For banks we feel it wouldn’t have that much of an effect.
12 23rd May’2011

13. Impact of Asset Liability Mismatch
Unfortunately, the disproportionate dependence of Indian infrastructure projects on bank funding has forced banks to take higher-than-normal
exposure towards long gestation projects, resulting in potential ALM mismatches. Infrastructure accounts for 14% of bank loans as on
Q3’11compared to 9% on March 2008. We expect this ratio to go up to around 18% by March 2012. The liability profile of banks, on the other
hand, continues to be characterized by short to medium term deposits with tenures of one to three years. This has led to an average mismatch of
30 % in the 'up to three years' bucket, as on March 31, 2011, a gap that is expected to widen further. Now the potential impact could lead to
p y g p p p p
margin erosions for banks whose residual maturity of assets is higher than that of its liabilities.
BANKS’ ASSETS AND LIABILITIES (in %) Interest rate outlook and Asset-Liability Mismatches
Liabilities FY09 FY10 Assets FY09 FY10
Deposits Loans and Advances Interest rate outlook / mismatches +ve mismatch* -ve mismatch**
Up to 1 year 48.6 49.4 Up to 1 year 38.9 38.9
Over 1 year and up to 3 Increasing interest rates Favorable Unfavorable
years 28.5 29.4 Over 1 year and up to 3 years 33.3 33.3
Over 3 years 22.9 21.2 Over 3 years 27.8 27.8 Decreasing interest rates Unfavorable Favorable
Borrowings Investments
Up to 1 year 46.3 43.7 Up to 1 year 31.2 27.7
Over 1 year and up to 3 * Positive mismatch refers to a liquidity surplus (assets maturing faster than liabilities)
years 19.2 15.3 Over 1 year and up to 3 years 16.1 14.5
Over 3 years 34.5 41 Over 3 years 52.6 57.8 ** Negative mismatch refers to a liquidity deficit (liabilities maturing faster than assets)
Source: RBI, Microsec Research
13 23rd May’2011

14. Impact of Asset Liability Mismatch….
Impact in Increasing rate
3YR+ Dep. as % of 3YR+ Borr. as % of 3YR+ Adv. as a %of Term loans As % Of Less than 3 yrs Dep
Bank (FY10) 3YR + adv 3YR+ adv total adv Advances As % of TL
scenario & SB rate
deregulation *
United Bank of India 204.70% 0.60% 34.60% 73.90% 61.84% -42.8
HDFC Bank 173.80% 30.90% 16.20% 75.90% 52.24% 3.1
State Bank Of India 163.80% 24.70% 24.40% 49.70% 82.00% -37.0
Punjab National Bank 124.50% 23.90% 23.60% 53.60% 78.18% -23.3
Jammu & Kashmir Bank 115.20% 11.20% 23.30% 65.90% 70.00% -9.7
Karur Vysya Bank 109.70% 5.30% 21.40% 32.30% 56.96% -10.7
IndusInd Bank 96.80% 211.50% 5.20% 57.80% 16.12% 32.4
Bank of Baroda 94.30% 22.70% 29.70% 59.40% 69.01% -16.3
Axis Bank 61.50% 12.90% 62.00% 71.80% 39.30% -2.5
South Indian Bank 59.10% 8.70% 19.20% 37.70% 71.68% -2.3
UCO Bank 58.70% 8.90% 61.10% 66.80% 38.57% -0.3
Indian O
I di Overseas Bank
B k 32.20%
32 20% 23.00%
23 00% 26.60%
26 60% 50.50%
50 50% 66.27%
66 27% 2.4
24
IDBI Bank 27.40% 47.20% 35.40% 83.10% 11.48% 47.1
Allahabad Bank 25.90% 15.30% 35.50% 55.30% 71.36% 1.2
Development Credit Bank 12.20% 17.10% 14.10% 55.20% 43.05% 27.3
Andhra Bank 11.90% 23.20% 24.40% 44.60% 64.33% 7.3
Yes Bank 8.90% 75.80% 13.70% 78.50% 2.24% 65.1
Dena Bank 8.30% 11.80% 36.20% 52.00% 74.91% 5.8
Dhanalakshmi Bank 6.80% 1.50% 36.30% 62.30% 31.67% 39.6
Kotak Mahindra Bank 4.30% 20.60% 24.30% 79.30% 14.99% 61.4
ICICI Bank 3.80%
3 80% 74.00%
74 00% 28.60%
28 60% 77.50%
77 50% 37.90%
37 90% 25.9
25 9
Source: RBI, Microsec Research
* Calculation has been done by assuming advances to be 100. The color scheme represents : ‘Deep green’ – least impact & ‘Deep Red’ – highest impact.
The figures in the box should be read as an indicator rather than on absolute basis. The actual numbers may be different.
14 23rd May’2011

15. Impact on credit growth - Private banks – Will history repeat itself?
Private banks in last rate hike cycle had shown quick adaptability to the situation. Their Net Interest Income growth had come down to 2.23%
(Average quarterly growth) from a high of 12.57% during the FY08 period. The private banks ward off some its impact by reducing operational
expenses, however with a lag of 3 months. Average Opex/NII at that time came down to 68.78% from a high of 92.75% during FY08. On asset
quality front, there was a seasonal blip on GNPA as on June quarter’ 2008. However, GNPA & NPPA remain at the elevated level for the next 3
quarters with rising incremental slippages. On a PAT level, the average quarterly growth rate came down to 11.11% from a high of 16.6% in FY08.
We expect some seasonal moderation in Q1’12 along with increase in bad loans. However the real impact to be felt on subsequent quarters.
p Q g p q q
NII Growth% (Sequential) 30.00% Opex/NII 120.00%
25.00% 100.00%
20.00% 80.00%
15.00%
60.00%
10.00%
40.00%
5.00%
20.00%
0.00%
-5.00% 0.00%
0 00%
-10.00%
-15.00%
-20.00%
PAT Growth (Sequential) %
Asset Quality trend
A t Q lit t d 3.50
40.00%
GNPA% NNPA% 3.00
2.50 30.00%
2.00 20.00%
1.50
10.00%
1.00
0.00%
0.50
0.00 -10.00%
-20.00%
-30.00%
Source: Company, ACE Equity, Microsec Research
15 23rd May’2011

16. Impact on credit growth – Public Banks
Public banks in last
P bli b k i l rate hik cycle (M 08 N ’08) h d shown mixed b results. Th i N I
hike l (May08-Nov’08) had h i d bag l Their Net Interest I
Income growth h d come d
h had down to 3 92%
3.92%
(Average quarterly growth) from 5% during the FY08 period. In addition public banks’ average quarterly operational expenses to NII (%) increased
to 72.3% from 70% during FY08. On asset quality front, there was a seasonal blip on GNPA as on June quarter’ 2008. However, GNPA & NPPA
remain at the elevated level for the next 3 quarters with rising incremental slippages. On a PAT level, the average quarterly growth rate stays
reasonable at 8.16%. We expect some seasonal moderation in Q1’12 along with increase in bad loans. However the real impact to be felt on
subsequent quarters when incremental restructured assets will dent profitability
profitability.
NII Growth (Sequential)% 20.00% Opex/NII
90.00%
15.00% 80.00%
70.00%
10.00%
10 00% %
60.00%
50.00%
5.00%
40.00%
0.00% 30.00%
20.00%
-5.00% 10.00%
10 00%
0.00%
-10.00%
-15.00%
Asset Quality trend
3.00 PAT Growth (Sequential)% 60.00%
2.50
2.00 40.00%
1.50
1.00 20.00%
0.50
0 50
0.00%
0.00
-20.00%
-40.00%
GNPA% NNPA%
Q4’11 include SBI associates also Source: Company, ACE Equity, Microsec Research
16 23rd May’2011

17. Impact of increasing rates on credit growth…Now & Then
Then (July'2008)
y Now (May'2011)
y Comparative stand
Inflation Concern The headline inflation rate (WPI) had accelerated to a 13-year high India's headline inflation (WPI) rose faster than expected in
of 11.89% during the week ended July 12, 2008, from a low of 3.1% March on higher fuel and manufacturing prices. WPI rose
during the week ended November 24, 2007. RBI was worried about 8.98% YoY. The March reading was above the central bank's
the risk of second-round effects from high global commodity prices inflation projection of 8% for the final month of the fiscal
and thus inflation expectations. year, suggesting its eight interest rate hikes since March 2010
have been insufficient to contain stubbornly high inflation.
Current account deficit Even though oil prices had moderated from a peak of US$145/bbl, India's CAD, which stood at 3.7 per cent of GDP in the first
they were at higher than comfort levels at US$ 128/bbl. The rise in half of last fiscal (2010-11), moderated to 2.1 per cent in Q3'11
oil prices since April'08 implied that the trade deficit would widen on the back of a pick up in exports. However the rising prices
further. The RBI was also concerned about high non-oil import of commodities, especially crude oil, are likely to swell India’s
growth causing further widening of the current account deficit at a import bill in the coming months. India imports almost 75%
time when global capital inflows were slowing. Non-oil imports of the oil it uses. Recent decline in NYMEX crude from US$
grew at an average of 24 9% during April May 2008
24.9% April-May 2008. 113/bbl to US$ 98/bbl gave some short term relief to Indian
govt.
Monetary Aggregates Non-food credit growth stood at 25.9%Y during the fortnight ended Non-food credit growth stood at 20.6%Y during the fortnight
July'08, from a low of 21.9% as of end-2007. While some of the ended March 25 2011. It was down from a high of 23.14% as
uptick had been on account of greater credit off-take by the oil of end-2010. CD ratio which was very high at the end of 2010,
companies underpinned by higher oil p
p p y g prices. The RBI was has come down to a reasonable levels. Deposits growth was
p g
particularly concerned about the level of credit growth, considering also picking up due to almost ~300 bps hike in deposit rates of
that deposit growth had already slowed to 21.7% as of the fortnight different maturities.
ended July 4, 2008.
Rate hike In its first quarter review of monetary policy, the Reserve Bank of RBI Hiked Repo Rate 50 bps to 7.25% with immediate effect
India (RBI) decided to hike the repo rate (the rate at which the RBI in its annual policy review. Cash Reserve Ratio was
infuses liquidity) by 50bps to 9% and the cash reserve ratio (CRR) unchanged at 6 0% Savings bank rate increased to 4.0% from
6.0%. 4 0%
by 25bps to 9%. It was above market expectation of 25 bps. 3.5%. RBI started marginal standing facility for banks at
8.25%.
Policy Action rationale The policy statement highlighted the RBI’s concerns about The Central Bank enunciated the view that containing
aggregate demand pressures in the economy as reflected in higher inflation is imperative. However, no control over supply side
domestic inflation, the rising non-food credit off-take, the widening constraints make the situation much more trickier this time.
trade deficit and loose fiscal policy We also believe RBI was definitely behind the curve this time.
Impact on growth GDP growth projection moderated from a high of 9%+ to 7-7.5%. GDP growth projection moderated from a high of 8.5-8.75%+
Credit growth in next 9 months come down to 15% YoY and to 7.5-8%. Credit growth in next 10 months is expected to
deposits grow was at 13% YoY. come down to 18% YoY and deposits grow was at 16% YoY.
The deposit growth will have a lag effect of the SB rate hike.
Thumbs up - Now is comparatively better Source: RBI, Microsec Research
17 23rd May’2011

18. Impact on forward earnings of companies under our coverage
2012E 2013E
2012E 2013E
Old New % Change Old New % Change
Old New % Change Old New % Change LICHFL
HDFC NII 15876.20 16428.50 3.48% 20639.06 19993.60 -3.13%
Bank NII 121234.80 123354.30 1.75% 148876.30 149875.50 0.67% PAT 10576.30 10761.39 1.75% 13495.36 13356.36 -1.03%
PAT 48658.00 47144.74 -3.11% 63248.00 62457.40 -1.25% EPS 24.90 25.34 1.75% 31.77 31.45 -1.03%
EPS 106.70 103.38 -3.11% 139.20 136.96 -1.61%
2012E 2013E
Old New % Change Old New % Change
2012E 2013E Dewan
NII 4650.90 4578.81 -1.55% 6092.68 5943.30 -2.45%
Housing
Old New % Change Old New % Change PAT 3035.70 3005.34 -1.00% 3855.34 3786.73 -1.78%
Axis Bank NII EPS 29.19 28.90 -1.00% 37.07 36.41 -1.78%
79124.00 78426.60 -0.88% 98324.00 96633.80 -1.72%
PAT 40093.00 39190.91 -2.25% 49899.00 49337.64 -1.13% 2012E 2013E
EPS 99.00 96.77 -2.25% 123.21 121.82 -1.12% Old New % Change Old New % Change
GRUH
NII 1490.30
1490 30 1531.03
1531 03 2.73%
2 73% 1654.20
1654 20 1768.30
1768 30 6.90%
6 90%
Finance
PAT 980.60 993.99 1.36% 1108.10 1146.33 3.45%
2012E 2013E
EPS 28.06 28.44 1.36% 31.71 32.80 3.44%
Old New % Change Old New % Change
IDBI Bank NII 52118.00 51190.40 -1.78% 62263.20 60660.20 -2.57% 2012E 2013E
PAT 23267.50 22592.74 -2.90% 27301.50 26905.63 -1.45% Old New % Change Old New % Change
Bajaj
NII 12398.70 12262.31 -1.10% 14479.95 14335.15 -1.00%
EPS 23.60
23 60 22.92
22 92 -2 90%
2.90% 27.70
27 70 27.29
27 29 -1 48%
1.48% Finance
PAT 2920.72 2847.70 -2.50% 4065.54 3994.39 -1.75%
EPS 79.80 77.81 -2.50% 111.10 109.13 -1.77%
2012E 2013E
Old New % Change Old New % Change 2012E 2013E
IOB Old New % Change Old New % Change
NII 51273.79 50180.40 -2.13% 58663.42 58961.50 0.51%
REC NII 37884.70 36653.45 -3.25% 45840.40 44923.59 -2.00%
PAT 12405.72 11741.27 -5.36% 15640.68 15210.57 -2.75% PAT 29486.80 28307.33 -4.00% 35973.90 35182.47 -2.20%
EPS 19.90 18.83 -5.36% 25.00 24.40 -2.40% EPS 29.80 28.61 -4.00% 36.36 35.56 -2.21%
Source: Microsec Research
Key assumptions
• Credit demand slow down to the tune of 300 bps to 18% in FY12.
• Factored in 50 bps hike in SB rate & 50 bps hike in FD rate for FY12. Also 75 bps hike in base rates.
FY12 rates
• Increase in Provisioning expenditure by 1.4%, keeping slippages at the same levels of H1’FY 11.
• For NBFCs, we have factored in 150 bps hike in cost of funds.
We also adjusted our estimates on the basis of their recent financial performance in FY11.
18 23rd May’2011

19. Target Price Revisions - Banks
Target Price Recommendation
Target P/ABV Annualized
^
Banks Prev Current Multiple** CMP* Upside%# return% Comments Risk Return
PSU
Profile
Hike in base rates (Up by 50 bps) may support the margin, higher
High
proportion of Restructured assets (6.2% of advances) may pose
IOB 195 190 1.15 148 28.38% 16% BUY Risk/High
some upside risk to provisioning cost which may dent the
Gain
bottomline.
Loan growth to moderate as management emphasis on quality
over quantity, hike in base rates (Up by 50 bps) may support the
High
margin, higher proportion of Restructured assets (6.7% of
IDBI Bank 183 175 1.00 132 32.58% 18% BUY Risk/High
advances) may pose some upside risk to provisioning cost which
Gain
may dent the bottomline. However we feel the asset quality
improvement will continue.
Private
It has the pricing power in this kind of scenario. Base rate hike of
55 bps and FD rate hike to the tune of 75-125 bps (different Low
HDFC Bank 2451 2451 3.40 2265 8.21% 4% HOLD maturities)may have some marginal impact on NIMs going Risk/Low
forward. Strong operational & asset quality may support earnings Gain
despite
d it some moderation.
d ti
Low capital adequacy 12.7% may compel the bank for capital
raising during FY12 to support growth. This may see some equity Low
Axis Bank 1529 1529 2.40 1216 25.74% 14% BUY dilution. There can be some near term assert quality pressure due Risk/High
to execution delays in power & Infra segment along with trouble- Gain
some Microfinance portfolio.
p
*Closing price as on 18th May’11, ** based on FY13 expected earnings, # absolute, ^ according to our rating scale
19 23rd May’2011

20. Target Price Revisions – NBFCs
Target P i
T Price Recommendation
R d i
Target P/ABV Annualized
^ Comments
Prev Current Multiple** CMP* Upside%# return% Risk Return
NBFCs
Profile
Higher proportion of variable rates on the asset side and fixed
rates on the liability side may give the company to maintain its
margin. However, increasing interest rates may slowdown the Low
LICHFL 238 238 2.00 208 14.4% 8% HOLD
credit demand in the Tier-1 cities. Lower proportion of high Risk/Low
yielding assets may hamper profitability. Asset quality to remain Gain
strong.
Higher proportion of bank borrowings (~40%) may have an
g p p g ( ) y
impact on margins going forward as most of the banks had
Low
increased their base rates by almost 225-300 bps during H2'11.
GRUH Finance 478 470 3.25 396 18.7% 10% HOLD Risk/Low
Strong asset quality and strong parentage will support earnings.
Gain
Higher proportion of some risky segment in the asset side may
pose some risk.
Higher proportion of bank borrowings (~40%) may have an
impact on margins going forward as most of the banks had High
Dewan Housing 356 346 1.75 238 45.4% 25% Strong BUY increased their base rates by almost 225-300 bps during H2'11. Risk/High
Acquisition of Deautsche Post Bank Home finance will segment Gain
the loan book and diversify the loan portfolio.
Business restructuring will support the earnings However
earnings. However,
slowdown in consumer & capital goods segment may pose top High
Bajaj Finance 1080 950 1.75 635 49.6% 27% Strong BUY line earnings risk going forward. Beside that the benefit of lower Risk/High
base will not be there in FY12. However, strong brand, Gain
improving RoE profile makes it a investment case for long term.
Higher exposure to financially weak SEBs & T&D segment may
g p y g y
pose some asset quality risk. Even slow down in project
High Risk /
REC 286 286 1.75 213 34.3% 19% BUY execution may threaten the top line growth. Higher proportion
Low Gain
of bulk borrowing may erase margins going forward as higher
bulk borrowing cost.
*Closing price as on 18th May’11, ** based on FY13 expected earnings, # absolute, ^ according to our rating scale
20 23rd May’2011

21. Banking Quarterly Performance Analysis (Q4’11) – Operational Efficiency saves the day
Banking
B ki sector profit f th f th quarter ending M h 2011 reported a 3 5% Q Q i
t fit for the fourth t di March t d 3.5% QoQ increase and a 48 78% Y Y growth over th quarter ending
d 48.78% YoY th the t di
March 2011. Private sector banks have again relatively performed better than PSU banks in terms of gaining market share and reporting strong
bottom-line numbers. The PSU bottomline numbers were relatively subdued due to higher provisioning for 2nd option of pension liability &
higher provisioning for bad loans. The standalone net profit growth of Private sector banks for the quarter was 14.44% QoQ as against a decline
of 7.2% for PSU banks. Also, the standalone net profit growth of Private sector banks for the quarter was 71.74% YoY as against a of 25.8% for
PSU banks
banks.
Among the consortium, the highest YoY % increase in net profit for March 2011 quarter was reported by Laxmi Vilas Bank & Development
Credit Bank (DCB) among the private sector banks. Among PSU Banks, the highest increase in net profit in YoY % term for Q4’11 was observed
in the case of IOB & United Bank of India.
On the asset quality front, Private sector saw a decline in Net NPA by 11.33% QoQ and 19.62% on a YoY basis. In case of PSBs, asset quality
worsened in Q4’11 by 6.3% QoQ and 46.1% YoY. Among the PSBs, Indian Overseas Bank (IOB) has shown the best performance in terms of
asset quality. The bank’s NNPA declined by 10.7% QoQ and 33.4% on a YoY basis. Among the private sector banks, DCB has shown the best
improvement on asset quality front , closely followed by ING Vysya Bank and Laxmi Vilas bank.
3.80% 80.00%
80 00% 71.74%
Q4'11 Q3'11 Private Sector Bank (YoY%) Public Sector Banks (YoY%)
3.67%
60.00%
3.60% 46.10% 46.1%
39.61%
3.44%
40.00% 30.5% 29.4%
3.40% 3.32% 25.8%
19.56%
19 56% 16.8%
3.29% 20.00%
3.23% 13.8%
3.20%
3.10%
0.00%
Interest Earned Interest expenses Other Income Provisions PAT NNPA
3.00%
-20.00%
19 62%
-19.62%
2.80% -40.00%
Private Bank PSU Average Combined
Average NIM% NIMs% NIMs% -60.00% -51.72%
* Excluding associates of SBI Source: Bloomberg, Microsec Research
21 23rd May’2011