Banking Sector - Q4FY12 Results Review

Silky Jain - Research Analyst Bhavya Sundesha - Research Associate

Email: silky.jain@nirmalbang.com Email: bhavya.sundesha@nirmalbang.com
Tel: 022 39268178 Tel: 022 39268022
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g Q4FY12 Results Review

Co Higher interest rate and slowing growth has resulted in an increase in NPA for the sector as a whole
thereby deteriorating the asset quality. We believe that the current environment continues to be

ve challenging for the Indian banking sector. Weaker rupee, inactive government policy and much higher
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2

fiscal deficit poses a risk to easing of inflation. With continuous slowdown in economy and increasing
worries about asset quality overall profitability of the banks are likely to remain under pressure in the
ra near term.

ge

Source: Nirmal Bang Research

The overall banking result for Q4FY12 was a mixed bag. Most of the private banks emerged as clear
winners owing to strong performance in asset quality, business growth and core profitability. The PSU
banks continued to bear the brunt of asset quality concerns which only got aggravated with significant
increase in restructuring book. Most of the PSU banks results were a disappointment barring an
exception of few. On operational basis, few banks reported good results which are as follows:

ICICI Bank
City Union Bank
Yes Bank
Indusind Bank
Dena Bank
DCB
Karur Vysya Bank
Kotak
SBI

We have tried to analyze the results of the banks based on the different parameters in order to conclude
which stocks looks good from investment purpose. We believe that overall the macro environment is not
supportive for the banking industry as a whole as of now. But once the environment improves the banks
which are fundamentally stronger would be amongst the ones which will face a faster recovery as
compared to the banks which are fundamentally weak. We have evaluated the banks on the following
parameters:

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g
Restruct
Co PBP Net
uring
book % adv Dep
NII YoY C/I YoY profit Gross Net of total CASA QoQ QoQ
ve Bank NIMs growth ratio growth margin NPA NPA adv ratio growth growth CAR
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2

SBI 3.9% 45.2% 43.4% 57.8% 11.9% 4.4% 1.82% 4.2% 46.6% 2.8% 4.3% 13.9%

ra Union Bank of India

PNB
3.3%
3.5%
9.3%
9.3%
39.3%
36.0%
83.9%
17.1%
11.9%
13.0%
3.0%
2.9%
1.70%
1.52%
6.6%
8.5%
31.3%
36.2%
15.9%
11.9%
8.5%
6.5%
11.9%
12.6%

ge Bank of India
Canara Bank
2.9%
2.5%
8.4%
3.4%
41.9%
46.9%
67.1%
-12.0%
10.9%
9.2%
2.3%
1.7%
1.47%
1.46%
7.0%
3.4%
34.3%
25.2%
7.9%
6.0%
3.6%
3.7%
12.0%
13.8%

Bank of Baroda 3.0% 7.0% 44.5% 5.4% 16.8% 1.5% 0.54% 5.3% 33.2% 10.2% 10.2% 14.7%

Central Bank 2.6% -11.5% 63.9% 85.1% -2.0% 4.8% 3.09% 11.5% 33.3% 13.1% 4.2% 12.4%

Corporation bank 2.4% 9.5% 35.2% 9.1% 8.8% 0.9% 1.26% 4.6% 22.2% 8.8% 7.5% 13.0%

IOB 2.7% 10.3% 45.7% 2.6% 9.8% 2.7% 1.35% 8.8% 26.4% 8.1% 6.8% 13.3%

United 3.0% 7.7% 44.2% 12.4% 6.3% 3.4% 1.72% 4.9% 40.8% 8.1% 7.6% 12.7%

Andhra bank 3.3% 6.1% 42.2% -6.7% 10.5% 2.1% 0.91% 7.2% 26.4% 7.0% 7.3% 13.2%

Indian Bank 3.2% -2.6% 42.6% -11.7% 9.9% 2.0% 1.33% 9.8% 31.5% 3.6% 1.5% 13.5%

OBC 2.7% 5.4% 46.6% 39.9% 5.8% 3.2% 2.21% 8.4% 24.0% 2.1% -0.1% 12.7%

Dena 3.2% 27.0% 41.2% 38.6% 11.8% 1.7% 1.01% 6.0% 34.5% 19.3% 12.9% 11.5%

UCO bank 2.7% 24.4% 44.1% 25.6% 6.0% 3.5% 1.96% 6.3% 23.9% 10.9% 7.6% 12.4%

Allahabad bank 3.2% 11.9% 45.2% 15.5% 8.8% 1.8% 0.98% 5.7% 30.8% 10.4% 9.8% 12.8%

Axis Bank 3.6% 26.2% 45.4% 11.9% 16.7% 1.1% 0.25% 1.8% 42.0% 14.1% 5.5% 13.7%

ICICI 3.3% 23.7% 41.7% 35.0% 16.7% 3.8% 0.62% 1.7% 43.5% 3.1% -2.0% 18.5%

HDFC bank 4.2% 19.3% 49.8% 15.1% 16.4% 1.0% 0.18% 0.4% 48.4% 1.3% 6.1% 16.5%

Kotak 4.8% 10.6% 75.4% 6.9% 12.1% 1.2% 0.57% 0.1% 32.0% -1.7% 6.4% 17.5%

Indusind 3.3% 19.7% 49.9% 27.2% 12.6% 1.0% 0.27% 0.3% 27.3% 8.1% 4.4% 13.9%

Yes bank 2.8% 28.6% 39.9% 23.4% 13.2% 0.2% 0.05% 0.5% 15.0% 5.9% 4.7% 17.9%

SIB 3.1% 28.4% 55.6% 6.4% 11.3% 1.0% 0.28% 3.7% 19.7% 10.3% 7.9% 14.0%

CUB 3.4% 14.7% 42.3% 17.3% 13.4% 1.0% 0.44% 0.2% 18.2% 10.8% 6.0% 12.6%

Federal bank 3.6% 9.6% 42.9% 6.2% 14.5% 3.4% 0.53% 6.4% 27.4% 10.1% 4.7% 16.6%

Ing Vysya 3.3% 18.9% 57.3% 53.9% 10.1% 1.9% 0.18% 1.4% 34.2% 9.3% 11.2% 14.0%

DCB 3.1% 13.5% 72.5% 8.2% 7.7% 4.4% 0.60% 0.1% 32.1% 22.7% 2.3% 15.4%

IDBI 2.1% 9.2% 39.9% 2.4% 11.2% 2.5% 1.61% 5.5% 24.1% 16.0% 18.8% 14.6%
Source: Company data, Nirmal Bang Research

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Net Interest Margins: Seasonal Impact
g Most of the banks saw lower NIMs on QoQ basis as the banks had to meet up its target of meeting
priority sector lending norms which led to decline in NIMs. The banks which were highly dependent on
borrowing got hurt by higher cost of funds resulting from higher interest rate in the year end. Moreover,
Co many of the PSU banks have reported interest income reversal which also led to decline in NIMs on
sequential basis.

ve On sequentially basis Bank of India reported increase in NIM. However, Allahabad Bank, OBC, PNB
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2

reported significant decline in NIMs on QoQ basis. Interest income reversal during the quarter led to the
sequential drop in NII.
ra Amongst the private sector Axis Bank, DCB, Federal Bank, ING reported QoQ decline in NIMs. ICICI Bank
and City Union Bank reported improvement in NIMs on sequential basis. On YoY basis too ICICI bank and
ge Axis Bank reported marginal increase in NIMs.
Going forward, we believe that the pressure on NIMs will continue to remain at least in Q1FY12. Most of
the banks have reduced their Base rate and BPLR which is expected to impact the margins of the banks
going forward. Moreover, increasing proportion of high cost deposits (bulk) will also impact the margins
in near term. However, there can be some respite in the margins resulting from the benefit arising from
the reduction in CRR.

Loan growth: Year End Syndrome

Demand for working capital continued to drive loan book growth for most of the banks. Almost all the
st
banks reported good loan growth in Q4FY12. Overall industry advances grew 17% YoY as on 31 March
2012 with most of the growth coming in the last fortnight of the year (2.8% on Fortnight basis).
Indusind Bank, DCB, South Indian Bank, HDFC Bank, Dena Bank, City Union Bank, Bank of Baroda,
Kotak reported above industry growth in FY12. However, Canara Bank, OBC, Bank Of India reported YoY
growth below industry average.
Loan book increased sequentially for almost all banks. However, some banks like Indian Bank (3.6%),
ICICI (3.1%), OBC (2.1%), HDFC Bank (1.3%) and Kotak (-1.7%) reported minimal growth on sequential
basis. Banks like DCB (22.7%), Dena (19.3%), UBI (15.9%), Axis (14.1%), PNB (11.9%), Allahabad Bank
(10.4%) and BoB (10.2%) reported good growth sequentially (double digit). Growth in deposits remained
subdued for the entire banking industry.

CASA growth: Players with high savings rate gains

Aggregate CASA grew at lower pace for most of the banks due to rising differential between savings and
term deposit rates. Further the term deposit growth continued to outpace the growth in overall deposits
adding pressure to the CASA ratio.
Private Banks like YES Bank, Kotak and Indusind Bank were the only bank which witnessed a sharp
improvement in CASA growth (55.6%, 41.1% and 23.9% on YoY basis respectively).

Cost to income ratio: Higher employee expenses dents opex

Sequentially most of the banks saw C/I ratio deteriorating, majorly due to hit of one-off provision of
pension and gratuity liability. As the actual liabilities came more than the provisions made by the bank
the banks witnessed a sharp increase in the employee cost. However, PNB, SBI, UBI, DCB, IOB,
Corporation Bank and IDBI reported improvement in C/I ratio on QoQ basis.

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g Asset Quality: No signs of bottoming out

Deterioration in asset quality continued during Q4FY12 for most of the PSU banks owing to higher
slippages and SEB and Air India restructuring. However higher recovery and up-gradation were the saving
Co grace for the banks.

Gross NPA figures increased for most of the PSU Banks sequentially. However, SBI, Andhra Bank and BOI
ve
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2

reported decline in Gross NPA sequentially. Private Banks fared better than the PSU Banks with most of
them reporting a decline in Gross NPA, major among them being Axis Bank, DCB, HDFC, ICICI and Karur

ra Vysya Bank. IndusInd and Corporation Bank reported marginal increase in Gross NPAs as compared to
significant increase witnessed by most of the peers.

ge Provision Coverage Ratio: Cushion against deteriorating asset quality

Most of the private banks have been maintaining high Provision Coverage Ratio (above 80%) which
indicates that these banks are well cushioned against the deteriorating asset quality. Higher slippages and
poor credit underwriting compared to private banks led to higher NPA provisions being made by majority
of the PSU Banks. Apart from SBI & UBI almost all PSU Banks reported significant increase in NPA
provision. SBI and BOI improved their PCR on a sequential basis while PNB & Allahabad bank reported
decline in PCR on sequential basis.

Restructured Book: No End seen in near term

Along with the NPAs, the restructured loan book of the banks have also increased and rather to a greater
extent. The proportion of restructured loans as compared to total advances is significantly high in case of
PSU Banks with the worst among them being Central bank of India, Indian Bank, IOB, PNB, OBC, Andhra
Bank, UCO bank. As compared to other PSU banks Dena Bank, Bank of Baroda, SBI and Allahabad bank
have comparatively lower proportion of restructured book. Amongst the Private Banks, Federal Bank and
ICICI Bank have high proportion of restructured loans.

However, there are few banks which have been maintaining a healthy asset quality with minimal
restructured book. The banks performing well in terms of restructured book are Kotak, DCB, City Union
Bank, IndusInd, HDFC and Yes Bank (all being Private banks).

While majority of the banks have claimed that the bulk of restructuring has been done, some banks have
agreed that the restructuring is yet to be completed. Amongst the banks which have given some guidance
on expected restructuring the following banks have the maximum restructuring yet to be done:

Canara Bank: ~5000 crs to SEB and ~1000 crs to other corporate accounts
Allahabad Bank ~ 2500 crs to SEB and other corporate accounts
Union Bank ~1500 crs to SEB and other corporate accounts

Management of Federal Bank does not expect any major restructuring except some normal accounts
which may come up for restructuring.

Though the NPAs have increased significantly during FY12, the asset quality woes have not ended here.
We believe that the asset quality of the banks will continue to remain under pressure in the near to
medium term resulting from:
Slowdown in the economy
Depreciating rupee

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g Moreover, with more and more corporates filing for restructuring, the restructured loan book continues
to remain under pressure with an increasing trend. It has been seen that on an average basis maximum
10% of the restructured book tend to fall to NPA. Thus, we have adjusted the banks current book value
Co for 10% of outstanding restructured book for greater transparency and have reworked the Adj. BV and
consequently Adj. P/BV. Following are the resultant figures :

ve
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2

ABV Restructu
ra (For
Net Adj.
O/S
Restructured
red book
% of total
10% of
Restructur ABV P/ABV
Bank CMP P/E NPA) P/BV Amt advances ed book post adj post adj ROE
ge SBI
Union Bank of India
2,056
202
8.5
4.3
1,015
152
2.02
1.32
37,168
11,880
4.2%
6.6%
3,717
1,188
960
143
2.14
1.41
19.3%
23.6%
PNB 756 4.5 646 1.17 25,000 8.5% 2,500 572 1.32 21.6%
Bank of India 341 5.1 253 1.34 17,670 7.0% 1,767 223 1.53 20.9%
Canara Bank 403 5.4 389 1.04 7,896 3.4% 790 371 1.09 16.1%
Bank of Baroda 687 4.7 601 1.14 15,200 5.3% 1,520 564 1.22 23.1%
Central Bank of India* 76 10.6 15 5.22 17,347 11.5% 1,735 -9 -8.56 -7.5%
Corporation bank 418 4.4 500 0.84 4,670 4.6% 467 468 0.89 17.0%
IOB 81 3.1 111 0.73 12,641 8.8% 1,264 96 0.85 19.6%
United 60 4.1 87 0.69 3,106 4.9% 311 78 0.77 14.2%
Andhra bank 109 4.5 120 0.91 6,081 7.2% 608 109 1.00 18.2%
Indian Bank 169 5.3 187 0.90 8,902 9.8% 890 166 1.02 15.0%
OBC 229 6.3 305 0.75 9,510 8.4% 951 272 0.84 9.3%
Dena 92 3.1 106 0.86 3,410 6.0% 341 97 0.95 23.7%
UCO bank 69 4.6 61 1.14 7,370 6.3% 737 50 1.40 16.1%
Allahabad bank 131 4.1 171 0.77 6,353 5.7% 635 158 0.83 16.6%
Axis Bank 972 7.8 541 1.79 3,060 1.8% 306 534 1.82 22.4%
ICICI 784 11.9 508 1.54 4,256 1.7% 426 504 1.56 12.6%
HDFC bank 506 20.4 129 3.93 788 0.4% 79 128 3.94 19.0%
Kotak 562 19.7 170 3.30 30 0.1% 3 170 3.30 16.4%
Indusind 299 15.6 95 3.15 91 0.3% 9 94 3.16 19.8%
Yes bank 330 10.7 132 2.49 201 0.5% 20 132 2.50 23.3%
SIB 24 5.6 17 1.41 1,021 3.7% 102 16 1.48 24.1%
City Union Bank 46 6.5 30 1.52 27 0.2% 3 30 1.53 22.4%
Federal bank 419 7.5 322 1.30 2,398 6.4% 240 308 1.36 16.7%
Ing Vysya 325 9.6 255 1.28 409 1.4% 41 252 1.29 13.1%
DCB 38 13.7 32 1.20 4 0.1% 0 32 1.20 8.6%
IDBI 85 3.5 120 0.71 10,037 5.5% 1,004 113 0.76 16.8%
* For Central Bank, P/E has been calculated based on annual EPS
Source: Company Data, Nirmal Bang Research

Based on our above calculations we can infer that the stocks having higher % of restructured book and
which are trading on a higher P/ABV after adjusting for slippages from restructured book which we have
highlighted in red will continue to “face some pressure in near term”.

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g Going forward: Pain not Yet Over

While bank’s have been hurt by restructuring bulk of the stressed assets we believe near term scope for
improvement is very less. The banking sector on a whole continues to be haunted with lots of problems
Co and no immediate solution is being seen which can provide a respite in the near term. Moreover, the
announcement of certain regulations and discussion papers (Basel III, priority sector, dynamic
provisioning etc) has increased challenges for banks which will impact the earnings in the medium term.
ve
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2

However, based on our overall study of the various parameters and the revised valuations we can
conclude that there are some stocks which have shown some resilience to the current macro-economic
ra scenario; though not completely restrained from it.
We believe issues related to asset quality will continue to remain over-hang for next couple of quarters
ge coupled with slowing credit demand and decline in margin will be the key parameters to watch out for in
near term. We believe that in such a scenario the stocks which have shown consistent performance over
the last few quarters on most of the parameters and are attractively valued (post adjustment of
estimated slippages) should be selected.
Based on our revised valuations we believe that these stocks can be accumulated on decline as these
stocks will perform once the macro environment improves as compared to the banks which have been
grappled with their own fundamental problems.

Stock Picks

Adj. P/ABV for Est. Div. Yield Price change since

Bank CMP P/E P/BV slippage Ratio(%) result RoE (%)
ICICI 836 11.9 1.54 1.56 2.1% -8% 12.6%
Axis Bank 1,027 7.8 1.79 1.82 1.6% -12% 22.4%
Yes bank 338 10.7 2.49 2.50 1.2% -11% 23.3%
Indusind 310 15.6 3.15 3.16 0.7% -14% 19.8%
Federal bank 423 7.5 1.30 1.36 2.1% 9% 16.7%
Ing Vysya 340 9.6 1.28 1.29 1.2% -13% 13.1%
City Union Bank 48 6.5 1.52 1.53 2.2% 0% 22.4%
DCB 40 13.7 1.20 1.20 0.0% -20% 8.6%
Dena 89 3.1 0.86 0.95 3.3% 2% 23.7%
Allahabad bank 131 4.1 0.77 0.83 4.6% -23% 16.6%
Corporation bank 416 4.4 0.84 0.89 4.9% 9% 17.0%
Source: Company Data, Nirmal Bang Research

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g
Co
ve
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2

ra
ge

Disclaimer:

This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and
estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This
document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for
general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated
herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This
document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees
may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or
perform investment banking or other services for any company mentioned in this document.

Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.)

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