PRIVATE BANKING

STOCKSAnd which to invest in. Aditya Gupta

2011009

1

Overview

• Market Capitalization

• General Ratios (focus: Capital Gains)

• Profitability

• Efficiency

• Debt / Risk

• Trend Analysis (and Dividend Yield)

• Special Banking Ratios

• CAR

• NPA

• NIM / Spread

• Verdict

2

Market Capitalization

Source: MoneyControl

3

Calculated Market Cap

Bank

As of 12/10/2014,

Market Cap (in

Cr)

Market Cap

(Calculated)Shares

Price

(as of

12/10/2014)

HDFC 209309.66 209309.66 2414322155 866.95

ICICI 169006.11 168777.71 1156011729 1460

Axis 89494.5 89123.75 2350000000 379.25

Kotak 77484.41 77397.28 770467156 1004.55

IndusInd 32940.04 32916.09 528093917 623.3

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General Ratios*

• Overpriced / Underpriced• P/E – Price to Earnings

• P/B – Price to Book

• Return on Equity

• ROCE

• Operating Efficiency• EV / EBITDA

• P/CF

• Net Profit Margins

• Risk and Debt • Debt to Equity Ratio

• Long term Debt to Equity

• Beta

*All calculated and cross verified.

5

Some Context

Source: Stable Investor

Notes:

• Cyclicality @ 3 years

6

P/E – the bread and butter

BankEPS

(Calculated)

EPS (money control)

Calculated P/E

(March)

Calculated Current P/EPS*

Reported (Edelweiss)

Reported P/E (moneycontrol)

Net Profit (Rs. Crore), from B/S

HDFC 35.12 35.34 19.07 24.69 24.8 23.6 8478.38

ICICI 84.86 84.94 12.30 17.20 16.1 16.58 9810.48

Axis 26.46 132.34 9.58 14.34 14.5 13.82 6217.17

Kotak 19.50 19.51 35.10 51.51 30.6 50.66 1502.52

IndusInd 26.66 26.79 14.91 23.38 22 22.05 1408.02

Average 16.93

Notes:

• Low for a reason. Why? High for a reason. Why?

• There is more to a company.

• Axis looks best so far.

• 3 year cyclicality

7

Price to Book

• One good run? Want historical performance? Works out

better. A “real” figure.

• What is Book Value?

• **Owner's equity (or owners equity, or stockholder's equity, net

worth, or book value of a company)

BankBook Value

(moneycontrol)

Net Worth (balance sheet)**

BV (Calculated)

P/BV (Edel)P/BV

(Calculated)

HDFC 181.23 43478.63 180.09 4.74 4.81

ICICI 633.92 73213.32 633.33 2.21 2.31

Axis 813.47 38220.48 162.64 2.33 2.33

Kotak 159.35 12283.62 159.43 4.06 6.30

IndusInd 171.89 9042.96 171.24 3.81 3.64

• Good for Liquid Asset Heavy firms – like banking.

• HDFC not doing too badly. ICICI makes entry.

• Axis still awesome.

8

ROE

• How much the company makes per penny put in

(accounting BV). Don’t want speculation.

BankShareholder's Equity (In Cr)

ROE (Edelweiss)

ROE (Calculated)

HDFC 43478.63 21.63 19.50ICICI 73213.32 15.9 13.40Axis 38220.48 17.63 16.27

Kotak 12283.62 14.53 12.23IndusInd 9042.96 17.53 15.57

So, HDFC is profitable! Market has overvalued it beyond sense (or has it)?

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ROCE

• Because shareholder’s Equity is not the only money that

goes into operations.

• (Total Liabilities – Deposits)

Bank

Gross Profit

(Reported) ≈ EBITDA

Total Liabilities

Deposits~ Capital

EmployedROCE

(Calculated)ROCE

(NDTV)

HDFC 35434.97 491599.5 367337.5 124262 28.52 21.53ICICI 41670.76 594641.6 331913.7 262727.9 15.86 10.82Axis 28038.15 383244.9 280944.6 102300.3 27.41 15.2

Kotak 7319.52 87585.35 59072.33 28513.02 25.67 12.73IndusInd 7491.15 87025.94 60502.29 26523.65 28.24 15.2

• Kindly excuse aberrant values. But the story is clear, so is the trend.

• ICICI is very risky – too much debt. HDFC shines.

• Axis and Indus doing well.

10

EV by EBITDA

• Kind of like the inverse of ROCE. Except we use “EV” to

proxy Capital Employed (which uses a Book value).

• Smaller the better.

Gross Profit (Reported) ≈

EBITDA

Market Cap

Cash Total Debt

EV (Calculated), MC + Debt -

Cash

Enterprise Value

(Edelweiss)

EV / EBITDA (Calculated)

EV / EBITDA (Edelweiss)

35434.97 209309.66 25345.63 406776.5 590740.53 586900 16.67111698 15.7

41670.76 169006.11 21821.83 486672.7 633856.98 662580 15.21107318 14.18

28038.15 89494.50 17041.32 331235.5 403688.68 394046 14.39783581 13.8

7319.52 77484.41 2948.23 71967.91 146504.09 156522 20.01553244 15.32

7491.15 32940.04 4413.92 75264.25 103790.37 101381 13.85506498 14.97

Inverse ROCE

4.64

9.24

6.58

7.86

6.58

• Market Pricing hurts HDFC again. Axis wins.

11

Net Profit Margin

Bank

Net Profit (Rs. Crore), from B/S

Net Sales NPM

HDFC 8478.38 41135.53 20.61

ICICI 9810.48 44178.15 22.21

Axis 6217.17 30641.16 20.29

Kotak 1502.52 8767.12 17.14

IndusInd 1408.02 8235.53 17.10

• How much of the Revenue can they actually convert into Profit?

• How low are their operational costs + interest + depreciation … etc.

• HDFC, Axis and ICICI are winners here.

12

P/CF

• And how much of that is cold, hard cash?

• A great measure (liquidity, profitability and efficiency)!

• Cannot fake this

BankCash from Operations

P/CF (operations)

HDFC 8363.60 25.03ICICI 4668.60 36.15

Axis 16702.56 5.34

Kotak 9001.63 8.60IndusInd -4105.76 -8.02

Notes:

• Lower, the better. Shouldn’t be

negative.

• IndusInd is losing cash.

• Axis shines, again. Kotak great too.

• Price hurts HDFC.

• ICICI – just a whole lot of Nope.

13

Small Recap

• IndusInd a no-go.

• HDFC, ICICI and Axis highly profitable.

• But, HDFC and ICICI are overpriced.

• Also, it seems ICICI has taken on a lot of debt.

• Lost a lot of their profits in Interest or other payments that didn’t

show up in EBITDA.

14

Riskiness: Debt Ratios and Beta

• Banking usually has > 1 Beta to the market.

• It seems like market responds to banking firms.

• Which makes sense – as banking firms are the first to feel

borrowing/saving economy and consumer behaviour and patterns.

Bank Borrowings Total DebtDebt* to

Equity (Calculated)

LT D/E(Calculated)

Beta

HDFC 39438.99 406776.47 9.36 0.91 1.12

ICICI 154759.1 486672.70 6.65 2.11 1.76

Axis 50290.94 331235.50 8.67 1.32 1.79Kotak 12895.58 71967.91 5.86 1.05 1.08

IndusInd 14671.96 75264.25 8.32 1.62 1.56

• We’re right. ICICI has a very risky capital composure.

• Also, Axis stock price is highly sensitive to the market, which currently

seems to be doing well.

15

Trend Analysis and Div. Yield

Bank VolumeDiv. Yield

(moneycontrol)

HDFC Medium 0.8%

ICICI Low 1.53%

Axis Very High 1%

Kotak High 0.08%IndusInd Low 0.53%

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So, what now?

• Axis seems to be the way to go. For now. Why?• (Highly) Undervalued.

• Great efficiency.

• Responses well to the market. Which is doing well for now.

• Good D/E balance.

• But are we done?• No. Banking Sector is special. We need to evaluate with other

ratios.

• Full Disclosure: Following ratios are from cited references and have not been calculated/verified.

• 1 man team – was short on time. I sincerely apologize.

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Key Ratios for Banks

• CAR – Capital Adequacy Ratio• Real money to protect depositors – How safe are they?

• Asset Health/Quality• Non Performing Assets

• How aggressive are they? How much have the messed up?

• Net Interest Margin• Profitability

• Interest Spread – though it doesn’t convey too much.

• Ofcourse, there are many more.• ICRA Credit Ratings

• AAA/Stable for most, Kotak AA+/Stable, IndusInd AA-/Stable

• MorningStar

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CAR

• Capital to Risk Weighted Assets Ratio (CAR)• (Tier 1 + 2) / Risk Weighted Assets

• TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free

reserves) - (equity investments in subsidiary + intangible assets + current

& b/f losses)

• TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves

+ C) hybrid debt capital instruments and subordinated debts

• As per BASEL Committee Accords (I, II, III).

Basically,

• “Real contributed money[Equity]” +

• “Still somewhat real contributed money”

• Over shaky money.

Tier I Capital: Actual

contributed equity plus

retained earnings.

Tier II Capital: Preferred

shares plus 50% of

subordinated debt.

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CAR

• An RBI Circular:

• http://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?Id=813

3&Mode=0

• Minimum requirements of capital fund in India: • Existing Banks 9% • New Private Sector Banks 10% • Local Area Banks 15% • Banks undertaking Insurance business 10%

•

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Not good of late.

• Late Recession Response.

• Banks' capital adequacy ratio at six-year low, hit by rising

NPAs (Non performing Assets)

• PSU banks worst hit with average CAR falling to 10.67% at end of

June quarter vs 11.18% in March 2014

However, most large

Private banks are

said to be okay.

21

CAR

• HDFC:• The Bank’s total Capital Adequacy Ratio (CAR) as per Basel III guidelines, was at

15.1 % as at June 30 , 2014 (15.5% as at June 30, 2013) as against a regulatory

requirement of 9%.

• Tier - I CAR was at 11.1% as on June 30, 2014 compared to 10.5% as at June 30,

2013.

• ICICI

• Tier 1: 9.50%, CAR: 11.5%

• Much worse than HDFC

• Axis Bank

• Tier 1:12.62%, CAR: 16.07% (Wow, because it is still profitable!)

• Kotak and IndusInd

• CAR: 19.01% and 13.83% respectively.

22

Non performing Assets

Bank NPA (Net) NPA (Gross) Source

HDFC 0.27% 0.98% Investor

Presentation

ICICI 0.82% 3.03% Economic Times

Axis 0.40% 1.25% MoneyControl

Kotak 0.98% 1.95% MoneyControl

IndusInd 0.33% 1.08% IndusInd

• How many of your loans are bad.

• Correlates strongly with profits. Risky growth behaviour.

• Net is adjusted for money received (interest or principal), collateral, etc.

• Also moves inversely with stock prices. Banking stock prices are very

sensitive to this.

• HDFC looks robust. Axis is healthy too.

• ICICI is too aggressive, unmitigated disaster.

• Has been on the rise. Risk for growth.

23

Net Interest Margin

• Whether they made money from their deposits or not.

• Revenue from Investments – Interest Paid for Deposits

• Over Average (Interest Generating) Assets

• Note that there is also a “spread”, difference of rate

BankSprea

d

In. Income

/ Total FundsNIM

HDFC 8.01% 4.14% 4.37%

ICICI 7.35% 2.91% 3.40%

Axis 7.67% 3.30% 3.97%

Kotak 9.52% 4.34% 4.97%

IndusInd 7.85% 3.61% 3.63%

• This is a weak proxy

for NIM.

• Axis is profitable as a

business, but not as a

“bank”

• ICICI least profitable

• Both are very aggressive

• HDFC and Kotak are

solid

• Kotak plays it safe

24

Verdict

• Axis is a solid, high growth, high risk, but highly efficient

stock option. In good economic conditions, this stock will

boom at high volume.

• Kotak is a good option for those who like to play very

safe. It will grow steadily but slowly.

• HDFC is a great steady investment too, but will grow

slowly due to overpricing.

• ICICI and IndusInd have shaky prospects.

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THANK YOUAditya Gupta (2011009)

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