With various banks having increased deposits rates recently, we believe that lending rates are likely to increase from Q2 FY11. Banks with substantial retail exposure are better placed to pass-on the rising cost of funds due to robust demand for retail loans. We expect bank lending rates to increase by 100-150bps in FY11. The one-to-two quarter lag in pass-on could impact NIMs of many public banks adversely in the short-term while private banks may be able to contain margin contraction via full pass-on and superior ALM. With macro drivers getting in place for robust and safer growth over the next 2-3 years, we remain positive on the sector. Our top picks are HDFC Bank and Yes Bank while Axis is the only SELL.