PSU banking stocks found fortunes in reverse on Thursday as operators and institutions were offloading on these counters.

Punjab National Bank (down 3.04% to Rs 86), Andhra Bank (down 2.20% to Rs 28.95), State Bank of India (down 1.36% to Rs 307.75), Dena Bank (down 1.43% to Rs 13.80), Canara Bank (down 1.04% to Rs 66.50), Corporation Bank (down 0.75% to Rs 146.25) and Bank of India (down 0.53% to Rs 37.30) featured among the losers among banks stocks.

Profit booking is believed to be doing PSU bank stocks in today as operators conduct a major part of that offloading. Institutions like Life Insurance Corporation are also booking profits here. Dealers, however, feel that these stocks will recover after the correction.

Comprising 17 state-run banks, the sector rose 6.83% to Rs 35,202.57 crore (Rs 352.02 billion) in market capitalisation (m-cap) in the last one week. In the last quarter, banking stocks have been on a sustained rise, adding 55.95% in m-cap from Rs 22,572.31 crore (Rs 225.72 billion).

Budgetary expectations have prompted a firm trend in bank stocks of late. That factor was, however, overlooked on Thursday.

On Tuesday, there were reports that the government may raise the cap for FIIs in public sector banks to 49% from the current 20%. Also the government intends to reduce its holding to 33% in banks. The announcement to this effect is likely to be made in the Union Budget for 2003-04.

Among the long list of expectations from the banking sector from the forthcoming Union Budget are the exemption of dividend tax completely - neither the bank nor the recipient to be taxed, higher tax break for provisioning of bad loans, sops for corporate debt restructuring in steel, textiles and chemicals etc. to reduce NPAs and increase in exposure limits to capital markets from 5% of incremental deposits to 8-10% to improve credit flow to capital of markets .

Meanwhile, analysts say the banking sector is poised to grow in line with the growth in economy. Their balance sheets are getting cleaned up at a faster pace now than earlier. Also interest rates are likely to remain soft thus helping banks to reduce cost of funds and earn higher treasury gains, recent fall in their prices notwithstanding. Any reduction in corporate tax rates or surcharges will also benefit banks as they are largest tax payers. Abolition of tax on dividend will also make banks more attractive as banks in general offer higher dividend yields. A further move towards simplified FDI norms will improve the valuations of PSU banks. Therefore analysts expect a bullish trend in bank stocks to continue, as valuations remain attractive in the current year.