>India Financial Sector: Entering a strong loan-growth cycle (DAIWA)

■ Credit likely to see a strong pick-up in FY11: High inflation has historically been followed by a strong pick-up in loan growth. The announcement of fresh investment projects totalling Rs3.8tn (US$88bn) during the December quarter was the highest for a quarter over the past two years. We project credit growth to touch 22% YoY for FY11 and remain positive on the sector.

■ Underperformance of the public-sector banks (PSBs) appears overdone: We believe that the underperformance of the PSBs against the private banks over the past couple of months is overdone, as we expect the worst of the asset-quality deterioration to be over by June 2010, and believe that the 10-year government-bond (G-Sec) yield may peak at 8-8.2%, after rising by almost 100bps over the past year. The 10-year G-Sec yield seems to be already discounting at least a 25bps interest-rate/cash-reserve-ratio (CRR) hike in April 2010. We have upgraded our rating for State Bank of India (SBI) to 1 (Buy), as we believe NPL and MTM concerns have been overdone.

■ We expect private banks to continue to outperform: HDFC Bank, Housing Development Finance (HDFC) and Axis Bank remain our top picks among the private players. We are bullish on Power Finance Corp (PFC) and Rural Electrification (REC), as we expect their loan growth to surprise on the upside, and offset the potential compression in interest spreads in FY11.

To read the full report: FINANCIAL SECTOR