>Rate hike in line with expectations, more expected; remain positive (GOLDMAN SACHS)

Lending and deposit rates likely to rise post monetary policy
The RBI has hiked both the repo and reverse repo rate by 25bp to 3.5% and 5.0%, respectively. Our ECS Research team expects another 25bp hike in policy rates in April 2010 and an aggregate increase of 150bp in both repo and reverse repo (including the above two) through 2010. We believe this will likely reflect in: (1) short-term rates which could increase by 300 bp– impacting bulk borrowers and AAA companies active in this segment; (2) GSec yields – which will likely range between 8%-8.5%, on the back of fiscal consolidation; and (3) PLR and deposits rates, which will likely increase by 100 -150 bp over the next one year. We believe banks are unlikely to hike PLR and deposit rates immediately given excess liquidity in the system and will likely revisit this post the monetary policy in April 2010.

We have an attractive stance on Indian banks
We have an attractive stance on the sector and think a buoyant economy will offset risk of rising rates. In our view, stock price performance will be driven by: (1) a strong economy: our ECS Research team projects GDP growth for FY11E at 8.2%/FY12E at 8.7%, vs. 6.6% in FY10E; (2) strong earnings growth driven by higher credit growth (20% for FY11E/FY12E vs. 15.8% as per RBI data released on Feb 26), higher margin/fees and lower NPLs in FY10E-12E; and (3) limited risk of MTM on GSec book given likely more benign GSec yields. We prefer banks with: high earnings growth, low risk to balance sheet, and high/improving RoEs.

Our top recommendations:
(1) Bank of Baroda (Buy, CL): Attractive valuations relative to high RoE (>21%) & earnings (15% CAGR), better asset quality. (2) HDFC Bank (Buy, CL): Strong franchise, retail theme, high CASA (52%), low bulk deposits (5%), low impaired assets, high Tier-I. (3) Punjab National Bank (Buy): High CASA (40%), low AFS (18%), highest return ratios amongst PSUs (23% RoE). (4) IndusInd Bank (Buy): Turnaround underway, uptick in key metrics, niche name with 40% book in retail, more benefit from restructuring to accrue. (5) LIC HF (Sell, CL): Exposure to mortgage space, but wary of high growth as this will likely jeopardize profitability.

Risks
(1) Elevated inflation levels could lead to stronger measures by RBI; (2) slippage in fiscal deficit could lead to crowding out of private investments/rise in GSec yields.

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