Macro Measures – Cautious on Banks – GS

The monetary policy will likely lead to better near-term prospects for banks. Market consensus expectation of earnings would be propped up by potential revaluation gains and earn trading income from bonds. However, expect the headwinds for the medium-term to stay. The aggregate SCB loan growth to ease significantly from 26% in 2008E to 14% in 2009E on the back of rapid deterioration in economic activity. Slower demand for loans and lending rate cuts would likely lead to slower operating revenue growth.

A Word of Caution:
Deterioration in real economy is likely to lead to higher NPA formation. We expect gross NPA for our coverage group to rise from 2.5% in 2008E to 4.5%-5% by 2010E. Rapid deterioration in economic activity could present downside risk to expectation.

Goldman top picks are HDFC Bank and Axis Bank due to continued favorable growth prospects and strong profitability. It expects significant downside to earnings growth in Kotak Mahindra Bank, Punjab National Bank and Bank of Baroda.

Goldman’s tone is more in-line with DSP Merrill Lynch as covered earlier.