Indian Banks - HSBC

FIG
India Commercial Banks

abc
Global Research
Indian Banks  Improving clarity on growth, rates and

asset quality likely to support price gains
Uncertainties receding
 Prefer private banks near term as growth
proxies – Axis, HDFC Bank, ICICI Bank
Valuation summary
Bloomberg Current Old New Pot’l Old New  PSU banks provide 12mth PE rerating
ticker (IN) share target target return HSBC HSBC
price price price (%) rating rating opportunity after interim concerns
(INR) (INR) (INR)
dissipate – PNB, Union, Canara
Public sector
Bank of Baroda BOB 734 689 789 10% OW(V) N(V)
Canara Bank CBK 426 534 534 28% OW(V) OW(V) Rating changes. Downgrading Bank of Baroda to Neutral
Punjab Nat’l Bank PNB 1,004 1,163 1,226 25% OW(V) OW(V)
State Bank of India SBIN 2,284 2,033 2,169 -4% N(V) UW(V) (V) and State Bank of India to UW(V) on stock performance
Union Bank of India UNBK 306 302 378 25% OW(V) OW(V)
Private sector
and relatively high provisioning pressures, respectively.
Axis Bank AXSB 1,226 1,489 1,489 22% OW(V) OW(V)
HDFC Bank HDFCB 1,863 2,313 2,313 25% OW OW Banks to gain from EPS acceleration and PE rerating.
ICICI Bank ICICIBC 960 1,180 1,180 24% OW(V) OW(V)
We expect 24% EPS CAGR for our coverage banks over
Source: Company data, HSBC; prices as of 8 June 2010
FY10-12e vs. 18% last year, causing PE multiples to expand
quicker than PB as the street starts to focus on credit and
earnings growth upside rather than asset quality risks.
Three uncertainties diminishing. Loan growth, direction of

short rates and asset quality trends are all closer to moving
up than down, as economic indicators (PMI, industrial
growth, overnight liquidity) point to a pickup in the credit
cycle and tightening liquidity.
Earnings sensitivity analysis on these three parameters

10 June 2010 points to Canara being most leveraged and Punjab National
Sachin Sheth*
Bank most insulated. We like both names given relatively
Analyst attractive valuations vs. peers even after factoring in
HSBC Securities & Capital Markets (India) Private Limited significantly higher provisions for Canara.
+91 22 2268 1224 sachinsheth@hsbc.co.in
Todd Dunivant* Multiples increased. We increase target PE multiples by up

Head of Banks Research, Asia Pacific to 25% for public sector (PSU) banks to 7.0-8.5x, more so
The Hongkong and Shanghai Banking Corporation Limited
for Union Bank and Canara Bank which historically have
+ 852 2996 6599 tdunivant@hsbc.com.hk
traded at discounts to peers in the downcycle.
Tejas Mehta*
Analyst Near term prefer private banks… Underperformance of
HSBC Securities & Capital Markets (India) Private Limited
private banks to PSU banks by ~10% and private banks
+ 91 22 2268 1243 tejasmehta@hsbc.co.in
View HSBC Global Research at: http://www.research.hsbc.com trading at discounts to their average multiples point to better
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, entry opportunities, particularly given brighter growth
and is not registered/qualified pursuant to NYSE and/or NASD prospects in the early stages of the upcycle as well as fewer
regulations
asset quality issues and more flexible pricing power.
Issuer of report: HSBC Securities and Capital Markets (India)
Private Limited
…but over 12 months prefer PSU banks, which hold out
Disclaimer & Disclosures promise of a higher PE rerating and earnings growth into the
This report must be read with the upcycle once near-term hiccups are overcome.
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it
FIG
India Commercial Banks abc
10 June 2010
Contents
Uncertainties receding 4
Sensitivity analysis 6
Affordable valuations 10
PSU bank profiles 13
Bank of Baroda (BOB) 14
Canara Bank (CNBK) 19
Punjab National Bank (PNBK) 24
State Bank of India (SBI) 29
Union Bank (UNBK) 34
Disclosure appendix 39
Disclaimer 42
2
FIG
10 June 2010
Table 1: Valuation summary (INR/sh)
_______HSBC PE _______ ______ HSBC PB________

RIC code Company Mkt Price Target price Potential Rating Mkt cap FY11E FY12E FY11E FY12E
return (USDm)
BOB BO BOB 734 789 10% Neutral(V) 5,656 7.5 6.3 1.6 1.3
CNBK BO Canara 426 534 28% Overweight(V) 3,733 5.5 4.8 1.2 1.0
PNBK BO PNB 1,004 1,226 25% Overweight(V) 6,839 6.2 4.9 1.5 1.2
SBI BO SBI 2,284 2,169 -4% Underweight(V) 30,681 13.3 10.1 1.9 1.7
UNBK.BO Union 306 378 25% Overweight(V) 3,288 5.9 4.8 1.4 1.1
AXBK.BO Axis 1,226 1,489 22% Overweight(V) 10,728 14.8 12.1 2.7 2.3
HDBK BO HDBK 1,863 2,313 25% Overweight 18,367 21.6 16.9 3.4 2.9
ICBK BO ICBK 960 1,180 24% Overweight(V) 19,557 21.5 17.5 1.9 1.8
Note: Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points above and below the hurdle rate for Indian stocks of 10.5%. Our target prices offer potential return above, below or within
the Neutral band of our model and the stocks are correspondingly rated OW(V), UW(V) or N(V). Market prices are as of 8-June-2010.
Source: Company data, HSBC
Table 2: India banks snapshot

Company Target price Rating Investment case
(INR)
Public sector
BOB 789 N(V)  Higher loan growth and better margins likely to lead to 18% CAGR in earnings growth over FY10-12e, low asset quality risks
 But stock has run up 28% over last 3 mths outperforming peers and the Sensex significantly
 Downgrade to Neutral (V) with target price of INR789 as it is trading at premium to peers at 7.5x FY11 EPS and 1.6x FY11 Book; stock
entry point at INR660
Canara 534 OW(V)  Lowering EPS estimates for FY11 and FY12 by 22% and 26%, respectively, to conservatively factor in higher NPL provisions; expecting
10% CAGR in earnings over FY10-12e
 Earnings are most sensitive to improving growth, margins, asset quality. Given its discount to peers, it offers promising rerating prospects
 Reiterate OW(V) with target price of INR534, as it trades at discount to peers at 5.5x FY11 EPS and 1.2x FY11 Book
PNB 1,226 OW(V)  Healthy earnings’ outlook as it is well positioned to deliver growth, high margins along with healthy asset quality; expecting 29% CAGR in
earnings over FY10-12e. Amongst the highest ROA & ROE within our universe
 Stock has lagged vs. peers over last 3 months
 Reiterate OW(V) with target price of INR1,226, as it is least sensitive to changes in margins and NPL provisions along with stable top
management; trading at 6.2x FY11 EPS and 1.5x FY11 Book
SBI 2,169 UW(V)  Lowering EPS estimates for FY11 and FY12 by 16% and 6%, respectively, to factor in higher NPL provisions; expecting 25% CAGR in
earnings over FY10-12e, but mostly back-ended. Not an ideal play in the initial stages of an upcycle.
 Enjoys the highest multiple and the lowest ROE in our PSU coverage universe
 Downgrade to UW(V) with target price of INR2,169, as slower margin expansion and asset quality headwinds likely to be key impediments
to stock outperformance; trading at 13.3x FY11 EPS and 2x FY11 Book
Union 378 OW(V)  Best placed for growth given its low LDR of 70%, which it can leverage to deliver higher margins and earnings growth; expect 24.6%
CAGR in earnings growth over FY10-12e
 Reiterate OW(V) with a target price of INR378, as it is currently trading cheaper than peers at 6x FY11 EPS and 1.4x FY11 Book
Private sector
Axis 1,489 OW(V)  Axis is one of our Super 10 Stocks in the Asia region
 Well placed for growth with a large corporate loan book; continued leveraging of its well-established liability franchise will help deliver
margins above 3.5% and fee-income growth; low asset quality risks
 Reiterate OW (V) with a target price of INR 1,489 as it is well positioned to deliver higher earnings’ growth; expect 27.6% CAGR in
earnings growth over FY10-12e; trades at reasonable PE of 14.8x FY11 EPS. Click here to view latest report.
HDBK 2,313 OW  Earnings growth to remain robust driven by healthy loan book expansion, high margins above 4% and least asset quality concerns; vast
branch network of 1,725 branches to drive fee-income growth.
 Reiterate OW(V) with a target price of INR2,313; expect 31% CAGR in earnings over FY10-12e; trades at a PE of 21.6x FY11 EPS
 Click here to view latest report.
ICBK 1,180 OW(V)  Poised for growth after a structural turnaround of its balance sheet; CASA ratio at 42% and balanced growth in retail and corporate book to
help improve margins; strong branch network of over 2,500 branches and loan growth to be the underlying drivers for fee-income growth
 Reiterate OW(V) with target price of INR1,180; expect 23% CAGR in earnings over FY10-12e; trades at a PE of 21.6x FY11 EPS. Click
here to view latest report.
Source: HSBC
3
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10 June 2010
Uncertainties receding
 Despite global uncertainties, domestic growth remains robust
 Valuations near 5-year averages = more upside
 Near-term prefer private banks, but we also like PSU names
Summary quicker than PB multiples in a credit upcycle,

more so for PSU banks.
Despite the 15% run-up in public sector (PSU)
bank stock prices and 6% for private banks over Hence, we increase our target multiples for most
the last 3 months (based on our indices), we PSU banks and not private banks given lower
continue to see 22-28% upside for the majority of confidence levels reflected in lower multiples
bank stocks in our coverage universe. assumed earlier for PSU banks. Our PE multiples are
raised by up to 25% as greater clarity emerges
As visibility of earnings growth improves led by
supporting the credit upcycle, bringing most PSU
indications of higher loan growth, higher rates and
banks to par at 7-8.5x, except State Bank of India
improving asset quality, we expect the market to
(SBI) which is at a higher level of 12.4x. SBI has
recognise this by expanding PE multiples quicker
traditionally enjoyed a premium to peers on account
than PB as the credit cycle progresses upwards
of superior size in terms of market cap and liquidity
and focus shifts to credit and earnings growth
and historically enjoyed superior management vs.
surprises from asset quality risks. This is not yet
peers. (We use a combination of PE, PB, and
visible given greater uncertainty on the above-
EPM/DCF to value our target prices, more details of
mentioned factors (growth, rates and asset
which are available in the Valuation section.)
quality), but as this uncertainty recedes the
multiple expansion is likely to play out. PSU bank stocks have moved up 10-30% since
our upgrade report in Feb-10, while private banks
With a pickup in key economic indicators (PMI,
have remained flattish along with the Sensex.
industrial growth), tightening liquidity boding
Thus, in the near term we prefer private bank
well for pricing power and margins, and leading
stocks as they tend to outperform PSU banks in
indicators pointing to improving asset quality, we
the early stages of an upcycle given fewer
forecast earnings growth to accelerate over the
uncertainties and typically higher earnings growth
18% growth we saw in FY10. We forecast 24%
in the initial stages of the upcycle. Also, most of
EPS CAGR over FY10-12E with private banks at
them trade at discounts to their 5-year average
27% and PSUs at 23%. Our forecasts are based on
multiples, providing better entry points. However,
the hypothesis that a credit upcycle commencing
over a 12-month period, PSU banks hold out
this year will raise loan growth as well as margins
promise of almost similar upsides of 25-28% once
with a reduction in provisioning levels as asset
near-term hiccups (growth, rates, asset quality
quality improves with the economic upcycle.
uncertainties) are overcome.
Historically, banks have seen PE multiples expand
4
FIG
10 June 2010
Significant outperformance of Bank of Baroda We ran sensitivities across these parameters and
(BOB) vs. peers leads us to downgrade the stock found Punjab National Bank (PNB) to be least
to Neutral (V) from Overweight (V), mainly on sensitive and Canara Bank the most, implying the
relative valuations and not because of any change former to be a defensive play in case of a
to our estimates. We see an entry opportunity at weakening domestic and global economy and the
10% below current levels. latter stock a play on recovery.
For SBI, however, we see diminished earnings In terms of valuations we believe investors would
prospects vs. our earlier estimates led mainly by want to position themselves defensively in the near
higher provision estimates in addition to the stock term given global uncertainties and also partake in
moving up 16% over the last 3 months, leading us to any upside in the medium term as uncertainties
downgrade to Underweight (V) from Neutral (V). diminish. Thus, we would recommend a mix of PSU
and private bank stocks.
However, all the other banking stocks in our
universe remain Overweight (V) rated with PSU names like Union Bank, PNB and Canara offer
upsides in a narrow range of 25-28%, providing valuation support at under 6x prospective PE and
investors with a wide choice of larger, fairly 1.4x book whereas private banks, albeit more
liquid names to play the expected credit upcycle. expensive than PSUs are better positioned for
quicker growth in the early phases of the credit
Key risk factors clearly remain the trio of:
upcycle, e.g. Axis Bank, ICICI Bank, HDFC Bank.
1 loan growth
2 margins
3 asset quality
5
FIG
10 June 2010
Sensitivity analysis
 Keep an eye on loan growth, interest rates and asset quality
 Our base case is that they would improve hereon
 We ran sensitivities on these three factors – Canara is the most
leveraged, PNB the least
Receding uncertainties Last year’s lower base right up to Nov09 is likely

Economic indicators (e.g. industrial production to work in favour of higher loan growth along
and PMI) point to continued strong growth with a real increase in credit demand that we
prospects for credit, particularly in the busy expect from 2H onwards this year.
season starting Sep-10. Liquidity indicators signal Chart 2: Economic indicators (% y-o-y)
tightening which would support higher lending 25
growth as well as rates and hence margins at 20
banks, which is typical in the initial stages of a 15
credit upcycle. And finally, this recovery would 10
likely result in improving asset quality, some 5
0
signs of which are already visible.
1Q FY10 2Q FY10 3Q FY10 4Q FY10 1Q FY11E 2Q FY11E 3Q FY11E 4Q FY11E
-5
Loan growth Real GDP Inflation (period end)

Nominal GDP Industrial Production
System loan growth has been recovering,

Source: CEIC, HSBC
bottoming out at 10% last November and
currently at 18% as at end-May. Our economics team expects real GDP growth to
Chart 1: System loan and deposit growth - recovering accelerate in 2H this year, combined with
35% tightening liquidity and rising short rates. We
30% current base expect this to catalyse loan growth and encourage
25% corporates to draw down their unutilised
20%
sanctioned loans.
15%
10% The correlation of nominal GDP growth with loan
5%
growth is fairly robust.
Mar-08
Jul-08
Sep-08
Jan-09
Mar-09
Sep-09
Jan-10
Mar-10
Jan-08
Jul-09
May-08
Nov-08
May-09
Nov-09
Deposit growth Loan growth
Source: RBI, HSBC
6
FIG
10 June 2010
Chart 3: Nominal GDP growth vs System loan growth (% y-o-y) Chart 5: Private consumption growth, capital formation
25.0 40.0
% y-o-y
35.0 25
20.0
30.0 20
25.0
15.0 15
20.0
10.0
10
15.0
10.0
5
5.0
5.0 0
- - -5
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
-10
98 99 00 01 02 03 04 05 06 07 08 09 10
Nominal GDPgrowth System Loan Growth (RHS) Priv ate consumption grt. Capital formation
Source: CEIC, HSBC Source: CSO, HSBC
As lead indicators like PMI for goods and services While private consumption appears to be dull,
continue to exhibit upward bias and robust capital formation has grown more than 15%.
momentum, we expect loan growth to accelerate Fixed capital investment growth also shows a
to 25% by March 2011 and settle at 22% by remarkable correlation with bank loan growth,
March 2012. further cementing our view of the credit upcycle.
On a segmental basis, we saw incremental loan In fact, an associated chart below also shows the
demand in 4Q, mainly from the corporate segment correlation of fixed capital investment with banks’
which contributed 44% of the loan growth in our PLR, which is more significant from a trend
coverage universe, followed by retail and SME at perspective, rather than the absolute level of PLR,
22% each. On a sectoral basis, we see incremental and points towards rising lending yields for banks.
demand currently from infrastructure including
Chart 6: Capital formation vs. Loan growth
telecom.
% Yr % Yr
Chart 4: India PMI: Manufacturing & Services 20 35
index 15 30
70
25
10
20
60 5
15
0
50
10
-5 98 99 00 01 02 03 04 05 06 07 08 09 10 5
40 -10 0
06 07 08 09 10 Fix ed Cap. Inv . (LHS) Bank Lendg (RHS)
PMI Manufacturing PMI Services
Source: CSO, HSBC
Source: HSBC
7
FIG
10 June 2010
Chart 7: Fixed capital investment vs. PLR At the same time, we believe that deposit rate
% % hikes will come with a lag and typically impact
25 10 margins with a lag. Hence, we look for an average
20 11
22bps margin expansion in our universe of private
15
and PSU banks in FY11 followed by flattish
12 trends in FY12.
10
13
5 Asset quality
0 14 4QFY10 results saw initial signs of improvement
in the Gross NPL ratio as well as coverage ratio
-5 98 99 00 01 02 03 04 05 06 07 08 09 10 15
(computed).
Fix ed Cap. Inv . (LHS) PLR* (RHS)
Source: CSO, RBI, HSBC

Chart 9: PSU universe: Asset quality trends
65% 4.0%
3.5%
This feeds into our hypothesis of how liquidity 60%
3.0%
55% 2.5%
also impacts short rates in the system. 2.0%
50% 1.5%
Tightening liquidity 45%

1.0%
0.5%
40% 0.0%
As the excess liquidity in the system gets sucked out
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
Q3-09
Q1-10
Q3-10
by telecom players drawing down loans for 3G
payments and corporate advance tax payments, we Cov erage ratio (LHS) Gross NPL ratio Net NPL ratio
expect short rates to start moving up. Subsequently, Source: Company data, HSBC
we do not see a return to excess liquidity for too

long, leading us to believe that higher short rates will This tallies with expert views from other sources,
be here to stay, particularly as credit growth sucks including credit rating agencies which see
out further liquidity from 2H. incrementally lower pressure from stressed sectors
like gems & jewellery and textiles. However, the
Chart 8: Inverse correlation - System liquidity vs. 6-mth CP rates
commercial real estate space continues to look
30,000 -
25,000 2
stressed. With the ongoing economic recovery, we
20,000 4 do expect funding pressures to alleviate for many of
15,000
10,000
6 these stressed sectors, resulting in lower leverage.
8
5,000 However, they continue to be plagued by external
10
-
12
demand pressures and uncertainties for exporters.
(5,000)
(10,000) 14
(15,000) 16
Incremental additions to restructured loans are
likely to fall off as are slippages in the
Sep-06
Sep-05
Jan-06
Jan-07
Sep-07
Jan-08
Sep-08
Jan-09
Sep-09
Jan-10
May-07
May-10
May-05
May-06
May-08
May-09
restructured portfolio, especially of PSU banks,

RSPORRPO INDEX (INR bn) 6M CP % (RHS, inverse scale)
except in a couple of cases. Thus, banks with
Source: Bloomberg, HSBC
lower than 70% coverage ratios are likely to face
relatively more pressure than others.
Our economics team led by Fred Neumann is
looking for 125bps of policy rate hikes in FY11, Also, running a sensitivity analysis on higher
leading us to believe that Indian banks will see a slippages (up to 7% additional slippage over existing
resumption of pricing power on their lending levels) reveals a maximum impact of 12% on FY11e
books, typical in the first year of a credit upcycle. earnings – not significantly worrying.
8
FIG
10 June 2010
Chart 10: Restructured loans to total loans (%) Our conclusions are as follows:
7.0
6.0
1 A 300bps change in FY11 loan growth has
5.0 minimal impact of about 2% on PSU bank
4.0 earnings and 30-40bps on ROE.
3.0
2 A 30bps change in gross profit margins
2.0
1.0
impacts earnings by 8-10% with Canara the
-
most impacted and PNB the least. Also, ROE
Dec-09
Mar-09
Jun-09
Sep-09
Mar-10
is impacted by 150-250 bps.

BOB Canara PNB SBI
Union Axis HDFC Bank ICICI Bank
3 A 30bps change in the credit cost/loans ratio
impacts earnings by 8-15%, with PNB the
Table 3: Slippage in restructured loan book, as at Mar-10
least impacted and Canara the most. ROE is
impacted by 180-300bps.
INRbn Restructured % of gross Slippages % Slippages %
book loans
Clearly, provisioning and margins impact
Union 50 4.2 4.8 9.7
SBI 268 4.2 25.8 9.6 earnings more than loan growth changes.
BOB 51 2.9 4.2 8.2
Accordingly, assuming our base case scenario of
Canara 76 4.5 5.1 6.7
PNB 121 6.5 7.8 6.4 improvement in these parameters it appears that
Source: Company data, HSBC Canara is best placed to leverage off this
improvement. Next, we look at valuations.
Sensitivity analysis
While our base case is one of a recovery across
these three parameters – GDP growth, margins
and asset quality – we believe it is worthwhile to
run sensitivities of earnings and profitability to
these factors, particularly for FY11 which is the
year of an inflection in the credit cycle.
Table 4: Sensitivity analysis of earnings and profitability to changes in loan growth, margins and provisioning, FY11e
100 bps change in FY11 loan growth BOB Canara PNB SBI Union
EPS 0.7% 0.7% 0.7% 0.6% 0.7%
BVPS 0.1% 0.1% 0.1% 0.1% 0.1%
RoE 0.14% 0.14% 0.16% 0.08% 0.15%
Tier-I CAR 0.06% 0.06% 0.06% 0.07% 0.05%
10bps change in FY11 margins BOB Canara PNB SBI Union

EPS 3.5% 4.5% 2.6% 3.3% 3.5%
BVPS 0.6% 0.8% 0.5% 0.4% 0.8%
RoE 0.75% 0.94% 0.64% 0.49% 0.83%
Tier-I CAR 0.06% 0.06% 0.05% 0.04% 0.06%
10bps change in FY11 LLP/Loans BOB Canara PNB SBI Union

EPS 3.8% 4.7% 2.7% 4.2% 3.4%
BVPS 0.7% 0.8% 0.6% 0.5% 0.7%
RoE 0.82% 0.98% 0.66% 0.61% 0.80%
Tier-I CAR 0.06% 0.07% 0.05% 0.05% 0.06%
Source: HSBC estimates
9
FIG
10 June 2010
Affordable valuations
 PE rerating likely above 5-yr average as loan growth accelerates
 But SBI, BOB shares have run up and appear overvalued
 Prefer private banks near term, PSU banks over 12 months
Recent stock performance Chart 12: PB valuations - PSU and Private banks
6.0
Over the last 12 months, both PSU and private bank
5.0
stocks in our index have gained 32% vs. the Sensex 4.0
gaining just 13%. But over the last 3 months, the 3.0
2.0
PSU stocks have taken the lead, outperforming their
1.0
private bank peers by about 10%. -
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-10
Mar-09
Chart 11: PSU vs. Private banks - Relative stock performance
140
Rolling P/B - PSU Rolling P/B - Pvt 5yr avg PB PSU 5yr avg PB Pvt
130
120
Source: Bloomberg, Company data, HSBC
110
100
90
80 Chart 13: PE valuations - PSU and Private banks
70
50
60
50 40
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
30
20
Relativ e PSU Index Relative Pvt Index
10
-
Source: Bloomberg, HSBC
(10)
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
However, valuations for most names are not

stretched and trade at or below 5-year averages, Rolling P/E - PSU Rolling P/E - Pvt 5yr avg PE PSU 5yr avg PE Pvt
barring a few (please refer to individual company

sections to view each stock’s chart).
Clearly, if loan growth accelerates to 25% this
year vs. 17% last year, we expect a PE rerating
across most names as well as earnings upgrades
resulting in significant stock appreciation.
10
FIG
10 June 2010
Historically, we have seen PE multiples expand be better economic growth proxies in the initial
quicker than PB multiples during a credit upcycle stages of a credit upcycle.
and vice versa (please refer to our sector note on
Table 5: Stock rating and potential return
19-Feb-10, Indian Banks: PSU Banks: Potential
Stock Mkt price Rating Target Potential
to rerate). (8-June-10) price return
BOB 734 Neutral(V) 789 10%
Chart 14: PSU banks: PE/PB vs. loan growth
Canara 426 Overweight(V) 534 28%
7.00 35% PNB 1,004 Overweight(V) 1,226 25%
30% SBI 2,284 Underweight(V) 2,169 -4%
6.50 Union 306 Overweight(V) 378 25%
25%
6.00 20% Axis 1,226 Overweight(V) 1,489 22%

15% HDBK 1,863 Overweight(V) 2,313 25%
5.50 ICBK 960 Overweight(V) 1,180 24%
10%
5.00 5% Source: Bloomberg, Company data, HSBC

Oct-03
Dec-07
Jan-01
Jun-02
Mar-05
Jul-06
Apr-09
We continue to set our target prices using a

PSU - PE/PB Loan grow th (RHS-inv erse)
weighted average combination of EPM, PE and
PB methodologies. We assign a 75% weight to the
PE, 15% to PB and 10% to the EPM component.
In past upcycles, PE multiples have rerated to well
The three-stage EPM uses explicit forecasts until
above 5-year averages as well as current multiples.
FY12, followed by 10 years of semi-explicit
Keeping in mind our estimate of 25% loan growth
forecasts. The final stage of 12 years (fade period)
this year, we do expect many of these PSU banks to
assumes convergence of ROE and COE. We have
rerate to their second highest multiple (as we believe
not changed assumptions for our EPM while
peak multiples may not be sustainable).
changes to our PE and PB are tabled below.
Other factors supporting this rerating hypothesis
Table 6: Summary of target PE and target PB changes
include the shareholding pattern in PSU banks
New PE Old PE Chg New PB Old PB Chg
which have seen lower FII holdings over the last 5
BOB 8.6 8.0 8% 1.2 1.2 0%
years, leaving enough room for incremental Union 7.5 6.1 23% 1.3 1.3 0%
Canara 7.0 5.6 25% 1.2 1.2 0%
buying once sentiment improves (except in PNB). PNB 7.5 7.5 0% 1.6 1.3 23%
Additionally, domestic institutional holders are HDBK 27.0 27.0 0% 4.0 4.0 0%
ICBK 25.0 25.0 0% 2.4 2.4 0%
increasingly becoming believers in the rerating SBI 12.4 10.5 18% 1.8 1.6 13%
Axis 20.0 20.0 0% 2.3 2.3 0%
story, at least cyclically if not structurally, given
their higher ROEs and less frequent capital
raisings vs. private banks.
We are generally above mean consensus earnings
Upsides for our OW(V) rated stocks are in a with a few exceptions as we maintain our view
narrow range of 22-28% across both PSU and that margins and growth are likely to surprise on
private banks. While PSU bank multiples do offer the upside in the ongoing credit cycle.
valuation support in case of a market correction,
they remain more vulnerable in the near term to
worsening asset quality and slower growth. This
is why we prefer private banks front-ended and
would buy PSU banks from a 12 month
perspective, particularly as private banks tend to
11
FIG
10 June 2010
Table 7: Valuation and risk factors

PE multiple PE-based PB multiple PB-based TP DCF value Weighted TP Upside risks Downside risks
TP (INR)
Weight 75% 15% 10%
Public sector banks
BOB 8.6 866 1.2 561 551 789 Better than expected loan Worse asset quality, slower economic
growth & asset quality recovery
CNBK 7.0 556 1.2 455 486 534 --- Slippages in restructured book may dampen
earnings given low coverage
PNBK 7.5 1,275 1.6 1,099 1,050 1,226 --- Higher slippages in restructured book
SBI 12.4 2,243 1.8 2,171 1,606 2,169 Higher loan growth or margins, ---
lower credit and opex costs
UNBK 7.5 402 1.3 297 320 378 --- Slippages in restructured book, low Tier-I
may constrain growth
Private sector banks
AXSB 20.0 1,689 2.3 1,075 615 1,489 --- Significantly worse asset quality, higher cost
of funds
HDBK 27.0 2,434 4.0 2,232 1,528 2,313 --- Lower loan growth, higher credit costs
ICBK 25.0 1,223 2.4 1,223 744 1,180 --- Worse asset quality, slower economic recovery
Table 8: Summary of estimate changes

________Rating________ __ Target price (INR)____ __________ EPS (INR)___________ _____ Target PE _______ ______Target PB_______
New Old New Old % FY11e % FY12e % New Old % New Old %
change change change change change
Public sector
BOB Neutral(V) Overweight(V) 789 689 14% 97.6 4.1% 116.2 -4.3% 8.6 8.0 7.5% 1.2 1.2 0.0%
Canara Overweight(V) Overweight(V) 534 534 0% 77.5 -21.7% 89.3 -25.8% 7.0 5.6 25.0% 1.2 1.2 0.0%
PNB Overweight(V) Overweight(V) 1,226 1,163 5% 162.9 -5.0% 205.1 -5.1% 7.5 7.5 0.0% 1.6 1.3 23.1%
SBI Underweight(V) Neutral(V) 2,169 2,033 7% 172.0 -16.2% 225.7 -6.2% 12.4 10.5 18.1% 1.8 1.6 12.5%
Union Overweight(V) Overweight(V) 378 302 25% 51.6 0.5% 63.8 -5.5% 7.5 6.1 23.0% 1.3 1.3 0.0%
Private sector
Axis Overweight(V) Overweight(V) 1,489 1,489 0% 82.9 -0.6% 101.0 -3.3% 20.0 20.0 0.0% 2.3 2.3 0.0%
HDBK Overweight Overweight 2,313 2,313 0% 86.1 0.3% 110.3 3.1% 27.0 27.0 0.0% 4.0 4.0 0.0%
ICBK Overweight(V) Overweight(V) 1,180 1,180 0% 44.7 -0.5% 54.8 -2.6% 25.0 25.0 0.0% 2.4 2.4 0.0%
Source: HSBC
Table 9: Consensus vs HSBC estimates

Rating spread Rating HSBC/Consensus Tgt Price __HSBC / Consensus EPS___ ____ HSBC / Consensus BPS _____
Consensus (OW, N, UW) HSBC FY11e FY12e FY11e FY12e
Public sector banks
BOB 38, 7, 0 N(V) 27% 8% 7% -1% 0%
CNBK 13, 6, 5 OW(V) 29% 4% -2% 1% -1%
PNBK 32, 9, 4 OW(V) 22% 19% 21% 4% 7%
SBI 17, 13, 14 UW(V) -1% 0% 6% 6% 4%
UNBK 26, 13, 7 OW(V) 32% 12% 13% 2% 5%
Private sector banks
AXSB 36, 10, 6 OW(V) 28% 11% 6% 1% 1%
HDBK 24, 18, 7 OW 22% 1% 0% 2% 3%
ICBK 28, 10, 7 OW(V) 27% 1% -3% 3% 3%
Source: Company data, HSBC, Bloomberg
12
FIG
10 June 2010
PSU bank profiles
13
FIG
10 June 2010
Bank of Baroda (BOB)

 Downgrade to Neutral (V) with a revised target price of INR789,
12-mth potential return of 10%
 Currently trading at premium to peers at 7.5x FY11e EPS and
1.6x FY11e book, limited scope for rerating
 Earnings less sensitive to incremental slippages and margins than
peers; stock entry point at INR660
Sensitivity analysis: In the pessimistic scenario BoB: Restructured book sensitivity analysis, FY11e
of incremental slippage from restructured book at Current slippage 8.2% 8.2% 8.2%
Increase in slippage 2.0% 4.0% 7.0%
7%, while gross NPL ratio increases by 16 bps to Optimistic Base Pessimistic
1.58%, impact on PAT is low at ~7% compared to Gross NPL (%) 1.46 1.51 1.58
Impact on PAT (%) 2 4 7
peers. BoB appears to be a more defensive bet in a Impact on ROA (%) 0.02 0.05 0.08
Impact on Tier 1 (%) 0.06 0.12 0.21
bullish scenario; upside to earnings growth seems
Source: HSBC
limited.
Performance and valuations: The recent BoB: Sensitivity analysis
outperformance already seems to be factoring in 100 bps change in FY11 loan growth
EPS 0.7%
higher loan book growth and margins for FY11. BVPS 0.1%
Besides, BoB has performed better than peer RoE 0.14%
Tier-I CAR 0.06%
banks on the asset quality front, which is already 10bps change in FY11 margins
EPS 3.5%
reflecting in its premium valuations; at 1.6x FY11 BVPS 0.6%
book, valuation upside looks limited. RoE 0.75%
Tier-I CAR 0.06%
10bps change in FY11 LLP/Loans
Earnings outlook: 18% earnings CAGR over EPS 3.8%
FY10-12e based on above-industry loan growth BVPS 0.7%
RoE 0.82%
and better earnings profile Tier-I CAR 0.06%
Source: HSBC
Key risks: (1) Asset quality has held out better
than peers, but higher than expected slippages
from the restructured book could dampen core
earnings growth; (2) lower than expected loan
growth due to macro uncertainties could result in
downside risk to earnings.
14
FIG
10 June 2010
Financials & valuation Bank of Baroda – BOB IN – Neutral (V); Target price INR789
Year to 3/2009a 3/2010e 3/2011e 3/2012e Year to 3/2009a 3/2010e 3/2011e 3/2012e
P&L summary (INRm) Growth (y-o-y %)
Net Interest Income 51,234 59,395 80,984 99,353 Net interest income 31.0 15.9 36.3 22.7
Non-interest Income 27,577 27,249 30,727 36,337 Non-interest income 34.5 (1.2) 12.8 18.3
Net fees/commission 7,455 8,361 9,997 11,562 Operating expense 21.9 6.6 17.7 14.4
Trading profits 9,324 6,779 5,922 7,596 PPOP 42.1 12.7 37.7 26.2
Other 10,798 12,109 14,808 17,179 Provisions 17.1 (36.0) 157.6 19.9
Total Operating income 78,811 86,644 111,711 135,690 PBT 51.5 26.8 20.3 28.2
Operating expense 35,761 38,106 44,862 51,311 PAT 55.1 37.3 16.7 19.0
Staff costs 23,481 25,021 29,813 34,284
Other oper expense 12,279 13,085 15,050 17,027 Customer loans (net) 34.9 21.6 24.0 22.0
PPOP 43,050 48,538 66,848 84,379 Total Assets 26.6 22.4 18.2 21.7
Provisions 9,621 6,158 15,860 19,012 RWA 17.2 16.5 14.7 28.2
Bad debt 2,686 9,555 11,884 14,605 Customer deposits 26.5 25.2 20.5 22.3
Other 6,935 (3,397) 3,976 4,408 Ratios (%)
Other non-oper profit(loss)
HSBC PBT 33,429 42,381 50,988 65,367 NIM 2.62 2.43 2.75 2.80
Exceptionals - - - - Gross yield 7.73 6.83 7.28 7.45
Profit-before tax 33,429 42,381 50,988 65,367 Cost of funds 5.40 4.63 4.78 4.94
Taxation 11,157 11,797 15,296 22,878 Spread 2.33 2.20 2.50 2.51
PAT 22,272 30,583 35,691 42,488
Minorities + pref dividend - - - - NPL/gross loans 1.27 1.36 1.42 1.41
Attributable profit 22,272 30,583 35,691 42,488 Credit cost 0.2 0.6 0.6 0.6
HSBC attributable profit 22,272 30,583 35,691 42,488 Coverage 43.9 75.3 73.1 73.9
NPL/RWA 1.4 1.6 1.8 1.7
Balance sheet summary (INRm) Provision/RWA 0.6 1.2 1.3 1.2
Total assets 2,274,067 2,783,167 3,290,202 4,005,205 Net write-off/RWA - - - -
Customer loans (net) 1,439,859 1,750,353 2,170,146 2,647,469 NPL/NTE 14.4 15.9 17.1 17.3
Investment assets 524,459 611,824 759,386 897,816 Net loans/total assets 63.3 62.9 66.0 66.1
Other assets 309,750 420,990 360,670 459,921 RWA/total assets 57.3 54.6 52.9 55.7
Total Liabilities 2,145,712 2,630,219 3,108,545 3,787,925 Loans/deposits 74.8 72.7 74.8 74.6
Customer deposits 1,923,970 2,408,558 2,901,907 3,549,579 Avg IEA/avg total assets 96.0 96.8 97.1 97.3
Debt securities issued 56,361 133,501 40,868 44,377 Avg IBL/avg total liab 96.4 97.4 97.5 96.8
Other liabilities 165,381 88,160 165,770 193,969
Total capital 128,355 151,064 181,657 217,281 Cost/income 45.4 44.0 40.2 37.8
Ordinary equity 128,355 151,064 181,657 217,281 Non-int income/total income 35.0 17.3 17.4 17.9
Minorities + other capital ROAA (including goodwill) 1.09 1.21 1.18 1.16
IEA (avg) 1,952,925 2,446,487 2,948,453 3,549,050 ROAE (including goodwill) 21.1 24.4 23.7 23.3
IBL (avg) 1,847,330 2,326,029 2,797,846 3,339,550 Return on avg tier 1 22.8 24.4 24.2 24.6
Leverage (x) 19.3 20.2 20.1 20.0
Capital adequacy (%)
Valuation data
RWA (INRm) 1,303,249 1,518,310 1,741,444 2,232,241
Core tier 1 8.5% 8.2% 8.0% 7.8% PE (diluted EPS) 12.0 8.8 7.5 6.3
Total tier 1 8.5% 9.2% 8.9% 8.5% P/PPOP 6.2 5.5 4.0 3.2
Total capital 14.1% 14.4% 14.3% 13.4% PBVPS 2.4 2.0 1.6 1.3
P/NTE 2.4 2.0 1.6 1.3
Dividend yield (x) 1.4 2.0 2.3 2.5
Per share data (INR)
P/Deposit 0.1 0.1 0.1 0.1
EPS reported (fully diluted) 60.9 83.7 97.6 116.2 P/Asset 0.1 0.1 0.1 0.1
HSBC EPS (fully diluted) 60.9 83.7 97.6 116.2
*Based on HSBC EPS (diluted)
DPS 10.5 15.0 17.0 18.0
NAV 311.5 373.7 451.4 546.6 Price relative
NAV (including goodwill) 311.5 373.7 451.4 546.6
992 992
ROAA deconstruction 892 892
792 792
Net interest income 2.52 2.35 2.67 2.72 692 692
Total interest income 7.42 6.60 7.07 7.24 592 592
Total interest expense 4.90 4.25 4.40 4.52 492 492
Net fees & commission 0.37 0.33 0.33 0.32 392 392
292 292
Other income 0.99 0.75 0.68 0.68 192 192
Operating income 3.87 3.43 3.68 3.72 92 92
Operating expenses 1.76 1.51 1.48 1.41 2008 2009 2010 2011
Staff costs 1.15 0.99 0.98 0.94 Bank of Baroda Rel to BOMBAY SE SENSITIVE INDEX
Other oper exp 0.60 0.52 0.50 0.47
PPOP 2.12 1.92 2.20 2.31 Source: HSBC
Provisions 0.47 0.24 0.52 0.52
Non-op items - - - -
PBT 1.64 1.68 1.68 1.79
Taxation 0.55 0.47 0.50 0.63
PAT 1.09 1.21 1.18 1.16
15
FIG
10 June 2010
BoB: PE/PB vs system loan growth
10x 40
35
9x
30
8x
25
7x 20
15
6x
10
5x
5
4x -
Mar-01
Mar-97
Mar-98
Mar-99
Mar-00
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
PE/PB Sy stem Loan gr (%) RHS
BoB: Rolling PE BoB: Rolling PB

12.0x 1.8x
1.6x
10.0x
1.4x
8.0x 1.2x
1.0x
6.0x
0.8x
4.0x 0.6x
2.0x 0.4x
0.2x
0.0x 0.0x
Mar-97
Mar-99
Mar-01
Mar-03
Mar-05
Mar-07
Mar-09
Mar-97
Mar-99
Mar-01
Mar-03
Mar-05
Mar-07
Mar-09
Rolling P/E Av erage 5 y ear

Rolling P/B Av erage 5 y ear
Source: Company data, HSBC Source: Company data, HSBC
16
FIG
10 June 2010
BoB: Old vs new estimates

INRm FY11e (new) Change FY12e (new) Change
Total Interest Income 214,646 -5.1% 264,275 -11.9%
Interest Expenses 133,662 -8.0% 164,922 -15.9%
Net Interest Income (NII) 80,984 0.1% 99,353 -4.3%
P/(L) on sale of Investments 5,485 -27.6% 7,043 -24.8%
P/(L) on Exchange Transactions 6,077 1.1% 7,467 -0.7%
Fee & Other Income 19,165 3.6% 21,827 -2.1%
Non-interest income ex-treasury 25,242 3.0% 29,294 -1.7%
Total Non-Interest Income 30,727 -4.2% 36,337 -7.2%
Total Income 111,711 -1.2% 135,690 -5.1%
Operating Expenses 44,862 -3.1% 51,311 -5.5%
Pre-provisioning Profits 66,848 0.2% 84,379 -4.9%
Core PPP 61,363 3.7% 77,336 -2.5%
Provisions for NPAs 11,884 -2.1% 14,605 -3.8%
Provisions for Std. Assets 1,496 -11.5% 1,703 -12.9%
Provisions on Investments 1,500 -48.7% 1,500 -26.7%
Other Provisions 980 1,204
Total Provisions 15,860 -10.7% 19,012 -7.0%
PBT 50,988 4.1% 65,367 -4.3%
Tax 15,296 4.1% 22,878 -4.3%
PAT 35,691 4.1% 42,488 -4.3%
Balance Sheet
Deposits 2,901,907 -0.2% 3,549,579 -1.2%
Net Advances 2,170,146 -3.0% 2,647,469 -4.7%
Total Assets 3,290,202 -2.5% 4,005,205 -3.9%
Net Interest Margin 2.73% 0.00% 2.78% -0.06%

Book Value 451.41 -1.04% 546.58 -2.40%
EPS 97.64 4.14% 116.24 -4.27%
ROA 1.18% 0.06% 1.16% -0.01%
ROE 23.7% 1.15% 23.3% -0.60%
Tax rate 30.0% 0.00% 35.0% 0.00%

Cost Income 40.2% -0.80% 37.8% -0.16%
Core Cost Income 42.2% -1.67% 39.9% -0.75%
17
FIG
10 June 2010
BoB: Earnings outlook (% YoY)

FY11e FY12e
Income Statement
Interest income 29% 23%
Interest expense 24% 23%
Net interest income 36% 23%
Other income - ex treasury 17% 16%
Treasury gain -14% 28%
Total other income 9% 18%
Operating income 28% 21%
Core operating income 31% 21%
Operating expense 18% 14%
Operating profit 35% 26%
Core operating profit 43% 26%
Loan loss provisions 24% 23%
Other provisions 254% 11%
Total provisions 127% 20%
Pre tax profit 20% 28%
Tax 30% 50%
Net profit 17% 19%
core PBT 26% 28%
Balance sheet
Advances 24% 22%
Deposits 20% 22%
Gross NPLs 29% 21%
Net NPLs 39% 18%
Total Assets 18% 22%
Valuation Under our research model, for stocks with a

We value BOB using a combination of economic volatility indicator, the Neutral band is 10ppt
profit model (EPM), PE, and PB methodologies. above and below the hurdle rate of 10.5% for
We assign a 75% weight to the PE, 15% to PB India. Our target price of INR789 (INR689
and 10% to the DCF component. The three-stage earlier) suggests a 10% potential return, including
EPM uses explicit forecasts until FY12e followed the dividend yield, which is within the Neutral
by 10 years of semi-explicit forecasts, where we band of 0.5-20.5% around the current share price.
assume 8% loan CAGR and a 20% dividend We therefore downgrade BOB from Overweight
payout. The final stage of 12 years (fade period) (V) to Neutral (V) rating.
assumes convergence of ROE and COE. We
assume a risk free rate of 8%, beta of 1, and
equity risk premium of 6%, translating into a cost
of equity of 14%. Our EPM value is INR551.
BoB: Valuation and risks summary (INR)

PE Weight 75% PB Weight 15% Weight 10% Weighted Upside Downside
multiple PE-based TP multiple PB-based TP DCF value target price risks risks
New 8.6 866 1.2 561 551 789 Better than expected loan Worse asset quality,
growth & asset quality slower economic recovery
Old 8.0 739 1.2 539 536 689
Source: HSBC
18
FIG
10 June 2010
Canara Bank (CNBK)

 Reiterate OW(V). Our target price remains INR534 after target PE
adjusted; 12-mth potential return of 28%
 Earnings revised down by 22% for FY11 and 26% for FY12 to
conservatively factor in higher provisions
 Trading at significant discount to peers at 5.5x FY11e EPS and
1.2x FY11e book; high potential to rerate in credit upcycle
Sensitivity analysis: CBK has one of the highest Canara: Restructured book sensitivity analysis, FY11e
sensitivities on PAT and RoA if delinquencies Current slippage 6.7% 6.7% 6.7%
from its restructured book increase meaningfully. Optimistic Base Pessimistic
In worst case of 7% additional slippages, the gross Gross NPL (%) 1.65 1.72 1.83
NPL ratio will increase by 25 bps to 1.83%, while Impact on ROA (%) 0.04 0.07 0.13
Impact on Tier 1 (%) 0.09 0.19 0.33
impact on PAT is also high at 11.7%. However,
Source: HSBC
CBK has highest scope to expand earnings and
RoE, if our hypothesis of a credit upcycle turns
Canara: Sensitivity analysis
out to be correct.
100 bps change in FY11 loan growth
EPS 0.7%
Performance and valuations: Imminent change BVPS 0.1%
in the top management and lower specific RoE 0.14%
Tier-I CAR 0.06%
provision coverage (30.5%) seems to have 10bps change in FY11 margins
EPS 4.5%
weighed down the stock’s performance in recent BVPS 0.8%
months. We expect the stock to do better once the RoE 0.94%
Tier-I CAR 0.06%
macro picture is clearer and uncertainties fade 10bps change in FY11 LLP/Loans
EPS 4.7%
after August. BVPS 0.8%
RoE 0.98%
Earnings outlook: 10% earnings CAGR over Tier-I CAR 0.07%
FY10-12e based on above-industry loan growth, Source: HSBC
but low margin expansion and higher provisions.
Key risks: (1) Asset delinquency risks remain as

CBK historically has had a higher slippage level
than peers; provision cost likely to remain at
higher levels; (2) CMD, Mr A C Mahajan is
retiring in July, which could create certain
uncertainties in the short term.
19
FIG
10 June 2010
Financials & valuation Canara Bank – CBK IN – Overweight (V) Target price INR534
Non-interest Income 23,112 28,578 31,280 36,380 Non-interest income 4.4 23.6 9.5 16.3
Other 9,599 11,578 15,124 17,789 Provisions 32.0 10.6 67.1 42.8
Staff costs 18,772 18,937 21,529 24,899
Provisions 13,914 15,390 25,722 36,723 RWA 7.7 13.0 30.4 29.3
Other 4,914 1,310 2,755 3,527 Ratios (%)
HSBC PBT 25,724 38,214 40,231 46,953 NIM 2.45 2.44 2.58 2.68
Taxation 5,000 8,000 8,449 10,330 Spread 2.13 2.22 2.38 2.46
PAT 20,724 30,214 31,783 36,624
NPL/RWA 1.7 1.8 1.8 1.7
Leverage (x) 21.8 21.4 21.1 21.3
Valuation data
RWA (INRm) 1,251,311 1,413,874 1,843,124 2,382,990
Total tier 1 8.0% 8.5% 7.9% 7.3% P/PPOP 4.4 3.3 2.6 2.1
P/NTE 1.7 1.4 1.2 1.0
Per share data (INR) Dividend yield (x) 1.9 2.6 3.2 3.8
P/Deposit 0.09 0.07 0.06 0.05
DPS 8.0 11.0 13.5 16.0
NAV 244.9 305.8 367.6 438.2
Price relative
548 548
448 448
198 198
Other income 0.84 0.88 0.78 0.74
148 148
Staff costs 0.94 0.79 0.74 0.71 Canara Bank Rel to BOMBAY SE SENSITIVE INDEX
Other oper exp 0.59 0.53 0.56 0.55
PPOP 1.98 2.22 2.27 2.37 Source: HSBC
Provisions 0.70 0.64 0.88 1.04
PBT 1.29 1.58 1.38 1.33
Taxation 0.25 0.33 0.29 0.29
PAT 1.04 1.25 1.09 1.04
20
FIG
10 June 2010
Canara: PE/PB vs system loan growth
6x 35
30
6x
25
5x 20
5x 15
10
4x
5
4x -
Dec-07
Dec-09
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-08
Canara: Rolling PE Canara: Rolling PB

9.0x 1.6x
8.0x 1.4x
7.0x 1.2x
6.0x
1.0x
5.0x
0.8x
4.0x
0.6x
3.0x
2.0x 0.4x
1.0x 0.2x
0.0x 0.0x
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Rolling P/E Av erage 5 y ear Rolling P/B Av erage 5 y ear
21
FIG
10 June 2010
Canara: Old vs new estimates

Net Interest Income (NII) 72,624 -3.6% 91,512 -7.3%
P/(L) on Exchange Transactions - -
Fee & Other Income 2,795 -33.3% 3,375 -30.0%
Non-interest income ex-treasury 22,041 0.1% 25,857 0.7%
Total Income 31,280 -4.8% 36,380 -5.0%
Pre-provisioning Profits 37,950 -1.0% 44,216 -0.1%
Core PPP 65,953 -5.6% 83,676 -9.8%
Provisions for NPAs 22,967 48.8% 33,196 40.0%
Provisions for Std. Assets 1,797 9.8% 1,927 3.4%
Provisions on Investments 768 -292.0% 1,364 -782.7%
Other Provisions 190 -0.7% 236 0.1%
Total Provisions 25,722 52.6% 36,723 43.4%
PBT 40,231 -24.1% 46,953 -30.1%
Tax 8,449 -32.0% 10,330 -41.8%
PAT 31,783 -21.7% 36,624 -25.8%
Balance Sheet
Deposits 2,873,581 0.2% 3,471,088 2.4%
Net Advances 2,116,368 -0.4% 2,602,161 0.5%
Total Assets 3,192,197 -5.1% 3,855,061 -2.8%
Net Interest Margin 2.57% 0.02% 2.67% -0.10%

Book Value 367.57 -7.88% 438.17 -12.70%
EPS 77.52 -21.71% 89.33 -25.85%
ROA 1.09% -0.24% 1.04% -0.31%
ROE 23.0% -4.70% 22.2% -4.57%
Tax rate 21.0% -2.44% 22.0% -4.44%

Cost Income 36.5% 1.10% 34.6% 2.27%
Core Cost Income 38.9% 1.20% 36.6% 2.37%
22
FIG
10 June 2010
Canara: Earnings outlook (% YoY)

FY11e FY12e
Income Statement
Tax 6% 22%
Net profit 5% 15%
Balance sheet
Advances 25% 23%
Deposits 22% 21%
Gross NPLs 30% 19%
Net NPLs 30% 13%
Valuation Under our research model, for Indian stocks with

a volatility indicator, the Neutral band is 10ppt
We value Canara Bank using a combination of
above and below the hurdle rate of 10.5%. Our
economic profit model (EPM), PE and PB
target price of INR534 suggests a 28% potential
methodologies. We assign a 75% weight to the
return, including the dividend yield, which is
PE, 15% to PB and 10% to the DCF component.
above the Neutral band of 0.5-20.5% around the
The three-stage EPM uses explicit forecasts until
current share price. We therefore reiterate our
FY12e followed by 10 years of semi-explicit
Overweight (V) rating.
forecasts, where we assume 8% loan CAGR and a
20% dividend payout. The final stage of 12 years
(fade period) assumes convergence of ROE and
COE. We assume a risk free rate of 8%, beta of 1,
and equity risk premium of 6%, translating into a
cost of equity of 14%. Our EPM value is INR486.
Canara: Valuation and risks summary (INR)

PE Weight 75% PB Weight 15% Weight 10% Weighted Downside
multiple PE-based TP multiple PB-based TP DCF value target price risks
New 7.0 556 1.2 455 486 534 Slippages in restructured book
may dampen earnings given low
coverage
Old 5.6 548 1.2 471 530 534
Source: HSBC
23
FIG
10 June 2010
Punjab National Bank

(PNBK)
 Reiterate OW(V) with a revised target price of INR1,226, 12-mth
potential return of 25%
 Currently trading at 6.2x FY11e EPS and 1.5x FY11e book value
 Continuing high margins, higher loan book growth to drive
performance; asset quality well established
Sensitivity analysis: Given its high restructured PNB: Restructured book sensitivity analysis, FY11e
book at over 6.5% of gross loans, higher slippage Current slippage 6.4% 6.4% 6.4%
will affect earnings; however, PNB appears to be Optimistic Base Pessimistic
better placed as earnings are likely to be less Gross NPL (%) 1.88 1.98 2.14
impacted by change in its already-high margins Impact on ROA (%) 0.05 0.10 0.18
Impact on Tier 1 (%) 0.11 0.22 0.39
and NPL provisions (high coverage at 81%). Our
Source: HSBC
sensitivity analysis shows 2.6% impact on EPS
for 10 bps change in margins and 2.72% impact
PNB: Sensitivity analysis
for 10 bps change in LLP.
EPS 0.7%
Performance and valuations: High margins, BVPS 0.1%
above-industry loan book growth, well provided RoE 0.16%
Tier-I CAR 0.06%
asset quality and a stable top management are the 10bps change in FY11 margins
EPS 2.6%
key drivers of its consistent outperformance. BVPS 0.5%
RoE 0.64%
Earnings outlook: We expect 28.7% earnings Tier-I CAR 0.05%
CAGR over FY10-12e based on above industry EPS 2.7%
loan growth, high margins at 3.5% and lower BVPS 0.6%
RoE 0.66%
provision requirements. Tier-I CAR 0.05%
Source: HSBC
Key risks: High restructured book at 6.5% of
gross loans poses incremental risks, should macro
risks resurface.
24
FIG
10 June 2010
Financials & valuation: Punjab National Bank – PNB IN – Overweight (V) ; Target price INR1,226
Staff costs 29,244 31,211 36,502 43,063
Provisions 9,774 14,215 15,572 15,797 RWA 20.3 23.7 14.4 25.3
Other 1,563 4,295 3,939 4,101 Ratios (%)
HSBC PBT 47,669 57,520 76,965 96,865 NIM 3.28 3.25 3.51 3.50
Exceptionals - 1,528 - - Gross yield 9.02 8.19 8.58 8.86
Taxation 16,760 19,994 25,601 32,204 Spread 2.95 2.96 3.23 3.26
PAT 30,909 39,054 51,365 64,661
NPL/RWA 1.8 1.7 1.9 1.8
Investment assets 633,852 775,939 942,987 1,124,992 Net loans/total assets 62.7 62.9 63.9 64.9
Leverage (x) 18.6 18.2 17.6 17.0
Valuation data
RWA (INRm) 1,536,739 1,901,639 2,175,091 2,724,782
Total tier 1 9.0% 9.2% 9.0% 9.1% P/PPOP 5.51 4.41 3.42 2.81
P/NTE 2.41 1.90 1.52 1.22
P/Deposit 0.15 0.13 0.10 0.08
DPS 20.0 25.3 28.0 33.0
NAV 416.7 529.0 659.1 825.6
Price relative
1371 1371
ROAA deconstruction
1171 1171
Total interest income 8.67 7.90 8.29 8.58
771 771
Total interest expense 5.51 4.76 4.90 5.19
Other income 0.69 0.47 0.36 0.33 371 371
Staff costs 1.31 1.15 1.11 1.08 Punjab National Bank Rel to BOMBAY SE SENSITIVE INDEX
Other oper exp 0.57 0.60 0.59 0.59
PPOP 2.58 2.64 2.81 2.83 Source: HSBC
Provisions 0.44 0.52 0.47 0.40
PBT 2.14 2.12 2.34 2.43
Taxation 0.75 0.74 0.78 0.81
PAT 1.39 1.38 1.56 1.62
25
FIG
10 June 2010
PNB: PE/PB vs system loan growth
7.0x 40
6.5x 35
6.0x 30
5.5x 25
5.0x 20
4.5x 15
4.0x 10
3.5x 5
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
PNB: Rolling PE PNB: Rolling PB

10x 2.0x
8x
1.5x
6x
1.0x
4x
0.5x
2x
0x 0.0x
Apr-06
Apr-07
Apr-08
Apr-02
Apr-03
Apr-04
Apr-05
Apr-09
Apr-10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
26
FIG
10 June 2010
PNB: Old vs new estimates

P/(L) on Exchange Transactions - -
Fee & Other Income 3,356 -6.0% 3,602 -12.3%
Non-interest income ex-treasury 27,064 8.4% 33,230 8.3%
Total Non-Interest Income 30,420 6.6% 36,832 5.9%
Total Income 36,866 0.3% 44,070 -1.2%
Pre-provisioning Profits 55,956 -0.4% 66,614 0.6%
Core PPP 92,537 -4.2% 112,663 -4.6%
Provisions for NPAs 11,633 2.6% 11,696 -1.9%
Provisions on Investments 1,783 -10.9% 1,599 6.6%
Other Provisions 418 -1.0% 514 -1.7%
PBT 76,965 -5.0% 96,865 -5.1%
Tax 25,601 -5.0% 32,204 -5.1%
PAT 51,365 -5.0% 64,661 -5.1%
Balance Sheet
Deposits 3,102,726 4.4% 3,784,543 5.8%
Net Advances 2,313,491 -1.3% 2,823,387 -2.0%
Total Assets 3,619,883 5.1% 4,352,510 5.6%
Net Interest Margin 3.48% -0.27% 3.48% -0.33%

Book Value 659.10 1.54% 825.56 -0.54%
EPS 162.91 -5.03% 205.08 -5.07%
ROA 1.56% -0.13% 1.62% -0.18%
ROE 27.4% -2.20% 27.6% -1.58%
Tax rate 33.3% 0.00% 33.2% 0.00%

Cost Income 37.7% 0.92% 37.2% 1.22%
Core Cost Income 39.4% 0.55% 38.7% 0.77%
27
FIG
10 June 2010
PNB: Earnings outlook (% YoY)

FY11e FY12e
Income Statement
Other provisions -8% 4%
Tax 28% 26%
Net profit 34% 26%
Balance sheet
Advances 24% 22%
Deposits 24% 22%
Gross NPLs 29% 17%
Net NPLs 37% 13%

We value PNB using a combination of economic
profit model (EPM), PE, and PB methodologies.
target price of INR1226 (INR1163 earlier)
We assign a 75% weight to the PE, 15% to PB
suggests a 25% potential return, including the
and 10% to the DCF component. We value PNBK
dividend yield, which is above the Neutral band of
using a combination of economic profit model
0.5-20.5% around the current share price. We
(EPM), PE, and PB methodologies. The three-
therefore reiterate our Overweight (V) rating.
stage EPM uses explicit forecasts until FY12e
followed by 10 years of semi-explicit forecasts,
where we assume 11% loan CAGR and a 20%
dividend payout. The final stage of 12 years (fade
period) assumes convergence of ROE and COE.
We assume a risk-free rate of 8%, beta of 1, and
of equity of 14%. Our EPM value is INR1,050.
PNB: Valuation and risks summary (INR)

New 7.5 1,275 1.6 1,099 1,050 1,226 Higher slippages in restructured book
Old 7.5 1,253 1.3 829 987 1,163
Source: HSBC
28
FIG
10 June 2010
State Bank of India (SBI)

 Downgrade to UW(V) from N(V) with a revised target price of
INR2,169 (from INR2,033), 12-mth potential loss of -4%
 Earnings revised down by 16% for FY11e and 6% for FY12e to
factor in higher provisions
 Trading at 13.4x FY11e EPS and 2x FY11e book; slower margin
expansion, asset quality headwinds are key barriers to upside
Sensitivity analysis: With a net stressed book at SBI: Restructured book sensitivity analysis, FY11e
5.9% of gross loans and higher slippages from the Current slippage 9.6% 9.6% 9.6%
restructured book at 9.6% in FY10, SBI’s Optimistic Base Pessimistic
earnings seem to be more susceptible to Gross NPL (%) 3.22 3.29 3.40
downside. In the pessimistic scenario of 7% Impact on ROA (%) 0.03 0.06 0.11
Impact on Tier 1 (%) 0.06 0.12 0.21
incremental slippage from restructured book, its
Source: HSBC
EPS could be impacted as much as 12.05%.
Similarly, earnings and RoE are more sensitive to
SBI: Sensitivity analysis
10 bps margin change and 10 bps LLP change
compared to other PSU banks. EPS 0.6%
BVPS 0.1%
Performance and valuations: Most expensive RoE 0.08%
Tier-I CAR 0.07%
PSU bank at 13.4x FY11e EPS. Slower margin 10bps change in FY11 margins
EPS 3.3%
expansion, high current LDR and higher BVPS 0.4%
provisions requirement to continue to play RoE 0.49%
Tier-I CAR 0.04%
negatively on the stock’s performance. 10bps change in FY11 LLP/Loans
EPS 4.2%
Earnings outlook: Expect 25% earnings CAGR BVPS 0.5%
RoE 0.61%
over FY10-12e with bulk of growth likely in FY12e. Tier-I CAR 0.05%
Source: HSBC
Key risks: (1) Higher loan growth and rising
margins with revival in macro fundamentals; (2)
asset quality deterioration peaking out sooner than
expected leading to lower credit costs; (3)
improvement in cost efficiencies.
29
FIG
10 June 2010
Financials & valuation: State Bank of India – SBIN IN – Underweight (V); Target price INR2,169
Total Operating income 335,639 386,396 474,944 571,598 PBT 35.8 (1.8) 20.1 30.9
Staff costs 97,473 127,547 150,235 173,599
Provisions 37,346 43,948 71,278 76,388 RWA (0.0) 11.8 3.9 13.9
Bad debt 24,750 51,478 63,994 68,773 Ratios (%)
Other 12,596 (7,530) 7,284 7,615
Other non-oper profit(loss) NIM 2.64 2.47 2.66 2.65
HSBC PBT 141,806 139,261 167,230 218,872 Gross yield 8.07 7.40 7.79 7.98
Exceptionals - - - - Cost of funds 5.83 5.25 5.32 5.45
Profit-before tax 141,806 139,261 167,230 218,872 Spread 2.24 2.14 2.46 2.53
Taxation 50,594 47,600 58,029 75,563
PAT 91,212 91,661 109,201 143,309 NPL/gross loans 2.8 3.05 3.16 3.23
Minorities + pref dividend - - - - Credit cost 0.5 0.9 0.9 0.8
Attributable profit 91,212 91,661 109,201 143,309 Coverage 38.72 44.4 50.7 54.9
HSBC attributable profit 91,212 91,661 109,201 143,309 NPL/RWA 2.0 2.3 2.8 3.0
Provision/RWA 0.8 1.0 1.4 1.6
Balance sheet summary (INRm) Net write-off/RWA - - - -
Total assets 9,644,321 10,534,140 12,647,105 15,034,884 NPL/NTE 26.9 29.6 33.0 35.1
Customer loans (net) 5,425,032 6,319,140 7,690,066 9,211,824 Net loans/total assets 56.3 60.0 60.8 61.3
Investment assets 2,759,540 2,857,900 3,312,057 3,776,631 RWA/total assets 80.0 81.9 70.9 67.9
Other assets 1,459,749 1,357,100 1,644,982 2,046,428 Loans/deposits 73.1 78.6 76.9 75.2
Total Liabilities 9,064,844 9,874,650 11,900,703 14,171,176 Avg IEA/avg total assets 93.7 95.2 95.0 94.8
Customer deposits 7,420,731 8,041,160 9,999,369 12,249,574 Avg IBL/avg total liab 93.2 95.1 97.4 98.3
Debt securities issued 537,137 1,030,120 1,080,930 1,131,308
Other liabilities 1,106,976 803,370 820,404 790,295 Cost/income 46.6 52.6 49.8 48.3
Total capital 579,477 659,490 746,402 863,708 Non-int income/total income 37.8 17.3 17.4 17.9
Ordinary equity 579,477 659,490 746,402 863,708 ROAA (including goodwill) 1.08 0.91 0.94 1.04
Minorities + other capital ROAE (including goodwill) 17.1 14.8 15.5 17.8
IEA (avg) 7,900,602 9,600,208 11,016,324 13,117,209
Return on avg tier 1 13.2 12.4 13.8 16.5
IBL (avg) 7,360,671 9,006,358 10,599,828 12,820,064
Leverage (x) 15.8 16.3 16.5 17.2
Valuation data
RWA (INRm) 7,719,190 8,632,432 8,965,938 10,208,320
Total tier 1 9.4% 9.5% 9.2% 9.0% P/PPOP 8.1 7.9 6.1 4.9
P/NTE 2.5 2.2 1.9 1.7
P/Deposit 0.20 0.18 0.14 0.12
DPS 29.0 29.1 30.0 35.0
NAV 912.7 1,038.6 1,175.4 1,360.2
Price relative
NAV (including goodwill) 912.7 1,038.6 1,175.4 1,360.2
3134 3134
ROAA deconstruction
2634 2634
Net interest income 2.48 2.16 2.53 2.54
Net fees and commissions 0.90 0.95 1.01 1.07
Other income 0.60 0.45 0.46 0.51 1134 1134
Operating expenses 1.86 1.86 1.95 2.08
2008 2009 2010 2011
Staff costs 1.16 1.18 1.28 1.40 State Bank of India Rel to BOMBAY SE SENSITIVE INDEX
Other oper exp 0.70 0.68 0.67 0.67
PPOP 2.13 1.69 2.06 2.04 Source: HSBC
Provisions 0.44 0.31 0.44 0.41
PBT 1.68 1.38 1.62 1.63
Taxation 0.60 0.48 0.56 0.56
PAT 1.08 0.90 1.06 1.07
30
FIG
10 June 2010
SBI: PE/PB vs system loan growth
10.0x 35
9.0x 30
25
8.0x
20
7.0x
15
6.0x
10
5.0x 5
4.0x -
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
SBI: Rolling PE SBI: Rolling PB
18x 2.7x
2.4x
15x
2.1x
12x 1.8x
1.5x
9x
1.2x
6x 0.9x
0.6x
3x
0.3x
0x 0.0x
Mar-96
Mar-98
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
Mar-96
Mar-00
Mar-04
Mar-06
Mar-08
Mar-10
Mar-00
Mar-98
Mar-02
31
FIG
10 June 2010
SBI: Old vs new estimates

INRm FY11e (New) Change FY12e (New) Change
Income Statement
Total Interest Income 857,669 -7.1% 1,046,572 -6.5%
P/(L) on sale of Investments 18,510 12.2% 21,266 3.2%
P/(L) on Exchange 24,121 -7.4% 32,529 -12.9%
Transactions
Fee & Other Income 138,897 0.5% 170,116 1.5%
Non-interest income ex- 163,018 -0.8% 202,645 -1.1%
treasury
Total Non-Interest Income 181,527 0.4% 223,911 -0.7%
Total Income 474,944 -3.4% 571,598 -2.9%
Pre-provisioning Profits 238,508 -5.5% 295,260 1.3%
Provisions for NPAs 63,994 44.7% 68,773 38.6%
Provisions on Investments 2,877 10.9% 2,427 64.6%
Other Provisions 1,401 1,690
Total Provisions 71,278 32.9% 76,388 30.7%
PBT 167,230 -15.9% 218,872 -6.1%
Tax 58,029 -15.2% 75,563 -6.1%
PAT 109,201 -16.2% 143,309 -6.2%
Balance Sheet
Deposits 9,999,369 -5.0% 12,249,574 -6.5%
Net Advances 7,690,066 -4.6% 9,211,824 -5.5%
Total Assets 12,647,105 -5.5% 15,034,884 -1.4%

Book Value 1,175.44 -1.82% 1,360.17 -3.03%
EPS 171.97 -16.25% 225.68 -6.17%
ROA 0.94% -0.12% 1.04% -0.03%
ROE 15.5% -2.93% 17.8% -0.70%
Tax rate 34.7% 0.27% 34.5% 0.02%

Cost Income 49.8% 1.11% 48.3% -2.13%
Core Cost Income 51.8% 1.44% 50.2% -2.09%
Source: HSBC, Company data
32
FIG
10 June 2010
SBI: Earnings outlook (YoY %)

FY11e FY12e
Tax 22% 30%
Net profit 19% 31%
Balance sheet
Advances 22% 20%
Deposits 24% 23%
CASA mix
Gross NPLs 26% 23%
Net NPLs 12% 12%

We value SBI using a combination of economic
profit model (EPM), PE, and PB methodologies.
target price of INR2,169 (INR2,033 earlier)
We assign a 75% weight to the PE, 15% to PB
suggests a -4% potential loss, including the
and 10% to the DCF component. The three-stage
dividend yield, which is below the Neutral band
EPM uses explicit forecasts until FY12e followed
of 0.5-20.5% around the current share price. We
by 10 years of semi-explicit forecasts, where we
therefore downgrade our rating to Underweight
assume 8% loan CAGR and a 20% dividend
(V) from Neutral (V).
payout. The final stage of 12 years (fade period)
assumes convergence of ROE and COE. We
assume a risk free rate of 8%, beta of 1, and
of equity of 14%. Our EPM value is INR1,606.
SBI: Valuation and risks summary (INR)

PE Weight 75% PB Weight 15% Weight 10% Weighted Upside
New 12.4 2,243 1.8 2,171 1,606 2,169 Higher loan growth or margins,
lower credit and opex costs
Old 10.5 2,106 1.6 1,893 1,696 2,033
33
FIG
10 June 2010
Union Bank (UNBK)

 Reiterate OW(V) with a revised target price of INR378 (was
INR302), 12-mth potential return of 25%
 Currently trading below peers at 6x FY11e EPS and 1.4x FY11e
book
 Leverage on its low LDR (70%) will be the key earnings driver
Sensitivity analysis: UBI would be one of our UBI: Restructured book sensitivity analysis, FY11e
preferred stocks to play in a credit upcycle as it could Current slippage 9.7% 9.7% 9.7%
deliver better RoE and earnings expansion with Optimistic Base Pessimistic
credit growth picking up and asset quality risks Gross NPL (%) 2.15 2.22 2.32
fading. Even slippages on restructured book could Impact on ROA (%) 0.03 0.06 0.11
Impact on Tier 1 (%) 0.07 0.15 0.26
result in lower earnings impact than for most peers.
Source: HSBC
Performance and valuations: One of the cheaper

PSU banks at 6x FY11e EPS. Rerating triggers UBI: Sensitivity analysis
would be a credit upswing in 2HFY11, healthy 100 bps change in FY11 loan growth
EPS 0.7%
loan book growth and margins. UBI is well BVPS 0.1%
provided on margins, entailing further upside. RoE 0.15%
Tier-I CAR 0.05%
10bps change in FY11 margins
Earnings outlook: We expect 24.6% earnings EPS 3.5%
BVPS 0.8%
CAGR over FY10-12e, led by higher growth loan RoE 0.83%
growth and margin expansion. Tier-I CAR 0.06%
EPS 3.4%
Key risks: (1) Restructured book at 4.1% of gross BVPS 0.7%
loans poses incremental risks; (2) lower Tier-I RoE 0.80%
Tier-I CAR 0.06%
capital could constrain balance sheet growth in the
Source: HSBC
near term.
34
FIG
10 June 2010
Financials & valuation: Union Bank of India – UNBK IN – Overweight (V); Target price INR378
Staff costs 11,519 13,545 15,866 18,518
Provisions 7,255 8,264 12,844 15,797 RWA 8.6 22.5 33.7 28.6
Other 1,790 1,274 2,633 3,316 Ratios (%)
HSBC PBT 23,566 28,329 38,347 47,369 NIM 2.80 2.44 2.77 2.81
Taxation 6,300 7,580 12,271 15,158 Spread 2.58 2.22 2.45 2.36
PAT 17,266 20,749 26,076 32,211
NPL/RWA 2.0 2.3 2.0 1.8
Customer loans (net) 965,342 1,193,150 1,492,640 1,838,080 NPL/NTE 22.0 25.6 24.7 23.0
Leverage (x) 22.5 22.5 22.2 21.6
Valuation data
RWA (INRm) 953,840 1,140,756 1,570,413 1,917,944
Total tier 1 8.2% 8.3% 7.5% 7.7% P/PPOP 5.03 4.24 3.03 2.46
P/NTE 2.20 1.77 1.40 1.11
P/Deposit 0.11 0.09 0.08 0.06
DPS 5.0 6.0 5.0 5.0
NAV 139.7 173.4 219.2 277.1
Price relative
414 414
Other income 0.82 0.61 0.49 0.45 114 114
Staff costs 0.81 0.76 0.72 0.69 Union Bank Of India Rel to BOMBAY SE SENSITIVE INDEX
Other oper exp 0.75 0.65 0.60 0.58
PPOP 2.16 2.05 2.33 2.34 Source: HSBC
Provisions 0.51 0.46 0.58 0.58
PBT 1.65 1.59 1.75 1.75
Taxation 0.44 0.43 0.56 0.56
PAT 1.21 1.17 1.19 1.19
35
FIG
10 June 2010
UBI: PE/PB vs system loan growth
7.0x 40
6.0x 35
5.0x 30
4.0x 25
3.0x 20
2.0x 15
1.0x 10
0.0x 5
Sep-02
Sep-03
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-04
P E /P B S y s te m L o a n g r ( % ) R H S
Source: Company data, HSBC, RBI, Datastream
UBI: Rolling PE UBI: Rolling PB

10x 1.8x
1.6x
8x 1.4x
1.2x
6x
1.0x
4x 0.8x
0.6x
2x 0.4x
0.2x
0x
0.0x
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Rolling P/E Average 5 year

Rolling P/B Av erage 5 y ear
Source: Company data, HSBC, Datastream Source: Company data, HSBC, Datastream
36
FIG
10 June 2010
UBI: Old vs. new estimates

INRm FY11e (New) Change FY12e (New) Change
P/(L) on Revaluation of Investments - -
P/(L) on Exchange Transactions 2,014 -52.5% 2,498 -56.1%
Fee & Other Income 14,715 13.2% 17,306 5.6%
Non-interest income ex-treasury 16,729 -3.0% 19,804 -10.3%
Total Income 80,199 -3.6% 97,464 -8.0%
Operating Expenses 29,008 1.8% 34,297 2.6%
Pre-provisioning Profits 51,191 -6.4% 63,167 -12.9%
Provisions for NPAs 10,211 -7.8% 12,482 -15.6%
Provisions for Std. Assets 864 -24.4% 1,192 -23.0%
Provisions on Investments 1,098 -70.1% 1,291 -56.1%
Other Provisions 671 833
PBT 38,347 0.5% 47,369 -9.6%
Tax 12,271 0.5% 15,158 -17.4%
PAT 26,076 0.5% 32,211 -5.5%
Balance Sheet
Deposits 2,057,273 -1.2% 2,468,525 -4.0%
Net Advances 1,492,640 4.4% 1,838,080 1.0%
Total Assets 2,441,547 0.0% 2,963,564 -1.6%

Book Value 219.15 1.5% 277.07 -0.2%
EPS 51.62 0.5% 63.77 -5.5%
ROA 1.19% 0.0% 1.19% -0.1%
ROE 26.3% -0.3% 25.7% -1.6%
Tax rate 32.0% 0.0% 32.0% -3.0%

Cost Income 36.2% 1.9% 35.2% 3.6%
Core Cost Income 38.5% 1.5% 37.1% 3.2%
37
FIG
10 June 2010
UBI: Earnings outlook (YoY %)

FY11e FY12e
Income Statement
Tax 62% 24%
Net profit 26% 24%
Balance sheet
Advances 25% 23%
Deposits 21% 20%
CASA mix
Gross NPLs 18% 14%
Net NPLs 18% 18%
Valuation
We value Union Bank using a combination of Under our research model, for stocks with a
economic profit model (EPM), PE, and PB volatility indicator, the Neutral band is 10ppt
methodologies. We assign a 75% weight to the above and below the hurdle rate of 10.5% for
PE, 15% to PB and 10% to the DCF component. India. Our target price of INR378 (INR302
The three-stage EPM uses explicit forecasts until earlier) suggests a 25% potential return, including
FY12e followed by 10 years of semi-explicit the dividend yield, which is above the Neutral
forecasts, where we assume 8% loan CAGR and a band of 0.5-20.5% around the current share price.
20% dividend payout. The final stage of 12 years We therefore reiterate our Overweight (V) rating.
(fade period) assumes convergence of ROE and
COE. We assume a risk free rate of 8%, beta of 1,
and equity risk premium of 6%, translating into a
cost of equity of 14%. Our EPM value is INR320.
UBI: Valuation & risks

New 7.5 402 1.3 297 320 378 Slippages in restructured book, low Tier-I
may constrain growth
Old 6.1 306 1.3 276 309 302
38
FIG
10 June 2010
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Sachin Sheth, Todd Dunivant and Tejas Mehta
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
39
FIG
10 June 2010
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities

As of 10 June 2010, the distribution of all ratings published is as follows:
Overweight (Buy) 51% (18% of these provided with Investment Banking Services)
Neutral (Hold) 36% (18% of these provided with Investment Banking Services)
Underweight (Sell) 13% (15% of these provided with Investment Banking Services)
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price Date Disclosure
AXIS BANK LTD AXBK.BO 1239.65 09-Jun-2010 1, 2, 4, 5, 7
BANK OF BARODA BOB.NS 730.10 09-Jun-2010 1, 2, 5, 6, 7, 11
CANARA BANK CNBK.BO 428.20 09-Jun-2010 2, 6, 7, 11
HDFC BANK HDBK.NS 1880.90 09-Jun-2010 2, 6, 7
ICICI BANK ICBK.NS 824.55 09-Jun-2010 1, 2, 4, 5, 6, 7, 11
PUNJAB NATIONAL BANK PNBK.BO 1020.00 09-Jun-2010 2, 6, 7
STATE BANK OF INDIA SBI.NS 2272.50 09-Jun-2010 2, 4, 6, 7
UNION BANK OF INDIA UNBK.BO 306.10 09-Jun-2010 2, 7
Source: HSBC
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 31 May 2010 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 April 2010, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
40
FIG
10 June 2010
Additional disclosures
4 This report is dated as at 10 June 2010.
5 All market data included in this report are dated as at close 08 June 2010, unless otherwise indicated in the report.
6 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
7 As of 31 May 2010, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities managed
by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 1% or more
of the total capital of the subject companies securities in the market for the following Company(ies) : AXIS BANK LTD ,
STATE BANK OF INDIA , ICICI BANK
41
FIG
10 June 2010
Disclaimer
* Legal entities as at 31 January 2010 Issuer of report
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Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) (India) Private Limited
Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf;
000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; Registered Office
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42
abc
Global Financial Institution Group
Research Team
Carlo Digrandi Insurance
Global Industry Head, FIG
+44 20 7991 6843 carlo.digrandi@hsbcib.com Europe
Kailesh Mistry
Banks Analyst, Head of European Insurance
+44 20 7991 6756 kailesh.mistry@hsbcib.com
Europe
Robin Down Dhruv Gahlaut
Analyst, Global Sector Head, Banks +44 207 991 6728 dhruv.gahlaut@hsbcib.com
+44 20 7991 6926 robin.down@hsbcib.com
Thomas Fossard
Monica Patrascu +33 1 56 52 43 40 thomas.fossard@hsbc.com
+44 20 7991 6828 monica.patrascu@hsbcib.com
Asia
Peter Toeman James Garner
+44 20 7991 6791 peter.toeman@hsbcib.com Analyst, Head of Asian Insurance
+852 6394 7866 james.e.garner@hsbc.com.hk
Dimitris Haralabopoulos
+30 210 696 5214 dimitris.haralabopoulos@hsbc.com Seewon Oh
+852 2822 3053 seewon.oh@hsbc.com.hk
Johannes Thormann
Global Head of Exchanges Real Estate
+49 211 910 3017 johannes.thormann@hsbc.de
Europe
Aybek Islamov John Fraser-Andrews
+44 20 7992 3624 aybek.islamov@hsbcib.com Head of Real Estate Equity Research, Europe
+44 20 7991 6732 john.fraser-andrews@hsbcib.com
Carlo Mareels
+44 20 7991 6722 carlo.mareels@hsbcib.com Nic Lyle
+44 20 7992 1823 nicolaslyle@hsbcib.com
Rob Murphy
+44 20 7991 6748 robert.murphy@hsbcib.com Thomas Martin
+49 211 910 3276 thomas.martin@hsbc.de
CEEMEA
Levent Bayar Stéphanie Dossmann
+90 212 376 4617 leventbayar@hsbc.com.tr +33 1 56 52 43 01 stephanie.dossmann@hsbc.com
Latin America Asia
Victor Galliano Ashutosh Narkar
+1 212 525 5253 victor.galliano@us.hsbc.com +91 22 2268 1474 ashutoshnarkar@hsbc.co.in
Mariel Santiago Louisa Fok
Financials +852 2996 6629 louisawmfok@hsbc.com.hk
+1 212 525 5418 mariel.x.santiago@us.hsbc.com
Michelle Kwok
Asia +852 2996 6918 michellekwok@hsbc.com.hk
Todd Dunivant
Analyst, Head of Banks, Asia-Pacific Alvin Wong
+852 2996 6599 tdunivant@hsbc.com.hk +852 2996 6621 alvincmwong@hsbc.com.hk
York Pun Credit Research

+852 2822 4396 yorkkypun@hsbc.com.hk
Banks and Insurance
Kathy Park
Asia
+82 2 3706 8755 kathypark@kr.hsbc.com
Dilip Shahani
Sachin Sheth Analyst, Head of Global Research, Asia-Pacific
+91 22 2268 1224 sachinsheth@hsbc.co.in +852 2822 4520 dilipshahani@hsbc.com.hk
Tejas Mehta Devendran Mahendran
+91 22 2268 1243 tejasmehta@hsbc.co.in Sovereigns and Financial Institutions
+852 2822 4521 devendran@hsbc.com.hk
Katherine Lei
+852 2996 6926 katherinelllei@hsbc.com.hk North America
Van Hesser
Sarah Hung Global Head of Credit Research, US Banks
+886 2 8725 6026 sarahychung@hsbc.com.tw +1 212 525 3114 van.hesser@us.hsbc.com
Specialist Sales Monica A Parekh
Associate
Nigel Grinyer +1 212 525 4117 monica.a.parekh@us.hsbc.com
+44 20 7991 5386 nigel.grinyer@hsbcib.com
Matthew Charlton R. Scott Frost
Insurance
+44 20 7991 5392 matt.charlton@hsbcib.com
+1 212 525 2382 scott.frost@us.hsbc.com
James Rogers
+44 20 7991 5077 james1.rogers@hsbcib.com
Martin Williams
+44 20 7991 5381 martin.williams@hsbcib.com
Juergen Werner
+49 211 910 4461 juergen.werner@hsbc.de

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FIG

India Commercial Banks

Indian Banks  Improving clarity on growth, rates and

Three uncertainties diminishing. Loan growth, direction of

Earnings sensitivity analysis on these three parameters

Todd Dunivant* Multiples increased. We increase target PE multiples by up

PSU bank profiles 13

Bank of Baroda (BOB) 14

Canara Bank (CNBK) 19

Punjab National Bank (PNBK) 24

State Bank of India (SBI) 29

Union Bank (UNBK) 34

Table 1: Valuation summary (INR/sh)

_______HSBC PE _______ ______ HSBC PB________

Table 2: India banks snapshot

Summary quicker than PB multiples in a credit upcycle,

Receding uncertainties Last year’s lower base right up to Nov09 is likely

growth as well as rates and hence margins at 20

banks, which is typical in the initial stages of a 15

credit upcycle. And finally, this recovery would 10

likely result in improving asset quality, some 5

Loan growth Real GDP Inflation (period end)

System loan growth has been recovering,

Deposit growth Loan growth

Source: RBI, HSBC

Source: CEIC, HSBC Source: CSO, HSBC

Source: CSO, RBI, HSBC

Tightening liquidity 45%

we do not see a return to excess liquidity for too

restructured portfolio, especially of PSU banks,

is impacted by 150-250 bps.

10bps change in FY11 margins BOB Canara PNB SBI Union

10bps change in FY11 LLP/Loans BOB Canara PNB SBI Union

However, valuations for most names are not

barring a few (please refer to individual company

6.00 20% Axis 1,226 Overweight(V) 1,489 22%

5.00 5% Source: Bloomberg, Company data, HSBC

We continue to set our target prices using a

Table 7: Valuation and risk factors

Table 8: Summary of estimate changes

Table 9: Consensus vs HSBC estimates

PSU bank profiles

Bank of Baroda (BOB)

Performance and valuations: The recent BoB: Sensitivity analysis

BoB: PE/PB vs system loan growth

Source: Company data, HSBC

BoB: Rolling PE BoB: Rolling PB

Rolling P/E Av erage 5 y ear

Source: Company data, HSBC Source: Company data, HSBC

BoB: Old vs new estimates

Net Interest Margin 2.73% 0.00% 2.78% -0.06%

Tax rate 30.0% 0.00% 35.0% 0.00%

BoB: Earnings outlook (% YoY)

Valuation Under our research model, for stocks with a

BoB: Valuation and risks summary (INR)

Canara Bank (CNBK)

but low margin expansion and higher provisions.

Key risks: (1) Asset delinquency risks remain as

Canara: PE/PB vs system loan growth

Source: Company data, HSBC

Canara: Rolling PE Canara: Rolling PB

Rolling P/E Av erage 5 y ear Rolling P/B Av erage 5 y ear

___HSBC PE _ HSBC PB____