Commercial Banking

Published by BUSINESS MONITOR INTERNATIONAL LTD

Including 5-year industry forecasts

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IndiaCommercial BankingReport Q3 2009 ISSN: 1747-8596

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India Commercial Banking Report Q3 2009 Including 5-year industry forecasts by BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: July 2009

India Commercial Banking Report Q3 2009

© Business Monitor International Ltd Page 2



CONTENTS

Executive Summary .........................................................................................................................................5

Table: Latest Actual Data (INRbn) ........................................................................................................................................................................ 5 Table: Latest Actual Data (US$bn)........................................................................................................................................................................ 5 Table: Latest Key Indicators At March 2008 ......................................................................................................................................................... 5 Table: Annual Growth Rate Projections, 2009-2013 (%) ...................................................................................................................................... 6 Table: Ranking Out Of 45 Countries Reviewed In 2009 ........................................................................................................................................ 6 Table: Projected Levels, 2008-2013 (INRbn)......................................................................................................................................................... 6 Table: Projected Levels (US$bn) ........................................................................................................................................................................... 7

Overview Of India’s Commercial Banking Sector.........................................................................................8

SWOT Analysis.................................................................................................................................................9

India Commercial Banking SWOT......................................................................................................................................................................... 9 India Political SWOT........................................................................................................................................................................................... 10 India Economic SWOT......................................................................................................................................................................................... 11 India Business Environment SWOT ..................................................................................................................................................................... 11

Commercial Banking Business Environment Rating .................................................................................13

Table: Commercial Banking Business Environment Ratings ............................................................................................................................... 13 Commercial Banking Business Environment Rating Methodology ...................................................................................................................... 16 Table: Asia Commercial Banking Business Environment Ratings ....................................................................................................................... 17

Economic Analysis – Global Banking Sector Outlook...............................................................................18

Table: Client Loans, 2007-2013 (% change y-o-y) .............................................................................................................................................. 19 Table: Loan-Deposit Ratio, 2007-2013................................................................................................................................................................ 21

Regional Outlook............................................................................................................................................23

Table: Comparison Of Loan/Deposit, Loan/Asset & Loan/GDP ratios, 2009 ..................................................................................................... 23 Table: Anticipated Developments in 2009 ........................................................................................................................................................... 24 Table: Comparison Of Total Assets, Client Loans And Client Deposits (US$bn) ................................................................................................ 25 Table: Comparison Of Per Capita Deposits, Late 2008 (US$) ............................................................................................................................ 26 Table: Interbank Rates And Bond Yields ............................................................................................................................................................. 27

Commercial Bank Sector Outlook ................................................................................................................28

Macroeconomic Activity ...................................................................................................................................................................................... 29 Table: India – Economic Activity......................................................................................................................................................................... 32 Monetary Policy................................................................................................................................................................................................... 33 Table: India – Monetary Policy ........................................................................................................................................................................... 35 Balance Of Payments........................................................................................................................................................................................... 36 Table: India – Balance Of Payments ................................................................................................................................................................... 38

Market Structure.............................................................................................................................................39

Protagonists......................................................................................................................................................................................................... 39 Table: Protagonists In India’s Commercial Banking Sector................................................................................................................................ 39 Definition Of The Commercial Banking Universe................................................................................................................................................ 40 List Of Banks ....................................................................................................................................................................................................... 41 Table: Nationalised Banks, State Bank Of India (SBI), Seven Associates Of SBI And IDBI ................................................................................ 41 Table: Private Sector Banks And New Private Sector Banks (*).......................................................................................................................... 42



Table: Foreign Banks .......................................................................................................................................................................................... 43

Company Profiles...........................................................................................................................................44

State Bank Of India.............................................................................................................................................................................................. 44 Key Statistics For State Bank Of India Group, 2004-2008 (INRmn).................................................................................................................... 44 Punjab National Bank.......................................................................................................................................................................................... 45 Key Statistics For Punjab National Bank, 2004-2008 (INRmn)........................................................................................................................... 45 Canara Bank........................................................................................................................................................................................................ 46 Key Statistics For Canara Bank, 2004-2008 (INRmn)......................................................................................................................................... 46 ICICI Bank........................................................................................................................................................................................................... 47 Key Statistics For ICICI Bank, 2004-2008 (INRmn)............................................................................................................................................ 47 HDFC Bank ......................................................................................................................................................................................................... 48 Key Statistics For HDFC Bank, 2006-2008 (INRmn) .......................................................................................................................................... 48 Axis Bank ............................................................................................................................................................................................................. 48 Key Statistics For Axis Bank, 2007-2008 (INRmn) .............................................................................................................................................. 49 Citibank ............................................................................................................................................................................................................... 49 Key Statistics For Citibank, 2007-2008 (INRmn)................................................................................................................................................. 50 HSBC Bank.......................................................................................................................................................................................................... 51 Standard Chartered Bank .................................................................................................................................................................................... 52 Key Statistics For Standard Chartered Bank, 2007-2008 (INRmn)...................................................................................................................... 52

Methodology ...................................................................................................................................................53

Basis Of Projections ............................................................................................................................................................................................ 54 Commercial Bank Business Environment Rating................................................................................................................................................. 54 Table: Commercial Banking Business Environment Indicators And Rationale.................................................................................................... 55 Table: Weighting Of Indicators ........................................................................................................................................................................... 56



Executive Summary

Table: Latest Actual Data (INRbn)

Date Total

assets Client loans

Bond portfolio Other

Liabilities and

capital Capital Client

deposits Other

March 2007 34,006.2 20,899.0 7,760.6 5,346.6 34,006.2 2,028.0 25,444.7 5,346.6

March 2008 41,709.5 25,491.0 9,586.6 6,631.9 41,709.5 2,726.2 31,400.0 6,631.9

Change, % 23% 22% 24% 24% 23% 34% 23% 24%

Source: BMI, Central banks, Regulators

Table: Latest Actual Data (US$bn)

Date Total

assets Client loans

Bond portfolio Other

Liabilities and

capital Capital Client

deposits Other

March 2007 847.7 445.1 165.3 113.9 724.2 50.6 634.3 113.9

March 2008 822.2 502.5 189.0 130.7 822.2 53.7 619.0 130.7

Change, % -3% 13% 14% 15% 14% 6% -2% 15%


Table: Latest Key Indicators At March 2008

Loan/Deposit ratio Loan/asset ratio Loan/GDP ratio GDP per capita,

US$ Deposits per capita,

US$

2339.56% 61.12% 57.17% 753 536

Rising Falling Rising




Table: Annual Growth Rate Projections, 2009-2013 (%)

Assets Loans Deposits

Annual Growth Rate 18 20 20

CAGR 16 17 19

Ranking 2 1 1


Table: Ranking Out Of 45 Countries Reviewed In 2009

Loan/Deposit ratio Loan/asset ratio Loan/GDP ratio

43 19 35

Local currency asset growth Local currency loan growth Local currency deposit growth

3 3 2


Table: Projected Levels, 2008-2013 (INRbn)

December

2008e December

2009f December

2010f December

2011f December

2012f December

2013f

Total assets 41,709.49 46,714.63 53,721.82 62,317.31 72,911.26 86,035.28

Client loans 25,490.97 29,059.71 33,709.26 39,776.93 46,936.77 56,324.13

Client deposits 31,400.04 36,738.05 43,350.90 51,587.57 61,905.08 74,286.09

e/f = BMI estimate/forecast. Source: BMI, Central banks, Regulators



Table: Projected Levels (US$bn)

December

2008e December

2009f December

2010f December

2011f December

2012f December

2013f

Total assets 969.99 849.36 1,033.11 1,246.35 1,518.98 1,870.33

Client loans 592.81 528.36 648.25 795.54 977.85 1,224.44

Client deposits 730.23 667.96 833.67 1,031.75 1,289.69 1,614.92

e/f = BMI estimate/forecast. Source: BMI, Central banks, Regulators



Overview Of India’s Commercial Banking Sector

BMI follows a rigorous approach to analysing commercial banking sectors around the world. We have

collated data relevant to national commercial banking sectors that have been published by central banks,

regulators and/or trade associations, as well as basic information concerning individual market

participants.

We have also considered BMI’s current views on the economic outlook for the country in question. Many

aspects have been – and continue to be – brought together in a systematic way through our proprietary

Commercial Bank Business Environment Ratings (CBBER), which facilitate cross-country comparisons.

In Q309 BMI has continued to extend the scope of its commercial banking report series, both in terms of

the depth in which individual states are assessed and the number of banking systems analysed.

Enhanced Global And Regional Context

We have expanded our coverage of the global and regional banking sectors to ensure that developments

in individual banking are placed firmly within the context of neighbouring and linked markets. Separate

regional overviews have been provided for emerging Europe, Asia, Latin America, the Middle East and

sub-Saharan Africa. The aim is to flag up pan-regional developments, highlight countries that stand

outside regional trends and isolate potential systemic risks.

Expanded Universe Of Commercial Banking Sectors

This quarter we are launching 13 new country reports. Building on our expertise analysing emerging

market economies, the focus is on enhancing coverage of key developed states (France, Switzerland,

Austria, Italy, Canada, Australia), emerging Europe (Bosnia, Bulgaria, Croatia), Asia (Sri Lanka,

Bangladesh) and Latin America (Peru). This will take the total number of countries covered to 59.

Improved Company Profiles

In Q209 we included company profiles in our reports for the first time. This quarter we are looking to

include more balance sheet data, and also expand the existing company profiles.



SWOT Analysis

India Commercial Banking SWOT

Strengths In macroeconomic terms, India’s prospects remain favourable, even if the economy is likely to slow

India’s high savings rate and the efficacy of the regulation undertaken by the Reserve Bank of India have provided for stability

Although loans have been growing rapidly, there are few signs of the excesses that have taken place over the last five years in China

The lack of linkages between Indian banks and the global financial system means that they are comparatively immune to volatility in global markets

Weaknesses A legacy of the protection of the commercial banking sector, which remains dominated by State Bank of India, is that efficiency levels and product offerings are a long way from world's best practice

The strength of the Indian banking system is more reflective of the sheer scale and entrenched position than its high level of development

The banking system is particularly held back by low levels of per capita GDP

The logistics involved in running a bank can be daunting due to the prevalence of paper-based payment systems (e.g. instruments such as cheques)

Opportunities India is still under-banked. Per capita deposits are low. People with savings often hold their wealth outside the formal banking system

India’s banking industry is progressively being opened up to competition from foreign banks

Loans are growing quite rapidly from a low base. Consumer finance is developing quickly

Opportunities exist for mutual funds, insurance companies and organisations offering related products

Threats The development of particular products – such as mortgages – is hampered by inefficiencies in the housing market (e.g. a cumbersome legal system and bizarre planning regulations) that need to be removed through the process of reform

It remains to be seen how much official enthusiasm there is for further deregulation and competition in the banking sector



India Political SWOT

Strengths India is the world's largest democracy. A secular constitution, framed in 1950, officially guarantees justice, liberty and equality while aiming to promote fraternity among the citizenry. More than 1,000 political parties registered for the April-May 2009 general elections, competing for the preference of India's 714mn eligible voters

Despite its multitude of problems, India has generally managed to avoid hard authoritarian rule or military coups, which have happened in many emerging markets, including its neighbours Bangladesh, Myanmar and Pakistan

Weaknesses Large coalition governments complicate policy-making at the centre, as coalition partners and outside parties pursue their own agendas. The competence of state government varies enormously across India's 35 states and union territories

India's tense relationship with Pakistan still weighs on regional stability. The two countries have gone to war three times since they were 'partitioned' on independence from British rule in 1947

Opportunities India has in recent years edged closer to the US in foreign policy, with Prime Minister Manmohan Singh finally closing an eagerly sought civilian nuclear deal with Washington in October 2008. We see the deal as evidence of Washington's increased interest in having New Delhi as a geopolitical partner in Asia. The fact that both the US and India are democracies, and the presence of a two million-strong affluent Indian population in the US, are bringing the two countries closer together

Thawing relations with Pakistan, following the earthquake crisis in October 2005 and a tentative peace process initiated in 2004, has made it easier for the parties to defuse potentially explosive situations, such as the Mumbai attacks in November 2008, which Islamabad acknowledges were planned and launched from its territory

Threats Hindu nationalism presents a growing threat to India's constitutionally enshrined secularism. Communal tensions between Hindus and minority Muslims, Christians, Sikhs and Buddhists have often erupted into deadly violence with the Gujarat riots in 2002-2003 being the latest instance of large-scale killings

India has experienced a series of serious terrorist attacks over the past two years, perpetrated by radical Islamist as well as Hindu groups. The Mumbai attacks in November 2008, perpetrated by Pakistani-based terrorists, have raised the spectre of further violence



India Economic SWOT

Strengths India has a very large domestic market, and rising domestic demand is a major driver of economic growth

A vast supply of cheap, skilled labour has turned India into the back office of the world. Around half of the population is under the age of 25

Booming exports of IT-enabled services, from call centres to software developers, are a valuable source of foreign exchange

Weaknesses Despite rapid economic growth, India remains a very poor country. According to IMF estimates, India's GDP per capita was US$1,082 (US$2,886 in purchasing power parity terms) in 2008, compared with US$2,969 (US$5,870 in PPP terms) in China

Agriculture remains inefficient. Poor June-September monsoon rains can slash rural incomes and consumption. Two-thirds of the population depends on farming for its livelihood

India has chronic trade and fiscal deficits, the latter of which is ballooning due to fiscal stimulus measures. The government spends a significant part of its revenue on interest payments, salaries and pensions. This limits the amount of money available on infrastructure improvements

Opportunities India's emerging middle class will continue to drive demand for new goods and services. A wealthier society, combined with tax reforms, would serve to boost revenue receipts, relieving fiscal pressures

The government has implemented some tax reforms. A value-added tax (VAT) introduced in 2005 to replace a complex web of sales taxes and a uniform goods and services tax to be implemented in April 2010 help should help boost compliance and therefore raise government revenue

Threats India's dependency on oil imports is problematic. This undermines the trade balance and makes India vulnerable to energy price-driven inflation

India is at risk of severe environmental problems. Many of its cities' air and rivers are heavily polluted, raising questions about the sustainability of the economy's rapid growth

India Business Environment SWOT

Strengths India is now one of the biggest recipients of foreign direct investment (FDI) among emerging markets, having attracted US$36.7bn of inflows in 2008, according to the United Nations Conference on Trade and Development (UNCTAD) - a 60% increase from the previous year

A cheap but skilled English-speaking labour force can do the jobs of Western workers for a fraction of the wages paid in North America or Europe

Weaknesses Despite pockets of excellence, such as the IT sector, overall literacy rates in India remain far lower than in Asian and other key emerging market nations

India's infrastructure is notoriously inadequate. A 500km road journey can take as much as 24 hours, owing to poor road conditions, congestion and toll booths

The competitiveness of local firms is undermined by reams of official red tape, from foreign investment restrictions to inflexible labour laws

Intellectual property rights are poorly protected in India. India is one of nine



countries on the 'priority watch list' for 2008 compiled by the Office of the US Trade Representative

Opportunities India could enhance the competitiveness of local industry through further liberalisation and deregulation

Ongoing infrastructure projects ranging from roads, railways, and airports should provide opportunities for foreign investors for many years to come

Indian Prime Minister Manmohan Singh is eager to reform the banking sector in order to increase the availability of long-term financing, particularly for large infrastructure projects

Threats The arrival of Western players, including management consultants Accenture and technology giant IBM, is bidding up local wages in the outsourcing sector. India faces growing challenges from countries such as Vietnam and potentially Bangladesh in a variety of sectors

China still remains a major competitor for FDI flows into India. India has excessive bureaucracy and poor infrastructure in comparison with China

The November 2008 Mumbai terror attacks demonstrated that security issues will increasingly be in investors' considerations



Commercial Banking Business Environment Rating

Table: Commercial Banking Business Environment Ratings

Limits of potential returns Data Score, out of 10 Ratings score, out of 100

Total assets, end 2008 US$ 970mn 7 Market Structure 77

Growth in total assets, 2008-2013 US$ 900.3mn 8

Growth in client loans, 2008-2013 US$ 631.6mn 8

Per-capita GDP, 2008 US$ 853.8 1 Country Structure 40

Tax 0.8 1

GDP volatility 1.6 9

Financial infrastructure 5.4 5

Risks to realisation of returns

Regulatory framework and development 5.0 5 Market Risk 53

Regulatory framework and competitive landscape 3.0 3

Moody's rating for local currency deposits 8.0 8

Long-term financial risk 6.0 6 Country Risk 60

Long-term external risk 9.3 9

Long-term policy continuity 8.0 8

Legal framework 3.7 4

Bureaucracy 2.9 3

Commercial banking business environment rating 61

Source: BMI

This quarter we have expanded our ratings universe once more, mainly taking in more developed market

economies. We now rate 59 banking systems, and it is little surprise that the developed states dominate

the top spots. The US and UK come first and second place, respectively, with scores of 88.7 and 88 out of

100. Of crucial importance to both scores is the very high rankings in the crucial ‘Risks to realisation of

returns – Market structure’ sub-category, which accounts for 42% of the overall score. The two countries

are ranked first and second in this category as well. This sub-category captures the size of the sector, and

the potential for assets and loans to grow in US dollar terms. While both systems have been buffeted by

the global credit crunch and will not post stellar growth numbers in percentage terms for the foreseeable

future, the sheer size of the US and UK’s financial systems means that there is massive potential for



deposits, assets and client loans to rise. In addition, the generally solid institutional framework – which

looks set to be augmented with new post-credit crunch regulations – will continue to provide a firm basis

for the sector.

A Mixed Bag For The Developed States

Following just behind the US and UK are a clutch of major developed state economies, including

Germany and France (83, ranked joint third globally), Canada (79.9, fifth), as well as Australia and Italy

(78.4, joint sixth). All of these sectors have reasonable prospects into the medium term, having a large

deposit and loan base, as well as the potential to grow substantially in volume (even if not percentage)

terms. However, several states are notable by their absence in this cluster. Austria falls somewhat short

(72.4, 10th) of the pack, along with Greece (69.4, 15th), but it is the poor performance of Switzerland

(62.7, 26th) and Japan (56.3, 33rd) which really stands out. Both states are going to struggle to post

increases in asset or loan growth in US dollar terms over the forecast period, to 2013, partially as a result

of currency moves to the downside, but also in the case of Switzerland because of the relative weakness

of the two key banking groups, UBS and Credit Suisse which had built up large franchises during the

good years.

Asia Rising

Significantly, just behind the main ‘pack’ of European economies, several Asian states have managed to

post strong performances in our risk ratings. South Korea (76.7, eighth) and Singapore (72.9, ninth) come

in ahead of Austria. However, Singapore leads the world globally in the ‘Risks to realisation of returns –

Country risk’ sub-category, with a score of 84, while South Korea has a score of 64. The two are ranked

22 equal overall. Singapore’s high score rests on good scores for key elements of BMI’s economic,

political and business environment risk ratings, which measure the risks to policy continuity. In contrast,

the small size of the economy and banking sector is a major factor limiting the potential for expansion,

especially in a world of lower liquidity and risk appetite. South Korea, however, has a large domestic

economy to provide the deposit base necessary to fund credit growth.

Elsewhere in Asia, we note that China (overall score 70.8) ranks 12th overall. As the world’s third biggest

economy – and still an emerging one at that – it is little surprise that the scope for asset growth in China is

huge. This has allowed the country to be ranked fourth in the ‘Limits of potential returns’ category (74),

and post the highest ‘Limits of potential returns – Market structure’ sub-category score, at 90. What

prevents China from rising any higher is its poor performance in the ‘Limits of potential returns –

Country structure’ sub-category, at 50 (49th), and the ‘Risk to realisation of returns category’, at 63.4

(42nd). Of particular concern to BMI is the potential for a collapse of the local system, because much

lending is still state directed and risk management is still embryonic. In addition, despite the size of the

whole economy, per capita GDP remains low. We forecast it at US$3,024 for 2009, with significant

income inequalities. This severely limits the ability of financial institutions to sell premium products in

the local markets, and also means that average deposit levels are still very low.



Emerging Europe, Limited Opportunities

The emerging European states are posting surprisingly mediocre ratings outturns. We highlight the

potential for a systemic crisis in the region as the major Western European banks removing credit and

capital from Central and Eastern Europe. These risks are exacerbated by the deep recessions we see in the

Baltic states, Bulgaria, Russia and Turkey, and the risks of further currency crises that could create even

greater economic dislocations, as the massive economic asymmetries that have built up in the region

unwind. When taken in tandem with the relatively small size of the local economies and the rapid banking

sector expansion seen in recent years, it is little surprise that the highest rated emerging European state is

regional heavyweight Russia, at 67.1 (21st globally), and that the top ‘new’ EU member is the Czech

Republic, at 64.5 (24th). Coming close to the bottom of both the regional and global peers groups are

Latvia (39, 56th) and Ukraine (43, 49th), which have both been forced to tap the IMF and EU for

emergency funds.

MENA Below Par

The big story in recent years in the Middle East and North Africa (MENA) banking sectors has been high

oil prices in recent years. Hydrocarbon revenues have swollen bank balances across the Gulf region, with

significant amounts of capital and liquidity finding its way to North Africa as well. With the days of

stellar oil prices gone for now (and not likely to return over the forecast period) the outlook is not so

positive for the region, and this is reflected in the fact that the two highest ranked countries are the UAE

at 11th and Saudi Arabia and 20th. No other MENA state is in the top half of our 59-strong ratings

universe. Of particular concern is that while some progress has been made on putting the region’s

financial infrastructure on a more sustainable footing in recent years, it is still far too dependant upon oil

revenues, and there are few drivers of either economic or commercial banking growth outside the natural

resources sector. Indeed, it is particularly worrying that not one MENA state has broken in to the top 10

states in the ‘Limits of potential returns – Market structure’ sub-category. The best performer is the UAE,

in 18th place, and even with the growth of Islamic banking products, the boom years are over. We expect

much more moderate growth in the financial space over the forecast period.

Opportunities In Africa

While Africa remains one of the most ‘under-banked’ regions in the world – and hence one of the most

insulated from the global credit crunch – the commercial banking business environment ratings still

reflect the major problems in operating even in the region’s largest economies. South Africa’s overall

70.5 rating score put it in 13th place globally, while in the ‘Limits of potential returns – Market structure’

category it scores 73.3, but it receives poor score for ‘Risks to realisation of returns – Country risk’, at 56.

The country’s main weaknesses, in common with Kenya and Nigeria, are bureaucracy, external economic

risk and financial market risk, all of which deter potential investors from engaging more fully in the local

market.



Diverse Latin Performance

Again, in Latin America, the ratings do not tell one particular story, with a widely diverse regional picture

developing. Perhaps the most interesting story is among the worst performers, which include Argentina

(43, 49th), Colombia (50.3, 43rd) and Venezuela (36, 58th). All three economies face difficult times over

the coming years, having been fiscally imprudent. The latter two (especially Venezuela) have benefited

significantly from the oil boom, which has now come to an end. There is little to be optimistic about in

any part of the ratings for these countries, and we anticipate a much weaker performance than in Brazil

(68.9, 16th), Chile (66.6, 22nd) or even Mexico (67.6, 19th). Of particular note is Brazil’s crucial ‘Limits of

potential returns – Market structure’ sub-category rating of 80 (seventh globally) and Chile’s reasonably

solid 80 ‘Risks to realisation of returns – Market structure’ rank of 11th.

Commercial Banking Business Environment Rating Methodology

Since Q108, we have described numerically the banking business environment for each of the countries

surveyed by BMI. We do this through our Commercial Banking Business Environment Rating (CBBER),

a measure that ensures we capture the latest quantitative information available. It also ensures consistency

across all countries and between the inputs to the CBBER and the Insurance Business Environment

Rating, which is likewise now a feature of our insurance reports. Like the Business Environment Ratings

calculated by BMI for all the other industries on which it reports, the CBBER takes into account the

limits of potential returns and the risks to the realisation of those returns. It is weighted 70% to the former

and 30% to the latter.

The evaluation of the ‘Limits of potential returns’ includes market elements that are specific to the

banking industry of the country in question and elements that relate to that country in general. Within the

70% of the CBBER that takes into account the ‘Limits of potential returns’, the market elements have a

60% weighting and the country elements have a 40% weighting. The evaluation of the ‘Risks to

realisation of returns’ also includes banking elements and country elements (specifically, BMI’s

assessment of long-term country risk). However, within the 30% of the CBBER that take into account the

risks, these elements are weighted 40% and 60%, respectively.

Further details on how we calculate the CBBER are provided at the end of this report. In general, though,

three aspects need to be borne in mind in interpreting the CBBERs. The first is that the market elements

of the ‘Limits of potential returns’ are by far the most heavily weighted of the four elements. They

account for 60% of 70% (or 42%) of the overall CBBER. Second, if the market elements are significantly

higher than the country elements of the ‘Limits of potential returns’, it usually implies that the banking

sector is (very) large and/or developed relative to the general wealth, stability and financial infrastructure

in the country. Conversely, if the market elements are significantly lower than the country elements, it

usually means that the banking sector is small and/or underdeveloped relative to the general wealth,

stability and financial infrastructure in the country. Third, within the ‘Risks to the realisation of returns’



category, the market elements (i.e. how regulations affect the development of the sector, how regulations

affect competition within it, and Moody’s Investor Services’ ratings for local currency deposits) can be

markedly different from BMI’s long-term risk rating.

Table: Asia Commercial Banking Business Environment Ratings

Limits of Potential

Returns Risks to Potential

Returns

Market

Structure Country

Structure Market

Risks Country

Risks Rating Ranking

South Korea 76.7 85.0 76.7 64.0 76.7 1

Singapore 53.3 85.0 96.7 84.0 72.9 2

Taiwan 70.0 77.5 83.3 64.0 72.6 3

China 90.0 50.0 56.7 68.0 70.8 4

Malaysia 63.3 77.5 76.7 70.0 70.1 5

Hong Kong 50.0 87.5 70.0 82.0 68.7 6

Thailand 63.3 67.5 80.0 64.0 66.6 7

Indonesia 66.7 60.0 76.7 48.0 62.6 8

India 76.7 40.0 53.3 60.0 60.6 9

Japan 30.0 77.5 63.3 80.0 56.3 10

Vietnam 53.3 47.5 40.0 50.0 49.5 11

Philippines 46.7 47.5 56.7 52.0 49.1 12

Pakistan 46.7 47.5 56.7 42.0 47.3 13

Scores out of 100, with 100 the highest. Source: BMI



Economic Analysis – Global Banking Sector Outlook

Meltdown Averted, But Bad Loans Loom Large

The aftermath of the global banking crisis is beginning to take shape. Largely due to the assistance of

governments, which have rushed in to cushion the fall of major commercial banking players in the wake

of high profile collapses in 2008, potential catastrophe has been averted. To be sure, we do not believe

that the bulk of the damage has yet been done, as the deleveraging process has some room to run and will

hurt the balance sheets and bottom lines of the vast majority of global financial institutions. But the risks,

for the most part, have evolved from the potential for the complete meltdown of the global banking

system to more conventional problems, including the rise of non-performing loans, worsening credit

portfolios and a general deterioration of asset quality. This is especially true as we do not see an economic

recovery in most states until 2010 at the earliest. With a few notable exceptions, this is the common

thread that runs through all of the national banking sectors covered by BMI. Our projections take this into

account across the board. For most states we forecast lower loan-to-deposit ratios and slow loan growth in

general, as banks rebuild their deposit bases and remain reluctant to extend new credit.

Developed States

The worst of the banking crisis appears to be behind us. At least, it appears that there will be few or

perhaps no further major bank failures to come, thanks to the implicit guarantee of governments eager to

avert another Lehman Brothers collapse. Still, the situation is far from rosy. Although monetary policy

across the developed world appears to be set up to maximise banking profits and rebuild balance sheets,

with a steep yield curve and 'quantitative easing' now in place in the UK and US, asset valuations are still

too high and need to be reduced considerably, and this will take time. Meanwhile, non-performing loans

are set to rise, from credit card portfolios to commercial real estate lending. We forecast rising household

savings rates in much of the developed world, which will help contribute to both higher deposit growth

and lower loan growth, as the excesses of the previous years are worked off.



Table: Client Loans, 2007-2013 (% change y-o-y)

2007 2008e 2009f 2010f 2011f 2012f 2013f

Argentina 41.3 20.8 8.0 5.0 10.0 17.0 19.0

Brazil 30.9 27.0 3.0 6.0 7.0 9.0 11.0

China 16.6 15.2 15.0 12.0 5.0 5.0 8.0

India 25.6 22.0 14.0 16.0 18.0 18.0 20.0

Japan 0.6 4.7 -5.0 1.0 1.5 3.0 3.0

Mexico 26.7 14.5 -2.0 2.5 3.5 4.0 4.5

Nigeria 108.8 61.3 5.0 9.0 13.0 15.0 15.0

Russia 50.3 35.6 7.0 9.0 12.0 16.0 17.0

Saudi Arabia 20.4 22.0 -10.0 4.0 5.0 6.0 7.0

Singapore 19.9 16.6 -5.0 4.0 6.0 7.0 7.5

South Africa 22.0 12.3 6.0 9.0 12.0 12.0 12.0

South Korea 13.1 17.5 -4.5 3.5 4.0 4.5 5.0

Turkey 27.5 26.0 -2.0 10.0 11.0 15.0 16.0

United Kingdom 26.4 26.5 -7.0 1.5 2.0 2.0 2.0

United States 9.3 -0.4 -3.0 3.0 4.5 5.0 5.5

e/f = BMI estimate/forecast. Source: National regulators, Central banks, Statistics agencies, BMI

Emerging Europe

Nowhere is the ‘meltdown averted, but major problems ahead’ theme more evident than in Central and

Eastern Europe, where assistance from multilateral agencies and the EU have lent support to local

banking sectors, at least to the extent that total collapse has been averted, for now. Also contributing to

the moderation in our regional outlook is the stabilisation of the global financial sector, which has helped

lower external financing costs for Central and Eastern European players. Nonetheless, we remain

concerned about the prospects for rising non-performing loans, which have been spiralling higher in some

states. We are particularly concerned about the economies of the Baltic states (Estonia, Latvia and

Lithuania), because if confidence in the banking sectors of these states falters amid major economic

contractions, a further bout of broad-based capital flight from the region could be triggered.

Latin America

Lessons learnt from past mistakes have put Latin America in a far healthier position to deal with the

current global crisis, and the fact that no Latin American banking sector has faced a systematic failure in

2008-2009 is testament to that progress. Regional authorities have implemented a number of measures to



reduce risk in recent years, not least by reducing their reliance on external financing, strengthening capital

defences and boosting regulatory robustness. Importantly, Latin America's commercial bank loan

portfolio is adequately covered by a stable and growing domestic depositor base. The region's loan-to-

deposit ratio falls within the 1.10 mark, which suggests that collective lending is primarily financed by

local deposits. However, we anticipate a significant deterioration in the quality of commercial bank loan

books, with non-performing loan ratios expected to head higher.

Asia

Given that most Asian economies will experience severe recessions, or sharp slowdowns at best, in 2009,

it is clear that banks are at risk of seeing their loans turn non-performing, as companies hard-hit by the

recession find themselves unable to repay their loans. However, Asian banks are generally in a healthier

position than their counterparts elsewhere, as loan-to-deposit ratios throughout the region's banking

systems are well below 1.00. The opportunities for Asian banks are arguably much more varied than the

risks, owing to differences in their levels of development, the way they are managed, degrees of foreign

bank penetration and their targeted customers. For Asia's major banks, there is a chance to reclaim market

share from their Western rivals, as the latter are forced to retreat from the region or put expansion plans

on hold as a result of their dire circumstances. For less developed places, such as rural China and

Vietnam, there are still major opportunities for local banks to expand their customer base.



Table: Loan-Deposit Ratio, 2007-2013

2007 2008e 2009f 2010f 2011f 2012f 2013f

Argentina 0.50 0.53 0.52 0.50 0.49 0.51 0.51

Brazil 1.77 1.64 1.54 1.47 1.39 1.33 1.30

China 0.69 0.67 0.70 0.73 0.71 0.69 0.67

India 0.82 0.81 0.79 0.78 0.77 0.76 0.76

Japan 0.76 0.77 0.74 0.73 0.73 0.74 0.74

Mexico 0.76 0.74 0.69 0.67 0.65 0.63 0.61

Nigeria 1.01 1.03 0.99 0.96 0.95 0.94 0.93

Russia 1.22 1.34 1.25 1.17 1.12 1.11 1.09

Saudi Arabia 0.85 0.90 0.84 0.85 0.84 0.80 0.75

Singapore 0.74 0.78 0.76 0.75 0.75 0.75 0.74

South Africa 1.11 1.07 1.06 1.05 1.04 1.03 1.02

South Korea 1.32 1.33 1.24 1.24 1.21 1.19 1.16

Turkey 0.67 0.67 0.64 0.64 0.65 0.66 0.69

United Kingdom 0.91 0.94 0.86 0.86 0.86 0.86 0.85

United States 0.94 0.87 0.81 0.81 0.81 0.80 0.80

e/f = BMI estimate/forecast. Source: National regulators, Central banks, Statistics agencies, BMI

Africa

The less-developed markets have fewer risks, in our view. In spite of the turmoil in the international

financial markets, sub-Saharan African banking sectors have so far remained resilient amid the global

credit crunch. This is because apart from having almost no direct exposure to US subprime assets, modest

linkages with the global financial system have prevented excessive leverage amongst African banks.

Furthermore, with the regional banking sectors' external debt levels manageable, we also expect the risk

of bank defaults to be limited in 2009 and 2010. We believe that a systemic banking sector crisis is

unlikely over the medium term, although we acknowledge that below-expected economic growth could

increase the proportion of non-performing loans across the region.

Middle East

Overextended loan books, in conjunction with a collapsing housing market and much lower liquidity, will

present challenges to Middle Eastern banking sectors in 2009-2010. Our core scenario is that, while some

smaller investment firms will go under, particularly in Kuwait, potentially hurting the balance sheets of

commercial banks, governments will bail them out. We also see the authorities continuing to inject



liquidity into the system where necessary. There is tremendous potential in so-called ‘frontier markets’ in

the Middle East and in North Africa. These are banking sectors that we would consider underbanked, in

that they are less saturated by existing players and have low loan and deposit penetration. This includes

countries covered by BMI's Commercial Banking service (Egypt and Iran) but also new markets that are

beginning to attract attention (Syria and Iraq).



Regional Outlook

Table: Comparison Of Loan/Deposit, Loan/Asset & Loan/GDP ratios, 2009

Loan deposit

ratio % Rank Trend Loan/Asset ratio % Rank Trend

Loan/GDP

ratio % Rank Trend

Bangladesh 79.5 42 Falling 62.1 20 Falling 36.8 46 Falling

China 69.9 52 Rising 51.2 36 Rising 129.9 6 Rising

Hong Kong 49.1 59 Falling 30.0 56 Falling 186.5 2 Falling

India 79.1 43 Falling 62.2 19 Rising 59.0 34 Falling

Indonesia 73.3 49 Falling 59.4 26 Falling 27.4 53 Falling

Japan 73.6 48 Falling 52.1 34 Falling 85.6 21 Rising

Malaysia 73.1 50 Falling 55.3 31 Falling 100.7 12 Falling

Pakistan 73.9 47 Falling 30.8 54 Falling 21.4 56 Falling

Philippines 65.4 54 Falling 49.5 40 Falling 34.1 48 Falling

Singapore 75.5 46 Falling 40.3 48 Falling 107.9 9 Rising

Sri Lanka 89.9 33 Rising 63.8 15 Falling 28.5 51 Rising

South Korea 124.3 11 Falling 67.4 10 Falling 120.2 7 Falling

Taiwan 84.3 37 Falling 63.4 17 Falling 155.5 5 Rising

Thailand 95.7 27 Falling 67.0 11 Falling 77.2 28 Rising

Vietnam 102.4 23 Falling 79.5 2 Rising 90.0 19 Falling

United States 81.3 40 Falling 54.1 33 Falling 54.6 39 Falling

Source: Central banks, regulators, BMI



Table: Anticipated Developments in 2009

Loan/Deposit

Ratio, % Trend Loan Growth,

US$bn

Deposit Growth,

US$bn Residual,

US$bn

Bangladesh 79.5 Falling 3.1 4.2 -1.1

China 69.9 Rising 688.5 680.1 8.5

Hong Kong 49.1 Falling -39.6 1.0 -40.6

India 79.1 Falling -64.5 -62.3 -2.2

Indonesia 73.3 Falling 16.5 25.4 -9.0

Japan 73.6 Falling -970.4 -993.5 23.2

Malaysia 73.1 Falling -5.9 5.5 -11.4

Pakistan 73.9 Falling -3.5 -4.7 1.2

Philippines 65.4 Falling -1.6 0.6 -2.3

Singapore 75.5 Falling -13.2 -8.6 -4.6

Sri Lanka 89.9 Rising 0.5 0.3 0.2

South Korea 124.3 Falling -67.1 -6.8 -60.3

Taiwan 84.3 Falling -4.1 5.0 -9.0

Thailand 95.7 Falling -1.6 0.3 -2.0

Vietnam 102.4 Falling 1.7 3.7 -2.0

United States 81.3 Falling -236.3 361.4 -597.7

NB Incorporates estimated economic data and projected banking data. Source: Central banks, regulators, BMI



Table: Comparison Of Total Assets, Client Loans And Client Deposits (US$bn)

2008 2007

Total

Assets Client Loans

Client Deposits

Total Assets

Client Loans

Client Deposits

Bangladesh 46.9 29.4 36.6 40.2 25.0 31.1

China 9,389.7 4,684.6 7,003.0 7,416.7 3,806.3 5,496.0

Hong Kong 1,384.1 423.8 781.9 1,327.3 379.8 752.7

India 970.0 592.8 730.2 789.0 484.9 590.4

Indonesia 203.1 120.5 161.6 203.8 106.7 160.9

Japan 8,976.7 4,778.8 6,166.8 6,903.8 3,712.6 4,914.6

Malaysia 369.6 208.3 271.4 346.7 191.2 248.4

Pakistan 112.0 35.6 48.2 142.1 38.6 54.8

Philippines 106.0 53.1 78.0 108.4 53.2 76.9

Singapore 464.5 189.1 241.5 404.4 161.9 218.6

Sri Lanka 17.4 11.1 12.6 16.5 9.5 12.0

South Korea 1,360.1 920.9 693.6 1,506.7 1,057.0 799.3

Taiwan 870.9 557.8 651.6 871.3 552.6 652.0

Thailand 289.5 195.9 202.7 268.0 181.7 192.9

Vietnam 100.8 79.4 75.5 88.0 66.7 68.7

United States 13,853.2 7,875.9 9,035.7 13,034.1 7,906.5 8,415.3




Table: Comparison Of Per Capita Deposits, Late 2008 (US$)

GDP Per Capita Client Deposits,

per capita

Rich 20% Client Deposits, per

capita

Poor 80% Client Deposits, per

capita

Bangladesh 555 257.3 1,029 64

China 2,886 5,199.7 20,799 1,300

Hong Kong 30,879 111,584.5 446,338 27,896

India 854 622.9 2,492 156

Indonesia 1,819 689.2 2,757 172

Japan 43,902 48,341.5 193,366 12,085

Malaysia 7,496 10,041.7 40,167 2,510

Pakistan 823 299.4 1,198 75

Philippines 1,677 869.6 3,478 217

Singapore 36,960 49,894.4 199,577 12,474

Sri Lanka 2,070 651.2 2,605 163

South Korea 15,166 14,284.6 57,138 3,571

Taiwan 16,384 28,286.9 113,148 7,072

Thailand 4,078 3,152.3 12,609 788

Vietnam 975 870.4 3,482 218

United States 46,888 29,700.3 118,801 7,425




Table: Interbank Rates And Bond Yields

Three-Month Interbank Rate %

Current Account % of GDP, 2009f

Budget balance % of GDP, 2009f End 2008 Early 2009

Bangladesh 2.6 -5.5 na na

China 11.0 -2.6 1.7 1.7

Hong Kong 9.9 -3.3 1.18 0.85

India -2.0 -5.5 9.1 6.7

Indonesia -0.1 -3.0 12.01 9.3

Japan 1.9 - 0.68 0.52

Malaysia 8.7 -7.7 3.15 2.1

Pakistan -7.1 -4.3 14 11

Philippines -0.4 -3.4 4.28 4.2

Singapore 12.2 -3.3 0.2 0.25

Sri Lanka -6.7 -6.4 18.01 10.5

South Korea 1.9 -7.0 1.73 0.3

Taiwan 6.2 -4.8 0.1 9.5

Thailand 3.0 -5.5 2.35 1.42

Vietnam -5.0 -8.2 9.5 7

United States -3.2 -14.1 1.5 1.5

NB Incorporates actual financial markets data, estimated economic data and projected banking data. na=not available. Source: Central banks, regulators, BMI



Commercial Bank Sector Outlook

Although there was a fall in the growth rate of Client Deposits (23% in 2008 to 17% in 2009), Client

Loans (22% in 2008 to 14% in 2009) and Total Assets (23% in 2008 to 12% in 2009), all three are

growing at double-digit rates. The global economic crisis has had significantly less impact on the Indian

Commercial Banking sector than on those of many other countries. For all three measures, the double-

digit growth is expected to accelerate from 2010 onwards over our five-year forecast period to 2013 (but

reaching growth rates that are lower than those seen in 2008).

Deposits will likely grow as a percentage of GDP from 75% in 2009 to 92% in 2013. With the continuing

growth in loans, we expect that loans as a percentage of GDP will continue to rise from nearly 59% in

2009 to 69% in 2013.

Unlike many other developing countries – such as neighbouring Pakistan – loans appear set to increase as

a percentage of Total Assets through to 2013 (from 62% this year to 65.5% in 2013). This suggests the

banking sector is continuing to evolve.

The Loan/Deposit ratio is likely to slip slightly – from 79% this year to 76% by 2013. However, this is

the continuation of a trend which has been in place since 2007 when the Loan/Deposit ratio peaked at

82%.

One interpretation of the very gentle fall in the Loan/Deposit ratio is that the banks' lending officers are

showing discipline. Most, but emphatically not all, of the increased deposits are being recycled as loans.

The overall picture is of a robust banking system.



Macroeconomic Activity

Slowdown Inevitable, Election Poses Risk

We maintain our 5.0% GDP growth forecast for FY2009/10 (April-March), with resilient growth in the

agricultural and service sectors softening the impact of the ongoing slowdown in the manufacturing

sector. Fiscal stimulus will also provide a boost, but an unfavourable outcome of the general elections in

April-May constitutes a clear risk to an economic recovery. We nevertheless expect GDP growth of 6.4%

in FY2010/11 as the global economy starts to improve and capital inflows to India resume in earnest.

India has often been heralded as a more domestically driven growth story than the heavily export-

dependent China and thus more resilient to shifts in demand in G3 markets. While we do not contest the

general gist of this theory, we maintain that India is far from immune from developments in developed

economies and global financial markets.

Admittedly, the slowdown of the Indian economy has so far been less severe than in developed markets

and more export-dependent developing nations. India's GDP growth slowed to 5.3% y-o-y in Q408

(calendar year), a sharp contrast to the economic contractions seen in more trade-dependent East Asian

nations like Singapore, South Korea and Taiwan in the same quarter. Nonetheless, the Q408 reading

constituted a marked deceleration in Indian growth which has been in place since Q306 with y-o-y growth

dropping from 7.6% in Q308 as both the agricultural and manufacturing sectors posted negative growth,

of 2.2% and 0.2% y-o-y respectively.

The deteriorating economic conditions in H208 prompted us to revise down our economic outlook for

India, which now pencils in GDP growth of 6.3% in FY2008/09 (April-March) and 5.0% in FY2009/10.

The United Progressive Alliance (UPA) coalition government has maintained its 7.1% growth target for

FY08/09, most likely in view of not giving the opposition Bharatiya Janata Party (BJP) a platform for

attacking the government's poor track record on economic reform during its five years in office, during

which the UPA has been reliant on parliamentary support from the staunchly Communist Party of India

(Marxists) (CPI(M)). The outcome of the April 16-May 13 elections is still uncertain, but will most likely

result in another precarious coalition government dependent on support from smaller parties in the Lok

Sabha (lower house of parliament).

We estimate growth in Q109 (calendar year) to slow further to 4.8% y-o-y as increased government

spending should only serve to offset part of the weakening in private consumption and corporate

investment. Indeed, macroeconomic data for Q109 support our view that the Indian economy is

continuing its slowdown in spite of the strong stimulus measures implemented by the government and the

Reserve Bank of India (RBI).



Industrial production dipped by 1.2% y-o-y in February, its lowest reading since at least April 1994, as

the corporate sector continued to pare back production of consumer goods. The trend of the industrial

production index has largely mirrored that of GDP growth in recent years, reflecting the growing

importance of the manufacturing sector in the Indian economy. As such, growth in the industrial

production index rose to double-digit figures for much of FY2006/07 before gradually trending down and

dropping into negative territory in December 2008.

Industrial Production And Exports Bottoming Out

While still nominally negative, we nonetheless view the February reading as a tentative sign that the

manufacturing sector may now be bottoming out after what is likely to be another quarter of negative

growth in y-o-y terms in Q109. Firstly, the industrial production reading was depressed by a reduced

number of working days compared to the year-ago period. Secondly, the capital goods and consumer non-

durables sub-indices have shown signs of bottoming out in recent months, which is encouraging, although

both indices are inherently volatile.

We expect the industrial production index to drop further in March, before gradually returning to positive

territory over FY2009/10, averaging 2.9% over the year as the government's fiscal stimulus package helps

drives up consumer and corporate spending. However, the fortunes of the manufacturing sector will be

very much linked with overseas sales, with the Federation of Indian Export Organisations (FIEO)

predicting in January that up to ten million jobs could be lost due to falling exports.

Exports fell by 21.7% y-o-y in February, the sharpest drop in at least 13 years, with provisional figures

released in early April showing that exports in March were down by 31% y-o-y. However, we estimate

that this could be the trough and are projecting exports to drop by 13.4% for FY09/10 as a whole. We are

projecting imports to concomitantly drop by 16.5% in FY09/10 as lower commodity prices add to a

reduced demand for input goods from overseas. We thus expect the net exports component of GDP,

which has been negative since FY2004/05, to contract by 18.3% in FY09/10, thus contributing 1.1

percentage points to overall GDP growth.

Nonetheless, it is clear that growth in India will continue to be driven by domestic demand with the

government attempting to supplant the demand injection provided by strong net capital inflows, which

ceased in H208, by increased government spending. Indeed, India's process of fiscal consolidation, aimed

at bringing down its chronic budget deficits, has been put into question altogether by the economic

stimulus packages announced by the outgoing UPA government. While a more expansive fiscal policy

was expected ahead of the elections, the government abandoned its commitment to consolidating India's

fiscal accounts completely in Q408 as incoming government revenue receipts drove home the extent of

the ongoing downturn.



As such, the interim budget for FY2009/10 presented on February 16 was highly expansive in nature,

envisaging a 6.0% of GDP fiscal deficit in FY08/09 followed by a 5.5% shortfall in FY09/10. The details

of the budget were largely left for the incoming government to fill. Whatever the composition of the

government taking office, we do not expect any major changes in the presented spending plans, which

were heavily weighted towards the agricultural sector and rural development.

Government Programmes To Boost Rural Growth

One of the main features of the presented budget was the extension of the farm debt waiver programme,

initiated in the FY2007/08 budget and now totalling INR653bn (US$13bn) of abandoned public debt to

roughly 36 million farmers. This should be welcomed as the 2.2% y-o-y contraction of the agricultural

sector in Q408, which was mainly due to a high base in Q407, has undermined claims that the largely

agrarian economy of rural India, to a great extent isolated from developments in the outside world, would

provide a buffer for GDP growth. However, we are not overly concerned by this negative figure as the

absence of proper irrigation systems, making Indian farmers excessively dependent on a good monsoon

rainfall, has made growth in the Indian agricultural sector considerably more volatile than in other GDP

sectors, as shown in the chart below.

We expect real growth in the agricultural sector to bounce back to 3.45% in FY09/10 after an estimated

2.83% expansion in FY08/09 on the back of normal precipitation during the June-September monsoon

season as predicted by the India Meterorological Department on April 17, with the farm debt waiver

programme boosting investment in the sector.

In addition to the farm debt waiver programme, the UPA government has also expanded the National

Rural Employment Guarantee Act (NREGA), a programme initiated in 2005 guaranteeing 100 days of

paid labour for unemployed rural Indians. The scheme, the cost of which has been estimated at INR301bn

(US$6bn) or 0.6% of GDP, carries the potential to raise growth in rural India through an improved

irrigation and transport network, but anecdotal evidence suggests that a substantial amount of the funds

have been squandered through corruption and in projects with little real value.

While investment in the Rural Infrastructure Development Fund and other public infrastructure projects

should bring more substantial benefits to the economy, we still fear that the gains of the government's

massive fiscal stimulus will primarily be in the form of a short-term boost in employment and spending

rather than by higher growth in the longer term. With implementation of the public infrastructure

programme likely to carry over into 2010 we see GDP expanding by 6.4% in FY2010/11, with economic

activity also being supported by the global economy returning to positive growth of 1.7% and 3.0% in

2010 and 2011 respectively after an expected 2.3% contraction in 2009.

Empirical evidence shows that capital inflows to emerging markets are highly correlated with economic

growth in developed economies. We thus expect the gradual return towards normal growth rates in the



EU, the US and Japan to be coupled with rising investment flows to EM, with India likely to yet again be

one of the main recipients. While this will help raise growth towards an average of 7.0% over FY2011/12

to FY2017/18, we reiterate that continued economic reform and increased investment, both public and

private, in education and infrastructure will be needed for this expansion rate to be maintained.

Table: India – Economic Activity

2006 2007 2008e 2009f 2010f 2011f 2012f 2013

Nominal GDP, INRbn 1,4 46,936.0 53,752.1 59,374.5 67,241.8 75,630.5 84,372.2 93,772.9 106,547.2

Nominal GDP, US$bn 2,5 841.52 1,074.19 1,171.19 1,350.57 1,534.16 1,632.99 1,833.48 1,989.58

Real GDP growth, % change y-o-y 3,5 9.7 9.0 6.3 5.0 6.4 7.0 7.0 7.0

Population, mn 6 1,155.30 1,172.20 1,189.40 1,207.00 1,224.30 1,240.30 1,256.60 1,273.10

Industrial production index, % y-o-y, ave 5 11.5 8.6 2.3 2.9 10.5 11.1 9.5 8.0

Unemployment, % of labour force, eop 6 8.0 8.0 9.0 10.0 9.0 8.5 8.3 8.0

Note: e/f = BMI estimate/forecast. 1 Fiscal years ending March 31 (1989=1989/90); 2 2008 = FY2008/09, Factor Cost, f = BMI forecast; 3 Factor Cost, f = BMI forecast. Source: 4 Asian Development Bank. 5 Central Statistics Organisation; 6 Oxford Economics



Monetary Policy

More Rate Cuts Expected As RBI Takes Over Stimulus Baton

We expect further rate cuts by the Reserve Bank of India (RBI) in 2009, bringing the benchmark repo rate

down to 4% by the end of FY2009/10 (April-March) as the central bank attempts to cushion the ongoing

slowdown in growth. Moreover, the new government will most likely signal that the scope for further

fiscal stimulus is limited given India's precarious credit rating, effectively passing the baton to the RBI to

support growth.

The Reserve Bank of India (RBI) continued its easing cycle at its April 21 meeting, cutting the repo rate

and the reverse repo rate by 25bps each to 4.75% and 3.25%, respectively. The cash reserve requirement

(CRR) ratio was, on the other hand, held flat at 5%.

The announced rate cuts come as wholesale price inflation lingers around zero (0.18% y-o-y in the week

ending April 4) and looks likely to dip into negative territory in Q209 (calendar year), as high base effects

set in and economic activity remains in the doldrums on the back of an uncertain outlook for both external

demand and the domestic economy following the April-May general elections.

In its annual policy statement for FY2009/10 (April-March), the RBI stated that it expects the economy,

with the assumption of a good monsoon, to expand by 6% in the new fiscal year, after an expected 6.5-

6.7% expansion in FY2008/09. This is a full percentage point above our more bearish 5.0% GDP growth

projection, giving further reason for the RBI to continue its monetary easing over the fiscal year as

growth disappoints.

In addition, the central bank stated that it expects growth in the wholesale price index (WPI) measure to

drop into negative territory in early FY 2009/10, but to finish the year at 4%, which is broadly in line with

our own projections of WPI inflation averaging 3.4% over the fiscal year. This means that WPI inflation

should remain considerably below the RBI's short-term objective of 4-4.5% for much of the fiscal year,

which, combined with below-trend growth, should pave the way for further rate cuts.

Moreover, both money supply and credit growth look likely to slow further over the fiscal year, dipping

deeper below the RBI's FY09/10 projections of 17% and 20%, respectively, at least in the short term. The

RBI announced on March 26 that it would buy government securities in the open market amounting to

INR800bn (US$16bn) in the first half of FY09/10 in order to boost liquidity conditions, in what

effectively amounts to quantitative easing. However, we do not expect this to have a marked effect on

lending conditions other than to reduce New Delhi's borrowing costs by depressing government bond

yields. The yield on the benchmark 10-year bond yield fell 20bps to 6.19% following the policy

announcement on April 21 and look likely to drop further towards 5.5% or even lower in the medium-

term as the RBI begins its purchasing regime.



Limits On Fiscal Spending Puts Onus On RBI To Support Growth

We believe the case for further monetary easing is strengthened by India's strained fiscal position, with

the central government's fiscal deficit expected to remain on the wrong side of 5% in FY09/10. Indeed,

the RBI estimated in its annual policy statement that the combined fiscal deficit for the central and state

governments would mount to about 9% of GDP in FY08/09, with special securities issued by the central

government outside of the market borrowing programme adding 1.8 percentage points to this figure.

The large budget deficit has raised fears about India's debt position with rating agency Standard & Poor's

downgrading its outlook on India's long-term sovereign debt from stable to negative on February 24, and

S&P's competitor Moody's keeping India’s sovereign ratings under surveillance. Although we caution

that the outcome of the ongoing national elections is far from certain, we expect that the new government

will most likely signal that the scope for further fiscal stimulus is limited given India's precarious credit

rating, effectively passing the baton to the RBI to effect further easing to support the economy.

We thus expect further rate cuts from the RBI over the course of 2009, bringing the repo rate down to 4%

by the end of FY09/10, with a concomitant cut in the reverse repo rate to 2.5%. In the near term, we

expect at least one more 25bps cut in both the repo and reverse repo rate looks likely ahead of or at the

RBI's next scheduled meeting in June.

Risks To Outlook

The main risk to our interest rate outlook is stubbornly high consumer price inflation (CPI), which came

in at 9.6% y-o-y in February. While we expect the contraction in wholesale prices to eventually feed

through into the consumer price index, we still see CPI remain in the high single digits for much of the

fiscal year, which is likely to constrain the RBI's easing ambitions.

Another continuing problem for the RBI in its policymaking is the reluctance of commercial banks to

pass on the policy rate cuts to customers. The lending rates of the five major commercial banks have

fallen less than 200 basis points since October 2008, when the RBI commenced its easing cycle, which

now amounts to 425bps in total. Were this situation to persist, which is not unlikely given that banks will

want to increase their margins in the face of the increasingly negative outlook for the economy, it may

make the RBI less inclined to further reduce rates.



Table: India – Monetary Policy

2005 2006 2007 2008 2009 2010 2011 2012 2013

Lending rate, %, eop 1,5 10.75 11.50 13.25 13.00 10.50 11.00 11.00 11.00 10.00

Real Lending Rate, %, eop 2,6 5.44 4.78 5.38 4.97 3.50 6.00 6.00 6.00 5.00

Consumer prices, % y-o-y, eop 7 5.3 6.7 7.9 8.0 7.0 5.0 5.0 5.0 5.0

Consumer prices, % y-o-y, ave 7 4.2 6.8 6.2 9.2 7.0 5.0 5.0 5.0 5.0

Exchange rate INR/US$, eop 3,8 44.97 44.11 39.38 48.58 48.00 48.00 48.00 46.00 44.00

Exchange rate INR/US$, ave 3,8 44.01 45.18 41.17 43.40 48.29 48.00 48.00 47.00 45.00

Wholesale prices, % y-o-y, eop 7 4.0 5.9 7.4 0.6 4.0 5.0 5.0 5.0 5.0

Wholesale prices, % y-o-y, ave 7 4.4 5.4 4.6 8.4 3.4 4.3 5.2 5.0 5.0

Central Bank policy rate, % 4,9 6.50 7.75 7.75 5.00 4.00 6.00 6.00 6.00 6.00

Exchange rate INR/EUR, eop 3,8 53.24 58.21 57.45 68.01 59.52 63.36 66.24 59.34 55.88

Notes: e BMI estimates. f BMI forecasts. 1 Calendar Year; 2 Real rate strips out the effects of inflation; 3 Calendar years; 4 Repo Rate, End of fiscal year; Sources: 5 IMF. 6 IMF/BMI; 7 Ministry of Statistics; 8 BMI; 9 Reserve Bank of India



Balance Of Payments

Narrowing C/A Deficit And Capital Inflows To Boost Rupee

We are expecting India's current deficit to shrink in FY2009/10 as the costs of commodity imports fall

and services exports prove robust. However, the current account deficit remains a risk for overall

economic stability as it makes India dependent on ‘footloose’ investment inflows. With India

outperforming most of the world economically in FY2009/10 we expect resumed capital inflows to put

upward pressure on the Indian rupee.

Surprisingly, India's current account deficit worsened to US$14.6bn in Q408 (calendar year), the largest

quarterly deficit since 1990, from US$12.8bn in the preceding quarter. We were expecting the current

account to improve on the back of a reduced trade deficit as a lower global oil price shrunk the import

bill. While the latter did in fact occur, the reduction in the trade deficit in balance-payments terms from

Q308 (5.7%) was considerably smaller than the 27.6% drop recorded in the monthly trade figures,

released by the Ministry of Commerce and Industry (MCI), due to an unexplained US$9bn discrepancy

between the import figures in the trade data released by the MCI and the Reserve Bank of India 's (RBI)

balance-of-payments data.

We are expecting a more pronounced decrease in the trade deficit figures in Q109 to bring the full-year

trade deficit to US$118.6bn, or 10.1% of expected GDP, in FY2008/09 (April-March) as a whole, but we

acknowledge that there are downside risks to this forecast (i.e. of a larger deficit). While import demand

will be supported by strong fiscal stimulus in FY2009/10, a reduced bill from oil and other commodity

imports will help bring the overall import bill down by 16.5% to US$241.2bn (from an estimated

US$288.9bn in FY08/09) while exports will dwindle by 13.4% to US$148.4bn (from an estimated

US$171.4bn in FY08/09), leaving a trade deficit of US$92.8bn, corresponding to 6.9% of expected GDP.

The expected shortfall in visible trade will be partially offset by a surplus in services trade, which we are

projecting to grow from US$37.6bn in FY2007/08 to US$45.4bn in FY08/09, and then to decrease to

US$42.8bn in FY2009/10 as overseas demand for business processing operations and other key service

exports drop. However, with many Western corporates seeking to streamline their operations to reduce

costs, the Indian outsourcing industry should do pretty well compared to other sectors, and we only

envisage a 5.5% drop in services exports in FY2009/10 to US$85bn.

An improved goods and service trade balance will help India narrow its current account shortfall from an

estimated US$44.2bn in FY08/09, corresponding to 3.8% of estimated GDP, to US$26.4bn in

FY2009/10, or an expected 2% of GDP. This will constitute a welcome break of a trend of a rising current

account deficit since FY03/04, which has, together with a chronic fiscal shortfall, raised fears about the

stability of the Indian economy were financial inflows to ebb.



India's high GDP growth rates from FY03/04 through to FY07/08 were to a large extent driven by large

capital inflows, rising to a massive US$108bn capital account surplus in FY07/08. These net capital

inflows have been more than sufficient to cover India's current account deficit, which has risen from

US$2.5bn in FY04/05 to US$17.4bn in FY07/08, putting severe upward pressure on the rupee and

allowing the Reserve Bank of India (RBI) to amass more than US$300bn in foreign-exchange reserves at

the end of FY07/08.

However, as one of the main beneficiaries of the emerging markets investment boom running up to 2007

due to its size, growth prospects and openness of capital markets, India has been dealt a heavy blow by

the rapid souring of global investor sentiment over the past year. Indeed, the capital account turned

negative in Q408 (-US$3.7bn) for the first time in a decade, due to an exodus of foreign investors from

the local stock and bond markets, forcing the RBI to provide US$17.9bn of its foreign-exchange reserves

to fill the overall balance of payments shortfall.

The sell-off of Indian shares, amounting to US$5.8bn in Q408, is likely to have continued in Q109 with

data from the Securities and Exchange Board of India (SEBI) stating that foreign institutional investors

shed US$1.65bn of Indian shares in Q109. However, the second half of March constituted a net inflow of

US$0.6bn as investor appetite returned to global equities. While the tentative rally in global stocks in

March remains fragile – in particular to an adverse outcome in the Indian elections in April-May – we

expect the capital account to return to positive figures in FY09/10 as an improved global risk appetite

combines with foreign purchases of government bonds. As such we envision the rupee coming under

renewed upward pressure in FY09/10 and we have revised up our end-09 target for the currency from

INR52.00/US$ to INR48.00/US$.

With depreciating pressures likely to persist in the short term, we expect that the RBI will have to

continue to supply foreign-currency reserves to the market for the time being. However, with upward

pressure mounting on the currency in H209, the RBI could easily turn to purchasing dollars to keep a lid

on rupee appreciation and keep the current account deficit in check. So we expect India's foreign currency

reserves to remain at around US$240bn by the end of FY09/10.



Table: India – Balance Of Payments

2005 2006 2007 2008 2009 2010 2011 2012 2013

Exports, US$bn 1,2 105.15 128.08 155.50 171.40 148.40 175.00 200.00 230.00 264.50

Imports, US$bn 1,2 157.06 191.25 235.90 288.90 241.20 262.00 283.78 322.99 367.62

Trade balance, US$bn 1,2 -51.90 -63.17 -80.40 -117.50 -92.80 -87.00 -83.78 -92.99 -103.12

Current account, US$bn 1,2 -9.90 -11.80 -17.40 -44.20 -26.40 -35.00 -48.00 -58.26 -62.33

Current account, % of GDP 1,2 -1.34 -1.40 -1.62 -3.77 -1.95 -2.28 -2.94 -3.18 -3.13

Foreign reserves ex gold, US$bn 1,3 158.11 226.59 302.66 240.00 240.00 230.00 220.00 235.00 250.00

Import cover, months g&s 3 5.2 4.9 6.0 6.9 7.1 7.6 9.7 11.9 14.1

Notes: e BMI estimates. f BMI forecasts. 1 Fiscal years ending March 31 (1989=1989/90); Sources: 2 Reserve Bank of India. 3 Reserve Bank Of Indi.



Market Structure

Protagonists

Table: Protagonists In India’s Commercial Banking Sector

Central bank: Reserve Bank of India (RBI)

www.rbi.org.in

The Reserve Bank of India (RBI) was established in 1935 in accordance with the Reserve Bank of India Act of 1934. Its Central Office has been in Mumbai since 1937. The RBI was nationalised in 1949. Through the Board of Financial Supervision (BFS), a committee of the Central Board of Directors of the RBI, the central bank is the supervisor and regulator of the Commercial Banking sector (and other financial institutions and banking finance companies). The RBI's other functions include: formulation and implementation of monetary policy; management of foreign exchange; issuance of notes and coin; banker to government; banker to banks; and ‘a wide range of promotional functions to support national objectives’ in relation to development.

Principal banking regulator: Reserve Bank of India (RBI)

www.rbi.org.in

Among its other roles, the Reserve Bank of India (RBI) regulates the Commercial Banking sector.

Banking trade association: Indian Banks' Association (IBA)

www.iba.org.in

The interests of India's Commercial Banking sector are represented by the Indian Banks' Association (IBA), which was formed in late 1946. It currently has 115 ordinary and 38 associate members. The membership includes: Public Sector Banks; Private Sector Banks; Foreign Banks with offices in India; and Urban Co-Operative Banks.

Source: Official data, Company data



Definition Of The Commercial Banking Universe

We define the universe of Indian banks to include 84 organisations identified by the IBA as Public Sector

Banks (28), Private Sector Banks (27) and Foreign Banks in India (29). The Reserve Bank of India also

identifies 30 State Co-operative Banks, 95 Regional Rural Banks and 55 Urban Co-operative Banks

which fall outside our definition of the universe of Commercial Banks for our purpose. Public Sector

Banks include: 19 Nationalised Banks, the State Bank of India (SBI), seven associates of the SBI and

IDBI Limited. Private Sector Banks include: 19 Private Sector Banks and eight New Private Sector

Banks.

According to the IBA, the total assets of the Public Sector Banks, the Private Sector Banks and the

Foreign Banks amounted to INR43,264bn at the end of 2008. The Public Sector Banks accounted for

INR30,222bn of this; SBI, for INR7,215bn alone. The next nine biggest Public Sector banks were Punjab

National Bank (INR 1,990bn), Canara Bank (INR1,805bn), Bank of Baroda (INR1,796bn), Bank of India

(INR1,788bn), IDBI (INR1,307bn), Union Bank of India (INR1,240bn), Central Bank of India (INR

1,240bn), Syndicate Bank (INR1,071bn), and Indian Overseas Bank (INR1,019bn). The combined assets

of the Private Sector Banks amounted to INR9,402bn, INR7,456bn of which was accounted for by the

New Private Sector Banks. The three largest (New) Private Sector Banks are: ICICI (with assets of

INR3,998bn), HDFC (INR1,332bn) and Axis Bank (INR1,096bn). Collectively, the Foreign Banks had

total assets of INR3,640bn at the end of 2008. The largest foreign banks in terms of total assets were:

Citibank (INR838bn), HSBC (INR759bn), Standard Chartered (INR734bn) and ABN Amro (INR366bn).

The next largest foreign bank was Deutsche, whose total assets amounted to INR247bn. Source: IBA



List Of Banks

Table: Nationalised Banks, State Bank Of India (SBI), Seven Associates Of SBI And IDBI

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Bank of Maharashtra

Canara Bank

Central Bank of India

Corporation Bank

Dena Bank

Indian Bank

Indian Overseas Bank

Oriental Bank of Commerce

Punjab & Sind Bank

Punjab National Bank

Syndicate Bank

UCO Bank

Union Bank of India

United Bank of India

Vijaya Bank

State Bank of India (SBI)

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Patiala

State Bank of Saurashtra

State Bank of Travancore

IDBI Ltd

Source: BMI



Table: Private Sector Banks And New Private Sector Banks (*)

Lord Krishna Bank Ltd.

SBI Commercial & International Bank Ltd.

Tamilnad Mercantile Bank Ltd.

The Bank of Rajasthan Ltd.

The Catholic Syrian Bank Ltd.

The Dhanalakshmi Bank Ltd.

The Federal Bank Ltd.

The Ganesh Bank of Kurundwad Ltd.

The Jammu & Kashmir Bank Ltd.

The Karnataka Bank Ltd.

The Karur Vysya Bank Ltd.

The Lakshmi Vilas Bank Ltd.

Nainital Bank Ltd.

The Ratnakar Bank Ltd.

The Sangli Bank Ltd.

The South Indian Bank Ltd.

The United Western Bank Ltd.

*Axis Bank Ltd.

*Centurion Bank of Punjab Ltd.

*Development Credit Bank Ltd.

*HDFC Bank Ltd.

*ICICI Bank Ltd.

*Indusind Bank Ltd.

*Kotak Mahindra Bank Ltd.

*YES Bank

Source: BMI



Table: Foreign Banks

ABN Amro Bank N.V.

Abu Dhabi Commercial Bank Limited

American Express Bank Limited

Antwerp Diamond Bank N.V.

AB Bank Limited

Bank Internasional Indonesia

Bank of America NA

Bank of Bahrain and Kuwait B.S.C.

Bank of Ceylon

Barclays Bank PLC

BNP Paribas

Chinatrust Commercial Bank

Citibank N.A.

Calyon Bank

Deutsche Bank AG

JPMorgan Chase Bank

Krung Thai Bank Public Company Limited

Mashreqbank psc

MIZUHO Corporate Bank Ltd.

Oman International Bank S.A.O.G.

Shinhan Bank

Societe Generale

Sonali Bank Ltd.

Standard Chartered Bank

State Bank of Mauritius Ltd.

The Bank of Nova Scotia

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

The Development Bank of Singapore Ltd.

The Hong Kong and Shanghai Banking Corpn. Ltd.

Source: BMI



Company Profiles

State Bank Of India

Overview The State Bank of India (SBI) is India’s oldest bank and by far the largest. SBI and its associates account for about one-third of total banking assets. The Reserve Bank of India is the largest shareholder, holding two-thirds, and the balance is owned by institutional investors.

It originated as the Bank of Calcutta in 1806. After extensive growth under various names, SBI was constituted by an Act of Parliament in 1955. In 1959, it was enabled to take over former state-associated banks as subsidiaries (later named associates). SBI has 14 local head offices and 57 regional offices. It has over 8,500 ATMs, about 10,000 SBI branches and another 5,100 associate branches. There are also 52 foreign offices in 34 countries. SBI has six associate banks, with a controlling interest ranging from 75% to 100%. These are the State Bank of Bikaner and Jaipur, the State Bank of Hyderabad, the State Bank of Indore, the State Bank of Mysore, the State Bank of Patiala and the State Bank of Travancore.

SBI merged with the State Bank of Saurashtra (SBS) in August 2008. (Source: SBI)

Website

www.sbi.co.in

SWOT Strengths The only dominant bank in India The merger with SBS increases the SBI’s market leadership Highly capitalised (High Capital Adequacy Ratio) Weaknesses Potential non-performing assets arising in the real estate and small and medium enterprises sectors Potential for political interference Opportunities Further expansion of successful IT-based banking Threats The gradual entry of foreign banks (to operate more fully) from 2009 The global economy is expected to remain in recession at least until 2010 Key Statistics Status

Public Sector Bank and Subsidiaries

Key Statistics For State Bank Of India Group, 2004-2008 (INRmn)

2004 2005 2006 2007 2008

Total Assets 5,509,844 6,285,776 6,968,324 8,151,744 10,272,700

Loans & Mortgages 2,200,294 2,865,295 3,743,168 4,809,337 5,997,848

Total Deposits 4,179,092 4,904,245 5,305,057 6,184,776 7,548,662

Total Shareholders' Equity 284,481 338,559 386,370 442,256 632,645

Source: Indian Banks' Association – www.iba.org.in



Punjab National Bank

Overview Punjab National Bank (PNB), founded in 1895, is India’s second largest public sector bank and its largest nationalised bank (in terms of number of branches, deposit, advances, total business, and operating and net profit in the year 2008-09). Based in New Delhi, PNB has representative offices in Almaty (Kazakhstan), Dubai, Shanghai, Singapore, a branch in Kabul, a subsidiary in London and a branch in Hong Kong. The bank also has a joint venture with Everest Bank in Nepal.

The bank has a policy of inclusive growth in the Indo-Gangetic belt which involves ‘Banking for the Unbanked.’ (Source: PNB)

Website

www.pnbindia.com

SWOT Strengths Large market share High-performing financially Weaknesses Potential for political interference Opportunities Plans for PNB Investment Services to set up an investment consultancy and a merchant banking subsidiary. Increased business with customers in rural areas through banking correspondents and technology (for the bank to benefit from low value but high volume transactions) Threats The gradual entry of foreign banks (to operate more fully) from 2009 The global economy is expected to remain in recession at least until 2010 Key Statistics Status

Public Sector Bank

Key Statistics For Punjab National Bank, 2004-2008 (INRmn)

2004 2005 2006 2007 2008

Total Assets 1046857 1281037 1483255 1661237 2037159

Loans & Mortgages 476568.4 610683.8 753850.6 976132.7 1209461

Total Deposits 872123.8 1011168 1175313 1378030 1636157

Total Shareholders' Equity 56020.5 86995.4 100304.9 111832.7 132139.6




Canara Bank

Overview Canara Bank was founded in 1906 and nationalised in 1969. It has nine subsidiaries, sponsored institutions or joint ventures in India and the rest of the world. It has 2,729 branches and over 2,000 ATMs. It has 1,362 branches with Internet and Mobile Banking services and 2,062 branches offering 'Anywhere Banking' services. All of its branches offer Real Time Gross Settlement and National Electronic Funds Transfer facilities.

The bank has identified 21 places where it wishes to expand globally. It has obtained approval from the Reserve Bank of India to open branches or offices in Johannesburg, Frankfurt, Muscat, Manama, QFC-Qatar, Leicester, New York, Sao Paulo, Dar-es-Salam and Tokyo. (Source: Canara Bank)

Website

www.canarabank.com

SWOT Strengths High-performing financially Comfortable Capital Adequacy Ratio Weaknesses Potential for political interference Opportunities Drive to increase its overseas presence New technology-based banking solutions Threats The gradual entry of foreign banks (to operate more fully) from 2009 The global economy is expected to remain in recession at least until 2010 Key Statistics Status

Public Sector Bank

Key Statistics For Canara Bank, 2004-2008 (INRmn)

2004 2005 2006 2007 2008

Total Assets 1013315 1111047 1337700 1665421 1809214

Loans & Mortgages 475599.7 608052.1 800254.5 988643.4 1076143

Total Deposits 850578.6 949971.2 1145810 1396425 1503320

Total Shareholders' Equity 58746.96 65084.12 76018.25 108860.6 108790




ICICI Bank

Overview ICICI Bank is India's second largest bank with a network of 1,451 branches and 4,721 ATMs in the country. It was founded in 1994 by ICICI Ltd, after the Indian government allowed new private banks to be established. It was then a wholly-owned subsidiary of ICICI.

The bank has subsidiaries in the UK, Russia and Canada. It has branches in the US, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai. It also has representative offices in the UAE, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Its UK subsidiary has branches in Belgium and Germany.

Its equity shares are listed on the Bombay Stock Exchange and the National Stock Exchange of India. Its American Depositary Receipts are listed on the New York Stock Exchange. (Source: ICICI Bank)

Website

www.icicibank.com

SWOT Strengths Dominant private sector bank Highly capitalised (High Capital Adequacy Ratio) Weaknesses Non-performing loans and Lehman Brothers-related losses (investment by UK subsidiary) Potential non-performing assets arising in the real estate and small and medium enterprises sectors Potential for political interference Opportunities Increased business with customers in rural areas (low value but high volume transactions) Plans to set up 580 new branches this year Threats The gradual entry of foreign banks (to operate more fully) from 2009 The global economy is expected to remain in recession at least until 2010 Key Statistics Status

Private Sector Bank Media Contact

Charudatta Deshpande Tel: 91-22-2653 8208 Email: [email protected]

Key Statistics For ICICI Bank, 2004-2008 (INRmn)

2004 2005 2006 2007 2008

Total Assets 1307476 1784336 2772296 3943347 4856166

Loans & Mortgages 643524.7 964099.6 1537062 2062109 2460377

Total Deposits 629015.3 944641.8 1612720 2334222 2639126

Total Shareholders' Equity 81170.43 127768.6 228667.2 248246 458034.2




HDFC Bank

Overview Mumbai-based HDFC Bank has 1,412 branches and 3,295 ATMs in 528 Indian towns and cities.

Founded in 1994, the bank has received many awards in recent years, including ‘Best Bank’ in 2008 from Business India and Business Today.

The bank merged with the Centurion Bank of Punjab (CBoP) in 2008. (Source: HDFC)

Website

www.hdfcbank.com

SWOT Strengths High-performing and high-rating bank Recent CBoP merger Weaknesses Non-performing loans (increased by the CBoP merger) Opportunities CBoP merger and associated extra business, including retail customer acquisition Threats The gradual entry of foreign banks (to operate more fully) from 2009 The global economy is expected to remain in recession at least until 2010 Key Statistics Status

Private Sector Bank

Key Statistics For HDFC Bank, 2006-2008 (INRmn)

2006 2007 2008

Total Assets 736013.2 913082.5 1331931

Loans & Mortgages 350623 469447.8 634181.5

Total Deposits 542908.9 660636.3 982670.8

Total Shareholders' Equity 53526.7 64989.8 115720.7


Axis Bank

Overview Mumbai-based Axis Bank began in 1994 as UTI Bank before changing its name in 1997.

It has a network of 838 branches and 3,674 ATMs in India with branches in Singapore, Hong Kong and



DIFC, Dubai. It also has representative offices in Shanghai and Dubai. (Source: Axis Bank)

Website

www.axisbank.com

SWOT Strengths High-performing bank Diversified product range Highly rated bank in capital markets Weaknesses Non-performing loans Opportunities Increase geographical coverage of potential growth centres Overseas expansion Threats The gradual entry of foreign banks (to operate more fully) from 2009 The global economy is expected to remain in recession at least until 2010 Key Statistics Status

Private Sector Bank

Key Statistics For Axis Bank, 2007-2008 (INRmn)

2007 2008

Total Assets 732,559.8 1,095,664.0

Loans & Mortgages 368,764.6 594,483.6

Total Deposits 520,153.2 830,394.3

Total Shareholders' Equity 33,974.3 87,518.4


Citibank

Overview

Part of Citigroup, the world's largest financial institution, Citigroup is a highly diversified financial services

company. It operates in more than 100 countries across six continents – North and South America, Europe,

Asia and the Middle East and Africa. It has 350,000 employees managing 200 million customer accounts. It

is organised into four major segments – Consumer Banking, Global Cards, Institutional Clients Group and

Global Wealth Management. It offers a full range of financial services for small and large corporations,

governments, and institutional and individual investors. (Source: Citigroup)

In February 2009, as part of a financial rescue package, the US government announced plans to take



ownership of over 35% of Citigroup, effectively a controlling interest.

Website

www.online.citibank.co.in

SWOT Strengths Size (largest in the world) Global reach (in more than 100 countries) Diversification of products, outlets and sources of earnings Weaknesses A loss of US$27.7 billion in 2008 Exposure to sub-prime loans and other toxic assets The Lehman Brothers bankruptcy will continue to disrupt Citigroup’s foreign exchange operations Opportunities Corporate restructuring into two operational units – Citicorp and Citi Holdings. The Public-Private Investment Program of the US Treasury’s Financial Stability Plan will assist Citigroup to remove its toxic assets, on top of funds invested under the Troubled Asset Relief Program (TARP) Threats The economy is expected to remain in recession at least until 2010 Key Statistics Status

Foreign Bank Media Contact

Madhulika Gupta Tel: 91-22-5001 5050 Email: [email protected]

Key Statistics For Citibank, 2007-2008 (INRmn)

2007 2008 2009

Total Assets 732559.8 1095664 1476972

Loans & Mortgages 368764.6 594483.6 814699.4

Total Deposits 520153.2 830394.3 1104619




HSBC Bank

Overview HSBC's predecessor in India was the Mercantile Bank of India, established in 1853 in Mumbai. This bank was acquired by HSBC in 1959. HSBC (as the Hong Kong and Shanghai Banking Corporation) was founded in 1865 to finance trade between China, Europe and the US.

HSBC has 45 branches across 24 cities in India, with ATMs, and phone banking services through an integrated contact centre.

HSBC is one of the largest banks in the world. It is Europe’s largest bank, by market value. Its international operations comprise around 9,500 offices in 86 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. HSBC is listed on the London, Hong Kong, New York, Paris and Bermuda stock exchanges. (Source: HSBC)

The 2008 financial results featured a 70% loss.

Website

www.hsbc.co.in

SWOT Strengths Size (one of the largest banks in the world) Global reach (in 86 countries) Weaknesses A 70% loss (globally) in 2008 Significant exposure to sub-prime loans – loan impairment allowances and write-offs are expected to rise Opportunities Global efficiencies Threats In Asia-Pacific, a prolonged period of low interest rates will reduce net interest income from the bank’s large deposit base. The economy is expected to remain in recession at least until 2010 Key Statistics Status


Louisa Leung, VP, External Affairs, Asia-Pacific and Hong Kong Tel: 852 2822 4930 Email: [email protected]



Standard Chartered Bank

Overview Mumbai-based Standard Chartered is the largest foreign bank in India with 81 branches in 31 cities.

It was formed in 1969 through a merger of two banks: the Standard Bank of British South Africa, founded in 1863, and the Chartered Bank of India, Australia and China, founded in 1853. The bank opened its first branch in India in 1858.

Internationally based in the UK, Standard Chartered is listed on both the London Stock Exchange and the Hong Kong Stock Exchange. It consistently ranks in the top 25 FTSE 100 companies by market capitalisation. Standard Chartered has a network of over 1,750 branches and outlets in more than 70 countries and territories. (Source: Standard Chartered Bank)

Website

www.standardchartered.co.in

SWOT Strengths High-performing bank Comfortable Capital Adequacy Ratio Weaknesses Having to cope with rising loan losses Opportunities Global efficiencies Acquisitions, including American Express (excluding the primary business of Amex) Threats The banking industry is consolidating in Europe and the US The economy is expected to remain in recession at least until 2010 Key Statistics Status


Geraldine Matchaba Tel: 91 22 2263 4574 Tel: [email protected]

Key Statistics For Standard Chartered Bank, 2007-2008 (INRmn)

2007 2008

Total Assets 58,891.35 73,445.24

Loans & Mortgages 30,103.80 33,351.53

Total Deposits 34,174.67 36,956.52




Methodology

BMI’s commercial banking reports seek to provide insights about the operating conditions in and

prospects for commercial banks in each of 59 key developed and emerging countries. The reports do this

by incorporating the latest information available from official sources, such as regulators, international

associations of regulators and trade associations; comparable information from other countries; and

economic and risk data compiled by BMI.

The reports focus on total assets, client loans and client deposits. Total assets are analogous to the

combined balance sheet assets of all commercial banks in a particular country. They do not incorporate

the balance sheet of the central bank of the country in question. Client loans are loans to non-bank clients.

They include loans to public sector and state-owned enterprises. However, they generally do not include

loans to governments, government (or non-government) bonds held or loans to central banks. Client

deposits are deposits from the non-bank public. They generally include deposits from public sector and

state-owned enterprises. However, they only include government deposits if these are significant. We take

into account capital items and bond portfolios. The former includes shareholders funds, and subordinated

debt that may be counted as capital. The latter includes government and non-government bonds.

In quantifying the collective balance sheets of a particular country, we assume three equations hold true:

Total assets = total liabilities and capital;

Total assets = client loans + bond portfolio + other assets;

Total liabilities and capital = capital items + client deposits + other liabilities.

In terms of the equations, other assets and other liabilities are balancing items that ensure equations two

and three can be reconciled with equation one. In practice, other assets and other liabilities are analogous

to inter-bank transactions. In some cases, such transactions are primarily with foreign banks.

In most countries for which we have compiled figures, building societies/thrifts are an insignificant part

of the banking landscape, and we do not include them in our figures. The US is the main exception to this.

In some cases, total assets and client loans include significant amounts that are owned or that have been

lent to customers in another country. In some cases, client deposits include significant amounts that have

been deposited by residents of another country. Such cross-border business is particularly important in

major financial centres such as Singapore and Hong Kong, the richer OECD countries and certain

countries in Central and Eastern Europe.



Basis Of Projections

BMI’s commercial banking forecasting methodology brings together:

Our in-depth sector-specific knowledge and commercial banking numerical database;

Our macroeconomic forecasts, which are generated by our country risk analysts using our

econometric model and subjective assessments of a country’s performance;

Our financial market team’s view on the markets, and their forecasts for interest rates, exchange

rates and credit spreads, all of which affect the repayment capabilities of local banks.

By combining sector-specific, economic and financial market views, we aim to provide a more complete

view of the challenges facing commercial banks, and the opportunities that exist. Forecasts for all

countries are fully benchmarked against regional and global peers.

Commercial Bank Business Environment Rating

BMI has devised Commercial Banking Business Environment Ratings for each of the 59 states we assess.

Our approach has been threefold. First, we have explicitly aimed to assess the market attractiveness and

risks to the predictable realisation of profits in each state, thereby capturing the operational dangers facing

companies operating in this industry globally. Second, we have, where possible, identified objective

indicators that serve as proxies for issues/trends within the industry to ensure consistent evaluate across

states. Finally, we have used BMI’s proprietary Country Risk Ratings in a nuanced manner to ensure that

the ratings accurately capture broader issues that are relevant to the industry and which may either limit

market attractiveness or imperil future returns. Overall, the ratings system – which now integrates with

the ratings systems for all industries covered by BMI – offers an industry-leading insight into the

prospects/risks for companies across the globe.

Ratings System

Conceptually, the new ratings system divides into two distinct areas:

Limits of potential returns: Evaluation of industry’s size and growth potential in each state, and also

broader industry/state characteristics that may inhibit its development.

Risks to realisation of those returns: Evaluation of industry-specific dangers and those emanating from

the state’s political/economic profile that call into question the likelihood of anticipated returns being

realised over the assessed time period.



Indicators

The following indicators have been used. Almost all indicators are objectively based.

Table: Commercial Banking Business Environment Indicators And Rationale

Limits of potential returns

Market structure

Estimated total assets, end-2008

Indication of overall sector attractiveness. Large markets are considered more attractive than small ones

Estimated growth in total assets, 2008-2013

Indication of growth potential. The greater the likely absolute growth in total assets, the higher the score

Estimated growth in client loans, 2008-2013 Indication of the scope for expansion in profits through intermediation

Country structure

GDP per capita A proxy for wealth. High-income states receive better scores than low-income states

Active population Those aged 16-64 in each state, as a % of total population. A high proportion suggests

that the market is comparatively more attractive

Corporate tax A measure of the general fiscal drag on profits

GDP volatility Standard deviation of growth over 7-year economic cycle. A proxy for economic stability

Risks to realisation of returns

Market risks

Regulatory framework and industry development

Subjective evaluation of de facto/de jure regulations on overall development of the banking sector

Regulatory framework and competitive environment

Subjective evaluation of the impact of the regulatory environment on the competitive landscape

Moody’s rating for local currency deposits External assessment of risk

Country risk From BMI’s Country Risk Ratings (CRR)

Short-term financial risk Rating from CRR, evaluating currency volatility

Short-term external risk Rating from CRR, denoting the state’s vulnerability to externally-induced economic

shock, which tend to be the principal triggers of economic crises

Policy continuity Rating from CRR, evaluating the risk of a sharp change in the broad direction of

government policy

Legal framework Rating from CRR, to denote strength of legal institutions in each state. Security of

investment can be a key risk in some emerging markets

Bureaucracy Rating from CRR to denote ease of conducting business in the state

Source: BMI



Weighting

Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-

components equal weight. Consequently, the following weights have been adopted.

Table: Weighting Of Indicators

Component Weighting, %

Limits of potential returns 70

of which – Banking market structure 60

– Country structure 40

Risks to realisation of potential returns 30

of which – Banking market risks 40

– Country risk 60

Source: BMI

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