CA Kajal Gandhi

Macro Economic Overview and

Banking Research

April 2013

CA Kajal Gandhi 2

Deal Team – At Your Service Strong, Stable Growth

• India’s medium term growth prospects remain strong on account of

− Favourable demographics

− Resilient economic structure

− Stable democratic institutions

− Continued infrastructure

• While growth has averaged at 8.5% between FY06 – 11, even in the face of a

severe and persistent global slowdown, GDP growth is expected to be around

5.0% in 2012-13.

• The private sector plays a key role in driving investment. Economic growth is

largely domestically generated by high savings / investment, making it less

vulnerable to adverse external developments

CA Kajal Gandhi 3

Deal Team – At Your Service Commitment to fiscal consolidation and reforms

• The finance ministry has been diligently following the fiscal consolidation path.

Fiscal deficit has been restricted to 5.2% of GDP in 2012-13 below the revised

estimate of 5.3%.

• Finance minister has set a target of fiscal deficit of 4.8% for 2013 - 14 and

reduce it to 3.0% by 2017.

• Several structural reforms marks a shift in governments approach towards fiscal

consolidation, including

− reduction in fuel subsidy

− targeted cash delivery of subsidies

− proposed introduction of Goods & Services Tax

− further PSU divestment

− liberalized FDI regime for multi-brand retail, insurance, pensions, domestic airlines and broadcasting

− amendment in Banking Regulation Act and Companies Act.

− setting up of Cabinet Committee on Investments

− increase in rail haulage rates and passenger fares after 10 years

CA Kajal Gandhi 4

Deal Team – At Your Service Macroeconomic Performance

Key Parameters 2005-06 2011-12 Change

Real GDP (INR billion)1 32,542 52,220 60% higher

Real Per Capita GDP (INR) 1 33,548 46,221 38% higher

Investment / GDP (%)2 35.8 37.6** 5% higher

Exports (US $ bn)1 103 303 194 % higher

General Government Gross Debt (% GDP) 1 77.4 64.9** 16% lower

Workers Remittances (US$ bn) 2 28.0+ 63.7++ 127% higher

Gross International Reserves (US$ bn) 1 151# 294 ## 94% higher

Foreign Direct Investment inflow (US $ bn) 9.1 46.8 414 % higher

Foreign Direct Investment outflow (US $ bn) 6.1 25.8** 323% higher

Favourable Change in Macroeconomic Variables since FY06

Sources: 1 Reserve Bank of India data (as on March 2012) 2 IMF WEO Database April 2012 ** For FY 2010-11 + for calendar year 2006 ++ for calendar year 2011 # As on 31 March 2006 ## As on 30 March 2012

CA Kajal Gandhi 5

Deal Team – At Your Service Macro Indicators - GDP

The Indian economy has been decelerating since March 2011. GDP growth reached mere 4.5% in Q3FY13 with

moderation in all three sectors of economy.

Weak monsoon impacted agricultural performance

Policy constraints, supply and infrastructure bottlenecks, reduced govt. spending impacted industrial growth.

Subdued growth in other sectors and weak external demand pulled down growth in services sector as well

9.4

8.9 9.

6 9.9

9.3 9.

8

9.4 9.8

9.7

9.5

9.6

8.6

9.8

8.5

5.8

3.5

5.9

9.3

7.7

11.4

8.5

7.6 8.

2 9.2

7.5

6.5

6.0

5.3

5.5

5.3

4.5

0

2

4

6

8

10

12

Jun-

05

Sep

-05

Dec

-05

Mar

-06

Jun-

06

Sep

-06

Dec

-06

Mar

-07

Jun-

07

Sep

-07

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

Sep

-12

Dec

-12

%

GDP growth has averaged at 8.5% between FY06 – 11 ,

Source: RBI, CSO

CA Kajal Gandhi 6

Deal Team – At Your Service Macro Indicators – GDP breakup

It continues to drive growth in GDP, while both Manufacturing and Agricultural growth have been under pressure due

to various reasons

Services constituting close to 66% of GDP

-4

0

4

8

12

16

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

YoY (

%)

Agri Services Industry

Source: RBI, CSO

CA Kajal Gandhi 7

Deal Team – At Your Service Macro Indicators – Channelising savings to investments

Savings rate continue to be greater than 30%, far higher than other emerging economies

The private sector, comprising households and corporates, remains the main contributor to saving.

To mobilize savings for the huge plan expenditure target, the FM has tried to incentivise households to invest in

financial instruments, rather than investing in physical assets like gold.

The liberalization of RGESS and proposal to introduce inflation linked bonds or saving certificates are steps in the

right direction

Gross Domestic Savings as % of GDP

24 25 2629

32 33 3537

32

28

35

31

0

5

10

15

20

25

30

35

40

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

%

Gross Fixed Capital Formation as % of GDP

2325

24 25

2930 31

33 32

26

30 29

0

5

10

15

20

25

30

35

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

%

Source: RBI, CSO Source: RBI, CSO

CA Kajal Gandhi 8

Deal Team – At Your Service Capital Flows facilitating financing of CAD

Robust FDI and FII inflow

7.7

15.9

22.418.0

9.4

22.1

7.1

27.4

-14.0

32.430.3

17.2

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

FY07 FY08 FY09 FY10 FY11 FY12

$ bi

llion

FDI FII

Source: RBI

CA Kajal Gandhi 9

Deal Team – At Your Service Focus on Infrastructure spending

12th 5 Year Plan: Emphasis on Infrastructure Investment

Infrastructure Debt Funds (IDFs) – a new step to fund long term projects

Promoting Public-Private Partnerships (PPPs) for funding and execution

Infrastructure investment has grown massively since 2007 supported by increased private sector participation

3.9 4.2 4.8 4.9 5 5.1 5

1.32.2

2.4 2.6 2.9 3.35

0

2

4

6

8

10

12

10Th plan actual FY08 FY09 FY10 FY11 FY12E 12th Plan Projected

% to G

DP

Public Private

Source: Secretariat for Infrastructure

CA Kajal Gandhi 10

Deal Team – At Your Service Financial Markets

Key Statistics of Indian Financial Services Industries

Industry Unit FY12 YTD FY13

Life Insurance Annual Premiums

- New Business Rs Crore 113,699 69,184

- Renewals Rs Crore 169,616 111,000

MF Industry

- AUM Rs Crore 587,217 813,530

- Annual Inflow Rs Crore -22,023 184,585

Banking Industry

- Credit Rs Crore 4,700,000 5,126,000

- Credit Growth % 19.0 16.3

- Deposit Rs Crore 6,100,000 6,560,000

- Deposit Growth % 14.2 12.8

Year Currency Bank deposits Non- banking deposits Life insurance fund Provident and pension fund Shares & debentures Others Change in Financial Savings assets

FY02 28,160 113,030 -350 41,240 44,220 9,830 49,904 286,034

FY03 28,630 122,700 12,500 52,010 45,950 7,120 54,462 323,372

FY04 42,680 155,930 1,950 52,240 48,950 9,080 78,643 389,473

FY05 36,980 175,050 80 67,990 55,790 8,110 103,165 447,165

FY06 52,150 265,720 520 83,490 61,950 33,860 86,502 584,192

FY07 67,190 429,280 4,580 114,850 72,500 50,850 25,421 764,671

FY08 81,280 389,010 1,290 169,850 71,540 74,310 -14,895 772,385

FY09 92,190 417,830 14,740 152,860 73,400 -2,330 -21,801 726,889

FY10 96,940 398,140 18,520 259,820 129,850 44,840 41,688 989,798

FY11 137,130 440,470 4,390 220,730 138,980 1,730 47,878 991,308

FY12 109,020 492,670 14,850 223,430 151,610 -6,510 -15,991 969,079

Asset class wise allocation of financial savings trend Rs Crore

Source: RBI Handbook

Source: Life Insurance Council, AMFI, RBI

CA Kajal Gandhi 11

Deal Team – At Your Service Companies Market share in Insurance NBP and MF AUM

MF AUM market share (Avg Dec’12) – (|793000 crore)

Life Insurance NBP market share (Q3FY13)

Source: RBI Handbook Source: Life Insurance Council, AMFI, RBI

Others

22%

IDFC

4%

DSP Blackrock

4%Kotak

4%Franklin

5%SBI

7%UTI

9%

Birla

10%

ICICI

10%

Reliance

12%

HDFC

13%

Others

29%

Birla Sunlife

6%

Kotak

Mahindra Old

Mutual

3% Reliance Life

5%

ICICI Prudential

17%

HDFC Standard

14%

Bajaj Allianz

10%

SBI Life

18%

CA Kajal Gandhi 12

Credit to GDP ratio

0.0

10.0

20.0

30.0

FY07

FY08

FY09

FY10

FY11

FY12

FY13*

(%)

68.070.072.074.076.078.080.0

(%)

Credit growth Deposit growth CD ratio

2.92.4 2.6

2.12.5 2.6

0.0

1.0

2.0

3.0

4.0

FY07 FY08 FY09 FY10 FY11 FY12

(X)

Credit multiplier

Historically, it has been observed that credit has grown at ~2.5x the GDP growth of India. Considering GDP

growth is estimated to remain modest at 6% for FY14E and 7%, thereafter, we believe credit to grow at ~16%

for the next year and then may pick up some pace

CA Kajal Gandhi 13

Banking sector – aggregate B/S (20% CAGR over FY06-12)

2006 2007 2008 2009 2010 2011 2012 06-12 CAGR

Liabilities

Capital 25206.51 29559.4 39965 44038 48648 59243 63700 16.7%

Reserves & surplus 157974.64 189619.15 275524 324219 381477 450648 544900 22.9%

Deposit 2164681.7 2696936.5 3320061 4063203 4752455 5616431 6453800 20.0%

Demand deposit 292945.21 354895.9 442055 472578 571019 641938 630400 13.6%

Saving 542874.82 631651.95 744052 874540 1109914 1351781 1528900 18.8%

Term deposit 1328861.7 1710388.7 2133954 2716085 3071522 3622712 4294500 21.6%

Borrowing 203147.83 243010.07 302629 323185 524763 673925 840100 26.7%

Other Liabilities & provisions 234852.53 300836.7 387987 486686 317797.91 383274 397000 9.1%

Total Liabilities 2785863 3459962 4326166 5241331 6025141 7183521 8299500 20.0%

Assets

Cash & balances with RBI 144475.42 195265.66 322971 297264 365813 458783 373700 17.2%

with banks 116443.7 158302.53 109109 198581 183456 191206 243800 13.1%

Investment 866508.35 950981.92 1177330 1449474.6 1719185 1916050 2230481 17.1%

Government sec. 690421.28 754446.48 925724 1164444.6 1367056 1457655 1742860 16.7%

Loans & advances net adv 1516811.4 1981236.4 2476934 3000905 3497053.4 4298705 5074600 22.3%

Bills purchased & discounted 103657.7 124292.64 150987 173910 189585 241600 292100 18.8%

Cash credit & overdraft 565001.16 709803.04 888882 1113557 1299142 1692042 2004400 23.5%

Term loan 848152.57 1147140.7 1437065 1713438 2008326.4 2365063 2778100 21.9%

Fixed asset 25081.57 31362.83 42395 48362 49564 54093 56700 14.6%

Other asset 116542.79 142812.56 197426 246743 210070 264682 320100 18.3%

Total asset 2785863 3459962 4326165 5241330 6025141 7183519 8299381 20.0%

CA Kajal Gandhi 14

Banking sector – aggregate P&L (22% CAGR over FY06-12)

2006 2007 2008 2009 2010 2011 2012 06-12 CAGR

Interest income 185388 231675 309570 388482 415752 491667 655100 23%

Interest exp. 107161 142420 208001 263223 272084 298891 430500 26%

Net Interest Income78227 89255 101569 125259 143668 192776 224600 19%

Other income 35368 43041 59315 75220 78519 79564 85700 16%

Total income 113595 132296 160884 200479 222187 272340 310300 18%

Operating exp. 59201 66319 77220 89581 99769 123129 137100 15%

Wage 33461 36148 39806 47974 55164 71950 78000 15%

Other cost 25740 30171 37414 41607 44605 51179 59100 15%

Provision 29812 34775 40939 58148 65310 78879 91500 21%

Net profit 24582 31202 42725 52750 57108 70332 81700 22%

CA Kajal Gandhi 15

Banking sector – Dupont Analysis (% of average assets)

2007 2008 2009 2010 2011 2012

Net Interest Income 2.86 2.61 2.62 2.55 2.92 2.90

Other income 1.38 1.52 1.57 1.39 1.20 1.11

Total income 4.24 4.13 4.19 3.94 4.12 4.01

Operating exp. 2.12 1.98 1.87 1.77 1.86 1.77

Wage 1.16 1.02 1.00 0.98 1.09 1.01

Other cost 0.97 0.96 0.87 0.79 0.77 0.76

Provision 1.11 1.05 1.22 1.16 1.19 1.18

Net profit 1.00 1.10 1.10 1.01 1.06 1.06

Fee based income and trading gains have seen declining trend

Cost rationalisation with growing assets but wage provisions to be high

PCR – provisions have been rising due to NPAs

CA Kajal Gandhi 16

Banking sector – Key Ratios

2010-11 2011-12 2010-11 2011-12

Public sector banks 0.96 0.88 16.9 15.33

1.1 Nationalised banks 1.03 0.88 18.19 15.05

1.2 SBI Group 0.79 0.89 14.11 16

Private sector banks 1.43 1.53 13.7 15.25

2.1 Old private sector banks 1.12 1.2 14.11 15.18

2.2 New private sector banks 1.51 1.63 13.62 15.27

Foreign banks 1.75 1.76 10.28 10.79

All SCBs 1.1 1.08 14.96 14.6

RoA (%) RoE (%)

Further breakup of RoA depicts private Sector Banks more profitable

CA Kajal Gandhi 17

Banking sector – Asset quality pressures surging

For the past couple of years, the asset quality deterioration has been creating a lot of uncertainties in the

bottomline of banks.

The absolute gross NPA of the industry has increased from | 97,922 crore in FY11 to | 137102 crore in

FY12 and further to | 1,83,000 crore in Q3FY13. Similarly, restructured assets (RA) have increased from |

1,06,859 crore in FY11 to | 2,57,000 crore in FY12 and further to ~| 3,20,000 crore as on Q3FY13. Going

forward, we believe the economic slowdown will continue to keep the trend of slippages and restructuring

at elevated levels. Albeit, the pace may reduce as most of the pain seems to be taken in the books.

Exhibit 1: NPA trend over the years

183000

68973

84747

97922

137102

61500

41813

31424

38723

94360

2.4 2.5 2.4

2.9

1.1 1.1 1.01.2

3.5

1.8

0

50000

100000

150000

200000

FY09 FY10 FY11 FY12 9MFY13

(| c

rore

)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

(%)

GNPA NNPA GNPA ratio NNPA ratio

Source: RBI, Capitaline, ICICIdirect.com Research

Exhibit 1: Stressed assets (SA) including NNPA & RA increase significantly

414360311500148672136557918032.2

3.0 2.7

5.36.1

3.24.1 3.6

6.5

7.9

0

100000

200000

300000

400000

500000

FY09 FY10 FY11 FY12E 9MFY13

(| c

rore

)

0.0

2.0

4.0

6.0

8.0

10.0

(%)

RA SA RA as % of advances SA as % of advances

Source: RBI, Capitaline, ICICIdirect.com Research

CA Kajal Gandhi 18

Basel III requirement estimates

The domestic banking industry will require | 2.7 lakh crore capital by March 2018 to meet its

tier-I capital requirement under Basel III framework as per Crisil estimates.

The tier-I capital of most PSU banks is on the lower side at ~8-9% in FY13. They will be

required to raise significant capital for funding their future growth two years down the line. A

challenge for government and need for more capital instruments.

Basel III requires total capital of 9% +2.5% countercyclical Buffer

Tier I capital required at 7% by 2018 (as per RBI)

Rs. Crore

Basel II 2010-11 2011-12

Capital funds (i+ ii) 6,703 7,780

i) Tier I capital 4,745 5,672

ii) Tier II capital 1,958 2,109

Risk-weighted assets 47,249 54,623

CRAR (A as % of 14.2 14.2

of which: Tier I 10 10.4

Tier II 4.1 3.9

Tier I capital accounted for more than 70

% of the total capital of Indian banks

both under Basel I and II, reflecting the

sound capital position of banks.

CA Kajal Gandhi 19

Banking sector – Key statistics (FY12)

Balance Sheet operations

Total Liabilities/Assets 82,994

Deposits 64,537

Borrowings 8,401

Loans and Advances 50,746

Investments 22,305

Off-balance Sheet Exposure (As percentage 175.9

Total Consolidated International Claims 2,809

Profitability

Net Profit 817

Return on Asset (RoA) (Per cent) 1.08

Return on Equity (RoE) (Per cent) 14.6

Net Interest Margin (NIM) (Per cent) 2.9

Asset Quality

Gross NPAs 1,423

Net NPAs 649

Total Provisions made 747

Gross NPA Ratio (Gross NPAs as percentage of Gross Advances) 3.1

Net NPA Ratio (Net NPAs as percentage of Net Advances) 1.4

Provisioning Coverage Ratio (Per cent) 53

Slippage Ratio (Per cent) 3

Written-off Ratio (Per cent) 4

Sectoral Deployment of Bank Credit

Total Non-food Gross Bank Credit 42,897

Agriculture and Allied Activities 5,226

Industry 19,659

Services 10,330

Personal Loans 7,683

CA Kajal Gandhi 20

Incremental Non Food Credit growth

Incremental non-

food credit

growth (%) Mar-10 Mar-11 Mar-12 Jan-13

Agriculture 17.68 7.05 9.99 10.4

Industry 58.67 49.32 55.69 48.5

Services 18.37 25.78 20.61 12

Retail loan 5.28 17.85 13.71 29Housing loan

(including

Priority Sector

Housing) 4.92 9.16 7.12 16.6

CA Kajal Gandhi 21

Bank NIMs

NIM (%) Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13

PSU coverage

Bank of India 2.9 2.8 3.1 2.9 2.2 2.4 2.6 2.9 2.3 2.4 2.4

Bank of Baroda 2.9 3.0 3.2 3.5 2.9 3.1 3.0 3.0 2.7 2.7 2.7

Dena Bank 2.8 3.5 3.3 3.1 2.9 3.2 3.3 3.2 3.1 2.9 2.9

Indian Overseas Bank 2.9 3.0 3.3 3.2 2.9 2.9 2.6 2.7 2.6 2.3 2.5IDBI Bank 1.6 2.3 2.3 2.1 2.1 2.0 1.9 2.1 2.1 2.1 2.3

Punjab National Bank 3.9 4.1 3.9 3.9 3.8 4.0 3.9 3.5 3.6 3.5 3.5

State Bank of India 3.2 3.4 3.4(Q3-3.61)3.32(Q4-3.07) 3.6 3.8 4.1 3.9 3.6 3.3 3.3

Syndicate Bank 3.1 3.6 3.4 3.4 3.2 3.4 3.5 3.6 3.2 3.3 3.3

Private coverage

Axis Bank 3.7 3.7 3.8 3.4 3.3 3.8 3.8 3.6 3.4 3.5 3.6

City Union Bank 3.6 3.7 3.5 3.8 3.6 3.4 3.2 3.4 3.2 3.3 3.5

Development Credit Bank 3.1 3.1 3.1 3.2 3.1 3.4 3.4 3.1 3.2 3.2 3.4

Dhanlaxmi bank 2.6 2.4 2.6 3.0 2.0 2.2 1.8 1.8 2.5 2.0 ~2.54

Federal Bank 4.2 4.4 4.3 4.0 3.9 3.8 3.9 3.6 3.4 3.6 3.5

HDFC Bank 4.3 4.2 4.2 4.2 4.2 4.1 4.1 4.2 4.3 4.2 4.1

Jammu & Kashmir Bank 3.7 3.7 3.7 3.8 3.8 3.6 3.9 3.8 3.9 4.1

Kotak Mahindra Bank 5.4 5.2 5.4 5.3 5.0 4.8 4.7 4.8 4.7 4.7 4.6

South Indian Bank 2.8 3.0 3.0 2.8 2.8 3.0 3.1 3.1 3.2 3.1 3.2

Yes Bank 3.1 3.0 2.8 2.8 2.8 2.9 2.8 2.8 2.8 2.9 3.0

CA Kajal Gandhi 22

Deal Team – At Your Service Market Share

Market Share in Advances

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E

Public Sector Banks

BOB 3.3 3.5 3.6 3.9 4.1 4.3 4.4 4.3

BOI 3.5 3.5 3.8 4.1 4.1 4.1 3.8 3.9

Dena 0.9 0.9 1.0 1.0 1.1 1.1 1.2 1.2

IOB 2.2 2.3 2.4 2.4 2.2 2.6 2.7 2.8

OBC 2.2 2.3 2.3 2.5 2.6 2.4 2.4 2.4

PNB 5.0 5.0 5.1 5.4 5.5 5.8 5.9 6.1

SBI 15.6 15.5 15.3 16.5 16.5 16.5 15.9 16.2

Syndicate Bank 2.4 2.7 2.7 2.9 2.8 2.7 2.7 2.7

UBI 3.5 3.2 3.1 3.5 3.7 3.8 3.9 3.9

Private Sector Banks

Axis 1.5 1.9 2.5 2.9 3.2 3.6 3.7 3.8

City Union Bank 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3

DCB 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1

Dhanlaxmi 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.3

Federal Bank 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8

HDFC Bank 2.3 2.4 2.7 3.6 3.9 4.1 4.2 4.3

Kotak Bank 0.4 0.6 0.7 0.6 0.6 0.7 0.8 0.9

SIB 0.4 0.4 0.4 0.4 0.5 0.5 0.6 0.6

Yes 0.2 0.3 0.4 0.4 0.7 0.9 0.8 0.8

CA Kajal Gandhi 23

Deal Team – At Your Service Indian Capital Markets – some key statistics

• India has 21 stock exchanges with NSE and BSE as premier exchanges with

combined daily average turnover of over Rs 1662 billion.

• FII investment of $24.8 billion in Equities and $4.7 billion in debt in YTD FY13

• Market Regulators

− Reserve Bank of India (RBI)

− Securities and Exchange Board of India (SEBI)

Key Statistics

• Market Capitalization

− BSE: $ 1176 billion

− NSE: $ 1153 billion

− Corporate Debt: $ 200 billion

− Government Securities: $ 722 billion

CA Kajal Gandhi 24

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 YTD

USD

Bill

ion

FII Debt FII Equity

8%

17%

25%

50%

DII FII Prop Retail

1%18%

6%

75%

BSE cash BSE derivatives NSE cash NSE derivatives

Deal Team – At Your Service Indian Capital Markets

Participation in Markets

Source: BSE, NSE

Average daily turnover of Rs 1662 billion

Source: BSE, NSE

Net Investment by the FIIs in India (US$ billion)

Source: Bloomberg

Thank You

April 2013