Update on Bank Stocks

Bank Update by Goldman Sachs
Updating estimates based on 3Q results and subsequent changes, We are updating estimates for SBI (SBI.BO), PNB (PNBK.BO), BOB (BOB.BO) and IOB (IOBK.BO) based on 3Q2008 results declared and changes in the trends seen in 4Q2008 thus far.



The 3Q2008 results of these banks reflected

1. strong demand for new loans,
2. significant improvement in their pricing power for loans leading to higher NIM and
3. significant gains on their bond trading portfolios due to rise in bond prices.
   

These trends appear to be reversing in 4Q2008:

1. Demand for new loans show significant moderation; we believe this trend would likely sustain in 2009 as well.
2. Slower demand for new loans is likely to weaken the pricing power of banks; this together with easing bias of the Central Bank in its monetary policy outlook would likely erode NIM of banks in 2009.
3. Upside from bond trading income appears to be capped due to decline in bond prices since the beginning of 4Q2008.

We believe the trend seen in 3Q2008 is likely to provide upside to our estimates for 2008 but reversal of favorable trends seen in 4Q2008 is likely to increase downside to current consensus expectations for 2009E.



We maintain Sell on PNB and BOB and Neutral on SBI and IOB. Our investment thesis and ratings are predicated on headwind to the macro conditions leading to slower operating revenue growth, higher operating cost and higher credit cost for loans due to deteriorating economic environment.

Our target prices are unchanged. We derive our 12-month Target Price for SBI (Rs1,150) using SOTP methodology; we derive our 12-m TPs for PNB (Rs340), BOB (Rs230) and IOB (Rs70) using mid-point of Camelot derived P/BX and their ex-growth value.