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Sector Update | Banking ICICI Direct Research

Sector Update | Banking ICICI Direct Research

Banking

December 31, 2019 Sector View Dominant PSBs, private remain structural picks Overweight The continued slowdown seen by NBFCs is seen enabling banks to garner a higher market share in advances, thereby growing at a relatively higher pace. Anticipated recovery in a large NCLT account, focus on retail segment and moderation in incremental stress assets will benefit PSU banks more leading to improvement in asset quality and, subsequently, reduce capital

pressure. We retain our confidence in banks rather than NBFCs as balance sheet management and lower growth concerns will take two to three quarters to stabilise. Within private banks, we prefer Axis and IDFC First Bank. Peaking of NPA cycle and resolution of large stressed assets Update Sector make dominant PSU banks a good investment opportunity. We prefer SBI in the PSU banking domain among our coverage.

The report highlights three segments;  Dominant PSU and large private banks as beneficiaries in current environment and will continue to outperform peers  Evolving retail payment to provide impetus to business  Broking twist – Intensifying competition and tighter regulations by Sebi to lead to consolidation in broking industry. Large to remain beneficiaries surviving competition and regulations.

Dominant PSU, large private banks remain beneficiaries

Factors favouring revival of dominant PSU banks

 Key beneficiaries of a decline in 10 year G-sec yields as interest rates

are anticipated to structurally remain lower

 Improvement in IBC norms being a major reform, which is seen reducing recovery timelines thereby improving the overall recovery rate to ~50% vs. the earlier ~20-25% range

 Focus on retail segment by PSU banks is likely to propel advance Research Equity Retail

growth and earnings trajectory. Top five PSU banks by advances – (SBI, BoI, Union, PNB) are focusing on the retail segment wherein the proportion has increased from 17% in FY16 to 24% in FY19 &

26% in H1FY20 (partially contributed by buyout from NBFCs) Research Analyst We expect below factors to pan out over the next couple of quarters. Kajal Gandhi  Subdued private capex and higher stress in the corporate sector led [email protected]

to sluggish credit growth in the last few years. While a gradual Vishal Narnolia Securities ICICI recovery is seen in the industry sector, traction in the retail segment [email protected] has remained consistent. Going ahead, the economic slowdown and Harsh Shah high base is seen keeping credit growth in single digits in FY20E with [email protected] a gradual recovery expected from FY21E onwards

 Resolution of large accounts like Essar Steel, Alok Industries and Bhushan Power & Steel along are expected to pare down industry GNPA to 7.1% though concerns on resolution of recently recognised RATING RATIONALE stressed companies remains a dragger. Recovery from resolution of large NCLT cases is seen providing a cushion against provision in lieu of recently cropped stressed asset

Evolving retail payment to lead to healthy growth in credit card Focus on , improving granularity, digital reach by promoting non-cash transactions, retail online payment methods have been garnering strength; especially post demonetisation. With outstanding credit cards at 5.25 crore, annualised spend of ~| 7 crore (as of September Sector Update | Banking ICICI Direct Research

2019), credit cards have been playing a dominant role in engaging substantial customers in digital payment arena that is seen growing further.

Broking twist – tighter Sebi guidelines to lead to consolidation In the last six years, Indian markets have seen a spurt in volumes at ~34.4% CAGR in FY13-19. Derivatives witnessed robust traction at 35.4% CAGR in FY13-19 to | 959000 crore. Indian stock markets have undergone massive development over several years in terms of yields, products and customer services. In our view, Indian broking industry is set to see a gradual shift from transaction based model to service or fee based model offering services like & investment advisory. Focus on fund based activities including margin funding and loan against shares, which the brokers are currently engaged, is seen further increasing enabling brokers as avenue of contribution to earnings. To enable investor safety, Sebi has issued tighter guidelines that are seen leading to consolidation in the industry and large brokers gaining market share.

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Credit growth remains moderate; retail, NBFC in focus Slower economic growth & sluggish private capex kept credit growth on a moderate pace at 8.3% YoY in October 2019. Increased focus on retail lending and portfolio buyout from NBFCs provided some respite to overall growth. Though the second half of the fiscal remains the busy season for the lending space, previous year base is seen keeping advances growth in single digits in FY20E. Industrial sector growth stayed in single digits at 3.4% in October 2019 but saw some signs of improvement compared to the recent run rate. This is largely driven by infrastructure, engineering & chemical sector that grew 7%, 6% & 4% YoY, respectively. Within infrastructure, telecommunication grew 3.3%YoY, roads grew 3.6% while power grew 4.9%. Within engineering, other engineering grew at a healthy pace of 8.2% YoY. The services segment growth continued to decline at 6.5% YoY in October 2019, led by the economic slowdown. However, among constituents, growth in NBFC witnessed moderation at 26.8% in October 2019 vs. 29.2% in FY19. It still supported overall growth with bank lending to NBFCs and portfolio buyouts from NBFCs. Retail loan segment recorded an improvement in growth to ~17% YoY in October 2019 vs. 16% in FY19. Led by their cautious stance, moderation was witnessed in pace of personal loans and credit cards. In addition, slowdown in auto sales has kept portfolio growth in single digits. However, growth in housing loan continue to remain healthy at 19.4% YoY in October 2019, providing impetus to the overall pie. Going ahead, the large industrial sector is poised to grow steadily compared to the small & medium industry. The government’s focus on MSME is expected to push up disbursements. However, moderate economic growth and base effect is seen keeping overall credit growth in single digit in FY20E. With an improving credit scenario and shifting of credit demand from NBFCs to bank, we expect credit growth to improve from FY21E onwards.

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Exhibit 1: Credit growth supported by steady pace in retail portfolio | crores FY17 FY18 FY19 Aug-19 Sep-19 Oct-19 Non-Food Credit 70,94,490 76,88,423 86,33,418 85,32,367 86,20,329 86,63,557 Agriculture & Allied Activities 9,92,386 10,30,215 11,11,300 11,13,027 11,27,794 11,34,705 Industry 26,79,831 26,99,268 28,85,778 27,65,215 27,74,883 27,86,751 Large 22,05,296 22,22,589 24,03,878 23,01,894 23,08,566 23,22,175 Services 18,02,237 20,50,472 24,15,609 23,50,198 23,61,866 23,52,418 NBFCs 3,91,032 4,96,393 6,41,208 6,80,360 7,13,510 7,13,344 Personal Loans 16,20,034 19,08,469 22,20,732 23,03,930 23,55,785 23,89,684 Housing (Including Priority Sector Housing) 8,60,086 9,74,565 11,60,111 12,14,773 12,53,190 12,68,734 Credit Card Outstanding 52,132 68,628 88,262 97,650 99,372 1,05,026 Vehicle Loans 1,70,525 1,89,786 2,02,154 2,02,662 2,03,446 2,06,720

YOY growth (%) Non-Food Credit 8.4% 8.4% 12.3% 9.8% 8.1% 8.3% Agriculture & Allied Activities 12.4% 3.8% 7.9% 6.8% 7.0% 7.1% Industry -1.9% 0.7% 6.9% 3.9% 2.7% 3.4% Large -1.7% 0.8% 8.2% 5.1% 3.4% 4.2% Services 16.9% 13.8% 17.8% 13.3% 7.3% 6.5% NBFCs 10.9% 26.9% 29.2% 38.8% 30.5% 26.8% Personal Loans 16.4% 17.8% 16.4% 15.6% 16.6% 17.2% Housing (Including Priority Sector Housing) 15.2% 13.3% 19.0% 16.6% 19.3% 19.4% Credit Card Outstanding 38.4% 31.6% 28.6% 24.4% 25.9% 25.9% Vehicle Loans 11.5% 11.3% 6.5% 3.7% 4.1% 5.0%

Proportion (%) Agriculture & Allied Activities 14.0% 13.4% 12.9% 13.0% 13.1% 13.1% Industry 37.8% 35.1% 33.4% 32.4% 32.2% 32.2% Large 31.1% 28.9% 27.8% 27.0% 26.8% 26.8% Services 25.4% 26.7% 28.0% 27.5% 27.4% 27.2% NBFCs 5.5% 6.5% 7.4% 8.0% 8.3% 8.2% Personal Loans 22.8% 24.8% 25.7% 27.0% 27.3% 27.6% Housing (Including Priority Sector Housing) 12.1% 12.7% 13.4% 14.2% 14.5% 14.6% Credit Card Outstanding 0.7% 0.9% 1.0% 1.1% 1.2% 1.2% Vehicle Loans 2.4% 2.5% 2.3% 2.4% 2.4% 2.4%

Source: RBI, ICICI Direct Research Operation twist to provide treasury gains in quarter After a fall in yields in the first half of the year, G-sec yield saw a surge, rising ~ 53 bps to 6.78% from the lows of 6.25% in July 2019. In Q3FY20, RBI lowered its repo rate by 25 bps in October 2019 and maintained status quo in December 2019. However, concerns on economic growth have kept the G-sec yield curve in a narrow range with no major movement till recently. RBI’s surprising stance on pausing a rate cut amid a slowdown in economy and hardening of yields globally led to a sharp surge of 33 bps in 10 year G- sec yield to 6.8% (6.47% as of December 1). Excess liquidity within short- term bonds and hardening of 10 year G-sec yields led to an increase in spread. To ease the borrowing situation within the money market, RBI initiated ’s version of operation Twist where RBI will be simultaneously buying long term government bonds and selling short term bonds. This will lead to softening of long term yield. RBI has already planned | 20000 crore worth of OMOs, post which yields have already fallen by 28 bps to 6.52%. Going ahead, clarity on fiscal shortfall and resultant supply will be the determining factor. Therefore, the Union Budget will remain a major event, which will determine the directional move in yields ahead. In the near term, easing of yields led by RBI intervention is seen providing treasury gains, especially for PSU banks.

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Exhibit 2: Sensitivity of G-sec yield on treasury income of banks Q2FY20 Investment AFS Duration Absolute Impact Average asset Impact on RoA due Impact on PAT Networth Impact on NW due book (yrs) due to decline in to decline in yield due to decline in to decline in yield Yield yield H 30 bps 50 bps 30 bps 50 bps 30 bps 50 bps 30 bps 50 bps | crore T M Public sector banks * 1,46,834 42,747 1.2 147 246 8,91,673 1.7 1.9 4.2% 7.1% 48,440 0.3% 0.5% 2,54,785 80,577 1.2 285 475 15,30,097 1.9 2.2 3.1% 5.1% 75,531 0.4% 0.6% PNB* 2,36,258 76,476 3.4 782 1,304 11,36,278 6.9 8.0 17.9% 29.8% 44,201 1.8% 2.9% SBI 9,41,406 4,06,687 2.1 2,587 4,311 35,81,787 7.2 8.4 7.0% 11.6% 2,26,075 1.1% 1.9% 76,648 27,084 3.3 267 444 4,36,607 6.1 7.1 15.4% 25.7% 22,944 1.2% 1.9%

Private sector banks 1,61,715 46,897 NA NA NA 8,05,145 NA NA NA NA 83,875 NA NA 9,923 2,836 0.9 7 12 44,901 1.6 1.9 0.7% 1.1% 5,181 0.1% 0.2% DCB 7,844 1,897 0.7 4 7 36,650 1.1 1.3 0.7% 1.1% 3,254 0.1% 0.2% J&K Bank** 21,612 4,402 0.9 11 19 1,56,412 0.7 0.9 1.0% 1.6% 7,249 0.2% 0.3%

Source: Company, ICICI Direct Research Essar Steel resolution to improve asset quality In the absence of any large resolution or slippages, the GNPA ratio broadly remained stable at 9.4% with absolute GNPA at | 921911 crore. In addition, moderation was witnessed in fresh slippages during the quarter. Resolution of large NCLT cases (Essar Power, Bhushan Power and Alok Industries) during the quarter is seen reducing systemic GNPA ratio to 7.1% in FY20E though concerns over resolution of recently recognised stressed companies could remain a dragger. Recovery from resolution of large NCLT cases is seen providing a cushion against provision in lieu of the recently cropped up stressed assets. This is seen providing respite against burden on earnings in the near term. Overall, we expect asset quality to broadly remain stable.

Exhibit 3: Asset quality remains steady in Q3FY20 FY16 FY17 FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 GNPA 575313 776835 1024586 1002682 997247 961129 920300 924271 921911 NNPA 331340 430173 517775 485181 463082 417837 354507 353766 341896 GNPA ratio 7.6 9.6 11.6 11.3 10.8 10.2 9.2 9.4 9.4 NNPA ratio 5.1 5.3 5.8 5.5 5.0 4.4 3.6 3.6 3.5 GNPA of PSU banks 523398 684733 896601 874071 868812 829745 789016 788087 778310 GNPA of Private banks 51915 92102 127985 128611 128435 131384 131284 136184 143601 w/off 57585 108374 161328 197705 Source: Company, ICICI Direct Research

Exhibit 4: Expected improvement in asset quality on back of NCLT resolution (| crore) FY20E Expected resolution (Essar Steel + Bhushan Power + Alok Industries+ Ruchi Soya) 143146 New GNPA 777154 New GNPA ratio 7.1 Resolution of power exposure to extent of ~| 35,000 crore 742154 New GNPA ratio 6.8 NNPA 304878 New NNPA ratio 2.8 Source: Company, ICICI Direct Research , SBI report higher NPA divergence Given the completion of Asset Quality Review (AQR) by RBI for FY19, a large number of banks reported a divergence in NPA. Ten banks (refer exhibit below) reported a divergence in GNPA, NNPA & provisions to the tune of | 21363 crore, | 16934 crore & | 22057 crore, respectively. Out of total divergence reported by lender, ~71% of GNPA & ~59% of divergence in provisions was reported by SBI & Yes Bank. The extent of divergence for banks was low except for Yes Bank that reported 42% divergence to its FY19

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GNPA. However, the management said that most of the stress has been recognised in H1FY20 and remaining stress will be provided in Q3FY20. In terms of divergence on provisioning, SBI and reported highest divergence in provisioning against bad loans at | 12036 crore and | 2262 crore, respectively. Majority of banks clarified that they have classified most of the divergences as NPA and incremental provisions will not have a substantial impact on earnings.

Exhibit 5: Divergences reported by banks GNPA as GNPA as NNPA as NNPA as Provisions Provisions | crore/ FY19 Divergence Divergence Divergence per Bank per RBI per Bank per RBI as per Bank as per RBI

Allahbad Bank 28705 28772 67 7419 7486 67 21261 21714 453 Bank of India 60661 61778 1117 19119 20236 1117 39392 40838 1446 of India 32356 34921 2565 11333 13110 1777 19934 20722 788 Indian Bank 13353 13537 184 6793 5973 -820 6132 7136 1004 Indian Overseas Bank 33398 33756 358 1437 1630 193 18647 20909 2262 3359 3416 57 1506 1451 -55 1785 1897 112 PNB 78473 81090 2617 30038 32655 2617 48151 50242 2091 SBI 172750 184682 11932 65895 77827 11932 106856 118892 12036 UCO Bank 29888 31106 1218 9650 9485 -165 18994 20384 1390 48729 49318 589 20332 20921 589 28397 29984 1588

Yes Bank 7883 11159 3276 4485 6784 2299 3398 4376 978 Source: Company, media articles, ICICI Direct Research

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Digital payment - offers huge opportunity ahead an immense and extremely unique market with a nascent payments industry that seems poised for dramatic growth. New dynamics on the supply side including regulators and participants (universal & payment banks, technology providers, aggregators, acquirers and fin-tech companies) are bound to bring about a major change in the rules of the game. Intense focus and strategic collaboration among market participants will lower the costs of bringing underserved and unbanked consumers to formal . With collective and continuous emphasis by the government, central banks and other stake holders, non-traditional payment methodologies are being redefined to pave the way for higher digital modes of payments. The new payments ecosystem will supplement as well as ride the wave of smartphones, internet penetration and recent policy initiatives like Jan Dhan, , Digital India and Digilocker to find creative ways to deal with each other in the new marketplace to settle their positions on where they will play and how they will win. Incentives and cash backs are being offered to change the perception of digital payment, thereby encouraging and engaging higher usage of non-cash medium of transactions. According to Crisil Research, value of digital payments in India is expected to more than double to | 4055 trillion in FY24E from | 1630 trillion in FY19, translating into a five-year CAGR of 20%. Increase in cashless presents three primary advantage for banks and other financial intermediaries: 1) provides opportunity to generate fee based income; 2) reduction in cost in lieu of handling cash; 3) higher customer engagement. Indian payment has been a cash economy for a long time but movement in the direction of digital or cashless mode of transactions is rapid. Non cash transactions have witnessed an increase at 14.1% CAGR to | 32.7 lakh crore.

Exhibit 6: Non cash payment on the rise 3500000 3,269,487 30 3000000 2,855,818 2,554,086 25 2500000 2,046,076 20 2000000 1,857,762 1,621,022 1,678,748 1,689,951 15 1500000 10 1000000 500000 5 0 0 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Payment in value (| billions) YoY growth (%)

Source: RBI, ICICI Direct Research

Drilling down further among constituents of non-cash payments, non-cash broadly comprises six methodologies including RTGS, NEFT, paper clearing and cards. With focus on improving granularity and reach of digital payments and promoting non-cash transactions, retail payment methods (IMPS, NEFT) have witnessed a faster increase in volumes as well as value. Value of transactions undertaken through retail non-cash means increased at ~40% CAGR in FY14-19. This has led to an increase in the proportion of retail non-cash in overall payment from ~1% in FY12 to ~8% in FY19. In contrast, paper clearing has been trending downwards with proportion in overall payment declining from 6.1% in FY12 to 2.5% in FY19. Proportion of prepaid instruments (PPI), though very small in the overall pie, has been growing at rapid pace of ~92% CAGR in FY12-19.

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Exhibit 7: Retail non-cash proportion rises from 1% in FY12... Exhibit 8: …to ~8% in FY19

6% 1%1%0% RTGS 8% 1%0% RTGS 3% CCIL Operated System CCIL Operated System 25% Paper Clearing Paper Clearing 52% 36% Retail Electronic Retail Electronic 67% Clearing Clearing Cards Cards

Source: RBI, ICICI Direct Research Source: RBI, ICICI Direct Research

Exhibit 9: Rapid growth in non-cash retail payment 120.0%

100.0% 1.3% 1.9% 2.8% 3.5% 4.5% 5.2% 6.7% 7.9% 80.0% 60.0% 40.0%

20.0% 0.0% 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

RTGS CCIL Operated System Paper Clearing Retail Electronic Clearing Cards PPIs

Source: RBI, ICICI Direct Research

Credit cards volumes to witness continued growth ahead A slew of factors ranging from the government’s focus on digitisation, young population with faster technology adaptability, higher mobile penetration, rising e-commerce, etc, have led to a rise in digital payment and credit cards as an avenue. Improving payment infrastructure (PoS machines) has further supported the acceptance of card technology for payment. The Indian card industry comprises ~92.4 crore debit cards (~95% of issued cards at ~97.1 crore as of January 2019). Credit cards comprise the remaining 5% of issued cards at ~4.7 crore (5.25 crore as of September 2019). Credit cards have witnessed faster growth at 32% CAGR in FY16-19, primarily led by demonetisation, which has provided an impetus to non-cash payments. Total spends using credit cards were at ~| 6 lakh crore in FY19 with per card spend at ~| 1.3 lakh per annum. As per Crisil Research, credit card spend is expected to grow ~2.5x to ~| 15 lakh crore in FY24E.

Exhibit 10: Average ticket per transaction | E-wallets UPI PPIs Debit card Credit cards

Avg transaction amount 450 1700 630 1300 3400 Source: RBI, DHRP, ICICI Direct Research As per Crisil research, the e-commerce industry in India is estimated to be ~| 2.9 lakh crore in FY19. Out of this, ~30-35% of payments are been made using credit cards, which is at ~| 101675 crore. Going ahead, the e- commerce industry is expected to grow at 23-28% CAGR in FY19-24E to | 9 lakh crore, which will provide further impetus to usage of credit card.

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Exhibit 11: Credit card issuance & spends on the rise post demonetisation Credit cards Ticket size Per card Volume Value (| Cards Transaction per Sep'19 annual spend (Million) Billion) (Million) per card transaction (|) (|) 2011-2012 320 966 17.8 18.0 3020 54339 2012-2013 397 1230 17.8 22.3 3100 69209 2013-2014 509 1540 19.6 26.0 3025 78765 2014-2015 615 1899 21.0 29.3 3087 90437 2015-2016 786 2407 25.0 31.4 3063 96264 2016-2017 1087 3284 30.0 36.2 3021 109460 2017-2018 1405 4590 37.0 38.0 3266 124045 2018-2019 1763 6033 47.0 37.5 3423 128372 2019-2020* 1041 3546 52.5 19.8 3407 67542 FY12-16 CAGR 25.2% 25.6% 8.9% 15.0% 0.4% 15.4% FY16-19 CAGR 30.9% 35.8% 23.4% 6.1% 3.8% 10.1%

Source: RBI, ICICI Direct Research * pertains to April – September 2019 In a bid to move towards a cashless society, the , in its payments vision document (May 2019), has set an objective to achieve ~44% share in point of sale (PoS)-based debit card transaction by FY21. Likewise, banks (both public, private sector banks) have been aggressively deploying swipe machines across the country making inroads in Tier II and III cities. Currently, there are ~37.5 lakh active PoS terminals deployed across India by banks as of FY19. Though banks were adding to the reach of PoS machines, demonetisation in November 2016 provided a fillip to the momentum. Of the overall active PoS, first 14 lakh machines were installed in 30 years while post demonetisation in the next three years, ~24 lakh machines were added. This is expected to grow to ~50 lakh ahead.

Exhibit 12: PoS strength at ~37.5 lakh; target to reach ~50 lakh 40.0 37.2 35.0 30.8 30.0 25.3 25.0 20.0 13.9 15.0 11.3 10.0 5.0 0.0 March, 2015 March, 2016 March, 2017 March, 2018 March, 2019

No. of POS Terminals in India (in )

Source: RBI, ICICI Direct Research

Private banks lead in credit cards; foreign banks ahead in utility In terms of cards, India has seen healthy growth in cards in the last decade, pushed mainly by private banks. As of FY19, ~4.7 crore (5.25 crore as of September 2019) credit card have been issued by the banking sector, as a whole. In FY12-16, value of transaction undertaken through credit card increased at 25.6% CAGR. However, this pace increased further at 35.8% CAGR in FY16-19 to | 6 lakh crore. Value of transaction undertaken through credit card is dependent on three factors – 1) number of cards issued, 2) number of transaction per card per annum and 3) amount per transaction. In FY12-16, higher usage of credit card i.e. transaction per card per annum increased from 18 to 36.9. This led to an increase in value of credit card transaction. However, post demonetisation, there was an increase in number of credit cards issued. This is evident from the rise in outstanding

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credit cards from 2.1 crore in FY16 to 3.78 crore in FY19. During the last seven years, value per transaction broadly remained stable at ~| 3200-3500. Of total credit card at ~4.7 crore (5.25 crore as of September 2019), private banks have ~3.1 crore (3.44 crore as of September 2019) cards contributing ~65% (~65.5% as of September 2019) of total issued cards. In terms of value, per annum transaction undertaken was at ~| 6 lakh crore in FY19 (| 3.54 lakh crore in April-September 2019). With average value per transaction at | 3500 and ~37-40 transactions undertaken per annum, utility per card was at | 128372 in FY19 (only PoS transaction). Private banks contribute nearly two-third of total transactions at PoS undertaken in terms of value at | 37099 crore (in Sep’19) of total transaction at | 59845 crore (in Sep’19). Among constituents, the value per transaction is broadly similar across various issuing banks. However, the number of transactions per card per annum defines the difference in card utility among the peers. For PSU banks, number of transactions per card per annum ranges at ~35. Private banks have higher number of transactions per card per annum at ~39 per card. Foreign banks have substantially higher number of transaction per card per annum at ~66, led by an affluent customer base.

Exhibit 13: Foreign banks have highest utilisation of credit card (Sep’19) Outstanding Amount of Transacti No. of Value of per Utility of Sep'19 cards (Sep transactions on per Transactions transaction (|) card (|) 2019) (| Millions) card PSB 11617996 35142310 121073 3.0 3445 10421 Private 34493345 110781428 370996 3.2 3349 10756 Foreign 6478378 34364451 106384 5.3 3096 16421 Total 52589719 180288189 598453 3.4 3319 11380

Source: RBI, ICICI Direct Research

In terms of volume as well as value, HDFC Bank and SBI lead in terms of credit cards market share, with ~43-45% market share. This is due to higher number of card issued by financiers – HDFC Bank has 1.3 crore cards while SBI has ~94 lakh cards. However, looking at card utilisation, volume of transaction per card is the highest in cards issued by foreign banks - Citibank (~7.8 in April 2019) followed by America Express (~4.6 in April 2019). Apart from this, Union Bank of India has between four and five transactions per month.

Exhibit 14: Higher number of card lead to substantial volume market share (Sep’19) 30 26.4 25 20 17.0 15.2 15 11.4 9.5 10 3.2 5 2.4 2.0

0

BANK

BANK

KOTAK

CITI BANK CITI

ICICI BANK ICICI

INDIA

AXIS BANK AXIS

MAHINDRA

STANDARD

HDFC BANK HDFC

CHARTERED

STATE BANK OF BANK STATE INDUSIND BANK INDUSIND

Source: RBI, ICICI Direct Research

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Exhibit 15: HDFC Bank, SBI have highest market share in value (Sep’19) 28.1 30 25 18.6 20 15 11.6 10.7 7.8 10 7.3 4.0 2.6 5

0

BANK

KOTAK

CITI BANK CITI

EXPRESS

ICICI BANK ICICI

INDIA

AMERICAN

AXIS BANK AXIS

MAHINDRA

HDFC BANK HDFC

STATE BANK OF BANK STATE INDUSIND BANK INDUSIND

Source: RBI, ICICI Direct Research

Debit cards – support to usher in cashless economy India has a large number of debit cards. However, primary usage was restricted to cash withdrawal. Therefore, in spite of such a huge outstanding card base, the goal of a cashless economy remains far distant. In addition, it does not enable intermediaries to generate fee based income. However, there has been a structural shift, though gradual, in the usage of debit card. On the one hand, usage of debit card at ATMs has been on a continuous decline from | 60791 per card per annum to | 36528 in FY19, primarily led by a reduction in the number of transaction per card per annum. However, usage of debit cards at PoS is on the rise; boosted by demonetisation. Number of transaction per card per annum has risen from 1.4 in FY12 to 2.1 in FY16, which more than doubled to 4.9 in FY19. This increase is attributable to demonetisation wherein scarcity of cash pushed usage of cards.

Exhibit 16: Transaction per debit card has been on gradual decline Debit Cards - ATM Ticket size Value Per card Volume Cards Transaction per Sep'19 ( annual spend (Million) (Million) per card transaction Billion) (|) (|) 2011-2012 5082 13998 230 22.1 2754 60791 2012-2013 5308 16683 282 18.8 3143 59182 2013-2014 6088 19648 337 18.1 3227 58326 2014-2015 6996 22279 400 17.5 3184 55747 2015-2016 8073 25371 565 14.3 3143 44934 2016-2017 8563 23603 671 12.8 2756 35166 2017-2018 8602 28988 781 11.0 3370 37126 2018-2019 9860 33108 906 10.9 3358 36528 FY12-16 CAGR 12.3% 16.0% 25.1% -10.3% 3.4% -7.3% FY16-19 CAGR 6.9% 9.3% 17.1% -8.7% 2.2% -6.7%

Source: RBI, ICICI Direct Research

ICICI Securities | Retail Research 11 Sector Update | Banking ICICI Direct Research

Exhibit 17: Higher usage of debit cards; especially post demonetisation Debit Cards - POS Ticket size Per card Volume Value (| Cards Transaction per Sep'19 annual spend (Million) Billion) (Million) per card transaction (|) (|) 2011-2012 328 534 230 1.4 1631 2321 2012-2013 467 743 282 1.7 1591 2636 2013-2014 619 955 337 1.8 1542 2834 2014-2015 808 1213 400 2.0 1502 3036 2015-2016 1174 1589 565 2.1 1354 2815 2016-2017 2399 3299 671 3.6 1375 4915 2017-2018 3343 4601 781 4.3 1376 5892 2018-2019 4414 5935 906 4.9 1344 6548 FY12-16 CAGR 37.6% 31.3% 25.1% 9.9% -4.5% 4.9% FY16-19 CAGR 55.5% 55.1% 17.1% 32.8% -0.2% 32.5%

Source: RBI, ICICI Direct Research For the first time since demonetisation, payment through debit cards at kirana & retail store has gained traction compared to ATM transactions. ATM transaction, which usually forms more than two-third of total card volume, saw a dip in market share led by higher PoS transaction. Accordingly, share of PoS in total volume increased to 34% from 30% in January 2019. With increasing penetration of e-commerce transaction & digitisation wave in in Tier II & III cities, RBI is aiming at~44% share of PoS transaction by FY21. Among constituents, foreign banks witness highest transaction value, though it still remains lower than value of transaction through credit card. Individually, HDFC Bank and SBI continue to command highest market share led by high number of customers.

Exhibit 18: Foreign banks have highest utility in debit cards Outstanding Amount of Transacti No. of Value of per Utility of Sep'19 cards (Sep transactions on per Transactions transaction (|) card (|) 2019) (| Millions) card PSB 609614786 870655393 2270843 1.4 2608 3725 Private 154622220 310675537 951852 2.0 3064 6156 Foreign 6213843 15197292 38416 2.4 2528 6182 Payment Bank 53289155 5408807 7869 0.1 1455 148 SFB 11853844 7018121 26067 0.6 3714 2199

Total 835593848 1208955150 3295047 1.4 2726 3943 Source: RBI, ICICI Direct Research

ICICI Securities | Retail Research 12 Sector Update | Banking ICICI Direct Research

Exhibit 19: SBI, HDFC Bank have highest market in debit card volume at PoS (Sep’19) 30 28.2

25

20

15 12.3 9.7 10 6.7 4.6 5 3.5 2.6 2.6 2.4

0

ICICI BANK ICICI

AXIS BANK AXIS

HDFC BANK HDFC

BANK OF INDIA OF BANK

BANK OF BARODA OF BANK

STATE BANK OF INDIA OF BANK STATE

UNION BANK OF INDIA OF BANK UNION

KOTAK MAHINDRA BANK MAHINDRA KOTAK NATIONAL PUNJAB

Source: RBI, ICICI Direct Research

Exhibit 20: Higher volume coincides with value of transaction (Sep’19) 35 29.8 30 25 20 15 13.2 10.3 10 7.6 4.1 3.5 5 2.4 1.9 1.6

0

CITI BANK CITI

ICICI BANK ICICI

AXIS BANK AXIS

HDFC BANK HDFC

BANK OF INDIA OF BANK

BANK OF BARODA OF BANK

STATE BANK OF INDIA OF BANK STATE

KOTAK MAHINDRA BANK MAHINDRA KOTAK PUNJAB NATIONAL BANK NATIONAL PUNJAB

Source: RBI, ICICI Direct Research

ICICI Securities | Retail Research 13 Sector Update | Banking ICICI Direct Research

Indian brokerage industry – perspective and structure The Indian broking industry is very fragmented with large number of participants (~3755/3099 registered with Sebi in cash/derivative market). Many of these may be propriety desk, still a large number of brokers offer trading services to customers. In the last six years, Indian markets have witnessed a spurt in volumes at ~34.4% CAGR from FY13 to FY19. Following global trend of higher tilt towards options, derivatives witnessed robust traction at 35.4% CAGR from | 155400 crore in FY13 to | 959000 crore in FY19, while equity (Cash) ADTO grew only by ~18.1% CAGR in FY13-19 to | 35200 crore. The Indian has undergone developments over several years in terms of yields, products and customer services. In the initial phase, Indian brokerages were to be divided in two categories – bank led brokers and non- bank led brokers. Majority of these brokerages were full service brokers with services spanning from providing platform for trading, settlement services, investment advisory (research), and wealth management. In order to counter the volatility of markets and thereby business, brokerages started on the path of diversification – the first step being distribution of financial products – and mutual funds. Later, brokerages entered next level of diversification through entry into new line of business spanning from to credit disbursement through NBFC. The Indian brokerage industry has now witnessed entry of new category of brokers – discount brokers that offer basic transactional service at low fixed brokerage irrespective of the size of trade quantum. Apart from transactional service, these brokers provide various product used for analysis and research services at additional cost.

Exchange volumes skewed towards derivatives in last 5 years Option segment witnessing higher share at 92% The Indian stock market has been witnessing a continuous rise in volumes 16 traded in FY15-Q2FY20. However, there has been a growing divergence 14 between cash and derivatives product segment. While the proportion of 12 cash segment has remained steady at ~3% of total volumes, option as a 10 8 13.4 product has been gaining prominence with share in total volume rising from 11.4 6 8.7 79% in FY15 to 88% in FY19 and 92% in Q2FY20. 4 5.7 2 2.6 2.3 3.2 Exhibit 21: Market volume tilting towards options crore lakh ADTO| in 0 0.5 0.5 0.6 0.8 0.9 0.8 0.9 ADTO in | crore FY17 FY18 FY19 Q1FY20 Q2FY20 Propn

Cash Intraday 16600 23300 26048 Cash Futures Options

Cash Delivery 8100 9600 9152 Source: NSE, ICICI Direct Research Cash 24700 33000 35200 33629 34023 2.3% Futures (NSE) 62361 82959 87564 79951 89734 6% Stocks (NSE) 44877 63405 65109 55955 61020 4% Index (NSE) 17484 19555 22455 23996 28714 2% Options (NSE) 318164 587711 870503 1136812 1339202 92% Stocks (NSE) 24627 39248 50735 45480 52299 4% Index (NSE) 293537 548463 819768 1091332 1286903 88% F&O total 382100 671000 959000 1216763 1428936 97.7% Total ADTO 406800 704000 993000 1250392 1462959

Source: NSE, ICICI Direct Research

ICICI Securities | Retail Research 14 Sector Update | Banking ICICI Direct Research

Exhibit 22: Options forming ~92% of market volume 16 14 12 10 8 13.4 11.4 6 8.7 4 5.7 ADTO in | lakh crore lakh ADTO| in 3.2 2 2.6 2.3 0.9 0.8 0.9 0 0.5 0.5 0.6 0.8 FY 15 FY 16 FY 17 FY18 FY19 Q1FY20 Q2FY20 Cash Futures Options

Source: NSE, ICICI Direct Research

Exhibit 23: Internet based trading on the rise in last five years 35 30 25 20 15

of total volume) of total 10 (% 5 0 FY14 FY15 FY16 FY17 FY18

Cash F&O

Source: NSE, ICICI Direct Research

Exhibit 24: Increase in market share of top five & 10 members 40 35 30 25

20 (%) 15 10 5 0 Mar-16 Mar-17 Mar-18 Mar-19 Nov-19 Top 10 brokers contribute ~63% of share (Sep’19) Top 5 Top 10

Source: NSE, ICICI Direct Research 13%

37% Snapshot of brokerages in India The Indian broking industry has a large number of players. However, in terms of number of active clients top 10 brokers contribute to ~63% of the industry size. Among peers, has the highest number of active clients with ~13% market share, followed by ~51% market share 50% contributed by next nine players. In terms of active clients, Zerodha has largest share of active clients, which were at 69%, compared to other players Zerodha Next top 9 brokers Others wherein active clients as a percentage of total was in the range of 24-32%.

Source: NSE, ICICI Direct Research

ICICI Securities | Retail Research 15 Sector Update | Banking ICICI Direct Research

Exhibit 25: Financials of brokers (FY19) | crore Kotak Sec HDFC Sec Axis Sec Moti JM Geojit Angel Zerodha Revenue from operation 1708 782 190 1120 343 288 731 880 Broking Income 868 526 160 668 121 223 501 490 Revenue ex interest income 1236 702 172 1045 298 288 542 712 Revenue ex interest inc/ Total Rev 72% 90% 91% 86% 87% 100% 74% 81% Total expense 1093 287 142 750 315 230 640 320 PAT 403 330 73 173 23 35 79 400 Total opex/total revenue 64% 37% 75% 70% 92% 80% 88% 36%

Source: Company, Media articles, annual report, DRHP, ICICI Direct Research

Exhibit 26: Proportion of clients remain broadly in a range across brokers Q2FY20 HDFC Sec Kotak Sec Motilal IIFL Sec Angel* JM Geogit Edelweiss 5 Paisa Zerodha Total clients ( in Lakh) 21.0 19.0 13.6 12.6 8.3 11.0 NA 10.1 11.0 4.2 15.0 Active clients ( in Lakh) 6.4 4.8 4.6 3.3 2.0 4.3 2.0 1.6 1.2 3.0 10.4 Active % of total clients 31% 27% 32% 32% 24% 39% NA 16% 11% 70% 69%

Source: Company, NSE, media articles & websites, annual report, DRHP, ICICI Direct Research

Exhibit 27: ADTO and yield of traditional and discount brokers Kotak Sec Motilal Sec IIFL Sec JM 5 paisa Zerodha Q1FY20 Q2FY20 Q1FY20 Q2FY20 Q1FY20 Q2FY20 FY18Q1FY19* Q1FY20 Q2FY20 Q1FY20Q2FY20* Q1FY20*

Total ADTO (| crore) 21207 23800 18900 20600 16934 19161 10890 13169 8205 10748 16805 18992 126900 Derivative (| crore) 17507 20536 17200 19000 15856 18021 9211 11318 7264 9861 16050 17923 123220 Cash (| crore) 3700 3264 1700 1600 1078 1140 1679 1851 941 887 755 1070 3680

Market share total 1.7% 1.6% 1.5% 1.4% 1.3% 1.3% 1.5% 1.3% 0.6% 0.7% 1.9% 2.0% 10.0% Market share deriv 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.4% 1.5% 0.6% 0.7% 1.3% 1.3% 0.0% Market share cash 10.0% 9.0% 4.6% 4.4% 2.9% 3.1% 8.8% 10.3% 2.6% 2.4% 2.1% 3.0% 10.0%

* Angel DRHP, annual reports

Source: Company, NSE, media articles, ICICI Direct Research Sub-brokers have been integral part of traditional In terms of business model, traditional broker had sub-broker as integral part of distribution franchise. Motilal Oswal and Angel have been strong players in the industry with a large sub-broker franchise. This leads to fillip to brokerage revenue enabling it as good business model for large traditional brokers. Going ahead, we expect smaller brokers to become sub-broker of larger franchise leading to consolidation in industry led by increased competitive intensity.

Exhibit 28: Broker-wise share of franchise FY19 Kotak Sec Sharekhan MOSL Angel# IIFL Sec No of franchise <1100 2600 2500 <11000 500* Volume share of franchise (ADTO in %) ~10-15 30 70 50 ~20-25

*Operational franchise, # Angel numbers are as per prospectus

Source: Company, media articles, ICICI Direct Research

Scaling of margin funding book to contribute to revenue Margin funding i.e. providing funding in lieu of securities held by client in his account is one of the avenues to generate interest based income for Indian brokers. Traditionally brokers have been providing this facility to their clients and generating interest income. Brokers provide margin funding on a rolling

ICICI Securities | Retail Research 16 Sector Update | Banking ICICI Direct Research

basis for different tenures. Therefore, actual interest generating margin funding book is seen at 1.5-2x of the closing balance as depicted in the Exhibit below. This avenue remains attractive as yields generated from margin funding book ranges between 12% and 18% on a rolling basis.

Exhibit 29: Margin funding book broker-wise as reported in balance sheet (FY19) 800 660 686 700 581 600 Funding book is in the range of 1.5-2x of what is 500 450 reported as closing balance 400 300 227 200 As of September 2019, majority of players have 103 78 100 24 52 witnessed decline in margin funding book due to lack 0 of funding options (e.g.: commercial papers) Kotak Sec HDFC Sec Sharekhan Axis Sec Moti Angel 5Paisa Geojit IIFL Securities

Source: Company, annual report, DRHP ICICI Direct Research

Exhibit 30: Interest as percentage of total income rising…. Exhibit 31: Share of broking income moderating

100 86 100 80 84 80 74 77 76 80 65 80 67 69 54 51 56 51 55 56 60 44 60 44 40 28 30 27 40 28 26 20 19 14 12 16 14 20 9 8 20 10 6 0 3 3 0 0

Brokergae Income/ Total Income Interest Income/ Total Income Brokergae Income/ Total Income Interest Income/ Total Income

Source: Company, Annual reports, DRHP, ICICI Direct Research Source: Company Annual reports, DRHP,, ICICI Direct Research

Business model to shift to advisory to sustain revenues In the western stock market, entry of discount brokers have led to traditional brokers mould their business model towards fee based income. Recently, brokers including Charles Schwab, TD Ameritrade, E-Trade have dropped trading fees and are offering nearly zero commission to clients. Accordingly, the aim is to generate revenue from service offering including ETF and advisory services rather than earlier regime of transaction based commission. In the wake of changes undertaken in domestic stock market and broking industry, evolution in terms of business model is imminent. In our view, the Indian broking industry is set to witness a gradual shift from transaction based model to service or fee based model offering services like wealth management and investment advisory. A shift towards fee based model is already in foray with brokers focussing on building non transaction - wealth AUM (refer exhibit below). Apart from advisory services, focus on fund based activities including margin funding and loan against shares, which the brokers are currently engaged, is seen further increasing, enabling brokers as sustainable avenue of contribution to earnings.

ICICI Securities | Retail Research 17 Sector Update | Banking ICICI Direct Research

Exhibit 32: Business model to focus on generation of AUM AUM (| crore) Motilal Edelweiss IIFL Wealth JM AMC 38,500 35,900 23,420 Wealth 18,100 26,950 48,041 DP/Custodian assets 60,100 21500# 28,907 Distribution 9,900 80850* 72,730

Total 126,600 165,200 173,098 14,037 *Includes retail demat AUM, # comprises fully of custodian & clearing assets

Source: Company, ICICI Direct Research

Bank led brokerages maintain top slot amid competition Emergence of discount brokers offering low brokerage on per order basis has led to a shift in market share in terms of active clientele. Market share of top 10 brokers in terms of number of clients moderated to ~63% in September 2019 vs. ~65% in July 2019. Gaining market share, RKSV and 5Paisa are new additions in top 12 list of brokers in terms of clientele. Both have climbed three places in ranking to nine and 11, respectively.

Exhibit 33: Active clients of top brokers Active Clients (in '000) FY14 FY15 FY16 FY17 FY18 FY19 Jul-19 Sep-19 Nov-19 Mkt share Zerodha 18 30 62 166 541 981 1008 1045 1113 12.3% ICICI Securities 501 595 560 618 798 881 895 906 935 10.3% HDFC Securities 279 348 408 483 602 651 647 635 648 7.1% Sharekhan 275 343 336 366 535 505 501 481 486 5.4% Kotak Securities 223 268 247 274 369 447 456 463 485 5.3% Axis Securities 77 120 184 259 405 390 377 338 311 3.4% Angel Broking 140 160 171 230 364 427 432 432 455 5.0% Motilal Oswal 123 153 166 207 308 326 330 326 333 3.7% RKSV Securities 188 277 376 4.1% Karvy 126 172 167 181 245 267 268 265 283 3.1% 5 Paisa Capital Ltd 158 234 295 3.3% SBI CAP Securities 68 114 126 169 214 212 213 213 220 2.4% IIFL Securities 201 199 2.2% Geojit Financial Services 157 157 1.7% Edelweiss Broking 115 117 1.3%

Source: NSE, ICICI Direct Research Among discount players, Zerodha has been one of the prominent player witnessing continuous increase in market share to ~12.3% in November 2019. Apart from Zerodha, RKSV and 5Paisa are next upcoming discount brokers gaining market share. In addition, new players like Bajaj Financial Securities (Bajaj Financial Services has launched subscription based brokerage plans) and are also in row to formally launch fixed brokerage plans. One of the peculiarity witnessed in terms of clientele is that discount brokers have a large proportion to the extent of 60-70% of first time investors in the age bracket of 25-40 years. With focus on engaging with incremental or new investors entering stock markets, traditional brokers have started to offer fixed brokerage products mainly in the derivative segment. As depicted in the Exhibit below, traditional brokers including Angel Broking, Edelweiss and Axis Securities has launched fixed brokerage plans. Revenue model of discount brokers is based on fixed brokerage per order rather than percentage of trade value. Players like Zerodha cater to ~20-40 lakh order/trade per day, though ~50% of orders generate revenue (Zerodha charges nil brokerage on cash delivery trades). Similarly 5Paisa caters to ~2- 3 lakh order per day and charges flat brokerage on per order basis. Increase in clientele and orders provides with the top-line in terms of brokerage fees,

ICICI Securities | Retail Research 18 Sector Update | Banking ICICI Direct Research

however, sustainability of this growth is yet to be seen. While low cost enables discount brokers to maintain business parity, sustainable rise in volumes remains most key driver for discount brokers to make meaningful profitability.

Exhibit 34: Broking plans - traditional players moving to fixed plans Brokers Angel Edelweiss Axis Sec Zerodha Upstox 5 Paisa

Discount plans I Trade Prime Edelweiss Lite Trade @ 20*

Brokerage Equity Delivery Nil ₹10 or 0.01% whichever lower |. 20 Nil Nil |. 10 Equity Intraday |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 20 |. 10 Equity Futures |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 20 |. 10 Equity Options |. 20 |. 10 |. 20 |. 20 |. 20 |. 10 Currency Futures |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 10 Currency Options |. 20 |. 10 |. 20 |. 20 |. 10

Source: NSE, company websites, media articles, ICICI Direct Research Traditional brokers had started with the business model encompassing online & offline model. Hence, requirement of headcounts have been higher compared to discount brokers. Therefore, as seen in the exhibit below, number of employees for traditional brokers stands higher on relative basis.

Exhibit 35: Broker-wise headcounts 6000 5000 4000 3000 2000 1000 0 Sharekhan Kotak Sec Motilal* HDFC Sec Angel Zerodha 5 Paisa * Geojit

No of employees

Source: Company, annual report, media articles, ICICI Direct Research

Sebi tightens rules on clients funds; large brokers could gain In June 2019, Sebi released a circular tightening rules for usage of client’s funds by brokers. As per the new rules, brokers need to transfer securities to their client accounts within one day of receiving payment and not put to any other use. In case, where the client defaults on payment, brokers have been asked to hold the securities up to five days post which the broker can liquidate securities in the market and recover their dues. Further, Sebi has mandated that securities with brokers for non-receipt of payment from clients is not be used as collateral for any of proprietary trades or can be pledged with financial institutions. Post this circular, brokers will not be able to use client stock as collateral thereby impacting revenue stream of few brokers. In a recent announcement, NSE has suspended Karvy Stock broking license due to non-compliance of regulatory provisions of the exchange. As per media sources, market regulator estimates that the broker has misused client securities worth ~| 2800 crore, pledging the securities with financial institutions. Currently, NSE has appointed EY India Ltd to conduct a forensic

ICICI Securities | Retail Research 19 Sector Update | Banking ICICI Direct Research

audit and findings of the same is awaited. However, such events act as trust deficit and can lead to large brokers gaining market share. IBC amendment; final piece in jigsaw In a move to remove the final hurdle for companies taking over stressed companies, the Union Cabinet approved an amendment to the Insolvency and Bankruptcy Code (IBC) that prohibits attaching assets of companies resolved under the mechanism for offences/crime committed by the previous management or promoters. This provides long-awaited relief to acquirers as it establishes the principle of equity, that acquirers can take over assets clear of all claims and, especially, past doings of the promoters and directors. The moves set a precedence for resolution of other pending cases. Early resolution of these account will bring systemic NPA down and aid profitability in the current year. Amendment to existing credit guarantee scheme To provide liquidity to troubled NBFCs, the approved changes to the partial credit guarantee scheme introduced in Budget 2019- 20. Lenders could now buy assets of NBFCs that are rated BBB+ & above (earlier AA & above). The scheme has been extended till June 30, 2020 with a guarantee by the government on the purchased asset capped at first loss of 10% of bought asset or | 10000 crore, whichever is lower. This move is expected to provide | 1 lakh crore of liquidity to NBFCs but the decision to buy stressed asset from NBFCs is at the discretion of banks.

Indian Bank Indian Bank’s stock price witnessed a knee jerk reaction on the Indian Bank Price Chart announcement of its amalgamation with . Given the bank’s healthy capitalization and a favourable credit-deposit ratio, the bank is 14,000 450 poised to benefit in the current environment while post-amalgamation a 12,000 400 350 better liability franchise and healthy capital position is seen improving 10,000 300 market share of merged entity. Accordingly, we believe that fears on 8,000 250 integration process, asset quality of merged entity & future growth of bank 6,000 200 are overstated. The merged bank is currently trading ~0.5 FY21E ABV, 4,000 150 100 which is cheaper compared to its peers. Factoring in synergies of merger to 2,000 50

pan out ahead, strong capital position and better asset quality, we remain 0 0

Jan-17 Aug-17 Mar-18 Jul-18 Oct-18 Feb-19 May-19 Sep-19 Dec-19 May-17 Nov-17 positive on Indian Bank. Therefore, we remain positive on the stock & upgrade to BUY from HOLD recommendation. However we lower our price target to | 130 per share (earlier | 220) valuing it at ~0.6x FY21E ABV. Indian Bank (R.H.S) Nifty (L.H.S) Exhibit 36: Key Financial and valuation (post-merger with Allahabad bank) | crore FY18* FY19* FY20E** FY21E** NII 5146 6263 12908 14198 PAT 1405 1259 525 2000 EPS 26.2 6.7 3.8 14.6 P/E 3.9 15.4 26.9 7.1 ABV 245 226 210 225 P/ABV 0.42 0.46 0.49 0.46 RoA 0.5 0.1 0.1 0.3 RoE 7.1 1.7 1.2 4.4

Source: Company, ICICI Direct Research * Indian Bank pre-merger, ** Proforma merged entity (Indian Bank and Allahabad Bank)

ICICI Securities | Retail Research 20 Sector Update | Banking ICICI Direct Research

Annexure

Exhibit 37: Asset quality trend Asset quality trend GNPA (| crore) NNPA (| crore) Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 PSU coverage Bank of Baroda 55,121 53,184 48,233 78,681 66,714 21,059 19,131 15,610 35,886 24,530 SBI 2,05,864 1,87,765 1,72,750 1,68,494 1,68,894 94,810 80,944 65,895 65,624 66,344 Indian Bank 12,334 13,198 13,353 13,453 13,453 7,060 7,571 6,793 6,854 6,854

Private coverage Axis Bank 30,938 30,855 29,789 29,405 27,053 12,716 12,233 11,276 11,037 10,706 City Union Bank 848 892 977 1,026 1,026 498 528 591 621 621 Development 410 445 439 470 491 155 163 154 163 200 IndusInd Bank 1,781 1,968 3,947 4,200 4,413 788 1,029 2,248 2,381 2,448 HDFC Bank 10,098 10,903 11,224 11,769 12,508 3,028 3,302 3,215 3,567 3,791 Jammu & Kashmir Bank 6,068 6,860 6,221 6,252 2,489 3,049 3,240 3,382 3,382 Yes Bank 3,866 5,159 7,883 12,092 17,134 2,020 2,876 4,485 6,883 9,757

Source: Company, ICICI Direct Research

Exhibit 38: Quarterly margin trend NIM (%) Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 PSU coverage Bank of Baroda 2.5 2.7 2.6 2.7 2.9 2.6 2.8 Indian Bank 2.9 3.1 3.0 2.9 3.0 2.9 2.9 SBI 2.5 2.8 2.7 2.8 2.8 2.8 2.9

Private coverage Axis Bank 3.3 3.5 3.4 3.5 3.4 3.4 3.5 9.3 10.3 10.3 10.5 10.7 10.5 8.2 City Union Bank 4.4 4.2 4.3 4.4 4.4 4.1 4.0 Development Credit Bank 4.1 3.9 3.8 3.8 3.8 3.7 3.7 HDFC Bank 4.3 4.2 4.3 4.3 4.4 4.3 4.2 IndusInd Bank 4.0 3.9 3.8 3.8 3.6 4.1 4.1 Jammu & Kashmir Bank 3.2 3.7 3.7 3.9 4.1 3.9 4.0 Kotak Mahindra Bank 4.4 4.3 4.2 4.3 4.5 4.5 4.6 Yes Bank 3.4 3.3 3.3 3.3 3.1 2.8 2.7 Source: Company, ICICI Direct Research Exhibit 39: Key financial of industry as of Q2FY20 (| crore) Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 NII 84835 94144 92132 99136 104651 102336 106102 Growth YoY 1.3 27.4 11.3 15.7 23.4 8.7 15.2 Other income 47391 37110 37019 41299 49070 42666 50354 Growth YoY 0.7 -11.4 -29.1 8.1 3.5 15.0 36.0 Total operating exp. 69366 64525 64068 71463 77857 71040 75068 Staff cost 34342 32053 32749 35995 36478 36200 37803 Operating profit 62860 66730 65084 68973 75864 73962 81388 Growth YoY -13.0 8.1 -13.8 9.9 20.7 10.8 25.1 Provision 148276 77236 70471 65837 107142 56111 60502 PBT -85460 -10552 -5437 3136 -31719 17773 20813 PAT -55648 -7130 -4404 -197 -21535 11209 6645 Growth YoY NM NM NM NM NM NM NM GNPA 1024586 1002682 997247 961129 920300 924271 921911 Growth YoY 31.9 20.9 18.7 8.5 -10.2 -7.8 -7.6 NNPA 517775 485181 463082 417837 354507 353766 341896 Growth YoY 2.3 -11.0 -31.5 -27.1 -26.2

Source: Capitaline, Company, ICICI Direct Research

ICICI Securities | Retail Research 21 Sector Update | Banking ICICI Direct Research

Exhibit 40: ICICI Direct Coverage Universe (BFSI) CMP M Cap EPS (|) P/E (x) P/ABV (x) RoA (%) RoE (%) Sector / Company (|) TP(|) Rating (| Bn) FY19FY20E FY21E FY19FY20E FY21E FY19 FY20E FY21E FY19FY20E FY21E FY19FY20E FY21E BoB (BANBAR) 102 130 Buy 473 1.8 5.0 20.9 57.2 20.4 4.9 1.2 1.0 0.9 0.1 0.2 0.7 0.9 2.9 10.9 SBI (STABAN) 335 400 Buy 2988 1.0 18.4 31.1 345.2 18 10.8 2.4 1.8 1.6 0.0 0.5 0.7 0.5 8.5 12.5 Indian Bank (INDIBA) 102 130 Buy 62 6.7 21.7 40.6 15.1 4.7 2.5 0.4 0.4 0.4 0.1 0.3 0.6 1.7 5.3 9.4 Axis Bank (AXIBAN) 760 865 Buy 2141 18.1 21.3 49.0 42 35.6 15.5 3.5 2.8 2.4 0.6 0.7 1.4 0.6 0.7 1.4 City Union (CITUNI) 234 240 Buy 172 9.3 10.4 12.0 25.2 22.5 19.5 4.0 3.4 3.0 1.6 1.6 1.6 15.3 14.8 14.8 DCB Bank (DCB) 171 220 Buy 53 10.5 12.6 16.7 16.2 13.5 10.2 1.9 1.8 1.5 1.0 1.0 1.2 12.2 12.9 14.8 HDFC Bank (HDFBAN) 1,272 1,440 Buy 6964 38.7 47.7 56.8 32.9 26.7 22.4 4.8 4.2 3.6 1.8 1.9 1.9 16.5 16.3 17.0 IndusInd Bank (INDBA) 1,513 1,400 Buy 1048 60.9 83.4 110.7 24.8 18.1 13.7 3.6 2.9 2.5 1.6 1.9 2.1 14.5 16.8 18.4 J&K (JAMKAS) 30 48 Hold 17 8.3 9.4 14.5 3.6 3.2 2.1 0.5 0.5 0.4 0.5 0.5 0.6 7.3 7.7 11.0 Kotak Bank (KOTMAH) 1,685 1,700 Hold 3219 25.5 33.7 39.8 66.1 50.0 42.4 7.8 6.9 6.0 1.7 1.9 1.9 12.1 14.0 14.4 Yes Bank (YESBAN) 47 UR Reduce 120 6.4 -1.6 6.5 7.3 -30.0 7.3 0.5 0.7 0.8 0.4 -0.2 0.6 5.6 -1.9 6.7 Bandhan (BANBAN) 497 680 Buy 799 16.4 22.0 28.2 2.9 2.1 1.7 0.5 0.5 0.4 3.9 4.8 4.3 19.0 27.2 26.7 IDFC First (IDFBAN) 45 54 Buy 216 -3.4 -0.5 1.5 -13.3 -90.2 30.1 1.3 1.3 1.3 -1.1 -0.1 0.4 -9.8 -1.4 3.9

Source: Bloomberg, ICICI Direct Research

ICICI Securities | Retail Research 22 Sector Update | Banking ICICI Direct Research

RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock

Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, (East) – 400 093 [email protected]

ICICI Securities | Retail Research 23 Sector Update | Banking ICICI Direct Research

ANALYST CERTIFICATION

I/We, Kajal Gandhi, CA, Vishal Narnolia, MBA and Harsh Shah, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a SEBI registered Research Analyst with SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, , general insurance, fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

Recommendation in reports based on technical and derivative analysis centre on studying charts of a stock's price movement, outstanding positions, trading volume etc as opposed to focusing on a company's fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports.

Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.

ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Retail Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Research.

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ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co- managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report.

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.

Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

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ICICI Securities | Retail Research 24

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