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Banking Sector - A Review

Banking sector under our coverage universe is expected to register NII growth of 22.4% (YoY), Pre-provisioning profit growth of 11.7% (YoY) and Net income growth of 7.2% (YoY).

Credit off take (as on December 05, 2008) has been robust at 26.3% (YoY) and 12.5% (YTD). During the same period (as on December 05,2008), deposits grew 21.4% (YoY) and 11.4% (YTD).
Margins to be stable; PLR cut would be compensated by recent cut in CRR, SLR, Repo and Reverse repo rates.
Write-back of MTM provisions as 10-year government bond has fallen
by around 320 bps during Q3FY09.
NPAs to rise; Write-back of MTM provision to provide cushion in overall
Top Picks: Axis Bank, HDFC Bank, Union Bank, BOB, Indian Bank, PNB

In the challenging global and domestic environment, policy makers (both Govern-
ment and RBI) are busy prescribing booster doses to minimize the spill-over effect
of global financial crisis. India's growth trajectory has been impacted by both finan
cial crisis and the follow-on global economic downturn, which is visible from nega-
tive IIP number for the month of October and decline in exports during two con-
secutive months - October and November.

The deteriorating economic environment could further worsen the asset quality.
However, we believe that we are on the downward trajectory of the interest rate
cycle which is likely to be favorable for the banking sector. With the softening in international commodity prices, domestic headline inflation (WPI) has already come
down to 6.38% (for week ended December 20, 2008), lowest in the last 42 weeks.
We expect WPI to continue to fall at an accelerated pace before touching 2.5-3.5%
levels by the end of FY09.

As a result, the stance of RBI's monetary policy has shifted from reining in inflation to spurring growth in the economy. During Q3FY09, RBI has cut the CRR by 350 bps, Repo rate by 250 bps and Reverse repo by 100 bps, leading to improvement in
the liquidity situation. Banks also responded to this signal by cutting both their deposit as well as lending rates.

We maintain our long-term positive stand on the banking sector, as we believe that
we are on the downward trajectory of interest rate cycle. With the moderating WPI
(6.38% for the week ended December 20, 2008, lowest in last 42 weeks) which is
likely to touch even 2.5-3.5% levels by the end of FY09, RBI is providing additional
liquidity for onward lending at lower interest rates.

We believe, banks that would focus more on quality rather than quantity of assets
and have a strong resource base are expected to outperform their peers.