Sector Update
Update | Financials
Sector
| 13 March 2019
Financials
Technology
Market Cap to CASA (%)
Current 10yr/15yr Avg.
Private Banks
Assessing the trends; looking at liability based valuation multiples
AXSB
74.7
62/59
HDFCB
154.7
115/102
Systemic credit growth has recovered to a five-year-high of ~14%, while deposit
ICICBC#
55.7
66/79
growth remains modest at 10%. We expect credit growth to remain strong, given the
IIB
120.6
147/120
improving economic parameters and rising share of banks in the total credit needs of
KMB#
149.0
193/236
the economy. Key beneficiaries of this trend will be lenders with strong liability
YES*
73.3
110/148
FB
41.9
48/45
franchisee, as it will allow smooth flow of funds at reasonable costs.
DCBB*
91.4
78/68
On analyzing the key trends, we note that: (a) Private banks' share in total deposits
J&K
6.5
17/20
has increased to 27% from 18.6% in FY14. (b) CASA market share of private banks has
KVB
32.5
55/52
increased from 21.7% in FY14 to 28.8%, while the share of banks offering differential
SIB
14.4
30/27
PSU Banks
SA rates has increased to 5% from 1.4% in FY14. (c) Jan Dhan deposits formed 9% of
BOB
13.9
24/23
incremental SA deposits for PSU banks.
PNB
11.1
17/19
Reserve Bank of India (RBI) has issued 12 banking licenses (including SFBs) over the
SBIN#
14.9
18/19
The rising significance of liability franchise
*Represents 7yr-10yrs avg.
# Adjusted for subs
Market Cap to Deposit (%)
Current 10yr/15yr Avg.
Private Banks
AXSB
34.2
29/26
HDFCB
62.9
53/49
ICICBC#
27.5
30/28
IIB
52.5
50/36
KMB
75.6
70/70
YES*
24.4
30/30
FB
14.0
15/13
DCBB*
22.1
19/18
J&K
3.2
7/8
KVB
9.7
13/12
SIB
3.5
7/6
PSU Banks
BOB
4.9
7/7
PNB
4.7
7/8
SBIN#
6.5
8/8
*Represents 7yr-10yrs avg
.
#Adjusted for subs
past five years, as against 12 licenses in the preceding 20 years. This has allowed
conversion of many non-bank lenders into banks and enabled them access to stable
and low cost liabilities. Recent funding issues in the financial sector have again
stressed the need of the liability franchisee. This consideration will drive M&As, going
forward. The RBI, too, will step in support of such moves, in our view.
Building a strong liability franchise is imperative:
The recent liquidity crisis has
again highlighted the importance of a strong liability franchise, as liquidity and
interest rate movements make it challenging for the NBFCs to manage their funding
cost due to the higher dependence on wholesale borrowings. The share of bank
borrowings for major NBFCs has increased sharply (range of 400bp-959bp) over
9MFY19 as usual funding channels were affected. Besides this, the cost of funds has
also risen for non-bank lenders. As the regulator and rating agencies tighten the
norms further, the cost of funding will remain elevated for them versus the banks.
Chase for deposits via M&As, focus to be on strengthening liability franchise:
The
importance of a liability franchise is only likely to increase as new universal banks
and SFBs aggressively chase deposits to drive business growth. M&A activities in the
banking sector have been mainly driven by either the government (SBIN’s merger
with associates; BOB/Vijaya/Dena merger) or the synergy benefits arising from the
asset-liability mix (HDFCB/CBoP, KMB/ING Vysya, IDFCB/CAFL). A liability franchise
will assume an increasingly important role behind potential M&As in the BFSI space,
more so as there remains a wide discount to the liability based valuation multiples.
Valuing the liability franchise:
Our long-term analysis of valuing the liability franchise
suggests that (a) retail private banks have traded at a higher market cap to CASA
multiple and (b) private corporate banks have seen de-rating of multiples, with asset
quality pressures leading to slowdown in business growth. On the basis of 10-15-year
average, HDFCB has traded at market cap/CASA of 115%-102%, KMB at 193%-236%,
IIB at 147%-120%, while the average for AXSB and ICICBC has been lower at 60%-80%.
With earnings momentum now back on track and the NPL cycle largely behind, we
expect multiples to improve and reflect the strength of the liability franchise.
CASA
Private Banks Ratio (%)
AXSB
45.8
HDFCB
40.7
ICICBC
49.3
IIB
43.6
KMB
50.7
YES
33.3
FB
33.3
DCBB
24.2
J&K
48.9
KVB
29.8
SIB
24.3
PSU Banks
BOB
35.0
PNB
42.1
SBIN
43.7
5 Year
CAGR (%)
13
16
16
31
42
35
17
21
9
14
14
8
10
11
Source: MOFSL, Company
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542
|
Parth Gutka
(Parth.Gutka@motilaloswal.com); +91 22 6129 1567
Himanshu Taluja
(Himanshu.Taluja@motilaloswal.com);
Yash Agarwal
(Yash.Agarwal@motilaloswal.com)
13 March 2019
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
1
 Motilal Oswal Financial Services
Sector Update | Financials
Exhibit 1: Valuation of liability franchise based on historical trends
Current Mkt.
Cap (INRb)
Private Banks
AXSB
1,760
HDFCB
5,363
ICICBC
1,668
IIB
923
KMB
1,616
YES*
543
RBK
265
FB
173
DCBB*
61
J&K
28
KVB
57
SIB
27
PSU Banks
BOB
296
PNB
304
SBIN
1,838
*Represent average of 7yrs-10yrs
Deposits –
3QFY19 (INRb)
5,141
8,525
6,068
1,757
2,138
2,228
522
1,235
275
862
586
777
6,106
6,504
28,305
CASA –
3QFY19 (%)
45.8
40.7
49.3
43.6
50.7
33.3
24.6
33.3
24.2
48.9
29.8
24.3
35.0
42.1
43.7
Mkt. Cap to
deposits (%)
34.2
62.9
27.5
52.5
75.6
24.4
50.9
14.0
22.1
3.2
9.7
3.5
4.9
4.7
6.5
Mkt. cap to
CASA deposits (%)
74.7
154.5
55.7
120.6
149.0
73.3
206.8
41.9
91.4
6.5
32.5
14.4
13.9
11.1
14.9
Mkt. cap to CASA
Avg. of 10yrs/15yrs (%)
62/59
115/102
66/79
147/120
193/236
110/148
NA
48/45
78/68
17/20
55/52
30/27
24/23
17/19
18/19
Source: MOFSL, Company
Exhibit 2: Valuation Summary
Val summary
Private Banks
ICICIBC*
HDFCB
AXSB
KMB*
YES
IIB
FB
DCBB
SIB
EQUITAS
AUBANK
RBK
PSU Banks
SBIN*
PNB
BOI
BOB
CBK
UNBK
INBK
Life Insurance
HDFCLIFE**
IPRULIFE**
Rating
FY20E
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Buy
Buy
Neutral
Neutral
Buy
Neutral
Neutral
Buy
Buy
Buy
Mkt. Cap
(INRb)
2,501
5,903
1,908
2,408
543
943
179
62
28
46
171
271
2,557
325
161
306
188
96
129
745
491
CMP
TP
Upside
(%)
15
12
15
7
10
16
26
-13
31
10
19
4
16
-6
-2
NA
5
-3
12
30
29
ABV (INR)
RoA (%)
RoE (%)
P/E (x)
P/ABV (x)
(INR) (INR)
392 450
2,226 2,500
738 850
1,261 1,350
244 270
1,636 1,900
91
115
201 175
15
20
136 150
606 720
628 650
293
85
92
116
264
83
269
366
334
340
80
90
140
278
80
300
475
430
FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E
134
518
228
201
116
430
59
92
21
69
107
170
169
40
76
113
185
98
245
152
589
271
229
138
544
66
104
23
76
138
190
202
62
87
135
259
120
278
0.5
1.8
0.6
1.7
1.2
1.7
0.8
0.9
0.3
1.5
1.5
1.2
0.1
-0.6
-0.9
0.3
0.2
0.1
0.3
NA
NA
1.2
1.8
1.2
1.7
1.2
2.1
1.0
1.0
0.5
1.6
1.3
1.3
0.6
0.4
0.2
0.5
0.4
0.3
0.5
NA
NA
4.7
16.7
7.2
12.1
15.5
16.5
9.5
11.6
5.6
9.7
13.8
12.3
1.8
-11.0
-15.0
5.3
3.5
2.1
4.6
18.6
15.7
11.8
16.5
13.9
13.3
16.7
20.2
12.5
13.4
8.6
12.4
13.9
14.9
11.5
6.6
2.7
8.8
8.2
5.5
8.6
19.1
14.9
38.5
27.9
39.8
24.9
13.2
23.8
14.8
19.8
9.2
20.1
46.9
30.4
33.3
-5.9
-3.8
13.1
15.5
18.4
17.6
56.8
41.7
14.1
23.2
18.7
19.5
10.8
16.3
10.2
15.2
5.7
14.3
35.4
22.4
7.3
10.6
24.7
7.4
6.2
6.4
8.9
48.0
37.6
2.2
4.3
3.2
4.7
2.1
3.8
1.6
2.2
0.7
2.0
5.6
3.7
1.3
2.1
1.2
1.0
1.4
0.8
1.1
4.1
2.2
1.9
3.8
2.7
3.9
1.8
3.0
1.4
1.9
0.7
1.8
4.4
3.3
1.1
1.4
1.1
0.9
1.0
0.7
1.0
3.4
1.9
90.0 107.1
151.4 173.9
(*) Multiples adj. for value of key ventures/Investments; For ICICIBC, SBIN and KMB ABV is adjusted for investment in subsidiaries
**ABV represents EV, RoE represents ROEV and P/ABV represents P/EV
Source: MOFSL, Bloomberg, Company
13 March 2019
2
 Motilal Oswal Financial Services
Sector Update | Financials
How valuable is the liability franchise for Banks ?
Growth in the banking business was quite skewed in nature, with deposit growth
consistently lagging loan growth by ~500bp for most of FY19. We believe that with
further revival in credit growth (led by improving economic parameters and rising
share of banks in the total credit needs of the economy), modest deposit growth can
become a limiting factor to the overall business growth of a bank. Thus, deposit
base mobilisation is imperative for banks to sustain growth momentum and
maintain healthy profitability as it allows smooth flow of funds at reasonable costs.
We note that all banks that have grown bigger in size have inevitably built a strong
liability franchise with robust CASA mix. This holds true for both the large private
and PSU lenders as well as for emerging banks like YES and IIB that have gained
critical size on the back of growing liability franchise. Alternately, one can infer that
as balance sheet size expands, the importance of liability franchise increases with
marginal benefits over reliance on wholesale borrowings increasing
disproportionately.
Good banks keep getting bigger…:
Good banks with superior track record in
building a robust franchise constantly get re-rated and deliver strong returns across
business cycles. In the case of HDFCB, deposits have grown at a CAGR of 27% over
the past fifteen years while its market cap has grown at a CAGR of 33%. Cost of
funds for the bank has largely been under control in comparison to the relatively
volatile yields on AAA bonds. The stable-to-improving funding costs along with other
operational improvements has enabled HDFCB to report constant improvements in
its RoA from 1.4% in FY04 to 1.8% in FY18.
HDFCB has grown its
deposit base at a CAGR of
27% over the past 15 years
Exhibit 3:
HDFCB — strong liability franchise enabled superior returns across business
cycles
60.6
54.7
55.4
57.7
Deposits (INRb)
54.5
44.4
52.0 52.7
CASA (%)
27% CAGR
over 15 years
44.8 44.0 43.2
48.0
43.5
48.4 47.4
Source: MOSL, Company
13 March 2019
3
 Motilal Oswal Financial Services
Sector Update | Financials
Exhibit 4:
HDFCB — Decline in cost of funds resulting in improved profitability
Cost of Funds (%)
6.0
4.5
3.0
1.5
-
1.3
1.0
NIM (%)
RoA (%) - RHS
1.9
1.6
Source: MOSL, Company
Exhibit 5: HDFCB has shown a consistent increase in market cap to CASA deposits
200.0%
150.0%
100.0%
50.0%
0.0%
FY10-13 Avg.
* RoA: 1.63%, RoE: 18.0%
* Credit Cost: 1.0%
* Credit growth: 25%
FY16-18 Avg.
* RoA: 1.82%, RoE: 18.0%
* Credit Cost: 0.6%
* Credit growth: 22%
FY05-08 Avg.
* RoA: 1.40%, RoE: 18.3%
* Credit Cost: 1.7%
* Credit growth: 38%
FY14-15 Avg.
* RoA: 1.89%, RoE: 20.3%
* Credit Cost: 0.6%
* Credit growth: 23%
Source: MOFSL, Company
…while some banks find it tough to grow or make way for M&A:
Banks with
modest liability franchise generally find their operations getting limited to home
geographies (J&K, Kerala and Tamil Nadu-based banks), and thus, lag larger peers in
growth/profitability metrics. Few of these banks have ended up becoming an
acquisition target for larger banks, which were looking to expand their geographical
reach and strengthen their asset/liability franchise, for instance, Kotak Mahindra
Bank acquiring ING Vysya Bank. We note that KMB’s acquisition of ING Vysya
happened at a superior valuation of ~2x book value and reflected the latter’s strong
regional footprint and established liability franchise. Looking at the deal value in
respect to liability based valuation multiples the acquisition materialized at
109%/36% of CASA deposits and total deposits respectively.
13 March 2019
4
 Motilal Oswal Financial Services
Sector Update | Financials
Exhibit 6:
ING — CASA ratio stood at ~33% in FY14
Deposits (INRb)
31
33
CASA (%)
35
34
33
33
Exhibit 7:
ING — RoA profile improved steadily
Cost of Funds (%)
RoA (%)
1.1
1.2
1.1
21
25
24
27
29
27
0.6 0.7
0.1
0.4
0.7
0.9
Source: MOSL, Company
Source: MOSL, Company
Exhibit 8: Valuing key mergers based on the strength of the bank’s liability franchise
Acquirer
HDFC Bank
ICICI Bank
Acquiree
Centurion Bank of
Punjab
Bank of Rajasthan
Date of
merger
2008
2010
2015
Deal Value
(INRb)
112.2
30.5
150.0
Deposits CASA Deposits
CASA
(INRb)
(INRb)
Ratio (%)
207.1
151.9
412.2
50.7
41.6
137.6
24.5%
27.4%
33.4%
Deal value to
deposits (%)
54.2%
20.1%
36.4%
Deal valueto CASA
deposits (%)
221.1%
73.3%
109.0%
Source: Company, MOSL, BBG
Kotak
ING Vysya Bank
Mahindra Bank
*For HDFCB-CBoP, the data is as on Dec’07,
*For ICICIBC-BoR, the data is as on Dec’09,
*For KMB-ING, the data is as on Mar’14
13 March 2019
5
 Motilal Oswal Financial Services
Sector Update | Financials
Sustainable competitive advantage: A tight leash on
funding cost
Liability franchise plays an important role in building a sustainable competitive
advantage. The recent liquidity crisis has highlighted this further as liquidity and
interest rate movements make it challenging for the NBFCs to manage funding costs
due to higher dependence on wholesale borrowings. As credit markets continue to
tighten and formalisation of the economy along with improved regulations increase
the credit acceptability of borrowers, the ability of a bank to lend at a cheaper cost
turns into a key driver of business growth. This enables the lender to sustainably
grow its loan book and gain critical mass without accumulating unwarranted risk on
the balance sheet.
IndusInd Bank (IIB) is one such example where the bank grew its liability franchise
considerably over the past 10 years, which drove a reduction in its funding cost from
a high of 8.3% to 5.8% in FY18. This has enabled IIB to lend to better-rated
corporates at competitive yields, which is reflected in the yield on its corporate
portfolio v/s other lenders. Besides moderation in funding cost, the strong liability
franchise has also enabled lenders to maintain stable earnings and growth across
rate cycles.
Exhibit 9:
IIB — CASA ratio has improved significantly over the past decade
Deposits (INRb)
23% CAGR over
10 years
19.2
23.7
27.2
27.3
29.3
CASA (%)
44.0
32.5
34.1
35.2
36.9
14.9
15.7
Source: MOSL, Company
Exhibit 10:
IIB: Consequently, RoA profile has improved steadily
Cost of Funds (%)
1.4
1.6
1.6
ROA (%)
1.8
1.8
1.8
1.8
1.8
IIB’s cost of fund has
declined from 8.3% in FY12
to 5.8% in FY18
1.1
0.6
0.4
0.3
Source: MOSL, Company
13 March 2019
6
 Motilal Oswal Financial Services
Sector Update | Financials
Recent liquidity crisis emphasizes importance of strong
liability franchise
In our view, the recent liquidity crisis has again highlighted the importance of a strong
liability franchise, as extreme interest rate movements make it challenging for the
NBFCs to manage their funding cost due to the higher dependence on wholesale
borrowings. The share of bank borrowings for major NBFCs has increased sharply over
9MFY19 as usual funding channels were affected. The majority of the NBFCs, especially
the large ones with strong parentage, have thus witnessed a sharp increase in the
contribution of term loans in the range of 400bp-959bp over the past nine months.
Besides, portfolio buyouts from NBFCs by banks (HDFC Bank – INR62b, ICICI Bank –
INR68.5b and SBI – INR110b) have further contributed to growth. This again points
toward the need of a strong deposit-based funding franchise for the bank as they
play an increasingly important role in meeting the credit needs of the economy,
both directly and indirectly (via NBFCs).
The regulatory arbitrage, which NBFCs have traditionally enjoyed unlike banks
(NBFCs are not required to comply with CRR/SLR regulations), is also getting diluted
with the RBI gradually lowering the SLR requirements for banks. Over FY14 -
FY19YTD, the RBI has lowered the SLR ratio by 325bp to current levels of 19.25% and
the same is scheduled to decline by 25bps every quarter till it reaches 18%.
Exhibit 11: NBFCs funding mix - proportion of term loans on Exhibit 12: NBFCs funding mix - proportion of NCDs has been
an uptrend for large NBFCs
on a decline
FY18
9MFY19
38.1%
56.6%
10.0%
14.0%
7.7%
17.3%
45.0%
79.0%
49.4%
37.5%
30.0%
30.4%
24.0%
74.0%
FY18
9MFY19
21.1%
14.6%
HDFC
LICHF
PNBHF
CIFC
HDFC
LICHF
PNBHF
CIFC
Source: Company, MOSL
Source: Company, MOSL
Exhibit 13: M&A between banks and NBFCs point toward liability franchise becoming a key M&A driver
Acquirer
IDFC Bank
IndusInd Bank
Bandhan Bank
Acquiree
Capital First
Bharat Financial
Inclusion
Gruh Finance
Date of
merger
2018
2018
2018
Key rationale for the merger
For IDFC - Access to the retail asset franchise and customer base
For Capital First- Easier liquidity and lower cost of funds
For IIB - Access to the MFI business and wide reach of BHAFIN
For BHAFIN – Sustainable liability franchise and lower cost of funds
Strategic fit with complementary geographical presence and asset
diversification
Promoter shareholding reduction was also one of the key drivers
Source: MOFSL, Company
13 March 2019
7
 Motilal Oswal Financial Services
Sector Update | Financials
Private banks gaining liability market share
Private banks’ deposit market share up to 27% from ~19% in FY14:
We note that
the deposits market share of PSU banks has declined from 80.6% in FY14 to 71.6%
currently, while that of private banks has increased from 18.6% to 27%. We note
that, among private banks, HDFCB has gained the highest market share – up 281bp
from 4.4% in FY14 to 7.2% in 3QFY19, followed by KMB (+109bp) and YES (+100bp),
while ICICIBC has shown slowest growth (up by a mere 23bp). Among PSU banks,
SBIN is the only bank to gain market share (+ 199bps), while BOB has lost the
highest market share (-181bp).
NBFCs, too, have increased their market share from 0.8% in FY14 to 1.4% in 3QFY19
– although the increase is marginal, it is still reflective of the fact that PSU banks are
getting constrained at the hands of private banks and NBFCs.
Exhibit 14: Deposits market share – private banks’ share up to 27% from 18.6% in FY14 – led by HDFCB, KMB and AXSB
Deposits
Private Banks
Axis Bank
City Union Bank
DCB Bank
Federal Bank
HDFC Bank
ICICI Bank
IDFC Bank
IndusInd Bank
J & K Bank
Karur Vysya Bank
Kotak Mahindra Bank
Lakshmi Vilas Bank
RBL Bank
South Indian Bank
Yes bank
Bandhan Bank
Total Private Banks Share
PSU Banks
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Canara Bank
Central Bank of India
IDBI Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab National Bank
State Bank of India
Syndicate Bank
Union Bank of India
Other PSU Banks
Total PSU Banks Share
9MFY19
(INRb)
5,141
355
275
1,235
8,525
6,068
619
1,757
862
586
2,138
308
522
777
2,228
346
31,848
2,092
2,136
6,106
5,151
5,755
2,954
2,300
2,258
2,203
2,163
6,504
28,305
2,591
4,023
9,952
84,494
FY17
3.9
0.3
0.2
0.9
6.0
4.6
0.4
1.2
0.7
0.5
1.5
0.3
0.3
0.6
1.3
0.2
23.0
1.9
1.8
5.6
5.1
4.6
2.8
2.5
1.7
2.0
2.1
5.8
24.2
2.4
3.5
9.6
75.8
Market Share (%)
FY18
9MFY19
4.0
0.3
0.2
1.0
7.0
5.0
0.4
1.4
0.7
0.5
1.7
0.3
0.4
0.6
1.8
0.3
25.6
1.9
1.8
5.2
4.6
4.6
2.6
2.2
1.8
1.9
1.8
5.7
23.9
2.4
3.6
8.8
73.1
4.4
0.3
0.2
1.0
7.2
5.1
0.5
1.5
0.7
0.5
1.8
0.3
0.4
0.7
1.9
0.3
27.0
1.8
1.8
5.2
4.4
4.9
2.5
1.9
1.9
1.9
1.8
5.5
24.0
2.2
3.4
8.4
71.6
Incremental Market Share (%)
FY17
FY18
9MFY19
5.7
0.3
0.4
1.9
9.8
4.2
3.2
3.5
0.3
0.4
1.9
0.5
1.0
1.1
3.1
1.1
38.5
0.1
2.1
2.8
2.7
1.6
3.1
0.3
0.4
-1.3
1.1
6.9
34.8
-0.1
3.4
1.5
59.4
6.1
0.4
0.7
2.2
22.2
11.0
1.2
4.1
1.2
0.5
5.5
0.4
1.5
0.9
9.0
1.7
69.0
1.8
2.0
-1.6
-3.0
4.6
-0.3
-3.2
4.0
0.9
-1.9
3.2
18.8
1.9
5.1
-3.4
28.9
12.2
0.5
0.7
2.3
12.9
9.2
2.8
4.5
1.3
0.4
4.3
-0.5
1.7
1.1
4.4
0.2
57.9
-0.9
1.1
3.9
-1.2
10.3
0.1
-3.6
3.5
0.7
1.8
1.6
25.1
-2.8
-1.3
-0.7
37.8
Source: MOFSL, Company
13 March 2019
8
 Motilal Oswal Financial Services
Sector Update | Financials
Private banks’ CASA market share up to ~29% from ~22% in FY14:
The CASA
market share of the private banks has increased from 21.7% in FY14 to 28.8%
currently. Increased digital initiatives, coupled with the differential SA rates being
offered, are the main reason for the strong incremental share of private banks.
We note that, among the private banks, KMB has gained the highest market
share (+165bp, from 0.7% in FY14 to 2.4% in 3QFY19), followed by HDFCB
(+128bp) and ICICIBC (+109bp), while AXSB has shown slowest growth (+30bp).
Among PSU banks, Andhra Bank and Indian Bank are the only banks to gain
market share, while SBIN has lost 122bp market share. However, PSU banks
have reported a modest pick-up in incremental CASA share over 9MFY19, led by
stronger trends for SBIN (+34%) and PNB (+11%).
Exhibit 15: CASA market share – private banks’ share up to 28.8% v/s 21.7% in FY14 – led by KMB, HDFCB and ICICIBC
CASA Deposits (INRb)
Private Banks
Axis Bank
City Union Bank
DCB Bank
Federal Bank
HDFC Bank
ICICI Bank
IDFC Bank
IndusInd Bank
J & K Bank
Karur Vysya Bank
Kotak Mahindra Bank
Lakshmi Vilas Bank
RBL Bank
South Indian Bank
Yes bank
Bandhan Bank
Total Private Banks Share
PSU Banks
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Canara Bank
Central Bank of India
IDBI Bank
Indian Bank
Indian Overseas Bank
Punjab National Bank
State Bank of India
Syndicate Bank
Union Bank of India
Other PSU Banks
Total PSU Banks Share
9MFY19
2,356
85
67
412
3,471
2,994
64
765
421
175
1,084
70
128
189
741
143
13,199
998
669
2,136
1,750
1,711
1,319
882
785
821
2,739
12,376
809
1,430
4,151
32,575
FY17
5.2
0.2
0.1
0.8
7.6
6.0
0.1
1.1
0.9
0.4
1.7
0.1
0.2
0.4
1.3
0.2
26.3
2.2
1.4
4.7
4.2
3.7
2.8
2.1
1.7
1.9
6.4
27.6
1.9
3.1
10.2
73.7
Market Share (%)
FY18
9MFY19
5.4
0.2
0.1
0.8
7.7
6.5
0.1
1.5
0.9
0.4
2.2
0.2
0.2
0.4
1.6
0.3
28.6
2.2
1.4
4.7
4.0
3.7
2.8
2.1
1.7
1.8
5.9
26.9
1.8
3.1
9.4
71.4
5.1
0.2
0.1
0.9
7.6
6.5
0.1
1.7
0.9
0.4
2.4
0.2
0.3
0.4
1.6
0.3
28.8
2.2
1.5
4.7
3.8
3.7
2.9
1.9
1.7
1.8
6.0
27.0
1.8
3.1
9.1
71.2
Incremental Market Share (%)
FY17
FY18
9MFY19
5.0
0.2
0.1
0.7
8.3
6.1
0.2
1.6
0.8
0.4
1.9
0.2
0.4
0.4
2.3
0.5
29.1
2.2
1.4
4.8
4.5
3.0
2.5
1.8
1.4
1.3
6.2
30.7
0.9
1.9
8.3
70.9
8.0
0.2
0.3
1.5
8.8
11.1
0.9
5.2
0.8
0.4
7.4
0.3
0.8
0.4
5.5
1.2
52.8
1.8
1.9
4.7
1.4
4.5
2.3
2.0
2.4
0.9
0.8
19.3
1.2
3.0
1.1
47.2
-8.4
0.5
0.8
3.5
4.1
9.6
0.7
10.0
1.4
0.9
10.8
0.0
2.2
1.8
1.0
2.8
41.7
1.4
2.3
1.9
-2.7
4.2
6.8
-4.0
1.5
2.4
10.8
34.2
0.5
3.8
-4.9
58.3
Source: MOFSL, Company
Banks offering differential SA rates report higher deposit growth:
Private banks
offering differential SA rates have reported stronger growth and thus gained
significant market share over the past few years. The combined SA share of such
banks has thus increased from 1.5% in FY14 to 5.0% currently. SFBs such as AUBANK
and EQUITAS have also been offering higher rates, which have led to strong traction
in their deposits balance. More recently, IDFC First has revised its SA rates to 7%.
13 March 2019
9
 Motilal Oswal Financial Services
Sector Update | Financials
Banks offering differential
SA rate have reported
healthy mobilisation in SA
deposits, thus steadily
gaining market share.
Exhibit 16: Differential SA rate being offered by major banks
Banks
IndusInd bank
Kotak bank
Yes Bank
RBL Bank
IDFC First Bank
AU Small Finance Bank*
Equitas Small Finance Bank*
System SA growth (2 year CAGR)
*Represents YoY growth
SA rates
(%)
4.00-6.00
5.00-6.00
5.00-6.25
5.50-7.00
6.00-7.00
5.00-6.75
5.50-7.50
SA growth (%)
(2 Year CAGR)
36.0
35.9
16.6
30.2
146.1
109.9
65.7
7.4
Source: MOFSL, Company
CASA per branch and employee stabilizes for large private banks, increases for
banks offering differential SA rates:
We note that CASA per branch and CASA per
employee are showing some signs of stability for large private banks such as HDFCB,
ICICBC and AXSB. Also, these metrics continue improving for other private banks
offering differential SA rates.
KMB has shown highest growth, with its CASA per branch increasing from INR161m
to INR746m over the past five years and CASA per employee rising from INR7m to
IINR27m (aided by its ‘811’ strategy and superior product proposition). YES and RBK
too have demonstrated healthy growth. AXSB witnessed lowest growth in CASA per
branch, mainly as the bank opened the maximum number of branches over the past
few years. In terms of CASA per employee, YES, AXSB and HDFCB have the highest
efficiency. Among PSU banks, SBIN tops with CASA per employee at INR46m.
Robust increase in CASA per
branch for KMB, YES and
RBK.
Exhibit 17: CASA per branch – KMB and HDFCB have been the clear outperformers; ICICIBC
catching up well
1,000.0
500.0
-
CASA per branch (INRm)
FY14
FY16
FY18
9MFY19
Source: MOFSL, Company
Exhibit 18: CASA per employee – YES, AXSB and HDFCB
have the highest efficiency
CASA per employee (INRm)
50.0
40.0
30.0
20.0
10.0
-
FY14
FY16
FY18
Exhibit 19: …while for PSU banks, it is largely stable; highest
for SBIN
CASA per employee (INRm)
50.0
40.0
30.0
20.0
10.0
-
FY14
FY16
FY18
Source: MOFSL, Company
Source: MOFSL, Company
13 March 2019
10
 Motilal Oswal Financial Services
Sector Update | Financials
Jan Dhan deposits form ~9% of incremental SA deposits
for PSU banks
While incremental lending for PCA banks was curtailed, deposit growth was
relatively good. Thus, their CD ratios were at controlled levels. Now, with six
banks out of the PCA framework, PSU banks are well positioned for faster credit
growth; they will benefit from excess liquidity they carry on their balance
sheets.
Further, the launch of Pradhan Mantri Jan Dhan Yojana also supported overall
deposit growth, with a total of INR870.3b being raised through these accounts
(as on 3QFY19). Deposits from the Jan Dhan Yojana contributed ~9% of
incremental SA deposits for PSU banks over 9MFY19 and constitute ~3.1% of
total SA deposits. We note that Allahabad Bank and Bank of India have shown
highest growth in accumulating Jan Dhan deposits, while United Bank of India
and Bank of Baroda have gained the maximum incremental CASA (~47%/~15%)
from these accounts.
PSU Banks - Jan Dhan
deposits comprise 3.1% of
total SA deposits as on
3QFY19; constitute ~9% of
incremental SA deposits.
Exhibit 20: A snapshot of progress made in Pradhan Mantri Jan Dhan Yojana as on
9MFY19
Deposits in Accounts (INRb)
Public Sector Banks (including attached RRBs)
Private Sector Banks
Grand Total
YoY growth (%)
Incremental SA increase on account of Jan Dhan
PSU Banks (%)
Private Banks (%)
FY15
147.6
9.1
156.7
FY16
343.2
13.5
356.7
128
10.8
0.4
FY17
608.7
21.0
629.7
77
FY18 9MFY19
763.2
845.6
21.8
24.8
784.9
870.3
25
11
9.6
1.4
4.8
8.5
8.5
0.5
0.1
0.6
Source: MOFSL, Company
FY15-19
CAGR (%)
118
89
68
67
60
Allahabad Bank and Bank of
India have reported highest
growth in Jan Dhan
deposits.
Exhibit 21: Top 5 gainers from Jan Dhan Yojana – deposits growth
Deposits in Accounts (INRb)
Allahabad Bank
Bank of India
State Bank of India
Bank of Baroda
Union Bank of India
FY15
1.46
4.80
29.51
13.25
3.86
FY17
14.45
41.36
155.72
60.04
16.00
9MFY19
32.69
61.10
235.72
102.79
25.20
Source: MOFSL, Company
~47%/~15% of incremental
SA deposits for United Bank
of India/Bank of Baroda
have been on account of
Jan Dhan Yojana.
Exhibit 22: Top 5 gainers of Jan Dhan Yojana – incremental SA contribution
SA deposits (INRb)
United Bank of India
Bank of Baroda
Oriental Bank of Commerce
Bank of India
Dena Bank
FY15
17.64
13.25
13.64
4.80
2.47
FY17
91.52
60.04
41.49
41.36
8.66
9MFY19
102.71
102.79
36.72
61.10
13.54
Incremental
Growth (%)
46.9
15.0
14.8
10.4
10.4
Source: MOFSL, Company
13 March 2019
11
 Motilal Oswal Financial Services
Sector Update | Financials
Assessing historical trends & valuing the liability
franchise
Our long-term analysis of valuing the liability franchise suggests that (a) retail
private banks have traded at a higher market cap to CASA multiple and (b) private
corporate banks have seen de-rating of multiples, with asset quality pressures
leading to slowdown in earnings/business growth. On the basis of 10-15-year
average, HDFCB has traded at market cap/CASA of 115%-102%, KMB at 193%-236%,
IIB at 147%-120%, while the average for AXSB and ICICBC has been lower at 60%-
80%. With earnings momentum now back on track and the NPL cycle largely behind,
we expect multiples to improve and reflect the strength of the liability franchise.
AXSB’s market Cap to CASA
multiple stands at ~64% v/s
long-period average of
~60% and peak of 92%
Exhibit 23: AXSB: Market cap to CASA deposits improves but far off from peak levels
100.0%
80.0%
60.0%
40.0%
20.0%
FY16-18 Avg.
* RoA: 0.78%, RoE: 8.2%
* Credit Cost: 2.8%
* Credit growth: 16%
FY05-08 Avg.
* RoA: 1.11%, RoE: 19.0%
* Credit Cost: 0.4%
* Credit growth: 59%
FY14-15 Avg.
* RoA: 1.73%, RoE: 17.6%
* Credit Cost: 0.7%
* Credit growth: 19%
FY10-13 Avg.
* RoA: 1.60%, RoE: 19.3%
* Credit Cost: 0.9%
* Credit growth: 25%
Source: MOFSL, Company
Exhibit 24: HDFCB showing consistent increase in market cap to CASA deposits
200.0%
150.0%
100.0%
50.0%
0.0%
FY10-13 Avg.
* RoA: 1.63%, RoE: 18.0%
* Credit Cost: 1.0%
* Credit growth: 25%
FY16-18 Avg.
* RoA: 1.82%, RoE: 18.0%
* Credit Cost: 0.6%
* Credit growth: 22%
FY05-08 Avg.
* RoA: 1.40%, RoE: 18.3%
* Credit Cost: 1.7%
* Credit growth: 38%
FY14-15 Avg.
* RoA: 1.89%, RoE: 20.3%
* Credit Cost: 0.6%
* Credit growth: 23%
Source: MOFSL, Company
13 March 2019
12
 Motilal Oswal Financial Services
Sector Update | Financials
Market cap/CASA multiple
lower than long-term
average; expect it to
improve and narrow the
gap with other peers, viz.
AXSB.
Exhibit 25: ICICIBC’s market cap to CASA deposits showing recovery signs
FY11-13 Avg.
* RoA: 1.47%, RoE: 11.3%
180.0%
* Credit Cost: 0.6%
* Credit growth: 17%
140.0%
100.0%
FY07-08 Avg.
60.0% * RoA: 1.08%, RoE: 12.4%
* Credit Cost: 1.0%
* Credit growth: 25%
20.0%
FY16-18 Avg.
* RoA: 1.19%, RoE: 9.7%
* Credit Cost: 2.6%
* Credit growth: 10%
FY14-15 Avg.
* RoA: 1.77%, RoE: 14.3%
* Credit Cost: 0.8%
* Credit growth: 16%
Source: MOFSL, Company
Market cap/CASA multiple
moving toward its long-
term average.
Exhibit 26: SBIN - Market Cap to CASA has been quite volatile affected by different cycles
FY05-08 Avg.
* RoA: 0.93%, RoE: 18.4%
* Credit Cost: 0.5%
32.0% * Credit growth: 28%
24.0%
16.0%
Market Cap/CASA
FY14-15 Avg.
* RoA: 0.65%, RoE: 11.4%
* Credit Cost: 1.3%
* Credit growth: 10%
FY10-13 Avg.
* RoA: 0.89%, RoE: 16.7%
8.0%
* Credit Cost: 1.1%
* Credit growth: 17%
0.0%
FY16-18 Avg.
* RoA: 0.06%, RoE: 1.0%
* Credit Cost: 3.1%
* Credit growth: 5%
Source: MOFSL, Company
Market cap/CASA multiple
at its long-term average;
expect it to improve, going
forward.
Exhibit 27: FB - market cap to CASA deposits closer to its long-term average
FY05-08 Avg.
* RoA: 1.08%, RoE: 17.7%
* Credit Cost: 1.3%
* Credit growth: 25%
Market Cap/CASA
FY10-13 Avg.
* RoA: 1.25%, RoE: 12.6%
* Credit Cost: 1.2%
* Credit growth: 18%
FY14-15 Avg.
* RoA: 1.21%, RoE: 13.1%
* Credit Cost: 0.5%
* Credit growth: 18%
80.0%
60.0%
40.0%
20.0%
0.0%
FY16-18 Avg.
* RoA: 0.68%, RoE: 8.1%
* Credit Cost: 1.1%
* Credit growth: 22%
Source: MOFSL, Company
13 March 2019
13
 Motilal Oswal Financial Services
Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
Sector Update | Financials
* In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
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In Singapore, this report is being distributed by Motilal Oswal Capital Markets Singapore Pte Ltd (“MOCMSPL”) (Co.Reg. NO. 201129401Z) which is a holder of a capital markets services license and an exempt financial adviser in Singapore,
as per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to MOCMSPL by Monetary Authority of Singapore.
Persons in Singapore should contact MOCMSPL in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of which some of
whom may consist of "accredited" institutional investors as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (“the SFA”). Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such
Singapore Person must immediately discontinue any use of this Report and inform MOCMSPL.
Disclaimer:
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. This report and information herein is solely for informational purpose and may 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. 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. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document
(including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including
those involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy,
completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval.
MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform
investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this
into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and
the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or
published, copied, in whole or in part, for any purpose. 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 MOSL 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. Neither the Firm, not its directors, employees, agents or representatives shall
be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The person accessing this information specifically agrees
to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSL
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm
Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id: na@motilaloswal.com, Contact No.:022-30801085.
Registration details of group entities: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser:
INA000007100.Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409)
offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate
products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
*MOSL
has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company Law Tribunal, Mumbai Bench. The existing registration no(s) of
MOSL would be used until receipt of new MOFSL registration numbers.
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