Nomura- India Banks- eRr Group- Upgrading PNB to Buy SBI and BOB to Neutral NPL Accretion for Large...

India banks

BANKS

EQUITY RESEARCH

Upgrading PNB to Buy; SBI and BOB to Neutral

NPL accretion for large PSU banks; are we getting close to the peak?

December 4, 2013

We see some early signs of abatement in impaired loan accretion for the larger PSU banks. Our analysis of 5 key loan-intensive sectors shows that the average size of stressed corporates doubled in the past 2 years, with persistently high interest rates a bigger determinant of stress than their operating performance. With uncertainties around interest rates ebbing and GDP growth picking up from here, we expect lower net impairment into FY15F. While we retain our preference for private sector banks given their structural advantages, we think the valuation comfort offered by some large PSUs offers interesting near-term opportunities. We highlight how improving macro, better trends in agri and retail and the recent Discom restructuring offers comfort on incremental delinquencies. As well, we analyze the interest coverage trends across 5 other key sectors: textile, metals, E&C, chemicals and food processing - that make up for 30% of incremental impairment over last two years.

Despite operating margin uptrend, high interest costs drive higher delinquencies: Our analysis of companies with ICR ratio less than 1x points to high interest rates being a key factor behind higher delinquencies despite export-driven sectors (eg, textile, metals, chemicals) showing improvement in their operating margins. The food processing sector (eg, sugar) has been hit by pricing disputes impacting supply; but we expect some resolution given its political sensitivity. Continued stress for E&C is likely until the capex cycle revives but some large restructuring done recently would ease delinquencies.

Increasing size of stressed corporates could potentially drive larger and lumpy recoveries: Average annual turnover of stressed companies rose to INR4bn from INR2bn three years ago driving up the ratio of stressed loans in the system. This implies potentially large and lumpy recoveries for the PSUs with any turn in macro.

While PNB and a few mid-size PSU banks offer valuation comfort, tight co-movement between impairment accretion and valuation for PSUs indicates strong potential for re-rating on any trend improvement.

Implication for coverage stocks: While we continue to like private sector banks over a longer horizon given their structural strengths, we believe asset quality trajectory would offer tactical opportunities into PSUs. Fig. 1: Stocks for Action

Source: Nomura estimates

Anchor themes

While we continue to prefer private sector banks given their structural strengths, we see some near term opportunities in public sector banks offering valuation comfort and early signs of improvement in impairment trends.

Nomura vs consensus

FY15F PAT for SBI, BOB and PNB are broadly in line with consensus.

Research analysts

India Banks

Abhishek Bhattacharya - NFASL [email protected] +91 22 4037 4034

Amit Nanavati - NSFSPL [email protected] +91 22 4037 4361

Company TP Target P/ABV Target P/E Rating Upside/Dow nside ROE - FY14F

PNB 625 0.63 4.9 Buy 12.4% 12.1

SBI 1,900 1.0 8.3 Neutral 4.3% 11.2

Bank of Baroda 650 0.78 5.7 Neutral -0.2% 13.4

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | India banks December 4, 2013

2

Contents

3 Recent events that have made us more positive on impairment trends for PSUs

6 What does our analysis of interest coverage trends reveal?

9 How does the valuation stack up for large PSU banks?

10 Key risks to our thesis

11 Punjab National Bank

19 State Bank of

27 Bank Of Baroda

35 Appendix A-1


3

Recent events that have made us more positive on impairment trends for PSUs While NPL accretion for PSU banks was high in the Sep'13 quarter, some recent data points lead us to believe that we might be getting close to the peak of the impairment cycle:

While economic stress has not come down yet, some macro indicators appear more benign Our economist, Sonal Verma, recently upgraded her GDP growth forecast for FY14F to 4.7% from 4.2% earlier (see: Global Annual Economic Outlook: 2014 outlook: Uneven recovery drives policy divergence, 25 Nov 2013) , reiterating the view that GDP growth for India is now close to bottoming. Historically, we have seen a very tight negative fit between delinquencies (incremental addition of NPLs) to economic growth. While on the interest rate front, our house view builds in another 25bps hike in the next policy statement; it also builds in a sharp moderation in inflation going into FY15. This leads us to believe that we are likely getting close to the peak of interest rate cycle as well. Recent RBI measures have also assuaged fears on currency to a large extent with healthy inflows in FCNR deposits cushioning the balance of payments. This move also has brought down the uncertainty on rate trajectory arising out of currency related intervention by RBI.

Fig. 2: Delinquency ratio vs real GDP Growth

Source: RBI; Nomura estimates

Fig. 3: Liquidity situation has improved over last few months

Source: Nomura Research; RBI, Bloomberg

With liquidity improving for the banking system the effective policy rate has shifted closer to the repo rate than the MSF rate which has lowered incremental borrowing costs despite the 25bps hike in repo rate in the Oct'13 policy.

Trends on retail/agri NPLs have been improving gradually: Incremental GNPL data made available by RBI recently indicates that the pain might be ebbing in agri and retail loans while getting more pronounced for SME and corporate loans. Agri and retail sectors put together account for 31% of outstanding GNPL for the system (see above chart).

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5 1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14F

FY

15F

Delinquency ratioReal GDP Growth (RHS- Reverse scale)

0

2

4

6

8

10

12

(2,000)

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Borrowing including MSF (INR bn)Borrowing under Repo (INR bn)Repo rate (RHS)MSF rate (RHS)

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=646724&appname=GRP&cid=bkhhUmhDZG4vWGs90

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=646724&appname=GRP&cid=bkhhUmhDZG4vWGs90


4

Fig. 4: GNPL Composition as of Mar'13

Source: RBI; Nomura research

Fig. 5: Net change in GNPL by sectors for all banks


As evident in the chart above, for both agri and other priority loans (which is largely small ticket mortgage and other secured retail loans), the NPL addition trend has improved into FY13.

Fig. 6: Large PSUs -slippage, recovery and write-off trends


Fig. 7: SBI: Rolling 12m slippage sector wise

Source: Company data; Nomura research

Recent quarterly data show recoveries and upgrades holding up while the trend of writing off bad debts aggressively has declined. Among the banks we cover, SBI and PNB also mirror this improvement in their agri and retail impairment trends, while BOB has yet to show a decline in these ratios.

Fig. 8: BOB : sector wise GNPL ratio

Source: Company data; Nomura Research

Fig. 9: PNB : change in GNPL sector wise

Source: Company data; Nomura Research

Trade/Services22%

Agri16%

Mortgage/Retail15%

Metals8%

Textiles7%

Power/other infra6%

E&C5%

Chemical/ Pharma3%

Food Processing

2%

Gems1%

Mining 1% Automobiles

1%

Others industries13%

(100)(50)

-50

100

150 200

250 300

350 400

FY08 FY09 FY10 FY11 FY12 FY13

Agri SMEOther priority Non-priority

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

0%

10%

20%

30%

40%

50%

60%

1Q

FY

11

2Q

FY

11

3Q

FY

11

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

Recovery/upgrades as % of opening GNPLWriteoffs as % of opening GNPLDelinquency ratio (RHS)

-20.0 40.0 60.0 80.0

100.0 120.0 140.0 160.0 180.0 200.0

4Q

F11

1Q

F12

2Q

F12

3Q

F12

4Q

F12

1Q

F13

2Q

F13

3Q

F13

4Q

F13

1Q

F14

2Q

F14

Corporate Agri RetailInt SME

-

1.0

2.0

3.0

4.0

5.0

6.0

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

Large corp SME Agri Retail

-20

-10

0

10

20

30

40

50

FY09 FY10 FY11 FY12 FY13 1HFY14

Corporate/ Services Retail Agri


5

Power sector reforms have been material on the Discom front, and recent implementation of financial restructuring plan (FRP) assuages risk of default for next two to three years With seven states now on-board the FRP programme - three already having issued the requisite bonds, cash flow visibility for the troubled Discoms is assured till FY15 at minimum. Average tariff hikes in FY14 have been lower compared to about 15-16% hike seen in FY13 largely on political considerations in an election year. However, our utilities analyst, Anirudh Gangahar, expects bigger tariff hikes in FY15 once the central elections get over. As per our estimate, most of these problem Discoms would break even at the operating level if current momentum in tariff hike continues. In the interim, FRP would provide the requisite relief of cash flows. PFC and REC have also chipped in with about INR380bn of transition financing to these Discoms towards their short term working capital requirements. However, stress on IPPs still continues with the recent development on coal linkages and tariff rulings yet to impact the ground situation. We expect the pace of restructuring on power developer side to continue well into FY15F.

Fig. 10: Losses of problem SEBs

Source: PFC state utility report, Nomura research

Fig. 11: Per unit tariff and cost increase vs realization gap

Source: PFC state utility report, Nomura research

Pace of restructuring activity still very high, although the trajectory is flattening While overall referrals in CDR continue to be high, the trajectory has come off from the highs a year ago. Even for the large PSU banks, incremental restructuring is trending flatter than a few quarters back.

Fig. 12: Rolling 12m CDR referral and approval trends

Source: CDR cell, Nomura research

Fig. 13: Live CDR cases outstanding sector wise

Source: CDR cell, Nomura research

As of Mar'13 the banking system had about INR3tn in outstanding standard restructured assets, of which INR2.1tn was in bilateral restructuring (within which INR650-700bn would be Discoms and INR500bn would be Air India. The five sectors we have analysed in more details below - textile, metals, chemical/ pharma, E&C and food processing account for about half of the outstanding CDR cases. This takes us to the key analysis

0

100

200

300

400

500

600

700

800

-50

0

50

100

150

200

250

FY07 FY08 FY09 FY10 FY11 FY12

Rajasthan TNUP HaryanaAP MPTotal losses

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0%2%4%6%8%

10%12%14%16%18%

FY07 FY08 FY09 FY10 FY11 FY12 FY13EFY14F

Revenue gap in INR per unit (RHS)Growth in per unit costTariff per unit growth

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Sep

-10

Dec-1

0

Mar-

11

Jun

-11

Sep

-11

Dec-1

1

Mar-

12

Jun

-12

Sep

-12

Dec-1

2

Mar-

13

Jun

-13

Sep

-13

12m rolling CDR reference (as % of bank credit)12m rolling CDR approval (as % of bank credit)12m rolling restr by large PSUs (as % of O/s loans)

Power & infra32%

Metals22%

Textiles10%

Chemical/Pharma8%

E&C6%

Food processing3%

Ship-Breaking3%

NBFC3%

Paper/Packaging3%

Hospitality2%

Others8%


6

What does our analysis of interest coverage trends reveal?

Methodology: We examined interest coverage ratio (ICR) as the key metric to assess asset quality stress and classified corporates with ICR less than 1x as stressed corporates. For the five key sectors: chemicals, textiles, E&C, metals and food processing, we charted the proportion of stressed assets (as represented by their total turnover in their respective sector ; since we looked at quarterly trends ascertained from the P&Ls). We charted this stressed sales ratio with the gap between operating margin and interest cost for each sector to get some colour on the depth of stress. In addition, we separately took out the stressed corporates to compare their operating margin trends and interest cost trajectory. Finally we examine at the average ticket size of stressed assets to compare its movement across sectors.

The export-oriented sectors - textile, metals and chemicals - show continuous improvement in operating margin trends but high interest rates continue to be a dampener; any turn in rate cycle is likely to lead to reduction in slippages If interest rates turn benign we believe many of these corporates would show strong recovery with their margins already on an uptrend. The food processing sector has seen deterioration in operating trends largely on account of troubles faced by sugar mills on pricing while E&C segment has seen continued stress with no end in sight to the capex crunch.

Fig. 14: Chemicals – ratio of stressed corporates

Source: ACE equities, Nomura research

Fig. 15: Chemical – operating margin vs interest costs


For the chemicals sector while the average gap between operating margins and interest costs have come off, the proportion of stressed corporates has remained high largely owing to some large corporates getting impacted by the liquidity crunch and high interest cost outflow. Orchid chemical is one case in point which has been referred to CDR with management discussing the tight liquidity and high interest costs that have impacted the company.

Fig. 16: Textiles – ratio of stressed corporates


Fig. 17: Textiles – operating margin vs interest costs


-45%-40%-35%-30%-25%-20%-15%-10%-5%0%0%

2%

4%

6%

8%

10%

12%

14%

16%

4Q

FY

05

2Q

FY

06

4Q

FY

06

2Q

FY

07

4Q

FY

07

2Q

FY

08

4Q

FY

08

2Q

FY

09

4Q

FY

09

2Q

FY

10

4Q

FY

10

2Q

FY

11

4Q

FY

11

2Q

FY

12

4Q

FY

12

2Q

FY

13

4Q

FY

13

2Q

FY

14

stressed sales ratio gap

-25%-20%-15%-10%-5%0%5%

10%15%

3Q

FY

06

1Q

FY

07

3Q

FY

07

1Q

FY

08

3Q

FY

08

1Q

FY

09

3Q

FY

09

1Q

FY

10

3Q

FY

10

1Q

FY

11

3Q

FY

11

1Q

FY

12

3Q

FY

12

1Q

FY

13

3Q

FY

13

1Q

FY

14

opm rolling 12m int cost rolling 12m

-30%

-25%

-20%

-15%

-10%

-5%

0%0%

5%

10%

15%

20%

25%

30%

4Q

FY

05

2Q

FY

06

4Q

FY

06

2Q

FY

07

4Q

FY

07

2Q

FY

08

4Q

FY

08

2Q

FY

09

4Q

FY

09

2Q

FY

10

4Q

FY

10

2Q

FY

11

4Q

FY

11

2Q

FY

12

4Q

FY

12

2Q

FY

13

4Q

FY

13

2Q

FY

14

stressed sales ratio gap (RHS)

-10%

-5%

0%

5%

10%

15%

20%

3Q

FY

06

1Q

FY

07

3Q

FY

07

1Q

FY

08

3Q

FY

08

1Q

FY

09

3Q

FY

09

1Q

FY

10

3Q

FY

10

1Q

FY

11

3Q

FY

11

1Q

FY

12

3Q

FY

12

1Q

FY

13

3Q

FY

13

1Q

FY

14



7

In the textiles sector again a similar trend is visible with operating margins showing an uptrend while interest costs remain very high. Some of the larger textile sector promoters have been aggressively pursued by PSU banks for recoveries. Some recent cases are Bombay Rayons- having repaid its debt to Central Bank of India in order to be removed from the wilful defaulter list (as per a news report by Financial Express).

Fig. 18: Metals – ratio of stressed corporates


Fig. 19: Metals – operating margin vs interest costs


In the metals sector, improvement in operating margins is most evident, with even the stressed corporates operating at positive margins. However, high interest rates have been a big dampener. Case in point is Jindal Stainless, which has seen its interest costs more than double in two years despite 20% increase in borrowings over the period.

Fig. 20: Food processing – ratio of stressed corporates


Fig. 21: Food processing – operating margin vs int costs


In the food processing sector - sugar continues to be a problem area with bigger corporates like Bajaj Hindustan and Balrampur Chini reporting operating losses in the recent quarter. In many mills logjam between sugarcane farmers and the mill owners on pricing has led to supply disruptions. However, with the political sensitivity of sugar and sugarcane sector, we expect some solutions to emerge soon.

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%0%2%4%6%8%

10%12%14%16%18%

4Q

FY

05

2Q

FY

06

4Q

FY

06

2Q

FY

07

4Q

FY

07

2Q

FY

08

4Q

FY

08

2Q

FY

09

4Q

FY

09

2Q

FY

10

4Q

FY

10

2Q

FY

11

4Q

FY

11

2Q

FY

12

4Q

FY

12

2Q

FY

13

4Q

FY

13

2Q

FY

14

stressed sales ratio gap (RHS)

-20%-15%-10%-5%0%5%

10%15%20%


-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%0%2%4%6%8%

10%12%14%16%18%20%

4Q

FY

05

2Q

FY

06

4Q

FY

06

2Q

FY

07

4Q

FY

07

2Q

FY

08

4Q

FY

08

2Q

FY

09

4Q

FY

09

2Q

FY

10

4Q

FY

10

2Q

FY

11

4Q

FY

11

2Q

FY

12

4Q

FY

12

2Q

FY

13

4Q

FY

13

2Q

FY

14


-40%

-30%

-20%

-10%

0%

10%

20%

1Q

FY

07

3Q

FY

07

1Q

FY

08

3Q

FY

08

1Q

FY

09

3Q

FY

09

1Q

FY

10

3Q

FY

10

1Q

FY

11

3Q

FY

11

1Q

FY

12

3Q

FY

12

1Q

FY

13

3Q

FY

13

1Q

FY

14



8

Fig. 22: E&C – ratio of stressed corporates


Fig. 23: E&C – operating margin vs interest costs


E&C segment continues to show the biggest impact of the capex cycle slowdown with weak operating margin trends. However, recently some big ticket restructuring have happened in the sector - the likes of Gammon India and Lanco both of which are expected to be approved by the CDR cell in Dec quarter. While we continued stress in this sector, incremental slippages are likely to moderate with many of the bigger corporates already restructured.

Fig. 24: Avg size of stressed corporates by annual turnover


Fig. 25: Int cost to sales for stressed corporates


Average ticket size of stressed corporates has almost doubled in the last three years; recoveries when they come could be potentially large and lumpy As evident in the chart above the average annual turnover of stressed corporates has moved to INR4bn from INR2bn in 2QFY11. Interestingly, this coincides with the introduction of the base rate regime which has led to significant increase in borrowing costs for quite a few larger corporates. While it would be premature to see any immediate trends, but we expect strong and lumpy recoveries to come when the macro begins to turn around.

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%0%

2%

4%

6%

8%

10%

12%

14%4Q

FY

05

2Q

FY

06

4Q

FY

06

2Q

FY

07

4Q

FY

07

2Q

FY

08

4Q

FY

08

2Q

FY

09

4Q

FY

09

2Q

FY

10

4Q

FY

10

2Q

FY

11

4Q

FY

11

2Q

FY

12

4Q

FY

12

2Q

FY

13

4Q

FY

13

2Q

FY

14


-20%-15%-10%-5%0%5%

10%15%20%25%30%

3Q

FY

06

1Q

FY

07

3Q

FY

07

1Q

FY

08

3Q

FY

08

1Q

FY

09

3Q

FY

09

1Q

FY

10

3Q

FY

10

1Q

FY

11

3Q

FY

11

1Q

FY

12

3Q

FY

12

1Q

FY

13

3Q

FY

13

1Q

FY

14


-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

3Q

FY

06

1Q

FY

07

3Q

FY

07

1Q

FY

08

3Q

FY

08

1Q

FY

09

3Q

FY

09

1Q

FY

10

3Q

FY

10

1Q

FY

11

3Q

FY

11

1Q

FY

12

3Q

FY

12

1Q

FY

13

3Q

FY

13

1Q

FY

14

E&C Chemical

Metal Textile

Food Processing

0%

5%

10%

15%

20%

25%

3Q

FY

06

1Q

FY

07

3Q

FY

07

1Q

FY

08

3Q

FY

08

1Q

FY

09

3Q

FY

09

1Q

FY

10

3Q

FY

10

1Q

FY

11

3Q

FY

11

1Q

FY

12

3Q

FY

12

1Q

FY

13

3Q

FY

13

1Q

FY

14

food metals E&CTextile Chemical


9

How does the valuation stack up for large PSU banks?

We have seen tight co-movement between valuation of PSU banks and their incremental impairment (slippages and addition in standard restructured book)

Within our coverage SBI and BOB are yet to report meaningful turn in their asset impairment trends, and are relatively richly priced. On the other hand, for PNB the turn in NPL cycle is more visible while valuation comfort is much bigger. We upgrade PNB to Buy with a TP of INR625. We also upgrade both SBI and BOB to Neutral from Reduce, but we would wait for more asset quality data points particularly on their mid-corporate loan book before turning more positive.

Fig. 26: PNB – Rolling impairments vs P/ABV

Source: Company data, Nomura estimates

Fig. 27: BOB – Rolling impairments vs P/ABV


Fig. 28: SBI – Rolling impairments vs P/ABV


Fig. 29: OBC – Rolling impairments vs P/ABV

Source: Company data, Bloomberg, Nomura research

Fig. 30: Canara Bank – Rolling impairments vs P/ABV


-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0 0

10

20

30

40

50

60

70

802 Qtr rolling gross impairments 2 Qtr rolling net impairments

P/ABV (inverse scale - RHS)

-

0.5

1.0

1.5

2.0 0

10

20

30

40

50

4Q

F10

1Q

F11

2Q

F11

3Q

F11

4Q

F11

1Q

F12

2Q

F12

3Q

F12

4Q

F12

1Q

F13

2Q

F13

3Q

F13

4Q

F13

1Q

F14

2Q

F14

2 Qtr rolling gross impairments2 Qtr rolling net impairmentsP/ABV (inverse scale - RHS)

-

1.0

2.0

3.0 0

50

100

150

200

4Q

F10

1Q

F11

2Q

F11

3Q

F11

4Q

F11

1Q

F12

2Q

F12

3Q

F12

4Q

F12

1Q

F13

2Q

F13

3Q

F13

4Q

F13

1Q

F14

2Q

F14


-

0.5

1.0

1.5 0

10

20

30

4Q

F10

1Q

F11

2Q

F11

3Q

F11

4Q

F11

1Q

F12

2Q

F12

3Q

F12

4Q

F12

1Q

F13

2Q

F13

3Q

F13

4Q

F13

1Q

F14

2Q

F14


-

0.5

1.0

1.5

2.0 0

10

20

30

40

50

4Q

F10

1Q

F11

2Q

F11

3Q

F11

4Q

F11

1Q

F12

2Q

F12

3Q

F12

4Q

F12

1Q

F13

2Q

F13

3Q

F13

4Q

F13

1Q

F14

2Q

F14



10

Fig. 31: Union Bank – Rolling impairments vs P/ABV


Fig. 32: BOI – Rolling impairments vs P/ABV


Key risks to our thesis

• Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly.

• Low core equity ratios make PSUs dependent perennially on government for capital infusion and this is likely to have growth implication.

• Increasing trends on opex ratios - With increase in pension and wage revision provisioning, in absence of higher growth the opex ratios are likely to trend higher for PSUs.

• Ceding market share in CASA deposits and retail assets - With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.

-

0.5

1.0

1.5

2.0 0

10

20

30

404Q

F10

1Q

F11

2Q

F11

3Q

F11

4Q

F11

1Q

F12

2Q

F12

3Q

F12

4Q

F12

1Q

F13

2Q

F13

3Q

F13

4Q

F13

1Q

F14

2Q

F14


-

0.5

1.0

1.5 0

10

20

30

40

4Q

F10

1Q

F11

2Q

F11

3Q

F11

4Q

F11

1Q

F12

2Q

F12

3Q

F12

4Q

F12

1Q

F13

2Q

F13

3Q

F13

4Q

F13

1Q

F14

2Q

F14


Key company data: See page 2 for company data and detailed price/index chart.

Punjab National Bank PNBK.NS PNB IN

BANKS

EQUITY RESEARCH

Upgrading to Buy from Reduce

The best value proposition in the PSU bank space

December 4, 2013

Rating Up from Reduce

Buy

Target price Increased from 440 INR 625

Closing price December 2, 2013 INR 556

Potential upside +12.4%

Action: Upgrade to Buy with a new TP of INR625 We upgrade PNB to Buy with a revised TP of INR625. As highlighted in our sector note, while we think immediate relief in impairment trends is not yet visible for PSU banks, we see improvement in underlying operating margins for loan-intensive corporate, particularly in the export-driven sectors. We expect this, along with potentially a benign macro environment, to drive strong recoveries going into FY15F.We revise our H2FY14F earnings by 3% on marginally lower LLPs while building in capital infusion announced by GoI. Our TP increase is largely driven by multiple expansions from 0.44x to 0.63x 1-y Fwd BV (BVPS of INR994).

Declining impairments and valuation comfort make PNB our preferred pick in the PSU space While delinquency trends have improved marginally for PNB, recovery has been much stronger compared to other large PSUs. PNB has shown improvement in GNPL accretion across retail, agri and industry sectors. As well, with the highest exposure to Discoms among large PSUs, PNB has benefited more from the recent FRP implementation. In addition, we think PNB offers the most valuation comfort among the three PSUs in our coverage. While low provision coverage, high MTM outgo and pressure on NIMs would be dampeners, we expect this stock to be the best positioned for a re-rating once the asset quality trends start improving meaningfully.

Valuation: Our TP implies 0.63x 1-year forward ABV of INR994 and 0.93x on NNPL adjusted 1-year forward book of INR670 for an adjusted RoE of 12.1% for FY14F. At current prices, PNB looks attractive, trading at 0.56x 1-year forward ABV. Our valuation methodology remains unchanged.

31 Mar FY13 FY14F FY15F FY16F

Currency (INR) Actual Old New Old New Old New

PPOP (mn) 109,074 108,817 109,838 123,027 124,981 132,125 138,149

Reported net profit (mn) 47,477 43,533 39,021 46,749 51,511 54,442 57,992

Normalised net profit (mn) 47,477 43,533 39,021 46,749 51,511 54,442 57,992

FD normalised EPS 138.17 126.69 110.50 136.06 145.87 158.44 164.22

FD norm. EPS growth (%) -3.6 -8.3 -20.0 7.4 32.0 16.5 12.6

FD normalised P/E (x) 4.0 N/A 5.0 N/A 3.8 N/A 3.4

Price/adj. book (x) 0.6 N/A 0.6 N/A 0.5 N/A 0.5

Price/book (x) 0.6 N/A 0.6 N/A 0.5 N/A 0.5

Dividend yield (%) 5.7 N/A 4.5 N/A 6.0 N/A 6.7

ROE (%) 15.7 12.7 11.3 12.4 13.5 13.1 13.7

ROA (%) 1.0 0.9 0.8 0.8 0.9 0.8 0.9


Anchor themes

While we continue to prefer private sector banks given their structural strengths, we see some near-term opportunities in public sector banks offering valuation comfort and early signs of improvement in impairment trends.

Nomura vs consensus

Our FY15F PAT is in line with consensus as we build improvement in provision cover. We expect LLPs of 100bps for FY15F.

Research analysts

India Banks




Nomura | Punjab National Bank December 4, 2013

12

Key data on Punjab National Bank Profit and Loss (INRmn) Year-end 31 Mar FY12 FY13 FY14F FY15F FY16FInterest income 364,761 418,933 438,024 500,631 574,630Interest expense -230,617 -270,368 -277,982 -318,821 -367,057Net interest income 134,144 148,565 160,042 181,810 207,574Net fees and commissions 25,470 24,760 26,433 30,381 35,021Trading related profits 5,390 7,200 7,254 7,400 5,939Other operating revenue 11,166 10,199 9,206 11,412 11,064Non-interest income 42,026 42,159 42,893 49,194 52,023Operating income 176,170 190,724 202,935 231,004 259,597Depreciation 0 0 0 0 0Amortisation

Operating expenses -22,793 -24,903 -27,643 -31,461 -35,703Employee share expense -47,235 -56,747 -65,455 -74,562 -85,745Op. profit before provisions 106,143 109,074 109,838 124,981 138,149Provisions for bad debt -24,030 -33,360 -31,404 -37,431 -37,049Other provision charges -11,743 -10,496 -24,716 -13,963 -14,545Operating profit 70,370 65,218 53,718 73,587 86,556Other non-operating income

Associates & JCEs

Pre-tax profit 70,370 65,218 53,718 73,587 86,556Income tax -21,528 -17,741 -14,697 -22,076 -28,563Net profit after tax 48,842 47,477 39,021 51,511 57,992Minority interests

Other items

Preferred dividends

Normalised NPAT 48,842 47,477 39,021 51,511 57,992Extraordinary items 0 0 0 0 0Reported NPAT 48,842 47,477 39,021 51,511 57,992Dividends -8,594 -11,135 -9,131 -12,054 -13,570Transfer to reserves 40,248 36,342 29,890 39,457 44,422

Valuation and ratio analysis

Reported P/E (x) 3.9 4.1 5.2 3.9 3.5Normalised P/E (x) 3.9 4.1 5.2 3.9 3.5FD normalised P/E (x) 3.9 4.0 5.0 3.8 3.4FD normalised P/E at price target (x) 4.4 4.5 5.7 4.3 3.8Dividend yield (%) 4.6 5.7 4.5 6.0 6.7Price/book (x) 0.7 0.6 0.6 0.5 0.5Price/adjusted book (x) 0.7 0.6 0.6 0.5 0.5Net interest margin (%) 3.48 3.40 3.37 3.37 3.35Yield on interest earning assets (%) 9.47 9.58 9.22 9.28 9.28Cost of interest bearing liabilities (%) 6.06 6.38 6.06 6.11 6.13Net interest spread (%) 3.42 3.20 3.16 3.17 3.15Non-interest/operating income (%) 23.9 22.1 21.1 21.3 20.0Cost to income (%) 39.7 42.8 45.9 45.9 46.8Effective tax rate (%) 30.6 27.2 27.4 30.0 33.0Dividend payout (%) 17.6 23.5 23.4 23.4 23.4ROE (%) 19.8 15.7 11.3 13.5 13.7ROA (%) 1.17 1.01 0.77 0.89 0.88Operating ROE (%) 28.6 21.6 15.6 19.3 20.4Operating ROA (%) 1.68 1.39 1.06 1.27 1.31

Growth (%)

Net interest income 13.6 10.8 7.7 13.6 14.2Non-interest income 16.3 0.3 1.7 14.7 5.8Non-interest expenses 19.8 9.3 11.0 13.8 13.5Pre-provision earnings 17.2 2.8 0.7 13.8 10.5Net profit 10.2 -2.8 -17.8 32.0 12.6Normalised EPS 2.4 -6.7 -20.0 32.0 12.6Normalised FDEPS 2.0 -3.6 -20.0 32.0 12.6Source: Company data, Nomura estimates

Relative performance chart (one year)

Source: ThomsonReuters, Nomura research (%) 1M 3M 12M

Absolute (INR) -2.6 26.7 -29.2

Absolute (USD) -3.2 34.5 -38.1

Relative to MSCI India -1.2 17.4 -35.0

Market cap (USDmn) 2,834.6

Estimated free float (%) 36.6

52-week range (INR) 920/400.2

3-mth avg daily turnover (USDmn)

18.72

Major shareholders (%)

Govt. of India 58.0

Source: Thomson Reuters, Nomura research

Notes


13

Balance Sheet (INRmn) As at 31 Mar FY12 FY13 FY14F FY15F FY16FCash and equivalents 184,332 178,255 229,847 218,624 254,747Inter-bank lending 103,351 92,491 114,834 124,243 142,317Deposits with central bank

Total securities 1,227,030 1,298,962 1,430,828 1,645,095 1,891,486Other interest earning assets

Gross loans 2,980,401 3,149,545 3,536,475 4,052,532 4,653,982Less provisions -42,654 -62,293 -58,202 -60,736 -62,897Net loans 2,937,748 3,087,252 3,478,273 3,991,796 4,591,085Long-term investments

Fixed assets 31,689 33,577 36,072 39,887 43,701Goodwill 370 370 370 370 370Other intangible assets

Other non IEAs 96,806 97,255 97,858 137,137 156,340Total assets 4,581,327 4,788,162 5,388,084 6,157,151 7,080,046Customer deposits 3,795,887 3,915,601 4,425,691 5,046,479 5,827,985Bank deposits, CDs, debentures 260,740 287,256 334,927 404,927 474,927Other interest bearing liabilities 111,903 108,953 108,953 108,953 108,953Total interest bearing liabilities 4,168,530 4,311,810 4,869,571 5,560,359 6,411,865Non interest bearing liabilities 135,242 150,191 156,375 195,197 222,164Total liabilities 4,303,772 4,462,001 5,025,946 5,755,556 6,634,029Minority interest

Common stock 3,392 3,535 3,630 3,630 3,630Preferred stock

Retained earnings 274,163 322,626 358,508 397,965 442,387Reserves for credit losses

Proposed dividends

Other equity

Shareholders' equity 277,555 326,161 362,138 401,595 446,017Total liabilities and equity 4,581,327 4,788,162 5,388,084 6,157,151 7,080,046Non-performing assets (INR) 87,196 134,658 176,263 177,299 172,638

Balance sheet ratios (%)

Loans to deposits 78.5 80.4 79.9 80.3 79.9Equity to assets 6.1 6.8 6.7 6.5 6.3

Asset quality & capital

NPAs/gross loans (%) 2.9 4.3 5.0 4.4 3.7Bad debt charge/gross loans (%) 0.81 1.06 0.89 0.92 0.80Loss reserves/assets (%) 0.93 1.30 1.08 0.99 0.89Loss reserves/NPAs (%) 48.9 46.3 33.0 34.3 36.4Tier 1 capital ratio (%) 9.3 9.8 9.7 9.4 9.1Total capital ratio (%) 12.6 12.7 12.7 12.2 11.6

Growth (%)

Loan growth 21.3 5.1 12.7 14.8 15.0Interest earning assets 24.4 4.9 12.2 14.7 15.0Interest bearing liabilities 21.0 3.4 12.9 14.2 15.3Asset growth 21.1 4.5 12.5 14.3 15.0Deposit growth 21.3 3.2 13.0 14.0 15.5

Per share

Reported EPS (INR) 144.00 134.31 107.50 141.90 159.76Norm EPS (INR) 144.00 134.31 107.50 141.90 159.76Fully diluted norm EPS (INR) 143.37 138.17 110.50 145.87 164.22DPS (INR) 25.34 31.50 25.15 33.21 37.38PPOP PS (INR) 312.94 308.58 302.59 344.30 380.58BVPS (INR) 818.31 922.73 997.63 1,106.33 1,228.71ABVPS (INR) 762.21 865.77 939.17 1,047.87 1,170.25NTAPS (INR) 817.22 921.68 996.61 1,105.31 1,227.69Source: Company data, Nomura estimates

Notes


14

Early signs of NPL improvement seen We increase our FY14F loan growth marginally to 12.7% from 12.4% projected earlier with NIM of 3.4% (compared to 3.5% in 2QFY14). We expect marginal improvement in asset quality with fresh delinquencies of INR56bn in 2HFY14F compared to INR66bn in 1HFY14 and writebacks of INR32bn in 2HFY14F compared to INR27bn in 1HFY14. We forecast LLPs of 96bps for FY14F, with average LLPs of 88bps for 3Q and 4Q.

Our key assumption changes are: marginally higher loan growth, marginally lower NIMs (compared to 2QFY14), lower delinquency and higher writebacks (as reflected in higher GNPL ratios).

The following table summarizes our assumption changes:

• We are increasing FY14F loan growth from 12.4% to 12.7% driven by higher growth in the domestic corporate and SME segments.

• Our FY14F GNPL ratio estimate reduces from 5.7% to 5% on the back of a loan delinquency, which is revised downwards from INR56bn in 2HFY14 to INR61bn and higher write-back (recovery and upgrades) from INR17bn in 2HFY14 to INR32bn. On the back of this, our LLP estimate declines from 97bps for FY14F to 96bps.

• Due to all these changes, our FY14F PAT is revised upwards by 3.4% for 2HFY14F and our adjusted RoE estimate is revised upwards to 14.3% from 13.1% earlier for FY14F.

• We also assume capital infusion by GOI (Government of India) of INR5bn in 4QFY14F. Fig. 33: Changes in FY14F assumptions


Over the past 12-18 months GNPL additions have been largely driven by corporate and services segments for PNB, while retail and agri segments have been consistently showing improving trends. While both delinquency and restructuring ratios seem to have peaked in early FY13 and have shown improving trends ever since, absolute quantum of impairments remain high. However, we believe improving operating margin trends in key stress sectors like iron & steel and textile will lead to lower impairments going forward. Also, recovery trends seem to be improving (as evident in the chart below) that might eventually bring down net delinquencies. We expect GNPL ratio to improve to 5% by FY14F from 5.2% in 2QFY14 and further to 4.4% by FY15F, driven by both improvement in delinquencies and higher levels of write-backs.

Key changes in our FY14F estimates Old NewLoan growth 12.4% 12.7%NII (INRmn) 159,121 160,042 NIM 3.37% 3.40%Non-interest income (INRmn) 42,821 42,893 Fee income (INRmn) 27,093 26,433 Investment provisions (INRmn) 4,519 11,829 Provisions for NPLs(INRmn) 31,844 31,404 LLPs 0.97% 0.96%Delinquency (INRmn) 126,945 122,287 GNPL ratio 5.68% 4.98%Provision coverage ratio 34.3% 33.0%PAT (INRmn) 43,533 39,021 Adjusted RoE 13.08% 14.28%


15

Fig. 34: Net change in GNPL sector wise (INRbn)

Source: Company data, Nomura research

Fig. 35: Delinquency vs restructured loan addition


Fig. 36: Recovery vs write-offs on opening GNPL


Fig. 37: Delinquencies vs LLPs


Fig. 38: Asset quality trends


Over the past few quarters margins have been trending in a tight range of 3.4-3.5% despite improvement in CASA ratio from 35% levels in FY12 to 39% in 2QFY14 as the yields decline was sharper in comparison to decline in cost of funds. With systemic interest rates at elevated levels and lower CASA share for the bank, we expect NIMs to decline another 5-10bps from 2Q levels closing the year at 3.4%, while we expect CASA ratio to stay stable at current levels.

-20

-10

0

10

20

30

40

50

FY09 FY10 FY11 FY12 FY13 H2FY14

Corporate/ Services Retail Agri

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

Delinquency ratio Restr ratio

0%5%

10%15%20%25%30%35%40%45%50%

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

Writeoff Recovery

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

10,000

30,000

50,000

70,000

90,000

110,000

130,000

FY

10

FY

11

FY

12

FY

13

FY

14F

FY

15F

Delinquencies (INRmn)LLPs, % (RHS)

1.70 1.79

2.93

4.28

4.98

4.38

0.53 0.84

1.52

2.34

3.39

2.92

30.0

40.0

50.0

60.0

70.0

80.0 0.5

1.5

2.5

3.5

4.5

5.5

FY

10

FY

11

FY

12

FY

13

FY

14F

FY

15F

Gross NPA, %Net NPA, %Provision cover (inverse scale - RHS)


16

Fig. 39: Margin trend


Fig. 40: CASA trends


Fig. 41: RoA decomposition


3.84

3.95

3.88

3.50

3.60

3.503.47

3.51 3.52

3.47

3.40 3.40

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4.01Q

FY

12

2QF

Y12

3QF

Y12

4QF

Y12

1QF

Y13

2QF

Y13

3QF

Y13

4QF

Y13

1QF

Y14

2QF

Y14

FY

14F

FY

15F

NIM, %

37.4

36.3

35.3 35.3

34.6

35.8

36.9

39.2

37.8

38.5 38.5 38.6

32.0

33.0

34.0

35.0

36.0

37.0

38.0

39.0

40.0

1QF

Y12

2QF

Y12

3QF

Y12

4QF

Y12

1QF

Y13

2QF

Y13

3QF

Y13

4QF

Y13

1QF

Y14

2QF

Y14

FY

14F

FY

15F

CASA ratio, %

Y/E March FY09 FY10 FY11 FY12 FY13 FY14F FY15F% of Average assetsInterest Income 8.67% 7.88% 8.00% 8.72% 8.94% 8.61% 8.67%

Interest Expense 5.51% 4.76% 4.50% 5.51% 5.77% 5.46% 5.52%

Net-Interest Income 3.15% 3.12% 3.50% 3.21% 3.17% 3.15% 3.15%

Non-Interest Income 1.31% 1.33% 1.07% 1.00% 0.90% 0.84% 0.85%

Fee income 0.62% 0.62% 0.65% 0.61% 0.53% 0.52% 0.53%

Treasury 0.30% 0.30% 0.15% 0.13% 0.15% 0.14% 0.13%

Forex gains 0.13% 0.12% 0.11% 0.14% 0.12% 0.12% 0.12%

Net Income 4.46% 4.45% 4.57% 4.21% 4.07% 3.99% 4.00%

Operating Expenses 1.89% 1.75% 1.89% 1.67% 1.74% 1.83% 1.84%

Operating Profit 2.58% 2.70% 2.68% 2.54% 2.33% 2.16% 2.17%

Provisions 0.44% 0.52% 0.74% 0.86% 0.94% 1.10% 0.89%

Taxes 0.75% 0.74% 0.63% 0.51% 0.38% 0.29% 0.38%

RoA (%) 1.39% 1.44% 1.31% 1.17% 1.01% 0.77% 0.89%

Avg.assets/avg equity (x) 18.6 18.8 19.1 18.4 16.6 15.7 16.0

RoE (%) 25.85% 27.01% 25.05% 21.45% 16.78% 12.05% 14.28%


17

Valuation methodology

We increase our TP to INR625 from INR440 and upgrade the stock to Buy as our 2HFY14F PAT increases by 3.4% and we increase our one-year forward (average FY14/15F ABV) target multiple from 0.44x earlier to 0.63x. We believe better-than-expected adjusted RoEs and potential improvement in fresh impairments and writebacks will lead to a re-rating for the stock. At the margin few sectors (as explained in the sector note) are showing improving trends which may lead to lumpy recoveries. Currently the stock trades at 2 SD below 5-year mean multiple which gives us comfort on the valuations front; in our view, any improvement in the asset quality trend will drive re-rating in PNB, which is the cheapest in our covered PSU space. In addition, PNB’s discount to State Bank of India (SBIN IN, Neutral, TP: INR1,900) is at the highest point over the last 5 years, offering us comfort on the relative valuation front..

We arrive at our TP of INR625 using a three-stage residual-income valuation method that assumes the following: 1) 11.5% CAGR for interest-earning assets over FY13-17F, 7.7% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 13.6% over FY14-17F and 12.4% over FY18-FY25F and a 6.9% terminal value ROE; and 3) discount rates ranging from 16.3% (current cost of equity) for FY14-17F, 12.5% for FY18-25F and a 10% terminal rate. At our TP, PNB should trade at 0.63x our average FY14/15F ABV of INR994 and 5x our average FY14/15F EPS of INR125 for an adjusted ROE of 12.1% for FY14F. On NNPL adjusted book, PNB should trade at 0.93x one-year forward book (fully adjusted for NNPLs) of INR670. We are building in capital infusion by Government of India (GOI) of INR5bn in 4QFY14F. Our valuation methodology remains unchanged.

Fig. 42: 1-yr Fwd PBV vs RoE


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0%

5%

10%

15%

20%

25%

30%

FY09 FY10 FY11 FY12 FY13 FY14F FY15F

RoE (LHS) Avg 1-yr fwd PBV (RHS)


18

Fig. 43: Valuation premium/discount to SBI

Source: Company data, Bloomberg, Nomura estimates

Fig. 44: One-year forward P/ABV multiple


Fig. 45: One-year forward P/E multiple




• Low core equity ratios make PSUs dependent perennially on government for capital infusion and this is likely to have growth implications.

• Increasing trends on opex ratios: With increases in pensions and wage revision provisionings, in absence of higher growth the opex ratios are likely to trend higher for PSUs.

• Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks are likely to continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach, but in the longer term they are likely to see some return erosion on account of these factors.

0.91

0.65

0.97

0.54

0.59

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10 3/3

1/2

008

9/3

0/2

008

3/3

1/2

009

9/3

0/2

009

3/3

1/2

010

9/3

0/2

010

3/3

1/2

011

9/3

0/2

011

3/3

1/2

012

9/3

0/2

012

3/3

1/2

013

9/3

0/2

013

PNB - Premium/Discount to SBI

0.0

0.5

1.0

1.5

2.0

2.5

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

P/ABV -1SD Mean-2SD1 +1SD +2SD

(x)(x)(x)

0.0

2.0

4.0

6.0

8.0

10.0

12.0


P/E -1SD Mean-2SD8 +1SD +2SD

(x)(x)(x)(x)


State Bank of India SBI.NS SBIN IN

BANKS

EQUITY RESEARCH

Upgrade to Neutral from Reduce

Improving trends but not out of the woods yet

December 4, 2013


Neutral



Potential upside +4.3%

Action: Upgrade to Neutral with revised TP of INR1,900 We upgrade SBI to Neutral and raise our TP to INR1,900 from INR1,400. As we highlight in our sector note, while immediate relief in impairment trends is not yet visible for PSU banks, we see improvement in underlying operating margins for loan-intensive corporates, particularly in export-driven sectors. We expect this, along with a potentially benign macro environment, to drive strong recoveries going into FY15F. However, for SBI, we expect another quarter or two of pain given recent management change and ongoing re-assessment of its stressed mid-corporate book. For SBI, in our view, valuation is also not that cheap, and any correction from here may present a good entry point. In comparison, we believe some of the mid-tier PSU banks offer more valuation comfort currently. We revise our FY14F earnings by 5% on slightly lower LLPs. Our TP increase is driven by our multiple expansion from 0.7x to 1x 1-year fwd ABV of INR1,610, while our ABV estimate moves up by 1%.

Catalyst: loan growth of 15.4%, NIM of 3.1%, LLP of 95bp for FY14F We raise our FY14F loan growth assumption to 15.4% from 14.2%.We expect delinquencies to remain high, averaging INR86.5bn per quarter in 2HFY14F compared to INR83.7bn in 2QFY14 with LLPs of 95bps.

Valuation: We value the core bank at INR1,575 implying 1x 1-year forward ABV of INR1,610 (1.5x on NNPL adjusted 1-year forward book of INR1,067) and we value the subsidiaries at INR325. At current prices, SBI looks fairly valued at 0.93x 1-year forward ABV for an adjusted RoE of 11.2% for FY14F. Our valuation methodology remains unchanged.



PPOP (mn) 310,817 300,975 305,425 336,132 353,247 390,388 403,115




FD norm. EPS growth (%) 15.8 -24.2 -21.4 20.7 31.0 16.9 11.2





ROE (%) 15.4 10.4 10.7 11.4 12.6 12.2 12.7

ROA (%) 1.0 0.6 0.7 0.7 0.8 0.7 0.7


Anchor themes

While we continue to prefer private sector banks given their structural strengths, we see some near-term opportunities in public sector banks offering valuation comfort and early signs of an improvement in impairment trends.

Nomura vs consensus

Our FY15F PAT is marginally below consensus as we build in continued asset quality pressures in the near term.

Research analysts

India Banks




Nomura | State Bank of India December 4, 2013

20

Key data on State Bank of India Profit and Loss (INRmn) Year-end 31 Mar FY12 FY13 FY14F FY15F FY16FInterest income 1,065,215 1,196,571 1,352,279 1,537,802 1,771,152Interest expense -632,304 -753,258 -863,388 -972,494 -1,128,409Net interest income 432,911 443,313 488,891 565,308 642,742Net fees and commissions 120,909 114,837 119,802 140,458 163,812Trading related profits -9,197 10,981 15,654 4,602 5,288Other operating revenue 31,803 34,530 28,294 33,033 37,425Non-interest income 143,514 160,348 163,750 178,094 206,525Operating income 576,425 603,661 652,642 743,402 849,267Depreciation 0 0 0 0 0Amortisation

Operating expenses -95,250 -109,035 -127,067 -141,246 -161,361Employee share expense -165,440 -183,809 -220,149 -248,909 -284,791Op. profit before provisions 315,735 310,817 305,425 353,247 403,115Provisions for bad debt -115,458 -113,678 -106,537 -108,246 -130,173Other provision charges -15,444 2,370 -34,344 -21,503 -24,332Operating profit 184,833 199,509 164,545 223,497 248,610Other non-operating income

Associates & JCEs


Other items

Preferred dividends

Normalised NPAT 117,073 141,050 113,018 149,743 166,569Extraordinary items 0 0 0 0 0Reported NPAT 117,073 141,050 113,018 149,743 166,569Dividends -26,452 -32,147 -25,599 -34,441 -38,311Transfer to reserves 90,621 108,903 87,419 115,302 128,258



Growth (%)

Net interest income 33.1 2.4 10.3 15.6 13.7Non-interest income -9.3 11.7 2.1 8.8 16.0Non-interest expenses 11.6 14.5 16.5 11.2 14.2Pre-provision earnings 24.6 -1.6 -1.7 15.7 14.1Net profit 41.7 20.5 -19.9 32.5 11.2Normalised EPS 38.8 15.8 -21.4 31.0 11.2Normalised FDEPS 38.8 15.8 -21.4 31.0 11.2Source: Company data, Nomura estimates



Absolute (INR) -3.0 20.2 -16.0

Absolute (USD) -3.6 27.5 -26.7




52-week range (INR) 2551.7/1452.7


72.58


Govt of India 59.4


Notes


21

Balance Sheet (INRmn) As at 31 Mar FY12 FY13 FY14F FY15F FY16FCash and equivalents 540,759 658,304 539,122 594,324 663,959Inter-bank lending 430,872 489,898 531,520 609,300 701,493Deposits with central bank

Total securities 3,121,976 3,509,273 4,118,216 4,667,083 5,263,043Other interest earning assets


Fixed assets 54,665 70,050 77,603 81,103 84,603Goodwill

Other intangible assets

Other non IEAs 531,130 478,920 572,427 806,111 929,035Total assets 13,355,192 15,662,610 17,906,775 20,728,780 23,787,705Customer deposits 10,436,474 12,027,396 13,794,576 15,747,753 17,864,410Bank deposits, CDs, debentures 869,894 1,289,535 1,602,077 1,757,077 2,002,077Other interest bearing liabilities 400,162 402,292 402,292 852,292 1,252,292Total interest bearing liabilities 11,706,529 13,719,223 15,798,946 18,357,123 21,118,779Non interest bearing liabilities 809,151 954,551 975,198 1,123,724 1,292,735Total liabilities 12,515,680 14,673,774 16,774,144 19,480,847 22,411,514Minority interest


Retained earnings 832,802 981,997 1,125,679 1,240,981 1,369,239Reserves for credit losses

Proposed dividends

Other equity

Shareholders' equity 839,512 988,837 1,132,631 1,247,933 1,376,191Total liabilities and equity 13,355,192 15,662,610 17,906,775 20,728,780 23,787,705Non-performing assets (INR) 396,765 511,894 709,484 786,819 850,434





Growth (%)


Per share

Reported EPS (INR) 180.71 209.25 164.39 215.41 239.62Norm EPS (INR) 180.71 209.25 164.39 215.41 239.62Fully diluted norm EPS (INR) 180.71 209.25 164.39 215.41 239.62DPS (INR) 39.42 47.00 36.82 49.54 55.11PPOP PS (INR) 487.36 461.10 444.26 508.16 579.90BVPS (INR) 1,251.05 1,445.60 1,629.34 1,795.21 1,979.72ABVPS (INR) 1,214.79 1,394.79 1,527.02 1,692.89 1,877.40NTAPS (INR) 1,251.05 1,445.60 1,629.34 1,795.21 1,979.72Source: Company data, Nomura estimates

Notes


22

Tailwinds from growth, delinquencies likely to persist in H2FY14F We raise our FY14F loan growth assumption to 15.4% from 14.2% projected earlier, with a blended NIM of 3.1% (compared with 3.2% in 2QFY14). We expect delinquencies to remain elevated, averaging INR86.5bn per quarter in 2HFY14F compared with INR83.7bn in 2QFY14, while we expect a marginal improvement in writebacks (average INR38bn/quarter in 2HFY14F vs. INR33.6bn/quarter in 1H) resulting in lower LLPs of 95bps for FY14F compared with our earlier estimate of 109bps

Key changes to our assumptions

Our key assumption changes have been: higher loan growth, stable NIMs (compared with Q2FY14), better asset quality (compared with our previous expectations) leading to lower LLPs of 95bps (compared with 109bps estimated earlier).

The table below summarises our assumption changes:

• We raise our loan growth estimate higher from 14.2% to 15.4%, driven by stronger growth in the corporate segment.

• We reduce our FY14F GNPL ratio estimate from 6.2% to 5.7%, as we cut our delinquency estimate for 2HFY14F to INR173bn compared with INR184bn estimated earlier (averaging INR86.5bn/quarter compared with INR83.7bn in 2Q). In terms of write backs, we now build in INR76bn of recovery and upgrades in 2HFY14F compared with our earlier estimate of INR62.5bn. On the back of our above changes we reduce our LLP estimate to 95bps for FY14F from 109bps earlier.

• Due to all these changes, our FY14F PAT estimate increases by 4% to INR113bn with an adjusted RoE of 11.2% (10.9% earlier).

• We also assume capital infusion by the Government of India (GOI) of INR20bn in 4QFY14F.

Fig. 46: Changes to our FY14F assumptions


Key changes in FY14F assumptions Old NewLoan growth 14.2% 15.4%NII (INRmn) 473,411 488,891 NIM 3.04% 3.14%Non-interest income (INRmn) 169,319 163,750 Fee income (INRmn) 121,107 119,802 Investment provisions (INRmn) 13,097 19,894 Provisions for NPLs (INRmn) 122,038 106,537 LLPs 1.09% 0.95%Delinquency (INRmn) 415,989 391,268 GNPL ratio 6.2% 5.7%Provision coverage ratio 48.3% 49.1%PAT (INRmn) 108,492 113,018 Adjusted RoE 10.89% 11.21%


23

We have analysed the delinquency trends for SBI on a rolling 12-month basis. While asset quality stress persists in the corporate segment (especially the mid-corporate segment) driven by sectors such as iron & steel and food processing, the agri and retail segments are showing early signs of improvement. Recovery trends have declined over the past few quarters and higher write-offs, have been aiding improvement in headline NPL ratios. We expect fresh delinquencies to stay elevated over the next few quarters with a new management taking charge and an ongoing scrutiny of its mid-corporate exposure. This keeps us cautious on the name in the near term as we believe there is scope for more negative surprises than positives.

Fig. 47: SBI rolling 12m slippage sector-wise


Fig. 48: Sector-wise slippage trends


Fig. 49: Delinquency vs. restructured loan additions


Fig. 50: Recovery vs. write-off on opening GNPLs


Fig. 51: Delinquencies vs. LLPs




-20.0 40.0 60.0 80.0

100.0 120.0 140.0 160.0 180.0 200.0

4Q

F11

1Q

F12

2Q

F12

3Q

F12

4Q

F12

1Q

F13

2Q

F13

3Q

F13

4Q

F13

1Q

F14

2Q

F14

Corporate SMEAgri RetailInternational

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

4QF12 1QF13 2QF13 3QF13 4QF13 1QF14

Iron/Steel EngTextile Food Auto/CV ITInfra CREother metals

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14


0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

Writeoff Recovery

0.40

0.60

0.80

1.00

1.20

1.40

1.60

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

FY

10

FY

11

FY

12

FY

13

FY

14F

FY

15F

Delinquencies (INRmn)LLPs, % (RHS)

3.05 3.29

4.45 4.76

5.71 5.48

1.72 1.63 1.82 2.10

2.99 2.79

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0 0.5

1.5

2.5

3.5

4.5

5.5

6.5

FY

10

FY

11

FY

12

FY

13

FY

14F

FY

15F



24

Margins have been declining for SBI over the past two years, as the bank was sacrificing yields to attract higher quality loans. With SBI still maintaining one of the lowest base rates in the system, we expect margins to stay subdued into 2HFY14F, thus taking our full-year FY14F NIM estimate to 3.14%, compared to3.21% in 2QFY14.

Fig. 53: Margin trends


CASA ratio has declined from 46-47% in FY12-13 to 44% in 2QFY14, as the bank has been ceding market share in current account deposits. We do not expect any meaningful rebound in current account deposits in the near-term and expect the CASA ratio to remain at around 44% till FY15F. We expect this to limit margin expansion from current levels unless the bank takes another rate hike from here. Fig. 54: CASA ratio trends


3.79

4.05

3.89

3.57

3.34 3.31

3.17 3.163.21

3.14 3.14

2.50

2.70

2.90

3.10

3.30

3.50

3.70

3.90

4.10

4.30

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

FY

14F

FY

15F

NIM, %

47.4 47.5

46.6

46.1

45.0

45.5

46.5

44.7

43.6

44.0

43.7

42.0

43.0

44.0

45.0

46.0

47.0

48.0

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

FY

14

F

FY

15

F

CASA ratio, %


25



Valuation methodology and risks

We raise our TP to INR1,900 from INR1,400, as we increase our FY14F PAT by 4% and raise our one-year forward (average FY14/15F ABV) target multiple from 0.7x to 1x as we believe any likely improvement in fresh impairments and write-backs should lead to a re-rating of the stock. We do not yet see any strong signs of improvement in asset quality; however, few sectors (as explained in the sector note) are showing improving trends which may lead to lumpy recoveries into FY15F. On our target multiple, SBI would trade 1SD below the 5-year mean multiple.

We arrive at our new TP of INR1,900 using a SOTP methodology (methodology unchanged), with its subsidiaries valued at INR325 and the core bank valued at INR1,575 using a three-stage residual-income valuation method that assumes the following: 1) 14.1% CAGR for interest-earning assets over FY13-17F, 9.7% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 12.5% over FY14-17F and 12.1% over FY18-FY25F and a 11.6% terminal value ROE, and; 3) discount rates ranging from 15.7% (current cost of equity) for FY14-17F, 12.5% for FY18-25F and a 10% terminal rate. At our TP, SBI should trade at 1x our average FY14/15F ABV of INR1,610 and 8.3x our average FY14/15F EPS of INR190 for an adjusted ROE of 11.2% for FY14F. On NNPL adjusted book, SBI should trade at 1.5x one-year forward book (fully adjusted for NNPLs) of INR1,067. We are building in capital infusion by the GOI (Government of India) of INR20bn in 4QFY14F.





Fee income 0.90% 0.96% 1.02% 0.94% 0.79% 0.71% 0.73%

Treasury 0.30% 0.21% 0.08% -0.07% 0.08% 0.09% 0.02%

Forex gains 0.14% 0.16% 0.13% 0.11% 0.12% 0.06% 0.07%

Net Income 3.98% 3.83% 4.25% 4.50% 4.16% 3.89% 3.85%



Provisions 0.44% 0.44% 0.91% 1.02% 0.77% 0.84% 0.67%

Taxes 0.60% 0.47% 0.59% 0.53% 0.40% 0.31% 0.38%

RoA (%) 1.08% 0.91% 0.73% 0.91% 0.97% 0.67% 0.78%


RoE (%) 17.3% 15.1% 12.7% 16.0% 15.9% 11.2% 13.4%


26

Fig. 56: 1-year fwd PBV vs. RoE


Fig. 57: One-year forward P/ABV chart


Fig. 58: One-year forward P/E chart




• Low core equity ratios make PSUs dependent perennially on government for capital infusion and this is likely to have growth implication.

• Increasing trends on opex ratios: With increase in pension and wage revision provisioning, in absence of higher growth the opex ratios are likely to trend higher for PSUs.

• Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0%

50%

100%

150%

200%

250%

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Avg 1-yr Fwd PBV RoE

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5



(x)

0.0

5.0

10.0

15.0

20.0

25.0



(x)


Bank Of Baroda BOB.NS BOB IN

BANKS

EQUITY RESEARCH

Upgrade to Neutral from Reduce

Yet to show signs of a recovery; appears fully priced

December 4, 2013


Neutral



Potential downside -0.2%

Action: Upgrade to Neutral with a revised TP of INR650 We raise our TP for BOB to INR650 from INR420 and upgrade to Neutral from Reduce. As highlighted in our sector note, while an immediate relief in impairment trends is not yet visible for PSU banks, we see some improvement in underlying operating margins for loan-intensive corporates, particularly in export-driven sectors. We expect this, along with potentially a benign macro environment, to drive strong recoveries going into FY15F. For BOB, we expect asset quality pain to linger for a quarter or two before declining meaningfully. As well, we think the stock appears to be fully priced and offers lower valuation comfort vs. PNB (PNB IN, Buy) and a few other mid-tier PSU banks. We raise our FY14F earnings by 13% on marginally lower LLPs. Our TP increase is driven by the increase in our estimated multiple from 0.5x to 0.78x 1-y fwd ABV of INR831, while our ABV estimate has moved up by just 2% to INR831.

Catalyst: 13.7% loan growth, 2.2% NIM and LLP of 91bp for FY14F We raise our FY14F loan growth to 13.7% from 12.3%, with blended NIM of 2.2% (vs 2.3% in 2QFY14). We expect a marginal improvement in asset quality with fresh delinquencies of INR35bn in 2HFY14F vs INR42bn in 1HFY14 and writebacks of INR9.2bn in 2HFY14F vs INR7.7bn in 1HFY14. We estimate LLPs of 91bps for FY14F with average LLPs of 98bps for 3QF and 4QF.

Valuation: At current prices, BOB looks fairly valued. Our TP implies 0.78x 1-year forward ABV of INR831 and 1x on NNPL adjusted 1-year forward book of INR642 for an adjusted RoE of 13.2% for FY14F. Our valuation methodology remains unchanged.



PPOP (mn) 90,738 91,377 90,998 104,459 111,227 121,260 127,527




FD norm. EPS growth (%) -12.1 -17.3 -8.3 15.8 28.1 7.8 9.3





ROE (%) 15.1 11.1 12.2 11.7 13.8 11.6 13.6

ROA (%) 0.9 0.7 0.7 0.7 0.8 0.7 0.8


Anchor themes

While we continue to prefer private sector banks given their structural strengths, we see some near-term opportunities in public sector banks offering valuation comfort and early signs of an improvement in impairment trends.

Nomura vs consensus

Our FY15F PAT is 5% above consensus as we are building in an improvement in delinquency and recovery trends.

Research analysts

India Banks




Nomura | Bank Of Baroda December 4, 2013

28

Key data on Bank Of Baroda Profit and Loss (INRmn) Year-end 31 Mar FY12 FY13 FY14F FY15F FY16FInterest income 296,737 351,967 389,088 441,357 510,005Interest expense -193,567 -238,814 -270,399 -298,224 -345,419Net interest income 103,170 113,153 118,689 143,133 164,586Net fees and commissions 17,962 18,585 20,547 23,279 27,221Trading related profits 6,067 6,173 7,250 8,674 10,018Other operating revenue 10,195 11,549 13,964 17,435 19,931Non-interest income 34,223 36,306 41,760 49,388 57,170Operating income 137,393 149,459 160,450 192,521 221,755Depreciation 0 0 0 0 0Amortisation

Operating expenses -21,234 -24,225 -27,485 -31,814 -36,634Employee share expense -29,856 -34,497 -41,967 -49,480 -57,594Op. profit before provisions 86,304 90,738 90,998 111,227 127,527Provisions for bad debt -18,652 -34,314 -32,065 -33,579 -35,971Other provision charges -6,896 -7,365 -7,677 -4,877 -6,321Operating profit 60,756 49,059 51,256 72,771 85,235Other non-operating income

Associates & JCEs


Other items

Preferred dividends

Normalised NPAT 50,567 45,554 42,610 54,578 59,665Extraordinary items -498 -746 -622 -622 -622Reported NPAT 50,070 44,807 41,988 53,956 59,043Dividends -8,123 -10,596 -9,825 -12,626 -13,816Transfer to reserves 41,947 34,211 32,163 41,330 45,227



Growth (%)

Net interest income 17.2 9.7 4.9 20.6 15.0Non-interest income 21.8 6.1 15.0 18.3 15.8Non-interest expenses 24.0 14.1 13.5 15.7 15.1Pre-provision earnings 23.6 5.1 0.3 22.2 14.7Net profit 19.2 -9.9 -6.5 28.1 9.3Normalised EPS 10.9 -16.2 -8.3 28.1 9.3Normalised FDEPS 5.7 -12.1 -8.3 28.1 9.3Source: Company data, Nomura estimates



Absolute (INR) -3.1 37.7 -14.6

Absolute (USD) -3.7 46.2 -25.5




52-week range (INR) 899/429.95


21.42


Govt. of India 57.0


Notes


29

Balance Sheet (INRmn) As at 31 Mar FY12 FY13 FY14F FY15F FY16FCash and equivalents 216,515 134,468 153,714 159,630 186,424Inter-bank lending 425,171 719,468 772,186 889,151 1,028,116Deposits with central bank

Total securities 832,094 1,213,937 1,185,428 1,368,694 1,580,922Other interest earning assets


Fixed assets 23,415 24,531 27,976 38,776 49,576Goodwill

Other intangible assets

Other non IEAs 102,247 97,039 119,686 137,681 159,060Total assets 4,473,215 5,471,302 5,990,040 6,895,423 7,973,571Customer deposits 3,848,711 4,738,833 5,176,807 5,986,862 6,961,596Bank deposits, CDs, debentures 125,651 154,690 182,474 214,474 246,474Other interest bearing liabilities 110,080 111,103 113,103 113,103 113,103Total interest bearing liabilities 4,084,442 5,004,626 5,472,384 6,314,439 7,321,172Non interest bearing liabilities 114,005 147,034 147,859 169,858 196,045Total liabilities 4,198,446 5,151,660 5,620,243 6,484,296 7,517,217Minority interest


Retained earnings 270,645 315,417 365,487 406,817 452,044Reserves for credit losses

Proposed dividends

Other equity

Shareholders' equity 274,769 319,642 369,797 411,127 456,354Total liabilities and equity 4,473,215 5,471,302 5,990,040 6,895,423 7,973,571Non-performing assets (INR) 44,648 79,826 127,354 161,367 191,638





Growth (%)


Per share

Reported EPS (INR) 127.84 106.37 97.71 125.56 137.40Norm EPS (INR) 129.11 108.14 99.16 127.01 138.85Fully diluted norm EPS (INR) 123.00 108.14 99.16 127.01 138.85DPS (INR) 19.76 25.15 22.86 29.38 32.15PPOP PS (INR) 220.35 215.40 211.76 258.84 296.77BVPS (INR) 668.34 758.78 860.56 956.74 1,061.98ABVPS (INR) 622.84 709.25 782.93 879.11 984.36NTAPS (INR) 668.34 758.78 860.56 956.74 1,061.98Source: Company data, Nomura estimates

Notes


30

Expect in-line industry loan growth with a marginal improvement in delinquencies with stronger recovery We increase our FY14F loan growth to 13.7% from 12.3% projected earlier, with blended NIM estimate of 2.2% (vs 2.3% in 2QFY14). We expect a marginal improvement in the asset quality with fresh delinquencies of INR35bn in 2HFY14F compared with INR42bn in 1HFY14 and writebacks of INR9.2bn in 2HFY14F vs INR7.7bn in 1HFY14. We estimate LLPs of 91bps for FY14F with average LLPs of 98bps for 3QF and 4QF.

Our key assumption changes are: marginally higher loan growth, lower delinquency and higher write-backs (as reflected in lower GNPL ratios).

The following table summarizes our assumption changes:

• We increase our FY14F loan growth from 12.3% to 13.7% driven by higher growth in domestic corporate and SME segments.

• Our FY14F GNPL ratio estimate reduces from 3.8% to 3.4% on the back of a loan delinquency estimate which is lowered from our earlier estimate of INR44bn for 2HFY14F to INR35bn and higher write-back (recovery and upgrades) from our earlier estimate of INR7.3bn in 2HFY14 to INR9.1bn. On the back of this, we reduce our LLP estimate from 100bps for FY14F to 91bps.

• Due to all these changes, we raise our FY14F PAT by 13% to INR43bn and our adjusted RoE to 13.4% from 12%.

• We also assume capital infusion by the government of India (GOI) of INR5.5bn in 4QFY14F.

Fig. 59: Changes in our FY14F assumptions


Key FY14F estimate changes Old NewLoan growth 12.3% 13.7%NII (INRmn) 120,370 118,689 NIM 2.23% 2.19%Non-interest income (INRmn) 40,414 41,760 Fee income (INRmn) 19,027 20,547 Investment provisions (INRmn) 3,807 2,233 Provisions for NPLs (INRmn) 34,998 32,065 LLPs 1.00% 0.91%Delinquency (INRmn) 87,775 77,207 GNPL ratio 3.8% 3.4%Provision coverage ratio 43.9% 43.2%PAT (INRmn) 37,650 42,610 Adjusted RoE 12.02% 13.42%


31

The GNPL ratio for BOB has been worsening across all the segments with no signs of improvement. The delinquency ratio has been inching up steadily and recovery trends have been declining. While we don’t see impairment trends improving significantly, we believe recovery and upgrade may positively surprise with a marginal decline in delinquencies. We build in a GNPL ratio of 3.4% for FY14F vs. 3.2% in 2QFY14.

Fig. 60: Sector-wise GNPL ratio


Fig. 61: Delinquency vs. restructured loan addition


Fig. 62: Recovery vs. write-offs on opening GNPL


Fig. 63: Delinquencies vs. LLPs




-

1.0

2.0

3.0

4.0

5.0

6.0

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

Large corp SME Agri Retail

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

4Q

FY

11

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

Writeoff Recovery

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

FY

10

FY

11

FY

12

FY

13

FY

14F

FY

15F

Delinquencies (INRmn)

LLPs, % (RHS)

1.36 1.36 1.54

2.40

3.36 3.69

0.54

1.28

1.94 2.09

30.0

40.0

50.0

60.0

70.0

80.0 0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY

10

FY

11

FY

12

FY

13

FY

14F

FY

15F



32

Margins have been consistently on a declining trend for BOB for the past six quarters from 3% levels in 4QFY12 to 2.3% in 2QFY4. This was on account of the sharp decline in international margins and higher mix of international loans in total loans. Domestic NIMs also compressed on declining yields. We budget in NIMs of 2.2% for FY14F and an improvement thereon to 2.35% for FY15F.

Fig. 65: Margin trends


Fig. 66: CASA ratio trends


2.87

3.07

2.992.96

2.73 2.712.65

2.51

2.41

2.32

2.19

2.35

2.00

2.20

2.40

2.60

2.80

3.00

3.20

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

FY

14F

FY

15F

NIM, %

27.9

27.4 27.2

26.9

26.1 25.8

26.0

25.3 25.3

26.3

27.0 26.8

23.0

24.0

25.0

26.0

27.0

28.0

29.0

1QF

Y12

2QF

Y12

3QF

Y12

4QF

Y12

1QF

Y13

2QF

Y13

3QF

Y13

4QF

Y13

1QF

Y14

2QF

Y14

FY

14F

FY

15F

CASA ratio, %


33



Valuation methodology

We increase our TP to INR650 from INR420 and upgrade the stock to Neutral as our FY14F PAT rises by 13% and we increase our one-year forward (average FY14/15F ABV) target multiple from 0.5x earlier to 0.78x as we believe better-than-expected adjusted RoEs and any likely improvement in fresh impairments and write-backs will lead to a re-rating of the stock driven by a higher multiple. While we don’t see any strong signals of improvement in asset quality, few sectors (as explained in the sector note) are showing improving trends, which may lead to lumpy recoveries. As well, on a relative valuation basis, BOB currently shows the lowest premium gap with SBI (as shown below). On our target multiple, BOB would trade 1SD below the five-year mean multiple, in our view. Our valuation methodology remains unchanged.

We arrive at our new TP of INR650 using a three-stage residual-income valuation method that assumes the following: 1) a 13.6% CAGR for interest-earning assets over FY13-17F, a 6.9% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 13.7% over FY14-17F and 11.6% over FY18-FY25F and an 8.8% terminal value ROE; and 3) discount rates ranging from 14.5% (current cost of equity) for FY14-17F, 12% for FY18-25F and a 10% terminal rate. At our TP, BOB should trade at 0.78x our average FY14/15F ABV of INR831 and 6.4x our average FY14/15F EPS of INR102 for an adjusted ROE of 13.2% for FY14F. On NNPL adjusted book, BOB should trade at 1x one-year forward book (fully adjusted for NNPLs) of INR642. We build in capital infusion by GOI of INR5.5bn in 4QFY14F.

Fig. 68: Average RoE vs. average 1-Yr fwd P/ABV






Fee income 0.4% 0.5% 0.5% 0.4% 0.37% 0.36% 0.36%

Treasury 0.4% 0.3% 0.1% 0.2% 0.12% 0.13% 0.13%

Forex gains 0.2% 0.2% 0.2% 0.2% 0.16% 0.18% 0.18%

Net Income 3.8% 3.4% 3.6% 3.4% 3.0% 2.80% 2.99%



Provisions 0.5% 0.3% 0.4% 0.6% 0.8% 0.69% 0.60%

Taxes 0.5% 0.5% 0.4% 0.3% 0.1% 0.15% 0.28%

RoA (%) 1.0% 1.2% 1.3% 1.26% 0.92% 0.74% 0.85%


RoE (%) 20.4% 23.6% 25.28% 22.3% 16.4% 13.42% 15.28%

0%

5%

10%

15%

20%

25%

30%

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

FY09 FY10 FY11 FY12 FY13 FY14E FY15F

1-Yr Fwd PBR (LHS) RoE (RHS)


34

Fig. 69: Valuation premium/discount to SBI


Fig. 70: One-year forward P/ABV multiple


Fig. 71: One-year forward P/E multiple




• Low core equity ratios make PSUs dependent perennially on the government for capital infusion and this is likely to have growth implication.

• Increasing trends on opex ratios: With the increase in pension and wage revision provisioning, in the absence of higher growth, the opex ratios are likely to trend higher for PSUs.

• Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.

0.73

0.50

0.98

0.62

0.82

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10 3/

31/2

008

9/30

/200

8

3/31

/200

9

9/30

/200

9

3/31

/201

0

9/30

/201

0

3/31

/201

1

9/30

/201

1

3/31

/201

2

9/30

/201

2

3/31

/201

3

9/30

/201

3

BOB - Premium/Discount to SBI

0.0

0.5

1.0

1.5

2.0



(x)

0.0

2.0

4.0

6.0

8.0

10.0



(x)


35

Appendix A-1

Analyst Certification

We, Abhishek Bhattacharya and Amit Nanavati, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Bank Of Baroda BOB IN INR 648 03-Dec-2013 Neutral N/A Punjab National Bank PNB IN INR 556 03-Dec-2013 Buy N/A State Bank of India SBIN IN INR 1813 03-Dec-2013 Neutral N/A A1,A2,A3

A1 The Nomura Group has received compensation for non-investment banking products or services from the issuer in the past 12 months.

A2 The Nomura Group had a non-investment banking securities related services client relationship with the issuer during the past 12 months.

A3 The Nomura Group had a non-securities related services client relationship with the issuer during the past 12 months.

Bank Of Baroda (BOB IN) INR 648 (03-Dec-2013) Rating and target price chart (three year history)

Neutral (Sector rating: N/A)

Date Rating Target price Closing price 23-Aug-13 420.00 470.80 04-Feb-13 765.00 804.15 22-Oct-12 675.00 784.45 14-Aug-12 Reduce 638.60 14-Aug-12 590.00 638.60 26-Apr-12 Neutral 766.20 26-Apr-12 820.00 766.20 31-Oct-11 Buy 771.15 31-Oct-11 950.00 771.15

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We arrive at our target price of INR650 using a three-stage residual-income valuation method that assumes the following: 1) 13.6% CAGR for interest-earning assets over FY13-17F, 6.9% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 13.7% over FY14-17F & 11.6% over FY18-FY25F and an 8.8% terminal value ROE; and 3) discount rates ranging from 14.5% (current cost of equity) for FY14-17F, 12% for FY18-25F and a 10% terminal rate. At our TP, BOB should trade at 0.78x our avg. FY14/15F ABV of INR831 and 6.4x our avg. FY14/15F EPS of INR102 for an adjusted ROE of 13.2% for FY14F. On NNPL adjusted book, BOB should trade at 1x one year forward book (fully adjusted for NNPLs) of INR642. We are building in capital infusion by GOI (government of India) of INR5.5bn in 4QFY14F. Risks that may impede the achievement of the target price Key risks to our thesis • Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly. • Low core equity ratios make PSUs


36

dependent perennially on the government for capital infusion and this is likely to have growth implication. • Increasing trends on opex ratios: With the increase in pension and wage revision provisioning, in the absence of higher growth, the opex ratios are likely to trend higher for PSUs. • Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.

Punjab National Bank (PNB IN) INR 556 (03-Dec-2013) Rating and target price chart (three year history)

Buy (Sector rating: N/A)

Date Rating Target price Closing price 23-Aug-13 Reduce 482.30 23-Aug-13 440.00 482.30 10-Jan-13 Buy 888.20 10-Jan-13 1,100.00 888.20 26-Oct-12 710.00 749.45 14-Aug-12 Reduce 732.10 14-Aug-12 680.00 732.10 26-Apr-12 965.00 845.30 31-Oct-11 Neutral 976.25 31-Oct-11 1,070.00 976.25 17-Oct-11 Not Rated 969.80 21-Jan-11 Suspended 1,125.35


Valuation Methodology We arrive at our TP of INR625 using a three-stage residual-income valuation method that assumes the following: 1) 11.5% CAGR for interest-earning assets over FY13-17F, 7.7% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 13.6% over FY14-17F and 12.4% over FY18-FY25F and a 6.9% terminal value ROE and 3) discount rates ranging from 16.3% (current cost of equity) for FY14-17F, 12.5% for FY18-25F and a 10% terminal rate. At our TP, PNB should trade at 0.63x our average FY14/15F ABV of INR994 and 5x our average FY14/15F EPS of INR125 for an adjusted ROE of 12.1% for FY14F. On NNPL adjusted book, PNB should trade at 0.93x one year forward book (fully adjusted for NNPLs) of INR670. We are building in capital infusion by GOI (Government of India) of INR5bn in 4QFY14F. Risks that may impede the achievement of the target price Key risks to our thesis: Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly. Low core equity ratios make PSUs dependent perennially on the government for capital infusion; this is likely to have growth implications. Increasing trends on opex ratios: With increases in pensions and wage revision provisionings, in absence of higher growth the opex ratios are likely to trend higher for PSUs. Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks are likely to continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.


37

State Bank of India (SBIN IN) INR 1813 (03-Dec-2013) Rating and target price chart (three year history)

Neutral (Sector rating: N/A)

Date Rating Target price Closing price 23-Aug-13 1,400.00 1,559.10 09-Nov-12 1,950.00 2,155.05 13-Aug-12 Reduce 1,906.55 13-Aug-12 1,750.00 1,906.55 26-Apr-12 Neutral 2,162.35 31-Oct-11 Buy 1,906.30 31-Oct-11 2,400.00 1,906.30 17-Oct-11 Not Rated 1,891.70 21-Jan-11 Suspended 2,596.90


Valuation Methodology We arrive at our target price of INR1,900 using SOTP with subsidiaries valued at INR325 and core bank valued at INR1,575 using a three-stage residual-income valuation method that assumes the following: 1) 14.1% CAGR for interest-earning assets over FY13-17F, 9.7% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 12.5% over FY14-17F & 12.1% over FY18-FY25F and a 11.6% terminal value ROE; and 3) discount rates ranging from 15.7% (current cost of equity) for FY14-17F, 12.5% for FY18-25F and a 10% terminal rate. At our TP, SBI should trade at 1x our avg. FY14/15F ABV of INR1,610 and 8.3x our avg. FY14/15F EPS of INR190 for an adjusted ROE of 11.2% for FY14F. On NNPL adjusted book, SBI should trade at 1.5x one year forward book (fully adjusted for NNPLs) of INR1,067. We are building in capital infusion by GOI (Government of India) of INR20bn in 4QFY14F. Risks that may impede the achievement of the target price Key risks to our thesis: • Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly. • Low core equity ratios make PSUs dependent perennially on government for capital infusion and this is likely to have growth implication. • Increasing trends on opex ratios - With increase in pension and wage revision provisioning, in absence of higher growth the opex ratios are likely to trend higher for PSUs. • Ceding market share in CASA deposits and retail assets - With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.

Rating and target price changes

Issuer Ticker Old stock rating New stock rating Old target price New target price

Bank Of Baroda BOB IN Reduce Neutral INR 420 INR 650

Punjab National Bank PNB IN Reduce Buy INR 440 INR 625

State Bank of India SBIN IN Reduce Neutral INR 1400 INR 1900

Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.


38

Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 44% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*. 46% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura Group*. 10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 21% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2013. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013 The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. Disclaimers This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial


39

Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (‘PTNI’), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; NIHK, Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034) and NIplc, Madrid Branch (‘NIplc, Madrid’). ‘CNS Thailand’ next to an analyst’s name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited (‘CNS’) to provide research assistance services to NSL under a Research Assistance Agreement. CNS is not a Nomura entity. THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP. Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice. Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (‘MSCI’). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates. Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a number of different types of research product including, among others, fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and services from the research department depending on their individual requirements. Clients outside of the US may access the Nomura Research Trading Ideas platform (Retina) at http://go.nomuranow.com/equities/tradingideas/retina/ Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. The securities described herein may not have been registered under the US Securities Act of 1933 (the ‘1933 Act’), and, in such case, may not be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura entity in your home jurisdiction. This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc. NIplc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. NIplc is a member of the London Stock Exchange. This document does not constitute a personal recommendation within the meaning of applicable regulations in the UK, or take into account the particular investment objectives, financial situations, or needs of individual investors. This document is intended only for investors who are 'eligible counterparties' or 'professional clients' for the purposes of applicable regulations in the UK, and may not, therefore, be redistributed to persons who are 'retail clients' for such purposes. This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of


40

Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. This document has not been approved for distribution to persons other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ (as defined by the Capital Markets Authority) in the Kingdom of Saudi Arabia (‘Saudi Arabia’) or 'professional clients' (as defined by the Dubai Financial Services Authority) in the United Arab Emirates (‘UAE’) or a ‘Market Counterparty’ or ‘Business Customers’ (as defined by the Qatar Financial Centre Regulatory Authority) in the State of Qatar (‘Qatar’) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or in Qatar or to any person other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ located in Saudi Arabia or 'professional clients' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in Qatar . By accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are an ‘Authorised Person’, an ‘Exempt Person’ or an ‘Institution’ in Saudi Arabia or that you are a 'professional client' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in Qatar and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia or Qatar. NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright © 2013 Nomura International (Hong Kong) Ltd. All rights reserved.

Nomura- India Banks- eRr Group- Upgrading PNB to Buy SBI and BOB to Neutral NPL Accretion for Large...

Documents

Transcript of Nomura- India Banks- eRr Group- Upgrading PNB to Buy SBI and BOB to Neutral NPL Accretion for Large...