>BANKING SECTOR (GOLDMAN SACHS)

■ Updating estimates: Recovery/upturn continues, but... : We are revising EPS ests. by +6% to +28% for HDBK for FY10E, by -14% to +7% for FY11E and -6% to +6% for FY12E, reflecting H1 results, continued macro recovery/upturn, offset by specific factors. While treasury gains led to stronger H1 earnings, credit growth remains sluggish. Our revisions factor in (1) marginally lower but accelerating credit growth from 4Q10E, (2) lower NII despite NIM gains due to lower asset growth, (3) lower 2H treasury gains and (4) still higher credit costs, including higher regulatory buffers, partly offset by (5) lower operating expenses/cost saving focus.

■ ... tug of war between downside and upside risks: Downside: banks may still deliver lower-than-expected NII, specifically in 3QFY10, due to (1) muted non-food credit off-take at 11.75% yoy so far, (2) lower investment yields as banks book gains on HTM portfolios, and (3) lower overall asset yields due to surplus liquidity and price competition.

Updating ests, keeping Buy on Axis, D/G SBI to Neutral from Buy

Upside risks: (1) Higher treasury gains as banks may continue to book profits from HTM book and G-Sec yields may soften at year-end due to higher liquidity/lower fiscal deficit; (2) decline in credit costs for some banks (especially those meeting the revised 70% provision coverage
norm), on macro recovery and corporate balance sheet restructuring.

■ Axis Bank remains our top pick/Buy; D/G SBI to Neutral from Buy: We continue to like Axis for its progressive expansion and new build-out (retail lending, insurance/asset mgmt, branding, risk mgmt) efforts on top of a strong CASA franchise and still-reasonable valuations. We D/G SBI to Neutral from Buy reflecting now-normalized valuations plus relatively harsher P&L headwinds from NIM, treasury and credit cost/ provision ramp-up pressures. We are reviewing our sector stance given (1) better macro outlook (est. FY11 GDP gwth of > 8.5%) and falling NPL risks, versus (2) potentially tightening monetary policy and prudential norms.

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