Right time to invest in BANKS!!

With Moody degrading Indian banks and S & P upgrading credit risk portfolio of Indian banks by one notch, lot of investors do suspect what is COOKING! Ofcourse Sept qtr FY12 results of banking behemoth SBI were extraordinary both in terms of profitability and higher provisions for Non Performing Assets. But if you check out, YES BANK had Net NPAs around 0.25% of its assets. Around 30% of it's income was fixed - fee basis , so that rules out the possibility of interest rate exposure. With 22% ROE and >20% growth rate over successive years, Yes Bank surely demands higher valuation than the present P/E of 10. Normally, P/B is the parameter to judge valuation of banks. It's book value has consistently increased by over 20% YoY, so that indicates where the price should go. Latest move of offering 7% interest to CASA account holders will only strengthen the roots to take advantage of high interest rate lending scenario. Net Interest margin is close to 2.8% which may increase following halt by RBI in increasing repo rates.
In the present scenario; capital goods, metals and realty sector really doesn't look like worth investing. But given the shallow valuations and decrease in EPS already factored in the current prices, not much downfall is expected. Over the next quarter, rate sensitivity will maximise its effect and then begin to subside. RBI's sole purpose to control inflation was to not compromise with India's GDP growth. Given the sorry state midcap and even some large caps find themselves in, interest expenses must decline.
In the Indian equity market, defensive sector like FMCG can't hold on for too long. It's already trading at a P/E multiple of more than 30, which defies logic. I don't see even big FMCG companies increasing EPS by more than 20% in a year timeframe. Increasing competition in the industry may just as well lead to some consolidation moves. White label consumer goods and private behemoths are readying up to take on the likes of HUL, ITC. Decreasing food inflation may just force them to increase the quantity in their packaged eatables.
Lots of brouhaha over rising NPAs have seen PSU banks going down like a knife! But the worst is over as claimed by SBI (3.5% Net NPA) and seems similar for UCO Bank (~3% NPA). UCO has plans for increasing it's CASA ratio to 35% from present 23%. That will help in increasing NIMs. Allahabad Bank has been consistent in it's growth over the past quarters with comparatively lesser NPAs(~0.7% of Net Advances). Speculations are rife on sectors to which banks are lending major chunk of funds. Power sector - which is unable to recover the costs is the main culprit followed by Capital Goods - battling decreasing growth in order books due to recessionary feeling.
All this is bound to change once Inflation subsides. Compared to 2011, this year's demand is on the lower side. See it by jobs at MBA colleges, results expectations of evergreen sector like IT or expansion plans of biggies like Reliance, L & T - you will realize the mood quite well. So see lesser hikes this year, lower spending and yes inflation at 5-6%. Then watch banks reach the pinnacle.