Alpesh Mehta ([email protected]); +91 22 3982 5415 Vallabh Kulkarni ([email protected]); +91 22 3982 5430 AGENDA Indradhanush – Towards the golden age Re-iterate Play 4R’s: Recovery|ROA acceleration | Reforms | Re-rating n The g overnment h as u nveiled “ Indradhanush” ( Hindi w ord f or “ Rainbow”), a framework t ouching s even c ontours o f t he b anking s ystem (A to G a pproach), continuing with its commitment of reforming State Owned Banking space. We believe this f ramework f or transforming the S tate Owned B anks re presents t he mo st comprehensive re form e ffort u ndertaken b y a ny g overnment s ince b anking nationalization in 1970. n Key highlights: Appointments (appointed MD&CEO and Chairman for 5 banks), Bank Board B ureau ( to o versee a ll P SU B anks i ncluding appointments; t o be operational from 1 st April 2016); Capitalization (INR700b committed by FY19; bank wise allocation for first INR200b announced); De-stressing (various measures to reduce asset quality stress); Empowerment (no interference from Government greater, flexibility in hiring manpower); Framework f or A ccountability ( Comprehensive KPI b ased f ramework t o assess performance; E SOPs f or s enior ma nagement); Governance re forms (governance reforms started with Gyan Sangam) n PSB re forms c an u sher i n s tructural c hanges, t hough m ay not n ecessarily re flect in earnings in the near term, and will help improving governance (in turn multiples) and outreach o f PSBs. Reforms further s upported by i mproved p rospects o f a n i nterest rate cut by RBI, cyclical recovery and opex optimization efforts undertaken by banks can result in significant re-rating. n Public sector banks (PSBs) are deep cyclicals, with RoAs of 0.4-0.7% at the bottom of the c ycle a nd 0 .9-1.4% a t t he p eak o f c ycle. S imilarly, P /BV r anges b etween 0.4-0.6x and 1 .3-2.3x. Valuations a re n ear ( for l arge P SBs) o r b elow t he l ong p eriod a verage (20-40% discount for mid-sized PSBs). n With a ppointment o f C hairman a nd M D&CEO from Private Sector b ackground and healthy capitalization, we upgrade BOB to BUY from Neutral earlier. We maintain our positive stance on SBI and UNBK. Seven point agenda – Most comprehensive action plan since 1970s n Appointments: MDs & CEOs and non-executive chairman of 5 banks were announced. A few high profile appointments include Mr. PS Jayakumar (MD&CEO, BOB – earlier with Citigroup), Mr. Rakesh Sharma (MD&CEO, Canara Bank – earlier with SBI and LVB), Mr. Ravi Venkatesan (Chairman, BOB – earlier with Microsoft/Infosys), Mr. G Padmanabhan (Chairman, BOI – earlier ED of RBI). n Bank Board Bureau: Structure of BBB has been laid out (chairman plus 6 personnel) with the aim to replace existing appointment board; and will act as an advisory services/body for banks’ strategy. BBB to start functioning from April ’16. BBB search committee would comprise of RBI Governor, Financial Services Secretary and Secretary, DoPT. n Capitalization: Commitment of INR700b by FY19; Announced bank wise allocation for first two tranches of FY16 (INR200b of the INR250 proposed for the year); SBIN, UNBK, BOB to be the key beneficiaries. IDBI/IOB amongst mid- sized banks. 15 August 2015 Sector Update Financials • Appointments (appointed MD&CEO and chairmen for 5 banks), • Bank Board Bureau (to oversee all PSU Banks including appointments; to be operational from 1st April 2016); • Capitalization (INR700b committed by FY19; bank wise allocation for first INR200b announced); Please refer to our sector report dated 5 th Jan 2015 Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities , Bloomberg, Thomson Reuters, Factset and S&P Capital.
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Indradhanush – Towards the golden age Re-iterate Play 4R’s: Recovery|ROA acceleration | Reforms | Re-rating
n The g overnment h as u nveiled “ Indradhanush” ( Hindi w ord f or “ Rainbow”), a framework t ouching s even c ontours o f t he b anking s ystem (A to G a pproach), continuing with its commitment of reforming State Owned Banking space. We believe this f ramework f or transforming the S tate Owned B anks re presents t he mo st comprehensive re form e ffort u ndertaken b y a ny g overnment s ince b anking nationalization in 1970.
n Key highlights: Appointments (appointed MD&CEO and Chairman for 5 banks), Bank
Board B ureau ( to o versee a ll P SU B anks i ncluding appointments; t o be operational
from 1st April 2016); Capitalization (INR700b committed by FY19; bank wise allocation
for first INR200b announced); De-stressing (various measures to reduce asset quality
stress); Empowerment (no interference from Government greater, flexibility in hiring
manpower); Framework f or Accountability ( Comprehensive KPI b ased f ramework t o
assess performance; E SOPs f or s enior ma nagement); Governance re forms
(governance reforms started with Gyan Sangam) n PSB re forms c an u sher i n s tructural c hanges, t hough m ay not n ecessarily re flect in
earnings in the near term, and will help improving governance (in turn multiples) and outreach o f PSBs. Reforms further s upported by i mproved p rospects o f a n i nterest rate cut by RBI, cyclical recovery and opex optimization efforts undertaken by banks can result in significant re-rating.
n Public sector banks (PSBs) are deep cyclicals, with RoAs of 0.4-0.7% at the bottom of the cycle and 0 .9-1.4% at the peak of cycle. S imilarly, P/BV r anges between 0.4-0.6x and 1 .3-2.3x. Valuations a re n ear ( for l arge P SBs) o r b elow t he l ong p eriod a verage (20-40% discount for mid-sized PSBs).
n With a ppointment o f C hairman a nd M D&CEO from Private Sector b ackground and healthy capitalization, we upgrade BOB to BUY from Neutral earlier. We maintain our positive stance on SBI and UNBK.
Seven point agenda – Most comprehensive action plan since 1970s n Appointments: MDs & CEOs and non-executive chairman of 5 banks were
announced. A few high profile appointments include Mr. PS Jayakumar (MD&CEO, BOB – earlier with Citigroup), Mr. Rakesh Sharma (MD&CEO, Canara Bank – earlier with SBI and LVB), Mr. Ravi Venkatesan (Chairman, BOB – earlier with Microsoft/Infosys), Mr. G Padmanabhan (Chairman, BOI – earlier ED of RBI).
n Bank Board Bureau: Structure of BBB has been laid out (chairman plus 6 personnel) with the aim to replace existing appointment board; and will act as an advisory services/body for banks’ strategy. BBB to start functioning from April ’16. BBB search committee would comprise of RBI Governor, Financial Services Secretary and Secretary, DoPT.
n Capitalization: Commitment of INR700b by FY19; Announced bank wise allocation for first two tranches of FY16 (INR200b of the INR250 proposed for the year); SBIN, UNBK, BOB to be the key beneficiaries. IDBI/IOB amongst mid-sized banks.
15 August 2015
Sector Update
Financials
· Appointments (appointed MD&CEO and chairmen for 5 banks),
· Bank Board Bureau (to oversee all PSU Banks including appointments; to be operational from 1st April 2016);
· Capitalization (INR700b committed by FY19; bank wise allocation for first INR200b announced);
Please refer to our sector
report dated 5th Jan 2015
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
n De-stressing: Focus on resolutions by involving stakeholders (Project Monitoring
Group, clearing pending policy decisions, long term availability of fuel, Discom reforms, Flexible restructuring, strengthening ARCs, etc).
n Empowerment: Focus on banks’ autonomy with no government interference; Banks are encouraged to take their decision independently keeping the commercial interest in mind; greater flexibility in hiring manpower to Banks
n Framework of Accountability: A new framework of key performance indicators (KPIs) to be measured for incentives was announced; Variable pay and ESOPs for top management are also announced
n Governance Reforms: Continuous engagement with banks, regular review meetings with banks with no interference. Next Gyan Sangam scheduled on 14-16th January 2016
Multiple below/near LPA| Economic Recovery a key catalyst n PSBs reforms can usher in structural changes, though may not necessarily reflect
in earnings in the near term, and will help improving governance (in turn multiples) and outreach of these banks.
n Reforms further supported by improved prospects of an interest rate cut by RBI, cyclical recovery and opex optimization efforts undertaken by banks can result in significant re-rating for PSBs.
n Public sector banks (PSBs) are deep cyclicals, with RoAs of 0.4-0.7% at the bottom of the cycle and 0.9-1.4% at the peak of cycle. Similarly, P/BV ranges between 0.4-0.6x and 1.3-2.3x. Valuations are near (for large PSBs) or below the long period average (20-40% discount for mid-sized PSBs).
n With appointment of Chairman and MD&CEO with Private Sector background and healthy capitalization, we upgrade BOB to BUY from Neutral earlier. We maintain our positive stance on SBI and UNBK.
Exhibit 1: PSU Banks - One year forward PE
Source: MOSL, Company
Exhibit 2: PSU Banks - One year forward PB
Source: MOSL, Company
3.9
10.6
7.8
7.4
2
4
7
9
12
Aug
-05
Nov
-06
Feb-
08
May
-09
Aug
-10
Nov
-11
Feb-
13
May
-14
Aug-
15
PSU Banks Sector PE (x) LPA (x)
1.9
0.6
0.91.1
0.3
0.8
1.3
1.8
2.3
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15PSU Banks Sector PB (x) LPA (x)
· De-stressing (various measures to reduce asset quality stress);
· Empowerment (no interference from Government greater, flexibility in hiring manpower);
· Framework for Accountability (Comprehensive KPI based framework to assess performance; ESOPs for senior management);
· Governance reforms (governance reforms started with Gyan Sangam)
15 August 2015 3
Financials | Sector Update
Increased transperency in Appointments Bank Board Bureau empowered to appoint Bank Chairman, MD & CEO n MDs & CEOs and non-executive chairman of 5 banks were announced –after a position
lying vacant for almost a year n A f ew h igh profile appointments include Mr. P S Jaykumar (MD&CEO, B OB – earlier
with C itigroup), Mr. R akesh S harma ( MD&CEO, C anara Bank – earlier w ith S BI a nd LVB), Mr. Ravi Venkatesan ( Chairman, BOB – earlier with Microsoft/Infosys), Mr. G Padmanabhan (Chairman, BOI – earlier ED of RBI).
n Untill the Bank Investment Company is estabhilised appointment of key managment person will b e d one by Bank Board B earu ( BBB). The members for the BBB will b e selected in the next six months and the BBB will start functioning from the 1st April, 2016.
Key details on MD & CEO appointments
Mr. P S Jayakumar New role: MD & CEO, Bank of Baroda Previous role: MD & CEO of Value and Budget Housing Corporation Pvt Ltd. Associated with Citi bank more than 2.5 decades Age: 53 years
n Prior to Value and Budget Housing Corporation Pvt. Ltd, Mr. Jayakumar served as Head of Balance Sheet Optimisation - Treasury in Asia-Pacific at Citigroup Inc. since May 2008.
n Mr. Jayakumar started his career with Citibank in 1986 and has held several senior management positions, including being Country Head for Consumer Business in India and Asia Pacific. He also served as Region Head of Asia-Pacific (Consumer Finance) at Citigroup Inc.
n Mr. Jayakumar is a Gurukul Chevening Scholar from the London School of Economics and Political Science on Globalization. He holds a Master's Degree in Management from XLRI, Jamshedpur and a Bachelor Degree in Commerce from the University of Madras.
Mr. M.O. Rego New role: MD &CEO, Bank of India Previous role: DMD, IDBI Bank Age: 56 years
n Mr. Rego joined IDBI in 1984 and has extensive exposure in all areas of Core Banking and his forte lies in International Banking and Treasury.
n Mr. Rego was also MD & CEO of IDBI Home finance Ltd. which under his leadership grew from a fledgling company to become the fourth largest housing finance company.
n He holds B.Com from University of Pune and M.B.A (Finance) from Symbiosis Institute of Business Management, Pune
15 August 2015 4
Financials | Sector Update
Mr. Rakesh Sharma New role: MD &CEO, Canara Bank Previous role: MD & CEO, The Laxmi Vilas Bank Ltd Age: 57 years
n Mr. Sharma was earlier with SBI where his last assignment was that of Chief General Manager. Mr. Sharma served SBI for over 33 years, heading different departments – both domestic as well as internationally. His expertise lies in retail and wholesale banking, asset liability management, loan syndication, trade finance and personnel development.
n During his stint in SBI, Mr. Sharma also administered banking operations for International Banking Group (IBG) encompassing consolidation of balance sheets for all the foreign offices of the bank. While posted at Tokyo, he was in charge of overall functioning of SBI branches in Japan.
n Mr. Sharma holds a B.Com degree and Masters in Economics.
Mr. Kishore Kharat Piraji New role: MD &CEO, IDBI Bank Previous role: ED, Union Bank of India Age: 56 years
n In the banking career, spanning over more than three decades in Bank of Baroda, Mr. K.P. Kharat has got varied exposure which includes Credit Administration, Foreign Business, Information Technology and general administration in India as well as overseas.
n Mr. K.P. Kharat has established and headed a foreign subsidiary of Bank of Baroda in Trinidad & Tobago; other foreign assignment was at Sharjah. In his last posting he was heading Financial Inclusion Vertical as General Manager of BOB
n Mr. K.P. Kharat is a graduate in Commerce, CAIIB and Law. He also holds an Executive Diploma in Management.
Ms. Usha Ananthasubramanian New role: MD &CEO, Punjab National Bank Previous role: CMD, Bhartiya Mahila Bank Age: 56 years
n Prior to taking over as CMD of the Bhartiya Mahila Bank, Ms. Usha Ananthasubramanian was the Executive Director of Punjab National Bank for over two years.
n In a career spanning over three decades, Ms. Ananthasubramanian has worked in various positions in the banking and allied areas. Key assignments held include General Manager South Zone, Bank of Baroda and Life Insurance Joint Venture Formation. She was closely associated with the transformation project of Bank of Baroda including rebranding and innovative HR initiatives.
n She holds a Master’s degree in Statistics from the University of Madras and a Master’s degree in Ancient Indian Culture from the University of Mumbai.
15 August 2015 5
Financials | Sector Update
Key details on Non-Executive Chairman Appointments
Mr. Ravi Venkatesan New role: Non-Executive Chairman, Bank of Baroda Previous role: Independent Director, Infosys Age: 51 years
n Mr. Venkatesan is a Director on the Board of Infosys, and a Fellow of the Center for Higher Ambition Leadership, Boston. n Between 2004 and 2011, he was the Chairman of Microsoft India, which, under his leadership, became Microsoft's
second largest and one of its fastest growing geographies. n Prior to Microsoft, he spent sixteen years with Cummins Inc. as Chairman of Cummins India Limited; he oversaw the
company’s transformation into a leading provider of power solutions and automotive engines in India. n He holds a bachelor’s degree in mechanical engineering from the Indian Institute of Technology, Bombay; a master’s in
engineering from Purdue University; and a Master of Business Administration from Harvard Business School.
Mr. G Padmananbhan New role: Non-Executive Chairman, Bank of India Previous role: Retired ED of Reserve Bank of India Age: 60 years
n Mr. Padmanabhan served as Executive Director of the Reserve Bank of India, looking after Department of Information and Technology, Department of Payment and Settlement Systems and Foreign Exchange Department.
n Prior to his appointment as Executive Director, Mr. Padmanabhan was heading the Department of Payment & Settlement Systems in the bank since March 2005.
n He is a post graduate in Economics from the University of Kerala and an MBA (International Banking and Finance) from the Birmingham University, UK.
Mr. T N Manoharan New role: Non-Executive Chairman, Canara Bank Previous role: Director, Tech Mahindra, Public Health Foundation Age: 59 years
n Mr. Manoharan served as the President of ICAI during 2006-07 and was instrumental in charting the road map for several accounting reforms in the Indian System and pioneered proactive amendments to the Chartered Accountants Act, 1949.
n Mr. Manoharan was the Chairman of ICAI of Accounting Research Foundation. He was on the Board of IRDA and on the committees constituted by RBI, SEBI, CAG and CBDT during 2006-07.
n Mr. Manoharan was nominated by the Government of India to the Board of Satyam Computer Services Ltd. He made significant contribution towards the revival of the erstwhile Mahindra Satyam within a short span of time. The Government of India conferred him the "Padma Shri" award in 2010.
15 August 2015 6
Financials | Sector Update
Mr. G Narayanan New role: Non-Executive Chairman, Vijaya Bank Previous role: Retired ED, Indian Overseas Bank Age: 66 years
n During the period spanning over 38 years in the Indian Banking Sector, Mr. Narayanan was ED of Indian Overseas Bank; General Manager of Bank of India heading treasury operations;. Managing Director of Centrum Capital Ltd. and Managing Director of Securities Trading Corporation of India Ltd.
n Mr. Narayanan was also Director of Clearing Corporation Of India Ltd, IL&FS Investment Managers Ltd and Securities Trading Corporation of India Ltd.
n Mr. Narayanan holds a Diploma in Corporate Law. He also completed Management Accountant (MAC-1). He has B.Com form Madras University.
Mr. T C V Subramainian New role: Non-Executive Chairman, Indian Bank Previous role: Retired CMD, Exim Bank Age: 66 years
n Mr. Subramanian served has diverse experience in industrial and export financing. He joined EXIM Bank in 1982 when it was set up and served as its CEO till 2009. He actively participated in the setting up of EXIM Bank as a model public sector organization with a professional work culture.
n Prior to EXIM bank, he worked at the Bank of India and IDBI. n He holds a BE, CAIIB and ICWAI (Inter).
15 August 2015 7
Financials | Sector Update
Bank Board Bureau – a reality now One step closer towards Bank Investment Company The decision to set up a Bank Board Bureau, one of the recommendations of Gyan Sangam, was a nnounced in the Budget. The F inance Minister has a lready indicated t hat o nce t he new structure is stablised, the Bank Board Bureau (BBB) will be eventually over period of time b ecome a B ank Investment Company (BIC) – In l ine w ith the Nayak C ommittee recommendation. The members for the BBB will be selected in the next six months and the BBB will start functioning from the 1st April, 2016.
Structure and Functions of the Bank Board Bureau (BBB) n BBB c omposition will comprise of a Chairman and six more members – three
will be officials and three experts (of which two would necessarily be from the banking sector).
n Key f unctions of t he BBB are: (a) Link between the PSBs and government, (b) constantly engage with the Board of Directors of all the PSBs to formulate appropriate strategies for their growth and development, and (c) Replace the Appointments Board for appointment of Whole-time Directors as well as non-Executive Chairman of PSBs.
n The BBB would broadly follow the selection methodology as approved in relevant Appointments Committee of the Cabinet (ACC) guidelines.
n Search C ommittee for m embers o f t he B BB would comprise of the RBI Governor, Department of Financial Services (DFS) Secretary and Department of Personnel and Training (DoPT) Secretary as members.
n The members for BBB will be selected in the next six months and the BBB will start functioning from the 1st April, 2016.
n As per Nayak committee recommendation, members of BBB be given a tenure of three years or until powers are passed on to BIC, whichever is shorter.
Suggestions of Nayak Committee on Bank Investment Company (BIC) n BIC will be Core Investment Company under the RBI registration and regulations
and character of the same will resemble to that of sovereign wealth fund n CEO (to be selected through search process) should be professional banker or
private equity professional having substantial experience in banking n Non executive chairman of BIC would be nominated by GOI n All other directors should be independent and bring in requisite banking or
investment skills n BIC employees would be incentivized based on financial returns of the bank n If required GOI shareholding in BIC should come below 50% n All banks employees will be obliged to CEO, CEO to board, board to BIC and BIC
to GOI (in terms of shareholders agreement)
BBB will comprise of a Chairman and six more
members – three will be officials and three experts
Search Committee for members of the BBB would comprise of RBI Governor,
DFS Secretary and DoPT Secretary as members.
15 August 2015 8
Financials | Sector Update
As per Nayak Committee recommendations, how the transition to BIC from direct government ownership shall happen? A) Phase 1: Constitution of BIC and fixing up of responsibility n Important legislative change required: PSU banks stake will be transferred to BIC
thus, it will be required all PSU banks shall come under companies act vs nationalized banking act or SBI act currently
n GOI shall initially hold entire equity of BIC and constitute professional board for BIC
n All existing ownership function shall be transferred to BIC and non ownership function such as regulatory and development related shall be transferred to RBI
B) Phase 2: Actual implementation of reforms start n Reconstitution of board takes place – an important step in our view to improve
governance standards and fixing up of responsibility n New board members shall be decided by identifying the skill gap, bringing in the
requisite professional with talent and experience in the financial services n BIC will continue to exercise bank ownership function C) Phase 3: Empowering board; BIC function as investor in banks n All the ownership functions will be transferred to respective boards n Appointment of independent directors, CEOs and other whole time directors
will be banks responsibilities. BIC will have maximum two nominee director on the board
n As the non-executive Chairman is not an independent director, a lead independent director would play a helpful role in each bank board, and would be chosen by the board's independent directors.
GOI is committed to BIC but silent on the structure and
time lines as yet
15 August 2015 9
Financials | Sector Update
Capitalization – a major boost CET1 for most banks above 7.5% vs minimum requirement of 6.125%
n GOI has committed to infuse INR700b capital over t he next four years (INR250b in FY16). Th e capital i nfusion in first a nd s econd t ranche t otaling I NR200b w ould t ake place within a month.
n As per our estimates, CET1 of all PSU Banks (ex-IOB) would remain above 7.5% (GOI stated target level) by March 2016.
n In the proposed capital infusion, we estimate minimum BV dilution in SBIN, BOB, PNB and UNBK. While, we estimate 10% dilution in trailing BV of BOI
Exhibit 3: Minimum dilution in case of SBIN, BOB and UNBK; Among mid sized banks IDBI/IOB are the key beneficiaries
Exhibit 6: Despite book value dilutive capital infusion for a few banks, PBV ratios remain significantly below LPA (INR) Pre Issue RoE Post Issue RoE New Price to Book (x) LPA 1yr fwd
Capital requirements are expected to be back-ended
towards FY17-19
15 August 2015 11
Financials | Sector Update
Exhibit 9: Equity capital infusion by GoI in PSU Banks (INR b)
Source: MOSL, Company
0 13 8 0 0 5 0
100
19 12
201
120 125 140
70
250 250
100 100
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
FY19
E
Equity capital infusion by GoI in PSU Banks (INRb)
15 August 2015 12
Financials | Sector Update
De-stressing PSBs Taking measures to reduce stress in select sectors The Government has issued a circular that there will be no interference from Government. Banks have been encouraged to take their decision independently keeping the commercial interest in mind. A c leaner d istinction b etween i nterference a nd intervention h as b een made. Government intends to provide greater flexibility in hiring manpower to banks. We think all these meausres will help improve the corporate governance perception at PSBs.
Exhibit 10: Taking several measures to reduce stress
Focu
s on
De-
Stre
ssin
g PS
B Ba
lanc
e Sh
eets
Various ministries to monitor stressed / delayed projects to resolve issues
SEBs will be given handholding towards enabling early reforms
Bank will explore options like change of promoter if he/she is not been able to bring in additional capital
Strengthening the capital position of ARCs
Requested RBI to consider proposal for granting further flexibility in restructuring of existing loans wherever the banks find viability
Source: MOSL
Exhibit 11: PSBs stressed assets ratio stood at 13.5% in FY15
Source: MOSL, RBI
Exhibit 12: Five sub-sectors, which together constituted 29% of total advances had 53% share in total stressed advances
Source: MOSL, RBI
17.313.6
10.57.5
2.7 1.4
Power Other infra (ex. power)
Iron and Steel
Textiles Aviation Mining
Share in stressed advances of PSBs
15 August 2015 13
Financials | Sector Update
Empowerment – No political interference Governance reform – Moving in the right direction n The G overnment i ssued a c ircular i n Jan-15 about n o p olitical i nterference i n t he
functioning o f P SBs. Since then o ur i ntereaction w ith b ankers s uggest t hat it i s followed in true sprit
n Government i ntends t o p rovide g reater f lexibility i n h iring ma npower t o banks. W e think all t hese m eausres w ill help i mprove t he corporate governance perception a t PSBs.
n GOI Issued a circular that there will be no interference from Government and
banks are encouraged to take their decision independently keeping the commercial interest in mind.
n Government intends to provide greater flexibility in hiring manpower to banks. Government is committed to provide required professionals as BoDs to the board so that well-informed and well-discussed decisions are taken.
n With autonomy comes accountability, accordingly Banks have been asked to build robust grievances redressal mechanism for customers as well as staff so that concerns of the affected are addressed effectively in time bound manner.
n Recommendations from the 2015 Gyan Sangam on no interference from
government, strengthening the risk management practices have been put into action.
n Finance Ministry has been constantly engaging with the PSBs through review meeting and other sessions to focus on improving HR management practices and removing barriers so that the PSBs can share and work together on common resources.
n In addition, Further, scheme of ESOPs for top management (under formulation), is a step in the right direction to attract outside talent for PSBs. Government has also indicated that other strategic initiatives such as consolidation etc. need to be discussed.
n Next Gyan Sangam, will be held on Jan 14-16th, 2016
Steps taken to empower banks and provide greater
flexibility
Governance Reforms: Gyan Sangam recommendations
taken into action
15 August 2015 14
Financials | Sector Update
Framework for Accountability Now, PSBs performance system based on profitability from growth n Present s ystem o f P SBs p erformance me asurement c alled SoI – Statement o f I ntent
has b een c ompletely re vamped. A n ew f ramework o f Key P erformance I ndicators (KPIs) has been introdued – Focus has shifted from growth to profitability
n Operating p erformance e valuated t hrough K PI f ramework w ill b e linked t o t he performance bonus t o b e p aid t o t he M D&CEO o f PSBs. Also, p erformance l inked bonus to be increased (currently maximum incentive to CMD INR0.8m)
n Government is also considering ESOPs for top management n PSBs need to follow strict timelines for filling fraud cases with CBI n Quarterly review by Finance minister
Exhibit 13: Operating performance evaluated through the KPI framework – DFS secretary to chair the review committee
*Total income = Net Interest Income + Total other Income, **Total income = Interest earned + Total other Income, The improvement achieved below maximum level will be evaluated on proportionate basis of achievement. Marks obtained in fraction will be rounded off to nearest unit. For Financial Inclusion, score below maximum will be evaluated as per specified matrix.
Source: MOSL
15 August 2015 15
Financials | Sector Update
Multiple re-rating on the cards Valuation multiples near LPA| Recovery cycle ahead | Reforms key catalyst n In o ur v iew, s tate-owned b anks’ R oEs a re b ottoming o ut a nd w e e xpect g radual
improvement hereon led by improving economic cycle. n Significant steps taken by RBI and GoI to provide conducive environment for recovery
cycle will help improve profitability going forward. n Improvement i n o perational performance i s likely t o d rive the f irst l eg o f re-rating,
with structural reforms goading the re -rating process further. Valuations are near or below t he l ong p eriod av erage. We u pgrade B OB t o B uy. Top P icks: SBIN, BOB and UNBK
RoEs at the cyclical low so does the multiple; Recovery, reforms key catalyst Public sector banks (PSBs) are deep cyclicals, with RoAs of 0.4-0.7% at the bottom of the cycle and 0.9-1.4% at the peak of the cycle. Similarly, P/BV ranges between 0.4-0.6x and 1.3-2.3x. Valuations are near (for large PSBs) or below the long period average (20-40% discount for mid size PSBs). Improvement in operational performance is likely to drive the first leg of re-rating, with structural reforms goading the re-rating process further. We upgrade BOB to Buy. Top Picks: SBIN, BOB and UNBK
Exhibit 14: PSU Banks - One year forward PE
Source: MOSL, Company
Exhibit 15: PSU Banks - One year forward PB
Source: MOSL, Company
Exhibit 16: Price to book ratio (1yr forward) for Indian Banks
*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries
15 August 2015 17
Financials | Sector Update
Exhibit 18: SBIN - One year forward PE
Source: MOSL, Bloomberg
Exhibit 19: SBIN - One year forward PB
Source: MOSL, Bloomberg
Exhibit 20: BOB - One year forward PE
Source: MOSL, Bloomberg
Exhibit 21: BOB - One year forward PB
Source: MOSL, Bloomberg
Exhibit 22: PNB - One year forward PE
Source: MOSL, Bloomberg
Exhibit 23: PNB - One year forward PB
Source: MOSL, Bloomberg
Exhibit 24: BOI - One year forward PE
Source: MOSL, Bloomberg
Exhibit 25: BOI - One year forward PB
Source: MOSL, Bloomberg
9.8
16.3
9.6
5.4
3
8
13
18
Aug
-05
Nov
-06
Feb-
08
May
-09
Aug
-10
Nov
-11
Feb-
13
May
-14
Aug
-15
PE (x) Peak(x) Avg(x) Min(x)
1.2
2.3
1.3
0.70.3
1.1
1.9
2.7
Aug
-05
Nov
-06
Feb-
08
May
-09
Aug
-10
Nov
-11
Feb-
13
May
-14
Aug
-15
PB (x) Peak(x) Avg(x) Min(x)
8.311.5
5.5
1.10
3
6
9
12
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15PE (x) Peak(x) Avg(x) Min(x)
1.0
1.8
0.8
0.20.0
0.5
1.0
1.5
2.0
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15
PB (x) Peak(x) Avg(x) Min(x)
6.9
11.7
7.3
2.82
5
7
10
12
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15
PE (x) Peak(x) Avg(x) Min(x)
0.7
1.8
1.1
0.40.0
0.5
1.0
1.5
2.0
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15
PB (x) Peak(x) Avg(x) Min(x)
5.7
12.9
7.4
3.83
6
9
12
15
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15
PE (x) Peak(x) Avg(x) Min(x)
0.4
1.8
1.0
0.40.0
0.5
1.0
1.5
2.0
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15
PB (x) Peak(x) Avg(x) Min(x)
15 August 2015 18
Financials | Sector Update
Exhibit 26: CBK - One year forward PE
Source: MOSL, Bloomberg
Exhibit 27: CBK - One year forward PB
Source: MOSL, Bloomberg
Exhibit 28: UNBK - One year forward PE
Source: MOSL, Bloomberg
Exhibit 29: UNBK - One year forward PB
Source: MOSL, Bloomberg
Exhibit 30: INBK - One year forward PE
Source: MOSL, Bloomberg
Exhibit 31: INBK - One year forward PB
Source: MOSL, Bloomberg
Exhibit 32: OBC - One year forward PE
Source: MOSL, Bloomberg
Exhibit 33: OBC - One year forward PB
Source: MOSL, Bloomberg
5.0
9.3
5.9
2.3
1
4
6
9
11
Aug
-05
Nov
-06
Feb-
08
May
-09
Aug
-10
Nov
-11
Feb-
13
May
-14
Aug
-15
PE (x) Peak(x) Avg(x) Min(x)
0.5
1.7
0.90.4
0.2
0.7
1.2
1.7
2.2
Aug
-05
Nov
-06
Feb-
08
May
-09
Aug
-10
Nov
-11
Feb-
13
May
-14
Aug
-15
PB (x) Peak(x) Avg(x) Min(x)
4.7
10.8
6.2
3.0
2
5
8
11
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15PE (x) Peak(x) Avg(x) Min(x)
0.6
1.7
1.0
0.4
0.2
0.8
1.4
2.0
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15
PB (x) Peak(x) Avg(x) Min(x)
5.4
9.5
5.42.3
2
4
7
9
12
Feb-
07
May
-08
Jul-0
9
Oct
-10
Dec
-11
Mar
-13
May
-14
Aug-
15
PE (x) Peak(x) Avg(x) Min(x)
0.5
1.7
0.90.2
0.0
0.5
1.0
1.5
2.0
Feb-
07
May
-08
Jul-0
9
Oct
-10
Dec
-11
Mar
-13
May
-14
Aug-
15
PB (x) Peak(x) Avg(x) Min(x)
3.1
15.2
6.6
2.41
6
11
16
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15
PE (x) Peak(x) Avg(x) Min(x)
0.3
1.4
0.8
0.30.0
0.5
1.0
1.5
2.0
Aug-
05
Nov
-06
Feb-
08
May
-09
Aug-
10
Nov
-11
Feb-
13
May
-14
Aug-
15
PB (x) Peak(x) Avg(x) Min(x)
15 August 2015 19
Financials | Sector Update
Exhibit 34: ANDB - One year forward PE
Source: MOSL, Bloomberg
Exhibit 35: ANDB - One year forward PB
Source: MOSL, Bloomberg
3.8
12.8
6.1
2.11
5
9
13
Aug
-05
Nov
-06
Feb-
08
May
-09
Aug
-10
Nov
-11
Feb-
13
May
-14
Aug
-15
PE (x) Peak(x) Avg(x) Min(x)
0.4
1.7
0.9
0.3
0.0
0.5
1.0
1.5
2.0
Aug
-05
Nov
-06
Feb-
08
May
-09
Aug
-10
Nov
-11
Feb-
13
May
-14
Aug
-15
PB (x) Peak(x) Avg(x) Min(x)
15 August 2015 20
Financials | Sector Update
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