>BANKING SECTOR (GOLDMAN SACHS)

4Q08 interest coverage analysis of non-financials: early evidence of improving outlook

Early signs of outlook improving for banks' asset quality outlook
Our constructive view on banks was predicated on three key factors (i.e., improving growth outlook, rising ROE), including a benign outlook for banks’ asset quality due to resilient macro
economic prospects and the likelihood of further pick-up in economic activity. Our analysis of 1735 non-financial companies suggests that corporate sector performance has indeed seen a significant rebound in 4Q08; EBITDA margin and interest coverage ratio have recovered back to the levels prevailing in 1Q08 despite growth conditions being weaker than the corresponding period.

Further improvement to outlook likely with pick-up in economic activity.
Given our expectations of further pick-up in economic activity, we believe credit quality outlook for banks will likely improve further from here. There are some hurdles to our above view; debt/EBITDA ratio of some companies are very high which may require restructuring their financial position through capital raises or selldown of assets.

Regulatory forbearance, improving growth outlook to keep NPL/credit costs in check
Regulatory forbearance on NPL recognition and improving growth outlook for the economy are
likely to keep NPL/credit costs trends for banks under check. We do not anticipate significant
increase in credit costs from 2008 levels. We expect NPL ratio to increase modestly from 2.5%
in 2008 to 3% by 2010E.

Reiterate Conviction Buy on SBI; Buy on Axis, PNB and IOB
We believe state owned banks are key beneficiaries from an improving growth outlook for the economy; benefit of widening jaw between revenue and cost growth during 2010E and 2011E
would likely drive earnings growth stronger during this period. We expect ROE to cyclically
rise for the sector from 13% in 2009E to 17% in 2011E. We reiterate our Conviction Buy on SBI
and Buy ratings on Axis, PNB and IOB .

Key risks include rise in long bond yields as well as policy interest rates and potential set-back to our asset quality outlook.

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