(Kotak) 07jan15 Banking

Company Report
Banks/Financial Institutions ATTRACTIVE

Sector
January 07, 2015
THEME
BSE-30: 26,909
A silent revival in business. With slow growth in the corporate-loan portfolio,
banks have shifted focus to retail, in which growth and risk-reward opportunities are
more favorable in the current leg of the cycle. Retail lending has gone through a
change and private banks and SBI are probably well placed to build a strong portfolio
over the next few years. Banks that have been focusing on housing are likely to shift
to other lending products, like credit cards, quite early in the cycle.
The re-emergence of focus on lending to retail is a cyclical phenomenon
We expect retail loans to grow 20% CAGR over FY2015-19 and their contribution to overall
loans to increase to ~20% of loans from ~15% in FY2014. Retail has been staging a
INSIDE
comeback on the balance sheet in recent quarters because (1) opportunities in corporate
Retail loans to grow
banking have dried up (loan growth is less than 10% yoy) as sanctions have fallen sharply and
improvement in the economy implies deleveraging ideas and lower working capital demand in 20% CAGR for
the initial years would be the main features of companies and (2) high impairment in the FY2014-19E…pg3
corporate-loan portfolio and negligible risk in retail is forcing banks to re-look at this business.
The move to the retail business is cyclical at this stage, given these factors. Portfolio is well
diversified across
Private banks well placed given the nature of their lending; SBI best among public banks India…pg7
We expect private banks to benefit most from the shift in loan growth towards retail as they
have a higher share of loans and greater focus to grow this portfolio. Besides HDFC Bank and Private banks to be
IndusInd Bank, we believe the re-entry of ICICI Bank and greater focus of Axis Bank will key beneficiaries of
enhance the share of private banks from 27% currently. Among public banks, we believe SBI this strong growth in
(32% share), which has the reach and focus in retail loans, is the biggest player. Most other retail loans…pg9
public banks will be competitive in select retail products.
Changes to business model expected to ease concerns; at least at this leg of the cycle
In this leg of the interest-rate cycle, we are less concerned about NPLs from the retail portfolio
as loans currently held appear to be reasonably strong. Besides, regulations on lending have
been tightened with measures such as caps on LTV in housing. However, we see private banks
as greater beneficiaries due to (1) a change in acquisition strategies due to solid expansion of M.B. Mahesh, CFA
the customer base and branches, in recent years, which allow greater cross-sell, (2) credit mb.mahesh@kotak.com
information bureaus, which have become stronger and (3) the ability to deploy analytics with Mumbai: +91-22-4336-0886
a larger data set, which probably differentiates this cycle from the previous one. On the other Nischint Chawathe
hand, the biggest change for most leading private banks is the strength of the liability nischint.chawathe@kotak.com
franchise where CASA ratio is currently ~40%. Mumbai: +91-22-4336-0887
Geetika Gupta
Profitability is a concern; we expect the mix to change and a higher share of unsecured loans geetika.gupta@kotak.com
Mumbai: +91-22-4336-0888
One of the key concerns about the shift to retail is the underlying profitability. The housing
loan segment is a low-margin business and vehicle loans offer slightly better yields, but after
adjusting the cost of acquisition and duration of loans, it is not as profitable. Hence, we expect
banks to look at new opportunities to improve profitability. A big area of change would be
unsecured, especially credit cards, as the contribution to profitability is far better than retail.
We expect the loan mix to change, especially with a greater share of used-vehicle financing
and loans against property. Also, we expect banks to balance the customer profile to include Kotak Institutional Equities
the salaried and non-salaried segment. Research
Important disclosures appear

at the back
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Banks/Financial Institutions Sector
TABLE OF CONTENTS
Retail: The last bastion for growth .......................................................... 3
Private banks well placed: SBI to gain among public banks ..................... 8
Housing: Biggest retail loan product ..................................................... 13
Vehicle loans: Short duration with profitabilty being the challenge ....... 21
Unsecured loans: Attractive and expected to grow at fastest ................ 24
Other retail assets ................................................................................. 28
Weak revenue growth is the biggest concern in retail loans ................. 31
Companies
Axis Bank: A steady improvement......................................................... 33
HDFC Bank: Best-in-class ...................................................................... 37
ICICI Bank: Retail taking precedence in growth metrics ........................ 41
IndusInd Bank: A diversified portfolio in the making ............................. 47
State Bank of India: Best among public banks ...................................... 53
The prices in this report are based on the market close of January 7, 2015.
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Sector Banks/Financial Institutions
RETAIL: THE LAST BASTION FOR GROWTH

Retail loans appear to be the last bastion for growth. With slowing corporate loans, there is a definite shift
by banks to distribute retail loans as risks, at this stage of the economic cycle, are lower. Lending has changed
in this cycle compared to the previous one though cyclical risks are unlikely to disappear. Private banks are
well-placed, given their high share of the retail loan market and retail’s contribution to the overall loan mix.
Focus shifts to retail as opportunities to lend elsewhere dwindle

We believe the big opportunity for banks to grow their balance sheets is likely to come from
retail loans over the next few years. Banks have altered their strategy to growth their loans
in retail portfolio for two main reasons: (1) the corporate loan-book slowdown is still not
complete while recovery is likely to be anemic, in our view, and (2) retail loans went through
a cyclical slowdown post FY2007, having gone through a period of solid growth after
FY2002-03. With rising NPLs and nascent analytical skills, most banks had to reassess their
strategies. With a slowdown in the economy, most banks shifted focus to corporate loans
from the retail segment. Over the past few years, retail consumer balance sheets have been
far stronger than corporate balance sheets, which resulted in negligible impairments over
the past few years. This has instilled confidence in banks to shift focus to retail.
Exhibit 1: Retail loan growth will be strong for the next few Exhibit 2: The contribution of retail loans to total loans will rise
years as demand for corporate loans will be weak Contribution of retail loans to overall loans, March fiscal year-ends,
Growth in retail loans, March fiscal year-ends, 2004-19E (%) 2004-19E (%)
45 30
36 27
27 24
18 21
9 18
0 15
2015E
2016E
2017E
2018E
2019E
2004
2005
2006
2007
2008
2009
2011
2013
2014
2010
2012
2015E
2016E
2018E
2019E
2017E
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: RBI, Kotak Institutional Equities estimates Source: RBI, Kotak Institutional Equities estimates
We expect retail loans to post 20% CAGR over FY2015-19

We expect retail loans for the banking sector to grow 20% CAGR over FY2015-19 (see
Exhibit 3). We have so far seen one complete cycle in the retail space—from FY2003 to
FY2010. A large part of the slowdown is explained by the exit of ICICI Bank, a few quarters
before the global financial crisis. The next cycle probably appears to have started in FY2011
and there are early signs that trends in retail loan growth may accelerate henceforth.
Housing loans, will remain the largest product offering for banks and is likely to grow at 18%
CAGR in this period though the contribution from this portfolio is likely to decline to 49%
from ~52% currently. Growth in vehicle loans should be comfortable at 20% CAGR
considering that banks are re-entering new product segments, such as used vehicle
financing. Credit cards or unsecured loans will see the fastest growth at 35% CAGR in the
retail portfolio though its contribution from a size perspective would still be negligible at 5%
against 3% currently. While the size is insignificant, we are still bullish about this space,
considering it is expected to be a far more profitable portfolio than other products.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 3: Retail loans are likely to grow 20% CAGR over the next few years
Growth in retail loans in recent years, March fiscal year-ends,2003-19E (` bn)
Consumer durables Housing Loans against FD Credit cards Education Vehicle Others
30,000
25,000
20,000
15,000
10,000
5,000
-
2003 2007 2010 2015E 2019E
Source: RBI, Kotak Institutional Equities estimates
Corporate loan growth slowdown a big reason for banks to shift focus
The following two exhibits explain our view on corporate-loan demand. We think there is
reason to believe corporate-loan growth is unlikely to return with zest. While there is
excitement that the investment cycle will come back, which would result in higher credit
demand we think it is a bit premature to take that call now.
The slowdown that started in FY1998 extended for nearly five years (see Exhibit 5) and we
are broadly seeing something similar today. Loan growth in the corporate segment is 6-8%
yoy (see Exhibit 4), led by a large decline in the corporate segment. We are not giving the
subsequent few years because there were two major events that drove growth, the reverse-
merger of ICICI Ltd with ICICI Bank and IDBI Ltd with IDBI Bank. The two entities helped to
show much stronger growth in subsequent years.
Our broad call is that demand for capex loans for banks would take a bit more time as
corporate entities would need to deleverage their balance sheets, which would mean
repayment rates are likely to be high and is likely to offset fresh disbursements. Also,
working capital cycles have expanded in recent years, implying an improvement in the
economy should initially result in lower working capital demand. Hence, our broad call is
that we are likely to see fairly subdued corporate loan demand.

Exhibit 4: Corporate loan growth has slowed to ~6-8% Exhibit 5: A similar slowdown was seen over FY1998-2002 too
Corporate loan growth, March fiscal year-ends, 2007-19E (%) Corporate loan growth, March fiscal year-ends, 1998-2002 (%)
30 18
24 14
18 11
12 7
6 4
0
0
2015E
2016E
2017E
2018E
2019E
2007
2008
2009
2010
2011
2012
2013
2014
1998
1999
2000
2001
2002
Source: RBI, Kotak Institutional Equities estimates Source: RBI, Kotak Institutional Equities
Exhibit 6: Growth in large corporate loans is 6-8% yoy Exhibit 7: Share of large corporate loans will decline
March fiscal year-ends, 2010-November 2014 (%) March fiscal year-ends, 2010-November 2014 (%)
2010 2011 2012 2013 2014 2015E
Micro and small Medium Large
Micro and small 22.1 2.4 12.2 20.0 23.7 14.1
Medium 8.6 (11.8) 12.4 (5.2) 2.2 1.8 100
Large 27.4 32.1 22.4 15.8 12.2 6.5
Industry 24.4 23.0 20.3 14.9 13.1 7.3
80
Source: RBI, Kotak Institutional Equities
60 74.1 79.6 81.0 81.7 81.0 81.0
40
20 10.1
7.3 6.8 5.6 5.1 5.0
15.7 13.1 12.2 12.8 13.9 14.0
0
2010 2011 2012 2013 2014 2015E
Share of housing to decline; urban markets still dominate the portfolio

Historically, housing has been the largest portfolio for banks and is still a metropolitan/urban
product. The share of housing in the overall retail portfolio is ~50% (see Exhibit 8) with a
peak of 53% and a lower share of 47% over the past decade. This, in our view, is unlikely to
change materially. Banks will continue to focus on expanding growth in retail through
housing as it gives stability to book due to its duration, lower risk compared to other
corporate loans and has a relatively low risk. Vehicle loans contribute ~10% of the loan
portfolio but only a part of this is reported under retail with the balance reported under the
corporate segment, especially for those loans where the borrower is a large corporate entity
like a fleet owner. Apart from disbursements to new vehicles, banks are actively looking at
building the used-vehicle finance portfolio in all products.

However, over the next few years, we think banks are likely to shift focus from housing to
other loan products, especially the unsecured loan portfolio. We see this as the next big
opportunity, especially coming through credit cards. While we are mindful of the risks
emerging from this product, we think it is a bit early to turn negative as the cycle broadly
favors banks to expand this portfolio a bit more aggressively than in the past. It has lower
contribution from an assets perspective but a high contribution from an earnings perspective.
Exhibit 8: Housing loans have been broadly stable at 50% of overall retail loans, led by metropolitan and urban regions
Break-up of retail loans, including region-wise split of individual retail loan products, March fiscal year-ends, 2004-14 (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Nov-14
Housing 47.7 49.5 51.6 52.8 51.2 51.4 54.8 51.6 50.5 53.3 52.2 52.5
Metropoliton 47.9 47.3 51.7 54.5 49.6 52.0 48.5 48.7 50.4 50.5
Urban 27.0 27.2 25.2 24.4 26.3 26.7 27.4 27.8 26.9 26.7
Semi-urban 16.1 15.2 13.1 12.4 13.0 14.1 15.8 16.0 15.9 16.5
Rural 9.0 10.3 10.0 8.7 11.1 7.1 8.2 7.5 6.7 6.3
Vehicles — — — — — 10.8 8.0 9.8 9.4 9.4 12.6 12.8
Metropoliton 50.1 35.6 38.6 39.8 37.9
Urban 27.6 28.9 28.3 29.9 30.9
Semi-urban 13.6 19.8 18.9 19.2 21.7
Rural 8.7 15.7 14.2 11.0 9.4
Education — — — — — 4.5 6.9 7.0 6.9 6.3 5.8 5.5
Metropoliton 28.1 28.2 24.7 23.3 21.4
Urban 29.6 27.5 28.0 27.1 25.8
Semi-urban 29.0 27.0 29.0 31.2 33.4
Rural 13.3 17.3 18.3 18.4 19.4
Credit cards — — — — — 5.5 3.9 3.1 3.0 2.9 2.4 2.6
Metropoliton 93.6 89.6 80.3 95.5 92.2
Others 52.3 50.5 48.4 47.2 48.8 27.8 26.4 28.5 30.2 28.1 27.1 26.6
Notes:
(a) Data for FY2014 and October 2014 pertains to monthly disclosure and there is variation from historical publications
South India the largest market for retail loans; Maharashtra the largest state
Unlike the overall loan break-up across geographies, the retail business appears to be strong
in South India, which accounts for ~40% of the retail loan business. West India has a share
of ~22% of overall loans. However, from a state perspective, Maharashtra is the largest
state for retail loans in India though one could argue that the risk-reward ratio is probably
much better in South India, where the four key states have a fairly strong and nearly
balanced contribution. Tamil Nadu is the second largest bank with 13% share while Andhra
Pradesh and Karnataka have a share of ~10% of the overall retail business.
Exhibit 9: The south is the largest market at 40% of retail loans Exhibit 10: West is the second largest market with 22% of loans
Contribution of South India to total retail loans, March fiscal year- Contribution of West India to retail loans, March fiscal year-ends,
ends, 2004-13 (%) 2004-13 (%)
Contribution (%) (LHS) Growth (%) (RHS) Contribution (%) (LHS) Growth (%) (RHS)
42 45 25.2 80
40 36 23.8 60
38 27 22.4 40
36 18 21.0 20
34 9 19.6 -
32 0 18.2 (20)
2004
2005
2006
2007
2008
2010
2011
2012
2013
2009
2004
2006
2007
2009
2010
2012
2013
2005
2008
2011
Source: RBI, Kotak Institutional Equities Source: RBI, Kotak Institutional Equities

Exhibit 11: Maharashtra is the largest state in India for retail loans
Break-up of loans according to state, March fiscal year-ends, 2004-13 (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Maharashtra 16.4 17.9 18.3 19.4 17.2 20.0 17.2 18.1 18.0 17.1
TamilNadu 12.5 10.9 10.6 10.3 12.4 11.7 11.4 11.3 11.9 12.7
Andhra Pradesh 8.8 9.0 8.2 8.6 9.4 9.6 10.3 10.5 10.4 10.5
Karnataka 9.8 10.1 10.6 10.5 10.5 9.9 9.8 9.1 9.5 9.9
Kerala 6.2 5.8 5.5 5.5 5.8 6.2 7.0 6.7 6.7 7.0
Delhi 7.9 8.3 8.8 7.9 7.0 7.9 6.9 7.5 7.7 6.7
Uttar Pradesh 6.4 6.1 5.6 5.5 6.4 4.9 5.0 5.1 5.0 5.3
Gujarat 3.8 3.9 4.1 4.6 5.1 4.1 4.4 4.4 4.5 5.0
West Bengal 4.9 5.1 4.9 5.2 4.3 4.7 4.6 4.1 3.5 3.6
Others 23.5 22.9 23.4 22.5 21.8 21.0 23.3 23.2 22.9 22.2

PRIVATE BANKS WELL PLACED: SBI TO GAIN AMONG PUBLIC BANKS

The underlying shift to retail which is expected to continue for the next few years is likely to augur well for
private banks compared to public banks. Frontline private banks have a large contribution from retail assets,
which should enable these banks to gain market share rapidly. Among public banks, we expect SBI to play
the dominant role given that it has an established business in retail assets, customer base and reach.
Private banks make a steady comeback; we expect consistent share increase

Private banks have been steadily making a comeback since FY2012 and we think this is likely
to accelerate as the shift in the overall industry moves towards retail. ICICI Bank and Axis Bank,
two of the largest private banks, have shifted focus to retail loans from corporate loans.
Among public banks, we think SBI will be the only one in a position to defend share in retail
and the overall loan mix. As highlighted in the exhibit below SBI (group) has the largest
market share in retail loans at 32% while nationalized banks, as a whole, have a share of
35%; private banks have market share of 27%. However, from a contribution to overall
loans, private banks, especially larger banks, have 40-50% of overall loans from retail.
Exhibit 12: SBI and private banks have a high market share in retail loans
Share of retail loans across banks, March fiscal year-ends, 2004-13 (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
SBI (group) 24.1 25.4 24.0 22.8 23.9 25.8 32.0 31.7 32.1 32.1
Nationalised banks 38.7 34.1 34.2 33.7 31.2 32.9 35.8 37.2 36.6 34.5
Private banks 24.1 28.1 29.6 33.5 32.9 30.2 23.6 23.2 22.6 27.1
Others 13.1 12.4 12.1 10.0 12.0 11.1 8.7 7.9 8.7 6.3
Frontline private banks to gain; regional banks have a different retail portfolio
We believe private banks are likely to be the key beneficiaries of this transition towards retail.
This would have a greater positive impact to the frontline private banks like HDFC Bank,
ICICI Bank, Axis Bank and SBI among public banks. The exhibit below shows individual banks’
market share of the overall retail business and the contribution of retail loans to their
respective portfolios. Among smaller banks, we think IndusInd Bank is best placed as it has
~45% of its overall loans in the retail portfolio.
We don’t see improvement in the shift of loans towards retail positively changing the
growth outlook for regional banks. City Union, Karur Vysya and to some extent Federal Bank
have a disproportionately high exposure of loans in the gold loans portfolio where we are
less excited about growth compared to other retail assets. But they have a high share of the
loan portfolio in the business banking segment, where we expect growth to be strong.

Exhibit 13: Leading private banks have a higher share of loans in the retail portfolio
Share of retail loans compared to the industry and contribution of these loans to the overall loan portfolio, March fiscal year-ends, 2007-2QFY15 (%)
Retail loans market share (%) Retail loans (% total loans)
2007 2008 2009 2010 2011 2012 2QFY15 2007 2008 2009 2010 2011 2012 2013 2014 2QFY15
Public banks
Allahabad - 1.5 2.5 3.4 3.7 1.9 1.9 — 14.9 23.7 27.6 27.9 13.6 13.6 14.0 14.3
Andhra 1.5 1.0 1.1 1.5 1.5 1.4 1.6 23.7 14.7 13.7 15.9 14.7 13.5 14.6 15.3 15.1
BOB 3.1 3.3 3.5 4.1 4.6 4.5 4.3 17.1 15.8 13.6 13.9 14.2 12.4 11.6 11.6 12.3
BOI 3.8 3.8 3.5 2.7 2.4 2.4 2.7 20.5 17.1 13.9 9.3 7.8 7.7 7.7 8.0 7.4
Canara 3.8 3.5 3.5 4.1 3.6 3.1 3.6 17.8 16.4 14.3 14.1 12.0 10.7 9.5 11.1 12.5
Corporation 1.7 1.7 1.7 2.0 2.2 2.6 2.8 25.6 22.5 19.2 18.5 18.0 20.2 21.2 21.2 22.1
Indian Bank 1.4 1.6 1.7 1.9 1.7 1.7 1.6 21.5 19.7 18.8 17.5 15.9 14.5 14.6 14.0 14.7
IOB 1.7 1.3 1.5 1.6 1.1 1.2 1.6 16.5 10.5 11.6 12.1 6.9 6.7 9.4 9.7 9.7
OBC 1.6 1.5 1.4 1.8 1.6 1.5 1.5 17.0 13.8 11.9 12.9 11.7 10.4 11.3 11.6 11.8
PNB 4.7 4.2 4.4 3.3 3.4 3.7 3.8 22.1 17.7 16.2 10.3 9.8 9.9 10.3 11.1 11.5
SBI 16.2 17.0 19.0 23.0 23.5 23.1 22.9 21.8 20.6 19.7 21.3 21.7 21.0 20.1 19.6 20.1
Union Bank 3.0 3.2 3.3 2.3 2.3 2.1 2.6 21.7 21.6 19.0 11.3 10.8 9.1 9.4 10.9 11.7
Private banks
Axis Bank 2.4 2.9 3.1 3.6 4.0 4.8 8.6 29.5 24.6 21.2 20.0 19.5 22.1 27.4 30.7 38.9
City Union — — — — 0.1 0.2 0.2 7.4 12.0 15.7 12.5 11.6
DCB — — 0.2 0.1 0.2 0.2 0.4 35.0 23.0 27.2 31.4 38.1 40.5 44.1
Federal Bank 1.0 1.1 1.3 1.5 1.3 1.3 1.4 29.1 29.7 32.0 32.0 29.5 28.1 30.2 32.5 31.8
HDFC Bank 7.0 8.7 11.0 12.5 11.5 13.6 14.5 67.9 69.6 62.7 58.3 50.1 54.8 56.9 47.7 48.3
ICICI Bank 28.0 26.1 18.9 13.5 12.0 12.2 13.2 65.2 58.4 48.6 43.6 38.7 38.0 37.0 39.7 39.8
IndusInd 1.5 1.5 1.3 1.4 1.7 2.2 2.4 60.6 57.4 45.5 40.4 44.4 49.2 50.5 45.0 43.3
J&K Bank — — — — — 0.7 0.7 16.0 15.0 15.0 16.0
Karur Vysya — — — — 0.2 0.3 0.4 7.6 8.2 12.0 12.6 13.0
Source: RBI, Company, Kotak Institutional Equities
Changes to business model in retail compared to the previous one

We believe that there are a few changes that are probably of relevance. This is not to say
that the cycle would see negligible impairments as the cyclical risks that emerge from credit
growth cannot be wished away. There is a fair chance that at the end of the cycle most
banks have a much higher share of their loans in portfolios that are fairly risky like unsecured
loans. This typically occurs as a response to interest rates as banks build a high share of loans
in low risk assets like housing in the initial leg of the cycle which tends to hurt profitability
when the rate-cycle reverses. But we are not too worried about some of these issues today.
We are too early in the cycle and interest rates have only just started to ease. We would
probably be worried about the nature of the portfolio, growth of individual banks post the
next increase in the rate cycle, which we think is some time away.
Acquisition models have changed in this period
One of the most important changes that we are probably seeing in the frontline private
banks is the change in acquisition models. In the previous cycle, there was a fairly high
dependence on direct sales agents to originate loans. Today, this has changed with banks
having invested in their own teams to acquire customers that are better in quality and less
susceptible to change to other banks that easily. Origination of retail loans from the bank’s
internal sources for Axis Bank is 55-70% across product streams (see Exhibit 14). Unsecured
loans have a much higher share than housing loans.

Exhibit 14: Axis Securities originates ~60% of the retail loans for Axis Bank
Disbursements across loan products, March fiscal year-ends, 2012-14
Contribution Total Contribution to Total
to total disbursements total disbursemen
2012 2013 Growth disbursements in FY2013 2014 Growth disbursements ts in FY2014
(Rs mn) (Rs mn) (%) (%) (Rs mn) (Rs mn) (%) (%) (Rs mn)
Home loans 53,840 77,340 43.6 54.0 143,222 88,720 14.7 55.0 161,309
LAP 6,440 13,750 113.5 57.0 24,123 21,360 55.3 58.0 36,828
Personal loans 10,320 18,600 80.2 62.0 30,000 26,440 42.2 69.0 38,319
Auto loans 23,820 93.0 25,613 26,380 10.7 93.0 28,366
Schematic loan for SME 5,040 15,230 202.2 27,980 83.7
Credit cards (#) 160,000 302,660 89.2 449,148 48.4
Notes:
(a) The business has been in multiple subsidiaries in the past: Axis Securities and Sales, Axis Capital and Axis Securities.
Source: Company, Kotak Institutional Equities
The two other big changes we have seen has been on the liability side. Since FY2007, banks
have been (1) aggressively expanding their branch footprints (see Exhibit 16) and that has
led to (2) strong acquisition of liability customers (see Exhibit 15). The exhibit below shows
the strong expansion in liability customers compared to retail customers in the previous few
years as well as the expansion in footprint for private banks. This cross-sell opportunity to
their customers is expected to ensure far lower risk compared to the previous cycle.
Exhibit 15: Greater focus on cross-selling products Exhibit 16: Strong branch expansion gives higher legs of growth
Savings and retail loans accounts (private), March fiscal year-ends, Branches of private banks (consolidated), March fiscal year-ends,
2004-13 (units) 2004-13 (%)
Savings account Retai loan accounts 16,000

100
12,800
80
9,600
60
6,400
40
3,200
20
0 -
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

CASA ratio allows banks to take significantly lower risk
One of the biggest benefits private banks have is the change in the banks’ liability profile.
The incentive to delay risk taking is significantly better when a bank has a stronger liability
profile. The three leading private banks and SBI have a CASA ratio of ~40% and it appears
these banks can maintain this ratio at close to current levels. We think this is a significant
differentiating factor in private banks compared to the previous cycle. Note that CASA ratio
is not a critical parameter when interest rates are declining as banks would continue to see
support from re-pricing of their liabilities at lower rates. However, this starts to hurt when
interest rates start to rise as banks would be forced to look at riskier borrowers or products
to maintain NIM levels. Banks tend to take this risk as the underlying environment is still
suited to take that risk.

Exhibit 17: CASA ratio has significantly improved for the leading private banks making the transition to retail easier
CASA ratio across banks, March fiscal year-ends, 2004-15E (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Public banks
Andhra Bank 30.5 37.3 36.1 36.3 34.5 33.6 31.4 29.4 29.1 26.4 25.7 24.8
BoB 33.7 36.4 36.5 37.9 33.2 31.2 29.6 29.6 28.7 26.9 25.3 25.7
BoI 31.7 33.7 34.5 35.0 32.2 30.6 26.8 27.8 25.4 26.7 25.6 22.9
Canara Bank 34.8 33.8 33.9 33.3 31.5 31.5 30.1 29.1 28.3 24.3 24.2 24.5
Corporation Bank 28.5 34.0 34.6 34.3 34.1 35.0 31.4 28.6 26.0 22.1 21.7 20.3
Indian Bank 32.2 33.5 34.9 34.8 35.4 32.3 31.6 32.2 30.9 30.6 27.6 27.2
IOB 32.2 34.4 38.9 39.9 34.9 33.5 30.3 32.5 30.2 26.4 26.5 25.3
OBC 28.5 28.6 28.3 32.6 30.3 27.9 23.7 25.0 24.6 24.1 24.6 24.3
PNB 46.9 45.9 46.3 49.0 46.2 43.0 38.8 40.8 38.5 35.3 39.2 38.3
SBI 37.3 40.8 41.3 47.6 48.5 47.0 41.6 47.3 49.4 44.8 44.8 42.9
Union Bank 36.2 35.8 32.7 32.4 34.5 34.9 30.1 31.7 31.8 31.3 31.0 29.5
Old private banks
City Union Bank 20.7 20.5 21.9 22.9 24.3 20.9 18.9 21.9 19.6 18.2 16.8 17.8
DCB 17.0 18.8 22.7 32.1 28.3 24.3 31.0 35.4 35.2 32.1 27.2 25.0
Federal Bank 21.1 23.1 24.5 25.0 25.2 25.1 24.5 26.2 26.9 27.5 27.2 31.2
ING Vysya Bank 21.1 24.9 24.2 27.0 28.9 31.5 27.0 32.6 34.6 34.2 32.5 33.4
KVB 21.5 22.9 24.4 26.9 27.7 25.6 21.9 23.5 23.3 19.2 19.2 20.5
J&K Bank 33.4 30.3 32.0 34.2 39.8 39.2 38.1 40.7 40.5 40.7 39.2 39.1
New private banks
Axis Bank 23.0 38.1 38.0 40.0 39.9 45.7 43.1 46.7 41.1 41.5 44.4 45.0
HDFC Bank 43.0 54.7 60.6 55.4 57.7 54.5 44.4 52.0 52.7 48.4 47.4 44.8
ICICI Bank 15.5 23.0 24.3 22.7 21.8 26.1 28.7 41.7 45.1 43.5 41.9 42.9
Yes Bank — — 1.4 10.7 5.8 8.5 8.7 10.5 10.3 15.0 18.9 22.0
IndusInd Bank 12.2 11.2 10.7 12.9 14.9 15.7 19.2 23.7 27.2 27.3 29.3 32.5
Credit information of customers has strengthened
A benefit for the entire industry has been the strong role of credit information bureaus,
which have a lot more data on customers. Typically, a history of 7-10 years is a reasonably
good period for an individual borrower as repayment patterns change to reflect the change
of an individual’s net worth. Also, banks are seeking far more information from new
borrowers and information-sharing mechanisms have improved. This implies far lower risk
compared to the previous cycle. While it means banks are probably having one cycle of
information with them, which implies the ability to understand long-term loss, given defaults
are still probably weak, we are at best far better positioned than in the previous cycle.
Analytics being used in decision making
Our discussion with private banks indicates analytics is starting to gain a foothold.
Hypothesis testing and portfolio analysis are becoming stronger for banks with a lot more
reliable data of customers. Banks have started to see early benefit of it being deployed in
retail. Using public information through CIBIL and PAN card details, banks have been able to
quickly take decisions on small-ticket retail loans such as vehicle loans. Processing times have
declined greatly, which has enabled banks, especially private banks, to gain a strong edge
over public banks. Pre-approved loans are likely to make a strong comeback in various
segments including big ticket loans like housing. In unsecured credit such as credit cards,
banks are able to identify new customer segments and introduce products that can help to
retain and acquire new customers.

Loan and customer mix critical as retail is not a highly profitable portfolio
We are essentially looking at two metrics across banks to understand whether the shift to
retail will be profitable. Our broad view is the corporate portfolio of banks has so far been
lot more profitable than the retail portfolio. Housing, which is the largest product in retail, is
the lowest yielding asset for most banks. Hence, the two essential parameters would be (1)
loan mix that each bank is carrying and (2) the nature of customers being targeted.
We believe banks would eventually need to look at segments like (1) loans against property
(2) used-vehicle financing in cars and commercial vehicles and (3) unsecured loans in their
portfolio to build a good mix that can help generate better yields. As we explain in the last
section, merely being in housing is not a great business decision.
Banks would also need to build a better mix of customer base which includes salaried and
self-employed segment. The scope for yield appreciation in salaried segment is the lowest.
We are not too sure if geographical expansion would have a very meaningful impact on
yields though we do know select markets have seen price irrationality in the past, especially
in a few products like commercial vehicles.
Looking at these variables to generate better returns, we think private banks are probably
much better. Apart from a strong mortgage book, private banks have been comfortable in
building a strong business focused on personal loans and credit cards. Note that the credit
card business can generate over 4% RoA and very high RoE when the risk of delinquency is
relatively low, which is where we are probably in the current leg of the cycle. The above
mentioned players among private and SBI in public banks are again well positioned though
SBI is the only player that does the cards business through its subsidiary. The mix of loans for
public banks is dominated by housing and business banking loans and this is probably not
the most efficient mix to generate similar return ratios.
Exhibit 18: Share of unsecured loans to rise but housing loans to remain the largest portfolio for banks
Break-up of housing loans across years, March fiscal year-ends, 2007-19E (%)
2007 2010 2015E 2019E
Others, Others,
Others,
16.1 20.2 Others,
19.7
21.7
Educ'n,
3.3
Educ'n, Educ'n, Educ'n
5.2 Home,
6.3
Home, Home, Home, , 3.5 48.7
50.6 51.4 52.3
Auto,
18.1 Auto,
Auto, Auto,
10.9 12.9 14.1
Credit FD Credit FD Credit

Credit FD
cards,loans, cards,loans, cards, FD
cards, loans, loans,
2.9 8.9 3.4 8.3 5.1
3.0 6.3 7.0

HOUSING: BIGGEST RETAIL LOAN PRODUCT

The high duration and low relative risk in housing loans is likely to keep housing as the largest portfolio in
banks’ retail mix. The loan mix is well diversified across regions with South India being the largest market,
LTV are fairly comfortable at origination as well as current value levels and average loans are fairly low,
which should ease concerns rising from the strong price appreciation seen in a few markets. Private banks
and SBI are probably best placed in this market.
We expect growth to pick up at 18-20% CAGR and contribution to loans to rise

We expect housing loans to be one of the main growth products for the banking sector over
the next few years. We expect growth to stay strong at 18-20% CAGR over FY2015-19 (see
Exhibit 3). Though growth and profitability are likely to be lower than other asset retail
classes, it is important for banks as it is extremely stable, given the duration of the loan
product, high ticket size compared to other retail asset products, helps to meet priority
sector requirements and can be characterized as a product with lower loss-given-default
especially considering the nature of this product as the most of the underlying purchase is
self-occupied.
Our broad growth assumption is based on the underlying metrics that the drivers for growth
are unchanged. Mortgage is a relatively under-penetrated product in India and there is great
impetus by the current government to increase housing volumes. Also, consumer balance
sheets are far stronger today and affordability as measured by installment to income or value
of the loans to annual income has not changed materially.
Housing loan portfolio is well diversified from a geographical perspective

Housing loan growth has gone through its own cycles in recent years. As of November 2014,
the growth in housing loans was stable and better than industry at 16% yoy. For most
banks, housing loans is the single largest product that is offered in the retail loan portfolio.
As of November 2014, housing loans contributed to 10% (see Exhibit 19 and 20) of the
overall loans and ~50% of the retail loan portfolio. Given the slowdown in the corporate
segment, we expect this portfolio to be the primary area of growth for the next few years till
we see the investment cycle improving which should result in a shift of focus for public banks.
Exhibit 19: Housing loan growth, which slowed over FY2008-10, Exhibit 20: We expect a gradual increase in contribution of
has been better than other segments at ~15% yoy housing loans over the next few years
Housing loan growth, March fiscal year-ends, 2005-19E (%) Contribution to overall loans, March fiscal year-ends, 2005-19E (%)
60 15
48 12
36 9
24 6
12 3
0 0
2015E
2016E
2017E
2018E
2019E
2015E
2016E
2017E
2018E
2019E
2005
2006
2007
2008
2009
2010
2012
2013
2014
2005
2006
2007
2008
2009
2010
2012
2013
2014
2011
2011

Diversified portfolio, marginal skew towards South; Maharashtra largest market

in India
From a geographical standpoint, we think it would be a relatively safe assumption that the
portfolio is reasonably well distributed in India. The exhibit below shows that South India has
a relatively higher contribution at 37% of the overall loans though the contribution from this
geography has remained unchanged over the past decade. West India is the second largest
market at ~28% of the overall loans but this is not driven by price appreciation but strong
growth in markets like Pune. The contribution from North India has been declining steadily
(100 bps over the past few years to 17%) as we note that banks have been very cautious in
lending in a few states. The contribution from these regions is ~80% of the overall housing
loans in India.
Exhibit 21: South India is the largest market at 37% of the overall loans
Break-up of housing loans across geographies, March fiscal year-ends, 2004-13 (` mn)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
South 315,561 473,344 648,411 832,177 977,414 1,103,968 1,147,916 1,339,414 1,424,416 1,727,450
Growth (%) 50.0 37.0 28.3 17.5 12.9 4.0 16.7 6.3 21.3
Contribution (%) 37.1 37.3 35.6 36.4 39.3 38.8 37.5 38.7 37.6 37.2
West 198,605 294,888 441,321 596,097 594,270 698,790 767,080 897,619 1,040,961 1,298,771
Growth (%) 48.5 49.7 35.1 (0.3) 17.6 9.8 17.0 16.0 24.8
Contribution (%) 23.3 23.3 24.2 26.0 23.9 24.5 25.0 25.9 27.5 27.9
North 162,237 239,044 379,389 414,690 405,795 514,650 556,134 617,652 642,710 794,439
Growth (%) 47.3 58.7 9.3 (2.1) 26.8 8.1 11.1 4.1 23.6
Contribution (%) 19.1 18.9 20.8 18.1 16.3 18.1 18.2 17.9 17.0 17.1
Central 87,024 131,320 174,243 215,657 267,497 261,158 290,043 306,257 353,474 442,896
Growth (%) 50.9 32.7 23.8 24.0 (2.4) 11.1 5.6 15.4 25.3
Contribution (%) 10.2 10.4 9.6 9.4 10.8 9.2 9.5 8.9 9.3 9.5
East 78,502 111,625 152,560 202,568 206,489 233,870 257,966 254,977 277,198 334,546
Growth (%) 42.2 36.7 32.8 1.9 13.3 10.3 (1.2) 8.7 20.7
Contribution (%) 9.2 8.8 8.4 8.8 8.3 8.2 8.4 7.4 7.3 7.2
North East 9,686 17,749 25,747 28,044 32,885 35,074 43,927 43,393 52,010 49,008
Growth (%) 83.3 45.1 8.9 17.3 6.7 25.2 (1.2) 19.9 (5.8)
Contribution (%) 1.1 1.4 1.4 1.2 1.3 1.2 1.4 1.3 1.4 1.1
Total 851,614 1,267,971 1,821,671 2,289,233 2,484,350 2,847,509 3,063,067 3,459,312 3,790,768 4,647,112
Growth (%) 48.9 43.7 25.7 8.5 14.6 7.6 12.9 9.6 22.6
Unlike western India, where there is a strong dominance from Maharashtra at ~20% of
overall loans, South India is reasonably well spread across all the states. Karnataka, Andhra
Pradesh (including Telangana) and Tamilnadu have a balanced share of ~10% each.
Exhibit 22: South is well represented while the west is dominated by Maharashtra
Break-up of housing loans across key states, March fiscal year-ends, 2004-13 (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Maharashtra 19.5 19.5 20.3 21.3 18.7 20.0 20.1 20.7 21.7 21.5
Karnataka 11.0 11.3 12.1 12.4 12.4 11.7 11.1 10.8 11.1 11.2
Andhra Pradesh 8.4 8.8 7.6 8.4 9.5 9.9 10.1 10.5 10.5 10.2
TamilNadu 11.2 10.1 9.6 9.4 11.0 10.4 9.1 10.5 9.3 9.5
Delhi 8.4 8.4 8.9 7.7 6.7 8.5 7.6 7.7 6.7 6.9
Kerala 6.5 6.9 6.1 6.0 6.3 6.6 7.0 6.7 6.3 6.0
Gujarat 3.6 3.4 3.6 4.4 4.9 4.2 4.5 4.7 5.2 5.9
Uttar Pradesh 6.1 6.3 5.9 5.7 6.6 5.4 5.0 4.8 4.8 5.1
West Bengal 4.4 4.4 4.4 4.7 4.2 4.9 5.1 4.2 4.0 3.8
Others 21.0 20.8 21.5 19.9 19.7 18.5 20.4 19.4 20.3 19.9

Mumbai emerges as the single largest market for housing loans for the banking sector with
a share of 12% of the overall housing loans with a growth of 20% CAGR since FY2003.
Within this 75% is in the main city, 20% is Thane (strongest growth amongst other regions)
and the balance in the suburbs. We are not too sure of the impact of loans purchased by
banks, as to whether it is reported by banks at their head-office, as this would give a higher
skew towards Mumbai. We have expanded the definition of Delhi to include its allied
districts given that the region has expanded sharply over the past decade. Delhi including
these districts would be ~9% of the overall housing loans for the country. Of this, 70% of
the overall housing loans in this geography would in Delhi, 13% in Gurgaon, 10% in
Gautam Buddha Nagar (Noida) and the balance in Faridabad and Ghaziabad. Bengaluru is
the third largest market while Pune has emerged as the fourth largest market for banks.
Growth in Pune, according to our analysis, shows strong growth in the overall loans by
number. Outstanding loans grew 27% CAGR since FY2003.
Exhibit 23: Share of Mumbai and Delhi (including nearby districts) has not increased sharply
Break-up of housing loans across various districts compared to total housing loans outstanding, March fiscal year-ends, 2004-13 (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
1 Mumbai and its suburbs 12.8 12.7 14.1 15.1 12.7 12.9 12.3 12.0 12.4 11.8
Main city 11.7 11.8 13.0 14.0 10.8 11.0 10.1 9.4 9.8 8.8
Thane 1.0 0.9 1.1 1.1 1.4 1.6 1.8 2.1 2.2 2.6
Suburban — — — — 0.5 0.3 0.4 0.6 0.5 0.5
2 Delhi and its suburbs 9.6 9.8 11.0 9.7 8.1 10.5 9.4 9.8 8.8 9.4
Delhi 8.4 8.4 8.9 7.7 6.7 8.5 7.6 7.7 6.7 6.9
Gurgaon 0.3 0.4 0.6 0.7 0.7 0.6 0.7 1.0 1.0 1.2
Gautam Buddha Nagar 0.6 0.7 1.0 1.0 0.2 1.0 0.8 0.7 0.7 0.9
Ghaziabad 0.5 0.6 0.6 0.5 3.0 0.6 0.6 0.6 0.6 0.8
Faridabad 0.3 0.3 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.4
3 Bengaluru 7.2 7.5 8.8 9.1 9.3 8.6 8.0 7.7 8.0 8.1
Urban 6.3 6.4 7.8 8.9 9.2 8.5 7.8 7.5 7.7 7.9
Rural 0.8 1.0 1.0 0.2 0.1 0.1 0.2 0.2 0.2 0.2
4 Pune 3.0 3.0 2.8 3.1 3.4 3.4 3.6 4.1 4.4 4.8
5 Chennai 12.1 5.7 5.7 5.5 6.1 5.7 4.6 5.8 4.4 4.7
6 Hyderabad 8.6 3.9 4.0 4.8 3.6 5.1 4.7 4.5 4.3 4.1
7 Ahmedabad 1.6 0.9 0.7 1.0 1.3 1.4 1.4 1.5 1.6 1.9
8 Kolkota 5.6 2.4 2.6 2.9 2.6 3.2 3.2 2.1 2.0 1.9
9 Ernakulam 3.0 1.5 1.4 1.4 1.7 1.7 1.7 1.7 1.6 1.4
10 Jaipur 3.1 1.2 1.4 1.4 1.6 1.3 1.4 1.2 1.2 1.2
Total of top 10 regions 66.4 48.5 52.7 54.1 50.5 54.0 50.2 50.3 48.6 49.3
Private banks: strong players despite a much lower market share

Given the strong focus we think private banks are likely to emerge as stronger players in the
housing loan segment. Their market share which peaked at 33% of loans in FY2007 had slid
to 20% of loans in FY2012 as ICICI Bank withdrew from the retail loan market having
suffered high losses in various assets classes within the retail portfolio (see Exhibit 24).
However post FY2012, we saw an improvement in the share of private banks. With ICICI
Bank investing heavily in building their retail business in secured loans and Axis Bank shifting
focus to retail loans, we should expect the share of private banks to increase over the next
few years, especially given that duration should still be rising in the bank’s portfolio (see
Exhibit 26).
Exhibit 24: Private banks led by shift in strategy have started to gain share
Share in loans across banks, March fiscal year-ends, 2004-13 (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
SBI (group) 24.8 27.0 23.8 22.4 23.8 25.6 32.5 32.8 34.8 33.2
Private banks 26.2 26.8 26.1 32.7 32.3 26.8 21.3 21.3 20.0 25.9
Others 9.0 8.8 10.5 6.3 7.7 8.9 6.6 7.9 6.7 5.7

Private banks have a reasonably similar market share across most regions. The market shares
were: South (26%), West (29%) and North (30%) and overall share of 26% in FY2013.
Exhibit 25: Private banks have gained market share across most key regions
Share of loans across banks in different markets, March fiscal year-ends, 2004-13 (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
South
SBI 27.1 29.8 26.4 24.8 25.1 28.9 36.6 36.9 39.3 36.9
Private banks 24.7 24.6 23.8 29.4 28.5 26.4 22.2 20.1 19.5 26.1
Others 48.2 45.6 49.8 45.9 46.4 44.7 41.2 43.0 41.2 37.0
West
SBI 16.4 20.2 18.0 15.6 17.1 19.0 26.4 28.4 29.0 29.7
Private banks 38.0 33.6 33.4 44.2 41.4 33.5 24.9 25.1 24.5 28.5
Others 45.6 46.2 48.6 40.3 41.6 47.5 48.7 46.6 46.5 41.8
North
SBI 20.5 23.3 20.3 20.4 19.9 22.0 27.5 25.1 27.6 27.2
Private banks 29.0 31.3 25.1 31.6 33.1 26.6 23.0 26.9 23.7 30.5
Others 50.6 45.5 54.6 48.0 47.0 51.4 49.5 48.0 48.7 42.2
Central
SBI 32.6 30.3 25.0 21.8 21.6 29.8 36.6 34.6 36.2 33.2
Private banks 18.3 26.0 32.4 33.7 44.0 25.8 17.8 16.6 14.2 20.1
Others 49.0 43.7 42.6 44.6 34.4 44.4 45.6 48.8 49.6 46.7
Exhibit 26: ICICI Bank, Axis Bank and SBI are the strongest players among banks, in housing loans
Share of key banks in housing loans, March fiscal year-ends (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2QFY15
Key public banks
BoB 2.1 1.8 1.8 1.9 2.0 2.1 2.4 2.3 2.2 2.1 2.2 2.2
Canara Bank 2.1 2.2 2.2 2.1 1.8 2.0 2.3 2.8 2.5 1.7 2.2 2.1
PNB 2.3 2.1 2.8 3.1 2.1 2.2 2.4 2.2 2.0 1.9 1.9 1.9
SBI 12.2 13.0 12.6 12.2 12.5 13.9 16.4 16.7 16.2 15.9 16.0 15.6
Key private banks
Axis Bank 0.2 0.6 1.1 1.5 2.1 2.7 3.4 3.5 4.4 5.2 5.8 6.0
HDFC Bank — — — — — 1.3 2.0 2.1 2.2 2.2 2.2 2.1
ICICI Bank 11.9 14.8 18.0 20.5 18.5 14.8 10.9 10.1 7.7 7.7 8.1 8.3
Kotak Bank — — — 0.6 0.7 0.8 1.1 1.3 1.3 1.4 1.4 1.4
All the banks listed above 30.8 34.4 38.5 41.3 39.2 38.9 39.8 39.8 37.2 36.8 38.5 38.3
Other banks 33.3 35.2 34.8 32.6 31.7 32.7 29.4 27.0 26.2 24.0 23.1 22.7
Total banks (from RBI) 64.1 69.6 73.3 73.9 70.9 71.6 69.2 66.9 63.4 60.8 61.6 61.0
Key NBFCs
HDFC Ltd. (a) 20.0 18.7 17.8 18.1 20.2 14.1 14.1 13.7 14.0 14.8 15.2 15.3
LIC Housing Finance (a) 6.6 6.1 5.6 5.4 5.7 6.5 7.8 8.7 9.4 10.0 10.1 10.0
Dewan Housing Finance 0.8 0.8 0.9 1.0 1.1 1.5 2.0 2.6 4.0 4.5 4.6 4.7
Indiabulls (a) — — — — 2.0 1.6 1.8 2.6 3.1 3.3 3.3 3.4
REPCO — — — — — — 0.0 0.0 0.4 0.5 0.5 0.6
All NBFCs listed above 27.4 25.6 24.3 24.6 29.0 23.6 25.7 27.6 30.9 33.1 33.8 33.9
Other NBFCs 8.5 4.8 2.4 1.5 0.1 4.7 5.1 5.5 5.6 6.1 4.6 5.1
Total NBFCs 35.9 30.4 26.7 26.1 29.1 28.4 30.8 33.1 36.6 39.2 38.4 39.0
Top 5 players 51.0 53.2 55.1 57.7 59.1 51.8 52.5 52.7 51.7 53.6 55.2 55.3
Notes:
(a) HDFC, LICHF - individual loans only; Indiabulls - mortagage loans.
(b) First Blue Housing Finance merged with Dewan Housing in FY2013, FY2012 numbers reinstated for the merger.
(c) Loans of other NBFCs assumed at 15% of loans of NBFCs listed above for 1Q-2QFY15, in line with historical trends
Source: RBI, Companies, Kotak Institutional Equities
Distribution of housing loans shows risk lower than perceived

We are not too negative about loan growth that banks showed in their housing portfolio in
recent quarters. We think that the risk, at this stage of the cycle, is probably lower than
perceived. The key risks that we understand are primarily on account of two factors (1) sharp
price appreciation in key markets and (2) high levels of inventory and (3) weak trends on
absorption. A sharp correction may lead to high impairment risk for the banking sector.

Exhibit 27: New launches have been slower Exhibit 28: Absorption trend has stabilized across markets
New launches trend of residential properties, calendar year-ends, New launches trend of residential properties, Calendar year-ends,
2010-14 (mn sq. feet) 2010-14 (mn sq. feet)
Bengaluru Gurgaon Mumbai Noida Bengaluru Gurgaon Mumbai Noida

30 25
24 20
18 15
12 10
6 5
0
0
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Mar-11
Mar-12
Mar-14
Mar-13
Jun-11
Jun-12
Jun-13
Jun-14
Dec-10
Dec-11
Dec-12
Dec-13
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Mar-11
Mar-12
Mar-13
Mar-14
Jun-11
Jun-12
Jun-14
Jun-13
Dec-10
Dec-11
Dec-12
Dec-13
Source: Propequity, Kotak Institutional Equities Source: Propequity, Kotak Institutional Equities
Exhibit 29: Signs of correction in many key markets Exhibit 30: Inventory levels are fairly high
Residential price index across key markets, calendar year-ends, 2008- 12-months rolling inventory of residential properties, calendar year-
14 (mn sq. feet) ends, 2010-14 (months)
Bengaluru Gurgaon Bengaluru Gurgaon

Mumbai Noida Mumbai Noida
250 70
210 56
170 42
130 28
14
90
-
50
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-07
Sep-08
Sep-09
Sep-11
Sep-12
Sep-13
Sep-14
Sep-10
Source: Propequity, Kotak Institutional Equities Source: Propequity, Kotak Institutional Equities
However, we find it difficult to prove that the banking sector could go through a risky and
painful impairment in the mortgage portfolio at this stage of the economic cycle. To put this
in perspective we note that banks have been essentially marketing two key products in the
retail housing loan portfolio: (1) purchase for house that could be for residential or
investment and (2) mortgage of an existing property. The customer segment is either
salaried (such as an individual working in the government or private sector) or self-
employed. In the mortgage portfolio, banks essentially focus on two variants within self-
employed where the underlying mortgage could be either a residential or a commercial
property.

In various other notes, we have broadly highlighted that the housing market in India is in a
nascent stage and there is a fairly strong impetus by various government bodies to increase
penetration through schemes. While the long-term opportunity is attractive it nevertheless
raises a concern whether the medium term story is intact. While it is fairly hard to prove
given the extent of data that we have at this stage we are essentially building a case that the
things may not be as bad as it is currently being perceived.
The average ticket size is not too high in our view
The exhibit below shows the break-up of the average loan ticket size across banks. The
average housing loan for banks is `0.7 mn, which appears to be not so high, in our view.
Note that these are outstanding loans and not loans at origination. The metropolitan
markets have a substantially higher ticket size as compared to rural and semi-urban markets.
However, we note that “average” as a concept has its shortcomings. In housing loans, the
lower average ticket size could be due to (1) steady repayment from existing loans (2)
housing loan growth had witnessed a significant slowdown from a disbursement perspective
in FY2008-12 as ICICI Bank had slowed in retail loans. Note that principal repayments
accelerates in EMI products which makes it lot more to increase the average ticket size (3)
construction-linked payments in various projects implies that the portfolio could see lower
ticket size in initial years.
Exhibit 31: The average housing loan ticket size for the sector is comfortable at `0.7 mn
Average housing loan, March fiscal year-ends, 2004-13 (` mn)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
SBI and its subsidiaries 0.23 0.30 0.33 0.32 0.36 0.40 0.45 0.54 0.59 0.63
Metropoliton 0.30 0.48 0.47 0.54 0.59 0.67 0.75 0.89 0.92 1.00
Urban 0.23 0.29 0.32 0.33 0.34 0.38 0.43 0.53 0.57 0.61
Semi-urban 0.19 0.22 0.25 0.23 0.28 0.30 0.34 0.41 0.45 0.47
Rural 0.22 0.27 0.33 0.26 0.29 0.28 0.31 0.38 0.39 0.39
Metropoliton 0.37 0.47 0.57 0.67 0.64 0.70 0.77 0.78 0.84 0.94
Urban 0.24 0.27 0.30 0.33 0.37 0.38 0.42 0.45 0.51 0.59
Semi-urban 0.17 0.21 0.23 0.25 0.25 0.30 0.32 0.34 0.38 0.44
Rural 0.16 0.19 0.21 0.24 0.25 0.23 0.26 0.25 0.29 0.31
Private banks 0.47 0.59 0.59 0.80 0.81 0.80 0.73 0.86 0.83 1.12
Metropoliton 0.58 0.77 0.67 0.94 0.85 0.92 0.85 1.07 1.00 1.43
Urban 0.39 0.49 0.58 0.70 0.76 0.77 0.69 0.76 0.67 0.93
Semi-urban 0.25 0.26 0.29 0.38 0.45 0.44 0.43 0.52 0.53 0.58
Rural 0.27 0.43 0.46 0.58 1.07 0.57 0.51 0.48 0.37 0.36
Total 0.28 0.35 0.40 0.46 0.48 0.50 0.51 0.58 0.58 0.71
Metropoliton 0.46 0.59 0.65 0.77 0.76 0.81 0.83 0.95 0.86 1.15
Urban 0.25 0.31 0.34 0.38 0.42 0.44 0.46 0.52 0.52 0.65
Semi-urban 0.18 0.21 0.24 0.25 0.27 0.30 0.33 0.38 0.41 0.45
Rural 0.17 0.21 0.25 0.25 0.33 0.25 0.27 0.29 0.30 0.31
To remove the shortcomings of “average” as a concept, we have provided the broad split of
housing loans across various ticket sizes. Note that the exhibit below shows that 50% of the
outstanding loans in housing is between `1mn and `5 mn. Further, the loans that are
greater than `10 mn are less than 10% of the overall housing portfolio for banks. The
number of accounts greater than `10 mn is less than 5% of the overall number of housing
loans.

Exhibit 32: 50% of the loans is primarily within `1-5 mn

Outstanding share of loans across various buckets, March fiscal year-ends, 2004-13 (%)
<0.25 0.25-0.2 0.25- 0.2 0.5-1 1-2.5 2.5-5 5-10 10-40 40-60 60-100 100-250 >250 >1000
2004 0.4 18.8 30.4 22.1 16.3 4.8 1.4 0.8 0.2 0.3 0.8 3.6 —
2005 0.2 13.8 29.1 23.5 17.7 5.6 0.3 2.0 0.5 0.7 1.3 5.4 —
2006 0.2 10.6 24.2 22.7 20.4 7.4 3.1 2.4 0.5 0.6 1.2 6.8 —
2007 0.2 8.0 20.5 21.9 20.8 8.1 19.0 1.1 0.2 0.2 0.0 0.1 —
2008 0.1 7.5 20.2 21.0 23.9 11.5 5.9 4.3 0.6 0.6 0.8 3.5 —
2009 0.1 6.7 19.8 20.8 25.6 12.2 5.5 4.3 0.7 0.7 0.8 2.7 —
2010 0.1 5.9 19.0 22.4 28.7 13.3 5.4 0.4 0.6 0.5 0.6 3.2 —
2011 0.1 4.2 16.0 20.7 29.9 14.5 5.9 5.0 0.7 0.5 0.3 2.3 —
2012 0.3 3.9 14.0 20.6 32.4 15.2 5.8 4.5 0.6 0.5 0.4 1.9 —
2013 1.8 2.4 10.3 17.7 33.2 17.9 7.8 6.1 0.9 0.7 0.4 0.3 0.4
Exhibit 33: Only 6% of outstanding housing loans is greater than `0.5 mn

Break-up of housing loans (by number of accounts) across various buckets, March fiscal year-ends, 2004-13 (%)
<0.25 0.25-0.2 0.25- 0.2 0.5-1 1-2.5 2.5-5 5-10 10-40 40-60 60-100 100-250 >250 >1000
2004 7.9 50.5 27.9 9.6 3.4 0.5 0.1 0.0 0.0 0.0 0.0 0.0 —
2005 5.6 44.8 32.0 12.2 4.5 0.6 0.1 0.0 0.0 0.0 0.0 0.0 —
2006 4.9 41.7 31.9 14.1 6.1 1.0 0.2 0.1 0.0 0.0 0.0 0.0 —
2007 6.2 37.1 30.7 15.9 7.4 1.3 1.4 0.0 0.0 0.0 0.0 0.0 —
2008 4.0 36.6 32.3 16.0 8.5 1.9 0.5 0.2 0.0 0.0 0.0 0.0 —
2009 3.9 34.9 32.2 16.6 9.6 2.1 0.5 0.2 0.0 0.0 0.0 0.0 —
2010 3.9 31.5 32.5 18.2 10.9 2.4 0.5 0.1 0.0 0.0 0.0 0.0 —
2011 3.7 26.5 32.6 19.8 13.4 3.1 0.6 0.2 0.0 0.0 0.0 0.0 —
2012 9.2 22.7 29.3 19.9 14.6 3.3 0.6 0.2 0.0 0.0 0.0 0.0 —
2013 5.3 22.8 27.0 20.9 18.0 4.7 1.1 0.3 0.0 0.0 0.0 0.0 0.0
RBI recent data point on LTV also points in a similar direction
RBI has given some broad metrics of the underlying LTV (loan to value) and Loans to Income
(LTI) at origination of loans. The two exhibits below shows the trends on the underlying
metrics. We note that a large share of lending today is in the 70-80% LTV level (see Exhibit
34). Even on the LTI metric, things have not shown any strong deterioration that we believe
is of serious concern today.
Exhibit 34: Incremental LTV is shows comfortable trends Exhibit 35: LTI ratios have not changed significantly
LTV on new loans, March fiscal year-ends, 2009-15 (%) Loans to Income ratio, March fiscal year-ends, 2009-15 (%)
Source: RBI Source: RBI

High price in recent years also imply lower LTV at the portfolio level
Given the substantial appreciation in the underlying value of asset and the wealth that the
household has built through ownership of a house, we think that the risk of sharp rise in
defaults appears to be challenging. Note that the underlying LTV is probably substantially
lower than the current LTV for most banks and this would be even lower when one factors
the repayment that the portfolio is seeing currently. Most banks have a fairly low LTV for
mortgages compared to housing loans. We understand this is 60-65% compared to 80%
for housing loans.
Can loan portfolios have regional disturbances? – challenging to answer
A portfolio’s risk would be sharp deterioration at a portfolio level. We take a look at this
explanation by looking at the portfolio of banks in key markets like Mumbai and Delhi
(including adjoining areas) and Bengaluru. Since 2HFY09, property prices measured by
external agencies have indicated that appreciation is 50-70% indicating a fairly high risk of
impairments if there is a reversal in asset prices. Hence, outstanding loans and value of the
underlying price should see a substantially higher growth in these markets. However, a look
at the growth in the housing loan portfolio in these markets offers a slightly contrasting
picture. Since FY2009, outstanding loans in Mumbai, Delhi and Bengaluru increased ~50%.
Only in places like Pune have we seen a massive increase in loans of 130% yoy but that is
primarily on the back of a sharp rise in the number of loans (50% yoy) rather than only
increase in the ticket size.
Our GameChanger analyst, in his recent report, Capital in the 21st century: India edition,
dated December 24, 2014 gave his views on the gains that households have witnessed over
the past decade. As a ratio of the GDP, the stock of households’ assets has gone up to 4X in
2012 from 2.5X in 2002 (see Exhibit 36). Urban households’ assets have gone up 8X over
the last decade compared to a 4.6X growth in rural households’ assets (see Exhibit 37).
Exhibit 36: Comparing households' assets and the GDP across time periods, June year-ends, 2002-12
Comparing households' assets and the GDP across time periods, June year-ends, 2002-12 (` tn)
2012 2002
Total value of assets 355 60
GDP 90 24
Assets/GDP ratio (X) 3.9 2.5
Notes:
(a) We take the GDP at market prices data as of the March fiscal year-ends 2002 and 2012.
Source: NSSO 70th round survey, Reserve Bank of India, Kotak Institutional Equities
Exhibit 37: Households' assets have gone up 6X over the last decade to 2012
Average value of total assets (AVA) owned by different types of households, June year-ends, 2002-12 (`)
Average value of total Total value of Increase in

assets Households total assets assets
(Rs) (mn) (Rs tn) (X)
2012 2002 2012 2002 2012 2002
Rural 1,006,985 265,606 169 138 170 37 4.6
Urban 2,285,135 417,158 81 56 185 23 7.9
Total 250 194 355 60 5.9
Notes:
(a) We have taken the number of households data from the Census 2001 and 2011 respectively.
Source: NSSO 70th round survey, Census of India, Kotak Institutional Equities

VEHICLE LOANS: SHORT DURATION WITH PROFITABILTY BEING THE CHALLENGE

A relatively short duration loan in a fairly competitive segment makes this a very challenging product to
make it as profitable as the other retail segments from a banking perspective. Customer mix and products
(new and used) are critical to deliver better returns. South India is the largest market and private banks are
gaining market share in this space.
Growth could remain strong; making it profitable is the biggest challenge

We broadly expect banks to grow their vehicle loan portfolio by ~20% CAGR over FY2015-
19. There are essentially four drivers of growth: (1) based on our auto analyst’s estimates,
we are building new vehicle volume growth of ~10% CAGR and a part of the balance
growth in this portfolio would be led by increases in product mix/price variation. (2) After a
brief pause post FY2007-12, we think banks are likely to get back into used vehicle
financing. This is critical as it helps improve the profitability of the portfolio. (3) working
capital financing for dealers would be third area of focus as it gives an advantage for banks
to increase sourcing of retail clients and (4) slightly riskier products like top-up financing of
existing loans as the yields are higher than new vehicle loans but lower than unsecured loans.
Our discussion with various banks indicates this portfolio does not have a similar
characteristic as unsecured loans as the intent to pay is higher, given that there is an
underlying security.
One of the biggest concerns in the vehicle finance portfolio is to make it profitable. Hence,
banks extend product pipelines beyond new vehicle financing in this portfolio.
Spread across market participants; SBI makes most of slowdown in private banks
A caveat to begin with: Unlike housing loans, where the portfolio is visible fully, under the
retail segment, vehicle loans needs to be factored for the impact of the higher ticket size
lending that is reported under the corporate segment. Hence, from an analysis perspective,
we have included the exposure that is under “vehicles, vehicle parts and transport
equipment” in this section. There could be a bit of distortion by introducing this under
vehicle loans as working capital and any term lending in this segment may not be a part of
pure vehicle financing but we think it is important considering the format of reporting.
Also, banks do purchase loans to meet their priority sector lending requirements which
could impact the geographical distribution of loans.
The exhibit below shows that the share of loans between SBI, nationalized banks and private
banks is broadly similar at 30%. Having dominated the portfolio till FY2009, private banks,
primarily ICICI Bank, vacated the retail portfolio for a few years considering the rapid rise in
NPLs in the retail portfolio. Amongst private banks, HDFC Bank and IndusInd Bank
dominated this portfolio leading to strong growth in loans in their respective portfolios. It
does appear that SBI has was a big beneficiary of this slowdown as it saw market share
improve.
Exhibit 38: SBI has made most of the benefit in terms of gains from the slowdown in ICICI Bank
March fiscal year-ends, 2009-14 (%)
2009 2010 2011 2012 2013
SBI (group) 22.4 28.7 26.1 27.0 29.7
Nationalised banks 23.7 33.8 32.3 31.9 31.7
Private banks 45.4 30.3 34.4 31.1 28.5
Others 8.6 7.2 7.2 10.1 10.1
Notes:
(a) Vehicle loans includes loans that is reported under industry.

Exhibit 39: The portfolio is balanced between retail and corporate vehicle loans
Contribution of retail and corporate vehicle loans across banks, March fiscal year-ends, 2009-13 (%)
2009 2010 2011 2012 2013

SBI (group)
Retail 45.8 53.6 63.9 66.4 70.0
Growth (%, yoy) 45.3 26.1 20.9 33.4
Corporate 54.2 46.4 36.1 33.6 30.0
Growth (%, yoy) 46.0 6.2 (17.6) 8.1 13.0
Nationalised banks
Retail 36.4 28.7 39.3 39.8 43.6
Growth (%, yoy) 8.8 52.5 12.3 24.9
Corporate 63.6 71.3 60.7 60.2 56.4
Growth (%, yoy) 28.5 54.8 (5.2) 9.9 7.0
Private banks
Retail 81.7 58.6 72.1 67.2 60.4
Growth (%, yoy) (53.7) 63.0 (5.4) (5.3)
Corporate 18.3 41.4 27.9 32.8 39.6
Growth (%, yoy) 12.8 46.2 (10.8) 19.1 27.3
Total
Retail 56.5 43.6 55.1 53.9 53.0
Growth (%, yoy) (25.4) 47.2 9.9 13.0
Corporate 43.5 56.4 44.9 46.1 47.0
Growth (%, yoy) 30.0 25.5 (7.2) 15.3 17.0
Notes:
(a) Vehicle loans includes loans that is reported under industry.
Exhibit 40: Private banks have gained market share in South but have lost in West and North
Market share in each geography across banks, March fiscal year-ends, 2009-13 (%)
2009 2010 2011 2012 2013

South
SBI 24.3 34.6 30.7 29.6 30.0
Private banks 45.2 29.6 36.0 32.7 35.5
Others 30.6 35.8 33.2 37.7 34.6
West
SBI 20.2 20.7 18.9 23.4 27.0
Private banks 46.5 34.0 36.5 33.0 27.0
Others 33.4 45.3 44.6 43.6 46.0
North
SBI 19.5 29.1 24.5 22.4 26.4
Private banks 46.1 30.0 36.3 33.8 26.6
Others 34.4 40.9 39.2 43.8 47.0
Central
SBI 29.5 39.0 30.8 31.5 39.2
Private banks 35.3 20.4 22.3 16.9 16.9
Others 35.2 40.6 46.9 51.7 43.9
Building broad recovery in numbers reflects changes in the business environment
Our auto analyst is fairly positive about the growth outlook in the auto segment. We expect
volumes in the cars and the two-wheeler segments to grow 11% CAGR but a slower
growth in the commercial vehicle segment at 3% CAGR for FY2014-16E. However, we
expect the medium and heavy commercial vehicle segment to grow strongly at 16% CAGR
in this period.

Exhibit 41: We expect growth in vehicles of ~10% CAGR over the next few years
Volume growth across product segments, March fiscal year-ends, 2009-19E (%)
(bn) Cars Two wheelers CVs Growth (RHS) (%)

25.0 40
20.0 30
15.0 20
10.0 10
5.0 -
- (10)
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Source: Kotak Institutional Equities estimates
Private banks: ICICI Bank slowdown hits performance but things are reversing
Similar to the housing portfolio, the loan portfolio for private banks across regions is broadly
similar today. South has the largest portfolios for private banks in the auto-loan portfolio
with a share of 35% while West and North regions have a share of 25-28% each (see
Exhibit 42). West was one of the largest market for private banks in early years but it does
appear that there has been a shift towards South in recent years. Note that the distribution
of loans could be impacted partly by loan buyouts that these banks did in the past.
Exhibit 42: 35% of the loan portfolio is from South, the most critical market in recent years
Contribution of loans across geographies for private banks, March fiscal year-ends, 2009-13 (%)
2009 2010 2011 2012 2013
South 25.4 22.2 27.0 27.5 34.9
West 38.2 42.9 35.3 31.7 27.9
North 23.0 23.9 26.6 30.5 25.3
Central 4.8 4.4 5.0 4.8 4.6
East 7.9 6.1 5.6 4.9 6.6
North East 0.6 0.5 0.6 0.7 0.8
Exhibit 43: South is the most critical segment for the banking sector
Contribution of key states for private banks, March fiscal year-ends, 2009-13 (%)
2009 2010 2011 2012 2013
Maharashtra 32.3 37.0 27.8 25.4 22.2
TamilNadu 9.0 7.7 10.8 11.2 15.9
Delhi 12.7 13.1 14.9 18.7 13.8
Karnataka 5.6 4.6 6.3 6.2 7.9
Andhra Pradesh 6.4 5.2 5.8 5.8 6.6
Gujarat 5.5 5.5 7.0 5.6 5.2
Kerala 4.2 4.5 3.9 4.1 4.3
West Bengal 5.6 3.5 3.6 3.0 4.0
Jammu and Kashmir 1.6 2.2 1.6 1.9 2.1
Others 17.2 16.6 18.3 18.1 18.1
Notes:
(a) Vehicle loans includes loans that is reported under industry

UNSECURED LOANS: ATTRACTIVE AND EXPECTED TO GROW AT FASTEST

Unsecured loans (credit cards and personal loans) are likely to re-emerge as strong growth drivers in the retail
portfolio of banks. Low penetration, an improving economy, changing sourcing models, better analytics and
strong consumer balance sheets augur well for banks to re-launch what is likely to be a highly profitable
business for private banks, the key players in this portfolio.
Share of unsecured loans to rise meaningfully over the next few years
We believe the share of unsecured loans to rise across all banks. Extreme competition in low
yielding but highly secured retail products like housing and vehicle loans, increased
confidence of a strong economy and consumers changing behavior on payments as well as a
relatively lower leverage of personal balance sheets should result in banks shifting focus
towards unsecured loans. We think that the trend has already begun across banks, at least
with the leading players as shown in the exhibit below.
We are not too negative on this development and believe banks are probably going to look
at aggressive growth in this portfolio over the next few years. While unsecured and credit
cards have too different return/risk profiles we are looking through one single frame for our
report here.
Exhibit 44: Unsecured loans likely to see strong growth over the next few years
Credit cards and personal loans across select banks, March fiscal year-ends, 2008-2QFY15 (` bn)
HDFCB ICICI Axis Kotak

600
480
360
240
120
-
2008 2009 2010 2011 2012 2013 2014 1QFY15 2QFY15
Credit cards: small portfolio but portfolio is skewed to a few players

The credit card business is extremely small at an industry level. At its peak it was 1.2% of the
overall loan portfolio growing at over 50% CAGR but the slowdown in retail saw banks
pulling back from this portfolio sharply. We don’t see a strong reason for this business to
move back to ~3% of the overall loans for the industry in the near future. However, we are
still fairly excited about this business. This is an important line of business for private banks,
which have 60% share of the total outstanding loans in this business with the balance with
foreign banks. There is negligible contribution from nationalized banks while SBI does the
credit card business through one of its subsidiaries. It may not be a dominating part of the
loan portfolio but it plays a very critical role from a contribution to earnings especially for the
three large private banks. We have explained the financials of this business from one of the
big credit card companies available in the public domain. The profitability from this business
can be more than 3-5X of most secured loans in an economic upcycle, which is where we
now are.

Exhibit 45: Credit cards would be a big opportunity for growth Exhibit 46: Contribution is still low at this stage of the cycle
Growth in credit card outstanding, March fiscal year-ends, 2005-19E Share of credit card outstanding in loans, March fiscal year-ends,
(%) 2005-19E (%)
120 1.5
90 1.2
60 0.9
30 0.6
0 0.3
-30 0.0
2015E
2016E
2017E
2018E
2019E
2005
2006
2007
2008
2009
2010
2012
2013
2014
2011
2015E
2016E
2017E
2019E
2018E
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Exhibit 47: Private banks dominate this business

Share of loans across various banks, March fiscal year-ends, 2009-13 (%)
2009 2010 2011 2012 2013

Private banks 49.1 49.9 51.2 63.2 61.1
Foreign banks 46.9 38.5 27.5 36.3 38.8
Others 4.0 11.6 21.3 0.5 0.1
Exhibit 48: ICICI, Axis, HDFC and SBI have >60% share Exhibit 49: Strong growth in POS machines is positive
Market share by number of credit cards, March fiscal year-ends, Number of point-of-sale machines, March fiscal year-ends, December
December 2011-June 2014 (%) 2011-June 2014
70 1.2
66 1.0
62 0.7
58 0.5
54 0.2
50 0.0
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
3QFY12
4QFY12
1QFY13
2QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
3QFY13

Portfolio has a high skew to South India
The exhibit below shows the break-up of loans outstanding in the credit card portfolio
across regions. While we see fairly volatile movement in the outstanding loans across
geographies which is probably a reflection of the credit appetite of individual banks, what
probably comes out clear is that the South is an important area of business for credit card
business. The contribution from this region has been 50-60% over the past few years. We
don’t have a strong reason for such a high skew though our interaction with banks in the
past does indicate that the credit repayment culture in South is probably better than
elsewhere. Our analysis shows that while private banks have ~60% share in the overall
business they probably have close to 75% share in South India. West India is probably one
of the few regions where the outstanding share of loans has consistently declined. This has
coincided with a massive decline in outstanding accounts/cards from this region. In FY2013,
the number of accounts/cards declined over 50% from this region with a large share of the
decline led by private banks.
Exhibit 50: Private banks have a bigger share in South

Share of loans across various regions, March fiscal year-ends, 2009-13 (%)
2009 2010 2011 2012 2013

South 103,281 118,419 105,022 131,824 157,066
Growth (%) 14.7 (11.3) 25.5 19.1
Contribution (%) 34.2 54.3 50.8 59.2 61.7
North 25,708 7,395 21,691 22,234 45,702
Growth (%) (71.2) 193.3 2.5 105.6
Contribution (%) 8.5 3.4 10.5 10.0 18.0
West 166,298 84,837 64,629 63,787 40,362
Growth (%) (49.0) (23.8) (1.3) (36.7)
Contribution (%) 55.0 38.9 31.3 28.6 15.9
Central 2,164 2,314 7,809 2,311 4,532
Growth (%) 6.9 237.5 (70.4) 96.1
Contribution (%) 0.7 1.1 3.8 1.0 1.8
East 4,599 5,039 6,637 2,408 6,783
Growth (%) 9.6 31.7 (63.7) 181.7
Contribution (%) 1.5 2.3 3.2 1.1 2.7
North East 92 68 973 214 12
Growth (%) (25.8) 1,331.5 (78.0) (94.2)
Contribution (%) 0.0 0.0 0.5 0.1 0.0
Total 302,141 218,071 206,761 222,779 254,457
Growth (%) (27.8) (5.2) 7.7 14.2
Exhibit 51: Penetration is fairly low and likely to be a big market in our view
Credit card details for the sector, March fiscal year-ends, 2004-14
Penetration Credit card Average
No of credit No of Amount of Savings Credit Debit loans balance per
cards (mn) Growth transactions Growth transactions Growth account cards cards outstanding card
(# mn) (%) (# mn) (%) (Rs bn) (%) (%) (%) (%) (Rs bn) (Rs)
2004 — 100 177 — — — 62 —
2005 — 129 29 257 45 — — — 64 —
2006 17 156 21 339 32 31 1.6 4.5 91 5,243
2007 23 33 170 9 414 22 33 2.0 6.6 133 5,760
2008 28 19 228 35 580 40 37 2.4 8.9 274 9,959
2009 25 (10) 260 14 654 13 42 2.1 11.8 280 11,336
2010 18 (26) 234 (10) 618 (5) 48 1.6 15.5 201 10,990
2011 18 (2) 265 13 755 22 52 1.5 19.1 181 10,032
2012 18 (2) 320 21 966 28 58 1.5 23.0 204 11,578
2013 20 11 397 24 1,230 27 67 1.6 26.9 249 12,740
2014 19 (2) 509 28 1,540 25 1.5 31.4 249 12,958
CAGR (2.6) 17.0 20.7
Notes:
(a) No of transactions pertains to POS only.
(b) CAGR has been calculated for 2007-14.

Credit cards likely to be money spinners over the next few years
We believe banks building a strong unsecured loan business, especially in credit cards,
should be in a position to deliver superior returns from their retail asset portfolio. The reason
we are quite excited with this business is primarily on account of the high profitability that it
is likely to deliver over the next few years and its contribution to the overall earnings for a
banks.
We have only one large scale pure play credit card company, SBI Card and Payment Services,
for our analysis which we have presented below (see Exhibit 52). Here again, this company
has seen a big change in business over the past few years though the recent trends suggest
that things have substantially changed to the positive. We are not sure if it is a right
representation of the sector but what we are seeing currently in this company that the RoAs
for the business is strong at 7% and RoEs are 40-50% currently. One could argue that the
RoE is primarily on account of the high losses faced in earlier years but RoAs offer comfort in
the underlying business potential.
Credit card companies essentially make revenues from a few fixed-income streams: (1)
spends leading interchange fees (2) interest income due to roll-over and possible cross sell of
EMI products (3) processing fees levied for various transactions like late payment charges or
fees for converting to personal loans etc. and (4) foreign exchange. Different banks have
different models, which focus on different segments of the income streams. Loss rates are
fairly comfortable today and an improvement in the economy, aided by focused acquisition
strategies should keep them closer to current levels. Hence, we believe this should be a key
fee income stream for most private banks. While HDFC Bank has been a strong player in the
credit card business, we believe the shift in focus by ICICI Bank and Axis Bank should result
in higher earnings over the long term from the credit card business.
Our reason for being positive rests on few factors: (1) sourcing models have undergone a
massive change with a lot of acquisition focusing on internal customers (2) banks have
built/are building strong analytics teams backed with lot more data compared to the
previous cycle for new product introductions and (3) credit information bureaus have
become lot stronger in this cycle.
Exhibit 52: The credit-card business can deliver 3-5% RoA

Performance of SBI Card and Payment Services, March fiscal year-ends, 2011-14 (` mn)
2011 2012 2013 2014 1HFY15
Revenues 6,927 8,005 10,592 15,201
Opex and finance charges 6,860 7,592 9,305 12,282
PBT 67 413 1,288 2,918
PAT 71 379 1,363 2,931 1,938
Number of cards (#, A) 1,969,151 2,225,141 2,572,777 2,858,116 2,915,327
Net worth (B) 2,783 3,165 4,530 7,460 9,398
Assets 19,963 23,465 34,932 47,248
Key ratios (%)
Growth in active cards 13.0 15.6 11.1
PAT margin 1.0 4.7 12.9 19.3
Return on assets 0.3 1.7 4.7 7.1
Return on equity 1.4 12.8 35.4 48.9 46.0
Asset quality 30+DPD 5.7 4.2 4.4 5.3
Notes
(a) Card base is as of 1HFY15.
(b) Net worth for 1HFY15 is addition of net profits for 1HFY15.
Source: Public documents, Kotak Institutional Equities

OTHER RETAIL ASSETS

We are not delving too much into other retail asset products. Education loans are led by public banks to meet
priority-sector lending requirements. Business banking, done by private banks, is a key product but its
characteristics partly reflect SME banking.
Education loans negligible and shared primarily by public banks

Education loans are not too attractive a portfolio for banks. The growth in this portfolio has
been steadily declining over the past few years and its contribution to overall loans has been
1% of loans (see Exhibits 53 and 54). This is not a key focus area for banks given that
profitability is weak and is more driven by the need to meet banks’ priority-sector lending
requirements. Discussions with banks indicate yields are fairly low for the risks that banks
take as most of the loans are unsecured in nature.
Exhibit 53: Growth has slowed in recent years Exhibit 54: Contribution of education loans is ~1% of loans
Growth of education loans in the retail portfolio, March fiscal year- Contribution of education loans to total loans, March fiscal year-ends,
ends, 2006-November 2014 (%) 2006-November 2014 (%)
80 7.0
64 5.6
48 4.2
32 2.8
16 1.4
0 0.0
2015E
2006
2007
2008
2009
2010
2012
2013
2014
2011
2015E
2006
2007
2008
2009
2010
2011
2012
2013
2014
Nationalized banks have a dominating share in this segment with 60% of overall loans and
SBI has a share of 35% and the balance is with private banks, primarily regional players
more than frontline private banks.
Exhibit 55: Nationalized banks have a dominant share in education loans

Share of education loans across banks, March fiscal year-ends, 2009-13 (%)
2009 2010 2011 2012 2013

Nationalised banks 56.0 50.1 54.9 57.8 59.3
SBI (group) 39.2 32.3 32.5 33.0 34.0
Others 4.8 17.6 12.6 9.1 6.7
South India is clearly the largest geography for education loans with a share of 50-55%. The
rest of the portfolio is broadly split between other regions. The share of West India has
declined in recent years. Tamilnadu is the largest state with a 25% share of overall loans.
Kerala and Andhra Pradesh are the two other large markets though the share of lending
from these states has declined mainly due to higher-than-expected NPLs.

Exhibit 56: South has the largest share with 55% of overall loans
Contribution from various geographies in education loans, March fiscal year-ends, 2009-13 (%)
2009 2010 2011 2012 2013

South 132,694 190,230 238,465 278,257 302,679
Growth (%) 43.4 25.4 16.7 8.8
Contribution (%) 53.4 49.6 50.7 53.5 55.0
West 30,991 58,157 58,831 54,440 54,649
Growth (%) 87.7 1.2 (7.5) 0.4
Contribution (%) 12.5 15.2 12.5 10.5 9.9
North 29,907 51,294 59,954 57,817 53,693
Growth (%) 71.5 16.9 (3.6) (7.1)
Contribution (%) 12.0 13.4 12.8 11.1 9.8
Central 27,170 39,071 51,776 60,069 62,458
Growth (%) 43.8 32.5 16.0 4.0
Contribution (%) 10.9 10.2 11.0 11.5 11.3
East 24,964 40,514 55,393 63,746 70,815
Growth (%) 62.3 36.7 15.1 11.1
Contribution (%) 10.0 10.6 11.8 12.3 12.9
North East 2,757 4,537 5,480 5,932 6,148
Growth (%) 64.6 20.8 8.3 3.6
Contribution (%) 1.1 1.2 1.2 1.1 1.1
Total 248,483 383,803 469,898 520,262 550,442
Growth (%) 54.5 22.4 10.7 5.8
Exhibit 57: Tamilnadu is the largest market with 25% share of education loans
Share of loans across individual states, March fiscal year-ends, 2009-13 (%)
2009 2010 2011 2012 2013
TamilNadu 17.6 16.4 19.6 22.6 24.2
Kerala 12.9 12.2 12.2 13.1 14.1
Andhra Pradesh 14.5 13.0 11.6 10.2 9.4
Maharashtra 8.5 11.3 8.7 7.4 7.3
Uttar Pradesh 6.0 6.0 6.6 6.7 6.8
Karnataka 8.0 7.6 6.9 7.0 6.8
West Bengal 3.4 3.4 3.3 3.0 2.9
Delhi 3.4 4.9 4.5 3.0 2.5
Gujarat 3.7 3.6 3.6 2.8 2.4
Others 22.1 21.6 23.0 24.1 23.6
Loans against fixed deposits: low yielding but extremely low risk asset
Over the past few years, loans against fixed deposits slowed from a contribution perspective.
Its contribution is 5% of retail loans compared to over 10% a decade ago. We understand
from banks that public banks are a lot more aggressive on this product than private banks.
The spreads on the underlying business is low but banks still prefer doing this business as it
does not consume capital (100% cash collateral). These are quasi-personal loans offered by
banks.

Exhibit 58: Growth has slowed in recent years Exhibit 59: Contribution of education loans is ~1% of loans
Growth in loans against fixed deposits, March fiscal year-ends, 2006- Contribution of loans against fixed deposits to retail loans, March
November 2014 (%) fiscal year-ends, 2006-November 2014 (%)
20 15
15 12
10 9
5 6
0 3
-5 2015E 0
2004
2005
2006
2007
2010
2011
2012
2013
2014
2008
2009
2015E
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Others: business banking loan come under retail

As per RBI’s definition, banks classify MSME loans with exposure up to `250 mn under the
retail segment. This would include business banking loans for various customers like traders,
professionals (doctors), gold loans and select retail agriculture products. Most of these loans
are collateralized loans offering yields higher than secured loan products.

WEAK REVENUE GROWTH IS THE BIGGEST CONCERN IN RETAIL LOANS

One of the biggest concerns that we have is the shift in business towards retail. From a returns perspective,
the portfolio is not as attractive as some other loan segments. Hence, it is quite likely that we will see banks
positioning their unsecured loan products a lot earlier in this cycle.
Housing is not a very high yielding portfolio for a bank

One of the biggest challenges banks face is the negative yield differential that a retail
portfolio generates compared to other loan segments.
The biggest challenge emerges from the housing portfolio where the yields are one of the
lowest across all product of the bank. The following exhibit shows the distribution of the
loan book across different interest rate buckets across years. About 75% of the overall loans
in FY2013 were in the 10-13% interest-rate bucket. However, when we compare the yields
with other retail portfolio the contribution from this segment is ~50% while for the overall
loan portfolio it was 40%. The outstanding loan portfolio had ~50% of the loans yielding
over 13%, which implies that the shift in retail business is not that attractive. Banks have
traditionally countered this argument by indicating that the cost of business and risk weight
justifies a lower yield on the underlying asset. While we agree with the former the latter is a
bit challenging as it implicitly requires a huge growth opportunity that the bank can tap into
to replace the pressure that is likely to emerge due to this shift.
The next secured lending product is vehicle financing where the proportion of loans in the
higher interest rate buckets as compared to housing loans is better. However, this only
represents a part of the full picture. Banks face a big challenge in this product in generating
better returns. While the yields in the underlying product are higher, the duration is far
lower, which implies the origination costs for such loans do not cover higher yields.
Exhibit 60: Home finance loans have a large share of loans between 10 and 11%
Break-up of outstanding housing loans across interest rates, March fiscal year-ends, 2004-13 (%)
<6 6-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-20 >20
2004 3.3 37.8 15.1 — — 4.5 2.4 1.0 1.8 5.7 28.5 —
2005 2.6 75.2 9.9 — — 12.3 — 0.0 — — — —
2006 2.3 83.2 8.0 — — 6.5 — — — — — —
2007 3.9 70.0 19.1 — — 7.0 — — — — — —
2008 0.4 30.2 48.9 — — 12.1 5.5 1.6 0.8 0.2 0.0 0.0
2009 0.5 32.9 39.7 — — 12.3 8.9 3.7 1.3 0.4 0.1 0.1
2010 0.5 62.0 26.3 — — 6.2 3.2 1.0 0.5 0.2 0.1 0.0
2011 0.4 41.4 42.7 — — 5.8 4.6 2.3 1.5 0.4 0.0 0.0
2012 0.7 25.3 39.2 — — 19.9 7.7 3.0 2.5 0.9 0.4 0.0
2013 0.7 6.2 10.6 41.8 21.8 11.6 3.6 1.8 1.1 0.5 0.1 0.0
Notes
(a) Loans prior to FY2013 were given in 1 bucket between 10-13%.
Unsecured loans need to be introduced faster in the product portfolio
This partially should explain any strategy taken by select banks, mainly the large private
banks, who have built a specialized vertical in the unsecured loan portfolio. The yield in
personal loans can be ~14% in most banks for shorter duration while credit cards are mostly
over 25% across banks. This is not an easy business as scaling it profitably takes time and
experience.

Exhibit 61: Unsecured loans provide the vital balance in the portfolio to generate better revenues in the retail portfolio
Proportion of respective loans across various interest rate buckets, March fiscal year-ends, 2004-13 (%)
<10 10-13 >13
Retail Retail Retail
Credit Overall Credit Overall Credit Overall

Housing Vehicle cards retail Overall Housing Vehicle cards retail Overall Housing Vehicle cards retail Overall
2004 41.0 26.4 14.0 15.1 12.7 16.1 43.8 60.4 69.1
2005 77.9 51.5 19.9 9.9 9.5 17.5 12.3 37.6 62.0
2006 85.5 57.9 25.7 8.0 7.4 18.8 6.5 32.8 53.6
2007 73.9 49.8 21.9 19.1 15.4 23.6 7.0 33.4 53.2
2008 30.6 22.0 9.5 48.9 34.1 30.5 20.3 41.8 58.9
2009 33.4 17.5 0.1 27.6 24.2 39.7 31.3 0.4 36.1 30.7 26.8 48.8 99.4 34.7 44.4
2010 62.4 28.7 0.7 48.9 36.5 26.3 39.7 1.7 29.1 32.3 11.2 30.5 97.4 21.6 30.8
2011 41.9 28.8 1.7 34.8 27.9 42.7 36.3 1.4 36.0 28.3 14.7 34.2 96.6 28.2 43.1
2012 26.0 12.0 0.2 19.9 10.4 39.2 38.2 2.3 34.3 30.3 34.4 49.2 96.6 44.7 57.9
2013 6.9 4.6 13.9 6.8 8.0 74.2 63.2 0.9 54.5 40.1 18.7 31.8 84.6 37.9 51.2
Notes
(a) Yield on credit cards were >20% for ~90% of the loans.

ADD
Axis Bank (AXSB)
Banks/Financial Institutions JANUARY 07, 2015
THEME
Coverage view: Attractive
A steady improvement. Since FY2010, Axis Bank has been steadily shifting its focus to Price (`): 499
the retail business; we expect the share of loans from retail to improve further. A strong Target price (`): 525
acquisition policy primarily through its subsidiary, loan mix and solid liability franchise
BSE-30: 26,909
should keep return ratios better than that of most other banks and similar to that of
other large private banks. Besides an improvement in the macro environment, we see
this transition as positive for the bank. We maintain our positive view (TP unchanged).
Company data and valuation summary
Axis Bank
Stock data Forecasts/Valuations 2015 2016E 2017E
52-week range (Rs) (high,low) 520-217 EPS (Rs) 29.5 35.2 40.3
Market Cap. (Rs bn) 1,178.4 EPS growth (%) 11.3 19.6 14.5
Shareholding pattern (%) P/E (X) 16.9 14.2 12.4
Promoters 28.9 NII (Rs bn) 139.6 162.0 180.9
FIIs 47.5 Net profits (Rs bn) 69.2 82.7 94.8
MFs 4.6 BVPS 183.0 210.8 241.9
Price performance (%) 1M 3M 12M P/B (X) 2.7 2.4 2.1
Absolute 0.0 33.5 102.0 ROE (%) 16.9 17.6 17.5
Rel. to BSE-30 5.8 30.3 55.3 Div. Yield (%) 1.0 1.2 1.4
Retail growth to remain strong; to lead overall growth in the medium term
We expect Axis Bank to grow its loan book by 17-18% CAGR for FY2014-16E primarily on the
back of strong growth in the retail portfolio. Retail loans that grew by 35% CAGR during
FY2010-14 are likely to still grow at a strong pace at 25-30% CAGR. Due to the strong liability
base acquired over the past few years as well as a steady rollout of retail products across
branches, we expect solid growth for the retail business. We expect housing loans, which were
the primary source of growth in the past few years, to grow at 25% CAGR. New growth drivers
in the portfolio would be the unsecured loans where we expect the contribution to rise as it
would help balance the lower returns from the mortgage portfolio. Over the past few years, the
bank has been able to build a strong analytics team that has enhanced the acquisition process
while monitoring has significantly strengthened, which should give comfort that the bank is
likely to be impacted by cyclical factors rather than bank-specific events.
Strong origination policy and solid liability franchise should keep return ratios steady
In our previous report released on December 2, 2014, ‘A steady performer’, we had highlighted
the strong origination policy of Axis Bank through Axis Securities, which originates ~60% of the
loans disbursed by the parent. Importantly, a large share of the unsecured portfolio is originated
in-house giving comfort to this business at this stage of the cycle. While the shift to retail is
likely to hurt margins, we broadly feel that the bank should be able to report fairly healthy
return ratios at ~17% as it has a strong liability franchise, which is at par with other leading M.B. Mahesh, CFA
banks. mb.mahesh@kotak.com
Mumbai: +91-22-4336-0886
Relatively well-placed among peers; maintain ADD Nischint Chawathe

nischint.chawathe@kotak.com
We maintain our positive view as we believe the shift to retail business now appears to be Mumbai: +91-22-4336-0887
complete and the loan portfolios of the frontline private banks are mostly similar. This should
Geetika Gupta
significantly ease concern over the long term. Despite the recent outperformance, we find geetika.gupta@kotak.com
valuations comfortable and value the bank at 2.3X book and 14X EPS (September 2016) for Mumbai: +91-22-4336-0888
RoEs in the range of 17% and ~15% earnings growth. We maintain ADD rating (target price
unchanged at `525). It still remains an interesting idea among frontline banks, in our view.
Kotak Institutional Equities Research

kotak.research@kotak.com
Mumbai: +91-22-4336-0000
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Exhibit 62: Share of lending to retail has been rising in recent years
Break-up of loans, March fiscal year-ends, 2009-17E (%)
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Retail loans 19.7 20.0 19.5 22.1 27.4 30.7 38.2 40.5 42.3
Housing 12.8 14.1 13.3 16.6 19.7 22.1 24.9 26.5 27.2
Auto 2.2 2.6 2.1 2.9 3.8 3.7 4.2 4.2 4.3
Personal 2.4 1.9 2.7 1.3 1.9 2.5 2.9 3.5 4.2
Others 2.4 1.3 1.4 1.3 1.9 2.5 6.1 6.3 6.6
Non retail loans 80.3 80.0 80.5 77.9 72.6 69.3 61.8 59.5 57.7
Notes:
(a) There has been a change in the definition of retail and SME loans in FY2015. Exposure in agriculture has
been divided into SME and retail. Under retail, this has been included under others.
Exhibit 63: Axis Bank: estimate changes

March fiscal year-ends, 2015-17E (` mn)
New estimates Old estimates % change

2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E
Net interest income 139,569 161,973 180,881 139,507 161,370 178,935 0.0 0.4 1.1
NIM (%) 3.5 3.4 3.3 3.5 3.4 3.3
Customer assets 2,954 3,437 3,968 2,954 3,437 3,968 — — —
Loan loss provisions 25,090 26,630 27,726 25,090 26,630 27,726 — — —
Other income 79,555 90,165 101,828 79,555 90,165 101,828 — — —
Fee income 54,477 61,014 68,336 54,477 61,014 68,336 — — —
Treasury income 9,000 11,000 13,000 9,000 11,000 13,000 — — —
Operating expenses 91,440 102,845 114,509 91,440 102,845 114,509 — — —
Employee expenses 29,856 32,175 34,196 29,856 32,175 34,196 — — —
PBT 102,493 122,564 140,374 102,432 121,961 138,428 0.1 0.5 1.4
Tax 33,304 39,826 45,613 33,284 39,630 44,981 0.1 0.5 1.4
Net profit 69,189 82,738 94,761 69,147 82,331 93,447 0.1 0.5 1.4
Source: Company, Kotak Institutional Equities estimates
Exhibit 64: Axis Bank trading at 2.0X one-year forward book Exhibit 65: Axis Bank still trading at a discount to its average
One-year forward trading PER and PBR, March fiscal year-ends, 2007- Axis Bank trading premium to peers, 2007-15 (X)
15 (X)
Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 1.5

25 5
1.3
20 4
1.1
15 3
0.9
10 2
5 1 0.7
0 0 0.5
Jan-07
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-08
Jan-09
Jan-15
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-07
Source: Company, Bloomberg, Kotak Institutional Equities estimates Source: Company, Bloomberg, Kotak Institutional Equities estimates

Exhibit 66: Axis Bank – key financial ratios and growth rates
March fiscal year-ends, 2012-17E (%)
2012 2013 2014 2015E 2016E 2017E

Growth rates (%)
Net loan 19.2 16.0 16.8 18.1 17.8 16.6
Total Asset 17.7 19.2 12.5 16.5 16.4 15.5
Deposits 16.3 14.8 11.2 17.0 16.7 15.5
Current 7.7 21.6 0.8 28.3 16.7 15.5
Savings 26.5 23.4 21.9 23.2 17.3 16.0
Fixed 15.4 9.2 9.9 10.3 16.3 15.2
Net interest income 22.2 20.6 23.6 16.8 16.1 11.7
Loan loss provisions (3.2) 66.8 19.1 14.8 6.1 4.1
Total other income 17.0 20.9 13.0 7.4 13.3 12.9
Net fee income 29.3 15.7 7.3 1.0 12.0 12.0
Net capital gains (80.1) 705.0 (44.1) 174.7 22.2 18.2
Net exchange gains 19.6 (1.5) 128.5 (5.0) 13.0 13.0
Operating expenses 25.7 15.1 14.3 15.7 12.5 11.3
Employee expenses 28.9 14.3 9.4 14.8 7.8 6.3
Key ratios (%)
Yield on average earning assets 8.6 9.0 8.7 8.7 8.4 8.1
Yield on average loans 9.9 10.5 10.3 10.1 9.8 9.5
Yield on average investments 7.8 7.5 7.4 7.5 7.2 6.9
Average cost of funds 5.9 6.3 5.9 5.8 5.5 5.4
Interest on deposits 6.0 6.4 5.8 5.6 5.4 5.3
Difference 2.7 2.7 2.8 2.9 2.9 2.8
Net interest income/earning assets 3.1 3.2 3.4 3.5 3.4 3.3
New provisions/average net loans 0.7 1.0 1.0 1.0 0.9 0.8
Interest income/total income 59.7 59.6 61.7 63.7 64.2 64.0
Fee income/total income 32.3 31.0 27.9 24.9 24.2 24.2
Operating expenses/total income 44.7 42.6 40.8 41.7 40.8 40.5
Tax rate 32.5 31.4 33.5 32.5 32.5 32.5
Dividend payout ratio 15.6 16.3 15.1 17.1 17.1 17.1
Share of deposits
Current 18.1 19.1 17.3 19.0 19.0 19.0
Fixed 58.5 55.6 55.0 51.8 51.7 51.5
Savings 23.5 25.2 27.7 29.2 29.3 29.5
Loans-to-deposit ratio 77.1 78.0 81.9 82.7 83.5 84.3
Equity/assets (EoY) 8.0 9.7 10.0 9.8 9.7 9.7
Dupont analysis (%)
Loan loss provisions 0.4 0.6 0.6 0.6 0.6 0.5
Net other income 2.1 2.1 2.0 1.9 1.9 1.8
Invt. depreciation — (—) (—) — — —
(1- tax rate) 67.5 68.6 66.5 67.5 67.5 67.5
ROA 1.6 1.7 1.7 1.7 1.7 1.7
Average assets/average equity 12.6 11.2 10.1 10.1 10.3 10.3
ROE 20.3 18.5 17.4 16.9 17.6 17.5

Exhibit 67: Axis Bank – income statement and balance sheet

2012 2013 2014 2015E 2016E 2017E

Income statement (Rs mn)
Total interest income 219,946 271,826 306,412 349,190 394,264 443,347
Loans 153,794 191,662 219,504 254,123 290,414 329,825
Investments 63,943 77,470 83,431 90,966 99,761 109,192
Total interest expense 139,769 175,163 186,895 209,621 232,291 262,466
Deposits from customers 121,836 150,155 154,589 171,980 193,665 218,046
Net interest income 80,177 96,663 119,516 139,569 161,973 180,881
Loan loss provisions 10,996 18,340 21,850 25,090 26,630 27,726
Net interest income (after prov.) 69,182 78,323 97,666 114,478 135,344 153,155
Other income 54,202 65,511 74,052 79,555 90,165 101,828
Net fee income 43,417 50,251 53,938 54,477 61,014 68,336
Net capital gains 728 5,863 3,276 9,000 11,000 13,000
Net exchange gains 6,740 6,641 15,177 14,418 16,292 18,410
Operating expenses 60,071 69,142 79,008 91,440 102,845 114,509
Employee expenses 20,802 23,770 26,013 29,856 32,175 34,196
Depreciation on investments 581 (1,039) (1,003) — — —
Other provisions (150) 200 223 100 100 100
Pretax income 62,882 75,531 93,490 102,493 122,564 140,374
Tax provisions 20,460 23,736 31,314 33,304 39,826 45,613
Net Profit 42,422 51,794 62,177 69,189 82,738 94,761
% growth 25.2 22.1 20.0 11.3 19.6 14.5
PBT+provisions-treasury 73,580 87,168 111,285 118,683 138,294 155,201
% growth 30.3 12.1 29.5 3.6 19.3 14.2
Balance sheet (Rs mn)
Cash and bank balance 139,339 204,350 282,387 335,088 389,861 452,233
Cash 35,957 40,539 41,646 49,976 59,971 71,965
Balance with RBI 71,072 107,382 128,767 150,744 168,648 186,777
Balance with banks 3,516 3,354 2,218 2,662 3,194 3,833
Net value of investments 931,921 1,137,375 1,135,484 1,293,630 1,481,398 1,688,175
Govt. and other securities 584,162 722,499 690,967 851,339 1,038,145 1,243,720
Shares 7,400 7,549 6,118 6,118 6,118 6,118
Debentures and bonds 231,508 260,744 236,366 236,366 236,366 236,366
Net loans and advances 1,697,595 1,969,660 2,300,668 2,717,412 3,200,271 3,731,290
Fixed assets 22,593 23,556 24,102 26,617 28,412 30,263
Net owned assets 22,593 23,556 24,102 26,617 28,412 30,263
Other assets 64,829 70,666 89,808 93,545 97,437 101,492
Total assets 2,856,278 3,405,607 3,832,449 4,466,292 5,197,379 6,003,452
Deposits 2,201,043 2,526,136 2,809,446 3,286,747 3,834,255 4,428,296
Borrowings and bills payable 371,570 474,799 538,691 619,495 712,419 819,282
Other liabilities 55,580 73,593 102,107 122,528 147,034 176,441
Total liabilities 2,628,193 3,074,528 3,450,244 4,028,771 4,693,708 5,424,019
Paid-up capital 4,132 4,680 4,698 4,698 4,698 4,698
Reserves & surplus 223,953 326,399 377,506 432,823 498,973 574,735
Total shareholders' equity 228,085 331,079 382,205 437,522 503,671 579,433

ADD
HDFC Bank (HDFCB)
THEME
Best-in-class. HDFC Bank has one of the best retail portfolios among banks. A strong Price (`): 945
market share across most retail asset products, including a solid business in unsecured Target price (`): 1,000
portfolio combined with best-in-class liability profile, makes it the strongest retail bank
BSE-30: 26,909
in the industry. The bank is likely to maintain its strong position in the retail business
although near-term growth could be slower given the nature of its business. We maintain
our ADD rating on the bank (TP unchanged).
HDFC Bank
MFs 5.5 BVPS 211.4 250.9 296.3
Absolute 0.2 9.6 42.2 ROE (%) 21.8 22.0 21.7
Growth could be slower than peers over the next few quarters but to improve over time
Unlike ICICI Bank and Axis Bank, which are building their retail business, HDFC Bank has always
had strong foothold in this portfolio. However, we expect the near-term growth in retail to be
slower as the bank’s portfolio of retail loans, especially in vehicle loans, is likely to be impacted
as there is a greater share of repayments, which requires a significantly higher growth in
disbursements. This appears to be a bit challenging considering the level of competition and the
underlying volume growth across products. However, these issues are likely to be addressed as
volume growth shows steady improvement.
Retail is its key strength; expect the share of unsecured to rise gradually
HDFC Bank is likely to have the most profitable retail portfolio across banks. Share of housing
loans as compared to its peers is negligible and these are primarily to meet priority-sector
lending requirements. We believe that the bank has one of the best unsecured businesses with
a highly profitable credit card business whose contribution to the overall profitability is high
despite a lower contribution to overall loans. Also, the bank’s liability franchise is the best
among peers, which gives strong comfort in delivering higher returns.
Maintain ADD
We maintain our ADD rating on the bank valuing it at `1,000 (unchanged), factoring the
possible equity infusion, which would increase the bank’s tier-1 ratio to 14.5% and make it M.B. Mahesh, CFA
mb.mahesh@kotak.com
extremely well-positioned for strong growth. While we don’t see any immediate requirement Mumbai: +91-22-4336-0886
for the bank to raise capital (tier-1 ratio is 11.8%), we believe that the management is
Nischint Chawathe
positioning itself for a strong revival in the economy and market share gains as public banks are nischint.chawathe@kotak.com
weakly positioned. We see RoEs declining by 200 bps in the medium term although we note Mumbai: +91-22-4336-0887
that our growth assumptions are lower as compared to the expectation of the management.
Geetika Gupta
Rising competition and slower demand recovery have been our primary factors behind a far geetika.gupta@kotak.com
more conservative estimate on growth as compared to the management. Mumbai: +91-22-4336-0888

Mumbai: +91-22-4336-0000
Exhibit 68: Proportion of retail loans declined to <50%

Break-up of loan book, March fiscal year-ends, 2009-2QFY15 (%)
2009 2010 2011 2012 2013 2014 1QFY15 2QFY15
Retail 58.9 55.5 57.1 54.4 43.7 48.9 51.3 54.8
Auto loans 31.0 26.9 23.9 23.2 18.6 20.1 20.8 21.5
Commercial vehicles 13.6 8.4 8.5 6.9 4.4 6.0 6.4 6.7
Car loans 13.1 15.7 13.2 14.9 13.1 13.0 13.2 13.5
Two wheelers 4.3 2.7 2.2 1.5 1.1 1.1 1.2 1.3
Unsecured 13.6 12.9 12.5 10.6 8.5 9.4 10.0 10.7
Business loans 8.9 10.8 13.8 10.6 7.2 8.9 8.9 9.5
Others 5.5 4.8 7.0 10.0 9.3 10.6 11.6 13.1
Corporate loans/others 41.1 44.5 42.9 45.6 56.3 51.1 48.7 45.2
Exhibit 69: HDFC Bank trading at 3.8X one-year forward book Exhibit 70: Valuation premium to peers has declined
One-year forward PER and PBR, 2008-15 (X) HDFC Bank PBR to ICICI Bank and Axis Bank PBR, 2008-15 (X)
Rolling PER (X) (LHS) Rolling PBR (X) (RHS) ICICI Bank Axis Bank
40 5.5 3.5
34 4.7 3.0
28 3.9 2.5
22 3.1 2.0
16 2.3 1.5
10 1.5 1.0
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-08
Jan-09
Jan-10
Jan-12
Jan-13
Jan-14
Jan-11
Jan-15
Exhibit 71: Earnings growth is higher than revenue growth since Exhibit 72: Excluding one-off, earnings growth is ahead of loan
FY2010 growth
Earnings and revenue growth, March fiscal year-ends, 2QFY12- Earnings and loan growth, March fiscal year-ends, 2QY12-2QFY15
2QFY15 (%) (%)
Revenue growth (LHS) Earnings growth (RHS) Loan growth (LHS) Earnings growth (RHS)
42 64
56
35
48
28
40
21 32
24
14
16
7
8
0 0
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
3QFY14
4QFY14
1QFY15
2QFY15
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY14
2QFY14
2QFY12
1QFY15
2QFY15
Notes:
(a) Revenues not strictly comparable as the bank has changed its Source: Company, Kotak Institutional Equities
accounting for certain expenses and income.

Exhibit 73: HDFC Bank growth rates and key ratios

2012 2013 2014 2015E 2016E 2017E
Growth rates (%)
Net loan 22.2 22.7 26.4 18.0 18.1 17.2
Customer assets growth 22.4 23.0 26.7 17.8 17.9 17.1
Retail loans to Customer assets 54.5 56.4 47.4 47.3 46.1 44.6
Net fixed assets 8.1 15.2 8.8 2.0 0.3 (1.3)
Cash and bank balance (29.4) 30.3 45.1 29.3 33.0 34.3
Total Asset 21.8 18.5 22.8 19.5 16.8 15.4
Deposits 18.3 20.1 24.0 23.5 18.1 16.1
Current (2.3) 15.2 17.5 32.8 24.6 16.1
Savings 29.0 22.3 30.2 21.8 18.1 18.3
Fixed 16.6 19.2 16.9 21.3 13.8 11.8
Loan loss provisions 35.8 (9.7) 7.1 5.2 18.0 17.6
Net fee income 19.9 19.8 11.0 11.2 14.9 15.0
Net capital gains 272.2 (182.3) (31.5) 443.2 66.7 —
Net exchange gains 37.4 (20.2) 38.7 (20.0) 18.0 18.0
Key ratios (%)
Difference 3.8 3.8 3.7 3.8 3.6 3.5
Fee income to total income 23.1 22.8 21.7 20.4 20.5 20.8
Fees income to PBT 57.4 53.0 44.9 41.2 40.1 40.0
Net trading income to PBT (3.9) 1.1 0.9 3.9 5.5 4.8
Exchange inc./PBT 16.8 10.4 11.0 7.2 7.2 7.4
Operating expenses/assets 3.0 3.0 2.7 2.5 2.4 2.3
Operating profit /AWF 2.7 2.8 3.0 2.9 2.9 2.9
Tax rate 31.2 31.0 33.6 33.1 32.1 31.1
Share of deposits
Current 18.4 17.7 16.7 18.0 19.0 19.0
Fixed 51.6 52.6 55.2 54.4 54.4 55.4
Savings 30.0 29.8 28.1 27.6 26.6 25.6
Asset quality trends (%)
Gross NPL 1.0 1.0 1.0 1.2 1.3 1.4
Net NPL 0.2 0.2 0.3 0.3 0.3 0.4
Slippages 1.0 1.0 1.9 1.7 1.7 1.7
Provision coverage (ex writeoff) 82.4 79.9 72.6 72.4 76.3 74.3
Dupont analysis (%)
Net other income 1.9 1.9 1.8 1.7 1.7 1.7
(1- tax rate) 68.8 69.0 66.4 66.9 67.9 68.9
ROA 1.7 1.8 1.9 1.9 1.9 2.0
ROE 18.7 20.3 21.3 21.8 22.0 21.7

Exhibit 74: HDFC Bank P&L and balance sheet

2012 2013 2014 2015E 2016E 2017E

Income statement
Loans 211,244 268,224 316,869 369,767 408,965 446,430
Investments 65,046 78,203 90,368 104,279 114,965 131,371
Cash and deposits 2,452 4,222 4,118 5,900 8,946 10,371
Other income 57,836 68,526 79,196 89,376 107,832 125,146
Net fee income 43,121 51,669 57,349 63,755 73,252 84,215
Net capital gains (1,959) 1,613 1,105 6,000 10,000 10,000
Other Provisions (1,624) (1,332) (2,915) — — —
Pretax income 75,132 97,512 127,728 154,703 182,553 210,340
Tax provisions 23,461 30,249 42,944 51,240 58,639 65,461
Net Profit 51,671 67,263 84,784 103,463 123,914 144,878
% growth 31.6 30.2 26.0 22.0 19.8 16.9
Operating profit 94,931 112,141 142,537 168,520 195,945 227,850
% growth 22.1 18.1 27.1 18.2 16.3 16.3
Balance sheet
Assets
Cash 43,070 50,077 38,505 57,758 86,636 129,954
Balance with RBI 106,841 96,197 214,951 263,569 308,585 355,899
Net value of investments 974,829 1,116,136 1,209,511 1,447,016 1,614,334 1,707,392
Govt. and other securities 762,178 849,023 946,400 1,193,121 1,360,439 1,453,498
Shares 836 1,245 1,348 1,348 1,348 1,348
Fixed assets 23,472 27,031 29,399 29,981 30,059 29,660
Net Owned assets 23,472 27,031 29,399 29,981 30,059 29,660
Other assets 217,216 190,144 251,246 311,760 317,274 323,339
Total assets 3,379,095 4,003,319 4,915,995 5,876,159 6,864,395 7,923,318
Liabilities
Deposits 2,467,064 2,962,470 3,673,375 4,537,325 5,357,308 6,221,306
Paid-up capital 4,693 4,759 4,798 4,798 4,798 4,798
Reserves & surplus 294,553 357,383 429,988 509,921 605,653 717,582

BUY
ICICI Bank (ICICIBC)
THEME
Retail taking precedence in growth metrics. We expect the share of retail loans to Price (`): 338
rise to 50% over the next few years. The mix is likely to change with the share of Target price (`): 400
unsecured loans to rise from current levels although housing loans would dominate the
BSE-30: 26,909
portfolio. While concerns on profitability remain similar to that for the industry, we think
the bank is better-positioned given its strong liability franchise. ICICI Bank remains our
preferred idea in the banking space. Maintain BUY with TP at `400 (unchanged).
ICICI Bank
MFs 7.8 BVPS 134.8 149.4 165.9
Absolute (6.0) 18.3 61.1 ROE (%) 14.3 15.2 16.1
Rel. to BSE-30 (0.6) 15.5 23.9 Div. Yield (%) 1.7 2.0 2.3
Contribution from retail to increase; expect strong growth in unsecured business as well
We see ICICI Bank as one of the preferred plays due to the change in business towards retail.
The bank has been steadily building business with lower focus on share but greater emphasis
on risk-adjusted returns, which is led by a foundation that is built on retail on assets, liabilities as
well as fee income. We expect the share of loans in retail to increase to ~50% in the next few
years. While we see the share of secured products to overall loans to increase, we think that
there would be greater shift in the unsecured portfolio like credit cards and personal loans over
the next few years. Importantly, we expect the distribution model to have changed in this period
with greater focus to source loans through cross-sell to internal customers as the bank has
significantly increased its customer base. This should result in lower non-cyclical impairment risk.
Structural changes to the liability profile of business gives relative comfort on profitability
One of the other key sources of comfort is the liability side for the bank today as compared to
the previous cycle. Led by strong expansion in branches and greater focus in improving the
nature of liabilities, ICICI Bank has one of the best sources of low-cost liability base. The bank is
starting this cycle with CASA ratio at closer to 40% as compared to 20-22% in FY2005-07.
Most importantly, ICICI Bank has the highest share of savings account balances as compared to
other private banks. CASA ratio is important as it helps banks achieve greater flexibility in
pricing, growth and profitability of retail assets in the portfolio.
M.B. Mahesh, CFA
Retain BUY; our preferred idea in the banking space mb.mahesh@kotak.com
Mumbai: +91-22-4336-0886
We maintain our BUY rating on ICICI Bank and value the bank at `400 (unchanged) broadly
Nischint Chawathe
factoring earnings revision and roll forward of our TP to September 2016. We value (1) the nischint.chawathe@kotak.com
bank at 2.3X book (adjusted for NPLs/subsidiaries) and 15X EPS for RoEs in the range of 15-16% Mumbai: +91-22-4336-0887
and 15% CAGR in earnings in the short term, (2) international subsidiaries at 0.7X book (low
Geetika Gupta
growth opportunity and subdued RoE performance) and (3) life insurance (stake of ICICI Bank) geetika.gupta@kotak.com
at `38/share. Valuations are expensive but long-term RoEs can still expand, which could help Mumbai: +91-22-4336-0888
explain higher multiple to the book. Our medium-term concern is that the risk of disappointment
on impairment ratios is likely to remain high and we factor credit costs at ~90-100 bps, which
would lead to subdued earnings for FY2015-17E.

Mumbai: +91-22-4336-0000
Exhibit 75: Break-up of the loan portfolio for ICICI Bank

Break-up of the loan portfolio, March fiscal year-ends, 2008-17E (%)
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Loan book break-up
Retail 58.4 50.5 45.9 41.2 40.5 38.7 41.9 44.6 47.7 49.9
Housing 29.2 26.4 26.2 25.0 19.3 19.9 20.9 22.6 24.0 25.0
Auto 7.9 6.1 4.7 4.0 3.7 4.0 4.6 5.1 5.3 5.4
Commercial vehicles 8.4 6.8 7.0 6.8 7.0 5.2 3.7 3.2 3.2 3.2
Personal loans 5.9 5.0 3.2 1.9 1.2 1.1 1.4 1.7 2.1 2.3
Credit card 3.7 4.1 3.3 2.2 1.8 1.3 1.1 1.2 1.4 1.6
Others 3.3 2.1 1.6 1.2 7.5 7.2 10.2 10.8 11.6 12.5
International 21.2 24.9 25.0 25.5 27.4 25.3 26.5 23.5 21.2 19.0
Domestic corporate/others 20.5 24.6 29.1 33.3 32.1 36.0 31.6 31.9 31.1 31.1
Growth across various product segments
Retail 20.6 (16.3) (24.6) 7.2 15.5 9.3 26.2 23.9 23.8 22.1
Housing 3.0 (12.5) (17.6) 14.0 (9.6) 18.2 22.6 25.6 23.0 21.1
Auto (7.2) (25.2) (36.0) 0.8 10.4 22.3 33.9 28.6 20.3 19.8
Commercial vehicles 2.6 (21.7) (15.0) 17.3 20.4 (15.2) (17.2) 1.0 25.0 20.0
Personal loans 5.9 (17.7) (47.4) (29.5) (26.8) 7.6 47.7 45.5 42.6 25.6
Credit card 38.2 7.2 (34.1) (18.2) (5.3) (20.8) (0.6) 35.0 35.0 30.0
Others (168.6) (38.5) (38.0) (6.4) 616.0 10.2 64.4 22.5 25.1 25.8
International 95.6 13.7 (16.6) 21.8 25.8 5.7 22.3 3.0 5.0 4.0
Domestic corporate/others (25.8) 16.4 (1.9) 36.6 12.9 28.3 2.6 17.1 13.1 16.5
Notes:
(a) There has been changes in the classification of loans in FY2012-13. Hence they are strictly not comparable.
Exhibit 76: Strong improvement in CASA ratio is another big benefit for ICICI Bank
CASA ratio, March fiscal year-ends, 2005-17E (%)
Current Savings
50
40
30 29.6 29.6
26.3 29.8 29.9 30.5 29.9
29.3
20 18.8
11.4 16.0
12.7 12.5
10
12.9 15.3 15.4 13.7 13.0 13.2 13.8 14.8
10.0 10.1 12.6
9.3 9.9
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Exhibit 77: ICICI Bank SOTP (FY2016) valuation
ICICI share (%) FY2016 (Rs) Valuation methodology

Value of ICICI standalone 100 308 Based on Residual Growth model
Subsidiaries
ICICI Financial Services 94 52
ICICI Prudential Life 74* 36 18X NBAP, margin assumed is 10%
General insurance 74* 10 2X FY2016 PBR
Mutual funds 51* 6 4% of AUMs
Other subsidiaries/associates
ICICI Securities 100 3 10X FY2016 PER
ICICI Securities Primary Dealer 100 2 1X FY2016 PBR
ICICI Homes 100 4 1.5X FY2016 PBR
ICICI Bank UK 100 4 0.7XFY2016 PBR
ICICI Bank Canada 100 6 0.7XFY2016 PBR
Venture capital/MF 100 2 10% of AUM of US$2 bn
Value of subsidiaries 74 `
Value of company 382
Source: Company, Bloomberg, Kotak Institutional Equities
Exhibit 78: ICICI Bank SOTP (FY2017) valuation
ICICI share (%) FY2017 (Rs) Valuation methodology

Value of ICICI standalone 100 343 Based on Residual Growth model
Subsidiaries
ICICI Financial Services 94 59
ICICI Prudential Life 74* 40 18X NBAP, margin assumed is 10%
General insurance 74* 12 2X FY2016 PBR
Mutual funds 51* 6 4% of AUMs
Other subsidiaries/associates
ICICI Securities 100 4 10X FY2016 PER
ICICI Securities Primary Dealer 100 2 1X FY2016 PBR
ICICI Homes 100 4 1.5X FY2016 PBR
ICICI Bank UK 100 5 0.7XFY2016 PBR
ICICI Bank Canada 100 7 0.7XFY2016 PBR
Venture capital/MF 100 2 10% of AUM of US$2 bn
Value of subsidiaries 83 `
Value of company 426
Source: Company, Bloomberg, Kotak Institutional Equities
Exhibit 79: Growth likely to moderate in FY2015 Exhibit 80: RoEs likely to improve by FY2017E
Revenue and earnings growth, March fiscal year-ends, 2008-17E (%) RoE (core), March fiscal year-ends, 2008-17E (%)
Revenue (RHS) Earnings (LHS) 18

28 40
22 16
21 21 30
20
16 14
14 14 14 13 20
34
28 29
26 12 16
7 10 15 16
18 15 16 15 15
14
7 13
- 0 - 10 12
(1)
10
(10) (2) 9 10
(7) (10) 8
2015E
2016E
2017E
2008
2010
2011
2012
2013
2014
2009
2015E
2016E
2017E
2008
2009
2011
2012
2013
2010
2014
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Exhibit 81: ICICI Bank – forecasts and valuation

March fiscal year-ends, 2012-17E
P/E ABVPS P/B
PAT EPS P/E BVPS P/B RoE Core RoE (standalone) (standalone) (standalone)
(Rs bn) (Rs) (X) (Rs) (X) (%) (%) (X) (Rs) (X)
2012 65 11 32 105 3 11 13 29.1 80 3.6
2013 83 14 25 116 3 13 15 22.5 91 3.2
2014 98 17 21 127 3 14 15 19.6 101 2.9
2015E 110 19 19 139 3 14 15 17.7 113 2.6
2016E 129 22 16 154 2 15 16 15.0 128 2.3
2017E 150 26 14 170 2 16 16 12.7 144 2.0
Exhibit 82: ICICI Bank – rolling PER and PBR Exhibit 83: ICICI Bank trades in line with its peers
March fiscal year-ends, 2008-14 (X) ICICI Bank trading premium to private banks, 2008-14 (X)
Rolling PER (X) (LHS) Rolling PBR (X) (RHS)

1.0
35 3.5
0.9
28 2.8
21 2.1
0.8
14 1.4 0.8
7 0.7 0.7
0 0.0 0.6
Jan-08
Jan-10
Jan-11
Jan-13
Jan-14
Jan-09
Jan-12
Jan-15
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Source: Company, Bloomberg, Kotak Institutional Equities Source: Company, Bloomberg, Kotak Institutional Equities
Exhibit 84: ICICI Bank – change in estimates

2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E
Net interest income 190,602 218,596 245,159 190,193 215,490 239,243 0.2 1.4 2.5
Spread 2.8 2.8 2.8 2.8 2.8 2.8
NIM (%) 3.3 3.3 3.2 3.3 3.3 3.2
Customer assets (Rs bn) 4,484 5,114 5,868 4,464 5,041 5,751 0.5 1.4 2.0
Loan loss provisions 34,786 38,258 39,542 34,688 37,837 38,783 0.3 1.1 2.0
Other income 114,847 130,178 149,496 114,847 130,178 149,496 0.0 0.0 0.0
Fee income 66,172 75,707 86,633 66,172 75,707 86,633 0.0 0.0 0.0
Treasury income 11,000 12,000 14,000 11,000 12,000 14,000 0.0 0.0 0.0
Operating expenses 114,813 127,855 141,863 114,813 127,871 141,902 0.0 (0.0) (0.0)
Employee expenses 48,700 53,755 60,392 48,700 53,755 60,392 0.0 0.0 0.0
PBT 155,850 182,662 213,250 155,539 179,960 208,053 0.2 1.5 2.5
Tax 45,976 53,885 62,909 45,884 53,088 61,376 0.2 1.5 2.5
Net profit 109,874 128,777 150,341 109,655 126,872 146,677 0.2 1.5 2.5
PBT-treasury+provisions 179,636 208,920 238,792 179,227 205,797 232,836 0.2 1.5 2.6

Exhibit 85: ICICI Bank, growth rates, key ratios and Du Pont analysis
2012 2013 2014 2015E 2016E 2017E

Growth rates (%)
Net loan growth 17.3 14.4 16.7 16.2 16.0 16.5
Customer assets growth 15.4 13.9 14.7 10.9 14.0 14.8
Corporate loans 18.5 17.9 10.7 10.7 9.7 11.4
Total retail loans 15.5 9.3 26.2 23.9 23.8 22.1
Deposits growth 13.3 14.5 13.4 16.5 17.8 16.2
Borrowings growth 27.2 3.9 6.9 13.2 9.8 15.9
Loan loss provisions (49.8) 54.9 62.5 39.1 10.0 3.4
Non-interest income 12.9 11.2 24.9 10.1 13.3 14.8
Net fee income (1.4) 0.5 15.5 4.9 14.4 14.4
Net capital gains (69.6) (689.9) 75.4 43.7 9.1 16.7
Total income 16.4 21.8 21.1 13.5 14.2 13.2
DMA 2.2 116.0 66.1 (49.2) 25.7 25.8
Asset management measures (%)
Interest on advances 9.4 10.0 10.0 9.9 9.6 9.4
Interest on investments 7.1 7.1 7.1 7.3 7.2 7.0
Other interest 6.6 6.4 6.4 6.2 6.0 5.8
Difference 2.2 2.5 2.6 2.8 2.8 2.8
Share of deposits
Current 13.7 12.6 13.0 13.2 13.8 14.8
Fixed 56.5 58.1 57.1 56.4 56.3 55.6
Savings 29.8 29.3 29.9 30.5 29.9 29.6
Tax rate 26.6 26.9 29.8 29.5 29.5 29.5
Asset quality metrics (%)
Gross NPL 3.5 3.2 3.0 2.9 2.6 2.3
Net NPL 0.7 0.8 1.0 0.9 0.8 0.7
Slippages 1.4 1.4 1.6 2.0 1.7 1.6
Provision coverage (ex write-off) 79.2 75.6 67.3 67.9 69.2 68.0
RoA composition - % of average assets
Net other income 1.7 1.6 1.8 1.8 1.8 1.8
(1- tax rate) 73.4 73.1 70.2 70.5 70.5 70.5
RoA 1.4 1.6 1.7 1.7 1.8 1.8
RoE 11.2 13.1 14.0 14.3 15.2 16.1

Exhibit 86: ICICI Bank income statement and balance sheet

2012 2013 2014 2015E 2016E 2017E

Interest on advances 59 273,411 314,279 361,432 409,518 463,787
Interest on investments 12 110,093 115,571 124,992 133,973 147,194
Total interest expense 4 262,092 277,026 309,425 339,916 381,190
Deposits from customers 5 168,889 178,682 203,570 225,520 256,451
Loan loss provisions 2 15,388 25,010 34,786 38,258 39,542
Other income 75,028 83,457 104,279 114,847 130,178 149,496
Net fee income 54,351 54,617 63,073 66,172 75,707 86,633
Net capital gains 85 4,364 7,654 11,000 12,000 14,000
Miscellaneous income 1,479 1,675 967 1,305 1,632 2,040
Employee expense 35,153 38,933 42,201 48,700 53,755 60,392
DMA 1,604 3,465 5,755 2,923 3,676 4,624
Pre-tax income 88,034 113,967 139,682 155,850 182,662 213,250
Tax provisions 23,382 30,712 41,577 45,976 53,885 62,909
Net profit 64,653 83,255 98,105 109,874 128,777 150,341
% growth 25.5 28.8 17.8 12.0 17.2 16.7
PBT+provision-treasury gains 104,605 127,628 158,292 179,636 208,920 238,792
% growth 12.6 22.0 24.0 13.5 16.3 14.3
Balance sheet (Rs mn)
Cash 46,696 46,775 51,869 60,438 71,212 82,761
Balance with RBI 157,917 143,752 166,349 281,274 324,614 377,296
Outside India 108,373 131,177 159,863 156,666 153,532 150,462
Net value of investments 1,595,600 1,713,936 1,770,218 1,873,522 2,079,466 2,332,699
Investments in India 1,514,212 1,636,199 1,696,161 1,799,465 2,005,409 2,258,642
Govt. and other securities 869,480 923,763 951,821 1,161,851 1,367,796 1,621,029
Shares 22,923 25,051 24,018 24,018 24,018 24,018
Subsidiaries 64,797 65,483 65,483 65,483 65,483 65,483
Corporate loans 1,508,567 1,778,384 1,968,796 2,178,770 2,389,167 2,662,664
Total retail loans 1,028,710 1,124,110 1,418,230 1,757,538 2,176,299 2,657,270
Fixed assets 46,147 46,471 46,781 49,776 47,181 47,328
Net leased assets 2,394 2,348 2,334 1,984 1,686 1,433
Net owned assets 43,753 44,122 44,448 47,793 45,495 45,895
Other assets 349,371 290,871 327,094 392,513 471,015 565,218
Total assets 4,890,688 5,367,947 5,946,416 6,791,432 7,757,517 8,925,232

ADD
IndusInd Bank (IIB)
THEME
A diversified portfolio in the making. IndusInd Bank will continue to have a Price (`): 792
dominating share of loans in the retail portfolio. However, unlike in the past cycle, Target price (`): 830
we expect the portfolio to be a lot more diversified from a product portfolio.
BSE-30: 26,909
The portfolio should deliver higher risk-adjusted returns, especially considering that the
liability profile is steadily improving. We maintain our positive view on the bank but we
are less optimistic of a multiple expansion considering the current valuation multiples.
We maintain ADD rating with TP of `830 (from `800 earlier).
IndusInd Bank
Market Cap. (Rs bn) 418.6 EPS growth (%) 25.9 16.9 17.1
MFs 5.9 BVPS 190.3 222.7 261.4
Absolute 0.6 32.1 89.1 ROE (%) 19.1 18.8 18.8
Retail to dominate but portfolio to be diversified from a product contribution perspective
Similar to the past few years, we think IndusInd Bank will continue to have a higher share of
loans from the retail portfolio. The bank will be a key beneficiary of an improving macro, which
should result in strong growth in disbursements in the vehicle finance portfolio. However,
unlike in the previous cycle where the vehicle loans dominated ~35% of loans, this cycle should
see a lot more diversification with the introduction of new loan streams like home loans, credit
cards and business banking.
Profitable portfolio as the customer segments are different; improving liability profile positive
Over the cycle, we think IndusInd Bank has been able to deliver strong return ratios primarily as
it focuses on customer segments that deliver better yields while the experience in this business
allows the bank to deliver lower impairments. An improving liability profile implies that the bank
can look at other products within the retail segment. We expect overall RoEs to remain healthy
at 18-19% over the next few years on the back of strong revenue growth of 20%. From a
short-term perspective, we see the decline in wholesale cost of funds as a positive for the bank.
The bank is well-capitalized with tier-1 ratio at 12% and healthy RoEs of 18-19%.
Valuations are rich; our positive view reflects the potential earnings growth
At 3.4X book and ~20X FY2016E EPS, IndusInd Bank is probably closer to our fair value. M.B. Mahesh, CFA
mb.mahesh@kotak.com
Valuations, in our view, are at the upper end, giving little headroom for expansion from current Mumbai: +91-22-4336-0886
levels. The stock is pricing in strong recovery in business and assigning a high probability of
Nischint Chawathe
success on most of the recent initiatives taken by the bank. However, our positive rating essentially
nischint.chawathe@kotak.com
is driven by the superior execution, strong return ratios and scalability of the business given the Mumbai: +91-22-4336-0887
size of the bank and opportunity in the market. We have marginally increased our earnings but
Geetika Gupta
increased our TP to `830 (from `800 earlier) to reflect a steadily improving macro environment. geetika.gupta@kotak.com
Mumbai: +91-22-4336-0888

Mumbai: +91-22-4336-0000
Looking to diversify loan sources; see less concentration from the vehicle finance
portfolio as we exit FY2017
We think the broad objective of the current strategy is to reduce the concentration of the
vehicle finance portfolio. Over the past three years, the bank has introduced new loan
streams like home loans, credit cards and increased share of two-wheeler financing in the
retail portfolio while has actively looked at new sectors in the corporate loan portfolio.
Under the new three-year cycle, the bank has indicated greater thrust towards lending in the
SME and rural portfolio while the bank is likely to scale up lending in loan products such as
loans against property, business banking and gold loans that were started only a couple of
years ago.
While the bank continues to see a higher share of lending in the vehicle finance portfolio, it
is quite relevant to note that the bank is looking to actively diversify the loan segments by
introducing new products and/or scaling existing business by becoming one of the leading
players in that portfolio. While the underlying economic slowdown can be attributed
partially for this change with the share of commercial vehicle finance portfolio declining to
16% from 24% in FY2012, we don’t see a sharp rise back to these highs anytime soon. We
note that even within the commercial vehicle portfolio, there is a larger share of used vehicle
finance while the bank has become a leading player in the two-wheeler financing space.
We broadly expect the growth trajectory to be similar to what we have seen in the bank in
recent past as there is greater confidence of recovery in the macro environment.
Exhibit 87: The bank is looking to diversify its loan portfolio within retail
Break-up of loans, March fiscal year-ends, 2008-2QFY15 (%)
2008 2009 2010 2011 2012 2013 2014 1QFY15 2QFY15
Retail advances 57.4 45.5 40.4 44.4 49.2 50.5 45.0 43.2 43.3
Vehicle financing 55.7 44.2 39.6 43.5 46.9 46.4 39.2 37.2 36.7
Commercial vehicles 34.0 26.4 19.5 21.8 23.6 22.5 17.4 16.4 16.2
Utility vehicles 2.6 2.7 3.4 3.2 3.5 4.0 3.7 3.5 3.4
Cars 4.7 3.2 2.3 3.2 4.0 4.6 4.8 4.7 4.8
Two and three wheelers 6.2 5.5 8.9 9.7 9.7 9.1 8.1 7.7 7.6
Equipment 8.3 6.4 5.5 5.7 6.1 6.1 5.2 4.9 4.7
Home loans 1.3 1.1 0.8 0.9 1.6 3.4 4.9 5.2 5.8
Personal loans 0.4 0.2 — — 0.7 0.8 0.8 0.9 0.9
Corporate advances 44.3 55.0 59.6 55.6 50.8 49.5 55.0 56.8 56.7
Large corporate advances 31.8 42.5 28.5 26.1 27.1 26.7 27.4 28.6 28.9
SME/commercial banking — — 22.2 19.3 15.2 14.6 17.6 17.4 17.0
Other loans 12.5 12.5 8.9 10.1 8.5 8.1 10.1 10.8 10.7

Exhibit 88: Working capital forms 50% of the non-retail loans

Break-up of loans by nature, March fiscal year-ends, 2009-14 (%)
2009 2010 2011 2012 2013 2014
Retail loans 72 83 116 172 224 248
Growth yoy (%) (2.3) 15.6 40.0 48.4 30.0 10.6
Non-retail loans 86 122 145 178 219 303
Growth yoy (%) 57.7 42.6 18.8 22.6 23.0 38.3
Working capital loans 65 87 99 93 119 165
Growth yoy (%) 55.8 33.9 13.6 (5.2) 27.7 38.7
Term loans 21 36 47 85 100 138
Growth yoy (%) 63.9 69.1 31.3 80.8 17.7 37.8
Total loans 158 206 262 351 443 551
Growth yoy (%) 23.3 30.3 27.3 34.0 26.4 24.3
Working capital (% of non-retail loans) 75.4 70.8 67.7 52.4 54.4 54.6
Exhibit 89: IndusInd Bank—change in estimates


2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E
Net loan growth (%) 23.5 22.0 18.4 23.5 22.0 18.4
Loans (Rs bn) 681 830 983 681 830 983 — — —
Total income 57,852 69,379 82,123 57,852 69,379 82,123 — — —
Net interest income 35,095 42,784 50,784 35,095 42,784 50,784 — — —
NIM (%) 3.8 3.8 3.8 3.8 3.8 3.8
Other income 22,757 26,595 31,339 22,757 26,595 31,339 — — —
Expenses 27,389 32,811 38,709 27,389 32,811 38,709 — — —
Employee cost 9,861 11,437 13,301 9,861 11,437 13,301 — — —
Other cost 17,528 21,374 25,409 17,528 21,374 25,409 — — —
Loan loss provisions 3,695 5,288 6,799 3,695 5,288 6,799 — — —
PBT 26,668 31,180 36,515 26,668 31,180 36,515 — — —
PAT 17,734 20,735 24,282 17,734 20,735 24,282 — — —
% growth yoy 25.9 16.9 17.1 25.9 16.9 17.1
PBT-treasury+provisions 28,263 34,068 40,414 28,263 34,068 40,414 — — —

Exhibit 90: IndusInd Bank trading at 3.5X one-year forward Exhibit 91: IndusInd Bank’s trading premium to peers has
book increased in recent months
March fiscal year-ends, 2008-15 (X) IndusInd Bank premium to peers, 2008-15 (X)
Rolling PBR (X) (LHS) Rolling PER (X) (RHS)

1.5
4.0 30
25 1.3
3.2
20
2.4 1.1
15
1.6 0.9
10
0.8 0.7
5
- 0 0.5
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-09
Jan-10
Jan-11
Jan-13
Jan-14
Jan-15
Jan-08
Jan-12

Exhibit 92: IndusInd Bank – key growth rates and financial ratios
2012 2013 2014 2015E 2016E 2017E
Growth rates (%)
Net loan 34.0 26.4 24.3 23.5 22.0 18.4
Customer assets 34.4 27.7 25.3 22.7 21.4 18.0
Investments excl. CPs and debentures 18.9 18.5 8.9 31.5 23.6 23.3
Net fixed and leased assets 10.1 15.1 34.4 (20.0) 17.2 9.8
Cash and bank balance 37.6 23.6 (1.2) 26.9 12.2 11.5
Total assets 26.2 27.3 18.7 22.2 19.6 17.5
Deposits 23.3 27.7 11.8 29.5 24.4 20.7
Current 9.5 28.6 10.7 33.5 27.4 23.5
Savings 53.5 49.8 41.0 43.4 36.4 31.3
Fixed 23.0 24.2 6.7 25.2 20.3 16.6
Loan loss provisions (3.2) 43.0 48.4 (2.4) 43.1 28.6
Net fee income 173.6 34.7 23.6 15.0 20.0 20.0
Net exchange gains 54.2 38.0 87.9 10.0 10.0 10.0
Key ratios (%)
Difference 2.9 2.9 3.0 3.1 3.2 3.2
Total provisions/gross loans 0.7 0.7 0.8 1.2 1.6 2.0
Net trading income to PBT 4.9 4.0 (1.7) 8.2 8.0 8.2
Exchange income to PBT 19.9 20.8 29.0 25.4 23.9 22.5
Operating expenses/assets 2.6 2.7 2.7 2.8 2.8 2.8
Tax rate 32.7 32.7 33.8 33.5 33.5 33.5
Share of deposits
Current 16.2 16.3 16.2 16.7 17.1 17.5
Fixed 72.7 70.7 67.5 65.2 63.1 60.9
Savings 11.1 13.0 16.4 18.1 19.9 21.6
Gross NPL 1.0 1.0 1.1 1.2 1.3 1.3
Net NPL 0.3 0.3 0.3 0.3 0.4 0.4
Slippages 1.1 1.5 1.4 1.5 1.5 1.5
Provision coverage 72.7 70.1 70.4 71.9 72.2 74.0
Dupont analysis (%)
Net other income 2.0 2.1 2.4 2.4 2.3 2.3
Invt. depreciation (0.0) 0.0 0.1 — — —
(1- tax rate) 67.3 67.3 66.2 66.5 66.5 66.5
RoA 1.6 1.6 1.8 1.8 1.8 1.8
RoE 20.1 18.3 18.0 19.1 18.8 18.8

Exhibit 93: IndusInd Bank – income statement and balance sheet

2012 2013 2014 2015E 2016E 2017E
Income statement
Loans 42,166 56,103 66,274 78,613 91,177 104,441
Investments 10,782 12,825 14,770 17,710 21,426 24,888
Cash and deposits 644 904 1,492 1,683 1,724 1,622
Other income 10,118 13,630 18,905 22,757 26,595 31,339
Net fee income 7,029 9,470 11,706 13,462 16,154 19,385
Net capital gains 577 644 518 2,200 2,500 3,000
Depreciation on investments (10) 13 876 — — —
Other provisions 31 67 16 100 100 100
Pretax income 11,927 15,764 21,285 26,668 31,180 36,515
Tax provisions 3,900 5,152 7,203 8,934 10,445 12,232
Net profit 8,026 10,612 14,082 17,734 20,735 24,282
Growth (%) 39.0 32.2 32.7 25.9 16.9 17.1
PBT - Treasury + Provisions 13,153 17,750 25,443 28,263 34,068 40,414
Growth (%) 26.3 35.0 43.3 11.1 20.5 18.6
Balance sheet
Cash 3,204 3,968 4,968 7,451 7,824 8,215
Balance with RBI 25,832 28,530 39,172 41,535 51,669 62,374
Net value of investments 145,720 196,542 215,630 262,846 309,478 366,825
Government and other securities 119,019 141,083 153,800 202,406 250,290 308,763
Shares 537 580 527 527 527 527
Net loans and advances 350,640 443,206 551,018 680,682 830,318 982,880
Fixed assets 6,568 7,561 10,164 8,130 9,524 10,454

Net owned assets 6,568 7,561 10,164 8,130 9,524 10,454
Other assets 17,638 17,269 25,753 26,268 26,793 27,329
Total assets 575,961 733,065 870,259 1,063,856 1,272,552 1,495,022
Deposits 423,615 541,167 605,023 783,675 974,883 1,176,859

Total liabilities 528,544 656,763 779,830 958,482 1,149,690 1,351,666
Paid-up capital 4,677 5,229 5,256 5,256 5,256 5,256
Reserves and surplus 42,740 71,074 85,173 100,117 117,605 138,100

ADD
State Bank of India (SBIN)
THEME
Best among public banks. SBI is well-positioned to play the growth in retail loans as Price (`): 300
compared to other public banks while history has shown that the bank can compete Target price (`): 330
quite well with private banks given its reach, customer base, liability profile and pricing.
BSE-30: 26,909
The portfolio has done well with gross NPLs far lower as compared to the overall
portfolio – a trend that is likely to continue. We maintain our ADD rating on the bank
(TP unchanged).
State Bank of India
MFs 4.8 BVPS 134.8 152.4 174.6
Absolute (5.5) 26.8 80.7 ROE (%) 11.3 11.9 13.3
Rel. to BSE-30 (0.0) 23.8 38.9 Div. Yield (%) 1.0 1.1 1.2
The only public bank with the strength and reach to do retail business, in our view
SBI along with its subsidiaries is one of the largest players in the retail segment. Unlike other
banks, SBI has three big strengths that allows to do this business better than most public banks
– (1) the bank has one of the best distribution footprints with a network of >21,000 branches
while the large customer base reduces acquisition costs and enables it to build a well-diversified
portfolio across customer segments and geography, (2) retail as a business comes more by
design while most other public banks struggle. As of 2QFY15, retail loans contributed ~20% of
the overall loans, which is the highest among its peers and (3) the bank has an excellent liability
profile, which allows it to build this business at relatively low cost.
Portfolio has done reasonably well; credit card business profitable but lies in its subsidiary
As compared to the overall loan portfolio, the retail business has done exceedingly well through
the past few years with gross NPLs at 1.4% of loans. However, we don’t think that the retail
portfolio of SBI is as profitable as other banks. The bank (1) competes a bit more aggressively
from a price perspective and has relatively higher impairment ratios compared to its primary
peers, (2) has a higher share of low-yielding housing (60% of retail loans) in the portfolio while
(3) other segments like credit card business is in the subsidiary.
SBI Cards and Payments Services, which has the credit card business, is a very profitable and
high-RoE business for the bank today. The business generates RoAs of 5% and RoEs closer to
M.B. Mahesh, CFA
~40-50%.
mb.mahesh@kotak.com
Mumbai: +91-22-4336-0886
SBI remains our top idea within public banks; maintain ADD
Nischint Chawathe
We retain SBI as our preferred idea among public banks. Despite the outperformance, we still nischint.chawathe@kotak.com
Mumbai: +91-22-4336-0887
believe that the bank is best-positioned to play a recovery in the macro environment.
Healthy tier-1 ratio, impressive franchise and strong execution are our key positive arguments. Geetika Gupta
geetika.gupta@kotak.com
We broadly maintain our estimates and rating on the bank (TP unchanged). Mumbai: +91-22-4336-0888

Mumbai: +91-22-4336-0000
Exhibit 94: Share of SME and mid-corporate loans has been coming off, increased for retail and large corporate loans
Loan growth and loan break-up, March fiscal year-ends, 2011-2QFY15 (%)
Loan growth (YoY %) Loan break-up (%)

2011 2012 2013 2014 2QFY15 2011 2012 2013 2014 2QFY15
Corporate and others 8.5 32.5 37.8 30.9 14.4 14.6 16.4 18.8 21.3 21.0
International 12.7 24.1 24.6 26.8 20.1 14.5 15.2 15.7 17.2 18.3
Mid-corporate 19.4 10.0 18.2 11.5 (2.1) 20.8 19.4 19.0 18.3 17.4
SME 22.8 41.3 8.9 (2.4) 1.4 15.8 18.9 17.1 14.4 13.5
Retail 22.2 10.8 14.9 13.3 11.2 21.7 20.4 19.4 19.1 20.1
Agriculture 21.2 (9.0) 25.8 10.7 8.6 12.5 9.7 10.1 9.7 9.7
Total 18.0 18.1 20.7 15.4 9.1
Exhibit 95: SBI is quietly repositioning its housing loans with higher ticket size
Break-up of retail loans, March fiscal year-ends, 2011-2QFY15 (` bn)
2011 2012 2013 2014 2QFY15
Housing loans 899 1,027 1,195 1,407 1,485
Growth (%) 26.3 14.3 16.3 17.8 14.2
Up to Rs3 mn 772 841 944 1,070 1,114
Growth (%) 8.9 12.2 13.3 9.8
Share in housing loans (%) 85.9 81.8 79.0 76.0 75.0
> Rs3 mn 127 187 251 338 371
Growth (%) 47.0 34.5 34.6 29.8
Share in housing loans (%) 14.1 18.2 21.0 24.0 25.0
Auto loans 151 183 248 279 289
Growth (%) 7.1 20.9 35.5 12.6 5.4
Education loans 111 126 138 147 154
Growth (%) 24.6 13.2 9.4 7.2 4.9
Others 637 719 809 981 1,042
Growth (%) 32.2 12.9 12.6 21.2 18.5
Exhibit 96: Greater focus to shift to cross-sell products Exhibit 97: Strong branch expansion gives higher legs of growth
Savings and retail loans accounts (SBI), March fiscal year-ends, 2004- Total branches for SBI (consolidate), March fiscal year-ends, 2004-13
13 (#) (%)
Savings account Retai loan accounts 22,400

240
19,200
192
16,000
144 12,800
9,600
96
6,400
48
3,200
0 -
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Exhibit 98: CA ratio to overall deposits has been declining in recent years
CASA ratio break-up across banks, March fiscal year ends, 2007-2QFY15 (%)
Current Savings
60
48
36
29.7 28.7
26.7 34.6
31.9 34.5 34.5
24 33.7 34.5 34.0
12
18.8 18.3
14.9
11.2 11.5 9.4 9.2 8.0 6.3 6.2
-
2007 2008 2009 2010 2011 2012 2013 2014 1QFY15 2QFY15
Exhibit 99: NPLs were broadly stable across all segments in the current quarter
Sectoral break-up of NPLs, March fiscal year-ends, 2011-2QFY15 (%)
Gross NPLs (Rs bn) Gross NPLs (%)

2011 2012 2013 2014 1QFY15 2QFY15 2011 2012 2013 2014 1QFY15 2QFY15
Corporate 4 5 10 24 14 12 0.3 0.4 0.5 0.9 0.6 0.4
Mid-corporate 60 127 184 263 246 249 3.8 7.4 9.0 11.5 11.4 11.5
International 23 25 28 38 36 29 2.1 1.9 1.7 1.8 1.6 1.3
SME 78 119 145 155 154 159 6.5 7.1 7.9 8.6 8.9 9.5
Agri 45 78 101 107 119 125 4.8 9.0 9.3 8.9 9.6 10.3
Retail 44 42 43 30 35 34 2.6 2.3 2.0 1.3 1.4 1.4
Total 253 397 512 616 604 607 3.3 4.4 4.8 5.0 4.9 4.9
Notes:
(a) Gross NPL has been calculated based on outstanding NPL in each category to the reported advances. These ratios differ from those reported by the
bank (exposures have been reclassified between various segments).
Exhibit 100: Credit card business can deliver 3-5% RoA

Performance of SBI Card and Payment Services, March fiscal year-ends, 2011-14 (` mn)
2011 2012 2013 2014 1HFY15
Revenues 6,927 8,005 10,592 15,201
Opex and finance charges 6,860 7,592 9,305 12,282
PBT 67 413 1,288 2,918
PAT 71 379 1,363 2,931 1,938
Number of cards (#, A) 1,969,151 2,225,141 2,572,777 2,858,116 2,915,327
Net worth (B) 2,783 3,165 4,530 7,460 9,398
Assets 19,963 23,465 34,932 47,248
Key ratios (%)
Growth in active cards 13.0 15.6 11.1
PAT margin 1.0 4.7 12.9 19.3
Return on assets 0.3 1.7 4.7 7.1
Return on equity 1.4 12.8 35.4 48.9 46.0
Asset quality 30+DPD 5.7 4.2 4.4 5.3
Notes
(a) Card base is as of 1HFY15.
(b) Net worth for 1HFY15 is addition of net profits for 1HFY15.
Source: Public documents, Kotak Institutional Equities

Exhibit 101: SBI SOTP valuation based on FY2016E
SBI NW Multiple Value Value per

holding FY2016E assumed FY2016 share FY2016
(%) (Rs mn) (X) (Rs mn) (Rs) Methodology adopted
SBI standalone 260 Residual income model
Non banking subsidiaries and investments
SBI Life 103,400 14 Based on appraisal value
SBI MF 63% 16,300 2 3% of AUM- Rs860 bn (20% CAGR - AUM)
NSE 8% 14,400 2 NSE value at Rs180 bn
UTI MF 17% 5,000 1 3% of Rs980 bn AUM (20% CAGR - AUM)
SBI Caps 86% 20,600 3 10X FY2016E PAT
SBI Cards 60% — — NA
SBI DFHI 72% 7,900 1 1X FY2016 networth
Non-bank subsidiaries 23
SBI Associate banks
State Bank of Bikaner and Jaipur 75% 43,484 1.0 43,500 ABV multiple based on RoE
State Bank of Hyderabad 100% 81,727 1.0 81,700 ABV multiple based on RoE
State Bank of Mysore 90% 40,739 1.0 40,700 ABV multiple based on RoE
State Bank of Patiala 100% 48,782 1.0 48,800 ABV multiple based on RoE
State Bank of Travancore 79% 30,154 1.0 30,200 ABV multiple based on RoE
Banking subsidiaries and associates 244,887 244,900
post discount of 10% 220,398 220,410 30
Value of all subsidiaries 53
Total value of the bank 313
Exhibit 102: SBI SOTP valuation based on FY2017E
SBI NW Multiple Value Value per

holding FY2017E assumed FY2017 share FY2017
(%) (Rs mn) (X) (Rs mn) (Rs) Methodology adopted
SBI standalone 286 Residual income model
Non banking subsidiaries and investments
SBI Life 115,808 16 Based on appraisal value
SBI MF 63% 18,700 3 3% of AUM- Rs1 tn (15% CAGR - AUM)
NSE 8% 16,100 2 NSE value at Rs180 bn
UTI MF 17% 5,700 1 3% of Rs1.1 tn AUM (15% CAGR - AUM)
SBI Caps 86% 23,100 3 10X FY2015E PAT
SBI Cards 60% — — NA
SBI DFHI 72% 8,800 1 1.1X FY2015 networth
Non-bank subsidiaries 26
SBI Associate banks
State Bank of Bikaner and Jaipur 75% 51,130 1.0 51,130 ABV multiple based on RoE
State Bank of Hyderabad 100% 96,730 1.0 96,730 ABV multiple based on RoE
State Bank of Mysore 90% 47,005 1.0 47,005 ABV multiple based on RoE
State Bank of Patiala 100% 56,958 1.0 56,958 ABV multiple based on RoE
State Bank of Travancore 79% 35,319 1.0 35,319 ABV multiple based on RoE
Banking subsidiaries and associates 287,142 287,142
post discount of 10% 258,428 258,428 35
Value of all subsidiaries 61
Total value of the bank 347

Exhibit 103: State Bank of India trading at 1.5X adjusted book Exhibit 104: SBI trading premium has been maintained
Rolling PER and APBR (including banking subsidiaries), 2007-14 SBI trading premium to PSU banks, 2007-14
Rolling PER (X) (LHS) Rolling PBR (X) (RHS)

2.0
25 3.0
1.8
20 2.5
15 2.0 1.6
10 1.5 1.4
5 1.0 1.2
0 0.5 1.0
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-07
Jan-08
Jan-09
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-10
Exhibit 105: SBI forecasts and valuation

March fiscal year-ends, 2012-17E
Net int. BVPS incl P/B Cons

income PAT EPS P/E ABVPS APBR banking subs. banking book RoE
(Rs bn) (Rs bn) (Rs) (X) (Rs) (X) (Rs) (X) (%)
2012 433 117 17 17.9 99 3.2 157 1.9 15.7
2013 443 141 21 15.1 115 2.7 180 1.6 15.4
2014 493 109 15 21.4 122 2.6 194 1.5 10.0
2015E 546 140 19 16.6 135 2.3 213 1.4 11.3
2016E 600 162 22 14.4 152 2.0 234 1.2 11.9
2017E 667 201 27 11.6 175 1.8 262 1.1 13.3

Exhibit 106: SBI – growth rates and key ratios

2012 2013 2014 2015E 2016E 2017E
Growth rates (%)
Net loan 14.7 20.5 15.7 12.0 12.2 14.2
Total Asset 9.1 17.3 14.4 14.5 14.2 14.8
Deposits 11.7 15.2 15.9 17.0 14.2 14.8
Current (25.0) 14.5 0.5 24.2 15.6 16.1
Savings 11.8 15.5 13.8 15.3 12.6 13.1
Fixed 21.9 15.2 19.9 17.0 15.0 15.5
Loan loss provisions 28.2 (3.3) 27.8 7.7 7.8 (0.3)
Total other income (9.3) 11.7 15.7 7.8 13.8 13.3
Net fee income 4.6 (5.0) 9.8 8.0 14.0 14.0
Net capital gains (199.9) (219.8) 106.9 9.7 8.0 3.7
Net exchange gains (2.2) 10.5 19.7 2.0 15.0 15.0
Key ratios (%)
Difference 3.2 2.8 2.6 2.5 2.4 2.3
Tax rate 36.7 29.3 32.7 30.0 31.0 31.0
Share of deposits
Current 9.4 9.4 8.1 8.6 8.7 8.8
Fixed 55.2 55.2 57.1 57.1 57.5 57.9
Savings 35.4 35.5 34.8 34.3 33.8 33.3
Gross NPL (%) 4.5 4.8 4.9 4.9 4.5 4.1
Net NPL (%) 1.8 2.1 2.6 2.5 2.3 2.0
Slippages (%) 3.3 3.7 3.9 3.2 3.0 2.9
Provision coverage (%, ex write-off) 60.1 57.1 49.5 50.6 52.0 53.9
Dupont analysis (%)
Net other income 1.1 1.1 1.1 1.0 1.0 1.0
Invt. depreciation 0.1 (0.1) 0.0 (0.0) (0.0) (0.0)
(1- tax rate) 63.3 70.7 67.3 70.0 69.0 69.0
RoA 0.9 1.0 0.6 0.7 0.7 0.8
RoE 15.7 15.4 10.0 11.3 11.9 13.3

Exhibit 107: SBI – P&L and balance sheet

2012 2013 2014 2015E 2016E 2017E
Income statement
Total interest income 1,065,215 1,196,551 1,363,508 1,520,759 1,691,050 1,885,054
Loans 810,777 905,371 1,024,841 1,140,736 1,246,581 1,376,258
Investments 239,491 271,986 319,419 365,262 420,870 481,194
Total interest expense 632,304 753,258 870,686 974,668 1,090,562 1,218,308
Other income 143,514 160,368 185,529 199,970 227,552 257,921
Net fee income 120,909 114,837 126,113 136,202 155,270 177,008
Net capital gains (9,197) 11,019 22,794 25,000 27,000 28,000
Depreciation on investments 6,833 (9,613) 5,633 (5,000) (1,000) (1,000)
Other Provisions (1,177) (253) (1,122) 2,000 2,400 2,880
Pretax income 184,833 199,509 161,739 200,392 234,240 290,772
Tax provisions 67,760 58,459 52,827 60,118 72,615 90,139
Net Profit 117,073 141,050 108,912 140,274 161,626 200,632
% growth 41.7 20.5 (22.8) 28.8 15.2 24.1
PBT - Treasury + Provisions 324,933 299,798 298,298 339,096 388,328 443,774
% growth 33.1 (7.7) (0.5) 13.7 14.5 14.3
Balance sheet
Cash and bank balance 971,632 1,148,202 1,325,496 1,626,521 2,004,217 2,242,285
Cash 111,864 115,522 115,522 138,626 159,420 191,304
Balance with RBI 428,896 542,782 804,224 1,060,465 1,397,856 1,604,039
Net value of investments 3,121,976 3,508,775 3,983,082 4,765,717 5,562,379 6,543,135
Govt. and other securities 2,558,336 2,692,602 3,081,988 4,107,220 4,903,882 5,884,638
Shares 33,376 38,658 30,092 30,092 30,092 30,092
Fixed assets 54,665 70,050 80,022 84,047 90,408 83,358
Other assets 531,130 478,920 435,459 500,778 575,895 662,279
Total assets 13,355,192 15,662,113 17,922,346 20,525,633 23,434,395 26,897,246
Deposits 10,436,474 12,027,396 13,944,085 16,314,841 18,638,075 21,387,191

Current 984,503 1,126,803 1,132,325 1,406,415 1,625,327 1,886,450
Fixed 5,760,407 6,636,762 7,960,081 9,313,444 10,714,231 12,380,129
Savings 3,691,563 4,263,831 4,851,679 5,594,982 6,298,517 7,120,612
Borrowings and bills payable 1,475,104 1,888,692 2,022,966 1,946,599 2,154,018 2,390,208
Other liabilities 604,102 757,188 772,473 968,225 1,213,584 1,521,118
Total shareholders' equity 839,512 988,837 1,182,823 1,295,968 1,428,719 1,598,729
"I, MB Mahesh, hereby certify that all of the views expressed in this report accurately reflect
my personal views about the subject company or companies and its or their securities.
I also certify that no part of my compensation was, is or will be, directly or indirectly, related
to the specific recommendations or views expressed in this report."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.
60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.
40% 36.4% * The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over the
30% next 12 months; Add = We expect this stock to deliver 5-15%
returns over the next 12 months; Reduce = We expect this stock
22.1% 22.1%
19.5% to deliver -5-+5% returns over the next 12 months; Sell = We
20% expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
basis. These ratings are used illustratively to comply with
10%
4.5% 4.5% applicable regulations. As of 30/09/2014 Kotak Institutional
1.9% 0.6% Equities Investment Research had investment ratings on 154
0% equity securities.
BUY ADD REDUCE SELL
Source: Kotak Institutional Equities As of September 30, 2014
Analyst coverage
Companies that the analyst mentioned in this document follow
Covering Analyst: MB Mahesh

Company name Ticker
Axis Bank AXBK.BO
Bank of Baroda BOB.BO
Bank of India BOI.BO
Canara Bank CNBK.BO
City Union Bank CTBK.BO
DCB Bank DCBA.BO
Federal Bank FED.BO
HDFC Bank HDBK.BO
ICICI Bank ICBK.BO
IndusInd Bank INBK.BO
Jammu & Kashmir Bank JKBK.BO
Karur Vysya Bank KARU.BO
Oriental Bank of Commerce ORBC.BO
Punjab National Bank PNBK.BO
State Bank of India SBI.BO
Union Bank of India UNBK.BO
YES Bank YESB.BO
Source: Kotak Institutional Equities Research.

Disclosures
Ratings and other definitions/identifiers

Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations:
Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or
Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company
and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental
basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied
upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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Company Report

Banks/Financial Institutions ATTRACTIVE

The re-emergence of focus on lending to retail is a cyclical phenomenon

Important disclosures appear

Retail: The last bastion for growth .......................................................... 3

Housing: Biggest retail loan product ..................................................... 13

Unsecured loans: Attractive and expected to grow at fastest ................ 24

Other retail assets ................................................................................. 28

Weak revenue growth is the biggest concern in retail loans ................. 31

Axis Bank: A steady improvement......................................................... 33

HDFC Bank: Best-in-class ...................................................................... 37

ICICI Bank: Retail taking precedence in growth metrics ........................ 41

IndusInd Bank: A diversified portfolio in the making ............................. 47

State Bank of India: Best among public banks ...................................... 53

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

RETAIL: THE LAST BASTION FOR GROWTH

Focus shifts to retail as opportunities to lend elsewhere dwindle

We expect retail loans to post 20% CAGR over FY2015-19

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Source: RBI, Kotak Institutional Equities estimates

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: RBI, Kotak Institutional Equities

Share of housing to decline; urban markets still dominate the portfolio

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Source: RBI, Kotak Institutional Equities

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: RBI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

PRIVATE BANKS WELL PLACED: SBI TO GAIN AMONG PUBLIC BANKS

Private banks make a steady comeback; we expect consistent share increase

Source: RBI, Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: RBI, Company, Kotak Institutional Equities

Changes to business model in retail compared to the previous one

Acquisition models have changed in this period

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

Source: Company, Kotak Institutional Equities

Savings account Retai loan accounts 16,000

Source: RBI, Kotak Institutional Equities

CASA ratio allows banks to take significantly lower risk

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Company, Kotak Institutional Equities

Credit information of customers has strengthened

Analytics being used in decision making

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

2007 2010 2015E 2019E

Credit FD Credit FD Credit

Source: RBI, Kotak Institutional Equities

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

HOUSING: BIGGEST RETAIL LOAN PRODUCT

We expect growth to pick up at 18-20% CAGR and contribution to loans to rise

Housing loan portfolio is well diversified from a geographical perspective

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

Diversified portfolio, marginal skew towards South; Maharashtra largest market

Source: RBI, Kotak Institutional Equities

Source: RBI, Kotak Institutional Equities

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: RBI, Kotak Institutional Equities

Private banks: strong players despite a much lower market share

Source: RBI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

Source: RBI, Kotak Institutional Equities

Source: RBI, Companies, Kotak Institutional Equities