X Bank Ltd (XBL) Case Study

Background X Bank Ltd (XBL) is a South-based, small-sized, old private sector bank. The bank had its presence spread across around 500 branches with majority of its network located in one particular state of Southern India. Asset quality parameters XBL has large exposure to Infrastructure, Textiles, NBFCs and Gems and Jewellery sector. Slippages in a few large accounts led to deterioration in the asset quality during FY12. Moreover XBLs re-structured assets increased to Rs.1,898 cr as on March 31, 2012 (Rs.1,665 cr as on March 31, 2011) and restructured asset to net worth stood at 73% as on March 31, 2012 increasing from 69% over a year ago. The restructured assets further increased to Rs.2,250 cr as on June 30, 2012. Textiles & Power sectors accounted for major share of restructured assets. At the same time, the banks recovery efforts have helped improve recovery during FY12 and Q1FY13. Profitability XBL has been improving its net interest margin (NIM) consistently from FY10 backed by improvement in core spread as XBL has been successful in mobilizing and maintaining a stable low-cost deposit (CASA as at June 30, 2012 stood at 23.64%) and its advances have been generating better yields with the banks increased focus on retail advances (whose share improved from 42.51% of advances in March 31, 2011 to 44.27% as on March 31, 2012). This along with improved credit to deposit ratio (at 66% as on March 31, 2012) led to improvement in margins in FY12 even as cost of deposits increased to 7.7% in FY12 from 6.6% (in FY11). Bank has low reliance on bulk deposits. Improvement in NIM is hindered to certain extent by large RIDF investment (as XBL was not meeting the targeted priority sector lending). The average yield on RIDF deposits for Q1FY13 was 4.20% as against its cost of deposits of 8.13% for the same period. At the same time, incremental investment in RIDF bonds is expected to be low as the bank has narrowed the gap in meeting its priority sector lending in FY12. Despite improvement in NIM during FY12, higher provisioning for NPAs and depreciation on investments impacted the profitability. The banks ROTA is at 0.72x in FY12 (0.70% in FY11). During Q1FY13, banks ROTA stood at 0.90% (annualised).

Capital adequacy The banks capital adequacy stood at 12.84% with Tier I CAR at 10.86% as on March 31, 2012, however marginally reducing from its level as on March 31, 2011 (13.33%). In FY11, the banks CAR stood at 12.37% (as on March 31, 2010) following Rs.457 crore rights issue. Asset growth XBL achieved growth in advances of around 19% during FY12 in line with the industry. Retail loan constituted about 44% of the banks advances as on March 31, 2012 with the balance exposure to corporates. The share of retail loan portfolio has been increasing over the years. The banks top industry exposures were to infrastructure, trading, textile and NBFCs. The banks investment portfolio showed an increase of over 13% in FY12. XBL maintains excess SLR of around 2.5% as at March 31, 2012. HTM constitutes the major portion of the investment portfolio, which has increased to 78% as at March 31, 2012 from 70% a year ago. The modified duration of the AFS portfolio was high and stood at 2.66 years as on March 31, 2012 as compared to 2.10 years as on March 31, 2011. Liquidity Profile The liquidity profile of the bank was comfortable with no cumulative negative mismatches up to 1 year.

Key Financials (Rs cr)

Year ended / As on March 31, Interest Income Non Interest Income Total Income Interest Expenses Operating Expenses (Incl. Depreciation) Provisions (excl tax) PAT Deposits Tangible Net worth Advances Investments Total Assets Key Ratios (%) Interest Spread Net Interest Margin (NIM) Cost to Income Cost of Deposits Yield on Advances Core Spread (Yield on Advances - Cost of Deposits) ROTA RONW Capital Adequacy Ratio Tier I Capital Adequacy Ratio Credit/Deposit ratio (times) Net NPA to Net Advances Net NPA to Tangible Net worth Gross NPA to Gross Advances Provision coverage % 2010 12m, A 1,976 379 2,355 1,708 386 71 167 23,731 1,833 14,436 9,992 27,022 1.16 1.08 59.68 7.54 10.58 3.04 0.67 9.83 12.37 9.98 0.61 1.31 10.29 3.73 55.60 2011 12m, A 2,371 292 2,663 1,758 549 120 205 27,336 2,429 17,348 11,506 31,693 2.24 2.09 60.71 6.60 10.75 4.15 0.70 9.60 13.33 11.27 0.63 1.62 11.54 3.97 60.08 2012 12m, A 3,113 334 3,447 2,369 568 222 246 31,608 2,598 20,721 12,841 36,322 2.22 2.19 52.69 7.70 12.47 4.77 0.72 9.79 12.84 10.86 0.66 2.10 16.75 3.27 47.18