“Low Adverse Risk to Earnings from Hereon”

“Low adverse risk to earnings from hereon”

Banking Sector Q2 FY21 Post Earnings Review

11 Nov 2020

Table of Content

1 Q2FY21 Earnings Summary – Key Takeaways 3

2 Top Picks & Valuation 5

3 Competitor Benchmarking 7-8

4 Companies – Q2 FY21 Earnings & Con-call Highlights

ICICI Bank 10-14

Axis Bank 15-19

State Bank of India 20-24

IndusInd Bank 25-29

Karur Vysya Bank 30-34

Kotak Mahindra Bank 35-39

HDFC Bank 40-44

Bandhan Bank 45-49

ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS www.krchoksey.com Thomson Reuters, Factset and Capital IQ Q2FY21 Earnings Summary – Key Takeaways

Low upside risks to credit costs • Improvement in outlook for credit costs • The banks have front ended credit costs on higher anticipation of stress assets. • However collection efficiency for larger banks, especially, have fared well. Collections have been between 94%-97% across large banks, especially. There has been a month-on-month improvement in October too. • While it is not as pristine as pre Covid level of 99%, most of the stress book may be restructured. We expect lower credit costs for large banks, especially. • Though asset quality is expected to worsen, the ensuing credit costs have been factored in. • Large banks capturing market share in advances and deposit • The advance growth beat industry trend for select banks while other have been far lower than long term trend. • Large banks and well capitalized banks have fared well with reasonable resource cost even amidst caution. • Despite higher liquidity, banks have not paused on the deposit its acquisition franchise. Larger banks have gained market share at a reasonable cost. NIMs have improved but not secularly • NIMs have improved but this improvement in not secular across banks. • The liquidity drag, likely reversals and mix change is likely to impact NIMs. • Cost to Income ratio improvement unlikely any further • C/I rose sequentially as the previous quarter was an exception. • While some benefits have been structural, favorably impacting FY21. We expect costs to rise from hereon. • We like banks with sustainable fee incomes.

1 Q2FY21 Earnings Summary – Key Takeaways 3

2 Top Picks & Valuation 5

3 Competitor Benchmarking 7-8

4 Companies – Q2 FY21 Earnings & Con-call Highlights

ICICI Bank 10-14

Axis Bank 15-19

State Bank of India 20-24

IndusInd Bank 25-29

Karur Vysya Bank 30-34

Kotak Mahindra Bank 35-39

HDFC Bank 40-44

Bandhan Bank 45-49

Valuation Snapshot Stock CMP Target Reco. Upside RoA P/ABV

New Old New Old FY21 FY22 FY21 FY22

ICICI bank 464 516 495 Acc. Buy 11.2% 1.0% 1.3% 2.41 2.16

Axis Bank 567 630 612 Acc. Buy 11.1% 0.5% 0.7% 1.96 1.80

State Bank of 220 300 262 Buy Buy 36.4% 0.5% 0.5% 0.89 0.82 India

IndusInd Bank 775 850 659 Acc. Acc. 9.7% 1.0% 1.6% 1.49 1.37

Karur Vysya Bank 35 42 42 Buy Buy 20.0% 0.5% 0.6% 0.51 0.48

Kotak Mahindra 1,728 1,800 1,650 Hold Acc. 4.2% 1.9% 2.0% 6.27 5.48 Bank

HDFC Bank 1,340 1,510 1,510 Buy Buy 12.7% 1.9% 1.9% 4.39 3.83

Bandhan Bank 340 431 431 Buy Buy 26.8% 3.1% 3.6% 3.00 2.50

Source: Company Reports, KRChoksey Research, Acc: Accumulate; Closing price as on 9th Nov 2020

1 Q2FY21 Earnings Summary – Key Takeaways 3

2 Top Picks & Valuation 5

3 Competitor Benchmarking 7-8

4 Companies – Q2 FY21 Earnings & Con-call Highlights

ICICI Bank 10-14

Axis Bank 15-19

State Bank of India 20-24

IndusInd Bank 25-29

Karur Vysya Bank 30-34

Kotak Mahindra Bank 35-39

HDFC Bank 40-44

Bandhan Bank 45-49

Healthy sequential performance State Karur Kotak ICICI Axis IndusInd HDFC Bandhan INR Cr Bank Vysya Mahindra Bank Bank Bank Bank Bank of India Bank Bank Net interest income 9,366 7,326 28,181 3,278 601 3,913 15,776 1,923

Pre-provision profit 8,261 6,898 16,460 2,831 449 3,297 13,814 1,628 Provisions 2,995 4,581 10,118 1,964 285 369 3,704 395 Net profit 4,251 1,683 4,574 647 115 2,184 7,513 920 GNPA 5.2% 4.2% 5.3% 2.2% 7.9% 2.6% 1.1% 1.2% NNPA 1.0% 0.9% 1.6% 0.5% 3.0% 0.6% 0.2% 0.4% PCR 81.6% 77.0% 88.2% 76.6% 75.2% 74.9% 84.5% 70.0% GNPA (ex SC standstill) 5.4% 4.3% 5.9% 2.3% 8.0% 2.7% 1.4% 1.5% NNPA (ex SC standstill) 1.1% 1.0% 2.1% 0.6% 3.1% 0.7% 0.4% NA PCR (ex SC standstill) 79.1% 76.0% 64.6% 73.7% 62.6% 72.6% 74.5% NA NIM 3.6% 3.6% 3.1% 4.2% 3.5% 4.5% 4.1% 8.0% CASA 43.8% 44.2% 44.0% 40.2% 33.9% 57.1% 41.6% 38.2% C-D Ratio 78% 91% 66% 88% 78% 78% 85% 111% Capital adequacy ratio 18.5% 18.9% 14.7% 16.6% 18.4% 22.1% 19.1% 25.7% RoA (annualized) 1.5% 0.8% 0.4% 0.8% 0.6% 4.5% 4.1% 3.6% Source: Company Reports, Bloomberg, KRChoksey Research

Healthy sequential performance Kotak ICICI Axis State Bank IndusInd Karur Vysya Bandhan % Change Mahindra HDFC Bank Bank Bank of India Bank bank Bank Bank QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY Net interest 0.9% -4.0% 4.9% -2.3% 5.8% -0.1% -0.9% -10.0% 7.1% -2.2% 5.1% 16.8% 0.7% 16.7% 6.2% 25.8% income Pre-provision -23.3% 20.2% 18.0% 15.9% -0.4% 11.9% -1.1% 8.9% -5.3% 4.1% 25.7% 31.4% 7.7% 18.1% 2.7% 24.5% profit Provisions -60.6% 19.6% 3.7% 8.8% -19.1% 14.4% -13.0% 10.2% 8.9% -1.8% -61.7% -9.6% -4.8% 37.1% -53.5% 171.0%

Net profit 63.6% 19.6% 51.3% 8.8% 9.2% 14.4% 40.5% 10.2% 8.9% -1.8% 75.5% 26.7% 12.8% 18.4% 67.3% -5.3%

Deposits 3.9% 19.6% 1.2% 8.8% 1.5% 14.4% 8.1% 10.2% 1.8% -1.8% 0.0% 12.2% 28.8% 28.8% 9.1% 34.4%

Advances 3.4% 6.4% 2.7% 10.5% -0.2% 6.9% 1.6% 2.1% 3.7% -3.2% 0.4% -4.0% 15.8% 3.5% 5.1% 22.6%

Gross NPA -3.5% -14.6% -9.2% -7.7% -2.9% -22.1% -11.1% 3.7% -1.4% -9.0% -5.0% 6.0% -9.6% -17.9% -13.2% -17.9%

Net NPA -17.1% -34.2% -18.0% -45.2% -14.6% -39.2% -37.8% -51.9% -9.9% -32.6% -26.6% -28.0% -53.7% -46.5% -21.8% -22.1%

NIM (bps) -12bps -7bps 18bps 7bps 11bps 13bps -12bps 6bps 11bps -9bps 12bps -9bps -20bps -10bps -15bps -20bps

Source: Company Reports, Bloomberg, KRChoksey Research

1 Q2FY21 Earnings Summary – Key Takeaways 3

2 Top Picks & Valuation 5

3 Competitor Benchmarking 7-8

4 Companies – Q2 FY21 Earnings & Con-call Highlights

ICICI Bank 10-14

Axis Bank 15-19

State Bank of India 20-24

IndusInd Bank 25-29

Karur Vysya Bank 30-34

Kotak Mahindra Bank 35-39

HDFC Bank 40-44

Bandhan Bank 45-49

Investment Rationale: Advances growth is in line with industry. Well capitalized for growth Advances grew at 6.4% YoY and deposits at 20% YoY. We expect the advance and deposit CAGR at 11% and 13% respectively. The bank’s CAR is at 18.5% and is well capitalized for growth. Improved Economic activity is a risk but the focus on secured book and market share gains is a positive. Operating performance to grow at CAGR 10% over FY20-22E PPoP is expected to clock CAGR 10% over FY20-22 largely on cost efficiencies. We expect the NIMs to normalise as the deposit costs are expected to remain sticky. It grew at 20% YoY in Q2FY21, we expect normalization on account of reversals and mix change. Well provided for in credit costs It has 2.26% of book provided for other than specific provisions and has INR 16,167 Cr of book is low rated. This is ~2% of the book. We believe the pandemic related stress is sufficient provided for. Though we expect 3% of book to restructure or slip, we don’t expect any further adverse credit costs. Valuation We have factored RoA improvement to 100 bps/120bps in FY21/22E on CAGR 11% in advance, 10% in PPoP and 43% in PAT. Its capital position is favorable at a CAR of 18.5% after the capital raise. We don’t expect adverse credit costs as legacy costs have been factored in. We increase our target to INR 516 from INR 495 on improved estimates of profits. The bank is valued at 2x FY22E P/ABV and the subsidiaries at INR 85.

Growth: Sequential improvement in credit costs Asset Quality: GNPA optically lower, some CASA: Improves sequentially assets recognized 80.0% 46.7% 63.6% 81.6% 78.5% 76.1% 60.0% 6.4% 82.0% 81.0% 40.0% 5.5% 5.2% 80.0% 16.2% 20.2% 19% 19.6% 6.4% 20.0% 79.0% 43.8% 0.9% NM 3.9% 3.4% 0.0% 78.0% 42.5% 77.0% -20.0% -14.6% 76.0% 1.6% -23.3% -3.5% 1.2% -40.0% 1.0% 75.0% -60.0% 74.0% -61% 73.0% -80.0% Q2 FY21 Q1 FY21 Q2 FY20 Q2 FY21 Q1 FY21 Q2 FY20 QoQ YoY GNPA NNPA Credit costs(%): Front ended In H1FY21 CAR: Well capitalized after capital raise ROA: Improve as credit costs fall

1.5% 2.67 18.5%

1.0%

16.1% 1.03 1.01 16.0%

0.3%

Q2 FY21 Q1 FY21 Q2 FY20 Q2 FY21 Q1 FY21 Q2 FY20 Q2 FY21 Q1 FY21 Q2 FY20 Source: Company, KRChoksey Research

Q2FY21 : Key Concall Takeaways

 The Mortgage rose to a all time high in September.  Auto loans are at pre-Covid in October  Rural disbursements are at pre Covid  INR 9,045 Cr recovery, INR 1,411 Cr are not declared NPA as required by the SC  Overall collection efficiency is 97%.  Unsecured loans are at 97% of the pre Covid  Over drafts is at pre Covid level  Retail Credit Card is 4% higher than pre Covid  Rural loans is 1% higher than normal  Expect 1% or less of the total loan to restructure. Retail restructuring is a monitorable  Except 2 account all accounts in downgrades are under INR 60 Cr.  Of the foreign book, 66% Indians companies, 17% non-Indian with India operation  The focus is to grow the secured book. In the unsecured it is likely to await more normalcy  Deposit cost is close to SBI’s cost. It is now likely to be sticky.

Profit and Loss (INR Crores) FY 18 FY 19 FY 20 FY 21E FY 22E Interest Income 54,966 63,401 74,798 80,439 83,681 Interest Expense 31,940 36,386 41,531 44,000 45,650 Net Interest Income 23,026 27,015 33,267 36,439 38,031 Non interest income 17,420 14,512 16,449 17,296 20,392 Operating income 40,445 41,527 49,716 53,735 58,423 - Employee expense 5,914 6,808 8,271 8,500 8,800 - Other operating expense 9,133 11,281 13,343 11,757 13,460 Operating Expense 15,047 18,089 21,614 20,257 22,260 PPOP 25,399 23,438 28,101 33,478 36,163 Provisions 17,964 19,661 14,053 17,823 14,500 PBT 7,435 3,777 14,048 15,655 21,663 Tax Expense 657 413 6,117 3,914 5,453 PAT 6,777 3,363 7,931 11,741 16,210 Diluted EPS (INR) 10.46 5.17 12.28 17.03 23.51 Balance Sheet (INR Crores) FY18 FY19 FY 20 FY21E FY 22E Source of Funds Share capital 1,286 1,289 1,295 1,379 1,379 Reserves & Surplus 1,03,868 1,07,074 1,15,206 1,41,544 1,57,754 Networth 1,05,153 1,08,363 1,16,501 1,42,922 1,59,133 Borrowings 1,82,859 1,65,320 1,62,897 1,66,155 1,70,309 Deposits 5,60,975 6,52,920 7,70,969 8,62,267 9,81,903 Other liabilities & provisions 30,196 37,851 47,995 36,407 29,912 Total Equity & Liabilities 8,79,189 9,64,459 10,98,365 12,07,755 13,41,260 Uses of Funds Balances w/ banks & others Investments 2,02,994 2,07,733 2,49,531 2,79,531 3,50,076 Loans & advances 5,12,395 5,86,647 6,45,290 7,09,819 7,94,997 Fixed assets 7,904 7,931 8,410 9,119 9,904 Other assets 71,727 81,852 75,978 78,137 97,674 Total Assets 8,79,189 9,64,459 10,98,365 12,07,755 13,41,260 Source: Company Reports, Bloomberg, KRChoksey Research

Key Ratio FY18 FY19 FY 20 FY21E FY 22E Growth Rates Advances (%) 10.4% 14.5% 10.0% 10.0% 12.0% Deposits (%) 14.5% 16.4% 18.1% 11.8% 13.9% Total assets (%) 13.9% 9.7% 13.9% 10.0% 11.1% NII (%) 5.9% 17.3% 23.1% 9.5% 4.4% Pre-provisioning profit (%) -9.2% -7.7% 19.9% 19.1% 8.0% PAT (%) -30.9% -50.4% 135.8% 48.0% 38.1% B/S Ratios Credit/Deposit (%) 91.3% 89.8% 83.7% 82.3% 81.0% CASA (%) 51.7% 49.6% 45.1% 43.6% 41.5% Advances/Total assets (%) 58.3% 60.8% 58.8% 58.8% 59.3% Leverage - Total Assets to Equity 8.36 8.90 9.43 8.45 8.43 Operating efficiency Cost/income (%) 37.2% 43.6% 43.5% 37.7% 38.1% Opex/total assets (%) 1.7% 2.7% 2.2% 2.5% 2.5% Opex/total interest earning assets 2.0% 2.6% 2.9% 2.5% 3.0% Profitability NIM (%) 3.2% 3.4% 3.7% 3.6% 3.2% RoA (%) 0.8% 0.4% 0.8% 1.0% 1.3% RoE (%) 6.6% 3.2% 7.1% 9.1% 10.7% Asset quality Gross NPA (%) 10.1% 7.9% 6.7% 5.5% 5.3% Net NPA (%) 5.4% 2.3% 1.8% 1.4% 1.4% PCR (%) 47.0% 55.0% 74.1% 75.6% 75.6% Credit cost (%) 2.6% 3.0% 1.9% 2.2% 1.9% Per share data / Valuation EPS (INR) 10.46 5.17 12.25 17.03 23.51 BVPS (INR) 163.56 168.08 179.96 207.32 230.83 ABVPS (INR) 120.28 147.02 161.64 192.81 215.24 P/E (x) 44.36 89.75 37.88 27.24 19.73 P/BV (x) 2.84 2.76 2.58 2.24 2.01 P/ABV (x) 3.86 3.16 2.87 2.41 2.16 Source: Company Reports, Bloomberg, KRChoksey Research

Investment Rationale: Advances growth outperformance trend maintained. Well capitalized for growth The advances grew 10% YoY, trend maintained over the industry. The retail and corporate book grew 12% YoY and the corporate bond segment was at 18% of corporate loans. The deposits grew 13% YoY and the CD ratio is at 90%. The bank raised INR 10,000 Cr and is well positioned for growth. We factor CAGR ~13% in advances over FY20-22. Operating performance grows 16% YoY on improving NIMs NIMs improved 18 bps QoQ despite a conservative reserve of 5 bps earmarked to reversal. This was driven by CASA improvement to 44% up 319 bps QoQ. While opex are likely to increase from hereon, we have factored CAGR 10% in operating profits on improved fee incomes and NII. Watch list rise but most of the 320 bps of credit costs provided for The stress/likely restructured book is at INR 18,063 Cr (3%). We have factored slippage of 2.5% and credit cost of 3.2%. We believe most of these credit costs have been provided for, and there is unlikely to be adverse hit to P/L. Valuation We have factored RoA improvement to 50bps/70bps in FY21/22E on advance growth of ~14% and CAGR 9% in PPoP. It comfortable in its balance sheet strength with a recent capital raise and legacy stress factored in. We raise the Target prove to INR 630 (from INR 612) implying a value of 2x FY22E P/ABV on improving RoA and growth momentum.

Growth: Maintain advance growth trend Asset Quality: GNPA Optically lower, but stress CASA: Improves as acquisition improve book rise 5% QoQ 44.2% 51.3% 78% 74% 60% 5.0% 4.7% 4.2% 18.0% 30% 20.1% 15.9% 8.8% 10.5% 41.0% 41.1% 2.0% 4.9% 4% 2.7% NM 1.2% 1.2% 0.9%

-7.7% -9.2%

Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 QoQ YoY GNPA NNPA

Credit costs(%): Front ended for the current CAR: Well capitalized for growth ROA: NIMs and C/I favourable pool of stress

18.9% 0.8% 2.12 1.97 1.74 18.2% 0.5%

17.3%

Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Source: Company, KRChoksey Research Q2FY21 Q1FY21 Q2FY20 -0.1%

Q2FY21 : Key Concall Takeaways • Many manufacturing units are at pre Covid . Broader trends are returning to normalcy for non contact sectors. • Asset quality: of the downgrades 25% is normal downgrades, the rest are pandemic related ( based on internal assessment). Additions is INR 931 Cr 0.64%, with standstill it would be INR 1572 Cr 1.4%. 1.6% of loan book may be restructured. 19-20% book provided • Raised INR 10,000 Cr taking CAR to 19.3%. • Granularity in fees and increase in credit cards, forex (increase in wallet) and some items have returned to pre Covid levels. • 28% YoY growth in salary acquisitions and CA acquisition is 29% YoY acquisition • Secured products have grown 3x QoQ and at 75% of Q4FY20 and Unsecured are 40% lower than pre Covid • Small business and MFI have grown at 17 % and 19% YoY in disbursement. Branch led unsecured loan origination. It is at 57% against 47% in FY20. • It has been rationalising the high risk cards segment. • In commercial banking, higher share of AAA and AA rated book in disbursement. 90% of corporate book is secured by hard capital. INR 7,000 Cr sanctioned under Government guaranteed schemes. Tight underwriting in wholesale implying 95% incremental advance is A- and 72% is AA- and above • 84% of SME is SME 3 + i.e A- and above across 35 sectors and ticket size is INR 3.3 Cr. 70% exposure is under INR 5 Cr. • Short term liquidity loans sanctioned INR 70,000 Cr and disbursed INR 60,000 Cr. • 64% sourcing for Rural from deep tier location. • Early bucket resolution (CE) is 80%. 30+ DPD 2.3%. Demand resolution 94%. It is 97% in Oct just short of pre Covid level • Impact on NIMs: 5 bps due to lower NPA, 3 bps Capital raise, 10 bps liquidity, NII reserve 5 bps

Profit and Loss (INR Crores) FY 18 FY 19 FY 20 FY 21E FY 22E Interest Income 45,780 54,986 62,635 63,844 70,857 Interest Expense 27,163 33,278 37,429 38,414 42,255 Net Interest Income 18,618 21,708 25,206 25,430 28,602 Non interest income 10,967 13,130 15,537 18,255 19,167 Operating income 29,585 34,839 40,743 43,684 47,769 - Employee expense 4,313 4,747 5,321 5,976 6,334 - Other operating expense 9,677 11,086 11,984 12,120 13,574 Operating Expense 13,990 15,833 17,305 18,096 19,909 PPOP 15,595 19,005 23,438 25,588 27,860 Provisions 15,473 12,031 18,534 19,090 17,563 PBT 122 6,974 4,904 6,498 10,297 Tax Expense -154 2,297 3,277 1,625 2,574 PAT 276 4,677 1,627 4,874 7,723 Diluted EPS (INR) 1.07 18.09 5.97 15.93 25.24 Balance Sheet (INR Crores) FY18 FY19 FY 20 FY21E FY 22E Source of Funds Share capital 513 514 564 612 612 Reserves & Surplus 62,932 66,162 84,384 98,791 1,06,130 Networth 63,445 66,676 84,948 99,403 1,06,742 Borrowings 1,48,016 1,52,776 1,47,954 1,48,498 1,63,348 Deposits 4,53,623 5,48,471 6,40,105 7,17,238 8,19,389 Other liabilities & provisions 26,245 33,073 42,158 41,223 54,415 Total Equity & Liabilities 6,91,329 8,00,997 9,15,165 10,06,362 11,43,894 Uses of Funds Balance w/ banks & others 86,909 1,02,304 97,268 1,01,024 1,05,086 Net investments 1,53,876 1,74,969 1,56,734 1,43,448 1,22,908 Loans & advances 4,39,650 4,94,798 5,71,424 6,42,842 7,36,054 Fixed assets 3,972 4,037 4,313 4,827 4,815 Other assets 50,377 59,988 85,426 1,14,222 1,75,031 Total Assets 6,91,329 8,00,997 9,15,165 10,06,362 11,43,894 Source: Company Reports, Bloomberg, KRChoksey Research

Key Ratio FY18 FY19 FY 20 FY21E FY 22E Growth Rates Advances (%) 17.8% 12.5% 15.5% 12.5% 14.5% Deposits (%) 9.5% 20.9% 16.7% 12.1% 14.2% Total assets (%) 14.9% 15.9% 14.3% 10.0% 13.7% NII (%) 2.9% 16.6% 16.1% 0.9% 12.5% Pre-provisioning profit (%) -11.3% 21.9% 23.3% 9.2% 8.9% PAT (%) -92.5% NM -65.2% 199.5% 58.5% B/S Ratios Credit/Deposit (%) 96.9% 90.2% 89.3% 89.6% 89.8% CASA (%) 53.8% 44.4% 43.5% 43.3% 42.4% Advances/Total assets (%) 63.6% 61.8% 62.4% 63.9% 64.3% Leverage - Total Assets to Equity 10.90 12.01 10.77 10.08 10.64 Operating efficiency Cost/income (%) 47.3% 45.4% 42.5% 41.4% 41.7% Opex/total assets (%) 2.0% 2.0% 1.9% 1.8% 1.7% Opex/total interest earning assets 2.4% 2.4% 2.4% 2.3% 2.3% Profitability NIM (%) 3.1% 3.2% 3.5% 3.4% 3.5% RoA (%) 0.0% 0.6% 0.2% 0.5% 0.7% RoE (%) 0.5% 7.2% 2.1% 5.3% 7.4% Asset quality Gross NPA (%) 7.8% 5.3% 4.9% 4.5% 4.0% Net NPA (%) 3.8% 2.1% 2.0% 1.8% 1.5% PCR (%) (excl. AUCA) 65.0% 77.0% 78.0% 75.0% 75.0% Slippage (%) 9.5% 3.2% 2.5% 2.5% 2.5% Credit cost (%) 4.1% 2.6% 3.5% 3.1% 2.9% Per share data / Valuation EPS (INR) 1.07 18.19 5.77 15.93 25.24 BVPS (INR) 247.20 259.27 301.08 326.20 351.44 ABVPS (INR) 182.55 215.43 261.12 289.35 314.59 P/E (x) NM 31.18 98.31 35.60 22.47 P/BV (x) 2.29 2.19 1.88 1.74 1.61 P/ABV (x) 3.11 2.63 2.17 1.96 1.80 Source: Company Reports, Bloomberg, KRChoksey Research

Investment Rationale: Advances grew 6% YoY, disbursement and sanctions at pre-Covid levels. Market share gains to continue The domestic advances grew 6.9% YoY, and those including investments has grown 8% YoY. This is driven by the retail. The retail segment remains robust and the exposure is of safer customers. The deposits continue to outgrow growing 14% YoY with CASA at 44%. We expect CAGR ~7% and ~10% in advance and deposit over FY20-22. Operating performance grows 12% YoY as NIMs improve The NIMs improved 11 bps largely aided by improved CASA and lower deposit rates. The C/I were elevated ad there have been one off charges in employee expenses. We have factored CAGR 5% in PPoP over Fy20-22. Slippages to worsen but large part of the costs front-ended The bank has front-ended a large party of the credit cost towards the likely stress book. It has provided 50 bps of provisions in H1FY21 against our estimate of 120 bps in FY21. Its GNPA were 5.8% without the standstill and slippages were 2.5% of advances. We expect slippages at 2.5% vs management estimate of 2%. Valuation The bank has one of the high-quality book amongst PSU and is likely to remain the best beneficiary. We expect it CAGR 11% in PAT over FY22-22E and clock an ROA of 50 bps. While its underperforming the private bank peers, the risk reward is favorable. It currently trades at 0.8x FY22 P/ABV. We have been conservative in our estimates and we value the bank at INR 300, valuing the bank at 1xFY22E P/ABV.

CASA: Improve to 44% aiding NIMs Growth in key metrics: Advance growth in line with industry Asset Quality: 5.8% ex the SC standstill

88.2% 86.3% 81.2% 51.9% 44.0% 7.2%

5.3% 5.4% 43.8% 14.6% 14.4% 11.9% 9.2% 5.8% 6.9% 1.5% 2.8% 43.7% 1.9% 1.6% -2.9% -19% -0.2% -0.4% -23% -22.1%

QoQ YoY Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20

GNPA NNPA ROA: To exit FY21 at 50 bps Credit costs(%): Provided to large extent CAR: Well capitalized amongst PSUs, no plan for capital raise 1.43 0.4% 14.7% 0.4% 1.21 0.3% 0.97

13.6% 13.4%

Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Source: Company, KRChoksey Research

Q2FY21 : Key Concall Takeaways • The collection efficiency is 97% excluding agriculture.

• Yono adds ~6000 daily users and has raised INR 25,000 Cr in deposits and INR 60,000 in advances4

• The proforma additions are INR 14,388 Cr of which there has been a pullback of INR 5,965 Cr (of which INR INR 2,078 in MSME, INR 1,100 in agriculture and INR 800 Cr in Per). Likely provisions to be lower in H2FY21 as it has made all provisions for the current stress.

• Likely slippages + restructured book is 2-2.5%

• It has made provisions for increase in wage hike and Gratuity charge of INR 1,600 Cr.

• INR 876 Cr is the likely interest reversal. This is likely to impact NIMs by 5 bps

• ECLGS sanctions have been INR 25,000 Cr and disbursement INR 22,000 Cr.

• Personal loans: 94% of Personal loans are from Government employees.

• Within salaried it has 19% penetration. It aims to take it to 25% implying a scope of INR 30,000 Cr in advances.

• Home loans: Focused on first time home buyers. 50% would be government employees and 20% is well rated corporates.

• Express Credit: 94% is to government employees and 100% is salaried.

• Recoveries excluding the lumpy recoveries from NCLT is estimated at INR 6,000-7,000 Cr

• 17-20% of people have been transferred to customer facing roles.

• It plans to increase productivity of employees.

• SMA accounts could be 3%.

Profit and Loss (INR Crores) FY 18 FY 19 FY 20 FY 21E FY 22E Interest Income 2,20,499 2,42,869 2,57,324 2,72,254 2,94,456 Interest Expense 1,45,646 1,54,520 1,59,239 1,65,879 1,85,400 Net Interest Income 74,854 88,349 98,085 1,06,375 1,09,056 Non interest income 39,165 35,214 39,006 41,815 44,554 Operating income 1,14,018 1,23,563 1,37,091 1,48,190 1,53,610 - Employee expense 33,179 41,055 45,715 48,915 51,361 - Other operating expense 26,765 28,633 29,459 31,815 34,361 Operating Expense 59,943 69,688 75,174 80,730 85,721 PPOP 54,075 53,875 61,917 67,459 67,888 Provisions 75,039 53,829 43,070 43,320 38,814 PBT -20,964 47 18,847 24,139 29,075 Exceptional Items 5,436 1,561 6216 1540 0 Tax Expense -8,981 745 10,575 6,035 7,269 PAT -6,547 862 14,488 19,644 21,806 Diluted EPS (INR) -7.34 0.97 16.23 22.01 24.43 Balance Sheet (INR Crores) FY18 FY19 FY 20 FY21E FY 22E Source of Funds Share capital 892 892 892 892 892 Reserves & Surplus 2,18,236 2,20,021 2,31,115 2,50,759 2,72,565 Networth 2,19,129 2,20,914 2,32,007 2,51,652 2,73,458 Borrowings 3,62,142 4,03,017 3,14,656 3,30,388 3,46,908 Deposits 27,06,343 29,11,386 32,41,621 35,37,076 38,87,722 Other liabilities & provisions 1,67,138 1,45,597 1,63,110 1,13,926 16,519 Total Equity & Liabilities 34,54,752 36,80,914 39,51,394 42,33,041 45,24,606 Uses of Funds Cash & Balance with RBI 41,501 45,558 84,361 88,579 93,008 Other Bank and Call Money 1,50,397 1,76,932 1,66,736 1,75,073 1,83,826 Net investments 10,60,987 9,67,022 10,46,955 10,67,894 10,89,251 Loans & advances 19,34,880 21,85,877 23,25,290 24,88,060 26,87,105 Fixed assets 39,992 39,198 38,439 40,361 42,379 Other assets 2,26,994 2,66,328 3,24,413 3,73,075 4,29,036 Total Assets 34,54,752 36,80,914 39,86,193 42,33,041 45,24,606 Source: Company Reports, Bloomberg, KRChoksey Research

Key Ratio FY18 FY19 FY 20 FY21E FY 22E Growth Rates Advances (%) 23.2% 13.0% 6.4% 7.0% 8.0% Deposits (%) 32.4% 7.6% 11.3% 9.1% 9.9% Total assets (%) 27.7% 6.5% 8.3% 6.2% 6.9% NII (%) 21.0% 18.0% 11.0% 8.5% 2.5% Pre-provisioning profit (%) 6.3% -0.4% 14.9% 9.0% 0.6% PAT (%) -37.5% 113.2% NM 35.6% 11.0% B/S Ratios Credit/Deposit (%) 71.5% 75.1% 71.7% 70.3% 69.1% CASA (%) 44.5% 44.6% 43.5% 44.3% 44.7% Advances/Total assets (%) 56.0% 59.4% 58.3% 58.8% 59.4% Leverage - Total Assets to Equity 15.77 16.66 17.18 16.82 16.55 Operating efficiency Cost/income (%) 52.6% 56.4% 54.8% 54.5% 55.8% Opex/total assets (%) 1.7% 1.9% 1.9% 1.9% 1.9% Opex/total interest earning assets 2.0% 2.2% 2.2% 2.2% 2.2% Profitability NIM (%) 2.8% 2.8% 2.9% 3.0% 2.9% RoA (%) -0.2% 0.0% 0.4% 0.5% 0.5% RoE (%) -3.2% 0.4% 6.4% 8.1% 8.3% Asset quality Gross NPA (%) 10.9% 7.5% 6.2% 4.7% 4.5% Net NPA (%) 5.7% 3.0% 2.2% 1.2% 1.8% PCR (%) (excl. AUCA) 50.4% 61.9% 65.2% 75.0% 75.0% Slippage (%) 4.9% 3.2% 2.1% 2.5% 2.0% Credit cost (%) 2.5% 1.7% 1.2% 1.2% 1.0% Per share data / Valuation EPS (INR) -7.34 0.97 16.23 22.01 24.43 BVPS (INR) 245.53 247.53 259.96 281.98 306.41 ABVPS (INR) 121.32 173.71 201.84 247.52 267.75 P/E (x) 16.73 NM 227.71 13.55 9.99 P/BV (x) 0.93 0.90 0.89 0.85 0.78 P/ABV (x) 1.35 1.81 1.27 1.09 0.89 Source: Company Reports, Bloomberg, KRChoksey Research

Investment Rationale: Advances grew 2% YoY way under trend, Focus on deposit continues Advance growth has been under trend on account of caution in key segments low momentum in MFI. However the bank remained focused on aggressive granular deposit mobilization despite the liquidity. We have factored 4% growth in advances as the economy remains weak and bank realigns its franchise. Operating performance to grow at CAGR 7% as NIM is likely to improve in FY22 after a tepid FY21 The NIMs fell 12 bps QoQ on account of liquidity. We factor an improvement in NIMs in FY22 after a fall in FY21 on lower deposit costs. The C/I had been 41%, we expect it to fall to 40% through FY22. Restructured book to rise, but a large part of costs are charged The bank has front-ended majority of its credit costs and there is unlikely to be an adverse charge in H2FY21. The share of secured book is likely to increase, implying lower structural credit costs for the bank. We expect 40 bps cost for FY21 and FY22. Valuation The bank has witnessed a weak growth on account of realigning advance and deposit book amidst risk aversion in key segments. We have factored a 15% advance growth in FY22 after 4% growth in FY21. We expect PAT CAGR of 17% over FY20-22 and RoA improvement to 1% in FY21 and 1.6% in FY22. We value the bank at 1.5x FY22E P/ABV, we revise our target price upwards to INR 850 (from INR 659).

Q2FY21 : Key Concall Takeaways  The cost of deposit fell 15 bp in Q2 47 in H1FY21. With sufficient liquidity it shall consider lowering FD rates.  The share of CD has fallen to 5%  91% of FDs were soured digitally.  Loan provision is 3%  90 bps slippages. Net slippages is negative despite higher MFI  Collection to inch up gradually. It is at 94.7% in September and 96% in October.  There are no corporate slippages even without the SC standstill.  MSME saw a cyclical recovery and retail grows faster than corporate  Within vehicles, CV and luxury buses are performing way behind normal  SCV/2W lower than normal. Its 5% of book  LCV is getting back on track  Disbursements in September is 80% of pre Covid  MFI collection efficiency is 91%, 85% of last September.  Focus on SME’s secured segment.  Large corporate _ INR 1,900 Cr repayment above normal.  Stressed RE is 5% of book that can be Restructured.  Mid corporate saw 95% of collection efficiency. Education, Auto Ancillary is lower  Low single digit restructuring  Retail SME is at pre Covid levels.

Growth in key metrics: Advance growth keeps Asset Quality: PCR improves CASA: Share lowers marginally. Focus on 42.0% earnings tepid granularity 76% 66% 49% 90% 166.3% 41.4% 2.5% 80% 41.5% 2.2% 2.2% 70% 41.0% 60%

10.2% 50% 40.5% 40.5% 2.1% 40.2% 1.1% 40% 12.7% 8.9% 8.1% 1.6% 3.7% 0.9% 40.0% 30% 40.0% 0.5% 20% 10% 39.5% -0.9% -13% -11.1% -53.2% -1.1% 0% Q2FY21 Q1FY21 Q2FY20 39.0% QoQ YoY Q2FY21 Q1FY21 Q2FY20 GNPA NNPA PCR

Credit costs(%): Frontend the pandemic related CAR: Well capitalized for growth ROA: Exit RoA at 1% stress book

2.84 16.6%

2.37 2.0%

15.2%

1.00 14.7% 0.8% 0.6%

Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Source: Company, KRChoksey Research

Profit and Loss (INR Crores) FY 18 FY 19 FY 20 FY 21E FY 22E Interest Income 17,281 22,261 28,783 27,782 30,271 Interest Expense 9,783 13,415 16,724 16,815 17,151 Net Interest Income 7,498 8,846 12,059 10,967 13,120 Non interest income 4,750 5,647 6,951 7,297 7,443 Operating income 12,248 14,493 19,010 18,264 20,562 - Employee expense 1,781 1,854 2,208 2,283 2,570 - Other operating expense 3,810 4,551 6,029 5,479 5,580 Operating Expense 5,591 6,405 8,237 7,762 8,150 PPOP 6,657 8,088 10,773 10,502 12,412 Provisions 1,176 3,108 4,652 5,983 4,296 PBT 5,481 4,981 6,121 4,518 8,116 Tax Expense 1,875 1,679 1,703 1,130 2,029 PAT 3,606 3,301 4,418 3,389 6,087 Diluted EPS (INR) 60.09 54.77 63.70 48.86 87.77 Balance Sheet (INR Crores) FY18 FY19 FY 20 FY21E FY 22E Source of Funds Share capital 600 603 694 694 694 Reserves & Surplus 23,227 26,072 33,330 37,748 41,136 Networth 23,827 26,675 34,023 38,441 41,830 Borrowings 38,289 47,321 60,754 52,172 54,780 Deposits 1,51,639 1,94,868 2,02,040 2,21,826 2,55,099 Other liabilities & provisions 7,856 8,944 10,232 14,984 24,807 Total Equity & Liabilities 2,21,626 2,77,819 3,07,058 3,27,439 3,76,533 Uses of Funds Cash & Balance with RBI Other Bank and Call Money 13,216 14,783 16,004 23,462 10,339 Net investments 50,077 59,266 59,980 62,111 89,285 Loans & advances 1,44,953 1,86,394 2,06,783 2,15,054 2,47,312 Fixed assets 1,339 1,710 1,820 2,093 2,407 Other assets 12,041 15,666 22,471 24,718 27,190 Total Assets 2,21,626 2,77,819 3,07,058 3,27,439 3,76,533 Source: Company Reports, Bloomberg, KRChoksey Research

Key Ratio FY18 FY19 FY 20 FY21E FY 22E Growth Rates Advances (%) 28.2% 28.6% 10.9% 4.0% 15.0% Deposits (%) 19.8% 28.5% 3.7% 9.8% 15.0% Total assets (%) 24.1% 25.4% 10.5% 6.6% 15.0% NII (%) 23.7% 18.0% 36.3% -9.1% 19.6% Pre-provisioning profit (%) 22.1% 21.5% 33.2% -2.5% 18.2% PAT (%) 25.8% -8.5% 33.8% -23.3% 79.6% B/S Ratios Credit/Deposit (%) 95.6% 95.7% 102.3% 96.9% 96.9% CASA (%) 44.0% 43.1% 50.4% 47.6% 43.7% Advances/Total assets (%) 65.4% 67.1% 67.3% 65.7% 65.7% Leverage - Total Assets to Equity 9.30 10.42 9.02 8.52 9.00 Operating efficiency Cost/income (%) 45.6% 44.2% 43.3% 42.5% 39.6% Opex/total assets (%) 2.5% 2.3% 2.8% 2.6% 2.2% Opex/total interest earning assets 3.1% 2.8% 3.2% 2.9% 2.9% Profitability NIM (%) 4.0% 3.8% 4.4% 4.0% 4.1% RoA (%) 1.6% 1.2% 1.4% 1.0% 1.6% RoE (%) 15.1% 12.4% 13.0% 8.8% 14.6% Asset quality Gross NPA (%) 1.2% 2.1% 2.5% 2.6% 2.4% Net NPA (%) 0.5% 1.2% 0.9% 1.1% 1.0% PCR (%) (excl. AUCA) 56.3% 43.0% 55.0% 60.0% 60.0% Slippage (%) 3.0% 1.2% 1.2% 1.0% 0.4% Credit cost (%) 0.7% 0.5% 0.5% 0.4% 0.4% Per share data / Valuation EPS (INR) 60.1 54.8 63.7 48.9 87.8 BVPS (INR) 397.0 442.6 490.6 554.3 603.1 ABVPS (INR) 384.5 405.3 463.4 521.4 567.1 P/E (x) 12.90 14.15 12.17 15.86 8.83 P/BV (x) 1.95 1.75 1.58 1.40 1.28 P/ABV (x) 2.02 1.91 1.67 1.49 1.37 Source: Company Reports, Bloomberg, KRChoksey Research

Investment Rationale: Advances to degrow in FY21 as it realigns the book Advance growth has remained weak as it realigns its book to reduce concentration and caution. We expect renewed growth trajectory in FY22. However the focus to granular deposit is expected to continue and deposit is likely to outgrow advances even with the excess liquidity. Operating performance to grow at CAGR 8% as efficiencies improve The bank has been able to control costs materially. Its C/I fell 207 bps YoY to 48.6%, it did rise sequentially – that being an exceptional. We expect C/I to improve to ~46% through FY22. This is expected to drive CAGR 8% in PPoP despite stable NIMs. Restructured book to rise, but a large part of costs are charged Like the peers, the bank has front-ended provisions. We believe this may not be fully sufficient. Its moratorium at August was 39%. It has provided 140 bps of credit costs vs our estimate of ~3%, implying a likely higher impact in H2FY21. Valuation The bank’s RoA is likely to improve to 50 bps and 60 bps in FY21/22 on low asset base and earnings CAGR of 4% over FY20-22. We await more clarity on the momentum in advance growth. We maintain our Target price at INR 42, implying 0.4x FY22E P/ABV.

Q2FY21 : Key Concall Takeaways  The cost of deposit has fallen to 5.06% as it has not refrained from high rated wholesale book and focused on granular deposit.  There are no planned expenses and the focus is on improved incomes to improve Cost ratios.  It has made provision towards salary hikes and is unlikely to face material increase.  Account opening volumes have returned to pre Covid levels.  62% of the customers need emergency scheme and it has disbursed INR 1,600 Cr. Some has used it as interest rate arbitrage.  The collection efficiency is better than estimated at 90% for term loans and 95% for working capital loans in the moratorium book.  Gold loans: 95% of INR 11,000 Cr is agriculture with Interest rate of 8.5%, no capital consumed. In retail the rate is 9-9.5%. Retail is a young book with the bank focusing on it for a year. Most of the portfolio is in Tamil Nadu, Andhra Pradesh and Telangana.  It has maintained LTV of 75% in gold loans and the increase in gold prices have been helpful.  Aim to improve yield with focus on high yielding loans in commercial loans and of retail gold loans.  Guidance: 1.75% slippages on current steady state and 2.5% of book is likely to be restructured.  Additional NPA if not for SC standstill would be INR 32 Cr.  There is 91% in CIG, 92% in CCB in collection efficiency. In retail there is improvement as well  Of the INR 220 Cr, INR 5 Cr could be for the SC dispensation and INR 130 Cr for the likely restructured book. There is yet adhoc INR 90 Cr unutilised.  No material restructuring request has been received.  The focus will be on those affected by Covid and meet cash flows metrics too.  Capacity utilisation is low yet at 60-65%. Hence demand in credit is a monitorable.

Growth in key metrics: Mixed trends Asset Quality: Not out of woods CASA: Improves, focus on granularity 75.2% 72.7% 61.8% 8.9% 33.9% 7.1% 8.9% 33.2% 8.3% 4.1% 3.7% 7.9% 1.8% 0.9% NM

-1.4% 4.5% 29.8% -5.3% 3.4% -3.2% 3.0% -1.8% -9.0%

-16%

-22% Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 GNPA NNPA PCR QoQ YoY Credit costs(%): Remains high, end FY21 at high CAR: Remains well capitalised ROA: Exit RoA at 50 bps impact 0.6% 0.6% 18.4% 18.1% 1.95 1.99

1.60 0.3%

16.0%

Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Source: Company, KRChoksey Research

Profit and Loss (INR Crores) FY 18 FY 19 FY 20 FY 21E FY 22E Interest Income 5,700 5,816 5,990 5,839 5,970 Interest Expense 3,402 3,453 3,642 3,586 3,703 Net Interest Income 2,298 2,363 2,348 2,253 2,268 Non interest income 900 963 1,155 1,328 1,487 Operating income 3,198 3,326 3,503 3,580 3,755 - Employee expense 639 761 857 899 926 - Other operating expense 782 854 885 797 836 Operating Expense 1,421 1,615 1,742 1,696 1,763 PPOP 1,777 1,711 1,761 1,884 1,992 Provisions 1,274 1,389 1,489 1,502 1,520 PBT 503 322 272 382 472 Tax Expense 158 111 37 76 94 PAT 345 211 235 306 377 Diluted EPS (INR) 4.75 2.64 2.94 3.83 4.72 Balance Sheet (INR Crores) FY18 FY19 FY 20 FY21E FY 22E Source of Funds Share capital 145 160 160 160 160 Reserves & Surplus 6,119 6,263 6,440 6,789 7,147 Networth 6,264 6,423 6,600 7,254 7,684 Borrowings 2,382 1,565 1,184 1,000 1,080 Deposits 56,890 59,868 59,075 62,029 66,991 Other liabilities & provisions 1,393 1,484 1,419 1,254 2,276 Total Equity & Liabilities 66,929 69,340 68,278 71,537 78,032 Uses of Funds Cash & Balance with RBI 2,960 2,935 2,733 3,648 3,903 Other Bank and Call Money 1,337 762 1,660 1,826 2,008 Net investments 15,803 14,882 15,762 18,915 22,698 Loans & advances 44,800 48,581 46,098 45,176 47,435 Fixed assets 528 583 587 704 845 Other assets 1,501 1,598 1,438 1,269 1,143 Total Assets 66,929 69,340 68,278 71,537 78,032 Source: Company Reports, Bloomberg, KRChoksey Research

Key Ratio FY18 FY19 FY 20 FY21E FY 22E Growth Rates Advances (%) 9.5% 8.4% -5.1% -2.0% 5.0% Deposits (%) 5.9% 5.2% -1.3% 5.0% 8.0% Total assets (%) 8.3% 3.6% -1.5% 4.8% 9.1% NII (%) 10.8% 2.8% -0.6% -4.1% 0.7% Pre-provisioning profit (%) 13.1% -3.7% 2.9% 7.0% 5.7% PAT (%) -43.0% -39.0% 11.5% 30.1% 23.4% B/S Ratios Credit/Deposit (%) 78.7% 81.1% 78.0% 72.8% 70.8% CASA (%) 29.1% 29.9% 30.5% 31.0% 31.0% Advances/Total assets (%) 66.9% 70.1% 67.5% 63.2% 60.8% Leverage - Total Assets to Equity 10.68 10.80 10.34 10.30 10.68 Operating efficiency Cost/income (%) 44.4% 48.6% 49.7% 47.4% 46.9% Opex/total assets (%) 2.1% 2.3% 2.6% 2.4% 2.3% Opex/total interest earning assets 2.2% 2.3% 2.6% 2.6% 2.6% Profitability NIM (%) 3.9% 3.67% 3.44% 3.4% 3.4% RoA (%) 0.5% 0.3% 0.3% 0.4% 0.5% RoE (%) 5.7% 3.3% 3.5% 4.3% 5.1% Asset quality Gross NPA (%) 6.6% 8.9% 8.7% 9.1% 9.2% Net NPA (%) 4.2% 4.1% 3.9% 3.9% 3.9% PCR (%) (excl. AUCA) 36.2% 44.1% 55.8% 60.0% 60.0% Slippage (%) 5.3% 5.6% 3.6% 3.3% 3.7% Credit cost (%) 3.0% 3.0% 3.1% 3.3% 3.3% Per share data / Valuation EPS (INR) 4.75 2.64 2.94 3.83 4.72 BVPS (INR) 85.49 79.56 82.57 90.76 96.14 ABVPS (INR) 59.85 49.29 59.94 68.92 73.06 P/E (x) 7.15 12.89 11.56 8.89 7.20 P/BV (x) 0.40 0.43 0.41 0.37 0.35 P/ABV (x) 0.57 0.69 0.57 0.49 0.47 Source: Company Reports, Bloomberg, KRChoksey Research

Investment Rationale: Advances muted but well capitalized for growth; strategic shift augurs well The bank has been highly cautious on its advance growth in recent times on account of the bank’s strategy and its customer segment. The change in strategy to now monetize their customers on the liability side is a much- awaited. Its deposit have also shown strength despite the fall in attractive rates. This augurs well for the inherent strength of its franchise. Operating performance to grow at CAGR 11% over FY20-22E The bank also plans to expand customer acquisition drive through the non digital channel outside metros and urbans. Costs are expected to rise but offset by other incomes. Well provided for in credit costs The bank has 0.62% of its advances towards nonspecific provisions. This is sufficient as a large part of the book is secured. We too believe that provisions for the stress book are front ended and there is unlikely to be material adverse surprise in credit costs. We expect normalcy in credit costs from hereon. Valuation We like the strategy to focus on earnings and expect CAGR 17% growth in earning over FY20-21E and improving ROA to 1.9% in FY21 and 2% in FY22 from 1.8% in FY20. Our target is INR 1,800 per share (raised from INR 1,650), using SOTP valuation applying a P/B multiple 5x (from 4.7x as we expect higher allocation for quality) to the FY22 adj. After the recent run up, we downgrade our rating to Hold.

Growth: Robust earning momentum Asset Quality: GNPA optically stable, at 2.7% ex CASA: Healthy despite rate cuts the standstill 57.1% 68.4% 64.0% 76% 74.9% 56.7% 2.7% 2.6% 2.3% 31% 26% 27% 17% 12% 5% 6% 0% 0% 53.6%

0.9% 0.9% -10% 0.6% -4% -5%

-62% Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 GNPA NNPA QoQ YoY CAR: Well capitalized for growth ROA: Exit RoAs at ~2% Credit costs(%): Provided for additional 0.64% of 2.4% book 22.1% 2.2% 21.2% 1.02 18.2%

1.4%

0.51 0.39

Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20

Source: Company, KRChoksey Research

Q2FY21 : Key Concall Takeaways • Focus of the bank is on earning growth and customer acquisition. • INR 93 cr of additional provisions exists. Nonspecific provision is 177% of NNPA. • The provisions at 0.62% of the book are currently sufficient. • Focus is on secured products with home and SME doing well. Comfort on Unsecured is still some time away. Government liquidity scheme is helpful, and it plans to build a granular book. The market share in government sponsored scheme is 6%. • It has 5.1% market share in digital driven by mobile. • It has launched 2 Credit Cards for mass affluent along with a Secured CC last quarter. • Collection efficiency in retail unsecured has improved and it is at pre Covid level in secured. • In Commercial vehicles disbursements have improved. Collection efficiency for large operators is 75-85%. Smaller player face challenges. Agriculture and allied and non-urban shows promise. • Passenger vehicle is likely to take longer time though collections have improved MoM. • Collection efficiency in agriculture has improved and credit uptick is likely. • There is MoM improvement in MFI as well. • Tractor have grown 8-10% in H1 and is likely to do well in the next two quarters. • It has avoided large concentrated low spread business book on corporate banking. It has maintained focus on customer profitability. • INR 12,000 Cr has migrated from SME to Commercial banking and INR 2,400 Cr is lower WC utilisation. • The bank plans to improve customer acquisition drive through all means – organic, inorganic, digital and physical and plans to monetise its liability customers for advances. • The lower SA cost has led to attrition and shift to FD for the higher ticket size. But the granular growth remains. • Securities has done well with strong client acquisition. The margin norms impact is transient.

Profit and Loss (INR Crores) FY 18 FY 19 FY 20 FY 21E FY 22E Interest Income 19,749 23,943 26,930 27,993 30,284 Interest Expense 10,217 12,684 13,430 13,141 14,945 Net Interest Income 9,532 11,259 13,500 14,853 15,339 Non interest income 4,052 4,604 5,372 6,124 6,859 Operating income 13,584 15,863 18,872 20,977 22,199 - Employee expense 2,950 3,184 3,878 3,789 3,856 - Other operating expense 3,475 4,331 4,973 5,500 5,800 Operating Expense 6,426 7,515 8,851 9,289 9,656 PPOP 7,158 8,348 10,021 11,688 12,543 Provisions 940 962 2,216 2,100 1,744 PBT 6,218 7,386 7,805 9,588 10,799 Tax Expense 2,134 2,520 1,857 2,397 2,700 PAT 4,084 4,865 5,947 7,191 8,099 Diluted EPS (INR) 21.43 25.49 31.09 37.59 42.34 Balance Sheet (INR Crores) FY18 FY19 FY 20 FY21E FY 22E Source of Funds Share capital 953 1,454 1,457 1,455 1,490 Reserves & Surplus 36,531 41,446 47,562 54,594 62,535 Networth 37,484 42,900.4 49,018 56,049 64,025 Borrowings 25,154 32,248 37,993 34,194 30,775 Deposits 1,92,643 2,25,880 2,62,821 2,89,103 3,32,468 Other liabilities & provisions 9,652 11,143 10,420 11,841 10,981 Total Equity & Liabilities 2,64,933 3,12,172 3,60,252 3,91,186 4,38,248 Uses of Funds Balances w/ banks & others 19,620 24,676 53,292 32,361 24,111 Investments 64,562 71,189 75,052 1,20,177 1,39,856 Loans & advances 1,69,718 2,05,695 2,19,748 2,25,880 2,59,762 Fixed assets 1,527 1,652 1,623 1,704 2,519 Other assets 9,506 8,961 10,537 11,063 12,000 Total Assets 2,64,933 3,12,172 3,60,252 3,91,186 4,38,248 Source: Company Reports, Bloomberg, KRChoksey Research

Key Ratio FY18 FY19 FY 20 FY21E FY 22E Growth Rates Advances (%) 24.72% 21.20% 6.83% 2.79% 15.00% Deposits (%) 22.4% 17.3% 16.4% 10.0% 15.0% Total assets (%) 23.5% 17.8% 15.4% 8.6% 12.0% NII (%) 17.3% 18.1% 19.9% 10.0% 3.3% Pre-provisioning profit (%) 19.6% 16.6% 20.0% 16.6% 7.3% PAT (%) 19.7% 19.1% 22.2% 20.9% 12.6% B/S Ratios 0.0% 0.0% 0.0% 0.0% 0.0% Credit/Deposit (%) 88.1% 91.1% 83.6% 78.1% 78.1% CASA (%) 50.8% 52.5% 56.2% 55.4% 54.7% Advances/Total assets (%) 64.1% 65.9% 61.0% 57.7% 59.3% Leverage - Total Assets to Equity 7.07 7.28 7.35 6.98 6.85 Operating efficiency Cost/income (%) 47.3% 47.4% 46.9% 44.3% 43.5% Opex/total assets (%) 2.5% 2.5% 2.8% 2.6% 2.3% Opex/total interest earning assets 2.9% 2.8% 3.0% 2.8% 2.5% Profitability NIM (%) 4.3% 4.2% 4.5% 4.5% 4.5% RoA (%) 1.7% 1.7% 1.8% 1.9% 2.0% RoE (%) 12.5% 12.1% 12.9% 13.7% 13.5% Asset quality Gross NPA (%) 2.2% 2.1% 2.2% 2.3% 2.3% Net NPA (%) 1.0% 0.8% 0.7% 0.7% 0.6% PCR (%) 56.5% 64.4% 69.0% 65.0% 65.0% Credit cost (%) 0.4% 0.3% 0.3% 0.3% 0.3% Per share data / Valuation EPS (INR) 21.43 25.49 31.09 37.59 42.34 BVPS (INR) 196.7 224.7 256.2 283.1 323.3 ABVPS (INR) 187.9 216.7 248.1 275.5 315.5 P/E (x) 80.6 67.8 55.6 46.0 40.8 P/BV (x) 8.8 7.7 6.7 6.1 5.3 P/ABV (x) 9.2 8.0 7.0 6.3 5.5 Source: Company Reports, Bloomberg, KRChoksey Research

Investment Rationale: Advances growth outperforms; Most beneficial in upturn; healthy 18% CAGR in Operating profits over FY20-22 We expect the bank to grow at CAGR 20% over FY20-22 driven by secured retail and wholesale outperforming the industry. While the caution is likely to remain in unsecured, the secured retail including autos and MSME is poised for traction. The bank has not been averse to deposits despite excess liquidity. We expect the strong franchise to continue to fuel its growth at reasonable costs. Change in mix is expected to reduce the momentum in NII growth but we expect cost efficiencies despite investment in infrastructure to aid profits. Provided for all recognized stress The management has assessed the likely bad assets based on the trends and history of likely stress. We believe the bank has provided for the legacy stress and there is unlikely to be any carry forward of stress from the current pool of recognized assets. Valuation With the traction in advances, lower incremental credit costs, strong operating profits, improved risk adjusted NIMs, we expect ~18% CAGR in NII and PPoP; PAT at CAGR 22% and ability to maintain RoAs at 1.9% in FY21/22 respectively. We maintain our target at Rs 1,510 implying a P/ABV of 3.7x FY22E P/ABV. It has already shown its strength in weakness and we expect it to remain most beneficial in an upturn.

Growth: Strong earning momentum Asset Quality: GNPA at steady state even after CASA: Maintaining at ~40% though losses to fall the standstill 37.1% 28.8% 84.5% 69.7% 76.2% 42.0% 28.8% 1.4% 1.4% 41.6%

18.1% 18.4% 16.7% 15.8% 1.1% 12.8% 7.7% 3.5% 0.7% 39.7% 0.4% -5% 0.3% -9.6% 0.2% -17.9%

Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 QoQ YoY GNPA NNPA PCR ROA: Exit RoA at 1.9%. Credit costs(%): Recognised all the stress related CAR: Very well capitalised to the pandemic 19.1% 2.0% 1.17 18.9% 1.9% 0.92

0.70 1.8% 17.5%

Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20

Source: Company, KRChoksey Research

Q2FY21 : Key Concall Takeaways • The bank has not recognized GNPA on account of the standstill by the Supreme Court. • Had it recognized the same, GNPA would be 1.37% vs 1.01%; NNPA at 0.35% vs 0.1%; slippages at 1.98% vs 0.8%; Provisions INR 2371 Cr vs INR 1241 Cr; GNPA ex agri at 1.2% vs 0.9%. • The bank has nevertheless provided for the likely GNPA. • Demand resolution (CE) is at 95.5% And is likely to be at 97% by Oct end vs Pre-covid level of 99%; Non moratorium demand resolution is 99% • LCR is 163% with excess liquidity of INR 106,000 Crs • 104 branches added in Q2, 117 in Q1, 100 branches being finalized to launch and another 100 are in the planning stage. • 1.2 mn new customer additions and 1.8 mn new liability account additions. Merchant acquisition at 97% of last year momentum • The bank is set to launch festive treats 2.0 before the festive season for the auto and retail segment at 10x the scale of last year. • Momentum: Unsecured likely to be pre-covid in Oct, LAP and WC at pre-Covid level, MFI to see full scale recovery in 90 days BB and SME growing at high single digit • The bank is launching a digital platform for autos • In wholesale, 75% of external rated portfolio are AAA or AA and 93% is A and above; Based on internal sourcing, unsecured exposure is ranked at 3.5 and Secured at 4.7 – 4.8 implying 55% lower PD. • Versus a likely 9% stress assessed in SME in March, the same is now 3% • HDB: Provided an additional INR 300 Cr. as provision, PBT growth at 10% excluding the provisions; LCR at 214% and CAR at 19%+

Profit and Loss (INR Crores) FY 18 FY 19 FY 20 FY 21E FY 22E Interest Income 80,241 98,972 1,14,813 1,27,380 1,66,364 Interest Expense 40,146 50,729 58,626 62,131 87,941 Net Interest Income 40,095 48,243 56,186 65,249 78,423 Non interest income 15,220 17,626 23,261 28,652 33,375 Operating income 55,315 65,869 79,447 93,902 1,11,798 - Employee expense 6,806 7,762 9,526 12,563 12,301 - Other operating expense 15,885 18,358 21,172 23,551 31,525 Operating Expense 22,690 26,119 30,698 36,114 43,826 PPOP 32,625 39,750 48,750 57,788 67,971 Provisions 5,927 7,550 12,142 14,571 16,028 PBT 26,697 32,200 36,607 43,217 51,944 Tax Expense 9,211 11,122 10,350 10,878 12,986 PAT 17,487 21,078 26,257 32,339 38,958 Diluted EPS (INR) 33.69 39.20 47.89 58.80 70.83 Balance Sheet (INR Crores) FY18 FY19 FY 20 FY21E FY 22E Source of Funds Share capital 519 545 548 550 550 Reserves & Surplus 1,05,776 1,48,662 1,70,438 1,94,692 2,23,910 Networth 1,06,295 1,49,206 1,70,986 1,95,242 2,24,460 Borrowings 1,23,105 1,17,085 1,44,629 1,63,866 2,42,985 Deposits 7,88,771 9,23,141 11,47,502 13,99,953 16,72,944 Other liabilities & provisions 45,764 55,108 67,394 69,202 1,12,717 Total Equity & Liabilities 10,63,934 12,44,540 15,30,511 18,28,263 22,53,105 Uses of Funds Balances w/ banks & others 2,09,341 93,527 1,44,410 1,38,595 1,65,621 Investments 2,42,200 2,90,588 3,91,827 5,28,966 6,92,945 Loans & advances 6,58,333 8,19,401 9,93,703 12,10,330 14,59,658 Fixed assets 3,607 4,030 4,432 4,765 5,014 Other assets 36,879 49,174 53,931 60,403 67,047 Total Assets 10,63,934 12,44,540 15,30,511 18,28,263 22,53,105 Source: Company Reports, Bloomberg, KRChoksey Research

Key Ratio FY18 FY19 FY 20 FY21E FY 22E Growth Rates Advances (%) 18.7% 24.5% 21.3% 21.8% 20.6% Deposits (%) 22.5% 17.0% 24.3% 22.0% 19.5% Total assets (%) 23.2% 17.0% 23.0% 19.5% 23.2% NII (%) 21.0% 20.3% 16.5% 16.1% 20.2% Pre-provisioning profit (%) 26.8% 21.8% 22.6% 18.5% 17.6% PAT (%) 19.7% 20.5% 24.6% 23.2% 20.5% B/S Ratios Credit/Deposit (%) 83.5% 88.8% 86.6% 86.5% 87.3% CASA (%) 43.5% 42.4% 42.2% 41.0% 40.2% Advances/Total assets (%) 61.9% 65.8% 64.9% 66.2% 64.8% Leverage - Total Assets to Equity 10.0 8.3 8.95 9.36 10.04 Operating efficiency Cost/income (%) 41.0% 39.7% 38.6% 38.5% 39.2% Opex/total assets (%) 2.1% 2.1% 2.0% 2.0% 1.9% Opex/total interest earning assets 2.5% 2.4% 2.4% 2.3% 2.3% Profitability NIM (%) 4.4% 4.4% 4.4% 4.2% 4.0% RoA (%) 1.8% 1.8% 1.9% 1.9% 1.9% RoE (%) 17.9% 16.5% 16.4% 17.7% 18.6% Asset quality Gross NPA (%) 1.3% 1.4% 1.26% 1.43% 1.49% Net NPA (%) 0.4% 0.4% 0.36% 0.42% 0.43% PCR (%) 69.8% 71.4% 96.0% 85.0% 85.0% Credit cost (%) 0.98% 1.02% 0.80% 1.32% 1.20% Per share data / Valuation EPS (INR) 33.7 39.2 47.9 58.8 70.8 BVPS (INR) 204.8 273.9 311.8 355.0 408.1 ABVPS (INR) 199.8 268.0 305.4 350.2 402.1 P/E (x) 39.8 34.2 28.0 22.8 18.9 P/BV (x) 6.5 4.9 4.3 3.8 3.3 P/ABV (x) 6.7 5.0 4.4 3.8 3.3 Source: Company Reports, Bloomberg, KRChoksey Research

Investment Rationale: Advances growth is in line with industry with an uptick in deposit base Advances grew at 22.6% YoY and deposits at 34.4% YoY. We expect the advance and deposit CAGR at 21% and 27.5% during FY20-22E, respectively. The bank’s CAR is at 25.7% and is well capitalized for growth. Expansion plan of 574 new banking outlets across country (south/west/north) by FY2021 to support overall business growth. Operating performance to grow at CAGR 18.5% during FY20-22E Best cost efficiency across private players is expected to raise bank’s future operating performance. Cost to income ratio is expected to remain below ~35%. NIMs are expected to normalise as the deposit costs are expected to be lower. Well provided for in credit costs Total INR 20.9 bn of bank provisioning includes additional provisioning of INR 17.4 bn (3.5% of micro loans and 2.3% of overall loans). Management expects efficiency close to pre-COVID levels; thus sufficient provisioning is available on balance sheet for FY2021. Valuation Disbursements are expected to pick up backed by expected demand and gradual normalcy in economic activities. Reduction in Promoters holding to 40% has eliminated overhang while making it more attractive. We expect bank to deliver ROA of 3.6% and ROE of 23.3% in FY22E. We maintain our target to INR 431 implying ~3.58x FY22E P/ABV

Growth: Sequential improvement in profitability GNPA optically lower CASA Ratio: sequential growth

171.0% PCR (%) 70.0% 38.2% 68.34% 66.6% 37.1% 1.76% 1.43% 67.3% 1.20% 34.4% 33.0% 25.8% 24.5% 22.6% 6.2% 0.56% 2.7% 9.1% 5.1% 0.40% 0.48% -5.3%

-13.2% Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 -53.5% -17.9% GNPA (%) NNPA (%) Q-o-Q Y-o-Y

Credit Costs(%): provided to a large Strong capital: sequential de-growth ROA Sequentially raised as credit costs falls extent

3.50 26.5% 4.8%

3.6% 25.7%

1.56 25.1% 2.3%

0.71

Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20 Q2FY21 Q1FY21 Q2FY20

Source: Company, KRChoksey Research

Q2FY21 : Key Concall Takeaways  The bank has defined a 5 year strategy to expand and further diversify into non-micro credit segments. It has renamed previous ‘micro banking segment’ as Emerging Entrepreneur Business (EEB). EEB Individual loans would be classified under ‘Commercial Banking’ (CB) which is replaced against ‘Wholesale Banking’, as it focuses only on SME/MSME/NBFC/vintage EEB borrowers where corporates lending is not in focus.  Collection efficiency of West Bengal stood at 90% and it was 96% in terms of borrowers.  The bank has disbursed top up loans to 12.3% of borrowers having a good credit history.  In EEB segment, ~15-18% of new borrowers availed loans from the bank while loans are offered to ~80% of existing borrowers in a year. There is enough demand and opportunity available in micro segment to pick and choose customers, as bank has a wide distribution network.  EEB average savings account per customer has seen consistently reduced up to INR 1,600 as on Sep’20 from INR 2,000 as on Sep’19, primarily due to COVID situation. It is expected improve again post pandemic.  In EEB segment, being a sole banker it is more focused towards moving high vintage micro borrowers (+10 years) to MSME level for better control on credit and leverage positioning.  In the housing segment, Gruh finance is looking to go beyond affordable housing to prime segment while more penetration observed from eastern states. It expects growth in current average ticket size of INR 9-9.5 lakh in the medium term. Micro housing segment would be a part of EEB vertical.  Individual micro loan book stood at INR 30 bn and has written off 109 cr from the book.  According to management, Small Enterprise Loans (SEL) are a part of commercial banking; average ticket size is of INR 3-3.5 lakhs. High vintage micro borrowers who are promoted from group loans to individual loans with an average ticket size of INR 1.65-1.75 lakhs are part of EEB Individuals. EEB individuals is also a part of CB for FY25 projections to achieve 30% of overall book.  Board of directors approved re-appointment of Mr. Chandra Shekhar Ghosh as MD & CEO of the bank for 5 years from July’21.

PROFIT & LOSS ACCOUNT (INR Crores) FY 2018 FY 2019 FY 2020 FY 2021E FY 2022E Interest income 4802.3 6644.1 10885.5 13724.2 16811.3 Interest expense 1770.1 2148.0 4561.6 6263.1 7059.8 Net interest income 3032.2 4496.1 6323.9 7461.1 9751.5 Non interest income 706.2 1063.0 1549.2 1498.1 1898.1 Operating income 3738.4 5559.1 7873.1 8959.2 11649.6 Operating expense 1308.3 1811.0 2426.5 2796.6 4001.2 PPOP 2430.1 3748.2 5446.6 6162.6 7648.4 Provisions 374.2 735.1 1393.2 2065.3 1923.4 PBT 2055.9 3013.1 4053.4 4097.3 5725.0 Tax expense 710.3 1061.6 1029.7 1031.3 1441.0 PAT 1345.6 1951.5 3023.7 3066.0 4284.0

BALANCE SHEET (INR Crores) FY 2018 FY 2019 FY 2020 FY 2021E FY 2022E SOURCES OF FUNDS Share capital 1192.8 1193.1 1610.2 1610.2 1610.2 Reserves & surplus 8189.1 10008.7 13585.2 15036.6 18544.4 Shareholders' funds 9381.9 11201.7 15195.5 16646.9 20154.6 Borrowings 285.0 521.4 16379.2 12612.0 10215.7 Deposits 33869.0 43231.6 57081.5 74206.0 92757.4 Other liabilities & provisions 774.1 1487.0 3061.7 4565.8 6103.7 TOTAL LIABILITIES & EQUITY 44310.1 56441.7 91717.8 108030.6 129231.5 USES OF FUNDS Cash and cash equivalent 5510.6 5802.7 8352.9 8302.2 10975.1 Investments 8371.9 10037.5 15351.8 16325.3 18551.5 Advances 29713.0 39643.4 66629.9 81288.5 97546.2 Fixed & other assets 714.5 958.2 1383.2 2114.6 2158.7 TOTAL ASSETS 44310.1 56441.7 91717.8 108030.6 129231.5 Source: Company Reports, Bloomberg, KRChoksey Research

KEY RATIOS FY 2018 FY 2019 FY 2020 FY 2021E FY 2022E Growth rates Advances (%) 76.5% 33.4% 68.1% 22.0% 20.0% Deposits (%) 45.8% 27.6% 32.0% 30.0% 25.0% Total assets (%) 46.5% 27.4% 62.5% 17.8% 19.6% NII (%) 26.2% 48.3% 40.7% 18.0% 30.7% Pre-provisioning profit (%) 35.5% 54.2% 45.3% 13.1% 24.1% PAT (%) 21.0% 45.0% 54.9% 1.4% 39.7% Balance sheet ratios Credit/Deposit (%) 87.7% 91.7% 116.7% 109.5% 105.2% Advances/Total assets (%) 34.3% 40.8% 36.8% 41.2% 49.0% Leverage (x) 67.1% 70.2% 72.6% 75.2% 75.5% Operating efficiency Cost/income (%) 35.0% 32.6% 30.8% 31.2% 34.3% Opex/total assets (%) 3.5% 3.6% 3.3% 2.8% 3.4% Opex/total interest earning assets (%) 3.4% 3.6% 3.0% 2.9% 3.4% Profitability NIM (%) 8.0% 9.0% 7.7% 7.6% 8.4% RoA (%) 3.6% 3.9% 4.1% 3.1% 3.6% RoE (%) 19.5% 19.0% 22.9% 19.3% 23.3% Asset quality Gross NPA (%) 1.3% 2.1% 1.5% 2.3% 2.3% Net NPA (%) 0.6% 0.6% 0.6% 0.8% 0.8% PCR (%) 53.7% 72.1% 60.7% 65.0% 65.0% Slippage (%) 1.7% 2.4% 0.4% 1.3% 0.6% Credit cost (%) 1.6% 2.1% 2.6% 2.8% 2.2% Per share data / Valuation EPS (INR) 11.3 16.4 18.8 19.0 26.6 BV (INR) 78.6 93.9 94.4 103.4 125.2 ABV (INR) 77.2 92.0 92.0 99.4 120.2 P/E (x) 42.2x 32.1x 10.8x 15.8x 11.3x P/BV (x) 6.0x 5.6x 2.2x 2.9x 2.4x P/ABV (x) 6.2x 5.7x 2.2x 3.0x 2.5x Source: Company Reports, Bloomberg, KRChoksey Research

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