Financials: Banks Well Equipped For A Time Like This

INSTITUTIONAL EQUITY RESEARCH
Financials
Banks well equipped for a time like this
INDIA | FINANCIALS | SECTOR UPDATE 2 December 2020
The corporate credit book is resilient in the current environment

The corporate credit-rating downgrades across agencies in the last 10 months have been Companies
miniscule vs. last year (same period). As a reference, the value of total credit rating
downgrades in April-October 2020 were Rs 3.3tn, 2.4% of system-wide credit and credit
Axis Bank
substitutes while for FY20, these were Rs 9.34tn and 7%. We believe that the corporate
Reco BUY
asset quality would remain resilient in the current environment based on: (1) lower amount
CMP, Rs 603
of corporate rating downgrades, and (2) a bulk of the stressed book was already recognised
Target Price, Rs 760
in the corporate-NPA cycle of FY16-18.
DCB Bank
Bounce rate is higher than pre-covid levels, but not alarming
Reco NEUTRAL
The bounce rate (in value terms) in auto-debit transactions has been 32%, which is higher
CMP, Rs 112
than pre-covid levels of 25%. But the CTS (Cheque Truncation System) bounce rate seem to
have normalised to pre-covid levels of c.7%. We can infer from this that the collection
efficiency in retail loans may not be sustainable at the level reported in October 2020, but HDFC Bank
the deviation is not large enough to be alarming.
Reco BUY
CMP, Rs 1433
ECLGS disbursement played a vital role in restarting MSME operations Target Price, Rs 1750
Emergency Credit Line Guarantee Scheme has aided stressed borrowers to re-start their
businesses after the lockdown, and hence, to reduce the stress on banks’ asset quality. The ICICI bank
survey conducted by National Institute of Banking Management on the impact of ECLGS Reco BUY
suggests that only 4-5% of respondents used ECLGS money to repay past debt, while 47% CMP, Rs 485
used it to restart operations. Thus, we reckon that the collection efficiency data reported by Target Price, Rs 560
banks is not influenced by ECLGS disbursement.
IndusInd Bank
Manageable stressed pool Reco NEUTRAL
Our analysis suggests that the overall stressed portfolio for large private-segment banks CMP, Rs 895
would be 2.6-7.3% (Refer to Table:5). The mortality in the stressed pool would be 2-4% and Target Price, Rs 925
the rest would be subject to restructuring under the framework permitted by the regulator.
Banks such as AXSB, HDFCB, ICICIBC, KMB, and SBI are well prepared to take the required Kotak Bank
shock and see a strong bounce-back in earnings in FY22, whereas IIB and DCB may take Reco BUY
more time. CMP, Rs 1875
Key stock recommendations
AXSB State Bank of India
 Built a reasonable contingency buffer (Rs 108bn; 1.9% of loan book) for asset quality Reco BUY
shocks. CMP, Rs 248
 Our conviction on asset quality comes from – encouraging collection efficiency; Target Price, Rs 310
predominant presence in the salaried segment within retail, and higher exposure to
better-rated corporates.
 Well-managed subsidiaries add value to the franchise.
 Maintain BUY with a revised target of Rs 750 vs. Rs 600 earlier.
HDFCB
 The bank will gain more market share based on the following – it has a complete suite
of products for diverse customer needs, it leverages technology that offers an omni-
channel experience, it has renewed its thrust on the semi-urban and urban market.
 Strong underwriting and strict monitoring of loans will enable it to contain its stressed Manish Agarwalla, Research Analyst
Sujal Kumar, Research Analyst
portfolio at manageable levels; we factor 2% slippage and 1% standard restructured
loan in FY21.
 Maintain BUY with a revised target of Rs 1,750 vs. Rs 1,380 earlier.
Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research
is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by
Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
FINANCIALS SECTOR UPDATE
ICICIBC
 Main points that give us confidence on the bank’s ability to manage the current
asset-quality crisis without a material impact on its return ratios –collection efficiency
returned to 97% of pre-covid levels; it has guided for normalised credit cost in FY22.
 We factor an eventual mortality of c.3% and standard restructuring of c.2% in FY21.
 Covid-related buffer (Rs 88bn; 1.2% of gross customer asset) would enable it to meet
post-moratorium credit shocks.
 Maintain BUY with a revised target of Rs 560 vs. Rs 520 earlier.
IIB
 Valuation improved to 1.5x (one-year forward P/ABVPS) from distressed level of 0.4x
in March 2020.
 What allayed investor concerns? The development in the last six months –
depositors’ trust in the bank was restored, ability to raise capital to protect its
balance sheet demonstrated, better-than-expected recovery in the business activity
(collections etc.). Therefore, valuation is no longer at distressed levels.
 Return to a normalized growth trajectory and credit cost would be a key driver for
further re-ratings. The aftermath of the moratorium will start hitting banks. Here, we
see challenge in terms of growth and see a long wait before credit-cost normalizes.
We model 3.3% slippage and 4% standard restructuring in FY21.
 Based on return on risk weighted asset, some of the front-line private banks (Axis,
ICICI) are better placed both in terms of valuation and return ratio matrices.
 Downgrade to NEUTRAL from BUY with a revised target of Rs 925 vs. Rs 720 earlier.
KMB
 Strong capital (tier-1 at 22.8%), higher covid provisions (Rs 12.7bn or 0.62% of loan)
and excellent deposit franchise (57.1% CASA at 3.87% cost of SA) should help KMB to
grab opportunities in a post-covid world.
 It is ready to focus on asset-side growth.
 A strong balance sheet should help it to gain market share.
 Higher margins and cost optimization should lead to enhanced return ratios over the
medium term.
 Maintain Buy with a revised target of Rs 2,150 vs. Rs 1,600 earlier.
SBI
 We are sanguine about the asset quality outcome given that fact that 1. Retail loan
are largely to salaried and PSU entity 2. The corporate credit cycle between FY16-18
recognized bulk of weak and marginal cases in corporate book 3. Agriculture as a
segment has done well in India owing to better rain and harvest 4. The Government’s
ECLGS has aided stress MSME segment.
 We factor total stress book of 3.5% for FY21.
 Strong NII performance and manageable credit cost warrants a Buy given the
subdued valuation.
 Maintain Buy with a revised TP of Rs310 (from Rs 285).
DCBB
 The MSME segment hurt by the extended lockdown and declining economic activity.
 Though the bank’s MSME/LAP portfolios are backed by hard collaterals, and resultant
loss-given-default may not be high, we are cautious about delayed repayments and
resultant higher credit costs for the bank in the near term.
 Maintain Neutral with a revised target of Rs 125 vs. Rs 80 earlier.

Table 1: Valuation matrix

M.Cap CMP Upside P/E P/BV
Reco (Rs. bn) (Rs.) TP (%) FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E
AXSB IN Equity BUY 1847 603 760 26.0 97.7 21.1 12.7 9.7 1.9 1.7 1.5 1.3
DCBB IN Equity NEU 25 112 125 11.6 10.3 11.1 9.9 7.2 1.0 0.9 0.8 0.7
ICICIBC IN Equity BUY 3,348 485 560 15.5 30.8 18.3 14.4 12.3 2.3 1.9 1.7 1.5
IIB IN Equity NEU 677 895 925 3.4 14.1 24.3 15.1 11.9 1.8 1.7 1.5 1.3
HDFCB IN Equity BUY 7,894 1433 1750 22.1 28.8 24.1 20.1 16.8 4.4 3.8 3.2 2.7
KMB IN Equity BUY 3,712 1,875 2150 14.7 47.7 37.4 30.5 26.5 5.8 4.4 3.7 3.1
SBIN IN Equity BUY 2,214 248 310 25.0 10.8 7.9 4.4 3.7 0.8 0.6 0.5 0.4
Source: PhillipCapital India Research Estimates
P/ABV EPS BV ABV

FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E
AXSB IN Equity 2.2 1.9 1.6 1.4 6 26 43 54 301 331 366 412 263 292 336 390
DCBB IN Equity 1.2 1.4 1.2 0.9 11 10 11 16 110 122 134 152 91 79 97 123
ICICIBC IN Equity 2.5 2.1 1.9 1.7 12 21 26 30 165 195 218 245 149 179 201 222
IIB IN Equity 1.9 1.9 1.6 1.4 64 37 59 75 500 534 602 668 474 479 546 618
HDFCB IN Equity 4.6 4.0 3.4 2.8 48 57 68 80 312 364 424 497 298 339 402 475
KMB IN Equity 5.9 4.5 3.8 3.1 31 38 45 47 257 321 364 411 251 312 354 400
SBIN IN Equity 1.0 0.9 0.6 0.5 16 19 28 33 225 241 265 295 167 172 201 230
Per share subsidiary value

FY20 FY21E FY22E FY23E
AXSB IN Equity 37 50 62 74
DCBB IN Equity NA NA NA NA
ICICIBC IN Equity 106 107 111 117
IIB IN Equity NA NA NA NA
HDFCB IN Equity 51 60 73 88
KMB IN Equity 387 456 515 617
SBIN IN Equity 75 98 126 126

Table 2: Business parameter analysis

Key variable Parameter AXSB DCBB HDFCB ICICIBC IIB KMB SBIN
CASA % 44.0 22.4 41.6 40.3 40.3 57.1 45.4
Retail deposit (% of total deposit) 57.3 65.0 62.9 60.6 30.8 66.6 72.2
Deposit Franchisee Deposit concentration (% of total deposit)
9.2 9.3 4 4.9 22.8 9.9 2.9
(Top 20 depositors)
cost of deposit % 4.4 6.5 4.3 4.2 5.6 4.4 4.4
% of total loan
Corporate loan 37 10 33 30 31 37 50
MSME loan* 11 11 16 9 8 8 11
Agri loan 6 21 11 9 12 13 8
Retail loan 47 58 41 52 49 42 31
Loan mix
Mortgage (HL, LAP) 24 42 6 32 6.7 23 18
Unsecured (PL, CC, CD) 10 16 9 4.5 6 6.2
Vehicle loan 7 8 11 9 27 8 3
Micro finance 11
Other retail loan 7 8 7 2 0 5 4
NNPA % 1.0 0.8 0.2 1.0 0.5 0.6 2.1

NPA benefit extended % 2.4 1.4 0.4 0.4 2.2 0.4 0.5
Provision buffer % 1.9 1.1 0.6 1.3 1.1 0.6 0.3
collection efficiency % 94 90 99 96 95 95 97
Asset quality
Stress book assumption (FY21)
Slippage % 4.2 2.7 2.1 2.9 3.3 2.3 2.3
Restructured book % 1.6 2.3 1.0 1.9 4.0 0.3 1.2
Total Stress % 5.8 5.0 3.1 4.8 7.3 2.6 3.5
Capital Position CET1, % 15.4 14.2 17.0 16.5 14.8 22.6 10.5
Liquidity position Liquidity coverage ratio, % 118 142 153 145 140 182 159
Source: RBI, PhillipCapital India Research

0
5
10
15
20
25
30
6
7
8
9
10
11
12
13
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Sep-14 Mar-13
Jun-13
Jan-15 Dec-15 Sep-13
Dec-13
May-15 Mar-16 Mar-14
Sep-15 Jun-16 Jun-14
Sep-14
Jan-16 Sep-16 Dec-14
Dec-16 Mar-15
May-16 Jun-15
Sector Trends
Mar-17 Sep-15 Deposit (%)

Credit and deposit growth
Sep-16 Dec-15
Jun-17 Mar-16
Jan-17
CP and CDs outstanding (Rs bn)

Sep-17 Jun-16


Sep-16
CP Outstanding
May-17
Public Sector Banks

Dec-17 Dec-16
Sep-17 Mar-18 Mar-17
Jun-17
Jan-18 Jun-18 Sep-17

Dec-17
Credit (%)
May-18 Sep-18
Mar-18
Weighted average lending rate on fresh loans

Sep-18 Dec-18 Jun-18
Mar-19 Sep-18
Jan-19 Dec-18
Jun-19 Mar-19
May-19 Jun-19
Sep-19 Sep-19
CD Outstanding
Sep-19 Dec-19
Dec-19
Jan-20 Mar-20
Private Sector Banks

Mar-20 Jun-20
May-20 Jun-20 Sep-20
CD ratio (rhs)
Sep-20 Sep-20
64
66
68
70
72
74
76
78
80
8
9
10
11
12
13
14
-5
-10
0
5
10
15
20
25
30
35
0
20
40
60
80
100
120
140
160
Sep-12 Mar-12
Jan-13 Mar-13 Jun-12
Sep-13 Dec-12
Sep-13 Dec-13 Mar-13
Sep-14 Dec-13
Agriculture
Sep-14 Dec-14 Mar-14

Credit growth breakup
Jun-15 Sep-14
May-15 Dec-14
Sep-15 Mar-15
Jan-16 Mar-16 Sep-15
May-16 Jun-16 Dec-15
Public Sector Banks

Sep-16 Mar-16
Sep-16 Dec-16
Industry
Jun-16
Jun-17 Dec-16
May-17 Mar-17
Sep-17
Jun-18 Dec-17
May-18 Mar-18
Sep-18
Retail

Sep-18
Weighted average lending rate on outstanding loans

Jan-19 Mar-19 Dec-18
May-19 Jun-19 Mar-19
Sep-19 Jun-19
Sep-19 Dec-19 Sep-19
Jan-20 Mar-20 Dec-19
Private Sector Banks

May-20 Jun-20 Mar-20
Spread between five-year GSec and five-year Corp (AAA) in bps
Sep-20 Jun-20
Sep-20
Services
Sep-20
Weighted average term-deposit rate SBI term-deposit rate vs. corporate-bond rate
Public Sector Banks Private Sector Banks SBI TD Rate (1-2 Yr) Corp Bond (AAA -1 Yr)
9.5 13.0
9.0 12.0
11.0
8.5
10.0
8.0
9.0
7.5
8.0
7.0
7.0
6.5
6.0
6.0 5.0
5.5 4.0
5.0 3.0
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Sep-17
Sep-13
Sep-14
Sep-15
Sep-16
Sep-18
Sep-19
Sep-20
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Median MCLR (%) Bank-wise MCLR change; bps (since Mar 2020)
South Indian
10.0 Public Private Bandhan
Indusind
Federal
Canara
Indian
Kotak
HDFC
BoM
UCO
ICICI
9.5
PNB
DCB
P&S
Axis
BoB
J&K
RBL
IOB
CBI
BoI
SBI
0
9.0
-20
8.5
-40
8.0
-60
7.5
-80
7.0
-100
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Mar-17
Mar-18
Mar-19
Mar-20
-120
Bank valuation (P/Adj BV vs. RORWA-FY22) Bank valuation (P/Adj BV vs. RORWA-FY23)
4.5 Quartile 2 4.5
Quartile 3
4.0 4.0 Quartile 3 Quartile 2
Price to Adjusted Book Value
Price to Adjusted Book Value
KMB 3.5
3.5 KMB
HDFC
3.0 3.0
2.5 HDFC
2.5
2.0 2.0
Axis ICICI ICICI Axis
1.5 Quartile 4
1.5 DCB IIB
IIB DCB
1.0 1.0
Quartile 1
0.5 0.5
Quartile 1 SBI
SBI Quartile 4 -
-
1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8
1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8
Return on Risk Weighted Assets Return on Risk Weighted Assets
Source: Company, PhillipCapital India Research

Asset quality scenario so far

At the end of the September quarter, lenders have posted strong collection trends –
with some banks almost nearing pre-covid levels. This can be seen in Chart 1 below.
The asset classification benefits given by banks can be seen in the Chart 2 below in
the form of unrecognised pool of stress asset. Against the unrecognised pool of stress
asset, banks have made adequate provision towards the same (Refer to Chart:2).
Chart 1: Collection efficiency in the month of September

120%
100%
80%
60%
40%
20%
0%
Chart 2: Asset quality dispensation & Provision buffer

3.0% Advances where asset classification benefit extended (% loan book)
Provision buffer (% loan book)
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
The pertinent questions –

 Is this collection efficiency trend sustainable?
 Did the borrowers made loan repayments by using operating cash flow or by
using savings?
 Are there any linkages between disbursement under ECLGS and loan repayments
by borrowers?
We tried to look at a few data points. While these may not be a complete
representation, they are still good indicators to assess underlying asset quality.
The data points we used to assess asset quality:

1. The corporate credit-rating downgrades across rating agencies and across rating
scales in order to assess the flow.
2. Bounce rate data under NACH (National Automated Clearing House) and CTS
(Cheque Truncation System).

3. Survey conducted by National Institute of Banking Management on impact of

ECLGS (Emergency Credit Line Guarantee Scheme)
The corporate credit rating downgrades not significant

 Corporate credit-rating downgrades across rating agencies in the last 10 months
have been miniscule vs. last year.
 As a reference – the value of total credit-rating downgrades has been Rs 3.3tn in
April-October 2020, which is 2.4% of system-wide credit and credit substitutes.
For FY20, this number was Rs 9.34tn and 7%.
 The rating downgrades to BB and below pool have been Rs 0.49tn in April-
October 2020, which is 0.35% of credit and credit substitute while in FY20 these
were at Rs 2.8tn and 3.6%.
We believe that the corporate asset quality would remain resilient in the current
environment based on: (1) lower amount of corporate rating downgrades, and (2) a
bulk of the stressed book was already recognised in the corporate-NPA cycle of FY16-
18.
Chart 3: Corporate rating downgrades

4,500
4,000
3,500
3,000
2,500
Rs bn
2,000
1,500
1,000
500
-
Jul-18
Dec-18
Jul-19
Jul-20
Jan-18
Mar-18
Apr-18
May-18
Oct-18
Apr-19
May-19
Oct-19
Dec-19
Jan-20
Oct-20
Mar-20
Apr-20
May-20
Feb-18
Nov-18
Jan-19
Mar-19
Jun-18
Aug-18
Sep-18
Feb-19
Jun-19
Aug-19
Sep-19
Nov-19
Feb-20
Jun-20
Aug-20
Sep-20
Chart 4: Corporate rating downgrades to BB & Below

1,600 Vodafone Idea

(Ex Vodafone- Rs 132 bn)
Amount (Rs bn) Qtr Avg
1,400
1,200
1,000
Rs bn
800
600
400
200
-
Jan-18
Mar-18
May-18
Jul-18
Jul-19
Jan-20
Apr-18
Oct-18
Mar-19
May-19
Apr-19
Oct-19
Mar-20
May-20
Jul-20
Oct-20
Feb-18
Jun-18
Dec-19
Apr-20
Aug-18
Sep-18
Nov-18
Dec-18
Jan-19
Feb-19
Jun-19
Aug-19
Sep-19
Nov-19
Feb-20
Jun-20
Aug-20
Sep-20
Tracking the incremental flow of vulnerable pool within the overall rating downgrade,
it can be noticed that the exposure to the individual banks are insignificant. The flow
to top private banks is less than 0.5% whereas the flow to IndusInd and RBL are at
very manageable level.
Chart 5: Bank-wise exposure vulnerable downgrades between April – October’ 20
Exposure as a % of Loan
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
Federal ICICI DCB Kotak SBI Axis Bank IndusInd RBL

Bounce rate data under NACH / CTS

[National Automated Clearing House/ Cheque Truncation System]
 The bounce rate (in value terms) in auto-debit transactions has been at 32%,
higher than pre-covid levels of 25%.
 The inverse of bounce rate, i.e., the success rate, is at 90% of pre-covid levels.
 Collection efficiency rate was 95-98% of pre-covid rate.
 The bounce rate numbers suggest that the collection efficiency has some
element of ‘one-time’; so, it may not be sustainable unless economic activity
improves further.
 However, the CTS bounce-rate seems to have normalised to pre-covid levels of
c.7%.
The inference we can draw from the bounce rate data is that the collection efficiency
in retail loans may not be sustainable at the level reported in October 2020, but the
deviation is not large enough to be alarming.
Chart 6: Bounce rate in auto debit NACH transaction

40% Bounce by Value Average trend line
35%
30%
25%
20%
15%
10%
5%
0%
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Feb-17
Oct-17
Feb-18
Oct-18
Feb-19
Oct-19
Feb-20
Oct-20
Chart 7: Bounce rate in CTS

14.0% Bounce by value average trend line
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Oct-16
Oct-15
Jul-16
Jul-17
Oct-17
Jul-18
Oct-18
Jul-19
Oct-19
Jul-20
Oct-20
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Survey conducted by National Institute of Banking Management on

impact of ECLGS (Emergency Credit Line Guarantee Scheme)

th
Total sanctions / disbursements under ECLGS, as on 12 November 2020, were
Rs 2.0/1.5 trillion.

 The ECLGS disbursement is expected to meet the short-term (three months, as

per survey) liquidity challenges of the MSME borrower.
 We believe ECLGS has aided the stressed borrowers to re-start their businesses
after the lockdown and hence, to reduce the stress on banks’ asset quality.
 The survey conducted by National Institute of Banking Management on the
impact of the ECLGS scheme suggests that only 4-5% of respondent used the
ECLGS money to repay past debt. This means the collection efficiency data
reported by banks are not influenced by ECLGS disbursement.
As per the TransUnion CIBIL report on the MSME CREDIT HEALTH INDEX (October
2020): “The impact of ECLGS on MSME lending is clearly visible. The number of loan
originations have accelerated in June 2020 due to deployment of funds under this
scheme. This is most likely to have a positive impact on the Growth Index in the near
future”.
Chart 8: Disbursement to MSME sector (Indexed to Feb’ 20 figure)

3.0 PSB PRIVATE NBFCs
2.6
2.5
2.0
1.5
1.0 1.0 1.0 1.0

0.8
0.6
0.5
0.5 0.4
0.2 0.2 0.2
0.0 0.1
FEB MAR APR MAY JUN
Chart 9: Lender wise MSME NPA

PSB Private NBFC
20% 19%
18%
18% 17%
16%
14%
12%
10%
10%
8%
6% 6%
6% 5%
5%
4%
4%
2%
0%
Jan-18 Jan-19 Jan-20
Other findings of the survey
Ease of liquidity
 87% of all respondents said that the ECLGS facility had helped to ease their short-
term financial problems.
 59% felt that the loan would sustain their business requirements only in the
short term (up to three months)

 A much smaller proportion (19%) believed that it would ease liquidity problems
beyond three months.
Table 3: Activity wise impact on liquidity by ECLGS

GECL eased No. of Month of liquidity
Liquidity ease by activity type liquidity problem support provided by GECL
Activity type Yes NO Upto 3 months More than 3 months Can't say
Manufacturing 83% 17% 65% 20% 15%
Retail Trade 87% 13% 58% 19% 23%
Services 84% 16% 59% 18% 23%
Source: eclgs.com
Use of GECL funds

 GECL funds were most likely to be used to restart operations and clear dues
to suppliers.
 Around 4-5% of respondents used the GECL money to repay existing dues
while most of it was utilised to restart businesses.
Table 4: Activity wise usage of ECLGS disbursement

Application of GECL To clear dues To restart To pay To repay
fund to suppliers operation salaries existing loan Any other
Activity type
Manufacturing 59% 47% 46% 5% 14%
Retail Trade 49% 47% 30% 4% 18%
Services 38% 47% 31% 5% 20%
Source: eclgs.com

Conclusion of the various data point used to assess asset quality
 The total stress book for top banks to range between 2.6%-7.3%.
 However effective mortality rate is expected to be between 2.1%-4.2% for these
top banks.
 Retail stressed loan pool is assessed based on collection efficiency (using peer
references).
 The corporate stressed pool is based on exposure to vulnerable corporates.
 The total stress is then classified into slippage and potential restructuring.
Table 5: Stress loan calculation

Loan book breakup % AXSB DCBB HDFCB ICICIBC IIB KMB SBIN
Corporate loan 37 10 33 30 31 37 50
MSME loan* 11 11 16 9 8 8 11
Agri loan 6 21 11 9 12 13 8
Retail loan 47 58 41 52 49 42 31
Mortgage (HL, LAP) 24 42 6 32 6.7 23 18
Unsecured (PL, CC) 10 16 9 4.5 6 6.2
vehicle loan 7 8 11 9 27 8 3
Micro finance 11
Other retail loan 7 8 7 2 0 5 4
Sector wise stress assumption AXSB DCBB HDFCB ICICIBC IIB KMB SBIN
Corporate loan 8.0% 10.0% 2.0% 8.5% 11.0% 2.0% 5.0%
MSME loan* 5.0% 7.0% 3.0% 5.0% 5.0% 2.0% 5.0%
Agri loan 1.0% 1.0% 1.0% 1.0% 1.5% 1.0% 2.0%
Retail loan 3.4% 5.3% 4.5% 3.3% 4.0% 3.7% 1.0%
Mortgage (HL, LAP) 1.4% 5.0% 1.0% 1.0% 3.0% 1.0% 1.0%
Unsecured (PL, CC) 10.0% 8.0% 10.0% 10.0% 8.0% 1.0%
vehicle loan 3.4% 10.0% 3.4% 5.0% 8.0% 10.0% 1.0%
micro finance 5.0%
Other retail loan 1.0% 2.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Calculation of stress loan % AXSB DCBB HDFCB ICICIBC IIB KMB SBIN
Slippage 4.2 2.7 2.1 2.9 3.3 2.3 2.3
Restructured 0.9 2.3 1.0 1.9 4.0 0.3 1.2
Total stress 5.1 5.0 3.1 4.8 7.3 2.6 3.5
Corporate loan 2.9 1.0 0.7 2.6 3.4 0.7 2.5
MSME loan* 0.5 0.8 0.5 0.5 0.4 0.2 0.6
Agri loan 0.1 0.2 0.1 0.1 0.2 0.1 0.2
Retail loan 1.6 3.1 1.8 1.7 3.3 1.6 0.3
Mortgage (HL, LAP) 0.3 2.1 0.1 0.3 0.2 0.2 0.2
Unsecured (PL, CC) 1.0 0.0 1.3 0.9 0.5 0.5 0.1
vehicle loan 0.2 0.8 0.4 0.5 2.1 0.8 0.0
micro finance 0.0 0.0 0.0 0.0 0.6 0.0 0.0
Other retail loan 0.1 0.2 0.1 0.0 0.0 0.1 0.0

NIM: Revival of credit growth key for sustenance of current margin

1. The decline in cost of deposits has helped banks to protect their margins, despite
a fall in their credit-to-deposit ratios. Cost-of-deposit may fall further in the next
few quarters, as the back book gets re-priced.
2. Revival of credit growth is a key for margins to sustain. As most banks are
flooded with capital, pressure to achieve credit growth in a moderate loan-
growth scenario would depress yields.
3. See downside risk for margins of IndusInd and DCB bank, as their yield-on-
advances ratios have not declined compared to the fall in in their costs of
deposits. HDFC Bank’s margins should remain resilient at current levels.
Chart 10: Cost and Yield Flow
ICICI Bank Axis Bank

YOA % COD % NIM % CD ratio %, rhs YOA % COD % NIM % CD ratio %, rhs
10 9.1 9.2 9.2 9.4 9.2 86
10 9.3 9.4 9.5 9.5 9.4 9.3 84 9.0 8.9
9.0 8.9 8.6
82 85
8
8
80
84
78 6 5.4 5.4 5.3 5.2
6 5.1 5.1 5.0 5.0
4.9 5.0 4.9 4.8 4.7
4.5 76 4.4 83
4.2
3.7 3.6 3.6 3.8 3.9 3.7 4 3.5 3.4 3.4 3.5 3.6 3.6 3.4 3.6
4 3.4 3.6
74 82
72
2 2
81
70
0 68 0 80
3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
IndusInd Bank Kotak Mahindra Bank

YOA % COD % NIM % CD ratio %, rhs YOA % COD % NIM % CD ratio %, rhs
14 110 12 95
12.0 12.0 12.0 11.9 11.9 12.0
11.5 11.3 10.0 9.9 10.0 10.0 9.8
12 105 9.7 9.4
10 9.2
90
10
100 8
8 85
6.7 6.8 6.9 6.7 6.5
6.1 95 6 5.5 5.3 5.4 5.3
5.7 5.6 5.1
6 4.3 4.5 4.5 4.6 4.7 4.64.7 4.44.4 4.5
4.3 4.3 4.0 80
3.8 4.1 4.1 4.2 4.2 90
3.6 4
4
75
2 85 2
0 80 0 70

HDFC Bank SBI

YOAst % COF % NIM % CD ratio %, rhs YOA % COD % NIM % CD ratio %, rhs
12 94 10 72
8.7 8.9 8.7
8.5 8.5 8.6 8.4
9.8 9.7 9.8 9.7 9.6 92 8.2 70
10 9.1 8.8 8.5 8
68
90
8
6 66
88 5.1 5.1 5.1 5.0 5.0 4.9
6 5.5 5.3 5.4 5.4 5.2 4.5 4.4 64
4.4 4.7 4.54.3
4.3 4.3 4.2 4.2 4.3 4.34.1 86 4
2.9 3.1 3.0 3.0 3.1 62
4 2.8 2.8 2.8
84 60
2
2 82 58
0 80 0 56
DCB Bank
YOA % COD % NIM % CD ratio %, rhs
14 87
11.6 11.6 11.5 11.5 11.4 11.3
12 11.3 11.1 86
10
85
8 7.0 7.0 7.0 6.9
6.6 6.7 6.7 6.5 84
6
3.8 3.8 3.7 3.7 3.7 3.6 3.7 83
4 3.4
2 82
0 81
3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21

Top lenders sitting on capital buffer

Top lenders – Axis Bank, ICICI Bank, IndusInd Bank, HDFC, Kotak Bank – has
cumulatively raised equity capital worth Rs 498bn and SBI raised AT1 and tier-2
bonds worth Rs 199bn. The CET1 percentage stands much higher than the threshold
level.
These top lenders with low costs of fund and adequate capital are geared to garner
market share and provide formidable competition to banks and NBFCs that have
higher costs of funds. 2015-2020 saw banks like Axis Bank, ICICI Bank, IndusInd Bank,
HDFC Bank, Kotak Bank and SBI cumulatively gaining 9.3% market share in deposits.
This trend is likely to continue, as these entities are well prepared in terms of capital,
technological capability, and retail deposit franchises.
Table 6: Capital Adequacy

Bank CET1 % Tier 1 % CAR % Capital Raised in FY21 (Rs bn)
Axis Bank 15.4 16.5 19.4 Equity - 100
DCB Bank 14.2 14.2 18.3
ICICI Bank 16.5 17.9 19.3 Equity - 150
IndusInd Bank 14.8 16.2 16.9 Equity -32.88
HDFC Bank 17.0 17.7 19.1
Kotak Bank 22.6 22.8 23.4 Equity - 74.48
Bank of Baroda 9.5 11.0 13.5
Indian Bank 10.6 10.7 13.6
State Bank of India 10.5 11.9 14.7 AT1 & Tier II - 199.3

Axis Bank (AXSB IN)

Built contingency buffer
2 December 2020
INDIA | FINANCIALS | Company Update
Has a reasonable contingency buffer: Provision buffer of Rs 108bn (1.9% of loan book) will BUY
provide reasonable cushion to likely asset-quality headwinds due to the economic CMP RS 603
slowdown. The collection efficiency after the moratorium in September was 94%. TARGET RS 750 (+26%)
Considering elevated stress in certain segments – such as MSME, commercial vehicle, LAP,
certain industries related to tourism, hotels, and entertainment, commercial real estate – SEBI CATEGORY: LARGE CAP
we factor the bank’s total stressed book at c.5.1%. Within this, we model 4.2% slippage for
FY21, and restructured portfolio of 0.9%. Given its higher provision buffer of 1.9%, AXSB will COMPANY DATA
be able to build enough provisions in FY21. O/S SHARES (MN) : 3060
MARKET CAP (RSBN) : 1847
MARKET CAP (USDBN) : 24.9
Margin to remain range-bound: Recognition of NPAs, competitive credit market, and 52 - WK HI/LO (RS) : 766 / 286
limited scope for improvement in the credit-to-deposit ratio may keep margins range bound LIQUIDITY 3M (USDMN) : 181.2
at 3.5-3.7%. From Q4FY20, the bank’s cost of deposits fell 64bps vs. a 44bps fall in yield on PAR VALUE (RS) : 2
advances.
SHARE HOLDING PATTERN, %
Well-managed subsidiaries are adding to the overall franchisee value: Axis’ AMC has Sep 20 Jun 20 Mar 20
PROMOTERS : 14.5 15.7 15.7
gained significant market share in the last 12 months – from 4.1%, to touch 5.7% at the end
FII / NRI : 23.4 24.0 24.5
of September 2020. Strong fund performance and brand recall has helped it to register 50% FI / MF : 50.3 47.0 46.7
yoy growth in the client folio – to reach 6.8mn at the end of September 2020. We expect PUBLIC & OTHERS : 11.8 13.4 13.2
average AUMs to cross Rs 3tn by FY23 vs. Rs 1.56tn at the end of September 2020. Similarly,
we expect Axis Finance to bounce back in terms of RoA and RoE in FY22, after a weak KEY FINANCIALS
FY20/21, led by a fall in credit costs. Rs bn FY21e FY22e FY23e
Pre-prov ROE (%) 27.4 26.1 26.4
Outlook and valuation Pre-prov ROA (%) 3.0 2.9 2.9
 Provision buffer of Rs 108bn will provide a reasonable cushion to likely asset-quality Net Profit 81 132 169
% growth 395.5 63.6 28.1
headwinds because of the economic slow-down.
EPS (Rs) 26.2 42.7 54.4
 We believe that large private banks, including Axis Bank, are well poised to capture BVPS (Rs) 291.6 336.2 390.1
market share because PSBs/NBFCs that cater to the self-employed segment would take ROE (%) 8.6 12.3 14.0
time to come out of the current asset quality cycle. Encouraging collection efficiency, P/E (x) 21.3 12.8 9.8
predominant presence in the salaried segment within retail, and higher exposure to Adj P/BV (x) 1.9 1.6 1.4
better-rated corporates provides conviction on asset quality.
 We model 3.8% slippage and 0.9% standard restructured asset for FY21. We introduce
FY23 financials and roll over our target multiple to FY23. We expect ROA of Manish Agarwalla, Research Analyst
0.9%/1.4%/1.5% in FY21/22/23 and ROE of 8.6%/12.3%/14%. At CMP, AXSB trades at
1.9x/1.6x/1.4x FY21/22/23 ABVPS of Rs 292/336/390. Maintain BUY with a revised
target of Rs 750 (Rs 600 earlier).
Sum-of-the-parts valuation
SOTP Valuation Stake Per share valuation Criteria
Parent 394 FY23 Adj book value
less: Investment in subsidiary 4 per share investment in subsidiary
core book value 390
Bank Valuation – A 683 1.75x FY23 core adj. book
Subsidiary
Axis AMC 75 57 8% FY23 average AUM of Rs 3 trillion, valuing entity at Rs 234bn
Axis Finance 100 12 2x FY23 adj networth of Rs18bn, valuing entity at Rs 37bn
Axis Capital 100 4 10x FY23 PAT of Rs1.3bn
Axis Securities 100 2 15x FY23 PAT of Rs 415mn
Total 68
Total subsidiary value – B 68

Total value of the entity - (A+B) 751

AXIS BANK COMPANY UPDATE
P/ABV Valuation band chart NIM

1600 Rs YOA % COD % NIM % CD ratio %, rhs
10 9.1 9.2 9.2 9.4 9.2 86
1400 9.0 8.9
8.6
4x
1200 85
8
1000 3x 84
6 5.4 5.4 5.3 5.2
5.0 5.0
800 4.7
4.4 83
2x
600 4 3.5 3.4 3.4 3.5 3.6 3.6 3.4 3.6
82
400 1x
2
81
200
0 0 80
Apr-17 Apr-18 Apr-19 Apr-20 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Asset Quality Return Ratios

Provision (incl std, specific & contingent) %, rhs RoA % RoE %, rhs
GNPA % 1.8 16
7.00 NNPA % 102
100 1.6 14
6.00 100 1.4 12
5.00 98 1.2
10
95 1.0
4.00 96 8
94 0.8
3.00 94 6
92 0.6
2.00 92 4
0.4
1.00 90 0.2 2
0.00 88 0.0 0
FY20 FY21e FY22e FY23e FY20 FY21e FY22e FY23e

AXIS BANK COMPANY UPDATE
Financials
Income Statement Valuation Ratios

Y/E Mar, Rs bn FY20 FY21e FY22e FY23e FY20 FY21e FY22e FY23e
Interest on Loans 483 507 578 676 Earnings and Valuation Ratios
Interest on Investments 112 124 136 150 Pre-provision Operating RoAE (%) 30.9 27.4 26.1 26.4
Others 31 34 36 39 RoAE (%) 2.1 8.6 12.3 14.0
Total Interest Earned 626 665 750 865 Pre-provision Operating ROA (%) 2.7 2.7 2.7 2.7
Total Interest Expended 374 370 409 475 RoAB (%) 0.21 0.93 1.37 1.54
Net Interest Income 252 295 341 390 EPS (Rs.) 5.8 26.2 42.7 54.4
Total non-interest income 155 142 140 157 Dividend per share (Rs.) 0.0 4.0 6.0 7.0
Total Income 407 437 482 546 Book Value (Rs.) 301.1 331.1 366.2 411.8
Personnel Expenses 53 58 65 73 Adj BV (Rs.) 262.9 291.6 336.2 390.1
Other Expenses 120 123 136 155
Total Op expenses 173 181 201 228 Revenue Analysis
Net Inc (Loss) before prov 234 256 281 318 Interest income on IBA (%) 7.9 7.7 7.8 7.9
Provision & cont. 185 148 104 91 Interest cost on IBL (%) 5.0 4.5 4.5 4.6
Net Inc (Loss) before tax 49 108 177 227 NIM on IBA / AWF (%) 3.2 3.4 3.5 3.6
Provision for Income Tax 33 28 45 58 Core fee Inc / AWF (%) 1.4 1.2 1.2 1.2
Net Profit 16 81 132 169 Portfolio gains / Total Inc (%) 5.6 6.1 3.2 2.8
Op.Exp / TI (%) 44.9 43.9 43.1 43.0
Op.Exp / AWF (%) 2.2 2.1 2.1 2.1
Balance Sheet Employee exps / Op exps (%) 30.7 32.1 32.3 31.9
Tax / Pre-tax earnings (%) 66.8 25.5 25.5 25.5
Y/E Mar, Rs bn FY20 FY21e FY22e FY23e
Assets
Asset Quality
Cash & Bal with RBI 973 1070 1177 1295
GNPAs / Gr Adv (%) 4.9 5.8 4.8 3.6
Loans, Adv & Int accrued 5714 6268 7209 8290
NNPAs / Net Adv (%) 1.6 1.4 0.9 0.6
Investments 1639 1671 1851 2055
Fixed Assets (Net) 43 45 47 49
Growth Ratio
Other assets 783 704 789 884
Loans (%) 15.5 9.7 15.0 15.0
Total Assets 9,152 9,759 11,073 12,572
Investments (%) (10.0) 1.9 10.8 11.0
Liabilities
Deposits (%) 16.3 6.7 15.1 14.0
Share capital 6 6 6 6
Networth (%) 27.4 19.8 11.1 13.0
Reserves and Surplus 844 1012 1125 1272
Net Int Income (%) 16.1 16.9 15.8 14.1
Debt 175 215 255 295
Non-fund based income (%) 7.9 (12.4) 7.1 12.9
Borrowing 1235 1250 1375 1519
Non-Int Exp (%) 9.3 4.5 11.2 13.4
Total Deposits 6432 6862 7902 9011
Profit Before Tax (%) (29.7) 120.7 63.6 28.1
Other liab incld prov 391 340 332 386
Net profit (%) (65.2) 395.5 63.6 28.1
Total Liabilities 9,152 9,759 11,073 12,572
Source: Company, PhillipCapital India Research Estimates Asset / Liability Profile
Avg CASA/ Deposits (%) 42.4 40.9 39.6 37.9
Avg Adv / Avg Dep (%) 84.1 84.8 86.0 87.5
Avg Invst / Avg Dep (%) 28.9 24.9 23.9 23.1
Incr Adv / Deposits (%) 85.0 128.8 90.5 97.5
Avg Cash / Avg Dep (%) 13.7 15.4 15.2 14.6
Capital Adequacy Ratio: 17.5 19.1 19.1 19.0

Tier I (%) 14.5 15.9 15.8 15.7
CET1 (%) 13.3 14.8 14.7 14.6
NNPAs to Equity (%) 11.0 9.0 6.1 4.0

DCB Bank (DCBB IN)

Delayed recovery
2 December 2020
Most impacted MSME segment; will take longer time to recover: The extended lockdown NEUTRAL
due to the ongoing pandemic has hurt the MSME segment the most, not large corporates. CMP RS 112
The collection efficiency for loans against property (LAP)/Home loan/commercial vehicle TARGET RS 125 (+12%)
(CV) loans, as of September 2020 was 87.5%/91.3%/77.1%, lower than pre-covid levels of
97.5%/ 98.5%/92.1%. Around 93% of MFI (Micro Finance Institution) borrowers have paid at SEBI CATEGORY: SMALL CAP
least one EMI. DCBB has guided for restructuring of 3-5% and expects slippage to remain
elevated for the next 3-4 quarters. We factor 5% stressed portfolio (Refer to Table:5) within COMPANY DATA
which we model c.3% slippage; the rest 2.3% as standard restructured. A major contribution O/S SHARES (MN) : 310
MARKET CAP (RSBN) : 33.4
of stress can be seen from LAP and CV portfolios.
52 - WK HI/LO (RS) : 205/ 58
Cautious approach to keep growth subdued in the near term: The focus of the bank is now LIQUIDITY 3M (USDMN) : 2.8
on collections and recovery, so that its portfolio quality is under control. Due to the lack of PAR VALUE (RS) : 2
adequate data pertaining to business activity for current or prospective customers, as a
cautious strategy, DCCB will not focus on growth in the near term. We have modelled credit SHARE HOLDING PATTERN, %
CAGR of 10% over FY20-23. Sep 20 Jun 20 Mar 20
Promoters : 14.9 14.9 14.9
FII / NRI / OCB : 37.7 35.9 35.3
Sustaining margins is a key challenge: Despite a 40bps decline in the cost of deposits in the FI / MF / Banks : 14.4 15.1 22.8
last nine months, DCBB’s yield on advances has declined by just 10bps. This can also be Indian Public : 33.0 34.1 27.0
because the loan book remained flat for the last few quarters. However, with re-pricing of
the existing loan book and incremental loan disbursement at a lower rate, NIM would see KEY FINANCIALS
pressure, even factoring some liquidity release in the balance sheet. Rs mn FY21e FY22e FY23e
Pre-prov ROE (%) 23.7 23.2 22.7
Pre-prov ROA (%) 2.3 2.3 2.3
Outlook and valuation
Net Profit 3,120 3,513 4,831
 The MSME segment is hurt by extended lockdown and declining economic activity. % growth -7.7 12.6 37.5
DCBB’s MSME/LAP portfolio is backed by hard collateral, so the resultant loss-given EPS (Rs) 10.1 11.3 15.6
default may not be high. However, we are cautious about the delayed repayment and BVPS (Rs) 78.5 96.7 123.2
ROE (%) 8.7 8.8 10.9
resultant higher credit cost for the bank in the near term.
P/E (x) 11.1 9.9 7.2
 We introduce FY23 financials and rollover our target multiple to FY23. We expect Adj P/BV (x) 1.4 1.2 0.9
earnings to move by -8%/+13%/+38% in FY21/22/23, translating into RoA of
0.85%/0.9%/1.1%.
Manish Agarwalla, Research Analyst
 We maintain a Neutral rating with a revised target of Rs 125 (Rs 80 earlier) valuing the Sujal Kumar, Research Analyst
bank at 1x FY23 ABVPS of Rs 123. The stock trades at 1.4x/1.2x/0.9x FY21/22/23 ABVPS
of Rs 78/97/123.

DCB BANK COMPANY UPDATE

300 YOA % COD % NIM % CD ratio %, rhs
14 87
250 11.6 11.6 11.5 11.5 11.4 11.3
12 11.3 11.1 86
2.5x
200 10
2x 85
8 7.0 7.0 7.0 6.9
150 6.6 6.7 6.7 6.5
1.5x 84
6
100 3.8 3.8 3.7 3.7 83
1x 3.7 3.7 3.6 3.4
4
50 82
2
0 0 81
Asset quality Return ratios

GNPA % 1.2 12.0
5.0 NNPA % 99 100
1.0 10.0
98
4.0
96 0.8 8.0
94
3.0 93 94 0.6 6.0
91 92
2.0
0.4 4.0
90
1.0 0.2 2.0
88
0.0 86 0.0 0.0


DCB BANK COMPANY UPDATE
Financials

Y/E Mar, Rs mn FY20 FY21e FY22e FY23e FY20 FY21e FY22e FY23e
Interest on Loans 28,432 28,148 31,244 35,305 Earnings and Valuation Ratios
Interest on Investments 6,228 5,979 6,278 6,780 Pre-provision Operating RoAE (%) 23.0 23.7 23.2 22.7
Others 707 960 1,000 1,200 RoAE (%) 10.3 8.7 8.8 10.9
Total Interest Earned 35,366 35,086 38,522 43,285 Pre-provision Operating ROA (%) 2.0 2.2 2.2 2.2
Total Interest Expended 22,717 22,054 23,893 26,949 RoAB (%) 0.95 0.85 0.90 1.08
Net Interest Income 12,649 13,033 14,628 16,337 EPS (Rs.) 10.9 10.1 11.3 15.6
Total non-interest income 3,911 3,780 3,884 4,434 Dividend per share (Rs.) 0.0 1.3 1.5 1.8
Total Income 16,560 16,812 18,513 20,771 Book Value (Rs.) 110.2 121.5 134.3 151.6
Personnel Expenses 4,588 4,359 4,838 5,564 Adj BV (Rs.) 90.8 78.5 96.7 123.2
Other Expenses 4,442 3,938 4,477 5,119
Total Op expenses 9,029 8,296 9,315 10,682 Revenue Analysis
Net Inc (Loss) before prov 7,531 8,516 9,197 10,088 Interest income on IBA (%) 9.9 9.5 9.8 9.7
Provision & cont. 2,611 4,300 4,450 3,560 Interest cost on IBL (%) 6.9 6.5 6.6 6.5
Net Inc (Loss) before tax 4,919 4,216 4,747 6,528 NIM on IBA / AWF (%) 3.6 3.5 3.7 3.7
Provision for Income Tax 1,540 1,096 1,234 1,697 Core fee Inc / AWF (%) 0.7 0.6 0.7 0.7
Net Profit 3,380 3,120 3,513 4,831 Portfolio gains / Total Inc (%) 4.1 7.7 3.3 3.5
Op.Exp / TI (%) 56.8 53.1 52.0 53.2
Op.Exp / AWF (%) 2.5 2.3 2.4 2.4
Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Assets
Asset Quality
Cash & Bal with RBI 35,459 35,436 34,492 34,033
GNPAs / Gr Adv (%) 2.5 3.5 4.0 3.8
Loans, Adv & Int accrued 2,53,453 2,53,578 2,93,204 3,36,725
NNPAs / Net Adv (%) 1.2 1.2 1.4 0.9
Investments 78,883 78,219 89,824 1,03,202
Fixed Assets (Net) 5,459 6,005 6,605 7,266
Growth Ratio
Other assets 11,798 13,352 14,635 15,533
Loans (%) 7.5 0.0 15.6 14.8
Total Assets 3,85,051 3,86,589 4,38,760 4,96,758
Investments (%) (1.0) (0.8) 14.8 14.9
Liabilities
Deposits (%) 6.8 (1.0) 13.1 12.4
Share capital 3,104 3,104 3,104 3,104
Networth (%) 9.8 10.3 10.5 12.9
Reserves and Surplus 28,734 32,242 36,220 41,594
Net Int Income (%) 10.1 3.0 12.2 11.7
Debt 10,728 11,801 14,751 18,439
Borrowing 23,351 22,884 27,003 31,863
Non-Int Exp (%) 5.9 (8.1) 12.3 14.7
Total Deposits 3,08,114 3,05,116 3,44,970 3,87,598
Profit Before Tax (%) (2.9) (14.3) 12.6 37.5
Other liab incld prov 8,637 9,068 10,338 11,785
Net profit (%) 3.9 (7.7) 12.6 37.5
Total Liabilities 3,85,041 3,86,589 4,38,760 4,96,758
Avg Adv / Avg Dep (%) 80.2 80.2 80.9 82.6
Avg Invst / Avg Dep (%) 26.6 25.6 25.8 26.3
Incr Adv / Deposits (%) 90.0 (4.2) 99.4 102.1
Avg Cash / Avg Dep (%) 10.6 11.6 10.8 9.4

Tier I (%) 13.9 15.3 14.9 14.8
CET1 (%) 13.9 15.3 14.9 14.8
NNPAs to Equity (%) 8.6 8.2 9.8 6.1

HDFC Bank (HDFCB IN)

Well poised to capture market share
2 December 2020
Well capitalized to gain market share. HDFCB gained the highest (3.3%) market share in BUY
deposits between 2015 and 2020 to touch 8.3%. The following factors will enable the bank CMP RS 1433
to gain more share: A complete suite of product for diverse customer needs, leveraging TARGET RS 1750 (+22%)
technology that offers an omnichannel experience, and a renewed thrust on the semi-urban
and urban markets. We model credit CAGR of c.17% and deposit CAGR of c.16% in FY20-23. SEBI CATEGORY: LARGE CAP
Resilient asset quality: Its asset quality has shown resilience even during the economic COMPANY DATA
downturn. Various data points – such as collection efficiency, exposure to stressed O/S SHARES (MN) : 5507
corporates, or proportion of overdue accounts – do not indicate any meaningful increase in
stress. We expect its total stressed pool to be around 3%, within which we factor c.2% to 52 - WK HI/LO (RS) : 1464 / 739
slip in FY21, and the rest getting restructured. LIQUIDITY 3M (USDMN) : 348
PAR VALUE (RS) : 2
NIM to remain stable: HDFCB has been able to maintain stable NIMs (4.1%-4.3%) across the
interest-rate cycle. Strong CASA base (42%) and retail deposits (63% of total deposits) should SHARE HOLDING PATTERN, %
Sep-20 Jun-20 Mar-20
help it to sustain its performance. Deployment of excess liquidity and improvement in CD
Promoters 21.2 21.2 21.2
ratio would enable the bank to maintain its NIMs at 4.1%-4.3%. The yield on advances has DII 18.6 18.0 17.9
grown 60bps, whereas cost of deposit declined by 50bps in the last nine months. FII 49.1 48.8 48.5
Public & Others 11.1 12.0 12.4
Improving customer experience and enhancing efficiencies: HDFC Bank has led the digital
transformation of the Indian financial services sector and continues to invest in technologies KEY FINANCIALS
to improve customer experience and enhance efficiencies. As a result, its cost-to-income Rs bn FY21e FY22e FY23e
ratio declined to 38.6% from 41% between FY18-20. We expect C/I ratio to decline further to Pre-prov ROE (%) 30.6 30.2 30.5
c.36.5% by FY23. Pre-prov ROA (%) 3.6 3.6 3.6
Net Profit 313 372 440
% growth 19.1 18.8 18.5
Outlook and valuation EPS (Rs) 57.0 67.8 80.3
 A judicious mix of its retail and corporate loan book has enabled the bank to BVPS (Rs) 339.3 402.4 475.3
demonstrate strong loan-book growth despite a systemic slowdown. ROE (%) 16.9 17.2 17.4
 Solid underwriting and strict monitoring of loans should enable it to contain its stressed P/E (x) 25.1 21.1 17.9
portfolio at manageable levels; we factor 2% slippage and 1% standard restructured Adj P/BV (x) 4.1 3.4 2.8
loans in FY21.
 Stable growth aided by tax cuts will help deliver PAT growth of c.19% in FY20-23. Sujal Kumar, Research Analyst
 At CMP, its core book trades at 4.1x/3.4x/2.8x FY21/22/23 core-ABVPS of Rs
339/402/475, thus valuing the subsidiary at Rs 88 per share.
 We introduce FY23 earnings and roll forward our target multiple to FY23. Maintain Buy
with a revised target of Rs 1,750 (up from Rs 1,380) at 3.5x FY23 ABVPS.
SOTP Valuation Stake Per share valuation Criteria
Parent 482 FY23 Adj book value
less: Investment in subsidiary 7 per share investment in subsidiary
core book value 475
Bank Valuation – A 1663 3.5x FY23 core adj. book
Subsidiary
HDB Financial 95.5 61 3.5x FY23 adj networth of Rs100bn, valuing entity at Rs 349bn
HDFC Securities 97.3 27 20x FY23 PAT of Rs7.6bn, valuing entity at Rs 152bn
Total 88
Total subsidiary value – B 88

Total value of the entity - (A+B) 1751

HDFC BANK COMPANY UPDATE

1800 YOAst % COF % NIM % CD ratio %, rhs
Rs 4x 12 94
1600
9.8 9.7 9.8 9.7 9.6 92
1400 10 9.1
3.5x 8.8 8.5
1200 90
3x 8
1000 88
2.5x 6 5.5 5.3 5.4 5.4 5.2
800 4.7
4.3 4.4 4.3 4.2 4.2 4.3 4.54.3 4.34.1 86
600
4
84
400
200 2 82
0 0 80

Provision (incl std, specific & contingent) %, rhs
RoA % RoE %, rhs
GNPA % 2.1 17.7
2.00 NNPA % 160 2.1
142 17.4
130 140 2.0
113 2.0 17.1
1.50 106 120
2.0
100 16.8
2.0
1.00 80 16.5
2.0
60
1.9 16.2
0.50 40
1.9
20 15.9
1.9
0.00 0 1.9 15.6

HDFC BANK COMPANY UPDATE
Financials

Interest on Loans 918 1,019 1,202 1,431 Earnings and Valuation Ratios
Others 24 32 36 40 RoAE (%) 16.4 16.9 17.2 17.4
Total Income 794 900 1,036 1,214 Book Value (Rs.) 311.8 363.8 424.1 496.9
Op.Exp / TI (%) 39.6 38.4 37.4 36.8
Op.Exp / AWF (%) 2.3 2.1 2.1 2.1
Y/E Mar, Rs bn FY19 FY20 FY21e FY22e
Assets
Asset Quality
Cash & Bal with RBI 866 960 1,064 1,171
GNPAs / Gr Adv (%) 1.3 1.5 1.7 1.7
Loans, Adv & Int accrued 9,937 11,428 13,516 15,906
NNPAs / Net Adv (%) 0.4 0.3 0.4 0.4
Investments 4,021 4,425 5,154 5,757
Growth Ratio
Other assets 436 489 547 613
Loans (%) 21.3 15.0 18.3 17.7
Total Assets 15,305 17,352 20,340 23,514
Investments (%) 33.0 10.0 16.5 11.7
Liabilities
Deposits (%) 24.1 13.4 17.5 16.0
Networth (%) 14.6 16.7 16.6 17.2
Net Int Income (%) 16.5 18.1 17.2 17.3
Debt 102 118 135 156
Borrowing 1,264 1,454 1,773 2,022
Non-Int Exp (%) 17.5 8.6 15.0 15.6
Total Deposits 11,543 13,086 15,381 17,836
Profit Before Tax (%) 13.7 14.6 18.8 18.5
Net profit (%) 24.6 19.1 18.8 18.5
Avg Adv / Avg Dep (%) 85.8 85.5 86.2 87.1
Avg Invst / Avg Dep (%) 33.8 34.3 33.6 32.8
Avg Cash / Avg Dep (%) 8.1 7.4 7.1 6.7

Tier I (%) 17.2 16.8 16.2 15.9
CET1 (%) 16.4 16.2 15.6 15.4
NNPAs to Equity (%) 2.1 2.0 2.0 2.2

ICICI Bank (ICICIBC IN)

Faster reversal to normalcy
2 December 2020
Improved collection efficiency and higher customer activation: ICICIBC’s collection BUY
experience has been quite encouraging with retail collection efficiency reaching 97% of pre- CMP RS 485
covid levels in September. Overdue levels for credit cards and the rural segment were 4% TARGET RS 560 (+16%)
and 1% higher than pre-covid levels. For SME/business banking, overdue loans were back to
pre-covid levels. For the corporate segment, less than 3% of the loan book was overdue. This SEBI CATEGORY: LARGE CAP
said, we expect the overall stress pool to be c.5% of gross customer asset(GCA), of which we
model 3% slippage and 2% standard restructuring in FY21. COMPANY DATA
O/S SHARES (MN) : 6900
Strong provision buffer; enough to bring back normalized credit costs in FY22: ICICIBC’s
provision buffer of Rs 88bn (1.3% of loan book) provides a strong cushion for any asset 52 - WK HI/LO (RS) : 552 / 269
quality shocks. We have built in a credit cost assumption of 2.4% in FY21 and expect it to LIQUIDITY 3M (USDMN) : 187.6
normalize to 1.4% in FY22. PAR VALUE (RS) : 2
Well-poised to gain market share: ICICIBC’s strong capital base and superior retail SHARE HOLDING PATTERN, %
franchisee will help it to gain market share. Its recent capital raising (Rs 150bn) has Sep 20 Jun 20 Mar 20
FII / NRI / OCB : 36.1 37.8 36.4
improved its tier-1 ratio to 17.9% (the second-best after KMB’s 22.8%). Its greater share of
FI / MF / Banks : 55.6 53.4 54.5
low-cost deposits (CASA at 40%) and granular deposit composition (61% is retail deposits) Indian Public : 8.3 8.9 9.1
are elements for long-term business sustenance. The bank gained 1.6% market share
between 2015 and 2020, despite a weak corporate credit cycle between FY16 and FY18. KEY FINANCIALS
With this largely behind it, the bank is well poised to grab higher market share ahead. We Rs bn FY21 FY22E FY23E
model 11% CAGR for credit and deposit in FY20-23. Pre-prov ROE (%) 26.5 22.7 22.7
Pre-prov ROA (%) 3.2 3.0 3.0
Outlook and valuation Net Profit 143 180 208
 We believe ICICIBC is best placed among peer banks based on its low exposure towards % growth 80.2 25.9 15.7
riskier segments (unsecured retail loans and MSMEs) in the current scenario. EPS (Rs) 20.7 26.0 30.0
BVPS (Rs) 179 201 222
 Its collection efficiency returned to 97% of pre-covid levels + guidance of normalised ROE (%) 10.9 11.8 12.2
credit costs in FY22 provides confidence in its ability to manage in the current asset- P/E (x) 18.3 14.4 12.3
quality crisis, without a significant impact on its return ratios. Adj P/BV (x) 2.1 1.9 1.7
 We have factored eventual mortality of c.3% and restructuring of c.2% in FY21.
 Strong provision coverage (81.5%) along with covid-related buffer (Rs 88bn; 1.2% of Manish Agarwalla, Research Analyst
GCA) should enable it to meet post-moratorium credit shocks. Sujal Kumar, Research Analyst
 We introduce FY23 financials and roll over our target multiple to FY23. We expect
earnings growth of 80%/+26%/+16% in FY21/22/23 translating into RoA of
1.3%/1.5%/1.6%.
 At CMP, ICICIBC trades at 2.1x/1.9x/1.7x core ABVPS of Rs 179/201/222 (valuing
subsidiaries at Rs 117). We maintain buy with a revised TP of Rs 560 (Rs520 earlier).
Shareholding Valuation Valuation Criteria
of ICICI per share Rs
Value of Banking Business (1) 444 2x FY23E core ABVPS of Rs222
ICICI Securities ltd 77.2% 16 15x FY23E PAT of Rs9.8bn
ICICI Prudential life insurance company ltd 51.4% 50 20x FY23E NBAP of Rs21bn+EV of Rs257bn
ICICI Lombard General insurance company ltd 51.9% 51 35x FY23E PAT of Rs 19.4bn
ICICI AMC 51.0% 22 8% FY23E AUM of Rs4tln
Housing finance business 100.0% 2 1x FY22E ABV of Rs13bn
Overseas banking subsidiaries 5 0.5x current BV of Rs 68bn
Value of subsidiary 147
Less: Holding company discount @ 15% 29
Net value of Subsidiary (2) 117
Total (1) + (2) 561
Source: PhillipCapital India Research

ICICI BANK COMPANY UPDATE

Rs
10 9.3 9.4 9.5 9.5 9.4 9.3 84
2.5x 9.0
600 8.9
82
2x 8
500 80
1.5x
400 6 78
4.9 5.0 5.1 5.1 4.9 4.8 4.5
1x 4.2 76
300 3.7 3.8 3.9 3.7
3.4 3.6 3.6 3.6
4 74
200
72
2
100 70
0 0 68
Asset Quality Return Ratios

1.8 14
GNPA %
7 NNPA % 98 100
1.6
12
6 1.4
95
92 10
5 91 1.2
90 1.0 8
4
86
0.8 6
3 85
0.6
2 4
80 0.4
1 2
0.2
0 75 0.0 0

ICICI BANK COMPANY UPDATE
Financials

Others 26 48 40 42 RoAE (%) 7.1 10.9 11.8 12.2
Total Income 497 567 595 661 Book Value (Rs.) 165 195 218 245
Personnel Expenses 83 89 99 110 Adj BV (Rs.) 149 179 201 222
Op.Exp / TI (%) 45.0 42.9 42.3 42.1
Op.Exp / AWF (%) 2.3 2.1 2.1 2.1
Assets
Asset Quality
Cash & Bal with RBI 1,192 1,269 1,220 1,183
GNPAs / Gr Adv (%) 6.2 5.9 5.1 4.3
NNPAs / Net Adv (%) 1.5 1.0 0.9 1.1
Investments 2,582 2,922 3,173 3,448
Growth Ratio
Other assets 673 724 795 787
Loans (%) 10.0 7.0 13.2 13.9
Total Assets 10,984 11,907 13,099 14,423
Investments (%) 19.9 13.2 8.6 8.7
Liabilities
Deposits (%) 17.9 11.2 10.2 10.2
Networth (%) 7.5 24.3 11.0 11.7
Net Int Income (%) 23.1 11.7 12.3 12.5
Debt 117 123 135 149
Borrowing 1,411 1,157 1,273 1,400
Non-Int Exp (%) 19.5 2.0 12.6 10.8
Total Deposits 7,737 8,603 9,484 10,456
Profit Before Tax (%) 271.9 30.4 31.8 15.7
Net profit (%) 135.8 80.2 25.9 15.7
Avg Adv / Avg Dep (%) 79.4 76.1 76.3 79.4
Avg Invst / Avg Dep (%) 33.1 33.7 33.7 33.2
Avg Cash / Avg Dep (%) 13.9 15.1 13.8 12.0

Tier I (%) 14.7 16.9 17.3 17.8
CET1 (%) 13.4 16.2 16.7 17.3
NNPAs to Equity (%) 8.9 5.0 5.0 6.1

IndusInd Bank (IIB IN)

Long wait for normalised credit cost
2 December 2020
Long road to normalised credit costs: The bank has a dominant presence in the segments NEUTRAL (Downgrade)
particularly hit hard by the post-pandemic lockdowns. Segments where the bank has a CMP RS 895
sizable presence – such as commercial real estate, commercial vehicles, micro finance, credit TARGET RS 925 (+3.4%)
cards, and MSMEs – have been relatively more affected. IIB’s overall stressed pool (Refer to
Table:5) of +7% translates into 3% slippage and 4% restructured book in FY21. The bank has SEBI CATEGORY: LARGE CAP
built in a provision buffer of Rs 21bn (1.1% of loan book). With the expected stress level,
credit costs should remain elevated for the next four quarters for the bank, before returning COMPANY DATA
to normalised levels. We have factored a credit cost of 3.5%/2.25% for FY21/22; IIB’s O/S SHARES (MN) : 756
guidance is 3-4% for FY21.
MARKET CAP (USDBN) : 9
52 - WK HI/LO (RS) : 1596 / 236
Change in balance-sheet composition will moderate credit growth vs. past performance: LIQUIDITY 3M (USDMN) : 215.8
IIB’s strategy has shifted towards “retailisation of the balance sheet” with a focus on PAR VALUE (RS) : 2
improving its retail deposits franchise, increasing the contribution of non-vehicle retail loans
and the proportion of micro-finance business, and reducing exposure to low-rated corporate SHARE HOLDING PATTERN, %
groups. Because of the lack of credit demand in the system, finding adequate opportunity to Sep 20 Jun 20 Mar 20
Promoters : 13.5 13.3 13.0
meet the desired RAROC (risk adjusted return on capital) would be challenging. We have
FII / NRI / OCB : 15.2 13.4 14.1
modelled credit CAGR of 12% over FY20-23. FI / MF / Banks : 56.2 56.5 57.8
Indian Public : 15.2 16.9 15.1
Holding on to margins is a key challenge: Despite a 50bps decline in the costs of deposits in
the last nine months, IIB’s yield-on-advances has remained flat – which could be attributed KEY FINANCIALS
to loan book remaining flat for the last few quarters. However, with the re-pricing of its Rs bn FY21e FY22E FY23E
existing loan book and incremental loan disbursement at lower rates, its NIM should come Pre-prov ROE (%) 30.5 26.8 25.5
under pressure, even after factoring some release of liquidity in its balance sheet. Pre-prov ROA (%) 3.8 3.5 3.3
Net Profit 28 46 58
Outlook and valuation % growth -36.8 64.0 26.4
EPS (Rs) 36.9 59.3 74.9
 IIB’s valuation has improved somewhat to 1.5x (one-year forward P/ABVPS) from a BVPS (Rs) 478.9 546.4 617.6
distressed level of 0.4x in March 2020. ROE (%) 7.4 10.5 11.8
 However, the valuation is no longer at distressed levels. Developments in in the last six P/E (x) 24.3 15.1 12.0
months that allayed investors’ concerns were – restoration of depositors’ trust in the Adj P/BV (x) 1.9 1.6 1.4
bank, its ability to raise capital to protect its balance sheet, and finally, better-than-
expected recovery in business activity (collections, etc.).
 The aftermath of the moratorium should start hitting banks in ensuing quarters. Manish Agarwalla, Research Analyst
 IIB’s ability to return to its normal growth trajectory and credit cost would be a key
driver for its further re-rating. Here, we see challenges in terms of growth and see a
long wait before credit cost normalizes. We model credit CAGR of 12% in FY20-23, credit
cost of 3.5%/2.25% in FY21/22, and 3.3% slippage and 4% standard restructuring in
FY21.
 We expect earnings growth of +37%/+64%/+26% in FY21/22/23 translating into RoA of
0.9%/1.4%/1.6%.
 Based on return-on-risk-weighted-asset, some frontline private-sector banks (Axis, ICICI
Bank) are better placed – both in terms of valuation and return ratios – compared to IIB.
 Hence, we downgrade the stock to NEUTRAL from BUY. At CMP, IIB trades at
1.9x/1.6x/1.4x ABVPS of Rs 479/546/618. Our revised target is Rs 925 (up from Rs 720
earlier), valuing the bank at 1.5x FY23E ABPVS of Rs 618.

INDUSIND BANK COMPANY UPDATE

14 110
12.0 12.0 12.0 11.9 11.9 12.0
2000 11.5 11.3
12 105
4x
10
1500 100
3x
8 6.7 6.8 6.9 6.7 6.5 95
6.1 5.7
1000 5.6
2x 6
4.1 4.1 4.2 4.3 4.3 4.2 90
3.8 3.6
4
500 1x
2 85
0 0 80
Asset Quality Return ratios

Provision (incl std, specific & contingent) %, rhs
GNPA % RoA % RoE %, rhs
6.0 140 1.8 14.0
NNPA %
119 1.6
120 12.0
5.0 110
1.4
98
100 10.0
89 1.2
4.0
80 1.0 8.0
3.0
60 0.8 6.0
2.0 0.6
40 4.0
0.4
1.0 20 2.0
0.2
0.0 0 0.0 0.0

INDUSIND BANK COMPANY UPDATE
Financials

Others 5 6 7 7 RoAE (%) 12.9 7.4 10.5 11.8
Total Income 190 194 208 229 Book Value (Rs.) 500.4 534.2 601.6 668.4
Op.Exp / TI (%) 46.2 44.8 46.6 47.2
Op.Exp / AWF (%) 3.0 2.7 2.8 2.8
Assets
Asset Quality
Cash & Bal with RBI 160 250 229 216
GNPAs / Gr Adv (%) 2.5 3.6 4.5 5.1
NNPAs / Net Adv (%) 0.9 0.8 0.9 1.0
Investments 618 676 763 861
Growth Ratio
Other assets 206 206 211 198
Loans (%) 6.5 5.6 15.1 14.8
Total Assets 3,071 3,337 3,738 4,183
Investments (%) 1.6 9.5 12.8 12.9
Liabilities
Deposits (%) 3.7 15.2 15.0 15.1
Networth (%) 2.9 16.4 15.0 11.1
Net Int Income (%) 12.1 9.2 8.6 11.7
Borrowing 551 441 396 357
Non-fund based income (%) 7.1 -21.5 16.6 15.0
Total Deposits 2,031 2,339 2,689 3,096
Non-Int Exp (%) 13.0 -3.6 15.0 14.0
Profit Before Tax (%) -2.4 -38.8 64.0 26.4
Net profit (%) 3.1 -36.8 64.0 26.4
Source: Company, PhillipCapital India Research Estimates
Asset / Liability Profile
Avg Adv / Avg Dep (%) 98.2 94.3 89.6 88.8
Avg Invst / Avg Dep (%) 30.8 29.6 28.6 28.1
Avg Cash / Avg Dep (%) 8.2 9.4 9.5 7.7

Tier I (%) 14.6 15.9 16.4 16.4
CET1 (%) 13.2 14.5 14.9 14.8
NNPAs to Equity (%) 5.4 3.9 4.6 5.2

Kotak Mahindra Bank (KMB IN)

Growth back on agenda
2 December 2020
One of the best deposit franchises: Over the years, KMB has built a strong deposit franchise
with a CASA ratio of 57% (as on Sept. 2020) at the lowest cost of deposit in the street at BUY
c.4%. While the management feels that there is still room for additional cuts in deposit CMP RS 1875
rates, any decision to cut the savings rate would be made considering strategic priorities. TARGET RS 2150 (+15%)
The combination of high CASA ratio and low COD provides KMB with a significant
competitive advantage and enables it to underwrite loans that were earlier not able to pass SEBI CATEGORY: LARGE CAP
through its RAROC (Risk-Adjusted Return on Capital) model because of higher cost of
funding. COMPANY DATA
O/S SHARES (MN) : 1980
Focus on growth: KMB is now ready for a strategic shift towards building a customer
franchise on the asset side, in addition to its liability franchise. It has already become 52 - WK HI/LO (RS) : 1948 / 1000
aggressive in the home-loan segment, offering the lowest rate on the street. It sees LIQUIDITY 3M (USDMN) : 145.7
opportunities in home loans, loan-against-property, and working-capital loans for Small and PAR VALUE (RS) : 2
Medium Enterprises. It will focus on growing these businesses while it calibrates its growth
in the unsecured retail segment. SHARE HOLDING PATTERN, %
Sep-20 Jun-20 Mar-20
Promoters 26.1 26.1 29.9
Resilient asset quality: Superior underwriting skills and strong monitoring of portfolio have DII 15.3 15.3 12.6
been its key strengths. KMB has had a cautious view on the SME sector over the past few FII 42.2 42.1 39.2
years, which is why it has kept its exposure towards this segment limited to 8%. It will Public & Others 16.5 16.5 18.3
experience lower slippage and restructuring compared to peers; its total stressed pool
should be around 2.6% within which we model c.2.3% slipping into FY21. However, credit KEY FINANCIALS
cost should remain low at c.90bps. Rs bn FY21e FY22e FY23e
Pre-prov ROE (%) 20.8 19.3 18.5
Pre-prov ROA (%) 3.1 3.1 3.0
NIM to remain stable: KMB’s net interest margin has been largely stable at 4.5-4.6% over Net Profit 73.8 88.3 94.0
the last one year, as the bank did not reap the entire benefits of declining deposit costs (- % growth 24.1 19.8 6.4
130bps in the last one year) due to higher liquidity. Strong CASA base, deployment of excess EPS (Rs) 38.0 44.6 47.5
liquidity and improvement in CD ratio should enable KMB to maintain NIM at 4.5-4.6% BVPS (Rs) 312.2 353.7 399.8
ROE (%) 13.1 13.0 12.3
ahead. P/E (x) 32.7 27.8 26.2
Adj P/BV (x) 4.0 3.5 3.1
Outlook and valuation
 Strong capital (tier-1 at 22.8%), higher covid provision (Rs 12.7bn or 0.62% of net
advances) and excellent deposit franchise (57.1% CASA at 3.87% cost of SA) should help Sujal Kumar, Research Analyst
KMB to grab opportunities in the post-covid world.
 With its focus on asset-side growth and a strong balance sheet, KMB should gain market
share. Higher margins and cost optimization should lead to enhanced return ratios over
the medium term. Stable growth aided by tax cuts should help the bank deliver PAT
growth of c.16.5% in FY20-23.
 We introduce FY23 earnings and roll forward our target multiple to FY23. At CMP stock
trades at 4.0x/3.5x/3.1x FY21/22/23 core-ABVPS of Rs 312/353/400, thus valuing the
subsidiary at Rs 643 per share.
 Maintain Buy. Revised target of Rs 2,150 (up from Rs 1,600) at 3.8x FY23 ABVPS.
Business Total Value Per Share % of Total Value
INR mn INR %
Kotak Bank 28,79,129 1,508 70%
Kotak Prime 1,44,092 75 4%
Kotak Life Insurance 5,67,936 298 14%
Kotak Securities & Capital Company 2,69,503 141 7%
Kotak AMC 1,83,824 97 5%
Kotak Investments 30,919 16 1%
Kotak International Subsidiaries 19,319 11 1%
Kotak Investment Advisors 5,248 4 0%
TOTAL 2,151 100.0%

KOTAK BANK COMPANY UPDATE

5x 12.0 95.0
2000 10.0 9.9 10.0 10.0 9.8 9.7
4x 10.0 9.4 9.2
90.0
3x
1500 8.0
85.0
2x 6.0 5.5 5.3 5.4 5.3
5.1
1000 4.3 4.5 4.5 4.6 4.7 4.64.7 4.44.4 4.04.5 80.0
4.0
500 75.0
2.0
0 0.0 70.0
Asset Quality Return ratio

Provision GNPA NNPA 2.4 13.2
3.50% 120% RoA % RoE %, rhs
109% 2.3
100% 13.0
3.00% 100% 2.3
80% 81% 2.2 12.8
2.50%
80%
2.2
2.00% 12.6
60% 2.1
1.50% 12.4
2.1
40% 2.0
1.00% 12.2
2.0
0.50% 20% 12.0
1.9
0.00% 0% 1.9 11.8
0 0 0 0 FY20 FY21e FY22e FY23e

KOTAK BANK COMPANY UPDATE
Financials

Interest on Loans 210.0 202.9 215.5 258.4 Earnings and Valuation Ratios
Interest on Investments 52.6 64.6 82.4 68.5 Pre-provision Operating RoAE (%) 22.0% 20.8% 19.3% 18.5%
Others 6.7 13.5 11.5 8.7 RoAE (%) 12.9% 13.1% 13.0% 12.3%
Total Interest Earned 269.3 281.0 309.3 335.5 Pre-provision Operating ROA (%) 3.1% 3.1% 3.1% 3.0%
Total Interest Expended 134.3 127.5 139.3 151.5 RoAB (%) 2.0% 2.1% 2.3% 2.2%
Net Interest Income 135.0 153.5 169.9 184.0 EPS (Rs.) 31.2 38.0 44.6 47.5
Total non-interest income 53.7 50.3 67.1 77.8 Dividend per share (Rs.) - 0.9 1.1 1.2
Total Income 188.7 203.8 237.0 261.8 Book Value (Rs.) 257.2 320.7 364.2 410.5
Personnel Expenses 38.8 39.6 47.5 52.2 Adj BV (Rs.) 251.4 312.2 353.7 399.8
Other Expenses 49.7 47.2 59.1 67.9
Total Op expenses 88.5 86.8 106.5 120.1 Revenue Analysis
Net Inc (Loss) before prov 100.2 117.0 130.5 141.7 Interest income on IBA (%) 9.1% 8.0% 7.9% 8.0%
Provision and contingencies 14.8 17.3 11.6 15.4 Interest cost on IBL (%) 5.0% 4.1% 4.1% 4.0%
Provision for Invst deprn 7.4 1.3 1.1 0.9 NIM on IBA / AWF (%) 4.5% 4.4% 4.3% 4.4%
Net Inc (Loss) before tax 78.0 98.4 117.8 125.3 Core fee Inc / AWF (%) 1.5% 1.1% 1.4% 1.5%
Provision for Income Tax 18.6 24.6 29.4 31.3 Portfolio gains / Total Inc (%) 0.0% 0.0% 0.0% 0.0%
Net Profit 59.5 73.8 88.3 94.0 Op.Exp / TI (%) 46.9% 42.6% 44.9% 45.9%
Op.Exp / AWF (%) 2.7% 2.3% 2.5% 2.6%
Employee exps / Op exps (%) 43.8% 45.6% 44.6% 43.5%
Balance Sheet Tax / Pre-tax earnings (%) 23.8% 25.0% 25.0% 25.0%
Asset Quality
Assets
GNPAs / Gr Adv (%) 2.25% 3.30% 3.24% 2.93%
Cash & Bal with RBI 533 411 301 239
NNPAs / Net Adv (%) 0.72% 0.98% 1.00% 0.86%
Investments 751 1,222 1,292 990
Growth Ratio
Loans (%) 6.8% 0.7% 21.3% 18.7%
Other assets 105 118 131 550
Investments (%) 5.4% 62.9% 5.7% -23.4%
Total Assets 3,603 3,981 4,425 4,983
Deposits (%) 16.4% 7.2% 11.8% 13.9%
Liabilities
Networth (%) 14.3% 29.5% 13.6% 12.7%
Net Int Income (%) 19.9% 13.7% 10.7% 8.3%
Non-fund based income (%) 16.7% -6.5% 33.5% 16.0%
Borrowing 371 409 430 451
Non-Int Exp (%) 17.8% -1.9% 22.7% 12.8%
Total Deposits 2,628 2,818 3,150 3,589
Profit Before Tax (%) 5.7% 26.0% 19.8% 6.4%
Net profit (%) 22.2% 24.1% 19.8% 6.4%
Avg CASA/ Deposits (%) 56% 57% 58% 59%
Avg Adv / Avg Dep (%) 90% 81% 82% 87%
Avg Invst / Avg Dep (%) 32% 36% 42% 34%
Incr Adv / Deposits (%) 38.0% 8.0% 142.4% 114.6%
Avg Cash / Avg Dep (%) 16.4% 17.3% 11.9% 8.0%
Capital Adequacy Ratio:

Tier I (%) 17.3% 20.3% 20.7% 20.8%
CET 1 (%) 17.1% 20.1% 20.6% 20.6%

State Bank of India (SBI IN)

Favourable risk reward
2 December 2020
Asset quality under control: A focus on top-rated borrowers and public-sector entities BUY
should help SBI to tide over the current economic cycle. A resilient retail loan portfolio and CMP RS 248
timely disbursement of ECLGS loans should contain the stress in its MSME portfolio. TARGET RS 310 (+25%)
Collection efficiency of 97.5% in October endows confidence in SBI’s overall asset quality.
We factor 3.5% stressed portfolio for the bank (Refer to Table:5) within which we have SEBI CATEGORY: LARGE CAP
modelled c.2.3% slippage and the balance 1.2% as standard restructured.
COMPANY DATA
Potential upside for margins: SBI quickly passed on falling costs of deposits to customers in O/S SHARES (MN) : 8925
the form of lower MCLR rates. The bank cut its deposit/lending rates by 60/50bps over the
last nine months. It has been able to maintain its margin at 3.1%, despite a decline in its 52 - WK HI/LO (RS) : 345 / 149
credit-deposit ratio to 61% from 66-67% earlier. An improvement in the credit-deposit ratio LIQUIDITY 3M (USDMN) : 175.6
creates potential upside for its margin. PAR VALUE (RS) : 2
Weak operational matrices: SBI has lagged behind other large banks in terms of operational SHARE HOLDING PATTERN, %
efficiency matrices. SBI’s cost-to-income is way higher (at 56%) compared to HDFC Bank Sep 20 Jun 20 Mar 20
(40%) and ICICI Bank (45%). We do not foresee any near-term material changes in the Promoters : 56.9 56.9 56.9
FII / NRI / OCB : 25.2 24.6 24.4
matrix, given its weak topline growth.
FI / MF / Banks : 7.7 9.1 10.7
Indian Public : 10.3 9.4 8.0
Outlook and valuation: Strong collection efficiency numbers and encouraging management
commentary on asset quality were big positive surprises. We are sanguine about the asset KEY FINANCIALS
quality outcome because of the following reasons: (1) Its retail loans are largely to salaried Rs bn FY21e FY22e FY23e
and PSU entities. (2) The corporate-NPA cycle in FY16-18 already recognized a bulk of weak Pre-prov ROE (%) 31.9 32.4 30.2
and marginal cases in its corporate book. (3) The agriculture segment has done well in India Pre-prov ROA (%) 1.8 1.8 1.8
due to better rain and harvest. (4) Government’s ECLGS has aided the stressed MSME Net Profit 169 250 298
segment. % growth 16.7 48.1 19.0
 Based on our analysis of credit exposure (refer to the table below), we factor a total EPS (Rs) 19.0 28.1 33.4
BVPS (Rs) 172.4 201.0 230.2
stressed book of 3.5% for FY21.
ROE (%) 7.9 10.7 11.6
 We introduce FY23 financials and roll over our target multiple to FY23. P/E (x) 12.9 8.7 7.3
 We expect earnings to move by -17%/+48%/+19% in FY21/22/23, translating into RoA of Adj P/BV (x) 0.7 0.6 0.5
0.4%/0.6%/0.7%.
 At CMP, stock trades at 0.7x/0.6x/0.5x on FY21/22/23 core ABVPS of Rs 172/201/230
(subsidiary and investment value of Rs 126 per share). Manish Agarwalla, Research Analyst
 Strong NII performance and manageable credit costs warrant a Buy rating, given its
subdued valuation. Maintain Buy with a revised TP of Rs 310 (up from Rs 285).
Sum-of-the-parts
Ownership Value/share Comment
Banking business (A) 184 0.8X FY23E Core -ABVPS OF Rs 230
SBI Life 55.5% 49 2.6x EV of Rs 298.6bn
SBI cards 69.5% 55 40 times FY22E PAT Rs 18bn
SBI Fund Mgt. 63.0% 20 30x of FY22E PAT of Rs 9.4bn
SBI General Insurance 70.0% 17 25 times FY22E PAT of Rs 8.8bn
SBI Caps 100.0% 5 15 times FY22E PAT of Rs 3bn
Subsidiary & associate value (B) 147
Yes Bank (C) 30.0% 10 Current market cap
Total (D) = (B+C) 157
Holding company discount @ 20% 31
Net value of subsidiary (D) 126
Fair Value (A) + (B) 310

STATE BANK OF INDIA CORPORATE UPDATE

Rs
10 72
2x 8.7 8.9 8.7
500 8.5 8.5 8.6 8.4 8.2 70
8
1.5x 68
400
6 66
1x 5.1 5.1 5.1 5.0 5.0 4.9
300 4.5 4.4 64
0.5x 4 3.1 62
200 2.8 2.8 2.8 2.9 3.1 3.0 3.0
60
100 2
58
0 0 56

0.8 14
GNPA %
7.0 NNPA % 82 0.7 12
79 80
6.0 80 0.6
10
5.0 78 0.5
8
4.0 75 76 0.4
6
3.0 73 74 0.3
2.0 72 4
0.2
1.0 70 0.1 2
0.0 68 0.0 0

STATE BANK OF INDIA CORPORATE UPDATE
Financials

Interest on Loans 1,797 1,744 1,918 2,110 Earnings and Valuation Ratios
Others 94 131 125 118 RoAE (%) 7.2 7.9 10.7 11.6
Total Interest Expended 1,592 1,550 1,639 1,734 RoAB (%) 0.4 0.4 0.6 0.7
Net Interest Income 981 1,103 1,227 1,326 EPS (Rs.) 16 19 28 33
Total non-interest income 452 366 379 378 Dividend per share (Rs.) 0 3 3 3
Total Income 1,433 1,469 1,606 1,705 Book Value (Rs.) 225 241 265 295
Personnel Expenses 457 503 553 608 Adj BV (Rs.) 167 172 201 230
Op.Exp / TI (%) 55.8 55.9 53.6 55.0
Op.Exp / AWF (%) 2.1 2.0 2.1 2.1
Assets
Asset Quality
Cash & Bal with RBI 2,511 3,168 2,951 2,793
GNPAs / Gr Adv (%) 6.15 5.91 5.77 5.58
NNPAs / Net Adv (%) 2.23 2.17 1.87 1.72
Investments 10,470 12,099 12,305 12,550
Growth Ratio
Other assets 2,896 2,737 3,245 3,512
Loans (%) 6.4 7.1 10.0 10.0
Total Assets 39,514 43,290 46,271 49,358
Investments (%) 8.3 15.6 1.7 2.0
Liabilities
Deposits (%) 11.3 12.4 6.8 6.5
Networth (%) 5.0 6.1 8.9 9.9
Net Int Income (%) 11.0 12.4 11.3 8.0
Debt 320 370 420 470
Borrowing 2,568 2,055 2,199 2,352
Non-Int Exp (%) 7.9 4.0 8.8 8.9
Total Deposits 32,573 36,611 39,119 41,673
Profit Before Tax (%) 1,459.1 (8.8) 48.1 19.0
Other liab incld prov 1,474 1,533 1,594 1,658
Net profit (%) 1,580.3 16.7 48.1 19.0
Avg Adv / Avg Dep (%) 67.8 65.2 64.8 66.9
Avg Invst / Avg Dep (%) 32.6 32.6 32.2 30.8
Avg Cash / Avg Dep (%) 7.7 8.2 8.1 7.1

Tier I (%) 11.0 10.3 10.7 10.9
CET1 (%) 9.8 9.2 9.6 9.9
NNPAs to Equity (%) 22.4 21.9 19.1 17.6

Stock Price, Price Target and Rating History (Axis Bank)

900
800
B (TP 850)850)
B (TP
700 B (TP 825)B (TP 800) B (TP 800)
B (TP 765)
600 B (TP 770) B (TP 700)
B (TP 560) B (TP 630)
500 B (TP 600)
N (TP 500)N (TP 490)
400
300
200
100
0
N-17 J-18 F-18 A-18 M-18 J-18 A-18 O-18 N-18 J-19 F-19 A-19M-19 J-19 A-19 O-19 N-19 J-20 F-20 A-20M-20 J-20 A-20 O-20 N-20
Stock Price, Price Target and Rating History (DCB Bank)

260
220
B (TP 250)
B (TP 240) N (TP 230)
180 B (TP 240) B (TP 205) S (TP 150) S (TP 150)
B (TP 215) B (TP 215)
140
100
N (TPN80)
(TP 80)
60 N (TP 67)
20
N-17 J-18 F-18 A-18 M-18 J-18 A-18 O-18 N-18 J-19 F-19 A-19 M-19 J-19 A-19 O-19 N-19 J-20 F-20 A-20 M-20 J-20 A-20 O-20 N-20
Stock Price, Price Target and Rating History (HDFC Bank)

1600
1400 B (TP 1415)B (TP 1420)

B (TP 2640) B (TP 1380)
B (TP 2640)B (TP 2740)
1200 B (TP 2530) B (TP 2524)
B (TP 2230)B (TP 2530) B (TP 2524)
B (TP 1100)
1000 B (TP 2200)
800
600
400
200
0
D-17 M-18 M-18 A-18 N-18 F-19 M-19 A-19 N-19 F-20 F-20 M-20 A-20 N-20

Stock Price, Price Target and Rating History (ICICI Bank)

600
B (TP 660)
B (TP 650)
550
B (TP 540)
500
B (TP 490) B (TP 520)
450 B (TP 465)
400 B (TP 405) B (TP 450) B (TP 470)
B (TP 400)
350 B (TP 364) B (TP 450)
B (TP 364)
300
250
200
150
100
N-17 J-18 M-18 A-18 J-18 J-18 A-18 O-18 D-18 J-19 M-19 A-19 J-19 J-19 S-19 O-19 D-19 J-20 M-20 A-20 J-20 J-20 S-20 O-20
Stock Price, Price Target and Rating History (IndusInd Bank)

2500
B (TP 2170)
2000 B (TP 2050)
B (TP 1900) B (TP 2170)
B (TP 2000) B (TP 1800)
B (TP 1800) B (TP 1640)
B (TP 1640)
1500
B (TP 1550)
1000
B (TP 720)
B (TP 740) B (TP 720)
500
0
D-17 J-18 M-18 A-18 M-18 J-18 A-18 O-18 N-18 J-19 F-19 A-19 M-19 J-19 A-19 O-19 N-19 J-20 F-20 M-20M-20 J-20 A-20 S-20 N-20
Stock Price, Price Target and Rating History (Kotak Bank)

2000
1800
N (TP 1660)
1600 N (TP 1485)
N (TP 1485)
1400 N (TP 1660) B (TP 1600)
B (TP 1450) B (TP 1450)
B (TP 1545)
1200 B (TP 1500)
BB(TP
(TP1545)
1500) B (TP 1450)
1000
800
J-18 F-18 A-18 M-18 J-18 A-18 S-18 N-18 D-18 F-19 M-19M-19 J-19 J-19 S-19 N-19 D-19 J-20 M-20 A-20 J-20 J-20 S-20 O-20 N-20

Stock Price, Price Target and Rating History (State Bank of India Bank)
400
350 B (TP 370) N (TP 350)

B (TP 380) B (TP 375)
B (TP 380) N (TP 305)
300 B (TP 345)
250 B (TP 285)

B (TP 260)
B (TP 245)
200
150
100
50
0
N-17 J-18 B (TP A-18 M-18 J-18 A-18 O-18 N-18 J-19 F-19 A-19 M-19 J-19 A-19 S-19 N-19 D-19 F-20 M-20M-20 J-20 A-20 S-20 O-20
345)
Rating Methodology
We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one
year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation
stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.
Large cap stocks

Rating Criteria Definition
BUY >= +10% Target price is equal to or more than 10% of current market price
NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%
SELL <= -10% Target price is less than or equal to -10%.
Mid cap and Small cap stocks

Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%
SELL <= -15% Target price is less than or equal to -15%.
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DN: c=IN, o=PHILLIPCAPITAL INDIA PRIVATE
MANISH LIMITED, postalCode=400101,

st=Maharashtra,
2.5.4.20=c120479ac54f5d14676ff3ef809e37b
AGARWALLA
36f813cda9aabd351941b5394771851dd,
serialNumber=8f2fac440030280867a204de6
8440acc0f02155e901622e89b053ba0537514
a1, cn=MANISH AGARWALLA
Date: 2020.12.02 09:04:46 +05'30'

Financials: Banks Well Equipped For A Time Like This

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Financials: Banks Well Equipped For A Time Like This

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INSTITUTIONAL EQUITY RESEARCH

The corporate credit book is resilient in the current environment

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

Table 1: Valuation matrix

P/ABV EPS BV ABV

Per share subsidiary value

Page | 3 | PHILLIPCAPITAL INDIA RESEARCH

Table 2: Business parameter analysis

NNPA % 1.0 0.8 0.2 1.0 0.5 0.6 2.1

Page | 4 | PHILLIPCAPITAL INDIA RESEARCH

Mar-17 Sep-15 Deposit (%)

CP and CDs outstanding (Rs bn)

Source: RBI, PhillipCapital India Research

Source: RBI, PhillipCapital India Research

Public Sector Banks

Page | 5 | PHILLIPCAPITAL INDIA RESEARCH

Weighted average lending rate on fresh loans

Private Sector Banks

Sep-14 Dec-14 Mar-14

Public Sector Banks

Sep-18 Dec-18 Jun-18

Weighted average lending rate on outstanding loans

Private Sector Banks

Source: RBI, PhillipCapital India Research

Price to Adjusted Book Value

Page | 6 | PHILLIPCAPITAL INDIA RESEARCH

Asset quality scenario so far

Chart 1: Collection efficiency in the month of September

Source: Company, PhillipCapital India Research

Chart 2: Asset quality dispensation & Provision buffer

Source: Company, PhillipCapital India Research

The pertinent questions –

The data points we used to assess asset quality:

Page | 7 | PHILLIPCAPITAL INDIA RESEARCH

3. Survey conducted by National Institute of Banking Management on impact of

The corporate credit rating downgrades not significant

Chart 3: Corporate rating downgrades

Source: Company, PhillipCapital India Research

Chart 4: Corporate rating downgrades to BB & Below

Page | 8 | PHILLIPCAPITAL INDIA RESEARCH

1,600 Vodafone Idea

Chart 5: Bank-wise exposure vulnerable downgrades between April – October’ 20

Source: Company, PhillipCapital India Research

Page | 9 | PHILLIPCAPITAL INDIA RESEARCH

Bounce rate data under NACH / CTS

Chart 6: Bounce rate in auto debit NACH transaction

Source: Company, PhillipCapital India Research

Chart 7: Bounce rate in CTS

Source: Company, PhillipCapital India Research

Survey conducted by National Institute of Banking Management on

Page | 10 | PHILLIPCAPITAL INDIA RESEARCH

 The ECLGS disbursement is expected to meet the short-term (three months, as

Chart 8: Disbursement to MSME sector (Indexed to Feb’ 20 figure)

1.0 1.0 1.0 1.0

Source: Company, PhillipCapital India Research

Chart 9: Lender wise MSME NPA

Source: Company, PhillipCapital India Research

Other findings of the survey

Page | 11 | PHILLIPCAPITAL INDIA RESEARCH

Table 3: Activity wise impact on liquidity by ECLGS

Use of GECL funds

Table 4: Activity wise usage of ECLGS disbursement