EQUITY RESEARCH

India | Banks

Banks
Macro Concerns vs. Micro Realities - Corporate
Asset Quality Impact Exhibit 1 - Interest coverage ratio for AAA
24 September 2019 has been falling, Risk of downgrades
exists in A & BBB accounts
Key Takeaway For BSE listed companies, ex financials &
Growth revival should be back on the agenda if the govt. has to neutralize the already default cases
16.0

perpetual fiscal hit from lower corporate taxes, which should keep long-term hopes 14.0
12.0 10.4

intact & valuation multiples elevated. In this report, we focus on corporate asset 10.0
8.0

quality owing to prevailing weaker economic sentiment & liquidity; the deep-dive on 6.0
4.0
4.6
2.7
3.3
2.2

Rs 33 tn of corporate debt doesn't throw a curveball. Axis Bank, ICICI Bank and HDFC 2.0
0.0

Bank are our top picks.

AAA AA A BBB BB & Below

Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

.
FinMin bazooka & the long rope of hope. The corporate tax rate cut, along with a Source: Jefferies, Ace Equity, Company data

perpetual lower tax rate on new manufacturing facilities, is an inflection point in our Exhibit 2 - Debt to EBIDTA ratio
thought process. Negating the impact of a perpetual fiscal hit (lower corp. taxes) For BSE listed companies, ex financials &
would necessitate growth revival (improve factors of production) and widening of already default cases
the tax base. We believe this should keep long-term hopes and the growth story alive.
7.0 6.3
6.0 5.6
5.2
5.0 4.2

Near term. However, the weak economic sentiment and constrained liquidity flow
4.0 3.5

3.0 2.4

can't be wished away and leveraged balance sheets will deteriorate. We expect 2.0

1.0

instances of defaults will keep decibel levels up as the recent news flow and price 0.0
AAA AA A BBB BB & Below Total

impacts fade away. A portfolio should therefore be positioned towards banks with .
Debt to FY19 EBIDTA

a higher CET 1, better PPOP growth, and lower non-NPL asset quality issues with Source: Jefferies, FactSet, Ace Equity
optimal valuation. While HDFC Bank is an easy choice, both Axis and ICICI Bank look Exhibit 3 - Prefer banks with strong CET
well placed on these metrics. 1, low on unidentified NPL & reasonable
valuations - ICICIBC, AXSB & HDFCB top
Pressure points. Debt segment has been fairly risk averse with spreads of BBB- picks
corporates widening to 2008-09 levels. The risk-aversion is very clear within Size of bubble: FY20E P/B
the financial system where AMC-MFs, insurance cos. & provident funds have
7.0%
Non NPL exp. (% loans)

6.0% YES, 0.9x

RBK, 1.9x
progressively withdrawn from the debt segment, which has further restrained
5.0%
IIB, 3.1x
4.0% BOB, 0.6x

smoother liquidity flow. Not surprisingly, bank loan growth has taken a back seat 3.0%
2.0% SBIN, 1.2x
KMB, 6.7x
AXSB, 2.1x
falling to 10% (vs 14-15% a few qtrs. back). NBFCs/HFCs too are clearly struggling 1.0%
0.0%
ICICIBC, 1.8x
HDFCB, 3.9x

to refinance themselves and lend onwards. (Ex. 9-23) 7.0% 9.0% 11.0% 13.0%
CET 1 ratio (%)
15.0% 17.0% 19.0%

.
Corp. asset quality - second wave? Not really! The current set of defaults represents Source: Jefferies estimates, company data,
MCA, debt filings, Bloomberg * Capital
the tail of the asset quality cycle that started in 2012-13. To be sure, pockets of issuances for Yes & Axis Bank factored in CET
problem exist - aggregate interest coverage ratio has declined (5.6x in Jun'19 vs 1 but not in P/B estimate, *RBK valuations as
per Bloomberg
6.4x in Mar'19) and Debt/EBITDA for 'A' rated corporate looks precipitous at 6.3x.
(Ex.43-46)

Our deep-dive in Rs 33 tn listed corp. debt (ex-financial) breaks down to only Rs 1.6 tn
of debt (across 40 companies/groups) where balance sheets look challenging, which
is 16% of the stock of gross NPLs. An NBFC/HFC default, though, is a little harder to
circle but we lean on the RBI/govt. to contain the larger systemic risks. (Ex.77-80)
Nilanjan Karfa * 
The micro impact. There's a wide divergence in macro concerns & micro realities
Equity Analyst
on asset quality. Indeed, the impact of the top 10 exposures (aggregate borrowings +91 22 4224 6118
Rs 1.1 tn), from our list of 40 stressed names and 15 additional companies, on nkarfa@jefferies.com
individual banks doesn't look worrisome. In the worst case (100% loss given default),
Harshit Toshniwal * 
the impact on ICICI & Axis Bank's book value is 9% & 12% respectively, and the decline
Equity Analyst
in stocks before the latest upward move more than factored in the risks. That said, +91 22 4224 6126
certain banks do have disproportionate exposure to specific corporates, so we would htoshniwal@jefferies.com
steer clear of these names. (Ex.8) ^Prior trading day closing price unless
otherwise noted.

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on
pages 30 to 35 of this report.
 * Jefferies India Private Limited 
 EQUITY RESEARCH
India | Banks

Table of Contents

I. Report Content ............................................................... 3

a. Executive Summary................................................... 3
b. Liquidity tightness - the restricted flow of capital, lack of
trust......................................................................... 6
c. Credit crunch was quite pronounced............................. 11
d. Screening the corporate debt - Potential signs of weakness
continue...................................................................15
e. Screening the NBFC/HFC debt profile - A mixed bag, but banks
unlikely to see major first order impact from developer loan
default..................................................................... 20
f. Sizing up the 'second wave' using data from listed companies
- At Rs 1.6 tn, isn't small but not large enough to disarray the
system.................................................................... 24
g. Translating the macro concerns to micro realities - Banks we
like screen better....................................................... 26
II. Disclosures .................................................................. 30

25 September 2019 2
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Executive Summary
The last two trading sessions saw the banking sector and the key stocks moving up
between 12-15%. This was largely on the back of an 11-15% recurring earnings upgrade
across banks led by a cut in the marginal corporate tax rate to 25% versus 35% earlier.
In our opinion, the earnings impact from this surprise event is now mostly over.

As the latest price spike or impact of tax cut fades, we believe the Street will once again
focus on asset quality risks emerging from poor liquidity flow and risk aversion in the
financial system. Equally, the Street will likely end up painting the risks across banks
with a broad brush. Hence, we believe this is where we need to segregate the micro
realities from the macro concerns.

Our deep-dive analysis of the listed corporate space with gross debt of Rs 33 tn, when
put through our stressed-exposure filter, throws a potential stressed exposure for the
banking system at Rs 1.6 tn, which is about 16% of the entire stock of the non-performing
loans, not large enough to start another scare-cycle. More importantly, when we further
distil the exposures down to individual banks and segregate these in various risk-
categories, the resultant book value impact for both Axis and ICICI Bank - our top two
banks - seems well priced in.

In particular, we argue while ICICI Bank's reported 'below investment grade' book
and lower incremental NPL formation broadly conveyed its lower asset quality risks,
the Street seems to be having doubts on Axis Bank, which resulted in the stock
recently coming off its peak by ~20%. Our analysis shows the potential stress at Axis
Bank is only marginally higher on corporate assets than at ICICI Bank, and given its
underperformance, we believe it presents a good buying opportunity.

Our order of preference remains Axis Bank, ICICI Bank and HDFC Bank.

Exhibit 4 - Banks: RoE vs P/B ratio Exhibit 5 - Banks: Core PPoP growth vs Price/PPoP

4.5 20.0
KMB KMB
4.0 18.0

3.5 16.0
Price to book (FY21, x)

HDFCB 14.0
3.0 HDFCB
Price to PPOP (FY21, x)

ICICIBC 12.0
2.5 IIB
10.0
2.0 AXSB ICICIBC
8.0 IIB
1.5 FB AXSB
6.0
1.0 4.0
SBIN FB
SBIN YES
0.5 PNB 2.0 PNB
BOB BOB
0.0 0.0
10.0 12.0 14.0 16.0 18.0 20.0 10% 15% 20% 25% 30%
Average RoE (FY21-22, %) Core - PPOP (FY20-22)
. .
Source: Jefferies estimates, Bloomberg, company data Source: Jefferies estimates, Bloomberg, company data

25 September 2019 3
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 6 - Valuation comparable

.
Source: Jefferies estimates, company data, Bloomberg * prices as on 23rd Sept, 2019 * LICHF, PNBHF, Repco, BAF, MMFS & SHTF are covered by
Bhaskar Basu

Exhibit 7 - Prefer banks with strong CET 1, low on unidentified NPL & reasonable
valuations - ICICIBC, AXSB & HDFCB top picks
Size of bubble: FY20E P/B
7.0%
Non NPL exp. (% loans)

6.0% YES, 0.9x

RBK, 1.9x
5.0%
IIB, 3.1x
4.0% BOB, 0.6x
3.0%
KMB, 6.7x
2.0% SBIN, 1.2x
AXSB, 2.1x
1.0% ICICIBC, 1.8x
HDFCB, 3.9x
0.0%
7.0% 9.0% 11.0% 13.0% 15.0% 17.0% 19.0%
CET 1 ratio (%)
.
Source: Jefferies estimates, company data, MCA, debt filings, Bloomberg * Capital issuances for
Yes & Axis Bank factored in CET 1 but not in P/B estimate, *RBK valuations as per Bloomberg

25 September 2019 4
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 8 - Stress exposure across major accounts (Amount in Rs bn)

.
Source: Jefferies estimates, MCA database, Debt offering circulars, Propstack, Economic Times, Business Standard

25 September 2019 5
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Liquidity tightness - the restricted flow of capital, lack of trust

Liquidity flow (and we refer specifically to the fixed income or debt segment) in the
broader market has remained constrained. It's quite unfortunate that we remain in pretty
much the same situation with a broad credit market freeze even after more than a year
since the IL&FS default.

And the reason is not hard to come by - we have had a series of defaults through
this entire period which has kept the credit market on the boil. Thus, while the AAA-
rated bond spread over G-Secs has started narrowing, and the AAA-rated NBFC bond
spread has softened against same-tenor AAA-rated corporate bonds although still wide
historically, the lowest investment grade i.e. BBB(-) rated bond spread over AAA-rated
bonds has widened to almost 2008-09 levels. This implies credit market risk aversion
towards lower rated corporates as well as NBFCs. In other words, the credit rating itself
is under question. And a lack of fund flow has put on hold smooth credit intermediation.

Meanwhile, the idiosyncratic risks in the interbank market (as reflected in the 3-
month interbank spread over OIS) has eased somewhat, though is still elevated from a
historical perspective.

Exhibit 9 - Credit spread of AAA (1 yr) over GSec getting better Exhibit 10 - Credit spread of AAA (3 yr) over GSec getting better

6.0 5.0
4.5
5.0 4.0
4.0 3.5
3.0
3.0 2.5
2.0
2.0 1.5
1.0 1.0
0.5
- -
Aug-08

Apr-10

Dec-11

Aug-13

Apr-15
Sep-15

Dec-16

Aug-18
Feb-16
Oct-07

Sep-10
Feb-11
Jun-09

Oct-12

Oct-17
Nov-09

May-12

Jun-14

May-17
Jul-11

Jul-16

Jan-19
Jun-19
Mar-08

Jan-09

Mar-13

Jan-14

Nov-14

Mar-18
Apr-10

Dec-11

Apr-15
Aug-08

Aug-13

Dec-16

Aug-18
Sep-10
Feb-11
Oct-07

Jun-09

Oct-12

Sep-15
Feb-16
Jun-14

Oct-17

Jun-19
Jan-09

Nov-09

Jul-11

May-12

Jan-14

Nov-14

Jul-16

May-17

Jan-19
Mar-08

Mar-13

Mar-18

AAA / G-Sec spread (1 yr) Average AAA / G-Sec spread (3 yr) Average
. .
Source: Jefferies, Bloomberg Source: Jefferies, Bloomberg

Exhibit 11 - Credit spread between AAA & BBB- rated (1 yr) Exhibit 12 - Credit spread between AAA & BBB- rated (3 yr)
corporate near 2009 highs corporate near 2009 highs
4.5 4.5

4.0 4.0

3.5 3.5

3.0 3.0

2.5 2.5

2.0 2.0

1.5 1.5
Apr-10

Apr-15
Sep-10

Dec-11

Dec-16
Oct-07

Aug-08

Jun-09

Feb-11

Oct-12

Aug-13

Jun-14

Sep-15
Feb-16

Oct-17

Aug-18
May-12

May-17

Jun-19
Jul-11

Jul-16
Aug-08

Apr-10

Aug-13

Apr-15

Aug-18

Mar-08

Nov-09
Sep-10

Dec-11

Jan-09

Mar-13

Nov-14
Jan-14

Mar-18

Jan-19
Feb-11

May-12

Sep-15

Dec-16
Feb-16

May-17
Oct-07

Oct-12

Jun-14
Jun-09

Oct-17

Jun-19
Mar-08

Jan-09

Nov-09

Jul-11

Mar-13

Nov-14

Jul-16
Jan-14

Mar-18

Jan-19

BBB- / AAA spread (1 yr) Average Trend BBB- / AAA spread (3 yr) Average Trend
. .
Source: Jefferies, Bloomberg Source: Jefferies, Bloomberg

25 September 2019 6
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 13 - Spread of NBFC bonds (3 yr) over corporate bonds Exhibit 14 - Idiosyncratic risks in the interbank market have
of similar tenor & ratings remains elevated, although some eased somewhat
softening witnessed in AAA bonds
2.0
60 First US$ swap of
1.8
50 1.6
1.4
40 1.2
1.0
30 0.8
0.6
20
0.4 Second US$ swap
0.2 of US$ 5 bn
10
0.0
- Sep-16 Feb-17 Jul-17 Dec-17 May-18 Oct-18 Mar-19 Aug-19
Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18
Interbank 3M - OIS 3M
NBFC AAA - Corp AAA NBFC AA - Corp AA .
. Source: Jefferies, Bloomberg
Source: Jefferies, Bloomberg

Debt financing channels have taken a step back

The risk-off is amply visible within the financial system, where AMC-MFs, insurance
companies and various provident funds have progressively withdrawn from the debt
segment and lending to only select well-rated entities, which is reflected in the softer
AAA spread over the sovereign. As a result, the onus of turning the financial system has
fallen on the shoulders of SOE banks (and to an extent Private sector banks) - neither of
which seem to have enough confidence in lending to the bottom of the pyramid viz. the
micro-to-mid corporates across industrial and service segments.

Exhibit 15 - Mutual funds and insurance companies have the highest net-receivable (both equity and debt) from the financial
sector (Rs bn)
12,000
9228 +ve: Net receivable from financial system
10,000 8,291
8,000 -ve: Net payable to financial system
6,000 4,815 5449
3,605 3951
4,000
2,000 582 829 256
65 95 104
0
(2,000) -255 -438
(4,000)
(6,000)
-4,971 -5454 -5,476
(8,000) -6201 -6,750
(10,000) -7723
AMC-MFs Insurance cos SOE Banks PFs Foreign Banks SUCBs AIFIs HFCs Pvt Banks NBFCs

Mar-18 Sep-18 Mar-19

.
Source: Jefferies, RBI

25 September 2019 7
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 16 - Mutual funds have curtailed exposure to debt & Exhibit 17 - Insurance cos. too have curtailed exposure to debt
commercial papers (% portfolio mix) (% portfolio mix)
64.0 62.2 62.6 62.2
39.0 61.2 61.2
36.9 58.3 57.7
33.6
30.8 31.6
30.1
27.5 26.9 27.6 26.4
25.3 25.6 24.4 25.3 24.7

21.3 22.7
17.2 16.5 16.0 16.8
19.1 14.4 29.5 28.8 30.6 30.9
13.5 28.6 27.7 28.1 28.1
15.4 14.4
13.1 11.9
10.9
8.8 9.1

Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19

Long term debt Equity CP CD Long term debt Equity

. .
Source: Jefferies, RBI Source: Jefferies, RBI

Exhibit 18 - NBFC funding profile skewing sharply towards term Exhibit 19 - ... mostly funded by banks (% funding mix)
loans (% funding mix)
49.9
51.3 47.1 47.5
47.9 43.9 43.5 42.3
47.5 47.2 40.3
45.2 39.6
40.8 40.7 35.6 36.6
40.0 33.0
32.5 32.4
33.8 29.6 29.5 28.3
30.9 32.7
27.0 25.9
23.2 24.9
22.0

21.1 19.7 19.5 19.9

19.2 18.7 18.4 17.5

13.6 13.1 13.1

11.0 9.6 10.7 11.0 10.0
Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19
Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19
Banks AMC-MFs Insurance cos.
Long term debt Long term loans CP .
. Source: Jefferies, RBI
Source: Jefferies, RBI

Exhibit 20 - HFC funding profile took a sharp swing post IL&FS Exhibit 21 - ... mutual funds have shrunk and tab picked up by
debt funding (% funding mix) banks and insurance cos. (% funding mix)
42.4 42.4 41.1 41.4 42.1
39.3 38.7 38.5 38.8
37.8 37.4
34.5 35.6 34.7 35.9
35.4
33.9 33.9 33.1
32.0 31.7 32.3 31.8
30.4
28.9 27.7
26.9 26.6 27.3 26.2 27.2 27.3

19.5 18.5 18.3 18.8 19.5 19.6

18.0 17.9

18.4 19.8 9.0 7.9 7.9 7.7 6.5 7.3 7.1

14.4 15.0 6.0
13.6 13.5 12.5
11.0

Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19

Long term debt Long term loans CP Banks AMC-MFs Insurance cos. AIFIs
. .
Source: Jefferies, RBI Source: Jefferies, RBI

25 September 2019 8
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 22 - Ex of infra (with some help of low base), broader Exhibit 23 - Loan growth to small & micro remains weak;
lending to mid-to-micro industry remains in single digits improvement in large segment is mostly NBFC loans
Bank loan growth to industries (% yoy) Bank loan growth to service sector (% yoy)
25% 35%
20% 30%
15%
25%
10%
20%
5%
15%
0%
10%
-5%
-10% 5%

-15% 0%

Sep-16

Sep-18
May-16

May-17

Sep-17

May-18

May-19
Jul-16

Nov-16

Jul-17

Nov-17

Jul-18

Nov-18

Jul-19
Jan-17
Mar-17

Jan-18
Mar-18

Jan-19
Mar-19
Jul-16
Sep-16

Jul-17
Sep-17

Jul-18
Sep-18

Jul-19
May-16

May-17

Nov-17

May-18

Nov-18

May-19
Nov-16
Jan-17
Mar-17

Jan-18
Mar-18

Jan-19
Mar-19

Total Large ex Infra Infra . Total Large & Medium Micro & Small
. Medium Micro & Small Source: Jefferies, RBI
Source: Jefferies, RBI

Some late movement from the govt - will this be enough?

The govt. appears to have woken up lately. While the earlier few attempts to resurrect
the financial market and bring back trust were too feeble to kickstart the weakening
cycle, the latest step wherein the marginal corporate tax rate was cut drastically from
35% to ~25%, while providing a lifelong incentive in the form of 17% corp. tax rate to new
manufacturing units, provides at least a decent starting point for an eventual private
sector capex returning sooner rather than later, at least on paper. That said, even on our
most benign expectations, the earliest we may see some uplift in private sector capex
is towards H2FY21 or thereafter.

Still, one of the recent steps taken that particularly disappointed was the SOE bank
merger announcement. As past data shows, bank mergers have resulted in a lower credit
offtake owing to consolidation, and that can't be good when sentiment is weak, and the
merging banks are ~23% of the systemic loans.

Exhibit 24 - Bank of Baroda and merging banks all slowed down Exhibit 25 - SBI loan growth slowed down as it prepared for the
post merger announcement merger with its own subsidiaries
Q1FY19A Q2FY19A Q3FY19A Q4FY19A Q1FY20A Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18
Pre-merger Post-merger Pre-merger Post-merger
BOB - solo 9.8% 11.9% 12.3% 9.7% SBIN - solo 10.7% 7.2% 4.1% 7.3%
DBNK -25.6% -16.7% -10.4% -20.8% . SBIN + subs 9.0% 6.0% 2.3% 1.1% 0.5% -0.1% 1.1% 3.5%

VJYBK 31.1% 37.2% 20.0% 12.4% Source: Jefferies, company data

. BOB - merged 10.5% 12.5% 11.2% 6.9% 6.4%
Source: Jefferies, company data

25 September 2019 9
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 26 - Measures taken by GoI over the past few weeks to boost consumption/investment & reforms in financials sector

.
Source: Jefferies, GoI

25 September 2019 10
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Credit crunch was quite pronounced

Systemic loan growth has been slowing quite rapidly of late. The banking sector, which
was growing 14-15% yoy till two quarters back and closed the recent quarter at 12% yoy,
fell a further 10% yoy in the last fortnight. Meanwhile, the aggregate NBFC/HFC loan
growth too slowed down to 15/10% yoy driven by weaker demand and liquidity tightness.

Exhibit 27 - Growth slowdown across NBFCs has been sharp

35%
30%
30%

25% 22%
20%
15%
15% 13% 12%
10%
10%

5%

0%
NBFC ex HFC HFCs Bank credit

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20

.
Source: Jefferies, company data * Based on list of 22 NBFC/HFCs

For the top five private banks (HDFCB, ICICIBC, AXSB, KMB and IIB), retail loan growth
slowed down to ~21% yoy as of end Q1 FY20 vs ~23% a year ago. Home loan growth
within the retail segment picked up from 13% in FY18 to 20% in Q1 FY20 (large part may
have come from buy-outs), which implies some slowdown in other segments e.g. vehicle
and personal loans, etc. Wholesale loan growth had been slow over the past few years,
and the pick up in recent months has also moderated. This was largely driven by risk
aversion in the wholesale segment and some caution on the retail segment, especially
on unsecured loans and credit cards.

Exhibit 28 - Retail loans have been key growth driver for private banks since FY12
Cumulative growth for HDFCB, ICICIB, AXSB, KMB and IIB
35%
30%
25%
20%
15%
10%
5%
0%
Q1FY12A
Q2FY12A
Q3FY12A
Q4FY12A
Q1FY13A
Q2FY13A
Q3FY13A
Q4FY13A
Q1FY14A
Q2FY14A
Q3FY14A
Q4FY14A
Q1FY15A
Q2FY15A
Q3FY15A
Q4FY15A
Q1FY16A
Q2FY16A
Q3FY16A
Q4FY16A
Q1FY17A
Q2FY17A
Q3FY17A
Q4FY17A
Q1FY18A
Q2FY18A
Q3FY18A
Q4FY18A
Q1FY19A
Q2FY19A
Q3FY19A
Q4FY19A
Q1FY20A

Wholesale loans Retail loans

.
Source: Jefferies, company data

25 September 2019 11
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 29 - Vehicle loan credit growth is typically impacted by Exhibit 30 - Home Loans: Growth has been relatively steady,
auto cycles banks have started to gain share from NBFCs
Cumulative growth for HDFCB, ICICIB, AXSB, KMB and IIB Cumulative growth for HDFCB, ICICIB, AXSB, KMB and IIB
35% 35%

30% 30%

25% 25%

20% 20%

15% 15%

10% 10%

5% 5%

0% 0%
Q1FY12A
Q2FY12A
Q3FY12A
Q4FY12A
Q1FY13A
Q2FY13A
Q3FY13A
Q4FY13A
Q1FY14A
Q2FY14A
Q3FY14A
Q4FY14A
Q1FY15A
Q2FY15A
Q3FY15A
Q4FY15A
Q1FY16A
Q2FY16A
Q3FY16A
Q4FY16A
Q1FY17A
Q2FY17A
Q3FY17A
Q4FY17A
Q1FY18A
Q2FY18A
Q3FY18A
Q4FY18A
Q1FY19A
Q2FY19A
Q3FY19A
Q4FY19A
Q1FY20A

Q1FY12A
Q2FY12A
Q3FY12A
Q4FY12A
Q1FY13A
Q2FY13A
Q3FY13A
Q4FY13A
Q1FY14A
Q2FY14A
Q3FY14A
Q4FY14A
Q1FY15A
Q2FY15A
Q3FY15A
Q4FY15A
Q1FY16A
Q2FY16A
Q3FY16A
Q4FY16A
Q1FY17A
Q2FY17A
Q3FY17A
Q4FY17A
Q1FY18A
Q2FY18A
Q3FY18A
Q4FY18A
Q1FY19A
Q2FY19A
Q3FY19A
Q4FY19A
Q1FY20A
Vehicle Loans Home Loans
. .
Source: Jefferies, company data Source: Jefferies, company data

Exhibit 31 - Credit Cards & Personal loans have witnessed some Exhibit 32 - Business Banking & LAP - Growth spurt seen post
softness of late demonetisation has moderated sharply
Cumulative growth for HDFCB, ICICIB, AXSB, KMB and IIB Cumulative growth for HDFCB, ICICIB, AXSB, KMB and IIB
50% 45%
45% 40%
40%
35%
35%
30%
30%
25%
25%
20%
20%
15% 15%

10% 10%

5% 5%
0% 0%
Q1FY12A
Q2FY12A
Q3FY12A
Q4FY12A
Q1FY13A
Q2FY13A
Q3FY13A
Q4FY13A
Q1FY14A
Q2FY14A
Q3FY14A
Q4FY14A
Q1FY15A
Q2FY15A
Q3FY15A
Q4FY15A
Q1FY16A
Q2FY16A
Q3FY16A
Q4FY16A
Q1FY17A
Q2FY17A
Q3FY17A
Q4FY17A
Q1FY18A
Q2FY18A
Q3FY18A
Q4FY18A
Q1FY19A
Q2FY19A
Q3FY19A
Q4FY19A
Q1FY20A

Credit Cards & Personal Loans Business Banking (incl LAP)

. .
Source: Jefferies, company data Source: Jefferies, company data * the cut out period growth was
distorted due to classification change

Exhibit 33 - CV/CE loan growth - Growth slowdown was impacted by cyclicality in CV Key trends:
Cumulative growth for HDFCB, ICICIB, AXSB, KMB and IIB
• CV/CE book of these players was ~Rs 1.1
40%
trillion, 36% of vehicle loan book.
30%

20%
• IIB and HDFCB dominant in CV financing,
10%
KMB growing fast in segment.
0% • Banks gaining share in CV financing at a
-10% time when NBFCs are restricted by liquidity
-20% challenges.
Q1FY11A
Q2FY11A
Q3FY11A
Q4FY11A
Q1FY12A
Q2FY12A
Q3FY12A
Q4FY12A
Q1FY13A
Q2FY13A
Q3FY13A
Q4FY13A
Q1FY14A
Q2FY14A
Q3FY14A
Q4FY14A
Q1FY15A
Q2FY15A
Q3FY15A
Q4FY15A
Q1FY16A
Q2FY16A
Q3FY16A
Q4FY16A
Q1FY17A
Q2FY17A
Q3FY17A
Q4FY17A
Q1FY18A
Q2FY18A
Q3FY18A
Q4FY18A
Q1FY19A
Q2FY19A
Q3FY19A
Q4FY19A
Q1FY20A

CV/CE Loans
.
Source: Jefferies, company data

Key trends:

• 2W book of was ~Rs 160 billion, ~5% of

vehicle loan book.

• HDFC Bank is most dominant in 2W

financing within the private banks, 2W book

25 September 2019 12
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 34 - Two-wheelers - Loan growth came off constituting ~8% of its vehicle finance
Cumulative growth for HDFCB, ICICIB, AXSB, KMB and IIB book.
40%
• ICICIBC has grown faster in the segment
30%
over the past year, even though on a smaller
20%
base.
10%

0%

-10%

-20%
Q1FY11A
Q2FY11A
Q3FY11A
Q4FY11A
Q1FY12A
Q2FY12A
Q3FY12A
Q4FY12A
Q1FY13A
Q2FY13A
Q3FY13A
Q4FY13A
Q1FY14A
Q2FY14A
Q3FY14A
Q4FY14A
Q1FY15A
Q2FY15A
Q3FY15A
Q4FY15A
Q1FY16A
Q2FY16A
Q3FY16A
Q4FY16A
Q1FY17A
Q2FY17A
Q3FY17A
Q4FY17A
Q1FY18A
Q2FY18A
Q3FY18A
Q4FY18A
Q1FY19A
Q2FY19A
Q3FY19A
Q4FY19A
Q1FY20A
2W Loans
.
Source: Jefferies, company data

Exhibit 35 - Passenger car financing impacted by slowdown in auto sales over the Key trends:
past three quarters
Cumulative growth for HDFCB, ICICIB, AXSB (total vehicle loan), IIB and KMB • Passenger cars constitute largest part
of vehicle finance book (more than 50%),
30%
~Rs1.6-1.7 trillion for the five banks.
25%

20% • HDFC Bank is most dominant (17% CAGR

15% over FY 16-19), followed by ICICIBC (12%
10% CAGR).
5%
• Slowdown in the last few quarters was due
0% to weak auto sales.
Q1FY11A
Q2FY11A
Q3FY11A
Q4FY11A
Q1FY12A
Q2FY12A
Q3FY12A
Q4FY12A
Q1FY13A
Q2FY13A
Q3FY13A
Q4FY13A
Q1FY14A
Q2FY14A
Q3FY14A
Q4FY14A
Q1FY15A
Q2FY15A
Q3FY15A
Q4FY15A
Q1FY16A
Q2FY16A
Q3FY16A
Q4FY16A
Q1FY17A
Q2FY17A
Q3FY17A
Q4FY17A
Q1FY18A
Q2FY18A
Q3FY18A
Q4FY18A
Q1FY19A
Q2FY19A
Q3FY19A
Q4FY19A
Q1FY20A

Passenger car loans

.
Source: Jefferies, company data

Exhibit 36 - Retail home loans & LAP: Growth for high rated NBFCs & banks has been stable

43%
45%

35% 28%
27%
24%
25% 22%
19%
13% 15%
15%

5%

-5%
-4%
-15%
HDFC Limited LIC Housing PNB Housing Indiabulls Housing HDFC Bank KMB ICICIBC AXSB SBIN

Q2FY19 Q3FY19 Q4FY19 Q1FY20

.
Source: Jefferies, company data

25 September 2019 13
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 37 - Vehicle loans: Growth slowdown across banks & NBFCs amidst softer cycle

45%
33%
35% 28%

25% 21% 22%

18%
15% 8% 8%
6% 7%
5%

-5%

-15%
SHTF MMFS Chola HDFCB KMB ICICIBC AXSB IIB SBIN

Q2FY19 Q3FY19 Q4FY19 Q1FY20

.
Source: Jefferies, company data

Exhibit 38 - Retail & Agri portfolio loan growth for banks has been stable; vehicle
sales slowdown partly offset by share gains from NBFCs

45%
38%
35%
22% 22%
25% 18%
16% 16%
15%

5%

-5%

-15%
HDFCB IIB KMB ICICIBC AXSB SBIN

Q2FY19 Q3FY19 Q4FY19 Q1FY20

.
Source: Jefferies, company data

Exhibit 39 - Banks have been cautious in growing their corporate & SME loan book

45%

35%

25% 19%
18%
15% 9% 9% 9%
4%
5%

-5%

-15%
HDFCB IIB KMB ICICIBC AXSB SBIN

Q2FY19 Q3FY19 Q4FY19 Q1FY20

.
Source: Jefferies, company data

25 September 2019 14
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Screening the corporate debt - Potential signs of weakness continue

The corporate sector felt the strains of weak sentiment and liquidity situation in H1
FY20. Several corporates including NBFCs/HFCs, defaulted or saw their credit ratings
downgraded by the rating agencies. As a result, lenders to these entities - especially
banks - had to bake in higher provisions or MTM haircuts on their bond portfolios. The
CARE Ratings' debt quality index (CDQI) which measures quality of debt had a rather
abrupt decline in May 2019 but has since remained stable.

Exhibit 40 - Debt quality index saw an abrupt dip post May 2019

92.0
91.0
90.0
89.0
88.0
87.0
86.0
85.0
Feb-17

Apr-17

Aug-17
Sep-17

Feb-18

Apr-18

Aug-18

Feb-19

Apr-19

Aug-19
Jun-17

Dec-17

Sep-18
Jun-18

Nov-18
Dec-18

Jun-19
Mar-17

Oct-17
Nov-17

Jan-18

Mar-18

Oct-18

Jan-19

Mar-19
May-17

Jul-17

May-18

Jul-18

May-19

Jul-19
CDQI Index (FY12 = 100)
.
Source: CARE Ratings

Significant distortion in credit-ratings vis-a-vis Interest Coverage Ratio (ICR) and Debt/EBITDA profile
Although we realize the issues are less to do with sector leverage, as a good starting
point we find it better to scope out the problematic ones based on current credit ratings,
interest coverage ratios and debt serviceability ratio (D/EBITDA). For our analysis, we
screened roughly 5000+ companies listed on BSE and then narrowed it down to 3000+
after excluding companies that have already defaulted or cases where we didn't have
consistent data and non-financial companies.

Cumulatively, this boils down to Rs 33 tn debt (ex-financials), of which about 38% has
a prime credit rating, 36% are rated 'AA', 11% rated 'A' and the balance (14%) rated
'BBB' or below. Incidentally, the 'A' rated corporates are those where we believe there is
meaningful divergence based on the current interest coverage and debt serviceability
ratio, and are prone to further rating downgrades.

Exhibit 41 - How is the overall corporate debt distributed across Exhibit 42 - Of this debt, ~25% is rated A & below, ~38% rated
sectors? AAA & ~36% rated AA
For BSE listed companies, ex financials & already default cases For BSE listed companies, ex financials & already default cases
BB & Below,
Ex-financial & Ex-Default BSE Cos. 10%
Debt = Rs 32.7 trillion BBB, 4%

Others, 21% Power, 17%

AAA, 38%
A, 11%

Construction -
RE, 2%
Oil & Refinery,
Auto &
18%
Ancilliary, 8%
Pharma, 4%

Metals, 12% Telecom, 9%

Engineering, AA, 36%
. 9%
.
Source: Jefferies estimates, FactSet, Ace Equity, Company Data Source: Jefferies estimates, FactSet, Ace Equity, Company Data

25 September 2019 15
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Importantly, the interest coverage ratio for this entire group declined to about 5.6x in Q1
FY20, the lowest in the last 14 quarters. But, in an interesting twist, when split by latest
credit ratings, it's the 'AAA' rated companies that have declined the most followed by
the 'AA' rated ones, although the coverage ratio remains well elevated so it has caused
little issue.

Surprisingly, it is the 'BBB' & below rated ones where the average coverage ratio has seen
an improvement. We don't think this reflects any improvement in underlying earnings
potential, but is rather reflecting rating movements down the curve, for various other
factors including liquidity constraints or breach of debt covenants.

Exhibit 43 - Ex-Financials ICR came off sharply in 1Q, partly due to seasonality but
also reflecting the softer profitability

7.00 6.8 6.8

6.6
6.5
6.3 6.3 6.3 6.3 6.4
6.50 6.2
6.1
6.00 5.8 5.8
5.6
5.50

5.00

4.50

4.00

ICR ex financials
.
Source: Jefferies, Ace Equity (Based on 5000+ BSE listed cos.)

Exhibit 44 - Interest coverage ratio for AAA has been falling, Risk of downgrades exist
in A & BBB accounts
For BSE listed companies, ex financials & already default cases
16.0
14.0
12.0 10.4
10.0
8.0
6.0 4.6
3.3
4.0 2.7 2.2
2.0
0.0
AAA AA A BBB BB & Below

Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

.
Source: Jefferies, Ace Equity, Company data

We further split the credit ratings by debt serviceability (Debt/EBITDA) ratio into various
credit rating buckets. As cited earlier, the 'A' rated corporates seem most at risk of credit
rating downgrades given their elevated debt serviceability ratios (the higher the ratio the
poorer the ability to sustain debt levels).

25 September 2019 16
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 45 - Surprisingly, Debt to EBIDTA ratio for A & below are not very different;
high possibility of downgrade
For BSE listed companies, ex financials & already default cases
7.0 6.3
6.0 5.6
5.2
5.0 4.2
4.0 3.5

3.0 2.4

2.0

1.0

0.0
AAA AA A BBB BB & Below Total

Debt to FY19 EBIDTA

.
Source: Jefferies estimates, FactSet, Ace Equity (Based on 5000+ BSE listed cos.)

Exhibit 46 - Debt to EBIDTA profile of AAA rated entities much stronger than AA &
below
For BSE listed companies, ex financials & already default cases
100%
17%
29% 27% 26%
80%
29% 62%
71% 21%
60% 24%
50%
40%
39% 7% 41%
38% 5% 3%
20% 7%
15% 28%
16% 17% 12%
8% 9%
0%
AAA AA A BBB BB & Below Total

0-3x 3-5x 5-7x >7x or <0x

.
Source: Jefferies estimates, FactSet, Ace Equity (Based on 5000+ BSE listed cos.)

Interest coverage ratio & credit rating - Telecom and Construction/Real-estate are quite low
Although it is not a surprise, both the telecom and construction/real-estate sectors have
a high incidence of companies where the credit ratings are 'A' or lower and in aggregate
the ICR levels too are quite low. As a result, we believe a significant portion of asset
quality challenges is likely to emerge from these sectors.

25 September 2019 17
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 47 - ICR: Engineering Exhibit 48 - ICR: Power Generation & Exhibit 49 - ICR: Telecommunication
(Construction) Sector Distribution Sector
For BSE listed companies, ex financials & For BSE listed companies, ex financials & For BSE listed companies, ex financials &
already default cases already default cases already default cases
4.5 4.2 4.1 4.1 3.0
4.0 2.6
4.0 4.0
4.0 3.9 2.5 2.2
3.5 3.0 2.0
3.0 2.7 2.8 2.0 1.8
3.8
2.3 2.4 3.8 3.7 3.7 3.7 1.5
2.5 1.5
1.9 2.1 1.9 1.5 1.2 1.2
2.0 3.5 1.1
3.6
1.5 1.0
1.0 3.4 0.5
0.5
0.0 3.2 0.0

Engineering - Construction Power Generation/Distribution Telecommunication - Service Provider

. . .
Source: Jefferies estimates, Ace Equity, Source: Jefferies estimates, Ace Equity, Source: Jefferies estimates, Ace Equity,
company data company data company data

Exhibit 50 - ICR: Construction (Real Exhibit 51 - ICR: Auto Ancilliary Exhibit 52 - ICR: Hotels
Estate) For BSE listed companies, ex financials & For BSE listed companies, ex financials &
For BSE listed companies already default cases already default cases
3.0 2.7 16.0 7.0
2.6 14.0 13.6 13.5 6.0
2.4 14.0 12.9 12.6
2.5 2.3 2.3 12.5 6.0
2.2 2.2 11.4 11.5 5.0
2.0 1.9 12.0 10.2 5.0 4.4
2.0
10.0
4.0
1.5 8.0 2.7 2.7
3.0 2.4
6.0 2.2 2.1 2.2
1.0
4.0 2.0
0.5 1.0
2.0
0.0 0.0 0.0

Construction - Real Estate Auto Ancillary Hotel, Resort & Restaurants

. . .
Source: Jefferies estimate, Ace Equity, company Source: Jefferies estimates, Ace Equity, Source: Jefferies estimates, Ace Equity,
data company data company data

Exhibit 53 - ICR: Steel & Iron Products Exhibit 54 - ICR: Trading Companies Exhibit 55 - ICR: Textile companies
For BSE listed companies, ex financials & For BSE listed companies, ex financials & For BSE listed companies, ex financials &
already default cases already default cases already default cases
4.5 4.2 6.0 4.5
3.9 3.8 3.9 3.9
4.0 4.9 4.0 3.5 3.5
3.4 3.4 5.0 4.4 3.3
3.5 3.5 2.9
3.0 3.7 2.9
4.0 3.4 3.3 3.0 2.7
3.0 2.5
2.5 3.0 2.8 2.9 2.9 2.5
2.5 2.0 3.0
2.0
2.0 1.5 2.0 1.5
1.5 1.0
1.0
1.0 0.5
0.5 0.0 0.0

Steel & Iron Products Trading Textile

. . .
Source: Jefferies estimates, Ace Equity, Source: Jefferies estimates, Ace Equity, Source: Jefferies estimates, Ace Equity,
company data company data company data

25 September 2019 18
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 56 - Power: Total Debt of Rs 5.4 Exhibit 57 - Telecom: Total Debt of Rs 2.9 Exhibit 58 - Engineering: Total Debt of Rs
trillion (~17% mix) trillion (~9% mix) 2.9 trillion (~9% mix)
For BSE listed companies, ex financials & For BSE listed companies, ex financials & For BSE listed companies, ex financials &
already default cases (as of FY19) already default cases (as of FY19) already default cases (as of FY19)

BB & Power BB & Telecom BB &

Engineering
Below, Below,
Below,
13% 7% AAA, 0%
BBB, 0% 15%
A, 0%

BBB, 0%
BBB, 10% AAA,
AA, 22% 44%
AA, 50%

A, 42%
AAA,
65%
A, 25%
AA, 5%
. . .
Source: Jefferies estimates, FactSet, Ace Equity, Source: Jefferies estimates, FactSet, Ace Equity, Source: Jefferies estimates, FactSet, Ace Equity,
Company Data Company Data Company Data

Exhibit 59 - Metals: Total Debt of Rs 4.1 Exhibit 60 - Pharma: Total Debt of Rs 1.3 Exhibit 61 - Auto & Ancilliary: Total Debt of
trillion (~12% mix) trillion (~4% mix) Rs 2.6 trillion (~8% mix)
For BSE listed companies, ex financials & For BSE listed companies, ex financials & For BSE listed companies, ex financials &
already default cases (as of FY19) already default cases (as of FY19) already default cases (as of FY19)

BB & Metals BB & Pharma BBB, 1%

BB & Auto & Ancilliary
Below, Below, AAA, Below,
4% AAA, 1% 10% 11% A, 4% 1% AAA, 1%
BBB, 12% BBB, 3%
A, 5%
A, 2%

AA, 81%
AA, 70% AA, 93%
. . .
Source: Jefferies estimates, FactSet, Ace Equity, Source: Jefferies estimates, FactSet, Ace Equity, Source: Jefferies estimates, FactSet, Ace Equity,
Company Data Company Data Company Data

Exhibit 62 - Construction (Real Estate): Exhibit 63 - Oil Exploration & Refinery: Exhibit 64 - Other Corporate: Total Debt of
Total Debt of Rs 0.8 trillion (~2% mix) Total Debt of Rs 5.9 trillion (~18% mix) Rs 6.7 trillion (~21% mix)
For BSE listed companies, ex financials & For BSE listed companies, ex financials & For BSE listed companies, ex financials &
already default cases (as of FY19) already default cases (as of FY19) already default cases (as of FY19)

Construction - RE Oil & Refinery Others

BB & BB &
Below, AAA, 0% Below, AAA,
AA, 14%
20% 22% 21%

BBB, 7%
BBB, 7%

A, 15% AA, 35%

A, 59% AAA,
. . 100% .
Source: Jefferies estimates, FactSet, Ace Equity, Source: Jefferies estimates, FactSet, Ace Equity, Source: Jefferies estimates, FactSet, Ace Equity,
Company Data Company Data Company Data

25 September 2019 19
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Screening the NBFC/HFC debt profile - A mixed bag, but banks unlikely to see
major first order impact from developer loan default
NBFCs including HFCs are a slightly different ballgame. We are less worried about
potential asset quality defaults for which each of the NBFCs has a capital buffer to
cushion the impact as is visible from the Tier 1 vs. Gross NPL (Stage 3) assets exhibits
below. Even if we draw out a scenario of doubling Stage 3 ratios (for example, especially
the presumed risky NBFCs/HFCs), we believe the Tier 1 ratio should be adequate to
withstand a second order impact on the banking system.

Exhibit 65 - NBFCs are capitalized adequately

As on Q1FY20
30%
24.5% 24.3% 23.6%
25% 23.2% 22.6%
20.5% 19.8% 19.4%
20% 18.0% 17.6% 17.3% 17.2% 16.3% 16.0% 15.9% 15.1% 14.3%
15% 12.0% 12.0%

10%

5%

0%

Tier 1 ratio (%)

.
Source: Jefferies, company data

Exhibit 66 - Asset quality position of NBFCs as on 1QFY20

As on Q1FY20
10.0% 8.9% 8.5%
8.0% 7.4%

6.0% 5.1%
4.2%
4.0% 3.2% 3.0%
2.4% 2.3% 2.2% 2.0% 2.0% 1.7% 1.6% 1.5% 1.5%
2.0% 0.8% 0.7% 0.7%

0.0%

Gross NPA (%)

.
Source: Jefferies, company data

25 September 2019 20
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 67 - NBFCs/HFCs - Gross NPL vs Tier 1 capital mapping

As on Q1FY20
26% MUTH
24% REPCO
Tier 1 capital ratio (%)

MGFL SUF
22% SCUF
20% CANF MGMA
IHFL MMFS
ABCL
18%
HDFC CIFC
16% BAF SHTF
IIFL LTFH
14% PNBHOUSI EDEL
12% LICHF
10%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
Gross NPL (Stage 3) (%)
.
8.5%
Source: Jefferies, company data

However, we don't think the financial markets react in quite the same way. In fact,
liquidity to NBFCs/HFCs under distress will likely disappear much before an asset
quality default hits the balance sheet. And, therefore, our concern stems from the
liquidity profile of NBFCs, which are entirely dependent on the vagaries of the financial
markets (banks and debt markets) towards refinancing and repayments coming back
from the asset side, as witnessed in the case of Altico Capital (unlisted) which despite
having a gross debt-to-equity ratio of 1.8x went into a tailspin.

We analyzed about 70 NBFC/HFCs for their debt, leverage and credit ratings. In terms
of credit rating, roughly two-thirds are still rated 'AAA' while less than 10% are rated
'A' or below. And, very surprisingly, the bulk of these had gross debt-to-equity ratios of
less than 6x. But, we still caution that there are no foolproof publicly available data to
forecast a potential disaster before it actually hits.

Exhibit 68 - Credit rating mix of overall NBFC credit (Rs 22 Exhibit 69 - HFCs 37%, NBFCs 33% and infrastructure lending
trillion) 27% of the overall pie
As on FY19 As on FY19
BB, 2% Other NBFCs,
BBB, 2% D, 5% 3%
A, 4%
Finance Term
Lending, 27% Finance -
Housing, 37%
AA, 20%

AAA, 67%

Finance - NBFC,
. . 33%
Source: Jefferies estimates, FactSet, Company data Source: Jefferies estimates, FactSet, Company data

25 September 2019 21
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 70 - Default rated NBFCs saw their leverage increase over last two years
Debt to Equity of NBFCs (credit rating bucket wise)
12.0

10.0

8.0

6.0

4.0

2.0

-
FY16 FY17 FY18 FY19

AAA AA A BBB D
.
Source: Jefferies, FactSet, company data

We also went one step further and analyzed the banking system exposure to the
developers within the commercial real-estate segment (CRE) to qualitatively understand
any first order impact on banks. Incidentally, aggregate CRE exposure for 36 banks fell
8% yoy in FY19 over FY18, while the last 4-year CAGR has been a mere 6.6% yoy.

While there is a wide variation in Private banks' exposure to real estate (residential &
commercial) - YES and IIB's exposure are quite material - but as a group Private banks
have seen exposure to CRE fall as a percentage of loans. The extreme shallow growth
in the developer portfolio for the aggregate banking sector (6.6% CAGR over FY15-19)
broadly lends credence to our view that the first order impact from developer default
will not be material.

Exhibit 71 - Private bank exposure to commerial real estate has come off
Funded and non-funded exposure as % of net loans
28%
26%
24% 2.9%
3.0% 3.0% 3.5% 3.6%
22%
20%
3.6% 4.5%
4.9% 7.6%
18% 2.9% 3.1% 3.6% 7.1% 6.9% 7.1% 6.7%
16% 2.5%
4.5% 3.8% 2.9% 3.1%
14% 4.0% 4.0% 2.4% 3.4% 2.4%
4.0% 2.9% 2.9%
12% 14.0% 3.1% 15.0%14.5%14.8%14.3%14.6%
13.7%
12.2%12.6%13.2% 11.7%12.8%
10% 11.4% 10.4%11.4%
FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19
All Banks SOE Banks Pvt Banks

Retail CRE NHB/HFC

.
Source: Jefferies, company data

25 September 2019 22
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Exhibit 72 - Ex-LRD developer book of ~Rs 4.6 trillion (70% of Exhibit 73 - Outstanding developer loan book of NBFCs/HFCs
pie) could see stress from tighter liquidity
89%
LRD - Non
Banks, 8%

Core Developer
- Banks, 31% 28% 27%
LRD - Banks, 21% 17% 15% 15% 14%
21% 7%

Core Developer Developer loans as % of loan book

- Non Banks, .
. 40% Source: Jefferies, company data
Source: Jefferies estimates, company data, RBI

Exhibit 74 - Total CRE exposure for banks Exhibit 75 - ...while core developers grew Exhibit 76 - ...and LRD & non-funded CRE
grew at a 6.6% CAGR over FY15-19 at 5.0% CAGR exposure grew 9.1% (dip in FY19)

4.0 2.5 2.0

3.5 1.8
2.0 1.6
3.0
1.4
2.5 1.5 1.2
2.0 1.0
1.5 1.0 0.8
0.6
1.0
0.5 0.4
0.5 0.2
0.0 0.0 0.0
FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19

Bank developer loans (Rs trn) Bank core developer credit (Rs trn) Bank LRD & Others (Rs trn)
. . .
Source: Jefferies, company data Source: Jefferies, company data Source: Jefferies, company data

25 September 2019 23
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 EQUITY RESEARCH
India | Banks

Sizing up the 'second wave' using data from listed companies - At Rs 1.6 tn, isn't
small but not large enough to disarray the system
It's not a 'second wave' but more the tail of the asset quality cycle - which started
with sector leverage issues in 2012-13, except that the recent cases are less sector
specific. But the common thread still revolves around leverage, including leverage at the
promoter entity level.

In slicing and dicing the corporate debt (excluding financials) in the listed space, which
is roughly Rs 33 tn, at a rough Debt/EBITDA > 3x and Interest Coverage Ratio (ICR) < 2x,
the aggregate corporate debt is roughly Rs 4.9 tn, which forms our basis for a deeper
drilling. However, we draw out other scenarios (see exhibit below) across a range of ICR
and Debt/EBITDA ratios.

As highlighted above, we drill down further in the highly stressed companies and apply
the following filters -

• Gross aggregate borrowing of Rs 10 bn or more from the banking system

• Exclude companies that have already defaulted or are NPLs
• Remove companies e.g. Adani Group and a few SOE companies
• Restate Voda-Idea debt to Rs 465 bn by excluding the capitalised spectrum debt which
is owed to the govt, although we add back the one-year spectrum guarantees

As a result, the stock of potential risky debt stands at around Rs 1.6 tn across 40 odd
entities/corporate groups. Against this Rs 1.6 tn in debt, the pledged shares are worth a
mere Rs 88 bn (vs. total pledged shares at Rs 1.8 tn). That's about 16% additional non-
NPL stress compared to the current stock of bad loans which are around Rs 10 tn: not
small but not large enough to disarray the banking system.

Exhibit 77 - Debt stress test scenario

.
Source: Jefferies estimates, company data, Ace Equity, FactSet

25 September 2019 24
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 EQUITY RESEARCH
India | Banks

Exhibit 78 - Identified assets which fall under our specific stress test scenario

.
Source: Jefferies, company data, Ace Equity, FactSet

25 September 2019 25
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Translating the macro concerns to micro realities - Banks we like screen better
In this section, we further drill down the list of potential stressed corporates/groups
to specific banks. At this stage, iwe highlight that the bank-wise exposure are
collated through multiple sources viz. Ministry of Corporate Affairs database, debt
offering documents, past annual reports, services of PropStack, newspaper articles (viz.
Economic Times, Business Standard) and our own assessments.

For the analysis, we chose the top 10 names in our potential stressed corporates list,
which contribute almost two-thirds of the stressed debt. We also add names that have
recently figured in newspaper headlines or credit rating documents as having defaulted
in their debt obligation. We segregate the entire list into three buckets viz. higher risk,
medium risk and lower risk.

In the worst case, the hit to book value for ICICI Bank and Axis Bank are roughly 9% and
12% respectively. Not surprisingly, both HDFC Bank and Kotak Bank make it to the top
of the list while Yes Bank stacks at the bottom of the pile.

25 September 2019 26
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 EQUITY RESEARCH
India | Banks

Exhibit 79 - Stress exposure across major accounts (Amount in Rs bn)

.
Source: Jefferies estimates, MCA database, Debt offering circulars, Propstack, Economic Times, Business Standard

25 September 2019 27
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 EQUITY RESEARCH
India | Banks

Exhibit 80 - Stressed asset positioning of major banks (Amt in Rs million)

.
Source: Jefferies, company data

Exhibit 81 - Net stress at ~4% for ICICIBC, SBIN and ~5.2% for AXSB

14%
12.7%

12%

10%
8.7% 8.6% 8.4%
8%
6.6%

6% 5.2%
4.0% 4.0% 3.8% 3.8%
4% 2.9% 3.1%
2.4% 2.2% 2.2%
2% 1.4%
0.8%
0.3%
0%
BOB AXSB ICICIBC SBIN FB IIB RBL KMB HDFC

Gross stress as a % of gross loans Net stress as % net loans

.
Source: Jefferies, company data ^Please note that numbers may not be comparable due to
reporting differences

25 September 2019 28
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 EQUITY RESEARCH
India | Banks

Exhibit 82 - Corporate & SME gross NPLs high, large part has already been provided
for

18.0% 17.0%

16.0%
14.0%
12.0% 11.0%
9.8%
10.0%
8.0%
6.0%
3.2%
4.0%
1.9%
2.0% 1.2%

0.0%
ICICIBC AXSB SBIN IIB HDFCB RBK

Core & SME Gross NPA (%) - on net advances

.
Source: Jefferies, company data

Exhibit 83 - Mix of NBFC/HFC exposure in overall loans

18.0%
16.0%
14.0%
4.8%
12.0%
10.0% 4.5%
8.0% 2.6%
6.0% 2.8% 3.4% 1.9%
10.9%
2.2%
4.0% 7.4% 6.4% 1.4% 1.5%
4.9% 5.1% 1.0%
2.0% 4.2% 3.8% 2.8% 2.5% 2.3%
0.0%
BOB CBK RBK SBIN FB HDFCB ICICIBC KMB AXSB IIB

NBFC (%) HFC (%)

.
Source: Jefferies, company data

25 September 2019 29
Please see important disclosure information on pages 30 - 35 of this report.
 EQUITY RESEARCH
India | Banks

Company Valuation/Risks
For Important Disclosure information on companies recommended in this report, please visit our website at https://
javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Analyst Certification:
I, Nilanjan Karfa, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related
to the specific recommendations or views expressed in this research report.
I, Harshit Toshniwal, certify that all of the views expressed in this research report accurately reflect my personal views about the
subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed in this research report.
Registration of non-US analysts: Nilanjan Karfa is employed by Jefferies India Private Limited, a non-US affiliate of Jefferies LLC
and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC,
a FINRA member firm, and therefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject
company, public appearances and trading securities held by a research analyst.
Registration of non-US analysts: Harshit Toshniwal is employed by Jefferies India Private Limited, a non-US affiliate of Jefferies
LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies
LLC, a FINRA member firm, and therefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a
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As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in
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reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's
judgement.

Investment Recommendation Record

(Article 3(1)e and Article 7 of MAR)
Recommendation Published September 24, 2019 , 23:07 ET.
Recommendation Distributed September 24, 2019 , 23:07 ET.

Company Specific Disclosures

Jefferies Group LLC makes a market in the securities or ADRs of HDFC Bank.
Jefferies Group LLC makes a market in the securities or ADRs of ICICI Bank.

For Important Disclosure information on companies recommended in this report, please visit our website at https://
javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Explanation of Jefferies Ratings

Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month
period.
Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within
a 12-month period.
Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less
within a 12-month period.
The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below
$10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold
rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is
plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below
$10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable
regulations and/or Jefferies policies.
CS - Coverage Suspended. Jefferies has suspended coverage of this company.
NC - Not covered. Jefferies does not cover this company.

25 September 2019 30
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 EQUITY RESEARCH
India | Banks

Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable
securities regulations prohibit certain types of communications, including investment recommendations.
Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial
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Valuation Methodology
Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and
expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are
not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF),
free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/
average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.

Jefferies Franchise Picks

Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month
period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction,
differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies
Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion.
Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired
return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P
stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent
a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment
style such as growth or value.

Risks which may impede the achievement of our Price Target

This report was prepared for general circulation and does not provide investment recommendations specific to individual investors.
As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own
investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors
as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an
indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this
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is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of,
value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs,
whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report
• Axis Bank (AXSB IN: INR704.30, BUY)
• Bajaj Finance Limited (BAF IN: INR3,962.25, BUY)
• Bank of Baroda (BOB IN: INR99.15, BUY)
• HDFC Bank (HDFCB IN: INR1,255.05, BUY)
• ICICI Bank (ICICIBC IN: INR440.85, BUY)
• IndusInd Bank Limited (IIB IN: INR1,517.05, HOLD)
• Kotak Mahindra Bank Limited (KMB IN: INR1,617.90, UNDERPERFORM)
• LIC Housing Finance Limited (LICHF IN: INR419.10, BUY)
• Mahindra and Mahindra Financial Services Limited (MMFS IN: INR342.60, BUY)
• PNB Housing Finance Limited (PNBHOUSI IN: INR641.00, HOLD)
• Power Finance Corporation Ltd. (POWF IN: INR104.05, UNDERPERFORM)
• Punjab National Bank (PNB IN: INR66.15, HOLD)
• Repco Home Finance Limited (REPCO IN: INR317.45, HOLD)
• Rural Electrification Corporation Ltd. (RECL IN: INR129.00, UNDERPERFORM)
• Shriram Transport Finance Company Limited (SHTF IN: INR1,165.40, BUY)
• State Bank of India (SBIN IN: INR302.45, BUY)
• The Federal Bank Limited (FB IN: INR94.25, BUY)
• Yes Bank Limited (YES IN: INR56.05, UNDERPERFORM)

25 September 2019 31
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 EQUITY RESEARCH
India | Banks

Distribution of Ratings
Distribution of Ratings

IB Serv./Past12 Mos. JIL Mkt Serv./Past12 Mos.

Count Percent Count Percent Count Percent

BUY 1160 53.19% 86 7.41% 14 1.21%

HOLD 873 40.03% 18 2.06% 3 0.34%

UNDERPERFORM 148 6.79% 1 0.68% 0 0.00%

25 September 2019 32
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 EQUITY RESEARCH
India | Banks

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25 September 2019 33
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25 September 2019 34
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 EQUITY RESEARCH
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25 September 2019 35
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