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Bank stocks are likely to trade with a slightly positive bias next week as the beginning of the new financial year brings hopes of a lower interest rate regime, better margin and economic growth. We have positive stance on the sector with overweight on Private Banks, and selectively positive on public sector banks. We believe that as the economic growth starts to improve, and interest rates soften, the
asset quality fears for banks should reduce. Thursday, bankers asked the Reserve Bank of India to reduce both the repo rate and banks' cash reserve ratio in its annual monetary policy that will be detailed on May 3. Many state-owned banks will likely face margin pressures and also stress on profitability on account of rising stress in asset quality and higher provision requirements in the next few months.The state-owned banks would stand to gain the most from an eventual turnaround
including State Bank of India and Punjab National Bank among the large-caps and United Bank, Corporation Bank and Indian Bank among the mid-caps. Given the economic environment, we continue to prefer private banks over state-owned. Decelerating economic growth environment, policy woes
in select sectors and elevated inflation and interest rates point to further economic stress and are not suggesting any conclusive trigger for improvement in asset quality in the near term. Hence, we prefer private banks, given their favorable cyclical and structural outlook, with Axis Bank and ICICI Bank being our top picks. But with the risk of higher competitive intensity in light of higher number of likely new entrants, the upsides are expected to be relatively more moderate than estimated earlier.
