The top-down?s tough, so shall be the bottom-up: It?s a tough macro out there; and the banks will feel that mood. We expect the sector?s profit growth at 5% (8% pre-provision profit); well below its averages over the last two difficult years, but actually a tad higher than the Q4FY13 lows. The mix too looks weak; moderating growth and low margins, and still high asset deterioration. You have got to be cautious; but with the banks? -7% 1m (month) underperformance (-10% YTD?year-to-date), is there too much caution out there?

* Stocks: Top Value

The stress points: BS (balance sheet) pressures should continue: (i) asset stress is there, but there’s some some stabilisation in pace (lower slippages/ higher restructuring)–management guidances are likely to remain noncommittal; and (ii) growth moderation: loan growth slippages (13-14%), weak deposit growth (13%) and soft management guidances are likely. This should show in the P&L (profit & loss account); with lower margins (-8bps q-o-q), high credit costs (>1% annualised) and modest fee growth (+11% y-o-y), it?s tough.

The surprises: It might not be entirely predictable, or entirely negative. Look out for: (i) trading gains (estimated at +48% y-o-y), falling rates, aggressive positions and an earnings offset; (ii) fees (+11%), currency volatility, capital markets; and (iii) NIMs– select repricing mismatches/ gains (wholesale funded/ NBFCs). Potential surprises? upside: Kotak (fixed income/equities), downside: SBI (costs, growth).

The divide and the risk: The private/public (PSB) divide will continue, though it might not remain as large as Q4FY13 (earnings: +24%, -19%, respectively). Private banks will lead in BS growth (+19% vs 14% y-o-y for PSBs), earnings (+23% vs -11%) and asset quality (stable for privates, + ~4% for PSBs). But staying in the game: It?s tough; but we don?t believe it?s getting worse. We also believe the broader growth/quality recovery will only be slow. But we do see valuations getting more reasonable and expectations moderating; and that is a good time

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Sector Rating: Overweight