>INDIA: FINANCIAL SERVICES (GOLDMAN SACH)

Back to secular growth path; upgrade SBI to Buy, add to Conv. list

Turning constructive on improved growth outlook
We believe the Indian economy and the financial sector are returning back to a potential growth path, post a period of adjustment to the intense dislocation in the global economic environment. We now turn constructive on Indian financials due to better fundamentals: 1) we forecast aggregate net income growth for the sector to rebound strongly from a subdued level of 1% in 2009E to 32% in 2010E and 23% in 2011E due to acceleration in loan growth, rising NIM and stable credit costs; 2) we forecast ROE to rise from 13% in 2009E to 17% in 2011E reflecting a pro-cyclical environment. We raise our 2009E-2011E EPS by up to 73% and our 12-m TP for stocks under our coverage by 26%-115%.

We see GARP ideas despite rally in stock prices
We turn constructive from our earlier cautious stance which was based on concerns about potential increase in NPL and credit costs. We note that the run-up in share prices since the lows seen in March 2009 partially reflects the improved outlook for the operating environment. However, we highlight potential GARP ideas based on sustained earnings growth, underperformance relative to benchmark index and inexpensive valuations despite the run-up.

Upgrade SBI to Buy, add to Conviction list; PNB to Buy from Sell
We upgrade SBI (SBI.BO) to Buy and add it to our Conviction list and reiterate Buy on Axis (AXBK.BO). Further, we upgrade PNB (PNBK.BO) and IOB (IOBK.BO) to Buy from Sell and Neutral, respectively; we also upgrade BOB (BOB.BO) to Neutral from Sell.

Add IDFC to Conviction Sell list; downgrade IBFSL to Sell
We downgrade HDFC (HDFC.BO)and ICICIB (ICBK.BO) to Neutral from Buy as we believe current valuations factor in potential upside from their respective operating fundamentals. We downgrade IBFSL (IBUL.BO) to Sell due to a strong price rally and concerns arising from a weak 4Q2008 performance. We maintain Sell on IDFC (IDFC.BO), and add it to our Conviction list, and on KMB (KTKM.BO); we maintain Neutral on HDFCB (HDBK.BO).

Key risks
Setback to growth expectations for the economy, rise in interest rates (policy rate as well as long bond yields), and deterioration in credit quality of loans for banks.

To see full report: FINANCIAL SERVICES