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Banking SectorValuation gap between private and public sector banks to narrow going ahead
December 10, 20
Kanika Thacker
Phone: +91-022-6631 8632
Amit Jain
Phone: +91-022-6113 1355
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Valuation gap between private and public sector banks to narrow goingah
PSU banks appear to have lost favor amongst investors due to concerns relating to asset quality, change in managem
and capital adequacy. As a result, the valuation gap between public and private banks has widened with public b
trading at ~62% discount to private banks as compared to historical averages of ~50%. We believe that markets seem
be over-reacting and asset quality concerns appear to be priced in. The high restructured books of public sector b
which have acted as a dampener, on investor sentiments do not seem nearly as threatening once we exclude, SEB
Air India restructuring which is unlikely to slip into non performing asset category. Based on our calculations, the ave
impact from slippages of 15% from restructured books adjusted for Air India and SEBs is ~9% on the FY14E adjusted
worth of banks. We expect these losses to be more than adequately compensated by gains from treasury books (~2
positive impact on adjusted networth of banks with a 100 bps decline in yields), recoveries and upgradations f
cumulative slippages of FY10-13E (The average impact from recoveries (50%) is ~14% on FY14E adjusted net wort
our PSU banking universe) and recoveries from written off accounts (The average impact from recoveries (15%) is ~3
on FY14E adjusted net worth of our PSU banking universe). As a result we do not expect the adjusted book value
banks to decline further from current levels. Despite the recent run up, several public sector banks are trading betheir long term one year forward P/ABV multiples and we expect valuations to move towards long term averages.
Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped a
likely to see some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market exp
the RBI to start the easing process which means yields dont have much upside risk (unless crude see a sharp up mo
However while the market would want to play on likely lower bond yields, it is skeptical about the rising risk of n
performing assets. However we believe though slippages will remain higher than historical averages, recoveries an
gradations will keep a check on net slippages in the coming quarters. Moreover with policy reforms and li
improvement in economic activity during FY14 vs. FY13, we believe the gap between private and PSU banks will nar
going ahead.
p
Recommendation summary for public sector banks
Bank
Target
Price
%
Upside Recommendation P/ABV ROAA ROAE
FY13E FY14E FY13E FY14E FY13E FY14
SBI 2590 13 Outperform 1.6 1.3 1.0% 1.0% 16.6% 18.2%
PNB 1001 22 Outperform 1.3 1.1 1.0% 1.1% 16.4% 18.7%
Union Bank 231 -9 Reduce 1.4 1.2 0.8% 0.8% 13.9% 15.3%
BOB 877 11 Neutral 1.2 1.0 1.1% 1.1% 17.4% 17.0%BOI 311 6 Hold 1.1 0.9 0.6% 0.7% 11.2% 14.3%
Corp. Bank 545 27 Buy 0.8 0.7 0.9% 0.9% 17.6% 18.3%
Canara Bank 549 13 Hold 1.2 1.1 0.8% 0.9% 14.0% 15.5%
Indian Bank 232 23 Buy 0.9 0.7 1.3% 1.4% 17.7% 18.6%
Allahabad Bank 190 19 Buy 0.9 0.8 0.9% 1.0% 15.7% 18.1%
OBC 371 6 Hold 0.9 0.8 0.8% 0.8% 11.6% 13.1%
IDBI Bank 113 3 Hold 0.9 0.9 0.7% 0.6% 10.3% 10.2%Source: Sunidhi Research, * CMP as of Dec 6
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Executive summary
Recoveries likely to improve going ahead
Recoveries/Upgrades rate currently trending at 10 year low at 20% for select banks vs. 10 year average of 60%, whereas st
estimates are factoring in low recoveries in line with those seen in FY12 and H1FY13. Thus a pickup in recoveries could prove to b
re-rating factor for public sector banks in next two years. We have analyzed the upside to currently estimated net worth for se
public sector banks under three recovery scenario (Rate of recovery/Upgrade moving to 40%, 50% and 60% of cumulative slippa
of FY10-13E). The average impact from recoveries (50%) is ~14% on FY14E adjusted net worth of our PSU banks universe.
Written off book at 22% of networth can prove to be a hidden gem
The second biggest helping hand would most likely come from the written off books of banks. Based on our calculations, the av er
prudentially written off book for PSBs in our study stands at 22% of FY14 adjusted net-worth. We have analyzed the upside tonetworth on account of recovery from written off accounts. The average impact from recoveries (15%) is ~3.2% on FY14E adjus
net worth of our PSU banks universe.
Historical trend in recovery/upgrades to slippage vs. GDP
Source: Company, Sunidhi Research
Write off book as % of Adj. Networth
Source: Company, Sunidhi Research
Restructured book largely seasoned or government guaranteed
The higher restructuring for public sector banks is partly due to restructuring in FY09-10 under the RBIs special dispensation sche
and partly due to Air India and SEBs restructuring which is unlikely to slip into NPA category. The restructured book excluding seasoned and government guaranteed portion would indicate much lower stress in the book as compared to stress visible pr
facie. We have analyzed the downside to the adjusted net-worth of banks on account of slippages from the restructured b
excluding Air India and SEB exposure. The average impact from slippage of 15% is ~9% on the FY14E adjusted net-worth of ba
(20% slippage would have an impact of 12%).
Restructured book vs. restructured excluding AI and SEB exposure
Source: Company, Sunidhi Research
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0%
20%
40%
60%
80%
100%
120%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
PNB UBI GDP (RHS)
0%
5%
10%
15%20%
25%
30%
35%
40%
45%
Write off book as pe rce ntage to adjusted networth
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Allahabad
Indian
OBC
PNB
Corp
BOI
IDBI
BOB
Canara
UBI
SBI
Restructured (%) Restructured ex SEB / AI (%)
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Select indicators suggest a revival in manufacturing
Select indicators (such as trend in new order book, raw material inventories and manufacturing PMI) along with recent governm
measures suggest that manufacturing activity could see a revival henceforth, which would have a positive bearing on GDP growt
revival in manufacturing and GDP growth would lead to lower non-performing assets for banks.
Trend in GFCF
Source:RBI
Trend in manufacturing PMI
Source:Markit economics
Trend in M1 growth
Source: RBI
Investment recovery likely with policy initiative
A majority of the companies with stalled project studied by our economy team reported that policy issues such as land acquisit
delay in environmental clearance, mining policy, fuel linkages and spectrum pricing were the main reason for the high incidence
stalled projects in the economy. These together accounts for about 68% of total stalled projects. Majority of these stalled proj
are in power, roads and mining sectors which remain the major stress points for banks.
Reasons for total stalled projects
Source:CMIE
Stalled project by Industry
Source: MIE
-5%
0%
5%
10%
15%
20%
25%
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Gross Fixed Capital Formation
30
35
40
45
50
55
60
65
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
0%
5%
10%
15%
20%
25%
30%
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
M1 Growth
Environmental ,
12.5%
Financial , 6.2%
Government,
11.8%
Land
Acquisition ,
27.7%
Raw
Material ,
15.9%
Management,
6.2%
Legal, 1.1%
Others,
18.6%
Cement , 1.37% Real Estate ,
8.98%
IT, 1.09%
Power, 36.38%
Transport,
11.23%
Metals &
Mininig ,
16.52%
Telecomunicati
on, 4.36%
Oil & Gas,
10.99%
Irrigation,
0.39%
Others, 8.70%
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In the last couple of months, we have seen some concrete policy intentions towards solving these issues with FinMins fast t
reform initiatives. Clearance of the most conflicting issue of retail FDI in both the houses reflects would help the current governm
to fast track its most pending decisions. Some of the important measures which can change the investment climate of the coun
include new FSAs expected to be signed by Coal India with better pricing mechanism, proposal to set up a Committee
Infrastructure, the State Electricity Distribution Responsibility Bill and setting up a National Investment Board (NIB). These along w
step towards financial restructuring scheme of discoms are likely to bring financial turnaround of discoms. Hence, the recent po
initiatives such as permitting FDI in retail trade, civil aviation and power trading exchanges and rationalization of diesel prices
help improve the investment climate.
Decline in interest rates to improve investment climate
It is expected that RBI is likely to move toward easy monetary policy in coming few quarters which would be the biggest trigger
change in investment climate. This would make lot of project viable and along with policy initiatives would improve debt servi
capability of corporates.
SBI base rate is currently ~50bps higher than 1 year CP rates
indicating room for base rate to decline by 25-50bps in near
term
Source: Bloomberg, Sunidhi Research
Also, 1 year CP is at only 100 bps premium to 1 year risk free r
which is generally a base level reflecting that risk premium ha
declined
Source: Bloomberg, Sunidhi Research
Price performance of PSBs are highly correlated to risky yields
Historically, we have observed that valuation of PSBs is highly correlated to high risk corporate bond yields (1 Year BBB corpor
bond yield). This is largely due to the fact that BBB bond yield is best barometer for asset quality stress as well as liquidity. In casfalling BBB bond yield, PSB stock price rallies due to a) expected improvement in liquidity scenario which would help banks
improve margins b) likely improvement in the economy to reduce asset quality stress and c) falling interest rate would result in g
in bond book. Considering SBI as proxy for PSBs, as we can see from chart below that SBI has rallied faster than the pace of fa
BBB bond yields and vice versa (we consider inverse BBB bond yield for simplicity).
Bond yields vs. SBI price performance
Source: Bloomberg, Sunidhi Research
-300
-250
-200
-150-100
-50
0
50
100
Jul-10
Sep-1
0
Nov-1
0
Jan-1
1
Mar-
11
May-1
1
Jul-11
Sep-1
1
Nov-1
1
Jan-1
2
Mar-
12
May-1
2
Jul-12
Sep-1
2
Nov-1
2
Spread
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Sep-0
5
Feb-0
6
Jul-06
Dec-0
6
May-0
7
Oct-0
7
Mar-
08
Aug-0
8
Jan-0
9
Jun-0
9
Nov-0
9
Apr-
10
Sep-1
0
Feb-1
1
Jul-11
Dec-1
1
May-1
2
1 Year CP rat e premium to 1 Year Gsec yield
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-100%
-50%
0%
50%
100%
150%
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Inverse 1 year BBB Corp Bond Yield - RHS SBI Price performance (YoY %)
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Valuation gap between private and PSU banks to narrow going ahead
Historically public sector banks have traded at a ~50% discount to new private sector banks. Post the recent run up in private sec
banking stocks, the discount has widened significantly with public sector banks trading at ~62% discount to private banks. T
despite the challenging environment we harbor a positive bias towards public sector banks due to their reasonable valuations.
Of the two important drivers of PSU banks stock performance, the first - bond rates already seems to have topped and is likely to
some easing going ahead, whereas concerns still remain in the second - NPA. Currently, the market expects the RBI to start
easing process which means yields dont have much upside risk (unless crude see a sharp upmove). However while the mar
would want to play on likely lower bond yields, it is skeptical about the rising risk of non-performing assets. However we bel
though slippages will remain higher than historical averages, recoveries and up gradations will keep a check on net slippages in coming quarters. Moreover with policy reforms and likely improvement in economic activity during FY14 vs. FY13, we believe
gap between private and PSU banks will narrow going ahead.
Additionally, a long term theme supporting valuations of public sector banks is their lower weight in indices in comparison to t
market share.
Public banks account for around two-thirds of the market on different parameters yet they are severely under-represented
Market share Represented in ownership
Deposits Advances Total Assets NII PAT Bankex (BSE) Bank Nifty (NSE) Mc
Private Sector Banks 19% 19% 21% 23% 31% 77.2% 76.0% 57.
PSBs 81% 81% 79% 77% 69% 22.8% 24.1% 43.
PSB ex SBI 64% 62% 61% 56% 53% 10.3% 10.0% 25.
Source: Company, Exchanges, Sunidhi Research
Trend in ownership pattern for public sector banks
Ownership (PSBs)
Q2FY13 Q2FY12 Q2FY11
Non promoter 26.60% 26.10% 28.21%
FII 9.84% 10.08% 13.45%
Insurance + MF 14.59% 15.02% 13.98%
Ownership (PSB ex SBI)
Non promoter 26.76% 25.32% 27.21%
FII 10.33% 11.10% 13.05%
Insurance + MF 12.02% 12.68% 12.81%
Source: Capitaline, Sunidhi Research
Valuation Summary
ABV P/ABV Peak 5 yr
1 yr fwd
valuation
Trough 5
yr 1 yr
fwd val.
Average
5 yr 1 yr
fwd val.
ROAA ROAE
CMP FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14
Private sector
xis Bank 1365 632.2 736.7 2.2 1.9 3.4 0.9 2.2 1.7% 1.6% 20.6% 19.5
ICICI Bank* 1135 437.5 493.5 2.1 1.9 3.1 1.1 2.3 1.6% 1.6% 16.3% 17.1
es Bank 467 162.1 199.9 2.9 2.3 3.2 0.6 2.0 1.5% 1.5% 23.9% 23.4
HDFC Bank 694 146.2 171.6 4.7 4.0 4.5 2.0 3.3 1.8% 1.8% 20.0% 20.8
Federal Bank 481 358.7 409.4 1.3 1.2 1.6 0.5 1.0 1.3% 1.3% 14.1% 14.9
Ing Vysya Bk 494 287.5 327.3 1.7 1.5 2.3 0.8 1.4 1.1% 1.1% 13.8% 14.6
Public sector
SBI (conso) 2307 1471.9 1726.4 1.6 1.3 2.7 0.9 1.7 1.0% 1.0% 16.6% 18.2PNB 822 613.2 770.2 1.3 1.1 2.0 0.8 1.4 1.0% 1.1% 16.4% 18.7
Union Bank 253 182.8 209.6 1.4 1.2 2.2 0.9 1.4 0.8% 0.8% 13.9% 15.3
BOB 792 686.8 797.7 1.2 1.0 2.0 0.7 1.3 1.1% 1.1% 17.4% 17.0
BOI 294 261.4 310.6 1.1 0.9 2.1 0.9 1.5 0.6% 0.7% 11.2% 14.3
Corporation 429 539.7 605.5 0.8 0.7 2.2 0.5 1.0 0.9% 0.9% 17.6% 18.3
Canara 481 406.5 457.6 1.2 1.1 2.4 0.7 1.4 0.8% 0.9% 14.0% 15.5
Indian Bank 189 211.9 257.2 0.9 0.7 1.6 0.6 1.0 1.3% 1.4% 17.7% 18.6
llahabad Bk 159 170.4 210.7 0.9 0.8 1.6 0.5 0.9 0.9% 1.0% 15.7% 18.1
OBC 350 369.5 412.5 0.9 0.8 1.5 0.4 0.9 0.8% 0.8% 11.6% 13.1
IDBI Bank 110 116.1 126.1 0.9 0.9 1.5 0.5 1.0 0.7% 0.6% 10.3% 10.2
*Adjusted for subsidiary valuation **Prices as on 6th
Dec 2012 Source: Sunidhi Research
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Impact on ABV based on key rationale
Rs bn
Allahabad
Bank BOB BOI
Canara
Bank
Corp.
Bank
IDBI
Bank
Indian
Bank OBC PNB UBI SBI
Networth with 100% buildup in
coverage (Ex Reval) (FY14) (A) 105 329 178 203 90 161 111 120 261 115 1,159
Stress Restructured Loans ex AI
and SEB (Q2FY13) 72 167 135 79 52 117 72 58 186 66 392
Default Rate (assumed 15%) (B) 11 25 20 12 8 18 11 9 28 10 59
Impact as % of Adj Networth 10% 8% 11% 6% 9% 11% 10% 7% 11% 9% 5%Upside on Recoveries/Upg. Rate
at 50% (C) 16 29 37 (7) 7 29 16 13 80 27 51
Impact as % of Adj Networth 15% 9% 21% -3% 8% 18% 14% 11% 31% 23% 4%
Upside on Recovery in Written
Off Accounts at 15% (D) 4 6 7 12 2 6 4 5 5 4 17
Impact as % of Adj Networth 4% 2% 4% 6% 2% 4% 3% 4% 2% 4% 1%
Upside from Gain in Tr. Book on
100bps Change in Yields (E) 3 6 9 10 2 1 1 3 9 2 15
Impact as % of Adj Networth 3% 2% 5% 5% 3% 1% 1% 2% 3% 2% 1%
Impact on Networth
(F=C+D+E+F-B) 12 17 33 3 4 18 9 12 66 23 24
Impact as % of Networth 11.2% 5.1% 18.5% 1.6% 4.6% 11.3% 8.5% 9.9% 25.1% 19.8% 2.1%
Adjusted Networth (A+F) 117 346 212 206 94 179 120 132 327 138 1,183
Market Capitalization 80 327 169 215 64 140 81 102 279 139 1,548
P/ABV 0.75 0.99 0.95 1.06 0.71 0.87 0.73 0.85 1.07 1.20 1.34
P/ABV (with above
adjustments) 0.68 0.94 0.80 1.04 0.68 0.78 0.68 0.77 0.85 1.01 1.31
Disc. to SBI (avg FY14 P/ABV)
- On P/ABV -44% -26% -29% -21% -47% -35% -45% -36% -20% -10%
- On P/ABV (With Adj) -48% -28% -39% -20% -48% -40% -48% -41% -35% -23%
Disc. to private banks (average
FY14 P/ABV)
- On P/ABV -64% -53% -55% -49% -66% -59% -65% -59% -49% -43% -36%
- On P/ABV (With Adj) -68% -55% -62% -50% -68% -63% -68% -63% -59% -52% -38%
Source: Sunidhi Research
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Table of Contents
Particulars Page No
Valuation gap between public and private banks has increased 08
Is the market over-reacting? 10
Treasury gains to boost profitability & provide a buffer for provisioning 16
Recoveries likely to improve going ahead 18
Written off book at 22% of networth can prove to be a hidden gem 19
Restructured book largely seasoned or government guaranteed 19
Select indicators suggest a revival in manufacturing 21
Narrow Money (M1) is directly linked to corporate sales 22
Investment recovery likely with policy initiative 22
So can the tide turn? 23
Policy reform Hopes come alive after both houses cleared FDI retail 25
Cabinet Committee on Investment (CCI) One step forward 26Coal price pooling by Coal India Ltd may change the face of Indian power sector and could lead to
reduction of asset quality stress 26
Decline in interest rate to improve investment climate 29
Price performance of PSBs are highly correlated to risky yields 31
Valuation gap between private and PSU banks to narrow going ahead 31
Sunidhis banking performance indicator (SBPI) 32
Key risks 34
Company Section
Allahabad Bank 39
Bank Of Baroda 43
Bank Of India 47
Canara Bank 51
Corporation Bank 55
IDBI Bank 59
Indian Bank 63
Oriental Bank Of Commerce 67
Punjab National Bank 71State Bank Of India 75
Union Bank Of India 79
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Valuation gap between public and private banks has increased
The Indian economy is going through challenging times consisting of volatility in liquidity, cru
inflation and growth. This has taken a toll on the prospects of the banking sector which is plag
with uncertainty relating to the monetary policy actions of the RBI and slower credit grow
Additionally, elevated interest rates are impacting the net interest margins and asset quality
banks.
We believe that the macro concerns are unlikely to reverse in the near term. Hence we exp
sharp volatility in the PSU banking space and cannot deny further downward risks to magrowth and stock prices. Due to the absence of any near term trigger, this segment may rem
volatile, however currently valuations are below long term averages for several public se
banks which has led to a widening in the discount between them and their private se
counterparts. Historically public sector banks have traded at a ~50% discount to new priv
sector banks. Post the recent run up in private sector banking stocks, the discount has wide
significantly with public sector banks trading at ~62% discount to private banks. Thus despite
challenging environment we harbor a positive bias towards public sector banks due to t
reasonable valuations.
Of the two important drivers of PSU banks stock performance, the first - bond rates already se
to have topped and is likely to see some easing going ahead, whereas concerns still remain in
second - NPA. Currently, the market expects the RBI to start the easing process which me
yields dont have much upside risk (unless crude see a sharp upmove). However while the mawould want to play on likely lower bond yields, it is skeptical about the rising risk of n
performing assets.
Valuation summary
ABV P/ABVPeak 5 yr
1 yr fwd
valuation
Trough 5
yr 1 yr
fwd
valuation
Average
5 yr 1 yr
fwd
valuation
ROAA ROAE
CMP FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY1
Private sector
Axis Bank 1365 632.2 736.7 2.2 1.9 3.4 0.9 2.2 1.7% 1.6% 20.6% 19.
ICICI Bank* 1135 437.5 493.5 2.1 1.9 3.1 1.1 2.3 1.6% 1.6% 16.3% 17.
Yes Bank 467 162.1 199.9 2.9 2.3 3.2 0.6 2.0 1.5% 1.5% 23.9% 23.
HDFC Bank 694 146.2 171.6 4.7 4.0 4.5 2.0 3.3 1.8% 1.8% 20.0% 20.
Federal Bank 481 358.7 409.4 1.3 1.2 1.6 0.5 1.0 1.3% 1.3% 14.1% 14.
Ing Vysya Bank 494 287.5 327.3 1.7 1.5 2.3 0.8 1.4 1.1% 1.1% 13.8% 14.
Public sector
SBI (Conso) 2307 1471.9 1726.4 1.6 1.3 2.7 0.9 1.7 1.0% 1.0% 16.6% 18.
PNB 822 613.2 770.2 1.3 1.1 2.0 0.8 1.4 1.0% 1.1% 16.4% 18.
Union Bank 253 182.8 209.6 1.4 1.2 2.2 0.9 1.4 0.8% 0.8% 13.9% 15.
BOB 792 686.8 797.7 1.2 1.0 2.0 0.7 1.3 1.1% 1.1% 17.4% 17.
BOI 294 261.4 310.6 1.1 0.9 2.1 0.9 1.5 0.6% 0.7% 11.2% 14.
Corporation 429 539.7 605.5 0.8 0.7 2.2 0.5 1.0 0.9% 0.9% 17.6% 18.
Canara 481 406.5 457.6 1.2 1.1 2.4 0.7 1.4 0.8% 0.9% 14.0% 15.
Indian Bank 189 211.9 257.2 0.9 0.7 1.6 0.6 1.0 1.3% 1.4% 17.7% 18.
Allahabad Bank 159 170.4 210.7 0.9 0.8 1.6 0.5 0.9 0.9% 1.0% 15.7% 18.
OBC 350 369.5 412.5 0.9 0.8 1.5 0.4 0.9 0.8% 0.8% 11.6% 13.
IDBI Bank 110 116.1 126.1 0.9 0.9 1.5 0.5 1.0 0.7% 0.6% 10.3% 10.*Adjusted for subsidiary valuation **Prices as on 6
thDec 2012
Source: Sunidhi Research
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Long term average 1 year forward P/ABV Average FY13E P/ABV
2.5
1.2
0
0.5
1
1.5
2
2.5
3
New Pvt Banks Public Banks
2.9
1.1
0
1
2
3
4
New Pvt Banks Public Banks
Source: Capitaline, Sunidhi Research Source: Capitaline, Sunidhi Research
This time its different
Our quest for understanding the reason for the widening valuation gap leads us to que
whether every economical downturn has led to investors switching from public banks to pr
banks, thus leading to an increase in the valuation gap between the two. An evaluation of
valuations in FY08 reveals that the answer to this question is in the negative. In FY08, valuatioboth public and private banks came off to leave the gap in line with the average of ~50%.
Exhibit 1: Average FY08 P/ABV
2.0
1.0
0.0
0.5
1.0
1.5
2.0
2.5
New Pvt Banks Public Banks
Source: Capitaline, Sunidhi ResearchScams, asset quality issues and policy paralysis have led to negative sentiments towa
all PSUs
Scams, asset quality issues and policy paralysis have led to negative sentiments towards all pcompanies not only banks. This is depicted through the returns of the BSE PSU index which
considerably underperformed the sensex over the past year.
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BSE PSU and Sensex returns BSE PSU and Sensex returns
Source: Capitaline, Sunidhi Research
Is the market over-reacting?The downtrend in PSU stocks over the past year leads us to question whether the market is oreacting to news flows relating to scams and policy deadlocks. According to behavioral econom
investors often fall prey to over-reaction and availability bias. This occurs when investors over-
to new information which is easily available thus creating a larger than justified impact on s
prices which is usually corrected in the future.
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
BSE PSU BSE Se nse x
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
1 day 1 Week 1 Month 3 Months 6 Months 1 Year
BSE PSU BSE Sensex
Winners & Losers
In 1985, behavioral finance academics Werner De Bondt and Richard Thaler released a stud
the Journal of Finance called "Does the Market Overreact?" In this study, the two exami
returns on the New York Stock Exchange for a three-year period. From these stocks, t
separated the best 35 performing stocks into a "winners portfolio" and the worst 35 perform
stocks were then added to a "losers portfolio". De Bondt and Thaler then tracked e
portfolio's performance against a representative market index for three years.
Surprisingly, it was found that the losers portfolio consistently beat the market index, while
winners portfolio consistently underperformed. In total, the cumulative difference between
two portfolios was almost 25% during the three-year time span. In other words, it appears
the original "winners" would became "losers", and vice versa.
So what happened? In both the winners and losers portfolios, investors essentially overreac
In the case of loser stocks, investors overreacted to bad news, driving the stocks' share p
down disproportionately. After some time, investors realized that their pessimism was
entirely justified, and these losers began rebounding as investors came to the conclusion
the stock was underpriced. The exact opposite is true with the winners portfolio: inves
eventually realized that their exuberance wasn't totally justified.
According to the availability bias, people tend to heavily weight their decisions toward m
recent information, making any new opinion biased toward that latest news
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Bridging the gapWe believe that the widening valuation gap between private and public sector banks is like
close in and move towards the mean of ~50%. This is because problems associated with p
sector banks such as bureaucracy and corruption have always been known which is why p
banks trade at such a steep discount to private banks. The widening gap appears to be an o
reaction to policy paralysis and asset quality issues which is likely to correct. The correction c
take place in three ways:
Valuations of private sector banks could come offValuations of private sector banks could come off by ~12%. Probability of this happening is
because valuations are close to the mean. To safeguard against this we should stay with che
private sector banks like Axis Bank and ICICI Bank.
Adjusted book values of public sector banks could correct by 12%
Adjusted book values of public sector banks could correct by 12%. This could happen through
erosion of book value due to higher slippages. However the probability of this happening is low
to the reasons discussed in the following section.
Valuations of public sector banks could increase by 12%
Adjusted book values of public sector banks could increase by 12%. We believe that this is the likely scenario. As a result we are positive on the public sector banking space.
Downside to public sector bank valuations appear limited from current levels
We believe that the downside to public sector bank valuations appear limited from current lev
due to the following reasons:
Estimates are already factoring in accelerated slippages for public sector banks
Estimates are already factoring in accelerated slippages for public sector banks, significa
higher than the average slippages seen over the past five years.
Expected Slippage rate
Bank FY13E FY14E
5 Yr average slippage
ratio
Allahabad Bank 3.2% 2.5% 2.0%
Bank of Baroda 1.9% 1.5% 1.2%
Bank of India 3.3% 2.4% 2.0%
Canara Bank 2.8% 2.3% 2.1%
Corporation Bank 1.8% 1.6% 1.1%
IDBI Bank 1.8% 1.7% 1.4%
Indian Bank 2.3% 2.2% 1.4%
Punjab National Bank 4.2% 2.5% 2.1%
State Bank of India 4.0% 2.8% 2.7%
Union Bank of India 2.5% 2.2% 1.9%
OBC 2.6% 2.3% 2.0%
Source: Company, Sunidhi estimates
In order for adjusted book values of public sector banks to come off by 12% due to asset qua
deterioration the slippage rates for public banks will have to increase significantly in FY
trending towards their ten year peaks.
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FY14E slippage rate assuming ABV deterioration of 12%
Bank
FY14E slippage
rate
FY14E slippage
rate for ABV to
come off by 12%
10 year peak
slippage rate
Allahabad Bank 2.5% 3.8% 3.9%
Bank of Baroda 1.5% 2.9% 3.0%
Bank of India 2.4% 3.3% 2.9%Canara Bank 2.3% 3.4% 4.6%
Corporation Bank 1.6% 2.7% 1.9%
IDBI Bank 1.7% 2.9% 4.2%
Indian Bank 2.2% 3.8% 2.5%
Punjab National Bank 2.5% 3.6% 4.5%
State Bank of India 2.8% 4.4% 3.6%
Union Bank of India 2.2% 3.0% 3.2%
OBC 2.3% 3.8% 9.5%
Source: Sunidhi estimates
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Why is this situation unlikely?We believe that the above situation appears unlikely based on the following factors:
An improvement in growth could lead to asset quality improvement
Asset quality, as the chart below suggests, is inversely proportional to GDP growth, thus as
quality is likely to witness an improvement once GDP growth starts to look up. GDP growth wh
stood at ~8.5% in FY10 and FY11 came off to 6.5% in FY12 and H1FY13. The slowdown in G
growth was due to several reasons including a slowdown in agricultural growth, Inflation an
slowdown in investments due to policy paralysis. Addressing these factors could help bring
economy back on the growth path.
Trend in GDP growth and asset quality
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
GDP growth (LHS) % GNPA (RHS)
Source: RBI, Sunidhi Research
Delayed rainfall impacted Kharif but Rabi crop expected to be good
The south-west monsoon which was deficient and unevenly distributed in June and July h
adversely impacted sowing of the Kharif crop. However, higher than LPA rainfall in the monthAugust and September significantly brought down the cumulative rainfall deficit to 92% of
(upto September 30). The good rainfall towards the end of the season has improved soil moist
content and reservoir levels, thus raising prospects for a good Rabi crop.
However, the production weighted rainfall index (PRN) constructed by RBI indicated a deficie
of 13%. Deficient rainfall resulted in shortfall in area sown for several crops especially cereals
pulses. Despite higher food inflation, we do not expect higher NPAs on account of the same
lately banks have begun to secure agricultural loans against securities such as gold. This has n
turned into a significant part of current exposure. (E.g. 45% of SBIs agriculture exposur
secured with gold). Hence, default risk from this book is significantly mitigated. We can see th
the reducing proportion of priority sector NPAs in FY12 as compared to FY11.
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Trend in monthly rainfall (% of LPA)
72%
87%
101%111%
0%
20%
40%
60%
80%
100%
120%
Jun-12 Jul-12 Aug-12 Sep-12
Source: IMD, Sunidhi Research
Trend in IMD rainfall assessment and RBI PRN
Source: RBI, Sunidhi Research
Rabi Crop Sowing (as on 30.11.2012)
Source: PIB, Sunidhi Research
Trend in composition of NPAs
47.2% 47.5% 49.1% 54.1%59.9% 63.9% 54.9% 53.8% 58.1% 50.0%
50.7% 51.2% 50.0% 43.7%38.8% 35.4% 44.0% 45.3% 41.5% 49.1%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Priority Non Priority Public
Source: RBI, Sunidhi Research
Unsecured loan books for all banks have come off in FY12
Banks have brought down their unsecured loan books in FY12 as compared to FY11.
proportion of unsecured loans has come off to 17.4% in FY12 as compared to 19.4% in FY11.
outstanding unsecured loan book for new private and public banks stands at par at ~17.
Meanwhile outstanding unsecured loan book for old private banks is significantly lower at 12%
reduction in unsecured loans could lead to lower slippages and higher recoveries going ahead.
Crops Area Sown (2012-13) Area Sown (2011-12) YoY% Cha nge
Wheat 157.89 162.5 -2.8%
Rice (Rabi) 0.85 1.05 -19.0%
Coarse Cereals 46.15 44.83 2.9%
Pulses 102.49 109.56 -6.5%
Oilseeds 66.84 66.76 0.1%
Total Rabi Area 374.22 384.70 -2.7%
(Area in la kh hectare)
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Trend in unsecured loan book for all listed banks
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2008 2009 2010 2011 2012
All Banks Public New Pvt Old Pvt
Source: RBI, Sunidhi Research
Cautious lending by banks to risky segments could lead to lower slippages ahead
Loan book growth slowed to 16.9% for the fortnight ended Nov 16, 2012 down from +19.3%
growth seen in Mar12. A slowdown in demand coupled with banks being selective about lend
to risky segments has caused the slowing in loan book growth. The cautious stance adopted
banks towards lending is likely to result in lower slippages going ahead. The deposit growth for
period stood lower than credit growth at 13.4% yoy, however the gap between credit and dep
growth has started narrowing suggesting an improvement in liquidity.
Trend in loan book and deposit growth Trend in LAF borrowings
Source: RBI, Sunidhi Research Source: RBI, Sunidhi Research
Credit Deposit growth spread
Source: RBI, Sunidhi Research
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Cre dit g row th (% yoy) De pos it g row th (% yoy)
-2,500.0
-2,000.0
-1,500.0
-1,000.0
-500.0
0.0
500.0
1,000.0
1,500.0
Jan-1
0
Mar-10
May-10
Jul-10
Sep-10
Nov-1
0
Jan-11
Mar-11
May-1
1
Jul-11
Sep-11
Nov-11
Jan-12
Mar-
12
May-12
Jul-12
Sep-1
2
Rs
billions
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
pr-10
Jun-10
-ct-
ec-
Fe
-r-
J
- -ct-
ec- - -
J
- -t-
Credit Deposit growth spread
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Treasury gains to boost profitability & provide a buffer for provisioningThe ten year G-Sec yields have remained at elevated levels over the past year owing to the R
reluctance in cutting the repo rate. However the RBI has indicated that it is looking at reducing
repo rate in the last quarter of FY13. OIS spreads are factoring in around 100bps reduction in
repo rate within the next one year. A reduction in the yields could lead to writebacks on
investment depreciation provision undertaken by public sector banks. In the table below we h
calculated the impact of a 100 bps reduction in repo rate on the PAT and networth of se
banks. According to our analysis, a 100 bps reduction in the yields would positively impact
FY14 adjusted networth of PSBs by ~2-5% and FY14 PAT by 6-28% depending on banks AFS b
and duration. These writebacks would also provide some room for public sector banks to m
higher loan loss provisions.
Trend in 10 year G-Sec yields Trend in Spot OIS and 1yr Fwd OIS rates
Source: RBI, Sunidhi Research
Impact of a 100 bps reduction in yields on PAT and networth of public sector banks
Rs Bn
Impact on PAT Impact on
Networth
InvestmentsBook
HTM AFS SLRAFS
Other intsensitive AFS
AFS Modduration (yrs)
-1%yields
FY13E FY14E FY13E FY
Allahabad Bank 583.1 373.5 210 45 132 2.8 3.1 17.6% 13.3% 2.6%
Bank of Baroda 983.8 NA NA 149 61 3.5 6.3 12.3% 11.0% 2.0%
Bank of India 867.5 600.3 266 169 98 4.3 9.3 39.2% 27.9% 4.0%
Canara Bank 1207.2 758.0 437 145 234 3.8 9.9 29.6% 23.8% 3.9%
Corporation Bank 535.8 392.5 140 69 53 2.4 2.3 14.8% 12.5% 2.4%
IDBI Bank 694.8 581.8 113 27 61 1.5 0.8 4.0% 3.7% 0.4%
Indian Bank 423.9 281.0 141 42 79 1.2 1.0 4.9% 4.0% 0.8%
Oriental Bank of
Commerce 554.0 474.4 79 52 22 4.1 2.6 18.0% 14.4% 2.0%
Punjab National Bank 1291.8 938.6 353 160 154 3.7 8.7 17.8% 13.5% 2.7%
Union Bank of India 720.5 564.4 156 98 47 1.7 2.1 9.9% 8.1% 1.3%
State Bank of India 3715.3 2838.3 877 432 356 2.4 14.6 7.6% 5.8% 1.2%
Source: Company, Sunidhi research
In addition to MTM write backs, banks treasury gains too will help boost profits. Banks w
higher yield on investments are more likely to book higher treasury gains once interest rates s
trending down.
7.5
7.7
7.9
8.1
8.3
8.5
8.7
8.9
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
1 year Gsec Yield
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Spot OIS 1 Year Forward OIS
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Yield on investment (Q2FY13)
Source: Company, Sunidhi research
Although, it has been on the agenda of the RBI to bring down its statutory liquidity ratio (S
over the past 15 years, it has only been reduced by 200 bps. In July 2012, the RBI brought down
SLR by 100 bps to 23%. A sudden and sharp fall in SLR holding of banks is unlikely considering
steep U-turn in the budget deficit trend resulting in a massive rise in government bond issuan
but the SLR cut is definitely a move in the right direction by the RBI. While banks have volunta
increased their SLR holdings especially PSU Banks (to fund government issues and as a
aversion measure), their bond holding is unlikely to remain in this range over the next few ye
once the fiscal situation improves or FII investment limit is hiked. A reduction in the SLR wo
help boost profitability of banks, which could in turn be used to shore up provision cover
ratios.
Current SLR vs. mandatory SLR requirement for public banks
Source: Company, Sunidhi research
8.1
7.9 7.97.8 7.8
7.7
7.57.4 7.4
7.2
7.0
6.6
6.8
7.0
7.2
7.4
7.6
7.8
8.0
8.2
8.4
Canara
BOI
PNB
Allahabad
BOB
Corp
OBC
Indian
UBI
SBI
IDBI
20.0%
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
34.0%
SLR/DTL Required SLR
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Recoveries likely to improve going ahead Historically trends show that recoveries and up-gradations move in line with GDP growth.
have analyzed past trends for recoveries from FY03-12 for PNB and UBI (reductions exclud
write-off and asset sale). Data for these banks reveals that these are trending at 10 year low
~20% as compared to long term average of ~62%. Going ahead we expect recoveries to impr
and move closer to long term averages which along with higher write-offs and asset sales wo
boost profits.
Historical trend in recovery / upgrades to slippage compared to GDP
Source: Company, Sunidhi research
Street estimates are factoring in low recoveries in line with those seen in FY12 and H1FY13. Th
pickup in recoveries could prove to be a re-rating factor for public sector banks in next two ye
We have analyzed the upside to currently estimated net worth for select public sector ba
under three recovery scenario (Rate of recovery/Upgrade moving to 40%, 50% and 60%
cumulative slippages during FY10-13E). The average impact from recoveries (50%) is ~14%
FY14E adjusted net worth. The results are highlighted in the table below.
Impact of recoveries on adjusted net-worth
Bank
Cumulative recovery/Up
gradation rate Upside (Rs bn) Upside to Adj. NW (FY14 )
FY10-13 @ 40% @ 50% @ 60% @ 40% @ 50% @ 60
Allahabad Bank 32% 6.8 15.6 24.4 6% 15% 23%
Bank of Baroda 27% 16.9 29.4 42.0 5% 9% 13%
Bank of India 32% 16.6 37.4 58.2 9% 21% 33%
Canara Bank 54% (24.9) (7.0) 10.9 -12% -3% 5%
Corporation Bank 33% 3.0 7.4 11.8 3% 8% 13%
IDBI Bank 19% 19.5 28.8 38.1 13% 19% 26%
Indian Bank 22% 10.1 15.6 21.2 9% 14% 19%
Punjab National Bank 20% 53.6 79.8 106.0 21% 31% 41%
Union Bank of India 30% 13.6 26.6 39.6 14% 26% 39%
State Bank of India 44% (38.5) 50.9 140.4 -3% 4% 12%
Oriental Bank of Commerce 36% 3.6 13.1 22.6 3% 11% 19%
Source: Sunidhi research
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0%
20%
40%
60%
80%
100%
120%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
PNB UBI GDP (RHS)
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Written off book at 22% of networth can prove to be a hidden gem The second biggest helping hand would most likely come from the written off books of ba
Based on our calculations, the average prudentially written off book for PSBs in our study sta
at 22% of FY14 adjusted net-worth. Since the written off book in our calculation is only accou
which are written off from the head office and not from branches, the reason behind a majorit
the write offs are to report better asset quality number and for tax benefits. Hence, we bel
that ~15-20% recovery from this book is the most likely probability considering the large
between the demand from ARC and prices expected by the banks management. We h
analyzed the upside to the networth on account of recovery from written off accounts.
average impact from recoveries (15%) is ~3.2% on FY14E adjusted net worth.
Impact of recoveries from written off accounts on FY14E net-worth
Impact on FY14E NW
(Rs bn)
Write offs O/S
(Q2FY13)
Adj NW (FY14) % of Adj NW
(FY14)
Recovery at 15% Recovery at 20%
Allahabad Bank 26.3 105.4 25% 3.7% 5.0%
Bank of Baroda 39.3 328.9 12% 1.8% 2.4%
Bank of India 44.9 178.4 25% 3.8% 5.0%
Canara Bank 80.4 202.7 40% 6.0% 7.9%
Corporation Bank 14.6 89.7 16% 2.4% 3.3%
IDBI Bank 40.8 148.4 28% 4.1% 5.5%
Indian Bank 23.6 110.6 21% 3.2% 4.3%
Punjab National Bank 32.3 261.2 12% 1.9% 2.5%
Union Bank of India 27.5 100.6 27% 4.1% 5.5%
State Bank of India 115.6 1158.5 10% 1.5% 2.0%
Oriental Bank of Commerce 32.7 120.4 27% 4.1% 5.4%
Source: Company, Sunidhi research
Restructured book largely seasoned or government guaranteedThe higher restructuring for public sector banks is partly due to restructuring in FY09-10 under
RBIs special dispensation scheme and partly due to Air India and SEBs restructuring whic
unlikely to slip into NPA category. Most of the outstanding restructured book of FY09-1
performing and the weaker part has already slipped into NPA. Slippages from the performrestructured book of 2009-10 is likely to be very low as these assets are already servicing th
debt post the expiry of the moratorium period. Also, we dont see any slippage from Air Indi
SEB accounts in next two years due to moratorium.
Additionally, considering that the large proportion of SEB and Air India restructuring is alre
completed, we expect incremental restructuring to come off from H2FY13. However, stand
asset provisioning on restructured book is likely to remain high due to the RBIs intention
increasing the provisions on the same.
Public sector banks restructured book o/s (Q2FY13)
Rs bn Restructured
loans OS
% of
loan
book
SEB Air
India
OS Rest
ex
SEB/AI
Advances %
lo
bo
Allahabad Bank 127.5 11.5% 49.2 5.8 72.5 1108.5 6.
Bank Of Baroda 210.8 7.2% 20.0 24.0 166.8 2921.8 5.
Bank Of India 194.2 7.6% 29.0 30.0 135.2 2561.5 5.
Canara Bank 148.9 6.9% 55.0 15.0 78.9 2157.5 3.
Corporation Bank 88.7 9.0% 39.0 13.0 52.0 981.6 5.
IDBI Bank Ltd 125.3 7.5% 0.0 8.0 117.3 1663.7 7.
Indian Bank 103.5 10.9% 23.5 8.0 72.0 950.0 7.
OBC 114.8 9.7% 41.0 16.3 57.5 1178.2 4.
PNB 278.5 9.4% 70.0 23.0 185.5 2947.9 6.
Union Bank 100.1 5.8% 34.0 0.0 66.1 1729.0 3.
SBI 404.5 4.4% 0.0 13.0 391.5 9269.2 4.
Source: Company, Sunidhi research
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Public sector banks restructured book o/s (Q2FY13)
Source: Company, Sunidhi research
The restructured book excluding the seasoned and government guaranteed portion wo
indicate much lower stress in the book as compared to stress visible prima facie. We h
analyzed the downside to the adjusted net-worth of banks on account of slippages from
restructured book excluding Air India and SEB exposure. The average impact from slippage of 1
is ~9% on the FY14E adjusted net-worth of banks (20% slippage would have an impact of 12%).
Impact of slippages from restructured book ex AI and SEBs on adjusted net-worth
Restructured
loans OS
OS Rest ex
SEB/AI
Slippages at
15% of
restructured
ex AI & SEB
Slippages at 20%
of restructured ex
AI & SEB
Adj Net
worth
(FY14)
Impact on Adj
NW assuming
15% slippages
Impact on Adj NW
assuming 20%
slippages
Allahabad Bank 127.5 72.5 10.9 14.5 105.4 10% 14%Bank Of Baroda 210.8 166.8 25.0 33.4 328.9 8% 10%
Bank Of India 194.2 135.2 20.3 27.0 178.4 11% 15%
Canara Bank 148.9 78.9 11.8 15.8 202.7 6% 8%
Corp Bank 88.7 52.0 7.8 10.4 89.7 9% 12%
IDBI Bank Ltd 125.3 117.3 17.6 23.5 148.4 12% 16%
Indian Bank 103.5 72.0 10.8 14.4 110.6 10% 13%
OBC 114.8 57.5 8.6 11.5 120.4 7% 10%
PNB 278.5 185.5 27.8 37.1 261.2 11% 14%
SBI 404.5 391.5 58.7 78.3 1158.5 5% 7%
Union Bank 100.1 66.1 9.9 13.2 100.6 10% 13%
Source: Company, Sunidhi research
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Allahabad
Indian
OBC
PNB
Corp
BOI
IDBI
BOB
Canara
UBI
SBI
Restructured (%) Restructured ex SEB / AI (%)
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Select indicators suggest a revival in manufacturingSelect indicators (such as trend in new order book, raw material inventories, GFCF
manufacturing PMI) along with recent government measures suggest that manufacturing acti
could see a revival henceforth, which would have a positive bearing on GDP growth. A reviva
manufacturing and GDP growth would lead to lower non-performing assets for banks.
Average growth in new orders for Q1FY13 stood at 19.4% yoy and 3% qoq as compared to 3
yoy and 2.8% qoq in Q4FY12. Additionally raw material inventory to sales ratio has increased
faster pace as compared to finished goods inventory thus suggesting an increase in manufactu
going ahead. The HSBC manufacturing PMI has been largely stable at ~53 over the past f
months suggesting that it could have bottomed out. Capacity utilization too is close to recent l
at ~72%, leading us to believe that it could witness a revival from these levels.
Trend in manufacturing PMI Trend in Mfg IIP and capacity utilization
52.9
30
35
40
45
50
55
60
65
Oc
t-08
Jan-0
9
Apr-
09
Jul-09
Oc
t-09
Jan-1
0
Apr-
10
Jul-10
Oc
t-10
Jan-1
1
Apr-
11
Jul-11
Oc
t-11
Jan-1
2
Apr-
12
Jul-12
Oc
t-12
6
7
77
7
7
8
8
8
-15
-10
-5
0
5
10
15
20
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Detrended Qtl -IIP MFG LHS CU RHS
Source Markit economics, Sunidhi Research Source RBI, Sunidhi Research
Gross Fixed Capital Formation (GFCF) (a gauge of investment in the economy) grew at a rob
pace 8.7% in Q2FY13 which is showing a sign of pick up largely led by higher governmexpenditure. Government Fixed Capital Expenditure (GFCE) started showing good strength an
likely to support economic activity in FY14 considering historical trend of higher governm
expenditure before election year.
Trend in GFCF
Source RBI, Sunidhi Research
Trend in GFCE
Source RBI, Sunidhi Research
-5%
0%
5%
10%
15%
20%
25%
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Gross Fixed Capita l Formation
0%
2%
4%
6%
8%
10%
12%
14%
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Government Final Consu mption Expenditure
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Narrow Money (M1) is directly linked to corporate sales
Improvement in narrow money growth could be considered as a primary indicator of a reviva
economic activity. M1 represent demand deposit of corporate and currency with public. Si
both together reflect the core liquidity in the system, improvement in M1 growth generally re
in improvement in economic activity and sales of corporates. Higher currency with public wo
mean better spending capability and higher demand deposit with corporates is generall
precursor to either better production or higher capex.
Trend in M1 growth
Source: RBI, Sunidhi Research
Trend in new order book Trend in inventory / sales
-15
-10
-5
0
5
10
15
20
25
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
%
Avg New Order book (QoQ) Avg New Order book (YoY)
0
5
10
15
20
25
30
35
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
%
FG Inv/Sales RM Inv/Sales
Source: RBI, Sunidhi Research Source: RBI, Sunidhi Research
Investment recovery likely with policy initiativeIndex of Industrial Production (IIP) has seen a sharp deceleration during April-Sept 2012 whic
mostly led by capital goods, mining and power. Capital goods remained the biggest cul
indicating slowdown in investment activity and slowing external demand. Mining sector contin
to contract due to regulatory and environmental issues. Power generation moderated on acco
of shortages in coal supply and uneven monsoon conditions. Ex capital goods, growth rate of
declined but still positive.
0%
5%
10%
15%
20%
25%
30%
M1 Growth
M1 Growth
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Trend in IIP growth
-10
-5
0
5
10
15
20
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Source RBI, Sunidhi Research
Trend in IIP growth ex capital goods
Source RBI, Sunidhi Research
The major reasons behind the slowdown in growth are high interest rates, fuel un-availability
government policy paralysis. Despite large new power capacity additions witnessed during
Eleventh Plan (about 55 GW of new capacity created), majority of it was in thermal power wh
was impacted by coal shortages resulting in lower utilization rates. In the absence of commitFuel Supply Agreements (FSAs), demand-supply gap is expected to elevate further during
Twelfth Plan and new powers project are expected to face further clearances problem. Thi
further exaggerated by stress in power distribution with large accumulated losses of discoms. T
demands fast decisions to improve investment in the sector, especially by easing po
constraints and removing major supply bottlenecks.
So can the tide turn?A majority of the companies with stalled project studied by our economy team reported t
policy issues such as land acquisition delay in environmental clearance, mining policy, fuel linka
and spectrum pricing were the main reason for the high incidence of stalled projects in
economy. These together accounts for about 68% of total stalled projects. Of the 191 proj
studied, about 93 projects entailing an investment close to Rs 6.7 tn in the infrastructure sp
were stalled for various reasons. The most prominent reason being the problem of l
acquisition with projects worth Rs. 3.1 tn. Next biggest issues being raw material unavailab
like fuel & bauxite and environmental clearance. Three biggest sectors largely impacted by pro
stalled are Power, Transport (mainly roads) and Metal & Mining accounting for 64% of t
stalled projects. These sectors remain the biggest stress sector for banks and are reflected in la
proportion into restructured book.
Trend in stalled projects
Reasons for total stalled projects
Source Capitaline, Sunidhi Research
Stalled project by Industry
Source Capitaline, Sunidhi Research
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Dec'07
Mar'08
Jun'08
Sep'08
Dec'08
Mar'09
Jun'09
Sep'09
Dec'09
Mar'10
Jun'10
Sep'10
Dec'10
Mar'11
Jun'11
Sep'11
Dec'11
Mar'12
Jun'12
Sept'12
IIP (excluding capital goods)
Environmental ,
12.5%
Financial , 6.2%
Government,
11.8%
Land
Acquisition ,
27.7%
Raw
Material ,
15.9%
Management,
6.2%
Legal, 1.1%
Others,
18.6%
Cement , 1.37% Real Estate ,
8.98%
IT, 1.09%
Power, 36.38%
Transport,
11.23%
Metals &
Mininig ,
16.52%
Telecomunicati
on, 4.36%
Oil & Gas,
10.99%
Irrigation,
0.39%
Others, 8.70%
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In last couple of months, we have seen some concrete policy intentions towards solving th
issues with FinMins fast track reform initiatives. Clearance of the most conflicting issue of re
FDI in both the houses reflects would help the current government to fast track its most pend
decisions. Some of the important measures which can change the investment climate of
country include new FSAs expected to be signed by Coal India with better pricing mechani
proposal to set up a Committee on Infrastructure, the State Electricity Distribution Responsib
Bill and setting up a Cabinet Committee on Investment (CCI) or NIB. These along with step towa
financial restructuring scheme of discoms are likely to bring financial turnaround of disco
Hence, the recent policy initiatives such as permitting FDI in retail trade, civil aviation & pow
trading exchanges and rationalization of diesel prices will help improve the investment climate
High incidence of stalled projects in the Power sector, Road and Mining sector which is bigg
stress point for banks
Out of the total stalled projects amounting to Rs 11.4 tn since 2008 (191 projects of more than
10 bn) Rs 6.9 tn which is about 60% are projects started implementation and are stalled. M
than 80% of these are in from sectors such as Power, Metals & Mining, Real Estate and Transp
sector (i.e. Rs 5.5 tn). Of the balance 45% (Rs 4.5 tn) of the projects (i.e. project that have not s
any investment) 50% contributed by Power and Metals & Mining sector. Hence, the high incide
of stalled projects in power and metals & mining sector indicates slow pace of growth in
investment activity and is the major reason for the stress in books of banks.
Trend in stalled projects
Stalled project by Industry
Source Capitaline, Sunidhi Research
Implementation Stalled by Industry
Source CMIE, Sunidhi Research
Announced & Stalled by Industry
Source CMIE, Sunidhi Research
Cement , 1.37% Real Estate ,
8.98%
IT, 1.09%
Power, 36.38%
Transport,
11.23%
Metals &
Mininig ,
16.52%
Telecomunicati
on, 4.36%
Oil & Gas,
10.99%
Irrigation,
0.39%
Others, 8.70%
Cement , 1.02% Real Estate
, 11.79%
IT, 1.81%
Power, 38.79%
Transport,
17.04%
Metals &
Mining, 13.92%
Telecomunicati
on, 7.02%
Irrigation ,
0.64%
Others, 7.97% Cement , 1.92% Real Estate ,4.72%
Power, 33.00%
Transport
Services , 2.33%
Metals & Mining
, 20.72%Telecomunicatio
n, 0.27%
Oil & Gas,
15.77%
Others, 21.27%
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Further, bulk of the stalled projects (~84% including foreign private players) is a private sec
initiative as shown in chart below. Of which, 60 private companies have deferred infra proje
worth Rs 5.2 tn, accounting for 56.7% of the total private sector stalled projects.
Trend in stalled projects
Stalled project by ownership
Source CMIE, Sunidhi Research
Implementation Stalled by Ownership
Source CMIE, Sunidhi Research
Policy reform Hopes come alive after both houses cleared FDI retail
Fast tracking of the policy reform could result in clearance of some of the major project wh
would result improvement in investment climate in the economy and better asset quality amo
banks. Of the 191 stalled projects, the most prominent reason for them being stalled are
problem of land acquisition with projects worth Rs 3.1 tn stuck on account of unavailability
land. Among project implemented and stalled, almost 60% (about Rs 4tn) are stalled due to po
issues such as land acquisition, delay in environmental clearance, mining policy, fuel linkages
spectrum pricing. However, in case of project announced and stalled, policy issues accounts
about 40% of total stalled projects (Rs 1.8 tn). Raw material unavailability (like fuel & bau
shortage) is another major reason responsible for current slowdown in investments, with proje
worth Rs 1.8 tn stuck on account of the same.
Trend in stalled projects
Reasons for total Stalled
Source CMIE, Sunidhi Research
Central
Government,
10.14%Government
State, 5.90%Government
Local Bodies,
0.26%
Indian Private
Sector, 80.60%
Foreign
Private Sector,
3.10%
Central
Government,
11.2%
GovernmentState, 9.3%
Government
Local Bodies,
0.4%
Indian Private
Sector, 78.5%
Foreign
Private Sector,
0.5%
Environmental ,
12.5%
Financial , 6.2%
Government,
11.8%
Land
Acquisition ,
27.7%
Raw
Material ,
15.9%
Management,
6.2%
Legal, 1.1%
Others,
18.6%
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Reasons for Announced & Stalled
Source CMIE, Sunidhi Research
Reasons for Implementation Stalled
Source CMIE, Sunidhi Research
Cabinet Committee on Investment (CCI) or NIB One step forwardTo speed up clearances of big infrastructure projects, Finance Minister P. Chidambaram in Sep
pitched for the setting up of a Cabinet Committee on Investment (CCI) or NIB headed by the Pr
Minister and has ministers from key ministry like Law, Finance and Justice as its members. As
the proposal once the final decision is taken by the NIB, no other ministry or governm
department will have the authority to challenge this clearance or delay in the proj
implementation. Considering most of the major ministries from centre and state would be pa
the board, CCI will supersede the various lines of clearance and would fast track the process.
study shows that of the 93 infrastructure projects stalled having an outlay of more than `10
projects worth Rs 1.3 tn have been held up for want of environment clearance. This amo
would move up to Rs 1.6 tn if we consider RBI definition of Infrastructure which includes Min
sector. The formation of the proposed NIB will help in fast tracking the clearances of th
investments and bring to the main stream.
Coal price pooling by Coal India Ltd may change the face of Indian pow
sector and could lead to reduction of asset quality stress
Availability of coal for thermal power stations is a matter of concern. According to working grfor 12th five year plan, coal requirement for power sector is expected to be around 682
tonnes (at 100% PLF) by FY17. Against the requirement of 682 mn tonnes, 54 mn tonne
expected to be imported by thermal power stations designed to use imported coal. SCCL
confirmed supply of 35 mn tonnes and c.100 mn tonnes are expected to be available from cap
coal blocks. Thus 493mn tonnes need to be made available by CIL to power stations. Conside
312mn tonnes supplied by CIL in FY12, CIL needs to supply at a CAGR of 10% over next five ye
to meet power sector demand in India. With new FSAs; where in CIL takes the onus of impor
coal on behalf of power utilities we can expect huge imports by CIL in near future.
Environmental ,
19.47%
Financial ,
2.25%
Government,
13.38%
Land
Acquisition ,
26.56%
Raw
Material ,21.46%
Management,
6.31%
Legal, 1.78%Others, 8.79%
Environmental ,
1.59%Financial ,
12.31%
Government,
9.30%
Land
Acquisition ,
29.59%
Raw Material ,
7.30%
Management,
6.02%
Others, 33.90%
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Potential demand for coal in India to be met by CIL
Projected coal dema
(Mn tonne
Sector 2016-
Electricity (A)-Realistic assumption (against 842 mn tonnes) 6
Iron & Steel 1
Cement
Others 1
Non Electricity (B) 2Total (A+B) 11
Coal Availability from
SCCL
Captive Blocks for Power utilities 1
Imported coal for TPS's designed on imported coal
Total Coal availability, excl. CIL 1
Potential demand to be met by CIL for Power 4
Production by CIL in FY12 3
CAGR growth required for CIL 10
Source: Working Group, Sunidhi Research
CIL takes the onus of meeting the demand by bridging it with imported coal
Total requirement of coal from power plants is expected at c.682 mn tonnes by FY2016-17,
with FSA/LOA signed at 85%, total requirement is trimmed c.583mn tonnes by FY2016-17. CIL w
its new FSAs has committed to supply 80% of its FSA qty without attracting any penalty un
which 65% would be met by its indigenous production and remaining 15% through imported c
CIL supplied 312 mn tonnes to power sector in FY12. To meet 65% FSA qty it has to mainta
CAGR of 7%, failing which it would have to divert e-auction coal to power sector.
FSA commitment by CIL
ear of Commissioning
Capacity
(MW)
FSA/LOA
Quantity CIL Dispatch FY12
M
Tonn
(MT) Sector
Units commissioned by 31.3.2009 67,370 304.8 Power 312
2009-10 5,395 24.4 Steel 4
2010-11 6,205 24.9 Cement 62011-12 16,671 71.7 Fertilizer 2
2012-13 9,835 39.6 Others 107
2013-14 10,845 44.2 Total 433
2014-15 11,127 46.9 Total FSA's Qty 582
2015-16 5,502 23.9 At 80% commitment 466
2016-17 660 2.3 At 65% commitment 378
otal 133,610 583 Dispatch by CIL to power utilities in FY12 3
Source:Ministry of Coal, Sunidhi Research Implied CAGR for achieving 80% FSA target 14Implied CAGR for achieving 65% FSA target 7
If supply at 65% of FSA then total imports by CIL
during FY16-17
As per CIL guidance, it expects CAGR growth of 5% in production till FY2016-17. However s
supply growth is not enough to meet power sectors coal requirement which is expected
increase by CAGR of 10%. Thus by new FSA it has tried to bridge the gap with imports.
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2016-17 road maps for coal demand and supply by CIL
Particulars (mn tonne) FY13 FY14 FY15 FY16 FY1
Existing +Completed Projects 227.39 222.56 202.35 197.26 192.4
Ongoing Projects 233.76 254.31 272.69 288.26 300.1
Future Projects 2.95 8.78 32.71 44.78 63.
TOTAL (A) 464 486 508 530 55
YoY Growth 5% 5% 4% 5%
Power demand (CEA) 466 545 631 663 68
FSA for power 396 463 536 564 58
At 80% (B) 317 371 429 451 46
At 65% (C) 257 301 349 366 37
Imports (D) (B-C) 59 69 80 85 8
Other user industry (A-C) 207 185 159 164 18
Source: Working Group Committee, Sunidhi Research
Coal pool pricing (CPP) could be a better option
We believe Coal price pooling could be a better option for the industry as coal availability is
major issue rather than coal price. Domestic coal is available at significant lower prices wh
compared to imported prices (40% discount). We believe coal pool pricing could lead to price h
of merely 8% in coal prices in contrast to nearly 60-70% price hike for power plants solely ba
on imported coal. Such higher power cost poses more problem rather than 8% hike in ovecosts (as per our Metal analyst calculation).
Price hike which SEBs need to approve
400-4300 Kcal
Imported coal 5300 Kcal CN
(equivalent basis
Domestic coal 810
Taxes (as per Annual report) 291
ROM cost 1101 200
Freight
cost at 300kms 1431 233
cost at 500kms 1651 255
weightage 0.8 0.
1321 46
Weighted avg price 178
price at 500 kms 165
Price difference 8%
Source: Sunidhi Research
Who gains? Private sector power plants tend to gain
Price pooling will fulfill the FSA requirements of nearly one third of the countrys thermal po
capacity, the bulk of which is in pvt sector. The cost of the coal is proposed to be subsidized
existing generation utilities, mostly in the public sector. Once the price pooling model is adop
power tariffs for plants located in the East are expected to increase more in comparison to
units that are in the coastal regions of the West ; as plants in the Eastern belt of India mostly
domestic coal.
Implementation of CPP would be significantly positive for the banking sector
Coal pool pricing thus if implemented can change the face of Indian power sector by assuring
supply of feed stock. This in turn would be hugely positive for Indian banking sector whic
reeling under the asset quality stress from power sector. Though the coal pooling p
mechanism would take time to get implemented but it assures the long term sustainability of
upcoming and already installed power plants.
Banks with highest exposure in Infra and Iron & Steel tend to benefit most if even a part of
above steps are taken as this would reduce stressed assets.
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Banks exposure to infrastructure and Iron & Steel sectors
Infrastructure Iron & Steel Total
Stress sector
infra and met
UCO 27% 9% 37% 9
P&SB 26% 3% 29% 5
Andhra 21% 6% 27% 10
OBC 19% 7% 26% 9
United 17% 8% 25% 4
Central 21% 3% 25% 5
SBI 15% 9% 24% 10
Canara 19% 4% 23% 8
PNB 16% 6% 22% 4
BOM 17% 4% 21% 4
Union 16% 4% 20% 5
Indian 16% 3% 19% 5
Corp 16% 3% 18% 5
Syndicate 13% 3% 16% 3
BOI 11% 5% 16% 6BOB 10% 4% 14% 6
Source: Company, Sunidhi Research
Decline in interest rate to improve investment climateIt is expected that the RBI is likely to move towards an easy monetary policy in the coming
quarters which would be the biggest trigger for a change in the investment climate. This wo
make a lot of projects viable and along with policy initiatives would improve the debt servic
capability of banks. As indicated by the charts below, we believe that there is room for inte
rates to go lower and harbor expectations of easing in the coming few quarter.
RBI should start softening soon
SBI base rate is currently ~50bps higher than 1 year CP rates
indicating room for base rate to decline by 25-50bps in near
term
Also, 1 year CP is at only 100 bps premium to 1 year risk free rat
which is generally a base level reflecting that risk premium has
declined
Source: Bloomberg, Sunidhi Research Source: Bloomberg, Sunidhi Research
-300
-250
-200
-150
-100
-50
0
50
100
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Spread
0.0
1.02.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Sep-0
5
Feb-0
6
Jul-06
Dec-
06
May-0
7
Oc
t-07
Mar-
08
Aug-0
8
Jan-0
9
Jun-0
9
Nov-0
9
Apr-
10
Sep-1
0
Feb-1
1
Jul-11
Dec-
11
May-1
2
1 Year CP rate p remium to 1 Year Gsec yield
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Banks bulk deposit cost has fallen
Source:Bloomberg, Sunidhi Research
OIS yield curve still negative although Gsec yield curve turned
positive indicating rate cut hopes
Source:Bloomberg, Sunidhi Research
Break in sticky upward trend of core inflation a major positive in Oct WPWPI inflation for Oct 12 eased to the lowest this fiscal to 7.45% against a reading of 7.81% in S
The ease was broad based with major groups of primary articles, fuel & power and manufactu
products marking a dip. One positive aspect of the Oct WPI number has been that the st
upward trend in core inflation (manufactured products ex food inflation) broke with the c
inflation falling below the 5.5% (at 5.2%) for the first time in last 3 months, with the MoM W
core inflation rising by a mere 0.1% in Oct. Going forward, we believe that the downward press
on the Primary Articles Inflation will continue on account of ease in food prices with bet
prospects of rabi food output. Food inflation has already eased to 6.6% in Oct from the annual
of 9.5%. The manufactured group of inflation could also continue with its downward trend
slowing demand in the economy adds to the easing pressure on the manufactured inflation.
Trend in Core Inflation
Source: CSO, Sunidhi Research
Trend in CPI
Source: CSO, Sunidhi Research
Signs of easing in the WPI inflation and bleak outlook on domestic industrial activity has rai
hopes for some interest rate action by financial year end.
-3.0
-2.0
-1.00.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
1 Year Gsec premium to 1 Year CoD
-300
-200
-100
0
100
200
300
400
Jan-02
Aug-02
Mar-03
Oct-03
May-04
Dec-04
Jul-05
Feb-06
Sep-06
Apr-07
Nov-07
Jun-08
Jan-09
Aug-09
Mar-10
Oct-10
May-11
Dec-11
Jul-12
10 Yr - 1 Yr OIS Spread
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11
WPI Core Inflation WPI Core Inflation (6 months MA)
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
13.5
Overall CPI Food Fuel Excluding Food and Fuel
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Price performance of PSBs are highly correlated to risky yieldsHistorically, we have observed that valuation of PSBs is highly correlated to high risk corpor
bond yields (1 Year BBB corporate bond yield). This is largely due to the fact that BBB bond yie
best barometer for asset quality stress as well as liquidity. In case of falling BBB bond yield,
stock price rallies due to a) expected improvement in liquidity scenario which would help bank
improve margins b) likely improvement in the economy to reduce asset quality stress and c) fal
interest rate would result in gain in bond book. Considering SBI as proxy for PSBs, as we can
from chart below that SBI has rallied faster than the pace of fall in BBB bond yields and vice ve(we consider inverse BBB bond yield for simplicity).
Source:Bloomberg, Sunidhi Research
Valuation gap between private and PSU banks to narrow going aheadHistorically public sector banks have traded at a ~50% discount to new private sector banks. P
the recent run up in private sector banking stocks, the discount has widened significantly w
public sector banks trading at ~62% discount to private banks. Thus despite the challengenvironment we harbor a positive bias towards public sector banks due to their reasona
valuations.
Of the two important drivers of PSU banks stock performance, the first - bond rates already se
to have topped and is likely to see some easing going ahead, whereas concerns still remain in
second - NPA. Currently, the market expects the RBI to start the easing process which me
yields dont have much upside risk (unless crude see a sharp upmove). However while the ma
would want to play on likely lower bond yields, it is skeptical about the rising risk of n
performing assets. We believe that though slippages will remain high as compared to hist
averages recoveries and up gradations will keep a check on net slippages in the coming quart
Moreover with more policy reforms and likely improvement in economic activity during FY14
FY13, we believe the gap between private and PSU banks to narrow going ahead.
Banks represent 20% of the weight-age in the BSE Sensex and 19.4% in the BSE100 given
sectors involvement in every aspect of Indias growth. Howe ver, within the sector
composition is largely tilted towards private sector banks. Meanwhile public sector ba
dominate all major banking parameters including profits, business etc. This analysis is furt
heightened on comparing the weight-age of PSBs ex SBI. On comparison of market share in b
parameters such as credit, deposits etc, PSBs (ex SBI) represent 55-60% of the share in FY12 vs
index weight-age of just ~10% in the Bankex and the Bank nifty. In terms of the Sensex and
BSE100, banks represent 19-20% weight-age represented largely by private banks at 15-1
where as PSBs (ex SBI) weight-age is only 2% in BSE100 and zero in the Sensex.
The following chart depicts the difference in representation of PSBs and private banks in term
market share and representation in stock indices
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-100%
-50%
0%
50%
100%
150%
May-0
5
Sep-0
5
Jan-0
6
May-0
6
Sep-0
6
Jan-0
7
May-0
7
Sep-0
7
Jan-0
8
May-0
8
Sep-0
8
Jan-0
9
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
Sep-1
1
Jan-1
2
May-1
2
Sep-1
2
Inverse 1 year BBB Corp Bond Yie ld - RHS SBI Price performance (YoY %)
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Public banks account for around two-thirds of the market on different parameters yet they are severely under-represented
Market share Represented in ownership
Deposits Advances Total Assets NII PAT Bankex (BSE) Bank Nifty (NSE) Mc
Private Sector Banks 19% 19% 21% 23% 31% 77.2% 76.0% 57.
PSBs 81% 81% 79% 77% 69% 22.8% 24.1% 43.
PSB ex SBI 64% 62% 61% 56% 53% 10.3% 10.0% 25.
Source: Company, Exchanges, Sunidhi Research
The basic reason behind this is large government ownership and restrictions on the maximforeign investor holding resulting in lower free float. This has also led to under ownership
institutional investors.
Trend in ownership pattern for public sector banks
Ownership (PSBs)
Q2FY13 Q2FY12 Q2FY11
Non promoter 26.60% 26.10% 28.21%
FII 9.84% 10.08% 13.45%
Insurance + MF 14.59% 15.02% 13.98%
Ownership (PSB ex SBI)
Non promoter 26.76% 25.32% 27.21%
FII 10.33% 11.10% 13.05%Insurance + MF 12.02% 12.68% 12.81%
Source: Capitaline, Sunidhi Research
According to Sunidhis banking performance indicator for Q2FY13, the top five positions are
occupied by private sector banks. However while assigning a weight of 25% to valuations and 7
to the ranking in accordance to SBPI, select public sector banks such as Bank of Baroda a
Syndicate Bank also appear in the top five.
Sunidhis banking performance indicator (SBPI)
Bank
Total
Rank
(Q2FY13)
Total
Rank
(Q1FY13)
Asset
quality
Rank CAR Rank
Operational
efficiency
Rank
Profitability
score Rank
Quarterl
performan
rank
Yes Bank Ltd. 1 1 1 4 13 2 1
Axis Bank Ltd. 2 5 4 8 1 3 2
HDFC Bank Ltd. 3 2 2 2 4 12 5
IndusInd Bank Ltd. 4 3 3 10 12 1 6
Kotak Mahindra Bank Ltd. 5 7 5 3 17 18 3
Bank Of Baroda 6 8 8 7 7 5 10
Federal Bank Ltd. 7 9 6 1 8 17 12
ICICI Bank Ltd. 8 4 7 19 2 22 4
IDBI Bank Ltd 9 18 11 13 21 9 9
Syndicate Bank 10 10 9 20 19 4 7
Oriental Bank of Commerce 11 12 15 11 9 16 11
Canara Bank 12 15 13 5 16 11 14
Indian Bank 13 6 14 14 6 14 16
Union Bank Of India 14 22 12 21 14 13 13SBI 15 14 17 12 5 7 20
Bank Of India 16 21 16 22 11 21 8
Vijaya Bank Ltd 17 17 10 9 23 20 15
Punjab National Bank 18 11 21 18 3 10 19
Indian Overseas Bank 19 20 20 6 22 6 21
Allahabad Bank 20 13 19 15 10 19 22
Andhra Bank 21 16 18 16 15 8 23
UCO Bank 22 19 22 17 20 23 18
Central Bank Of India 23 23 23 23 18 15 17
Source: Company, Sunidhi Research
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SBPI ranking including valuation
Bank Total Rank
P/ABV
FY13E Valuation Rank
Total Rank plus
valuation rank
Total Rank
valuation
Yes Bank Ltd. 1 2.9 20 6 1
Axis Bank Ltd. 2 2.2 18 6 2
Bank Of Baroda 6 1.2 11 7 3
HDFC Bank Ltd. 3 4.7 23 8 4
Syndicate Bank 10 0.9 3 8 5
IndusInd Bank Ltd. 4 3.8 22 9 6
Federal Bank Ltd. 7 1.3 14 9 7
IDBI Bank Ltd 9 0.9 9 9 8
Kotak Mahindra Bank Ltd. 5 2.9 21 9 9
Oriental Bank of Commerce 11 0.9 8 10 10
ICICI Bank Ltd. 8 2.1 17 10 11
Indian Bank 13 0.9 4 11 12
Canara Bank 12 1.2 12 12 13
Union Bank Of India 14 1.4 15 14 14
Indian Overseas Bank 19 0.7 1 15 15
Bank Of India 16 1.1 10 15 16
SBI 15 1.6 16 15 17Allahabad Bank 20 0.9 7 17 18
Punjab National Bank 18 1.3 13 17 19
Andhra Bank 21 0.9 6 17 20
Vijaya Bank Ltd 17 2.2 19 18 21
Central Bank Of India 23 0.8 2 18 22
UCO Bank 22 0.9 5 18 23
Source: Company, Sunidhi Research *Prices as on 6th
Dec
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Key risksThe government reforms initiated in September including FDI in retail, aviation, diesel price hik
SEB restructuring etc, have helped improve investors sentiment and portfolio flows. They h
also helped to reduce risks of downgrades and sharp rupee depreciation. However, some crit
economic issues still persist which remain the key downside risk to the banking sector wh
includes fiscal deficit, inflation, CAD issue, liquidity risk. Although some of the policy initiative
direct cash transfer would reduce the stress marginally but weak global financial conditions
higher pre budget spending could worsen the conditions. Hence, this would require
improvement in the external condition in addition to continued policy action by the governmand central bank.
Pre-election spending could lead to fiscal slippages
We expect the fiscal deficit (state + centre deficit) to be around 8.5% given only select measu
taken by the government to contain the fiscal deficit. Also, considering we are approaching
election year (2014), we could see a sharp rise in government expenditure whereas incom
largely inelastic. Historically, government expenditure rises at a faster pace during an election y
as per the chart below. Consistent high crude prices could result in risks of a higher sub
burden. Similarly, fertilizer and food subsidy bills are also likely to surprise on the upside. Wea
than expected tax revenues along with higher expenditure and more budget deficit for the st
are likely to result in poor fiscal deficit numbers.
Trend in central government expenditure
*Circles re