Financial Report 2015-16

P S JayakumarManaging Director and CEO

Dear Stakeholder,

I am privileged to present before you the highlights of our Bank's performance during the financial year 2016-17.

The details of the achievements and initiatives taken by us are enclosed in the Annual Report.

Economic Overview

The Financial Year 2016-17 has witnessed continued strong progress on economic reforms covering aspects such as fiscal consolidation, passage of the Goods and Services Tax (GST) Bill, the Insolvency and Bankruptcy Code, infrastructure particularly in building Smart Cities, continued deep progress on renewable energy, record agriculture, focus on outcomes such as doubling farm income, continued ease of doing business, Aadhar enabled payment of direct transfer benefits. Given the expectations of a good monsoon in India and global economic growth, the near term growth opportunities look promising.

The global economy grew by 3.1 % in the year 2016, which is marginally lower than 3.2% in 2015. Global trade in consonance with global growth grew at a slower pace of 2.3% in 2016 as compared to 2.6% observed in 2015. Sweeping global order changes and uncertainties notwithstanding - the UK choosing to exit the European Union in the Brexit referendum held in June 2016, a new Government in the US taking charge in January 2017 and making sweeping policy changes and a historic deal between OPEC and non-OPEC countries to curtail production effective January 2017 which has had an impact on crude oil prices. India's macroeconomic indicators reflect stability on both external as well as internal counts. The redemption of FCNR (B) deposits was effected in a smooth manner further contributing to the macroeconomic stability of the Indian economy.

The efforts initiated by the Government on building a cashless economy and giving a fillip to digital modes of payments, that commenced in November 2016 presented a unique 'once in a life-time' opportunity for us to contribute to nation-building. Our staff worked ceaselessly to ease the situation for the people in our country.

The RBI has initiated a slew of measures to address the issue of NPA resolution which would benefit the entire banking system in India. The Bankruptcy Code has provided the architecture for time bound resolution and is expected to preserve the economic value of assets and give an impetus to economic growth.

Our economy has the unique potential to achieve higher growth rates backed by the favourable demographic mix, drive to promote the entrepreneurial spirit and the proactive reform orientation of the Government. The improvement in global growth and trade outlook is also going to support India's growth. Meeting the capital needs of the banking system is one key area which requires focused attention from all stakeholders for achieving higher sustainable growth. The banking system will also have to prepare itself for implementation of Basel-III that would require changes in the applicability of liquidity coverage ratio as well as counter cyclical buffer. The stringent regulations pertaining to risk weighting of the unrated exposures would also have an impact the capital needs of banks. Going forward, the banking sector would have to grapple with technology and accounting challenges emerging from the implementation of GST and IndAS accounting standards. With greater acceptance of digital payment modes, cyber security is another area where banks will have to build deep expertise.

In view of the emerging challenges before us, our Bank is working towards the execution of several strategic initiatives that are expected to give a competitive advantage. I would like to share with you a snap shot of some of the key initiatives currently underway.

Execution of strategic initiatives under Project Navoday, our comprehensive Business Transformation Journey:

During the year, our Bank has embarked on a transformation journey 'Project Navoday' and has made several strides in this journey, the core of which has been around growth through processes, products, platforms and people capability building. The thrust of Project Navoday is building the next generation capabilities and unleashing the organizational talent to make our Bank future ready with the ability to deliver a differentiated world-class customer experience.

We are also preparing for the full fledged launch of our Shared Services Center in GIFT City, Gandhinagar which, through digitization and centralization with seamless scaling-up and standardization of processes, compliance and controls would improve efficiencies and help our staff to address the needs of our customers and deepen our relationship with them. Our Bank-wide Market Research Study on Customer Satisfaction and Brand Health completed in March 2017 has provided us with valuable feedback on customer perceptions and expectations from the Bank. Our Employee Engagement Survey 2016 also provided us with valuable insights on our employee needs and expectations from the Bank, which has formed the basis of the rollout of several employee-centric initiatives. In summary, the two extensive, independent primary research studies undertaken by our Bank in 2016 have been instrumental in helping us define the details of our two-pronged focus on our customers and our employees.

Some of the new business initiatives aligned with the transformation that were undertaken in 2016-17 are as below:

• Building strong product propositions across Retail and Corporate Banking
• Strengthening the Business Origination and Credit Processes for Corporate and Retail Banking
• Alliance-led strategy of ecosystem financing to support innovation and entrepreneurship in Agriculture and Rural Banking and thereby help farmers augment their income
• Integrated Enterprise Risk Management with focus on strengthening risk and compliance self-assessment, internal audit and risk management processes, policies and procedures across the Bank
• Optimisation in the use of capital, risk based pricing and extensive use of bureau data
• Technology enablement as the backbone for all businesses we undertake. The Bank is working on adoption of technology innovations such as Robotics Process Automation, Block Chain Technology and Artificial Intelligence to bring more efficiency and transparency in the business process. Digital transformation, aimed at promoting a cashless economy through efforts such as promotion of digital villages and digital-only branches, early participation in Aadhar enabled banking, UPI, Bharat Bill Payment and comprehensive mobile banking
• People transformation, aimed at increasing employee motivation and engagement
• Societal transformation through Financial Inclusion: Our Bank views financial inclusion as an opportunity to bring about societal transformation while pursuing a beneficial business proposition. We have taken a number of initiatives to ensure that the banking services are extended across the geographic breadth of the country in a sustainable manner by leveraging technology. Some efforts in this direction include Aadhar seeding through alternate delivery channels and organizing camps, creation of dashboards to monitor the performance of BCs, hosting financial literacy camps, organising in-house training and certification programme for Banking correspondents and other innovative propositions

Strengthening our Brand: To attract the youth and instill in them the values of commitment, dedication and hard work to the profession, ace badminton players P V Sindhu and K Srikant endorse our Brand and their youth and zeal inspire our customers to associate with the core strength of these players. In order to increase the Brand recall, our Bank has acquired the naming rights of Sikandarpur and Andheri Metro Stations in the financial year 2016-17. Also, our Bank is a national supporter for FIFA U-17 World scheduled in October 2017 which will help the Bank to reach millions of students through school programs, workshops, football festivals and so on. Further, our Bank has also taken efforts to improve the brand recall by improving the brand visibility at strategic locations as well as in cinemas.

The interplay of the macroeconomic scenario, emerging challenges and the various initiatives underway has made us stronger as revealed from the financial performance this year. Our Bank reported profit in FY 2017 on a net basis as against posting a loss in FY 2016. Our Bank's gross global business crossed the Rs. 10 trillion milestone. Let me share with you the key highlights of the Bank's performance in FY 2017.

Financial Performance

Deposits

During FY 2017, the deposits in the Banking system increased significantly due to demonetization initiative of Government. This is reflected in the robust growth in the domestic CASA deposits of our Bank that increased from Rs. 1,32,539 crore in FY 2016 to Rs. 1,73,594 crore in FY 2017. Post the demonetization period, our Bank took a number of initiatives to retain the low cost deposits garnered during November 9 to December 31, 2016. As such, the share of CASA in domestic deposits on a terminal basis which had increased from 33.57% as of March 2016 to 40.46% in December 2016 could be retained at 39.44% as of March, 2017. It is noteworthy that on average basis the share of CASA in domestic deposits increased from 30.62% as of March 2016 to 37.08% as of December 2016 and then further to 38.79% as of March 2017. Despite the growth in CASA segment, overall deposits of our Bank grew by 4.81% on a year-on-year (y-o-y) basis to Rs. 6,01,675 crore. This was due to a conscious effort on our part to shed bulk and high cost deposits in favour of retail term deposits thereby lowering the cost of deposits. Our Bank's domestic deposits grew from Rs. 3,94,844 crore as of March 31, 2016 to Rs. 4,40,092 crore as of March 31, 2017 while its international deposits contracted from Rs. 1,79,194 crore to Rs. 1,61,583 crore over the same period.

Advances

Our Bank sought to consolidate and re-balance its portfolio in favour of high yielding assets while shedding the low yielding portfolios. The Global Advances of our Bank were at Rs. 3,83,259 crore as of March 31, 2017 as against Rs. 3,83,770 crore as of March 31, 2016. While the international loan book contracted from Rs. 1,20,502 crore to Rs. 1,05,735 crore, the outstanding domestic advances increased from Rs. 2,63,268 crore to Rs. 2,77,524 crore, over the same period. Our Bank diversified its portfolio in favour of retail loan portfolio which increased from Rs. 50,850 crore as of March 2016 to Rs. 57,994 crore as of March 2017. Within this, the home loan portfolio registered an increase of 20.80% on y-o-y basis. Our Bank is committed to play a meaningful role in supporting the Government's objective to improve the income of farmers and transform the rural ecosystem. Our Agriculture loan portfolio increased to Rs. 47,297 crore as of March 2017, registering a growth of 28.45% on y-o-y basis.

Stressed Assets

During the year, the banking sector continued to grapple with the problem of stressed assets that saw slow progress in resolution despite several policy initiatives. The limited progress in resolving stressed assets was an industry wide phenomenon as there were challenges associated with consortium lending, excess capacity in many industries, over leveraged borrowers and limited ability of Corporates to access the equity markets. Our Bank was also impacted by these challenges, but it sought to limit the growth of fresh slippages by ensuring that its loan origination process is made more efficient and there is a focused approach to recovery. Accordingly, our Bank's Gross Non-Performing Assets (GNPA) slightly increased from Rs. 40,521 crore as of March 2016 to Rs. 42,719 crore as of March 2017. As of March 31, 2017, the Gross NPA and Net NPA ratios were at 10.46% and 4.72% as against 9.99% and 5.06% respectively on the corresponding date of the last financial year. Our Bank preferred prudence over profit and has worked continuously to enhance its intrinsic strength by increasing its Provision Coverage Ratio (PCR). The PCR including technical write offs (TWO) as of March 2017 was 66.83% as against 60.09% as of March 2016. Even excluding TWO, our Bank's PCR stood at 57.68% as of March 2017 as against 52.11% as of March 2016. It is also worth noting that the Standard Restructured Advances of the Bank fell from a level of Rs. 25,905 crore in March 2015 to Rs. 13,735 crore as of March 2016 and further to Rs. 10,785 crore in March 2017.

Profit

Our Bank's Operating Profit registered a growth of 24.49% to touch a level of Rs. 10,975 crore in FY 2017 as against Rs. 8,816 crore in FY 2016 due to an improvement in its core earnings and supported by a 35.19% growth in its other income. The Net Interest Income showed a positive traction by recording a growth of 6.07% on y-o-y basis to touch a level of Rs. 13,513 crore. The Other Income reached a level of Rs. 6,758 crore supported by good growth in trading gains and forex profits during the year. The Total Revenue increased to Rs. 20,271 crore in FY 2017 as against Rs. 17,739 crore in FY 2016.

Total expenses declined by 5.62% driven by the fall in interest expenses and marginal increase in operating expenses. While Interest expenses declined by 8.41%, operating expenses increased by 4.18% on a y-o-y basis in FY 2017. The slow pace of growth in operating expenses helped the Bank to improve upon its cost to income ratio which declined from 50.30% in March 2016 to 45.86% in March 2017, suggesting higher operating efficiency.

During the year, our Bank provided Rs. 7,680 crore as against Rs. 13,766 crore in FY 2016 towards NPAs due to decline in fresh slippages. As a result, our Bank returned to generating profits on a net basis in FY 2017 after having posted net loss in FY 2016. The Net Profit of our Bank for FY 2017 stood at Rs.1,383 crore.

Capital

Our Bank continues to be well capitalized to meet Its growth aspirations on the back of strong franchise it enjoys with our customers and other stakeholders. Capital Adequacy Ratio of our Bank as per Basel III at 12.24% as of March, 2017 continues to be above the regulatory requirement. As of March 31, 2017 the Tier 1 capital ratio of our Bank is 9.93% and Common Equity Tier 1 (CET-1) is 8.98%. The Consolidated group Capital Adequacy Ratio is 12.80% as of March 31, 2017.

In a nutshell, our Bank sought to consolidate its operations and explored profitable business opportunities to return to a high growth trajectory while continuing to build on its internal strengths.

Going forward as these transformation measures get institutionalized, we are confident of providing world class services to our customers as well as generating higher value for all our stakeholders. A strong foundation for a sustainable and better quality of earnings has been put in place.

We are confident that our strategic focus on customers, people, processes, solution offerings enabled by the best in class technology will help us retain the leadership position in the emerging business environment. We believe that the multi-pronged initiatives will provide a strong foundation for the Bank to play a major role in the future growth of our country.

Our Way Forward

Our focus areas as discussed and agreed internally for the financial year 2017-18 include:

• Driving inclusive, high-quality and profitable growth and thereby build our market share
• Continuing to accelerate recovery and collection efforts to minimize the impact of stressed assets
• Enhancing customer and employee satisfaction with increased customer centricity and addressing financial needs through a multi-pronged digital transformation strategy
• Ensuring compliance with all systems, processes and procedures
• Strengthening our Subsidiaries and Associates through technology upgradation, complementary new products, talent and capability upgradation so as to provide alongside with the Bank, a full range of products and services
• Progressing steadily with the execution of our comprehensive transformation Project Navoday

I would like to acknowledge and thank the Chairman of the Board Mr Ravi Venkatesan and all the Board members for their valuable support and inputs to the Management in all our endeavours.

The Management team is confident that our collective effort and teamwork will help us as we channelize our energies to surpass the expectations of all stakeholders - our customers, our people and our shareholders. We look forward to your continued support and goodwill in this journey.

P S Jayakumar
Managing Director and CEO