>Indian Banks(Citi Group)

 Asset quality pulls and pressures — India’s economic outlook has continued to
deteriorate, raising further questions on banks' asset quality, given that a)
industrial production growth has slowed sharply; b) corporates face a funding
crunch (especially off-shore); c) credit spreads have moved up (though rates have
started coming off); and d) loan growth has been consistently high (25%+) for 3-4
years. Where could this lead us on asset quality; we seek history as a guide.
 What does history tell us? — a) Still far from peak NPLs (25%, current 2%), and
slippages (6.7%, current 2%); b) deterioration correlates more with IIP than
GDP/loan growth; c)1-3 yr lag between economic slowdown, and NPLs peaking; d)
lending rates matter (peak 19%, current 14%), but impact limited; e) credit costs
are back-ended, they rise even after the economy bottoms; f) stocks underperform
with rising deterioration; appear better correlated to slippages than credit costs.
 Is history relevant? — It always is; but there are caveats: a) Data - limited
availability, distortions (accounting, classification, structural changes); b) BS/P&L
changes -Large bond gains, supporting NPL clean-ups; c) Structural changes -
loan mix, capital and corporate health; d) Starting point – very high base NPLs as
standardized asset quality norms and reporting introduced only in early 1990's.
 History usually repeats itself, but scale and form often vary — We believe asset
quality will hurt; though jury is probably still out on pace and extent of pain. Key
determinants: a) Severity of economic slowdown; b) Scale and timing of domestic
fiscal, monetary actions; c) Global credit and growth environment; and d) Bank
management response to environment; collectively and specifically.

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