Private Sector Banking Report

Indian Private Banking Sector
Executive Summary
BANKING SECTOR REVIEW

.
We believe that the Indian banking industry is on the threshold of significant expansion given that:
India is the fastest developing economy in the world

India’s banking sector has grown at ~3x GDP; on latest methodology of GDP computation
we project growth at 2.5x GDP
domestic credit as a % of GDP dismally low as compared to other emerging economies
huge potential with 300 mn ‘unbanked’ population.
Accordingly, we expect the banking industry to grow at a 2 year CAGR of 19% to Rs 255 tn by
2017. Within the Indian banking sector, we prefer private sector banks (PSBs) to the public sector
banks (PSUs) given that:
PSB advances have grown at faster pace of 3.8x GDP as compared to 3.3x for PSUs
leading to market share cannibalization – PSB share has increased from 11% of banking
business pie in 1999 to 19% in 2014. Going forward, we anticipate PSBs to gain incremental
market share of 0.8% each year to constitute 22% of pie by 2017.
faster growth of branch network pan India make PSBs well poised to cater to the large
business opportunity
superior asset quality
adequate capital reserves
efficient operations – coupled with superior asset quality leads to meaningful internal
generation leading to healthy return ratios for shareholders and better valuations giving
them the ability to raise capital at lower dilution.
Within the private banking space, we like:
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- 1- Monday, 24 August, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
HDFC Bank – Despite street skepticism on growth, we remain positive given well diversified
portfolio, steady growth despite being the largest private sector bank, best in class asset
quality, and aggressive digital initiatives which could propel future growth; BUY with a target
price of Rs.1,327 implying an upside of ~30%.
Axis Bank – On multiple parameters, Axis scores at par with HDFC yet trades at a discount
of ~50% to HDFC’s P/Bv multiple. While we agree with a size discount, a discount of 50%
appears unwarranted and believe it should narrow to ~20%, possible inclusion in MSCI is a
trigger; BUY with a target price of Rs 813 implying a upside of 69%.
ICICI Bank, a late-cycle play -- Despite most of ICICI’s operating matrices being on par with
its peers -- Axis & HDFC Bank, poor asset quality continues to be a concern which is holding
back re-rating of the stock. Asset quality is likely to show material improvement as and when
the economy gathers pace, which is expected to happen only post FY17. However, value
unlocking via listing of its businesses could provide re-rating opportunity over the medium
term. BUY with a target price of Rs 349, implying an upside of 29%.
Yes Bank Over IndusInd Bank – Yes Bank’s current valuations are at a significant discount
of 25% to that of Indusind despite superior operational efficiencies and asset quality,
comparable return ratios, potential for NIM expansion with higher CASA focus and a more
granular portfolio which de-risks business model. Further, the loan book size is set to
outpace that of IndusInd in the coming years; BUY with a target price of Rs 1,317 implying
an upside of 109%.
DCB over CUB – While DCB is smaller compared to CUB, it has successfully improved its
operational parameters since it started restructuring its business from FY11 onwards. With a
larger CASA base, similar loan portfolio but higher growing loan book and earnings, similar
NIMs and asset quality, we believe DCB offers better returns potential than CUB; we
recommend a BUY with a target price of Rs 183, implying an upside of 46%.
Lakshmi Vilas Bank – Among mid-sized banks, LVB emerges as a clear winner: i) loan
book is set to grow at a healthy pace of 22% CAGR over FY15-17 leading to market share
gains ii) on track to improve asset quality -- GNPA (2.2%, -55bps), NNPA (1.4%,-45 bps) to
comparable levels with that of peers by FY17 iii) NIM expansion given its strong focus on
CASA improvement and iv) steep improvement in RoA and RoE with high earnings growth;
we recommend a BUY with a target price of Rs 110, implying an upside of 48%.
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-2- Monday, 24 August, 2015
CONTENTS
Private Banks to the Fore 4
Why we prefer Private banks over Public Sector bank
Valuation Snapshot 21
Top Picks
Why HDFC Bank remains our top pick? 23
Axis Bank – Major re-rating on the cards 24
ICICI Bank – Late Cycle Play 29
Kotak Mahindra Bank post merger with ING - what’s in store? 34
Which is better, IndusInd Bank or Yes Bank? 35
Mid Sized Small banks: 41
Why DCB over CUB? 41
Why LVB over others? 45
Companies
HDFC Bank 55
Axis Bank 64
ICICI Bank 74
Kotak Mahindra Bank 86
IndusInd Bank 96
Yes Bank 109
DCB Bank 122
City Union Bank 132
Lakshmi Vilas Bank 140
Federal Bank 153
South Indian Bank 161
Karnataka bank 169
Karur Vysya Bank 176
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Private Sector Banks to the fore
We believe that the banking industry is on the threshold of significant expansion given that:
 India is the fastest growing economy
After a sustained period of high inflation, policy logjam and slow growth, the Indian economy is all set to stage
a recovery. According to IMF estimates, India’s real GDP is set to accelerate by ~100 bps from an average of
6.4% during 2012-14, to 7.5% from 2015-17. These estimates pip India as the fastest growing economy over
the next two years.
India – Fastest growing economy in the world

% 7.5
8
7 6.4
6
5
4 3.5 3.3 3.0 3.0
3 2.4
2.1 2.0
2 1.6 1.4
0.9 0.9 0.7
1
0
Spain
Italy
China
UK
India
Brazil
France
Russia
Korea
Mexico
USA
Germany
Canada
Australia
Japan
-1
-2
-1.3
2015-2017E Average GDP growth rate
Source: IMF
 Indian banks have grown at ~3x real GDP
Over a period of 15 years, the banking industry, on an average, has grown at 3x India’s real GDP. Advances
have grown at a 15 year CAGR of 22%, while deposits have grown 19% during the same period.
th
India’s banking industry size: From Rs 11 tn in 1999 to Rs 152 tn in 2014
Rs bn
180,000.0
160,000.0
140,000.0
120,000.0
100,000.0
80,000.0
60,000.0
40,000.0
20,000.0
0.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: RBI, Ventura Research
Overall, the banking Sector has grown at ~3x India’s Real GDP
25.00 % (x) 7.0
6.0
20.00
5.0
15.00
4.0
3.0
10.00
2.0
5.00
1.0
0.00 0.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Bank to Real GDP growth multiple (RHS) India Real GDP growth rate
Deposits + Advances growth rate Average Bank to GDP growth multiple (RHS)
th
 Banking assets as a % of GDP is dismally low
The potential of the banking industry can also be gauged by the fact that the size of India’s banking assets
projected for FY17 is likely to be similar to the China’s banking assets size in 2003 (~Rs 160-170 tn). Also, India’s
banking assets as a % of GDP at ~ 95% is far lower than that of China -- ~250%. Given the favorable
demographics, expected recovery in the economy and the huge unbanked population, we believe India’s banking
industry is poised for robust growth in the coming years.
Huge potential for India to catch-up in terms of banking assets

300.0
257.4
250.1
250.0 233.0 234.0
227.7
202.8 196.6 201.7 202.2 198.1 199.5
200.0
150.0
93.1 93.0 92.3 92.4 94.7

100.0 80.6 86.8
69.5 72.7 75.5
66.9
50.0
0.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
China Banking Assets to GDP India Banking Assets to GDP
Source: RBI, Ventura Research, World Bank
Despite being one of the fastest growing economies, India ranks low in terms of domestic credit
400 374.2
350
300
245
250
207.1
200 172.8 171.5 169.2 169 162.4
148 141.1
150
108.3
100 74.8
52.4 50.8
50
0
India
Italy
Spain
Australia
UK
China
Japan
Brazil
US
Korea
Germany
France
Russia
Mexico
Domestic credit provided by financial sector (% of GDP)
Source: RBI, Ventura Research, World Bank
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 Consequently, Indian banking industry has substantial room for growth
As per the revised methodology of GDP calculation, banking sector growth has averaged at 2.6x in the past three
years. Being the back-bone of economic recovery, we expect the banking sector to maintain its growth to GDP
multiple at a conservative 2.5x. This translates to a total banking pie opportunity of Rs 255 tn by 2017, a 3 year
CAGR of 19%.
Banking Industry Growth Opportunity

Rs bn
300,000
2 year CAGR:
2012-14: 17% 255581
250,000 2015-17E: 19%
214982
200,000 181159
152,684
150,000
128,007
111,199
100,000
50,000
0
2012 2013 2014 2015P 2016P 2017P
Within the Indian banking sector, we prefer PSBs to PSUs given that:
 PSBs have grown at a faster rate…
PSBs have outpaced PSUs with a total business growth of 23% CAGR as compared to 18% CAGR for public
sector banks over a period of 15 years.
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Banking Industry Growth Opportunity
80.00 % 15 year Median: 20.0
15 year CAGR:
Total advances: 21% Total advances to GDP multiple: 3.2x
Private sector advances to GDP 18.0
70.00 Private sector advances: 26%
Public sector advances: 20% multiple: 3.8x
Public sector advances to GDP 16.0
60.00 multiple: 3.3x
14.0
50.00
12.0
40.00 10.0
8.0
30.00
6.0
20.00
4.0
10.00
2.0
0.00 0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private Sector Advances Growth Public Sector Advances Growth

Pvt Bank Adv to GDP growth multiple (RHS) Public Bank Adv to GDP growth multiple (RHS)
Deposits growth in PSBs significantly higher; median growth at 3.3x Real GDP
40.00 % 0.1
15 year CAGR: 15 year Median:
Total deposits: 17% Total dep growth to GDP growth:
35.00 Pvt bank deposits: 21% 2.5x 0.1
Public bank deposits: 14% Pvt Sector deposits growth to GDP
growth: 3.3x 0.1
30.00
Pub sector deposits growth to
GDP growth: 2.3x 0.1
25.00
0.1
20.00
0.0
15.00
0.0
10.00
0.0
5.00 0.0
0.00 0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private sector deposits growth Public sector deposits growth

Pvt Bank Dep to GDP growth multiple (RHS) Public Bank Dep to GDP growth multiple (RHS)
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…leading to market share cannibalization
With consistent out-performance, private banks have cannibalized the banking business from public sector banks.
In 1999, public sector banks accounted for 82% of the total business pie, which has shrunk to 77% in 2014. During
the same period, the share of private sector banks has increased from 11% to 19%.
India Banking Business Pie -- 1999 India Banking Business Pie -- 2014
Foreign Banks, Foreign Banks,
7% 4%
Indian Private
Sector Banks, Indian Private
11% Sector Banks,
19%
Public Sector
Public Sector Banks, 77%
Banks, 82%
Source: RBI, Ventura Research Source: RBI, Ventura Research
Incremental gain/loss of market share: Private and Public sector banks

3.0 % 2.7
2.5 Avg market share gain of
2.2 private banks: 0.5% each
2.0 year in the past
1.4 1.4 1.5 1.4
1.1
1.0 0.6
0.5 0.5 0.5 0.5
0.1 0.1 0.1
0.0
-0.1 0.0
-0.3
-0.1
-1.0 -0.8
-0.8
-1.0
Avg market share loss of
-1.5 public sector banks:
-2.0
-2.0 0.4% each year in the
-2.1
past 15 years
-2.4 -2.5
-3.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Incremental market share change of Private banks Incremental market share change of Public Banks
th
Within the banking sector, we expect private sector banks to continue to eat into the market share of public sector
banks. In the past 15 years, private sector banks gained 0.5% market share each year. We expect the gain to be
higher at 0.8% each year going forward. This translates to the private sector pie growing to Rs 55 tn in 2017 from
Rs 29.3 tn in 2014 at a three year CAGR of 23%.
India Banking Pie- 2014 India Banking Pie- 2017E

Foreign Banks, Foreign Banks,
4% 4%
Indian Private
Indian Private
Sector Banks,
Sector Banks,
19%
22%
The size of private

sector banks business
could grow to Rs 60 tn
in 2017
Public Sector
Public Sector Banks, 74%
Banks, 77%
Source: RBI, Ventura Research Source: RBI, Ventura Research
SBI has lost significant market share to HDFC, Axis and Kotak
SBI BOB Bank Of India PNB Canara Bank HDFC ICICI Axis Kotak
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
Amongst the largest banks, private
-4.0% sector banks will continue to eat into
-5.0% the share of public sector banks.
HDFC is expected to be the biggest
-6.0% beneficiary
-7.0%
FY05-FY15
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- 10 - Monday, 24 August, 2015
Yes Bank top market share gainer amongst mid-sized private banks
Central Bank
Union Bank
Synd Bank
Corp Bank
Allahabad
IDBI Bank
J&K Bank
Yes Bank
IndusInd
Bank
Federal
OBC
UCO
KVB
IOB
SIB
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
-0.4% Amongst the mid-sized banks,
majority of them are expected
-0.6% to lose market share barring
-0.8% Yes & IndusInd bank
FY05-FY15 FY17E
Mid-sized PSBs has lost significant market share to their private counterparts
Andhra Bank
Maharashtra
United Bank
Indian Bank
Vijaya Bank
Dena Bank
Dhanlaxmi
Bank Of
Karnataka
Bank
CUB
DCB
0.1% LVB
0.1%
0.0%
-0.1%
-0.1%
-0.2%
-0.2% Amongst the small-sized
banks, public sector banks
-0.3% have lost market share
significantly
-0.3%
FY05-FY15 FY17E
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 Faster growth of branch network make PSBs well poised to cater to the large business opportunity
Public sector banks have a wide-spread presence with the largest public sector bank, SBI, having branch strength
of 16,000+ as of FY15. However, the pace of branch expansion in private banks is nearly 3x than that of public
sector banks. In the past 6 years, the top 5 private sector banks have expanded their branches at an average
CAGR of 27%, as compared to 8% for the public sector banks.
Private sector bank v/s Public sector bank – Branch expansion

18000
6%
16000
14000
12000 Top private sector banks

expanding presence at a
10000 rapid pace
8000
6%
10% 13%
6000 8%
19% 19%
4000 21%
2000 34%
0
SBI BOB BoI PNB CanBank HDFC ICICI Axis Kotak
FY09 FY15 % indicates 6 year CAGR
Source: Ventura Research
Yes Bank, Induslnd Bank and IDBI Bank most aggressive in branch expansion
5000 5%
4500 8% Yes Bank is the most
4000 8% aggressive mid-sized private
10%
3500 7% 6% sector bank in terms of
3000 branch expansion
8% 14%
2500
2000 22%
1500 13%
28% 6% 8%
1000 32% 12%
500
0
IOB
KVB
SIB
IndusInd
Syndicate
OBC
UCO
Yes Bank
Central Bank
Union Bank
Allahabad
Federal
J&K Bank
IDBI Bank
Corporation
Bank
Bank
Of India
Bank

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CUB and Andhra most aggressive amongst smaller banks
3000
2500 7% 11%
5%
2000 5%
7% 7%
1500
1000
7%
15%
500 6% 4%
12%
0
LVB
CUB
DCB
Indian Bank
United Bank
Karnataka
Dena Bank
Dhanlaxmi
Maharashtra
Vijaya Bank
Andhra Bank
Bank Of
Bank
Bank
Top private banks score above public banks in business per branch (FY15) as well
in Rs crs
300
273
265
250 233
203 203
200 192
185
176 175 178
155 150 150
150 140 142 140 135
129 128 122 132
124 120
109 109 112 117 112 115
106
96 98
100 88 89
75
50
Bank Of …
Central Bank …
0
SIB
LVB
BOB
OBC
IOB
SBI
ICICI
UCO
PNB
KVB
Axis
IndusInd
Vijaya Bank
HDFC
CUB
DCB
Corporation Bank
Andhra Bank
BoI
Federal
J&K Bank
IDBI Bank
Kotak
Syndicate Bank
Canara Bank
Dena Bank
Karnataka Bank
Dhanlaxmi Bank
United Bank
Yes Bank
Allahabad Bank
Indian Bank
Union Bank
th
 Superior Asset Quality:
The asset quality of private sector banks is relatively far superior to public sector banks. Strict control over asset
quality through thorough screening procedures and robust loan recovery mechanisms has helped private sector
banks maintain a healthy balance sheet and steady growth in profits. On the other hand, stressed balance sheets
have made PSU’s wary of lending. For instance, Gross NPAs in our banking system has increased at a 15 year
CAGR of 11% from 1999-2014 to Rs 2642 bn as of 2014. PSU bank NPAs which constitute 89% of the total NPAs
in the system, have grown at a 10% CAGR during the same period. Public sector banks’ gross NPA as a % of total
advances, stood at 4.5%, while that of private sector banks stood at 1.8%.
Gross NPAs as a % of advances lowest for private sector banks

18.0 %
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Public Sector Banks Indian Private Sector Banks Foreign Banks
th
Gross NPAs comparison (FY15) – Private sector banks far superior
10.0 (x) 9.5
9.0 8.3
8.0
6.6 6.8
7.0 6.3
5.9 6.1 6.0 6.0
6.0 5.4 5.5 5.3 5.5
5.0 5.2
4.8
5.0 4.3 4.4
3.7 3.9 3.8
4.0
3.1 3.0
2.8 2.8
3.0
1.9 2.0 1.9
2.0 1.7 1.9 1.8
1.4
0.9 0.8
1.0 0.4
Central Bank Of …
0.0
SIB
LVB
BOB
SBI
OBC
IOB
PNB
ICICI
KVB
UCO
Axis
Corporation Bank
IndusInd
Federal
CUB
DCB
Karnataka Bank
HDFC
BoI
Dena Bank
IDBI Bank
J&K Bank
Kotak
Syndicate Bank
Vijaya Bank
Andhra Bank
Allahabad Bank
Union Bank
Indian Bank
Canara Bank
United Bank
Dhanlaxmi Bank
Yes Bank
Bank Of Maharashtra
Source: RBI, Ventura Research, * Post merger with ING Vysya Bank
 Adequate capital reserves:
In 2014, the Basel III Tier I capital adequacy ratio of private banks stood at 12.3%, nearly 400 bps higher than
public sector banks. This provides a cushion for private banks to withstand and absorb losses, thereby providing
higher protection to lenders and borrowers. It also translates to lesser capital raising requirements in order to
sustain growth.
Private sector banks have consistently higher Tier I Capital Adequacy Ratio
16.0 %
13.9 14.2
14.0 13.3 13.3
12.3 12.2 12.3
12.0
10.0 8.9 9.2

8.4 8.8 8.4
8.0
8.0 7.0
6.0
4.0
2.0
2008 2009 2010 2011 2012 2013 2014
Private Banks Public Sector Banks
th
According to industry estimates, mid-level PSU banks will require Rs 1.8 tn in capital over the next four-financial
years to meet Basel III requirements. According to RBI’s timeline for implementing Basel III norms, the minimum
total capital adequacy requirement will increase to 9.625% and subsequently to 10.25% in the next financial year.
However, raising this capital will be a difficult task for public sector banks given that:
Public sector banks are trading at discounted valuations – many of them at 0.5-0.8x historical price-to-book
valuations compared to 2-3.5x range of private banks. Due to the higher multiple, private banks can raise
more capital with lower equity dilution.
Public sector banks trading at low valuations (FY15 P/Bv)

6.0 (x)
Large Banks -- 5.4
Avg TTM
5.0 P/Bv
Public: 0.8x 4.4
Private: 3.7x
4.0 3.7
3.1 3.0
3.0
2.4
2.1 2.2
2.0
1.5
1.3 1.3
1.0 1.1 1.1
0.8 0.9 0.9
1.0 0.7 0.6 0.8
0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.5 0.5 0.6 0.6
0.4 0.3 0.4 0.4
0.0
UCO
Federal
ICICI
DCB
CUB
BoI
Karnataka Bank
J&K Bank
BOB
OBC
SBI
Corporation Bank
Syndicate Bank
Vijaya Bank
Canara Bank
IOB
HDFC
Kotak
KVB
PNB
Axis
Bank Of Maharashtra
Dhanlaxmi Bank
SIB
LVB
Yes Bank
Indian Bank
Dena Bank
United Bank
IndusInd
Andhra Bank
IDBI Bank
Allahabad Bank
Union Bank
Central Bank Of India
Source: RBI, Ventura Research, * Post merger with ING Vysya Bank
Across cycles, PSBs have traded at a premium compared to PSUs

(x)
Pvt: 0.8x
4.00 Pvt: 2.17x PSU: 0.48x
PSU: 1.2x
3.50
Pvt: 1.56x Pvt: 1.89x
3.00 PSU: 0.91x PSU: 0.8x
2.50
2.00
1.50
1.00
0.50
0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Private Banks All Banks Public Sector Banks
th
PSBs P/Bv multiple trend PSUs P/Bv multiple trend
4.00 2.00
1.80
3.50
1.60
3.00
1.40
2.50 1.20
2.00 1.00
0.80
1.50
0.60
1.00
0.40
0.50 0.20
0.00 0.00
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Private Banks +1 standard deviation -1standard deviation Mean Public Sector Banks +1 standard deviation -1standard deviation Mean
Source: Ventura Research Source: Ventura Research
High NPAs and provisions have adversely impacted the profitability of public sector banks, leading to low
internal capital generation.
The government is burdened with the task of economic recovery and controlling deficit. With only Rs 250 bn
(~14% of requirement) provided for bank recapitalization in this fiscal, government’s support could be
inadequate.
This provides private sector banks an opportunity to capitalize on the credit growth potential which public sector
banks may not be able to meet given capital constraints.
 PSBs operate far more efficiently than PSUs:
Private sector banks have efficiently managed operations, branch network and employee strength as measured by
RoA. RoA of private sector banks has consistently been ~1.5x higher than that of public sector banks. Further,
while RoAs of private sector banks has been on an improving trend, the RoA of public sector banks has only
deteriorated in the past couple of years.
Return on Assets trend for Public sector and Private banks
1.8 % 1.65
1.63
1.6 1.53
1.43
1.4 1.28
1.16 1.13 1.13
1.2 1.06 1.07
1.04 1.02
1.0 1.16
0.83 1.03
0.77 1.00 1.00 0.97 0.96
0.8 0.95 0.92
0.88 0.88
0.77 0.80
0.6
0.4 0.48 0.50
0.2
0.0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Private Banks Public Sector Banks
th
Return on Assets (FY15) significantly higher for Private Sector Banks
2.5
2.3
1.9
2.0 1.8
1.8
1.6 1.6
1.5
1.5 1.3 1.3
1.0 0.9 0.9

0.7 0.7
0.5 0.6 0.5 0.5 0.6 0.5 0.5 0.5
0.5
0.5 0.3 0.3 0.4 0.3 0.3
0.3 0.2 0.3 0.3 0.2 0.2
-0.2
0.0
SIB
LVB
OBC
BOB
SBI
IOB
ICICI
KVB
PNB
UCO
Axis
Central Bank Of India
Corporation Bank
IndusInd
DCB
Federal
CUB
Karnataka Bank
HDFC
BoI
IDBI Bank
Dena Bank
J&K Bank
Kotak
Syndicate Bank
Vijaya Bank
Andhra Bank
Indian Bank
Allahabad Bank
Union Bank
Canara Bank
United Bank
Dhanlaxmi Bank
Yes Bank
Bank Of Maharashtra
-0.5
-1.0
-1.5
-2.0 -1.8
 Digital initiatives:
Over the past decade, the Indian banking sector has witnessed major leaps in digitization of banking operations,
primarily led by the initiatives of private sector banks. The thrust on digitization continues as 300 million Indians
remain devoid of any sort of financial services. Further, challenges such as inefficiencies in payments/ transfer
system and disbursal and monitoring of credit in rural areas limit the growth potential of the economy. Rightfully so,
the government has increased its focus on achieving financial inclusion with the most notable initiative being the
Pradhan Mantri Jan Dhan Yojna.
According to a report by McKinsey Global Institute, an estimated 300 million Indians have no access to banking,
which prevents them from accumulating savings or participating fully in the formal economy. Only 36 percent of
rural Indians have bank accounts, and even those with bank accounts often do not have access to any other
financial services, such as credit to buy farm equipment or fund a small business. Of some 170 million rural
households in India, just 45 million to 50 million have access to formal credit, and one-third of them also borrow
from non-formal sources, at punishingly high rates of interest.
Run by dynamic and professional management, private sector banks have led the digitization of the banking sector
in India. Most of the banking operations including account opening, loan disbursement, and transfers/bill payments
are now carried out through mobile/net banking. Public sector banks have followed suit. Some example of the
digital initiatives undertaken by leading private sector banks:
HDFC Bank has launched a dedicated ‘Go Digital’ Initiative. Under this initiative, among other things,
o The bank is set to launch a digital wallet and an electronic marketplace for various online merchants.
o Auto loans to be disbursed in less than 30 minutes using biometrics technology
o Launched the Chillr App – to transfer money to contacts and the PayZapp app which enables one
click payments to vendors/service providers.
th
ICICI Bank has launched its own ‘digital village’ project by adopting a village in Gujarat to provide services
ranging from cashless banking to digitized school teaching. It has also launched an end-to-end digitization
system across the insurance platform to improve sales effectiveness.
IndusInd Bank’s personalized bank account number, online account opening and video branch are some
digital initiatives to reduce costs and create customer value.
A McKinsey Global Institute Report, December 2014 has highlighted seven technology based applications that
have the power to transform the financial services sector in the coming decade.
Technological advancements that can re-shape the financial service sector in the coming decade…
Initiative Description Impact
Universal Electronic Bank Account Zero Balance Accounts for all A digitally verifiable identity for all Indians will enable faster account opening
citizens above the age of 18,
enabled by a unique verifiable
digital identity
Mobile Money Use of mobile phon-based Mobile phones penetrating rural areas at a rapid pace, requires better co-ordination
money transfer systems with banks and telecom carriers
Advanced credit underwriting Use of unconventional channels Credit underwriting using unconventional data (mobile calling, texting and payments
to provide credit to unbanked data) can enable lending of as much as $30 bn per year to unbanked Indians by
and improve underwriting and 2025
pricing for all customers
Technology enabled business Bank appointed agents to 300 mn transactions routed through this channel; $100 bm of government direct
correspondents deliver basic financial services benefits and $3bn of domestic remmittances can be routed through this channel over
to non-tech users through the next 2-4 years
mobile phones or micro-ATMs
Digital government transfers and Government payments and Government makes payments of about $100 bn per year to citizens under various
payments transfers using verifiable digital programs which suffers from leakage and high admin costs -- digital transfers could
identiy, mobile payments, and help save on these costs equivalent to 5-20% of total annual flow; these applications
universal electronic bank could have a potential economic impact of $4bn to $17bn per year in 2025
accounts to cut leakage
Enhanced customer experience Simple, Easy to use 7-10% of all Indian bank customers use online banking; to expand base banks
applications on mobile and must adopt unconventional methods to enhance customer experience For eg:
other channels i) Kotak Mahindra Bank's mobile app offers easy peer-to-peer money transfers
ii) ICICI Bank's Facebook app allows payments between Facewbook friends
iii) HDFC Bank launched Smartbuy, an e commerce marketplace for customers
Digitally enabled sales & fulfillment Data analytcis backed Data backed customer segmentation can lead to higher conversions than cold
customer acquisition, virtual calling
servicing and administration
Source: McKinsey Global Institute analysis
th
…and could have an economic impact of $32 bn to $140 bn per year in 2025
Source: McKinsey Global Institute analysis
These initiatives not only spell growth prospects through penetration into the unbanked population, but also throw
open additional opportunities for banks to capitalize on. Private sector banks, led by proactive managements,
adequate capital reserves, healthy profitability and asset quality, are the best placed to bridge the gap between the
banked and the unbanked through technological advances. Further, with PSU banks struggling with asset quality
woes and bare minimum capital reserves, private sector banks have a huge opportunity for growth arising not only
from digitization but also through cannibalization of market share which is expected to leap in their favour in the
coming years.
th
`
Valuation Snapshot:
Financial Snapshot
CMP M. Cap Target Price EPS (Rs) P/E (x) Adj. BV P/Adj. BV (x) NIM (%) GNPA (%) NNPA (%) C/I (%) RoA (%) RoE (%)
Banks
(Rs) (Rs. Cr) (Rs) (%) (x) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E
HDFC 1019 256,176 1327 30.2 4.1 41 49 62 25.0 20.8 16.4 244 279 324 4.2 3.7 3.1 4.4 4.3 4.4 0.9 1.0 1.0 0.2 0.3 0.4 45.6 44.6 43.0 1.9 1.9 1.9 19.4 18.4 20.1
ICICI 270 156,748 349 29.3 2.1 19 24 29 14.0 11.1 9.4 132 144 164 2.1 1.9 1.6 3.5 3.4 3.6 3.0 3.6 3.4 1.2 1.6 1.5 36.8 37.5 37.0 1.8 2.0 2.0 14.5 16.4 17.2
Kotak 648 118,323 690 6.6 5.1 12 13 19 53.6 49.1 33.2 91 118 135 7.1 5.5 4.8 4.5 4.1 4.3 1.9 2.0 2.0 0.9 1.0 0.9 52.1 53.5 50.5 1.9 1.6 1.6 14.1 12.7 13.9
Axis 482 114,561 813 68.7 3.3 31 37 43 15.5 13.1 11.1 183 212 246 2.6 2.3 2.0 3.5 3.5 3.6 1.3 1.5 1.5 0.4 0.5 0.6 40.7 40.5 40.2 1.7 1.8 1.8 17.8 18.1 18.2
IndusInd 866 51,246 922 6.5 3.4 34 44 54 25.6 19.5 15.9 197 226 271 4.4 3.8 3.2 3.6 3.7 3.8 0.8 0.9 0.9 0.0 0.4 0.4 46.8 44.7 44.8 1.8 2.0 2.0 18.2 20.5 21.2
Yes 630 26,343 1317 109.0 3.3 48 63 78 13.1 10.0 8.0 286 335 399 2.2 1.9 1.6 3.2 3.4 3.5 0.4 0.5 0.6 0.1 0.2 0.2 41.3 37.7 35.4 1.6 1.8 1.9 20.9 20.3 21.4
Federal 61 10,462 73 19.7 1.4 6 6 7 10.4 9.7 8.5 43 47 52 1.4 1.3 1.2 3.1 3.2 3.2 2.0 2.4 2.3 0.7 1.1 1.0 50.0 49.7 49.2 1.3 1.2 1.2 13.7 13.2 13.6
Karur Vysya 471 5,738 583 23.8 1.5 37 50 59 12.6 9.4 8.0 325 358 389 1.4 1.3 1.2 2.9 3.4 3.4 1.9 1.6 1.5 0.7 0.6 0.6 53.9 49.2 49.1 0.9 1.1 1.2 12.0 13.8 15.0
City Union 91 5,417 115 26.4 2.2 7 7 9 13.7 12.5 10.2 41 46 52 2.2 2.0 1.7 3.2 3.3 3.5 1.9 1.9 2.0 1.3 1.4 1.4 42.8 43.8 43.1 1.5 1.4 1.5 16.3 15.1 16.4
DCB 125 3,535 183 46.4 2.7 7 8 9 18.4 16.2 13.3 52 60 68 2.4 2.1 1.8 3.8 3.8 3.8 1.8 1.9 2.0 1.0 1.1 1.1 58.8 56.0 55.2 1.3 1.2 1.2 14.0 12.8 13.7
South Indian 19 2,626 24 26.3 0.9 2 2 3 8.4 7.8 6.4 24 25 27 0.8 0.8 0.7 2.5 2.6 2.6 1.7 1.7 1.7 1.0 1.0 1.0 52.7 53.0 52.7 0.5 0.5 0.6 8.8 8.9 10.1
Karnataka 122 2,301 152 24.6 0.8 24 29 37 5.1 4.2 3.3 147 162 179 0.8 0.8 0.7 2.4 2.5 2.6 3.0 3.1 2.9 2.0 2.0 1.9 52.4 51.9 48.0 0.9 1.0 1.1 14.0 15.3 18.0
Lakshmi Vilas 74 1,334 110 48.6 1.2 7 10 14 10.0 7.3 5.2 70 82 95 1.1 0.9 0.8 2.8 3.0 3.1 2.8 2.5 2.2 1.9 1.6 1.4 54.9 52.8 50.5 0.5 0.8 1.1 9.3 12.0 14.7
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-21- Mon day 24 August, 2015
`
2 yrs forward EPS v/s P/ Adj. BV 2 yrs forward GNPA v/s NNPA
45.0
1.8 KTK
40.0 LVB
1.6
ICICI
35.0
1.4 CUB LVB
2 yrs Forword NNPA (%)

2 yrs EPS CAGR (%)
30.0 Yes IIB 1.2

KTK Kotak
25.0 1.0 DCB
ICICI
20.0 DCB 0.8 SIB
KVB Axis Federal
KVB Axis
15.0 SIB 0.6
CUB
HDFC Kotak
10.0 Federal 0.4
IIB
HDFC
5.0 0.2 Yes
0.0 0.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5
2 yrs forward P/Adj BV 2 yrs forward GNPA (%)

2 yrs forward ROE v/s ROA 2 yrs forward Cost to Income v/s NIM
25.0 60.0
Yes
IIB 55.0
20.0 Axis KVB DCB
HDFC
KTK SIB
2 yrs forward C/I (%)

2 yrs forward ROE ( %)
50.0 CUB
CUB ICICI Kotak
15.0 LVB DCB
KVB Kotak KTK LVB Federal
Federal 45.0
IIB
10.0 SIB Axis
40.0
HDFC
5.0 ICICI
35.0 Yes
0.0 30.0
0.0 0.5 1.0 1.5 2.0 2.5 2.0 2.5 3.0 3.5 4.0 4.5
2 yrs forward ROA (%) 2 yrs forward NIM (%)
th
-22- Mon day 24 August, 2015
1) Why HDFC bank remains our top pick:
Despite street skepticism on maintaining pace of growth, we remain strongly positive

on the fortunes of HDFC Bank. In deference to street estimates we are quite
confident that robust growth is on the cards given that:
 It is well placed to benefit from the impending economic upturn & growing
consumerism. We forecast the loan book growth of 23.9% CAGR over the
forecast period FY15-17 leading to an earnings growth of 23.5% CAGR.
 The bank has a successful track record of leadership initiatives which
inspires confidence in the successful rollout of its new foray. It recent
technology led initiatives are expected to help further consolidate its market
position and foster market share gains,. Further the deeper embedding of
technology across all operations is expected to improve its operational
efficiencies significantly.
 Early initiatives in rural banking are expected to favor the Bank immensly.
 HDFC Bank has adequately demonstrated beyond doubt of maintaining best
in class asset quality.
Valuation
Barring the economic meltdown of FY2008-2009, HDFC Bank has consistently

traded in a tight band of 3.2X - 4.6X of its 1-Yr Forward Adj P/BV (mean of 3.9X Adj
P/BV since 2002) With the Bank taking the lead in the introduction of technology
based product offerings, its exemplary asset quality, market penetration
opportunities and resurgent expectations of the economy, we believe that HDFC
Bank will continue to demand premium valuations. We initiate coverage on HDFC
bank with a BUY for a target price of Rs. 1,327 implying an upside of ~30% over the
CMP of Rs. 1019. The target price is arrived at by assigning a multiple of a 4.1x on
FY17E Adj. BV
HDFC Bank P/Adj. BV
`
1,400 Average P/Adj. BV- Bull Phase average
4.0x P/Adj. BV- 4.2x
1,200
1,000
800
600
400 Overall average
P/Adj. BV- 4.0x
200
0
Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15
CMP 1X 2X 3X 4X 5X
Source : HDFC Bank, Ventura Research
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- 23 - Monday 24 August, 2015
2) Axis Bank - major re-rating on the cards:
Granular build up of the retail portfolio, increasing focus on higher rated corporate
loans, continued thrust on CASA and stable asset quality augur well for Axis Bank
(Axis). Further the aggressive branch roll out with the branches functioning more as
advisory based centers over transaction networks should help drive business growth
momentum. Given these superlative metrics, we believe that a valuation re-rating is
on the cards. We recommend a Buy on the stock at its CMP of Rs. 462 (current
FY17 P/Adj. BV of 2.0x) with a price objective of Rs 813 (target P/BV 3.3x) implying
an upside of 69% over the next 18 months. Inclusion in the MSCI should be an
added positive.
Axis Bank 1-Yr Fwd P/Adj. BV Bands
800 `
700
600
500
400
300
200
100
0
CMP 1X 1.75X 2.5X 3.25X 4X
Source :Axis Bank, Ventura Research
Axis Bank relative valuation to HDFC Bank to narrow further
Currently Axis Banks trades at a discount of 0.6x to HDFC Bank on an Adj P/BV
basis. Undoubtedly HDFC Bank given its best in class performance metrics
deserves the rich valuations it commands. However we believe that the significant
valuation discount of Axis Bank is unjustified given that its performance on most
parameters are near or equal to that of HDFC Bank’s.
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Relative P/Adj BV discount indicates significant scope for rerating
1.2
1-Yr Forward Adj. P/BV relative valuation
0.8
0.6
0.4
Bull phase average- 0.7x Bear phase average- 0.5x

0.2
Entire period average- 0.6x
0
16-Oct-04
16-Oct-06
16-Oct-07
16-Oct-08
16-Oct-10
16-Oct-11
16-Oct-12
16-Oct-14
16-Oct-05
16-Oct-09
16-Oct-13
16-Apr-04
16-Apr-06
16-Apr-08
16-Apr-09
16-Apr-10
16-Apr-12
16-Apr-13
16-Apr-14
16-Apr-05
16-Apr-07
16-Apr-11
16-Apr-15
Axis Bank HDFC
Source : Ventura Research
Historically during the previous bull run, the multiple averaged around 0.7x and
during the fag end of the boom in 2008 it peaked at 0.9x HDFC’s 1 yr forward Adj
P/BV. It was only when the economic slowdown and stress build up in the system
got accentuated that the discount widened and Axis Bank consistently traded well
below its long term average discount (0.5x). In October 2013 the gap widened to its
maximum of 0.4x. Since then with the onset of the new government and sentiment
stabilizing, this discount has started narrowing.
In a fast growing economy BFS stocks tend to post strong growth and with India on
the brink of a turnaround, BFS stocks are expected to be at the fulcrum of the India
growth story. We expect the discount to narrow substantially as the growth cycle
returns. Since the previous bull run there is substantial improvement in the metrics
of Axis Bank not only in comparison to its own performance (of the previous bull run)
but vis-avis HDFC Bank.
Possible inclusion in the MSCI could trigger a further narrowing of this valuation
disparity. This should fuel demand for the Axis Bank paper. We target an average
discount to HDFC Bank of ~0.8X implying a price target of Rs 813.
The following set of comparative charts of Axis Banks and HDFC Bank operation
metrics elucidates the compelling re-rating of the valuation of Axis Bank.
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Axis Bank’s valuation to catch up with HDFC
Axis Bank has superior CASA ratio
800000 ` crores HDFC Bank 60.0 500000 ` crores 46.0
Axis Bank
700000 450000 45.0
50.0
400000
600000 44.0
350000
40.0
500000 43.0
300000
400000 30.0 250000 42.0
200000 41.0
300000
20.0
150000
200000 40.0
100000
10.0
100000 50000 39.0
0 0.0 0 38.0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
Deposits CASA % Deposits CASA %
Source: HDFC Bank, Ventura Research Source: Axis Bank, Ventura Research
Higher share of the granular lending business augurs well with Axis
d
120 % HDFC Bank 120 Axis Bank

%
100 100
80 80 34.5 36.1
51.0 51.0 51.0 42.6 46.9
59.0 55.1 56.5 57.4
72.0 72.0 71.0
60 60
40 40
65.5 63.9
49.0 49.0 49.0 57.4 53.1
20 41.0 20 44.9 43.5 42.6
28.0 28.0 29.0
0 0
2011 2012 2013 2014 2015 2016E 2017E
2011 2012 2013 2014 2015 2016E 2017E
Corporate Consumer
Corporate Consumer
HDFC will continue to outperform Axis Bank in terms of credit book
600000.0 500000.0 ` crores

` crores HDFC Bank Axis Bank
500000.0 400000.0
400000.0
300000.0
300000.0
200000.0
200000.0
100000.0
100000.0
0.0
0.0
2011 2012 2013 2014 2015 2016E 2017E
2011 2012 2013 2014 2015 2016E 2017E
th
Axis Bank’s NII lags HDFC Bank
35000.0 ` crores % 30 25000.0 ` crores Axis Bank 35
HDFC Bank %
30000.0
25 30
20000.0
25000.0 25
20
15000.0
20000.0 20
15
15000.0 15
10000.0
10
10000.0 10
5000.0
5 5
5000.0
0.0 0 0.0 0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
NII Growth % NII Growth %
HDFC’s asset quality better than Axis

1.6 0.6
GNPA % NNPA %
1.4
0.5
1.2
0.4
1.0
0.8 0.3
0.6
0.2
0.4
0.2 0.1
0.0 0.0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
HDFC AXIS HDFC AXIS
Source: HDFC Bank, Axis Bank, Ventura Research

Scope for NIMs to expand for Axis Axis Bank has fairly lower Cost to Income
60.0
5.0 % NIM % Cost to Income
4.5
50.0
4.0
3.5 40.0
3.0
2.5 30.0
2.0
20.0
1.5
1.0 10.0
0.5
0.0 0.0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
HDFC AXIS HDFC AXIS

th
Axis Bank’s return ratios closely track HDFC
25.0 ROE 2.5 ROA

% %
20.0 2.0
15.0 1.5
10.0 1.0
5.0 0.5
0.0 0.0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
HDFC AXIS HDFC AXIS
Source: HDFC Bank, Axis Bank, Ventura Research Source: HDFC Bank, Axis Bank, Ventura Research
Capital Adequacy is on par with HDFC Bank

18 % HDFC Bank 18 % Axis Bank
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
Tier-1 Tier-2 Tier-1 Tier-2
Source: HDFC Bank, Ventura Research

Source: Axis Bank, Ventura Research
th
3) ICICI Bank – Late cycle play:
As known to all asset quality has been the biggest concern with respect to BFS
stocks and the market has been ruthless in downgrading stocks with poor asset
quality. ICICI Bank has been no exception.
Despite most of ICICI Bank’s operating matrices being on par with its peers -- Axis &
HDFC Bank, the poor asset quality continues to be of concern which is holding back
re-rating of the stock. The asset quality & restructured book remain sticky and
continue to be key monitorable.
Asset Quality remains the key monitorable Restructured Assets have risen considerably
6.0 % % 90.0 20000 ` Crores.
80.0 18000 Q1FY16 restructured loan book is Rs.1,962 crore

5.0 Currently no pipeline for f urther restructuring.
70.0 16000
Restructuring lumpiness significantly down;
14000 maximum exposure of a single account to 5%
4.0 60.0
12000
50.0
3.0 10000
40.0
8000
2.0 30.0
6000
20.0
1.0 4000
10.0 2000
- 0.0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 2011 2012 2013 2014 2015
PCR (RHS) GNPA NNPA Restructured Assets
Source :ICICl Bank, Ventura Research Source :ICICl Bank, Ventura Research
Asset quality is likely to show material improvement as and when the economy
gathers pace, which is expected to happen only post FY17. Having said this, the
value unlocking via listing of its businesses can provide re-rating opportunity over
the medium term.
However there is scope for significant appreciation given the value unlocking which
is expected to play out from the listing of its profitable financial subsidiaries.
We initiate coverage on ICICI Bank with a ‘ACCUMULATE’ recommendation and a

target price of Rs. 349. We have valued ICICI Bank based on the sum-of-parts
method; the core banking business is valued at Rs. 273 (1.9x FY17E Adj. P/BV) and
Rs. 76 is the value assigned to its other businesses. We have arrived at the adjusted
book value of standalone book by deducting investment in subsidiaries. Our SOTP
target price implies an upside of 28% from the CMP. At the CMP of Rs. 273, it is
trading at 1.6X FY17 Adj. P/BV.
th
SOTP Valuation of ICICI Bank
Total Valus ICICI Bank's Value attributable to
Sum of the parts valuation (` crores) stake ICICI Bank (` crores) ` /share Valuation Methodology
ICICI Prudential Life insurance Life insurance business is valued at 14x FY17 New
Company (74% stake) 23153.8 73.70% 17064.4 29 Business Achieved Profit (NBAP)
ICICI Lombard General Insurance
(74% stake) 6427.4 74% 4756.3 8 Valued at 12x Normalized Earnings for FY15
ICICI Asset management (51%
stake) 8462.5 51% 4315.9 7 5% of FY15 AUM
ICICI Securities including PD 2604.0 100% 2604.0 4 12x FY15 Earnings
ICICI Venture Fund 1845.0 100% 1845.0 3 15% of FY15 AUM
ICICI Home Finance 2238.0 100% 2238.0 4 1.5x FY15 BV
ICICI Bank UK 5113.5 100% 5113.5 9 1.5x FY14 BV
ICICI Bank Canada 6274.8 100% 6274.8 11 1.2x FY14 BV
Total Value of Subsdiaries 76

2x FY17E adjusted book (adjusted for investment in
Value of the bank 273 subs and net NPLs)
Target value for ICICI Bank 349

Source :ICICl Bank, Ventura Research
The following set of comparative charts of ICICI Bank, Axis Bank and HDFC Bank
operation metrics clearly elucidates that asset quality improvement is the key to re-
rating of the stock. Barring asset quality, ICICI Bank is comparable on all other
operation metrics.
th
ICICI Bank CASA deposits in line with peers
60.0 %
Axis Bank ICICI Bank HDFC Bank
50.0
40.0
30.0
20.0
10.0
0.0
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E
ICICI Bank Net Interest Margin comparable to Axis

5.0 % Axis Bank ICICI Bank HDFC Bank
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
ICICI Bank Cost to Income ratio lower than that of its peers
60.0 %
50.0
40.0
30.0
20.0
10.0
0.0
th
Despite size, all three players expect strong credit growth
600000 ` Crores
500000
400000
300000
200000
100000
0
ICICI’s asset quality remains a concern area

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
ICICI’s Net NPLs are expected to remain sticky over the forecast period
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
th
ICICI’s Return on Equity expected to pick up
20.0
15.0
10.0
5.0
0.0
Return on Assets comparable to peers

2.0
1.5
1.0
0.5
0.0
Capital adequacy is comfortable

25
%
20
15
10
0
Tier I Tier II
es
th
4) Kotak Mahindra Bank Post merger with ING Bank - what’s in store
We initiate coverage on Kotak Mahindra Bank with a HOLD recommendation. Since

the merger announcement with ING Vysya Bank, the Bank has seen a major re-
rating. We believe that the market has fully discounted its FY17 earnings leaving
little room for appreciation. We have valued Kotak Mahindra Bank based on the
sum-of-parts method; the core banking business is valued at 581 (4.1x FY17E Adj.
P/BV) and 109 is the value assigned to its other businesses. We have arrived at the
adjusted book value of standalone book by deducting investments in subsidiaries. At
the CMP of 648, it is trading at 4.8X FY17 Adj. P/BV.
SOTP valuation of Kotak Mahindra Bank
Value Value (` Per Share Valuation

Company Amt
Base crores) (`) Methodology
Kotak Mahindra AMC AUM 38600 2702 14.8 7% AUM

KMCC PAT 12 360 2.0 30x FY15 Earnings
Kotak Securities PAT 290 5800 31.8 20x FY15 Earnings
Insurance NBP 1540 3231 17.7 P/NBAP
Others PAT 132 2640 14.5 20x FY15 Earnings
International Subsidiaries Book 480 1200 6.6 2.5x FY15 Book
Kotak Prime Book 1291 4131 22.6 3.2x FY15 Book
Total Subsidiaries Value 109.9
Core Banking Business Value 551.6
SOTP Value 661.5
Source :Kotak Mahindra Bank, Ventura Research
Adj P/Bv
800 Major re-rating of KMB in line with

`
the merger with ING Vysya Bank
700
600
500
400
300
200
100
0
Mar-09 Mar-11 Mar-13 Mar-15
CMP 4X 4.65X 5.3X 5.95X 6.6X
th
5) Which is better IndusInd Bank or Yes Bank?
IndusInd Bank valuations re-rating already factored in
Since the change in management at the helm of IndusInd Bank, the stock has
consistently been re-rated as the management delivered across all metrics stated in
its planning cycles. During the first planning cycle FY2008-11 the stock averaged a
2.4X 1 yr forward Adj P/BV. In the second cycle FY11-14 this got re-rated to an
average of 2.9X. And as IIB outperforms its own performance benchmarks in the
current Planning Cycle 3 FY14-FY17 we have seen the stock being re-rated to an
average of 3.9x.
IndusInd Bank P/Adj. BV Band
1,000 1st Cycle- 2nd Cycle- 3rd Cycle -

2.4x 2.9x 3.9x
900
800
700
600
500
400
300
200
100
0
Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15
CMP 1.2X 1.7X 2.2X 2.7X 3.2X
Source : IndusInd Bank, Ventura Research
IIB’s valuation at a significant premium to HDFC Bank
We believe that IIB has more or less peaked in valuations given that it trades at a
premium relative to HDFC Banks on the Adj P/ BV basis.
P/ Adj. BV comparison between IndusInd and HDFC Bank
1 Yr Forward P/Adj. BV 1.2

7
1 Yr Forward P/Adj. BV relative valuation
6 1.0
5 0.8
4
0.6
3
2 0.4
1 0.2
0
0.0
09-09-2007
09-02-2008
09-07-2008
09-12-2008
09-10-2009
09-03-2010
09-08-2010
09-01-2011
09-11-2011
09-04-2012
09-12-2013
09-05-2014
09-10-2014
09-04-2007
09-05-2009
09-06-2011
09-09-2012
09-02-2013
09-07-2013
09-03-2015
FY16E
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
HDFC vs. IndusInd

Indusind bank HDFC
as
th
Given the size of HDFC Bank’s business and compelling metrics, in our opinion, IIB
should trade at a discount to HDFC Bank. Since 2010 this discount has hovered in
the range of 0.7X – 0.9X HDFC Bank’s I year forward multiple. We believe that this
discount to the leader HDFC is expected to continue during the forecast period.
Our target for HDFC Bank over the next 18 months is Rs 1327 (P/Adj BV of 4.1 on
FY17). Based on our peer discount of 0.8X, we believe that IIB can rally another 7%
to Rs. 922 (3.4X FY17 Adj P/ BV.)
Yes Bank offers a better investment opportunity than its peer IIB
The immediate peer for comparison with IIB is Yes Bank (given the size of
business.) Yes Bank’s current valuations are at a significant discount of 0.5X to that
of IIB.
P/ Adj. BV comparison between IndusInd and Yes Bank
ases
1 Yr Forward P/Adj. BV 1.2 1 Yr Forward P/Adj. BV relative valuation

7
1.1
6 1.0
5 0.9
4 0.8
3 0.7
2 0.6
1 0.5
0 0.4
FY16E
FY09
FY10
FY11
FY12
FY13
FY14
FY15
09-04-2007
09-09-2007
09-02-2008
09-07-2008
09-12-2008
09-05-2009
09-03-2010
09-08-2010
09-01-2011
09-06-2011
09-11-2011
09-04-2012
09-07-2013
09-05-2014
09-10-2014
09-03-2015
09-08-2015
09-10-2009
09-09-2012
09-02-2013
09-12-2013
Yes vs. IndusInd Base
Indusind bank Yes bank
This is despite the fact that:
 the loan book size is set to outpace that of IIB over the forecast period
 more granular and higher retail exposure ensures reduced business risk and
volatility
 NIMs have room to catch up as substantial head room is available for CASA
expansion
 Impeccable asset quality
 Superior operational efficiency
 Comparable return ratios
We believe that the valuation discount is unjustified and hence Yes Bank offers a
better investment opportunity. In our opinion the valuation multiple of Yes Bank
should at least be on par with that of IIB, if not a premium
th
Yes Bank is one of our top bets in the private banking space. Based on our financial
model and valuations we believe that the stock has the potential to provide a 109%
return from the CMP of Rs 629 (1.6X FY17 Adj P/BV of Rs 399 / share) and
recommend buying the stock. Our optimism is based on the fact that Yes Bank has
sustained its growth momentum while maintaining the lowest NPA levels (GNPA
0.4% / NNPA 0.1%) among peers. Yes Bank has significantly de-risked its business
model by enhancing the granularity of its deposit and asset base. Fee income
growth has been sustained, NIMs have consistently expanded and the cost of
operations has been kept surprisingly low despite a rapid pan-India branch roll out.
Share holder return ratios continue to remain impressive inspite of frequent capital
raising.
Significant re-rating on the cards
Barring the bear markets of FY2008 and FY2013, Yes Bank has consistently traded
in the band of 2.3x to 3.6x its 1-Yr Fwd Adj. P/BV (with average multiple of 2.9x).
Given the fact that the company has shown robust growth since its inception with
performance on par with all its peers, we believe a re-rating for Yes Bank is on the
cards.
Yes Bank P/Adj. BV Band
1,600 `
1,400
1,200
1,000
800
600
400
200
0
Mar-07 Mar-09 Mar-11 Mar-13 Mar-15
CMP 1X 1.95X 2.9X 3.85X 4.8X
Source : Yes Bank, Ventura Research
The following set of comparative charts of Yes Bank and IndusInd Bank operation
metrics elucidates the compelling re-rating of the valuation of Yes Bank:
th
IndusInd Bank’s valuation expensive than that of Yes Bank
Yes Bank has got enough headroom to expand CASA
160000.0 ` crores CASA

30.0 140,000.0 ` crores CASA 40.0
140000.0 120,000.0 35.0
25.0
120000.0 30.0
100,000.0
20.0
100000.0 25.0
80,000.0
80000.0 15.0 20.0
60,000.0
60000.0 15.0
10.0
112880.3
137856.7
19,037.4
114788.5
40,000.0
13273.2
16169.4
26798.6
49151.7
74192.0
45938.9
66955.6
91175.8
22110.3
34365.4
42361.5
54116.7
74134.4
90741.9
26710.2
60502.3
40000.0 10.0
5.0 20,000.0
20000.0 5.0
0.0 0.0 - 0.0
FY16E
FY17E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
Yes bank CASA % (RHS) IndusInd bank CASA % (RHS)
Source: Yes Bank, Ventura Research Source: IndusInd Bank, Ventura Research
Size of lending book almost similar with an equivalent split among consumer and corporate lending
d
120 % of loan books Yes Bank 120 % of loan books IndusInd Bank
100 100
31 35 35 37 35 35 35
80 40 80 40 45 44 43 41 41 41
49
60 60
40 40
69 65 65 63 65 65 65 60
60 55 56 57 59 59 59
51
20 20
0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Corporate Banking Consumer*

Corporate Consumer
Yes Bank’s NIM to catch up with that of IIB Yes Bank has higher operating efficiency
4.0 (%) 70.0 (%)
65.0
3.5
60.0
3.0
55.0
2.5 50.0
45.0
2.0
40.0
1.5
35.0
1.0 30.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Yes bank IndusInd bank Yes bank IndusInd bank
Source: Yes Bank, IndusInd Bank, Ventura Research Source: Yes Bank, IndusInd Bank, Ventura Research
th
Yes Bank likely to enjoy faster profit growth
4000.0 ` crore 120.0 3500.0 ` crores 160.0

PAT PAT
3500.0 3000.0 140.0
100.0
3000.0 120.0
80.0 2500.0
2500.0 100.0
2000.0
2000.0 60.0 80.0
1500.0 1500.0
40.0 60.0
1000.0 1000.0 40.0
20.0
500.0 500.0 20.0
0.0 0.0 0.0 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY08
FY09
FY10
FY11
FY12
FY16E
FY17E
FY13
FY14
FY15
Yes bank Yes yoy Growth (%) RHS IndusInd bank Indusind yoy Growth (%) RHS
Yes Bank has better Asset quality profile
3.5 (%) GNPA 2.5 (%) NNPA

3.0
2.0
2.5
2.0 1.5
1.5
1.0
1.0
0.5
0.5
0.0 0.0
Source: Yes Bank, IndusInd Bank, Ventura Research Source: Yes Bank, IndusInd Bank, Ventura Research
Return ratios of both the banks are almost similar
30.0 (%) ROE 2.5 (%) ROA
25.0
2.0
20.0
1.5
15.0
1.0
10.0 Dip in ROE due to capital infusion, earning
normalized within 2-3 quarters. 0.5
5.0 Similar trend is expected in Yes Bank
0.0 0.0
Yes bank Indusind bank Yes bank Indusind bank
Source: Yes Bank, IndusInd Bank Ventura Research Source: Yes Bank, IndusInd Bank Ventura Research
th
Both the banks are adequately funded for future growth
as
25.00 (%) CAR 18.00 (%) CAR

16.00
20.00 14.00
12.00
15.00
10.00
8.00
10.00
6.00
5.00 4.00
2.00
0.00 0.00
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E
Yes bank Tier I Tier II IndusInd Bank Tier I Tier II
th
6) Among the mid sized and small sized banks we have made an effort to
categorize comparative peers considering valuations and size of
operations. Accordingly we have grouped them into 2 sets:
i) Compared CUB with DCB given their premium valuations,

ii) Created another peer set of five banks
a. Federal Bank,
b. Karnataka Bank,
c. South Indian Bank,
d. Karur Vysya Bank and
e. Lakshmi Vilas Bank.
i) We prefer DCB over CUB
We initiate coverage on DCB with a BUY and a price target of Rs. 183. We have
valued DCB based on our target P/Adj BV of 2.7X (on FY17E’s adjusted Book
Value). Our target implies an upside of 47% from the CMP. At a CMP of Rs. 125 the
stock is trading at 1.8x FY17E P/Adj. BV.
DCB vs. CUB DCB Bank 1-Yr Fwd. P/Adj. BV Band

4.0 1 Yr Forward Adj. P/BV valuation 200 `
3.5 Avg. P/Adj BV- 2.1 Avg. P/Adj BV- 1.6
180
3.0 160
2.5 140
2.0 120
1.5 100
1.0 80
0.5 60
0.0 40
9-Jul-08
9-Jul-13
9-Feb-08
9-Mar-10
9-Jun-11
9-Feb-13
9-Mar-15
9-Aug-10
9-May-09
9-May-14
9-Oct-09
9-Oct-14
9-Sep-07
9-Dec-08
9-Sep-12
9-Dec-13
20
9-Apr-07
9-Jan-11
9-Apr-12
9-Nov-06
9-Nov-11
0
DCB CUB CMP 0.5X 1.3X 2X 2.8X 3.5X
Source : Ventura Research Source : Ventura Research
DCB is smaller in comparison to its immediate peer CUB. We believe that DCB
offers a better investment proposition over CUB. Since the restructuring of the
business took place in FY11, DCBs operating metrics have seen a decisive
improvement. Asset quality which was its bane has been brought under control. On
all parameters vis a-vis business growth, operating metrics, return ratios etc DCB is
better placed than CUB. Currently DCB is trading at a premium of 1.2X to that of
CUB on the Adj P/BV basis. We believe that this premium will continue to prevail
over the forecast period.
The following set of comparative charts of DCB and CUB’s operating metrics clearly
elucidate why the premium valuation of DCB is expected to sustain over the forecast
period.
th
DCB to continue to trade at premium to CUB
DCB has a larger CASA base compared to CUB
20000.0 ` crores CASA 40.0 35,000.0 ` crores CASA 25.0

18000.0 35.0 30,000.0
16000.0 20.0
30.0
14000.0 25,000.0
12000.0 25.0 15.0
20,000.0
10000.0 20.0
8000.0 15,000.0 10.0
15.0
6000.0 10,000.0
10.0
4000.0 5.0
5.0 5,000.0
2000.0
0.0 0.0 - 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY08
FY09
FY10
FY11
FY16E
FY17E
FY12
FY13
FY14
FY15
DCB Bank CASA % (RHS) CUB CASA % (RHS)
Source: DCB Bank, Ventura Research Source: CUB, Ventura Research

Loan book composition of both the banks is similar
d
120 % of loans book DCB 120 % of loans book CUB
100 100
30 30 35
80 41 44 45 45 80 40 38 39 42 41 41 42 42
49
60 60
40 40
70 70 65 59 56 55 55 60 62 61 58 59 59 58 58
51
20 20
0 0
Corporate Consumer Corporate Banking Consumer*
DCB’s loan book to grow at a quicker pace
16000 ` crores 60 30000.00 ` crores City Union Bank 40.00

DCB Bank
14000 50 35.00
25000.00
12000 40
30.00
30 20000.00
10000 25.00
20
8000 15000.00 20.00
10
6000 15.00
0 10000.00
4000 -10 10.00
5000.00
2000 -20 5.00
0 -30 0.00 0.00
Advances Advances Growth Advances Advances Growth
Source: DCB Bank, CUB, Ventura Research Source: DCB Bank, CUB, Ventura Research
th
Earnings growth of DCB to outstrip that of CUB
300.00 Rs Crore 200% Rs Crore

450.0 45%
400.0 40%
250.00 150% 35%
350.0
200.00 30%
100% 300.0 25%
150.00 250.0 20%
50% 200.0 15%
100.00 10%
150.0
0% 5%
50.00 100.0
0%
-50% 50.0 -5%
0.00
0.0 -10%
FY16E
FY17E
FY10
FY11
FY12
FY13
FY14
FY15
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
-50.00 -100%
-100.00 DCB Bank DCB yoy Growth (%) RHS -150% CUB CUB yoy Growth (%) RHS
Asset quality of both the banks is similar
10.00 GNPA 4.50 (%) NNPA

(%)
9.00 4.00
8.00 3.50
7.00
3.00
6.00
2.50
5.00
2.00
4.00
1.50
3.00
2.00 1.00
1.00 0.50
0.00 0.00
DCB Bank CUB DCB Bank CUB
NIMs at par DCB’s efficiency has improver remarkably
4.0 (%) 90.0 (%)
3.5 80.0
3.0 70.0
2.5 60.0
2.0 50.0
1.5 40.0
1.0 30.0
Source: Source: DCB Bank, CUB, Ventura Research Source: Source: DCB Bank, CUB, Ventura Research
th
Return ratios to catch up with CUB
2.0 (%) ROA 30.0 (%) ROE

1.5 25.0
20.0
1.0
15.0
0.5 10.0
0.0 5.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 0.0
-0.5
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
-5.0
-1.0
-10.0
-1.5 -15.0
-20.0
DCB Bank CUB
DCB Bank CUB

as
18.0% % DCB Bank 18.0% % CUB

16.0% 16.0%
14.0% 14.0%
12.0% 12.0%
10.0% 10.0%
8.0% 8.0%
6.0% 6.0%
4.0% 4.0%
2.0% 2.0%
0.0% 0.0%
Tier I Tier II Tier I Tier II
th
ii) Among the other 5 mid-sized banks we clearly believe that Lakshmi Vilas
Bank presents a compelling case for emerging a winner given:
 Fastest loan growth (22% CAGR FY15-17) among peers leading to market share
gains.
 The worst with respect to asset quality is behind us and the Bank is on track to
improve its asset quality - GNPA (2.2%, -55bps), NNPA (1.4%,-45 bps) to levels
comparable with that of peers by FY17. While during Q1FY16, while all its peers
have seen worsening of asset quality, LVB stands apart with its significant
improvement. The restructured book is also expected to moderate by FY17.
Moderate improvement in asset quality

3.5 2.5 %
% Gross NPA Net NPA
3.0
2.0
2.5
1.5
2.0
1.5 1.0
1.0
0.5
0.5
0.0 0.0
Federal KVB SIB LVB KBL DCB Federal KVB SIB LVB KBL DCB
Q4FY15 Q1FY16 Q4FY15 Q1FY16
Restructured Assets kept under check

3000 ` crores
2500
2000
1500
1000
500
0
Federal KVB SIB LVB KBL DCB
Q4FY15 Q1FY16
th
 NIM expansion on the cards given its strong focus to improve CASA & thereby
reduced cost of funds (-15bps) and slight expansion of lending yields (+70 bps)
 Steep improvement in return ratios RoA and RoE.
 Faster earnings growth and compelling valuations.
Fastest estimated earnings growth and cheaper valuations augur well for LVB
45.00
40.00 LVB
35.00
2-Yr EPS CAGR
30.00 KVB KarBank

25.00
20.00 DCB
SIB CUB
15.00 FedBank
10.00
5.00
0.00
0.0 0.5 1.0 1.5 2.0 2.5 3.0
FY17E P/Adj. BV
We initiate coverage on Lakshmi Vilas Bank with a BUY and a target price of
Rs. 110 over a period of 18 months. We have valued Lakshmi Vilas Bank based
on our target Price to Adjusted Book Value of 1.15X on FY17E book value. Our
target price implies an upside of ~48% from the CMP. At the CMP of Rs. 74, the
bank is trading at 0.8X FY16 and 0.7X FY17 of its Adj. P/BV.
Adj. P/BV valuation bands for LVB
`
150
125
100
75
50
25
0
CMP 0.3X 0.6X 0.9X 1.2X 1.5X
Source : LVB, Ventura Research
th
0.0
1.0
1.2
0.2
0.4
0.6
0.8
0.0
0.4
0.6
0.8
1.0
1.2
1.4
0.2
1.6
16-Apr-07 16-Apr-07
16-Sep-07 16-Sep-07
- 47 -
16-Feb-08 16-Feb-08
16-Jul-08 16-Jul-08
16-Dec-08 16-Dec-08
16-May-09 16-May-09

16-Oct-09 16-Oct-09
16-Mar-10 16-Mar-10
16-Aug-10
16-Aug-10
LVB
LVB
16-Jan-11
16-Jan-11
16-Jun-11
16-Jun-11
16-Nov-11
SIB
LVB vs. SIB
16-Nov-11
LVB vs. KVB
16-Apr-12
KVB
16-Apr-12
16-Sep-12
16-Sep-12
16-Feb-13
16-Feb-13
16-Jul-13
16-Jul-13
16-Dec-13
16-Dec-13
16-May-14
16-May-14
16-Oct-14
16-Mar-15 16-Oct-14
16-Mar-15
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0.0
0.5
1.0
2.0
2.5
1.5
16-Apr-07 16-Apr-07
16-Sep-07 16-Sep-07
16-Feb-08 16-Feb-08
16-Jul-08 16-Jul-08
16-Dec-08 16-Dec-08
16-May-09
16-May-09
16-Oct-09
16-Oct-09

16-Mar-10
16-Mar-10
16-Aug-10
LVB
16-Aug-10
16-Jan-11
LVB
16-Jan-11
16-Jun-11
16-Jun-11
16-Nov-11
16-Nov-11
16-Apr-12
LVB vs. KBL
KBL
FedBank
LVB vs. FEDB
16-Apr-12
16-Sep-12
16-Sep-12
16-Feb-13
th
16-Feb-13
16-Jul-13
16-Jul-13
16-Dec-13
16-Dec-13
16-May-14
16-Oct-14
16-May-14
16-Mar-15 16-Oct-14
Monday 24 August, 2015

16-Mar-15
LVB has demonstrated strong growth in advances and expected to outperform peers
Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank
80000
` Crores
70000
60000
50000
40000
30000
20000
10000
LVB’s NIMs expected to be in line with peers over the forecast period
4.0 % Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Significant reduction in LVB’s Cost to Income ratio on the cards

80.0 Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank
%
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
th
While LVB‘s elevated GNPAs are expected to come down sharply …
%
6.0
5.0
4.0
3.0
2.0
1.0
0.0
… NNPA though expected to come off sharply will still remain elevated
%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

LVB expected CASA growth highest among peers
40.0
% Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
th
RoE expected to improve considerably compared to peers
30.0 %
25.0
20.0
15.0
10.0
5.0
0.0
Sharp improvement of RoA on the anvil

1.8 %
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
th
Valuation brief of other mid-sized and small-sized banks
Federal Bank:
Federal Bank has been proactive in the launch of new product and service offerings
in the digital space. While we are optimistic about these forays we remain concerned
about its asset quality which is expected to worsen over the forecast period. Further
the loan growth of 14.6% CAGR is expected to be in line with that of the industry,
leading to an earnings growth of 11% over the period FY15-17. We believe that
much of the appreciation is already factored into the price. At the current price of Rs.
61, the stock is trading at 1.2X of its FY17E Adj. P/BV. We initiate our coverage on
Federal Bank with a target price of Rs. 73 (1.2X FY17 Adj. P/BV) and recommend a
HOLD on the stock.
Federal Bank Adj. P/BV
90 `
80
70
60
50
40
30
20
10
0
CMP 0.3X 0.6X 0.9X 1.2X 1.5X
South Indian Bank:
South Indian Bank has seen significant deterioration in asset quality in FY15. While
the asset quality is not expected to worsen from current levels, it is expected to
remain elevated over the forecast period. The Bank is expected to see a significant
churn in the composition of its loan book (from low yielding assets to higher yielding
ones) however loan growth is expected to be in line with that of the sector. In line
with the churn of the loan book NIMs are expected to expand marginally (but are
expected to be significantly lower than those seen in FY13.) We do not expect a
significant re-rating of the stock given the fact its return ratios are also expected to
remain flat and significantly off its highs of 20% (RoE) and 1.1% (RoA) established in
FY12. We value the Bank at 0.9X Adj. P/BV at Rs. 24, implying a potential upside of
26% over a period of 18 months. We recommend a HOLD on the stock.
th
South Indian Bank Adj. P/BV
40 `
35
30
25
20
15
10
5
0
CMP 0.3X 0.6X 0.9X 1.2X 1.5X
Karnataka Bank:
Despite its RoE being the highest among its peers, on most other operational
parameters the Bank continues to lag behind its peers. Key monitorables for the
Bank for a re-rating are an improvement in asset quality and uptick in NIMs. The
credit book is expected to grow at a slightly better pace than the industry leading to
an earnings growth of 25%. At current valuations the stock is quoting at 0.7X FY17E
Adj /PBV. We initiate coverage with a target price of 152 (0.85X FY17 Adj P/BV)
indicating a potential appreciation of 25% over the next 18 months.
Karnataka Bank Adj. P/BV
350 `
300
250
200
150
100
50
0
CMP 0.4X 0.7X 0.9X 1.2X 1.4X
th
Karur Vysya Bank:
We initiate coverage on Karur Vysya Bank with a target price of 583 (1.5X FY17 Adj
P/BV) indicating a potential appreciation of 24% over the next 18 months. Key
monitorables would be faster than expected loan growth which could result in
upward revision of earnings numbers and hence price targets. We recommend an
‘ACCUMULATE’ on the stock.
Karur Vysya Bank Adj. P/BV
800 `
700
600
500
400
300
200
100
0
CMP 0.4X 0.8X 1.2X 1.6X 2X
th
COMPANIES
th
HDFC Bank Ltd.
BUY
Target Price `1,327 CMP `1,019 FY17E P/Adj. BV 3.1x
Index Details Contrary to the street we are upbeat about HDFC Bank’s growth prospects.
Sensex 25,742 The recent product forays using technology, in our opinion, should raise the
Nifty 7,809 competitive bar for the industry and help HDFC Bank consolidate its
position as the top private sector bank. The recent move to deepen
Industry Banking
penetration in rural India is a long term positive and would further
strengthen its liability franchise. Its best in class asset quality, exemplary
consistent performance and stickiness of high margins makes it a must
Scrip Details have portfolio stock. In our view, current valuations are justified given the
consistency in performance for the bank across economic cycles and high
MktCap(`cr) 2,56,176
return ratios. We initiate with a BUY for a target price of Rs. 1,327 implying
O/s Shares (Cr) 251.2 an upside of ~30% over the CMP of Rs. 1019. The target price is arrived at
Av Vol (Lacs) 1.2 by assigning multiple of 4.1x on FY17E Adj. BV.
52 Week H/L 1127/792
Div Yield (%) 0.8 Despite its size, strong growth still on the cards
FVPS (`) 2
Despite having grown at a scorching pace since its inception to become India’s
largest private sector bank, the outlook for growth has not dimmed. We expect
Shareholding Pattern HDFC Bank to continue to outperform the sector (4-5% better than system
Shareholder % growth) given that the country is grossly under banked, economic revival is on the
Promoters 21.6 cards and the malaise affecting the government owned banks is expected to lead
DIIs 10.5 to market share gains. We expect HDFC Bank’s loan portfolio to grow at a CAGR
FIIs 32.5 of 23.9% to Rs. 5,61,392 crores by FY17.
Public 35.4 Credit growth momentum to continue over coming years
Total 100.0
600000.0 ` crores
HDFC Bank vs. Sensex 500000.0
308765
1200 31000 400000.0
244477
1000 30000
29000
193712
800 28000 300000.0

154530 148470
87939 107481
103080 136641
79991
600 27000
71723
26000
400 200000.0
25000
252626
208258
200 24000
171783
79991
100000.0
54107
0 23000
01-Jul-2015
01-Feb-2015
01-Mar-2015
01-Jun-2015
01-Aug-2014
01-May-2015
01-Aug-2015
01-Oct-2014
01-Sep-2014
01-Dec-2014
01-Jan-2015
01-Apr-2015
01-Nov-2014
0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
HDFC Bank S&P Bse Sensex Corporate Retail

Key Financials (` in Cr)
Net Non
P/E P/Adj BV
Y/E Mar Interest Interest PAT EPS Adj. BV ROE (%) ROA (%)
(x) (x)
Income Income
2014 18,482.6 7919.6 8,478.4 35.3 177.8 21.3 1.9 28.8 5.7
2015 22,395.7 8,996.3 10,215.9 40.8 243.8 19.4 1.9 25.0 4.2
2016E 26,625.5 10,579.1 12,277.5 49.0 279.8 18.4 1.9 20.8 3.7
2017E 32,306.5 13,779.6 15,586.7 62.2 323.7 20.1 1.9 16.4 3.1
th
Deposit growth to mirror advance growth
800000.0 ` crores % 30.0
700000.0
25.0
600000.0
20.0
500000.0
400000.0 15.0
300000.0
10.0
167404.4
246706.4
296247.0
367337.5
450795.7
563403.8
208586.4
698620.8
200000.0
5.0
100000.0
0.0 0.0
Deposits Deposit Growth
Well placed to benefit from the impending economic upturn & growing
consumerism
The credit portfolio is well balanced with near equal exposure to retail and
wholesale segments (53:47) with no skewing to any particular sector of the
economy. This has ensured stability in the loan book growth across business
cycles. Further the rapid scale up of its rural footprint has also ensured that the
Bank has a well balanced presence across the urban & rural diaspora. These key
strategic decisions clearly ensure that HDFC Bank is well placed to benefit from
the upturn in the economy and growing consumerism.
Granular Retail loan portfolio

2% 2%
5%
20%
6%
8%
14%
9%
10%
12%
11%
Others Two Wheelers Gold Loans

CV/CE Kisan Gold Credit Cards
Business Banking NRI Home Loans
Personal Loan Auto Loans
th
Successful track record of leadership initiatives inspires confidence in new
forays
The Bank has been an early entrant across business opportunities and this
initiative has ensured that it continues to enjoy a leadership position. Today it is
one of the largest settlements bank for capital and commodity markets, the
preferred banking partner for e commerce and stands at number two in tax
collections for the GOI.
Technology led initiatives to help consolidate market position and foster

market share gains
The Banks digital platform and technological advancements has helped bolster
customer acquisition. This leverage in technology has led customer initiated
transactions through internet and mobile to increase from 13% in FY05 to 63% in
FY15. We expect significant traction as more customers migrate to mobile
banking.
Currently the fledgling m-commerce industry of Rs 13,000 crores is significantly

smaller than the Rs. 110,000 crores internet commerce. Global trends indicate
that the increasing penetration of smart phones, convenience of mobile
transacting and “mobile only” websites coupled with the governments Digital India
initiative and 4G is expected to lead to m-commerce eventually taking over from
internet commerce.
Innovative digital product initiatives and thrust on data analytics to further

raise the bar and consolidate its formidable leadership position
It has up fronted investments in technology and its pioneering product initiatives

like 4W / 2W auto loans in 30 / 15 minutes respectively and design your own loan
against share products will raise the bar in terms of service delivery and customer
turnaround times.
It is also strengthening its in-house CRM and analytics team. These technological
initiatives are expected to help the HDFC Bank achieve its priorities which include
customer acquisition, product distribution and increasing customer penetration
through cross-selling, besides enhancing credit efficiencies.
All pervasive technology to improve operation efficiencies significantly.
As the scale and size of its digital platform enhances, operating efficiencies are
expected to kick in. It is pertinent to know that staffing costs have risen by only
th
15.7% over the last 5 years while total income has grown at a much faster 23.3%.
The cost effective digital initiative coupled with the improving profitability of its
recently opened branches and reduced turnaround times of low cost rural
branches should help in lowering the cost to income by 600 bps to 39% by FY17.
Early rural initiative augurs well for HDFC Bank
HDFC Bank has rapidly scaled up its geographical footprint nearly doubling its
number of branches over the last three years. The thrust has been on opening
semi urban and rural branches with these now accounting for 55% of its network.
Aggressive and diversified branch expansion

120.0 %
1987 2544 3062 3403 3659
100.0
9 9
17 22 23
80.0
31 36
36
60.0 34 32
28
40.0 27
24 21 21
20.0
32 28 23 23 24
0.0
FY11 FY12 FY13 FY14 FY15
Metro Urban Semi-Urban Rural
The wide spread of its pan India footprint of low cost branches (with less than 5
personnel) have seen a considerable drop in turnaround time and are generating
good business. These branches have helped improve deposit mobilizations
through savings and large retail deposits besides helping the Bank achieve its
priority sector lending (PSL) objectives.
We expect deposits to grow at a CAGR of 24.5% with CASA share improving to

43% (CASA CAGR of 24.5% to Rs. 299,625 crores fueled by SA CAGR of 26.7%
to Rs. 192,150 crore)
th
Stable share of retail in Deposit mix
120.0 %
100.0
80.0
48.0 47.3 51.6 52.6 55.2 57.1 57.6 57.1
60.0
40.0
52.0 52.7 48.4 47.4
20.0 44.8 42.9 42.4 42.9
0.0
CASA TD
With an improving savings mix in CASA and large retail deposits, the already low
cost of funds is expected to remain around these levels. Further, the Bank has
focused on increasing working capital finance and trade services, which are high
yielding compared to term loans. The low cost of funds and focus on high yielding
assets has ensured higher margins than peers. Across business cycles margins
have remained extremely stable (range of 4.25 - 4.5%) due to its strict policy of
not compromising on margins and asset quality. Going forward we expect margins
to remain sticky around these levels.
Best in class asset quality
Even in the current challenging times, the asset quality of HDFC Bank has
remained healthy. Its GNPA has improved from 1.4% in FY10 to 0.9% in FY15. Its
NNPA stood at 0.2% in FY15 which is lower than the 10 year average. We expect
asset quality to remain benign as the Bank has an uncompromising stance
towards asset quality vis-a-vis growth. We have modeled marginally higher
GNPAs (+10 bps to 1%) and NNPAs (+5 bps to 0.4%)
th
Asset quality to remain best amongst the industry
1.6 % % 90.0
1.4 80.0
1.2 70.0
60.0
1.0
50.0
0.8
40.0
0.6
30.0
0.4 20.0
0.2 10.0
0.0 0.0
PCR (RHS) GNPA % NNPA %
Source HDFC Bank, Ventura Research
Operational performance to remain robust
We expect HDFC’s interest income to grow at a CAGR of 23.7% to Rs. 74,223

crores, which is slightly lower than its 5-year average of 24.5%. However, this is
despite the higher base of HDFC. Further, with a majority of HDFC’s fee income
(85-90%) coming from the retail segment, we expect an uptick in the fee income
growth on the back of revival of the retail segment, and have projected a growth of
19.6% in fees income to Rs. 10,610 crores by FY17E. Moreover, as the benefits
of the initiatives taken on the technological front unfurls, the Cost to Income ratio
is expected to squeeze by 260 bps to 42% by FY17E. All these positives will
translate to profitability growth of ~24% CAGR to Rs. 15,586 crores by FY17E and
will drive the return ratios of the Bank going ahead.
NII growth to sustain NIMs to stay at historical level
35000.0 ` crores % 30.0 14.0 %

30000.0 25.0 12.0
25000.0 10.0
20.0
20000.0 8.0
15.0
15000.0 6.0
10.0
10000.0 4.0
5000.0 5.0 2.0
0.0 0.0 0.0

NII NII rate (RHS) CoF YoA NIM (RHS)
Source HDFC Bank, Ventura Research Source : HDFC Bank, Ventura Research
th
Lower cost to drive profitability Consistently strong return ratios
52.0 25.0 % % 2.5
%
50.0
20.0 2.0
48.0
15.0 1.5
46.0
44.0
10.0 1.0
42.0
5.0 0.5
40.0
38.0 0.0 0.0

Cost to Income RoE RoA (RHS)
Source : HDFC Bank, Ventura Research Source :HDFC Bank, Ventura Research
Adequately funded for future growth
HDFC’s CAR as of FY15 stood at 16.8% (of which 13.7% is Tier I), which was well
above regulatory requirements of 9%. In FY15, the bank issued equity shares
worth Rs. 9,722 crores to ensure adequate capital to support its growth and
expansion.
Comfortable Capital Adequacy

20.0 %
18.0
16.0
4.2 3.1
14.0 4.0 4.9 5.7 4.3
12.0
10.0
8.0
13.3 13.7
6.0 12.2 11.6 11.1 11.8
4.0
2.0
0.0
FY10 FY11 FY12 FY13 FY14 FY15
Tier-1 Tier-2
Why HDFC bank remains our top pick:
We remain strongly positive on the fortunes of HDFC Bank in deference to street

estimates. We are confident that robust growth is on the cards given that:
th
It is well placed to benefit from the impending economic upturn & growing
consumerism. We forecast the loan book growth of 23.9% CAGR over the
forecast period FY15-17 leading to an earnings growth of 23.5% CAGR.
The bank has a successful track record of leadership initiatives, which
inspires confidence in the successful rollout of its new foray. Its recent
technology led initiatives are expected to help further consolidate its
market position and foster market share gains,. Further the deeper
embedding of technology across all operations is expected to improve its
operational efficiencies significantly.
Early initiatives in rural banking are expected to favor the Bank immensely.
HDFC Bank has adequately demonstrated beyond doubt of maintaining
best in class asset quality.
HDFC Bank’s premium valuation to sustain
Barring for the economic meltdown of FY2008-2009, HDFC Bank has consistently
traded in a tight band of 3.2X - 4.6X of its 1-Yr Forward Adj P/BV (with its mean
since 2002 of 3.9X Adj P/BV) With the Bank taking the lead in the introduction of
technology based product offerings, its exemplary asset quality, market
penetration opportunity and resurgent expectations of the economy, we believe
that HDFC Bank will continue to demand premium valuations. We initiate
coverage on HDFC bank with a BUY for a target price of Rs. 1,327 implying an
upside of ~30% over the CMP of Rs. 1019. The target price is arrived at by
assigning a multiple of 4.1x on FY17E Adj. BV.
HDFC Bank 1-Yr Fwd P/Adj. BV bands

`
1,400 Average P/Adj. BV- Bull Phase average
4.0x P/Adj. BV- 4.2x
1,200
1,000
800
600
400 Overall average
P/Adj. BV- 4.0x
200
0
CMP 1X 2X 3X 4X 5X
th
Financials & Projections
Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E Y/E March (` crore) FY13 FY14 FY15 FY16E FY17E
Income Statement Ratio Analysis
Interest Income 35,064.9 41,135.5 48,469.9 60,198.0 74,223.2 Efficiency Ratio (%)
Interest Expense 19,253.8 22,652.9 26,074.2 33,572.5 41,916.7 Int Expended / Int Earned 54.9 55.1 53.8 55.8 56.5
Net Interest Income 15,811.1 18,482.6 22,395.7 26,625.5 32,306.5 Int Income / Total Funds 8.8 8.4 8.2 8.3 8.3
YoY change (%) 22.7 16.9 21.2 18.9 21.3 NII / Total Income 37.7 37.7 39.0 37.6 36.7
Non Interest Income 6,852.6 7,919.6 8,996.3 10,579.1 13,779.6 Other Inc. / Total Income 16.3 16.1 15.7 14.9 15.7
Total Net Income 22,663.7 26,402.3 31,392.0 37,204.6 46,086.1 Ope. Exp. / Total Income 26.8 24.5 24.3 22.6 22.0
Total Operating Expenses 11,236.1 12,042.2 13,987.6 15,998.0 19,356.2 Net Profit / Total Funds 1.7 1.7 1.7 1.7 1.7
Pre Provision profit 11,427.6 14,360.1 17,404.5 21,206.6 26,729.9 Credit / Deposit 80.9 82.5 81.1 80.4 80.4
YoY change (%) 21.7 25.7 21.2 21.8 26.0 Investment / Deposit 37.7 32.9 36.9 33.1 30.9
Provisions for expenses 1,676.4 1,587.3 2,075.8 2,716.4 3,256.1 NIM 4.6 4.4 4.4 4.3 4.4
Profit Before Tax 9,751.2 12,772.8 15,328.7 18,490.2 23,473.9
YoY change (%) 29.8 31.0 20.0 20.6 27.0 Solvency
Taxes 3,024.9 4,294.4 5,112.8 6,212.7 7,887.2 Gross NPA (Rs. Cr) 2,334.6 2,989.3 3,438.4 4,527.4 5,613.9
Net profit 6,726.3 8,478.4 10,215.9 12,277.5 15,586.7 Net NPA (Rs. Cr) 469.0 820.0 896.3 1,482.5 2,227.8
YoY change (%) 30.2 26.0 20.5 20.2 27.0 Gross NPA (%) 1.0 1.0 0.9 1.0 1.0
Net NPA (%) 0.2 0.3 0.2 0.3 0.4
Balance Sheet Capital Adequacy Ratio (%) 16.8 16.1 16.8 16.0 15.1
Cash & Balances with RBI 14,627.4 25,345.6 27,510.5 37,951.8 44,357.6 Tier I Capital (%) 11.1 11.8 13.7 13.1 12.6
Inter bank borrrowing 12,652.8 14,238.0 8,821.0 14,085.1 20,958.6 Tier II Capital (%) 5.7 4.3 3.1 2.9 2.5
Investments 111,613.6 120,951.1 166,460.0 186,208.3 216,147.9
Loan and Advances 239,720.6 303,000.3 365,495.0 452,735.2 561,391.7 Per Share Data (`)
Other Assets 21,717.5 28,064.5 22,216.6 35,672.4 50,898.0 EPS 28.3 35.3 40.8 49.0 62.2
Total Assets 400,331.9 491,599.5 590,503.1 726,652.8 893,753.7 Dividend Per Share 5.5 6.9 8.0 9.8 12.4
Deposits 296,247.0 367,337.5 450,795.7 563,403.8 698,620.8 Book Value 152.2 181.2 247.4 284.9 332.6
Demand 52,310.3 61,488.0 73,711.5 88,822.4 107,475.1 Adjusted Book Value of Share 150.2 177.8 243.8 279.0 323.7
Savings 88,211.2 103,133.3 119,634.7 150,195.1 192,150.5
Term 155,725.5 202,716.1 257,449.5 324,386.3 398,995.2 Valuation Ratio
Borrowings 33,006.6 39,439.0 45,213.6 52,396.6 62,875.9 Price/Earnings (x) 36.0 28.8 25.0 20.8 16.4
Other Liability 34,864.2 41,344.4 32,484.4 39,438.3 48,903.5 Price/Book Value (x) 6.7 5.6 4.1 3.6 3.1
Equity 475.9 479.8 501.3 501.3 501.3 Price/Adj.Book Value (x) 6.8 5.7 4.2 3.7 3.1
Reserves 35,738.3 42,998.8 61,508.1 70,912.8 82,852.4
Total Liabilities 400,331.9 491,599.5 590,503.1 726,652.8 893,753.7 Return Ratio
RoAA (%) 1.8 1.9 1.9 1.9 1.9
Dupont Analysis RoAE (%) 20.3 21.3 19.4 18.4 20.1
% of Average Assets
Net Interest Income 4.3 4.1 4.1 4.0 4.0 Growth Ratio (%)
Non Interest Income 1.9 1.8 1.7 1.6 1.7 Interest Income 25.8 17.3 17.8 24.2 23.3
Net Income 6.1 5.9 5.8 5.6 5.7 Interest Expenses 28.4 17.7 15.1 28.8 24.9
Operating Expenses 3.0 2.7 2.6 2.4 2.4 Other Income 18.5 15.6 13.6 17.6 30.3
Operating Profit 3.1 3.2 3.2 3.2 3.3 Total Income 24.5 17.0 17.1 23.2 24.3
Provisions & Contingencies 0.5 0.4 0.4 0.4 0.4 Net profit 0.3 26.0 20.5 20.2 27.0
Taxes 0.8 1.0 0.9 0.9 1.0 Deposits 20.1 24.0 22.7 25.0 24.0
Avg.Assets / Avg.Equity (x) 781.0 933.3 1,102.9 1,313.7 1,616.2 Advances 22.7 26.4 20.6 23.9 24.0
th
Axis Bank Ltd.
BUY
Target Price `813 CMP `482 FY17E Adj. P/BV 2.0x
Index Details Granular build up of the retail portfolio, increasing focus on higher rated
corporate loans, continued thrust on CASA and stable asset quality augur well
Sensex 25,742
for Axis Bank (Axis). Further, the aggressive branch roll out with the branches
Nifty 7,809
functioning more as advisory based centers over transaction networks should
Industry Bank
help drive business growth momentum. Given these superlative metrics, we
believe that a valuation re-rating is on the cards. We recommend a Buy on the
Scrip Details stock at its CMP of Rs. 482 (current FY17 P/Adj. BV of 2.1x) with a price
Mkt Cap(` cr) 1,14,561 objective of Rs 813 (target P/BV 3.3x) implying an upside of 69% over the next
BVPS (`) 197 18 months. Inclusion in the MSCI should be an added positive.
O/s Shares (cr) 237.5
Av Vol (Lacs) 5.2 Retail to propel credit growth
52 Week H/L 655/369
Over the forecast period, we expect Axis Bank to maintain the growth momentum of
Div Yield (%) 0.8
its credit book. The loan book is expected to grow at a CAGR of 19.7% to Rs.
FVPS (`) 2
402,461 crores driven by its thrust on “SME and retail lending” ( CAGR of 22.2% to
Rs. 231,203 crores over the same period). The Retail segment is expected to be
Shareholding Pattern propelled by SME lending and mortgage loans. Further the bank is not averse to
Shareholder % taking calibrated risks as it intends to grow its unsecured lending (expected share of
Promoters 29.2 unsecured lending to go up to 12-15% of total credit) by mining its existing +2 mns
DIIs 13.4 clientele. Extensive usage of data analytics is expected to keep risks under check.
FIIs 44.5 Advances growth expected to remain above 20%
Public 12.9
Total 100.0 450000 ` crores % 40
400000 35
350000 30
Axis Bank vs. Sensex
300000
25
231203
700 31000
250000
190356
600 30000
154899
20
106247
500 29000
200000
113084 83882
49165
36519
108394 61366
28000
400
27000 15
300
26000 150000
200 25000 10
120074
126184
146373
171257
100 100000
67821
93242
24000
0 23000
50000 5
01-Jul-2015
01-Feb-2015
01-Mar-2015
01-Jun-2015
01-Aug-2014
01-May-2015
01-Aug-2015
01-Oct-2014
01-Sep-2014
01-Dec-2014
01-Jan-2015
01-Apr-2015
01-Nov-2014
0 0
Axis Bank Ltd. S&P Bse Sensex Retail FY10 Growth rate (RHS)

Net Non
EPS Adj.BV P/Adj. ROA ROE
Y/E Mar Interest Interest PAT P/E (x)
(`) (`) BV (x) (%) (%)
Income Income
2014 11,951.6 7,405.2 6,217.7 26.5 158.3 18.2 3.0 1.7 17.4
2015 14,224.1 8,365.0 7,357.9 31.0 182.9 15.5 2.6 1.7 17.8
2016E 16,579.4 9,259.1 8,748.0 36.9 211.5 13.7 2.3 1.8 18.1
2017E 20,028.0 10,291.0 10,293.2 43.4 246.3 11.1 2.0 1.8 18.2
th
- 64 Monday 24 August, 2015
.. Diversified retail lending book Deposit growth to complement growth in advances
500000.0 ` crores 40.0
450000.0 35.0
6%
2% 400000.0
30.0
350000.0
9%
Housing Loans 300000.0 25.0
Auto Loans
8% 250000.0 20.0
Personal Loans
200000.0 15.0
LAP
150000.0
12% Credit cards 10.0
63% 100000.0
Others
50000.0 5.0
0.0 0.0
Deposits Deposit Growth
Source :Axis Bank, Ventura Research Source :Axis Bank, Ventura Research
NIMs to improve marginally
The robust growth of the retail lending business is expected to improve its share vis-
à-vis the corporate book to 57:43 from the present 55:45. Given the fact that there is
general caution against a build-up of corporate NPAs, preference towards a higher
rated corporate portfolio implies a slowdown in the corporate loan growth (CAGR of
16.5% to Rs. 171,257 crores by FY17) and elevating margin pressures. However the
larger spreads of the faster growing retail book should help improve overall NIMs
(calculated) to 3.6% by FY17E.
Lower CoF to keep NIM intact Granular Deposit mix

10.0 % 120.0 %
9.0
100.0
8.0
7.0
80.0
6.0 53.3 58.9 58.5 55.6 55.0 55.2 54.5 55.0
5.0 60.0
4.0
40.0
3.0
2.0 46.7 41.1 41.5 44.4 45.0 44.8 45.5 45.0
20.0
1.0
0.0 -
Yield on Advances Cost of Funds NIM CASA TD
th
Thrust on expanding rural footprint
To promote retail growth the Bank has an aggressive branch expansion plan of
adding another 1000 branches by FY17 to its existing network of 2589 branches.
A psyche change of treating branches more as advisory centers than simply
transaction banking networks and the focus towards sourcing one retail product per
branch (as a main product based on specific criteria) is expected to drive business
growth. Over all deposit mobilization is expected to grow at a CAGR of 20.5% to Rs
467,977 crores. Thrust on increasing long term growing CASA (CAGR of 20.8% to
Rs. 210,590 crores) is expected to contain the cost of funds.
Adequately funded on the capital front
On the capital front Axis is adequately funded to grow over the next 2-3 years. The
internal threshold Tier 1 CAR of 9.5% is expected to trigger another round of fund
raising, which in our opinion would be more back ended towards Q3FY17 (only if
necessary).
Adequately funded on the capital front
18.0 %
16.0
4.8 4.2
14.0 4.6 3.0
12.0 4.2
3.2
10.0
8.0
6.0 12.2 12.8 12.1
11.2
9.4 9.5
4.0
2.0
0.0
Tier I Tier II
Source : Axis Bank, Ventura Research
Asset quality to be maintained
The improving macro economic situation is expected to lower stressed asset

formation in the system. While we have factored in marginal deterioration of asset
quality (FY17 GNPA 1.52 (+15bps) / NNPA 0.55 (+10 bps), we are not particularly
perturbed and believe that asset quality should be comfortable. The focus on higher
rated corporate borrowers and granular structure of its retail book is expected to
maintain asset quality over the next couple of years. On the provisioning front, Axis
Bank has been very prudent and has a provisioning coverage ratio (PCR) of 78%.
The restructured asset book of Axis Bank stood at Rs. 8,170 crores (2.7% of gross
advance), going ahead no significant restructuring is in the pipeline.
th
Asset Quality to remain stable
1.6 % % 76.0
1.4 74.0
1.2
72.0
1.0
70.0
0.8
68.0
0.6
66.0
0.4
0.2 64.0
0.0 62.0
PCR (RHS) GNPA NNPA
Operationally we expect NII to grow at a CAGR of 18.3% to Rs. 20,031 crores by

FY17. Fee income is expected to grow at a CAGR of 12.2% to Rs 8,542 crores aided
by retail fees which comprise 38% of overall fee income. Cost to income is expected
to be maintained at 40.2 by FY17E, this is despite aggressive branch expansion
plans. Earnings are expected to grow at a CAGR of 17.5% to Rs. 10,295 crores by
FY17. Higher profitability will lead to greater return ratios. We expect RoE and RoA to
be at 18.3% and 1.8% respectively, from the current 17.8% and 1.7%.
Superior return ratios NII growth to moderate to sustainable level of 17-18%

21.0 % % 1.9 25000 ` crores % 40
20.5 1.8 35
20.0 1.8 20000
30
19.5 1.7
15000 25
19.0 1.7
18.5 1.6 20
18.0 1.6 10000 15
17.5 1.5 10
17.0 1.5 5000
5
16.5 1.4
0 0
16.0 1.4
RoE RoA (RHS) NII NiI growth
th
Operational efficiency to improve further
46.0 %
45.0
44.0
43.0
42.0
41.0
40.0
39.0
38.0
37.0
FY17E
FY16E
Q1FY14
Q2FY14
Q4FY14
Q1FY15
Q3FY15
Q4FY15
Q3FY14
Q2FY15
Cost to Income
Re-rating on the cards
Granular build up of the retail portfolio, increasing focus on higher rated corporate
loans, continued thrust on CASA and stable asset quality augur well for Axis Bank
(Axis). Further the aggressive branch roll out with the branches functioning more as
advisory based centers over transaction networks should help drive business growth
momentum. Given these superlative metrics, we believe that a valuation re-rating is
on the cards. We recommend a Buy on the stock at its CMP of Rs. 482 (current
FY17 P/Adj. BV of 2.0x) with a price objective of Rs 813 (target P/BV 3.3x) implying
an upside of 69% over the next 18 months. Inclusion in the MSCI should be an
added positive.
P/Adj. BV
800 `
700
600
500
400
300
200
100
0
CMP 1X 1.75X 2.5X 3.25X 4X
th
Axis Bank relative valuation to HDFC Bank at cyclical lows
Currently Axis Banks trades at a discount of 0.5x to that of HDFC Bank on the Adj
P/BV basis. Undoubtedly HDFC Bank given its best in class performance metrics
deserves the rich valuations it commands. However we believe that the significant
valuation discount of Axis Bank is unjustified given that its performance on most
parameters are near or equal to that of HDFC Bank’s.
Further scope for re-rating of the valuations

1.2
1-Yr Forward Adj. P/BV relative valuation
0.8
0.6
0.4
Bull phase average- 0.7x Bear phase average- 0.5x

0.2
Entire period average- 0.6x
0
16-Oct-04
16-Oct-05
16-Oct-06
16-Oct-07
16-Oct-08
16-Oct-09
16-Oct-10
16-Oct-11
16-Oct-12
16-Oct-13
16-Oct-14
16-Apr-04
16-Apr-05
16-Apr-06
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16-Apr-08
16-Apr-09
16-Apr-10
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16-Apr-15
Axis Bank HDFC

Historically during the previous bull run, the multiple averaged around 0.7x and
during the fag end of the boom in 2008 it peaked at 0.9x HDFC’s 1 yr forward
Adj P/BV. It was only when the economic slowdown and stress build up in the
system got accentuated that the discount widened and Axis Bank consistently traded
well below its long term average discount (0.5x). In October 2013 the gap widened to
its maximum of 0.4x. Since then with the onset of the new government and
sentiment stabilizing, this discount has started narrowing.
In a fast growing economy BFS stocks tend to post strong growth and with India on
the brink of a turnaround, BFS stocks are expected to be at the fulcrum of the India
growth story. We expect the discount to narrow substantially as the growth cycle
returns. Since the previous bull run there is substantial improvement in the metrics of
Axis Bank not only in comparison to its own performance (of the previous bull run)
but vis-avis HDFC Bank.
Possible inclusion in the MSCI could trigger a further narrowing of this valuation
disparity. This should fuel demand for the Axis Bank paper. We target an average
discount to HDFC Bank of ~0.8X implying a price target of Rs 813.
The following set of comparative charts of Axis Banks and HDFC Bank operation
metrics elucidates the compelling re-rating of the valuation of Axis Bank.
th
Axis Bank’s valuation to catch up with HDFC
Axis Bank has superior CASA ratio
800000 ` crores HDFC Bank 60.0 500000 ` crores 46.0
Axis Bank
700000 450000 45.0
50.0
400000
600000 44.0
350000
40.0
500000 43.0
300000
400000 30.0 250000 42.0
300000 200000 41.0

20.0
150000
200000 40.0
100000
10.0
100000 39.0
50000
0 0.0 0 38.0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
Deposits CASA % Deposits CASA %
Higher share of the granular lending business augurs well with Axis
d
120 % HDFC Bank 120 Axis Bank

%
100 100
80 80 34.5 36.1
42.6 46.9
51.0 51.0 51.0 55.1
59.0 56.5 57.4
72.0 72.0 71.0
60 60
40 40
65.5 63.9
57.4 53.1
49.0 49.0 49.0 44.9
20 41.0 20 43.5 42.6
28.0 28.0 29.0
0 0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
Corporate Consumer Corporate Consumer
HDFC will continue to outperform Axis Bank in terms of credit book

©
600000.0 500000.0 ` crores

` crores HDFC Bank Axis Bank
500000.0 400000.0
400000.0
300000.0
300000.0
200000.0
200000.0
100000.0
100000.0
0.0 0.0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
th
Axis Bank’s NII lags HDFC Bank
35000.0 ` crores % 30 25000.0 ` crores Axis Bank 35
HDFC Bank %
30000.0 30
25
20000.0
25000.0 25
20
20000.0 15000.0
20
15
15000.0 15
10000.0
10
10000.0 10
5
5000.0
5000.0 5
0.0 0 0.0 0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
NII Growth %
NII Growth %
HDFC’s asset quality better than Axis

1.6 0.6
GNPA % NNPA %
1.4
0.5
1.2
0.4
1.0
0.8 0.3
0.6
0.2
0.4
0.1
0.2
0.0 0.0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
HDFC AXIS HDFC AXIS
Source: HDFC Bank, Axis Bank Ventura Research

Scope of NIM to expand for Axis Axis Bank has fairly lower Cost to Income
5.0 % NIM 60.0
% Cost to Income
4.5
4.0 50.0
3.5
40.0
3.0
2.5 30.0
2.0
20.0
1.5
1.0
10.0
0.5
0.0 0.0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
HDFC AXIS HDFC AXIS

th
Axis Bank’s return ratios closely track HDFC
25.0 ROE 2.5 ROA

% %
20.0 2.0
15.0 1.5
10.0 1.0
5.0 0.5
0.0 0.0
2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E
HDFC AXIS HDFC AXIS
Source: HDFC Bank, Axis Bank Ventura Research Source: HDFC Bank, Axis Bank Ventura Research
CAR on par
18 % HDFC Bank 18 % Axis Bank
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
Tier-1 Tier-2 Tier-1 Tier-2
as
Source: HDFC Bank, Ventura Research

Source: Axis Bank Ventura Research
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Financials and Projections
Net profit 5,179.4 6,217.7 7,357.9 8,748.0 10,293.2 Net NPA (Rs. Cr) 704.1 1,024.6 1,316.9 1,897.1 2,417.8
Net NPA (%) 0.3 0.4 0.4 0.5 0.6
Investments 113,737.5 113,548.4 132,342.8 153,756.5 179,438.8
Other Assets 9,422.2 11,391.0 12,407.5 13,394.9 14,705.9 EPS 22.1 26.5 31.0 36.9 43.4
Savings 63,777.7 77,775.9 88,292.0 109,185.5 132,671.5
Reserves 32,639.9 37,750.6 44,202.4 51,561.3 60,326.5
RoAA (%) 1.4 1.7 1.7 1.8 1.8
% of Average Assets
Taxes 0.8 0.9 0.9 0.9 0.9 Deposits 14.8 11.2 14.8 20.0 20.9
Avg.Assets / Avg.Equity (x) 710.6 771.8 895.4 1,050.5 1,232.3 Advances 16.0 16.8 22.2 19.8 19.5
th
ICICI Bank Ltd.
ACCUMULATE
Target Price `349 CMP `270 FY17E P/Adj. BV 1.6x

Index Details ICICI Bank (ICICI), one of India’s largest private sector banks, has witnessed
Sensex 25,472 a marked improvement in performance ever since it embarked on its 5C
Nifty 7,809 strategy -- concentrated focus on improving Credit Growth, Credit Quality,
CASA, Customer Centricity, and Cost Efficiency. Over the years, the Bank
Industry Bank
has made substantial progress on all the parameters. While the bank’s asset
quality has improved, it continues to remain below industry standards owing
to exposure to cash strapped sectors like infrastructure and power.
Scrip Details
We initiate coverage on ICICI Bank with a BUY recommendation and a target
price of 349. We have valued ICICI Bank based on the sum-of-parts method;
O/s Shares (Cr) 580.5 the core banking business is valued at 273 (1.9x FY17E Adj. P/BV) and 76
Av Vol (Lacs) 7.6 being value assigned to its other businesses. We have arrived at the adjusted
52 Week H/L 393/280 book value of standalone book by deducting investment in subsidiaries. Our
Div Yield (%) 1.6 SOTP target price implies an upside of 28% from the CMP. At the CMP of 270,
FVPS (`) 2 it is trading at 2.1x FY15, 1.9x FY16 and 1.6x FY17 of its Adj. P/BV
Shareholding Pattern Credit Growth : Thrust on Retail & SME Banking to spur the growth
Shareholder %
Over the past decade, ICICI’s advances have grown at a steady pace except for
Promoters -
FY09 and FY10, which were challenging years for the bank as well as the macro
DIIs 22.3
economy following the fallout of the financial crises globally. During these years,
FIIs 40.2 the bank’s loan book de-grew at 3% and 17% respectively. Overall, advances have
Public 37.4 grown at a five year CAGR of 16% to Rs 3,87,522 crore in FY15 led by growth in
Total 100.0 the corporate lending book, the proportion of which has increased from 21% in
FY10 to 29% in FY15.
ICICI Bank vs. Sensex
450 31000 Retail & SME lending to drive future growth
400 30000
350 29000
300 28000
250
200
27000
26000
The management has indicated that it will focus on high yielding retail (43% of
150
100
50
25000
24000
FY15 advances) and SME advances (4% of SME advances) for future growth. The
0 23000
Bank intends to leverage its technological expertise to provide a superior customer
01-Jul-2015
01-Feb-2015
01-Mar-2015
01-Jun-2015
01-Aug-2014
01-May-2015
01-Aug-2015
01-Oct-2014
01-Sep-2014
01-Dec-2014
01-Jan-2015
01-Apr-2015
01-Nov-2014
experience which is expected to drive growth in the retail segment. Further, given
the weak global economy and sluggish corporate demand, the growth in corporate
ICICI Bank S&P Bse Sensex
and overseas (24% of FY15 advances) advances is expected to lag retail loan
book growth. Also, faster retail loan book growth will add diversity to the advances
Key Financials (` in Cr) portfolio.
Net Non
P/E P/Adj BV
Y/E Mar Interest Interest APAT EPS Adj. BV ROE (%) ROA (%)
(x) (x)
Income Income
2014 16,475.6 10,428.8 9,811.7 17.0 121.0 14.0 1.7 15.9 2.2
2015 19,039.6 12,176.0 11,176.2 19.3 131.5 14.5 1.8 14.0 2.1
2016E 21,816.0 14,185.0 14,021.9 24.3 144.2 16.4 2.0 11.1 1.9
2017E 27,015.7 16,738.3 16,662.7 28.8 163.7 17.2 2.0 9.4 1.6
th
Granular retail loan break up
%
15.5
2.4
4.2
5.7 54.2
18.0
Home Loans Vehicle Loans Business Banking

Personal Loans Credit Cards Others
Source :ICICI Bank, Ventura Research

Overall, we expect advances to grow at a 2-year CAGR of 19% to Rs 5,48,731
crore by FY17 led by 23.5% CAGR in retail advances to Rs 2,51,163 crores
(~46%), 18% CAGR in overseas business to Rs 1,30,564 crore in FY17(~24%)
and 12% CAGR each in corporate ( 26%) and SME loan book(4%). Within retail
advances, we expect Business Banking (26% CAGR), Credit Cards (23.5%
CAGR) and Home loans (21% CAGR) segments to drive growth.
Focus on retail to drive the credit growth
600000.0 ` crores
500000.0
273361
400000.0
238135
205774
300000.0
146997 191706
122485 167764
103521150207
94119122247
85167 96039
200000.0
275370
226891
181748
100000.0
0.0
Retail Corporate
Low-cost retail deposits franchise to drive deposits growth
ICICI’s deposit base has grown at a 5-year CAGR of 12.3% to Rs 3,61,583 crore
in FY15 led by 17% growth in SA to Rs 1,14,860 crore, 11.3% growth in term
deposits to Rs 201,499 crore in FY15 and 7.8% growth in CA to Rs 45,195 crore.
The bank has improved its CASA ratio from 29% in FY09 to 44% by FY15 driven
th
by healthy growth in SA deposits. Strong traction in the savings account was
fueled by the robust branch expansion, continuous technological advances and a
customer differentiated approach. We expect the management to maintain the
CASA levels at ~44%. Overall, we expect the deposit base to grow at a 2-year
CAGR of 20.2% to Rs 5,22,601 crore by FY17, led by 22.6% CAGR in SA
deposits to Rs 1,72,590 crore and 24.7% CAGR in term deposits to Rs 3,13,404
crore by FY17.
CASA ratio to remain stable over the forecast period Robust Deposit growth on the cards
120.0 (%) 600000.0 ` crores (%) 25.0
100.0 500000.0 20.0
15.0
80.0 400000.0
58.3 54.9 56.5 58.1 57.1 55.7 54.0 53.0
10.0
60.0 300000.0
5.0
40.0 200000.0
0.0
41.7 45.1 43.5 41.9 42.9 44.3 46.0 47.0
20.0 100000.0 -5.0
- 0.0 -10.0
CASA TD Deposits Growth Rate
Source : ICICI Bank, Ventura Research Source : ICICI Bank, Ventura Research
Customer Centricity: Leveraging technology to cater its customer base
ICICI Bank is one of the pioneers in adopting cutting-edge technology to provide

convenience banking. The Bank continues to innovate and offer a range of new
products and services with special focus on rural and inclusive banking. The
strategy is to rapidly expand in the rural markets, leverage its strength in
technology and deliver relevant products and services to the rural and unbanked
population through a multi-channel network.
Branch Banking: Shift in focus from service provider to revenue centre
The shift in the working ideology of branches (service provider to revenue centre)
and continuous leverage of technology forms the thrust of ICICI’s strategy in
providing superior customer experience. It has also launched mobile branch
services to achieve deeper penetration of services in rural locations.
Apart from digital branches, its physical network of branches is strong and well
diversified -- as of FY15 it had 4050 branches (steady 3 year CAGR of 14%) with
25% located in metro cities, 23% in urban areas, 30.1% in semi-urban areas, and
21.9% in rural areas. The bank is planning to expand its branch network from
4,050 to ~4,900 by FY17E which will further strengthen its retail presence.
th
Focus on expanding rural presence
120.0 % Branches composition
2,752 3,100 3,753 4,050
100.0
11.3 15.0 22.4 21.9
80.0
32.8 31.9
60.0 29.7 30.1
40.0 26.2 25.2

23.0 23.0
20.0
29.7 27.9 24.9 25.0
0.0
FY12 FY13 FY14 FY15
Metro Urban Semi Urban Rural
Asset quality continues to remain sticky
ICICI’s woes on asset quality started from FY08 and peaked with a GNPA of 5.2%
in FY10 (~73% of its GNPA was from unsecured retail portfolio). Subsequently,
ICICI has commendably lowered the NPAs to 3.0% & 1.2% on gross and net
levels respectively.
A three pronged approach has helped the bank arrest its deteriorating asset
quality;
i) Collateral based lending, preferably to high rated clients
ii) Focus on building a granular asset base, and
iii) Sustained monitoring and proactive action whenever necessary.
It has also decreased its exposure to unsecured personal loans and credit cards
and increased exposure to secured corporate lending.
Despite these measures, the environment continues to be fraught with risks for
ICICI bank due to its exposure to Power (6.2% of FY15 advances), Infra (6.1%)
and Iron & Steel (5.6%). The bank’s current restructuring pipeline stood at Rs 15
bn as of FY15. The management has indicated that aggregate additions to
restructured loans and NPAs will be lower in FY16, than in FY15. Going forward,
we anticipate GNPAs to marginally increase from 3.01% in FY15 to 3.44% by
FY17 and net NPAs to increase from 1.2% to 1.5% in FY17. The Provision
Coverage Ratio which stood at ~60% in FY15; is expected to remain steady in the
range of 60-63%.
Asset quality sustenance is a key monitorable which investors must closely

watch out for.
th
Asset Quality remains the key moniterable
6.0 % % 90.0
80.0
5.0
70.0
4.0 60.0
50.0
3.0
40.0
2.0 30.0
20.0
1.0
10.0
- 0.0
PCR (RHS) GNPA NNPA
Adequate Capital Reserves to sustain the 5C strategy
ICICI Bank’s CAR (Basel III) stood at 17.02%, with Tier I capital of 12.78%. We
believe ICICI Bank is adequately capitalized to undertake the envisaged growth
plans under its 5C strategy.
Cost Optimization: Cost to income ratio to marginally decrease over the

period
Cost consciousnesses, slower pace of physical branch expansion, digital

initiatives and optimizing employee strength have enabled the bank bring down its
cost to income ratio from 42.2% in FY11 to 36.83% in FY15. We believe the bank
has achieved a sustainable cost-to-income ratio and expect it remain at around
same levels going forward.
Capital Adequacy Ratio C/I ratio to sustain at same levels

25.0 % 44.0 %
43.0
20.0 42.0
41.0
5.5 6.4 5.4
5.8 5.9 40.0
15.0 4.3
39.0
38.0
10.0
37.0
14.0 13.2 12.7 12.8 13.7 12.9 36.0
5.0 35.0
34.0
0.0 33.0
FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Tier I Tier II Cost to Income
th
Operationally we expect NII to grow at a CAGR of 19% to Rs. 27,016 crore by
FY17, similar to the growth rate witnessed in the past five years. Cost to income is
expected to remain stable at 37%. We expect NIMs to increase gradually as the
asset base shifts towards higher yielding retail loans- expect NIMs to expand 10
bps to 3.6% by FY17. Earnings are expected to grow at a CAGR of 22% to Rs.
16,663 crores by FY17E. We expect RoE to expand 320 bps to 17.7% in FY17
and RoA to expand 20 bps to 2.0% in FY17 from FY15 levels, fairly tracking the
levels of Axis & HDFC Bank.
Uptick expected in NII growth Lower cost of funds to aid NIM expansion
30000.0 ` crores 35.0 14.0 %
25000.0 30.0 12.0
25.0 10.0
20000.0
20.0 8.0
15000.0
15.0 6.0
10000.0
10.0 4.0
5000.0 5.0 2.0
0.0 0.0 0.0

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
NII NII growth Yields on Advances Cost of Funds NIM
Higher profitability to sustain return ratios

20.0 % 2.5
18.0
16.0 2.0
14.0
12.0 1.5
10.0
8.0 1.0
6.0
4.0 0.5
2.0
0.0 0.0
RoE RoA
th
 Valuation:
ICICI Bank- Late cycle play
As known to all asset quality has been the biggest concern with respect to BFS
stocks and the market has been ruthless in downgrading stocks with poor asset
quality. ICICI Bank has been no exception. Despite most of ICICI Bank’s operating
matrices being on par with its peers -- Axis & HDFC Bank, the poor asset quality
continues to be of concern which is holding back re-rating of the stock. The asset
quality & restructured book remain sticky and continue to be key monitorables.
Asset Quality remains the key moniterable Restructured assets have risen considerably
6.0 % % 90.0 20000 ` Crores.
80.0 18000 Q1FY16 restructured loan book is Rs.1,962 crore

5.0 Currently no pipeline for f urther restructuring.
70.0 16000
Restructuring lumpiness significantly down;
4.0 60.0 14000 maximum exposure of a single account to 5%
12000
50.0
3.0 10000
40.0
8000
2.0 30.0
6000
20.0
1.0 4000
10.0 2000
- 0.0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 2011 2012 2013 2014 2015
PCR (RHS) GNPA NNPA Restructured Assets
Source :ICICI Bank, Ventura Research Source :ICICI Bank, Ventura Research
Asset quality is likely to show material improvement as and when the economy
gathers pace, which is expected to happen only post FY17. Having said this, the
value unlocking via listing of its businesses can provide a re-rating opportunity
over the medium term.
However there is scope for significant appreciation given the value unlocking
which is expected to play out from the listing of its profitable financial subsidiaries.
We initiate coverage on ICICI Bank with a BUY recommendation and a target

price of Rs. 349. We have valued ICICI Bank based on the sum-of-parts method;
the core banking business is valued at Rs. 273 (1.9x FY17E Adj. P/BV) and 76 is
the value assigned to its other businesses. We have arrived at the adjusted book
value of standalone book by deducting investment in subsidiaries. Our SOTP
target price implies an upside of 28% from the CMP. At the CMP of Rs. 270, it is
trading at 2.1x FY15, 1.9x FY16E and 1.6x FY17E of its Adj. P/BV.
th
SOTP valuation of ICICI Bank
Total Valus ICICI Bank's Value attributable to
Sum of the parts valuation (` crores) stake ICICI Bank (` crores) `/share Valuation Methodology
ICICI Prudential Life insurance Life insurance business is valued at 14x FY17 New
Company (74% stake) 23153.8 73.70% 17064.4 29 Business Achieved Profit (NBAP)
ICICI Lombard General Insurance
(74% stake) 6427.4 74% 4756.3 8 Valued at 12x Normalized Earnings for FY15
ICICI Asset management (51%
stake) 8462.5 51% 4315.9 7 5% of FY15 AUM
ICICI Securities including PD 2604.0 100% 2604.0 4 12x FY15 Earnings
ICICI Venture Fund 1845.0 100% 1845.0 3 15% of FY15 AUM
ICICI Home Finance 2238.0 100% 2238.0 4 1.5x FY15 BV
ICICI Bank UK 5113.5 100% 5113.5 9 1.5x FY14 BV
ICICI Bank Canada 6274.8 100% 6274.8 11 1.2x FY14 BV
Total Value of Subsdiaries 76

2x FY17E adjusted book (adjusted for investment in
Value of the bank 273 subs and net NPLs)
Target value for ICICI Bank 349
The following set of comparative charts of ICICI Bank, Axis Bank and HDFC
Bank operation metrics clearly elucidates that asset quality improvement is the
key to rerating of the stock. Barring asset quality, ICICI Bank is comparable on
all other operation metrics.
th
Despite size, all three players expect strong credit growth
600000 ` Crores
500000
400000
300000
200000
100000
0
ICICI Bank Net Interest Margin comparable to Axis

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

ICICI Bank Cost to Income ratio lower than that of its peers
60.0 %
50.0
40.0
30.0
20.0
10.0
0.0
th
ICICI Bank CASA deposits in line with peers
60.0 %
50.0
40.0
30.0
20.0
10.0
0.0

ICICI’s asset quality remains a concern area
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
ICICI’s Net NPLs are expected to remain sticky over the forecast period
20.0
15.0
10.0
5.0
0.0
th
ICICI’s Return on Equity expected to pick up
20.0
15.0
10.0
5.0
0.0
Return on Assets comparable to peers

2.0
1.5
1.0
0.5
0.0

Capital adequacy is comfortable
25
%
20
15
10
0
Tier I Tier II
th
Net profit 8,326.1 9,811.7 11,176.2 14,021.9 16,662.7 Net NPA (Rs. Cr) 2,230.6 3,298.0 4,460.5 7,464.6 8,397.4
Net NPA (%) 0.7 1.0 1.2 1.6 1.5
Investments 171,393.6 177,021.8 186,580.0 229,958.1 256,549.6
Other Assets 33,725.4 37,371.4 29,722.0 32,483.0 34,986.1 EPS 14.4 17.0 19.3 24.3 28.8
Savings 85,650.7 99,133.0 114,860.0 143,291.3 172,590.3
Equity 1,153.6 1,155.0 1,167.0 1,155.0 1,155.0 Price/Adj.Book Value (x) 2.4 2.2 2.1 1.9 1.6
Reserves 65,543.5 72,042.5 79,262.0 89,572.5 101,788.0
RoAA (%) 1.6 1.7 1.8 2.0 2.0
% of Average Assets
Provisions & Contingencies 0.4 0.5 0.6 0.4 0.5 Net profit 28.8 17.8 13.9 25.5 1,883.3
Taxes 0.6 0.7 0.7 0.7 0.7 Deposits 14.5 13.4 8.9 22.5 18.0
Avg.Assets / Avg.Equity (x) 444.5 490.1 534.3 617.3 735.5 Advances 14.4 16.7 14.4 20.0 18.0
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Kotak Mahindra Bank Ltd.
HOLD
Index Details Kotak Mahindra Finance Ltd. was the first NBFC in India to receive a
Sensex 25,742 banking license in February 2003 and convert to a bank – Kotak Mahindra
Nifty 7,809 Bank (KMB). In a span of a decade, KMB catapulted to being the fourth
largest private sector bank in India. In November 2014, it announced a
Industry Bank
merger with the 8th largest private sector bank – ING Vysya resulting in a
merged entity with Rs 2 tn worth of banking assets (advances + deposits).
During the process of integration, i.e. in FY16, return ratios and profitability
Scrip Details are expected to be subdued with the synergies likely to fully kick - in from
FY17 onwards. The management has chalked out a step-wise integration
plan to ensure a smooth transition post the merger. An enhanced pan India
O/s Shares (Cr) 182.9 network, greater loan portfolio diversity and multiple additions to product
Av Vol (Lacs) 1.21 offerings achieved through reasonable valuations - deal valued at ~2.1x
52 Week H/L 745/459 erstwhile ING’s (eING) trailing book value - speak volumes about the
Div Yield (%) 0.13 management’s foresight. While we are optimistic on the prospects of the
FVPS (`) 5 merged entity, we believe the valuations of KMB fully factor in the synergy
benefits and the resultant growth and profitability potential. We initiate
Shareholding Pattern coverage on KMB with a target price of Rs 690 and recommend a HOLD.
Shareholder %
Kotak-ING Merger: An ideal match
Promoters 33.8
DIIs 3.7
Merger details:
FIIs 35.3 Effective April 01st 2015, KMB merged with ING, resulting in an institution with
Public 27.2 banking assets (deposits + advances) of over Rs 2tn. The Rs 15,000 crore
Total 100.0 merger was done through an all stock deal at share swap ratio of 725:1000 – For
every 1000 shares of ING of face value Rs 10 each, shareholders got 725 shares
KMB vs. Sensex of KMB of face value of Rs 5 each.
800 31000
700 30000
600
500
29000
28000
Merger Status:
400
300
27000
26000
• KMB has indicated merger costs of Rs 200 crore which includes employee
200 25000
100 24000 pensions and costs on NPAs of eING’s corporate book. Of this amount, the
0 23000
management has incurred Rs 54 crore in Q4FY15, Rs 63 crores in Q1FY16,
01-Jul-2015
01-Feb-2015
01-Mar-2015
01-Jun-2015
01-Aug-2014
01-May-2015
01-Aug-2015
01-Oct-2014
01-Sep-2014
01-Dec-2014
01-Jan-2015
01-Apr-2015
01-Nov-2014
with remaining Rs 83 crores to be provided in the remaining quarters of FY16.

Kotak Bank S&P Bse Sensex
• Wholesale and Treasury business has been integrated
• Support functions to be integrated in Q2, retail assets business in H2 and branch
Key Financials (` in Cr) banking business around April 2016.
Net Non
P/E P/Adj BV
(x) (x)
Income Income
2014 3,720 1,400 1503 9.8 79.6 13.8 1.8 66.4 8.1
2015 4,224 2,028 1866 12.1 91.4 14.1 1.9 53.6 7.1
2016E 6,943 2,497 2412 13.2 117.9 12.7 1.6 49.1 5.5
2017E 8,972 3,289 3569 19.5 134.5 13.9 1.6 33.3 4.8
Hence, the full impact of the synergies of the merger will be visible from FY17
onwards. At the time of the merger, KMB ranked fourth amongst the private sector
th
Hence, the full impact of the synergies of the merger will be visible from FY17
onwards. At the time of the merger, KMB ranked fourth amongst the private sector
banks, and ING, the 8th. Post merger, Kotak has consolidated its position with a
combined branch network of 1,260 branches, ~1950 ATMs across 641 locations.
Synergies of merger:
The merger is expected to yield significant synergies for KMB through:

Enhanced presence: KMB has a strong foothold in the form of a branch
network in West and North India, while eING’s branch network is pre-
dominantly South based. This translates to a near pan-India presence post
merger. Further, KMB’s branch network will strengthen to 1250 branches
from 640 pre-merger thereby enhancing the reach significantly. This is
likely to result in savings in infrastructure and customer acquisition costs.
Branch network of the merged entity
Branches ING Vysya Kotak Kotak (Merged)

West 12% 46% 30%
North 20% 34% 27%
South 64% 15% 38%
East 4% 5% 5%
Total Branches 573 641 1,214
Wide productTotalofferings:
ATMs KMB and eING boast
635 of 1,159
a diverse set of product
1,794
offerings. However, KMB is likely to benefit from eING’s strong
Source : KMB, Ventura Research
mobilization of CA deposits and forex and trade finance product offerings,
which has scaled up owing to its foreign parentage. The merged entity’s
better CASA mix and higher fee income from overseas business will help
boost profitability in the long run.
Significant Product Complementarities
ING Vysya Kotak Kotak (Merged)

Corporate & Banking Business
Commercial Banking (CV,CE etc)
Consumer Finance
Agriculture/Tractor
Deposits -- CA
Deposits -- SA
Fees (Forex, Trade)
Private Banking/Broking/IB
Asset Management/Insurance
th
Diversify asset base: The merger will help KMB granulize its lending
portfolio leading to a relatively de-risked business model. SME lending
constitutes ~8% of KMB’s loan book, while it constituted ~38% of eING’s
loan book.
Significant Product Complementarities
ING Vysya Kotak Kotak (Merged)

Large Corporates
Mid Corporates
SMEs ( including Traders)
HNI
Mass Affluent
Mass Market
NRIs
MNCs
Adequate Capital Reserves: With ING’s CAR at 14.99% and Kotak’s

CAR at 17.59%, the CAR for the merged entity stands at a healthy
16.51%. Thus, the merger was carried out without significant dilution of
KMB’s equity base and KMB (merged) has adequate capital reserves for
smooth integration and aggressive growth plans.
Adequate Capital Reserves

24.0 %
20.0
1.9 1.1
16.0 1.8 1.0
1.3 1.2
12.0
18.0 17.9
8.0 15.7 16.2 15.3
14.7
4.0
0.0
FY11 FY12 FY13 FY14 FY15 Q1FY16
(merged)
Tier-1 Tier-2

Headroom for enhancing foreign shareholding: The merged entity
provides scope for enhancing the foreign shareholding limit, the share of
which stands at 48%. FIPB has approved KMB’s application for increasing
the shareholding limit to 55%. Given that the foreign shareholding in
private banks is limited to 74%, KMB has a lot of headroom for enhancing
foreign shareholding even post the merger.
th
Given the above synergies, we forecast key parameters of KMB (merged) with the
following rationale:
Loan book: Addition of SME portfolio will bring in granularity; growth to

pick-up in FY17
KMB’s advances have grown at a healthy 5 year CAGR of 26% to Rs 66,160

crore by FY15. Over these years, KMB’s loan portfolio has witnessed a structural
shift – the high yielding retail loan portfolio has declined from 60% in FY11 to Rs
44% in FY15, which has resulted in NIMs declining from 5.2% to 4.93% during the
same period. In terms of the lending mix, corporate banking portfolio has
remained steady at around 30%, while the share of commercial vehicles and
construction equipment (CV/CE) has declined from 21% in FY10 to 8% in FY15.
Corporate banking along with home loans & LAP (22%), and agriculture (18%)
constituted ~71% of KMB’s loan portfolio as of FY15. ING, on the other hand, has
a loan book composition in favour of high yielding corporate book i) Business
banking (36%), primarily to traders/SME and ii) Wholesale banking – (35%)
primarily to the NBFCs, telecom, manufacturing and construction sectors.
Accordingly, the loan composition of the merged entity is relatively diversified with
the high yielding corporate composition of ING.
Diversified Loan Portfolio post merger

2%
7%
30%
20%
5%
21%
15%
Corporate banking CV/CE Agriculture Division

Business Banking Home Loans Small Business, PL, CC
Others

The management has guided a 15-20% growth rate in the loan book of the
merged entity. The growth is likely to be slower in FY16 as KMB is rationalizing
the loan book, specifically on loan limits and cleaning up the stressed assets.
Once the rationalization process is completed, the management expects cross-
selling to drive loan book growth. For instance, ~200 branches of eING have
started selling auto loans, tractor loans, and personal credit cards which were
absent in their portfolio and like-wise; KMB has started leveraging ING’s Kissan
Credit Card agri product to drive lending opportunity to small and medium farmers.
th
Q1FY16 advances of the merged entity stood at Rs 1,03,614 crore. We expect
Kotak’s FY16 advances to touch Rs 1,21,115 crore and grow at 24% YoY in FY17
to Rs 1,50,183 crore.
Loan Book growth of KMB (merged)
%
160000.0 ` Crores Growth rate for FY16 is over 45.0
estimated merged no for
140000.0 40.0
KMB and ING for FY15
120000.0 35.0
30.0
100000.0
25.0
80000.0
20.0
60000.0
15.0
121,116
150,184
40000.0 10.0
29329
39079
48469
53028
66161
20000.0 5.0
0.0 0.0
FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Advances Advances growth (RHS)
CASA to improve post merger
KMB’s deposits have grown at a 5-year CAGR of 26% to Rs 74,860 crore in

FY15, led by 21% CAGR in CA to Rs 13181 crore (17.6%), 42% CAGR in SA to
Rs 14,036 crore (18.6%) and 24% CAGR in Term Deposits to Rs 47,642 crore in
FY15. CASA ratio increased from 31.2% in FY10 to 36.4% in FY15 led by robust
growth in SA deposits, specifically after KMB started offering interest rates of
~5.5-6% after the de-regulation of SA interest rates in October 2011. ING’s CASA
ratio, too, stood at a healthy 31.8%, with a equitable mix of CA and SA as on
December 2014. However, ING’s CA float is healthy due to higher concentration
of SME deposits. For Q1FY16, the CASA of the merged entity stood at 34.2%.
The management has guided an optimistic outlook on CASA growth given that:
ING’s SA customer base can earn upto 6% interest

Customers get access to a higher number of ATMs
KMB has been efficient in mobilization of low cost deposits – SA
mobilization per branch of KMB is ~ 50% higher than that of eING, while
CA mobilization per branch is 25% higher. Hence, there is headroom to
improve deposit mobilization in eING’s branch network.
Going forward, we expect KMB (merged) to clock deposits worth Rs 1,39,213

crore in FY16 and grow at 22.6% in FY17 to Rs 1,70,663 crore. CASA is expected
to improve to 38.3% in FY17 from 34.2% in Q1FY16 led by 35% YoY growth in SA
and 25% YoY growth in CA.
th
Healthy deposit growth of KMB (merged) CASA ratio to improve
180000.0 ` Crores
Growth rate for FY16 is over
%
50.0 120.0 %
estimated merged no for 45.0
160000.0
KMB and ING for FY15 100.0
140000.0 40.0
35.0 80.0
120000.0
30.0 63.6 64.0 61.7
100000.0 70.0 67.8 70.8 68.1
25.0 60.0
80000.0
20.0
60000.0 40.0
15.0
40000.0 10.0 20.0 36.4 36.0 38.3
20000.0 30.0 32.2 29.2 31.9
5.0
0.0 0.0 0.0
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Deposits Deposit Growth (RHS) CASA TD
Source :KMB, Ventura Research Source : KMB, Ventura Research

Asset Quality: Clean-up in progress
KMB has successfully bought down its Gross NPA levels from 2.4% in FY10 to
1.85% in FY15 and Net NPA from 1.73% to 0.92% during the same period. ING’s
Gross NPA stood at 1.86%, while Net NPA stood at 0.66% as of December 2014.
The Gross NPA of the merged entity stood at 2.3% (+40 bps QoQ) in Q1FY16
and Net NPA stood at 1%. The deterioration in asset quality is primarily due to the
stress on eING’s asset portfolio, which the management is addressing in the
following manner:
While the NPA levels of ING are reasonable, KMB has identified Rs ~3000
crore of eING’s fund and non-fund based portfolio (6% of ING’s loan
portfolio and 2.5% of the combined entity’s book) as stressed assets, but
not necessarily NPAs. As a part of the clean-up exercise, KMB has
transferred these loans to its Asset Reconstruction division with a
specialized team for monitoring/recovery of these accounts. Also, the
stressed assets are primarily related to the corporate loan book; ING’s
SME asset quality, according to the management, is good.
The management has adopted a cautious policy on asset quality
management – No CDR participation, transfer to ARC, conversion to off-
balance sheet items or 5/25 loans disbursement in Q1FY16.
Restructured but standard loans stood at Rs 418 crore in Q1FY16, of
which Rs 271 crore arose from the eING portfolio.
Further, NPA provisioning for the quarter stood at Rs 305 crore (primarily
on eING’s stressed assets) compared to Rs 66 crore for standalone KMB
in the previous quarter. The management has guided additional provisions
of about 0.4-0.5% (Rs 420-520 crore) of combined book for 9MFY16.
th
Accordingly, we expect Gross NPAs and Net NPAs to remain elevated at 2% and
1% respectively in FY16 and gradually reduce to 1.95% and 0.9% by FY17.
NPAs to remain elevated in the short term

2.5 % % 60.0
50.0
2.0
40.0
1.5
30.0
1.0
20.0
0.5
10.0
0.0 0.0
PCR (RHS) GNPA NNPA
Operationally, we expect NII of Rs. 6943 crore in FY16 and Rs 8972 crore in FY17
(YoY growth of 29%). Fee income is expected to grow 35% YoY to Rs 1907 crore
by FY17 led by higher cross selling opportunities and eING’s forex and trade
finance vertical. KMB’s cost to income ratio is likely to reduce to 50.5% in FY17
from elevated levels of ~54% in FY15-16 through:
Elimination of over-lapping branches, ATMs and high cost premises

Consolidation of data centres
Pricing rationalization with vendors given the larger scale of business
Digital initiatives such as i) Kotak Bharat – first multi-lingual/no data
connectivity App ii) Kaypay: World’s largest bank agnostic, real time
payment platform and iii) using the digital medium for client acquisition –
KMB has one of the highest mobile banking penetration
th
NII and NII growth rate Cost to Income to reduce by FY17
10000.0 ` Crores Growth rate for FY16 is over % 35.0 55.0 %
estimated merged no for
9000.0 54.0
KMB and ING for FY15 30.0
8000.0
53.0
7000.0 25.0
6000.0 52.0
20.0
5000.0 51.0
15.0
4000.0 50.0
3000.0 10.0
49.0
2000.0
5.0 48.0
1000.0
0.0 0.0 47.0
NII NII rate (RHS) Cost to Income
Source : KMB, Ventura Research Source : KMB, Ventura Research
KMB’s Q1FY16 NIM stood at 4.2%, down from 5.1% in Q1FY15 and 4.9% in
FY15 on account of higher SA interest rates offered to eING customer base and
reduction of base rate. We expect NIMs to remain range bound at this level over
the FY16-17. Earnings are expected to grow 48% YoY to Rs. 5407 crores by
FY17E. We expect RoE to decline to 12.7% in FY16 from 14.1% in FY15 and
gradually improve to 13.9% by FY17 as the synergies start reaping benefits. RoA
is expected to remain range bound at 1.6% in FY16-17.
CoF, YoA and NIM trend RoE and RoA trend

16.0 % % 6.0 18.0 % % 2.5
14.0 16.0
5.0
14.0 2.0
12.0
4.0 12.0
10.0 1.5
10.0
8.0 3.0
8.0
1.0
6.0
2.0 6.0
4.0 4.0 0.5
1.0
2.0 2.0
0.0 0.0 0.0 0.0

CoF YoA NIM (RHS) RoE RoA (RHS)
Source : KMB, Ventura Research Source : KMB, Ventura Research
th
Valuation:
We initiate coverage on Kotak Mahindra Bank with a HOLD recommendation.

Since the merger announcement with ING Vysya Bank, the Bank has seen a
major re-rating. We believe that the market has fully discounted its FY17
earnings leaving little room for appreciation. We have valued Kotak Mahindra
Bank based on the sum-of-parts method; the core banking business is valued
at Rs. 581 (4.1x FY17E Adj. P/BV) and Rs. 109 is value assigned to its other
businesses. We have arrived at the adjusted book value of standalone book
by deducting investments in subsidiaries. At the CMP of 648, it is trading at
4.8X FY17 Adj. P/BV.
SOTP valuation of Kotak Mahindra Bank
Value Value (` Per Share Valuation

Company Amt
Base crores) (`) Methodology
Kotak Mahindra AMC AUM 38600 2702 14.8 7% AUM

KMCC PAT 12 360 2.0 30x FY15 Earnings
Kotak Securities PAT 290 5800 31.8 20x FY15 Earnings
Insurance NBP 1540 3231 17.7 P/NBAP
Others PAT 132 2640 14.5 20x FY15 Earnings
International Subsidiaries Book 480 1200 6.6 2.5x FY15 Book
Kotak Prime Book 1291 4131 22.6 3.2x FY15 Book
Total Subsidiaries Value 109.9
Core Banking Business Value 551.6
SOTP Value 661.5
Adj P/Bv
800 Major re-rating of KMB in line with

`
the merger with ING Vysya Bank
700
600
500
400
300
200
100
0
Mar-09 Mar-11 Mar-13 Mar-15
CMP 4X 4.65X 5.3X 5.95X 6.6X
th
Provisions for expenses 184.5 304.7 164.5 734.5 600.7 NIM 4.5 4.5 4.5 4.1 4.3
Taxes 611.3 769.9 967.0 1,242.8 1,838.5 Gross NPA (Rs. Cr) 758.1 1,059.4 1,237.2 2,422.3 2,928.6
Net profit 1,360.7 1,502.5 1,866.0 2,412.4 3,568.8 Net NPA (Rs. Cr) 311.4 573.6 609.1 1,204.5 1,345.4
Net NPA (%) 0.6 1.1 0.9 1.0 0.9
Investments 28,873.4 25,484.5 30,421.1 43,324.3 52,591.5
Other Assets 2,662.1 3,093.3 3,167.9 13,275.1 14,664.6 EPS 9.1 9.8 12.1 13.2 19.5
Savings 7,268.1 10,087.0 14,036.1 26,940.5 36,369.7
Reserves 9,073.7 11,889.9 13,754.9 23,065.8 26,434.2
RoAA (%) 1.8 1.8 1.9 1.6 1.6
% of Average Assets
Taxes 0.8 0.9 1.0 0.8 0.8 Deposits 32.4 15.8 26.7 86.0 22.6
Note: FY16 and FY17 financials are of the merged entity
th
IndusInd Bank Ltd.
HOLD
Index Details IndusInd Bank (IIB) over its past two planning cycle has adequately
demonstrated its abilities of executing its plan and delivering on aspirational
Sensex 25,742
goals. So far during the third planning cycle too IIB is well on track to
Nifty 7,809
achieve its stated benchmarks. Given its proven execution capabilities we
Industry Bank
expect the loan book to grow at a CAGR of 25.2% to Rs. 107900.9 crores by
FY17 while earnings are expected to grow at a CAGR of 26.8% to Rs. 2885.5
crores over the same period. Over the same period, we expect the bank to
Scrip Details maintain its exemplary asset quality.
Mkt Cap (Rs cr) 51,246
BVPS (Rs) 197 Although we are upbeat about the business prospect of IIB, we believe that at
O/s Shares (cr) 58.3 the CMP of 866 (3.2X FY17 P/Adj BV) the stock is not cheap and much of the
Av Vol (Lacs) 0.9 expectation is already built into price. We recommend a Hold on the stock
with a target price of Rs. 922 (7% appreciation over 18 months).
52 Week H/L 988/534
Div Yield (%) 0.4
We believe at the CMP of Yes Bank’s current valuations (1.6X FY17 P/Adj
FVPS (Rs) 10.0
BV) are at a significant discount of 0.25X to that of IIB despite the fact that:
the loan book size is set to outpace that of IIB over the forecast period
Shareholding Pattern more granular and higher retail exposure ensures reduced business risk
Shareholders % and volatility
Promoters 15.0 NIMs have room to catch up as substantial head room is available for
DIIs 9.4 CASA expansion
FIIs 38.6 Impeccable asset quality
Public 37.0 Superior operational efficiency
Total 100.0 Comparable return ratios
IndusInd vs. Sensex We believe that the valuation discount is unjustified and hence Yes Bank
offers a better investment opportunity. In our opinion the valuation multiple
of Yes Bank should at least be on par with that of IIB, if not a premium.
Past performance suggests high probability of IIB achieving its planning

cycle objectives
2008 marked a significant change in the fortunes of IndusInd Bank, when a

professional management team took over the reins. A 3 year planning cycle was
instituted to script a success story.
Key Financials (Rs. Cr.)
Net Non
EPS Adj.BV P/Adj. ROA ROE
Y/E Mar Interest Interest PAT P/E (x)
(Rs) (Rs) BV (x) (%) (%)
Income Income
2014 2,890.7 1,890.5 1,408.0 26.8 160.8 32.3 5.4 1.8 16.9
2015 3,420.3 2,403.9 1,793.7 33.9 197.1 25.6 4.4 1.8 18.2
2016E 4,276.0 2,911.6 2,353.8 44.5 226.2 19.5 3.8 2.0 20.5
2017E 5,312.1 3,571.4 2,885.5 54.5 271.3 15.9 3.2 2.0 21.2
th
In order to make a mark in the industry and build its brand further, IIB is looking at
.. increasing its suite of products to provide a comprehensive range of offerings. To
achieve a swift presence across product categories the bank has partnered with other
players
1. AVIVA for Life Insurance
2. Chola Mitsui for General Insurance
3. Kotak Securities tie up for Broking Business
4. Health products from Religare
5. Home loan products from HDFC
6. Credit Card Business (acquired from Deutsche Bank)
It further plans to introduce one unique product / services offering every 6-8 months. A
number of service offerings have been introduced in the recent past viz:
1. Choose your Bank Account Number

2. Video Calling branch managers for NRI customers
3. Option to choose currency denominations during cash withdrawals from ATMs.
These offering have helped the Bank build bank recall and deepen customer
relationships.
Towards executing this plan the India geography has been categorized into four
segments
I. Developed markets which include large metros where there already exists deep
penetration. Here the strategy is to improve penetration among the business
owner segment with a comprehensive suite of offerings that span facility
management, working capital, investment advisory products and other advisory
services. In the large metros the focus is on the liability products than the assets
side.
II. Home markets cover the Tier I cities and here the focus is to improve branch
build up and enhance CASA share. Concentration is on 18 cities and these have
been identified based on parameters spanning wealth creation potential, existing
competition, deposit growth, local GDP etc.
The roll out plan is to invest heavily on advertisement and brand promotions,
highlight product led advantages and undertake mass penetration drives. The
strategy has already been rolled out in 12 cities and another six will be included
in the current year.
III. For Rural Markets the strategy is mainly asset led with a thrust on PSL
compliance through CV financing and agri business products. The footprint
expansion here is primarily through the cluster approach.
th
IV. Rest of Indian markets – finding newer opportunities to grow business further.
In our opinion the strategy is working for the Bank and given the unquestionable
execution capability as played out in the earlier planning cycles we have confidence that
the stretch targets set by the Bank are achievable.
In its guidance, IIB had indicated a loan book growth of 25-30% by FY17. In the first year
of the third planning cycle the Bank has grown ~25% to 68,788 crores. By FY17 we
expect the loan book to scale to Rs. 107,901 crores (2 yr CAGR of 21.5%). Consumer
Finance (41% of total lending) is expected to grow at a 2 year CAGR of 24.4% to
Rs.43,969 crores (with non vehicle finance driving the growth as its share of business
improves to 29.5% from the current 24.3%). Corporate and Commercial Banking
Business is expected to grow at a CAGR of 25.8% to Rs. 63,932 crores by FY17E.
Growth momentum of advance book to continue
120000.0 ` crores
100000.0
63931.6
80000.0
50543.6
28412.0 40376.0
60000.0
22401.0 21920.0
8220.4 12330.6
15428.2 19635.8
24785.0 30317.0
11774.5 14391.1
40000.0
43969.4
20000.0 34753.5
0.0
Consumer Finance Corp. & Commercial
Source :IndusInd Bank, Ventura Research
Consumer finance book well balanced
Comm. Vehicle Loans

2.7
13.0 Utility Vehicle Loans
Small CV
2.5
37.4 Two Wheeler Loans
9.9 Car Loans
Equipment Financing
11.1
Credit Card
7.1
9.9 6.5 Loan Against Property
BL,PL,GL,etc
th
Deposits are expected to grow at a 24.4% CAGR to Rs.114,788 crores by FY17E aided
by the doubling of branch network and consequent doubling of the customer based. IIB
plans to scale branch network to 1200 from the current 801 branches. We expect CASA
to grow at a CAGR of 29.8% to Rs. 42,618 crores by FY17E. The unique customer
friendly services stated above are expected to aid the faster than industry growth rates.
Overall CASA share is expected to grow by 300 bps to 37.1% by FY17E.
Extensive focus on expanding CASA

120.0 %
100.0
80.0
67.5 65.9 64.4 62.9
76.3 72.8 72.7 70.7
60.0
40.0
20.0 32.5 34.1 35.6 37.1

23.7 27.2 27.3 29.3
-
CASA TD
Source :IndusInd Bank, Ventura Research
IIB’s NIMs are already at an enviable 3.6% which is on par with its larger peers. Given
the rebalancing of the loan book, the growth in low cost CASA deposits and fixed rate
CV book in a declining interest rate scenario, we expect NIMs to expand by 20 bps to
3.8% by FY17E.
NIM expansion on the cards

16.0 % 4.0
%
14.0 3.5
12.0 3.0
10.0 2.5
8.0 2.0
6.0 1.5
4.0 1.0
2.0 0.5
- -
Yields on Advances Cost of Funds NIM (RHS)
th
During FY15, IIB sold gross loans amounting to ~Rs. 420 crores to ARCs which led to a
lower GNPA at 0.8%. In the same fiscal IIB also proactively classified 3 standard
accounts (which showed some signs of stress) as NPA. Despite this the NPA stood at a
reasonable level of 0.3%. With the size of the restructured and stressed asset book at a
lower level, a pick-up in CV segment and economy revival on cards, we expect asset the
quality to remain stable.
Asset quality to remain stable

1.40 % 80
1.20 70
60
1.00
50
0.80
40
0.60
30
0.40
20
0.20 10
0.00 0
PCR (RHS) Gross NPA Net NPA
Source: IndusInd Bank, Ventura Research
Faster loan growth in FY15 led to further utilization of Tier I capital, which further eroded
by 150 bps to 11.2% (13.8% in FY13). With the acquisition of the Gems & Jewellery
portfolio from ABN Amro, capital consumption is expected to remain higher. The
management has guided capital issuance in the current fiscal.
Capital Adequacy Ratio

18.0 %
16.0
14.0 3.6 1.6
1.1
5.7 2.5
12.0 0.9
10.0
8.0
13.8 12.7
6.0 12.3 11.4 11.2
9.7
4.0
2.0
0.0
Tier I Tier II
th
- 100 - Monday, 24 August, 2015
On the operational front, we expect the profits to grow at 26.8% CAGR to Rs. 2,886
crores by FY17E led by growth in revenues, better NIMs and higher operational
efficiency. We expect the interest income to grow to Rs. 14,371 crores by FY17E,
implying a CAGR of ~22%. The Bank’s fee based income is expected to grow at 22.8%
CAGR to Rs. 3,144 crores by FY17E. Cost to Income is also expected to be lowered by
300 bps to 44.8% by FY17 as we expect faster business growth and a rapid turnaround
of new branches. Cost to Income is comparable to peers.
In Q1FY16, IIB grew its credit book by 23% at Rs. 72,243 crores. Asset quality of bank
remained under control with its Gross NPA at 0.8% (+2 bps QoQ) and Net NPA
remained unchanged at 0.31%. IIB managed to sustain its NIM at 3.7% during the
quarter. NII during the quarter grew by 22.5% YoY to Rs. 981 crores while profits grew
by ~25% to Rs. 525.04 crores over the same period.
NII growth to moderate to a sustainable level Return ratios to continue to improve

6000.0 ` crores % 60.00 20.0 % % 2.0
1.8
19.5
5000.0 50.00 1.6
19.0 1.4
4000.0 40.00
18.5 1.2
3000.0 30.00 1.0
18.0 0.8
2000.0 20.00 0.6
17.5
0.4
1000.0 10.00 17.0
0.2
0.0 0.00 16.5 0.0
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
NII NII growth RoE RoA (RHS)
Source : IndusInd Bank, Ventura Research Source : IndusInd Bank, Ventura Research

52.0 %
50.0
48.0
46.0
44.0
42.0
40.0


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- 101 - Monday, 24 August, 2015
 Valuation

Since the change in management at the helm of IndusInd Bank, the stock has
consistently been re-rated as the management delivered across all metrics stated in its
planning cycles. During the first planning cycle- FY2008-11- the stock averaged a 2.4X 1
yr forward Adj P/BV. In the second cycle FY11-14 this got re-rated to an average of
2.9X. And as IIB outperforms its own performance benchmarks in the current Planning
Cycle 3 (FY14-FY17), we have seen the stock being re-rated to an average of 3.9x.
IndusInd Bank P/Adj. BV Bands
1,000 1st Cycle- 2.4x 2nd Cycle- 2.9x 3rd Cycle - 3.9x
900
800
700
600
500
400
300
200
100
0
Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15
CMP 1.2X 1.7X 2.2X 2.7X 3.2X
IIB’s valuation at a significant premium to HDFC Bank
We believe that IIB has more or less peaked in valuations given that it trades at a
premium relative to HDFC Banks on the Adj P/ BV basis.
P/ Adj. BV comparison between IndusInd and HDFC Bank

as
1 Yr Forward P/Adj. BV 1.2

7 1 Yr Forward P/Adj. BV relative valuation
6 1.0
5 0.8
4
0.6
3
2 0.4
1 0.2
0
0.0
12/9/2008
11/9/2011
12/9/2013
10/9/2009
10/9/2014
2/9/2008
7/9/2008
5/9/2009
3/9/2010
8/9/2010
1/9/2011
6/9/2011
4/9/2012
9/9/2012
2/9/2013
7/9/2013
5/9/2014
3/9/2015
4/9/2007
9/9/2007
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
HDFC vs. IndusInd

Indusind bank HDFC
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- 102 - Monday, 24 August, 2015
Given the size of HDFC Bank’s business and compelling metrics, in our opinion, IIB
should trade at a discount to HDFC Bank. Since 2010 this discount has hovered in the
range of 0.7X – 0.9X HDFC Bank’s I year forward multiple. We believe that this discount
to the leader HDFC is expected to continue during the forecast period.
Our target for HDFC Bank over the next 18 months is Rs 1,327 (P/Adj BV of 4.1X on
FY17). Based on our peer discount of 0.8X, we believe that IIB can rally another 7% to
Rs. 922 (3.4X FY17 Adj P/ BV.)
Yes Bank offers better investment opportunity than its peer IIB
The immediate peer for comparison with IIB is Yes Bank (given the size of business.)
Yes Bank’s current valuations are at a significant discount of 0.25X to that of IIB.

ashes

7
1.1
6
5 1.0
4 0.9
3
0.8
2
0.7
1
0 0.6
12/9/2008
10/9/2009
12/9/2013
10/9/2014
11/9/2011
4/9/2007
9/9/2007
2/9/2008
7/9/2008
3/9/2010
1/9/2011
6/9/2011
4/9/2012
9/9/2012
2/9/2013
7/9/2013
3/9/2015
5/9/2009
8/9/2010
5/9/2014
8/9/2015
0.5
0.4
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E

This is despite the fact that:
more granular and higher retail exposure ensures reduced business risk and volatility
NIMs have room to catch up as substantial head room is available for CASA
expansion
Impeccable asset quality
Superior operational efficiency
Comparable return ratios
We believe that the valuation discount is unjustified and hence Yes Bank offers a better
investment opportunity. In our opinion the valuation multiple of Yes Bank should at least
be on par with that of IIB, if not a premium
th
- 103 - Monday, 24 August, 2015
Yes Bank is one of our top bets in the private banking space. Based on our financial
model and valuations we believe that the stock has the potential to provide a 109%
return from the CMP of Rs 629 (1.6X FY17E Adj P/BV of Rs 399 / share) and
recommend buying the stock. Our optimism is based on the fact that Yes Bank has
sustained its growth momentum while maintaining the lowest NPA levels (GNPA 0.4% /
NNPA 0.1%) among peers. Yes Bank has significantly de-risked its business model by
enhancing the granularity of its deposit and asset base. Fee income growth has been
sustained, NIMs have consistently expanded and the cost of operations has been kept
surprisingly low despite a rapid pan-India branch roll out. Share holder return ratios
continue to remain impressive inspite of frequent capital raising.
Barring the bear markets of FY2008 and FY2013, Yes Bank has consistently traded in
the band of 2.3x to 3.6x its 1-Yr Fwd Adj. P/BV (with average multiple of 2.9x). Given the
fact that the company has shown robust growth since its inception, with performance on
par with all its peers, we believe a re-rating for Yes Bank is on the cards.

1,600 `
1,400
1,200
1,000
800
600
400
200
0
CMP 1X 1.95X 2.9X 3.85X 4.8X
The following set of comparative charts of Yes Bank and IndusInd Bank operation
metrics elucidates the compelling re-rating of the valuations of Yes Bank:
th
- 104 - Monday, 24 August, 2015
IndusInd Bank’s valuation more expensive than that of Yes Bank

30.0 140,000.0 ` crores CASA 40.0
140000.0 120,000.0 35.0
25.0
120000.0 30.0
100,000.0
20.0
100000.0 25.0
80,000.0
80000.0 15.0 20.0
60,000.0
60000.0 15.0
10.0
112880.3
137856.7
19,037.4
114788.5
40,000.0
13273.2
16169.4
26798.6
49151.7
74192.0
45938.9
66955.6
91175.8
22110.3
34365.4
42361.5
54116.7
74134.4
90741.9
26710.2
60502.3
40000.0 10.0
5.0 20,000.0
20000.0 5.0
0.0 FY16E 0.0 - 0.0
FY17E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
d
120 % 120 %
100 100
21
31 35 35 35 35 35
80 40 80 40 43 41 41 41
45 44 49
60 60
40 79 40
69 65 65 65 65 65
60 60 59 59 59
55 56 51 57
20 20
0 0
4.0 (%) 70.0 (%)
65.0
3.5
60.0
3.0
55.0
2.5 50.0
45.0
2.0
40.0
1.5
35.0
1.0 30.0
Source: Yes Bank, Ventura Research Source: Yes Bank, Ventura Research
th
- 105 - Monday, 24 August, 2015
Yes Bank likely to enjoy faster profit growth.
4000.00 ` crore 120%

PAT
3500.0 ` crores PAT 160%
3500.00 3000.0 140%
100%
3000.00 120%
80% 2500.0
2500.00 100%
2000.0
2000.00 60% 80%
1500.0
1500.00 60%
40%
1000.00 1000.0 40%
20% 500.0
500.00 20%
0.00 0% 0.0 0%
FY16E
FY17E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY16E
FY15
FY17E
3.5 (%) GNPA 2.50 (%) NNPA

3
2.00
2.5
1.50
2
1.5
1.00
1
0.50
0.5
0 0.00
Source: Yes Bank,IndusInd Bank, Ventura Research Source: Yes Bank, IndusInd Bank , Ventura Research
30.0 (%) ROE 2.5 (%) ROA
25.0
2.0
20.0
1.5
15.0
1.0
0.0 0.0
Source: Yes Bank, IndusInd Bank, Ventura Research Source: Yes Bank, IndusInd Ban, Ventura Research
th
- 106 - Monday, 24 August, 2015
25.0% Yes bank 18.0% IndusInd Bank

16.0%
20.0% 14.0%
12.0%
15.0%
10.0%
8.0%
10.0%
6.0%
4.0%
5.0%
2.0%
0.0% 0.0%

as
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- 107 - Monday, 24 August, 2015
Taxes 515.2 720.3 915.5 1,133.3 1,389.3 Gross NPA (Rs. Cr) 457.8 620.8 562.9 654.9 821.1
Net profit 1,061.2 1,408.0 1,793.7 2,353.8 2,885.5 Net NPA (Rs. Cr) 136.8 184.1 210.5 308.2 396.1
Net NPA (%) 0.3 0.3 0.0 0.4 0.4
Investments 19,654.2 21,563.0 24,859.4 29,630.0 36,310.6
Other Assets 2,483.0 3,591.7 4,689.2 5,649.8 6,859.5 EPS 20.3 26.8 33.9 44.5 54.5
Savings 7,032.8 9,915.2 12,944.0 17,134.3 23,439.8
Reserves 7,096.7 8,506.3 10,101.0 11,778.8 14,354.6
RoAA (%) 1.6 1.8 1.8 2.0 2.0
% of Average Assets
Taxes 0.8 0.9 0.9 0.9 1.0 Deposits 27.7 11.8 22.5 22.4 26.5
th
- 108 - Monday, 24 August, 2015
YES Bank Ltd
BUY
Target Price `1,317 CMP `630 FY17E P/Adj. BV 1.6x

Index Details Under its Version 3.0 we believe that Yes Bank is well on track to achieve its
Sensex 25,742 aspirational targets. Yes Bank has significantly derisked its business model
Nifty 7,809 by enhancing granularity of its deposit and asset base. High loan growth &
fee income growth have been sustained. NIMs have consistently expanded
Industry Bank
and cost of operations has been surprisingly kept low despite a rapid pan
India branch roll out. Share holder return ratios continue to remain
Scrip Details
impressive inspite of frequent capital raising. Based on our financial model
and valuations we believe that the stock has the potential to achieve our
MktCap(`cr) 26,343
price target of Rs. 1,317 providing a 109% return from the CMP of Rs 630
O/s Shares (Cr) 41.8
(3.3X FY17E Adj P/BV of Rs 399/ share). We initiate with a BUY
Av Vol (Lacs) 3.22
52 Week H/L 910/516 We believe the valuation discount of 50% to its peer IndusInd Bank is
Div Yield (%) 1.0 unwarranted and we expect the valuation re-rating story to pan out over the
FVPS (`) 10 forecast period given that :
 the loan book size is set to outpace that of IIB over the forecast
Shareholding Pattern period
Shareholder %  more granular and higher retail exposure ensures reduced business
Promoters 22.0
risk and volatility
 NIMs have room to catch up as substantial head room is available for
DIIs 21.3
CASA expansion
FIIs 44.4
 Impeccable asset quality
Public 12.3
 Superior operational efficiency
Total 100.0
 Comparable return ratios
Yes Bank vs. Sensex Version 1.0- Establishing a strong foundation for a growth
1000 31000
900 30000
800
29000
700
600
500
28000
27000
Yes Bank, which commenced operations in 2004, took a little more than a decade
400
300
26000
25000
to emerge as the fourth largest private sector bank in India. A 3-phased approach
200
24000
100
0 23000 viz. growth versions, was adopted to sustain the aggressive expansion without
01-Jul-2015
01-Feb-2015
01-Mar-2015
01-Jun-2015
01-Aug-2014
01-May-2015
01-Aug-2015
01-Oct-2014
01-Sep-2014
01-Dec-2014
01-Jan-2015
01-Apr-2015
01-Nov-2014
compromising on asset quality. Focus on fee income generation with lower tenure
of assets has been the key foundation of its strategy. Further, the focus has
Yes Bank S&P Bse Sensex
always been on lending to sun-rise sectors.
In Version 1.0, the period from 2004-2010, the management expanded its credit
base from Rs 760 crores in FY05 to Rs 22,193 crores in FY10, at a CAGR of
Key Financials (` in Cr) nearly 100%.
Net Non
P/E P/Adj BV
(x) (x)
Income Income
2014 2716.3 1721.6 1617.8 44.9 196.4 25.0 1.6 14.0 3.2
2015 3487.8 2046.5 2005.5 48.0 285.8 20.9 1.6 13.1 2.2
2016E 4613.3 2421.8 2724.3 63.0 335.3 20.3 1.8 10.0 1.9
2017E 5809.1 2867.2 3510.1 78.4 398.8 21.4 1.9 8.0 1.6
th
The asset portfolio was strategically build to focus on high growth sectors – Food
& Agri, Engineering, Infra, Logistics, Technology, Media, Telecom and Healthcare
constituted 78% of the total advances as at March 2010. The expansion in
deposits and advances, however, was primarily led by corporate and institutional
segments. While retail loans constituted only 30% of the advances, retail deposits
formed ~20% of the deposits. CASA remained low at 10.5% of total deposits. Fee
income increased from Rs 7.8 crore in FY05 to Rs 379 crore by FY10 at a CAGR
of 120%+. This growth was achieved despite the financial crises that emerged
from the default of sub-prime loans and the bankruptcy of Lehman Brothers.
The focus, during the period, was to rapidly expand and keep costs low, which the
bank achieved successfully – Cost to Income declined from over 100% in FY05 to
36% in FY10, while NIMs expanded from 1.5% in FY05 to 2.25% in FY10. RoE
expanded from -1.76% to 20.27% during the same period, while RoA increased
from 0.29% to 1.61%. Net NPAs remained low at 0.06%. The number of branches
expanded five times -- from ~30 in FY06 to 150 by FY10. At the end of Version
1.0, the bank had 200 ATMs and 3000+ employees, a significant increase from
~200 employees in FY05.
Version 2.0- Vertical take off
The bank continued its aggressive and competitive stance as it entered Version
2.0 – the ‘Vertical Take Off’ phase from FY11 to FY15. Advances grew at a CAGR
of 22% to Rs 75,550 crore and deposits grew at 19% to ~Rs 92,000 crore by
FY15. In this phase, the bank launched innovative offerings – such as savings
rate of 7%, complete suite of retail loan offerings and digitalization of processes to
speed up customer acquisitions. The bank also invested heavily in building the
‘YES’ brand to attract retail business.
Version 3.0- Establishing a Pan India presence
Consequently, the proportion of high yielding retail loan book increased to 35% by
FY15 and low-cost retail deposits now constitute ~45% of the total liabilities;
CASA ratio has improved to 23% in FY15 from 10% in FY10. The Bank’s NIMs
further expanded to 2.7% in FY15 from 2.2% as focus on cost control continued to
be a priority. RoE remained high in the range of 21-24%, while RoA expanded
from 1.52% to 1.64% in FY15, in line with the top private sector banks. This phase
also saw Yes Bank catapulting to the fourth largest private sector banks in terms
of size with superior asset quality – Net NPAs remained low at less than 0.1%.
The bank expanded its branch network around 2.5 times to 630 through the hub &
spoke model which helped keep costs low. The bank had 10,000+ employees at
the end of this phase.
th
As Yes Bank now enters Version 3.0, the period from FY16-FY20, the
management has envisaged its retail portfolio, which currently is ~35% of its loan
book, to grow to ~40% of the loan book, including the SME segment. On the
deposit base, the management expects retail deposits to be in the range of 60-
65% from ~45% currently. Clearly, the focus of the bank is on increasing the retail
business by continued investments in brand building and the launch of new
offerings – the launch of credit cards is on the anvil. Given the management’s
track record, innovative approach, adequate capital reserves and superior asset
quality, we believe the bank is well on course to achieve its vision of being a
$100-billion bank by the end of Version 3.0.
Aggressive retail focus to drive credit growth
Yes Bank’s advances have grown at a rapid pace – 5-year CAGR of ~28% to Rs
75,550 crore in FY15 driven by a 31% CAGR in retail the loan book and a 26%
CAGR in the corporate loan book. With a sub-5% exposure to any particular
sector, the bank has been able to sustain an above average industry growth rate
despite subdued macro-economic conditions in recent times.
Advances Growth
140000 ` crores
120000
100000
45575
80000
35501
26669
60000
20417
30409 16591
22336 12027
22869 15119
40000
15335 6858
20000
35216
48881
60447
74360
0
Corporate Retail
Within the loan book, Yes Bank has focused on increasing the share of high
yielding retail and MSME loans – from 30.9% in FY10 to 35.3% in FY15,
specifically to sun-rise sectors. Given the aggressive branch expansion plans and
the launch of new products specifically targeting the retail segment viz. Loan
Against Property, Gold & Home Loan products, we expect advances to grow at a
CAGR of 26% to Rs 1,19,935 crore by FY17, led by retail loan book CAGR of
30.7% (increase to 38% of total advances from 35.3% in FY15) and corporate
loan book CAGR of 23.3%.
th
SA deposits, even at lower cost, to drive CASA
Yes Bank adopted an aggressive strategy of offering significantly higher interest

rates to mobilize SA deposits. This strategy has paid off and in the past five years,
SA deposits increased at a CAGR of 100% to Rs 12,580 crore in FY15. Given
that the bank has increased its minimum account balance requirements for its 7%
interest rate offering, the cost of SA deposits are likely to come down.
Nevertheless, the bank’s offering of 6%-8% interest rate on savings bank deposits
is still relatively higher than majority of other banks. Yes Bank is likely to continue
this aggressive stance until the critical mass on CASA deposits (~30-32%) is
achieved.
We expect CA to grow at 26.5% CAGR (28.5% CAGR from FY10-FY15) to Rs

13,605 crore by FY17, SA to grow at a faster pace of 35% CAGR to Rs 22,927 by
FY17 (100% CAGR from FY15-FY17) and total CASA to grow at a 32% CAGR to
Rs 36,532 crore. We expect CASA ratio to increase to 26.5% by FY17 from 23.1%
currently. Term deposits are expected to grow at a CAGR of 20.2% to Rs
1,01,325 crore by FY17 and the overall deposit mobilization is expected to grow at
a CAGR of 23% to Rs 137,857 crore by FY17.
Deposit mix
120.0 %
100.0
80.0
78.0 76.9 75.0 73.5

60.0 85.0 81.1
89.5 89.7
40.0
20.0
22.0 23.1 25.0 26.5
15.0 18.9
10.5 10.3
0.0
CA TD
Aggressive branch expansion
Yes Bank has an aggressive branch expansion strategy in place – it increased the
number of branches from 214 in FY11 to 630 branches as of FY15 and further
plans to increase it to 800 by FY16. The branch expansion program will not only
help in raising the CASA ratio but also help in tapping the previously untapped
market, increase its presence in retail banking and enhance customer acquisition.
th
Superior Asset quality maintained despite high growth
With a granular asset base, Yes Bank has been successful in maintaining its
asset quality despite high growth under challenging macro-economic conditions.
Gross NPAs have been below 0.4% and Net NPAs below 0.1% for the past 4
years supported by a healthy Provision Coverage Ratio over 75%. On a
conservative basis, we expect Gross NPAs to increase to 0.55% and Net NPA to
increase to 0.18% by FY17. Restructured assets stood at Rs 382 crore in FY15
(0.5% of Gross Advances). Slippages stood at ~1.2% of gross advances in FY15,
and are expected to remain at those levels going forward.
Asset quality
0.6 % % 100.0
90.0
0.5
80.0
70.0
0.4
60.0
0.3 50.0
40.0
0.2
30.0
20.0
0.1
10.0
0.0 0.0
PCR GNPA (RHS) NNPA
Source Yes Bank, Ventura Research
Q1 results tame street concerns on asset quality
Recently, the street was abound with rumours of non-disclosure of NPAs, large
proportion of stressed assets and potential default of a large account. However,
the management has denied the same. In our opinion, the granular and diversified
nature of Yes Bank’s asset base provides a cushion to asset quality concerns.
Having said this, the Q1FY16 results clearly demonstrated that the management
was in full control and asset quality continues to remain exemplary
th
Asset quality was well under control during Q1FY16
0.50
0.45 %
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16
GNPA NNPA
Higher Capital Reserves validates growth potential
With the latest infusion of capital (Rs 2,952 crore via QIP), Yes Bank was able to
bolster its Capital Adequacy Ratio to 15.6% in FY15 (Tier I stood at 11.5%, while
Tier II stood at 4.1%) from 8.93% in FY14. Being adequately capitalized, Yes
Bank is well poised maintain its aggressive growth momentum from FY15-FY17.
Further, we believe that the trigger point for raising the additional capital will be at
10% - 10.5% (CAR). However, the bank is not averse to raising additional capital
if a suitable opportunity presents itself. Infact, Yes Bank has plans for a $ 1 billion
ADR or QIP issue offering in the next fiscal.

25.0 %
20.0
7.7
15.0
8.0 8.8 4.1
6.8
4.6
10.0
12.9 11.5
5.0 9.7 9.9 9.5 9.8
0.0
Tier I Tier II
th
Robust operational performance expected
Operationally we expect NII to grow at a CAGR of 29.1% to Rs. 5809 crore by

FY17, lower than 35% CAGR from FY10-FY15 as the bank has achieved a
sizeable scale. Other income, which constitutes income from transaction banking,
financial markets and advisory and third party distribution, is expected to grow at a
CAGR of 18% to Rs 2046 crore, (CAGR 29% in the past five years). Continuous
expansion of product & service offerings in fee based income areas, supported by
rapid branch expansion and a change in management strategy towards Retail
Banking (earlier largely focus on corporate lending) will continue to drive other
income. Cost to income is expected to decline to 35.43% by FY17 (~600 bps
decline from FY15) on the back of cost efficiencies. We expect NIMs to increase
gradually as the asset base shifts towards higher yielding retail and MSME loans
– expect NIMs to expand 30 bps to 3.5% by FY17. Earnings are expected to grow
at a CAGR of 32% to Rs. 3510 crores by FY17E, similar to the growth witnessed
in the past. We expect RoE and RoA to remain stable at 21.5% and 1.7% in the
coming two years.
Yields, Cost and NIM RoE vs. RoA

14.0 % 30.0 % % 1.8
1.7
12.0 25.0
1.7
10.0 20.0
1.6
8.0 15.0 1.6
1.5
6.0 10.0
1.5
4.0 5.0
1.4
2.0 0.0 1.4
YoA CoF NIM RoE RoA (RHS)
Source : Yes Bank, Ventura Research Source : Yes Bank, Ventura Research
th
Net Income growth at ~29% CAGR
7000.0 % 70.0
` crores
6000.0 60.0
5000.0 50.0
4000.0 40.0
3000.0 30.0
2000.0 20.0
1000.0 10.0
0.0 0.0
NII NII growth
Valuation re-rating on the cards
The immediate peer for comparison is IndusInd Bank given the size of
business. Yes Bank’s current valuations are at a significant discount of 0.5x to
that of IIB.

as

7
1.1
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0
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10/9/2009
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7/9/2008
3/9/2010
1/9/2011
6/9/2011
4/9/2012
9/9/2012
2/9/2013
7/9/2013
3/9/2015
5/9/2009
8/9/2010
5/9/2014
8/9/2015
0.4
FY09
FY10
FY11
FY13
FY14
FY15
FY12
FY16E
This is despite the fact that

more granular and higher retail exposure ensures reduced business risk and
volatility
NIMs have room to catch up as substantial head room is available for CASA
expansion
th
Impeccable asset quality
Superior operational efficiency
Comparable return ratios
Yes Bank is one of our tops in the private banking space. Based on our financial
model and valuations we believe that the stock has the potential to provide 109%
return from the CMP of Rs 630 (1.6X FY17E Adj P/BV of Rs 399/ share) and
recommend buying the stock. Our optimism is based on the fact that Yes Bank
has sustained its growth momentum while maintaining the lowest NPA levels
(GNPA 0.4% / NNPA 0.1%) among peers. Yes Bank has significantly de-risked its
business model by enhancing granularity of its deposit and asset base. Fee
income growth has been sustained, NIMs have consistently expanded and cost of
operations have been surprisingly kept low despite a rapid pan India branch roll
out. Share holder return ratios continue to remain impressive inspite of frequent
capital raising.
Barring the bear markets of FY2008 and FY2013, Yes Bank has consistently
traded in the band of 2.3x to 3.6x its 1-Yr Fwd Adj. P/BV (with average multiple of
2.9x). Given the fact that the company has shown robust growth since inception
with performance on par with all its peers, we believe a re-rating for Yes Bank is
on the cards.

1,600 `
1,400
1,200
1,000
800
600
400
200
0
CMP 1X 1.95X 2.9X 3.85X 4.8X
The following set of comparative charts of Yes Bank and IndusInd Bank
operation metrics elucidates the compelling re-rating of valuation of Yes Bank.
th
IndusInd Bank’s valuation more expensive than that of Yes Bank

30.0 140,000.0 ` crores CASA 40.0
140000.0 35.0
25.0 120,000.0
120000.0 30.0
20.0 100,000.0
100000.0 25.0
80,000.0
80000.0 15.0 20.0
60000.0 60,000.0
10.0 15.0
112880.3
137856.7
19,037.4
114788.5
13273.2
16169.4
26798.6
49151.7
74192.0
45938.9
66955.6
91175.8 40,000.0
22110.3
34365.4
42361.5
54116.7
74134.4
90741.9
26710.2
60502.3
40000.0 10.0
5.0
20000.0 20,000.0 5.0
0.0 0.0 - 0.0
FY16E
FY17E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
Source: Yes Bank, Ventura Research Source: Indusind Bank, Ventura Research
d
120 % of loan books Yes Bank 120 % of loan books IndusInd Bank
100 100
31 35 35 37 35 35 35
80 40 80 40 45 44 43 41 41 41
49
60 60
40 40
69 65 65 63 65 65 65
60 60 55 56 57 59 59 59
51
20 20
0 0
4.0 (%) 70.0 (%)
65.0
3.5
60.0
3.0
55.0
2.5 50.0
45.0
2.0
40.0
1.5
35.0
1.0 30.0
th
Yes Bank likely to enjoy faster profit growth.
4000.00 ` crore 120%

PAT
3500.0 ` crores PAT 160%
3500.00 3000.0 140%
100%
3000.00 120%
80% 2500.0
2500.00 100%
2000.0
2000.00 60% 80%
1500.0
1500.00 60%
40%
1000.00 1000.0 40%
20% 500.0
500.00 20%
0.00 0% 0.0 0%
FY16E
FY17E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY16E
FY15
FY17E
3.5 (%) GNPA 2.50 (%) NNPA

3
2.00
2.5
2 1.50
1.5
1.00
1
0.50
0.5
0 0.00
30.0 (%) ROE 2.5 (%) ROA
25.0
2.0
20.0
1.5
15.0
1.0
0.0 0.0
th
25.0% (%) CAR 18.0% (%) CAR

16.0%
20.0% 14.0%
12.0%
15.0%
10.0%
8.0%
10.0%
6.0%
4.0%
5.0%
2.0%
0.0% 0.0%
Yes bank Tier I Tier II IndusInd Bank Tier I Tier II

as
th
Taxes 625.1 708.5 904.7 1,235.5 1,591.8 Gross NPA (Rs. Cr) 94.0 172.5 313.4 479.7 659.6
Net profit 1,300.7 1,617.8 2,005.5 2,724.3 3,510.1 Net NPA (Rs. Cr) 7.0 25.7 87.7 143.9 215.9
Net NPA (%) 0.0 0.1 0.1 0.2 0.2
Inter bank borrrowing 727.0 1,350.1 2,316.5 2,040.6 2,507.4 Tier II Capital (%) 8.8 4.6 4.1 3.4 3.1
Investments 42,976.0 40,950.4 46,605.2 55,032.4 64,823.1
Other Assets 5,051.7 6,520.6 6,458.2 7,957.9 9,720.9 EPS 36.3 44.9 48.0 63.0 78.4
Savings 6,022.7 9,327.5 12,580.0 16,983.0 22,927.1
Reserves 5,449.0 6,761.1 11,662.3 14,264.9 17,649.2
RoAA (%) 1.5 1.6 1.6 1.8 1.9
% of Average Assets
Taxes 0.7 0.7 0.7 0.8 0.9 Deposits 36.2 10.8 22.9 23.8 22.1
th
DCB Bank Ltd.
BUY
Index Details Since the economic debacle, DCB Bank has undertaken significant business
Sensex 25,742 restructuring to derisk its balance sheet and ensure sustainability of earnings.
Asset quality, which was its bane, has been brought under control. Its granular
Nifty 7,809
and diversified asset book has ensured that growth has not come at the cost of
Industry Bank
asset quality. We initiate coverage on DCB with a BUY and a price target of Rs.
183. We have valued DCB based on our target P/Adj BV of 2.7X (on FY17E’s
adjusted Book Value). Our target implies an upside of 47% from the CMP. At a
Scrip Details CMP of Rs. 125 the stock is trading at 1.8x FY17E P/Adj. BV.
Mkt Cap (` cr) 3535
BVPS (`) 54.2 DCB is the smallest among the private banks and in comparison to its immediate
O/s Shares (cr) 28.3 peer CUB, we believe that DCB offers a better investment proposition. Since the
Av Vol (Lacs) 1.4 restructuring of the business took place in FY11 the Bank’s operating metrics
52 Week H/L 150/78 has seen a decisive improvement. On all parameters vis a-vis business growth,
operating metrics, return ratios etc DCB is better placed than CUB (as shown in
Div Yield (%) 0.0
the following charts)
FVPS (`) 10.0
Currently DCB is trading at a premium of 1.2x to CUB on an Adj P/BV basis. We

Shareholding Pattern believe that this premium will continue to prevail over the forecast period.
Shareholders %
Promoters 16.3 Prudent approach to credit growth augurs well
DIIs 24.4
FIIs 14.8 A granular and diversified credit portfolio has enabled DCB Bank to derisk its balance
Public 44.5 sheet and ensure sustainability in earnings. Over the past five years, DCB’s loan book
Total 100.0
grew at ~26% CAGR and crossed the Rs 10,000 crore mark in FY15. Management’s
prudent and cautious approach viz. a higher focus on secured lending has ensured that
this healthy growth in loan book has not come at the cost of asset quality. Over the
DCB vs. Sensex
forecast period, we expect DCB Bank to maintain this momentum in loan book growth
and clock a CAGR of ~20% to reach Rs 15,017 crores by FY17. The focus of the Bank
will continue to be on enhancing mortgage credit, which we expect will grow at a CAGR
of 25% to Rs 7,030 crores by FY17. In terms of the credit mix, given the management’s
aversion to risk, we expect the proportion of mortgage loans to increase to 47% of the
loan book from 43% in FY15.

Net Non
ROE ROA
Y/E Mar Interest Interest APAT EPS Adj. BV P/E P/Adj BV
(%) (%)
Income Income
2014 368 139 151 6.0 40.9 14.1 1.3 20.7 3.1
2015 508 166 191 6.8 52.3 14.0 1.3 18.4 2.4
2016E 677 198 218 7.7 59.5 12.8 1.2 16.2 2.1
2017E 816 241 265 9.4 68.0 13.7 1.2 13.3 1.8
th
Advances Growth
16000.0 ` crores
..
12013.7
14000.0
12000.0
9876.7
10000.0
8058.1
8000.0
6023.7
4069.0
5005.4
2584.4
1113.2 3168.4
6000.0
4000.0
1215.4
1580.7
2116.4
2407.0
2625.5
3003.4
875.3
2000.0
0.0
Corporate Retail
Source : DCB Bank, Ventura Research
Higher term deposits = better ALM
In the past five years, DCB Bank’s deposits have grown at a CAGR of 21% to Rs
12,609 crore in FY15, led by a 26% CAGR in term deposits which constitutes 77% of
the total deposits. The management’s strategy of focusing on term deposits has
enabled them to better time their assets and liabilities, thereby resulting in a stable
balance sheet. Given the longer tenure of its asset book, focus of DCB is more towards
garnering ALM-favorable term deposits than towards CASA. The Bank’s CASA ratio
currently stands relatively low at 23.4%, which we expect will marginally increase to
25% by FY17.
Deposits to grow at a 2 year CAGR of 22% Deposit mix

20000.0 35.0 120.0
` Crores %
18000.0
30.0 100.0
16000.0
14000.0 25.0
80.0
12000.0 20.0 64.6 64.8 67.9 72.8 75.0 76.6 77.9 77.6
10000.0 60.0
8000.0 15.0
6000.0 40.0
10.0
4000.0 19.2 19.4 18.9
5.0 20.0 16.4 15.7 15.5 16.2
2000.0 15.2
16.2 15.8 13.2 10.8 9.3 8.2 8.5 8.8
0.0 0.0 0.0
Deposits Deposits Growth CA SA TD
Source : DCB Bank, Ventura Research Source : DCB Bank, Ventura Research
th
The overall deposit mobilization is expected to grow at a CAGR of 22% to Rs 18,771
crore by FY17. Term deposits are expected to grow at a CAGR of 23% to Rs 14,558
crore in FY17. In FY15, as the Bank raised capital and went slow on deposit growth, the
C/D ratio increased to 83% from ~78% earlier. We expect the Credit to Deposit ratio to
taper to 80% over the next two years
Doubling of branches on the cards
DCB bank has the lowest branch network of 154 branches spread primarily in the
Western part of India. It is now looking to double its branch count and have an equitable
presence pan India, primarily in Tier 2-Tier 6 cities through a cluster based approach.
This strategy is in line with its focus on MSME leading and achieving a faster break-
even for its branches.
Superior Asset quality to be maintained
The management’s persistent focus on maintenance of asset quality gives us great

comfort. We factor in a marginal 20 bps increase in GNPA to 1.98% by FY17, while
NNPAs are expected to remain stable at 1.1%. The management has set an internal
pre-defined limit of Rs 3 crores on exposure to large and unsecured loans. Similarly,
enhancement of existing accounts will be capped at Rs 3 crore. A higher proportion of
mortgage loans provide a great cushion in maintaining asset quality. Further, DCB Bank
has a provisioning coverage ratio (PCR) of 43%. The restructured asset book of DCB
Bank stood at Rs. 50 crores, with no significant restructuring expected in the near
future. Slippages stood between 0.5-0.6% of gross advances in FY15. Also, DCB is
planning to increase the floating provision base by 15% each year.
Asset quality
% %
10.0 100.0
9.0 90.0
8.0 80.0
7.0 70.0
6.0 60.0
5.0 50.0
4.0 40.0
3.0 30.0
2.0 20.0
1.0 10.0
0.0 0.0
PCR (RHS) GNPA NNPA
Source DCB Bank, Ventura Research
th
In FY15, DCB Bank’s Capital Adequacy Ratio (CAR) strengthened to 15.1% (+ 130 bps
YoY) as it raised Rs. 250 crores through the issue of 3.04 crores shares to QIPs. Tier I
capital stood at 14.4% -- way above the RBI’s mandated guidelines of 9%, while Tier II
capital stood at 0.7%. The bank, thus, has adequate capital reserves to support its
conservative- growth oriented approach.

18.0 %
16.0
1.6 0.7
14.0
2.9 1.0 0.8 0.7
12.0 2.2
10.0 1.8
8.0
13.8 14.4
6.0 11.9 12.6 13.0 12.9
11.1
9.4
4.0
2.0
0.0
Tier I Tier II
Operational growth to continue
Operationally we expect NII to grow at a CAGR of 26.7% to Rs. 816 crore by FY17,
similar to the CAGR from FY10-FY15. Other income is expected to grow at a CAGR of
20.5% to Rs 241 crores, much higher than the 9% CAGR witnessed in the past five
years. For other income, we have assumed a conservative growth compared to the
management’s guidance of 28-30%. DCB is focusing on increasing its other income
through increased cross selling of products, both in-house and third party by entering
into partnerships.
Cost to income is expected to decline to 55.2% by FY17 (~350 bps decline from FY15)
on the back of relatively higher growth in other income and cost efficiencies. We expect
NIMs to remain stable in the range of 3.75%-3.8%. Earnings are expected to grow at a
CAGR of 18% to Rs. 265 crores by FY17E. We expect RoE to moderate from 14% in
FY15 to 13.8% in FY17, while RoA is expected to remain stable at 1.2%.
th
Yields, Cost and NIM RoE vs. RoA
14.0 % % 4.5 16.0 1.3 1.4
% 1.3 1.2 1.2
4.0 14.0
12.0 1.2
3.5 1.0 14.1 14.0
12.0 13.7
10.0 12.8 1.0
3.0
10.0 11.0
8.0 2.5 0.7 0.8
8.0
6.0 2.0
0.6
1.5 6.0 7.4
4.0 0.3 0.4
1.0 4.0
2.0 0.2
0.5 2.0 3.5
0.0 0.0 0.0 0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Yield on Advances Cost of Funds NIM (RHS)
RoE RoA (RHS)
Source : DCB Bank, Ventura Research Source : DCB Bank, Ventura Research
NII to grow at robust pace on a higher base

900.0 % 40.0
` crores
800.0 35.0
700.0 30.0
600.0
25.0
500.0
20.0
400.0
15.0
300.0
200.0 10.0
100.0 5.0
0.0 0.0
NII NII Growth
th
 Valuation
DCB vs. CUB DCB Bank 1-Yr Fwd. P/Adj. BV Band
4.0 1 Yr Forward Adj. P/BV valuation 200 `
Avg. P/Adj BV- 2.1 Avg. P/Adj BV- 1.6
3.5 180
3.0 160
2.5 140
2.0 120
1.5 100
80
1.0
60
0.5
40
0.0
20
9-Jul-08
9-Jul-13
9-Feb-08
9-Mar-10
9-Jun-11
9-Feb-13
9-Mar-15
9-Aug-10
9-May-09
9-May-14
9-Oct-09
9-Oct-14
9-Sep-07
9-Dec-08
9-Sep-12
9-Dec-13
9-Jan-11
9-Apr-12
9-Apr-07
9-Nov-06
9-Nov-11
0
DCB CUB CMP 0.5X 1.3X 2X 2.8X 3.5X
Source : Ventura Research Source : Ventura Research
We initiate coverage on DCB with a BUY and a price target of Rs. 183. We have valued DCB
based on our target P/Adj BV of 2.7X (on FY17E’s adjusted Book Value). Our target implies
an upside of 47% from the CMP. At a CMP of Rs. 125 the stock is trading at 1.8x FY17E
P/Adj. BV.
DCB is the smallest among the private banks and in comparison to its immediate peer CUB.
We believe that DCB offers a better investment proposition. Since the restructuring of the
business took place in FY11 the Bank’s operating metrics have seen a decisive
improvement. Asset quality which was its bane has been brought under control. On all
parameters vis a-vis business growth, operating metrics, return ratios etc DCB is better
placed than CUB (as shown in the following charts)
Currently DCB is trading at a premium of 1.2x to CUB on an Adj P/BV basis. We believe that
this premium will continue to prevail over the forecast period.
th
DCB to continue to trade at premium to CUB
DCB has a larger CASA base compared to CUB
20000.0 ` crores CASA 40.0 35,000.0 ` Crore City Union Bank 25.0
18000.0 35.0 30,000.0
16000.0 20.0
30.0
14000.0 25,000.0
12000.0 25.0 15.0
20,000.0
10000.0 20.0
8000.0 15,000.0 10.0
15.0
6000.0 10,000.0
10.0
4000.0 5.0
5.0 5,000.0
2000.0
0.0 0.0 - 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
DCB Bank CASA % (RHS) CUB CASA % (RHS)

Loan book composition of both the banks is similar
d
120 120
100 100
30 30 35
80 41 44 45 45 80 40 38 39 42 41 41 42 42
49
60 60
40 40
70 70 65 59 56 55 55 60 62 61
51 58 59 59 58 58
20
20
0
0
DCB’s loan book to grow at a quicker pace
16000 ` crores 60 30000.00 ` crores City Union Bank 40.00

DCB Bank
14000 50 35.00
25000.00
12000 40
30.00
30 20000.00
10000 25.00
20
8000 15000.00 20.00
10
6000 15.00
0 10000.00
4000 -10 10.00
2000 5000.00
-20 5.00
0 -30 0.00 0.00
Advances Advances Growth Advances Advances Growth
th
Earnings growth of both the banks to mirror each other
300.00 200%
` crores 450.0 ` crores 45%
250.00 400.0 40%
150%
35%
350.0
200.00 30%
100% 300.0 25%
150.00 250.0 20%
50%
200.0 15%
100.00
150.0 10%
0% 5%
50.00 100.0
0%
-50% 50.0 -5%
0.00
0.0 -10%
FY16E
FY17E
FY10
FY11
FY12
FY13
FY14
FY15
-100%
FY10
FY12
FY13
FY15
FY11
FY14
FY16E
FY17E
-50.00
-100.00 DCB Bank DCB yoy Growth (%) RHS -150%

CUB CUB yoy Growth (%) RHS
Asset quality of both the banks is similar
4.5 (%) NNPA 10.0 GNPA

(%)
4.0 9.0
3.5 8.0
7.0
3.0
6.0
2.5
5.0
2.0
4.0
1.5
3.0
1.0 2.0
0.5 1.0
0.0 0.0
NIMs at par DCB’s efficiency has improver remarkably
4.0 (%) 90.0 (%)
3.5 80.0
3.0 70.0
2.5 60.0
2.0 50.0
1.5 40.0
1.0 30.0
Source: DCB Bank, CUB, Ventura Research Source; DCB Bank, CUB, Ventura Research
th
Return ratios to catch up with CUB
2.0 (%) ROA 30.0 (%) ROE

1.5 25.0
20.0
1.0
15.0
0.5 10.0
0.0 5.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 0.0
-0.5
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
-5.0
-1.0
-10.0
-1.5 -15.0
-20.0
DCB Bank CUB
DCB Bank CUB

as
18.0% DCB Bank 18.0% CUB

16.0% 16.0%
14.0% 14.0%
12.0% 12.0%
10.0% 10.0%
8.0% 8.0%
6.0% 6.0%
4.0% 4.0%
2.0% 2.0%
0.0% 0.0%
th
Interest Income 916.1 1,128.3 1,422.4 1,779.9 2,132.0 Efficiency Ratio (%)
Interest Expense 631.7 759.9 914.2 1,103.0 1,316.1 Int Expended / Int Earned 69.0 67.3 64.3 62.0 61.7
Net Interest Income 284.4 368.4 508.2 676.9 815.9 Int Income / Total Funds 8.1 8.7 8.8 9.1 9.1
Non Interest Income 117.0 138.7 165.7 197.7 240.8 Other Inc. / Total Income 11.3 10.9 10.4 10.0 10.1
Total Net Income 401.4 507.1 673.9 874.5 1,056.7 Ope. Exp. / Total Income 26.6 25.2 25.0 24.8 24.6
Total Operating Expenses 275.3 319.1 396.5 489.9 583.1 Net Profit / Total Funds 0.9 1.2 1.2 1.1 1.1
Pre Provision profit 126.1 188.0 277.4 384.6 473.7 Credit / Deposit 78.7 78.8 83.0 80.0 80.0
Profit Before Tax 102.1 151.4 208.0 304.2 384.2
Taxes 0.0 0.0 16.8 86.7 119.1 Gross NPA (Rs. Cr) 215.0 138.5 186.1 221.6 272.4
Net profit 102.1 151.4 191.2 217.5 265.1 Net NPA (Rs. Cr) 49.1 74.0 105.1 124.0 151.4
Net NPA (%) 0.7 0.9 1.0 1.1 1.1
Cash & Balances with RBI 378.8 505.1 569.2 714.1 737.7 Tier I Capital (%) 13.0 14.4 14.2 12.9 9.4
Inter bank borrrowing 504.5 184.5 150.0 141.2 172.0 Tier II Capital (%) 0.8 0.7 0.8 0.7 1.8
Investments 3,358.7 3,634.2 4,470.6 5,647.4 6,879.8
Other Assets 450.8 459.2 477.4 524.2 566.4 EPS 4.1 6.0 6.8 7.7 9.4
Demand 899.2 959.1 1,032.5 1,325.7 1,649.9 Adjusted Book Value of Share 36.0 40.9 52.3 59.5 68.0
Savings 1,372.4 1,622.2 1,917.6 2,424.9 3,042.9
Borrowings 1,528.6 863.2 1,167.0 1,250.2 1,501.7 Price/Earnings (x) 30.6 20.7 18.4 16.2 13.3
Other Liability 386.3 583.9 770.8 847.1 1,032.0 Price/Book Value (x) 3.3 2.8 2.2 2.0 1.7
Reserves 749.9 900.6 1,303.4 1,520.9 1,786.0
RoAA (%) 1.0 1.3 1.3 1.2 1.2
% of Average Assets
Taxes 0.0 0.0 0.1 0.5 0.6 Deposits 32.0 23.5 22.1 23.9 20.1
th
City Union Bank Ltd.
ACCUMULATE

Index Details With over 100+ years of existence, City Union Bank’s (CUB) consistency in
Sensex 25,742 maintaining profitability, dividend payouts and asset quality gives us great
Nifty 7,809 comfort. Primarily a southern based bank, it is now looking to expand its
presence in West India. At the helm of their strategy is conservative
Industry Bank
approach to lending – particularly to SME/MSME and deposit mobilization
which has helped the bank grow steadily, without too many hiccups, during
various economic cycles.
Scrip Details
We initiate coverage on CUB with an Accumulate and a price target of Rs

MktCap(`cr) 5,417
115. We have valued CUB based on our target P/Adj BV of 2.2X (on FY17E’s
O/s Shares (Cr) 59.66
adjusted Book Value). Our target implies an upside of 26% from the CMP. At
Av Vol (Lacs) 0.34 a CMP of Rs. 91, the stock is trading at 1.7x FY17E P/Adj. BV.
52 Week H/L 105.9/74.3
Div Yield (%) 1.1 CUB is a fledgling bank and is comparable to DCB. We believe that
FVPS (`) 2 compared to CUB, DCB offers a better investment proposition. While CUB
has performed commendably across economic cycles we believe that its
Shareholding Pattern performance is already built into the valuations.
Shareholder %
DCB since the restructuring of its business in FY11 has seen a sharp
Promoters -
improvement in its operating metrics. Asset quality which was its bane has
DIIs 10
been brought under control. On all parameters viz., business growth,
FIIs 37
operating metrics, return ratios etc DCB is better placed than CUB (as
Public 53 shown in the following charts)
Total 100.0
Currently CUB is trading at a discount of 0.8x to that of DCB on the Adj
CUB vs. Sensex P/BV basis. We believe that this discount will continue to prevail over the
120 31000
30000
forecast period.
100
29000
80 28000
60 27000
40 26000 Prudent strategy ensures steady credit growth
25000
20 24000
CUB’s advances have grown at a steady pace -- 5 year CAGR of ~14% to Rs

0 23000
01-Jul-2015
01-Feb-2015
01-Mar-2015
01-Jun-2015
01-Aug-2014
01-May-2015
01-Aug-2015
01-Oct-2014
01-Sep-2014
01-Dec-2014
01-Jan-2015
01-Apr-2015
01-Nov-2014
17,965 crore in FY15. Product-wise, working capital loans continue to account for
City Union Bank S&P Bse Sensex
65% of the total loan book, while the proportion of MSME lending has increased
from ~27% to ~35% in the past five years. The strategy is to build a loan portfolio
of collateral-backed, high yielding and short duration advances, primarily based
on floating interest rates (~85% of total loan book) which helps protect profitability.
Net Non
P/E P/Adj BV
(x) (x)
Income Income
2014 759 301 347 6.4 33.7 18.9 1.4 14.2 2.7
2015 807 404 384 6.6 41.3 16.3 1.5 13.7 2.2
2016E 954 442 433 7.3 46.3 15.1 1.4 12.5 2.0
2017E 1,155 513 531 8.9 52.3 16.4 1.5 10.2 1.7
th
Tamil Nadu is one of the preferred destinations for SME/MSMEs and CUB has in-
depth expertise of lending to this sector. We believe the bank will continue to grow
its loan book at a steady pace of 16% to Rs 24,060 crores by FY17, with
proportions of MSME and working capital loans largely remaining the same.
Retail and SME to fuel future credit growth
30000 ` crores
25000
21413
20000
18220
15630
15000
13682
12807
2549 9589
2036 7219
10000
5000
2439
2415
2336
2485
2647
0
Corporate Retail & SME
Source : CUB, Ventura Research
Focus on term deposits to aid ALM
CUB’s deposits have grown at a 5 year CAGR of 19% to Rs 24,075 crore, led by
term deposits (~80% of the total deposits) which have grown at a similar pace.
The management is not very aggressive in increasing its CASA ratio, since it has
been able to maintain NIMs upwards of 3% consistently for the past many years
given the composition of its loan book. Further, term deposits constitute relatively
higher maturity retail deposits, with no reliance on low yielding bulk corporate
deposits. This helps maintain profitability and aid ALM with majority of the
advances and deposits have a similar maturity profile.
CASA share is expected to remain stable
120.0 %
100.0
80.0
60.0 78.1 80.4 81.8 83.2 82.2 80.8 80.5 79.9
40.0
20.0
21.9 19.6 18.2 16.8 17.8 19.2 19.5 20.1
0.0
CASA TD
th
We expect deposits to grow at a steady 2-year CAGR of 14.6% to Rs 31,659
crore led by a similar growth in term deposits to Rs 23,128 crore by FY17. We
expect the CASA ratio to marginally increase from 19.2% in FY15 to 20.1% by
FY17. Within the CASA mix, we expect SA deposits to increase at a 2-year CAGR
of 20% to Rs 4,266 crore and CA to increase at a 2 year CAGR of 12.2% to Rs
1,965 crore by FY17.
Deposit book to grow at 14.7%

35000.0 ` crores % 30.0
30000.0 25.0
25000.0
20.0
20000.0
15.0
15000.0
10.0
10000.0
12914.3
16340.8
20304.8
22016.9
24075.0
27606.0
31657.9
10284.6
5000.0 5.0
0.0 0.0
Deposits Growth
Source CUB, Ventura Research
Geographical branch expansion
As of March 2015, CUB has 475 branches, of which 421 branches are located in
the South and 324 in Tamil Nadu (~68%) alone. Further, the branches are
strategically located to tap and service the SME/MSME sectors -- ~60% of the
branches are located in the semi urban and rural areas. We understand that the
management is focused on further expanding its branch network in Maharashtra
and Gujarat as well, which currently stands at 17 and 9 respectively. We expect
the bank to add ~50-60 branches each year and reach a total branch network of
~575 branches by FY17.
Healthy asset quality despite loan book skewed towards SME/MSME
CUB’s gross NPAs have remained in the range of 1.3-1.8%, while Net NPAs have
ranged around 0.5% to 1.3% in the past five years despite a loan book skewed
towards SME/MSME and traders. CUB’s loan book is granular in nature – textiles,
the largest sector that it lends to, constitutes only 5% of the total loan book.
Further, the bank lends to the SME/MSME segment only after securing additional
collateral in the form of residential property or personal guarantees. Further, these
loans are based on one-to-one relationships unlike lending consortiums. This
helps CUB closely monitor the asset quality regularly and ensure timely
th
collections. On a conservative basis, we expect Gross NPAs to marginally
increase from 1.86% in FY15 to 1.95% by FY17 and Net NPAs to increase from
1.3% to 1.4% during the same period.
As of FY15, CUB’s restructured standard assets stood at 1.44% of Gross

Advances (FY14 –1.7%). During FY15, the bank restructured loans worth Rs 10.3
crore, and the balance o/s in respect of restructuring stood at Rs 260 crore (1.4%
of total Gross advances)
Slight increase in NPAs factored in

2.50 %
2.00
1.50
1.00
0.50
0.00
GNPA NNPA
With a high CAR of 16.52% (Basel II norms) and a core CAR of 16.03%, we do
not foresee any requirement for the bank to go in for capital infusion. It is well
capitalized to realize the steady business growth that we anticipate in the coming
years.
18.0 %
16.0 0.5 0.1
0.6 0.1
14.0 0.7
12.0 0.9 0.9
10.0
8.0 16.0 15.8 15.1
14.5
13.3
6.0 11.8 11.7
4.0
2.0
0.0
Tier I Tier II
th
Operationally we expect NII to grow at a CAGR of 19.6% to Rs. 1155 crores by
FY17. Other income, which constitutes fee and treasury income would continue to
form ~12% of the total income. The bank has been able to maintain NIMs at 3%+,
in line with top private banks, despite a low CASA. The bank’s strategy of floating
based interest rate loans and increasing proportion of high yielding SME/MSME
will continue to help maintain profitability. We expect NIMs to expand from 3.16%
in FY15 to 3.49% in FY17. Cost to income is expected to remain in the range of
42%-43% going forward. Earnings are expected to grow at a CAGR of 16% to Rs.
531 crores by FY17. We expect the RoE and RoA to remain stable at 16.4% and
1.5% in the coming two years.
NII growth to pick up aided by NIM expansion Stable cost and yields to keep NIMs steady
1400.0 60 16.0 %
` crores %
1200.0 14.0
50
12.0
1000.0
40
10.0
800.0
30 8.0
600.0
6.0
20
400.0
4.0
200.0 10
2.0
0.0 0 0.0
NII NII growth YoA CoF NIM
Source : CUB, Ventura Research Source : CUB, Ventura Research
Uptick in return ratios expected C/I ratio expected to remain flat

30.0 % 1.8 46.0 45.2
%
43.8
24.9 1.7 44.0 42.8 43.1
25.0 23.5
1.7 22.3 41.7
20.6 1.7 42.0
1.6 18.9 39.6
20.0 16.7 1.6 39.3
16.4 40.0
15.1 1.6 37.5
15.0 1.6 38.0
1.5 1.5
1.5 36.0
10.0 1.5
1.5
1.4 1.4 1.4 34.0
5.0
1.4 32.0
0.0 1.3 30.0

RoE RoA Cost to Income
th
Retail & SME loan book composition
11
3 17
5
17
34
Traders MSME Agricluture

Retail Traders Personal Loans Others
 Valuation
We initiate coverage on CUB with an ‘ACCUMULATE’ and a price target of Rs

115. We have valued CUB based on our target P/Adj BV of 2.2X (on FY17E’s
adjusted Book Value). Our target implies an upside of 26% from the CMP. At a
CMP of Rs. 91, the stock is trading at 1.7x FY17E P/Adj. BV.
CUB is a fledgling bank and is comparable to DCB. We believe that compared to

CUB, DCB offers a better investment proposition. While CUB has performed
commendably across economic cycles we believe that its performance is already
built into the valuations.
DCB since the restructuring of its business in FY11 has seen a sharp
improvement in its operating metrics. Asset quality which was its bane has been
brought under control. On all parameters viz., business growth, operating metrics,
return ratios etc DCB is better placed than CUB (as shown in the following charts)
Currently CUB is trading at a discount of 0.8x to DCB on the Adj P/BV basis. We
believe that this discount will continue to prevail over the forecast period.
th
CUB vs. DCB CUB 1-Yr Fwd. P/Adj. BV Band
1.60 160
1 yr fwd P/Adj. BV relative valuation Avg. P/Adj. BV- 0.7x Avg. P/Adj. BV- 1.4x
1.40 Avg. P/Adj. BV- 1.7x
140
1.20
120
1.00
0.80
100
0.60 80
0.40 60
0.20 40
0.00
20
9-Jul-08
9-Jul-13
9-Mar-10
9-Jun-11
9-Feb-13
9-Mar-15
9-Feb-08
9-Aug-10
9-May-09
9-May-14
9-Oct-09
9-Oct-14
9-Sep-07
9-Dec-08
9-Sep-12
9-Dec-13
9-Apr-07
9-Jan-11
9-Apr-12
9-Nov-11
9-Nov-06
0
CUB DCB CMP 1X 1.5X 2X 2.5X 3X
th
Net Interest Income 624.0 759.4 807.4 953.7 1,155.0 Int Income / Total Funds 9.5 10.2 9.7 9.6 9.8
Total Net Income 897.6 1,060.6 1,211.5 1,395.4 1,668.3 Ope. Exp. / Total Income 15.2 16.8 16.7 17.3 17.5
Net NPA (%) 0.6 1.2 1.3 1.4 1.4
Investments 5,266.8 5,953.6 6,365.3 7,245.4 8,175.7
Other Assets 693.7 763.8 1,003.6 1,107.7 1,287.2 EPS 678.7 6.4 6.6 7.3 8.9
Savings 2,069.3 2,475.4 2,962.6 3,555.1 4,266.1
Borrowings 476.7 305.0 168.8 207.0 237.4 Price/Earnings (x) 0.1 14.2 13.7 12.5 10.2
Other Liability 554.9 647.0 931.8 1,104.2 1,361.3 Price/Book Value (x) 2.6 2.4 2.0 1.8 1.6
Reserves 1,593.2 1,970.7 2,635.9 2,977.9 3,397.5
RoAA (%) 1.6 1.4 1.5 1.4 1.5
% of Average Assets
Taxes 0.4 0.3 0.5 0.5 0.5 Deposits 24.3 8.4 9.3 14.7 14.7
th
Lakshmi Vilas Bank Ltd.
BUY
Target Price ` 110 CMP `74 FY17E P/Adj. BV 0.7x
Index Details Lakshmi Vilas Bank (LVB), one of the oldest private sector banks in the
Sensex 25,742 country, has a dominant presence in the South. LVB is on the path of revival
Nifty 7,809 from the aftermath of the economic turmoil that adversely impacted the
bank from FY11-FY14. During this period, the bank’s asset quality
Industry Bank
deteriorated substantially – net NPAs increased from 0.9% in FY11 to 3.44%
in FY14. However, with the change in focus towards high yielding Retail and
MSME lending along with significant recovery and up-gradation of NPAs to
Scrip Details standard asset category, we expect a revival in the bank’s business over the
forecasted period.
MktCap ( Cr) 1334
O/s Shares (Cr) 17.9 We clearly believe that Lakshmi Vilas Bank presents a compelling case for
Av Vol (Lacs) 0.7 emerging a winner given:
52 Week H/L 111/69
Div Yield (%) 2.2
 Fastest loan growth (22% CAGR FY15-17) among peers leading to
market share gains.
FVPS (`) 10
 The worst is behind us with respect to asset quality and the Bank is
on track to improve asset quality - GNPA (2.2%, -55bps), NNPA
Shareholding Pattern
(1.4%,-45 bps) to comparable levels with that of peers by FY17. While
Shareholder % during the Q1FY16 all its peers have seen worsening of asset quality,
Promoters 9.5 LVB stands apart with its significant improvement. The restructured
DIIs 7.2 book is also expected to moderate by FY17
FIIs 10.7  NIM expansion is on the cards given its strong focus to improve
Public 72.5 CASA & thereby reduce cost of funds (-15bps) along with a slight
Total 100.0 expansion of lending yields (+70 bps)
Lakshmi Vilas Bank vs. Sensex  Faster earnings growth and compelling valuations.
120 31000
30000
100
80
29000 We initiate coverage on Lakshmi Vilas Bank with a BUY and a target price of
28000
60 27000
26000
Rs. 110 over a period of 18 months. We have valued Lakshmi Vilas Bank
40
20
25000
24000
based on our target Price to Adjusted Book Value of 1.15X on FY17E book
0 23000
value. Our target price implies an upside of ~48% from the CMP. At the CMP
01-Jul-2015
01-Feb-2015
01-Mar-2015
01-Jun-2015
01-Aug-2014
01-May-2015
01-Aug-2015
01-Oct-2014
01-Sep-2014
01-Dec-2014
01-Jan-2015
01-Apr-2015
01-Nov-2014
of Rs. 74, the bank is trading at 0.7X FY16 and 0.7x FY17 of its Adj. P/BV.
Lakshmi Vilas Bank S&P Bse Sensex

Net Non
P/E P/Adj BV
(x) (x)
Income Income
2014 486.0 218.0 59.7 6.1 62.5 6.2 0.3 12.1 0.7
2015 526.6 284.0 121.6 7.4 70.0 9.3 0.5 10.0 0.9
2016E 785.6 290.3 218.6 10.2 82.0 12.0 0.8 7.3 0.8
2017E 1036.7 349.4 352.0 14.1 95.4 14.7 1.1 5.2 0.7
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- 140 - Monday, 24 August, 2015
Retail & MSMEs to fund next leg of credit growth
LVB is embarking on its next leg of growth with a thrust on the Retail and MSMEs
segment. LVB is looking to leverage its rural and sub-rural reach & market
expertise to provide MSMEs with term and working capital loans for shorter
durations (1 to 3 years) to enhance credit growth.
Retail Lending to bolster loan growth
30000 ` Crores
25000
6815
20000
5985
5233
15000
3568
3296
10000
6581 3607
5261 2752
11119
13965
17524
5000
8407
9320
0
Corporate Retail & SMR
Further, i) launch of new products such as ‘LAP’ viz. Lakshmi Business Credit
ii) Tie-ups with HDFC and Ashok Leyland for home loan and CV financing
respectively, and
iii) huge potential in the under-penetrated MSME lending market will drive
growth in the coming years. We expect the loan book to grow at 14%
CAGR to Rs 24,338 crore by FY17E.
In the past, LVB grew its loan book by focusing on wholesale lending, which
helped the bank achieve a CAGR of 21% over FY10-15. However, the economic
slowdown resulted in delinquencies leading to a deterioration of its asset quality.
The bank’s recent shift in focus onto MSME and Retail – contribution of Retail and
MSME has increased from ~45% in FY12 to 53% in FY15 -- should help it
diversify its risk portfolio. We expect the retail and MSME proportion in the loan
book to increase to 36% (FY15: 34%) and 21% (FY 15: 19%) respectively by
FY17.
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- 141 - Monday, 24 August, 2015
Granular Retail portfolio
Housing
6.3
2.4
25.0 Education Loans
11.7
Gold loans
Other Personal Loans

22.0
32.6 Personal Loans
Loans collateralised
by Deposits
Focus on CASA growth; 20% targeted by FY17E
LVB’s CASA ratio at 17% in FY15 is relatively lower than other private sector
banks, largely owing to slower branch expansion (8% CAGR FY10-FY15, 400
branches as of FY15) and an erstwhile focus on term deposits. However, LVB has
re-worked its strategy. It is now focusing on driving the low cost CASA deposits
through branch expansion (added 109 branches in the past two years) and hired a
dedicated sales force of 500 employees with an incentivized pay structure to
mobilize CASA.
CASA to grow at over 30% CAGR

120.0 %
100.0
80.0
60.0 81.8 81.2 85.1 85.5 85.8 83.3 81.6 79.8
40.0
20.0
18.2 18.8 14.9 14.5 14.2 16.7 18.4 20.2
0.0
CASA TD
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- 142 - Monday, 24 August, 2015
Further, the increased focus towards the MSME segment should augur well for
CA mobilization and help improve the CASA ratio steadily to ~20% by FY17E (Rs.
6417 crore, CAGR of 32% from FY15-17). We expect the overall deposit base to
grow at a CAGR 20.3% to Rs 31,815 crore by FY17, driven by 56% CAGR in CA
to Rs 3491 crore and 25% CAGR in SA to Rs 3459 crore by FY17. We expect
term deposits to grow at a slow pace of ~16.5% CAGR to Rs 24,864 crore over
the forecasted period.
Higher share of retail term deposits aids Asset-Liability Management (ALM)
LVB has managed ALM relatively better than peers, with ~83% of deposits and
~89% of advances maturing below three-years as of FY14. The banks advances
mix is tilted more towards working-capital loans (~70%), which is majorly financed
by retail term deposits which form ~86% of the deposits. The better asset-liability
match should also help LVB maintain stable margins across interest rate cycles as
a similar maturity pattern helps to pass on deposit rate hikes to borrowers.
Asset quality expected to improve
The LVB management has successfully managed to arrest the asset quality
deterioration -- Net NPAs improved from 3.44% in FY14 to 1.85% in FY15.
Considerable amount of secured lending with LTV in the range of 60% to 80%,
restructuring and up- gradation of bad loans into standard category, recalibration
in disbursement towards corporates and risky sectors should help control
slippages and improve asset quality. We expect Gross NPAs to improve from
2.75% in FY15 to 2.2% in FY17 and Net NPAs to improve from 1.85% in FY15 to
1.4% in FY17. We expect restructured assets, which stood at Rs 1315 crore in
FY15 to constitute 8% of total advances from 9% currently.
Asset Quality to improve further

6.0 %
5.1
5.0
4.2
3.9
4.0
4.1 3.0
2.8
3.0 3.4 2.5
2.2
1.9
2.0 2.4
1.7 1.9
1.0 1.6
1.4
0.9
0.0
GNPA NNPA
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- 143 - Monday, 24 August, 2015
Adequate Capital Reserves to sustain restructuring
LVB recently infused capital via a rights issue which increased the Capital
Adequacy Ratio (CAR) to 13.7% in FY15 from 10.9% in FY14. LVB is adequately
capitalized to undertake the envisaged restructuring exercises.
Capital raising to assist in maintaining CAR

30.0 %
25.0
20.0 11.5
9.9 8.2
15.0 7.8
1.1
1.2 0.9
10.0 3.0
14.2 12.6
12.1 12.1 10.4 11.3 10.7
5.0
7.9
0.0
Tier I Tier II
Operationally we expect NII to grow at a CAGR of 40.3% to Rs.1037 crore by

FY17, higher than 16% CAGR from FY10-FY15, which was a slow growth period
for the bank. Cost to income is expected to improve from 55% in FY15 to 50.5%
by FY17. LVB’s operating model has largely remained cost-heavy due to lower
operating efficiency and low CASA per branch as compared to its peers. However,
the management is confident of bringing in operating efficiencies with growth in
CASA and effective branch expansion strategy. We expect NIMs to increase
gradually as the asset base shifts towards higher yielding retail and MSME loans;
we expect NIMs to expand by 10 bps to 3.1% by FY17. Earnings are expected to
grow at a CAGR of 70% to Rs. 409 crores by FY17 on a low base. With improving
asset quality and profitability, we expect RoE to expand 540 bps to 14.7% in FY17
and RoA to expand 70 bps to 1.2% in FY17 from FY15 levels.
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- 144 - Monday, 24 August, 2015
Lower cost of funds to help sustain NIMs NII growth to remain above 30%
14.0 % 1200.0 ` Crores 70.0
12.0 60.0
1000.0
50.0
10.0
800.0
40.0
8.0
600.0 30.0
6.0
20.0
400.0
4.0
10.0
2.0 200.0
0.0
0.0 0.0 -10.0

YoA CoF NIM NII NII Growth
Source : LVB, Ventura Research Source : LVB, Ventura Research
Higher income base to improve C/I ratio Higher profitability to propel return ratios
60.0 18.0 % % 1.4
%
58.0 16.0
1.2
56.0 14.0
54.0
12.0 1.0
52.0
10.0
50.0 0.8
8.0
48.0
6.0 0.6
46.0
44.0 4.0
0.4
42.0 2.0
40.0 0.0 0.2
Cost to Income RoE RoA
Source : LVB, Ventura Research Source : LVB, Ventura Research
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- 145 - Monday, 24 August, 2015
 Valuation
Among the other 5 mid-sized banks we clearly believe that Lakshmi Vilas
Bank presents a compelling case for emerging a winner given:
 Fastest loan growth (22% CAGR FY15-17) among peers leading to market
share gains.
 The worst with respect to asset quality is behind us and the Bank is on track to
improve its asset quality - GNPA (2.2%, -55bps), NNPA (1.4%,-45 bps) to
levels comparable with that of peers by FY17. While during the Q1FY16 all its
peers have seen a worsening of asset quality, LVB stands out with its
significant improvement. The restructured book is also expected to moderate
by FY17
Moderate improvement in asset quality

3.5 2.5 %
% Gross NPA Net NPA
3.0
2.0
2.5
1.5
2.0
1.5 1.0
1.0
0.5
0.5
0.0 0.0
Federal KVB SIB LVB KBL DCB Federal KVB SIB LVB KBL DCB
Q4FY15 Q1FY16 Q4FY15 Q1FY16
Restructured Assets kept under check

3000 ` crores
2500
2000
1500
1000
500
0
Federal KVB SIB LVB KBL DCB
Q4FY15 Q1FY16
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- 146 - Monday, 24 August, 2015
 NIM expansion on the cards given its strong focus to improve CASA & thereby
reduced cost of funds (-15bps) and slight expansion of lending yields (+70
bps)
 Faster earnings growth and compelling valuations.
Fastest estimated earnings growth and cheaper valuations augur well for LVB
45.00
LVB
40.00
35.00
2-Yr EPS CAGR
30.00 KarBank
25.00
KVB DCB
20.00
SIB
15.00 FedBank
CUB
10.00
5.00
0.00
0.0 0.5 1.0 1.5 2.0 2.5
FY17E P/Adj. BV
We initiate coverage on Lakshmi Vilas Bank with a BUY and a target price of Rs.
110 over a period of 18 months. We have valued Lakshmi Vilas Bank based on
our target Price to Adjusted Book Value of 1.15X on FY17E book value. Our
target price implies an upside of ~48% from the CMP. At the CMP of Rs. 74, the
bank is trading at 0.8X FY16 and 0.7X FY17 of its Adj. P/BV.
Adj. P/BV valuation bands for LVB
`
150
125
100
75
50
25
0
CMP 0.3X 0.6X 0.9X 1.2X 1.5X
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- 147 - Monday, 24 August, 2015
0.0
1.0
1.2
0.2
0.4
0.6
0.8
0.2
0.4
0.6
0.8
1.0
1.2
1.4
0.0
1.6
16-Apr-07
16-Apr-07
16-Aug-07 16-Sep-07
16-Dec-07 16-Feb-08
- 148 -
16-Apr-08 16-Jul-08
16-Aug-08
16-Dec-08
16-Dec-08
16-Apr-09 16-May-09
16-Aug-09 16-Oct-09

16-Dec-09
16-Mar-10
16-Apr-10
16-Aug-10 16-Aug-10
LVB
LVB
16-Dec-10 16-Jan-11
16-Apr-11 16-Jun-11
16-Aug-11
LVB vs. SIB

16-Nov-11
LVB vs. KVB
16-Dec-11
SIB
KVB
16-Apr-12
16-Apr-12
16-Aug-12 16-Sep-12
16-Dec-12
16-Feb-13
16-Apr-13
16-Aug-13 16-Jul-13
16-Dec-13 16-Dec-13
16-Apr-14 16-May-14
16-Aug-14
16-Oct-14
16-Dec-14
16-Apr-15 16-Mar-15
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0.0
0.5
1.0
2.0
2.5
1.5
16-Apr-07 16-Apr-07
16-Sep-07 16-Sep-07
16-Feb-08 16-Feb-08
16-Jul-08 16-Jul-08
16-Dec-08 16-Dec-08
16-May-09 16-May-09
16-Oct-09 16-Oct-09

16-Mar-10 16-Mar-10
16-Aug-10 16-Aug-10
LVB
LVB
16-Jan-11 16-Jan-11
16-Jun-11 16-Jun-11
16-Nov-11 16-Nov-11
LVB vs. KBL
LVB vs. FEDB

KBL
16-Apr-12 16-Apr-12
FedBank
16-Sep-12 16-Sep-12
th
16-Feb-13 16-Feb-13
16-Jul-13 16-Jul-13
16-Dec-13 16-Dec-13
16-May-14 16-May-14
16-Oct-14 16-Oct-14
Monday, 24 August, 2015

16-Mar-15 16-Mar-15
LVB has demonstrated strong growth in advances and expected to outperform peers
80000
` Crores
70000
60000
50000
40000
30000
20000
10000

LVB’s NIMs expected to be in line with peers over the forecast period
4.0 % Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

Significant reduction in LVB’s Cost to Income ratio on the cards
%
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
th
- 149 - Monday, 24 August, 2015
While LVB‘s elevated GNPAs are expected to come down sharply …
%
6.0
5.0
4.0
3.0
2.0
1.0
0.0

… NNPA though expected to come off sharply will still remain elevated
%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

LVB expected CASA growth highest among peers
40.0
% Federal Bank Karur Vysya Bank South Indian Bank Lakshmi Vilas Bank Karnartaka Bank City Union Bank DCB Bank
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
th
- 150 - Monday, 24 August, 2015
RoE expected to improve considerably compared to peers
30.0 %
25.0
20.0
15.0
10.0
5.0
0.0
Sharp improvement of RoA on the anvil

1.8 %
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
th
- 151 - Monday, 24 August, 2015
Net Interest Income 392.0 486.0 526.6 785.6 1,036.7 Int Income / Total Funds 10.0 9.6 9.0 9.5 9.5
Total Net Income 589.1 704.0 810.7 1,075.9 1,386.1 Ope. Exp. / Total Income 17.3 17.9 17.8 16.6 16.3
YoY change (%) 29.5 -70.7 339.3 67.5 60.0 Solvency
Taxes 46.2 -19.3 55.9 78.8 123.7 Gross NPA (Rs. Cr) 459.9 546.5 454.7 448.5 487.2
YoY change (%) 28.8 -34.9 103.8 79.8 61.1 Gross NPA (%) 3.9 4.2 2.8 2.5 2.2
Net NPA (%) 2.4 3.4 1.9 1.6 1.4
Cash & Balances with RBI 728.2 1,192.1 1,143.4 1,397.6 1,525.0 Tier I Capital (%) 9.2 7.9 12.6 11.3 10.7
Investments 4,324.5 5,688.7 6,103.8 7,234.9 8,816.1
Other Assets 767.4 763.5 930.9 959.1 1,027.2 EPS 9.4 6.1 7.4 10.2 14.1
Demand 738.5 912.5 1,429.9 2,404.1 3,491.1 Adjusted Book Value of Share 74.9 62.5 70.0 82.0 95.4
Savings 1,524.1 1,729.7 2,214.1 2,767.6 3,459.5
Borrowings 480.0 458.1 458.1 458.1 458.1 Price/Earnings (x) 7.9 12.1 10.0 7.3 5.2
Other Liabilities 553.4 568.5 727.0 816.8 933.9 Price/Book Value (x) 0.7 0.7 0.9 0.8 0.7
Reserves 916.8 956.0 1,377.0 1,860.4 2,469.1
RoAA (%) 0.5 0.3 0.5 0.8 1.1
% of Average Assets
Provisions & Contingencies 0.7 1.4 0.8 1.0 0.9 Net profit -0.1 -0.3 1.2 0.7 0.6
Taxes 0.3 -0.1 0.2 0.3 0.4 Deposits 10.7 18.9 18.3 20.3 20.4
th
- 152 - Monday, 24 August, 2015
Federal Bank Ltd.
HOLD
Index Details Federal Bank (FEDBANK) is one of the largest old generation private sector
Sensex 25,742 banks, with a dominant presence in the South -- ~47% of the branch network
Nifty 7,809 is located in Kerala alone. After a muted business growth in FY14,
FEDBANK made a strong comeback in FY15 backed by an improving macro-
Industry Bank
economic scenario in South India and strategy modifications – reducing
exposure to riskier sectors, diversifying asset base and undertaking digital
initiatives to control costs.
Scrip Details
Federal Bank has been proactive in the launch of new product and service
MktCap(`cr) 10,462
offerings in the digital space. While we are optimistic about these forays, we
O/s Shares (Cr) 171.5 remain concerned about its asset quality which is expected to worsen over
Av Vol (Lacs) 1.7 the forecast period. Further the loan growth of 14.6% CAGR is expected to
52 Week H/L 79/58 be in line with that of the industry, leading to an earnings growth of 11%
Div Yield (%) 1.6 over the period FY15-17. At the current price of Rs. 61, the stock is trading
FVPS (`) 2 at 1.2X of its FY17E Adj. P/BV. We believe that much of the appreciation is
already factored into price. We initiate our coverage on Federal Bank with a
Shareholding Pattern target price of Rs. 73 (1.2X FY17 Adj. P/BV) and recommend a HOLD on the
stock.
Shareholder %
Promoters -
Credit growth to revive during FY16-17
DIIs 33.9
FIIs 34.4 FEDBANK’s advances have grown at a 5-year CAGR of 15% to Rs 51,285 crore
Public 31.6 in FY15. While the bank maintained a sustained growth of ~18-20% from FY10 to
Total 100.0 FY13, advances de-grew by 1.5% in FY14 on account of the slowdown in the key
markets of South India and the management’s stance of being selective in credit
Federal Bank vs. Sensex disbursals. However, it also bought down the ballooning NPA levels significantly –
from Gross NPAs of ~3.5% to 2.5% in FY14. As the economic conditions
improved, FEDBANK’s advances grew at 18.1% in FY15. The management’s
prudent credit management gives us great comfort.

Net Non
P/E P/Adj BV
(x) (x)
Income Income
2014 2,229 694 839 4.9 38.8 12.6 1.2 12.4 1.6
2015 2,380 878 1006 5.9 43.0 13.7 1.3 10.4 1.4
2016E 2,740 974 1080 6.3 46.6 13.2 1.2 9.7 1.3
2017E 3,169 1,085 1235 7.2 52.2 13.6 1.2 8.5 1.2
th
Retail credit expected to be robust, Corporate muted
80000 ` Crores
70000
60000
50000
47738
40520
40000
34910
25515
29790
17235 20521
30000
13420 18533
10241 16709
20000
19609
18582
17688
16375
13647
10000
0
Corporate Retail & SME
Source :Federal Bank, Ventura Research
The proportion of high yielding retail and SME & Agri loans has consistently been
on the rise – from ~55% in FY12 to 68% in FY15. This has helped improve
profitability and add granularity to the asset base which could provide a cushion in
adverse economic situations. Going forward, we believe FEDBANK will be able to
sustain the growth momentum given its strong brand power in the South and
anticipated economic revival. We expect advances to grow at a 2 year CAGR of
15% to Rs 67,348 crores in FY17 led by a 16% CAGR in SME & Agri loans to Rs
26,362 crore, 18% CAGR in Retail loans to Rs 21,376 crore and 9% CAGR in
Corporate loans to Rs 19,609 crore in FY17.
Diverse retail mix
21.6
42.5
14.8
21.1
Housing Gold Mortgage Others
Source : Federal Bank, Ventura Research
th
Focus on improving CASA ratio
FEDBANK’s deposits have grown at a 5 year CAGR of 14% to Rs 70,825 crore,

led by 17-18% growth in CASA to Rs 21,784 crore (CA: 6%, SA: 25% of total
FY15 deposits) and 13% growth in term deposits to Rs 49,041 crore in FY15. The
management has focused on improving the CASA ratio and reducing the
dependence on high cost bulk term deposits (from 25.3% of deposits in FY11 to
1.1% in FY15).
Deposits to grow at 14.1% CAGR CASA share expected to grow steadily

100000.0 ` Crores % 25.0 120.0 %
90000.0
100.0
80000.0 20.0
70000.0
80.0
60000.0 15.0
73.1 72.5 72.8 68.8 69.2 68.1 66.7
73.8
50000.0 60.0
40000.0 10.0
40.0
30000.0
20000.0 5.0 20.0
26.9 27.5 27.2 31.2 30.8 31.9 33.3
10000.0 26.2
0.0 0.0 0.0

Deposit Deposit growth CASA TD
Source : Federal Bank, Ventura Research Source : Federal Bank, Ventura Research
For instance, CASA ratio has improved from ~26% in FY10 to ~30.7% in FY15,
primarily led by increase in the contribution of SA deposits – from 21.1% to 25%
during the same period. Aggressive branch expansion and focus on garnering low
cost NRI SA deposits through foreign exchange remittances from expats based in
the Middle East has been the key to SA growth. The contribution of NRI deposits
to total SA deposits has increased from 40.4% in FY11 to 45.5% in FY15. Also,
within term deposits, the proportion of NRI term deposits has increased from
37.5% in FY11 to 43.2% by FY15.
We understand that the management is looking to sustain the CASA ratio in the
range of 32-33% and enhance growth in its deposits through sustained focus on
NRI, HNI and salaried class deposits, Priority Banking initiatives, and branch
expansions. We expect CASA to grow at a 2 year CAGR of 19% to Rs 30,664
crore by FY17 led by 18% growth in SA deposits to Rs 24,783 crore. CASA ratio
is expected to improve from 30.7% in FY15 to 33.3% by FY17. Term deposits are
expected to grow at CAGR of 16% to Rs 66,044 crore by FY17E. Overall deposits
mobilization is expected to grow at a CAGR of 14.1% to Rs 92,131 crore by FY17.
th
Geographic diversification of branch network on the cards
As of Q1FY16, FEDBANK’s branch strength stands at 1247, with presence

primarily in South and West India, and some parts of North India. Of the total
branch network, ~47% is located in Kerala, ~11% in Tamil Nadu and 8% in
Maharashtra and Karnataka each. The management is consciously working to
reduce its dependence on Kerala, which constituted 55% of the total branch
strength in FY12. FEDBANK has steadily expanded its branch strength, primarily
on a cluster bases, – at a 5-year CAGR of 13% to 1247 as of date. We expect the
steady pace of expansion to continue given its focus on garnering retail deposits.
Asset quality has substantially improved; though concerns remain
FEDBANK has successfully improved its asset quality – Gross NPAs have come
down from 3.49% in FY11 to 2.04% in FY15. However, Net NPAs have increased
from 0.6% in FY11 to 0.73% in FY15, which effectively means that the bank has
lowered its provisions– Provision coverage ratio has reduced from 84% in FY11 to
64% in FY15. With a relatively more diversified asset book, higher focus on Retail
& SME lending, and single account exposure restricted to Rs 100 crore (except for
very large accounts), the bank hopes to maintain GNPAs at between 2-2.2% in
the coming two years. However, there are few accounts worth Rs 300-400 crore
which are currently under stress and key monitrables for asset quality concerns.
We expect the GNPA to increase to 2.27% in FY17 and Net NPA to increase to
1.04% by FY17.
Upside risk on asset quality limited

4.0 % % 90
3.5 80
3.0 70
60
2.5
50
2.0
40
1.5
30
1.0 20
0.5 10
0.0 0
PCR GNPA NNPA
th
With a high CAR of 15.07% and core CAR of 14.4%, we do not foresee any
requirement for the bank to go in for capital infusion. It is well capitalized to realize
the steady business growth that we anticipate in the coming years.
The bank is adequately funded With 14.8% Tier I capital

20.0 %
18.0 1.4
16.0 1.2 0.8
0.5 0.7
14.0 0.6
12.0
10.0
8.0 16.9 15.9
15.6 14.6 14.8
14.1
6.0
4.0
2.0
0.0
Tier I Tier II
Operationally we expect NII to grow at a CAGR of 19% to Rs. 3,168 crore by

FY17, higher than 11% CAGR from FY10-FY15. We don’t anticipate that the bank
will witness a FY14-like year in terms of a business slowdown. Fee income is
expected to grow at a 17% CAGR to Rs 536.8 crore by FY17 (CAGR 20% in the
past five years). Continuous expansion of product & service offerings in fee based
income areas, supported by rapid branch expansion and a number of digital
initiatives such as online account opening and mobile based transactions will drive
other income. The digital initiatives will also help control costs. We expect the
bank to arrest the increase in cost to income ratio – which was 37% in FY11 and
has reached 50% in FY15; we expect the ratio to decline marginally to ~49.2% by
FY17. The bank has been able to maintain NIMs at 3%+ consistently on the back
of strong retail-based liability franchisee and an increasing proportion of retail and
SME/MSME loans. We expect NIMs to improve from 3.1% in FY15 to 3.2% by
FY17. Earnings are expected to grow at a CAGR of 11% to Rs. 1,235 crores by
FY17E, similar to the growth witnessed in the past. We expect RoE and RoA to
remain stable at 13.5-14% and 1.2-1.3% in the coming two years.
th
Steady Cost and yield will help NIMs to sustain Return ratios to remain stable
12.0 % 16.0 % 14.4 % 1.5
13.9 13.7 13.6
14.0 13.2 1.4
12.6
10.0 12.0
12.0 1.4 1.4
10.3
8.0 1.3
10.0
1.3 1.3
6.0 8.0 1.3
1.2 1.2 1.2 1.2
6.0
4.0 1.2
4.0 1.2
1.1 1.1
2.0
2.0 1.1
0.0 0.0 1.0
YoA CoF NIM RoE RoA
C/I ratio has topped out, to improve marginally NII growth to bounce back
55.0 % 3500.0 ` Crores % 25.0
49.3 50.0 49.7 49.2
50.0 3000.0
20.0
44.9 2500.0
45.0
2000.0 15.0
39.4
40.0 36.9
34.9 1500.0 10.0
35.0
1000.0
5.0
30.0 500.0
25.0 0.0 0.0

Cost to Income NII NII growth
th
 Valuation
Federal Bank has been proactive in the launch of new product and service
offerings in the digital space. While we are optimistic about these forays we
remain concerned about its asset quality which is expected to worsen over the
forecast period. Further the loan growth of 14.6% CAGR is expected to be in line
with that of the industry, leading to an earnings growth of 11% over the period
FY15-17. We believe that much of the appreciation is already factored into the
price. At the current price of Rs. 61, the stock is trading at 1.2X of its FY17E Adj.
P/BV. We initiate our coverage on Federal Bank with a target price of Rs. 73 (1.2X
FY17 Adj. P/BV) and recommend a HOLD on the stock.
Federal Bank 1-Yr Fwd. P/Adj. BV
90 `
80
70
60
50
40
30
20
10
0
CMP 0.3X 0.6X 0.9X 1.2X 1.5X
th
Non Interest Income 664.4 693.8 878.3 974.2 1,084.6 Other Inc. / Total Income 9.7 9.1 10.6 10.6 10.4
YoY change (%) -3.4 1.8 10.0 14.7 15.8 Investment / Deposit 36.7 40.4 34.5 34.4 34.0
Taxes 355.6 373.1 515.3 485.2 581.3 Gross NPA (Rs. Cr) 1,554.0 1,087.4 1,057.7 1,303.0 1,425.1
Net profit 838.2 838.9 1,005.7 1,080.0 1,235.3 Net NPA (Rs. Cr) 431.9 321.6 373.3 613.2 652.9
Net NPA (%) 1.0 0.7 0.7 1.1 1.0
Investments 21,154.6 24,117.9 24,409.2 27,523.6 31,305.6
Other Assets 2,061.7 2,510.8 2,376.3 2,312.0 2,641.7 EPS 4.9 4.9 5.9 6.3 7.2
Total Assets 71,032.9 74,594.1 82,850.5 93,172.9 1,07,122.0 Dividend Per Share 0.9 1.0 1.1 1.1 1.2
Savings 12,743.2 15,284.3 17,726.9 20,687.3 24,783.4
Reserves 6,193.6 6,779.5 7,566.8 8,255.3 9,250.0
Total Liabilities 71,032.9 74,594.1 82,850.5 93,172.9 1,07,122.0 Return Ratio
RoAA (%) 1.3 1.2 1.3 1.2 1.2
% of Average Assets
Taxes 0.5 0.5 0.7 0.6 0.6 Deposits 17.7 3.7 18.6 13.0 15.1
Avg.Assets / Avg.Equity (x) 384.9 425.7 459.8 342.5 292.3 Advances 16.8 -1.5 18.1 13.5 15.7
th
South Indian Bank Ltd.
HOLD

Index Details Incorporated in 1929, South Indian Bank (SIB) is a leading mid-sized private
Sensex 25,742 sector bank with a dominant presence in Kerala. SIB is adopting a four-
Nifty 7,809 pronged strategy for future growth: i) Enhancing exposure to high yielding
Retail and SME segments ii) Improving asset quality, which has deteriorated
Industry Bank
in the past few quarters iii) Continuing efforts to improve CASA mix and iv)
Undertaking digital initiatives for client acquisition and retention.
Scrip Details South Indian Bank has seen significant deterioration in asset quality in
FY15. While the asset quality is not expected to worsen from current levels,
MktCap (`cr) 2,626
it is expected to remain elevated over the forecast period. The Bank is
O/s Shares (Cr) 135.0 expected to see a significant churn in the composition of its loan book (from
Av Vol (Lacs) 6.6 low yielding assets to higher yielding ones) however loan growth is
52 Week H/L 32/19 expected to be in line with that of the sector. NIMs are expected to expand
Div Yield (%) 2.6 marginally (but are expected to be significantly lower than those seen in
FVPS (`) 1 FY13.) We do not expect a significant re-rating of the stock given the fact its
return ratios are also expected to remain flat and significantly off its highs
Shareholding Pattern of 20% (RoE) and 1.1% (RoA) established in FY12. We value the Bank at 0.9X
Adj. P/BV at Rs. 27, implying a potential upside of 26% over a period of 18
Shareholder %
months. We recommend a HOLD on the stock.
Promoters -
DIIs 12.9 Reduced exposure to corporate; increased to SME
FIIs 28.1
Public 59.0 SIB’s advances have grown at a 5 year CAGR of 19% to Rs 37,392 crore in
Total 100.0 FY15. In line with the bank’s strategy of growing its exposure to high yielding
sectors, the SME portion in SIB’s loan book has increased from 9% in FY12 to
South Indian Bank vs. Sensex 21%, while the corporate loan book has reduced from 46% in FY12 to 42% in
Q1FY16. However, the proportion of retail exposure, which primarily constitutes
Housing loan (24%), Gold Loan (21%), loan to Service & Traders (18%) and
Manufacturing sector (16%), has reduced from 37% to 24% during the same
period. The management is focusing on enhancing the retail and SME portion
through the following initiatives:
i) Dedicated retail hub in Cochin for focusing on home loans; two more
hubs planned – one in South India and one in North India; ‘Green
Channel’ branches to drive SME loan
Net Non
P/E P/Adj BV
(x) (x)
Income Income
2014 1,399 368 507 3.8 23.0 15.9 1.0 5.0 0.8
2015 1,366 497 307 2.3 24.0 8.8 0.5 8.4 0.8
2016E 1,545 538 330 2.4 25.2 8.9 0.5 7.8 0.8
2017E 1,790 625 400 3.0 27.1 10.1 0.6 6.4 0.7
th
ii) Centralized processing of loans with focus on faster approvals
iii) Requisite staff training to push mortgage loans;
iv) Television tapped for marketing retail loan products ( has roped in
Mamootty, an actor, as brand ambassador)
v) New product introductions in various segments
The gold loan portfolio, which finds strong demand in the South, has reduced from
Rs 5905 crore in June 2014 (22% of advances) to Rs 4268 crore in June 2015
(11% of advances), a de-growth of 28% YoY. The primary reason for the fall being
the crash in gold prices and the low Loan-to-Value ratio on gold loans. However,
the management has indicated that it is taking steps to revive the gold loan
segment by rationalization of LTV allowed within lending norms and leveraging
rural branches to focus on gold loans. It plans to increase the total gold loan
composition to 15% of its lending book in the coming years. Also, the
management envisages reducing its corporate loan book exposure to 30% in
future.
Retail lending to propel loan book for SIB
60000
` crores
50000
15492
40000
15301
15195
15165
30000
15452
14677 12604
20000
10798 9691
16364
21065
22197
27001
33134
10000
0
Retail Corporate
Source : South Indian Bank, Ventura Research
We expect SIB’s advances to grow at a 2 year CAGR of 14% to Rs 48,627 crore

by FY17, with the proportion of corporate loan book expected to decline to 31% by
FY17 from 41% in FY15 and retail portion expected to increase from 25.4% in
FY15 to 30% by FY17.
Efforts to improve CASA mix
SIB’s deposits have grown at a 5-year CAGR of 18% to Rs 51,912 crore, led by
an 18% CAGR in term deposits to Rs 41,229 crore and 15% CAGR in CASA (CA:
3.5%, SA: 17.08% of total FY15 deposits).
th
The bank’s CASA ratio has remained stagnant in the range of 20.5-21.5% in the
past five years; CASA stood at 22.3% in Q1FY16. The management is now taking
concentrated efforts to increase its CASA ratio including,
i) setting specific CASA related targets,
ii) enhancing digital banking initiatives,
iii) setting up a central processing unit to ease load on branches, and
iv) reducing the proportion of retail bulk deposits.
Deposit growth to pick up to compliment credit book

70000.0 ` crores % 35.0
60000.0 30.0
50000.0 25.0
40000.0 20.0
30000.0 15.0
20000.0 10.0
10000.0 5.0
0.0 0.0
Deposit Deposits grwth
Source :South Indian Bank, Ventura Research
It aims to improve the CASA mix by ~2% each year. We estimate the CASA ratio
to improve to 21.95% by FY17 from 20.59% in FY15, with CASA growing at a 2-
year CAGR of 16% to Rs 14365 crore. We expect term deposits to grow at a
slower rate – 11% CAGR to Rs 51,081 crore by FY17 (78% of total deposit base)
as compared to 18% CAGR from FY10-FY15. Overall deposits mobilization is
expected to grow at a CAGR of 12% to Rs 65,446 crore by FY17.
Share of CASA to increase marginally

120.0 %
100.0
80.0
60.0 76.9 78.5 80.3 81.4 79.3 79.4
40.0
20.0
23.1 21.5 19.7 18.6 20.7 20.6
0.0
CASA TD
Source :South Indian Bank, Ventura Research
th
Improving branch productivity
As of Q1FY16, SBL’s branch strength stood at 828, with 447 branches in Kerala
and 239 branches in South India, excluding Kerala. SBL’s pace of branch
expansion has been moderate at 5-year CAGR of 8% to 828 as of date. It has
commenced a phase-wise productivity improvement in branches; 150 branches
have been taken up in Phase I. The management aims to re-distribute resources
efficiently to bring in cost efficiencies in these branches.
Taking steps to improve deteriorating asset quality
SIB’s asset quality worsened in Q1FY16; Gross NPAs increased to 1.85% (+14
bps QoQ, +35bps YoY), while Net NPAs increased to 1.21% (+25 bps QoQ, +30
bps YoY). Fresh slippages in Q1FY16 stood at Rs 175 crore with majority arising
from a single Rs 60 crore account in the steel sector. The management has
indicated that this account could be upgraded in the coming quarter. Also, two
accounts totaling Rs 230 crore are under watch. During Q1FY16, total
restructured assets stood at Rs 2170 crore (5.5% of total advances).
The management is taking steps to arrest the deteriorating asset quality -- during
FY11-FY15, GNPAs increased from 1.11% to 1.71%, while net NPAs increased
from 0.29% to 0.96%. Apart from cleaning its books through the sale of stressed
assets to Asset Reconstruction companies, the bank is also setting up a recovery
cell to monitor bad loans and restructured assets. It has adopted a cautious
approach on large account exposures and is taking steps to enhance the retail
and SME loan book which will granulize the asset base. Accordingly, we expect
the asset quality to remain stable – GNPA expected at 1.68%, Net NPA at 0.95%
by FY17.
Asset Quality to remain stable

1.6 % % 76.0
1.4 74.0
1.2
72.0
1.0
70.0
0.8
68.0
0.6
66.0
0.4
0.2 64.0
0.0 62.0
PCR (RHS) GNPA NNPA
th
With a CAR of 11.4% (Basel III) and core CAR of 10.0%, the bank may require
additional funding to support future growth. However, with increasing proportion of
retail loan book with the lower risk weights, the requirement for additional capital
may be limited.
Capital infusion may take place over the forecast period

18.0 %
16.0
14.0 3.0
2.7 2.5 1.9
12.0 1.6 1.6
10.0
8.0
6.0 12.4 11.5 12.1
11.3 10.8 10.4
4.0
2.0
0.0
Tier I Tier II

Operationally we expect NII to grow at a CAGR of 14.5% to Rs. 1789 crore by
FY17 (19% CAGR in the past five years). Fee income is expected to grow at a
15% CAGR to Rs 400 crore by FY17 (CAGR 22% in the past five years). SIB is
focusing on growing its other income, primarily by
i) strengthening its retail presence
ii) focusing on NRI remittances and currency conversion
iii) integrating domestic and forex treasury operations to enhance treasury
income and
iv) expanding the POS/ATM network
SIB’s Cost to income ratio has increased from ~47% in FY11 to 52.7% in FY15.
The bank is taking a number of steps to bring in operational efficiencies such as
i) revamping branch operations to enhance productivity, and

ii) undertaking several digital initiatives such as mobile and internet based
applications.
The bank’s internet transaction value has increased to Rs 5936 crore in FY15,
from Rs 3127 crore in FY14, while mobile transaction value has increased to Rs
130 crore in FY15 from Rs 20 crore in FY14. We expect the cost-to-income ratio
to remain stable at 52.7% in FY17.
th
Higher advances to help in NII uptick C/I ratio to moderate over the forecast period
2000.0 ` crores % 45.0 54.0 %
1800.0 40.0 53.0
1600.0 35.0 52.0
1400.0 30.0 51.0
50.0
1200.0 25.0
49.0
1000.0 20.0
48.0
800.0 15.0
47.0
600.0 10.0 46.0
400.0 5.0 45.0
200.0 0.0 44.0
0.0 -5.0 43.0
NII NII growth Cost to Income
Source :South Indian Bank, Ventura Research Source : South Indian Bank, Ventura Research
The bank’s NIM contracted from 3.1% in FY11 to 2.7% in FY15 as the loan book
largely comprises of low yielding corporate loans. NIMs further deteriorated in
Q1FY16 to 2.54% due to a decline in lending yields on account of a base rate cut
and higher interest income reversal. We expect NIMs to improve marginally to
2.6% by FY17 with increasing focus on retail and SME loans. Earnings are
expected to grow at a CAGR of 14% to Rs. 400 crores by FY17E. We expect RoE
to improve from 8.8% in FY15 to 10.1% by FY17, while RoA is expected to
improve from 0.5% to 0.6% in the coming two years.
NIMs to remain in the range of 2.5-2.6% Return ratios to recoup after steep fall over the years
14.0 % 25.0 % % 1.2
12.0 1.0
20.0
10.0
0.8
15.0
8.0
0.6
6.0 10.0
0.4
4.0
5.0
2.0 0.2
0.0 0.0 0.0

YoA CoF NIM RoE RoA
Source :South Indian Bank, Ventura Research Source :South Indian Bank, Ventura Research
th
 Valuation
South Indian Bank has seen significant deterioration in asset quality in FY15.
While the asset quality is not expected to worsen from current levels, it is
expected to remain elevated over the forecast period. The Bank is expected to
see a significant churn in the composition of its loan book (from low yielding
assets to higher yielding ones) however loan growth is expected to be in line with
that of the sector. In line with the churn of the loan book NIMs are expected to
expand marginally (but are expected to be significantly lower than those seen in
FY13.) We do not expect a significant re-rating of the stock given the fact its return
ratios are also expected to remain flat and significantly off its highs of 20% (RoE)
and 1.1% (RoA) established in FY12. We value the Bank at 0.9X Adj. P/BV at Rs.
24, implying a potential upside of 26% over a period of 18 months. At the CMP of
Rs. 19 the stock is trading at 0.7X FY17E Adj. P/BV. We recommend a HOLD on
the stock.
South Indian Bank Adj. P/BV
40 `
35
30
25
20
15
10
5
0
CMP 0.3X 0.6X 0.9X 1.2X 1.5X
th
YoY change (%) 25.4 9.2 -2.3 13.1 15.9 NII / Total Income 26.9 26.0 23.6 24.2 24.7
Total Operating Expenses 767.2 882.9 981.3 1,104.0 1,271.4 Net Profit / Total Funds 1.0 0.9 0.5 0.5 0.5
Pre Provision profit 848.6 884.3 882.0 978.2 1,143.3 Credit / Deposit 71.9 76.3 72.0 73.7 74.3
YoY change (%) 30.2 4.2 -0.3 10.9 16.9 Investment / Deposit 28.3 30.2 32.2 31.0 30.3
YoY change (%) 14.6 11.1 -35.8 5.1 21.5 Solvency
YoY change (%) 25.0 1.0 -39.5 7.3 21.5 Gross NPA (%) 1.4 1.2 1.7 1.7 1.7
Net NPA (%) 0.8 0.8 1.0 1.0 1.0
Investments 12,523.5 14,351.8 16,717.2 17,791.7 19,833.2
Other Assets 1,120.1 1,186.4 1,412.4 1,424.4 1,474.9 EPS 3.8 3.8 2.3 2.4 3.0
Savings 6,685.5 7,936.6 8,868.4 10,124.0 11,995.2
Reserves 2,869.8 3,233.7 3,454.4 3,673.5 3,955.5
RoAA (%) 1.1 1.0 0.5 0.5 0.6
% of Average Assets
Provisions & Contingencies 0.4 0.3 0.7 0.8 0.8 Net profit 25.0 1.0 -39.5 7.3 21.5
Taxes 0.3 0.4 0.3 0.3 0.3 Deposits 21.3 7.3 9.3 10.6 14.0
th
Karnataka Bank Ltd.
HOLD
Index Details Karnataka Bank Ltd (KBL), incorporated in 1924, is one of the oldest private
Sensex 25,742 sector banks in India, with a dominant presence in the South -- ~62% of the
Nifty 7,809 branch network is located in Karnataka alone. Adopting technological
changes to curtail costs, putting up efficient risk management system in
Industry Bank
place to keep the asset quality in check and enhancing the proportion of
advances towards high yielding sectors form the crux of KBL’s strategy for
future growth. Further, the Bank is implementing prioritized initiatives under
Scrip Details ‘Project Tejas’, -- a Business Process Re-engineering project aimed at high
growth with superior quality.
M/Cap(`cr) 2301
O/s Shares (Cr) 18.8 Despite its RoE being the highest among its peers on most operational
Av Vol (Lacs) 1.4 parameters the Bank continues to lag behind its peers. The credit book is
52 Week H/L 158/108 expected to grow at a slightly better pace than the industry leading to an
Div Yield (%) 3.4 earnings growth of 25%. At current valuations the stock is quoting at 0.7X
FVPS (`) 10 FY17E Adj /PBV. We initiate coverage with a target price of 152 (0.85X FY17
Adj P/BV) indicating a potential appreciation of 25% over the next 18
Shareholding Pattern months. Key monitorables for the Bank for a re-rating are improvement in
asset quality and an uptick in NIMs.
Shareholder %
Promoters -
Focus on enhancing SME/MSME lending…
DIIs 9.2
FIIs 22.3 Over FY10-FY15, KBL’s advances have grown at a 5-year CAGR of 17% to Rs
Public 68.5 31,680 crore in FY15. Since FY12, KBL has undertaken major revamping
Total 100.0 exercise in its asset portfolio. In line with its strategy of focusing on high yielding
retail and SME/MSME sectors, it has successfully reduced dependence on low
Karnataka Bank vs. Sensex yielding corporate lending – from 55.7% in FY12 to 49.3% as of Q1FY16. This
has also enabled KBL add granularity to its asset portfolio – the exposure to top
20 accounts has reduced from 21.31% of total advances in FY10 to 9.92% by
FY15. Also, the exposure to infrastructure advances, the single largest sector in
the bank’s asset portfolio, has reduced from 14.31% in FY10 to 7.1% in FY15.
The management has indicated that it will continue to pursue growth in
SME/MSME lending (currently ~25% of total advances) through:

Net Non
P/E P/Adj BV
(x) (x)
Income Income
2014 1,056 506 311 16.5 133.4 10.5 0.7 7.4 0.9
2015 1,169 581 451 24.0 146.8 14.0 0.9 5.1 0.8
2016E 1,369 656 545 29.3 161.8 15.3 1.0 4.2 0.8
2017E 1,656 751 708 36.7 179.1 18.0 1.1 3.3 0.7
th
New product launches to suit the needs of the MSME sector
i) Launch of 160 specialized MSME focused branches
ii) MoUs with leading players – a) Reliance Capital for co-financing
agreement, b) CARE for credit rating services, and c) Tata Motors,
Ashok Leyland, BEML and TVS Motors for purchase of vehicles by
MSMEs
iii) Simplified procedures, collateral free loans upto a certain amount, and
waiving off processing charges upto a certain loan amount
Going forward, we expect KBL’s advances to grow at a 2-year CAGR of 15%

to Rs 41,897 crore by FY17, with the proportion of retail lending expected to
increase to 57.5% by FY17 from 49.8% in FY15.
Retail lending to outgrow corporate loan growth
45000 ` Crores
40000
24080
35000
19295
30000
15777
13606
25000
11671
20000
9179
8084 6352
15000
9715 7633
10000
11541
13537
14740
15903
17137
17817
5000
0
Corporate Retail
Source :Karnataka Bank, Ventura Research
…and on improving CASA ratio
KBL’s deposits have grown at a 5-year CAGR of 14% to Rs 49,008 crore, led by a
16% CAGR in CASA to Rs 11,473 crore (CA: 6.2%, SA: 18.7% of total FY15
deposits) and 14% CAGR in term deposits to Rs 34,536 crore in FY15. The
bank’s CASA ratio has remained stagnant in the range of 24-25% in the past five
years.
The management is now taking concentrated efforts to increase its CASA ratio by:
i) Introducing new CA & SA schemes to suit the needs of various market
segments
ii) Enhancing the ATM network, internet banking technology, mobile banking
facilities and electronic payment facilities
iii) Holding dedicated CASA campaigns to tap new customers
th
Deposit mobilization to reduce Efforts on to improve CASA share
70000.0 ` crores % 18.0 120.0 %
16.0
60000.0 100.0
14.0
50000.0
12.0 80.0
40000.0 10.0
76.7 75.1 75.4 75.1 74.6 75.1 74.3 73.3
60.0
30000.0 8.0
6.0 40.0
20000.0
4.0
10000.0 20.0
2.0 23.3 24.9 24.6 24.9 25.4 24.9 25.8 26.8
0.0 0.0 -
Deposits Growth CASA TD
Source : Karnataka Bank, Ventura Research Source : Karnataka Bank, Ventura Research
Given the management’s focus on improving the CASA mix, we expect the CASA
ratio to improve from 24.94% in FY15 to 26.75% in FY17E. CASA is expected to
grow at a 2-year CAGR of 17% to Rs 15,785 crore by FY17 led by 17% growth in
SA deposits to Rs 11,713 crore. Term deposits are expected to grow at a CAGR
of 12% to Rs 43,225 crore by FY17, slower than 14% CAGR witnessed in the past
five years. Overall deposits mobilization is expected to grow at a CAGR of 13% to
Rs 59,010 crore by FY17.
Balancing branch expansion with cost control
As of Q1FY16, KBL’s branch strength stands at 682, with a pan-India presence.

Of the total branch network, ~62% is located in Karnataka, ~6.5% in Tamil Nadu,
6% in Maharashtra, 4.5% in Andhra Pradesh and 3% in Delhi. KBL’s pace of
branch expansion has been moderate at a 5-year CAGR of 8% to 682 as of date,
with majority of the branch additions taking place from FY13-FY15. For FY16, the
bank plans to add 50 branches to take the total branch count to 725. The
moderate phase of expansion is in line with the bank’s strategy of striking a
balance between controlling costs and network expansion.
Risk management systems to bring down NPAs
KBL has managed to marginally improve its asset quality over the years – Gross
NPAs have declined from 3.73% in FY10 to 3.26% in Q1FY16. However, Net
NPAs have increased from 1.31% to 2.05% during the same period. Despite an
improvement in GNPA, it continues to remain at the upper range of the industry
norms. The management, in order to correct this situation, has undertaken several
measures to set up an effective risk management system:
i) Internal credit rating – all credit exposures rated internally using sound
techniques
th
ii) Focused cells created to monitor and maintain asset quality
iii) Regular offsite surveillance of borrower accounts.
NPA expected to come off at the start of FY17

2.50 % 4.50
3.97
3.73 4.00
2.95 3.10
2.00 3.27 2.92 2.94 3.50
2.11 2.51 3.00
2.00 1.94
1.50 1.91 1.98
1.62 2.50
1.51
1.31 2.00
1.00
1.50
0.50 1.00
0.50
0.00 0.00
NNPA GNPA (RHS)
Source : Karnataka Bank, Ventura Research

With a focused approach, we expect GNPAs to reduce to 2.95% and Net NPAs to
reduce to 1.94% by FY17. As of Q1FY16, restructured loans and related accounts
stood at 7% of total gross advances.
With a CAR of 12.07% (Basel III) and core CAR of 10.28%, we do not foresee any
requirement for the bank to go in for capital infusion. It is well capitalized to realize
the steady business growth that we anticipate in the coming years.
Operationally we expect NII to grow at a CAGR of 19% to Rs. 1656 crore by

FY17, in-line with the growth witnessed in the past five years. Fee income is
expected to grow at a 16.5% CAGR to Rs 525 crore by FY17 (CAGR 15.8% in the
past five years). Increased focus on cross selling, utilizing customer segmentation
tools provided by KPMG and Financial Planning counseling are some of the
measures the bank is taking to augment fee income. KBL’s Cost to income ratio
has been over 50% -- ranging from 50-55% during FY12-FY15; ~47% in Q1FY16.
We expect the bank to report a Cost to income ratio of 48% in FY17. Several
digital initiatives are expected to bring in operational efficiencies:
i) Internet based online money transfer solution, both for residents and NRIs
ii) 24X7 banking service e-Lobby portals at various locations
iii) Implemented requisite software for efficient life cycle management of

borrower accounts
th
iv) Incorporated a cell to focus on digital initiatives and ideas, among other
things.
Capital utilization to increase as loan book picks up

14.0 %
12.0 2.1 2.5

2.0 2.7 1.9
2.0
10.0 1.8
8.0
6.0 11.3 10.9 10.5 10.7 10.5 9.9 9.4

4.0
2.0
0.0
Tier I Tier II
Source :Karnataka Bank, Ventura Research
The bank has been able to improve its NIM from 1.1% in FY10 to 2.55% as of
Q1FY16 with a higher proportion of retail lending and improvement in Cost-to-
income ratio. We expect NIMs to improve marginally to 2.6% by FY17. Earnings
are expected to grow at a CAGR of 25% to Rs. 708 crores by FY17E, similar to
the growth witnessed in the past. We expect RoE to improve from 14% in FY15 to
18% by FY17, while RoA is expected to improve from 0.9% to 1.1% in the coming
two years.
Lower CoF to keep NIM intact NII expected to grow at ~19% CAGR
14.00 % 1800.0 ` crores % 25.0
12.00 1600.0
1400.0 20.0
10.00
1200.0
8.00 15.0
1000.0
6.00 800.0
10.0
600.0
4.00
400.0 5.0
2.00
200.0
- 0.0 0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Yield on Advances Cost of Funds NIM NII NII growh
Source : Karnataka Bank, Ventura Research Source : Karnataka Bank, Ventura Research
th
65.0 %
60.7
59.7
60.0
56.0
55.0 52.7 52.4
51.2 51.9
50.0 48.0
45.0
40.0
Cost to Income
Source : Karnataka Bank, Ventura Research
 Valuation
Despite its RoE being the highest among its peers on most operational
parameters the Bank continues to lag behind its peers. Key monitorables for the
Bank for a re-rating are an improvement in asset quality and uptick in NIMs. The
credit book is expected to grow at a slightly better pace than the industry leading
to an earnings growth of 25%. At current valuations the stock is quoting at 0.7X
FY17E Adj /PBV. We initiate coverage with a target price of 152 (0.85X FY17 Adj
P/BV) indicating a potential appreciation of 25% over the next 18 months.
Karnataka Bank 1-Yr Fwd. P/Adj. BV

350 `
300
250
200
150
100
50
0
CMP 0.4X 0.7X 0.9X 1.2X 1.4X
Source :Ventura Research
th
Net Interest Income 903.7 1,056.1 1,168.9 1,369.2 1,655.7 Int Income / Total Funds 9.1 8.9 9.1 8.8 8.8
Total Operating Expenses 666.0 874.6 916.9 1,051.3 1,154.8 Net Profit / Total Funds 0.8 0.7 0.9 0.9 1.0
Pre Provision profit 635.3 687.0 832.8 973.8 1,252.4 Credit / Deposit 69.9 69.8 68.9 69.0 71.0
Taxes 116.1 97.6 108.0 115.6 160.7 Gross NPA (Rs. Cr) 638.9 835.9 944.2 1,055.7 1,151.4
Net NPA (%) 1.5 1.9 2.0 2.0 1.9
Investments 13,432.5 15,226.8 15,988.1 19,003.0 22,226.6
Other Assets 932.4 1,119.1 1,554.4 1,488.4 1,697.8 EPS 18.5 16.5 24.0 29.3 36.7
Savings 6,520.0 7,558.8 8,602.0 10,164.0 11,713.4
Reserves 2,664.7 2,860.5 3,200.6 3,541.8 3,946.5
RoAA (%) 0.9 0.7 0.9 1.0 1.1
% of Average Assets
Provisions & Contingencies 0.4 0.6 0.6 0.6 0.6 Net profit 41.5 -10.6 45.1 20.7 29.9
Taxes 0.3 0.2 0.2 0.2 0.2 Deposits 14.1 12.6 13.4 14.8 11.8
th
Karur Vysya Bank Ltd.
ACCUMULATE
Index Details With a lineage of nearly 100 years, Karur Vysya Bank (KVB) is a steadily
Sensex 25,742 profit earning and dividend paying old generation private sector bank based
Nifty 7,809 in South India. However, FY14 and FY15 were disappointing years for the
bank – business growth slowed down considerably, cost-to-income
Industry Bank
increased to nearly 55% and asset quality deteriorated sharply. KVB is
focused on restructuring its business, reviving growth and undertaking
strategic initiatives which could serve as a cushion in challenging macro-
Scrip Details economic situations. These initiatives include strengthening credit
monitoring systems, increasing exposure to different industries to diversify
MktCap(`cr) 5,738
asset book, undertaking various digital initiatives to improve CASA and
O/s Shares (Cr) 12.2 bring in cost efficiencies.
Av Vol (Lacs) 0.1
52 Week H/L 618/443 KVB has guided for slower loan growth over the forecast period as it
Div Yield (%) 2.7 restructures its loan book in favour of higher yielding and more granular
FVPS (`) 10 lending portfolio. CASA too is expected to improve significantly. Earnings
are expected to grow at a CAGR of 26% to Rs. 717 crores by FY17E. We
Shareholding Pattern expect RoE to improve from 12% in FY15 to 15% by FY17, while RoA is
expected to improve from 0.9% to 1.2% in the coming two years. At current
Shareholder %
valuations the stock is quoting at 1.2X FY17E Adj /PBV. We initiate coverage
Promoters 2.1
with a target price of 583 (1.5X FY17 Adj P/BV) indicating a potential
DIIs 24.1
appreciation of 24% over the next 18 months. Key monitorables would be
FIIs 21.2 faster than expected loan growth which could result in upward revision of
Public 52.6 earnings numbers and hence price targets. We recommend an
Total 100.0 ACCUMULATE on the stock.
Karur Vysya Bank vs. Sensex Loan book growth to remain modest through FY16-17
KVB’s advances have grown at a 5 year CAGR of 22% to Rs 36,109 crore by

FY15. In line with the bank’s strategy of growing its exposure to high yielding
sectors, the corporate loan book of KVB has decreased from 42.1% in FY12 to
36.4% in Q1FY16. However, in FY15 and Q1FY16, advances grew at a subdued
pace of only 6.2% and 7.4% respectively owing to muted economic conditions
and fall in gold loan book – from 23.3% of total advances in FY14 to 18% in
Q1FY16. Regulatory changes relating to lower loan to value in gold and fall in
prices of gold prices made the product unattractive.
Net Non
P/E P/Adj BV
(x) (x)
Income Income
2014 1,284 564 430 40.1 294.8 13.4 0.9 11.8 1.6
2015 1,466 581 456 37.5 325.4 12.0 0.9 12.6 1.4
2016E 1,857 695 611 50.2 357.8 13.8 1.1 9.4 1.3
2017E 2,042 811 718 59.0 388.9 15.0 1.2 8.0 1.2
th
Loan growth expected to be modest
` crores
50000
45000
15917
40000
14509
35000
13433
12509
30000
11079
25000
10083
20000
10117 7698
15000
13867
10000
18401
21483
22676
25572
29174
5000
0
Retail Corporate
Source : KVB, Ventura Research
The management has indicated that it is re-balancing its portfolio to focus more on
retail, specifically home loan, and commercial banking advances which have a
small ticket size. It has also reiterated that it has taken conscious efforts to reduce
exposure on low yielding and large ticket accounts (consortium lending), even if it
translates to a slower than industry growth rate. During these times of a
slowdown, the management intends to focus on profitability by taking prompt
measures for weak accounts. With the pick-up in economy, it plans to
aggressively expand business growth, especially in the retail and SME segment.
We expect KVB’s advances to grow at a 2 year CAGR of 11.7% to Rs 45,091
crore by FY17.
Focus to drive CASA growth
KVB’s deposits have grown at a 5 year CAGR of 18.3% to Rs 44,690 crore led by
19% CAGR in term deposits to Rs 34,848 crore (~78% of total deposits), 21%
growth in SA to Rs 6313 crore and 11% growth in CA to Rs 3528 crore in FY15.
KVB’s CASA ratio at 22% is relatively lower compared to peers The management
is not renewing high cost deposits with and has adopted a concentrated focus on
CASA mobilization – in Q1FY16, CASA ratio improved to 23.3%. Going forward,
we expect the CASA ratio to improve to 25% by FY17. Deposits are expected to
grow at a 2 year CAGR of 11% to Rs 54,989 crore by FY17 led by 18% CAGR in
CASA to Rs 13,747 crore and 8.8% CAGR in term deposits to Rs 41,241 crore.
th
Deposits grow at 10.9% CAGR… …CASA to grow at 18.2% CAGR
60000.0 ` crores % 35.0 120.0 %
50000.0 30.0 100.0

25.0
40000.0 80.0
20.0
74.4 78.1 80.8 80.8 79.5 78.0
30000.0 60.0 76.5 76.7
15.0
20000.0 40.0
10.0
10000.0 5.0 20.0
23.5 23.3 19.2 19.2 20.5 22.0 24.0 24.0
0.0 0.0 -
Deposit Deposit growth CA TD
Source : KVB, Ventura Research Source : KVB, Ventura Research
South based branch network
As of Q1FY16, KVB’s branch strength stood at 634, with 339 branches in Tamil
Nadu (53%), 86 branches in Andhra Pradesh (13.5%), 47 branches in Telangana
(7.4%) and 41 branches in Karantaka (6.4%). Hence, nearly 80% of the total
branch network is South based. However, within South India, it has a well
diversified branch network across various segments -- around 37% of its branch
network is located in semi-urban area, ~27% in urban areas, 20% in metro areas
and the remaining in rural areas. KVB’s pace of branch expansion has been
moderate at 5 year CAGR of 12%; it plans to add 50 branches in the current
fiscal. Overall, we expect the company’s branch tally to reach ~725 by FY17, at a
CAGR of 7%.
Taking steps to improve asset quality
KVB consistently improved its asset quality over the past five years – GNPAs fell
from 1.95% in FY09 to 0.82% in FY14 through stringent credit monitoring and
collateral based lending. However, asset quality deteriorated significantly in FY15
– Gross NPA increased to 1.85% on account of slippages in the metals,
infrastructure and textile sector (21% of total advances) accentuated by the
slowdown in economy. The management has taken efforts to bring down the
NPAs – cleaning the balance sheet at the cost of business growth, reducing
exposure to the relatively riskier infrastructure sector from 9.3% as at March 2015
to 8.6% in June 2015 and maintaining the provision coverage ratio at 75%. While,
the gross NPA continued to remain at elevated levels of 1.91% in Q1FY16, we
derive solace from the fact that:
th
 Slippages remained stable YoY at Rs 2 bn
 No fresh restructuring of loans
 Minimal slippages of Rs 2 core from restructured book
Asset quality to improve from hereon

0.80 % 2.00
0.70 1.80
1.60
0.60
1.40
0.50 1.20
0.40 1.00
0.30 0.80
0.60
0.20
0.40
0.10 0.20
0.00 0.00
NNPA GNPA (RHS)
The management has indicated that they expect slippages to reduce considerably
with minimal incremental stress on assets. We expect Gross NPAs to decline 35
bps to 1.5% in FY17 and Net NPAs to decline 14bps to 0.56% by FY17.
With a CAR of 13.2% (Base III) and core CAR of 12.25%, the bank is well
capitalized to meet its growth requirements.
Adequate capital to accommodate future growth

16 %
14 1.6 1.3 1.2 1.3 1.1
12 1.0
10
8
12.88 13.1 13.1 13.1 13.6
6 11.6
4
0
Tier I Tier II
th
Operationally, we expect NII to grow at a CAGR of 18% to Rs. 2042 crore by
FY17 (21% CAGR in the past five years). Fee income is expected to grow at a
16.7% CAGR to Rs 541 crore by FY17 (CAGR 20% in the past five years). KVB’s
cost to income ratio increased from ~41.8% in FY11 to 52.7% in FY15 as
business growth slowed and costs continued to rise. With healthy growth in fee
income and replacement of high costs deposits with CASA, we forecast the Cost
to income ratio to stabilize at ~49% levels over the next two years. KVB’s NIM has
expanded from 2.89% in FY15 to 3.3% in Q1FY16 by replacing high cost deposits
and shedding excess deposits. We expect NIMs to remain range bound at this
level over the FY16-17. Earnings are expected to grow at a CAGR of 26% to Rs.
717 crores by FY17E. We expect RoE to improve from 12% in FY15 to 15% by
FY17, while RoA is expected to improve from 0.9% to 1.2% in the coming two
years.
NIM expansion to spurt initial growth in NII Lower cost to propel NIM
2500.0 ` crores % 40.0 14.00 %
35.0 12.00
2000.0
30.0
10.00
1500.0 25.0
8.00
20.0
6.00
1000.0 15.0
4.00
10.0
500.0
5.0 2.00
0.0 0.0 -
NII NII growth Yield on Advances Cost of Funds NIM
Source : KVB, Ventura Research Source :KVB, Ventura Research
Return ratios to experience an uptick Cost/Income ratio to flatten

25.0 % % 2.0 60.0 %
1.8
55.0
20.0 1.6
1.4
50.0
15.0 1.2
1.0 45.0
10.0 0.8
40.0
0.6
5.0 0.4
35.0
0.2
- - 30.0
RoE RoA (RHS) Cost to Income
Source : KVB, Ventura Research Source : KVB, Ventura Research
th
 Valuation
We initiate coverage on Karur Vysya Bank with a target price of 583 (1.5X FY17
Adj P/BV) indicating a potential appreciation of 24% over the next 18 months. Key
monitorables would be faster than expected loan growth which could result in
upward revision of earnings numbers and hence price targets. We recommend an
ACCUMULATE on the stock.
1-Yr Fwd Adj. P/BV Band

800 `
700
600
500
400
300
200
100
0
CMP 0.4X 0.8X 1.2X 1.6X 2X

th
Total Operating Expenses 762.2 1,010.4 1,103.4 1,256.3 1,400.3 Net Profit / Total Funds 1.2 0.8 0.9 1.0 1.1
Pre Provision profit 848.8 837.8 943.3 1,295.8 1,453.0 Credit / Deposit 76.3 77.7 80.8 81.0 82.0
YoY change (%) 17.0 -1.3 12.6 37.4 12.1 Investment / Deposit 35.8 30.3 28.6 26.5 26.1
Taxes 175.3 -3.4 7.2 203.7 239.3 Gross NPA (Rs. Cr) 108.7 139.9 281.0 240.5 248.0
Net NPA (%) 0.4 0.4 0.7 0.6 0.6
Investments 13,837.3 13,247.0 12,773.0 13,102.8 14,340.4
Other Assets 1,619.9 1,625.8 1,521.4 1,803.6 2,029.1 EPS 51.3 40.1 37.5 50.2 59.0
Savings 4,385.8 5,408.5 6,313.7 7,917.2 9,164.8
Other Liability 995.8 1,165.8 1,315.4 1,484.5 1,649.7 Price/Book Value (x) 1.6 1.5 1.4 1.2 1.2
Reserves 2,975.8 3,192.3 4,117.4 4,464.0 4,850.0
RoAA (%) 1.3 0.9 0.9 1.1 1.2
% of Average Assets
Net Income 3.8 3.8 3.9 4.6 4.6 Interest Expenses 31.1 24.3 2.5 -0.2 11.2
Provisions & Contingencies 0.3 0.8 0.9 0.9 0.8 Net profit 9.7 -21.9 6.1 34.1 17.5
Taxes 0.4 0.0 0.0 0.4 0.4 Deposits 20.4 13.2 2.1 10.7 11.1
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Private Sector Banking Report

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Private Sector Banking Report

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Indian Private Banking Sector

BANKING SECTOR REVIEW

India is the fastest developing economy in the world

Within the private banking space, we like:

 India is the fastest growing economy

India – Fastest growing economy in the world

 Indian banks have grown at ~3x real GDP

Source: RBI, Ventura Research

25.00 % (x) 7.0

Source: RBI, Ventura Research

Huge potential for India to catch-up in terms of banking assets

93.1 93.0 92.3 92.4 94.7

China Banking Assets to GDP India Banking Assets to GDP

Source: RBI, Ventura Research, World Bank

Domestic credit provided by financial sector (% of GDP)

Source: RBI, Ventura Research, World Bank

Banking Industry Growth Opportunity

Source: RBI, Ventura Research

 PSBs have grown at a faster rate…

Private Sector Advances Growth Public Sector Advances Growth

Source: RBI, Ventura Research

Private sector deposits growth Public sector deposits growth

Source: RBI, Ventura Research

Source: RBI, Ventura Research Source: RBI, Ventura Research

Incremental gain/loss of market share: Private and Public sector banks

Source: RBI, Ventura Research

India Banking Pie- 2014 India Banking Pie- 2017E

The size of private

Source: RBI, Ventura Research Source: RBI, Ventura Research

Source: RBI, Ventura Research

Source: RBI, Ventura Research

Private sector bank v/s Public sector bank – Branch expansion

12000 Top private sector banks

Source: Ventura Research

FY09 FY15 % indicates 6 year CAGR

Source: Ventura Research

Gross NPAs as a % of advances lowest for private sector banks

Public Sector Banks Indian Private Sector Banks Foreign Banks

Source: RBI, Ventura Research

 Adequate capital reserves:

10.0 8.9 9.2

Private Banks Public Sector Banks

Source: RBI, Ventura Research

Public sector banks trading at low valuations (FY15 P/Bv)

Central Bank Of India

Across cycles, PSBs have traded at a premium compared to PSUs

Private Banks All Banks Public Sector Banks

Source: Ventura Research

Source: Ventura Research Source: Ventura Research

 PSBs operate far more efficiently than PSUs:

0.4 0.48 0.50

Private Banks Public Sector Banks

Source: RBI, Ventura Research

1.0 0.9 0.9

Central Bank Of India

Source: RBI, Ventura Research

Source: McKinsey Global Institute analysis

Source: McKinsey Global Institute analysis

2 yrs Forword NNPA (%)

30.0 Yes IIB 1.2

2 yrs forward P/Adj BV 2 yrs forward GNPA (%)

2 yrs forward C/I (%)

Source: Ventura Research Source: Ventura Research

Despite street skepticism on maintaining pace of growth, we remain strongly positive