State Bank of India (STABAN) | 280 Target : | 340 Target Period : 12 Months Potential Upside : 21% Consolidation Pain to Ease Off Gradually

Home , SBI Capital Markets, State Bank of Saurashtra

Result Update August 14, 2017

Rating matrix Rating : Buy State Bank of India (STABAN) | 280 Target : | 340 Target Period : 12 months Potential Upside : 21% Consolidation pain to ease off gradually...

• Post-merger of associate banks, State Bank of India (SBI) has What’s changed? (Merged bank) announced its performance for the first time Target Unchanged

EPS FY18E Introduced at | 11.4 • Slippages for the merged entity remained higher at | 26249 crore EPS FY19E Introduced at | 16.5 (| 28590 crore in Q1FY17), led by slippage from non-corporate book Rating Unchanged (agri + retail + SME) at | 17886 crore. This is attributable to farm loan waivers, end of forbearance on loan classification and non- Quarterly performance (Merged bank) alignment of exposure below | 50 crore from subsidiaries Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) • Corporate slippages were at | 8363 crore, of which substantial NII 17,606 18,246 (3.5) 21,065 (16.4) proportion (| 7976 crore) came from watchlist. Consequently, Other income 8,006 8,761 (8.6) 12,222 (34.5) watchlist declined from | 32427 crore to | 24444 crore. GNPA was at PPP 11,874 13,762 (13.7) 17,309 (31.4) PAT 2,006 374 436.2 (3,442) (158.3) | 188069 crore (GNPA ratio at 9.97%) vs. | 177866 crore in Q4FY17 • Exposure to 12 accounts referred to IBC was at | 50247 crore with Key financials (Merged bank) outstanding provision at | 19943 crore. Exposure restructured under | Crore FY18E FY19E SDR was at | 12807 crore, while S4A accounts is at | 8124 crore. NII 87,010 96,920 Standard restructured assets were at | 39337 crore. Total stressed PPP 25,261 27,119 assets (GNPA + RA) were at 12.05% of advances PAT 9,849 14,194 [ • NII (merged bank) came in at | 17606 crore, down 3.5% YoY, led by Valuation summary (Merged bank) ~48 bps YoY decline in margin. Other income came at | 8006 crore, FY18E FY19E down 8.6% YoY, led by one-off gains of | 907 crore from sale of P/E 24.5 17.0 stake in NSE in Q1FY17 Target P/E 29.8 20.7 • Provision came at | 8929 crore, down 31.5% YoY and 57.3% QoQ. P/ABV 1.8 1.8 However, NPA related provision increased to | 12125.3 crore vs. Target P/ABV 2.2 2.0 | 6339.6 crore YoY. Lower provision in the quarter led to revival in RoE 4.4 5.9 profit at | 2006 crore, up 436% YoY, after reporting loss in Q4FY17 RoA 0.3 0.4 [ • Advances growth remained sluggish at ~1.5% YoY to | 18.86 lakh Stock data crore, led by slower offtake in corporate and SME segment. Growth Market Capitalisation | 242258 Crore in the retail book remained healthy at 13.3% YoY. Deposit growth GNPA | 188069 Crore came in at 13.3% YoY to | 26.02 lakh crore with CASA at 44.38% NNPA | 107760 Crore • The management expects 6-8% YoY growth in advances in FY18E. NIM 2.4% Slippages are guided to decline below 3.3% for FY18E. 52 week H/L 315/224 Subsequently, credit cost is seen remaining lower at 2.25% vs. Networth | 229025 Crore 2.48% in Q1FY18. Higher recovery, increased proportion of advances Face value | 1 and re-pricing of CoF to lead to 10-15 bps improvement in margins DII Holding (%) 21.6 FII Holding (%) 11.2 RoA improvement to take longer; structural value remains intact; BUY [ Merger with associate banks has resulted in huge NPA stress and Price performance subsequently muted profits. Clarity on loan waiver and completion of Return % 1M 3M 6M 12M merger process is expected to yield healthy recovery/upgrade in non SBI 11.8 2.1 10.0 35.3 corporate pie. However, a recovery in the corporate segment remains BOI 15.7 -17.6 19.2 43.6 uncertain with the outcome of insolvency resolution to be seen. With PNB 10.6 -15.8 0.6 23.4 completion of merger process, business growth will remain in focus. Post Research Analyst capital raising in recent QIP, capital adequacy ratio (CAR) was at 13.3% with CET1 at 10.06% remaining sufficient for near term credit offtake. Kajal Gandhi [email protected] Inflow of ~| 5000-6000 crore, from SBI Life IPO will add further to its capital adequacy, enabling it to manage future credit growth and NPA Vishal Narnolia resolution (we have not factored in one-time gains in FY18E EPS). Return [email protected] ratios are expected to take longer to improve due to lower profits in merged entity. However, long term structural value remains intact. Vasant Lohiya Therefore, we continue to maintain our target price of | 340/share, [email protected] valuing the merged bank at 1.6x FY19E ABV (| 168/share) and subsidiaries at | 64/share. Strategic stake in non-core investments like NSE (5.19%), BSE (4.75%), NSDL, ARCIL, UTI AMC, etc, may add further value, while management change remains near term hangover. We reiterate our BUY recommendation on SBI.

ICICI Securities Ltd | Retail Equity Research

Variance analysis (Consolidated basis)

Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) NII 19,323 19,673 -1.8 22,643 -14.7 NIM (%) 2.6 2.9 -37 bps 2.8 -25 bps Other Income 13,958 13,375 4.4 20,264 -31.1

Net Total Income 33,281 33,048 0.7 42,908 -22.4 Operating expense 19,864 18,499 7.4 37,862 -47.5 PPP 13,417 14,549 -7.8 17,694 -24.2 Provision 9,051 13,131 -31.1 21,070 -57.0 PBT 4,366 1,419 207.7 -3,376 -229.3 Tax Outgo 1,261 551 128.6 7 17,027.6 PAT 3,032 1,046 189.9 -2,978 -201.8

Key Metrics Advances 1834700 1820308 0.8 1896887 -3.3 Deposits 2,618,464 2,311,338 13.3 2,599,811 0.7

[[[ Source: Company, ICICIdirect.com Research

Variance analysis (Merged bank) Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) NII 17,606 18,246 -3.5 21,065 -16.4 NII (merged bank) remained subdued led by ~48 bps YoY decline in margins NIM (%) 2.4 2.8 -48 bps 2.7 -38 bps Decline in margins is attributable to margin erosion in subsidiaries Other Income 8,006 8,761 -8.6 12,222 -34.5 Optically negative growth led by one-off gains from sale of stake in NSE in Q1FY17

Net Total Income 25,612 27,007 -5.2 33,287 -23.1 Operating expense 13,718 13,245 3.6 15,978 -14.1 PPP 11,874 13,762 -13.7 17,309 -31.4 Provision 8,929 13,037 -31.5 20,932 -57.3 NPA related provision increased to | 12125.3 crore vs | 6339.6 crore YoY PBT 2,945 725 306.1 -3,623 -181.3 Tax Outgo 939 351 167.5 -181 -618.8 PAT 2,006 374 436.2 -3,442 -158.3 Lower provision led to revival in bottomline

Key Metrics Slippages remained elevated at | 26249 crore vs | 28590 crore in Q1FY17, led by slippage GNPA 188,068 137,662 36.6 177,866 5.7 from non-corporate book at | 17886 crore NNPA 107,760 78,242 37.7 96,978 11.1 NNPA ratio increased 78 bps QoQ to 5.97% Total Restructured assets 39,337 39,055 0.7 36,634 7.4 Total stressed assets (GNPA + RA) stood at 12.05% of advances Advances 1886666 1859513 1.5 1952507 -3.4 Corporate segment growth remained sluggish. Healthy growth in retail at 13.3% YoY Deposits 2,602,534 2,297,426 13.3 2,585,320 0.7 CASA remained healthy at 44.38%

Source: Company, ICICIdirect.com Research

Change in estimates (Merged Bank) Current FY18E FY19E Credit growth (%) 8.0 10.0 Deposit Growth (%) 10.0 10.0 Cost to income ratio (%) 49.2 48.2 GNPA ratio (%) 9.6 8.7 NNPA ratio (%) 5.0 4.5 Credit cost (%) 2.7 2.5

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 2

Company Analysis Merger update SBI has merged its five associate banks. These five associate banks are State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore. Besides, Bhartiya Mahila Bank (BMB) has been merged. As per the merger plan, State Bank of Bikaner and Jaipur shareholders got 28 shares of SBI (| 1 each) for every 10 shares (| 10 each) held. Similarly, State Bank of Mysore and State Bank of Travancore shareholders got 22 shares of SBI for every 10 shares. With this merger, SBI has joined the league of top 50 banks globally in terms of assets. The total customer base of the bank will reach ~37 crore with a branch network of around 24,000 and nearly 59,000 ATMs across the country. The government holding in the merged SBI will be 60.6% vs. 61.3% pre-merger. The treasury of the associate banks will be merged to function out of the corporate office of SBI at Mumbai.

The merged entity has a deposit base of more than | 26 lakh crore with advances of about | 18.60 lakh crore as on April 1, 2017. However, merger with associate banks will result in muted profits for the bank initially, as subsidiaries (five banks) reported FY17 loss of | 11866 crore with Q4 alone at | 6000 crore due to cleanup of NPA stress vs. SBI’s standalone profit of | 10400 crore in the same period. Return ratios will take longer to improve due to lower profit. New opening watchlist post merger was at | 32427 crore, of which | 11075 crore is power and | 8000 crore belongs to standalone SBI. The management expects slippages and credit cost to remain similar to FY17 levels wherein we factor in ~| 40000 crore in slippages including subsidiaries now. The merged entity GNPA and NNPA ratio were elevated at 9.11% and 5.19%, respectively, with PCR of 61.5%. Exhibit 1: Summary of merged entity as of April 1, 2017 Financial metrics Total Deposits 2,585,320.0 CASA Ratio (%) 44 Total Advances 1,868,962.0 Mkt. Share - Deposits (%) 23 Mkt. Share – Advances (%) 21.2 Number of branches 24,017 Total Staff 278,872.0 No. of customers (in lakhs) 4,204

Capital Adequacy % CET 1 9.4 Tier 1 10.1 CAR 12.9 GoI Shareholding 60.8

Asset quality % Gross NPA Ratio 9.1 Net NPA Ratio 5.2 Provision Coverage Ratio 61.5 Slippage Ratio 5.8 Credit Cost 2.9

Financial Ratios % Cost to income Ratio 49.5 Cost of Deposits 5.9 Yield on Advances 9.3 NIM (Domestic) 2.9

Source: Company Quarterly Presentation, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 3

SBI (Merged bank) Non corporate contribute to slippages; pace of accretion to dwindle SBI, being a proxy for the Indian economy, suffered significant asset quality deterioration owing to a slowdown in the economy. In addition, merger of associate banks led to additional pressure on asset quality. As of June 2017, absolute GNPA mounted to | 188069 crore vs. | 177866 crore in Q4FY17. GNPA ratio increased 86 bps QoQ to 9.97%, while NNPA ratio increased 78 bps QoQ to 5.97%.

Slippages for merged entity continued to remain higher at | 26249 crore (| 28590 crore in Q1FY17), primarily led by incremental slippage from non-corporate book (agri + retail + SME) at | 17886 crore. Farm loan waivers, end of forbearance on loan classification related to demonetisation and non-alignment of exposure below | 50 crore from subsidiaries led to higher slippage from non corporate book. Slippages from corporate book were at | 8363 crore, out of which substantial proportion (| 7976 crore) came from watch list. Consequently, watchlist has declined from | 32427 crore to | 24444 crore.

Exposure to 12 accounts referred to IBC was at | 50247 crore with outstanding provision at | 19943 crore. Incremental provision required stands at | 8571 crore. Exposure restructured under SDR was at | 12807 crore while S4A accounts is at | 8124 crore. Standard restructured assets was at | 39337 crore. Consequently, total stressed assets (GNPA + RA) were at 12.05% of advances.

Though slippages remained elevated in the current quarter, higher slippage in corporate segment from watch list provides confidence in previous assessment of asset quality. The management has guided lower slippages and higher recoveries in non corporate book. Slippages from agriculture, SMEs and retail is guided to be contained at | 30432 crore, while ~| 16790 crore is expected to be either upgraded or recovered. Going forward, with clarity on loan waiver and completion of merger process, we expect healthy recovery/ upgrade in non corporate pie. However, recovery in corporate segment remains uncertain in light of uncertainty on the process and outcome of insolvency resolution. Overall, the pace is seen dwindling gradually. We expect GNPA ratio to remain at ~8.7% in FY19E.

Exhibit 2: Near term asset quality pressure to continue... Total stressed asset ratio (NNPA + restructured asset) for 250000 the merged bank was at 8.12% in Q1FY18 200000

150000

(| crore) 100000

50000

0 51197 21956 61605 31096 60434 31883 60712 32997 61991 34468 56725 27591 56421 28669 56834 28591 72791 40249 98170 55747 101541 57421 105783 60013 108172 61430 177866 96978 192952 99989 193952 100789 FY13 FY14 FY16 FY17 FY15E FY18E FY19E Q1FY15 Q2FY15 Q3FY15 Q1FY16 Q2FY16 Q3FY16 Q1FY17 Q2FY17 Q3FY17 GNPA NNPA

*GNPA and NNPA pertaining to FY17, FY18E and FY19E are for merged entity. Data prior to FY17 is of SBI standalone Source: Company Quarterly Presentation, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 4

Erstwhile standalone bank had suffered significant asset quality deterioration with GNPA mounting from | 15714 crore in FY09 and | 25326 crore in FY11 to | 98170 crore in FY16. In FY17, it closed at | 112342 crore while in Q3 and Q2FY17, this number was at | 108172 crore and | 105780 crore, respectively, showing signs of settling around these levels, with slippages moderating at ~| 10000 crore a quarter.

Exhibit 3: Sectoral gross NPA movement on outstanding basis Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18* Corporate 22494 23582 38831 62211 64118 67988 71620 80079 125014 In Q1FY18, non corporate segment contributed major SME 17260 17381 17785 17032 17344 17743 17194 15850 30426 proportion of slippages at | 17886 crore. Agri 10856 10219 10329 8687 8764 8399 7407 7455 17988 Retail 3272 3003 3154 2458 2911 3225 2380 2165 7632 International 2540 2649 2693 7785 8404 8428 9571 6794 7009 Total 56422 56834 72792 98173 101541 105783 108172 112343 188069

*NPA data for Q1FY18 is for the merged bank. Data prior to Q1FY18 is of SBI standalone Source: Company Quarterly Presentation, ICICIdirect.com Research

Credit growth benign; gradual pick up in business ahead Exhibit 4: Business growth to pick up gradually in FY18-19E

3500000 25

3000000 20 2500000

2000000 15

1500000 10(%) (| crore) 1000000 5 500000

0 1394409 1209829 1418915 1198903 1473700 1209648 1510076 1232545 1576793 1300026 1613545 1280127 1634115 1337153 1671416 1391257 1730722 1463700 1782371 1416485 1858999 1433554 2040778 1447824 2585320 1868963 2843852 2018480 3128238 2220328 0 FY14 FY15 FY16 FY17 FY18E FY19E Q1FY15 Q2FY15 Q3FY15 Q1FY16 Q2FY16 Q3FY16 Q1FY17 Q2FY17 Q3FY17

Deposit Credit YoY Deposit Growth (RHS) YoY Credit Growth (RHS)

Data for FY18E and FY19E is for the merged bank. Data prior to FY17 is of SBI standalone Source: Company Quarterly Presentation, ICICIdirect.com Research

Exhibit 5: Well-diversified loan book (Merged bank) FY15 Q2FY16 Q3FY16 Q4FY16 Q1FY17* Q2FY17 Q3FY17 Q4FY17* Q1FY18* YoY (%) QoQ (%) Agriculture 119782 118419 121102 125387 185948 128649 125068 191265 189100 1.7 -1.1 Top corporate 271778 283549 301166 329026 970744 312390 308283 993637 376093 NA NA Medium Corporate 227755 204749 213777 232626 205478 204200 295804 NA NA SME 181473 176572 181922 189536 166052 161829 256582 NA NA Retail 272429 291043 308266 327075 432455 350465 362219 481386 490005 13.3 1.8 International 234532 265817 265702 266817 270365 280082 285536 286219 279082 3.2 -2.5

* Data for Q1FY18, Q4FY17, Q1FY17 is for the merged bank. Other data are of SBI standalone. Corporate loans clubbed for Q1FY17 and Q4FY17 Source: Company Quarterly Presentation, ICICIdirect.com Research

Credit growth seeing pick-up at 6-8% YoY in FY18E Advances growth for the merged bank remained sluggish in single digit at ~1.5% YoY to | 18.86 lakh crore, led by slower off-take in corporate and SME segment. However, growth in retail segment (25.9% of advances) continued at healthy pace of 13.3% YoY to | 490005 crore. Going ahead, we expect retail and better rated corporate segments to remain in focus on the asset side. Maintaining its market share, SBI is seen growing its credit book at ~9% YoY in FY18-19E.

ICICI Securities Ltd | Retail Equity Research Page 5

During FY10-14, SBI has grown its credit across all segments. However, if we consider FY16 credit, major growth has been contributed by the top corporate and retail segment. So far, the majority of the NPA has been witnessed in mid-corporate, SME and agri segment. Large corporate have also added to NPA with RBI’s asset quality review.

Deposit growth to remain healthy; CASA seen largely stable Deposits growth remained healthy at 13.3% YoY to | 26.02 lakh crore with CASA remaining steady at 44.38%. Currency demonetisation undertaken by the government gave a boost to deposit accretion, especially CASA deposit. Deposits stayed the highlight for FY17, up 18.2% YoY, led by demonetisation flattish QoQ at | 2044751 crore (erstwhile standalone SBI). SBI being the largest beneficiary, CASA surged to 45.6%. Going ahead, we expect deposit CAGR of 10% in FY17- 19E to | 3128237 crore.

Margin improvement led by healthy recovery and decline in CoF Exhibit 6: CASA ratio continued to remain broadly stable

3500000 46.6 47 3000000 46 45 2500000 44.4 44.4 43.9 44 43.6 43.5 43.5 2000000 42.8 42.8 43.043 42.6 42.7 42.6 42.7 42.2 (%) 1500000 41.7 42 (| crore) 41.3 41 1000000 40 500000 39 1292456 0 1349939 1394409 1418915 1473700 1510076 1576793 1613545 1634115 1671416 1730722 1782371 1858999 2040778 2585320 2843852 3128238 38 FY14 FY15 FY16 FY17 FY18E FY19E Q2FY14 Q3FY14 Q1FY15 Q2FY15 Q3FY15 Q1FY16 Q2FY16 Q3FY16 Q1FY17 Q2FY17 Q3FY17 Total Deposits CASA Ratio (RHS)

*Figures pertaining to FY17, FY18E and FY19E are for merged entity. Data prior to FY17 is of SBI standalone Source: Company Quarterly Presentation, ICICIdirect.com Research

NIM for the merged bank came at 2.36% compared to 2.84% in Q1FY17. However, the YoY decline in margin is attributable to subdued margins from associate banks which declined 43 bps YoY to 2.35%. The management has guided 10-15 bps improvement in margins in FY18E, led by higher recovery, increased proportion of advances and decline in cost of funds (CoF). Recently, SBI has for the time, post de-regulation of saving account interest rate, has reduced interest rate on saving account by 50 bps to 3.5% for deposit below |1 crore (which comprises of major proportion of savings account).

Non-banking subsidiaries continue to support consolidates earnings

Exhibit 7: Non-banking subsidiaries profitability trend PAT ROE % (| crore) FY15 FY16 FY17 FY15 FY16 FY17 B) Non- Banking Subsidiaries SBI Capital Markets 338 279 252 33.2 26.3 20.2 SBI Funds Management 163 165 224 30.8 26.6 29.6 SBI Life Insurance 820 861 955 20.3 18.2 20.0 SBI cards & payment 267 284 390 27.61 26.7 29.5 SBI General Insurance -105 -120 153 NA NA 13.9

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 6

Outlook and valuation RoA improvement to take longer; structural value remains intact; BUY Merger with associate banks have resulted in huge NPA stress and subsequently muted profits. Clarity on loan waiver and completion of merger process is expected to yield healthy recovery/upgrade in non corporate pie. However, recovery in corporate segment remains uncertain with the outcome of insolvency resolution to be seen. With completion of merger process, business growth will remain in focus. Post capital raising in recent QIP, CaR stood at 13.3% with CET1 at 10.06% remains suffice for near term credit off-take. Inflow of ~| 5000-6000 crore, from SBI Life IPO will add further to its capital adequacy, enabling it to manage future credit growth and NPA resolution (we have not factored in one-time gains in FY18E EPS). Return ratios are expected to take longer to improve due to lower profits in merged entity. However, long term structural value remains intact. Therefore, we continue to maintain our target of | 340 per share, valuing the merged bank at 1.6x FY19E ABV (| 168 per share) and subsidiaries at | 64 per share. Strategic stake in non-core investments like NSE (5.19%), BSE (4.75%), NSDL, ARCIL, UTI AMC, etc, may add further value, while a management change remains a near term hangover. We reiterate our BUY recommendation on SBI.

Exhibit 8: Return ratios to improve gradually

18 1.2 17.1 16 15.7 15.4 1.0 14.8 14 1.1 12.6 1.0 0.8 12 0.9 0.9 10 0.7 10.0 10.6 0.6 0.6 0.7 (%) (%) 8 7.3 0.4 0.5 6 5.9 0.2 4 4.4 0.4 0.3 2 - 0 (0.1) (0.2) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 RoE RoA (RHS) FY18E FY19E

*RoA and RoE pertaining to FY17, FY18E and FY19E are for merged entity. Data prior to FY17 is of SBI standalone Source: Company, ICICIdirect.com Research

Exhibit 9: Valuation (Merged bank) NII Growth PAT Growth ABV P/ABV RoA RoE (| cr) (%) (| cr) (%) (|) (x) (%) (%) FY18E 87,010 10.0 9,849 NA 154.7 1.8 0.3 4.4 FY19E 96,920 11.4 14,194 44.1 167.9 1.7 0.4 5.9

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 7

Exhibit 10: SoTP valuation of SBI FY19E |/share SBI (merged banks) 276 SBI AMC 8 SBI Life 45 SBI capital markets 4 SBI cards 3 SBI General Insurance 4 Value per share 340

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 8

Recommendation History vs. Consensus

500 100.0

90.0 400 80.0

(|) 300 70.0 (%)

60.0 200 50.0

100 40.0 Aug-15 Oct-15 Dec-15 Mar-16 May-16 Aug-16 Oct-16 Jan-17 Mar-17 May-17 Aug-17

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events Date Event Mar-05 Huge losses in treasury book due to G-sec yields surging kept share prices low, credit growth remained low Aug-08 Acquires State bank of Saurashtra, one associate bank out of 7 Mar-09 Banks saw dream run of credit growth at 30% levels during FY06-09, SBI grew at 27.5% Nov-08 Acquires SBI Commercial and Industrial bank Jun-09 Acquires State Bank of Indore May-11 With the arrival of new chairman, high provision was made for pension and gratuity benefit, hampering the PAT which was recorded at mere | 21 crore for a quarter vs average run rate of |30bn Oct-11 Moody's downgrades SBI financial strength rating from C- to D+ citing deteriorating asset quality FY11 The stock of SBI hits its peak post which the bank has been consistently marred by NPA and restructured assets in line with economic slowdown May-13 G-sec yields spike post Fed announcement on May 22 of its intention to taper QE and tight liquidity measures by RBI. MTM risk and CoF rise. Also, asset quality continues to deteriorate with slippages reaching to all- time high level of | 13700 crore in Q1FY14 Sep-13 Moody and Fitch downgrade debt rating of top three Indian PSU banks citing worsening credit quality and recapitalisation concerns Dec-13 Bank board approves QIP of |~9000 crore and issuance to government shares worth | 2000 crore ( fixed at | 1752 per share for government) to enhance capital

Dec-13 New chairperson - first lady for SBI, expected to continue on the earlier path and no surprises seen in result post her joining in September 2013 Aug-15 RBI declares SBI as domestic systematically important bank (D-SIB), considered Too Big To Fail (TBTF) Sep-15 Issues shares to the government at an issue price of | 274.37 a share for raising | 5,392.99 crore. Apr-17 Merger of 5 associate banks effective from April 1, 2017

Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m)on Change (m) (in %) Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 1 Government of India 31-03-2017 56.56% 4,882.36M +210.73M Promoter 60.2 60.2 62.2 62.2 58.0 2 Life Insurance Corporation of India 31-03-2017 8.15% 703.12M -55.58M FII 10.7 11.1 9.1 9.5 11.2 3 HDFC Asset Management Co., Ltd. 31-03-2017 2.20% 189.74M +5.19M DII 19.5 19.3 19.1 18.8 21.6 4 ICICI Prudential Asset Management Co. Ltd. 30-06-2017 1.34% 115.55M +41.06M Others 9.6 9.4 9.6 9.6 9.3 5 Reliance Nippon Life Asset Management Limited 31-12-2016 1.30% 112.42M +8.41M 6 SBI Funds Management Pvt. Ltd. 31-03-2017 1.05% 90.28M +2.80M 7 Franklin Templeton Asset Management (India) Pvt. Ltd. 30-06-2017 0.69% 59.35M +8.46M 8 BlackRock Institutional Trust Company, N.A. 31-07-2017 0.62% 53.13M +2.37M 9 The Vanguard Group, Inc. 30-06-2017 0.51% 44.20M +2.88M 10 Kotak Mahindra Asset Management Company Ltd. 30-06-2017 0.47% 40.33M +11.18M Source: Reuters, ICICIdirect.com Research

Recent Activity Buys Sells Investor name Value(m) Shares(m) Investor name Value(m) Shares(m) Government of India +953.39M +210.73M Life Insurance Corporation of India -251.46M -55.58M ICICI Prudential Asset Management Co. Ltd. +173.87M +41.06M Lyxor Asset Management -25.67M -5.74M Kotak Mahindra Asset Management Company Ltd. +47.34M +11.18M APG Asset Management -25.23M -5.58M Franklin Templeton Asset Management (India) Pvt. Ltd. +35.81M +8.46M Amundi Asset Management -11.50M -2.72M Causeway Capital Management LLC +26.93M +5.95M M & G Investment Management Ltd. -8.36M -2.17M

Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 9

Financial summary (Merged bank)

Profit and loss statement | Billion Key ratios (Year-end March) FY17E FY18E FY19E (Year-end March) FY17E FY18E FY19E

Interest Earned 228,530 246,472 271,292 Valuation Interest Expended 149438.7 159462.1 174372.2 No. of Equity Shares (Crore) 811.0 862.2 862.2 Net Interest Income 79,092 87,010 96,920 BV (|) 261.2 270.7 284.8 % growth 10.0 11.4 BV-ADJ (|) 141.6 154.7 167.9 Non Interest Income 40662.4 44748.8 48736.2 P/BV 1.1 1.0 1.0 Net Income 119754.1 131758.7 145656.2 P/ABV 2.0 1.8 1.7 Employee cost 36727.5 39516.1 43037.2 GNPA 9.5 9.6 8.7 Other operating Exp. 23265.9 25261.4 27119.3 NNPA 5.2 5.0 4.5 Operating Income 59760.6 66981.2 75499.6 RONW -0.8 4.4 5.9 Provisions 60690.0 53489.7 55508.2 ROA (0.1) 0.3 0.4

PBT -929.4 13491.5 19991.4 Source: Company, ICICIdirect.com Research Taxes 835.0 3642.7 5797.5 Net Profit (1,764) 9,849 14,194 % growth NA 44.1 EPS (2.2) 11.4 16.5 es Source: Company, ICICIdirect.com Research

Balance sheet | Billion Growth ratios (% growth) (Year-end March)-| crore 1st April 2017 FY18E FY19E (Year-end March) FY18E FY19E Sources of Funds FY19E Total assets 9.2 8.9 Capital 810.98 862.18 862.18 Advances 8.0 10.0 Reserves and Surplus 211001.0 232511.1 244705.1 Deposits 10.0 10.0 Networth 211812.0 233373.3 245567.3 Total Income 10.0 10.5 Deposits 2585320.3 2843852.4 3128237.6 Net interest income 10.0 11.4

Borrowings 332105.7 345389.9 359205.5 Operating expenses 8.0 8.3 Other Liabilities & Provisions 175623.2 186160.6 197330.2 Operating profit 12.1 12.7 Total 3,304,861 3,608,776 3,930,341 Net profit NA 44.1 Book value 3.6 5.2 Application of Funds EPS NA 44.1 Fixed Assets 49906.4 49906.4 49906.4 Source: Company, ICICIdirect.com Research Advances 1868962.6 2018479.6 2220327.6

Investments 932926.7 1016890.1 1108410.2 Cash and balances with RBI 160741.4 171993.2 184032.8 Money at call, balance at bank 110120.3 121132.4 133245.6 Other Assets 182204.3 230374.4 234418.0 Total assets 3,304,862 3,608,776 3,930,341

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 10

ICICIdirect.com coverage universe (Banking)

CMP M Cap EPS (|) P/E (x) P/ABV (x) RoA (%) RoE (%) Sector / Company (|) TP(|) Rating (| Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

Bank of Baroda (BANBAR) 151 200 Buy 35,855 6 10 19 25.3 14.9 7.9 1.5 1.3 1.0 0.2 0.3 0.5 3 5 10 Punjab National Bank (PUNBAN) 145 180 Buy 31,641 6 14 21 23.3 10.1 6.8 -0.7 2.9 1.8 0.2 0.4 0.5 3 7 10 State Bank of India (STABAN) 299 340 Buy 261,635 13 18 26 22.7 16.5 11.5 1.8 1.6 1.4 0.4 0.5 0.7 6 8 10 Indian Bank (INDIBA) 286 380 Buy 14,264 29 34 45 9.8 8.4 6.3 1.3 1.1 1.0 0.7 0.8 1.0 8 10 12 Axis Bank (AXIBAN) 488 585 Buy 117,048 15 23 40 31.8 20.9 12.2 2.5 2.2 1.9 0.7 0.9 1.3 7 10 15 City Union Bank (CITUNI) 158 180 Buy 10,739 8 9 11 20.8 17.4 15.0 3.3 2.8 2.4 1.5 1.6 1.6 15 16 16 DCB Bank (DCB) 176 200 Hold 5,596 7 9 11 25.0 20.2 16.1 2.7 2.2 2.0 0.9 1.0 1.1 11 12 12 Federal Bank (FEDBAN) 107140Buy21,12656822.018.413.62.31.81.60.80.91.0101112 HDFC Bank (HDFBAN) 1,756 1,840 Hold 457,569 57 68 84 30.9 25.7 20.8 5.1 4.6 4.1 1.9 1.9 2.0 18 19 20 IndusInd Bank (INDBA) 1,615 1,650 Hold 98,272 48 59 75 33.7 27.6 21.6 4.8 4.2 3.7 1.8 1.8 1.9 15 16 18 Jammu & Kashmir Bk(JAMKAS) 77 105 Buy 4,422 -31 8 12 -2.4 9.9 6.4 1.2 1.1 1.0 -2.0 0.5 0.7 -27 7 10 Kotak Mahindra Bank (KOTMAH) 995 970 Hold 261,635 19 23 30 53.7 42.6 33.5 7.1 6.1 5.3 1.7 1.8 2.0 13 14 16 Yes Bank (YESBAN) 1,733 1,800 Hold 79,918 73 98 128 23.8 17.8 13.6 3.7 3.1 2.6 1.8 1.9 2.0 19 19 20

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 11

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, Hold 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: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

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

ICICI Securities Ltd | Retail Equity Research Page 12

ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number – INH000000990. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com.

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

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months.

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

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months.

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

It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months.

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

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

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

It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report.

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

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

ICICI Securities Ltd | Retail Equity Research Page 13