ICICI Securities Limited

Initiating Coverage March 28, 2011

Rating Matrix Rating : Buy City Union (CITUNI) Target : | 52 Target Period : 12-15 months | 44 Potential Upside : 18 % Sticking to basics ensures profitability…

Performance Highlights (CUB) is a South based small sized bank. The | Crore FY09 FY10 FY11E FY12E FY13E bank stands out from the rest due to its target SME customer profiling NII 243 278 388 483 598 and loan product mix resulting in higher NIM and best in class returns PPP 227 256 338 417 511 matrix. While other build up scale through the wholesale business first and enter retail subsequently, CUB’s growth, though PAT 122 153 213 269 337

stemming in from retail, is in principle not for consumption as the bank Stock Metrics mainly lends to small businesses, traders, etc. It has been growing steadily albeit relatively conservatively and aims to continue with this Bloomberg Code CTBK.BO strategy for the next four or five years in order to reach a larger scale Reuters Code CUBK.IN before embarking on an aggressive growth trajectory. We believe this Face Value (|) 1 strategy works for the bank and estimate that a 26% CAGR in business Market Cap (| cr) 1,770 would lead to 30% CAGR in PAT with RoA and RoE being maintained at 52 week H/L 54 /28 1.7% and 22.7%, respectively, over FY10-13E. Sensex 18,993 Business loans, high short-term loan book to maintain NIM at 3.1% 2W Average volumes (BSE) 135,000 CUB’s loan book is high interest yielding in nature as:

ƒ It has higher proportion of SME-trade loans segment (constitutes 54% Comparable Return Matrix (%) of its loan book). Short-term loans remain high (~58% in FY10) Company 1M 3M 6M 12M ƒ Approx. 80% of its loan book is on a floating basis enabling frequent City Union Bank 23.2 0.2 -0.7 60.8 repricing of its book, resulting in higher pricing power, which helps 10.0 -3.9 -27.9 26.5 maintain NIM South 14.1 -13.9 -0.7 41.8 We expect advances to grow at a sturdy 28% CAGR over FY10-13E resulting in NIM stabilising at 3.1% by FY13E. Price Movement Small ticket secured loans sustain healthy asset quality… CUB has been successful in bringing its GNPA and NNPA down from peak 60 7000 levels of 2% and 1.5% in Q1FY10 to 1.3% and 0.5%, respectively, in 40 5000 Q1FY11 and maintaining them ever since. Its lending philosophy of ) |

( providing small ticket secured loans (~1:1 loan to collateral ratio) helps 20 3000 control asset quality. We expect GNPA and NNPA to decline further to 0 1000 1.1% and 0.4%, respectively, over FY10-13E. Valuations Oct-10 Jan-11 Jun-10 Nov-10 Mar-10 Mar-11 Aug-10 May-10 At the CMP of | 44, the stock is currently trading at 1.2x its FY13E ABV. We believe CUB is capable of sustaining its high RoA and RoE of over City Union Bank Nifty (RHS) 1.4% and 20%, respectively, while continuing its business strategy as a Analyst’s name niche banker to small businesses having a working capital loan oriented business model. We have valued the stock at 1.4x FY13E ABV and arrive Kajal Gandhi [email protected] at a target price of | 52, giving 18% upside. We are initiating coverage on the stock with a BUY rating. Viraj Gandhi

[email protected] Exhibit 1: Valuation Metrics FY09 FY10 FY11E FY12E FY13E Mani Arora NP (| Crore) 122.1 152.8 213.5 268.6 336.6 [email protected] EPS (|) 3.8 3.8 5.3 6.4 8.0 Growth (%) 20.1 0.2 39.7 19.8 25.3

P/E (x) 11.5 11.5 8.2 6.9 5.5

ABV (|) 18.7 19.7 24.0 30.7 37.7 Price / Book (x) 2.1 2.1 1.8 1.4 1.1 P/ABV (x) 2.3 2.2 1.8 1.4 1.2 GNPA (%) 1.8 1.4 1.2 1.2 1.1 NNPA (%) 1.1 0.6 0.5 0.4 0.4 RoNA (%) 1.5 1.5 1.7 1.7 1.7 RoE (%) 19.9 20.6 23.3 23.0 22.7

Source: Company annual reports, ICICIdirect.com Research

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Shareholding pattern (Q3FY11) Company background Shareholders Holding (%) City Union Bank (CUB) is an old private sector bank with a legacy of over Promoters 0.0 100 years. Based out of , , it has a network of Institutional investors 23.4 236 branches with 209 branches concentrated in Southern India. CUB has General public 76.6 a history of 100 years of profits and dividend payouts. The bank, which is concentrated primarily in Tamil Nadu with 63% of its total branch FII & DII holding trend (%) network, derives ~72% of its business from the state alone. The bank, 20 which is 100% CBS based, offers diverse products and services catering 17 primarily to SME, traders and retail customers. It has a bancassurance tie- 15 16 14 up with LIC and National Insurance Company. CUB has entered in 12 contract with Export Credit & Guarantee Corporation Ltd (ECGC) for 12 marketing export credit insurance products through its branch network 8 8 8 (%) and has also obtained a license to function as a 6 8 (DP) under National Securities Depository Ltd. 4 City Union Bank was founded in Kumbakonam, Tamil Nadu in 1904 as 'The Kumbakonam Bank Ltd’, incorporated as a limited company and 0 spread out gradually to become a regional bank in the district. Q4FY10 Q1FY11 Q2FY11 Q3FY11 In 1945, the bank was converted into a scheduled . It went on to acquire small banks with Common Wealth Bank Ltd being the first in 1957. It amalgamated two more local banks 'The City Forward Bank Ltd' and ' Ltd' with itself in 1965 and was rechristened as the 'The Kumbakonam City Union Bank Limited'. It stepped out of Tamil Nadu for the first time in 1980 opening its first branch in Sultanpet, Bangalore. It changed its name to 'City Union Bank Ltd' in December 1987 in sync with its new national image. It has a history of steady corporate leadership since its inception, with only six CEOs so far. V Narayanan who was with the bank since 1974 and went on to become the Chairman and CEO of the bank in 1980 was Rights issue of 8 famous in the industry for his illustrious leadership skills and vision. S crore shares offering one Balasubramanian took charge in 2004 as the Chairman and CEO with Mr share for every Kamakodi being promoted as the executive director of the bank. four shares held with issue price of | 6 in 2009 Exhibit 2: Strong foothold in Southern India Exhibit 3: Business concentration in Tamil Nadu

Equity shares Procured Gujarat, Gujarat preferential licenses to act 3% Others, Others Kerala, Kerala allotment in as agent for 5% Maharash 1% 4% 4% 2% 2007 procuring life Maha- tra and general rashtra, 6% insurance business in 5% 2003 Tamil Karna- 6% IPO, listing of Nadu, taka, 8% Andhra Tamil the bank’s 63% shares on BSE, Andhra Pradesh Nadu NSE and MSE in ‘The City Pradesh, 72% Branches 9% Business 1998 Forward Bank 13% Ltd’ and ‘The Union Bank Ltd’ Source: Company quarterly presentation, Source: Company quarterly presentation, amalgamated ICICIdirect.com, Research ICICIdirect.com, Research with City Union Acquired Bank in 1965 Common Wealth Bank Ltd | 3000 crore Converted to a scheduled bank in 1945

Founded in 1904

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Investment Rationale

City Union Bank is a pure play on the small and conservative growth story in the Indian banking space. The bank has made profits and paid dividends for the past 100+ years of its existence. Moreover, it has one of the best returns matrices across the industry with RoA and RoE above 1.4% and 20%, respectively, since FY07 with returns scaling a new high with RoA at 1.7% and RoE at 24% in 9MFY11. We are initiating coverage and adding the stock to our existing coverage universe of 18 banks on this count. The bank is different from a or an IDBI Bank since they forayed into the wholesale business first, built a scale and then went aggressive on retail business. Though CUB’s growth is stemming in from retail, the bank mainly lends for business purpose rather than consumption.

City Union Bank’s business model entails: The bank capitalises on knowledge of its niche market of small ƒ Management mantra of consistent business growth businesses, SME and traders primarily based in South India. Its loan over aggressive expansion plans for larger size product composition leans towards high interest yielding working ƒ Focus on loans for business purposes rather than capital loans. It is this target customer profiling and right product mix consumption that enables the bank to charge a premium or pricing power, which ƒ Loan profile focused on SME-traders and high short- helps sustain the spread. This enables it to maintain NIM of over 3% (on term loans gives a competitive advantage in the form of account of better pricing power) and has helped the bank to keep a pricing power reasonable check on its cost of funds despite a low CASA of 19% (since ƒ This competitive advantage helps maintain higher NIM bulk deposits form only 3%) of total deposits. The bank has a healthy of over 3% asset liability management with 71% of deposits and 69% of advances ƒ Healthy asset quality due to low ticket size and loan to having maturity period of one to three years in FY10. Moreover, it collateral value ratio of ~1:1 balances its asset-liability by lending to small businesses (classified as ƒ These strategies help the management to ensure retail) through retail term deposits that help maintain the spread. operating efficiency and higher returns The bank also boasts a healthy asset quality, which was maintained ƒ The management wants to continue with this existing throughout the recession riddled years of FY09-10 while most banks business strategy for the next four or five years before grappled with mounting NPA. Moreover, with low ticket size and ~1:1 embarking on a higher growth trajectory ratio of loan to collateral value the bank is placed comfortably with GNPA ratio at 1.3% and NNPA ratio at 0.5% in 9MFY11. CUB plans to continue with the same strategy for the next four or five years in order to reach a comfortable size before embarking on an aggressive expansion trajectory. We believe this strategy works for the bank and estimate that a 26% CAGR in business would lead to 30% CAGR in PAT with RoA and RoE being maintained at 1.7% and 22.7%, respectively, over FY10-13E. Exhibit 4: Balance sheet to grow at 24% CAGR over FY10-13E…

25000 22289

20000 18056 14308 15000 11559

crore) 9251 |

( 10000 7349 5363 4127 5000

0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

CAGR:29% CAGR:24%

Source: Company annual reports, ICICIdirect.com Research

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CUB- Small in size but high on returns… CUB’s unique business model is capable of sustaining higher returns (one of the best across industry) while achieving a larger scale of business. We expect the core business performance to strengthen profits through FY10- 13E due to steady business growth and higher spreads protected by its pricing power. With return ratios scaling all-time highs in 9MFY11 with RoA at 1.7% and RoE at 24%, we estimate 26% CAGR in business would lead to returns being maintained at 1.7% and 22.7% over FY10-13E. Exhibit 5: Core business performance set to boost return ratios further from here on… FY09 FY10 FY11E FY12E FY13E Net interest income/ avg. tota 2.9 2.7 3.0 3.0 3.0

The bank has a consistent track record of declaring profits Non-interest income/ avg. tot 1.5 1.4 1.1 1.1 1.0 and paying dividends for more than 100 years Non-operating profit/ avg. tot 4.4 4.1 4.1 4.1 4.0 Operating expenses/ avg. tota 1.7 1.6 1.5 1.5 1.4 Operating profit/ avg. total as 2.7 2.5 2.6 2.6 2.5 Provisions/ Avg. total assets 0.6 0.6 0.5 0.4 0.4 Return on Avg. assets 1.5 1.5 1.7 1.7 1.7 Leverage (Avg assets/ Avg e 13.5 14.0 14.1 13.8 13.6 Return on equity 19.9 20.6 23.3 23.0 22.7

Source: Company annual reports, ICICIdirect.com Research

The bank will be able to capitalise on its asset utilisation (refer exhibit 5) even though the leverage factor will moderate from 14.1x to 13.6x over FY10-13E post the equity dilution of 5% (| 100 crore) factored in FY12E required to fuel the bank’s growth plans. Despite the dilution, the bank would be able to maintain higher RoE of ~23% till FY13E derived from pure banking play. Exhibit 6: High returns since past five years…

2.0 24 23.3 23.0 22.7 CUB has one of the best returns matrices across the 1.7 22.0 1.6 1.7 1.7 22 industry with RoA and RoE above 1.4% and 19%, 1.5 1.5 21.8 1.5 1.5 respectively, since FY07 with returns scaling a new high 1.4 20.6 20 with RoA at 1.7% and RoE at 24% in 9MFY11 (%) 19.7 19.9 (%) 1.0 18

0.5 16 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

RoA* RoE* (RHS)

Source: Company annual reports, ICICIdirect.com Research

CUB has outshone its peers despite its small size when it comes to returns. The bank is set to deliver higher returns than and Lakshmi Vilas Bank in the forthcoming years. The bank’s small size and niche positioning generates pricing power on the lending front leading to higher returns on its assets as well as equity employed.

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Exhibit 7: Best in class returns…

ROA ROE Peer Banks FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12E City Union Bank 1.5 1.5 1.7 1.7 19.9 20.6 23.3 23.0 1.2 0.3 0.3 0.5 19.3 5.4 4.6 8.4 1.4 1.1 1.2 1.3 12.1 10.3 12.0 13.5 1.3 0.7 0.8 0.9 18.1 9.8 12.9 15.3 South Indian Bank 1.0 1.1 1.0 1.1 16.0 17.9 17.8 19.5

Source: Company annual reports, ICICIdirect.com Research

…derived from consistent profitability We expect PAT to double from | 153 crore in FY10 to | 337 crore in FY13E registering a growth of 30% CAGR resulting from steady business growth percolating to the NII and boosting its core fee based income. Moreover, an efficient cost to income ratio of ~36% and lower credit costs on account of healthy asset quality would reduce the burden on the bottomline through FY11-13E. The strategies envisaged and implemented by the bank would lead to a shift in its PAT growth trajectory from 28% CAGR over FY06-10 to 30% CAGR over FY10-13E. Exhibit 8: PAT to double by FY13E…

400

300 CAGR:30% 337

We expect 26% CAGR in business to percolate to the 200 269 bottomline with PAT registering 30% CAGR over FY10-13E Crore) | 213 ( CAGR: 28%

100 153 122 102 72 56 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

PAT

Source: Company annual reports, ICICIdirect.com Research

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Higher return ratios boosted by effective business strategy... City Union Bank (CUB) has positioned itself as a niche banker for small businesses and traders with its South India centric and high yielding working capital loans oriented business model. It is embarking on a steady growth trajectory aimed at increasing its business size by ~30% YoY in FY11E-12E targeting a business size of above | 30000 crore by FY13E. CUB derives its competitive advantage from: • Steady business growth vs. aggressive pace to expand balance sheet • Digging deeper in South India, expanding in lucrative centres across India • Loans to small businesses and traders, high proportion of short term loans • Focus on retail based term deposit mobilisation Steady business growth vs. aggressive pace to expand balance sheet… The bank’s business growth has been steady over the past five years growing at 30% CAGR over FY06-10 with a declining C-D ratio (down from 72% in FY06 to 66% in FY10), which provides it sufficient headroom to push up its advances growth, going ahead. We expect the business to expand at 26% CAGR with advances surging at 28% CAGR and deposits rising at 25% CAGR over FY10-13E. Exhibit 9: C-D Ratio to inch up to 71% by FY11E, stabilise at 72% by FY13E...

21000 74 18000 72 72 72 72 71 71 71 15000 70 12000 69 68 (%) Crore) 9000 We expect the business momentum to continue with the | ( 66 66 bank expanding its business at 26% CAGR over FY10-13E 6000 64 with the C/D ratio stable at ~ 72% 3000 0 3518 2550 4699 3329 6425 4537 8207 5645 10285 6833 12751 9068 16066 11517 19881 14337 62 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Deposits Advances CD Ratio (RHS)

Source: Company annual reports, ICICIdirect.com Research

Exhibit 10: Bank’s business growth trajectory across business cycles…

45 80 72 71 71 69 70 65 66 35 60 57 55 54 51 52 50 25 (%) 40 (%) 15 30 20 5 10 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Advances Growth YoY Deposits Growth YoY C-D ratio (RHS)

Source: Company annual reports, ICICIdirect.com Research

The historical growth trend reveals that the advances and deposits follow a lead-lag pattern albeit with a wider gap across business cycles. This is

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the third phase since FY00 where the deposit mobilisation exceeded loan growth during FY09-10, marking the first leg of the phase. However, the bank has changed its growth trajectory with advances pacing ahead of deposits since Q1FY11 (refer exhibit 11) with the bank utilising the headroom created by a lower C/D ratio in FY10. Advances have already grown 40% YoY vis-à-vis deposit growth at 35% YoY in 9MFY11. Exhibit 11: Credit offtake shifting gears post FY10, pacing ahead of deposits…

1600 45 1400 38 40 40 1200 35 35 1000 30 30 29 30 800 27 25 27 25 600 23 (%) Crore) 22 21 20 | 19 ( 400 18 200 15 0 10 -200 Q1FY10 H1FY10 9MFY10 FY10 Q1FY11 H1FY11 9MFY11 5 -400 0

Incremental Deposits (QoQ) Incremental Advances (QoQ) Deposits Growth YoY (RHS) Advances Growth YoY (RHS)

Source: Company quarterly presentation, ICICIdirect.com Research

Digging deeper in South India, expanding in lucrative centres across India…

It had received 62 branch licenses of which it plans to open CUB has a network of 236 branches with 209 branches concentrated in the remaining 48 by July 2011. The bank is opening 33 Southern India. The bank, which is concentrated primarily in Tamil Nadu branches in Tamil Nadu alone and expanding across India with 63% of its total branch network, derives ~72% of its business from opening branches in strategic business centres the state alone. Exhibit 12: Total 72% of business derived from Tamil Nadu

State No. of Branches Statewise % of Branches Statewise % of Business State-wise planned business expansion Tamil Nadu 148 63 72 State Tier I & II centersTier III to VI centers Andhra Pradesh 30 13 9 Tamil Nadu 15 18 Karnataka 19 8 6 Andhra Pradesh 4 Maharashtra 12 5 6 Karnataka 1 Kerala 10 4 2 Maharashtra 4 Gujarat 6 3 1 Chattisgarh 1 Others 11 5 4 Total 236 100 100 New Delhi 2 Orisaa 1 Source: Company quarterly presentation, ICICIdirect.com Research Punjab 1 Uttar Pradesh 1 The small sized bank aims to strengthen its existing concentration down Total 30 18 South by opening up new branches across Tier I to Tier VI centres and Source: Company quarterly presentation targets a pan-India presence by expanding its branch network to 500 branches in the next three years.

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Loans to small businesses and traders; high proportion of short-term loans… CUB has gained from its target customer profiling and loan product composition, which provides it with pricing power (the ability to charge a higher interest rate). It is adept at catering to the requirements of its target market of SME and traders, which constitute 54% of its loan book. Its competitive advantage lies in its loan book, which is skewed towards high interest yielding short-term loans (~58% in FY10). Moreover, 80% of its loan book is on a floating basis enabling it to reprice its book frequently

(beneficial in a rising interest rate scenario). Exhibit 13: Advances to grow at 28% CAGR over FY10-13E…

16000 40 36 33 12000 31 30 27 24 24 8000 21 20 (%) Crore) | ( 14 4000 10

0 2550 3329 4537 5645 6833 9068 11517 14337 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Advances Advances Growth YoY (RHS)

Source: Company annual reports, ICICIdirect.com Research

CUB has expanded its loan book at 28% CAGR over FY06-10 growing aggressively in FY07-08 with growth peaking at 36% YoY in FY08. However, the recession hit years of FY09-10 saw growth moderating to 24% YoY (FY09) and 21% YoY (FY10), respectively. The bank has grown its loan book by 40% YoY in 9MFY11. Since CUB has no plans to change its loan profile for runaway growth, we estimate the loan book will grow at a sturdy 28% CAGR over FY10-13E. Exhibit 14: SME-traders constitute 54% of total loans

9MFY11 Agri The bank believes in lending for wealth creation rather than 13% consumption, which explains its lack of thrust in retail MSME consumption loans like auto and personal loans 30% Large Ind. 6%

It is not looking at a wholesale business based model for Retail Traders the next four or five years 10%

Services Wholesale Traders 29% 12%

Source: Company quarterly presentation, ICICIdirect.com Research

The bank’s comparative advantage lies in its positioning as a niche lender to small businesses like the local money lender of old times. The bank has stuck to its old private sector roots capitalising on its concentration in South India, understanding of the market dynamics and its target customer needs. It is adept at catering to the requirements of its target market of SME and traders, which constitutes 54% of its loan book, charging a higher rate of interest.

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Exhibit 15: Loan product mix: short term loans constitute 58% of total advances…

9MFY11 Demand Loans 24% OD/CC and Demand Loans 35% Approximately 80% of its loan book is on a floating basis, Bills purchased/ which allows frequent loan book repricing during a rising discounted interest rate scenario, thus reducing interest rate risk and 2% protecting its NIM Term Loans 39%

Source: Company quarterly presentation, ICICIdirect.com Research

The bank has an interesting loan product mix as 58% of its advances are high interest yielding short-term loans fulfilling working capital requirements. This also helps in generating a faster loan book churn as

the average maturity of working capital loans is 1.75-3 years. Exhibit 16: High interest yielding working capital loans lead to consistent profitability… Advances FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Short term advances (%) 64.6 65.4 47.6 52.6 58.1 58.4 58.7 58.9 Short-term loans constitute 58% of CUB’s advances as Term loans (%) 35.4 34.6 52.4 47.4 41.9 41.6 41.3 41.1 opposed to the industry average of 42%

Short term advances 1648 2176 2161 2971 3973 5293 6760 8438 Term loans 902 1153 2376 2674 2860 3775 4757 5899 Total advances 2550 3329 4537 5645 6833 9068 11517 14337 Source: Company annual reports, ICICIdirect.com Research

Approximately 80% of its loan book is on a floating basis, which allows frequent loan book repricing during rising interest rate scenario. This reduces interest rate risk, thus protecting its NIM. Moreover, the bank keeps its asset quality healthy as it has low average ticket size loans backed by collaterals. Unsecured loans for the bank amount to a mere 3% of total advances. Exhibit 17: Credit offtake to key industries: Textile accounts for 10% of total loans 900 835

600 370 401 Crore) |

( 249 Industry wise, textiles and iron and steel are two major 300 205 146 150 sectors with a 10% and 5% share in total advances, respectively. The bank is not a major player in 0 infrastructure lending due to its smaller size Construction Textiles Food Iron & Steel Paper Other Metal Other (CRE) Processing & Metal Industries Products

Source: Company quarterly presentation, ICICIdirect.com Research

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Focus on retail based term deposit mobilisation…. CUB’s deposits grew at 31% CAGR over FY06-10 with accretion of core retail term deposits. The bank had lowered its C/D ratio from 71% in FY08 to 66% in FY10 with deposit growth a step ahead of loan book growth and has been leveraging this headroom for faster loan book expansion in FY11. The bank has a low CASA of ~19%, which does not play a major role in controlling cost of funds and maintaining high margins for the bank. Interestingly, a positive for the bank is its proportion of high cost bulk deposits, which is as low as 3% of total deposits. This protects it from a sudden spike in costs. We expect deposits to increase at 25% CAGR over FY10-13E with the CASA ratio inching up to ~20%. Exhibit 18: CASA to remain subdued as deposit mobilisation leans on retail term deposits…

25000 30

20000 24 25 23 22 21 20 20 15000 19 19 19 19 The CASA ratio improved from 19% in FY09 to 22% in FY10 15 (%) Crore)

| 10000 even as total deposit growth slackened from 28% YoY in ( 10 FY09 to 25% YoY in FY10. This can be attributed to term 5000 5 deposits declining faster than demand deposits, thus 0 0 improving the CASA ratio FY06 FY07 FY08 FY09 FY10 9MFY11 FY11E FY12E FY13E

We expect the CASA ratio to inch up to ~20% as the bank Term Deposits CASA CASA ratio (RHS) undertakes deposit growth at 25% CAGR over FY10-13E

driven by retail term deposits Source: Company annual reports, ICICIdirect.com Research

Although the bank has been trying to garner a higher proportion of CASA, it has to undertake higher term deposit mobilisation in order to increase its deposit base, which explains its CASA declining to 19% in 9MFY11. With the bank aiming at 30% YoY business growth in the next two years, we believe it would need aggressive deposit mobilisation to fund its expanding loan book focusing more on long-term deposits, thus putting CASA under pressure. Exhibit 19: Term deposit to grow faster than CASA, going forward…

50 50 43 45 40 42 40

31 31 30 28 26 25 30 (%) (%) 20 21 26 23 20 18 15 10 10 10

0 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Term Deposits Growth YoY CASA Growth YoY (RHS)

Source: Company annual reports, ICICIdirect.com Research

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Effective business strategy helps sustain NIM over 3%… CUB has historically maintained a higher NIM of above 3% (refer exhibit 21) due to its pricing power protecting the spread. The bank gets its pricing power (the ability to charge a higher interest rate) from its SME focused, short-term loans oriented loan book. We expect NIM to stabilise at 3.1% by FY13E. Getting its asset-liability match right… The bank has matched its ALM with 71% of deposits and 69% of advances having maturity period of one to three years in FY10. As CUB’s loan mix is skewed towards short term loans it helps generate a higher churn for the bank. On the deposits front, fixed rate term deposits immunise the bank from frequent spike in deposit rates. This asset liability match helps maintain NIM across interest rate cycles as a similar maturity pattern helps to pass on deposit rate hikes to repricing of loans. Exhibit 20: Well matched ALM… Loans and advances Deposits (%) FY08* FY09 FY10 FY08* FY09 FY10 1 day - 0.6 0.7 - 0.2 0.3 2-7 days - 0.6 2.2 - 0.5 0.8 8-14 days* 4.9 0.7 2.6 6.4 1.1 1.1 15 to 28 days 0.8 0.8 1.0 3.9 1.0 1.1 29 days to 3 months 1.9 1.9 2.2 10.5 5.0 4.8 >3 mnths to <6 mnths 0.5 0.2 1.3 8.9 4.2 4.3 >6 mnths to <1 yr 0.2 0.3 2.9 20.4 12.2 13.0 >1 yr to <3 yrs 60.6 64.2 68.7 46.3 71.9 71.6 >3 yrs to <5 yrs 11.4 11.2 8.4 3.2 3.6 2.8 > 5 yrs 19.7 19.5 10.0 0.4 0.3 0.3 Total 100 100 100 100 100 100 Source: Company annual reports, ICICIdirect.com Research

Moreover, it balances its asset-liability by lending to small businesses (classified as retail) through retail term deposits, which helps maintain spread. Defying stereotype of high CASA for higher NIM… Historically, high NIM of above 3% for more than five years despite having a lower CASA base (~19%) lies at the heart of the bank’s business strategy. Unlike most banks, which control their cost of deposits through a higher CASA base, CUB is able to sustain high margins on account of the higher premium it is able to command from its niche market of SME and traders. Consequently, the bank has enjoyed high yields of over 12% since FY08 and has maintained NIM of over 3%. We estimate NIM will stabilise at 3.1% by FY13E by maintaining its spread given its pricing power advantage. Exhibit 21: Historically high NIM of over 3% sustainable in future…

4.0 3.7 3.7 3.6 3.6 3.5 3.2 3.0 3.0 3.2 3.1 3.1 3.1 We estimate NIM will stabilise at 3.1% by FY13E by (%) maintaining its spread given its pricing power advantage 2.0

1.0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Q1FY11 Q2FY11 Q3FY11

NIM

Source: Company annual reports and quarterly presentation ICICIdirect.com Research

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As discussed extensively in this report, given its positioning as a SME- trader focused bank catering to their specific requirements, higher churn and yields due to greater proportion of short-term loans (working capital loans), extensive knowledge about its market dynamics and a floating loan book size of approximately 80%, the bank has been able to manage its yields on advances across business cycles, thus maintaining the spread. Moreover, the deposit base consists mainly of retail term deposits, which have a higher maturity. This reduces the bank’s dependence on high cost bulk deposits, which constitutes only 3% of the total deposits.

Exhibit 22: …due to competitive advantage in managing yields.

15.1 12 13.8 13.5 16 12.6 12.8 13.0 12.3 11.7 11.4 11.3 10 11.0 10.9 12 9.9 8 9.0 8.7 8 (%) 7.9 8.0 (%) 6 7.7 7.0 7.2 6.8 6.1 6.0 4 4 5.8

2 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Q3FY11 CoD YoA (RHS)

Source: Company quarterly presentation, ICICIdirect.com Research

Exhibit 23: NIM relatively higher than peers…

4.5 4.0 3.5 4.3 3.8

3.0 3.5 3.2 3.2

2.5 3.0 2.9 2.8 2.8 2.6 (%) 2.6 2.5 CUB ranks well above its peer set in terms of NIM, coming 2.0 2.5 2.2 2.2 2.2 second only to Federal bank. 1.5 2.0 1.0 1.3 0.5 0.0 FY08 FY09 FY10

City Union Bank Dhanlakshmi Bank Federal Bank Karnataka Bank Lakshmi Vilas Bank South Indian Bank

Source: Company annual reports, ICICIdirect.com Research

ICICIdirect.com | Equity Research Page 12 ICICI Securities Limited

Asset quality concerns at bay… The bank has not only gained from steady business growth and loan book profiling, it has been successful in maintaining its asset quality as well. CUB’s asset quality concerns have been swept away since the recession hit years of FY09-10 leading to deteriorating asset quality. CUB has been successful in bringing its GNPA and NNPA down from peak levels of 2% and 1.5% in Q1FY10 to 1.3% and 0.5%, respectively, in Q1FY11 and maintaining them ever since. The provision coverage ratio has been shored up from 56% to a comfortable 71% (including tech. write-offs) over the same period. We expect GNPA and NNPA to decline further to 1.1% and 0.4%, respectively, over FY10-13E. What is intriguing is the fact that the asset quality deterioration for CUB has been relatively contained as opposed to the industry (especially small banks), which saw heavy slippages during Q4FY09-Q1FY10. Exhibit 24: Asset quality concerns at bay…

3 due to tech.w/offs. 80

70.3 71.6 72.4 71.4 2 2.0 2.0 2.0 56.1 60 2 53.5 53.3 1.4 1.5 1.3 1.3 1.3 Both GNPA and NNPA levels have declined in Q3FY10 from (%) 1.2 (%) 1 1.1 a high of | 121 crore and 66 crore in Q3FY10 after spiking 40 again in Q2FY11 to | 109 crore and | 45 crore, 1 0.6 0.5 0.5 0.5 respectively 0 20 We estimate GNPA and NNPA will decline further to 1.1% Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 and 0.4%, respectively, by FY13E GNPA ratio NNPA ratio Provision Coverage Ratio (RHS)

Source: Company quarterly presentation, ICICIdirect.com Research

It is CUB’s lending philosophy, which helps rein in the asset quality as the bank mainly lends small ticket secured loans to SME and traders for wealth creation. Best practices of secured lending ensure paring of losses in case of default as the bank maintains ~1:1 loan to collateral ratio. Moreover, a small ticket size mitigates concentration risk with no single large account turning into NPA, thus exposing the bank to greater risk.

Exhibit 25: Consistently improving asset quality over the years

7 6 5.9 5 4 4.3

(%) 3.4 According to the bank; it expects slippages of ~ 1% of 3 2.6 advances, going forward, with average recovery time being 2 2.0 1.8 1.8 1.4 two years 1 1.1 1.0 1.1 1.2 1.2 1.1 0.6 0.5 0.4 0.4 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

GNPA NNPA

Source: Company annual reports, ICICIdirect.com Research

ICICIdirect.com | Equity Research Page 13 ICICI Securities Limited

Exhibit 26: Restructured assets well on path of recovery

S. no. No. of Borrowers Amount (| Crore) 1 Restructured in Phase I -FY09 213 318.79 2 Restructured in Phase II - FY10 51 165.56 3=1+2 Total 264 484.35

4 Accounts closed by Q3FY11 67.49 5 Accounts turned as NPA 12.36 6 Accounts repaid till Q3FY11 185.06 7=3-6 Balance Outstanding 299.29

Source: Company quarterly presentation, ICICIdirect.com Research

Restructured assets have declined from | 484 crore in FY10 to | 299 crore with 2.5% of restructured assets turning into NPA and no new accounts being restructured for the past six quarters. Recovery has also been strong as 38% of restructured assets have already been recovered.

ICICIdirect.com | Equity Research Page 14 ICICI Securities Limited

Financials NII growth spurt in FY11E to set base for steady growth in FY11-13E… Aggressive business growth in FY11E of ~27% YoY driven by loan book surging 33% YoY would lead to a sharp spike in NII growth to ~39% YoY. This is in stark contrast to NII growth declining from the historical average of ~20% maintained since FY07-09 to 15% YoY in FY10. We expect NII growth to get pared down to ~24% YoY in both FY12E and FY13E, albeit on a higher base. Interest expenses soared ahead of interest income over the past five years as the bank focused on higher deposit mobilisation with deposits growing at 31% CAGR as opposed to advances expanding at 28% over FY06-10. Consequently, interest expenses grew at 38% CAGR as against 31% CAGR for interest income over the same period. With advances growth picking up in the next two years, we estimate interest income will grow in tandem with expenses at 28% CAGR and 27% CAGR, respectively, over FY10-13E. Exhibit 27: NII growth spike in FY11E to build base for future growth...

700 50 600 We expect NII growth to shoot up to ~39% YoY in FY11E 40 500 39 598 before it settles to ~24% YoY in FY12E and FY13E,

400 483 respectively. This is mainly on account of a pick-up in core 30 (%) Crore) 388 | 300 business growth in the coming years as the bank increases ( 26 24 24 its business at ~26% CAGR leading to 29% CAGR in NII 200 21 20 19 278 20 over FY10-13E, respectively 243 100 200

167 15 140 0 10 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

NII NII Growth YoY

Source: Company annual reports, ICICIdirect.com Research

Despite the high lending and deposit rates industry-wide, the bank will be successful in moderating its effect on its margins and NII by repricing its loan book at short intervals as ~80% of its loan book is on a floating basis. Going forward, we expect business growth of 26% CAGR to strengthen NII at 29% CAGR over FY10-13E.

ICICIdirect.com | Equity Research Page 15 ICICI Securities Limited

CEB* to provide thrust to non-interest income… We expect that non-interest income will grow in tandem with the strengthening core business performance. Historically, higher trading profits in FY09-10 led to a smart rise in the bank’s otherwise sluggish non- interest income. We believe that with higher interest rates prevailing in FY11E, trading gains will diminish with core fee based income taking the lead from here on. Commission, exchange and brokerage (CEB*) has improved YoY from | 45 crore in 9MFY11 to | 68 crore in 9MFY11 (equalling FY10 CEB of | 69 crore). We estimate non-interest income to expand at ~12% CAGR over FY10-13E. Exhibit 28: Trading gains to get wiped out in FY11E…

250 35 31 30 27 200 25 20 150 15 15 15 14 12 (%) Crore) 10 |

( 100 8 5 50 0 -4 -5 0 40 54 90 124 143 148 175 203 -10 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Non-Interest Income Trading/Non Interest Income (RHS)

Source: Company annual reports, ICICIdirect.com Research

Exhibit 29: CEB* to provide impetus to non-interest income…

160 140 3 2 26 120 14 11 100 1 46 20 48 The bank has also benefited from stronger suit recoveries, 80 24 Crore) 14 | which have been flowing in at a steady pace since FY10. ( 60 1 16 17 The bank has recovered | 20 crore as suit recoveries in 40 50 8 12 59 69 68 9MFY11 20 48 27 35 - FY06 FY07 FY08 FY09 FY10 9MFY11

CEB & Charges Treasury Profit Suit Recoveries Others

Source: Company annual reports, ICICIdirect.com Research *CEB: Commission, Exchange and Brokerage

The bank is also the largest bancassurance partner of LIC in Southern India. Moreover, given LIC and L&T’s strategic investment in the bank (they have a stake of 4.9% and 4.8%, respectively, in the bank), CUB can leverage this relationship to promote its products with them.

ICICIdirect.com | Equity Research Page 16 ICICI Securities Limited

Operational efficiency: Outperforms peers… CUB has been able to contain its opex growth better than its peers like South Indian Bank, Karur Vysya etc. (refer exhibit 31). This is evident from its cost to income ratio (C/I ratio), which declined by 300 bps from 39% in FY10 to 36% in 9MFY11 due to total income growth outpacing opex growth. The bank received branch licenses for 62 branches and plans to open the remaining 48 branches before July 2011. This would lead to higher staff cost and rental expenses. However, we expect a higher total income growth to offset the cost burden and the cost to income ratio to moderate to 36% by FY13E. Exhibit 30: C/I ratio to moderate as income growth outpaces opex growth…

350 50 300 41 40 250 39 38 38 39 36 37 37 36 200 The bank has maintained its operational efficiency as its C/I 30 (%) Crore) ratio, which hovered around 40% for the past five years, | 150 ( decelerated to 36% in 9MFY11. We expect the C/I ratio to 100 20 be in the range of 36% by FY13E 50

0 70 36 90 44 110 49 140 65 166 80 150 72 198 98 241 120 290 147 10 FY06 FY07 FY08 FY09 FY10 9MFY11 FY11E FY12E FY13E

Operating expenses Employee expenses C/I ratio (RHS)

Source: Company annual reports and quarterly presentation, ICICIdirect.com Research

City Union Bank has fared better than its peers in terms of operational efficiency, ranking well above Lakshmi Vilas Bank, South Indian Bank and Karnataka Bank, which hover between 40% and 50%. Exhibit 31: C/I ratio best among peers…

100 83.5 80

60 50.2 48.2 48.5

(%) 36.1 36.2 37.3 40

20

0 DLB* Karnataka LVB* SIB* Karur Vysya CUB Federal bank Bank

DLB* Karnataka Bank LVB* SIB* Karur Vysya CUB Federal bank

Source: Company quarterly presentations Q3FY11, ICICIdirect.com Research *DLB: Dhanlaxmi Bank, LVB: Lakshmi Vilas Bank, SIB: South Indian Bank

Positives for the bank include no pressure from provisioning for gratuity and second pension option as faced by public sector banks. Moreover, the bank is fully CBS based implying no major expenditure on technology investment.

ICICIdirect.com | Equity Research Page 17 ICICI Securities Limited

Investment book: Growth to moderate, well protected from MTM hits… We expect investment growth to moderate from 32% CAGR over FY06-10 to 22% CAGR over FY10-13E as the bank steps up its loan growth in the forthcoming years. If we analyse the investment-deposit ratio (I-D ratio) since FY06, we find that as CUB was conservative on the lending front during FY09-10, its I-D ratio scaled up from 27% to 31% over FY08-10. Going forward, we expect the bank to accelerate its loan book growth, thereby maintaining its I-D ratio at ~29% over FY10-13E. Exhibit 32: Investments to grow at 22% CAGR over FY10-13E…

8000 33

5899 6000 4720 30 3740 4000 3210 (%) Crore) | ( 2397 1718 27 2000 1057 1307

0 24 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Investments Investment-Deposit Ratio (RHS)

Source: Company annual reports, ICICIdirect.com Research

CUB’s Investment book is well protected from mark to market (MTM) hit caused by elevated G-Sec yields as the bank’s AFS book constitutes only 13% of the book with a modified duration of 2.89 years. Moreover, as discussed earlier, we expect the trading income proportion in non-interest income to moderate from 27% in FY10 to ~15% by FY13E. Exhibit 33: Well protected investment book

Q3FY11 Q4FY10 Q3FY10 Total Investments (| Crore) 3545 3219 3022 SLR 808084 Investments Breakup (| Crore) AFS 472 393 410 HTM 3073 2826 2608 HFT - - 5 Modified Duration AFS 2.89 2.89 2.88 HTM 5.68 5.98 6.07 HFT 0 0 6.91 Overall 5.25 5.49 5.56 Source: Company quarterly presentations Q3FY11 , ICICIdirect.com Research

ICICIdirect.com | Equity Research Page 18 ICICI Securities Limited

Capital raising plan on the anvil… The bank has a strong Tier-I ratio of 12.1% in 9MFY11 albeit with a lower Tier-II ratio at 0.97% as the bank has a sub-debt of only | 40 crore on its books. The bank has kept headroom for raising Tier-II capital when required and is looking forward to raise more Tier-I capital in the coming years. The bank has received board approval to raise equity worth | 300 crore, which it intends to raise in tranches from FY12E onwards. Exhibit 34: Tier-I ratio strong, option for raising Tier-II at bank’s discretion…

16

1.6 1.1 12 1.2 1.0 2.9 8 (%) 11.8 11.5 12.4 12.1 4 8.4

0 FY07 FY08 FY09 FY10 9MFY11

Tier-I Tier-II

Source: Company annual reports, ICICIdirect.com Research

In FY05, the bank had a target of increasing its net worth to | 1000 crore by December 2010. It expects to cross the mark before the end of FY11 (current net worth of ~ | 993 crore). Exhibit 35: Targeted net worth of | 3000 crore over next five years

Target net worth: | 3000 crore over next five years

| 1000 crore by end of Addition of | 2000 FY11E crore over next five years

| 1000 crore via | 1000 crore via fresh internal accruals capital raising

Source: Company, ICICIdirect.com Research

CUB has planned to further increase its net worth to | 3000 crore (addition of | 2000 crore) over the next five years with internal accruals and fresh capital issue contributing | 1000 crore each.

ICICIdirect.com | Equity Research Page 19 ICICI Securities Limited

Risk & concerns

High concentration risk… The bank gets 72% of the total business from 63% of its branches concentrated in Tamil Nadu. Although this gives the bank a competitive advantage in its niche expertise, it also makes it vulnerable to region- specific risks. Even though the bank is planning to open branches in lucrative centres in other parts of India, concentration risk would still be high given the business model.

Small size makes bank gullible to consolidation… CUB’s small size exposes it to risk of consolidation. Its branch concentration in southern India and SME-focused business strategy make the bank attractive as a probable acquisition target for big banks looking to strengthen their footprint in southern India.

Rising rate scenario to impact costs even more… High inflation has led to a tight monetary policy with higher policy rates pushing up both bank’s lending rates as well as deposit rates. Banks have been increasing their deposit rates in order to attract deposits, thus increasing costs. Such a situation would have an even greater effect on CUB on account of its small size and low CASA base. However, its impact on margins would be relatively lesser than those banks dependent on low cost deposits to maintain high margins.

Trouble in India Inc growth story to hurt asset quality as SME sector gets hit Concerns on global geo-political condition, rampant inflation and slowdown in Indian economic growth have been voiced frequently. Any slowdown in the India Inc growth story would trigger defaults by the SME segment. CUB’s asset quality may be hit by virtue of its SME focused business strategy.

ICICIdirect.com | Equity Research Page 20 ICICI Securities Limited

Valuation At the CMP of | 44, CUB is currently trading at 1.4x its FY12E ABV and 1.2x its FY13E ABV. The stock historically traded at sub 1.2x its one year forward ABV levels from H2FY09 till end of FY10. The stock has climbed up steadily since then scaling a high of 2x before sliding down to the present 1.4x levels. Exhibit 36: One year forward P/ABV band

60

50

40

30(|)

20

10

0 Apr-10 Apr-09 Apr-08 Apr-07 Apr-06 Apr-05 Dec-10 Dec-09 Dec-08 Dec-07 Dec-06 Dec-05 Aug-10 Aug-09 Aug-08 Aug-07 Aug-06 Aug-05

Price 1x 1.2x 1.4x 1.8x 2x

Source: Bloomberg, ICICIdirect.com Research

CUB has a superior return matrix as compared to its peers with both RoA and RoE well ahead of South Indian Bank (SIB), Federal Bank, etc. (refer exhibit below). Despite the bank’s small size, its consistent performance across all operational metrics is reflected in its P/ABV ratio. It has continued to maintain its lead over its peer set trading at 1.4x its FY12E ABV as opposed to Federal Bank and SIB, which are trading at 1.3x their FY12E ABV. Exhibit 37: Superior returns compared to peer set…

Branches Advances* Deposits* CASA (%) RoA (%) RoE (%) P/ABV (x) Banks 9MFY11 9MFY11 9MFY11 9MFY11 FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12E City Union Bank 232 8517 11977 18.6 1.5 1.5 1.7 1.7 19.9 20.6 23.3 23.0 2.3 2.2 1.8 1.4 Dhanlaxmi Bank 274 7771 10532 20.2 1.2 0.3 0.3 0.5 19.3 5.4 4.6 8.4 1.7 1.7 1.2 1.1 Federal Bank 737 28240 36914 29.6 1.4 1.1 1.2 1.3 12.1 10.3 12.0 13.5 1.5 1.4 1.4 1.3 Karnataka Bank 466 16282 25424 24.9 1.3 0.7 0.8 0.9 18.1 9.8 12.9 15.3 0.9 0.8 0.8 0.7 South Indian Bank 570 26998 19188 22.4 1.0 1.1 1.0 1.1 16.0 17.9 17.8 19.5 2.1 1.7 1.5 1.3

Source: Company annual reports and quarterly presentation, ICICIdirect.com Research *Advances and Deposits are in | Crore

We believe the bank is capable of sustaining higher returns while continuing with its business strategy as a niche banker for small businesses due to its small size, south India centric and high yielding working capital loans oriented business model. It has one of the best returns matrices across the industry with RoA and RoE above 1.4% and 20%, respectively, since FY07 with returns scaling a new high with RoA at 1.7% and RoE at 24% in 9MFY11. We estimate that a 26% CAGR in business would lead to returns being maintained at 1.7% and 22.7%, respectively, over FY10-13E. We have arrived at the target multiple using the Gordon Growth model at a 10% discount to the computed multiple, based on cost of equity at 14%, long-term growth rate at 3% and sustainable RoE of 20%. We have valued the stock at 1.4x FY13E ABV and arrive at a target price of | 52 giving an upside of 18%. We are initiating coverage on the stock with a BUY rating.

ICICIdirect.com | Equity Research Page 21 ICICI Securities Limited

Financial Scorecard

Exhibit 38: Profit and loss account

| Crore FY09 FY10 FY11E FY12E FY13E Interest Earned 804.4 956.6 1220.4 1589.9 1991.4 Interest Expended 561.8 678.5 832.6 1107.1 1393.7 Net Interest Income 242.6 278.1 387.8 482.8 597.7 growth (%) 21.4 14.7 39.4 24.5 23.8 Non Interest Income 123.7 143.5 147.7 175.0 203.5 Net Income 366.3 421.6 535.5 657.7 801.2 Operating expense 139.5 165.9 197.5 240.9 290.2 Gross profit 226.7 255.8 338.0 416.9 511.0 Provisions 48.4 60.5 62.5 68.0 73.9 Taxes 56.2 42.5 62.0 80.2 100.5 Net Profit 122.1 152.8 213.5 268.6 336.6 growth (%) 20.1 25.1 39.7 25.8 25.3

Source: Company annual reports, ICICIdirect.com Research

Exhibit 39: Balance sheet

| Crore FY09 FY10 FY11E FY12E FY13E Sources of Funds Capital 3240404242 Reserves and Surplus 629 786 964 1294 1594 Networth 661 826 1004 1336 1636 Deposits 8207 10285 12751 16066 19881 Borrowings 4040444858 Other Liabilities & Provisions 343 409 508 606 714 Total 9251 11559 14308 18056 22289

Applications of Funds Fixed Assets 41 63 68 72 79 Investments 2397 3210 3740 4720 5899 Advances 5645 6833 9068 11517 14337 Other Assets 282 352 329 459 468 Cash with RBI & call money 885 1100 1103 1288 1506 Total 9251 11559 14308 18056 22289

Source: Company annual reports, ICICIdirect.com Research

ICICIdirect.com | Equity Research Page 22 ICICI Securities Limited

Exhibit 40: Ratios FY09 FY10 FY11E FY12E FY13E Valuation No. of Equity Shares 32.0 40.0 40.0 42.0 42.0 EPS (Rs.) 3.8 3.8 5.3 6.4 8.0 BV (Rs.) 20.7 20.7 25.1 31.8 39.0 ABV (Rs.) 18.7 19.7 24.0 30.7 37.7 P/E 11.5 11.5 8.2 6.9 5.5 P/BV 2.1 2.1 1.8 1.4 1.1 P/ABV 2.3 2.2 1.8 1.4 1.2 DPS (Rs.) 0.8 0.8 0.8 0.8 0.8

Yields & Margins (%) assets 10.2 9.7 9.9 10.2 10.2 Avg. cost on funds 7.7 7.3 7.2 7.7 7.7 Net Interest Margins 3.1 2.8 3.1 3.1 3.1 Avg. Cost of Deposits 6.8 7.3 7.2 7.7 7.7 Yield on average advances 11.6 12.1 12.3 12.6 12.6

Profitabilty (%) Interest income/ total avg. a 9.7 9.2 9.4 9.8 9.9 Net interest income/ total inc 26.1 25.3 28.3 27.4 27.2 Non-interest income/ total in 13.3 13.0 10.8 9.9 9.3 Non-interest income/ avg. as 1.5 1.4 1.1 1.1 1.0 Trading gains/ total income 10.4 9.3 3.4 3.9 3.9 Non-interest income/ total ne 33.8 34.0 27.6 26.6 25.4

Quality and Efficiency (%) Credit/Deposit ratio 68.8 66.4 71.1 71.7 72.1 GNPA 1.8 1.4 1.2 1.2 1.1 NNPA 1.1 0.6 0.5 0.4 0.4 RONW 19.9 20.6 23.3 23.0 22.7 ROA 1.5 1.5 1.7 1.7 1.7

Source: Company annual reports, ICICIdirect.com Research

ICICIdirect.com | Equity Research Page 23 ICICI Securities Limited

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, 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.

Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai – 400 093

[email protected]

ANALYST CERTIFICATION We /I, Kajal Gandhi CA Viraj Gandhi MBA CM Mani Arora 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 personal views about any and all of 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. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. Disclosures: ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated , investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

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