HSBC's Preferred play: Smaller private banks: YES Bank, OW

Quarter-end credit growth picks up: For the fortnight ended on 24 September 2010,
system loan growth improved on YTD basis from 4.4% in the previous fortnight and 3.4%
from August end to 5.6% currently. Despite this increase, it shows the slowest pickup
over the last five years. Also, despite a lower base, YoY growth remained moderate at
19%. The question remains whether the traditional 2H pickup can comfortably exceed
RBI’s estimate of 20%.
Past trends give hope for credit growth: An analysis of the past five years’ trend indicates
that the busy season (2H of each year) sees 2H over 1H growth of an average of 16%.
Extrapolating this to the current year, we arrive at FY11 credit growth of 21%, above RBI’s
estimate but below Street estimates of 22% and much below our estimate of 25%.
Lagging deposit growth implies margin pressure: Deposit growth has remained
subdued, growing only 4.9% on a YTD basis and the lowest growth in the past six years.
In the event credit growth picks up in 2HFY11, the current liquidity situation implies
higher deposit rates and hence margin pressure.
Preferred play: We prefer smaller private banks with a higher comfort level on loan
growth. We highlight Overweight (V)-rated YES Bank with a INR402 target price.