With recovery still a few quarters away, investors should stick with banks that have shown a consistent growth in earnings over the last several quarters. In volatile times these banks will offer comfort of predictability in earnings, though at a premium.

While demonetisation has led to uncertainties, it has also opened up opportunities for banks with sound fundamentals and robust business model. Most private banks fit this bill, as they are better placed to deploy excess funds in profitable lending opportunities and garner market share from PSBs. A healthy CASA base, strong capital position and niche focus on segments such as retail and SME can drive upsides in earnings. A few banks such as YES Bank and HDFC Bank are also better placed to compete on rates to draw in new business opportunities.

HDFC Bank, IndusInd, Kotak Mahindra Bank, YES Bank and Federal Bank remain top picks. While ICICI Bank and Axis Bank may continue to see asset quality pain for one or two more quarters, their relatively stronger core performance (vis-à-vis PSBs) and capital position still make them attractive bets for the long term.

It is imperative to avoid falling into ‘value’ traps. Weak core earnings has left the already scarce capital of PSBs bearing the burden of huge losses on account of steep provisions. With corporate loan growth yet to pick up, PSU bank stocks are best avoided, despite their cheap valuations. In particular, stay clear of banks with high stressed assets and weak capital.

Within the PSU pack, SBI is the only player that holds some promise, thanks to the size of its balance sheet, relatively higher exposure to retail loans, ability to compete better and healthy capital position.

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