Fiancial Services Conference

Financial Services Conference Update
We, at Edelweiss, hosted a Financial Services Conference on February 15, 2007 in Mumbai to give our
investors an opportunity to interact directly with fifteen financial services companies. In tandem, there
were nine presentations by industry experts on diverse business segments in the financial services
space viz., Banking, Mortgage Finance, Insurance (life and non life), CV Financing, Agri/Micro Financing,
Infrastructure Financing, Retail Financing, and industry outlook, which gave an insight into the intricacies
of this space. This document tries to encapsulate the key take always from the presentations and
meeting.
Key Takeaways
Discussions at this event reaffirm our belief that the buoyant growth in the Indian economy in the next
three-four years will provide strong tailwinds for banks, insurance, and other financial services companies.
The financial services space will be one of the biggest beneficiaries of the current economic expansion.
Bank managements were confident of continued credit growth emanating from strong underlying
demand.
Credit demand is expected to be growth-supportive and resilient. We expect credit to attain 19% CAGR
over FY07-09E, after growing at 26% in FY07 (factoring in some credit tightening post recent CRR
hike). While direct impact of CRR hike on profitability (1-2%) and margins is lower, it is likely to slow
down banks’ ability to expand credit. Loan demand from corporate and infrastructure sectors will
remain strong in FY08E, while the retail sector is expected to report slower than historic growth.
In our view, pricing power is back with banks, which will enable stable margins going forward. Increasing
competition on the deposit side will again benefit banks with a strong deposit franchise.
Valuations
We maintain our positive view on the sector. However, in the near term, due to negative news flow and
uncertainty over inflation and interest rates, we expect valuations to remain subdued. In the current
scenario, we advise investors to be selective in bank stocks. We also expect greater visibility on M&A
to guide valuations as we approach the end of FY08.
Our top picks
At current valuations, we prefer PNB, Union Bank, IOB, and Centurion Bank.
PNB at 1.3x FY08E book: Strong franchise, high CASA, and 19-21% expected RoE.
Centurion Bank of Punjab at 3.3x FY08E book and 28x FY08E EPS: Attractive valuations given strong
growth outlook, high profitability, and M&A possibilities.
Union Bank at 1.0 FY08E book: Improved margins, high operating efficiency, and 20% plus expected
RoE.
IOB at 1.4x FY08E book: Attractive valuations given 24-25% plus RoE over FY07-08E.
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Contents
CONTENTS
Metrics — At a glance ................................................................................................................................................. 5
MAIN TRACK PRESENTATIONS
Outlook on banks: Opportunities and challenges ......................................................................................................... 7
Mortgage Finance ....................................................................................................................................................... 9
Rural banking and micro finance ................................................................................................................................ 10
Retail banking strategies at Centurion Bank ............................................................................................................... 11
Infrastructure Financiang ........................................................................................................................................... 12
Is life insurance a glorified asset management business? ............................................................................................ 13
General Insurance: A holistic view .............................................................................................................................. 14
Consumer and Commercial Vehicle Finance .............................................................................................................. 15
Outlook on interest rates ........................................................................................................................................... 16
COMPANIES
Allahabad Bank ......................................................................................................................................................... 17

Centurion Bank of Punjab .......................................................................................................................................... 19
Federal Bank ............................................................................................................................................................. 21
HDFC ........................................................................................................................................................................ 23
IDBI ........................................................................................................................................................................... 25
Indian Overseas Bank ............................................................................................................................................... 27
LIC Housing Finance ................................................................................................................................................. 29
M&M Finance ............................................................................................................................................................ 31
Oriental Bank of Commerce ...................................................................................................................................... 33
Punjab National Bank ................................................................................................................................................ 35
SBI ............................................................................................................................................................................ 37
Shriram Transport Finance ......................................................................................................................................... 39
Union Bank ............................................................................................................................................................... 41
UTI Bank ................................................................................................................................................................... 43
Yes Bank .................................................................................................................................................................. 45
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Financial Services Conference main track presentations
From To Speaker Company Topic
8:45 9:15 Registration
9:10 9:15 Welcome Address
9:00 9:45 S Maheshwari L&T Finance Infrastructure Finance
9:45 10:30 Harpreet Singh Centurion Bank Retail Finance
10:30 11:15 Amit Tandon Fitch Ratings Outlook on Banks
11:30 12:15 Keki Mistry HDFC Ltd Mortgages
12:15 13:00 Kamesh Goyal Bajaj Allianz Non Life Insurance
14:00 15:00 P. Nandgopal Reliance Life Insurance Life Insurance
15:00 15:45 Subhasri Shriram Shriram Group CV and Consumer Finance
16:00 17:00 Brahmanand Hegde ICICI Bank Agri and Micro Financing
17:00 18:00 Ajay Mahajan Yes Bank Financial Markets
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METRICS – AT A GLANCE
Companies Mkt. Cap Price P/B P/B RoE P/E P/E PE/G EPS CAGR Div. yield P/PPOP Reco
FY07E FY08E FY08E FY07E FY08E FY07-09 FY07-09 FY08E FY08E
(USD mn) (INR) (x) (x) (%) (x) (x) (x) (%) (%) (x)
State Owned Bank

Bankss
Allahabad Bank 865 87 1.1 1.0 20.2 5.1 5.0 0.6 9.0 5.7 3.0 BUY
Andhra Bank* 907 84 1.3 1.1 17.2 7.8 6.7 5.2 Not rated
Bank of Baroda* 1,905 235 1.0 0.9 14.1 8.4 6.6 4.1 Not rated
Bank of India* 1,936 179 1.6 1.4 18.5 9.4 7.7 3.1 Not rated
Canara Bank* 2,033 223 1.1 1.0 17.5 7.3 6.0 3.4 Not rated
Corporation Bank* 938 294 1.1 1.0 15.0 8.0 6.9 3.4 Not rated
Dena Bank* 226 35 0.8 0.7 15.9 6.7 5.4 - Not rated
Indian Overseas Bank 1,368 113 1.6 1.4 23.9 6.8 6.2 0.5 13.4 2.7 3.1 BUY
Oriental Bank 1,310 235 1.1 1.0 14.5 6.3 7.4 5.1 1.5 3.0 4.8 ACCUMULATE
Pun. Natl. Bank 3,444 492 1.5 1.3 20.4 8.7 6.7 0.3 23.3 2.4 3.4 BUY
SBI (standalone) 13,844 1,184 2.0 1.7 17.1 13.6 10.8 0.5 20.2 1.3 4.8 ACCUMULATE
SBI (Consolidated) 13,844 1,184 1.6 1.3 10.4 8.7 0.5 17.9 ACCUMULATE
Syndicate Bank 854 74 1.2 1.0 21.7 5.0 5.2 0.6 8.5 4.9 2.9 BUY
Union Bank (I) 1,194 106 1.1 1.0 20.2 5.8 5.2 0.3 17.7 3.8 2.6 BUY
Vijaya Bank* 460 48 1.1 1.0 17.9 6.5 5.5 5.8 Not rated
Private Sector Banks
Centurion Bank 1,171 36 4.1 3.5 14.5 40.4 27.8 0.7 37.4 0.2 10.3 BUY
Federal Bank 453 238 1.4 1.2 18.6 7.9 6.9 0.4 15.3 1.5 3.6 BUY
HDFC Bank 7,684 1,096 5.5 4.7 22.0 29.9 23.0 0.9 24.2 0.6 9.8 REDUCE
ICICI Bank 19,192 966 3.5 3.1 15.7 23.9 21.0 1.3 16.3 1.0 10.0 ACCUMULATE
ICICI Bank (adj)# 19,192 792 2.9 2.6 15.7 19.6 17.2 1.1 16.3 1.3 8.2 ACCUMULATE
IDBI* 1,398 87 0.9 0.8 11.1 9.4 7.7 1.2 Not rated
IndusInd Bank* 336 52 1.7 1.5 21.8 9.0 6.8 2.1 Not rated
Karnataka Bank 486 181 1.7 1.6 14.7 11.6 11.2 1.0 11.3 1.8 6.2 ACCUMULATE
UTI Bank 3,461 554 4.6 3.9 21.9 24.7 19.3 1.0 19.1 0.8 9.3 BUY
Yes Bank 883 147 5.2 2.9 12.9 44.7 30.6 0.6 53.5 - 7.9 BUY
Speciality Finance
HDFC Ltd 9,776 1,759 7.4 5.1 24.1 30.1 25.4 1.6 15.9 1.6 ACCUMULATE
HDFC Ltd (adj)# 9,776 1,289 5.4 3.7 24.10 22.1 18.6 1.2 15.9 2.1 ACCUMULATE
LIC HF 316 168 0.9 0.8 15.8 5.6 6.0 217.7 0.0 3.3 BUY
Mahindra Finance** 254 412 4.6 35.8 Not rated
IDFC 2,394 96 3.7 3.4 18.6 20.6 19.0 4.6 4.2 2.1 ACCUMULATE
Reliance Capital** 3,673 674 5.3 31.2 Not rated
SREI 140 58 1.4 1.1 15.9 10.3 8.7 1.0 8.9 2.6 REDUCE
Shriram Transport** 462 138 2.4 12.7 Not rated
* Balance sheet data as of FY06 and EPS, BV are Bloomberg consensus estimates ** Balance sheet data as of FY06 and EPS, BV are Edelweiss rough estimates# adjusted for value of subsidiaries
At A Glance
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METRICS – AT A GLANCE (CONTD.)
BV PS BV PS EPS EPS NIM ROA CASA ratio Net NPA Branches B/S Loan CAGR Mcap/CASA Mcap/branch
FY07E FY08E FY07E FY08E FY07E FY07E FY07E FY07E Mar-06 FY07E FY07-09E FY07E FY06
(INR) (INR) (INR) (INR) (%) (%) (%) (%) # (INR) bn (%) (%) (INR mn)
State Owned Banks
Allahabad Bank 80 92 17.1 17.3 2.9 1.3 39 0.83 2,046 691 19.0 20.43 19.02
Andhra Bank* 67 75 10.8 12.6 3.3 1.4 36 0.24 1,222 407 33.13 33.40
Bank of Baroda* 234 260 28.2 35.7 3.3 0.7 38 0.86 2,743 1,134 24.12 31.25
Bank of India* 113 131 19.0 23.1 2.9 0.7 35 1.49 2,674 1,121 26.78 32.58
Canara Bank* 195 225 30.4 37.4 3.0 1.1 33 1.11 2,542 1,327 23.53 35.99
Corporation Bank* 263 296 36.6 42.7 3.5 1.2 34 0.64 882 405 37.39 47.85
Dena Bank* 44 51 5.3 6.6 3.2 0.7 44 2.26 1,122 263 9.86 9.06
Indian Overseas Bank 69 83 16.5 18.2 3.7 1.4 36 0.71 1,526 757 19.0 30.52 40.34
Oriental Bank 206 230 37.1 31.7 2.7 1.5 30 0.67 1,233 741 19.0 35.98 47.82
Pun. Natl. Bank 331 388 56.6 73.2 3.8 1.2 47 0.25 4,093 1,634 18.0 26.43 37.86
SBI (stand alone) 596 685 87.2 109.7 3.2 0.9 43 1.44 9,306 5,272 17.0 34.47 66.94
SBI (Consolidated) 798 907 114 136.8 14,000 7,429 26.51 44.50
Syndicate Bank 61 74 14.7 14.1 3.0 1.1 29 0.83 1,828 834 18.0 18.78 21.03
Union Bank (I) 95 110 18.2 20.6 3.0 1.0 35 1.01 2,082 998 18.0 22.41 25.80
Vijaya Bank* 44 50 7.3 8.7 3.4 0.8 33 0.84 923 332 18.39 22.45
Private Sector Banks
Centurion Bank 9 10 0.9 1.3 4.2 1.0 33 1.08 249 166 43.0 144.77 211.6
Federal Bank 171 202 30.1 34.7 3.3 1.2 27 0.63 430 226 19.0 45.53 47.4
HDFC Bank 198 235 36.6 47.7 4.5 1.4 55 0.36 585 916 29.0 111.77 591.1
ICICI Bank 278 308 40.3 46.0 2.4 1.3 24 0.98 667 3,301 27.5 230.24 1,294.8
ICICI Bank (adj)# 278 308 40.3 46.0 667 3,301 188.78 1,061.6
IDBI* 96 106 9.3 11.3 0.5 0.7 30 1.07 430 996 81.99 146.3
IndusInd Bank* 31 34 5.8 7.7 2.1 0.7 13 2.12 147 219
Karnataka Bank 104 116 15.6 16.2 2.7 1.2 22 1.42 395 166 18.5 79.17 55.4
UTI Bank 121 144 22.5 28.8 2.7 1.1 38 0.90 481 713 29.4 97.12 323.8
Yes Bank 28 50 3.3 4.8 2.7 1.4 8 - 29 91 64.7 1,274.21 1,369.6
Speciality Finance
HDFC Ltd 238 344 58.3 69.2 2.6 2.5 - 219 644 24.8
HDFC Ltd (adj)# 238 344 58.3 69 2.6 2.5 - 219 644
LIC HF 180 201 30.2 28.0 2.3 1.6 1.30 120 174 13.9
Mahindra Finance** 91 11.5 9.0 2.6 2.40 400 49
IDFC 26 28 4.6 5.0 3.2 3.6 - 168 34.1
Reliance Capital** 127 21.6 - 45
SREI 42 51 5.6 6.7 4.3 1.9 0.29 36 42 78.2
Shriram Transport** 57 10.9 10.0 2.8 0.40 296 52
* Balance sheet data as of FY06 and EPS, BV are Bloomberg consensus estimates ** Balance sheet data as of FY06 and EPS, BV are Edelweiss rough estimates # adjusted for value of subsidiaries
Outlook on banks: Opportunities and challenges
Outlook on banks: Opportunities and challenges

By Fitch Ratings India
Mr. Amit Tandon, CEO of Fitch Ratings India, discussed the outlook on banks and opportunities and
challenges linked with it. Key takeaways from his presentation are as follows:
Improved performance in 2006 as compared to 2005, or has it been missing
Banks continued to show strong growth Y-o-Y. Growth in loans continued to be over 30% for two
consecutive years. Asset quality has improved distinctly over the past few years. Investment in government
securities has also reduced over the past few years, given the strong credit momentum. Banks have
become leaner and efficiency has become a focal point in view of increased competition. Though
banks have managed to grow their profitability (RoE), only half of the banks in the sample space have
managed to improve their efficiency (RoA). Margins are under pressure due to sudden demand and
scarce liquidity.
Will growth momentum sustain?
GDP growth at above 8.5% translates into higher credit off take. Capital investments (particularly in
infrastructure) are expected to maintain credit growth. The retail boom is expected to continue with
increased geographic penetration and wider product suite with SME the second growth story. Retail is
an under-penetrated market for organized players as the lion’s share is still with unorganized players.
India has favorable demographics and a mass market (both urban and rural markets).
Chart 1: Cosumer lending as a % of GDP

100
80
60
(%)
40
20
0
Thailand
Phillipines
UK
Hong kong
USA
Japan
Taiwan
Malaysia
Australia
Indonesia
India
China
Singapore
Korea
Source: Fitch ratings
There is a marked change in the outlook towards SME lending with improving financial health and
changing mindsets of managements. With corporate business offering wafer thin margins, SME offer
not only higher margins, but also higher returns per customer with more upside potential. It diversifies
the loan book and also helps banks meet their priority sector commitments.
But NPAs continue to be on the high side and SME are the worst hit in case of a cyclical downturn.
Though there are concerns on bank credit growing too fast, structurally, there appears enormous
scope for expansion. Bank credit and deposits as a percentage of GDP in India is lower than its peers.
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Predicting key trends
The market dynamics are changing as the market share is moving from public sector banks to new
generation private sector banks. Consolidation is the key to provide stiff competition to foreign banks.
The cost of deposits is increasing and hence margins are declining. Banks have to focus on how to
maintain margins and be profitable. Garnering low cost deposits is the key to success. The NPA ratio
will improve due to the base effect, but loan loss provisions are in line with matured economies, which
is not a healthy sign and should be higher due to ‘emerging market’ risks faced by them. Capital
adequacy will be a growth constraint for all banks with little headroom available on the investment side.
Raising equity will remain a priority as rapid credit growth and changing asset composition means total
capital resources will have to be augmented further. Implementation of Basel II has been postponed,
but operational risk charge is expected to trim at least 75bps from total capital adequacy ratio. AS-15
may decrease capital adequacy ratio further by 100bps; government banks with high ‘pension’ liabilities
will be relatively higher affected.
There have been changes in the regulatory environment e.g., loss on MTM investments now will have
to be reduced from the net worth instead of routing it through P&L. Also, now RBI has been provided the
flexibility to reduce SLR.
In conclusion, retail and SME are expected to continue to grow further. The dispersed market is
expected to consolidate with key big players emerging. Asset quality and margins remain key concerns.
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Mortgage Finance
Mortgage Finance
By HDFC Limited
Mr. Keki Mistry, managing director of HDFC Limited, enlightened the audience by making a crisp presen-
tation on the mortgage market in India and on HDFC Limited. Key takeaways from his presentation are:
• Housing loans continue to be in demand due to tax incentives by government, rising income
levels, and increasing penetration.
• He emphasized that with increasing interest rates, cost to the consumer does not necessarily
increase to the same extent and thus demand continues to look strong.
• HDFC continues to grow at a strong pace and it expects to grow its disbursements by 25% per
annum going forward.
• Asset quality is not a concern in view of peaking property prices as the loan disbursed is determined
on the repayment capacity of the individual, qualification, number of dependents, where is he
working and not on value of the property. HDFC expects to keep net NPA below 1%. Average
loan size has increased by 10% due to sharp increase in real estate prices.
• HDFC is increasing lending rates actively to pass on the higher funding cost to customers in rising
interest rate environment.
• From retail deposits, the company has now shifted to wholesale funds as major source of funding.
Average loan to value continues to be at 63%, which the company expects to increase in the
coming quarters.
• Competition from banks had peaked in 2001-2003 due to excessive liquidity in banks. Now the
competition is gradually declining. With increased concerns on banks’ participation in real estate,
housing finance companies are expected to increase their market share.
• There is substantial value to be unlocked in the subsidiaries. HDFC expects to list most of its
subsidiaries in the coming three-four years.
Our View
HDFC is the strongest and most venerable play on Indian mortgages over the long term. We expect the
bank, with its strong brand recall, superior real estate knowledge, and revamped distribution strategy,
to attain 22% CAGR in loan disbursement over FY07-09E. Consequently, we expect it to deliver 24%
and 16% CAGR in loan book and earnings, respectively, over FY07-09E.
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Rural banking and micro finance

By ICICI Bank
Mr. Brahmanand Hegde, head–rural and micro banking group at ICICI Bank, enlightened us on banking in
the hinterland focusing on rural, micro financing, and agri banking. From his presentation it was clear that
rural banking offers huge opportunities, though key issues need to be addressed by focusing on non-
traditional approaches for both channels as well as products. Beyond doubt, technology is a key enabler for
rapid scale up and risk management is key to sustainability of rural banking. ICICI Bank is aggressively
adopting the ‘No White Spaces’ strategy and micro-financing to cater to the most underserved segments.
Key Takeaways
Structural factors provide huge opportunity in rural banking
Long term structural factors provide immense opportunities in rural banking—70-75% population is
dependant on the rural economy, about 50% of GDP flows from rural India, and 780 mn people have
limited access to basic banking services. Despite predominance of informal lenders, institutional credit
to rural India has grown by 19% CAGR over FY00-05.
Key challenges
Key challenges faced by banks in rural areas are:
Inadequate banking infrastructure (7% of villages have a branch and the average distance is ~3.8 kms).
ATM penetration is low and other banking channels are non existent.
Regulatory constraints (license for opening branches/ATMs).
Low profitability due to low ticket size, high cost, and high default risk.
‘No White Space’ strategy
To address the need of financial inclusion and bring a large proportion of population into the fold of
basic banking services, ICICI Bank has initiated a holistic rural banking approach by launching ‘No
White Spaces’ strategy. Through this, it will not leave any rural business opportunity (farmers, agri
traders, processors, and non agri traders) untapped. An ICICI Bank touch point (combination of branch
and non-branch channels customized to various segments) will be available 10 km away from any
customer.
Micro financing
Micro finance (providing financial services to poor and micro enterprises) is the need of the hour to cater
to the most underserved segments. Small ticket size, high operating costs, and high default risk makes
it inefficient for commercial banks to target this high volume/ low value transactions.
Traditional models viz., SHG-bank linkage and bank-MFI linkage lacked scalability, incentive alignment,
and operated amidst inappropriate legal structures for on-lending activities.
Hence, ICICI Bank initiated structures partnering directly with MFIs, where the bank provided loan
funds, mezzanine equity, and technology to lend directly to clients on a risk sharing basis with NGO/
MFI. NGOs/MFIs undertake risk origination, monitoring, and collection.
In collaboration with micro-finance partners, the bank offers asset building and risk mitigating products
and flexible loans and financial services that respond to low income clients along with insurance to
protect loan portfolio.
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Retail banking strategies at Centurion Bank
Retail banking strategies at Centurion Bank

By Centurion Bank of Punjab
Mr. Harpreet Singh, head-branch banking and wealth management at Centurion Bank of Punjab, pre-
sented on emerging opportunities for retail banking in India and discussed clear strategies for retail credit
growth at Centurion Bank.
Key Takeaways
Structural drivers viz., India’s buoyant phase of economic growth (9% plus GDP growth), improving
demographics (64% population estimated to be in the 14-60 years age group), expanding consumerism
(retail lending growing at 35% CAGR over FY03-07E), and low consumer finance penetration (consumer
debt to GDP ratio at ~10%, significantly lower than US, UK, Singapore, and Taiwan) provides excellent
opportunities for growth of retail banking in India.
Centurion Bank clearly follows retail focused strategy (69% of net advances) aided by extensive
distribution franchise of 259 branches across 128 cities. It is a leading player in two-wheeler loans and
ranks amongst the top 7 in CV, mortgage, and personal loan disbursals. It aims at sustaining its two
wheeler leadership, continuing growth momentum in CV financing, and accelerating growth in personal
and mortgage financing through the following strategies:
Existing products-existing customers: Deepening and improving delivery of existing products.
New products-existing customers: Cross sell and up sell new products using hooks (use two-
wheeler business as a feeder channel for up selling).
Existing products-new customers: Expanding network across geographies and across segments or
resorting to acquisition strategy.
New products-new customers: Through product innovation.
Besides adopting a growing, profitable, and sustainable business model, Centurion Bank follows a
more customer focused model addressing diverse needs of individuals across all stages of their life
cycle.
Distribution framework at Centurion Bank revolves around branches, ATM network, relationship and
financial managers, direct distribution channels, product specific back up teams, tele-direct marketing,
and presence at dealerships.
Innovative abilities of the bank are well reflected in its unique positioning of ‘Miracle’ credit card as
‘India’s first credit card with conscience’. It serves twin objectives of social responsibility and business.
It is an initiative of sponsoring education and living expenses of 3,500 rural kids every year.
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Infrastructure Financing
By L&T Finance
Mr. S. Maheshwari from L&T Finance (NBFC for infrastructure financing floated by Larsen & Toubro)
shared some interesting thoughts on infrastructure financing, emphasizing in particular on an urge to have
proper institutional framework and innovative financing options for creating an enabling environment for
infrastructure developments.
Key Takeaways
Effective institutional framework
India needs effective regulatory institutions, which are efficiently staffed, and legislations adequately
revamped to create an enabling environment for infrastructure. New institutions with new frameworks
and culture are the need of the hour (though this will increase invisible project costs). Multiplying good
institutional structures is also very important.
Innovative financing options
Project financing is no longer a game of plain vanilla equity and debt. Some out-of-the-box thinking is
required to introduce innovative financing options. Besides equity capital with differential rights, mezzanine
capital and debt refinancing, structured finance option is a new game today which can effectively
reduce the level of equity needs.
Fourth tier capital: New trend
Fourth tier capital, structured between promoters’ equity and lenders’ sub-debt, is being resorted to off
late. It provides clear advantage to further enhance funding base through aggressive leveraging and
provides enough potential to enable cash exit to the promoters.
Project management critical
Creating a good project management organization is critical to handle large and complex projects. It is
necessary to break up projects into more manageable parts and the right developers need to be
selected who can manage things better and stay through the project implementation.
Addressing end users’ needs
Project structuring needs to be made more sensitive to end users’ requirements. Thus the end user will
feel a part of the process and it will make the process of project implementation much smoother.
Careful tariff setting
Tariffs need to be set with utmost care to build confidence of an end user. Initially, low tariff should be
charged to build traffic. Then, tariff can be hiked using the RPI+X formula till it reaches desired levels.
It is necessary to depoliticize the tariff setting process with a separate regulatory mechanism.
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Is life insurance a glorified asset management business?
Is life insurance a glorified asset management business?

By Reliance Life Insurance
Mr. P. Nandgopal, CEO of Reliance Life Insurance, presented on life insurance providing detailed insights
into Unit Linked Insurance Plans and important parameters to be considered for valuing life insurance
business. He also delved into the contentious topic of “whether India’s ULIP gathering life insurance
companies are any different from mutual funds.”
Key Takeaways
ULIP vis-à-vis mutual funds
Investors are quite confused over allocating their savings to life insurance and mutual funds. Not only
do these products serve different purposes over different tenures, but even the gap in the benefits
between these products has now seemingly narrowed with an increased popularity of Unit Linked
Insurance Plans (ULIPs). ULIPs combine life investment protection with a variety of investment options
similar to those of mutual fund plans.
• Why are ULIPs preferred to mutual funds?
• It is considered a long term savings instrument.
• Provides better control over money.
• Marketing efforts are greater in case of ULIPs due to higher commission rates.
However, ULIPs are more expensive than mutual funds and also carry the risk of asset-liability mismatch.
Retail investors should weigh the benefits of each of these products and accordingly invest in them.
ULIP vis-à-vis traditional policies
Globally, ULIPs are more popular than traditional plans. Even in India there is a similar trend. However,
traditional policies are now gaining traction and going forward, the contribution of ULIPs is expected to
decline. Moreover, in ULIPs, risk is passed on to customers and returns (premium income less expenses)
are relatively lower than in traditional policies where risk is retained with the company and higher
premium is charged.
As per our analysis, profit margins on traditional life insurance policies are higher than on ULIPs as it
leaves excess investment returns with the insurance company. However, RoE on ULIPs are superior to
traditional products due to lower capital requirements in the former.
Outlook on life insurance sector
According to Mr. P. Nandgopal, the insurance sector is expected to grow very strongly, with GDP
growth, rising savings rate, and demographic profile (64% population in 14-60 years age group) being
the key drivers.
Valuation of insurance business
According to Mr. P. Nandgopal, besides assigning a multiple to new business achieved profits (NBAP)
to value life insurance business, other valuation methodologies of primary importance will be the
embedded value method (discounting future cash flows) or internal rate of return method (average IRR
expected going forward is 15-18%). The ratios that hold significance for valuation are persistence ratio
(average 70%), expense ratio, capital efficiency ratio, and tenure. We prefer the (embedded value +
present value of NBAP) method to value life insurance businesses.
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General insurance: A holistic view

By Bajaj Allianz General Insurance
Mr. Kamesh Goyal, CEO of Bajaj Allianz General Insurance, gave a holistic perspective on the general
insurance industry and its outlook. Key takeaways from his presentation were:
• Circa 2001 and prior, distribution channels were absent and commission on gross written premium
was less than 2.5% for the industry; the product mix was skewed towards the corporate segment,
with very little/no retail focus; the growth rate was also slow at 12%. Underwriting profitability was
poor and competition was centered around pricing. In the past five years, growth has been around
15% with drop in premium rates for corporate business, especially marine/health and property.
Motor business has posted strong growth in line with Asian peers and GDP growth. Also, health
insurance is growing at a strong pace with increase in medical tourism. Penetration (as a percentage
of GDP) has increased from 0.53% to 0.64% in the past five years.
• Future opportunity lies with retail and to encash this opportunity, Bajaj Allianz is increasing tie-ups
with auto manufacturers, motor dealers, banks, and travel agents. It intends to increase cross
selling of products and increase premium income. The industry is gearing up to develop and
service the retail segment with policy issuance at point of sale, developing distribution channels
like direct marketing, telemarketing, setting up call centers as a single point of contact for customers,
and setting up web portals for transactions online.
• De-tariffing will impact the industry in the short term and will mature the industry faster. De-tariffing
will force companies to be more efficient.
• Motor and health have loss ratios greater than 100%, so premiums should increase as the industry
can no longer absorb the losses.
• Rates for some customers will increase and for others they are likely to decrease. Retail assets and
infrastructure projects will provide a big boost.
Key challenges:
The expense ratio is increasing. It is rising for the public sector, while it is declining for the private sector.
De-tariffing and rising salaries will push expense ratios beyond 33%. There is a huge scope to decrease
expenses by 25-30%. Lack of skilled manpower is driving salaries upwards. However, a secular bull run
in equity markets and drop in interest rates have helped insurance companies post profits. Going
forward, if there is a bear phase and a catastrophe, it will be a huge dampener for the industry. De-
tariffing offers a big opportunity for private players to tap segments like motor and commercial vehicles.
The company expects the market share of private players to be around 45% in 2010.
14
Consumer and Commercial Vehicle Finance
Consumer and Commercial Vehicle Finance

By Shriram City Union Finance
Ms. Subhashri Shriram, executive director of Shriram City Union Finance Ltd. (SCUFL) delivered a company
presentation focusing on industry growth drivers, future plans, and marketing strategy at SCUFL.
Key Takeaways
SCUFL is primarily focused on retail financing and manages INR 13 bn funds with assistance from the
group’s chit fund entities in marketing and collections with operations from more than 600 outlets. It
caters to 4.1 mn customers through 1.2 mn agents.
It has largely derisked its business model in the retail financing space by diversifying into various
segments viz., consumer durable finance, auto finance (including new and pre-owned vehicles),
personal finance, trade finance, and retail gold finance.
Revenues have grown by 26% CAGR over FY04-06 to INR 2.15 bn, in line with similar asset growth.
PAT has grown by 35% CAGR to INR 504 mn during the same period.
SCUFL taps a small portion of chit subscriber base that currently contributes majority of its business
(chit subscribers currently cater only to 0.63% of the total population of Tamil Nadu, Andhra Pradesh,
and Karnataka). Therefore, immense potential exists for business from this segment.
Soaring demand in the INR 200 bn consumer durable industry is throwing up several opportunities in the
segment. Low penetration levels across segments is an indication of the potential. The company is
targeting 10% market share in this segment.
SCUFL currently offers personal loans to its existing customers and chit subscribers, particularly the
salaried class.
There are more than 3.57 mn SMEs in India and number of owners among chit subscribers is about 800
per branch. Targeting 10% of owners in a year with average ticket size of INR 0.5 mn creates a
business potential of INR 18.6 bn from chit customers alone.
The company has recently added retail gold financing to its product line (restricting this business to
Chennai and AP). There is potential to enter bullion trading.
It plans to effectively leverage on its wide network, in-house credit verification, quick disbursements,
expertise of chit outlets in collection and dealer tie-ups for all leading brands.
Key risks
Chit fund, its major business segment, is losing its current relevance.
Concentration in South exposes it to regional risks.
Competition from banks and institutions with access to cheaper funds.
15
Outlook on interest rates

By Yes Bank
Mr. Ajay Mahajan, group president–Financial Markets and Private Banking at Yes Bank, shared his well
thought out view on interest rates outlook considering several broad economic factors. Key takeaways from
his presentation were:
Global growth and inflationary pressures are anticipated to moderate in 2007. Monetary policies are ex-
pected to be divergent in 2007. It is expected that the Federal Reserve will hold back interest rates (possibly
may even lower rates) through 2007, while ECB, BoE, and BoJ are likely to hike rates further. India and
China are set to tighten rates. Inflationary pressures are expected to remain high in India, while in China they
are expected to rise.
ECB is expected to raise rates by 25bps in March, taking the rate to 3.75%. Two additional rate moves to
4.25% are expected by early 2008. The above rate yields to support Euro as European Zone yield spreads
narrow versus the US.
BoE will raise rates further to 5.5%. Sustained GBP gains appear limited in the near term due to overvalued
conditions. High yielding status of the GBP should underpin sentiment.
BoJ will gradually tighten with one rate hike expected in H107. Slow monetary tightening and persistent
capital outflows is likely to slow down Japanese Yen (JPY) recovery and so limited gains can be expected
in JPY.
On the domestic front, the pressures from the supply side are expected to remain; in addition demand
pressures are expected to emerge. Manufactured prices’ inflation has remained subdued so far due to
productivity gains and competition. Credit growth maintains a strong momentum for third consecutive year.
Inter-bank rate now ruling at 10.25% which necessitates a PLR of around 11.5% in order to recover CRR
and SLR cost. So, in the absence of global cues, domestic interest rates are expected to be firm.
16
India Equity Research | Banking
ALLAHABAD BANK INR 82
BUY
Highlights
The bank is continuing on an accelerated growth path, steadily improving its market share
driven by better deposit mobilization and higher than system credit expansion. Vishal Goyal, CFA
+91-22-2286 4370
The new management has implemented a few initiatives—roll out of CBS, setting up of a vishal.goyal@edelcap.com
general insurance venture with Sompo of Japan and plans to expand its reach in southern Kunal Shah
+91-22-4009 4532
India, western Maharashtra and Gujarat—which may change the perception of the bank. kunal.shah@edelcap.com
The bank is now increasingly focusing on retail, SME, and agri credit, alongwith increased Ajitesh Nair
+91-22-4009 4535
thrust on mobilizing low cost deposits. ajitesh.nair@edelcap.com
Investment Rationale
The new management is increasingly focusing on expanding its reach in southern India,
western Maharashtra and Gujarat, thereby lowering the concerns regarding its dominant
presence in high risk, low returns eastern states.
Loan portfolio mix is likely to shift in favour of retail advances in eastern and central regions
from public sector advances in western and northern regions. The bank has 236 retail boutiques
dedicated to retail business. We expect loan growth to settle at 32% for FY07E.
We believe that Allahabad Bank’s margin will improve in the coming quarters as its treasury is Reuters : ALBK.BO
increasing proportion of high yielding non-SLR investments and loan mix shift in favour of retail Bloomberg : ALBK IN
and SME advances. We expect NIMs to improve to 2.8% in FY08E.

Market Data
We expect the operating expense (opex) to assets ratio to come down to 1.7% in FY07E and 52-week range (INR) : 99 / 53
1.6% in FY08E from 2.2% in FY06. Share in issue (mn) : 446.7
M cap (INR bn/USD mn) : 36.6 / 829.5

The stock has high dividend yields of ~5.0% and is underowned by foreigners (FIIs own 18%
Avg. Daily Vol. BSE/NSE (‘000) : 927.0
against the 20% limit).
Valuations: Attractive at 1.0x book Share Holding Pattern (%)

Despite 20% plus RoE and 5% plus dividend yield, the bank trades at significant discount (40- Promoters : 55.2
50%) to its peers, mainly due to technological backwardness and poor perception of its asset MFs, FIs & Banks : 7.6
quality. In our view, with the change in management, technology initiatives (through CBS FIIs : 18.6
rollout), economic development in eastern states and inroads into other locations, the present Others : 18.6
discount is likely to narrow down in the future. The stock currently trades at 0.9x FY08E book
and 2.8x FY08E PPOP. We recommend a ‘BUY’
‘BUY’, expecting 25% plus return (excluding 5%
dividend yield) in the next 12 months.
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Key Risks
Asset quality
quality: In the event of an economic slowdown, there is a greater risk of NPA accretion for
Allahabad Bank than its peers, given its geographical spread and relatively weaker risk management
systems. However, increased technological penetration can alleviate some risk of weak risk management
system.
Technology
Technology: Delay in implementing CBS can restrict the improvement in CASA ratio and fee income.
Company Description
Allahabad Bank is India’s oldest public sector bank with a pan-India presence and sixth largest network
of over 2,040 branches across India. It has a strong presence in the eastern region with 70% of its
branches are in Uttar Pradesh and Eastern India. It commands 7-10% share in the network in Uttar
Pradesh and West Bengal.
Its credit book is well diversified with corporate advances forming 45%, retail 20.2%, agricultural loans
17.2%, and other priority loans 21.2%. SME lending (including SSI) forms 17% of the total loan book.
Its market share in advances was at 2.02% and market share in deposits was 2.29% as of March 2006.
Branches 2046
Mcap (INR bn) 37
Our recommendation BUY
Balance sheet size (INR bn) 691
Ownership State owned
FY06 FY07E FY08E FY09E
Net interest income (INR mn) 15,774 17,053 20,360 24,599

PAT (INR mn) 7,061 7,622 7,717 9,051
Advances (INR bn) 291 396 476 561
Deposits (INR bn) 485 623 718 861
(%)
Fee to assets 1.0 0.7 0.6 0.6
Opex to assets 2.2 1.7 1.7 1.5
NIM 3.3 2.9 2.8 2.9
Net NPA 0.8 0.8 0.8 0.9
CAR 13.4 11.7 11.8 11.2
CASA 39.3 39.0 39.8 40.0
RoE (%) 29.6 23.0 20.2 20.6

RoA (%) 1.5 1.3 1.1 1.1
EPS (INR) 15.8 17.1 17.3 20.3
Book value (INR) 68.3 79.8 91.6 105.2
PE (x) 5.2 4.8 4.8 4.1
PB (x) 1.2 1.0 0.9 0.8
P/PPOP (x) 3.7 3.4 2.8 2.2
PPOP per share (INR) 22.4 24.4 29.5 37.7
18
CENTURION BANK OF PUNJAB INR 36
BUY
We expect Centurion Bank to post 48% CAGR in loan growth over the next two years, led by
lending to retail and SME segments. We expect growth in retail credit (constituting 69% of the Vishal Goyal, CFA
bank’s loan book) to be more broad-based in the future, to include mortgages, personal loans, +91-22-2286 4370
vishal.goyal@edelcap.com
and credit cards, instead of being concentrated on two wheelers and CVs.
Kunal Shah
+91-22-4009 4532
Centurion Bank has sustained its margins at the highest level in the industry at 4.7%, with kunal.shah@edelcap.com
exceptionally higher growth in personal and mortgage loans along with robust growth in SME
Ajitesh Nair
segment. Going forward we expect margins to remain at 4% plus over FY07-09E. +91-22-4009 4535
ajitesh.nair@edelcap.com
Opex/assets still remain high at Centurion Bank, but this will play out to its advantage as there
is dramatic scope of improvement and will push up return ratios.
Inorganic growth is a part of Centurion Bank’s overall strategy, and we believe, the bank is in
a good position to pursue the same.
The bank with a countrywide network, diversified product portfolio, and advanced technology
in place, is the best fit as an acquisition target by a foreign bank.
Valuations: Still attractive
The stock currently trades at 3.5x FY08E book and 27.8x FY08E earnings. We believe that its Reuters : CENB.BO
inorganic growth strategy will have a strong positive impact on its valuations, going forward. Bloomberg : CBOP IN
The bank deserves a premium valuation for its highly profitable business (reflected in its high
RoA), tremendous growth potential (both organic and inorganic), and M&A possibilities. We Market Data
expect the bank to generate 43% EPS CAGR over FY06-09E and deliver 20% RoE, once the 52-week range (INR) : 39 / 19
capital ratio stabilizes. We have a ‘BUY’ recommendation on the stock. Share in issue (mn) : 1,478.2
M cap (INR bn/USD mn) : 53.2 / 1,205.1

Key Risks
Avg. Daily Vol. BSE/NSE (‘000) : 2,066.3
Deterioration in systemic retail asset quality
Share Holding Pattern (%)

The bank has over 69% of its assets as retail loans. A system-wide deterioration in the quality
Promoters : 0.0
of retail assets can impact its profitability due to its heavy dependence on the category.
MFs, FIs & Banks : 2.4
Deterioration in margins FIIs : 25.0
Others : 72.6
Higher than expected decline in margins is a risk to our estimate..
Company Description
Centurion Bank of Punjab (Centurion Bank) is a growing private sector bank with 249 branches and
402 ATMs across India.
It is one of the leading players in two-wheeler and commercial vehicle (CV) financing. Retail credit is the
bank’s mainstay, constituting 69% of its advances.
The bank successfully merged the Bank of Punjab with itself and is producing synergies in the form of
expanded reach, product diversification, and availability of low cost deposits. The merged bank has
branch network in both northern and southern part of the country.
Recently, Centurion Bank has announced a merger with Kochi-based Lord Krishna Bank which, on
approval from RBI, will add 112 branches in South India.
Branches 249
Mcap (INR bn) 53
Ownership Private

PAT (INR mn) 878 1,373 2,377 3,279
Advances (INR bn) 65 106 155 216
Deposits (INR bn) 94 144 209 297
(%)
Fee to assets 3.3 3.0 2.8 2.5
NIM 4.2 4.2 4.3 4.1
Net NPA 1.1 1.1 1.2 1.4
CAR 12.1 10.4 10.0 8.4
CASA 38.7 33.2 33.7 34.2
RoE (%) 12.9 12.1 14.5 15.9

RoA (%) 0.9 1.0 1.2 1.2
EPS (INR) 0.6 0.9 1.3 1.7
Book value (INR) 6.5 8.8 10.3 11.3
PE (x) 57.2 40.4 27.8 21.4
PB (x) 5.5 4.1 3.5 3.1
P/PPOP (x) 23.3 20.0 13.4 10.3
20
FEDERAL BANK INR 238
BUY
Highlights
Breaking away from the image of an old generation private bank, Federal Bank admits it is not
in the same league as ICICI Bank, HDFC Bank, and UTI Bank, but is aspiring to be in those Vishal Goyal, CFA
ranks. It is looking at 2009 with a lot of confidence and sees itself playing the role of a +91-22-2286 4370
consolidator.
Kunal Shah
+91-22-4009 4532
It is looking to expanding its branch network in the north western corridor. It currently has a kunal.shah@edelcap.com
network of 526 branches, which it plans to extend to 545 by March 2007.The bank is transforming
Ajitesh Nair
its technology platform from in-house technology to Finacle from Infosys at a rapid pace. +91-22-4009 4535
Margins are expected to be maintained above 3%. Asset quality is in control with 82% of its
NPA book collateralized, which gives it a strong bargaining power for recovery. Hence, recoveries
are expected to be strong.
The bank is coming out with a 1:1 rights issue; timing and pricing details of the same are under
discussion. The bank is raising capital to meet the capital requirements for its insurance JV
with IDBI and Belgo-Dutch bancassurance group Fortis. It is also reviving its subsidiary Fedbank
Financial Services to sell its products through this arm.
SME and retail loans, which constitute a bulk of the bank’s loan book, are likely to continue to Reuters : FED.BO
lead its growth in future. Loan book is expected to grow at 22% CAGR over next three years Bloomberg : FB IN
through network expansion.
Market Data
With the implementation of core banking solutions (CBS) in FY07, we expect the bank’s fee
52-week range (INR) : 274 / 137
income to grow at 11% CAGR over the next two years. Fee business will further receive boost
Share in issue (mn) : 83.6
due to its wide geographical presence in Kerala, which is amongst the largest recipients of NRI
M cap (INR bn/USD mn) : 19.9 / 450.6
remittances.
Federal Bank is well-positioned with the NRI segment. NRI deposits account for ~30% of the
total deposits which are cheaper than domestic term deposits. Share Holding Pattern (%)
Promoters : 0.0
Valuations: Attractive
The bank’s fundamentals are improving, which we believe will lead to a re-rating in valuations. FIIs : 37,3
During the past 24 months the stock has underperformed the banking index and broader Others : 54.0
market by 39% and 52%, respectively.
We believe that the stock is attractively valued at 1.2x FY08E book relative to its 18% plus RoE
and M&A possibilities (post 2009). We have a ‘BUY’ recommendation.
Key Risks
The bank’s high dependence on the NRI segment (30% of its deposits come from NRI segment)
exposes it to regulatory risks.
Geographical concentration in the South exposes it to the regional risk.
Execution risk of its transition to the CBS platform.
Company Description
Federal Bank is an old private sector bank based in Kerala. It has an asset base of over INR 200 bn,
network of over 524 branches (80% branches in Kerala), and 368 ATMs.
SME and retail lending are the bank’s focus areas and constitute 34% and 30%, respectively, of its
loan book.
The bank’s recent merger with Ganesh Bank has added 32 branches to its existing network, increasing
its foothold in western India.
IFC Washington has ~8% equity holding in Federal Bank.
Branches 534
Mcap (INR bn) 20
Ownership Private

PAT (INR mn) 2,225 2,575 2,972 3,423
Advances (INR bn) 117 150 180 213
Deposits (INR bn) 179 199 235 277
(%)
Fee to assets 1.1 0.9 0.8 0.8
NIM 3.3 3.3 3.3 3.2
Net NPA 1.0 0.6 0.4 0.4
CAR 13.8 12.0 11.1 10.9
CASA 25.0 27.0 27.3 27.6
RoE (%) 22.6 19.0 18.6 18.2

RoA (%) 1.2 1.2 1.2 1.2
EPS (INR) 26.0 30.1 34.7 40.0
Book value (INR) 145.2 171.4 201.7 236.8
PE (x) 9.2 7.9 6.9 6.0
PB (x) 1.6 1.4 1.2 1.0
P/PPOP (x) 4.4 4.2 3.6 3.1
22
India Equity Research | BFSI
HOUSING DEVELOPMENT FINANCE CORP. INR 1,759

ACCUMULATE
HDFC is the strongest and most venerable play on Indian mortgages over the long term. We
expect HDFC, with its strong brand recall, superior real estate knowledge, and revamped Vishal Goyal, CFA
distribution strategy, to attain 22% CAGR in loan disbursement over FY06-09E. Consequently, +91-22-2286 4370
we expect HDFC to deliver 24% and 19% CAGR in loan book and earnings, respectively.
Kunal Shah
+91-22-4009 4532
HDFC has differentiated itself from its peers with its diversified network and revamped distribution kunal.shah@edelcap.com
strategy. Of the total individual loans disbursed during FY06, 65% (38% in FY05) were routed
Ajitesh Nair
through third party channels viz., HDFC Bank, DSAs, and distribution subsidiaries. +91-22-4009 4535
HDFC has been highly proactive in passing on the cost and benefit to customers. With strong
pricing power in the housing finance space, we believe HDFC will be able to pass on any
increased funding cost to customers. Net effect, according to us, will be a very modest
contraction in spreads of 7-10bps over FY06-08E.
Besides the core business, HDFC’s insurance, AMC, banking, BPO, and real estate private
equity businesses are also growing at a rapid pace and the estimated value of its investments/
subsidiaries explains ~25% of HDFC’s market capitalisation. Value of stakes in HDFC Bank
and HDFC Standard Life forms a significant portion of its unrealised gains. Unrealised gains on
its investments amount to INR 470 per share of HDFC Ltd. Reuters : HDFC.BO
Bloomberg : HDFC IN
Valuations: Fair
Stripping off the value in investments, HDFC’s mortgage business is currently valued at 3.6x
Market Data
FY08E book and 18.1x FY08E earnings. We are impressed by its strong brand equity, talented
52-week range (INR) : 1,822 / 962
management team, relentless commitment to a now proven “profitable growth” strategy,
revenue diversification and related growth prospects, and unbeatable record of asset quality.
M cap (INR bn/USD mn) : 439.8/9,946.6
We believe HDFC to be the best play available on Indian mortgage finance. However due to
recent sharp appreciation we expect limited returns and have an ‘ACCUMULATE’ recom-
mendation on the stock.
Key risks Promoters : 0.0
Loss of market share to commercial banks and HFC’s MFs, FIs & Banks : 6.1
FIIs : 79.8
Higher than expected increase in funding cost Others : 14.1
Risk of fraud and NPA accretion due to increase in interest rates and fall in property prices is
inherent to the mortgage business
Company Description
Housing Development Finance Corporation Ltd. (HDFC) is India’s largest provider of housing finance,
primarily focusing on retail housing. Cumulative loan approvals and disbursements as at March 2006
were INR 1,124 bn and INR 931 bn, respectively. This is with respect to over 2.8 mn housing units.
HDFC has widened its distribution network to 219 offices in India. It also covers over 90 locations
through its outreach programme, which has helped the corporation disburse housing loans in more
than 2,400 towns and cities in India. It has also supplemented the distribution channel through the
appointment of direct selling agents (DSA).
Currently, 79% of the shares are held by foreign institutional investors/foreign direct investments and
12% by individuals.
Besides the core business of mortgages, HDFC has evolved into a financial conglomerate diversifying
into other businesses through its subsidiaries viz., HDFC Standard Life Insurance (78.38%), HDFC
Asset Management Company (50.1%), HDFC Bank (21.94%), Intelenet Global (BPO) (50%), and
HDFC Chubb General Insurance Company (74%).
Branches 219
Mcap (INR bn) 439
Our recommendation ACCUMULATE
Ownership Private

PAT (INR mn) 12,572 14,561 17,860 20,889
Advances (INR bn) 450 578 721 885
(%)
Fee to assets 0.1 0.1 0.1 0.1
NIM 2.7 2.6 2.7 2.7
Net NPA - - - -
CAR 15.0 13.3 13.2 13.1
CASA NA NA NA NA
RoE (%) 30.1 28.0 24.1 19.9

RoA (%) 2.8 2.5 2.5 2.4
EPS (INR) 50.4 58.3 69.2 78.4
Book value (INR) 179.0 238.1 344.2 455.2
PE (x) 34.9 30.1 25.4 22.4
PB (x) 9.8 7.4 5.1 3.9
24
IDBI INR 87
NOT RATED
Highlights
The bank emphasized that turnaround is in the offing due to recovery from written off ac-
counts, unlocking of value from its investment book and disinvestment of non-productive Vishal Goyal, CFA
assets. Unrealized gains on its equity book are ~INR 15 bn. The bank expects to reverse +91-22-2286 4370
around INR 15 bn of SSF. It is aiming to grow its balance sheet size at 20% and low cost
Kunal Shah
deposits (which remains a focus) at a similar rate. On a two-three year’s horizon, consolidation +91-22-4009 4532
remains a good probability. The bank also expects huge recoveries from United Western kunal.shah@edelcap.com
Bank’s (UWB) written off accounts. Ajitesh Nair

+91-22-4009 4535
Cleaning up relatively greater portion of its balance sheet, the bank is now thriving on quality
balance sheet growth to drive profitability and return ratios. The bank has identified following
key growth strategies going forward: stepping up credit to SME, agriculture, and retail segments;
garnering higher low cost deposits; augmenting fee-based income; and aggressively improving
asset quality through effective recoveries and restricting delinquencies.
UWB acquisition is expected to be positive for IDBI as it more than doubles its branch network
and gives it much needed access to low cost deposits thus lowering its funding cost and
increasing its margins.
Reuters : IDBI.BO
The bank has fairly large investment book where it has un-booked gains on the equity Bloomberg : IDBI IN
portfolio. Of these, stake in NSE, NSDL and Stock Holding Corporation are large and the bank
is sitting on substantial un-booked gains. However uncertainty remains over the value unlocking. Market Data
52-week range (INR) : 110 / 49

Going forward, with adequate capital in place, strong growth in fee income, increased reach
tight credit monitoring measures, the return ratios are expected to improve from these levels.
M cap (INR bn/USD mn) : 62.8 / 1,419.7
The bank is currently trading at 1.7x FY06 book.
Avg. Daily Vol. BSE/NSE (‘000) : 4,485.3
Key Risks
Increased delinquencies and non-recovery from written off accounts may impact its Share Holding Pattern (%)
profitability. Promoters : 52.7

Legacy borrowings may continue to weigh down on its margins and the profitability. FIIs : 12.9
Company Description Others : 17.3
IDBI was established in 1964 as a wholly owned subsidiary of RBI to catalyze the development
of the nation. In 1976 the 100% of ownership was transferred from RBI to Government of India.
Due to high NPA and cost of funds the government restructured the institution into a bank. In
2005 IDBI merged its banking subsidiary IDBI bank with itself.
Since its transformation into commercial bank, it is diversifying beyond project finance and currently
has 176 branches and 382 ATM’s spread across 101 cities. It has an asset size of INR 885 bn which
makes it the fifth largest bank in the country. Government of India holds 52.5 % of the equity.
The bank has recently acquired United western bank which expands its branch network to 430 from
176.
Subsidiary % Holding
IDBI Capital 100.0

IDBI Housing finance 100.0
Western India 82.0
Arcil 20.0
CARE 26.0
CCIL 6.5
IDFC 3.2
IFCI 6.0
NSDL 13.0
NSE 7.0
SHCL 17.0
SIDBI 19.2
STCI 7.2
Branches 430
Mcap (INR bn) 63
Our recommendation NOT RATED
FY03 FY04 FY05 FY06
Net interest income (INR mn) 3,354 (2,373) 1,879 3,799

PAT (INR mn) 4,014 4,650 2,990 5,204
Advances (INR bn) 462 329 454 527
(%)
Fee to assets 0.3 0.4 0.4 0.7
NIM 0.6 (0.4) 0.3 0.5
Net NPA 15.9 2.7 1.9 1.1
CAR 18.7 18.2 15.5 14.8
CASA 0.0 0.0 38.3 29.5
RoE (%) 5.9 7.3 5.1 8.5

RoA (%) 0.7 0.8 0.4 0.7
EPS (INR) 6.1 7.1 8.3 7.2
Book value (INR) 106.9 89.4 82.1 88.0
PE (x) 23.9 20.7 17.8 20.5
PB (x) 1.4 1.6 1.8 1.7
P/PPOP (x) 88.6 (16.8) 2,431.0 116.9
PPOP per share (INR) 1.7 (8.8) 0.1 1.3
26
INDIAN OVERSEAS BANK INR 113
BUY
Highlights
IOB has outperformed the system in credit growth. However, going forward, it will consciously
slow down its loan growth in line with the system average. Vishal Goyal, CFA
+91-22-2286 4370
The bank is expected to leverage on its 100% investment in Bharat Overseas Bank and 35% vishal.goyal@edelcap.com
stake in each of the profitable three regional rural banks (RRBs) viz., Pandyan Grama Bank, Kunal Shah
+91-22-4009 4532
Puri Gramya Bank, and Dhenkanal Gramya Bank. Pandyan Grama Bank has been adjudged kunal.shah@edelcap.com
the best performing RRB among 196 RRBs in India.
Ajitesh Nair
+91-22-4009 4535
Despite robust credit growth, Tier-1 capital is still strong at almost 9% and there is enough ajitesh.nair@edelcap.com
headroom to raise further Upper Tier-2 capital as and when required.
IOB expects to maintain a low cost-income ration in the future as well. Earnings growth going
forward will be driven by strong loan growth, strong fee income, and reduced provisioning
levels.
The bank expects return on assets to reach 1.5% (from 1.38% in FY06) in FY07.
IOB has one of the highest interest margins on account of high yielding loan book (retail, SME,
agri) and high CASA ratio of 36%. Considering the higher funding and aggressive asset growth Reuters : IOBK.BO
in Q3FY07 we expect NIMs to contract 15-25bps over FY07-09E. Bloomberg : IOB IN
Loan book at IOB continued to grow at above system growth at 39% in Q3FY07. Market Data

The bank has generated average 30% RoE during the past four years (FY03-06), enabled by
its high interest margins and efficient capital management. Going forward, we expect RoE to
M cap (INR bn/USD mn) : 61.6 / 1,392.2
remain robust at 23% plus over FY07-09E.
Acquisition of Bharat Overseas Bank (BhOB) will strengthen IOB’s trade finance and NRI
remittance business. IOB has proposed to merge this bank with itself, which will add 102 Share Holding Pattern (%)
branches to its network. Promoters : 61.2

We like the bank for its high return on assets (of 1.3% plus) and high RoE (25%).
FIIs : 18.2
Valuations: Attractive for ~23% RoE Others : 15.5
The stock currently trades at 1.4x FY08E book, 3.1x FY08E PPOP, and 6.2x FY08E earnings.
We like the bank for its high RoE on high capitalization (given its high RoA). We expect the
bank to generate 23-26% RoE and 13.4% EPS CAGR over FY07-09E. IOB is our top pick and
we have a ‘BUY’ recommendation.
Key Risks
Aggressive credit growth may lead to higher than estimated NPA.
More than expected compression in net interest margin.
Company Description
IOB is a mid-sized PSU bank with balance sheet size of INR 600 bn. It has 1,522 domestic branches
and over 300 ATMs and currently, 389 branches are under core banking.
It is dominantly present in four southern states of Tamil Nadu, Kerala, Andhra Pradesh, and Karnataka.
The bank has six overseas branches and aims to grow its share in trade finance and remittance market
through Bharat Overseas Bank (its wholly owned subsidiary).
The bank’s focus traditionally has been on SME lending, which forms 14% of total credit, which
explains its high margins.
Government holding is at 61% and foreign holding at maximum permissible 20%.
Branches 1526
Mcap (INR bn) 62

PAT (INR mn) 7,831 8,995 9,924 11,569
Advances (INR bn) 348 455 546 645
Deposits (INR bn) 505 610 720 850
(%)
Fee to assets 0.8 0.9 0.9 0.8
NIM 3.9 3.7 3.6 3.5
Net NPA 0.6 0.7 0.6 0.9
CAR 13.0 10.4 11.0 11.2
CASA 39.9 36.4 36.4 36.4
RoE (%) 28.5 26.3 23.9 23.2

RoA (%) 1.5 1.4 1.3 1.3
EPS (INR) 14.4 16.5 18.2 21.2
Book value (INR) 56.1 69.3 83.1 99.9
PE (x) 7.9 6.8 6.2 5.3
PB (x) 2.0 1.6 1.4 1.1
P/PPOP (x) 4.9 3.8 3.1 2.7
28
LIC HOUSING FINANCE INR 160
BUY
Due to internal restructuring and intense pricing war disbursals for the company grew at a
paltry 9% (below industry average of 36%) over FY04-06. Post internal restructuring, we Vishal Goyal, CFA
expect LICHFL to grow at a higher than historical growth rates, though slower than industry +91-22-2286 4370
growth. We expect LICHFL to grow its disbursals at 14% CAGR during FY06-09E considering
Kunal Shah
the strong tailwinds in mortgage finance in India. Resultantly, loan outstanding would grow to +91-22-4009 4532
INR 230 bn at 16% CAGR during the same period. kunal.shah@edelcap.com
Ajitesh Nair
The loan spreads have been under pressure for quite some time due to increasing cost of +91-22-4009 4535
funds and the limited pricing power due to stiff competition. In our view, pressure on spreads
should ease in FY08, as we see industry mortgage rates rising and the company acquiring
greater pricing power amid strong demand. 85% of loans are on floating rate basis and hence,
any further increase in cost of funds can be passed on. We expect the spreads to remain at
1.6% in H2FY07 before improving to ~1.7% in FY08.
Historically, asset quality for LICHFL has not been highly impressive. However, with adoption
of better and strict risk management process and concerted efforts on NPA recoveries, we
expect the company to improve its net NPA from 1.8% in March 2006 to around 1.2% by
March 2008.
Reuters : LICH.BO
In order to sustain the loan growth, we believe the company will need to replenish its tier I Bloomberg : LICHF IN
capital in FY08. The company has capital adequacy of 14.3% (tier I capital at 10.3%) as on
September 2006. We expect the company to raise equity in FY08 through 17.5% dilution. Market Data
52-week range (INR) : 234 / 136

Valuations: Inexpensive at 0.8x book
The stock currently trades at 0.8x FY08E book and 5.7 FY08E earnings. The low business M cap (INR bn/USD mn) : 13.6 / 307.5
growth, narrowing margins, competitive environment, and asset quality issues are fully factored Avg. Daily Vol. BSE/NSE (‘000) : 358.0
in its current price, which reflects in significant discount to its peers. Moreover, the stock
should be supported by its 3.7% dividend yield and its inexpensive valuations at 0.8x FY08E Share Holding Pattern (%)
book. Considering the strong tailwinds in mortgage finance, the company’s RoE potential of Promoters : 39.1
~15%, and its current valuations, we recommend ‘BUY’ with 25% return in the next 12 MFs, FIs & Banks : 8.1
months. FIIs : 29.6
Key risks Others : 23.2
Limited pricing power and higher than expected funding cost may pressurize loan spreads
NPA provisions could be higher than estimates if our belief of new risk management would not
lead to better than historical asset quality
Company Description
LICHFL is the second-largest housing finance company and fourth-largest player in home loan market.
It provides loans for homes, construction activities, and corporate housing schemes.
Almost 95% of new loans are to retail customers and balance 5% to large ticket commercial sector. It
is fourth in terms of market share (including banks) with 6% market share in home loan disbursements.
The company has loan outstanding of INR 149 bn as on March 31, 2006. It has 115 offices and 100
camps across the country. The company has a marketing network of 5,500 direct sales agents, home
loan agents, and associates.
LIC India is the majority shareholder with 39% of the shareholding and FII holding is presently at 34%.
Branches 120
Mcap (INR bn) 14
Ownership Private

PAT (INR mn) 2,086 2,566 2,801 3,021
Advances (INR bn) 147 168 190 215
(%)
Fee to assets 0.6 0.7 0.7 0.8
NIM 2.5 2.3 2.4 2.3
Net NPA 1.8 1.7 1.4 1.3
CAR 14.1 13.3 15.3 15.1
CASA NA NA NA NA
RoE (%) 16.4 17.8 15.8 14.2

RoA (%) 1.5 1.6 1.5 1.5
EPS (INR) 24.5 30.2 28.0 30.2
Book value (INR) 158.3 180.1 200.9 224.2
PE (x) 6.5 5.3 5.7 5.3
PB (x) 1.0 0.9 0.8 0.7
30
M&M FINANCE INR 240
NOT RATED
Highlights
The company is taking several initiatives and is still investing for further growth, expanding
distribution network and asset base. Presently, ~70% of its loan book comprises of Mahindra Vishal Goyal, CFA
products. +91-22-2286 4370
The company has added 52,000 plus new customer contracts (net) during Q3FY07 (as Kunal Shah
+91-22-4009 4532
against 37,000 plus in Q3FY06 and 41,000 plus in Q2FY07) taking cumulative number of kunal.shah@edelcap.com
customer contracts to 595,000 plus by December 2006. Consequently, its loan book grew
Ajitesh Nair
35% Y-o-Y and 9% Q-o-Q to INR 57 bn. +91-22-4009 4535
Income from operations (net of interest expenses) grew 55% Y-o-Y during Q3FY07. Preprovision
profit grew 86% Y-o-Y (6% Q-o-Q) to INR 802 mn due to better operating efficiency as benefits
of investments in branch expansion have started yielding results. However, PAT growth was
weighed down to 59% Y-o-Y due to higher provisioning. PAT was lower 15% Q-o-Q.
NIMs expanded by ~100bps to 9% as hike in lending rates fully offset 80bps rise in cost of
funds. However, NIMs were almost flat Q-o-Q. Provisions more than doubled during the
quarter to INR 415 mn due to higher NPA accretion. Additions to gross NPA (in absolute terms)
were of INR 700 mn and gross NPA ratio rose to 6.9% in Q3FY07 from 6.2% in Q2FY07.
Reuters : MMFS.BO
MMFSL is in a position to take advantage of growth in the CV financing segment with its rural Bloomberg : MMFS IN
domain knowledge, extensive branch network, close association with M&M and auto dealers,
strong parent brand, and large customer base. Market Data
52-week range (INR) : 299 / 159

The organized auto and auto finance market is expected to grow at a CAGR of 15% and 20%,
M cap (INR bn/USD mn) : 20.6 / 466.8
respectively, over FY06-10E, buoyed by 34% growth in used vehicle finance segment and 15-
18% growth in new car and utility vehicle segment (Source: CRIS INFAC).
Currently, ~30% of its loan book comprises of non-Mahindra products. To insulate itself from Share Holding Pattern (%)
too much dependence on the parent’s products, it has recently entered into a tie up with Promoters : 70.9
Maruti Udyog. It has even commenced financing commercial vehicles and two wheelers (on MFs, FIs & Banks : 0.6
pilot basis). FIIs : 23.1
Others : 5.5
To leverage on its large client base and wide distribution network, MMFS entered into the
insurance broking business in 2005 and has recently commenced distribution of mutual funds
as well. It even plans to enter housing and personal loan business.
Valuations
The company is currently trading at 2.6x book (mrq) and 16.4x earnings (ttm).
Key Risks
Rising competition may restrict its growth and margins may contract.
The company needs to maintain credit rating to avail funds at competitive rates.
The company is highly dependant on parent’s portfolio and to insulate this risk it needs to add more
non-M&M products.
Company Description
M&M Financial Services (MMFS) finances purchase of utility vehicles, tractors and cars, particularly in the
rural and semi-urban areas. 78% of its branches are situated in rural areas and 21% in semi-urban areas.
The company is taking several initiatives and is still investing for further growth. In the first nine months
of FY07, the company has added 95 branches taking its total branch network to 400 and added 279
employees, raising its employee strength to 2,575.
On the back robust demand in UV, tractors, and cars segments, MMFS has delivered strong growth in
customer contracts, asset size, and profitability. Asset book grew by 41% CAGR in the past years,
aiding 44% CAGR in revenues and 19% CAGR in profitability.
The company is leveraging well on its close association with M&M and 1,000 plus auto dealer relationships,
retaining leadership in financing Mahindra products.
Promoters (M&M) hold 68% and FIIs, at present, hold 23%.
Branches 400
Mcap (INR bn) 20
Our recommendation Not rated
Ownership Private
FY04 FY05 FY06
Operating income (INR mn) 2,051 2,731 3,600

PAT (INR mn) 676 823 1,083
Loan book (INR bn) 17 26 42
Total assets (INR bn) 15 20 31
(%)
Fee to assets 0.2 0.2 0.2
Opex to assets 3.7 3.4 3.1
NIM 11.8 10.6 9.0
Net NPA 3.7 3.2 2.4
CAR 16.2 17.8 18.2
CASA NA NA NA
RoE (%) 28.5 26.9 24.7

RoA (%) 3.7 3.3 2.6
EPS (INR) 11.2 13.2 14.4
Book value (INR) 41.5 50.7 81.9
PE (x) 21.6 18.2 16.7
PB (x) 5.8 4.7 2.9
32
O RIENTAL BANK OF COMMERCE INR 235
ACCUMULATE
Highlights
The bank sounded positive on recoveries being a key driver for profit growth and cleaning up
the balance sheet, retrieving capital and liquidity. The bank has recovered INR 7 bn during Vishal Goyal, CFA
9mFY07, substantial amount coming in from Global Trust Bank’s (GTB) accounts. NPAs in +91-22-2286 4370
GTB’s accounts that stood at INR 13.4 bn at the time of merger have been significantly
Kunal Shah
brought down to INR 8.6 bn. +91-22-4009 4532
kunal.shah@edelcap.com
During FY07, the bank has opened 27 new branches and expects to roll out another 20 to 25
Ajitesh Nair
branches in February and March 2007. This addition to the branch network will help it in +91-22-4009 4535
mobilizing more low cost deposits.
The bank has resorted to fund raising thrice in FY07. CAR, currently, stands at comfortable
levels of 13%. It has got a lot of headroom to further mobilize Tier-2 bonds. The bank can take
on another INR 20–30 bn of advances comfortably in Q4FY07 without sourcing the additional
deposits from its existing capital base.
The bank has insulated its bond portfolio from interest rate risk up to 8.1% 10-year Gsec yield.
Thereafter, the bank will be required to provide for investment depreciation in respect to its AFS
investments. Presently, 36% of its investments are in the AFS category and the duration of this
portfolio is 3.7 years. Reuters : ORBC.BO
Bloomberg : OBC IN
CASA ratio at OBC stands at relatively lower levels (when compared to its peers) of 30%. The
bank expects to improve it further by 1 or 2 percentage points with the launch of CASA Market Data
campaign throughout the country. 52-week range (INR) : 280 / 139

M cap (INR bn/USD mn) : 58.9 / 1,330.3
OBC’s loan growth (led by SME loans) at 24% YTD growth is in line with system growth. Retail
loans grew, albeit at a slower pace of 9% Y-o-Y, and constituted 17.4% of the loan book.
Deposit growth at 23% Y-o-Y was higher than system growth. Currently, CASA deposits stand
at 30.2%. We expect loan book growth to moderate to 27% in FY07E.
Promoters : 51.1
Net interest margins have remained largely flat 2.5-2.6% and we expect the margin to remain MFs, FIs & Banks : 22.0
at similar levels in FY08E. FIIs : 19.0
Others : 7.9
Historically, high operating efficiency had enabled strong RoAs for OBC. It is amongst the most
efficient Indian banks, with expense to assets ratio at 1.64%
Asset quality has shown remarkable improvement as recoveries remain strong during FY06.
Considering the strength in economy and OBC’s strength in NPA management skills, recoveries
may surprise us on the upside.
Valuations: To follow weak core operations; appear fair
The stock currently trades at 1.0x FY08E book and 4.77x FY08E earnings. We believe weak
earnings outlook would limit the upside potentials and advise buying on price declines. We
have a ‘ACCUMULATE’ recommendation..
Key Risks
Exposed bond book makes it vulnerable to rising yields.
Company Description
Oriental Bank of Commerce is a mid sized PSU bank, with the eleventh-largest branch network and
tenth-largest asset book among Indian banks. Historically, the bank had a strong presence in North
and West India and merger of Global Trust Bank (then roughly 15% of the size of OBC) provided it a
foothold in the South.
The bank has over 1,200 branches across India, 1,017 of which are under core banking solution.
It has one of the best efficiency ratios in the industry (cost to income ratio of 40%).
Government ownership in the bank is at minimum 51%, leaving no room for further equity dilution. FII
holding in the bank is at maximum allowed 20%.
Branches 1233
Mcap (INR bn) 59

PAT (INR mn) 8,040 9,293 7,944 9,567
Advances (INR bn) 336 428 514 606
Deposits (INR bn) 502 632 731 863
(%)
Fee to assets 0.6 0.7 0.6 0.5
NIM 3.0 2.7 2.6 2.6
Net NPA 0.5 0.7 0.9 1.3
CAR 12.5 10.6 10.6 10.2
CASA 32.6 30.4 31.4 31.6
RoE (%) 23.7 19.3 14.5 15.6

RoA (%) 1.5 1.5 1.1 1.1
EPS (INR) 32.1 37.1 31.7 38.2
Book value (INR) 177.1 206.4 230.4 259.8
PE (x) 7.3 6.3 7.4 6.2
PB (x) 1.3 1.1 1.0 0.9
P/PPOP (x) 6.0 5.2 4.8 3.8
34
PUNJAB NATIONAL BANK INR 492
BUY
Highlights
The bank has guided for 16% deposit growth rate. During 9MFY07, deposit growth rate was
merely 12%, but relatively higher growth expected in Q4FY07 will aid in achieving the target Vishal Goyal, CFA
growth rate of 16%. +91-22-2286 4370
Bulk deposits of the bank, presently account for 6-7% of total deposits. Of 4,500 branches, Kunal Shah
two-third in the Northern belt and two-third in semi-urban and rural areas will maintain CASA +91-22-4009 4532
at 50% going forward.
Ajitesh Nair
The bank expects advances to grow at 23% in FY07E and 20% in FY08E. It has guided future +91-22-4009 4535
growth rate of 20-22%. The bank is targeting business of INR 2,400 bn for FY07E. Approximately
70% of its loans are granted on a floating rate basis.
The bank’s net interest margins will be protected at 4% plus level, with assets being repriced
upwards. There is potential for improvement in CD ratio as SLR ratio is still at 26.5%. The NIM
looks sustainable.
With roll out of CBS, there has been reduction in space requirement for branches. Hence, 0.2
mn sq ft of area has been surrendered by the bank, thereby reducing its rental expense.
Of the total investment book, 69% currently is in the HTM category. The average duration of
Reuters : PNBK.BO
its investment book is 3.5 years. The bank has insulated its investment portfolio till 10- year
Bloomberg : PNB IN
yield of 7.61%. Thereafter it will have to provide for investment depreciation.
Investment Rationale Market Data
PNB has been performing well on key operating parameters. Its 1.2% plus return on assets, 52-week range (INR) : 585 / 300
enabled by high margins, improving cost ratios, and declining provisions can potentially generate Share in issue (mn) : 315.3
higher than presently reported RoE (19%). M cap (INR bn/USD mn) :155.1 / 3,516.8

PNB has grown its loan book robustly fueled by strong growth in retail credit. We believe PNB
has enough liquidity in its balance sheet to grow credit at 18% plus for the next two years.
PNB’s net interest margins at 4.16% are one of the highest amongst Indian banks, supported Promoters : 57.8
by its strong low cost deposit franchise (47% second highest after HDFC Bank). We expect MFs, FIs & Banks : 14.0
NIMs (post investment premium amortisation) to stay high at 3.6-3.8% (reported NIMs ~4.20%) FIIs : 20.1
during FY07-09E. Others : 8.1
Going forward, we do not expect any significant rise in NPA vis-à-vis asset growth and forecast
net NPA ratio to remain at current levels during FY07-09E.
Valuations: Attractive at 1.3x book
The stock is available at 1.3x FY08E book, 3.4x FY08E PPOP and 6.7x FY08E earnings. We
like the bank for its strong core operating performance—high margin business, and high
sustainable RoA. We believe that the bank is best positioned to grow balance sheet even in a
tight liquidity environment given its excess SLR and high CASA ratio. We expect 18-20% RoE
and 26% EPS CAGR over FY07-08E. PNB is our top pick among Indian banks and we have
a ‘BUY’ recommendation.
Key Risks
Though the bank has shifted a part of its portfolio to the HTM category in H1FY07, its bond book is still
exposed with 40% of investments in AFS category. Any spike in long term interest rates is a risk to our
estimates.
More than expected decline in CASA ratio may impact the margins and consequently profitability.
Company Description
Punjab national bank (PNB) is North India-based bank with 4,093 branches and 432 extension counters,
most of which are in the states of Punjab, Haryana, Uttar Pradesh, Madhya Pradesh, and Bihar. More
than 50% of its branches are in rural and semi-urban areas.
The bank’s balance sheet stands at around INR1,600 bn and it has the highest CASA ratio among
nationalized banks.
The government’s shareholding, at 57%, leaves little scope for significant dilution/capital rising hereon.
Foreign holding too is full at the maximum permissible 20%.
PNB in a joint venture with Principal of USA has floated an asset management company and Insurance
company with 30% and 37% stake respectively.
Branches 4093
Mcap (INR bn) 155
Balance sheet size (INR bn) 1,634

PAT (INR mn) 14,785 17,834 23,094 27,127
Advances (INR bn) 746 937 1,115 1,304
Deposits (INR bn) 1,197 1,348 1,537 1,760
(%)
Fee to assets 0.8 0.9 0.8 0.8
NIM 3.6 3.8 4.0 3.9
Net NPA 0.3 0.2 0.2 0.3
CAR 12.0 8.9 9.3 9.4
CASA 49.0 47.0 47.1 47.3
RoE (%) 17.5 18.3 20.4 20.4

RoA (%) 1.1 1.2 1.4 1.4
EPS (INR) 46.9 56.6 73.2 86.0
Book value (INR) 287.8 331.1 387.8 454.0
PE (x) 10.5 8.7 6.7 5.7
PB (x) 1.7 1.5 1.3 1.1
P/PPOP (x) 5.7 4.1 3.4 2.9
36
STATE BANK OF INDIA INR 1,184
ACCUMULATE
Highlights
Being an unrivalled industry leader, State Bank of India remains a macro economic proxy for
Indian economy with customer base of ~146 mn, distribution network of 14,156 branches, Vishal Goyal, CFA
and leveraging on strong relationships with over 80% of large corporates and 50% of mid +91-22-2286 4370
corporates in India.
Kunal Shah
The bank has recently raised INR 10 bn through upper Tier-2 bonds with a maturity of 15 years +91-22-4009 4532
and carrying a coupon of 9.4%.
Ajitesh Nair
The management expects retail banking, business process reengineering, and technology +91-22-4009 4535
upgradation to fuel growth in future.
The bank expects to sustain margins at the current levels by improving loan yields and
controlling deposit cost driven by its strategy of scaling up low cost deposit and de-focusing on
bulk deposits.
SBI’s international banking business is developing scale with 28% share in foreign trade, 24%
share in NRI deposits, and 23% share in inward remittances. The increased thrust on fee
income is reflected in revision of service charges and new NRI initiatives targeting deeper
penetration in inward remittances (through speed remittances, online automated clearing
house, increasing tie-ups, and instant transfers). Reuters : SBI.BO
Bloomberg : SBIN IN
The bank is addressing the problem of large and ageing workforce by restricting fresh
recruitments to about 15% of natural attrition and has launched an early exit scheme for all
Market Data
cadres of employees (wherein 4,000 officers are about to leave).
52-week range (INR) : 1,379 / 684
Investment Rationale Share in issue (mn) : 526.3
We expect the bank to attain 19% CAGR in loan book over the next two years. Medium sized M cap (INR bn/USD mn) : 623.1/14,091.8
corporate, retail and international business will be the key growth drivers for the bank. Avg. Daily Vol. BSE/NSE (‘000) : 2,250.9
The step up in technology infrastructure coupled with reduced workforce (higher retirees) in
the next few years will aid in containing opex vis-à-vis asset growth.
Promoters : 59.7
Retail fee income can potentially be a growth area if serious cross selling is done at SBI’s MFs, FIs & Banks : 12.9
extensive network. FIIs : 11.9
Of SBI’s seven associate banks, State Bank of Travancore, State Bank of Mysore, and State Others : 15.5
Bank of Bikaner and Jaipur are already listed. Management has expressed its intention to
unlock values of its investment in associate banks through a public issue.
Valuations: Little upside from 1.4x book
We expect the bank to post 14% EPS CAGR and average RoE of 17% over FY06-09E. On a
consolidated book, the stock trades at 1.4x FY08E book and 8.6x FY08E earnings. The stock
trades at 1.7x FY08E standalone book and 10.8x FY08E standalone earnings. While we are
positive on the structural story of SBI, we believe current valuations factor in the near term
upsides. We advise ‘BUY’ only on price declines and our recommendation is ‘ACCUMULATE’.
Key Risks
Risk of losing market share to new private sector banks.
Investment risk on MTM as 36% of investments in AFS category.
Increased government intervention in the operation of PSU banks.
Enforcement of AS-15 relating to provision of retirement benefits that is likely to erode the reserves of
SBI by a year’s profit.
Company Description
The State Bank of India is India’s largest commercial bank with an asset size of INR 4,600 bn. It has over
9,000 branches on standalone basis, 14,000 branches including associates, the largest ATM network
of 5,826 ATMs, and largest card base of 23.49 mn cards. It has a market share of around 23-24% in
advances and deposits.
Over the past two years, the bank has increased focus on retail credit, both to provide itself the necessary
growth momentum and also to improve spreads. Retail credit now forms 23% of its total loan book.
For better management of operations, SBI has integrated its treasury operations and has a common
technology platform across all its seven subsidiary banks. It has 4,573 branches under CBS.
Branches 9186
Mcap (INR bn) 623
Balance sheet size (INR bn) 5,272

PAT (INR mn) 44,076 45,895 57,710 66,323
Advances (INR bn) 2,616 3,271 3,859 4,477
Deposits (INR bn) 3,800 4,162 4,818 5,561
(%)
Fee to assets 1.5 1.4 1.3 1.2
NIM 3.4 3.2 3.3 3.3
Net NPA 1.9 1.4 1.2 1.3
CAR 11.9 13.6 12.2 12.7
CASA 47.6 43.1 43.1 43.2
RoE (%) 17.0 15.6 17.1 17.1

RoA (%) 1.0 0.9 1.1 1.0
EPS (INR) 83.7 87.2 109.7 126.0
Book value (INR) 525.3 595.9 684.6 786.4
PE (x) 14.1 13.6 10.8 9.4
PB (x) 2.3 2.0 1.7 1.5
P/PPOP (x) 4.3 4.1 3.5 3.1
38
SHRIRAM TRANSPORT FINANCE INR 134
NOT RATED
Shriram Transport has huge opportunity to grow its asset base considering target market
potential of INR 225 bn each in new CVs and in pre owned trucks. To tap this opportunity Vishal Goyal, CFA
Shriram will leverage on its strong customer base (of 0.5 mn plus), wide distribution network +91-22-2286 4370
and strong competencies developed over the years in the areas of loan origination, valuation
Kunal Shah
of pre-owned trucks, effective customer evaluation and collection. +91-22-4009 4532
It expects to grow its AUMs to INR 150 bn by 2010E, targeting a CAGR of 15% plus over FY07-
Ajitesh Nair
10E. This will be aided by creating a network of 200 private financiers on franchisee basis and +91-22-4009 4535
increasing its national coverage to 100% by FY07 (from 91% currently). The company is
building a vertically integrated business model by scaling up new truck financing business and
providing value-added services such as loan for reconditioned truck, accidental repair loans,
tyre finance, working capital loans, engine replacement finance, and truck exchange
programmes.
The company has business specific competitive edge in terms of valuation expertise and
efficient collection. It develops the resale price grid, regionwise, for all the popular models in the
past 5-12 years. To ensure efficient collection, it maintains direct contact with customers by
avoiding intermediaries and links significant proportion (~60%) of the salary of field officers to
Reuters : SRTR.BO
origination and collection effectiveness. To reduce the chances of defaults, it lends at relatively
Bloomberg : SHTF IN
lower loan to value ratio of 60%.
Strong private equity investors like New Bridge, Chrys Capital, FMO, Citicorp, Quantum, and Market Data
UTI Bank are providing it growth support. 52-week range (INR) : 152 / 75

Valuations
M cap (INR bn/USD mn) : 20.9 / 473.7
The stock is currently trading 2.7x FY06 book and 14.3x FY06 EPS. Avg. Daily Vol. BSE/NSE (‘000) : 253.3
Key Risks
In the event of an economic slowdown, there is greater risk of NPA accretion as it serves highly
Promoters : 37.4
vulnerable segment of pre-owned truck owners.
Yields may come under pressure with increased competition in this segment. FIIs : 16.4
Others : 44.0
Rising interest rate scenario may have an adverse impact on its funding cost.
Company Description
Shriram Transport Finance is the largest asset financing NBFC with AUMs of INR 100 bn plus. The
company is a leader in organized high yield financing of pre-owned CVs with strategic presence in 5-
12 years old trucks and a market share of 20-25%. In new CV financing, it enjoys a market share of 7-
8%.
It has a low cost pan-India presence covering 91.3% of truck owners with a network of four regional
offices, 50 divisional offices, and 327 branches and employs more than 1,500 field officers.
The company has grown its assets by 32% CAGR over FY02-06 and earnings have grown at a 62%
CAGR during the same period. In 9MFY07Disbursements have grown by 86% Y-o-Y and preowned
CV constituted 66% of the total disbursements in FY06.
Branches 296
Mcap (INR bn) 20
Our recommendation Not rated
Ownership Private
FY04 FY05 FY06
Operating income (INR mn) 2,609 3,467 9,087

PAT (INR mn) 368 493 1,416
Retail book (INR bn) 777 1,006 2,169
AUM (INR bn) 47 58 75
(%)
Fee to assets 2.2 2.3 2.0
Opex to assets 4.5 3.8 3.6
NIM 12.7 11.4 10.1
Net NPA 0.8 0.7 0.4
CAR 14.1 17.6 19.6
CASA NA NA NA
RoE (%) 39.0 31.8 22.4

RoA (%) 3.5 3.2 2.8
EPS (INR) 8.2 9.1 9.4
Book value (INR) 21.9 30.1 49.6
PE (x) 16.3 14.7 14.3
PB (x) 6.1 4.5 2.7
P/PPOP (x)
40
UNION BANK INR 106
BUY
Highlights
The bank expects deposits to grow at 20% in FY07, substantial growth (50% of the target or
INR 70 bn) has flowed in from the Union Double Plus Scheme. Management expects 22% Vishal Goyal, CFA
growth in deposits in FY08E. +91-22-2286 4370
Union Bank has reduced the proportion of bulk deposits from 25% in March 2006 to 18% in Kunal Shah
December 2006 and expects to maintain it at the similar levels in Q4FY07. The management +91-22-4009 4532
expects the bulk deposit proportion to marginally increase to 19% in FY08E.
Ajitesh Nair
CASA remains the key focus area for the bank and it aims to maintain it at 35% in FY07E and +91-22-4009 4535
aggressively improve it to 40% in FY08E. The bank expects to maintain cost of deposit in the
range of 5.5-5.6% in FY08E.
Advances are expected to grow at 20-22% for FY07E and at 25% for FY08E. More than half
of the advances portfolio consists of the retail, SME, and agriculture, having an average yield
of 11% and the management expects 25% growth in FY08E from these areas. The bank has
been increasing its focus on advances to small traders which has a higher yield of 14%. It is
increasing its thrust on SME by dedicating 150 specialised SME branches from this quarter.
The bank expects to increase yield on advances to 9.5% in FY08E.
~40% of the loans are granted on a fixed rate basis and this may put some pressure on the
Reuters : UNBK.BO
yields in a rising interest rate scenario.
Bloomberg : UNBK IN
Net interest margins for 9MFY07 stood at 2.89%.The banks expects to increase it to 3% in Q4FY07
and report NIMs of 2.95% for FY07. It plans to further increase the NIMs to 3.05% in FY08E. Market Data
The bank expects fee income from distribution of the third party products to grow from INR 210 52-week range (INR) : 142 / 81
mn in FY06 to INR 520-530 mn in FY07E. The insurance venture is expected to start in six Share in issue (mn) : 505.1
months and the bank is also in discussions with some players to start an Asset Reconstruction M cap (INR bn/USD mn) : 53.5 / 1,210.8
Company. The bank has also launched various derivatives products in this year and this Avg. Daily Vol. BSE/NSE (‘000) : 1,013.5
segment could see high growth in the coming years.

The management expects recoveries of INR 850-900 mn by end of this year. The bank has a
Promoters : 55.4
total written off account book of INR 12 bn. With property prices on an upswing, the bank has
witnessed good growth in recoveries as lenders are paying off debt to capitalise on this opportunity.
FIIs : 19.7
Investment Rationale Others : 15.8
We like Union Bank due to its high operating efficiency. It has one of the lowest operating
expenses-to-asset-ratio (50-60bps lower than PSU banking aggregate), which can be credited
to its high CBS coverage.
The bank is also protected, to a great extent, by the rising interest rates with its low duration
and 95% of SLR investments in the HTM category.
With higher upgrades/recoveries, limited slippages, and insulated bond portfolio, we expect
provision to subside going forward.
We remain upbeat on fee income growth and expect it grow by 13% over FY07-09E with third
party distribution being a major trigger.
Valuations
We like the management’s renewed focus on profitable business and asset quality, which reflects in its
improved NIMs and low NPA levels. We expect Union Bank to deliver high RoE of 20% plus in the next
three years. In the past two years, the stock has underperformed the broader market by 126% and has
delivered 3% absolute return. The stock is arguably the cheapest among Indian banks at 1.0x FY08E
book, relative to its RoE and earnings outlook. The stock trades at 5.2x FY08E earnings and 2.56x
FY08E PPOP. We have a ‘BUY’ recommendation.
Key Risks
Liability management will be a key factor to grow loan book at a faster-than-expected rate.
Margins may come under pressure as the bank has low SLR cushion.
Company Description
Incorporated in 1919, Union Bank of India (Union Bank) is one of the oldest banks in India. Its network
of 2,082 branches and balance sheet size of INR 886 bn as on March 2006 are sixth largest and fifth
largest, respectively, in the country.
The bank has the most widespread branch network in India (after SBI), with branches distributed evenly
across all regions. Around 979 of the bank’s branches are networked under core banking solution
(CBS).
Branches 2,082
Mcap (INR bn) 54

PAT (INR mn) 6,751 9,183 10,423 12,727
Advances (INR bn) 534 641 769 892
Deposits (INR bn) 741 830 994 1,161
(%)
Fee to assets 0.7 0.8 0.7 0.7
NIM 3.2 3.0 3.0 2.9
Net NPA 1.6 1.0 0.9 0.9
CAR 11.4 12.3 12.5 12.2
CASA 32.4 35.0 35.4 35.7
RoE (%) 18.7 20.7 20.2 21.1

RoA (%) 0.9 1.0 1.0 1.0
EPS (INR) 13.4 18.2 20.6 25.2
Book value (INR) 81.0 94.8 109.9 128.5
PE (x) 8.0 5.8 5.2 4.2
PB (x) 1.3 1.1 1.0 0.8
P/PPOP (x) 3.6 3.0 2.6 2.2
42
UTI BANK INR 554
BUY
Highlights
UTI Bank is uniquely positioned to harness the high growth opportunity in India. The bank has
relatively better scope for aggressively expanding across segments where it has a low presence Vishal Goyal, CFA
(retail credit) and spreading across geographies. It is targeting a presence in more than 75% of +91-22-2286 4370
India’s districts in the next five years.
Kunal Shah
+91-22-4009 4532
The bank is making efforts to improve margins by improving CD ratio, mobilizing higher low kunal.shah@edelcap.com
cost deposits, and developing high yield assets.
Ajitesh Nair
+91-22-4009 4535
Rapidly growing franchise and new product offerings (viz., credit cards) will further drive growth ajitesh.nair@edelcap.com
in retail fee income. The bank is also intensifying efforts to penetrate the remittance business
by aggressively spreading its international operations Other key contributors to fee income will
be project advisory, debt syndication, and third party distribution of insurance.
UTI Bank has registered buoyant loan growth on a balanced portfolio skewed towards corporate
advances than retail.
Loan book is expected to grow at a brisk pace of 30% plus in FY07E with SME, agri, housing,
and personal loan segments likely to be the key growth engines. Reuters : UTBK.BO
Bloomberg : UTIB IN
The margins at UTI Bank are relatively low when compared with peers. It is making efforts to
narrow down the gap by improving CD ratio to 79% in FY08E (from 72%) and developing high
Market Data
yield asset book. We expect substantial expansion in margins to 3.1% by FY09E (from 2.6%).
52-week range (INR) : 530 / 222
Going forward, we expect overall fee income to grow at ~35% in the next two years. Share in issue (mn) : 278.7
M cap (INR bn/USD mn) :154.4 / 3,488.3

Asset quality at UTI Bank remains under check with a low gross NPA ratio of 1.2% and net
NPA ratio of 0.68% in December 2006. Overall quality of loan portfolio remained healthy with
82% of corporate advances with a rating of ‘A’ and above.
It will be a strong contender for acquisition by a foreign bank after 2009E, considering its low Promoters : 43.2
promoter holding, increasing geographical spread, and phenomenal growth momentum. MFs, FIs & Banks : 8.4
FIIs : 36.4
Valuations
Others : 12.0
UTI Bank’s Q3 results have reinforced our belief that it can deliver CAGR of 25% in earnings
over FY06-09E with average RoE of 20% plus. The stock currently trades at 3.9x FY08E book
and 19.3x FY08E earnings and 9.25x PPOP. We like the bank for its ability to deliver high
growth without diluting its 20% RoE. We have a ‘BUY’ recommendation.
Key Risks
Change in key management personnel may impact the pace of growth and profitability.
Company Description
UTI Bank is the third-largest private sector bank in terms of asset size, with a balance sheet size of INR
713 bn. It has a network of 481 branches and extension counters across India.
As compared to other leading private banks, UTI Bank’s loan portfolio is skewed more towards
corporate advances than retail. Retail advances contribute merely 28% to the total loan portfolio.
The bank earns substantial fee income from transaction and merchant banking activities.
The key promoter UTI Ltd. holds 27.5%, LIC holds 10.4%, and the rest is widely held by FIIs and the
public.
Branches 481
Mcap (INR bn) 154
Ownership Private

PAT (INR mn) 8,708 11,470 14,941 19,477
Advances (INR bn) 223 348 466 583
Deposits (INR bn) 401 581 758 917
(%)
Fee to assets 1.5 1.4 1.4 1.4
NIM 2.6 2.7 2.8 3.1
Net NPA 1.0 0.9 1.0 1.0
CAR 11.1 10.1 10.7 13.3
CASA 40.0 37.5 37.5 37.5
RoE (%) 18.3 20.2 21.9 18.7

RoA (%) 1.2 1.1 1.1 1.1
EPS (INR) 17.4 22.5 28.8 31.9
Book value (INR) 103.1 120.7 143.7 221.2
PE (x) 31.8 24.7 19.3 17.4
PB (x) 5.4 4.6 3.9 2.5
P/PPOP (x) 17.8 13.4 9.3 8.0
44
YES BANK INR 147
BUY
YES Bank is one of the few private sector banks with product depth, a sustainable competitive
edge, and strong growth. Vishal Goyal, CFA
+91-22-2286 4370
Given the strong underlying credit demand and small asset book, the loan book is expected to vishal.goyal@edelcap.com
grow at more than 90% for the next three years. Kunal Shah
+91-22-4009 4532
YES Bank’s high contribution of fee income enables high return on assets (of 1.4% plus) and
can potentially generate higher than presently reported RoE (10-14%), once the capital ratios Ajitesh Nair
+91-22-4009 4535
normalise. ajitesh.nair@edelcap.com
Capital adequacy stood at 14.3% (Tier I at 10.2%) at December 2006. The bank infused INR
1.2 bn through equity placement to Swiss Re (at INR 120 per share). It is in the process of
raising INR 1.55 bn of upper tier II. We expect it to raise additional capital in next six months,
and therefore, are building in 14% equity dilution (around USD 150 mn) in FY08E.
Considering the bank’s strong fundamentals reflected in its product width, adept management
and technological prowess, we find it to be perfect acquisition candidate for a foreign player
once the regulations ease.
Reuters : YESB.BO
Valuations
Bloomberg : YES IN
We like YES Bank for its strong management, ability to generate high fee income, high
expected growth, and M&A probability (once the regulations ease). The stock currently trades
Market Data
at 2.9x FY08E book and 30.6x FY08E earnings. We have a ‘BUY’ recommendation.
Key Risks Share in issue (mn) : 280.0
M cap (INR bn/USD mn) : 41.2 / 930.0

There is an execution risk in its network expansion plan.
If demand for credit dies down, lack of pricing power can impact its margins adversely (due to
nascent deposit franchise). Share Holding Pattern (%)
Promoters : 35.9
Unseasoned credit book makes it more vulnerable to an economic downturn.
FIIs : 52.6
Others : 9.5
Company Description
YES Bank is a private Indian bank promoted by Rana Kapoor and Ashok Kapur with the financial
support of Rabobank Nederland, and three global institutional private equity investors—CVC Citigroup,
AIF Capital, and ChrysCapital.
It is the only greenfield bank approved by RBI in the past decade which started functioning in November
2004.
It has a network of 29 branches as on January 22, 2006 and a CASA ratio of 7.3%.
Corporate lending forms 63% of its book while SME lending is at 36%.The bank plans to foray into retail
finance. The bank derives nearly half of its revenues from advisory and other fee based income.
Branches 29
Mcap (INR bn) 40
Ownership Private
Net interest income (INR mn) 855 1,758 3,548 6,060

PAT (INR mn) 553 922 1,538 2,482
Advances (INR bn) 24,071 60,177 105,310 163,231
Deposits (INR mn) 29,104 70,585 121,529 200,250
(%)
Fee to assets 3.7 2.4 1.8 1.6
NIM 3.3 2.7 2.9 3.1
Net NPA - - - -
CAR 16.4 12.2 14.0 10.1
CASA 10.7 8.0 14.0 18.0
RoE (%) 14.1 13.6 12.9 14.5

RoA (%) 2.1 1.4 1.3 1.3
EPS (INR) 2.0 3.3 4.8 7.8
Book value (INR) 21.2 28.0 50.0 57.0
PE (x) 71.8 44.7 30.6 19.0
PB (x) 6.9 5.2 2.9 2.6
P/PPOP (x) 41.8 27.2 17.5 10.6
46

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Financial Services Conference Update

Our top picks

Metrics — At a glance ................................................................................................................................................. 5

MAIN TRACK PRESENTATIONS

Outlook on banks: Opportunities and challenges ......................................................................................................... 7

Mortgage Finance ....................................................................................................................................................... 9

Rural banking and micro finance ................................................................................................................................ 10

Retail banking strategies at Centurion Bank ............................................................................................................... 11

Infrastructure Financiang ........................................................................................................................................... 12

Is life insurance a glorified asset management business? ............................................................................................ 13

General Insurance: A holistic view .............................................................................................................................. 14

Consumer and Commercial Vehicle Finance .............................................................................................................. 15

Outlook on interest rates ........................................................................................................................................... 16

Allahabad Bank ......................................................................................................................................................... 17

Financial Services Conference main track presentations

From To Speaker Company Topic

8:45 9:15 Registration

9:10 9:15 Welcome Address

9:00 9:45 S Maheshwari L&T Finance Infrastructure Finance

9:45 10:30 Harpreet Singh Centurion Bank Retail Finance

10:30 11:15 Amit Tandon Fitch Ratings Outlook on Banks

11:30 12:15 Keki Mistry HDFC Ltd Mortgages

12:15 13:00 Kamesh Goyal Bajaj Allianz Non Life Insurance

14:00 15:00 P. Nandgopal Reliance Life Insurance Life Insurance

15:00 15:45 Subhasri Shriram Shriram Group CV and Consumer Finance

17:00 18:00 Ajay Mahajan Yes Bank Financial Markets

State Owned Bank

Outlook on banks: Opportunities and challenges

Improved performance in 2006 as compared to 2005, or has it been missing

Will growth momentum sustain?

Chart 1: Cosumer lending as a % of GDP

Source: Fitch ratings

Predicting key trends

Rural banking and micro finance

Key challenges faced by banks in rural areas are:

Regulatory constraints (license for opening branches/ATMs).

‘No White Space’ strategy

Retail banking strategies at Centurion Bank

Existing products-existing customers: Deepening and improving delivery of existing products.

New products-new customers: Through product innovation.

Innovative financing options

Fourth tier capital: New trend

Project management critical

Addressing end users’ needs

Careful tariff setting

Is life insurance a glorified asset management business?

• Why are ULIPs preferred to mutual funds?

• It is considered a long term savings instrument.

• Provides better control over money.

ULIP vis-à-vis traditional policies

Outlook on life insurance sector

Valuation of insurance business

General insurance: A holistic view

Consumer and Commercial Vehicle Finance

Concentration in South exposes it to regional risks.

Competition from banks and institutions with access to cheaper funds.

Outlook on interest rates

ALLAHABAD BANK INR 82

and SME advances. We expect NIMs to improve to 2.8% in FY08E.

M cap (INR bn/USD mn) : 36.6 / 829.5

Valuations: Attractive at 1.0x book Share Holding Pattern (%)

Mcap (INR bn) 37

Our recommendation BUY