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INDIA COMMERCIAL BANKING REPORT INCLUDES 5-YEAR FORECASTS TO 2020

Published by:BMI Research

India Commercial Banking Report Q1 2017 INCLUDES 5-YEAR FORECASTS TO 2020

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: October 2016

ISSN: 1747-8596

BMI Research 2 Broadgate Circle London EC2M 2QS United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: [email protected] Web: http://www.bmiresearch.com

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CONTENTS

BMI Industry View ............................................................................................................... 7 Table: Commercial Banking Sector Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Table: Commercial Banking Sector Key Ratios, September 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Table: Annual Growth Rate Projections 2015-2020 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Table: Ranking Out Of 75 Countries Reviewed In 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Table: Commercial Banking Sector Indicators, 2013-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

SWOT .................................................................................................................................... 9 Commercial Banking .................................................................................................................................. 9

Political ................................................................................................................................................. 11

Economic ............................................................................................................................................... 13

Operational Risk ..................................................................................................................................... 15

Industry Forecast .............................................................................................................. 17 Industry Trend Analysis ............................................................................................................................ 17

Commercial Banking Risk/Reward Index ....................................................................... 21 Asia Commercial Banking Risk/Reward Index ............................................................................................... 21

Table: Asia Commercial Banking Risk/Reward Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Market Overview ............................................................................................................... 23 Asia Commercial Banking Outlook ............................................................................................................. 23

Table: Banks' Bond Portfolios, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP ratios, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table: Comparison of Total Assets & Client Loans & Client Deposits (USDbn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Table: Comparison of USD Per Capita Deposits, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Economic Analysis ................................................................................................................................... 27

Competitive Landscape .................................................................................................... 31 Market Structure ..................................................................................................................................... 31

Protagonists .......................................................................................................................................... 31 Table: Protagonists In India's Commercial Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Definition Of The Commercial Banking Universe ......................................................................................... 31

List Of Banks ......................................................................................................................................... 32 Table: Public Sector Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Table: Foreign Banks In India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Company Profile ................................................................................................................ 35 Bank of Baroda ....................................................................................................................................... 35

Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Table: Balance Sheet (INRmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

HDFC Bank ........................................................................................................................................... 39

India Commercial Banking Report Q1 2017

Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Table: Balance Sheet (INRmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

ICICI Bank ............................................................................................................................................. 43 Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Table: Balance Sheet (INRmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Punjab National Bank .............................................................................................................................. 47 Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Table: Balance Sheet (INRmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

State Bank of India ................................................................................................................................... 51 Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Table: Balance Sheet (INRmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Regional Overview ............................................................................................................ 55

Global Industry Overview .................................................................................................. 62 Global Commercial Banking Outlook .......................................................................................................... 62

Regional Outlooks .................................................................................................................................. 64

Demographic Forecast ..................................................................................................... 69 Table: Population Headline Indicators (India 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Table: Key Population Ratios (India 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Table: Urban/Rural Population & Life Expectancy (India 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Table: Population By Age Group (India 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Table: Population By Age Group % (India 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Methodology ...................................................................................................................... 74 Industry Forecast Methodology ................................................................................................................ 74

Sector-Specific Methodology .................................................................................................................... 75

Risk/Reward Index Methodology ............................................................................................................... 76 Table: Commercial Banking Risk/Reward Index Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Table: Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

India Commercial Banking Report Q1 2017

BMI Industry View

Table: Commercial Banking Sector Indicators

Date Total

assets Client loans

Bond portfolio Other

Liabilities and capital Capital

Client deposits Other

September 2015, INRbn 100,135.1 66,858.9 26,418.9 6,857.4 100,135.1 8,976.1 86,139.1 5,019.9

September 2016, INRbn 108,717.5 73,099.7 28,393.9 7,223.8 108,717.5 na na na

% change y- o-y 8.6% 9.3% 7.5% 5.3% 8.6% na na na

September 2015, USDbn 1,526.7 1,019.3 402.8 104.5 1,526.7 136.9 1313.3 104.5

September 2016, USDbn 1,632.1 1,097.4 426.3 108.4 1,632.1 na na 108.4

% change y- o-y 6.9% 7.7% 5.8% 3.7% 6.9% na na 3.7%

Source: BMI; Central banks; Regulators

Table: Commercial Banking Sector Key Ratios, September 2016

Loan/deposit ratio Loan/asset ratio Loan/GDP ratio GDP Per Capita, USD Deposits per capita, USD

- 67.24% 54.56% 1,535.9 na

- Rising Falling na na

Source: BMI; Central banks; Regulators

Table: Annual Growth Rate Projections 2015-2020 (%)

Assets Loans Deposits

Annual Growth Rate 19 19 20

CAGR 17 17 20

Ranking 9 10 4

Source: BMI; Central banks; Regulators

India Commercial Banking Report Q1 2017

Table: Ranking Out Of 75 Countries Reviewed In 2016

Loan/deposit ratio Loan/asset ratio Loan/GDP ratio

66 9 46

Local currency asset growth Local currency loan growth Local currency deposit growth

15 17 4

Source: BMI; Central banks; Regulators

Table: Commercial Banking Sector Indicators, 2013-2020

2013 2014 2015e 2016f 2017f 2018f 2019f 2020f

Total assets, INRbn 84,904.6 93,298.8 104,019.1 117,541.6 138,699.1 163,664.9 193,124.6 229,818.3

Total assets, USDbn 1,373.9 1,479.9 1,572.4 1,703.5 1,981.4 2,321.8 2,726.1 3,227.9

Client loans, INRbn 57,413.4 63,185.2 69,882.5 78,967.2 91,602.0 108,090.3 127,546.6 152,205.6

Client loans, USDbn 929.0 1,002.2 1,056.4 1,144.5 1,308.6 1,533.4 1,800.4 2,137.8

Client deposits, INRbn 72,234.9 80,119.5 88,871.5 106,645.8 127,974.9 153,569.9 184,283.9 221,140.7

Client deposits, USDbn 1,168.8 1,270.9 1,343.4 1,545.6 1,828.2 2,178.6 2,601.3 3,106.0

e/f = estimate/forecast. Source: BMI; Central banks; Regulators

India Commercial Banking Report Q1 2017

SWOT

Commercial Banking

India Commercial Banking SWOT

Strengths ■ In macroeconomic terms, India is set to be a global growth outperformer in the

coming years.

■ India's high consumer savings rate and the efficacy of the regulation undertaken by

the Reserve Bank of India have provided stability.

■ Although loans have been growing rapidly, there are few signs of the excesses that

have taken place over the last few years versus that of China.

■ The lack of linkages between Indian banks and the global financial system means that

they are comparatively immune to volatility in global markets.

Weaknesses ■ A legacy of the protection of the commercial banking sector, which remains

dominated by the State Bank of India, is that efficiency levels and product offerings

are a long way from best practice globally.

■ The banking system is particularly held back by low levels of per capita GDP.

■ The logistics involved in running a bank can be daunting due to the prevalence of

paper-based payment systems (e.g., instruments such as cheques).

Opportunities ■ India is still under-banked. Per-capita deposits are low. People with savings often

hold their wealth outside the formal banking system.

■ India's banking industry is progressively being opened up to competition from foreign

banks.

■ The Reserve Bank of India is looking to enact major reforms to the sector, after

several years of policy stagnation.

■ Opportunities exist for mutual funds, insurance companies and organisations offering

related products.

India Commercial Banking Report Q1 2017

India Commercial Banking SWOT - Continued

■ The government's progressive sale of public banks to private sector participants

could help improve the management and efficiency of these institutions.

Threats ■ The development of particular products - such as mortgages - is hampered by

inefficiencies in the housing market (e.g., a cumbersome legal system and bizarre

planning regulations) that need to be removed through the process of reform.

■ It remains to be seen how effective pension and insurance reforms will be in boosting

financial intermediation.

■ State-directed lending requirements and other debt waivers reduce the profitability

and resilience of the sector, with asset quality deteriorating over the past few years.

India Commercial Banking Report Q1 2017

Political

Political SWOT Analysis

Strengths ■ India is the world's largest democracy. A secular constitution, framed in 1950,

officially guarantees justice, liberty and equality while aiming to promote fraternity

among the citizenry. More than 1,600 political parties registered for the April-May

2014 general elections, competing for the preference of India's 814mn eligible voters.

■ Despite its multitude of problems, India has generally managed to avoid hard

authoritarian rule or military coups, which have happened in many other developing

countries, including India's neighbours Bangladesh, Myanmar, and Pakistan.

Weaknesses ■ Large coalition governments complicate policymaking at the centre as coalition

partners and outside parties pursue their own agendas. The competence of state

government varies enormously across India's 35 states and union territories.

■ India's tense relationship with Pakistan still weighs on regional stability. The two

countries have gone to war three times since they were 'partitioned' on independence

from British rule in 1947.

■ Issues such as the ineffectiveness of the executive and judiciary in controlling

underhand practices, the apparent arbitrary allocation of government licences, and

the uneasy influence of special interest groups remain key investor concerns.

Opportunities ■ India has in recent years edged closer to the US in foreign policy. Both the US and

India are democracies and face threats from militant Islamists; this, combined with the

presence of a 2mn-strong affluent Indian diaspora in the US, is bringing the two

countries closer together.

■ Thawing relations with Pakistan has made it easier for the parties to defuse potentially

explosive situations, such as the Mumbai attacks in November 2008, which

Islamabad acknowledges were planned and launched from its territory.

Threats ■ India's growing regional rivalry with China, if unchecked, could lead to a more hostile

regional outlook.

India Commercial Banking Report Q1 2017

Political SWOT Analysis - Continued

■ India has experienced a series of serious terrorist attacks over the past few years,

perpetrated by radical Islamist and rural Maoist groups. The surge in Naxalite attacks

has also raised the spectre of further violence.

India Commercial Banking Report Q1 2017

Economic

Economic SWOT Analysis

Strengths ■ India has a very large domestic market, and rising domestic demand is a major driver

of economic growth.

■ A vast supply of inexpensive but skilled labour has turned India into the back office of

the world. Around half of the population is younger than 25.

Weaknesses ■ Despite rapid economic growth, India remains a very poor country. According to

BMI's estimates, India's GDP per capita was roughly USD1,621 in 2014, a quarter of

the size of China's.

■ Agriculture remains inefficient, and poor monsoon rains can slash rural incomes and

consumption. Two-thirds of the population depend on farming for their livelihood.

■ India runs chronic trade and fiscal deficits, both of which are likely to persist. The

government spends a significant part of its revenue on interest payments, subsidies,

salaries, and pensions. This limits the amount of money available for infrastructural

improvements.

Opportunities ■ India's emerging middle class will continue to drive demand for new goods and

services. A wealthier society, combined with tax reforms, would serve to boost

revenue receipts, relieving fiscal pressure.

■ The government has implemented some tax reforms. A uniform goods and services

tax to be implemented in the near future should help boost compliance, thereby

raising government revenue.

■ With Chinese labour costs rising aggressively, India may well enjoy a manufacturing

boom in the coming years as multinational look to take advantage of a young,

competitive workforce and major transport network improvements.

Threats ■ India's dependency on oil imports is problematic. This undermines the trade balance

and makes India vulnerable to energy price-driven inflation and oil price spikes during

periods of political instability abroad.

India Commercial Banking Report Q1 2017

Economic SWOT Analysis - Continued

■ India is at risk of severe environmental problems. Many of its cities' air and rivers are

heavily polluted, raising questions about the sustainability of the economy's rapid

growth.

India Commercial Banking Report Q1 2017

Operational Risk

SWOT Analysis

Strengths ■ Low minimum wage rates and high productivity reduce operating costs for

businesses.

■ India has one of the largest and best funded armed services in the world, offering a

major deterrence against potential adversaries.

■ A high presence of international banks facilitates the flow of funds into the country

without the risk of losing money in transfer fees.

■ The cost of electricity has fallen marginally in the past decade.

Weaknesses ■ Major disparities exist in terms of access to education depending on socio-economic

status.

■ India's cyber capacities are underdeveloped, constricting the ability to cope with the

emerging cyber threat.

■ Corruption, weak government policies and poor law enforcement increase legal risks

and operating costs of businesses present in India.

■ High lead times and lengthy administration costs drive up the cost of doing business

in India and delay supply chains.

Opportunities ■ Investment in education will boost the mean years of schooling in the medium term.

■ Border cooperation with neighbouring states could reduce organised crime.

■ Increasing internet penetration rates create opportunity for internet-focused

businesses.

■ The government is undertaking a number of projects to increase the quality of India's

ports including the development of a transhipment hub.

Threats ■ Low rate of urbanisation means a highly dispersed work force, posing a risk to

businesses.

India Commercial Banking Report Q1 2017

SWOT Analysis - Continued

■ Inefficient bureaucratic processes and corruption facilitate money laundering activities

and are difficult and time-consuming to root out.

■ India's tense relations with Pakistan reduce the likelihood that the Kashmir crisis will

be resolved.

■ Poor contract enforceability has the potential to severely damage small businesses in

need of cheap trials to stay solvent.

India Commercial Banking Report Q1 2017

Industry Forecast

Industry Trend Analysis

BMI View: We maintain our view that Non Performing Assets (NPAs) will continue to escalate in 2016 and

2017, especially among Public Sector Banks (PSBs). The large NPA burden has already weighed on credit

growth and could further undermine financial stability. We expect new NPAs to originate from steel and

power generation industries due to high leverage and weak profitability in these sectors. That said, we

believe that RBI's commitment to resolving NPAs will bear fruit over time.

Following an escalation in stressed assets in Q1FY2016/17 (quarter ending June), we maintain our view that

asset quality will continue to weaken in 2016 and 2017. Public sector banks face the highest asset quality

risks, which could impede overall credit flows and undermine financial stability. Increased Non Performing

Assets (NPAs) are especially likely to emerge from the steel and power-generation sectors due to their

mounting losses and low interest coverage ratios. Over the longer term, we believe that the Reserve Bank of

India (RBI) will make progress in resolving troubled assets in the banking system, building on the

momentum of reforms such as bankruptcy law and its previous efforts to encourage greater transparency in

recognising and declaring NPAs.

India Commercial Banking Report Q1 2017

Growing NPA Burden In Public Banks

India - Gross NPAs, % Of Total Advances

Source: RBI, BMI

Notes: PSB-Public Sector Bank, PVB - Private Bank, FB - Foreign Bank

NPAs Remain Concentrated In PSBs And Are Likely To Rise Further

Non Performing Assets (NPAs) among Scheduled Commercial Banks (SCBs) accelerated to 8.7% of total

assets in June from 7.8% in March, which was in line with our expectations. Meanwhile, banks' total

stressed assets, which stood at 12.0% in June 2016, suggest that future increases in NPAs are likely over the

coming quarters.

Asset quality risks remain concentrated primarily among Public Sector Banks (PSBs), with NPAs and

stressed assets both exceeding the national aggregate, at 11.3% and 15.4% respectively in June. Due to their

dominant presence in the banking system, rising NPAs among PSBs are likely to impede credit flows to the

commercial sector. Banks with high levels of stressed assets are more likely to adopt a cautious approach

and will be less willing to extend new loans. Indeed, credit growth to the private sector has slowed, falling

from an average monthly rate of 12.2% y-o-y in 2014 to 9.2% y-o-y in 2015. This in turn is likely to further

India Commercial Banking Report Q1 2017

exacerbate NPA risks, as highly indebted firms may be unable to meet their interest payment obligations

due to liquidity shortages. Interest coverage in India's corporate sector has declined steadily from a high of

8.7% in June 2007 to just 3.2% in March 2015, and is likely to remain low over the coming quarters.

Credit Growth Decelerates

India - Credit To The Private Sector, % chg y-o-y

Source: RBI, BMI

Specifically, we highlight that higher NPLs are likely to arise from steel and power-generation industries

due to the fragile balance sheets and falling cash flows of firms in these industries. In the steel sector, firms

continue to struggle with low prices and excess capacity, despite the introduction of anti-dumping taxes. We

also expect a spike in NPAs from power generation firms due to financial stresses arising from high

electricity distribution losses, theft and pricing failures. For instance, the interest coverage of the Power

Grid Corporation of India, which supplies approximately half of India's electricity, dipped to 3.3% in March

2016 compared to 3.6% the previous year, while the company's debt-to-capital ratio remains high at 71.9%.

RBI Committed To Resolving NPA Burden

That said, we believe that the RBI will maintain a proactive stance to tackle asset quality risks in the

banking system. Its reform measures will likely lead to cumulative progress in addressing banks' NPA

India Commercial Banking Report Q1 2017

burdens. The new RBI governor, Urjit Patel, has signalled his priority to continue the work of his

predecessor, Raghuram Rajan, on banking sector reforms. While Rajan initiated measures to encourage

greater NPA recognition and declaration, we expect Patel to focus on recovering and resolving NPAs in

order to facilitate healthy credit flows and improve the central bank's policy rate transmission.

We believe that the RBI will engage banks cooperatively when planning reforms. This could enhance the

effectiveness of future reforms designed to resolve and recover NPAs. For example, the RBI updated its

rules on allowing banks not to declare the sustainable component of a restructured loan as a bad asset.

Under the Sustainable Structuring of Stressed Assets (S4A) mechanism, which was introduced in June

2016, banks are allowed to restructure loans by separating them into a sustainable and unsustainable

component, before converting the latter into equity instruments in order to prevent bad debt from piling up.

Banks and rating agencies however have since provided feedback that the scheme was of limited

applicability due to its strict pre-conditions, including the minimum loan size of INR5bn. In response, the

RBI announced plans to relax the criteria in October. The RBI is also conducting discussions with financial

sector professionals to evaluate further measures to resolve NPAs, which could include creating a bad bank

to separate healthy and toxic assets from banks' balance sheets.

India Commercial Banking Report Q1 2017

Commercial Banking Risk/Reward Index

Asia Commercial Banking Risk/Reward Index

Commercial Banking Risk/Reward Index Methodology

Since Q108, we have described numerically the banking business environment for each of the countries

analysed by BMI. We do this through our Commercial Banking Industry Risk/Reward Index (RRI), a

measure that ensures we capture the latest quantitative information available. It also ensures consistency

across all countries. Like all of BMI's Industry Risk/Reward Indices, its takes into account the Rewards on

offer within the banking sector in a given country, but also the Risks to investors being able to realise those

opportunities. The overall index is weighted 70% towards Rewards and 30% towards Risks.

Within the Rewards category, we look at factors that are specific to the banking industry (accounting for

60% of the score within this category), and elements that relate to that country in general (accounting for

40% of the weighting). These include, but are not limited to, total assets, asset and loan growth, GDP and

taxation. Likewise on the Risks side, we look at industry-specific Risks (weighted 40% of the Risks total)

and country-specific Risks (weighted 60%). These include, but are not limited to, the regulatory framework

and environment, the competitive environment, financial risk, legal risk and policy continuity.

In general three aspects need to be borne in mind when interpreting the RRIs. The first is that the Industry

Rewards element is the most heavily weighted of the four elements, accounting for 42% (60% of 70%) of

the overall Index. Second, if the Industry Rewards score is significantly higher than the Country Rewards

score, within the Rewards category, it usually implies that the banking sector is (very) large and/or

developed relative to the general wealth, stability and financial infrastructure in the country. Conversely, if

the industry score is significantly lower, it usually means that the banking sector is small and/or

underdeveloped relative to the general wealth, stability and financial infrastructure in the country. Third,

within the Risks category, the industry-specific elements (ie, how regulations affect the development of the

sector, how regulations affect competition within it, and Moody's Investor Services' Ratings for local

currency deposits) can be markedly different from BMI's long-term Country Risk Index for a given market.

India Commercial Banking Report Q1 2017

Table: Asia Commercial Banking Risk/Reward Index

Limits of Potential Returns Risks to Potential Returns Overall

Market Structure Country Structure Market Risks Country Risks Index Ranking

Bangladesh 56.7 47.5 43.3 48.0 50.9 54

China 93.3 60.0 63.3 70.0 76.2 13

Hong Kong 73.3 95.0 73.3 82.0 81.0 10

India 83.3 57.5 60.0 56.0 68.4 24

Indonesia 73.3 65.0 80.0 54.0 68.3 25

Japan 30.0 75.0 66.7 78.0 55.6 47

Malaysia 70.0 80.0 83.3 76.0 75.5 15

Pakistan 50.0 50.0 53.3 46.0 49.7 55

Philippines 56.7 62.5 60.0 62.0 59.7 38

Singapore 66.7 95.0 96.7 84.0 81.3 9

Sri Lanka 33.3 57.5 33.3 50.0 43.1 63

South Korea 80.0 85.0 83.3 78.0 81.4 8

Taiwan 76.7 72.5 86.7 72.0 75.9 14

Thailand 63.3 65.0 86.7 70.0 67.8 31

Vietnam 66.7 57.5 36.7 54.0 58.2 41

New Zealand 53.3 87.5 86.7 82.0 72.1 20

United States 93.3 85.0 100.0 82.0 89.8 2

Scores out of 100, with 100 the highest. Source: BMI

India Commercial Banking Report Q1 2017

Market Overview

Asia Commercial Banking Outlook

Table: Banks' Bond Portfolios, 2015

Bond Portfolio, USDbn Bond as % total assets Year-on-year growth %

Bangladesh 35.8 21.9 8.7

China* 1,873.0 8.7 17.5

Hong Kong* 379.2 19.8 8.1

India 405.5 25.8 10.6

Indonesia** 17.3 4.3 17.7

Japan 1,917.4 22.8 -7.9

Malaysia 64.0 11.9 -11.8

Pakistan 65.2 51.0 45.5

Philippines 50.3 21.7 8.6

Singapore 96.3 12.9 6.2

Sri Lanka*** 8.1 21.9 8.4

South Korea 565.2 23.0 9.8

Taiwan*** 202.9 15.1 3.1

Thailand 73.9 15.4 0.3

Vietnam* 20.4 10.9 64.4

New Zealand 8.3 2.5 -11.0

United States 667.9 4.3 3.2

Source: Central banks, regulators, BMI. * Only 2012 data available. **Only 2011 data available. *** Only 2014 data available

India Commercial Banking Report Q1 2017

Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP ratios, 2016

Loan/Deposit

ratio % Rank Trend Loan/Asset

ratio % Rank Trend Loan/GDP

ratio % Rank Trend

Bangladesh 90.7 37 Falling 53.6 42 Falling 46.3 52 Rising

China 80.5 49 Falling 52.8 45 Falling 153.9 7 Rising

Hong Kong 65.5 67 Falling 38.5 65 Falling 304.3 1 Falling

India 74.0 63 Falling 67.2 10 Falling 57.3 47 Rising

Indonesia 92.8 34 Falling 66.2 12 Falling 36.3 59 Rising

Japan 70.4 64 Falling 46.8 54 Falling 94.1 24 Falling

Malaysia 82.1 45 Falling 61.5 22 Falling 121.6 14 Falling

Pakistan 59.4 71 Falling 40.4 63 Falling 21.9 68 Rising

Philippines 75.3 59 Falling 57.1 46 Falling 46.0 53 Rising

Singapore 103.9 20 Rising 56.7 34 Falling 147.7 9 Falling

Sri Lanka 78.9 52 Falling 57.2 33 Falling 31.6 63 Rising

South Korea 81.0 47 Falling 68.1 11 Falling 126.4 12 Rising

Taiwan 80.9 48 Falling 62.6 27 Falling 168.7 4 Rising

Thailand 95.4 29 Falling 68.3 8 Falling 87.9 27 Rising

Vietnam 88.1 40 Falling 76.5 2 Falling 112.1 15 Rising

New Zealand 212.1 1 Falling 90.5 1 Falling 175.7 2 Rising

United States 107.1 14 Rising 76.5 3 Falling 66.3 35 Rising

Source: Central banks, regulators, BMI

India Commercial Banking Report Q1 2017

Table: Comparison of Total Assets & Client Loans & Client Deposits (USDbn)

2016 2015

Total Assets Client Loans Client Deposits Total Assets Client Loans Client Deposits

Bangladesh 184.7 99.1 109.2 163.2 87.6 98.8

China 33,095.0 17,466.6 21,687.4 30,669.1 16,186.3 21,028.1

Hong Kong 2,517.8 969.6 1,480.3 2,474.9 972.2 1,387.0

India 1,703.5 1,144.5 1,545.6 1,572.4 1,056.4 1,343.4

Indonesia 509.5 337.2 363.4 444.8 294.3 320.1

Japan 9,924.3 4,647.5 6,598.7 8,404.8 3,943.8 5,656.1

Malaysia 606.0 372.6 453.9 536.7 330.0 383.9

Pakistan 145.9 58.9 99.4 128.0 51.6 86.7

Philippines 241.3 137.7 182.8 232.3 121.9 176.8

Singapore 747.8 424.1 408.0 746.3 423.2 395.2

Sri Lanka 44.2 25.3 32.0 40.0 22.9 29.5

South Korea 2,468.7 1,681.1 2,076.5 2,452.8 1,638.9 2,039.6

Taiwan 1,425.2 891.7 1,102.6 1,347.0 818.4 1,042.1

Thailand 513.0 350.6 367.4 480.7 328.5 340.9

Vietnam 285.5 218.4 247.8 261.8 200.3 229.3

New Zealand 327.6 296.6 139.9 327.9 287.0 140.0

United States 16,182.3 12,384.2 11,558.4 15,559.9 11,683.2 11,008.0

Source: Central banks, regulators, BMI

India Commercial Banking Report Q1 2017

Table: Comparison of USD Per Capita Deposits, 2016

GDP Per Capita Client Deposits,

per capita Rich 20% Client Deposits,

per capita Poor 80% Client

Deposits, per capita

Bangladesh 80 51 15 670

China 7 191 12 15,689

Hong Kong 8 465 9 201,499

India 69 77 14 1,165

Indonesia 13,600 39 12 1,395

Japan 102 134 2 52,236

Malaysia 4 148 8 14,761

Pakistan 105 37 15 516

Philippines 49 61 14 1,788

Singapore 1 142 3 71,624

Sri Lanka 155 40 16 1,539

South Korea 1,220 156 6 41,115

Taiwan 32 209 5 47,130

Thailand 35 92 10 5,391

Vietnam 23,300 127 18 2,624

New Zealand 1 83 1 30,638

United States 1 62 6 35,661

Source: Central banks, regulators, BMI

India Commercial Banking Report Q1 2017

Economic Analysis

BMI View: The Indian economy expanded by 7.6% in real terms in FY2015/16 (April-March) from 7.2% in

the previous year, and we maintain our view that the South Asian economy will be the fastest growing major

economy over the coming years. Nevertheless, we also retain our FY2016/17 real GDP growth forecast of

7.2%, and highlight that the economy is still facing ongoing challenges from weak private investment and

external headwinds.

India's real GDP growth accelerated to 7.9% y-o-y in Q4FY2015/16 (quarter ending March 2016) from

7.2% y-o-y in the previous quarter, bringing growth for the whole of FY2015/16 (April-March) to 7.6%,

which was above both our forecast (7.3%) and Bloomberg consensus forecasts (7.5%). We continue to

believe that India will be Asia's fastest growing major economy, and we maintain our FY2016/17 real GDP

growth forecast of 7.2%. However, we reiterate that the Indian economy will continue to face ongoing

challenges from weak private investment in the infrastructure sector and external headwinds, which will

prevent the economy from meeting consensus expectations of 7.7% expansion in FY2016/17.

Strong Growth From Industrial And Services Sectors

India - Percentage Points (pp) Contribution To Real GDP Growth By Sectors

Source: MOSPI

India Commercial Banking Report Q1 2017

Manufacturing And Services Sectors To Continue Outperforming

We hold a constructive outlook on the Indian manufacturing sector owing to supportive policies and

structural factors including India's large, cheap labour force, and we believe that the sector will continue to

grow at a robust rate over the coming quarters. Indeed, the Indian statistics office reported that the

manufacturing sector expanded by 9.3% y-o-y in Q4FY2015/16 (versus 11.5% y-o-y in the previous

quarter), and it contributing 1.7 percentage points (pp) to the Q4FY2015/16 headline GDP growth figure.

We believe that India's manufacturing sector will continue to benefit from the government's 'Make In India'

campaign amid the improvements in the power and mining sector, despite slowing reforms to simplify the

country's complex labour laws (see ''Make In India' To Spur Manufacturing Sector, But Targets Too

Ambitious', May 31).

Meanwhile, growth in India's services sector (which accounts for approximately 45% of GDP) came in at a

strong rate of 8.7% y-o-y in Q4FY2015/16, despite a slight slowdown from 9.1% y-o-y in Q3FY2015/16.

We believe that the services sector, particularly the transport and logistics category, will continue to

perform well over the coming months as domestic trade activity will continue to grow. The category will be

boosted by the delivery of agricultural produce to various areas of the country and inputs for the

manufacturing sector through freight.

Investment Environment And External Sector Outlook Still Weak

Despite the strong headline GDP figure, we continue to highlight that the Indian economy is still facing

significant challenges. One of the key sectors that is facing difficult times is the agricultural sector, despite

an improvement in real growth to 2.3% y-o-y in Q4FY2015/16 (versus a contraction of 1.0% y-o-y in

Q3FY2015/16). According to the India Meteorological Department, the 2016 summer monsoon rainfall will

likely exceed the 50-year average by 6.0%. Although the outlook for production in the upcoming

FY2016/17 season is more positive owing to the return of more normal rains in 2016 after two straight years

of below-par monsoon rainfall, growth is still likely to remain relatively subdued amid ongoing structural

inefficiencies such as poor irrigation. Moreover, should rainfall disappoint again this year, agricultural

production in domestic grains, oilseeds crop as well as sugar would likely be subdued.

In addition, gross capital formation growth continues to trend lower, having fallen into negative territory of

-2.4% y-o-y in Q4FY2015/16, and this highlights India's weak private investment environment. We believe

that this slow pace of investment growth is unlikely to improve significantly over the coming quarters as

structural issues will hinder investment in the infrastructure sector. Although the Modi administration

India Commercial Banking Report Q1 2017

remains committed to attracting private investment into the infrastructure sector through its focus of

enhancing Public-Private partnerships (PPPs) in its FY2016/17 Union and Railway Budget, the sector is still

hindered by red tape and recurring project delays. A third of approximately 1,000 construction and

infrastructure projects valued at USD210bn are still delayed, and while this actually presents progress

compared with 42% last year, it still shows the pervasiveness of bottlenecks. The main reasons for this

include the fact that the balance sheets of infrastructure companies are still stressed, while there are delays

in land acquisition and gaining environmental clearance, coupled with contractual issues, which result in

time and cost overruns. Lastly, the Indian banking sector is still stressed, which will also impede the

efficient allocation of credit to the corporate sector, and prevent a significant pick-up in investment.

Furthermore, there are still no signs of a significant improvement in India's external sector, as net exports

contributed negatively to the headline GDP growth number for the fourth consecutive quarter, subtracting

-0.1pp in Q4FY2015/16. Despite being the Asian economy that is least exposed to the slowing Chinese

economy, the Indian economy has significant trade exposures to the US and Europe, with the two regions

accounting approximately 36% of overall exports. The US economy is showing signs of weakness amid

falling corporate profitability. Meanwhile, the EU economy is still fragile due to the ongoing political

uncertainties in the region. Therefore, given the uncertainties in the global economy, we do not expect

Indian exports to recover strongly over the coming quarters.

India Commercial Banking Report Q1 2017

Trading Above Resistance

India - Nifty Index

Source: Bloomberg

Potential To Rally Further Amid Positive Sentiment

With respect to Indian equities, the Nifty Index could rally further towards the 9,000 level, despite its still

lofty valuations owing to positive investor sentiment. Looking at the technical picture, the Nifty Index has

already broken near-term resistance at around the 8,000 level.

India Commercial Banking Report Q1 2017

Competitive Landscape

Market Structure

Protagonists

Table: Protagonists In India's Commercial Banking Sector

Central bank: Reserve Bank of India (RBI)

www.rbi.org.in

The RBI was established in 1935 in accordance with the Reserve Bank of India Act 1934. Its principle functions are to 'regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. The RBI was nationalised in 1949, and has remained government owned ever since. Through the Board of Financial Supervision, a committee of the central board of directors of the RBI, the central bank is the supervisor and regulator of the commercial banking sector and other financial institutions and banking finance companies. The RBI's functions include: formulation and implementation of monetary policy; management of foreign exchange; issuing of notes and coins; being a banker to government; being a banker to banks; and 'a wide range of promotional functions to support national objectives' in relation to development.

Principal banking regulator: Reserve Bank of India (RBI)

www.rbi.org.in

Among its other roles, the RBI regulates the commercial banking sector.

Banking trade association: Indian Banks' Association (IBA)

www.iba.org.in

The interests of India's commercial banking sector are represented by the IBA, established in 1946. It has 139 ordinary and more than 98 associate members. Its membership includes public sector banks, private sector banks, foreign banks with offices in India, and urban cooperative banks.

Definition Of The Commercial Banking Universe

We define the universe of Indian banks as including 91 organisations, which are variously identified by the

Indian Banks' Association as public sector banks (27), private sector banks (23) and foreign banks in India

(41). Public sector banks include 20 nationalised banks, the State Bank of India (SBI), the five associates

of SBI and the Industrial Development Bank of India (IDBI).

India Commercial Banking Report Q1 2017

List Of Banks

Table: Public Sector Banks

Nationalised Banks

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Bank of Maharashtra

Bhartiya Mahila Bank

Canara Bank

Central Bank of India

Corporation Bank

Dena Bank

Indian Bank

Indian Overseas Bank

Oriental Bank of Commerce

Punjab & Sind Bank

Punjab National Bank

Syndicate Bank

UCO Bank

Union Bank of India

United Bank of India

Vijaya Bank

State Bank of India (SBI)

IDBI Bank

Associates of SBI

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Mysore

State Bank of Patiala

State Bank of Travancore

Source: IBA, BMI

India Commercial Banking Report Q1 2017

Table: Foreign Banks In India

AB Bank Ltd

Abu Dhabi Commercial Bank

American Express Banking Corporation

Australia & New Zealand Banking Group

Bank of America

Bank of Bahrain and Kuwait

Barclays Bank

BNP Paribas

Citibank

Commonwealth Bank of Australia

Credit Agricole CIB

Credit Suisse AG

DBS Bank

Deutsche Bank

Doha Bank

FirstRand Bank

HSBC Bank Oman S.A.O.G

ICBC

Industrial Bank of Korea

JPMorgan Chase Bank

Japan Bank for International Cooperation

JSC VTB Bank

KBC Bank N.V.

KEB Hana Bank

Krung Thai Bank

Mashreq Bank

Mizuho Corporate Bank

National Australia Bank

National Bank of Abu Dhabi

Rabobank International

Sberbank

SBM Bank (Mauritius)

India Commercial Banking Report Q1 2017

Foreign Banks In India - Continued

Shinan Bank

Societe Generale

Sonali Bank

Standard Chartered Bank

Sumitomo Mitsui Banking Corporation

Bank of Nova Scotia

Bank of Tokyo-Mitsubishi UFJ

HSBC Ltd

Royal Bank of Scotland

The Toronto Dominion Bank

UBS

United Overseas Bank

Westpac Banking Corporation

Woori Bank

Source: IBA, BMI (as of October 2016)

India Commercial Banking Report Q1 2017

Company Profile Bank of Baroda

SWOT Analysis

Strengths ■ Large state-backed bank.

■ Well capitalised balance-sheet and robust business model.

■ Strong overseas footprint.

Weaknesses ■ Branch network could be far stronger to garner faster growth from expanding

economy.

■ Both deposits and lending activity declined during FY16.

■ Saw a net profit in FY15 turn into a net loss in FY16.

Opportunities ■ International and domestic expansion plans.

Threats ■ Uncertain regional economic climate could hamper international expansion and

growth at home.

■ GNPA increased significantly in FY16.

■ Bank caught up in money laundering scandal.

Company Overview Mumbai-based Bank of Baroda was established in 1908 and is now normally ranked

behind State Bank of India and Punjab National Bank amid the biggest state-owned

banks in India. At the end of 2014, the government owned a 56.3% stake in the bank,

with the remaining shares publicly listed.

The bank had a total of 5,479 branches globally as of October 2016, including 5,372 in

India and 107 overseas outlets.. The lender also has 13 zonal controlling offices and 56

regional controlling offices. The bank has subsidiaries in Botswana, Kenya, Uganda,

New Zealand, Tanzania, Trinidad & Tobago, Guyana, and Ghana. The bank also has

representative offices in Thailand, and branches in 15 other countries, including the US,

UK, and China.

The bank signed a partnership agreement with the Khalifa Industrial Zone Abu Dhabi

(Kizad) in the UAE in July 2011 to supply its tenants with retail banking facilities and

financial services. The deal is part of Kizad's 'one-stop-shop' approach to providing for

India Commercial Banking Report Q1 2017

its businesses and Baroda will help the zone in trying to attract more overseas

investment.

In 2015 Bank of Baroda has been caught up in an alleged INR60bn foreign exchange

scam. As a result, the Reserve Bank of India (RBI) is likely to make it mandatory for all

lenders to report smaller transactions from a single account.

Corporate

Highlights During FY16 to the end of March 2016, Bank of Baroda consolidated its operations and

focused on sustainable performance by taking steps to re-balance its portfolio towards

reducing the cost of its liabilities and improving yield on assets. Thus the total deposits

of the bank were at INR5,740,380mn as of the end of FY16 as compared to

INR6,175,600mn last year. Advances were at INR3,837,700mn as of the same date, but

down from INR4,280,650 in FY15. The bank remained cautious in lending to the large

corporate and SME segment.

In FY16, international business contributed 31.3% of global business.

Gross Non-Performing Assets (GNPA) of the bank increased from INR162,610mn as of

the end of FY15 to INR405,210mn in FY16. The bank's Provision Coverage Ratio (PCR)

was at 60.09% in FY16 as against 52.70% in Q316.

Bank of Baroda posted a lower operating profit of INR88,160mn for FY16, down from

INR99,150mn in FY15 on account of increased slippages leading to lower net interest

income of INR127,400mn compared with INR131,870mn in FY15. The bank posted a

net loss of INR53,960mn in the year ending March 2016, dropping from a net profit of

INR33,980mn in FY15.

Despite weak financials, the Capital Adequacy Ratio of the bank as per Basel III

continues to be healthy at 13.17% as of March 2016, with the Tier 1 capital ratio at

10.79% and the Common Equity Tier 1 (CET-1) at 10.29%. Meanwhile, the consolidated

group capital adequacy ratio stood at 13.63% as at the end of March 2016.

In 2014 Moody's affirmed its 'Baa3' long-term credit rating for Bank of Baroda, though

warned that India's public-sector banks have a negative outlook due to weakening

profits and deteriorating asset quality. In September 2014 Fitch affirmed the bank's IDR

at 'BBB-'.

India Commercial Banking Report Q1 2017

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation INR 187,215 326,638 260,515 339,255 271,942 465,443 360,947 373,159

Market Capitalisation USD 4,024 7,307 4,906 6,192 4,396 7,362 5,450 5,614

Share Price INR 102.79 179.34 133.07 173.29 129.11 216.78 156.65 161.95

Share Price USD 2.21 4.01 2.51 3.16 2.09 3.43 2.37 2.44

Share Price USD, % change (eop) 92.0 81.6 -37.5 26.2 -34.0 64.3 -31.0 na

Change, year-to-date na na na na na na na na

Shares Outstanding (mn) 1,821 1,821 1,958 2,056 2,106 2,147 2,211 na

Source: Bank of Baroda, Bloomberg

Table: Balance Sheet (INRmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 1,834,790 2,315,767 2,842,768 3,662,138 4,574,120 5,593,883 6,761,141 7,339,774

Loans & Mortgages 1,064,926 1,455,595 1,777,119 2,320,851 2,920,771 3,336,252 4,037,154 4,354,155

Total Deposits 1,414,093 1,966,084 2,459,511 3,116,032 3,926,159 4,826,389 5,799,971 6,299,813

Total Shareholders' Equity 113,948 133,711 157,740 218,453 286,075 333,918 380,052 422,044

Earnings per share (INR) 8.50 13.09 17.46 24.33 26.80 23.34 23.65 18.22

Source: Bank of Baroda, Bloomberg

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 45,744 45,644 63,243 82,134 89,785 102,668 112,890 117,797

Loans & Mortgages 26,550 28,690 39,535 52,052 57,332 61,232 67,408 69,880

Total Deposits 35,255 38,752 54,717 69,886 77,067 88,582 96,841 101,106

Total Shareholders' Equity 2,841 2,635 3,509 4,899 5,615 6,129 6,346 6,773

Earnings per share (USD) 0.21 0.29 0.37 0.53 0.56 0.43 0.39 0.30

Source: Bank of Baroda, Bloomberg

India Commercial Banking Report Q1 2017

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets 0.9 1.1 1.2 1.4 1.3 0.9 0.8 0.6

Return on Equities 15.3 19.3 21.9 23.7 20.9 15.5 14.1 9.8

Loan Deposit Ratio 75.3 74.0 72.3 74.5 74.4 69.1 69.6 69.1

Loan Asset Ratio 58.0 62.9 62.5 63.4 63.9 59.6 59.7 59.3

Equity Asset Ratio 6.2 5.8 5.5 5.9 6.2 5.9 5.6 5.7

Total Risk Based Capital Ratio na 14.1 14.4 14.5 14.7 13.3 12.3 13.1

Tier 1 Capital Ratio na 8.5 9.2 10.0 10.8 10.1 9.3 9.9

Source: Bank of Baroda, Bloomberg

India Commercial Banking Report Q1 2017

HDFC Bank

SWOT Analysis

Strengths ■ High-performing and highly rated bank.

■ Large and expanding branch network across India.

■ Strong capital ratios.

■ Expanding branch and ATM network.

■ Net profit up 20.4% in FY16.

Weaknesses ■ Exposure to unsecured consumer finance has had an adverse affect during a financial

crisis.

Opportunities ■ The acquisition and associated extra business, including retail customer acquisition.

■ Net revenue up 22.1% in FY16.

■ HDFC is becoming a market leader in fast-growing online and mobile banking

sectors.

■ Both loans and deposits increased during FY16.

Threats ■ Although still strong, the bank's CAR declined during FY16.

Company Overview Mumbai-headquartered HDFC Bank was incorporated in August 1994, and had a

nationwide network of 4,541 Branches and 12,013 ATM's across 2,587 Indian towns

and cities as of June 2016. The bank was established in 1994 after the RBI allowed

private entrants into the banking sector and it is now one of the country's largest banks

in terms of market capitalisation. HDFC Bank had over 28mn customers as of March

2014.

HDFC Bank offers a wide range of commercial and transactional banking services and

treasury products to wholesale and retail customers. The bank has received many

awards in recent years, including the 'Best Domestic Bank in India' for the last three

years in Asiamoney magazine.

The bank is 22.5% owned by HDFC Group. The remaining shares in the bank are

publicly listed on the Bombay Stock Exchange and The National Stock Exchange of

India. The Bank's American Depository Shares (ADS) are listed on the New York Stock

India Commercial Banking Report Q1 2017

Exchange (NYSE) and the Bank's Global Depository Receipts (GDRs) are listed on

Luxembourg Stock Exchange.

In December 2013, the Reserve Bank of India (RBI) restricted any further foreign

investment in HDFC after the bank crossed the threshold for 49% foreign ownership.

The bank filed an application with the Foreign Investment Promotion Board (FIPB) to

increase its foreign shareholding limit to 74%, and this was eventually approved in

December 2014.

In Q314, HDFC became the leading private-sector bank for mobile transactions; to

further boost its standing in this fast-growing sector, the bank launched a new mobile

banking platform in December 2014 and a 'digital wallet' in January 2015.

In February 2015, HDFC Bank launched a share offer in India and the US to raise up to

INR100bn (USD1.6bn) to meet the Basel III global banking industry rules. HDFC, which

reportedly filed with the US watchdog to sell 22mn American Depositary Shares, also

plans to sell shares to investors in India to raise up to INR20bn (USD324mn). The lender

secured the Indian government's approval in the week ended January 31 2015 to raise

up to USD1.6bn by selling shares. However, the government granted approval on

condition that its foreign ownership must not be more than 74%. HDFC lacks

immediate capital requirement, but the new finances raised via share sale are expected

to help boost its growth.

Corporate

Highlights For the year ended March 2016, HDFC Bank earned total income of INR709,732mn. Net

revenues (net interest income plus other income) for FY16 were INR383,432mn, up by

22.1% over INR313,920mn for the year ended March 2015. The bank's net profit for

FY16 was INR122,962mn, up by 20.4%, over the year ended FY15. Meanwhile, the

consolidated net profit of the bank increased by 19.8% to INR128,013mn for the year

ended March 2016.

HDFC's total balance sheet size as of March 2016 was INR7,088,460mn as against

INR5,905,030mn a year earlier. Total deposits in FY16 came to INR5,464,240mn, an

increase of 21.2% y-o-y. Advances as of March 2016 were INR4,645,94omn, an

increase of 27.1% over FY15. Both segments of the Bank's loan portfolio grew faster

than system loan growth. As per regulatory [Basel 2] segment classification, the

domestic retail loans and wholesale loans grew by 29.7% and 27.2% respectively (as

per internal business classification grew by 28.4% and 28.5% respectively).

The bank's total Capital Adequacy Ratio (CAR) as per Basel III guidelines, was at 15.5%

as at March 2016 (16.8% as at March 2015) as against a regulatory requirement of 9%.

Tier-I CAR was at 13.2% as at March 2016 compared to 13.7% as at March 2015.

Gross non-performing assets (NPAs), meanwhile, were at 0.94% of gross advances by

the end of FY16, as against 0.93% in FY15. Net non-performing assets were at 0.3% of

net advances as on March 2016. Total restructured loans were at 0.1% of gross

advances as of the same date, flat from FY15.

India Commercial Banking Report Q1 2017

During 2014, Moody's held HDFC Bank's credit rating at 'Baa2', with a stable outlook.

S&P also affirmed its BBB- long-term credit rating for HDFC Bank, though assigned a

negative outlook in September 2014 due to a similar revision for India's sovereign

rating.

Company Data ■ Website: www.hdfcbank.com ■ Status: Private Sector Bank

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation INR 730,327 1,088,174 999,027 1,606,969 1,594,440 2,300,405 2,732,522 3,251,642

Market Capitalisation USD

15,697 24,341 18,812 29,330 25,777 36,384 41,256 48,916

Share Price INR 340.45 469.27 426.85 678.60 665.85 951.60 1,082.15 1,284.35

Share Price USD 7.32 10.50 8.04 12.39 10.76 15.05 16.34 19.32

Share Price USD, % change (eop) 78.4 43.5 -23.4 54.1 -13.1 39.8 8.6 na

Change, year-to- date na na na na na na na na

Shares Outstanding (mn) 2,127 2,289 2,326 2,347 2,379 2,399 2,506 na

Source: The HDFC Bank Ltd, Bloomberg

Table: Balance Sheet (INRmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 1,331,931 1,834,028 2,229,475 2,779,629 3,410,550 4,077,230 5,036,200 6,070,965

Loans & Mortgages 634,181 986,607 1,255,398 1,608,028 1,984,661 2,471,534 3,145,542 3,817,934

Total Deposits 982,671 1,402,550 1,648,599 2,058,420 2,442,434 2,936,254 3,643,210 4,468,111

Total Shareholders' Equity 115,721 151,379 216,947 257,077 303,944 368,641 443,184 633,157

Earnings per share (INR) 9.27 10.59 13.76 17.29 22.57 29.10 36.58 44.10

Source: The HDFC Bank Ltd, Bloomberg

India Commercial Banking Report Q1 2017

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 33,207 36,149 49,599 62,341 66,946 74,832 84,089 97,433

Loans & Mortgages 15,811 19,446 27,929 36,065 38,957 45,362 52,521 61,274

Total Deposits 24,499 27,645 36,676 46,166 47,943 53,891 60,830 71,709

Total Shareholders' Equity 2,885 2,984 4,826 5,766 5,966 6,766 7,400 10,162

Earnings per share (USD) 0.23 0.23 0.29 0.38 0.47 0.54 0.61 0.72

Source: The HDFC Bank Ltd, Bloomberg

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets 1.4 1.4 1.5 1.6 1.7 1.8 1.9 1.9

Return on Equities 17.7 16.9 16.4 16.9 18.9 20.6 21.6 19.9

Loan Deposit Ratio 64.5 70.3 76.1 78.1 81.3 84.8 86.9 86.0

Loan Asset Ratio 47.6 53.8 56.3 57.9 58.2 61.1 62.9 63.3

Equity Asset Ratio 8.7 8.2 9.7 9.2 8.9 9.0 8.8 10.4

Total Risk Based Capital Ratio 13.6 15.1 17.5 16.5 16.7 16.9 16.0 16.8

Tier 1 Capital Ratio 10.3 10.2 13.3 12.3 11.7 11.0 11.7 13.7

Source: The HDFC Bank Ltd, Bloomberg

India Commercial Banking Report Q1 2017

ICICI Bank

SWOT Analysis

Strengths ■ Dominant private sector bank.

■ Well-capitalised and a high capital adequacy ratio.

■ Highly rated by international agencies.

■ Expanding branch network.

■ Consolidated assets increased in FY16.

Weaknesses ■ The bank has faced losses due to its exposure to consumer lending.

■ The bank has been forced to sell its subsidiary in Russia and trim back other

international operations.

Opportunities ■ Increased business with customers in rural areas (low-value, high-volume

transactions).

■ Expects to increase its infrastructure lending in the short-term.

■ Advances increased by 12% in FY16.

Threats ■ The gradual entry of foreign banks operating more fully.

■ New licenses for private banks would pose a threat to existing players.

■ Decline in profit after tax in FY16.

Company Overview ICICI Bank is India's largest private sector bank with total assets of INR7,206.95bn at

the end of March 2016 and profit after tax of INR97.26bn as of the same date. ICICI

Bank, which was founded in 1994 by ICICI Ltd after the government allowed new

private banks to be established, currently has a network of 4,450 Branches and 14,295

ATM's across India. It has been listed on the Bombay Stock Exchange since 1998 and

the New York Stock Exchange since 2000.

The bank has subsidiaries in the UK, Russia, and Canada, plus branches in the US,

Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai. It also has representative

India Commercial Banking Report Q1 2017

offices in the UAE, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia.

The UK subsidiary has branches in Belgium and Germany.

In 2012, ICICI bank started opening electronic branches - 24/7 one-stop shops for all

banking transactions - and now has over 100 across the country. In January 2015, to

mark the 60th anniversary since ICICI Ltd was founded, the bank launched a new

'digital village' project in Gujarat, bringing technological solutions to banking and

everyday life in rural India.

In December 2014, the bank announced that it would sell its Russian subsidiary, ICICI

Bank Eurasia, to Sovcombank. The transaction is currently pending regulatory approval.

The bank also increased the repatriation of capital at its UK and Canadian subsidiaries

as it looks to the domestic market for future growth.

Corporate

Highlights Consolidated profit before collective contingency and related reserve made by ICICI

Bank, and tax, was IRS179,040mn for FY16 compared to IRS183,390mn for FY15.

Consolidated profit after tax was IRS101,800mn in FY16 compared to IRS122,470mn in

FY15.

The y-o-y growth in domestic advances was 16% in FY16. The bank continued to see

robust growth in its retail business resulting in a y-o-y growth of 23% in the retail

portfolio. The retail portfolio constituted about 47% of the loan portfolio of the bank.

Total advances increased by 12% y-o-y to IRS4,352,640mn as at March 2016 from

IRS3,875,220mn at March 2015.

In FY16, savings account deposits increased by IRS193,700mn and current account

deposits increased by IRS93,500mn. The Bank's CASA ratio was 45.8% at the end of

March 2016 compared to 45.2% at December 31, 2015 and 45.5% in March 2015.

Consolidated profit before collective contingency and related reserve made by ICICI

Bank, and tax, was IRS179,040mn for FY16 compared to IRS183,390mn for FY15.

Consolidated profit after tax was IRS101,800mn in FY16 compared to IRS122,470mn in

FY15.

Consolidated assets grew by 11% from IRS8,260,790mn at the end of March 2015 to

IRS9,187,560mn as of March 2016.

The Bank's capital adequacy at the end of March 2016 as per Reserve Bank of India's

guidelines on Basel III norms was 16.64% and Tier-1 capital adequacy was 13.09%,

significantly higher than the regulatory requirements.

Rating's agency Moody's held its long-term credit score for ICICI Bank at 'Baa2' during

2014, maintaining a stable outlook. Meanwhile, in September 2014 Fitch affirmed its

long-term IDR for ICICI Bank at 'BBB-', noting that the bank had some of the strongest

financial metrics in the sector.

India Commercial Banking Report Q1 2017

Company Data Website:

■ www.icicibank.com

Status:

■ Private Sector Bank

Media Contact:

■ Charudatta Deshpande ■ Tel: 91-22-2653-8208 ■ Email: [email protected]

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation INR 977,089 1,315,218 789,104 1,308,643 1,268,544 2,044,925 1,519,003 1,454,812

Market Capitalisation USD

21,000 29,420 14,859 23,885 20,508 32,344 22,934 21,885

Share Price INR 175.40 229.02 136.93 227.65 219.75 353.10 261.35 250.10

Share Price USD 3.77 5.12 2.58 4.15 3.55 5.58 3.95 3.76

Share Price USD, % change (eop) 104.7 35.9 -49.7 61.1 -14.5 57.2 -29.3 na

Change, year-to- date na na na na na na na na

Shares Outstanding (mn) 5,566 5,574 5,759 5,764 5,768 5,775 5,797 na

Source: ICICI Bank Limited, Bloomberg

Table: Balance Sheet (INRmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 4,856,166 4,826,910 4,893,473 5,337,679 6,192,869 6,748,217 7,475,257 8,260,792

Loans & Mortgages 2,460,377 2,661,305 2,257,781 2,560,193 2,921,254 3,299,741 3,873,418 4,384,901

Total Deposits 2,639,126 2,618,558 2,415,723 2,591,060 2,819,505 3,147,705 3,595,127 3,859,552

Total Shareholders' Equity 458,034 480,380 525,669 566,607 627,042 704,682 784,406 872,104

Earnings per share (INR) 6.44 6.43 8.39 10.71 13.27 16.66 19.13 21.17

Source: ICICI Bank Limited, Bloomberg

India Commercial Banking Report Q1 2017

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 121,071 95,140 108,865 119,712 121,560 123,855 124,813 132,578

Loans & Mortgages 61,341 52,455 50,229 57,420 57,341 60,562 64,674 70,374

Total Deposits 65,797 51,612 53,742 58,112 55,344 57,772 60,027 61,942

Total Shareholders' Equity 11,419 9,468 11,695 12,708 12,308 12,933 13,097 13,996

Earnings per share (USD) 0.16 0.14 0.18 0.24 0.28 0.31 0.32 0.35

Source: ICICI Bank Limited, Bloomberg

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets 0.8 0.7 1.0 1.2 1.3 1.5 1.6 1.6

Return on Equities 9.9 7.8 9.5 11.4 13.1 14.8 15.2 15.2

Loan Deposit Ratio 94.7 101.6 93.5 98.8 103.6 104.8 107.7 113.6

Loan Asset Ratio 51.5 55.1 46.1 48.0 47.2 48.9 51.8 53.1

Equity Asset Ratio 9.2 9.8 10.5 10.4 9.9 10.2 10.2 10.3

Total Risk Based Capital Ratio 13.5 14.7 19.2 19.9 19.6 19.7 18.3 17.2

Tier 1 Capital Ratio 10.7 10.3 12.9 12.7 12.8 12.9 13.1 12.9

Source: ICICI Bank Limited, Bloomberg

India Commercial Banking Report Q1 2017

Punjab National Bank

SWOT Analysis

Strengths ■ Large market share.

■ Dominance in northern India and in rural retail banking.

■ Total business of the bank increased in FY16.

■ Strong capital base.

Weaknesses ■ Potential for political interference.

■ High concentration of foreign currency loans leaves bank vulnerable to currency

swings.

■ Reputation damaged by the bribes-for-loans scandal.

Opportunities ■ Increased business with customers in rural areas through banking correspondents

and technology (for the bank to benefit from low-value, high-volume transactions).

■ Deposits and advances to the bank rose in FY16.

Threats ■ The gradual entry of foreign banks operating more fully.

■ Rising NPL ratio has led to negative outlook on credit rating.

Company Overview Punjab National Bank (PNB), established in 1895, is India's second largest public sector

bank (the government owned a 58.9% stake as of October 2014) and its largest

nationalised bank in terms of the number of branches, deposits, advances, total

business and operating and net profit.

Based in New Delhi, PNB has a network 6,809 branches and 9,669 ATMs in India as of

June 2016. The bank has a presence in 10 countries with four representative offices,

five overseas branches, three overseas subsidiaries (in London, Bhutan, Kazakhstan),

and a joint-venture with Everest Bank in Nepal (in which PNB owns a 20% stake). The

bank has an estimated 89mn customers worldwide.

PNB has a policy of inclusive growth in the Indo-Gangetic region, which involves

'banking for the unbanked'. In addition to its large network of nearly 2,500 rural

branches, it has launched a number of ATMs designed for disabled customers. PNB is

also expanding its international network, and has been granted permission from the

India Commercial Banking Report Q1 2017

Reserve Bank of India to open new representative offices in Myanmar and Bangladesh.

However, in June 2014 the bank announced that it would no longer be seeking to set up

a subsidiary in Canada due to ongoing delays and regulatory obstacles.

In 2011, PNB was caught up in a 'bribes-for-loans' scandal that raised concerns over

corruption at state-run banks in India. The problems continued in 2014 as within the

space of three weeks in April one branch manager was sentenced to prison for the

same crime, while another senior manager was arrested on similar charges.

Corporate

Highlights PNB's total business of the bank stood at IRS9,653,770mn as of the end of FY16, up by

9.5% y-o-y. Total deposits of the bank recorded a y-o-y growth of 10.3% to reach

IRS5,530,510mn in FY16. Meanwhile, net advances increased to IRS4,123,260mn

registering a y-o-y growth of 8.4% as of the end of March 2016. Retail loans were at

IRS578,010mn as of the end of FY16, growing 19% on a y-o-y basis over FY15.

The bank's operating profit for FY16 was at IRS122,160mn, while net profit reached

IRS39,740mn as of the same date. Total income, meanwhile, reached a level of

IRS543,010mn in FY16 and net interest income closed the year ending March 2016 at

IRS153,120mn.

As of the end of March 16, the bank's gross NPA ratio stood at 12.90% and net NPA

ratio was at 8.61%. The restructured assets of the bank declined to IRS201,440mn in

FY16 from IRS383,150mn a year earlier.

In December 2013, Moody's changed its rating outlook for PNB from stable to negative

due to concerns over rising NPLs amid an environment of high interest rates and rising

inflation. The bank's long-term foreign currency rating stands at 'Baa2'. In September

2014, Fitch affirmed PNB's long-term IDR at 'BBB-', with a stable outlook.

Company Data ■ Website: www.pnbindia.in ■ Status: Public Sector Bank

India Commercial Banking Report Q1 2017

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation INR 285,728 385,300 247,367 295,526 221,433 396,648 227,188 307,385

Market Capitalisation USD 6,141 8,619 4,658 5,394 3,580 6,274 3,430 4,624

Share Price INR 181.24 244.40 156.16 174.26 125.29 219.10 115.70 144.45

Share Price USD 3.90 5.47 2.94 3.18 2.03 3.47 1.75 2.17

Share Price USD, % change (eop) 80.0 40.3 -46.2 8.2 -36.3 71.1 -49.6 na

Change, year-to-date na na na na na na na na

Shares Outstanding (mn) 1,577 1,577 1,584 1,767 1,767 1,810 1,855 na

Source: Punjab National Bank, Bloomberg

Table: Balance Sheet (INRmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 2,037,159 2,535,912 3,035,694 3,862,838 4,704,454 4,966,478 5,748,205 6,360,112

Loans & Mortgages 1,209,461 1,584,534 1,911,109 2,477,466 3,013,465 3,202,891 3,660,732 4,046,141

Total Deposits 1,636,157 2,106,592 2,514,577 3,162,319 3,844,082 3,990,002 4,612,035 5,152,454

Total Shareholders' Equity 132,140 157,002 189,298 229,160 295,353 348,353 385,163 425,884

Earnings per share (INR) 13.97 20.28 25.20 29.02 29.63 29.12 20.32 18.78

Source: Punjab National Bank, Bloomberg

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 50,789 49,983 67,535 86,635 92,344 91,153 95,977 102,074

Loans & Mortgages 30,154 31,232 42,516 55,564 59,151 58,785 61,123 64,937

Total Deposits 40,792 41,521 55,942 70,924 75,456 73,231 77,007 82,692

Total Shareholders' Equity 3,294 3,095 4,211 5,140 5,797 6,394 6,431 6,835

Earnings per share (USD) 0.35 0.44 0.53 0.64 0.62 0.54 0.34 0.31

Source: Punjab National Bank, Bloomberg

India Commercial Banking Report Q1 2017

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets 1.2 1.4 1.4 1.3 1.2 1.0 0.7 0.6

Return on Equities 18.3 22.3 23.2 22.1 19.4 15.6 10.0 8.5

Loan Deposit Ratio 73.9 75.2 76.0 78.3 78.4 80.3 79.4 78.5

Loan Asset Ratio 59.4 62.5 63.0 64.1 64.1 64.5 63.7 63.6

Equity Asset Ratio 6.4 6.1 6.2 5.9 6.2 6.9 6.6 6.6

Total Risk Based Capital Ratio na na na na 13.0 13.2 12.1 12.9

Tier 1 Capital Ratio na na na na 9.4 10.0 9.3 9.7

Source: Punjab National Bank, Bloomberg

India Commercial Banking Report Q1 2017

State Bank of India

SWOT Analysis

Strengths ■ The merger with State Bank of Saurashtra and Indore increased SBI's market

leadership.

■ Highly capitalised and a high capital-adequacy ratio, with support from the State.

■ It is the dominant bank in India and has an extraordinarily large distribution network.

Weaknesses ■ Potential non-performing assets arising in the real estate and SME sectors.

■ Potential for political interference.

■ Inefficiency impedes the giant bank's processes.

■ Net profit fell by 24% in FY16.

Opportunities ■ Further expansion of successful IT-based banking.

■ Aggressive international expansion will spread SBI's risk and expand overseas

revenue.

■ SBI's consolidation of its insurance business can take advantage of the bank's large

distribution network.

■ Deposits and advances increased in FY16.

■ Growth in SME lending.

Threats ■ State-owned banks may struggle to compete with private sector as RBI accepts new

licenses and more foreign banks arrive.

■ Exposed to broader economic and political risks.

■ Operating expenses rose 9.8% in FY16.

Company Overview State Bank of India (SBI) is India's oldest bank and by far the largest; SBI and its

subsidiary associate banks account for about a third of the total banking assets in India.

SBI started as the Bank of Calcutta in 1806. After extensive growth under various

India Commercial Banking Report Q1 2017

names, SBI was constituted by an act of parliament in 1955. In 1959, it was enabled to

take over former state-associated banks as subsidiaries, later called associates.

As of September 2014 (latest available data), SBI had 53,871 group ATMs, 16,086

domestic branches, and 190 foreign offices in 36 other countries, with a total staff

headcount of 217,379. The bank's overseas operations include eight foreign

subsidiaries in Canada, USA, Mauritius, Nepal, Botswana, Indonesia, Bhutan, and

Russia.

SBI has a controlling interest of 75-100% in each of its five associate banks: State Bank

of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of

Patiala and State Bank of Travancore. SBI merged with State Bank of Saurashtra in

August 2008 and with the State Bank of Indore in August 2010. The bank had said it

would merge another of the associate banks in FY14, though later decided against it.

In January 2014, SBI raised INR80.0bn (USD1.2bn) with the country's biggest ever

qualified institutional placement, though it fell short of its INR100bn target. As of

September 2014 the central government owned a 58.6% stake in SBI, with foreign

institutions holding much of the remaining shares.

In July 2014, SBI opened its first six 'digital branches' as part of a drive to strengthen its

challenge to private-sector rivals in the internet and mobile banking sectors. In January

2015, SBI signed a memorandum of understanding with National Australia Bank in a bid

to increase cooperation in migrant banking and international payments between the two

countries.

Corporate

Highlights Net Profit declined by 24.05% from IRS131,020mn in FY15 to IRS99,510mn in FY16.

Non Interest-income increased from IRS225,760mn in FY15 to IRS281,580mn in FY16 -

equivalent to growth of 24.73% y-o-y. Operating Expenses rose by 9.8% during the

same time period while operating profit increased from IRS395,370mn in FY15 to

IRS432,580mn in FY16, a growth rate of 9.41% y-o-y.

Deposits of the bank increased from IRS15,767,930mn in FY15 to IRS17,307,220mn in

FY16, up by 9.76% y-o-y. Within this, domestic deposits grew from IRS14,872,360mn

in March 2015 to IRS16,364,250mn in March 2016 - an increase of 10.03% y-o-y.

Gross Advances increased by 13.04% y-o-y from IRS13,354,240mn in FY15 to

IRS15,095,00mn in FY16. SME Advances increased from IRS1,814,730mn in FY15 to

IRS1,895,360mn in FY16 - an increase of 4.44% y-o-y. Agri advances, meanwhile,

increased by 4.68% y-o-y from IRS1,197,820mn in FY15 to IRS1,253,870mn in FY16.

During the same time period international advances rose by 13.77% from

IRS2,345,320mn in FY15 to IRS2,668,170mn as of March 2016.

Capital Adequacy Ratio under Basel III at SBI improved to 13.12% in March 16 from

12.00% in March 15.

India Commercial Banking Report Q1 2017

The bank is rated 'Baa3' (with a stable outlook) by Moody's, and 'BBB-' (negative) by

both Fitch and Standard & Poor's.

Company Data ■ Website: www.sbi.co.in ■ Status: Public Sector Bank with Associates

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation INR 1,440,543 1,785,551 1,028,096 1,600,779 1,208,346 2,328,188 1,742,355 1,991,929

Market Capitalisation USD 30,961 39,941 19,360 29,217 19,535 36,824 26,306 29,965

Share Price INR 226.90 281.19 161.91 238.55 176.65 311.85 224.45 256.60

Share Price USD 4.88 6.29 3.05 4.35 2.86 4.93 3.39 3.86

Share Price USD, % change (eop) 84.2 29.0 -51.5 42.8 -34.4 72.7 -31.3 na

Change, year-to- date na na na na na na na na

Shares Outstanding (mn) 6,349 6,349 6,350 6,710 6,840 7,466 7,466 na

Source: State Bank of India, Bloomberg

Table: Balance Sheet (INRmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 10,272,695 13,048,257 14,501,440 16,478,983 18,299,562 21,331,086 23,964,953 27,001,100

Loans & Mortgages 5,997,848 7,446,466 8,525,943 9,822,982 11,461,589 13,587,430 15,282,103 16,411,981

Total Deposits 7,548,662 9,868,013 10,872,554 12,303,892 13,885,105 15,898,439 17,963,061 20,338,610

Total Shareholders' Equity

632,645 746,187 857,669 864,484 1,099,557 1,292,869 1,522,797 1,668,847

Earnings per share (INR) 15.91 17.27 18.48 16.83 24.16 26.68 20.40 22.76

Source: State Bank of India, Bloomberg

India Commercial Banking Report Q1 2017

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 256,113 257,185 322,613 369,587 359,202 391,504 400,139 433,343

Loans & Mortgages 149,535 146,772 189,676 220,308 224,980 249,379 255,163 263,397

Total Deposits 188,199 194,501 241,881 275,949 272,551 291,795 299,927 326,416

Total Shareholders' Equity 15,773 14,708 19,081 19,388 21,583 23,729 25,426 26,783

Earnings per share (USD) 0.40 0.38 0.39 0.37 0.51 0.49 0.34 0.37

Source: State Bank of India, Bloomberg

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets 1.0 0.9 0.9 0.7 0.9 0.9 0.6 0.7

Return on Equities 17.3 16.4 15.1 12.8 16.2 15.5 10.4 11.0

Loan Deposit Ratio 80.4 76.2 79.4 81.1 84.6 87.7 87.2 82.5

Loan Asset Ratio 59.1 57.7 59.6 60.6 64.2 65.3 65.4 62.1

Equity Asset Ratio 6.0 5.5 5.7 5.1 5.8 5.9 6.1 6.0

Total Risk Based Capital Ratio 13.5 14.2 13.5 12.3 13.7 12.8 12.2 12.0

Tier 1 Capital Ratio 9.0 9.0 9.3 8.0 9.7 9.5 9.5 9.5

Source: State Bank of India, Bloomberg

India Commercial Banking Report Q1 2017

Regional Overview

BMI View: Chinese, Australian and New Zealand banks have been growing their loan exposure to the

residential property market, which we believe is overvalued and are vulnerable to significant price

corrections. We believe that this poses substantial risks to loan growth and financial stability. Policymakers

in these countries are already aware of these risks, and we expect them to continue to enact measures to

cool property prices and strengthen their financial systems.

In our view, residential real estate prices in China, Australia, and New Zealand are elevated, with the

potential of significant downturns. The banks in these countries have been increasing their exposure to their

property markets, and we believe that this poses downside risks to loan growth and financial stability.

Facing Slowing Risks

Asia - Loans, % chg y-o-y

Source: BMI, Bloomberg, PBoC, RBA, RBNZ

China's Credit Fuelled Housing Market Poses Significant Risks

We believe that China's residential housing market, particularly in Tier-1 and Tier-2 cities, is overheating,

with new home prices in those cities rising by an average of 28.2% y-o-y and 10.3% y-o-y, respectively, in

India Commercial Banking Report Q1 2017

August (versus 27.1% y-o-y and 8.5% y-o-y in July). The surge in property prices has been credit-driven,

with our estimates showing that household loans (mostly mortgages) as a share of total new yuan-

denominated loans have been on an uptrend since 2007, and accounted for 45.7% of the total in the first

eight months in 2016.

Runaway Price Gains In Tier-1 And Tier-2

China - Newly Built Property Prices, % chg y-o-y

Source: BMI, Bloomberg

The Chinese government has already implemented cooling measures to curb the rapid rise in house prices,

with local governments in more than 20 cities announcing additional tightening measures such as increases

in down-payments for first and second-time buyers, coupled with purchase restrictions in late-September

and early-October (during the golden week holidays). That said, in the near-term, there is still potential for

additional price gains as local residents rush to buy new homes amid expectations of additional tightening

measures and their fear of missing out. This could set the stage for a significant downturn down the road,

which we believe would weigh on loan growth in mainland China.

India Commercial Banking Report Q1 2017

Increasing Exposure

China - Big Five State-Owned Banks' Overall Real Estate Loans, % Of Overall Loans

Source: BMI, Annual Reports

Note: Figures are average of Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China

(ABC), Bank of China (BOC), and Bank of Communications (BoComm)

Additionally, we believe that Chinese property firms and banks are exposed to substantial credit and

liquidity risks, which would result in weakening of asset quality, in the event of a sharp price correction.

According to our calculations, direct loan exposure to the real estate market by the big five state-owned

Chinese banks rose to 27.7% of overall loans in 2015 from 22.8% in 2007. Looking at the breakdown,

residential mortgages and corporate loans accounted for 21.6% and 6.1% of their total loans, respectively, in

2015. Other than these usual mortgage loans, banks have become increasingly exposed to property

developers through trust companies and directional asset management plans. We note that Chinese real

estate developers are already highly leveraged, and this has been further exacerbated by their use of off

balance-sheet financing vehicles, such as wealth management products (see 'Credit-Fuelled Housing Poses

New Risks in The Event Of A Price Correction', September 21).

India Commercial Banking Report Q1 2017

Driven By Surging Mortgage Debt

Australia - Household Debt, % Of GDP And Established House Price Index

Source: BMI, BIS, Bloomberg, ABS

Australia's Record Household Debt A Worrying Sign For Financial System

Australia's housing boom has resulted in a significant increase in household debt as a share of GDP, which

reached a record high of 125.2% in Q116, according to the Bank of International Settlements (BIS), which

we believe poses significant risks to the country's financial system. According to Australian Prudential

Regulatory Authority (APRA) data, housing loans at the big four Australian banks accounted for 62.5% of

overall loans, which rose from 55.3% in December 2007. In our view, Australia's residential property

market, particularly in Sydney and Melbourne, remains at risk of a major price decline. Data from the

Australian Bureau of Statistics (ABS) suggest that housing supply will likely increase over the coming

months, with the total number of approved dwellings growing by 10.1% y-o-y in August (versus 4.2% in

July). An impending rise in housing supply, combined with still-elevated valuations, waning investor

demand, and subdued wage growth, are factors that will likely put downside pressure on housing prices.

India Commercial Banking Report Q1 2017

Housing Takes Up A Significant Share Of Total Loans

Australia - Big Four Banks' Housing Loans, % Of Total Loans And Tier-1 Capital Ratio, %

Source: BMI, APRA

While we highlight that the Tier-1 capital ratios of the big Australian banks have risen to 11.9% in June

2016 (from just 7.0% at end-2016) as their earnings benefitted from the booming housing market, the

APRA believes that Australian banks still have to improve their capital positions in order to maintain their

strength. In particular, a significant drop in house prices to historical norms has the potential to trigger a

substantial rise in mortgage defaults. This could therefore wipe out large portions of banks' balance sheets,

resulting in significant losses and an increase in impaired assets and past due items as a share of loans and

advances, which stood at 0.8% in June.

India Commercial Banking Report Q1 2017

Starting To Lose Steam, But Downside Risks Remain

New Zealand - Housing Price Indices, % chg y-o-y

Source: BMI, Bloomberg, Quotable Value

New Zealand Faces Considerable Risks From Stretched Affordability

New Zealand banks are also heavily exposed to the residential property market, with housing accounting for

52.9% of overall claims in August, and this therefore, poses considerable financial instability risks. We note

that New Zealand's residential housing prices continue to rise, and in our view, a further increase in New

Zealand's house prices raises the risk of a deep correction over the coming quarters. Affordability ratios are

looking stretched, with Auckland's price-to-income ratio standing at around 10x. Indeed, according to the

New Zealand's government property appraiser Quotable Value (QV), average nationwide residential

property values and home prices in Auckland continue to rise at a fast pace, despite signs of growth topping

out. We note that the Reserve Bank of New Zealand (RBNZ) is aware of such risks, and will continue to

implement additional macro-prudential measures to strengthen the country's banks. For example, the RBNZ

is attempting to follow the footsteps of the APRA, and it is considering increasing capital requirements for

housing loans, according to the July 7 speech by RBNZ's Deputy Governor and Head of Financial Stability

Grant Spencer. While the non-performing loan ratio of New Zealand banks has been on a downtrend and

India Commercial Banking Report Q1 2017

stood at a multi-year low of 0.5% in March, this would rise significantly, if house prices undergo a sharp

correction.

India Commercial Banking Report Q1 2017

Global Industry Overview

Global Commercial Banking Outlook

■ Developed market tail risks predominate, particularly in Europe

■ Most emerging market banking sectors to see improved prospects in 2017

■ Key exceptions include Saudi Arabia, Russia and Turkey

■ BMI introduces new non-performing loan data series this quarter

The global banking sector in 2017 will be characterised by divergence in loan and asset growth. In general,

emerging market banking sectors will see a marked improvement in loan growth and asset quality in 2017

compared with the previous three years, alongside an ameliorating macroeconomic backdrop and a modest

rebound in commodity prices. There are some notable exceptions, in countries experiencing slow recoveries

from crises, including Russia and Brazil, and other countries where the macroeconomic environment and

asset quality are deteriorating, such as China. The biggest global event risks arguably come from developed

Europe, where there are several pressure points that could trigger a crisis in the coming year, including the

weak condition of German giant Deutsche Bank. The US banking sector stands apart in terms of developed

market loan growth, with well-capitalised banks and a relatively solid outlook for private sector borrowing

demand, but tightening regulation and monetary policy pose risks.

New Non-Performing Loan Data Series

This quarter, BMI has added data on non-performing loans (NPLs) to our commercial banking databases

and reports. We now have NPL data online for 86 countries which will be updated quarterly, in line with

our normal commercial banking reports. Our NPL data is based on the International Monetary Fund

definition of all loans on which repayments of either interest or principal are overdue by 90 days or more.

The data we have collected is for the total financial sector, covering the total lending from the banking

sector within each particular country. The data is published, where available, on a monthly as well as an

annual basis, and is available as a percentage of all loans and in value terms in local currency, dollars and

euros.

We incorporate NPL data into our country-by-country banking sector analysis, as it offers a key indication

as to the health of a financial sector as well as the wider economy. The highest NPL ratios belong to

distressed eurozone countries that have seen severe banking crises in the past five years, including Greece,

Portugal and Cyprus; additionally, countries that have endured more idiosyncratic crises, such as Ukraine,

have very high NPL levels (see chart). On the other end of the scale are developed countries such as the US.

India Commercial Banking Report Q1 2017

Problems Are Polarised

End-2015 Non-Performing Loan Ratios (%) G

re e

C yp

ru s

U kr

a in

It a ly

Ir e la

n d

P o rt

u g a

In d

E u

ro zo

n e

S p

a in

B ra

zi l

S o

u th

A fr

ic a

U n ite

d K

in g d

o m

G e

rm a n y

C h in

U n ite

d S

ta te

Ja p

a n

C a

n a

d a

A u

st ra

lia

Source: National sources, BMI

While the official data usually gives an accurate picture as to the general state of asset quality in a country,

sometimes our analysts need to overlay the official data with additional scrutiny of the state of the banking

sector to get a sense of the true risk. China is a good case in point, where the headline figure understates

risk, in our view. The headline NPL ratio reported by the China Banking Regulatory Commission has risen

to a multi-year high of 1.8% as of Q216 (from a low of 0.9% in Q309), but as we have previously asserted,

this figure is highly understated (see 'Banks Teetering On The Brink Of A Potential Bailout', 10 August

2016). Chinese banks manage their reported NPL ratios closely and have extended the amount of time that a

loan can be overdue before they classify it as bad, particularly for state-owned enterprises. The 'at-risk'

credit ratio in China could be around 20%, and if more stringent criteria were to be applied, the figure could

be estimated to be as high as 30%. In addition to this, the NPL data give us historic trends over time, rather

than an outlook. Therefore, while the NPL data is useful to see trends over time, our accompanying analysis

is intended to provide a holistic view on the risks inherent in the national banking sectors in our universe of

coverage.

India Commercial Banking Report Q1 2017

Regional Outlooks

Developed States: Although the eurozone banking sector is showing continued signs of progress following

the crises of the past decade, massive systemic risks lie in wait in late 2016 and 2017. These include the

precarious position of Germany's Deutsche Bank, a slow burning but dangerous non-performing loan

burden in Italy, the Portuguese banking sector's vulnerability to the sovereign losing its investment grade

rating, and the potential for the European Central Bank to tighten policy prematurely. In the US, the

regulatory landscape is likely to become more stringent under a Hillary Clinton presidency following the

November 2016 elections, with the biggest burdens continuing to fall on large banks. While this is largely

factored into our loan growth forecasts for the US commercial banking system as a whole, further changes

in the regulatory regime could point to further upside for smaller versus larger banks, and potentially more

consolidation among banks at the lower end of the asset scale.

Slow Recovery, With Major Risks

Eurozone - Bank Loans To Households and Non-Financial Corporations

Client loans, % y-o-y (RHS) Client loans, % of GDP (LHS)

2 0 0

2 0

0 9

2 0

1 0

2 0

1 1

2 0

1 2

2 0

1 3

2 0 1

2 0

1 6

2 0

1 7

2 0

1 8

2 0

1 9

2 0

160

170

180

190

200

-5

-10

f=BMI forecast. Source: ECB,BMI

Asia: Banks in China, Australia, and New Zealand have large exposure to property markets, and we believe

that this poses downside risks to loan growth and financial stability. Residential real estate prices in all of

these markets are elevated, and carry the potential for significant downturns. Policymakers in these

India Commercial Banking Report Q1 2017

countries are already aware of these risks, and we expect them to continue to enact measures to cool

property prices, and strengthen their financial systems. Most notably, we believe that China's residential

housing market, particularly in Tier-1 and Tier-2 cities, is overheating due to surging credit. Household

loans (mostly mortgages) as a share of total new yuan-denominated loans have been on an uptrend since

2007, and accounted for 45.7% of the total in the first eight months in 2016. Chinese property firms and

banks are exposed to substantial credit and liquidity risks, which would result in weakening of asset quality,

in the event of a sharp price correction.

Chinese Banks Have Increasing Exposure To Real Estate

China - Big Five State-Owned Banks' Overall Real Estate Loans, % Of Overall Loans

Source: BMI, Annual Reports

Note: Figures are average of Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China

(ABC), Bank of China (BOC), and Bank of Communications (BoComm)

Emerging Europe: The banking sectors of emerging Europe face divergent growth outlooks over the

coming years, each characterised by distinct phases of the deleveraging cycle. Private sector deleveraging is

running its course across many economies including Bulgaria, Romania, Hungary and Serbia, with bank

lending poised for gradual recovery. Sluggish recovery from recession will keep banking sector growth

prospects dim in Russia, Kazakhstan and Ukraine, while Turkey is in the early stages of a prolonged

India Commercial Banking Report Q1 2017

deleveraging process. Central Europe will be an outperformer in terms of credit growth, although

profitability will be constrained by policy changes and ultra-low interest rates.

Deleveraging Running Its Course In Southeastern Europe

Client Loans, % of GDP

Bulgaria Romania Serbia

2 0

0 6

2 0

0 7

2 0 0

2 0

0 9

2 0 1

2 0

1 1

2 0

1 2

2 0 1

2 0

1 5

2 0

1 6

2 0

1 7

2 0

1 8

f = BMI forecast. Source: National sources, BMI

Latin America: Latin American banks will broadly see stronger asset growth in 2017, in line with an

expected rebound in economic activity. Over 2016, slowing economic growth and elevated interest rates

have undermined loan demand, while high inflation has hurt asset quality and sector profitability. Over the

coming year, higher average commodity prices and a move toward more orthodox macroeconomic policies

will drive accelerating economic growth, which will underpin more robust loan demand. Additionally,

decelerating inflation will bolster sector profitability and allow interest rates to fall in key economies,

offering tailwinds to loan demand. Argentina and Peru are best positioned for robust growth. Mexico and

Brazil face near-term headwinds, including sluggish economic activity, which will weigh on asset growth.

India Commercial Banking Report Q1 2017

Growth Rates Vary Across Latin America

Latin America (Selected) - Client Loan Growth, %

Argentina Brazil Chile Colombia Mexico Peru

2014 2015 2016f 2017f 2018f 2019f 2020f

f=BMI forecast. Source: Respective central banks, BMI

Middle East and North Africa: In 2017, we expect the operating environment to improve for commercial

banks in all of the Gulf Cooperation Council (GCC), apart from Saudi Arabia. The recovery will be gradual,

and we believe that there is no going back to the boom years of 2007-2014, when oil prices averaged almost

double what we forecast for the coming years. Amid tightening liquidity and a riskier economic backdrop,

banks will favour safer government debt over riskier private sector lending. As the Saudi Arabian

government pushes ahead with austerity, we see real GDP growth decelerating. In this context, Saudi banks

will continue to struggle finding new lending opportunities to the private sector, and asset growth will slow.

India Commercial Banking Report Q1 2017

Slowdown Is Over For Most GCC Banking Sectors, But Not For Saudi Arabia

GCC - Real GDP Growth (LHS), And Commercial Banks Asset Growth (RHS), % y-o-y

f = BMI forecast. Source: UN, National sources, BMI

Sub-Saharan Africa: Average loan growth will be noticeably slower across Sub-Saharan Africa (SSA) over the next five years compared to the last decade. In the region's commodity plays such as oil producing Nigeria and copper producing Zambia, more challenging economic conditions will weigh on job creation and cool business and consumer confidence, undermining demand for new credit. Infrastructure-driven Kenya, Tanzania and Uganda will also see more modest loan growth, though this is in large part due to low base effects. Strong real GDP growth and increased access to credit through mobile money platforms saw double-digit loan growth across these countries in the last decade. However, while these factors will continue to offer tailwinds to banking sector expansion, underpinning our outlook for still relatively robust loan growth across East Africa, we believe that the easiest gains have already occurred and further demand for credit will occur at a more even pace.

India Commercial Banking Report Q1 2017

Demographic Forecast

Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only

is the total population of a country a key variable in consumer demand, but an understanding of

the demographic profile is essential to understanding issues ranging from future population trends to

productivity growth and government spending requirements.

The accompanying charts detail the population pyramid for 2015, the change in the structure of

the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show

indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split

and life expectancy.

Population

(1990-2050)

India - Population, mn

1 9

9 0

2 0

0 0

2 0

0 5

2 0

1 0

2 0

1 5

2 0

2 5

2 0

3 0

2 0

3 5

2 0

4 0

2 0

4 5

2 0

5 0

500

1,000

1,500

2,000

f = BMI forecast. Source: World Bank, UN, BMI

India Commercial Banking Report Q1 2017

India Population Pyramid

2015 (LHS) & 2015 Versus 2050 (RHS)

Source: World Bank, UN, BMI

Table: Population Headline Indicators (India 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Population, total, '000 870,601 1,053,481 1,144,326 1,230,984 1,311,050 1,388,858 1,461,625

Population, % y-o-y na 1.8 1.6 1.4 1.2 1.1 1.0

Population, total, male, '000 450,559 545,690 593,103 638,354 679,548 719,387 756,312

Population, total, female, '000 420,041 507,790 551,222 592,629 631,502 669,471 705,312

Population ratio, male/female 1.07 1.07 1.08 1.08 1.08 1.07 1.07

na = not available; f = BMI forecast. Source: World Bank, UN, BMI

Table: Key Population Ratios (India 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Active population, total, '000 507,014 641,156 714,483 787,736 859,993 925,489 984,741

Active population, % of total population 58.2 60.9 62.4 64.0 65.6 66.6 67.4

Dependent population, total, '000 363,586 412,324 429,843 443,247 451,056 463,369 476,883

Dependent ratio, % of total working age 71.7 64.3 60.2 56.3 52.4 50.1 48.4

India Commercial Banking Report Q1 2017

Key Population Ratios (India 1990-2025) - Continued

1990 2000 2005 2010 2015f 2020f 2025f

Youth population, total, '000 330,215 365,901 375,166 380,303 377,426 372,831 367,793

Youth population, % of total working age 65.1 57.1 52.5 48.3 43.9 40.3 37.3

Pensionable population, '000 33,371 46,422 54,676 62,943 73,630 90,538 109,089

Pensionable population, % of total working age 6.6 7.2 7.7 8.0 8.6 9.8 11.1

f = BMI forecast. Source: World Bank, UN, BMI

Table: Urban/Rural Population & Life Expectancy (India 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Urban population, '000 222,412.6 291,466.6 334,543.8 380,743.5 429,329.7 483,086.8 541,342.1

Urban population, % of total 25.5 27.7 29.2 30.9 32.7 34.8 37.0

Rural population, '000 648,189.1 762,014.5 809,782.5 850,241.0 881,720.8 905,772.1 920,283.1

Rural population, % of total 74.5 72.3 70.8 69.1 67.3 65.2 63.0

Life expectancy at birth, male, years 57.6 61.8 63.7 65.4 66.9 68.4 69.6

Life expectancy at birth, female, years 58.3 63.5 65.4 67.7 69.9 71.4 72.8

Life expectancy at birth, average, years 57.9 62.6 64.5 66.5 68.3 69.8 71.1

f = BMI forecast. Source: World Bank, UN, BMI

Table: Population By Age Group (India 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Population, 0-4 yrs, total, '000 121,482 127,648 129,592 128,485 123,711 123,938 122,777

Population, 5-9 yrs, total, '000 110,874 121,455 125,165 127,619 126,965 122,563 122,989

Population, 10-14 yrs, total, '000 97,858 116,797 120,409 124,198 126,750 126,329 122,027

Population, 15-19 yrs, total, '000 87,891 108,767 115,769 119,397 123,347 126,041 125,709

Population, 20-24 yrs, total, '000 78,255 95,770 107,344 114,298 118,192 122,258 125,067

Population, 25-29 yrs, total, '000 70,137 85,474 94,267 105,719 112,815 116,925 121,109

Population, 30-34 yrs, total, '000 61,939 75,866 84,075 92,782 104,214 111,542 115,764

Population, 35-39 yrs, total, '000 54,266 67,807 74,499 82,607 91,289 102,821 110,228

India Commercial Banking Report Q1 2017

Population By Age Group (India 1990-2025) - Continued

1990 2000 2005 2010 2015f 2020f 2025f

Population, 40-44 yrs, total, '000 41,686 59,513 66,351 72,947 81,019 89,744 101,272

Population, 45-49 yrs, total, '000 35,385 51,498 57,835 64,556 71,118 79,179 87,895

Population, 50-54 yrs, total, '000 31,379 38,652 49,406 55,624 62,295 68,822 76,819

Population, 55-59 yrs, total, '000 25,944 31,543 36,312 46,627 52,777 59,317 65,742

Population, 60-64 yrs, total, '000 20,128 26,260 28,619 33,174 42,922 48,836 55,132

Population, 65-69 yrs, total, '000 14,436 19,629 22,542 24,784 29,038 37,848 43,342

Population, 70-74 yrs, total, '000 9,534 13,165 15,547 18,039 20,109 23,809 31,308

Population, 75-79 yrs, total, '000 5,490 7,736 9,328 11,157 13,195 14,921 17,879

Population, 80-84 yrs, total, '000 2,671 3,859 4,694 5,755 7,111 8,576 9,836

Population, 85-89 yrs, total, '000 930 1,506 1,886 2,340 3,016 3,827 4,692

Population, 90-94 yrs, total, '000 261 436 552 704 934 1,242 1,605

Population, 95-99 yrs, total, '000 41 78 111 142 197 272 368

Population, 100+ yrs, total, '000 5 10 13 19 27 40 57

f = BMI forecast. Source: World Bank, UN, BMI

Table: Population By Age Group % (India 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Population, 0-4 yrs, % total 13.95 12.12 11.32 10.44 9.44 8.92 8.40

Population, 5-9 yrs, % total 12.74 11.53 10.94 10.37 9.68 8.82 8.41

Population, 10-14 yrs, % total 11.24 11.09 10.52 10.09 9.67 9.10 8.35

Population, 15-19 yrs, % total 10.10 10.32 10.12 9.70 9.41 9.08 8.60

Population, 20-24 yrs, % total 8.99 9.09 9.38 9.29 9.02 8.80 8.56

Population, 25-29 yrs, % total 8.06 8.11 8.24 8.59 8.61 8.42 8.29

Population, 30-34 yrs, % total 7.11 7.20 7.35 7.54 7.95 8.03 7.92

Population, 35-39 yrs, % total 6.23 6.44 6.51 6.71 6.96 7.40 7.54

Population, 40-44 yrs, % total 4.79 5.65 5.80 5.93 6.18 6.46 6.93

Population, 45-49 yrs, % total 4.06 4.89 5.05 5.24 5.42 5.70 6.01

Population, 50-54 yrs, % total 3.60 3.67 4.32 4.52 4.75 4.96 5.26

Population, 55-59 yrs, % total 2.98 2.99 3.17 3.79 4.03 4.27 4.50

Population, 60-64 yrs, % total 2.31 2.49 2.50 2.69 3.27 3.52 3.77

Population, 65-69 yrs, % total 1.66 1.86 1.97 2.01 2.21 2.73 2.97

Population, 70-74 yrs, % total 1.10 1.25 1.36 1.47 1.53 1.71 2.14

India Commercial Banking Report Q1 2017

Population By Age Group % (India 1990-2025) - Continued

1990 2000 2005 2010 2015f 2020f 2025f

Population, 75-79 yrs, % total 0.63 0.73 0.82 0.91 1.01 1.07 1.22

Population, 80-84 yrs, % total 0.31 0.37 0.41 0.47 0.54 0.62 0.67

Population, 85-89 yrs, % total 0.11 0.14 0.16 0.19 0.23 0.28 0.32

Population, 90-94 yrs, % total 0.03 0.04 0.05 0.06 0.07 0.09 0.11

Population, 95-99 yrs, % total 0.00 0.01 0.01 0.01 0.02 0.02 0.03

Population, 100+ yrs, % total 0.00 0.00 0.00 0.00 0.00 0.00 0.00

f = BMI forecast. Source: World Bank, UN, BMI

India Commercial Banking Report Q1 2017

Methodology

Industry Forecast Methodology

BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and

causal/econometric modelling. The precise form of model we use varies from industry to industry, in each

case being determined, as per standard practice, by the prevailing features of the industry data being

examined.

Common to our analysis of every industry is the use of vector autoregressions, which allow us to forecast a

variable using more than the variable's own history as explanatory information. For example, when

forecasting oil prices, we can include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable's own

history is often the most desirable method of analysis. Such single-variable analysis is called univariate

modelling. We use the most common and versatile form of univariate models: the autoregressive moving

average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality

is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for

analysis and forecasting.

We mainly use OLS estimators, and, in order to avoid relying on subjective views and encourage the use of

objective views, we use a 'general-to-specific' method. BMI mainly uses a linear model, but simple non-

linear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for

example poor weather conditions impeding agricultural output, dummy variables are used to determine the

level of impact.

Effective forecasting depends on appropriately selected regression models. BMI selects the best model

according to various different criteria and tests, including but not exclusive to:

■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account;

■ Testing the directional movement and magnitude of coefficients;

■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); and

■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.

India Commercial Banking Report Q1 2017

Human intervention plays a necessary and desirable role in all of our industry forecasting. Experience,

expertise and knowledge of industry data and trends ensure analysts spot structural breaks, anomalous data,

turning points and seasonal features where a purely mechanical forecasting process would not.

Sector-Specific Methodology

BMI's Commercial Banking Report series is closely integrated with our analysis of country risk,

macroeconomic trends and financial markets. The reports draw heavily on our extensive economic dataset,

which includes up to 550 indicators per country, as well as our in-depth view of each local market. We

collate our commercial banking databank from official sources (including central banks and regulators)

wherever possible, and only fall back on secondary sources where all attempts to secure primary data have

failed. Company data is sourced, in the first instance, from company reports, with central bank, regulator or

trade association data only used as a backup.

■ The reports focus on total assets, client loans and client deposits.

■ Total assets are analogous to the combined balance sheet assets of all commercial banks in a particular country. They do not incorporate the balance sheet of the central bank of the country in question.

■ Client loans are loans to non-bank clients. They include loans to public sector and state-owned enterprises. However, they generally do not include loans to governments, government (or non- government) bonds held or loans to central banks.

■ Client deposits are deposits from the non-bank public. They generally include deposits from public sector and state-owned enterprises. However, they only include government deposits if these are significant.

■ We take into account capital items and bond portfolios. The former include shareholders funds, and subordinated debt that may be counted as capital. The latter includes government and non-government bonds.

In quantifying the collective balance sheets of a particular country, we assume that three equations hold

true:

■ Total assets = total liabilities and capital;

■ Total assets = client loans + bond portfolio + other assets;

■ Total liabilities and capital = capital items + client deposits + other liabilities.

In terms of the equations, other assets and other liabilities are balancing items that ensure equations two and

three can be reconciled with equation one. In practice, other assets and other liabilities are analogous to

inter-bank transactions. In some cases, such transactions are generally with foreign banks.

In most countries for which we have compiled figures, building societies/thrifts are an insignificant part of

the banking landscape, and we do not include them in our figures. The US is the main exception to this.

India Commercial Banking Report Q1 2017

In some cases, total assets and client loans include significant amounts that are owned or that have been lent

to customers in another country. In some cases, client deposits include significant amounts that have been

deposited by residents of another country. Such cross-border business is particularly important in major

financial centres such as Singapore and Hong Kong, the richer OECD countries and certain countries in

Central and Eastern Europe.

Risk/Reward Index Methodology

BMI's Risk/Reward Index (RRI) provides a comparative regional ranking system evaluating the ease of

doing business and the industry-specific opportunities and limitations for potential investors in a given

market. The RRI system is divided into two distinct areas:

Rewards: Evaluation of a sector's size and growth potential in each state, and also broader industry/state

characteristics that may inhibit its development. This is further broken down into two sub categories:

■ Industry Rewards. This is an industry-specific category that takes into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors.

■ Country Rewards. This is a country-specific category, and the score factors in favourable political and economic conditions for the industry.

Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic

profile that call into question the likelihood of anticipated returns being realised over the assessed time

period. This is further broken down into two sub categories:

■ Industry Risks. This is an industry-specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry, and the relative maturity of a market.

■ Industry Risks. This is a country-specific category in which political and economic instability, legislation and overall business environment are evaluated to provide an overall score.

We take a weighted average, combining industry and country risks, or industry and country rewards. These

two results in turn provide an overall Risk/Reward Index, which is used to create our regional ranking

system for the risks and rewards of involvement in a specific industry in a particular country.

For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall

risk/reward index score a weighted average of the total score. Importantly, as most of the countries and

territories evaluated are considered by BMI to be 'emerging markets', our score is revised on a quarterly

basis. This ensures that the score draws on the latest information and data across our broad range of sources,

and the expertise of our analysts.

India Commercial Banking Report Q1 2017

In constructing these index scores, the following indicators have been used. Almost all indicators are

objectively based.

Table: Commercial Banking Risk/Reward Index Indicators

Rationale

Industry Rewards

Estimated total assets, 2015 Indication of overall sector attractiveness. Large markets are considered more attractive than small ones.

Estimated growth in total assets, 2015-2019

Indication of growth potential. The greater the likely absolute growth in total assets, the higher the score.

Estimated growth in client loans, 2015-2019

Indication of the scope for expansion in profits through intermediation.

Country Rewards

GDP per capita A proxy for wealth. High-income states receive better scores than low-income states.

Active population Those aged 16-64 in each state, as a % of total population. A high proportion suggests that the market is comparatively more attractive.

Corporate tax A measure of the general fiscal drag on profits.

GDP volatility Standard deviation of growth over seven-year economic cycle. A proxy for economic stability.

Risks

Industry risks

Regulatory framework and industry development

Subjective evaluation of de facto/de jure regulations on overall development of the banking sector.

Regulatory framework and competitive environment

Subjective evaluation of the impact of the regulatory environment on the competitive landscape.

Country Risks

Short-term financial risk Rating from BMI's Country Risk Ratings (CRR), evaluating currency volatility.

Policy continuity Rating from CRR, evaluating the risk of a sharp change in the broad direction of government policy.

Legal framework Rating from CRR, to denote strength of legal institutions in each state. Security of investment can be a key risk in some emerging markets.

Bureaucracy Rating from CRR to denote ease of conducting business in the state.

Source: BMI

India Commercial Banking Report Q1 2017

Weighting

Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal

weight. Consequently, the following weights have been adopted:

Table: Weighting Of Indicators

Component Weighting, %

Rewards 70, of which

Industry Rewards 60

Country Rewards 40

Risks 30, of which

Industry Risks 40

Country Risks 60

Source: BMI

India Commercial Banking Report Q1 2017

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