Banking and Financial Services

December 21, 2021 Sector View

Banks / HFCs – Overweight
Changing landscape for banks, NPA issues behind
NBFC / Brokerage - Neutral
With delinquencies largely having materialised and restructuring done, we
believe the impact of the second wave of the pandemic is largely behind us Insurance / AMC – Overweight
and the banking sector is on the cusp of sustained recovery path. Credit

Sector Update
growth has seen a gradual pick-up and reached 7.3% YoY as on December
3, 2021, with retail and MSME leading the way while the corporate segment
is showing green shoots of revival.
As markets have been focusing on fintechs as the future of the Indian
financial industry, new age IPOs throwing newer opportunities. Digital
currency has remained the talk of the town. Digital currency (encrypted
form) has been garnering attention of the investor community with global
crypto market reaching over $2.6 trillion; in India it is ~$15 billion. RBI also
has vouched for its own central bank digital currency (CBDC), which comes
with various benefits while the government also plans to take up a bill related
to the same in the winter session of Parliament.
Talking about recent quarterly performance, it was largely in line with
expectations as banks witnessed increased business with unlocking activity,
which resulted in a better operating performance and profitability. NII grew
6.3% YoY led by advance growth, though margins remained flat to negative.
C/I ratio increased meaningfully to 52.7% from 45.6% due to higher
collections and loan origination expense. Credit cost declined sharply by

ICICI Securities – Retail Equity Research

36.7% QoQ to | 34530 crore, ~1.4% of loans, from ~2.2% in Q1FY22 as
fresh slippages declined, resulting in 62.9% YoY uptick in earnings.
Banking sector outlook:
 Bank credit has shown a continuous improvement from June 2021
onwards as unlocking began and reached the 7.3% YoY mark in
December 2021 from ~5.9% levels. Non-food credit growth has shown
a steady 20-30 bps improvement MoM since June 2021. Category wise
retail and MSME loans have been key drivers with 11.7% and 21.1% YoY
growth, respectively, according to the latest RBI sectoral data for October
2021. For FY22E, we continue to expect credit growth at 6-8% YoY with
retail & MSME continuing to drive disbursements
 Collection efficiency for large private bank has reached above 98% while
PSBs have also seen sequential 2-3% improvement and reached ~95-
96% range. Recent business data from Mahindra Finance (key rural
player) and another key MFI player, suggests further improvement in
asset quality
Research Analyst
 Among various recent developments, RBI’s announcement on Prompt
Kajal Gandhi
Corrective Action (PCA) Framework and harmonisation of NPA [email protected]
classification norms remain a highlight. These norms are expected to
create some turbulence in the interim phase but will bring NBFCs almost Vishal Narnolia
[email protected]
at par with banks in terms of regulation, supervision and is structurally
positive in the long run Sameer Sawant
[email protected]
Dixit Sankharva
We remain positive on large banks and HFCs from investment perspective, [email protected]
recommend Axis Bank and HDFC Ltd among large lenders, IDFC First Bank
in the midcap domain and HDFC Life & SBI Life among non-lenders.
Among PSU banks, SBI continues to remain our preferred pick as legacy
asset quality issues are behind and retail NPAs, if any, are not expected to
be lumpy, keeping provisions under check and earnings to improve.
Competition from new age fintech players are expected to keep mid-sized
banks and NBFCs under pressure.

ICICI Securities |Retail Research 1

 Sector Update | Banking and Financial Services ICICI Direct Research

Digital currency offers advantage, thus gaining interest across

the globe
The government is likely to introduce the crypto-currency bill in the
Parliament this winter session. The bill likely seeks private crypto-currency
avoidance and wishes to facilitate a framework for India’s own digital
currency to be issued by the RBI. Digital currency (encrypted form) has been
garnering attention of the investor community and global crypto market has
reached over $2.6 trillion, with India at ~$15 billion. Bitcoin, Ether are top
two crypto-currencies with market cap of $900 billion, $470 billion
respectively.
RBI had earlier vouched for central bank digital currency but maintained
caution against private cryptos. Central bank digital currency (CBDC) is the
legal tender issued by a central bank in a digital form. It is the same as a fiat
currency and is exchangeable one-to-one with the fiat currency. Only its
form is different. It is liability in one book and asset for another. A 2021 BIS
survey of central banks found that 86% were actively researching the
potential for CBDCs, 60% were experimenting with the technology and 14%
were deploying pilot projects.
CBDC represent a unique opportunity to design a technologically advanced
representation of central bank money. It is expected to promote financial
inclusion as it does not necessarily require a bank account.
Key advantages of digital currency:
 CBDC can provide a government-authorised solution for storing
value and making high volume low value payments
 It benefits the government by reducing cash management cost,
which is ~1-1.5% of GDP
 Reduces settlement risk, thus lowering liquidity requirements
 Currency conversion would be faster in case of CBDCs. In turn, this
should help faster international payments
 Since CBDC would be backed by the sovereign, risk of volatility as
compared to other crypto currencies would be much lower

Along with benefits, digital currency also comes with its own demerits,
which primarily include risk of cyber-attacks and may lower spreads for
banks due to its impact on CASA.
Countries with strong digital capabilities and network will be able to adopt
the new technology faster than others. The dollar gets an edge, being widely
accepted in all crypto currencies trading across various platforms.

Exhibit 1: Digital mode of transaction gaining dominance

100.0 2.0 2.0
90.0
80.0 40.0 44.2
70.0
60.0
2.9 4.1
%

50.0
40.0
30.0 54.2 49.7
20.0
10.0
0.0
Preferred mode of payment Preferred mode of receive money

Cash Cheque Digital No comment

Source: ICRA Report, ICICI Direct Research

ICICI Securities |Retail Research 2

 Sector Update | Banking and Financial Services ICICI Direct Research

Retail, MSME drive credit growth; pick-up signs seen in

corporate
Bank credit has shown a continuous improvement since June 2021 as
unlocking began and has reached 7.3% YoY mark in December (fortnightly
data) from around 5.9%. Non-food credit growth has shown a steady 20-30
bps improvement MoM since June 2021 onwards. This was primarily on
account of pent up demand, festive season and good monsoons boosting
rural demand as well. Category wise retail, MSME loans have been key
drivers with 11.7%, 21.1% YoY growth, respectively, as per latest RBI
sectoral data for October 2021. Within the MSME space, medium industries
saw strong 48% YoY growth partially benefitted by extension of ECLGS
scheme. Within the retail segment, consumer durable segment saw healthy
44.4% YoY growth (due to festive season boost) while housing and auto
loans saw 8.4% YoY growth each. Housing loans (ex-priority sector) saw an
even better growth of 14.5% YoY. Agriculture loan growth remained steady
at 9% YoY.
Corporate (large industries) credit growth was in the negative territory due
to corporate deleveraging and caution on the part of lenders. However, in
the past few months, the deceleration of growth has slowed down while for
October 2021, it showed positive 0.5% YoY growth. Though absolute
growth does not seem substantial, it is the first positive growth since August
2020, indicating some green shoots.
Exhibit 2: Incremental corporate borrowing from banks from March 2021
20000

-20000

-40000

-60000

-80000

-100000

-120000

-140000
Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21
Source: Bloomberg, ICICI Direct Research

ICICI Securities |Retail Research 3

 Sector Update | Banking and Financial Services ICICI Direct Research

Exhibit 6: Industry wise credit deployment data

| crores Jun-21 Jul-21 Aug-21 Sep-21 Oct-21
Non-Food Credit 1,07,54,953 1,08,32,938 1,08,28,662 1,08,94,450 1,09,82,596
Agriculture & Allied Activities 12,84,399 13,18,024 13,04,270 13,21,325 13,44,042
Industry 28,67,304 28,24,855 28,26,181 28,29,547 28,54,571
Large 23,44,313 22,75,362 22,65,896 22,59,034 22,70,350
Services 26,00,627 25,97,736 25,94,741 25,71,563 26,03,938
NBFCs 8,83,851 8,92,226 8,70,541 8,76,825 8,83,614
Personal Loans 27,86,519 28,58,741 28,93,913 29,18,538 29,55,599
Housing (Including Priority Sector 14,64,645
Housing) 14,66,762 14,69,744 14,78,451 14,85,235
Credit Card Outstanding 1,02,757 1,11,323 1,15,612 1,15,641 1,23,312
Vehicle Loans 2,38,214 2,65,951 2,68,643 2,70,378 2,72,610

YOY growth (% ) Jun-21 Jul-21 Aug-21 Sep-21 Oct-21

Non-Food Credit 5.9% 6.2% 6.7% 6.8% 6.9%
Agriculture & Allied Activities 11.4% 12.4% 11.3% 9.9% 10.2%
Industry -0.3% 1.0% 2.5% 2.5% 4.1%
Large -3.4% -2.9% -1.4% -1.0% 0.5%
Services 2.9% 2.7% 2.3% 0.8% 2.9%
NBFCs -2.2% 0.5% -2.5% -2.5% 1.4%
Retail 11.9% 11.2% 12.1% 12.1% 11.7%
Housing (Including Priority Sector Housing)
9.7% 8.9% 9.2% 9.0% 8.4%
Credit Card Outstanding 5.3% 9.8% 10.3% 9.5% 11.9%
Vehicle Loans 11.0% 7.3% 8.2% 8.9% 8.4%

Proportion (% )
Agriculture & Allied Activities 13.1% 13.5% 13.4% 13.5% 13.8%
Industry 29.4% 28.9% 28.9% 29.0% 29.2%
Large 21.8% 21.0% 20.9% 20.7% 20.7%
Services 26.6% 26.6% 26.6% 26.3% 26.7%
NBFCs 8.2% 8.2% 8.0% 8.0% 8.0%
Retail 28.5% 29.3% 29.6% 29.9% 30.3%
Housing (Including Priority Sector Housing)
13.6% 13.5% 13.6% 13.6% 13.5%
Credit Card Outstanding 1.0% 1.0% 1.1% 1.1% 1.1%
Vehicle Loans 2.2% 2.5% 2.5% 2.5% 2.5%
Source: RBI, ICICI Direct Research

Credit card spends in India have also witnessed an increasing trend in

spends. It was further helped by the festive season as the value of credit
card transactions rose 26% MoM to reach | 1,00,943 crore in October 2021,
data by the Reserve Bank of India showed.
Exhibit 3: Increasing trend of spends
1.2
1.0
0.8
| lakh crore

0.6
0.4
0.2
0.0
Mar-21

Jun-21

Jul-21

Aug-21

Sep-21
Apr-21

May-21

Oct-21

Credit Card Spends

Source: RBI, ICICI Direct Research

Even on an incremental basis, corporate borrowing from banks has reached

the positive territory for September 2021, which again indicates some sort
of revival. However, we believe capex has to come into play to spur growth
in this segment for which capacity utilisation has to reach above the 75%
mark at least.

ICICI Securities |Retail Research 4

 Sector Update | Banking and Financial Services ICICI Direct Research

Asset quality likely to have bottomed

According to recent quarter numbers, the asset quality performance was
better than the previous quarter with lower slippages and better recoveries.
Slippages were mostly at ~1-1.4% vs. 2-2.5% QoQ while GNPA declined
~30-70 bps, barring a few exceptions. With September being the last month
to avail restructuring facility, we saw borrowers utilising the same. Thus, the
restructured book for most banks has gone up ~30-100 bps QoQ. Collection
efficiency for large private bank has reached above 98% while PSBs have
also seen sequential 2-3% increase in collections and reached ~95-96%
range.
Business data from Mahindra Finance (key rural player) for November 2021
suggests an improvement in collection efficiency to 94% from 91% MoM
and 84% YoY. It expects this to reflect positively on its stage 2 and stage 3
assets. In another disclosure by a key MFI player, collection efficiency
(excluding arrears) improved to 93.3% in the second quarter of the fiscal and
further to 94.3% in October 2021.
We believe these are early indicators of an improvement in underlying stress
as region wise, the rural economy being more impacted due to the second
wave and MFI being the most hurt - borrower type wise. We opine that NPAs
have largely bottomed out while with a further pick-up in economic activity,
the trend should remain positive. Improvement in stress and other
resolutions could lead to a gradual decline in credit cost.
However, we also not that, under the Emergency Credit Line Guarantee
Scheme (ECLGS), total sanctions were at | 2.73 lakh crore (out of revised
cap of | 4.5 lakh crore) and disbursement at | 2.14 lakh crore until mid-July
2021. We need to keep a close watch on the fresh slippages, as the one-year
moratorium ends (under ECLGS).
Exhibit 4: Asset quality of Indian banking system as of September 2021
Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22
GNPA 882639 876824 816786 786344 770186 717790 785467 787771 751588
NNPA 324548 325188 264357 241870 205823 167641 241576 245727 227505
GNPA ratio 9.0 8.4 7.6 7.4 7.3 6.7 7.2 7.3 6.9
NNPA ratio 3.3 3.1 2.5 2.3 1.9 1.6 2.2 2.3 2.1
GNPA of PSU banks 749636 742420 668666 665587 632735 597945 636504 632026 601278
GNPA of Private banks 133003 134403 148121 120757 137451 119845 148962 155745 150310
Source: Company, Capitaline, ICICI Direct Research

ICICI Securities |Retail Research 5

 Sector Update | Banking and Financial Services ICICI Direct Research

Exhibit 5: Stressed assets scenario in various banks

Bank/NBFC GNPA % NNPA % Collection Eff (% ) Restructured % Total stressed O/S provisions
Q2FY22 Q2FY22 Q2FY22 Q2FY22 Q2FY22 Q2FY22
PSU Banks
SBI 4.9% 1.5% 95.0% 1.2% 5.4% 3.6%
Bank of Baroda 8.1% 9.6% 96.0% 3.0% 9.3% 5.3%
Indian Bank 9.6% 3.3% 91.0% 5.5% 11.8% 6.3%
Canara Bank 8.4% 3.2% 2.4% 9.4% 5.2%

Large Private Banks

HDFC Bank 1.4% 0.4% 1.7% 2.0% 1.7%
Kotak Bank 3.2% 1.1% 0.5% 3.4% 2.7%
Axis Bank 3.5% 1.1% 98.9% 0.6% 3.8% 3.3%
IndusInd Bank 2.8% 0.8% 3.6% 4.2% 3.4%

Mid Size Private Bank

Federal Bank 3.2% 1.1% 96.0% 2.6% 4.3% 2.5%
DCB Bank 4.7% 2.6% 6.8% 7.4% 2.1%
Bandhan Bank 10.8% 3.0% 10.2% 14.9% 7.8%
IDFC First Bank 4.3% 2.1% 2.9% 5.4% 2.7%
City Union Bank 5.6% 3.5% 0.0% 5.6% 2.1%
CSB Bank 4.1% 2.6% 93.0% 0.8% 4.4% 3.7%
Total Stressed is calculated as GNPA % + 40% of Restructured %

Source: Company, Media Articles, ICICI Direct Research

Check bounce rate in April and May 2021 increased as lockdowns came into
force, to around 36.5% compared to ~33% in March 2021. However, there
has been a meaningful decline in bounce rates, which was at 31.2% (20-
month low) for October 2021, showing an economic revival.

Exhibit 6: Bounce rates show meaningful decline from July 2021 onwards
37 36.5
35.9
36
35 34.1
34
32.8 33.2 33
33
31.7
%

32 31.2
31
30
29
28
Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21

Auto-debit bounce rate

Source: NCPI, ICICI Direct Research

Introduction of PCA framework for NBFCs

Reserve Bank of India introduced the Prompt Corrective Action (PCA)
Framework for NBFCs as they have been growing large in size. This puts
restrictions on NBFC whenever their financial metrics drop below the
prescribed threshold. This framework will bring NBFCs almost at par with
banks in terms of regulation and supervision. This framework will come into
effect from October 1, 2022, on the basis of their financial position on or after
March 31, 2022. Currently, in listed domain, all large NBFCs (except M&M
Financial) adhere to the requirements. Hence, no restriction of any kind is
expected. For M&M Financial, NNPA (at 6.4%) is above threshold 1.
However, based on management commentary and improvement in asset
quality, it is likely to remain out of the ambit of restriction till March 2022.

ICICI Securities |Retail Research 6

 Sector Update | Banking and Financial Services ICICI Direct Research

The objective of the PCA framework is to enable supervisory intervention at

appropriate time and require the supervised entity to initiate and implement
remedial measures in a timely manner, so as to restore its financial health.
This framework will be applicable to all deposit taking NBFCs as also other
large NBFCs that sit in the middle, upper and top players of the central bank’s
scale based regulation for the sector. Non-deposit taking NBFCs with asset
size of less than | 1000 crore, government owned NBFCs, housing finance
companies and primary dealers are, however, exempt from the framework.
Exhibit 7: RBI’s trigger thresholds for PCA

RBI Regulator
Indicator Threshold 1 Threshold 2 Threshold 3
minimum
CRAR 15% 12% - 15% 9% - 12% < 9%
Tier 1 Capital Ratio 10% 8% - 10% 6% - 8% < 6%
Net NPA Ratio NA 6% - 9% 9% - 12% >12%
Source: RBI, ICICI Direct Research

PCA Actions:
Risk threshold 1: Restriction on dividend distribution/remittance of profits;
promoters/shareholders to infuse equity and reduce leverage
Risk threshold 2: In addition to mandatory actions of threshold 1, restrictions
on branch expansion
Risk threshold 3: Besides mandatory actions of threshold 1&2, appropriate
restrictions on capital expenditure, other than technological upgrade within
board-approved limits; restrictions/reduction in variable operation costs
Once an NBFC is placed under PCA, taking it out of the framework or
withdrawal of restrictions imposed under it will be considered if no breaches
in risk thresholds in any of the parameters are observed according to four
continuous quarterly financial statements, one of which should be the
annual audited financial statement. Also, this will be based on the
supervisory comfort of the RBI, including an assessment on the
sustainability of the NBFC’s profitability.
Exhibit 8: RBI’s trigger thresholds for PCA
NBFCs CAR Ratio Tier 1 Ratio Net NPA Ratio
Bajaj Finance 27.7% 24.9% 1.1%
Muthoot Finance 27.6% 26.7% 0.0%
Mahindra Finance 26.1% 22.3% 6.4%
Manappuram Finance 31.8% 31.5% 1.3%
IIFL Finance 25.9% 18.3% 1.1%
Poonawalla Fincorp 52.2% 50.1% 2.0%
Cholamandalam 19.6% 16.7% 4.0%
L&T Finance 25.2% 20.1% 2.8%
Shriram City Union Finance 29.1% 28.0% 3.5%
Shiram Transport Finance 23.2% 21.1% 4.2%
Source: Company, ICICI Direct Research

Harmonisation in NPA norms; NBFCs to witness uptick in NPA

RBI has harmonised certain regulatory guidelines with respect to
classification and upgradation of NPA for NBFCs. These guidelines are
expected to result in ~20-80 bps increase in stage 3 asset for NBFCs but
excess ECL provisioning will not have any impact on credit cost and, thus,
earnings for most non-bank lenders.
Banking sector peers have an automated system for tagging accounts as
NPAs on the day the account becomes overdue for more than 90 days. In
contrast, there were no uniform rules for NBFCs with some of them
recognising NPAs at the end of the reporting period while other NBFCs were

ICICI Securities |Retail Research 7

 Sector Update | Banking and Financial Services ICICI Direct Research

upgrading accounts classified as NPAs to standard category upon payment

of only interest and partial overdue. Further, upon payment of single or more
EMIs leads to upgrade from stage 3 to stage 2 asset pool. Hence, to bring
uniformity across lending institutions, RBI has clarified that loan account
once classified as NPAs may be upgraded as standard asset only if the entire
amount of principal and interest overdue are repaid. This is expected to
make stage 3 assets pool relatively stickier as now the movement of asset
can only be from stage 3 to stage 1, and not stage 2.
The stricter norms that are made applicable to NBFCs could lead to increase
in more loan accounts being classified NPAs as partially paid loans may be
classified as slippage, which will further lead to increase in GNPAs.
Further, NBFCs need to shift to daily NPA/SMA recognition wherein
borrower accounts shall be flagged as overdue by the lending institutions as
part of their day-end process for the due date, irrespective of the time of
running such process. E.g. if due date of a loan account is March 31, 2021,
and full dues are not received before the lending institution runs the day-
end process for this date, the date of overdue shall be March 31, 2021. If it
continues to remain overdue, then this account shall get tagged as SMA-1
upon running day-end process on April 30, 2021 i.e. upon completion of 30
days of being continuously overdue. Accordingly, the date of SMA-1
classification for that account shall be April 30, 2021. Similarly, if the account
continues to remain overdue, it shall get tagged as SMA2 upon running day-
end process on May 30, 2021 and if continues to remain overdue. Further, it
shall get classified as NPA upon running day-end process on June 29, 2021.
This stated norm will lead to short term rise in stage-3 assets for few
quarters. Thereafter, stage-3 assets will normalise.
Exhibit 9: Stage 3 assets of NBFCs
Stage 3 Coverage
Particulars (in% ) Stage 3 assets
Ratio
Bajaj Finance 2.5% 55.5%
Muthoot Finance 1.9% 36.3%
Mahindra Finance 12.7% 53.0%
Manappuram Finance 1.6% 21.7%
HDFC 2.5% 54.8%
Poonawalla Fincorp 4.8% 54.0%
L&T Finance 5.7% 52.0%
Cholamadalam 6.2% 36.5%
Shriram City Union Finance 6.9% 51.2%
Shiram Transport Finance 7.8% 48.6%
Home First 1.7% 29.6%
Aavas 1.0% 26.0%
LIC Housing Finance 5.1% 43.3%
Source: Company, ICICI Direct Research

ICICI Securities |Retail Research 8

 Sector Update | Banking and Financial Services ICICI Direct Research

Ownership guidelines & corporate structure to get re-aligned

RBI accepted 21 recommendations of the Internal Working Group (IWG)
related to ownership guidelines & corporate structure of Indian private
sector banks, with some with partial modifications. The recommendations
accepted are as follows:
 The cap on promoters’ stake in long run of 15 years may be raised from
the current levels of 15% to 26% of the paid-up voting equity share
capital of the bank
View: Promoters like the Hinduja Group, HDFC Ltd and the Aga Khan
Fund will be allowed to increase their stake in IndusInd Bank, HDFC Bank
and DCB Bank, respectively, to 26%, if they choose to
 Non-promoter shareholding cap shall be increased from 10% to 15% for
financial institutions/entities but will remain at 10% for non-financial
institutions/entities
View: Key shareholders such as LIC, which has 8.37% stake in SBI, for
example, will be allowed to increase their stake to 15%, if they choose to
 Banks currently under Non-Operative Financial Holding Company
(NoFHC) structure may be allowed to exit such a structure if they do not
have other group entities in their fold
View: It may be noted that banks licenced before 2013 and which operate
group entities, e.g. SBI, Kotak Mahindra Bank, are not covered by the 21
recommendations accepted
 Whenever a new licensing guideline is issued, if new rules are more
relaxed, benefit should be given to existing banks, immediately. If new
rules are tougher, earlier licensees should transition to new guidelines
but the transition path should be finalised in consultation with earlier
licensees to ensure compliance in a non-disruptive manner
View: This means if the NoFHC structure attains tax neutral status, any
adherence to the NoFHC norm from earlier licensees such as SBI, and
Kotak Mahindra Bank would be non-disruptive in nature.

Other key points accepted by RBI:

 No change to existing initial lock-in requirement for promoter, which will
remain at 40% of paid-up voting equity share capital for five years
 There will be no need to fix cap on promoter holding for first five years
 No intermediate sub-targets for promoter holding of 5-15 years but
submission of a dilution schedule will be mandatory
 Monitoring mechanism to be devised to ensure that the control of
promoting entity / major shareholder does not fall into the hands of
someone not fit and proper
 If invoking of a pledge leads to transfer of shares greater than 5% stake,
the voting rights of the acquirer will be restricted to 5% till the latter
applies to the RBI for regularisation
 Minimum requirement in terms of number of years of track record for an
NBFC converting to a universal bank, for SFB converting to a universal
bank and for a payments bank converting to an SFB will continue as is at
10 years, five years and five years, respectively
 Minimum net worth requirement for licencing of new banks would be
raised from | 500 crore to | 1000 crore for universal banks, from | 200
crore to | 300 crore for SFBs and from | 100 crore to | 150 crore for UCBs
converting to SFBs but will rise to | 300 crore in five years
 SFBs to be set up in the future should be listed within six years of
reaching net worth equal to that prescribed as entry level capital for
universal banks or eight years from commencement of operations
 Universal banks should continue to be listed within six years of
commencement of operations

ICICI Securities |Retail Research 9

 Sector Update | Banking and Financial Services ICICI Direct Research

Annexure
Exhibit 10: Asset quality scenario
Asset quality trend GNPA (| crore) NNPA (| crore)
Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22
PSU coverage
Bank of Baroda 65,698 63,182 66,671 63,029 62,398 16,795 16,668 21,800 20,260 19,968
SBI 125,863 117,244 126,389 134,259 133,756 36,451 29,032 36,810 43,153 44,753

Private coverage
Axis Bank 26,832 21,998 25,315 25,950 25,690 26,832 21,998 25,315 25,950 25,690
City Union Bank 1,221 1,072 1,026 1,026 1,026 631 527 621 621 1,294
Development Credit Bank 574 502 1,083 1,269 1,285 206 150 594 719 707
IndusInd Bank 4,532 3,651 5,795 6,186 6,062 1,056 466 1,477 1,760 1,724
Federal Bank 3,552 3,470 4,602 4,649 4,556 3,552 3,470 4,602 4,649 4,556
HDFC Bank 11,305 8,826 15,086 17,099 17,399 1,756 1,016 4,555 5,486 5,586
Source: Company, ICICI Direct Research

Exhibit 11: Quarterly margin trend

NIM (% ) Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22
PSU coverage
Bank of Baroda 2.8 2.8 2.7 3.0 2.9
SBI 3.3 3.3 3.3 3.2 3.5
Syndicate Bank 0.0 0.0 0.0 0.0 0.0
Indian Bank 3.1 3.1 2.3 2.9 2.9

Private coverage
Axis Bank 3.9 3.8 3.7 3.7 3.7
City Union Bank 4.1 4.2 3.7 3.9 4.0
Development Credit Bank 3.7 3.8 3.5 3.3 3.4
Federal Bank 3.5 3.6 3.4 3.4 3.5
HDFC Bank 4.1 4.2 4.2 4.1 4.1
Kotak Mahindra Bank 4.5 4.6 4.4 4.6 4.5
IndusInd Bank 4.2 4.1 4.1 4.1 4.1
Bandhan Bank 8.0 8.3 6.8 8.5 7.6
Source: Company, ICICI Direct Research

Exhibit 12: Key financials of industry as of Q2FY22

(| crore) Q2FY22 Q1FY22 Q4FY21 Q3FY21 Q2FY21
NII 127949 122837 116593 123255 120370
Growth YoY 6.3 0.7 3.6 12.4 18.3
Other income 52975 56086 67562 52808 45551
Growth YoY 16.3 26.5 15.8 2.6 -7.1
Total operating exp. 95347 81588 88673 82233 77238
Staff cost 44168 43003 42350 42477 40206
Operating profit 85577 97335 95482 93830 88683
Growth YoY -3.5 4.8 14.7 10.3 10.6
Provision 34530 54621 61563 58073 51721
PBT 51047 42756 33920 35757 37010
PAT 43681 31329 24909 26296 26810
Growth YoY 62.9 45.8 NM NM 191.0
GNPA 751588 787771 785467 717790 770186
Growth YoY -2.4 0.2 -3.8 -18.1 -12.7
NNPA 227505 245727 241576 167641 205823
Growth YoY 10.5 1.6 -8.6 -48.4 -36.6
Advances
Source: (Lakh crore)
Capital-line, Company, ICICI Direct Research 100.6 99.2 103.2 98.4 93.9
Deposits (Lakh crore) 145 142 142 136 133

ICICI Securities |Retail Research 10

 Sector Update | Banking and Financial Services ICICI Direct Research

IndusInd Price Performance State Bank of India Price Performance Indian Bank Price Performance

2000 20000 600 20000 350 20000

1800 18000 18000 300 18000
1600 16000 500 16000 16000
1400 14000 400 14000 250 14000
1200 12000 12000 200 12000
1000 10000 300 10000 10000
800 8000 8000 150 8000
600 6000 200 6000 6000
100
400 4000 100 4000 4000
200 2000 2000 50 2000
0 0 0 0 0 0

Jun-19

Jun-20

Jun-21
Dec-18

Dec-19

Dec-20

Dec-21
Jun-21

Jun-20
Jun-19

Jun-20

Jun-19

Jun-21
Dec-18

Dec-19

Dec-20

Dec-21

Dec-18

Dec-19

Dec-20

Dec-21
Indusind Bank Nifty Index SBI Nifty Index Indian Bank Nifty Index

Axis Bank Price Performance City Union Price Performance DCB Bank Price Performance
900 20000 300 20000 300 20000
800 18000 18000 18000
700 16000 250 16000 250 16000
600 14000 14000 14000
12000 200 200
500 12000 12000
10000 150 10000 150 10000
400 8000
300 8000 8000
6000 100 6000 100 6000
200 4000 4000 4000
100 2000 50 50
2000 2000
0 0 0 0 0 0
Jun-21
Dec-18

Jun-19

Dec-19

Jun-20

Dec-20

Dec-21

Dec-18

Jun-19

Dec-19

Jun-20

Dec-20

Jun-21

Dec-21
Dec-18

Jun-19

Dec-19

Jun-20

Dec-20

Jun-21

Dec-21

Axis Bank Nifty Index City Union Bank Nifty Index DCB Bank Nifty Index

Federal Bank Price Performance HDFC Bank Price Performance Bandhan Bank Price Performance

120 20000 1800 20000 800 20000

18000 1600 18000 700 18000
100 16000 16000 16000
1400 600
80 14000 1200 14000 14000
12000 12000 500 12000
60 10000 1000 400 10000
10000
8000 800 8000 300 8000
40 6000 600 6000 6000
400 200 4000
20 4000 4000
2000 200 2000 100 2000
0 0 0 0 0 0
Jun-19

Jun-20

Jun-21
Dec-19
Dec-18

Dec-20

Dec-21
Dec-18

Jun-19

Dec-19

Jun-20

Dec-20

Jun-21

Dec-21

Jun-19

Jun-20

Jun-21
Dec-18

Dec-19

Dec-20

Dec-21

Federal Bank Nifty Index HDFC Bank Nifty Index Bandhan Bank Nifty Index

Jammu & Kashmir Bank Price Performance Kotak Mahindra

Bank PriceBank
Performance
Price Performance Nippon Life Price Performance

800 20000 2500

2000 20000
14000 500 20000.0
700 18000 18000 450 18000.0
16000 2000 12000
16000 400 16000.0
600 14000 1500 14000 350 14000.0
10000
500 12000 1500 12000 300 12000.0
400 10000 8000
10000 250 10000.0
1000
300 8000 1000 6000
8000 200 8000.0
200 6000 6000
4000 150 6000.0
4000 500 4000 100 4000.0
100 2000 2000 50 2000.0
0 0 00 00 0 0.0
Dec-19

Dec-19
Dec-18

Jun-19

Jun-20

Dec-20

Jun-21

Dec-21

Dec-18

Jun-19

Dec-19

Jun-20

Dec-20

Jun-21

Dec-21

Dec-18

Jun-19

Jun-20

Dec-20

Jun-21

Dec-21
Mar-17

Mar-18

Mar-19

Mar-20
Sep-17

Sep-18

Sep-19

Kotak Bank Nifty Index Nippon Life India Nifty Index

Bandhan Bank Nifty Index
Kotak Bank Nifty Index

ICICI Securities |Retail Research 11

 Sector Update | Banking and Financial Services ICICI Direct Research

SBI Cards Price Performance Bajaj Finserv Price Performance SBI Life Price Performance

1400 20000 25000 20000 1400 21000

1200 18000 18000 1200 18000
16000 20000 16000
1000 14000 14000 1000 15000
800 12000 15000 12000 800 12000
10000 10000
600 8000 10000 8000 600 9000
400 6000 6000 400 6000
4000 5000 4000
200 2000 2000 200 3000
0 0 0 0 0 0

Jun-19

Jun-20

Jun-21
Dec-18

Dec-19

Dec-20

Dec-21
Dec-18

Jun-19

Dec-19

Jun-20

Dec-20

Jun-21

Dec-21
Mar-20

Mar-21
Sep-20

Sep-21
Jun-20

Dec-20

Jun-21

Dec-21

SBI Cards Nifty Index Bajaj Finserv Nifty Index SBI Life Nifty Index

Bajaj Finance Price Performance HDFC AMC Price Performance

9000 20000 4000 21000

8000 18000 3500 18000
7000 16000 3000
6000 14000 15000
12000 2500 12000
5000 2000
10000
4000 8000 1500 9000
3000 6000 6000
2000 1000
4000 500 3000
1000 2000
0 0 0 0
Oct-18

Oct-19

Oct-20

Oct-21
Apr-19

Apr-20

Apr-21
Dec-19
Dec-18

Jun-19

Jun-20

Dec-20

Jun-21

Dec-21

Bajaj Finance Nifty Index HDFC AMC Nifty Index

ICICI Securities |Retail Research 12

 Sector Update | Banking and Financial Services ICICI Direct Research

Exhibit 13: ICICI Direct coverage universe (BFSI)

CMP M Cap EPS (|) P/E (x) P/ABV (x) RoA (% ) RoE (% )
Sector / Company
(|) TP(|) Rating (| Bn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E
BoB (BANBAR) 81 120 Buy 419 2.5 12.6 15.3 32.6 6.4 5.3 0.8 0.7 0.6 0.1 0.5 0.6 1.7 8.1 9.1
SBI (STABAN) 448 640 Buy 3998 22.9 45.6 44.2 20 9.8 10.1 1.8 1.6 1.4 0.5 0.9 0.8 8.4 14.9 12.7
Indian Bank (INDIBA) 136 180 Buy 169 26.6 32.9 46.7 5.1 4.1 2.9 0.6 0.7 0.6 0.6 0.6 0.8 9.9 10.4 13.5
Axis Bank (AXIBAN) 663 970 Buy 2033 21.5 41.0 52.7 30.8 16.2 12.6 2.1 1.9 1.7 0.7 1.2 1.4 7.1 11.7 13.4
City Union (CITUNI) 132 200 Buy 98 8.8 9.3 11.7 15.0 14.2 11.3 2.1 1.8 1.5 1.3 1.2 1.4 11.9 11.3 12.4
Federal Bank (FEDBAN) 81 120 Buy 170 8.0 8.8 11.3 10.2 9.2 7.2 1.1 1.1 1.0 0.8 0.9 1.0 10.4 10.9 12.7
HDFC Bank (HDFBAN) 1,420 2,000 Buy 7871 47.9 56.4 66.1 29.7 25.2 21.5 4.7 3.9 3.4 1.9 1.9 1.9 16.4 16.6 16.7
IndusInd Bank (INDBA) 848 1,400 Buy 657 36.7 57.4 72.9 23.1 14.8 11.6 1.6 1.4 1.4 0.8 1.2 1.3 7.3 10.0 12.3
Kotak Bank (KOTMAH) 1,727 2,550 Buy 3426 35.1 38.9 48.9 49.1 44.4 35.3 5.6 5.0 4.4 1.9 1.9 2.1 12.4 11.4 12.7
CSB Bank (CSBBAN) 247 380 Buy 43 12.6 19.7 24.7 19.6 12.5 10.0 2.3 2.0 1.7 0.1 1.0 1.4 10.5 14.6 15.8
Bandhan (BANBAN) 249 270 Hold 400 13.7 -7.0 24.7 18.2 -35.6 10.1 2.8 3.0 2.3 2.1 -0.9 2.8 13.5 -6.7 22.2
IDFC First (IDFBAN) 46 60 Buy 284 0.8 0.5 2.3 57.7 95.5 20.1 1.5 1.2 1.1 0.3 0.2 0.7 2.7 1.4 5.8
Source: Company, ICICI Direct Research

ICICI Securities |Retail Research 13

 Sector Update | Banking and Financial Services ICICI Direct Research

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

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

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

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

ICICI Securities |Retail Research 14

 Sector Update | Banking and Financial Services ICICI Direct Research

ANALYST CERTIFICATION

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

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 is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with Insurance Regulatory Development Authority of India Limited (IRDAI)
as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock
broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, 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 and its analysts, persons reporting to analysts and their relatives are generally prohibited from maintaining a financial
interest in the securities or derivatives of any companies that the analysts cover.

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

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

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

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

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

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

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

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

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 |Retail Research 15