Banking Getting Better Sooner Than Expected Sector Update

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Banking Getting better sooner than expected Sector Update

Q3FY2021 Results Review Q3FY2021 was a strong quarter with most banks reporting positive earnings and an improving outlook on growth and asset quality. Private banks’ advances grew Sector: Banking faster than the system and resulted in continued market share gains. Coupled with Sector View strong deposit growth, notably low-cost CASA deposits, reduced cost of funds and led to better margins. Even on a proforma basis, most private banks highlighted only a slight (and manageable) deterioration in asset quality. Hence, the proforma NPA Private Banks Positive vs Reported GNPA was within 50-200 bps range for most private banks, excluding some new-age banks with relatively high exposure to micro and SME loan segments. PSU Banks Neutral With the recent spate of capital raising and strengthening of balance sheet, the management commentary focused on reverting back to advances growth in FY2022 and normalisation of credit costs (asset quality related write-offs) from Q1FY2022.

PSU banks too posted decent earnings, but advances growth remained tepid due Our coverage universe to capital constraints and credit cost is also at elevated levels. SBI, was easily the Companies CMP Reco. PT (Rs) best performer among PSU banks and not only continued to see improved asset- (Rs) quality performance, but also gained market share on the advances front. PSU PSU Banks banks and micro-lenders reported a higher restructured book, but still largely State Bank 402 Buy 460 within manageable range. Gap of proforma versus reported GNPAs was higher for of India PSU banks and small-ticket / micro-loan players. We expect PSBs’ margins to be Bank of 80 Hold UR rangebound due to credit cost outlook is yet to regain clarity and growth outlook is Baroda still weak. However, any progress on recoveries from IBC/NCLT would be a re-rating Punjab 40 Hold 42 trigger going ahead. We believe that low interest rates, recovery in economic activity National are potent positives for the financial sector. We prefer structurally strong players Bank with high capitalisation and robust book quality. The earlier apprehension regarding Bank of India 71 Hold UR an unwieldy restructuring pipeline were ameliorated through proactive provisions Private Banks and improving collections, and we believe that asset quality outlook has improved ICICI Bank 658 Buy 770 for the banking sector. Axis Bank 775 Buy 900 HDFC Bank 1626 Buy 1810 Outlook Federal 85 Buy 95 Retain preference for private banks; turn neutral on PSU banks: External/regulatory Bank support continues, which makes it challenging to assess the situation with objective IndusInd 1058 Buy 1340 clarity. However, we expect normalisation in growth and asset quality trends from Bank FY2022E. Going forward, since only SME sector window for restructuring is open, Kotak 2020 Buy 2130 we believe there is limited overhang on the asset quality and profitability fronts. Mahindra On the asset quality front, slippages were lower (for most banks, Private as well as Bank PSU Banks) sequentially. Management commentary also was positive across board, RBL Bank 259 Buy UR with most banks guiding for improvement in growth outlook and a low/manageable City Union 166 Buy 225 restructuring pipeline. We believe that low interest rates, recovery in economic activity Bank are potent positives for the banking sector. Resumption and acceleration of NCLT / IBC AU Small 1093 Buy 1260 proceedings will be positive triggers. Going forward, as players shed extra liquidity, it Finance will provide support to medium term margins. We retain preference for private banks UR - Under review and turn neutral on PSU banks. Valuations Most banks indicated a shift from the risk-off stance to a more proactive growth outlook (in varying degrees), and the commentary too was more positive. We have revised our earnings estimates for the sector. We believe that collection trends for Q4 and H1FY2022 asset quality/growth will be key monitorable going forward. We expect well-managed private banks (PBs) and SBI to continue to outperform their peers due to better capitalisation and improved book quality. We continue to prefer large corporate/ retail PBs and SBI among PSBs, and see potential for them to gain market share as the situation normalises. We like banks such as HDFC Bank, ICICI Bank, and Axis Bank due to their better earnings and asset-quality visibility along with niche players like AU Small Finance Bank. While PSU banks have reported better than expected performance, however we believe lack of clarity on asset quality outlook prevents us from being constructive on the sector at present, and we prefer only SBI at present amongst PSU banks. Key Risks: Price chart A delay in economic recovery or significant economic distress may lead to accretion to corporate and SME NPAs along with slowdown in the retail segment may affect 150 earnings. 130 110 90 Leaders in Q3FY2021: HDFC Bank, ICICI Bank, SBI, Axis Bank, Kotak Bank, and Federal 70 Bank 50 30 Laggards in Q3FY2021: PNB and Bank of India 20 21 20 20 20 - - - - - Preferred Picks: Feb Feb Aug Nov May Private banks - ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, AU Small Finance Nifty 50 Nifty Bank Bank; PSU Banks - SBI February 16, 2021 6 Sector Update

Q3FY2021 result snapshot Company Net Interest Income (Rs Cr) PPoP (Rs Cr) PAT (Rs Cr) Q3FY21 Q3FY20 YoY % QoQ % Q3FY21 Q3FY20 YoY % QoQ % Q3FY21 Q3FY20 YoY % QoQ % PSU Banks State Bank of 28,820 27,779 3.7 2.3 17,333 19,039 -9.0 5.3 5,196 6,553 -20.7 13.6 India Bank of Baroda 7,749 7,132 8.6 3.2 5,591 4,958 12.8 0.7 1,061 -1,407 N.A -36.8 Punjab National 8313 4,355 90.9 -1.6 6390.8 3,763 69.8 12.6 506 -492.3 N.A -18.5 Bank Bank of India 3,740 4,159 -10.1 -9.1 2,835.70 4,135 -31.4 -8.5 541 106 410.1 2.8 Total PSU Banks 48,621 43,425 12.0 0.8 32,150 31,895 0.8 4.4 7,304 4,760 53.5 -1.3 Private Banks ICICI Bank 9,912 8,545 16.0 5.8 8,820 7,529 17.1 6.8 4,941 4,146 19.2 16.3 Axis Bank 7,373 6,453 14.3 0.6 6,096 5,743 6.1 -11.6 1,117 1,757 -36.4 -33.6 HDFC Bank 16,318 14,173 15.1 3.4 15,186 12,945 17.3 9.9 8,758 7,416 18.1 16.6 Federal Bank 14,137 1,155 1124.0 924.5 963 744 29.4 -4.3 404 441 -8.4 31.4 IndusInd Bank 3,406 3,074 10.8 3.9 2,973 2,746 8.3 5.0 853 1,300 -34.4 31.8 Kotak Mahindra 4,007 3,430 16.8 2.4 3,083 2,388 29.1 -6.5 1,854 1,596 16.1 -15.1 Bank RBL Bank 908 923 -1.6 -2.6 805 732 9.9 11.8 147 70 110.2 2.0 City Union Bank 489 427 14.4 2.9 458 308 48.6 19.2 170 192 -11.7 7.8 AU Small Finance 633 507 24.9 12.9 873 313 179.0 87.2 466 190 145.2 44.9 Bank Total Private 57,182 38,686 47.8 33.0 39,257 33,448 17.4 4.2 18,710 17,109 9.4 8.7 Banks Source: Company, Sharekhan Research

Valuations Company CMP Reco/ Target BVPS P/BV View Price FY21E FY22E FY21E FY22E PSU Banks State Bank of India 402 Buy 460 180.9 226.3 2.2 1.8 Bank of Baroda 80 Hold UR 155.0 162.1 0.5 0.5 Punjab National Bank 40 Hold 42 30.3 47.9 1.3 0.8 Bank of India 71 Hold UR 109 131 0.7 0.5 Private Banks ICICI Bank 658 Buy 770 209.8 232.3 3.1 2.8 Axis Bank 775 Buy 900 297.3 321.9 2.6 2.4 HDFC Bank 1626 Buy 1810 349.6 398.1 4.7 4.1 Federal Bank 85 Buy 95 79.3 87.4 1.1 1.0 IndusInd Bank 1058 Buy 1340 522.8 586.9 2.0 1.8 Kotak Mahindra Bank 2020 Buy 2130 331.7 373.8 6.1 5.4 RBL Bank 259 Buy UR 188.3 202.3 1.4 1.3 City Union Bank 166 Buy 225 79.5 91.4 2.1 1.8 AU Small Finance 1093 Buy 1260 150 190 7.3 5.8 Source: Company, Sharekhan Research; UR: Under Review

February 16, 2021 8 Sector Update

Revision in earnings estimates Company Name Change in Reasoning Current Previous Target Estimate Price Reco Reco Strong numbers; Operating results were strong and Axis Bank Fine tuned Buy Buy 900 with capital raise, is placed better Credit growth expected to be muted and the Bank of India Fine tuned corporate segment’s asset quality remains key Hold Hold UR monitorable City Union Bank Fine tuned Mixed performance; Improving Outlook Buy Buy 225 Federal Bank Revised Up Strong numbers; Improving Outlook Buy Buy 95 Strong business growth, asset quality appears HDFC Bank Fine tuned Buy Buy 1810 manageable Operational performance was strong, Asset quality ICICI Bank Revised Up Buy Buy 770 performance improved IndusInd Bank Fine tuned Improving business mix, long term outlook positive Buy Buy 1340 Operational performance was strong, Asset quality Kotak Mahindra Bank Revised Up Buy Buy 2130 performance improved Credit growth expected to be muted and the Punjab National Bank Fine tuned corporate segment’s asset quality remains key Hold Hold 42 monitorable Asset quality concerns abating, improved RBL Bank Fine tuned Buy Buy UR Capitalization helps Operational performance was strong, Asset quality State Bank of India Revised Up Buy Buy 460 performance improved AU Small Finance Reasonable and in-line performance, Asset quality Maintained Buy Buy 1260 Bank outlook is bright Source: Sharekhan Research

February 16, 2021 9 Axis Bank Well-placed to revert to growth

3R MATRIX + = - Summary Right Sector (RS) ü Axis Bank has a strong asset-quality position, with the bank having front-loaded Right Quality (RQ) ü of provisions (on a proforma basis), which dovetail into an improved balance Right Valuation (RV) ü sheet and provide impetus for growth in FY2022E and FY2023E. For Q3FY2021, asset quality improved q-o-q; front-loading of provisions (on + Positive = Neutral - Negative proforma basis) augurs well for the long term; aggregate basis provision coverage is at 116% of GNPA. What has changed in 3R MATRIX Management’s growth commentary on FY2022E growth offers confidence; the Old New stock trades at 2.4x/2.2x its FY2022E/FY2023E ABVPS; improving tailwinds are RS  positive, we have accordingly fine tuned our target multiples. We maintain Buy on the stock with a revised PT of Rs. 900. RQ  RV  Axis Bank has a strong asset-quality position, with the bank having front-loaded of provision (on a proforma basis), which dovetail into an improved balance sheet and provides impetus for growth in FY2022E and FY2023E. The bank’s cumulative Reco/View Change provisions (standard + additional other than NPAs) translate to 2.08% of standard Reco: Buy  loans; aggregate provision coverage ratio (specific+ standard+ additional + CMP: Rs. 775 COVID-19 provisions) stood at healthy 116% of GNPA. Around 81% of the retail book is secured. Moreover, reasonable restructuring book (26% Provision cover; 100% Price Target: Rs. 900 á provisions cover for unsecured retail restructured book) are positive cushions for the á Upgrade  Maintain â Downgrade asset quality. Management commentary was positive and indicated that FY2022E is likely to be a strong year for growth and profitability, and most of the residual Company details asset-quality recognition is likely to be completed in FY2021, with minimal impact Market cap: Rs. 2,37,422 cr on provisions. Axis Bank is well-capitalised with a strong CRAR (Tier1 at 15.6%), 52-week high/low: Rs. 800/285 helped by the recent fund-raising. The bank’s digital prowess, improving business traction across segments, near-normal collection efficiency, and business strengths NSE volume: 226.8 lakh (No of shares) indicate an improving outlook. We believe improved economic growth (helped by a progressive and growth-oriented government policy and Union Budget) is positive BSE code: 532215 for the banking sector, and strong players such as Axis Bank are well placed to NSE code: AXISBANK benefit from it. We have accordingly fine-tuned our target multiples. We maintain Free float: Buy on the stock with a revised price target (PT) of Rs. 900. 264.4 cr (No of shares) Our Call Valuation - Axis Bank is available at 2.4x/2.2x its FY2022E/FY2023E ABVPS. We Shareholding (%) believe valuations are reasonable and there is potential for re-rating once earnings Promoters 13.4 and the economic scenario normalise. A conservative provisioning policy, comfortable FII 56.8 capitalisation, overall franchise value, and a high provision coverage ratio (PCR) are DII 23.0 positives, which will help the bank ride over medium-term challenges and provide support to growth and valuations. The deal with Max Financial Services and other Others 6.9 bancassurance partnerships augur well for fee income sustainability and growth in Price chart the long run. We have accordingly fine-tuned our target multiples. We maintain Buy on the stock with a revised PT of Rs. 900. 1000

800 Key risk

600 Prolonged uncertainty due to intermittent lockdowns may impact growth and rise in NPAs in unsecured and other retail segments can pose a risk to profitability. 400

200 Valuation Rs cr 20 20 20 21 - - - - Particulars FY19 FY20 FY21E FY22E FY23E Jun Oct Feb Feb Net interest income 21,708 25,206 24,934 27,330 30,155 Price performance Net profit 4,676 1,627 5,485 9,392 10,024 EPS (Rs) 18.2 5.8 19.4 33.3 35.5 (%) 1m 3m 6m 12m PE (x) 42.6 134.4 39.9 23.3 21.8 Absolute 14.7 26.4 78.0 3.7 Adj book value (Rs/share) 213.3 263.1 297.3 321.9 347.9 Relative to P/ABV (x) 3.6 2.9 2.6 2.4 2.2 9.6 7.0 40.5 -22.0 Sensex RoE (%) 7.2 2.1 6.1 9.5 9.4 Sharekhan Research, Bloomberg RoA (%) 0.6 0.2 0.5 0.8 0.7 Source: Company; Sharekhan estimates

February 16, 2021 10 Powered by the Sharekhan

3R Research Philosophy Update Stock

Outlook and Valuation n Sector View – Credit growth yet to pick up, private banks placed better System-level credit offtake, which is still subdued, is now improving, with credit growth of over 6% in the latest fortnight. On the other hand, deposits rose by ~12%, which indicate relatively healthy economic scenario. Moreover, the accommodative stance of the Reserve Bank of India (RBI), resulting in surplus liquidity, provides succour in terms of easy availability of funds and lower cost of funds for banks and financials. The end of the loan moratorium is a relief. Going forward, collection efficiency is likely to be a function of book quality, client profile, as well as economic pickup. At present, we believe the banking sector is likely to see increased risk-off behaviour, with tactical market share gains for well-placed players. We believe private banks, with improved capitalisation and strong asset quality (with high coverage and provisions buffers) are structurally better placed to take-off once the situation normalises. n Company Outlook – Looks promising We believe with Axis Bank’s strong positioning, across retail, business banking, and corporate with a pan-India presence, we expect the bank is likely to see lesser challenges to growth as and when it starts to unwind its cautious stance. Axis Bank has tightened underwriting standards and oversight and is now front-loading the provisions, which we believe is positive and allows it to target growth in FY2022E unburdened from legacy issues. In the retail segment too, along with tighter underwriting criteria across product lines, collection efficiency has also been strengthened. The strong liabilities segment (led by retail term and CASA deposits) places it at a strong position with margin cushions. We believe while Axis Bank is being prudent with a provision buffer, it is a long-term positive and will help to provide investor comfort. n Valuation – Maintain Buy with a revised PT of Rs. 900 Axis Bank is available at 2.4x/2.2x its FY2022E/FY2023E ABVPS. We believe valuations are reasonable and there is potential for re-rating once earnings and economic scenario normalise. A conservative provisioning policy, comfortable capitalisation, overall franchise value, and a high PCR are positives, which will help the bank ride over medium-term challenges and provide support to growth and valuations. The deal with Max Financial Services and other bancassurance partnerships augur well for fee income sustainability and growth in the long run. We believe improved economic growth (helped by a progressive and growth-oriented government policy and Union Budget) are positives for the banking sector, and strong players such as Axis Bank are well placed to benefit from it. We have accordingly fine-tuned our target multiples. We maintain Buy on the stock with a revised PT of Rs. 900.

One-year forward PBV (x) band

3.0

2.5

2.0

1.5

1.0

0.5

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PBV Series3 Series4 Source: Sharekhan Research

Peer valuation P/BV (x) P/E (x) RoA (%) RoE (%) Particulars CMP (Rs) FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E Axis Bank 775 2.3 2.2 39.9 23.3 0.5 0.8 6.1 9.5 HDFC Bank 1626 4.5 3.9 29.3 24.2 1.9 2.0 16.5 17.2 ICICI Bank 658 3.2 2.9 32.4 24.3 1.2 1.4 10.7 12.3 Kotak Mahindra Bank 2020 2.9 2.6 36.5 23.9 1.7 1.7 6.6 8.6 Source: Company, Sharekhan Research

February 16, 2021 11 Powered by the Sharekhan

3R Research Philosophy Update Stock

About company Axis Bank is the third-largest private sector bank in India. The bank offers the entire spectrum of financial services to customer segments covering large and mid-corporates, MSME, agriculture, and retail businesses. The bank has 11 subsidiaries, which contribute and benefit from the bank’s strong market position across categories.

Investment theme Axis Bank has a well-diversified loan book having strengths in both retail and corporate segments. The bank’s liability profile has improved significantly, which would be helpful in sustaining margins at healthy levels. Loan book quality is improving, with greater emphasis on the granular and retail business, which we believe is positive for its profitability and growth going forward. We believe comfortable liquidity, overall franchise value, healthy capitalisation levels, and a high (PCR) enable Axis Bank to ride over medium-term challenges. The deal with MFS is also a long-term positive that can yield considerable benefits. At present, we believe risk reward is favourable for long-term investors.

Key Risks Prolonged uncertainty due to intermittent lockdowns may impact growth and rise in NPAs in unsecured and other retail segments can pose a risk to profitability.

Additional Data

Key management personnel Mr Amitabh Chaudhry MD & CEO Mr Rajiv Anand Excecutive Director Mr Puneet Sharma President & CFO Mr Deepak Maheshwari Group Excecutive & CCO Source: Company Website

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Life Insurance Corp of India 8.3 2 Dodge & Cox 3.59 3 Unit Trust of India 3.37 4 SBI Funds Management Pvt Ltd 3.19 5 BC ASIA INVESTMENTS 3.12 6 Vanguard Group Inc/The 2.67 7 ICICI Prudential Asset Management 2.59 8 BlackRock Inc 2.47 9 FMR LLC 2.37 10 HDFC Trustee Co Ltd/India 2.13 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 16, 2021 12 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research ICICI Bank Strong franchise; good for the long term

3R MATRIX + = - Summary Asset quality position is strong, with the bank having front-loaded provisions (on a proforma Right Sector (RS) ü basis), which has strengthened balance sheet; strong capital position gives it a springboard for growth. Right Quality (RQ) ü Reported GNPA / NNPA declined to 4.72% / 0.69% down by 91 bps / 40 bps q-o-q; proforma GNPA / NNPA saw just a slight rise of 6 bps / 14 bps from Q2 FY2021 levels; NIMs improved Right Valuation (RV) ü q-o-q. Stock trades at 2.8x/2.5x its FY2022E/FY2023E BVPS; we believe valuations are + Positive = Neutral - Negative reasonable, considering the overall franchise value, strong capitalisation and a high PCR We have accordingly fine-tuned our target multiples for the standalone bank. We maintain a Buy rating with a revised SOTP-based price target (PT) of Rs. 770. What has changed in 3R MATRIX

Old New ICICI Bank has a strong asset quality position, with the bank front-loading provisions (on a proforma basis) which resulted into a strengthened balance sheet and provides RS  impetus to growth in FY22E and FY23E. Asset quality improved in Q3 with reported GNPA / NNPA declined by 91 bps / 40 bps q-o-q to 4.72% / 0.69%. Proforma GNPA / RQ  NNPA were also decent, rising slightly by 6 bps / 14 bps as compared to Q2FY2021. RV Even as compared to reported numbers, proforma GNPA / NNPA gap is 70 bps / 57  bps, which is manageable. The bank created contingency provisions of Rs. 3,012 crore for proforma NPAs and utilised Rs. 1,800 crore of COVID-19 related provisions made Reco/View Change earlier. Accordingly, the bank held aggregate COVID-19 provisions of Rs. 9,984 crore, as compared to Rs. 8,772 crore in Q2FY2021. Proforma provisioning coverage also Reco: Buy  remained robust at 77.6% as on December 31, 2020. Fund-based and non-fund based CMP: Rs. 658 outstanding to borrowers rated ‘BB and below’ was at Rs. 18,061 crore, up by 11.7% q-o-q (increased by 10 bps and stood at 2.6% of Loans) which is manageable. The bank’s Price Target: Rs. 770 á strong capital position with a CET-1 ratio of 16.79% including profits for 9MFY2021 gives it a springboard for growth. NIMs improved in Q3FY2021 to 3.67% (was 3.57% in Q2 Upgrade Maintain Downgrade á  â FY2021 and 3.77% in Q3 FY2020), indicating the strength of the liability book and Company details business franchise. Looking ahead, we believe that optimism in the economy supported by indicators of resumption in economic activity and continued growth in digitisation Market cap: Rs. 455,049 cr and the bank’s extensive franchise, high-quality digital platforms and solutions, and its prudent risk management practices with strong capital ratios put it in a good position 52-week high/low: Rs. 679/269 to capture opportunities that will arise in the near and medium term. We believe that NSE volume: improved economic growth (helped by a progressive and growth oriented government 299.2 lakh policy and Union Budget) are positives for banking sector, and strong players like ICICI (No of shares) Bank are well-placed to benefit from it. We have accordingly fine-tuned our target BSE code: 532174 multiples for the standalone bank. We maintain a Buy rating on the stock with a revised SOTP-based price target (PT) of Rs. 770. NSE code: ICICIBANK Our Call Free float: 690.4 cr (No of shares) Valuation - We expect RoEs to normalise in FY2022E, aided by normalised credit cost and business traction. Using the SOTP methodology, we value the bank’s standalone operations at ~2.5x its FY2023E BV and rest of the subsidiaries at ~Rs. 123 per share. The Shareholding (%) bank is available at 2.8x/2.5x its FY2022E/FY2023E BVPS. We believe that valuations are Promoters 0.0 reasonable, considering the overall franchise value as a whole, strong capitalisation and a high provision coverage ratio (PCR) being key comfort factors. Healthy capital levels FII 58.3 (Including profits for 9MFY2021, the Tier-1 ratio was 18.12%) and provision buffers indicate balance sheet’s strength. We maintain our Buy rating on the stock with a revised SOTP- DII 35.1 based price target (PT) of Rs. 770.

Others 6.6 Key Risks A slower recovery in the economy, higher slippages due to COVID-19 vulnerabilities and Price chart slippages from the corporate book (especially from the ‘BB and below’-rated portfolio) 600 could impact earnings.

500

400

300 Valuation Rs cr

200 Particulars FY19 FY20 FY21E FY22E FY23E 20 20 21 20 - - - Net Interest Income (NII) 27,014.8 33,267.1 34,647.1 38,263.7 44,041.7 Jun - Oct Feb Feb Net profit (Rs cr) 3,364.4 7,931.3 13,931.0 17,248.3 20,662.9 EPS (Rs) 5.2 12.3 20.8 25.8 30.9 Price performance P/E (x) 126.1 53.7 31.6 25.5 21.3 (%) 1m 3m 6m 12m BVPS (Rs) 162.5 174.3 209.8 232.3 259.3 Absolute 23.7 35.4 82.8 21.6 P/BV (x) 4.0 3.8 3.1 2.8 2.5 Relative to 16.4 16.9 45.9 -5.4 RoE (%) 3.1% 7.1% 10.7% 11.4% 12.3% Sensex RoA (%) 0.4% 0.8% 1.1% 1.2% 1.2% Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

February 16, 2021 14 Powered by the Sharekhan

3R Research Philosophy Update Stock

Outlook and Valuation n Sector view - Credit growth yet to pick up, private banks placed better System-level credit offtake, which is still subdued, is now improving, with a credit growth of ~6% in the latest fortnight. On the other hand, deposits rose by ~12%, which indicate a relatively healthy economic scenario. Moreover, the RBI’s accommodative stance, resulting in surplus liquidity, provides succour in terms of easy availability of funds and lower cost of funds for banks and financial services companies. The end of the loan moratorium is a relief. Going forward, collection efficiency is likely to be a function of book quality, client profile, as well as economic pick-up. At present, we believe the banking sector is likely to see increased risk- off behaviour, with tactical market share gains for well-placed players. We believe that private banks, with improved capitalisation and strong asset quality (with high coverage and provisions buffers) are structurally better-placed to take off once the situation normalises. n Company outlook - Strong franchise, good for the long term ICICI Bank’s strong brand positioning across retail, business banking and corporate with a pan-India presence, makes it attractive and strong business. Looking ahead, we believe that optimism in the economy supported by the indicators of resumption of economic activity and continued growth in digitisation along with the bank’s extensive franchise, high quality digital platforms and solutions, and its prudent risk management practices with strong capital ratios put us it in a good position to capture opportunities that will arise in the near and medium term. Stabilising watchlist book, healthy provision buffer and improvement in margins and liability profile indicate a strong business outlook for the bank. The recent capital raise has strengthened capital position. Also, the improving collections efficiency and recovery in business traction indicate that the scenario is normalising fast. With a strategy of front-loading of provisions, we believe that bank is well placed to enter FY2022 with a strong book quality and minimal legacy burden. We find ICICI Bank to be an attractive franchise with a strong balance sheet and pan-India reach, which make it attractive for the long term. Moreover, its well-performing subsidiaries which are strong players in their respective fields add value to the overall business. n Valuation - Maintain Buy with revised PT of Rs. 770 We expect RoEs to normalise in FY2022E, aided by normalised credit cost and business traction. Using the SOTP methodology, we value the bank’s standalone operations at ~2.5x its FY2023E BV and rest of the subsidiaries at ~Rs. 123 per share. The bank is available at 2.3x/2.1x its FY2022E/FY2023E BVPS. We believe that valuations are reasonable, considering the overall franchise value as a whole, strong capitalisation and a high provision coverage ratio (PCR) being key comfort factors. Healthy capital levels (Including profits for 9MFY2021, the Tier-1 ratio was 18.12%) and provision buffers indicate balance sheet’s strength. We maintain our Buy rating on the stock with a revised SOTP-based price target (PT) of Rs. 770.

ICICI Bank SOTP valuation Rs Valuation Methodology Value of Standalone ICICI Bank 647 2.5x FY23E BVPS Non Banking Subsidiary Valuation ICICI Bank Holding Value/share Life Insurance Subsidiary 73.5% 62 2.5x EV FY23E; 20% Holdco discount General Insurance Subsidiary 51.9% 41 38.4x FY23E PAT; Holdco discount 20% Broking business 77.2% 13 Proportionate Mcap Rest 7 Holding Co discount 20.0% SOTP Valuation (Rs per share) 770 Source: Company, Bloomberg, Sharekhan Research

February 16, 2021 15 Powered by the Sharekhan

3R Research Philosophy Update Stock

One-year forward P/BV (x) band

Source: Sharekhan Research

Peer Comparison P/BV (x) P/E (x) RoA (%) RoE (%) Particulars CMP FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E ICICI Bank 658 3.2 2.9 32.4 24.3 1.2 1.4 10.7 12.3 HDFC Bank 1626 4.5 3.9 29.3 24.2 1.9 2.0 16.5 17.2 Axis Bank 775 2.3 2.2 39.9 23.3 0.5 0.8 6.1 9.5 Kotak Mahindra Bank 2020 2.9 2.6 36.5 23.9 1.7 1.7 6.6 8.6 Source: Bloomberg, Sharekhan Research

February 16, 2021 16 Powered by the Sharekhan

3R Research Philosophy Update Stock

About company ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its group companies. The bank is the second largest private sector bank in terms of loan book size, having a pan-India presence. The bank’s subsidiaries in life insurance, general insurance, and stock broking are all strong entities in their respective fields and are developing well as a strong franchise, and provide support to overall value. In its banking business, it has continued to improve the portfolio mix towards retail and higher rated corporate loans and has made significant progress in de-risking the balance sheet. Hence, today the proportion of retail loans in the portfolio mix has increased to 64%, while an increasingly high proportion of corporate loans disbursed are to customers rated A- and above, which helps de-risking the overall loan book.

Investment theme The bank has built an attractive franchise consisting of banking, insurance, and securities business over the years. We believe going forward, growth and asset quality risks have declined and outlook has improved due to the green-shoots of recovery. The bank has continued to improve its portfolio mix towards retail (granular) and higher rated corporate loans; hence, in the past four years, this has helped it significantly de-risk its balance sheet from legacy stress and has enhanced franchise value. We find ICICI Bank to be an attractive franchise with a strong balance sheet and pan-India reach, which will help it tide over medium-term challenges. Moreover, its well-performing subsidiaries add value to the overall franchise which is another positive.

Key Risks A slower recovery in the economy, higher slippages due to COVID-19 vulnerabilities and slippages from the corporate book (especially from the ‘BB and below’-rated portfolio) could impact earnings.

Additional Data Key management personnel Sandeep Bakhshi CEO/Managing Director Rakesh Jha Chief Financial Officer Vishakha V Mulye Executive Director Anup Bagchi Executive Director Source: Company

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Life Insurance Corp of India 6.72 2 SBI Funds Management Pvt Ltd 3.62 3 Dodge & Cox 3.59 4 HDFC Asset Management Co Ltd 2.9 5 ICICI Prudential Asset Management 2.62 6 BlackRock Inc 2.41 7 Republic of Singapore 2.17 8 Franklin Resources Inc 1.69 9 Capital Group Cos Inc/The 1.66 10 Nippon Life India Asset Management Ltd 1.63 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 16, 2021 17 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research IndusInd Bank Headwinds receding, fundamentals stay strong

3R MATRIX + = - Summary

Right Sector (RS) ü IndusInd Bank has a strong asset quality position (with front-loaded provisions) that has led to an improved balance sheet; healthy capitalisation makes it well- placed to capture growth in FY22E and FY23E. Right Quality (RQ) ü Collections efficiency (CE) has been recovering; overall vehicle collection efficiency was at 96.9% and MFI CE was at 94.4%, which is encouraging. Right Valuation (RV) ü IIB has total provisions at 188% of GNPAs and 111% of proforma GNPA are a cushion in the present environment. + Positive = Neutral - Negative At 1.8x/1.6x its FY2022E/FY2023E BVPS, we maintain a Buy rating on stock with a revised PT of Rs. 1,340. What has changed in 3R MATRIX Old New IndusInd Bank has a strong asset quality position (with front-loaded provisions) that has led to an improved balance sheet. Healthy capitalisation places RS  it well to capture growth in FY22E and FY23E. A sequential improvement in RQ  collection efficiency (CE) (overall vehicles CE is at 96.9%, while for MFIs it is at 94.4%) augurs well. A sharp rise in reported GNPA/NNPA numbers, which RV  came at 1.74%/0.22%, down 47 bps/30 bps q-o-q. Even on a proforma basis, GNPA/ NNPA ratio is at 2.93%/0.70%, respectively, are well-contained, and is Reco/View Change positive. The bank has strengthened its balance sheet by improving provision Reco: Buy  coverage ratio to 87% as of December 2020. Provisions and contingencies for Q3FY2021 comprising provisions for credit and other losses were Rs. CMP: Rs. 1,058 1,853 crore of provisions as compared to Rs. 1,448 crore in Q2FY2021. Total Price Target: Rs. 1,340 á provisions (comprising specific, floating, general and standard asset provisions) á Upgrade  Maintain â Downgrade stood at 188% of GNPAs and 111% of proforma GNPAs and are a cushion in the present environment. The bank’s ‘BBB and below-rated’ exposures are Company details well-collateralised with a five-year average slippage of 0.4%, which will help Market cap: Rs. 80,175 cr contain NPAs. The bank has strengthened its balance sheet by improving its provision coverage ratio and the recent capital raise has also helped. Going 52-week high/low: Rs. 1209/236 forward, we expect credit cost and advances growth for FY2022E to be normal NSE volume: and hence believe that the bank’s improved position vis-à-vis its balance sheet. 176.7 lakh (No of shares) We have tweaked target multiples to pre-COVID levels, in light of an improved BSE code: 532187 outlook. We maintain a Buy rating on the stock with a revised PT of Rs. 1,340. NSE code: INDUSINDBK Our Call Free float: Valuation: IndusInd Bank currently trades at 1.8x/1.6x its FY2022E/FY2023E 65.5 cr (No of shares) book value, which is reasonable. The bank’s well-capitalised balance sheet and provision buffer are cushions for profitability. We believe that the growth Shareholding (%) outlook is improving. Moreover, better collection efficiency and the expected low Promoters 13.4 restructuring pipeline indicate that credit costs are manageable, and normalcy is set to return in FY2022. We believe that the bank’s balance sheet has improved FII 60.2 and valuations are reasonable. We have tweaked target multiples to pre–COVID DII 17.6 levels, in light of the improved outlook. We maintain our Buy rating with a revised PT of Rs. 1,340. Others 8.8 Key Risks Price chart Rise in slippages and delay in recoveries from stressed corporate loan book and 1400 slower growth in retail/MFI loan book may impact earnings. 1200 1000 800 600 400 Valuation Rs cr 200 Particulars FY19 FY20 FY21E FY22E FY23E 20 21 20 20 20 - - - - - Net Interest Income 8846 12060 12781 15020 17022 Feb Feb Aug Nov May PAT 3301 4460 2943 5456 6363 EPS 55.0 68.8 38.9 72.1 84.1 Price performance BVPS 438.4 498.0 522.8 586.9 661.7 (%) 1m 3m 6m 12m ROE % 13.1 14.7 7.4 12.3 12.7 Absolute 13.4 35.0 106.2 -7.2 ROA % 1.2 1.4 0.7 1.1 1.1 Relative to 6.2 16.4 69.3 -34.6 P/E (x) 19.2 16.6 27.2 14.7 12.6 Sensex P/BV (x) 2.4 2.1 2.0 1.8 1.6 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

February 16, 2021 19 Powered by the Sharekhan

3R Research Philosophy Update Stock

Outlook and Valuation n Sector view - Credit growth yet to pick up, private banks placed better System-level credit offtake, which is still subdued, is now improving, with a credit growth of ~6% in the latest fortnight. On the other hand, deposits rose by ~12%, which indicate a relatively healthy economic scenario. Moreover, the RBI’s accommodative stance, resulting in surplus liquidity, provides succour in terms of easy availability of funds and lower cost of funds for banks and financial services companies. The end of the loan moratorium is a relief. Going forward, collection efficiency is likely to be a function of book quality, client profile, as well as economic pick-up. At present, we believe the banking sector is likely to see increased risk-off behaviour, with tactical market share gains for well-placed players. We believe that private banks, with improved capitalisation and strong asset quality (with high coverage and provisions buffers) are structurally better-placed to take off once the situation normalises. n Company outlook - Promising outlook We expect IIB to address challenges through a combination of better strategy and execution and prudent disclosure with a focus on reducing risk. While for the near term, asset quality will be a key monitorable, we expect pessimism to gradually ease over the medium term. Factors such as the bank’s willingness to recognise stress upfront in any loan segment, before it becomes challenging and a strategy to build adequate provisions or counter-cyclical buffers if the business is risky will be long-term cushions. Our constructive view on IndusInd Bank is backed by its demonstrated strong asset-quality performance (for most period in recent years, except in the near past), along with improved capital levels (CET 1 at 14.3%). Near-term challenges continue, but we expect growth and credit cost to normalise in FY2022E, given improving macro conditions and the bank’s stated stance to be front-load provisions. We expect NIM to be at 4.1- 4.3% for the medium term, supported by its improving liability franchise. n Valuation - We maintain Buy on the stock with an unchanged PT of Rs. 1,340 IndusInd Bank currently trades at 1.8x/1.6x its FY2022E/FY2023E book value, which is reasonable. The bank’s well- capitalised balance sheet and provision buffer are cushions for profitability. We believe that the growth outlook is improving. Moreover, better collection efficiency and the expected low restructuring pipeline indicate that credit costs are manageable, and normalcy is set to return in FY2022. We believe that the bank’s balance sheet has improved and valuations are reasonable. We have tweaked target multiples to pre–COVID levels, in light of the improved outlook. We maintain our Buy rating with a revised PT of Rs. 1,340.

One-year forward P/BV (x) band

5.3

4.3

3.3

2.3

1.3

0.3 15 16 17 18 19 20 21 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 ------Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr

PBV +1 sd 3-yr Avg -1 sd

Source: Sharekhan Research

Peer Comparison P/BV (x) P/E (x) RoA (%) RoE (%) Particulars CMP FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E IndusInd Bank 858 1.6 1.5 22.1 11.9 0.7 1.1 7.4 12.3 RBL Bank 258 1.2 1.1 27.3 12.7 0.6 1.1 4.7 9.0 Federal Bank 85 1.1 1.0 11.3 8.7 0.8 1.0 9.6 11.5 Source: Bloomberg, Sharekhan research

February 16, 2021 20 Powered by the Sharekhan

3R Research Philosophy Update Stock

About company IIB is a private bank established in 1994, having a pan-India presence with 1,910 branches and 2,785 ATMs spread across 750+ geographical locations of the country. The bank also has representative offices in London, Dubai, and Abu Dhabi. IIB has a strong retail loan franchise, along with its subsidiary in microfinance. The network also includes 2,144 branches of BFIL and 851 outlets of IMFS. IIB is well placed with CRAR at 16.3% with Tier-1 at 15.6%.

Investment theme IIB has emerged as a strong player, which has been able to post healthy NIMs/low NPAs across interest rate and asset-quality cycles consistently for several years. The bank has transformed itself, not only developing strong business verticals such as vehicle finance, retail loans, credit cards, and business banking, etc., but has also successfully established fee-generating verticals, which diversify its income and lead to better return ratios. The bank has managed credit costs well and industry’s best NIMs are key differentiators for the bank. The recent pandemic has impacted business across segments and the ensuing lockdown has not only impacted business operations but also collection and cashflows of borrowers. We believe though the medium term may see challenges, banks with strong capitalisation and a prudent and cautious stance with a strong balance sheet will likely be able to withstand the challenges better.

Key Risks Rise in slippages and delay in recoveries from stressed corporate loan book and slower growth in retail/MFI loan book may impact earnings.

Additional Data Key management personnel Mr Sumanth Kathpalia Managing Director & CEO Mr Arun Khurana Deputy CEO Mr Ramesh Ganesan Head-Transaction banking Mr S V Zaregaonkar Chief Financial Officer Mr Ramaswamy Meyyappan Chief Risk Officer Source: Company

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Indusind International Holdings Lt 10.3 2 BNP PARIBAS ARBITRAGE 3.5 3 INDUSIND LTD 3.2 4 DRAGSA INDIA EQUITIES 2.8 5 JPMorgan Chase & Co 2.6 6 BRIDGE INDIA FUND 2.5 7 UBS AG/Singapore 2.5 8 SFSPVI LTD 2.3 9 SBI Funds Management Pvt Ltd 2.1 10 Route One Investment Co LP 1.8 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 16, 2021 21 Sector Update

Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research

February 16, 2021 22 AU Small Finance Bank All set on growth path

3R MATRIX + = - Summary AU Small Finance Bank (AUSFB) had front-loaded provisions (on a proforma basis); and Right Sector (RS) ü going forward, we expect a strengthened balance sheet and healthier asset-quality book (compared to pre-COVID levels), which make it well placed for growth in FY2022E and Right Quality (RQ) ü FY2023E. The bank expects credit cost to normalise from Q4FY2021; collection efficiency has Right Valuation (RV) ü improved across most segments; restructuring book is expected to be at ~1.5% of total by Q4FY2021 and is manageable. As a large part of the loan book is secured (98%) and collections are improving, we find the + Positive = Neutral - Negative stock attractive as it has a long growth runway. AUSFB trades at 5.7x/4.6x its FY2022E/FY2023E ABPVS; We maintain Buy with a revised What has changed in 3R MATRIX PT of Rs. 1,260. Old New AU Small Finance Bank (AUSFB) had front-loaded provisions (on a proforma basis). RS  Going forward, we expect a strengthened balance sheet and healthier asset- quality book (compared to pre-COVID levels), which make it well placed for growth RQ  in FY2022E and FY2023E. During the recent quarter, growth momentum and incremental spreads improved, which augur well. AUM at Rs. 33,222 crore grew by RV  11% y-o-y and ~9% q-o-q, with AUM spreads stable at 7.6% and incremental spreads improving to 8.1%. Demand normalised in most segments in Q3FY2021 and the bank expects Q4FY2021 to be better. Retail deposits (CASA + retail term deposits) Reco/View Change are now at 55% of deposits versus 43% in Q3FY2020; CASA ratio is at 22% versus Reco: Buy  16% in Q3FY2020. Reported GNPA/NNPA for Q3FY2021 improved to 0.99%/0.24% from 1.54%/0.45% in Q2FY2021. Collection efficiency has normalised across most CMP: Rs. 1,091 segments. The bank has currently done restructuring of 0.8% of gross advances, Price Target: Rs. 1,260 á overall to reach 1.5% by Q4FY2021. In Q3FY2021, the bank restructured Rs. 251 crore (0.8% of gross advances), mainly in the bus, taxi (within wheels), schools, á Upgrade  Maintain â Downgrade and apparels (within SBL). The bank has indicated that total restructured advances should stabilise at ~1.5% of gross advances, including fresh restructuring that the Company details bank may undertake in Q4FY2021. Proforma GNPA and NNPA was 3.3% and 1.3%, respectively. The bank has created additional provisions for these accounts. The Market cap: Rs. 33460 cr bank is currently carrying Rs. 733 crore (72% coverage) on proforma GNPA and Rs. 52-week high/low: Rs. 1217/366 48 crore on restructured assets (19% coverage). The bank indicated that current provisioning levels were adequate and expects credit costs to normalise from NSE volume: Q4FY2021. We have tweaked our target multiples to pre-COVID levels, in light of 3.9 lakh (No of shares) improved outlook. We maintain Buy on the stock with a revised price target (PT) of Rs. 1,260. BSE code: 540611 Our Call NSE code: AUBANK Valuation – At the CMP, AUSFB is available at 5.7x/4.6x its FY2022E/FY2023E ABPVS. Free float: 21.8 cr We believe AUSFB is likely to sustain its premium valuations due to its strong asset- (No of shares) quality mix, superior return ratios, a long runway for growth, along with high promoter ownership. As the bank moves ahead to become a full-scale retail focused bank, we Shareholding (%) expect ROA/ROE to improve to 2%/20% in FY2023E from 1.8%/17.9% in FY2020, which will support valuations. We expect normalisation in asset quality along with improving Promoters 29.0 collection efficiency from FY2022E. Given the secured nature of its lending book (98% of the loan book is secured), improving collection, conservative underwriting FII 37.0 mechanism, efficient risk management capabilities, and long runway for growth, we find the stock attractive. We have tweaked our target multiples to pre-COVID levels, in DII 15.1 light of the improved outlook. We maintain Buy with a revised PT of Rs. 1,260.

Others 18.9 Key Risks Price chart A prolonged delay in pick-up in economic activity will affect growth and profitability of the bank. Further, the bank has high exposure to the informal/SME segments, which 1300 may be vulnerable if economic recovery is delayed. 1100

900 Valuation Rs cr 700 Particulars FY19 FY20 FY21E FY22E FY23E 500 Net Interest Income 1,342.6 1,908.9 2,448.9 2,822.5 3,105.8 300 20 20 21 20 PPOP 721.9 1,197.2 1,683.2 2,146.3 2,580.1 - - - Jun - Oct Feb Feb PAT 381.8 674.8 915.0 1,244.9 1,552.2 EPS (Rs.) 13.2 22.8 30.1 40.9 51.0 Price performance ABVPS (Rs.) 92.6 126.2 150.0 190.0 238.8 (%) 1m 3m 6m 12m P/E (x) 82.8 47.8 36.2 26.6 21.3 Absolute 18.7 22.0 69.9 -4.3 P/ABVPS (x) 11.8 8.6 7.3 5.7 4.6 Relative to 12.3 3.4 26.9 -31.3 ROE (%) 14.0 17.9 17.4 19.3 19.5 Sensex ROA (%) 1.5 1.8 1.7 1.9 1.9 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

February 16, 2021 23 Powered by the Sharekhan

3R Research Philosophy Update Stock

Outlook and Valuation n Sector view - Long-term positive outlook for SFBs While financial inclusion (in terms of deposits, bank channels, and services accessibility) has reached a significant penetration level in India, we believe credit delivery and accessibility still lag for the non-salaried as well as non-urban centre clients. Therefore, there exists a large market that can be effectively catered to by special entities such as SFBs. We believe SFBs have a structural advantage of access to low-cost retail deposits (and opportunity for asset growth as well) compared to NBFCs, which will enable them to sustain margins and have sustainable growth. We believe the largely underpenetrated market segment is an attractive space with a large headroom for growth. n Company outlook - Strong fundamentals, improving outlook AUSFB has had a long and successful history (since it was an NBFC and now as a bank) in credit underwriting quality, mainly in the under/un-banked self-employed customer segment that lacks formal income documentation. AUSFB is predominantly present in underpenetrated states such as Rajasthan and Madhya Pradesh (~42% and 16% of its AUM, respectively), which have significantly low credit and deposit penetration. We believe AUSFB’s presence in these states provides the bank a competitive edge to pursue growth, along with its niche customer profile with low competition from peer banks and NBFCs. We believe business outlook is improving with disbursements normalising and CASA improving sharply to 22% of deposits. Improving collection efficiency trends are encouraging. We expect FY2022 to record normalised growth, helped by revival in credit offtake and lower credit cost burden. n Valuation - Maintain Buy with a revised PT of Rs. 1,260 Valuation – At the CMP, AUSFB is available at 5.7x/4.6x its FY2022E/FY2023E ABPVS. We believe AUSFB is likely to sustain its premium valuations due to its strong asset-quality mix, superior return ratios, a long runway for growth, along with high promoter ownership. As the bank moves ahead to become a full-scale retail focused bank, we expect ROA/ROE to improve to 2%/20% in FY2023E from 1.8%/17.9% in FY2020, which will support valuations. We expect normalisation in asset quality along with improving collection efficiency from FY2022E. Given the secured nature of its lending book (98% of the loan book is secured), improving collection, conservative underwriting mechanism, efficient risk management capabilities, and long runway for growth, we find the stock attractive. We have tweaked our target multiples to pre-COVID levels, in light of the improved outlook. We maintain our Buy rating with a revised PT of Rs. 1,260.

One-year forward P/BVPS (x) band

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

- 19 19 19 20 20 20 19 20 18 19 19 20 19 19 20 20 19 20 19 19 18 20 20 19 20 ------Jul Jul Jan Jan Jun - Jun - Oct Oct Apr Apr Feb Sep Feb Sep Dec Dec Aug Aug Nov Nov Nov Mar Mar May May

PBV 3-yr Avg +1 sd -1 sd

Source: Sharekhan Research

Peer Comparison P/BV (x) P/E (x) RoA (%) RoE (%) Particulars CMP FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E AU Small Finance Bank 1,091 7.3 5.7 36.3 26.6 1.7 1.9 17.4 19.3 HDFC bank 1616 2.8 2.6 26.9 23.3 1.9 2.0 11.5 12.1 Source: Company, Bloomberg, Sharekhan Research

February 16, 2021 24 Powered by the Sharekhan

3R Research Philosophy Update Stock

About company AUSFB is a small finance bank that transitioned from a prominent, retail-focused non-banking finance company (NBFC), which primarily served low and middle-income individuals and businesses that have limited or no access to formal banking and finance channels. AUSFB received a license from the Reserve Bank of India (RBI) to set up an SFB on December 20, 2016, and commenced its SFB operations from April 19, 2017. The bank’s liability product offerings include current accounts, savings accounts, term deposits, recurring deposits, and collections and payments solutions for MSME and SME customers. The bank aims to be a retail-focused and preferred trusted SFB, offering integrated and tailored solutions to its customers. At the end of FY2020, AUSFB had total AUM of Rs. 30,893 crore, spread across vehicle finance, SME, MSME, and other high-yielding products (including OD against FDs, gold loans, and personal loans etc.). At the end of Q2FY2021, the bank operates through 686 branches, with 63% of its branches in the rural and semi-urban areas. Rajasthan, Maharashtra, Madhya Pradesh, and Gujarat are the key geographies from where AUSFB sources 72% of its AUM and 68% of its total deposits.

Investment theme AUSFB has expanded and strengthened its business model to offer a diverse suite of banking products and services by leveraging its asset-based lending strengths, NBFC customer base, and cost-efficient, technology- driven hub-and-spoke branch operating model to successfully operate its small finance bank. In addition to its vehicle finance, MSME, and SME offerings, the bank’s asset product offerings include working capital facilities, gold loans, agriculture-related term loans, Kisan credit cards for farmers, and loans against securities. The liability franchise has shaped up well with deposits presently forming ~70% of the total borrowings. Of the same, deposits are dominated by retail deposits, forming ~43% of the mix and low-cost CASA deposits form 14.5% of the deposit base.

Key Risks A prolonged delay in pick-up in economic activity will affect growth and profitability of the bank. Further, the bank has high exposure to the informal/SME segments, which may be vulnerable if economic recovery is delayed.

Additional Data Key management personnel Mr.Sanjay Agarwal Managing Director/CEO Mr.Uttam Tibrewal Whole Time Director Mr. Vimal Jain Chief Financial Officer Mr.Deepak Jain Chief Operating Officer Source: Bloomberg

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Agarwal Sanjay 18.5 2 CAMAS INVESTMENTS 4.7 3 Westbridge AIF I 3.9 4 Agarwal Shakuntala 3.9 5 AGARWAL JYOTI 3.9 6 Capital Group Cos Inc/The 3.8 7 Kotak Mahindra Asset Management Co 3.8 8 Nomura Holdings Inc 2.9 9 Motilal Oswal Asset Management Co 2.5 10 MYS HOLDINGS PVT LTD 2.2 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 16, 2021 25 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services

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