Like Alchemist said in another post, the market knows better than us individuals.
The reason is that the private sector banks have much better asset quality.
HDFC Bank has pristine asset quality followed by IndusInd and Yes. Another thing is the strong CASA base.
IndusInd is going strong on CASA while Yes has just started baby steps in this direction. Yes being the youngest has the most bright prospect (for someone willing to take that much risk too)
All in all, these three (HDFC, Indus, Yes) are the prime investment candidates in Banking space. Two other noteworthy candidates are Kotak Mahindra and ING Vysya and from the large cap space of course - ICICI Bank.
Avoid PSU banks altogether. Election year is coming and they will be at the beck and call of the UPA to dole out goodies and dilute their asset quality yet again with unworthy loans.