GS+-+India+Financials+27Jul11

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July 27, 2011

India: Financial Services

Equity Research

Still amid choppy waters; stocks not yet ready for upturn

Stocks trading in a narrow range; no significant positive catalysts

Since May 2011, Indian financials’ stocks have traded sideways due to multiple

headwinds: (1) Sticky inflation, (2) policy tightening, (3) Potential growth

deceleration, (4) increasing risk to asset quality, (5) weaker earnings outlook on

margin pressure. While inflation and interest rates are close to their peaks, we

believe earnings would remain under pressure on lower margin, higher NPLs.

Stocks peak/bottom before inflation does, but are not overvalued

Our analysis of historical trends indicate that the financials sector displays a

high correlation with inflation, interest rates, GDP, IIP and suggest that bankingstocks tend to peak/bottom 4-6 months ahead of inflation levels peaking/

bottoming. Our GS Global ECS Research team forecasts inflation to peak in

Aug-Sep 2011 and believes there is a high probability that rates have peaked.

While investor holdings in the banking sector remain high, current valuations

are not at their peak vs. the previous cycle, and hence we do not expect a

sharp adjustment. We also believe outperformance is unlikely till we see

earnings correction, thereby leading to stocks trading in a narrow range.

Earnings performance to remain under pressure next few quarters

Lower loan growth at 18%-20% vs. over 21% last year, margin decline of

50-100 bps vs. peak in Dec 2010, MTM hit on investment portfolio, and lack

of treasury gains will lead to muted profit growth in FY12, in our view.NPLs too will see a cyclical uptick, which will likely have a P&L impact. On

the positive front, we find banks have hiked lending rates (PLR at 14.25%

vs. 14%) more than deposit rates (9.25% vs. 10.5%) this cycle and margin

pressure will likely be less vs. the past. If RBI hikes rates any further,

margin compression could be more than expected, in our view.

Earnings headwinds likely to persist; we remain selective

While the sector is not overvalued, select sector defensives—HDFC Bank/HDFC/

Kotak—are trading at expensive valuations; rated Sell. We suggest being

selective and prefer private banks to PSU banks as we believe they are able to

manage their spreads better than PSUs through the rate cycle (Sell BOI). Our top

picks: IndusInd (Buy, on CL) and Yes Bank (Buy) given their strong earningsgrowth as we believe margin pressure will be offset by higher CASA ratio; ICICI

Bank (Buy) – better growth prospects and the international book repricing to help

sustain its margins. We revise our 12-m TPs for stocks yet to report 1QFY12

results by 2%-5% as we roll forward our target BVPS to June-2012.

COVERAGE SUMMARY

*stock is on our Asia Pacific Conviction List.

VALUATION SUMMARY

Source: Company data, Goldman Sachs Research estimates.

Tabassum Inamdar, CFA+91(22)6616-9052 [email protected] Goldman Sachs India SPL

Goldman Sachs does and seeks to do business with companies coveredin its research reports. As a result, investors should be aware that thefirm may have a conflict of interest that could affect the objectivity ofthis report. Investors should consider this report as only a single factorin making their investment decision. For Reg AC see the end of the text.For other important disclosures, see the Disclosure Appendix, or go towww.gs.com/research/hedge.html. Analysts employed by non-USaffiliates are not registered/qualified as research analysts with FINRA inthe U.S.

Shyam Srinivasan, CFA+91(22)6616-9346 [email protected] Goldman Sachs India SPL Snigdha Sharma+91(80)6637-8765 [email protected] Goldman Sachs India SPL

The Goldman Sachs Group, Inc. Global Investment Research

Price Up/downsideRs. Ticker Rating (July 26) 12-m TP potential (%)

Public BanksBOB BOB.BO Buy 900 1110 23%

BOI BOI.BO Sell 389 360 -7%

PNB PNBK.BO Buy 1165 1410 21%

SBI SBI.BO Neutral 2442 2760 13%

Unio n Bank UNBK.BO Neu tral 3 04 340 1 2%

Private Banks

Axis Bank AXBK.BO Neu tral 132 0 1460 1 1%

HDFC Bank HDBK.BO S ell 498 500 0%

ICICI Bank ICBK.BO Buy 1041 1255 21%

IndusInd INBK.BO Buy* 269 350 30%

Kotak Mahindra KTKM.BO Sell 466 460 -1%

Yes Bank YESB.BO Buy 319 380 19%NBFCs

HDFC HDFC.BO Sell 694 670 -3%

IDFC IDFC.BO Neutral 135 150 11%

LIC HF LICH.BO Neutral 215 230 7%

PFC PWFC.BO Neutral 202 220 9%

Shriram SRTR.BO Neutral 6 78 710 5%

FY 2012E FY2013E FY 2012E FY2013E

Public banks 1.4 1.2 7.5 6.7 Bank of Baroda 1.5 1.3 7.5 7.2

Bank of India 1.2 1.0 7.3 6.6

Punjab National Bank 1.5 1.3 7.0 6.1

State Bank of India 2.0 1.7 11.5 9.6

SBI standalone valuation 1.6 1.3 9.1 7.6

Union Bank 1.2 1.0 6.4 5.8

Private banks 2.7 2.3 17.4 14.6 Axis Bank 2.4 2.1 13.3 11.7

HDFC Bank 4.0 3.5 24.0 19.9

ICICI Bank 2.0 1.9 18.4 15.4

ICBK standalone valuation 1.7 1.5 14.9 12.4IndusInd Bank 2.8 2.4 17.4 14.3

Kotak Mahindra Bank 4.5 3.9 34.7 30.2

KMB standalone valuation 2.8 2.5 23.0 19.8

Yes Bank 2.4 2.0 11.8 9.6

NBFC's 2.4 2.0 12.2 10.4 HDFC 5.2 4.6 25.0 20.9

HDFC standalone valuation 4.4 3.7 18.7 15.5

IDFC 1.6 1.5 13.3 11.1

LIC Housing Finance 2.0 1.6 9.2 7.4

Power Finance 1.3 1.1 8.7 7.0

Shriram Transport 2.5 2.1 10.9 10.8

Sector Average 2.1 1.8 13.0 10.9

P/B (X) P/E (X)



July 27, 2011 India: Financial Services

Goldman Sachs Global Investment Research 2

Stocks not yet ready for a turnaround, to trade in a narrow range

We believe stock prices will likely continue to trade in a narrow range in the

medium term till interest rates and inflation reach close to the cycle bottom.

Simultaneously, we do not expect stock prices to fall significantly as banks have

been more rational this cycle in pricing their loans, and current valuations arenot at their historical peaks as has been the case in past cycles. We believe, in

such a scenario, focusing on stocks with greater earnings visibility and

reasonable valuations would be key. We maintain preference for private banks

over public banks as we believe they are able to manage their spreads better vs.

PSU banks. Top picks are: IndusInd Bank (Buy, on CL) and Yes Bank (Buy) given

their potential to surprise on earnings and strong growth as we believe margin

pressure will be offset by higher CASA ratio; ICICI Bank (Buy) – better growth

prospects and its international book repricing to help sustain margins.

Exhibit 1: Stocks are trading in a range since November-2010

Stock price performance of our coverage universe

*stock is on our Asia Paci fic Conviction list. For important disclosures, please go to http://www.gs.com/research/hedge.html.

Source: Datastream, Goldman Sachs Research estimates.

Stock performance lackluster, turnaround some time away?

Bank stocks have fallen 4% to 45% from their highs in November 2010 (with the exception

of HDFC Bank) and have remained in a narrow range since then on macro headwinds. Now

that we are coming close to inflation and interest rate peaks, is it time to be overweight

banks’/financials’ stocks? We expect stocks to continue to remain in a narrow range till we

see a decline in inflation. Key observations from past trends and reasons that lead to our

conclusion are:

Absolute Price Performance between:

Public Banks

Bank of Baroda Buy 99% -21% 19% -16% 9% -14% -2% -2%

Bank of India Sell 36% -19% 16% -11% -9% -24% -12% -12%

Punjab National Bank Buy 60% -28% 22% -13% 11% -15% -4% -3%

State Bank of India Neutral 76% -28% 15% -24% 12% -30% -18% -18%

Union Bank Neutral 48% -19% 6% -7% -2% -22% -10% -10%

Average 64% -23% 16% -14% 4% -21% -9% -9%

Private Banks

Axis Bank Neutral 59% -25% 24% -19% 12% -15% -3% -3%

HDFC Bank Sell 50% -16% 19% -6% 11% 4% 16% 16%

ICICI Bank Buy 61% -24% 16% -10% 3% -18% -6% -6%

IndusInd Bank Buy* 100% -23% 27% -11% 10% -4% 8% 8%

Kotak Mahindra Sell 30% -27% 26% -8% 10% -6% 6% 6%

Yes Bank Buy 59% -35% 31% -11% 13% -15% -3% -3%

Average 60% -25% 24% -11% 10% -9% 3% 3%

HDFC Sell 59% -19% 23% -12% 8% -6% 6% 6%

IDFC Neutral 48% -42% 24% -17% 4% -37% -26% -25%

LIC Housing Finance Neutral 84% -39% 36% -5% -2% -22% -10% -10%

Power Finance Neutral 50% -32% -9% -12% 0% -45% -34% -33%

Shriram Transport Neutral 81% -23% 19% -14% -3% -23% -11% -11%

Average 64% -31% 19% -12% 2% -27% -15% -15%

Overall Average 62% -26% 20% -12% 5% -18% -6% -6%

Sensex 29% -17% 12% -9% 6% -12% --- ---

MSCI India 27% -18% 12% -9% 8% -12% --- ---

Relative vs.

Sensex

Relative vs.

MSCI IndiaAbsolute

Performance since peak levels in Nov'10

Rating

Jan '10 - Nov '10 Nov '10 - Feb '11 May '11 - CurrentFeb '11 - Apr '11 Apr '11 - May '11





1. Historical correlation shows that stock prices are generally correlated with

inflation, interest rates, GDP, and IIP. Stocks start underperforming four to six

months before interest rates and inflation hit the peak and start outperforming four to

six months before inflation and interest rate hit the bottom (see Exhibits 4-9).

2. Past two inflation/interest rate peak cycles were different. The first peak cycle

in 1996 was followed by the Asian financial crisis in 1997 and banks have seen

significant structural changes in terms of balance sheet and income statement since

then. The second one was in 2007, which was followed by the global financial crisis in

2008. We believe the difference in this cycle is that while inflation and interest rates are

high, stocks are not trading at high valuations as was the case in the past two cycles

and therefore stock prices are unlikely to fall significantly.

We note that SBI’s PLR is now higher than the last cycle. In the last cycle it was at

13.75% vs. current at 14.25%. For other banks (like BoB), the PLR peaked at 14% in

the last cycle, and in this cycle it is at 14.5%.

SBI’s peak deposit rate was 10.5% in the last cycle, and in this cycle it is lower at

9.25%, which could increase though we do not expect this to touch similar levels.

We believe both higher PLR and lower deposit rates are good for banks’ margins.

Similarly, other banks have seen deposit rates peak at 10.5% in the last cycle vs.

9.5% in this cycle. In our view, margin pressure should technically be lower this

cycle vs. last due to this combination of higher PLR and lower peak deposits. We

believe banks may find it increasingly difficult to pass on further rate hikes from

the RBI, if any, implying margin compression could be more than expected.

A key similarity is the real rates, which currently is high at 7% similar to the last cycle,

which could mean pressure on corporate India’s profitability could increase.





Exhibit 2: Current PLR is higher than from last inflation cycle despite inflation being lower. However, deposit rates arecurrently lower implying spreads for banks are higher now. These spreads will nevertheless compress as inflation andrates start to decline, although at a relatively lesser pace; we prefer private banks to PSU banksKey macro variables, Private and PSU bank metrics over market peak (Jan-08), inflation peak (July-08), inflation low (Jun-09),

and current (July-2011)

Note: SBI’s peak deposit rate was 10.5% in October 2008.

Source: Company data, Datastream, Bloomberg, Goldman Sachs Research.

3. However, stock prices are unlikely to move up significantly as they are above historical

averages. Simultaneously, banks have to face earnings headwinds from lower margin,

lower loan growth, higher NPLs, and MTM hit on investment portfolios. We believe all

these factors could lead to stock prices remaining in a narrow range.

4. Investor holdings in the banking and finance sector have not reduced despite macro

headwinds indicating that the sector has remained overweight.

Jan-08 Jul-08/Aug-08 Jun-09 Jul-11

Interest rate Market peak Inflation peak Inflation low Current Relative to Past Inflation peakG-sec yields: 10 yr (%) 7.79 9.32 7.01 8.31 Lower

G-sec yields: 1 yr (%) 7.45 9.39 4.25 8.17 Lower

Spread: 10yr -1 yr 0.34 (0.07) 2.76 0.14 Higher

Repo rate (%) 7.75 9.00 4.75 8.00 Lower

CRR (%) 7.50 8.75 5.00 6.00 Lower

SBI PLR (%) 12.75 13.75 11.75 14.25 Higher

SBI 6m deposit rate (%) 7.50 8.00 6.25 7.25 Lower

SBI Max deposit rate (%) 8.75 10.00 7.50 9.25 Lower

5 year AAA bond yield (%) 9.05 10.83 7.94 9.42 Lower

Inflation

WPI inflation (%) 4.45 11.25 (0.71) 9.44 Lower

WPI core inflation (%) 5.26 8.02 (1.31) 7.20 Lower

Real rates

PLR - WPI (%) 8.30 2.50 12.46 4.81 Higher

PLR - Core WPI (%) 7.49 5.73 13.06 7.05 Higher

5 year AAA bond yield - WPI(%) 4.60 (0.42) 8.64 (0.02) Negative rates

Valuation

PSU banks: 12-m fw PE 7.89 4.95 6.11 6.16

PVT banks: 12-m fw PE 36.59 16.84 16.59 17.77

PSU banks: 12-m fw PB 1.37 0.85 1.00 1.13

PVT banks: 12-m fw PB 3.81 1.79 1.89 2.55

Profitability

PSU bank spreads 2.10 2.02 1.63 2.29 Margins are high now as expected,

but likely to fall as we see inflation and

interest rates correct

PVT bank spreads 2.21 2.20 2.24 2.66 Private banks manage spreads better

than PSU banks

Last market peak valuations were

higher than this cycle, correction

therefore could be limited unless there

is another potential financial crisis





Exhibit 3: Valuation summary

*stock is on our Asia Pacific Conviction list. All target prices mentioned above are on a 12-month basis. For important disclosures, please go to

http://www.gs.com/research/hedge.html.


Strong correlation to inflation, interest rates, GDP, and IIP

The limited historical trends over the past cycles indicate that bank stocks peak before

inflation and interest rates. Our GS Global ECS Research team expects inflation to peak in

2Q at 9.6% and then start correcting to around 6% by March 2012. We note stock

performance is usually strong in the initial phase of policy tightening, reflecting higher loan

growth, and margins on the back of recovery.

However, unlike in the past when inflation has swung down sharply, our GS Global ECS

Research team expects inflation to bottom at around 4.9%-5.1% in 3QFY13. Further, they

estimate repo rates at 8% have likely peaked for now, and would remain stable before

falling marginally by December 2012 to around 7.5%. While we do not expect inflation/rates

to collapse, we believe stocks may start outperforming as rates/inflation decline even

though the bottom is at higher levels vs. the past cycles.

Price

Market Cap

3m

ADVT 7/26/2011

Target Price/

Valuation

Total

ReturnReuters

ticker Rating (US$ mn) (US$ mn) (Rs) (Rs)

Potential

(Rs) FY 2012E FY2013E FY 2012E FY2013E Median PeakPublic banksBOB BOB.BO Buy 7,927 7.3 900 1,110.0 26% 1.49 1.27 7.5 7.2 0.8 1.9

BOI BOI.BO Sell 4,786 10.4 389 360.0 -5% 1.17 1.01 7.3 6.6 0.7 2.1

PNB PNBK.BO Buy 8,397 6.4 1,165 1,410.0 23% 1.51 1.25 7.0 6.1 1.3 1.8SBI SBI.BO Neutral 34,983 129.1 2,442 2,760.0 14% 2.04 1.74 11.5 9.6 0.8 2.0

SBI standalone valuation 1,812 2,129.9 1.58 1.34 9.1 7.6

Union Bank UNBK.BO Neutral 3,589 5.1 304 340.0 15% 1.19 1.02 6.4 5.8 0.9 1.5

Private banksAxis AXBK.BO Neutral 12,245 47.6 1,320 1,460.0 12% 2.44 2.09 13.3 11.7 1.4 4.6

HDFCB HDBK.BO Sell 26,185 41.8 498 500.0 1% 3.98 3.45 24.0 19.9 3.1 5.0

ICICIB ICBK.BO Buy 26,977 87.2 1,039 1,255.0 22% 2.01 1.85 18.4 15.4 1.7 3.3

ICICI Bank standalone valuation 779 975.0 1.70 1.55 14.9 12.4

IndusInd Bank INBK.BO Buy* 2,820 4.3 269 350.0 31% 2.82 2.44 17.4 14.3 0.9 2.9

KMB KTKM.BO Sell 7,742 11.7 466 460.0 -1% 4.47 3.92 34.7 30.2 2.5 11.2

KMB standalone valuation 286 278.0 2.80 2.45 23.0 19.8

Yes Bank YESB.BO Buy 2,505 18.4 319 380.0 20% 2.41 1.98 11.8 9.6 3.2 5.1

NBFC'sHDFC HDFC.BO Sell 22,979 42.1 694 670.0 -2% 5.22 4.57 25.0 20.9 2.8 7.0

HDFC standalone valuation 453 429.0 4.42 3.75 18.7 15.5

IDFC IDFC.BO Neutral 4,443 23.8 135 150.0 13% 1.65 1.48 13.3 11.1 2.7 5.7

LIC Housing Finance LICH.BO Neutral 2,298 32.3 215 230.0 9% 2.01 1.65 9.2 7.4 0.8 1.7

Power Finance PWFC.BO Neutral 5,213 17.0 202 220.0 12% 1.27 1.12 8.7 7.0 2.0 3.1

Shriram Transport SRTR.BO Neutral 3,454 13.2 678 710.0 6% 2.52 2.11 10.9 10.8 1.0 3.8

P/B (X) P/E (X) Historical P/B (X)





Exhibit 4: PSU banks stocks are highly correlated withinflation, and have tended to react 6 months ahead of peakand bottom…PSU bank stocks’ performance (yoy) vs. headline, and core

inflation

Exhibit 5: …a trend that is evident in private bank stockstooPrivate bank stocks’ performance (yoy) vs. headline, and core

inflation

Source: Bloomberg, Datastream, Goldman Sachs ECS Research estimates. Source: Bloomberg, Datastream, Goldman Sachs ECS Research estimates.

Exhibit 6: Banking stocks tend to peak 5 months beforerepo rates…PSU bank stocks’ performance (yoy) vs. repo rate

Exhibit 7: …and start outperforming 5 months beforerepo rates hit the bottomPrivate bank stocks’ performance (yoy) vs. repo rate

Source: Bloomberg, Datastream, Goldman Sachs ECS Research estimates. Source: Bloomberg, Datastream, Goldman Sachs ECS Research estimates.

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

A p r - 1 2

J u l - 1 2

PSU Banks stock performance (6M Lead) Headline (RHS) Core (RHS)

Forecasts

Correlation - PSU (6M lead) to Headline inflation: 78.2%

Correlation - PSU (6M lead) to Core inflation: 63.5%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-100%

-50%

0%

50%

100%

150%

200%

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

A p r - 1 2

J u l - 1 2

PVT Banks stock performance 6M lead Headline (RHS) Core (RHS)

Forecasts

Correlation - PVT (6M lead) to Core inflation: 65.1%Correlation - PVT (6M lead) to Headline inflation: 64.9%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

A p r - 1 2

J u l - 1 2

PSU Banks stock performance 6M lead Repo rate(RHS)

Forecasts

Correlation - PSU (6M lead) to Repo rate: 19.9%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-100%

-50%

0%

50%

100%

150%

200%

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

A p r - 1 2

J u l - 1 2

PVT Banks stock performance 6M lead Repo rate(RHS)

ForecastsCorrelation - PVT (6M lead) to Repo rate: 27.5%





Exhibit 8: PLR, RR, and inflation currently moving intandem…PSU bank stocks’ performance (yoy) vs. PLR

Exhibit 9: …which is being reflected in banks’ stock priceperformancePrivate bank stocks’ performance (yoy) vs. PLR

Source: Bloomberg, Datastream. Source: Bloomberg, Datastream.

Correlation high even vs. GDP and IIP

We believe performance of banking stocks is highly correlated with IIP and GDP as well.

We expect GDP growth to moderate to 7.5% in FY2012 from 8.5% in FY2011, but to

improve to 7.8% in FY2013. A strong economy leads to higher loan growth, margin, fee

income, and lower NPLs, which in turn is reflected in the stock price performance.

Exhibit 10: Private banks show relatively highercorrelation with GDP vs. PSU banks…GDP and banking sector performance

Exhibit 11: …a fact corroborated by IIP numbers as wellIIP and banking sector performance

Source: Bloomberg, Datastream. Source: Bloomberg, Datastream.

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

J u n - 0 0

D e c - 0 0

J u n - 0 1

D e c - 0 1

J u n - 0 2

D e c - 0 2

J u n - 0 3

D e c - 0 3

J u n - 0 4

D e c - 0 4

J u n - 0 5

D e c - 0 5

J u n - 0 6

D e c - 0 6

J u n - 0 7

D e c - 0 7

J u n - 0 8

D e c - 0 8

J u n - 0 9

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

Repo Rate Inflation PLR (RHS)

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

-100%

-50%

0%

50%

100%

150%

J u n - 0 0

D e c - 0 0

J u n - 0 1

D e c - 0 1

J u n - 0 2

D e c - 0 2

J u n - 0 3

D e c - 0 3

J u n - 0 4

D e c - 0 4

J u n - 0 5

D e c - 0 5

J u n - 0 6

D e c - 0 6

J u n - 0 7

D e c - 0 7

J u n - 0 8

D e c - 0 8

J u n - 0 9

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

PVT bank stock performance PSU bank stock performance PLR (RHS)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-100%

-50%

0%

50%

100%

150%

200%

Public Sector Private Sector Real GDP growth (RHS)

Correlation Public Sector to Real GDP: 33.5%

Correlation Private Sector to Real GDP: 56.8%Forecasts

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-100%

-50%

0%

50%

100%

150%

200%

Public Sector Private Sector IIP growth (RHS)

Correlation PublicSector to IIP: 53.7%

Correlation Private Sector to IIP: 71.5% Forecasts





Exhibit 12: We expect GDP growth to moderate over FY2011, and believe consumptionrather than investment is likely to drive growth going forwardGrowth in GDP and components in % change yoy

Source: Goldman Sachs Global ECS Research estimates, Goldman Sachs Research estimates.

We correlate PSU and private banks’ stock price performance with a cross section of macro

indicators that include growth in real GDP and industrial production, repo/reverse repo

policy rates, and finally headline and core inflation on a quarterly basis. In the first scenario,

we assume no lag between the indicators: Real GDP and industrial production shows

significant positive correlation (34%-76%) with stock price performance. In the second

scenario, we assume a lag in stock price performance by a quarter and have captured

metrics that records maximum correlation: Repo/reverse repo and Inflation (more so core)

show higher negative correlation (-40% to -58%) vs. the first scenario implying that they

could be potentially viewed as useful leading indicators to banks’ stock prices.

Exhibit 13: Real GDP and IIP have the highest positivecorrelation with PSU, and private bank stocksCorrelation of PSU, and private bank stocks’ performance vs.

key macroeconomic indicators with no lag assumed

Exhibit 14: Repo and inflation also serve as good leadingindicators with a 1 quarter offsetCorrelation of PSU, and private bank stocks’ performance vs.

key macroeconomic indicators with lag for max. correlation

Source: Goldman Sachs Research estimates. Source: Goldman Sachs Research estimates.

Slower economic activity to impact earnings trajectory

For the near term, we expect core earnings to be muted as: (1) Credit growth moderates to

18%-20% in FY12E vs. 19% in 1HFY11 and 21%-23% in 2HFY11, (2) NIMs fall 50-100bps

from the peak of December 2010, as deposit cost moves up, while lending rates stabilize, (3)

fee income remains under pressure on slowing industry/retail loans and product sales, (4)

banks take MTM hit or report lower gains given rising GSec yields, and (5) we see a cyclical

uptick in NPLs. We see downside risks to our loan growth, margin assumptions and

potentially higher NPLs if RBI continues to tighten further. For now, our GS Global ECS

Research team believes that the rates have peaked.

Growth (%) Q1FY12E Q2FY12E Q3FY12E Q4FY12E Q1FY13E Q2FY13E Q3FY13E Q4FY13E

Real GDP 7.6 7.7 7.4 7.5 7.9 7.9 7.7 7.9

Production

Agriculture 2.0 2.0 3.0 3.2 3.0 2.0 3.0 2.6Industry 7.4 7.4 7.3 7.3 7.3 7.4 7.3 7.1

Services 8.9 8.7 8.6 8.5 9.0 9.0 9.0 9.2

Expenditure

Consumer 7.5 6.7 6.2 6.2 8.2 8.4 8.1 7.5

Domestic demand 8.6 8.3 7.7 7.6 8.4 8.5 8.2 7.7

Exports 17.4 17.2 16.8 16.7 14.4 14.2 13.9 13.6

Correlation Matrixwith no lag PSU Banks Private banks

Real GDP 34% 57%

IIP 58% 76%

Prime lending rate -23% -38%

Repo Rate -38% -29%

Reverse Repo rate -33% -18%

WPI -13% -9%

Core Inflation -34% -25%

Stock price performance Correlation MatrixWith offset Offset PSU Banks Private banks

Real GDP -1 7% 25%

IIP -1 45% 64%

PLR -1 -24% -47%

Repo Rate -1 -58% -52%

Reverse repo -1 -54% -40%

WPI -1 -40% -40%

Core Inflation -1 -52% -47%

Stock price performance





Exhibit 15: Slower economic activity could result inslower profit growth…Growth in PBT in %: FY09-FY13E

Exhibit 16: …and core earnings growthGrowth in PBT less treasury inc, provisions in %: FY09-FY13E

Source: Company data, Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates.

Credit growth will likely slow

Credit growth has moderated with slowing economic activity, and we believe will likely

come off further to around 18%-20% in FY2012. RBI’s own target for non-food gross credit

growth for FY12 is 18%, although the current credit growth trend is above the indicative

trajectory of the RBI. The incremental credit deposit ratio has also come off sharply this

year to 52% from 98% last year and would likely impact margins, in our view. We estimate

incremental CD ratio between 76%-84% for FY2012.

Exhibit 17: Sector growth is currently at 20%, we expect

system credit growth between 18%-20% for FY12ESystem credit growth

Exhibit 18: Incremental CD ratio has been one of the

lowest in recent pastIncremental credit deposit ratio

Source: RBI. Source: RBI.

Growth in PBT (%) FY09 FY10 FY11 FY12E FY13E

Public Banks

Bank of Baroda 55.8 23.3 33.3 13.8 4.1

Bank of India 55.1 -40.1 40.2 23.0 11.5Punjab National Bank 44.6 23.9 11.2 19.8 16.1

State Bank of India 35.8 -1.8 7.3 38.0 19.0

Union Bank 16.4 21.3 4.3 21.4 11.1

Private banks

Axis Bank 69.2 38.3 33.3 18.6 15.5

HDFC Bank 44.8 29.8 35.7 22.1 21.9

ICICI Bank 1.2 4.5 26.4 29.2 21.9

Indusind Bank 99.1 134.4 65.0 24.7 23.3

Kotak Mahindra Bank -69.7 90.4 32.2 33.1 15.6

Yes Bank 52.0 55.9 56.1 23.8 23.7

NBFCs

HDFC -4.6 21.7 24.3 16.6 19.4

IDFC 3.5 37.9 24.5 19.8 20.0

LIC Housing Finance 36.5 25.4 42.3 17.6 23.1

Power Finance 11.8 51.4 17.5 17.2 24.2

Shriram Transport 52.1 46.2 37.3 14.4 0.5

Growth in PBT (Less treasury, provs) FY09 FY10 FY11 FY12E FY13E

Public Banks

Bank of Baroda 36.4 21.3 58.3 18.5 8.2

Bank of India 41.3 -12.7 23.1 8.9 20.9Punjab National Bank 41.0 29.8 34.2 20.2 20.4

State Bank of India 26.3 5.6 50.6 14.8 18.7

Union Bank 12.9 12.2 24.5 17.1 21.5

Private banks

Axis Bank 70.1 28.6 36.9 12.7 24.0

HDFC Bank 36.0 27.0 27.8 19.2 22.6

ICICI Bank 25.3 3.6 17.2 13.8 18.2

Indusind Bank 39.6 140.3 69.6 24.9 36.0

Kotak Mahindra Bank 12.2 83.3 -10.4 36.2 27.8

Yes Bank 30.2 101.8 67.2 17.6 30.8

NBFCs

HDFC 23.1 16.4 22.0 20.6 20.8

IDFC 7.7 46.1 61.9 22.4 33.5

LIC HF 38.5 27.7 33.1 44.4 27.0

Shriram Transport Finance 56.3 48.4 39.0 14.3 0.4

21

20

10%

15%

20%

25%

30%

A

p r

M

a y

J

u n

J u l

A

u g

S

e p

O

c t

N

o v

D

e c

J

a n

F

e b

M

a r

2008 2009 2010 2011 2012

50.4

131.0

99.5

85.8

72.8

64.4

71.7

97.5

52.0

0%

20%

40%

60%

80%

100%

120%

140%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Jul-11





Exhibit 19: Deceleration in infrastructure credit growth as telecom loans run down; sloweroff take in power/road credit will likely pull down the system credit growth, in our viewSectoral deployment of credit (Rs bn), split of total (%) and growth in these segments (yoy) in %

Source: RBI.

Deposit growth has been modest despite rising rate while CASAgrowth is slowing

Exhibit 20: System deposit growth has picked up in FY12,likely due to higher rates…System deposit growth

Exhibit 21: …on term deposits, while CASA has declinedduring the same period as depositors shift to termdepositsTime and demand deposit growth

Source: RBI. Source: RBI.

Growth (y-o-y) FY08 FY09 FY10 FY11 May-11 Rs bn % of Total

Non-Food Gross Bank Credit 22.7 18.1 16.8 20.6 22.1 36,836 100.0

Agriculture 18.9 23.8 22.9 10.6 12.0 4,508 12.2

Services 30.7 18.3 12.4 23.9 24.1 8,819 23.9

Commercial real estate 37.4 47.0 0.5 21.4 19.9 1,147 3.1 Retail 11.0 11.3 4.2 17.0 18.4 6,932 18.8

Industry 26.1 20.9 24.2 23.6 26.7 16,577 45.0

Food Processing 26.9 7.1 21.3 29.3 26.2 857 2.3

Textiles 22.5 7.0 6.9 19.2 20.7 1,456 4.0

Petroleum, Coal & Nuclear 17.7 63.3 14.0 (26.6) 5.0 662 1.8

Chemicals and Chemical Products 16.1 17.3 26.2 10.3 15.7 924 2.5

Basic Metals and Metal Products 25.5 23.0 26.8 28.8 29.9 2,139 5.8

All Engineering 20.9 25.5 12.3 26.3 27.2 939 2.5

SME 33.3 66.9 44.3 21.8 20.6 4,560 12.4

Infrastructure 41.4 33.5 40.8 38.6 38.7 5,502 14.9

Power 28.4 32.5 51.2 43.3 42.4 2,875 7.8

Telecom 89.2 35.6 17.9 69.2 53.7 977 2.7

Road 31.7 42.6 55.4 25.8 31.2 982 2.7 Industry excluding infrastructure 22.1 17.1 18.5 17.7 16.8 11,311 30.7

16

18

10%

15%

20%

25%

30%

A p r

M a y

J u n

J u l

A u g

S e p

O c t

N o v

D e c

J a n

F e b

M a r

2008 2009 2010 2011 2012

21.6%

-1.8%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

Time deposits (yoy) Demand deposits (yoy) (RHS)





NIM pressure likely to remain till rates bottom, fees too will be

under pressure as economic activity moderates

We believe banks will likely see margin pressure over FY12 and 1HFY13, signs of which

were reflected in 4QFY11 and 1QFY2012 results as deposit rates continue to rise, while

lending rates start to stabilize and then fall subsequently. Margins will also be impacted by

slower growth in loans both due to slowing economic activity and moderation in

infrastructure lending.

We have seen both the wholesale borrowing cost and the PLR rise a lot more in this cycle

vs. the last cycle. SBI’s PLR peaked at 13.75% in the last cycle, vs. 14.25% currently. Retail

deposit rates are still lower than the last peak.

Exhibit 22: PLR has been raised between 200-250bps...Prime lending rate progression

Exhibit 23: …while base rates have gone up by 200-225bpsBase rate progression

Source: Company data. Source: Company data.

Exhibit 24: Wholesale borrowing cost – i.e., CD/CP rates have moved up 340-500bps fromthe bottom in December 2009CD, CP rates progression

Source: Bloomberg.

PLR (%) SBI BOB BOI PNB UNBK HDFCB ICBK

Dec-09 11.75 12.00 12.00 11.00 11.75 15.75 15.75Aug-10 12.25 12.50 12.50 11.75 12.25 15.75 16.25

Oct-10 12.50 12.50 12.50 11.75 12.25 16.25 16.25

Nov-10 12.50 12.50 12.50 11.75 12.75 16.25 16.25

Dec-10 12.75 13.25 13.25 12.50 13.25 16.50 16.75

Jan-11 12.75 13.25 13.25 13.00 13.25 16.50 17.00

Feb-11 13.00 13.75 13.75 13.00 13.75 16.50 17.50

Mar-11 13.00 13.75 13.75 13.00 13.75 17.25 17.50

Apr-11 13.25 13.75 13.75 13.00 13.75 17.25 17.50

Jul-11 14.25 14.50 13.75 13.50 14.50 17.75 18.25

Change from 2009 (bps) 250 250 175 250 275 200 250

Base rate (%) Initial Dec-10 Mar-11 Apr-11 Jul-11Change since

July 2010 (PP)SBI 7.50 7.60 8.25 8.50 9.50 2.00

Union 8.00 9.00 9.50 9.50 10.25 2.25

BOB 8.00 9.00 9.50 9.50 10.25 2.25

BOI 8.00 9.00 9.50 9.50 10.00 2.00

PNB 8.00 9.00 9.50 9.50 10.00 2.00

HDFC Bank 7.25 7.50 8.70 8.70 9.50 2.25

ICICI Bank 7.50 7.75 8.75 8.75 9.50 2.00

Axis Bank 7.50 8.00 8.75 8.75 9.75 2.25

IndusInd 7.00 7.75 8.75 8.75 10.00 3.00

Kotak 7.25 8.00 8.75 8.75 9.25 2.00

Yes bank 7.00 8.00 8.50 8.50 10.25 3.25

% Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Jul-11

Change in

2010 (bps)

Change in

2011 (bps)

Change from

peak (bps)

Change since

Dec 2009

CD 3M 3.85 4.95 6.50 7.13 9.00 9.45 8.38 8.75 515 -25 -138 490

CD 6M 4.87 5.20 6.65 7.61 9.38 9.45 9.07 9.27 451 -11 -91 440

CD 12M 5.85 6.05 6.90 8.07 9.48 9.50 9.73 9.57 363 9 -61 372

CP 3M 4.25 5.75 6.88 7.53 9.48 10.36 8.90 9.13 523 -34 -157 488

CP 6M 5.50 6.00 6.98 7.99 9.73 10.58 9.54 9.58 423 -15 -125 408

CP 12M 6.55 6.75 7.37 8.48 9.95 10.74 10.10 9.98 340 3 -80 343





Exhibit 25: Retail deposit rates have increased but still not at the same level as the last cycle; the difference is morelikely on short-term deposits where some banks like SBI are offering very high ratesSummary of deposit rates across maturities

Source: Company data.

Exhibit 26: Retail deposit rates have moved up across most maturities

Deposit rate trajectory for key banks

Source: Company data.

Current Deposit rates BOB PNB SBI Axis ICICI HDFCB Union BOI Indus Yes Kotak

7 days to 14 days 4.25% 4.00% 7.00% - 3.75% 3.50% 4.00% 4.00% 3.00% 4.00% 4.00%

15 days to 45 days 4.25% 4.50% 7.00% 2.5-3.0% 4-5% 4-5% 4.75% 4.50% 4.00% 4-4.50% 5-5.50%

46 days to 90 days 4.25% 5.50% 7.00% 3.5-4.0% 6.25-6.50% 6.25-6.50% 5.25% 5.50% 5.5-5.75% 6.00% 6.25%

91 days to 180 days 6.50% 7.00% 7.25% 6.25-6.75% 7.00% 6.75% 7-7.25% 7.00% 6.25% 7.25% 7.50%181 days & above but less than 1 year 7.25-7.50% 8.00% 6.5-7.75% 7.75-8.50% 7-7.75% 7.25-7.75% 8-8.15% 8.00% 7.75-8.50% 8.25-9.00% 8.25-8.75%

1 year & above but less than 2 years 9.00% 9-9.05% 9.25% 9-9.25% 8.25-9.25% 8.25-8.50% 9.15% 9-9.25% 9-9.50% 9-9.60% 9.25-9.60%

2 years and above upto 749 days 9.00% 9.00% 9.25% 8.50% 8.50% 8.50% 9.15% 8.00% 8.75-9.50% 8.75% 9.50%

Above 750 days but less than 3 years 9.00% 9%-9.15% 9.25% 8.50% 8.5-9.25% 8.50% 9.15% 8.00% 8.75-9.50% 8.75-9.30% 9.50%

3 years and above but less than 5 years 8.50% 8.5-9.25% 9.25% 8.50% 8.75% 8.25% 9.15% 7.75-8.25% 8.75% 8.75% 9.25%

5 years and above but less than 8 years 8.50% 8.75% 9.25% 8.50% 8.75% 8.25% 8.5-9.00% 8.50% 8.75% 8.75% 9.25%

8 years and above up to 10 years 8.50% 8.75% 9.25% 8.50% 8.75% 8.25% 8.50% 8.75% 8.75% 8.75% 9.25%

Tenure SBI BOB BOI PNB UNBK HDFCB ICBK

Dec-09 5.25 5.50 5.00 4.50 4.50 5.50 5.25

Dec-10 7.75 7.00 6.75 7.50 7.00 6.50 6.50

Mar-11 7.75 6.75 7.25 7.75 7.50 7.75 7.00

Jul-11 7.75 7.50 7.50 9.00 8.00 7.75 7.75

Change 250 200 250 450 350 225 250

Dec-09 6.00 6.50 6.50 6.50 6.75 6.50 6.25

Dec-10 9.00 8.35 8.25 8.25 8.10 7.25 8.00

Mar-11 9.25 9.10 9.25 9.05 8.10 8.25 9.00

Jul-11 9.25 9.35 9.25 9.50 9.00 8.50 9.25

Change 325 285 275 300 225 200 300

Dec-09 6.50 7.00 7.00 7.00 7.00 6.50 7.50

Dec-10 8.25 7.50 8.25 8.25 7.50 7.50 8.50

Mar-11 8.25 8.50 8.25 9.25 9.15 8.25 8.50Jul-11 9.25 8.50 8.25 9.25 9.15 8.25 8.75

Change 275 150 125 225 215 175 125

6M

1 - 2 Years

3 - 5 Years





Exhibit 27: We assume lower NIMs in FY13E on the basis of (1) interest rates likely peakingin 1HFY13E, and (2) the full impact of the recent 50bp hike in saving bank deposit rateChange from annualised 3QFY11 NIMs, spread change from 3QFY09-1QFY10

*For Shriram, NIM is calculated as Net interest income/Average asset under management.


Exhibit 28: We expect NII to come under pressure due tomargin compression…Growth in NII

Exhibit 29: …while other income remains mutedGrowth in other income

Source: Company data, Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates.

Net interest Margins (%) FY11 FY12E FY13EQ3FY11 annualized

NIMs

Decline in NIMs over

annualized Q3FY11 ‐

FY13E

Decline in spreads during last cycle

(Q3FY09‐Q1FY10), when interest rates

were declining (SBI's PLR down 125bp

and 1‐2yr deposit rate down 200bp)

Bank of Baroda 2.83 2.69 2.50 3.26 (76) (97)

Bank of India 2.59 2.48 2.48 2.97 (49) (97)

Punjab National Bank 3.61 3.40 3.43 4.26 (83) (66)

State Bank of India 2.97 2.92 2.97 3.53 (56) (136)

Union Bank of India 2.97 2.68 2.71 3.35 (64) (118)

Axis Bank 3.19 2.84 2.90 4.01 (111) 12

HDFC Bank 4.44 4.24 4.18 5.08 (90) (46)

ICICI Bank 2.59 2.70 2.75 2.62 12 6

IndusInd Bank 3.56 3.60 3.85 4.09 (24) 80

Kotak Mahindra Bank 5.04 4.63 5.46 5.57 (10) (21)

Yes Bank 2.72 2.57 2.75 3.24 (49) 74

Housing Development Fin. 3.51 3.49 3.47 3.61 (15) (91)

IDFC 4.47 4.12 4.24 4.74 (49) (45)

LIC Housing Finance 2.94 2.65 2.67 3.34 (67) (47)

Shriram Transport* 9.52 9.10 8.77 10.80 (204) 193

PSU Banks

Private Banks

NBFCs

Growth in NII (%) FY09 FY10 FY11 FY12E FY13E

Public Banks

Bank of Baroda 31.0 15.9 48.2 16.4 10.9

Bank of India 28.2 0.6 35.7 3.4 23.0

Punjab National Bank 27.0 21.2 38.5 18.0 23.1


Union Bank 23.6 9.9 48.3 8.7 20.6

Private banks

Axis Bank 37.3 35.8 31.1 14.3 26.2

HDFC Bank 42.0 13.0 25.7 17.5 22.7

ICICI Bank 2.0 -3.0 11.1 17.8 17.2

Indusind Bank 52.6 93.1 55.3 29.0 34.6


Yes Bank 51.8 54.1 63.6 26.8 36.3

NBFCs

HDFC 16.7 12.1 24.6 19.4 20.2

IDFC 30.6 87.4 28.7 17.3 22.8

LIC Housing Finance 29.2 20.5 54.8 16.6 24.9

Power Finance 24.8 28.8 22.7 21.5 24.3

Shriram Transport 50.2 27.4 40.1 16.9 12.9

Growth in Other income (%) FY09 FY10 FY11 FY12E FY13E

Public Banks

Bank of Baroda 63.4 -1.2 3.1 -6.3 18.9

Bank of India 44.2 -14.3 1.0 0.7 3.7

Punjab National Bank 46.2 16.9 5.9 10.1 11.5


Union Bank 19.5 34.0 3.2 0.3 3.0

Private banks

Axis Bank 60.0 36.2 17.4 18.2 26.8

HDFC Bank 44.1 15.7 13.9 25.5 21.6

ICICI Bank -13.3 -1.4 -11.1 19.6 23.9

Indusind Bank 53.3 21.3 28.9 19.3 29.5


Yes Bank 22.7 32.3 8.3 20.3 28.4

NBFCs

HDFC -60.1 86.5 19.3 -0.9 13.6

IDFC 7.0 -21.1 3.7 10.8 18.3

LIC Housing Finance 27.2 34.1 114.2 -49.3 12.4

Power Finance 41.7 1.8 38.9 9.4 9.5

Shriram Transport -21.2 39.3 57.0 -63.1 14.0





Treasury income could take a hit

GSec yields have moved up by 39-88 bps in 2011 over and above the 33-290 bps increase

in rates in 2010. Our GS Global ECS Research team expects 10-year Gsec yields to reach

8.5% by March 2012. We believe this will likely impact banks’ ability to book gains in order

to offset margin pressure, and in most cases will also lead to MTM hit for banks as yieldsare currently at 8.3%.

Exhibit 30: Banks tend to book treasury gains when the yields start declining and viceversaNet treasury income for our coverage universe vs. 10-year Gsec yields

Source: Company data, Bloomberg.

Exhibit 31: Rates have risen by 88 bp on the short end much more than the long end likelyleading to MTM hit for banksGsec yields (%)

Source: Bloomberg.

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

-60

-40

-20

0

20

40

60

80

100

F Y 0 0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

Q 1 F Y 0 7

Q 2 F Y 0 7

Q 3 F Y 0 7

Q 4 F Y 0 7

Q 1 F Y 0 8

Q 2 F Y 0 8

Q 3 F Y 0 8

Q 4 F Y 0 8

Q 1 F Y 0 9

Q 2 F Y 0 9

Q 3 F Y 0 9

Q 4 F Y 0 9

Q 1 F Y 1 0

Q 2 F Y 1 0

Q 3 F Y 1 0

Q 4 F Y 1 0

Q 1 F Y 1 1

Q 2 F Y 1 1

Q 3 F Y 1 1

Q 4 F Y 1 1

R s b n

Net treasury income 10 Year Gsec yields (RHS)

% Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Jul-11

Change in

2010 (bps)

Change in

2011 (bps)

1 yr G Sec 4.39 5.15 5.42 6.51 7.29 7.56 8.22 8.17 290 88

10 yr G Sec 7.59 7.83 7.55 7.95 7.92 8.01 8.33 8.31 33 39





Exhibit 32: Treasury income contribution has been substantially lower in FY11 as Gsecyields have moved higherNet treasury income in FY10-FY13E as % of PBT


Exhibit 33: In our view, SBI and BOI will likely be impacted the most if rates riseSensitivity of profits to higher yields assuming current yields of 8.3%

Note: BOI, UNBK data as of 1QFY12.


Rs mn % of PBT

Net Trading income FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E

Public banks

Bank of Baroda 11,040 4,347 1,100 2,000 26.0 7.7 1.7 3.0

Bank of India 3,501 1,848 1,037 2,000 14.0 5.3 2.4 4.2

Punjab National Bank 5,844 1,548 660 2,000 9.9 2.4 0.8 2.2

State Bank of India 31,048 2,789 2,800 7,000 22.3 1.9 1.4 2.8

Union Bank 6,901 4,374 2,970 2,500 24.4 14.8 8.3 6.3

Private banks

Axis Bank 8,594 2,670 884 3,500 22.3 5.2 1.5 5.0

HDFC Bank 3,451 -527 -413 1,000 8.0 -0.9 -0.6 1.2

ICICI Bank 18,377 -4,060 0 1,500 34.4 -6.0 0.0 1.4

IndusInd Bank 1,113 685 578 400 20.9 7.8 5.3 3.0

Kotak Mahindra Bank 517 379 597 350 6.4 3.5 4.2 2.1

Yes Bank 832 -392 -150 100 11.5 -3.5 -1.1 0.6

(In Rs mn,

unless

specified)

FY2012E

Profit

Before Tax

AFS

Portfolio

as of FY11

AFS Portfolio as

% of Investments

Duration

(Years) 8.25% 8.50% 8.75% 9.00% 8.25% 8.50% 8.75% 9.00%

BOB 64,316 159,045 22.3% 2.81 63,869 62,752 61,635 60,518 -0.7% -2.4% -4.2% -5.9%

BOI 42,991 309,145 36.6% 1.22 42,614 41,671 40,728 39,785 -0.9% -3.1% -5.3% -7.5%

PNB 78,620 205,574 21.5% 2.71 78,063 76,670 75,277 73,884 -0.7% -2.5% -4.3% -6.0%

SBI 206,403 715,127 27.0% 3.30 204,043 198,143 192,243 186,343 -1.1% -4.0% -6.9% -9.7%

Union Bank 35,893 102,640 17.1% 1.59 35,730 35,322 34,914 34,506 -0.5% -1.6% -2.7% -3.9%

% impact to our PBT estimatesAdjusted PBT estimates (Rs mn)





Asset quality deterioration likely to reflect in FY2013

Slower corporate sales growth, and EBITDA margin pressure will likely translate into an

increase in NPLs for banks and finance companies, in our view, and we believe the NPL

ratio for the industry could move up to around 3% from 2.5%. However, we expect to see

increase in NPLs only in FY2013E, as banks will initially restructure/evergreen loans.

Exhibit 34: We expect NPLs to increase in FY13E…Gross and net NPL ratios in FY10-FY13E


Exhibit 35: …implying provisions to start rising as well during the same periodLoan loss provisions as % of advances: FY10-FY13E


Gross NPL (% of total advances) Net NPL (% of total advances)

FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E

Public banks

Bank of Baroda 1.4 1.4 1.4 2.0 0.3 0.3 0.4 0.6

Bank of India 2.9 2.2 2.1 2.5 1.3 0.9 0.7 1.0

Punjab National Bank 1.7 1.8 1.7 2.1 0.5 0.8 0.7 1.0

State Bank of India 3.1 3.3 3.2 3.8 1.7 1.6 1.3 1.8

Union Bank 2.2 2.4 2.4 2.8 0.8 1.0 1.0 1.4

New private banks

Axis Bank 1.3 1.1 1.2 1.5 0.4 0.3 0.4 0.7 HDFC Bank 1.4 1.0 1.0 1.3 0.3 0.2 0.2 0.4

ICICI Bank 5.1 4.7 4.2 4.4 2.1 1.1 0.8 1.3

IndusInd Bank 1.2 1.0 0.9 1.2 0.5 0.3 0.2 0.4

Kotak Mahindra Bank 3.6 2.0 1.7 1.9 1.7 0.7 0.7 0.8

Yes Bank 0.3 0.2 0.2 0.4 0.1 0.0 0.0 0.1

NBFC

HDFC 0.8 0.8 0.8 0.8 0.5 0.5 - -

LIC HF 0.7 0.6 0.6 0.7 0.1 - - 0.0

FY10 FY11 FY12E FY13EPublic banks

Bank of Baroda 0.61 0.56 0.51 0.55Bank of India 1.06 0.49 0.51 0.67Punjab National Bank 0.56 0.97 0.89 1.00State Bank of India 0.83 1.29 0.86 0.90Union Bank 0.60 0.85 0.65 0.77

Private BanksAxis Bank 1.37 0.77 0.45 0.78HDFC Bank 1.56 0.90 1.00 1.10ICICI Bank 2.42 1.06 0.67 0.60IndusInd Bank 0.83 0.70 0.64 0.90

Kotak Mahindra Bank 2.26 0.34 0.41 0.70Yes Bank 0.57 0.27 0.17 0.36NBFCs

HDFC 0.06 0.03 0.05 0.06IDFC 0.43 0.38 0.44 0.42LIC HF (0.07) 0.49 0.13 0.10Shriram Transport Finance 2.29 1.51 2.06 2.50

Loan loss provisions as % of Advances





Valuations not too high, not too low, do not expect a significantdecline/appreciation

While macro issues still remain a concern and are yet to be reflected in the performance of

banks, we believe valuations are not too high, hovering above historical averages. Given

that we expect weaker earnings performance, we believe the stocks are unlikely to rerate

significantly, but they may not decline significantly either, given that they are below peak

levels. In such a scenario, we expect stock prices to move in a narrow range till we see

rates stabilize and fall. We prefer being selective and prefer stocks that carry higher

probability of meeting our earnings estimates i.e., have lower risk to earnings, and whose

valuations are reasonable vs. growth and ROE.

We revise our 12-m TPs by 2%-5% as we roll forward our target BVPS to June-2012 for the

stocks under our coverage that are yet to report 1QFY12 results (BOB/PNB/SBI/ICICIB/IDFC/

Power Finance/Shriram Transport).

Exhibit 36: PSU banks have corrected sharply but stilltrade just below 1SD…PSU Banks 12-m fwd P/B (X)

Exhibit 37: …while correction in private banks has beenless steep and they are currently trading at 1SDPrivate Banks 12-m fwd P/B (X)

Source: Company data, Bloomberg, Goldman Sachs Research estimates. Source: Company data, Bloomberg, Goldman Sachs Research estimates.

1.13

0.90

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8 PSU Average +1 SD -1 SD +2 SD

Average P/B (Jan-03 to Mar-07) 0.7X

Average P/B (Apr-07 to Current) 1.1X 3.8

2.9

2.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5 Private Average +1SD -1SD +2 SD





Exhibit 38: MSCI India valuation including financials isabove average…MSCI India: 12-m forward PE(x), average and ±1SD

Exhibit 39: …whereas below average excluding financialsMSCI India excl financials: 12-m forward PE(x), average and

±1SD

Source: FactSet, I/B/E/S, MSCI, Goldman Sachs Global ECS Research. Source: FactSet, I/B/E/S, MSCI, Goldman Sachs Global ECS Research.

Exhibit 40: Current valuations are below the historical peak valuations of January 2008Summary of valuations: Current vs. market peak (January 2008) and subsequent low (March 2009)


14.34

0

5

10

15

20

25

J u l - 9 8

J u l - 9 9

J u l - 0 0

J u l - 0 1

J u l - 0 2

J u l - 0 3

J u l - 0 4

J u l - 0 5

J u l - 0 6

J u l - 0 7

J u l - 0 8

J u l - 0 9

J u l - 1 0

J u l - 1 1

(X) Forward P/E Average +1 SD -1 SD

MSCI India

14.1

8

10

12

14

16

18

20

22

N o v - 0 3

M a y - 0 4

N o v - 0 4

M a y - 0 5

N o v - 0 5

M a y - 0 6

N o v - 0 6

M a y - 0 7

N o v - 0 7

M a y - 0 8

N o v - 0 8

M a y - 0 9

N o v - 0 9

M a y - 1 0

N o v - 1 0

M a y - 1 1

MSCI Excl fina ncia ls Avera ge +1 SD -1 SD

P/E(x)

Price (Rs.)

12m fw PE

(x)

12m fw PB

(x)

12m fw PE

(x)

12m fw PB

(x)

12m fw PE

(x)

12m fw PB

(x) 12m fw PE 12m fw PB 12m fw PE 12m fw PB

Public BanksBank of Baroda 900 7.45 1.43 9.83 1.48 2.24 0.49 -24% -3% 233% 190%

Bank of India 389 7.13 1.13 7.86 1.89 5.16 0.75 -9% -40% 38% 51%

Punjab National Bank 1,165 6.79 1.44 8.64 1.70 2.50 0.60 -21% -16% 172% 140%

State Bank of India 2,442 10.95 1.95 17.43 2.80 6.21 0.87 -37% -30% 76% 124%

Union Bank 304 6.23 1.15 7.03 1.82 2.87 0.68 -11% -37% 117% 69%

Private BanksAxis Bank 1,320 12.88 2.34 27.03 4.10 4.36 0.73 -52% -43% 195% 223%

HDFC Bank 498 22.80 3.84 35.08 5.07 11.93 1.75 -35% -24% 91% 119%ICICI Bank 1,041 17.61 1.97 35.21 3.11 7.29 0.57 -50% -37% 141% 246%

IndusInd Bank 269 16.50 2.71 41.02 2.87 3.49 0.55 -60% -5% 372% 397%

Kotak Mahindra Bank 466 33.47 4.32 63.21 9.11 14.42 0.90 -47% -53% 132% 381%Yes Bank 319 11.17 2.28 31.85 5.34 2.72 0.42 -65% -57% 311% 438%

NBFCsHDFC 694 23.83 5.04 36.67 7.01 12.95 2.40 -35% -28% 84% 110%

IDFC 135 12.69 1.60 38.18 5.27 5.92 0.89 -67% -70% 114% 79%

LIC Housing Finance 215 8.66 1.91 6.90 1.54 2.59 0.51 26% 24% 234% 272%

Power Finance 202 8.24 1.22 19.33 2.87 6.33 1.13 -57% -57% 30% 8%

Shriram Transport Finance 678 10.88 2.40 16.52 3.91 4.54 1.04 -34% -39% 140% 131%

Sensex 14.34 2.46 23.33 4.91 10.63 1.83 -39% -50% 35% 34%

Market peak Market low

Current valuation on GSe Valuation on 8-Jan-2008 Valuation on 9-Mar-2009 Current vs Peak Current vs Low





Exhibit 41: HDFC Bank and Kotak Mahindra Bank are currently trading at a premium toaverage valuations and we have a Sell rating on bothCurrent valuations vs. historical ranges


Exhibit 42: Target price changes

For important disclosures, please go to http://www.gs.com/research/hedge.html.


Price (Rs.)

12m fw PE

(x)

12m fw PB

(x)

12m fw PE

(x)

12m fw PB

(x) 12m fw PE 12m fw PB

Public BanksBank of Baroda 900 7.45 1.43 6.72 1.17 11% 22%

Bank of India 389 7.13 1.13 6.49 1.10 10% 3%

Punjab National Bank 1,165 6.79 1.44 6.98 1.40 -3% 3%

State Bank of India 2,442 10.95 1.95 9.68 1.55 13% 26%

Union Bank 304 6.23 1.15 5.70 1.20 9% -5%

Private Banks

Axis Bank 1,320 12.88 2.34 13.07 2.26 -1% 4%

HDFC Bank 498 22.80 3.84 20.28 3.24 12% 19%

ICICI Bank 1,041 17.61 1.97 15.76 1.78 12% 11%

IndusInd Bank 269 16.50 2.71 16.42 1.82 0% 49%

Kotak Mahindra Bank 466 33.47 4.32 13.78 2.18 143% 98%

Yes Bank 319 11.17 2.28 17.67 2.58 -37% -12%

NBFCs

HDFC 694 23.83 5.04 19.87 4.47 20% 13%

IDFC 135 12.69 1.60 16.09 2.32 -21% -31%

LIC Housing Finance 215 8.66 1.91 7.89 1.55 10% 23%

Power Finance 202 8.24 1.22 10.66 1.59 -23% -23%

Shriram Transport Finance 678 10.88 2.40 7.67 1.70 42% 41%

Current valuation on GSe Current vs MedianFY03-07, FY10-June11

Valuations (median)

Price Up/downsideRs. Ticker Rating (July 26) Old New Chg (%) potential (%)

Public Banks

BOB BOB.BO Buy 900 1070 1110 3.7 23%

PNB PNBK.BO Buy 1165 1350 1410 4.4 21%

SBI SBI.BO Neutral 2442 2650 2760 4.2 13%

Private BanksICICI Bank ICBK.BO Buy 1041 1235 1255 1.6 21%

NBFCs

IDFC IDFC.BO Neutral 135 145 150 3.4 11%

PFC PWFC.BO Neutral 202 210 220 4.8 9%

Shriram SRTR.BO Neutral 678 680 710 4.4 5%

12-m Target price





NBFC’s vs. banks: Which will see a turnaround first?

In a rising rate environment situation, we expect bulk borrowers to get impacted the most

in terms of spreads/margins and performance, and also likely to turn around before retail

borrowers as rates stabilize and fall. However, we believe bulk and retail borrowers are

unlikely to turn around in the next two to three quarters till the full impact of cost increaseis reflected. Given the current high valuations of HDFC (considered as a defensive stock),

and sector-specific issues hurting IDFC (power exposure) and Shriram (RBI tightening norm,

structural increase in cost), we prefer Yes Bank, IndusInd Bank among banks that have

higher wholesale funding.

Exhibit 43: Wholesale borrowers are more impacted asrates rise…Change in 6M CP/CD rates, change in company spreads

Exhibit 44: …which is reflected in their stock pricesChange in 6M CP/CD rates, change in stock prices

Source: Company data, Bloomberg, Goldman Sachs Research estimates. Source: Datastream.

Change (%)Q3FY08-

Q2FY09

Q3FY09-

Q2FY10

Q3FY10-

Q1FY12E6 month CD rate 3.75 -8.05 5.53

6 month CP rate 4.46 -7.41 4.29

Change in spreads (%)Q3FY08-

Q3FY09

Q4FY09-

Q4FY10

Q1FY11-

Q1FY12E

Wholesale borrowers

HDFC (0.65) 1.33 (1.37)

IDFC 0.53 (0.05) (0.43)

LIC Housing Finance (0.15) 0.37 (0.54)

Yes Bank (0.12) 0.95 (0.57)

Wholesale borrowers offset by pricing power/ higher CASA

Shriram Transport Finance (0.61) 3.79 0.52

IndusInd Bank 0.16 1.66 (0.22)

Axis Bank (0.09) 0.73 (0.72)

Kotak Mahindra Bank 0.50 0.17 (1.84)

Retail borrowers

Bank of Baroda 0.35 (0.31) (0.06)

Bank of India 0.67 (0.86) 0.15 HDFC Bank 0.28 0.08 (0.44)

ICICI Bank 0.32 0.27 0.03

Punjab National Bank 0.37 (0.03) (0.20)

State Bank of India 0.51 (0.73) 0.33

Union Bank 0.62 (0.11) (0.39)

Cumulative change (%)

Change (%)Q3FY08-

Q2FY09

Q3FY09-

Q2FY10

Q3FY10-

Q1FY126 month CD rate 3.75 -8.05 5.53

6 month CP rate 4.46 -7.41 4.29

Stock price performance (%)Q3FY08-

Q2FY09

Q3FY09-

Q2FY10

Q3FY10-

Q1FY12

Wholesale borrowers

HDFC 9.9 31.4 (3.6)

IDFC 3.5 38.6 (35.3)

LIC Housing Finance 222.1 86.2 (15.8)

Yes Bank (0.9) 71.5 (11.3)

Wholesale borrowers offset by pricing power/ higher CASA

Shriram Transport Finance 94.8 102.8 (20.3)

IndusInd Bank 54.2 130.0 2.7

Axis Bank 28.4 56.0 (15.8)

Kotak Mahindra Bank (15.8) 22.6 0.9

Retail borrowers

Bank of Baroda 47.7 80.9 (0.1)

Bank of India 48.8 25.4 (19.8)

HDFC Bank 14.1 51.1 0.9

ICICI Bank (14.9) 22.7 (1.6)

Punjab National Bank 46.6 62.4 (15.7)

State Bank of India 19.3 47.3 (25.6)

Union Bank 46.9 61.9 (24.6)

Cumulative change (%)





High ownership has not reduced through the cycle

Despite high inflation and interest rates, ownership in the banks and financials sector has

remained high as can be seen from FII holdings, share of banking stocks in top 200

companies, and banks holding as per MSCI. This poses two types of risks, (1) Incremental

buying in the sector may be limited given likely earnings pressures, and (2) possibility thatinvestors sell in case operating performance of companies is worst than expected.

Exhibit 45: FII ownership in NBFCs, and smaller privatebanks is higher than in the pastFII share holding during market peak (Jan ’08), Low (Mar ’09)

and Current (Mar-11/June-11)

Exhibit 46: DII have increased stake in ICICI Bank, INBKbut reduced in IDFC, and LICHFDII share holding during market peak (Jan ’08), Low (Mar ’09)

and Current (Mar-11/June-11)

Source: Capitaline, BSE. Source: Capitaline, BSE.

Exhibit 47: While inflation and interest rates have beenmoving higher, financial stocks’ weightage has remainedhigh and close to peak levels…Share of banking and financial stocks in top 200 stocks

Exhibit 48: … as confirmed by the weightage of financialstocks in MSCI India, which is currently at a peakWeightage of banks, and NBFCs in MSCI India

Source: Capitaline. Source: Factset,MSCI, GS Global ECS Research.

20

16

20 20 20

37

49

70

30

2627

62

38

30

1316 15

19

14 14

47 47

65

49

26

48

58

47

40 41

0%

10%

20%

30%

40%

50%

60%

70%

80%

BOB BOI PNB SBI Union

Bank

Axis HDFC

Bank

ICICI

Bank

Indus Ind Kota k Yes HDFC IDFC LIC HF Shrira m

Market Peak (Jan '08) Market Low (Mar '09) Current

PSU Banks NBFCsPrivate Banks

18

5

17

12 12

87

17

2

5

2825

51

19

5

16

12

17 17

13

5

11

25

8

5

12

29

37

8

3

0%

10%

20%

30%

40%

50%

60%

BOB BOI PNB SBI Union

Bank

Axis HDFC

Bank

ICICI

Bank

Indus Ind Kota k Yes HDFC IDFC LIC HF Shrira m

Market Peak (Jan '08) Market Low (Mar '09) Current

PSU BanksNBFCsPrivate Banks

12.7

10.5

12.5

4.41

0%

2%

4%

6%

8%

10%

12%

14%

Banks Finance

23.30

3.41

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

M a r - 9 6

N o v - 9 6

J u l - 9 7

M a r - 9 8

N o v - 9 8

J u l - 9 9

M a r - 0 0

N o v - 0 0

J u l - 0 1

M a r - 0 2

N o v - 0 2

J u l - 0 3

M a r - 0 4

N o v - 0 4

J u l - 0 5

M a r - 0 6

N o v - 0 6

J u l - 0 7

M a r - 0 8

N o v - 0 8

J u l - 0 9

M a r - 1 0

N o v - 1 0

Banks NBFCs





Exhibit 49: Mutual funds have increased their stake in financial stocksSectoral deployment of funds by mutual funds

Source: SEBI.

17.31%

3.99%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

12%

13%

14%

15%

16%

17%

18%

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

Banks Finance (RHS)





Reg AC

I, Tabassum Inamdar, CFA, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subjectcompany or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to thespecific recommendations or views expressed in this report.

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The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregateof various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividendyield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

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Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

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Global 32% 54% 14% 52% 41% 37%

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Price target and rating history chart(s)






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