Bank stocks are likely to stay firm in this week, though investors may continue to prefer private sector banks over state-owned peers, they prefer private sector banks over state-owned entities on account of better operating performance, profitability and lower asset quality concerns in a challenging environment. We are relatively more bearish than the Street on PSU (public sector undertaking) banks despite their cheap valuations. We expect the private sector banks to have a more table earnings trajectory over the next several quarters than the PSU bankstheir relatively robust asset quality, higher loan loss coverage and heir retail loan orientation. Among state-owned banks, Positive on Bank of Baroda stocks as its operating performance has been sharply better than its peers, but still trades at similar book value. We believe this makes Bank of Baroda a long-term investment candidate, while at the same time it makes sense to trade BoB on the long side, with a short on any other PSU bank
Bank stocks may also stay muted ahead of the Reserve Bank of India's mid-quarter policy review on Sep 17. Investors are likely to avoid big investments in the sector at least until the policy review, although expectations are that RBI will not make any changes in policy rates or liquidity instruments. We believe that the Reserve Bank of India is unlikely to cut its key policy rates in its Mid Quarter Review of Monetary Policy due in September since upside risks to inflation continue to persist in the near-term.
