Indian Banks' Exposure To Dubai

 November 30 2009, 11:46:


 MAHRUKH ADAJANIA & SREEKANTH AKULA, NOMURA ASIA RESEARCH

This note highlights the exposure of India banks to Dubai.

Bank of Baroda's exposure to Dubai accounts for 2% of its
total assets and 7% of its international assets.
For all other large banks exposure is not significant.

Summary

Except for Bank of Baroda,
no bank has provided quantitative details of its Dubai exposures.
Among non-banks, Kotak Mahindra Bank has insurance policies
generated from Dubai, runs an offshore mutual fund and has
 other investments and broking revenuescoming out of Dubai.

ICICI Bank

ICICI Bank management provided the following details
• Loans for the UAE region are booked at the Bahrain branch.
The Bahrain balance sheet is US$6bn. Separate Dubai exposure is
not available.
• Non-India corporate exposure in Dubai is not material.
• India exposure to Dubai is with recourse to the parent’s balance sheet.
• The bank does not see any material impact from the current environment.

Valuation Methodology:

We value ICICI Bank's core business at 1.7x P/BV FY11F.
 We have valued life insurance at 20x one-year forward
 new business profit, asset management at 7% of equity
funds and 2% of debt funds, ICICI Ventures at 18x one-year
 forward earnings, general insurance at 10x one-year
forward P/E, ICICI Securities at 18x one-year forward P/E
and I-Sec PD at 5x one-year forward P/E. We have applied
a 15% subsidiary discount to arrive at our final
consolidated subsidiary value.

Risks Which May Impede the Achievement of the Price Target: 

Upside risks to our estimates from faster-than-expected growth:

 we build in 5% loan growth for FY10F and 15% for FY11F.
We believe the bank could review its strategy of slow growth
 in certain segments, especially mortgages if there are
favourable policy changes, such as tax sops in the budget.
Downside risks to our earnings estimates: slower-than-expected
 economic growth, a rapid rise in bond yields owing to rising
fiscal deficit and increasing global stress that will hurt ICICI's
international book, are key downside risks to our estimates.

State Bank of India

SBI only has a representative office in Dubai.
The bank was granted a full-fledged banking license
 at end-September 2009. It is trying to build out
business and has no significant exposure to Dubai yet.

Valuation Methodology:

 We value SBI using a sum-of-the-parts (SOTP) valuation,
 valuing the banking and non-banking businesses separately.
 Our 12-month price target of INR2,590 for SBI comprises
 INR2,356 for the banking business and INR231 for subsidiaries.
Our price target for the core bank is derived using a target
RoE of 17.1% and CoE of 12.0% arriving at a multiple
of 1.8x P/BV. Our fair value of INR231 for the subsidiaries
 comprises insurance and asset management business.
We have valued life insurance at 18x oneyear
forward NBAP (New business acheived profit).
We have valued SBI's asset management business
 at 3% of debt funds and 7% of equity funds.

Risks Which May Impede the Achievement of the Price Target:

 A faster than expected rise in rates or slower than expected
loan growth are key risks to our ratings and price targets
 for Indian banks.

Bank of Baroda

• BoB's total exposure to Dubai is US$833mn or
INR40bn, which is 7% of total international
assets and 2% of total assets as of September 2009.
 Total exposure to UAE is INR100bn or US$2bn.
The numbers provided by management are lower
than street estimates.
• BoB's exposure to Dubai World is US$200mn and
the first repayment is due only in 2011 and the
next one in 2013.
• Over and above Dubai World, BoB has an exposure
 of US$120mn to other Gulf properties. We estimate
that at least 60% of this would be to Dubai.
• BoB does not have exposure to Nakheel.
• The exposure to both Dubai and UAE is diversified
between local and trade finance exposure but no
 proportion has been made available.
• The gross NPLs on the total Dubai balance sheet
are low at 0.3% and net NPLs are zero.
• All property exposures in Dubai are standard
 accounts as of now.
• BoB stopped lending to Dubai real
 estate 1.5 years ago.
• BoB has said that it will revert on the size
 of the Dubai balance sheet.
• Other than Dubai, BoB has exposure to other Emirates
nations, including the Abu Dhabi government.
• UAE operations account for 12% of BoB's earnings but
the proportion of earnings from Dubai is not known.

HDFC

• HDFC has a representative office in Dubai
 to finance India property. HDFC does not have Dubai exposure.

Valuation Methodology:

 We value the core business at INR1,264 and
subsidiaries at INR702, which gives us our
consolidated fair value of INR1,970.
 We have valued the core business on a sustainable
 RoE of 22.9% and CoE of 11.4%, which yields a P/BV multiple
of 3.2x. We have valued life insurance at 18x FY11E NBAP.
 We have valued HDFC’s stake in its asset management company
at 7% of equity funds and 2% of debt funds.

Risks Which May Impede the Achievement of the Price Target: 

(1) Subsidiary valuations have moved up sharply in the
recent past, driven by strong business performance.
 In our valuations, HDFC's subsidiaries account for
more than 30% of the fair value. Hence, stronger-than-expected
performance by the subsidiaries could provide upside to our
valuation. The two largest subsidiaries are the life
insurance business and HDFC Bank. We estimate taht a
life insurance premium CAGR of 58% over FY07-FY10,
compared with our current assumption of a 48% CAGR,
would add INR50, or 2%, to fair value.

(2) Continued strong performance in a period of
prolonged sector weakness would warrant a premium,
 in our view. (3) The current strong performance
 has likely been driven by HDFC's ability to deliver
in a severely weak mortgage market in the past
two quarters. If the housing market were to witness
prolonged weakness in the
next quarters as HDFC sustained its growth rates,
we believe the market would likely ascribe a premium
 to the franchise value of HDFC, which is a potential
upside risk too.

Axis Bank

• The Dubai balance sheet is 1.3% of Axis
 Bank’s total balance sheet.

Other banks operating out of South India,
 such as Federal Bank and South Indian Bank,
could be sourcing a lot of their deposits from
Dubai.

Valuation Methodology:

We value Axis Bank at 2.5x P/BV FY11 (sustainable
RoE of 19.4% and growth rate of 7%).

Risks Which May Impede the Achievement of the Price Target:

 A faster-than-expected rise in interest rates and higher
delinquencies are key risks to our rating and price
 target for Axis Bank.