Tuesday, May 19, 2009


Upgrading View to In-line

Closing our Cautious View: The Indian Bank Index has lagged the market by 10% YTD. However, strong election results for UPA, in our opinion, reduces the tail risk of sharply higher NPLs. Our economist has upgraded his GDP forecast for India. In an improving economy, banks are less likely to underperform. Hence, we have raised our industry view to In-Line. Our top
picks are IDFC, HDFC, BOI, Union, PNB and BoB

Weak revenue progression: We have been cautious on Indian banks, forecasting weak revenue progression and higher NPLs. F4Q09 normalized earnings faced significant pressures. Banks reported earnings growth by pushing NPLs into the future (restructuring) and booking capital gains. We expected underlying earnings to remain weak into F2010.

Not going all the way to an Attractive view. Our enthusiasm for private banks remains muted. While tail risks have lessened, we still expect their revenue progression to be modest (weaker NIMs and fees). Private bank stocks are factoring in a hectic economic recovery, which we consider unlikely. Hence, we would not chase them. ICICI Bank stock may do well near term,
but, even in the best case, we doubt that ROE can exceed 8-9% in F2010, implying full current multiples.

Our preferred stocks are wholesale-funded IDFC and HDFC: We expect their NIMs to spike due to lower funding costs. Moreover, loan growth maybe higher than our fairly modest outlook. And, since these banks are not bogged down by legacy NPLs, they stand to benefit the most.

We would also go long SOE banks. The government may reform public finances, which would be good for bond markets. Moreover, any move by government to reduce fragmentation or improve efficiencies would be a positive. We like BOI, Union, PNB and BoB.