Within the banking sector, the new generation private sector banks that are quick to react to change and have exploited technological changes well, are seen as better stock picks than the state-run banks.

"Lower volumes growth will hurt state-run banks more than the private sector banks," said Pranav Securities' banking analyst Manish Karwa.

A survey of seven Indian banks showed that the earnings growth averaged 57 per cent in the second quarter, powered by higher loan volumes, lower cost of deposits and easier investment norms.

Central bank data showed that the bank loans to the commercial sector grew by 23.3 per cent year-on-year in the second quarter of the financial year compared to 15.1 per cent in the previous year.

Total loans by the State Bank of India (SBI), the country's largest commercial bank, grew to Rs 1,056.02 billion ($ 22.63 billion) on September 29 from Rs 935.19 billion on June 30.

Larger volumes and improved margins helped the bank post a 71 per cent rise in net profit to Rs 6.06 billion in the second quarter, beating analysts' estimates of Rs 3.70 to 4.65 billion. But the results brought little cheer as investors continued to shun most banking stocks on concern, a sustained fall in industrial production, a poor monsoon and the effect of the increase in global oil prices will hit economic growth.

This is likely to translate to lower volumes for banks as companies will shy away from building inventories.

``The slowdown in the economy could have an impact on credit growth in the next six months and this is likely to hit profits in the longer term,'' says SG Asia Securities' banking analyst Seshadri Sen.

Reflecting these concerns, SBI's shares have shed nearly 22 per cent in the second quarter of 2000-01, Sensex fell 14 per cent during the same period.

On Friday afternoon, the shares were up by Rs 3.80 at Rs 176.10, but off nearly 40 per cent from their 2000 high of Rs 293 in February.

Analysts said they saw little chances for investors flocking to buy state-run bank shares despite low valuations,unless there was an upturn in economic activity.

"There is no trigger for state-run bank stocks. Although valuations are low, there is little chance that the investors will buy unless the public sector character is removed," Mr Karwa said. "Private sector UTI Bank, HDFC Bank and GTB were the stocks to pick."On Friday, shares of HDFC Bank traded at Rs 252, off calendar 2000's highs of Rs 295.85, while GTB shares at Rs 89 were lower by 15 percent from their high of Rs 104.50 hit on February 3.

(Reuters)