Commercial Banking

Published by BUSINESS MONITOR INTERNATIONAL LTD
India Commercial Banking Report Q3 2009

Including 5-year industry forecasts
ISSN: 1747-8596
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Including 5-year industry forecasts by BMI
Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International Publication date: July 2009
Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com
2009 Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher.
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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 Indias 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 Indias 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
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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
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Executive Summary
Table: Latest Actual Data (INRbn)
Date March 2007 March 2008 Change, %
Total assets
34,006.2 41,709.5 23%
Client loans
20,899.0 25,491.0 22%
Bond portfolio
7,760.6 9,586.6 24%
Other
5,346.6 6,631.9 24%
Liabilities and capital

34,006.2 41,709.5 23%
Capital
2,028.0 2,726.2 34%
Client deposits
25,444.7 31,400.0 23%
Other
5,346.6 6,631.9 24%
Source: BMI, Central banks, Regulators
Table: Latest Actual Data (US$bn)
Date March 2007 March 2008 Change, %
Total assets 847.7 822.2 -3%
Client loans 445.1 502.5 13%
Bond portfolio 165.3 189.0 14%
Other 113.9 130.7 15%
Liabilities and capital 724.2 822.2 14%
Capital 50.6 53.7 6%
Client deposits 634.3 619.0 -2%
Other 113.9 130.7 15%
Table: Latest Key Indicators At March 2008
Loan/Deposit ratio 2339.56% Rising
Loan/asset ratio 61.12% Falling
Loan/GDP ratio 57.17% Rising
GDP per capita, US$ 753
Deposits per capita, US$ 536
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Table: Annual Growth Rate Projections, 2009-2013 (%)
Assets Annual Growth Rate CAGR Ranking 18 16 2
Loans 20 17 1
Deposits 20 19 1
Table: Ranking Out Of 45 Countries Reviewed In 2009
Loan/Deposit ratio 43 Local currency asset growth 3
Loan/asset ratio 19 Local currency loan growth 3
Loan/GDP ratio 35 Local currency deposit growth 2
Table: Projected Levels, 2008-2013 (INRbn)
December 2008e Total assets Client loans Client deposits 41,709.49 25,490.97 31,400.04
December 2009f 46,714.63 29,059.71 36,738.05
December 2010f 53,721.82 33,709.26 43,350.90
December 2011f 62,317.31 39,776.93 51,587.57
December 2012f 72,911.26 46,936.77 61,905.08
December 2013f 86,035.28 56,324.13 74,286.09
e/f = BMI estimate/forecast. Source: BMI, Central banks, Regulators
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Table: Projected Levels (US$bn)
December 2008e Total assets Client loans Client deposits 969.99 592.81 730.23
December 2009f 849.36 528.36 667.96
December 2010f 1,033.11 648.25 833.67
December 2011f 1,246.35 795.54 1,031.75
December 2012f 1,518.98 977.85 1,289.69
December 2013f 1,870.33 1,224.44 1,614.92
e/f = BMI estimate/forecast. Source: BMI, Central banks, Regulators
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Overview Of Indias 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 BMIs 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.
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SWOT Analysis
India Commercial Banking SWOT
Strengths
In macroeconomic terms, Indias prospects remain favourable, even if the economy is likely to slow Indias 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 Indias 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
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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
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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
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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
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Commercial Banking Business Environment Rating

Table: Commercial Banking Business Environment Ratings
Limits of potential returns Total assets, end 2008 Growth in total assets, 2008-2013 Growth in client loans, 2008-2013 Per-capita GDP, 2008 Tax GDP volatility Financial infrastructure Risks to realisation of returns Regulatory framework and development Regulatory framework and competitive landscape Moody's rating for local currency deposits Long-term financial risk Long-term external risk Long-term policy continuity Legal framework Bureaucracy Commercial banking business environment rating
Data US$ 970mn US$ 900.3mn US$ 631.6mn US$ 853.8 0.8 1.6 5.4
Score, out of 10 7 8 8 1 1 9 5
Ratings score, out of 100 Market Structure 77
Country Structure 40
5.0 3.0 8.0 6.0 9.3 8.0 3.7 2.9 61
5 3 8 6 9 8 4 3
Market Risk 53
Country Risk 60
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 UKs financial systems means that there is massive potential for
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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. Singapores high score rests on good scores for key elements of BMIs 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 worlds 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.
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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 regions 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 regions largest economies. South Africas 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 countrys 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.
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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 Brazils crucial Limits of potential returns Market structure sub-category rating of 80 (seventh globally) and Chiles 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, BMIs 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
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category, the market elements (i.e. how regulations affect the development of the sector, how regulations affect competition within it, and Moodys Investor Services ratings for local currency deposits) can be markedly different from BMIs long-term risk rating.
Table: Asia Commercial Banking Business Environment Ratings
Limits of Potential Returns Market Structure South Korea Singapore Taiwan China Malaysia Hong Kong Thailand Indonesia India Japan Vietnam Philippines Pakistan 76.7 53.3 70.0 90.0 63.3 50.0 63.3 66.7 76.7 30.0 53.3 46.7 46.7 Country Structure 85.0 85.0 77.5 50.0 77.5 87.5 67.5 60.0 40.0 77.5 47.5 47.5 47.5
Risks to Potential Returns Market Risks 76.7 96.7 83.3 56.7 76.7 70.0 80.0 76.7 53.3 63.3 40.0 56.7 56.7 Country Risks 64.0 84.0 64.0 68.0 70.0 82.0 64.0 48.0 60.0 80.0 50.0 52.0 42.0 Rating 76.7 72.9 72.6 70.8 70.1 68.7 66.6 62.6 60.6 56.3 49.5 49.1 47.3 Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13
Scores out of 100, with 100 the highest. Source: BMI
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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.
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Table: Client Loans, 2007-2013 (% change y-o-y)
2007 Argentina Brazil China India Japan Mexico Nigeria Russia Saudi Arabia Singapore South Africa South Korea Turkey United Kingdom United States 41.3 30.9 16.6 25.6 0.6 26.7 108.8 50.3 20.4 19.9 22.0 13.1 27.5 26.4 9.3
2008e 20.8 27.0 15.2 22.0 4.7 14.5 61.3 35.6 22.0 16.6 12.3 17.5 26.0 26.5 -0.4
2009f 8.0 3.0 15.0 14.0 -5.0 -2.0 5.0 7.0 -10.0 -5.0 6.0 -4.5 -2.0 -7.0 -3.0
2010f 5.0 6.0 12.0 16.0 1.0 2.5 9.0 9.0 4.0 4.0 9.0 3.5 10.0 1.5 3.0
2011f 10.0 7.0 5.0 18.0 1.5 3.5 13.0 12.0 5.0 6.0 12.0 4.0 11.0 2.0 4.5
2012f 17.0 9.0 5.0 18.0 3.0 4.0 15.0 16.0 6.0 7.0 12.0 4.5 15.0 2.0 5.0
2013f 19.0 11.0 8.0 20.0 3.0 4.5 15.0 17.0 7.0 7.5 12.0 5.0 16.0 2.0 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
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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-todeposit 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.
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Table: Loan-Deposit Ratio, 2007-2013
2007 Argentina Brazil China India Japan Mexico Nigeria Russia Saudi Arabia Singapore South Africa South Korea Turkey United Kingdom United States 0.50 1.77 0.69 0.82 0.76 0.76 1.01 1.22 0.85 0.74 1.11 1.32 0.67 0.91 0.94
2008e 0.53 1.64 0.67 0.81 0.77 0.74 1.03 1.34 0.90 0.78 1.07 1.33 0.67 0.94 0.87
2009f 0.52 1.54 0.70 0.79 0.74 0.69 0.99 1.25 0.84 0.76 1.06 1.24 0.64 0.86 0.81
2010f 0.50 1.47 0.73 0.78 0.73 0.67 0.96 1.17 0.85 0.75 1.05 1.24 0.64 0.86 0.81
2011f 0.49 1.39 0.71 0.77 0.73 0.65 0.95 1.12 0.84 0.75 1.04 1.21 0.65 0.86 0.81
2012f 0.51 1.33 0.69 0.76 0.74 0.63 0.94 1.11 0.80 0.75 1.03 1.19 0.66 0.86 0.80
2013f 0.51 1.30 0.67 0.76 0.74 0.61 0.93 1.09 0.75 0.74 1.02 1.16 0.69 0.85 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
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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).
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Regional Outlook
Table: Comparison Of Loan/Deposit, Loan/Asset & Loan/GDP ratios, 2009
Loan deposit ratio % Bangladesh China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore Sri Lanka South Korea Taiwan Thailand Vietnam United States 79.5 69.9 49.1 79.1 73.3 73.6 73.1 73.9 65.4 75.5 89.9 124.3 84.3 95.7 102.4 81.3
Rank 42 52 59 43 49 48 50 47 54 46 33 11 37 27 23 40
Trend Falling Rising Falling Falling Falling Falling Falling Falling Falling Falling Rising Falling Falling Falling Falling Falling
Loan/Ass et ratio % 62.1 51.2 30.0 62.2 59.4 52.1 55.3 30.8 49.5 40.3 63.8 67.4 63.4 67.0 79.5 54.1
Rank 20 36 56 19 26 34 31 54 40 48 15 10 17 11 2 33
Trend Falling Rising Falling Rising Falling Falling Falling Falling Falling Falling Falling Falling Falling Falling Rising Falling
Loan/G DP ratio % 36.8 129.9 186.5 59.0 27.4 85.6 100.7 21.4 34.1 107.9 28.5 120.2 155.5 77.2 90.0 54.6
Rank 46 6 2 34 53 21 12 56 48 9 51 7 5 28 19 39
Trend Falling Rising Falling Falling Falling Rising Falling Falling Falling Rising Rising Falling Rising Rising Falling Falling
Source: Central banks, regulators, BMI
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Table: Anticipated Developments in 2009
Loan/Deposit Ratio, % Bangladesh China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore Sri Lanka South Korea Taiwan Thailand Vietnam United States 79.5 69.9 49.1 79.1 73.3 73.6 73.1 73.9 65.4 75.5 89.9 124.3 84.3 95.7 102.4 81.3
Trend Falling Rising Falling Falling Falling Falling Falling Falling Falling Falling Rising Falling Falling Falling Falling Falling
Loan Growth, US$bn 3.1 688.5 -39.6 -64.5 16.5 -970.4 -5.9 -3.5 -1.6 -13.2 0.5 -67.1 -4.1 -1.6 1.7 -236.3
Deposit Growth, US$bn 4.2 680.1 1.0 -62.3 25.4 -993.5 5.5 -4.7 0.6 -8.6 0.3 -6.8 5.0 0.3 3.7 361.4
Residual, US$bn -1.1 8.5 -40.6 -2.2 -9.0 23.2 -11.4 1.2 -2.3 -4.6 0.2 -60.3 -9.0 -2.0 -2.0 -597.7
NB Incorporates estimated economic data and projected banking data. Source: Central banks, regulators, BMI
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Table: Comparison Of Total Assets, Client Loans And Client Deposits (US$bn)
2008 Total Assets Bangladesh China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore Sri Lanka South Korea Taiwan Thailand Vietnam United States 46.9 9,389.7 1,384.1 970.0 203.1 8,976.7 369.6 112.0 106.0 464.5 17.4 1,360.1 870.9 289.5 100.8 13,853.2 Client Loans 29.4 4,684.6 423.8 592.8 120.5 4,778.8 208.3 35.6 53.1 189.1 11.1 920.9 557.8 195.9 79.4 7,875.9 Client Deposits 36.6 7,003.0 781.9 730.2 161.6 6,166.8 271.4 48.2 78.0 241.5 12.6 693.6 651.6 202.7 75.5 9,035.7 Total Assets 40.2 7,416.7 1,327.3 789.0 203.8 6,903.8 346.7 142.1 108.4 404.4 16.5 1,506.7 871.3 268.0 88.0 13,034.1 Client Loans 25.0 3,806.3 379.8 484.9 106.7 3,712.6 191.2 38.6 53.2 161.9 9.5 1,057.0 552.6 181.7 66.7 7,906.5
2007 Client Deposits 31.1 5,496.0 752.7 590.4 160.9 4,914.6 248.4 54.8 76.9 218.6 12.0 799.3 652.0 192.9 68.7 8,415.3
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Table: Comparison Of Per Capita Deposits, Late 2008 (US$)
GDP Per Capita Bangladesh China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore Sri Lanka South Korea Taiwan Thailand Vietnam United States 555 2,886 30,879 854 1,819 43,902 7,496 823 1,677 36,960 2,070 15,166 16,384 4,078 975 46,888
Client Deposits, per capita 257.3 5,199.7 111,584.5 622.9 689.2 48,341.5 10,041.7 299.4 869.6 49,894.4 651.2 14,284.6 28,286.9 3,152.3 870.4 29,700.3
Rich 20% Client Deposits, per capita 1,029 20,799 446,338 2,492 2,757 193,366 40,167 1,198 3,478 199,577 2,605 57,138 113,148 12,609 3,482 118,801
Poor 80% Client Deposits, per capita 64 1,300 27,896 156 172 12,085 2,510 75 217 12,474 163 3,571 7,072 788 218 7,425
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Table: Interbank Rates And Bond Yields
Three-Month Interbank Rate % Current Account % of GDP, 2009f Bangladesh China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore Sri Lanka South Korea Taiwan Thailand Vietnam United States 2.6 11.0 9.9 -2.0 -0.1 1.9 8.7 -7.1 -0.4 12.2 -6.7 1.9 6.2 3.0 -5.0 -3.2 Budget balance % of GDP, 2009f -5.5 -2.6 -3.3 -5.5 -3.0 -7.7 -4.3 -3.4 -3.3 -6.4 -7.0 -4.8 -5.5 -8.2 -14.1 End 2008 na 1.7 1.18 9.1 12.01 0.68 3.15 14 4.28 0.2 18.01 1.73 0.1 2.35 9.5 1.5 Early 2009 na 1.7 0.85 6.7 9.3 0.52 2.1 11 4.2 0.25 10.5 0.3 9.5 1.42 7 1.5
NB Incorporates actual financial markets data, estimated economic data and projected banking data. na=not available. Source: Central banks, regulators, BMI
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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 doubledigit 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.
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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 exportdependent 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).
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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 nondurables 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.
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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$6bn) or 0.6% of GDP, carries the potential to raise growth in rural India through an improved irrigation and transport network, but anecdotal evidence suggests that a substantial amount of the funds have been squandered through corruption and in projects with little real value. While investment in the Rural Infrastructure Development Fund and other public infrastructure projects should bring more substantial benefits to the economy, we still fear that the gains of the government's massive fiscal stimulus will primarily be in the form of a short-term boost in employment and spending rather than by higher growth in the longer term. With implementation of the public infrastructure programme likely to carry over into 2010 we see GDP expanding by 6.4% in FY2010/11, with economic activity also being supported by the global economy returning to positive growth of 1.7% and 3.0% in 2010 and 2011 respectively after an expected 2.3% contraction in 2009. Empirical evidence shows that capital inflows to emerging markets are highly correlated with economic growth in developed economies. We thus expect the gradual return towards normal growth rates in the
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EU, the US and Japan to be coupled with rising investment flows to EM, with India likely to yet again be one of the main recipients. While this will help raise growth towards an average of 7.0% over FY2011/12 to FY2017/18, we reiterate that continued economic reform and increased investment, both public and private, in education and infrastructure will be needed for this expansion rate to be maintained.
Table: India Economic Activity
2006 Nominal GDP, INRbn Nominal GDP, US$bn Real GDP growth, % 3,5 change y-o-y Population, mn
6 1,4 2,5
2007 53,752.1 1,074.19 9.0 1,172.20 8.6 8.0
2008e 59,374.5 1,171.19 6.3 1,189.40 2.3 9.0
2009f 67,241.8 1,350.57 5.0 1,207.00 2.9 10.0
2010f 75,630.5 1,534.16 6.4 1,224.30 10.5 9.0

2
2011f 84,372.2 1,632.99 7.0 1,240.30 11.1 8.5
2012f 93,772.9 1,833.48 7.0 1,256.60 9.5 8.3
2013 106,547.2 1,989.58 7.0 1,273.10 8.0 8.0
46,936.0 841.52 9.7 1,155.30 11.5 8.0

1
Industrial production 5 index, % y-o-y, ave Unemployment, % of 6 labour force, eop
Note: e/f = BMI estimate/forecast. Fiscal years ending March 31 (1989=1989/90); 2008 = FY2008/09, Factor Cost, f 3 4 5 6 = BMI forecast; Factor Cost, f = BMI forecast. Source: Asian Development Bank. Central Statistics Organisation; Oxford Economics
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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 6.56.7% 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 mediumterm as the RBI begins its purchasing regime.
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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 Indias 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.
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Table: India Monetary Policy
2005 Lending rate, %, eop

1,5 2,6 7 7
2006 11.50 4.78 6.7 6.8 44.11 45.18 5.9 5.4 7.75 58.21
2007 13.25 5.38 7.9 6.2 39.38 41.17 7.4 4.6 7.75 57.45
2
2008 13.00 4.97 8.0 9.2 48.58 43.40 0.6 8.4 5.00 68.01
2009 10.50 3.50 7.0 7.0 48.00 48.29 4.0 3.4 4.00 59.52
2010 11.00 6.00 5.0 5.0 48.00 48.00 5.0 4.3 6.00 63.36
2011 11.00 6.00 5.0 5.0 48.00 48.00 5.0 5.2 6.00 66.24
3
2012 11.00 6.00 5.0 5.0 46.00 47.00 5.0 5.0 6.00 59.34
2013 10.00 5.00 5.0 5.0 44.00 45.00 5.0 5.0 6.00 55.88
10.75 5.44 5.3 4.2 44.97 44.01 4.0

7
Real Lending Rate, %, eop
Consumer prices, % y-o-y, eop Consumer prices, % y-o-y, ave Exchange rate INR/US$, eop Exchange rate INR/US$, ave
7
3,8 3,8
Wholesale prices, % y-o-y, eop Wholesale prices, % y-o-y, ave Central Bank policy rate, %
4,9 3,8
4.4 6.50 53.24

1
Exchange rate INR/EUR, eop

e f
Notes: BMI estimates. BMI forecasts. Calendar Year; Real rate strips out the effects of inflation; Calendar 4 5 6 7 8 9 years; Repo Rate, End of fiscal year; Sources: IMF. IMF/BMI; Ministry of Statistics; BMI; Reserve Bank of India
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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.
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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$240bn by the end of FY09/10.
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Table: India Balance Of Payments
2005 Exports, US$bn Imports, US$bn

1,2 1,2 1,2
2006
128.08 191.25 -63.17 -11.80 -1.40 226.59 4.9
1
2007
155.50 235.90 -80.40 -17.40 -1.62 302.66 6.0
2008
171.40 288.90 -117.50 -44.20 -3.77 240.00 6.9
2009
148.40 241.20 -92.80 -26.40 -1.95 240.00 7.1
2010
175.00 262.00 -87.00 -35.00 -2.28 230.00 7.6
2011
200.00 283.78 -83.78 -48.00 -2.94 220.00 9.7
2
2012
230.00 322.99 -92.99 -58.26 -3.18 235.00 11.9
2013
264.50 367.62 -103.12 -62.33 -3.13 250.00 14.1
105.15 157.06 -51.90 -9.90 -1.34 158.11 5.2
Trade balance, US$bn

1,2
Current account, US$bn Current account, % of 1,2 GDP Foreign reserves ex gold, 1,3 US$bn Import cover, months g&s
3
Notes: BMI estimates. BMI forecasts. Fiscal years ending March 31 (1989=1989/90); Sources: Reserve Bank of 3 India. Reserve Bank Of Indi.
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Market Structure
Protagonists
Table: Protagonists In Indias 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
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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
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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
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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
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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
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Company Profiles
State Bank Of India
Overview The State Bank of India (SBI) is Indias 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 SBIs 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 Total Assets Loans & Mortgages Total Deposits Total Shareholders' Equity 5,509,844 2,200,294 4,179,092 284,481
2005 6,285,776 2,865,295 4,904,245 338,559
2006 6,968,324 3,743,168 5,305,057 386,370
2007 8,151,744 4,809,337 6,184,776 442,256
2008 10,272,700 5,997,848 7,548,662 632,645
Source: Indian Banks' Association www.iba.org.in
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Punjab National Bank

Overview Punjab National Bank (PNB), founded in 1895, is Indias 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 Total Assets Loans & Mortgages Total Deposits Total Shareholders' Equity 1046857 476568.4 872123.8 56020.5
2005 1281037 610683.8 1011168 86995.4
2006 1483255 753850.6 1175313 100304.9
2007 1661237 976132.7 1378030 111832.7
2008 2037159 1209461 1636157 132139.6
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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, QFCQatar, 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)
2005 1111047 608052.1 949971.2 65084.12
2006 1337700 800254.5 1145810 76018.25
2007 1665421 988643.4 1396425 108860.6
2008 1809214 1076143 1503320 108790
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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: charudatta.deshpande@icicibank.com
Key Statistics For ICICI Bank, 2004-2008 (INRmn)
2005 1784336 964099.6 944641.8 127768.6
2006 2772296 1537062 1612720 228667.2
2007 3943347 2062109 2334222 248246
2008 4856166 2460377 2639126 458034.2
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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 Total Assets Loans & Mortgages Total Deposits Total Shareholders' Equity 736013.2 350623 542908.9 53526.7
2007 913082.5 469447.8 660636.3 64989.8
2008 1331931 634181.5 982670.8 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
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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 Total Assets Loans & Mortgages Total Deposits Total Shareholders' Equity 732,559.8 368,764.6 520,153.2 33,974.3
2008 1,095,664.0 594,483.6 830,394.3 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
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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 Citigroups foreign exchange operations Opportunities Corporate restructuring into two operational units Citicorp and Citi Holdings. The Public-Private Investment Program of the US Treasurys 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: madhulika.gupta@citigroup.com
Key Statistics For Citibank, 2007-2008 (INRmn)
2007 Total Assets Loans & Mortgages Total Deposits
2008
2009
732559.8 368764.6 520153.2
1095664 594483.6 830394.3
1476972 814699.4 1104619
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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 Europes 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 banks large deposit base. The economy is expected to remain in recession at least until 2010 Key Statistics Status Foreign Bank Media Contact Louisa Leung, VP, External Affairs, Asia-Pacific and Hong Kong Tel: 852 2822 4930 Email: pressoffice@hsbc.com
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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 Foreign Bank Media Contact Geraldine Matchaba Tel: 91 22 2263 4574 Tel: Geraldine.matchaba@standardchartered.com
Key Statistics For Standard Chartered Bank, 2007-2008 (INRmn)
2007 Total Assets Loans & Mortgages Total Deposits 58,891.35 30,103.80 34,174.67
2008 73,445.24 33,351.53 36,956.52
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Methodology
BMIs 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.
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Basis Of Projections
BMIs 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 countrys performance; Our financial market teams 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 BMIs 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 industrys 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 states political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period.
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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, end2008 Estimated growth in total assets, 2008-2013 Estimated growth in client loans, 2008-2013 Country structure GDP per capita Active population Corporate tax GDP volatility Risks to realisation of returns Market risks Regulatory framework and industry development Regulatory framework and competitive environment Moodys rating for local currency deposits Country risk Short-term financial risk Short-term external risk Policy continuity Legal framework Bureaucracy Subjective evaluation of de facto/de jure regulations on overall development of the banking sector Subjective evaluation of the impact of the regulatory environment on the competitive landscape External assessment of risk From BMIs Country Risk Ratings (CRR) Rating from CRR, evaluating currency volatility Rating from CRR, denoting the states vulnerability to externally-induced economic shock, which tend to be the principal triggers of economic crises Rating from CRR, evaluating the risk of a sharp change in the broad direction of government policy Rating from CRR, to denote strength of legal institutions in each state. Security of investment can be a key risk in some emerging markets Rating from CRR to denote ease of conducting business in the state A proxy for wealth. High-income states receive better scores than low-income states Those aged 16-64 in each state, as a % of total population. A high proportion suggests that the market is comparatively more attractive A measure of the general fiscal drag on profits Standard deviation of growth over 7-year economic cycle. A proxy for economic stability Indication of overall sector attractiveness. Large markets are considered more attractive than small ones Indication of growth potential. The greater the likely absolute growth in total assets, the higher the score Indication of the scope for expansion in profits through intermediation
Source: BMI
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Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all subcomponents equal weight. Consequently, the following weights have been adopted.
Table: Weighting Of Indicators
Component Limits of potential returns of which Banking market structure Country structure Risks to realisation of potential returns of which Banking market risks Country risk
Weighting, % 70 60 40 30 40 60
Source: BMI
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Published by BUSINESS MONITOR INTERNATIONAL LTD

India Commercial Banking Report Q3 2009

India Commercial Banking Report Q3 2009

Part of BMIs Industry Report & Forecasts Series

India Commercial Banking Report Q3 2009

Business Monitor International Ltd

India Commercial Banking Report Q3 2009

Overview Of Indias Commercial Banking Sector.........................................................................................8 SWOT Analysis.................................................................................................................................................9