>Indian Banking(IIFL)

An expected spike in loan delinquencies is presently the biggest concern for the banking system. But how bad
could the situation get? We present two scenarios: moderate and bearish. In the moderate case, assuming
NPLs rise by 60% this year and the next, aggregate profit growth for all banks can slowdown to 10% in FY09
and decline by 16% in FY10. In the bearish case, assuming NPLs rise by 100% in each year, profit growth can
only creep up at 3% in FY09 and drop by 36% next year. While a profit decline is possible next year, banks’
books are expected to remain intact with healthy CAR. The BSE Bankex has corrected by 60%YTD, reflecting
some of these concerns, but any upside is likely to be capped by the negative news flow. Six major banks
presently trade at their 10-yr average PB valuation of 1.2x. Government banks appear safer than private ones.

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