>INDIA FINANCIALS: Stick to Quality: u/g HDFC and BOI to OW, d/g IDFC and SBI to UW

• We remain positive on India financials against a macro backdrop of
rising rates and accelerating growth. All-round quality is likely to do
better than lopsided deposit or loan franchises, with credit growth and
falling NPL provisions being key earnings drivers. We reshuffle our
ratings and our top picks are HDFC Bank/HDFC, Kotak and IndusInd.

• Rising rates are not a worry, yet, because they are unlikely to affect
growth. Rates are definitely rising, though, across all segments.
Continuing tightness in short term liquidity should put upward pressure
on deposit costs. Bond yields should also harden, given the fiscal
weakness. Lending yields have gone up only in segments, but we expect
a more general hardening with a lag.

• Loan growth and provisions are key earnings drivers, against a
backdrop of the improving economy. NIM expansion is largely done and
the outlook is flat. Fee income is a challenge, as flow businesses are
under pressure all round. This is different from the previous cycle where
non-interest income played a strong role.

• We reshuffle our ratings: a) upgrade HDFC to OW given the strong
loan growth tailwinds, b) BOI to OW because of the asset quality
turnaround, c) cut IDFC to UW on concerns around the flow business
and c) SBI to UW because of high valuations and relative absence of
positive triggers.

• All-rounders in focus. At this phase of the cycle, balance between loan
origination and deposits is important, given liquidity is neither excessive
nor short. We recommend exiting the "origination" shops like IDFC. Our
top picks are a) quality names like HDFC and HDFC Bank and b) Kotak
and IndusInd which are addressing legacy weaknesses in funding
franchises.Our least preferred is SBI, which we think is too richly valued.

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